II INTERNAL MANAGEMENT ACCOUNTING AND CONTROL SYSTEMS

I(a) Distinguish between Job and Process costing. Job Costing It is used where production is undertaken under specific orders. Cost is determined for each job separate ! #ach job is separate and independent of the other. #ach job is usua ! a sing e comp ete unit and there is no work in progress after comp etion. &here are no transfers from one job to another un ess there is a surp us or e'cess production. Job costs are ascertained on ! when jobs are comp eted. &he items of prime cost can be traced with job cost. Cost contro is difficu t due to di+erse nature of jobs.

3 marks Process Costing It is used in continuous and mass production industries producing homogenous products. Costs are compi ed for each process on time basis. Products are manufactured continuous ! and the! ose their indi+idua identit!. &here can be work in progress at the end of the costing period. ,s the product mo+es from one process to another the cost is transferred to ne't process. &he costs are ascertained at the end of the costing period. Prime cost cannot be traced with a particu ar order due to continuous production. Cost contro is comparati+e ! easier because the products are homogenous and production is stab e. 7 marks

1. 2. ". $. %. (. ). *.

1. 2. ". $. %. (. ). *.

(b) -hat are the assumptions and uses of .argina Costing/

,ccording to the &ermino og! of Cost ,ccountanc! of the Institute of Cost and .anagement ,ccountants0 1ondon0 .argina Cost represents 2the amount of an! gi+en +o ume of output b! which aggregate costs are changed if the +o ume of output is increased b! one unit3. &he Institute of Cost and .anagement ,ccountants0 1ondon0 has defined .argina Costing as 2the ascertainment of margina costs and of the effect on profit of changes in +o ume or t!pe of output b! differentiating between fi'ed costs and +ariab e costs3. ,ssumptions4 1. , e ements of cost5 production0 administration and se ing and distribution5 can be segregated into fi'ed and +ariab e components. 2. 6ariab e cost remains constant per unit of output irrespecti+e of the e+e of output and thus f uctuates direct ! in proportion to changes in the +o ume of output. ". &he se ing price per unit remains unchanged or constant at a e+e s of acti+it!.

$. 7i'ed costs remain unchanged or constant for the entire +o ume of production.

II INTERNAL MANAGEMENT ACCOUNTING AND CONTROL SYSTEMS

%. &he +o ume of production or output is the on ! factor which inf uences the costs.

8ses4 1. 9e ps management in Production P anning. 2. 7aci itates ca cu ations of important factors ike :.#.P. ". 6a uab e aid to management for decision making. $. 7aci itates stud! of re ati+e profitabi it!. %. 9e ps in cost contro . (. Profit p anning. (c) -hat is &ransfer Pricing/ 8nder what conditions transfer prices are necessar!/ #'p ain brief ! the t!pes of transfer pricing. 10 marks 2, transfer price is a price used to measure the price of goods or ser+ices furnished b! a profit centre to other responsibi it! centres within a compan!3. &he e+a uation of manageria performance within the compan! through profit centres is impossib e without determining transfer price. In case +arious profit centres of the compan! e'change goods and ser+ices. In such situations0 there is need to determine the monetar! +a ues0 ca ed transfer price0 at which the transfer shou d take p ace so that costs and re+enues cou d be proper ! assigned. &!pes4 1. Cost price 2. Cost p us a norma mark5up ". Incrementa cost $. ;hared profit re ati+e to the cost %. .arket price (. ;tandard price ). <egotiated price *. Dua or two5wa! price. II. Differentiate between .argina and ,bsorption Costing. ,bsorption Costing .argina Costing 5 marks

II INTERNAL MANAGEMENT ACCOUNTING AND CONTROL SYSTEMS

1. , costs whether +ariab e or fi'ed are treated as product costs e+en though fi'ed cost are period costs and ha+e no re e+ance to current operations. 2. &he stock of finished goods and work in progress is +a ued at tota cost. ". In absorption costing arbitrar! apportionment of fi'ed costs0 o+er the products0 resu ts in under or o+er5 absorption of such costs. $. .anageria decision5making is based upon =profit> which is the e'cess of sa es +a ue o+er tota cost. Part :

1. ?n ! +ariab e costs are treated as product costs0 fi'ed cost is treated as period cost @ is charged to PA1 aAc for that period. 2. 7B and -IP are +a ued at margina cost ie +ariab e cost on !. ". It e'c udes fi'ed costs and the Cuestion of under or o+er absorption of fi'ed costs does not arise. $. &he manageria decisions are guided b! =contribution> which is the e'cess of sa es +a ue o+er +ariab e cost.

I (a) 7rom the fo owing particu ars find the most profitab e product mi' and prepare a statement of profitabi it! of that product mi'. 10 marks Particu ars 8nits budgeted to be produced and so d ;e ing priceA unit EeCuirementsAunitsF direct materia Direct abour 6ariab e ?9s 7i'ed ?9s Cost of Direct materia Akg Direct abour hour rate .a'imum possib e units of sa es Product , 1*DD Es. (D % kg $ hrs Es. ) Es. 1D Es. $ Es. 2 $DDD Product : "DDD Es. %% " kg " hrs Es. 1" Es. 1D Es. $ Es. 2 %DDD Product C 12DD Es. %D $ kg 2 hrs Es. * Es. 1D Es. $ Es. 2 1%DD

, the three products are produced from the same direct materia using the same t!pe of machines and abour. Direct abour0 which is the ke! factor0 is imited to 1*(DD hrs. Particu ars Product , Product : Product C

II INTERNAL MANAGEMENT ACCOUNTING AND CONTROL SYSTEMS

(b) Gour compan! has a production capacit! of 2 akhs units per !ear. <orma capacit! uti iHation is reckoned is IDJ. 6ariab e production costs are Es.11 per unit. &he fi'ed cost are Es. "(DDDDA!ear. 6ariab e se ing costs are Es. " per unit and fi'ed se ing costs are Es. 2)DDDDA!ear. &he unit se ing price is Es. 2D. In the !ear which ended on "1.".2D120 the production was 1(DDDDunits and sa es were 1%DDDD units. &he c osing in+entor! on "1.".2D12 was 2DDDD units. &he +ariab e production costs for the !ear were Es. "%DDD higher than the standard. Calculate the profit for the year by the Absorption and Marginal Costing methods and comment on the results. 15 marks Particu ars (,) ;a es in units ;e ing price per unit ;a es (:) 6ariab e production costs 6ariab e se ing costs ("K1%DDDD) 7i'ed cost 7i'ed se ing cost &ota cost L opening in+entor! ,bsorption costing 10%D0DDD 2D "D0DD0DDD 1)0I%0DDD $0%D0DDD "0(D0DDD 20)D0DDD 2*0)%0DDD M .argina Costing 10%D0DDD 2D "D0DD0DDD 1)0I%0DDD $0%D0DDD M M 220$%0DDD M

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2*0)%0DDD 5 C osing in+entor! Cost of goods so d "0(D0DDD(1*K2DDDD ) 2%01%0DDD

220$%0DDD 20*D0DDD(1$K2DDDD) 1I0(%0DDD

?perating profit 5 5 7i'ed cost 7i'ed se ing cost <et profit

$0*%0DDD M M $0*%0DDD

1D0"%0DDD "0(D0DDD 20)D0DDD $0D%0DDD