Model Answer / Suggested Solution. Subject: Financial and Cost Accounting

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1 Model Answer / Suggested Solution Code AR-7334 M.Com. II Semester Subject: Financial and Cost Accounting Que. 1. Short answers: i. Every businessman has to incur some expenses and he makes some income also. Some name is given to the head under which these expenses and incomes are recorded, e.g. when wages are paid, cash goes out but the name for this head is wages account. If interest is received, cash comes in, but the head, under which the cash is recorded, is named as Interest account. Therefore, the names of heads of expenses and income are called nominal accounts. ii. The common expenses which can not be conveniently apportioned to many departments should be preferably shown in the general profit and loss account these expenses are called unallocated expenses, e.g. interest on loan, salary of general manager etc. iii. Prime Cost Works oncost Opening Stock of work in progress Closing Stock of work in progress Factory Cost iv. Normal wastage is one which is incidental to production due to unavoidable reasons and it also results due to inherent result of the particular process and is uncontrollable in shorter period of time and is within standard limit. This normal wastage generally occurs due to evaporation, shrinkage, breakages, spoilage for various reasons. Abnormal wastage is one which is in excess of the normal wastage, arising due to abnormal causes or due to unforeseen factors. A cause which is not common to production, or the occurrence of which is not to be generally experienced in the ordinary course of production, is an abnormal cause. The defective materials, sickness of machines, managerial carelessness, natural calamities, fire, machine-breakdown etc. are the examples of abnormal wastage. v. The operating cost unit for the following businesses / undertakings: a. Passenger carrying transport: per passenger kilometre b. Electricity supply undertakings: per kilowatt-hour c. Hospitals: per patient-day, per bed, per operation d. Hotel undertakings: per room vi. Bank Reconciliation Statement Bank Balance as per pass book 7,400 Less: Cheque Presented after Due Date 15,000 Add: Rent of Locker charged but not recorded 500 Less: Interest allowed by bank not recorded 300 Unfavorable balance as per pass book 7,400

2 vii.. Debtors A/c Particulars Amount Dr. Particulars Amount Cr. To Balance b/d To Sales 5,000 45,000 By Cash By Goods Return By Balance c/d 30, ,500 50,000 50,000 viii. To Plant: Purchase Installation Contract A/c 14, By Plant: Return to Store Sold At site By Profit & Loss A/c: Plant theft Loss on sale of Plant 1,000 3,500 6,500 2,500 1,500 15,000 15,000 Que. 2. ix. Reconciliation Statement Profit as per Cost Accounts: 50,000 Add: Interest Received 1,000 Dividend received 7,500 58,500 Less: Interest Paid 1,500 Provision for Tax 8,000 9,500 Profit as per Financial Accounts 49,000 x. 5 (buses) x 25 (days) x 4 (trips) x 2 x 25 (km) x (50 passengers x 90%)= 11,25,000 passenger KM ACCOUNTING PRINCIPLES: Accounting principles are a body of doctrines commonly associated with the theory and procedures of accounting serving as an explanation of current practices and as a guide for selection of conventions or procedures where alternatives exits. Accounting principles must satisfy the following conditions: 1. They should be based on real assumptions; 2. They must be simple, understandable and explanatory; 3. They must be followed consistently; 4. They should be able to reflect future predictions; 5. They should be informational for the users. Accounting Principles are mainly classified into Accounting Concepts and Conventions.

3 ACCOUNTING CONCEPTS: Accounting concepts define the assumptions on the basis of which financial statements of a business entity are prepared. Certain concepts are perceived, assumed and accepted in accounting to provide a unifying structure and internal logic to accounting process. The word concept means idea or notion, which has universal application. Financial transactions are interpreted in the light of the concepts, which govern accounting methods. Concepts are those basic assumptions and conditions, which form the basis upon which the accountancy has been laid. Unlike physical science, accounting concepts are only result of broad consensus. These accounting concepts lay the foundation on the basis of which the accounting principles are formulated. Accounting concepts are as follows: 1. Business Entity Concepts 2. Going concern Concept 3. Dual Aspect Concept 4. Cost Concept 5. Money Measurement Concept 6. Matching Concept 7. Realisation Concept 8. Accrual Concept 9. Financial Period Concept ACCOUNTING CONVENTIONS Accounting conventions emerge out of accounting practices, commonly known as accounting principles, adopted by various organizations over a period of time. These conventions are derived by usage and practice. The accountancy bodies of the world may change any of the convention to improve the quality of accounting information. Accounting conventions need not have universal application. In the study material, the terms accounting concepts, accounting principles and accounting conventions have been used interchangeably to mean those basic points of agreement on which financial accounting theory and practice are founded. Accounting Conventions are as follows: 1. Conservatism 2. Materiality 3. Consistency 4. Full Disclosure 5. Prudence (Students are supposed to explain these points.)

4 Que. 3. Operating Cost: There are large number of organisation where the goods are not produced but services are rendered. The cost incurred for rendering services by these organisation are termed as operating cost or service cost. Operating Costing: In order to determine the total cost and per unit cost of services rendered by organisations providing or services on the basis of expenditure incurred for the services and determining the per unit selling price of service, the method which is applied is known as operating costing. Thus, operating costing method is one designed to ascertain and control the costs of the undertakings which do not produce products but which render services. Operating Cost applies where standardised services are provided by an undertaking or by a service cost centre within an undertaking. I.C.M.A., England The operating cost method is similar to the Unit cost method or the output cost method as the cost per unit of the service rendered is required to be ascertained in this method by preparing the cost-sheet. The difference between the cost-sheet of the output and the cost-sheet of service obviously lies in adoption of a suitable cost unit and the collection, analysis and allocation of the cost to the cost units. Scope of Operating Costing: The undertakings to which this method is applicable are, for example, as follows: Transport Services: Motor, Railways, Shipping, Air etc. Public Utility Services: Gas, Electricity, Hospitals, Theatres, Universities, Colleges, Water supply undertakings or corporations etc. Catering Establishments: Hotels, Hostels, Canteens, Cafeteria etc. The services provided by various services organisation differ from each other. Some few service industries are as follows: i. Transport Costing ii. Power House Costing iii. Canteen Costing iv. Hotel Costing v. Hospital Costing Transport Operating Cost Sheet This is a cost sheet prepared monthly or quarterly and it contains the items of expenses in the classified form, to show the cost per unit. This cost-sheet is an important document in operating costing and should be prepared carefully. The profarma of the cost-sheet is presented below:

5 Vehicle No Carrying Capacity. Operating Cost Sheet Month ended. Amount A. Standing Charges: Depreciation of Vehicle Insurance of Vehicle Tax, Licence etc. Interest Administration Expenses B. Maintenance Charges: Garage Staff Salaries Garage Other expenses Repairs & Renewals Overhaul Expenses Cleaning Expenses Sub-Total Sub-Total C. Operating of Running Cahrges: Petrol Oil & Grease Salaries of Running Staff Driver Mechanic Cleaner Depreciation tyres and battery Sub-Total D. Total Operating Cost (A+B+C) Operating Cost per ton km= Total Operating Cost/Total ton-km Operating Cost per passenger= Total Operating Cost/Total Passenger km E. Revenue F. Net Profit G. Tonne kilometre Carried H. Cost per tonne kilometre Note: expenses may be distributed between Fixed and Variable Cost according to their nature. Que. 4.. Azadnagar Branch Stock Account To Balance b/d (4,000+1,000) To Goods Supplied To Surplus (Balancing Figure) 5,000 By Cash A/c (Cash Sales) 10,000 30,000 By Branch Debtors (Cr. Sales) 20,000 1,000 By Loss by Fire (Invoice Price) 2,500 By Balance c/d 3,500 36,000 36,000

6 Azadnager Debtors Account To Balance b/d To Credit Sales (Balance) 1,000 By Cash A/c 16,000 20,000 By Goods Return to H.O. 500 By Cash Paid to H.O. 2,500 By Balance c/d 2,000 21,000 21,000 To Loss by Fire To Stock Reserve To Direct Expenses To Adjustment of Returns to H.O. To Branch P/L A/c (Gross Profit) Azadnagar Branch Adjustment Account By Stock Reserve By Goods sent to branch A/c By Surplus 1,000 6, ,700 7,200 7,200 Azadnagar Branch Profit & Loss Account To Indirect Expenses To General P&L A/c 250 6,250 By Branch Adjustment A/c (Gross Profit) By Surpluss (1, ) 5, ,500 6,500 Que. 5. Accounts in the Books of Moon Electronics Star Electronics Account Date Particulars Amount Date Particulars Amount To Cash A/c By Cash A/c 40, To Commission Earned To Cash A/c 4,000 35,550 40,000 40,000 Commission Earned Account Date Particulars Amount Date Particulars Amount To General P&L A/c 4, By Star Electronics A/c 4,000 4,000 4,000

7 Que. 6.. Cost Sheet (for the next half year ending 31 st Dec. 2004) (1,600 electric fans) Particulars Total cost Per Fan Cost of material used Wages 64,000 96, Prime cost 1,60, Manufacturing expenses 40, Works cost 2,00, Office & General Expenses: Office salaries Rent & Rates General Expenses 48,000 8,000 24, Cost of production 2,80, Selling expenses 16, Cost of sales 2,96, Profit 24, Sales 3,20, Statement of Estimate (for the next half year ending 31 st Dec. 2004) (output: 2,000 electric fans) Particulars Total Cost Material used (2,000x40) 80,000 Add: 25% rise 20,000 Wages (2000x60) 1,20,000 Add: 12 ½ % rise 15,000 1,00,000 Per Fan ,35, Prime cost 2,35, Manufacturing Expenses (40,000x2,35,000/1,60,000) 58, Works cost 2,93, Office & General expenses (Same in total as in previous period) 80, Cost of Production 3,73, Selling expenses 10 per unit 20, Cost of Sales 3,93, Profit (10% of cost) 39, Sales Price 4,33,

8 Que. 7.. Operating Cost Sheet Monthly Cost Truck A Truck B Bus Fixed Cost: Depreciation Road and other taxes Other overhead expenses Supervision Variable Cost: Repairs General Garage overheads Petrol Oil Drivers salaries Cleaners Wages Total (A) Total (B) Total (A + B) Ton-miles: Truck A (100x3000/30) Truck B (120x4500/30) Passenger Miles of Bus (25x2000) Cost per ton miles of truck A Cost per ton miles of truck A Re Cost per passenger-miles of Bus Re Que. 8.. Statement showing the cost of manufactures Opening stock of raw materials 4,000 Add: Purchase of raw materials 24,000 28,000 Less: Closing Stock of raw materials 6,000 Materials Consumed 22,000 Add: Wages 10,000 Prime cost 32,000 Add: Factory oncost (25% of prime cost) 8,000 Works cost 40,000 Add: Office oncost (75% of factory oncost) 6,000 Office Cost 46,000 Add: Opening Stock of finished articles 8,000 54,000 Less: Closing stock of finished articles 2,000 52,000 Profit 13,000 Sales 65,000

9 Profit & Loss Account For the year ending 31 st Dec., 1994 Particulars Amount Particulars Amount To opening Stock: By Sales 65,000 Raw Material 4,000 By Closing Stock: Finished Articles 8,000 12,000 Raw Material 6,000 To Purchases 24,000 Finished Materials 2,000 8,000 To Wages To Work expenses To Office Expenses To Net Profit 10,000 7,750 6,100 13,150 73,000 73,000 Reconciliation Statement Profit as disclosed by Cost Account Add: Overcharge of factory oncost in Costs A/c: Factory oncost as per cost account Works expenses as per financial account Less: Undercharge of office oncost in Cost Account: Office expenses as per financial accounts Office oncost as per cost accounts 8,000 7,750 13, ,250 6,100 6, Profit as per financial accounts 13,150 Prepared By: Dr. Shishir Pandey Assistant Professor Department of Commerce Guru Ghasidas Vishwavidyalaya Bilaspur, C.G.