UCP51 COST ACCOUNTING-I UNIT-I COST ACCOUNTING & COST SHEET Type: 20% Theory 80% Problem Question & Answers

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1 ACADEMIC YEAR: REGULATION CBCS UCP51 COST ACCOUNTING-I UNIT-I COST ACCOUNTING & COST SHEET Type: 20% Theory 80% Problem Question & Answers PART A ANSWERS 1.What is meant by cost accounting? (April / May 2014,2016) Cost Accounting primarily deals with collection, analysis of relevant of cost data for interpretation and presentation for various problems of management. Cost accounting accounts for the cost of products, service or an operation. 2. Define cost accounting. April/ May2015 Cost Accounting is defined as, the establishment of budgets, standard costs and actual costs of operations, processes, activities or products and the analysis of variances, profitability or the social use of funds. 3. What is Absorption Costing? In this costing system, costs are absorbed in the product units irrespective of their nature. In other words, all fixed and variable costs are absorbed in the products. 4. What is Marginal Costing? Marginal Costing, only variable costs are charged to the products and fixed costs are written off to the Costing Profit and Loss A/c. Naturally, the fixed costs will not enter into the inventories and they will be valued at marginal costs only. 5. What is Fixed cost? Out of the total costs, some costs remain fixed irrespective of changes in the production volume. These costs are called as fixed costs. 6. What is Variable cost? These costs are variable in nature, they change according to the volume of production. Their variability is in the same proportion to the production. 7. What is Semi- Variable cost? Certain costs are partly fixed and partly variable. In other words, they contain the features of both types of costs. These costs are neither totally fixed nor totally variable. Maintenance costs, supervisory costs etc are examples of semi-variable costs. These costs are also called as stepped costs. RAAK/B.COM(CA)/ARUNAGIRI/III YEAR/V Sem/UCP 51/COST. ACC /UNIT-1 Unit 1 Answers Page 1 of 20

2 ACADEMIC YEAR: REGULATION CBCS What is cost sheet? (April /May 2015) Cost Sheet is a statement of cost showing the total cost of production and profit or loss from a particular product or service. A Cost Sheet shows the cost in a systematic manner and element wise. 9. What is Prime cost? Prime cost consists of direct material, direct wages and direct expenses. In other words Prime cost represents the aggregate of cost of material consumed, productive wages, and direct expenses. Prime Cost = Direct material + Direct Wages + Direct expenses. 10. How material consumed is calculated in Cost sheet? Material consumed = Material purchased + Opening stock of material Closing stock of material 11.What is Factory Cost? Addition to prime cost it includes works or factory overheads. Factory overheads consist of cost of indirect material, indirect wages, and indirect expenses. Factory cost is also known as works cost, production or manufacturing cost. Factory cost = Prime cost + Factory overheads 12. What is Total cost of production? Office and administrative overheads are added to factory or works cost, total cost of production is found. Cost of production = Factory cost + Office and Administration. 13.What is cost of goods sold? Cost of goods sold is not necessary, that all the goods produced in a period are sold in the same period. The cost of opening stock of finished goods is added in the total cost of production in the current period and cost of closing stock of finished goods is deducted. 14. What is cost unit? The cost unit is a unit of product, service or time in relation to which cost may be ascertained. 15. What is meant by cost of sales? Selling and distribution overheads are added to the total cost of production, total cost is arrived at. This cost is also termed as cost of Sales. RAAK/B.COM(CA)/ARUNAGIRI/III YEAR/V Sem/UCP 51/COST. ACC /UNIT-1 Unit 1 Answers Page 2 of 20

3 ACADEMIC YEAR: REGULATION CBCS What is a sales? The profit margin is added to the total cost, sales are arrived at. Excess of sales over total cost is termed as profit. When total cost exceeds sales, it is termed as loss. 17.What is cost control and reduction? Cost Control and Reduction is one of the important functions of cost accounting. Cost control implies various actions taken in order to ensure that the cost do not rise beyond a particular level while cost reduction means reducing the existing cost of production. 18. What is quotation?(april/ May 2015) A quotation is a document that a vendor or service provider would give to a customer to describe specific goods and services that they may provide and its cost. Besides the term quotation can also be referred by other terms like Bid, Quote, Estimate, Tender & Proposal. Quotation means any offer for supply of goods or services received or collected from a supplier other than a tender. 19. What are the different costing system? * Historical costing * Absorption costing * Marginal costing * Uniform costing 20. Classify the cost according to the elements. * Material * Labour * Expenses 21. Classify the cost according to the behavior. * Fixed cost * Variable cost * Semi-variable cost 22. Classify the cost according to the function. * Production cost * Administration cost * Selling & distribution cost * Research & Development cost 23. What are the methods of costing? * Job costing * Batch costing * Process costing RAAK/B.COM(CA)/ARUNAGIRI/III YEAR/V Sem/UCP 51/COST. ACC /UNIT-1 Unit 1 Answers Page 3 of 20

4 ACADEMIC YEAR: REGULATION CBCS * Operating costing * Contract costing 24. What is tender? Tender" means an invitation to offer for an item/items or work. All Public Sector purchases/contracts in India, over a certain value has to be publicly notified. 25. Classify the cost according to the management decision making. * Marginal costing * Differential costing * Opportunity costing * Abnormal costing * Controllable costing. PART B ANSWERS 1. Explain the importance of Cost Sheet. a. Cost ascertainment The main objective of the cost sheet is to ascertain the cost of a product. Cost sheet helps in ascertainment of cost for the purpose of determining cost after they are incurred. It also helps to ascertain the actual cost or estimated cost of a Job. b. Fixation of selling price To fix the selling price of a product or service, it is essential to prepare the cost sheet. It helps in fixing selling price of a product or service by providing detailed information of the cost. c.help in cost control For controlling the cost of a product it is necessary for every manufacturing unit to prepare a cost sheet. Estimated cost sheet helps in the control of material cost, labour cost and overheads cost at every point of production. d. Facilitates managerial decisions It helps in taking important decisions by the management such as, whether to produce or buy a component, what prices of goods are to be quoted in the tender, whether to retain or replace an existing machine etc. 2. Write down the objectives of cost accounting. 1.To ascertain the cost of production on per unit basis, for example, cost per kg, cost per meter etc. 2. Cost accounting helps in the determination of selling price. Cost accounting enables to determine the cost of production on a scientific basis and it helps to fix the selling price. 3. Cost accounting helps in cost control and cost reduction. 4. Ascertainment of division wise, activity wise and unit wise profitability RAAK/B.COM(CA)/ARUNAGIRI/III YEAR/V Sem/UCP 51/COST. ACC /UNIT-1 Unit 1 Answers Page 4 of 20

5 ACADEMIC YEAR: REGULATION CBCS becomes possible through cost accounting. 5.Cost accounting also helps in locating wastages, ineffeciencies and other loopholes in the production processes/services offered. 6.Cost accounting helps in presentation of relevant data to the management which helps in decision making. 7. Cost accounting also helps in estimation of costs for the future. 3. Write down the essentials of a good Costing system. * Costing system adopted in any organization should be suitable to its nature and size of the business and its information needs. * A costing system should be such that it is economical and the benefits derived from the same should be more than the cost of operating of the same. * Costing system should be simple to operate and understand. Unnecessary complications should be avoided. * Costing system should ensure proper system of accounting for material, labour and overheads and there should be proper Classification made at the time of recording of the transaction itself. * Before designing a costing system, need and objectives of the system should be identified. * The costing system should ensure that the final aim of ascertaining of cost as accurately possible should be achieved. 4. Explain the different costing systems. A. Historical Costing :- In this system, costs are ascertained only after they are incurred and that is why it is called as historical costing system. It is ascertained by past data. B. Absorption Costing :- In this type of costing system, costs are absorbed in the product units irrespective of their nature. In other words, all fixed and variable costs are absorbed in the products. It is based on the principle that costs should be charged or absorbed to whatever is being costed, whether it is a cost unit, cost center. C. Marginal Costing :- In Marginal Costing, only variable costs are charged to the products and fixed costs are written off to the Costing Profit and Loss A/c. The principle followed in this case is that since fixed costs are largely period costs, they should not enter into the production units. Naturally, the fixed costs will not enter into the inventories and they will be valued at marginal costs only. D. Uniform Costing :- This is not a distinct method of costing but is RAAK/B.COM(CA)/ARUNAGIRI/III YEAR/V Sem/UCP 51/COST. ACC /UNIT-1 Unit 1 Answers Page 5 of 20

6 ACADEMIC YEAR: REGULATION CBCS the adoption of identical costing principles and procedures by several units of the same industry or by several undertakings by mutual agreement. Uniform costing facilitates valid comparisons between organizations and helps in eliminating 5. Explain the importance and limitations of cost accounting. 1. Importance to Management Cost accounting provides invaluable help to management. It is difficult to indicate where the work of cost accountant ends and managerial control begins. The advantages are as follows : Helps in ascertainment of cost Cost accounting helps the management in the ascertainment of cost of process, product, Job, contract, activity, etc., by using different techniques such as Job costing and Process costing. Aids in Price fixation By using demand and supply, activities of competitors, market condition to a great extent, also determine the price of product and cost to the producer does play an important role. The producer can take necessary help from his costing records. Helps in Cost reduction Cost can be reduced in the long-run when cost reduction programme and improved methods are tried to reduce costs. 2. Importance to Employees Worker and employees have an interest in which they are employed. An efficient costing system benefits employees through incentives plan in their enterprise, etc. As a result both the productivity and earning capacity increases. 3. Cost accounting and creditors Suppliers, investor, financial institution and other moneylenders have a stake in the success of the business concern and therefore are benefited by installation of an efficient costing system. They can base their judgement about the profitability and prospects of the enterprise upon the studies and reports submitted by the cost accountant. 4. Importance to National Economy An efficient costing system benefits national economy by stepping up the government revenue by achieving higher production. The overall economic developments of a country take place due to efficiency of production. 5. Data Base for operating policy Cost Accounting offers a thoroughly analysed cost data which forms the basis of formulating policy regarding day to day business. The limitations of cost accounting: It is expensive because analysis, allocation and absorption of overheads require considerable amount of additional work. The results shown by cost accounts differ from those shown by financial accounts. Preparation of reconciliation statements frequently is necessary to verify their accuracy. This leads to unnecessary increase in workload. RAAK/B.COM(CA)/ARUNAGIRI/III YEAR/V Sem/UCP 51/COST. ACC /UNIT-1 Unit 1 Answers Page 6 of 20

7 ACADEMIC YEAR: REGULATION CBCS It is unnecessary because it involves duplication of work. Some industrial units are functioning efficiently without any costing system. Costing system itself does not control costs. If the management is alert and efficient, it can control cost without the help of the cost accounting. 6. Difference between financial and cost accounting. FINANCIAL ACCOUNTING 1. It aims at finding out results of accounting year in the form of Profit and Loss Account and Balance Sheet. 2. It is more attached with reporting the results and position of business to persons and authorities other than management like government, creditors, investors, owners etc. 3. Financial Accounting data is historical in nature 4. In financial accounting, the major emphasis is in cost classification based on type of transactions, e.g. salaries, repairs, insurance, stores etc. 5. In financial accounting, only those transactions are recorded which can be expressed in monetary terms. 6. It aims at presenting true and fair view of the Profit and loss position as well as financial position. 7. Financial Accounts are subject to statutory audit to verify whether they disclose a true and fair view of the Profit and loss as well as financial position COST ACCOUNTING 1. It aims at computing cost of production/ service in a scientific manner and then cost control and cost 2. It is an internal reporting system for an organization s own management for decision making. 3. It not only deals with historical data but is also futuristic in approach. 4. In cost accounting, classification is basically on the basis of functions, activities, products, process and on internal planning and control and information needs of the organization. 5. Cost accounting uses both monetary as well as quantitative information. 6. It aims at computing true and fair view of the cost of production/services offered by the firm. 7. Cost accounts are subject to cost audit which verifies whether the cost accounts disclose true and fair view of the cost of production of the company. RAAK/B.COM(CA)/ARUNAGIRI/III YEAR/V Sem/UCP 51/COST. ACC /UNIT-1 Unit 1 Answers Page 7 of 20

8 ACADEMIC YEAR: REGULATION CBCS Calculate prime cost from the following particulars for a production unit: Cost of material purchased 30,000 Opening stock of material 6,000 Closing stock of material 4,000 Wages paid 3,000 Rent of hire of a special machine for production 5,000 Rs. Statement showing Prime Cost Details Direct Material: Material Consumed Amount (Rs.) Opening stock of material 6,000 Add : Material Purchased 30,000 Material available for consumption 36,000 Less :Closing stock of material 4,000 Material consumed 32,000 Direct Labour : Wages 3,000 Direct Expenses: Rent of hire a special machine 5,000 Prime cost 40,000 RAAK/B.COM(CA)/ARUNAGIRI/III YEAR/V Sem/UCP 51/COST. ACC /UNIT-1 Unit 1 Answers Page 8 of 20

9 ACADEMIC YEAR: REGULATION CBCS Calculate factory cost from the following particulars: Rs. Material consumed 60,000 Productive wages 20,000 Direct Expenses 5,000 Consumable stores 2,000 Oil grease/lubricating 500 Salary of a factory manager 6,000 Unproductive wages 1,000 Factory rent 2,000 Repair and Depreciation on Machine 600 Statement showing Factory cost Details Amount (Rs.) Material consumed 60,000 Productive wages 20,000 Direct Expenses 5,000 PRIME COST 85,000 Add : Factory overheads Indirect Material: Consumable stores 2,000 Oil grease/lubricating Indirect Labour: Salary of a factory manager 6,000 Unproductive wages 1, Indirect Expenses: Factory rent 2,000 Repair and Depreciation on Machine Factory cost RAAK/B.COM(CA)/ARUNAGIRI/III YEAR/V Sem/UCP 51/COST. ACC /UNIT-1 Unit 1 Answers Page 9 of 20

10 ACADEMIC YEAR: REGULATION CBCS From the following information calculate the works cost. Rs. Direct material 80,000 Direct Labour 22,000 Direct Expenses 5,000 Factory overheads 12,000 Work-in-progress: Opening stock 13,000 Closing stock 7,000 STMENT SHOWING FACTORY COST Details Amount (Rs.) Direct Material: Material Consumed 80,000 Direct Labour: Productive wages 22,000 Direct Expenses 5,000 Prime cost 1,07,000 Factory overheads 12,000 Factory Cost (Gross) 1,19,000 Add: Opening stock of work-in-progress 13,000 1,32,000 Less: Closing stock of work-in-progress 7,000 Factory cost 1,25, From the following information calculate the total cost of production Rs. Direct material 90,000 Direct Labour 32,000 Direct Expenses 9,000 Factory overheads 25,000 Office and administration overheads 18,000 RAAK/B.COM(CA)/ARUNAGIRI/III YEAR/V Sem/UCP 51/COST. ACC /UNIT-1 Unit 1 Answers Page 10 of 20

11 ACADEMIC YEAR: REGULATION CBCS STATEMENT SHOWING TOTAL COST OF PRODUCTION Details Amount (Rs.) Direct material Direct Labour Direct Expenses 9000 PRIME COST Factory overheads WORKS COST Office and administration overheads TOTAL COST OF PRODUCTION PART C ANSWERS 1. Explain the costs that can classified on the basis of management decision making. *Marginal Cost :- Marginal cost is the change in the aggregate costs due to change in the volume of output by one unit. Marginal cost can be effectively used for decision making in various areas. *Differential Costs :- Differential costs are also known as incremental cost. This cost is the difference in total cost that will arise from the selection of one alternative to the other. *Opportunity Costs :- It is the value of benefits sacrificed in favor of an alternative course of action. It is the maximum amount that could be obtained at any given point of time if a resource was sold or put to the most valuable alternative use that would be practicable. Opportunity cost of goods or services is measured in terms of revenue which could have been earned by employing that goods or services in some other alternative uses. *Relevant Cost :- The relevant cost is a cost which is relevant in various decisions of management. Decision making involves consideration of several alternative courses of action. In this process, whatever costs are relevant are to be taken into consideration. RAAK/B.COM(CA)/ARUNAGIRI/III YEAR/V Sem/UCP 51/COST. ACC /UNIT-1 Unit 1 Answers Page 11 of 20

12 ACADEMIC YEAR: REGULATION CBCS *Replacement Cost :- This cost is the cost at which existing items of material or fixed assets can be replaced. Thus this is the cost of replacing existing assets at present or at a future date. *Abnormal Costs :- It is an unusual or a typical cost whose occurrence is usually not regular and is unexpected. This cost arises due to some abnormal situation of production. Abnormal cost arises due to idle time, may be due to some unexpected heavy breakdown of machinery. *Controllable Costs :- In cost accounting, cost control and cost reduction are extremely important. In fact, in the competitive environment, cost control and reduction are the key words. Hence it is essential to identify the controllable and uncontrollable costs. Controllable costs are those which can be controlled or influenced by a conscious management action. For example, costs like telephone, printing stationery etc. *Shutdown Cost :- These costs are the costs which are incurred if the operations are shut down and they will disappear if the operations are continued. Examples : costs of sheltering the plant and machinery and construction of sheds for storing exposed property. Computation of shutdown costs is extremely important for taking a decision of continuing or shutting down operations. *Capacity Cost :- These costs are normally fixed costs. The cost incurred by a company for providing production, administration and selling and distribution capabilities in order to perform various functions. Capacity costs include the costs of plant, machinery and building for production, warehouses and vehicles for distribution and key personnel for administration. These costs are in the nature of long-term costs and are incurred as a result of planning decisions. *Urgent Costs :- These costs are those which must be incurred in order to continue operations of the firm. For example, cost of material and labour must be incurred if production is to take place. 2. Explain the various classifications of cost. A. Classification according to elements :- Costs can be classified according to the elements. There are three elements of costing, viz. material, labour and expenses. Total cost of production/ services can be divided into the three elements to find out the contribution of each element in the total costs. B. Classification according to nature :- *Direct and Indirect :- Expenses which are identifiable / traceable are called direct expenses. Expenses which are not identifiable/ traceable are called indirect expenses. These identifiable and unidentifiable things are happened in labour, materials and wages. RAAK/B.COM(CA)/ARUNAGIRI/III YEAR/V Sem/UCP 51/COST. ACC /UNIT-1 Unit 1 Answers Page 12 of 20

13 ACADEMIC YEAR: REGULATION CBCS C. Classification according to behavior :- *Fixed Costs :- Out of the total costs, some costs remain fixed irrespective of changes in the production volume. These costs are called as fixed costs Examples of these costs are salaries, insurance, rent, etc. *Variable Costs :- These costs are variable in nature, they change according to the volume of production. Their variability is in the same proportion to the production. *Semi-variable Costs : Certain costs are partly fixed and partly variable. In other words, they contain the features of both types of costs. These costs are neither totally fixed nor totally variable. Maintenance costs, supervisory costs etc are examples of semi-variable costs. These costs are also called as stepped costs. D. Classification according to functions :- *Production Costs :- All costs incurred for production of goods are known as production costs. *Administrative Costs :- Costs incurred for administration are known as administrative costs. Examples of these costs are office salaries, printing and stationery, office telephone, office rent, office insurance etc. *Selling and Distribution Costs :- All costs incurred for procuring an order are called as selling costs while all costs incurred for execution of order are distribution costs. Market research expenses, advertising, sales staff salary, sales promotion expenses are some of the examples of selling costs. Transportation expenses incurred on sales, warehouse rent etc are examples of distribution costs. *Research and Development Costs :- Research and development has become one of the important functions of a business organization. Expenditure incurred for research and development can be classified as Research and Development Costs. E. Classification according to time *Historical Costs :- These are the costs which are incurred in the past, i.e. in the past year, past month or even in the last week or yesterday. The historical costs are ascertained after the period is over. *Predetermined Cost :- These costs relating to the product are computed in advance of production, on the basis of a specification of all the factors affecting cost and cost data. Pre determined costs may be either standard or estimated. Standard Cost is a predetermined calculation of how much cost should be under specific working conditions. It is based on technical studies regarding material, labour and expenses.. F. Classification of costs for Management decision making RAAK/B.COM(CA)/ARUNAGIRI/III YEAR/V Sem/UCP 51/COST. ACC /UNIT-1 Unit 1 Answers Page 13 of 20

14 ACADEMIC YEAR: REGULATION CBCS *Marginal Cost :- Marginal cost is the change in the aggregate costs due to change in the volume of output by one unit. Marginal cost can be effectively used for decision making in various areas. *Differential Costs :- Differential costs are also known as incremental cost. This cost is the difference in total cost that will arise from the selection of one alternative to the other. *Opportunity Costs :- It is the value of benefits sacrificed in favor of an alternative course of action. It is the maximum amount that could be obtained at any given point of time if a resource was sold or put to the most valuable alternative use that would be practicable. Opportunity cost of goods or services is measured in terms of revenue which could have been earned by employing that goods or services in some other alternative uses. 3. Explain the factors and practical difficulties for installation of costing system. Factors and practical difficulties for installation of costing system I.Size of the firm :- Size of the firm is an extremely important factor in designing a cost accounting system. As the size of the firm and its business grows, the volume and complexity of the cost data also grows. In such situation, the cost accounting system should be capable of supplying such information. II. Manufacturing Process :- Process of manufacturer changes from industry to industry. In some industries, there may be a continuous process of production while in some batch or job type of production may be in operation. A cost accounting system should be such that the manufacturing process is taken into consideration and cost data is collected accordingly. III. Nature and Number of Products :- If a single product is produced, all costs like material, labour and indirect expenses can be directly allocated to that product. But if more than one product is manufactured, the question of allocation and apportionment as well as absorption of indirect expenses ( Overheads ) arises and hence the cost accounting system should be designed accordingly as more complex data will be required. IV. Management Control Needs :- The designing of a cost accounting system in a business organization is guided by the management control requirements. The costing system should supply data to persons at different levels in the organization to take suitable action in their respective areas. V. Raw Materials :- The designing of a cost accounting system in a business is also guided by the raw materials required for the production. The nature of raw materials and the degree of waste therein influence the designing of costing system. There are some materials which have a high degree of spoilage. RAAK/B.COM(CA)/ARUNAGIRI/III YEAR/V Sem/UCP 51/COST. ACC /UNIT-1 Unit 1 Answers Page 14 of 20

15 ACADEMIC YEAR: REGULATION CBCS VI. Organization Structure :- The structure of the organization also plays a vital role in designing a costing system. The system should correspond to the hierarchy of the organization. VII. External Factors :- External factors are also important in designing of a costing system. For example, Cost Accounting Record Rules have been mandatory for certain types of industries. Practical Difficulties in Installation of Costing system I. Top Management of an organization may not give necessary support and recognition to the costing system installed in an organization. Due to lack of support, this system may not give desired results. II. There may be resistance from existing accounting staff due to fear of losing job recognition and importance after the implementation of the system. III. Employees of other departments may not co-operate for installation of costing system due to fear of increase in workload or revealing of ineffeciency. IV. The foremen, supervisors, workers and other operating level staff may resent the introduction of costing system due to the fear on increasing of workload. V. Shortage of qualified and effecient staff may be another difficulty in installing and operating a costing system. 4. Specimen for cost sheet. COST SHEET FOR THE PERIOD ---- PRODUCTION OF ---UNITS Particulars Amount (Rs.) Amount (Rs.) A. Direct Materials Opening Stock + Purchases + Carriage inwards - Closing Stock B. Direct Wages C. Direct Expenses I. Prime Cost ( A + B + C ) RAAK/B.COM(CA)/ARUNAGIRI/III YEAR/V Sem/UCP 51/COST. ACC /UNIT-1 Unit 1 Answers Page 15 of 20

16 ACADEMIC YEAR: REGULATION CBCS D. Factory Overheads- Indirect materials Loose Tools Indirect wages Rent and Rates ( Factory) Lighting and heating ( F ) Power and fuel Repairs and Maintenance Drawing office expenses Research and experiment Depreciation Plant ( F ) Insurance ( F ) Work Manager s salary II. Factory Cost/Works Cost ( I + D ) E. Office and Administrative Overheads Rent and Rates office Salaries office Insurance of office building and equipments Telephone and postage Printing and Stationery Depreciation of furniture and office Legal expenses Audit fees Bank Charges III. Cost of Production ( II + E ) F. Selling and Distribution Overheads Showroom rent and rates Salesmen s salaries and commission Traveling expenses Printing and Stationery Sales Department Advertising Bad debts Postage Debt collection expenses Carriage outwards Depreciation of delivery van Debt collection expenses Samples and free gifts IV. Cost of Sales ( III + F ) V. Profit/Loss VI. Sales ( IV + V) RAAK/B.COM(CA)/ARUNAGIRI/III YEAR/V Sem/UCP 51/COST. ACC /UNIT-1 Unit 1 Answers Page 16 of 20

17 ACADEMIC YEAR: REGULATION CBCS Prepare cost sheet from the following data Rs. Opening stock of raw material 12,500 Purchases of raw material 1,36,000 Closing stock of raw material 8,500 Direct wages 54,000 Direct expenses 12,000 Factory overheads 100% of direct wages Office and administrative over heads 20% of works cost Cost of opening stock of finished goods 12,000 Cost of Closing stock of finished goods 15,000 Profit on cost 20%. Details Raw material consumed Opening stock of raw material Add: Purchases Amount (Rs.) Less: Closing stock of raw material ,40,000 Direct wages 54,000 Direct expenses 12,000 Prime cost 2,06,000 Factory overheads: 100% of direct wages 54,000 Works cost 2,60,000 Office and administrative overheads 20/100 20% of works cost, (2,60,000 52,000 Total cost of production 3, Add : opening stock of finished goods 12,000 Cost of Goods available for sale 3,24,000 Less : Closing stock of finished goods 15,000 RAAK/B.COM(CA)/ARUNAGIRI/III YEAR/V Sem/UCP 51/COST. ACC /UNIT-1 Unit 1 Answers Page 17 of 20

18 ACADEMIC YEAR: REGULATION CBCS Cost of goods sold 3,09,000 Selling and distribution overheads 26,000 Total Cost = cost of sales 3,35,000 Profit (20% On Cost i.e. 3,35,00 20/100) 67,000 Sales 4,02, The following information is given to you from which you are required to prepare Cost Sheet for the period ended on 31St march 2006Consumable material: Rs. Opening stock 20,000 Purchases 1,22,000 Closing stock 10,000 Direct wages 36,000 Direct Expenses 24,000 Factory overheads Office and administration overheads Selling and distribution expenses 50 % of direct wages 20% of works cost Rs.3 per unit sold Units of finished goods In hand at the beginning of the period (Value Rs ) 500 Units produced during the period 12,000 In hand at the end of the period 1,500 Find out the selling price per unit if 20% profit on selling price. There is no work-inprogress either at the beginning or at the end of the period. Cost sheet for the period 31 st March 2006 Details Amount Rate Material Consumed: Opening Stock Add: Purchases Less: Closing Stock Cost of raw material consumed 132, Direct wages RAAK/B.COM(CA)/ARUNAGIRI/III YEAR/V Sem/UCP 51/COST. ACC /UNIT-1 Unit 1 Answers Page 18 of 20

19 ACADEMIC YEAR: REGULATION CBCS Direct Expenses Prime Cost Factory Overheads: 50% of Direct Wages (i.e ) Works/Factory overheads Office overheads 20% of works cost Total Cost of production Add: Opening stock of finished goods (500 25) Cost of goods available for sale ( ) Less : Closing stock of Finished 21per unit (1500 units) Cost of goods sold ( = units) Add: Selling & Distribution per unit Cost of Sales Cost of sales Add: Profit 20% On Selling Price i.e. 25% of cost of sales Sales M/S.Indu industries ltd. Are the manufacturers of moonlight torches. The following are the data related to manufacture of torches during the month of March 1991 Rs. Raw material consumed Direct wages Machine hours worked 9500 hours Machine hour rate 2 per hour Office overheads 20% of works cost Selling overheads 50 paise per unit. Units produced units Units sold Rs.5 per unit Prepare a cost sheet showing the cost and profit per unit and the total profit earned. RAAK/B.COM(CA)/ARUNAGIRI/III YEAR/V Sem/UCP 51/COST. ACC /UNIT-1 Unit 1 Answers Page 19 of 20

20 ACADEMIC YEAR: REGULATION CBCS STATEMENT OF COST & PROFIT FOR THE MONTH OF MARCH 1991 (Output units) Particulars Per unit (Rs) Total (Rs) Raw material consumed Direct wages PRIME COST Add: Factory overheads Machine hours X Rate per hour WORKS COST Add: Office overheads 20% of works cost COST OF PRODUCTION Less: Closing stock of finished goods (2000X3.06) COST OF PRODUCTION OF GOODS SOLD Add: Selling overheads :.0.50 per unit sold COST OF SALES PROFIT SALES RAAK/B.COM(CA)/ARUNAGIRI/III YEAR/V Sem/UCP 51/COST. ACC /UNIT-1 Unit 1 Answers Page 20 of 20

21 ACADEMIC YEAR: REGULATION CBCS UCP 51 COST ACCOUNTING -I UNIT-II MATERIAL PURCHASE AND CONTROL Type: 20% Theory 80% Problem Question & Answers PART A ANSWERS 1. Define Material control?(april /May2015) Material control defined as The regulation of the functions of an organisation relating to the procurement, storage and usage of materials in such a way as to maintain an even flow of production without excessive investment in material stock. 2. What is centralized purchasing? It refers to purchasing of requirements of the entire organisation by one particular department. 3. What is decentralized purchasing? It refers each of the departments purchasing themselves for their own requirements. 4. What is material? Materials are the basic substances used in the process of production. These substances are transformed into finished goods in the course of production. 5. List out the advantages of material control. a. Material of desired quality should be available when needed for effecient and uninterrupted production. b. Material should be purchased only when it is needed and in most economic quantities. 6. What is inventory control? It means, The systematic regulation of stock level. 7. Write a note on Bin card. Bin cards are a card placed outside the bin to record all the movement of materials in or outside the bin. RAAK/B.COM(CA) /V.ARUNAGIRI/III YEAR/V Sem/UCP51/COST. ACC /UNIT-2 Unit 2 Answers Page 1 of 10

22 ACADEMIC YEAR: REGULATION CBCS Define EOQ.(April /may 2015) The CIMA official Terminology defines EOQ as The most economic stock replenishment order size, which minimizes the sum of stock ordering costs and stock holding costs. EOQ is used in an optimizing stock control system. 9. Write a note on ABC analysis. In this technique, the items of inventory are classified according to the value of usage. Materials are classified as A, B and C according to their value. 10. What is JIT purchasing? Business concerns are giving maximum attention to reducing stock levels by establishing good relationship with suppliers to arrange the frequent delivery of goods. 11. What is VED analysis? Vital, essential and desirable analysis is done mainly for control of spare parts. Spares are controlled on the basis of their importance. 12. Define inventory turnover ratio. Kohler defines a ratio which measure the number of times a firm s average inventory sold during the year. 13. What is safety stock? Safety stocks are the amount of stocks that are carried in excess of the expected use during the lead time to provide a cushion against running out of stocks. 14. List out the objectives of establishing purchase department. * Specialization * Economy in purchasing * Optimum investment * Source of information. 15. What is FNSD analysis? Age of the inventory indicates the duration of inventory in the organization. It shows the moving position of inventory during the year. F stands for Fast N stands for Normal RAAK/B.COM(CA) /V.ARUNAGIRI/III YEAR/V Sem/UCP51/COST. ACC /UNIT-2 Unit 2 Answers Page 2 of 10

23 ACADEMIC YEAR: REGULATION CBCS S stands for Slow D stands for Dead stock 16. Define perpetual inventory system. The recording as the occur of receipts, issues and the resulting balances of individual items of stock in either quantity or quantity and value. 17. What are the various methods for levels of stock? * Maximum level * Minimum level * Re-order level * Average level * Danger level 18. Define Maximum level The level at above the stock should not be allowed to exceed at any time. Maximum Level = Reorder Level + Re order Qty (Min. consumption x Min. Reorder period) 19. Define Minimum level The level below stock should not be allowed to fall at any time. The stock goes below this level; there is a danger of stoppage of production for want of materials. Minimum Level = (Normal Consumption x Normal Reorder period) 20. What is meant by Reorder level? The level at which the new order for material in to the placed by the store keeper. It is fixed in between Maximum level and minimum level to ensure that the stock on hand does not fall below the minimum level before the receipt of ordering materials. Reorder level = Maximum consumption x Maximum Reorder period. 21. What is meant by codification of materials? A system of symbols designed to be applied to a classified set of items to give a brief, accurate reference, facilitating entry, collation and analysis. 22. What are the types of coding of materials? * Alphabetical * Numerical * Mnemonic * Alphabetical- cum- numerical RAAK/B.COM(CA) /V.ARUNAGIRI/III YEAR/V Sem/UCP51/COST. ACC /UNIT-2 Unit 2 Answers Page 3 of 10

24 ACADEMIC YEAR: REGULATION CBCS What is automatic order system? In this method is done with the help of computers. Order for fresh purchases are automatically placed when the inventory reaches order point quantity. 24. What is Inventory control Techniques? The important techniques covered here are ABC analysis Economic order quantity (EOQ) Reorder point Safety stock. 25. What is meant by Stores ledger? This is the chief accounting record for materials. It is maintained by the cost accounting department. It is the key to an effective system of inventory control PART B ANSWERS 1. Write down the objectives of material control. Material of desired quality should be available when needed for effecient and uninterrupted production. Material should be purchased only when it is needed and in most economic quantities Investment in material is maintained at minimum level consistent with the operating requirement Purchasing of material will be made at the most favorable prices under the best possible terms. Material is stored in such a way that the objective of protection is met fully and at the same time material is made available easily. Issues of materials are authorized properly and are accounted for properly. 2. Write down the advantages of material control. Ensures availability of material for production. Reduces wastage of raw material. Achieves economy of buying and storage cost. Reduces pilferage, theft, obsolescence and other material losses. Avoid excessive investments in stock. RAAK/B.COM(CA) /V.ARUNAGIRI/III YEAR/V Sem/UCP51/COST. ACC /UNIT-2 Unit 2 Answers Page 4 of 10

25 ACADEMIC YEAR: REGULATION CBCS Helps in maintaining perpetual inventory system to furnish information to management regarding materials. Helps in ascertaining value of jobs, processes and orders. 3. Difference between Bin card and Stores ledger. SI.NO BIN CARD STORE LEDGER 1. It is maintained by stores It is maintained by costing 2. department. It provides quantities received, issued and the balance in the bin. department. It contains both the value of receipts, issues and balances. 3. Entries are made before the Entries are made after the 4. transactions take place. Each and every transaction is transactions take place. Transactions are summarized and individually entered. entries are made periodically. 4. What are the functions of the storekeeper? Acting as a buffer or protection against the consequences of non-availability of material. Protecting the material Avoiding overstocking and under stocking Establishing a proper system for ensuring control over usage, through streamlining issues and receipts. Keeping proper records of usage, wastages etc. Minimizing material losses occurring due to mis-handling, evaporation, breakage etc. Preparing proper documentation regarding the receipts and issues. 5. Explain the factors to be considered while fixing the minimum and maximum stock level. MinimumLevel: The following factors are to be taken into consideration while fixing the minimum level:- * Nature of the Material: Minimum level must be maintained by the materials which are regularly stored. * The maximum time required from the date of order to the date of actual delivery: It is known as lead time. Provided the re-order point remains constant, the longer the lead time, the lower will be the minimum RAAK/B.COM(CA) /V.ARUNAGIRI/III YEAR/V Sem/UCP51/COST. ACC /UNIT-2 Unit 2 Answers Page 5 of 10

26 ACADEMIC YEAR: REGULATION CBCS * Rate of material consumption: The minimum rate, the maximum rate & the normal rate of consumption are to be taken into consideration. Maximumlevel: The following factors are to be taken into consideration while fixing the maximum level:- - Rate of Material consumption. - The lead time - The maximum requirement of the material at any time. - Nature of the material: The materials which deteriorate quickly should be stored as less as possible. - Storage space available for the material. - Price Economy: During the harvesting seasons, seasonal materials are cheap. So, during the harvesting season maximum purchase is made & as a result the maximum level is high. - Cost of storage & insurance - Cost of the material & finance available: The maximum level is likely to be low when the material is costly. Also the maximum level should be high if the price is likely to be going up. - Turnover of the inventory: The maximum level is low in case of slow moving material & the maximum level is high in case of quick moving material. - Nature of supply: The maximum level should be as high as possible, if the supply is uncertain. - Economic Order Quantity: Upon the economic order quantity, maximum level largely depends, because the quantity is decided & hence the maximum level is influenced by the economy order quantity unless otherwise contra indicated. ` 6. A supplier quotes for material M as follows Lot price 200 Rs.5 per Kg 500 Rs.3.50 per Kg 800 Rs.2.50 per Kg He allows a trade discount of 25%and a cash discount of 3% if payment made within 15 days. One container is required for every 100 Kgs. Of the materials and the containers are charged at Rs.15 each but credited at Rs.10 on return. The buyer decides to buy 800 Kgs. Transport charges amounting to Rs.200 are charged by the supplier. Calculate the purchase price of 800 Kgs. RAAK/B.COM(CA) /V.ARUNAGIRI/III YEAR/V Sem/UCP51/COST. ACC /UNIT-2 Unit 2 Answers Page 6 of 10

27 ACADEMIC YEAR: REGULATION CBCS In a truck load, the following materials were received: Code No. Material Quantity Rate Rs. M2010 P5025 Carbon black S.H. Phosphate 3050 Kgs Kgs per Kg 3.00 per Kg Sales tax was charged at 5% Railway freight Rs.1050 Transport charges Rs.100 Loading & unloading Rs.50 The goods received note received from the store keeper showed the following quantity. M Kgs. P Kgs. From the above particulars you are required to calculate the purchase rate per Kg. of carbon black and S.H. Phosphate. 8. The following is the data relating to materials received from a supplier as per the invoice. Rs. Material X Kgs. At Rs.5 per Kg Material Y Kgs. At Rs.8 per Kg Freight 9000 Excise duty (at 4%) 3600 Shortage due to breakage, considered as normal - Material X 50 Kgs. Material Y 40 Kgs. Ascertain the effective cost of the materials per Kg. if provision has to be made for a further wastage due to handling in stores of 50 Kgs and 60 Kgs. Respectively for the material Y and Y. 9. The following information is relating to material for the year ended The value of material is Re.1 per Kg. Opening stock Kg. Purchases Kg. Closing Stock Kg. Calculate the material turnover ratio and express in number of days the average inventory held. RAAK/B.COM(CA) /V.ARUNAGIRI/III YEAR/V Sem/UCP51/COST. ACC /UNIT-2 Unit 2 Answers Page 7 of 10

28 ACADEMIC YEAR: REGULATION CBCS Find out the EOQ from the following particulars Annual usage : 6000 units Cost of material per unit: Rs.20 Cost of placing and receiving one order : 10% of inventory value. PART C ANSWERS 1. Explain the essentials of material control. Proper co-ordination: Proper co-ordination of all departments involved, in material purchasing, receiving, testing, approving, storage, issue and in accounting, is essential. Competent Purchasing agent: Centralisation of purchasing in a purchasing department under the direct and authority of a competent and trained purchasing agent is also considered essential. Use of Standard Forms: The use of standard forms for orders, requisitions etc, upon which written and signed instruction are given, are essential for proper control of materials. Control by budgeting material and Equipment: Use of materials, supplies and equipment budgets so that the economy in purchasing and use of materials can be realized, is important factor for adequate control of material. Storage Location: Storage of all materials and supplies should be in a designated location properly safe guarded under supervision and proper planning should be there for storing and issuing of materials. Operation of perpetual Inventory: Operation of proper perpetual inventory system should be used so that it is possible to determine at any time the amount and value of each kind of material in stock. It also enables the comparison of book inventory with the results of physical counting. Standards or Levels to be fixed: A minimum quantity of each item of material, below which point the inventory is not allowed to drop, and a maximum quantity, above which stock is not carried should be fixed. RAAK/B.COM(CA) /V.ARUNAGIRI/III YEAR/V Sem/UCP51/COST. ACC /UNIT-2 Unit 2 Answers Page 8 of 10

29 ACADEMIC YEAR: REGULATION CBCS Storage Control and Issue: The proper operation of a system of stores control and issue is introduced so that there will be delivery of materials upon requisitions to departments in the right amount at the time they are needed. Internal Check: The operation of internal check should be introduced to ensure that transactions involving materials and equipment are checked by reliable and independent officials. Development of Controlling Accounts and Subsidiary Records: Controlling accounts and subsidiary records reveal summary of detailed materials costs at each stage of material receipt and consumption from the store room to finished goods. Regular Reports: Regular reports and information should be provided to the management in connection with the purchases of materials, issues from stock, inventory balances, obsolete stock, goods returned to vendors, and spoiled or defective units. 2. You are required to compute the EOQ and the frequency of the orders in terms of days, from the data given below: Consumption of material per annum Rs.8000 Ordering cost per day Rs.25 Storage and carrying cost per annum 10% of inventory. 3. Following information is relating to a type of raw material is available. Annual demand 2400 units Unit price Rs.20 Ordering cost per order Rs.4 Storage cost 2% per annum Interest rate 10% per annum Lead time half month. Calculate EOQ and total amount of inventory cost in respect of the particular raw material. RAAK/B.COM(CA) /V.ARUNAGIRI/III YEAR/V Sem/UCP51/COST. ACC /UNIT-2 Unit 2 Answers Page 9 of 10

30 ACADEMIC YEAR: REGULATION CBCS Two components A and B are use dare as follows: Reordering quantity: A 1200 units B 1000 units Reordering Period: A 2 to 4 weeks B 3 to 6 weeks Normal usage units per week each Minimum usage units per week each Maximum usage units per week each You are required to calculate the following for each of the components. a) Reordering level, b) Maximum level, c) Minimum level, d) Average level. 5. X and Y two components are used as follows: Minimum usage - 50 units per week each Maximum usage units per week each Normal usage units per week each Ordering Quantities -X 600 units Y 1000 units Delivery period - X 4 to 6 weeks Y 2 to 4 weeks Maximum order period for emergency purchases X : 2 weeks Y : 2 weeks Calculate the each component: a) Reordering level b) Maximum level c) Minimum level d) Danger level RAAK/B.COM(CA) /V.ARUNAGIRI/III YEAR/V Sem/UCP51/COST. ACC /UNIT-2 Unit 2 Answers Page 10 of 10