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Thursday, September 26, 2019

M.Com Previous Year Solved Papers: Cost and Management Accounting' 2017 (September - Incomplete)

2017 (September)
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) Define ‘Cost’, ‘Costing’ and ‘Cost accounting’. Explain briefly the nature and objectives of Cost accounting. 2+2+2+5+5=16
Ans: Introduction to Cost Accounting

Cost: The term ‘cost’ has to be studied in relation to its purpose and conditions. As per the definition by the Chartered Institute of Management Accountants (C.I.M.A.), London ‘cost’ is the amount of actual expenditure incurred on a given thing.
Costing: The C.I.M.A., London has defined costing as the ascertainment of costs. “It refers to the techniques and processes of ascertaining costs and studies the principles and rules concerning the determination of cost of products and services”.
Cost Accounting: It is the method of accounting for cost. The process of recording and accounting for all the elements of cost is called cost accounting. I.C.M.A. has defined cost accounting as follows: “The process of accounting for cost from the point at which expenditure is incurred or committed to the establishment of its ultimate relationship with cost centers and cost units. In its widest usage it embraces the preparation of statistical data, the application of cost control methods and the ascertainment of the profitability of activities carried out or planned”.
Cost Accountancy: The term ‘Cost Accountancy’ includes Costing and Cost accounting. Its purposes are Cost-control and Profitability – ascertainment. It serves as an essential tool of the management for decision-making.
I.C.M.A., has defined cost accountancy as follows: “The application of costing and cost accounting principles, methods and techniques to the science, art and practice of cost control and the ascertainment of profitability. It includes the presentation of information derived there from for the purpose of managerial decision making”.
Nature of Cost Accounting
The nature of cost accounting can be brought out under the following headings:
1.       Cost accounting is a branch of knowledge: Though considered as a branch of financial accounts, cost accounting is one of the important branch of knowledge, i.e., a discipline by itself. It is an organised body of knowledge consisting of its own principles, concepts and conventions. These principles and rules vary from industry to industry.
2.       Cost accounting is a science: Cost accounting is a science as it is a body of systematic knowledge relating to not only cost accounting but relating to a wide variety of subjects such as law, office practice and procedure, data processing, production and material control, etc. It is necessary for a cost accountant to have intimate knowledge of all these field of study in order to carry on his day-to-day activities. But it is to be admitted that it is not a perfect science as in the case of natural science.
3.       Cost accounting is an art: Cost accounting is an art in the sense it requires the ability and skill on the part of cost accountant in applying the principles, methods and techniques of cost accountancy to various management problems. These problems include the ascertainment of cost, control of costs, ascertainment of profitability, etc.
4.       Cost accounting is a profession: In recent years cost accounting has become one of the important professions which have become more challenging. This view is evident from two facts. First, the setting up of various professional bodies such as the Institute of Cost accountant in India, ICMAI in USA and the institute of cost and management Accountants in UK. Such professional bodies both in developed and developing countries have increased the growing awareness of costing profession among the people. Secondly, a large number of students have enrolled in these institutes to obtain costing degrees and memberships for earning their livelihood.
Scope of Cost Accounting
The term scope here refers to field of activity. Cost accounting refers to the process of determining the cost of a particular product or activity. It provides useful data both for internal and external reports reporting. Internal reporting presents details of cost data in a summarized and aggregate form. For instance, in case a company manufacturing electrical goods cost of each product.
In order that cost accounting satisfies the requirements of both internal and external reporting, the following are the different activities which are undertaken under cost accounting system:
a)      Cost Determination: This is the first step in the cost accounting system. It refers to determining the cost for a specific product or activity. This is a critical activity since the other three activities, explained below, depend on it.
b)      Cost Recording: It is concerned with recording of costs in the cost journal and their subsequent posting to the ledger. Cost recording may be done according to integral or non-integral system a separate set of books is maintained for costing and financial transactions.
c)       Cost Analyzing: It is concerned with critical evaluation of cost information to assist the management in planning and controlling the business activates. Meaningful cost analysis depends largely upon the clear understanding of the cost finding methods used in cost accounting.
d)      Cost Reporting: It is concerned with reporting cost data both for internal and external reporting purpose. In order to use cost information intelligently it is necessary for the managers to have good understanding of different cost accounting concepts.
(b) Narrate the concepts of Cost Reduction and Cost Control. State in brief, the advantages as well as dangers of Cost Reduction efforts.                           3+3+5+5=16
2. (a) (i) Explain the essential features of process costing.                           6
Ans: Features/Characteristics of Process Costing:
a)      Process Costing Method is applicable where the output results from a continuous or repetitive operations or processes.
b)      Products are identical and cannot be segregated.
c)       It enables the ascertainment of cost of the product at each process or stage of manufacture.
d)      The output consists of products, which are homogenous.
e)      Production is carried on in different stages (each of which is called a process) having a continuous flow.
f)       The input will pass through two or more processes before it takes the shape of the output. The output of each process becomes the input for the next process until the final product is obtained, with the last process giving the final product.
g)      The output of a process except the last may also be saleable in which case the process may generate some profit.
h)      The input of a process except the first may be capable of being acquired from the outside sources.
i)        The output of a process is transferred to the next process generally at cost to the process. It may also be transferred at market price to enable checking efficiency of operations in comparison to the market conditions.
j)        Normal and abnormal losses may arise in the processes.

(ii) The Kalyan Transport Company is running four buses between two towns which are fifty kilometers apart. Seating capacity of each bus is 40 passengers. The following particulars were obtained from their books for a particular month of a year.

Salaries of office and supervisory staff
Wages of drivers, conductors and cleaners
Diesel oil and Other oils
Repairs and Maintenance
Taxation, Insurance etc
Depreciation (on Kms. Basis)
Interest and other charges
Actual passengers carried were 75% of the seating capacity. All the four buses run 30 days in the month, each bus made one round trip per day. Prepare an Operating Cost Sheet for the month showing the cost per passenger-km.     10
(b) Discuss the objectives of reconciliation of cost and financial accounts. Explain the need for reconciliation.    6+10=16

3. (a) What is Common-size Statement? Discuss the features and utility of such a statement.                    4+12=16
Ans: Common Size Statements: These are the statements which indicate the relationship of different items of a financial statement with a common item by expressing each item as a percentage of that common item. The percentage thus calculated can be easily compared with the results of corresponding percentages of the previous year or of some other firms, as the numbers are brought to common base. Such statements also allow an analyst to compare the operating and financing characteristics of two companies of different sizes in the same industry. Thus, common size statements are useful, both, in intra-firm comparisons over different years and also in making inter-firm comparisons for the same year or for several years. This analysis is also known as ‘Vertical analysis’.
Characteristics/Essentials of Common Size Statements
Common Size statements are regarded as indices of an enterprise‘s performance and position. As such, extreme care and caution should be exercised while preparing these statements. Common Size statements generally reflect the following observable characteristics:
a)      Internal Audience: Common Size statements are intended for those who have an interest in a given business enterprise. They have to be prepared on the assumption that the user is generally familiar with business practices as well as the meaning and implication of the terms used in that business.
b)      Articulation: The basic Common Size statements are interrelated and therefore are said to be articulated‘. Example: Profit and Loss account shows the Common Size results of operations and represents an increase or decrease in resources that is reflected in the various balances in the balance sheet.
c)       Historical Nature: Common Size statements generally report what has happened in the past. Though they are used increasingly as the basis for the future by prospective investors and creditors, they are not intended to provide estimates of future economic activities and their effect on income and equity.
d)      Legal and economic consequences: Common Size statements reflect elements of both economics and law. They are conceptually oriented towards economics, but many of the concepts and conventions have their origin in law. Example: Conventions of disclosure and materiality
e)      Technical Terminology: Since Common Size statements are products of a technical process called accounting‖, they involve the use of technical terms. It is, therefore, important that the users of these statements should be familiar with the different terms used therein and conversant with their interpretations and meanings.
f)       Summarization and Classification: The volume of business transaction affecting the business operations are so vast that summarization and classification of business events and items alone will enable the reader to draw out useful conclusions.
g)      Money Terms: All business transactions are quantified, measured and related in monetary terms. In the absence of this monetary unit of measurement, Common Size statements will be meaningless.
h)      Various Valuation Methods: The valuation methods are not uniform for all items found in a Balance Sheet. Example: Cash is stated at current exchange value; Accounts receivable at net realizable value; inventories at cost or market price whichever is lower; fixed assets at cost less depreciation.
i)        Accrual Basis: Most Common Size statements are prepared on accrual basis rather than on cash basis i.e., taking into account all incomes due but not received and all expenses due but not paid.
j)        Need for Estimates and judgement: Under more than one circumstance, the facts and figures to be presented through Common Size statements are to be based on estimates, personal opinions and judgements. Example: Rate of depreciation, the useful economic life of a fixed asset, provision for doubtful debts are all instances where estimates and personal judgements are involved.
k)      Verifiability: it is essential that the facts presented through Common Size statements are susceptible to objective verification, so that the reliability of these statements can be improved.
l)        Conservatism: Wherever and whenever estimates and personal judgements become essential during the course of preparation of Common Size statements, such estimates, should be based moderately on a conservative basis to avoid any possibility of overstating the assets and incomes.
m)    Understandability: Common Size statements should be prepared following the accepted accounting principles for better understanding of the users.
n)      Comparable: Common Size statements should disclose the information in such a manner that they are conformable for inter-firm and intra-firm comparison.
Merits of Common Size Statements:
a)      A common size statement facilitates both types of analysis, horizontal as well as vertical. It allows both comparisons across the years and also each individual item as shown in financial statements.
b)      Comparison of the performance and financial condition in respect of different units of the same industry can also be done.
c)       These statements help the management in making forecasts for the future.
Demerits of Common Size Statements:
a)      If there is no identical head of accounts, then inter-firm comparison will be difficult.
b)      Inter-firm comparison may be misleading if the firms are not of the same age and size, follow different accounting policies.
c)       Inter-period comparison will also be misleading if there is frequent changes in accounting policies.
(b) From the following Balance Sheet of the Popular Co. Ltd. prepare Common-size Balance Sheets and give your comments on the affairs of the company.                                            10+6=16
Popular Company Limited
Balance Sheet
Share Capital
Secured Loans
Unsecured Loans
Current Liabilities
Fixed Assets
Current Assets:




4. (a) “A device for making financial data more meaningful is to reduce them to ratios.” Elucidate the statement with justifications.                                    16
Ans: Ratio analysis and Its Significance: 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:
a)      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.
b)      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.
c)       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.
d)      To simplify the accounting information: Accounting ratios are very useful as they briefly summaries the result of detailed and complicated computations.
e)      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.
f)       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.
g)      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.
(b) From the following Balance Sheet you are required to calculate the ratios mentioned below and comment in relation to each of these ratios:
1)      Ratio of External Equities to Total Assets,
2)      Ratio of Fixed Assets to Net Worth,
3)      Ratio of current Assets to Net Worth.                                     6+5+5=16
Balance Sheet
As at ………………
6,000 Equity Shares @ Rs. 100 each
7% Debentures
Reserves and Surplus
Sundry Creditors
Bills Payable
Cash balances



5. (a) Differentiate between:                                     8+8=16
1)      Fixed working capital and variable working capital.
2)      Gross working capital and net working capital.
Ans: 1) Some portion of working capital is fixed natured and some portion fluctuates for some time. In the view point working capital classified in to 2 classes,
a)      Fixed or permanent working capital
b)      Variable or temporary working capital
Fixed or permanent working capital: The fund, which is required to produce a certain amount of goods or services at a certain period of time, is called Fixed working capital. The minimum amount of cash money, A/R, which are kept to operate the business is called Fixed working capital.
Variable working capital: When extra working capital is required then a addition to fixed working capital due to seasonal causes or increased production or sales, this working capital is variable working capital. So, the working capital which fluctuates with keeping the relation between production & Sales is variable working capital.
2) There are two concepts of working capital:
a)      Gross working capital
b)      Net working capital
Gross working capital refers to investment in all current assets -raw materials, work-in-progress, finished goods, book debts, bank balance and cash balance. The gross concept of working capital is significant in the context of measuring working capital needed, measuring the size of the business, continued and smooth flow of operations of the business and the like.
Net working capital refers to the excess of current assets over current liabilities. That is, value of current assets minus value of current liabilities (current liabilities include trade creditors, bills payable, outstanding expenses such as wages, salaries, dividend payable and tax payable, bank overdraft, etc.) The net concept of working capital is significant in the context of financing of working capital, the short term liquidity aspects of the business, and the like.
(b) M/s A.B. & Co. requests you to prepare a statement showing the working capital requirements. They estimate to produce 4,800 units in a year. The following information have been furnished for you.
Elements of Cost
Cost Per unit (Rs.)
Raw materials
Direct labour
Total cost
Selling price
Raw materials are in stock on an average period of one month. Materials remain in process on an average period of half a month. Finished goods are in stock on an average period of one and a half months. Customers enjoy one month’s credit while suppliers allow one month’s credit.  Cash in hand expected in Rs. 2,500. Production is carried out uniformly during the year and wages and overheads accrue evenly.                   16

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