2018 – Solved Question Paper | Cost and Management Accounting | Previous Year – Masters of Commerce (M.Com) | Dibrugarh University

2018 – Solved Question Paper | Cost and Management Accounting | Previous Year – Masters of Commerce (M.Com) | Dibrugarh University

2018

Course: 103

(Cost and Management Accounting)

Full Marks: 80

Time: 3 hours

The figures in the margin indicate full marks for the questions.

1(a) Explain the objectives of cost accounting. How does it differ from objectives of financial accounting? Support your answer with adequate example.

-> Cost Accounting is a business practice in which we record, examine, summarize, and study the company’s cost spent on any process, service, product or anything else in the organization. This helps the organization in cost controlling and making strategic planning and decision on improving cost efficiency. Such financial statements and ledgers give the management visibility on their cost information. Management gets the idea where they have to control the cost and where they have to increase more, which helps in creating a vision and future plan. There are different types of cost accounting such as marginal costing, activity-based costing, standard cost accounting, and lean accounting. In this article, we will discuss more objectives, advantages, costing and meaning of costs.

It is a process via which we determine the costs of goods and services. It involves the recording, classification, allocation of various expenditures, and creating financial statements. This data is generally used in financial accounting.

This helps us calculate the costs of the various goods. It also involves a suitable presentation of this data for the purposes of cost control and guidance to the management .

It deals with the cost of every unit, job, process, order, service, etc, whichever is applicable and includes the cost of production, cost of selling and cost of distribution.

Objectives of cost accounting:-

1. Cost Ascertainment: The main objective of cost accounts to find out the cost of product, process, job, contract, service or any unit of production. It is done through various methods and techniques.

2. Cost Control: The very basic function of cost accounts to control costs. Comparison of actual cost with standards reveals the discrepancies (Variances). The variances reveal whether the cost is within the control or not. Remedial actions are suggesting controlling the costs which are not within control.

3. Cost Reduction: Cost reduction refers to the real and permanent reduction in the unit cost of goods manufactured or services rendered without affecting the use intended. It can be done with the help of techniques called budgetary control, standard costing, material control, labour control, and overheads control.

4. Fixation of Selling Price: The price of any product consists of total cost and the margin required. Cost data are useful in the determination of selling price or quotations. It provides detailed information regarding various components of cost. It also provides information in terms of fixed cost and variable costs, so that the extent of price reduction can be decided. 5. Framing business policy: It helps management in formulating business policy and decision making. Break-even analysis, cost volume profit relationships, differential costing, etc are helpful in making decisions regarding key areas of the business.

Cost accounting differs from objectives of financial accounting:-

1. Cost accounting deals with the internal aspects of the business. As a result, cost accounting helps to improve the flaws of a company. Financial accounting, on the other hand, handles the external aspect of the company. How much profits the company makes, how much cash flow the company brings in, in a given year, etc. As a result, the goodwill of a company depends on financial accounting .

2. Cost accounting is used basically to reduce cost and to improve the efficiency of business processes. It acts as a tool for management. On the other hand, financial accounting doesn’t concern itself about controlling anything; rather its objective is to create a true and fair picture of the financial affairs of the company.

3. Cost accounting is a lot about knowing the pixel view of a business. On the contrary, financial accounting shows us the big picture.

4. Cost accounting is not mandatory and applicable to all organizations. Only the organizations which are engaged in manufacturing activities are bound to report through cost accounting. On the other hand, financial accounting is mandatory for all organizations.

5. Since cost accounting is used to control costs and take prudent management decisions, cost accounting is performed in every short interval. Financial accounting, on the other hand, is bound to report the financial affairs of the company at the end of the year.

6. In cost accounting, estimation has a great value in determining and comparing the cost of sales per unit. In financial accounting, every transaction and reporting is based on actual data.

(b) Spell out the differences between Activity Based Costing and Conventional Costing .

-> 1. The real change Activity-Based Costing implements in the cost structure of the organisation lies in the treatment of allocation of overheads while the conventional system allocates costs between products on the basis of machine-hours or labour-hours.

2. Traditionally companies distribute their overhead, between different products in the same ratio as the respective costs of direct labour in these products. Hence if a unit of the product A consumes twice as many labour-hours as a unit of product B, the total overhead cost per unit is also distributed between product A and product B in the same ratio. As such, manufacturer of the two products uses the overheads, in a production that bears no relationship with labour costs.

3. The result of using Actively-Based costing is found to be a dramatic one. The respective costs of different products are often found to be as much as 50% higher or lower than those computed under the conventional costing system.

2(b) State with examples how Abnormal Loss and Abnormal Gain under Process Costing are ascertained. Use imaginary figures in your examples.

-> In accounting , Consignment can be defined as the act of sending the goods by the manufacturers or producers to their agents for the purpose of sale. The person who sends the goods is Consignor (the manufacturer or producer) and the agent who receives the goods is Consignee. During the consignment, normal and abnormal loss may occur.

Normal and Abnormal Loss

Goods sent on consignment does not become the property of consignee as he has not bought them. The ownership of goods remains with the consignor until they are sold, so the goods appear as inventory in the books of the consignor, not the consignee.

The consignee tries to sell the goods according to the instructions of the consignor. When the goods are sold he will deduct his expenses, commissioned from the sale proceeds and remits the balance to the consignor. If the goods are destroyed, consignee will not be responsible. Its burden will fall on the consignor. There are two types of losses that can occur in consignment:

1] Normal Loss

Normal losses are those which we cannot stop. These are natural wastage.

For example, if you doing the business of timber on the basis of their weight. It is sure that after cutting of tree, weight of wood will decrease. So, this loss is normal loss. In process account’s credit side, we just show the normal loss’s units. Now, our total produced units will decrease. This will increase our cost of production per unit in any process. For example: If total cost of process A is Rs. 10,000. When we produce 100 units in A process, we have checked that due to natural reasons, we have just 90 units. Now, in A Process Account, we will show 100 units in debit side and 10 units of normal loss in credit side without writing its amount. Due to this our total cost of Rs. 10,000 will of 90 units. It means, cost per unit has increased from Rs. 100 per unit to Rs. 111 per unit.

2] Abnormal Loss

All those losses which happen due to abnormal reasons are called abnormal losses. Following are its main example.


1. If you use bad quality raw material in the production, there is big risk of wastage in production. So, use of bad quality raw material is the reason of abnormal loss.


2. Careless is also reason of abnormal loss. For example, due to the careless of worker, 5 units waste the products during production. So, loss of 5 units is the abnormal loss.


3. All those losses which are not normal will be the abnormal loss. For treating the abnormal loss in the process account, we need to calculate the value of abnormal loss.


a) When there is not any normal loss

Abnormal loss = Normal cost at normal production / normal output X units of abnormal loss

b) When there is normal loss

Abnormal loss = {Normal cost at normal production / (Total output – normal loss units)} X Units of abnormal loss. Example: In process A 100 units of raw materials were introduced at a cost of Rs. 1000. The other expenditure incurred by the process was Rs. 602 of the units introduced 10% are normally lost in the course of manufacture and they possess a scrap value of Rs. 3 each. The output of process A was only 75 units. Prepare process A account.

Process A Account

Debit Side

Units

Amount in Rs.

Credit Side

Units

Amount in Rs.

Raw material

100

1000

Normal Loss

10

Other Expenses

602

Sale of Scrap of normal wastage 10 units X Rs. 3 each

30

*Abnormal Loss

15

262

Process B ( Output ) – balancing figure

75

1310

100

1602

100

1602

Calculation of Abnormal loss in units and in value

Total input========== 100 units
Less normal loss in units== 10 units
————————————–
Normal Output ======== 90 units
actual output of A process = 75 units
————————————–
Abnormal loss in units ==== 15 units
==========================
Value of Abnormal Loss
= Cost of Total Output – scrap sale of normal loss/ Normal Output X Units of Abnormal loss
= 1602 – 30 / 90 X 15 = Rs. 262

3(a) What is Financial Leverage? What are the ratios normally used for measuring the extent of leverage of an entity?

-> Financial leverage simply means the presence of debt in the capital structure of a firm. Similarly, in other words, we can also call it the existence of fixed-charge bearing capital which may include preference shares along with debentures, term loans etc. There are basically three leverages; operating leverage , financial leverage, combined leverage. The objective of introducing leverage to the capital is to achieve maximization of wealth of the shareholders.

Financial leverage deals with the profit magnification in general. It is also well known as gearing or ‘trading on equity’. The concept of financial leverage is not just relevant to businesses but it is equally true for individuals. Debt is an integral part of the financial planning of anybody whether it is an individual, firm or a company. We will try to understand it from the business point of view.

In a business, debt (short or long term) is acquired not only on the grounds of ‘need for capital’ but also taken to enlarge the profits accruing to the shareholders. Let me clarify it further. An introduction of debt in the capital structure will not have an impact on the sales, operating profits etc but it will increase the share of the equity shareholders, the ROE % (Return on Equity).

Measures of Financial Leverage

There are various measures of Financial Leverage

  • Debt Ratio: It is the ratio of debt to total assets of the firm which means what percentage of total assets is financed by debt.
  • Debt Equity Ratio : It is the ratio of debt to equity which signifies how many dollars of debt is taken per dollar of equity.
  • Interest Coverage Ratio : It is the ratio of profits to interest. This ratio is also represented in times. It represents how many times of the interest is the available profit to pay it off. Higher such ratio, higher is the interest paying capacity. The reciprocal of it is income gearing.

Degree of Financial Leverage

A degree of financial leverage is nothing but a measure of magnification that happens due to debt capital in the structure. The degree of financial leverage is the proportion of a percentage change in EPS due to a certain percentage change in EBIT.

Degree of Financial Leverage (DFL) = % changes in EPS/ % changes in EBIT

(b) Write shorts answer to the following questions:

(i) When are the financial statements consolidated ?

-> While preparing a consolidated financial statement, there are two basic procedures that need to be followed: first, you cancel out all the items that are accounted as an asset in one company and a liability in another, and then add together all unconcealed items.

There are two main types of items that cancel each other out from the consolidated statement of financial position.

  • “Investment in subsidiary companies” which is treated as an asset in the parent company will be cancelled out by “share capital” account in subsidiary’s statement. Only the parent company’s “share capital” account will be included in the consolidated statement.

· If trading between different companies in one group happen, then the payables of one company will be cancelled by the receivables of another company.

Goodwill arising on consolidation

Goodwill is treated as an intangible asset in the consolidated statement of financial position. It arises in cases, where the cost of purchase of shares is not equal to their par value. For example, if a company buys shares of another company worth $40,000 for $60,000, we conclude that there is a goodwill worth or $20,000.

Performa for calculating goodwill is as follows:

Goodwill

Fair value of consideration transferred

Plus fair value of non-controlled interest at acquisition

Less ordinary share capital of subsidiary company

Less share premium of subsidiary company

Less retained earnings of subsidiary company at acquisition date

Less fair value adjustments at acquisition date

Non-controlled interest

If the parent company does not buy 100% of shares of the subsidiary company, there are a proportion of the net assets that is owned by the external company. This proportion that is related to outside investors is called the non-controlling interest (NCI).

The preformed for calculating the NCI is as follows:

Non-controlling interest

Fair value of NCI at acquisition date

Plus NCI’s share of post-acquisition retained earnings or other reserves

(ii) Why comparative data provided in financial statements?

-> The comparative financial statements are statements of the financial position at different periods; of time. The elements of financial position are shown in a comparative form so as to give an idea of financial position at two or more periods. Any statement prepared in a comparative form will be covered in comparative statements.

From practical point of view, generally, two financial statements (balance sheet and income statement) are prepared in comparative form for financial analysis purposes. Not only the comparison of the figures of two periods but also be relationship between balance sheet and income statement enables an in depth study of financial position and operative results.

The comparative statement may show:

(i) Absolute figures (rupee amounts).

(ii) Changes in absolute figures i.e., increase or decrease in absolute figures.

(iii) Absolute data in terms of percentages.

(iv) Increase or decrease in terms of percentages.

The analyst is able to draw useful conclusions when figures are given in a comparative position. The figures of sales for a quarter, half -year or one year may tell only the present position of sales efforts. When sales figures of previous periods are given along with the figures of current periods then the analyst will be able to study the trends of sales over different periods of time. Similarly, comparative figures will indicate the trend and direction of financial position and operating results.

The financial data will be comparative only when same accounting principles are used in preparing these statements. In case of any deviation in the use of accounting principles this fact must be mentioned at the foot of financial statements and the analyst should be careful in using these statements.

Types of Comparative Statements:

The two comparative statements are

(i) Balance sheet, and

(ii) Income statement.

(i) Comparative Balance Sheet:

The comparative balance sheet analysis is the study of the trend of the same items, group of items and computed items in two or more balance sheets of the same business enterprise on different dates.’ The changes in periodic balance sheet items reflect the conduct of a business.

The changes can be observed by comparison of the balance sheet at the beginning and at the end of a period and these changes can help in forming an opinion about the progress of an enterprise. The comparative balance sheet has two columns for the data of original balance sheets. A third column is used to show increases in figures. The fourth column may be added for giving percentages of increases or decreases.

Guidelines for Interpretation of Comparative Balance Sheet:

While interpreting Comparative Balance Sheet the interpreter is expected to study the following aspects:

(1) Current financial position and liquidity position.

(2) Long -term financial position.

(3) Profitability of the concern.

(1) For studying current financial position or short -term financial position of a concern, one should see the working capital in both the years. The excess of current assets over current liabilities will give the figures of working capital. The increase in working capital will mean improvement in the current financial position of the business.

An increase in current assets is accompanied by the increase in current liabilities of the same amount will not show any improvement in the short-term financial position. A student should study the increase or decrease in current assets and current liabilities and this will enable him to analyze the current financial position.

The second aspect which should be studied in current financial position is the liquidity position of the concern. If liquid assets like cash in hand, cash at bank, bills receivables, debtors, etc. show an increase in the second year over the first year, this will improve the liquidity position of the concern.

The increase in inventory can be on account of accumulation of stocks for want of customers, decrease in demand or inadequate sales promotion efforts. An increase in inventory may increase working capital of the business but it will not be good for the business.

(2) The long -term financial position of the concern can be analyzed by studying the changes in fixed assets, long-term liabilities and capital .The proper financial policy of concern will be to finance fixed assets by the issue of either long-term securities such as debentures, bonds, loans from financial institutions or issue of fresh share capital.

An increase in fixed assets should be compared to the increase in long-term loans and capital. If the increase in fixed assets is more than the increase in long term securities then part of fixed assets has been financed from the working capital. On the other hand, if the increase in long-term securities is more than the increase in fixed assets then fixed assets have not only been financed from long-term sources but part of working capital has also been financed from long-term sources. A wise policy will be to finance fixed assets by raising long-term funds.

The nature of assets which have increased or decreased should also be studied to form an opinion about the future production possibilities. The increase in plant and machinery will increase production capacity of the concern. On the liabilities side, the increase in loaned funds will mean an increase in interest liability whereas an increase in share capital will not increase any liability for paying interest. An opinion about the long-term financial position should be formed after taking into consideration above-mentioned aspects.

(3) The next aspect to be studied in a comparative balance sheet question is the profitability of the concern. The study of increase or decrease in retained earnings, various resources and surpluses, etc. will enable the interpreter to see whether the profitability has improved or not. An increase in the balance of Profit and Loss Account and other resources created from profits will mean an increase in profitability to the concern. The decrease in such accounts may mean issue of dividend, issue of bonus shares or deterioration in profitability of the concern.

(4) After studying various assets and liabilities an opinion should be formed about the financial position of the concern. One cannot say if short-term financial position is good then long-term financial position will also be good or vice-versa. A concluding word about the overall financial position must be given at the end.

(ii) Comparative Income Statement:

The Income statement gives the results of the operations of a business. The comparative income statement gives an idea of the progress of a business over a period of time. The changes in absolute data in money values and percentages can be determined to analyze the profitability of the business. Like comparative balance sheet, income statement also has four columns. First two columns give figures of various items for two years. Third and fourth columns are used to show increase or decrease in figures in absolute amounts and percentages respectively.

Guidelines for Interpretation of Income Statements:

The analysis and interpretation of income statement will involve the following steps:

(1) The increase or decrease in sales should be compared with the increase or decrease in cost of goods sold. An increase in sales will not always mean an increase in profit. The profitability will improve if increase in sales is more than the increase in cost of goods sold. The amount of gross profit should be studied in the first step.

(2) The second step of analysis should be the study of operational profits. The operating expenses such as office and administrative expenses, selling and distribution expenses should be deducted from gross profit to find out operating profits.

An increase in operating profit will result from the increase in sales position and control of operating expenses. A decrease in operating profit may be due to an increase in operating expenses or decrease in sales. The change in individual expenses should also be studied. Some expenses may increase due to the expansion of business activities while others may go up due to managerial inefficiency.

(3) The increase or decrease in net profit will give an idea about the overall profitability of the concern. Non-operating expenses such as interest paid, losses from sale of assets, writing off of deferred expenses, payment of tax, etc. decrease the figure of operating profit. When all non-operating expenses are deducted from operational profit, we get a figure of net profit. Some non-operating incomes may also be there which will increase net profit. An increase in net profit will gave us an idea about the progress of the concern.

(4) An opinion should be formed about profitability of the concern and it should be given at the end. It should be mentioned whether the overall profitability is good or not.

(iii) What benefits are derived from a common-size-balance sheet?

-> Common size balance sheet refers to percentage analysis of balance sheet items on the basis of the common figure as each item is presented as the percentage which is easy to compare, like each asset is shown as a percentage of total assets and each liability is shown as a percentage of total liabilities and stakeholder equity as a percentage of total stakeholder’s equity.

Advantages of Common-Size Statement:

The advantages of Common-Size Statement are:

(a) Easy to Understand:

Common-size Statement helps the users of financial statement to make clear about the ratio or percentage of each individual item to total assets/liabilities of a firm. For example, if an analyst wants to know the working capital position he may ascertain the percentage of each individual component of current assets against total assets of a firm and also the percentage share of each individual component of current liabilities.

(b) Helpful for Time Series Analysis:

A Common-Size Statement helps an analyst to find out a trend relating to percentage share of each asset in total assets and percentage share of each liability in total liabilities.

(c) Comparison at a Glance:

An analyst can compare the financial performances at a glance since percentage of increase or decrease of each individual component of cost, assets, liabilities etc. are available and he can easily ascertain his required ratio.

(d) Helpful in analysing Structural Composition:

A Common-Size Statement helps the analyst to ascertain the structural relations of various components of cost/expenses/assets/liabilities etc. to the required total of assets/liabilities and capital.

Limitations of Common-Size Statement:

Common-Size Statement is not free from snags.

Some of them are:

(a) Standard Ratio:

Common-Size Statement does not help to take decisions since there is no standard ratio/percentage regarding the change of percentage in the various components of assets, liabilities, sales etc.

(b) Change in Price-level:

Common-Size statement does riot recognise the change in price level i.e. inflationary effect. So, it supplies misleading information’s since it is based on historical cost.

(c) Following Consistency:

If consistency in the accounting principle, concepts, conventions is not maintained then Common Size Statement becomes useless.

(d) Seasonal Fluctuation:

Common-Size Statement fails to convey proper records during seasonal fluctuations in various components of sales, assets liabilities etc. e.g. sales and closing stock significantly vary. Thus, the statement fails to supply the real information to the users of financial statements.

(e) Window Dressing:

Effect of window dressing in financial statements cannot be ignored and Common-Size Statements fail to supply the real positions of sales, assets, liabilities etc. due to the evil effects of window dressing appearing in the financial statements.

(f) Qualitative Element:

Common-Size Statement fails to recognise the qualitative elements, e.g. quality of works, customer relations etc. while measuring the performance of a firm although the same should not be ignored.

(g) Liquidity and Solvency Position:

Liquidity and solvency position cannot be measured by Common-Size Statement. It considers the percentage of increase or decrease in various components of sales, assets, liabilities etc. In other words it does not help to ascertain the Current Ratio, Liquid Ratio, Debt Equity Capital Ratio, Capital Gearing Ratio etc. which are applied in testing liquidity and solvency position of a firm.

small_c_popup.png

Hello

We are happy you are here

[wppb-login]

Oh No!

It seems like you have forgotten your password. Don’t worry tell us your email id or username and we’ll try to help
error: Alert: Content is protected !!
Secured By miniOrange