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Appendix
ICWA Inter Gr. II
(Solution upto June 2011 & Questions of Dec. 2011
included)
Paper - 8 : Cost and Management Accounting
Chapter-1 : Cost Concept and Classification of Cost
2011 - June [4] (a)
Answer :
Management Accounting : management accounting is concerned
with accounting information which is useful for the management. It
is the presentation of accounting information in such a way as to
assist the management in the creation of policy and day to day
operation of the undertaking It includes the methods and concepts
necessary for effective planning, for choosing between alternative
business actions and for control through the evaluation and
interpretation of performance. It embraces within its fold several
subjects and cost accounting is one of them.
2011 - June [5] (b)
Answer :
Chargeable Expenses:

These are also called direct expense.

These expenses are directly charged to product or cost unit.

These are treated as a part of prime costs.

They are directly identifiable.

E.g. Cost of patent rights, hire charges of special plant,


experimental costs, Royalty paid in mining, costs of special
layouts and designs, etc.
2011 - June [8] (a),(c)
Answer :
(a) Profit Centre : A centre whose performance is measured in
terms of both, the expenses it incurs and revenue it earns is
called as profit center. Thus the profit centre is that segment
of the activity of a business with which both the revenues and

Appendix ICWA Inter Gr. II Paper 8

II-2

expenses are identified and profit or loss made by that


particular segment of activity is ascertained.
Profit centre is a responsibility centre for which both costs and
revenues are accumulated.
As defined by CIMA London, profit centre is a part of business
accountable for costs and revenues It may be called a
Business Unit or Strategic Business Unit. The object of profit
centre is to maximize the centres profit i.e. difference between
revenues and expenses.
(c) Cost Control & Cost Reduction : Cost control and cost
reduction are two different concepts. Cost control has
achieved the cost targets as its objective while cost reduction
is directed to explore the possibility of improving the targets
themselves.
Cost reduction is a continuous process and has no visible end
while cost control ends when targets are achieved.
Cost control aims at maintaining the costs in accordance
with established standards.
Cost control seeks to attain lowest possible cost under
existing conditions.
Cost control is a preventive function.
Cost reduction is concerned with reducing costs.
Cost reduction recognizes no condition as permanent
,since a change will result in a lower cost.
Cost reduction is a corrective function.
Chapter-2 : Material Accounting
2011 - June [8] (e)
Answer :
FSND Analysis: Age of the inventory indicates the duration of
inventory in the organization. It shows the moving position of
inventory during the year. This analysis divides the items of
inventory into four categories in the descending order of their usage
rate as follows.
1. F stands for fast moving items and stocks of such items are
consumed in a short span of time.
2. Stock of fast moving items must be observed constantly and
replenishment orders be placed in time to avoid stock out
position.
3.
N means normal moving items and such items are
exhausted over a period of time, i.e. say one year. The order
levels and quantities for such items should be on the basis of

Appendix ICWA Inter Gr. II Paper 8

II-3

a new estimate of future demand to minimize the risks of a


surplus stock.
4.
S indicates slow moving items, existing stock of which would
last for two years or so. These items must be reviewed
carefully before eliminating them.
5.
D stands for dead stock which means that there will not be
any further demand for the same. It is necessary to identify
these items and if there cannot be any alternative use for the
same, should be eliminated.
2011 - Dec [8] Write short notes on the following:
(e) Perpetual Inventory System.
(5 marks)
Chapter-3 : Labour Accounting
2011 - June [2] (a),(b)
Answer :
(a) Difference between Job Evaluation and Merit Rating
Job Evaluation

Merit Rating

Job Evaluation is the Merit rating is the assessment of


assessment of relative worth of relative worth of the man behind
the job.
jobs in a business.
Job Evaluation rates the jobs.

Merit rating rates the employees.

The objective of job evaluation Merit rating provides a scientific


is to set up a rational wage and basis for determining fair wages
for each worker based on his
salary structure.
ability and performance.
Job Evaluation simplifies wage Merit rating helps in determining
administration by rationalizing fair rate of pay to different
and bringing uniformity in the workers on the basis of their
relative performances.
wage rates.
(b) Computation of profit foregone as a result of Labour Turn
Over
Costs due to Labour Turnover
`
`
Recruitment Cost
34,520
Selection and placement cost
42,610
Training cost
69,270
1,46,400
Contribution foregone
Total hours lost Contribution per labour hour = 75,000 3.86 =
2,89,500
4,39,500

Appendix ICWA Inter Gr. II Paper 8

II-4

Working Note
Contribution = 83,03,300

= ` 16,60,660

Actual Labour Hours worked = 4,45,000 - of 30,000 hrs. which


were ineffective due to training.
= 4,45,000 15,000 = 4,30,000 hrs.
Contribution per direct labour hour = 16,60,660 / 4,30,000 = ` 3.86
Total Hours lost
Potential productive hours lost due to delays in filling vacancies
= 60,000 hrs.
Unproductive labour hours due to training new recruits
= 15,000 hrs.
75,000 hrs.
2011 - Dec [4] (a) Distinguish between Incentives to indirect
workers and Indirect incentives to direct workers.
(5 marks)
(b) Both direct and indirect employees of a department in a factory
are entitled to production bonus in accordance with a Group
Incentive Scheme, the outlines of which are as follows:
(i) For any production in excess of standard rate fixed at
10,000 tonnes per month of 25 days, a general incentive of
` 10 per tonne is paid in aggregate. The total amount
payable to each separate group is determined on the basis
of an assumed percentage of such excess production being
contributed by it, namely @ 70% by direct labour, @ 10% by
inspection staff, @ 12% by maintenance staff and @ 8% by
supervisory staff.
(ii) Moreover, if the excess production is more than 20% above
the standard, direct labour also get a special bonus @ ` 7
per tonne for all production in excess of 120% of standard.
(iii) Inspection staff are penalised @ ` 20 per tonne for rejection
by customers in excess of 1% of production (Actual).
(iv) Maintenance staff are penalised @ ` 20 per hour of
breakdown.
From the following particulars for a month, workout the production
bonus by each group:
A. Production 13,000 tonnes (Actual)
B. Rejection by customers200 tonnes
C. Machine breakdown50 hours (4 + 2 + 2 + 2 = 10 marks)
Chapter-4 : Overhead
2011 - Dec [5] (b) XYZ Ltd. manufactures four products A, B, C and
D. Whose data are given below:

Appendix ICWA Inter Gr. II Paper 8


A

II-5
D

9,000 18,000
6,000
3,000
Direct Materials (`)
9,000
4,500
3,000
1,500
Direct Labour (`)
300
150
100
50
Direct Labour Hours
5
10
15
30
Machine Hours
You are required to prepare a statement showing the allocation of
factory overheads (which amounted to ` 1,08,000) using the basis
of allocation as under:
(i) Direct Material Cost
(ii) Direct Labour Cost
(iii) Direct Labour Hours
(iv) Machine Hours
Out of these four bases of allocation, which you prefer and why?
(2 + 2 + 2 + 2 + 2 = 10 marks)
Chapter-6 : Job, Batch and Contract
2011 - Dec [7] (b) Distinguish between Job costing and Process
costing.
(5 marks)
2011 - Dec [8] Write short notes on the following :
(c) Cost-plus Contract;
(5 marks)
Chapter-7 : Process Costing, Joint Products and By-Products
2011 - June [6] (b)
Answer :
Difference between By-Products and Joint Products
Basis
Joint products
By-products
1. Meaning

When two or more


products of equal or
unequal importance are
produced either
simultaneously or in the
course of operation are
joint products.

Those products which


are recovered from
material discarded in a
main process or from
the production of some
major products.

2. Production Produced from same Produced from wastage


input and process.
scraps or discarded
material.
3. Incidental They are not produced They are produced
produced incidentally.
incidentally.
4. Impact on Significant
total cost total cost.

impact

on Little impact on total


cost.

Appendix ICWA Inter Gr. II Paper 8

II-6

5. Economic Equal economic import- Lesser economic impoimportance ance.


rtance.
2011 - June [7] (b)
Answer :
(i) Apportionment of total cost to products A,B and C using
sales value
Products
Sales Value (`)
Apportioned Cost (`)
A

1,20,000

96,000

80,000

64,000

3,00,000

2,40,000

(ii) Profit Statement after further processing.


Product

X
Y
Z

Final Revenue Original Incremental Incremeoutput


(`)
revenue
Revenue
ntal cost
(units)
(`)
(`)
(`)
4,750 2,09,000 1,20,000
80,000
7,200 1,29,600
9,200 4,41,600 3,00,000

89,000
49,600
1,41,600

Profit/
Loss
(`)

70,000 19,000
1,600
48,000
1,60,000 (18,400)

From the above result it is clear that product A and B should be


processed further, product C should be sold without further
processing.
2011 - Dec [6] (b) Explain the concept of Joint Costs in joint
products and by products.
(5 marks)
Chapter-8 : Cost Accounting in Service Sector
2011 - June [3] (b)
Answer :
Cost of Generation of Power (Per KWH)
Unit generated 15,00,000 KWH
Particulars
Amount Cost per KWH
(`)
(`)
Coal (Ref. Note 1)
Operation Labour
Lubricant & Supplies
Sub-total (a)
Semi variable cost: Repair & Maintenance
Sub-total (b)

33,740
16,500
10,500
60,740

0.0225
0.0110
0.0070
0.0405

21,000
21,000

0.0140
0.0140

Appendix ICWA Inter Gr. II Paper 8


Standing Charges: 5,250
Plant Supervision
9,000
Administration overhead
6,000
Depreciation 4% on ` 1.5 Lakh
10,500
Interest on Capital @ 7% on 1.5 lakh
30,750
Sub-total (c)
1,12,490
Grand Total (a + b + c)
Note-1
Coal consumption =

II-7

0.0205
0.0750

= 1020.58

Cost = (1020.58 33.06) = ` 33,740


2011 - Dec [6] (a) Following are the particulars given by the owner
of a hotel. You, as a Cost & Management Accountant, are
requested to advise him that what rent should he charge from his
customers per day so that he is able to earn 25% on cost other than
interest:
(i) Staff salaries ` 80,000 per annum.
(ii) Room attendants salary ` 2 per day. The salary is paid on
daily basis and services of room attendant are needed only
when the room is occupied. There is one room attendant for
one room.
(iii) Lighting, heating and power. The normal lighting expenses
for a room if it is occupied for the whole month is ` 50.
Power is used only in winter and normal charge per month
if occupied for a room is ` 20.
(iv) Repairs to Building` 10,000 per annum.
(v) Linen, etc.` 4,800 per annum.
(vi) Sundries` 6,600 per annum.
(vii) Interior decoration, etc.` 10,000 per annum.
(viii) Cost of Building at ` 4,00,000 and its depreciation rate is
5%.
(ix) Other equipment at ` 1,00,000 and its depreciation rate is
10%.
(x) Interest @ 5% may be charged on its investment in the
buildings and equipment.
(xi) There are 100 rooms in the Hotel and 80% of the rooms are
normally occupied in summer and 30% rooms are busy in
winter.
[You may assume that period of summer and winter is six months
each. Normal days in a month may be assumed to be 30.]
(10 marks)

Appendix ICWA Inter Gr. II Paper 8

II-8

2011 - Dec [8] Write short notes on the following :


(b) Inter-Locking Accounts;
(5 marks)
Chapter-10 : Reconciliation of Cost and Financial Accounts
2011 - June [7] (a)
Answer :
List of expenses which are of purely financial nature and
recorded in financial accounts only and not recorded in cost
accounts.
The following items are not recorded in cost accounts as they are
of purely financial nature.
(A) Appropriation of profits:C Provision for taxation,
C Transfer to reserves,
C Goodwill
C Preliminary expenses written off.
(B) Purely financial charges:C Losses on sale of assets
C Bad debts written off, recovered
C Fines and penalties payable
C Interest on proprietors capital
C
Compensation payable.
(C) Purely financial incomes:Interest received on bank deposits,
C Dividend, interest received on investments.
C Rent received
C Transfer fees received
Chapter-11 : Marginal Costing and Decision Making
2011 - June [4] (b)
Answer :
Composition of Contribution at Various price level
Particulars

Present
Level

Proposal (i)

Proposal (ii)
(a)

Quantities in
Units

(c)

70,000

50,000

70,000

75,000

75

40,000 @ ` 75
30,000 @ ` 55

70

67

64

50

50

50

50

50

10 lakh

11.90

10.5

Selling price
per unit (`)
Variable cost
per
unit (`)
Total

(b)

40,000

10 lakhs 10.00 lakh (40,000

Appendix ICWA Inter Gr. II Paper 8


Contribution
(`)

(40,000 25)

25) +
1.5 lakh (30,000
5) = 11.50

(50,000
20)

Lakhs
(70,000
17)

II-9
lakhs
(75,000
14)

2011 - Dec [2] (a) A company prepares a budget for a production


of 200000 units. Variable cost per unit is ` 15 and the fixed cost is
` 2 per unit. The company fixes its selling price to fetch a profit of
10% on cost.
(i) What is the break-even point? (both in units and in `)
(ii) What is profit volume ratio?
(iii) If it reduces its selling price by 5%, how does the revised
selling price affect the break-even point and the profit
volume ratio?
(iv) If a profit increase of 10% is desired more than the budget,
what should be the sales at the reduced price ?
(3 + 2 + 3 + 2 = 10 marks)
(b) State briefly the effect on profitability under marginal costing and
absorption costing.
(5 marks)
2011 - Dec [7] (a) M/s. Jupiter & Co. Ltd. manufactures a product
in its factory which presently utilises 60% of its capacity. The cost
details including selling price are given below:
`
Sales 6000 units
5,40,000
Direct Materials
96,000
Direct Labour
1,20,000
Direct Expenses
20,000
Factory Overheads
2,00,000
Administration Overheads
21,000
Selling and Distribution Overheads
25,000
Out of fixed overheads, 12.5% and 20% of selling and distribution
overheads variable with production and sales. Administration
overheads are wholly fixed.
Now, it is revealed that existing product could not achieve budgeted
level for two consecutive years, the management decides to
introduce a new product with marginal investment but largely using
present plant and machinery.
The cost data of the new product is given below:
`
Direct Materials
16 per unit
Direct Labour
15 per unit
Direct Expenses
2 per unit
Variable Factory Overheads
2 per unit
Variable Selling & Distribution Overheads
1.5 per unit

Appendix ICWA Inter Gr. II Paper 8

II-10

Marketing Manager of the company is expecting to sell 2000 units


of new product at a price of ` 60 per unit.
The fixed factory overheads are expected to increase by 10% and
fixed selling and distribution expenses will go up by ` 13,500
annually. Administration overheads will remain unchanged.
You are advised to give your opinion. Should the new product be
introduced?
(3 + 3 + 3 + 1 = 10 marks)
Chapter-12 : Activity Based Costing
2011 - June [6] (a)
Answer :
(i) Calculated of Cost driver rates:
Material procurement
` 11,60,000 2,200 = ` 527
Material Handling
` 5,00,000 1,360 = ` 368
Set up
` 8,30,000 1,040 = ` 798
Maintenance
` 19,40,000 16,800 = ` 115
Quality control
` 3,52,000 1,800 = ` 195
Machinery
` 14,40,000 v 48,000 = ` 30
(ii) Calculation of price cost of batch of 5,200 components
Direct Material
= ` 2,60,000
Direct Labour
= ` 4,90,000
` 7,50,000
(iii) Overhead are charged to the batch as below:
Material procurement
52 527
= ` 27,404
Material Handling
36 368
= ` 13,248
Set up
50 798
=
` 39,900
Maintenance
1,380 115
= ` 1,58,700
Quality control
56 195
=
` 10,920
Machinery
3,600 30
= ` 1,08,000
Total overhead absorbed
= ` 3,58,172
Total cost of production of the batch of 5,200 components
Price cost
` 7,50,000
Overhead as per Activity Based Costing(ABC)
` 3,58,157
` 11,08,172

Appendix ICWA Inter Gr. II Paper 8

II-11

Chapter-13 : Budgetary Control


2011 - June [5] (a)
Answer :
Flexible budget for overhead
Particulars
Capacity Level
70%
`
A.
B.

C.

D.

E.
F.
G.

80%
`

90%
`

Variable overhead:
10,500 12,000 13,500
(i) Indirect Labour
4,000
4,500
3,500
(ii) Indirect Material
Variable portion of Semi- variable
overhead:
12,250 14,000 15,750
(i) Power
800
900
700
(ii) Repair & maintenance
26,950 30,800 34,650
Total Variable (a)
Fixed portion of semi variable
overhead;
6,000
6,000
6,000
(i) Power
1,200
1,200
1,200
(ii) Repair & maintenance
Fixed overhead
11,000 11,000 11,000
(i) Depreciation
3,000
3,000
3,300
(ii) Insurance
10,000 10,000 10,000
(iii) Others
31,200 31,200 31,200
Total Fixed(b)
58,150 62,000 65,850
Total Over head[(a) + (b)]
1,08,500 1,24,000 1,39,500
Estimated direct Cost
Overhead recovery rate per direct
0.5359 0.5000 0.4720
labour hrs.

Working Notes:
Variable overhead
(i) Indirect labour

(ii) Indirect material

12,000

= ` 10,500

12,000

= ` 13,500

4,000

= ` 3,500

4,000

= ` 4,500

Semi variable overhead


Power (70% variable 30% fixed)
(i) Variable overhead

20,000

= ` 14,500

Appendix ICWA Inter Gr. II Paper 8


14,000

= ` 12,250

14,000

= ` 15,750

II-12

(ii) Repair & maintenance (40% variable 60% fixed)


Variable overhead

2,000

= ` 800

800

= ` 700

800

= ` 900

Estimated direct labour hour at 80% capacity = 1,24,000


1,24,000

= 1,08,500 hrs

1,24,000

= 1,39,500 hrs

2011 - June [8] (b),(d)


Answer :
(b) Budgetary Control:- It is system and a technique which uses
budget as a means of controlling all aspects of the business.
CIMA states that Budgetary control is the establishment of
budget relating to the responsibilities of executives of a policy
and the continuous comparison of the actual with the
budgeted result, either to secure by individual action the
objective of the policy or to provide a basis for its revision.
Purpose
The purpose of budgetary control is to aid in systematic
planning and control of business operations from period to
period.
Objectives
C It helps in determination of targets of performance.
C It provides detailed plan of action.
C It brings coordination among managers.
C Setting up of responsibilities of managers.
C It provides a basis of comparison.
C Best use of resource to maximize profits.
C It helps in analysis of variances.
C Basis for revision of policies.
(d) Material Purchase Budget:- Material Purchase Budget tells
about the materials to be acquired from the market during the

Appendix ICWA Inter Gr. II Paper 8

II-13

budget period. Materials to be acquired are estimated after


taking into account the closing inventory and the opening
inventory of the materials for which orders have already been
placed.
This budget is prepared in quantity as well as in monetary
terms and helps in planning of the purchases of raw materials.
Availability of storage ,space, financial resources , various
levels of raw materials like maximum level, minimum level,
reorder level etc. are taken in to consideration while preparing
material purchase budget.
2011 - Dec [3] (a) The following facts are extracted from the books
of Alpha Radio Manufacturing Company for the year 2010.
(i) It produces two types of radioType A and Type B and sells
these in two marketsKolkata and Siliguri.
(ii) The budgeted and actual sales for the year 2010 are as
follows:
Kolkata
Type ABudgeted
Actual
Type BBudgeted
Actual

1000 units at ` 200 each


900 units at ` 200 each
800 units at ` 300 each
1000 units at ` 300 each

Siliguri
800 units at ` 200 each
750 units at ` 200 each
600 units at ` 300 each
750 units at ` 300 each

Analysis of variance discloses that Type A is overpriced and Type


B is underpriced. If the price of A Type radio set is reduced by 10%
and price of B Type ratio set is increased by 20% and if a modern
and extensive advertisement campaign is introduced, then the
following volume of sales could be made in the next year as
expected by the Marketing Manager.
Expected increase/decrease
Kolkata Siliguri
over the current budget
Market Market
Product A: Due to change in pricing policy + 20% + 15%
Due to introduction of modern
advertisement campaign
+ 5%
+ 3%
Product B: Due to change in pricing policy + 10% (!)2%
Due to introduction of modern
advertisement campaign
+ 5%
+ 5%
On the basis of above you are required to prepare sales budget for
the year 2011.
(10 marks)
(b) State the difference between Forecast and Budget. (5 marks)
2011 - Dec [5] (a) Budgets are classified according to Time. State
how they are classified.
(5 marks)

Appendix ICWA Inter Gr. II Paper 8

II-14

2011 - Dec [8] Write short notes on the following:


(d) Principal Budget Factor;
(5 marks)
Chapter-17 : Transfer Pricing
2011 - June [3] (a)
Answer :
Budgeted volume of production per year = 5,00,000 units
Profit margin per unit = 3,00,000/5,00,000 = ` 0.60
Transfer price for Division A
`
Variable cost per unit
10.00
Fixed cost per unit ` 9,00,000/ ` 5,00,000
1.80
Profit margin per unit ` 3,00,000/ ` 50,000
0.60
Transfer price per unit
12.40
2011 - Dec [8] Write short notes on the following :
(a) Limitations of market-based transfer pricing;
(5 marks)
Chapter-19 : Objective Questions
2011 - June [1] {C} (a)
Answer :
(a) (i) (e)
(ii) (d)
(iii) (c)
(iv) (a)
(v) (b)
(b) (i) False
(ii) True
(iii) True
(iv) False
(v) True
(c) (i) Maximum, maximum
(ii) Differential
(iii) Joined, left
(iv) Abnormal Gain
(v) Uniform
(d) (i) (C)
(ii) (B)
(iii) (C)
(iv) (B)
(v) (B)

Appendix ICWA Inter Gr. II Paper 8

II-15

2011 - Dec [1] {C} (a) Match the statement in Column I with the
appropriate statement in Column II:
Column I
Column II
(i) Performance of Public
(a) Measures Divisional
Enterprises
Performance
(ii) Residual Income
(b) Purchase Order Processed
(iii) Cost Driver
(c) Future Costs affected by
decision making
(iv) Point Rating
(d) Shows profitability and
capacity utilization
(v) Relevant Cost
(e) Job Evaluation
(1 5 = 5 marks)
(b) State whether the following statements are True or False:
(i) Incentive systems benefit only workers.
(ii) Service departments do not render services to each other.
(iii) Contract costing is only a variant of Job costing.
(iv) Differential costing and Marginal costing mean the same
thing.
(v) Standards are arrived at based on past performance.
(1 5 = 5 marks)
(c) Fill-up the blanks suitably:
(i) In absorption costing ________ cost is added to inventory.
(ii) ________ becomes more effective in a firm with the use of
standard costing.
(iii) In make or buy decision, it is profitable to buy from outside
only when the suppliers price is below the firms own
_________.
(iv) A cost which does not involve any cash outflow is called
______.
(v) ________ costing reduces the possibility of under pricing.
(1 5 = 5 marks)
(d) In the following cases, one out of four answers is correct. You
are required to indicate the correct answer and give brief workings:
(i) XYZ Co. Ltd. is having 400 workers at the beginning of the
year and 500 workers at the end of the year. During the year
20 workers were discharged and 15 workers left the
company. The Labour Turnover rate under separation
method is:
(a) 22.20%
(b) 7.78%
(c) 4.00%
(d) 14.40%

Appendix ICWA Inter Gr. II Paper 8


(ii)

(iii)

(iv)

(v)

II-16

A factory operates a standard cost system, where 2000 kgs


of raw materials @ ` 12 per kg were used for a product,
resulting in price variance of ` 6,000 (F) and usage variance
of ` 3,000 (A). Then standard material cost of actual
production was
(a) ` 20,000
(b) ` 30,000
(c) ` 25,000
(d) ` 27,000
A company maintains a margin of safety of 25% on its
current sales and earns a profit of ` 30 lakhs per annum. If
the company has a p/v ratio of 40%, its current sales
amount to
(a) ` 200 lakhs
(b) ` 300 lakhs
(c) ` 325 lakhs
(d) None of the above
The annual demand of a certain product is 8000 units,
ordering cost per order is ` 40, carrying cost is 10% of
average inventory value and purchase cost is ` 10 per unit.
The EOQ for the product is
(a) 1,200
(b) 1,000
(c) 900
(d) 800
Sales for two consecutive months of a company are `
3,80,000 and ` 4,20,000. The companys net profits for
these months amounted to ` 24,000 and ` 40,000
respectively. There is no change in P/V ratio or fixed costs.
The P/V ratio of the company is
(a)
(b) 40%
(c) 25%
(d) None of the above

(2 5 = 10 marks)

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