SUGGESTED ANSWERS TO QUESTIONS_SYL2016_DEC2017_PAPER-8

INTERMEDIATE EXAMINATION
GROUP -I
(SYLLABUS 2016)
SUGGESTED ANSWERS TO QUESTIONS
DECEMBER- 2017
Paper-8: COST ACCOUNTING
Time Allowed : 3 Hours Full Marks : 100
The figures on the right margin indicate full marks.
All Sections are compulsory. Each section contains instructions
regarding the number of questions to be answered within the section.
All working notes must form part of the answer.
Wherever necessary, candidates may make appropriate
assumptions and clearly state them.
No present value factor table or other statistical table will be
provided in addition to this question paper.

Section - A
Section A contains Question Number 1. All parts of this question are compulsory.

1. Answer the following questions:

(a) Choose the correct answer from the given alternatives (You may write only the
Roman numeral and the alphabet chosen for your answer): 1×10=10

(i) Cost of idle time arising due to non-availability of raw material is

(A) recovered by inflating the raw material rate.
(B) recovered by inflating the wage rate.
(C) charged to factory overheads.
(D) charged to costing profit and loss account.

(ii) Selling and distribution overheads are absorbed on the basis of

(A) rate per unit.
(B) percentage on works cost.
(C) percentage on selling price of each unit.
(D) Any of the above

(iii) What entry will be passed under integrated system for purchase of stores on
credit?
(A) Dr. Stores
Cr. Creditors
(B) Dr. Purchases
Cr. Creditors
(C) Dr. Stores Ledger Control A/c
Cr. Creditors
(D) Dr. Stores Ledger Control A/c
Cr. General Ledger Adjustment A/c

(iv) In a process 800 units are introduced during 2016-17. 5% of input is normal loss.
Closing work-in-progress 60% complete is 100 units. 660 completed units are
transferred to next process. Equivalent production for the period is
(A) 760 units
(B) 744 units
(C) 540 units
(D) 720 units

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 SUGGESTED ANSWERS TO QUESTIONS_SYL2016_DEC2017_PAPER-8

(v) _________ deals with the principles and methods of determining the production or
operation overheads.
(A) CAS-3
(B) CAS-5
(C) CAS-9
(D) CAS-16

(vi) There is a loss as per financial accounts Rs.10,600, donations not shown in cost
accounts Rs. 6,000. What would be the profit or loss as per cost accounts?
(A) Loss Rs. 16,600
(B) Profit Rs. 16,600
(C) Loss Rs. 4,600
(D) Profit Rs. 4,600

(vii)A hotel having 100 rooms of which 80% are normally occupied in summer and
25% in winter. Period of summer and winter be taken as 6 months each and
normal days in a month be assumed to be 30. The total occupied room days will
be
(A) 1525 Room days
(B) 18900 Room days
(C) 36000 Room days
(D) None of the above

(viii)A firm has fixed expenses Rs. 90,000, sales Rs. 3,00,000 and profit Rs. 60,000. The
P/V ratio of the firm is
(A) 10%
(B) 20%
(C) 30%
(D) 50%

(ix) Marginal costing technique follows the following basis of classification:

(A) Element-wise
(B) Function-wise
(C) Behaviour-wise
(D) Identifiability-wise

(x) Which of the following is not a potential benefits of using a budget?

(A) More motivated managers
(B) Enhanced co-ordination of firm activities
(C) Improved inter-departmental communication
(D) More accurate external financial statements

(b) Match the statement in Column I with the most appropriate statement in Column II:
(You may opt to write only the Roman numeral and the matched the alphabet
instead of copying contents into the answer Books) 1x5=5

Column I Column II
(i) Component of Cost Sheet (A) High initial costs
(ii) Objective of Cost Accounting (B) Classification of cost
(iii) CAS1 (C) In terms of completed units
(iv) Equivalent Production (D) Reference to the job
(v) De-merit of a centralized purchase (E) To determine the value of closing
organization inventory

(c) State whether the following statements are 'True' or 'False':(You may write only the
Roman numeral and whether True or False without copying the statements into the
answer Books) 1x5=5

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 SUGGESTED ANSWERS TO QUESTIONS_SYL2016_DEC2017_PAPER-8

(i) By-products may undergo further processing before sale.

(ii) Materials which can be identified with the given product unit of cost centre is
called as indirect materials.
(iii) Increasing Labour Turnover increases the productivity of labour resulting in low
costs.
(iv) In case of materials that suffers loss in weight due to evaporation etc. the issue
price of the materials is inflated to cover up the losses
(v) Penalties and fines are included in cost accounts to determine the cost of
production.

(d) Fill in the blanks suitably: (You may write only the Roman numeral and content filling
the blanks) 1x5=5

(i) In standard costs, __________ norm is applied as a scale of reference for assessing
actual cost to serve as a basis of cost control.
(ii) Material Transfer Note is a __________ for transferring the materials from one job to
other job.
(iii) One of the disadvantages of overtime working is incurring _________ labour cost.
(iv) CAS-2 deals with Cost Accounting Standard on ___________ determination.
(v) Where the cost and financial accounts are maintained independently of each
other, it is indispensable to ______ them, as there are differences in the profits of
two sets of books.

Answer:

1. (a) (i) (D)

(ii) (D)
(iii) (C)
(iv) (D)
(v) (A)
(vi) (C)
(vii) (B)
(viii) (D)
(ix) (C)
(x) (D)

(b)
Column I Column II
(i) Component of Cost Sheet (D) Reference to the job
(ii) Objective of Cost Accounting (E) To determine the value of closing inventory
(iii) CAS1 (B) Classification of cost
(iv) Equivalent Production (C) In terms of completed units
(v) De-merit of a centralized (A) High initial costs
purchase organization

(c) (i) True

(ii) False
(iii) False
(iv) True
(v) False

(d) (i) predetermined

(ii) document
(iii) excess (or additional or more or higher)
(iv) capacity
(v) reconcile

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Section - B
Answer any five questions from question numbers 2 to 8.
Each question carries 15 marks. 15 x 5=75

2. (a) From the following particulars with respect to a particular item of materials of a
manufacturing company, calculate the best quantity to order:
Ordering quantities (tonne) Price per ton (Rs.)
Less than 250 6.00
250 but less than 800 5.90
800 but less than 2,000 5.80
2,000 but less than 4,000 5.70
4,000 and above 5.60

The annual demand for the material is 4,000 tonnes. Stock holding costs are 25% of
material cost p.a. The delivery cost per order is Rs. 6.00. 8

(b) The summary as per primary distribution is as follows:

Production departments A- Rs. 2,500; B- Rs. 2,300 & C- Rs. 1,700

Service departments X–Rs. 700; Y–Rs. 900
Expenses of service departments are distributed in the ratios of:
X department: A- 20%, B- 40%, C- 30% and Y- 10%
Y department: A- 40%, B- 20%, C- 20% and X- 20%
Show the distribution of service costs among A, B and C under repeated distribution
method. 7
Answer:
2. (a)
Statement showing computation of total inventory cost at different order size
Ordering Quantities
Particulars 200 250 800 2,000 4,000
(i) Purchasing cost 24,000 23,600 23,200 22,800 22,400
(ii) No. of orders 20 16 5 2 1
(iii) Ordering Cost 120 96 30 12 6
(iv) Average size of orders 100 125 400 1,000 2,000
(v) Inventory carrying cost per unit 1.5 1.475 1.45 1.425 1.4
(6x25%) (5.9x25%) (5.8x25%) (5.7x25%) (5.6x25%)
(vi) Inventory carrying cost (iv)x (v) 150 184.375 580 1,425 2,800
(vii) Total inventory cost (i)+(iii)+(vi) 24,270 23,880 23,810 24,237 25,206
For the above computations the best quantity to order is 800 units.
Note: Minimum ordering quantity assumed to be 200 tons; it may be any quantity
below 250 tons, but the decision will remain same.
(b)
Particulars Production departments Service departments
A B C X Y
Rs. Rs. Rs. Rs. Rs.
1 As per primary distribution 2,500 2,300 1,700 700 900
2 Service Dept. X 140 280 210 (700) 70
3 Service Dept. Y 388 194 194 194 (970)
4 Service Dept. X 38.8 77.6 58.2 (194) 19.4
5 Service Dept. Y 7.76 3.88 3.88 3.88 (19.4)
6 Service Dept. X 0.776 1.552 1.164 (3.88) 0.388
7 Total 3,075.336 2,857.032 2,167.244 0 0.388
It can be noticed that the undistributed balance in service department is very
negligible and thus can be ignored for further distribution.

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 SUGGESTED ANSWERS TO QUESTIONS_SYL2016_DEC2017_PAPER-8

3. (a) How would you treat overtime in cost records as per CAS-7? 5

(b) The following is the Trading & Profit and Loss Account of Ram & Co.:

Particulars Rs. Particulars Rs.

To Materials consumed 23,01,000 By Sales (30000 units) 48,75,000
To Direct wages 12,05,750 By Stock of Finished goods 1,30,000
(1000 units)
To Production overheads 6,92,250 By W.I.P: `
Material 55,250
Wages 26,000
Prod. O. H. 16,250 97,500
To Administration Overheads 3,10,375 By Interest on Bank deposit 65,000
To Selling & Distribution Overheads 3,68,875 By Dividends 3,90,000
To Preliminary expenses written off 22,790
To Goodwill written off 45,000
To Fines 3,250
To Interest of mortgage 13,000
To Loss on sale of machine 16,250
To Taxation 1,95,000
To Net Profit 3,83,960
55,57,500 55,57,500

Ram & Co. manufactures a standard unit. The cost accounting records of the firm
shows the following information:
(i) Production overheads have been charged at 20% on prime cost.
(ii) Administration overheads have been recovered at Rs. 9.75 per finished unit.
(iii) Selling and distribution overheads have been recovered at Rs. 13 per unit sold.
Required:
(i) Prepare a statement showing cost and profit as per cost records.
(ii) Prepare a statement reconciling the profit disclosed by cost accounts with that
shown in financial accounts. 10

Answer:

3. (a) Treatment of overtime in Cost Records : As per CAS-7, Overtime Premium shall be
assigned directly to the cost object or treated as overheads depending on the
economic feasibility and specific circumstances requiring such overtime.

When overtime is worked due to exigencies or urgencies of the work, the

basic/normal payment is treated as Direct Labour Cost and charged to Production or
cost unit on which the worker is employed. Whereas the amount of premium (extra
amount) is treated as overhead.

If overtime is spent at the request of the customer, then the entire amount (including
over time premium) is treated as direct wages and should be charged to the job.

When the overtime is worked due to lack of capacity as general policy of the
company thenthe total amount paid is treated as direct wages which is computed at
the estimated rate based on the figures of the previous years.

Overtime worked on account of the abnormal conditions such as flood, earthquake,

etc., should not be charged to cost, but to Costing Profit and Loss Account if
integrated accounts are maintained.
It will thus be seen that overtime involves payment of increased wages and should be
resorted to only when extremely essential.

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 SUGGESTED ANSWERS TO QUESTIONS_SYL2016_DEC2017_PAPER-8

(b) (i) Statement Showing Cost and Profit in Cost Records

Production 31,000 units
Particulars Amount (Rs.)
Total W.I.P. Production
Material Consumed 23,01,000 55,250 22,45,750
Wages 12,05,750 26,000 11,79,750
Prime Cost 35,06,750 81,250 34,25,500
Add: Production Overhead (20% on prime cost) 7,01,350 16,250 6,85,100
Works Cost 42,08,100 97,500 41,10,600
Add: Administration Overhead @ Rs. 9.75 per unit 3,02,250
Cost of Production 44,12,850
44,12, 850 ×1, 000 1,42,350

Less: Closing Stock = 31, 000

Production Cost of Goods Sold 42,70,500
Add: Selling and Distribution Overhead (30,000×13) 3,90,000
Cost of Sales 46,60,500
Profit 2,14,500
Sales 48,75,000

(ii) Reconciliation Statement

Particulars Rs. Rs.
Net Profit as per Cost Accounts 2,14,500
Add:(i) Excess Production Overhead in Cost Records 9,100
[6,85,100 - (6,92,250 - 16,250 WIP)]
(ii) Excess selling overhead in Cost Records 21,125
[3,90,000-3,68,875]
(iii) Interest on bank deposits not included in Cost Books 65,000
(iv) Dividend not shown in Cost Books 3,90,000 4,85,225
6,99,725
Less:(i)Administration Overhead under-recovered in 8,125
CostBooks (3,10,375 - 3,02,250)
(ii)Closing stock overvalued in Financial 12,350
Books(1,42,350-1,30,000)
(iii) Preliminary expenses written off in Financial Books only 22,790
(iv) Goodwill written off in Financial Books only 45,000
(v) Fines shown in Financial Books only 3,250
(vi) Interest charged in Financial Books only 13,000
(vii)Loss on sale of machine shown in Financial Books only 16,250
(viii)Income tax provided in financial books only; 1,95,000 3,15,765
Profit as per Financial Books 3,83,960

4. (a) Component 'Citipride' is made entirely in cost centre 200. Material cost is 6 paise per
component and each component takes 10 minutes to produce. The machine
operator is paid 72 paise per hour, and machine hour rate is Rs. 1.50. The setting up of
the machine to produce the component 'Citipride' takes 2 hours 30 minutes. On the
basis of this information, prepare a cost sheet showing the production and setting up
cost, both in total and per component, assuming that a batch of:
(i) 10 components,
(ii) 100 components, and
(iii) 1000 components is produced. 9

(b) SG Ltd. manufactures product A which yields two by-products B and C. The actual
joint expenses of manufacturing for a period were Rs. 9,000.
The profits on each product as a percentage of sales are 33-1/3%, 25% and 15%
respectively.

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Subsequent expenses are as follows:

Products (Rs.)
Particulars 'A' 'B' 'C’
Material 100 75 25
Direct 200 125 50
Overheads 150 125 75
Total 450 325 150
Sales 6,300 4,800 2,500
Apportion the joint expenses. 6

Answer:

4. (a)
Cost Sheet Component 'Citipride'
Particulars Batch Size
10 components 100 components 1000 components
Total Per Total Per Total Per
Rs. component Rs. component Rs. component
Rs. Rs. Rs.
A. Setting up Cost:
Machine Operators wages 1.80 0.180 1.80 0.0180 1.80 0.00180
(2.5 hours @ Re. 0.72 p.h)
Overheads 2.5 hours @ 3.75 0.375 3.75 0.0375 3.75 0.00375
Rs. 1.50 p.h)
Total of (A) 5.55 0.555 5.55 0.0555 5.55 0.00555
B. Production Cost:
Material Cost @ Re. 0.06 0.60 0.060 6.00 0.0600 60.00 0.06000
per component
MachineOperators Wages 1.20 0.120 12.00 0.1200 120.00 0.12000
[(Refer to Working Note (1)]
Overheads
[(Refer to Working Note (2)] 2.50 0.250 25.00 0.2500 250.00 0.25000
Total of (B) 4.30 0.430 43.00 0.4300 430.00 0.43000
C. Total Cost: (A +B) 9.85 0.985 48.55 0.4855 435.55 0.43555

Working Notes:
10 Components 100 Components 1000 Components
(1) Operators Wages 1.20 12.00 120.00
Time taken in minutes by [(100/60)x0.72] [(1000/60)x0.72] [(10000/60)x0.72]
machine operators
@10 minutes per component
Operators Wages @ Re. 0.72
per hour (Rs.)
(2) Overhead expenses 2.50 25.00 250.00
Total overhead expenses @ [(100/60)xRs.1.50][(1000/60)xRs.1.50] [(10000/60)xRs. 1.50]
Rs.1.50 per Machine hour
(Rs.)

(b) Statement Showing Apportionment of Joint Expenses

Particulars A B C Total
Sales 6,300 4,800 2,500 13,600
(-) Profit 2,100 1,200 375 3,675
Total Cost (Joint & Separate Cost) 4,200 3,600 2,125 9,925
Separate Expenses 450 325 150 925
Share of Joint Expenses 3,750 3,275 1,975 9,000

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 SUGGESTED ANSWERS TO QUESTIONS_SYL2016_DEC2017_PAPER-8

5. (a) Shri Rajesh Agarwal has started transport business with a fleet of 10 taxies. The various
expenses incurred by him are given below:
(i) Cost of each taxi Rs. 3,00,000.
(ii) Salary of Office Staff Rs. 5,000 p.m.
(iii) Salary of Garage's Supervisor Rs. 10,000 p.m.
(iv) Rent of Garage Rs. 5,000 p.m.
(v) Drivers Salary (per taxi) Rs. 10,000 p.m.
(vi) Road Tax and Repairs per taxi Rs. 6,000 p.a.
(vii)Insurance premium @ 6% of cost p.a.
The life of a taxi is 300000 Km. and at the end of which it is estimated to be sold at Rs.
25,000. A taxi runs on an average 6000 Km. per month of which 10% it runs empty,
petrol consumption 11 Km. per litre of petrol costing Rs. 72 per litre. Oil and other
sundry expenses amount to Rs. 50 per 100 Km.
Calculate the effective cost of running a taxi per kilometre. If the hire charge is Rs. 13
per kilometre on average, find out the profit that Shri Agarwal may expect to make in
the firstyear of operation. 8

(b) A contractor has undertaken a construction work at a price of Rs. 5,00,000 and begun
the execution of work on 1st January, 2016. The following are the particulars of the
contract up to 31st December, 2016.
Particulars Amount (Rs.) Particulars Amount (Rs.)
Machinery 30,000 Overheads 8,252
Materials 1,70,698 Materials returned 3,098
Wages 1,48,750 Work certified 3,90,000
Direct expenses 6,334 Cash received 3,60,000
Uncertified work 9,000 Materials on 31.12.2016 3,766
Wages outstanding 5,380
Value of plant on 31.12.2016 23,000
It was decided that the profit made on the contract in the year should be arrived at
by deducting the cost of work certified from the total value of the architect's
certificate, that1/3 of the profit so arrived at should be regarded as a provision
against contingencies and that such provision should be increased by taking to the
credit of Profit and Loss Account only such portion of the 2/3rd profit, as the cash
received to the work certified. Prepare the Contract Account showing the profit on the
Contract. 7
Answer:
5. (a) Statement showing computation of effective cost and profit for the year:
Particulars Amount Amount
(Rs.) (Rs.)
Fixed expenses:
Salary of staff 5,000
Salary of garage supervisor 10,000
Rent of garage 5,000
Driver Salary (10 x 10,000) 1,00,000
Road tax and repairs (6,000 x 10/12) 5,000
Insurance premium (3,00,000 x 6% x 10/12) 15,000 1,40,000
Fixed cost of 10 taxis per month
Cost per taxi = Rs. 1,40,000/10 = Rs. 14,000
Cost per km = 14,000/6,000 = 2.33 2.33
(Alternatively, Fixed Cost per Taxi may be worked out directly)
Running Costs:
Depreciation [(3,00,000-25,000) / 3,00,000] 0.92
Petrol (72/11) 6.55
Oil & sundry expenses (50/100) 0.50
Cost 10.30
Effective cost per Km = 10.30 x (100/90) 11.44
Profit for year = (13.00 - 1 1.44) x 10 x 5,400 x 12 = Rs.10,10,880
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(b)
Contract Account
Dr. Cr.
Particulars Amount Particulars Amount
(Rs.) (Rs.)
To, Machinery A/c 30,000 By, Plant & Machinery A/c 23,000
To, Materials A/c 1,70,698 By, Materials returned A/c 3,098
To,Wages incl.outstandingA/c 1,54,130 By, Materials on hand A/c 3,766
To, Direct Expenses A/c 6,334 By, W.I.P A/c 3,99,000
To, Overheads A/c 8,252 Work certified 3,90,000
To, P&L A/c 36,585* Work uncertified 9,000
To, Reserve c/d 22,865*
4,28,864 4,28,864

* Total Cost = Expenses before Profit and Reserve = Rs. 3,69,414 – Rs. 29,864 credits
∴ Total Expenses= Rs. 3,39,550 .
Hence, Total Cost = Rs. 3,99,000 WIP – Rs. 3,39,550 =Rs. 59,450
or
Alternatively, Total including WIP = Rs. 4,28,864 – Rs. 3,69,414 = Rs. 59,450

Cash Received 3,60,000

= = 0.92308
Work Certified 3,90,000
2 rd
∴ Rs. 59,450 × 0.92308 = Rs. 54,877 ∴ of Rs. 54,877 = Rs.36,585 Profit
3
Hence, Balance (Rs. 59,450 – Rs. 36,585)= Rs. 22,865 is Reserve

6. (a) Following particulars relate to a manufacturing factory for the month of March, 2017
Variable cost per unit Rs. 14
Fixed factory overhead Rs. 5,40,000
Fixed selling overhead Rs. 2,52,000
Sales price per unit Rs. 20
(i) What is the break-even point expressed in rupee sales?
(ii) How many units be sold to earn a target net income of Rs. 60,000 per month?
(iii) How many units must be sold to earn a net income of 25% on cost?
(iv) What should be the selling price per unit if break-even point is to be brought down
to 120000 units? 8
(b) There are three similar plants under one Corporate Management who wants them to
be merged for better operation. The following are the details relating to these plants.
Plant A Plant B Plant C
Capacity in Operation 100% 70% 50%
(Rs. in lakhs)
Turnover 300 280 150
Variable Cost 200 210 75
Fixed Cost 70 50 62
You are required to calculate:
(i) Capacity of merged plant to be operated to break-even;
(ii) Profitability of working at 75% capacity;
(iii) The turnover from the merged plant to give a profit of Rs. 28 lakhs. 7

Answer:

6. (a) (i) Calculation of BEP in rupee sales:

S - V 20 -14
P/V Ratio = = × 100 = 30%
S 20
F 5, 40, 000 + 2, 52, 000
BEP = = = Rs. 26,40,000
P / V Ratio 30%

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 SUGGESTED ANSWERS TO QUESTIONS_SYL2016_DEC2017_PAPER-8

(ii) Sales to earn a target net income of Rs. 60,000 per month:
Contribution per unit = Rs. 20 – Rs. 14 = Rs. 6.
F + Desired Profit 7,92, 000 + 60, 000
Sales in units = = = 1,42,000 units.
Contribution per unit 6
(Sales in Rupees = 1,42,000 × Rs. 20 = Rs. 28,40,000.)→ This is optional

(iii) No. of units to be sold to earn a net income of 25% on cost:

Profit @ 25% on cost means a profit @ 20% on Sales. Let sales be assumed as Rs. x;
the desired profit will be 20% of x or .20x.
F + Desired Profit
Now, x =
P / V Ratio
7,92, 000 + 0.20x 100
Or x= ×
1 30
or 30x = 7,92,00,000 + 20x
or 10x = Rs. 7,92,00,000
or x = Rs. 79,20,000
79, 20, 000
No. of units to be sold = = 3,96,000 units
20 (S.P. per unit)

(iv) Selling Price per unit if BEP is brought down to 1,20,000 units :
Fixed Cost 7,92, 000
Contribution per unit = = = 6.60 per unit.
BEP in units 1, 20, 000
Now, S.P. per unit = V + C = Rs.14 + Rs. 6.60 = Rs. 20.60.

(b) Computation of Sales and Variable Costs for Plants B and C at 100 per cent capacity
of working. (Rs. in lakhs)
Capacity Plant A Plant B Plant C Merged Plant
100% 100% 100% 100%
Sales 300 400 300 1,000
Less: Variable Cost at 100% Capacity 200 300 150 650
Contribution 100 100 150 350
Less: Fixed Cost 70 50 62 182
Profit 30 50 88 168

Contribution 350
(i) P/V Ratio = × 100 = × 100 = 35%
Sales 1, 000
Fixed Cost 182
BEP (in Rs.) = = = Rs. 520 lakh
P / V ratio 35%
520
Capacity of Rs. 520 lakhs to total sales Rs. 1,000 lakhs = × 100 = 52%.
1, 000

(ii) Sales at 75% capacity = Rs. 750 lakhs

P = (Sales × P/V ratio) – Fixed Cost
35
= 750 × - 182 or 262.5 – 182 = Rs. 80.5 lakhs.
100

(iii) Sales to earn a profit of Rs. 28 lakhs.

Fixed Cost + Desired Profit 182 + 28 210
Sales = = = = 600 lakhs.
P / V Ratio 35% 35%

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 SUGGESTED ANSWERS TO QUESTIONS_SYL2016_DEC2017_PAPER-8

7. (a) The details regarding the composition and the weekly wage rates of labour force
engaged on a job scheduled to be completed in 30 weeks are as follows:
Category of Standard Actual
Workers No. of Weekly Wage Rate No. of Weekly Wage Rate
Workers per worker Workers per worker
Skilled 75 60 70 70
Semi-skilled 45 40 30 50
Unskilled 60 30 80 20
The work is actually completed in 32 weeks.

Calculate the following Labour Variances:

(i) Labour Cost Variance;
(ii) Labour Rate variance;
(iv) Labour Efficiency Variance;
(v) Labour Revised Efficiency Variance;
(v) Labour Mix Variance. 8

(b) Three Articles X, Y and Z are produced in a factory. They pass through two cost
centers A and B. From the data furnished, compile a statement for budgeted machine
utilization in both the centers.
(i) Sales budget for the year:
Product Annual Budgeted Opening stock of Closing stock
Sales (units) finished products (units)
X 4800 600 Equivalent to 2 months sales
Y 2400 300 - Do --
Z 2400 800 - Do --
(ii) Machine hours per unit of product:
Product Cost centers
A B
X 30 70
Y 200 100
Z 30 20
(iii) Total number of machines:
Cost Centre: A 338
B 305
Total 643
(iv) Total working hours during the year: Estimated 2100 hours per machine 7

Answer:

7. (a) Computation of Standard and Actual Time

Category Standard Time (ST) Actual Time (AT)
Skilled 75x30 = 2,250 70 x 32 = 2,240
Semiskilled 45 x30= 1,350 30x32 = 960
Unskilled 60x30 = 1,800 80x32 = 2,560

Computation of Standard Cost and Actual Cost

Category Standard Actual Revised
of Worker Time Rate Cost Time Rate Cost Time
ST SR (Rs.) SC(Rs.) AT AR(Rs.) AC(Rs.) RST

Skilled 2,250 60 1,35,000 2,240 70 1,56,800 2,400

Semiskilled 1,350 40 54,000 960 50 48,000 1,440
Unskilled 1800 30 54,000 2,560 20 51,200 1,920
Total 5,400 - 2,43,000 5,760 - 2,56,000 5,760

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Computation of Revised Standard Time (RST)

2, 250
Skilled worker : × 5,760 = 2,400 Hours
5, 400
1, 350
Semi-skilled worker : × 5,760 = 1,440 Hours
5, 400
1, 800
Unskilled worker : × 5,760 = 1,920 Hours
5, 400

Computation of Variances

(i) LCV (Labour Cost Variance) = TSC - TAC = 2,43,000 - 2,56,000 = Rs. 13,000 (A)

(ii) LRV (Labour Rate Variance)= AT(SR-AR)

Skilled Worker : 2,240 (60 – 70) = Rs. 22,400 (A)
Semiskilled Worker :960 (40 – 50) = Rs. 9,600 (A)
Unskilled Worker : 2,560 (30 – 20) = Rs. 25,600 (F) = Rs. 6,400 (A)

(iii) LEV (Labour Efficiency Variance) = SR(ST-AT)

Skilled Worker : 60 (2,250 – 2,240) = Rs.600 (F)
Semiskilled Worker : 40(1,350 – 960) = Rs. 15,600 (F)
Unskilled Worker : 30(1,800 – 2,560) = Rs. 22,800 (A) = Rs. 6,600 (A)

(iv) LREV (Labour Revised Efficiency Variance) = SR (ST – RST)

Skilled Worker : 60(2,250 – 2,400) = Rs. 9,000 (A)
Semiskilled Worker : 40(1,350 – 1,440) = Rs. 3,600 (A)
Unskilled Worker : 30(1,800 – 1,920) = Rs. 3,600 (A) = Rs. 16,200 (A)

(v) LMV (Labour Mix Variance)= SR (RST – AT)

Skilled Worker : 60(2,400 – 2,240) = Rs. 9,600 (F)
Semiskilled Worker : 40(1,440 – 960) = Rs. 19,200 (F)
Unskilled Worker : 30(1,920 – 2,560) = Rs. 19,200 (A) = Rs. 9,600 (F)

(b) Calculation of Units of Production of Different Products

Particulars Product X Product Y Product Z
Sales 4800 2400 2400
Add: Closing Stock 800 400 400
5600 2800 2800
Less: Opening Stock 600 300 800
Production 5000 2500 2000

Machine Utilisation Budget

Cost Centres→ A B
Product → X Y Z TOTAL X Y Z TOTAL
Particulars ↓
(i) Production 5000 2500 2000 5000 2500 2000
(units)
(ii) Hours per unit 30 200 30 70 100 20

(iii) Total Machine 1,50,000 5,00,000 60,000 7,10,000 3,50,000 2,50,000 40000 6,40,000
Hours
(iv) Utilisation of 71 238 29 338 167 119 19 305
Number of
Machines

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8. Answer any three out of the following four questions: 5×3=15

(a) "Cost Accounting and Management Accounting are inter-dependent." Do you agree,
discuss.
(b) Differentiate between Operation Cost and Operating Cost.
(c) Enumerate the need for predetermined overhead rate.
(d) What is Responsibility Accounting? Also state the Principles of Responsibility
Accounting.

Answer:
8. (a) Cost Accounting: In cost accounting, primary emphasis is on cost and it deals with its
collection, analysis, relevance, interpretation and presentation for various problems of
management.
Management Accounting: It utilizes the principles and practices of financial
accounting and cost accounting in addition to other management techniques for
efficient operations of a concern. It widely uses different techniques from various
branches of knowledge like Statistics, Mathematics, Economics, Law and Psychology
to assist the management in its task of maximizing profits or minimizing losses. The main
thrust in management accounting is towards determining policy and formulating
plans to achieve desired objectives of management.
From the above discussion it may be concluded that cost accounting and
management accounting are inter-dependent, greatly related and inseparable.
(b) Operation Cost:
Operation cost is the cost of a specific operation involved in a production process or
business activity. The cost unit in this method is the operation, instead of process.
When the manufacturing method of a concern consists of a number of distinct
operations, operating costing is suitable.
Operating Cost:
Operating cost is the cost incurred in conducting a business activity. It refers to the
cost of concerns which do not manufacture any product but which provide services.
Industries and establishments like power house, transport and travel agencies,
hospitals, schools etc. which undertake services rather than the manufacture of
products, ascertain operating costs. The cost units used are Kilo Watt Hour (KWH),
Passenger Kilometre and Bed in the Hospital etc.
Operation costing method constitutes a distinct type of costing but it may also be
classed as a variant of process cost since costs in this method are usually compiled
for a specified period.

(c) Need for predetermined Overhead Rate:

Predetermined Overhead Rate is needed for the following reasons:
i) actual Rate can be determined only after the overheads have been
incurred
ii) to avoid delay in computing cost
iii) to prepare Quotations in time and quickly
iv) actual Overhead Rate may fluctuate from period to period. But in case of
predetermined rate, it is not so.
v) to ensure cost control.

OR
As per study material as under:
Advantages of Predetermined Overhead Rate:
i) Enables prompt preparation of cost estimates, quotations and fixation of
selling prices.

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ii) Cost data is available to management along with financial data.

iii) In case of Cost-plus contracts prompt billing is possible through pre-
determined recovery rate/s.
iv) In concerns having budgetary control system, no extra clerical efforts are
required in computing the pre-determined overhead rate.

(d) Responsibility Accounting:

It is a system of accounting that recognizes various responsibility centres throughout
the organisation and reflects the plans and actions of each of these centres by
assigning particular revenues and costs of the one having the pertinent responsibility.

It is a system in which the person holding the supervisory posts as president, function
head, foreman, etc. are given a report showing the performance of the company or
department or section as the case may be. The report will show the data relating to
operational results of the area and the items of which he is responsible for control.
Responsibility accounting follows the basic principles of any system of cost control
and standard costing. It differs only in the sense that it lays emphasis on human
beings and fixes responsibilities for individuals. It is based on the belief that control can
be exercised by human beings, so responsibilities should be fixed for individuals.

Principles of Responsibility Accounting:

(i) A target is fixed for each department or responsibility centre.
(ii) Actual performance is compared with the target.
(iii) The variances from plan are analysed so as to fix the responsibility.
(iv) Corrective action is taken by higher management and is communicated.

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