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GU Cost Accounting Solved Question Paper 2024
2024 COMMERCE
(Honours Core/Regular)
Paper: COM-HC-4016/COM-RC-4026
BCom 4th Semester (Cost Accounting)
Full Marks: 80, Time: Three hours
The figures in the margin indicate full marks for the questions.
1. Answer the following as directed: (1 × 10 = 10 marks)
(a) Cost accounting is a tool used by management for________. (Fill in the blank with appropriate word)
Answer: decision-making
(b) Aggregate of direct costs is referred to as _______ cost. (Fill in the blank with appropriate word)
Answer: prime
(c) The difference between attendance time and work time is known as _______ (Fill in the blank with appropriate word)
Answer: idle time
(d) Abnormal loss of material is charged to costing Profit and Loss Account. (State whether the statement is true or false)
Answer: True
(e) Idle time arises only when workers are paid on_______basis of wages payments. (Fill in the blank with appropriate word)
Answer: time
(f) Variable cost per unit remains constant. (State whether the statement is true or false)
Answer: True
(g) Contract costing is also known as
(i) process costing
(ii) terminal costing
(iii) job costing
(iv) batch costing
(Select the correct answer)
Answer: (ii) terminal costing
(h) In job costing, the cost of an incomplete job is termed as_____.(Fill in the blank with appropriate word)
Answer: work-in-progress
(i) Overtime work is to be paid for at_____ the normal rate. (Fill in the blank with appropriate word)
Answer: extra or double (commonly "double" is accepted)
(g) The method of costing used in a factory manufacturing similar products in large quantities is
(i) process costing
(ii) terminal costing
(iii) job costing
(iv) batch costing
(Select the correct answer)
Answer: (i) process costing
(j) What is notional profit?
Answer: Notional profit is the difference between the value of work done and the total cost of work done on a contract. It is a temporary profit shown before the contract is completed.
2. Answer the following questions: (2 × 5 = 10 marks)
(a) What is unit cost?
Answer: Unit cost means the cost of producing one single item or unit of product.
(b) Write two benefits of time and motion study.
Answer:
It helps to fix the best method of doing a job.
It saves time and increases efficiency of workers.
(c) What is meant by semi-variable overhead?
Answer: Semi-variable overhead is a cost which has both fixed and variable parts. It partly changes with production and partly stays the same.
(d) Write two features of contract costing.
Answer:
It is used for large and long-term projects like buildings or roads.
Each contract is treated as a separate job.
(e) State the meaning of overtime.
Answer: Overtime means extra hours worked by workers beyond normal working hours. It is usually paid at a higher rate.
3. Answer any four of the following questions: (5 × 4 = 20 marks)
(a) Mention five benefits of cost accounting.
Answer: Cost accounting is a system used by businesses to record, analyze, and control the costs of producing goods or services. It helps management to make better decisions and improve the efficiency and profitability of the business.
The Following are the five benefits of Cost Accounting:-
Helps in Cost Control: Cost accounting helps to find out the actual cost of products and services. It shows where money is being spent and helps to reduce unnecessary costs.
Fixing Selling Price: It helps in deciding the correct selling price of a product by providing accurate cost data. This ensures that the business earns profit while staying competitive.
Improves Efficiency: By analyzing the use of materials, labour, and machines, cost accounting helps to reduce waste and improve overall productivity.
Helps in Decision Making: Cost accounting provides useful data to the management which helps in making decisions like choosing between different products, methods, or markets.
Profitability Analysis: It helps in comparing the profit earned from different products, services, or departments. This allows the business to focus more on the profitable areas.
(b) From the following information, prepare a cost sheet showing cost per unit and profit for the month of January, 2024:
Raw materials consumed: ₹ 80,000
Direct wages: ₹ 48,000
Machine hour worked: 8,000 hours
Machine hour rate: ₹ 4 per hour
Office overhead: 10% of works cost
Selling overhead per unit: ₹ 1.5
Units produced: 4,000 units
Units sold: 3,600 units @ ₹ 50 each
(c) Following information, relating to a type of raw material, is available:
Annual demand: 6,400 units
Unit cost: ₹ 6
Carrying cost: 25% of unit cost
Procurement cost: ₹ 75 per order
Calculate EOQ and number of orders per annum.
Solution: Download PDF For Practical Solutions
(d) Explain briefly the needs of labour cost control.
Answer: Labour cost control means managing and reducing the costs related to workers’ wages while increasing their efficiency and productivity. It helps the business save money and improve performance.
The Following are five Needs for labour cost control:
To Reduce Wastage of Time: It helps in reducing idle time and ensures that workers use their time effectively.
To Increase Productivity: Labour cost control encourages better work performance, leading to more output in less time.
To Avoid Excess Payment: It prevents overpayment by checking attendance, overtime, and proper wage calculation.
To Fix Standard Labour Cost: It helps to fix standard labour costs for each job or product, which helps in planning and budgeting.
To Improve Efficiency: Labour cost control encourages training, supervision, and motivation, which leads to better work quality.
(e) Write five features of overhead cost.
Answer: Overhead cost refers to all indirect costs of production or running a business that cannot be directly linked to a specific product or job, like rent, electricity, or office salaries.
Following are the five features of overhead cost:
Indirect in Nature: Overheads cannot be directly traced to a single unit of product or job.
Grouped into Categories: They are divided into factory overhead, office overhead, and selling & distribution overhead.
Fixed, Variable, or Semi-variable: Overhead costs may remain the same, change with output, or have both fixed and variable parts.
Need for Allocation and Apportionment: Overheads are distributed among different departments or jobs using suitable methods.
Not Part of Prime Cost: Unlike direct material and direct labour, overheads are included in total cost but not in prime cost.
(f) Write five differences between job costing and contract costing.
Answer: Job costing is used for small, customized jobs, while contract costing is used for large-scale, long-term projects like construction.
The Following are five key differences:
4. Answer any four of the following questions: (10 × 4 = 40 marks)
(a) Explain the factors to be considered for installation of a costing system.
Answer: Installing a costing system in an organisation is an important step to control and manage the cost of operations. A good costing system provides useful information to the management for planning, controlling, and decision-making. While installing a costing system, the following factors must be considered:
Nature and Size of the Business: The costing system should match the nature (manufacturing, trading, or service) and size (small, medium, or large) of the business.
Types of Products or Services: The number and variety of products or services the business offers will affect the method of costing to be used, such as job costing, process costing, or batch costing.
Organisational Structure: The system should fit into the existing organisation structure and should clearly define responsibilities and reporting systems.
Methods of Production: The production process (continuous, job-based, or project-based) must be studied to design a suitable costing system.
Availability of Resources: The availability of skilled staff, time, and funds for setting up and running the costing system must be considered.
Need for Cost Information: The level and detail of cost information required by the management will affect the complexity of the system.
Level of Automation and Technology: If the business uses modern tools and software, the costing system should be compatible and easy to integrate.
Legal and Tax Requirements: The system should help in meeting government reporting and tax rules, especially for industries where cost audit is compulsory.
Flexibility and Simplicity: The system should be flexible to adjust with changing needs and simple enough to be understood and used by the staff.
Cost-Benefit Analysis: The cost of installing and maintaining the system should be justified by the benefits it provides to the organisation.
(b) Explain 'maximum level', 'minimum level', and 're-ordering level' of materials stock maintained in an organisation.
Answer: In a business, especially in manufacturing, it is important to maintain proper levels of stock to avoid shortage or overstocking. The following three stock levels are used for control:
Maximum Level:
Meaning: It is the highest quantity of material that should be kept in store.
Purpose: To avoid overstocking, wastage, theft, and extra storage cost.
Factors Considered: Storage space, risk of damage or obsolescence, cost of carrying inventory, and future demand.
Minimum Level:
Meaning: It is the lowest quantity of material that must be kept in stock at all times.
Purpose: To avoid complete stock-out and stop in production.
Factors Considered: Rate of usage, lead time (time taken for delivery), and risk of delay from suppliers.
Re-ordering Level (or Re-order Level):
Meaning: It is the level of stock at which a new order for materials should be placed.
Purpose: To ensure that new stock arrives before the current stock reaches the minimum level.
Formula:
Re-order level = Maximum usage × Maximum lead timeFactors Considered: Usage rate, lead time, and reliability of suppliers.
By maintaining these stock levels properly, an organisation ensures smooth production, avoids extra cost, and uses its resources efficiently.
(c) North-East Manufacturing Company uses rubber, which is purchased according to requirement, from the market. Following purchases and issues were made during the month of March, 2024:
March 1: Opening stock 2,000 kg @ ₹ 5 each
March 3: Issued 1,500 kg
March 4: Purchased 4,500 kg @ ₹ 6 each
March 7: Issued 1,600 kg
March 8: Return by production department 100 kg (Issued on March 3)
March 15: Purchased 2,400 units @ ₹ 6.50 each
March 18: Return to supplier 200 units (Purchased on March 4)
March 24: Purchased 1,000 units @ ₹ 7 each
March 26: Issued 2,100 units
March 27: Purchased 1,200 units @ ₹ 7.50 each
March 31: Issued 2,800 units
From the above information, prepare Storage Ledger by applying FIFO method.
Solution: Download PDF For Practical Solutions
(d) What is meant by labour turnover? What would be possible effects of labour turnover on the cost of production? (2 + 8 = 10 marks)
Answer: Labour turnover refers to the rate at which employees leave and are replaced in an organisation during a certain period. It shows how frequently workers join and leave a company.
It is usually expressed as a percentage and calculated using the formula:
Labour Turnover (%) = (No. of employees left or replaced during the period / Average number of employees) × 100
Effects of Labour Turnover on Cost of Production (8 marks):
Increased Recruitment and Training Costs: When old workers leave, new workers must be hired and trained. This adds to recruitment and training expenses.
Loss of Efficiency and Productivity: New workers take time to learn the job, and during this period, production may slow down or become less efficient.
Higher Scrap and Defective Output: Inexperienced workers are more likely to make mistakes, which can lead to defective goods or wastage of materials.
Increased Supervision Costs: New employees often require more attention and supervision, which increases labour supervision costs.
Disruption in Production: Frequent changes in the workforce can disturb the smooth flow of work, leading to delays and lower output.
Loss of Skilled Workers: When experienced workers leave, the company may lose valuable skills and knowledge, which are not easily replaced.
Low Morale Among Workers: High labour turnover can create job insecurity and dissatisfaction among the remaining employees, affecting their performance.
Increased Overhead Costs per Unit: When output decreases due to inefficient labour, fixed costs like rent and salaries are spread over fewer units, increasing the cost per unit.
Conclusion: Labour turnover is a serious issue for any organisation. If not controlled, it increases the overall cost of production and reduces the quality and efficiency of work. Therefore, businesses should try to reduce labour turnover by creating a healthy work environment, offering fair wages, and keeping employees satisfied.
(e) Following are the information related to earning of a worker for a week: (2+4+4=10)
Weekly working time 48 hours
Hourly wage rate 7.50
Rate per unit ₹3-00
Normal time taken per unit 24 minutes
Normal output per week 120 units
Actual output per week 150 units
Calculate the earning of the worker for a week under:-
(i)straight price rate
(ii) Halsay premium scheme
(iii)Rowan premium scheme
Solution: Download PDF For Practical Solutions
(f) What is meant by machine hour rate? Mention the steps required to compute machine hour rate. (2 + 8 = 10 marks)
Answer: Machine hour rate is the cost of operating a machine for one hour. It includes all expenses related to running and maintaining the machine, such as depreciation, repairs, power, insurance, and supervision. It helps to calculate accurate production costs where machines are heavily used.
Formula: Machine Hour Rate = Total machine-related overheads / Total machine hours
Steps Required to Compute Machine Hour Rate:
Identify the Machine or Group of Machines: Decide whether the rate is to be calculated for one machine or a group of similar machines.
Estimate Total Working Hours of the Machine: Calculate the total number of hours the machine is expected to work during a specific period (e.g., a month or year), after deducting downtime for repairs and maintenance.
Classify Expenses into Fixed and Variable Costs:
Fixed Costs: Expenses that remain constant, like rent, insurance, and depreciation.
Variable Costs: Expenses that vary with machine usage, like power and lubricants.
Calculate Fixed Costs: Add all fixed expenses related to the machine for the period (e.g., annual depreciation, rent share, insurance, etc.).
Calculate Variable Costs: Add all variable costs based on usage, such as electricity used per hour × total machine hours.
Add Fixed and Variable Costs Together: Total machine expenses = Fixed Costs + Variable Costs.
Divide by Total Machine Hours: Now divide the total machine expenses by the total machine hours to get the rate per hour.
Check and Revise Regularly: The machine hour rate should be reviewed and updated regularly to reflect any changes in cost or usage.
Conclusion: The machine hour rate is a useful tool for accurate cost control in industries where machines play a key role in production. It ensures proper allocation of costs and helps in fixing prices and comparing efficiency.
(g) A product passes through two processes. The output of process I becomes the input of process II and the output of process II is transferred to warehouse. The quantity of raw materials introduced into process I is 20,000 kg. The cost and output data for the month of January 2024 are as under:
The company fixes selling price on end product at a margin of 20% on cost. Prepare the Process Account and determine the selling price per unit.
Solution: Download PDF For Practical Solutions
(h) Following are the summary of transactions obtained from the costing records of Sri Ram India Limited:
Purchase ₹ 2,00,000
Production wages paid ₹70,000
Stock issued to production order ₹80,000
Works expenses charged to production ₹45,000
Finished goods transferred from production orders 2,22,000
Administrative expense charged to production 15,000
Work expenses outstanding 12,100
Work expenses paid ₹25,000
Pass Journal entries for the above transaction under integral system of accounting.
Solution: Download PDF For Practical Solutions
-00000-
2024
COMMERCE
(Honours Elective)
Paper: COM-HE-5016
(Management Accounting)
Full Marks: 80
Time: Three hours
The figures in the margin indicate full marks for the questions.
Answer either in English or in Assamese.
1. Answer as directed: (1 × 10 = 10 marks)
(a) Management Accounting deals with both quantitative and qualitative information.
Answer: True
(b) Define Management Accounting.
Answer: Management Accounting is the process of preparing management reports and accounts that provide financial and statistical information to managers to assist in decision-making, planning, and controlling business operations.
(c) _______ ratio is useful for measuring the short-term liquidity.
Answer: Current
(d) Sale of fixed assets for cash will improve the current ratio.
Answer: True
(e) What do you mean by cash budget?
Answer: A cash budget is a financial plan that estimates the cash inflows and outflows over a specific period of time to ensure that a business has sufficient cash to meet its obligations.
(f) State the meaning of budgetary control.
Answer: Budgetary control is a system of managing costs through the preparation of budgets, comparing actual performance with the budgeted figures, and taking corrective actions to achieve organizational objectives.
(g) Contribution is the difference between the sales and the total cost of sales.
Answer: False
(Correct Statement: Contribution is the difference between sales and variable cost.)
(h) What is break-even point?
Answer: Break-even point is the level of sales at which total revenue equals total cost, resulting in neither profit nor loss.
(i) The difference between actual cost and standard cost is known as
Answer: (a) variance
(j) State the meaning of standard cost.
Answer: Standard cost is a predetermined cost that is established as a benchmark for measuring actual performance and efficiency in production or operations.
2. Give brief answers to the following questions: (2 × 5 = 10 marks)
(a) Mention two limitations of standard costing.
Answer: i) Standard costing may not be suitable in a rapidly changing environment where costs and processes frequently change.
ii) It can be costly and time-consuming to set and maintain accurate standards, especially for complex operations.
(b) Write a brief note on margin of safety.
Answer: Margin of safety is the difference between actual sales and break-even sales. It indicates how much sales can drop before the business incurs a loss, showing the risk cushion for a company.
(c) Write any two objectives of Management Accounting.
Answer: i) To provide relevant financial and non-financial information to management for decision-making.
ii) To assist in planning, controlling, and evaluating business operations.
(d) Mention two objectives of Financial Statement Analysis.
Answer: i) To assess the financial health and performance of an organization.
ii) To aid investors and creditors in making informed decisions regarding the company.
(e) What is current ratio?
Answer: Current ratio is a liquidity ratio that measures a company’s ability to pay its short-term obligations with its current assets. It is calculated as Current Assets ÷ Current Liabilities.
3. Answer the following questions: (any four) (5 × 4 = 20 marks)
(a) Explain briefly the scope of Management Accounting.
Answer: The scope of Management Accounting is broad and covers various aspects of financial and non-financial information to assist management in decision-making, planning, and controlling business operations. It includes the following areas:
i) Financial Accounting: Management Accounting uses financial data derived from financial accounting to analyze past performance and make future decisions. It helps in understanding the profitability, financial position, and operational efficiency of the business.
ii) Cost Accounting: It focuses on cost control and cost reduction through proper recording, classification, and analysis of costs. It helps in determining the cost of products, services, or processes and provides a basis for pricing and profitability analysis.
iii) Budgeting and Forecasting: Management Accounting involves preparing various types of budgets such as sales, production, and cash budgets. These budgets help in forecasting future financial needs and provide a roadmap for achieving business goals.
iv) Decision-Making: It assists the management in decision-making processes like make or buy decisions, product mix decisions, pricing strategies, and capital investment decisions by providing relevant cost and revenue information.
v) Performance Evaluation: It provides tools such as standard costing and variance analysis to evaluate the efficiency and effectiveness of different departments and cost centers.
vi) Financial Analysis and Interpretation: Management Accounting interprets financial statements and ratios to assess the financial health of the organization. It helps in understanding liquidity, solvency, and profitability through detailed analysis.
vii) Internal Control: It aids in establishing an effective system of internal control by monitoring the use of resources and ensuring that operations are in line with organizational policies and objectives.
Thus, the scope of Management Accounting is not limited to accounting alone but extends to all areas of business operations that require analysis and interpretation for effective managerial decision-making.
(b) Describe briefly liquidity ratios used to measure the liquidity of a firm.
Answer: Liquidity ratios are financial metrics used to measure the ability of a firm to meet its short-term obligations as they come due. These ratios assess whether a company has enough liquid assets to cover its current liabilities. The most common liquidity ratios are:
i) Current Ratio: The current ratio is calculated as:
Current Ratio = Current Assets / Current Liabilities
It measures the firm’s ability to pay off its short-term liabilities with its short-term assets. A ratio of 2:1 is generally considered healthy. A higher ratio indicates strong liquidity, while a lower ratio suggests potential difficulty in meeting short-term obligations.
ii) Quick Ratio (Acid-Test Ratio): The quick ratio is calculated as:
Quick Ratio = (Current Assets – Inventories) / Current Liabilities
This ratio excludes inventory from current assets, as inventory is less liquid compared to other assets. It provides a more stringent measure of liquidity. A ratio of 1:1 is generally considered satisfactory.
iii) Cash Ratio: The cash ratio is calculated as:
Cash Ratio = (Cash + Cash Equivalents) / Current Liabilities
This ratio indicates the firm’s ability to pay its current liabilities using only cash and cash equivalents. It is the most conservative liquidity ratio.
These liquidity ratios are crucial for assessing the financial health of a business, especially from the viewpoint of creditors and investors, as they reflect the firm's capacity to settle its short-term dues efficiently.
(c) State the basic characteristics of marginal costing.
Answer: Marginal costing is a technique of costing that considers only variable costs for decision-making, while fixed costs are treated as period costs and are not allocated to products. The basic characteristics of marginal costing are:
i) Classification of Costs: Under marginal costing, costs are classified into fixed and variable components. Variable costs vary directly with the level of output, while fixed costs remain constant irrespective of production volume.
ii) Treatment of Fixed Costs: Fixed costs are not apportioned to the cost of products. They are treated as period costs and are charged in full against the revenue of the period in which they are incurred.
iii) Contribution Margin: Marginal costing emphasizes the concept of contribution, which is calculated as:
Contribution = Sales – Variable Costs
This contribution is used to cover fixed costs, and any excess is considered as profit. It is a key measure for decision-making.
iv) Profit Planning: Profit is determined based on contribution. It helps in analyzing the effect of changes in sales volume, cost, and price on profit. Break-even analysis and cost-volume-profit analysis are used extensively in marginal costing.
v) Decision-Making Tool: Marginal costing is widely used in managerial decision-making, such as make or buy decisions, pricing decisions, product mix decisions, and determining the minimum price to accept an order.
vi) Simple and Useful: This method is simple to understand and apply. It provides relevant and accurate information for short-term decision-making and is especially useful in a competitive business environment.
Thus, marginal costing provides valuable insights into cost behavior and helps management in optimizing resources and maximizing profits.
(d) Explain briefly labour cost variance.
Answer: Labour Cost Variance is the difference between the standard cost of labour for actual output and the actual labour cost incurred. It is a part of variance analysis under standard costing and helps in evaluating the efficiency of labour usage and cost control in an organization.
The formula for Labour Cost Variance (LCV) is:
LCV = (Standard Hours × Standard Rate) – (Actual Hours × Actual Rate)
Labour cost variance can further be divided into the following components:
i) Labour Rate Variance (LRV):
It arises due to the difference between the standard wage rate and the actual wage rate.
LRV = Actual Hours × (Standard Rate – Actual Rate)
ii) Labour Efficiency Variance (LEV):
It arises due to the difference between the standard hours allowed and the actual hours worked.
LEV = Standard Rate × (Standard Hours – Actual Hours)
A favourable labour cost variance indicates that the actual labour cost is less than the standard cost, which is a sign of efficiency. On the other hand, an unfavourable variance means higher labour costs than expected, which requires managerial attention. Labour cost variance analysis helps management identify inefficiencies and take corrective action to improve productivity and cost control.
(e) Write the distinctions between fixed budget and flexible budget.
Answer: The distinctions between a fixed budget and a flexible budget are as follows:
i) Definition: A fixed budget is a budget that remains unchanged regardless of changes in the level of activity or output.
A flexible budget is a dynamic budget that adjusts according to the actual level of activity or production.
ii) Adaptability: A fixed budget is rigid and cannot be adjusted once prepared.
A flexible budget is adaptable and can be modified as per actual activity levels.
iii) Usefulness: Fixed budgets are less useful in dynamic business environments where activities fluctuate frequently.
Flexible budgets are more practical and useful as they allow better control and performance measurement under changing conditions.
iv) Cost Classification: In a fixed budget, cost behavior (fixed, variable, semi-variable) is not considered.
A flexible budget classifies costs based on their behavior, making it more accurate and informative.
v) Performance Evaluation: Fixed budgets may not provide an accurate basis for performance evaluation when actual activity levels differ from the budgeted levels.
Flexible budgets allow realistic comparisons, making them more effective for performance appraisal and variance analysis.
Thus, while fixed budgets are useful in stable conditions, flexible budgets are preferred in situations with variable activities as they provide better control and decision-making support.
(f) Write a brief note on comparative statements.
Answer: Comparative statements are financial statements that present figures of two or more periods side by side to facilitate comparison and analysis of financial performance over time. These statements help in identifying trends, growth patterns, and areas of improvement by comparing data such as sales, expenses, profits, assets, and liabilities.
The two main types of comparative statements are:
i) Comparative Income Statement: It shows the results of operations (i.e., revenues and expenses) of different periods, allowing analysis of changes in profitability and cost structure over time.
ii) Comparative Balance Sheet: It presents the financial position of a business on different dates, enabling evaluation of changes in assets, liabilities, and equity.
The key features of comparative statements are:
Side-by-side presentation of financial data for different periods.
Amount and percentage change columns to show the increase or decrease in figures.
Trend analysis to understand business growth and performance.
Comparative statements are useful for internal management, investors, and creditors to make informed decisions based on historical performance and financial stability. They are an important tool in financial analysis and strategic planning.
4. Answer the following questions: (any four) (10 × 4 = 40 marks)
(a) Explain different tools and techniques of Management Accounting in the areas of decision-making.
Answer: Management Accounting involves the use of various tools and techniques to assist the management in effective decision-making. These tools help in planning, controlling, evaluating, and interpreting financial and non-financial information to support strategic and operational decisions. The important tools and techniques of Management Accounting in the areas of decision-making are explained below:
i) Financial Statement Analysis: This involves the analysis and interpretation of financial statements such as the income statement and balance sheet. Techniques like ratio analysis, comparative financial statements, and trend analysis are used to assess the financial health of the organization. These tools help management understand the liquidity, solvency, profitability, and operational efficiency of the business.
ii) Fund Flow and Cash Flow Analysis: Fund flow analysis shows the movement of working capital between two balance sheet dates, while cash flow analysis explains the inflow and outflow of cash during a specific period. These analyses help management understand the sources and uses of funds and the firm’s ability to meet its short-term financial obligations. It aids in financial planning and ensures sufficient liquidity for operational needs.
iii) Budgetary Control: Budgetary control involves the preparation of budgets for various functions of the organization and comparing the actual performance with the budgeted targets. Variance analysis is conducted to identify deviations and take corrective actions. Budgetary control helps in cost control, resource allocation, and effective coordination among departments. It also assists in future planning and setting performance benchmarks.
iv) Standard Costing and Variance Analysis: Standard costing sets predetermined costs for products or services, and actual performance is compared with these standards. Variance analysis identifies the differences between standard and actual costs, categorized into material, labour, and overhead variances. These variances help management to locate inefficiencies, control costs, and improve operational performance.
v) Marginal Costing and Break-even Analysis: Marginal costing helps in determining the impact of variable costs on the total cost and profitability of the business. It is used for short-term decision-making like product pricing, make-or-buy decisions, and determining the most profitable product mix. Break-even analysis identifies the sales volume at which total cost equals total revenue, i.e., the point of no profit and no loss. This analysis supports decisions related to sales planning and profitability improvement.
vi) Cost-Volume-Profit (CVP) Analysis: CVP analysis examines how changes in cost and volume affect a company’s operating profit. It helps in determining the effect of changes in fixed and variable costs, sales volume, and price on profit. It is useful in decision-making related to pricing, product selection, and profit planning.
vii) Responsibility Accounting: This technique involves assigning responsibilities to different managers for controlling revenues and costs within their departments or responsibility centers. It enhances accountability and performance evaluation by comparing actual results with the assigned responsibilities.
viii) Decision-making Techniques: Management accounting uses techniques like differential cost analysis, relevant costing, opportunity cost analysis, and capital budgeting methods (such as Payback Period, NPV, IRR) to support decisions involving alternative choices. These tools help in choosing the best course of action by analyzing the financial impact of each alternative.
ix) Ratio Analysis: This technique involves the calculation of various ratios like current ratio, quick ratio, debt-equity ratio, return on investment (ROI), etc., to assess the financial condition and performance of a business. It provides useful insights into liquidity, solvency, and profitability for better decision-making.
x) Trend Analysis and Forecasting: Management accountants analyze historical data to identify trends and forecast future outcomes. Forecasting techniques like regression analysis, time-series analysis, and moving averages are used to predict sales, costs, and cash flows. This aids in long-term strategic planning.
In conclusion, the tools and techniques of management accounting are essential for informed decision-making. They provide accurate and timely information that helps managers in planning, controlling, and optimizing business operations to achieve organizational objectives effectively.
(b) Write any five limitations of Management Accounting. How does Management Accounting differ from Cost Accounting? (5 + 5 = 10 marks)
Answer:
Five Limitations of Management Accounting:
i) Based on Historical and Financial Data: Management Accounting relies heavily on data from financial accounting, which is historical in nature. This limits its effectiveness in fast-changing business environments where real-time data is essential for decision-making.
ii) Lack of Standardization: Unlike financial accounting, management accounting does not follow any standardized principles or frameworks. This leads to variations in the preparation and presentation of reports, making it difficult to compare and interpret results across companies or periods.
iii) Subjective and Judgment-Based: Management accounting involves a significant amount of judgment and estimates. Tools like forecasting, budgeting, and variance analysis depend on assumptions that may not always be accurate, leading to biased or misleading conclusions.
iv) Costly and Time-Consuming: Implementing and maintaining a management accounting system requires significant resources in terms of time, cost, and expertise. Small businesses may find it difficult to afford or justify the investment needed for such systems.
v) Lack of Forward-Looking Capability: While management accounting attempts to assist in planning and forecasting, its heavy reliance on past data and trends can limit its ability to accurately predict future events or respond proactively to changing market conditions.
Difference Between Management Accounting and Cost Accounting:
(c) "Marginal costing technique is a valuable aid to management in taking many managerial decisions." Explain the statement with reference to managerial application of marginal costing.
Answer: Marginal costing is a vital cost accounting technique that considers only variable costs while calculating the cost of production. Fixed costs are treated as period costs and are not assigned to products. The core concept of marginal costing revolves around the contribution margin, which is the difference between sales revenue and variable costs. This technique is especially useful for short-term decision-making, where understanding the impact of cost and volume changes is crucial.
The statement that "Marginal costing technique is a valuable aid to management in taking many managerial decisions" is absolutely true, as it helps management to make rational, data-driven, and timely decisions by analyzing cost behavior and contribution margins. The following points explain the various managerial applications of marginal costing that support the statement:
i) Fixation of Selling Price: Marginal costing helps in fixing the minimum selling price of a product during periods of competition, market downturn, or excess capacity. Since fixed costs are not considered in the pricing decision, the management can accept orders at a price that covers variable costs and contributes marginally to fixed costs and profit. This helps in maintaining the production volume and avoiding losses.
ii) Make or Buy Decision: When management needs to decide whether to manufacture a component in-house or buy it from an outside supplier, marginal costing provides a comparative analysis of the variable production cost and the purchase price. If the marginal (variable) cost of manufacturing is lower than the buying price, the company should manufacture; otherwise, it should buy. This ensures cost-effectiveness in procurement decisions.
iii) Profit Planning and Volume Decisions: Marginal costing is used in cost-volume-profit (CVP) analysis, which studies the relationship between cost, volume, and profit. Break-even analysis, a key component of CVP, helps management identify the level of sales at which the business neither makes a profit nor incurs a loss. This aids in setting sales targets and profit planning.
iv) Product Mix Decision: In situations where a business produces multiple products but has limited resources (such as machine hours, labour hours, or raw materials), marginal costing helps determine the most profitable product mix. By calculating the contribution per unit of the limiting factor, management can prioritize the production of items that yield the highest contribution, thus maximizing overall profit.
v) Accepting Special Orders: Marginal costing helps in analyzing whether to accept a special order at a lower price, especially when the company has idle capacity. If the price offered covers the variable cost and adds to the fixed cost recovery, the order can be accepted even if it is below the normal selling price. This allows the firm to generate additional income without affecting regular operations.
vi) Decision to Continue or Discontinue a Product or Department: If a particular product line or department is showing losses, marginal costing helps assess whether it is contributing positively towards covering fixed costs. If the contribution margin is positive, it may be advisable to continue operations. If contribution is negative, discontinuation may be a better option.
vii) Key or Limiting Factor Analysis: When a limiting factor (like shortage of materials, labour, or machine hours) restricts production, marginal costing helps in the optimal utilization of that limiting factor. Products yielding the highest contribution per unit of the limiting factor are given priority.
viii) Budgeting and Forecasting: Marginal costing is used to forecast the effect of changes in costs, sales volume, and selling prices on profitability. This helps in preparing flexible budgets and setting realistic performance targets under varying conditions.
In conclusion, marginal costing is a powerful managerial tool that aids in short-term economic decision-making by providing clarity on cost behavior and profit relationships. It helps management optimize resource utilization, set pricing policies, and maximize profitability through rational and informed decision-making. Hence, the technique of marginal costing plays a crucial role in modern business management.
(d) (i) The following information of a company is given below:
Current Ratio = 2.8
Acid-Test Ratio = 1.5
Working Capital = ₹1,62,000
Find out Current Assets, Current Liabilities and Liquid Assets.
Answer:
Let Current Liabilities = x
Then,
Current Assets = 2.8x (from the Current Ratio)
Working Capital = Current Assets – Current Liabilities
⇒ 2.8x – x = ₹1,62,000
⇒ 1.8x = ₹1,62,000
⇒ x = ₹1,62,000 ÷ 1.8 = ₹90,000
So,
Current Liabilities = ₹90,000
Current Assets = 2.8 × ₹90,000 = ₹2,52,000
Now,
Acid-Test Ratio = (Liquid Assets / Current Liabilities) = 1.5
⇒ Liquid Assets / ₹90,000 = 1.5
⇒ Liquid Assets = 1.5 × ₹90,000 = ₹1,35,000
Final Answers:
i) Current Liabilities = ₹90,000
ii) Current Assets = ₹2,52,000
iii) Liquid Assets = ₹1,35,000
(ii) How is the Common Size Statement different from Comparative Statement?
Answer: Common Size Statement and Comparative Statement are both tools used in financial analysis but differ in their approach and purpose:
(e) Following are the information obtained from the books of Bajaj India Ltd.:
Fixed Cost = ₹1,60,000
Selling Price per unit = ₹100
Variable Cost per unit = ₹90
We are to calculate:
(i) P/V Ratio
(ii) Break-even Sales (in ₹)
(iii) Break-even Sales (in units)
(iv) Sales to earn a profit of ₹40,000
(v) Profit when sales are ₹20,00,000
Answer: Download PDF For Practical Solutions
(f) From the following data, prepare a cash budget for the three months April to June, 2023 of an organisation:
Further Information :
(i) 10% of sales is realised in the month of sale and the balance is realised equally in two subsequent months.
(ii) Creditors allow a credit of one month.
(iii) 20% of the wages of a month remains as arrear which is paid in the following month.
(vi) Sundry expenses are paid in the month itself.
(v) Income tax ₹ 20,000 and dividends ₹ 12,000 are payable in June.
(vi) Cash in hand on 1-4-2023 was ₹ 40,000.
Answer: Download PDF For Practical Solutions
(g) From the following information regarding a standard product, calculate:
(i) Labour cost variance
(ii) Labour rate variance
(iii) Labour efficiency variance
(4 + 3 + 3 = 10 marks)
Hours per unit 10 hours
Units produced 500
Hours worked 6000
Actual Labour cost ₹ 2,400
Answer: Download PDF For Practical Solutions
(h) The standard materials required for producing 100 units is 120 kgs. A standard price of 0.50 paise per kg is fixed and 2,40,000 units were produced during the period. Actual materials purchased were 3,00,000 kgs at a cost of ₹ 1,65,000.
Calculate:
(i) Material cost variance
(ii) Material price variance
(iii) Material usage variance (4 + 3 + 3 = 10 marks)
Answer: Download PDF For Practical Solutions
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