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

2016 (May)

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 high value items.
c)       Muster roll is necessary for the preparation of the labour attendance register .
d)      Fixed overhead cost is a periodical cost.

2. Answer the following (any four):                                         4x4=16
a) “Classification of cost plays a vital role in ascending cost.” Explain this statement.
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. Classification of cost helps in determining the product cost and period cost of the product. It also helps in determining tender price.
b) Give five differences between Cost Accounting and Financial Accounting.
Financial Accounting
Cost Accounting
1.    Nature
Financial accounts are maintained on the basis of historical records.
Cost accounts lay emphasis on both historical and predetermined costs.
2.    Use
Financial Accounting is used even by outside entities.
Cost Accounting is used only the management of the concern.
3.    System
Financial Accounting uses the double-entry system for recording financial data.
Cost Accounting does not use the double-entry for collecting cost data.
4.    Scope
Financial Accounting covers all items of income and expenditure whether related to the cost centers or not,
Cost Accounting covers all items related to a cost centre.

c)  Give four reasons of under-absorption and over-absorption of overheads.
Ans: Reason of over or under-absorption of overheads: The under or over-absorption of overhead arises due to following reasons:
a)         Errors in estimating overheads.
b)         Overhead may change due to change in method of production.
c)          The seasonal fluctuation in overhead cost in some industries.
d)         Under utilization of available capacity, unexpected change in the volume of out put.
e)         Valuation of work in progress in wrong process.
d) What is ABC analysis? How is it differ from VED analysis?
Ans: Difference between ABC analysis, Perpectual Inventory system and VED analysis
ABC analysis
VED analysis
Its main objective is to reduce the investment in material.
Its main objective is to prevent stoppage of production due to shortage of essential material.
In this system, stocks are classified on the basis of value.
The analysis classifies items on the basis of their criticality for the industry or company – vital, essential and desirable.
It will not pay equal attention to all types of inventory.
More attention is given to essential inventory.
ABC analysis is applicable when there is small variety of stock.
VED analysis is specially applied in the case when there is a large variety of stocks such as spare parts inventory, medical stores etc.
Store ledger and bin card is not prepared in this analysis.
Store ledger and bin card is not prepared in this analysis.

e) Give four differences between Job Costing and Process Costing.
Ans: Difference between Job costing and Process Costing
Basis of distinction
Job Costing
Process Costing
Job costing is used when the cost object is an individual (or a lot/batch) unit or a distinct product or service.
Process Costing is generally used for a mass of identical product or service.
Accumulation of Cost
Costs can be accumulated by each individual product or service.
The Costs are accumulated in a period. The total costs in a period are divided over the number of units to get an average unit cost.
Cost Determination
Job costing is done against a specific order being produced.
Costs are compiled for each process over a period of time.
Cost Calculation
Costs are calculated when a job is over.
Costs are calculated at the end of a cost period like an accounting year.
There are usually no transfers of costs from one job to another.
Transfer of costs from one process to another is made as the product moves from one process to the other.

3. (a) From the following information, prepare a Cost Sheet showing the cost and profit:             14
Opening raw material
Closing raw material
Opening work-in-progress:
      Works Overhead
Closing work-in-progress:
      Works overhead


Opening finished goods – 200 units @ Rs. 84.
Closing finished goods – 1,600 units
Purchase of raw material
Carriage on purchases
Sale of scrap of raw material
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
Statement of Cost or Cost sheet
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

(a) Raw Material consumed during the year
Add: Direct wages

Prime Cost
Add: Works overhead @ 60% of direct labour cost

Work’s Cost incurred
Add: Opening stock of work-in-progress
Works overhead
Less: Closing stock of work-in-progress
Works overhead




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


(b) Cost of Production
Add: Opening Stock of finished goods (@84)
Less: Closing Stock of finished goods(756000/9000= 84)

(c) Cost of goods Sold
Add: Selling and Distributive overheads

Total cost of sales
(d) Add: Profit for the year



(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

Perpetual Inventory System: Perpetual Inventory system means continuous stock taking. CIMA defines perpetual inventory system as ‘the recording as they occur of receipts, issues and the resulting balances of individual items of stock in either quantity or quantity and value’. Under this system, a continuous record of receipt and issue of materials is maintained by the stores department and the information about the stock of materials is always available. Entries in the Bin Card and the Stores Ledger are made after every receipt and issue and the balance is reconciled on regular basis with the physical stock. The main advantage of this system is that it avoids disruptions in the production caused by periodic stock taking. Similarly it helps in having a detailed and more reliable check on the stocks. The stock records are more reliable and stock discrepancies are investigated and appropriate action is taken immediately.
Salient features of perpetual inventory system
1)      It requires more efforts to maintain inventory under this method.
2)      Quantity balances shown by the store ledger and bin cards are reconciled.
3)      A number of items are physically checked systematically and by rotation.
4)      The method is comparatively costly as compared to periodical inventory system.
5)      Store ledger and bin cards keeps inventory record up-to date and decent.
6)      The method applies to those concerns usually that sell high-value items (Such as car, personal computer, equipments etc.) not at a large quantity as compared to items under periodic system.
7)      Causes for difference between physical balances and book balances can be explored.
8)      Making corrective entries in case of discrepancies.
9)      Removing the causes of discrepancies between physical quantities and book balances.
Advantages of Perpetual Inventory System
a)      Easy detection of errors - Errors and frauds can be easily detected at an early date. It helps in preventing their occurrence.
b)      Better control over stores- The system exercises better control over all receipts and issues in such a manner so as to give a complete picture of both quantities and values of stock in hand at all times.
c)       No interruption of production process- Production process is not interrupted as the physical verification of stock is made on a planned and regular basis.
d)      Acts as internal check- Under the system, records are made simultaneously in the bin cards and stores ledger accounts which acts as a system of internal check for detection of errors as and when they are committed.
e)      Investment in materials kept under control - The investment in materials is kept at a minimum level as the actual stock is continuously compared with the maximum level and minimum level.
f)       Early detection of loss of stock- Loss of stock due to shrinkage, evaporation, accident, fire, theft, etc. can be easily detected.
g)      Accurate and up-to-date accounting records- Due to continuous stock­taking, the store-keeper and stores accountant become more vigilant in their works and they maintain accurate and up-to-date records.
h)      Easy to prepare interim accounts- It is possible to prepare periodical profit and loss account and balance sheet without physical stock-taking being made.
i)        Availability of correct stock data- Correct stock data is readily available for settlement of insurance claims.
4. (a) From the following particulars, work out the earnings for the week of a worker under the:                                  14
a)      Straight piece rate system;
b)      Differential piece rate system;
c)       Halsey premium system;
d)      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
20 minutes
120 pieces
150 pieces

(b) What is idle time? Discuss its causes. How is it treated in Cost Accounting?                  4+6+4=14
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.
a)      The main reasons for the occurrence of normal idle time are as follows:
b)      Time taken by workers to travel the distance between the main gate of factory and the place of their work.
c)       Time lost between the finish of one job and starting of next job.
d)      Time spent to overcome fatigue.
e)      Time spent to meet their personal needs like taking lunch, tea etc.
The main reasons for the occurrence of abnormal idle time are:
a)      Due to machine break downs, power failure, non-availability of raw materials, tools or waiting for jobs due to defective planning.
b)      Due to conscious management policy decision to stop work for some time.
c)       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.
5. (a) From the following details, compute the hourly rate of a machine installed in a shop:          14
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
20 units per hour
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

(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:
a.       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
b.      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
c.       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
d.      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
e.      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
f.        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
g.       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:
Process – A
Process – B
Materials (in tonnes)
Cost of material per tonne (in Rs.)
Wages (in Rs.)
Manufacturing expenses (in Rs.)
Output (in tonnes)
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
To Raw Materials
To Wages
To Mfg. Expenses


By loss of weight
By Normal Loss (Scrap)
By Abnormal Loss
By Process B A/c


Process B A/c
To Process A A/c
To Direct Materials
To Wages
To Manufacturing Expenses
To Abnormal Gain A/c

By loss of weight
By Normal Loss (Scrap)

By Finished Stock A/C




(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
a)      It helps to identity the reasons for the difference in the profit or loss shown by cost and financial accounts.
b)      It ensures the arithmetical accuracy and reliability of cost accounts.
c)       It contributes to the standardization of policies regarding stock valuation, depreciation and overheads.
d)      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.
a)      Items included in the financial accounts but not in cost accounts.
Ø  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.
Ø  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.
Ø  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.
b)      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.
c)       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.
d)      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.
e)      Different basis of depreciation adopted: The rates and methods of charging depreciation may be different in two sets of accounts.