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ANSWERS TO MODEL QUESTION PAPER ON COSTING

Q1 (A)

a)Cost Accounting is the process of accounting for costs, which begins


with recording of Income and expenditure of the bases on which they are
calculated and ends with the preparation of statistical data.Cost
Accounting is thus the mechanism by means of which cost of products or
services are ascertained and controlled.

b)Cost Audit is the verification of the correctness of cost accounts and


check on the adherence of the cost Accounting plan. Cost Audit is
essential where cost accounting is carried out on a large scale. Cost
Auditor gives more emphasis on the control of material, labour and
overhead, cost finding routine, reconciliation of cost with financial
accounts, and such other matters of importance.
c) Uniform costing is the use by several undertakings of the same
costing principles and /or practices. Uniform costing is thus not a separate
technique or method—it simply denotes a situation in which a number of
undertakings may use the same costing principles in such a way as to
produce costs which are of the maximum comparability because from
such costs valuable conclusions can be drawn and interactive lessons
learnt.
d) Direct Costs is the aggregate of material cost and apportion of fixed
cost that can be traced or allocated to products. Direct costs are ,
therefore , all traceable costs.
e) Overheads is the aggregate of indirect material costs, indirect wages
and indirect expenses. The word therefore indicates that the cost
accountant is either unable or unwilling to allocate to particular cost unit
and is generally apportioned to or absorbed by cost units on some
suitable bases. The main problem in overheads are :
1. Linking overhead to cost units in such a way that each cost unit
gets its due share in overhead
2. Devising suitable plans for controlling overheads

Q1 (B)
a) Factory Labourers wages -----------------Production
b) Carriage outwards _____________ Distribution
c) Cost of Idle time in factory -------------- Production
d) Cash Discount ------------- Selling
e) Income Tax -------------- Omitted from cost records
Q2

Grade Units SP/Unit SP % of profit to Actual Purchase


sales profit rate/Unit
included
in price
a b c d e f c-f
A 5,000 1.20 6,000 (18000- 0.12 1.08
9000)x100/10000
= 10%
B 3,000 1.00 3,000 0.10 0.90

C 2,000 0.50 1,000 0.05 0.45


Total 10,000

Q3 A

a) Reordering Level is the point lying between the


maximum and minimum levels at which time it is
essential to initiate purchase orders for fresh supplies of
the material. This point will usually be slightly higher
than the minimum stock , to cover such emergencies as
abnormal usage of the material or unexpected delay in
delivery of fresh supplies. This level depends on lead
time, rate of consumption, and economic order quantity.
b) Economic order quantity is called the reordering
quantity which is the normal quantity to be placed on
order when the stock has reached its ordering level. The
reorder quantity will be such that when it is added to the
min imum stock will not exceed the maximum stock. It is
denoted by the formula :
______
E = √ 2.U.O
C
C – Cost of carrying one unit in inventory for one year
U – Annual usage in Units
O—Order placing and receiving cost per order
C) Inventory Turnover is a ratio of the value of materials
consumed during a period to the average value of inventory during the
period. A high ratio indicates fast moving stock. This ratio is indicated by the
number of days in which the average inventory is consumed. This is done by
dividing 365 days by the inventory turnover ratio. The number of times an
inventory is used within a particular period is a good measure of the
efficiency of material control and material utilization. Thus knowing the
turnover of different items it is possible to avoid keeping capital locked up in
undesirable stocks.

Average Inventory Opening Stock +Closing stock


______________________________
2
Inventory Turnover Material Consumption
______________________
Average Inventory
Inventory Turnover
Period 365
------
Inventory Turnover

Q3 B
a) FIFO This is the price paid for the material first taken into stock from
which the material to be priced could have been drawn. Items longest in
stock are used up first. This method is most suitable for use where the
material is slow moving and has comparatively high unit cost.
b) Base stock price This is the adoption of any pricing method keeping a
fixed minimum volume of material at all times at a fixed price regardless of
the price fluctuations. Base stock is always in store and is not used unless an
emergency arises.
C) Weighted Average Price This is the price which is calculated by
dividing the total cost of material in the stock from which the material to be
priced have been drawn, by the total quantity of material in the stock

Q4 1. Labour Turnover The cost of recruiting an efficient worker and


training him is very high and for this reason it is necessary to conrol the cost
of “leaving the workers and replacing them”. Labour turnover is the term
applied to the RATE at which the employees who leave the factory have to be
replaced and to control its cost is also an important aspect of labour conttol
cost. A high rate of labour turnover can have a serious adverse effect upon
the production costs.
2. Job Evaluation is the process of studying and assessing the
relative values of jobs within an industry in order to ascertain their
comparative labour worth.The demand for a simplified and balanced wage
structure has led to the development of job evaluation.

3.Time rate of wages This is the method of payment by


hour,day,week or other agreed time regardless of output. Under this method
payment for extra for overtime work is also done. The employer gets all the
benefits for increase in productivity under the time rate. The formula is
Earnings =Hours workedxrate per hour. There are two levels of payment
under this method : the ordinary levels and high wage levels.

3. Taylor Differential piece rate system Under this system of


wage payments day wages are not guaranteed. It provides for
two piece rates a low piece rate for output below standard and
a high piece rate for output above standard, This scheme is
suitable in mass production industries. For eg standard time
allowed 100units per hour, Normal rate Rs 3.50 per hour and
the differential rates to be applied are 80% of piece rate below
standard and 120% of piece rate above standard. If A
completes 700 units and B completes 900 ,the rate per unit for
a 8 hr day will be Rs 0.035 the earnings would be A 80% of Rs
0.035 i.e o.028 and B 120% of Rs 0.035 i.e Rs 0.042 and A will
get Rs 19.60 per day and B will get Rs 37.38 per day.
4. Halsey Premium Bonus Under this scheme worker is given
fixed percentage of the time saved over the standard time
allowed as a premium bonus. The time rate is guaranteed.. The
share of bonus can vary between 30% and 50% of time saved
but the usual percentage is 50%.. The formula is
E=HWxRH+50%(TA-HW)XRH. If RH is Re1/hr TA 30 hrs HW 20
hrs the earnings will be 20x1+50%(30-20)x1= Rs 25

Q5
.
1. Fixed Overheads It is that portion of the total overhead which
tends to be unaffected by variations in volumes of output.
Expenses like Rent, insurance of factory buildings, salaray of
administrative staff are fixed in nature. It may be noted that an
expense is fixed only witin defined activity limits and in the long
run in an expanding or contracting business, no expense
remains unchanged.
2 Machine Hour Rate This is an actual or predetermined rate of
overhead absorption which is calculated by dividing the
overhead to be absorbed by the number of hours for which a
machine/machines are operated or expected to be operated.
Overhead to be absorbed Rs 6,000 Machine hrs 2,000 The
machine hr rate will be 6,000/2,000=Rs 3/hr
3 Standing order Numbers Indirect items such as Rent
electricity charges telephone charges etc incurred for the entire
works requires apportionment to different cost centres on some
suitable basis after they are collected under separate
STANDING ORDER NUMBERS .These are also called primary
standing numbers and distribution of such expenses to different
cost centres on some suitable basis is called primary
apportionment.
4 Sinking Fund method of Depreciation. This is the method
of providing for depreciation by means of fixed periodic
changes accompanied by investment which aggregated with
compound interest over the life of the asset would equal the
cost of that asset. Under this method a sum of money together
with interest received on investment is invested periodically in
gilt edged securities and at the same time a charge for
depreciation is made to costs equal to the amount invested
periodically. This method provides cash for the replacement of
the asset at the end of the useful life.This method is also used
for amortising i.e recovering the capital value paid for
leasehold in the accounts over a fixed period.

Q6

STATEMENT OF COMPREHENSIVE HOUR RATE


MACHINE B ESTIMETED PRODUCTION 3600 +ESTIMATED
SET UP TIME 400 HOURS PER ANNUM

__________________________________________________________________________
____

Particulars Basis of Apportionment Amt/Annum Mach.Hr


rate

Fixed Expenses

A. Depreciation Rs 50,000/10 Rs 5,000

B. Overhead Exps

Factory Rent Area 3000sqft


______ X 50,000 Rs 1,875
80,000

Heating Lighting Area 3000sqft


______ X 40,000 Rs 1,500
80,000
Supervision No of Mcs 1/25X 1,50,000 Rs 6,000

Reserve equpmt Actuals Rs 5,000


____________
Total Fixed Exp Rs 19,375

19,375/4000
4.84
Power While in operation
0.50
Operators wages 24/8= Rs 3/hr /2mcs
1.50
----
----
Comprehensive MHR while in operation 6.84

Fixed expenses
4.84
Power Nil

Operators wages 24/8


3.00

____
Comprehensive MHR under set up
7.84

Job 1102 Job 1103

Set Up 7.84 80hr 627.20 7.84 40 hr 313.60


Operation 6.84 130 hrs 889.20 6.84 160 hrs 1094.40
_______ ________
1516.40 1408.00

Q7

STATEMENT SHOWING PROFIT AS PER COST ACCOUNTS


FOR THE YEAR ENDED 30JUNE 2010

Partticulars Amount Per Unit


Rs Rs

Production 10250+250-500=10000 units

Cost of Materials 2,60,000 26.00

Labour Cost 1,50,000 15.00

Factory Overheads 90,000 9.00


_____________________________
Factory Cost 5,00,000 50.00

Adm Overheads 20% of Factory cost 1,00,000 10.00


_____________________________
Cost of production 6,00,000 60.00

Add Opg stk of finishedgoods


500 units @Rs 45.00 22,500
________________________________

6,22,500
Less Clg stk of finished goods
250 units @Rs 60.00 15,000
_______________________________
Cost of goods sold 10250 units 6,07,500

Selling Expns 10250x6 61,500


__ _______________
Cost of sales of 10250 units 6,69,000

Sales of 10250 units 7,17,500


_________________

Profit 48,500
_________________

Reconciliation

Profit as above 48,500

Add Overvaluation of
Opg stock of finished goods in costing 5,000
Overabsorption of selling expenses 6,500
Income in financial accounts but not
In costing

Interest 250
Rent recd 10,000 10,250
----------- 21,750
________
70,250
Less Underabsorption of

Factory overheads 4,750

adm overheads 6,000

Overvaluation of closing finished stock 2,500

Expenses in financials but not in costing

Bad debts 4,000


Prel Exp 5,000 9,000
------------ 22,250
__________
Profit as per financial accounts 48,000
__________
Q8

1)
Statement of equivalent production

Partculars Output material Labour Overheads


Units Units % Units % Units %
____________________________________________________________________________
__

Finished output 9.500 9,500 100% 9,500 100% 9,500 100%


Normal Loss 1%
Of Input of 10000
Units 100 _____________________________________________

Abnormal loss
Balancing Figure 50 50 100% 40 80% 40 80%

Closing WIP 350 350 100% 175 50% 175 50%


____________________________________________________
10,000 9,900 9,715 9715
____________________________________________________
Units Introduced 10000X 3 = 30,000
Add Direct Materials 14,650
________
44,650
Less sale of normal scrap
100x1 100
_________
44.550 21,148 42,000
__________
Cost per equivalent units
Of production 44,550 21,148 42,000
________ ________ ________
9,900 9.715 9,715
= 4.50 2.17685 4.3232

2. Statement of cost
Finished goods = 9500x11.00 1,04,500
Abnormal Loss
Material 5x4.50 225
Labour 40x 2.17685 87
Overheads 40x4,3232 173
_______ 485
Closing wip
Material 350x4.50 1575
Labour 175x2.17685 381
Overheads 175x 4.3232 757
______ 2,713
---------------
Total 1,07,698

3. Process B account

To opeg stock Nil Nil By normal loss 100 100


To units Intro
Duced 10000 30,000 By abnormal loss 50 485
To Direct Mat 14,650 By Finished
To Labour 21,148 Output @11/unit 9500 1,04,500
To overheads 42,000 by closing wip 350 2,713
________________________________________________

10000 1.07,798 10000 1,07,798


_____________________________________________________________

4. Abonormal loss
To process B 50 485 By sales 50 125
By cost
P&L 360
________________________________________
50 485 50 485

Q9

Number of passenger kms


Onward Trip 4 busesx50 kmsx30daysx40 pass x75% = 1,80,000

Return Trip 4 busesx50 kmsx30daysx40 pass x75% = 1,80,000


------------------
Total pass Kms 3,60,000

Total cost = Rs 14.400


Total pass Kms = 3,60.000
Cost /passenger = 14,400\3,60,000
= Re0.04
i.e 4 paise per pass km

Q 10 a)
The net profit arrived at under marginal costing
will not be the same as under absorption costing because :
• Over and under absorbed overheads In absorption
costing fixed overheads can never be absorbed exactly
because of the difficulty in forecasting costs and volume of
output. In marginal costing the atual fixed overheads
incurred is wholly charged to P&L account unlike in
absorption costing. Hence there will be differences in net
profits.
• Differences in stock valuation In marginal costing wip
and finished stocks are valued at marginal cost but in
absorption costing they are valued at total production cost
including fixed costs and hence profit will differ as fixed
overheads are different in the two methods.

b)
Pay off = Sales –variable cost-fixed cost

PAY OFF TABLE


_______________________________________________________________
______________
Product Particulars Demand
Poor Moderate High
_____________________________________________________________________________
Units 25,000 1,00,000 1,50,000

Fountain pens

Type 1 sales 5,00,000 20,00,000 30,00,000


Variable costs 2,50,000 10,00,000 15,00,000
____________________________________
Contribution 2,50,000 10,00,000 15,00,000
Fixed cost 2,00,000 2,00,000 2,00,000
___________________________________

Pay off 50,000 8,00,000 13,00,000


Type 2 sales 5,00,000 20,00,000 30,00,000
Variable costs 2,00,000 8,00,000
12,00,000
____________________________________
Contribution 3,00,000 12,00,000 18,00,000
Fixed cost 3,20,000 3,20,000 3,20,000
___________________________________

Pay off ( 20,000) 8,80,000


14,80,000
___________________________________________________________________________
Type 3 sales 5,00,000 20,00,000 30,00,000
Variable costs 1,50,000 6,00,000 9.00,000
____________________________________
Contribution 3,50,000 14,00,000 21,00,000
Fixed cost 6,00,000 6,00,000 6,00,000
___________________________________

Pay off (2,50,000) 8,00,000


15,00,000

Q11 a)

COMPUTATION OF FIXED OVERHEAD VARIANCE

a) Actual Fixed overhead during the month = Rs


10,100
b) Fixed Overheads as in Budget for the month = Rs
10,000
c) Std Fixed overhead for actual production
5200x2 = Rs
10,400

Variances

Expenditure Variance a-b = Rs


100(A)
Volume Variance b-c = Rs
400(F)
Total FO variance Rs 300
(F)

b)

Finished output 1700 kgs Standard loss in processing


15%
Hence input is 177x100/85 = 2000 kgs

For an input of 2000 kgs the standard cost will be as


follows :

A 40% of 2000 = 800 kgs @ Rs 4.00 = 3,200


B 60% of 2000 =1200 kgs @ Rs 3.00 = 3,600
_________________________________________
2,000 kgs 6.800
Less 15% 300 kgs --
--------------------------------------------------------
------
Finished output 1,700 kgs 6,800
Standard yield rate Rs 4/kg

Actual cost

A 35+800-5 = 830 kgs consumed 35x 4.00


140.00
795x4.25 (purc)
3,378.75
3,518.
75

B 40+1200-50= 1190 kgs consumed 4x 3.00


120.00
11.50x2.50(purc)
2,875.00
2,995.
00

Total 2020 kgs


6,513.75
Less 320 Kgs
Finished output 1700 kgs

Material price variance MPV = AQ(SR-AR)


Or
(AQXSR)-(AQXAR)
A = 830X4=3320-3518.75 = 198.75 ( A)
B = 1190X3= 3570-2995 = 575.00(F)
376.25(F)

Material usage variance SR( SQ-AQ)


A= 4.00( 800-830) = 120.00(A)
B= 3.00( 1200-1190) = 30.00(F)
90.00 (A)

Material yield variance SYR(SY-AY)


= 4( 1717-1700) = 68(A)

Note for 2000 kgs input SY 1700


2020 Kgs input SY 1717

Material mix variance


4.00( 800x2020/2000-830

A = 4.00(808-830) = 88(A)
B 3.00(1200x2020/2000-1190
= 3.00(1212-1190) = 66(F)
__________
22.00(A)
Material cost variance SC-AC
6800.6513.75 = 286.25(F)

Reconciliation

MCV = MPV+MYV+MMV
286.25(F) = 376.25(F)+68(A) + 22(A)

Q 12
_________________________________________________________________
___

MATERIAL BUDGET
A LTD YEAR 2XXX

Product Qty to be Mat 11 Mat 13 Mat 16 Mat 17


Mat 18
Produced
KGS KGS KGS KGS KGS
A 12,000 600 120 - 72 48
B 11,000 880 55 330 110 44
Total qty 1480 175 330 182 92

Rate/Kgs Rs 60 Rs 60 Rs 10 Rs 50 Rs 25

Cost of each material Rs 88,800 Rs10,500 Rs 3,300 Rs 9,100 Rs


2,300

B.

Process III Account

Units Amount Units Amount

To Bal 500 7,200 By Normal


Loss 1,000 3,000
Process II 21,300 1,65.400 By Abnormal
Loss 100 1,400
Materials 80,360 By Process IV 18,900
2,84,550
Wages 39,620 By Bal 1,800
23,400
Overheads 19,810
__________________________________________________________
21,800 3,12,390 21,800
3,12.390

PROCESS COST SHEET


Process III
Opg wip 500 units
FIFO Method

Statement of equivalent production


Input output Equivalent
production

Material A Material B
Lab&Ohds
Items Units Items Units Units % Units % Units
%

Opg wip 500 opg wip 500 150 50 250


50
Introduced 21300 Introduced
And completed
During the
Period 18,400 18,400 100 18.400 100 18,400
100
Tfr process
IV 18,900
Normal loss 1,000
------------------------------------------------------------- Abnormal
Loss 100 100 100 100 100 100
100

Closing wip 1800 1800 100 1440 80 1080


60
Total 21800 21800 20100 20090 19810

Statement of cost for each element

Element of cost cost equiv prod cost/unit

Material A
Trnsfer from prev process 165400
Less Scap Normal 3000 162400 20300 8.00
Material B
Added this process 80360 20090 4.00
Direct wages 39620 19810 2.00
Overhead 19810 19810 1.00
----------------------------------------------------------
---
3,02,190

Statement of apportionment of cost

Items Elements Eq.Prod cost/unit cost Total


cost

Opg wip Mat A - 8 -


Mat B 150 4 600
Wages 250 2 500
Ovheads 250 1 250
1350

Introduced
And completed Mat A 18400 8 147200
Mat B 18400 4 73600
Wages 18400 2 36800
Ovheads 18400 1 18400
276000

Abnormal Loss
Mat A 100 8 800
Mat B 100 4 400
Wages 80 2 160
Ovheads 80 1 80
1440

Closing wip Mat A 1800 8 14400


Mat B 1440 4 5760
Wages 1080 2 2160
Ov Heads 1080 1 1080
23400
----------------------------------------------------------------------------------------------
---------------- Total cost
3,02,190