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CMA Intermediate · Cost Accounting · Direct Expenses

Vihaan Engineering pays a royalty of Rs 5 per unit on units sold and a separate royalty of Rs 2 per unit on units produced under a licence. In a month it produced 10,000 units and sold 8,000 units. Which amount is the direct expense to be included in the cost of production for the month?

Rs 20,000. Only the royalty payable on production, Rs 2 on 10,000 units, is a direct expense included in cost of production. The royalty on units sold is a selling and distribution cost and must be kept out of production cost.

  1. ARs 20,000Correct
  2. BRs 56,000
  3. CRs 40,000
  4. DRs 36,000

Explanation

Royalty on production (Rs 2 x 10,000 = Rs 20,000) is a direct expense in production cost. Royalty on sales (Rs 5 x 8,000 = Rs 40,000) is a selling cost, not a production cost. Adding both (60,000) or using sales units for the production royalty is wrong.

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