2016
(September)
COMMERCE
Paper: 103
(Cost and Management Accounting)
Full Marks – 80
Time – Three Hours
The figures in the
margin indicate full marks for the questions.
1. (a) Discuss the meaning of
Activity Based Costing. What are the benefits of Activity Based Costing? State
its differences with Conventional Costing. 4+6+6=16
Or
(b) Narrate the objectives and
features of cost reduction. State the major areas in which cost reduction is
usually possible. 3+3+10=16
2. (a) Explain the
possible reasons for differences between profits shown by cost accounts and
financial accounts. 16
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.
Reasons
for disagreement between Profits as per financial accounting and Profits as per
cost accounting:
The difference in the profitability of cost and financial records
may be due to the following reasons.
1)
Items included in the financial accounts but
not in cost accounts.
Ø
Purely financial income- such as interest
received on bank deposits, interest and dividend on investments, rent
receivables, transfer fee received, profit on the sale of assets etc.
Ø
Purely financial charges – such as losses due
to scraping of machinery, losses on the sale of investments and assets,
interest paid on the bank loans, mortgages, debentures etc., expenses of
company’s transfer office, damages payable at law etc.
Ø
Appropriation of profit – the appropriation of
profit is again a matter which concerns only financial accounts. Items like
payment of income tax and dividends transfer to reserve, heavy donations,
writing off of preliminary expenses, goodwill and patents appear only in profit
and loss appropriation account and the costing profit and loss a/c is not
affected.
2)
Items included in cost accounts only: There
are certain items which are included in cost accounts but not in financial accounts.
They are: Charges in lieu of rent where premises are owned, interest on capital
employed in production but upon which no interest is actually paid.
3)
Under/Over absorption of overhead expenses: In
cost accounts, overheads are absorbed at predetermined rates which are based on
past data. In the financial accounts the actual amount incurred is taken into
account. There arise a difference between the actual expenses and the
predetermined overheads charged to product or job.
If overheads are not fully recovered, which means that the amount
of overheads absorbed in cost accounts is less than the actual amount, the
shortfall is called as under recovery or under absorption. If overhead expenses
recovered in cost accounts are more than that of the actually incurred, it is
called over absorption. Thus, both the over and under recovery may cause the
difference in the profits of both the records.
4)
Different basis of stock valuation: In cost
accounts, the stock of finished goods is valued at cost by FIFO, LIFO, average
rate, etc. But, in financial accounts stocks are valued either at cost or
market price, whichever is less.
The valuation of work-in-progress may also lead to variation. In
financial books only prime cost may be taken into account for this purpose
whereas in cost accounts, it may be valued at prime cost plus factory overhead.
5)
Different basis of depreciation adopted: The
rates and methods of charging depreciation may be different in two sets of
accounts.
Or
(b) The product of a manufacturing concern passes through two processes
A and B and then to finished stock. It is ascertained that in each process
normally 5% of the total weight is lost and 10% is scrap which from processes A
and B, realizes Rs. 80 per ton and Rs. 200 per ton respectively. The following
are the figures relating to both the processes:
|
|
Process A
|
Process B
|
|
Materials (in tons)
Cost of materials per ton (in Rs.)
Wages (in Rs.)
Manufacturing expenses (in Rs.)
Output (in tons)
|
1,000
125
28,000
8,000
830
|
70
200
10,000
5,250
780
|
Prepare Process Cost Accounts
showing cost per ton of each process. There was no stock or work-in-progress in
any process. 8+8=16
3. (a) What is Comparative Income Statement? Discuss the utility of
such a statement. 4+12=16
Ans: Comparative Statements: These are
the statements showing the profitability and financial position of a firm for
different periods of time in a comparative form to give an idea about the
position of two or more periods. It usually applies to the two important
financial statements, namely, balance sheet and statement of profit and loss
prepared in a comparative form. The financial data will be comparative only
when same accounting principles are used in preparing these statements. If this
is not the case, the deviation in the use of accounting principles should be
mentioned as a footnote. Comparative figures indicate the trend and direction
of financial position and operating results. This analysis is also known as
‘horizontal analysis’.
Comparative
statements are of two types – “Comparative balance sheets and Comparative
income statements”.
Comparison
to financial statements can be done in two ways:
(i)
Financial statements of an enterprise for two or more accounting years
(Inter-period Comparison)
(ii) Financial statements of different
enterprises for the same accounting year (Inter-firm Comparison).
Merits of Comparative Financial
Statements:
a)
Comparison of financial statements helps to
identify the size and direction of changes in financial position of an
enterprise.
b)
These statements help to ascertain the
weakness and soundness about liquidity, profitability and solvency of an
enterprise.
c)
These statements help the management in making
forecasts for the future.
Demerits of Comparative Financial
Statements:
a)
Inter-firm comparison may be misleading if the
firms are not of the same age and size, follow different accounting policies.
b)
Inter-period comparison will also be
misleading if there is frequent changes in accounting policies.
Or
(b) From the
Income Statement given below, prepare a Common-size Income Statement. Give your
brief interpretation of the common-size Income Statement. 12+4=16
INCOME STATEMENTS
For the year ending
31st
December, 2014 and 2015
|
Particulars
|
2014
(Rs.)
|
2015
(Rs.)
|
|
Sales
Less: Cost of goods sold
|
1,40,000
85,000
|
1,65,000
1,05,000
|
|
Gross Profit
|
55,000
|
60,000
|
|
Operating Expenses:
Selling and distribution expenses
Administrative expenses
|
12,000
10,000
|
16,000
11,000
|
|
Total operating expenses
|
22,000
|
27,000
|
|
Net income before tax
Income Tax (40%)
|
33,000
13,200
|
33,000
13,200
|
|
Net Income
|
19,800
|
19,800
|
4. (a) “Ratios are
mechanical and incomplete.” Give comment on this statement with justifications
in support of your contention. 16
Ans:
Ans: Meaning
of Ratio Analysis
A ratio is one figure expressed in
terms of another figure. It is mathematical yardstick of measuring relationship
of two figures or items or group of items, which are related, is each other and
mutually inter-dependent. It is simply the quotient of two numbers. It can be
expressed in fraction or in decimal point or in pure number. Accounting ratio
is an expression relating to two figures or two accounts or two set accounting
heads or group of items stated in financial statement.
Ratio analysis is the method or
process of expressing relationship between items or group of items in the
financial statement are computed, determined and presented. It is an attempt to
draw quantitative measures or guides concerning the financial health and
profitability of an enterprise. It can be used in trend and static analysis. It
is the process of comparison of one figure or item or group of items with
another, which make a ratio, and the appraisal of the ratios to make proper
analysis of the strengths and weakness of the operations of an enterprise.
According to Myers, “Ratio analysis of
financial statements is a study of relationship among various financial factors
in a business as disclosed by a single set of statements and a study of trend
of these factors as shown in a series of statements."
Objectives of Ratio analysis
a)
To know the area of the business which need
more attention.
b)
To know about the potential areas which can be
improved with the effort in the desired direction.
c)
To provide a deeper analysis of the
profitability, liquidity, solvency and efficiency levels in the business.
d)
To provide information for decision making.
e)
To Judge Operational efficiency
f)
Structural analysis of the company
g)
Proper Utilization of resources and
h)
Leverage or external financing
Advantages and Uses of Ratio Analysis
There are various groups of people who
are interested in analysis of financial position of a company used the ratio
analysis to workout a particular financial characteristic of the company in
which they are interested. Ratio analysis helps the various groups in the
following manner:
1)
To workout the profitability: Accounting ratio
help to measure the profitability of the business by calculating the various
profitability ratios. It helps the management to know about the earning
capacity of the business concern.
2)
Helpful in analysis of financial statement:
Ratio analysis help the outsiders just like creditors, shareholders,
debenture-holders, bankers to know about the profitability and ability of the
company to pay them interest and dividend etc.
3)
Helpful in comparative analysis of the
performance: With the help of ratio analysis a company may have comparative
study of its performance to the previous years. In this way company comes to
know about its weak point and be able to improve them.
4)
To simplify the accounting information:
Accounting ratios are very useful as they briefly summaries the result of
detailed and complicated computations.
5)
To workout the operating efficiency: Ratio
analysis helps to workout the operating efficiency of the company with the help
of various turnover ratios. All turnover ratios are worked out to evaluate the
performance of the business in utilising the resources.
6)
To workout short-term financial position:
Ratio analysis helps to workout the short-term financial position of the
company with the help of liquidity ratios. In case short-term financial
position is not healthy efforts are made to improve it.
7)
Helpful for forecasting purposes: Accounting
ratios indicate the trend of the business. The trend is useful for estimating
future. With the help of previous years’ ratios, estimates for future can be
made.
Limitations of Ratio Analysis
In spite of many advantages, there are
certain limitations of the ratio analysis techniques. The following are the
main limitations of accounting ratios:
1)
Limited Comparability: Different firms apply
different accounting policies. Therefore the ratio of one firm can not always
be compared with the ratio of other firm.
2)
False Results: Accounting ratios are based on
data drawn from accounting records. In case that data is correct, then only the
ratios will be correct. For example, valuation of stock is based on very high
price, the profits of the concern will be inflated and it will indicate a wrong
financial position. The data therefore must be absolutely correct.
3)
Effect of Price Level Changes: Price level
changes often make the comparison of figures difficult over a period of time. Changes
in price affect the cost of production, sales and also the value of assets.
Therefore, it is necessary to make proper adjustment for price-level changes
before any comparison.
4)
Qualitative factors are ignored: Ratio
analysis is a technique of quantitative analysis and thus, ignores qualitative
factors, which may be important in decision making. For example, average
collection period may be equal to standard credit period, but some debtors may
be in the list of doubtful debts, which is not disclosed by ratio analysis.
5)
Effect of window-dressing: In order to cover
up their bad financial position some companies resort to window dressing. They
may record the accounting data according to the convenience to show the
financial position of the company in a better way.
6)
Costly Technique: Ratio analysis is a costly
technique and can be used by big business houses. Small business units are not
able to afford it.
7)
Misleading Results: In the absence of absolute
data, the result may be misleading. For example, the gross profit of two firms
is 25%. Whereas the profit earned by one is just Rs. 5,000 and sales are Rs.
20,000 and profit earned by the other one is Rs. 10, 00,000 and sales are Rs.
40, 00,000. Even the profitability of the two firms is same but the magnitude
of their business is quite different.
Or
(b) (i) State the significance of the following ratios and how these
are calculated:
1) Inventory Turnover Ratio.
2)
Receivable
Turnover Ratio. 5x2=10
Ans: 1) Stock
Turnover Ratio: Stock turnover ratio is a ratio between cost of goods sold and
average stock. This ratio is also known as stock velocity or inventory turnover
ratio.
Stock Turnover Ratio = Cost of Goods
Sold/Average Stock
Where Average Stock = [Opening Stock +
Closing Stock]/2
Cost of Goods Sold = Opening Stock +
Net Purchases + Direct Expenses – Closing Stock
Objective and Significance: Stock is a
most important component of working capital. This ratio provides guidelines to
the management while framing stock policy. It measures how fast the stock is
moving through the firm and generating sales. It helps to maintain a proper
amount of stock to fulfill the requirements of the concern. A proper inventory
turnover makes the business to earn a reasonable margin of profit.
2)
Receivable Turnover Ratio/Debtors’ Turnover Ratio: Debtors
turnover ratio indicates the relation between net credit sales and average
accounts receivables of the year. This ratio is also known as Debtors’
Velocity.
Debtors Turnover Ratio = Net Credit
Sales/Average Accounts Receivables
Where Average Accounts Receivables =
[Opening Debtors and B/R + Closing Debtors and B/R]/2
Credit Sales = Total Sales – Cash
Sales-Return Inward
Objective and Significance: This ratio
indicates the efficiency of the concern to collect the amount due from debtors.
It determines the efficiency with which the trade debtors are managed. Higher
the ratio, better it is as it proves that the debts are being collected very
quickly.
Debt
Collection Period: Debt collection period is the period over
which the debtors are collected on an average basis. It indicates the rapidity
or slowness with which the money is collected from debtors.
Debt Collection Period = 12 Months or
365 Days/Debtors Turnover Ratio
Or
Debt Collection Period = Average Trade
Debtors/Average Net Credit Sales per day
Or
365 days or 12 months x Average
Debtors/Credit Sales (360 days can also be used instead of 365 days)
Objective and Significance: This ratio
indicates how quickly and efficiently the debts are collected. The shorter the
period the better it is and longer the period more the chances of bad debts.
Although no standard period is prescribed anywhere, it depends on the nature of
the industry.
(ii) The
current ratio of Popular Co. Ltd. is 2 : 1. Which of the following suggestion
would improve, reduce or leave unchanged the current ratio? 1x6=6
1)
To sell stock for cash.
2)
To purchase stock on credit.
3)
To pay-off a current liability.
4)
To discount account receivables.
5)
To borrow money from bank for long period.
6)
To sell old furniture for cash.
5. (a) “The fate
of large scale investment in fixed capital is often determined by a relatively
small amount of current assets.” Give your comment on this statement. 16
Or
(b) The capacity of an organisation
is to produce 40,000 units of valve per annum. Due to protracted power cuts,
the organisation can operate at 60% of the capacity level. Ascertain the
working capital requirement at the current level of operations. The following
data on the cost-price structure of valves, at the current level of production,
are available:
|
Elements of Cost
|
Per unit (Rs.)
|
|
Raw materials
Direct labour
Overheads
|
6
3
4
|
|
Total cost
Profit
|
13
3
|
|
Selling price
|
16
|
Raw materials are in stock, on an
average for 2 months. The duration of the production process is half a month.
Finished products are in stock, on an average for 1 month.
Credit allowed to customers is 3
months and that obtained from suppliers of raw materials is 1½ months. Lag in
payment of wages is half a month. There
is, usually, no lag in payment of overheads. 16
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