Tuesday, May 16, 2017

Dibrugarh University Solved Question Papers - Cost Accounting (May' 2016)

2016 (May)
COMMERCE


1. (a) Choose the correct answer:                                             1x4=4
a)      The method of costing used in a refinery is process costing/job costing.
b)      The practice of charging all costs to product is absorption costing/batch costing.
c)       Administration expenses are mostly fixed/variable.
d)      Variable cost per unit remains same/increases when the volume of production increases.
(b) Fill in the blanks:                                        1x4=4
a)      Fixed cost per unit decreases with rise in output and increases with fall in output.
b)      Under the ABC analysis of material control, A stands for Heavy value items.
c)       Mustard roll is necessary for the preparation of the ____.
d)      Fixed overhead cost is a Period cost.


2. Answer the following (any four):                                         4x4=16
a)      “Classification of cost plays a vital role in ascending cost.” Explain this statement.
b)      Give five differences between Cost Accounting and Financial Accounting.
c)       Give four reasons of under-absorption and over-absorption of overheads.
d)      What is ABC analysis? How is it differ from VED analysis?
e)      Give four differences between Job Costing and Process Costing.


3. (a) From the following information, prepare a Cost Sheet showing the cost and profit:                                               14
Particulars
Rs.
Opening raw material
Closing raw material
Opening work-in-progress:
      Material
      Wages
      Works Overhead
Closing work-in-progress:
      Material
      Wages
      Works overhead
29,500
36,000

13,600
11,000
6,600

12,000
16,500
9,900
Opening finished goods – 200 units @ Rs. 84.
Closing finished goods – 1,600 units
Particulars
Rs.
Purchase of raw material
Carriage on purchases
Sale of scrap of raw material
Wages
1,90,000
1,500
5,000
2,97,000
Works overhead @ 60% of direct labour cost; Administrative overhead @ 12 per unit produced. Selling and distribution overheads @ 20% of selling price. Sales 7,600 units at a profit of 10% on cost price
Ans:
Statement of Cost or Cost sheet
PARTICULARS
Units
Amount
Amount
Opening Stock of Raw material
Add: Purchase of Raw material
Add: Carriage inward
Less: Sale of scrap of raw material
Less: Closing Stock of Raw material


29,500
1,90,000
1,500
5,000
36,000
(a) Raw Material consumed during the year
Add: Direct wages


1,80,000
2,97,000
Prime Cost
Add: Works overhead @ 60% of direct labour cost


4,77,000
1,78,200
Work’s Cost incurred
Add: Opening stock of work-in-progress
Material                
Wages
Works overhead
Less: Closing stock of work-in-progress
Material
Wages
Works overhead



13,600
11,000
6,600

12,000
16,500
9,900
6,55,200



31,200

38,400
Work’s cost / factory cost
Add: Administration overhead @ Rs 12 per unit produced (9,000 * 12)


6,48,000

1,08,000
(b) Cost of Production
Add: Opening Stock of finished goods (@84)
Less: Closing Stock of finished goods(756000/9000= 84)
9,000
200
1,600

7,56,000
16,800
1,34,400
(c) Cost of goods Sold
Add: Selling and Distribution overheads
7,600

6,38,400
1,80,061
Total cost of sales
(d) Add: Profit for the year
7,600

8,18,461
81,846
Sales
7,600

9,00,307
Production = Sales + closing stock – opening stock = 7,600+1,600 – 200 = 9,000
Working note:
Let the cost be                                                                       x
Add: Profit @ 10% on cost                                               0.10x
Sales                                                                                     1.10X
Selling and distribution expenses (20% on 1.10x)       0.22x
Now,
Total cost = 6,38,400 + 0.22x = x
= x – 0.22x = 6,38,400
= 0.88x = 6,38,400/0.78 = 818461
= x = 5,58,480/0.78 = 7,16,000

Or
(b) “The perpetual inventory system is an integral part of material control.” Discuss this statement by bringing out the salient features and advantages of this system.                                      14


4. (a) From the following particulars, work out the earnings for the week of a worker under the:                                  14
Particulars
Rs.
  1. Straight piece rate system;
  2. Differential piece rate system;
  3. Halsey premium system;
  4. Rowan system:
Number of working hours per week
Wages per hour
Rate per piece
Normal time per piece
Normal output per week
Actual output for the week
Differential piece rate:
80% piece rate when output is below standard 120% when output is above standard.





48 hours
3.75
1.50
20 minutes
120 pieces
150 pieces
Ans:       (i) Straight Price Rate system = Price Produced x rate per price = 150 x 1.50 = Rs. 225
(ii) Taylor’s differential price rate
Normal output = 120
Actual output = 150 (Above Standard)
i.e. 20% of price rate is applicable
120% of price rate = 1.50 x 120% = 1.80
Now, Wages under differential Price rate
= 150 x 1.80 = 270
(iii) Time Taken = 48 hours
Time allowed = 150 x 120 = 3,000 minutes or 50 hours
(based on actual output)
Time Saved = 50 – 48 = 2 hours
Now, Wages under Halsey Premium Plan:
(iv) Wages under Rowan system:
Or
(b) What is idle time? Discuss its causes. How is it treated in Cost Accounting?                  4+6+4=14


5. (a) From the following details, compute the hourly rate of a machine installed in a shop:          14
Particulars
Rs.
Cost of Machine
Installation charges
Estimated Scrap value (Life 15 years)
Rent and rates of the shop p.a.
General lighting of the shop p.m.
Insurance premium for the machine per quarter
Estimated repairs and maintenance cost of the machine p.a.
Power consumption of the machine
Rate of power per 100 units
Estimated working hours of the machine per year
Shop Supervisor’s salary per month
2,00,000
20,000
10,000
7,200
800
720
3,000
20 units per hour
20
2,300
1,800
The machine occupies 1/4th of the total floor area of the shop. The supervisor is expected to devote 1/5th of his time for supervising the machine. Normal idle time is expected to be 300 hours per annum.
Ans: Computation of Machine Hour Rate

P.a.
Per hour
(i) Depreciation

(ii) Rent

(iii) Electricity

(iv) Repairs & Maintenance

(v) Power

(vi) Supervisor’s Salary

(vii) Insurance (720*4)




1,800


2,400

3,000





4,320


2,880
7.00



0.90


1.20

1.50


4


2.16


1.44
Machine Hour Rate

18.20
Normal Working Hours
= 2,300 - 300
= 2,000
Or
(b) Define overhead. What do you mean by absorption of overheads? Discuss the different methods of absorption of overheads.                                                         4+2+8=14
Ans: Overheads - Meaning
Cost related to a cost center or cost unit may be divided into two i.e. Direct and Indirect cost. The Indirect cost is the overhead cost and is the total of indirect material cost, indirect labour cost, indirect expenses. These indirect costs are called as ‘Overhead’ costs. According to CIMA, overhead costs are defined as, ‘ the total cost of indirect materials, indirect labor and indirect expenses.’ Thus all indirect costs like indirect materials, indirect labor, and indirect expenses are called as ‘overheads’. Examples of overhead expenses are rent, taxes, depreciation, maintenance, repairs, supervision, selling and distribution expenses, marketing expenses, factory lighting, printing stationery etc. In subsequent paragraphs, we will be discussing various aspects of overhead accounting.
Absorption of overheads: The most important step in the overhead accounting is ‘Absorption’ of overheads. CIMA defines absorption as, ‘the process of absorbing all overhead costs allocated or apportioned over a particular cost center or production department by the units produced.’ In simple words, absorption means charging equitable share of overhead expenses to the products. As the overhead expenses are indirect expenses, the absorption is to be made on some suitable basis. The basis is the ‘absorption rate’ which is calculated by dividing the overhead expenses by the base selected. A base selected may be any one of the basis given below. The formula used for deciding the rate is as follows,
Overhead Absorption Rate = Overhead Expenses/ Units of the base selected.
The methods used for absorption are as follows:
    1. Direct Material Cost: Under this method, the overheads are absorbed on the basis of percentage of direct material cost. The following formula is used for working out the overhead absorption percentage: Budgeted or Actual Overhead Cost/ Direct Material Cost X 100
    2. Direct Labor Cost Method: This method is used in those organizations where labor is a dominant factor in the total cost. Under this method, the following formula is used for calculating the overhead absorption rate: Budgeted or Actual Overheads/ Direct Labor Cost X 100
    3. Prime Cost Method: This method is an improvement over the first two methods. Under this method, the Prime Cost is taken as the base for calculating the percentage of absorption of overheads by using the following formula: Budgeted or Actual Overheads/ Prime Cost X 100
    4. Production Unit Method: This method is used when all production units are similar to each other in all respects. Total overhead expenses are divided by total production units for computing the rate per unit of overheads and overheads are absorbed in the product units. If a firm produces more than one products and if they are not uniform to each other, equivalent units are calculated to find out the rate of overheads per unit. The formula of absorption of overheads is as follows: Overhead absorption rate = Budgeted or Actual Overheads/Production Units
    5. Direct Labor Hour Method: Under this method, the rate of absorption is calculated by dividing the overhead expenses by the direct labor hours. The formula is as follows. Budgeted or Actual Overhead Expenses/Direct Labor Hours
    6. Machine Hour Rate: Where machines are more dominant than labor, machine hour rate method is used. CIMA defines machine hour rate as ‘actual or predetermined rate of cost apportionment or overhead absorption, which is calculated by dividing the cost to be appropriated or absorbed by a number of hours for which a machine or machines are operated or expected to be operated’. In other words, machine hour rate is the cost of operating a machine on per hour basis. The formula for calculating the machine hour rate is, Budgeted or Actual Overhead Expenses/ Machine Hours
    7. Selling Price Method: In this method, selling price of the products is used as a basis for absorbing the overheads. The logic used is that if the selling price is high, the product should bear higher overhead cost. Ratio of selling price is worked out and the overheads are absorbed.
6. (a) The product of a manufacturing concern passes through two processes A and B and then to finished stock. It is ascertain that in each process normally 5% of the total weight is lost and 10% is scrap which realizes Rs. 80 per tonne and Rs. 200 per tonne from processes A and B respectively. The following are the figures relating to both the processes:
Particulars
Process – A
Process – B
Materials (in tonnes)
Cost of material per tonne (in Rs.)
Wages (in Rs.)
Manufacturing expenses (in Rs.)
Output (in tonnes)
1,000
125
28,000
8,000
830
70
200
10,000
5,250
780
Prepare Process Accounts showing cost per tonnes of each process. There was no stock of work-in-progress in any process.                                                               14


Process A A/c
Particulars
Units
Amount
Particulars
Units
Amount
To Raw Materials
To Wages
To Mfg. Expenses
1,000
-
1,25,000
28,000
8,000
By loss of weight
By Normal Loss (Scrap)
By Abnormal Loss
By Process B A/c
50
100
20
830
------
8,000
3,600
1,49,400

1,000
1,61,000

1,000
1,61,000


Process B A/c
Particulars
Units
Amount
Particulars
Units
Amount
To Process A A/c
To Direct Materials
To Wages
To Manufacturing Expenses
To Abnormal Gain A/c
830
70


15
1,49,400
14,000
10,000
5,250
3,150
By loss of weight
By Normal Loss (Scrap)

By Finished Stock A/C
45
90

780
-----
18,000

1,63,800

915
1,81,800

915
1,81,800


Working Note: (i) Value of abnormal loss (Process A A/c)
(ii) Value of abnormal gain (Process B A/c)
Or
(b) Under what circumstances, an enterprise needs to reconcile of Cost Accounts and Financial Accounts? State the reasons for which profit from Cost Accounting and that of Financial Accounting do not tally.                         5+9=14
Ans: 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.
Financial accounts are concerned with the ascertainment of profit or loss for the whole operation of the organisation for a relatively long period, usually a year, without being too much concerned with cost computation, whereas cost accounts are concerned with the ascertainment of profit or loss made by manufacturing divisions or products for cost comparison and preparation and use of a variety of cost statements. The difference in purpose and approach generally results in a different profit figure from what is disclosed by the financial accounts and thus arises the need for the reconciliation of profit figures given by the cost accounts and financial accounts.
The reconciliation of the profit figures of the two sets of books is necessary due to the following reasons
  1. It helps to identity the reasons for the difference in the profit or loss shown by cost and financial accounts.
  2. It ensures the arithmetical accuracy and reliability of cost accounts.
  3. It contributes to the standardization of policies regarding stock valuation, depreciation and overheads.
  4. Reconciliation helps the management in exercising a more effective internal control.
Reasons for disagreement between Profits as per financial accounting and Profits as per cost accounting:
The difference in the profitability of cost and financial records may be due to the following reasons.
  1. Items included in the financial accounts but not in cost accounts.
  • Purely financial income- such as interest received on bank deposits, interest and dividend on investments, rent receivables, transfer fee received, profit on the sale of assets etc.
  • Purely financial charges – such as losses due to scraping of machinery, losses on the sale of investments and assets, interest paid on the bank loans, mortgages, debentures etc., expenses of company’s transfer office, damages payable at law etc.
  • Appropriation of profit – the appropriation of profit is again a matter which concerns only financial accounts. Items like payment of income tax and dividends transfer to reserve, heavy donations, writing off of preliminary expenses, goodwill and patents appear only in profit and loss appropriation account and the costing profit and loss a/c is not affected.
  1. Items included in cost accounts only: There are certain items which are included in cost accounts but not in financial accounts. They are: Charges in lieu of rent where premises are owned, interest on capital employed in production but upon which no interest is actually paid.
  2. Under/Over absorption of overhead expenses: In cost accounts, overheads are absorbed at predetermined rates which are based on past data. In the financial accounts the actual amount incurred is taken into account. There arise a difference between the actual expenses and the predetermined overheads charged to product or job.
If overheads are not fully recovered, which means that the amount of overheads absorbed in cost accounts is less than the actual amount, the shortfall is called as under recovery or under absorption. If overhead expenses recovered in cost accounts are more than that of the actually incurred, it is called over absorption. Thus, both the over and under recovery may cause the difference in the profits of both the records.
  1. Different basis of stock valuation: In cost accounts, the stock of finished goods is valued at cost by FIFO, LIFO, average rate, etc. But, in financial accounts stocks are valued either at cost or market price, whichever is less. The valuation of work-in-progress may also lead to variation. In financial books only prime cost may be taken into account for this purpose whereas in cost accounts, it may be valued at prime cost plus factory overhead.
  2. Different basis of depreciation adopted: The rates and methods of charging depreciation may be different in two sets of accounts.  
(OLD COURSE)
Full Marks: 80
Pass Marks: 32
1. (a) Choose the correct answer:                                             1x4=4
a)      Prime Cost/Production cost is the combination of direct material, direct labour and direct expenses.
b)      In ABC analysis, A indicates less value/moderate value/high value material.
c)       Fixed cost per unit remains same/increases/decreases when volume of production increases.
d)      Standard costing is a method/technique of Cost Accounting.


(b) Fill in the blanks:                                    1x4=4
a)      In process costing, output of every process is the input of next process.
b)      FIFO method, if pricing issue of material is suitable at the time of decreasing price.
c)       Prime cost under abnormal condition is to be debited to costing profit and loss account.
d)      Under Rowan plan, bonus is always in ____.


2. Write short notes (on any four):                                           4x4=16
a) ABC analysis: A-B-C Analysis: ABC Analysis: ABC System: In this technique, the items of inventory are classified according to the value of usage. Materials are classified as A, B and C according to their value.
Items in class ‘A’ constitute the most important class of inventories so far as the proportion in the total value of inventory is concerned. The ‘A’ items constitute roughly about 5-10% of the total items while its value may be about 80% of the total value of the inventory.
Items in class ‘B’ constitute intermediate position. These items may be about 20-25% of the total items while the usage value may be about 15% of the total value.
Items in class ‘C’ are the most negligible in value, about 65-75% of the total quantity but the value may be about 5% of the total usage value of the inventory.
The numbers given above are just indicative, actual numbers may vary from situation to situation. The principle to be followed is that the high value items should be controlled more carefully while items having small value though large in numbers can be controlled periodically.
b) Cost of idle time:
a. Normal idle time is inherent in any job situation and thus it cannot be eliminated or reduced. For example: time gap between the finishing of one job and the starting of another; time lost due to fatigue etc. The cost of normal idle time should be charged to the cost of production. This may be done by inflating the labour rate. It may be transferred to factory overheads for absorption, by adopting a factory overhead absorption rate.
b. Abnormal idle time is defined as the idle time which arises on account of abnormal causes; e.g. strikes; lockouts; floods; major breakdown of machinery; fire etc. Such an idle time is uncontrollable. The cost of abnormal idle time due to any reason should be charged to Costing Profit & Loss Account.
c) Reconciliation of Cost Accounting and Financial Accounting: 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.
Financial accounts are concerned with the ascertainment of profit or loss for the whole operation of the organisation for a relatively long period, usually a year, without being too much concerned with cost computation, whereas cost accounts are concerned with the ascertainment of profit or loss made by manufacturing divisions or products for cost comparison and preparation and use of a variety of cost statements. The difference in purpose and approach generally results in a different profit figure from what is disclosed by the financial accounts and thus arises the need for the reconciliation of profit figures given by the cost accounts and financial accounts.
d) Classification of Cost: Cost classification is the process of grouping costs according to their common characteristics. It is the placement of like items together according to their common characteristics. A suitable classification of costs is of vital importance in order to identify the cost with cost centers or cost units. Costs may be classified according to their nature, i.e. material, labour and expenses and a number of other characteristics. The important ways of classification are:
a) By Nature or Element or Analytical Classification
According to this classification, the costs are divided into three categories i.e. Materials, Labour and Expenses. There can be further sub classification of each element; for example, material into raw material components, and spare parts, consumable stores, packing material etc. This classification is important as it helps to find out the total cost, how such total cost is constituted and valuation of work in progress.
b) By Functions
According to this classification costs are divided as follows:
Manufacturing and Production Cost: This is the total of costs involved in manufacture, construction and fabrication of units of production.
Commercial Cost: This is the total of costs incurred in the operation of a business undertaking other than the cost of manufacturing and production. Commercial cost may further be sub-divided into (a) administrative cost and (b) selling and distribution cost.
c) As Direct and Indirect
According to this classification, total cost is divided into direct costs and indirect costs.
Direct costs are those which are incurred for and may be conveniently identified with a particular cost centre or cost unit. Materials used and labour employed are common examples of direct costs.
Indirect costs are those cost which are incurred for the benefit of number of cost centers or cost units and cannot be conveniently identified with a particular cost centre or cost unit. Examples of indirect cost include rent of building, management salaries, machinery depreciation etc.
d) By Variability
According to this classification, costs are classified into three groups viz. fixed, variable and semi-variable.
Fixed or period costs are commonly described as those which remain fixed in total amount with increase or decrease in the volume of output or productive activity for a given period of time. Examples of fixed costs are rent, insurance of factory building, factory manager’s salary etc.
Variable or product costs are those which vary in total in direct proportion to the volume of output. Examples are direct material costs, direct labour costs, power, repairs etc. Such costs are known as product costs because they depend on the quantum of output rather than on time.
Semi-variable costs are those which are partly fixed and partly variable. For example, telephone expenses included a fixed portion of annual charge plus variable charge according to calls; thus total telephone expenses are semi-variable. Other examples of such costs are depreciation, repairs and maintenance of building and plant etc.
e) By Controllability
Under this, costs are classified according to whether or not they are influenced by the actions of a given member of the undertaking. On this basis it is classified into two categories:
Controllable costs are those which can be influenced by the action of a specified member of an undertaking, that is to say, costs which are at least partly within the control of management. Generally speaking, all direct costs including direct material, direct labour and some of the overhead expenses are controllable by lower level of management.
Uncontrollable costs are those which cannot be influenced by the action of a specified member of an undertaking that it is to say, which are within the control of management. Most of the fixed costs are uncontrollable. For example, rent of the building is not controllable and so are managerial salaries.
f) By Normality
Under this, costs are classified according to whether these are cost which are normally incurred as a given level of output in the conditions in which that level of activity is normally attained. On this basis, it is classified into two categories:
Normal cost: It is the cost which is normally incurred at a given level of output in the conditions in which that level of output is normally attained. It is a part of cost of production.
Abnormal cost: It is the cost which is not normally incurred at a given level of output in the conditions in which that level of output is normally attained. It is not a part of cost of production and charged to Costing Profit and Loss Account.
g) By Capital and Revenue or Financial Accounting Classification
The cost which is incurred in purchasing assets either to earn income or increasing the earning capacity of the business is called capital cost. For example, the cost of a rolling machine in case of steel plan. Such cost is incurred at one point of time but the benefits accruing from it are spread over a number of accounting years.
It any expenditure is done in order to maintain the earning capacity of the concern such as cost of maintaining an asset or running a business it is revenue expenditure e.g. cost of materials used in production, labour charges paid to convert the material into production, salaries, depreciation, repairs and maintenance charges, selling and distribution charges etc.
h) By Time: Cost can be classified as (i) Historical costs and (ii) Predetermined costs.
i) Historical costs: The cost which is ascertained after their incurrence is called historical costs.
ii) Predetermined costs: Such costs are estimated costs i.e. computed in advance of production taking into consideration the previous period’s costs and the factors affecting such costs. Predetermined cost determined on scientific basis becomes standard cost.
i) According to Planning and Control
Planning and control are two important functions of management. Cost accounting furnishes information to the management which is helpful is the due discharge of these two functions. According to this, costs can be classified as budgeted costs and standard costs.
i) Budgeted costs: Budgeted costs represent an estimate of expenditure for different phases of business operations such as manufacturing, administration, sales, research and development etc. coordinated in a well conceived framework for a period of time in future which subsequently becomes the written expression of managerial targets to be achieved.
ii) Standard Cost: Standard cost is the predetermined cost based on a technical estimate for materials, labour and overhead for a selected period of time and for a prescribed set of working conditions.
j) For Managerial Decisions
On this basis, costs may be classified into the following costs:
i) Marginal cost: Marginal cost is the total of variable costs i.e. prime cost plus variable overheads.
ii) Out of pocket costs: This is that portion of the cost which involves payment to outsiders i.e., gives rise to cash expenditure as opposed to such costs as depreciation, which do not involve any cash expenditure.
iii) Differential costs: The change in costs due to change in the level of activity or pattern or method of production is known as differential costs.
iv) Sunk costs: A sunk cost is an irrecoverable cost and is caused by complete abandonment of a plant. It is the written down value of the abandoned plant less its salvage value.
v) Imputed costs: These costs are those costs which appear in cost accounts only e.g. national rent charged on business premises owned by the proprietor, interest on capital for which no interest has been paid. These costs are also known as notional costs.
vi) Opportunity cost: It is the maximum possible alternative earning that might have been earned if the productive capacity or services had been put to some alternative use.
vii) Replacement cost: It is the cost at which there could be purchased an asset or material identical to that which is being replaced or revalued. It is the cost of replacement at current market price.
viii) Avoidable and unavoidable cost: Avoidable costs are those which can be eliminated if a particular product or department, with which they are directly related, is discontinued. Unavoidable cost is that cost which will not be eliminated with the discontinuation of a product or department.
e) Machine hour rate: Where machines are more dominant than labor, machine hour rate method is used. CIMA defines machine hour rate as ‘actual or predetermined rate of cost apportionment or overhead absorption, which is calculated by dividing the cost to be appropriated or absorbed by a number of hours for which a machine or machines are operated or expected to be operated’. In other words, machine hour rate is the cost of operating a machine on per hour basis. The formula for calculating the machine hour rate is, Budgeted or Actual Overhead Expenses/ Machine Hours.
3. (a) The following are the data taken from the Cost Accounts of a manufacturer in respect of the month of March, 2014:                                                                 14
Particulars
Rs.
Stock in hand on 01-03-2014:
      Raw Materials
      Work-in-progress
      Finished goods
Purchase of Raw materials
Sales of finished goods
Direct wages
Stock in hand 31-3-2014:
      Raw Materials
      Work-in-progress
      Finished goods
Non-productive wages
Works Expenses
Office and Administrative expenses
Selling expenses

25,000
8,220
17,360
21,900
72,310
17,150

26,250
9,100
15,750
830
8,430
3,160
4,210
Prepare a Cost Sheet showing the following:
a)      Cost of materials consumed.
b)      Cost of production.
c)       Cost of goods sold.
d)      Profit for the month.
Cost Sheet
PARTICULARS
AMOUNT
Raw Material (Opening)
Add: Material purchases
Less: Raw Material (Closing)
25,000
21,900
26,250
(a) Raw Material consumed during the year
Add: Direct Labour
20,650
17,150
(b) Prime Cost
37,800

830
8,430
Add: Factory Overheads:
Non-productive wages
Works Expenses
(b) Work’s cost incurred
Add: W-I-P (Opening)
Less: W-I-P (Closing)
47,060
8,220
9,100
(c) Work’s cost
Add: Administrative Overheads
46,180
3,160
(d) Cost of production
Add: Finished goods (Opening)
Less: Finished goods (Closing)
49,340
17,360
15,750
(e) Cost of goods sold
Add: Selling and distributive overheads
50.950
4,210
(f) Total Cost
(g) Profit (Balancing figure)
55,160
17,150
Sales
72,310


Or
(b) Define Cost Accounting. Briefly explain different methods and techniques of Cost Accounting. 4+4+6=14
Ans: Introduction to Cost Accounting
Cost: The term ‘cost’ has to be studied in relation to its purpose and conditions. As per the definition by the Chartered Institute of Management Accountants (C.I.M.A.), London ‘cost’ is the amount of actual expenditure incurred on a given thing.
Costing: The C.I.M.A., London has defined costing as the ascertainment of costs. “It refers to the techniques and processes of ascertaining costs and studies the principles and rules concerning the determination of cost of products and services”.
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”.
Cost Accountancy: The term ‘Cost Accountancy’ includes Costing and Cost accounting. Its purposes are Cost-control and Profitability – ascertainment. It serves as an essential tool of the management for decision-making.
I.C.M.A., has defined cost accountancy as follows: “The application of costing and cost accounting principles, methods and techniques to the science, art and practice of cost control and the ascertainment of profitability. It includes the presentation of information derived there from for the purpose of managerial decision making”.
Techniques of Costing
The types and techniques of costing are as follows:
  1. Historical Costing: ‘The ascertainment of costs after they have been incurred’ is called Historical costing. Such costs are, therefore, ‘postmortem’ costs as under this method all the expenses incurred on the production are first incurred and them the costs are ascertained.
  2. Standard Costing: ‘The preparation and use of standard costs, their comparison with actual costs and the analysis of variance to their causes and points of incidence’ is called standard costing.
  3. Here the standards are first set and then they are compared with actual performances. The difference between the standard and the actual is known as the variance. The variances are analyzed to find out their causes and also the points or locations at which they occur.
  4. Marginal Costing: Marginal Costing involves the ascertainment of marginal costs and of the effects on profit of changes in volumes or type of output by differentiating between fixed costs and variable costs’. The fixed costs are those which do not change but remain the same, with the increase or decrease in the quantum of production. The variables costs are those which do change proportionately with the change in quantum of production.
  5. The marginal costing takes into account only the variable costs to find out ‘marginal costs’. The difference between Sales and Marginal costs is known as ‘Contribution’ and contribution is an aggregate of fixed costs and Profit/Loss. So the fixed costs are deducted from the contribution to find out the profits. Marginal costing is a technique to ascertain the effect on profits. Marginal costing is a technique to ascertain the effect on profit by the change in the volume of output or by the change in the type of output.
  6. Direct Costing: The practice of charging all direct cost to operations, process or products, leaving all the indirect costs to be written off against profits in the period in which they arise is called direct costing.
  7. Absorption Costing: It is the practice of charging all costs, both variables and fixed, to operations, processes or products. This is the traditional technique as opposed to Marginal or Direct costing techniques. Here both the fixed and variables cost are charged in the same manner.
Methods of Costing
The methods of costing are as follows:
  1. Job Costing: The job costing methods are applicable where the unit of manufacture is one and complete in itself. They include printers, job foundries, tool manufactures, and contractors, etc. the following methods are included in Job Costing:
  2. Contract Costing: This method if applied in undertakings erecting buildings or carrying out constructional works, e.g., House buildings, ship building, Civil Engineering contracts. Here the cost unit is one and completed in itself. The cost unit is a contract which may continue for over more than a year. It is also known as the Terminal Costing, since the works are to be completed within a specified period as per terms of contract or agreement executed by the contractor and contractee.
  3. Batch Costing: In this method, a batch of similar or identical products is treated as a job. Here the unit of cost is a batch of group of products, costs are collected and analyzed according to batch numbers and the costs are ascertained batch wise. This method is applied in pharmaceutical industries where medicines or injections are manufactures batch wise or in general engineering factories producing components in convenient batches.
  4. Process Costing: Process costing method is applicable to those industries manufacturing a number of units of output requiring processing. Here an article has to undergo two or more processes for reaching the stage of finished goods and succeeding process till completion.
  5. Unit costing: This method is also known as single or output costing. The objective of this method is to ascertain the total cost as well as the cost per unit. A cost sheet is prepared taking into account the cost of material, labour and overheads, Unit costing is applicable in the case of mines, oil drilling units, cement works, brick works and units manufacturing cycles, radios, washing machines etc.
  6. Operating costing: This method is followed by industries which render services. To ascertain the cost of such services, composite units like passenger kilometers and tone kilometers are used for ascertaining costs. For example, in the case of a bus company, operating costing indicates the cost of carrying a passenger per kilometer.
  7. Operation costing: This is a more detailed application of process costing. It involves costing by every operation. This method is used where there is mass production of repetitive nature involving a number of operations. The main purpose of this method is to ascertain the cost of each operation.
  8. Multiple Costing: It is also known as composite costing. It refers to a combination of two or more of the above methods of costing. It is adopted in industries where several parts are produced separately and assembled to a single product.
4. (a) during the first week of January, 2015, a worker Mr. Ashok manufactured 300 articles. He received wages for a guaranteed 48 hours week at the rate of Rs. 4 per hour. The estimated time to produce one article is 10 minutes and under the incentive scheme, the time allowed is increased by 20%. Calculate his gross wage according to –
a)      Piece work with a guaranteed weekly wages;
b)      Rowan premium bonus;
c)       Halsey premium bonus 50% to workman.                                     4+5+5=14
Ans:  Time allowed per piece = 10 minutes
Time allowed under incentive scheme = 10 + 20 % = 12 minutes
Standard units per hour = 60/12 = 5 units
Rate per piece = rate per hour / piece per hour = 4/5 = 0.80
(i) Straight Price Rate system with a guaranteed weekly wages
= Price Produced x rate per price
= 300 x 0.80 = 240
Or guaranteed weekly wages = 48 x 4 = 192
Whichever is higher is payable to the worker i.e. Rs. 240
(ii) Time Taken = 48 hours
Time allowed = 300 x 12 = 3,600 minutes or 60 hours
(based on actual output)
Time Saved = 60 – 48 = 12 hours
Now, wages under Rowan system:
(iii) Wages under Halsey Premium Plan:
Or
(b) (i) Define labour turnover. Explain its reasons.
Ans: Meaning: Labour turnover may be defined as change in labour force i.e., percentage change in the labour force during a specific period. High labour turnover indicates that labour is not stabilised and there are frequent changes by way of workers leaving the organization. High labour turnover is to be avoided. At the same time very low labour turnover indicates inefficient workers are being retained in the organization.
Causes of Labour turnover: The causes for labour turnover can be broadly classified under three heads.
(1) Personal Causes
(2) Unavoidable Causes
(3) Avoidable Causes
i) Personal Causes: Some of the employees may leave the organization on account of personal reasons as given below:
(a) Circumstances of family.
(b) Retirement on reaching the prescribed age.
(c) Change in material status in case of women employees.
(d) Dislike for the job or place;
(e) Death of the employee.
(f) Employee getting recruited in a better job.
(g) Permanent disability due to accidents.
(h) Involvement of employee in activities of moral turpitude.
ii) Unavoidable Causes: In certain instances the organization may discharge the employees due to unavoidable reasons as mentioned below:
(a) Termination of workers on account of insubordination or inefficiency
(b) Discharge of workers on account of irregularity or long absence.
(c) Retrenchment of workers by the company on account of shortage of work.
iii) Avoidable Causes: Some of the employees may leave the organization account of the following reasons:
(a) Non availability of promotion opportunities
(b) Dissatisfaction with incentive schemes
(c) Unhappy with remuneration
(d) Unsuitable to job due to wrong placement
(e) Unhappy with working conditions
(f) Non availability of accommodation, health and recreational facilities
(g) Lack of stability of Tenure.
(ii) Discuss the essential features of an ideal wage payment method.                           4+3+7=14
Ans: An ideal incentive plan must possess the following features:
  1. Simplicity - The plan should be simple to understand and operate. Who should be able to calculate their wages without any difficulty?
  2. Acceptability - It should be acceptable to workers as well as the employer.
  3. Flexibility - The incentive plan should be flexible to introduce nice changes.
  4. Quality - The plan should ensure the quality of the output. Workers should be discouraged to speed up the work to earn more wages at the cost of quality.
  5. Stability - The plan should give a stable earnings over a period of time, minimum but adequate wage must be ensured.
  6. Wide coverage - It should cover the maximum number of workers. 1 direct as well as indirect worker should be covered.
  7. No restriction on earnings - The plan should not have any restriction earnings of workers. They should be allowed to earn as much as they can.
  8. Investigation and evaluation - The plan should be based on scientific investigation and evaluation to produce good result. Standard time should fix on the basis of time and motion study.
  9. Increasing output and lowering cost of production - It should aim increasing output and lowering cost of production.
  10. Motivating to earn more - The plan should motivate the workers increase their efficiency and earn more.
The success of an incentive plan depends on the mutual cooperation a understanding between employer and employees.
5. (a) From the following data, calculate the machine hour rate of a machine:                         14
Particulars
Rs.
Cost of machine
Scrap value
Estimated life
Effective working days:
      200 days of 8 hours
      100 days of 6 hours
Maintenance and repairs
Stores consumed
Power consumption
Insurance premium
Supervision expenses
Estimated idle time
35,500
2,500
12 years



7.5% of cost of machine
1,000
2 per operating hour
1% of cost of machine
7,500
10%


Computation of Machine Hour Rate
Particulars
Per Hour
(i) Depreciation
(ii) Repairs & Maintenance (35,500 x 7.5% = 2,662.5/1980)
(iii) Power
(iv) Stores ( 1000/1980)
(v) Insurance (35,500 x 1% = 3,550/1980)
(vi) Supervision expenses (7,500/1980)

1.39

1.34
2
0.51
1.79
3.78
Machine Hour Rate
10.93


Or
(b) Define overhead. How are overheads classified? Explain four reasons of over-absorption and under-absorption of overheads.                                                         4+5+5=14
Ans: Overheads - Meaning
Cost related to a cost center or cost unit may be divided into two i.e. Direct and Indirect cost. The Indirect cost is the overhead cost and is the total of indirect material cost, indirect labour cost, indirect expenses. These indirect costs are called as ‘Overhead’ costs. According to CIMA, overhead costs are defined as, ‘ the total cost of indirect materials, indirect labor and indirect expenses.’ Thus all indirect costs like indirect materials, indirect labor, and indirect expenses are called as ‘overheads’. Examples of overhead expenses are rent, taxes, depreciation, maintenance, repairs, supervision, selling and distribution expenses, marketing expenses, factory lighting, printing stationery etc. In subsequent paragraphs, we will be discussing various aspects of overhead accounting.
Classification of Overheads: Classification is defined by CIMA as, ‘the arrangement of items in logical groups having regard to their nature or the purpose to be fulfilled. In other words, classification is the process of arranging items into groups according to their degree of similarity. Accurate classification of all items is actually a prerequisite to any form of cost analysis and control system. Classification is made according to following basis.
    1. Classification according to Elements:  According to this classification overheads are divided according to their elements. The classification is done as per the following details.
  1. Indirect Materials: Materials which cannot be identified with the given product unit of cost center is called as indirect materials. For example, lubricants used in a machine is an indirect material, similarly thread used to stitch clothes is also indirect material. Small nuts and bolts are also examples of indirect materials.
  2. Indirect Labour: Wages and salaries paid to indirect workers, i.e. workers who are not directly engaged on the production are examples of indirect wages.
  3. Indirect Expense:  Expenses such as rent and taxes, printing and stationery, power, insurance, electricity, marketing and selling expenses etc are the examples of indirect expenses.
  1. Functional Classification: Overheads can also be classified according to their functions. This classification is done as given below.
  1. Manufacturing Overheads:  Indirect expenses incurred for manufacturing are called as manufacturing overheads. For example, factory power, works manager’s salary, factory insurance, depreciation of factory machinery and other fixed assets, indirect materials used in production etc. It should be noted that such expenditure is incurred for manufacturing but cannot be identified with the product units.
  2. Administrative Overheads:  Indirect expenses incurred for running the administration are known as Administrative Overheads. Examples of such overheads are, office salaries, printing and stationery, office telephone, office rent, electricity used in the office, salaries of administrative staff etc.
  3. Selling and Distribution Overheads:  Overheads incurred for getting orders from consumers are called as selling overheads. On the other hand, overheads incurred for execution of order are called as distribution overheads. Examples of selling overheads are, sales promotion expenses, marketing expenses, salesmen’s salaries and commission, advertising expenses etc. Examples of distribution overheads are warehouse charges, transportation of outgoing goods, packing, commission of middlemen etc.
  4. Research and Development Overheads: In the modern days, firms spend heavily on research and development. Expenses incurred on research and development are known as Research and Development overheads.
  1. Classification according to Behavior: According to this classification, overheads are classified as fixed, variable and semi-variable. These concepts are discussed below.
  1. Fixed Overheads: Fixed overheads are commonly described as those that do not vary in total amount with increase or decrease in production volume, for a given period of time, may be a year. Salaries, depreciation of fixed assets, property taxes, are some of the examples of fixed costs. Total fixed costs remain same irrespective of changes in volume of production but per unit of fixed cost is variable. It increases if production decreases while if production increases, it decreases.
  2. Variable Overheads: Variable overheads are those which go on increasing if production volume increases and go on decreasing if the volume decreases. Such increase or decrease may or may not be in the same proportion. Variable overheads are generally considered to be controllable as they are directly connected with the production.
  3. Semi-variable Overheads:  These types of overheads remain constant over a relatively short range of variation in output and then are abruptly changed to a new level. In other words, they remain same up to a certain level of output and after crossing that level, they start increasing. For example, supervisor’s salary is treated as fixed but if a decision is taken to operate a second shift, additional supervisor may have to be appointed which results into increase in the salary of the supervisor. This indicates that it is a semi-variable overheads. Similarly, maintenance expenditure, fire insurance are also semi-variable overheads.
Over or under absorption of overheads meaning:
Overhead expenses are usually applied to production on the basis of predetermined rates. The pre-determined rate may present estimated or actual cost. The actual overhead cost incurred and overhead applied to the production will seldom be the same. But due to certain reasons the difference between two may arise.
Over absorptions: If the amount applied exceeds, the actual overhead, it is said to be an over absorption of overheads.
Under absorption: If the amount applied is short fall of the actual overhead in production it is said to be the under absorption of overheads. The over or under absorption of overheads may be termed as overhead variance.
Reason of over or under-absorption of overheads: The under or over-absorption of overhead arises due to following reasons:
  1. Errors in estimating overheads.
  2. Overhead may change due to change in method of production.
  3. The seasonal fluctuation in overhead cost in some industries.
  4. Under utilization of available capacity, unexpected change in the volume of out put.
  5. Valuation of work in progress in wrong process.
6. (a) A product passes through three processes P, Q and R. The Normal wastage of each process is as follows:
Process P = 5%, process Q = 6%, and process R = 10%. Wastage of process P was sold at Rs. 2 per unit, that of process Q at Rs. 5 per unit and that of process R at Rs. 10 per unit. 1,000 units were issued to process P in the beginning of April, 2015 at cost of Rs. 2 per unit. The other expenses were as follows:

Process

P
Q
R
Raw materials (in Rs.)
Wages (in Rs.)
Direct expenses (in Rs.)
Actual output (in Rs.)
2,000
5,000
1,550
950
3,000
8,000
2,946
910
1,000
6,000
3,738
810
Prepare Process Accounts of P, Q and R assuming that there were no openings or closing stocks.                                    14
Process P A/c
Particulars
Units
Amount
Particulars
Units
Amount
To Raw Materials
To Direct Materials
To Wages
To Direct Expenses
1,000
-
-
-
2,000
2,000
5,000
1,550
By Normal loss

By Process Q A/c
50

950
100

10,450

1,000
10,550

1,000
10,550
Process Q A/c
Particulars
Units
Amount
Particulars
Units
Amount
To Process P A/c
To Direct Materials
To Wages
To Direct Expenses
To Abnormal Gain A/c
950
-
-
-
17
10,450
3,000
8,000
2,946
459
By Normal loss
(950 x 6%)

By Process R A/c
57


910
285


24,570

967
24,855

967
24,855
Process R A/c
Particulars
Units
Amount
Particulars
Units
Amount
To Process Q A/c
To Direct Materials
To Wages
To Direct Expenses
910
-
-
-
24,570
1,000
6,000
3,738
By Normal loss
(910 x 10%)

By Abnormal Loss
By Finished Stock A/c
91


9
810
910


378
34,020

910
35,308

910
35,308


Working Note:
(i) Value of abnormal gain (Process B A/c)
(ii) Value of abnormal loss (Process C A/c)
Or

(b) What do you mean by Cost Audit and Cost Management? Explain how a cost auditor works in conducting cost audit.                 4+4+6=14

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