IGNOU FREE SOLVED ASSIGNMENT: ECO - 10 ELEMENTS OF COSTING (2019 - 2020) | IGNOU B.COM FREE SOLVED ASSIGNMENTS

IGNOU FREE SOLVED ASSIGNMENTS (2019-20)
Elective Course in Commerce
ECO – 10: Elements of Costing
ASSIGNMENT- 2019-20

Dear Students,

As explained in the Programme Guide, you have to do one Tutor Marked Assignment in this Course.

Assignment is given 30% weightage in the final assessment. To be eligible to appear in the Term-end examination, it is compulsory for you to submit the assignment as per the schedule. Before attempting the assignments, you should carefully read the instructions given in the Programme Guide.

This assignment is valid for two admission cycles (July 2019 and January 2020). The validity is given below:

1) Those who are enrolled in July 2019, it is valid up to June 2020.

2) Those who are enrolled in January 2020, it is valid up to December 2020.

You have to submit the assignment of all the courses to The Coordinator of your Study Centre. For appearing in June Term-End Examination, you must submit assignment to the Coordinator of your study centre latest by 15th March. Similarly for appearing in December Term-End Examination, you must submit assignments to the Coordinator of your study centre latest by 15^th September.

Course Code: ECO - 10
Course Title : Elements of Costing
Assignment Code : ECO - 10/TMA/2019-20
Coverage : All Blocks
Maximum Marks: 100

Attempt all the questions

1. What are the different methods of costing? State the industries to which they can be applied. (20)

Ans: Methods of Costing: The methods of costing are as follows:

1)      Job Costing: Job costing is designed to accumulate cost data for a manufacturing firm which produces goods to specific order. It is also known as specific orders costing or production order costing. Under this method of costing, each job, batch or contract is treated as a cost unit and costs are collected and built up accordingly. It is employed in industries in which:

a) A production is done on the basis of customer’s own specifications.

b) Products are manufactured in distinguishable lots.

c) Products are not uniform.

d) It is practical to maintain a separate record of each lot from the time production is begun until it is completed.

Following is the list of concerns which generally employ job costing method.

a) Printing Work. b) Design Engineering Concerns. c) Repair Works. d) Construction companies. e) Furniture makers. f) Hardware industry. g) Automobile garages. h) Interior decoration etc.

2)      Contract Costing: This method if applied in undertakings erecting buildings or carrying out constructional works, e.g., House buildings, ship building, Civil Engineering contracts. Here the cost unit is one and completed in itself. The cost unit is a contract which may continue for over more than a year. It is also known as the Terminal Costing, since the works are to be completed within a specified period as per terms of contract or agreement executed by the contractor and contractee.

3)      Batch Costing: In this method, a batch of similar or identical products is treated as a job. Here the unit of cost is a batch of group of products, costs are collected and analyzed according to batch numbers and the costs are ascertained batch wise. This method is applied in pharmaceutical industries where medicines or injections are manufactures batch wise or in general engineering factories producing components in convenient batches.

4)      Process Costing: Process costing method is applicable to those industries manufacturing a number of units of output requiring processing. Here an article has to undergo two or more processes for reaching the stage of finished goods and succeeding process till completion. There are number of industries where Process costing system can be used except where job, Batch or Unit Operation Costing is necessary. The following are examples of industries where process costing is applied:

a)      Where the final product merges only after two or more process such as paper-the raw material, bamboo is made into pulp; pulp is a made into paper and then it is finished, glazed etc. for sale;

b)      The product of one process becomes the raw material of another process or operation e.g. refined groundnut oil is the material for making vegetable ghee and

c)       Different products may have a common prior process e.g. brass goods will require melting of brass commonly for all goods. Another example is petroleum products by the same refinery.

d)      Some other industries where Process Costing is applied are:

e)      Chemical works, Textiles, weaving, spinning , Soap making, Food product, Box making, Canning factory, Coke works, Paint, ink and varnishing etc.

5)      Unit costing: This method is also known as single or output costing. The objective of this method is to ascertain the total cost as well as the cost per unit. A cost sheet is prepared taking into account the cost of material, labour and overheads, Unit costing is applicable in the case of mines, oil drilling units, cement works, brick works and units manufacturing cycles, radios, washing machines etc.

6)      Operating costing: This method is followed by industries which render services. To ascertain the cost of such services, composite units like passenger kilometers and tone kilometers are used for ascertaining costs. For example, in the case of a bus company, operating costing indicates the cost of carrying a passenger per kilometer.

7)      Operation costing: This is a more detailed application of process costing. It involves costing by every operation. This method is used where there is mass production of repetitive nature involving a number of operations. The main purpose of this method is to ascertain the cost of each operation.

8)      Multiple Costing: It is also known as composite costing. It refers to a combination of two or more of the above methods of costing. It is adopted in industries where several parts are produced separately and assembled to a single product. 

2. (a)The following data are available in respect of material ZM – 3 :

Supply Period	2 to 4 months
Consumption Rate Maximum Minimum Normal Annual	300 units per month 50 units per month 150 units per month 1800 units

Storage costs are 25% of stock value. Ordering costs are Rs. 200 per order. Price per unit of material Rs. 32 Compute:

1)         Reorder level

2)         Minimum Stock level

3)         Maximum Stock level

 Ans: 

(b) Explain the principles of apportionment of factory overheads with example.     (10+10)

Ans: Factory overheads: It is the cost of all items involved in the manufacturing of a product or service. It includes all direct costs and all indirect costs related to the production. It includes cost of direct materials, direct labour, direct expenses, and overhead expenses related to production. Overhead expenses, means all indirect costs involved in the production process. This is termed as factory overhead or manufacturing overheads. Eg. Salaries of staff for production department, technical supervision, Expenses of stores department, Depreciation of Plant and Machinery, Repairs and maintenance of Factory Building and Machineries etc.

Apportionment of Overhead Expenses

Cost apportionment is the allotment of proportions of items to cost centre or cost units on an equitable basis. The term refers to the allotment of expenses which cannot identified wholly with a particular department. Such expenses require division and apportionment over two or more cost centre or units. So cost apportionment will arise in case of expenses common to more than one cost centre or unit. It is defined as the allotment to two or more cost centre of proportions of the common items of cost on the estimated basis of benefit received. Common items of overheads are rent and rates, depreciation, repairs and maintenance, lighting, works manager’s salary etc.

Principles of Apportionment of Overhead Costs

The determination of a suitable basis is of primary importance and the following principles are useful guides to a cost accountant:

1)         Service or Use or Benefit Derived. It the service rendered by a particular item of expense to different departments can be measured, overhead can be conveniently apportioned on this basis. Thus, the cost of maintenance may be apportioned to different departments on the basis of machine hours or capital value of the machines, rent charges to be distributed according to the floor space occupied by each department.

2)         Ability to Pay Method. Under this method, overhead should be distributed in proportion to the sales ability, income or profitability of the departments, territories, basis of products etc. Thus, job or products making higher profits take a higher share of the overhead expenses. This method is inequitable and is not generally advisable to relieve inefficient units at the cost of efficient units.

3)         Efficiency Method. Under this method, the apportionment of expenses is made on the basis of production targets. If the target is exceeded, the unit cost reduces indicating a more than average efficiency. If the target is not achieved, the unit cost goes up, disclosing thereby the inefficiency of the department.

4)         Survey Method. In certain cases it may not be possible to measure exactly the extent of benefit which the various departments receive as this may vary from period to period. A survey is made of the various factors involved and the share of overhead costs to be borne by each cost centre is determined. Thus, the salaries of foreman serving two departments can be apportioned after a proper survey which may reveal that 30% of such salary should be apportioned to one department and 70% to the other department. The cost of lighting, when not metered, may similarly be apportioned on a survey of the number and wattage of light points and the hours of use in each cost centre.

Illustration 5. What basis would you follow for distribution of the following overhead expenses to departments?

a)         Store Service Expenses,

b)         Employees’ State Insurance,

c)          Factory Rent,

d)         Municipal Rent, Rates and Taxes,

e)         Insurance on Building and Machinery,

f)          Welfare Department Expenses,

g)         Creche Expenses,

h)         Steam,

i)           Electric Light,

j)           Fire Insurance

Solution:

Expenses	Basis of apportionment
(a) Store Service Expenses (b) E.S.I. (c) Factory Rent (d) Municipal Rent, Rates and Taxes (e) Insurance on Building and Machinery (f) Welfare Department Expenses (g) Creche Expenses (h) Steam. (i) Electric Light Calculated units (j) Fire Insurance.	Value of material consumed Wages on each department Floor area Floor area Insurable value Number of employees Number of female employees Potential demand (1) For capital items – value of capital items. (2) For stores – Average value of goods in stock

Following illustration will indicate how allocation and apportionment of expenses are done in practice and finally the total overhead or each department is obtained from the Departmental Distribution Summary.

 3. Explain the terms minimum level, maximum level and ordering level of stock. What are the factors that govern the fixation of these level.       (20)

Ans: Minimum Level: It represents the minimum quantity of an item of material to be kept in the store at any time. Material should not be allowed to fall below this level. If the stock goes below this level, production may be held up for want of materials. This stock is also known as safety stock level or buffer stock. While fixing the minimum level the following factors are to be taken into consideration:

1.          Nature of the material: Materials that are regularly stored must maintain a minimum level. If on customer’s order a special item of material is to be purchased, no minimum level is required to be fixed for that.

2.          The maximum time required from the date of order to the date of actual delivery: It is known as the lead time. The longer the lead time, the lower is the minimum level, provided the re-order point remains constant.

3.          Rate of consumption of the material: The minimum rate, the maximum rate and the normal rate of consumption are to be taken into consideration.

Maximum Level: It is the stock level above which stock should not be allowed to rise. This is the maximum quantity of stock of raw materials which can be had in the stock. It is goes above, it will be overstocking. While fixing the maximum level the following factors require consideration:

1.          Rate of consumption of the material.

2.          The lead time.

3.          The maximum requirement of the material at any time.

4.          Nature of the material: The materials which deteriorate quickly are stored as little as possible.

5.          Storage space available for the material.

6.          Price economy: Seasonal materials are cheap during the harvesting season. So maximum purchase is made during the harvesting season and as a result the maximum level is high.

7.          Cost of storage and insurance.

8.          Cost of the material and the finance available: When the material is costly the maximum level is likely to be low. If the price is likely to go up maximum level should be high.

9.          Inventory turnover: In case of slow moving materials the maximum level is low and in case of quick moving material the maximum level is high.

10.      Nature of supply: If the supply is uncertain the maximum level should be as high as possible.

11.      Economic order quantity (EOQ): Maximum level largely depends on economic order quantity, because unless otherwise contra indicated the economic order quantity decides the quantity ordered and hence influences the maximum level.

Ordering or Re-Ordering Level

This level is fixed between the minimum level and the maximum level. This is fixed in such a manner that the excess of ordering level over the minimum level is sufficient to meet the requirement during the lead time. Thus, the minimum level the rate of consumption and the lead time are the main factors to be considered while fixing the re-ordering level.

The following formula may be used for working out of the above levels:

Maximum level = Re-order level plus Re-order quantity minus (Minimum usage x Minimum order period)

4. M/S Buildcon Ltd. Undertook a contract construct a multi – storey building on 1-5-2018. The contractee agreed to pay 80% of the work certified and retain 20% till the completion of contact. The details of the expenditure and other details during the period 2018– 19 are given below. The contract price was Rs. 50,00,000.

	(Rs.)
Raw Materials used Labour paid Carriage Administration Cost Wages payable Work Certified Work Uncertified Cash received	9,00,000 7,50,000 37,000 2,43,000 30,000 29,00,000 2,00,000 80% of Work certified

You are required to prepare Contract Account, Contractee’s Account for the last year 2018-19 and the Balance Sheet (Asset Side) as would appear in Contractors’s books as on 31-3-2019.                                     (20)

Answer:

Contract Ledger Account For the year ended on 31st March, 2019
Particulars	Amount	Particulars	Amount
To Raw Material Used To Labour paid To Carriage To Administrative Cost To Wages payable	9,00,000 7,50,000 37,000 2,43,000 30,000	By Balance c/d (Cost to date being cost of work certified)	19,60,000
	19,60,000		19,60,000
To Balance b/d (Cost of work certified) To Profit and loss a/c (11,40,000*1/3*80%) To Work-in-progress c/d (Provisions)	19,60,000   3,04,000   8,36,000	By Work – in – progress -          Works Certified -          Works uncertified	29,00,000 2,00,000
	31,00,000		31,00,000

 

Contractee’s Account
To Balance C/d	23,20,000	By Cash Account (29,00,000*80%)	23,20,000
	23,20,000		23,20,000

 

Balance Sheet As on 31st March, 2019
Liabilities	Amount	Assets	Amount
Profit and loss account (will include)	3,04,000	Work – in – Progress - Work Certified                              29,00,000 - Work Un certified                           2,00,000                                                            31,00,000 Less: Advance from contractee    23,20,000	7,80,000

 5. Write short notes on the following:                                   (4X5)
(a) Costing

Ans: The term ‘cost’ has to be studied in relation to its purpose and conditions. As per the definition by the Chartered Institute of Management Accountants (C.I.M.A.), London ‘cost’ is the amount of actual expenditure incurred on a given thing. Costing: The C.I.M.A., London has defined costing as the ascertainment of costs. “It refers to the techniques and processes of ascertaining costs and studies the principles and rules concerning the determination of cost of products and services”.

(b) Economic Order Quantity

Ans: Economics order quantity: Economics order quantity represents the size of the order for which both order, ordering and carrying costs together are minimum. If purchases are made in large quantities, inventory carrying cost will be high. If the order size is small, ordering cost will be high. Hence, it is necessary to determine the order quantity for which ordering and carrying costs are minimum. The formula used for determining economics order quantity is a s follows:

               

Where,

A is the annual consumption of material in units.

O is the cost of placing an order (ordering cost per unit)

C is the cost of interest and storing one unit of material for the one year (carrying cost per unit per annum).

(c)Process Costing

Ans: Process costing is a method of operation costing which is used to ascertain the cost of production at each process, operation or stage of manufacture, where processes are carried in having one or more of the following features:

a)      Where the product of one process becomes the material of another process or operation

b)      Where there is simultaneous production at one or more process of different products, with or without by product,

c)       Where, during one or more processes or operations of a series, the products or materials are not distinguishable from one another, as for instance when finished products differ finally only in shape or form’.

Process costing is defined by Kohler as: “A method of accounting whereby costs are charged to processes or operations and averaged over units produced; it is employed principally where a finished product is the result of a more or less continuous operation, as in paper mills, refineries, canneries and chemical plants; distinguished from job costing, where costs are assigned to specific orders, lots or units.

Features/Characteristics of Process Costing:

a)      Process Costing Method is applicable where the output results from a continuous or repetitive operations or processes.

b)      Products are identical and cannot be segregated.

c)       It enables the ascertainment of cost of the product at each process or stage of manufacture.

d)      The output consists of products, which are homogenous.

(d) Office and Administration Overheads

Ans: Office and Administrative Overheads:  Indirect expenses incurred for running and administration of office are known as office and Administrative Overheads. Majority of office and administrative overheads are of fixed nature and these overheads are always absorbed as a percentage of works cost. Examples of such overheads are: Office rent, rates and taxes, printing and stationery, staff salaries and bonus, consultation fees, counting or compting house salary, office lighting and electricity, sundry and general expenses, director’s fees and other expenses, Contribution to provident fund and employees state insurance, consultation   fees, legal and bank charges, audit fees, depreciation on office equipments and furniture, Subscription of journal and magazines, postage and telephone, executives expenses, clerks and secretaries and accountant salaries and other expenses, R&D Expenses (Research and Development expenses), estimating expenses.