CMA Intermediate · Cost Accounting · Direct Expenses
A firm's cost sheet shows royalty on sales at Rs 4 per unit sold and royalty on production at Rs 3 per unit produced. Production was 10,000 units and sales 9,000 units. Which treatment is correct?
Royalty on production, 10,000 units at Rs 3 = Rs 30,000, is a direct expense, while royalty on sales, 9,000 units at Rs 4 = Rs 36,000, is treated as selling and distribution overhead.
- AProduction royalty Rs 30,000 is a direct expense; sales royalty Rs 36,000 is a selling overheadCorrect
- BBoth royalties Rs 66,000 are direct expenses
- CProduction royalty Rs 27,000 is direct expense; sales royalty Rs 40,000 is selling overhead
- DBoth royalties are factory overheads
Explanation
Royalty on production is a direct expense: 10,000 x 3 = 30,000. Royalty on sales is a selling and distribution overhead: 9,000 x 4 = 36,000. Wrong bases give the other figures.
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