Cost Accounting Solved Question Paper 2024 (May/June) [Dibrugarh University BCOM 2nd SEM NEP Syllabus]

Cost Accounting Solved Question Paper 2024 (May/June)
Dibrugarh University BCOM 2^nd SEM NEP Syllabus

COMMERCE (Minor)

Full Marks: 80

Pass Marks: 24

Time: 3 hours

The figures in the margin indicate full marks for the questions

Paper: MINFIN2 (Cost Accounting)

1. (a) Write True or False of the following: 1x4=4

(i) Variable cost per unit remains constant.

Ans: True

(ii) Cost accounting is not needed if prices are beyond the control of the firm.

Ans: False

(iii) Service costing is applicable in canteens.

Ans: True

(iv) Machine hour rate method of absorption is suitable where major portion of production is performed by machine.

Ans: True

(b) Fill in the blanks: 1x4=4

(i) Cost accounting provides data for managerial _______.

Ans: Decision making

(ii) FIFO method of valuing material issues is suitable in times of _______.

Ans: Falling prices

(iii) A landline telephone expenses is _______ cost.

Ans: Semi variable

(iv) The method of costing applied in biscuit industries is _______ costing.

Ans: Batch

2. Write short notes on any four of the following: 4x4=16

(a) Cost Centre.

Ans: Cost Centre: A large business is divided into a number of functional departments (such as production, marketing and finance) for administrative convenience. These departments are further divided into smaller divisions for cost ascertainment and control. These smaller divisions are called cost centers. A cost centre is a location, person or item of equipment (or group of these) in relation to which cost can be ascertained and controlled. In simple words, it is a subdivision of the organization to which cost can be charged.

The determination of suitable cost centre is very important for the purpose of cost ascertainment and control. The manager of a cost centre is held responsible for control of cost of his cost centre. The number and size of cost centers vary from organization to organization. The selection of a suitable cost centre depends on the following factors:

a. Nature and size of the business.

b. Layout and organization of the factory.

c. Availability of various cost data and information.

d. Management policy regarding cost ascertainment and control.

(b) Material Loss.

Ans: Material losses are those losses which arises due to evaporation, leakage, poor quality, careless handling, theft, accident, fire, inefficiency in operation, etc. Such losses are classified into two categories - normal losses and abnormal losses.

1. Normal Losses: Losses which are arises due to inherent nature of the material and unavoidable are called Normal losses. Normal losses of material cannot be completely avoided but may be controlled to a limited extent. Such loss can be estimated in advance on the basis of past experience or chemical data. These losses increase the cost per unit of raw material or can be transferred to factory overheads.

Examples of material losses are as follows:

a) Losses by evaporation

b) Loss due to loading and unloading

c) Losses due to breaking the bulk into small pieces etc.

2. Abnormal Losses: Losses that arises due to inefficiency in operations, carelessness, theft, accident etc. is called as abnormal losses. It is avoidable by preventive action, proper planning and control. These losses cannot to be charged to the cost of production. These are charged to costing profit and loss account.

Examples of abnormal losses are as follows:

a) Loss due to Breakage

b) Loss due to Fire, accident, flood etc.

c) Theft

(c) Overtime.

Ans: 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.

(d) ABC Analysis.

Ans: ABC Analysis: In this technique, the items of inventory are classified according to the value of usage. Materials are classified as A, B and C according to their value.

Items in class ‘A’ constitute the most important class of inventories so far as the proportion in the total value of inventory is concerned. The ‘A’ items constitute roughly about 5-10% of the total items while its value may be about 80% of the total value of the inventory.

Items in class ‘B’ constitute intermediate position. These items may be about 20-25% of the total items while the usage value may be about 15% of the total value.

Items in class ‘C’ are the most negligible in value, about 65-75% of the total quantity but the value may be about 5% of the total usage value of the inventory.

The numbers given above are just indicative, actual numbers may vary from situation to situation. The principle to be followed is that the high value items should be controlled more carefully while items having small value though large in numbers can be controlled periodically.

Advantages of ABC analysis

a. Reduction in investment: under ABC analysis, the materials from group 'A' are purchase in lower quantities as much as possible. With this, the effort to reduce the delivery period is also made. These in turn help to reduce the investment in material.

b. Optimization of Inventory management function: Each class of the inventory gets management attention as per its value and accordingly, manpower is allocated and expenses are incurred to manage it. It ensures that most important items are regularly monitored and closely observed whereas such efforts are expended with for the less important items.

c. Control on high value material: under ABC analysis, strict control can be exercised to the materials in group 'A' that have higher value.

d. Reduction in Storage cost: Since Class “A” material is of high value and are purchase in lower quantities as much as possible, it reduces the total storage cost.

e. Saving in time and cost: Since a signification effort is made for management of the material from group 'A', it helps to save time as well as cost.

f. Opportunity to convert Class B items into Class A: As Class B items hold potential for growth, the business may tap into this opportunity and convert it frequent yet low-value customers into regular, high-value customers to Class A.

Disadvantage of ABC analysis

a) No Proper classification of material: ABC analysis will not be effective if the material is not classified into the groups properly.

b) Not suitable if materials are of same value: It is not suitable for the organization where the costs of materials do not vary significantly.

c) No scientific base: There is no any scientific base for the classification of material under ABC analysis.

d) Not suitable for small organisation: The classification of the materials into different groups may lead to extra cost. Hence, it may not be suitable for small organization.

(e) Rowan Premium Bonus Plan.

Ans: Rowan System or Rowan Plan: The scheme was introduced in 1901 by David Rowan of Glasgow, England. The wages are calculated on the basis of hours worked whereas the ‘bonus is that proportion of the wages of time taken which the time saved bears to the standard time allowed’. Total wages under this scheme is calculated with the help of the following formula:

Earnings = Time taken x Rate per hour + Time saved / Standard time (Time taken x Rate per hour)

The main principles/features of Rowan plan are:

a) Time rate is guaranteed and the worker gets the guaranteed irrespective of whether he completes the job within the time also takes more time to do it.

b) Standard time and standard work are fixed for the job or operation in advance;

c) The workers producing more than the standard, or the workers completing the work in less than the standard time fixed, get bonus in addition to the ordinary time wage.

d) Bonus is based on that proportion of the time wages which the time saved bears to the standard time.

e) Workers who fail to reach the prescribed standard get the time wages.

f) Labour cost per unit of output decreases. The employer also shares the benefit of efficiency which induced him to improve the method and equipment.

g) Wages per hour increases but in the same proportion as the output.

(f) Causes of Labour Turnover.

Ans: Causes of Labour turnover: The causes for labour turnover can be broadly classified under three heads.

(1) Personal Causes

(2) Unavoidable Causes

(3) Avoidable Causes

i) Personal Causes: Some of the employees may leave the organization on account of personal reasons as given below:

(a) Circumstances of family.

(b) Retirement on reaching the prescribed age.

(d) Dislike for the job or place;

(e) Death of the employee.

(f) Employee getting recruited in a better job.

(g) Permanent disability due to accidents.

(h) Involvement of employee in activities of moral turpitude.

ii) Unavoidable Causes: In certain instances, the organization may discharge the employees due to unavoidable reasons as mentioned below:

(a) Termination of workers on account of insubordination or inefficiency

(b) Discharge of workers on account of irregularity or long absence.

iii) Avoidable Causes: Some of the employees may leave the organization account of the following reasons:

(a) Non availability of promotion opportunities

(b) Dissatisfaction with incentive schemes

(d) Unsuitable to job due to wrong placement

(e) Unhappy with working conditions

(f) Non availability of accommodation, health and recreational facilities

(g) Lack of stability of Tenure.

3. (a) What do you understand by cost classification? Discuss the various bases of classification of costs and various types of costs. 4+6+4=14

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) Prepare a Cost Sheet to show the total cost of production and cost per unit of goods manufactured by a company for the month of July 2023. Also find the cost of sales and profit:

(Rs.)

Stock of Raw Materials 01-07-2023

Raw Materials purchased

Stock of Raw Materials 31-07-2023

Manufacturing Wages

Office Rent

General Expenses

Discount on Sales

3,000

28,000

4,500

7,000

500

400

300

Depreciation on Plant

Loss on Sale of a part of Plant

Factory Rent and Rates

Advertisement Expenses

Income Tax Paid

Sales

1,500

300

3,000

600

2,000

50,000

The number of units produced during July 2023 was 3,000. The stocks of finished goods were 200 and 400 units on 01-07-2023 and 31-07-2023 respectively. The total costs of the units on hand on 01-07-2023 was Rs. 2,800. All these had been 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 do you mean by material control? What are its techniques? Discuss its significances. 3+3+8=14

Ans: Inventory control means to monitor the stock of goods used for production, distribution and captive (self) consumption. For a specific time period, stocks of goods are placed at some particular location. Stock of goods includes raw-materials, work in progress, finished goods, packaging, spares, components, consumable items, etc. Inventory Control means maintaining the inventory at a desired level. The desired-level keeps on fluctuating as per the demand and supply of goods.

According to Gordon Carson, "Inventory control is the process whereby the investment in materials and parts carried in stocks is regulated, within pre-determined limits set in accordance with the inventory policy established by the management."

Simply "Inventory control is a method to identify those stocks of goods, which can be used for the production of finished goods. It shall be supported by a schedule which gives details regarding; opening stock, receipt of raw-materials, issue of materials, closing stock, and scrap generated."

Techniques of Inventory Control

The techniques or the tools generally used to effect control over the inventory are the following:

1) Budgetary techniques for inventory planning;

2) A-B-C. System of inventory control;

3) Economic Order Quantity (E.O.Q.) i.e., how much to purchase at one time economically;

4) VED Analysis;

5) Perpetual inventory system and the system of store verification;

6) Fixation of Stock Level;

7) Control Ratios.

Significance/Advantages of Inventory control

1. Protects from fluctuations in demand: There are always chances of fluctuations in the demand of a material. These fluctuations can be adjusted if there are sufficient items in the stock of inventory. Therefore, proper inventory control protects the company from fluctuations in demand.

2. Better services to customers: If the company maintains a proper inventory of raw-materials, then it can complete its production in time. So, it can deliver the finished goods to the customers in time. Similarly, if the company has a proper inventory of finished goods, then it can satisfy the additional demand of the customers.

3. Continuity of production operations: Proper inventory control helps to maintain continuity of production operations. This is because it maintains a smooth flow of raw materials. So, there are no shortages of raw-materials required for production process.

4. Reduces the risk of loss: Proper inventory control helps to reduce the risk of loss due to obsolescence (outdated) or deterioration of items. This is because it checks all the items regularly.

5. Minimizes the administrative workload: Proper inventory control helps to minimize the administrative work load of purchasing, inspection, warehousing, etc. This will reduce the manpower requirement and will minimize the labour cost too.

6. Protects fluctuation in output: Inventory control tries to reduce the gap between planned production and actual production. There are cases where the production schedule cannot be followed because of Sudden breakdown of machines, Problems in supply of materials, Sudden labour strikes, Loss due to failure of power supply, etc.

In such cases, the difference between planned production and actual production can be bridged by inventories held in stock.

7. Effective use of working capital: Proper inventory control helps to make effective use of working capital. Inventory control helps in maintaining the right amount of stocks of materials, components, etc. Over stocking is avoided. Therefore, the working capital will not be blocked in excess inventory.

(b) A worker takes 80 hours to do a job for which the time allowed is 100 hours. His daily rate is Rs. 2.50 per hour. Calculate the works cost of the job under the following methods of payment of wages and statement of works cost and calculate the wages:

(i) Time Rate.

(ii) Halsey Plan.

(iii) Rowan Plan.

Additional Information:

(1) Materials cost Rs. 120.

(2) Factory overhead 125% of wages.

Solution:

Statement of Comparative Works Cost

	Time rate	Piece rate	Halsey plan	Rowan plan
Materials Direct wages	Rs. 120.00 200.00	Rs. 120.00 250.00	Rs. 120.00 225.00	Rs. 120.00 240.00
Prime cost Factory overhead (125% of direct wages)	320.00 250.00	370.00 312.50	345.00 281.25	360.00 300.00
Works cost	570.00	682.50	626.25	660.00

5. (a) What factors would you consider for determining the overhead absorption rate? Explain the causes of over- and under- absorption of overheads. 7+7=14

Ans: Absorption of overheads refers to charging of overheads to individual products or jobs. The overhead expenses pertaining to a cost centre are ultimately to be charged to the products, jobs etc. which pass through that cost centre. For the purpose of absorption of overhead to individual jobs, processes or products, overheads absorption rates are applied. The overhead rate of expenses for absorbing them to production may be estimated on the following three bases:

(i) The figure of the previous year or period may be adopted as the overhead rate to be charged on production in the current year.

(ii) The overhead rate for the year may be determined on the basis of the estimated expenses and anticipated volume of production or activity.

(iii) The overhead rate for the year may be determined on the basis of normal volume of output or capacity of the business.

Factors to be taken into consideration for determining Overhead absorption rate

To determine the Overhead Absorption Rate effectively, management must choose a base that represents the actual consumption of indirect costs as accurately as possible.

1. Selection of a Suitable Base: The base for absorption of overheads must correlate strongly with the incurrence of overheads. Common bases include:

a) Direct Labour Hours: This is ideal for labour-intensive industries where overheads fluctuate with labour time.

b) Machine Hours: This is ideal for capital-intensive industries where depreciation, power, and maintenance are the primary overheads.

c) Units of Production: This base is accurate only if a single or uniform product is manufactured.

d) Direct Material Cost or Labour Cost: Used when overheads are directly proportional to the cost of raw materials or labour wages.

2. Estimation of Capacity Level: One must decide between Normal Capacity or maximum Capacity to avoid under- or over-recovery of fixed costs.

3. Nature of Overheads: Overheads should be classified into fixed and variable. Variable overheads usually vary with production volume, while fixed overheads remain constant regardless of output. A failure to distinguish between these leads to an inaccurate overhead absorption rate.

4. Departmentalization: For exact overhead absorption rate entire unit must be divided into separate departments and absorption rate of each department provides much higher accuracy.

5. Cost of Implementation: The system of calculating overhead absorption rate must be cost-effective. While highly complex allocation systems are more accurate, they are administratively expensive to maintain.

Causes of Over- and Under-Absorption of Overheads

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.

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.

Reasons for under-absorption of overheads

1. Inaccurate Estimation: Budgeted overheads were set too low as compared to actual market prices for utilities, rent, or maintenance.

2. Unforeseen Price Increases: Inflation or sudden spikes in service costs e.g. electricity charges that were not anticipated in the budgeted cost.

3. Reduced Capacity Utilization: If the factory produced less units or operated for less hours than the budgeted hours, the total fixed overheads were not fully recovered which leads to under-absorption.

4. Inefficiency: Wastage of resources or excessive spoilage leads to higher actual costs.

5. Under-estimation of Output: If the production volume was lower than expected, the overheads allocated were insufficient.

If the amount applied exceeds, the actual overhead, it is said to be an over absorption of overheads. Reasons for over-absorption of overheads are given below:

1. Over-estimation of Costs: Budgeting at the start of the period was too cautious. By setting cost targets higher than what was actually spent, the predetermined overhead rate became unnecessarily high.

2. Efficiency Gains: The efficient management of costs leads to lower actual expenditures compared to the budget, leading to over-absorption of overheads.

3. Increased Capacity Utilization: If the factory produced more units or worked more efficiently than planned, more overheads were absorbed into the products than were actually incurred. Essentially, the fixed overheads were spread across a larger number of units.

4. Decreased Costs: Unexpected drops in the price of materials, lower utility bills, or cheaper service contracts than those originally budgeted lead to over-absorption of overheads.

5. Budgeted Output Exceeded: When the actual production volume is higher than the budgeted units, the total overheads absorbed on the basis of predetermined rate will naturally exceed the actual costs incurred which leads to over absorption of overheads.

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.

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.

(b) From the following particulars, compute a comprehensive machine hour rate: 14

(i) Cost of machine Rs. 1,00,000.

Estimated life = 15 years.

Residual value = Rs. 10,000

(ii) Machine running hours 2040 hours per machine per annum including idle time of 40 hours due to repairs and maintenance and breakdown of machine.

(iii) Power consumption of the machine per hour = 20 units; Rate of power per 100 units = Rs. 80.

(iv) There are two operators in the shop and wage of an operator who is in-charge of two machines is Rs. 12,000 p.a.

(v) Rent, rates and taxes of the shop Rs. 4,800 p.a.

(vi) Insurance premium for the machine Rs. 400 per quarter.

(vii) General lighting per month Rs. 600.

(viii) Repairs and maintenance expenses per month Rs. 400 per machine.

(ix) Shop supervisor’s salary per month Rs. 1,500.

(x) Other factory overhead allocated to the shop Rs. 6,000 p.a.

There are four identical machines in the shop. The supervisor devotes 1/5^th of his time for supervising the machine.

Solution:

6. (a) What do you mean by contract costing? Discuss different types of contract. Also explain how contract costing is different from job costing. 4+3+7=14

Ans: 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:

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

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.

Types of Contracts

1. Fixed Price Contracts: In this type of contract, the contract price is agreed upon in advance between contractor and contractee. If the actual costs exceed the estimated costs, the contractor will bear the loss. In such contract efficiency leads to higher profits.

2. Cost-Plus Contracts: Where the contractee agrees to pay the contractor, as contract price, the exact cost plus certain percentage thereof to cover overhead expenses and profit, the contract is called cost plus contract. In case of new type of work where the contractor cannot estimate the cost due to lack of experience in the line, cost plus contract is generally entered into. Government contracts are often on cost plus contract basis.

3. Contracts with Escalation Clauses: These contracts include a clause to adjust the contract price if the prices of specified materials or labour rates increase beyond a certain threshold during the contract period. This clause is usually provided in the contracts as a safeguard against any likely changes in the price or utilization of material and labour. If during the period of execution of a contract, the prices of materials or labour rise beyond a certain limit, the contract price will be increased by an agreed amount. Inclusion of such a term in a contract deed is known as an 'escalation clause'

An escalation clause usually relates to change in price of inputs, it may also be extended to increased consumption or utilization of quantities of materials, labour etc. In such a situation the contractor has to satisfy the contractee that the increased utilization is not due to his inefficiency. This protects the contractor from unforeseen inflation.

4. De-escalation (or Retention) Contracts: While less common, these may include provisions where the price is reduced if costs are kept below a certain benchmark, incentivizing cost control.

Difference between Contract costing and Job Costing

The principals involved in contract costing are the same as those involved in job costing. Certain modifications are to be made in the principles, in some cases, to suit the requirements of particular contracts. In spite of same principles, contract costing differs from job costing on same points mentioned below:

Number of jobs in hand at a time may be much greater than the number of contracts in hand at a time.

Most of the items of expenses are capable of being directly charged to contract accounts; but direct charging to that extent is not possible in case of jobs.

Collection, analysis, apportionment or allocation of cost is simpler in contract costing than in job costing.

In case of contracts taking a number of years to complete the question of assessment of profit at the end of each financial year crops up. This question does not arise in case of job costing.

Normally, contracts are executed outside the factory, i.e., at customer’s site; but jobs are executed within the factory.

(b) Bengal Chemical Co. Ltd. produced three chemicals during the month of July 2023 by three consecutive processes. In each process, 2% of the total weight put in is lost and 10% is scrap which from Processes – 1 and 2 realize Rs. 100 a ton and from Process – 3 Rs. 20 a ton. The products of three processes are dealt with as follows:

			Process – 1			Process – 2		Process – 3
Passed on to the next process Sent to warehouse for sale			75% 25%			50% 50%		- 100%
	Process – 1			Process – 2			Process – 3
	(Rs.)	Tons		(Rs.)	Tons		(Rs.)		Tons
Raw Materials	1,20,000	1000		28,000	140		1,07,840		1348
Manufacturing Wages	20,500	-		18,520	-		15,000		-
General Expenses	10,300	-		7,240	-		3,100		-

Prepare Process Cost Accounts showing the cost per ton of each product. 14

Solution:

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Cost Accounting Solved Question Paper 2024 (May/June) [Dibrugarh University BCOM 2nd SEM NEP Syllabus]