Monday, March 16, 2020

GAUHATI UNIVERSITY 4TH SOLVED PAPERS: COST AND MANAGEMENT ACCOUNTING (May-June’ 2017)


Gauhati University Question Papers
COST AND MANAGEMENT ACCOUNTING (May-June’ 2017)
Full Marks: 80
Time Allowed: 3 hours
GROUP – A
COST ACCOUNTING
Marks: 40
Answer either in English or Assamese
The figures in the margin indicate full marks for the questions
ANSWER ALL THE QUESTIONS AS DIRECTED
1. Answer the following as directed:                      1x6=6
a) Fixed cost does not change in the same proportion in which output changes. (Write True or False)
Ans: True
b) LIFO method of pricing issue is useful during period of inflation. (Write True or False)
Ans: True
c) Abnormal idle time cost of factory should be charged to production overhead. (Write True or False)
Ans: False
d) The rate of change in the composition of labour force in the organisation is called _____. (Fill in the blank)

Ans: Labour Turnover
e) When the actual cost incurred is less than the standard cost, the variance is known as _____. (Fill in the blank)
Ans: Favourable variance
f) The most of advantages buying quantity/pattern to adopt is determined by computing the: (Choose the correct answer)
1)      Re-order level.
2)      Optimum stock level.
3)      EOQ. Is the correct answer.
4)      Lead time.
2. Answer the following questions:                                        2x2=4
a) What is Cost Sheet?
Ans: The expenditure which has been incurred upon production for a period is extracted from the financial books and the store records, and set out in a memorandum or a statement. If this statement is confined to the disclosure of the cost of the units produced during the period, it is a termed as a cost sheet. In other words cost sheet is a statement showing the total cost under proper classification in a logical order.
b) Write any two differences between Bin-Card and Stores Ledger.
Ans: Difference between Store Ledger and Bin Card
Store Ledger
Bin Card
1.    It is a record of both quantity and value.
2.    It is maintained by the cost clerk.
3.    It is kept in the cost office.
1.       It is a record of quantity only.
2.       It is maintained by the storekeeper.
3.       It is attached to the bin.

3. Answer any two questions from the following:
a) What are the different methods of payment of remuneration to labourers? Briefly explain any one of them.       5
Ans: Methods of Wages Payment
The methods of remuneration can be classified into:
a)      Time Rate System
b)      Pieced Rate System
c)       Incentive Schemes
a)      Time Rate System: In this system, a worker is paid on the basis of attendance for the day or according to the hours of the day, regardless of the output. This system is also known as time work, day work, day age rate or day rate. The wage rate of the day worker may be fixed on hourly, daily, weekly, fortnightly, or monthly basis depending on the practice followed in the concern. There are two variants of this system, each differing only in so far as the fixation of the time rate is concerned. They are:
1.       Measured Day work or Graduated Time Rate
2.       Differential Time Rate
Graduated Time Rate:   Under this method wages are paid at time rates which vary according to
a.       Merit-rating of the workers, or
b.      Changes in the cost of living index.
It the cost of living goes up, the wages also go up proportionately, and vice versa. Thus the works get the real wages. Similarly, the workers having higher merit rating get higher wages, and the workers with lower rating get lower wages.
Differential Time Rate: Workers are paid rate accounting to their individual efficiency. They are paid normal rate upto a certain percentage of efficiency and the rate increases in steps for efficiency slabs beyond the standard. As the efficiency is measured in terms of output, this method does not fall strictly under the area of time rate system.
b)      Piece Rate System: The payment of wages under this system is based upon the out turn of the worker. The rate is fixed per piece of work and the worker is paid according to the pieces of work completed or the volume of work done by him, irrespective of the time taken by him in completing that work. A workman is free to earn as much as his ability, energy, or skill would allow to him to produce. The piece rate System can be classified into:
a.       Straight Piece Rate.
b.      Differential Piece Rate.
Straight Piece Rates: It is a simple method of making payment at a fixed rate per unit for the units manufactured. Earnings = Number of units X Rate per unit.
Differential Piece Rates: Under this system, efficient workers are paid wages at a lower rate. A definite standard of efficiency is set for each job and for efficiency below or above the standard different piece rates are paid according to different levels of efficiency. The following two methods of wage payment are studied under this system:
a.       Taylor Differential Piece-rate Method, and
b.      Merrick Differential Piece rate Method
Taylor Differential Piece-Rate: F.W. Taylor thought to improve the efficiency of workers by suggesting two rates of payment of wages: A higher rate to the workers who product equal to or more than the standard fixed for production during the day (120%), and a lower rate to the workers who do not achieve the standard (80%).
Merrick Differential Piece-rate: In the Taylor Method, the effect on the wages is quite sharp in the marginal cases. To remove this defect Merrick suggested three piece rates for a job as follows:
Percentage of Standard Output                Payment under Merrick Method
Upto 83%                                                            Normal piece rate
Above 83% and upto 100%                          110% of normal piece rate
Above 100%                                                       120% of normal piece rate
c)       Incentive Schemes: Under this heading, we study the following methods:
a.       Halsey Premium Scheme;
b.      Rowan Premium Scheme;
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)
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)

b) Write the basis of apportionment of the following overheads:                            5
Ans: Expenses and their basis of apportionment:
1)      Factory rent – Area Occupied
2)      Electricity bill for light – Light points
3)      Depreciation of machinery - Book value of machinery used
4)      Electric power bill – H.P. of Machine
5)      Supervision expenses – Time devoted
6)      Stores overhead – Raw material consumed
7)      Canteen expenses – No. of workers on payroll.
8)      Repair and maintenance – Book value of machinery or running hours
9)      Building’s depreciation – Book value of building
10)   Hospital expenses – No. of employees on payroll.
c) What is Economic order quantity? Calculate EOQ from the following information:     2+3=5
Ans: 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.
Monthly consumption of raw materials
Cost of placing an ordering
Cost of material
Carrying cost
250 units
Rs. 30 per order.
Rs. 5 per unit
10% of the material cost


4. Answer the following questions:                        10x2=20
(a) Explain costing as an aid to management.
Ans: 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 accounting is considered to be an aid to management due to its following benefits:
a)      Helps in Decision Making: Cost accounting helps in decision making. It provides vital information necessary for decision making. For instance, cost accounting helps in deciding:
1.       Whether to make a product buy a product?
2.       Whether to accept or reject an export order?
3.       How to utilize the scarce materials profitably?
b)      Helps in fixing prices: Cost accounting helps in fixing prices. It provides detailed cost data of each product (both on the aggregate and unit basis) which enables fixation of selling price. Cost accounting provides basis information for the preparation of tenders, estimates and quotations.
c)       Formulation of future plans: Cost accounting is not a post-mortem examination. It is a system of foresight. On the basis of past experience, it helps in the formulation of definite future plans in quantitative terms. Budgets are prepared and they give direction to the enterprise.
d)      Avoidance of wastage: Cost accounting reveals the sources of losses or inefficiencies such as spoilage, leakage, pilferage, inadequate utilization of plant etc. By appropriate control measures, these wastages can be avoided or minimized.
e)      Highlights causes: The exact cause of an increase or decrease in profit or loss can be found with the aid of cost accounting. For instance, it is possible for the management to know whether the profits have decreased due to an increase in labour cost or material cost or both.
f)       Reward to efficiency: Cost accounting introduces bonus plans and incentive wage systems to suit the needs of the organization. These plans and systems reward efficient workers and improve productivity as well improve the morale of the work -force.
g)      Prevention of frauds: Cost accounting envisages sound systems of inventory control, budgetary control and standard costing. Scope for manipulation and fraud is minimized.
h)      Improvement in profitability: Cost accounting reveals unprofitable products and activities. Management can drop those products and eliminate unprofitable activities. The resources released from unprofitable products can be used to improve the profitability of the business.
i)        Preparation of final accounts: Cost accounting provides for perpetual inventory system. It helps in the preparation of interim profit and loss account and balance sheet without physical stock verification.
j)        Facilitates control: Cost accounting includes effective tools such as inventory control, budgetary control and variance analysis. By adopting them, the management can notice the deviation from the plans. Remedial action can be taken quickly.

Or
Calculate the material price variance, material usage variance, material mix variance and material cost variance from the following data: Consumption per 100 units of product
Material
Standard
Actual
A
B
40 units @ Rs. 50 per unit
60 units @ Rs. 40 per unit 
50 units @ Rs. 50 per unit
60 units @ Rs. 45 per unit
(b) Explain purchasing procedure of material.
Ans: Process of purchasing and receiving goods
Purchase procedure differs from business to business, but all of them follow a general pattern or procedure. There should be proper Purchase Procedure to ensure that right type of material is purchased at right time, in right quantity, at right prices and at right place. All these things require a well-defined procedure of purchasing. The steps in Purchase Procedure are explained below.
Purchase Requisition: A form known as ‘Purchase Requisition’ is commonly used as a format requesting the purchase department to purchase the required material. Normally the purchase requisition is issued by the Stores Department when the quantity of the concerned material reaches the minimum level. Only in the cases of materials, which are not kept in the stores on regular basis, the requisition is issued by the concerned department. Purchase requisition has information like the quantity required, the expected date of receipt, the department in which the material is required, description of material etc. Copies of the purchase requisition are sent to the Accounts department and the concerned department who is in need of the material.
Purchase Order: After the receipt of purchase requisition, the purchase department places an order with a supplier, offering to buy certain material at stated price and terms. However before issuing the purchase order, quotations may be invited from various suppliers for arriving at the best deal. The purchase department usually keeps a list of suppliers from whom the quotations are invited. The quotations received are examined on various parameters like price, delivery period, terms and conditions, quality of material etc. After this, purchase order is issued to the selected supplier. It should be remembered that a purchase order is a legal document and it results into a contract between the company and the supplier. Hence the terms and conditions in the purchase order should be drafted clearly without any ambiguity.
Receiving the Materials: The receiving department performs the function of unloading and unpacking materials which are received by an organization. This will need an inspection report which is sometimes incorporated in the receiving report, indicating the items accepted and rejected with reasons. Copies of the receiving report along with the inspection report are sent to various departments like purchase, stores, concerned department, accounts department and costing department.
Approval of invoice: Approval of invoice indicates that goods according to the purchase order have been received and payments can be made for the same. However if the goods are not according to the quality ordered or are in excess of the quantity specified or are damaged or are of inferior quality, payment is withheld.
Making the Payment: After the invoice is approved the payment is made to the supplier. The purchase procedure is completed with the payment released.
Or
A Ltd. has four departments. The following are the expenses for a period of 3 months:

Rs.
Rent
Repairs
Depreciation
Light
Supervision
Insurance of Plant
Employees Insurance
Power
1,000
600
450
100
1,500
500
150
900
Departments
Area (sq. ft.) 75
Total wages (in Rs.)
No. of workers
Value of plants (in Rs.)
A
55
4,000
12
12,000
B
45
3,000
8
9,000
C
25
2,000
6
6,000
D

1,000
4
3,000
Prepare a statement showing the appropriation of costs to the various departments.
GROUP – B
MANAGEMENT ACCOUNTING
Marks: 40
5. Answer the following questions as directed:                                                 1x6=6
a)      Management Accounting deals with the presentation of information in such a way so as to assist management. (Write True or False)
Ans: True
b)      A budget prepared in a manner so as to give the budgeted cost for various levels of activity is known as _____. (Fill in the blank)
Ans: Flexible Budget
c)       In an undertaking with high fixed cost, break-even point can be attained at a lower level activity. (Write True or False)
Ans: False
d)      Flow of funds means increase or decrease in working capital. (Write true or false)
Ans: True
e)      Issue of capital will mean _____ in working capital. (Fill in the blank)
Ans: Increase in working capital
f)       Two elements of current ratio are current assets and _____ (Fill in the blank)
Ans: Current liabilities
6. Answer the following questions:                                        2x2=4
a) What is the significance of current ratio?
Ans: Objective and Significance: Current ratio shows the short-term financial position of the business. This ratio measures the ability of the business to pay its current liabilities. The ideal current ratio is supposed to be 2:1. In case, if this ratio is less than 2:1, the short-term financial position is not supposed to be very sound and in case, if it is more than 2:1, it indicates idleness of working capital.
b) What are the limitations of financial statements?
Ans: Limitations of financial statements
Financial Statements suffers from various limitations which are given below:
(i) Historical Records: The financial statements are not of much help as the information given in these statements is historic in nature and does not reflect the future.
(ii) Ignores Price Level Changes: Different assets are shown at the historical cost in financial statements. It, therefore, ignore the price level change or present value of the assets.
(iii) Qualitative aspect Ignored: Financial statements considered only those items which can be expressed in terms of money. Financial Statements ignores the qualitative aspect such as quality of management, quality of labour force, Public relations.
(iv) Not free from Bias: Financial statements are largely affected by the personal judgement of the accountant in selecting accounting policies.
(v) Variation is accounting practices: Different firms follow different accounting practices.
7. Answer any two from the following questions:
a)  What is flexible budget?                       5
Ans: A flexible budget is defined as “a budget which, by recognizing the difference between fixed, semi-variable and variable cost is designed to change in relation to the level of activity attained”. Flexible budgets represent the amount of expense that is reasonably necessary to achieve each level of output specified. In other words, the allowances given under flexibility budgetary control system serve as standards of what costs should be at each level of output.
According to ICMA, England defined Flexible Budget is a budget which is designed to change in accordance with the level of activity actually attained.”
Advantages of flexible budget
1. In flexible budget, all possible volume of output or level of activity can be covered.
2. Overhead costs are analysed into fixed variable and semi-variable costs.
3. Expenditure can be forecasted at different levels of activity.
4. It facilitates at all times related factor can be compared, which essential for intelligent decision are making.
b) What is a solvency ratio? Calculate solvency ratio if the total liabilities to outsiders are Rs. 2,00,000 and total assets are Rs. 6,00,000.                       3+2=5
Ans: This ratio gives same indication as the debt-equity ratio as this is a variation of debt-equity ratio. This ratio is also known as solvency ratio. This is a ratio between long-term debt and total long-term funds.
Debt to Total Funds Ratio = Debt/Total Funds
Where Debt (long term loans) include Debentures, Mortgage Loan, Bank Loan, Public Deposits, Loan from financial institution etc.
Total Funds = Equity + Debt = Capital Employed
Equity (Shareholders’ Funds) = Share Capital (Equity + Preference) + Reserves and Surplus – Fictitious Assets
c) What are the various types of financial statements? Explain any one of them.                             5
Ans: Types of Financial statements: A set of financial statements includes (Types):
a) Profit and loss account or income statement: Income statement is one of the financial statements of business enterprises which shows the revenues, expenses, and profits or losses of business enterprises for a particular period of time. Its main aim to show the operating efficiency of the enterprises. Income Statement is sometime called the statement of financial performance because this statement let the users to assess and measure the financial performance of entity from period to period of the same entity or with competitors. 
b) Balance sheet or Position statement: Balance Sheet is sometime called statement of financial position. It shows the balance of assets, liabilities and equity at the end of the period of time. Balance sheet is sometime called statement of financial position since it shows the values of net worth of entity.
c) Cash flow statement: A Cash Flow Statement is similar to the Funds Flow Statement, but while preparing funds flow statement all the current assets and current liabilities are taken into consideration. But in a cash flow statement only sources and applications of cash are taken into consideration, even liquid asset like Debtors and Bills Receivables are ignored. A Cash Flow Statement is a statement, which summarises the resources of cash available to finance the activities of a business enterprise and the uses for which such resources have been used during a particular period of time.
d) Funds flow statement: The financial statement of the business indicates assets, liabilities and capital on a particular date and also the profit or loss during a period. But it is possible that there is enough profit in the business and the financial position is also good and still there may be deficiency of cash or of working capital in business. Financial statements are not helpful in analysing such situation. Therefore, a statement of the sources and applications of funds is prepared which indicates the utilisation of working capital during an accounting period. This statement is called Funds Flow statement.
e) Schedule and notes to account: The notes to the financial statements are integral part of a company's external financial statements. They are necessary because not all relevant financial information can be communicated through the amounts shown (or not shown) on the face of the financial statements. Generally, the notes are the main method for complying with the full disclosure principle and are also referred to footnote disclosures.
8. Answer the following questions:                        10x2=20
a) Explain the scope and objectives of Management Accounting in brief.
Ans: Scope of Management Accounting: The field of management accounting is very wide. The main purpose of management accounting is to provide information to the management to perform its functions of planning directing and controlling. Management accounting includes various areas of specialization to render effective service to the management.
a)      Financial Accounting: Financial Accounting deals with financial aspects by preparation of Profit and Loss Account and Balance Sheet. Management accounting rearranges and uses the financial statements. Therefore it is closely related and connected with financial accounting.
b)      Cost Accounting: Cost accounting is an essential part of management accounting. Cost accounting, through its various techniques, reveals efficiency of various divisions, departments and products. Management accounting makes use of all this data by focusing it towards managerial decisions.
c)       Budgeting and Forecasting: Budgeting is setting targets by estimating expenditure and revenue for a given period. Forecasting is prediction of what will happen as a result of a given set of circumstances. Targets are fixed for various departments and responsibility is pinpointed for achieving the targets. Actual results are compared with preset targets and performance is evaluated.
d)      Inventory Control: This includes, planning, coordinating and control of inventory from the time of acquisition to the stage of disposal. This is done through various techniques of inventory control like stock levels, ABC and VED analysis physical stock verification, etc.
e)      Statistical Analysis: In order to make the information more useful statistical tools are applied. These tools include charts, graphs, diagrams index numbers, etc. For the purpose of forecasting, other tools such as time series regression analysis and sampling techniques are used.
f)       Analysis of Data: Financial statements are analysed and compared with past statements, compared with those of other firms and with standards set. The analysis and interpretation results in drawing reports and presentation to the management.
Objectives of Management Accounting
The primary objective is to enable the management to maximize profits or minimize losses. The fundamental objective of management accounting is to assist management in their functions. The other main objectives are:
1)      Planning and policy formulation: Planning is one of the primary functions of management. It involves forecasting on the basis of available information. The main objective of management accounting is to supply the necessary data to the management for formulating plans for the future. the management accountant prepares statements of past results and gives estimations for the future which helps the management in planning and policy formulation.
2)      Controlling: Controlling performance various unit in an organisation is one the main function of management. The actual performance of every unit is compared with pre determined objectives to find the deviations and take corrective steps to improve the performance of various units. The management is able to control performance of each and every individual with the help of management accounting devices such as standard costing, budgetary control etc.
3)      Help in the interpretation process: The main object of management accounting is to present financial information to the management in easily understandable manner. He can use diagrams, graphs and charts to present the data in a precise manner.
4)      Helps in decision making: Management has to take many strategic decisions. Management accounting makes decision making process more modern and scientific by providing significant information relating to various alternatives.
5)      Reporting: One of the primary objectives of management accounting is to keep the management fully informed about the latest position of the concern. This facilitates management to take proper and timely decisions. It presents the different alternative plans before the management in a comparative manner.
Or
From the following data, you are required to calculate:
1)      P/V ratio.
2)      Break-even sales.
3)      Sales required to earn a profit of Rs. 4,50,000.
4)      Break-even point in units.
5)      What should be the selling price per unit, if the break-even point is reduced to 5,000 units?
Given:
Fixed cost
Variable cost per unit:
Direct material
Direct labour
Direct expenses
Selling price
Rs. 1,00,000

Rs. 6 per unit
Rs. 2 per unit
Rs. 2 per unit
Rs. 20 per unit

b) What are the advantages and disadvantages of budgetary control?
Ans: Advantages of Budgetary Control:
A budget is a blue print of a plan expressed in quantitative terms. Budgeting is technique for formulating budgets. Budgetary Control, on the other hand, refers to the principles, procedures and practices of achieving given objectives through budgets. Here are the some Advantages of Budgetary Control:
a)      Maximization of Profit: The budgetary control aims at the maximization of profits of the enterprise. To achieve this aim, a proper planning and co-ordination of different functions is undertaken. There is proper control over various capital and revenue expenditures. The resources are put to the best possible use.
b)      Efficiency: It enables the management to conduct its business activities in an efficient manner. Effective utilization of scarce resources, i.e. men, material, machinery, methods and money - is made possible.
c)       Specific Aims: The plans, policies and goals are decided by the top management. All efforts are put together to reach the common goal of the organization. Every department is given a target to be achieved. The efforts are directed towards achieving come specific aims. If there is no definite aim then the efforts will be wasted in pursuing different aims.
d)      Performance evaluation: It provides a yardstick for measuring and evaluating the performance of individuals and their departments.
e)      Economy: The planning of expenditure will be systematic and there will be economy in spending. The finances will be put to optimum use. The benefits derived for the concern will ultimately extend to industry and then to national economy. The national resources will be used economically and wastage will be eliminated.
f)       Policy formulation: It helps in the review of current trends and framing of future policies.
Limitations of Budgetary Control System:
The list of advantages given above is impressive, but a budget is not a cure all for organisational ills. Budgetary control system suffers from certain limitations and those using the system should be fully aware of them.
a)      The budget plan is based on estimates: Budgets are based on forecasting cannot be an exact science. Absolute accuracy, therefore, is not possible in forecasting and budgeting. The strength or weakness of the budgetary control system depends to a large extent, on the accuracy with which estimates are made. Thus, while using the system, the fact that budget is based on estimates must be kept in view.
b)      Danger of rigidity: Budgets are considered as rigid document. Too much emphasis on budgets may affect day-to-day operations and ignores the dynamic state of organization functioning.
c)       Budgeting is only a tool of management: Budgeting cannot take the place of management but is only a tool of management. ‘The budget should be regarded not as a master, but as a servant.’ Sometimes it is believed that introduction of a budget programme alone is sufficient to ensure its success. Execution of a budget will not occur automatically. It is necessary that the entire organisation must participate enthusiastically in the programme for the realisation of the budgetary goals.
d)      False Sense of Security: Mere budgeting cannot lead to profitability. Budgets cannot be executed automatically. It may create a false sense of security that everything has been taken care of in the budgets.
e)      Lack of coordination: Staff co-operation is usually not available during budgetary control exercise.
f)       Expensive Technique: The installation and operation of a budgetary control system is a costly affair as it requires the employment of specialized staff and involves other expenditure which small concerns may find difficult to incur. However, it is essential that the cost of introducing and operating a budgetary control system should not exceed the benefits derived there from.
Or
With the following data for a 60% activity, prepare a Flexible Budget for production at 80% capacity:
Production at 60% capacity
Materials
Labour
Direct expenses
Factory overheads
Administrative expenses
6,000 units
Rs. 100 per unit
Rs. 40 per unit
Rs. 10 per unit
Rs. 40,000 (60% variable)
Rs. 30,000 (60% fixed)

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