1. (a) Fill in the blanks: 1×4=4
a) Cost which can be charged to a particular unit of cost is considered as _product cost___.
b) Reorder quantity may be measured in _unit of value___.
c) Under the Rowan plan _bonus___ is a fixed percentage.
d) The basis of apportionment for indirect wages is _direct labour___.
(b) Choose and write the correct answer: 1×4=4
a) In a printing industry, job costing/process costing is applied.
b) The sum of direct material cost and direct labour cost is termed as prime cost/overhead.
c) Tender form is issued by the purchasing department/production department.
d) Vacation pay for factory workers should be charged to factory overhead/direct labour.
2. Write on the following (any four): 4×4=16
- Statement of cost and profit.
Cost Sheets are statements setting out the costs of a product giving details of all the costs. Presentation of costing information depends upon the method of costing. A cost sheet can be prepared weekly, monthly, quarterly or annually. In a cost sheet besides total expenditure incurred, cost per unit of output in case of each element of cost can be shown in a separate column. The cost sheet should give cost per unit in the previous period for the purposes of comparison.
Components of Total Cost
1. Prime Cost: Prime cost consists of costs of direct materials, direct labors and direct expenses. It is also known as basic, first or flat cost.
2. Factory Cost: Factory cost comprises prime cost and, in addition, works or factory overheads that include costs of indirect materials, indirect labors and indirect expenses incurred in a factory. It is also known as works cost, production or manufacturing cost.
3. Office Cost: Office cost is the sum of office and administration overheads and factory cost. This is also termed as administration cost or the total cost of production.
4. Total Cost: Selling and distribution overheads are added to the total cost of production to get total cost or the cost of sales
- Inventory control:
Inventory control can be defined as a system used in a manufacturing concern to control the investment in stock. The system involves the reading and monitoring of various stock levels, forecasting future demands and deciding when and how much quantity or order. The overall objective of inventory control is to minimise the costs associated with stock.
Classification of Inventory control:
- Carrying Costs: Carrying Cost includes:
- Rent, rates, lighting, heating, refrigeration and air-conditioning costs of stores.
- Material handling Casts.
- Insurance and Security Costs.
- Stores staffing, equipment, maintenance and running costs.
- Deterioration and obsolescence.
- Pilferage, evaporation and damage.
- Interest on Capital invested in stocks.
- Costs of obtaining stocks or ordering costs include:
- Clerical and administration costs of purchasing. Accounting and Reception of goods
- Transport Goods.
- Set up and tooling costs where goods are manufactured internally and planning, production control costs associated with the internal order.
- Costs of being without Stock or Stock-out Costs:
- cost of production stoppages caused by want of raw materials.
- Extra costs associated with urgent and small quantity, replenishment orders.
- Loos of future sales because customers may find out other sources.
c) Causes of labour turnover.
The various causes of labour turnover can be classified under the following three heads:
- Personal Causes: Workers may leave the organisation purely on personal grounds, e.g.
- Domestic troubles and family responsibilities.
- Retirement due to old age.
- Accident making workers permanently incapable of doing work.
- Women workers may leave after marriage in order to take up household duties.
- Dislike for the job or place.
- Workers finding better jobs at some other places.
- Workers may leave just because of their craving nature.
- Cases involving moral turpitude.
- Unavoidable Causes: in certain circumstances it becomes necessary for the management to ask some of the workers to leave the organisation. These circumstances may be as follows:
- Workers may be discharged due to insubordination or inefficiency.
- Workers may be discharged due to continued or long distance.
- Workers may be retrenched due to storage of work.
- Avoidable Causes:
- low wages and allowance may induce workers to leave the factory and join other factories where higher wages and allowances are paid.
- Lack of accommodation, medical, transport and recreational facilities.
- Long hours of work.
- Unfair method of promotion.
- Lack of security of employment.
- Lack of proper training facilities.
d) Allocation, apportionment and absorption of overhead.
- Cost Allocation–
When items of cost are identifiable directly with some products or departments such costs are charged to cost centres. This process is known as cost allocation. .It is the charging of discrete, identifiable items of cost to cost centres or cost units. It is complete distribution of an item of overhead to the departments or products on logical or equitable basis is called allocation. Where a cost can be clearly identified with a cost centre or cost unit, then it can be allocated to that particular cost centre or unit..
Examples – Electricity charges can be allocated to various departments if separate meters are installed, Depreciation of machinery can be allocated to various departments as the machines can be identified .
- Cost Apportionment
Cost Apportionment is the allotment of proportions of items to cost centers. When items of cost cannot directly charge to or accurately identifiable with any cost centres, they are prorated or distributed amongst the cost centres on some predetermined basis. This method is known as cost apportionment. Wherever possible, the overheads are to be allocated.
- Absorption’ of overheads
Accurate absorption will help in arriving at accurate cost of production. Overheads are indirect costs and hence there are numerous difficulties in charging the overheads to the product units. The basis should be selected after careful maximum accuracy of Cost Distribution to various production units. The basis should be reviewed periodically and corrective action whatever needed should be taken for improving upon the accuracy of the absorption. e) Five reasons for disagreement of profit as shown by the Cost Accounting and Financial Accounting.
3. (a) Following information are related to a product for the year ended on 31st March, 2016:
|Stock on 1st April, 2015: Raw materials Finished products (2000 tons) Stock on 31st March, 2016: Raw materials Finished products (4000 tons) Raw material purchased Direct wages Rent, rates and taxes of works Carriage inwards Work-in-progress on 1st April, 2015 Work-in-progress on 31st March, 2016 Cost of factory supervision Sales of finished goods||10,000 8,000 12,120 16,000 60,000 50,000 20,000 720 2,400 8,000 4,000 1,50,000|
Advertisement and selling expenses amount to 0.25 paise per ton sold. 32000 tons were produced during the year. Prepare a cost sheet showing (i) the value of raw materials used, (ii) cost of production for the year, (iii) cost of goods sold, (iv) the net profit for the year and (v) the net profit per ton of the product. 14
|Opening stocks of raw material Add: Purchase of raw material Carriage on purchase Less: Closing stock of raw material Cost of raw material consumed Add: Direct wages Prime cost Add: Factory overhead: Rent Rate and taxes Cost of factory suspension Opening stock of work in progress Less: Closing stock of work in progress Actual work cost Add: Opening stock of finished goods Less: Closing stock of finished goods Cost of production Add: Selling and Distribution overhead Cost of good soldProfit (b/f) Sales||10000 60000 720||58600 50000|
|70720 (12120) 20000 4000 2400 (8000)|
|8000 (16000)||127000 (8000)|
(b) What do you understand by cost classification? Discuss the various bases of classification of costs and various types of costs. 4+6+4=14
Ans: Cost classification is the process of grouping costs according to their common characteristic. It is the placement of like items together according to their common characteristics. A suitable classification of cost is of vital importance in order to identify the cost with cost centres or cost units.
Cost may be classified according to their nature i.e. material, labour and expenses and a number of other characteristics. The same cost figures are classified to different ways of costing depending upon the purpose to be achieved and requirements of a particular concern.
The important ways of classification are:
- By nature or element or analytical classification: According to these classification, the cost can be divided into three categories i.e. material, labour and expenses. There can be further sub classification of each element for example: material into raw material components, spare parts, consumable stores, packing material etc. This classification is important as it helps to find out the total cost is constituted and valuation of work in progress.
- By function: According to this classification cost are divided in the light of different aspect of basis managerial activities involved in the operation of a business undertaking according to this classification costs are divided as follows:
- Production costs: Production costs is the cost of sequence of operation which begin with supplying materials, labour and services and ends with the primary packing of the product.
- Administrative cost: Administrative cost represents the cost of formulating the policy, directing the organisation and controlling the operation of an undertaking which is not related directly to production, selling, distribution, research or development activity or function.
- Selling Cost: Selling cost represents the cost of seeking to create and stimulate demand and of securing order.
- Distribution Cost: it represents the cost of the sequence of operation which begins with making the packed product available for despatch and ends with making the reconditioned returned empty package, if any, available for reuse.
- Research Cost: The cost of searching for new or improved products, new application of materials, or new or improved method.
- Development Cost: The cost 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 commencement of formal production of that product or by the method
- Pre Production Cost: It is that part of development cost which is incurred in making a trail production run preliminary to formal production.
- By relation to cost centre: According to this classification, cost is divided into direct costs and indirect cost.
- Direct Cost: it is the cost which can be conviently identified with and directly allocated to a cost centre or cost object in an economically feasible way. It represents the aggregate of
- Direct Material Cost.
- Direct Labour Cost.
- Direct Expenses.
- Indirect Cost: It is the cost which cannot be conveniently identified with and directly allocated to a cost centre or cost object in an economically feasible way. It represent the aggregate of:
- Indirect Material Cost.
- Indirect Labour Cost.
- Indirect Expenses.
- By Variable/Behaviour: according to this classification, costs are classified according to their behaviour in relation to their changes in the level of activity or volume of production, on the basis, costs are classified into three groups.
- Fixed Costs: Fixed Costs are those costs which do not vary with the change in the volume of production upto a given range.
- Variable Costs: Variable costs are those costs which do not vary with the change in the volume of production upto a given range.
- Semi variable costs/semi fixed costs: Semi variable costs are those costs of which one part remains fixed upto a given range and the other part varies with the change in the volume of production but not in the same proportion.
- By Controllability: under this costs are classified according to whether or not they are influenced by the action of a given member of the undertaking. On the basis, costs are classified into two categories.
- Controllable Costs: These are the costs which can be influenced by the action of a specified member of an undertaking at a given level of authority.
- Uncontrollable Costs: these are the costs which cannot be influenced by the action of a specified member of an undertaking at given level of authority.
- By Normality: under this, costs are classified according to whether these are costs which are normally incurred at a given level of output is normally attached on these basis it is classified in two categories.
- Normal costs: It is the cost which is normally incurred at a given level of output in the condition in which that level of output is normally attained. It is a part of costs of production.
- Abnormal Costs: It is that costs which is not normally incurred at a given level of output in the condition in which that level of output is normally attained. It is not a part of cost of production and charged to costing profit and loss account.
- By inventory: According to this classification, cost is divided into:
- Product cost/ Inventorial costs which are charged to product services.
- Period cost: These are the cost which are not charged to product/services but are written off as expenses against the revenue of that period in which these are incurred.
- By time: Costs can be classified as:
- Historical Costs: These are the actual costs which are ascertained after these have been incurred.
- Predetermined Costs: These are the future costs which are ascertained in advance before production starts on the basis of specification of all the factors affecting costs. These may be nether standard cost or estimated costs.
- For Managerial Decision Making: on the basis, costs may be classified into the following costs.
- Relevant Costs: These are those future costs which differ under different alternatives.
- Irrelevant Costs: These are those costs which are not relevant.
- Sunk Costs: These are the historical or past costs incurred by a part decision.
- Shut down cost: These are those fixed costs which continue to be incurred even when a plant is temporarily shut down.
- Out of pocket cost: These are those cost which involve cash outlay.
- Opportunity costs: it is the value of sacrifice made in accepting an alternative course of action.
4. (a) A worker takes 80 hours to do a job for which the time allowed is 100 hours. His daily rate is Rs. 2.50 per hour. Calculate the work cost of the job under the following methods of payment of wages and statement of works cost:14
a) Time rate
b) Halsey plan
c) Rowan plan
1) Material cost – Rs. 120
2) Factory overhead 125% of wages
a) Time Rate method:
=Ti me Taken x Rate Per Hour.
= 80 x 2.50
b) Halsey Plan.
= (Time Taken x Rate Per Hour) + 50% (Time Saved x Rate Per Hour)
= (80 x 2.50) + 50% (20 x 2.50)
= 200 + 50% (50)
= 200 + 25
c) Rowan Plan.
= (Time Taken x Rate Per Hour) + Time Saved/Standard the
(Time taken x Rate Per Hour)
= (80 x 2.50) + 20/100 (80 x 2.50)
= 200 + 20/100 x200
= 200 + 40
= Rs 240.
Calculation of work costs
|Particulars||Time Rate||Halsey Method||Rowan Method|
|Materials Wages Prime Costs Add: Factory Overhead Work Cost||120 200||120.00 225.00||120 240|
|320 250||345.00 281.25||360 300|
(b) What do you mean by perpetual inventory system? How does it differ from ABC analysis? State the advantages of ABC analysis. 4+6+4=14
Ans: A perpetual inventory system is a method of tracking and recording inventory and costs of good sold on a continual basis, so a current inventory balance can be calculated in real time. In other words, a perpetual inventory balanced at any point in time.
It might sound like common sense, but keeping a running total inventory was extremely time consuming and difficult time consuming and difficult before computers and other input devices like bar codes scanner took over accounting systems. Companies used to use the periodic inventory system, which recording inventory transaction in batches at specific times.
Advantages of ABC analysis:
The advantages of ABC analysis are as follows:
- Reduction in investments: Under ABC analysis, the materials from group ‘A’ are purchase in lower quantities as much as possible with this, the effort to reduce the delivery period is also made. These in turn help to reduce the investment in materials.
- Strict Control: Under ABC analysis, strict control can be exercised to the materials in group ‘A’ that have higher value.
- Minimum Storage Cost: Since, the material from group ‘A’ are purchase in lower quantities as much as possible, it reduce the storage cost as well.
- Saving in time: Since a significance effort is made for management of the material from group ‘A’, it helps to save time as well.
- Economy: This method is economical, since equal time and labour is not needed for all types of materials.
|ABC analysis||Perpetual Inventory System|
|Its main objective is to reduce the investment in material.||Its main objective is physical verification of all items.|
|In this system, stocks are classified on the basis of value.||There is no classification of stock.|
|It will not pay equal attention to all types of inventory.||Equal attention is given to all types of inventory.|
|ABC analysis is applicable when there is small variety of stock.||This system is applicable whether or not stocks are of large varieties or small varieties.|
|Store ledger and bin card is not prepared in this analysis.||Store ledger and bin card is prepared in this system.|
5. (a) From the following particulars, compute a comprehensive machine hour rate: 14
a) Cost of machine – Rs. 1,00,000; Estimated life – 15 years; Residual value – Rs. 10,000
b) Machine running hours – 2040 hours per machine per annum including idle time of 40 hours due to repairs and maintenance and breakdown of machine.
c) Power consumption of the machine per hour – 20 units; Rate of power per 100 units – Rs. 80.
d) There are two operators in the shop and wages of an operator who is in charge of two machines Rs. 12,000 p.a.
e) Rent, rates and taxes of the shop Rs. 4,800 p.a.
f) Insurance premium for the machine Rs. 400 per quarter.
g) General lighting per month – Rs. 600
h) Repairs and maintenance expenses per month Rs. 400 per machine.
i) Shop supervisor’s salary per month – Rs. 1,500.
j) Other factory overhead allocated to the shop Rs. 6,000 p.a.
There are four identical machines in the shop. The supervisor devotes 1/5th of his time for supervising the machine.
Solution: Computation of Machine Hour Rate.
|Particulars||Per Annum||Per Hour|
|Standing Charge: Rent, Rate and Taxes (4800/4) General lighting (600 x 12/4) Insurance Premium (400 x 4) Supervision Salary (1500 x 12/5) Other factory overhead (6000/4) For 2000 hours Machine Expense: Depreciation (100000 – 10000/15 x 2000) Power Operator wages (6000/2000) Repairs and maintained (400 x 12 /2000) Machine Hour Rate||1200 1800 1600 3600 1500||4.85 3.00 16.00 3.00 2.40|
Normal Working Hours = 2040 – 40 =2000 hours.
(b) Explain the following: 7+7=14
a) Various methods of determining overhead rate.
Answer: Various methods of determining overhead rate are:
- Raw Material Cost basis: when the historical records of a company reveal that in the past, there was a correlation between raw materials costs and factory overheads then they may use a rate as a percentage of raw material cost to absorb production overhead costs into the product or cost unit.
Overhead absorption rate and total overheads to be absorbed for the job may be calculated as:
Overhead Usurpation Rate = Estimated FOH x100
Estimated material cost
=136.36% of direct material.
Absorption of overheads based on direct material cost:
Overhead Absorption Rate x Actual material cost of job = Total absorbed OHS
136.36% x Rs240 = 327
- Direct Labour Cost Basis: This is frequently used rate in practice and is easy to apply as amount of direct wages is readily available. This is recommended as unlike material prices; labour rate are relatively stable moreover there is direct relationship between direct labour cost and factory overheads the bases that both are related to time.
Overhead Absorption Rate = Estimated FOH/Estimated labour cost x 100
=150000/90000 x 100
=166.67% of direct wages.
Absorption of overhead based on direct labour cost:
Actual labour cost of job x overhead absorption rate = total absorbed OHS
200 x 166.67 = 333
- Prime Cost Basis: This is applied by using both direct material and direct labour cost in the calculation, which is given below:
Overhead absorption rate = Estimated FOH/Estimated prime cost x 100
= 150000/200000 x x100
Absorption of overhead based on prime on prime cost:
Actual prime cost of job x overhead absorption rate = Total absorbed OHS
240 + 200 x 75% = 330.
- Unit of production cost: This method is simple and easy to use when company manufactures only one type of product and all units produced are similar in terms of size, time spend being worked on by the cost centre etc. This is calculated as follows:
Overhead absorption rate = Estimated FQH / Estimated units of output x 100
= 150000/500units x 100
= 30 per unit.
Absorption of overhead based on units of production:
Actual unit of output x overhead absorption rate = Total absorption OHS
10 units x 30 = 300
- Direct labour hour basis: This method is more appropriate in a labour intensive cost centre where there is insignificant role of machine related expenses and relatively high labour costs. This is considered as a method for overhead absorption than direct labour cost method as is only based on time factor and is not distorted by factors like varying wages rates, overtime or bonus payments.
Overhead absorption Rate = Estimated FOH / Estimated labour Hours x 100
= 150000/30000 hours x 100
= 5 per labour hour.
Absorption of overhead based on direct labour cost:
Actual labour hours for the job x Overhead absorption rate = total absorbed OHS
63 hours x 5 = 315
- Machine Hour Basis: This method is more appropriate in a capital intensive cost centre where use of machines is the most significant factor in production. In such a cost centre most of the production overheads are related to the machinery (power, repairs, depreciation, etc) So a machine hour rate should reflect fairly the incidence of overheads. This is used as follows:
Overhead absorption rate = Estimated FOH / Estimated Machine Hours x 100
= 150000/25000hours x 100
= 6 per machine hour
Absorption of overhead based on machine hour
Actual machine hour for job x Overhead absorption rate = total absorbed OHS
44 hours x 6 = 264.
- Various bases of apportionment of overheads to departments.
Bases of Apportionment:
Suitable bases have to be found out for apportioning the items of overhead cost to production and service departments and then for reapportionment of service departments costs to other service and production departments. The basis adopted should be such by which the expenses being apportioned must be measurable by the basis adopted and there must be proper correlation between the expenses and the basis.Therefore, the common expenses have to be apportioned or distributed over the departments on some equitable basis. The process of distribution is usually known as ‘Primary Distribution’.
Following are the main bases of overhead apportionment utilised in manufacturing concerns:
(i) Direct Allocation:Overheads are directly allocated to various departments on the basis of expenses for each department respectively. Examples are: overtime premium of workers engaged in a particular department, power (when separate meters are available), jobbing repairs etc.
(ii) Direct Labour/Machine Hours:Under this basis, the overhead expenses are distributed to various departments in the ratio of total number of labour or machine hours worked in each department.
- Value of Materials Passing through Cost Centres: This basis is adopted for expenses associated with material such as material handling expenses.
- Direct Wages: This method is used only for those items of expenses which are booked with the amounts of wages, e.g., workers’ insurance, their contribution to provident fund, workers’ compensation etc.
- Number of Workers: This method is used for the apportionment of certain expenses as welfare and recreation expenses, medical expenses, time keeping, supervision etc.
- Floor Area of Departments: This basis is adopted for the apportionment of certain expenses like lighting and heating, rent, rates, taxes, maintenance on building, air conditioning, fire precaution services etc.
- Capital Values: In this method, the capital values of certain assets like machinery and building are used as basis for the apportionment of certain expenses e.g. rates, taxes, depreciation, maintenance, insurance charges of the building etc.
- Light Points: This is used for apportioning lighting expenses.
- Kilowatt Hour: This basis is used for the apportionment of power expenses.
6. (a) From the following information, prepare a Reconciliation Statement: 14
|Profit as per cost accounts Works overheads under recovered Administrative overheads under recovered Selling overheads over recovered Overvaluation of opening stock in cost accounts Overvaluation of closing stock in cost accounts Interest earned during the year Rent received during the year Bad debts written-off during the year Preliminary expenses written-off during the year||1,45,500 9,500 22,750 19,500 15,000 7,500 3,750 27,000 9,000 18,000|
Reconciliation of Cost and Financial Account
|Profit as per cost accounts Add: a) Selling overheads over recovered b) Overvaluation of opening stock in cost accounts c) Interest earned during the year shown in P/L only d) Rent received during the year||65,250||1,45,500|
|Less: a) Works overheads under recovered b) Administrative overheads under recovered c) Overvaluation of closing stock in cost accounts e) Bad debts written-off during the year f) Preliminary expenses written-off during the year||2,10,750 66,750|
|Profit as per financial accounts||1,44,000|
(b) (i) How does job costing differ from process costing?
|Basis||Job Costing||Process Costing|
|Production||Production is against specific orders.||Production is in continuous flow; the products being homogeneous.|
|Cost determination||Costs are determined for each job separately.||Costs are compiled for each process for department on time basis i.e. for production of a given accounting period.|
|Entity||Each job is separate and independent of other.||Products lose their individual entity as they are manufactured in a continuous flow.|
|Cost Calculator||Costs are compiled when a job is completed.||Costs are calculated at the end of the cost period.|
|Unit Cost||Total cost of a job is divided by the number of units produced in the job in order to calculated unit cost of a job.||The total cost of each process is divided by the total production for the process to calculate the average cost per unit for the period.|
|Transfer||There are usually no transfers from one job to another unless there is a surplus work or excess production.||Transfer of costs from one process to another is made, as the product moves from one process to another.|
|Work-in progress||There may or may not be work-in-process at the beginning or end of the accounting period.||There is always some work-in-progress at the beginning as well as at the end of the accounting period.|
(ii) What do you mean by normal loss, abnormal loss and abnormal gain in process costing? How are they treated in Process Accounts? 7+7=14
Ans: Normal process loss: It is a part of the process loss caused under normal circumstances. It is non-controllable loss and may occur due to evaporation due to evaporation or pilferage. Thus it is the loss which is unavoidable an account of inherent nature of production process.
Abnormal process loss: Any loss caused by unexpected or abnormal conditions such as plant break down, sub-standard material, carelessness, accident etc, or loss in excess of the margin anticipated for normal process loss should be regarded as abnormal process loss. The cost of an abnormal process loss unit is equal to the cost of a good unit. The units of abnormal loss are calculated as under:
Abnormal lose=Actual loss – Normal loss
Or Abnormal loss=Expected output (i.e. Input-normal loss)-Actual output
Abnormal gain (or effectives)
We know that margin allowed for normal loss is an estimate (i.e. on the basis of expectation in process industries in normal condition)and slight differences are bound to occur between the actual output of a process and that anticipated. These differences will not always represent increased loss, on occasions the actual will be less than that expected. Thus, when actual loss in a process is smaller than was expected an abnormal gain results. The value of gain will be calculated in similar manner to an abnormal loss, then posted to an abnormal gain account.