ECO 10 ELEMENTS OF COSTING | DEC 2014 | IGNOU SOLVED QUESTION PAPER | IGNOU B.COM SOLVED PAPERS

ECO - 10: ELEMENTS OF COSTING SOLVED QUESTION PAPERS
ELEMENTS OF COSTING
IGNOU SOLVED QUESTION PAPERS 
BACHELOR'S DEGREE PROGRAMME
Term-End Examination: Dec, 2014
ELECTIVE COURSE: COMMERCE
Time: 2 hours; Maximum Marks: 50; (Weightage: 70%)

Note: Attempt any two questions from Section-A and any two questions from Section-B.

Eco 10 Solved Question Papers Elements of Costing

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SECTION — A

1. Define 'Cost Accounting'. State the various limitations of financial accounting that gave rise to the need for cost accounting.        3, 7

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”.

Limitations of financial statements

Financial Statements suffers from various limitations which are given below:

(i) Historical Records: Persons like shareholders, investors etc., are mainly interested in knowing the likely position in future. 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: Price level change and purchasing power of money are inversely related. 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) Suffers from the Limitations of financial statements: Since analysis of financial statements is based on the information given in the financial statements, it suffers from all such limitations from which the financial statements suffer.

(v) Not free from Bias: Financial statements are largely affected by the personal judgement of the accountant in selecting accounting policies. Therefore, financial are not free from bias.

(vi) Variation is accounting practices: Different firms follow different accounting practices. For example, depreciation can be provided either on SLM basis or WDV basis. Profits earned or loss suffered will be different when different practices are followed. Therefore, a meaningful comparison of their financial statements is not possible.

2. (a) Explain ABC analysis for inventory control with the help of suitable examples.         5, 5

Ans: ABC Analysis: ABC System: In this technique, the items of inventory are classified according to the value of usage. Materials are classified as A, B and C according to their value.

Items in class ‘A’ constitute the most important class of inventories so far as the proportion in the total value of inventory is concerned. The ‘A’ items constitute roughly about 5-10% of the total items while its value may be about 80% of the total value of the inventory.

Items in class ‘B’ constitute intermediate position. These items may be about 20-25% of the total items while the usage value may be about 15% of the total value.

Items in class ‘C’ are the most negligible in value, about 65-75% of the total quantity but the value may be about 5% of the total usage value of the inventory.

The numbers given above are just indicative, actual numbers may vary from situation to situation. The principle to be followed is that the high value items should be controlled more carefully while items having small value though large in numbers can be controlled periodically.

Advantages of ABC analysis

a. Reduction in investment: under ABC analysis, the materials from group 'A' are purchase in lower quantities as much as possible. With this, the effort to reduce the delivery period is also made. These in turn help to reduce the investment in material.

b. Optimization of Inventory management function: Each class of the inventory gets management attention as per its value and accordingly, manpower is allocated and expenses are incurred to manage it. It ensures that most important items are regularly monitored and closely observed whereas such efforts are expended with for the less important items.

c. Control on high value material: under ABC analysis, strict control can be exercised to the materials in group 'A' that have higher value.

d. Reduction in Storage cost: Since Class “A” material is of high value and are purchase in lower quantities as much as possible, it reduces the total storage cost.

e. Saving in time and cost: Since a signification effort is made for management of the material from group 'A', it helps to save time as well as cost.

f. Opportunity to convert Class B items into Class A: As Class B items hold potential for growth, the business may tap into this opportunity and convert it frequent yet low-value customers into regular, high-value customers to Class A.

Disadvantage of ABC analysis

a)      No Proper classification of material: ABC analysis will not be effective if the material are not classified into the groups properly.

b)      Not suitable if materials are of same value: It is not suitable for the organization where the costs of materials do not vary significantly.

c)       No scientific base: There is no any scientific base for the classification of material under ABC analysis.

Not suitable for small organisation: The classification of the materials into different groups may lead to extra cost. Hence, it may not be suitable for small organization.

(b) State the advantages or disadvantages of time wage system.

3. Write short notes on any two of the following:                                            5, 5

a)         LIFO method of pricing issue of materials.

Ans:  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.

Advantages:

a. Issues are based on actual cost.

b. Issue price reflects current market price.

c. Product cost will be based on current market price and hence will be more realistic.

d. There is no unrealized profit or loss.

e. Simple to operate if purchases are not many and prices are steady or rising.

f. When prices are raising this method is helpful in preparation of quotation or estimates.

                Disadvantages:

a. This method involves considerable clerical work.

b. Under felling price, issues are priced at lower prices and stocks are valued at higher rates.

c. Stock of material shown in the balance sheet will not reflect market price.

d. Due to variation in prices, comparison of cost of similar job is difficult.

e. This method is not accepted by the income tax authorities.

b)         Behaviour-wise classification of overheads.

c)          Economic Order Quantity.

d)         Fringe benefits and their treatment in cost accounts.

SECTION - B

4. The following are the particulars relating to a contract which began on 1st January 2011 at a contract price of Rs. 50,00,000. The accounting year ended on 31st December 2011.                  10, 5

Particulars

Rs.

Machinery

3,00,000

Materials

17,06,000

Wages paid

14,80,000

Direct Expenses

63,300

Outstanding wages

53,800

Uncertified work

90,000

Overheads

82,400

Materials returned to stores

16,000

Materials in hand (31.12.2011)

37,000

Machinery on hand (31.12.2011)

2,20,000

Work certified

39,00,000

Cash received

35,10,000

Prepare Contract Account for the period ended 31st December 2011 showing the account of profit that may be taken to the credit of Profits and Loss Account of the year. Also show the account of work-in-progress as it would appear in the balance sheet of the year.

5. In a factory the product passes through two processes A and B. A loss of 5% is allowed in process A and 2% in process B, nothing being realised by disposal of the wastage.         15

During April, 2012, 10,000 units of material costing Rs. 60 per unit were introduced in process

A. The other costs were as follows:

 

Process A (Rs.)

Process B (Rs.)

Other materials

Labour

Overheads

 

1,00,000

60,000

61,400

60,000

46,000

The output was 9,300 units from process A. 9,200 units were produced from process B which were transferred to the warehouse. 8,000 units of the finished product were sold at Rs. 150 per unit, the selling and distribution expenses were Rs. 20 per unit. Prepare the Process Accounts and a statement of profit and loss of the firm for April 2012 assuming there were no opening stocks of any type.

Solution:-





6. (a) From the following invoice received from a supplier, prepare a statement showing the material cost per unit :      9,6 1

Quantity

Materials

Rate (Rs. )

Amount (Rs. )

250 kgs

P

100

25,000

150 kgs

Q

120

18,000

 

Less: Trade discount

 

43,000

– 1,290

 

41,710

Add:

Cost of containers

Cartage and Freight

Octroi duty

 

460

2,000

430

44,600

 Capacity of each container is 50 kgs. Containers will be returned at a value of Rs. 27.50 each.

(b) Explain the main features of Taylor's Differential Piece Rate System of wage payment.

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