CA Ipc Most Important Costing Theory

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COSTING MOST IMPORTANT THEORY NOTES 2014

CA SUKESH BHATIA CLASSES, 1/27, NEAR GURUDWARA, LALITA PARK, LAXMI NAGAR,DELHI-110092, PH-9811270284, 9910021477 Page 1

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About the Author:-

CA SUKESH BHATIA has graduated from University of Delhi as one of the top scorers in

Cost Accounting & Financial Management at University Level. Thereafter he raised his barsfurther and qualified as a Chartered Accountant with amazing scores at each level. His teachingcareer began after his much appreciated spell at NIPPON PAINTS (INDIA) PVT. LTD.

During his college education, his extra-curricular activities helped him stay ahead of the crowd.Playing chess was his hobby and his participation in various chess competition won his variousacclaims.

He has served as visiting faculty member at several professional institutes, and has been takingactive steps to improve quality of teaching at many private educational bodies. He has also

pioneered a blog casukeshbhatiaclasses.blogspot.com which is with a purpose to provideguidance to CA student community.

His friendly nature and helpful nature has popularized him as a friend-cum-coach and not just ateacher among students.


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Why this book has been written?In my classes I have many times observed that students normally ignore theory portion of theCost & FM syllabus. This leads to 2 losses to them:-

1) Less opportunity to get more marks.2) Explanation skills are not developed.

Being a Chartered Accountant you must have good speaking skills which are developed by goodwriting skills. Students explanation skills shall be developed by theory portion and this is thereason for which ICAI asks theory in exams.So, I am hoping this book will be a great medium to achieve the above said goals and it will beappreciated by students.

We are happy to inform that the entire paper ofIPCC/PCC- May-2014, Nov-2013, May-2013, Nov-2012 and May-2012 was covered in our books.

Human efforts are not perfect. In spite of my best efforts, I am aware of possible errors and

omissions that escaped my notice. I shall, therefore, be extremely thankful to the learned oneswho will extend their cooperation by sending their valuable criticism, suggestions andobservations for further improvement of the book. I am reachable atcasukeshbhatiaclasses @gmail.com

JULY 2014. CA. SUKESH BHATIA
mailto:[email protected]:[email protected]:[email protected]:[email protected]


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INDEX

Chapter No. Chapter Name Page No.1 BASIC CONCEPT 9-162 MATERIAL 17-213 LABOUR 22-284 OVERHEADS 29-345 BUDGETORY CONTROL 35-366 INTEGRATED & NON-INTEGRATED

ACCOUNTS37-38

7 JOB COSTING & BATCH COSTING 39-408 JOINT PRODUCT & BY PRODUCT 41-429 MARGINAL COSTING 43-4510 OPERATING COSTING 46-4711 RECONCILIATION OF COST & ACCOUNTS 48-4912 STANDARD COSTING 5013 CONTRACT COSTING 51-53


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IMPORTANCE OF THEORY IN COST &FM IPCC (INTERMEDIATE) EXAM

CURRENT PATTERN OF EXAM

Q1. PRACTICAL (COMPULSORY) = 20 marks

Q2. PRACTICAL (OPTIONAL) = 16 marks Out of these remaining 6 questions only 5 questionsare to be attempted.

TOTAL OPTIONAL WEIGHTAGE = 80 marks

Q3. PRACTICAL (OPTIONAL) = 16 marks

OUT OF 80 MARKS THEORY WEIGHTAGE = 32 MARKS

Q4. PRACTICAL (OPTIONAL) = 16 marks HENCE, THEORY % = (32/80) x 100 = 40%

Q5. THEORY (OPTIONAL) = 16 marks

Q6. PRACTICAL (OPTIONAL) = 16 marks

Q7. THEORY (OPTIONAL) = 16 marks

CONCLUSION:-

1. Theory covers 40% of Optional Paper.

2. Theory covers 32% of Total Paper.

3. Question No. 5 & Question No. 7 are theory questions.

4. Student has to attempt at least one theory question (either Q5 or

Q7). It means 16 marks theory is compulsory.

5. There is an internal choice in Question No. 7.

6. For what more are you waiting ? Why not to grab this opportunityin the coming NOVEMBER ATTEMPT.


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TOPICS COVERED IN OUR COSTINGPRACTICAL CLASSES:-

SR.NO.

CHAPTER NAME TOPICS COVERED

1. COST SHEET (i) Cost Sheet Basics & Cost Apportionment(ii) Cost Estimation for New Jobs/Orders Question(iii) Use of simultaneous Equation in Basic Cost Analysis(iv) Semi-Variable Costs & Pricing Decisions using Cost

Sheet(v) Preparation of Income Statement and Basic Decision

Making2. MATERIALS (i) ABC Analysis

(ii) EOQ Computation and Discount Analysis(iii) Stock Levels(iv) Material Turnover Ratios(v) Landed Cost of Materials

(vi) Pricing of Material Issues & Valuation of Inventory(vii) Stock-Out and Probability Analysis(viii) Miscellaneous Illustrations

3. LABOUR (i) Treatment of Idle Time Cost & Overtime Premium(ii) Labour Turnover Rates(iii) Wage Payment System Time and Piece, Halsey and

Rowan, Others(iv) Group Bonus Schemes(v) Miscellaneous Illustrations

4. OVERHEADS (i) Segregation of Semi-Variable Expenses(ii) Capacity Concepts(iii) Re-apportionment of Service Department Expenses

under 3 Methods(iv) Recovery/Absorption using Different method and

Machine Hour Rate(v) Treatment of Absorption Differences

5. INTEGRATED & NON-INTEGRATEDACCOUNTING

SYSTEM

(i) Non-Integrated Accounting System Journal Entriesand Ledger Accounts

(ii) Integrated Accounting System Journal Entries andLedger Accounts

(iii) Reconciliation of Costing and Financial profits with thefollowing special points/aspects WIP and FGValuation, Reconciliation with Losses, if any, ReserveWorking with given reconciliation Statement

6. JOB & BATCH (i) Preparation of Job Cost Sheet and Estimation of Job


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COSTING Costs for New Orders(ii) Economic Batch Quantity and related computations(iii) Preparation of Batch Cost Sheet and Estimation of Costs

and Profits of Batches7. CONTRACT COSTING (i) Profit Recognition with Notional Profit, and Balance

Sheet Abstract(ii) Escalation clause(iii) Profit Recognition using Notional Profit and Estimated

Total Profit8. JOINT PRODUCT &

BY PRODUCT(i) Joint Cost Apportionment Methods

(ii) Further Processing Decisions(iii) By Product Revenue Accounting

9. PROCESS COSTING (i) Process Account Treatment of Normal loss, Abnormalloss and Abnormal gains

(ii) Operation Costing & Routing Transfers through ProcessStock Account

(iii) Inter-Process Profits(iv) Equivalent Production FIFO Method First and

Subsequent Processes(v) Equivalent Production WAC Method First and

Subsequent Processes(vi) Equivalent Production Other Illustrations

10. OPERATING COSTING (i) Preparation of Operating Cost Statement, andComputation of Cost/Fare/Takings

11. STANDARD COSTING (i) Computation of Cost Variances Materials, VOH, andFOH

(ii) Computation of Budget Ratios or Control-Ratio(iii) Computation of Sales Variances two approaches(iv) Computation of All Variances/Multiple variances and/

or Reverse Working12. MARGINAL COSTING (i) Basics Computation of PVR, BEP, MOS, Profits etc.

(ii) Marginal Cost Statement two periods analysis(iii) BEP in different Situations/Contexts(iv) Effect of change in Costs, Volume and Prices(v) Indifference Point

(vi) Profits under Marginal & Absorption Costing Systems(vii) Evaluation of Proposals and Decision Making Basics

13. BUDGETORYCONTROL

(i) Functional Budgets Production, Materials and Labour(ii) Flexible Budgets Analysis of Semi-Variable Costs(iii) Original and Revised Budgets & Misc. Illustrations


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CHAPTER BASIC CONCEPTQues1. Write short notes on essential factors/features for installing a Cost Accounting system.(Nov 10) (Nov 12)

Ans. Essential Factors for installing a Cost Accounting System

Before setting up a system of cost accounting following factors should be studied:

Objective :

The objective of costing system, for example whether it is being introduced for fixingprices or for insisting a system of cost control.

Type of business :

The areas of operation of business wherein the managements action will be mostbeneficial. For instance, in a concern, which is anxious to expand its operations,increases in production would require maximum attention.

On the other hand for a concern, which is not able, to sell the whole of its productionthe selling effort would require attention. The system of costing in each case should bedesigned to highlight, in significant areas, factors considered important for improvingthe efficiency of operations in that area.

General organization :

The business, with a view of finding out the manner in which the system of cost controlcould be introduced without altering or extending the organization appreciably.

The Technical Details :

Technical aspects of the concern and the attitude and behaviour that will be successfulin winning sympathetic assistance or support of the supervisory staff and workmen.

Change in operations

The manner in which different variable expenses would be affected with expansion orcessation of different operations.

Methods of maintenance of cost records

The manner in which Cost and Financial accounts could be interlocked into a singleintegral accounting system and in which results of separate sets of accounts, cost andfinancial, could be reconciled by means of control accounts.


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Information

The maximum amount of information that would be sufficient and how the same shouldbe secured without too much clerical labour, especially the possibility of collection of

data on a separate printed from designed for each process; also the possibility ofinstruction as regards filling up of the forms in writing to ensure that these would befaithfully carried out.

Accuracy

How the accuracy of the data collected can be verified? Who should be maderesponsible for making such verification in regard to each operation and the form ofcertificate that he should give to indicate the verification that he has carried out?

Informative and Simple

The manner in which the benefits of introducing Cost Accounting could be explained tovarious persons in the concern, especially those in charge of production department andawareness created for the necessity of promptitude, frequency and regularity incollection of costing data.

Support

Support of top management and employees are essential for installing a CostAccounting System in any organization.

Ques2. Distinguish between Controllable costs and Uncontrollable costs. (Nov 06)

Ans. Controllable costs :

Controller costs are the costs which can be influenced by the action of the specificmember of an undertaking.

Controllable costs incurred in a particular responsibility centre can be influenced by theaction of the executive heading that responsibility centre.

Uncontrollable costs :-

Uncontrollable costs are the costs which cannot be influenced by the action of aspecified member of an undertaking.

The distinction between these two costs is a very thin line & is sometimes left toindividual that we may specify a particular cost to be either controllable uncontrollable.

Ques3. Distinguish between product cost and period cost. (May 06)

Ans. Product Costs:-


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Product costs are associated with the purchase and sale of goods. In the production scenario, such costs are associated with the acquisition and

conversation of materials and all other manufacturing inputs into finished product forsale.

Hence under absorption cost, total manufacturing costs constitute inventoriable orproduct cost.

Period Cost:-

Periods costs are the costs, which are not assigned to the products but are charged asexpenses against revenue of the period in which they are incurred.

General Administration, marketing, sales and distribution overheads are recognized asperiod costs.

Ques4. Briefly discuss, how the synergetic effect helps in reduction in costs. (May 07)

Ans. Cost reduction

It means achievement of real and permanent reduction in the unit cost of goodsmanufactured or service rendered without impairing their suitability for the useintended or diminution in the quality of the product.

Analysis of synergic effect is helpful in cost reduction. Example :- When two or more products are produced and managed together. In such

cases the result of combined efforts are higher than sum of the results of individualproducts.

Ques5. Explain in brief the explicit cost with examples. (May 07)

Ans. Explicit Cost:-

These are also known as out of pocket costs. They refer to costs involving immediate payment of cash. Salaries, postage and telegram, printing and stationery, interest on loan etc., are some

of the examples of explicit costs involving immediate cash payment.

Ques6. What items are generally included in good uniform costing manual? (May 07)

Ans. A good uniform costing manual should contain:-

Introduction Statement of objectives Purpose of the systems Scope of the systems Need for the system


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Organization

Organizational structure for developing and operating the system Stages or steps for implementing the system

System of Accounting

Principles of accounting to be followed Span of accounting period Classification of accounts Description of accounts

Method of Costing

Costing period Unit of Production Departmentalization Treatment of material cost, labour cost and OH cost, Reconciliation between financial accounts and cost accounts

Reporting

Reporting period Ratio Levels of reporting Cost statements

Ques7. Discuss briefly the relevant costs with examples. (Nov 07)

Ans. Relevant Cost:-

Relevant cost helps in specific management decision making. Business decisions involve planning for future and consideration of various alternative

courses of action. In the planning process the costs which are affected by the decisions in hand.

The cost is said to be relevant if it helps the manager in taking a right decision infurtherance of the companys objectives.

Relevant cost is a future cost which causes the difference alternatives. For Example: For sales promotion if the company extends the period of warrantee, the

additional cost incurred during the extended period of warrantee.

Ques8. What are the main objectives of cost accounting? (May 08)

Ans. The objectives of cost accounting are as follows:-


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To ascertain & analyses costs To control costs To reduce costs To fix the Selling Price To prepare Periodic Statements

To Provide Information

Ques9. Explain controllable and noncontrollable cost with examples. (May 08)

Ans. Controllable costs :

Controller costs are the costs which can be influenced by the action of the specificmember of an undertaking.

Controllable costs incurred in a particular responsibility centre can be influenced by theaction of the executive heading that responsibility centre.

Uncontrollable costs :-

Uncontrollable costs are the costs which cannot be influenced by the action of aspecified member of an undertaking.

Ques10. State the method of costing that would be most suitable for (Nov 08) Oil refinery Bicycle manufacturing Interior decoration Airlines company

Ans. The suitable method of costing for the following is:

Oil Refinery : Process costing Bicycle manufacturing : Multiple costing Interior decoration : Job costing but if on a larger basis then Contract costing Airlines company : Operating costing

Ques11. Define Imputed cost & Capitalized cost.

Ans. Imputed Cost :

Imputed costs are notional costs which do not involved any cash outlay. Examples of imputed cost are Interest on capital, the payment for which is not actually

made; these costs are similar to opportunity costs.

Capitalized Cost:


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Capitalized are costs which are initially recorded as assets and subsequently treated asexpenses.

Ques12. What is Cost accounting? Enumerate its important objectives?

Ans. Cost Accounting

It is defined as the process of accounting for cost which begins with the recording ofincome and expenditure or the bases on which they are calculated and ends with theprepara tion statements and reports for ascertaining and controlling costs.

Cost accounting preliminary deals with the collection and analysis of relevant cost datafor interpretation and presentation for various problems of management.

Cost accounting is the application of accounting and costing principles, methods andtechniques in the ascertainment of costs and analysis of saving and / or excess ascompared with previous experience or with standards.

CIMA defines cost accounting as the establishment of budgets , standard costs actualcosts of operation, processes, activities or products & the analysis of variances,profitability or the social use of funds.

The objectives of cost accounting are as follows :

To ascertain and analyse costs : The primary objective of cost accountings is toascertain and

analyse costs incurred on the production of various products, jobs and services etc. To control costs : There are a number of techniques in cost accounting like standard

costing and budgetary control for controlling cost.

To reduce costs : By now, the objective of cost accounting has been extended to reducecosts. For cost reduction plan, products, processes, procedures, organization, andmethods are continuously reviewed or scrutinized in order to improve efficiency and toreduce cost.

To fix the selling price : Under cost accounting, reliable data is provided to act as a basefor fixing selling prices.

To prepare periodic statements : In cost accounting system, periodic cost statements(viz. monthly, quarterly) for review of operating results are prepared.

To provide information : Cost accounting provides useful information for planning andcontrol and for taking various decisions regarding increases in production, installation or

replacement of a machine, making or buying of a component, continuing or closingdown of a business etc.

To Ascertain the profit of each activity : The profit of any activity can be ascertained bymatching cost with the revenue of that activity. The purpose under this step is todetermine costing profit or loss of any activity on an objective basis.

Decision making is defined as a process of selecting a course of action out of two ormore alternative courses. For making a choice between different courses of action, it isnecessary to make a comparison of the outcomes, which may be arrived under differentalternatives.


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Ques13. Distinguish between cost units and cost centres.

Ans. Cost Units : It is a unit of product, service or time (or combination of these) in relation to which costs

may be ascertained or express. A batch which consists of a group of identical items and maintain its identity throughone or more stages of production may also be considered as a cost unit.

Cost units are usually the units of physical measurement like number, weight, area,volume, weight, area, volume, length, time and value.

Cost Centre : It is defined as a location , person or an stress of equipment ( or group of these) for

which cost may be ascertained and used for the purpose of cost control. Cost centres are of two types, viz., personal and impersonal. A personal cost centre consists of a person or group of persons and an impersonal cost

centre consists of a location or an item or equipment ( or group of these).

Ques12. How do you deal with the following in cost account ?

Packing Expenses Fringe benefit

Ans. Packing Expenses :

Cost of primary packing necessary for protecting the product or for convenient handling,

should become a part of the prime cost. The cost of packing to facilitate the transportation of the product from the factory to

the customer should become a part of the distribution cost. The cost of fancy packing necessary to attract customers is an advertising expenditure.

Hence, it is to be treated as a selling overhead.

Fringe benefit : These are the additional payments of facilities provided to the workers apart from their

salary and direct cost allowances like house rent and city compensatory allowances. If the amount of fringe benefit is considerably large, it may be recovered as direct

charge by means of a supplementary wage or labour rate; otherwise may be collectedas part of production overheads.

Ques13 . State the types of cost in the following cases: (May 12) a) Interest paid on own capital not involving any cash outflow.b) Withdrawing money from bank deposit for the purpose of purchasing new machine

for expansion purpose.c) Rent paid for the factory building which is temporarily closedd) Cost associated with the acquisition and conversion of material into finished


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product.

Ans. Type of costs

a) Imputed Cost

b) Opportunity Costc) Shut Down Costd) Product Cost


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CHAPTER MATERIALQues1. Discuss the use of perpetual inventory records and continuous stock verification, and itsadvantages. (Nov 06)

or

Ques1. Perpetual inventory system comprises Bin Card and Stores Ledger, but the efficacy ofthe system depends on continuous stock taking. Comment. (May 13)

Ans. Use of Perpetual Inventory Records :

Under this system, a continuous of receipt and issue of materials is maintained bythe stores deptt. and the information about the stock of materials is alwaysavailable.

In this method stock records are maintained in such a way as to make an entry in therecords, the physical movement of stock on receipts and issue of materials and toindicate the balance of each item of material in the stores at any point of time.

In this system, the entries are made in bin cards and stores ledger as and when thereceipts and issue of materials take place and the balance is ascertained after everyreceipt or issue of materials.

The stocks as per dual records viz. bin cards and stores ledgers are reconciled on acontinuous basis.

Advantages:

This system facilities production planning and inventory control.

It helps in having a detailed and more reliable check on the stores. The stock records are more reliable and stock discrepancies are invested &immediate actions are taken.

Use of Continuous Stock Taking:

Under this system, physical stock verification is made for each item of stock oncontinuous basis.

It is physical checking of stock on continuous basis. It is a method of verification of physical stock on a continuous basis instead of at the

end of the accounting period. It is a verification conducted round the year, thus covering each item of stores twiceor thrice.

Variable items are checked more frequently than the stocks with lesser value.

Advantages:

Any discrepancies, irregularities or charges are detected at early stage & brought tothe notice of management.

It acts as a moral check on stores staff.


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It insists on upto date maintaining of stock records. The disruption in production caused by periodic stock taking is eliminated.

Ques2. Discuss the accounting treatment of spoilage and defectives? (May 07)

Ans. Treatment of spoilage in costing :

Normal Spoilage :

If the cost of spoiling is normal & inherent in the process or operation, then the costof spoilage is absorbed by charging either to the specific production order or to theproduct overheads.

Abnormal spoilage : If the cost of abnormal spoilage arises in the process then it is charged to costing Profit

& Loss A/c.

If spoilt units are reused as raw materials in the same process no, separate accountingtreatment is required.

But if, spoilage is used for any other process or job, a proper credit should be given torelevant process A/c or job A/c

Treatment of Defective in costing :

1. Normal Defective : Charged to Good Output : The entire cost of rectification of normal defective is

charged correctly, then the rectification costs are charged to general overheads.

Charged to departmental overheads : If department responsible for such defectives iscorrectly identified, then rectification costs are charged to such departments. Charged to specific jobs : If it is easily identified with specific job, the rectification costs

should be charged to that job.

2. Abnormal Defective : The rectification cost should be charged to costing Profit & Loss A/c.

Ques3. Explain, why the Last in First out (LIFO) has an edge over First in First out (FIFO) or anyother method of pricing material issues. (Nov 07)

Ans. Last in First out (LIFO) has an edge over First in First out (FIFO) because:-

Under LIFO method, production is charged with current market prices and hence pricingof the production is facilitated whereas in case of FIFO method, production is chargedwith old price (i.e. low price under inflationary trend).

In the same way, under weighted price method, the rise in prices is spread over a largenumber of units and therefore its effect is much reduces. The average price is alwaysless than the current market price. However, determination of the average pricerequires a lot of clerical work.


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Sr.No.

Nature A items having highconsumption value

Bitems having moderateconsumption value

Citems having low consumption value

1. Extent ofcontrol

Very strict control isImplemented

Moderate controlImplemented

Loose control isImplemented

2. Orderfrequency Frequent orderingshould be placed Order should beplaced in 3 months Order should beplaced once in 6months or in a year

3. Lead time Maximum efforts toreduce the lead time isundertaken

Moderate efforts toreduce lead time isundertaken

Minimum clericalefforts to reducelead time isundertaken

4. Level ofmanagement

Must be taken care ofby senior officers

Can be supervised bymiddle management

Can be supervisedby the clerical staff

5. ReviewPeriod

Reviewed after amonthor every 15 days ofwaste, obsolete &surplus tems

Reviewed after every3months of waste,obsolete & surplusitems

Reviewed annuallyover obsolete &surplus items

6. Supplysources

There may be supply ofas many source aspossible for each item

There may be supplyof three or morereliable sources

Three reliablesources for eachitem may besupplied

7. Followup Maximum follow up isRequired

Periodic follow up isRequired

Follow up isrequired only inexceptional

8. Safety stock Very low safety stock isNeeded

Low safety stock isNeeded

High safety stock isNeeded

9. Centralization Centralized purchasingis done

Centralized &decentralizedpurchasing is done

Decentralizedpurchasing is done

10. ValueAnalysis

Rigorous value analysisis made

Moderate valueanalysis is made

Minimum valueanalysis is made

Advantages of ABC: The advantages are :

Smooth Flow: This method ensures that minimum investment will be made ininventories of stock of materials or stocks to be carried, without any danger ofinterruption of production for want of materials or stores requirement.

Cost Savings: The cost of placing orders, receiving goods & maintaining stocks isminimized.

Control by Exception: Managements time is saved since attention need be paid only tosome of the items rather than all the items.

Standardization of Work: With the introduction of ABC system, much of the workconnected with purchase can be systematized on a routine basis.


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Limitation of ABC:-

In order to be fully cost effective, ABC analysis should be carried out with standardizedand codification.

The result of ABC analysis should be reviewed periodically & should be up dated.

Ques5 . Distinguish between bill of material and material requisition note. (May 12)

Ans. BOM verses MRN

Bills of material ( BOM) Material Requisition Note ( MRN)

It is document by the drawing

office.

It is prepared by the foreman of the

consuming department.

It is a complete schedule ofcomponent parts and raw materialsrequired for a particular job or workorder.

It is a document authorizing Store-Keeper to issue Material to theconsuming department.

It often serves the purpose of aStore Requisition as it shown thecomplete schedule of materials

required for a particular job i.e. itcan replace stores requisition.

It cannot replace a bill of material.

It can be used for the purpose ofquotation.

It is useful in arriving historical costonly.

It helps in keeping a quantitativecontrol on materials draw throughstores Requisition.

It shows the material actuallydrawn from stores.


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CHAPTER LABOURQues1. Distinguish between Job Evaluation and Merit Rating. (May 08)

Ans. Distinguish between Job Evaluation and Merit Rating :

Job evaluation is the ascertainment of the relative worth of jobs within a companywhereas merit rating is the assessment of the relative worth of the man behind the job.

Job evaluation and its accomplishments are meant to set up a rational wage whereassalary structure whereas, merit rating provides a scientific basis for determining fairwages for each worker based on his ability whereas and performance.

Job evaluation simplifies wage administration by bringing uniformity in wage rates,whereas, merit rating is used to determine fair rate of pay for different workers on the

basis of their performance.

Ques2. Enumerate the various methods of Time booking. (May 07)

Ans. The various methods of Time Booking are :

Piece work card Daily time sheet Weekly time sheet Clock card

Time ticket Job ticket Combined ticket

Ques3. Enumerate the remedial steps to be taken to minimize the labour turnover. (Nov 07)

Ans. The following remedial steps may be adopted to minimize labour turnover :

Exit interview with each outgoing employee to ascertain the reasons for his leaving theorganization.

Job analysis and evaluation carried out even before recruitment to ascertain therequirement of each job.

Scientific system of recruitment, placement and promotion, by fitting the right person inthe right job.

Use of committee, comprising of members from management and workers to handleissue concerning workers grievance, requirements etc.

Enlightened attitude of management Mental revolution on the part of management bytaking workers into confidence and acting a healthy working atmosphere, withmeasures such as :


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a) Training service rules after discussion between management and workers union.b) Provisions of facilities for education, training and development of workers.c) Introduction of procedures for settlement of workers grievance.

Ques4. Discuss the treatment of over time premium in cost accounting. (May 08)

Ans. Accounting treatment of overtime premium depends upon the circumstances of the work.

Case 1 : If the overtime is worked on customers instruction in order to complete the work at the earliest then it should be directly charged to the job as a part of direct wages.Case 2 : If the overtime is worked due to shortage of the labour or any other reason thenit is treated as a part of the labour cost and such overtime premium is appointed on the basis oftotal hours work on different jobs.Case 3 : If the overtime is worked to makeup the lost time due to unavoidable reason it means it is a cost incurred for normal time and it should be treated as part of the productionOH and it can be recovered from the job completed during the accounting period.Case 4 : If the overtime is worked to makeup the time lost due to avoidable reasons i.e., abnormal idle time then it is charged to costing Profit /Loss A/c.Case 5 : If overtime is worked due to its management fault it should be charged to thatparticular department.

Ques5. Describe briefly, how wages may be calculated under the following systems:- Gantt task and bonus system Emersons efficiency system Rowan system Halsey system Barth system (Nov 08)

Ans. The various systems of wage payment have been discussed below:-

Gantt task and bonus system : This system, like Emersons system, involves, measurement of efficiency. It is a combination of time and piece work system. According to this system a high standard or task is set on the basis of careful time and

motion study. The workers actual performance is compared with the standard and efficiency

determined. Only time wages are paid to the worker to production below the set standards areachieved or exceeded, the payment to the concerned worker is made at a higher pricerate.

The piece rate fixed under this system also includes an element of bonus to the extentof 20%.

The figure of bonus to such workers is calculated over the time rate of the workers. Thus, the system consists of paying a worker on time basis if he does not attain the

standard and on piece basis if he does.


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Wages payable to workers under this plan are calculated as under:-

Output Paymenta) Output below standard

b)

Output at standardc) Output above standard

a) Guaranteed time rate

b)

Time rate plus bonus of 20% (usually)of time ratec) High price rate on workers whole

output. It is so fixed, so as to include abonus of 20% of the time rate

Emersons Efficiency System : Emerson was one of Taylors associates. He guaranteed time wages but wanted to reward efficiency. Under this system, minimum time wages are guaranteed. But beyond a certain level of efficiency, bonus in addition to minimum day wages is

given. A worker who is able to attain efficiency, measured by his output equal to 2/3rd of the

standard efficiency, or above, is deemed to be an efficient worker deservingencouragement.

The scheme thus provides for payment of bonus at a rising scale at various levels ofefficiency, ranging from 66.67% to 150%.

For a performance below 66.67% only time rate wages without any bonus are paid. Above 66.67% to 100% efficiency, bonus varies between 0.01% and 20%. Above 100% efficiency, bonus of 20% of basic wages plus 1% for each 1% increase in

efficiency is admissible.

It can be summarized as below:-

Less than 662/3 % Only time wages 662/3 % to 100% Basic (100%) + Bonus (0.01% to 20%) 100%above Basic (100%) + Bonus (20%) + 1% for

each 1% increase in efficiency

This system does not presuppose a high degree of average performance.

Wages on time basis are guaranteed.

Rowan System : In its essence, the plan is similar to the Halsey Plan Wages at the ordinary rate for actual

time put in a worker are guaranteed and a bonus given, if the worker saves time out ofthe standard time, set for him.

According to this plan, the bonus is that proportion of wages of actual time taken whichtime saved bears to the standard time.


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Formula for calculating wages under Rowan System : (Time Saved / Time Allowed) x Time Taken x Rate Per Hour

Halsey System : Under this method, standard time for doing job is determined and workers are

encouraged to do the job in less than the standard time. A standard is fixed for each job or process. If there is no saving on this standard time allowance, the worker is paid only his day

rate. He gets his time rate even if he exceeds the standard time limit, since his day rateis guaranteed.

If however, he does the job in less than the standard time, he gets a bonus equal to 50% of wages of time saved; the employer benefits by the other 50 percent.

The scheme also is sometimes referred to as the Halsey fifty percent plan.

Formula for calculating wages under Halsey system

=( Time Taken x Time Rate) + 50% of (Time saved x Time Rate)

Halsey Weir system :- The Halsey Weir system is the same as the Halsey system except that the bonus paid to

workers is 30% of time saved. This system is useful for capital intensive industry.

Barth System : Barth System is particularly suitable for trainees and beginners and also for unskilled

workers. The reason is that for low production efficiency, the earnings are higher than in the

piece work system but as the efficiency increases, the rate of increase in the earningsfalls.

Formula for calculating the remuneration under Barth Plan :Earning = Hourly Rate x Standard hours x Hours worked

Ques6. Discuss accounting treatment of idle capacity costs in cost accounting. (May 09)

Ans. Idle Capacity : It represents the difference between practical capacity and the actual capacity based on

long term sales expectancy. If the actual capacity is different from the capacity based on sales expectancy, then theidle capacity is the difference between the practical capacity and the actual capacity.

Idle capacity represents a part of practical capacity which has been utilized due toregular interruptions and which may not be avoided.

Idle capacity cost can be determined as:-


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Idle capacity cost = Total capacity cost = Total OH related to plant / Normal capacity xIdle capacity

It may be normal or abnormal. The treatment can be done in the following ways :

Type Reason Treatment

Arising due tounavoidable reasons(Normal idle capacity )

Generally arises due to lack ofdemand or due to seasonalnature of the product.

Production OHs are absorbedinto the cost of productioneither by the inflated OHabsorption rate or thesupplementary OH rate.

Arising due to avoidablereasons ( Abnormal idlecapacity )

It may arise due to lack ofproper planning control or dueto lack of managementsforecasting.

The cost of such idletreatment capacity should bechanged to costing Profit andLoss A/c.

If arises due to tradedepression or any otherexternal factors

Then it being normal in nature The cost should be charged tocosting P/L A/c.

Ques7. Which is better plan out of Halsey 50 percent bonus scheme and Rowan bonus schemefor an efficient worker? In which situation the worker get same bonus in both schemes? (May10)

Ans. Comparison between Halsey & Rowan

Rowan Bonus Scheme pays more bonus if the time saved is below the 50 percent oftime allowed and if the time saved is more than 50 percent of time allowed then Halseybonus scheme pays more bonus.

Normally, time saved by a worker is not more than 50 percent of time allowed.Therefore, the Rowan bonus scheme is better for an efficient worker.

When the time saved is equal to 50 percent of time allowed then both plans pays bonusto a worker.

Bonus under Halsey Plan= Standard wage rate x 50/100 x Time saved .(i)

Bonus under Rowan Plan= Standard wage rate x Time taken / Time allowed x Time taken (ii)

Bonus under Halsey Plan will be equal to the Bonus under Rowan Plan when the followingcondition holds good:-

= Standard wage rate x 50/100 x Time saved = Standard wage rate x Time taken / Time allowedx Time Saved


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or 1/2 = Time Taken / Time Allowedor Time Taken = 1/2 of Time Allowed

Hence, when the time taken is 50% of the time allowed, the bonus under Halsey and Rowan

Plans is equal.Ques8. Discuss the three different methods of calculating labour turnover. (Nov 10)

Ans. Three different methods of calculating labour turnover :

a) Separation Method = Number of employees seperated during the periodAverage number of employees during the period

X 100

b)

Replacement Method =Number of employees replaced during the periodAverage number of employees during the period

X 100

c) Flux Method = Number of employees seperated +Number of employees replacedAverage number of employees during the period

X 100

d) Flux Method with new recruitment

=Number of employees seperated + Number of Accessions

Average number of employees during the period X 100

Ques9. Enumerate the causes of labour turnover

Ans. Causes of Labour Turnover : The main causes of labour turnover in an organisation/industry can be broadly classified under the following three heads : a) Personal Causes;b) Unavoidable Causes ; andc) Avoidable Causes

Personal causes are those which induce or compel workers to leave their jobs; such causeinclude the following :

Change of jobs for betterment. Premature retirement due to ill health or old age. Domestic problems and family responsibilities. Discontent over the jobs and working environment.

Unavoidable causes are those under which it becomes obligatory on the part of managementto ask one or more of their employees to leave the organization; such causes are summed up aslisted below :

Seasonal nature of the business; Shortage of raw material, power, slack market for the product etc.; Change in the plant location; Disability, making a worker unfit work;


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Disciplinary measures; Marriage (generally in the case of women)

Avoidable causes are those which require the attention of management on a continuous basisso as to keep the labour turnover ratio as low as possible.


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CHAPTER OVERHEADSQues1. Write short notes on treatment of underabsorbed and overabsorbed overheads inCost Accounting. (Nov 10)

Ans. Treatment of Under absorbed and Over absorbed Overheads in Cost Accounting :

Overheads are usually applied to production on the basis of a predetermined rate. The actual overhead rate will rarely coincide with the predetermined overhead rate

due to different spending pattern and activity level. Such over or under absorption as arrived at under different situations may also be

termed as overhead variance. The amount of overabsorption being represented by a credit balance in the account

and conversely, the amount of under absorption, being a debit balance.

If such balances are small, they should be transferred to costing Profit & Loss A/c where,however the different is large and due to wrong estimation, it would be desirable toadjust the cost of products manufactured, as otherwise the cost figures would convey amisleading impression.

Such adjustments usually take the form of supplementary rates.

Ques2. Discuss the difference between allocation and apportionment of overhead. (May 08)

Ans. Cost Allocation :

The term allocation implies relating overheads directly to the various departments. The estimated amount of various items of manufacturing overheads should be allocatedto various cost centre or departments.

Cost Apportionment :

Those items of estimated overheads (like the salary of the works manager) which cannotbe directly allocated to the various departments and cost centers are apportioned.

Apportionment implies the allotment of proportions of items of cost to cost centers ordepartments.

It implies that the unallocable expenses are to be spread over the various departmentsor cost centres on an equitable basis.

The difference between cost allocation and apportionment are as follows :

Cost Allocation Cost ApportionmentMeaning Identifying a cost centre and

charging its expenses in fullAllotment of propotions ofcommon cost to various costcentre


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Nature of expenses Specific and identificable General and commonNumber of centre (Dept.) One ManyBasis Allocate directly Allocate IndirectlyAmount of overhead Change in full Change in proportionableAssumption Not required Required

Ques3. Distinguish between Fixed overheads and Variable overheads. (May 10)

Ans. Fixed Overheads v/s Variable Overheads :

Fixed overheads are not affected by any variation in the volume of activity, e.g.,managerial remuneration, rent etc.

These remain the same from one period to another except when they are deliberatelychanged.

Fixed overheads are generally variable per unit of output or activity e.g., Rent,

Insurance, Depreciation, Audit fees etc. Whereas, the variable overheads that change in proportion to the change in the volumeof activity or output, e.g., power consumed, consumable stores etc.

The variable overheads are generally constant per unit of output or activity, e.g., directmaterial, direct labour, commission on sale.

Ques4. Explain briefly the conditions when supplementary rates are used. (May 07)

Ans. Use of Supplementary OH Absorption Rates :

This method is used when it is caused due to normal or avoidable reasons. When the amount of over and under absorbed POHEs is significant (i.e., more than 10%

of total O/H incurred), supplementary rate if over absorbed amount is to be deducted. On the other hand, the supplementary rate if under absorbed amount is to be added,

therefore, Negative Supplementary Rate = Over Absorbed POHEs/ Actual value of the Base output Positive Supplementary Rate = Under Absorbed POHEs / Actual value of Base output

This method is preferred when :

There is a serious estimation errors When there is a substantial change in the level of activities When there is a major change in the production method In case of contract on cost plus basis

Ques5. Explain Blanket overhead rate (Nov 07)

Ans. Blanket OH Rate : It is also known as Single or Plant wise OH absorption Rate. It is calculated as under :


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Blanket rate = OH cost for the entire factory / Total quantity of the base selected This method is used when the size of the company is small or when the burden of O/H is

more or less uniform among all the production deptts. These rates are easy to compute and require clerical cost but have a very limited use.

The limitations of such rates are as under Such rates may give misleading results where several products are manufactured andare required to be passed through various production departments.

As the performance of the individual deptt. cannot be assessed properly with this rate,so no satisfactory managerial control is possible.

Such rate may render the valuation of WIP erroneous.

Ques6. Explain the cost accounting treatment of unsuccessful Research and Development. (Nov07)

Ans. Research & Development Cost : R & D expenditures is a deferred expenditure because it is incurred not for benefitting a

certain period, but for benefitting several accounting periods. Such expenditure is incurred for innovating a new product or improving the existing

product or developing new methods of production.

Research Cost : Research cost are incurred under 2 heads :

Basic research cost which is incurred for improving the existing scientific and /ortechnical knowledge.

Applied research cost applied research is done for the purpose of achieving someparticular practical motto or objectives.

Treatment in Cost A/cs :

Basic Research Cost : It should be treated as production OH for a particular period and absorbit in product cost because it is related to all existing products or methods or techniques ofproduction etc.Applied Research Cost : It is further classified into 2 parts for the costing purpose. They are

If it is incurred for the improvement of the existing product and methods of productionit should be treated as POH and absorbed accordingly

If it is incurred for innovating new products or methods then such cost is absorbed onthe basis of amortization. If whole of such expenditure is so huge, then it should be absorbed in subsequent years

in which some benefit is received by the producer. If applied research work becomes a failure, then such research expenditure is charged

against profit in costing P & L A/c. If size of such amount is heavy, then such amount is spread over in subsequent year

also.


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Ques7. Explain the treatment of over and under absorption of Overheads in Cost accounting.(May 10)

Ans. Treatment of over and under absorption of overheads are :

If an enterprise uses actual rate for absorption of POHEs then the enterprise recover theactual amount incurred regarding the POH.

It means no difference is there in between POHEs incurred and POHEs absorbed. Therefore, there is no over and under absorption of OHEs but this method of absorption

creates a number of problems regarding costing. Therefore, enterprises prefer to use budgeted or standard rate for absorption of POHEs

but it creates another problem i.e., over and under absorption. It arises due to a number of reasons which may be normal or abnormal in nature.

The important ones are : Wrong estimation of POHEs Unexpected changes in the level of activities Change in production method Uncontrollable causes (due to govt. policies, environmental changes etc.)

Out of the above mentioned causes, volume of output plays an important role because it solelydepends upon the demand which is beyond the control of the enterprises.

There are varieties of methods used for over or under absorption of OHEs in accounts.However, in the corporate sector 3 important methods are widely used for accounting of overand under absorption of POHEs

Use of supplementary OH absorption rates Write off to costing profit and loss A/c Carry over to the next period accounts

1. Use of supplementary OH absorption rates : This method is used when it is caused dueto normal or avoidable reasons.

When the amount of over and under absorbed POHEs is significant (i.e., more than 10%of total OH incurred), supplementary absorption rates are computed by the way ofaddition or deduction.

This rate may be called negative supplementary rate if over absorbed amount is to bededucted.

On the other hand, the supplementary rate may be called positive supplementary rate ifunder absorbed amount is to be added, therefore,

Negative Supplementary Rate = Over Absorbed POHEs /Actual value of the Base outputPositive Supplementary Rate = Under absorbed POHEs/ Actual value of Base output

This method is preferred when : There is a serious estimation error


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There is a substantial change in the level of activities There is a major change in the production method A case of contract on cost plus basis is there

2. Writing off to Costing Profit and Loss A/c. : When the amount of over and under

absorbed POHEs is not so significant, it may be written off to costing P/L, but, if it issignificant (sizeable) and it arises due to :a) Some uncontrollable and abnormal factorsb) Contingent estimation of output Then such over or under absorbed POHEs may be written off to costing P/L, but, it suffer

from some limitations like it cannot be adjusted in the value of WIP, unsold stock or soldunit (it means pricing policy cannot be adjusted).

3. Carry forward to next Periods Accounts : This method is used when:- Balance amount is comparatively small

In case of new product whose output is low in initial years due to lack of demand Normal business cycle I of more than one accounting period Over under absorbed OH is carried over to next period in the hope that the same will

automatically be adjusted or absorbed. But under this method, comparatibility of the performance is not properly feasible.

Ques8. What are the methods of reapportionment of service department expenses over theproduction departments? Discuss? (Nov 10)

Ans. Methods of re apportionment of service department expenses over the productiondepartments:

Direct redistribution method Step method or nonreciprocal method Reciprocal Service method

Direct re distribution Method : Service department costs under this method are apportioned over the production

departments only, ignoring services rendered by one service department to another. Therefore, as compared to previous method, this method is more complicated because

a sequence of apportionments has to be selected here. The sequence here begins with the department that maximum number of other service

departments.

Reciprocal Service Method : This method recognizes the fact that where there are two or more service departments

they may render service to each other and, there these interdepartmental services areto be given due weight while redistributing the expenses of service department.

The methods available for dealing with reciprocal services are :a) Simultaneous equation methodb) Repeated distribution method


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c) Trial & Error method

Ques9. Distinguish between cost allocation and cost absorption. (May 13)

Ans. Distinguish between Cost allocation and Cost absorption:

Cost allocation is the allotment of whole item of cost to a cost center or a cost unit. In other words, it is the process of identifying, assigning or allowing cost to a cost

center or a cost unit.

Cost absorption is the process of absorbing all indirect costs or overhead costsallocated or apportioned over particular cost center or production department bythe units produced.


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CHAPTER BUDGETS & BUDGETORYCONTROL

Ques1. Explain briefly the concept of flexible budget (Nov 08)

Ans. Flexible Budgets

Flexible Budgets show the expected results of a responsibility unless for several activitylevels.

It is a budget which by recognizing the difference between fixed, semivariable andvariable costs is designed to change in relation to level of activity attained.

It is not rigid as it can be recasted on the basis of activity level to be achieved. It consists of services of static budgets for different levels of activity.

Variance analysis through flexible budget provides useful information as each cost isanalyzed according to its behaviour.

It facilitates the ascertainment of cost, fixation of selling price and submission ofquotations.

Flexible budgets provide a meaningful basis of comparison of the actual performancewith the budgeted targets.

Such budgets are especially useful in estimating and controlling factory costs andoperating expenses.

Flexible Budgeting may be resorted to in the following situations :

a) New Business : In case of new business venture, due to its typical nature, it may be difficult to forecast

the demand of a product accurately.

b) Uncertain Environment : Where the business is dependent upon the very of nature.

c) Factor Market Conditions : In the case of Labour intensive industry where the production of the concern is

dependent upon the availability of labour.

Ques2. Discuss the components of budgetary control system. (May 09)

Ans. Components of budgetary control system : There are a number of bases for classifying the budgets into two or more categories. But the most important and widely used bases are functional classification and

classification according to flexibility. The policy of a business for a defined period is represented by the master budget the

details of which are given in a number of individual budgets called functional budgets.


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The functional budgets are broadly grouped under the following heads.

Physical Budget : This budget contains information in terms of physical units e.g., Sales Qty,Product Qty, Inventory, Manpower budget.

Cost Budgets : Manufacturin g Cost, Administration Cost, sales & distribution cost, R & D Cost

Profit Budget : A budget which enable in the ascertainment of profit, e.g., Sales budget, Profit& loss budget etc.

On the other hand, budgets may be classified into two categories on the basis offlexibility as fixed budgets and flexible budgets.

Ques3. List the eight functional budgets prepared by a business. (Nov 09)

Ans. A functional budget is prepared according to the various functions of the organization e.g:Sales, Production, and Administration Research & development etc.

Following are the most popular functional budgets :a) Sales budgetb) Production budgetc) Materials budgetd) Labour budgete) Manufacturing overhead budgetf) Administrative cost budgetg) Plant utilization budgeth) Research and Development budgeti) Capital expenditure budget

j) Cash budget


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CHAPTER INTEGRATED & NON-INTEGRATED ACCOUNTS

Ques1. What are the essential prerequisites of integrated accounting system? Discuss? (Nov05)

Ans. The success of an integrated system of accounting depends upon certain prerequisiteswhich should be ensured before the system is introduced. These are :

Deciding the extent of integrated of the two sets of books. Some companies find ituseful to integrate upto the stage of primary cost or factory cost while others prefer anintegration of the entire accounting records.

A suitable coding system must be developed to serve the purpose of both financial and

cost accounts. To lay down the procedure for the treatment of provision for accruals prepaid expenses,other adjustments necessary for preparing interim accounts.

Perfect coordination should exist between the staff responsible for financial aspectsand cost aspects of the accounts. An efficient of accounting documents is to be ensured.

Under this system, there is no need for a separate cost ledger of cause, there will be anumber of subsidiary ledgers. In addition to the useful customers ledgers and thebought ledgers, there will be

a) Stores ledgerb) Stock ledger, &,c) Job ledger

Ques2. What is an Integrated Accounting System? State its advantages. (May 10) (May 12)

Ans. Integrated Accounting System

Integrated Accounts is the name given to a system of accounting, where by cost andfinancial accounts are kept in the same set of books.

There will be no separate sets of books for Costing and Financial records. Integrated accounts provide or meet out fully the information requirement for Costing

as well as for Financial Accounts.

Main advantages of integrated accounts are as follows :

Since there is one set of accounts, thus there is one figure of profit. Hence, the questionof reconciliation of costing profit and financial profit does not arise.

Efforts in duplicate recording of entries & to maintain separate sets of books are saved.Thus, there is saving of time and labour.

The operation of the system is facilitated with the use of mechanized accounting.


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Costing data are available from books of original entry and hence, no delay is caused inobtaining information.

Combination of two sets of books and centralization of accounting function results ineconomy.

Complete analysis of cost and sales is kept.

Complete details of all receipts and payments in cash are kept. Complete details of all assets and liabilities are kept and this system does not usenational account to represent impersonal accounts.

Since financial books are subject to a rigorous accuracy, checking integrated accountsensures similar checks for cost account.

Ques3. Is reconciliation of cost accounts and financial accounts necessary in case ofintegrated accounting system? (May 13)

Ans. Necessity of Reconciliation:-

In integrated accounting system cost and financial accounts are kept in the sameset of books.

Such a system will have to afford full information required for Costing as well asfor Financial Accounts.

In other words, information and data should be recorded in such a way so as toenable the firm to ascertain the cost (together with the necessary analysis) ofeach product, job, process, operation or any other identifiable activity.

It also ensures the ascertainment of marginal cost, variances, abnormal losses andgains.

In fact all information that management requires from a system of Costing fordoing its work properly is made available.

The integrated accounts give full information in such a manner so that the profitand loss account and the balance sheet can be prepared according to therequirements of law and the management maintains full control over the liabilitiesand assets of its business.

Since, only one set of books are kept for both cost accounting and financialaccounting purpose so there is no necessity of reconciliation of cost and financialaccounts.


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CHAPTER JOB COSTING & BATCHCOSTING

Ques1 . Distinguish between Job Costing and Batching Costing (May 06)

Ans. The main difference between job costing and process costing are as follows: S.No. Basic Job Costing Process Costing 1. Method Job costing is one of the

methods of costing used toascertain cost of each job.

Process costing is one of themethods of costing used toascertain cost of a product at eachprocess or stage of manufacture.

2. Costdetermination

Cost is determinedseparately for each job.

Cost of a product is determinedby accumulating cost of each

process.3. End product The end product of one job is

the finished product and maynot become raw material forother jobs.

The end product of a processbecomes the raw material for thenext process.

4. Cost collection The cost is collected on thebasis of job order.

The cost is collected by period i.e.,on time basis.

5. Cost estimation Cost is computed orestimatedbefore the production.

Costs are computed for eachprocess at the end of each period.

6. Costcompilation

The cost of each job iscomplied separately byadding materials, labour andoverhead period.

The unit cost here is the averagecost of the process for a givenperiod.

7. WIP There may or may not bework in progress at the endof accounting period.

There is always some work inprogress at the beginning as wellas end of accounting period.

8. Supervision Detailed supervision andcontrol is needed as each jobis distinct and different fromothers.

Supervision and control iscomparatively easier as theprocess operations arestandardize.

Ques2 . Explain Equivalent Production and Inter-Process profit in relation to Process Costing.(Nov 13)

or

Ques3 . What is inter-process profit? State its advantages and disadvantages. (Nov 12)


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Ans. Equivalent Production:-

When opening and closing stocks of Work-in-process exist, unit costs cannot becomputed by simply dividing the total cost by total number of units still in process.

We can convert the Work-in-process units into finished units called equivalentproduction units so that the unit cost of these uncompleted (WIP) units can be obtained.

Equivalent Production Units = Actual number of units in production x % of workcompleted.

It consists of balance of work done on opening work-in-process, current productiondone fully and part of work done on closing WIP with regard to different elements ofcosts viz., material, labour and overhead.

Inter-Process Profit

In some process industries the output of one process is transferred to the next processnot at cost but at market value or cost plus a percentage of profit.

The difference between cost and the transfer price is known as inter-process profits.

The advantages and disadvantages of using inter-process profit, in the case of process typeindustries are as follows:

Advantages :

Comparison between the cost of output and its market price at the stage ofcompletion is facilitated.

Each process is made to stand by itself as to the profitability.

Disadvantages : The use of inter-process profits involves complication. The system shows profits which are not realized because of stock not sold out.


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CHAPTER JOINT PRODUCT & BYPRODUCT

Ques1. Describe briefly, how joint costs upto the point of separation may be apportionedamongst the joint products under the following methods. (May 09)

Average unit cost method Contribution margin method Market value at the point of separation Market value after further processing Net realizable value method

Ans. Methods of apportioning joint cost among the joint products

Average Unit Cost Method : In this method, total process cost (upto the point of separation ) is divided by total unitsof joint products produced.

On division average cost per unit of production is obtained. The effect of application of this method is that all joint products will have uniform cost

per unit.

Contribution Margin Method : In this method joint cost are segregated into two parts variable and fixed. The variable costs are apportioned over the joint products on the basis of units

produced (average method) or physical quantities. When the products are further processed, then all variable cost incurred is added to thevariable cost determined earlier.

After that contribution is calculated by deducting variable cost from their respectivesales values.

The fixed costs are then apportioned over the joint products on the basis of contributionratios.

Market value at the Time of Seperation : This method is used for apportioning joint costs to joint products upto the split off point. This method is difficult to apply if the market values of the products at the point of

separation are not available. The joint cost may be apportioned in the ratio of sales values of different joint products.

Net Realisable Value Method : Under this method joint costs are apportioned on the basis of net realizable value of the

joint products. Net Realizable Value = Sale value of joint products (at finished stage)

a) () estimated profit margin


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b) () selling & distribution expenses, if any c) () post splitoff cost

Ques2. How apportionment of joint costs upto the point of separation amongst the jointproducts using market value at the point of separation and net realizable value method isdone? Discuss? (Nov 10)

Ans. Apportionment of Joint Cost amongst Joint Products using:

Market value at the point of separation This method is used for apportionment of joint costs products upto the split off point. It

is difficult to apply if the market value of the product at the point of separation is notavailable.

It is useful method where further processing costs are incurred disproportionately.

Net realized value Method

From the sales value of the joint products (at finished stage) are deducted : a) Estimated profit marginsb) Selling distribution expenses, if anyc) Post split off costs The resultant figure so obtained is known as net realized value of joint products. Joint costs are apportioned in the ratio of net realized value.


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CHAPTER MARGINAL COSTINGQues1. Explain and illustrate cash break even chart (May 08)

Ans. Cash Breakeven Chart

A cash breakeven chart records Cash costs and revenues on the vertical axis and thelevel of activity on the horizontal axis.

In this chart, variable cost are assumed to be payable in cash. Beside this, the fixed expenses are divided into two groups viz. Those expenses which involves cash outflow, e.g., rent, insurance, salaries etc. Those expenses which do not involve cash outflow, e.g., depreciation, bad debts etc. The making of the cash breakeven chart would require us to select appropriate axes. Subsequently, we will mark costs/ revenues on the Y axis whereas the level of activity

shall be traced on the X axis. Lines representing (i) Cash Fixed costs, (ii) Total costs at maximum level of activity and(iii) Revenue at maximum level of activity (joined to the origin) shall be drawn next.

The cash breakeven point is that point where the sales revenue line intersects the totalcash cost line.

Other measures like the margin of safety and profit can also be measured from thechart.

Ques2. What do you understand by key factor? Give two examples of it? (May 10)

Ans. Key Factor

Key factor is a factor which at a particular time or over a period limits the activities of anundertaking.

It may be the level of demand for the products or service or it may be the shortage ofone or more of the productive resources.

Examples of key factors are :a) Shortage of raw materialb) Shortage of labourc) Plan capacity availabled) Sales capacity availablee) Cash availability

Ques2. Elaborate the practical application of Marginal Costing. (Nov 13) (May 01)

Ans. Some areas where Marginal Costing Techniques is used by for decision-making are:-


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Determination of Selling Price Since marginal cost per unit is constant from period toperiod; company decisions on pricing policy can be taken.

Product Mix Decisions In case of limited availability of resources product mix decisionsare taken.

Shut Down or Continue Decisions Whether to continue a product or shut down its

production is a decision which is taken with help of marginal costing. Marketing Decisions Marketing of which product will give more benefit. These typesof decisions are based on marginal costing.

Change verses Status Quo Whether it is recommended to replace a machine or not isresolved by marginal costing.

Expanding or Contracting Company may have an option either to expand itsproduction capacity or fulfill demand by entering into some contract. Marginal costinghelps in these types of decisions.

Ques3. What is Margin of Safety. (Nov 13) (Nov 01) (May 75) (May 97)

Ans. Margin of Safety (MOS):-

It is the excess of total sales over the Break even Sales. MOS can be expressed as a % of total sales (in value as well as in quantity). It can be calculated as :- MOS Sales = Total Sales BEP Sales MOS Sales = Profit/PV Ratio

Ques4. Discuss basic assumptions of Cost Volume Profit analysis. (May 12)

Ans. CVP Analysis:-Assumptions

Changes in the levels of revenues and costs arise only because of changes in thenumber of products (or service) units produced and sold.

Total cost can be separated into two components: Fixed and variable Graphically, the behaviour of total revenues and total cost are linear in relation to

output level within a relevant range. Selling price, variable cost per unit and total fixed costs are known and constant. All revenues and costs can be added, sub traded and compared without taking into

account the time value of money.

Ques5 . Short note on Angle of Incidence. (May 12)

Ans. Angle of incidence

This angle is formed by the intersection of sales line and total cost line at the break-even point.

This angle shows the rate at which profits are being earned once the break-even pointhas been reached.


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The wider the angle the greater is the rate of earning profits. A large angle of incidence with a high margin of safety indicates extremely favorable

position.


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CHAPTER OPERATING COSTING

Ques1. Operation costing is defined as refinement of Process costing. Explain it. (May 07)

Ans. Operation costing is defined as refinement of Process costing because:-

Operation costing is used for establishing cost of services rendered or service offered forsale and no items are produced.

It is also applied to the operations concerned within an organization which providesservices to production departments. It is solely concerned with the determination of thecost of each operation rather than the process costing.

Operation costing provides better control and facilities, the computation of unitoperation cost at the end of each operation.

So, it can be said that the method of operation costing is similar to output costing butnot as process costing.

Ques2. State the unit of cost for the following industries : (Nov 08) (May 13)a) Transportb) Powerc) Hoteld) Hospitale) Steelf) Automobile

Ans. The unit of cost for various industries are as follows :

Industry Unit of CostTransport Goods Per ton km. or per

tonne km Power Per kilo watt hour (Kwh) or

Horse Power (HP)

Hotel Per Roomday or Per Service day

Hospital Per Patient day or Per Bed day or per Operation

Steel TonneAutomobile Numbers

Ques3. Explain briefly, what do you understand by Operating Costing. How composite units arecomputed ? (Nov 09) (Nov 12)

Ans. Operating Cost


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Operating costing is one of the methods of costing used to ascertain the cost ofgenerating and rendering services such as transport, hospital, canteens, electricity,transport etc.

Operating Costing aims at ascertaining the operating costs.

The cost incurred to generate and render services such as hospital, canteen, electricity,transport etc. is called operating cost. Operating costs (in transport costing) are classified into three broad categories:

a) Operating and running costb) Standing costc) Maintenance cost

Operating and running cost : These are the costs which are incurred for operating and runningthe vehicle. For eg. , cost of diesel, petrol etc. These costs are variable in nature and vary withoperations in more or less same proportions.

Standing cost : Standing costs are the costs which are incurred irrespective of operation. Foreg., rent of garage, salary of drivers, insurance premium etc.It is fixed in nature and thus the cost goes on accumulating as the time passes.

Maintenance cost : Maintenance costs are the costs which are incurred to keep the vehicle ingood or running condition.For eg., Cost of repair, painting, overhauling etc. It is semivariable in nature and is influencedby both time and volume of operation.


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CHAPTER RECONCILIATION OF COST &ACCOUNTS

Ques1. Enumerate the factors which cause difference in profits as shown in Financial Accountsand Cost Accounts (May 07)

Ans. Reasons for Disagreement:

The difference in profit or loss ascertained in cost accounts & financial account is due to thefollowing r easons :

1. Certain items are shown only in financial accounts and not in cost accounts. Like : Profit or loss on sale of fixed assets Discount on issue or redemption of shares and debentures

Receipt of interest and dividends on investments Distribution of dividends Donations and charities Capital issue expenses Cash discounts and bad debts Preliminary expenses written off Misc. income or expenditure not relating to business Payment of income tax Transfer of profits to reserves Writing off intangible and fictitious assets like goodwill

Expenses relating to previous year Lay off wages and retrenchment compensation P /L relating to transactions of abnormal or nonrecurring nature

2. Certain items are shown only in cost accounts and not in financial A/cs. Like : National rent on premises owed Notional interest on capital Depreciation on fully depreciation assets

3. Disagreement due to under or over absorption of overhead items :

In cost accounts, overheads are generally absorbed on the basis of a predeterminedoverhead rate, whereas in financial A/cs, actual expenditure on overheads is recorded,this also causes a difference between the two figures.

4. Difference due to use of different methods of stock valuation Different methods of valuation of closing stock adopted in cost and financial account

will also cause a difference in the results shown by the two sets of books. In financialaccounts the method generally followed is cost or market price whichever is lower,


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whereas in cost accounts different methods of pricing of material issues such as LIFO,FIFO, average etc., are used.

5. Difference due to use of different rates of depreciation : Use of different methods of depreciation is also responsible for the variat

CA Ipc Most Important Costing Theory

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