Cost Accounting Solved Question Paper 2017 [Gauhati University BCOM 4th SEM CBCS Pattern]

Cost Accounting Solved Question Paper 2017

[Gauhati University BCOM 4th SEM CBCS Pattern]

Paper: COM-HC-4016/COM-RC-4026 (Cost Accounting)

Full Marks: 80 : Time: Three hours

The figures in the margin indicate full marks for the questions.

1. Choose the correct options from the following:             1x10=10

a) Cost centre are created for _______.

1) Inventory valuation.

2) Product pricing.

3) Control and fixation of responsibility.

4) Revenue generation.

Ans: 4) Revenue generation.

b) Re-ordering period or lead time means:

1) Time required to raise purchase requisition.

2) Time needed to process an order.

3) Time needed to place an order and receive the material.

4) The interval between the date of production and the date of receipt of material.

Ans: 3) Time needed to place an order and receive the material.

c) For a work order the standard time and time taken are 20 hours and 15 hours respectively. Time rate being Rs. 2 per hour. Total wages payable under Rowan Premium Plan will be:

1) 37.50

2) 47.50

3) 27.50

4) 17.50

Ans: 1) 37.50

d) The charging of discrete, identifiable items of cost to cost centre or cost unit is known as:

1) Absorption of overhead.

2) Allocation of overhead.

3) Apportionment of overhead.

4) Alignment of overhead.

Ans: 2) Allocation of overhead.

e) Wage sheet is prepared by the:

1) Personnel department.

2) Payroll department.

3) Engineering department.

4) Time-keeping department.

Ans: 2) Payroll department.

f) Loss incurred in an incomplete contract is transferred to _______ A/c.

1) Profit and Loss.

2) Contract.

3) Work certified.

4) Contractor.

Ans: 1) Profit and Loss.

g) In Process costing, the abnormal loss is treated as _______ cost and written off to Profit and Loss Account.

1) Unit.

2) Period.

3) Process.

4) Future.

Ans: 2) Period.

h) The change in cost due to changes in the method of production is known as _______.

1) Marginal cost.

2) Replacement cost.

3) Differential cost.

4) Opportunity cost.

Ans: 1) Marginal cost.

i) Which one of the following item is not included in the annual carrying cost of inventory?

1) Insurance cost.

2) Amount of interest payable on the money locked up in the materials.

3) Cost of storage.

4) Cost of staff posted in the purchasing department.

Ans: 4) Cost of staff posted in the purchasing department.

j) Examine the correctness of the statements given below:

I. Under-absorption of overhead means the amount by which the absorbed overheads fall short of the actual amount of overheads incurred.

II. Over-absorption of overhead means the excess of overheads absorbed over the actual amount of overheads incurred.

1) Statement I is correct.

2) Statement II is correct.

3) Both the statement I and II are correct.

4) Both the statements I and II are incorrect.

Ans: 3) Both the statement I and II are correct.

2. Answer the following questions:       2x5=10

a) State two objectives of Cost Accounting.

Ans: The main objectives/functions of cost accounting are:

1) Ascertain Cost: To ascertain the cost of product or a services reveled and enable measurement of profit by proper valuation of inventory.

2) Analyse Costs: To analysis costs or to classify the expenses under different heads of accounts viz. material, labour, expenses etc.

b) If the minimum stock level and average stock level of raw materials A are 4,000 and 9,000 units respectively, find out its re-order quantity.

Ans: Average Stock Level = Minimum Stock Level + ½ ROQ

=> 2(Average stock level – Minimum stock level) = ROQ

=> ROQ = 2(9,000-4,000) = 10,000

c) What is meant by abnormal idle time?

Ans: Abnormal idle time is defined as the idle time which arises on account of abnormal causes; e.g. strikes; lockouts; floods; major breakdown of machinery; fire etc. Such an idle time is uncontrollable. The cost of abnormal idle time due to any reason should be charged to Costing Profit & Loss Account.

d) State two basic principles of process costing.

Ans: Fundamental Principles of Process Costing:

The following are the fundamental principles of process costing:

a) Cost of material, wages and overheads expenses are collected for each process or operation in a period.

b) Adequate records in respect of output and scrap of each processes or operation during the period are kept.

e) What is meant by integrated accounts?

Ans: Integrated or Integral accounting is a system in which cost and financial accounts are kept in the same set of books. In such a system, transactions of both cost and financial accounts are recorded in one combined set of books based on double entry system. This system eliminates the need for separate sets of account books for costing and financial accounting purposes. Accounts are designed in such a way that full information required for costing as well as financial accounting purposes is obtained from one set of books.

3. Answer any four of the following questions:         5x4=20

(a) Distinguish between cost control and cost reduction.

Ans:

(b) The capacity usage ratio in respect of a machine for a particular month is 80% and 90% respectively. The available working hours in a month is 200 hours.

The break-up of ideal time is as follows:

Waiting for job Break down Waiting for tools

5 hours 4 hours 3 hours

Calculate the idle time cost when the hourly fixed cost of running the machine is Rs. 8.00

(c) Explain the concept of ABC system as a technique of effective material control.

Ans: ABC Analysis: ABC System: In this technique, the items of inventory are classified according to the value of usage. Materials are classified as A, B and C according to their value.

Items in class ‘A’ constitute the most important class of inventories so far as the proportion in the total value of inventory is concerned. The ‘A’ items constitute roughly about 5-10% of the total items while its value may be about 80% of the total value of the inventory.

Items in class ‘B’ constitute intermediate position. These items may be about 20-25% of the total items while the usage value may be about 15% of the total value.

Items in class ‘C’ are the most negligible in value, about 65-75% of the total quantity but the value may be about 5% of the total usage value of the inventory.

The numbers given above are just indicative, actual numbers may vary from situation to situation. The principle to be followed is that the high value items should be controlled more carefully while items having small value though large in numbers can be controlled periodically.

Advantages of ABC analysis

a. Reduction in investment: under ABC analysis, the materials from group 'A' are purchase in lower quantities as much as possible. With this, the effort to reduce the delivery period is also made. These in turn help to reduce the investment in material.

b. Optimization of Inventory management function: Each class of the inventory gets management attention as per its value and accordingly, manpower is allocated and expenses are incurred to manage it. It ensures that most important items are regularly monitored and closely observed whereas such efforts are expended with for the less important items.

c. Control on high value material: under ABC analysis, strict control can be exercised to the materials in group 'A' that have higher value.

d. Reduction in Storage cost: Since Class “A” material is of high value and are purchase in lower quantities as much as possible, it reduces the total storage cost.

e. Saving in time and cost: Since a signification effort is made for management of the material from group 'A', it helps to save time as well as cost.

(d) ABC Ltd. closed its accounts for the year ended 31^st March, 2016. The profit shown in financial accounts is Rs. 3,72,000 and for the same period cost accounts showed a profit of Rs. 4,10,000. On comparison of both the accounts, the following stock balances are appearing:

	Cost Accounts (Rs.)	Financial Accounts (Rs.)
Opening stock of raw materials Closing stock of raw materials Opening stock of finished goods Closing stock of finished goods	1,36,000 1,10,000 2,66,000 2,29,000	1,45,000 1,03,000 2,58,000 2,23,000

Additional information appearing in the Financial Accounts:

Loss on sale of machinery Dividend received Interest received

Rs. 35,000 Rs. 7,000 Rs. 4,000

Prepare a Memorandum Reconciliation Account.

Ans:

(e) In Process B. 75 units of a commodity were transferred from process A at a cost of Rs. 1,310. The additional expenses incurred by the process were Rs. 190, 20% of the units entered are normally lost and sold at Rs. 4 per unit. The output of the process was 70 units. Prepare Process B Account and Abnormal Gain Account.

Ans:

Also Read: Gauhati University Cost Accounting Solved Question Papers

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- Cost Accounting Solved Paper' 2021

(f) Write a short note on 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.

Over or under absorption of overheads meaning:

Overhead expenses are usually applied to production on the basis of predetermined rates. The pre-determined rate may present estimated or actual cost. The actual overhead cost incurred and overhead applied to the production will seldom be the same. But due to certain reasons the difference between two may arise.

Over absorptions: If the amount applied exceeds, the actual overhead, it is said to be an over absorption of overheads.

Under absorption: If the amount applied is short fall of the actual overhead in production it is said to be the under absorption of overheads. The over or under absorption of overheads may be termed as overhead variance.

Reason of over or under-absorption of overheads: The under or over-absorption of overhead arises due to following reasons:

a)       Errors in estimating overheads.

b)      Overhead may change due to change in method of production.

c)       The seasonal fluctuation in overhead cost in some industries.

d)      Underutilization of available capacity, unexpected change in the volume of output.

e)      Valuation of work in progress in wrong process.

(g) State the steps involved in the installation of a costing system in a large manufacturing company.                  10

Ans: 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.

Or

The book of Abinash Manufacturing Co. presents the following data for the month of April, 2017:

Direct labour cost Rs. 17,500 being 175% of works overheads.

Cost of goods sold excluding administrative expenses Rs. 56,000.

Inventory accounts showed the following balances:

	1st April (Rs.)	30th April (Rs.)
Raw material Work-in-progress Finished goods	8,000 10,500 17,600	10,600 14,500 19,000

Other information:

a) Selling expenses Rs. 3,500

b) General and administrative expenses Rs. 2,500

c)  Sales for the month Rs. 75,000

Compute the value of materials purchased and also prepare a Cost statement.               10

4. (a) X Ltd. is committed to supply 24,000 bearings per annum to Y Ltd. on a steady basis. It is estimated that it costs 10 paisa as inventory holding cost per bearing per month and that the set-up cost per run of bearing manufacture is Rs. 324. What would be the optimum run size for bearing manufacture? What is the minimum inventory holding cost at optimum run size?

(b) What are the various assumptions in the calculation of EOQ?             7+3=10

Ans: Assumptions of EOQ:

a) All the ordering costs and carrying costs are known.

b) Consumption of material is constant.

c) An EOQ can be set for an individual component having no regard to the manufacture of the other components.

Or

(a) What factors are to be considered while adopting a method for the pricing of materials?

Ans: Following factors are taken into consideration while selecting a method for the pricing of materials:

a) The nature of production

b) Effect of pricing method on tax payable

c) Traceability of the issue to the particular lot or consignment

d) Frequency of issues of material

e) Stock turnover rate

f) Variations and fluctuations in price and their nature

g) Clerical labour involved in the method

h) Volume/frequency of receipts of materials

i) Nature of the cost accounting system followed

(b) State two advantages of LIFO method of valuing materials.                     8+2=10

Ans: According to LIFO method units last entering the process are to be completed first. The completed units will be shown at their current cost and the closing-work in process will continue to appear at the cost of the opening inventory of work-in-progress along with current cost of work in progress if any.

Advantages:

a. Issues are based on actual cost.

b. Issue price reflects current market price.

5. A machine is purchased for cash at Rs. 9,200. Its working life is estimated to be 18,000 hours after which its scrap value is estimated at Rs. 200. It is assumed that:

1) The machine will work for 1,800 hours annually.

2) The repair charges will be Rs. 1,080 during the whole period of life of the machine.

3) The power consumption will be 5 units per hour at 6 paisa per unit.

4) Other annual standing charges are estimated to be:

a) Rent of department (machine occupies 1/5^th of total space) Rs. 780.

b) Light Rs. 288 (12 points in the department, 2 points engaged in machine).

c)  Foreman’s salary (1/4^th of his time occupied in the machine) Rs. 6,000.

d)  Insurance premium for machine Rs. 36.

e) Cotton waste Rs. 60.

Calculate machine hour rate.

Or

[A] Calculate the earnings of worker under:               5

1) Halsey Plan.

2) Rowan Plan from the following particulars:

a) Hourly rate of wages guaranteed is 0.50 per hour

b) Standard time for producing one dozen articles is 3 hours.

c) Actual time taken by the worker to produce 20 dozen articles is 48 hours.

Ans:

[B] What could be the possible effects of labour turnover on cost of production?           5

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 stabilized 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.

Impact of ‘Labour Turnover’ on a manufacturing organization’s working: The impact of labour turnover on a manufacturing organization’s working is many folds. In fact, the labour turnover increases the cost of production in the following ways:

1.       Even flow of production is disturbed.

2.       Cost of recruitment and training increases.

3.       Breakage of tools, wastage of materials increases.

4.       Overall production decreases due to the time lost between the leaving and recruitment of new workers.

5.       Reduction in sales accounts for loss of contribution and goodwill consequently.

6. The following was the expenditure on a contract of Rs. 12,00,000 commenced in April 2015:

Cash received on account to 31^st March 2016 amounted to Rs. 2,40,000. Retention money is 20% of the work certified, the value of materials in hand at 31^st March, 2016 was Rs. 10,000. Prepare Contract Account showing the position at the end of the year and the amount of the profit which might reasonably be taken to Profit and Loss Account after allowing 10% for depreciation on plant.

Or

(a) Write short note on inter-process transfer pricing in terms of process costing.        5

Ans: Inter-Process Profit

Some process industries transfer the finished goods from one process to the next process at a price above cost. The excess of the transfer price over cost represents inter-process profit. The last process also transfers the financial goods to finished stock account at a price higher than cost. So all processes, including the last process, make profit from the transfer of products to the subsequent processes or finished stock. This profit is called inter-process profit. The profit margin is fixed at certain per cent on transfer price or at certain per cent on cost. Transfer at a price higher than cost is claimed to be advantageous on the following points:

1. It reveals process efficiency. For example, the cost of a particular process may be very low and that of a subsequent process may be very high, but the ultimate cost of the finished product may be just what was estimated. Here, the extra efficiency of the first process cannot be properly realised unless it transfers its product to the next process after taking into consideration the profit on the transfer. The transfer price including profit may be compared with the market price of the same product at the same degree of completion. If the market price is higher than cost, the process enjoys better standard of efficiency. The industry may choose to sell at this stage instead of further processing. If, however, the market price is lower than cost, the industry may choose to buy instead of producing, after taking also the other factors into consideration.

2. If a process gets transfer from the preceding process at a price comparable with the market price, the process may be expected to be alert on the point that, it should finish the product at the estimated cost. Thus, transfer at a price higher than cost helps a process to attain desired level of efficiency.

3. By comparing the transfer prices with the corresponding market prices the ‘weak’ or ‘strong’ spots in the manufacturing activities can be located and suitable measures can be adopted to improve the conditions wherever necessary.

In short, transfer at a price higher than cost helps: (a) profit planning; (b) taking buy or make decision, and (c) taking sale or further process decision.

(b) State the features of process cost system.       5

Ans: 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.

e) Production is carried on in different stages (each of which is called a process) having a continuous flow.

f) The input will pass through two or more processes before it takes the shape of the output. The output of each process becomes the input for the next process until the final product is obtained, with the last process giving the final product.

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