2019

COST AND MANAGEMENT ACCOUNTING-I — HONOURS

First Paper
(CC 2.1 Ch)
Full Marks: 80
The figure in the margin indicate full marks.
Candidates are required to give their answers in their own words
as far as practicable.
Group – A
(Marks – 20)
Choose the correct option in each of the following questions:
1. What do you mean by the term ‘Cost’? State how cost is classified behaviour-wise and element-
wise.
Ans.
Cost is the amount of resources used for some definite activity or purpose. Cost is incurred for the
production of goods or rendering of services. Cost includes both actual cost (i.e., outflow of cash)
and notional (i.e., imputed) cost.
The elements that constitute the cost of production are known as elements of cost. There are three
elements of cost, namely, Materials cost, Labour (or Employee) cost and Expenses.
Cost can also be classified on the basis of its behaviour as Variable cost, Fixed cost and Semi-
variable cost.
Or,
State the essentials of a good cost accounting system.

Ans.

A sound cost accounting system should be installed in all manufacturing organizations. This is
necessary for appropriate treatment of various costs and correct reporting of cost information. The
essentials of a good cost accounting system are as follows:
(i) The system should be easy to apply and understandable to all interested parties.
(ii) The costs of installing and operating the system should be economical.
(iii) The technical aspects and human factors should get equal attention after considering the
manufacturing process.
(iv) The system should be helpful for taking various managerial decisions.
(v) The system should be installed by considering the nature of the organization and the product
to be produced.
(vi) The volume of clerical work and costs should be kept minimum.
2. (a) What do you mean by sunk cost?

(b) Mention the cost unit to be applicable against each of the following industries:
(i) Road transport
(ii) Nursing home
(iii) Sugar Industry
(iv) Electricity generation
(v) Cable industry
(vi) Gas

Ans.

(a) Sunk cost is the historical cost that has already been incurred and written off. This cost is of
little importance in future decision making purposes. For example, when an old machine is to be
replaced by a new machine, the depreciated book value (i.e., written down value) of the old
machine is a sunk cost.

(b) Cost unit appropriate for the following industries:

Name of Industry Applicable Cost Unit

(i) Road Transport (i) Passenger-kilometer / Tonne-kilometer

(ii) Nursing Home
(iii) Sugar industry
(iv) Electricity generation
(v) Cable industry
(vi) Gas
(ii) Per day / Per bed
(iii) Tonne / Kg.
(iv) Kilowatt-hour (KWH)
(v) Number of connections / Number of customers
(vi) Cubic foot / Cubic meter

3. From the following particulars calculate the machine hour rate for Machine No. 707 :

Total standing charges for the year ₹ 5,400

Cost of power per unit ₹ 1.20

The machine consumes 4 units of power per hour.

Machine No. 707 is expected to work 2,000 hours p.a. out of which normal idle time is estimated
at 8% of total working hours and time for routine maintenance is estimated at 40 hours p.a.

Ans.

Working Notes:
(a) Effective Machine Hours available per annum
Expected machine hours available 2,000 Hours
Less: Normal Idle Time (8% of available working hours) 160 Hours
1,840 Hours
Less: Time required for routine maintenance 40 Hours
Effective Machine Hours available 1,800 Hours
(b) Power consumption per annum
The machine consumes 4 units of power per hour.
Therefore, Total power consumption = 1,800 Hours × 4 units per hour = 7,200 units
 (c) Power cost per annum
Power cost per unit = Rs. 1.20
Total power cost = 7,200 units × Rs. 1.20 per unit = Rs. 8,640

Computation of Machine Hour Rate (MHR) for Machine No. 707

(i) Variable Cost
Power cost per annum [Note (c)] Rs. 8,640

(ii) Fixed Cost

Standing charges per annum Rs. 5,400
Total Cost Rs.14,040
Effective Machine Hours available [Note (a)] 1,800 Hours
Machine Hour Rate (Rs. 14,040 / 1,800 Hours) Rs. 7.80 per hour

Or

What do you mean by under and over absorption of factory overhead? State any two methods of
treatment of such under and over absorption in cost accounts.

Ans.

Under and over absorption of factory overhead

If factory overhead absorbed (recovered) exceeds the actual factory overhead, then the excess of
absorbed overhead over the actual overhead is called over absorption of factory overhead.
On the other hand, when actual factory overhead is more than the absorbed factory overhead, then
the excess of actual overhead over the absorbed overhead is called under absorption of factory
overhead.
(a) Factory overhead absorbed – Factory overhead incurred = Positive value (It implies over-
absorption of factory overhead).
(b) Factory overhead absorbed – Factory overhead incurred = Negative value (It implies under-
absorption of factory overhead).

4. The following particulars are available in respect of a contract as on 31.03.2019 :

₹
Contract price 10,00,000
Total Cost of contract till 31.03.2019 5,50,000
Cost of uncertified work 25,000
Cash received (retention money being 15%) 5,31,250

Compute the amount of profit that may be transferred to Profit & Loss Account and the value of
Work-in-Progress.

Ans.
 Working Notes:

(a) Value of certified work

Cash Received (i.e., 85% of Certified Work) = Rs. 5,31,250 [As Retention money is 15%]
Therefore, 85% of Certified Work = Rs. 5,31,250.
Certified Work = Rs. 5,31,250 / 85% = Rs. 6,25,000
(b) Percentage of work certified = (Rs. 6,25,000 / Rs. 10,00,000) × 100 = 62.5%
(c) Computation of Notional Profit
Work Certified Rs. 6,25,000
Add: Cost of Uncertified Work Rs. 25,000
Rs. 6,50,000
Less: Total Cost of Contract Rs. 5,50,000
Notional Profit Rs. 1,00,000

(d) Profit to be taken to the credit of Costing Profit & Loss Account
⅔ × Notional Profit × (Cash Received / Work Certified)
= ⅔ × Rs. 1,00,000 × (Rs.5,31,250 / Rs. 6,25,000) = Rs. 56,667
(e) Value of Work-in-Progress
Cost of work completed (i.e., Total cost of contract) Rs. 5,50,000
Add: Profit credited to Costing Profit & Loss Account Rs. 56,667
Rs. 6,06,667
Less: Cash Received Rs. 5,31,250
Work-in-Progress Rs. 75,417

Group – B
(Marks – 30)

5. (a) Discuss the concept of Economic Ordering Quantity.

(b) The following data are available in respect of a component used in a factory:
Annual Usage 2,000 units
Cost per unit ₹ 100
Ordering cost per order ₹ 400.
Carrying cost per unit per annum 10%
(i) Calculate EOQ and frequency of order per annum.
(ii) Evaluate the proposal of buying 1,000 units in a lot if discount @ 2% is available.

Ans.
(a) Economic order quantity (E.O.Q.) represents the most favourable quantity to be ordered at the
re-order point. E.O.Q. balances two opposite natured costs, namely, ordering costs and carrying
costs. At E.O.Q., ordering costs equal to carrying costs and as a result, the total cost is minimum.
(b) (i) Computation of Economic Order Quantity (E.O.Q.)
U = Annual usage = 2,000 units;
O = Ordering Cost = Rs. 400 per order
 C = Carrying Cost per unit p.a. = 10% of Rs. 100 = Rs. 10
Therefore, E.O.Q. = √(2.U.O./ C) = √ (2 × 2,000 × 400) / 10 = 400 units
Number of orders to be placed = Annual Usage / E.O.Q. = 2,000 units / 400 units = 5 orders
Frequency (i.e., Time gap between orders) of order = 365 days / 5 orders = 73 days per order.
(ii) Evaluation of alternative proposal
(a) Total cost of existing situation (when EOQ is maintained)
Materials Cost (2,000 units × Rs. 100 per unit) Rs. 2,00,000
Ordering Cost (Rs. 400 per order × 5 orders) Rs. 2,000
Carrying Cost (400 units / 2 × Rs. 10 per unit) Rs. 2,000
Total Cost Rs. 2,04,000

(b) Total cost of alternative proposal ( i.e., availing 2% discount for buying 1,000
units)
Materials Cost (2,000 units × Rs. 98 per unit) Rs. 1,96,000
Ordering Cost (Rs. 400 per order × 2 orders) Rs. 800
Carrying Cost (1,000 units / 2 × 10% of Rs. 98) Rs. 4,900
Total Cost Rs. 2,01,700
Therefore, 1,000 units should be purchased at a time as total cost is lower in alternative
proposal.

Or,

The particulars of receipts and issues of materials in a factory in March, 2019 are as under :
March 1 Opening balance 1000 kgs @ ₹ 5 per kg.
8 Purchased 2000 kgs @ ₹ 6 per kg.
17 Issued 1400 kgs
21 Purchased 1000 kgs @ ₹ 7 per kg.
30 Issued 2000 kgs
Calculate the value of stock as on 31-03-2019 and the value of materials issued using LIFO method
and Weighted Average method. (Preparation of stores Ledger Account is not mandatory).

Ans.
(i) Value of Closing Stock (Under LIFO Method)
Closing Stock = Opening Stock + Total Purchase Cost – Cost of goods issued
= (1,000 × 5) + [(2,000 × 6) + (1,000 × 7)] – [(1,000 × 7 + 400 × 6) + (1,600 × 6 + 400 × 5)]
= 5,000 + [12,000 + 7,000] – [9,400 + 11,600]
= 5,000 + 19,000 – 21,000 = Rs. 3,000
(ii) Value of Closing Stock (Under Weighted Average Method)
Closing Stock = Opening Stock + Total Purchase Cost – Cost of goods issued
= (1,000 × 5) + [(2,000 × 6) + (1,000 × 7)] – [1,400 × 5.67 (Note-1) + 2,000 × 6.18 (Note -2)]
= 5,000 + [12,000 + 7,000] – [7,938 + 12,360]
= 5,000 + 19,000 – 20,298 = Rs. 3,702
Working Notes:
1. Rate of first issue = [(1,000 units × Rs. 5 per unit) + (2,000 units × Rs. 6 per unit)] ÷ 3,000 units
= [Rs. 5,000 + Rs. 12,000] ÷ 3,000 units
= Rs. 5.67 per unit
2. Rate of second issue = [(Balance 1,600 units × Rs. 5.67 per unit) + (1,000 units × Rs. 7 per unit)] ÷ 2,600
units

= [Rs. 9,072 + Rs. 7,000] ÷ 2,600 units

= Rs. 6.18 per unit

6. In respect of the production department of a factory, following information’s are available :

(i) Total number of direct workers 10

(ii) Hourly rate of wages (guaranteed) ₹2
(iii) Number of working days in the month 25
(iv) Number of working hours per day for each worker 8
(v) Actual production during the month 1,000 units

In view of the increased demand for the product, the management proposes to introduce either
Halsey (50% bonus) or Rowan Incentive Scheme of wage payment, whichever will yield maximum
increase in earning, if the workers can increase productivity by at least 25%.

The workmen accepted the proposal and achieved the production of 1,300 units in the following
month. You are required to:
(a) Calculate the effective rate of earnings per hour under Halsey Scheme and Rowan Scheme
considering the time taken previously for producing 1 unit as time allowed.
(b) Calculate the savings to the management in terms of direct labour cost per unit under the
schemes.
(c) Advise the management about the selection of the scheme to fulfil its assurance.

Ans.
Working Notes:
(i) Actual time worked per month = 8 hours per day × 25 days × 10 workers = 2,000 labour hours
(ii) Average (or Standard) time for producing one unit = 2,000 labour hours / 1,000 units
= 2 labour hours per unit
(iii) Standard time required for producing 1,300 units = 1,300 units × 2 labour hours per unit
= 2,600 labour hours
(iv) Time Saved = S.T. – A.T. = 2,600 labour hours – 2,000 labour hours = 600 labour hours
(v) Incentive scheme of wage payment is available to workers provided their productivity increases by
at least 25%.
Increase in production due to rise in productivity of workers = 1,300 units – 1,000 units = 300 units.
Percentage increase in production = (300 units / 1,000 units) × 100 = 30% (i.e., above 25%).
(vi) Earnings under Halsey Scheme:
Earnings = Time taken × Rate per hour + 50% of Time Saved × Rate per hour
= 2,000 hours × Rs. 2 per hour + 50% of 600 hours × Rs. 2 per hour = Rs. 4,000 + Rs. 600 = Rs. 4,600
Earnings under Rowan Scheme:
Earnings = Time taken × Rate per hour + (Time Saved / Standard time) × Time taken × Rate per hour
= 2,000 hours × Rs. 2 per hour + (600 hours / 2,600 hours) × 2,000 hours × Rs. 2 per hour
= Rs. 4,000 + Rs. 923 = Rs. 4,923.
(a) Effective Rate of Earnings:
Halsey Scheme = Rs. 4,600 / 2,000 hours = Rs. 2.30 per hour
Rowan Scheme = Rs. 4,923 / 2,000 hours = Rs. 2.46 per hour
(b) Savings to the management in terms of Labour Cost:
Halsey Scheme:
(I) Labour Cost per unit (under Time Wage) = 2 hours × Rs. 2 per hour = Rs. 4
(II) Labour Cost per unit (under Halsey Scheme) = Rs. 4,600 / 1,300 units = Rs 3.54
(III) Savings in Labour Cost = Rs. 4.00 – Rs. 3.54 = Rs. 0.46 per unit

Rowan Scheme:
(I) Labour Cost per unit (under Time Wage) = 2 hours × Rs. 2 per hour = Rs. 4
(II) Labour Cost per unit (under Rowan Scheme) = Rs. 4,923 / 1,300 units = Rs 3.79
(III) Savings in Labour Cost = Rs. 4.00 – Rs. 3.79 = Rs. 0.21 per unit

(c) Advice to the management:

Halsey Scheme ensures more savings in Labour Cost per unit than Rowan Scheme. Therefore,
the management should accept Halsey Scheme of incentive plan so as to fulfill its assurance to
the workers.

Or,
What is overtime premium? How can it be treated in cost accounts? Suggest two steps that can be
taken to control overtime.

Ans.
Overtime refers to the situation when a worker works beyond his normal working hours. The
additional amount spent on overtime work is known as overtime wage. Generally, overtime is
paid at a higher rate than the normal rate of wage. Overtime premium is the payment at extra
rate over the normal rate.
Overtime wages = Wages at normal at + Overtime Premium
Or, Overtime Premium = Overtime wages – Wages at normal rate.

7. The cost book of R. Ltd. showed a net profit of ₹ 86,200 for the period 2018-19. A scrutiny of the
figures from financial books and cost books revealed the following facts:
(₹)
Works overhead under-recovered 1,560
Administration overhead over-recovered 850
Depreciation charged in : in financial accounts 5,600
: in cost accounts 6,250
Interest on investment on recorded in cost book 4,000
Income tax provided in financial accounts 20,150
 Bank interest and transfer fees recorded only in financial books 375
Value of opening stock in : Cost accounts 24,800
: Financial accounts 26,300
Goodwill written off 5,000
Loss on sale of furniture 600

Prepare a statement showing the reconciliation between the profits as revealed by the two sets of
books.

Ans.
Reconciliation of Profits for the year 2018-19

Particulars Amount Amount

(Rs.) (Rs.)
Net Profit as per Cost Accounts 86,200
Add:
(i) Over-recovery of Administration Overhead in Cost Accounts 850
(ii) Depreciation over charged in Cost Accounts (Rs.6,250 – Rs. 5,600) 650
(iii) Interest on investment (i.e., income) not recorded in Cost Accounts 4,000
5,500
Less: 91,700
(i) Under-recovery of Works Overhead in Cost Accounts 1,560
(ii) Bank interest and transfer fees not recorded in Cost Accounts 375
(iii) Under valuation of Opening Stock in Cost Accounts (26,300 – 24,800) 1,500
(iv) Loss on sale of furniture not recorded in Cost Accounts 600
4,035
Net Profit as per Financial Accounts 87,665

Note: Income Tax and Goodwill written off will not affect the Net Profit as per Financial Profit
& Loss Account. Therefore, these items are excluded in the preparation of Reconciliation
Statement.

Group – C
(Marks – 30)

8. Ultra Ltd. supplies the following details in respect of a truck of 5-tonne capacity :

Cost of truck - ₹ 18,00,000; Estimated life – 10 years; Lubricant - ₹ 150 per trip each wat; Repairs
and maintenance - ₹ 10,000 p.m.; Driver’s wage - ₹ 15,000 p.m.; Cleaner’s wage - ₹ 5,000 p.m.;
Insurance, tax and others - ₹ 1,20,000 p.a.
The truck gives an average of 10 kms per litre of diesel and cost of diesel is ₹ 65 per litre.
The truck carries goods to and from the city covering a distance of 50 kms each way.
On outward trip, freight is available to the extent of 80% capacity and on return 20% of capacity.
The truck runs on an average 25 days a month.
Calculate the operating cost per tonne-km and the rate per tonne-km that the company should
charge if a profit of 50% on freightage is to be earned.

Ans.
 Working Notes:
(a) Tonne-km. per month:
Outward Trip = (80% of 5 Tonne) × 50 Km. per day × 25 days = 5,000 Tonne-km.
Inward Trip = (20% of 5 Tonne) × 50 Km. per day × 25 days = 1,250 Tonne-km.
Total 6,250 Tonne-km.
(b) Depreciation of Truck = Rs. 18,00,000 / 10 years = Rs. 1,80,000 per year.
(c) Cost of Diesel per month:
Distance covered by the truck per month = 50 km. per day in each run × 2 × 25 days = 2,500 km.
Consumption of Diesel per month = 2,500 km. / 10 km. per liter = 250 liters
Cost of Diesel per month = 250 liters × Rs. 65 per liter = Rs. 16,250
Operating Cost of the Truck per month
Particulars Amount per month
(Rs.)
Depreciation of Truck (Rs. 1,80,000 / 12 months) [Note (b)] 15,000
Diesel Cost [Note (c)] 16,250
Lubricant Cost (Rs. 150 each way × 2 × 25 days) 7,500
Repairs and Maintenance 10,000
Driver’s Wage 15,000
Cleaner’s Wage 5,000
Insurance, Tax and Others (Rs. 1,20,000 / 12 months) 10,000
Operating Cost per month 78,750
Tonne-km. per month [Note (a)] 6,250 Tonne-km.
Operating Cost per Tonne-km. (Rs. 78,750 / 6,250 Tonne-km.) Rs. 12.60
Add: Profit (50% on freight Or, 100% on Operating Cost of Rs. 12.60) Rs. 12.60
Freight to be charged per Tonne- Rs. 25.20
km.
(i) Operating cost = Rs. 12.60 per Tonne-km.
(ii) Freight to be charged = Rs. 25.20 per Tonne-km.

Or,
Product Z passes through two processes before it is transferred to finished stock. The following
information is available :

Process A (₹) Process A (₹) Finished Stock (₹)

Materials 80,000 - -
Labour 1,04,000 1,80,000 -
Overhead 40,000 60,000 -
Closing stock at cost 32,000 80,000 60,000
Profit on transfer price 20% 20% -

There is no stock at the beginning. Sales were ₹ 8,20,000.

Prepare Process accounts and the Finished Stock account.

Ans.
 Dr. Process-A
Account Cr.
Particulars Amount Particulars Amount
(₹) (₹)
To Opening Stock Nil By Process–B Account 2,40,000
To Materials cost 80,000 (Output transferred)
To Labour cost 1,04,000
To Overheads 40,000
Prime Cost 2,24,000
Less: Closing Stock 32,000

Cost of Transfer 1,92,000

Add: Profit (20% on Transfer
price Or, 25% on Cost of transfer 48,000

Transfer Price 2,40,000 2,40,000

Dr. Process-B
Account Cr.
Particulars Amount Particulars Amount
(₹) (₹)
To Process – A Account 2,40,000 By Finished Stock Account 5,00,000
To Materials cost Nil (Output transferred)
To Labour cost 1,80,000
To Overheads 60,000
Prime Cost 4,80,000
Less: Closing Stock 80,000
Cost of Transfer 4,00,000
Add: Profit (20% on Transfer
price Or, 25% on Cost of transfer 1,00,000

Transfer Price 5,00,000 5,00,000

Dr. Finished Stock

Account Cr.
Particulars Amount Particulars Amount
(₹) (₹)
To Process – B Account 5,00,000 By Bank Account (Sales 8,20,000
To Costing Profit & Loss A/c 3,80,000 By Closing Stock Account 60,000
8,80,000 8,80,000
9. From the following particulars relating to production and sales for the year ended 31.03.2019,
prepare a statement showing cost and profit :

₹ ₹ ₹ ₹

Raw Materials 12,500 Direct Labour 1,35,000

(01.04.2018) Office Expenses ₹ 2 p.u. -
W.I.P (01.04.2018) Selling Expenses ₹ 1 p.u. -
At Prime cost 15,000 Distribution Expenses 15,000
Factory Expenses 3,000 Sales (28,000 units) 4,00,000
Raw Materials 20,000
(31.03.2019)
W.I.P. (31.03.2019)
18,000
At Prime Cost 10,000
Material purchased 1,10,000
Factory Expenses 8,000
Freight on material 5,000
Loss of material by fire 5,000
Factory expenses 70,000
Chargeable expense 25,000 18,000

Stock of finished goods:

Date Units Value (₹)

01.04.2018 8,000 60,000
31.03.2019 10,000 ?

Ans.

Cost Sheet for the year ending on 30th June, 2009

Particulars Amount ₹ Amount ₹
Raw materials consumed:
Opening stock 12,500
Add: Purchases 1,10,000
1,22,500
Less: Closing stock 20,000
1,02,500
Less: Loss of materials by fire (i.e., abnormal loss) 5,000
97,500
Add: Freight on raw material purchased 5,000 1,02,500
Direct labour cost 1,35,000
Chargeable expenses 25,000
2,62,500
Add: Opening work-in-progress (at prime cost) (+) 15,000
Less: Closing work-in-progress (at prime cost) (-) 10,000 (+)5,000
Prime Cost 2,67,500
Add: Factory overheads 70,000
3,37,500
Add: Opening work-in-progress (manufacturing expenses) (+) 3,000
Less: Closing work-in-progress (manufacturing expenses) (-) 8,000 (-)5,000
Works Cost 3,32,500
Add: Administration overheads [@ ₹2 on 30,000 units of production] 60,000
Cost of production (30,000 units) 3,92,500
Add: Opening finished stock (8,000 units) (+) 60,000

𝟑𝟑,𝟗𝟗𝟗𝟗,𝟓𝟓𝟓𝟓𝟓𝟓 (-) 1,30,833 (-) 70,833

Less: Closing finished stock (10,000 units) � × 𝟏𝟏𝟏𝟏, 𝟎𝟎𝟎𝟎𝟎𝟎�
𝟑𝟑𝟑𝟑,𝟎𝟎𝟎𝟎𝟎𝟎
Cost of goods sold (28,000 units) 3,21,667
 Add: Selling overheads [@ ₹ 28,000
Less: Closing work-in-progress (manufacturing expenses) 15,000
Cost of sales 3,64,667
4,00,000
Profit 35,333

Working Notes:
(1) Calculation of production in units (finished goods)
Opening stock 8,000
Add: Production 30,000 (Balancing figure by back calculation)
38,000
Less: Closing stock 10,000
Units sold 28,000
Opening Stock + Production = Sales + Closing Stock [in units]
Therefore, Production = 28,000 + 10,000 – 8,000 = 30,000 units
𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪 𝒐𝒐𝒐𝒐 𝒑𝒑𝒑𝒑𝒑𝒑𝒑𝒑𝒑𝒑𝒑𝒑𝒑𝒑𝒑𝒑𝒑𝒑𝒑𝒑 𝟑𝟑,𝟗𝟗𝟗𝟗,𝟓𝟓𝟓𝟓𝟓𝟓
(2) Cost of production per unit (current production) = = = 13.08333
𝑼𝑼𝑼𝑼𝑼𝑼𝑼𝑼𝑼𝑼 𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷𝑷 𝟑𝟑𝟑𝟑,𝟎𝟎𝟎𝟎𝟎𝟎
Therefore, the cost of 10,000 units (closing stock) = (10,000 × 13.08333) = 1,30,833 (approx..)
Total profit is ₹35,333 for 28,000 units sold.
𝟑𝟑𝟑𝟑,𝟑𝟑𝟑𝟑𝟑𝟑
Therefore, profit per unit = = ₹𝟏𝟏. 𝟐𝟐𝟐𝟐𝟐𝟐𝟐𝟐 (𝒂𝒂𝒂𝒂𝒂𝒂𝒂𝒂𝒂𝒂𝒂𝒂. )
𝟐𝟐𝟐𝟐,𝟎𝟎𝟎𝟎𝟎𝟎