2017 (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) 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.
Or
(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
Ans:
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.
|
|
Rs.
|
|
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
|
20,000
30,000
10,000
3,000
2,500
4,000
3,500
|
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
Or
(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.
Or
(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
|
Liabilities
|
2015
|
2015
|
Assets
|
2015
|
2016
|
|
Share Capital
Reserves
Secured Loans
Unsecured Loans
Current Liabilities
|
70
70
25
15
20
|
70
120
20
10
30
|
Fixed Assets
Current Assets:
Stock
Debtors
Cash
|
100
60
30
10
|
120
80
40
10
|
|
|
200
|
250
|
|
200
|
250
|
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.
Or
(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 ………………
|
Liabilities
|
Rs.
|
Assets
|
Rs.
|
|
6,000 Equity Shares @ Rs. 100 each
7% Debentures
Reserves and Surplus
Sundry Creditors
Bills Payable
|
6,00,000
3,00,000
1,60,000
60,000
1,00,000
|
Buildings
Furniture
Machinery
Stock
Debtors
Cash balances
|
5,00,000
4,20,000
80,000
1,20,000
60,000
40,000
|
|
|
12,20,000
|
|
12,20,000
|
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
Overheads
|
8
2
6
|
|
Total cost
Profit
|
16
4
|
|
Selling price
|
20
|
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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