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1 KEY - INTERNAL ASSESSMENT TEST 1 Date : 20/08/2018 Subject & Code : Cost Management Name of faculty : Dr.R.Duraipandian Note: Answer all questions (17MBAFM305) Max Marks : 40 Section : Finance Time: 8:30 10:00 AM 1(a) What is cost centres. Cost centers and profit centers are typically treated differently within an organization. Becausee a cost center doesn't produce a profit directly from its activities, managers of cost centers are responsible for keeping their costs in line or below budget. Examples of cost centers include marketing, human resources and research and development. (2 marks) (b) How activity based costing more appropriate in an advanced technology based manufacturing environment. Answer Key: Activity-Based Costing (ABC) is that costing in which costs are first traced to activities and then to the products. It is a costing system which focuses on activities performed to produce products. Activities become the focal points for cost accumulation. This cost system assumes that activities are responsible for the incurrence of costs and products create the demands for activities. There are two primary stages in ABC first, tracing cost to activities; second, tracing activities to products. The different steps in the two stages of ABC are explained below: Classification of Activities in Manufacturing Organizations: (6 marks) (c) Appropriate Activities are identified and classified into different categories or segments of the production process in a manufacturing concern. The grouping of activities is preferably done using different levels at which activities are performed. Broadly, activities are classified into one of four activity categories: 1. Unit level activities - Performed for each unit sold 2. Batch level activities - Performed for each sales order 3. Product level activities - Performed to obtain or maintain each customer 4. Facility level activities - Performed to maintain the general marketing function In a factory, two types of fans are produced namely, popular and proxy. Ascertain the cost and profit per unit sold from the following particulars.

2 Popular Proxy Materials Labour 8, 200 9, 450 4, 450 4, 900 Works overhead is 60% of labour and office overhead is 20% on works cost. The selling expenses per fan sold are Re.1. The selling price of popular fan is 275 and proxy fan is units of popular and 50 units of proxy are sold. There is no opening or closing stock. Material Popular (40 Units) Total 8, Proxy (50 Units) Total 9, Labour 4, , Prime Cost 12,, , Works overhead Works Cost ,, ,940 17, Works overhead Cost of Production 3,064 18,, ,458 20, Selling Expenses Cost of Sales 40 18,, , (a) Loss (bal. fig.) (7,424) (185.60) (798) (15.96) Sales 11,, , Briefly define any two techniques of costing.. Standard costing: In this technique, standard cost is predetermined as target of performance, and actual performance is measured against the standard. (2 marks) Budgetary control: It is a technique applied to the control of total expenditure by comparing actual performance with planned performance.

3 Marginal costing: In this technique, special interest and importance. separation of costs into fixed and variable (marginal) is of Total absorption Marginal costing: In this technique, separation of costs into fixed and variable (marginal) is of special interest and importance. It is a traditional method of costing whereby total costs (fixed and variable) are charged to products. Uniform costing: In this technique, separation of costs into fixed and variable (marginal) is of special interest and importance. (b) Explain in detail about different types of "Cost Classifications". The cost data are classified into various categories according to: Elements of a product (product cost): The cost elements of a product (its integral components) are: (i) Materials, (ii) Direct Labour and (iii) Factory overheads Relationship to production: Based on relationship to production, the two categories of costs are: (i) Prime costs and (ii) Conversion costs. Relationship to volume: On the basis of relationship to volume, costs are classified as variable, fixed and Mixed or semi-variable. Ability to trace: From the viewpoint of ability to trace it to specific jobs/departments/sales territories, and so on, cost may be (i) Direct, and (ii) Indirect. Department where incurred: A manufacturing company has typically two departments: (i) Production and (ii) Service. Functional areas/activities performed Cost classification by function relate to manufacturing, marketing, administrative, and financing. Period charged to income: Based on the period charged to income, cost are classified into product and period costs. Relationship to planning, controlling and decision making: Standard and Budgeted Costs, Controllable and Non-controllable Costs, Committed and Discretionary fixed Costs, Relevant and Irrelevant Costs, (6 marks)

4 Differential Costs, Opportunity Costs, Shut-down Costs (c) A company manufacturing two products, furnishes the following data for a year: Products Annual Output (Units) Total Machine Hours Total number of purchase orders Total number of set-ups A 5,000 B 60,000 20, ,20, The annual overheads are as under: Volume related activity costs Set-up related costs Purchase related costs 5,50,000 8,20,000 6,18,000 You are required to calculate the cost per unit of each product A and B based on Activity Based Costing Method. Answer Key: Machine Hour Rate = 3.93 Cost of one set-up = 12, Cost of one purchase order = 1, Cost to volume related activities Cost related to setups 78,600 4,71,600 2,56,250 5,63, In respect of a factory the following figures have been obtained for the year Cost of materials 6,00,000; Direct wages 5,00,000; Factory overheads 3,00,000; Administrative overheads 3,36,000; Selling overheads 2,24,000; Distribution overheads 1,40,000 and Profit 4,20,000. A work order has

5 been executed in 2018 and the following expenses have been incurred. Materials 8000; Wages Assume that in 2018, the rate of factory overheads has increase by 20%, administrative and selling overheads have gone up by 12.5% and distribution expenses have gone down by 10%. At what price should the product be sold so as to earn the same rate of profit on selling price as in 2017? Factory overhead is based on direct wages, while all other overheads are based on works cost. Cost Sheet Prime Cost ,00,000 13,000 Cost of Production 17,36,000 21,082 Cost of Sales 21,00,000 25,564 Profit 4,20,000 5,113 Sales 25,20,000 30,677