ECO 10 ELEMENTS OF COSTING | DEC 2015 | 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, 2015
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

JUNE 2014

JUNE 2015

JUNE 2016

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DEC 2014

DEC 2015 (CURRENT PAGE)

DEC 2016

DEC 2017

DEC 2018

DEC 2019 COMING SOON


SECTION - A

1.(a) Write a brief note on "Costing as an Aid to Management".                               5

Advantages of Cost Accounting (Aid to Management)

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.

(b) Explain the concept of Fixed costs and Variable costs. What is the significance of such classification?      5

Fixed or period costs are commonly described as those which remain fixed in total amount with increase or decrease in the volume of output or productive activity for a given period of time. Examples of fixed costs are rent, insurance of factory building, factory manager’s salary etc.

Variable or product costs are those which vary in total in direct proportion to the volume of output. Examples are direct material costs, direct labour costs, power, repairs etc. Such costs are known as product costs because they depend on the quantum of output rather than on time. 

2. Describe the steps usually followed in the purchase of raw material by a manufacturing concern.    10

Ans: 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. 

3. (a) What do you mean by Absorption of overheads ? Explain any one method of overhead absorption with an example.            5

Ans: Absorption of Overheads

The most important step in the overhead accounting is ‘Absorption’ of overheads. CIMA defines absorption as, ‘the process of absorbing all overhead costs allocated or apportioned over a particular cost center or production department by the units produced.’ In simple words, absorption means charging equitable share of overhead expenses to the products. As the overhead expenses are indirect expenses, the absorption is to be made on some suitable basis. The basis is the ‘absorption rate’ which is calculated by dividing the overhead expenses by the base selected. A base selected may be any one of the basis given below. The formula used for deciding the rate is as follows,

Overhead Absorption Rate = Overhead Expenses/ Units of the base selected.

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 products 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

e.      Direct Labor Hour Method: Under this method, the rate of absorption is calculated by dividing the overhead expenses by the direct labor hours. The formula is as follows. Budgeted or Actual Overhead Expenses/Direct Labor Hours

f.        Machine Hour Rate: Where machines are more dominant than labor, machine hour rate method is used. CIMA defines machine hour rate as ‘actual or predetermined rate of cost apportionment or overhead absorption, which is calculated by dividing the cost to be appropriated or absorbed by a number of hours for which a machine or machines are operated or expected to be operated’. In other words, machine hour rate is the cost of operating a machine on per hour basis. The formula for calculating the machine hour rate is, Budgeted or Actual Overhead Expenses/ Machine Hours

g.       Selling Price Method: In this method, selling price of the products is used as a basis for absorbing the overheads. The logic used is that if the selling price is high, the product should bear higher overhead cost. Ratio of selling price is worked out and the overheads are absorbed.

(b) Distinguish between Job Costing and Contract Costing.                         5

Difference between Job costing and Process Costing

Basis of distinction

Job Costing

Process Costing

Basic

Job costing is used when the cost object is an individual (or a lot/batch) unit or a distinct product or service.

Process Costing is generally used for a mass of identical product or service.

Accumulation of Cost

Costs can be accumulated by each individual product or service.

The Costs are accumulated in a period. The total costs in a period are divided over the number of units to get an average unit cost.

Cost Determination

Job costing is done against a specific order being produced.

Costs are compiled for each process over a period of time.

Cost Calculation

Costs are calculated when a job is over.

Costs are calculated at the end of a cost period like an accounting year.

Transfer

There are usually no transfers of costs from one job to another.

Transfer of costs from one process to another is made as the product moves from one process to the other.

Forms and Details

There is more paper work.

It has lesser paper work.

Inventory

There is little or no inventory.

There is regular and significant inventory.

Mechanization

It is less amenable to mechanization & automation.

It is more amenable to mechanization & automation.


SECTION - B

4. (a) A firm is engaged in the production of a product x. It provides the following cost information for a month and asks you to prepare its cost sheet:                    10

Raw material consumed

Direct wages paid

Works overheads

Office overheads

Gross output during the month

Rejection

Sale value of rejected units

Rs. 2,56,000

Rs. 54,000

30% of wages

10% of works cost

1,000 units

10% of Gross output

Rs. 2,500

Prepare the necessary cost sheet.

Solution:-


(b) Why do you need reconciliation of cost and financial accounts? Explain.                       5

Reasons for disagreement between Profits as per financial accounting and Profits as per cost accounting:

The difference in the profitability of cost and financial records may be due to the following reasons.

1)      Items included in the financial accounts but not in cost accounts.

Ø  Purely financial income- such as interest received on bank deposits, interest and dividend on investments, rent receivables, transfer fee received, profit on the sale of assets etc.

Ø  Purely financial charges – such as losses due to scraping of machinery, losses on the sale of investments and assets, interest paid on the bank loans, mortgages, debentures etc., expenses of company’s transfer office, damages payable at law etc.

Ø  Appropriation of profit – the appropriation of profit is again a matter which concerns only financial accounts. Items like payment of income tax and dividends transfer to reserve, heavy donations, writing off of preliminary expenses, goodwill and patents appear only in profit and loss appropriation account and the costing profit and loss a/c is not affected.

2)      Items included in cost accounts only: There are certain items which are included in cost accounts but not in financial accounts. They are: Charges in lieu of rent where premises are owned, interest on capital employed in production but upon which no interest is actually paid.

3)      Under/Over absorption of overhead expenses: In cost accounts, overheads are absorbed at predetermined rates which are based on past data. In the financial accounts the actual amount incurred is taken into account. There arise a difference between the actual expenses and the predetermined overheads charged to product or job.

If overheads are not fully recovered, which means that the amount of overheads absorbed in cost accounts is less than the actual amount, the shortfall is called as under recovery or under absorption. If overhead expenses recovered in cost accounts are more than that of the actually incurred, it is called over absorption. Thus, both the over and under recovery may cause the difference in the profits of both the records.

4)      Different basis of stock valuation: In cost accounts, the stock of finished goods is valued at cost by FIFO, LIFO, average rate, etc. But, in financial accounts stocks are valued either at cost or market price, whichever is less.

The valuation of work-in-progress may also lead to variation. In financial books only prime cost may be taken into account for this purpose whereas in cost accounts, it may be valued at prime cost plus factory overhead.

5) Different basis of depreciation adopted: The rates and methods of charging depreciation may be different in two sets of accounts.

5. (a) From the following information, calculate Economic Order Quantity (EOQ) :                           7

Annual usage

Cost of Material per unit

Ordering cost per order

Annual carrying cost of one unit

6,000 units

Rs. 2.50

Rs. 15.00

20% of inventory value

Solution:-

(b) Work out the Machine Hour Rate for the following machine:                                       8

Cost of Machine

Installation expenses

Working life

Working Hours

Repair charges

Power 10 units per hour

Lubricating oil

Consumable stores

Wages of operator

Rs. 90,000

Rs. 10,000

10 years

2,000 per year

50% of depreciation

@ 1.50 per unit

Rs. 12 per day of 8 hours

Rs. 10 per day of 8 hours

Rs. 200 per day

Solution:-

6. M/s Buildcon Ltd. undertook a contract construct a multi-storey building on 1-5-2013. The contractee agreed to pay 80% of the work certified and retain 20% till the completion of contract. The details of the expenditure and other details during the period 2013-14 are given below. The contract price was 50,00,000.

 

Rs.

Raw materials used

9,00,000

Labour paid

7,50,000

Carriage

37,000

Administration cost

2,43,000

Wages payable

30,000

Work certified

29,00,000

Work uncertified

2,00,000

Cash received

80% of work certified

You are required to prepare Contract Account, Contractee's Account for the year 2013-14 and the Balance sheet (Assets side) as would appear in contractor's books as on 31-3-2014.     15

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