# Cost Accounting Solved Question Paper May' 2019, Dibrugarh University B.Com 4th Sem CBCS Pattern

## Cost Accounting Solved Question Paper May' 2019Dibrugarh University B.Com 4th Sem CBCS PatternTime: 3 hoursFull Marks: 80Pass marks: 24

The figures in the margin indicate full marks for the questions

1. (a) Choose the correct answer:    1x4=4

1)      Prime cost includes

a)       Direct material + Direct labour + Works expenses.

b)      Direct material + Direct labour + Chargeable expenses.

c)       Direct material + Direct labour + Office expenses.

2)      Purchase budget should be prepared by the

a)       Financial Manager.

b)      Production Manager.

c)       Purchase Manager.

3)      Depreciation is a

a)      Fixed expenses.

b)      Variable expenses.

c)       Semi-variable expenses.

4)      In process costing, the abnormal loss is treated as

a)      Period cost.

b)      Unit cost.

c)       Future cost.

(b) Fill in the blanks:   1x4=4

1)      Fixed cost per unit decreases with rise in output.

2)      Re-order quantity may be measured in units.

3)      Fixed overhead cost is a period cost.

4)      The need of reconciliation arises in non-integrated accounting system.

2. Write short notes on (any four): 4x4=16

a) Techniques of costing.

Ans: 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.

b) ABC analysis.

Ans: 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.

Ans: Rowan System or Rowan Plan: The scheme was introduced in 1901 by David Rowan of Glasgow, England. The wages are calculated on the basis of hours worked whereas the ‘bonus is that proportion of the wages of time taken which the time saved bears to the standard time allowed’. Total wages under this scheme is calculated with the help of the following formula:

Earnings = Time taken x Rate per hour + Time saved / Standard time (Time taken x Rate per hour)

The main principles/features of Rowan plan are:

a)       Time rate is guaranteed and the worker gets the guaranteed irrespective of whether he completes the job within the time also takes more time to do it.

b)      Standard time and standard work are fixed for the job or operation in advance;

c)       The workers producing more than the standard, or the workers completing the work in less than the standard time fixed, get bonus in addition to the ordinary time wage.

d)      Bonus is based on that proportion of the time wages which the time saved bears to the standard time.

e)      Workers who fail to reach the prescribed standard get the time wages.

f)        Labour cost per unit of output decreases. The employer also shares the benefit of efficiency which induced him to improve the method and equipment.

g)       Wages per hour increases but in the same proportion as the output.

Ans: 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.

e) Abnormal process loss.

Ans: Abnormal Loss: If the units lost in the production process are more than the normal loss, the difference between the two is the abnormal loss. It is excluded from total cost due to which it does not affect the cost per unit of the product. The relevant process of account is credited and abnormal loss account is debited with the abnormal loss valued at full cost of finished output. The amount realized from sale of scrap of abnormal loss units is credited to the abnormal loss account and the balance in the abnormal loss account is transferred to the Costing Profit and Loss Account.

Features of Abnormal Loss:

a) It arises due to external factor.

b) It is accidental in nature.

c) It cannot be estimated in advance.

d) It is insurance loss.

e) It is avoidable.

### Also Read: Cost Accounting Question Papers and Solutions

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3. (a) Discuss in detail the advantages and limitations of Cost Accounting.            8+6=14

Ans: Advantages of Cost Accounting (Aid to Management)

a)       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:

1.       Whether to make a product buy a product?

2.       Whether to accept or reject an export order?

3.       How to utilize the scarce materials profitably?

b)      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.

c)       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.

d)      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.

e)      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.

f)        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.

g)       Prevention of frauds: Cost accounting envisages sound systems of inventory control, budgetary control and standard costing. Scope for manipulation and fraud is minimized.

h)      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.

i)        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.

j)        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.

Limitations of Cost Accounting

In spite of the various advantages claimed by cost accounting, the discipline suffers from the following limitations:

a)       Cost Accounting is costly to operate: It involves heavy expenditure to operate. The benefits derived by operating the system are more than the cost.

b)      Cost Accounting involves many forms and statements: It involves usage of many forms and statements which leads to increase of paper work.

c)       Costing may not be applicable in all types of Industries: Existing methods of cost accounting may not be applicable in all types of industries. Cost accounting methods can be devised for all types of industries, and services.

d)      It is based on Estimations: Costing system relies on predetermined data and therefore it is not reliable. Costing system estimates costs scientifically based on past and present situations and with suitable modifications for the future. This leads to accurate cost figures based on which management can initiate decisions. But for the predetermined costs, cost accounting also becomes another ‘Historical Accounting’.

e)      It is not an exact science: Like any others accounting system, it is not an exact science but an art that has developed through theories and practices.

f)        Bias Judgments: Many judgments are biased and depend on individual discretion.

g)       Difference in opinion: Different views are held by different cost accounts about the items to be includes in cost.

Or

***

***

(b) Following data are taken from the Cost Accounts of a manufacturer in respect of the month of March 2019:

 Particulars Rs. Stock in hand on 1st March 2019: Raw materials Work-in-progress Finished goods Purchase of raw materials Sale of finished goods Direct wages Stock in hand on 31st March, 2019: Raw materials Work-in-progress Finished goods Non-productive wages Works expenses Office and administrative expenses Selling and distribution 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 Statement of Cost and Profit showing the following: 2x7=14 (AVAILABLE IN E-BOOK)

1)      Cost of materials consumed.

2)      Prime cost.

3)      Works cost.

4)      Cost of production.

5)      Cost of goods sold.

6)      Cost of sales.

7)      Profit for the month.

4. (a) A statement of materials received and issued in March 2019 is given below:

 March 1 March 5 March 8 March 10 March 16 March 20 March 23 March 27 March 31 Opening stock of materials 4,400 units @ Rs. 8 per unit Purchased 550 units @ 10 per unit. Issued 2,200 units. Purchased 6,600 units @ 12 per unit. Issued 4,400 units. Issued 1,100 units. Issued 2,200 units. Purchased 4,950 units @ 11 per unit Issued 3,300 units.

From the above statement, prepare Stores Ledger by applying –

1)      First-in-first-out method;

2)      Last-in-first-out method;      7+7=14

Or

(b) (1) What is idle time? What are its causes?   6

Ans: Idle time refers to the labour time paid for but not utilized on production. It, in fact, represents the time for which wages are paid, but during which no output is given out by the workers. This is the period during which workers remain idle.

Reasons for idle time: According to reasons, idle time can be classified into normal idle time and abnormal idle time.  Normal idle time is the time which cannot be avoided or reduced in the normal course of business. The main reasons for the occurrence of normal idle time are as follows:

1.       Time taken by workers to travel the distance between the main gate of factory and the place of their work.

2.       Time lost between the finish of one job and starting of next job.

3.       Time spent to overcome fatigue.

4.       Time spent to meet their personal needs like taking lunch, tea etc.

The main reasons for the occurrence of abnormal idle time are:

1.       Due to machine break downs, power failure, non-availability of raw materials, tools or waiting for jobs due to defective planning.

2.       Due to conscious management policy decision to stop work for some time.

3.       In the case of seasonal goods producing units, it may not be possible for them to produce evenly throughout the year. Such a factor too results in the generation of abnormal idle time.

(2) A worker takes 12 hours to complete a work on daily wages and 8 hours on a scheme of payment by results. Worker’s daily rate is Rs. 6 per hour. The cost of material of the product is Rs. 20 and the overheads are recovered at 200% of the total wages. Calculate the Factory Works Cost of the product under:   4+4=8

1)      Rowan plan;

2)      Halsey scheme;

5. (a) Define overhead. How are overheads classified? Explain four reasons of over-absorption and under-absorption of overheads.    4+5+5=14

Ans: Meaning and Definition of overheads

Aggregate of all expenses relating to indirect material cost, indirect labour cost and indirect expenses is known as Overhead. Accordingly, all expenses other than direct material cost, direct wages and direct expenses are referred to as overhead.

According to Wheldon, Overhead may be defined as "the cost of indirect material, indirect labour and such other expenses including services as cannot conveniently be charged to a specific unit."

Blocker and WeItmer define overhead as follows: "Overhead costs are operating cost of a business enterprise which cannot be traced directly to a particular unit of output. Further such costs are invisible or unaccountable."

Classification of overheads is the process of grouping of costs based on the features and objectives of the business organization. Classification is made according to following basis:

a)      Classification according to Elements:  According to this classification overhead 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.

b)      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.

c)       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 semi-variable overheads. Similarly, maintenance expenditure, fire insurance are also semi-variable overheads.

Reason of over or under-absorption of overheads: The under or over-absorption of overhead arises due to following reasons:

b)      Overhead may change due to change in method of production.

c)       The seasonal fluctuation in overhead cost in some industries.

d)      Underutilization of available capacity, unexpected change in the volume of output.

e)      Valuation of work in progress in wrong process.

Or

(b) From the following information, work out the production hour rate of recovery of overhead in department P1, P2 and P3: 14

 Particulars Total Production Departments Service Departments Rs. P1 P2 P3 S1 S2 Rent (Rs.) Electricity (Rs.) Fire insurance (Rs.) Plant depreciation (Rs.) Transport (Rs.) Estimated working hours 1,000 200 400 4,000 400 - 200 50 80 1,000 50 1,000 400 80 160 1,500 50 2,500 150 30 60 1,000 50 1,800 150 20 60 300 100 - 100 20 40 200 150 -

Expenses of service departments S1 and S2 are apportioned as under: (AVAILABLE IN E-BOOK)

 P1 P2 P3 S1 S2 S1 30% 40% 20% - 10% S2 10% 20% 50% 20% -

6. (a) (1) What is process costing? What are its features? Name any three industries in which process costing is used. 2+5+3=10

Ans: Process Costing

Process costing is a method of operation costing which is used to ascertain the cost of production at each process, operation or stage of manufacture, where processes are carried in having one or more of the following features:

Where the product of one process becomes the material of another process or operation

Where there is simultaneous production at one or more process of different products, with or without by product,

Where, during one or more processes or operations of a series, the products or materials are not distinguishable from one another, as for instance when finished products differ finally only in shape or form’.

Process costing is defined by Kohler as: “A method of accounting whereby costs are charged to processes or operations and averaged over units produced; it is employed principally where a finished product is the result of a more or less continuous operation, as in paper mills, refineries, canneries and chemical plants; distinguished from job costing, where costs are assigned to specific orders, lots or units.

Features/Characteristics of Process Costing:

a) Process Costing Method is applicable where the output results from a continuous or repetitive operations or processes.

b) Products are identical and cannot be segregated.

c) It enables the ascertainment of cost of the product at each process or stage of manufacture.

d) The output consists of products, which are homogenous.

e) Production is carried on in different stages (each of which is called a process) having a continuous flow.

f) The input will pass through two or more processes before it takes the shape of the output. The output of each process becomes the input for the next process until the final product is obtained, with the last process giving the final product.

g) The output of a process except the last may also be saleable in which case the process may generate some profit.

h) The input of a process except the first may be capable of being acquired from the outside sources.

i) The output of a process is transferred to the next process generally at cost to the process. It may also be transferred at market price to enable checking efficiency of operations in comparison to the market conditions.

j) Normal and abnormal losses may arise in the processes.

Application of Process Costing

There are number of industries where Process costing system can be used except where job, Batch or Unit Operation Costing is necessary. The following are examples of industries where process costing is applied:

a) Where the final product merges only after two or more process such as paper-the raw material, bamboo is made into pulp; pulp is a made into paper and then it is finished, glazed etc. for sale;

b) The product of one process becomes the raw material of another process or operation e.g. refined groundnut oil is the material for making vegetable ghee and

c) Different products may have a common prior process e.g. brass goods will require melting of brass commonly for all goods. Another example is petroleum products by the same refinery.

Some other industries where Process Costing is applied are:

Chemical works, Textiles, weaving, spinning, Soap making, Food product, Box making, Canning factory, Coke works, Paint, ink and varnishing etc.

(2) Distinguish between normal process loss and abnormal process loss.              4

Ans: Normal Loss: The fundamental principle of costing is that the good units should bear the amount of normal loss. Normal loss is anticipated and in a process it is inevitable. It is included in total cost of the product due to which cost per unit is increases. The cost of normal loss is therefore not worked out. The number of units of normal loss is credited to the Process Account and if they have some scrap value or realizable value the amount is also credited to the process account. If there is no scrap value or realizable value, only the units are credited to the process account.

Abnormal Loss: If the units lost in the production process are more than the normal loss, the difference between the two is the abnormal loss. It is excluded from total cost due to which it does not affect the cost per unit of the product. The relevant process of account is credited and abnormal loss account is debited with the abnormal loss valued at full cost of finished output. The amount realized from sale of scrap of abnormal loss units is credited to the abnormal loss account and the balance in the abnormal loss account is transferred to the Costing Profit and Loss Account.

Difference between normal loss and abnormal loss:

 Bases Normal Loss Abnormal Loss 1. Source It arises due to internal factors. It arises due to external factor. 2. Nature It is recurring in nature. It is accidental in nature. 3. Estimation It can be estimated in advance from the past experience. It cannot be estimated in advance. 4. Access to insurance It is not insurable loss. It is insurance loss. 5. Avoidance It is unavoidable loss. It is avoidable.

Or

(b) A company’s Trading and Profit & Loss Account was as follows:

 Particulars Rs. Particulars Rs. Purchases Direct wages Works expenses Selling expenses Administration expenses Depreciation Net profit 25,210 10,500 12,130 7,100 5,340 1,100 20,300 Sales (50,000 units at Rs. 1.50 each) Discount received Profit on sale of land Closing stock 75,000 260 2,340 4,080 81,680 81,680

The profit as per Cost Accounts was only Rs. 19,770. Reconcile the financial and cost profits using the following information:  14

1)      Cost accounts value of closing stock Rs. 4,280.

2)      The works expenses in the Cost Accounts were taken as 100% of direct wages.

3)      Selling and administration expenses were charged in the Cost Accounts at 10% of sales and Rs. 0.10 per unit respectively.

4)      Depreciation in the Cost Accounts was Rs. 800. (AVAILABLE IN E-BOOK)

(OLD COURSE)

Full Marks: 80

Pass Marks: 32

1. (a) Fill in the blanks: 1x4=4

1)         Costing is defined as ‘the technique and process of ascertaining costs’.

2)         A Bin card provides a complete record of all materials received and the quantity thereof.

3)         The rate of change in the composition of labour force in an organization is termed as labour turnover.

4)         Overhead is the aggregate of indirect material, indirect labour and indirect expenses.

(b) Choose and write the correct answer:   1x4=4

1)         Unit costing / Job costing is employed in paper mill industries.

2)         In case of rising prices, LIFO / FIFO method of pricing material issues reports higher income.

3)         Cost of normal idle time is always controllable / uncontrollable.

4)         Fixed overheads per unit is reduced / increased when volume of output is increased.

2. Write on the following (any four):       4x4=16

a) Elements of cost.

Ans: 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.

Components of Total Cost

1. Prime Cost: Prime cost consists of costs of direct materials, direct labors and direct expenses. It is also known as basic, first or flat cost.

2. Factory Cost: Factory cost comprises prime cost and, in addition, works or factory overheads that include costs of indirect materials, indirect labors and indirect expenses incurred in a factory. It is also known as works cost, production or manufacturing cost.

3. Office Cost: Office cost is the sum of office and administration overheads and factory cost. This is also termed as administration cost or the total cost of production.

4. Total Cost: Selling and distribution overheads are added to the total cost of production to get total cost or the cost of sales.

b) Scope of Cost Accounting.

Ans: The term scope here refers to field of activity. Cost accounting refers to the process of determining the cost of a particular product or activity. It provides useful data both for internal and external reports reporting. Internal reporting presents details of cost data in a summarized and aggregate form. For instance, in case a company manufacturing electrical goods cost of each product.

In order that cost accounting satisfies the requirements of both internal and external reporting, the following are the different activities which are undertaken under cost accounting system:

a)       Cost Determination: This is the first step in the cost accounting system. It refers to determining the cost for a specific product or activity. This is a critical activity since the other three activities, explained below, depend on it.

b)      Cost Recording: It is concerned with recording of costs in the cost journal and their subsequent posting to the ledger. Cost recording may be done according to integral or non-integral system a separate set of books is maintained for costing and financial transactions.

c)       Cost Analyzing: It is concerned with critical evaluation of cost information to assist the management in planning and controlling the business activates. Meaningful cost analysis depends largely upon the clear understanding of the cost finding methods used in cost accounting.

d)      Cost Reporting: It is concerned with reporting cost data both for internal and external reporting purpose. In order to use cost information intelligently it is necessary for the managers to have good understanding of different cost accounting concepts.

c) ABC analysis.

Ans: 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.

Ans: Apportionment of Overhead Expenses: Cost apportionment is the allotment of proportions of items to cost centres or cost units on an equitable basis. The term refers to the allotment of expenses which cannot identify wholly with a particular department. Such expenses require division and apportionment over two or more cost centres or units. So cost apportionment will arise in case of expenses common to more than one cost centre or unit. It is defined as the allotment to two or more cost centres of proportions of the common items of cost on the estimated basis of benefit received. Common items of overheads are rent and rates, depreciation, repairs and maintenance, lighting, works manager’s salary etc.

e) Cost audit.

f) Cost sheet.

Ans: Cost Sheets are statements setting out the costs of a product giving details of all the costs. Presentation of costing information depends upon the method of costing. A cost sheet can be prepared weekly, monthly, quarterly or annually. In a cost sheet besides total expenditure incurred, cost per unit of output in case of each element of cost can be shown in a separate column. The cost sheet should give cost per unit in the previous period for the purposes of comparison.

Walter & Bigg define, “The expenditure which has been incurred upon production for a period is extracted from the financial books and the store records, and set out in a memorandum or a statement. If this statement is confined to the disclosure of the cost of the units produced during the period, it is a termed as a cost sheet”. In other words, cost sheet is a statement showing the total cost under proper classification in a logical order.

Components of Total Cost

1. Prime Cost: Prime cost consists of costs of direct materials, direct labors and direct expenses. It is also known as basic, first or flat cost.

2. Factory Cost: Factory cost comprises prime cost and, in addition, works or factory overheads that include costs of indirect materials, indirect labors and indirect expenses incurred in a factory. It is also known as works cost, production or manufacturing cost.

3. Office Cost: Office cost is the sum of office and administration overheads and factory cost. This is also termed as administration cost or the total cost of production.

4. Total Cost: Selling and distribution overheads are added to the total cost of production to get total cost or the cost of sales.

3. (a) Prepare a Cost Sheet from the following: 11

 Particulars Rs. Sales Materials 1.1.2018 Materials 31.12.2018 Work-in-progress 1.1.2018 Work-in-progress 31.12.2018 Finished goods 1.1.2018 Finished goods 31.12.2018 Materials purchased Direct labour Manufacturing overheads Selling expenses General office expenses 8,00,000 40,000 32,000 55,000 72,000 64,000 1,51,000 1,52,000 1,45,000 1,08,000 50,000 40,000

Or

(b) Distinguish between the following: 6+5=11

1. Direct cost and Indirect cost.

Ans: Direct costs are those which are incurred for and may be conveniently identified with a particular cost centre or cost unit. Materials used, labour employed and direct expenses are common examples of direct costs. Total of all direct cost is called prime cost.

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.  Indirect cost is also known as overheads. Overheads is divided into three parts – factory overheads, office & administrative overheads and selling & distribution overheads.

2. Fixed cost and Variable cost.

Ans: Fixed cost: Fixed cost 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.

Variable cost: Variable cost 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 cost is generally considered to be controllable as they are directly connected with the production. Material cost, labour cost and other direct expenses are common examples of variable cost.

4. (a) XYZ Ltd. manufactures a product A and provides you the following particulars:

 Cost of placing an order Annual carrying cost per unit Normal usage Minimum usage Maximum usage Re-order period Rs. 90 Rs. 5.20 50 units per week 25 units per week 75 units per week 4 to 6 weeks

Compute from the above:            11

1)      Re-order quantity.

2)      Re-order level.

3)      Minimum level.

4)      Maximum level.

5)      Average stock level.

Or

(b) Explain the meaning and purpose of the following documents: 4+3+4=11

1)      Purchase Requisition.

2)      Bin Card.

3)      Stores Ledger.

Ans: Purchase Requisition: A form known as ‘Purchase Requisition’ is commonly used as a format requesting the purchase department to purchase the required material. Normally the purchase requisition is issued by the Stores Department when the quantity of the concerned material reaches the minimum level. Only in the cases of materials, which are not kept in the stores on regular basis, the requisition is issued by the concerned department. Purchase requisition has information like the quantity required, the expected date of receipt, the department in which the material is required, description of material etc. Copies of the purchase requisition are sent to the Accounts department and the concerned department who is in need of the material.

Bin Card: Bin is a place where materials are kept in. It may be a rack, container, shelf or space where stores are kept. Bin card is a document showing the particulars of materials kept in the bin. It is a document attached to the bin disclosing the quantitative details of materials received, issued and the closing balance. A bin card is used for each item of material. Each receipt and issue is recorded on the bin card in a chronological order and the latest balance is shown after each receipt and issue. Bin card is maintained by the store keeper. It indicates information like different stock levels. No, name of material, material code number, stores ledger folio number, quantity of materials received, issued and the balance in hand.

Store Ledger: Store ledger is a document showing the quantity and value of materials received, issued and in balance at the end. One stores ledger is allotted to each component of material. Entries are made in this ledger by the costing clerk with reference to goods received note, material requisition note, material returned note etc. It is very similar to the bin card except it contains additional columns showing the prices and value of materials received, issued and balance in hand. It gives the value of closing stock at any time. Besides, a store ledger contains information like name of the material, code number, different stock levels etc.

5. (a) From the following particulars, you are required to work out the earning of worker for a week under –

1)    Straight piece rate;

2)    Halsey premium scheme (50% sharing);

 Weekly working hours Hourly wage rate Piece rate per unit Normal time taken per unit Normal output per week Actual output per week 48 Rs. 7.50 Rs. 3.00 24 minutes 120 units 150 units

Or

(b) What is idle time? Explain its causes. How is idle time treated in Cost Accounts?  3+4+4=11

Ans: Idle time refers to the labour time paid for but not utilized on production. It, in fact, represents the time for which wages are paid, but during which no output is given out by the workers. This is the period during which workers remain idle.

Types 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.

Reasons for idle time: According to reasons, idle time can be classified into normal idle time and abnormal idle time.  Normal idle time is the time which cannot be avoided or reduced in the normal course of business.

1.    The main reasons for the occurrence of normal idle time are as follows:

2.    Time taken by workers to travel the distance between the main gate of factory and the place of their work.

3.    Time lost between the finish of one job and starting of next job.

4.    Time spent to overcome fatigue.

5.    Time spent to meet their personal needs like taking lunch, tea etc.

The main reasons for the occurrence of abnormal idle time are:

4.    Due to machine break downs, power failure, non-availability of raw materials, tools or waiting for jobs due to defective planning.

5.    Due to conscious management policy decision to stop work for some time.

6.    In the case of seasonal goods producing units, it may not be possible for them to produce evenly throughout the year. Such a factor too results in the generation of abnormal idle time.

Control of Idle Time

Following steps are suggested to control idle time:

i) Vigilance must be exercised to control and eliminate idle time.

ii) The instructions to the workers should be given in advance so that workers need not wait.

iii) Plant and machine should be maintained properly so that their breakdown can be avoided

iv) The causes of the idle time should be found out and the root cause must be removed.

v) Regular and timely supply of raw materials must be made available through a good system of storing materials.

6. (a) Compute the machine hour rate from the following data:                                                 12

 Particulars Rs. Cost of machine Installation charges Scrap value after 10 years Rent of the ship per month General lighting for the ship per month Insurance for the machine p.a. Repairs p.a. Power consumption 10 units per hour and average rate of power per unit Shop supervisor’s salary p.m. Estimated working hours p.a. 10,00,000 1,00,000 50,000 10,000 2,000 9,000 10,000 4 15,000 2,500

The machine occupies one-fourth of total area of the shop. Supervisor denotes one-third of his time for the machine.

Or

(b) What are the causes of under-absorption and over-absorption of overheads? How will you deal with them in Cost Accounts?  7+5=12

Ans: 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:

g)       Overhead may change due to change in method of production.

h)      The seasonal fluctuation in overhead cost in some industries.

i)        Underutilization of available capacity, unexpected change in the volume of output.

j)        Valuation of work in progress in wrong process.

Treatment of under and over absorption of overheads

Once the under/over absorption is noticed, the following corrective steps are to be taken to rectify the same.

a)       Use of supplementary Rate: The under/over absorption can be rectified by using the supplementary rate. This rate is calculated by dividing the under/over absorbed amount of overheads by the units of the base. The rate so arrived is known to be supplementary rate.

b)      Carrying forward to future period: If the amount of under/over absorption of overheads is small, it may be carried forward to the future period hoping that it will be rectified in the future.

c)       Writing off to Profit and Loss A/c: Amount of under/over absorption can be written off to Costing Profit and Loss Account and thus not reflected in the total costs.

7. (a) A product of XYZ Ltd. Co. possesses through two processes A and B. 10,000 units at a cost of Rs. 1.10 were issued to process A. Other direct expenses were as follows:

 Particulars Process – A Process – B Sundry materials Direct labour Direct expenses Output (units) Rs. 2,000 Rs. 4,500 Rs. 1,500 9,000 Rs. 2,000 Rs. 8,000 Rs. 1,500 9,120

Wastage of process A was 5% and in process B 4%. Wastage of process A was sold at 0.25 per unit and that of process B at 0.50 per unit. Overhead charges were 160% of direct labour. Prepare Process – A A/c and Process – B A/c.                 11

Or

(b) (1) Explain the special features of contract costing.   5

Ans: The distinguishing features of contract are as follows:

Features regarding Production

i) The work is undertaken to customer’s specific requirements.

ii) The work will be of a relatively long duration and involves large amount.

iii) The work is usually site based.

iv) The work is frequently of a constructional nature.

v) Plant and equipment may be purchased or hired for the duration of the contract.

vi) The completion date is fixed in advance, and penalties follow delays

vii) Certain aspects of the work are assigned to sub-contractors.

Features regarding Cost

i) The cost unit in contract costing is a contract.

ii) A separate account is prepared for each contract to ascertain the profit or loss on each contract.

iii) Most of the items of cost can be classified as direct since they can be easily identified with a specific contract.

iv) Indirect costs are normally restricted to Head Office expenses and storage costs. These are allocated to various contracts on which work is carried out during the year.

v) The contract price is often fixed in advance and payment is received at various stages of completion based on architect’s certificate.

vi) A separate contract ledger is maintained for recording costs when the number of contracts is large.

(2) How does cost audit differ from financial audit?        6