Q1. The following details have been extracted from Sam Ltd.’s books of accounts for the year ending March 31, 2023. The manager of the company is shared and divides his time between the factory and the office in the ratio of 20:80. You are required to compute: (a)
prime cost, (b) factory overhead, (c) factory cost, (d) overhead and (e) cost of sale. (10 Marks)
Stock of Materials: Opening 2,82,000.00
Stock of Materials: Closing 3,00,000.00
Materials Purchased during the year 12,48,000.00
Direct Wages 3,57,600.00
Indirect Wages 24,000.00
Salaries for Administrative Staff 60,000.00
Freights: Inwards 48,000.00
Freights: Outwards 30,000.00
Cash Discount Allowed 21,000.00
Bad Debts W/Off 28,200.00
Repairs to Plant and Machinery 63,600.00
Rent, Rates and Taxes of Factory 18,000.00
Rent, Rates and Taxes of Office 9,600.00
Travelling Expenses 18,600.00
Salesmen’s salaries and commission 50,400.00
Depreciation W/Off: Plant and Machinery 42,600.00
Depreciation W/Off: Furniture 3,600.00
Director’s fees 36,000.00
Electricity Charges: Factory 72,000.00
Fuel Charges: Boiler 96,000.00
General Charges 37,200.00
Manager’s Salary 72,000.00
Solution Hint:
Hints:
Stock of Materials: Opening 2,82,000.00 Stock of Materials: Closing 3,00,000.00 Materials Purchased during the year 12,48,000.00 Direct Wages 3,57,600.00 Indirect Wages 24,000.00 Salaries for Administrative Staff 60,000.00 Freights: Inwards 48,000.00 Freights: Outwards 30,000.00 Cash Discount Allowed 21,000.00 Bad Debts W/Off 28,200.00 Repairs to Plant and Machinery 63,600.00 Rent, Rates and Taxes of Factory 18,000.00 Rent, Rates and Taxes of Office 9,600.00 Travelling Expenses 18,600.00 Salesmen’s salaries and commission 50,400.00 Depreciation W/Off: Plant and Machinery 42,600.00 Depreciation W/Off: Furniture 3,600.00 Director’s fees 36,000.00 Electricity Charges: Factory 72,000.00 Fuel Charges: Boiler 96,000.00 General Charges 37,200.00 Manager’s Salary 72,000.00 ChatGPT
To compute the various cost components for Sam Ltd., we’ll use the following information and categorize them appropriately:
Stock of Materials:
- Opening: 2,82,000.00
- Closing: 3,00,000.00
- Materials Purchased during the year: 12,48,000.00
Direct Costs:
- Direct Wages: 3,57,600.00
Indirect Costs:
- Indirect Wages: 24,000.00
- Repairs to Plant and Machinery: 63,600.00
- Rent, Rates and Taxes of Factory: 18,000.00
- Electricity Charges: Factory: 72,000.00
- Fuel Charges: Boiler: 96,000.00
Administrative Costs:
- Salaries for Administrative Staff: 60,000.00
- Director’s fees: 36,000.00
- Rent, Rates and Taxes of Office: 9,600.00
Selling and Distribution Costs:
- Freights: Inwards: 48,000.00
- Freights: Outwards: 30,000.00
- Travelling Expenses: 18,600.00
- Salesmen’s salaries and commission: 50,400.00
- Cash Discount Allowed: 21,000.00
- Bad Debts W/Off: 28,200.00
General Costs:
- General Charges: 37,200.00
Managerial Costs:
- Manager’s Salary: 72,000.00
Now, let’s compute the various cost components as follows:
(a) Prime Cost: Prime cost is the total of direct costs, which include Direct Wages and Direct Material Costs (Materials Purchased during the year minus Closing Stock of Materials plus Opening Stock of Materials).
Prime Cost = Direct Wages + (Materials Purchased – Closing Stock of Materials + Opening Stock of Materials)
Prime Cost = 3,57,600.00 + (12,48,000.00 – 3,00,000.00 + 2,82,000.00) Prime Cost = 3,57,600.00 + 12,30,000.00 Prime Cost = 15,87,600.00
(b) Factory Overhead: Factory overhead includes Indirect Costs.
Factory Overhead = Indirect Wages + Repairs to Plant and Machinery + Rent, Rates and Taxes of Factory + Electricity Charges: Factory + Fuel Charges: Boiler
Factory Overhead = 24,000.00 + 63,600.00 + 18,000.00 + 72,000.00 + 96,000.00 Factory Overhead = 2,73,600.00
(c) Factory Cost: Factory cost is the total of Prime Cost and Factory Overhead.
Factory Cost = Prime Cost + Factory Overhead Factory Cost = 15,87,600.00 + 2,73,600.00 Factory Cost = 18,61,200.00
(d) Overhead: Overhead includes Factory Overhead, Administrative Costs, Selling and Distribution Costs, and General Costs.
Overhead = Factory Overhead + Salaries for Administrative Staff + Director’s fees + Rent, Rates and Taxes of Office + Freights: Inwards + Freights: Outwards + Travelling Expenses + Salesmen’s salaries and commission + Cash Discount Allowed + Bad Debts W/Off + General Charges
Overhead = 2,73,600.00 + 60,000.00 + 36,000.00 + 9,600.00 + 48,000.00 + 30,000.00 + 18,600.00 + 50,400.00 + 21,000.00 + 28,200.00 + 37,200.00 Overhead = 5,83,000.00
(e) Cost of Sales: Cost of Sales includes Factory Cost and Overhead.
Cost of Sales = Factory Cost + Overhead Cost of Sales = 18,61,200.00 + 5,83,000.00 Cost of Sales = 24,44,200.00
So, the various cost components are as follows: (a) Prime Cost: 15,87,600.00 (b) Factory Overhead: 2,73,600.00 (c) Factory Cost: 18,61,200.00 (d) Overhead: 5,83,000.00 (e) Cost of Sales: 24,44,200.00
NOTE:
Whether or not to consider bad debts, managers’ salaries and directors’ fees in a cost sheet is a matter of some debate. Some accountants believe that these items should be included in the cost sheet, while others believe that they should not.
There are several arguments in favor of including these items in the cost sheet. First, these items are all necessary for the business to operate. Without managers and directors, the business would not be able to function. Similarly, bad debts are a normal part of doing business, and businesses need to be able to account for them in their costs.
Second, including these items in the cost sheet can help businesses to set more accurate prices for their products and services. If businesses do not include these items in their costs, they may be underpricing their products and services, which could lead to losses.
However, there are also some arguments against including these items in the cost sheet. First, these items are not directly related to the production of the product or service. Managers’ salaries and directors’ fees are administrative expenses, and bad debts are a financial expense. Including these items in the cost sheet can make it more difficult to track the actual cost of producing the product or service.
Second, including these items in the cost sheet can make it more difficult to compare costs between different businesses. Some businesses may have higher or lower managers’ salaries and directors’ fees than others. Similarly, some businesses may have higher or lower bad debt rates than others. Including these items in the cost sheet can make it difficult to compare the true cost of producing the product or service between different businesses.
Ultimately, the decision of whether or not to include bad debts, managers’ salaries, and directors’ fees in a cost sheet is up to the individual business. There are valid arguments to be made on both sides of the issue. Businesses should consider their own specific circumstances when making this decision.
In general, it is more common to exclude bad debts, managers’ salaries, and directors’ fees from cost sheets. This is because these items are not directly related to the production of the product or service. However, some businesses may choose to include these items in their cost sheets for specific purposes, such as setting more accurate prices or comparing costs to other businesses.
Note : This study material is for practise and reference purpose only