CA Inter Cost and Management Accounting Notes by PW for January 2027 Exam

Preparing a cost sheet requires you to understand how different expenses contribute to the total cost of a product. You need to classify direct and indirect expenses correctly, calculate the different stages of cost, and account for items such as raw materials, work-in-progress and finished goods.

The CA Inter Cost and Management Accounting Notes by PW help you revise these concepts through a detailed cost sheet format, expense treatment rules, important points to remember, and a practical question. The notes cover the calculations and classifications involved in preparing a cost sheet for the January 2027 exam.

CA Inter Cost and Management Accounting Questions

1. XYZ, a manufacturing firm, has revealed the following information for September 2019:

Raw materials: Rs. 2,42,000 on 1 September and Rs. 2,92,000 on 30 September
Work-in-progress: Rs. 2,00,000 on 1 September and Rs. 5,00,000 on 30 September

The firm incurred the following expenses for a targeted production of 1,00,000 units during the month:

Consumable stores and spares of factory: Rs. 3,50,000
Research and development cost for process improvements: Rs. 2,50,000
Quality control cost: Rs. 2,00,000
Packing cost (secondary) per unit of goods sold: Rs. 2
Lease rent of production asset: Rs. 2,00,000
Administrative expenses (general): Rs. 2,24,000
Selling and distribution expenses: Rs. 4,13,000
Finished goods: opening Nil, closing 5,000 units

Defective output, which is 4% of targeted production, realises Rs. 61 per unit. Closing stock is valued at cost of production (excluding administrative expenses). Cost of goods sold, excluding administrative expenses, is Rs. 78,26,000. Direct employees’ cost is 1/2 of cost of material consumed. Selling price of the output is Rs. 110 per unit.

You are required to: (i) calculate the value of material purchased and (ii) prepare a cost sheet showing the profit earned by the firm.

Solution:

Working note 1: Let raw material purchased = y
Raw material consumed = 2,42,000 + y − 2,92,000 = y − 50,000
Direct wages = 1/2 × (y − 50,000) = 0.5y − 25,000
Prime cost = (y − 50,000) + (0.5y − 25,000) = 1.5y − 75,000

Working note 2: Cost of goods sold = Rs. 78,26,000, and there is no opening stock, so the whole of it comes from cost of production.
Good units produced = 1,00,000 − 4,000 = 96,000
Cost of production = Rs. 82,56,000 (see statement below), so cost per unit = 82,56,000 ÷ 96,000 = Rs. 86
Closing stock of finished goods = 5,000 × 86 = Rs. 4,30,000

Statement of cost and profit:

Opening stock of material: Rs. 2,42,000
Add: Purchases: Rs. 52,50,000
Less: Closing stock of material: (Rs. 2,92,000)
Direct material consumed: Rs. 52,00,000
Add: Direct labour (1/2 × 52,00,000): Rs. 26,00,000
Prime cost: Rs. 78,00,000
Add: Consumable stores and spares: Rs. 3,50,000
Add: Lease rent of production asset: Rs. 2,00,000
Gross factory cost: Rs. 83,50,000
Add: Opening WIP: Rs. 2,00,000
Less: Closing WIP: (Rs. 5,00,000)
Net factory cost: Rs. 80,50,000
Add: Quality control cost: Rs. 2,00,000
Add: Research and development cost: Rs. 2,50,000
Less: Sale of defective goods (1,00,000 × 4% × 61): (Rs. 2,44,000)
Cost of production: Rs. 82,56,000
Less: Closing stock of finished goods: (Rs. 4,30,000)
Cost of goods sold: Rs. 78,26,000
Add: Administration overheads: Rs. 2,24,000
Add: Secondary packing (Rs. 2 × 91,000 units sold): Rs. 1,82,000
Add: Selling and distribution overheads: Rs. 4,13,000
Cost of sales: Rs. 86,45,000
Add: Profit (balancing figure): Rs. 13,65,000
Sales [(1,00,000 − 4,000 − 5,000) × 110]: Rs. 1,00,10,000

Finding y: 78,00,000 = 1.5y − 75,000
1.5y = 78,75,000
y = Rs. 52,50,000

Answer: (i) Material purchased = Rs. 52,50,000. (ii) Profit = Rs. 13,65,000

2. The following figures are available from the books of SK Co. for the year ended 31 March:

Materials: stock on 1 April Rs. 2,000, stock on 31 March Rs. 4,000, purchases Rs. 20,000
Wages: Rs. 15,000
Profit for the year: Rs. 12,180
Selling overhead: Rs. 10,500
Factory overhead: Rs. 9,000
Administration overhead: Rs. 8,400

(a) Prepare a cost sheet showing prime cost, work cost, cost of production, cost of sales and sales.

(b) In April, the factory receives an order for a job which will require materials of Rs. 2,400 and wages of Rs. 1,500. Ascertain the sale price of the job if the factory intends to earn a profit 10% higher than the percentage of profit earned in the year ending on 31 March. Assume that the factory overhead has gone up by 16 2/3% and selling overhead has gone down by 20% after 31 March. Further assume that factory overhead is recovered as a percentage of wages, and administration and selling overhead as a percentage of works cost.

Solution:

(a) Statement of cost and profit:

Opening stock of material: Rs. 2,000
Add: Purchases: Rs. 20,000
Less: Closing stock of material: (Rs. 4,000)
Direct material consumed: Rs. 18,000
Add: Direct wages: Rs. 15,000
Prime cost: Rs. 33,000
Add: Factory overhead: Rs. 9,000
Works cost / cost of production: Rs. 42,000
Add: Administration overhead: Rs. 8,400
Add: Selling overhead: Rs. 10,500
Cost of sales: Rs. 60,900
Add: Profit: Rs. 12,180
Sales: Rs. 73,080

(b) Recovery rates:

Factory overhead = 9,000/15,000 × 100 = 60% of wages. After an increase of 16 2/3%: 60% × 7/6 = 70% of wages
Administration overhead = 8,400/42,000 × 100 = 20% of works cost
Selling overhead = 10,500/42,000 × 100 = 25% of works cost. After a decrease of 20%: 25% × 80% = 20% of works cost
Profit = 12,180/60,900 × 100 = 20% of cost of sales. Profit 10% higher: 20% × 110% = 22% of cost of sales

Statement of selling price of the job:

Direct material: Rs. 2,400
Direct wages: Rs. 1,500
Prime cost: Rs. 3,900
Add: Factory overhead (70% × 1,500): Rs. 1,050
Works cost: Rs. 4,950
Add: Administration overhead (20% × 4,950): Rs. 990
Add: Selling overhead (20% × 4,950): Rs. 990
Cost of sales: Rs. 6,930
Add: Profit (22% × 6,930): Rs. 1,525 (rounded)
Sales: Rs. 8,455

Answer: (a) Sales = Rs. 73,080. (b) Selling price of the job = Rs. 8,455

3. A factory incurred the following expenditure during the year:

Direct material consumed: Rs. 12,00,000
Manufacturing wages: Rs. 7,00,000
Manufacturing overheads: Fixed Rs. 3,60,000 and Variable Rs. 2,50,000, totalling Rs. 6,10,000
Total: Rs. 25,10,000

In the next year, the following changes are expected in production and cost of production:
(a) Production will increase due to recruitment of 60% more workers in the factory.
(b) Overall efficiency will decline by 10% on account of recruitment of new workers.
(c) There will be an increase of 20% in fixed overhead and 60% in variable overhead.
(d) The cost of direct material will be decreased by 6%.
(e) The company desires to earn a profit of 10% on selling price.

Ascertain the cost of production and selling price.

Solution:

Let existing production units = 100
Add: Increase due to recruitment of workers (100 × 60%) = 60
Total = 160
Less: Decline due to efficiency (160 × 10%) = 16
New production units = 144

Statement of cost and sales:

Direct material: 12,00,000 × 144/100 × 94/100 = Rs. 16,24,320
Direct wages: 7,00,000 × 144/100 × 100/90 = Rs. 11,20,000
Prime cost: Rs. 27,44,320
Add: Fixed overheads: 3,60,000 × 120/100 = Rs. 4,32,000
Add: Variable overheads: 2,50,000 × 144/100 × 160/100 = Rs. 5,76,000
Cost of production: Rs. 37,52,320
Add: Profit (balancing figure): Rs. 4,16,924
Sales (37,52,320 ÷ 90%): Rs. 41,69,244

Direct material and variable overheads move with quantity, wages are adjusted inversely for efficiency, and fixed overheads change only by the stated percentage.

Answer: Cost of production = Rs. 37,52,320. Selling price = Rs. 41,69,244

4. A factory’s normal capacity is 1,20,000 units per annum. The estimated costs of production are as under:

(a) Direct material Rs. 3 per unit; direct labour Rs. 2 per unit (subject to a minimum of Rs. 12,000 per month).
(b) Indirect expenses: Fixed Rs. 1,60,000 per annum; Variable Rs. 2 per unit; Semi-variable Rs. 60,000 up to 50% capacity and additional Rs. 20,000 for every 20% increase in capacity.
(c) Each unit of raw material yields scrap which is sold at the rate of 20 paise per unit.

The factory worked at 50% capacity for the first three months, but it was expected that it would work at 80% capacity for the remaining 9 months. During the first three months, the selling price per unit was Rs. 12. What should be the price in the remaining nine months to produce a total profit of Rs. 2,18,000?

Solution:

First 3 months (50% capacity):
Units = 1,20,000 × 50% × 3/12 = 15,000
Direct material (15,000 × 3): Rs. 45,000
Direct wages: 15,000 × 2 = Rs. 30,000, which is less than the minimum of 12,000 × 3 = Rs. 36,000, so Rs. 36,000 is taken
Fixed expenses (1,60,000 × 3/12): Rs. 40,000
Variable expenses (15,000 × 2): Rs. 30,000
Semi-variable expenses (60,000 × 3/12): Rs. 15,000
Less: Scrap (15,000 × 0.20): (Rs. 3,000)
Total cost: Rs. 1,63,000

Remaining 9 months (80% capacity):
Units = 1,20,000 × 80% × 9/12 = 72,000
Direct material (72,000 × 3): Rs. 2,16,000
Direct wages: 72,000 × 2 = Rs. 1,44,000, which is more than the minimum of 12,000 × 9 = Rs. 1,08,000, so Rs. 1,44,000 is taken
Fixed expenses (1,60,000 × 9/12): Rs. 1,20,000
Variable expenses (72,000 × 2): Rs. 1,44,000
Semi-variable expenses (60,000 + 20,000 + 20,000) × 9/12: Rs. 75,000
Less: Scrap (72,000 × 0.20): (Rs. 14,400)
Total cost: Rs. 6,84,600

Calculation of selling price for the remaining 9 months:

Sales for first 3 months (15,000 × 12): Rs. 1,80,000
Less: Cost for first 3 months: Rs. 1,63,000
Profit for first 3 months: Rs. 17,000
Annual target profit: Rs. 2,18,000
Profit required from remaining 9 months: Rs. 2,01,000
Add: Cost for remaining 9 months: Rs. 6,84,600
Sales required for remaining 9 months: Rs. 8,85,600
Selling price per unit = 8,85,600 ÷ 72,000 = Rs. 12.30

Answer: Selling price for the remaining nine months = Rs. 12.30 per unit

5. PNME Ltd. manufactures two types of masks, “Disposable Masks” and “Cloth Masks”. The cost data for the year ended 31 March 2022 is as follows:

Direct materials: Rs. 12,50,000
Direct wages: Rs. 7,00,000
Production overhead: Rs. 4,00,000
Total: Rs. 23,50,000

It is further ascertained that:

• Direct material cost per unit of cloth mask was twice as much as that of disposable mask.

• Direct wages per unit for disposable mask were 60% of those for cloth mask.

• Production overhead per unit was at the same rate for both types of masks.

• Administration overhead was 50% of production overhead for each type of mask.

• Selling cost was Rs. 2 per cloth mask.

• Selling price was Rs. 35 per unit of cloth mask.

• Cloth masks sold: 45,000 units.

• Units produced: Cloth masks 50,000 and Disposable masks 1,50,000.

You are required to prepare a cost sheet for cloth masks showing (i) cost per unit and total cost and (ii) profit per unit and total profit.

Solution:

Working note 1: Direct material
Let the cost per unit of disposable mask = M, so cloth mask = 2M
(2M × 50,000) + (M × 1,50,000) = 12,50,000
2,50,000M = 12,50,000
M = Rs. 5, so direct material per cloth mask = 2 × 5 = Rs. 10

Working note 2: Direct wages
Let the wages per unit of cloth mask = W, so disposable mask = 0.6W
(W × 50,000) + (0.6W × 1,50,000) = 7,00,000
1,40,000W = 7,00,000
W = Rs. 5 per cloth mask

Working note 3: Production overhead
Overhead per unit = 4,00,000 ÷ (50,000 + 1,50,000) = Rs. 2
For cloth masks = 2 × 50,000 = Rs. 1,00,000

Administration overhead is related to production overhead in the question, so it is included in cost of production only.

Cost sheet for cloth masks (units produced 50,000, units sold 45,000):

Direct materials: Rs. 10.00 per unit, Rs. 5,00,000 total
Direct wages: Rs. 5.00 per unit, Rs. 2,50,000 total
Prime cost: Rs. 15.00 per unit, Rs. 7,50,000 total
Production overhead: Rs. 2.00 per unit, Rs. 1,00,000 total
Factory cost: Rs. 17.00 per unit, Rs. 8,50,000 total
Administration overhead (50% of production overhead): Rs. 1.00 per unit, Rs. 50,000 total
Cost of production: Rs. 18.00 per unit, Rs. 9,00,000 total
Less: Closing stock (5,000 × 18): (Rs. 90,000)
Cost of goods sold (45,000 units): Rs. 18.00 per unit, Rs. 8,10,000 total
Add: Selling cost: Rs. 2.00 per unit, Rs. 90,000 total
Cost of sales: Rs. 20.00 per unit, Rs. 9,00,000 total
Profit: Rs. 15.00 per unit, Rs. 6,75,000 total
Sales (45,000 × 35): Rs. 35.00 per unit, Rs. 15,75,000 total

Answer: Total cost = Rs. 20 per unit (Rs. 9,00,000). Profit = Rs. 15 per unit (Rs. 6,75,000)

CA Inter Cost and Management Accounting Notes PDF for January 2027 Exam

Use the CA Inter Cost and Management Accounting Notes PDF by PW to revise the Cost Sheet chapter. The notes explain the cost sheet format, its different cost components, treatment of expenses, overhead classification, conversion cost and important points to remember. 

Why use CA Inter Cost and Management Accounting Notes by PW?

The notes cover important concepts and expense treatments that you need to understand while preparing a cost sheet. You can use them to:

• Understand the Cost Sheet Format: Revise the sequence of cost calculations, from direct material consumed and prime cost to net factory cost, cost of production, cost of goods sold, cost of sales and sales.

• Identify Different Cost Components: Understand the treatment of direct labour, direct expenses, factory overheads, administrative overheads, selling and distribution overheads, and other expenses while calculating costs.

• Revise the Treatment of Expenses: Check how expenses such as insurance on raw material and work-in-progress, stores-related expenses, bank charges, audit fees, salesmen's commission, pollution control expenses and carriage on raw material returns are classified.

• Understand GST and Discount Treatment: Revise how input tax credit, unavailable ITC, customs duty, trade discounts, cash discounts and other discounts are treated while preparing a cost sheet.

• Learn the Treatment of Scrap and Defectives: Understand when the sale value of scrap is deducted from raw material consumed or net factory cost, how disposal costs are treated, and how rectification costs are accounted for.

• Differentiate Normal and Abnormal Losses: Revise how normal losses are charged to the consumer through cost and abnormal losses are transferred to the Profit and Loss Account.

• Understand Conversion Cost: Learn how direct labour, direct expenses and factory overheads contribute to the cost of converting raw materials into finished goods.

• Practise Cost Sheet Calculations: Refer to the practical question included in the notes to understand how different expenditure items are considered while preparing a cost sheet.

Revise the Cost Sheet chapter with the CA Inter Cost and Management Accounting Notes by PW before the January 2027 examination. Work through the cost sheet format, practise classifying different expenses, and review the treatment of adjustments such as GST, discounts, scrap and defectives to strengthen your understanding of cost calculations. 

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