ICAN MI (COSTING) WEEK 1 TOPICS: INTRODUCTION TO COSTING SUGGESTED SOLUTIONS

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1 KINDLY REFER TO CHAPTER 1 OF THE COMPREHENSIVE LECTURES TO READ UP THE TOPIC BEFORE YOU ATTEMPT THE QUESTIONS BELOW FOR PROPER UNDERSTANDING AS THE TOPIC HAS BEEN DISCUSSED IN THE SAID VIDEO LECTURES. THANKS ICAN MI (COSTING) WEEK 1 TOPICS: INTRODUCTION TO COSTING SUGGESTED SOLUTIONS STARRY GOLD ACADEMY , , info@starrygoldacademy.com, Page 1

2 1.. is the expenditure (actual or notional) incurred on or attributable to a given thing or described as the resources that have been sacrificed or must be sacrificed to attain a particular objective. A. Costing B. Cost C. Cost centre D. Cost unit THE CORRECT ANSWER IS B 2. The term that is used to classifying, recording, allocation and appropriation of expenses for the determination of cost of products or services and for the presentation of suitably arranged data for the purpose of control and guidance of management. A. Costing B. Cost C. Cost centre D. Cost unit STARRY GOLD ACADEMY , , info@starrygoldacademy.com, Page 2

3 THE CORRECT ANSWER IS A 3. primarily deals with collection, analysis of relevant of cost data for interpretation and presentation for various problems of management. A. Costing B. Cost accountancy C. Cost accounting D. Cost technique THE CORRECT ANSWER IS C 4. is a broader term and is defined as, the application of costing and cost accounting principles, methods and techniques to the science and art and practice of cost control and the ascertainment of profitability as well as presentation of information for the purpose of managerial decision making. A. Costing STARRY GOLD ACADEMY , , info@starrygoldacademy.com, Page 3

4 B. Cost accountancy C. Cost accounting D. Cost technique THE CORRECT ANSWER IS B 5. One of the following is a feature of cost control A. Cost control is a continuous process and involves setting standards and budgets for deciding targets of different expenses and constant comparison of actual the budgeted and standards. B. Cost control involves creation of responsibilities centre with clearly defined authorities and responsibilities. C. It also involves, timely cost control reports showing the variances between standard and actual performance. D. All of the above THE CORRECT ANSWER IS D STARRY GOLD ACADEMY , , info@starrygoldacademy.com, Page 4

5 6. Which of the following is an objective of cost accounting? A. To indicate to the management any inefficiencies and the extent of various forms of waste, whether of materials, time, expenses or in the use of machinery, equipment and tools. Analysis of the causes of unsatisfactory results may indicate remedial measures. B. To provide data for periodical profit and loss accounts and balance sheets at such intervals, e.g., weekly, monthly or quarterly, as may be desired by the management during the financial year, not only for the whole business but also by departments or individual products. Also, to explain in detail the exact reasons for profit or loss revealed in total, in the profit and loss account. C. To reveal sources of economies in production having regard to methods, types of equipment, design, output and layout. Daily, weekly, monthly or quarterly information may be necessary to ensure prompt and constructive action. D. All of the above THE CORRECT ANSWER IS D STARRY GOLD ACADEMY , , info@starrygoldacademy.com, Page 5

6 7. Which of the following best explains the major importance of cost accounting? A. Cost accounting helps in channelizing production on right lines - proper costing information makes it possible for the management to distinguish between profitable and non-profitable activities. Profits can be maximized by concentrating on profitable operations and eliminating non-profitable ones. B. Cost accounting eliminates wastages As cost accounting is concerned with detailed break-up of costs, it is possible to check various forms of wastages or losses. C. Cost accounting makes comparisons possible Proper maintenance of costing records provides various costing data for comparisons which in turn helps the management in formulation of future lines of action. D. All of the above THE CORRECT ANSWER IS D 8. The three broad elements of costs include the following A. Historical, pre-determined and estimated costs B. Material, labour and expenses STARRY GOLD ACADEMY , , info@starrygoldacademy.com, Page 6

7 C. Total, fixed and variable D. Material, direct and indirect THE CORRECT ANSWER IS B 9. The major distinguishing feature of fixed and variable cost is that fixed costs are those costs that remain constant throughout the production period whereas variable costs are those costs that vary with the level of output. A. True B. False C. Undecided D. Ambiguous THE CORRECT ANSWER IS A 10.. are costs that contain fixed and variable elements and because of the variable element, they fluctuate with volume and because of the fixed element; they do not change in direct proportion to output. A. Total cost B. Average cost STARRY GOLD ACADEMY , , info@starrygoldacademy.com, Page 7

8 C. Marginal cost D. Semi-fixed (semi variable) costs THE CORRECT ANSWER IS D 11. Functional costs can be simply classified into which of the following A. Manufacturing / production Costs B. Administration Cost C. Selling and distribution cost D. All of the above THE CORRECT ANSWER IS D 12. The cost of replacing an asset at current market values is called.. A. Conversion cost B. Controllable cost C. Uncontrollable cost D. Replacement cost THE CORRECT ANSWER IS D STARRY GOLD ACADEMY , , info@starrygoldacademy.com, Page 8

9 13. One of the following is a major principle of costing A. There must be a close relationship between cost and what is being costed B. Appropriate cost should be charged to cost unit or cost centre that enjoys the benefits of the cost C. The conservative convention should be ignored since it emphasizes the conservative valuation of assets in order to avoid the risk of paying dividends out of capital D. All of the above THE CORRECT ANSWER IS D 14. Which of the following is not among the techniques of costing? A. Absorption or total costing B. Marginal costing C. Standard costing D. Contract costing THE CORRECT ANSWER IS D STARRY GOLD ACADEMY , , info@starrygoldacademy.com, Page 9

10 15. Which of the following is a process involved in setting up a sound costing system? A. Ascertaining the objective of management in installing the system B. Ascertaining the information required by the management C. Ascertaining and understanding the technical features of the class of industry concerned D. All of the above THE CORRECT ANSWER IS D 16. A cost that has already been incurred and that cannot be changed by any decision made now or in the future is called. A. Differential cost B. Sunk cost C. Opportunity cost D. Product cost THE CORRECT ANSWER IS B STARRY GOLD ACADEMY , , info@starrygoldacademy.com, Page 10

11 17. Because of irregular power supply from Power Holding Company of Nigeria, Ray Power FM leased a 20KV generator from Holt leasing Nigeria Limited for electricity supply during power failure. The lease agreement calls for a flat monthly lease payment of N10,000 plus N300 for each hour that the generator is in operation. During the month of December, the generator set was operated for cumulative period of 50 hours. Determine the total cost of operating the generator set in the month of December by Ray Power FM. A. N15,000 B. N25,000 C. N35,000 D. N45,000 Total fixed cost = N10,000 Total variable cost = No. of operating hrs. X Rate per hr. = 50 X 300 = N15,000 Total operating cost for the month of December = FC + VC = N(10, ,000) = N25,000 STARRY GOLD ACADEMY , , info@starrygoldacademy.com, Page 11

12 THE CORRECT ANSWER IS B 18. The major difference between cost accounting and financial accounting is that.. A. Cost accounting information is meant for the use of internal decision makers of the business while financial accounting information is meant for both the management and external users B. Cost accounting is to aid internal decision making in the organization while financial accounting is to enable management to render accounts of its stewardships in terms of the profits generated in relation to the assets invested in the business C. The primary emphasis of cost accounting is segment reporting while the focus of financial accounting is on the totality of the business rather than the individual parts D. All of the above THE CORRECT ANSWER IS D STARRY GOLD ACADEMY , , info@starrygoldacademy.com, Page 12

13 19. The major difference that exists between sales and variable cost of the sales can be termed. A. Profit B. Revenue C. Contribution D. Direct cost THE CORRECT ANSWER IS C 20. A trader buys an article for N6 and then sells it for N10. What is the profit and contribution of the trader? A. N2000 / N2500 B. N4000 / N3000 C. N2500 / N2000 D. N3000 / N4000 From the question, Selling price = N10 Variable cost = N6 By formula, Contribution = Sales Variable cost STARRY GOLD ACADEMY , , info@starrygoldacademy.com, Page 13

14 = N(10 6) = N4 NOTE: Contribution is the difference between Sales and Variable cost. Profit = Contribution fixed cost That is, Profit is the difference between contribution and fixed cost. Since the question does not involve fixed cost, then it would be difficult to compute the profit. Therefore, Contribution is N4 STARRY GOLD ACADEMY , , info@starrygoldacademy.com, Page 14

15 THEORY PART ATTEMPT ALL QUESTIONS QUESTION 1 What do you understand by Cost Accounting? By cost accounting, we simply refer to the process of collecting, summarizing, analyzing and reporting in monetary terms tailor-made information to management showing the costs and benefits of pursuing each alternative course of action open to management. In other words, cost accounting is a broad term used to explain the principles, methods, techniques and convention which are employed in business for planning, control, decision making, analysis and evaluation of utilization of the business resources that is material, facilities and employees. Discuss the major principles that underline Cost Accounting For better understanding and appreciation of cost accounting, there is the need to be aware of some of the basic principles guiding the subject. The principles are; STARRY GOLD ACADEMY , , info@starrygoldacademy.com, Page 15

16 i. There must be a close relationship between cost and what is being costed ii. Appropriate cost should be charged to cost unit or cost centre that enjoys the benefits of the cost iii. The conservative convention should be ignored since it emphasizes the conservative valuation of assets in order to avoid the risk of paying dividends out of capital iv. Cost accounting aims to provide information on activity of an organization to assist managers to perform well v. Past costs should never be charged to future periods because they can distort future period results and thus misleading the management. Distinguish clearly between Costing methods and costing techniques with relevant examples By costing methods, we simply refer to the methods of costing which are purely designed to suit way goods are produced or the way services are provided. Therefore, costing methods depend upon the nature of production. Examples are; STARRY GOLD ACADEMY , , info@starrygoldacademy.com, Page 16

17 i. Specific order costing which includes job or batch costing and contract costing ii. Operation costing such as process or operation costing, joint and by-products costing and service operation costing. On the other hand, costing techniques are those designed to suit the manner in which it is decided to present the information to management. They largely depend upon the purpose to which the management requires the information. Examples of costing techniques are absorption or total costing, marginal costing, standard costing, budget and budgetary control. What are the major uses of cost accounting? Highlight the major processes involved in setting up a sound cost system The major uses of cost accounting include the following; i. Cost accounting information assists in identifying areas of wastages and inefficiencies ii. It also gives explanation about reasons for increase or decrease in profit STARRY GOLD ACADEMY , , info@starrygoldacademy.com, Page 17

18 iii. It also assists in data collection on actual performance and presenting them against the background of the budget iv. The system assists in formulation of cost reduction proposal and it duly follows it up v. Installation of costing system would lead to effective cost control However, the major processes involved in setting up a sound costing system are; i.ascertain the objective of management in installing the system ii.ascertain the information required by the management iii.ascertain and understand the technical features of the class of industry concerned iv.study the expected individual characteristics of the company v.select a suitable costing method vi.design suitable forms to collect cost data vii.design the cost codes viii.prepare a cost manual to guide the costing staff in operating the system STARRY GOLD ACADEMY , , info@starrygoldacademy.com, Page 18

19 QUESTION 2 Explain controllable and non-controllable cost with relevant examples. Controllable costs are those which can be influenced by the action of a specified member of an undertaking. A business organization is usually divided into a number of responsibility centres and each such centre is headed by an executive. Controllable costs incurred in a particular responsibility centre can be influenced by the action of the executive heading that responsibility centre. Direct costs comprising direct labour, direct materials, direct expenses and some of the overhead are generally controllable by the top level management. Non-controllable costs are those which cannot be influenced by the action of a specified member of an undertaking. For example, expenditure incurred by the tool room is controllable by the tool room manager but the share of the tool room expense which is apportioned to the machine shop cannot be controlled by the machine shop manager. It is only in relation to a particular individual that a cost may be specified as controllable or not. STARRY GOLD ACADEMY , , info@starrygoldacademy.com, Page 19

20 Cost centre and Cost unit are one and the same. Explain your stand There are significant differences between cost centre and cost unit, hence they are not one and the same as they connote different meanings and definitions. CIMA defines Cost Centre as a production or service, function, activity or item of equipment whose costs may be attributed to cost units. A cost centre is the smallest organizational sub-unit for which separate cost allocation is attempted. A cost centre is an individual activity or group of similar activities for which costs are accumulated. For example in production departments, a machine or group of machines within a department or a work group is considered as cost centre. Any part of an enterprise to which costs can be charged is called as cost centre. A cost centre can be : (i) Geographical i.e. an area such as production department, stores, sales area. (ii) An item of equipment e.g. a lathe, forklift, truck or delivery vehicle. (iii) A person e.g. a sales person. On the other hand, CIMA defines Cost Unit as a quantitative unit of product or service in relation to which costs are ascertained. STARRY GOLD ACADEMY , , info@starrygoldacademy.com, Page 20

21 A cost unit is a unit of product or unit of service to which costs are ascertained by means of allocation, apportionment and absorption. It is a unit of quantity of product, service or time or a combination of these in relation to which costs are expressed or ascertained. For example, specific job Write short notes on the following: Cost: This is the expenditure (actual or notional) incurred on or attributable to a given thing or described as the resources that have been sacrificed or must be sacrificed to attain a particular objective. Costing: This is the term that is used to classifying, recording, allocation and appropriation of expenses for the determination of cost of products or services and for the presentation of suitably arranged data for the purpose of control and guidance of management. Profit centre: This is defined as, a segment of the business entity by which both revenues are received and expenses are incurred or controlled. Cost sheet: This is a statement of cost showing the total cost of production and profit or loss from a particular product or service. A Cost Sheet shows the cost in a systematic manner and element wise. STARRY GOLD ACADEMY , , info@starrygoldacademy.com, Page 21

22 Cost control: It implies various actions taken in order to ensure that the cost do not rise beyond a particular level while cost reduction means reducing the existing cost of production. It also means keeping the expenses within limits or control. Cost reduction: This refers to attempt to reduce the costs. For example, if the present costs are #1,500 per unit, attempts can be made to reduce it to bring it down to #1,000 and below. QUESTION 3 Explain the major difference between avoidable cost and unavoidable cost Avoidable costs are those costs which under the present conditions need not have been incurred. In other words, avoidable costs are those costs that that may not be incurred but avoided by an organization for some specific reasons. Example: (a) spoilage in excess of normal limit; (b) Unfavourable cost variances which could have been controlled STARRY GOLD ACADEMY , , info@starrygoldacademy.com, Page 22

23 On the other hand, unavoidable costs are the direct opposite of avoidable costs. They are those costs which under the present conditions must be incurred irrespective of the objectives of the organization. How would you differentiate between direct fixed cost and common fixed cost? By definition, direct fixed cost can be seen as cost that can be directly traced to the production cost. It could also mean the cost that is incurred by and solely for a given product while common fixed cost is a cost that relates to two or more segments or it is a cost that supports the operation of more than one segment. Explain the significant relationship between contribution and profit There exists significant relationship between contribution and profit which can be stated below; Profit = Contribution Fixed cost Contribution = Profit + Fixed cost STARRY GOLD ACADEMY , , info@starrygoldacademy.com, Page 23

24 By implication, there are two ways of looking at Contribution i. Contribution = Sales Variable cost ii. Contribution = Profit + Fixed cost QUESTION 4 The following cost and activity data were taken from factory records Activity (Units) Cost incurred (N) STARRY GOLD ACADEMY , , info@starrygoldacademy.com, Page 24

25 Using the least squares method of linear regression, calculate the fixed and variable elements of cost. Since the level of Activity is greatly dependent upon the Cost. Therefore, we can say that Activity is a dependent variable (Y) and Cost is an independent variable (X) Given the cost equation; Y = a + bx Where; Y = Activity level X = Cost incurred a = fixed cost b = variable cost To get fixed cost, a STARRY GOLD ACADEMY , , info@starrygoldacademy.com, Page 25

26 a = Y. X2 - X. XY n X 2 ( X) 2 b = n XY - X. Y n X 2 ( X) 2 X Y X2 XY STARRY GOLD ACADEMY , , info@starrygoldacademy.com, Page 26

27 X = 180, Y = 2140, X 2 = 3616, XY = a = (2140)(3616) (180)(42480) 10(3616) (180)2 = = 91840/3760 = b = 10(42480) (180)(2140) 10(3616) (180) 2 = STARRY GOLD ACADEMY , , info@starrygoldacademy.com, Page 27

28 = 39600/3760 = Therefore, Fixed cost = N24.43 and Variable cost = N10.53 STARRY GOLD ACADEMY , , info@starrygoldacademy.com, Page 28

29 STARRY GOLD ACADEMY , , Page 29

Answer to PTP_Intermediate_Syllabus 2008_Jun2015_Set 1

Answer to PTP_Intermediate_Syllabus 2008_Jun2015_Set 1 Paper 8: Cost & Management Accounting Time Allowed: 3 Hours Full Marks: 100 Question No 1 is Compulsory. Answers any five Questions from the rest. Working Notes should form part of the answer. Question.1