Cost Accounting Solved Question Paper 2016 [Gauhati University BCOM 4th SEM CBCS Pattern]

Cost Accounting Solved Question Paper 2016

[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 option from the following:       1x5=5

a) An organizational segment or area of activity considered to accumulate cost is termed as –

1) Cost unit.

2) Cost centre.

3) Management unit.

4) Management centre.

Ans: 2) Cost centre.

b) Which method of valuing materials is suitable in times of rising prices?

1) LIFO.

2) FIFO.

3) HIFO.

4) FILO.

Ans: 1) LIFO.

c) Which of the following methods of wage payment do not guarantee a minimum wage to the workers?

1) Halsey Premium Plan.

2)  Bedeaux Point Plan.

3) Taylor’s Differential Plan.

4) Rowan Premium Plan.

Ans: 3) Taylor’s Differential Plan.

d) Examine the correctness of the statements given below:

I. Factory overheads cannot be associated with a specific product or job.

II. Factory overhead should not be included in the total cost of a product or job.

1) Statement I is correct.

2) Statement II is correct.

3) Both the statement I and II are correct.

4) Both the statement I and II are incorrect.

Ans: 1) Statement I is correct.

e) Normal wastage in process costing is classified as:

1) Deferred charge.

2) Period cost.

3) Product cost.

4) An extraordinary item.

Ans: 3) Product cost.

2. Answer the following questions:        2x5=10

a) What is meant by lead time?

Ans: Lead time is the amount of the time elapsed between the replenishment of order and delivery of the ordered goods by the supplier.

b) Calculate the wages to be earned by a worker, using straight piece rate system of wage payment, if the normal rate per hour is Rs. 5, standard time per unit is 12 min and in a 40 hours’ week, the output of the worker is 166 units.

c)  State the meaning of cost drivers.

Ans: Cost drivers are the root cause of why a particular cost incurred. Simply cost drivers refers to any unit of action taken by a business that costs money.

d) Pass the journal entry to record materials returned to supplier under integral accounting system.

e) State two important features of process costing.

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.

3. Answer any five of the following questions:           5x5=25

(a) State the characteristics of a good cost accounting system.

Ans: Characteristics of a Good Costing System

An ideal system of cost accounting must possess some characteristics which bring all the advantages, discussed above; to the business, in order to be ideal and objective. The main characteristics are:

a)       Simplicity: It must be simple, flexible and adaptable to the changing conditions. And it must be easily understandable to the personnel. The information provided must be in the proper order, in right time and to the right persons so as to be utilized fully.

b)      Flexibility and Adaptability: The costing system must be flexible to accommodate the changing conditions and circumstances. The expansion, contraction of changes must be adopted in the existing system with minimum changes.

c)       Economy: The costing system must suit the finance available. The expenditure must be less than the benefits derived from the system adopted.

d)      Comparability: The management must be able to make comparison of the facts and figures with the past figures, figures of other concerns, or other departments of the same concern.

e)      Minimum Changes to the Existing one: When introducing a costing system, it may cause minimum change to the existing set up of the business.

(b) Explain the concept of Perpetual Inventory System as a technique of effective material control.

Ans: Perpetual Inventory System: Perpetual Inventory system means continuous stock taking. CIMA defines perpetual inventory system as ‘the recording as they occur of receipts, issues and the resulting balances of individual items of stock in either quantity or quantity and value’. Under this system, a continuous record of receipt and issue of materials is maintained by the stores department and the information about the stock of materials is always available. Entries in the Bin Card and the Stores Ledger are made after every receipt and issue and the balance is reconciled on regular basis with the physical stock. The main advantage of this system is that it avoids disruptions in the production caused by periodic stock taking. Similarly, it helps in having a detailed and more reliable check on the stocks. The stock records are more reliable and stock discrepancies are investigated and appropriate action is taken immediately.

Salient features of perpetual inventory system

a)       It requires more efforts to maintain inventory under this method.

b)      Quantity balances shown by the store ledger and bin cards are reconciled.

c)       A number of items are physically checked systematically and by rotation.

d)      The method is comparatively costly as compared to periodical inventory system.

e)      Store ledger and bin cards keeps inventory record up-to date and decent.

(c) Calculate the earnings of a worker under:

1) Halsey plan and

2) Rowan plan.

If the hourly rate of wages guaranteed is 0.50 paisa per hour, standard time for producing one dozen articles is 3 hours and the actual time taken by the worker to produce 20 dozen articles is 48 hours.

(d) Distinguish between under absorption and over-absorption of overheads.

Ans: Over or under absorption of overheads

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.

(e) The following information relating to a manufacturing unit is provided:

Input of raw materials in process – I 1,000 units @ Rs. 6 per unit. Direct material Rs. 5,200 Direct wages Rs. 4,000 Production overheads Rs. 4,000 Actual output 950 units (to be transferred to Process II) Normal loss 5% Value of scrap per unit Rs. 4

Prepare Process-I Account and Normal Loss Account as they may appear in the books of accounts.

(f) A manufacturing company disclosed a net loss of Rs. 5,72,000 as per their cost accounts for the year ended March 31^st, 2016. The following information was revealed as a result of scrutiny of the figures of both the sets of books:

Particulars

Rs.

1)      Factory overhead over-absorbed 2)      Administration overhead under-absorbed 3)      Depreciation charged in financial accounts 4)      Depreciation charged in cost accounts 5)      Income tax provided 6)      Interest on loan funds in financial accounts 7)      Interest on investments not included in cost accounts 8)      Transfer fees (credit in financial books) 9)      Stores adjustment (credit in financial books)

16,000 24,000 2,20,000 2,45,000 1,50,000 2,67,000 64,000 16,000 8,000

Prepare Memorandum Reconciliation Account.

Or

State the needs for reconciliation of cost and financial accounts.

Ans: Need for reconciliation of cost and financial accounts

When cost accounts and financial accounts are maintained in two different sets of books, there will be prepared two profit and loss accounts - one for costing books and the other for financial books. The profit or loss shown by costing books may not agree with that shown by financial books. Such a system is termed as, ‘Non-Integral System’ whereas under the integral system of accounting, there are no separate cost and financial accounts. Consequently, the problem of reconciliation does not arise under the integral system.

However, where two sets of accounting systems, namely, financial accounting and cost accounting are being maintained, the profit shown by the two sets of accounts may not agree with each other. Although both deal with the same basic transactions like purchases consumption of materials, wages and other expenses, the difference of purpose leads to a difference in approach in a collection, analysis and presentation of data to meet the objective of the individual system.

Financial accounts are concerned with the ascertainment of profit or loss for the whole operation of the organisation for a relatively long period, usually a year, without being too much concerned with cost computation, whereas cost accounts are concerned with the ascertainment of profit or loss made by manufacturing divisions or products for cost comparison and preparation and use of a variety of cost statements. The difference in purpose and approach generally results in a different profit figure from what is disclosed by the financial accounts and thus arises the need for the reconciliation of profit figures given by the cost accounts and financial accounts.

The reconciliation of the profit figures of the two sets of books is necessary due to the following reasons

a)       It helps to identity the reasons for the difference in the profit or loss shown by cost and financial accounts.

b)      It ensures the arithmetical accuracy and reliability of cost accounts.

c)       It contributes to the standardization of policies regarding stock valuation, depreciation and overheads.

d)      Reconciliation helps the management in exercising a more effective internal control.

Also Read: Gauhati University Cost Accounting Solved Question Papers

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4. Explain the concept of cost centre. How does cost accounting contribute to the effective and efficient resources allocation in a manufacturing entity?      3+7=10

Ans: Cost Centre: A large business is divided into a number of functional departments (such as production, marketing and finance) for administrative convenience. These departments are further divided into smaller divisions for cost ascertainment and control. These smaller divisions are called cost centers. A cost centre is a location, person or item of equipment (or group of these) in relation to which cost can be ascertained and controlled. In simple words, it is a subdivision of the organization to which cost can be charged.

The determination of suitable cost centre is very important for the purpose of cost ascertainment and control. The manager of a cost centre is held responsible for control of cost of his cost centre. The number and size of cost centers vary from organization to organization. The selection of a suitable cost centre depends on the following factors:

a. Nature and size of the business.

b. Layout and organization of the factory.

c. Availability of various cost data and information.

d. Management policy regarding cost ascertainment and control.

Costing is an aid to management

a)       Helps in Decision Making: Cost accounting helps in decision making. It provides vital information necessary for decision making. For instance, cost accounting helps in deciding:

1.       Whether to make a product buy a product?

2.       Whether to accept or reject an export order?

3.       How to utilize the scarce materials profitably?

b)      Helps in fixing prices: Cost accounting helps in fixing prices. It provides detailed cost data of each product (both on the aggregate and unit basis) which enables fixation of selling price. Cost accounting provides basis information for the preparation of tenders, estimates and quotations.

c)       Formulation of future plans: Cost accounting is not a post-mortem examination. It is a system of foresight. On the basis of past experience, it helps in the formulation of definite future plans in quantitative terms. Budgets are prepared and they give direction to the enterprise.

d)      Avoidance of wastage: Cost accounting reveals the sources of losses or inefficiencies such as spoilage, leakage, pilferage, inadequate utilization of plant etc. By appropriate control measures, these wastages can be avoided or minimized.

e)      Highlights causes: The exact cause of an increase or decrease in profit or loss can be found with the aid of cost accounting. For instance, it is possible for the management to know whether the profits have decreased due to an increase in labour cost or material cost or both.

f)        Reward to efficiency: Cost accounting introduces bonus plans and incentive wage systems to suit the needs of the organization. These plans and systems reward efficient workers and improve productivity as well improve the morale of the work -force.

g)       Prevention of frauds: Cost accounting envisages sound systems of inventory control, budgetary control and standard costing. Scope for manipulation and fraud is minimized.

h)      Improvement in profitability: Cost accounting reveals unprofitable products and activities. Management can drop those products and eliminate unprofitable activities. The resources released from unprofitable products can be used to improve the profitability of the business.

i)        Preparation of final accounts: Cost accounting provides for perpetual inventory system. It helps in the preparation of interim profit and loss account and balance sheet without physical stock verification.

j)        Facilitates control: Cost accounting includes effective tools such as inventory control, budgetary control and variance analysis. By adopting them, the management can notice the deviation from the plans. Remedial action can be taken quickly.

Or

The following are the costing records for the year 2016:

Particulars	Opening (Rs.)	Closing (Rs.)
Raw materials Work-in-progress: Materials Wages Works overheads Finished goods 200 units @ Finished goods 1,600 units @ Purchase of raw materials Rs. 1,90,000 Carriage on purchase Rs. 1,500 Sale of scrap of raw materials Rs. 5,000 Wages paid Rs. 2,97,000 Work overheads are absorbed @ 60% of direct labour cost. Administration overheads are absorbed @ Rs. 12 per unit produced. Selling and distribution overheads are absorbed @ 20% of selling price. Sales during the year 7,600 units at a profit of 10% on sales price.	29,500   13,600 11,000 6,600 84 (p.u) -	36,000   12,000 16,500 9,900 - 84 (p.u)

Prepare a cost sheet for the year ended 31^st march, 2016.

5. (a) Distinguish between ordering cost and carrying cost of materials.          3

Ans: Ordering cost is the cost of placing an order. Carrying cost is the cost of interest and storing one unit of material for the one year (carrying cost per unit per annum).

Ordering cost is independent of the quantity demanded, while carrying cost which includes storage cost, handling cost, upkeep expenses, insurance charges, opportunity cost etc. increases with the increase in the quantity ordered. Thus, ordering cost decreases as the size of purchase increases, but the carrying cost increases with the increase in the size of purchase.

(b) Arun company buys in lots of 500 boxes of an article which is a 3 months’ supply. The cost per box is Rs. 125 and the ordering cost is Rs. 150. The inventory carrying cost is estimated at 20% of unit value. What is the total annual cost of the existing inventory policy? How much should be saved by employing EOQ method of material control?    7

Or

(a) What is meant by material control?     3

Ans: Inventory control means to monitor the stock of goods used for production, distribution and captive (self) consumption. For a specific time period, stocks of goods are placed at some particular location. Stock of goods includes raw-materials, work in progress, finished goods, packaging, spares, components, consumable items, etc. Inventory Control means maintaining the inventory at a desired level. The desired-level keeps on fluctuating as per the demand and supply of goods.

According to Gordon Carson, "Inventory control is the process whereby the investment in materials and parts carried in stocks is regulated, within pre-determined limits set in accordance with the inventory policy established by the management."

Simply "Inventory control is a method to identify those stocks of goods, which can be used for the production of finished goods. It shall be supported by a schedule which gives details regarding; opening stock, receipt of raw-materials, issue of materials, closing stock, and scrap generated."

(b) Explain the basic requirement that you are to consider while lying down an efficient system of material control in your organisation.           7

Ans: Essential of store control: The following at the essentials of good system of material control.

a)       There should be proper co-operation and co-ordination among the departments dealing with materials.

b)      All purchases must be centralized and must be made through an expert purchase manager.

c)       All items in the stores should be classified with codes.

d)      Receiving and inspection procedure should be chalked out.

e)      Ideal storage and preservation facilities will have to be provided.

f)        Stores control measures like ABC analysis, perpetual inventory system, stock verification should be introduced.

g)       There should be an efficient system of internal audit and internal check.

h)      Maximum level, minimum level and re-order level of stock should be fixed to avoid over-stocking or shortage of materials.

i)        Appropriate records should be maintained to control issues and utilization of stores in production.

j)        There should be a system of regular reporting to management regarding materials purchases, storage and utilization.

6. (a) A machine was purchased in January, 2015 for Rs. 5 lakhs. The total cost of all machineries inclusive of the new machine was Rs. 75 lakhs. The following further information are available:           8

Expected life of the machine: 10 years

Scrap value at the end of 10 years: Rs. 5,000.

Repairs and maintenance for the machine during the year Rs. 2,000. Expected number of working hours of the machine per year 4,000 hrs. Insurance premium paid annually for all the machines Rs. 4,500.

Electricity consumption for the machine per hour (@ 75 paisa per unit) 25 units. Area occupied by the machine 100 sq. ft. area of departments 1,600 sq. ft. Rent per month of the department Rs. 800. Lighting charges for 20 points for the whole department (three points for the machine) Rs. 120 per month. Compute the machine hour rate for the new machine.

(b) State two basic features associated with the integral system of accounting.             2

Ans: Features of Integral accounting: Integral accounting has the following distinctive features:

1.   In integral accounting, there is no need to open a Cost Ledger Control Account as it is possible to complete double entry without this account.

2.   Subsidiary ledgers, i.e., stores ledger, work-in-progress ledger and finished goods ledger are maintained as in done in non-integrated accounting. In addition, a sales ledger (containing personal accounts of all customers) and a purchase ledger (containing personal accounts of all suppliers) are also maintained. Overheads ledger is maintained to contain separate accounts for factory, administration and selling and distribution overheads.

Or

(a) Calculate the earnings of worker Ram and Shyam under straight piece rate system and Taylor’s differential piece rate system from the following particulars. Also state the comparative advantages of Taylor’s differential piece rate system over straight piece rate system.             7

Normal rate per hour Standard time per unit Differential to be applied: 80% of piece rate below standard. 120% of piece rate at or above standard. Ram produces 1,300 units per day and Shyam produces 1,500 units per day.

Rs. 2.00 30 seconds.

(b) Write a note on control over overtime work.     3

Ans: Steps for Controlling Overtime:

a)       Entire overtime work should be duly authorized after investigating the reasons for it.

b)      Overtime cost should be shown against the concerned department. Such a practice should enable proper investigation and planning of production in future.

c)       If overtime is a regular feature, the necessity for recruiting more men and adding a shift should be considered.

d)      If overtime is due to lack of plant and machinery or other resources, steps may be taken to install more machines, or to resort to sub-contracting.

e)      If possible an upper limit may be fixed for each category of workers in respect of overtime.

7. In process A, 100 units of raw materials were introduced at a cost of Rs. 1,000. The other expenditure incurred by the process was Rs. 700. Of the units introduced, 10% are normally lost in the course of manufacture and they possess a scrap value of Rs. 4 each. The output of process A was only 80 units. Prepare necessary accounts as they may appear in the books of accounts. Also state the meaning of inter-process transfer price in terms of process costing.  8+2=10

Or

a) What is meant by cost-plus-contract?                   5

Ans: Cost plus Contracts: Where the contractee agrees to pay the contractor, as contract price, the exact cost plus certain percentage thereof to cover overhead expenses and profit, the contract is called cost plus contract.

In case of new type of work where the contractor cannot estimate the cost due to lack of experience in the line, cost plus contract is generally entered into. Government contracts are often on cost plus contract basis.

Since in these contracts the contractor is assured of reimbursement of actual cost, there is no initiative on the part of the contractor to economize. Higher cost means higher profit. So, the contractor is interested in higher cost. On the part of the contractee, therefore, higher supervision cost is involved. The fixed percentage of margin allowed sometimes becomes inadequate and sometimes it becomes excessive.

Main features of cost-plus-contracts:

1. This method is adopted in the case of those contracts where the probable cost of contract cannot be ascertained in advance with a reasonable accuracy.

2. These contracts are preferred when the cost of material and labour is not steady and contract completion may take number of years.

3. The different costs to be included in the execution of the contract are mutually agreed so that no dispute may arise in future in this respect. Under such type of contract contractee is allowed to check or scrutinize the concerned books, documents accounts.

4. Such a contract offers a fair price to the contractee and also a reasonable profit to contractor.

5. The contract price here is ascertained by adding a fixed and mutually pre-decided component of profit to the total cost of the work.

b) State the basic features of batch costing.             5

Ans: Batch Costing is a form of job costing. In this, the cost of a group of products is ascertained. The unit of cost is a batch or a group of identical products instead of a single job, order or contract. Separate cost sheets are maintained for each batch of products by assigning a batch number. The cost per unit is ascertained by dividing the total cost of a batch by the number of items produced in that batch. Following are some of the important features of batch costing:

1) In batch costing, the unit of cost is a batch or a group of identical products instead of a single job, order or contract.

2) Batch costing is employed by companies manufacturing in batches. It is used by readymade garment factories for ascertaining the cost of each batch of cloths made by them. Pharmaceutical or drug industries, electronic component manufacturing units, radio manufacturing units too use this method of costing for ascertaining the cost of their product.

3) Separate cost sheets are maintained for each batch of products by assigning a batch number.

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