Dibrugarh University Solved Question Papers - Cost Accounting (May' 2013)

Cost Accounting May’ 2013 (Semester Exam)

1. (a) Choose the correct answer:

a)      Variable cost per unit remains same/increases/decreases due to increase in production.
b)      Under the ABC analysis of material control, A stands for low value/moderate value/high value items.
c)       Idle time represents the time for which the employers the time for which the employer makes payment and gains something in terms of production/makes payment but does not gain anything in terms of production.
(b) fill in the blanks:
a)      Fixed overhead cost is a Committed/Period cost.
b)      Prime cost incurred due to any abnormality is debited to Abnormal Loss Account.
c)       In process costing the output of the each process is the Input of the next process.
(c)  Write true or false:
a)      Most of the items of costs are direct in contract costing.  True
b)      High wages of cost not necessarily mean high cost per unit.  True

2. Answer the following:
a) Distinguish 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.
5.    Reports
Financial Accounting results are shown P&L A/c and balance sheet.
Cost Accounting results are shown in Cost Sheet/ Coating Profit & Loss A/c/ Reports Contract A/c/ Process A/c.
b) What do you mean by perpetual inventory system?
Ans: 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
a)      It requires more efforts to maintain inventory under this method.
b)      Quantity balances shown by the store ledger and bin cards are reconciled.
c)       A number of items are physically checked systematically and by rotation.
d)      The method is comparatively costly as compared to periodical inventory system.
e)      Store ledger and bin cards keeps inventory record up-to date and decent.
c)  Define labour turnover. Explain the causes of labour turnover.
Ans: Meaning: Labour turnover may be defined as change in labour force i.e., percentage change in the labour force during a specific period. High labour turnover indicates that labour is not stabilised and there are frequent changes by way of workers leaving the organization. High labour turnover is to be avoided. At the same time very low labour turnover indicates inefficient workers are being retained in the organization.
Causes of Labour turnover: The causes for labour turnover can be broadly classified under three heads.
(1) Personal Causes
(2) Unavoidable Causes
(3) Avoidable Causes
i) Personal Causes: Some of the employees may leave the organization on account of personal reasons as given below:
(a) Circumstances of family.
(b) Retirement on reaching the prescribed age.
(c) Change in material status in case of women employees.
(d) Dislike for the job or place;
(e) Death of the employee.
(f) Employee getting recruited in a better job.
(g) Permanent disability due to accidents.
(h) Involvement of employee in activities of moral turpitude.
ii) Unavoidable Causes: In certain instances the organization may discharge the employees due to unavoidable reasons as mentioned below:
(a) Termination of workers on account of insubordination or inefficiency
(b) Discharge of workers on account of irregularity or long absence.
(c) Retrenchment of workers by the company on account of shortage of work.
iii) Avoidable Causes: Some of the employees may leave the organization account of the following reasons:
(a) Non availability of promotion opportunities
(b) Dissatisfaction with incentive schemes
(c) Unhappy with remuneration
(d) Unsuitable to job due to wrong placement
(e) Unhappy with working conditions
(f) Non availability of accommodation, health and recreational facilities
(g) Lack of stability of Tenure.
d) Distinguish between ABC and VED analysis.
Ans: Difference between ABC analysis, Perpectual Inventory system and VED analysis
ABC analysis
Perpectual Inventory System
VED analysis
Its main objective is to reduce the investment in material.
Its main objective is physical verification of all items.
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.
There is no classification of stock.
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.
Equal attention is given to all types of inventory.
More attention is given to essential inventory.
ABC analysis is applicable when there is small variety of stock.
This system is applicable whether or not stocks are of large varieties or small varieties.
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 prepared in this system.
Store ledger and bin card is not prepared in this analysis.

3. Following extract of costing information relates to a commodity for the year ended 31st March, 2012:
Stock on 1st April, 2011: Raw materials
Finished product (1000 tones)
Stock on 31st March, 2012: Raw materials
Finished product (2000 tons)
Raw materials purchased
Direct wages
Rent, Rates and Taxes
Carriage inwards
Work in progress on 1st April, 2011
Work in progress on31st April, 2012
Cost of factory supervision
Sales of finished goods
Advertisement and selling expenses amounts of 0.25 paise per ton sold. 16000 tones were produced during the year. Prepare a statement showing:
a)      The value of raw material used;
b)      The cost of production;
c)       The cost of turnover for the year;
d)      The net profit for the year and net profit per ton.
Statement of Cost or Cost sheet
Opening Stock of Raw material
Add: Purchase of Raw material
Add: Carriage inward
Less: Closing Stock of Raw material

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

Prime Cost
Add: Work’s overheads:
Cost of factory supervision


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

Work’s cost / factory cost
Add: Office and administrative overhead:
Rent, Rates and taxes


(b) Cost of Production
Add: Opening Stock of finished goods
Less: Closing Stock of finished goods
(c) Cost of goods Sold
Add: Selling and Distributive overheads (0.25*15,000)

Total cost of sales
(d) Add: Profit for the year
Profit per ton = 20250/15000 = 1.35
(b) Describe the various methods of pricing materials issued and point out their advantages and disadvantages.

A number of methods are used for pricing material issues. Each method has its own advantages and disadvantages. As such, it is impossible to say which method is the best. Each organisation should choose a particular method best suited to it. While choosing a method, it is necessary to see that the method chosen is simple, effective and realistic. At the same time, it is equally necessary to consider the effect of the method on production cost and inventory valuation. The following are the different methods of pricing the material issues:
First In First Out Method (FIFO)
According to this method the units first entering the process are completed first. Thus the units completed during a period would consist partly of the units which were incomplete at the beginning of the period and partly of the units introduced during the period.  The cost of completed units is affected by the value of the opening inventory, which is based on the cost of the previous period. The closing inventory of work-in-process is valued at its current cost.                
a. This method is simple to understand and easy to operate.
b. The closing stock is valued at the current market price.
c. Since issues are priced at cost, no profit or loss arises from pricing.
d. This method is more suitable in times of falling prices.
e. Deterioration and obsolescence can be avoided.
a. When prices fluctuate, calculation becomes complicated. This increases the possibility of clerical errors.
b. During the period of price fluctuations, material charged to jobs vary. Therefore, comparison between jobs is difficult.
c. During the period of rising prices, product costs are under stated and profits are overstated. This may result in payment of higher dividend out of capital.
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.
Simple Average Method
                The simple average is determined by adding different prices of materials in stock and dividing the total by number of prices. Quantity purchased in each lot is ignored.
a. This method is simple to understand and easy to operate.
b. It reduces clerical work.
c. It is suitable when price are stable.
a. It does not take into account the quantities purchased.
b. The value of closing stock becomes unrealistic.
c. Material cost does not represent actual cost price.
d. When prices fluctuate, this method will give incorrect result.
Weighted Average Method:
                This is an improvement over the simple average method. This method takes into account both quantity and price for arriving at the average price. The weighted average is obtained by dividing the total cost of material in the stock by total quantity of material in the stock.
a. It gives more accurate results than simple average price because it considers both quantity as well as price.
b. It evens out the effect of price fluctuations. All jobs are charged a average price. So, comparison between jobs is more easy and realistic.
c. It is suitable in the case of materials subject to wide price fluctuations.
d. It is acceptable to income tax authorities.
a. Stock on hand does not represent current market price.
b. When large numbers of purchases are made at different rates, the calculation is tedious. So, there are more chances of clerical error.
c. With some approximation in average price, there will be profit or loss due to over or under charging of material cost to jobs.
4.   (a) From the following information, calculate the total monthly remuneration of each of three workers X, Y and Z:
Standard production per month per worker=1000 units
Actual production during a month X=890 units, Y= 720 units and Z= 960 units
Piecework rate per unit of actual production=20 paise
Dearness wages Rs. 50 per month (fixed)
House rent allowance 20 per month (fixed)
Additional production bonus at the rate of Rs. 5 for each percentage of actual production exceeding 80% of the standard.
Ans: Calculation of Monthly Remuneration
(a) Basic Wages =Price Produced x Rate per piece

(b) Dearness Wages
(c) House Rent Allowance
(d) Additional Production Bonus
(890 x 0.20)
(9 x 5)
(720 x 0.20)
(960 x 0.20)
(16 x5)
Total monthly remuneration

(b) Discuss the principles of Premium Bonus Plans. Describe salient features of Rowan Plan and Halsey Plans  
Ans: The Halsey premium plan: This system is known as fifty fifty plan. It was introduced by F.A. Halsey, an American engineer. Under this method a standard time is fixed for the performance of each job; worker is paid for actual time taken at an hourly rate plus 50% of time saved as bonus. Total wages under this scheme is calculated with the help of the following formula:
Earnings = Time taken x Rate per hour + 50% (Time saved x Rate per hour)
Features of Halsey Premium Scheme: Under this plan,
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)      The bonus or the premium, by whatever name called, is 30 to 70 percent of the wages of time saved, the usual percentage being 50%,
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.
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 where as 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 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.

5.  (a) Compute machine hour rate of a machine in a shop consisting of 3 machines occupying equal floor space. Following detail are supplied for the machine of which estimated working hours per year are fixed at 2500 hours in which normal idle time is estimated at 20% of the standard time:
Rent and taxes of the shop per annum
Electricity for the shop per month
Repairs and maintenance expenses for the machine per annum
Rate of power changes for 100 units(the machine consuming 10 units per hour)
Forman’s salary for supervising all three machines, per month
Indirect labour cost Rs. 2 per hour for the machine The machine cost Rs.130000 and scraps value is estimated at Rs. 10000 and estimated life is 10 years. The foreman devotes equal attention for each machine in the shop.   

(b) What do you mean by overhead cost? Explain the various classification of overhead cost and its bases of apportionment.
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.
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.
Bases of Apportionment: Suitable bases have to be found out for apportioning the items of overhead cost to production and service departments and then for reapportionment of service departments costs to other service and production departments. The basis adopted should be such by which the expenses being apportioned must be measurable by the basis adopted and there must be proper correlation between the expenses and the basis. Therefore, the common expenses have to be apportioned or distributed over the departments on some equitable basis. The process of distribution is usually known as ‘Primary Distribution’.
Following are the main bases of overhead apportionment utilised in manufacturing concerns: 
(i) Direct Allocation: Overheads are directly allocated to various departments on the basis of expenses for each department respectively. Examples are: overtime premium of workers engaged in a particular department, power (when separate meters are available), jobbing repairs etc.
(ii) Direct Labour/Machine Hours: Under this basis, the overhead expenses are distributed to various departments in the ratio of total number of labour or machine hours worked in each department.
(iii) Value of Materials Passing through Cost Centres: This basis is adopted for expenses associated with material such as material handling expenses.
(iv) Direct Wages: This method is used only for those items of expenses which are booked with the amounts of wages, e.g., workers’ insurance, their contribution to provident fund, workers’ compensation etc.
(v) Number of Workers: This method is used for the apportionment of certain expenses as welfare and recreation expenses, medical expenses, time keeping, supervision etc.
(vi) Floor Area of Departments: This basis is adopted for the apportionment of certain expenses like lighting and heating, rent, rates, taxes, maintenance on building, air conditioning, fire precaution services etc.
(vii) Capital Values: In this method, the capital values of certain assets like machinery and building are used as basis for the apportionment of certain expenses e.g. rates, taxes, depreciation, maintenance, insurance charges of the building etc.
(viii) Light Points: This is used for apportioning lighting expenses.
(ix) Kilowatt Hours: This basis is used for the apportionment of power expenses.
(x) Technical Estimates: This basis of apportionment is used for the apportionment of those expenses for which it is difficult, to find out any other basis of apportionment. This is used for distributing lighting, electric power, works manager’s salary, internal transport, steam, water charges etc. when these are used for processes. 

6. (a) A product process through processes A, B and C. The normal wastage of each process is as followings:
Process A=5%, Process B=6% and Process C=10%. Wastage of process A was sold at Rs. 2 per unit, that of process B at Rs. 5 per unit and that of process C at 10 per unit.
1000 units were issued to process A in the beginning of April, 2011 at a cost of Rs. 2 per unit. The other expenses were as follows:
A (Rs.)
B (Rs.)
C  (Rs.)
Raw materials
Direct expenses
Actual output(units)
Prepare processes accounts of A, B and C assuming that there were no opening or closing stocks.
Process A A/c
To Raw Materials
To Direct Materials
To Wages
To Direct Expenses
By Normal loss

By Process B A/c




Process B A/c
To Process A A/c
To Direct Materials
To Wages
To Direct Expenses
To Abnormal Gain A/c
By Normal loss
(950 x 6%)

By Process C A/c




Process C Account
To Process B A/c
To Direct Materials
To Wages
To Direct Expenses
By Normal loss
(910 x 10%)

By Abnormal Loss
By Finished Stock A/c





(b) Explain the following:
a) Value of WIP on an incomplete contract
b) Reconciliation of Cost and Financial Accounts
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.
c)  Difference between cost audit and financial audit.