Sunday, April 21, 2019

Cost Accounting Solved Question Papers (May' 2018 Old Course)


(OLD COURSE)
Full Marks: 80
Pass Marks: 32
1. (a) Fill in the blanks:                                   1x4=4
1)      Overheads are the combination of direct material, direct labour and direct expenses.
2)      Fixed cost per unit decreases when volume of production increases.
3)      In Cost Accounting, depreciation is the indirect expenses.
4)      In process costing, the output of the each process is the input of the next process.
(b) Choose and write the correct answer:                         1x4=4

1)      Variable cost per unit remains same/increases/decreases due to increase in production.
2)      Rent of factory building is a variable cost/fixed cost/semi-variable cost.
3)      A high labour turnover increases/decreases the cost of production.
4)      Standard costing is a method/technique of Cost Accounting.
2. Write on the following (any four):                                       4x4=16
a) Distinction between Cost Accounting and Management Accounting.
Ans: DISTINGUISH BETWEEN MANAGEMENT ACCOUNTING AND COST ACCOUNTING
Cost accounting and Management accounting are two modern branches of accounting. Both the systems involve presentation of accounting data for the purpose of decision making and control of day-to-day activities. Cost accounting is concerned not only with cost ascertainment, but also cost control and managerial decision making.
Management accounting makes use of the cost accounting concepts, techniques and data. The functions of cost accounting and management accounting are complimentary. In cost accounting the emphasis is on cost determination while management accounting considers both the cost and revenue. Though it appears that there is overlapping of areas between cost and management accounting, the following are the differences between the two systems.
a)      Purpose: The main objective of cost accounting is to ascertain and control the cost of products or services. The function of management accounting is to provide information to management for efficiently performing the functions of planning, directing, and controlling.
b)      Emphasis: Cost accounting is based on both historical and present data, whereas management according deals with future projections on the basis of historical and present cost data.
c)       Principles and Procedures: Established procedures and practices are followed in cost accounting. No such prescribed practices are followed in Management accounting. The analysis is made and the resulting conclusions are presented in reports as per the requirements of the management.
d)      Data Used: Cost accounting uses only quantitative information whereas management accounting uses both qualitative and quantitative information.
e)      Scope: Management accounting includes, financial accounting, cost accounting, budgeting, tax planning and reporting to management, whereas Cost accounting is concerned mainly with cost ascertainment and control.
b) 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:
1)      Interest on investment of working capital
2)      Property tax and insurance
3)      Storage cost, handling cost
4)      Deterioration and shrinkage of stocks
5)      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
S   =  Cost to place a single order
I  =  Cost to hold one unit inventory for a year

c) 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) Apportionment and absorption of overheads.
Ans: 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.
Absorption of Overheads
The most important step in the overhead accounting is ‘Absorption’ of overheads. CIMA defines absorption as, ‘the process of absorbing all overhead costs allocated or apportioned over a particular cost center or production department by the units produced.’ In simple words, absorption means charging equitable share of overhead expenses to the products. As the overhead expenses are indirect expenses, the absorption is to be made on some suitable basis. The basis is the ‘absorption rate’ which is calculated by dividing the overhead expenses by the base selected. A base selected may be any one of the basis given below. The formula used for deciding the rate is as follows,
Overhead Absorption Rate = Overhead Expenses/ Units of the base selected.
e) Reconciliation of Cost Account and Financial Account.
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.
3. (a) The Accounts of ABC Manufactures Ltd. For the year ending 31st December, 2017 shows the following:
Particulars
(Rs.)
Stock of raw material on 1.1.2017
Materials purchased
Material returned to suppliers
Direct labour
Direct expenses
Factory expenses
Office and administrative expenses
Selling and distribution expenses
Stock of materials on 31.12.2017
Profit
6,720
1,50,000
2,000
50,000
15,300
20,000
8,000
7,900
7,720
10,000
Find out:
1)      Material consumed;
2)      Prime cost;
3)      Work cost;
4)      Cost of production;
5)      Sales.                                            11
Solution:
Cost Sheet
Particulars
Amount
Opening Stock R/M
Add: Purchase of R/M (less return)
Less: Closing Stock of R/M
6,720
1,48,000
7,720
(a) Raw material consumed
Add: Direct labour
Add: Direct Expenses
1,47,000
50,000
15,300
(b) Prime cost
Add: Factory overheads
2,12,300
20,000
(c) Works Cost
Add: Office and administration overheads
2,32,300
8,000
(d) Cost of production
Add: Selling and Distribution overheads
2,40,300
7,900
(e) Total Cost
Add: Profit
2,48,200
10,000
(f) Sales
2,58,200
Or
(b) What are elements of cost? Classify costs according to elements, function and variability and give two examples of each.                          3+8=11
Ans: Cost classification is the process of grouping costs according to their common characteristics. It is the placement of like items together according to their common characteristics. A suitable classification of costs is of vital importance in order to identify the cost with cost centers or cost units. Costs may be classified according to their nature, i.e. material, labour and expenses and a number of other characteristics. 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. Cost are further divided into direct 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.
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.
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.
4. (a) Compute the reorder level, minimum level, maximum level and average stock level for components A and B based on the following data:                       11
Particulars
A
B
Maximum consumption per week
Average consumption per week
Minimum consumption per week
Reorder period
Reorder quantity
150 units
100 units
50 units
8 to 12 weeks
400 units
150 units
100 units
50 units
4 to 8 weeks
600 units

Or
(b) Describe the various methods of pricing materials issued for production and point out their advantages and disadvantages.    11
Ans: METHODS OF PRICING OF MATERIAL
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.
Advantages:
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.
                Disadvantages:
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.
Advantages:
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.
                Disadvantages:
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.
Advantages:
a. This method is simple to understand and easy to operate.
b. It reduces clerical work.
c. It is suitable when price are stable.
                Disadvantages:
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.
Advantages:
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.
                Disadvantages:
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.
5. (a) From the following data, ascertain the total earnings of each worker separable under
(1) Halsey scheme (50%) and
(2) Rowan scheme:                                                11
Name of Worker
Time allowed
Actual time taken
Basic rate of wages per hour
Amal
5 hours
4 hours
Rs. 3.00
Bimal
5 hours
6 hours
Rs. 3.00


Or
(b) What is labour turnover? What are its causes? How can it be reduced?                        3+5+3=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) From the following details, compute the hourly rate of a machine installed in a shop:              12
Particulars
(Rs.)
Cost of machine
Installation charges
Estimated scrap value
Rent and rates p.a.
General lighting of the shop p.m.
Insurance premium for the machine per quarter
Repairs and maintenance p.a.
2,00,000
20,000
10,000
7,200
800
720
3,000
Power consumption 20 units per hour, rate of power per 100 units is Rs. 20, estimated working hours of the machine 2300 hours per year, shop supervisor’s salary per month Rs. 1,800. The machine occupies 1/4th of the total floor area of the shop. The supervisor is expected to devote 1/5th of his time for supervising the machine. Normal idle time is expected to be 300 hours per annum.
Solution:

Or
(b) Define overhead. State the different methods of classification for determining overheads.                4+8=12
Ans: Meaning and Definition of overheads
Aggregate of all expenses relating to indirect material cost, indirect labour cost and indirect expenses is known as Overhead. Accordingly, all expenses other than direct material cost, direct wages and direct expenses are referred to as overhead.
According to Wheldon, Overhead may be defined as "the cost of indirect material, indirect labour and such other expenses including services as cannot conveniently be charged to a specific unit."
Blocker and WeItmer define overhead as follows: "Overhead costs are operating cost of a business enterprise which cannot be traced directly to a particular unit of output. Further such costs are invisible or unaccountable."
Classification of Overheads
Classification of overheads is the process of grouping of costs based on the features and objectives of the business organization. Classification is made according to following basis:
1. Classification according to Elements:  According to this classification overheads are divided according to their elements. The classification is done as per the following details.
a)      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.
b)      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.
c)       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.
2. Functional Classification: Overheads can also be classified according to their functions. This classification is done as given below.
a)      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.
b)      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.
c)       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.
d)      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.
3. Classification according to Behavior: According to this classification, overheads are classified as fixed, variable and semi-variable. These concepts are discussed below.
a)      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.
b)      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.
c)       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.

7. (a) Assam Construction obtained a contract for the building of an office for Rs. 6,00,000. Construction work commenced on 1st April, 2017 and at the end of the financial year they received payment of Rs. 2,40,000 representing 80% of the amount of work certified. The following information in available from the books of the contractors:
Particulars
(Rs.)
Material issued
Materials of land on 31.3.2018
Wages paid
Plant installed at site
Direct Expenses
Overheads allocated to the contract
Work finished but not yet certified at cost
Plant to be depreciated at 10%
1,20,000
5,000
1,60,000
1,20,000
22,000
11,000
10,000
Prepare the Contract Account for the year ended 31.3.2018 and show your calculation of the amount adjusted to the credit of Profit and Loss Account.        11
Or
(b) Distinguish between:                                        6+5=11
1)      Job Costing and Process Costing.
Ans: Difference between Job costing and Process Costing
Basis of distinction
Job Costing
Process Costing
Basic
Job costing is used when the cost object is an individual (or a lot/batch) unit or a distinct product or service.
Process Costing is generally used for a mass of identical product or service.
Accumulation of Cost
Costs can be accumulated by each individual product or service.
The Costs are accumulated in a period. The total costs in a period are divided over the number of units to get an average unit cost.
Cost Determination
Job costing is done against a specific order being produced.
Costs are compiled for each process over a period of time.
Cost Calculation
Costs are calculated when a job is over.
Costs are calculated at the end of a cost period like an accounting year.
Transfer
There are usually no transfers of costs from one job to another.
Transfer of costs from one process to another is made as the product moves from one process to the other.
Forms and Details
There is more paper work.
It has lesser paper work.
2)      Cost Audit and Financial Audit.

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