Cost Ascertainment: Material, Employee and Overheads
Cost Ascertainment covers the three input costs - material, employee and overheads - and is the heaviest computational area of Paper 8. Expect formula-driven questions with a small twist in the wording.
Material
- EOQ = √(2AO/C), where A is annual consumption, O ordering cost per order and C carrying cost per unit per year. EOQ minimises the sum of ordering and carrying costs.
- Reorder level = maximum consumption × maximum lead time. Minimum level = reorder level − (normal consumption × normal lead time). Maximum level = reorder level + EOQ − (minimum consumption × minimum lead time). Danger level sits below minimum level.
- Issue pricing is FIFO or weighted average under CAS 6; LIFO is not permitted for cost statements.
Employee cost
Time rate pays hours worked; piece rate pays output. Halsey bonus = 50% of time saved × rate. Rowan bonus = (time saved ÷ time allowed) × time taken × rate, which caps the bonus at time saved × rate. Normal idle time is charged to overheads; abnormal idle time goes to the costing profit and loss account.
Overheads
Allocation is direct; apportionment is indirect. Secondary distribution uses direct, step-ladder or reciprocal (simultaneous equation) methods. Absorption bases include direct labour hours, machine hours and material cost. Machine hour rate = machine expenses ÷ machine hours. Over/under absorption = overhead absorbed − overhead incurred.
Worked example
Standard time 10 hours, actual time 8 hours, wage rate ₹50 per hour. Halsey: 8 × 50 + 50% × 2 × 50 = ₹450. Rowan: 8 × 50 + (2 ÷ 10) × 8 × 50 = ₹480. EOQ check: annual demand 12,000 units, ordering cost ₹200, carrying cost ₹12, gives √(2 × 12,000 × 200 ÷ 12) = √4,00,000 ≈ 632 units.
Traps
Forgetting to deduct the scrap value of normal loss before dividing by good units; pairing maximum lead time with normal consumption in the reorder formula; charging abnormal idle time to overheads; and inverting the Rowan fraction.