ADL 56 Cost & Managerial Accounting

Cost and Managerial Accounting (ADL-56)

Assignment - A Quest1. Cost Accounting is an aid to management discuss the main points in support of this statement. Also explain briefly the limitation of Cost Accounting. Answer 1: COST ACCOUNTING is an aid to management & its Limitations: a) Cost Accounting This accounts for cost; begins with recording revenues and cost

and ends with preparation of periodical statements & reports for ascertaining & controlling costs.

b) The Cost accounting helps the management in the following important areas : (i) Ascertaining the cost of a product, job etc., (ii) determination of selling price (iii) Ascertaining the profit of each activity (iv) scope for cost control & cost reduction measures (v) decision making.

c) Limitation of Cost Accounting: 1) It ignores item of pure finance like dividends, rental income, interest, cash discounts, bad debts, profits/loss on account of sale of capital nature of items, Appropriation of profits, abnormal items etc., 2) It is an internal accounting statement submitted to management (job wise, department wise, product wise etc) for proper planning, controlling cost & decision making process & cannot be used by outside parties like Government, customers, vendors, employees etc. unlike financial statements.

Quest2. Prepare the Stores Ledger Accounts and discuss the effects of adopting LIFO and FIFO on profits, with the help of the following figures: Date Details Jan 1 Opening Balance -10 Units (December 28 th purchase ) @ Rs 30 Jan10 Purchase 10 Units @ Rs 33 Jan 12 Issued 10 units Jan 31 Closing Balance 10 units Feb 3 Purchase 10 units @ Rs 36 Feb 12 Issued 10 units Feb 28 Purchased 10 units @ Rs 40 Sales during these two months amounted to Rs 1,000. Answer 2: I) Stores Ledger Accounts:

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A) adopting FIFO method (first in first out) Receipts Issues

Date Descptn Qty price Value Date Descptn Qty price Value (Rs.) (Rs.)

Jan 1 Opening stock 10 30 300

Jan 10 Purchases 10 33 330 Jan 12 Issues 10 30 300 Jan 31 Closing stock 10 33 330 Total for Jan 20 630 20 630

Feb 1 Opening stock 10 33 330

Feb 3 Purchases 10 36 360 Feb 12 Issues 10 33 330 Feb 28 Purchases 10 40 400 Feb 28 Closing stock 10 36 360 10 40 400

Nett closing stock 20 760

Total for Feb 30 1090 30 1090 B) adoting LIFO method (last in first out) Receipts Issues

Date Descptn Qty price Value Date Descptn Qty price Value (Rs.) (Rs.)

Jan 1 Opening stock 10 30 300

Jan 10 Purchases 10 33 330 Jan 12 Issues 10 33 330 Jan 31 Closing stock 10 30 300 Total for Jan 20 630 20 630

Feb 1 Opening stock 10 30 300

Feb 3 Purchases 10 36 360 Feb 12 Issues 10 36 360 Feb 28 Purchases 10 40 400 Feb 28 Closing stock 10 30 300 10 40 400

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Nett closing stock 20 700

Total for Feb 30 1060 30 1060 II) Impact of adopting FIFO & LIFO method on Profits: (Jan-Feb)

Profit & loss Statement: (gross profits)

Particulars Adopting FIFO(rs) Adopting LIFO(rs) a) Sales 1000 1000 b) Closing stock 760

(refer A above)700

(refer B above) c) Total 1760 1700 d) cost of issues 630 690 e) Gross Profits (c-d) 1130 1010 Conclusion/inference By adopting FIFO, margins can be

maximized by Rs.120/- LIFO method does not reflect undue high

margins because of valuing the issues at current cost.

Quest3. A company has three production departments and two service departments, and for a period the department distribution summary has the following details: Production Departments Rs P1 Rs 800, P2 Rs 700, P3 Rs 500 2000 Service Departmnets S1 Rs 234 and S2 Rs 300 534 The expenses of service departments are charged out on a percentage basis as follows: P1 P2 P3 S1 S2 Service Departments S1 20% 40% 30% -- 10% Service Department S2 40% 20% 20% 20% --- Prepare a statement showing the apportionment of two service departments expenses to production department by simultaneous Equation Method and Repeated Distribution Method. Answer 3: Overhead Distribution Statement :

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(i) REPEATED DISTRIBUTION METHOD :

Particulars Value Cost driverProduction

departments Service departments

Rs. P1 P2 P3 S1 S2 Overheads 2534 direct 800 700 500 234 300 Distribution of Service dept cost - S1 cost apportionment ratios 20% 40% 30% 10% - S1 Cost distribution 47 94 70 (234) 23Total cost of Service Dept's - 1st stage - 323 - S2 cost apportionment ratios 40% 20% 20% 20% - S2 Cost distribution 129 65 65 65 (323)Total cost of Service Dept's 2nd stage 65 - Repeating the Process of service cost distribution : - S1 Cost distribution 13 26 19 (65) 6Total cost of Service Dept's 3rd stage 0 6 - S2 Cost distribution 3 1 1 1 (6)Total cost of Service Dept's 4th stage 1 - - S1 Cost distribution 0 1 0 (1) 0Total cost of Service Dept's 5th stage 0 0 Total cost of Production departments after apportionment of Service dept 992 886 656 0 0

(ii) SIMULTANEOUS EQUATION METHOD: Assumptions Total overhead of S1 after including cost of S2 = X Total overhead of S2 after including cost of S1 = Y Equation 1 : X = 234 (S1 cost) + 20% (Y) (i.e X = 234 + 0.2Y) Equation 2: Y = 300 (S2 cost) + 10% (X) (i.e Y = 300 + 0.1X) Soving the equation 1 : X = 234 + 0.2(300+0.1X) nothing but X = 300 Substituting X = 300 in equation 2 , we will get Y = 330

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(ii) SIMULTANEOUS EQUATION DISTRIBUTION :

Particulars Value Cost driverProduction

departments Service departments

Rs. P1 P2 P3 S1 S2 Overheads 2534 direct 800 700 500 234 300 Distribution of Service dept cost - S1 cost apportionment ratios 20% 40% 30%

- S1 Cost distribution 60 120 90

(300) (arrived above) 30

Total cost of Service Dept's - 1st stage (66) 330 - S2 cost apportionment ratios 40% 20% 20% - S2 Cost distribution 132 66 66 66 (330)Total cost of Service Dept's - 2 nd stage - Total cost of Production departments after apportionment of Service dept 992 886 656 0 0

Quest4. From the following particulars of Rosa Ram Ltd. For three months ending 31 March , 2005 prepare:

(a) Cost sheet for the period giving various costs, and (b) Profit and Loss Account for the quarter showing profit per barrel.

Wages Rs 12,000, Coal and Oil 11,200, Cooperage , Corks and Shives Rs 4,000,Malts Rs 40,000,Hops 10,800, Beer Duty Rs 2,80,000 Water Rs 1,000, Rent and Taxes Rs.6,000, By product Rs 3,600, Sugar Rs 14,000 , Preservatives Rs 1,600, Other Materials Rs 1,200 , Repairs Rs 1,800, Depreciation 1,200, Administration Expenses Rs 24,000 , Selling and Distribution Expenses Rs. 30,000. Opening stock for beer Rs 40,500 (300 barrels). Closing stock of beer Rs 67,500 (500 barrels). Beer sales Rs 4,98,000(2800 barrels) . Beer brewed during the period 3,000 barrels.

Answer 4: a) Cost sheet for the period:

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Cost sheet of Rosa Ram Ltd - 31.03.2005 : Direct Materials : - Malt 40000 - Hops 10800 - By Product 3600 - Sugar 14000 - Presevatives 1600 - Other materials 1200 71200 Direct Wages 12000 Direct Expense - Coal & Oil 11200 - Cooperage,Corks & Shives 4000 15200 Prime Cost 98400 Add : Works cost / Factory Overheads : - Beer duty 280000 - Water 1000 - Rent & Taxes 6000 - Repairs 1800 - Depreciation 1200 290000 Gross / Net works cost/Cost of Production 3000 barrels 388400 Add : Opening stock of finished goods 300 barrels 40500

Less: Closing stock of finished goods 500 barrels 67500 (27,000)

Cost of Goods Sold 361,400

Add : Administrative overheads(treated as period cost) 24,000

Add : Selling & Distribution exps 30,000

Cost of sales 415,400

Profits (sales - cost of sales) 29.50 82,600

(per barrel)

Sales 2800 barrels 498,000

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b) Profit & Loss A/c for the quarter:

Particulars units Amount Particulars Units Amount

Opening stock 300 40500 Sales 2800 498,000

Cost of Production 3000 388400 Closing stock 500 67500 Gross Profit 136600 Total 565500 565500

Administrative expenses 24,000 Gross Profit b/f 136600

Selling & Distribution expenses 30,000

Nett Profit 82,600

Total 136,600

136,600

Profit ber barrel (Rs.82600/- / 2800 barrels) 29.50

Question 5: What is Machine Hour Rate? What is the use of MHR? Explain the calculation procedure of it with imaginary figures. Answer 5: Machine hour rate & its uses: a) Machine hour rate can be defined as an operating cost of the machine per hour worked. b) It is the ideal method for capital intensive departments, where labour hours spent is not much. It helps in identifying the idle capacity of the machine (extent of under absorption indicates idle capacity) Calculation: Machine hour rate = Running cost (depreciation, power, repairs etc.) + Standard cost (wages, supervision, insurance etc.) / Effective working hours (Total hours Normal hrs lost)

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Let us see example ; XYZ company operates its production with a machinery/plant which runs for 2000 hrs capacity per month & normal lost hrs due to maintenance etc is 10% It incurs the following cost per month in respect of the machine: a) wages 800 b) depreciation 600 c) maintenance 300 d) power charges - 300 Computation of machine hour rate = Overheads (2000/-) / effective machine hrs (1800 hrs (2000-10%) Machine hour rate of XYZ company = Rs.1.11

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Assignment - B

Quest 1: What is Marginal Costing? How variable cost and fixed cost are are treated in marginal costing vis--vis with Absorption Costing? Answer 1: Marginal Costing: a) It is defined as the ascertainment of marginal cost and of the effect on profit of changes in volume or type of output by differentiating between fixed and variable costs. b) it is relevant for decision making & it is also known as variable costing or out of packet costing. Treatment of Variable & Fixed cost (Marginal vs. Absorption costing):

Marginal costing Absorption costing i) Only Variable costs are included for product costing & inventory valuation

i) both fixed and variable costs are considered for product costing & inventory valuation

ii) Fixed costs are regarded as a period cost. The profitability of different products is judged by their PV ratio.

ii) Fixed costs are charged to production. Each product bears a reasonable share of fixed cost and thus the profitability of a product is influenced by the apportionment of fixed costs.

Quest 2: S Ltd. furnishes you the following information relating to the half year ending 30th June, 2007. Fixed Expenses 50,000. Sales Value 2, 00,000. Profit 50,000. During the period half of the same year the company has projected the loss of Rs 10,000. Calculate-

(a) P/V Ratio, break even point and margin of safety for the half year ending 30 th June.

(b) Expected sales volume for second half of the year assuming that selling price and fixed expenses remain unchanged in the second half.

(c) The break even point and margin of safety for the whole year 2007. Answer 2:

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The details of S ltd for the half year ended 30th June 2007 has been tabulated as below:

Ist half details Particulars Value (Rs.)

Sales 200,000 Variable cost 100,000 Contribution 100,000 Fixed expenses 50,000 Profit 50,000

(a) PV ratio: (contribution / sales * 100) = (100000/200000)*100 = 50% Break even point (rs.) : (fixed cost / PV ratio) = (50000/50%) = 100,000/- Margin of safety (rs): (profit / PV ratio) = (50000/50%) = 100,000/- Or (total sales BEP sales) = (200,000 100,000) = 100,000/- (b)

2nd half computed Particulars Value (Rs.)

Sales 80,000 Variable cost 40,000 Contribution 40,000 Fixed expenses 50,000 Loss (10,000)

Details for whole year 2007 is as below :

Full year 2007 Particulars Value (Rs.)

Sales 280,000 Variable cost 140,000 Contribution 140,000 Fixed expenses 100,000 Profit 40,000

( c) Break even point for 2007 (rs.) : (fixed cost / PV ratio) = (100000/50%) = 200,000/- Margin of safety (rs): (profit / PV ratio) = (40000/50%) = 80,000/- Or (total sales BEP sales) = (280,000 200,000) = 80,000/- Ques 3: The standard material cost for 100 kgs of chemical D is made up of- Chemical A- 30 Kgs @ Rs 4.00 per kg. Chemical B- 40 Kgs @ Rs 5.00 per kg. Chemical C-80 Kgs @ Rs 6.00 per kg.

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In a batch of 500 kgs of chemical D was produced from a mix of

Chemical A - 140 Kgs at a cost of Rs . 588. Chemical B - 220 kgs at a cost of Rs 1,056. Chemical C- 440 kgs at a cost of Rs 2,860. How do the yield, mix and price factors contribute to the variance in the actual cost per 100 kgs. of chemical D over the standard cost? Answer 3: i) Material price Variance (MPV) = AQ * SP - AQ * SP (wkg note 3-2)

4300 - 4504 = Rs. - 204 (variance) ii) Material Mix Variance (MMV) = RAQ * SP - AQ * SP (wkg note 4-3)

4000 - 4300 = Rs. - 300 (variance)

iii) Material Yield Variance (MYV) = SQ * SP - RAQ * SP (wkg note 1-4) 4000 - 4000 = Rs. 0 (variance)

Workings: Wor.Note ref Wor.Note ref

1 SQ * SP 2 AQ * AP kgs price value kgs price value chemical A 150 4 600 chemical A 140 4.2 588 chemical B 200 5 1000 chemical B 220 4.8 1056 chemical C 400 6 2400 chemical C 440 6.5 2860 Total 750 4000 800 4504

3 AQ * SP 4 RAQ * SP kgs price value kgs price value chemical A 140 4 560 chemical A 150 4 600 chemical B 220 5 1100 chemical B 200 5 1000 chemical C 440 6 2640 chemical C 400 6 2400 800 4300 750 4000

NOTES : RAQ - Revised acutal quantity (acutal quantity re-written in standard proportion

SQ - Standard quantity AQ - Actual quantity SP - Standard price AP - Actual price

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Standard quantity for actual output is converted & considered

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Assignment - B

Case Study East and West Enterprises is currently working at 50% capacity and produces 10,000 units.. At 60% capacity the raw material cost increases by 2% and the selling price falls by 3%. At 70% capacity the raw material cost increases by 4% and the selling price falls by 5%. At 50% capacity working the product costs Rs 180 per unit and is sold at Rs 200 per unit. The unit cost of Rs 180 is made up as follows: Material Rs 100 Wages Rs 30 Factory overhead Rs 20(40% fixed) Administrative overhead Rs 30(50% fixed). You are required to do the following

(a) Divide the cost at 50 % level into fixed, variable and semi-variable. (b) Prepare the cost sheet at 50% level and find out the profit. (c) Estimate the profits of the company when it works at 60% and 70% capacity.

Answer to case study :

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Statement showing the costs & Profits @ different capacity levels :

Particualrs 50% capacity 60% capacity 70% capacity Units - (a) 10000 12000 14000 Selling price per unit - (b) 200 194 190 (falls by 3%) (falls by 5%) Cost of production per unit - Material 100 102 104

(increases by 2%)

(increases by 4%)

- Wages 30 30 30 - Factory O/H's - Variable 12 12 12 - Administrative O/H's-Variable 15 15 15Total Variable cost / unit - ( c) 157 159 161 Contribution per unit - (d) - (b-c) 43 35 29

Sale Value (a * b) 2,000,000

2,328,000

2,660,000

Variable Cost (a * c) 1,570,000

1,908,000

2,254,000

Contribution (d * a) 430,000

420,000

406,000 Fixed cost : - Factory O/H's (8 per unit) 80000 80000 80000 - Administrative O/H's (15 per unit) 150000 150000 150000 Profits (contribution-fixed cost) 200,000 190,000 176,000

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Part - C Objective Types Question 1. Costing is a technique of----------------

(a) Ascertainment of cost. (b) Ascertainment of expenditure. (c) Ascertainment of revenue. (d) Control of cost. (e) Both (a) and (d).

Answer : (a) 2. The method of costing used in refinery is

(a) Job. (b) Process. (c) Standard. (d) Contract.

Answer : (b)

3. In automobile industry , cost unit is ---------- (a) Quality. (b) Number. (c) Weight. (d) (a) and (b).

Answer : (c)

4. Ordering cost and carrying cost are equal at -----------level.

(a) Reorder. (b) Average. (c) EOQ. (d) Danger.

Answer : (c)

5. Broadly speaking any expenditure over and above ----------------------is known as overheads.

(a) Indirect costs. (b) Fixed cost. (c) Prime cost. (d) Factory cost.

Answer : (a)

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6. Which of the following is not a technique of costing?

(a) Marginal Costing. (b) Standard Costing. (c) Activity Based Costing. (d) Incremental Costing.

Answer : (d)

7. Which of the following statements are not correct?

(a) Variable overhead cost is a direct cost. (b) Fixed overhead is a committed cost. (c) Overhead cost is the aggregate of indirect material, indirect labour and

other indirect expenses. (d) Variable overhead is a discretionary cost.

Answer : (d)

8. Office telephone expense is an example of .

(a) Variable cost. (b) Semi-variable cost. (c) Fixed cost. (d) Sunk cost.

Answer : (b)

9. -------------------------------is a contract, provides that the contract price would be suitably enhanced on the happening of a specified contingency.

(a) Change to term. (b) Repetitive. (c) Arbitrage. (d) Escalation.

Answer : (d)

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10. Specific order costing includes.

(a) Job. (b) Contract. (c) Batch (d) (a) and (b) of above. (e) All of the above.

Answer : (e)

11. When the completion of the contract is less then , the total expenditure on the contract is transferred to -------------------------Account.

(a) Profit & Loss. (b) Contra tees. (c) Work-in-progress. (d) None of the above.

Answer : (c)

12. -------------------------------------- is the most important point to be determined in industries where batch costing is employed.

(a) Economic Order Quantity. (b) Batch number. (c) Economic Batch Quantity. (d) Expiry date.

Answer : (c) 13. The method of costing applied in furniture industry is ---------------- costing.

(a) Process. (b) Job. (c) Operation. (d) Batch.

Answer : (b) 14. The method of costing applied in steel industry is ---------------- costing.

(a) Process. (b) Job. (c) Operation. (d) Batch.

Answer : (a)

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15. When actual loss is more than estimated loss, the difference between the two

is considered to be --------------------------.

(a) Normal loss. (b) Estimated loss. (c) Abnormal loss. (d) Provisional loss.

Answer: (c)

16. --------------------------------is spread on good items of production.

(a) Abnormal loss. (b) Normal loss. (c) Abnormal gain. (d) Both (a) and (c). (e) None of the above.

Answer: (b)

17. Which of the following is an example of abnormal cost?

(a) Loss due to handling. (b) Loss due to shrinkage. (c) Loss due to leakage. (d) Loss due to evaporation. (e) Loss due to lock out.

Answer: (e)

18. The costs incurred up-to the point of separation is called--------------------- costs.

(a) Common. (b) Normal. (c) Abnormal. (d) Relevant. (e) None of the above.

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Answer: (a)

19. The stage of production at which separate products are identified is known as -------------------------- stage.

(a) Milestone. (b) Identification. (c) Split off. (d) Common.

Answer: (c)

20. The most important criterion for distinguishing between scrap, by-product and joint product is ---------------------------------------of the products.

(a) Weight. (b) Importance. (c) Order of finality. (d) Relative sales value.

Answer: (c)

21. --------------------------------is an example of variable cost.

(a) Rent of factory building. (b) Direct material. (c) Telephone charges. (d) Depreciation.

Answer: (b)

22. ------------------------------is an example of fixed cost.

(a) Rent of factory building. (b) Direct material. (c) Telephone charges. (d) Supervisors salary.

Answer: (a)

23. ------------------------------is an example of semi-variable cost.

(a) Rent of factory building. (b) Direct material. (c) Telephone charges. (d) Supervisors salary. (e) Both (c) and (d).

Answer: (e)

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24. ------------------------- and variable costs are same.

(a) Marginal cost. (b) Average cost. (c) Budgeted cost. (d) Standard cost. (e) Differential cost.

Answer: (a)

25. Conversion cost doesnt include---------------.

(a) Direct Material. (b) Direct labour. (c) Factory overhead. (d) Both (a) and (b).

Answer: (a)

26. Fixed costs are also called ..

(a) Standard costs. (b) Imputed costs. (c) Capacity costs. (d) Sunk costs.

Answer: (c)

27. -----------------------------are relevant costs for decision making.

(a) Differential Costs. (b) Incremental Fixed costs. (c) Variable costs. (d) Imputed costs. (e) None of the above (f) All of the above.

Answer: (f)

28. -----------------------------are irrelevant costs for decision making.

(a) Differential Costs. (b) Incremental Fixed costs. (c) Variable costs. (d) Imputed costs.

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(e) Sunk costs. (f) All of the above.

Answer: (e)

29. The profit in marginal costing differs from absorption costing method mainly because of:

(a) Fixed Cost treatment. (b) Variable cost treatment. (c) Difference in stock valuation. (d) Over or under absorption of overheads. (e) Both (c) and (d).

Answer: (d) 30. Muskan Ltd which makes only one product sells 10,000 units of its product making a loss of Rs 10,000. The variable cost per unit of the product is Re 8 and the fixed cost is Rs 30,000. What is the Contribution per unit?

(a) Rs 8. (b) Rs 2. (c) Rs 3. (d) None of the above.

Answer: (b) 31. What is the Break even point in the above case(Q30) , if the sales price, variable cost and fixed cost remain the same.

(a) 15000 units. (b) 12000 units. (c) 20000 units. (d) None of the above.

Answer: (a) 32. Standard costing is more widely used method in--------------------------------industry.

(a) Contract. (b) Transport. (c) Process. (d) None of the above.

Answer: (d)

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33. Which of the below is not one type of standard?.

(a) Current. (b) Basic. (c) Normal. (d) Ideal.

Answer: (a) 34. Variance is comparison of --------------------- with standards.

(a) Estimated. (b) Calculated. (c) Actual. (d) Ideals.

Answer: (c)

35. The process of comparing profits reflected by cost accounting records and financial accounting records and to know the reason of difference is known as:

(a) Audit. (b) Verification. (c) Examination. (d) Reconciliation. (e) Investigation.

Answer: (d) 36. Which of the following items could be reason/reasons of the difference between two sets of books of accounts (Financial/Cost).

(a) Stock valuation method. (b) Absorption of overheads. (c) Interest on debentures. (d) Goodwill written off. (e) All of the above.

Answer: (e)

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37. If the opening stock was valued at Rs 4000 in financial accounts and Rs 5000 in cost accounts, what will the impact of the transaction?

(a) Cost account profit is more by Rs 1000. (b) It gets off-set during the year, hence no impact. (c) Financial accounts profit is more by Rs 1000. (d) None of the above.

Answer: (c) 38. The technique which does not take into account the past trends in preparing the budgets is -------------------------.

(a) Incremental Budgeting. (b) Performance Budgeting. (c) Zero Based Budgeting. (d) Target Budgeting. (e) None of the above.

Answer: (c) 39. Which is the following statement is not true about budgeting?

(a) Budgeting is a forecasting technique. (b) Budgeting is different from standard costing. (c) It is done prior to defined period of time. (d) Budgeting is only financial statement. (e) It is financial / and or quantitative statement.

Answer: (d) 40. A budget prepared for the entire firm/company is called----------------budget.

(a) Functional. (b) Master. (c) Flexible. (d) Fixed. (e) None of the above.

Answer: (b)