Saturday, January 18, 2014

IGNOU SOLVED ASSIGNMENTS: ECO - 10 (2015 - 16)

ECO – 10: ELEMENTS OF COSTING
For July 2015 and January 2016 admission cycle
School of Management Studies
India Gandhi National Open University
Maiden Geri, New Delhi -110068
Elective Course in Commerce
ECO – 10: Elements of Costing
ASSIGNMENT- 2015-16
Dear Students,
As explained in the Programme Guide, you have to do one Tutor Marked Assignment in this Course.
Assignment is given 30% weightage in the final assessment. To be eligible to appear in the Term-end examination, it is compulsory for you to submit the assignment as per the schedule. Before attempting the assignments, you should carefully read the instructions given in the Programme Guide.
This assignment is valid for two admission cycles (July 2015 and January 2016). The validity is given below:
1. Those who are enrolled in July 2015, it is valid up to June 2016.
2. Those who are enrolled in January 2016, it is valid up to December 2016.
You have to submit the assignment of all the courses to The Coordinator of your Study Centre. For appearing in June Term-End Examination, you must submit assignment to the Coordinator of your study centre latest by 15th March. Similarly for appearing in December Term-End Examination, you must submit assignments to the Coordinator of your study centre latest by 15th September.

 Answer of Q.N.1.
Cost Accounting: It is the method of accounting for cost. The process of recording and accounting for all the elements of cost is called cost accounting.

I.C.M.A. has defined cost accounting as follows: “The process of accounting for cost from the point at which expenditure is incurred or committed to the establishment of its ultimate relationship with cost centers and cost units. In its widest usage it embraces the preparation of statistical data, the application of cost control methods and the ascertainment of the profitability of activities carried out or planned”.
Objectives of Cost Accounting
a)      To serve as a guide to price fixing of products.
b)      To disclose sources to wastage in various operations of manufacture.
c)       To reveal sources of economy in production process.
d)      To provide for an effective system of stores and material.
e)      To measure the degree of efficiency of the various departments or units of production.
f)       To provide suitable means and information to the top management to control and guide the operations of the business organisation.
g)      To exercise effective control on the costs, time and efforts of labour, machines and other factors of production.
h)      To compare actual costs with the standard costs and analyse the causes of variation.
i)        To provide necessary information to develop cost standards and to introduce the system of budgetary control.
j)        It enables the management to know where to economize on costs, how to fix prices, how to maximize profit and so on.
Role of Cost Accounting in Planning and Control of business operations:
There cannot be a readymade costing system for every undertaking. In order to meet the special needs of a business, a costing system has to be especially devised to give it a blend of efficiency and economy. The installation of a costing system requires a thorough study and understanding of all the aspect involved as otherwise the system may be a misfit and enterprise will not be able to derive full advantage from it. While installing a costing system it is important to make cost benefit analysis i.e., the benefits from the system must exceed the amount spent on it. The management must feel the need for it and should be able to make full use of the information available from the system in the conduct of business. In other words, the system should be justified on the basis of its value to management. Costing system is a useful tool in the hands of management because it helps the management in the following ways:
1. Helps in Decision Making: Cost accounting helps in decision making. It provides vital information necessary for decision making. For instance, cost accounting helps in deciding:
a. Whether to make a product buy a product?
b. Whether to accept or reject an export order?
c. How to utilize the scarce materials profitably?
2. Helps in fixing prices: Cost accounting helps in fixing prices. It provides detailed cost data of each product (both on the aggregate and unit basis) which enables fixation of selling price. Cost accounting provides basis information for the preparation of tenders, estimates and quotations.
3. Formulation of future plans: Cost accounting is not a post-mortem examination. It is a system of foresight. On the basis of past experience, it helps in the formulation of definite future plans in quantitative terms. Budgets are prepared and they give direction to the enterprise.
4. Avoidance of wastage: Cost accounting reveals the sources of losses or inefficiencies such as spoilage, leakage, pilferage, inadequate utilization of plant etc. By appropriate control measures, these wastages can be avoided or minimized.
5. Highlights causes: The exact cause of an increase or decrease in profit or loss can be found with the aid of cost accounting. For instance, it is possible for the management to know whether the profits have decreased due to an increase in labour cost or material cost or both.
6. Reward to efficiency: Cost accounting introduces bonus plans and incentive wage systems to suit the needs of the organization. These plans and systems reward efficient workers and improve productivity as well improve the morale of the work -force.
7. Prevention of frauds: Cost accounting envisages sound systems of inventory control, budgetary control and standard costing. Scope for manipulation and fraud is minimized.
8. Improvement in profitability: Cost accounting reveals unprofitable products and activities. Management can drop those products and eliminate unprofitable activities. The resources released from unprofitable products can be used to improve the profitability of the business.
9. Preparation of final accounts: Cost accounting provides for perpetual inventory system. It helps in the preparation of interim profit and loss account and balance sheet without physical stock verification.
10. Facilitates control: Cost accounting includes effective tools such as inventory control, budgetary control and variance analysis. By adopting them, the management can notice the deviation from the plans. Remedial action can be taken quickly.
Q.2. (a) Two components A and B are used as follows:
Normal usage                    50 units per week each
Minimum usage               25 units per week each
Maximum usage              75 units per week each
Reorder Quantity A: 300 units; B: 500 units          
Reorder Period A: 4 to 6 weeks, B: 2 to 4 weeks
Calculate for each component:
(i) Reorder level,                                 
(ii) Minimum Level,
(iii) Maximum level,
Solution:
(i) Reorder Level = Maximum Rate of Consumption x Maximum Reorder Period.
A = 75 x 6 = 450 units
B = 75 x 4 = 300 units
(ii) Minimum Level = Reorder Level – (Average Rate of consumption x Average Reorder Period)
A = 450 – (50 – 5) = 200 units
B = 300 – (50 x 3) = 150 units
(iii) Maximum Stock Level = (Reorder Level + Reorder Quantity) – (Minimum Consumption Rate x Minimum Reorder Period)
A = (450 + 300) – (25 x 4) = 650 units
B = (300 + 500) – (25 x 2) = 750 units
Answer of Q.N.2. (b).
Meaning of perpetual inventory system
Perpetual inventory system is also known as "Automatic Inventory System". Perpetual inventory system is a technique of controlling stock items by maintaining store record in a manner such that stock balances at any point of time are readily available. The terms 'Perpetual Inventory' refer to the system of record-keeping and a continuous physical verification of stocks, with reference to store records.
Advantages of Perpetual Inventory System
a)      Perpetual inventory system provides an opportunity to verify the physical stock of materials.
b)      Perpetual inventory system helps in rapid stock checking which, in turn, helps in the preparation of interim accounts.
c)       A moral check on the store staff to maintain proper stock records.
d)      The investment in materials and supplies may be kept at the lowest point.
e)      It is not necessary to stop the production so as to carry out a complete physical stocktaking.
f)       Perpetual inventory system helps to avoid deterioration, obsolescence etc.
g)      Perpetual inventory system helps to discover or find out discrepancies and errors and remedial action can be taken quickly.
h)      Timely replenishment of stock is facilitated by means of recording the level specified in the bin card.
Answer of Q.N.3.
Meaning of Overheads:
Overhead is those costs required to run a business, but which cannot be directly attributed to any specific business activity, product, or service. Thus, overhead costs do not directly lead to the generation of profits. Overhead is still necessary, since it provides critical support for the generation of profit-making activities. Overhead is also known as burden or indirect costs. A subset of overhead is manufacturing overhead, which are all overhead costs incurred in the manufacturing process. Another subset of overhead is administrative overhead, which are all overhead costs incurred in the general and administrative side of a business.

The Principles of Apportionment of Overhead Costs in Cost Accounting
The determination of a suitable basis is of primary importance and the following principles are useful guides to a cost accountant:
a) Service or use or benefit derived: If the service rendered by a particular item of expense to different departments, can be measured, overhead can be conveniently apportioned on this basis. Thus the cost of maintenance may be apportioned to different departments on the basis of machine hours or capital value of the machines, rent charges to be distributed according to the floor space occupied by each department.
b) Ability to pay method: Under this method, overhead should be distributed in proportion to the sales ability, income or profitability of the departments, territories, basis of products etc.
c) Efficiency method: Under this method, the apportionment of expenses is made on the basis of production targets. If the target is exceeded, the unit cost reduces indicating a more than average efficiency. If the target is not achieved, the unit cost goes up, disclosing thereby, the inefficiency of the department.
d) Survey method: In certain cases it may not be possible to measure exactly the extent of benefit which the various departments receive as this may vary from period to period. A survey is made of the various factors involved and the share of overhead costs to be borne by each cost center is determined. Thus the salaries of foreman serving two departments can be apportioned after a proper survey which may reveal that 30% of such salary should be apportioned to one department and 70% to the other department.
Bases of Apportionment of overheads:
Suitable bases have to be found out for apportioning the items of overhead cost to production and service departments and then for reapportionment of service departments costs to other service and production departments. The basis adopted should be such by which the expenses being apportioned must be measurable by the basis adopted and there must be proper correlation between the expenses and the basis. Therefore, the common expenses have to be apportioned or distributed over the departments on some equitable basis. The process of distribution is usually known as ‘Primary Distribution’.
Following are the main bases of overhead apportionment utilised in manufacturing concerns: 
(i) Direct Allocation: Overheads are directly allocated to various departments on the basis of expenses for each department respectively. Examples are: overtime premium of workers engaged in a particular department, power (when separate meters are available), jobbing repairs etc.
(ii) Direct Labour/Machine Hours: Under this basis, the overhead expenses are distributed to various departments in the ratio of total number of labour or machine hours worked in each department. Majority of general overhead items are apportioned on this basis.
(iii) Value of Materials Passing through Cost Centres: This basis is adopted for expenses associated with material such as material handling expenses.
(iv) Direct Wages: According to this basis, expenses are distributed amongst the departments in the ratio of direct wages bills of the various departments. This method is used only for those items of expenses which are booked with the amounts of wages, e.g., workers’ insurance, their contribution to provident fund, workers’ compensation etc.
(v) Number of Workers: The total number of workers working in each department is taken as a basis for apportioning overhead expenses amongst departments. Where the expenditure depends more on the number of employees than on wages bill or number of labour hours, this method is used. This method is used for the apportionment of certain expenses as welfare and recreation expenses, medical expenses, time keeping, supervision etc.
(vi) Floor Area of Departments: This basis is adopted for the apportionment of certain expenses like lighting and heating, rent, rates, taxes, maintenance on building, air conditioning, fire precaution services etc.
(vii) Capital Values: In this method, the capital values of certain assets like machinery and building are used as basis for the apportionment of certain expenses. Examples are: Rates, taxes, depreciation, maintenance, insurance charges of the building etc.
(viii) Light Points: This is used for apportioning lighting expenses.
(ix) Kilowatt Hours: This basis is used for the apportionment of power expenses.
(x) Technical Estimates: This basis of apportionment is used for the apportionment of those expenses for which it is difficult, to find out any other basis of apportionment. An assessment of the equitable proportion is carried out by technical experts. This is used for distributing lighting, electric power, works manager’s salary, internal transport, steam, water charges etc. when these are used for processes.
Answer of Q.N.4.
Reconciliation of Cost and Financial Accounts
When cost accounts and financial accounts are maintained in two different sets of books, there will be prepared two profit and loss accounts - one for costing books and the other for financial books. The profit or loss shown by costing books may not agree with that shown by financial books. Such a system is termed as, ‘Non-Integral System’ whereas under the integral system of accounting, there are no separate cost and financial accounts. Consequently, the problem of reconciliation does not arise under the integral system.
However, where two sets of accounting systems, namely, financial accounting and cost accounting are being maintained, the profit shown by the two sets of accounts may not agree with each other. Although both deal with the same basic transactions like purchases consumption of materials, wages and other expenses, the difference of purpose leads to a difference in approach in a collection, analysis and presentation of data to meet the objective of the individual system.
Need For Reconciliation
Reconciliation between the results of two sets of accounts is necessary due to the following reasons:
1. Reconciliation helps to check the arithmetical accuracy of both sets of accounts.
2. Management is enabling to know the reasons for the difference in results of both cost and financial accounts.
3. Reconciliation explains reasons for difference which facilitate internal control.
4. Reconciliation ensures the reliability of cost data.
5. Reconciliation promotes co-ordination between cost and financial departments.
6. Reconciliation helps in formulation of policies regarding absorption of overheads and depreciation and stock valuation method.
7. Reconciliation ensures managerial decision-making.
PROCEDURE OF PREPARATION ON RECONCILIATION STATEMENT OR MEMORANDUM RECONCILIATION ACCOUNT
A Reconciliation Statement or a Memorandum Reconciliation Account should be drawn: up for reconciling profits shown by the two sets of books. Results shown by any sets of books may be taken as the base and necessary adjustment should be made to arrive at the results shown by the other set of books. The technique of preparing a Reconciliation Statement as well as a Memorandum Reconciliation account is discussed below:
When there is a difference between the profits disclosed by cost accounts and financial accounts, the following steps shall be taken to prepare a Reconciliation Statement
1 Ascertain the various reasons of disagreement (as discussed above) between the profits disclosed by two sets of books of accounts.
2. If profit as per cost accounts (or loss as per financial accounts) are taken as the base:
ADD:
(i) Items of income included in financial accounts but not in cost accounts.
(ii) Items of expenditures (as interest on capital, rent on owned premises, etc.) included in cost accounts but not in financial accounts.
(iii) Amounts by which items of expenditure have been shown in excess in cost accounts as compared to the corresponding entries in financial accounts.
(iv) Amounts by which items of income have been shown in excess in financial accounts as compared to the corresponding entries in cost accounts
(v) Over-absorption of overheads in cost accounts.
(vi) The amount by which closing stock of inventory is under-valued in cost accounts.
(vii) The amount by which the opening stock of inventory is over-valued in cost accounts.
DEDUCT:
(i) Items of income included in cost accounts but not in financial accounts
(ii) Items of expenditure included in financial accounts but not in cost accounts.
(iii) Amounts by which item of income have been shown in excess in cost accounts over the corresponding entries in financial accounts.
(iv) Amounts by which items of expenditure have been shown in excess in financial accounts over the corresponding entries in’ cost accounts.
(v) Under absorption of overheads in cost accounts.
(vi) The amount by which closing stock of inventory is over-valued in cost accounts.
(vii) The amount b which the opening stock of inventory is under -valued in cost accounts.
3. After making all the above additions and deductions, the resulting figure will be profit as per financial accounts.
Note: If, profit as per financial accounts (or loss as per cost accounts) is taken as the base, then items added shall be deducted and items to be deducted shall be added, i.e., the procedure shall be reversed.

Answer of Q.N.5.
Process-A a/c
Particulars
Units
Amount
Particulars
Units
Amount
To Basic material
5000
5,000
By Normal loss
250
40
To Additional material

6,000
By Abnormal Loss
50
210
To Labour

7,000
By Process-B
4700
19,750
To Mgf. Expenses

2,000




5000
20,000

5000
20,000

Here, Value of abnormal loss = {(Total cost – scrap value)/ (Total Input – Normal Loss)} * Units of abnormal loss
= {(20000 – 40)/ (5000-250)} * 50
= (19960/4750)*50
= 210                                         
Process-B
Particulars
Units
Amount
Particulars
Units
Amount
To Process-A
  4,700
19,750
By Normal loss
470
94
To Material

3,000
By Abnormal loss
80
542
To Labour

4,000
By Process-c
4150
28,114
To Mgf. Expenses

2,000




4700
28,750

4700
28,750

Here, Value of abnormal loss = {(Total cost – scrap value)/ (Total Input – Normal Loss)} * Units of abnormal loss
= {(28750 – 94)/ (4700 - 470)} * 80
= (28656/4230)*80               
= 542