Sunday, April 21, 2019

Cost Accounting Solved Question Papers (May 2018 New Course)


2018 (May)
COMMERCE
(General/Speciality)
Course: 401
(Cost Accounting)
Time: 3 hours
The figures in the margin indicate full marks for the questions
(NEW COURSE)
Full Marks: 80
Pass Marks: 24

1. (a) Fill in the blanks:                                   1x4=4
1)      Fixed cost per unit decreases when volume of production increases.
2)      In printing industries, the method of process costing is applied.
3)      In process costing, the output of the each process in the input of the next process.
4)      In Cost Accounting, overheads are the combination of indirect material, indirect labour and indirect expenses.
(b) Choose and write the correct answer:                             1x4=4
1)      Under the ABC analysis of material control, A stands for low value/moderate value/high value items.
2)      In a chemical industry, the method of process costing/contract costing is applied.
3)      Variable overhead cost is a period cost/an output cost.
4)      Cost of abnormal idle time and overtime is transferred to costing Profit and Loss Account/General Profit and Loss Account.
2. Write on the following (any four):                                       4x4=16
a) Distinction between Cost Accounting and Financial Accounting (any four points)     
Ans: DISTINGUISH BETWEEN FINANCIAL AND COST ACCOUNTING
Basis
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) 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.
c) Allocation and absorption of overheads.
Ans: Allocation of Overhead Expenses: Allocation is the process of identification of overheads with cost centres. An expense which is directly identifiable with a specific cost centre is allocated to that centre. So it is the allotment of whole item of cost to a cost centre or cost unit or refers to the charging of expenses which can be identified wholly with a particular department. For example, the whole of overtime wages paid to the workers relating to a particular department should be charged to that department. So, the term allocation means the allotment of the whole item without division to a particular department or cost centre.
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.
d) 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.
e) 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.
3. (a) The following data have been extracted from the books of M/s, ABC Industries Ltd. For the calendar year, 2017:
Particulars
(Rs.)
Opening stock of raw materials
Purchase of raw materials
Closing stock of raw materials
Carriage inwards
Wages: Direct
Indirect
Other direct charges
Rent and rates: Factory
Office
Indirect consumption of materials
Depreciation: Plant
Office Furniture
Salary: Office
Salesman
Other factory expenses
Other office expenses
Managing Director’s remuneration
Other selling expenses
Travelling expenses of salesman
Carriage and freight outward
Sales
Advance income-tax paid
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25,000
85,000
40,000
5,000
75,000
10,000
15,000
5,000
500
500
1,500
400
2,500
2,000
5,700
700
12,000
1,000
1,100
1,400
2,50,000
15,000
2,000
Managing Director’s remuneration is to be allocated in the ratio of 2 : 1 : 3 for factory, office and sales departments respectively. From the above information, prepare the different phases of cost and net profit.                            14
Cost Sheet of M/S ABC Industries
Particulars
Amount
Amount
Opening Stock of R/M
Add: Purchase of R/M
Carriage Inwards
25,000
85,000
5,000


Less: Closing stock of R/M
1,15,000
40,000


(a)  R/M consumed
Add: Wages (Direct)
Add: Other direct changes

75,000
75,000
15,000
(b) Prime Cost
Add: Factory overheads:
Indirect materials
Indirect wages
Factory rent and rates
Depreciation on Plant
Other Factory expenses
Managing director’s remuneration (12,000 x 2/6)


500
10,000
5,000
1,500
5,700
4,000
1,65,000






26,700
(c) works cost
Add: Office and administrative Overheads:
Office rent & rates
Depreciation on office furniture
Office salary
Other office expenses
Managing director’s remuneration


500
400
2,500
700
2,000
1,91,700





6,100
(d) Cost of production:
Add: Selling and Distribution Overheads:
Salesman salary
Managing director’s remuneration (12,000 x 3/6)
Other Selling Expenses
Travelling Expenses of salesman
Carriage & Freight outward
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2,000
6,000
1,000
1,100
1,400
2,000
1,97,800






13,500
(e) Total cost
Add: Profit

2,11,300
38,700
(f) Sales

2,50,000
Or
(b) What do you mean by material control? What are its techniques? Discuss its significances.               3+3+8=14
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."
Significance/Advantages of Inventory control
1. Protects from fluctuations in demand: There are always chances of fluctuations in the demand of a material. These fluctuations can be adjusted if there are sufficient items in the stock of inventory. Therefore, proper inventory control protects the company from fluctuations in demand.
2. Better services to customers: If the company maintains a proper inventory of raw-materials, then it can complete its production in time. So, it can deliver the finished goods to the customers in time. Similarly, if the company has a proper inventory of finished goods, then it can satisfy the additional demand of the customers.
3. Continuity of production operations: Proper inventory control helps to maintain continuity of production operations. This is because it maintains a smooth flow of raw materials. So, there are no shortages of raw-materials required for production process.
4. Reduces the risk of loss: Proper inventory control helps to reduce the risk of loss due to obsolescence (outdated) or deterioration of items. This is because it checks all the items regularly.
5. Minimizes the administrative workload: Proper inventory control helps to minimize the administrative work load of purchasing, inspection, warehousing, etc. This will reduce the manpower requirement and will minimize the labour cost too.
6. Protects fluctuation in output: Inventory control tries to reduce the gap between planned production and actual production. There are cases where the production schedule cannot be followed because of Sudden breakdown of machines, Problems in supply of materials, Sudden labour strikes, Loss due to failure of power supply, etc.
In such cases, the difference between planned production and actual production can be bridged by inventories held in stock.
7. Effective use of working capital: Proper inventory control helps to make effective use of working capital. Inventory control helps in maintaining the right amount of stocks of materials, components, etc. Over stocking is avoided. Therefore, the working capital will not be blocked in excess inventory.
8. Check on loss of materials: Inventory control helps to maintain a check on the loss of materials due to carelessness or pilferage. If there is no proper inventory control, then there are more chances of carelessness and pilferage by the employees, especially in the store-keeping department.
9. Facilitates cost accounting activities: Inventory control facilitates cost accounting activities. This is because, inventory control provides a means of allocating materials cost of products, departments or other operating accounts.
10. Avoids duplication in ordering: Inventory control avoids duplication in ordering of stock. This is done by maintaining a separate purchase department.
INVENTORY CONTROL TECHNIQUES
Techniques of Inventory Control
The techniques or the tools generally used to effect control over the inventory are the following:
1)      Budgetary techniques for inventory planning;
2)      A-B-C. System of inventory control; (SHORT NOTE)
3)      Economic Order Quantity (E.O.Q.) i.e., how much to purchase at one time economically; (SHORT NOTE)
4)      VED Analysis;
5)      Perpetual inventory system and the system of store verification; (SHORT AND BROAD QUESTION)
6)      Fixation of Stock Level;
7)      Control Ratios.

1)      Budgetary Techniques: For the purchase of raw materials and stocks, what we required is a purchase Budged to be prepared in terms of quantities and values involved. The sales stipulated as per sales Budget of the corresponding period generally works out to be the key factor to decide the production quantum during the budget period, which ultimately decides the purchases to be made and the inventories to be planned.
2)      ABC Analysis: ABC System: 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.
Advantages of ABC analysis
a. Reduction in investment: under ABC analysis, the materials from group 'A' are purchase in lower quantities as much as possible. With this, the effort to reduce the delivery period is also made. These in turn help to reduce the investment in material.
b. Optimization of Inventory management function: Each class of the inventory gets management attention as per its value and accordingly, manpower is allocated and expenses are incurred to manage it. It ensures that most important items are regularly monitored and closely observed whereas such efforts are expended with for the less important items.
c. Control on high value material: under ABC analysis, strict control can be exercised to the materials in group 'A' that have higher value.
d. Reduction in Storage cost: Since Class “A” material is of high value and are purchase in lower quantities as much as possible, it reduces the total storage cost.
e. Saving in time and cost: Since a signification effort is made for management of the material from group 'A', it helps to save time as well as cost.
f. Opportunity to convert Class B items into Class A: As Class B items hold potential for growth, the business may tap into this opportunity and convert it frequent yet low-value customers into regular, high-value customers to Class A.
Disadvantage of ABC analysis
a)      No Proper classification of material: ABC analysis will not be effective if the material are not classified into the groups properly.
b)      Not suitable if materials are of same value: It is not suitable for the organization where the costs of materials do not vary significantly.
c)       No scientific base: There is no any scientific base for the classification of material under ABC analysis.
d)      Not suitable for small organisation: The classification of the materials into different groups may lead to extra cost. Hence, it may not be suitable for small organization.

3)      Economics order quantity: Economics order quantity represents the size of the order for which both order, ordering and carrying costs together are minimum. If purchases are made in large quantities, inventory carrying cost will be high. If the order size is small, ordering cost will be high. Hence, it is necessary to determine the order quantity for which ordering and carrying costs are minimum. The formula used for determining economics order quantity is a s follows:
               

Where,
A is the annual consumption of material in units.
S is the cost of placing an order (ordering cost per unit)

I is the cost of interest and storing one unit of material for the one year (carrying cost per unit per annum).
4)      VED Analysis: VED – Vital, Essential, Desirable – analysis is used primarily for control of spare parts. The spare, parts can be divided into three categories – vital, essential or desirable – keeping in view the critically to production.
5)      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
f)       It requires more efforts to maintain inventory under this method.
g)      Quantity balances shown by the store ledger and bin cards are reconciled.
h)      A number of items are physically checked systematically and by rotation.
i)        The method is comparatively costly as compared to periodical inventory system.
j)        Store ledger and bin cards keeps inventory record up-to date and decent.
k)      The method applies to those concerns usually that sell high-value items (Such as car, personal computer, equipments etc.) not at a large quantity as compared to items under periodic system.
l)        Causes for difference between physical balances and book balances can be explored.
m)    Making corrective entries in case of discrepancies.
n)      Removing the causes of discrepancies between physical quantities and book balances.
Advantages of Perpetual Inventory System
a)      Easy detection of errors - Errors and frauds can be easily detected at an early date. It helps in preventing their occurrence.
b)      Better control over stores- The system exercises better control over all receipts and issues in such a manner so as to give a complete picture of both quantities and values of stock in hand at all times.
c)       No interruption of production process- Production process is not interrupted as the physical verification of stock is made on a planned and regular basis.
d)      Acts as internal check- Under the system, records are made simultaneously in the bin cards and stores ledger accounts which acts as a system of internal check for detection of errors as and when they are committed.
e)      Investment in materials kept under control - The investment in materials is kept at a minimum level as the actual stock is continuously compared with the maximum level and minimum level.
f)       Early detection of loss of stock- Loss of stock due to shrinkage, evaporation, accident, fire, theft, etc. can be easily detected.
g)      Accurate and up-to-date accounting records- Due to continuous stock­taking, the store-keeper and stores accountant become more vigilant in their works and they maintain accurate and up-to-date records.
h)      Easy to prepare interim accounts- It is possible to prepare periodical profit and loss account and balance sheet without physical stock-taking being made.
i)        Availability of correct stock data- Correct stock data is readily available for settlement of insurance claims.
6)      Fixation of stock level: The object of fixing stock levels for each item of material is to maintain required quantity of materials in the store and thereby the expenses may be reduced. The different stock levels are: (1) Minimum stock level (2) Maximum stock level (3) Reorder stock level
a.       Minimum stock level: It represents the minimum quantity of an item of material to be kept in the store at any time. Material should not be allowed to fall below this level. If the stock goes below this level, production may be held up for want of materials. This stock is also known as safety stock level or buffer stock.
b.      Maximum stock level: It is the stock level above which stock should not be allowed to rise. This is the maximum quantity of stock of raw materials which can be had in the stock. It is goes above, it will be overstocking.
c.       Reorder stock level: It is the point at which the storekeeper should initiate purchase requisition for fresh supply. This level lies between the maximum level and the minimum level.
7)      Control Ratios: The control ratios are mainly two:
a)      Inventory Turnover Ratio which we have studied and
b)      Input-output Ratio.
Inventory Turnover: Inventory Turnover is a ratio of the value of the materials consumed during a period to the average value of inventory held during that period.
If the inventory turnover rate in terms of value of materials is high, or if the length of the inventory turnover period is short, the material is said to be fast moving. So if the rate of consumption is fast or if the inventory turnover rate is good, it is a healthy measure of efficiency of materials control, as the capital employed is properly utilized.
 Input-output Ratio: The Input-output Ratio is the ratio of the raw material put into manufacture and the standard raw materials content of the actual output. This ratio enables one to find out whether the usage of the materials is favourable or not. A standard ratio of input of materials and output of material should be determined and the actual ratio should be compared with the standard ratio.
4. (a) The following are the information in respect to a worker who has manufactured 240 articles during the last week of December 2017:                                               4+5+5=14
Working hours during the week are 48 hours, standard rate Rs. 5 per hour and standard time to manufacture an article is 15 minutes.
Calculate his gross wages for the week according to:
1)      Piecework with guaranteed weekly wages;
2)      Rowan Premium Bonus Plan;
3)      Halsey Premium Bonus Plan;                    
Ans:
Time Take = 48 Hours
Time Allowed based on actual output = 15 mins * 240 = 3600 mins or 60 hours
Time Saved = 60 – 48 = 12 Hours
Piece produced per hour = 60/15 = 4 Units
Rate Per piece = 5/4 = Rs. 1.25
1) Piece work with guaranteed weekly wages = Piece produced * Rate per piece
= 240*1.25
= Rs. 300
Or Guaranteed weekly wages = 48*5 = 240
Whichever is higher is his actual wages i.e., Rs. 300
2) Rowan Premium Plan = TT*Rate per Hour + TS/ST (TT*Rate per hour)
= 48*5+ 12/60(48*5) = Rs. 288
3) Halsey Premium plan = TT*Rate per hour + 50% (TS*Rate per hour)
= 48*5+50% (12*5) = Rs. 270
Or
(b) (1) Describe the essential characteristics of a good system of wage payment.                        7
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.
(2) Describe with illustration the salient features of Rowan Plan and Halsey Plan.   7
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)
Principles/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 principles/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) From the following information, compute machine hour rate of a machine in a shop consisting of 3 machines occupying equal floor space. The estimated working hours per year are fixed at 2500 hours in which normal idle time is estimated at 20% of the standard time:                                                                 14
Rent and taxes of the shop per annum – Rs. 3,600
General Electricity for the shop per month – Rs. 200
Repairs and maintenance expenses for the machine per annum – Rs. 600
Rate of power charges for 100 units (the machine consuming 10 units per hour) – Rs. 3
Foreman’s salary for supervising all the machines per month – Rs. 750
Indirect labour cost – Rs. 2 per hour for the machine.
The machine cost – Rs. 1,30,000.
Scrap value is estimated at Rs. 10,000.
Estimated life is 10 years. The foreman devotes equal attention for each machine in the shop.
Solution:
Calculation of Machine Hour Rate
Particulars
Per annum
Per hour
Standing Charges:
Rent (3,600 /3)
Electricity (200 x 12/3)
Foreman’s Salary (750 x 12/3)

1,200
800
3,000

For 2,000 hours
5,000
2.50
Running Expenses:
Depreciation
R/M
Power (10*3/100)



6.00


0.30

0.30
Indirect Labour cost (Operator’s wages)

2
Machine hour rate

11.10
Normal working hours = 2,500 – 20% = 2,000
Or
(b) What factors would you consider for determining the overhead absorption rate? Explain the causes of over and under-absorption of overheads.                                               7+7=14
Ans: 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.
The methods used for absorption are as follows:
a.       Direct Material Cost: Under this method, the overheads are absorbed on the basis of percentage of direct material cost. The following formula is used for working out the overhead absorption percentage: Budgeted or Actual Overhead Cost/ Direct Material Cost X 100
b.      Direct Labor Cost Method: This method is used in those organizations where labor is a dominant factor in the total cost. Under this method, the following formula is used for calculating the overhead absorption rate: Budgeted or Actual Overheads/ Direct Labor Cost X 100
c.       Prime Cost Method: This method is an improvement over the first two methods. Under this method, the Prime Cost is taken as the base for calculating the percentage of absorption of overheads by using the following formula: Budgeted or Actual Overheads/ Prime Cost X 100
d.      Production Unit Method: This method is used when all production units are similar to each other in all respects. Total overhead expenses are divided by total production units for computing the rate per unit of overheads and overheads are absorbed in the product units. If a firm produces more than one products and if they are not uniform to each other, equivalent units are calculated to find out the rate of overheads per unit. The formula of absorption of overheads is as follows: Overhead absorption rate = Budgeted or Actual Overheads/Production Units
e.      Direct Labor Hour Method: Under this method, the rate of absorption is calculated by dividing the overhead expenses by the direct labor hours. The formula is as follows. Budgeted or Actual Overhead Expenses/Direct Labor Hours
f.        Machine Hour Rate: Where machines are more dominant than labor, machine hour rate method is used. CIMA defines machine hour rate as ‘actual or predetermined rate of cost apportionment or overhead absorption, which is calculated by dividing the cost to be appropriated or absorbed by a number of hours for which a machine or machines are operated or expected to be operated’. In other words, machine hour rate is the cost of operating a machine on per hour basis. The formula for calculating the machine hour rate is, Budgeted or Actual Overhead Expenses/ Machine Hours
g.       Selling Price Method: In this method, selling price of the products is used as a basis for absorbing the overheads. The logic used is that if the selling price is high, the product should bear higher overhead cost. Ratio of selling price is worked out and the overheads are absorbed.
Over or under absorption of overheads meaning:
Overhead expenses are usually applied to production on the basis of predetermined rates. The pre-determined rate may present estimated or actual cost. The actual overhead cost incurred and overhead applied to the production will seldom be the same. But due to certain reasons the difference between two may arise.
Over absorptions: If the amount applied exceeds, the actual overhead, it is said to be an over absorption of overheads.
Under absorption: If the amount applied is short fall of the actual overhead in production it is said to be the under absorption of overheads. The over or under absorption of overheads may be termed as overhead variance.
Reason of over or under-absorption of overheads: The under or over-absorption of overhead arises due to following reasons:
a.       Errors in estimating overheads.
b.      Overhead may change due to change in method of production.
c.       The seasonal fluctuation in overhead cost in some industries.
d.      Under utilization of available capacity, unexpected change in the volume of out put.
e.      Valuation of work in progress in wrong process.

6. (a) A product of a manufacturing concern posses through two processes A and B and then to finished stock. It is ascertained that in each process 5% of the total weight is lost and 10% is scrap, which from processes A and B realizes Rs. 80 per tone and Rs. 200 per tone respectively. The following are the figures relating to both the processes:
Particulars
Process – A
Process – B
Materials (tones)
Cost of materials (Rs. Per tone)
Wages (Rs.)
Manufacturing expenses (Rs.)
Output (tones)
1,000
125
28,000
8,000
830
70
200
10,000
5,250
780
Prepare the Process Cost Accounts showing cost per tones of each process. There was no work-in-progress in any process.                                                 14
Process A A/c
Particulars
Units
Amount
Particulars
Units
Amount
To Raw Materials
To Wages
To Mfg. Expenses
1,000
-

1,25,000
28,000
8,000

By loss of weight
By Normal Loss (Scrap)
By Abnormal Loss
By Process B A/c
50
100
20
830
------
8,000
3,600
1,49,400

1,000
1,61,000

1,000
1,61,000
Process B A/c
Particulars
Units
Amount
Particulars
Units
Amount
To Process A A/c
To Direct Materials
To Wages
To Manufacturing Expenses
To Abnormal Gain A/c
830
70


15
1,49,400
14,000
10,000
5,250
3,150
By loss of weight
By Normal Loss (Scrap)

By Finished Stock A/C
45
90

780
-----
18,000

1,63,800


915
1,81,800

915
1,81,800
               
Or
(b) (1) Define job costing. Where is it applied?                                             2+2=4
Ans: Job Costing: Job costing is designed to accumulate cost data for a manufacturing firm which produces goods to specific order. It is also known as specific orders costing or production order costing. Under this method of costing, each job, batch or contract is treated as a cost unit and costs are collected and built up accordingly.
According to “ICMA”, London, it is that category of basic costing method which is applicable where the work consists of separate contract job or batches each of which is authorized by specific order or contract. It is followed by manufacturing and non-manufacturing concerns.
It is employed in industries in which:
a) A production is done on the basis of customer’s own specifications.
b) Products are manufactured in distinguishable lots.
c) Products are not uniform.
d) It is practical to maintain a separate record of each lot from the time production is begun until it is completed.
Following is the list of concerns which generally employ job costing method.
a) Printing Work. b) Design Engineering Concerns. c) Repair Works. d) Construction companies. e) Furniture makers. f) Hardware industry. g) Automobile garages. h) Interior decoration etc.

(2) Under what circumstances, we need to prepare Reconciliation of Cost Account and Financial Account and how is it prepared?                                           10
Ans: Meaning of Reconciliation of Cost and Financial Accounts
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.
PREPARATION ON RECONCILIATION STATEMENT OR MEMORANDUM RECONCILIATION ACCOUNT
A Reconciliation Statement or a Memorandum Reconciliation Account should be drawn: up for reconciling profits shown by the two sets of books. Results shown by any sets of books may be taken as the base and necessary adjustment should be made to arrive at the results shown by the other set of books. The technique of preparing a Reconciliation Statement as well as a Memorandum Reconciliation account is discussed below:
When there is a difference between the profits disclosed by cost accounts and financial accounts, the following steps shall be taken to prepare a Reconciliation Statement
1 Ascertain the various reasons of disagreement (as discussed above) between the profits disclosed by two sets of books of accounts.
2. If profit as per cost accounts (or loss as per financial accounts) are taken as the base:
ADD:
(i) Items of income included in financial accounts but not in cost accounts.
(ii) Items of expenditures (as interest on capital, rent on owned premises, etc.) included in cost accounts but not in financial accounts.
(iii) Amounts by which items of expenditure have been shown in excess in cost accounts as compared to the corresponding entries in financial accounts.
(iv) Amounts by which items of income have been shown in excess in financial accounts as compared to the corresponding entries in cost accounts
(v) Over-absorption of overheads in cost accounts.
(vi) The amount by which closing stock of inventory is under-valued in cost accounts.
(vii) The amount by which the opening stock of inventory is over-valued in cost accounts.
DEDUCT:
(i) Items of income included in cost accounts but not in financial accounts
(ii) Items of expenditure included in financial accounts but not in cost accounts.
(iii) Amounts by which item of income have been shown in excess in cost accounts over the corresponding entries in financial accounts.
(iv) Amounts by which items of expenditure have been shown in excess in financial accounts over the corresponding entries in’ cost accounts.
(v) Under absorption of overheads in cost accounts.
(vi) The amount by which closing stock of inventory is over-valued in cost accounts.
(vii) The amount b which the opening stock of inventory is under -valued in cost accounts.
3. After making all the above additions and deductions, the resulting figure will be profit as per financial accounts.
Note: If, profit as per financial accounts (or loss as per cost accounts) is taken as the base, then items added shall be deducted and items to be deducted shall be added, i.e., the procedure shall be reversed.

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