Cost & Management Accounting

Dec 2025 Examination

 

 

Q1. A factory produces a single product. The following information relates to the month of March:

– Standard labour time per unit = 2.0 hours.

– Standard labour rate = Rs.100 per hour.

– Actual production = 1,000 units.

– Actual hours worked (including idle time) = 2,200 hours.

– Idle time during the period = 100 hours (paid but unproductive).

– Actual average labour rate paid = Rs.95 per hour.

Overheads:

– Budgeted fixed factory overheads = Rs.1,00,000 per month.

– Budgeted variable factory overheads = Rs.20 per productive hour.

– The overhead absorption basis is labour hours; standard hours for absorption = hours required for actual output (i.e., 2.0 hr × 1,000 units).

– Actual fixed overheads incurred = Rs.1,10,000.

– Actual variable overheads incurred = Rs.46,000.

Required:

(a) Calculate the standard labour cost for the output, actual labour cost, labour rate variance, labour efficiency variance.

(b) Compute the overhead absorption rate per hour, overheads absorbed, and state whether overheads are over- or under-absorbed and by how much.

(c) Suggest two control measures (brief) — one for labour cost control and one for overhead control. (1 mark) (10 Marks)

Ans 1.

Introduction

Cost and management accounting provides a systematic framework for analyzing production costs and identifying areas where performance can be improved. It helps management understand not only how much has been spent but also whether resources are being used effectively. In the given case, the focus is on analyzing labour and overhead costs for a factory producing a single product. Variance analysis, a central tool in cost accounting, allows managers to compare actual performance with predetermined standards, highlighting areas of efficiency and inefficiency. By studying labour rate variance, labour efficiency variance, and overhead absorption, managers can better assess whether costs were well controlled or deviated from the

 

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Q2(A). A manufacturing company is reviewing its inventory valuation methods. The finance team notes that FIFO and LIFO, each impact reported profits, tax liabilities, and inventory values differently, especially during periods of volatile material prices. The operations team is concerned about the complexity of calculations and the alignment with actual material flows. The management team must decide which method best supports both financial reporting and operational needs. Evaluate the implications of choosing between FIFO, LIFO for inventory valuation in a manufacturing company experiencing frequent price fluctuations. How should management decide which method to adopt, and what improvements would you suggest to ensure both financial accuracy and operational efficiency? (5 Marks)

Ans 2a.

Introduction

Inventory valuation is a crucial element of financial and operational decision-making in manufacturing companies. The method chosen affects reported profits, tax liabilities, and balance sheet values, especially during times of volatile material prices. FIFO and LIFO are two widely used approaches, each with unique implications for financial reporting and operational practices. In a scenario where material costs fluctuate frequently, the choice between FIFO and LIFO can significantly influence managerial decisions, profitability analysis, and the overall transparency of financial performance.

 

Q2(B). A textile mill’s spinning department reported an abnormal gain this quarter, with actual production surpassing the normal output due to enhanced worker efficiency and minor process improvements. While this has led to lower per-unit costs and higher reported profits, the finance director is concerned about whether this gain is sustainable and how it should influence future budgeting, cost estimation, and operational planning. Assess the managerial response to an abnormal gain in a textile mill’s spinning process, where actual output exceeded expected levels due to improved worker efficiency. How should management adjust future cost estimates and operational strategies in light of this abnormal gain, and what are the potential risks of misinterpreting such gains in process costing? (5 Marks)

Ans 2B.

Introduction

In process industries like textiles, output is often standardized, and any deviation from normal production is closely analyzed. An abnormal gain occurs when actual production surpasses the expected output, typically due to efficiency improvements or favourable conditions. While such gains reduce per-unit costs and increase profits in the short term, management must carefully evaluate their sustainability. Misinterpreting abnormal gains as permanent improvements can distort future budgeting, cost estimations, and planning, potentially leading to unrealistic targets