Cost Accounting Solved Question Paper 2025 (May/June) [Dibrugarh University BCOM 2nd SEM NEP Syllabus]

Cost Accounting Solved Question Paper 2025 (May/June)
Dibrugarh University BCOM 2^nd SEM NEP Syllabus

COMMERCE (Minor)

The figures in the margin indicate full marks for the questions

Paper: MINFIN2 (Cost Accounting)

Full Marks: 60 (80 for 2023 Batch)

Time: 2 hours (3 hours for 2023 Batch)

1. (a) Fill in the blanks: (1×4=4)

(i) Costing is a technique of ________.

Ans: Ascertaining costs

(ii) ________ method of pricing issues is suitable in case of raising prices.

Ans: LIFO

(iii) Depreciation is a ________ expense.

Ans: Fixed Expenses

(iv) ________ costing method is applicable for dairy industry.

Ans: Process

(b) Write True or False: (1×4=4)

(i) Two types of idle times are normal and abnormal idle time.

Ans: True

(ii) Cost accounting is useful for ascertaining the profit or loss of a firm.

Ans: False

(iii) Canteen expenses are apportioned on the basis of number of workers.

Ans: True

(iv) Service costing is also known as output costing.

Ans: False, Service costing is also known as operating costing and unit costing is also known as output costing.

2. Write short notes on any three of the following: (4×3=12)

(a) Activity-based costing

Ans: The activity-based costing (ABC) system is a method of accounting which can be used to find the total cost of activities necessary to make a product. The ABC system assigns costs to each activity that goes into production. It is a costing method that identifies activities in an organization and assigns the cost of each activity to all products and services according to the actual consumption by each.

In this system, first costs are traced to activities and then to products, where as in traditional system, costs are first traced not to activities but to an organisational unit, such as department or plant and then to products. In ABC system, activity means a unit of work; here cost driver is a factor, such as the level of activity or volume that affects costs. Cost drivers signify factors, forces or events that determine the costs of activities. This system brings accuracy and reliability in product cost determination by emphasizing on cause and effect relationship in the cost incurrence.

Objectives of Activity Based Costing: The major objectives of Activity Based Costing are as follows –

* To identify value added activities in transactions.

* To focus high cost activities.

* To distribute overheads on the basis of activities.

* To identify the opportunities for improvements and reduction of costs.

* To validate the success of the quality drive with ABC.

(b) Time wage system

Ans: Time Rate System: In this system, a worker is paid on the basis of attendance for the day or according to the hours of the day, regardless of the output. This system is also known as time work, day work, day age rate or day rate. The wage rate of the day worker may be fixed on hourly, daily, weekly, fortnightly, or monthly basis depending on the practice followed in the concern. There are two variants of this system, each differing only in so far as the fixation of the time rate is concerned. They are:

1. Measured Day work or Graduated Time Rate

2. Differential Time Rate

1. Graduated Time Rate: Under this method wages are paid at time rates which vary according to

* Merit-rating of the workers, or

* Changes in the cost of living index.

It the cost of living goes up, the wages also go up proportionately, and vice versa. Thus the works get the real wages. Similarly, the workers having higher merit rating get higher wages, and the workers with lower rating get lower wages.

2. Differential Time Rate: Workers are paid rate accounting to their individual efficiency. They are paid normal rate upto a certain percentage of efficiency and the rate increases in steps for efficiency slabs beyond the standard. As the efficiency is measured in terms of output, this method does not fall strictly under the area of time rate system.

(c) Bin Card vs. Stores Ledger

Ans: Difference between Store Ledger and Bin Card

Store Ledger

Bin Card

1. It is a record of both quantity and value.

2. It is maintained by the cost clerk.

3. It is kept in the cost office.

4. Entries are made by the cost clerk.

5. Entries are made on the basis of documents like goods received note, material requisition note etc.

6. Posting are made after the transactions.

7. Transactions are periodically recorded.

8. Inter departmental transactions are recorded for costing purpose.

9. Facilitates physical verification of closing stock.

1. It is a record of quantity only.

2. It is maintained by the storekeeper.

3. It is attached to the bin.

4. Entries are made by the store keeper.

5. Entries are made on the basis of actual quantity received and issued.

6. Postings are made before the transactions.

7. Individual transactions are recorded.

8. Inter departmental transfers are not shown.

9. Facilitates physical verification of closing stock.

(d) Absorption of overheads

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 Labour Cost Method: This method is used in those organizations where labour 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 Labour 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. Direct Labour Hour Method: Under this method, the rate of absorption is calculated by dividing the overhead expenses by the direct labour hours. The formula is as follows. Budgeted or Actual Overhead Expenses/Direct Labour Hours

e. Machine Hour Rate: Where machines are more dominant than labour, 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

(e) Process losses

Ans: It is rare that the output of a process is equal to its input. In most of the cases, the output of a process is less than the input. The difference between the input and output and output is called process loss. The process loss may be in the form of loss in weight, scrapes or wastes. These process losses may be classified into:

* Normal Loss: The fundamental principle of costing is that the good units should bear the amount of normal loss. Normal loss is anticipated and in a process it is inevitable. It is included in total cost of the product due to which cost per unit is increases. The cost of normal loss is therefore not worked out. The number of units of normal loss is credited to the Process Account and if they have some scrap value or realizable value the amount is also credited to the process account. If there is no scrap value or realizable value, only the units are credited to the process account.

* Abnormal Loss: If the units lost in the production process are more than the normal loss, the difference between the two is the abnormal loss. It is excluded from total cost due to which it does not affect the cost per unit of the product. The relevant process of account is credited and abnormal loss account is debited with the abnormal loss valued at full cost of finished output. The amount realized from sale of scrap of abnormal loss units is credited to the abnormal loss account and the balance in the abnormal loss account is transferred to the Costing Profit and Loss Account.

3. (a) Define cost accounting. Explain the importance of cost accounting as a managerial tool. (2+8=10)

Ans: Cost Accounting: It is the method of accounting for cost. The process of recording and accounting for all the elements of cost is called cost accounting. I.C.M.A. has defined cost accounting as follows: “The process of accounting for cost from the point at which expenditure is incurred or committed to the establishment of its ultimate relationship with cost centers and cost units. In its widest usage it embraces the preparation of statistical data, the application of cost control methods and the ascertainment of the profitability of activities carried out or planned”.

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) Prepare the Cost Sheet to show the total cost of production and cost per unit of goods manufactured by a company for the month of July 2024. Also find the cost of sales and profit: (10 Marks)

Particulars	Amount (₹)
Stock of Raw Materials (01.07.2024)	3,000
Raw Materials purchased	28,000
Stock of Raw Materials (31.07.2024)	4,500
Manufacturing Wages	7,000
Depreciation on Plant	1,500
Loss on sale of a part of Plant	300
Factory Rent and Rates	3,000
Office Rent	500
General Expenses	400
Discount on Sales	300
Advertisement Expenses (charged fully)	600
Income Tax paid	2,000
Sales	50,000

Units produced: 3,000. Stock of finished goods: 200 units (01.07.2024) and 400 units (31.07.2024). Cost of opening finished stock: ₹2,800. All opening units were sold during the month.

Solution:

Statement of Cost

PARTICULARS

UNIT

AMOUNT

Raw Materials Consumed:

Opening Stock

Purchases

Less: Closing Stock of Raw Material

3,000

28,000

4,500

(a) Raw Material consumed during the year

Manufacturing wages

26,500

7,000

(b) Prime Cost

Work’s Overheads:

Factory rent & rates

Depreciation on plant

33,500

3,000

1,500

(c) Work’s Cost

Administrative Overheads:

Office rent

General Expenses

38,000

500

400

(d) Cost of production

Add: Opening stock of finished goods

Less: Closing Stock of finished goods (38,900/3,000 = 12.97 * 400)

3,000

200

400

38,900

2,800

5,187

(e) Cost of goods sold

Selling & Distributive Overheads:

Advertisement Expenses

2,800

36,513

600

(f) Total Cost

Add: Net Profit

2,800

37,113

12,887

Sales

2,800

50,000

Working Note: Total cost per ton = (Total Cost / Output during the year)

4. (a) What is meant by overtime? How should overtime cost be treated in Cost Accounts? (3+7=10)

Ans: Overtime is the amount of wages paid for working beyond normal working hours as specified by Factories Act or by a mutual agreement between the worker’s union and the management. There is a practice is to pay for overtime work at higher rates. Hence, payment of overtime consists of two elements, the normal wages e.g., the usual amount, and the extra payment i.e., the premium. This amount of extra payment paid to a worker under overtime is known as overtime premium.

Treatment of Overtime Premium in Cost Accounting

a) If overtime is resorted to at the desire of the customer, then overtime premium may be charged to the job directly.

b) If overtime is required to cope with general production programme or for meeting urgent orders, the overtime premium should be treated as overhead cost of the particular department or cost center, which works overtime.

c) If overtime is worked in a department, due to the fault of another department, the overtime premium should be charged to the latter department.

d) Overtime worked on account of abnormal conditions such as flood, earthquake etc. should not be charged to cost but to costing P/L A/c.

Steps for Controlling Overtime:

a) Entire overtime work should be duly authorized after investigating the reasons for it.

b) Overtime cost should be shown against the concerned department. Such a practice should enable proper investigation and planning of production in future.

c) If overtime is a regular feature, the necessity for recruiting more men and adding a shift should be considered.

d) If overtime is due to lack of plant and machinery or other resources, steps may be taken to install more machines, or to resort to sub-contracting.

e) If possible an upper limit may be fixed for each category of workers in respect of overtime.

(b) From the details given, calculate: (2.5×4=10)

(i) Reordering level,

(ii) Maximum level,

(iii) Minimum level,

(iv) Danger level.

Cost of placing a purchase order: ₹20

Annual units to be purchased: 5,000

Purchase price per unit (incl. transport): ₹50

Annual storage cost per unit: ₹5

Lead time: Average 10 days, Max 15 days, Min 6 days, Emergency 4 days.

Consumption: Average 15 units/day, Max 20 units/day.

Solution:

5. (a) Define cost allocation and cost apportionment. Explain fully the distinction between them. (2+2+6=10)

Ans: Cost allocation: Cost allocation refers to the allotment of whole items of costs to cost centres. For example, if a worker is employed in department "A", then the wages paid to the worker are allocated or charged to department "A". This process of charging the entire wages (being ‘cost’) of the worker to department "A" is termed as cost allocation.

Cost apportionment: It is the process of distributing an item of cost over several cost centres or cost units. Thus, one item of cost is charged to two or more cost centres or cost units. Normally overheads (indirect costs) are charged to cost centres or cost units by way of apportionment in proportion to the anticipated benefits.

Difference between Cost allocation and cost apportionment:

Basis of Distinction	Cost Allocation	Cost Apportionment
Nature of Cost	Cost allocation deals with direct costs which are identifiable with the products.	Cost apportionment deals with indirect costs (overhead).
Scope	Cost allocation charges the whole item to a single cost center.	Cost apportionment distributes the overheads over several cost centers.
Basis Required	No special basis is required for cost allocation as the identity is clear.	Cost apportionment requires a logical basis e.g., area, horse-power, number of employees, average stock etc. for distribution of overheads.
Complexity	Cost allocation is Simple because the direct expenses are clearly identifiable with the product.	Cost apportionment is more complex as it requires selection of an appropriate apportionment base.
Accuracy	Cost allocation is generally considered more accurate as it is based on actual usage.	Cost apportionment is less precise because it is an estimation which is based on a chosen base.

(b) Find the total overheads of production departments charging service departmental costs using the repeated distribution method: (10 Marks)

Particulars	A (Prod)	B (Prod)	C (Prod)	X (Serv)	Y (Serv)
Primary Dist. Overheads	₹6,300	₹7,400	₹4,500	₹2,800	₹2,000
Service Dept. X %	40%	30%	20%	—	10%
Service Dept. Y %	30%	20%	30%	20%	—

Solution:

6. (a) What do you mean by unit costing? In which industry is unit costing applied? Explain its purposes. (2+3+5=10)

Ans: Meaning: Unit costing is a method of calculating the cost of producing individual units of a product or providing a service. It involves breaking down all of the costs that go into producing a product or providing a service and assigning those costs to each individual unit. This can be useful for determining the price at which a product or service should be sold in order to cover costs and generate a profit.

Unit costing is used in a variety of industries, including manufacturing, construction, and professional services. It is commonly used to set prices for products and services, to determine the cost of producing a product or providing a service for a particular customer or project, and to assess the efficiency and profitability of production or service processes.

Unit costing is used in a variety of industries, including:

1. Manufacturing: In the manufacturing industry, unit costing is often used to determine the cost of producing individual units of a product. This can be useful for setting prices, assessing the efficiency of production processes, and identifying opportunities to reduce costs.

2. Construction: In the construction industry, unit costing is often used to determine the cost of completing a particular project or task. This can be useful for bidding on projects, setting prices for services, and assessing the profitability of different types of projects.

3. Professional services: Unit costing is also commonly used in the professional services industry, such as consulting, accounting, and legal services. It can be used to determine the cost of providing a service for a particular customer or project, and to set prices for services.

4. Other industries: Unit costing is also used in a variety of other industries, including healthcare, education, and government. It is generally applicable to any industry where products or services are produced or provided on a per-unit basis.

The main purposes of unit costing are:

1. Setting prices for products and services: Unit costing can be used to determine the price at which a product or service should be sold in order to cover costs and generate a profit. This is typically done by adding a mark-up to the unit cost to account for overhead, general and administrative expenses, and profit.

2. Determining the cost of producing a product or providing a service for a particular customer or project: Unit costing can be used to determine the cost of producing a product or providing a service for a specific customer or project. This can be useful for bidding on projects, negotiating prices with customers, and assessing the profitability of different types of work.

3. Assessing the efficiency and profitability of production or service processes: Unit costing can be used to assess the efficiency of production or service processes by comparing the unit cost of producing a product or providing a service to the price at which it is sold. This can help organizations to identify opportunities to reduce costs and increase profitability.

4. Making informed decisions about pricing, production processes, and resource allocation: By providing a detailed understanding of the costs involved in producing a product or providing a service, unit costing can help organizations to make informed decisions about pricing, production processes, and resource allocation.

5. Identifying opportunities to reduce costs and increase efficiency: Unit costing can help organizations to identify opportunities to reduce costs and increase efficiency by providing a detailed understanding of the costs involved in producing a product or providing a service. This can be useful for identifying areas where costs can be reduced or processes can be improved.

(b) Prepare the Contract Account for the year ending 31st January 2024 from the following: (10 Marks)

M/s XYZ undertook a contract for erecting a sewage treatment plant for prosperous municipality for a total value of 24 Lakhs. It was estimated that job would be completed by 31^st January 2024. You are asked to prepare the Contract Account for the year ending on 31^st January 2024 from the following particulars:

a) Materials: ₹3,00,000; Wages: ₹6,00,000; Overheads: ₹1,20,000; Special Plant: ₹2,00,000.

b) Work certified: ₹16,00,000 (80% received in cash).

c) Materials at site (31.01.2024): ₹40,000.

d) Depreciate plant by 10%.

e) Work uncertified: 5% of materials issued and 6% of wages.

f) Overheads are charged as a percentage of direct wages.

g) Ignore plant depreciation for uncertified work.

Ascertain amount to be transferred to Profit & Loss A/c on the basis of realised profit.

Solution:

Additional 20 Marks (For 2023 Batch Only)

7. (a) Explain the classification of costs for the purpose of managerial decision-making. (10 Marks)

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.

Costs may be classified according to their nature, i.e. material, labour and expenses and a number of other characteristics. The important ways of classification are:

a) By Nature or Element or Analytical Classification

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) By Functions

According to this classification costs are divided as follows:

Manufacturing and Production Cost: This is the total of costs involved in manufacture, construction and fabrication of units of production.

Commercial Cost: This is the total of costs incurred in the operation of a business undertaking other than the cost of manufacturing and production. Commercial cost may further be sub-divided into (a) administrative cost and (b) selling and distribution cost.

c) As Direct and Indirect

According to this classification, total cost is divided into direct costs and indirect costs.

Direct costs are those which are incurred for and may be conveniently identified with a particular cost centre or cost unit. Materials used and labour employed are common examples of direct costs.

Indirect costs are those cost which are incurred for the benefit of number of cost centers or cost units and cannot be conveniently identified with a particular cost centre or cost unit. Examples of indirect cost include rent of building, management salaries, machinery depreciation etc.

d) By Variability

According to this classification, costs are classified into three groups viz. fixed, variable and semi-variable.

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.

Semi-variable costs are those which are partly fixed and partly variable. For example, telephone expenses included a fixed portion of annual charge plus variable charge according to calls; thus total telephone expenses are semi-variable. Other examples of such costs are depreciation, repairs and maintenance of building and plant etc.

e) By Controllability

Under this, costs are classified according to whether or not they are influenced by the actions of a given member of the undertaking. On this basis it is classified into two categories:

Controllable costs are those which can be influenced by the action of a specified member of an undertaking, that is to say, costs which are at least partly within the control of management. Generally speaking, all direct costs including direct material, direct labour and some of the overhead expenses are controllable by lower level of management.

Uncontrollable costs are those which cannot be influenced by the action of a specified member of an undertaking that it is to say, which are within the control of management. Most of the fixed costs are uncontrollable. For example, rent of the building is not controllable and so are managerial salaries.

f) By Normality

Under this, costs are classified according to whether these are cost which are normally incurred as a given level of output in the conditions in which that level of activity is normally attained. On this basis, it is classified into two categories:

Normal cost: It is the cost which is normally incurred at a given level of output in the conditions in which that level of output is normally attained. It is a part of cost of production.

Abnormal cost: It is the cost which is not normally incurred at a given level of output in the conditions in which that level of output is normally attained. It is not a part of cost of production and charged to Costing Profit and Loss Account.

g) By Capital and Revenue or Financial Accounting Classification

The cost which is incurred in purchasing assets either to earn income or increasing the earning capacity of the business is called capital cost. For example, the cost of a rolling machine in case of steel plan. Such cost is incurred at one point of time but the benefits accruing from it are spread over a number of accounting years.

It any expenditure is done in order to maintain the earning capacity of the concern such as cost of maintaining an asset or running a business it is revenue expenditure e.g. cost of materials used in production, labour charges paid to convert the material into production, salaries, depreciation, repairs and maintenance charges, selling and distribution charges etc.

h) By Time

Cost can be classified as (i) Historical costs and (ii) Predetermined costs.

i) Historical costs: The cost which is ascertained after their incurrence is called historical costs.

ii) Predetermined costs: Such costs are estimated costs i.e. computed in advance of production taking into consideration the previous period’s costs and the factors affecting such costs. Predetermined cost determined on scientific basis becomes standard cost.

i) According to Planning and Control

Planning and control are two important functions of management. Cost accounting furnishes information to the management which is helpful is the due discharge of these two functions. According to this, costs can be classified as budgeted costs and standard costs.

i) Budgeted costs: Budgeted costs represent an estimate of expenditure for different phases of business operations such as manufacturing, administration, sales, research and development etc. coordinated in a well-conceived framework for a period of time in future which subsequently becomes the written expression of managerial targets to be achieved.

ii) Standard Cost: Standard cost is the predetermined cost based on a technical estimate for materials, labour and overhead for a selected period of time and for a prescribed set of working conditions.

j) For Managerial Decisions

On this basis, costs may be classified into the following costs:

i) Marginal cost: Marginal cost is the total of variable costs i.e. prime cost plus variable overheads.

ii) Out of pocket costs: This is that portion of the cost which involves payment to outsiders i.e., gives rise to cash expenditure as opposed to such costs as depreciation, which do not involve any cash expenditure.

iii) Differential costs: The change in costs due to change in the level of activity or pattern or method of production is known as differential costs.

iv) Sunk costs: A sunk cost is an irrecoverable cost and is caused by complete abandonment of a plant. It is the written down value of the abandoned plant less its salvage value.

v) Imputed costs: These costs are those costs which appear in cost accounts only e.g. national rent charged on business premises owned by the proprietor, interest on capital for which no interest has been paid. These costs are also known as notional costs.

vi) Opportunity cost: It is the maximum possible alternative earning that might have been earned if the productive capacity or services had been put to some alternative use.

vii) Replacement cost: It is the cost at which there could be purchased an asset or material identical to that which is being replaced or revalued. It is the cost of replacement at current market price.

viii) Avoidable and unavoidable cost: Avoidable costs are those which can be eliminated if a particular product or department, with which they are directly related, is discontinued. Unavoidable cost is that cost which will not be eliminated with the discontinuation of a product or department.

(b) How should overtime cost be treated in Cost Accounts? (10 Marks)

Treatment of Overtime Premium in Cost Accounting

e) If overtime is resorted to at the desire of the customer, then overtime premium may be charged to the job directly.

f) If overtime is required to cope with general production programme or for meeting urgent orders, the overtime premium should be treated as overhead cost of the particular department or cost center, which works overtime.

g) If overtime is worked in a department, due to the fault of another department, the overtime premium should be charged to the latter department.

h) Overtime worked on account of abnormal conditions such as flood, earthquake etc. should not be charged to cost but to costing P/L A/c.

Steps for Controlling Overtime:

f) Entire overtime work should be duly authorized after investigating the reasons for it.

g) Overtime cost should be shown against the concerned department. Such a practice should enable proper investigation and planning of production in future.

h) If overtime is a regular feature, the necessity for recruiting more men and adding a shift should be considered.

i) If overtime is due to lack of plant and machinery or other resources, steps may be taken to install more machines, or to resort to sub-contracting.

j) If possible an upper limit may be fixed for each category of workers in respect of overtime.

8. (a) What do you mean by fixed overheads? Why are they called burden? (10 Marks)

(b) Explain the distinguished features of contract costing. (10 Marks)

Ans: Contract Costing: Contract costing is a special form of job costing used for ascertaining cost and profit on contracts undertaken for big jobs like constructing a building, a road, a bridge or a ship. Such jobs mainly comprise activities outside the contractor’s premises and involve huge amount. They take long time to complete so much so that the work may extend over more than one accounting year. This means that the cost and profit may have to be worked out even on incomplete work as at the end of an accounting year. Hence, a special method of accounting known as ‘contract costing’ or ‘terminal costing’ has been developed for ascertaining cost and profit on such jobs.

The distinguishing features of contract are as follows:

Features regarding Production

i) The work is undertaken to customer’s specific requirements.

ii) The work will be of a relatively long duration and involves large amount.

iii) The work is usually site based.

iv) The work is frequently of a constructional nature.

v) Plant and equipment may be purchased or hired for the duration of the contract.

vi) The completion date is fixed in advance, and penalties follow delays

vii) Certain aspects of the work are assigned to sub-contractors.

Features regarding Cost

i) The cost unit in contract costing is a contract.

ii) A separate account is prepared for each contract to ascertain the profit or loss on each contract.

iii) Most of the items of cost can be classified as direct since they can be easily identified with a specific contract.

iv) Indirect costs are normally restricted to Head Office expenses and storage costs. These are allocated to various contracts on which work is carried out during the year.

v) The contract price is often fixed in advance and payment is received at various stages of completion based on architect’s certificate.

vi) A separate contract ledger is maintained for recording costs when the number of contracts is large.

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Cost Accounting Solved Question Paper 2025 (May/June) [Dibrugarh University BCOM 2nd SEM NEP Syllabus]