IPCC

PAPER 3 (Part 1) : COST ACCOUNTING

(Theory Notes)

1 BASIC CONCEPTS
Q 1. Define the terms cost centre and cost unit. Write short notes on Cost Centre.
marks) (May 97, Nov 02 - 4 marks)(May 95 - 4

Distinguish et!een Cost "nit and Cost Centre. A. The term Cost Unit is defined as a unit of quantity of product, service or time (or a combination of these) in relation to which costs may be ascertained or expressed. It can be for a ob, batch, or product !roup. The term Cost Centre is defined as a location, person or an item of equipment or a !roup of these for which costs may be ascertained and used for the purposes of Cost Control. Cost Centres can be personal Cost Centres, impersonal Cost Centres, operation cost and process Cost Centres. Thus each sub"unit of an or!anisation is #nown as a Cost Centre, if cost can be ascertained for it. In order to recover the cost incurred by a Cost Centre, it is necessary to express it as the cost of output. The unit of output in relation to which cost incurred by a Cost Centre is expressed is called a Cost Unit. Q 2. What is meant y #rofit Centre$
marks) (%o& 9' - 4

A. It is defined as an activity centre of a business or!anisation. Chief of such a centre is fully responsible for all costs, revenues and profitability of its operation. The main ob ective of profit centre is to maximise the centre$s profit. Creation of profit centres facilitates mana!ement control and implementation of the ob ectives of responsibility accountin!. % profit centre may have a number of cost centres. Q 3. Distinguish et!een Cost Centre and #rofit Centre. A. % Cost Centre is the smallest se!ment of activity or the area of responsibility for which costs are accumulated. % &rofit Centre is that se!ment of activity of a business which is responsible for both revenue and expenses and discloses the profit of a particular se!ment of activity. Important points of distinction between Cost Centre and &rofit Centre are as below' (a) Cost Centres are created for accountin! convenience of costs and their control. (hereas a profit centre is created because of decentralisation of operations. (b) % Cost Centre does not have tar!et costs but efforts are made to minimise costs, but each profit centre has a profit tar!et and en oys authority to adopt such policies as are necessary to achieve its tar!ets. Q 4. ()*+ain #rofit centres and in&estment centres.
Marks) (%o& ,- - .

A. Centres which have the responsibility of !eneratin! and maximi)in! profits are called profit centres. Those centres which are concerned with earnin! an adequate return on investment are #nown as Investment centres. Q . /ist do!n the factors that you !i++ consider efore insta++ing a costing system. (numerate the factors !hich are to e considered efore insta++ing a system of cost accounting in a manufacturing organi0ation. (May 91 - 2, marks)(%o& 99 - 5 marks) A. The factors which must be considered before installin! a Costin! *ystem are listed below' (i) The ob ective of costin! system, for example whether it is bein! introduced for fixin! prices or for insistin! a system of cost control. (ii) The system of costin! in each case should be desi!ned for improvin! the efficiency of operations in a particular area. (iii) The !eneral or!anisation of the business, with a view to introduce a system of cost control, without alterin! or extendin! the or!anisation appreciably. (iv) The technical aspects of the concern and the attitude and behaviour of the supervisory staff and wor#men. (v) The manner in which different variable expenses would be affected with expansion or cessation of different operations. (vi) The manner in which Cost and +inancial accounts could be inter"loc#ed into a sin!le inte!ral accountin! system. Q !. What are the essentia+s of an effecti&e costing system$ Discuss the essentia+ of a good cost accounting system$ (May 91 - 1 marks)(May ,4 - . marks) A. The essential features, which a !ood Cost %ccountin! *ystem should possess, are as follows'
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(i) Cost %ccountin! *ystem should be tailor"made, practical, simple and capable of meetin! the requirements of a business concern. (ii) The data to be used by the Cost %ccountin! *ystem should be accurate. (iii) ,ecessary cooperation and participation of executives from various departments of the concern is essential for developin! a !ood system of Cost %ccountin!. (iv) The cost of installin! and operatin! the system should ustify the results. (v) The system of costin! should not sacrifice the utility by introducin! meticulous and unnecessary details. (vi) % carefully phased pro!ramme should be prepared by usin! networ# analysis for the introduction of the system. Q ". Distinguish et!een contro++a +e costs and uncontro++a +e costs.
marks) (May 9' - 4 marks) (Nov 01 - 2 marks) (May 03 - 2

()*+ain contro++a +e and non-contro++a +e cost !ith e)am*+es. (#CC May ,- 3 . marks) (May 0 - 2 marks) A. Controllable costs are those which can be influenced by the action of a specified member of an underta#in!. % business or!ani)ation is usually divided into a number of responsibility centres and each such centre is headed by an executive. Controllable costs incurred in a particular responsibility centre can be influenced by the action of the executive headin! that responsibility centre. -irect costs comprisin! direct labour, direct materials, direct expenses and some of the overhead are !enerally controllable by the shop level mana!ement. ,on"controllable costs are those which cannot be influenced by the action of a specified member of an underta#in!. +or example, expenditure incurred by the tool room is controllable by the tool room mana!er but the share of the tool room expense which is apportioned to the machine shop cannot be controlled by the machine shop mana!er. It is only in relation to a particular individual that a cost may be specified as controllable or not. ,ote' .. % supervisor may be unable to control the amount of mana!erial remuneration allocated to his department but for the top mana!ement this would be a controllable cost. /. -epreciation would be a non"controllable cost in the short"term but controllable in the lon! terms. Q #. Distinguish et!een4 (i) 5aria +e cost and direct cost (ii) (stimated cost and standard cost. A. (i) Variable and direct cost: % variable cost is a cost that chan!es in total in direct proportion to chan!es in the related total activity or volume. Cost of material is an example of variable cost. -irect cost is a cost which can be identified either with a cost centre or with a cost unit. %n example of direct cost is the allocation of direct materials to a department and then to the various obs. %ll variable costs are direct"but each direct cost may not be variable. (ii) Estimated cost and standard cost: 0stimated costs can be defined as the expected cost of manufacture or acquisition, often in terms of a unit of product computed on the basis of information available in advance of actual production or purchase. 0stimated cost are prospective costs since they refer to prediction of costs. *tandard Cost means a pre"determined cost. It attempts to show what the cost should be for clearly defined conditions and circumstances. *tandard costs represent planned cost of a product. They are expected to be achieved under a particular production process under normal conditions. Q $. (numerate the main o 6ecti&es of introduction of a Cost 7ccounting 8ystem in a manufacturing organisation What are the main o 6ecti&es of Cost 7ccounting$ A. The 1ain ob ectives of Cost %ccountin! in an or!ani)ation are .. %scertainment of cost. /. -etermination of sellin! price. 2. Cost control and cost reduction. 3. %scertainin! the profit of each activity. 4. %ssistin! mana!ement in decision"ma#in!. 5. -etermination of brea# even point. Q 1%. Write short notes on any t!o of the fo++o!ing$ (i) Con&ersion cost
(%o& .,,. - 9 marks) (May ,2 - . marks)(#CC May ,- 3 . marks)

( May .,,9 - 4 marks)

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(ii) 8unk cost

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( May ,9 - 4 marks)(%o& ,, - 4 ( May ,9 - 4

(%o& ,, - 4 (%o& ,, - 4

(iii) :**ortunity cost

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(i&) Differentia+ cost (&) #re-*roduction Cost

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(&i) ;raining Costs

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A. (i) Conversion cost: It is the cost incurred to convert raw materials into finished !oods. It is the sum of direct wa!es, direct expenses and manufacturin! overheads. (ii) Sunk cost: 6istorical costs or the costs incurred in the past are #nown as sun# cost. They play no role in the current decision ma#in! process and are termed as irrelevant costs. +or example, in the case of a decision relatin! to the replacement of a machine, the written down value of the existin! machine is a sun# cost, and therefore, not considered. (iii) Opportunity cost: It refers to the value of sacrifice made or benefit of opportunity fore!one in acceptin! an alternative course of action. +or example, a firm financin! its expansion plan by withdrawin! money from its ban# deposits. In such a case the loss of interest on the ban# deposit is the opportunity cost for carryin! out the expansion plan. (iv) Differential cost: (Incremental and decremental costs). It represents the chan!e (increase or decrease) in total cost (variable as well as fixed) due to chan!e in activity level, technolo!y, process or method of production, etc. +or example if any chan!e is proposed in the existin! level or in the existin! method of production, the increase or decrease in total cost or in specific elements of cost as a result of this decision will be #nown as incremental cost or decremental cost. (v) Pre-production cost: These costs forms the part of development cost, incurred in ma#in! a trial production run, preliminary to formal production. These costs are incurred when a new factory is in the process of establishment or a new pro ect is underta#en or a new product line or product is ta#en up, but there is no established or formal production to which such costs may be char!ed. These costs are normally treated as deferred revenue expenditure (except the portion which has been capitalised) and char!ed to the costs of future production. (vi) rainin! cost: These costs comprises of 7 wa!es and salaries of the trainees or learners, pay and allowances of the trainin! and teachin! staff, payment of fees etc, for trainin! or for attendin! courses of studies sponsored by outside a!encies and cost of materials, tools and equipments used for trainin!. Costs incurred for runnin! the trainin! department, the losses arisin! due to the initial lower production, extra spoila!e etc. occurrin! while providin! trainin! facilities to the new recruits. %ll these costs are boo#ed under separate standin! order numbers for the various functions. Usually there is a service cost centre, #nown as the Trainin! *ection, to which all the trainin! costs are allocated. The total cost of trainin! section is thereafter apportioned to production centers. Q 11. Discuss cost c+assification ased on &aria i+ity and contro++a i+ity.
- 4 marks) (%o& ,4

A. Cost c+assification ased on &aria i+ity <i)ed cost 7 These are costs, which do not chan!e in total despite chan!es of a cost driver. % fixed cost is fixed only in relation to a !iven relevant ran!e of the cost driver and a !iven time span. 8ent, insurance, depreciation of factory buildin! and equipment are examples of fixed costs where the final product produced is the cost ob ect. 5aria +e costs 7 These are costs which chan!e in total in proportion to chan!es of cost driver. -irect material, direct labour are examples of variable costs, in cases where the final product produced is the cost ob ect. 8emi-&aria +e costs 7 These are partly fixed and partly variable in relation to output e.!. telephone and electricity bill. Cost c+assification ased on contro++a i+ity Contro++a +e costs 7 %re incurred in a particular responsibility center and relate to a defined time span. They can be influenced by the action of the executive headin! the responsibility center e.!. direct costs. "ncontro++a +e costs 7 %re costs are influenced by the action of the responsibility center mana!er e.!. expenditure incurred by the tool room are controllable by the foreman in char!e of that section, but the share of tool room expenditure which are apportioned to the machine shop are not controllable by machine shop foreman. Q 12. Define e)*+icit costs. =o! is it different from im*+icit costs$ ()*+ain in rief the e)*+icit cost !ith e)am*+es. ()*+ain in rief the :ut of *ocket cost !ith e)am*+es.
(May ,2 - . marks)(May ,' - . marks) (#CC May ,' 3 . marks)

A. ()*+icit costs4 These costs are also #nown as out of *ocket costs. They refer to those costs which involves immediate payment of cash. *alaries, wa!es, posta!e and tele!ram, interest on loan etc. are some examples of explicit costs because they involve immediate cash payment. These payments are recorded in the boo#s of account and can be easily measured. Main *oints of difference4 The followin! are the main points of difference between explicit and implicit costs. (i) Implicit costs do not involve any immediate cash payment. %s such they are also #nown as imputed costs or economic costs. (ii) Implicit costs are not recorded in the boo#s of account but yet, they are important for certain types of mana!erial decisions such as equipment replacement and relative profitability of two alternative courses of action. Q 13. Discuss the four different methods of costing a+ong!ith their a**+ica i+ity to concerned industry$
marks) (%o& 99 - 4

A. +our different methods of costin! alon! with their applicability to concerned industry have been discussed as below' .. >o Costing4 The ob ective under this method of costin! is to ascertain the cost of each ob order. % ob card is prepared for each ob to accumulate costs. The cost of the ob is determined by addin! all costs a!ainst the ob it is incurred. This method of costin! is used in printin! press, foundries and !eneral en!ineerin! wor#shops, advertisin! etc. /. ?atch Costing4 This system of costin! is used where small components9parts of the same #ind are required to be manufactured in lar!e quantities. 6ere batch of similar products is treated as a ob and cost of such a ob is ascertained as discussed under ., above. If in a cycle manufacturin! unit, rims are produced in batches of /,4:: units each, then the cost will be determined in relation to a batch of /,4:: units. 2. Contract Costing4 If a ob is very bi! and ta#es a lon! time for its completion, then method used for costin! is #nown as Contract Costin!. 6ere the cost of each contract is ascertained separately. It is suitable for firms en!a!ed in the construction of brid!es, roads, buildin!s etc. 3. :*erating Costing4 The method of Costin! used in service renderin! underta#in!s is #nown as operatin! costin!. This method of costin! is used in underta#in!s li#e transport, supply of water, telephone services, hospitals, nursin! homes etc. Q 14. Distinguish et!een #eriod Costs and Discretionary Costs.
marks) (May@ %o& ,' - .

A. &eriod costs' There are the costs, which are not assi!ned to the products but are char!ed as expenses a!ainst the revenue of the period in which they are incurred. %ll non"manufacturin! costs such as !eneral and administrative expenses, sellin! and distribution expenses are period costs. -iscretionary costs' *uch costs are not tied to a clear cause and effect relationship between inputs and outputs. They arise from periodic decisions re!ardin! the maximum outlay to be incurred. 0xamples are 7 advertisin!, public relations, trainin! etc. Q 1 . ?rief+y discuss@ ho! the synergetic effect he+* in reduction in costs$ (#CC May ,' 3 .
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A. Two or more products are produced and mana!ed to!ether. The result of combined efforts is hi!her than sum of the results of individual products. %nalysis of syner!etic effect is helpful in cost control. Q 1!. What items are genera++y inc+uded in good uniform costing manua+$
marks) (#CC May ,' 3 9

A. Uniform costin! manual includes essential information and instructions to implement accountin! procedures. (a) Introduction' It includes ob ects and scope of the plannin!. (b) %ccountin! procedure and plannin! includes rules, and !eneral principle to be followed. (c) Cost accountin! plannin! includes methods of costin!, relation between cost and financial accounts and methods of inte!ration. Q1". Distinguish et!een Cost reduction and Cost contro+.
marks) (%o& ,.@ May ,9@ ,4@ %o& ,4 - 4 marks)(%o& ,' - 9

A.

Cost reduction .. It aims at achievin! a reduction in unit cost of !oods manufactured or services rendered without impairin! their suitability for the use intended. /. It does not reco!nise any condition as permanent

Cost control It aims at achievin! the pre"determined cost tar!ets and ends when the tar!ets are achieved. It entails tar!et settin!, ascertainin! the actual
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and believe that by waste reduction, expense reduction and increased production cost reduction ob ective can be achieved. 2. It assumes existence of concealed potential savin!s and challen!es the norm. 3. It is a corrective function. Q 1#. Distinguish et!een *roduct cost and *eriod cost.
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performance and comparin! it with the tar!ets, investi!atin! the variances and ta#in! remedial measures. It does not challen!es norms or standards established for the purpose. It is a preventive function.
(#CC >une ,9 3 .

A. &roduct costs are associated with the purchase and sale of !oods. In the production scenario, such costs are associated with the acquisition and conversion of materials and all other manufacturin! inputs into finished product for sale. 6ence under absorption cost, total manufacturin! costs constitute inventoriable or product cost. &eriods costs are the costs, which are not assi!ned to the products but are char!ed as expense a!ainst revenue of the period in which they are incurred. ;eneral %dministration, mar#etin!, sales and distributor overheads are reco!ni)ed as period costs. Q 1$. 8tate and e)*+ain the differences et!een <inancia+ 7ccounting@ Cost 7ccounting and Management 7ccounting.
(M()

A. "elations#ip bet$een cost accountin!% financial accountin!% mana!ement accountin! and financial mana!ement: Cost %ccountin! is a branch of accountin!, which has been developed because of the limitations of +inancial %ccountin! from the point of view of mana!ement control and internal reportin!. +inancial accountin! performs admirably, the function of portrayin! a true and fair overall picture of the results or activities carried on by an enterprise durin! a period and its financial position at the end of the year. %lso, on the basis of financial accountin!, effective control can be exercised on the property and assets of the enterprise to ensure that they are not misused or misappropriated. To that extent financial accountin! helps to assess the overall pro!ress of a concern, its stren!th and wea#nesses by providin! the fi!ures relatin! to several previous years. -ata provided by Cost and +inancial %ccountin! is further used for the mana!ement of all processes associated with the efficient acquisition and deployment of short, medium and lon! term financial resources. *uch a process of mana!ement is #nown as +inancial 1ana!ement. The ob ective of +inancial 1ana!ement is to maximise the wealth of shareholders by ta#in! effective Investment, +inancin! and -ividend decisions. <n the other hand, 1ana!ement %ccountin! refers to mana!erial processes and technolo!ies that are focused on addin! value to or!anisations by attainin! the effective use of resources, in dynamic and competitive contexts. 6ence, 1ana!ement %ccountin! is a distinctive form of resource mana!ement which facilitates mana!ement$s decision ma#in! by producin! information for mana!ers within an or!anisation. Q 2%. %ame the &arious re*orts ((+a oration not needed) that may e *ro&ided y the Cost 7ccounting De*artment of a ig manufacturing com*any for the use of its e)ecuti&es. (May 9- - 5
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A. =arious reports that may be provided by the Cost %ccountin! -epartment of a bi! manufacturin! Company for the use of its executives are as under' (i) Cost *heets (ii) *tatements of material consumption (iii) *tatements of labour utilisation (iv) <verheads incurred compared with bud!ets (v) *ales effected compared with bud!ets (vi) 8econciliation of actual profit with estimated profit (vii) The total cost of inventory carried (viii) The total cost of abnormally spoiled wor# in factory and abnormal losses in stores (ix) >abour turnover statements (x) 0xpenses incurred on research and development compared with bud!eted amounts. Q 21. Define the fo++o!ing4 (a) Am*uted cost ( ) Ca*ita+ised cost

(#CC %o& ,9 - . Marks)

A. (a) Imputed Cost' These costs are notional costs which do not involve any cash outlay. Interest on capital, the payment for which is not actually made, is an example of Imputed Cost. These costs are similar to opportunity costs. (b) Captialised Cost' These are costs which are initially recorded as assets and subsequently treated as expenses.
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Q 22. Define uniform costing.

marks)

(%o& ,,@ ,' - 1@ 4

Write a short note on uniform costing. (May 91 - 9 marks) A. (hen a number of firms in an industry a!ree amon! themselves to follow the same system of costin! in detail, adoptin! common terminolo!y for various items and processes they are said to follow a system of uniform costin!. In such a case, a comparison of the performance of each of the firms can be made with that of another, or with the avera!e performance in the industry. Under such a system it is also possible to determine the cost of production of !oods which is true for the industry as a whole. It is found useful when tax"relief or protection is sou!ht from the ;overnment. Q 23. Discuss the &arious re*orts *ro&ided y Cost 7ccounting de*artment.
marks) (%o& ,' - 4

A. The followin! are the various 8eports provided by Cost %ccountin! -epartment' (i) Cost sheet settin! out the total cost, analysed into various elements, !ivin! comparative fi!ure of previous period and other plants under the same mana!ement. (ii) Consumption of material statements. (iii) >abour utili)ation statements, details about total number of hours paid for, standard hours for output, idle time and causes thereof. (iv) <verheads incurred compared with bud!ets. (v) 8econciliation of actual profit earned with estimated or bud!eted profit. (vi) Total cost of abnormally spoiled wor# in the factory and abnormal loss and store. (vii) Total cost of inventory carried, number of monthly stoc#s would be sufficient. (viii) >abour turnover and cost of recruitment and trainin! of new employee. (ix) 0xpenses incurred on 8 ? - as compared to bud!eted amount.

2 &ater'a(
Q 1. Distinguish et!een ?i++ of Materia+ and Materia+ BeCuisition %ote. Write notes on ?i++ of Materia+. (May 9- - 4 marks) A. ?i++ of Materia+4 It is a comprehensive list of materials with exact description and specifications, required for a ob or other production units. This also provides information about required quantities so that if there is any deviation from the standards, it can easily be detected. It is prepared by the 0n!ineerin! or &lannin! -epartment in a standard form. Materia+ reCuisition %ote4 It is a formal written demand or request, usually from the production department to store for the supply of specified materials, stores etc. It authorises the store#eeper to issue the requisitioned materials and record the same on bin card. The purpose of bill of material is to act as a sin!le authorisation for the issue of all materials and stores items mentioned in it. It provides an advance intimation to store department about the requirements of materials. It reduces paper wor#. It serves as a wor# order to the production department and a document for computin! the cost of material for a particular ob or wor# order to the cost department. The purpose of material requisition note is to draw material from the store by concerned departments. Q 2. (hat are the main ob ectives of material control @ 0xplain the important requirements to attain these ob ectives. A. Ob&ectives of system of material control: (i) 0nsurin! that no activity, particularly production, suffers from interruption for want of materials and stores. This requires constant availability of every item that may be needed howsoever small its cost may be. (ii) *eein! to it that all the materials and stores are acquired at the lowest possible. (iii) 1inimisation of the total cost involved, both for acquirin! stoc#s and for holdin! them. (iv) %voidance of unnecessary losses and wasta!es that may arise from deterioration in quality due to defective or lon! stora!e or from obsolescence. (v) 1aintenance of proper records to ensure that reliable information is available for all items of materials and stores. This will help in detectin! losses ? pilfera!es. It will facilitate proper production plannin!. "e'uirements of material control: 1aterial control requirements are as follows'. .. &roper co"ordination of all departments involved &i0.@ finance, purchasin!, receivin!, inspection, stora!e, accountin! and payment. /. -eterminin! purchase procedure to see that purchases are made, after ma#in! suitable enquiries, at the most favourable terms to the firm. 2. Use of standard forms for placin! the order, notin! receipt of !oods, authorisin! issue of the materials etc. 3. &reparation of bud!ets concernin! materials, supplies and equipment to ensure economy in purchasin! and use of materials. 4. *tora!e of all materials and supplies in a well desi!nated location with proper safe!uards. 5. <peration of a system of perpetual inventory to!ether with continuous stoc# chec#in! so that it is possible to determine at any time the amount and value of each #ind of material in stoc#. Q 3. Discuss rief+y ho! the fo++o!ing items are to e treated in costs4(i) Carriage in!ards ra! materia+s (ii) 8torage +osses (iii) Cash discount recei&ed (i&) Ansurance costs on stocks of ra! materia+s. A. (i) Carria!e in$ards on ra$ materials: It represents the expenditure incurred in brin!in! raw materials to factory from outside. This expense is directly allocated to materials and thus forms a part of the .cost of such materials. (hen this is not practicable and allocation to specific items of materials is difficult, the expense is treated as manufacturin! overhead and is char!ed to cost of production at a predetermined rate. In some of the underta#in!s the practice is to char!e these expenses as a percenta!e of cost, wei!ht or some other physical unit of material. (ii) Stora!e losses4 The losses arisin! out of stora!e of material can be classified into two cate!ories. The treatment of losses under each cate!ory in Cost %ccounts is as under'"
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(a) >osses due to reasons li#e evaporation, shrin#a!e, absorption and moisture, etc. are considered as normal losses. *uch losses are absorbed by !ood production units by inflatin! the cost of material issued for production. (b) >osses due to fire, flood, storm, theft etc. are treated as abnormal losses. If these losses are heavy and are not recoverable from the insurance authorities, it is preferred to char!e them to Costin! &rofit and >oss %ccount. (iii) Cas# discount received: It is an allowance !iven by the vendor for prompt payment of material price. The opinion amon! accountants about its treatment differs. Two prevalent approaches for treatin! the cash discount received are as follows'" (a) The cash discount received in the course of materials buyin! should be deducted from the invoice price of the materials. This way the discount received will reduce the purchase price of the materials. (b) It may be treated as an item of financial nature and therefore be #ept outside the purview of cost accountin!. 6owever, it can be dealt in the followin! manner. The full invoice price should be char!ed to the material account creditin! the suppliers with the net invoice price, and the discount earned account with the amount of cash discount received. If the prompt payment could not be made, the discount lost is debited to the discount lost account. %ny difference between the discount earned and discount lost may be treated as an item of administrative overhead. (iv) (nsurance costs on stocks of ra$ materials: The amount paid as insurance costs (insurance premium) on stoc#s of raw materials is meant for coverin! the ris# which may arise due to fire, theft, riot etc. The insurance cost is apportioned over different materials on the basis of their value. This cost may be char!ed directly to the cost of material. Q 4. Write short note on (i) Be*+acement #rice and (ii) 8tandard #rice A. (i) Replacement Price Method: 8eplacement price is defined as the price at which it is possible to purchase an item, identical to that which is bein! replaced or revalued. Under this method, materials issued are valued at the replacement cost of the items. This method pre"supposes the determination of the replacement cost of materials at the time of each issueA &i0.@ the cost at which identical materials could be currently purchased. The product cost under this method is at current mar#et price, which is the main ob ective of the replacement price method. This method is useful to determine true cost of production and to value material issues in periods of risin! prices, because the cost of material considered in cost of production would be able to replace the materials at the increased price. Advantage: &roduct cost reflects the current mar#et prices and it can be compared with the sellin! price. Disadvantage: The use of the method requires the determination of mar#et price of material before each issue of material. *uch a requirement creates problems. (ii) Standard Price Method: Under this method, materials are priced at some predetermined rate or standard price irrespective of the actual purchase cost of the materials. *tandard cost is usually fixed after ta#in! into consideration the followin! factors' (i) Current prices, (ii) %nticipated mar#et trends, and (iii) -iscount available and transport char!es etc. *tandard prices are fixed for each material and the requisitions are priced at the standard price. This method is useful for controllin! material cost and determinin! the efficiency of purchase department. In the case of hi!hly fluctuatin! prices of materials, it is difficult to fix their standard cost on lon!"term basis. Advantages: (.) The use of the standard price method simplifies the tas# of valuin! issues of materials. (/) It facilitates the control of material cost and the tas# of ud!in! the efficiency of purchase department. (2) It reduces the clerical wor#. Disadvantages: (.) The use of standard price does not reflect the mar#et price and thus results in a profit or loss. (/) The fixation of standard price becomes difficult when prices fluctuate frequently. Q
marks)

. ()*+ain the conce*t of D7?C 7na+ysisD as a techniCue of in&entory contro+. (May ,, - 9 marks)(Nov 04 - 4 marks)(#CC May ,- 3 9
(%o& 9- - 1 marks) (May 91 - 4 marks)

What do you understand y 7?C ana+ysis of in&entory contro+$ Write short note on 7?C 7na+ysis. 7+so e)*+ain the ro+eEim*ortance of 7?C ana+ysis in materia+ contro+. A. )*C )nalysis as a tec#ni'ue of (nventory Control:

It is a system of inventory control. It exercises discriminatin! control over different items of stores classified on the basis of investment involved. Usually they are divided into three cate!ories accordin! to their importance, namely, their value and frequency of replenishment durin! a period. B%$ cate!ory of items consists of only a small percenta!e i.e. about .:C of total items handles by the stores but require heavy investment about D:C of inventory value, because of their hi!h price or heavy requirement or both. BE$ cate!ory of items are relatively less important 7 /:C of the total items of material handled by stores and C of investment required is about /:C of total investment in inventories. BC$ cate!ory 7 D:C of total items handled and .:C of value. +or B%$ cate!ory items, stoc#s levels and 0<F are used and effective monitorin! is done. +or BE$ cate!ory same tools as in B%$ cate!ory are applied. +or BC$ cate!ory of items, there is no need of exercisin! constant control. <rders for items in this !roup may be placed after 5 months or once in a year, after ascertainin! consumption requirement. (mportance of )*C )nalysis: %EC analysis helps the mana!ement in the followin! ways' (.) The investment in inventories is optimised throu!h a close and direct control over % items. This would naturally release funds which can then be channelised into more profitable areas. (/) The orderin! and carryin! costs are reduced since the mana!ement would attempt to optimise such costs so far as they relate to the bul# of the items. (2) If the mana!ement see#s to exercise direct control over all the items of inventory, the inventory control system would become very expensive. %EC analysis therefore cuts down the cost of the system and relates its cost to the attendant benefits. (3) (ith scientific control of inventories, the stoc# turnover rate can be maintained at comparatively hi!h levels. The concept of %EC analysis can be used in areas other than inventory also. This technique basically emphasises that where the items to be controlled are numerous, one should cate!orise them accordin! to their importance. Close control should then be exercised on the most si!nificant cate!ory. <n the less important cate!ories, the de!ree of control maybe related to the benefit from control. Thus finally it may be concluded that %EC analysis plays an important role for a sound system of material control. Q !. Descri e *er*etua+ in&entory records and continuous stock &erificationEcontinuous stock taking. (%o& 91 4 marks)(May ,2 9
marks)

A. &erpetual inventory records represents a system of records maintained by the stores department. It in fact comprises of (i) Ein cards, and (ii) *tores >ed!er. Ein cards maintains a quantitative record of receipts, issues and closin! balances of each item of stores. *eparate bin cards are maintained for each item. 0ach card is filled up with the physical movement of !oods i.e. on its receipt and issue. >i#e bin cards the stores led!er is maintained to record all receipts and issues in respect of materials. 0ntries in it are made with the help of !oods received notes and material issue requisitions. % perpetual inventory record is usually chec#ed by a pro!ramme of continuous stoc# verification. Continuous stoc# verification means the physical chec#in! of those inventory records (which are maintained under perpetual inventory) with actual stoc#. &erpetual inventory records helps in proper material control as discrepancies in physical stoc# and boo# fi!ures are re!ularly reconciled throu!h continuous stoc# verification. Q ". =o! is norma+ and a norma+ +oss of materia+ arising during storage treated in Cost 7ccounts$
marks) (May ,2 - 5

A. Cost )ccounts treatment of normal and abnormal loss of material arisin! durin! stora!e: The difference between the boo# balance and actual physical stoc#, which may either be !ain or loss, should be transferred to Inventory %d ustment %ccount pendin! scrutiny to ascertain the reason for the difference. If on scrutiny, the difference arrived at is considered as normal, then such a difference should be transferred to overhead control account and if abnormal, it should be debited to costin! profit and loss account. In the case of normal losses, an alternative method may be used. Under this method the price of the material issued to production may be inflated so as to cover the normal loss. Q #. ()*+ain4 (i) >ust in ;ime (>A;) *roduction
marks)

(ii) >ust-in-time (>A;) *urchasing

(May99 - 9

A. (i) +ust-in-time (+( ) production: &roduction system in which each component on a production line is produced immediately as needed by the next step in the production line.
10

(ii) +ust-in-time (+( ) purc#asin!: The purchase of !oods or materials such that delivery immediately precedes demand or use. In the extreme, no inventories would be held. Q $. D;o e a +e to ca+cu+ate a asic (:F certain assum*tions are necessary. D/ist do!n these assum*tions. (%o& 95 - .
marks)

A. The computation of economic order quantity is sub ect to the followin! assumptions' (i) <rderin! cost (per order) and carryin! cost (per unit9annum) are #nown and constant. (ii) %nticipated usa!e (in units) of material for a period is uniform and #nown. (iii) Cost per unit of the material (to be purchased) is #nown and it is constant. Q 1%. =o! is s+o! mo&ing and non-mo&ing item of stores detected and !hat ste*s are necessary to reduce such stocks$ A. The existence of slow movin! and non"movin! item of stores can be detected in the followin! ways' (i) Ey preparin! and scannin! periodic reports showin! the status of different items or stores. (ii) Ey calculatin! the stoc# holdin! of various items in terms of number of days9 months of consumption. (iii) Ey computin! ratios periodically, relatin! to the issues as a percenta!e of avera!e stoc# held. (iv) Ey implementin! the use of a well desi!ned information system. ,ecessary steps to reduce stock of slo$ movin! and non-movin! item of stores: (i) &roper procedure and !uidelines should be laid down for the disposal of non"movin! items, before they further deteriorates in value. (ii) -iversify production to use up such materials. (iii) Use these materials as substitute, in place of other materials. Q 11. Distinguish et!een ?in Card and 8tores /edger.
marks) (May ,. - . marks)(%o& ,4 - . marks)(May ,, - 4 marks)(May ,9 - . marks)(May 99 - 4

(%o& ,2 - 4 marks)

A.

*in Card .. Ein"cards are maintained in the stores and are servin! the purpose of stoc# re!ister. /. Ein card is the stores recordin! document. 2. Inter departmental transfer of materials do not appear in bin"cards. 3. 0ntries in it are posted by the issue cler#. 6e records the Cuantity about receipts, issues and closin! balance alon! with code number of material, maximum, minimum and reorder levels. 4. 6ere transactions are posted individually. &ostin! is done at the time of issue of material. Q 12. ()*+ain ?in Cards and 8tock Contro+ Cards.
- . Marks)

Stores -ed!er *tores led!er is maintained in the cost accounts department. The stores led!er is an accountin! record. Inter departmental transfer of materials appear only in stores led!er. 6ere entries are posted by the stores led!er cler#. 6e records the Cuantities and &a+ue about receipts, issues and closin! balance alon! with code number of material, maximum, minimum and reorder levels. 6ere transactions can be posted periodically. &ostin! is done after the issue of materials.
(May ,'

A. Ein Cards are quantitative records of the stores receipt, issue and balance. It is #ept for each and every item of stores by the store #eeper. 6ere, the balance is ta#en out after each receipt or issue transaction *toc# control cards are also similar to Ein Cards. *toc# control cards contain further information as re!ards stoc# on order. These cards are #ept in cabinets or trays or loose binders. Q 13. ()*+ain@ !hy the /ast in <irst out (/A<:) has an edge o&er <irst in <irst out (<A<:) or any other method of *ricing materia+ issues. (#CC %o& ,' 3 9
marks)

()*+ain the ad&antages that !ou+d accrue in using the /A<: method of *ricing for the &a+uation of ra! materia+ stock. A. /A<:- /ast-in-first-out4 % method of pricin! for the valuation of raw material stoc#. It is based on the assumption that the items of the last batch (lot) purchased are the first to be issued. Therefore, under this method, the price of the last batch (lot) of raw material is used for pricin! raw material issues. The advanta!es that would accrue from the use of >I+< method of pricin! the valuation of raw materials are as follows'" (i) The cost of the material issued will be reflectin! the current mar#et price. (ii) The use of the method durin! the period of risin! prices does not reflect undue hi!h profit in the income statement.
11

(iii) (iv) (v)

In the case of fallin! price, profit tend to rise due to lower material cost, yet the finished !oods appear to be more competitive and are at mar#et price. <ver a period, the use of >I+< will iron out the fluctuations in profit. -urin! the period of inflation, >I+< will tend to show the correct profit.

Q 14. ()*+ain <A<: method of &a+uation of materia+ issue. Discuss the effect of rising *rices and fa++ing *rices on this method of *ricing of materia+ issues. 7+so gi&e its ad&antages. A. It is a method of pricin! the issues of materials, in the order in which they are purchased. In other words, the materials are issued in the order in which they arrive in the store or the items lon!est in stoc# are issued first. Thus each issue of material only recovers the purchase price which does not reflect the current mar#et price. This method is considered suitable in times of fallin! price because the material cost char!ed to production will be hi!h while the replacement cost of materials will be low. Eut, in the case of risin! prices, if this method is adopted, the char!e to production will be low as compared to the replacement cost of materials. Advantages: .. It is simple to understand and easy to operate. /. 1aterial cost char!ed to production represents actual cost with which the cost of production should have been char!ed. 2. In the case of fallin! prices, the use of this method !ives better results. 3. Closin! stoc# of material will be represented very closely at current mar#et price. Q 1 . What is a *urchase reCuisition$
marks) (%o& 9- - 4

A. % &urchase requisition is a form used for ma#in! a formal request to the purchasin! department to purchase materials. &urchase requisitions are usually initiated by (i) % store department for re!ular and standard items held in the stoc#. (ii) The production control department for special material required for specific obs. (iii) The maintenance department for maintenance equipment and items of capital expen diture. (iv) The heads of departments for office equipments. The aforesaid arran!ement is only a matter of convenience. In some concerns distinction is made between re!ular indents and special indents, dependin! upon whether the items are needed for replacin! stoc#s or for special orders. 0ach purchase requisition should clearly state the quantity, quality and other specifications in the appropriate column of the !iven specimen form alon! with the purpose for which materials are required. It should also indicate the date by which such materials are needed. -ependin! upon the procedure to be followed appropriate number of copies of the purchase requisitions may be prepared and used accordin!ly. Q 1!. What is (conomic :rder Fuantity$ A. Economic Order .uantity: 0conomic order quantity represents the si)e of the order for which both orderin! and carryin! costs to!ether are minimum. If purchases are made in lar!e quantities, inventory carryin! cost will be hi!h. If the order si)e is small, orderin! cost will be hi!h. 6ence, it is necessary to determine the order quantity for which orderin! and carryin! costs are minimum. The formula used for determinin! economic order quantity is as follows' / %< 0<F G C (here' % is the annual consumption of material in units < is the cost of placin! an order (orderin! cost per order) C is cost of interest and storin! one unit of material for one year (carryin! cost per unit per annum) Q 1". ()*+ain (conomic ?atch Fuantity in ?atch Costing. (May ,' - . Marks) A. There are two types of costs involved in Eatch Costin! (i) set up costs(ii) carryin! costs. If the batch si)e is increased, set up cost per unit will come down and the carryin! cost will increase. If the batch si)e is reduced, set up cost per unit will increase and the carryHn! cost will come down. 0conomic Eatch quantity will balance both these opponent costs. It is calculated as follows' /-* 0EF = c (here,
12

G %nnual -emand in units * G *et up cost per batch C G Carryin! cost per unit per annum. Q 1#. What is materia+ hand+ing cost$ =o! !i++ you dea+ !ith it in cost account$
marks)

(May 99 - 9

A. Materia+ hand+ing cost4 It refers to the expenses involved in receivin!, storin!, issuin! and handlin! materials. To deal with this cost in cost accounts there are two prevalent approaches as under' +irst approach su!!ests the inclusion of these costs as part of the cost of materials by establishin! a separate material handlin! rate e.!., at the rate of percenta!e of the cost of material issued or by usin! a separate material handlin! rate which may be established on the basis of wei!ht of materials issued. Under another approach these costs may be included alon! with those of manufacturin! overhead and be char!ed over the products on the basis of direct labour or machine hours.
Q 1$. Discuss the treatment of s*oi+age and defecti&es in Cost 7ccounting.
(#CC May ,'@ >une ,9 3 9 marks)(#(. %o& ,' - 4 marks) (May ,9 - 9 marks)

A. Spoila!e: *poila!e is the tem used for materials which are badly dama!ed in manufacturin! operations, and it cannot rectified economically and hence ta#en out of the process to be disposed of in some manner without further processin!. %orma+ spoila!e costs are included in costs either char!in! it to production order or by char!in! it to production overheads so that it is spread over all products. %ny value reali)ed from spoila!e is credited to production order or production overhead account as the case may be. Cost of a norma+ spoila!e is char!ed to costin! profit ? loss %9c. Defectives: -efectives si!nifies those units or portions of production which can be rectified and turned cut as !ood units by application of additional material, labour or other service. %orma+ defectives can be recovered ' char!ed to !ood production ' char!ed to !eneral overhead ' char!ed to department. If defectives are a norma+ and are due to causes beyond the control of or!ani)ation then they should be char!ed to profit and loss %9c. Q 2%. Differentiate et!een Gscra*H and Hdefecti&esH and ho! they are treated in cost accounting.
marks) (#CC %o& ,- 3 .

A. Scrap: *crap is incidental residence from certain type of manufacture, usually of small amount and low value, recoverable without further processin!. The cost of scrap is borne by !ood units and income scrap is treated as other income. Defectives: -efectives si!nifies those units or portions of production which can be rectified and turned cut as !ood units by application of additional material, labour or other service. %orma+ defectives can be recovered ' char!ed to !ood production ' char!ed to !eneral overhead ' char!ed to department. If defectives are a norma+ and are due to causes beyond the control of or!ani)ation then they should be char!ed to profit and loss %9c. Q 21. Distinguish amongst4 Waste 8*oi+age 8a+&age Bectification 8cra*. =o! are they treated in Cost 7ccounts$ Discuss the accounting treatment of defecti&es in cost accounts.
marks)

(May ,, - 4

A. Waste: It represents that portion of basic raw materials lost in processin! havin! no recoverable value. (aste may be visible"remnants of basic raw materialsIor invisible, e.!., disappearance of basic raw materials throu!h evaporation, smo#e etc. %orma+ waste is absorbed in the cost of net output, whereas a norma+ waste is transferred to the Costin! &rofit and >oss %ccount.
13

Spoila!e: *poila!e is the tem used for materials which are badly dama!ed in manufacturin! operations, and it cannot rectified economically and hence ta#en out of the process to be disposed of in some manner without further processin!. %orma+ spoila!e costs are included in costs either char!in! it to production order or by char!in! it to production overheads so that it is spread over all products. %ny value reali)ed from spoila!e is credited to production order or production overhead account as the case may be. Cost of a norma+ spoila!e is char!ed to costin! profit ? loss %9c. Salva!e: *alva!ed material refers to the material retrieved from the spoiled wor#. *alva!e is the process by which salva!ed material is retrieved. The salva!ed units of material are usable in the production. The value of salva!ed material may be credited to the account to which spoila!e is char!ed. "ectification: It means brin!in! bac# the defective units either to standard units of production or as seconds, by rewor#in!. Eefore the start of rectification wor#, an estimate of the cost of rectification is prepared and compared with the excess value to be obtained after rectification. The concern only !oes ahead with the tas# of rectification if the aforesaid comparison is found favourable. The tas# of rectification is usually carried out under a J8ectification (or# <rderJ, and all costs of re"wor# are collected a!ainst this wor# order for material, labour and overhead. If the defective production is inherent in the process of manufacture, and arises as a normal consequence of productive activities and if it can be identified with specific obs, the rectification cost is char!ed to the obs as the cost of manufacturin! !ood units of the product. This will have the effect of addin! to the cost of the obs. If the expenditure on rectification is considered abnormal, it is excluded from product costs and char!ed to Costin! &rofit and >oss %ccount. Scrap: *crap is incidental residence from certain type of manufacture, usually of small amount and low value, recoverable without further processin!. The cost of scrap is borne by !ood units and income scrap is treated as other income. Q 22. Write short notes on any three of the fo++o!ing4 (i) Be-order Cuantity (ii) Be-order +e&e+ (iii) Ma)imum stock +e&e+ (i&) Minimum stock +e&e+ (%o& ,9 - 1 marks) Distinguish et!een Be-order +e&e+ and Be-order Cuantity. A. (i) "e-order 'uantity4 It refers to the quantity of stoc# for which an order is to be placed at any one point of time. It should be such that it minimises the combined annual costs of"placin! an order and holdin! stoc#. *uch an orderin! quantity in other words is #nown as economic order quantity (0<F). 0<F G
/ %< C i

% G %nnual raw material usa!e quantity < G <rderin! cost per order C G Cost per unit i G Carryin! cost percenta!e per unit per annum (ii) "e-order level: It is the level at which fresh order should be placed for the replenishment of stoc#. G 1aximum re"order period K 1aximum usa!e G 1inimum level L consumption
%vera!e %vera!e time to obtain fresh sup plies

(iii) /a0 stock level: 1aximum level of an inventory item is its maximum quantity held in stoc# at any time. The mathematical formula used for its determination is as follows' 1aximum level G 8e"order level 7 (1inimum Consumption K 1inimum 8e"order period) L 8e"order quantity. (iv) /inimum stock level: 1inimum level indicates the lowest fi!ures of inventory balance, which must be maintained in hand at all times, so that there is no stoppa!e of production due to non"availability of inventory. The formula used for its calculation is as follows' 1inimum level of inventory G 8e"order level 7 (%vera!e rate of consumption K %vera!e time of inventory delivery). Q 23. Discuss rief+y the considerations go&erning the fi)ation of the ma)imum and minimum +e&e+s of in&entory.
14

A. Considerations for t#e fi0ation of ma0imum level of inventory1 1aximum level of an inventory item is its maximum quantity held in stoc# at any time. The mathematical formula used for its determination is as follows' 1aximum level G 8e"order level 7 (1inimum Consumption K 1inimum 8e"order period) L 8e"order quantity. The important considerations which should !overn the fixation of maximum level for various inventory items are as follows' (.) The fixation of maximum level of an inventory item requires information about re"order level. (/) Mnowled!e about minimum consumption and minimum delivery period for each inventory item should also be #nown. (2) The determination of maximum level also requires the fi!ure of economic order quantity. (3) %vailability of funds, stora!e capacity, nature of items and their price also are important for the fixation of minimum level. (4) In the case of important materials due to their irre!ular supply, the maximum level should be hi!h. Considerations for t#e fi0ation of minimum level of inventory 1inimum level indicates the lowest fi!ures of inventory balance, which must be maintained in hand at all times, so that there is no stoppa!e of production due to non"availability of inventory. The formula used for its calculation is as follows' 1inimum level of inventory G 8e"order level 7 (%vera!e rate of consumption K %vera!e time of inventory delivery). #e main considerations for t#e fi0ation of minimum level of inventory are as follo$s: .. Information about maximum consumption and maximum delivery period in respect of each item to determine its re"order level. /. %vera!e rate of consumption for each inventory item. 2. %vera!e delivery period for each item. The period can be calculated by avera!in! the maximum and minimum period.

15

3 )a*o+r
Q
(M()

1.

Distinguish

et!een

;ime

kee*ing

and

;ime

ooking.

A. )ttendance Procedure 2 ime-keepin!' It refers to correct recordin! of the employees, attendance time. There is difference between .time #eepin! and time boo#in!. The latter refers to brea# up of time on various obs while the former implies a record of total time spent by the wor#ers in a factory. %ttendance 8e!ister and 1etal -isc 1ethod are the manual methods of time"#eepin!. Time 8ecordin! Cloc#s and -ial Time 8ecords are the mechanical methods of time"#eepin!. ime-*ookin!: Information !enerated by time"#eepin! department do not show' how the total time was put to use in the factory how lon! he was #ept waitin! for one reason or another due to lac# of wor#, lac# of material and supplies, lac# of instructions, machine brea#downs, power failures and the li#e. These are all vital pieces of information necessary for the proper collection of cost data and for effective controllin! of costs. +or the collection of all such information, a separate record, !enerally #nown as Time (or Nob) card, is #ept. This is called time" boo#in!. Q
(M()

2.

Discuss

rief+y

the

im*ortant

factors

for

the

contro+

of

+a our

cost.

A. The main points which need consideration for controllin! labour costs are the followin!' (i) %ssessment of manpower requirements. (ii) Control over time"#eepin! and time"boo#in!. (iii) Time ? 1otion *tudy. (iv) Control over idle time and overtime. (v) Control over labour turnover. (vi) (a!e systems. (vii) Incentive systems. (viii) *ystems of wa!e payment and incentives. (ix) Control over casual, contract and other wor#ers. (x) Nob 0valuation and 1erit 8atin!. (xi) >abour productivity. Q 3. Discuss the o 6ecti&es of time kee*ing I time ooking. A. Time keeping has the following two objectives: (i) #re*aration of #ayro++4 (a!e bills are prepared by the payroll department on the basis of information provided by the time #eepin! department. (ii) Com*utation of Cost4 >abour cost of different obs, departments or cost centers are computed by costin! department on the basis of information provided by the time #eepin! department. #e ob&ectives of time bookin! are as follo$s: (i) To ascertain the labour time spent on the ob and the idle labour hours. (ii) To ascertain labour cost of various obs and products. (iii) To calculate the amount of wa!es and bonus payable under the wa!e incentive scheme. (iv) To compute and determine overhead rates and absorption of overheads under the labour and machine hour method. (v) To evaluate the performance of labour by comparin! actual time boo#ed with standard or bud!eted time. Q 4. Discuss rief+y the &arious factors necessary for introducing an incenti&e system. ()*+ain the characteristics of a good incenti&e system. A. =arious factors necessary for introducin! an incentive system are' (i) It should be ust both to the employer and to the employee. (ii) It should be stron! both ways i.e. it should have a standard tas# and a !enerous return. (iii) It should be unrestricted as to the amount of the earnin!. (iv) It should be reasonable, apart from bein! simple, for employee to fi!ure out his incentive in relation to his individual performance.
16

(v) It should be flexible and intimately related to other mana!ement controls. (vi) It should automatically assist supervision and, when necessary, aid team wor#. (vii) It should have employee$s support and in no way should it be paternalistic. (viii) It should have mana!erial support in so far as production material, quality control, maintenance and non"financial incentives are concerned. (ix) It should not be used temporarily and dropped in recession times as means of wa!e reduction. Q . Discuss the accounting treatment of Ad+e time and o&ertime !ages.
(May@ .,,9@ 9 marks)

Discuss the treatment of o&ertime *remium in Cost accounting. (%o&. .,,4@ 9 marks) (#CC May ,- 3 . marks) A. Accounting treatment of idle time wages in cost accounts: %orma+ id+e time is inherent in any ob situation and thus it cannot be eliminated or reduced. +or example' time !ap between the finishin! of one ob and the startin! of anotherA time lost due to fati!ue etc. The cost of normal idle time should be char!ed to the cost of production. This may be done by inflatin! the labour rate. It may be transferred to factory overheads for absorption, by adoptin! a factory overhead absorption rate. 7 norma+ id+e time is defined as the idle time which arises on account of abnormal causesA e.!. stri#esA loc#outsA floodsA ma or brea#down of machineryA fire etc. *uch an idle time is uncontrollable. The cost of abnormal idle time due to any reason should be char!ed to Costin! &rofit ? >oss %ccount. Treatment of Overtime Premium in Cost Accounting If overtime is resorted to at the desire of the customer, then overtime premium may be char!ed to the ob directly. If overtime is required to cope with !eneral production pro!ramme or for meetin! ur!ent orders, the overtime premium should be treated as overhead cost of the particular department or cost center, which wor#s overtime. If overtime is wor#ed in a department, due to the fault of another department, the overtime premium should be char!ed to the latter department. <vertime wor#ed on account of abnormal conditions such as flood, earthqua#e etc., should not be char!ed to cost but to costin! &9> %9c. Q !. What is o&ertime *remium$ ()*+ain the treatment of o&ertime *remium in cost accounting. 8uggest ste*s for contro++ing o&ertime. (%o& 95 - - marks) A. Overtime premium: <vertime is the amount of wa!es paid for wor#in! beyond normal wor#in! hours as specified by +actories %ct or by a mutual a!reement between the wor#ers union and the mana!ement. There is a practice is to pay for overtime wor# at hi!her rates. 6ence, payment of overtime consists of two elements, the normal wa!es e.!., the usual amount, and the extra payment i.e., the premium. This amount of extra payment paid to a wor#er under overtime is #nown as overtime premium. reatment of Overtime premium is Cost )ccountin!
(Same as in previous question)

Steps for Controllin! Overtime: (i) 0ntire overtime wor# should be duly authori)ed after investi!atin! the reasons for it. (ii) <vertime cost should be shown a!ainst the concerned department. *uch a practice should enable proper investi!ation and plannin! of production in future. (iii) If overtime is a re!ular feature, the necessity for recruitin! more men and addin! a shift should be considered. (iv) If overtime is due to lac# of plant and machinery or other resources, steps may be ta#en to install more machines, or to resort to sub"contractin!. (v) If possible an upper limit may be fixed for each cate!ory of wor#ers in respect of overtime. Q ". Discuss the effect of o&ertime *ayment on *roducti&ity. (%o& ,4 - 9 marks) A. (ffect of o&ertime *ayment on *roducti&ity4 <vertime wor# should be resorted to only when it is extremely essential because it involves extra cost. The overtime payment increases the cost of production in the followin! ways' .. The overtime premium paid is an extra payment in addition to the normal rate. /. The efficiency of operators durin! overtime wor# may fall and thus output may be less than normal output. 2. In order to earn more the wor#ers may not concentrate on wor# durin! normal time and thus the output durin! normal hours may also fall. 3. 8educed output and increased premium of overtime will brin! about an increase cost of production. Q #. ()*+ain the meaning of and the reasons for id+e time and discuss its treatment in cost accounting.
marks)
17

(%o& ,- - 9

A. Idle time refers to the labour time paid for but not utili)ed on production. It, in fact, represents the time for which wa!es are paid, but durin! which no output is !iven out by the wor#ers. This is the period durin! which wor#ers remain idle. Reasons for idle time: %ccordin! to reasons, idle time can be classified into normal idle time and abnormal idle time. ,ormal idle time is the time which cannot be avoided or reduced in the normal course of business. The main reasons for the occurrence of normal idle time are as follows' .. Time ta#en by wor#ers to travel the distance between the main !ate of factory and the place of their wor#. /. Time lost between the finish of one ob and startin! of next ob. 2. Time spent to overcome fati!ue. 3. Time spent to meet their personal needs li#e ta#in! lunch, tea etc. The main reasons for the occurrence of abnormal idle time are' .. -ue to machine brea# downs, power failure, non"availability of raw materials, tools or waitin! for obs due to defective plannin!. /. -ue to conscious mana!ement policy decision to stop wor# for some time. 2. In the case of seasonal !oods producin! units, it may not be possible for them to produce evenly throu!hout the year. *uch a factor too results in the !eneration of abnormal idle time. Treatment in Cost Acco nting:
(Same as in Q 5.)

Q $. Distinguish et!een Ad+e ;ime and Ad+e <aci+ities. =o! are they treated in Cost 7ccounts$ De&e+o* a system of contro+ for Ad+e ;ime in a factory. )1 Idle time refers to the labour time paid for but not utili)ed on production. It, in fact, represents the time for which wa!es are paid, but durin! which no output is !iven out by the wor#ers. This is the period durin! which wor#ers remain idle. %ccordin! to reasons, idle time can be classified into normal idle time and abnormal idle time. (dle facilities: The term .facility has a wider connotation which may also include production capacity. +acilities may be provided by fixed assets such as buildin! space, plants equipment capacity, etc. or by various service functions such as material services, production services, personal services etc. If a firm fails to ma#e full use of the facilities of its disposal, the firm may be said to have idle facilities. Thus idle facilities refer to that part of total facilities which remains unutilised due to any reason such as non"availability of raw material, power, lac# of demand etc. In Cost %ccountin! idle facilities are treated in the same way as those of idle capacity. reatment of idle time in Cost )ccountin!: (As given in Q 5.) reatment of idle facilities in Cost )ccountin!: ,ormal idle facilities cost which arises due to unavoidable reasons, should be included in the wor#s overhead. <n the other hand, abnormal idle facilities cost which arises due to plants or machines9facilities remainin! idle on account of trade depression or for want of wor# etc., should be written off to costin! profit and loss account. System of controllin! idle time: 1ana!ement should aim at eliminatin! controllable idle time and on a lon!"term basis reducin! even the normal idle time. This would require a detailed analysis of the causes leadin! to such idle time. -ependin! upon the particular causes, proper mana!erial action would be required to reduce the impact of such idle time. Easic control can be exercised throu!h periodical reports on idle time showin! a detailed analysis of the causes for the same, the departments where it is occurrin! and the persons responsible for it, alon! with a statement of the cost of such idle time. Q 1%. What do you understand y /a our ;urno&er$ =o! is it measured$ What are its causes$ What are the remedia+ ste*s you !ou+d suggest to minimi0e its occurrence$ What do you understand y +a our turno&er$ =o! is it measured$ (May ,9 - 2J4
marks)

Write short note on /a our ;urno&er. (May 91 - 4 marks) Write 8hort note on /a our ;urno&er. (%o& 94 - 4 marks) A. The process of wor#ers leavin! and comin! in business or!ani)ations !ives rise to the phenomenon of labour turnover. >abour turnover of an or!ani)ation in the rate of chan!e in its labour force durin! a specified period. This rate of chan!e is compared with an index which acts as a thermometer to ascertain its reasonableness. The suitable index of labour turnover may be the standard or usual labour turnover in the industry or locality, or the labour turnover rate for a past period. % hi!her labour turnover reflects that the wor#ers in the or!ani)ation are new and inexperienced, and it is a matter of concern to the or!ani)ation. %lso it accounts for an increase in cost of production and even disturbs the even flow of production in the mar#et.
18

Measurement of /a our ;urno&er4 (See next question) Causes of /a our ;urno&er : The main causes of labour turnover in an or!ani)ation9industry can be broadly classified under the followin! heads' (a) &ersonal Causes (b) Unavoidable Causes (c) %voidable Causes #ersona+ Causes are those which induce or compel wor#ers to leave their obs purely on personal !roundsA e.!. (i) Chan!e of ob for betterment. (ii) -iscontentment over the ob and wor#in! environment. "na&oida +e Causes are those under which it become obli!atory on the part of mana!ement to as# some or more of their employees to leave the or!ani)ationA such causes may include the followin!' (i) *horta!e of raw material, power, demand for the products, etc. (ii) Chan!e in the plant location. 7&oida +e Causes are those causes which require the attention of mana!ement on a continuous basis so as to #eep the labour turnover ratio as low as possible. The main causes are as follows' (i) -issatisfaction with ob, remuneration, hours of wor#, wor#in! conditions etc. (ii) >ac# of trainin! facilities and promotional avenues. (iii) >ow wa!es and allowances. Bemedia+ ste*s to minimi0e +a our turno&er4 (See Q 13.) Q 11. Discuss the three methods of ca+cu+ating +a our turno&er.
marks) (%o& ,4 - 9 (%o& ,' - 4 Marks)

Discuss the three methods of ca+cu+ating +a our turno&er. A. Methods of Calculating labour turnover (i) (ii) 8eplacement method G %v. number of employees on roll
,o. of employees replaced .:: ,o. of employees separated durin! the year

*eparation method G %v. number of employees on the roll durin! the year .::
(,o. of employees separated +,o. of employees replaced ) .:: %v. number of employees on roll durin! the period
(%o& 9- - 1

(iii) +lux method G

marks)

Q 12. What is the im*act of /a our ;urno&er on a manufacturing organisations !orking$

A. >abour turnover refers to the rate of chan!e in the composition of labour force of a concern durin! a specified period of time. The impact of labour turnover on a manufacturin! or!anisation$s wor#in! is many fold. In fact the labour turnover increases the cost of production in the followin! ways' (i) 0ven flow of production is disturbed. (ii) Cost of recruitment and trainin! increases. (iii) Erea#a!e of tools, wasta!e of materials increases. (iv) <verall production decreases due to the time lost between the leavin! and recruitment of new wor#ers. (v) 8eduction in sales accounts for loss of contribution and !oodwill consequently. Q 13. 0numerate the remedial steps to be ta#en to minimi)e the labour turnover.
marks) (#CC %o& ,' 3 9

A. The followin! steps are useful for minimi)in! labour turnover' (a) 0xit interview' %n interview be arran!ed with each out!oin! employee to ascertain the reasons of his leavin! the or!ani)ation. (b) Nob analysis and evaluation' to ascertain the requirement of each ob. (c) <r!anisation should ma#e use of a scientific system of recruitment, placement and promotion for employees. (d) <r!anisation should create healthy atmosphere, providin! education, medical and housin! facilities for wor#ers. (e) Committee for settlin! wor#ers !rievances. Q 14. 8tate the distinction et!een >o e&a+uation and Merit rating. A. >o e&a+uation can be defined as the process of analysis and assessment of obs to ascertain reliably their relative worth and to provide mana!ement with a reasonably sound basis for determinin! the basic internal wa!e and salary
19

(%o& 91 - 4 marks)(%o& 99 - 4 marks)(%o& ,2 - 9 marks)(#CC May ,- 3 9 marks)

structure for the various ob positions. In other words, ob evaluation provides a rationale for differential wa!es and salaries for different !roup of employees and ensures that these differentials are consistent and equitable. Merit rating is the quantitative or qualitative assessment of an employee$s personality or his performance on the ob made by his supervisor or other person qualified to ud!e. ;he main *oints of distinction et!een 6o e&a+uation and merit rating are as fo++o!s4 .. Nob evaluation is the assessment of the relative worth of obs within a company and merit ratin! is the assessment of the relative worth of the man behind a ob. /. Nob evaluation and its accomplishments are meant to set up a rational wa!e and salary structure whereas merit ratin! provides a scientific basis for determinin! fair wa!es for each wor#er based on his ability and performance. 2. Nob evaluation simplifies wa!e administration by brin!in! an uniformity in wa!e rates where as merits ratin! is used to determine fair rate of pay for different wor#ers. Q 1 . What do you understand y time and motion study$ Distinguish et!een time study and motion study. A. ;ime and motions study4 It is the study of time ta#en and motions (movements) performed by wor#ers while performin! their obs at the place of their wor#. Time and motion study has played a si!nificant role in controllin! and reducin! labour cost. Time *tudy is concerned with the determination of standard time required by a person of avera!e ability to perform a ob. 1otion study, on the other hand, is concerned with determinin! the proper method of performin! a ob so that there are no wasteful movements, hirin! the wor#er unnecessarily. 6owever, both the studies are conducted simultaneously. *ince materials, tools, equipment and !eneral arran!ement of wor#, all have vital bearin! on the method and time required for its completion. Therefore, their study would be incomplete and would not yield its full benefit without a proper consideration of these factors. Q 1!. Discuss t!o ty*es of Costs@ !hich are associated !ith +a our turno&er.
marks) (%o& ,9 - 9

Discuss the t!o ty*es of cost associated !ith +a our turno&er. (%o& 99 - 4 marks) A. Two types of costs associated with labour turnover are' (i) #re&enti&e costs4 These costs are incurred to #eep the labour turnover rate at a low level. They include costs of accommodation, transport facilities, medical services, welfare schemes, pension schemes, environment improvement, li!htin!, heatin!, air" conditionin! etc. The rate of labour turnover is usually low, if a company incurs hi!her preventive costs. (ii) Be*+acement costs4 These costs arise due to hi!h labour turnover, e.!. cost of advertisin!, recruitment, selection, trainin! ? induction, abnormal brea#a!e and scrap, extra wa!es ? overheads etc., caused as a result of inefficient and inexperienced newly recruited wor#ers. Q 1". 8tate the circumstances in !hich time rate system of !age *ayment can e *referred in a factory. (%o& ,4 - 9
marks)

A. In the followin! circumstances the time rate system of wa!e payment is preferred in a factory. .. &ersons whose services cannot be directly or tan!ibly measured, e.!., !eneral helpers, supervisory and clerical staff etc. /. (or#ers en!a!ed on hi!hly s#illed obs or renderin! s#illed services, e.!., tool ma#in!, inspection and testin!. 2. (here the pace of output is independent of the operator, e.!., automatic chemical plants. Q 1#. At shou+d e managements endea&or to increase in&entory turno&er ut to reduce +a our turno&er. ()*and and i++ustrate the idea contained in this statement. A. An&entory turno&er4 It is a ratio of the value of materials consumed durin! a period to the avera!e value of inventory held durin! the period. % hi!h inventory turnover indicates fast movement of stoc#. /a our turno&er4 It is defined as an index denotin! chan!e in the labour force for an or!ani)ation durin! a specified period. >abour turnover in excess of normal rate is termed as hi!h and below it as low turnover. (ffects of high in&entory turno&er and +o! +a our turno&er4 6i!h inventory turnover reduces the investment of funds in inventory and thus accounts for the effective use of the concern$s financial resources. It also accounts for the increase of profitability of a business concern. %s a!ainst hi!h labour turnover the low labour turnover is preferred because hi!h labour turnover causes"decrease in production tar!etsA increase in the chances of brea# down of machines at the shopfloor levelA increase in the number of accidentsA loss of customers and their brand loyalty due to either non"supply
20

of the finished !oods or due to sub"standard production of finished !oodsA increase in the cost of selection, recruitment and trainin!A increase in the material wasta!e and tools brea#a!e. %ll the above listed effects of hi!h labour turnover accounts for the increase in the cost of production9process9service. This increase in the cost finally accounts for the reduction of concern$s profitability. Thus, it is necessary to #eep the labour turnover at a low level. %s such, it is correct that mana!ement should endeavour to increase inventory turnover and reduce labour turnover for optimum and best utili)ation of available resources and reduce the cost of production and thus increase the profitability of the or!ani)ation. Q 1$. Distinguish et!een Direct and Andirect +a our.
marks) (%o& ,2 - .

A. -irect labour cost is the labour costs that is specifically incurred for or can be readily char!ed to or identified with a specific ob, contract, wor#"order or any other unit of cost. Indirect labour costs are labour costs which cannot be readily identified with products or services but are !enerally incurred in carryin! out production activity. The importance of the distinction lies in the fact that whereas direct labour cost can be identified with and char!ed to the ob, indirect labour costs cannot be so char!ed and are, therefore, to be treated as part of the factory overheads to be included in the cost of production. Q 2%. "nder the Bo!an #remium ?onus system@ a +ess efficient !orker can o tain same onus as a high+y efficient !orker. Discuss !ith suita +e e)am*+es. (May ,' - 4 Marks) A. Time ta#en time saved rate per hour Eonus under 8owan system G Time allowed +or example let time allowed for a ob G 3 hours and >abour rate G 8s. 4 per hour. Case ( : -ess efficient $orker If time ta#en G 2 hours Then time saved G 3 7 2 G . hour 2 hours . hour 8s. 4 =8s. 2.D4 Eonus G 3 hours Case (( : 3i!#ly efficient $orker If time ta#en G . hour Then time saved G 3 7 . G 2 hours . hour 2 hours 8s. 4 =8s. 2.D4 Eonus G 3 hours *o, it can be concluded that under 8owan *ystem, the less efficient wor#er and hi!hly efficient wor#er can !et the same bonus. Q 21. (numerate the &arious methods of ;ime ooking. A. The various methods of time boo#in! are' (a) Nob tic#et. (b) Combined time and ob tic#et. (c) -aily time sheet. (d) &iece wor# card. (e) Cloc# card. Q 22. Descri e rief+y@ ho! !ages may e ca+cu+ated under the fo++o!ing systems4 (i) Kantt task and onus system (ii) (mersons efficiency system (iii) Bo!an system (i&) =a+sey system (&) ?arth system. -iscuss the ;antt tas# and bonus system as a system of wa!e payment and incentives.

(#CC %o& ,- 3 9 marks) (,ov :3 " 2 mar#s)

21

A. (i) 4antt task and bonus system: This system is a combination of time and piecewor# system. %ccordin! to this system a hi!h standard or tas# is set and payment is made at time rate to a wor#er for production below the set standard. (a!es payable to wor#ers under the plan are calculated as under' :ut*ut (i) <utput below standard (ii) <utput at standard (iii) <utput over standard #ayment ;uaranteed time rate Time rate plus bonus of /:C (usually) of time rate 6i!h piece rate on wor#er$s output. (It is so fixed so as to include a bonus of /:C of time rate)

(ii) Emerson5s Efficiency System: Under this system wa!es may be calculated as below' Performance 6a!es / Eelow 55 92 C efficiency Time rate without any bonus 55 /92 C " .::C efficiency Eonus varies between .C to /:CO %bove .::C efficiency Eonus of /:C of basic wa!es plus .C for every .C increase in efficiency O%t .::C efficiency the bonus percenta!e will be /:C (iii) "o$an System: %s per this system standard time allowance is fixed for the performance of a ob and bonus is paid if time is saved.

(iv) 3alsey System: Under this system a standard time is fixed for each ob. If there is no savin! on this standard time allowance, the wor#er is paid only his day rate. (a!es under 6alsey *ystem G Time ta#en K Time rate L (4:C of time saved K time rate) (v) *art# System: This is particularly suitable for trainees and be!inners and also for uns#illed wor#ers. Q 23. Which de*artments are in&o+&ed in the contro+ of +a our costs$ Descri e rief+y the functions of the fo++o!ing de*artments in re+ation to +a our4 (a) #ersonne+ de*artment. ( ) (ngineering de*artment. (c) Cost 7ccounting de*artment. A. In a lar!e or!anisation, !enerally the followin! departments are involved in the control of labour costs' .. #ersonne+ De*artment " This department is assi!ned the duty of recruitin! wor#ers, trainin! them and maintainin! their record. It is the duty of this department to ensure that the persons recruited possess the qualifications and qualities necessary to perform well the concerned obs. /. (ngineering and Work 8tudy De*artment " This department prepares plans and specifications for each ob, supervises production activities, conducts time and motion studies, underta#es ob analysis, etc. 2. ;ime-kee*ing De*artment " This -epartment is primarily concerned with the maintenance of attendance records of the employees and the time spent by them on various obs, etc. 3. #ayro++ De*artment " This department is responsible for the preparation of payroll of the employees. 4. Cost 7ccounting De*artment " This department is responsible for the accumulation and classification etc. of all type of costs. %ll such data pertainin! to labour costs are also collected, analysed and allocated to various obs, processes, departments, etc., by this department.

22

4 O,erhea-s
Q 1. Define administration o&erheads and state rief+y the treatment of such o&erheads in Cost 7ccounts. (%o& 91 4
marks)

A. )dministration Over#ead: These are costs of formulatin! the policy, directin! the or!anisation and controllin! the operation of an underta#in!. These are not related directly to production activity or function. In other words, all expenses, incurred on policy formulation, direction, control, office administration and business mana!ement are included in administration overheads. reatment of )dministrative Over#eads in Cost )ccountin! (i) Charge to Costing #rofit and /oss 7ccount4 %ccordin! to this method administrative overheads should be treated as fixed cost as they are concerned with the formulation of policy. 6ence these overheads should be transferred to the Costin! &rofit and >oss %ccount. (ii) 7**ortionment et!een #roduction and 8e++ing and Distri ution4 %ccordin! to this method, it is assumed that administrative overheads are incurred both for production and for sellin! and distribution. Therefore these overheads should be divided on some equitable basis between production and sellin! and distribution activity. (iii) ;reat as a se*arate e+ement of tota+ cost4 6ere administration overheads are considered as a cost of a distinct and identifiable operation of the or!anisation necessary to carry on its activity. Therefore these overheads are recovered separately on some equitable basis which may be on cost or sales basis. Q 2. What is +anket o&erhead rate$ An !hich situations@ +anket rate is to e used and !hy$
marks) (May 99 - 9

()*+ain ?+anket o&erhead rate. (#CC %o& ,' 3 . marks) A. Elan#et overhead rate refers to the computation of one sin!le overhead rate for the entire factory. This is also #nown as plantwise or the sin!le overhead rate for the entire factory. It is determined as follows' 8ituation for using +anket rate4 The use of blan#et rate may be considered appropriate for factories which produce only one ma or product on a continuous basis, e.!. chemical plant, !lass plant etc.. It may also be used in those units in which all products utilise same amount of time in each department. If such conditions do not exist, the use of blan#et rate will !ive misleadin! results in the determination of the production cost, specially when such a cost ascertainment is carried out for !ivin! quotations and tenders. Q 3. What is Ad+e Ca*acity $ =o! shou+d this e treated in cost accounts$
marks) (May 9' - 1 (%o& ,2 - 4

=o! !ou+d you treat the id+e ca*acity costs in Cost 7ccounts$
marks)

Discuss accounting treatment of id+e ca*acity costs in cost accounting. (#CC >une ,9 3 9 marks) A. It is that part of the capacity of a plant, machine or equipment which cannot be effectively utilised in production. The idle capacity may arise due to lac# of product demand, no availability of raw"material, shorta!e of s#illed labour, shorta!e of power, etc. Costs associated with idle capacity are mostly fixed in nature. These costs remain unabsorbed or unrecovered due to under"utilisation of plant and service capacity. Idle capacity costs are treated in the followin! ways in Cost %ccounts. (a) If idle capacity is due to unavoidable reasons such as repairs ? maintenance, chan!e over of ob etc., a supplementary overhead rate may be used to recover the idle capacity cost. In this case, the costs are char!ed to production capacity utili)ed. (b) If idle capacity cost is due to avoidable reasons such as faulty plannin!, power failure etc, the cost should be char!ed to Costin! &rofit ? >oss %9c. (c) If idle capacity is due to seasonal factors, then the cost should be char!ed to cost of production by inflatin! overhead rates. Q 4. What is an id+e ca*acity$ What are the costs associated !ith it$ =o! are these treated in *roduct costs$ A. Idle Capacity: Idle capacity is that part of the capacity of a plant, machine or equipment which cannot be effectively utilised in production. In other words, it is the difference between the practical or normal capacity and capacity of utilisation based on expected sales. +or example, if the practical capacity of production of a machine is to
23

the tune of .:,::: units in a month, but is used only to produce P,::: units, because of mar#et demand of the product, then in such a case, /,::: units will be treated as the idle capacity of the machine. The idle capacity may arise due to lac# of product demand, non"availability of raw"material, shorta!e of s#illed labour, absenteeism, shorta!e of power, fuel or supplies, seasonal nature of product, etc (dle Capacity Costs: Costs associated with idle capacity are mostly fixed in nature. These include depreciation, repairs and maintenance char!es, insurance premium, rent, rates, mana!ement and supervisory costs. These costs remain unabsorbed or unrecovered due to under"utilisation of plant and service capacity. Idle capacity cost can be calculated as follows'" Idle capacity cost G
%!!re!ate overhead related to plant K Idle Capacity ,ormal plant capacity

;reatment of Ad+e ca*acity cost4 Idle capacity costs can be treated in product costin!, in the followin! ways' (i) If the idle capacity cost is due to unavoidable reasons such as repairs, maintenance, chan!e over of ob, etc, a supplementary overhead rate may be used to recover the idle capacity cost. In this case, the costs are char!ed to the production capacity utilised. (ii) If the idle capacity cost is due to avoidable reasons such as faulty plannin!, power failure etc., the cost should be char!ed to profit and loss account. (iii) If the idle capacity cost is due to seasonal factors, then, the cost should be char!ed to the cost of production by inflatin! overhead rates. Q . Discuss the *ro +ems of contro++ing the se++ing and distri ution o&erheads.
(May ,4 - 9 marks)

A. #ro +ems of contro++ing the se++ing I distri ution o&erheads are4 (i) The incidence of sellin! ? distribution overheads depends on external factors such as distance of mar#et, nature of competition etc. which are beyond the control of mana!ement. (ii) They are dependent upon customersJ behaviour, li#in! etc. (iii) These expenses are of the nature of policy costs and hence not amenable to control. The above problems of controllin! sellin! ? distribution overheads can be tac#led by adoptin! the followin! steps' (a) Comparin! the fi!ures of sellin! ? distribution overhead with the fi!ures of previous period. (b) *ellin! ? distribution overhead bud!ets may be used to control such overhead expenses by ma#in! a comparison of bud!etary fi!ures with actual fi!ures of overhead expenses, ascertainin! variances and finally ta#in! suitable actions, (c) *tandards of sellin! ? distribution expenses may be set up for salesmen, territories, products etc. The laid down standards on comparison with actual overhead expenses will reveal variances, which can be controlled by suitable action. Q !. Discuss in rief three main methods of a++ocating su**ort de*artments costs to o*erating de*artments. :ut of these three@ !hich method is conce*tua++y *refera +e$ (%o& 99 - 4 marks) Discuss the ste* method and reci*roca+ ser&ice method of secondary distri ution of o&erheads. (%o& ,4 - 4 marks) A. The three main methods of allocatin! support departments costs to operatin! departments are' (i) Direct re-distri ution method4 Under this method, support department costs are directly apportioned to various production departments only. This method does not consider the service provided by one support department to another support department. (ii) 8te* method4 Under this method the cost of the support departments that serves the maximum numbers of departments is first apportioned to other support departments and production departments. %fter this the cost of support department servin! the next lar!est number of departments is apportioned. In this manner we finally arrive on the cost of production departments only. (iii) Beci*roca+ ser&ice method4 This method reco!nises the fact that where there are two or more support departments they may render services to each other and, therefore, these inter"departmental services are to be !iven due wei!ht while re" distributin! the expenses of the support departments. The methods available for dealin! with reciprocal services are' (a) *imultaneous equation method (b) 8epeated distribution method (c) Trial and error method. The reciprocal service method is conceptually preferable. This method is widely used even if the number of service departments is more than two because due to the availability of computer software it is not difficult to solve sets of simultaneous equations. Q ". Write a note on Lc+assificationL@ La++ocationL and La sor*tionL of o&erheads. =o! does it he+* in contro++ing o&erheads$ (May 9- - 5 marks) ()*+ain !hat is meant y Cost 7**ortionment and Cost 7 sor*tion.
24

Distinguish et!een cost a++ocation and cost a sor*tion. (%o&em er@ .,,2@ . marks). A. Classification of overheads: It, means determination of cate!ories, classes or !roups in which overhead costs may he sub"divided. Usually, overhead costs are classified under three broad cate!ories vi), +actory <verheadsA <ffice and administrative <verheads and *ellin! and distribution <verheads. +actory overheads represent all those indirect costs that are incurred in the manufacturin! process. +or example, consumable stores, factory rent, depreciation of plant, factory buildin!, repairs and maintenance. <ffice and administrative overheads represent costs which are associated with the administration and maintenance of the office. *ellin! and distribution overheads are the expenses incurred for sellin! and distribution of products. It includes salaries of sales staff and commissionA sales"promotion expensesA advertisin! expenses, warehousin! costs etc. Cost apportionment Cost apportionment is the process of char!in! expenses in an equitable proportion to the various cost centres or departments. This describes the allotment of proportions of overhead to cost centres or departments. It is carried out in respect of those items of cost which cannot be allocated to any specific cost centre or department. +or example, the salary of !eneral mana!er cannot be allocated wholly to the production department, as he attends in !eneral to all the departments. Therefore, some lo!ical basis is selected and adopted for the apportionment of such type of expenses over various departments. >i#ewise, factory rent can be apportioned over the production and service departments on the basis of the area occupied by each. Cost a!sorption It is defined as the process of absorbin! all overhead costs allocated or apportioned over particular cost centre or production department by the units produced. %bsorption of overheads ta#es place only after the allocation and apportionment of overhead expenses. In other words, the overhead costs are either allocated or apportioned over different cost centres or cost units and afterwards they are absorbed on equitable basis by the output of the same cost centres. Cost allocation Cost allocation is the allotment of whole items of cost to cost centers. +or example, if a typist wor#s exclusively for Eoard of *tudies, then the salary paid to him should be char!ed to Eoard of *tudies account. This technique of char!in! the entire overhead expenses to a cost centre is #nown as cost allocation. Q #. Discuss the difference et!een a++ocation and a**ortionment of o&erhead.
marks) (May ,- 3 .

A. The followin! are the differences between allocation and apportionment. .. %llocation costs are directly allocated to cost centre. <verheads which cannot be directly allocated are apportioned on some suitable basis. /. %llocation allots whole amount of cost to cost centre or cost unit where as apportionment allots part of cost to cost centre or cost unit. 2. ,o basis required for allocation. %pportionment is made on the basis of area, assets value, number of wor#ers etc. Q $. 7 de*artmenta+ store has se&era+ de*artments. What ases !ou+d you recommend for a**ortioning the fo++o!ing items of e)*ense to its de*artments (2) <ire insurance of ?ui+ding. (.) Bent (9) De+i&ery ()*enses. (4) #urchase De*artment ()*enses. (5) Credit De*artment ()*enses. (1) Kenera+ 7dministration ()*enses. (') 7d&ertisement. (-) 8a+es 7ssistants 8a+aries. (9) #ersona+ De*artment e)*enses. (2,) 8a+es Commission A. (tems of e0penses *asis 7or apportionin! (.) +ire Insurance of Euildin!. +loor %rea (/) 8ent +loor %rea (2) -elivery 0xpenses. =olume or -istance or (ei!ht
25

(3) (4) (5) (D) (P) (Q) (.:)

(tems of e0penses &urchase department 0xpenses Credit -epartment 0xpenses. ;eneral %dministration 0xpenses. %dvertisement. *ales %ssistants *alaries. &ersonal -epartment expenses. *ales Commission

*asis 7or apportionin! ,o. of &urchase order9=alue of &urchases Credit *ales =alue (or#s cost %ctual sales %ctual9Time devoted ,o. of 0mployees %ctual

Q 1%. Indicate the base or bases that you would recommend to apportion overhead costs to production department' (i) 8u**+ies (ii) Be*airs (iii) Maintenance of ui+ding (i&) ()ecuti&e sa+aries (&) Bent (&i) #o!er and +ight (&ii) <ire insurance (&ii) Andirect +a our. A. Item ases of apportionment (i) *upplies %ctual supplies made to different departments (ii) 8epair -irect labour hoursA 1achine hoursA -irect labour wa!esA &lant value. (iii) 1aintenance of buildin! +loor area occupied by each department (iv) 0xecutive salaries %ctual basisA ,umber of wor#ers. (v) 8ent +loor area (vi) &ower and li!ht M ( hours or 6 & (power)A ,umber of li!ht pointsA +loor spaceA 1eter readin!s (li!ht) (vii) +ire insurance Capital cost of plant and buildin!A =alue of stoc# (viii) Indirect labour -irect labour cost. Q 11. Distinguish et!een fi)ed and &aria +e o&erheads. A. <i)ed o&erhead e)*enses do not vary with the volume of production within certain limits. In other words, the amount of fixed overhead tends to remain constant for volumes of production within the installed capacity of plant. +or example, rent of office, salary of wor#s man!er, etc. 5aria +e o&erheads cost varies in direct proportion to the volume of production. It increases or decreases in direct relation to any increase or decrease in output. Q 12. Discuss the treatment in cost accounts of the cost of sma++ too+s of short effecti&e +ife. (May ,. - 4 marks) A. *mall tools are mechanical appliances used for various operations on a wor# place, especially in en!ineerin! industries. *uch tools include drill bits, chisels, screw cutter, files etc. ;reatment of cost of sma++ too+s of short effecti&e +ife4 (i) *mall tools purchased may be capitali)ed and depreciated over life if their life is ascertainable. 8evaluation method of depreciation may be used in respect of very small tools of short effective life. -epreciation of small tools may be char!ed to' 7 +actory overheads 7 <verheads of the department usin! the small tool. (ii)Cost of small tools should be char!ed fully to the departments to which they have been issued, if their life is not ascertainable. Q 13. =o! do you dea+ !ith the fo++o!ing in Cost 7ccount$ (i) Besearch and De&e+o*ment ()*enses (ii) <ringe enefits (iii) (m*+oyee !e+fare costs (i&) De*reciation
marks) (May 91@ %o& 9- - . marks) (%o& 9-@ 99 - . marks) (May 91 - . marks) (May 91 - .

(&) ?ad de ts (%o& 99 - 4 marks) (&i) #acking ()*enses (&ii) ()*enses on Bemo&a+ and Be-erection of Machinery. ?onus and gratuity (&iii) A. (i) "esearc# and Development E0pense: 8esearch and -evelopment expense is the expense incurred for searchin! new or improved products, production methods 9 techniques or plants 9 equipments.
26

;reatment in Cost 7ccounts4 0xpense of Easic 8esearch (if it is a continuous activity) be char!ed to the revenues of the concern. It may be spread over a number of years if research is not a continuous activity and amount is lar!e. 0xpense of applied research, if relates to all existin! products and methods of production then it should be treated as a manufacturin! overhead of the period durin! which it has been incurred and absorbed. *uch expenses are directly char!ed to the product, if it is solely incurred for it. If applied research is conducted for searchin! new product or methods of production etc., then the research expense treatment depends upon the outcome of such research. +or example, if research findin!s are expected to produce future benefits or if it appears that such findin!s are !oin! to result in failure then the costs incurred may be amorti)ed by char!in! to the Costin! &rofit and >oss %ccount of one or more years dependin! upon the si)e of expenditure. If research proves successful, then such costs will be char!ed to the concerned product. -evelopment expenses be!in with the implementation of the decision to produce a new or improved product or to employ a new or improved method. The treatment of development expenses is same as that of applied research. (ii) 7rin!e benefits4 In every or!anisation, wor#ers are paid some benefits in addition to their normal wa!e or salary. These additional benefits are popularly called frin!e benefits. They include' (i) 6ousin! (ii) Children education allowance (iii) 6oliday pay (iv) >eave pay (v) >eave travel concession to home town or any place in India etc. 0xpenses incurred on frin!e benefits in respect of factory wor#ers should be treated as factory overheads and apportioned amon! the production and service departments on the basis of number of wor#ers in each department. +rin!e benefits to office and sellin! and distribution staff should be treated as administration overheads and sellin! and distribution overheads respectively and recovered accordin!ly. (iii) Employee 6elfare Costs: It includes those expenses, which are incurred by the employers on the welfare activities of their employees. The welfare activities on which these expenses are usually incurred may include canteen, hospital, play !rounds, etc. These expenses should be separately recorded as (elfare -epartment Costs. These Costs may be apportioned to production cost centres on the basis of total wa!es or the number of men employed by them. (iv) Depreciation: It represents the fall in the asset value due to its use, wear and tear and passa!e of time. -epreciation is an indirect cost of production and operations. It is an important element of cost and without this true cost of production cannot be obtained. In costin!A depreciation on plant and machinery is normally treated as part of the factory overheads. (v) *ad debts: There is no unanimity amon! various authors about the treatment of bad debts. *ome authors believe that bad debts are financial losses and therefore should not be included in the cost of a particular product or ob. %nother view is that, bad debts are a part of sellin! and distribution overhead, especially where they arise in the normal course of tradin!. Therefore they should be treated in cost accounts in the same way as any other sellin! and distribution expense. (vi) Packin! E0penses: It includes the expenses incurred on wrappin!, tyin!, bottles, boxes, containers or ba!s etc. In Cost %ccounts they are treated as follows' (i) It is treated as a direct material cost in the case of those products which cannot be sold without the use of a pac#in!. +or example in#"pot A EreadA paste etc. (i) It may be treated as distribution overhead if pac#in! expenses are incurred to facilitate the transportation of finished products. (ii) It may be treated as advertisement cost and included in sellin! overheads if it is incurred for advertisement to ma#e the product attractive. (vii) E0penses on "emoval and "e- erection of /ac#inery: 0xpenses are sometime incurred on removal and re" erection of machinery in factories. *uch expenses may be incurred due to factors li#e chan!e in the method of productionA an addition or alteration in the factory buildin!, chan!e in the follow of production, etc. %ll such expenses are treated as production overheads. (hen amount of such expenses is lar!e, it may be spread over a period of time. If such expenses are incurred due to faulty plannin! or some other abnormal factor, then they may be char!ed to Costin! &rofit and >oss %ccount. (viii) *onus and !ratuity: Eonus under the payment of Eonus %ct is to be paid compulsorily to the wor#ers althou!h the amount of bonus may vary with amount of profit earned. % minimum bonus of P.22C is, however, payable irrespective of profit or loss earned by the concern. The amount of bonus, therefore, may be included in a direct labour cost to the extent of the minimum bonus, as the same is payable even in a loss situation. %ny amount paid as bonus in excess of the minimum may be considered as an appropriation of profit. 6owever, bonus lin#ed with productivity is definitely a part of the overhead cost.
27

*o far as !ratuity is concerned, it is indeed directly lin#ed with the wa!es and is not by any means related to the profits. %ccordin!ly, it should be treated as an element of cost. Q 14. ()*+ain the cost accounting treatment of unsuccessfu+ Besearch and De&e+o*ment cost.
marks) (#CC %o& ,' 3 .

A. Cost of unsuccessful research is treated as factory overhead, provided the expenditure is normal and is provided in the bud!et. If it is not bud!eted, it is written off to the profit and loss account. If the research is extended for lon! time, some failure cost is spread over to successful research. Q 1 . What is notiona+ rent of a factory ui+ding$ Ki&e one reason !hy it may e inc+uded in cost accounts.
marks) (%o& 95 - .

A. %otiona+ Bent4 It is a reasonable char!e raised in the cost accounts for the use of owned premises. <ne reason for the use of such a nominal char!e is to enable comparison between the cost of items made in factories which are owned and in rented factories. 6owever, it may be noted that in the case of owned factory, cost for the same is accounted for by means of depreciation. Q 1!. ()*+ain !hat do you mean y Chargea +e ()*enses and state its treatment in Cost 7ccounts$
marks) (%o& ,. - 9

A. Chargea +e e)*enses4 %ll expenses, other than direct materials and direct labour cost which are specifically and solely incurred on production, process or ob are treated as char!eable or direct expenses. These expenses in cost accountin! are treated as part of prime cost, 0xamples of char!eable expenses include " 8ental of a machine or plant hired for specific ob, royalty, cost of ma#in! a specific pattern, desi!n, drawin! or ma#in! tools for a ob. Q 1". D;he more ki+ometers you tra&e+ !ith your o!n &ehic+e@ the chea*er it ecomes.D Comment rief+y on this statement. A. The cost per #ilometre, (if one travels in his own vehicle) will decline when he travels more #ilometers. This is because the ma ority of costs for runnin! and maintainin! vehicles are of fixed nature and the component of fixed cost per #ilometre !oes on decreasin! with an increase in #ilometre travel. 6ence, the !iven statement is true. Q 1#. Define 8e++ing and Distri ution ()*enses. Discuss the accounting for se++ing and distri ution e)*enses. (%o& 99 - 4
marks) (%o& 95 - . marks)

A. 8e++ing e)*enses4 0xpenses incurred for the purpose of promotin!, mar#etin! and sales of different products. Distri ution e)*enses4 0xpenses relatin! to delivery and despatch of !oods9products to customers. 7ccounting treatment for se++ing and distri ution e)*enses4 *ellin! and distribution expenses are usually collected under separate cost account numbers. These expenses may be recovered by usin! any one of followin! method of recovery. .. &ercenta!e on cost of production 9 cost of !oods sold. /. &ercenta!e on sellin! price. 2. 8ate per unit sold. Q 1$. Why is the use of an o&erhead a sor*tion rate ased on direct +a our hours genera++y *refera +e to a direct !ages *ercentage rate for a +a our intensi&e o*eration$ (%o& 95 - 9 marks) A. % method of overhead absorption is considered appropriate if the total amount of overhead absorbed in a period does not fluctuate materially from the actual expense incurred in the period. -irect wa!es percenta!e rate method do not possess the aforesaid features In other words, the overhead char!ed varies from period to period due to chan!es in direct wa!es. In fact, overhead expenses are !enerally a function of time. Therefore, a time base overhead absorption rate method is always preferred over any other method. In the case of labour intensive operations, it is advisable to use labour hour method for overhead absorption. Q 2%. ()*+ain ho! under and o&er a sor*tion of o&erheads are treated in cost accounts.
marks) (%o& 9- - 4

Discuss the treatment of under a sor ed and o&er-a sor ed factory o&erheads in Cost 7ccounting. (May ,4 - 4 marks) A. &roduction overheads are !enerally recovered or char!ed on the !oods on some predetermined basis. Irrespective of the method used for the recovery of overheads, it has been observed that a difference arises between the amount of overheads absorbed and the amount of overheads actually incurred. If the absorbed amount is more than the overheads
28

actually incurred then such a difference is termed as an over absorption of overheads. If the recovery is less than the actual overheads incurred then the difference is termed as under absorption of overheads. Under and over absorbed overheads can be disposed off in Cost %ccounts by usin! any one of the followin! methods' (i) 8se of Supplementary "ates: (hen the amount of under absorbed and over absorbed overhead is si!nificant or lar!e, because of differences due to wron! estimation, then the cost of product needs to be ad usted by usin! supplementary rates (under and over absorption9actual overhead) to avoid misleadin! impression. (ii) 6ritin! off to Costin! Profit 9 -oss )ccount: (hen under or over absorbed amount of overheads is quite ne!li!ible and it is not felt worth while to absorb it by usin! supplementary rates, the said amount is transferred to Costin! &rofit ? >oss %ccount. In case under absorption of overheads arises due to factors li#e idle capacity, defective plannin! etc. Then also it may be transferred to Costin! &rofit ? >oss %ccount. (iii) Carryin! over to t#e ne0t year5s accounts 4 Under this method, the amount of over9under absorbed overhead is carried over to the next period this method is not considered desirable as it allows costs of one period to affect cost of another9period. +urther, comparison between one period and another is rendered difficult. 6owever, this method may be used when the normal business cycle extends over more than one year, or in the case of a new pro ect, the output is low in the initial years. Q 21. ()*+ain rief+y the conditions !hen su**+ementary rates are used.
marks) (#CC May ,' 3 .

A. (hen the amount of under absorbed and over absorbed overhead is si!nificant or lar!e, because of differences due to wron! estimation, then the cost of product needs to be ad usted by usin! supplementary rates (under and over absorption9actual overhead) to avoid misleadin! impression.

29

No. I.te/rate- A00o+.ts

Q 1. Write short note on Cost /edger Contro+ 7ccount.
marks) (May 91 - 4

A. Cost /edger Contro+ 7ccount4 This control account is also popularly #nown as B;eneral >ed!er %d ustment %ccount$ is opened in Cost >ed!er to complete double"entry. %ll items of income and expenditure ta#en from financial accounts and all transfers from cost accounts to financial boo#s are recorded in this account. *ince the purpose of this account is to complete double entry in the cost led!er, therefore all transactions in the cost led!er must be recorded throu!h the BCost >ed!er Control %ccount$. The balance in this account will always be equal to the total of all the balances of the impersonal accounts. Q 2. What are the essentia+ *re-reCuisites of integrated accounting system$ (%o& 91@ ,2@ ,- - 4@ 9 marks)(#CC %o& ,' 3 9
marks)

A. (ssentia+ *re-reCuisites for integrated accounts4 (a) The mana!ement$s decision about the extent of inte!ration of the two sets of boo#s. (b) % suitable codin! system must be made available so as to serve the accountin! purposes of financial and cost accounts. (c) %n a!reed routine, with re!ard to the treatment of provision for accruals, prepaid expenses, other ad ustment necessary for preparation of interim accounts. (d) &erfect coordination should exist between the staff responsible for the financial and cost accounts and an efficient processin! of accountin! document should be ensured. Q 3. What are the ad&antages of integrated accounting$
marks) (%o& 9'@ May ,. - 4

Write short note on Antegrated 7ccounting. (May 99@ 9- - 4 marks)(May 95 - 4 marks) A. (nte!rated )ccountin!: Inte!rated %ccountin! is a system of accountin! whereby cost and financial accounts are #ept in the same set of boo#s. *uch a system will have to afford full information required for Costin! as well as for +inancial %ccounts. +or instance, purchases account is eliminated and direct postin!s are made to *tores Control %ccount, (or#"in"&ro!ress account, or <verhead %ccount. It also ensures the ascertainment of mar!inal cost, variances, abnormal losses and !ains. In fact all information that mana!ement requires from a system of Costin! for doin! its wor# properly is made available. The inte!rated accounts !ive full information in such a manner so that the profit and loss account and the balance sheet can also be prepared. The main advanta!es of Inte!rated %ccountin! are as follows' (i) *ince there is one set of accounts, thus there is one fi!ure of profit. 6ence the question of reconciliation of costin! profit and financial profit does not arise. (ii) There is no duplication of recordin! of entries and efforts to maintain separate set of boo#s. (iii) Costin! data are available from boo#s of ori!inal entry and hence no delay is caused in obtainin! information. (iv) Centrali)ation of accountin! function results in economy. Q 4. When is the reconci+iation statement of Cost and <inancia+ accounts not reCuired$
Marks) (#CC %o& ,9 - .

A. (hen the Cost and +inancial %ccounts are inte!rated " there is no need to have a separate reconciliation statement between the two sets of accounts. Inte!ration means that the same set of accounts fulfill the requirement of both i.e., Cost and +inancial %ccounts. Q . What are the reasons for disagreement of *rofits as *er cost accounts and financia+ accounts$Discuss. (May .,,, - 4
marks)

What are the reasons for disagreement of #rofits as *er <inancia+ accounts and Cost accounts$ Discuss. (%o& 99@ 4 marks) (numerate the factors !hich cause difference in *rofits as sho!n in <inancia+ 7ccounts and Cost 7ccounts.(#CC May ,'@ 9 marks) Discuss the reasons for disagreement of *rofits as *er Cost 7ccounting and <inancia+ 7ccounting. (%o& ,' - 4
marks)

Why is it necessary to reconci+e the #rofit et!een Cost 7ccounts and <inancia+ 7ccounts$ (%o& ,. - 5 marks) Why is it necessary to reconci+e the #rofits et!een the Cost 7ccounts and <inancia+ 7ccounts$ (May ,4 - 5 marks) A. (hen the cost and financial accounts are #ept separately, It is imperative that these should be reconciled, otherwise the cost accounts would not be reliable. The reconciliation of two set of accounts can be made, if both the sets contain
30

sufficient detail as would enable the causes of differences to be located. It is, therefore, important that in the financial accounts, the expenses should be analysed in the same way as in cost accounts. It is important to #now the causes which !enerally !ive rise to differences in the costs ? financial accounts. The various reasons for disa!reement of profits shown by the two sets of boo#s vi)., cost and financial may be listed as below' .. Items appearin! only in financial accounts, not in cost accounts' (i) Income' (a) &rofit on sale of assets (b) Interest received (c) -ividend received (d) *hare Transfer fees (ii) 0xpenditure (a) >oss on sale of assets (b) &reliminary expenses written off (c) ;oodwill written off (d) Underwritin! commission and debenture discount written off (iii) %ppropriation (a) -ividends (b) 8eserves, *in#in! +und, etc. /. Items appearin! only in cost accounts, not in financial accounts' (a) ,otional interest on capitalA (b) ,otional rent on premises owned. 2. Under or over"absorption of overhead In cost accounts overheads are char!ed to production at pre"determined rates while in financial accounts actual amount of overhead is char!ed, the difference !ives rise to under or over absorptionA causin! a difference in profits. 3. -ifferent bases of stoc# valuation In financial boo#s, stoc#s are valued at cost or mar#et price, whichever is lower. In cost boo#s, however, stoc# of materials may be valued on +I+< or >I+< basis and wor#"in"pro!ress may be valued at prime cost or wor#s cost. -ifferences in store valuation may thus cause a difference between the two profits. 4. -epreciation The amount of depreciation char!e may be different in the two sets of boo#s either because of the different methods of calculatin! depreciation or the rates adopted. 1otivations for reconciliation 9 %dvanta!es 9 Uses of reconciliation are' To ensure reliability of cost data To ensure ascertainment of correct product cost To ensure correct decision ma#in! by the mana!ement based on Cost ? +inancial data To report fruitful financial 9 cost data. Q !. /ist the <inancia+ e)*enses !hich are not inc+uded in cost.
Marks) (#CC %o& ,9 - .

A. +inancial expenses which are not included in cost accountin! are as follows' Interest on debentures and deposit ;ratuity &ension Eonus of 0mployee Income Tax &reliminary 0xpenses -iscount on issue of *hare Underwritin! Commissions. Q ". Beconci+iation of cost and financia+ accounts in the modern com*uter age is redundant Comment. (May 9- - 4
marks)

A. In the modern computer a!e the use of computer #nowled!e and accountin! softwares has helped the field of +inancial and Cost %ccountin! in a bi! way. In fact, computers wor# at a very hi!h speed and can process voluminous data for !eneratin! desired output in no time. <utput produced is precise and accurate. Computers can wor# for hours without
31

any fati!ue. They can brin! out different +inancial %ccountin! and Cost %ccountin! statements and reports accurately in a presentable form. +inancial accounts and Cost accounts show their results accurately and precisely, when maintained on a computer system, but the profit shown by one set of boo#s may not a!ree with that of the other set. The main reasons for the disa!reement of the profit fi!ures shown by the two set of boo#s is the absence of certain items which appear in financial boo#s only and are not recorded in cost accountin! boo#s. *imilarly, there may be some items which appear in cost accounts but do not find a place in the financial boo#s. *ome examples which affect it are as below' .. &rofit 9 loss on sale of assets /. Interest received 2. -ividend received 3. &reliminary expenses, !oodwill written off 4. Under or over"absorption of overhead 5. -ifferent bases of stoc# valuation D. -ifferent methods of -epreciation Under the situation of differential profit fi!ure shown by financial and cost accounts, it is necessary to reconcile the results (profit9loss) shown. *uch a reconciliation proves arithmetical accuracy of data, explains reasons for the difference in two sets of boo#s and affords reliability to them. 6ence, the reconciliation of cost and financial accounts is essential and not redundant even in the modern a!e of computer.

32

! &etho- o1 Cost'./ (I)

(2o* Cost'./3 Co.tra0t Cost'./3 Bat0h Cost'./ 4 O5erat'./ Cost'./)
Q 1. Distinguish et!een >o Costing I ?atch Costing$
marks) (%o& ,4@ %o& ,1 - .

Descri e 6o Costing and ?atch Costing gi&ing e)am*+e of industries !here these are used$ (May ,2 - 9 marks) A. In ob costin!, costs are collected and accumulated accordin! to ob. 0ach ob or unit of production is treated as a separate entity for the purpose of costin!. Nob costin! may be employed when obs are executed for different customers accordin! to their specification. Eatch costin! is a form of ob costin!, a lot of similar units which comprises the batch may be used as a cost unit for ascertainin! cost. *uch a method of costin! is used in case of pharmaceutical industry, readymade !arments, industries manufacturin! parts of T=, radio sets etc. Q 2. What do you understand y ?atch Costing$ An !hich industries it is a**+ied$ A. Eatch Costin! is a form of ob costin!. In this, the cost of a !roup of products is ascertained. The unit of cost is a batch or a !roup of identical products instead of a sin!le ob, order or contract. *eparate cost sheets are maintained for each batch of products by assi!nin! a batch number. The cost per unit is ascertained by dividin! the total cost of a batch by the number of items produced in that batch. Eatch costin! is employed by companies manufacturin! in batches. It is used by readymade !arment factories for ascertainin! the cost of each batch of cloths made by them. &harmaceutical or dru! industries, electronic component manufacturin! units, radio manufacturin! units too use this method of costin! for ascertainin! the cost of their product. Q 3. An ?atch Costing@ ho! is (conomic ?atch Fuantity determined$
marks) (May ,2 - 9

A. In batch costin! the most important problem is the determination of B0conomic Eatch Fuantity$. The determination of economic batch quantity involves two type of costs vi), (i) set up cost and (ii) carryin! cost. (ith the increase in the batch si)e, there is an increase in the carryin! cost but the set"up cost per unit of the product is reducedA this situation is reversed when the batch si)e is reduced. Thus there is one particular batch si)e for which both set up and carryin! costs are minimum. This si)e of a batch is #nown as economic or optimum batch quantity. 0conomic batch quantity can be determined with the help of a table, !raph or mathematical formula. The mathematical formula usually used for its determination is as follows' /-C 0EFG C (here, - G %nnual demand for the product * G *ettin! up cost per batch C G Carryin! cost per unit of production per annum Q 4. Write notes on (sca+ation C+ause.
marks) (%o& ,, - . marks@ May 94 - 4

()*+ain the im*ortance of an (sca+ation C+ause in contract cost. (#CC %o& ,' 3 . marks) A. Escalation Clause: This clause is usually provided in the contracts as a safe!uard a!ainst any li#ely chan!es in the price or utili)ation of material and labour. If durin! 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 a!reed amount. Inclusion of such a term in a contract deed is #nown as an Jescalation clauseJ %n escalation clause usually relates to chan!e in price of inputs, it may also be extended to increased consumption or utili)ation of quantities of materials, labour etc. In such a situation the contractor has to satisfy the contractee that the increased utili)ation is not due to his inefficiency. Q . Discuss the *rocess of estimating *rofitE+oss on incom*+ete contracts.
marks) (%o& ,9 - 4

A. Process of estimatin! profit 2 loss on incomplete contracts (i)If completion of contract is less than /4C no profit should be ta#en to profit and loss account. (ii)If completion of contract is upto /4C or more but less than 4:C then
33

.92 K ,otional &rofit K (or# certified may be ta#en to profit and loss account. (iii)If completion of contract is 4:C or more but less than Q:C then /92 K ,otional &rofit K (or# certified may be ta#en to profit and loss account (iv)If completion of contract is !reater than or equal to Q:C then one of the followin! formulas may be used for ta#in! the profit to profit and loss account. .. /. 2. 3. 4. 0stimated &rofit K Contract price
(or# certified (or# certified Cash received to date cos t to date Cash received cos t (or# certified Cash received

Cash received

0stimated &rofit K Contract price (or# certified

Cost of the wor# 0stimated total Cost of the wor# 0stimated &rofit K 0stimated total (or# certified ,otional &rofit K Contract price

0stimated &rofit K

Q !. ()*+ain the fo++o!ing4 (i) %otiona+ *rofit in Contract costing (ii) Betention money in Contract costing (May ,' - .@ . Marks) A. (i) ,otional profit in Contract costin!: It represents the difference between the value of wor# certified and cost of wor# certified. ,otional &rofit G =alue of wor# certified 7 (Cost of wor#s to date 7 Cost of wor# not yet certified) (ii) "etention /oney in Contract Costin!: % contractor does not receive the full payment of the wor# certified by the surveyor. Contractee retains some amount to be paid after some time, when it is ensured that there is no default in the wor# done by the contractor. If any deficiency or defect is noticed, it is to be rectified by the contractor before the release of the retention money. Thus, the retention money provides a safe!uard a!ainst the default ris# in the contracts. Q ". What are the main features of LCost-#+us-ContractsL$
marks) (%o& 91 - 4 (%o& ,, - .

Write note on cost-*+us-contracts.

marks)

A. These contracts provide for the payment by the contractee of the actual cost of manufacture plus a stipulated profit, mutually decided between the two parties.

1ain features of cost"plus"contracts'

.. This method is adopted in the case of those contracts where the probable cost of contract cannot be ascertained in advance with a reasonable accuracy. /. These contracts are preferred when the cost of material and labour is not steady and contract completion may ta#e number of years. 2. The different costs to be included in the execution of the contract are mutually a!reed so that no dispute may arise in future in this respect. Under such type of contract contractee is allowed to chec# or scrutinise the concerned boo#s, documents accounts. 3. *uch a contract offers a fair price to the contractee and also a reasonable profit to contractor. 4. The contract price here is ascertained by addin! a fixed and mutually pre"decided component of profit to the total cost of the wor#. Q #. What is cost *+us contract$ 8tate its ad&antages.
Marks) (%o& ,- - 9 (#CC May ,- 3 . marks)(#CC %o& ,9 - .

What are the main ad&antages of cost *+us contract$

Marks)

34

A. Cost plus contract: Under cost plus contract, the contract price is ascertained by addin! a percenta!e of profit to the total cost of the wor#. *uch types of contracts are entered into when it is not possible to estimate the contract cost with reasonable accuracy due to unstable condition of material, labour services etc. Costs plus contracts have the followin! advanta!es' .. The contractor is assured of a fixed percenta!e of profit. There is no ris# of incurrin! any loss on the contract. /. It is useful especially when the wor# to be done is not definitely fixed at the time of ma#in! the estimate. 2. Contractee can ensure himself about Rthe cost of the contractS, as he is empowered to examine the boo#s and document of the contractor to ascertain the veracity of the cost of the contract. Q $. ()*+ain rief+y@ !hat do you understand y :*erating Costing$ =o! are com*osite units com*uted$ (#CC %o& ,9 - 9
Marks)

A. :*erating Costing' It is method of ascertainin! costs of providin! or operatin! a service. This method of costin! is applied by those underta#in!s which provide services rather than production of commodities. This method of costin! is used by transport companies, !as and water wor#s departments, electricity supply companies, canteens, hospitals, theatres, schools etc. Composite units may be computed in two ways' (a) %bsolute (wei!hted avera!e) tones #ms, quintal #ms etc. (b) Commercial (simple avera!e) tones #ms, quintal #ms etc. %bsolute tonnes"#ms are the sum total of tonnes #ms arrived at by multiplyin! various distances by respective load quantities carried. Commercial tonnes"#ms, are arrived at by multiplyin! total distance #ms, by avera!e load quantity. Q 1%. 8*ecify the methods of costing and cost units a**+ica +e to the fo++o!ing industries4 A. Ind str" Method of #nit of cost costing Toy ma#in! Eatch &er batch Cement Unit &er tonne or per ba! 8adio 1ultiple &er 8adio or per batch Eicycle 1ultiple &er Eicycle *hip buildin! Contract &er *hip 6ospital <peratin! &er Eed per day or &er patient per day Eric#"wor#s *in!le or output .,::: bric#s <il refinin! mill &rocess &er"Tonne 8oad transport company <peratin! &er"tonne"#m City Eus Transport <peratin! &assen!er #m. Transport <peratin! &er passen!er #m or per tonne #m 6otels providin! lod!in! facilities <peratin! 8oom day 6otel <peratin! &er room day or per meal &ower &er Milowatt (#w) hour Interior decoration Nob costin! 0ach Nob %irlines company <peratin! costin! *teel &rocess &er Tonne Coal *in!le &er unit Erid!e construction Contract 0ach contract %dvertisin! Nob 0ach Nob +urniture 1ultiple 0ach unit *u!ar company havin! its own su!ar"cane fields &rocess &er Fuintal9Tonne
(%o& 9' - . marks) (May ,. - 9 marks) (#CC %o& ,- 3 . marks) (%o& 9- - 9 marks)

35

" &etho- o1 Cost'./ (II)

(Pro0ess Cost'./3 O5erat'o. Cost'./3 2o'.t Pro-+0ts a.- By65ro-+0ts)
Q 1. Distinguish et!een 6o costing and *rocess costing.
marks) (%o& 91 - 4 marks)(May 95 - 4 marks)(%o& 9- - 4

A.

+ob Costin! .. Nob costin! is a specific order costin! /. Cost here is determined on ob basis 2. 0ach ob needs special treatment and no two obs are ali#e 3. The cost of each ob is compiled separately by addin! materials, labour and overhead costs 4. Costs are computed when ob is completed. 5. %s each ob is distinct or is of different nature, more detailed supervision and control are necessary

Process Costin! &rocess costin! is a method of costin! used to ascertain the cost of a product at each sta!e of manufacture Costs are accumulated for each process separately for a !iven period of time. +inished product of one process becomes the raw material for the next process. The unit cost here is the avera!e cost of the process for a !iven period. Its correct computation requires the measurement of production at various sta!es of manufacture. Costs are computed for each process at the end of each period. %s the process operations are standardised accumulation of costs and supervision and control are comparatively easier.

Q 2. D;he &a+ue of scra* generated in a *rocess shou+d e credited to the *rocess account.D Do you agree !ith this statement$ Ki&e reasons. (%o& 95 - . marks) A. This statement is not correct The value of scrap (as normal loss) received from its sale is credited to the process account. Eut the value of scrap received from its sale under abnormal conditions should be credited to %bnormal >oss %ccount. Q 3. ()*+ain rief+y the *rocedure for the &a+uation of Work-in-*rocess.
marks) (%o& ,. - .

A. The valuation of wor#"in"process can be made in the followin! three ways, dependin! upon the assumptions made re!ardin! the flow of costs. 7+irst"in"first out (+I+<) method 7>ast"in"first out (>I+<) method " %vera!e cost method % brief account of the procedure followed for the valuation of wor#"in"process under the above three methods is as followsA <A<: method4 %ccordin! to this method the units first enterin! the process are completed first. Thus the units completed durin! a period would consist partly of the units which were incomplete at the be!innin! of the period and partly of the units introduced durin! the period. The cost of completed units is affected by the value of the openin! inventory, which is based on the cost of the previous period. The closin! inventory of wor#"in"process is valued at its current cost. /A<: method4 %ccordin! to this method units last enterin! the process are to be completed first. The completed units will be shown at their current cost and the closin!"wor# in process will continue to appear at the cost of the openin! inventory of wor#"in"pro!ress alon! with current cost of wor# in pro!ress if any. 7&erage cost method4 %ccordin! to this method openin! inventory of wor#"in"process and its costs are mer!ed with the production and cost of the current period, respectively. %n avera!e cost per unit is determined by dividin! the total cost by the total equivalent units, to ascertain the value of the units completed and units in process. Q 4. ()*+ain eCui&a+ent units.
marks) (May ,. - .

A. (hen openin! and closin! stoc#s of wor#"in"process exist, unit costs cannot e computed by simply dividin! the total cost by total number of units still in process. (e can convert the wor#"in"process units into finished units called equivalent units so that the unit cost of these units can be obtained. 0quivalent %ctual number of &ercenta!e of completed units G units in the process K wor# completed
36

of manufacture It consists of balance of wor# done on openin! wor#"in"process, current production done fully and part of wor# done on closin! (I& with re!ard to different elements of costs vi)., material, labour and overhead. Q . =o! !ou+d you account for y-*roduct in cost accounting4 (. marks) (i) When they are of sma++ tota+ &a+ue. (4 marks) (ii) When they are of considera +e tota+ &a+ue. (May 9' - 4 marks) (iii) When they reCuire further *rocessing. Discuss the treatment of y-*roduct Cost in Cost 7ccounting. A. Treatment of !"product in Cost Accounting:

(%o& ,' - 9 Marks)

(i) When they are of sma++ tota+ &a+ue4 If the amount realised from the sale of by"product is small, it may be dealt in any one of the followin! two ways' (.) The sale value of the by"product may be credited to the &rofit and >oss %ccount and no credit be !iven in the cost accounts. The credit to the &rofit and >oss %ccount here is treated either as miscellaneous income or as additional sales revenue. (/) The sale proceeds of the by"product may be treated as deductions from the total costs. The sale proceeds in fact should be deducted either from the production cost or from the cost of sales. (ii) When they are of considera +e tota+ &a+ue4 In this case by"products may be re!arded as oint products. To determine exact cost of by"products the costs incurred upto the point of separation, should be apportioned over by"products and oint products by usin! a lo!ical basis. In this case, the oint costs may be divided over oint products and by"products by usin! physical unit method (at the point of split off) or ultimate sellin! price (if sold). (iii) When they reCuire further *rocessing4 In this case, the net realisable value of the by"product at the split"off point may be arrived at by subtractin! the further processin! cost from the realisable value of by"products. Q !. Distinguish et!een >oint *roducts and ?y-*roducts. A. >oint #roducts are defined as the products which are produced simultaneously from same basic raw materials by a common process or processes but none of the products is relatively of more importance or value as compared with the other. +or example spirit, #erosene oil, fuel oil, lubricatin! oil, wax, tar and asphalt are the examples of oint products. ?y-*roducts, on the other hand, are the products of minor importance ointly produced with other products of relatively more importance or value by the common process and usin! the same basic materials. These products remain inseparable upto the point of split off. +or example in -airy industries, batter or cheese is the main product, but butter mil# is the by"product. #oints of Distinction4 (.) Noint product are the products of equal economic importance, while the by"products are of lesser importance. (/) Noint products are produced in the same process, whereas by"products are produced from the scrap or the discarded materials of the main product. (2) Noint products are not produced incidentally, but by"products emer!e incidentally also. Q ". Write short note on o*eration costing.
marks) (May 91 - 4

A. <peration Costin! is defined as the refinement of process costin!. It is concerned with the determination of the cost of each operation rather than the process. In those industries where a process consists of distinct operations, the method of costin! applied or used is called operation costin!. <peration costin! offers better scope for control. It facilitates the computation of unit operation cost at the end of each operation by dividin! the total operation cost by total input units. It is the cate!ory of the basic costin! method, applicable, where standardi)ed !oods or services result from a sequence of repetitive and more or less continuous operations, or processes to which costs are char!ed before bein! avera!ed over the units produced durin! the period. The two costin! methods included under this head are process costin! and service costin!. Q #. G:*eration costing is defined as refinement of #rocess costing.H ()*+ain it.
marks) (#CC May ,' 3 9

A. <peration costin! is concerned with the determination of the cost of each operation rather than the process' In the industries where process consist of distinct operations, the operation costin! method is applied. It offers better control and facilitates, the computation of unit operation cost at the end of each operation.
37

Q $. Distinguish et!een :*erating Costing and :*eration Costing. A. Operatin! Costin!: It is a method of costin! applied by underta#in!s which provide service rather than production of commodities. >i#e unit costin! and process costin!, operatin! costin! is thus a form of operation costin!. The emphasis under operatin! costin! is on the ascertainment of cost of renderin! services rather than on the cost of manufacturin! a product. It is applied by transport companies, !as and water wor#s, electricity supply companies, canteens, hospitals, theatres, school etc. (ithin an or!anisation itself certain departments too are #nown as service departments which provide ancillary services to the production departments. +or example, maintenance department, power house, boiler house, canteen, hospital, internal transport. Operation Costin!' It represents a refinement of process costin!. In this each operation instead of each process of sta!e of production is separately costed. This may offer better scope for control. %t the end of each operation, the unit operation cost may be computed by dividin! the total operation cost by total output. Q 1%. Descri e rief+y@ ho! 6oint costs u*to the *oint of se*aration may e a**ortioned amongst the 6oint *roducts under the fo++o!ing methods4 (i) 7&erage unit cost method (ii) Contri ution margin method (iii) Market &a+ue at the *oint of se*aration (i&) Market &a+ue after further *rocessing (&) %et rea+i0a +e &a+ue method. (#CC >une ,9 3 9 marks) A. 1ethods of apportionin! oint cost amon! the oint products' (i) )vera!e 8nit Cost /et#od: Under this method, total process cost (upto the point of separation) is divided by total units of oint products produced. <n division avera!e cost per unit of production is obtained. The effect of application of this method is that all oint products will have uniform cost per unit. (ii) Contribution /ar!in /et#od: Under this method oint costs are se!re!ated into two parts 7 variable and fixed. The variable costs are apportioned over the oint products on the basis of units produced (avera!e method) or physical quantities. If the products are further processed, then all variable cost incurred be added to the variable cost determined earlier. Then contribution is calculated by deductin! variable cost from their respective sales values. The fixed costs are then apportioned over the oint products on the basis of contribution ratios. (iii) /arket Value at t#e ime of Separation: This method is used for apportionin! oint costs to oint products upto the split off point. It is difficult to apply if the mar#et value of the products at the point of separation are not available. The oint cost may be apportioned in the ratio of sales values of different oint products. (iv) /arket Value after furt#er Processin!: 6ere the basis of apportionment of oint costs is the total sales value of finished products at the further processin!. The use of this method is unfair where further processin! costs after the point of separation are disproportionate or when all the oint products are not sub ected to further processin!. (v) ,et "ealisable Value /et#od: 6ere oint costs is apportioned on the basis of net realisable value of the oint products, ,et 8ealisable =alue G *ale value of oint products (at finished sta!e) (") estimated profit mar!in (") sellin! ? distribution expenses, if any (") post split off cost

38

# Sta.-ar- Cost'./
Q 1. ()*+ain rief+y ho! standards are com*i+ed for materia+ and +a our costs for a *roduct. A. /aterial 'uantity standards: The followin! procedure is usually followed for settin! material quantity standards. (a) 8tandardisation of *roducts4 -etailed specifications, blueprints, norms for normal wasta!e etc., of products alon! with their desi!ns are settled. (b) #roduct c+assification4 -etailed classified list of products to be manufactured are prepared. (c) 8tandardisation of materia+4 *pecifications, quality, etc., of materials to be used in the standard products are settled. (d) #re*aration of i++ of materia+s4 % bill of material for each product or part showin! description and quantity of each material to be used is prepared. (e) ;est runs4 *ample or test runs under re!ulated conditions may be useful in settin! quantity standards in a precise manner. -abour 'uantity standards: The followin! are the steps involved in settin! labour quantity standards' (a) 8tandardisation of *roducts4 -etailed specifications, blueprints, norms for normal wasta!e etc., of products alon! with their desi!ns are settled. (b) #roduct c+assification4 -etailed classified list of products to be manufactured are prepared. (c) 8tandardisation of methods4 *election of proper machines to use proper sequence and method of operations. (d) Manufacturing +ayout4 % plan of operation for each product listin! the operations to be performed is prepared. (e) Time and motion study is conducted for selectin! the best way of completin! the ob. (f) The operator is !iven trainin! to perform the ob or operations in the best possible manner. Q 2. =o! are &ariances dis*osed off in a standard costing system$ Discuss rief+y. A. The followin! are the various methods' (a) (rite off all variances to profit and loss account or cost of sales every month. (b) -istribute the variance pro"rata to cost of sales, wor#"in"pro!ress and finished !ood stoc#s. (c) (rite off quantity variance to profit and loss account but the price variances may be spread over cost of sales, wor#"in" pro!ress and finished !oods stoc#s. The reason behind apportionin! price variances to inventories and cost of sales is that they represent cost althou!h they are described as variance. Q 3. Ca+cu+ation of &ariances in standard costing is not an end in itse+f@ ut a means to an end. .Discuss. Q 4. Discuss the &arious uses E ad&antages and criticisms +e&e+ed against standard costing. A. )dvanta!es of Standard Costin!: (i) It serves as a basis for measurin! operatin! performance and cost control. Ey settin! standards, proper classification and determination of variances, is possible. This serves as a si!nal for prompt corrective action. (ii) It aids price fixin!. (iii) Introduction of standard costin! facilitates evaluation of obs and introduction of incentives. (iv) *tandard costin! facilitates the estimation of the cost of new products with !reater accuracy. (v) It serves as a basis for inventory valuation. *tandard costs are used for inventory valuation because less clerical wor# is involved in carryin! inventory at standard cost. (vi) *tandard costin! is also used for the measurement of profits. (vii) *tandard costin! !reatly aids business plannin!, bud!etin! and mana!erial decision ma#in!. (ix) It provides ob ectives and tar!ets to be achieved by each level of mana!ement and defines the responsibilities of departmental mana!ers. Criticism of Standard Costin!: (i) 5ariation in *rice4 <ne of the chief problem faced in the operation of the standard costin! system is the precise estimation of li#ely prices or rate to be paid. (ii) 5arying +e&e+s of out*ut4 If the standard level of output set for pre"determination of standard costs is not achieved, the standard costs are said to be not realised. (iii) Changing standard of techno+ogy4 In case of industries that have frequent technolo!ical chan!es affectin! the conditions of production, standard costin! may not be suitable. (iv) *tandards may be either too strict or too liberal because they may be based on theoretical maximum efficiency
39

attainable !ood performance or avera!e past performance.

40

$ &ar/'.a( Cost'./
Q 1. Discuss rief+y the re+e&ant costs !ith e)am*+es.
marks) (#CC %o& ,' 3 .

A. 8elevant costs are those expected future cost which are essential but differ for alternative course or action. (a) 6istorical cost or sun# costs are irrelevant as they do not play any role in the decision ma#in! process. (b) =ariable costs which will not differ under various alternatives are irrelevant. Q 2. ()*+ain and i++ustrate cash reak-e&en chart.
marks) (#CC May ,- 3 9

A. In cash brea#"even chart, only cash fixed costs are considered. ,on"cash items li#e depreciation etc. are excluded from the fixed cost for computation of brea#"even point. It depicts the level of output or sales at which the sales revenue will equal to total cash outflow. It is computed as under'

6ence for example suppose insurance has been paid on .st Nanuary, /::5 till 2.st -ecember, /:.: then this fixed cost will not be considered as a cash fixed cost for the period .st Nanuary, /::P to 2.st -ecember, /::Q. Q 3. What is a margina+ cost$ A. 1ar!inal cost is the amount at any !iven volume of output by which a!!re!ate variable costs are chan!ed if the volume of output is increased by one unit. In practice this is measured by the total variable cost attributable to one unit. 1ar!inal cost can precisely be the sum of prime cost and variable overhead. In this context a unit may be a sin!le article, a batch of articles, an order, a sta!e of production capacity, a process or a department. It relates to the chan!e in output in particular circumstances under consideration. Q 4. (hat is contribution@ 6ow is it related to profit@ A. Contribution or the contributory mar!in is the difference between sales value and the mar!inal cost. It is obtained by subtractin! mar!inal cost from sales revenue of a !iven activity. It can also be defined as excess of sales revenue over the variable cost. The difference between sales revenue and mar!inal9variable cost is considered to be the contribution towards fixed expenses and profit of the entire business. Contribution G +ixed Cost L &rofit <8 &rofit G Contribution 7 +ixed Cost Q . What is a +imiting or key factor$ Ki&e e)am*+es. A. Mey factor or >imitin! factor is a factor which at a particular time or over a period limits the activities of an underta#in!. It may be the level of demand for the products or services or it may be the shorta!e of one or more of the productive resources, e.!., labour hours, available plant capacity, raw material$s availability etc. Q !. (hy is it important to classify costs as fixed and variable@
41

A. *e!re!ation of all expenses into fixed and variable elements is the essence of mar!inal costin!. The primary ob ective of the classification of expenses into fixed and variable elements is to find out the mar!inal cost for various types of mana!erial decisions. The other uses of it are as below' (i) Contro+ of e)*enses 4 The classification of expenses helps in controllin! expenses. +ixed expenses are said to be sun# costs as these are incurred irrespective of the level of production activity and they are re!arded as uncontrollable expenses. *ince variable expenses vary with the production they are said to be controllable. (ii) #re*aration of udget estimates4 This distinction between fixed and variable cost also helps the mana!ement to estimate precisely the bud!eted expenses. Q ". What is a margina+ cost eCuation$ A. The contribution theory explains the relationship between the variable cost and sellin! price. It tells us that sellin! price minus variable cost of the units sold is the contribution towards fixed expenses and profit. If the contribution is equal to fixed expenses, there will be no profit or loss and if it is less than fixed expenses, loss is incurred. *ince the variable cost varies in direct proportion to output, therefore if the firm does not produce any unit, the loss will be there to the extent of fixed expenses. These points can be described with the help of followin! mar!inal cost equation' (* K U) 7 (= K U) G + L & (here, * G *ellin! price per unit = G =ariable cost per unit U G Units + G +ixed expenses & G &rofi t Q #. Differentiate et!een a sor*tion costing and margina+ costing. A. /ar!inal costin! )bsorption costin! .. <nly variable costs are considered for Eoth fixed and variable costs are considered for product costin! and product costin! and inventory valuation. inventory valuation. /. +ixed costs are re!arded as period costs. +ixed costs are char!ed to the cost of production. 0ach product bears a The &rofitability of different products is reasonable share of fixed cost and thus the profitability of a product is ud!ed by their &9= ratio. influenced by the apportionment of fixed costs. 2. Cost data presented hi!hli!ht the total Cost data are presented in conventional pattern. ,et profit of each contribution of each product. product is determined after subtractin! fixed cost alon! with their variable costs. 3. The difference in the ma!nitude of openin! The difference in the ma!nitude of openin! stoc# and closin! stoc# stoc# and closin! stoc# does not affect the affects the unit cost of production due to the impact of related fixed cost. unit cost of production. Q $. What are the ad&antages and disad&antages of margina+ costing$ A. )dvanta!es of /ar!inal Costin! .. The mar!inal cost remains constant per unit of output whereas the fixed cost remains constant in total. *ince mar!inal cost per unit is constant from period to period within a short span of time, firm decisions on pricin! policy can be ta#en. /. If fixed overheads are included on the basis of pre"determined rates, there will be either under"recovery or over"recovery of overheads. 1ar!inal costin! avoids such under or over recovery of overheads. 2. The stoc# of finished !oods and wor#"in"pro!ress are carried on mar!inal cost basis and the fixed expenses are written off to profit and loss account as period cost. This shows the true profit of the period. 3. 1ar!inal costin! helps in the preparation of brea#"even analysis which shows the effect of increasin! or decreasin! production activity on the profitability of the company. 4. *e!re!ation of expenses as fixed and variable helps the mana!ement to exercise control over expenditure. 5. 1ar!inal costin! helps the mana!ement in ta#in! a number of business decisions li#e ma#e or buy, discontinuance of a particular product, replacement of machines, etc. -imitations of /ar!inal Costin! .. It is difficult to classify exactly the expenses into fixed and variable cate!ory. *ome expenses are neither totally variable nor wholly fixed. /. Contribution of a product itself is not a !uide for optimum profitability unless it is lin#ed with the #ey factor.
42

2. *ales staff may mista#e mar!inal cost for total cost and sell at a priceA which will result in loss or low profits. 6ence, sales staff should be cautioned while !ivin! mar!inal cost. 3. <verheads of fixed nature cannot alto!ether be excluded particularly in lar!e contracts, while valuin! the wor#"in" pro!ress. In order to show the correct position fixed overheads have to be included in wor#"in"pro!ress. 4. *ome of the assumptions re!ardin! the behaviour of various costs are not necessarily true in a realistic situation. +or example, the assumption that fixed cost will remain static throu!hout is not correct. +ixed cost may chan!e from one period to another. +or example salaries bill may !o up because of annual increments or due to chan!e in pay rate etc. The variable costs do not remain constant per unit of output. There may be chan!es in the prices of raw materials, wa!e rates etc. after a certain level of output has been reached due to shorta!e of material, shorta!e of s#illed labour, concessions of bul# purchases etc. 5. 1ar!inal costin! i!nores time factor and investment. +or example, the mar!inal cost of two obs may be the same but the time ta#en for their completion and the cost of machines used may differ. The true cost of a ob which ta#es lon!er time and uses costlier machine would be hi!her. This fact is not disclosed by mar!inal costin!. Q 1%. Critica++y discuss the assum*tions under+ying C5# ana+ysis. A. Cost volume profit (C=&) analysis is the analysis of three variables cost, volume and profit. *uch an analysis explores the relationship between costs, revenue, activity levels and the resultin! profit. It aims at measurin! variations in cost and volume. C=& analysis is based on the followin! assumptions' .. Chan!es in the levels of revenues and costs arise only because of chan!es in the number of units produced and sold. /. Total costs can be separated into two componentsA a fixed component that does not vary with output level and a variable component that chan!es with respect to output level. 2. (hen represented !raphically, the behaviour of total revenues and total costs are linear in relation to output level within a relevant ran!e and time period. 3. *ellin! price, variable cost per unit, and total fixed costs within a relevant ran!e and time period are #nown and constant. 4. The analysis either covers a sin!le product or assumes that the proportion of different products when multiple products are sold will remain constant as the level of total units sold chan!es. 5. %ll revenues and costs can be added, subtracted, and compared without ta#in! into account the time value of money. Q 11. ()*+ain4 (i) ?reake&en Chart (ii) Contri ution ?reake&en Chart (iii) #rofit-&o+ume Chart A. (i) *reakeven C#art' % brea#even chart records costs and revenues on the vertical axis and the level of activity on the hori)ontal axis. The brea#even point is that point where the sales revenue line intersects the total cost line. <ther measures li#e the mar!in of safety and profit can also be measured from the chart.

(ii) Contribution *reakeven C#art: It is not possible to use a brea#even chart to measure contribution. This is one of its ma or limitations especially so because contribution analysis is literally the bac#bone of mar!inal costin!. To overcome such a limitation contribution brea#even chart is used, which is based on the same principles as a conventional brea#even chart except for that it shows the variable cost line instead of the fixed cost line. >ines for Total cost and *ales revenue remain the same. The brea#even point and profit can be read off in the same way as with a conventional chart. 6owever it is also possible to read the contribution for any level of activity.
43

The contribution can be read as the difference between the sales revenue line and the variable cost line. (iii) Profit-volume C#art: This is also very similar to a brea#even chart. In this chart the vertical axis represents profits and losses and the hori)ontal axis is drawn at )ero profit or loss. In this chart each level of activity is ta#en into account and profits mar#ed accordin!ly. The brea#even point is where this line interacts the hori)ontal axis.

The loss at a nil activity level is equal to 8s. /,::,:::, i.e. the amount of fixed costs. The second point used to draw the line could be the calculated brea#even point or the calculated profit for sales of a particular number of units. )dvanta!es of t#e profit-volume c#art: The bi!!est advanta!e of the profit"volume chart is its capability of depictin! clearly the effect on profit and brea#even point of any chan!es in the variables. Q 12. Distinguish et!een Margina+ Costing and Differentia+ Costing. A. 1ar!inal Costin! is defined as the B%scertainment of mar!inal costs and of the effect on profit of chan!es in volume or type of output by differentiatin! between fixed costs and variable costs$. -ifferential Costin! is defined as the technique of costin! which uses differential costs and9or differential revenues for ascertainin! the acceptability of an alternative. The technique may be termed as incremental costin! when the difference is increase in costs and decremental costin! when the difference is decrease in costs. The main points of distinction between mar!inal costin! and differential costin! are as below' (a) The technique of mar!inal costin! requires a clear distinction between variable costs and fixed costs whereas no such distinction is made in the case of differential costin!. (b) In mar!inal costin!, mar!in of contribution and contribution ratio are the main yard stic#s for performance evaluation and for decision ma#in! whereas under differential costs analysis, differential costs are compared with the incremental or decremental revenue (as the case may be) for arrivin! at a decision. (c) -ifferential cost analysis is possible in both absorption costin! and mar!inal costin!, where as mar!inal costin! in itself is a distinct technique. (d) 1ar!inal cost may be incorporated in the cost accountin! system whereas differential costs are wor#ed out separately.

44

1% B+-/ets a.- B+-/etary Co.tro(

Q 1. ()*+ain rief+y the conce*t of f+e)i +e udget.
marks) (#CC %o& ,- 3 .

A. 7le0ible *ud!et: % flexible bud!et is defined as Ra bud!et which, by reco!ni)in! the difference between fixed, semi" variable and variable cost is desi!ned to chan!e in relation to the level of activity attainedS. % fixed bud!et, on the other hand is a bud!et which is desi!ned to remain unchan!ed irrespective of the level of activity actually attained. In a fixed bud!etary control, bud!ets are prepared for one level of activity whereas in a flexibility bud!etary control system, a series of bud!ets are prepared one for the each of a number of alternative production levels or volumes. +lexible bud!ets represent the amount of expense that is reasonably necessary to achieve each level of output specified. In other words, the allowances !iven under flexibility bud!etary control system serve as standards of what costs should be at each level of output. Q 2. Discuss the com*onents of udgetary contro+ system.
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A. Components of bud!etary control system The policy of a business for a defined period is represented by the master bud!et the details of which are !iven in a number of individual bud!ets called functional bud!ets. The functional bud!ets are broadly !rouped under the followin! heads' (a) &hysical Eud!ets 7 *ales Fty, &roduct Fty., Inventory, 1anpower bud!et. (b) Cost Eud!ets 7 1anufacturin! Cost, %dministration Cost, sales ? distribution cost, 8 ? - Cost. (c) &rofit Eud!et Q 3. /ist the eight functiona+ udgets *re*ared y a usiness.
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A. The various commonly used +unctional bud!ets are' *ales Eud!et &roduction Eud!et &lant Utilisation Eud!et -irect 1aterial Usa!e Eud!et -irect 1aterial &urchase Eud!et -irect >abour (&ersonnel) Eud!et +actory <verhead Eud!et &roduction Cost Eud!et Q 4. Discuss rief+y the o 6ecti&es of udgeting. (sta +ishing s*ecific targets for future o*erations is *art of the *+anning function of management@ !hi+e e)ecuting actions to meet the goa+s is the directing function of management.. An the conte)t of this statement@ discuss the *+anning@ directing and contro++ing functions of management. A. The process of bud!etin! is initiated with the establishment of specific tar!ets of performance and is followed by executin! plans to achieve such desired !oals and from time to time comparin! actual results with the tar!ets of performances9!oals. 0stablishin! specific tar!ets for future operations is part of the plannin! function of mana!ement, while executin! actions to meet the !oals is the directin! function of mana!ement. Plannin!: Eud!etin! supports the plannin! process by requirin! all or!anisational units to establish their tar!ets for the upcomin! period. The tar!ets, in turn, motivate individuals and !roups to perform at hi!h levels. -urin! the plannin! phase of the bud!et process, all viewpoints are considered, options identified, and cost reduction opportunities assessed. This process may reveal opportunities or threats that were not #nown prior to the bud!et plannin! process. Directin!: <nce the bud!et plans are in place, they can be used to direct and coordinate operations in order to achieve the stated tar!ets. The bud!etary units of an or!anisation are called responsibility centers. 0ach responsibility center is led by a mana!er who has the authority over and responsibility for the unit$s performance. Controllin!' %s time passes, the actual performance of an operation can be compared a!ainst the planned tar!ets. This provides prompt feedbac# to employees about their performance. If necessary, employees can use such feedbac# to ad ust their activities in the future. Comparin! actual results to the plan also helps prevent unplanned expenditures.
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Q . Define the terms ?udget and ?udgeting contro+. A. ?udget4 % financial and9or quantitative statement, prepared and approved prior to a defined period of time of the policy to be pursued durin! that period for the purpose of attainin! a !iven ob ective. It may include income, expenditure and employment of capital. ?udgetary Contro+4 Eud!etary control is the establishment of bud!ets relatin! to the responsibilities of executives of a policy and the continuous comparison of the actual with the bud!eted results, either to secure by individual action the ob ective of the policy or to provide a basis for its revision. Q !. Distinguish et!een fi)ed udget and f+e)i +e udget. A. 7i0ed *ud!et .. It does not chan!e with actual volume of activity achieved. Thus it is #nown as ri!id or inflexible bud!et. /. It operates on one level of activity and under one set of conditions. It assumes that there will be no chan!e in the prevailin! conditions, which is unrealistic. 2. 6ere as all costs li#e " fixed, variable and semi"variable are related to only one level of activity. *o variance analysis does not !ive useful information. 3. If the bud!eted and actual activity levels differ si!nificantly, then the aspects li#e cost ascertainment and price fixation do not !ive a correct picture. 4. Comparison of actual performance with bud!eted tar!ets will be meanin!less specially when there is a difference between the two activity levels. Q ". Write short notes on the fo++o!ing@ (a) Ca*ita+ e)*enditure udget ( ) Cash ?udget A. (a) Capital e0penditure bud!et " The capital expenditure bud!et represents the planned outlay on fixed assets li#e land, buildin!, plant and machinery, etc. durin! the bud!et period. This bud!et is sub ect to strict mana!ement control because it entails lar!e amount of expenditure. The bud!et is prepared to cover a lon! period of years and it pro ects the capital costs over the period. The advanta!es of capital expenditure bud!et are the followin! ' (.) It outlines the capital development pro!ramme and estimated capital expenditure durin! the bud!et period. (/) It enables the company to establish a system of priorities. (hen there is a shorta!e of funds, capital rationin! becomes necessary. (2) It serves as a tool for controllin! expenditure. (3) It provides the amount of expenditure to be incorporated in the future bud!et summaries for calculation of estimated return on capital employed. (4) This enables the cash bud!et to be completed. (ith other cash commitments capital expenditure commitment should also be considered for the completion of the bud!et. (5) It facilitates cost reduction pro!ramme, particularly when modernisation and renovation is covered by this bud!et. (b) Cas# bud!et " Cash bud!et represents the cash requirements of the business durin! the bud!et period. It is the plan of receipts and payments of cash for the bud!et period, analysed to show the monthly flow of cash drawn up in such a way that the balance can be forecasted at re!ular intervals. The cash udget is one of the most important elements of the bud!eted balance sheet. Information from the various operatin! bud!ets, such as the sales bud!et, the direct materials purchases bud!et, and the sellin! and administrative expenses bud!et, affects the cash bud!et. In addition, the capital expenditures bud!et, dividend policies, and plans for equity or lon!"term debt financin! also affect the cash bud!et. Q #. Distinguish et!een <unctiona+ udgets and master udget. A. 7unctional bud!et - % functional bud!et is one which is related to function of the business as for example, production bud!et relatin! to the manufacturin! function. +unctional bud!ets are prepared for each function and they are subsidiary to the master bud!et of the business. The various types of functional bud!ets to be prepared will vary accordin! to the si)e and
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7le0ible *ud!et It can be recasted on the basis of activity level to be achieved. Thus it is not ri!id. It consists of various bud!ets for different levels of activity. 6ere analysis of variance provides useful information as each cost is analysed accordin! to its behaviour. +lexible bud!etin! at different levels of activity, facilitates the ascertainment of cost, fixation of sellin! price and tenderin! of quotations. It provides a meanin!ful basis of comparison of the actual performance with the bud!eted tar!ets.

nature of the business. The various commonly used functional bud!ets are *ales bud!et, &roduction bud!et, +actory overhead bud!et, Cash bud!et, etc. These functional bud!ets are also #nown as schedules to master bud!et /aster bud!et " (hen all the necessary functional bud!ets have been prepared, the bud!et officer will prepare the master bud!et which may consist of bud!eted profit and loss account and bud!eted balance sheet. These are in fact the bud!et summaries. (hen the master bud!et is approved by the board of directors, it represents a standard for the achievement of which all the departments will wor#. Q $. Discuss the o 6ecti&es of introducing a ?udgetary Contro+ 8ystem in an organisation. A. The ob ectives of a system of bud!etary control are !iven below' .. &ortrayin! with precision the overall aims of the business and determinin! tar!ets of performance for each section or department of the business. /. >ayin! down the responsibilities of each of the executives and other personnel so that every one #nows what is expected of him. 2. &rovidin! a basis for the comparison of actual performance with the predetermined tar!ets and in&estigation of deviation, if any. 3. 0nsurin! the best use of all available resources to maximise profit or production, sub ect to the limitin! factors. 4. Co"ordinatin! the various activities of the business2 5. &rovidin! a basis for revision of current and future policies. D. -rawin! up lon! ran!e plans with a fair measure of accuracy. P. &rovidin! a yardstic# a!ainst which actual results can be compared. Q 1%. Discuss rief+y the ad&antages and +imitations of ?udgetary Contro+ 8ystem. A. )dvanta!es of *ud!etary Control System .. The use of bud!etary control system enables the mana!ement of a business concern to conduct its business activities in the efficient manner. /. It is a powerful instrument used by business houses for the control of their expenditure. 2. It reveals the deviations to mana!ement, from the bud!eted fi!ures after ma#in! a comparison with actual fi!ures. 3. 0ffective utilisation of various resources li#e men, material, machinery and money is made possible, as the production is planned after ta#in! them into account. 4. It helps in the review of current trends and framin! of future policies. 5. It creates suitable conditions for the implementation of standard costin! system in a business or!anisation. D. It inculcates the feelin! of cost consciousness amon! wor#ers. -imitations of *ud!etary Control System: .. Eud!ets may or may not be true, as they are based on estimates. /. Eud!ets are considered as ri!id document. 2. Eud!ets cannot be executed automatically. 3. *taff co"operation is usually not available durin! bud!etary control exercise. 4. Its implementation is quite expensive. Q 11. What do you understand y the term sa+es udget$ =o! it is *re*ared$ A. *ales forecast is the commencement of bud!etin! and hence sales bud!et assumes primary importance. The quantity which can be sold may be the principal bud!et factor in many business underta#in!s. The sales bud!et indicates for each product (.) the quantity of estimated sales and (/) the expected unit sellin! price. +or estimatin! the quantity of sales for each product factors li#e bac#lo! of unfilled sales orders, planned advertisin! and promotion, expected industry and !eneral economic conditions are considered. <nce an estimate of the sales volume is obtained, the expected sales revenue can be determined by multiplyin! the volume by the expected unit sales price. The sales bud!et represents the total sales in physical quantities and values for a future bud!et period. Q 12. Discuss the sa+ient features of a udgetary contro+ system. A. % bud!etary control system can be defined as .the establishment of bud!ets relatin! to the responsibilities of executives to the requirements of a policy, and the continuous comparison of actual with bud!eted results either to secure by individual action the ob ective of that policy or to provide a base for its revision. The salient features of such a system are the followin!' (i) -eterminin! the ob ectives to be achieved, over the bud!et period, and the policy or policies that mi!ht be adopted for the achievement of these ends.
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(ii) -eterminin! the variety of activities that should be underta#en for the achievement of the ob ectives. (iii) -rawin! up a plan or a scheme of operation in respect of each class of activity. (iv) >ayin! out a system of comparison of actual performance by each person, section or department with the relevant bud!et and determination of causes for the discrepancies, if any. (v) 0nsurin! that corrective action will be ta#en where the plan is not bein! achieved In brief, it is a system to assist mana!ement in ma#in!, estimatin! and plannin! for the future and to facilitate the analysis of the variation between estimated and actual performance.

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