Costing PDF - Past Exam Questions

Summary

This document is study material for costing, specifically targeted at Inter CA students. The document includes example cost sheets and theory sections related to costing concepts. Additional questions for practice covering various topics such as cost sheet, absorption costing etc. are also included.

Full Transcript

PREFACE Dear Students, Welcome to the world of knowledge -- J.K. Shah Classes ! I have the pleasure of presenting this study material to you. It contains good number of good problems, selected so carefully from wide-ranging sources. It covers the problems which will bring in to focus all import...

PREFACE Dear Students, Welcome to the world of knowledge -- J.K. Shah Classes ! I have the pleasure of presenting this study material to you. It contains good number of good problems, selected so carefully from wide-ranging sources. It covers the problems which will bring in to focus all important concepts that you need to study in order to fortify yourself for your examination. The subject will be taught by eminent professors who are highly experienced and well-versed with the job. The coaching is very exhaustive and wholly concept based. The conceptual explanations are entirely supported by good problems that cover the past and the problems which peep into the future. Also, the coaching is very systematic, well - planned and absolutely time bound. For a change, say good - bye to mechanical learning. I am sure you will feel that the study is a pleasurable job and not a painful exercise. Each topic of this study material is divided into four parts : (A) Theory Section : This section covers theory related to the topic. (B) Classwork Section : This section covers good number of quality problems which will be solved in the classroom. (C) Theory for Exam : This section covers important theory questions relevant for your IPCC exam. (D) Homework Section : This section covers good number of problems. Students are strongly advised to solve these problems. I wish you a very happy study time. BEST OF LUCK ! Prof. J.K. Shah. Chartered Accountant INDEX 1 COST SHEET 1-33 2 ABSORPTION COSTING & OVERHEADS 34-55 3 ACTIVITY BASED COSTING 56-61 4 JOB COSTING 62-66 5 PROCESS & OPERATION COSTING 67-101 6 JOINT PRODUCTS & BY PRODUCTS 102-117 7 COST ACCOUNTING SYSTEM 118- 154 8 BUDGETARY CONTROL 155 - 168 9 UNIT AND BATCH COSTING 169 - 172 10 STANDARD COSTING 173 - 199 11 MARGINAL COSTING 200 - 216 12 APPLICATIONS 217 - 229 ADDITIONAL QUESTIONS FOR PRACTICE 230 - 257 13 / PAST EXAMINATION QUESTIONS 14 MULTIPLE CHOICE QUESTIONS 01 COST SHEET 258 - 262 02 ABSORPTION COSTING & OVERHEADS 263 - 269 03 ACTIVITY BASED COSTING 270 - 274 04 COST ACCOUNTING SYSTEMS (INTEGRATED 275- 282 & NON – INTEGRATED ACCOUNTS) 05 PROCESS & OPERATION COSTING 283 - 289 06 JOINT PRODUCTS & BY PRODUCTS 290 - 297 07 SERVICE OR OPERATING COSTING 298 - 303 08 MATERIAL COST CONTROL, STOCK 304 - 310 VALUATION AND STOCK CONTROL 09 EMPLOYEE COST AND DIRECT EXPENSES 311 - 316 10 UNIT & BATCH COSTING 317 - 319 11 JOB COSTING 320 - 323 12 BUDGET 324 - 330 13 STANDARD COSTING 331 - 336 14 MARGINAL COSTING 337 - 344 15 ANSWER KEY 345 - 358 INTER CA. – COSTING COST SHEET THEORY SECTION (New & Applicable Format) Cost Sheet of........... for the year ending......... Particulars Total Cost (`) Raw Materials Consumed Opening Stock of Raw Materials xx + Purchase of Raw Materials xx - Scrap of Raw Materials (xx) + Carriage Inwards (Any expenses on purchase) xx Less : Closing Stock of Raw Materials (xx) Less : Purchase Return (xx) xx Direct employee (labour) cost xx Direct expenses xx Prime Cost xx Works/ Factory Overheads xx Gross Works Cost x Add: Opening Work in Process xx Less: Closing Work in Process (xx) Works/ Factory Cost xx Quality Control Cost xx Research and Development Cost xx Administrative Overheads (relating to production activity) xx Less: Credit for Recoveries / Scrap / By- Products / miscellaneous (xx) income Add: Packing cost (primary) xx Cost of Production xx Add: Opening stock of finished goods xx Less: Closing stock of finished goods (xx) 1 INTER CA. – COSTING Cost of Goods Sold xx Add: Administrative Overheads (General) xx Add: Marketing Overheads -Selling Overheads xx -Distribution Overheads xx Cost of Sales xx Profit xx Sales xx (Old Format) Cost Sheet of........... for the year ending.............. Particulars Total Cost (`) Raw Materials Consumed Opening Stock of Raw Materials Xx + Purchase of Raw Materials Xx - Scrap of Raw Materials (xx) + Carriage Inwards (Any expenses on purchase) xx Less : Closing Stock of Raw Materials (xx) Less : Purchase Return (xx) xx Add : Direct Labour / Direct Wages / Manufacturing Wages / xx Productive Wages / Factory Wages Add : Direct Expenses xx Prime Cost sx Add : Factory / Manufacturing / Works / Production Overheads xx xx xx xx Less : Sale of Scrap xx xx xx Add : Opening Stock of WIP Xx Less : Closing Stock of WIP xx Factory / Works / Production / Manufacturing Cost xx Add : Office & Administrative Overheads (related to production) xx xx xx xx 2 INTER CA. – COSTING Cost of Production xx + Opening Stock of Finished Goods xx - Closing Stock of Finished Goods (xx) Cost of Goods sold xx Add : Office & Administrative Overheads (General) xx Add : Selling & Distribution Overheads xx xx xx xx xx Cost of Sales / Total Cost xx Add : Profit xx Sales xx Notes: 1. Variable Cost: It is directly related to production. It is also known as product cost. For e.g. Direct Material, Direct Labour, Direct Expenses. Variable cost per unit normally remains same. Total variable cost keeps on changing. If production is increased then total variable cost will increase & if production is decreased then total variable cost will decreased. 2. Fixed Cost: It is related to period & not related to product. It is also known as period cost. For e.g. Salary, Rent etc. Total amount of Fixed Cost remains same. Fixed cost per unit keeps on changing. If production is increased then Fixed cost per unit will decrease & if production is decreased then Fixed cost per unit will increased. 3. Semi Variable Cost: It is also known as Semi Fixed Cost. It is neither variable nor Fixed. It remains same upto certain level of Activity and then it will change. Sometimes semi variable can be divided into two parts i.e. Variable & Fixed. For e.g. Telephone Expenses. 4. Stock Valuation: In Cost Accounting stock is to be valued at Cost Price. Cost Price means what? (A) Closing stock of Raw Material → It is to be valued at purchase price of Raw Material, purchase price of Raw Material also includes expenses related to purchase. (B) WIP → Valuation of WIP includes Direct Material + Direct Labour + Direct Expenses + Factory Overheads. 3 INTER CA. – COSTING (C) Finished Goods → It is to be valued at cost of production. (Direct Material + Direct Labour + Direct Expenses + Factory Overheads + Administrative Overheads. 5. Financial expenses & Financial incomes are to be ignored in cost accounting. E.g. of Financial Expenses: Bad debts, Cash discount allowed, Loss on sale of Assets, Interest, Provision for Income - tax etc. E.g. of Financial incomes: Bad debts recovered, Interest received, Dividend received, Rent received, Profit on Sale of Assets etc. 6. Disputed Expenses: E.g. Bad debts, Cash discount allowed, Interest, etc. {These Expenses can be considered as Financial expenses or It can be recorded in Cost Accounting}. 7. Notional Expenses are to be recorded in Cost Accounting only. For e.g. Rent of Premises owned by the company i.e. notional rent. 4 INTER CA. – COSTING CLASSWORK SECTION Question 1 The following extracts of costing information relate to commodity A for the year ended 31.3.2019. Purchase of Raw Material ` 48,000 Direct Wages ` 40,000 Stock on 1-4-2018 of Raw Material ` 8,000 of Finished Goods 1,600 quintals ` 6,400 Stock on 31-3-2019 of Raw Material ` 6,800 of Finished Goods 3,200 quintals Work on cost (factory overhead) ` 16,800 Work-in-Progress: 1st April 2018 ` 1,920 31st March 2019 ` 6,400 Office and Administrative Overheads (Related to Production) ` 3,200 Sales (Finished Product) ` 1,20,000 Advertising, discount allowed and selling cost is Re. 0.40 per quintal. During the year 25,600 quintals of commodity were produced. Prepare Cost sheet. Question 2 XYZ a manufacturing firm, has revealed following information for 10 September, 2019: 1st September 30th September (`) (`) Raw Materials 2,42,000 2,92,000 Works-in-progress 2,00,000 5,00,000 The firm incurred following expenses for a targeted production of 1,00,000 units during the month : ` Consumable Stores and spares of factory 3,50,000 Research and development cost for process improvements 2,50,000 Quality control cost 2,00,000 Packing cost (secondary) per unit of goods sold 2 Lease rent of production asset 2,00,000 5 INTER CA. – COSTING Administrative Expenses (General) 2,24,000 Selling and distribution Expenses 4,13,000 Finished goods (opening) Nil Finished goods (closing) 5000 units Defective output which is 4% of targeted production, realizes 61per unit. Closing stock is valued at cost of production (excluding administrative expenses) Cost of goods sold, excluding administrative expenses amounts to `78,26,000. Direct employees cost is ½ of the cost of material consumed. Selling price of the output is 110 per unit. You are required to : (i) Calculate the Value of material purchased (ii) Prepare cost sheet showing the profit earned by the firm. Question 3 Following is the Cost Sheet of Electronics Ltd. for the year 2019. Cost Sheet for the year 2019 Particulars Produced 10,000 CTV Tubes Total Cost Sold 10,000 CTV Tubes Amount Amount Direct Materials 90,000 Direct Wages 60,000 Prime Cost 1,50,000 Add: Factory Overheads Power and Consumable Stores 12,000 Factory Indirect Wages 15,000 Lighting of Factory 5,500 Sundry Factory Overheads 3,000 Plant Repairs and Maintenance and Depreciation 11,500 47,000 Factory/Works Cost/ 1,97,000 Add: Administration Overheads [Related to Production] --- [-] Sale of Scrap [2,000] Cost of Production/Cost of Goods Sold 1,95,000 Add Administration Overheads (General] Clerical Salaries and Management Expenses 33,500 Add: Marketing Overheads Selling and Distribution Overheads 5,500 6 INTER CA. – COSTING Cost of Sales 2,34,000 Profit 82,000 Sales 3,16,000 As from 1st January, 2020 the selling price is reduced to ` 31 per unit. It is estimated that production could be increased in 2020 by 50% due to spare capacity. Rates for materials and direct wages will increase by 10%. You are required to prepare Estimated Cost Sheet for 2020 assuming that 15,000 units will be produced & sold during the year and factory overheads will be recovered at 75% of direct wages and administrative overheads (General) and selling expenses will be recovered at 20% of works cost. Question 4 X and Y shoes Polish Company Ltd. manufactures black and brown polish in one standard size of tin retailing at ` 1.08 & ` 1.20 respectively. Following data are supplied to you. ` Direct Materials : Polish 7,38,000 Tins 2,88,000 Direct wages 2,44,800 Production overheads 3,67,200 Administrative and Selling Overheads 1,22,400 Sales for the year were black 14,40,000 tins and brown 6,00,000 tins. The opening and closing stock were: Black Brown Opening Stock 48,000 1,60,000 Closing Stock 1,08,000 60,000 The opening stock of black and brown polish was valued at its production cost of paise 80.4 per tin and paise 86.4 per tin respectively. The cost of raw materials for Brown Polish is 10% higher than that for black but there is no difference in the cost of tins. Direct wages for brown are 8% higher than those for black polish and production overheads are considered to vary with direct wages. Administrative and Selling overheads is absorbed at a uniform rate per tin of polish sold. Prepare a statement to show the cost and profit per tin of each polish. 7 INTER CA. – COSTING Question 5 X Ltd. has the following expenditures for the year ended 31st March, 20X8: Amount Amount (`) (`) Raw materials purchased 10,00,00,000 Freight inward 11,20,600 Wages paid to factory workers 29,20,000 Contribution made towards employees’ PF & ESIS 3,60,000 Production bonus paid to factory workers 2,90,000 Royalty paid for production 1,72,600 Amount paid for power & fuel 4,62,000 Amount paid for purchase of moulds and patterns (life is 8,96,000 equivalent to two years production) Job charges paid to job workers 8,12,000 Stores and spares consumed 1,12,000 Depreciation on: - Factory building 84,000 - Office building 56,000 - Plant & Machinery 1,26,000 - Delivery vehicles 86,000 3,52,000 Salary paid to supervisors 1,26,000 Repairs & Maintenance paid for: - Plant & Machinery 48,000 - Sales office building 18,000 - Vehicles used by directors 19,600 85,600 Insurance premium paid for: - Plant & Machinery 31,200 - Factory building 18,100 - Stock of raw materials & WIP 36,000 85,300 Expenses paid for quality control check activities 19,600 Salary paid to quality control staffs 96,200 Research & development cost paid improvement in 18,200 production process Expenses paid for pollution control and engineering & 26,600 maintenance 8 INTER CA. – COSTING Expenses paid for administration of factory work 1,18,600 Salary paid to functional mangers: - Production control 9,60,000 - Finance & Accounts 9,18,000 - Sales & Marketing 10,12,000 28,90,000 Salary paid to General Manager 12,56,000 Packing cost paid for: - Primary packing necessary to maintain quality 96,000 - For re-distribution of finished goods 1,12,000 2,08,000 Interest and finance charges paid 7,20,000 Fee paid to auditors 1,80,000 Fee paid to legal advisors 1,20,000 Fee paid to independent directors 2,20,000 Performance bonus paid to sales staffs 1,80,000 Value of stock as on 1st April, 20X7 - Raw materials 18,00,000 - Work-in-process 9,20,000 - Finished goods 11,00,000 38,20,000 Value of stock as on 31st March, 20X8 - Raw materials 9,60,000 - Work-in-process 8,70,000 - Finished goods 18,20,000 36,50,000 Sale of scrap and waste generated 86,000 From the above data you are requested to PREPARE Statement of cost for X Ltd. for the year ended 31st March, 20X8, showing (i) Prime cost, (ii) Factory cost, (iii) Cost of Production, (iv) Cost of goods sold and (v) Cost of sales. Question 6 Maximum production capacity of JK Ltd. is 5,20,000 units per annum. Details of estimated cost of production are as follows: - Direct material ` 15 per unit. - Direct wages ` 9 per unit (subject to a minimum of ` 2,50,000 per month). - Fixed overheads ` 9,60,000 per annum. - Variable overheads ` 8 per unit. - Semi-variable overheads are ` 5,60,000 per annum up to 50 per cent capacity and additional ` 1,50,000 per annum for every 25 per cent increase in capacity or a part of it. 9 INTER CA. – COSTING JK Ltd. worked at 60 per cent capacity for the first three months during the year 2018-19, but it is expected to work at 90 per cent capacity for the remaining nine months. The selling price per unit was ` 44 during the first three months. You are required to find out, what selling price per unit should be fixed for the remaining nine months to yield a total profit of ` 15,62,500 for the whole year. 10 INTER CA. – COSTING HOMEWORK SECTION Question 1 A re-roller produced 400 metric tons of M.S. bars spending ` 36,00,000 towards materials and ` 6,20,000 towards rolling charges. Ten percent of the output was found to be defective, which had to be sold at 10% less than the price for good production. If the sales realization should give the firm an Overall profit of 12.5% on cost, find the selling price per metric ton of both the categories of bars. The scrap arising during the rolling process fetched a realization of ` 60,000. Question 2 A Ltd. Co. has capacity to produce 1,00,000 units of a product every month. Its works cost at varying levels of production is as under: Level Works cost per unit (`) 10% 400 20% 390 30% 380 40% 370 50% 360 60% 350 70% 340 80% 330 90% 320 100% 310 Its fixed administration expenses amount to `1,50,000 and fixed marketing expenses amount to `2,50,000 per month respectively. The variable distribution cost amounts to ` 30 per unit. It can sell 100% of its output at `500 per unit provided it incurs the following further expenditure: (a) it gives gift items costing ` 30 per unit of sale; (b) it has lucky draws every month giving the first prize of ` 50,000; 2nd prize of ` 25,000, 3rd prize of ` 10,000 and three consolation prizes of ` 5,000 each to customers buying the product. (c) it spends `1,00,000 on refreshments served every month to its customers; (d) it sponsors a television programme every week at a cost of ` 20,00,000 per month. It can market 30% of its output at `550 per unit without incurring any of the expenses 11 INTER CA. – COSTING referred to in (a) to (d) above. PREPARE a cost sheet for the month showing total cost and profit at 30% and 100% capacity level. Question 3 From the following particulars, you are required to PREPARE monthly cost sheet of Aditya Industries: Amount (`) Opening Inventories: - Raw materials 12,00,000 - Work-in-process 18,00,000 - Finished goods (10,000 units) 9,60,000 Closing Inventories: - Raw materials 14,00,000 - Work-in-process 16,04,000 - Finished goods ? Raw materials purchased 1,44,00,000 Wages paid to production workers 36,64,000 Expenses paid for utilities 1,45,600 Office and administration expenses paid 26,52,000 Travelling allowance paid to office staffs 1,21,000 Selling expenses 6,46,000 Factory overheads - ` 1,72,800 Units sold- 1,60,000 Units produced- 1,94,000 Desired profit- 15% on sales Question 4 The books of Adarsh Manufacturing Company present the following data for the month of April, 2020: Direct labour cost ` 17,500 being 175% of works overheads. Cost of goods sold excluding administrative expenses ` 56,000. Inventory accounts showed the following opening and closing balances: 12 INTER CA. – COSTING April 1 (`) April 30 (`) Raw materials 8,000 10,600 Work-in-progress 10,500 14,500 Finished goods 17,600 19,000 Other data are: (`) Selling expenses 3,500 General and administration expenses 2,500 Sales for the month 75,000 You are required to: (i) FIND out the value of materials purchased. (ii) PREPARE a cost statement showing the various elements of cost and also the profit earned. Question 5 X Ltd. Furnishes you the following details to enable you to prepare cost sheet. Production Overheads ` 80,000 Material Purchased ` 5,00,000 Administrative Overheads (Related to Production) `1,00,000 Inventory Details Opening Closing (`) (`) Materials 1,50,000 1,20,000 Work-in-Progress 80,000 95,000 Finished Goods 2,04,000 ? A firm had the stock of 12,000 units in opening inventory. It sold 64,000 units at ` 28.5 per unit. It has 8,000 units in its closing inventory. Labour cost incurred amounted to ` 3,85,000. The cost of sales amounted to ` 14,01,000. 13 INTER CA. – COSTING IMPORTANT THEORY QUESTIONS FOR EXAMINATION Question 1 Define the terms ‘cost centre’ and ‘cost unit’. Answer Cost Centre: The term cost centre is defined as a location, person or an item of equipment or a group 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 centres and process cost centres. Cost Unit: 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 job, batch, or product group. Question 2 Given below is a list of ten industries. Give the method of costing and the unit of cost against each industry. (i) Nursing Home (vi) Bridge Construction (ii) Road Transport (vii) Interior Decoration (iii) Steel (viii) Advertising (iv) Coal (ix) Furniture (v) Bicycles (x) Sugar company having its own sugarcane fields. Answer Industry Method of costing Unit of cost (i) Nursing Home Operating Per Bed per week or per day (ii) Road transport Operating Per Tonne Kilometer or per mile (iii) Steel Process Per Tonne (iv) Coal Single Per unit (v) Bicycles Multiple Each unit (vi) Bridge construction Contract Each contract (vii) Interior Decoration Job Each Job (viii) Advertising Job Each Job (ix) Furniture Multiple Each unit 14 INTER CA. – COSTING Question 3 Distinguish between: (i) Cost Unit and Cost Centre (ii) Cost Centre and Profit Centre Answer (i) Distinction between Cost Unit and Cost Centre 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 job, batch, or product group. The term Cost Centre is defined as a location, person or an item of equipment or a group 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 organisation is known 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. (ii) Cost Centre and Profit Centre A Cost Centre is the smallest segment of activity or the area of responsibility for which costs are accumulated. A Profit Centre is that segment of activity of a business which is responsible for both revenue and expenses and discloses the profit of a particular segment of activity. Important points of distinction between Cost Centre and Profit Centre are as below: (a) Cost Centres are created for accounting convenience of costs and their control. Whereas a profit centre is created because of decentralisation of operations. (b) A Cost Centre does not have target costs but efforts are made to minimise costs, but each profit centre has a profit target and enjoys authority to adopt such policies as are necessary to achieve its targets. Question 4 List down any eight factors that you will consider before installing a costing system Answer The eight factors which must be considered before installing a Costing System are listed below: (i) Nature of business: The system of costing to be introduced should suit the general nature of business. 15 INTER CA. – COSTING (ii) Layout aspects: The size and layout of the organisation should be studied by the system designers. (iii) Methods and procedures in vogue: The system designers should also study various methods and procedures for the purchase, receipts, storage and issue of material. They should also study the methods of wage payment. (iv) Management’s expectations and policies: The system of costing should be designed after a careful analysis of the organisational operations, management’s expectation and the policies of the concern. (v) Technical aspects: The technical aspects of the business should be studied thoroughly by the designers. They should also make an attempt to seek the assistance and support of the supervisory staff and workers of the concern for the system. (vi) Simplicity of the system: The system of costing to be installed should be easy to understand and simple to operate. The procedures laid down for operating the system should be easily understood by operating system. (vii) Forms standardisation: Various forms to be used by the costing system for various data / information collection and dissemination should be standardised as far as possible. (viii) Accuracy of data: The degree of accuracy of data to be supplied by the system should be determined. Question 5 Outline the steps involved in installing a costing system in a manufacturing unit. What are the essentials of an effective costing system? Answer The main steps involved in installing a costing system in a manufacturing unit may be outlined as below: (i) The objectives of installing a costing system in a manufacturing concern and the expectations of the management from such a system should be identified first. The system will be a simple one in the case of a single objective but will be an elaborate one in the case of multiple objectives. (ii) It is important to ascertain the significant variables of the manufacturing unit which are amenable to control and affect the concern. For example, quite often the production costs control may be more important than control of its marketing cost. Under such a situation, the costing system should devote greater attention to control production costs. 16 INTER CA. – COSTING (iii) A thorough study to know about the nature of business, its technical aspects ; products, methods and stages of production should also be made. Such a study will facilitate in selecting a proper method of costing for manufacturing unit. (iv) A study of the organisation structure, its size and layout etc., is also necessary. This is useful to management to determine the scope of responsibilities of various managers. (v) The costing system should be evolved in consultation with the staff and should be introduced only after meeting their objections and doubts, if any. The co-operation of staff is essential for the successful operation of the system. (vi) Details of records to be maintained by the costing system should be carefully worked out. The degree of accuracy of the data to be supplied by the system should be determined. (vii) The forms to be used by foreman, workers, etc., should be standardised. These forms be suitably designed and must ensure minimum clerical work at all stages. (viii) Necessary arrangements should be made for the flow of information/data to all concerned managers, at different levels, regularly and promptly. (ix) Reconciliation of costs and financial accounts be carried out regularly, if they are maintained separately. (x) The costing system to be installed should be easy to understand and simple to operate. Essential of an effective costing system: The essential features that an effective costing system should possess are as follows : (a) Costing system should be tailor made, practical, simple and capable of meeting the requirements of a business concern. (b) The method of costing should be suitable to the industry. (c) Necessary co-operation and participation of executives from various departments of the concern is essential for developing good cost accounting system. (d) The cost of installing and operating the system should justify the results. (e) The system of costing should not sacrifice the utility by introducing meticulous and unnecessary details. Question 6 Distinguish between the following? Controllable costs and uncontrollable costs. Answer Controllable costs and uncontrollable costs: Costs which can be influenced by the action of a specified person in an organisation are known as controllable costs. Costs which remains unaffected by the action of such person 17 INTER CA. – COSTING are termed as uncontrollable. In a business organisation heads of each responsibility centre are responsible to control costs. Costs which they are able to control are known as controllable and includes material, labour and direct expenses. Costs which they fail to control includes fixed costs and all allocated costs. It may be noted that controllable and uncontrollable cost concepts are related to the authority of a person in the organisation. An expenditure which may be uncontrollable by one person may be controllable by another. Moreover, in the long run all costs might be controllable. Question 7 (a) Describe briefly the role of the cost accountant in a manufacturing organisation. (b) Distinguish between: (i) Variable cost and direct cost (ii) Estimated cost and standard cost. Answer (a) Cost accountant in a manufacturing organisation plays several important roles. He establishes a Cost Accounting department in his concern. He ascertains the equirement of cost information which may be useful to organisational mangers at different levels of the hierarchy. He develops a manual, which specifies the functions to be performed by the Cost Accounting department. The manual also contains the format of various forms which would be utilised by the concern for procuring and providing information to the concerned officers. It also specifies the frequency at which the cost information would be supplied to a concerned executive. Usually, the functions performed by a Cost Accounting department includes cost ascertainment, cost comparison, cost reduction, cost control and cost reporting. Cost ascertainment, requires the classification of costs into direct and indirect. Further it requires classification of indirect costs (known as overheads) into three classes viz, factory overheads; administration overheads and selling and distribution overhead. Cost accountant suggests the basis which may be used by his subordinates for carrying out the necessary classifications as suggested above. Cost comparison is the task carried out by Cost Accountant for controlling the cost of the products manufactured by the concern. Cost Accountant of the concern establishes standards for all the elements of cost and thus a standard cost of the finished product. The standard cost so determined may be compared with the actual cost to determine the variances. Cost Accountant ascertains the reasons for the 18 INTER CA. – COSTING occurrence of these variances for taking suitable action. Cost analysis may also be made by Cost Accountant for taking decisions like make or by and for reviewing the current performance. Cost Accountant also suggests suitable techniques for the purpose of cost reduction / cost control, after carrying out a cost benefit analysis. Cost Accountant also plays a key role in the preparation of Cost reports. These reports help the executives of a business concern in reviewing their own performance and in identifying the weak areas, where enough control measure may be taken in future. In brief, one may say that there is hardly any activity in a manufacturing organisation with which a Cost Accountant is not directly associated in some form or the other. (b) (i) Variable and direct cost: A variable cost is a cost that changes in total in direct proportion to changes in the related total activity or volume. Cost of material is an example of variable cost. Direct cost is a cost which can be identified either with a cost centre or with a cost unit. An example of direct cost is the allocation of direct materials to a department and then to the various jobs. All variable costs are direct-but each direct cost may not be variable. (ii) Estimated cost and standard cost: Kohler defines estimated costs 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’ Estimated cost are prospective costs since they refer to prediction of costs. Standard Cost means a pre-determined cost. It attempts to show what the cost should be for clearly defined conditions and circumstances. Standard costs represent’ planned cost of a product. They are expected to be achieved under a particular production process under normal conditions. Although pre-determination is the essence of both standard costs and estimated costs, but they differ from each other in the following respects: (i) Difference in computation (iv) Difference in records (ii) Difference in emphasis (v) Applicability (iii) Difference in use 19 INTER CA. – COSTING Question 8 Enumerate the main objectives of introduction of a Cost Accounting System in a manufacturing organisation.  (Nov., 2002, 3 Marks) Answer The main objectives of introduction of a Cost Accounting System in a manufacturing organization are as follows: (i) Ascertainment of cost (ii) Determination of selling price (iii) Cost control and cost reduction (iv) Ascertainment of profit of each activity (v) Assisting in managerial decision making Question 9 Write short notes on the following? (i) Conversion cost (ii) Sunk cost (iii) Opportunity cost Answer (i) Conversion cost: It is the cost incurred to convert raw materials into finished goods. It is the sum of direct wages, direct expenses and manufacturing overheads. (ii) Sunk cost: Historical costs or the costs incurred in the past are known as sunk cost. They play no role in the current decision making process and are termed as irrelevant costs. For example, in the case of a decision relating to the replacement of a machine, the written down value of the existing machine is a sunk cost, and therefore, not considered. (iii) Opportunity cost: It refers to the value of sacrifice made or benefit of opportunity foregone in accepting an alternative course of action. For example, a firm financing its expansion plan by withdrawing money from its bank deposits. In such a case the loss of interest on the bank deposit is the opportunity cost for carrying out the expansion plan. 20 INTER CA. – COSTING Question 10 How does a production account differ from a cost sheet?  (May, 2000, 3 Marks) Answer The following are the points of difference between a production account and a cost sheet. (i) Production Account is based on double entry system whereas cost sheet is not based on double entry system. (ii) Production Account consists of two parts. The first part shows cost of the component and total production cost. The second part shows the cost of sales and profit for the period. Cost Sheet presents the elements of costs in a classified manner and the cost ascertained at different states such as prime cost; works cost; cost of production; cost of goods sold; cost of sales and total cost. (iii) Production Account shows the cost in aggregate and thus facilitates comparison with other financial accounts. Cost sheet shows the cost in a detailed and analytical manner which facilitates comparison of cost for the purpose of cost control. (iv) Production Account is not useful for preparing tenders or quotations. Estimated cost sheets can be prepared on the basis of actual cost sheets and these are useful for preparing tenders or quotations. Question 11 Discuss cost classification based on variability and controllability.  (Nov. 2004, 4 Marks) Answer Cost classification based on variability Fixed cost – These are costs, which do not change in total despite changes of a cost driver. A fixed cost is fixed only in relation to a given relevant range of the cost driver and a given time span. Rent, insurance, depreciation of factory building and equipment are examples of fixed costs where the final product produced is the cost object. Variable costs – These are costs which change in total in proportion to changes of cost driver. Direct material, direct labour are examples of variable costs, in cases where the final product produced is the cost object. Semi-variable costs – These are partly fixed and partly variable in relation to output e.g. telephone and electricity bill. Cost classification based on controllability Controllable costs – Are incurred in a particular responsibility center and relate to a defined time span. They can be influenced by the action of the executive heading the 21 INTER CA. – COSTING responsibility center e.g. direct costs. Uncontrollable costs – Are costs are influenced by the action of the responsibility center manager e.g. expenditure incurred by the tool room are controllable by the foreman in charge of that section, but the share of tool room expenditure which are apportioned to the machine shop are not controllable by machine shop foreman. Question 12 Discuss the essential of a good cost accounting system?  (May 2004, 2 Marks) Answer Essentials of a good cost accounting system: It should be tailor-made, practical, simple and capable of meeting the requirements of a business concern. The data used by the system should be accurate, otherwise it may distort the output of system. Cost of installing & operating the system should justify the results. Cost accounting system should have the support of top management of the concern. The system should have the necessary support from all the user’s departments. Question 13 Explain: (i) Sunk Costs (ii) Pre-production Costs (iii) Research and Development Costs (iv) Training Costs  (Nov., 2000, 2 x 4 = 8 Marks) Answer (i) Sunk Costs: These are historical costs which are incurred in the past. These costs were incurred for a decision made in the past and cannot be changed by any decision that will be made in future. In other words, these costs plays no role in decision making, in the current period. While considering the replacement of a plant, the depreciated book value of the old plant is irrelevant, as the amount is a sunk cost which is to be written off at the time of replacement. (ii) Pre-production Costs: These costs forms the part of development cost, incurred in making 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 project is 22 INTER CA. – COSTING undertaken or a new product line or product is taken up, but there is no established or formal production to which such costs may be charged. These costs are normally treated as deferred revenue expenditure (except the portion which has been capitalised) and charged to the costs of future production. (iii) Research and Development Costs: Research costs are the costs incurred for the discovery of new ideas or processes by experiment or otherwise and for using the results of such experimentation on a commercial basis. Research costs are defined as the costs of searching for new or improved products, new applications of materials, or improved methods, processes, systems or services. Development costs, are the costs of the process which begins with the implementation of the decision to produce a new or improved product or to employ a new or improved method and ends with the commencement of formal production of that product by that method. (iv) Training Costs: These costs comprises of – wages and salaries of the trainees or learners, pay and allowances of the training and teaching staff, payment of fees etc., for training or for attending courses of studies sponsored by outside agencies and cost of materials, tools and equipments used for training. Costs incurred for running the training department, the losses arising due to the initial lower production, extra spoilage etc. occurring while providing training facilities to the new recruits. All these costs are booked under separate standing order numbers for the various functions. Usually there is a service cost centre, known as the Training Section, to which all the training costs are allocated. The total cost of training section is thereafter apportioned to production centers. Question 14 Enumerate the factors which are to be considered before installing a system of cost accounting in a manufacturing organization. Answer Factors which are to be considered before installing a system of cost accounting in a manufacturing organization are: (i) The objectives of installing a system of cost accounting should be defined, that is whether the system is meant for control of cost or for price fixation. (ii) The organization of the company should be studied to understand the authority and responsibilities of the managers. (iii) The technical aspects and flow process should be taken into consideration. 23 INTER CA. – COSTING (iv) The products to be manufactured should be studied. (v) The marketing set up to be looked into for devising suitable control reports. (vi) The possibility of integrating cost accounting system with financial accounting system should be examined. (vii) The procedure for collection and verification of reliability of the information should be studied. (viii) The degree of details of information required at each level of management should be examined. (ix) The maximum amount of information that would be sufficient and how the same should be secured without too much clerical labour, especially the possibility of collection of data on a separate printed form designed for each process; also the possibility of instruction as regards filling up of the forms in writing to ensure that these would be faithfully carried out. (x) How the accuracy of the data collected can be verified? Who should be made responsible for making such verification with regard to each operation and the form of certification that should be given indicate verification that he has carried out. (xi) The manner in which the benefits of introducing Cost Accounting could be explained to various persons in the concern, especially those incharge of production department and an awareness created for the necessity of promptitude, frequency and regularity in collection of costing data. Question 15 You have been asked to install a costing system in a manufacturing company. What practical difficulties will you expect and how will you propose to overcome the same?  (May 2004, 4 Marks) Answer The practical difficulties with which a Cost Accountant is usually confronted with while installing a costing system in a manufacturing company are as follows: (i) Lack of top management support: Installation of a costing system do not receive the support of top management. They consider it as an interference in their work. They believe that such, a system will involve additional paperwork. They also have a mis-concept in their minds that the system is meant for keeping a check on their activities. (ii) Resistance from cost accounting departmental staff: The staff resists because of fear of loosing their jobs and importance after the implementation of the new system. 24 INTER CA. – COSTING (iii) Non - cooperation from user departments: The foremen, supervisor and other staff members may not cooperate in providing requisite data, as this would not only add to their responsibilities but will also increase paper work of the entire team as well. (iv) Shortage of trained staff: Since cost accounting system’s installation involves specialised work, there may be a shortage of trained staff. To overcome these practical difficulties, necessary steps required are : * To sell the idea to top management – To convince them of the utility of the system. * Resistance and non-cooperation can be overcome by behavioural approach. To deal with the staff concerned effectively. * Proper training should be given to the staff at each level. * Regular meetings should be held with the cost accounting staff, user departments, staff and top management to clarify their doubts / misgivings. Question 16 Define Explicit costs. How is it different from implicit costs?  (May, 2001, 2 Marks) Answer Explicit costs: These costs are also known as out of pocket costs. They refer to those costs which involves immediate payment of cash. Salaries, wages, postage and telegram, interest on loan etc. are some examples of explicit costs because they involve immediate cash payment. These payments are recorded in the books of account and can be easily measured. Main points of difference: The following are the main points of difference between explicit and implicit costs. (i) Implicit costs do not involve any immediate cash payment. As such they are also known as imputed costs or economic costs. (ii) Implicit costs are not recorded in the books of account but yet, they are important for certain types of managerial decisions such as equipment replacement and relative profitability of two alternative courses of action. 25 INTER CA. – COSTING Question 17 What are the main objectives of Cost Accounting?  (May 2001, 2 Marks) Answer The main objectives of Cost Accounting are as follows: (i) Ascertainment of cost. (ii) Determination of selling price. (iii) Cost control and cost reduction. (iv) Ascertainment of profit of each activity. (v) Assisting management in decision making. Question 18 Explain controllable and non-controllable costs with illustrations.  (May 2001, 2 Marks) Answer Controllable and non-Controllable costs Controllable costs: These are the costs which can be influenced by the action of a specified person in an organisation. In every organisation, there are a number of departments which are called responsibility centres, each under the charge of a specified level of management. Costs incurred in these responsibility centres are influenced by he action of the incharge of the responsibility centre. Thus any cost that an organisational unit has the authority to incur may be identified as controllable cost. Non-controllable costs: These are the costs which cannot be influenced by the action of a specified member of an undertaking. For example, expenditure incurred by the ‘Tool Room’ is controllable by the Tool Room Manager but the share of Tool Room expenditure, which is apportioned to the Machine Shop cannot be controlled by the manager of the Machine Shop. However, the distinction between controllable and non-controllable costs is not very sharp and is sometimes left to individual judgment to specify a cost as controllable or non-controllable in relation to a particular individual manager. Question 19 Discuss the four different methods of costing alongwith their applicability to concerned industry? (Nov. 1999, 4 Marks) 26 INTER CA. – COSTING Answer Four different methods of costing along with their applicability to concerned industry have been discussed as below: 1. Job Costing: The objective under this method of costing is to ascertain the cost of each job order. A job card is prepared for each job to accumulate costs. The cost of the job is determined by adding all costs against the job it is incurred. This method of costing is used in printing press, foundries and general engineering workshops, advertising etc. 2. Batch Costing: This system of costing is used where small components / parts of the same kind are required to be manufactured in large quantities. Here batch of similar products is treated as a job and cost of such a job is ascertained as discussed under 1, above. If in a cycle manufacturing unit, rims are produced in batches of 2,500 units each, then the cost will be determined in relation to a batch of 2,500 units. 3. Contract Costing: If a job is very big and takes a long time for its completion, then method used for costing is known as Contract Costing. Here the cost of each contract is ascertained separately. It is suitable for firms engaged in the construction of bridges, roads, buildings etc. 4. Operating Costing: The method of Costing used in service rendering undertakings is known as operating costing. This method of costing is used in undertakings like transport, supply of water, telephone services, hospitals, nursing homes etc. Question 20 How would you deal the following items in the cost accounts of a manufacturing concern? (a) Research and Development cost (b) Packing Expenses (c) Fringe Benefits (d) Expenses on Removal and Re-erection of Machinery. Answer (a) Research and Development Cost: Research and Development Cost is the cost / expense incurred for searching new or improved products, production method / techniques or plants/ equipments. Research Cost may be incurred for carrying basic or applied research. Both basic and applied research relates to original investigation to gain from new scientific or technical knowledge and understanding, which is not directed towards any specific practical aim (under basic research) and is directed towards a specific practical aim or objective (under applied research). 27 INTER CA. – COSTING Treatment in Cost Accounts Cost of Basic Research (if it is a continuous activity) be charged 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 large. Cost of applied research, if it relates to all existing products and methods of production then it should be treated as a manufacturing overhead of the period during which it has been incurred and absorbed. Such costs are directly charged to the product, if it is solely incurred for it. If applied research is conducted for searching new products or methods of production etc., then the research costs treatment depends upon the outcome of such research. For example. If research findings are expected to produce future benefits or if it appears that such findings are going to result in failure then the costs incurred may be a mortised by charging to the Costing Profit and Loss Accounts of one or more years depending upon the size of expenditure. If research proves successful, then such costs should be charged to the concerned product. Development Costs, begins 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. (b) Packing Expenses: It includes the expenses incurred on wrapping, tying, bottles, boxes, containers or bags etc. In Cost Accounts 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 packing. For example ink-pot; Bread; paste etc. (ii) It may be treated as distribution overhead if packing expenses are incurred to facilitate the transportation of finished products. (iii) It may be treated as advertisement cost and included in selling overheads if it is incurred for advertisement to make the product attractive. (c) Fringe Benefits: Additional Benefits paid to the employees of a concern and are not related to the direct efforts of the employees, are called fringe benefits. They include holiday pay; leave pay; employer’s contribution to provident fund; gratuity and pension schemes; state insurance; medical benefits; subsidised facility etc. Expenditure incurred on fringe benefits in the case of factory workers should be treated as factory overheads and are apportioned among all the production and service departments on the basis of the number of workers in each department. Fringe benefits to office and selling and distribution staff should be treated as administration and selling and distribution overheads respectively and are recovered accordingly. 28 INTER CA. – COSTING (d) Expenses on Removal and Re-erection of Machinery: Expenses are sometime incurred on removal and re-erection of machinery in factories. Such expenses may be incurred due to factors like change in the method of production; an addition or alteration in the factory building, change in the follow of production, etc. All such expenses are treated as production overheads. When amount of such expenses is large, it may be spread over a period of time. If such expenses are incurred due to faulty planning or some other abnormal factor, then they may be charged to Costing Profit and Loss Account. Question 21 Define administration overheads and state briefly the treatment of such overheads in Cost Accounts.  (Nov. 1996, 4 Marks) Answer Definition of Administration Overhead: These are costs of formulating the policy, directing the organisation and controlling the operation of an undertaking. 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 management are included in administration overheads. Treatment of Administrative Overheads in Cost Accounting: (i) Charge to Costing Profit and Loss Account: According to this method administrative overheads should be treated as fixed cost as they are concerned with the formulation of policy. Hence these overheads should be transferred to the Costing Profit and Loss Account. (ii) Apportionment between Production and Selling and Distribution: According to this method, it is assumed that administrative overheads are incurred both for production and for selling and distribution. Therefore these overheads should be divided on some equitable basis between production and selling and distribution activity. (iii) Treat as a separate element of total cost: Here administration overheads are considered as a cost of a distinct and identifiable operation of the organisation necessary to carry on its activity. Therefore these overheads are recovered separately on some equitable basis which may be on cost or sales basis. 29 INTER CA. – COSTING Question 22 Enumerate the arguments for the inclusion of interest on capital in cost accounts. Answer Arguments for the inclusion of interest on capital in cost accounts: 1. Interest is the cost of capital as wages are the reward for labour. Both are factors of production and, therefore should not be treated differently in cost accounts. While determining the total cost, interest like wages should also be included in the cost of production. 2. The exclusion of interest from cost accounts, particularly in businesses where raw material is used in different states of readiness would distort costs and render their comparison a difficult one. 3. Profit on different jobs/operations requiring different periods for completion may not be comparable if interest on capital is not included in their total cost, 4. Sometime exclusion of interest cost may lead the management to take wrong decisions. 5. The significance of time value of money is recognized only when interest is treated as an element of cost. Question 23 What is notional rent of a factory building? Give one reason why it may be included in cost accounts.  (November 1995, 2 Marks) Answer Notional Rent: It is a reasonable charge raised in the cost accounts for the use of owned premises. One reason for the use of such a nominal charge is to enable comparison between the cost of items made in factories which are owned and in rented factories. However, it may be noted that in the case of owned factory, cost for the same is accounted for by means of depreciation. Question 24 How do you deal with the following in cost accounts? Bad debts. (November 1999, 4 Marks) Answer Treatment of Cost Accounts Bad debts: There is no unanimity among various authors about the treatment of bad 30 INTER CA. – COSTING debts. Some authors believe that bad debts are financial losses and therefore should not be included in the cost of a particular product or job. Another view is that, bad debts are a part of selling and distribution overhead, especially where they arise in the normal course of trading. Therefore they should be treated in cost accounts in the same way as any other selling and distribution expense. Question 25 How would you treat the following in Cost Accounts? (i) Employee welfare costs  (2 Marks) (ii) Research and development costs  (2 Marks) (iii) Depreciation (May, 1996)  (2 Marks) Answer (i) Employee Welfare 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 grounds, etc. These expenses should be separately recorded as Welfare Department Costs. These Costs may be apportioned to production cost centres on the basis of total wages or the number of men employed by them. (ii) Research and development costs: It is the cost/expense incurred for searching new or improved products, production methods/techniques or plants/equipments. Re– search cost may be incurred-for carrying basic or applied research. Both basic and applied research relates to original investigations to gain from new scientific or technical knowledge and understanding, which is not directed towards any specific practical aim (under basic research) and is directed towards a specific practical aim or objective (under applied research). Treatment in Cost Accounts: Cost of Basic Research (if it is a continuous activity) be charged 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 large. Cost of applied research, if relates-to all existing products and methods of production then it should be treated as a manufacturing overhead of the period during which it has been incurred and absorbed. Such costs are directly charged to the product, it is solely incurred for it. If applied research is conducted for searching new products or methods of production etc. then the research costs treatment depends upon the outcome of such research. For example, if research findings are expected to produce future benefits or if it 31 INTER CA. – COSTING appears that such findings are going to result in failure then the costs incurred may be amortised by charging to the Costing Profit and Loss Account of one or more years depending upon the size of expenditure. If research proves successful, then such costs will be charged to the concerned product. Development Costs begins 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. (iii) Depreciation: It represents the fall in the asset value due to its use, wear and tear and passage of time. Depreciation 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 costing; depreciation on plant and machinery is normally treated as part of the factory overheads. Question 26 Discuss the treatment in cost accounts of the cost of small tools of short effective life.  (May 2002, 4 Marks) Answer Small tools are mechanical appliances used for various operations on a work place, specially in engineering industries. Such tools include drill bits, chisels, screw cutter, files etc. Treatment of cost of small tools of short effective life: (i) Small tools purchased may be capitalized and depreciated over life if their life is ascertainable. Revaluation method of depreciation may be used in respect of very small tools of short effective life. Depreciation of small tools may be charged to : – Factory overheads – Overheads of the department using the small tool. (ii) Cost of small tools should be charged fully to the departments to which they have been issued, if their life is not ascertainable. Question 27 Define Product costs. Describe three different purposes for computing product costs. Answer Definition of product costs: Product costs are inventoriable costs. These are the costs, which are assigned to the product. Under marginal costing variable manufacturing costs and under absorption costing, total manufacturing costs constitute product costs. 32 INTER CA. – COSTING Purposes for computing product costs: The three different purposes for computing product costs are as follows: (i) Preparation of financial statements: Here focus is on inventoriable costs. (ii) Product pricing: It is an important purpose for which product costs are used. For this purpose, the cost of the areas along with the value chain should be included to make the product available to the customer. (iii) Contracting with government agencies: For this purpose government agencies may not allow the contractors to recover research and development and marketing costs under cost plus contracts. rease tariff, increase in the prices of consumables etc.s 33 INTER CA. – COSTING ABSORPTION COSTING & OVERHEADS THEORY SECTION ABSORPTION COSTING 1. GENERAL: In order to get fixed overheads cost per unit, for the purpose of determining the sales price, we need to know the actual fixed overheads and actual level of activity; But the actual overheads and the actual level of activity would be known to us only at the end of the accounting year, whereas the sales price has to be known before the commencement of the accounting year and therefore the actual information cannot be used. Absorption costing technique as against marginal costing technique, lays down artificial link between the budgeted overheads and the budgeted level of activity, to get budgeted overheads charge, which is known as "Absorption rate, recovery rate or application rate. The level of activity can be expressed in terms of output, machine hours, labour hours, labour cost, material cost or prime cost, man-days etc. Once the absorption rate is developed, every time something is produced, the overheads will be charged at absorption rate. Thus, the factory overheads that we write in the cost sheet are absorbed overheads and not the actual. (Unless the company follows marginal costing). 34 INTER CA. – COSTING 2. METHODS: Depending on the terms in which level of activity is expressed, there are six different methods; as stated below: (a) Output method = ` - Per Unit (b) Machine hour rate = ` - Per Machine Hour (c) Labour hour rate = ` - Per Labour Hour (d) Labour cost method x 100 = % of Labour Cost (e) Material Cost Method x 100 = % of Material Cost (f) Prime cost method x 100 = % of Prime Cost 35 INTER CA. – COSTING 3. Selection of Method: (a) If the company manufactures only one product, or two or more products but which are more or less identical from overheads point of view, then the output method is the best. (b) When the company manufactures two or more products which are quite different from overheads point of view. (i) Machine hour rate: If the production is basically machine oriented, then the overheads would mainly depend on machine utilisation and therefore the product which will make more use of machines, should be charged more amount of overhead also. Accordingly, we follow machine hour rate method. (ii) Labour hour rate / labour cost method: When the output is predominately labour oriented, we may follow one of these two methods. If the overheads mainly depend on labour time, then, the labour hour rate method should be followed whereas, if the overheads mainly depend upon labour type, then labour cost method should be followed. If may be noted that if there is only one of labour, or there are different types of labour but the wage are same, these two methods will give identical results. (iii) Material cost method: If the overheads depend on the cost of raw material consumed, then this method should be followed. (iv) Prime cost method: If he overheads depend on not only the material cost but also on the labour cost, we follow this method. 4. Detection of Method: Sometimes, the method is neither named nor adequate information is given so as to enable us to calculate the rate. However, overheads absorbed in the past months of the same accounting period are given alongwith level of activity in different terms. In such cases, we compare the overheads absorbed with level of activity in different terms and whichever method gives consistently the same rate of overheads absorption can be presumed as being followed by the company. If two or more methods satisfy this condition, any of them can be selected at random. If the method is named but the rates are not given, then, in such cases also, the same technique can be followed to detect the rates. 36 INTER CA. – COSTING 5. Under / Over Absorption of Overheads: At the end of the accounting year we compare actual fixed overheads with fixed overheads absorbed difference is known as under / over absorption of overhead. Under or over absorption will arise whenever either overheads will change or output will change or both will change but not in same proportion. If both will change in same proportion then there will not be any under or over absorption of overheads. Actual Fixed Overhead xx (-) Fixed Overhead Absorbed xx Under / (Over) Absorbed xx Absorption Rate = = = `4 p.u. A B C D Actual Fixed Overhead 1,00,000 90,000 1,10,000 96,000 (-) Fixed Overhead Absorbed 96,000 1,00,000 96,000 96,000 (ALA x AR) (24,000 x 4) (25,000 x 4) (24,000 x 4) (24,000 x 4) Under / Over Absorbed 4,000 (10,000) 14,000 NIL Under Over Under ↓ Absorbed / Absorbed / Absorbed / No effect recovered recovered recovered OR OR OR Over Spent Under Over Spent Spent 6. Treatment of under / over absorption of overheads: 1. Carry Forward Method Under this method under / over absorbed amount is carried forward to next year. This method is not allowed in financial accounting because in financial accounting expenses of current year cannot be carried forward to next year. 2. Adjust in Current Year (A) Adjust in cost of sales / Costing P & L A/c at the end of the year In this method under / over absorbed amount is to be adjusted in cost of Sales or Costing P & L A/c. 37 INTER CA. – COSTING In this method under / over absorbed amount is charged to Sales Quantity instead of Production Quantity. (B) Supplementary Rate Method In this method under or over absorbed amount is to be adjusted at the same place where absorbed amount is recorded. In this method under or over absorbed amount is charged to Production Quantity. Supplementary rate method can be followed during the year or at the end of the year. Calculation of Supplementary Rate Under or Over Absorbed amount xxx ÷ Actual level of activity xx Supplementary Rate xx OR Actual Fixed Overheads xx ÷ Actual level of activity xx Actual Rate xx - Absorption Rate xx Supplementary Rate xx (C) Partly adjust by supplementary rate method and partly adjust in cost of sales / costing P & L A/c. In this method, under or over absorbed amount which is due to normal factor is to be adjusted by supplementary rate method. Under / Over absorbed amount which is due to Abnormal factor is to be adjusted in cost of sales / costing P & L A/c. 38 INTER CA. – COSTING OVERHEADS 1. Objective: It is to get total budgeted overheads, the ultimate objective being to get the overhead absorption rate so that the overhead can be charged to the output for preparing the cost sheet. The Budgeted level of activity in this chapter would always be given. The technique is also to be used to get actual overheads at the end of the year. 2. Types of Departments: There can be two types of departments in all, namely, production department and service department, The production departments are in charge of production and therefore they incur the prime cost as well as the overhead. Whereas the service departments manufacture nothing but only render some very useful and vital service to the production departments. Accordingly every conceivable expenditure, by whatever name called, that the service departments (e.g. canteen department) incur is always an overhead expenses item. 3. Type of Overheads Expenses: There are following three types of expenses in all. (A) Primary distribution: (i) Allocable overheads (ii) Apportionable overheads (B) Secondary distribution: (iii) Reapportionable overheads of service departments, The allocable expenses are the expenses for which various depts. can be directly held responsible and therefore we directly charge expenses to those departments. The apportionable overheads are common expenses (e.g. rent) for which no department can be directly held responsible. We apportion these expenses to various departments on some equitable basis, the basis being the one on which the expenditures basically depends (e.g. Rent basically would depend on area and therefore we apportion it on the basis of area occupied. If area is not given then we settle for the next best option. (no. of light points). If that also is not given then we prefer still next best (may be number of employees) and if we have no other alternative now, then we go to the last resort. If the production is basically machine oriented then, such expenses we apportion in the ratio of machine hours and if labour oriented then on the basis of labour hours or direct labour cost. 39 INTER CA. – COSTING Re-apportionable expenses are the total expenses of service departments (allocated and apportioned), They are now to be reapportioned, effectively, to production departments. There are 3 possibilities in all as shown below, but it should be obvious that the reapportionment has to be in the ratio of service rendered. It is to be reapportioned to all those departments which have taken the service. (i) Totally independent service departments: (Direct Method) In such cases the order in which we take up the service departments is not important. because the expenses are to be reapportioned only the production departments. Here all service departments render service only to production departments. (ii) Partially dependent service departments: (or Step, ladder method) Here one service department renders the service to the other of them but, does not take the service of other of them. Accordingly, the order in which we take up the department is very important. (iii) Totally interdependent service departments: (Reciprocal Method) Here each service department renders the service to other of them and takes the service from other of them also. There are two methods in all and any of which can be employed, the result remaining to same. (a) Continuous distribution or cycle method. (b) Equation method. 40 INTER CA. – COSTING CLASSWORK SECTION ABSORPTION COSTING Question 1 AC Ltd. is a small company which undertakes a variety of jobs for its customers. Budgeted Profit and Loss statement for the year ending 31st December, 2019 ` ` Sales 7,50,000 Cost : Direct Labour 1,00,000 Direct Materials 50,000 Prime Cost 1,50,000 Fixed Production overheads 3,00,000 Production Cost 4,50,000 Selling, distribution and administration cost. 1,60,000 6,10,000 Profit 1,40,000 Budgeted Data: Labour hours for the year 25,000 Machine hours for the year 15,000 Number of jobs for the year 300 An enquiry has been received and the production department has produced estimates of the prime cost involved and of the hours required to complete job A -57, which is shown below: ` Direct Materials 250 Direct Labour 200 Prime cost 450 Labour hours required 80 Machine hour required 50 You are required to: (i) Calculate by different methods, six overheads absorption rates; (ii) Comment briefly on the suitability of each method calculated in (a) (iii) Calculate cost estimates for job A-57 using in turn each of the six overheads absorption rates calculated in (a). 41 INTER CA. – COSTING Question 2 The Alpha Manufacturing Company processes production through two departments (i) Machining. (ii) Finishing. Overhead rates are predetermined on the basis of machine hours in the Machine department and direct labour cost in the Finishing department. Figures for the year based on which overhead rates were arrived at are furnished below: Machine Dept. Finishing Dept. Direct labour cost (`) 36,00,000 40,00,000 Factory overhead (`) 80,00,000 60,00,000 Direct labour hours 24,00,000 50,00,000 Machine hours 20,00,000 5,00,000 The cost sheet of job order No. 1478 indicates: Machine Dept. Finishing Dept. Material consumed (`) 50 77 Direct labour cost (`) 45 40 Direct labour hours 24 35 Machine hours 15 5 Assume that production order no. 1478 consisted of 10 Nos of part no. 1865. Prepare a cost sheet showing the unit cost of each part. Question 3 ABC Ltd. manufactures a single product and absorbs the production overheads at a pre- determined rate of ` 10 per machine hour. At the end of financial year 20X1-X2, it has been found that actual production overheads incurred were ` 6,00,000. It included ` 45,000 on account of ‘written off’ obsolete stores and ` 30,000 being the wages paid for the strike period under an award. The production and sales data for the year 20X1-X2 is as under: Production: Finished goods 20,000 units Work-in-progress 8,000 units (50% complete in all respects) Sales: Finished goods 18,000 units 42 INTER CA. – COSTING The actual machine hours worked during the period were 48,000. It has been found that one-third of the under-absorption of production overheads was due to lack of production planning and the rest was attributable to normal increase in costs. (i) Calculate the amount of under-absorption of production overheads during the year 20X1-X2; and (ii) Show the accounting treatment of under-absorption of production overheads. Question 4 A light engineering factory fabricates machine parts to customers. The factory commenced fabrication of 12 Nos. machine parts to customers’ specifications and the expenditure incurred on the job for the week ending 21st August, 20X1 is given below: (`) (`) Direct materials (all items) 780 Direct labour (manual) 20 hours @ ` 15 per hour 300 Machine facilities : Machine No. I : 4 hours @ ` 45 180.00 Machine No. II : 6 hours @ ` 65 390.00 570.00 Total 1650.00 Overheads @ ` 8 per hour on 20 manual hours 160.00 Total cost 1810.00 The overhead rate of ` 8 per hour is based on 3,000 man hours per week; similarly, the machine hour rates are based on the normal working of Machine Nos. I and II for 40 hours out of 45 hours per week. After the close of each week, the factory levies a supplementary rate for the recovery of full overhead expenses on the basis of actual hours worked during the week. During the week ending 21st August, 20X1, the total labour hours worked was 2,400 and Machine Nos. I and II had worked for 30 hours and 32.5 hours respectively. Prepare a Cost Sheet for the job for the fabrication of 12 Nos. machine parts duly levying the supplementary rates. 43 INTER CA. – COSTING OVERHEADS Question 5 Deccan Manufacturing Ltd., have three departments which are regarded as production departments. Service departments’ costs are distributed to these production departments using the “Step Ladder Method” of distribution. Estimates of factory overhead costs to be incurred by each department in the forthcoming year are as follows. Data required for distribution is also shown against each department: Department Factory Direct labour No. of employees Area in sq.m. overhead hours Production: X 1,93,000 4,000 100 3,000 Y 64,000 3,000 125 1,500 Z 83,000 4,000 85 1,500 Service: P 45,000 1,000 10 500 Q 75,000 5,000 50 1,500 R 1,05,000 6,000 40 1,000 S 30,000 3,000 50 1,000 The overhead costs of the four service departments are distributed in the

Use Quizgecko on...
Browser
Browser