4th Semester B.Com (Major)
COST AND MANAGEMENT ACCOUNTING
2019
(All Major Subjects)
Full Marks: 80
Pass Marks: 24
Time: Three Hours
The figures in the margin indicate full marks for the questions.
GROUP - A
(Cost Accounting)
Marks: 40
1. Answer the following as directed: (1×6=6)
i) Standard costing helps in measuring efficiency. (Write True or False)
Answer: True
ii) Abnormal idle time cost of the factory should be charged to production overhead. (Write True or False)
Answer: False
iii) The time taken in processing the order and then executing it is known as ______. (Fill in the blank)
Answer: Lead time
iv) The technique of standard costing may not be applicable in case of ______. (Fill in the blank)
Answer: Job order production
v) Bin Card shows:
a) Work-in-process inventory and value of stores
b) Quantity of stores
c) Both value and quantity of stores
Answer: b) Quantity of stores
vi) The difference between actual cost and standard cost is known as:
a) Variance
b) Profit
c) Differential cost
Answer: a) Variance
2. Answer the following questions: (2×2=4)
i) What is Flat Time Rate?
Answer: Flat Time Rate is a method of wage payment where workers are paid a fixed amount of money for each hour or day worked, regardless of their output. It is based solely on time spent on the job and does not consider the quantity or quality of work performed.
ii) State two causes of material usage variance.
Answer:
i) Use of sub-standard or inferior quality materials during production.
ii) Inefficiency or carelessness of workers leading to wastage of materials.
3. Answer any two questions from the following: (5×2=10)
i) Explain the various functions of cost accounting.
Answer: Cost accounting performs several important functions that help in the efficient management of a business. One of its main functions is ascertainment of cost, where it helps in calculating the exact cost of production of goods or services. This is essential for fixing the right selling price and analyzing profitability. Another important function is cost control. By setting standards and comparing them with actual performance, cost accounting helps to identify areas where costs are exceeding and take corrective action.
Cost accounting also supports cost reduction by identifying wasteful activities and inefficiencies and suggesting ways to improve productivity. It helps in decision-making by providing detailed cost data which is useful in choosing between alternatives such as make or buy decisions, selecting the most economical production method, etc. Furthermore, cost accounting plays a vital role in budgeting and planning. It helps in preparing various budgets and estimating future costs, which supports better planning and control. Lastly, it provides useful information to management for performance evaluation, so that the efficiency of departments and employees can be measured and rewarded accordingly.
ii) How is a cost sheet prepared? Explain.
Answer:
A cost sheet is a statement that shows the total cost and cost per unit of a product for a particular period. The preparation of a cost sheet begins with calculating the prime cost, which includes direct materials, direct labor, and direct expenses. These are the basic costs directly related to the production process.
After that, factory or works overheads such as power, rent, and indirect labor are added to the prime cost to arrive at the factory cost. Then, administrative overheads like office salaries, stationery, and other indirect costs related to administration are added to the factory cost to calculate the cost of production.
If any opening or closing stock of finished goods exists, adjustments are made to arrive at the cost of goods sold. After that, selling and distribution overheads, such as advertising and transportation, are added to determine the total cost or cost of sales. If the company wants to calculate the selling price, then a profit margin is added to the total cost.
A cost sheet can be prepared monthly, quarterly, or annually and helps in analyzing cost behavior and fixing appropriate prices.
iii) Distinguish between cost accounting and management accounting in table.
Answer:
4. Answer any one of the following questions: (10×2=20)
i) Discuss the preliminary steps for establishing a system of Standard Costing
Answer: Establishing a system of standard costing in an organization requires careful planning and several preliminary steps to ensure its effectiveness. Standard costing is a cost control tool where predetermined costs, known as standard costs, are compared with actual costs to identify variances and take corrective actions. The success of this system depends largely on how well it is planned and implemented. The following are the preliminary steps involved in establishing a system of standard costing:
1) Establishing Cost Centres: The first step is to divide the entire organization into various cost centres. A cost centre is a department or a specific unit within the organization where costs are incurred and can be controlled. It helps in collecting cost data in a systematic way and makes it easier to assign responsibilities for cost control. Each cost centre should have a clearly defined head who is responsible for cost management.
2) Classification of Accounts: All accounts should be properly classified into elements such as direct materials, direct labour, direct expenses, and overheads. Further classification of overheads into factory, administrative, and selling and distribution is also necessary. This classification helps in setting accurate standards and making comparisons between standard and actual costs easier and more meaningful.
3) Setting of Standards: This is a crucial step in standard costing. Standards must be set for every element of cost. These standards should be realistic, attainable, and based on scientific analysis such as time and motion studies. There are three main types of standards:
i) Basic Standards – long-term and rarely changed,
ii) Ideal Standards – theoretical and assume perfect conditions,
iii) Current Standards – based on normal operating conditions and practical for comparison.
4) Determination of Standard Costs: After setting the standards, the next step is to determine the standard cost for each product, job, or process. This involves calculating the standard material cost, labour cost, and overheads for each unit of output. These costs act as benchmarks against which actual costs are later compared.
5) Designing of Cost Sheets and Reports: Standard costing requires the preparation of cost sheets and variance reports in a suitable format. These documents should be clear and easy to understand so that any deviations from standards can be quickly spotted and corrective actions taken. The format must also allow segregation of variances into controllable and uncontrollable types.
6) Installing an Efficient Recording System: An efficient system of recording actual costs is needed so that comparisons with standard costs can be made accurately. This involves proper maintenance of accounting records, time cards, material issue notes, and cost ledgers. The data should be up-to-date and reliable.
7) Training and Involvement of Staff: Before implementing the standard costing system, it is necessary to train the employees and make them aware of their roles. Workers, supervisors, and accountants must understand the importance of the system and cooperate in maintaining the standards. Their involvement ensures that variances can be minimized through better operational control.
8) Fixing Responsibilities for Variances: Every department and cost centre should have someone responsible for controlling variances. When actual costs differ from standard costs, the variance should be analyzed and assigned to the concerned person or department. This helps in taking quick corrective measures and prevents recurrence of errors.
9) Continuous Review and Revision: Standards once set are not permanent. Regular review and revision of standard costs are necessary to reflect current conditions such as changes in material prices, wage rates, and technology. If standards are outdated, the whole system becomes meaningless and may result in misleading variances.
In conclusion, the implementation of standard costing requires a systematic approach with detailed planning, classification, and continuous monitoring. These preliminary steps form the foundation of an effective standard costing system, which ultimately helps in improving cost efficiency, operational control, and overall profitability of the business.
Or
A manufacturing concern has the following data:
Standard time fixed for a month: 8,000 hours
Standard wage rate: Rs. 2.25 per hour
Number of workers employed: 50
Average working days in a month: 25
A worker works for 7 hours per day
Total wage bill for the month: Rs. 21,875
Idle time due to power failure: 100 hours
Calculate the Labour Cost Variance, Rate of Pay Variance, Net Labour Efficiency Variance, and Idle Time Variance.
Answer: Given Data:
Standard time fixed for the month = 8,000 hours
Standard wage rate = Rs. 2.25 per hour
Number of workers employed = 50
Average working days in a month = 25
Each worker works = 7 hours per day
Total wage bill for the month (Actual wages) = Rs. 21,875
Idle time due to power failure = 100 hours
Calculate Actual Hours Worked
Each worker works 7 hours per day for 25 days:
Actual hours paid (total hours for which wages are paid):
= 50 workers × 25 days × 7 hours/day
= 8,750 hours
Out of this, 100 hours are idle time, so:
Actual hours worked = 8,750 − 100 = 8,650 hours
Calculate Standard Wages
Standard wages for actual hours worked:
= 8,650 hours × Rs. 2.25 = Rs. 19,462.50
Standard wages for standard hours (as per standard time):
= 8,000 hours × Rs. 2.25 = Rs. 18,000
Labour Cost Variance (LCV)
LCV = Standard Cost for actual output − Actual Wages Paid
= Rs. 18,000 − Rs. 21,875 = Rs. 3,875 (Adverse)
Rate of Pay Variance (RPV)
RPV = Actual Hours Paid × (Standard Rate − Actual Rate)
First, find Actual Rate:
Actual rate = Rs. 21,875 / 8,750 hours = Rs. 2.50 per hour
Now calculate RPV:
= 8,750 × (2.25 − 2.50)
= 8,750 × (−0.25)
= Rs. 2,187.50 (Adverse)
Idle Time Variance (ITV)
ITV = Idle Hours × Standard Rate
= 100 hours × Rs. 2.25 = Rs. 225 (Adverse)
Net Labour Efficiency Variance (LEV)
LEV = Standard Rate × (Standard Hours − Actual Hours Worked)
= 2.25 × (8,000 − 8,650)
= 2.25 × (−650)
= Rs. 1,462.50 (Adverse)
Summary of Variances:
ii) Explain the measures applied for the control of labour cost
Answer: Controlling labour cost is essential to improve productivity and maintain profitability in any organization. The following are some important measures used for controlling labour cost:
1) Scientific Recruitment and Training: Proper recruitment of skilled and qualified workers, followed by effective training programs, helps increase efficiency and reduce wastage of labour hours. Trained workers are more productive and committed.
2) Incentive Schemes: Introducing incentive wage plans like piece rate systems, bonus schemes, or profit-sharing can motivate workers to perform better and increase output, which helps to reduce the cost per unit.
3) Time and Motion Study: Conducting time and motion studies helps in identifying the most efficient way of performing a task. This results in the setting of realistic time standards and improvement in work processes, reducing unnecessary labour time.
4) Effective Supervision: Proper supervision ensures that workers are doing their work efficiently and not wasting time. It also helps in minimizing idle time due to negligence or poor planning.
5) Use of Labour Budgets: Labour budgets are prepared in advance to estimate the labour requirements and costs. Comparing actual labour cost with budgeted cost helps in identifying deviations and taking timely corrective action.
6) Reduction of Idle Time: Idle time should be controlled by ensuring continuous availability of materials, proper maintenance of machines, and efficient production scheduling. This helps reduce the loss of productive hours.
7) Proper Job Evaluation and Work Allocation: Right man for the right job ensures better output. Job evaluation and fair distribution of work prevent overburdening and underutilization of manpower.
8) Control Over Overtime: Unnecessary overtime should be avoided as it increases labour cost due to higher pay rates. Proper planning and shift allocation help reduce reliance on overtime.
9) Automation and Use of Technology: Where possible, replacing manual work with machines can improve productivity and reduce labour costs in the long run.
10) Regular Performance Appraisal: Monitoring and evaluating the performance of workers help identify high performers and areas where training or motivation is needed. This promotes efficiency and cost control.
These measures collectively help in optimizing the use of human resources and reducing overall labour costs while maintaining productivity.
Or
Based on the following information, calculate the earnings of 'A' and 'B' under Straight Piece Rate System and Taylor's Differential Piece Rate System:
Standard production: 190 units per hour
Normal time rate: Rs. 5 per hour
Differential piece rate to be applied:
80% of piece rate for below standard performance
120% of piece rate for performance at or above standard
Actual performance:
'A' produced 80 units in a 10-hour day
'B' produced 110 units in a 10-hour day
Answer: Download PDF For Practical Solutions
GROUP - B (Management Accounting)
Marks: 40
5. Answer the following as directed: (1×6=6)
i) Flow of funds means an increase or decrease in working capital. (Write True or False)
Answer: True
ii) Contribution is the difference between sales and the total cost of sales. (Write True or False)
Answer: False
(Explanation: Contribution is the difference between sales and variable cost, not the total cost of sales.)
iii) Current ratio is used to analyze the long-term financial position. (Write True or False)
Answer: False
(Explanation: Current ratio is used to analyze the short-term liquidity position, not the long-term financial position.)
iv) The increase in P.V ratio means lower break-even point and higher ______. (Fill in the blank)
Answer: Profit
v) Two elements of Current Ratio are current assets and ______. (Fill in the blank)
Answer: Current liabilities
vi) Which one of the following is an objective of budgetary control?
a) Evaluation
b) Reporting
c) Selling estimate
d) Capital expenditure
(Choose the correct option)
Answer: a) Evaluation
6. Answer the following questions: (2×2=4)
i) What is Liquidity Ratio?
Answer: Liquidity Ratio is a financial metric used to measure a company’s ability to meet its short-term obligations or debts as they become due. It shows the relationship between current assets and current liabilities, indicating whether the company has enough liquid resources to pay off its immediate liabilities. Common examples of liquidity ratios are the Current Ratio and Quick Ratio.
ii) What is Contribution?
Answer: Contribution is the amount remaining from sales revenue after deducting the variable costs associated with producing those sales. It is calculated as Sales minus Variable Costs. Contribution helps in covering fixed costs and generating profit, and it is a key concept in cost-volume-profit analysis.
7. Answer any two questions from the following: (5×2=10)
i) Explain briefly the nature and scope of management accounting.
Answer: Management accounting is a specialized branch of accounting that focuses on providing financial and non-financial information to the management for the purpose of planning, decision-making, and control. It is concerned with the collection, classification, analysis, and interpretation of financial information that helps managers in formulating policies and day-to-day operations.
Nature of Management Accounting:
i) Decision-Oriented: Management accounting provides necessary data to assist management in making strategic and operational decisions.
ii) Forward-Looking: Unlike financial accounting, which is historical in nature, management accounting is future-oriented and helps in forecasting.
iii) Internal Use: The reports generated in management accounting are meant for internal stakeholders, i.e., managers and executives.
iv) Flexible: Management accounting is not bound by legal requirements or accounting standards. It is adaptable to the needs of the organization.
v) Interdisciplinary: It draws from fields such as economics, finance, statistics, and operations research.
Scope of Management Accounting:
i) Financial Accounting: Management accounting uses data from financial accounting to analyze past performance.
ii) Cost Accounting: It incorporates cost data to assist in budgeting and cost control.
iii) Budgeting and Forecasting: Helps in preparing financial plans and estimating future financial outcomes.
iv) Decision-Making: Provides relevant data for decisions like make-or-buy, pricing, product mix, etc.
v) Performance Evaluation: Helps in evaluating departmental or individual performance.
vi) Internal Control: Aids in designing systems to monitor and control internal activities.
vii) Financial Analysis and Interpretation: Analyzes and interprets financial data for management use.
viii) Reporting: Generates periodic reports for internal use to guide business operations.
ii) How does management accounting differ from financial accounting?
iii) Discuss in brief the various tools and techniques used in management accounting.
Answer: Management accounting uses a variety of tools and techniques to help managers analyze data, control costs, and make effective decisions. These can be broadly classified as follows:
Tools of Management Accounting:
These are instruments or methods that help in collecting, summarizing, and presenting data in a useful form.
Budgeting: Preparation of detailed financial plans estimating future income, expenses, and resources. Budgets act as a tool to plan and control operations by setting financial targets.
Financial Statements and Reports: Includes cost reports, profit and loss statements, departmental reports, and other periodic summaries that provide managers with performance information.
Ratio Analysis: Calculation and interpretation of financial ratios like liquidity ratios, profitability ratios, and solvency ratios to evaluate the financial health and efficiency of the organization.
Forecasting: Predicting future financial outcomes and trends based on historical data and market analysis to aid in planning.
Techniques of Management Accounting:
These refer to the analytical methods applied to interpret data, identify variances, and support decision-making.
Standard Costing and Variance Analysis: Setting standard costs for production and analyzing the difference between actual costs and standards to identify inefficiencies.
Break-even Analysis (Cost-Volume-Profit Analysis): Determining the sales volume at which the business neither makes a profit nor incurs a loss, helping in understanding the impact of cost and sales volume on profitability.
Marginal Costing and Contribution Analysis: Calculating the additional cost of producing one more unit (marginal cost) and the contribution margin (sales minus variable costs) to assist in decisions about pricing, product lines, and cost control.
Performance Measurement: Using techniques such as variance analysis, key performance indicators (KPIs), and benchmarking to evaluate operational effectiveness.
Ratio Analysis: Apart from being a tool for presentation, it is also used as a technique for analyzing financial ratios to interpret business performance.
8. Answer any one of the following questions: (10×2=20)
i) What is a Financial Statement? Discuss the limitations of financial statements.
Answer: A Financial Statement is a formal record of the financial activities and position of a business, person, or other entity. It provides a summary of an entity's financial performance and financial position over a specific accounting period. The main components of financial statements include the Balance Sheet, Profit and Loss Account (Income Statement), Cash Flow Statement, and Statement of Changes in Equity.
These statements are prepared based on standardized accounting principles and help users such as investors, creditors, management, and regulators to understand the financial health of the entity.
Main Components of Financial Statements:
i) Balance Sheet – Shows the financial position of the entity at a specific point in time, including assets, liabilities, and equity.
ii) Profit and Loss Account – Summarizes revenues and expenses to show the net profit or loss during an accounting period.
iii) Cash Flow Statement – Provides information about cash inflows and outflows from operating, investing, and financing activities.
iv) Statement of Changes in Equity – Shows changes in the owners’ equity over a period.
Limitations of Financial Statements:
i) Historical Nature: Financial statements are based on historical data. They do not reflect current market values or future prospects directly.
ii) Ignore Qualitative Aspects: Non-financial factors such as employee morale, product quality, customer satisfaction, and company reputation are not reflected in financial statements.
iii) Based on Accounting Policies: The figures in financial statements can be affected by the choice of accounting policies such as depreciation methods, inventory valuation, etc., which may differ across firms.
iv) Not Inflation-Adjusted: Financial statements do not account for changes in the purchasing power of money due to inflation, which can distort the real value of assets and liabilities.
v) Window Dressing: Companies may manipulate or present financial information in a way that makes them look more favorable, a practice known as window dressing.
vi) Lack of Timeliness: Since financial statements are generally prepared at the end of the accounting period, they may not provide timely information for urgent decision-making.
vii) Static in Nature: They show the position at a particular point in time and do not indicate trends or continuous changes.
viii) Limited Scope for Future Planning: Financial statements are not designed to predict the future. They provide a base, but management needs other tools for forecasting and budgeting.
Or
From the summary Cash Account of Raju Trading Corporation Ltd., prepare a Cash Flow Statement for the year ending 31st March 2018 in accordance with AS-3 (Revised) using the Direct Method. The company does not have any cash equivalents.
Summary Cash Account (For the year ended 31.3.2018)
Answer:
Cash Flow Statement of Raju Trading Corporation Ltd.
For the year ended 31st March 2018
(Prepared as per AS-3 Revised – Direct Method)
(Rs. in '000)
A. Cash Flow from Operating Activities:
i) Cash receipts from customers – 5,600
ii) Less: Cash payments to suppliers – (4,000)
iii) Overhead expenses – (400)
iv) Wages and salaries – (200)
v) Tax paid – (500)
Net Cash from Operating Activities = 5,600 – (4,000 + 400 + 200 + 500) = 500
B. Cash Flow from Investing Activities:
i) Proceeds from sale of fixed assets – 200
ii) Less: Purchase of fixed assets – (400)
Net Cash used in Investing Activities = 200 – 400 = (200)
C. Cash Flow from Financing Activities:
i) Proceeds from issue of equity shares – 600
ii) Less: Dividend paid – (100)
iii) Repayment of bank loan – (600)
Net Cash used in Financing Activities = 600 – (100 + 600) = (100)
D. Net Increase in Cash and Cash Equivalents (A + B + C):
= 500 – 200 – 100 = 200
E. Add: Opening Balance of Cash and Cash Equivalents:
= 100
F. Closing Balance of Cash and Cash Equivalents:
= 100 + 200 = 300
(Tally with closing balance given)
ii) Managerial Applications of Marginal Costing as an Aid to Pricing Decisions
Marginal costing plays a crucial role in managerial decision-making, especially in setting prices under different market conditions. Its applications in pricing decisions are as follows:
i) Fixation of Selling Price: Marginal costing helps in fixing prices during competitive conditions. When the firm aims to recover only variable costs in the short run, prices can be set lower to retain customers or enter new markets.
ii) Pricing in Special Orders: When the company receives special orders or export orders, marginal cost analysis helps to quote a competitive price by ignoring fixed costs and focusing on contribution.
iii) Decision under Trade Depression: During market downturns or recessions, the company may fix prices just above marginal cost to maintain operations and reduce losses.
iv) Tender and Contract Pricing: Marginal costing helps in deciding the lowest acceptable price in tenders by evaluating contribution and capacity utilization.
v) Differential Pricing: It helps in deciding different prices for different market segments by analyzing contribution margins and pricing flexibility.
vi) Profit Planning: It assists management in analyzing the impact of pricing on profitability by using cost-volume-profit relationships.
Marginal costing thus provides a scientific base for pricing decisions and helps management in formulating appropriate strategies in a dynamic market environment.
Or
ABC Glass Manufacturing Company requires you to calculate and present the budget for the period April 2019 to 31st March 2020 from the following information:
Answer: ABC Glass Manufacturing Company
Budget for the year April 2019 to 31st March 2020
Sales Revenue
i) Sales of Toughened Glass = Rs. 3,00,000
ii) Sales of Bent Toughened Glass = Rs. 5,00,000
Total Sales = Rs. 8,00,000
Direct Costs
i) Direct Material Cost = 60% of Sales = 60% of 8,00,000 = Rs. 4,80,000
ii) Direct Wages = 20 workers × Rs. 150/month × 12 months
= 20 × 150 × 12 = Rs. 36,000
Factory Overheads
i) Factory Overheads (85% of Direct Wages) = 85% of Rs. 36,000 = Rs. 30,600
ii) Indirect Labour = Rs. 5,000
iii) Works Manager Salary = Rs. 500/month × 12 = Rs. 6,000
iv) Stores and Spares = 21% of Sales = 21% of Rs. 8,00,000 = Rs. 1,68,000
v) Depreciation on Machinery = Rs. 12,600
vi) Repairs and Maintenance = Rs. 8,000
vii) Foreman Salary = Rs. 5,000
viii) Other Sundries (10% of Direct Wages) = 10% of Rs. 36,000 = Rs. 3,600
Total Factory Overheads =
= 30,600 + 5,000 + 6,000 + 1,68,000 + 12,600 + 8,000 + 5,000 + 3,600 = Rs. 2,38,800
Administrative, Selling & Distribution Expenses
= Rs. 14,000
Summary Budget Statement
Conclusion: The estimated profit for the year April 2019 to March 2020 is Rs. 31,200 based on the given budgetary data.
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