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
Variance analysis is an important technique in cost accounting since it helps management assess the efficiency and effectiveness of production processes. By comparing actual costs to standard or planned prices, companies may discover areas of good or bad performance, limit spending, and make educated choices. Labour and administrative expenditures account for a large share of overall manufacturing costs. By analysing worker rate and efficiency deviations, as well as overhead absorption, manufacturers
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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 an important part of financial management for manufacturing organisations since it has a direct impact on reported earnings, tax liabilities, and the balance sheet. Inventory accounting methods must strike a compromise between financial reporting accuracy, regulatory compliance, and operational pragmatism. Two generally used systems are FIFO (First-In, First-Out) and LIFO (Last-In, First-Out), both of which have different consequences for profit assessment, taxes, and inventory management, especially in contexts with rapid material price swings. A thorough examination of these
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 costing, an unexpected gain occurs when real output exceeds the predicted or typical output under regular production circumstances. Abnormal gains are often the consequence of increased efficiency, technical advancements, or favourable operating conditions. While atypical gains temporarily cut per-unit expenses and enhance reported profits, they are not recurrent and must be carefully managed. Proper evaluation is required to ensure that such advantages do not result in unrealistic
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