1 Introduction to Cost and

Transcription

1 1 Introduction to Cost and Management Accounting This Chapter Includes Concept of Cost; Management Accounting and its Evolution of Cost Accounting evolution, Meaning, Objectives, Costing, Cost Accounting and Cost Nature and Scope Accountancy Tools and Techniques of Management Accounting Objectives, Importance and Scope of cost accounting Relationship of Cost Accounting, Classifications and Elements of Cost; Financial Accounting, Management Cost Centre and Cost Unit Accounting and Financial Management Methods and Techniques of Costing Cost Accounting Standards Limitations of Management Accounting Installation of a Costing System Practical Difficulties in Installing a Conflicts in Profit versus Value Costing System Maximisation Principle Role of Cost Accountant in Decision Role of Management Accountant in Making Decision Making. Marks of Short Notes, Distinguish Between, Descriptive & Practical Questions 2.1

2 2.2 O Solved Scanner CS Executive Prog. M-I Paper 2 (New Syllabus) CS Executive Programme (Module I) OBJECTIVE QUESTIONS Dec [5] {C} (a) State, with reasons in brief, whether the following statements are true of false : (i) Cost accounting is a branch of financial accounting. (2 marks) (b) Choose the most appropriate answer from the given options in respect of the following : (iii) The type of process loss that should not affect the cost of inventories is (a) Abnormal loss (b) Normal loss (c) Seasonal loss (d) Standard loss. (1 mark) (c) Re! write the following sentences after filling!up the blank spaces with appropriate word (s)/ figure (s) : (i) Cost is a fact whereas price is a. (ii) Imputed costs are relevant for. (iii) A is the cost that has already been incurred and cannot be avoided by decisions taken in the future. (v) A profit centre is a division or organisational unit concerned with controlling both and costs. (1 mark each) (a) (i) False; (b) (iii) (a) Abnormal loss (c) (i) policy; (ii) decision making; (iii) sunk cost; (v) sales / (revenue); June [5] {C} (a) State, with reasons in brief, whether the following statements are true or false : (ii) Fixed cost per unit remains fixed. (iv) Rent on owned building is included in cost accounts (2 marks each)

3 [Chapter # 1] Introduction to Cost and Management... O 2.3 (b) Re-write the following sentences after filling-in the blank spaces with appropriate word(s)/figures(s) : (ii) Abnormal wastage part of cost of production. (iv) Direct material + direct labour + factory overheads =. (1 mark each) (a) (ii) False : It is the total fixed cost which remains fixed inspective of the level of output. But, the fixed cost per unit will be different at different level of output. As level of output increases the fixed cost per unit will decrease and the level of output decreases the fixed cost per unit will increases. (iv) True: Rent on owned building is included in cost accounts, it is done to calculate the real cost after taking into account the notional cost which would have been paid, had the building been taken on rent. (b) (ii) is not (iv) Factory cost/works cost Dec [5] {C} (a) State, with reasons in brief, whether the following statements are correct or incorrect : (i) All long-term costs are controllable. (ii) Rent on own building is not included in cost accounts. (2 marks each) (b) Choose the most appropriate answer from the given options in respect of the following : (iii) Non-controllable cost is the cost which (a) Is not subject to control at any level of managerial supervision (b) Cannot be controllable during a particular financial year (c) Cannot be controllable at any cost (d) None of the above. (1 mark) (c) Re-write the following sentences after filling-in the blank spaces with appropriate word(s)/figure(s) : (v) is the allotment of proportion of items of cost to cost centre/cost units. (1 mark) Answer: (a) (i) Correct : Normally, in short run all variable cost are controllable and all fixed cost are not controllable whereas in long run/terms all cost whether variable or fixed cost are controllable. (ii) Incorrect : For decision making, point of view rent on own building is very important. Whether it is not recorded in the book and also important in comparing alternatives. This cost is treated as imputed or notional costs and do not enter into traditional accounting systems. (b) (iii) (a) (c) (v) Apportionment

4 2.4 O Solved Scanner CS Executive Prog. M-I Paper 2 (New Syllabus) June [5] {C} (a) State, with reasons in brief, whether the following statements are correct or incorrect: (iv) A profit centre whose performance is measured by its return on investment (ROI) is known as investment centre. (2 marks) (b) Choose the most appropriate answer from the given options in respect of the following: (iv) Fixed costs remain fixed (a) Over a short period (b) Over a long period and within relevant range (c) Over a short period and within a relevant range (d) Over a long period. (1 mark) (c) Re-write the following sentences after filling-in the blank spaces with appropriate word(s)/figure(s): (i) expenses are excluded from cost. (1 mark) (a) (iv) This statement is Correct : Reason :- In investment centre, it is the responsibility of the manager to earn a satisfactory return on the assets employed in his responsibilities centre which is govern by ROI. (b) (iv) (c) (c) (i) Notional Dec [5] {C} (a) State, with reasons in brief, whether the follower statements are true or false : (iv) Opportunity cost is recorded in the books of account. (2 marks) (b) Choose the most appropriate answer from the given options in respect of the following : (v) The management accounting is an extension of! (a) Financial accounting (b) Responsibility accounting (c) Cost accounting (d) All of the above. (1 mark) (c) Re-write the following sentences after filling-in the blank spaces with appropriate word(s)/figure(s) : (iv) costs are not useful for decision making as all past costs are irrelevant. (1 mark)

5 [Chapter # 1] Introduction to Cost and Management... O 2.5 (a) (iv) False: Opportunity cost is not recorded in the books of account, even though it is considered for decision making. Opportunity cost is the benefit foregone which would have been received had it been used for second best use. (b) (v) (d) All of the above. (c) (iv) Sunk costs are not useful for decision making as all past costs are irrelevant June [5] {C} (b) Re-write the following sentences after filling-in the blank spaces with appropriate word(s)/figure(s) : (iii) A responsibility centre in which a manager is accountable for costs only is called. (1 mark) (c) State, with reasons in brief, whether the following statements are true or false : (i) Direct costs and variable costs are not necessarily the same. (2 marks) (b) (iii) A responsibility centre in which a manager is accountable for cost only is called Cost centre (c) (i) True : Direct costs are not necessarily the same as variable cost. Direct costs comprises of direct material cost, direct labour cost and direct expenses. Variable cost is made up of direct material, direct wages, direct expenses and variable overheads Dec [5] {C} (a) State, with reasons in brief, whether the following statements are true or false: (iii) Sunk costs are not relevant for decision-making. (iv) Costing and cost accounting are the same. (2 marks each) (b) Write the most appropriate answer from the given options in respect of the following: (i) Opportunity cost helps in (a) Ascertainment of cost (b) Controlling cost (c) Making managerial decisions (d) None of the above. (ii) Fixed cost per unit-increases when (a) Production volume decreases (b) Production volume increases (c) Variable cost per unit decreases (d) Variable cost per unit increases.

6 2.6 O Solved Scanner CS Executive Prog. M-I Paper 2 (New Syllabus) (v) The type of spoilage that does not affect the cost of inventories is (a) Normal spoilage (b) Standard spoilage (c) Abnormal spoilage (d) Seasonal spoilage. (1 mark each) (a) (iii) The statement is true:- A sunk cost cannot be avoided it has already been incurred in past as it refers to past cost it is called as unavoidable cost. This cost is not so important for decision making. Therefore, past cost are irrelevant. (iv) The statement is false:- Cost accounting and costing are two different terms. Costing provides only the basis and information for ascertainment of cost. Whereas the cost accounting is classifying, recording and allocating expenditure for determination of cost of product or services and for the preparation of data for the purpose of control and guidance of management. (b) (i) (c) Making management decisions (ii) (a) Production volume decreases (v) (a) Normal spoilage June [5] {C} (b) Re-write the following sentences after filling-in the blank spaces with appropriate word(s)/figure(s) : (i) Variable cost per unit does not remain. (1 mark) (i) Variable June [5] {C} (a) State, with reasons in brief, whether the following statement are true or false: (v) Management accounting is based on double entry system. (2 marks) (b) Write the most appropriate answer from the given options in respect of the following: (ii) Differential cost analysis is incorporated in the (a) Cost books (b) Financial books (c) Statutory books (d) None of the above. (1 mark) (c) Re-write the following sentences after filling-in the blank spaces with appropriate word(s)/figure(s): (i) A document which provides for assembly of different costs in respect of a cost centre or a cost unit is called. (1 mark)

7 [Chapter # 1] Introduction to Cost and Management... O 2.7 Answer: (a) (v) This statement is false : Management Account is not based on double entry system. (b) (ii) (a) Cost books. (c) (i) Cost sheet. SHORT NOTES June [7] (a) Write short notes on the following: (ii) Activity based costing (3 marks) Activity Based Costing: According to this techniques the overhead costs of the organisations are identified with each activity which is acting as the cost driver. Such cost drivers may be purchase :- (a) order issued; (b) quality inspections; (c) maintenance request; (d) material receipt; (e) inventory movement; (f) power consumed and (g) machine time. Hence, ABC technique- is a technique which involves identification of cost with each cost driving activity and making it as the basis for apportionment of costs over different products or Jobs. DISTINGUISH BETWEEN June [5] {C} (c) Distinguish between the following : (ii) 'Fixed cost' and 'variable cost.' (3 marks) (1) Fixed Cost can never be zero: In the short-term when production is temporarily stopped, there will be no variable cost. Thus, the variable costs will be zero. But, the fixed cost can never be zero whether a firm produces or not the fixed costs are always positive. (2) Price Determination : In short, due to fall in demand, the producer is forced to sell the commodity at low price. In such a situation, the producer will sale the product so long as it covers the variable costs. He will not bother about the fixed costs because he has to bear these costs even at zero level of output.

8 2.8 O Solved Scanner CS Executive Prog. M-I Paper 2 (New Syllabus) June [6] (a) Distinguish between the following : (i) 'Cost accounting' and 'management accounting'. (3 marks) Cost Accounting 1. It deals with ascertainment allocation, apportionment and accounting aspect of costs. 2. It provides a base for management accounting. 3. The status of cost accountant comes after the management accountant. 4. It has a narrow approach. He has to refer to economic and statistical data for analysing cost effects. 5. It does not include financial accounting, tax planning and tax accounting. 6. It can be installed without management accounting. Management Accounting It deals with the effect and impact of costs on the business. It is derived from both cost accounting and financial accounting. Management accountant is senior in position to cost accountant. It reports the effect of cost on the business alongwith cost analysis. It includes financial and cost accounting, tax planning and tax accounting. It needs financial and cost accounting as its base for its installation. DESCRIPTIVE QUESTIONS Dec [7] (Or) Although including interest in the normal cost is practically difficult but excluding interest altogether may lead to wrong managerial decisions. Comment. (6 marks) Arguments in favour of and against the inclusion of interest on capital in cost: There is controversy amongst the cost expert about the inclusion of interest of capital in cost. In some businesses the introduction of capital is from own Private Sources while in other it is taken on loan. Cost experts are agree that interest on both types of capitals should be included in cost records. Any how following points are in favour and against the inclusion of interest on capital in cost.

9 [Chapter # 1] Introduction to Cost and Management... O 2.9 (a) Points in favour of inclusion of interest on capital in cost: (i) Interest is reward of capital, as wages are the reward of labour hence, like wage interest should be included in costs. (ii) Real profit cannot be ascertained without taking account of interest. (iii) It is necessary to include notional interest if intelligent comparisons are to be made between operations, processes, etc. (b) Points against the inclusion of interest on capital in cost: (i) The argument of interest as reward of capital holds goods in economics and not in costing. (ii) Interest being an anticipation of profit cannot be a part of cost. Hence, it is true that there are practical difficulties in including interest as part of the normal cost. However, excluding it altogether may lead to wrong managerial decisions which are not desirable. Therefore, it is suggested that while interest may be excludes from the regular cost sheet, cost calculations for other purposes for decision making should include a proper amount of notional interest where the interest will be material Dec [6] (c) What are the limitations of management accounting? (3 marks) Limitations of Management Accounting The management accountant has the responsibility of producing and providing dependable accounting and other relevant data for the use of management. The following are the limitations of management accounting: 1. Different meaning of the same term: In accounting different terms carry different meanings under different set of circumstances and conditions. The most common source of confusion is the word cost. There are historical costs, full costs, direct costs, variable costs, standard costs, original costs, residual costs, net costs, differential costs, opportunity costs, estimated cost and incremental costs. etc. 2. Approximations: Management accounting data cannot be completely accurate in all respects. A good deal of approximation is involved in the compilation and preparation of such data. 3. Incompleteness of the data: Data will not disclose the extent to which the quality and utility of a product is affected by the changes in materials or methods of production. The management should guard itself against the belief that problems could be completely solved by numerical analysis. 4. Importance of proper management action: A management accountant may provide information and figures in most appropriate form to the management. But figures themselves are nothing more than marks on pieces of paper, and by themselves they accomplish nothing. Anything that the business accomplishes is the result of action of the people.

10 2.10 O Solved Scanner CS Executive Prog. M-I Paper 2 (New Syllabus) Dec [7] (a) Explain briefly the role of a management accountant in a business enterprise. (5 marks) For efficient and effective management of an enterprise management needs financial information in understandable form. The management accountant being principal officer in charge of accounts of the company plays a significant role in providing relevant financial information needed for day to day as well as strategic decisions. The role of management accountant in this direction includes : (i) Management accountant establishes, coordinates and administers plans to facilitate the forecasting of sales, preparation of budgets and development of cost standards that facilitates profit planning, capital budgeting and financing. (ii) He formulates accounting policy and procedures to facilitate analysis and interpretation of financial data for the use of management. (iii) He also assists in tax planning and implementing control schemes for enhancing profit for owners of the business. (iv) He keeps up to date information on economic and social matters which may affect the interest of his employer. (v) He prepares reports for the use of managers at different layers of management for their rational decision making June [7] (c) Explain the significance of decision-making costs. Briefly explain the various type of costs used by the management in decision-making. (3 marks) There are certain costs which are specially used for decision making by the management such decision making costs may, be relevant costs or irrelevant costs. Various types of costs used by management in decision making are briefly described below :- 1. Opportunity Costs : Opportunity cost is the cost of selecting one course of action and the losing of other opportunities to carry out that course of action. It is the amount that can be received if the asset is utilized in its next best alternative. 2. Differential Cost : Differential cost has been defined as "the difference in total cost between alternatives, calculated to against decision making." It helps management to know the additional profit that would be earned if idle capacity is used or when additional investments are made. 3. Imputed Costs : Some costs are not incurred and are useful while taking decision pertaining to a particular situation. Examples : Interest on internally generated funds, salaries of owners of proprietorship or partnership, notional rent. etc.

11 [Chapter # 1] Introduction to Cost and Management... O Out-of-Pocket Costs : This costs signify such outlay required for an activity. The management would like to know that the income from a particular project will at least cover the expenditure for the project, Acceptance of a special order requires to be considered as additional costs need not be incurred if the special order is not accepted. 5. Marginal Costs : It is the aggregate of variable Costs, i.e. prime cost plus variable overheads. Thus, costs are classified as fixed and variable. 6. Replacement Costs : This is the cost of replacing an asset at current market values example when the cost of replacing an asset is considered it means the cost of purchasing the asset at the prevailing market price is important and not the cost at which it was purchased Dec [8] (c) Management accounting is a decision making system. Comment. (3 marks) Answer: Please refer June [7] (a) on page no Dec [3] (a) Explain the cost concepts : Opportunity cost, sunk cost, differential cost and conversion cost. (4 marks) CS Inter Gr. I DISTINGUISH BETWEEN June [7] (a) Distinguish between 'costing' and 'cost accounting'. (2 marks) Difference Between 'Costing' And 'Cost Accounting' Costing Cost Accounting 1. It is broader in its scope. 2. It is concerned with ascertainment of cost. 3. It begins where cost accountancy ends. It is narrow in scope. It is concerned with recording of cost. It begins where costing ends Dec [5] {C} (c) Distinguish between the following: (ii) Explicit costs and implicit costs. (3 marks)

12 2.12 O Solved Scanner CS Executive Prog. M-I Paper 2 (New Syllabus) Implicit Costs: These are imputed value of the entrepreneurs own resources and services. Explicit Costs: There are those which are paid by the employer to owners of the factor units, which do not belong to the employer himself June [8] (a) Distinguish between imputed costs and common costs. (5 marks) Imputed Costs: These are hypothetical cost which are specially computed for the purpose of decision-making. Interest on capital is a common-type of imputed cost. As interest on capital is usually not included in cost, it is considered necessary to take it into account when deciding about the alternative capital investment projects. Common Costs: Common costs are costs, which are incurred for more than one product, job, territory or any other specific costing object. It is the cost of services employed in the creation of two or more outputs which is not allocated to those outputs on a clearly justified basis. They are not easily related with individual products and hence are generally apportioned. Common costs are not only common to products, but they may be common to process, functions, responsibilities, customs, sales territories, periods of time and similar costing units. DESCRIPTIVE QUESTIONS June [5] {C} (d) State, with reasons, whether the following statements are correct or incorrect: (i) Notional costs and imputed costs mean the same thing, (ii) Conversion costs and overheads are interchangeable terms. (4 marks) (i) This statement is correct. These are the hypothetical cost which are specially computed for the purpose of decision making, Interest on capital is a common type of imputed cost. (ii) This statement is incorrect. This term is used to denote the sum of direct labour and overhead costs in the production of a product. It is the total cost of converting a raw material into finished product Dec [5] {C} (d) Explain briefly the nature of 'management accounting'. (4 marks)

13 [Chapter # 1] Introduction to Cost and Management... O 2.13 (i) Management accounting is a decision-making system. (ii) Management accounting is futuristic. (iii) Management accounting is a technique of selective nature. (iv) Management accounting analyses different variables. (v) Management accounting does not set particular formats for information June [7] (a) "Management accounting is a decision making system." Comment. (2 marks) Decision-making is an important and prime function of top management. Management Accounting may make the decision-making process more modern and scientific by providing significant information relating to various alternatives in terms of cost and revenue. With the help of techniques provided by Management Accounting, data relating to cost, price profit or saving for each of the available alternatives may be collected and analysed and these provide a base for taking sound decision. Management Accounting deals with a number of techniques which could be used injudging the profitability and feasibility of the alternative selected on the basis of cost and revenue data June [8] (a) "Opportunity cost is the measure of the benefit of opportunity foregone."comment. (3 marks) The terminology of ICMA defines opportunity cost as the value of benefit sacrificed in favour of an alternative course of action. It is the value of benefit sacrificed in favour of an alternative course of action. It is an a important cost for decision making and in comparing various alternatives to choose the best one. For example, if an owned building is proposed to be used for a project, are likely rent of the building is the opportunity cost which should be taken into account while evaluating the profitability of the project Dec [5] {C} Attempt the following : (i) Explain the complementary role of financial accounting and cost accounting. (5 marks) Both financial accounting and cost accounting are concerned with systematic recording and presentation of financial data. The complementary roles of financial accounting and cost accounting may be summarized as under:

14 2.14 O Solved Scanner CS Executive Prog. M-I Paper 2 (New Syllabus) Financial Accounting 1. It provides information in general way disclosing the profit or loss to the owner s and outsiders? 2. Financial accounts disclose profit for the entire business as a whole. 3. It fails to guide the formulation of pricing policy. 4. All the expenses or costs are reported in aggregate. 5. Monetary information is used only. 6. Stock is valued at cost or market price whichever is lower. Cost Accounting It provides detailed information about cost and profit and gives information to the management for planning decision-making and controlling. It discloses profit or loss of each job, product or service. It provides adequete data for formulating pricing policy. Costs are presented on unit basis and in analytical way. Non-monetary information like units is also used. Stock or inventory is valued at cost only June [5] {C} Attempt the following : (i) Mention the various tools and techniques of management accounting. (5 marks) The following are the tools and techniques of management accounting: (i) Financial planning (ii) Financial Statement Analysis (iii) Decision-making (iv) Control Techniques (v) Statistical and operational techniques (vi) Reporting Dec [5] {C} Attempt the following : (i) Management accounting is not concerned with legal and/or conventional constraints and the generally accepted principles unlike financial accounting. Comment. (5 marks) Financial accounting has to be governed by generally accepted principles. It provides information about the business in a general way. It tells about the profit and loss and financial position of business to outsiders and other outside parties. It classifies, records and analysis the transactions in a subjective manner that is according to the nature of expense.

15 [Chapter # 1] Introduction to Cost and Management... O 2.15 Management accounting is concerned with presentation of accounting information in the most useful way for managerial decision making. It does not specify any legal and or conventional constraints and the generally accepted principles. Management accounting collects and communicates significant and required information for various level of management, known as internal parties. In management accounting fixed assets may be stated at appraisal values, overhead cost may be omitted from inventories or revenues may be recorded before realization. The form and content of management accounting information differs according to the needs and purpose Dec [8] (a) Attempt the following : (i) What are the essential steps required for installation of an efficient and effective management accounting system? (4 marks) Management accounting is the collection, analysis, diagnosis and interpretation of accounting information in such a way as to help the management. Management accounting is an integral part of management concerned with: (a) Presenting and interpreting information used for formulating strategy; (b) Planning and controlling activities; (c) Decision taking; (d) Optimizing the use of resources; (e) Disclosure to shareholders; (f) Disclosure to employee and (g) Safeguarding the assets; Following are the essential steps required for installation of an efficient and effective management accounting system. 1. An appropriate organizational manual should be prepared and adopted. 2. The requisite staff will have to be recruited, trained and developed. 3. Appropriate forms, return etc. should be designed, prepared and made available. 4. Classification and codification of accounts. 5. Setting up suitable system of budgetary control. 6. Setting up cost budget and profit centers and introduction of operational research technique June [6] (Or) (a) "Costing is a reality and pricing is a policy." Comment. (5 marks) Costing is technique and process of ascertaining costs. These techniques consist of principles and rules which govern the procedure of ascertaining cost of products or services. The process includes the day to day routine of determining costs by historical or conventional costing, standard costing or marginal costing. The techniques to be

16 2.16 O Solved Scanner CS Executive Prog. M-I Paper 2 (New Syllabus) followed for analysis of expenses and the process by which such an analysis should be related to the different products or services differ from industry to industry. The main object of costing is the analysis of financial records, so as to sub-divide expenditure and to allocate it to selected cost centers, and hence to arrive the total cost for the departments, process or jobs of the organization. Pricing of a product is used as a policy parameter by the organization to optimize the interest in terms of profit and revenue subject to cost structure, competition, customer expectations, legal concerns and perceived value to customers. Price of a product is based on total cost i.e. production, administration and selling overheads, fixed as well as variable plus normal profit. In the normal course, price fixed should cover all the costs plus a desired level of profit. But in some situations the selling price may vary depending on the desired profit even below total cost to tide over the situations. Hence the management may fix the price of a product based on the situations prevailing in the market and considering the objectives of the business. Hence costing is considered as a reality and pricing is a policy. Repeatedly Asked Questions No. Question Frequency 1 Management accounting is a decision making system. Comment June [7] (a), 12 - Dec [8] (c) 2 Times Table Showing Marks of Compulsory Questions Year 09 J 09 D 10 J 10 D 11 J 11 D 12 J 12 D 13 J 13 D Dt. Between 3 Total 3