Gauhati University Question Papers
COST AND MANAGEMENT ACCOUNTING (May-June’ 2015)
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: 1x4=4
a) Work in progress is valued at what cost?
Ans: Work Cost incurred
b) What is committed cost?
Ans: Committed costs are investments which are already made and cannot be recovered in any case.
c) On what basis welfare-service cost is apportioned?
Ans: No of employees working in each department
d) What is machine hour rate?
Ans: Machine hour rate is simply the cost of running a machine per hour.
2. Answer (any three) Questions of the following: 2x3=6
a) Why opportunity costs are not recorded in the books?
Ans: Though opportunity costs are important but it does not involved flow of cash. That is why is not recorded in the books.
b) What is Cost Unit?
Ans: Cost Unit: It is a unit of production, service or time or combination of these, in relation to which costs may be ascertained or expressed. It should be one with which expenditure can be most readily associated. An appropriate cost unit should be selected keeping in view the following:
a) Cost units should suit the business.
b) It should be most natural to the business.
c) Cost unit should be readily understood and accepted by all concerned.
c) Give two examples of unavoidable causes of labour turnover.
Ans: ii) Unavoidable Causes: In certain instances the organization may discharge the employees due to unavoidable reasons as mentioned below:
(a) Termination of workers on account of insubordination or inefficiency
(b) Discharge of workers on account of irregularity or long absence.
d) What is Flat Time Rate?
Ans: Flat time rate is a method of wage payment in which worker are paid at a fixed rate on the basis of time devoted by them. It is the oldest method of wage payment.
3. Write explanatory notes on any two of the following: 5x2=10
a) Joint cost and Common Cost.
Ans: Joint costs are those which are incurred during a joint production process. Here, Joint Production process means a process where on input yields multiple output such as crude oil yields petrol, diesel etc. Joint cost can be material, labour or overheads. These costs are mainly incurred at the point of separation.
Common cost: Common costs are those which are incurred for the organisation as a whole. These costs are not attributable to any specific job or product or process or department or area of the business. These are mainly fixed in nature. For example rent of the factory. Common cost is included in factory or office or selling overheads depending on the purpose for it incurred.
b) Relationship between Cost Accounting and Management Accounting.
Ans: Cost accounting and Management accounting are two modern branches of accounting. Both the systems involve presentation of accounting data for the purpose of decision making and control of day-to-day activities. Cost accounting is concerned not only with cost ascertainment, but also cost control and managerial decision making.
Management accounting makes use of the cost accounting concepts, techniques and data in taking various managerial decisions. Marginal costing, standard costing, budgetary control are various tools and techniques of cost accounting which provides necessary information to assist the management in the creation of policy and in the day-to-day operations. It enables the management to discharge all its functions i.e. planning, organization, staffing, direction and control efficiently with the help of accounting information. The functions of cost accounting and management accounting are complimentary. In cost accounting the emphasis is on cost determination while management accounting considers both the cost and revenue.
c) VED Analysis.
Ans: VED Analysis: VED – Vital, Essential, Desirable – analysis is used primarily for control of spare parts. The spare, parts can be divided into three categories – vital, essential or desirable – keeping in view the critically to production. Vital items are those without which production process becomes totally inoperative or unsafe. Essential items are those which reduces the equipment’s performance but does make the process inoperative or unsafe. Desirable items are those which does not affect the performance of the equipment. In VED analysis more importance is given to vital items. Its main objective is to prevent stoppage of production due to shortage of essential material. VED analysis is specially applied in the case when there is a large variety of stocks such as spare parts inventory, medical stores etc. In VED analysis, store ledger and bin card is not prepared.
4. What is Overtime? How is overtime cost treated in Cost Accounting? How can such cost be controlled? 2+4+4=10
Ans: Overtime premium – Meaning and Treatment
Overtime is the amount of wages paid for working beyond normal working hours as specified by Factories Act or by a mutual agreement between the workers union and the management. There is a practice is to pay for overtime work at higher rates. Hence, payment of overtime consists of two elements, the normal wages e.g., the usual amount, and the extra payment i.e., the premium. This amount of extra payment paid to a worker under overtime is known as overtime premium.
Treatment of Overtime Premium in Cost Accounting
a) If overtime is resorted to at the desire of the customer, then overtime premium may be charged to the job directly.
b) If overtime is required to cope with general production programme or for meeting urgent orders, the overtime premium should be treated as overhead cost of the particular department or cost center, which works overtime.
c) If overtime is worked in a department, due to the fault of another department, the overtime premium should be charged to the latter department.
d) Overtime worked on account of abnormal conditions such as flood, earthquake etc. should not be charged to cost but to costing P/L A/c.
Steps for Controlling Overtime:
a) Entire overtime work should be duly authorized after investigating the reasons for it.
b) Overtime cost should be shown against the concerned department. Such a practice should enable proper investigation and planning of production in future.
c) If overtime is a regular feature, the necessity for recruiting more men and adding a shift should be considered.
d) If overtime is due to lack of plant and machinery or other resources, steps may be taken to install more machines, or to resort to sub-contracting.
e) If possible an upper limit may be fixed for each category of workers in respect of overtime.
Or
Particulars | Rs. |
Annual demand 2400 units Unit price Ordering cost per order Storage cost Interest rate | 2.40 4.00 2% per annum 10% per annum |
From the above particulars calculate Economic Order Quantity. 10
5. Define Current Standard and Basic Standard. How Standard costs are different from Estimate costs? 5+5=10
Ans: Standards can be classified into two broad categories on the basis of the length of use:
i. Current standards: These are standards which are related to current conditions, particularly of the budget period. They are for short-term use and are more suitable for control purpose. They are also more amenable for combining with budgeting.
ii. Basic standards: These are long-term standards; some of them intended to be in use for even decades. They are helpful for planning long-term operations and growth. There can be significant difference in the standards set depending on the base used for them. The following are the different bases for setting standard, whether they are current standards for short-term or basic standards for long-term use.
Ø Ideal standards: These standards reflect the best performance in every aspect. They are like 100 marks in a paper for students taking up examinations. What is possible under ideal circumstances in all aspects is reflected in these standards. They are impractical and unattainable in practice. There utility for control purpose is negligible.
Ø Past performance based standards: The actual performance attained in the past may be taken as basis and the same may be retained as standard. Such standards do not provide any incentive or challenge to the employees. They are too easy to attain. Their value from cost control point of view is minimal.
Ø Normal standard: It is defined as “the average standard which, it is anticipated can be attained over a future period of time, preferably long enough to cover one trade cycle”. They are average standard reflecting the average performance over a complete trade cycle which may take three to five years. For a specific period, say a budget period, their relevance is negligible.
Ø Attainable high performance standards: They are based on what can be achieved with reasonable hard work and efforts. They are based on the current conditions and capability of the workers. These standards are considered to be of great practical value because they provide sufficient incentive and challenge to the workers to attain them. Any variances from such standard are really significant because the standard which is attainable with effort is not attained.
Standard Cost and Estimated Cost
Estimates are predetermined costs which are based on historical data and are often not very scientifically determined. They usually compiled from loosely gathered information and therefore, they are unsafe to use them as a tool for measuring performance. Standard costs are a predetermined cost which aims at what the cost should be rather then what it will be. Both the standard costs and estimated costs are used to determine price in advance and their purpose is to control cost. But, there are certain differences between these two costs as stated below:
The following are some of the important differences between standard cost and estimated cost:
Basis | Standard Cost | Estimated Cost |
a. Emphasis | Standard cost emphasizes as what the cost ‘should be’ in a given set of situations. | Estimated cost emphasizes on what the cost ‘will be’. |
b. Basis for calculation | Standard costs are planned costs which are determined by technical experts after considering levels of efficiency and production. | Estimated costs are determined by taking into consideration the historical data as the basis and adjusting it to future trends. |
c. Efficiency measurement | It is used as a devise for measuring efficiency | It cannot be used as a devise to determine efficiency. It only determines expected costs. |
d. Cost control | Standard costs serve the purpose of cost control | Estimated costs do not serve the purpose of cost control. |
e. Part of cost accounting | Standard costing is part of cost accounting process | Estimated costs are statistical in nature and may not become a part of accounting. |
f. Technique of cost accounting | It is a technique developed and recognised by management and academicians. | It is just an estimate and not a technique |
g. Applicability | It can be used where standard costing is in operation | It may be used in any concern operating on a historical cost system. |
Or
The standard cost card shows the following details relating to materials needed to produce 1 kg of groundnut oil:
a) Quantity of groundnut required 3 kg.
b) Standard price of groundnut Rs. 2.50 per kg.
c) Actual production 1000 kg.
d) Actual quantity of material used 3500 kg.
e) Actual price of groundnut Rs. 3 per kg.
Calculate
a) Material cost variance.
b) Material price variance.
c) Material usage variance.
GROUP – B
MANAGEMENT ACCOUNTING
Marks: 40
The figures in the margin indicate full marks for the questions.
6. Answer the following as directed: 1x4=4
a) What do you mean by interpretation of financial statement?
Ans: Financial Statement Analysis and interpretation is the process of identifying the financial strength and weakness of a firm from the available accounting and financial statements.
b) What is dynamic analysis?
Ans: It is application of mathematical modeling in business to develop financial forecast.
c) What is the premise of zero-base budgeting?
Ans: The premise of ZBB is that every expenditure requires justification.
d) Give an example of budget key factor.
Ans: Key factor are those which will limit the activities of an undertaking such as sales, material etc.
7. Write short notes on (any three) of the following: 2x3=6
a) Flexible Budget.
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.
b) Contribution.
Ans: Contribution is the excess of sales over marginal cost. It is not purely profit. It is the profit before recovery of fixed assets. Fixed costs are first met out of contribution and only the remaining amount is regarded as profit. Contribution is an index of profitability. It has a fixed relationship with sales. Larger the sales more will be the contribution and vice versa. Contribution = Sales – Marginal cost or Fixed cost + profit.
c) Comparative Income Statement.
Ans: Comparative income statement is a statement in income statement of two or more periods are compared to show the changes in absolute terms and in terms of percentage. It helps in analysis the size and direction of changes in operating results.
d) Cash-flow statement.
Ans: Cash flow statement is a statement which summarizes sources of cash inflow and uses of cash outflows of a firm during a particular period of time, say a month or a year. It is very useful tool for liquidity analysis of the enterprise. It is prepared in cash basis and its shows cash flows under three heads: Operating activities, investing activities and financing activities.
8. Answer (any two) of the following: 5x2=10
a) What are the objectives of Management Accounting?
Ans: 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.
b) Explain the functions of a Management Accountant.
Ans: Functions of Management Accountant: The functions of management accountant depend upon his status in the organisation, needs of the enterprise and personal capabilities of the persons. But still some functions are commonly performed by management accountants. The Financial Executives Institute, America has specified the functions of the controller as follows:
1. Planning for Control. Management accountant establishes co-ordinates and maintains as integrated plan for the control of operations. Such a plan would provide cost standards, expense budgets, sales forecasts, capital investment programme, profit planning and the system to effectuate the plans.
2. Reporting. Management accountant measures performance against given plans and standards. The results of operations are interpreted to all levels of management. This function will include installation of accounting and costing systems and recording of actual performance so as to find out deviations, if any.
3. Evaluating. He should evaluate various policies and programme. The effectiveness of planning and procedures to attain the objectives of the organisation will depend upon the caliber of the management accountant.
4. Administration of Tax. Management accountant is expected to report to government agencies as required under different laws and to supervise all matters relating to taxes.
5. Appraisal of External Effects. He is to access the effect of various economic and fiscal policies of the Government and also to evaluate the impact of other external factors on the attainment of organisational objects.
c) Distinguish between standard costing and budgetary control.
Ans: Budgetary Control and Standard Costing: Both standard costing and budgetary control achieve the same objective of maximum efficiency and cost reduction by establishing predetermined standards, comparing actual performance with the predetermined standards and taking corrective measures, where necessary. Thus, although both are useful tools to the management in controlling costs, they differ in the following respects:
Budgetary Control | Standard Costing |
Budgetary control deals with the operations of a department of business as a whole. | Standard costing is applied to manufacturing of a product, process or processes or providing a service. |
It is extensive in its application, as it deals with the operation of department or business as a Whole. | It is intensive, as it is applied to manufacturing of a product or providing a service. |
Budgets are prepared for sales, production, cash etc. | It is determined by classifying recording and allocating expenses to cost unit. |
It is a part of financial account, a projection of all financial accounts. | It is a part of cost account, a projection of all cost accounts. |
Control is exercised by taking into account budgets and actual. Variances are not revealed through accounts. | Variances are revealed through difference accounts. |
Budgeting can be applied in parts. | It cannot be applied in parts. |
It is more expensive and broad in nature, as it relates to production, sales, finance etc. | It is not expensive because it relates to only elements of cost. |
Budgets can be operated with standards. | This system cannot be operated without budgets. |
9. Explain how Ratio-Analysis is a useful tool of shareholder, Banker, Management, Employees and the Government. 10
Ans: Importance of Ratio analysis to its users:
(i) Owners/Shareholders: Owners contribute capital in the business and they are always exposed to risk. In view of risk involved, the owners are always interested in knowing the profitability and financial strength of the company. various profitability ratios such as gross profit ratio, net profit ratios, return on capital employed helps them in knowing the profitability of the company and debt equity ratio indicates about the financial strength of the company.
(ii) Management: Managers has the responsibility to not only safeguard the owner’s investment but also to increase the value of business. Ratio analysis help the management to find out the overall as well as segment-wise efficiency of the business. It helps them in decision making as well as in controlling and self evaluation. Management uses various efficiency ratios, liquidity ratios, profitability ratios such as stock turnover ratio, debtors turnover ratio, creditors turnover ratio, return on investment, current ratio, debt equity ratio etc in taking various managerial decisions.
(iii) Employees and Workers: Employees and workers are entitled to bonus at the year end besides the salary and wages which is directly linked with the profits of the enterprise. Therefore, the employees and workers are interested in financial statements. Profitability ratios such as gross profit ratio, net profit ratio or operating profit ratios helps them in ascertaining the operating efficiency of the company and liquidity ratios helps in knowing whether or not company in a position to pay their dues.
(iv) Banks and Financial Institutions: Banks and Financial Institutions provide loans to the businesses. They watch the performance of the business to ensure the safety and recovery of the loan advanced. Liquidity ratios and long term solvency ratio helps them in assessing the capacity of the company to pay debts. Also interest coverage ratio helps them in ensuring that the profit is sufficient to meet the interest on debt.
(v) Government authorities: The government makes use of financial statements to compile national income accounts and other information. The information so available to it enables them to take policy decisions. Also income tax collection is based on the financial statement of the companies.
Or
Explain Current Ratio, Quick Ratio and Absolute Liquid Ratio indicating the particulars of current assets and current liabilities and their ideal proportions. 4+3+3=10
Ans: Current Ratio: Current ratio is calculated in order to work out firm’s ability to pay off its short-term liabilities. This ratio is also called working capital ratio. This ratio explains the relationship between current assets and current liabilities of a business. It is calculated by applying the following formula:
Current Ratio = Current Assets/Current Liabilities
Current Assets include Cash in hand, Cash at Bank, Sundry Debtors, Bills Receivable, Stock of Goods, Short-term Investments, Prepaid Expenses, Accrued Incomes etc.
Current Liabilities includes Sundry Creditors, Bills Payable, Bank Overdraft, Outstanding Expenses etc.
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.
Liquid Ratio: Liquid ratio shows short-term solvency of a business. It is also called acid-test ratio and quick ratio. It is calculated in order to know whether or not current liabilities can be paid with the help of quick assets quickly. Quick assets mean those assets, which are quickly convertible into cash.
Liquid Ratio = Liquid Assets/Current Liabilities
Liquid assets includes Cash in hand, Cash at Bank, Sundry Debtors, Bills Receivable, Short-term investments etc. In other words, all current assets are liquid assets except stock and prepaid expenses.
Current liabilities includes Sundry Creditors, Bills Payable, Bank Overdraft, Outstanding Expenses etc.
Objective and Significance: Liquid ratio is calculated to work out the liquidity of a business. This ratio measures the ability of the business to pay its current liabilities in a real way. The ideal liquid ratio is supposed to be 1:1. In case, this ratio is less than 1:1, it shows a very weak short-term financial position and in case, it is more than 1:1, it shows a better short-term financial position.
Absolute Liquid Ratio: Absolute Liquid ratio shows very short-term solvency of a business. It is calculated in order to know whether or not a firm can pay its current liabilities as and when it becomes due. It is calculated as:
Absolute Liquid Ratio = Absolute Liquid Assets/Current Liabilities
Absolute Liquid assets includes Cash in hand, Cash at Bank and Short-term investments etc.
Current liabilities includes Sundry Creditors, Bills Payable, Bank Overdraft, Outstanding Expenses etc.
Objective and Significance: Absolute Liquid ratio is calculated to work out the quick payment capacity of a business. This ratio measures the ability of the business to pay its current liabilities as and when they become due . The ideal absolute liquid ratio is supposed to be 0.50:1. In case, this ratio is less than 0.50:1, it shows a very weak short-term financial position and in case, it is more than 050:1, it shows a better short-term financial position.
10. What is Break-Even Analysis? What are its assumptions? How is break-even-point calculated in terms of sales units and value? 2+4+2+2=10
Ans: Break even analysis
The study of cost-volume-profit analysis is often referred to as “Break even analysis “ and the two terms are used interchangeably by many. This is why break even analysis is a known form of cost-volume-profit analysis. The term break even analysis is used in two sense – narrow sense and broad sense. In its broad sense, break even analysis refers to the study of relationship between cost, volume and profit. In its narrow sense, it refers to a technique of determining that level of operations where total revenue equal total expenses i.e., break even point.
Assumptions of Break even analysis:
1. All costs can be classified into fixed and variable elements. Semi variable costs are also segregated into fixed and variable elements.
2. The total variable costs change in direct proportion with units of output. It follows a linear relation with volume of output and sales.
3. The total fixed costs remain constant at all levels of output. These are incurred for a period and have no relation with output.
4. Only variable costs are treated as product costs and are charged to output, product, process or operation
5. Fixed costs are treated as ‘Period costs’ and are directly transferred to Costing Profit and Loss Account.
6. The closing stock is also valued at marginal cost and not at total cost.
7. The relative profitability of product or department is based on the contribution it gives and not based on the profit.
8. It is also assumed that the selling price per unit remains the same i.e, any number of units can be sold at the current market price.
9. The product or sales mix remains constant over a period of time.
Break-even Point and its Calculation:
Break Even Point is the level of sales required to reach a position of no profit, no loss. At Break Even Point, the contribution is just sufficient to cover the fixed cost. The organisation starts earning profit when the sales cross the Break Even Point. Break Even Point can be calculated either in terms of units or in terms of cash or in terms of capacity utilization. It can be calculated as follows:
BEP in units = Fixed Cost / Contribution per unit
BEP in cash = Fixed Cost / P.V. Ratio
BEP in terms of capacity utilization = (BEP in units / Total capacity) x 100
Or
Particulars | Rs. |
Fixed Cost Selling price Variable Cost | 12000 12 per unit 9 per unit |
From the above information, calculate:
a) Profit at a sales volume of Rs. 60,000/- and Rs. 1,00,000/-
b) Desired sales to earn a profit of Rs. 6,000/- and Rs. 15,000/- 5+5=10
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