Gauhati University Solved Papers
MANAGEMENT ACCOUNTING Solved Papers (May-June’ 2014)
(MAJOR)
Full Marks: 80
Time Allowed: 3 hours
Answer either in English or Assamese
The figures in the margin indicate full marks for the questions
1. (a) State whether the following statements are True or False: 1x5=5
1) Marginal Costing regards only variable
cost; but fixed cost is treated as period cost.
Ans: True
2) Standard Cost is a predetermined
calculation of how much costs should be under specified conditions.’
Ans: True
3) Budgetary control cannot be applied in
parts or segments and it is a composite and comprehensive item.
Ans: True
4) _____ is a cost measured by the
change in cost due to change in output by aggregate of all units taken
together. (Choose the most appropriate option from: marginal cost, fixed cost,
joint cost)
Ans: marginal cost
5) Management accounting does not embrace
presentation of accounting information that assists management in its operating
activity and undertaking managerial decisions.
Ans: False
(b) Fill in the
blank with appropriate word/words: 1x5=5
1) Cost volume profit (CPV) technique is based
on the assumption that fixed cost, variable cost and selling price per unit are
_____ for the time period analysed. (Choose from: constant; variable;
semi-variable)
Ans: constant
2) All the budgets like production, sales
material, labour expenses are then integrated to form a single budget is known
as _____.
Ans: Master Budget
3) Standard cost is a _____ cost which is
calculated from management’s standards of efficient operation and the relevant
necessary expenditure.
Ans: Predetermined cost
4) When actual cost is greater than
standard cost, then variance is _____.
Ans: Adverse
5) Electronic data processing and real
time information sharing can be facilitated by _____ accounting system.
Ans: Computerised
(c) Write brief
answers to the following in about 50 words
each: 2x5=10
1) State the
nature of management accounting.
Ans: Nature of management accounting
The task of management accounting involves furnishing of accounting data to the management for basing its decisions on it. It also helps, in improving efficiency and achieving organisational goals. The following are the main characteristics of management accounting:
1. Providing Accounting Information.
2. Cause and Effect Analysis.
3. Use of Special Techniques and Concepts.
4. Taking
Important Decisions.
2) State the
meaning of marginal cost and its use.
Ans: Marginal Cost: The term Marginal cost means the additional
cost incurred for producing an additional unit of output. It is the addition
made to total cost when the output is increased by one unit. Marginal cost of
nth unit = Total cost of nth unit- total cost of n-1 unit. E.g. When 100 units
are produced, the total cost is Rs. 5000.When the output is increased by one
unit, i.e., 101 units, total cost is Rs.5040.Then marginal cost of 101th unit
is Rs. 40[5040-5000]
Marginal cost is also equal to the total variable cost of
production or it is the aggregate of prime cost and variable overheads. The
chartered Institute of Management Accountants [CIMA] England defines Marginal
as “the amount at any given volume of output by which aggregate costs are
changed if the volume of output is increased or decreased by one unit.
3) Discuss
the reasons for preparation of flexible budget.
Ans: Flexible Budget: 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.
Uses of flexible budget
1. In flexible budget, all possible volume of output or level of
activity can be covered.
2. Overhead costs are analysed into fixed variable and
semi-variable costs.
3. Expenditure can be forecasted at different levels of activity.
4) How does
variance arising in standard costing?
Ans: The deviation of the actual cost or
profit or sales from the standard cost or profit or sales is known as
“Variance”. When actual cost is less than standard cost or actual profit is
better than standard profit it is known as favourable variance and such a
variance is usually a sign of efficiency of the organisation. On the other
hand, when actual cost is more than the standard cost or actual profit or
turnover is less than standard profit or turnover it is called unfavourable or
adverse variance and is usually an indicator of inefficiency of the
organisation. Variance of different items of cost provide the key to cost
control because they disclose whether and to what extent standards set have
been achieved.
5) What is
the meaning of budget?
Ans: Budget: A
budget is the monetary and / or quantitative expression of business plans and
policies to be pursued in the future period of time. Budgeting is preparing
budgets and other procedures for planning, coordination and control or business
enterprises.
I.C.M.A. defines a budget as “A financial
and / or quantitative statement, prepared prior to a defined period of time, of
the policy to be pursued during that period for the purpose of attaining a
given objective”.
2. Write short
notes on any four of the
following: 5x4=20
a) Break
even analysis.
Ans: 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., breakeven point.
Cost-Volume-Profit analysis is analysis of
three variables i.e., cost, volume and profit which explores the relationship existing amongst costs,
revenue, activity levels and the resulting
profit. It aims at measuring variations of profits and costs with
volume, which is significant for business profit planning.
CVP analysis makes use of principles of
marginal costing. It is an important tool of planning for making short term
decisions. The following are the basic
decision making indicators in Marginal Costing:
(a) Profit Volume Ratio (PV Ratio) / Contribution Margin ratio
(b) Break Even Point (BEP)
(c) Margin of Safety (MOS)
(d) Indifference Point or Cost Break Even Point
(e) Shut-down Point
b) Distinction
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. |
c) Assumptions
of marginal costing.
Ans: Assumptions
in Marginal Costing
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.
d) Use of
accounting information for management purpose.
Ans: Use of accounting information for
managerial purpose:
1. Providing Accounting Information. Management accounting is based on accounting information. The collection and classification of data is the primary function of accounting department. The information so collected is used by the management for taking policy decisions. Management accounting involves the presentation of information in a way it suits managerial needs.
2. Cause and Effect Analysis. Financial accounting is limited to the preparation of profit and loss account and finding out the ultimate result, i.e., profit or loss Management accounting goes a step further. The ‘cause and effect’ relationship is discussed in management accounting. If there is a loss, the reasons for the loss are probed. If there is a profit, the factors directly influencing the profitability are also studies. So the study of cause and effect relationship is possible in management accounting.
3. Use of Special Techniques and Concepts. Management accounting uses special techniques and concepts to make accounting date more useful. The techniques usually used include financial planning and analysis, standard costing, budgetary control, marginal costing, project appraisal, control accounting, etc. The type of technique to be used will be determined according to the situation and necessity.
4. Taking Important Decisions. Management accounting helps in taking various important decisions. It supplies necessary information to the management which may base its decisions on it. The historical date is studies to see its possible impact on future decisions. The implications of various alternative decisions are also taken into account while taking important decisions.
5. Achieving of Objectives. In management accounting, the accounting information is used in such a way that it helps in achieving organisational objectives. Historical date is used for formulating plans and setting up objectives. The recording of actual performance and comparing it with targeted figures will give an idea to the management about the performance of various departments. In case there are deviations between the standards set and actual performance of various departments corrective measures can be taken at once. All this is possible with the help of budgetary control and standard costing.
e) Use of
budgetary control as a control device.
Ans: A budget is a blue print of a plan expressed in
quantitative terms. Budgeting is technique for formulating budgets. Budgetary Control, on the
other hand, refers to the principles,
procedures and practices of achieving given objectives through budgets. Here are the some uses of Budgetary Control:
a)
Maximization
of Profit: The budgetary control aims at the maximization of profits of the enterprise. To achieve this aim, a proper planning and
co-ordination of different functions is undertaken. There is proper control
over various capital and revenue expenditures. The resources are put to the
best possible use.
b) Efficiency:
It enables the management to conduct its business activities in an efficient
manner. Effective utilization of scarce resources, i.e. men, material,
machinery, methods and money - is made possible.
c)
Specific
Aims: The plans, policies and goals are decided by the top management.
All efforts are put together to reach the common goal of the organization.
Every department is given a target to be achieved. The efforts are directed towards achieving come specific aims. If there is no
definite aim then the efforts will be wasted in pursuing different aims.
d) Performance
evaluation: It provides a yardstick for measuring and evaluating the
performance of individuals and their departments.
e)
Economy: The planning of expenditure will be systematic and there will be
economy in spending. The finances will be put to optimum use. The benefits
derived for the concern will ultimately extend to industry and then to national
economy. The national resources will be used economically and wastage will be
eliminated.
f) Standard
Costing and Variance analysis: It creates suitable conditions for the
implementation of standard costing system in a business organization. It
reveals the deviations to management from the budgeted figures after making a
comparison with actual figures.
f) Variance
analysis in standard costing.
Ans: Variance
analysis is the process of analysing variance by sub-dividing the total
variance in such a way that management can assign responsibility for off
standard performance. It, thus, involves the measurement of the deviation of
actual performance from the intended performance. That is, variance analysis is
a tool to measure performances and based on the principle of management by
exception. In variance analysis, the attention of management is drawn not only
to the monetary value of unfavourable and favourable managerial performance but
also to the responsibility and causes for the same. After the standard costs
have been fixed, the next stage in the operation of standard costing is to
ascertain the actual cost of each element and compare them with the standard
already set. Computation and analysis of variances is the main objective of
standard costing. Actual cost and the standard cost is known as the ‘cost
variance’.
As per I.C.M.A, Variance Analysis is “the resolution into
constituent parts and explanation of variances”. The definition indicates two
aspects-resolutions into constituent parts is the first aspect which is nothing
but subdivision of the total cost variance. Explanation of variance includes
the probing and inquiry for causes and responsible persons”.
UTILITY OF
VARIANCES ANALYSIS
a.
Variances are analysed to find out the causes
or circumstances leading to it so that management can exercise proper control.
Variance analysis sub divides the total variance based on difference
contributory causes. This gives a clear picture of the different reasons for
the overall variance.
b.
The sub division of variance establishes and
highlights the interrelationship between different variances.
c.
Variance analysis ‘explains’ the causes for
each variance. It paves way for fixing responsibility for all variances.
Also Read Management Accounting Solved Papers Gauhati University
Management Accounting Solved Papers' 2012
Management Accounting Solved Papers' 2013
3. From the
following information prepare an Income Statement under marginal
costing: 10
|
Products |
||
|
X |
Y |
|
|
Direct materials Direct wages Factory overhead: Fixed Variable Selling overhead: Fixed Variable Sales Opening Stock of finished goods valued at
variable cost |
7,500 9,000 3,000 3,900 1,500 2,100 32,500 500 |
33,000 10,500 3,000 13,500 1,500 9,000 77,500 500 |
Fixed factory
overhead and fixed selling overhead were appointed to products x and y on
equitable bases.
Or
Describe the managerial application of
managerial costing techniques in various decision-making
areas. 10
Ans: “Marginal Costing” is a valuable
aid to Management: Marginal costing and Beak even analysis are very useful to
management. The important uses of marginal costing and Break Even analysis are
the following:
1)
Cost
control: Marginal costing divides total cost into
fixed and variable cost. Fixed Cost can be controlled by the Top management to
a limited extent and Variable costs can be controlled by the lower level of
management. Marginal costing by concentrating all efforts on the variable costs
can control total cost.
2)
Profit
Planning: It helps in short-term profit planning by
making a study of relationship between cost, volume and Profits, both in terms
of quantity and graphs. An analysis of contribution made by each product
provides a basis for profit-planning in an organisation with wide range of
products.
3)
Fixation
of selling price: Generally prices are determined by demand and
supply of products and services. But under special market conditions marginal
costing is helpful in deciding the prices at which management should sell. When
marginal cost is applied to fixation of selling price, it should be remembered
that the price cannot be less than marginal cost. But under the following
situation, a company shall sell its products below the marginal cost:
Ø To
maintain production and to keep employees occupied during a trade depression.
Ø To prevent
loss of future orders.
Ø To dispose
of perishable goods.
Ø To
eliminate competition of weaker rivals.
Ø To
introduce a new product.
Ø To help in
selling a co-joined product which is making substantial profit?
Ø To explore
foreign market
4)
Make or Buy: Marginal
costing helps the management in deciding whether to make a component part
within the factory or to buy it from an outside supplier. Here, the decision is
taken by comparing the marginal cost of producing the component part with the
price quoted by the supplier. If the marginal cost is below the supplier’s price,
it is profitable to produce the component within the factory. Whereas if the
supplier’s price is less than the marginal cost of producing the component,
then it is profitable to buy the component from outside.
5)
Closing down of a department or discontinuing
a product: The firm that has several departments or
products may be faced with this situation, where one department or product
shows a net loss. Should this product or department be eliminated? In marginal
costing, so far as a department or product is giving a positive contribution
then that department or product shall not be discontinued. If that department
or product is discontinued the overall profit is decreased.
6)
Selection of a Product/ sales mix: The marginal
costing technique is useful for deciding the optimum product/sales mix. The
product which shows higher P/V ratio is more profitable. Therefore, the company
should produce maximum units of that product which shows the highest P/V ratio
so as to maximize profits.
7)
Evaluation
of Performance: The different products and divisions have
different profit earning potentialities. The Performance of each product and
division can be brought out by means of Marginal cost analysis, and improvement
can be made where necessary.
8)
Limiting Factor: When a limiting factor restricts the output, a
contribution analysis based on the limiting factor can help maximizing profit.
For example, if machine availability is the limiting factor, then machine hour
utilisation by each product shall be ascertained and contribution shall be
expressed as so many rupees per machine hour utilized. Then, emphasis is given
on the product which gives highest contribution.
9)
Helpful in taking Key Managerial Decisions: In addition to above, the following are the important areas where
managerial problems are simplified by the use of marginal costing :
Ø Analysis of Effect of change in Price.
Ø Maintaining a desired level of profit.
Ø Alternative methods of production.
Ø Diversification of products.
Ø Alternative course of action etc.
4. Explain the
different tools and techniques of management accounting in areas of
decision-making. 10
Ans: Tools and
Techniques Used in Management Accounting: Management accountant
supplies information to the management so that latter may be able to discharge
all its functions, i.e., planning organization, staffing, direction and control
sincerely and faithfully. For doing this, the management accountant uses the
following tools and techniques.
a) Financial planning: Financial planning is the act of deciding in advance about the financial activities necessary for the concern to achieve its primary objectives. It includes determining both long term and short term financial objectives of the enterprise, formulating financial policies and developing the financial procedure to achieve the objectives. The role of financial policies cannot be emphasized to achieve the maximum return on the capital employed. Financial policies may relate to the determination of the amount of capital required, sources of funds, govern the determination and distribution of income, act as a guide in the use of debt and equity capital and determination of the optimum level of investment in various assets.
b) Analysis of financial statements: The analysis is an attempt to determine the significance and meaning of the financial statement data so that a forecast may be made of the prospects for future earnings, ability to pay interest and debt maturities and profitability of a sound dividend policy. The techniques of such analysis are comparative financial statements, trend analysis, funds flow statement and ratio analysis. This analysis results in the presentation of information which will help the business executive, investors and creditors.
c) Historical cost accounting: The historical cost accounting provides past data to the management relating to the cost of each job, process and department so that comparison may be made with the standard costs. Such comparison may be helpful to the management for cost control and for future planning.
d) Standard costing: Standard costing is the establishment of standard costs under most efficient operating conditions, comparison of actual with the standard, calculation and analysis of variance, in order to know the reasons and to pinpoint the responsibility and to take remedial action so that adverse things may not happen again. This aspect is necessary to have cost control.
e) Budgetary control: The management accountant uses the total of budgetary control for planning and control of the various activities of the business. Budgetary control is an important technique of directing business operations in a desired direction, i.e. achieve a satisfactory return on investment.
f) Marginal costing: The management accountant uses the technique of marginal costing, differential costing and break even analysis for cost control, decision-making and profit maximization.
g) Funds flow statement: The management accountant uses the technique of funds flow statement in order to analyze the changes in the financial position of a business enterprise between two dates. It tells wherefrom the funds are coming in the business and how these are being used in the business. It helps a lot in financial analysis and control, future guidance and comparative studies.
h) Cash flow statement: A funds flow statement based on increase or decrease in working capital is very useful in long-range financial planning. It is quite possible that these may be sufficient working capital as revealed by the funds flow statement and still the company may be unable to meet its current liabilities as and when they fall due. It may be due to an accumulation of investments and an increase in trade debtors. In such a situation, a cash flow statement is more useful because it gives detailed information of cash inflow and outflow. Cash flow statement is an important tool of cash control because it 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.
i) Decision making: Whenever there are different alternatives of doing a particular work, it becomes necessary to select the best out of all alternatives. This requires decision on the part of the management. The management accounting helps the management through the techniques of marginal costing, capital budgeting, differential costing to select the best alternative which will maximize the profits of the business.
j) Revaluation accounting: The management accountant through this technique assures the maintenance and preservation of the capital of the enterprise. It brings into account the impact of changes in the prices on the preparation of the financial statements.
k) Statistical and graphical techniques: The management accountant uses various statistical and graphical techniques in order to make the information more meaningful and presentation of the same in such form so that it may help the management in decision-making. The techniques used are Master Chart, Chart of sales and Earnings, Investment chart, Linear Programming, Statistical Quality control, etc.
l) Communication (or Reporting): The success for failure of the management is dependent on the fact, whether requisite information is provided to the management in right form at the right time so as to enable them to carry out the functions of planning controlling and decision-making effectively. The management accountant will prepare the necessary reports for providing information to the different levels of management by proper selection of data to be presented, organization of data and selecting the appropriate method of reporting.
Or
Elaborate
the application of computer and information technology (CIT) in dissemination
of managerial information in management
accounting. 10
|
Office Salaries General
Expenses Depreciation Rent and rates Selling Cost: Travelling
Expenses Sales Office
Expenses Distribution
Cost: Wages Rent |
Rs. 90,000 2% of sales Rs. 7,500 Rs. 8,750 10% of sales 2% of sales Rs. 15,000 5% of sales |
All fixed
expenses are assumed to remain unchanged even at 100% capacity. Draw up Flexible
Administration, Selling and Distribution cost budget, operating at 100% of
normal capacity.
Or
State the initial steps to be taken for
installation of a budgetary control system. In this context highlight the
contents of a budget manual.
Ans: Essentials Factors for the Success of
Budgetary Control: There are
certain steps which are necessary for the successful implementation of a
budgetary control system. They are as follows:
1. Organization for Budgetary Control: The proper organization is essential for the
successful preparation, maintenance and administration of budgets. A budgetary
committee is formed which comprises the departmental heads of various
departments. All the functional heads of various departments are entrusted with
the responsibility of ensuring proper implementation of their respective
departmental budgets. This has been shown in the following chart.
2.
Budget
Centres: A budget
centre is that part of the organization for which the budget is prepared. A
budget centre may be a department, section of a department or any other part of
the department. The establishment of budget centres is essential for covering
all parts of the organization. The budget centres are also necessary for cost
control purposes. The appraisal of performance of different parts of the
organization becomes easy when different centres are established.
3.
Budget
Manual: A budget
manual is a document which tells out the duties and also responsibilities of
various executives concerns with the budgets. It specifies the relation among
various functionaries. A budget manual covers the following:
1)
A budget manual clearly defines the objectives
of budgetary control system. It also gives the benefits and principles of this
system.
2)
The duties and responsibilities of various
persons dealing with preparation and execution of budgets are also given in a
budget manual. It enables the management to know of persons dealing with
various aspects of budgets and clarify their duties and responsibilities.
3)
It gives information about the sanctioning
authorities of various budgets. The financial powers of different managers are
given in the manual for enabling the spending of amount on various expenses.
4)
A proper table for budgets including the
sending of performance reports is drawn so that every work starts in time and a
systematic control is exercised.
5)
The specimen forms and number of copies to be
used for preparing budget reports will also be stated. Budget centres involved
should be clearly stated.
6)
The length of various budget periods and
control points be clearly given.
7)
The procedure to be followed in the entire
system should be clearly stated.
8)
A method of accounting to be used for various
expenditures should also be stated in the manual.
4.
Budget Officers:
The chief
executive who is at the top of the organization appoints some person as budget
officer. The budget officer is empowered to scrutinize the budgets prepared by
different functional heads and to make changes in them, if the situation so demands.
The actual performance of department is communicated to the budget officer. He
determines the deviation in the budgets and takes necessary steps to rectify
the deficiencies.
5.
Budget
Committee: In small
scale concerns, the accountant is made responsible for preparation and
implementation of budgets. In large scale concerns a committee known as budget
committee is formed. The heads of all departments are made members of this
committee. The committee is responsible for preparation and execution of budgets.
The members of this committee put up the case of their respective departments
and help the committee to take collective discussions. The budget office acts
as coordinator of this committee.
6.
Budget
Period: A budget
period is the length of time for which a budget is prepared. The budget period
depends upon a number of factors. It may be different for different industries
or even it may be different in the same industry or business.
7.
Determination
of Key Factors: The
budgets are prepared for all functional areas. These budgets are
inter-departmental and inter-related. A proper coordination amount different
budget is necessary for making the budgetary control a success. The constraints
on some budgets may have an effect on other budgets too. A factor which influences
all other budgets is known as Key Factor or Principal Factor. There may be a
limitation on the quality of goods a concern may sell. In this case, sales will
be a key factor and all other budgets will be prepared by keeping in view the
amount of goods the concern will be able to sell. The raw material supply may
be limited; so production, sales and cash budgets will be decided according to
raw materials budget. Similarly, plant capacity may be key factor if the supply
of other factor is easily available.
|
Quantity of
materials purchased units Value of materials
purchased Standard
quality of materials required – Per ton to
output Standard rate
of material Opening Stock
of materials Closing Stock
of materials Output during
the period |
3,000 units Rs. 9,000 25 units Rs. 2.50 per
unit 10 units 510 units 75 units |
Or
State the advantages of standard costing.
Discuss the steps of setting standard costs. 10
Ans: Advantages
of standard costing:
a. Cost control: Standard costing is universally
recognised as a powerful cost control system. Controlling and reducing costs
becomes a systematic practice under standard costing.
b. Elimination of wastage and inefficiency: Wastage
and inefficiency in all aspects of the manufacturing process are curtailed,
reduced and eliminated over a period of time if standard costing is in
continuous operation.
c. Norms: Standard
costing provides the norms and yard sticks with which the actual performance
can be measured and assessed.
d. Locates sources of inefficiency: It
pin points the areas where operational inefficiency exists. It also measures
the extent of the inefficiency.
e. Fixing responsibility: Variance
analysis can determine the persons responsible for each variance. Shifting or
evading responsibility is not easy under this system.
f. Management by exception: The principle
of ‘management by exception can be easily followed because problem areas are
highlighted by negative variances.
Introduction of Standard Costing System in an
Establishment
Introducing standard costing in any
establishment requires the fulfillment of following preliminaries:
a) Establishment of cost centers: A cost centre is a location,
person or item of equipment for which costs may be ascertained and used for the
purpose of cost control. The cost centers divide an entire organisation into
convenient parts for costing purpose. The nature of production and operations,
the organisational structure, etc. influence the process of establishing cost
centres. No hard and fast rule can be laid down in this regard. Establishment
of the cost centres is essential for pin pointing responsibility for variances.
b) Classification and codification of accounts: The
need for quick collection and analysis of cost information necessitates
classification and codification. Accounts are to be classified according to
different items of expenses under suitable headings. Each of the headings is to
be given a separate code number. The codes and symbols used in the process
facilitate introduction of computerization.
c) Determining the types of standards and their basis: 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.
d) Determining
the expected level of activity: Capacity of operation or level of
activity expected over a future period is vital in fixing current or short-term
standards. When the activity level is decided on the basis of sales or
production, whichever is the limiting factor; all standard can be developed
with the activity level as the focal point. The purchase of material, usage of
material, labour hours to be worked, etc. are solely governed by the planned
level of activity.
e) Setting
standards: Standards may be either too strict or too liberal because
they may be based on theoretical maximum efficiency attainable good performance
or average past performance. Setting standards may also be called
developing standards or establishment of standard cost because as a consequence
of setting standards for various aspects, standard cost can be computed.
Material quantity standards: The following procedure is usually
followed for setting material quantity standards.
(a) Standardization of products: Detailed
specifications, blueprints, norms for normal wastage etc., of products along
with their designs are settled.
(b) Product classification: Detailed
classified list of products to be manufactured are prepared.
(c) Standardization of material: Specifications,
quality, etc., of materials to be used in the standard products are settled.
(d) Preparation of bill of materials: A
bill of material for each product or part showing description and quantity of
each material to be used is prepared.
(e) Test runs: Sample or test runs
under regulated conditions may be useful in setting quantity standards in a
precise manner.
Labour quantity standards: The following are the steps involved in
setting labour quantity standards:
(a) Standardization of products: Detailed
specifications, blueprints, norms for normal wastage etc., of products along with
their designs are settled.
(b) Product classification: Detailed
classified list of products to be manufactured are prepared.
(c) Standardization of methods: Selection
of proper machines to use proper sequence and method of operations.
(d) Manufacturing layout: A plan of
operation for each product listing the operations to be performed is prepared.
(e) Time and motion study is
conducted for selecting the best way of completing the job.
(f) The
operator is given training to perform the job or operations in the best
possible manner.
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