Indian Institute of Management, Indore

PGP-1, 2013-2015

Cost Accounting: Assignment

Prepared by:
2013PGP020 | Aditya Sood
2013PGP210 | Manish Kumar
2013PGP116 | Natasha De
2013PGP314 | Ramesh Krishnan U.
2013PGP317 | Ranjan Kumar
2013PGP371 | Shenu Nandgaye

Under the guidance of

Prof. Jayanthi Iyer
Indian Institute of Management, Indore

Mahendra Trading Company

MG Road , Khajuri Bazar, Indore-452001
The Company
The company was founded in 1996. The primary purpose of the organization involves procurement of
stationary goods for different organisations/institutions and wholesale distribution of the goods in
Indore and its adjacent areas like Dewas, Pitampur, Rau etc.
Products: Mahendra Trading Company deals in all stationary material like notebooks, geometry
instruments, CDs/DVDs, computer appliances etc. The various products are mainly from big brands
like ITC, Moserbear, Navneet, Natraj etc.
The company sells broadly to three types of customers via the following distribution channels:

Organisations (schools/offices/institutions)

Stationary Shops

Smaller Distributors

Organizational Structure: The organization is a lean organization. The firm is a joint proprietorship.
It is headed by Mr. R Mahendra and Mr A Mahendra. The staff consists of a manager who looks after
the procurement and the daily operations. He is assisted by several other employees like computer
operator, procurement division etc.
Process Map of the Organization

Procurement

Port Clearing

Receipt and
Inspection

Inventory
Control

Dispensing to
Consumers

Requisition of
Supplies

Storage

Income Statement

Sales

88,50,000.00

79,50,000.00

Direct Labour and Expenses

Distribution Overhead
Packaging and Handling

2,06,000.00

Store Delivery

1,99,000.00

Procurement Control

97,500.00

5,02,500.00

Gross Margin

3,97,500.00

Gross Margin Percentage

4.491%

General Admin Expense

1,60,000.00

Operating Income (Pre-Tax)

2,37,500.00

Present costing system

It attributed the indirect costs equally amongst the three distribution channels.
The following data for the month of April, 2013 in respect of Mahendra Trading Company Enterprises
has been reported:
Traditional Costing
Organizations
Number of Trips/Deliveries

Stationary Shops

Smaller Distributors

250.00

1,250.00

100.00

Average Revenue per Trip

12,500.00

2,500.00

26,000.00

Average Cost per Trip

11,300.00

2,240.00

23,250.00

Contribution per trip

1,200.00

260.00

2,750.00

Total Contribution

300,000.00

325,000.00

275,000.00

Distribution Overhead

167,500.00

167,500.00

167,500.00

Gross Margin

132,500.00

157,500.00

107,500.00

General Admin Expenses

53,333.33

53,333.33

53,333.33

Operating Profit before Tax

79,166.67

104,166.67

54,166.67

The operating cost (other than the cost of goods sold) of Mahendra Trading Company Enterprises are
Rs. 5,02,500.00. These distribution overheads are assigned to three activities i.e. store delivery, and
packaging and handling per store, procurement control equally.
Correct method through ABC Costing
Organizations

Stationary Shop

Smaller Distributors

2,500,000.00

2,500,000.00

2,500,000.00

Number of Medicine
Packets

Order Size

10,000.00

2,000.00

25,000.00

5.00

12.00

45.00

250.00

1,250.00

100.00

60.00

45.00

30.00

Procurement

5,000.00

5,000.00

5,000.00

Packaging and Handling

Order Size

10,000.00

2,000.00

25,000.00

15,000.00

56,250.00

3,000.00

5,000.00

Number of Batches in
each trip
Number of
Trips/Deliveries
Average Trip Length
(km)
Batch size in

Average Trip
Store Delivery

Length*No of trips
Batch size in

Procurement Control

Procurement

5,000.00

5,000.00

Stationary

Smaller

Distribution Overhead

Cost Driver

Total Cost

Organizations

Shops

Distributors

Packaging and Handling

Order Size

206,000.00

55,675.68

11,135.14

139,189.19

199,000.00

40,202.02

150,757.58

8,040.40

97,500.00

32,500.00

32,500.00

65,000.00

502,500.00

128,377.70

194,392.71

212,229.59

Average Trip
Store Delivery

Lenth*No of trips
Batch size in

Procurement Control

Procurement

Income Statement according to ABC Costing

This shows that Hospitals Distribution Channel is the most profitable amongst the three whereas the
traditional method showed that Chemists Channel was the most profitable.
ABC Costing
Organizations
Number of Trips/Deliveries

Stationary Shops

Smaller Distributors

250.00

1,250.00

100.00

Average Revenue per Trip

12,500.00

2,500.00

26,000.00

Average Cost per Trip

11,300.00

2,240.00

23,250.00

Contribution per trip

1,200.00

260.00

2,750.00

Total Contribution

300,000.00

325,000.00

275,000.00

Distribution Overhead
Packaging and Handling

55,675.68

11,135.14

139,189.19

Store Delivery

40,202.02

150,757.58

8,040.40

Procurement Control

32,500.00

32,500.00

65,000.00

Total

128,377.70

194,392.71

212,229.59

Gross Margin

171,622.30

130,607.29

62,770.41

53,333.33

53,333.33

53,333.33

118,288.97

77,273.96

9,437.07

General Admin Expenses

Operating Profit before Tax

Types of Costs:

Direct and Indirect Costs division is shown above.

None of the Costs can be divided into inventorial and conversion costs because the revenues and
costs incurred with the company pertain to distribution and these cannot be held for store to be
used on a later date.
Fixed Costs are costs of setting up warehouses, transport vehicles, and office furniture and
fixtures. Variable costs are electricity, salaries, fuel used in transport, office stationery and so on.
Prime Costs are those that were occurred for many years at once, and period costs are those that
are incurred each year.

Roles of Accountants
Accountants are helpful in making companys various decisions be it strategic . They are also
responsible for planning and controlling by performing three important roles of problem solving, scorekeeping, and attention directing.
Problem solving makes use of comparative analysis for decision making.
Score-keeping accumulates data and reports resultsto all levels of managementdescribes
how the organization is doing.
Attention directing helps managers focus on opportunities and problems.
These three roles are simultaneously performed due to the interaction among strategic decisions,
planning decisions and control decisions.
Various decisions put different emphases on these three roles and it can be difficult to distinguish the
roles because management accountants who may often engaged in overlapping of activities.
Strategic and planning decisions, the problem solving role is most prominent.
Control decisions, management accountants are primarily engaged in score-keeping and
attention directing activities.
Feedback from score-keeping and attention-directing often leads to revisions of planning
decisions and return to the problem solving role.