ECO 10 Solved Question Paper Dec 2016
ECO - 10: ELEMENTS OF COSTING SOLVED QUESTION PAPERS
ELEMENTS OF COSTING
IGNOU BCOM SOLVED QUESTION PAPERS
BACHELOR'S DEGREE PROGRAMME
Term-End Examination: Dec 2016
ELECTIVE COURSE: COMMERCE
Time: 2 hours; Maximum Marks: 50; (Weightage: 70%)
Term-End Examination: Dec 2016
ELECTIVE COURSE: COMMERCE
Time: 2 hours; Maximum Marks: 50; (Weightage: 70%)
Note: Attempt any two questions from Section-A and any two questions from Section-B.
Eco 10 Solved Question Papers Elements of Costing | |
SECTION - A
1. Explain the various steps that are usually
taken in connection with the purchase of materials in a manufacturing concern. 10
Process
of purchasing and receiving goods
Purchase procedure differs from business to business, but all of
them follow a general pattern or procedure. There should be proper Purchase
Procedure to ensure that right type of material is purchased at right time, in
right quantity, at right prices and at right place. All these things require a
well-defined procedure of purchasing. The steps in Purchase Procedure are
explained below.
Purchase
Requisition: A form known as ‘Purchase Requisition’ is commonly used as a
format requesting the purchase department to purchase the required material.
Normally the purchase requisition is issued by the Stores Department when the
quantity of the concerned material reaches the minimum level. Only in the cases
of materials, which are not kept in the stores on regular basis, the
requisition is issued by the concerned department. Purchase requisition has
information like the quantity required, the expected date of receipt, the
department in which the material is required, description of material etc.
Copies of the purchase requisition are sent to the Accounts department and the
concerned department who is in need of the material.
Purchase Order: After the receipt
of purchase requisition, the purchase department places an order with a
supplier, offering to buy certain material at stated price and terms. However
before issuing the purchase order, quotations may be invited from various
suppliers for arriving at the best deal. The purchase department usually keeps
a list of suppliers from whom the quotations are invited. The quotations
received are examined on various parameters like price, delivery period, terms
and conditions, quality of material etc. After this, purchase order is issued
to the selected supplier. It should be remembered that a purchase order is a
legal document and it results into a contract between the company and the
supplier. Hence the terms and conditions in the purchase order should be
drafted clearly without any ambiguity.
Receiving the
Materials: The
receiving department performs the function of unloading and unpacking materials
which are received by an organization. This will need an inspection report
which is sometimes incorporated in the receiving report, indicating the items
accepted and rejected with reasons. Copies of the receiving report along with
the inspection report are sent to various departments like purchase, stores,
concerned department, accounts department and costing department.
Approval of
invoice: Approval
of invoice indicates that goods according to the purchase order have been
received and payments can be made for the same. However if the goods are not
according to the quality ordered or are in excess of the quantity specified or
are damaged or are of inferior quality, payment is withheld.
Making the Payment:
After
the invoice is approved the payment is made to the supplier. The purchase
procedure is completed with the payment released.
2. (a) State the factors to be considered
before installation of a system of costing. 5+5
Steps
in Installation of a Costing System
The
costing system of an organization should be carefully planned in order to
achieve its objectives. The important steps for the installation of a costing
system are discussed below:
1) Determination
of objectives: The first step is to clearly lay down the objectives of the
costing system. If the objective is only to ascertain the cost, a simple system
will be sufficient. However, if the objective is to get information for
decision making, planning and control, a more elaborate system of costing is
necessary.
2) Study of
the nature of business: The nature of the business and other technical
aspects like nature of the products, methods and stages of production cycle
should be carefully analyzed. Such an analysis is necessary to decide the
method of costing to be adopted. For example, contract costing is suitable for
large construction projects. Operating costing is adopted by service industries
like transport.
3) Study of
the nature of the organization: The costing system should be designed to
meet the requirements of the organization. Hence, it is necessary to study the
nature, size and layout of the organization. The factors to be considered are:
a. Size of
the organization and the size of the departments.
b. The
physical layout of the organization.
c. The
different levels of management.
d. The extent
of decentralization of authority.
e. The nature
of authority relationships.
4) Deciding
the structure of cost accounts: A suitable costing system can be developed
on the basis of the study of the nature of business and organization. The
structure of cost accounts should be simple and in accordance with the natural
production process.
5) Determination
of cost rates: This step involves a thorough study of the following points
for developing an integrated costing system.
a. Classification
of costs into direct and indirect costs.
b. Grouping
of indirect costs (overheads) into production, administration, selling and
distribution etc.
c. Methods of
pricing issues.
d. Treatment
of wastes of all types.
e. Absorption
of overheads.
f.
Calculation of overhead rates.
6) Organization
of the cost office: The cost office is responsible for the efficient
operation of the costing system. The cost office, with adequate staff must be
located a close as possible to the factory. The following are the major
functions of the cots office.
a. Stores
accounts.
b. Labour
accounting
c. Recording
of cost data and
d. Cost
control.
7) Further,
the role and duties and responsibilities of the cost accountant must be clearly
defined. He must have the necessary authority to discharge his duties
effectively.
8) Introducing
the system: After completion of the above steps, the costing system may be
formally introduced. Introduction of the system in an existing organization
should be done gradually. Before introduction, the feature of the systems, its
working and advantages must be explained to the concerned employees to secure
their co-operation.
(b) Explain any two methods of costing
with suitable examples.
Methods
of Costing
The
methods of costing are as follows:
1) Job
Costing: The job costing methods are applicable where the unit of
manufacture is one and complete in itself. They include printers, job
foundries, tool manufactures, and contractors, 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.
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.
3. Write short notes on any two of the
following: 5+5
a)
Bin card
Bin Card: Bin is a place where materials are kept in. It may be a
rack, container, shelf or space where stores are kept. Bin card is a document
showing the particulars of materials kept in the bin. It is a document attached
to the bin disclosing the quantitative details of materials received, issued
and the closing balance. A bin card is used for each item of material. Each
receipt and issue is recorded on the bin card in a chronological order and the
latest balance is shown after each receipt and issue. Bin card is maintained by
the store keeper. It indicates information like different stock levels. No,
name of material, material code number, stores ledger folio number, quantity of
materials received, issued and the balance in hand.
b)
Inventory turnover Ratio
Inventory Turnover: Inventory Turnover is a ratio of the value of the materials consumed during a period to the average value of inventory held during that period.
If the inventory turnover rate in terms of value of materials is high, or if the length of the inventory turnover period is short, the material is said to be fast moving. So if the rate of consumption is fast or if the inventory turnover rate is good, it is a healthy measure of efficiency of materials control, as the capital employed is properly utilized.
c)
Machine Hour Rate
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
d)
Apportionment of factory overheads
Departmentalisation
or primary distribution of overheads and Allocation and Apportionment of
Overheads
After classification of overheads all the
items of overheads are collected properly under suitable account heading. The
next step is allocation and apportionment of overheads. This is also known as
departmentalization or primary distribution of overheads.
Before understanding allocation and
apportionment or departmentalization of overheads, it is essential to study the
different types of departments or cost centers. In a manufacturing concern
there can be broadly two categories of departments namely production
departments and service departments.
Production Departments: Production departments are those
departments where actual process of manufacturing is carried on. For example in
a cotton textile mill, spinning, weaving and finishing departments are
production departments. In the production departments, with the help of manual
and or machine operations the raw materials are converted to finished goods.
Example: In steel, rolling mill, hot mill,
cold mill, polishing, grinding are the production departments.
Service Departments: Service departments are auxiliary and
are those departments which are not directly engaged in production. These
departments are essential for smooth and efficient running of production
departments. Such departments render services such as repairs, maintenance,
electricity, etc. for the benefit of other departments.
Example: Stores, cost office, personnel dept.
labour welfare dept., canteen, time keeping, repairs and maintenance, tool
room, hospital etc.
A department may be either production
department or service department depending upon the nature and function. But
there are some service departments which occasionally engaged in production
apart from rendering services. These are called partly producing departments.
For example, a carpentry unit which does repairs of furniture and fittings may
be engaged to manufacture packing boxes. In such case it will be a partly
producing department.
Allocation
of Overhead Expenses: Allocation
is the process of identification of overheads with cost centres. An expense
which is directly identifiable with a specific cost centre is allocated to that
centre. So it is the allotment of whole item of cost to a cost centre or cost
unit or refers to the charging of expenses which can be identified wholly with
a particular department. For example, the whole of overtime wages paid to the
workers relating to a particular department should be charged to that
department. So, the term allocation
means the allotment of the whole item without division to a particular
department or cost centre.
Apportionment of Overhead Expenses: Cost apportionment is the allotment of proportions of items to cost centres or cost units on an equitable basis. The term refers to the allotment of expenses which cannot identify wholly with a particular department. Such expenses require division and apportionment over two or more cost centres 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 centres 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.
SECTION - B
4. The profit disclosed by cost accounts was
Rs. 17,000. The following details are ascertained on comparison of cost and
financial accounts: 15
|
|
(Rs.) |
|
a)
Over recovery
of overhead in cost accounts b)
Loss charged in
financial accounts only c)
Depreciation
charged in cost books d)
Depreciation
charged in financial books e)
Loss due to
theft of stock recorded in cost accounts f)
Interest on
Investment received g)
Income tax paid
h)
Bank Interest
received not recorded in cost books i)
Stock
adjustment (Credited in financial books) j)
Works overhead
under-recovered in costing books |
2,000 6,000 2,400 1,600 400 8,000 1,000 1,000 400 4,000 |
Prepare a reconciliation statement and
find out the profit as per financial accounts.
Solution:-
5. A worker under Halsey Method of
remuneration has a day rate of Rs. 72 per week of 48 hours plus a cost of
living bonus of Rs. 0.60 per hour worked. He is given an 8 hour task to perform
which he accomplished in 6 hours. He is allowed 30% of the time saved as
premium bonus. What would be his total hourly rate of earnings, and what
difference would it make if he was paid under Rowan Method. 8, 7
Solution:-
6. (a) From the following information, prepare a Stores
Ledger A/C as per FIFO method of pricing of issue of material 10
|
Date |
Particulars |
Units |
Rate (Rs.) |
|
May 1, 2014 May, 3, 2014 May 4, 2014 May 6, 2014 May 8, 2014 May 9, 2014 |
Opening balance Received Issued Issued Received Issued |
1,000 5,000 3,000 2,000 3,000 2,000 |
5.00 6.00 5.00 |
The
weekly physical stock taking on April 7, 2014 showed a shortage of 100 units.
(b) From the following information,
calculate Economic Order Quantity: 5
a)
Annual demand 12,000 units
b)
Ordering cost Rs. 90 per order
c)
Inventory carrying cost per annum Rs. 15 per
unit
Solution:-
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