Cost Accounting Solved Question Paper 2010 (Old Course), Dibrugarh University B.Com 4th Sem CBCS Pattern

Cost Accounting Solved Question Paper 2010 (Old Course)
Dibrugarh University B.Com 4th Sem

1. Define cost accounting. Discuss briefly the objectives and advantages of cost accounting.
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”.
Advantages of Cost Accounting (Aid to Management)
a)      Helps in Decision Making: Cost accounting helps in decision making. It provides vital information necessary for decision making. For instance, cost accounting helps in deciding:
1.       Whether to make a product buy a product?
2.       Whether to accept or reject an export order?
3.       How to utilize the scarce materials profitably?
b)      Helps in fixing prices: Cost accounting helps in fixing prices. It provides detailed cost data of each product (both on the aggregate and unit basis) which enables fixation of selling price. Cost accounting provides basis information for the preparation of tenders, estimates and quotations.
c)       Formulation of future plans: Cost accounting is not a post-mortem examination. It is a system of foresight. On the basis of past experience, it helps in the formulation of definite future plans in quantitative terms. Budgets are prepared and they give direction to the enterprise.
d)      Avoidance of wastage: Cost accounting reveals the sources of losses or inefficiencies such as spoilage, leakage, pilferage, inadequate utilization of plant etc. By appropriate control measures, these wastages can be avoided or minimized.
e)      Highlights causes: The exact cause of an increase or decrease in profit or loss can be found with the aid of cost accounting. For instance, it is possible for the management to know whether the profits have decreased due to an increase in labour cost or material cost or both.
f)       Reward to efficiency: Cost accounting introduces bonus plans and incentive wage systems to suit the needs of the organization. These plans and systems reward efficient workers and improve productivity as well improve the morale of the work -force.
g)      Prevention of frauds: Cost accounting envisages sound systems of inventory control, budgetary control and standard costing. Scope for manipulation and fraud is minimized.
h)      Improvement in profitability: Cost accounting reveals unprofitable products and activities. Management can drop those products and eliminate unprofitable activities. The resources released from unprofitable products can be used to improve the profitability of the business.
i)        Preparation of final accounts: Cost accounting provides for perpetual inventory system. It helps in the preparation of interim profit and loss account and balance sheet without physical stock verification.
j)        Facilitates control: Cost accounting includes effective tools such as inventory control, budgetary control and variance analysis. By adopting them, the management can notice the deviation from the plans. Remedial action can be taken quickly.
OR
Cost accounting is better understood as a cost control and cost reduction exercise and not mere a cost ascertainment process. Discuss.
Ans: 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”.
Objectives of cost accounting
a)      To serve as a guide to price fixing of products.
b)      To disclose sources to wastage in various operations of manufacture.
c)       To reveal sources of economy in production process.
d)      To provide for an effective system of stores and material.
e)      To measure the degree of efficiency of the various departments or units of production.
f)       To provide suitable means and information to the top management to control and guide the operations of the business organisation.
g)      To exercise effective control on the costs, time and efforts of labour, machines and other factors of production.
h)      To compare actual costs with the standard costs and analyse the causes of variation.
i)        To provide necessary information to develop cost standards and to introduce the system of budgetary control.
j)        It enables the management to know where to economize on costs, how to fix prices, how to maximize profit and so on.
Scope of Cost Accounting
The term scope here refers to field of activity. Cost accounting refers to the process of determining the cost of a particular product or activity. It provides useful data both for internal and external reports reporting. Internal reporting presents details of cost data in a summarized and aggregate form. For instance, in case a company manufacturing electrical goods cost of each product.
In order that cost accounting satisfies the requirements of both internal and external reporting, the following are the different activities which are undertaken under cost accounting system:
a)      Cost Determination: This is the first step in the cost accounting system. It refers to determining the cost for a specific product or activity. This is a critical activity since the other three activities, explained below, depend on it.
b)      Cost Recording: It is concerned with recording of costs in the cost journal and their subsequent posting to the ledger. Cost recording may be done according to integral or non-integral system a separate set of books is maintained for costing and financial transactions.
c)       Cost Analyzing: It is concerned with critical evaluation of cost information to assist the management in planning and controlling the business activates. Meaningful cost analysis depends largely upon the clear understanding of the cost finding methods used in cost accounting.
d)      Cost Reporting: It is concerned with reporting cost data both for internal and external reporting purpose. In order to use cost information intelligently it is necessary for the managers to have good understanding of different cost accounting concepts.
2.  What do you understand by economic order quantity? How are they calculated?
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
EOQ =
Example: Pam runs a mail-order business for gym equipment  Annual demand for the TricoFlexers is 16,000. The annual holding cost per unit is $2.50 and the cost to place an order is $50. 
Calculate economic order quantity (EOQ)\
Calculation:
Underlying Assumptions of Economic Order Quantity:
a)      The ordering cost is constant.
b)      The rate of demand is constant
c)       The lead time is fixed
d)      The purchase price of the item is constant i.e no discount is available
e)      The replenishment is made instantaneously; the whole batch is delivered at once.

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OR
From the following figures, prepare a store ledger account of ABC Ltd. Assuming that materials are issued on LIFO basis :
April 1, 1999 : Opening stock of ball bearing
100 nos. valued at Rs 5 each
Purchases during the month :
April 5 : 200 ball bearings @ Rs 11 each
April 10 : 100 ball bearings @ RS 12 each
Issues to production during the month :
April 18—100 ball bearings
April 25—50 ball bearings
Ans:

3. Explain the different systems of wage payment.
Ans: Methods of Wages Payment
The methods of remuneration can be classified into:
a)      Time Rate System
b)      Pieced Rate System
c)       Incentive Schemes
a)      Time Rate System: In this system, a worker is paid on the basis of attendance for the day or according to the hours of the day, regardless of the output. This system is also known as time work, day work, day age rate or day rate. The wage rate of the day worker may be fixed on hourly, daily, weekly, fortnightly, or monthly basis depending on the practice followed in the concern. There are two variants of this system, each differing only in so far as the fixation of the time rate is concerned. They are:
1.       Measured Day work or Graduated Time Rate
2.       Differential Time Rate
Graduated Time Rate:   Under this method wages are paid at time rates which vary according to
a.       Merit-rating of the workers, or
b.      Changes in the cost of living index.
It the cost of living goes up, the wages also go up proportionately, and vice versa. Thus the works get the real wages. Similarly, the workers having higher merit rating get higher wages, and the workers with lower rating get lower wages.
Differential Time Rate: Workers are paid rate accounting to their individual efficiency. They are paid normal rate upto a certain percentage of efficiency and the rate increases in steps for efficiency slabs beyond the standard. As the efficiency is measured in terms of output, this method does not fall strictly under the area of time rate system.
b)      Piece Rate System: The payment of wages under this system is based upon the out turn of the worker. The rate is fixed per piece of work and the worker is paid according to the pieces of work completed or the volume of work done by him, irrespective of the time taken by him in completing that work. A workman is free to earn as much as his ability, energy, or skill would allow to him to produce. The piece rate System can be classified into:
a.       Straight Piece Rate.
b.      Differential Piece Rate.
Straight Piece Rates: It is a simple method of making payment at a fixed rate per unit for the units manufactured. Earnings = Number of units X Rate per unit.
Differential Piece Rates: Under this system, efficient workers are paid wages at a lower rate. A definite standard of efficiency is set for each job and for efficiency below or above the standard different piece rates are paid according to different levels of efficiency. The following two methods of wage payment are studied under this system:
a.       Taylor Differential Piece-rate Method, and
b.      Merrick Differential Piece rate Method
Taylor Differential Piece-Rate: F.W. Taylor thought to improve the efficiency of workers by suggesting two rates of payment of wages: A higher rate to the workers who product equal to or more than the standard fixed for production during the day (120%), and a lower rate to the workers who do not achieve the standard (80%).
Merrick Differential Piece-rate: In the Taylor Method, the effect on the wages is quite sharp in the marginal cases. To remove this defect Merrick suggested three piece rates for a job as follows:
Percentage of Standard Output                Payment under Merrick Method
Upto 83%                                                            Normal piece rate
Above 83% and upto 100%                          110% of normal piece rate
Above 100%                                                       120% of normal piece rate
c)       Incentive Schemes: Under this heading, we study the following methods:
a.       Halsey Premium Scheme;
b.      Rowan Premium Scheme;
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)
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)
OR
Discuss the prerequisites of a sound incentive scheme.
Ans: An ideal incentive plan must possess the following features:
a)      Simplicity - The plan should be simple to understand and operate. Who should be able to calculate their wages without any difficulty?
b)      Acceptability - It should be acceptable to workers as well as the employer.
c)       Flexibility - The incentive plan should be flexible to introduce nice changes.
d)      Quality - The plan should ensure the quality of the output. Workers should be discouraged to speed up the work to earn more wages at the cost of quality.
e)      Stability - The plan should give a stable earnings over a period of time, minimum but adequate wage must be ensured.
f)       Wide coverage - It should cover the maximum number of workers. 1 direct as well as indirect worker should be covered.
g)      No restriction on earnings - The plan should not have any restriction earnings of workers. They should be allowed to earn as much as they can.
h)      Investigation and evaluation - The plan should be based on scientific investigation and evaluation to produce good result. Standard time should fix on the basis of time and motion study.
i)        Increasing output and lowering cost of production - It should aim increasing output and lowering cost of production.
j)        Motivating to earn more - The plan should motivate the workers increase their efficiency and earn more.
The success of an incentive plan depends on the mutual cooperation a understanding between employer and employees.
4. What are the general considerations that would decide bases for distribution of overhead cost to departments?
Ans: 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.
Guidelines or Principles of Apportionment:
The guidelines or principles which facilitate in determining a suitable basis for apportionment of overheads are explained below:
1. Derived Benefit: According to this principle, the apportionment of common item of overheads should be based on the actual benefit received by the respective cost centers. This method is applicable when the actual benefits are measurable. For example, rent can be apportioned on the basis of floor area occupied by each department.
2. Potential Benefit: According to this principle, the apportionment of common item of overheads should be based on potential benefits (i.e. benefits likely to be received). When the measurement of actual benefit is difficult or impossible or uneconomical this method is adopted. For example, the cost of canteen can be apportioned as the basis of number of employees in each department which is a potential benefit.
3. Ability to pay: According to this method, overheads should be apportioned on the basis of the sales ability or income generating ability of respective departments. In other words, the departments which contribute more towards profit should get a higher proportion of overheads.
4. Efficiency method: According to this principle, the apportionment of overheads is made on the basis of the production targets. If the target is higher, the unit cost reduces indicating higher efficiency. If the target is not achieved the unit cost goes up indicating inefficiency of the department.
5. Specific criteria method: According to this principle, apportionment of overheads is made on the basis of specific criteria determined in a survey. Hence this method is also known as 'Survey method'. When it is difficult to select a suitable basis in other methods, this method is adopted. For example, while apportioning salary of foreman, a careful survey is made to know how much time and attention is given by him to different departments. On the basis of the above survey the apportionment is made.
OR
A machine has been purchased for cash at Rs 9,200. Its working life is estimated to be 18000 hours after which its scrap value is estimated at Rs 200. It is assumed from past experience that-
i)        The machine will work for 1800 hours annually,
ii)       The repair charges will be Rs 1080 during the whole period of life of the machine;
iii)     The power consumption will be 5 units per hour at 6 paise per unit;
iv)     Other annual standing charges are estimated to be :
1)      Rent of department (machine 1/5th )—Rs 780
2)      Light (12 points in the department, 2 points engaged in the machine)—Rs 288
3)      Foreman’s salary (1/4th of his time is occupied in the machine)—Rs 6,000
4)      Insurance premium (fire) for machinery—Rs 36
5)      Cotton waste—Rs 60
Find out the machine hour rate on the basis of above data for allocation of work expenses to all jobs for which the machine is used.
Ans:

5. Write notes on:                           Out of Syllabus
i)        Fixed price contract with escalation clause
ii)      Cost plus contract
OR
A & Co’s profit as per costing system was Rs 46,126 whereas the audited final accounts showed a profit of Rs 33,248. From the following additional information, you are required to prepare a reconciliation statement showing clearly the reason for discrepancy between the two figures:
Trading and profit and loss account for the year ended on 31-03-03
Particulars
Amount
Particulars
Amount
To Opening stock    4,94,358
Add : Purchases     1 ,64,308
6,58,666
Less : Closing stock 1,50,242  
Materials consumed
“  Direct wages                                 
 “  Factory overhead
 “  Gross Profit                                     

To administrative overhead       
“   Selling overhead
“   Net profit                                         




5,08,424
46,266
41,652
96,658
6,93,000
19,690
44,352
33,248
97,290
By Sales








By gross profit
By sundry income
6,93,000






______
6,93,000
96,658
632
97,290
The costing records show the following :
i)        Closing stock—Rs 1,56,394
ii)       Direct wages absorbed during the year—Rs 49,734
iii)     Factory overhead absorbed—Rs 39,428
iv)     Administrative overhead charged at 3% of selling price
v)      Selling overhead charged @ 5% on value of sales
Ans:
Reconciliation of Cost and Financial A/c
Particulars
Amount
Amount
Profit As per Financial Accounting
Add: (i) Closing Stock overvalued in Cost Accounting
(ii) Factory overhead under absorbed in Cost Accounting
(iii) Selling overheads under absorbed in Cost Accounting

6,152
2,224
9,702
33,248


18,078

Less: (i) Direct Wages over charged in Cost Accounting
(ii) Sundry income not included in Cost Accounting
(iii) Administrative Overheads overcharged in Cost Accounting

3,468
632
1,100
51,326


5,200
Profit as per Cost Accounting

46,126
Rough Calculation
Particulars
Financial Accounting
Cost Accounting
Difference
Closing Stock
Direct Wages
Factory Overheads
Administrative Overheads
Selling Overheads
Sundry Income
1,50,242
46,266
41,652
19,690
44,352
632
1,56,394
49,734
39,428
20,790
34,650
-
+ 6,125
-3,468
+ 2,224
-1,100
+9,702
-632