Dibrugarh University Solved Question Papers - Cost Accounting (May' 2015)

2015 (May)
(General / Speciality)
Course: 401
Time: 3 hours
(Cost Accounting)
Full Marks: 80
Pass marks: 32
The figures in the margin indicate full marks for the questions
1. (a) Fill in the blanks :                                                                                           1x5=5

(i)      Fixed cost per unit decreases when volume of production increases.
(ii)    Prime cost is the combination of direct materials, direct labour and direct expenses.
(iii)   Cost of abnormal idle time and overtime is transferred to Costing Profit and Loss Account.
(iv)  Depreciation on showroom building is to be treated as Selling and distribution overheads.
(v)    In contract costing Escalation clause allows adjustment of the prices of materials or rate of labour, etc., when these rises beyond a specified limit.
(b) Choose the correct answer:                                                                                         1x3=3
(i)      Rent of a factory building is a variable cost / fixed cost / semi-variable cost.
(ii)    A high labour turnover increase / decreases the cost of production.
(iii)   The basis of apportionment for canteen and staff welfare expenses is floor area occupied / number of workers / wages.
 2. Write short notes on (any four) :                                                                                      4x4=16
(a) Economic Order Quantity (EOQ)
Ans: Economic order quantity (EOQ) is that size of the order which gives maximum economy in purchasing any material and ultimately contributes towards maintaining the materials at the optimum level and at the minimum cost.
In other words, the economic order quantity (EOQ) is the amount of inventory to be ordered at one time for purposes of minimizing annual inventory cost.
The quantity to order at a given time must be determined by balancing two factors: (1) the cost of possessing or carrying materials and (2) the cost of acquiring or ordering materials. Purchasing larger quantities may decrease the unit cost of acquisition, but this saving may not be more than offset by the cost of carrying materials in stock for a longer period of time.
The carrying cost of inventory may include:
a)      Interest on investment of working capital
b)      Property tax and insurance
c)       Storage cost, handling cost
d)      Deterioration and shrinkage of stocks
e)      Obsolescence of stocks.
Formula of Economic Order Quantity (EOQ): The different formulas have been developed for the calculation of economic order quantity (EOQ). The following formula is usually used for the calculation of EOQ.
A  =  Demand for the year
Cp   =  Cost to place a single order
Ch  =  Cost to hold one unit inventory for a year
(b) LIFO: Last In First Out Method (LIFO)
According to this method units last entering the process are to be completed first. The completed units will be shown at their current cost and the closing-work in process will continue to appear at the cost of the opening inventory of work-in-progress along with current cost of work in progress if any.
a. Issues are based on actual cost.
b. Issue price reflects current market price.
c. Product cost will be based on current market price and hence will be more realistic.
d. There is no unrealized profit or loss.
e. Simple to operate if purchases are not many and prices are steady or rising.
f. When prices are raising this method is helpful in preparation of quotation or estimates.
a. This method involves considerable clerical work.
b. Under felling price, issues are priced at lower prices and stocks are valued at higher rates.
c. Stock of material shown in the balance sheet will not reflect market price.
d. Due to variation in prices, comparison of cost of similar job is difficult.
e. This method is not accepted by the income tax authorities.
(c) Stock control: Inventory control means to monitor the stock of goods used for production, distribution and captive (self) consumption. For a specific time period, stocks of goods are placed at some particular location. Stock of goods includes raw-materials, work in progress, finished goods, packaging, spares, components, consumable items, etc. Inventory Control means maintaining the inventory at a desired level. The desired-level keeps on fluctuating as per the demand and supply of goods.
According to Gordon Carson, "Inventory control is the process where by the investment in materials and parts carried in stocks is regulated, within pre-determined limits set in accordance with the inventory policy established by the management."
Simply "Inventory control is a method to identify those stocks of goods, which can be used for the production of finished goods. It shall be supported by a schedule which gives details regarding; opening stock, receipt of raw-materials, issue of materials, closing stock, and scrap generated."
(d) Objectives of material control: The following are the important objectives of store control
a)      to make available the right type of raw material at the right time in order to have smooth and continuous flow of production;
b)      to ensure effective utilization of material;
c)       to prevent over stocking of materials and consequent locking up of working capital;
d)      to procure appropriate quality of raw materials at reasonable price;
e)      to prevent losses during storage of materials;
f)       to supply information to the management regarding the cost of materials and the availability of stock;
(e) Reorder level: It is the point at which the storekeeper should initiate purchase requisition for fresh supply. This level lies between the maximum level and the minimum level. It is calculated by applying the following formula: Maximum consumption x maximum re-order period. If maximum consumption is not given, then it is calculated as follows: Safety stock level + normal consumption * normal reorder period.
(f)  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.
3. (a) The Assam Company Ltd. Furnishes the summary of Trading and Profit & Loss Account for the year ended 31st December, 2014
Raw Materials Consumed
Direct Wages
Production Overheads
Administrative Overheads
Selling and Distribution Overheads
Preliminary Expenses Written off
Goodwill Written off
Income Tax
Work-in-Progress :
Production Overheads
Sales (12,000 units)
Finished Goods (200 units)
Interest on Securities

The company manufactures standard unit. Information from last year’s records shows that –
(i)      Factory overheads have been allocated to the production at 20% on prime cost;
(ii)    Administrative overheads have been charges at Rs. 3 per unit on the units produced;
(iii)   Selling and distribution overheads have been charged at Rs. 4 per unit of units sold.
You are required to prepare a Cost Sheet showing profit or loss as per Cost Accounts.      14
Cost Sheet of Assam Company Limited
For the month of 31st December’ 2014
Raw Materials Consumed
Direct Wages

Prime Cost
Add: Factory Overheads (20% on prime cost)

Work’s Cost incurred
Less: Closing Stock of work-in-progress (28,200+11,790+7,900)

Work’s Cost
Add: Office and administrative Overheads (Rs. 3 per unit produced)

Cost of Production
Less: Closing Stock of finished goods
Cost of goods Sold
Add: Selling and Distributive Overheads (Rs. 4 per unit sold)

Cost of Sales

PRODUCTION = SALES + CLOSING STOCK = 12,000+200 = 12,200


(b) Discuss the nature of Cost Accounting and explain different cost concepts.            7+7=14
Ans: Meaning and nature of 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”.
Following are the nature and characteristic of Cost Accounting:
1) Cost accounting views the whole organization from the individual component of the organization like a job, a process etc.
2) Cost accounting aims at ascertaining the profitability of individual components of the organization.
3) It is meant for those people who are part of the decision making process of the organization. Thus, it is only for internal use.
4) It is not a legal requirement. It is not compulsory to maintain cost accounting records.
5) In Cost Accounting, data is immediately available which facilitates in decision making process.
6) Cost Accounting considers each and every transaction, whether related to past or future which will have an impact on the business.
Classification of Cost – Various Cost Concepts
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.
4. (a) The following data is available in respect of a worker for the year, 2014 in the ABC Manufacturing Company:
(i)         Wages per month Rs. 600
(ii)       Dearness Allowance 20 paise per month per cost of living index point over 400 points; present index is 1,400 points.
(iii)      House Rent Allowance 25% of (i) and (ii).
(iv)     Annual Bonus for the year Rs. 3,000
(v)       Cost of labour welfare amenities for the year Rs. 3,20,400
(vi)     Employer’s contribution to –
a.          Contributory Provident Fund, 10% of basic wages.
b.         Employees State Insurance 2% of basic wages.
(vii)    Annual working days, 310 days of 8 hours
(viii)  Total leave with pay permitted in a year – 30 days.
(ix)     Normal ideal time – 240 hours
(x)       Abnormal idle time – 100 hours
(xi)     No. of workers in the factory – 150
Compute labour cost for the year per head and per hour. Also state how the cost of idle time can be treated.                                                   10+4=14
Ans: Computation of Total Labour cost
a) Basic Wages (600*12*150)
b) Dearness Allowance (0.20*12*1000*150)
c) House Rent Allowance (25% of a and b)
d) Annual Bonus
e) Cost of labour welfare and amenities
e) Employer’s contribution to:
- Provident fund (10% of basic wages)
- ESIC (2% of basic wages)

Total Labour Cost
Labour cost per worker = 27,00,000/150 = 18,000
Calculation of normal labour hours = 310*8*150 – 240*150 (normal idle time) – 30*8*150 (leave period) = 3,00,000
Labour cost per hour = 27,00,000/3,00,000 = Rs. 9
(b) Distinguish between:                                                                 7+7=14
(i) Idle time and overtime.
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. Idle time is divided into two parts:
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.
Overtime is the amount of wages paid for working beyond normal working hours as specified by Factories Act or by a mutual agreement between the workers union and the management. There is a practice is to pay for overtime work at higher rates. Hence, payment of overtime consists of two elements, the normal wages e.g., the usual amount, and the extra payment i.e., the premium. This amount of extra payment paid to a worker under overtime is known as overtime premium.
Treatment of Overtime Premium in Cost Accounting
a)      If overtime is resorted to at the desire of the customer, then overtime premium may be charged to the job directly.
b)      If overtime is required to cope with general production programme or for meeting urgent orders, the overtime premium should be treated as overhead cost of the particular department or cost center, which works overtime.
(ii) Remuneration and incentives.
Ans: Difference between remuneration and incentives:
Remuneration is a payment or compensation received by an employee against the services provided by him. This includes the basic salary, any bonus, allowances or other economic benefits that an employee or executives received during his employment. Remuneration paid on the basis of time rate or piece rate basis. It is fixed in nature and is constant for every employee even if they doesn't work as per standards. Remuneration is traditionally seen as the total income of an individual and may comprises a range of separate payments determined according to different rules.
Incentive is a monetary or non-monetary reward which is given to a worker for his efficiency and hard work. It is given to the workers when their actual production is more than the standard production. It is considered as a performance appraisal to the employee if he/she performs better than standard work in a way that benefits to the organization. It is variable in natures and change according to the efficiency of the workers. An incentive motivates and encourages a worker to produce more and better and help in increasing the interest of the worker in the production.
Both remuneration and incentive are labour cost. Sometimes, both the terms are used interchangeably but they are different from each other in following aspects:
1. Nature
Remuneration is fixed.
Incentive is variable.
2. work
Remuneration is given to labourers, employees for their presheculded task or routine task.
incentive is provided when they perform good in their routine task.
3. Motivation
It is routine payment. It does not motivate an employee.
Incentive are ways to appreciate the employees performance.

5. (a) A machine was purchases on January, 2014 for Rs. 5 lakhs. The total cost of all machinery inclusive of the new machine was Rs. 75 lakhs. The following further particulars are available :
Expected life of the machine 10 years
Scrap value at the end of 10 years – Rs. 5,000
Repairs and maintenance for the machine during the year – Rs. 2,000
Expected number of working hours of the machine per year 4000 hours.
Insurance Premium Annually for all machines – Rs. 4,500
Electricity consumption for the machine per hour @ 75 paise per unit for 25 units.
Area occupied by the machine 100 sq. ft.
Area occupied by other machines 1500 sq. ft.
Rent per month of the department – Rs. 800
Lighting charges – Rs. 120 per months for 20 points for the whole department out of which 3 points are for the machine.
Compute the machine hour rate for the machine on the basis of the data given above.        14

(b) Define overhead. What do you mean by under and over-absorption of over-heads? State the causes of over and under-absorption of the factory overheads.                            4+4+6=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.
(a)   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.
(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 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:
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.
6. (a) A product is produced through two distinct processes – Process I and Process II. On completion it is transferred to finished stock. From the following particulars during the month of December, 2014, prepare Process Accounts:    14
Process – I
Process – II
Unit introduced
Transfer to next process / finished goods
Normal loss (on inputs)
Realisable value of normal loss (per unit) (in Rs.)
Cost incurred :
Direct Material (in Rs.)
Direct Labour (in Rs.)
Direct Expenses (in Rs.)
Production overheads (100% of direct labour)


Assume that there was no opening or closing stock of Raw Materials and Work-in-Progress.
Process I A/c
To Raw Materials
To Wages
To Direct Expenses
To Production overheads
(100% of wages)
By Normal loss (10%)

By Process II A/c




Process II A/c
To Process I A/c
To Wages
To Direct Expenses
To Production overheads
(100% of wages)
By Normal loss (5%)
By Abnormal Loss

By Finished Stock A/c





(b) Explain the following:                                                      7+7=14
(i) Reconciliation of Cost and Financial Accounts.
Ans: 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.
(ii) Treatment of WIP.