Page 99 - DCOM206_COST_ACCOUNTING_II

Cost Accounting – II

Notes (a) Differential Cost = 14,47,267 – 16,50,000 = ` 97,267
97,267
(b) Minimum price per export = = ` 64.84 per unit
1,500
At this price, there is no addition to revenue. Any price above ` 64.84 per unit may be accepted.
A price below this may be considered, if other benefits i.e., mere sales and revenue are likely to
accrue. It is assumed that no capital investment is necessary and no export charges have to be
incurred and that the export price will have no effect on the home market where the product will
continue to be sold at the old price.
Problem 4:
(Equipment replacement) A factory engaged in manufacturing of electronic goods has a ten-year
old equipment depreciated on straight-line basis. The useful estimated life of the equipment
was estimated to be 20 years with a residual value of ` 3 lakhs (original cost of the equipment is
23 lakhs.) the output of the equipment is 1,200 units per hour.
The management now proposes to install an equipment worth ` 50 lakhs which has an estimated
life of 15 years and a residual value of ` 5 lakhs. The payment terms for the new equipment
include a part exchange provision of ` 6 lakhs in respect of the existing equipment. The output
of the new equipment is 3,000 units per hour.
Other comparative annual cost relating to the two equipments are as under:
Existing New Equipment
Equipment (`)
Wages 1,00,000 1,20,000
Repairs and Maintenance 20,000 52,000
Consumables 3,20,000 4,80,000
Power 1,20,000 1,50,000
Allocation of fixed cost 60,000 80,000
Total hours run per year 2,400 2,400

You are required to prepare a comparative schedule showing total conversion cost as well as
cost per 1,000 units after considering interest @10% on net cash outflow for procuring the new
equipment and also for providing the yearly recovery of the loss suffered in the transaction.

Solution:
Comparative statement of Cost of Equipment
Existing Equipment New Equipment
Capital cost of equipment including cost of installation 23,00,000 50,00,000
Less: Residual Value 3,00,000 5,00,000
20,00,000 45,00,000
Less: Depreciation written off 10,00,000 –
10,00,000 45,00,000

Comparative statement of Operational Cost of Equipment
Annual Depreciation
New equipment 3,00,000
Old equipment 1,00,000 70,00,000
Interest on capital - 4,40,000
Contd...
Wages 1,00,000 1,20,000
Repairs and maintenance 20,000 52,000
94 Consumables 3,20,000 4,80,000
LOVELY PROFESSIONAL UNIVERSITY
Power 1,20,000 1,50,000
Allocation of fixed expense 60,000 80,000
7,20,000 16,92,000
Hours run per annum 2400 2400
Operating cost per hour (`) 300 705
Output per hour (units) 1200 3000
Operating cost per 1000 units (`) 250 2356