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COST ACCOUNTING IMPORTANT THEORY QUESTIONS

 1. BASIC CONCEPTS

Q 1.State the difference between cost control and cost reduction.
ANS. 

Cost Control Cost Reduction
1. Cost control aims at maintaining the costs in accordance with the established standards. 1. Cost reduction is concerned with reducing costs. It challenges all standards and endeavours to better them continuously.
2. Cost control seeks to attain lowest possible cost under existing conditions. 2. Cost reduction recognises no condition as permanent, since a change will result in lower cost.
3. In case of Cost Control, emphasis is on past and present. 3. In case of cost reduction it is on present and future.
4. Cost Control is a preventive function. 4. Cost reduction is a corrective function. It operates even when an efficient cost control system exists.
5. Cost control ends when targets are achieved. 5. Cost reduction has no visible end.
Q2. What are the essential factors for installing a cost accounting system? Explain. 
ANS.- Before installation of a system of cost accounting in a manufacturing organisation the under mentioned factors should be studied:




    (i)Objective: The objective of costing system, for example whether it is being introduced for fixing prices or for insisting a system of cost control.
    (ii)Nature of Business or Industry: The Industry in which business is operating. Every business industry has its own peculiar feature and costing objectives. According to its cost information requirement cost accounting methods are followed. For example, Indian Oil Corporation Ltd. has to maintain process wise cost accounts to find out cost incurred on a particular process say in crude refinement process etc.
    (iii)Organisational Hierarchy: Costing system should fulfill the requirement of different level of management. Top management is concerned with the corporate strategy, strategic level management is concerned with marketing strategy, product diversification, product pricing etc. Operational level management needs the information on standard quantity to be consumed, report on idle time etc.
    (iv)Knowing the product: Nature of product determines the type of costing system to be implemented. The product which has by-products requires costing system which account for by-products as well. In case of perishable or short self- life, marginal costing method is required to know the contribution and minimum price at which it can be sold.
    (v)Knowing the production process: A good costing system can never be established without the complete knowledge of the production process. Cost apportionment can be done on the most appropriate and scientific basis if a cost accountant can identify degree of effort or resources consumed in a particular process. This also includes some basic technical know-how and process peculiarity.
    (vi)Information synchronisation: Establishment of a department or a system requires substantial amount of organisational resources. While drafting a costing system, information needs of various other departments should be taken into account. For example, in a typical business organisation accounts department needs to submit monthly stock statement to its lender bank, quantity wise stock details at the time filing returns to tax authorities etc.
    (vii)Method of maintenance of cost records: The manner in which Cost and Financial accounts could be inter-locked into a single integral accounting system and in which results of separate sets of accounts, cost and financial, could be reconciled by means of control accounts.
    (viii)Statutory compliances and audit: Records are to be maintained to comply with statutory requirements, standards to be followed (Cost Accounting Standards and Accounting Standards).




    (ix)Information Attributes: Information generated from the Costing system should be possess all the attributes of an information i.e. complete, accurate, timeliness, confidentiality etc. This also meets the requirements of management information system.

Q 3.Explain ‘Sunk Cost’ and ‘Opportunity Cost’.
ANS. Sunk cost: Historical costs or the costs incurred in the past are known as sunk cost. They play no role in the current decision making process and are termed as irrelevant costs. For example, in the case of a decision relating to the replacement of a machine, the written down value of the existing machine is a sunk cost, and therefore, not considered.

Opportunity cost: It refers to the value of sacrifice made or benefit of opportunity foregone in accepting an alternative course of action. For example, a firm financing its expansion plan by withdrawing money from its bank deposits. In such a case the loss of interest on the bank deposit is the opportunity cost for carrying out the expansion plan.

Q 3. Briefly explain the essential features of a good cost accounting system.
ANS  Essentials of a good Cost Accounting System: The essential features, which a good Cost Accounting System should possess, are as follows:
 (a) Informative and Simple: Cost Accounting System should be tailor-made, practical, simple and capable of meeting the requirements of a business concern.
 (b) Accuracy: The data to be used by the Cost Accounting System should be accurate; otherwise it may distort the output of the system.
(c) Support from Management: Necessary cooperation and participation of executives from various departments of the concern is essential for developing a good system of Cost Accounting.
 (d) Cost- Benefit: The Cost of installing and operating the system should justify the results.
(e) Precise Information: The system of costing should not sacrifice the utility by introducing meticulous and unnecessary details.
 (f) Procedure: A carefully phased programme should be prepared by using network analysis for the introduction of the system.

Q 4.Discuss cost classification based on variability and controllability.
ANS. Cost classification based on variability
Fixed cost – these are costs, which do not change in total despite changes of a cost driver. A fixed cost is fixed only in relation to a given relevant range of the cost driver and a given time span. Rent, insurance, depreciation of factory building and equipment are examples of fixed costs where the final product produced is the cost object.
Variable costs- these are costs which change in total in proportion to changes of cost driver. Direct material, direct labour are examples of variable costs in cases where the final product produced is the cost object.
Semi-variable costs – These are partly fixed and partly variable in relation to output e.g. telephone and electricity bill.

Cost classification based on controllability
Controllable costs – are incurred in a particular responsibility center and relate to a defined time span. They can be influenced by the action of the executive heading the responsibility center e.g. direct costs.
Uncontrollable costs – are costs which are not influenced by the action of the responsibility manager e.g. expenditure incurred by the tool room is controllable by the foreman in charge of that section, but the share of tool room expenditure which is apportioned to the machine shop is not controllable by machine shop foreman.




Q 5.Explain the area of cost reduction at product design stage. (3 Marks, May 2005)
ANS.
Products design offers the greatest scope of cost reduction of a permanent nature. The impact of a decision made at the beginning stage on costs can be revealed at every stage of manufacture or processing of the product in the factory. The design function, therefore, offers an extremely important area for cost reduction action.
Before making new designs, a design policy has to be settled by top management. The design policy may be selected towards objectives such as:
(a) Low cost and functional efficiency
(b) Widest possible application
(c) Quality and life and
(d) Appearance.
Any attempt to achieve cost reduction through design economies may come into conflict with the overriding design policy and hence a firm policy concerning design has to be settled by overcoming, as far as possible, conflicts.
Potential areas for cost reduction in the field of design are:
(i) Introduction of new designs
(ii) Improvement in the existing designs and
(iii) Standardisation and simplification.

Q 6. Narrate the objectives of cost accounting.
ANS. The main objectives of introduction of a Cost Accounting System in a manufacturing organization are as follows:
(i) Ascertainment of cost: The main objective of a Cost Accounting system is to ascertain cost for cost objects. Costing may be post completion or continuous but the aim is to arrive at a complete and accurate cost figure to assist the users to compare, control and make various decisions.
(ii) Determination of selling price: Cost Accounting System in a manufacturing organisation enables to determine desired selling price after adding expected profit margin with the cost of the goods manufactured.
(iii) Cost control and Cost reduction: Cost Accounting System equips the cost controller to adhere and control the cost estimate or cost budget and assist them to identify the areas of cost reduction.
(iv) Ascertainment of profit of each activity: Cost Accounting System helps to classify cost on the basis of activity to ascertain activity wise profitability.
(v) Assisting in managerial decision making: Cost Accounting System provides relevant cost information and assists managers to make various decisions.

Q 7.Discuss the area of activity in respect of which cost accounting records are to be maintained.
ANS. The areas of activity in respect of which cost accounting records are to be maintained under cost accounting record rules are:
 Raw materials, components, stores and spare parts
 Salaries and wages
 Service department expenses
 Utilities
 Depreciation
 Other overheads
 Conversion cost
 R & D expenses
 Interest
 Joint products and by products
 Work-in-progress and finished goods stocks
 Cost statements
 Record of physical verification
 Packing
 Production records.

Q 8.  EXPLAIN PROFIT CENTRES 
ANS Profit Centres are the part of a business which is accountable for both cost and revenue. These are responsible for generating and maximizing profits. Performance of these centres is measured with the volume of profit it earns.

Q 9.Distinguish between Explicit and Implicit cost
ANS. Explicit costs, which are also known as out of pocket costs, refer to costs involving immediate payment of cash. Salaries, wages, interest on capital, etc. are some of the examples of explicit costs. They can be easily measured.
Implicit costs (also known as economic costs) do not involve any immediate cash payment.

The main points of difference between Explicit and Implicit costs are:
 Implicit costs do not involve immediate cash payment whereas Explicit costs involves immediate outgo of cash.
 Implicit costs are not recorded in the book of account whereas explicit costs are entered in the books of Accounts.

Q 10. What is meant by “cost centre”? What are the different type of cost centres?
ANS. It is defined as a location, person or an item 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:
Personal Cost Centre: It consists of a person or group of persons e.g. Mr. X, supervisor, foreman, accountant, engineer, process staffs, mining staffs, doctors etc.
Impersonal Cost Centre: It consists of a location or an item of equipment (or group of these) e.g. boiler house, cooling tower, weighing machine, canteen, and generator set etc.




Cost Centres in a manufacturing concern are of two types:
Production Cost Centre: it is a cost centre where raw material is handled for conversion into finished products. Here both direct and indirect expenses are incurred. Machine shops, welding shops and assembly shops etc. are examples of production cost centres.
Service Cost Centre: It is a cost centre which serves as an ancillary unit to production cost centre. Payroll processing department, HRD, Power house, Gas production shops, Plant maintenance centres etc. are example of service cost centres.

Q 11.Distinguish between
(i) Profit Centres and Investment Centres.
(ii) Product Cost and Period Cost.
ANS.(i) Profit Centres and investment centres
A profit centre is a centre where the manager has the responsibility of generating and maximising profits. In such centres, the manager is responsible for revenue and cost.
Investment centres are those centres which are concerned with earning an adequate ROI. In such centres, the manager is responsible for investment, revenue and cost.

(ii) Product costs and period costs
Product costs are costs which are associated with purchase and sale of goods. These are costs are used for inventory valuation and incurred up to factory stage.
Period costs are costs, which are not assigned to the products but are charged as expenses against revenues of the period in which they are incurred e.g. Selling, General Administrative and Distribution overheads.

Q 12.Discuss the various reports provided by Cost Accounting Department
ANS. Various reports provided by Cost Accounting Department
(i) Cost sheet setting out the total cost, analysed into various elements.
(ii) Consumption of material statements.
(iii) Labour utilization statements.
(iv) Overheads incurred compared with the budget and overheads actually charged to production.
(v) Sales effected compared with budgets.
(vi) Reconciliation of actual profits earned with budgeted profits.
(vii) The total cost of abnormally spoiled work in factory and abnormal losses.
(viii) Labour turnover, cost of recruitment and training new employees.
(ix) Expenses incurred on R & D as compared with those budgeted.

Q 13.Identify the methods of costing for the following:
         .(i) Where all costs are directly charged to a specific job.
         (ii) Where all costs are directly charged to a group of products.
        (iii) Where cost is ascertained for a single product.
        (iv) Where the nature of the product is complex and method can not be ascertained.
ANS- (i) Job Costing
(ii) Batch Costing
(iii)Unit Costing or Single or Output Costing
(iv)Multiple Costing

Q 14.State the types of cost in the following cases:
(i) Interest paid on own capital not involving any cash outflow.
(ii) Withdrawing money from bank deposit for the purpose of purchasing new machine for expansion purpose.
(iii) Rent paid for the factory building which is temporarily closed
(iv) Cost associated with the acquisition and conversion of material into finished product.
ANS.Type of costs
(i) Imputed Cost
(ii) Opportunity Cost
(iii) Shut Down Cost
(iv) Product Cost

 

Q.15 -Explain ‘Cost Unit’ and ‘Cost Centre’?
Ans- 1.Cost Units: It is a unit of product, service or time (or combination of these) in relation to which costs may be ascertained or expressed.
We may for instance determine the cost per tonne of steel, per tonne kilometre of a transport service or cost per machine hour. Sometime, a single order or a contract constitutes a cost unit. A batch which consists of a group of identical items and maintains its identity through one 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, length, time and value.

2.Cost Centre: It is defined as a location, person or an item 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:

  •       Personal Cost Centre: It consists of a person or group of persons e.g. Mr. X, supervisor, foreman, accountant, engineer, process staffs, mining staffs, doctors etc.
  •       Impersonal Cost Centre: It consists of a location or an item of equipment (or group of these) e.g. boiler house, cooling tower, weighing machine, canteen, and generator set etc.

OR

Cost Centres in a manufacturing concern are of two types:

  •       Production Cost Centre: it is a cost centre where raw material is handled for conversion into finished products. Here both direct and indirect expenses are incurred. Machine shops, welding shops and assembly shops etc. are examples of production cost centres.
  •       Service Cost Centre: It is a cost centre which serves as an ancillary unit to production cost centre. Payroll processing department, HRD, Power house, Gas production shops, Plant maintenance centres etc. are example of service cost centres.
Q 16.Distinguish between engineered cost and differential cost.
ANS. Engineered costs are costs that result specifically from a clear cause and effect relationship between inputs and outputs. The relationship is usually personally observable. Examples of inputs are direct material cost, direct labour cost. Examples of output are car, computer etc.
     Differential costs represent the change in total cost due to change in activity level, technology, process or method of production, etc. Example, if total cost under alternative I is ` 30,000 and alternative II is ` 50,000, then differential cost is ` 20,000 (` 50,000- ` 30,000).
Q 17.Define the following:
(a) Imputed cost
(b) Capitalised cost
ANS
(a) Imputed Cost: These costs are notional costs which do not involve any cash outlay. Interest on capital, the payment for which is not actually made, is an example of Imputed Cost. These costs are similar to opportunity costs.
(b) Capitalised Cost: These are costs which are initially recorded as assets and subsequently treated as expenses

Q18 .What are the main objectives of cost accounting?
ANS.The Main objectives of Cost Accounting are
1. Ascertainment of cost.
2. Determination of selling price.
3. Cost control and cost reduction.
4. Ascertaining the project of each activity.
5. Assisting management in decision-making.
6. Determination of break- even point.

Q 19.State the difference between Cost Accounting and Management Accounting. 
ANS. Difference between Cost Accounting and Management Accounting
  Basis Cost Accounting Management Accounting
1 Nature It records the quantitative aspect only It records both qualitative and quantitative aspect.
2 Objective It records the cost of producing a product and providing a service It Provides information to management for planning and co-ordination
3 Area It only deals with cost Ascertainment. It is wider in scope as it includes F.A., budgeting, Tax, Planning.
4 Recording of data It uses both past and present figures It is focused with the projection of figures for future.
5 Development It’s development is related to industrial revolution. It develops in accordance to the need of modern business world.
6 Rules and Regulation It follows certain principles and procedures for recording costs of different products It does not follow any specific rules and regulations.

2.MATERIAL

 
Q.20 Distinguish between Bin card and Stores ledger.
ANS. Bin card is quantitative record of stores receipt, issue and balance. Control over stock is more effective, in as much as comparisons of actual quantity in hand at any time with the book balance are possible. Bin cards are kept attached to the bins or quite near thereto, so as to assist in the identification of stock.
     Stores ledger is quantitative and value record of stores receipts, issue and balance. It is a subsidiary ledger to the main cost ledger. It is maintained by cost accounting department.
Q 21. Explain – (i) A.B.C. Analysis
ANS.  ABC Analysis: It is a system of selective inventory control whereby the measure of control over an item of inventory varies with its usage value. It exercises discriminatory control over different items of stores grouped on the basis of the investment involved. Usually the items of material are grouped into three categories viz; A, B and C according to their use value during a period. In other words, the high use value items are controlled more closely than the items of low use value.
(i)‘A’ Category of items consists of only a small percentage i.e., about 10 % of the total items of material handled by the stores but require heavy investment i.e., about 70% of inventory value, because of their high prices and heavy requirement.
(ii)‘B’ Category of items comprises of about 20% of the total items of material handled by stores. The percentage of investment required is about 20% of the total investment in inventories.
(iii)‘C’ category of items does not require much investment. It may be about 10% of total inventory value but they are nearly 70% of the total items handled by stores
 



Q 22.Discuss the treatment of spoilage and defectives in cost accounting
ANS. Normal spoilage (which is inherent in the operation) costs are included in costs either by charging the loss due to spoilage to the production order or charging it to production overhead so that it is spread over all the products. Any value realized from the sale of spoilage is credited to production order or production overhead accounts, as the case may be. The cost of abnormal spoilage is charged to Costing P/L A/C. When spoiled work is the result of rigid specification, the cost of spoiled work is absorbed by good production while the cost of disposal is charged to production overhead.
 
     Defectives that are considered inherent in the process and are identified as normal can be recovered by using the following method.
      Charged to goods products
      Charged to general overheads
      Charged to departmental overheads
       If defectives are abnormal, they are charged to Costing Profit and Loss Account.
 

Q 23.Write treatment of items associated with purchase of material:
(i) Cash discount
(ii) Subsidy/Grant/Incentives
(iii) VAT or State Sales Tax
(iv) Commission/ brokerage paid
ANS.

  Items Treatment
1 Cash discount Any subsidy/ grant/ incentive received from the Government or from other sources deducted from the cost of purchase.
2 Subsidy/Grant/Incentives Any subsidy/ grant/ incentive received from the Government or from other sources deducted from the cost of purchase.
3 VAT or State Sales Tax State Sales Tax/VAT is paid on intra-state sale and collected from the buyers. It is excluded from the cost of purchase if credit for the same is available. Unless mentioned specifically it should not form part of cost of purchase.
4 Commission or brokerage paid Commission or brokerage paid is added with the cost of purchase.

Q 24.Distinguish between ‘Scraps’ and ‘Defectives’ in costing
ANS. 

  Scrap Defectives
1 It is loss connected with output This type of loss connected with the output but it can be in the input as well.
2 Scraps are not intended but cannot be eliminated due to nature of material or process itself. Defectives also are not intended but can be eliminated through proper control.
3 Generally scraps are not used or rectified. Defectives can be used after rectification.
4 Scraps have insignificant recoverable value. Defectives are sold at lower value from that of good one.

Q 25.“Perpetual inventory system comprises Bin Card and Stores Ledger, but the efficacy of the system depends on continuous stock taking.” Comment
ANS.Perpetual Inventory system represents a system of records maintained by the stores department. Records comprise of (i) Bin Cards and (ii) Stores Ledger. Bin Card maintains a quantitative record of receipts, issues and closing balances of each item of stores. Like a bin card, the Stores Ledger is maintained to record all receipt and issue transactions in respect of materials. It is filled up with the help of goods received note and material requisitions. But a perpetual inventory system’s efficacy depends on the system of continuous stock taking. Continuous stock taking means the physical checking of the records i.e. Bin cards and store ledger with actual physical stock. Perpetual inventory is essentially necessary for material control. It incidentally helps continuous stock taking.

The main advantages of continuous stock taking are as follows:
(1) Physical stocks can be counted and book balances adjusted as and when desired without waiting for the entire stock-taking to be done.
(2) Quick compilation of Profit and Loss Accounts (for interim period) due to prompt availability of stock figures.
(3) Discrepancies are easily located and thus corrective action can be promptly taken to avoid their recurrence.
(4) A systematic review of the perpetual inventory reveals the existence of surplus, dormant, obsolete and slow-moving materials, so that remedial measures may be taken in time.
(5) Fixation of the various levels and check of actual balances in hand with these levels assist the Storekeeper in maintaining stocks within limits and in initiating purchase requisitions for correct quantity at the proper time.

Q 26.Distinguish between bill of material and material requisition note.
ANS.
  Bills of material Material Requisition Note
1 It is document by the drawing office 1. It is prepared by the foreman of the
consuming department.
2 It is a complete schedule of component
parts and raw materials required for a
particular job or work order.
It is a document authorizing Store-
Keeper to issue Material to the
consuming department.
3 It often serves the purpose of a Store
Requisition as it shown the complete
schedule of materials required for a
particular job i.e. it can replace stores
requisition.
It cannot replace a bill of material.
4 It can be used for the purpose of
quotation
It is useful in arriving historical cost
only.
5 It helps in keeping a quantitative control
on materials draw through stores
Requisition.
It shows the material actually drawn
from stores.

3. LABOUR

Q 27.Distinguish between bill of material and material requisition note.
ANS. Gantt Task and Bonus System
This system is a combination of time and piecework system. According to this system a high standard or task is set and payment is made at time rate to a worker for production below the set standard.
 
Wages payable to workers under the plan are calculated as under:
  OUTPUT PAYMENT
1 Output below standard Guaranteed time rate
2 Output at standard Time rate plus bonus of 20% (usually) of time rate
3 Output over standard High piece rate on worker’s output .(It is so fixed ,so as to include a bonus of 20% of time rate)

Q 28.Define ‘Labour Turnover’. How is it measured? Explain.
ANS. Labour turnover in an organisation is the rate of change in the composition of labour force during a specified period measured against a suitable index. The standard of usual labour turnover in the industry or labour turnover rate for a past period may be taken as the index or norm against which actual turnover rate should be compared.

The methods for measuring labour turnover are:
Replacement method: This method takes into consideration actual replacement of labour irrespective of no. of workers leaving.
Replacement method = (Number of employees replaced during the year/Average number of employees on roll during the year) × 100

Separation method: In this method labour turnover is measured by dividing the total no. of separations during the period by average no. of workers on payroll during the same period.
Separation method = (Number of employees separated during the year/Average number of employees on roll during the year) × 100

Flux method: This method takes into account both the replacements as well as no. of separations during the period.
Flux method = {(No.of employees replaced duringthe year + No.of employees separated during the year)/ Average number of employees on roll during the year } × 100

 

Q 29.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; and
(c) Avoidable Causes.

Personal causes are those which induce or compel workers to leave their jobs; such causes include the following:
(i) Change of jobs for betterment.
(ii) Premature retirement due to ill health or old age.
(iii) Domestic problems and family responsibilities.
(iv) Discontent over the jobs and working environment.




Unavoidable causes are those under which it becomes obligatory on the part of management to ask one or more of their employees to leave the organisation; such causes are summed up as listed below:
(i) Seasonal nature of the business;
(ii) Shortage of raw material, power, slack market for the product etc.;
(iii) Change in the plant location;
(iv) Disability, making a worker unfit for work;
(v) Disciplinary measures;
(vi) Marriage (generally in the case of women).

Avoidable causes are those which require the attention of management on a continuous basis so as to keep the labour turnover ratio as low as possible. The main causes under this case are indicated below:
(i) Dissatisfaction with job, remuneration, hours of work, working conditions, etc.,
(ii) Strained relationship with management, supervisors or fellow workers;
(iii) Lack of training facilities and promotional avenues;
(iv) Lack of recreational and medical facilities;
(v) Low wages and allowances.

 
Q 30.Which is better plan out of Halsey 50 percent bonus scheme and Rowan bonus scheme for an efficient worker? In which situation the worker get same bonus in both schemes?

ANS.Rowan Bonus Scheme pays more bonus if the time saved is below the 50 per cent of time allowed and if the time saved is more than 50 percent of time allowed then Halsey bonus scheme pays more bonus. Generally, time saved by a worker is not more than 50 per cent of time allowed. So, the Rowan bonus scheme is better for an efficient worker. When the time saved is equal to 50 per cent of time allowed then both plans pays same bonus to a worker.

Q 31.Discuss the treatment of Idle time and Overtime premium in Cost Accounting.
ANS. Treatment of Idle time and Overtime Premium in Cost Accounting
 Normal idle time is treated as a part of the cost of production. Thus, in the case of direct workers, an allowance for normal idle time is built into labour cost rates. In case of indirect workers, normal idle time is spread over all the products or jobs through the process of absorption of factory overheads.
 Abnormal idle time cost is not included as a part of production cost and is shown as a separate item in costing Profit and Loss Account.
 Management should aim at eliminating controllable idle time and on a long-term basis reduce even the normal idle time.
 If overtime is resorted to at the desire of the customer, then overtime premium may b charged to the job directly.
 If overtime is required to cope with general production programme or for meeting urgent orders, the overtime premium should be treated as overhead cost of the particular department/cost centre.

Q 32.Enumerate the various methods of Time booking.Enumerate the various methods of Time booking.
ANS. The various methods of time booking are:
(a) Job ticket.
(b) Combined time and job ticket.
(c) Daily time sheet.
(d) Piece work card.
(e) Clock card.

Q 33.Distinguish between Job evaluation and Merit rating.
ANS.  Job evaluation is the assessment of the relative worth of jobs within a company and merits rating are the assessment of the relative worth of the man behind the job.
 Job evaluation and its accomplishment are means to set up a rational wage and salary structure where as merits rating provides a scientific basis for determining fair wages for each worker based on his ability and performance.
 Job evaluation simplifies wage administration by bringing an uniformity in wage rates where as merits rating is used to determine fair rate of pay for different workers.

Q 34.Enumerate the remedial steps to be taken to minimize the labour turnover.
ANS The following steps are useful for minimizing labour turnover:
(a) Exit interview: An interview be arranged with each outgoing employee to ascertain the reasons of his leaving the organization.
(b) Job analysis and evaluation: to ascertain the requirement of each job.
(c) Organisation should make use of a scientific system of recruitment, placement and promotion for employees.
(d) Organisation should create healthy atmosphere, providing education, medical and housing facilities for workers.
(e) Committee for settling workers grievances.

4. OVERHEADS

Q 35.Explain the treatment of over and under absorption of overheads in cost accounts.
ANS. Treatment of over and under absorption of overheads are:-
(i) Writing off to costing P&L A/c:– Small difference between the actual and absorbed amount should simply be transferred to costing P&L A/c, if difference is large then investigate the causes and after that abnormal loss/ gain shall be transferred to costing P&L A/c.
(ii) Use of supplementary Rate: Under this method the balance of under and over absorbed overheads may be charged to cost of W.I.P., finished stock and cost of sales proportionately with the help of supplementary rate of overhead.
(iii) Carry Forward to Subsequent Year: Difference should be carried forward in the expectation that next year the position will be automatically corrected.

Q 36.How do you deal with the following in cost account?
(i) Packing Expenses
(ii) Fringe benefits
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. If the cost of special packing is at the request of the customer, the same should be charged to the specific work order or the job. The cost of fancy packing necessary to attract customers is an advertising expenditure. Hence, it is to be treated as a selling overhead.

Fringe benefits: These are the additional payments or 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 these may be collected as part of production overheads.

Q 37.Distinguish between allocation and apportionment of cost.
ANS. Distinguish between allocation and apportionment of cost.

 Cost allocation: The term ‘allocation’ refers to assignment or allotment of an entire item of cost to a particular cost centre or cost unit. It implies relating overheads directly to the various departments. The estimated amount of various items of manufacturing overheads should be allocated to various cost centres or departments. For example- if a separate power meter has been installed for a department, the entire power cost ascertained from the meter is allocated to that department.

Cost apportionment: There are some items of estimated overheads (like the salary of the works manager) which cannot be directly allocated to the various departments and cost centres. Such unallocable expenses are to be spread over the various departments or cost centres on an appropriate basis. This is called apportionment.

Q38.Discuss the step method and reciprocal service method of secondary distribution of overheads.
ANS. Step method: This method gives cognisance to the service rendered by service department to another service dep’t, thus sequence of apportionments has to be selected. The sequence here begins with the dep’t that renders service to the max number of other service dep’t. After this, the cost of service dep’t serving the next largest number of dep’t is apportioned.
Reciprocal service method : This method recognises the fact that where there are two or more service dep’t, they may render service to each other and, therefore, these inter dep’t services are to be given due weight while re-distributing the expense of service dep’t. The methods available for dealing with reciprocal servicing are:
– Simultaneous equation method
– Repeated distribution method
– Trial and error method.

Q 39.Explain: Single and multiple overhead rate.
ANS.Single and multiple overhead rate: A single overhead rate, when computed for the entire factory is known as the blanket rate.
Blanket rate = Overhead cost of entire factory / total quantum of the base selected
The blanket rates can be utilised in the following cases;
 Where only one major product is being produced.
 Where several products are produced but: (a) all products pass through all departments and (b) all products require the same length of time in each department.
When the above conditions are not applicable, separate departmental rates should be used.

Multiple rates involve computation of separate rates for each production department, service department, cost-centre, each product or line and each production factor.

Q 40.Discuss the treatment of research and development expenditures in cost accounting.
ANS. If research is conducted in the methods of production, the expenses should be charged to production overhead. If the research relates to administration, the expenses are charged to administration overheads. If it is related to market research, the expenses are charged to S&D overheads. Development costs incurred in connection with a particular product should be charged directly to that product. Such expenses are usually treated as deferred revenue expenditure and recovered as cost per unit of the product when production is fully established. Routine nature research expenses are charged to general overheads.

Q 41.Discuss the accounting of Selling and Distribution overheads.
ANS. It is difficult to determine an entirely satisfactory basis for computing the overhead rate for absorbing selling and distribution overheads. The basis usually adopted is:
 Sales value of goods
 Cost of goods sold
 Gross profit on sales
 Number of orders or units sold

EXPENSES BASIS OF ALLOCATION
Salaries in Sales Department. Estimated time devoted to the sale of various products.
Advertisements Actual amount incurred for each product
Show room expenses Average space occupied by each product
Rent of finished goods, go downs and expenses on own delivery vans. Average quantities delivered during a period

Q 42.What are the methods of re-apportionment of service department expenses over the production departments? Discuss.
ANS. Methods of re-apportionment of service department expenses over the production departments
(i) Direct re-distribution method.
(ii) Step method or non-reciprocal method.
(iii) 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. The basis of apportionment could be no. of workers. H.P of machines.

Step Method or Non-Reciprocal Method : This method gives cognizance to the service rendered by service department to another service department. 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 renders service to the maximum number of other service departments.

Reciprocal Service Method : This method recognises the fact that where there are two or more service departments they may render service to each other and, there these inter-departmental services are to be given due weight while re-distributing the expenses of service department. The methods available for dealing with reciprocal services are:
 Simultaneous equation method
 Repeated distribution method
 Trial & Error method.

Q 43.Explain the cost accounting treatment of unsuccessful Research and Development cost.
ANS. Cost of unsuccessful research is treated as factory overhead, provided the expenditure is normal and is provided in the budget. If it is not budgeted, it is written off to the profit and loss account. If the research is extended for long time, some failure cost is spread over to successful research.

5. NON-INTEGRATED ACCOUNTING

 

Q 44.State benefits of Integrated Accounting.
ANS.  Integrated Accounts is the name given to a system of accounting, whereby cost and financial 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.

The main advantages of Integrated Accounting are as follows:
1.No need for Reconcilation: The question of reconciling costing profit and financial profit does not arise, as there is only one figure of profit.
2. Less efforts: Due to use of one set of books, there is significant saving in efforts made.
3. Less time consuming: No delay is caused in obtaining information provided in books of original entry.
4.Economical Process: It is economical also as it is based on the concept of ‘Centralization of Accounting Function’

Q 45.“Is reconciliation of cost accounts and financial accounts necessary in case of integrated accounting system?”
ANS. In integrated accounting system cost and financial accounts are kept in the same set of books. Such a system will have to afford full information required for Costing as well as for Financial Accounts. In other words, information and data should be recorded in such a way so as to enable the firm to ascertain the cost (together with the necessary analysis) of each product, job, process, operation or any other identifiable activity. It also ensures the ascertainment of marginal cost, variances, abnormal losses and gains. In fact all information that management requires from a system of Costing for doing its work properly is made available. The integrated accounts give full information in such a manner so that the profit and loss account and the balance sheet can be prepared according to the requirements of law and the management maintains full control over the liabilities and assets of its business.
Since, only one set of books are kept for both cost accounting and financial accounting purpose so there is no necessity of reconciliation of cost and financial accounts.

Q 46.Why is it necessary to reconcile the Profits between the Cost Accounts and Financial Accounts?
ANS .When the cost and financial accounts are kept separately, it is imperative that these should be reconciled, otherwise the cost accounts would not be reliable. The reconciliation of two set of accounts can be made, if both the sets contain sufficient detail as would enable the causes of differences to be located. It is, therefore, important that in the financial accounts, the expenses should be analysed in the same way as in cost accounts. It is important to know the causes which generally give rise to differences in the costs & financial accounts. These are:

(i) Items included in financial accounts but not in cost accounts Appropriation of profits
 Income-tax
 Transfer to reserve
 Dividends paid
 Goodwill / preliminary expenses written off
 Pure financial items
 Interest, dividends
 Losses on sale of investments
 Expenses of Co’s share transfer office
 Damages & penalties

(ii) Items included in cost accounts, but not in financial accounts
 Opportunity cost of capital
 Notional rent

(iii) Under / Over absorption of expenses in cost accounts

(iv) Different bases of inventory valuation
Motivation for reconciliation are:
 To ensure reliability of cost data
 To ensure ascertainment of correct product cost
 To ensure correct decision making by the management based on cost & financial data
 To report fruitful financial / cost data

Q 47.What are the essential pre-requisites of integrated accounting system? Discuss.
ANS. (i) The management’s decision about the extent of integration of the two sets of books.
(ii) A suitable coding system must be made available so as to serve the accounting purposes of financial and cost accounts.
(iii) An agreed routine, with regard to the treatment of provision for accruals, pre-paid expenses, other adjustments necessary for preparation of interim accounts.
(iv) Perfect coordination should exist between the staff responsible for the financial and cost aspects of the accounts and an efficient processing of accounting documents should be ensured.

Q 48.Enumerate the factors which cause difference in profits as shown in Financial Accounts and Cost Accounts.
ANS. (a) Items included in financial accounts but not in cost accounts such as: Interest received on bank deposits, loss/profit on sale of fixed assets and investments, dividend, rent received.
(b) Items included in cost accounts on notional basis such as rent of owned building, interest on own capital etc.
(c) Items whose treatment is different in the two sets of accounts such as inventory valuation.

6. JOB AND BATCH COSTING

 

Q 49.What is meant by Job Costing? Give examples of (any four) industries where it is used.
ANS. Job Costing:
Meaning: It is a method of costing which is used when the work is undertaken as per the customer’s special requirement. When an inquiry is received from the customer, costs expected to be incurred on the job are estimated and on the basis of this estimate, a price is quoted to the customer. Actual cost of materials, labour and overheads are accumulated and on the completion of job, these actual costs are compared with the quoted price and thus the profit or loss on it is determined.
Example: Job costing is applicable in printing press, ship-building, heavy machinery, foundry, general engineering works, machine tools, interior decoration, repairs and other similar work.

Q 50.Distinguish between Job costing and batch costing
ANS.According to Job costing, costs are collected and accumulated according to jobs. Each job or unit of production is treated as a separate entity for the purpose of costing. Job costing may be employed when jobs are executed for different customers according to their specifications.

Batch costing is a form of job costing, a lot of similar units which comprises the batch may be used as a cost unit for ascertaining cost. Such a method of costing is used in case of pharmaceutical industry, readymade garments, industries manufacturing parts of TV, radio sets etc.

7. Contract Costing

 

Q 51.Write notes on ‘Escalation Clause’.
ANS. Escalation Clause: This clause is usually provided in the contracts as a safeguard against any likely changes in the price or utilization of material and labour. If during the period of execution of a contract, the prices of materials or labour rise beyond a certain limit, the contract price will be increased by an agreed amount. Inclusion of such a term in a contract deed is known as an ‘escalation clause’.

An escalation clause usually relates to change in price of inputs, it may also be extended to increased consumption or utilization of quantities of materials, labour etc (where it is beyond the control of the contractor). In such a situation the contractor has to satisfy the contractee that the increased utilization is not due to his inefficiency.

Q 52. Discuss briefly the principles to be followed while taking credit for profit on incomplete contract ?
ANS. Principles to be followed while taking credit for profit on incomplete contracts:

The portion of profit to be credited to costing profit and loss account depends on the stage of completion of a contract. The stage of completion of the contract refers to certified work only and uncertified work is not considered.

The transfer of profit to the costing profit and loss account is done as under:

(i)Contract less than 25% complete: If the contract has just started or it is less than 25% complete, no profit is taken into account.
(ii)Contract is 25% or more but less than 50% complete: In this case one third of the notional profit reduced in the ratio of cash received to work certified, may be transferred to the profit and loss account. The amount of profit to be transferred to the profit and loss account may be determined by using the following formula:  1/3 × Notional profit × (Cash received / Work certified)
(iii)Contract is 50% or more but less than 90% complete: In this case, two third of the notional profit, reduced by the portion of cash received to work certified may be transferred to the profit and loss account. In this case the formula to be used is as under:  2/3 × Notional profit × (Cash received / Work certified)
(iv)Contracts nearing completion, say between 90% and 100% complete: When a contract is nearing completion or 90% or more work has been done on a contract. The amount of profit to be credited to costing profit and loss account may be determined by using any one of the following formula.
(a)Estimated profit × (Work certified / Contract price)
(b)Estimated profit × (Work certified / Contract price) × (Cash received / Work certified)
(c)Estimated Profit × (Cost of work to date / estimated total cost)
(d)Estimated profit × (Cost of work to date / estimated total cost) × (Cash received / Work certified )
(e)Notional profit  × (Work certified / contract price)

 
 

Q 53.State the escalation clause in contract costing.
ANS. If during the period of execution of a contract, the prices of materials, or labour etc., rise beyond a certain limit, the contract price will be increased by an agreed amount. Inclusion of such a clause in a contract deed is called an “Escalation Clause”

Q 54.Explain the terms notional profit and retention money in contract costing.
ANS. Notional Profit in contract costing ;
It represents the difference between the value of work certified and cost of work certified.
Notional Profit = Value of work Certified Less Cost of work Certified

 Retention money in contract Costing:
A contractor does not receive the full payment of work certified by the surveyor of work certified by the surveyor. Contractee retains some amount to be paid after some time, when it is ensured that there is no default in the work done by the contractor. If any deficiency or defect is noticed it is to be rectified by the contractor before the release of the retention money. Thus retention money provides a safe guard against the default risk in contract

Q 55. What is cost plus contract? What are its advantages?
ANS. Cost plus contract: Under cost plus contract, the contract price is ascertained by adding a percentage of profit to the total cost of the work. Such types of contracts are entered into when it is not possible to estimate the contract cost with reasonable accuracy due to unstable condition of material, labour services etc.
Following are the advantages of cost plus contract:
(i) The contractor is assured of a fixed percentage of profit. There is no risk of incurring any loss on the contract.
(ii) It is useful specially when the work to be done is not definitely fixed at the time of making the estimate.
(iii) Contractee can ensure himself about the ‘cost of contract’ as he is empowered to examine the books and documents of the contractor to ascertain the veracity of the cost of contract.

 

8. OPERATING COSTING

Q 56.State the different types of Packing Credit.
ANS. Different Types of Packing Credit
Packing credit may be of the following types:
 (i) Clean Packing credit: This is an advance made available to an exporter only on production of a firm export order or a letter of credit without exercising any charge or control over raw material or finished goods. It is a clean type of export advance. Each proposal is weighted according to particular requirements of the trade and credit worthiness of the exporter. A suitable margin has to be maintained. Also, Export Credit Guarantee Corporation (ECGC) cover should be obtained by the bank.
(ii) Packing credit against hypothecation of goods: Export finance is made available on certain terms and conditions where the exporter has pledgeable interest and the goods are hypothecated to the bank as security with stipulated margin. At the time of utilising the advance, the exporter is required to submit alongwith the firm export order or letter of credit, relative stock statements and thereafter continue submitting them every fortnight and whenever there is any movement in stocks.
(iii) Packing credit against pledge of goods: Export finance is made available on certain terms and conditions where the exportable finished goods are pledged to the banks with approved clearing agents who will ship the same from time to time as required by the exporter. The possession of the goods so pledged lies with the bank and is kept under its lock and key.
(iv) E.C.G.C. guarantee: Any loan given to an exporter for the manufacture, processing, purchasing, or packing of goods meant for export against a firm order qualifies for the packing credit guarantee issued by Export Credit Guarantee Corporation.
(v) Forward exchange contract: Another requirement of packing credit facility is that if the export bill is to be drawn in a foreign currency, the exporter should enter into a forward exchange contact with the bank, thereby avoiding risk involved in a possible change in the rate of exchange.

Q 57. How would you account for idle capacity cost in Cost Accounting?
ANS. Idle capacity costs are treated in the following ways in Cost Accounts:
(i) If the idle capacity cost is due to unavoidable reasons: A supplementary overhead rate may be used to recover the idle capacity cost. In this case, the costs are charged to the production capacity utilised.
(ii) If the idle capacity cost is due to avoidable reasons: Such as faulty planning, etc. the cost should be charged to Costing Profit and Loss Account.
(iii) If the idle capacity cost is due to trade depression, etc.,: Being abnormal in nature the cost should also be charged to the Costing Profit and Loss Account.
(iv) If the idle capacity cost is due to seasonal factors, then the cost should be charged to cost of production by inflating overhead rate.

 

 

Q 58. State the method of costing and also the unit of cost for the following industries:
(i) Hotel
(ii) Toy-making
(iii) Steel
(iv) Ship Building
ANS.

  Industry Method of Costing Unit of Cost
1 Hotel Operating Costing Room day/ per bed
2 Toy Making Batch Costing Units/ Batch
3 Steel Process Costing/ Single Costing Per Tonne/ Per MT
4 Ship Building Contract Costing Project/ Unit

Q 59.What do you understand by operating costing? How are composite units computed?
ANS.Meaning of Operating Costing:
Operating Costing is a method of ascertaining costs of providing or operating a service. This  method of costing is applied by those undertakings which provide services rather than production of commodities. This costing method is usually made use of by transport companies, gas and water works departments, electricity supply companies, canteens, hospitals, theatres, schools etc.

Computation of composite units: When two units are merged into one it is called Composite units. It is explained with example as follows.

Composite units i.e. tonnes kms., quintal kms. etc. may be computed in two ways.
(i) Absolute (weighted average) tonnes-kms.
Absolute tonnes-kms., are the sum total of tonnes-kms., arrived at by multiplying various distances by respective load quantities carried.
(ii) Commercial (simple average) tonnes-kms.
Commercial tonnes-kms., are arrived at by multiplying total distance kms., by average load quantity.

9. PROCESS COSTING , JOINT AND BY PRODUCTS

 

Q 60.What is inter-process profit? State its advantages and disadvantages.
ANS. In some process industries the output of one process is transferred to the next process not 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 type industries are as follows:
Advantages:
1. Comparison between the cost of output and its market price at the stage of completion is facilitated.
2. Each process is made to stand by itself as to the profitability.
Disadvantages:
1. The use of inter-process profits involves complication.
2. The system shows profits which are not realised because of stock not sold out

Q 61.Explain the following:
         (i) Explicit costs
         (ii) Engineered costs
ANS (i) Explicit Costs – These costs are also known as out of pocket costs and refer to costs involving immediate payment of cash. Salaries, wages, postage and telegram, printing and stationery, interest on loan etc. are some examples of explicit costs involving immediate cash payment.
(ii) Engineered Costs – These are costs that result specifically from a clear cause and effect relationship between inputs and outputs. The relationship is usually personally observable. Examples of inputs are direct material costs, direct labour costs etc.

Q 62.“Operation costing is defined as refinement of Process costing.”
ANS. Operation costing is concerned with the determination of the cost of each operation rather than the process:
 In the industries where process consists of distinct operations, the operation costing method is applied.
 It offers better control and facilitates the computation of unit operation cost at the end of each operation.

Q 63.Describe briefly, how joint costs upto the point of separation may be apportioned amongst the
joint products under the following methods:
(i) Average unit cost method
(ii) Contribution margin method
(iii) Market value at the point of separation
(iv) Market value after further processing
(v) Net realizable value method.
ANS. (i) Average Unit Cost Method: under this method, total process cost (upto the point of separation) is divided by total units of 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.

(ii) Contribution Margin Method: under this method joint costs 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. If the products are further processed, then all variable cost incurred be added to the variable cost determined earlier. Then contribution is calculated by deducting variable cost from their respective sales values. The fixed costs are then apportioned over the joint products on the basis of contribution ratios.

 (iii) Market Value at the Time of Separation: This method is used for apportioning joincosts to joint products upto the split off point. It is difficult to apply if the market value 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.

 (iv) Market Value after further Processing: Here the basis of apportionment of joint costs is the total sales value of finished products at the further processing. The use of this method is unfair where further processing costs after the point of separation are disproportionate or when all the joint products are not subjected to further processing.

(v) Net Realisable Value Method: Here joint costs is apportioned on the basis of net realisable value of the joint products,
Net Realisable Value = Sale value of joint products (at finished stage)
(-) estimated profit margin
(-) selling & distribution expenses, if any
(-) post split off cost

Q 64.How apportionment of joint costs upto the point of separation amongst the joint products using market value at the point of separation and net realizable value method is done? Discuss
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 to joint products upto the split off point. It is difficult to apply if the market value of the product at the point of separation is not available. It is useful method where further processing costs are incurred disproportionately

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

Q 65. What is inter-process profit? State its advantages and disadvantages.
ANS. Definition of Inter-Process Profit and Its advantages and disadvantages
In some process industries the output of one process is transferred to the next process not 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 type industries are as follows:
 Advantages:
1. Comparison between the cost of output and its market price at the stage of completion is facilitated.
2. Each process is made to stand by itself as to the profitability.
Disadvantages:
1. The use of inter-process profits involves complication.
2. The system shows profits which are not realised because of stock not sold out

Q 66.Explain the following terms in relation to process costing:
(i) Equivalent Production
(ii) Inter-process profit
ANS. (i) Equivalent Production: When opening and closing stocks of work-in-process exist, unit costs cannot be computed 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 equivalent production units so that the unit cost of these uncompleted (W-I-P) units can be obtained. Equivalent Production units = Actual number of units in production × Percentage of work completed. It consists of balance of work done on opening work-in-process, current production done fully and part of work done on closing WIP with regard to different elements of costs viz., material, labour and overhead.

(ii) Inter-Process Profit: In some process industries the output of one process is trans-ferred to the next process not 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.

 

10. STANDARD COSTING

 

Q 67.Describe the various steps involved in adopting standard costing system in an organization.
ANS. The Steps of standard costing is as below:
(i) Setting of Standards: The first step is to set standards which are to be achieved.
(ii) Ascertainment of actual costs: Actual cost for each component of cost is ascertained. Actual costs are ascertained from books of account, material invoices, wage sheet, charge slip etc.
(iii) Comparison of actual cost and standard cost: Actual costs are compared with the standards costs and variances are determined.
(iv) Investigation of variances: Variances arises are investigated for further action. Based on this performance is evaluated and appropriate actions are taken.
(v) Disposition of variances: Variances arise are disposed off by transferring it the relevant accounts (costing profit and loss account) as per the accounting method (plan) adopted.

11.MARGINAL COSTING

Q 68.Elaborate the practical application of Marginal Costing.
ANS. Practical applications of Marginal costing:
(i) Pricing Policy: Since marginal cost per unit is constant from period to period, firm decisions on pricing policy can be taken particularly in short term.
(ii) Decision Making: Marginal costing helps the management in taking a number of business decisions like make or buy, discontinuance of a particular product, replacement of machines, etc
(iii) Ascertaining Realistic Profit: Under the marginal costing technique, the stock of finished goods and work-in-progress are carried on marginal cost basis and the fixed expenses are written off to profit and loss account as period cost. This shows the true profit of the period.
(iv) Determination of production level: Marginal costing helps in the preparation of break-even analysis which shows the effect of increasing or decreasing production activity on the profitability of the company.

Q 69.Explain and illustrate cash break-even chart.
ANS In cash break-even chart, only cash fixed costs are considered. Non-cash items likedepreciation etc. are excluded from the fixed cost for computation of break-even point. It depicts the level of output or sales at which the sales revenue will equal to total cash outflow.
It is computed as under:
Cash BEP (Unit)= Cash Fixed Cost/Cost per Units

Hence for example suppose insurance has been paid on 1st January, 2006 till 31st December, 2010 then this fixed cost will not be considered as a cash fixed cost for the period 1st January, 2008 to 31st December, 2009.
 
Q 70.What do you understand by Key factor? Give two examples of it.
ANS. Key factor is a factor which at a particular time or over a period limits the activities of an undertaking. It may be the level of demand for the products or service or it may be the shortage of one or more of the productive resources.
Examples of key factors are:
(a) Shortage of raw material.
(b) Shortage of Labour.
(c) Plant capacity available.
(d) Sales capacity available.
(e) Cash availability.

12.BUDGET AND BUDGETARY CONTROL

Q 71.State the considerations on which capital expenditure budget is prepared.
ANS. The preparation of Capital Expenditure Budget is based on the following considerations:
1. Overhead on production facilities of certain departments as indicated by the plant utilisation budget.
2. Future development plans to increase output by expansion of plant facilities.
3. Replacement requests from the concerned departments
4. Factors like sales potential to absorb the increased output, possibility of price reductions, increased costs of advertising and sales promotion to absorb increased output, etc.

Q 72.Describe the salient features of budget manual.
ANS. Salient features of Budget Manual
• Budget manual contains many information which are required for effective budgetary planning.
• A budget manual is a collection of documents that contains key information for those involved in the planning process.
• An introductory explanation of the budgetary planning and control process, including a statement of the budgetary objective and desired results is included in Budget Manual
• Budget Manual contains a form of organisation chart to show who is responsible for the preparation of each functional budget and the way in which the budgets are interrelated.
• In contains a timetable for the preparation of each budget.
• Copies of all forms to be completed by those responsible for preparing budgets, with explanations concerning their completion is included in Budget Manual.

Q 73.Describe the steps involved in the budgetary control technique.
ANS. There are certain steps involved in the budgetary control technique. They are as follows:
(i) Definition of objectives: A budget being a plan for the achievement of certain operational objectives, it is desirable that the same are defined precisely. The objectives should be written out; the areas of control demarcated; and items of reve-nue and expenditure to be covered by the budget stated.
(ii) Location of the key (or budget) factor: There is usually one factor (sometimes there may be more than one) which sets a limit to the total activity. Such a factor is known as key factor. For proper budgeting, it must be located and estimated properly.
(iii) Appointment of controller: Formulation of a budget usually required whole time services of a senior executive known as budget controller; he must be assisted in this work by a Budget Committee, consisting of all the heads of department along with the Managing Director as the Chairman.
 (iv) Budget Manual: Effective budgetary planning relies on the provision of adequate information which are contained in the budget manual. A budget manual is a collection of documents that contains key information for those involved in the planning process.
  (v) Budget period: The period covered by a budget is known as budget period. The Budget Committee determines the length of the budget period suitable for the business. It may be months or quarters or such periods as coincide with period of trading activity.
 (vi) Standard of activity or output: For preparing budgets for the future, past statistics cannot be completely relied upon, for the past usually represents a combination of good and bad factors. Therefore, though results of the past should be studied but these should only be applied when there is a likelihood of similar conditions repeating in the future.

Q 74. State the difference between Fixed Budget and Flexible Budget.
ANS.

  Fixed Budget Flexible Budget
1. Flexible Budget It can be re-casted on the basis of activity level to be achieved. Thus it is not rigid.
2. It operates on one level of activity and under one set of conditions It consists of various budgets for different level of activity.
3. If the budgeted and actual activity levels differ significantly, then cost ascertainment and price fixation do not give a correct picture. It facilitates the cost ascertainment and price fixation at different levels of activity.
4. Comparisons of actual and budgeted targets are meaningless particularly when there is difference between two levels. It provided meaningful basis of comparison of actual and budgeted targets.
 
Q 75.Explain briefly the concept of ‘flexible budget’.
ANS. A flexible budget is defined as “a budget which, by recognizing the difference between fixed, semi-variable and variable cost is designed to change in relation to the level of activity attained”. A fixed budget, on the other hand is a budget which is designed to remain unchanged irrespective of the level of activity actually attained. In a fixed budgetary control, budgets are prepared for one level of activity whereas in a flexibility budgetary control system, a series of budgets are prepared one for the each of a number of alternative production levels or volumes. Flexible budgets represent the amount of expense that is reasonably necessary to achieve each level of output specified. In other words, the allowances given under flexibility budgetary control system serve as standards of what costs should be at each level of output.

Q 76.Discuss the components of budgetary control system.
ANS. 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. The functional budgets are broadly grouped under the following heads:
(a) Physical Budgets – Sales Qty, Product Qty., Inventory, Manpower budget.
(b) Cost Budgets – Manufacturing Cost, Administration Cost, sales & distribution cost, R & D Cost.
(c) Profit Budget

Q 77.List the eight functional budgets prepared by a business.
ANS. The various commonly used Functional budgets are:
 Sales Budget
 Production Budget
 Plant Utilisation Budget
 Direct Material Usage Budget
 Direct Material Purchase Budget
 Direct Labour (Personnel) Budget
 Factory Overhead Budget
 Production Cost Budget

Q 78. Give the method of costing and the unit of cost against the under noted industries:
       (i) Road transport
       (ii) Steel
       (iii) Bicycles
       (iv) Bridge construction
ANS. 

  Industry Method of Costing Suggestive Unit of Cost
1 Road Transport Operating Costing Passenger k.m. or tonne k.m.
2 Steel Process Costing/ Single or Unit Costing Tonne/ Metric Ton (MT)/ per kg/ per bar
3 Bicycles Multiple Costing Number/ per piece
4 Bridge Construction Contract Costing Project/ Unit

Q 79.Explain Conversion cost 
ANS. Conversion cost: It is the cost of transforming basic material into finished goods Conversion Cost consists of direct wages, direct expenses and manufacturing overheads. So,
Conversion Cost= Direct labour Cost + Direct Expenses + Manufacturing Overhead
Or
Conversion Cost = Factory Cost – Direct Materials Cost

Q 31.State the unit of cost for the followings:
(1) Transport
(2) Power
(3) Hotel
(4) Hospital
ANS.  Transport  – Per passenger k.m. or per tonne k.m.
Power       -Per Kilo – watt (kw) hour
Hotel         -Per room day / or per meal
Hospital    -Per Patient – day / or per bed/day

 

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