2018
COST AND MANAGEMENT ACCOUNTING
Paper: 405 (Management Major)
Full Marks – 80
Time – Three Hours
The figures in the margin indicate full marks for the questions
GROUP – A (Cost Accounting)
Marks – 40
1. Answer the following as directed: 1x6=6
a) Variable cost remains fixed per unit. Write true or false.
Ans: True
b) In case of LIFO method, issues are based on actual cost. Write true or false.
Ans: False, in FIFO method issues are based on actual cost
c) In historical costing, actual costs are ascertained after they have been incurred. Write true or false.
Ans: True
d) Quantity and price are recorded in the Bin Card. Write true or false.
Ans: False, Store ledger records both price and quantity
e) Time wage is suitable where quantity of work is more important than quality of work. Write true or false.
Ans: False, it is suitable where quality of work is more important than quantity of work
f) Rent is variable overhead. Write true or false.
Ans: False, it is a fixed overhead
2. Answer the following questions: 2x2=4
a) What is labour turnover?
Ans: Labour turnover may be defined as change in labour force i.e., percentage change in the labour force during a specific period. High labour turnover indicates that labour is not stabilised and there are frequent changes by way of workers leaving the organization. High labour turnover is to be avoided. At the same time very low labour turnover indicates inefficient workers are being retained in the organization.
b) What is bill of materials?
Ans: A bill of materials is list of raw material required to manufacture or develop or repair a product or service. In short it is a complete list of materials to be used in production.
3. Answer any two questions from the following: 5x2=10
a) Write any five differences between financial accounting and cost accounting.
Ans: DISTINGUISH BETWEEN FINANCIAL AND COST ACCOUNTING
Basis | Financial Accounting | Cost Accounting |
1. Nature | Financial accounts are maintained on the basis of historical records. | Cost accounts lay emphasis on both historical and predetermined costs. |
2. Use | Financial Accounting is used even by outside entities. | Cost Accounting is used only the management of the concern. |
3. System | Financial Accounting uses the double-entry system for recording financial data. | Cost Accounting does not use the double-entry for collecting cost data. |
4. Scope | Financial Accounting covers all items of income and expenditure whether related to the cost centers or not, | Cost Accounting covers all items related to a cost centre. |
5. Reports | Financial Accounting results are shown P&L A/c and balance sheet. | Cost Accounting results are shown in Cost Sheet/ Coating Profit & Loss A/c/ Reports Contract A/c/ Process A/c. |
6. Period | Financial Accounting is for a specific period. | Cost Accounting concentrates on cost centers and not on period. |
b) What are the different methods of measuring labour turnover?
Ans: Measurement of Labor Turnover: It is essential for any organisation to measure the labor turnover. This is necessary for having an idea about the turnover in the organisation and also to compare the labor turnover of the previous period with the current one. The following methods are available for measurement of the labor turnover.
1. Additions Method: Under this method, number of employees added during a particular period is taken into consideration for computing the labor turnover. The method of computing is as follows:
Labour Turnover = Number of additions/Average number of workers during the period X 100
2. Separations Method: In this method, instead of taking the number of employees added, number of employees left during the period is taken into consideration. The method of computation is as follows:
Labour Turnover = Number of separations/Average number of workers during the period X 100
3. Replacement Method: In this method neither the additions nor the separations are taken into consideration. The number of employees replaced is taken into consideration for computing the labour turnover.
Labour Turnover = Number of replacements/Average number of workers during the period X 100
4. Flux Method: Under this method labor turnover is computed by taking into consideration the additions as well as separations. The turnover can also be computed by taking replacements and separations also. Computation is done as per the following methods:
Labor Turnover = ½ [Number of additions + Number of separations] /Average number of workers during the period X 100
c) Write the differences between ABC analysis and VED analysis.
Ans: Difference between ABC analysis, Perpectual Inventory system and VED analysis
ABC analysis | VED analysis |
Its main objective is to reduce the investment in material. | Its main objective is to prevent stoppage of production due to shortage of essential material. |
In this system, stocks are classified on the basis of value. | The analysis classifies items on the basis of their criticality for the industry or company – vital, essential and desirable. |
It will not pay equal attention to all types of inventory. | More attention is given to essential inventory. |
ABC analysis is applicable when there is small variety of stock. | VED analysis is specially applied in the case when there is a large variety of stocks such as spare parts inventory, medical stores etc. |
Store ledger and bin card is not prepared in this analysis. | Store ledger and bin card is not prepared in this analysis. |
4. Answer the following questions: 10x2=20
(a) What are the techniques of costing?
Ans: Techniques of Costing: The types and techniques of costing are as follows:
1) Historical Costing: ‘The ascertainment of costs after they have been incurred’ is called Historical costing. Such costs are, therefore, ‘postmortem’ costs as under this method all the expenses incurred on the production are first incurred and them the costs are ascertained.
2) Standard Costing: ‘The preparation and use of standard costs, their comparison with actual costs and the analysis of variance to their causes and points of incidence’ is called standard costing.
3) Here the standards are first set and then they are compared with actual performances. The difference between the standard and the actual is known as the variance. The variances are analyzed to find out their causes and also the points or locations at which they occur.
4) Marginal Costing: Marginal Costing involves the ascertainment of marginal costs and of the effects on profit of changes in volumes or type of output by differentiating between fixed costs and variable costs’. The fixed costs are those which do not change but remain the same, with the increase or decrease in the quantum of production. The variables costs are those which do change proportionately with the change in quantum of production.
5) The marginal costing takes into account only the variable costs to find out ‘marginal costs’. The difference between Sales and Marginal costs is known as ‘Contribution’ and contribution is an aggregate of fixed costs and Profit/Loss. So the fixed costs are deducted from the contribution to find out the profits. Marginal costing is a technique to ascertain the effect on profits. Marginal costing is a technique to ascertain the effect on profit by the change in the volume of output or by the change in the type of output.
6) Direct Costing: The practice of charging all direct cost to operations, process or products, leaving all the indirect costs to be written off against profits in the period in which they arise is called direct costing.
7) Absorption Costing: It is the practice of charging all costs, both variables and fixed, to operations, processes or products. This is the traditional technique as opposed to Marginal or Direct costing techniques. Here both the fixed and variables cost are charged in the same manner.
Or
Two components X and Y are used as follows:
Normal usage Maximum usage Minimum usage Re-order quantity X Y Re-order period X Y | 600 units per week each 900 units per week each 300 units per week each. 4,800 units 7,200 units. 4 to 6 weeks, 2 to 4 weeks. |
Calculate:
1) Re-order level.
2) Minimum level.
3) Maximum level.
4) Average level for each component X and Y.
(b) What are the various methods of absorption of overhead?
Ans: The most important step in the overhead accounting is ‘Absorption’ of overheads. CIMA defines absorption as, ‘the process of absorbing all overhead costs allocated or apportioned over a particular cost center or production department by the units produced.’ In simple words, absorption means charging equitable share of overhead expenses to the products. As the overhead expenses are indirect expenses, the absorption is to be made on some suitable basis. The basis is the ‘absorption rate’ which is calculated by dividing the overhead expenses by the base selected. A base selected may be any one of the basis given below. The formula used for deciding the rate is as follows,
Overhead Absorption Rate = Overhead Expenses/ Units of the base selected.
The methods used for absorption are as follows:
a. Direct Material Cost: Under this method, the overheads are absorbed on the basis of percentage of direct material cost. The following formula is used for working out the overhead absorption percentage: Budgeted or Actual Overhead Cost/ Direct Material Cost X 100
b. Direct Labor Cost Method: This method is used in those organizations where labor is a dominant factor in the total cost. Under this method, the following formula is used for calculating the overhead absorption rate: Budgeted or Actual Overheads/ Direct Labor Cost X 100
c. Prime Cost Method: This method is an improvement over the first two methods. Under this method, the Prime Cost is taken as the base for calculating the percentage of absorption of overheads by using the following formula: Budgeted or Actual Overheads/ Prime Cost X 100
d. Production Unit Method: This method is used when all production units are similar to each other in all respects. Total overhead expenses are divided by total production units for computing the rate per unit of overheads and overheads are absorbed in the product units. If a firm produces more than one products and if they are not uniform to each other, equivalent units are calculated to find out the rate of overheads per unit. The formula of absorption of overheads is as follows: Overhead absorption rate = Budgeted or Actual Overheads/Production Units
e. Direct Labor Hour Method: Under this method, the rate of absorption is calculated by dividing the overhead expenses by the direct labor hours. The formula is as follows. Budgeted or Actual Overhead Expenses/Direct Labor Hours
f. Machine Hour Rate: Where machines are more dominant than labor, machine hour rate method is used. CIMA defines machine hour rate as ‘actual or predetermined rate of cost apportionment or overhead absorption, which is calculated by dividing the cost to be appropriated or absorbed by a number of hours for which a machine or machines are operated or expected to be operated’. In other words, machine hour rate is the cost of operating a machine on per hour basis. The formula for calculating the machine hour rate is, Budgeted or Actual Overhead Expenses/ Machine Hours
g. Selling Price Method: In this method, selling price of the products is used as a basis for absorbing the overheads. The logic used is that if the selling price is high, the product should bear higher overhead cost. Ratio of selling price is worked out and the overheads are absorbed.
Or
Raw Materials | Standard Mix | Actual Mix | ||||
Units (Kg.) | Price (Rs. ) | Amount (Rs. ) | Units (Kg.) | Price (Rs.) | Amount (Rs.) | |
A B | 60 40 | 25 50 | 1,500 2,000 | 56 44 | 25 50 | 1,400 2,200 |
Less: Loss | 100 30 | 3,500 | 100 26 | 3,600 | ||
70 | 74 | |||||
The standard loss is 30%.
GROUP – B
(Management Accounting)
Marks – 40
5. Answer the following questions as directed: 1x6=6
a) Budgeting is a tool of Management Accounting. (Write true or false).
Ans: True
b) Analysis of financial statements means an attempt to determine the significance and meaning of the data presented in financial statements. (Write true or false).
Ans: False
c) Liquidity means ability of a firm to meet its long-term obligations. (Write true or false).
Ans: False, Short term also
d) A quick ratio of 1:1 is considered to represent a satisfactory current financial position. (Write true or false).
Ans: True
e) EPS = (Net profit after taxes – Preference dividend)/ No. of Equity shares.
Ans: True
f) Contribution is the difference between sales and _______. (Fill in the blank).
Ans: Variable cost
6. Answer the following questions: 2x2=4
a) Mention two objectives of management accounting.
Ans: Objectives of Management Accounting
1. The primary objective is to enable the management to maximize profits or minimize losses.
2. The secondary objective of management accounting is to assist management in their functions.
b) What is margin of safety?
Ans: The positive difference between the sales volume and the break even volume is known as the margin of safety. The larger the difference, the safer the organization is from a loss making situation. It can be calculated either in cash or in units. Margin of Safety can be derived as follows: Margin of Safety = Actual Sales – Break even Sales.
7. Answer any two questions from the following: 5x2=10
a) What is cash flow statement?
Ans: A Cash Flow Statement is similar to the Funds Flow Statement, but while preparing funds flow statement all the current assets and current liabilities are taken into consideration. But in a cash flow statement only sources and applications of cash are taken into consideration, even liquid asset like Debtors and Bills Receivables are ignored.
A Cash Flow Statement is a statement, which summarises the resources of cash available to finance the activities of a business enterprise and the uses for which such resources have been used during a particular period of time. Any transaction, which increases the amount of cash, is a source of cash and any transaction, which decreases the amount of cash, is an application of cash.
Simply, Cash Flow is a statement which analyses the reasons for changes in balance of cash in hand and at bank between two accounting period. It shows the inflows and outflows of cash.
Objectives of Cash Flow Statement
The Cash Flow Statement is prepared because of number of merits, which are offered by it. Such merits are also termed as its objectives. The important objectives are as follows:
1) To Help the Management in Making Future Financial Policies: Cash Flow statement is very helpful to the management. The management can make its future financial policies and is in a position to know about surplus or deficit of cash.
2) Helpful in Declaring Dividends etc.: Cash Flow Statement is very helpful in declaring dividends etc. This statement can supply necessary information to understand the liquidity.
3) Cash Flow Statement is Different than Cash Budget: Cash budget is prepared with the help of inflow and outflow of cash. If there is any variation, the same can be corrected.
4) Helpful in devising the cash requirement: Cash flow statement is helpful in devising the cash requirement for repayment of liabilities and replacement of fixed assets.
b) What is budgetary control?
Ans: Budgetary control is the process of preparation of budgets for various activities and comparing the budgeted figures for arriving at deviations if any, which are to be eliminated in future. Thus budget is a means and budgetary control is the end result. Budgetary control is a continuous process which helps in planning and coordination. It also provides a method of control.
According to Brown and Howard “Budgetary control is a system of coordinating costs which includes the preparation of budgets, coordinating the work of departments and establishing responsibilities, comparing the actual performance with the budgeted and acting upon results to achieve maximum profitability”.
Features of Budgetary Control:
A budgetary control system can be defined as the establishment of budgets relating to the responsibilities of executives to the requirements of a policy, and the continuous comparison of actual with budgeted results either to secure by individual action the objective of that policy or to provide a base for its revision.
The salient features of such a system are the following:
(a) Objectives: Determining the objectives to be achieved, over the budget period, and the policy or policies that might be adopted for the achievement of these ends.
(b) Activities: Determining the variety of activities that should be undertaken for the achievement of the objectives.
(c) Plans: Drawing up a plan or a scheme of operation in respect of each class of activity in physical as well as monetary terms for the full budget period and its part.
(d) Performance evaluation: Laying out a system of comparison of actual performance by each person, section or department with the relevant budget arid determination of causes for the discrepancies, if any.
c) From the following information, calculate –
1) Current assets and
2) Current liabilities.
Current ratio = 2.5
Working capital = Rs. 90,000
8. Answer any two questions from the following: 10x2=20
(a) Explain managerial application of marginal costing.
Ans: Applications of Marginal costing: Marginal costing and Beak even analysis are very useful to management. The important uses of marginal costing and Break Even analysis are the following:
1) Cost control: Marginal costing divides total cost into fixed and variable cost. Fixed Cost can be controlled by the Top management to a limited extent and Variable costs can be controlled by the lower level of management. Marginal costing by concentrating all efforts on the variable costs can control total cost.
2) Profit Planning: It helps in short-term profit planning by making a study of relationship between cost, volume and Profits, both in terms of quantity and graphs. An analysis of contribution made by each product provides a basis for profit-planning in an organisation with wide range of products.
3) Fixation of selling price: Generally prices are determined by demand and supply of products and services. But under special market conditions marginal costing is helpful in deciding the prices at which management should sell. When marginal cost is applied to fixation of selling price, it should be remembered that the price cannot be less than marginal cost. But under the following situation, a company shall sell its products below the marginal cost:
Ø To maintain production and to keep employees occupied during a trade depression.
Ø To prevent loss of future orders.
Ø To dispose of perishable goods.
Ø To eliminate competition of weaker rivals.
Ø To introduce a new product.
Ø To help in selling a co-joined product which is making substantial profit?
Ø To explore foreign market
4) Make or Buy: Marginal costing helps the management in deciding whether to make a component part within the factory or to buy it from an outside supplier. Here, the decision is taken by comparing the marginal cost of producing the component part with the price quoted by the supplier. If the marginal cost is below the supplier’s price, it is profitable to produce the component within the factory. Whereas if the supplier’s price is less than the marginal cost of producing the component, then it is profitable to buy the component from outside.
5) Closing down of a department or discontinuing a product: The firm that has several departments or products may be faced with this situation, where one department or product shows a net loss. Should this product or department be eliminated? In marginal costing, so far as a department or product is giving a positive contribution then that department or product shall not be discontinued. If that department or product is discontinued the overall profit is decreased.
6) Selection of a Product/ sales mix: The marginal costing technique is useful for deciding the optimum product/sales mix. The product which shows higher P/V ratio is more profitable. Therefore, the company should produce maximum units of that product which shows the highest P/V ratio so as to maximize profits.
7) Evaluation of Performance: The different products and divisions have different profit earning potentialities. The Performance of each product and division can be brought out by means of Marginal cost analysis, and improvement can be made where necessary.
8) Limiting Factor: When a limiting factor restricts the output, a contribution analysis based on the limiting factor can help maximizing profit. For example, if machine availability is the limiting factor, then machine hour utilisation by each product shall be ascertained and contribution shall be expressed as so many rupees per machine hour utilized. Then, emphasis is given on the product which gives highest contribution.
9) Helpful in taking Key Managerial Decisions: In addition to above, the following are the important areas where managerial problems are simplified by the use of marginal costing :
Ø Analysis of Effect of change in Price.
Ø Maintaining a desired level of profit.
Ø Alternative methods of production.
Ø Diversification of products.
Ø Alternative course of action etc.
Or
A company is making a loss of Rs. 40,000 and relevant information is as follows:
Sales Variable cost Fixed cost | Rs. 1,20,000 Rs. 60,000 Rs. 1,00,000 |
You are required to calculate:
1) Breakeven point.
2) Sales required to earn a profit of Rs. 1,00,000.
3) Profit when sales are Rs. 6,00,000.
4) Margin of Safety when total sales are Rs. 3,50,000.
(b) Explain in brief the following budgets:
1. Cash budget.
Ans: A cash budget is a budget or plan of expected cash receipts and disbursements during the period. These cash inflows and outflows include revenues collected, expenses paid, and loans receipts and payments. In other words, a cash budget is an estimated projection of the company's cash position in the future.
Chartered Institute of Management Accountant (CIMA) defines cash budgets as a short-term fiscal plan expressed in money which is prepared in advance. It helps to determine the cash-inflow and cash-outflow of the business. Features of Cash Budget:
a) The cash-budget period is broken down into periods, mainly in months.
b) The cash-budget is always in columnar form i.e. column showing each month
c) Payments and receipts of cash are identified in different heading and showing total for each month.
2. Master budget.
Ans: When the functional budgets have been completed, the budget committee will prepare a master budget for the target of the concern. Accordingly a budget which is prepared incorporating the summaries of all functional budgets. It comprises of budgeted profit and loss account, budgeted balance sheet, budgeted production, sales and costs. The ICMA England defines a Master Budget as ‘the summary budget incorporating its functional budgets, which is finally approved, adopted and employed’. The master budget represents the activities of a business during a profit plan. This budget is also helpful in coordinating activities of various functional departments.
3. Zero-based budgeting.
Ans: ZBB is defined as ‘a method of budgeting which requires each cost element to be specifically justified, as though the activities to which the budget relates were being undertaken for the first time. Without approval, the budget allowance is zero’.
Zero – base budgeting is so called because it requires each budget to be prepared and justified from zero, instead of simple using last year’s budget as a base. In Zero Based budgeting no reference is made to previous level expenditure. Zero based budgeting is completely indifferent to whether total budget is increasing or decreasing.
CIMA has defined it “as a method of budgeting whereby all activities are revaluated each time a budget is set."
4. Fixed budget.
Ans: A fixed budget, on the other hand is a budget which is designed to remain unchanged irrespective of the level of activity actually attained. In a fixed budgetary control, budgets are prepared for one level of activity whereas in a flexibility budgetary control system, a series of budgets are prepared one for each level of alternative production levels or volumes. According to ICWA London ‘Fixed budget is a budget which is designed to remain unchanged irrespective of the level of activity actually attained.”
Fixed budget is usually prepared before the beginning of the financial year. This type of budget is not going to highlight the cost variance due to the difference in the levels of activity. Fixed budgets are suitable under static conditions.
Or
A Ltd. has prepared the budget for the production of 1,00,000 units from a costing periods as under:
Particulars | Per unit (Rs.) |
Raw materials Direct labour Direct expenses Works overhead (60% of fixed cost) Administrative overhead (80% of fixed cost) Selling overhead (50% fixed) | 10.00 3.00 0.50 10.00 1.60 0.80 |
Actual production in the period was only 60,000 units. Prepared a budget for the original and revised levels of output.
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