2013 - June [7] (a) Date Receipts Qty (Units) May 2013 1 Opening Balance Solution Paper 8 COST AND MANAGEMENT ACCOUNTING June - 2013 Chapter 2 Material Rate FIFO Method Issue Qty. (Units) Rate Issue LIFO Method Qty (units) Rate 500 25 - - - - - 3 - - - To Production 70 25 To Production 70 25 4 - - - To Production 100 25 To Production 100 25 8 - - - To Production 80 25 To Production 80 25 13 From Supplier 200 24.5 - - - - - - 14 Returned to stores 15 24 - - - - - - 15 - - - (Shortage) 5 25 (Shortage) 5 24 16 - - - To Production 180 25 To Production (180) 10170 24 24.5 20 From Supplier 240 24.75 - - - - - - 24 - - - To Production (304) 65 200 15 24 25 To Production 24.5 (304) 24 24.75 24030 34 24.75 24.5 25 25 From supplier 320 24.5 26 - - - To Production 112 24.75 To Production 112 24.5 27 - - - (Shortage) 8 24.75 (Shortage) 8 24.5 27 Returned Stores 12 24.5 - - - - - - 28 From Supplier 100 25 - - - - - - 1
Particulars FIFO Method FIFO Method Units ` Units ` Total Issued to production Less: Returns Net Cost of Consumption Closing inventory value Opening inventory value Total Average inventory at cost 846 27 819 21,001 654 20,347 13,010 12,500 25,510 25,510/2 = 12,755 846 27 819 20,924 654 20,270 13,094 12,500 25,594 25,584/2 = 12,797 Inventory Turnover Ratio = Material cost of the sales/ average inventory = 20347/12755= 1.595 or 1.6 Working Notes: (i) Calculation of closing inventory value FIFO Method 20,270/12797=1.585 or 1.6 LIFO Method 96 @ 24.75 = ` 2,376 320 @ 24.5 = 7,840 12 @ 24.5 = 294 100 @ 25 = 2,500 528 ` 3,010 316 @ 25 = ` 7,900 212 @ 24.5 = 5,194 528 ` 13,094 (ii) Calculation of value issued to production FIFO Method 496 @ 25 = ` 12,375 200 @ 24.5 = 4,900 15 @ 24 = 360 136 @ 24.75 = 3,366 846 ` 21,001 LIFO Method 284 @ 25 = ` 7,100 10 @ 24 = 240 312 @ 24.5 = 7,644 240 @ 24.75 = 5,940 846 ` 20,924 Conclusion: Inventory turnover ratio (1.595) under FIFO method shows a more favourable situation. Chapter 4 Direct Expenses, Overheads & Treatment of Special Items 2013 - June [2] (b) (ii) Bad Debts: One view is that Bad Debts should be excluded from cost accounts as they are financial losses. Another view is that they should be treated as part of selling and distribution overheads, especially when they arise in the normal course of trading. 2
Therefore, bad debts should be treated in cost accounting as any other selling and distribution expenses. 2013 - June [2] (b) (i) Fringe Benefits: These benefits are given in the form of overtime, extra-shift duty allowance, holiday pay, pension facilities etc. There are some non-cash fringe benefits also like canteen facility etc. Expenditure incurred on fringe benefits in respect of factory workers should be treated as factory overheads and apportioned among all the production and service departments on the basis of number of workers in each department. Fringe benefits of office and selling & distributing staff should be treated as administration overheads and selling and distribution overheads respectively and recovered accordingly. Chapter 6 Job, Batch and Contract 2013 - June [4] (b) Answer: Please refer 2012 - June [7] (b) 2013 - June [6] (b) Statement of the cost of the job (i) Statement of the cost of the job when overheads are charged using Direct Material Cost Rate Particulars Amount ` Material Cost Labour Overheads 6000 6000 5000 4000 Cost of Job 15000 (ii) Statement of the cost of the job when overheads are charged using Labour Hour Rate Particulars Amount ` Material Cost Labour Overheads 4000 6000 5000 4000 Cost of Job 15000 (iii) Statement of the cost of the job when overheads are charged using Machine Hour Rate Particulars Amount ` Material Cost 6000 24000 Labour 5000 Overheads 2880 Cost of Job 13880 3
Chapter 7 Process Costing, Joint Products and By-Products 2013 - June [3] (b) Joint products: - When two or more products are simultaneously produced from the same raw material having equal importance is termed as joint products. The processing of a particular raw material may result in the output of two or more products, e.g. in oil refining, fuel oil, petrol, diesel, kerosene, lubricating oil are joint products. By-products: - One or more products simultaneously produced with a greater value produced in the same process. Here the greater value product is known as main product and smaller value product is termed as by product. For difference refer 2006 - [Dec] (2) 2013 - June [5] (b) Process A A/C Particulars Units Amount To Materials To Wages To Manuf. Exp. 1000 125000 By Normal Loss 28000 By Abnormal Loss 8000 By Sale of scrap By Process B A/C Particulars Units Amount 50 20 100 830 3600 8000 149400 1000 161000 1000 161000 Working Note: Cost per unit = = 180 per unit Particulars Units Amount To Process A A/C To Materials To Wages To Manuf. Exp. To Abnormal Gain 830 70 15 Process B A/C Particulars Units Amount 149400 By Normal Loss 14000 By Sale of scrap 10000 By Finished stock 5250 3150 45 90 780 18000 163800 915 181800 915 181800 4
2013 - June [8] (e) Chapter 8 Cost Accounting in Service Sector Industry Apportioning Costing Method Cost Unit (i) Textile Process Costing Per metre (or any unit of length) (ii) Canteen Operating Costing Per meal/per item (iii) Medicines Batch Costing Per batch (iv) Paper Unit Costing/Process Costing Per ream (or any unit of numbers) (v) Oil Refinery Process Costing Per tonne/per litre (or any unit of volume or weight) Chapter 10 Reconciliation of Cost and Financial Accounts 2013 - June [6] (a) Reconciliation Statement Particulars Amount ` Net loss as per costing records (1,72,400) Add: Administrative overhead recovered in excess Depreciation over-recovered in costing (12500-11200) Interest received not included in costing Bank interest credited in financial books Stores adjustment (credit) in financial books Interest charged in cost A/cs but not in financial A/cs Less: Works overhead under-recovered in costing Obsolescence charged (loss) in financial records Income tax provided in financial books Opening stock under-valued in cost A/cs (54,000-52,600) Closing stock over-valued in cost A/cs (52,000 49,600) Preliminary expenses written off in financial A/cs Provision for doubtful debts in financial A/cs 1700 1300 8000 750 475 6000 3120 5700 40300 1400 2400 800 150 Net loss as per Financial Accounts ( 2,08,045) 5
2013 - June [2] (a) Particulars Sales Chapter 11 Marginal Costing and Decision Making Year I ` 10,00,000 Year II SP increased by 20% ` 12,00,000 Year II Actual ` 16,80,000 Year II Before SP Increase 14, 00,000 (10,00,000 + 40%*) Less: Marginal Cost of Sales 6,00,000 6,00,000 8,00,000 8,40,000 (at year I cost) (6,00,000 + 40%) Contribution 4,00,000 6,00,000 8,80,000 5,60,000 Working Note- *Increase in Sales = ` 16, 80,000 ` 12, 00,000 = ` 4,80,000 ˆ Increase in Volume = 100 = 40% (i) Increase in contribution due to increase in Selling Price =16,80,000-14,00,000 = ` 2,80,000 Increase in Volume = 40% If only volume increased, Sales value should have been = ` 14,00,000 Variable cost should have been = ` 8,40,000 Contribution should have been = ` 5,60,000 (ii) Increase in Contribution due to volume increase = 5,60,000 4,00,000 = ` 1,60,000 Variable cost for the increased volume should have been = ` 8,40,000 It is actually = ` 8,00,000 (iii) Increase in Contribution due to Cost Reduction = ` 40,000 2013 - June [5] (a) Capacity utilized 80% Turnover at 80% capacity 32,000 units Turnover at 100% capacity 40,000 Units Fix cost ` 1,50,000, Fixed cost at more than 80% = ` 1,70,000 Selling price ` 25 per unit Contribution per unit ` 7.50 PVR = 100 = 30% 6
(i) BEP = = = 20,000 units Activity level in % = 100 = 50% (ii) (a) If fixed cost is ` 1,50,000 Let desire sales be X units Desire sales = X = X= ` 7,50,000 units Numbers of units = 1.50,000/25= 30,000 units As activity level is less than 32000 units, hence additional supervision cost will not be applicable. (b) If fixed cost is ` 1,70,00 X= X = ` 8,50,000 No. of units = 8,50,000/25 = 34,000 units No. of unit to be sold to earn a profit of ` 1,00,000 (iii) No. of units = 1,50,000 + 1,00,000/7.5 = 33,333 units Which exceeds 32,000 units. Hence fixed cost will be ` 1,70,000 No of units = = 36,000 units Activity level = 36,000/40,000 100 = 90% Chapter 12 Activity Based Costing 2013 - June [8] (b) Please Refer 2008 - Dec [8] (b) Chapter 13 Budgetary Control 2013 - June [8] (c) Please refer 2004 - June [8] (e) 2013 - June [8] (a) Principal budget factors: Principal budget factor is also known as key factor or limiting 7
factor or governing factor. A principal budget factor is a factor which at a particular time, or over a period, will limit the activities of an undertaking. The factor may vary from business to business or even from year to year for the same business. It is defined as the factor, the extent of whose influence must first be assessed in order to exercise that the functional budget are reasonably capable of fulfillment. Importance of budget factor- The early identification of this factor is important in the budgetary planning process because it indicates which budget should be prepared first. Failure to identify the principal budget factor at an early stage could lead to delays later on when managers realize that the targets they have been working with are not feasible. Examples of key factors: (a) Sales: (i) Depression in demand, (ii) High price of product, (iii) Shortage of efficient salesman, (iv) Tough competition, (v) Strict credit terms, (vi) Poor customer service - failing in delivery promise, inadequate stock due to warehousing problems, failing in quick service etc. (vii) Poor advertising, (viii) (b) Poor quality product etc. Production: (i) Shortage of capacity or unbalanced capacity between processing departments. (ii) Lack of proper production planning, (iii) Power or gas or steam shortage, (iv) Lack of proper maintenance resulting in frequent break-down of machines, (v) Lack of proper supervision and/or technical staff. (vi) Bottleneck in key process etc. (c) Raw materials (i) shortage due to non availability, (ii) Shortage due to' import restriction, rationing through quotas. (d) Labour (i) Shortage of particular skill, (ii) High absenteeism, (iii) Absence of incentive scheme. 8
(e) Working capital (i) Inadequacy of funds, (ii) Liberal credit policy, (iii) Inefficient management of funds. 2013 - June [4] (a) Cash Budget Description May 2013 June 2013 July 2013 Opening Balance 40,000 92,428 (9,860) Receipts 4,01,700 4,50,280 4,25,880 Total Inflows 4,41,700 5,42,708 4,16,020 Payments of Suppliers 1,61,640 1,72,440 1,66,320 Labour Payments 86,040 86,400 79,920 Variable OH Paid 26,592 28,728 27,936 Fixed OH Paid 75,000 75,000 75,000 Capital Expenditure 1,90,000 Total Outflows 3,49,272 5,52,568 3,49,176 Closing Balance 92,428 (9,860) 66,844 Particulars April May June July August Budgeted Sales 4,00,000 4,50,000 5,20,000 4,20,000 4,80,000 60% of Sales Current 2,40,000 2,70,000 3,12,000 2,52,000 2,88,000 40% Sales prior month 1,80,000 2,08,000 1,68,000 1,92,000 Sales value of Production 4,20,000 4,78,000 4,80,000 4,44,000 Variable cost of pdn = 60% 2,52,000 2,86,800 2,88,000 2,66,400 Materials required for pdn 60% 1,51,200 1,72,080 1,72,800 1,59,840 50% materials purchased prior month 86,040 86,400 79,920 50% materials purchased this month 75,600 86,040 86,400 79,920 Material Purchases 1,61,640 1,72,440 1,66,320 79,920 Payment to suppliers 1,61,640 1,72,440 1,66,320 Labour paid = 30% of V.C. 75,600 86,040 86,400 79,920 Var. OH = 10% of variable cost 25,200 28,680 28,800 26,640 9
40% of var OH paid this month 10,080 11,472 11,520 10,656 60% var OH paid next month 15,120 17,208 17,280 15,984 Total Variable OH paid 26,592 28,728 27,936 Cash Fixed OH = 9 lacs/12 75,000 75,000 75,000 75,000 75,000 Chapter 14 Standard Costing 2013 - June [8] (d) Normal Idle Time: It is inherent in any work situation and cannot be eliminated. Abnormal Idle time: Apart from normal idle time, there may be some factors which may give rise to abnormal idle time. In standard costing, standard labour time is fixed after taking into account the normal idle time. However, if the actual idle time is more than this normal level, it is considered as abnormal idle time and is therefore shown as variance which is always adverse. It indicates the loss caused due to abnormal idle time. Since we need to exclude the influence of the actual rate, we have idle time variance = Abnormal idle time standard rate. 2013 - June [3] (a) Fixed overhead cost variance = ` 1,400(A) given Fixed overhead Volume variance = ` 1,000(A) given Budgeted Over Head = ` 6,000 (given) Standard rate = Budgeted Overhead /budgeted hours = 6000/1200 = 5 Over head cost variance = Overhead expenditure variance + over head volume variance -1400 = Overhead Exp. Variance -1000 Overhead Exp. Variance = ` 400(A) Overhead Exp. Variance = Budgeted overhead Actual Overhead -400 = 6000 Actual Overhead Actual Over Head incurred = ` 6400 Actual Hours for Actual Production= 6400/8 = 800 hours Overhead capacity variance = (Actual hours Budgeted hours ) standard rate = (800 1200 ) 5 = ` 2000 (A) 10
Chapter 17 Transfer Pricing 2013 - June [7] (b) Method of transfer pricing: 1. Cost based transfer pricing 2. Market Pricing 3. Bargained or Negotiated Pricing 1. Cost based transfer pricing- (a) (b) (c) Actual cost of production : In this method goods or services are transferred at their actual cost of production. Demerit- Inefficiency of transferor borne by receiving centre. Standard cost: Under this method all transfers are valued at their standard cost. Demerit- Standards may be unrealistic or out dated creating an unfair price for any of the divisions. Cost of Sales/Full cost : Under this method, in addition to actual cost of production, expenses like selling and distribution, administration, research and development cost etc are also allowed to be recovered from user division. Demerit- In this method, the supplying unit is not allowed to make any profit on transfers to other units. 2. Market pricing- Under this method, the transfer prices of goods/services transferred to other units/divisions is based on market prices. Demerits - Difficulty in obtaining just market prices. Sometime it is difficult to obtain at all any market price for those very products which are manufactured only for internal consumption. 3. Bargained or Negotiated Pricing- Under this method, all independent unit are allowed to fix the prices after negotiations or bargaining. Divisional managers have full freedom to go for outside purchases if prices quoted by other division are not acceptable to them. Demerit- If the negotiating range is not mutually beneficial to both the divisions, there is clash of interest and management intervention may become necessary. The more powerful division may have its way. Goal congruence may be sacrificed, adversely affecting the overall Company profits. 11
2013 - June [1] (a) Answer1. Column I (i) (ii) (iii) (iv) (v) Chapter 6 Objective Questions (b) (i.) False (ii.) False (iii.) False (iv.) False (v.) False (c) (i.) Profit (ii.) Reorder (iii.) Tonne-kilometer (iv.) Job Coasting (v.) Adverse (d) (i.) (a) Over Absorption = Absorbed OH - Actual OH = (15 5750) - 85000 = ` 1250 (ii.) (d) Total loss = Normal Loss + Abnormal Loss = 10% of 500 (input) + = 150 kgs.= 650 kgs. Good Production = 5000 650 = 4350 kgs. Column II (B) (D) (A) (E) (C) (iii.) (c) Break Even Point = 60% Hence, Margin of Safety = 100 60 = 40% Profit = 60,000 = Contribution on MOS. Hence, Total Contribution = 60,000 40% = ` 1,50,000 (iv.) (a) Production = Sales + Closing Stock Opening Stock Finished Goods = 500000 + 150000 80000 = 5,70,000 Units WIP: 60,000 50,000 = 10,000 Units Number of equivalent units produced = 5,80,000 Units (vi.) (d) Opportunity Cost = Cost of next best alternative. Contribution B: 3500 11 = ` 38,500 Contribution C: 5000 8 = ` 40,000 Opportunity Cost: ` 40,000 12