PAPER – 4 : COST ACCOUNTING AND FINANCIAL MANAGEMENT

Section A : Cost Accounting

QUESTIONS

1. (a) Classify each of the followings on the basis of behavioural aspects of cost.
(i) Telephone Bills
(ii) Depreciation
(iii) Factory rental
(iv) Supplies and other indirect material
(v) Advertising
(vi) Repair and Maintenance
(vii) Factory manager’s salary
(viii) Royalty payments.
(b) Which of the following costs are likely to be treated as controllable cost ?
(i) Price paid for materials
(ii) Charge for floor space
(iii) Raw materials used
(iv) Electricity used for machinery
(v) Machinery depreciation
(vi) Direct labour
(vii) Insurance on machinery
(viii) Share of costs of industrial relations department
2. (a) "Costs may be classified in a variety of ways according to their nature and the information
needs of the management." Explain.
(b) "Relevant cost analysis helps in drawing the attention of managers to those elements of cost
which are relevant for the decision." Comment.
3. (a) What is spoilage? Give its treatment in Cost Accounting.
(b) You are required to calculate the following levels for part No. 123456 from the information
given there under:
(a) Re-ordering level
(b) Maximum level
(c) Minimum level.
(d) Danger level
(e) Average stock level.
The following data may be used to calculate the re-ordering quantity.
1. Total cost of purchasing relating to the order Rs. 20
2. Number of units to be purchased during the year 5,000
3. Purchase price per unit including transportation cost Rs. 50
4. Annual cost of storage of one unit Rs. 5.
 2

Lead Times Average 10 days

Maximum 15 days
Minimum 6 days
Max. for emergency purchase 4 days
Rate of Consumption Average 15 units per day
Maximum 20 units per day
4. Mr. Debasish is working by employing 10 skilled workers. Mr. Debasish is considering the
introduction of some incentive scheme- either Halsey scheme (with 50% bonus) or Rowan
scheme- of wage payment for increasing the labour productivity to tackle with the growing
demand for the product by 25%. He feels that, if the proposed incentive scheme could bring about
an average 20% increase over the present earnings of the workers, it could be sufficient incentive
for them to increase production and he has accordingly given this assurance to the workers.
As a result of this assurance, the increase in productivity has been observed as revealed by the
following figures for the current month:
Hourly rate of wages (guaranteed) Rs. 2.00
Average time for producing 1 piece by one worker at the previous performance 2 hours
(This may be taken as time allowed)
Number of working days in the month 25
Number of working hours per day for each worker 8
Actual production during the month 1,250 units
You are required to:
(1) Calculate effective rate of earnings per hour under Halsey scheme and Rowan scheme.
(2) Calculate the savings to Mr. Debasish in terms of direct labour cost per piece under the
above schemes.
(3) Give your consultancy to Mr. Debasish about the selection of the scheme to fulfil his
assurance.
5. (a) Assuming a man day of 8 hours, you are required to calculate the labour cost per man day.
The following data has been provided.
(a) Basic Salary Rs. 2 per day
(b) Dearness Allowance 25 paise per every point over 100
cost of living index for working class.
Current cost of living index is 700
points.
(c) Leave Salary 10% of (a) and (b)
(d) Employer’s contribution to Provident Fund 8% of (a), (b) and (c)
(e) Employer’s contribution to State Insurance 2.5% of (a), (b) and (c)
(f) Expenditure on amenities to labour Rs. 20 per head per mensem
(g) Number of working days in a month 25 days of 8 hours each
6. Raunak Ltd. is the manufacturer of a special product and follows the policy of EOQ (Economic
Order Quantity) for one of its components. The component’s details are given as below:
Rs.
Purchase price per component 200
Cost of an order 100
Annual cost of carrying one unit in inventory 10% of purchase price
 3

Total cost of carrying inventory and ordering per annum Rs. 4,000
The company has been offered a discount of 2% by the vendor on the price of the component
provided the lot size is 2,000 components at a time.
You are required to:
(a) Calculate the EOQ;
(b) Advise whether the quantity discount offer should be accepted or not.
(Assume that the inventory carrying cost does not vary according to discount policy);
(c) What advice you will give if the company is offered 5% discount on a single order?
7. Neptune Company Ltd. is making a study of the relative profitability of the two products – X and
Y. In addition to Direct costs, Indirect selling & distribution costs to be allocated between the two
products X and Y are given below:
Rs.
Insurance charges for inventory (finished) 78,000
Storage costs 1,40,000
Packing and forwarding charges 7,20,000
Salesmen’s salaries 8,50,000
Invoicing costs 4,50,000
Other informations are:
Product X Product Y
Selling price per unit (Rs.) 500 1,000
Cost per unit (exclusive of indirect selling
& distribution costs) Rs. 300 Rs. 600
Annual sales in units 10,000 8,000
Average inventory (in units) 1,000 800
Total number of invoices 2,500 2,000
One unit of Product X requires a storage space twice as much as Product Y. The cost of packing
and forwarding one unit is the same for both the products. Salesmen are paid salary added with
commission @ 5% on sales. Equal amount of energy are put forth on the sales of each of the
products.
You are required to prepare:
(i) A schedule showing the apportionment of the Indirect selling and distribution costs between
the two products.
(ii) Prepare a statement showing the relative profitability of the two products.
8. Gupta and Gupta Investment Co. Ltd. provide tax advice to multinational firms, Gupta and Gupta
Investment Co. Ltd. charges clients for (a) direct professional time (at an hourly rate) and (b)
support services (at 30 per cent of the direct professional costs billed). The billing rate per hour
for three professionals working with the company are as follows:
Professional Billing rate per hour
Rs.
Sachin 5,000
Sourav 1,200
Rahul 800
Gupta and Gupta Investment Co. Ltd. has just prepared the May bills for their two main clients.
The hours of professional time spent on each of them are as follows:
 4

Samsung Akai
Professional (hours per client) (hours per client)
Sachin 15 3
Sourav 4 8
Rahul 22 30
Total 41 41
Required:
1. What amounts will Gupta and Gupta Investment Co. Ltd. Bill to Samsung Ltd. and Akai Ltd.
for May?
2. If support services were billed at Rs. 500 per professional labour-hour (instead of 30 per
cent of professional labour costs.), how would this alteration affect the amounts Gupta and
Gupta Investment Co. Ltd. Billed to the two clients for May?
9. “The profits of cost accounts may be different from those projected by financial accounts and in
such cases a memorandum reconciliation statement is needed” In the context of this statement,
discuss the possible reasons of differences between the two sets of accounts and the need of
reconciliation.
10. Following figures has been extracted from the records of DS Co. Ltd.
Rs.
Net loss as per financial records 2,28,045
Net loss as per costing records 1,92,500
Works overhead under recovered as per cost records 3,120
Excess administrative overhead recovered 1,700
Depreciation charged in financial Profit and Loss A/c 11,200
Depreciation recovered in cost accounting 12,500
Interest received not included in costing 5,000
Loss as obsolescence charged in financial records 5,700
Income tax provided in financial books 37,300
Bank interest credited in financial records 750
Stores adjustment (credit) in financial records 475
Operating stock in : Costing records 62,600
Financial records 64,000
Closing stock in : Costing records 72,000
Financial records 69,600
Interest charged in cost accounts but not in financial
Profit and Loss A/c 6,000
Preliminary expenses written off in financial Profit and
Loss A/c 800
Provision for doubtful debts in financial Profit and Loss A/c 150
You are required to prepare a statement reconciling the loss as per the costing records with that
of the financial accounts.
11. Puja Ltd operates a historical job costing system, which is not integrated with financial accounts.
The company manufactures engines, the technology of which is frequently bought from inventors
to whom royalty is needed to be paid. The following are details of the opening balances in the
Cost Ledger for the month of May 2007.
 5

Rs.
Stores ledger control account 85,400
Work in progress control account 1,67,350
Finished goods control account 49,250
Cost ledger control account 3,02,000
The following transactions took place during the month:
Rs.
Material:
Purchases 42,700
Issues to production 63,400
Issues to general maintenance 1,450
Issues to construction of manufacturing equipment 7,650
Factory wages:
Total gross wages paid 1,24,000
Rs. 75,750 of the above wages are direct wages while Rs. 12,500 has been expended on the
construction of manufacturing equipment; the balance being the amount paid as indirect wages.
The actual amount of production overhead incurred excluding the items shown above amounted
to Rs. 1,52,350 out of which Rs. 30,000 was absorbed by the manufacturing equipment under
construction and Rs. 7,550 was under absorbed. As per the policy of Puja Ltd., the under
absorbed overhead needed to be written off at the month end. The company shall also pay Rs.
2,150 as royalty for the relevant months production to an inventor from whom technology had
been bought.
Selling overheads : Rs. 22,000
Sales : Rs. 4,10,000
The company’s gross profit margin is 25% on factory cost.
At the end of the month stocks of work in progress had increased by Rs. 12,000. The
manufacturing equipment under construction was completed within the month, and transferred out
of the cost ledger at the end of the month.
You are required to prepare the relevant control accounts, costing profit and loss account and any
other accounts you consider necessary to record the above transactions in the cost ledger for the
concerned month.
12. The following data are available in respect of Process for the month of June, 2007:
Opening work-in-progress 2,250 Units at Rs. 11,250
Degree of Completion:
Materials 100%
Labour 60%
Overheads 60%
Input of materials 22,750 Units at Rs. 88,500
Direct wages Rs. 20,500
Production overheads Rs. 41,000
Units scrapped 3,000 Units
Degree of Completion:
Material 100%
Labour 70%
 6

Production overheads 70%

Closing work-in-progress: 2,500 Units
Degree of Completion:
Material 100%
Labour 80%
Production overheads 80%
Units transferred to the next process: 19,500 Units
Normal process loss is 10% of total input (opening stock plus units put in). Scrap value is Rs.
3.00 per unit. The company follows FIFO method of inventory valuation;
You are required to:
(i) Prepare statement of equivalent production
(ii) Prepare statement of cost per equivalent unit for each element and cost of abnormal loss,
closing work-in-progress and units transferred to next process; and
(iii) Prepare process I account.
13. In an Oil Mill four products emerge from a refining process. The total cost of input during the
quarter ending March 2007 is Rs. 1,48,000. The output, sales and additional processing costs
are as under:
Products Output in Litres Additional processing Sales value
cost after split off
ACH 8,000 43,000 1,72,500
BCH 4,000 9,000 15,000
CSH 2,000  6,000
DSH 4,000 1,500 45,000
In case these products wee disposed off at the split off point that is before further processing, the
selling price would have been:
ACH BCH CSH DSH
15.00 6.00 3.00 7.50
Prepare a statement of profitability based on:
(i) If the products are sold after further processing is carried out in the mill.
(ii) If they are sold at the split off point.
14. Answer the following questions:
(a). Are fixed costs per unit variable in nature? If yes, why?
(b). Amongst the four alternatives provided to you below, which would be the most appropriate
basis for apportioning machinery insurance costs to cost centres within a factory and why?
(1). The number of machines in each cost centre
(2). The floor area occupied by the machinery in each cost centre
(3). The value of the machinery in each cost centre
(4). The operating hours of the machinery in each cost centre.
(c). Department L production overheads are absorbed using a direct labour hour rate. Budgeted
production overheads for the department were Rs. 480,000 and the actual labour hours were
100,000. Actual production overheads amounted to Rs. 516,000. Based on the above data,
and assuming that the production overheads were over absorbed by Rs. 24,000, what was
the overhead absorption rate per labour hour ?
 7

(d). When material prices fluctuate widely, what is the most suitable method (from amongst the
Weighted Average, LIFO or FIFO) for pricing material ?
15. Minda Corporation Limited undertook a contract for Rs. 5,00,000 on 1 st April 2006. On 31 st March
2007 when the accounts were closed, the following details about the contract were gathered:
Rs.
Materials purchased 1,00,000
Wages paid 45,000
General expenses 10,000
Plant purchased 50,000
Material in hand 31.3.1996 25,000
Wages accrued 31.3.1996 5,000
Work certified 2,00,000
Cash received 1,50,000
Work uncertified 15,000
Depreciation of plant 5,000
The contract contained an escalation clause, which read as follows:
“In the event of increase(s) of prices of materials and rates of wages by more than 5%, the
contract price would be increased accordingly by 25% of the rise of the cost of materials and
wages beyond 5% in each case.”
It was found that since the date of signing the agreement, the prices of materials and wage rates
increased by 25%. The value of the work certified does not take into account the effect of the
above clause.
Prepare the contract account. The workings should form part of your answer.
16. A factory with two production processes. Normal loss in each process is 10% and scrapped units
sell for Rs. 0.50 each from process 1 and Rs. 3 each from process 2. Relevant information for
costing purposes relating to period 5 is as follows.
Direct materials added: Process X Process Y
Units 2,000 1,250
Cost Rs. 8,100 Rs. 1,900
Direct labour Rs. 4,000 Rs. 10,000
Production overhead 150% of direct labour 120% of direct
cost labour cost
Output to process 2/finished 1,750 units 2,800 units
goods
Actual production overhead Rs. 17,800
You are required to:
Prepare the accounts for process X, process Y, scrap, abnormal loss or gain and production
overhead.
17. (a) Explain in brief the purpose of Cost Audit.
(b) What is Cost reduction. Explain its Advantages
18. (a) Define uniform costing. Explain its Limitations.
(b) Differentiate between Production Account and Cost Sheet.
 8

19. The following particulars were extracted from the records of Epsilon Ltd. on 31 st December:
Dept A Dept. B Dept. C
Rs. Rs. Rs.
Overhead incurred 2,000 1,500 2,500
Overhead absorbed 2,200 1,400 2,250
The departmental loads during the three months to 31 st December averaged:
Dept. A 100% of normal capacity
Dept. B 75% of normal capacity
Dept. C 50% of normal capacity
How would you deal with the balances under and over-absorbed? What preliminary enquiries
would you make?
20. Discuss briefly the characteristics of Job, Batch and Contract Costing.
21. Distinguish between:
(a) Production Account and Cost Sheet.
(b) Controllable cost and uncontrollable cost.
(c) Bin cards and Stores ledger.
(d) Explicit costs and implicit costs.
(e) Cost driver and cost pool.

SUGGESTED ANSWERS/HINTS

1. (a) (i) SV
(ii) F
(iii) F
(iv) V
(v) F (Advertising is a discretionary cost.)
(vi) SV
(vii) F
(viii) V
(b) Controllable (iii),(iv),(vi)
Non controllable (i),(ii),(v),(vii),(viii)
2. (a) Cost classification is the process of grouping costs according to their characteristics. Costs
are classified or grouped according to their common characteristics. Costs may be classified
according to elements, according to functions or operations, according to their behaviour,
according to controllability or according to normality.
The break up of the aggregate costs into relevant types, is an essential pre-requisite of
decision making as well as of controlling costs. Classification of costs on different bases is
thus necessary for various purposes. For the purpose of decision-making and control, costs
are distinguished on the basis of their relevance to different type of decisions and control
functions. The importance of distinguishing costs as direct or indirect lies in the fact that
direct costs of a product or an activity can be accurately allocated while indirect costs have
to be apportioned on the basis of certain assumptions. This is so because direct costs are
controllable at the operational level whereas indirect costs are not amenable to such control.
 9

(b) Relevant costs are pertinent or valid costs for a decision. These bear upon or ‘influence
decision' and are directly related to the decisions to be made. These are critical to the
decision, and have significance for it. These are the costs which generally respond to
managerial decision making, and have significance in arriving at correct conclusions. These
costs are capable of making a difference in user-decisions and enter into a choice between
alternative courses of action. In specific terms, relevant costs for decisions are defined as
"expected future costs that will differ under alternatives".
Relevant costs are futuristic in nature. These are the costs that are expected to occur during
the time period covered by the decision. These costs are different between alternatives
being considered. Only costs that differ among decision alternatives are relevant to a
decision.
3. (a) Spoilage: It refers to materials which are badly damaged in manufacturing operations and
they cannot be rectified economically and hence taken out of the process to be disposed off
in some manner without further processing. Spoilage may be normal or abnormal.
Normal spoilage: It arises under efficient operating conditions. It is an inherent result of
the particular process and thus uncontrollable in the short run. The normal spoilage costs
are included in costs either by charging the loss due to spoilage to the production order or by
charging it to production overhead so that it is spread over all the products. Any value
realised from spoilage is credited to production order or production overhead account as the
case may be.
Abnormal spoilage: Abnormal spoilage is that which arises due to causes not inherent in the
manufacturing process. The cost of abnormal spoilage is charged to costing profit and loss
account.
(b) a. Re-ordering level = Maximum usage × maximum lead time
= 20 × 15 = 300 units.
b. Maximum level = Re-ordering level + Re-order quantity (1)  Minimum usage
(2) × Minimum lead time
= 300+200 – 10 × 6 = 440 units
c. Minimum level = Re-ordering level – Average consumption × Average lead time
= 300 – 15 x 10 = 150 units
d. Danger level = Average consumption × Maximum lead time for emergency
Purchases
= 15 × 4 = 60 units
1
e. Average stock level = Minimum level + × Re-order quantity
2
1
= 150 × × 200 = 250 units
2
Working Note:
2QR 2  5,000  20
1. Re-order Quantity = = = 200 units
CP 10% of 50
Where, Q = Annual purchase = 5,000; R = Ordering cost = Rs. 20
C = Storage cost % of P = Price per unit = Rs.. 50.
2. Minimum Usage has been calculated as follows:
Minimum Usage  Maximum Usage
Average Usage =
2
or 2 x Average Usage = Minimum Usage + Maximum Usage
 10

2 x 15 units = Minimum Usage + 20 units

Minimum usage = 30 units – 20 units = 10 units.
4. Production during the month 1,250 units
Time allowed for 1250 units @ 2 hours per unit (1250x2 hours) 2,500 hours
Actual time taken 25 days x 8 hours x 10 workers 2,000 hours
Time saved 500 hours
Halsey Scheme:
Rs.
Basic Wages of 10 workers: 2,000 hours @ Rs. 2 per hour 4,000
Bonus @ 50% x (500 x Rs. 2) 500
Total wages for 2,000 hours 4,500
Rs. 4,500
Effective hourly rate of earnings  Rs. 2.25
2,000
Rs. 4,500
Labour cost per piece  Rs. 3.60
1,250
Saving in terms of direct labour cost per unit (Rs. 4.00- Rs. 3.60) = Rs. 0.40.
Rowan Scheme:
Rs.
Basic Wages (as calculated under Halsey scheme) 4,000
500
Bonus:  Rs. 4,000 800
2,500
Total wages for 2,000 hours 4,800
Rs. 4,800
Effective hourly rate of earnings  Rs. 2.40
2,000
Rs. 4,800
Labour cost per unit  Rs. 3.84
1,250
Saving in terms of direct labour cost per unit (Rs. 4.00 – Rs. 3.84) = Rs. 0.16.
From the calculations shown above it is clear that, saving in labour cost under the Halsey scheme
(Rs. 0.40 per unit) is more than that under the Rowan scheme (Rs. 0.16 per unit). The Halsey
scheme does not, however, fulfill the guarantee of 20% increase in average earnings of the
workers (i.e., 20% of Rs. 2 or Rs. 0.40 per hour, actual increase being 12.5% only), while the
Rowan scheme fulfils this assurance. Hence it is advisable that Mr. Debasish shall adopt the
Rowan scheme.
5. (a) STATEMENT OF LABOUR COST
(per man-day of 8 hours)
Rs.
(a) Basic Salary 2.00
(b) Dearness Allowance @ 25 paise per every point over 100 cost of living
600 25 1 6.00
index for a month of 25 days × =
100 25
8  10 0.80
(c) Leave Salary –10% of (a) and (b) =
100
 11

8.80 8 0.70
(d) Employer’s contribution to Provident Fund 8% of (a), (b) and (c) =
100
(e) Employer’s contribution to State Insurance 2.5% of (a), (b) and (c)
8.80  2.5 0.22
= =
100
(f) Amenities to labour @ Rs. 20 per head per month of 25 working days
20 0.80
= =
25
Total 10.52

6. (a) Calculation of EOQ:

Annual consumption of inventory in units has not been given in the problem. The following
relationship in the various items of E.O.Q may be used to determine this figure:
Total cost of carry inventory and ordering per annum = 2C 0 OC c
Where,
Co = Consumption per annum in units.
O = ordering cost per order.
Cc = carrying cost of one unit of inventory for one year.
Or Rs. 4000 = 2C 0 * Rs. 100 * Rs. 20

Rs. 4000 = 4,000 * C 0

Rs. 4000 * 4000 = 4000 * Co
Rs. Co = 4000 units

2C 0 O 2 * 4,000 * 100
EOQ =   200 units.
Cc Rs. 20
(b) If the order size is 2,000 units at 2% discount:
Annual Consumption 4,000 units
No. of orders    2
Order size 2,000 units
Rs.
Ordering cost is, 2 orders per year at Rs. 100 per order 200
2,000 units
Carrying cost of average inventory is  Rs. 20 20,000
2
Total cost per annum (excluding item cost) 20,200
Less: Annual cost when EOQ is applied 4,000
Incremental cost 16,200
Amount of discount to be received: 2% of (Rs. 200 x 4,000 units)
= Rs. 16,000.
The offer is not acceptable, since the increase in total annual cost (Rs. 16,200) is more than
the amount of quantity discount (Rs. 16,000). It will result in an additional material cost of
Rs. 200 per annum.
Note: Calculation of Cc = 10% of Rs. 200 = 20
 12

(c) If the order size is 4,000 units at 5% discount:

4,000 units
No. of order   1.
4,000 units
Rs.
Ordering Cost is 1 order per year at Rs. 100 per order 100
4,000 units
Carrying cost of average inventory is  Rs. 20 40,000
2
Total cost per annum (excluding item cost) 40,100
Less: Annual cost when EOQ is applied 4,000
Incremental cost 36,100
Amount of quantity discount: 5% x Rs. 200 x 4,000 units = Rs. 40,000.
This offer is acceptable because it will result in a saving of Rs. (40,000  36,100) or
Rs. 3,900 per annum in material cost.
7. Apportionment of Overhead
Items of Basis of Apportionment Total Amount Product x Product y
Overheads
(Rs.)
Insurance Average Inventory in value
Charges (1,000*Rs. 500) : (800*1,000) 78,000 30,000 48,000
Storage Cost Storage space (1,000*2): (800*1) 1,40,000 1,00,000 40,000
Packing and Annual Sales in units
forwarding (10,000*8,000) 7,20,000 4,00,000 3,20,000
charges
Salesmen Energy of salesman 8,50,000 4,25,000 4,25,000
salary
Salesmen Annual Sales in Value
Commission (10,000*500) 6,50,000 2,50,000 4,00,000
Invoicing costs Total number of invoices (2,500 :
2,000) 4,50,000 2,50,000 2,00,000
Total 28,80,000 14,55,000 14,33,000

Statement of Profitability
Product X Product Y
Annual sales 10,000*500 = 50,00,000 8,000*1,000 = 80,00,000
Less: cost of sales 10,000*300 = 30,00,000 8,000*600 = 48,00,000
Gross profit 20,00,000 32,00,000
Less: Other expenses 14,55,000 14,33,000
5,45,000 17,67,000
Net profit %age of sales (5,45,000/50,00,000)*100 = 10.9% (17,67,000/80,00,000)*100 = 22.09 %
 13

8. Alternative allocation bases for a Professional Services Firm.

1.
Client Direct Professional Support Services
Time
Rate Number Total Rate of Total Total Amount
per of hours service billed to client
hour
(1) (2) (3) (4) = (2)  (3) (5) (6) = (4)  (5) (7) = (4) + (6)
Samsung Ltd.
Rs. Rs. Rs. Rs.
Sachin 5,000 15 75,000 30% 22,500 97,500
Sourav 1,200 4 4,800 30% 1,440 6,240
Rahul 800 22 17,600 30% 5,280 22,880
1,26,620

Akai Ltd.
Rs. Rs. Rs. Rs.
Sachin 5,000 3 15,000 30% 4,500 19,500
Sourav 1,200 8 9,600 30% 2,880 12,480
Rahul 800 30 24,000 30% 7,200 31,200
63,180

2.
Client Direct Professional Support Services
Time
Rate per Number of Total Rate Total Amount billed
hour hours to client
(1) (2) (3) (4) = (2)  (3) (5) (6) = (4)  (5) (7) = (4) + (6)
Samsung Ltd.
Rs. Rs. Rs. Rs. Rs.
Sachin 5,000 15 75,000 500 7,500 82,500
Sourav 1,200 4 4,800 500 2,000 6,800
Rahul 800 22 17,600 500 11,000 28,600
1,17,900
Akai Ltd.
Rs. Rs. Rs. Rs.
Sachin 5,000 3 15,000 500 1,500 16,500
Sourav 1,200 8 9,600 500 4,000 13,600
Rahul 800 30 24,000 500 15,000 39,000
69,100
 14

Requirement 1 Requirement 2
Rs. Rs.
Samsung 1,26,620 1,17,900
Akai 63,180 69,100
1,89,800 1,87,000

9. Differences between the two sets of accounts arises when separate books are maintained for
both cost accounts and financial accounts.
The various reasons for disagreement of profits may be listed as below:
1. Items appearing only in financial accounts
The following items of income and expenditure are normally included in financial accounts
and not in cost accounts. Their inclusion in cost accounts might lead to unwise managerial
decisions. These items are:
(i) Income:
(a) Profit on sale of assets
(b) Interest received
(c) Dividend received
(d) Rent receivable
(e) Share transfer fees
(ii) Expenditure:
(a) Loss on sale of assets
(b) Uninsured destruction of assets
(c) Loss due to scrapping of plant and machinery
(d) Preliminary expenses written off
(e) Goodwill written off
(f) Underwriting commission and debenture discount written off
(g) Interest on mortgage and loans
(h) Fines and penalties
2. Items appearing only in cost accounts
There are some items which are included in cost accounts but not in financial accounts.
These are:
(a) Notional interest on capital;
(b) Notional rent on premises owned
3. Under or over-absorption of overhead
In cost accounts overheads are charged to production at pre-determined rates whereas in
financial accounts actual amount of overhead is charged, the difference gives rise to under-
or over-absorption; causing a difference in profits. When such under absorption or over
absorption is charged or credited respectively to the Costing Profit and Loss Account, there
shall be no need of reconciliation.
4. Different bases of stock valuation
In financial books, stocks are valued at cost or market price, whichever is lower. In cost
books, however, stock of materials may be valued on FIFO or LIFO basis and work-in-
 15

progress may be valued at prime cost or works cost. Differences in stock valuation may thus
cause a difference between the two profits.
5. Depreciation
The amount of depreciation charged may be different in the two sets of books either
because of the different methods of calculating depreciation or the rates adopted. In cost
accounts, for instance, the straight line method may be adopted whereas in financial
accounts it may be the diminishing balance method.
10. Reconciliation Statement
Rs. Rs.
Loss as per costing Profit and Loss A/c 1,92,500
Add: 1. Works overhead under recovered as per costing records 3,120
2. Loss of obsolescence in financial records 5,700
3. Income tax provided in financial records 37,300
4. Difference in value of Opening stock (64,000 – 62,600) 1,400
5. Difference closing stock value (72,000 – 69,600) 2,400
6. Preliminary expenses written off 800
7. Provision for doubtful debts 150 50,870
2,26,270
Less: Administration overhead 1,700
Excess depreciation over-recovered in cost (12,500 – 11,200) 1,300
Interest received 5,000
Bank interest credited in financial book 750
Stores adjustment 475
Interest charged only in cost accounts 6,000 15,225
Loss as per financial records 2,28,145
11. Cost ledger control account
Rs. Rs.
Sales A/c 4,10,000 1.5.2007 Balance b/f 3,02,000
Capital under construction A/c 50,150 Stores ledger Control
A/cPurchases 42,700
Balance c/f 2,37,500 Wages control A/c 1,24,000
Production overhead A/c 1,52,350
WIP A/c  Royalty 2,150
Selling overhead A/c 22,000
_______ Profit 52,450
6,97,650 6,97,650

Stores ledger control account

Rs. Rs.
1.5.2007 Balance b/f 85,400 WIP control A/c 63,400
Cost ledger control A/c  42,700 Production overhead control 1,450
Purchases A/c
Capital under construction A/c 7,650
_______ 31.5.2007 Balance 55,600
1,28,100 1,28,100
 16

Wages control A/c

Rs. Rs.
Cost ledger control A/c 1,24,000 Capital under construction A/c 12,500
Production overhead control A/c 35,750
________ WIP control A/c 7,550
1,24,000 1,24,000

Production overhead control account

Rs. Rs.
Stores ledger A/c 1,450 Capital under construction A/c 30,000
Wages control A/c 35,750 WIP control A/c – Absorption
(balancing figure) 1,52,000
Cost ledger control A/c 1,52,350 Costing Profit and Loss A/c
_______ (under absorption) 7,550
1,89,550 1,89,550

Work in progress control account

Rs. Rs.
1.5.07 Balance b/f 1,67,350 Finished goods control A/c
Stores ledger A/c – issues 63,400 (balancing figure) 2,81,300
Wages control A/c 75,750 31.5.07 Balance c/f 1,79,350
Production overhead absorbed 1,52,000
Cost ledger control A/c  Royalty 2,150 _______
4,60,650 4,60,650

Finished goods control account

Rs. Rs.
1.5.07 Balance b/f 49,250 Cost sales A/c 3,28,000
WIP control A/c 2,81,300 31.5.07 Balance c/f 2,550
3,30,550 3,30,550

Capital under construction account

Rs. Rs.
Stores ledger control A/c 7,650 Cost ledger control A/c 50,150
Wages control A/c 12,500
Production overhead absorbed 30,000 ______
50,150 50,150

Sales account
Rs. Rs.
Costing Profit and Loss A/c 4,10,000 Cost ledger control A/c 4,10,000

Cost of sales A/c

Rs. Rs.
Finished goods A/c 3,28,000 Costing Profit and Loss A/c 3,28,000
 17

Selling overhead account

Rs. Rs.
Cost ledger control A/c 22,000 Costing Profit and Loss A/c 22,000

Costing profit and loss account

Rs. Rs.
Selling overhead A/c 22,000 Sales A/c 4,10,000
Production overhead
(under absorbed) 7,550
Cost of sales A/c 3,28,000
Profit–Cost ledger control A/c 52,450 _______
4,10,000 4,10,000
Notes:
1.
Closing balance of work in progress Rs. 1,67,350 (opening balance)
Rs. 12,000 (increase as per question)
Rs. 1,79,350
2. Transfer from finished goods stock to cost of sales account : Rs 4,10,000 sales multiplied by
100/125 = Rs. 3,28,000
12. (i) Statement of Equivalent Production
(FIFO Method)
Input Material Labour Overheads
% Units % Units % Units
Opening W.I.P. 2,250 units Completed 2,250 units   40 900 40 900
Introduced 22,750 units Completed 17,250 units 100 17,250 100 17,250 100 17,250
Normal loss 2,500 units
Abnormal loss 500 units 100 500 70 350 70 350
Closing 2,500 units 100 2,500 80 2,000 80 2,000
W.I.P.
25,000 units 20,250 20,500 20,500

(ii) Statement of cost

Item of Cost Amount Equivalent Cost per
(Rs.) production unit (Rs.)
(Unit)

Material 88,500
Less: Revenue from sale of normal loss
(2,500 units  Rs. 3) 7,500 81,000 20,250 4
Direct wages 20,500 20,500 1
Production overheads 41,000 20,500 2
Cost of completing one unit 7
 18

Statement of Evaluation
Amount Amount
(Rs.) (Rs.)
Abnormal loss (500 units)
Material 500 units  Rs. 4 2,000
Labour 350 units  Re.1 350
Production overheads 350 units  Rs. 2 700 3,050
Cost of units transferred
Opening WIP (2,250 units) 11,250
Add: Cost incurred
Labour 900 units  Re. 1 900
Production overheads 900 units  Rs. 2 1,800 2,700 13,950
Units introduced & completed 1,20,750
(17,250 units  Rs.7)
Total cost of 19,500 units 1,34,700
transferred to next process
Closing WIP (2,500 units)
Material 2,500 units  Rs.4 10,000
Labour 2,000 units  Re.1 2,000
Production overheads 2,000 units  Rs. 2 4,000 16,000

Process I Account
Particulars Units Rs. Particulars Units Rs.
To Opening WIP 2,250 11,250 By Normal Loss 2,500 7,500
To Material 22,750 88,500 By Unit completed and
To Wages 20,500 transferred to Process II 19,500 1,34,700
To Production overheads 41,000 By Abnormal loss 500 3,050
______ _______ By Closing WIP 2,500 16,000
25,000 1,61,250 25,000 1,61,250

13. (i) Statement of profitability of an Oil Mill (after carrying out further processing) for the quarter
ending 31st March 2007.
Products Sales Value Share of Joint Additional Total cost Profit
name after further cost processing after (loss)
processing cost processing
ACH 1,72,500 98,667 43,000 1,41,667 30,833
BCH 15,000 19,733 9,000 28,733 (13,733)
CSH 6,000 4,933 -- 4,933 1,067
DSH 45,000 24,667 1,500 26,167 18,833
2,38,500 1,48,000 53,500 2,01,500 37,000
 19

(ii) Statement of profitability at the split off point

Products’ Selling price Output in Sales value share of joint profit at split
name of split off units at split off cost off point
point
ACH 15 8,000 1,20,000 98,667 21,333
BCH 6 4,000 24,000 19,733 4,267
CSH 3 2,000 6,000 4,933 1,067
DSH 7.50 4,000 30,000 24,667 5,333
1,80,000 1,48,000 32,000
Note: Share of Joint Cost has been arrived at by considering the sales value at split off
point.
14. (a) Fixed costs are costs which do not change in total quantum till the time the capacity is
reached. Hence if the production is less than the capacity, the fixed cost per unit do not
remain as budgeted. Hence, we can say that fixed costs are variable in unit.
(b) The most appropriate basis for apportioning is “The value of the machinery in each cost
centre” since the number of machines or the floor area or the operating hours do not give
any indication of the value on which insurance amounts and premiums are decided upon.
(c) Since overheads are over absorbed, the budgeted quantum shall be Rs. 24,000 more than
what has actually been incurred. Hence Budgeted Overheads for 1,00,000 labour hours will
be Rs. 24,000 + 5,16,000 = Rs. 5,40,000 or Rs. 5.40 per labour hour
(d) The Weighted Average method is most suitable at times when prices fluctuate widely
because this method incorporates fluctuations in prices by identifying a weighted average
price rather than individual prices as used under both FIFO and LIFO.
15.
Minda Corporation Limited
Contract account for the year ended 31 st March 2007
Dr. Cr.
Rs. Rs.
To Materials purchased 1,00,000 By Work-in-progress c/d
To Wages paid 45,000 Work certified 2,00,000
Add: Wages accrued 5,000 50,000 Work uncertified 15,000
To General expenses 10,000 Effect of escalation
To Depreciation of plant 5,000 clause 5,000 2,20,000
To Notional profit c/d 80,000 By Materials in hand c/d 25,000
2,45,000 2,45,000
To Profit and loss A/c 20,000 By Notional profit b/d 80,000
To Work-in-progress c/d
(Profit in reserve) 60,000
80,000 80,000
1.4.2007 1.4.2007
To Work-in-progress b/d By Work-in-progress b/d 60,000
Work certified 2,00,000 (profit in reserve)
Work uncertified 15,000
 20

Effect of escalation
clause 5,000 2,20,000
To Materials in hand b/d 25,000

Working Notes:
(i) Ascertainment of effect of escalation clause:
Total increase Increase up to Increase
25% 5% beyond 5%
Rs. Rs. Rs.
Materials:
Effect of increased price
25 15,000 3,000 12,000
(Rs. 1,00,000  Rs. 25,000) 
125
Wages:
Effect of increased wage rates:
25 10,000 2,000 8,000
Rs. 50,000 
125
Total increase 25,000 5,000 20,000
Increase in value of work done (certified & uncertified)
to date: 25% of Rs. 20,000 = Rs. 5,000
(ii) Profit to be transferred to the profit and loss account:
Since the contract is between 1/4 and 1/2 complete, one-third of the notional profit, reduced
by the proportion of cash received to work certified, is to be transferred as below:
1 Cash received
=  Notional profit 
3 Work certified
1 Rs. 1,50,000
=  Rs.80,000  = Rs. 20,000.
3 Rs. 2,00,000
16. Output and losses
Process X Process Y
Units Units
Output 1,750 2,800
Normal loss (10% of input) 200 300
Abnormal loss 50 
Abnormal gain  (100)
2,000 3,000*
* 1,750 units from Process X + 1,250 units input to process.
Cost per unit of output and losses
Process X Process Y
Rs. Rs.
Cost of input
 Material 8,100 1,900
 From process X  (1,750  Rs. 10) 17,500
 21

 Labour 4,000 10,000

 Overhead (150%  Rs. 4,000) 6,000 (120%  Rs. 10,000) 12,000
18,100 41,400
Less scrap value of (200  Rs. 0.50) (100) (300  Rs. 3) (900)
normal loss
18,000 40,500
Expected output
90% of 2,000 1,800
90% of 3,000 2,700
Cost per unit
Rs. 18,000 1,800 Rs. 10
Rs. 40,500 2,700 Rs. 15
Total cost of output and losses
Process X Process Y
Rs. Rs.
Output (1,750  Rs. 10) 17,500 (2,800 Rs. 15) 42,000
Normal loss (200  Rs. 0.50)* 100 (300 Rs. 3)* 900
Abnormal loss (50  Rs. 10) 500 
18,100 42,900
Abnormal gain  (100 Rs. 15) (1,500)
18,100 41,400

* Normal loss is valued at scrap value only.

Complete accounts
Process X Account
Units Rs. Units Rs.
Direct material 2,000 8,100 Scrap A/c (normal loss) 200 100
Direct labour 4,000 Process Y A/c 1,750 17,500
Production overhead A/c 6,000 Abnormal loss A/c 50 500
2,000 18,100 2,000 18,100

Process Y Account
Units Rs. Units Rs.
Direct materials
From process X 1,750 17,500 Scrap A/c (normal loss) 300 900
Added materials 1,250 1,900 Finished goods A/c 2,800 42,000
Direct labour 10,000
Production overhead 12,000
41,400
Abnormal gain 100 1,500 _____ ______
3,100 42,900 3,100 42,900
 22

Abnormal Loss Account

Rs. Rs.
Process X (50 units) 500 Scrap A/c: sale of scrap of extra loss (50 units) 25
Profit and loss A/c 475
500 500

Abnormal Gain Account

Rs. Rs.
Scrap A/c (loss of scrap revenue due 300 Process Y abnormal gain 1,500
to abnormal gain, 100 units  Rs. 3) (100 units)
Profit and Loss A/c 1,200
1,500 1,500

Scrap Account
Rs. Rs.
Scrap value of normal loss Cash A/c – cash received
Process X (200 units) 100 Loss in process X (250 units) 125
Process Y (300 units) 900 Loss in process Y (200 units) 600
Abnormal loss A/c (process X) 25 Abnormal gain A/c (process Y) 300
1,025 1,025

Production Overhead Account

Rs. Rs.
Overhead incurred 17,800 Process X A/c 6,000
Over-absorbed overhead A/c Process Y A/c 12,000
(or Profit & Loss A/c) 200
18,000 18,000
17. (a) Purpose of Cost Audit: The purpose of cost audit is to examine whether the methods laid
down for ascertaining cost and the decisions are being properly implemented and whether
the Cost Accounting plan has been adhered to or not.
Broadly, the purposes of cost audit can be classified as : (i) protective, and (ii) constructive.
Protective purpose of Cost Audit: Under this, cost audit aims at examining that there is no
undue wastage or losses and the costing system brings out the correct and realistic cost of
production or processing. The benefit of this protective function is derived by the
organisation, its owners and consumers.
Constructive purpose of Cost Audit: Cost audit has a constructive purpose as well. Cost
auditor plays a constructive role by providing management of the company with information
useful in regulating production; choosing economical methods of operation, reducing
operations cost and re-formulating plans etc., on the basis of his findings during the course
of cost audit.
(b) Cost reduction may be defined as the achievement of real and permanent reduction in the
unit cost of goods manufactured or services rendered without impairing their suitability for
the use intended or diminution in the quality of the product.
Advantages of Cost reduction
The advantages accruing from cost reduction programme can be discussed under following
three heads:
(a) In so far as an individual company is concerned, cost reduction results in profit
improvement. The more the profits, the more stable the company becomes. It enhances
the share value, improves investment opportunities and facilitates collection of capital.
 23

(b) Society will be benefited by reduced prices, which may be possible, by savings from
cost reduction programmes. Competitive position will improve and the industry as a
whole will strive to improve productivity and pass on the advantage of such
programmes to the society. Workers and staff of the industry may also be benefited
throughout increased wages and improved welfare amenities.
(c) The country also stands to gain immensely by cost reduction programme. Industry will
be able to maintain the international parity in prices of exportable commodities and
consequential increase in export will result in increased foreign exchange savings. Also
internal revenue will increase through more tax revenues.
18. (a) Uniform Costing: Uniform costing is not a distinct method of costing. In fact, when several
undertakings start using the same costing principles and/or practices they are said to be
following uniform costing. The basic idea behind uniform costing is that the different
concerns in an industry should adopt a common method of costing and apply uniformly the
same principles and techniques for better cost comparison and common good. The
principles and methods of completion, analysis, apportionment and absorption of overheads
differ from one concern to the other in the same industry; but if a common or uniform pattern
is adopted by all, it helps mutually in cost control and cost reduction. Therefore, it is
necessary that a uniform method of costing should be adopted by the member unit of an
industry.
Limitations of uniform costing: For the answer of this question refer to Chapter11 of Cost
Accounting book of the Institute.
(b) The following are the points of difference between a Production Account and a Cost
Sheet:
(i) Production Account is based on double entry system whereas Cost Sheet is not based
on double entry system.
(ii) Production Account consists of two parts. The first part shows cost of the components
and total production cost. The second part shows the cost of sales and profit for the
period. Cost Sheet presents the elements of costs in a classified manner and the cost
is ascertained at different stages such as prime cost; works cost; cost of production;
cost of goods sold; cost of sales and total cost.
(iii) Production Account shows the cost in aggregate and thus facilitates comparison with
other financial accounts. Cost Sheet shows the cost in detail and analytical manner,
which facilitates comparison of cost for the purpose of cost control.
(iv) Production Account is not useful for preparing tenders or quotations. Estimated cost
sheets can be prepared on the basis of actual cost sheets and these are useful for
preparing tenders or quotations.
19.
Details Department
A B C
Rs. Rs. Rs.
Overhead incurred 2,200 1,500 2,500
Overhead absorbed 2,000 1,400 2,250
Over-absorbed 200
Under-absorbed 100 250

Treatment of Over-absorbed/Under-absorbed Overheads

Department A: as the over-absorbed overhead is 10%, it is desirable to apply supplementary
overhead rate and correspondingly give credit to the respective jobs.
 24

Department B: as the under-absorbed overhead is less than 10%, it should be transferred to the
current year’s profit and loss account.
Department C: as the under-absorbed overhead is 10%, it is appropriate to apply supplementary
overhead rate and give debit to the respective jobs.
The preliminary enquiries should be made on the lowest capacity utilization (50%) of Department
C. The reasons for this underutilized capacity should be further segregated into controllable and
uncontrollable. Department B is also not able to fully utilize the capacity. It is advisable to
consider this aspect in formulating next year’s budgets by eliminating the unutilized capacity.
20. The following are the various characteristics of Job, Batch and Contract Costing:
1. Job Costing is an appropriate method to use in cases where individual jobs are of
significance or are customised as per the order. In such cases there is a need to identify the
cost of such unique jobs. Thus, time sheet / log book labour details and material usage from
material requisitions shall be used to assign labour and material costs to the respective jobs.
The cost of audits is usually accumulated on a job-costing basis, as is the cost of servicing a
motorcar.
2. In Batch Costing, large numbers of identical products are accumulated as a ‘batch’, to which
costs are assigned in much the same way as costs are assigned to a particular job in Job
Costing. Batch Costing is of use in cases where the individual unit of production is not costly
enough or is sufficiently differentiated from all other units of production. Shoes or Picture
Tubes can be costed on batch costing lines.
3. Contract Costing is used in cases where individual cost unit is large, and its completion is
liable to be extended over a number of accounting periods. The determination of period
profits for reporting purposes is a complex process when Contract Costing is being used.
The proportion of direct costs to the total costs is usually larger in contract costing when
compared with the other specific order costing methods. This form of costing is appropriate
in the construction of power stations, flyovers etc.
21. (a) The following are the points of difference between a Production Account and a Cost Sheet:
(i) Production Account is based on double entry system whereas Cost Sheet is not based
on double entry system.
(ii) Production Account consists of two parts. The firstJ part shows cost of the components
and total production cost. The second part shows the cost of sales and profit for the
period. Cost Sheet presents the elements of costs in a classified manner and the cost
is ascertained at different stages such as prime cost; works cost; cost of production;
cost of goods sold; cost of sales and total cost.
(iii) Production Account shows the cost in aggregate and thus facilitates comparison with
other financial accounts. Cost Sheet shows the cost in detail and analytical manner,
which facilitates comparison of cost for the purpose of cost control.
(iv) Production Account is not useful for preparing tenders or quotations. Estimated cost
sheets can be prepared on the basis of actual cost sheets and these are useful for
preparing tenders or quotations.
(b) Controllable costs and uncontrollable costs: Costs which can be influenced by the action
of a specified person in an organisation are known as controllable costs. Costs which
remains unaffected by the action of such a person are termed as uncontrollable costs. In a
business organisation heads of each responsibility centre are responsible to control costs.
Costs which they are able to control are known as controllable and includes material; labour
and direct expenses. Costs which they fail to control includes fixed costs and all allocated
costs.
It may be noted that controllable and uncontrollable cost concepts are related to the
authority of a person in the organisation. An expenditure which may be uncontrollable by
 25

one person may be controllable by another. Moreover, in the long run all costs may be
controllable.
(c) Bin Card and Stores Ledger: Bind Card is a quantitative record of stores receipt, issue
and balance and is kept by store keeper for each item of stores.
Stores ledger keeps quantitative and monetary value records of stores receipt, issue and
balance and is prepared by the Cost Accounting Department.
(d) Explicit Costs and Implicit Costs: Product cost is explicit cost. Opportunity cost is an
example of implicit cost. Imputed costs (notional costs) are an example of implicit cost.
(e) Cost Driver: A cost driver is a characteristic of an event or activity that results in the
increase of costs. In activity based costing the most significant cost drivers are identified.
Activity cost pool: It is a measure of the frequency and intensity of demand placed on
activities by cost objects. It is used to assign activity cost-to-cost objects.