Elective Course in Commerce
ECO – 10: Elements of Costing

Dear Students,

As explained in the Programme Guide, you have to do one Tutor Marked Assignment in this Course.

Assignment is given 30% weightage in the final assessment. To be eligible to appear in the Term-end examination, it is compulsory for you to submit the assignment as per the schedule. Before attempting the assignments, you should carefully read the instructions given in the Programme Guide.

This assignment is valid for two admission cycles (July 2020 and January 2021). The validity is given below:

1) Those who are enrolled in July 2020, it is valid up to June 2021.

2) Those who are enrolled in January 2021, it is valid up to December 2021.

You have to submit the assignment of all the courses to The Coordinator of your Study Centre. For appearing in June Term-End Examination, you must submit assignment to the Coordinator of your study centre latest by 15th March. Similarly for appearing in December Term-End Examination, you must submit assignments to the Coordinator of your study centre latest by 15th September.

Course Code: ECO - 10
Course Title : Elements of Costing
Assignment Code : ECO - 10/TMA/2020-21
Coverage : All Blocks
Maximum Marks: 100

Attempt all the questions:

1. Describe the factors to be considered before installing a system of costing in an organization. Also explain the requisites of an effective system of costing. (10+10)

Ans: Factors to be considered before installing a costing system

The costing system of an organization should be carefully planned in order to achieve its objectives. The following factors to be taken into consideration before installing an adequate costing system :

1)      Determination of objectives: The first step is to clearly lay down the objectives of the costing system. If the objective is only to ascertain the cost, a simple system will be sufficient. However, if the objective is to get information for decision making, planning and control, a more elaborate system of costing is necessary.

2)      Study of the nature of business: The nature of the business and other technical aspects like nature of the products, methods and stages of production cycle should be carefully analyzed. Such an analysis is necessary to decide the method of costing to be adopted. For example, contract costing is suitable for large construction projects. Operating costing is adopted by service industries like transport.

3)      Study of the nature of the organization: The costing system should be designed to meet the requirements of the organization. Hence, it is necessary to study the nature, size and layout of the organization. The factors to be considered are:

a.       Size of the organization and the size of the departments.

b.      The physical layout of the organization.

c.       The different levels of management.

d.      The extent of decentralization of authority.

e.      The nature of authority relationships.

4)      Deciding the structure of cost accounts: A suitable costing system can be developed on the basis of the study of the nature of business and organization. The structure of cost accounts should be simple and in accordance with the natural production process.

5)      Determination of cost rates: This step involves a thorough study of the following points for developing an integrated costing system.

a.       Classification of costs into direct and indirect costs.

b.      Grouping of indirect costs (overheads) into production, administration, selling and distribution etc.

c.       Methods of pricing issues.

d.      Treatment of wastes of all types.

e.      Absorption of overheads.

f.        Calculation of overhead rates.

6)      Organization of the cost office: The cost office is responsible for the efficient operation of the costing system. The cost office, with adequate staff must be located a close as possible to the factory. The following are the major functions of the cots office.

a.       Stores accounts.

b.      Labour accounting

c.       Recording of cost data and

d.      Cost control.

7)      Further, the role and duties and responsibilities of the cost accountant must be clearly defined. He must have the necessary authority to discharge his duties effectively.

8)      Introducing the system: After completion of the above steps, the costing system may be formally introduced. Introduction of the system in an existing organization should be done gradually. Before introduction, the feature of the systems, its working and advantages must be explained to the concerned employees to secure their co-operation.

Eco 10 Solved Question Papers Elements of Costing

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Characteristics of a Good Costing System

An ideal system of cost accounting must possess some characteristics which bring all the advantages, discussed above; to the business, in order to be ideal and objective. The main characteristics are:

a)      Simplicity: It must be simple, flexible and adaptable to the changing conditions. And it must be easily understandable to the personnel. The information provided must be in the proper order, in right time and to the right persons so as to be utilized fully.

b)      Flexibility and Adaptability: The costing system must be flexible to accommodate the changing conditions and circumstances. The expansion, contraction of changes must be adopted in the existing system with minimum changes.

c)       Economy: The costing system must suit the finance available. The expenditure must be less than the benefits derived from the system adopted.

d)      Comparability: The management must be able to make comparison of the facts and figures with the past figures, figures of other concerns, or other departments of the same concern.

e)      Minimum Changes to the Existing one: When introducing a costing system, it may cause minimum change to the existing set up of the business.

f)       Uniformity of Forms: Forms of different colours can be used to distinguish them. Forms must be uniform in size and quality. Form should contain instructions to fill, to use and for disposal.

g)      Less Clerical Work: Printed forms will involve less labour to fill in, as the workers may be a little educated. They may not like to spend much time in filling the forms.

h)      Efficient Material Control and Wage System: There must be a proper procedure for recording the time spent on different jobs, by workers for the payment of wages. A systematic method of wage system will help in the control of labour cost. Since the cost of material forms a great proportion to the total cost, there must be an efficient system of stores control.

i)        A Sound Plan: There must be proper and sound plans to collect, to allocate and to apportion overhead expenses on each job or each product in order to find out the cost accurately.

j)        Reconciliation: The systems of costing and financial accounting must be facilitated to reconcile in the easiest manner.

k)      Overall Efficiency of Cost Accountant: The work of the cost accountant under a good system of costing must be clearly defined as to his duties and responsibilities to the firm are very essential. 

2. Define 'material control'. What are its objectives? Describe its advantages and basic requirements. (2+3+5+10)

Ans: Inventory or Store Control: Inventory control means to monitor the stock of goods used for production, distribution and captive (self) consumption. For a specific time period, stocks of goods are placed at some particular location. Stock of goods includes raw-materials, work in progress, finished goods, packaging, spares, components, consumable items, etc. Inventory Control means maintaining the inventory at a desired level. The desired-level keeps on fluctuating as per the demand and supply of goods.

According to Gordon Carson, "Inventory control is the process where by the investment in materials and parts carried in stocks is regulated, within pre-determined limits set in accordance with the inventory policy established by the management."

Simply "Inventory control is a method to identify those stocks of goods, which can be used for the production of finished goods. It shall be supported by a schedule which gives details regarding; opening stock, receipt of raw-materials, issue of materials, closing stock, and scrap generated."

Objectives of store control: The following are the important objectives of store control

a)      to make available the right type of raw material at the right time in order to have smooth and continuous flow of production;

b)      to ensure effective utilization of material;

c)       to prevent over stocking of materials and consequent locking up of working capital;

d)      to procure appropriate quality of raw materials at reasonable price;

e)      to prevent losses during storage of materials;

f)       to supply information to the management regarding the cost of materials and the availability of stock;

Significance/Advantages of Inventory control

1. Protects from fluctuations in demand: There are always chances of fluctuations in the demand of a material. These fluctuations can be adjusted if there are sufficient items in the stock of inventory. Therefore, proper inventory control protects the company from fluctuations in demand.

2. Better services to customers: If the company maintains a proper inventory of raw-materials, then it can complete its production in time. So, it can deliver the finished goods to the customers in time. Similarly, if the company has a proper inventory of finished goods, then it can satisfy the additional demand of the customers.

3. Continuity of production operations: Proper inventory control helps to maintain continuity of production operations. This is because it maintains a smooth flow of raw materials. So, there are no shortages of raw-materials required for production process.

4. Reduces the risk of loss: Proper inventory control helps to reduce the risk of loss due to obsolescence (outdated) or deterioration of items. This is because it checks all the items regularly.

5. Minimizes the administrative workload: Proper inventory control helps to minimize the administrative work load of purchasing, inspection, warehousing, etc. This will reduce the manpower requirement and will minimize the labour cost too.

6. Protects fluctuation in output: Inventory control tries to reduce the gap between planned production and actual production. There are cases where the production schedule cannot be followed because of Sudden breakdown of machines, Problems in supply of materials, Sudden labour strikes, Loss due to failure of power supply, etc.

In such cases, the difference between planned production and actual production can be bridged by inventories held in stock.

7. Effective use of working capital: Proper inventory control helps to make effective use of working capital. Inventory control helps in maintaining the right amount of stocks of materials, components, etc. Over stocking is avoided. Therefore, the working capital will not be blocked in excess inventory.

8. Check on loss of materials: Inventory control helps to maintain a check on the loss of materials due to carelessness or pilferage. If there is no proper inventory control, then there are more chances of carelessness and pilferage by the employees, especially in the store-keeping department.

9. Facilitates cost accounting activities: Inventory control facilitates cost accounting activities. This is because, inventory control provides a means of allocating materials cost of products, departments or other operating accounts.

10. Avoids duplication in ordering: Inventory control avoids duplication in ordering of stock. This is done by maintaining a separate purchase department.

Essential of store control: The following at the essentials of good system of material control.

a)      There should be proper co-operation and co-ordination among the departments dealing with materials.

b)      All purchases must be centralized and must be made through an expert purchase manager.

c)       All items in the stores should be classified with codes.

d)      Receiving and inspection procedure should be chalked out.

e)      Ideal storage and preservation facilities will have to be provided.

f)       Stores control measures like ABC analysis, perpetual inventory system, stock verification should be introduced.

g)      There should be an efficient system of internal audit and internal check.

h)      Maximum level, minimum level and re-order level of stock should be fixed to avoid over-stocking or shortage of materials.

i)        Appropriate records should be maintained to control issues and utilization of stores in production.

j)        There should be a system of regular reporting to management regarding materials purchases, storage and utilization.

3. (a) What are the main methods of pricing? Explain the First in First out method.  5+5=10

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Ans: Methods of Pricing of material issue:+A number of methods are used for pricing material issues. Each method has its own advantages and disadvantages. As such, it is impossible to say which method is the best. Each organisation should choose a particular method best suited to it. While choosing a method, it is necessary to see that the method chosen is simple, effective and realistic. At the same time, it is equally necessary to consider the effect of the method on production cost and inventory valuation. The following are the different methods of pricing the material issues:

1. First in First Out Method (FIFO)

2. Last in first out method (LIFO)

3. Simple Average Method

4. Weighted average method

1. First In First Out Method (FIFO)

According to this method the units first entering the process are completed first. Thus the units completed during a period would consist partly of the units which were incomplete at the beginning of the period and partly of the units introduced during the period.  The cost of completed units is affected by the value of the opening inventory, which is based on the cost of the previous period. The closing inventory of work-in-process is valued at its current cost.

2. Last In First Out Method (LIFO): According to this method units last entering the process are to be completed first. The completed units will be shown at their current cost and the closing-work in process will continue to appear at the cost of the opening inventory of work-in-progress along with current cost of work in progress if any.

3. Simple Average Method: The simple average is determined by adding different prices of materials in stock and dividing the total by number of prices. Quantity purchased in each lot is ignored.

4. Weighted Average Method:

                This is an improvement over the simple average method. This method takes into account both quantity and price for arriving at the average price. The weighted average is obtained by dividing the total cost of material in the stock by total quantity of material in the stock.

First In First Out Method (FIFO)

According to this method the units first entering the process are completed first. Thus the units completed during a period would consist partly of the units which were incomplete at the beginning of the period and partly of the units introduced during the period.  The cost of completed units is affected by the value of the opening inventory, which is based on the cost of the previous period. The closing inventory of work-in-process is valued at its current cost.


a. This method is simple to understand and easy to operate.

b. The closing stock is valued at the current market price.

c. Since issues are priced at cost, no profit or loss arises from pricing.

d. This method is more suitable in times of falling prices.

e. Deterioration and obsolescence can be avoided.


a. When prices fluctuate, calculation becomes complicated. This increases the possibility of clerical errors.

b. During the period of price fluctuations, material charged to jobs vary. Therefore, comparison between jobs is difficult.

c. During the period of rising prices, product costs are under stated and profits are overstated. This may result in payment of higher dividend out of capital.

b) In a factory, the following purchase and issues were made during the month of Account January, 1988.


Purchases Units

Rate (Rs)


Jan 1

Jan 8

Jan 13

Jan 18

Jan 23

Jan 25

Jan 31






















Prepare the stores Ledger Account under FIFO method.


4. What are the distinct features of direct and indirect labour? Explain the principle of time keeping and its purpose. (10+5+5)

Ans: Direct Labour: Direct labour is that labour which is directly engaged in the production of goods or services and which can be conveniently allocated to the job, process or commodity unit. For example, labour engaged in making the bricks in a kiln is direct labour because labour charges paid for making 1,000 bricks can be conveniently allocated to the cost of 1,000 bricks.

Features of Direct labour:

a.       Direct labour cost is variable in nature. Increases or decreases with production.

b.      Direct labour cost per unit will remain constant at each level of activity.

c.       Direct labour cost is a part of prime cost of product

d.      It is incurred at the time of production or purchase of goods.

e.      Direct labour cost is directly allocated to a particular cost unit.

Indirect Labour: Indirect labour is that labour which is not directly engaged in the production of good and services but which indirectly helps the direct labour engaged in production. The examples of indirect labour are mechanics, supervisors, supervisors, chowkidars, sweepers, foremen, watchmen, time-keeper, cleaners, repairers etc. The cost of indirect labour cannot be conveniently allocated to a particular job, order, process or article.

Features of Indirect labour:

a.       Indirect labour cost is normally fixed in nature. Increases or decreases in production do not affect indirect labour cost.

b.      Indirect labour cost total will remain constant at each level of activity.

c.       Indirect labour cost is treated as overheads.

d.      It is incurred at the time of operation in factory.

e.      Indirect labour cost is apportioned on suitable basis.

TIME-KEEPING: This department is concerned with maintenance of attendance time and job time of workers. Attendance time is recorded for wage calculation and job time or time booking is considered for computing time spent for each department, job, Operation and Process for calculating labour cost department wise, job wise and of each process and operation.

Principles of Time keeping:

1. Good time keeping system prevents ‘proxy’ for one another among workers

2. Time-keeping has to be done for even piece workers to maintain uniformity, regularity and continuous flow of production.

3. Both the arrival and exit of workers is to be recorded so that total time spent by workers is available for wage calculations.

4. Mechanized methods of time keeping are to be used to avoid disputes.

5. Late arrival time and early departure time are to be recorded to maintain discipline.

6. The time recording should be simple, quick and smooth.

7. Time recording is to be supervised by a responsible officer to eliminate irregularities.

Time-keeping: Time-keeping will serve the following purposes:

1. Time keeping helps in preparation of Pay Rolls in case of time-paid workers.

2. Time keeping is necessary in meeting the statutory requirements.

3. Time keeping creates a sense of discipline amongst the workers due to which they give attendance in factory timely.

4. Recording of each worker’s time ‘in’ and ‘out’ of the factory making distinction between normal time, overtime, late attendance and early leaving.

5. For overhead distribution when overheads are absorbed on the basis of labour hours.

5. Write short notes on the following:  4x5=20

a) Methods of absorption

Ans: The methods used for absorption are as follows:

a.       Direct Material Cost: Under this method, the overheads are absorbed on the basis of percentage of direct material cost. The following formula is used for working out the overhead absorption percentage: Budgeted or Actual Overhead Cost/ Direct Material Cost X 100

b.      Direct Labor Cost Method: This method is used in those organizations where labor is a dominant factor in the total cost. Under this method, the following formula is used for calculating the overhead absorption rate: Budgeted or Actual Overheads/ Direct Labor Cost X 100

c.       Prime Cost Method: This method is an improvement over the first two methods. Under this method, the Prime Cost is taken as the base for calculating the percentage of absorption of overheads by using the following formula: Budgeted or Actual Overheads/ Prime Cost X 100

d.      Production Unit Method: This method is used when all production units are similar to each other in all respects. Total overhead expenses are divided by total production units for computing the rate per unit of overheads and overheads are absorbed in the product units. If a firm produces more than one product and if they are not uniform to each other, equivalent units are calculated to find out the rate of overheads per unit. The formula of absorption of overheads is as follows: Overhead absorption rate = Budgeted or Actual Overheads/Production Units

b) Contract costing

Ans: Contract Costing: This method if applied in undertakings erecting buildings or carrying out constructional works, e.g., House buildings, ship building, Civil Engineering contracts. The cost unit is a contract which may continue for over more than a year. It is also known as the Terminal Costing, since the works are to be completed within a specified period as per terms of contract or agreement executed by the contractor and contractee. The cost of the contract and profit or loss are ascertained. The execution period of the contract may be extend over a number of years. But at the end of each year, a contract account is prepared to find profit from the contract to the extend completed on the basis of cash realised or some suitable basis.

c) Process costing

Ans: Process costing is a method of operation costing which is used to ascertain the cost of production at each process, operation or stage of manufacture, where processes are carried in having one or more of the following features:

a)      Where the product of one process becomes the material of another process or operation

b)      Where there is simultaneous production at one or more process of different products, with or without by product,

c)       Where, during one or more processes or operations of a series, the products or materials are not distinguishable from one another, as for instance when finished products differ finally only in shape or form’.

Process costing is defined by Kohler as: “A method of accounting whereby costs are charged to processes or operations and averaged over units produced; it is employed principally where a finished product is the result of a more or less continuous operation, as in paper mills, refineries, canneries and chemical plants; distinguished from job costing, where costs are assigned to specific orders, lots or units.

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.

d) Classification of costs

Ans: Cost classification is the process of grouping costs according to their common characteristics. It is the placement of like items together according to their common characteristics. A suitable classification of costs is of vital importance in order to identify the cost with cost centers or cost units. Costs may be classified according to their nature, i.e. material, labour and expenses and a number of other characteristics. The important ways of classification are:

a) By Nature or Element or Analytical Classification: According to this classification, the costs are divided into three categories i.e. Materials, Labour and Expenses.

b) By Functions: According to this classification costs are divided as Manufacturing and Production Cost and Commercial Cost.

c) Classification by relation to cost centre: According to this classification, total cost is divided into direct costs and indirect costs.

d) By Variability: According to this classification, costs are classified into three groups viz. fixed, variable and semi-variable.

e) By Controllability: Under this, costs are classified according to whether or not they are influenced by the actions of a given member of the undertaking. On this basis it is classified into two categories: Controllable and uncontrollable costs.

f) By Normality: Under this, costs are classified according to whether these are cost which are normally incurred as a given level of output in the conditions in which that level of activity is normally attained. On this basis, it is classified into two categories: Normal cost and abnormal cost.

g) By Capital and Revenue or Financial Accounting Classification: The cost which is incurred in purchasing assets either to earn income or increasing the earning capacity of the business is called capital cost.

h) By Time: Cost can be classified as (i) Historical costs and (ii) Predetermined costs.

i) According to Planning and Control: Planning and control are two important functions of management. Cost accounting furnishes information to the management which is helpful is the due discharge of these two functions. According to this, costs can be classified as budgeted costs and standard costs.

j) For Managerial Decisions: On this basis, costs may be classified into the following costs: i) Marginal cost, ii) Out of pocket costs, iii) Differential costs, iv) Sunk costs, v) Imputed costs,  vi) Opportunity cost  vii) Replacement cost, viii) Avoidable and unavoidable cost.


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