Page 156 - DCOM202_COST_ACCOUNTING_I

Cost Accounting – I

Notes II. Calculation of potential total sales if there was no labor turnover
Particulars Hours
Hours lost for delayed replacement 12,000
Unproductive hours 50% of 9000 hours 4,500
Total hours lost 16,500
Actual labor hours spent 4,80,000
Less: Unproductive hours 4,500
Productive labor hours worked 4,75,500

Sales related to 4, 75, 500 productive hours = ` 600 lakhs Potential sales lost due to loss of
16, 500 direct labor hours, ` 6, 00, 00, 000 / 4, 75, 500 [Direct labor hours] x 16, 500 D.L.H. =
` 20, 82, 019.

Total sales if there was no labor turnover = ` 6, 00, 00, 000 + ` 20, 82, 019 = ` 6, 20, 82, 019.
III. Variable expenses if there was no labor turnover: ` 2, 10, 00, 000 / 6, 00, 00, 000 x 6, 20, 82,
019 = ` 2, 17, 28, 707

Comparative Statement showing Actual Profit vis-à-vis Profit, Which would Have Been
Realized If There Was No Labor Turnover
Particulars Actual ` If No Labor Turnover `
Sales 6,00,00,000 6,20,82,019
Costs:
Variable cost 2,10,00,000 2,17,28,707
Direct labor 48,00,000 49,20,000
Fixed costs 80,00,000 80,00,000
Separations replacement costs 1,00,000 —
Total costs 3,39,00,000 3,46,48,707

Profit [Sales – Total Costs] 2,61,00,000 2,74,33,312
Thus loss of profit due to labor turnover = ` 2, 74, 33, 312 – ` 2, 61, 00, 000 = ` 13, 33, 312
Illustration: A company uses an old method of machining a part manufactured for sale. The
estimates of operating details for the year 2005-06 are given below.
Number of parts to be manufactured and sold: 30, 000 Raw materials required per part: 10 kg @ `
2 per kg Average wage rate per worker: ` 40 per day of 8 hours Average labor efficiency: 60%

Standard time required to manufacture one part: 2 hours Overhead rate: ` 10 per clock hour
Material handling expenses: 2% of the value of raw material.
The company has a suggestion box scheme and an award equivalent to three months saving in
labor cost is passed on to the employee whose suggestion is accepted. In response to this scheme
suggestion has been received from an employee to use a special Jig in the manufacture of the
aforesaid part. The cost of the Jig, which has life of one year is ` 30, 000 and the use of the Jig will
reduce the standard time by 12 minutes.
Required:
(a) Compute the amount of award payable to the employee who has given the suggestion.

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