Dibrugarh University Solved Question Papers - Cost Accounting (May' 2014)

Cost Accounting May’ 2014 (Semester Exam)
The figures in the margin indicate full marks for the questions.
1.    (a) Fill in the blanks :                                                                                               1x5=5

(i)      LIFO method is suitable in times of rising prices.
(ii)    Material control aims at achieving effective material utilisation.
(iii)   Cost audit is concerned with the verification and examination of Cost Accounts.
(iv)  When actual loss is more than the estimated loss, then the difference is considered to be abnormal loss.
(v)    Depreciation is an indirect expenses in cost.
(a)    Select the appropriate answer for each of the following questions :                       1x3=3
(i) Which of the following is not a method of costing?
(1)    Contract Costing
(2)    Operating Costing
(3)    Batch Costing
(4)    Marginal Costing
(ii) Specify the method of costing suitable to a toy-making unit
(1)    Process Costing
(2)    Operating Costing
(3)    Batch Costing
(4)    Multiple Operating Costing
(iii) In which of the following contracts Contract Costing is applied as a specialized system of Job Costing?
(1)    Short-term contract
(2)    Long-term contract
(3)    Medium-term contract
(4)    Continuous processes
2.    Write short notes on (any four) :                                      4x4=16
(a) ABC analysis: In this technique, the items of inventory are classified according to the value of usage. Materials are classified as A, B and C according to their value.
Items in class ‘A’ constitute the most important class of inventories so far as the proportion in the total value of inventory is concerned. The ‘A’ items constitute roughly about 5-10% of the total items while its value may be about 80% of the total value of the inventory.
Items in class ‘B’ constitute intermediate position. These items may be about 20-25% of the total items while the usage value may be about 15% of the total value.
Items in class ‘C’ are the most negligible in value, about 65-75% of the total quantity but the value may be about 5% of the total usage value of the inventory.
The numbers given above are just indicative, actual numbers may vary from situation to situation. The principle to be followed is that the high value items should be controlled more carefully while items having small value though large in numbers can be controlled periodically.
(b) Merit rating: Merit rating aims at evaluating the performance of workers. Main objective of merit rating is to reward employee on the basis of efficiency and merit. Merit rating brings out the comparative worth of workers. The traits generally considered for determining merit and worth of workers are as under: 1) Education Qualification and knowledge 2) Skill and experience 3) Attitude to the work 4) Quality of work done 5) Efficiency 6) Regularity 7) Integrity 8) Reliability 9) Qualities like leadership, initiative, self confidence and sense of judgment 10)Discipline 11)Cooperation
The above traits are allotted with points and total points scored on all traits determine the worth of workers. The employees may be rated individually as per the pints they score and they may be put in groups based on their common scores of points.
Importance of Merit rating: Merit is a valuable tool considered to be important for human resource measurement. Merit rating has the following advantages:
(1) It helps to know the individual worker’s worth and traits; this helps the supervisor to assign the tasks in which the worker is proficient.
(2) It points out traits in which the workers are not proficient. The workers will have an opportunity to improve by suitable training.
(3) It helps in increasing wages and promotion opportunities.
(4) It helps to stimulate the self-confidence of workers as it recognizes the merit and worth of workers.
(c)Idle time: 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.
(d) Time and motion study: The study of time and motion is essential for designing an incentive system. Time study determines the time to be spent on the job. Standard time is the time that should be taken for completing a particular job under standard or normal working conditions. For fixation of standard time, motion study is necessary. Thus, the motion study precedes the time study. Motion study means dividing the job into fundamental elements or basic operations of the job or process and studying them in detail to eliminate the unnecessary elements or motions. After investigation all movements in a job, process or operation, the motion study aims at finding out the most scientific and systematic way of performing the job. After eliminating unnecessary motions, the time that should be taken to perform these motions is decided with the help of a stop-watch. In the time so fixed, some allowance is added in the same for normal idle time, which is due to fatigue, change of job, change of tools, preventive maintenance of machines and so on. Thus standard time for a job or process is arrived at.
(e) Job card: This card is a combined record, which shows both, the time taken for completion of the job as well as the attendance time. Therefore there is no need to keep separate record of both, time taken and attendance time.
3.    (a) Define costing. Discuss the essentials of an Ideal Cost Accounting System.          4+8=12
Ans: Introduction to Cost Accounting
Cost: The term ‘cost’ has to be studied in relation to its purpose and conditions. As per the definition by the Chartered Institute of Management Accountants (C.I.M.A.), London ‘cost’ is the amount of actual expenditure incurred on a given thing.
Costing: The C.I.M.A., London has defined costing as the ascertainment of costs. “It refers to the techniques and processes of ascertaining costs and studies the principles and rules concerning the determination of cost of products and services”.
Cost Accounting: It is the method of accounting for cost. The process of recording and accounting for all the elements of cost is called cost accounting. I.C.M.A. has defined cost accounting as follows: “The process of accounting for cost from the point at which expenditure is incurred or committed to the establishment of its ultimate relationship with cost centers and cost units. In its widest usage it embraces the preparation of statistical data, the application of cost control methods and the ascertainment of the profitability of activities carried out or planned”.
Cost Accountancy: The term ‘Cost Accountancy’ includes Costing and Cost accounting. Its purposes are Cost-control and Profitability – ascertainment. It serves as an essential tool of the management for decision-making.
I.C.M.A., has defined cost accountancy as follows: “The application of costing and cost accounting principles, methods and techniques to the science, art and practice of cost control and the ascertainment of profitability. It includes the presentation of information derived there from for the purpose of managerial decision making”.
Characteristics of a Good Costing System
An ideal system of cost accounting must possess some characteristics which bring all the advantages, discussed above; to the business, in order to be ideal and objective. The main characteristics are:
a)      Simplicity: It must be simple, flexible and adaptable to the changing conditions. And it must be easily understandable to the personnel. The information provided must be in the proper order, in right time and to the right persons so as to be utilized fully.
b)      Flexibility and Adaptability: The costing system must be flexible to accommodate the changing conditions and circumstances. The expansion, contraction of changes must be adopted in the existing system with minimum changes.
c)       Economy: The costing system must suit the finance available. The expenditure must be less than the benefits derived from the system adopted.
d)      Comparability: The management must be able to make comparison of the facts and figures with the past figures, figures of other concerns, or other departments of the same concern.
e)      Minimum Changes to the Existing one: When introducing a costing system, it may cause minimum change to the existing set up of the business.
f)       Uniformity of Forms: Forms of different colours can be used to distinguish them. Forms must be uniform in size and quality. Form should contain instructions to fill, to use and for disposal.
g)      Less Clerical Work: Printed forms will involve less labour to fill in, as the workers may be a little educated. They may not like to spend much time in filling the forms.
h)      Efficient Material Control and Wage System: There must be a proper procedure for recording the time spent on different jobs, by workers for the payment of wages. A systematic method of wage system will help in the control of labour cost. Since the cost of material forms a great proportion to the total cost, there must be an efficient system of stores control.
i)        A Sound Plan: There must be proper and sound plans to collect, to allocate and to apportion overhead expenses on each job or each product in order to find out the cost accurately.
j)        Reconciliation: The systems of costing and financial accounting must be facilitated to reconcile in the easiest manner.
k)      Overall Efficiency of Cost Accountant: The work of the cost accountant under a good system of costing must be clearly defined as to his duties and responsibilities to the firm are very essential.
(b) Following details relate to ATEACO Ltd. for the year ending 31.03.2013:
Stock of Raw Materials
Stock of Finished Goods
Expenses during the year in Rs.
Direct Wages
Purchase of Raw Materials (97000 units)
Other Materials
Carriage Inward
Carriage Outward
Wages to Foremen
R & D Expenses
Other Wages
Manager’s Salary
Employee’s State Insurance
Power and Fuel
Office Expenses
Printing and Stationery
Counting House Salary
Sales of Scraps
Income Tax
Donation to Charity
Selling and Distribution expenses Rs. 1 per unit. Units manufactured during the year are 96000. Finished stock is valued at current cost. Prepare Cost Sheet showing the following:
a)      Materials consumed
b)      Prime cost
c)       Factory cost
d)      Cost of production
e)      Cost of goods sold
f)       Total cost of sales
Cost Sheet of ATEACO Ltd.
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

(b) Prime Cost
Add: Work’s overheads:
      Other material
      Wages to foremen
      Other wages
      Power and fuel
Less: Sale of Scraps


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

(c) Work’s cost / factory cost
Add: Office and administrative overhead:
R & D Expenses
Manager’s salary
Employees State Insurance
Office expenses
Printing & stationery
Counting House Salary


(d) Cost of Production
Add: Opening Stock of finished goods (20,28,000/96,000*6,000)
Less: Closing Stock of finished goods (20,28,000/96,000*10,000)
(e) Cost of goods Sold
Add: Selling and Distributive overheads
(f) Total cost of sales
4.  (a) Sunshine Electronics manufactures picture tube for TV. Details of their operation during the year are given below:
Average monthly market demand – 2000 tubes
Ordering cost – Rs. 100 per order
Inventory carrying cost – 20% per annum
Cost of tubes – Rs. 500 per tube
Normal usage – 100 tubes per week
Minimum usage – 50 tubes per week
Maximum usage – 200 tubes per week
Lead time to supply – 6 to 8 weeks.
(i) Compute economic order quantity. If the supplier is willing to supply quarterly 1500 units at a discount of 5%, is it worth accepting.                                                                                      5
(ii) Compute the following :                                                         2x3=6
(1) Maximum level of stock
(2) Minimum level of stock
(3) Reorder level
Increase in annual Cost: Rs. (71,650 – 10,200) = Rs. 61,450
Amount of quantity discount: 5% x Rs. 500 x 5,200 units = Rs. 1,30,000
Since, the amount of quantity discount (Rs. 1,30,000) is more than the increase in total cost (Rs. 61,450), it is advisable to accept the offer. This will result in a saving of Rs. (1,30,000 – 61,450) or Rs. 68,550 p.a. in inventory cost.
(1) Maximum level of Stock:
= Re-order level + Re-order quantity – (Minimum usage x Minimum delivery period)
= 1,600 units + 102 units – (50 units x 6 weeks) = 1,402 units.
(2) Minimum level of Stock:
= Re-order level – (Normal usage x Normal delivery Period) [See Note]
= 1,600 units – (100 units x 7 weeks) = 900 units
Normal delivery period is taken to be the average delivery period.
(3) Re-order level of Stock:
= Maximum usage x Maximum delivery period
= 200 units x 8 weeks = 1,600 units.
(b) What do you mean by material control? Discuss its objectives.                         4+7=11
Ans: Inventory or Store 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."
Objectives of store 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;

5.    (a) A workman has taken 15 hours in performing a job. The standard hours fixed for the job are 20 hours. He is paid hourly payment @ Rs. 4. He is allowed to be paid 40% of the time saved. In addition, he also gets a dearness allowance of Rs. 2 a day of 8 hours.  Calculate his total earnings under:
(i) Halsey Premium Plan;
(ii) Rowan Premium Plan;                                                              5½+5½=11

(b) What do you mean by labour turnover? What steps should be taken to check the increasing rate of labour turnover? Discuss.                                                4+7=11
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.
Remedial steps to minimize labour turnover: The following steps are useful for minimizing labour turnover:
1.    Exit interview: An interview is arranged with each outgoing employee to ascertain the reasons of his leaving the organization.
2.    Job analysis and evaluation: to ascertain the requirement of each job.
3.    Organisation should make use of a scientific system of recruitment, placement and promotion for employees.
4.    Organisation should create healthy atmosphere, providing education, medical and housing facilities for workers.
5.    Committee for settling workers grievances.
6.    (a) Assam Engineering Works has three production departments A, B, C and one service department S. From the following particulars, calculate labour hour rate for each of the production departments. Expenses for the period of 12 months :
Indirect Wages
Depreciation on Machinery
Canteen Expenses
Additional information :

Light points
Floor space (sq. m)
Horsepower of Machine (HP)
No. of workers
Direct wages (in Rs.)
Cost of machine (in Rs.)
Working days – 200 days of 8 hours each. Service rendered by service department S to production departments A, B and C are 30%, 20% and 50% respectively.
Ans: Overheads distribution summary

Production Department

Items of Exp.
Basis of Apportionment
Service Department
Direct Wages



Indirect Wages

Canteen Exp.






Floor Space (6:5:9:4)
HP Hour Ratio
Cost of Machine
Direct Wages
No. of Workers
Light Points





















Apportionment of Service dept. overheads






Labour Hour worked

Labour Hour Rate





(b) Define overhead. How are overheads classified? State four reasons of over-absorption or under-absorption of overheads.                                              2+5+4=11
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.

7.    (a) From the following particulars, prepare Contract Account for the year ended on 31st December, 2013:     11

Materials sent to site
Wages paid
Wages outstanding
Direct expenses
Establishment charges
Special plant installed at cost
Cost of work not certified
Value of special plant of 31.12.2013
Materials at site on 31.12.2013
Total contract price
Cash received
Retention – 10% of work certified Sale of scrap
General plant costing Rs. 1,20,000 was used for 3 months. Depreciation on that is to be                provided at 15 % p.a.
(b) What do you mean by ‘Cost Audit’ and ‘Cost Management’? Discuss the functions of a Cost Auditor. 3+3+5=11