Cost Accounting Solved Question Paper 2023 (May/June)
COMMERCE (Core)
Paper: C-408 (Cost Accounting)
Full Marks: 80
Pass Marks: 32
Time: 3 hours
The figures in the margin indicate full marks for the questions
1. (a) Fill in the blanks: 1x4=4
(1) A _______ is a device for the purpose of breaking up costs into
smaller subdivisions.
Ans: Cost Unit
(2) _______ level is the
level above which stocks are not allowed to rise.
Ans: Maximum Level
(3) Costs that contain
both fixed and variable elements are known as _______ costs.
Ans: Semi variable
(4) Under Job Costing,
each job or order is given a ______
Ans: Unique identity
number or Job number
(b) Write True or False: 1x4=4
(1) Opportunity cost is
the cost of opportunity lost.
Ans: True
(2) Labour turnover is
harmful and costly.
Ans: True
(3) All direct costs are
termed as overhead.
Ans: False, Indirect cost
(4) In Contract Costing,
materials purchased or supplied from the stores shall be credited to Contract
A/c.
Ans: False, Debit
2. Write short notes on any four of the following: 4x4=16
(a) Elements 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.
Classifying
costs into various categories serves several purposes:
1. It
helps managers understand how costs behave: By classifying costs as fixed,
variable, or mixed, managers can understand how costs change as the level of
output changes. This can be valuable information when making decisions about
pricing, production, and other aspects of business strategy.
2. It
helps managers assign costs to specific products or departments: By classifying
costs as direct or indirect, managers can assign costs to specific products or
departments. This can be useful for product costing, budgeting, and decision
making.
3. It
helps managers identify costs that can be controlled: By classifying costs as
controllable or uncontrollable, managers can identify costs that can be
influenced or managed by a specific individual or department. This can help
managers make better decisions about how to allocate resources and control
costs.
4. It
helps managers identify relevant costs: By classifying costs as relevant or
sunk, managers can identify costs that will be incurred as a result of a
decision and are therefore relevant to that decision. This can help managers
make better decisions by focusing on the costs that will actually be affected
by a particular decision.
5. It
helps managers understand the level of predictability of costs: By classifying
costs as committed or discretionary, managers can understand the level of
predictability of costs. This can help managers make better decisions about how
to allocate resources and plan for the future.
According
to this classification, the costs are divided into three categories i.e.
Materials, Labour and Expenses. There can be further sub classification of each
element; for example, material into raw material components, and spare parts,
consumable stores, packing material etc. This classification is important as it
helps to find out the total cost, how such total cost is constituted and
valuation of work in progress.
(b) Economic Order Quantity.
Ans: Economics order quantity: Economics order quantity represents the size of the order for which both order, ordering and carrying costs together are minimum. If purchases are made in large quantities, inventory carrying cost will be high. If the order size is small, ordering cost will be high. Hence, it is necessary to determine the order quantity for which ordering and carrying costs are minimum. The formula used for determining economics order quantity is a s follows:
Where,
A is the
annual consumption of material in units.
O is the
cost of placing an order (ordering cost per unit)
C is the
cost of interest and storing one unit of material for the one year (carrying
cost per unit per annum).
(c) Piece-rate System.
Ans: Piece Rate System: The payment of
wages under this system is based upon the out turn of the worker. The rate is
fixed per piece of work and the worker is paid according to the pieces of work
completed or the volume of work done by him, irrespective of the time taken by
him in completing that work. A workman is free to earn as much as his ability,
energy, or skill would allow to him to produce. The piece rate System can be classified
into:
a) Straight Piece Rates: It
is a simple method of making payment at a fixed rate per unit for the units
manufactured. Earnings = Number of units X Rate per unit.
b) Differential Piece Rates: Under this system, efficient workers are paid wages at a lower rate.
A definite standard of efficiency is set for each job and for efficiency below
or above the standard different piece rates are paid according to different
levels of efficiency. The following two methods of wage payment are studied
under this system:
- Taylor Differential
Piece-rate Method, and
- Merrick
Differential Piece Rate Method
Taylor Differential Piece-Rate: F.W. Taylor thought to improve the efficiency of workers by
suggesting two rates of payment of wages: A higher rate to the workers who
product equal to or more than the standard fixed for production during the day
(120%), and a lower rate to the workers who do not achieve the standard (80%).
Merrick Differential Piece-rate: In the Taylor Method, the effect on the wages is quite sharp in the
marginal cases. To remove this defect Merrick suggested three piece rates for a
job as follows:
Percentage
of Standard Output Payment under Merrick
Method
Upto
83% Normal
piece rate
Above
83% and upto 100% 110%
of normal piece rate
Above
100% 120%
of normal piece rate
(d) Machine Hour Rate.
Ans: Machine
hour rate represents the hourly cost of factory overhead for operating a
particular machine and is obtained by dividing the factory expenses connected
with a machine for a given period by the number of hours worked by the machine
during that period.
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.
Where machines are more
dominant than labor, machine hour rate method is used. The formula for
calculating the machine hour rate is, Budgeted or Actual Overhead Expenses/
Machine Hours
(e) Batch Costing.
Ans: According to I.C.M. A., London,
“Batch Costing is that form of specific order costing which applies where
similar articles are manufactured in batches either for sale-or use within the
company”. A ‘Batch’ according to I.C.M. A., London is “a cost unit which
consists of a group of similar articles which maintain its identity throughout
one or more stages of production”.
In batch costing, 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.
3. (a) “Cost Accounting has become an
essential tool of management.” Explain the statement. What are its limitations?
8+6=14
Ans:
Costing is an 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.
Limitations
of Cost Accounting
In spite
of the various advantages claimed by cost accounting, the discipline suffers
from the following limitations:
a) Cost Accounting is costly to
operate: It involves heavy expenditure to operate. The benefits derived by
operating the system are more than the cost.
b) Cost Accounting involves many forms
and statements: It involves usage of many forms and statements which leads
to increase of paper work.
c) Costing may not be applicable in all
types of Industries: Existing methods of cost accounting may not be
applicable in all types of industries. Cost accounting methods can be devised
for all types of industries, and services.
d) It is based on
Estimations: Costing system relies on predetermined data and therefore it
is not reliable. Costing system estimates costs scientifically based on past
and present situations and with suitable modifications for the future. This
leads to accurate cost figures based on which management can initiate
decisions. But for the predetermined costs, cost accounting also becomes
another ‘Historical Accounting’.
e) It is not an exact science: Like
any others accounting system, it is not an exact science but an art that has
developed through theories and practices.
f)
Bias Judgments: Many judgments are biased and depend on
individual discretion.
g) Difference in opinion: Different
views are held by different cost accounts about the items to be includes in
cost.
Or
(b)
From the following particulars, prepare a Cost Sheet for the month of January,
2023: 14
|
Particulars |
Rs. |
|
Stock of raw materials on 1st January,
2023 Stock of raw materials on 31st January,
2023 Purchase of raw materials Productive wages Depreciation Factory rent Materials destroyed by fire Office rent General expenses Selling overhead Number of units produced during the month |
30,000 45,000 2,80,000 63,000 20,000 18,000 2,000 48,000 6,000 15,000 4,000 units |
Stock
of finished goods on 1st January, 2023 was 2,000 units valued at Rs.
30,000.
Stock
of finished goods on 31st January, 2023 was 500 units. Apply FIFO
method.
Ans:
Solution:
S
4. (a)
Two materials X and Y are used as follows:
Minimum
usage – 50 units per week each
Maximum
usage – 150 units per week each
Normal
usage – 100 units per week each
|
|
X |
Y |
|
Ordering Quantity (units) Delivery Period (weeks) |
600 4 to 6 |
1,000 2 to 4 |
Calculate
for each material: 3½
x 4 = 14
(1)
Minimum Level.
(2)
Maximum Level.
(3)
Reordering Level.
(4)
Average Stock Level.
Ans:.png)
Or
(b) Calculate normal and overtime wages payable to a workman on the
basis of the following particulars:
|
Days |
Hours Worked |
|
Monday Tuesday Wednesday Thursday Friday Saturday |
9 8 10 11 9 5 |
Normal
working hours are 8 hours per day and the normal rate of wages is Rs. 12.50 per
hour. Overtime pay is at the under-mentioned rates:
Upto 9
hours in a day at single rate and over 9 hours in a day at double rate.
Alternatively, upto 48 hours in a week at single rate and over 48 hours at
double rate.
Which
is more beneficial to the workman? 14
Ans:
|
Days |
Hours Worked |
Normal Working Hours |
Overtime hours |
|
|
At single rate |
At double rate |
|||
|
Monday Tuesday Wednesday Thursday Friday Saturday |
9 8 10 11 9 5 |
8 8 8 8 8 4 |
1 - 1 1 1 1 |
- - 1 2 - - |
|
|
52 |
44 |
5 |
3 |
Normal wage for 44 hours @ Rs. 12.5 = Rs. 550
Overtime wages:
At single Rate for 5 hours @ Rs. 12.5 per
hour = Rs. 62.50
At Double rate for 3 hours @ Rs. 25 per
hour = Rs. 75
Total = Rs. 687.5
Or
Normal Wages for 48 hours @ Rs. 12.5 per hour
= Rs. 600
Overtime wages for 4 hours @Rs. 25 per hour = Rs. 100
Total = Rs. 700
5. (a) What do you understand by
over-absorption and under-absorption of overheads? What are the causes of
under-absorption and over-absorption of overheads? How are they treated in Cost
Accounts? 2+2+8+2=14
Ans: Over or under absorption
of overheads meaning:
Overhead
expenses are usually applied to production on the basis of predetermined rates.
The pre-determined rate may present estimated or actual cost. The actual
overhead cost incurred and overhead applied to the production will seldom be
the same. But due to certain reasons the difference between two may arise.
Over absorptions: If the amount
applied exceeds, the actual overhead, it is said to be an over absorption of
overheads.
Under absorption: If the amount
applied is short fall of the actual overhead in production it is said to be the
under absorption of overheads. The over or under absorption of overheads may be
termed as overhead variance.
Reason of over or under-absorption of
overheads: The
under or over-absorption of overhead arises due to following reasons:
a) Errors in estimating overheads.
b) Overhead may change due to change in method of production.
c) The seasonal fluctuation in overhead cost in some industries.
d) Underutilization of available capacity, unexpected change in the
volume of output.
e) Valuation of work in progress in wrong process.
Treatment of under and over absorption
of overheads
Once
the under/over absorption is noticed, the following corrective steps are to be
taken to rectify the same.
a) Use of supplementary Rate: The
under/over absorption can be rectified by using the supplementary rate. This
rate is calculated by dividing the under/over absorbed amount of overheads by
the units of the base. The rate so arrived is known to be supplementary rate.
b) Carrying forward to future period: If
the amount of under/over absorption of overheads is small, it may be carried
forward to the future period hoping that it will be rectified in the future.
c) Writing off to Profit and Loss A/c:
Amount of under/over absorption can be written off to Costing Profit and Loss
Account and thus not reflected in the total costs.
Or
(b) A manufacturing company has three production departments and two
service departments. Overhead allocated for a year to these departments are as
follows:
|
|
Production Dept. (Rs.) |
|
Service Dept.(Rs.) |
|
A B C |
5,000 3,000 2,500 |
1 2 |
2,000 3,000 |
The
following percentages are applicable for the apportionment of the costs of the
services departments:
|
Dept. |
A |
B |
C |
1 |
2 |
|
1 2 |
40% 20% |
30% 40% |
10% 30% |
- 10% |
20% - |
Find out the total costs of production departments after
apportionment of the costs of the service departments taking into consideration
inter-departmental services. 14
6. (a) The following
information relates to a building contract for Rs. 10,00,000:
|
|
2021-22
(Rs.) |
2022-23
(Rs.) |
|
Materials issued Direct wages Direct expenses Indirect expenses Work certified Work uncertified Materials at site Plant issued Cash received from
contractor |
3,00,000 2,30,000 22,000 6,000 7,50,000 8,000 5,000 14,000 6,00,000 |
84,000 1,05,000 10,000 1,400 10,00,000 - 7,000 2,000 10,00,000 |
Value of plant as on 31st March,
2022 was Rs. 7,000 and on 31st March, 2023 was Rs. 5,000.
Prepare (1) Contract A/c and (2) Contractee’s
A/c for the years 2021-22 and 2022-23 taking into consideration such profit for
transfer to the Profit & Loss A/c as you think proper. 7+7=14
Or
(b) What is a Reconciliation Statement? Why is it necessary to reconcile
the profit shown by the Cost Accounts and Financial Accounts? Under what
circumstances such reconciliation be avoided? 3+7+4=14
Ans:
Meaning of Reconciliation of Cost and Financial Accounts
When cost
accounts and financial accounts are maintained in two different sets of books,
there will be prepared two profit and loss accounts - one for costing books and
the other for financial books. The profit or loss shown by costing books may
not agree with that shown by financial books. Such a system is termed as,
‘Non-Integral System’ whereas under the integral system of accounting, there
are no separate cost and financial accounts. Consequently, the problem of
reconciliation does not arise under the integral system.
However, where
two sets of accounting systems, namely, financial accounting and cost
accounting are being maintained, the profit shown by the two sets of accounts
may not agree with each other. Although both deal with the same basic transactions
like purchases consumption of materials, wages and other expenses, the
difference of purpose leads to a difference in approach in a collection,
analysis and presentation of data to meet the objective of the individual
system.
Financial
accounts are concerned with the ascertainment of profit or loss for the whole
operation of the organisation for a relatively long period, usually a year,
without being too much concerned with cost computation, whereas cost accounts
are concerned with the ascertainment of profit or loss made by manufacturing
divisions or products for cost comparison and preparation and use of a variety
of cost statements. The difference in purpose and approach generally results in
a different profit figure from what is disclosed by the financial accounts and
thus arises the need for the reconciliation of profit figures given by the cost
accounts and financial accounts.
The
reconciliation of the profit figures of the two sets of books is necessary due
to the following reasons
1. To find out
the reasons for the difference in the profit or loss in cost and financial
accounts and to indicate the position clearly and to be sure that no mistakes
pertaining to accounts have been committed.
2. To ensure the
mathematical accuracy and reliability of cost accounts in order to have cost
ascertainment, cost control and to have a check on the financial accounts.
3. To contribute
to the standardisation of policies regarding stock valuation, depreciation and
overheads.
4. To facilitate
coordination and promote better cooperation between the activities of financial
and cost sections of the accounting department.
5. To place
management in better position to acquaint itself with the reasons for the
variation in profits paving the way to more effective internal control.
When
reconciliation of cost and financial accounting is not necessary?
Integrated
or Integral accounting is a system in which cost and financial accounts are
kept in the same set of books. In such a system, transactions of both cost and
financial accounts are recorded in one combined set of books based on double
entry system. This system eliminates the need for separate sets of account
books for costing and financial accounting purposes. Accounts are designed in
such a way that full information required for costing as well as financial
accounting purposes is obtained from one set of books.
Since
only one set of accounts is maintained under this method, no Costing Profit and
Loss Account is prepared. Thus there is only one figure of profit or loss and,
as such, there is no need for reconciliation of costing and financial profit or
loss.
***
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