Term-End Examination: Dec, 2016
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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1. Explain the various steps that are usually taken in connection with the purchase of materials in a manufacturing concern.                              10

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.


2. (a) State the factors to be considered before installation of a system of costing.                         5+5

Steps in Installation of a Costing System

The costing system of an organization should be carefully planned in order to achieve its objectives. The important steps for the installation of a costing system are discussed below:

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.


(b) Explain any two methods of costing with suitable examples.

Methods of Costing

The methods of costing are as follows:

1)      Job Costing: The job costing methods are applicable where the unit of manufacture is one and complete in itself. They include printers, job foundries, tool manufactures, and contractors, etc.

2)      Contract Costing: This method if applied in undertakings erecting buildings or carrying out constructional works, e.g., House buildings, ship building, Civil Engineering contracts. Here the cost unit is one and completed in itself. 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.

3)      Batch Costing: In this method, a batch of similar or identical products is treated as a job. Here the unit of cost is a batch of group of products, costs are collected and analyzed according to batch numbers and the costs are ascertained batch wise. This method is applied in pharmaceutical industries where medicines or injections are manufactures batch wise or in general engineering factories producing components in convenient batches.

4)      Process Costing: Process costing method is applicable to those industries manufacturing a number of units of output requiring processing. Here an article has to undergo two or more processes for reaching the stage of finished goods and succeeding process till completion.

5)      Unit costing: This method is also known as single or output costing. The objective of this method is to ascertain the total cost as well as the cost per unit. A cost sheet is prepared taking into account the cost of material, labour and overheads, Unit costing is applicable in the case of mines, oil drilling units, cement works, brick works and units manufacturing cycles, radios, washing machines etc.

6)      Operating costing: This method is followed by industries which render services. To ascertain the cost of such services, composite units like passenger kilometers and tone kilometers are used for ascertaining costs. For example, in the case of a bus company, operating costing indicates the cost of carrying a passenger per kilometer.

7)      Operation costing: This is a more detailed application of process costing. It involves costing by every operation. This method is used where there is mass production of repetitive nature involving a number of operations. The main purpose of this method is to ascertain the cost of each operation.

8)      Multiple Costing: It is also known as composite costing. It refers to a combination of two or more of the above methods of costing. It is adopted in industries where several parts are produced separately and assembled to a single product. 


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

a)         Bin card

Bin Card: Bin is a place where materials are kept in. It may be a rack, container, shelf or space where stores are kept. Bin card is a document showing the particulars of materials kept in the bin. It is a document attached to the bin disclosing the quantitative details of materials received, issued and the closing balance. A bin card is used for each item of material. Each receipt and issue is recorded on the bin card in a chronological order and the latest balance is shown after each receipt and issue. Bin card is maintained by the store keeper. It indicates information like different stock levels. No, name of material, material code number, stores ledger folio number, quantity of materials received, issued and the balance in hand.

b)         Inventory turnover Ratio


Inventory Turnover: Inventory Turnover is a ratio of the value of the materials consumed during a period to the average value of inventory held during that period.

If the inventory turnover rate in terms of value of materials is high, or if the length of the inventory turnover period is short, the material is said to be fast moving. So if the rate of consumption is fast or if the inventory turnover rate is good, it is a healthy measure of efficiency of materials control, as the capital employed is properly utilized.


c)          Machine Hour Rate

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

d)         Apportionment of factory overheads


Departmentalisation or primary distribution of overheads and Allocation and Apportionment of Overheads

After classification of overheads all the items of overheads are collected properly under suitable account heading. The next step is allocation and apportionment of overheads. This is also known as departmentalization or primary distribution of overheads.

Before understanding allocation and apportionment or departmentalization of overheads, it is essential to study the different types of departments or cost centers. In a manufacturing concern there can be broadly two categories of departments namely production departments and service departments.

Production Departments: Production departments are those departments where actual process of manufacturing is carried on. For example in a cotton textile mill, spinning, weaving and finishing departments are production departments. In the production departments, with the help of manual and or machine operations the raw materials are converted to finished goods.

Example: In steel, rolling mill, hot mill, cold mill, polishing, grinding are the production departments.

Service Departments: Service departments are auxiliary and are those departments which are not directly engaged in production. These departments are essential for smooth and efficient running of production departments. Such departments render services such as repairs, maintenance, electricity, etc. for the benefit of other departments.

Example: Stores, cost office, personnel dept. labour welfare dept., canteen, time keeping, repairs and maintenance, tool room, hospital etc.

A department may be either production department or service department depending upon the nature and function. But there are some service departments which occasionally engaged in production apart from rendering services. These are called partly producing departments. For example, a carpentry unit which does repairs of furniture and fittings may be engaged to manufacture packing boxes. In such case it will be a partly producing department.

Allocation of Overhead Expenses: Allocation is the process of identification of overheads with cost centres. An expense which is directly identifiable with a specific cost centre is allocated to that centre. So it is the allotment of whole item of cost to a cost centre or cost unit or refers to the charging of expenses which can be identified wholly with a particular department. For example, the whole of overtime wages paid to the workers relating to a particular department should be charged to that department. So, the term allocation means the allotment of the whole item without division to a particular department or cost centre.

Apportionment of Overhead Expenses: Cost apportionment is the allotment of proportions of items to cost centres or cost units on an equitable basis. The term refers to the allotment of expenses which cannot identify wholly with a particular department. Such expenses require division and apportionment over two or more cost centres or units. So cost apportionment will arise in case of expenses common to more than one cost centre or unit. It is defined as the allotment to two or more cost centres of proportions of the common items of cost on the estimated basis of benefit received. Common items of overheads are rent and rates, depreciation, repairs and maintenance, lighting, works manager’s salary etc.



4. The profit disclosed by cost accounts was Rs. 17,000. The following details are ascertained on comparison of cost and financial accounts:                                          15



a)          Over recovery of overhead in cost accounts

b)         Loss charged in financial accounts only

c)          Depreciation charged in cost books

d)         Depreciation charged in financial books

e)         Loss due to theft of stock recorded in cost accounts

f)           Interest on Investment received

g)          Income tax paid

h)         Bank Interest received not recorded in cost books

i)            Stock adjustment (Credited in financial books)

j)           Works overhead under-recovered in costing books












Prepare a reconciliation statement and find out the profit as per financial accounts.               


5. A worker under Halsey Method of remuneration has a day rate of Rs. 72 per week of 48 hours plus a cost of living bonus of Rs. 0.60 per hour worked. He is given an 8 hour task to perform which he accomplished in 6 hours. He is allowed 30% of the time saved as premium bonus. What would be his total hourly rate of earnings, and what difference would it make if he was paid under Rowan Method.                        8, 7


6. (a) From the following information, prepare a Stores Ledger A/C as per FIFO method of pricing of issue of material                     10






May 1, 2014

May, 3, 2014

May 4, 2014

May 6, 2014

May 8, 2014

May 9, 2014

Opening balance

















The weekly physical stock taking on April 7, 2014 showed a shortage of 100 units.

(b) From the following information, calculate Economic Order Quantity:                         5

a)         Annual demand 12,000 units

b)         Ordering cost Rs. 90 per order

c)          Inventory carrying cost per annum Rs. 15 per unit



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