KSA Model exam inter (new) Costing ans key ` 1,56,250 ` 48, `9,

Transcription

1 KSA Model exam inter (new) Costing ans key Solutions : 1(a) (i) Order size (Q) (Units) *No. of orders A Q (Units) Cost of purchase A cost per unit Ordering cost A Q Carrying cost Q C 25% 2 Total cost (3+4+5) (1) (2) (3) (4) (5) (6) ,00,000 (500 9,600) 1,56,250 48, , ,80,000 1,25,000 58,500 (500 9,360) 50 9, ,04,250 48,63, ,60,000 62,500 1,14,000 (500 9,120) 100 9, ,40,000 31,250 2,22,000 (500 8,880) 200 8, ,20,000 20,875 3,24,000 (500 8,640) 300 8, ,36,500 46,93,250 46,64,875 A = Annual requirement The above table shows that the total cost of 500 units including ordering and carrying cost is minimum ( 46,64,875) where the order size is 300 units. Hence the most economical purchase level is 300 units.

2 (*Note: Practically number of orders should be rounded off to the nearest whole number) (ii) Calculation of Economic Order Quantity (EOQ), when no discount is available. 1(b) 2AO tonne EOQ = = = 69 tonnes. 12,500 C i (i) Rowan Plan : Normal time wage = 15 5= 75 Bonus = Time saved /Time allowed (Time taken Time rate) 5 = 15 5 = (ii) Halsey Plan: Normal time wage = 15 5 = 75 Bonus = 50% of (Time saved x Time rate) = 50% of (5x5) = Statement of Comparative Factory cost of work Rowan Plan Halsey Plan Materials Direct Wages Prime Cost Factory Overhead (100% of Direct wages) Factory Cost (c) 1. (i) Contribution = = 200 per unit. Fixed cos t Break even Sales Quantity = Cash Break even Sales Qty= Contribution margin per unit Cash Fixed Cost Contribution margin per unit = 3,50,00,000 = 1,75,000 units 200 = 2,00,00,000 = 1,00,000 units. 200 Contribution/ unit (ii) P/V ratio = Selling Pr ice / unit 100 = = 53.33% 375 No. of units that must be sold to earn an Income (EBIT) of 25,00,000 (iii) Fixed cost Desired EBIT level 3,50,00,000 25,00,000 Contribution margin per unit = = 1,87,500 units 200

3 (ii) After Tax Income (PAT) = 25,00,000 Tax rate = 40% Desired level of Profit before tax Estimate Sales Level = = 25,00, = 41,66, Fixed Cost Desired Profit P / Vratio Or, FixedCost Contributionper DesiredPr unit ofit SellingPr ice per unit = 3,50,00,000 41,66,667 = 7,34,42, % 1(d) Statement of Cost and Selling price for 2,000 units of output Particulars Cost per unit () Total Cost () Direct Materials ,000 Direct Labour ,000 Prime cost ,000 Add: Factory Overheads (Refer working ,000 note-2) Total cost ,000 Add: Profit (25% of Cost) ,000 Sales ,000 Working Notes: (1) Direct Material and Direct Labour cost is varying directly in proportion to units produced and shall remain same per unit of output. (2) Calculation of Factory Overheads- An observation of Cots related to different output levels for factory overheads shall reveal 2 things (a) Total cost increases from 31,000 to 34,000 along with increase in output from 1,200 units to 1,800 units but cost per unit is not constant (b) Cost per unit is reducing along with increase in output from (31,000 1,200 units) to (34,000 1,800 units) We can see that the cost is a semi- variable cost and has to be calculated for 2,000 units by analysing its Fixed and Variable components Week Number Units Manufactured Factory Overheads 1 1,200 31, ,600 33,000 Difference 400 2,000 Therefore, Variable Cost per Unit = Change in Factory Overheads Change in output = 2, = 5 Now total Factory Overheads for week 2 = 33,000

4 2(a) Of this Variable Overheads = 1,600 units 5 = 8,000 Therefore, Variable Cost for 2,000 units = 2,000 units 5 = 10,000 Fixed Cost will not change and hence will be = 25,000 Therefore, Total Factory Cost = Variable Overheads + Fixed Overheads Overheads for 2,000 units = 10, ,000 = 35,000 (5x4=20) (a) Cost Sheet (for the quarter ending 30 September 2018) Amount () (i) Raw materials consumed Opening stock of raw materials 2,45,600 Add: Purchase of materials 12,22,650* Less: Closing stock of raw materials (2,08,000) Raw materials consumed 12,60,250 Add: Direct wages (1,47, %) 2,57,250 Direct Expenses 1,80,000 (ii) Prime cost 16,97,500 Add: Factory overheads (2,57,250/175%) 1,47,000 Gross Factory cost 18,44,500 Add: Opening work-in-process 1,70,800 Less: Closing work-in-process (1,90,000) (iii) Factory cost 18,25,300 Add: Administration overheads (10% of factory overheads) 14,700 Add: Opening stock of finished goods 3,10,000 Less: Closing stock of finished goods (2,75,000) (iv) Cost of goods sold 18,75,000 Add: Selling & distribution overheads 60,000 Cost of sales 19,35,000 (v) Net Profit 2,75,000 Sales 22,10,000 *(18,75, ,75,000 3,10,000 (1,47,000 10%) + 1,90,000 1,70,800 (2,57, /175%) - 1,80,000 2,57, ,08,000 2,45,600) = 12,22,650 Working notes Purchase of raw materials = Raw material consumed + Closing stock - opening stock of raw material Raw material consumed = Prime cost - Direct wages - Direct expenses

5 Factory Overheads = 2,57,250*100/175 Prime cost = Factory cost + Closing WIP Opening WIP Factory overheads Factory Cost = Cost of Production goods sold + Closing stock of Finished goods Opening stock of finished goods Administrative overheads Net Profit = Sales - Cost of sales Alternative solution Cost Sheet (for the quarter ending 30 September 2018) Amount () (i) Raw materials consumed Opening stock of raw materials 2,45,600 Add: Purchase of materials 12,37,350* Less: Closing stock of raw materials (2,08,000) Raw Material consumed 12,74,950 Add: Direct wages (1,47, % 2,57,250 Direct Expenses 1,80,000 (ii) Prime cost 17,12,,200 Add: Factory overheads (2,57,250/175%) 1,47,000 Gross Factory cost 18,59,200 Add: Opening work-in-process 1,70,800 Less: Closing work-in-process (1,90,000) (iii) Factory cost/works cost/cost of production 18,40,000 Add: Opening stock of finished goods 3,10,000 Less: Closing stock of finished goods (2,75,000) (iv) Cost of goods sold 18,75,000 Add: Administration overheads (10% of factory overheads) 14,700 Add: Selling & distribution overheads 60,000 Cost of sales 19,49,700 (v) Net Profit 2,60,300 Sales 22,10,000 *(18,75, ,75,000 3,10, ,90,000 1,70,800 1,47,500-1,80,000 2,57, ,08,000 2,45,600) = 12,37,350

6 Working notes Purchase of raw materials = Raw material consumed + Closing stock - opening stock of raw material Raw material consumed = Prime cost - Direct wages - Direct expenses Factory Overheads = *100/175 Prime cost = Factory cost + Closing WIP Opening WIP Factory overheads Factory Cost = Cost of Production goods sold + Closing stock of Finished goods Opening stock of finished goods Net Profit = Sales - Cost of sales (10 marks) 2(b) (i) Overheads application base: Direct labour hours Equipment- Y Equipment - Z Direct material cost Direct labour cost Overheads* *Pre-determined rate = Budgeted overheads Budgeted direct labour hours , = 12, 42, 500 = , 000 hours (ii) Estimation of Cost-Driver rate: Activity Overhead cost Cost-driver level Cost driver rate Order processing 2,10, Orders processed Machine processing 8,75,000 50, Machine hours Inspection 1,57,500 15, Inspection hours

7 (iii) Equipment- Y Equipment- Z Direct material cost Direct labour cost Prime cost 750 1,050 Overhead cost Order processing 350 : 250 1,22,500 87,500 Machine processing 23,000 : 27,000 4,02,500 4,72,500 Inspection 4,000 : 11,000 42,000 1,15,500 Total overhead cost 5,67,000 6,75,500 Per unit cost = 5,67,000/2, = 6,75,500/3,125 Unit manufacturing cost , Equipment- Y Equipment - Z Unit manufacturing cost using direct labour hours as an application base , Unit manufacturing cost using activity based costing , Cost distortion ( )40.42 (+)32.34 Low volume product Y is under-costed and high volume product Z is over-costed using direct labour hours as a basis for overheads absorption. It is due to the limitation of traditional costing system. (iv) Activity-based costing system is suitable in case of ABC Ltd because it is a multi-product company and overheads costs are substantial portion of total cost. The use of activity based costing will avoid cost distortion as ABC Ltd has a large proportion of non-unitlevel activities such as orders processed and inspection hours. (10 marks) 3(a) (i) (a) Statement of Joint Cost allocation of inventories of X, Y and Z for Balance Sheet purposes (By using Net Realisable Value Method) Product

8 s X Y Z Total () () () () Final sales value of total 5,49,000 6,60,375 5,70,750 17,80,125 production (Working Note 1) (366 x 1,500) (587 x 1,125) (761 x 750) Less: Additional cost ,10,000 3,10,000 Net realisable value (at split-off point) 5,49,000 6,60,375 2,60,750 14,70,125 Joint cost allocated (Working Note 2) 2,33,398 2,80,748 1,10,854 6,25,000 Cost of goods sold for income statement purpose as of March 31, 2014 (By using Net Realisable Value Method) Product s X Y Z Total () () () () Allocated joint cost 2,33,398 2,80,748 1,10,854 6,25,000 Additional costs ,10,000 3,10,000 Cost of goods available for sale (CGAS) 2,33,398 2,80,748 4,20,854 9,35,000 Less: Cost of ending 1,14,785 28,692 13,846 inventory (CGAS (CGAS (CGAS 1,57,323 (Working Note 1) 49.18%) 10.22%) 3.29%) Cost of goods sold 1,18,613 2,52,056 4, ,77,677 Income Statement (Showing gross margin and gross margin percentage) (By using net realisable value method) Sales revenue () 2,79,000 (186 x 1,500) Less: Cost of goods sold () Product s X Y Z 5,92,875 (527 x 1,125) 5,52,000 (736 x 750) Total 14,23,875 1,18,613 2,52,056 4,07,008 7,77,677 Gross margin () 1,60,387 3,40,819 1,44,992 6,46,198 Gross margin (%) 57.49% 57.49% 26.27% 45.38% (b) Statement of joint cost allocation of inventories of X, Y and Z for Balance sheet purposes (By using Constant Gross Margin Percentage Net Realisable Value Method) Produc

9 t Total X Y Z () () () () Final sales value of total production 5,49,000 6,60,375 5,70,750 17,80,125 Less: Gross margin 2,60,641 3,13,517 2,70,967 8,45,125 Less: Additional Cost 2,88, ,46, ,99,783 3,10,000 9,35,000 3,10,000 Joint cost allocated 2,88,359 3,46,858 (10,217) 6,25,000 (Working Note 3) Note: The negative joint cost allocation to product Z illustrates one unusual feature of the constant gross margin NRV method. Cost of Goods Sold for Income Statement purpose (By using Constant Gross Margin Percentage Net Realisable Value Method) X Product s Y Z () () () () Allocated joint cost Additional costs 2,88, ,46, (10,217) 3,10,000 6,25,000 3,10,000 Cost o good available f for s (CGAS) sale 2,88,359 3,46,858 2,99,783 9,35,000 1,87,127 Less: Cost of ending inventory (Working Note 1) Cost of Goods sold Total 1,41,815 35,449 9,863 (CGAS %) (CGAS %) (CGAS 3.29%) 1,46,544 3,11,409 2,89,920 7,47,873 Income Statement (Showing gross margin and gross margin percentage) (By using Constant Gross Margin Percentage NRV Method) X Sales revenue () Less: Cost of Goods sold () Gross margin () 2,79,000 Product s Y Total Z 5,92,875 5,52,000 (186 x 1,500) (527 x 1,125) (736 x 750) 14,23,875 1,46,544 3,11,409 2,89,920 7,47,873 1,32,456 2,81,466 2,62,080 6,76,002

10 Gross margin (%) 47.48% 47.48% 47.48% 47.48% (ii) Comparative statement of gross percentage for X, Y and Z (Using Net Realisable Value and Constant Gross Margin Percentage NRV Methods) Product gross margin percentage Metho d X Y Z Net Realisable Method Constant gross margin percentage NRV Working Notes 1. Total production of three products for the year Product s Quantity sold in tones Quantity of ending inventory in tons Total productio n Ending inventory percentage (%) (5) = (3)/ (4) (1) (2) (3) (4) = [(2) + (3)} X Y Z Joint cost apportioned to each product: Total Joint cost xnet Realisable Value of each product TotalNet Realisable Value Totalcos t of Product X 2,33,398 6,25,000 x 5,49,000 14,70,125 Similarly, the joint cost of inventories of products Y and Z comes to 2,80,748 and 1,10,854 respectively. 3. Gross margin percentage Final sales value production 17,80,125 Less: Joint cost and additional costs ( 6,25, ,10,000) 9,35,000 Gross margin 8,45,125 Gross margin percentage ( 8,45,125 17,80,125) % () (10 marks)

11 3(b) (i) Process- I Statement of Equivalent Production Input s Outpu t Particulars Kg. Particulars Kg. Opening W.I.P. New material introduced 40,000 2,00,000 Normal loss Units introduced & completed Abnormal loss Closing WIP 40,000 1,60,000 10,000 30,000 Equivalent output Material Conversion (%) kg. (%) kg ,60,000 10,000 30, /3 rd -- 1,60,000 10,000 20,000 2,40,000 2,40,000 2,00,000 1,90,000 Process- I Statement of Cost for each element Elements of cost Material Conversion cost Costs of opening WIP Costs in process Total cost Equivalent units Cost per Kg. () () () Kg. () 20,000 75,000 95,000 2,00, ,000 1,02,000 1,14,000 1,90, ,000 1,77,000 2,09, Statement of Apportionment of Cost Units completed Elements Equivalent Work completed Closing WIP Material Conversion Material Conversion s (Kg.) unit 1,60,000 1,60,000 30,000 20,000 Cost/unit () Cost () 76,000 96,000 14,250 12,000 Total cost () 1,72,000 26,250 (ii) Statement showing comparative data to decide whether 1,20,000 kg. of product A should be processed further into AX. Alternative I To sell product A after Process I Sales 1,20,000 kg () 1,92,00 Less: Cost from Process- I 1,20,000 kg ,29,000 Profit 63,000

12 Alternative II Process further into AX Sales 2,40,000 kg ,80,000 Less: Cost from Process- I 1,20,000 kg = 1,29,000 Material in Process- II = 1,32,000 = 1,20,000 3,81,000 Profit Processing cost in Process- II 99,000 Hence company should process further It will increase profit by 99,000 63,000 = 36,000 (iii) Calculation of minimum selling price per kg.: Cost of processing remaining 40,000 kg. further Material 1,76,000 cost () 1,32,000 44,00 0 Processing 1,40,000 1,20,000 20,00 0 Cost from process- I relating to 40,000 kg. A (40,000 kg ) 43,000 Benefit foregone if 40,000 kg. A are further processed 40,000 kg. ( ) 21,000 Total cost 1,28,000 Additional quantity of product AX (40,000 kg. 2) 80,000 1,28,000 Minimum selling price = ,000 kg. (10 marks) 4(a) (i) Material variances: (a) Direct Material Cost Variance = Standard Cost Actual Cost = (40,960 units 5 kg. 4.20) (2,05,600 kg. 4.50) = 8,60,160 9,25,200 = 65,040 (A) (b) Material Price Variance = Actual Qty. (Std. Price Actual Price)

13 = 2,05,600* kg. ( ) = 61,680 (A) (*Material variances are calculated on the basis of consumption) (c) Material Usages Variance = Std. Price (Std. Qty. Actual Qty.) = 4.20 (40,960 units 5 kg. 2,05,600 kg.) = 3,360 (A) (ii) Labour Variances and Overhead Variances: (iii) (a) Labour Cost Variance = Standard cost Actual cost = (40,960 units 3 hours 3) 3,87,840 = 19,200 (A) (b) Labour Rate Variance = Actual Hours (Std. Rate Actual Rate) = 1,21,200 hours ( ) = 24,240 (A) (c) Labour Efficiency Variance = Std. Rate (Std. Hour Actual Hour) (d) Total Factory Overhead Variance Calculation of unit selling price = 3 (40,960 units 3 hour 1,21,200 hour) = 5,040 (F) = Factory Overhead Absorbed Actual Factory Overhead = (Actual Hours Std. Rate) Actual Factory Overhead = (40,960 units 3 hours 1.20) 1,00,000 = 47,456 (F) Preparation of Income Statement Direct material Direct labour 9.00 Factory overhead 3.60 Factory cost Margin 25% on factory cost 8.40 Selling price Income Statement () () () Sales (40,000 units 42) 16,80,000 Less: Standard cost of goods sold (40,000 units 33.60) 13,44,000 Less: Adverse Variances: Material Price variance 61,680 Material Usage variance 3,360 3,36,000 Labour Rate variance 24,240 89,280

14 Add: Favourable variances: Labour efficiency variance 5,040 2,46,720 Factory overhead 47,456 52,496 Actual gross margin 2,99,216 iv Labour hour saved () Standard labour hours (40,960 units 3 hours) 1,22,880 Actual labour hour worked 1,21,200 Labour hour saved 1,680 Bonus for saved labour = 50% (1,680 hours 3) = 2,520. (10 marks) 4(b) 1. Calculation of Cost per annum Particulars Arts () Commerce () Science () Total () Teachers salary (W.N-1) 16,80,000 21,00,000 25,20,000 63,00,000 R-apportionment of Economics & Mathematics teachers salary (W.N- 2) (84,000) 1,45,091 (61,091) - Principal s salary (W.N-3) 1,24,800 1,87,200 2,88,000 6,00,000 Lab assistants salary (W.N-4) - - 1,72,800 1,72,800 Salary to library staff (W.N-5) 43,200 28,800 57,600 1,29,600 Salary to peons (W.N-6) 31,636 94,909 47,455 1,74,000 Salary to other staffs (W.N-7) 38,400 1,15,200 57,600 2,11,200 Examination expenses (W.N- 8) 86,400 2,59,200 1,29,600 4,75,200 Office & Administration 1,21,600 3,64,800 1,82,400 6,68,800 expenses (W.N- 7) Annual Day expenses (W.N-7) 36,000 1,08,000 54,000 1,98,000 Sports expenses (W.N- 7) 9,600 28,800 14,400 52,800 Total Cost per annum 20,87,636 34,32,000 34,62,764 89,82,400 (i) Calculation of cost per student per annum Particulars Arts () Commerce () Science () Total () Total Cost per annum 20,87,636 34,32,000 34,62,764 89,82,400 No. of students Cost per student per annum 17,397 9,533 19,238 13,610

15 (ii) Calculation of profitability (i) Particulars Art Commerce Science s () () () Total Fees per annum 12,000 12,000 12,000 Cost per student per 17,397 9,533 19,238 annum Profit/ (Loss) per student (5,397) 2,467 (7,238) per annum Total () No. of students Total Profit/ (Loss) (6,47,640) 8,88,120 (13,02,840) (10,62,360) Computation of fees to be charged to earn a 10% profit on cost Particular s Art s () Commerce () Science () Cost per student per annum 17,397 9,533 19,238 Add: 1, ,924 Fees per annum 19,137 10,486 21,162 Fees per month 1, ,764 Working Notes: (1) Teachers salary Particulars Arts Commerce Science No. of teachers Salary per annum () 4,20,000 4,20,000 4,20,000 Total salary 16,80,000 21,00,000 25,20,000 (2) Re-apportionment of Economics and Mathematics teachers salary Economics Mathematics Particulars Arts Commerce Science Commerce No. of classes Salary re-apportionment () (84,000) 84,000 (61,091) 61,091 4,20,000 1, ,20,000 1, (3) Principal s salary has been apportioned on the basis of time spent by him for administration of classes. (4) Lab attendants salary has been apportioned on the basis of lab classes attended by the students. (5) Salary of library staffs are apportioned on the basis of time spent by the students in library.

16 (6) Salary of Peons are apportioned on the basis of number of students. The peons salary allocable to higher secondary classes is calculated as below: Amount () Peon dedicated for higher secondary 1,20,000 (1 peon 10, months) Add: 15% of other peons salary {15% of (3 peons 10, months)} 54,000 1,74,000 (1) Salary to other staffs, office & administration cost, Annual day expenses and sports expenses are apportioned on the basis of number of students. (2) Examination Expenses has been apportion taking number of students and number examinations into account. (10 marks) 5(a) Contract Acc unt (20 2-X3) Particulars () Particulars () To Materials issued 90,000 By Material sold 18,125 To Wages paid 75,000 By Plant sold 2,875 Add : Outstanding 6,250 81,250 By Plant at site c/d 7,750 To Plant 25,000 By Material at site c/d 4,250 To Sundry Expenses 7,250 By Work-in-progress c/d Less : Prepaid 625 6,625 Work certified 2,18,750 (1,75,000 80%) To Establishment charges 14,625 Work uncertified 27,375 2,46,125 To Costing P & L A/c (18,125 15,000) To Notional profit (Profit for the year) 3,125 58,500 2,79,125 2,79,125 Calculation of Estimated Profit (1) Material consumed (90, ,125 18,125) () 75,000 Add: Further consumption 85,750 1,60,750 (2) Wages: 81,250 Add: Further cost (87,325 6,250) 81,075 Add: Outstanding 8,300 1,70,625 (3) Plant used (25,000 2,875) 22,125 Add:Further plant introduced 31,250 () ()

17 5(b) Less:Closing balance of plant (3,750) 49,625 (4) Establishment charges 14,625 Add: Further charges for nine months (14,625 9/12) 10,969 25,594 (5) Sundry expenses 7,250 Add: Further expenses 6,875 14,125 (6) Reserve for contingencies 10,800 Estimated profit (balancing figure) 68,481 Contract price 5,00,000 (i) Production Budget for the year 2013 by Quarters I II III IV V Sales demand(unit) Opening Stock 70% of Current Quarter s Demand 30% of Following Quarter s Demand Total Production(II &III) Closing Stock (I+IV-Sales) *Balancing Figure I 18,000 6,000 12,600 6,600 19,200 7,200 I I 22,000 7,200 15,400 7,500 22,900 8,100 II I 25,000 8,100 17,500 8,100 25,600 8,700 I V 27,000 8,700 18,900 7,400* 26,300 8,000 Total 92,000 30,000 64,400 29,600 94,000 32,000 (ii) Break Even Point = Fixed Cost PV Ratio = 2,20, % = 16,00,000 or 40,000 units. P/V Ratio = ( = 5.50) =13.75% (Or, Break Even Point = Fixed Cost Contribution = 2,20, = 40,000 Units) Total sales in the quarter II is 40,000 equal to BEP means BEP achieved in II quarter. 5(c) Materials Control A/c () To Balance b/d 32,000 By Work-in-process control A/c 53,000 Cost Ledger Control A/c 92,000 By Balance b/d 71,000 (Purchases) (refer working note) Work-in-Process Control A/c () 1,24,000 1,24,000

18 () To Balance b/d 9,200 By Finished Goods Control A/c 1,51,000 To Materials Control A/c 53,000 By Balance c/d: (Bal. fig.) To Wages Control A/c ( 10 7,000 hours) To Overheads Control A/c ( 4 7,000 hours) Finished Goods Control A/c 70,000 Material 5,000 Wages ( ,000 hours) 28,000 Overheads ( 4 1, hours) () 9,200 1,60,200 1,60,200 () To Balance b/d 24,000 By Cost of sales A/c (Bal. fig.) 1,45,000 To Work-in-process Control 1,51,000 By Balance b/d 30,000 A/c (as above) 1,75,000 1,75,000 Manufacturing Overheads A/c () To Cost Ledger Control A/c () () 29,600 By Work-in-process control A/c 28,000 ( 4 7,000 hours) By Costing P/L A/c (Under- 1,600 absorbed OH) 29,600 29,600 Working Note: Payables (Creditors) A/c () To Cash or Bank 89,200 By Balance b/d 16,400 To Balance c/d 19,200 By Purchases (Balancing fig.) 92,000 () 1,08,400 1,08,400 (5x3=15)

19 6(a) Cost Control 1. Cost control aims at maintaining the costs in accordance with the established standards. Cost Reduction 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. 3. In case of cost control, emphasis is on past and present 2. Cost reduction recognises no condition as permanent, since a change will result in lower cost. 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. 6(b) 1. Expensive: It is expensive because analysis, allocation and absorption of overheads require considerable amount of additional work, and hence additional money 2. Requirement of Reconciliation: The results shown by cost accounts differ from those shown by financial accounts.thus Preparation of reconciliation statements is necessary to verify their accuracy. 3. Duplication of Work: It involves duplication of work as organization has to maintain two sets of accounts i.e. Financial Account and Cost Account. 4. Inefficiency: Costing system itself does not control costs but its usage does. 6(c) Re-order level & Re-order quantity: Re-order level is defined as that level of an inventory item where a fresh order for its replenishment is placed. Mathematically it can be determined by using the following formulae: Re-order level (ROL) Alternatively: = [Maximum consumption Maximum re-order period] Average rate of Average = Minimum level + consumption re order period

20 Re-order quantity (ROQ) is defined as that quantity of an inventory item for which order is placed again and again. Economic order quantity is a re-order quantity but not vice-a-versa. It can be determined by using the following mathematical expression: EOQ = ROQ = 2 Annual requirement of inventory item in units Cost of placinganorder Thus, Re-order level is the level of stock which indicates the order for the further materials and on the other hand ROQ is the quantity of material that should be ordered. 6(d) 6(e) (i) Halsey Premium Plan : Under Halsey premium plan a standard time is fixed for each job or process. If there is no saving on this standard time allowance, the worker is paid only his day rate. He gets his time rate even if he exceeds the standard time limit, since his day rate is guaranteed. Advantages and Disadvantages of Halsey Premium Plan Advantages Disadvantages 1. Time rate is guaranteed while there is opportunity for increasing earnings by increasing production. 2. The system is equitable in as much as the employer gets a direct return for his efforts in improving production methods and providing better equipment. 1. Incentive is not so strong as with piece rate system. In fact the harder the worker works, the lesser he gets per piece. 2. The sharing principle may not be liked by employees.

21 (5x5=25)