ipcc costing theory

8/12/2019 IPCC Costing Theory

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IPCC

PAPER 3 (Part 1) : COST ACCOUNTING(Theory Notes)

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BASIC CONCEPTSQ 1. Define the terms cost centre and cost unit.Write short notes on Cost Centre. (May 97, Nov 02 - 4 marks)(May 95 - 4marks)

Distinguish et!een Cost "nit and Cost Centre.

A. The term Cost Unit is defined as a unit of quantity of product, service or time (or a combination of these) in relation towhich costs may be ascertained or expressed. It can be for a ob, batch, or product !roup.The term Cost Centre is defined as a location, person or an item of equipment or a !roup of these for which costs may beascertained and used for the purposes of Cost Control. Cost Centres can be personal Cost Centres, impersonal Cost Centres,operation cost and process Cost Centres.Thus each sub"unit of an or!anisation is #nown as a Cost Centre, if cost can be ascertained for it. In order to recover the costincurred by a Cost Centre, it is necessary to express it as the cost of output. The unit of output in relation to which costincurred by a Cost Centre is expressed is called a Cost Unit.

Q 2. What is meant y #rofit Centre$ (%o& 9' - 4marks)

A. It is defined as an activity centre of a business or!anisation. Chief of such a centre is fully responsible for all costs,revenues and profitability of its operation. The main obective of profit centre is to maximise the centre$s profit. Creation ofprofit centres facilitates mana!ement control and implementation of the obectives of responsibility accountin!. % profit centremay have a number of cost centres.

Q 3.Distinguish et!een Cost Centre and #rofit Centre.A. % Cost Centre is the smallest se!ment of activity or the area of responsibility for which costs are accumulated. % &rofitCentre is that se!ment of activity of a business which is responsible for both revenue and expenses and discloses the profit ofa particular se!ment of activity.Important points of distinction between Cost Centre and &rofit Centre are as below'

(a) Cost Centres are created for accountin! convenience of costs and their control. hereas a profit centre is createdbecause of decentralisation of operations.

(b) % Cost Centre does not have tar!et costs but efforts are made to minimise costs, but each profit centre has a profittar!et and enoys authority to adopt such policies as are necessary to achieve its tar!ets.

Q 4.*+ain #rofit centres and in&estment centres. (%o& , - Marks)

A.Centres which have the responsibility of !eneratin! and maximiin! profits are called profit centres.Those centres which are concerned with earnin! an adequate return on investment are #nown as Investment centres.

Q ./ist do!n the factors that you !i++ consider efore insta++ing a costing system.numerate the factors !hich are to e considered efore insta++ing a system of cost accounting in a manufacturingorgani0ation. (May 91 - 2, marks)(%o& 99 - 5 marks)

A.The factors which must be considered before installin! a Costin! *ystem are listed below'(i) The obective of costin! system, for example whether it is bein! introduced for fixin! prices or for insistin! a system of costcontrol.

(ii) The system of costin! in each case should be desi!ned for improvin! the efficiency of operations in a particular area.(iii) The !eneral or!anisation of the business, with a view to introduce a system of cost control, without alterin! or extendin!the or!anisation appreciably.(iv) The technical aspects of the concern and the attitude and behaviour of the supervisory staff and wor#men.(v) The manner in which different variable expenses would be affected with expansion or cessation of different operations.(vi) The manner in which Cost and +inancial accounts could be inter"loc#ed into a sin!le inte!ral accountin! system.

Q !.What are the essentia+s of an effecti&e costing system$Discuss the essentia+ of a good cost accounting system$ (May 91 - 1 marks)(May ,4 - marks)

A. The essential features, which a !ood Cost %ccountin! *ystem should possess, are as follows'

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(i) Cost %ccountin! *ystem should be tailor"made, practical, simple and capable of meetin! the requirements of a businessconcern.(ii) The data to be used by the Cost %ccountin! *ystem should be accurate.(iii) ecessary cooperation and participation of executives from various departments of the concern is essential for developin!a !ood system of Cost %ccountin!.(iv) The cost of installin! and operatin! the system should ustify the results.(v) The system of costin! should not sacrifice the utility by introducin! meticulous and unnecessary details.(vi) % carefully phased pro!ramme should be prepared by usin! networ# analysis for the introduction of the system.

Q ".Distinguish et!een contro++a+e costs and uncontro++a+e costs. (May 9' - 4 marks)(Nov 01 - 2 marks) (May 03 - 2marks)

*+ain contro++a+e and non-contro++a+e cost !ith eam*+es. (#CC May , 3 marks) (May 0 - 2 marks)

A.Controllable costs are those which can be influenced by the action of a specified member of an underta#in!. % businessor!aniation 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 headin! thatresponsibility centre. -irect costs comprisin! direct labour, direct materials, direct expenses and some of the overhead are!enerally controllable by the shop level mana!ement.on"controllable costs are those which cannot be influenced by the action of a specified member of an underta#in!. +orexample, expenditure incurred by the tool room is controllable by the tool room mana!er but the share of the tool roomexpense which is apportioned to the machine shop cannot be controlled by the machine shop mana!er. It is only in relation toa particular individual that a cost may be specified as controllable or not.ote' . % supervisor may be unable to control the amount of mana!erial remuneration allocated to his department but for

the top mana!ement this would be a controllable cost./. -epreciation would be a non"controllable cost in the short"term but controllable in the lon! terms.

Q #.Distinguish et!een(i) aria+e cost and direct cost (ii) stimated cost and standard cost.

A.(i) Variable and direct cost:% variable cost is a cost that chan!es in total in direct proportion to chan!es in the related total activity or volume. Cost ofmaterial is an example of variable cost.-irect cost is a cost which can be identified either with a cost centre or with a cost unit. %n example of direct cost is the

allocation of direct materials to a department and then to the various obs. %ll variable costs are direct"but each direct costmay not be variable.

(ii) Estimated cost and standard cost:0stimated costs can be defined as the expected cost of manufacture or acquisition, often in terms of a unit of productcomputed on the basis of information available in advance of actual production or purchase. 0stimated cost are prospectivecosts since they refer to prediction of costs.*tandard Cost means a pre"determined cost. It attempts to show what the cost should be for clearly defined conditions andcircumstances. *tandard costs represent planned cost of a product. They are expected to be achieved under a particularproduction process under normal conditions.

Q $. numerate the main o6ecti&es of introduction of a Cost 7ccounting 8ystem in a manufacturing organisation(%o& ,, - marks)

What are the main o6ecti&es of Cost 7ccounting$ (May ,2 - marks)(#CC May , 3 marks)

A.The 1ain obectives of Cost %ccountin! in an or!aniation are. %scertainment of cost./. -etermination of sellin! price.2. Cost control and cost reduction.3. %scertainin! the profit of each activity.4. %ssistin! mana!ement in decision"ma#in!.5. -etermination of brea# even point.

Q 1%.Write short notes on any t!o of the fo++o!ing$(i) Con&ersion cost (May ,, - 4 marks)

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(ii) 8unk cost ( May , - 4 marks)(%o& ,, - 4marks)

(iii) :**ortunity cost ( May , - 4marks)

(i&) Differentia+ cost(&) #re-*roduction Cost (%o& ,, - 4marks)

(&i) ;raining Costs (%o& ,, - 4marks)

A.(i) Conversion cost: It is the cost incurred to convert raw materials into finished !oods. It is the sum of direct wa!es,direct expenses and manufacturin! overheads.

(ii) Sunk cost: 6istorical costs or the costs incurred in the past are #nown as sun# cost. They play no role in the currentdecision ma#in! process and are termed as irrelevant costs. +or example, in the case of a decision relatin! to the replacementof a machine, the written down value of the existin! machine is a sun# cost, and therefore, not considered.

(iii) Opportunity cost: It refers to the value of sacrifice made or benefit of opportunity fore!one in acceptin! an alternativecourse of action. +or example, a firm financin! its expansion plan by withdrawin! money from its ban# deposits. In such acase the loss of interest on the ban# deposit is the opportunity cost for carryin! out the expansion plan.

(iv) Differential cost: (Incremental and decremental costs). It represents the chan!e (increase or decrease) in total cost(variable as well as fixed) due to chan!e in activity level, technolo!y, process or method of production, etc. +or example if any

chan!e is proposed in the existin! level or in the existin! method of production, the increase or decrease in total cost or inspecific elements of cost as a result of this decision will be #nown as incremental cost or decremental cost.

(v) Pre-production cost: These costs forms the part of development cost, incurred in ma#in! a trial production run,preliminary to formal production. These costs are incurred when a new factory is in the process of establishment or a newproect is underta#en or a new product line or product is ta#en up, but there is no established or formal production to whichsuch costs may be char!ed. These costs are normally treated as deferred revenue expenditure (except the portion which hasbeen capitalised) and char!ed to the costs of future production.

(vi) rainin! cost:These costs comprises of 7 wa!es and salaries of the trainees or learners, pay and allowances of thetrainin! and teachin! staff, payment of fees etc, for trainin! or for attendin! courses of studies sponsored by outside a!enciesand cost of materials, tools and equipments used for trainin!. Costs incurred for runnin! the trainin! department, the lossesarisin! due to the initial lower production, extra spoila!e etc. occurrin! while providin! trainin! facilities to the new recruits.

%ll these costs are boo#ed under separate standin! order numbers for the various functions. Usually there is a servicecost centre, #nown as the Trainin! *ection, to which all the trainin! costs are allocated. The total cost of trainin! sectionis thereafter apportioned to production centers.

Q 11.Discuss cost c+assification ased on &ariai+ity and contro++ai+ity. (%o& ,4- 4 marks)

A.Cost c+assification ased on &ariai+ity


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A.*+icit costs These costs are also #nown as out of *ocketcosts. They refer to those costs which involves immediatepayment of cash. *alaries, wa!es, posta!e and tele!ram, interest on loan etc. are some examples of explicit costs becausethey involve immediate cash payment. These payments are recorded in the boo#s of account and can be easily measured.Main *oints of difference The followin! are the main points of difference between explicit and implicit costs.(i) Implicit costs do not involve any immediate cash payment. %s such they are also #nown as imputed costs or

economic costs.(ii) Implicit costs are not recorded in the boo#s of account but yet, they are important for certain types of mana!erial

decisions such as equipment replacement and relative profitability of two alternative courses of action.

Q 13.Discuss the four different methods of costing a+ong!ith their a**+icai+ity to concerned industry$ (%o& 99 - 4marks)

A.+our different methods of costin! alon! with their applicability to concerned industry have been discussed as below'. >o Costing The obective under this method of costin! is to ascertain the cost of each ob order. % ob card is prepared

for each ob to accumulate costs. The cost of the ob is determined by addin! all costs a!ainst the ob it is incurred. Thismethod of costin! is used in printin! press, foundries and !eneral en!ineerin! wor#shops, advertisin! etc.

/. ?atch Costing This system of costin! is used where small components9parts of the same #ind are required to bemanufactured in lar!e quantities. 6ere batch of similar products is treated as a ob and cost of such a ob is ascertainedas discussed under , above. If in a cycle manufacturin! unit, rims are produced in batches of /,4:: units each, then thecost will be determined in relation to a batch of /,4:: units.

2. Contract Costing If a ob is very bi! and ta#es a lon! time for its completion, then method used for costin! is #nown as

Contract Costin!. 6ere the cost of each contract is ascertained separately. It is suitable for firms en!a!ed in theconstruction of brid!es, roads, buildin!s etc.3. :*erating Costing The method of Costin! used in service renderin! underta#in!s is #nown as operatin! costin!. This

method of costin! is used in underta#in!s li#e transport, supply of water, telephone services, hospitals, nursin! homesetc.

Q 14.Distinguish et!een #eriod Costs and Discretionary Costs. (May@ %o& ,' - marks)

A. &eriod costs' There are the costs, which are not assi!ned to the products but are char!ed as expenses a!ainst therevenue of the period in which they are incurred. %ll non"manufacturin! costs such as !eneral and administrative expenses,sellin! and distribution expenses are period costs.-iscretionary costs' *uch costs are not tied to a clear cause and effect relationship between inputs and outputs. Theyarise from periodic decisions re!ardin! the maximum outlay to be incurred. 0xamples are 7 advertisin!, public relations,trainin! etc.

Q 1. ?rief+y discuss@ ho! the synergetic effect he+* in reduction in costs$ (#CC May ,' 3 marks)

A. Two or more products are produced and mana!ed to!ether.The result of combined efforts is hi!her than sum of the results of individual products.%nalysis of syner!etic effect is helpful in cost control.

Q 1!.What items are genera++y inc+uded in good uniform costing manua+$ (#CC May ,' 3 marks)

A.Uniform costin! manual includes essential information and instructions to implement accountin! procedures. (a) Introduction' It includes obects and scope of the plannin!. (b) %ccountin! procedure and plannin! includes rules, and !eneral principle to be followed.

(c) Cost accountin! plannin! includes methods of costin!, relation between cost and financial accounts and methods ofinte!ration.

Q1".Distinguish et!een Cost reduction and Cost contro+. (%o& ,@ May ,@ ,4@ %o& ,4 - 4 marks)(%o& ,' - marks)

A.Cost reduction Cost control

. I t aims at achievin! a reduction in unit cost of !oodsmanufactured or services rendered without impairin! theirsuitability for the use intended.

It aims at achievin! the pre"determined cost tar!etsand ends when the tar!ets are achieved.

/. It does not reco!nise any condition as permanent It entails tar!et settin!, ascertainin! the actual

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and believe that by waste reduction, expense reduction andincreased production cost reduction obective can beachieved.

performance and comparin! it with the tar!ets,investi!atin! the variances and ta#in! remedialmeasures.

2. I t assumes existence of concealed potential savin!sand challen!es the norm.

It does not challen!es norms or standardsestablished for the purpose.

3. It is a corrective function. It is a preventive function.

Q 1#.Distinguish et!een *roduct cost and *eriod cost. (#CC >une ,9 3 marks)

A.&roduct costs are associated with the purchase and sale of !oods. In the production scenario, such costs are associatedwith the acquisition and conversion of materials and all other manufacturin! inputs into finished product for sale. 6ence underabsorption cost, total manufacturin! costs constitute inventoriable or product cost.&eriods costs are the costs, which are not assi!ned to the products but are char!ed as expense a!ainst revenue of the periodin which they are incurred. ;eneral %dministration, mar#etin!, sales and distributor overheads are reco!nied as period costs.

Q 1$. 8tate and e*+ain the differences et!een


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Q 22. Define uniform costing. (%o& ,,@ ,' - 1@ 4marks)

Write a short note on uniform costing. (May 91 - marks)

A.hen a number of firms in an industry a!ree amon! themselves to follow the same system of costin! in detail, adoptin!common terminolo!y for various items and processes they are said to follow a system of uniform costin!. In such a case, acomparison of the performance of each of the firms can be made with that of another, or with the avera!e performance in theindustry. Under such a system it is also possible to determine the cost of production of !oods which is true for the industry asa whole. It is found useful when tax"relief or protection is sou!ht from the ;overnment.

Q 23.Discuss the &arious re*orts *ro&ided y Cost 7ccounting de*artment. (%o& ,' - 4marks)

A.The followin! are the various 8eports provided by Cost %ccountin! -epartment'(i) Cost sheet settin! out the total cost, analysed into various elements, !ivin! comparative fi!ure of previous period

and other plants under the same mana!ement.(ii) Consumption of material statements.(iii) >abour utiliation statements, details about total number of hours paid for, standard hours for output, idle time and

causes thereof.(iv) abour turnover and cost of recruitment and trainin! of new employee.(ix) 0xpenses incurred on 8 ? - as compared to bud!eted amount.

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&ater'aQ 1.Distinguish et!een ?i++ of Materia+ and Materia+ Beuisition %ote.Write notes on ?i++ of Materia+. (May 9 - 4 marks)

A.?i++ of Materia+It is a comprehensive list of materials with exact description and specifications, required for a ob or other

production units. This also provides information about required quantities so that if there is any deviation from the standards, itcan easily be detected. It is prepared by the 0n!ineerin! or &lannin! -epartment in a standard form.Materia+ reuisition %oteIt is a formal written demand or request, usually from the production department to store for thesupply of specified materials, stores etc. It authorises the store#eeper to issue the requisitioned materials and record the sameon bin card.The purpose of bill of material is to act as a sin!le authorisation for the issue of all materials and stores items mentioned in it.It provides an advance intimation to store department about the requirements of materials. It reduces paper wor#. It serves asa wor# order to the production department and a document for computin! the cost of material for a particular ob or wor# orderto the cost department.The purpose of material requisition note is to draw material from the store by concerned departments.

Q 2.hat are the main obectives of material control @ 0xplain the important requirements to attain these obectives.

A.Ob&ectives of system of material control:(i) 0nsurin! that no activity, particularly production, suffers from interruption for want of materials and stores. This requiresconstant availability of every item that may be needed howsoever small its cost may be.(ii) *eein! to it that all the materials and stores are acquired at the lowest possible.(iii) 1inimisation of the total cost involved, both for acquirin! stoc#s and for holdin! them.(iv) %voidance of unnecessary losses and wasta!es that may arise from deterioration in quality due to defective or lon!stora!e or from obsolescence.(v) 1aintenance of proper records to ensure that reliable information is available for all items of materials and stores. This willhelp in detectin! losses ? pilfera!es. It will facilitate proper production plannin!."e'uirements of material control:1aterial control requirements are as follows'.. &roper co"ordination of all departments involved &i0.@ finance, purchasin!, receivin!, inspection, stora!e, accountin! and

payment./. -eterminin! purchase procedure to see that purchases are made, after ma#in! suitable enquiries, at the most favourableterms to the firm.2. Use of standard forms for placin! the order, notin! receipt of !oods, authorisin! issue of the materials etc.3. &reparation of bud!ets concernin! materials, supplies and equipment to ensure economy in purchasin! and use ofmaterials.4. *tora!e of all materials and supplies in a well desi!nated location with proper safe!uards.5.


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(a) >osses due to reasons li#e evaporation, shrin#a!e, absorption and moisture, etc. are considered as normal losses. *uchlosses are absorbed by !ood production units by inflatin! the cost of material issued for production.(b) >osses due to fire, flood, storm, theft etc. are treated as abnormal losses. If these losses are heavy and are notrecoverable from the insurance authorities, it is preferred to char!e them to Costin! &rofit and >oss %ccount.

(iii) Cas# discount received:It is an allowance !iven by the vendor for prompt payment of material price. The opinionamon! accountants about its treatment differs. Two prevalent approaches for treatin! the cash discount received are asfollows'"(a) The cash discount received in the course of materials buyin! should be deducted from the invoice price of the materials.

This way the discount received will reduce the purchase price of the materials.(b) It may be treated as an item of financial nature and therefore be #ept outside the purview of cost accountin!. 6owever, itcan be dealt in the followin! manner.The full invoice price should be char!ed to the material account creditin! the suppliers with the net invoice price, and thediscount earned account with the amount of cash discount received. If the prompt payment could not be made, the discountlost is debited to the discount lost account. %ny difference between the discount earned and discount lost may be treated asan item of administrative overhead.

(iv) nsurance costs on stocks of ra$ materials:The amount paid as insurance costs (insurance premium) on stoc#sof raw materials is meant for coverin! the ris# which may arise due to fire, theft, riot etc. The insurance cost is apportionedover different materials on the basis of their value. This cost may be char!ed directly to the cost of material.

Q 4.Write short note on (i) Be*+acement #rice and (ii) 8tandard #rice

A.(i)Replacement Price Method: 8eplacement price is defined as the price at which it is possible to purchase an item,identical to that which is bein! replaced or revalued. Under this method, materials issued are valued at the replacement costof the items. This method pre"supposes the determination of the replacement cost of materials at the time of each issueA &i0.@the cost at which identical materials could be currently purchased. The product cost under this method is at current mar#etprice, which is the main obective of the replacement price method.This method is useful to determine true cost of production and to value material issues in periods of risin! prices, because thecost of material considered in cost of production would be able to replace the materials at the increased price.

Advantage: &roduct cost reflects the current mar#et prices and it can be compared with the sellin! price.Disadvantage: The use of the method requires the determination of mar#et price of material before each issue of material.*uch a requirement creates problems.

(ii) Standard Price Method: Under this method, materials are priced at some predetermined rate or standard price

irrespective of the actual purchase cost of the materials. *tandard cost is usually fixed after ta#in! into consideration thefollowin! factors'(i) Current prices,(ii) %nticipated mar#et trends, and(iii) -iscount available and transport char!es etc.*tandard prices are fixed for each material and the requisitions are priced at the standard price. This method is useful forcontrollin! material cost and determinin! the efficiency of purchase department. In the case of hi!hly fluctuatin! prices ofmaterials, it is difficult to fix their standard cost on lon!"term basis.

Advantages:() The use of the standard price method simplifies the tas# of valuin! issues of materials.(/) It facilitates the control of material cost and the tas# of ud!in! the efficiency of purchase department.(2) It reduces the clerical wor#.

Disadvantages:() The use of standard price does not reflect the mar#et price and thus results in a profit or loss.(/) The fixation of standard price becomes difficult when prices fluctuate frequently.

Q .*+ain the conce*t of 7?C 7na+ysis as a techniue of in&entory contro+. (May ,, - marks)(Nov 04 - 4 marks)(#CC May , 3 marks)

What do you understand y 7?C ana+ysis of in&entory contro+$ (%o& 9 - 1 marks)Write short note on 7?C 7na+ysis. (May 91 - 4 marks)

7+so e*+ain the ro+eEim*ortance of 7?C ana+ysis in materia+ contro+.

A.*C nalysis as a tec#ni'ue of nventory Control:

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It is a system of inventory control. It exercises discriminatin! control over different items of stores classified on the basis ofinvestment involved. Usually they are divided into three cate!ories accordin! to their importance, namely, their value andfrequency of replenishment durin! a period.B%$ cate!ory of items consists of only a small percenta!e i.e. about : of total items handles by the stores but require heavyinvestment about D: of inventory value, because of their hi!h price or heavy requirement or both.BE$ cate!ory of items are relatively less important 7 /: of the total items of material handled by stores and of investmentrequired is about /: of total investment in inventories.BC$ cate!ory 7 D: of total items handled and : of value.

+or B%$ cate!ory items, stoc#s levels and 0


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(ii) +ust-in-time (+) purc#asin!: The purchase of !oods or materials such that delivery immediately precedes demand oruse. In the extreme, no inventories would be held.

Q $.;o e a+e to ca+cu+ate a asic :F certain assum*tions are necessary. /ist do!n these assum*tions. (%o& 95 - marks)

A.The computation of economic order quantity is subect to the followin! assumptions'(i)


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(iii) In the case of fallin! price, profit tend to rise due to lower material cost, yet the finished !oods appear to be morecompetitive and are at mar#et price.

(iv) I+< will iron out the fluctuations in profit. (v) -urin! the period of inflation, >I+< will tend to show the correct profit.

Q 14. *+ain


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- G %nnual -emand in units* G *et up cost per batchC G Carryin! cost per unit per annum.

Q 1#.What is materia+ hand+ing cost$ =o! !i++ you dea+ !ith it in cost account$ (May 99 - marks)

A.Materia+ hand+ing costIt refers to the expenses involved in receivin!, storin!, issuin! and handlin! materials. To deal withthis cost in cost accounts there are two prevalent approaches as under'+irst approach su!!ests the inclusion of these costs as part of the cost of materials by establishin! a separate material

handlin! rate e.!., at the rate of percenta!e of the cost of material issued or by usin! a separate material handlin! rate whichmay be established on the basis of wei!ht of materials issued.Under another approach these costs may be included alon! with those of manufacturin! overhead and be char!ed over theproducts on the basis of direct labour or machine hours.

Q 1$.Discuss the treatment of s*oi+age and defecti&es in Cost 7ccounting.(#CC May ,'@ >une ,9 3 marks)(# %o& ,' - 4 marks) (May , - marks)

A.Spoila!e: *poila!e is the tem used for materials which are badly dama!ed in manufacturin! operations, and it cannotrectified economically and hence ta#en out of the process to be disposed of in some manner without further processin!.%orma+spoila!e costs are included in costs either char!in! it to production order or by char!in! it to production overheads sothat it is spread over all products. %ny value realied from spoila!e is credited to production order or production overheadaccount as the case may be.

Cost of anorma+spoila!e is char!ed to costin! profit ? loss %9c.Defectives: -efectives si!nifies those units or portions of production which can be rectified and turned cut as !ood units byapplication of additional material, labour or other service.%orma+defectives can be recovered ' char!ed to !ood production' char!ed to !eneral overhead' char!ed to department.If defectives are anorma+and are due to causes beyond the control of or!aniation then they should be char!ed to profit andloss %9c.

Q 2%.Differentiate et!een Gscra*H and Hdefecti&esH and ho! they are treated in cost accounting. (#CC %o& , 3 marks)

A.Scrap:*crap is incidental residence from certain type of manufacture, usually of small amount and low value, recoverablewithout further processin!.

The cost of scrap is borne by !ood units and income scrap is treated as other income.Defectives:-efectives si!nifies those units or portions of production which can be rectified and turned cut as !ood units byapplication of additional material, labour or other service.%orma+defectives can be recovered ' char!ed to !ood production' char!ed to !eneral overhead' char!ed to department.If defectives are anorma+and are due to causes beyond the control of or!aniation then they should be char!ed to profit andloss %9c.

Q 21.Distinguish amongstWaste8*oi+age

8a+&ageBectification8cra*.

=o! are they treated in Cost 7ccounts$Discuss the accounting treatment of defecti&es in cost accounts. (May ,, - 4marks)

A. Waste: It represents that portion of basic raw materials lost in processin! havin! no recoverable value. aste may bevisible"remnants of basic raw materialsor invisible, e.!., disappearance of basic raw materials throu!h evaporation, smo#eetc.%orma+waste is absorbed in the cost of net output, whereas anorma+waste is transferred to the Costin! &rofit and >oss%ccount.

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Spoila!e: *poila!e is the tem used for materials which are badly dama!ed in manufacturin! operations, and it cannot rectifiedeconomically and hence ta#en out of the process to be disposed of in some manner without further processin!.%orma+spoila!e costs are included in costs either char!in! it to production order or by char!in! it to production overheads sothat it is spread over all products. %ny value realied from spoila!e is credited to production order or production overheadaccount as the case may be.Cost of anorma+spoila!e is char!ed to costin! profit ? loss %9c.Salva!e:*alva!ed material refers to the material retrieved from the spoiled wor#. *alva!e is the process by which salva!edmaterial is retrieved. The salva!ed units of material are usable in the production.

The value of salva!ed material may be credited to the account to which spoila!e is char!ed."ectification:It means brin!in! bac# the defective units either to standard units of production or as seconds, by rewor#in!.Eefore the start of rectification wor#, an estimate of the cost of rectification is prepared and compared with the excess value tobe obtained after rectification. The concern only !oes ahead with the tas# of rectification if the aforesaid comparison is foundfavourable.The tas# of rectification is usually carried out under a J8ectification or#


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A.Considerations for t#e fi0ation of ma0imum level of inventory11aximum level of an inventory item is its maximum quantity held in stoc# at any time. The mathematical formula used for itsdetermination is as follows'

1aximum level G 8e"order level 7 (1inimum Consumption K 1inimum 8e"order period) L 8e"order quantity.The important considerations which should !overn the fixation of maximum level for various inventory items are as follows'() The fixation of maximum level of an inventory item requires information about re"order level.(/) Mnowled!e about minimum consumption and minimum delivery period for each inventory item should also be #nown.(2) The determination of maximum level also requires the fi!ure of economic order quantity.

(3) %vailability of funds, stora!e capacity, nature of items and their price also are important for the fixation of minimum level.(4) In the case of important materials due to their irre!ular supply, the maximum level should be hi!h.Considerations for t#e fi0ation of minimum level of inventory1inimum level indicates the lowest fi!ures of inventory balance, which must be maintained in hand at all times, so that thereis no stoppa!e of production due to non"availability of inventory. The formula used for its calculation is as follows'

1inimum level of inventory G 8e"order level 7 (%vera!e rate of consumption K %vera!e time of inventory delivery).

#e main considerations for t#e fi0ation of minimum level of inventory are as follo$s:. Information about maximum consumption and maximum delivery period in respect of each item to determine its re"orderlevel./. %vera!e rate of consumption for each inventory item.2. %vera!e delivery period for each item. The period can be calculated by avera!in! the maximum and minimum period.

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3

a*o+rQ 1. Distinguish et!een ;ime kee*ing and ;ime ooking.(M)

A. ttendance Procedure 2 ime-keepin!' It refers to correct recordin! of the employees, attendance time. There isdifference between .time #eepin! and time boo#in!. The latter refers to brea# up of time on various obs while the formerimplies a record of total time spent by the wor#ers in a factory.%ttendance 8e!ister and 1etal -isc 1ethod are the manual methods of time"#eepin!.Time 8ecordin! Cloc#s and -ial Time 8ecords are the mechanical methods of time"#eepin!.ime-*ookin!:Information !enerated by time"#eepin! department do not show'

how the total time was put to use in the factory

how lon! he was #ept waitin! for one reason or another due to lac# of wor#, lac# of material and supplies, lac# of

instructions, machine brea#downs, power failures and the li#e.These are all vital pieces of information necessary for the proper collection of cost data and for effective controllin! of costs.+or the collection of all such information, a separate record, !enerally #nown as Time (or Nob) card, is #ept. This is called time"boo#in!.

Q 2. Discuss rief+y the im*ortant factors for the contro+ of +aour cost.(M)

A.The main points which need consideration for controllin! labour costs are the followin!'(i) %ssessment of manpower requirements.(ii) Control over time"#eepin! and time"boo#in!.(iii) Time ? 1otion *tudy.(iv) Control over idle time and overtime.(v) Control over labour turnover.(vi) a!e systems.(vii) Incentive systems.(viii) *ystems of wa!e payment and incentives.(ix) Control over casual, contract and other wor#ers.(x) Nob 0valuation and 1erit 8atin!.(xi) >abour productivity.

Q 3. Discuss the o6ecti&es of time kee*ing I time ooking.

A.Time keeping has the following two objectives:(i) #re*aration of #ayro++a!e bills are prepared by the payroll department on the basis of information provided bythe time #eepin! department.(ii) Com*utation of Cost >abour cost of different obs, departments or cost centers are computed by costin!department on the basis of information provided by the time #eepin! department.#e ob&ectives of time bookin! are as follo$s:(i) To ascertain the labour time spent on the ob and the idle labour hours.(ii) To ascertain labour cost of various obs and products.(iii) To calculate the amount of wa!es and bonus payable under the wa!e incentive scheme.(iv) To compute and determine overhead rates and absorption of overheads under the labour and machine hour

method.(v) To evaluate the performance of labour by comparin! actual time boo#ed with standard or bud!eted time.

Q 4. Discuss rief+y the &arious factors necessary for introducing an incenti&e system.*+ain the characteristics of a good incenti&e system.

A.=arious factors necessary for introducin! an incentive system are'(i) It should be ust both to the employer and to the employee.(ii) It should be stron! both ways i.e. it should have a standard tas# and a !enerous return.(iii) It should be unrestricted as to the amount of the earnin!.(iv) It should be reasonable, apart from bein! simple, for employee to fi!ure out his incentive in relation to his individualperformance.

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(v) It should be flexible and intimately related to other mana!ement controls.(vi) It should automatically assist supervision and, when necessary, aid team wor#.(vii) It should have employee$s support and in no way should it be paternalistic.(viii) It should have mana!erial support in so far as production material, quality control, maintenance and non"financialincentives are concerned.(ix) It should not be used temporarily and dropped in recession times as means of wa!e reduction.

Q .Discuss the accounting treatment of Ad+e time and o&ertime !ages. (May@ ,,@ marks)

Discuss the treatment of o&ertime *remium in Cost accounting. (%o&. ,,4@ marks) (#CC May , 3 marks)

A.Accounting treatment of idle time wages in cost accounts:%orma+ id+e time is inherent in any ob situation and thus it cannot be eliminated or reduced. +or example' time !apbetween the finishin! of one ob and the startin! of anotherA time lost due to fati!ue etc. The cost of normal idle timeshould be char!ed to the cost of production. This may be done by inflatin! the labour rate. It may be transferred tofactory overheads for absorption, by adoptin! a factory overhead absorption rate.

7norma+ id+e timeis defined as the idle time which arises on account of abnormal causesA e.!. stri#esA loc#outsA floodsAmaor brea#down of machineryA fire etc. *uch an idle time is uncontrollable. The cost of abnormal idle time due to anyreason should be char!ed to Costin! &rofit ? >oss %ccount.Treatment of Overtime Premium in Cost Accounting

If overtime is resorted to at the desire of the customer, then overtime premium may be char!ed to the ob directly.

If overtime is required to cope with !eneral production pro!ramme or for meetin! ur!ent orders, the overtimepremium should be treated as overhead cost of the particular department or cost center, which wor#s overtime.

If overtime is wor#ed in a department, due to the fault of another department, the overtime premium should be

char!ed to the latter department.

%9c.

Q !. What is o&ertime *remium$ *+ain the treatment of o&ertime *remium in cost accounting. 8uggest ste*s forcontro++ing o&ertime. (%o& 95 - marks)

A.Overtime premium:


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A. Idle timerefers to the labour time paid for but not utilied on production. It, in fact, represents the time for whichwa!es are paid, but durin! which no output is !iven out by the wor#ers. This is the period durin! which wor#ers remainidle.Reasons for idle time: %ccordin! to reasons, idle time can be classified into normal idle time and abnormal idle time.ormal idle time is the time which cannot be avoided or reduced in the normal course of business.

The main reasons for the occurrence of normal idle time are as follows'. Time ta#en by wor#ers to travel the distance between the main !ate of factory and the place of their wor#./. Time lost between the finish of one ob and startin! of next ob.

2. Time spent to overcome fati!ue.3. Time spent to meet their personal needs li#e ta#in! lunch, tea etc.The main reasons for the occurrence of abnormal idle time are'. -ue to machine brea# downs, power failure, non"availability of raw materials, tools or waitin! for obs due todefective plannin!./. -ue to conscious mana!ement policy decision to stop wor# for some time.2. In the case of seasonal !oods producin! units, it may not be possible for them to produce evenly throu!hout theyear. *uch a factor too results in the !eneration of abnormal idle time.Treatment in Cost Acconting:(Same as in Q 5.)

Q $.Distinguish et!een Ad+e ;ime and Ad+e abour turnover of an or!aniation in the rate of chan!e in its labour force durin! a specified period. This rateof chan!e is compared with an index which acts as a thermometer to ascertain its reasonableness. The suitable index oflabour turnover may be the standard or usual labour turnover in the industry or locality, or the labour turnover rate for apast period. % hi!her labour turnover reflects that the wor#ers in the or!aniation are new and inexperienced, and it is amatter of concern to the or!aniation. %lso it accounts for an increase in cost of production and even disturbs the evenflow of production in the mar#et.

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Measurement of /aour ;urno&er (See next question)Causes of /aour ;urno&er:The main causes of labour turnover in an or!aniation9industry can be broadly classifiedunder the followin! heads'(a) &ersonal Causes(b) Unavoidable Causes(c) %voidable Causes#ersona+ Causesare those which induce or compel wor#ers to leave their obs purely on personal !roundsA e.!.(i) Chan!e of ob for betterment.

(ii) -iscontentment over the ob and wor#in! environment."na&oida+e Causesare those under which it become obli!atory on the part of mana!ement to as# some or more oftheir employees to leave the or!aniationA such causes may include the followin!'(i) *horta!e of raw material, power, demand for the products, etc.(ii) Chan!e in the plant location.

7&oida+e Causesare those causes which require the attention of mana!ement on a continuous basis so as to #eep thelabour turnover ratio as low as possible. The main causes are as follows'(i) -issatisfaction with ob, remuneration, hours of wor#, wor#in! conditions etc.(ii) >ac# of trainin! facilities and promotional avenues.(iii) >ow wa!es and allowances.Bemedia+ ste*s to minimi0e +aour turno&er (See Q 13.)

Q 11.Discuss the three methods of ca+cu+ating +aour turno&er. (%o& ,4 - marks)

Discuss the three methods of ca+cu+ating +aour turno&er. (%o& ,' - 4 Marks)

A.Methods of Calculating labour turnover

( i) 8eplacement method Grollonemployeesofnumber.%v

::replacedemployeesof.,o

(ii) *eparation method G ::yearthedurin!rolltheonemployeesofnumber%v.

yearthedurin!separatedemployeesof,o.

(ii i) +lux method G ::periodthedurin!rollonemployeesofnumber.%v

)replacedemployeesof.,oseparatedemployeesof.,o(

+

Q 12.What is the im*act of /aour ;urno&er on a manufacturing organisations !orking$ (%o& 9 - 1marks)

A.>abour turnover refers to the rate of chan!e in the composition of labour force of a concern durin! a specified periodof time. The impact of labour turnover on a manufacturin! or!anisation$s wor#in! is many fold.In fact the labour turnover increases the cost of production in the followin! ways'(i) 0ven flow of production is disturbed.(ii) Cost of recruitment and trainin! increases.(iii) Erea#a!e of tools, wasta!e of materials increases.(iv)


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structure for the various ob positions. In other words, ob evaluation provides a rationale for differential wa!es andsalaries for different !roup of employees and ensures that these differentials are consistent and equitable.Merit rating is the quantitative or qualitative assessment of an employee$s personality or his performance on the obmade by his supervisor or other person qualified to ud!e.;he main *oints of distinction et!een 6o e&a+uation and merit rating are as fo++o!s. Nob evaluation is the assessment of the relative worth of obs within a company and merit ratin! is the assessmentof the relative worth of the man behind a ob./. Nob evaluation and its accomplishments are meant to set up a rational wa!e and salary structure whereas merit

ratin! provides a scientific basis for determinin! fair wa!es for each wor#er based on his ability and performance.2. Nob evaluation simplifies wa!e administration by brin!in! an uniformity in wa!e rates where as merits ratin! isused to determine fair rate of pay for different wor#ers.

Q 1.What do you understand y time and motion study$Distinguish et!een time study and motion study.

A. ;ime and motions study It is the study of time ta#en and motions (movements) performed by wor#ers whileperformin! their obs at the place of their wor#. Time and motion study has played a si!nificant role in controllin! andreducin! labour cost.Time *tudy is concerned with the determination of standard time required by a person of avera!e ability to perform a

ob. 1otion study, on the other hand, is concerned with determinin! the proper method of performin! a ob so that thereare no wasteful movements, hirin! the wor#er unnecessarily. 6owever, both the studies are conducted simultaneously.

*ince materials, tools, equipment and !eneral arran!ement of wor#, all have vital bearin! on the method and timerequired for its completion. Therefore, their study would be incomplete and would not yield its full benefit without aproper consideration of these factors.

Q 1!.Discuss t!o ty*es of Costs@ !hich are associated !ith +aour turno&er. (%o& , - marks)

Discuss the t!o ty*es of cost associated !ith +aour turno&er. (%o& 99 - 4 marks)

A.Two types of costs associated with labour turnover are'( i) #re&enti&e costsThese costs are incurred to #eep the labour turnover rate at a low level. They include costs of accommodation, transportfacilities, medical services, welfare schemes, pension schemes, environment improvement, li!htin!, heatin!, air"conditionin! etc. The rate of labour turnover is usually low, if a company incurs hi!her preventive costs.(ii) Be*+acement costs

These costs arise due to hi!h labour turnover, e.!. cost of advertisin!, recruitment, selection, trainin! ? induction,abnormal brea#a!e and scrap, extra wa!es ? overheads etc., caused as a result of inefficient and inexperienced newlyrecruited wor#ers.

Q 1".8tate the circumstances in !hich time rate system of !age *ayment can e *referred in a factory. (%o& ,4 - marks)

A.In the followin! circumstances the time rate system of wa!e payment is preferred in a factory.. &ersons whose services cannot be directly or tan!ibly measured, e.!., !eneral helpers, supervisory and clericalstaff etc./. or#ers en!a!ed on hi!hly s#illed obs or renderin! s#illed services, e.!., tool ma#in!, inspection and testin!.2. here the pace of output is independent of the operator, e.!., automatic chemical plants.

Q 1#.At shou+d e managements endea&or to increase in&entory turno&er ut to reduce +aour turno&er. *and andi++ustrate the idea contained in this statement.

A. An&entory turno&er It is a ratio of the value of materials consumed durin! a period to the avera!e value of inventoryheld durin! the period. % hi!h inventory turnover indicates fast movement of stoc#./aour turno&er It is defined as an index denotin! chan!e in the labour force for an or!aniation durin! a specifiedperiod. >abour turnover in excess of normal rate is termed as hi!h and below it as low turnover.ffects of high in&entory turno&er and +o! +aour turno&er 6i!h inventory turnover reduces the investment of funds ininventory and thus accounts for the effective use of the concern$s financial resources. It also accounts for the increaseof profitability of a business concern. %s a!ainst hi!h labour turnover the low labour turnover is preferred because hi!hlabour turnover causes"decrease in production tar!etsA increase in the chances of brea# down of machines at theshopfloor levelA increase in the number of accidentsA loss of customers and their brand loyalty due to either non"supply

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of the finished !oods or due to sub"standard production of finished !oodsA increase in the cost of selection, recruitmentand trainin!A increase in the material wasta!e and tools brea#a!e.%ll the above listed effects of hi!h labour turnover accounts for the increase in the cost of production9process9service.This increase in the cost finally accounts for the reduction of concern$s profitability. Thus, it is necessary to #eep thelabour turnover at a low level.%s such, it is correct that mana!ement should endeavour to increase inventory turnover and reduce labour turnover foroptimum and best utiliation of available resources and reduce the cost of production and thus increase the profitabilityof the or!aniation.

Q 1$.Distinguish et!een Direct and Andirect +aour. (%o& ,2 - marks)

A.-irect labour cost is the labour costs that is specifically incurred for or can be readily char!ed to or identified with a specificob, contract, wor#"order or any other unit of cost.Indirect labour costs are labour costs which cannot be readily identified with products or services but are !enerally incurred incarryin! out production activity.The importance of the distinction lies in the fact that whereas direct labour cost can be identified with and char!ed to the ob,indirect labour costs cannot be so char!ed and are, therefore, to be treated as part of the factory overheads to be included inthe cost of production.

Q 2%. "nder the Bo!an #remium ?onus system@ a +ess efficient !orker can otain same onus as a high+y efficient!orker. Discuss !ith suita+e eam*+es. (May ,' - 4 Marks)

A.

Eonus under 8owan system G hourperratesavedtimeallowedTime

ta#enTime

+or example let time allowed for a ob G 3 hours and >abour rate G 8s. 4 per hour.Case : ess efficient $orkerIf time ta#en G 2 hoursThen time saved G 3 7 2 G hour

Eonus G 2.D48s.48s.hourhours3

hours2=

Case : 3i!#ly efficient $orkerIf time ta#en G hour

Then time saved G 3 7 G 2 hoursEonus G 2.D48s.48s.hours2

hours3

hour=

*o, it can be concluded that under 8owan *ystem, the less efficient wor#er and hi!hly efficient wor#er can !et the samebonus.

Q 21.numerate the &arious methods of ;ime ooking.A.The various methods of time boo#in! are'(a) Nob tic#et.(b) Combined time and ob tic#et.(c) -aily time sheet.(d) &iece wor# card.

(e) Cloc# card.

Q 22.Descrie rief+y@ ho! !ages may e ca+cu+ated under the fo++o!ing systems(i) Kantt task and onus system(ii) mersons efficiency system(iii) Bo!an system(i&) =a+sey system(&) ?arth system. (#CC %o& , 3 9 marks)-iscuss the ;antt tas# and bonus system as a system of wa!e payment and incentives. (ov :3 " 2 mar#s)

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A. (i)4antt task and bonus system: This system is a combination of time and piecewor# system. %ccordin! to thissystem a hi!h standard or tas# is set and payment is made at time rate to a wor#er for production below the setstandard.

a!es payable to wor#ers under the plan are calculated as under'

:ut*ut #ayment

(i)


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4

O,erhea-sQ 1. Define administration o&erheads and state rief+y the treatment of such o&erheads in Cost 7ccounts. (%o& 91 4marks)

A.dministration Over#ead:These are costs of formulatin! the policy, directin! the or!anisation and controllin! theoperation of an underta#in!. These are not related directly to production activity or function. In other words, allexpenses, incurred on policy formulation, direction, control, office administration and business mana!ement areincluded in administration overheads.reatment of dministrative Over#eads in Cost ccountin!

(i) Charge to Costing #rofit and /oss 7ccount %ccordin! to this method administrative overheads should be treatedas fixed cost as they are concerned with the formulation of policy. 6ence these overheads should be transferred to theCostin! &rofit and >oss %ccount.

(ii) 7**ortionment et!een #roduction and 8e++ing and Distriution%ccordin! to this method, it is assumed thatadministrative overheads are incurred both for production and for sellin! and distribution. Therefore these overheads shouldbe divided on some equitable basis between production and sellin! and distribution activity.

(iii) ;reat as a se*arate e+ement of tota+ cost 6ere administration overheads are considered as a cost of a distinct andidentifiable operation of the or!anisation necessary to carry on its activity. Therefore these overheads are recoveredseparately on some equitable basis which may be on cost or sales basis.

Q 2.What is +anket o&erhead rate$ An !hich situations@ +anket rate is to e used and !hy$ (May 99 - marks)

*+ain ?+anket o&erhead rate. (#CC %o& ,' 3 marks)

A.Elan#et overhead rate refers to the computation of one sin!le overhead rate for the entire factory. This is also #nown asplantwise or the sin!le overhead rate for the entire factory. It is determined as follows'

8ituation for using +anket rateThe use of blan#et rate may be considered appropriate for factories which produce only one maor product on a continuousbasis, e.!. chemical plant, !lass plant etc.. It may also be used in those units in which all products utilise same amount of timein each department. If such conditions do not exist, the use of blan#et rate will !ive misleadin! results in the determination ofthe production cost, specially when such a cost ascertainment is carried out for !ivin! quotations and tenders.

Q 3.What is Ad+e Ca*acity $ =o! shou+d this e treated in cost accounts$ (May 9' - 1marks)

=o! !ou+d you treat the id+e ca*acity costs in Cost 7ccounts$ (%o& ,2 - 4marks)

Discuss accounting treatment of id+e ca*acity costs in cost accounting. (#CC >une ,9 3 marks)

A.It is that part of the capacity of a plant, machine or equipment which cannot be effectively utilised in production. The idlecapacity may arise due to lac# of product demand, no availability of raw"material, shorta!e of s#illed labour, shorta!e ofpower, etc. Costs associated with idle capacity are mostly fixed in nature. These costs remain unabsorbed or unrecovered dueto under"utilisation of plant and service capacity.Idle capacity costs are treated in the followin! ways in Cost %ccounts.(a) If idle capacity is due to unavoidable reasons such as repairs ? maintenance, chan!e over of ob etc., a

supplementary overhead rate may be used to recover the idle capacity cost. In this case, the costs are char!ed to productioncapacity utilied.(b) If idle capacity cost is due to avoidable reasons such as faulty plannin!, power failure etc, the cost should be char!edto Costin! &rofit ? >oss %9c.(c) If idle capacity is due to seasonal factors, then the cost should be char!ed to cost of production by inflatin! overhead rates.

Q 4. What is an id+e ca*acity$ What are the costs associated !ith it$ =o! are these treated in *roduct costs$

A. Idle Capacity: Idle capacity is that part of the capacity of a plant, machine or equipment which cannot beeffectively utilised in production. In other words, it is the difference between the practical or normal capacity andcapacity of utilisation based on expected sales. +or example, if the practical capacity of production of a machine is to

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the tune of :,::: units in a month, but is used only to produce P,::: units, because of mar#et demand of the product,then in such a case, /,::: units will be treated as the idle capacity of the machine.The idle capacity may arise due to lac# of product demand, non"availability of raw"material, shorta!e of s#illed labour,absenteeism, shorta!e of power, fuel or supplies, seasonal nature of product, etcdle Capacity Costs: Costs associated with idle capacity are mostly fixed in nature. These include depreciation, repairs andmaintenance char!es, insurance premium, rent, rates, mana!ement and supervisory costs. These costs remain unabsorbedor unrecovered due to under"utilisation of plant and service capacity. Idle capacity cost can be calculated as follows'"

Idle capacity cost Gcapacityplant,ormal

planttorelatedoverhead%!!re!ateK Idle Capacity

;reatment of Ad+e ca*acity costIdle capacity costs can be treated in product costin!, in the followin! ways'(i) If the idle capacity cost is due to unavoidable reasons such as repairs, maintenance, chan!e over of ob, etc, asupplementary overhead rate may be used to recover the idle capacity cost. In this case, the costs are char!ed to theproduction capacity utilised.(ii) If the idle capacity cost is due to avoidable reasons such as faulty plannin!, power failure etc., the cost should bechar!ed to profit and loss account.(iii) If the idle capacity cost is due to seasonal factors, then, the cost should be char!ed to the cost of production by inflatin!overhead rates.

Q .Discuss the *ro+ems of contro++ing the se++ing and distriution o&erheads. (May ,4 - marks)

A.#ro+ems of contro++ing the se++ing I distriution o&erheads are(i) The incidence of sellin! ? distribution overheads depends on external factors such as distance of mar#et, nature ofcompetition etc. which are beyond the control of mana!ement.

(ii) They are dependent upon customersJ behaviour, li#in! etc. (iii) These expenses are of the nature of policy costs and hence not amenable to control.The above problems of controllin! sellin! ? distribution overheads can be tac#led by adoptin! the followin! steps' (a) Comparin! the fi!ures of sellin! ? distribution overhead with the fi!ures of previous period. (b) *ellin! ? distribution overhead bud!ets may be used to control such overhead expenses by ma#in! a comparison of

bud!etary fi!ures with actual fi!ures of overhead expenses, ascertainin! variances and finally ta#in! suitable actions, (c) *tandards of sellin! ? distribution expenses may be set up for salesmen, territories, products etc. The laid downstandards on comparison with actual overhead expenses will reveal variances, which can be controlled by suitable action.

Q !.Discuss in rief three main methods of a++ocating su**ort de*artments costs to o*erating de*artments. :ut of these

three@ !hich method is conce*tua++y *refera+e$ (%o& 99 - 4 marks)Discuss the ste* method and reci*roca+ ser&ice method of secondary distriution of o&erheads. (%o& ,4 - 4 marks)

A.The three main methods of allocatin! support departments costs to operatin! departments are'(i) Direct re-distriution method Under this method, support department costs are directly apportioned to variousproduction departments only. This method does not consider the service provided by one support department to anothersupport department.(ii) 8te* methodUnder this method the cost of the support departments that serves the maximum numbers ofdepartments is first apportioned to other support departments and production departments. %fter this the cost of supportdepartment servin! the next lar!est number of departments is apportioned. In this manner we finally arrive on the cost ofproduction departments only.(iii) Beci*roca+ ser&ice methodThis method reco!nises the fact that where there are two or more support departmentsthey may render services to each other and, therefore, these inter"departmental services are to be !iven due wei!ht while re"distributin! the expenses of the support departments. The methods available for dealin! with reciprocal services are'

(a) *imultaneous equation method(b) 8epeated distribution method(c) Trial and error method.

The reciprocal service method is conceptually preferable. This method is widely used even if the number of servicedepartments is more than two because due to the availability of computer software it is not difficult to solve sets ofsimultaneous equations.

Q ". Write a note on Lc+assificationL@ La++ocationL and Lasor*tionL of o&erheads. =o! does it he+* in contro++ingo&erheads$ (May 9 - 5 marks)*+ain !hat is meant y Cost 7**ortionment and Cost 7sor*tion.

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Distinguish et!een cost a++ocation and cost asor*tion. (%o&emer@ ,,2@ marks).

A.Classification of overheads:It, means determination of cate!ories, classes or !roups in which overhead costs may he sub"divided.Usually, overhead costs are classified under three broad cate!ories vi, +actory


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tems of e0penses *asis 7or apportionin!

(3) &urchase department 0xpenses o. of &urchase order9=alue of &urchases

(4) Credit -epartment 0xpenses. Credit *ales =alue

(5) ;eneral %dministration 0xpenses. or#s cost

(D) %dvertisement. %ctual sales

(P) *ales %ssistants *alaries. %ctual9Time devoted

(Q) &ersonal -epartment expenses. o. of 0mployees

(:) *ales Commission %ctual

Q 1%.Indicate the base or bases that you would recommend to apportion overhead costs to production department'(i) 8u**+ies (ii) Be*airs(iii) Maintenance of ui+ding (i&) ecuti&e sa+aries(&) Bent (&i) #o!er and +ight (&ii)


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;reatment in Cost 7ccounts0xpense of Easic 8esearch (if it is a continuous activity) be char!ed to the revenues of theconcern. It may be spread over a number of years if research is not a continuous activity and amount is lar!e.0xpense of applied research, if relates to all existin! products and methods of production then it should be treated as amanufacturin! overhead of the period durin! which it has been incurred and absorbed. *uch expenses are directly char!ed tothe product, if it is solely incurred for it.If applied research is conducted for searchin! new product or methods of production etc., then the research expensetreatment depends upon the outcome of such research. +or example, if research findin!s are expected to produce futurebenefits or if it appears that such findin!s are !oin! to result in failure then the costs incurred may be amortied by char!in! to

the Costin! &rofit and >oss %ccount of one or more years dependin! upon the sie of expenditure. If research provessuccessful, then such costs will be char!ed to the concerned product.-evelopment expenses be!in with the implementation of the decision to produce a new or improved product or to employ anew or improved method. The treatment of development expenses is same as that of applied research.(ii) 7rin!e benefits In every or!anisation, wor#ers are paid some benefits in addition to their normal wa!e or salary.These additional benefits are popularly called frin!e benefits. They include'

(i) 6ousin!(ii) Children education allowance(iii) 6oliday pay(iv) >eave pay(v) >eave travel concession to home town or any place in India etc.

0xpenses incurred on frin!e benefits in respect of factory wor#ers should be treated as factory overheads and apportioned

amon! the production and service departments on the basis of number of wor#ers in each department.+rin!e benefits to office and sellin! and distribution staff should be treated as administration overheads and sellin! anddistribution overheads respectively and recovered accordin!ly.(iii) Employee 6elfare Costs: It includes those expenses, which are incurred by the employers on the welfare activitiesof their employees. The welfare activities on which these expenses are usually incurred may include canteen, hospital, play!rounds, etc. These expenses should be separately recorded as elfare -epartment Costs. These Costs may be apportionedto production cost centres on the basis of total wa!es or the number of men employed by them.(iv) Depreciation:It represents the fall in the asset value due to its use, wear and tear and passa!e of time. -epreciationis an indirect cost of production and operations. It is an important element of cost and without this true cost of productioncannot be obtained. In costin!A depreciation on plant and machinery is normally treated as part of the factory overheads.(v) *ad debts: There is no unanimity amon! various authors about the treatment of bad debts. *ome authors believethat bad debts are financial losses and therefore should not be included in the cost of a particular product or ob. %nother view

is that, bad debts are a part of sellin! and distribution overhead, especially where they arise in the normal course of tradin!.Therefore they should be treated in cost accounts in the same way as any other sellin! and distribution expense.(vi) Packin! E0penses: It includes the expenses incurred on wrappin!, tyin!, bottles, boxes, containers or ba!setc. In Cost %ccounts they are treated as follows'(i) It is treated as a direct material cost in the case of those products which cannot be sold without the use of apac#in!. +or example in#"pot A EreadA paste etc.(i) It may be treated as distribution overhead if pac#in! expenses are incurred to facilitate the transportation offinished products.(ii) It may be treated as advertisement cost and included in sellin! overheads if it is incurred for advertisement to ma#ethe product attractive.(vii) E0penses on "emoval and "e- erection of /ac#inery: 0xpenses are sometime incurred on removal and re"erection of machinery in factories. *uch expenses may be incurred due to factors li#e chan!e in the method ofproductionA an addition or alteration in the factory buildin!, chan!e in the follow of production, etc. %ll such expenses aretreated as production overheads. hen amount of such expenses is lar!e, it may be spread over a period of time.If such expenses are incurred due to faulty plannin! or some other abnormal factor, then they may be char!ed toCostin! &rofit and >oss %ccount.(viii) *onus and !ratuity: Eonus under the payment of Eonus %ct is to be paid compulsorily to the wor#ers althou!hthe amount of bonus may vary with amount of profit earned. % minimum bonus of P.22 is, however, payableirrespective of profit or loss earned by the concern. The amount of bonus, therefore, may be included in a direct labourcost to the extent of the minimum bonus, as the same is payable even in a loss situation. %ny amount paid as bonus inexcess of the minimum may be considered as an appropriation of profit. 6owever, bonus lin#ed with productivity isdefinitely a part of the overhead cost.

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*o far as !ratuity is concerned, it is indeed directly lin#ed with the wa!es and is not by any means related to the profits.%ccordin!ly, it should be treated as an element of cost.

Q 14.*+ain the cost accounting treatment of unsuccessfu+ Besearch and De&e+o*ment cost. (#CC %o& ,' 3 marks)

A.Cost of unsuccessful research is treated as factory overhead, provided the expenditure is normal and is provided in thebud!et. If it is not bud!eted, it is written off to the profit and loss account. If the research is extended for lon! time, somefailure cost is spread over to successful research.

Q 1.What is notiona+ rent of a factory ui+ding$ Ki&e one reason !hy it may e inc+uded in cost accounts. (%o& 95 - marks)

A.%otiona+ BentIt is a reasonable char!e raised in the cost accounts for the use of owned premises.


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actually incurred then such a difference is termed as an over absorption of overheads. If the recovery is less than theactual overheads incurred then the difference is termed as under absorption of overheads.Under and over absorbed overheads can be disposed off in Cost %ccounts by usin! any one of the followin! methods'(i) 8se of Supplementary "ates: hen the amount of under absorbed and over absorbed overhead is si!nificant or lar!e,because of differences due to wron! estimation, then the cost of product needs to be adusted by usin! supplementary rates(under and over absorption9actual overhead) to avoid misleadin! impression.(ii) 6ritin! off to Costin! Profit 9 oss ccount: hen under or over absorbed amount of overheads is quitene!li!ible and it is not felt worth while to absorb it by usin! supplementary rates, the said amount is transferred to

Costin! &rofit ? >oss %ccount. In case under absorption of overheads arises due to factors li#e idle capacity, defectiveplannin! etc. Then also it may be transferred to Costin! &rofit ? >oss %ccount.(iii) Carryin! over to t#e ne0t year5s accounts Under this method, the amount of over9under absorbed overhead is carriedover to the next period this method is not considered desirable as it allows costs of one period to affect cost of another9period.+urther, comparison between one period and another is rendered difficult. 6owever, this method may be used when thenormal business cycle extends over more than one year, or in the case of a new proect, the output is low in the initial years.

Q 21. *+ain rief+y the conditions !hen su**+ementary rates are used. (#CC May ,' 3 marks)

A.hen the amount of under absorbed and over absorbed overhead is si!nificant or lar!e, because of differences due towron! estimation, then the cost of product needs to be adusted by usin! supplementary rates (under and overabsorption9actual overhead) to avoid misleadin! impression.

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No Ite/rate- A00o+tsQ 1.Write short note on Cost /edger Contro+ 7ccount. (May 91 - 4

marks)

A.Cost /edger Contro+ 7ccount This control account is also popularly #nown as B;eneral >ed!er %dustment %ccount$ isopened in Cost >ed!er to complete double"entry. %ll items of income and expenditure ta#en from financial accountsand all transfers from cost accounts to financial boo#s are recorded in this account. *ince the purpose of this accountis to complete double entry in the cost led!er, therefore all transactions in the cost led!er must be recorded throu!h theBCost >ed!er Control %ccount$. The balance in this account will always be equal to the total of all the balances of theimpersonal accounts.

Q 2.What are the essentia+ *re-reuisites of integrated accounting system$ (%o& 91@ ,2@ , - 4@ marks)(#CC %o& ,' 3 marks)

A.ssentia+ *re-reuisites for integrated accounts (a) The mana!ement$s decision about the extent of inte!ration of the two sets of boo#s. (b) % suitable codin! system must be made available so as to serve the accountin! purposes of financial and cost

accounts.(c) %n a!reed routine, with re!ard to the treatment of provision for accruals, prepaid expenses, other adustment

necessary for preparation of interim accounts.

(d) &erfect coordination should exist between the staff responsible for the financial and cost accounts and an efficientprocessin! of accountin! document should be ensured.

Q 3.What are the ad&antages of integrated accounting$ (%o& 9'@ May , - 4marks)

Write short note on Antegrated 7ccounting. (May 99@ 9 - 4 marks)(May 95 - 4 marks)

A.nte!rated ccountin!:Inte!rated %ccountin! is a system of accountin! whereby cost and financial accounts are #ept inthe same set of boo#s. *uch a system will have to afford full information required for Costin! as well as for +inancial%ccounts. +or instance, purchases account is eliminated and direct postin!s are made to *tores Control %ccount,or#"in"&ro!ress account, or


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sufficient detail as would enable the causes of differences to be located. It is, therefore, important that in the financialaccounts, the expenses should be analysed in the same way as in cost accounts. It is important to #now the causes

which !enerally !ive rise to differences in the costs ? financial accounts.The various reasons for disa!reement of profits shown by the two sets of boo#s vi., cost and financial may be listed as below'. Items appearin! only in financial accounts, not in cost accounts'(i) Income'(a) &rofit on sale of assets(b) Interest received

(c) -ividend received(d) *hare Transfer fees(ii) 0xpenditure(a) >oss on sale of assets(b) &reliminary expenses written off(c) ;oodwill written off(d) Underwritin! commission and debenture discount written off(iii) %ppropriation(a) -ividends(b) 8eserves, *in#in! +und, etc./. Items appearin! only in cost accounts, not in financial accounts'(a) otional interest on capitalA

(b) otional rent on premises owned.2. Under or over"absorption of overheadIn cost accounts overheads are char!ed to production at pre"determined rates while in financial accounts actual amount

of overhead is char!ed, the difference !ives rise to under or over absorptionA causin! a difference in profits.3. -ifferent bases of stoc# valuationIn financial boo#s, stoc#s are valued at cost or mar#et price, whichever is lower. In cost boo#s, however, stoc# ofmaterials may be valued on +I+< or >I+< basis and wor#"in"pro!ress may be valued at prime cost or wor#s cost.-ifferences in store valuation may thus cause a difference between the two profits.4. -epreciationThe amount of depreciation char!e may be different in the two sets of boo#s either because of the different methods ofcalculatin! depreciation or the rates adopted.1otivations for reconciliation 9 %dvanta!es 9 Uses of reconciliation are'

To ensure reliability of cost data To ensure ascertainment of correct product cost

To ensure correct decision ma#in! by the mana!ement based on Cost ? +inancial data

To report fruitful financial 9 cost data.

Q !./ist the


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any fati!ue. They can brin! out different +inancial %ccountin! and Cost %ccountin! statements and reports accuratelyin a presentable form. +inancial accounts and Cost accounts show their results accurately and precisely, whenmaintained on a computer system, but the profit shown by one set of boo#s may not a!ree with that of the other set.

The main reasons for the disa!reement of the profit fi!ures shown by the two set of boo#s is the absence of certain itemswhich appear in financial boo#s only and are not recorded in cost accountin! boo#s. *imilarly, there may be some items whichappear in cost accounts but do not find a place in the financial boo#s. *ome examples which affect it are as below'. &rofit 9 loss on sale of assets/. Interest received

2. -ividend received3. &reliminary expenses, !oodwill written off4. Under or over"absorption of overhead5. -ifferent bases of stoc# valuationD. -ifferent methods of -epreciationUnder the situation of differential profit fi!ure shown by financial and cost accounts, it is necessary to reconcile the results(profit9loss) shown. *uch a reconciliation proves arithmetical accuracy of data, explains reasons for the difference in two setsof boo#s and affords reliability to them. 6ence, the reconciliation of cost and financial accounts is essential and not redundanteven in the modern a!e of computer.

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!&etho- o Cost'/ (I)

(o* Cost'/ Cotra0t Cost'/ Bat0h Cost'/ O5erat'/ Cost'/)

Q 1.Distinguish et!een >o Costing I ?atch Costing$ (%o& ,4@ %o& ,1 - marks)

Descrie 6o Costing and ?atch Costing gi&ing eam*+e of industries !here these are used$ (May ,2 - marks)

A. In ob costin!, costs are collected and accumulated accordin! to ob. 0ach ob or unit of production is treated as aseparate entity for the purpose of costin!. Nob costin! may be employed when obs are executed for differentcustomers accordin! to their specification.

Eatch costin! is a form of ob costin!, a lot of similar units which comprises the batch may be used as a cost unit forascertainin! cost. *uch a method of costin! is used in case of pharmaceutical industry, readymade !arments, industriesmanufacturin! parts of T=, radio sets etc.

Q 2.What do you understand y ?atch Costing$ An !hich industries it is a**+ied$

A.Eatch Costin! is a form of ob costin!. In this, the cost of a !roup of products is ascertained. The unit of cost is abatch or a !roup of identical products instead of a sin!le ob, order or contract. *eparate cost sheets are maintained foreach batch of products by assi!nin! a batch number. The cost per unit is ascertained by dividin! the total cost of abatch by the number of items produced in that batch.

Eatch costin! is employed by companies manufacturin! in batches. It is used by readymade !arment factories for ascertainin!the cost of each batch of cloths made by them. &harmaceutical or dru! industries, electronic component manufacturin! units,radio manufacturin! units too use this method of costin! for ascertainin! the cost of their product.

Q 3.An ?atch Costing@ ho! is conomic ?atch Fuantity determined$ (May ,2 - marks)

A.In batch costin! the most important problem is the determination of B0conomic Eatch Fuantity$.The determination of economic batch quantity involves two type of costs vi, (i) set up cost and (ii) carryin! cost. ith theincrease in the batch sie, there is an increase in the carryin! cost but the set"up cost per unit of the product is reducedA thissituation is reversed when the batch sie is reduced. Thus there is one particular batch sie for which both set up and carryin!costs are minimum. This sie of a batch is #nown as economic or optimum batch quantity.0conomic batch quantity can be determined with the help of a table, !raph or mathematical formula. The mathematicalformula usually used for its determination is as follows'

0EFGC

-C/

here, - G %nnual demand for the product * G *ettin! up cost per batch

C G Carryin! cost per unit of production per annum

Q 4.Write notes on sca+ation C+ause. (%o& ,, - marks@ May 94 - 4marks)

*+ain the im*ortance of an sca+ation C+ause in contract cost. (#CC %o& ,' 3 marks)

A.Escalation Clause:This clause is usually provided in the contracts as a safe!uard a!ainst any li#ely chan!es in theprice or utiliation of material and labour. If durin! the period of execution of a contract, the prices of materials or labourrise beyond a certain limit, the contract price will be increased by an a!reed amount. Inclusion of such a term in a

contract deed is #nown as an Jescalation clauseJ%n escalation clause usually relates to chan!e in price of inputs, it may also be extended to increased consumption orutiliation of quantities of materials, labour etc. In such a situation the contractor has to satisfy the contractee that theincreased utiliation is not due to his inefficiency.

Q .Discuss the *rocess of estimating *rofitE+oss on incom*+ete contracts. (%o& , - 4marks)

A.Process of estimatin! profit 2 loss on incomplete contracts(i)If completion of contract is less than /4 no profit should be ta#en to profit and loss account.(ii)If completion of contract is upto /4 or more but less than 4: then

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92 K otional &rofit Kcertifiedor#

receivedCash

may be ta#en to profit and loss account.(iii)If completion of contract is 4: or more but less than Q: then

/92 K otional &rofit Kcertifiedor#

receivedCash

may be ta#en to profit and loss account(iv)If completion of contract is !reater than or equal to Q: then one of the followin! formulas may be used for ta#in!

the profit to profit and loss account.

. 0stimated &rofit KpriceContract

certified(or#

/. 0stimated &rofit Kcertified(or#

receivedCash

priceContract

certified(or#

2. 0stimated &rofit Ktcostotal0stimated

datetowor#theofCost

3. 0stimated &rofit Kcertifiedor#

receivedCash

tcostotal0stimated

datetowor#theofCost

4. otional &rofit KpriceContract

certified(or#

Q !.*+ain the fo++o!ing(i) %otiona+ *rofit in Contract costing(ii) Betention money in Contract costing (May ,' - @ Marks)

A.(i) ,otional profit in Contract costin!: It represents the difference between the value of wor# certified and cost of wor#certified.

otional &rofit G =alue of wor# certified 7 (Cost of wor#s to date 7 Cost of wor# not yet certified)(ii) "etention /oney in Contract Costin!: % contractor does not receive the full payment of the wor# certified by thesurveyor. Contractee retains some amount to be paid after some time, when it is ensured that there is no default in the

wor# done by the contractor. If any deficiency or defect is noticed, it is to be recti fied by the contractor before therelease of the retention money. Thus, the retention money provides a safe!uard a!ainst the default ris# in thecontracts.

Q ".What are the main features of LCost-#+us-ContractsL$ (%o& 91 - 4marks)

Write note on cost-*+us-contracts. (%o& ,, - marks)

A. These contracts provide for the payment by the contractee of the actual cost of manufacture plus a stipulated profit,mutually decided between the two parties.

1ain features of cost"plus"contracts'. This method is adopted in the case of those contracts where the probable cost of contract cannot be ascertained inadvance with a reasonable accuracy./. These contracts are preferred when the cost of material and labour is not steady and contract completion may ta#enumber of years.

2. The different costs to be included in the execution of the contract are mutually a!reed so that no dispute may arisein future in this respect. Under such type of contract contractee is allowed to chec# or scrutinise the concerned boo#s,documents accounts.3. *uch a contract offers a fair price to the contractee and also a reasonable profit to contractor.4. The contract price here is ascertained by addin! a fixed and mutually pre"decided component of profit to the totalcost of the wor#.

Q #.What is cost *+us contract$ 8tate its ad&antages. (%o& , - Marks)

What are the main ad&antages of cost *+us contract$ (#CC May , 3 marks)(#CC %o& ,9 - Marks)

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A.Cost plus contract: Under cost plus contract, the contract price is ascertained by addin! a percenta!e of profit to the totalcost of the wor#. *uch types of contracts are entered into when it is not possible to estimate the contract cost with reasonableaccuracy due to unstable condition of material, labour services etc.Costs plus contracts have the followin! advanta!es' . The contractor is assured of a fixed percenta!e of profit. There is no ris# of incurrin! any loss on the contract. /. It is useful especially when the wor# to be done is not definitely fixed at the time of ma#in! the estimate. 2. Contractee can ensure himself about Rthe cost of the contractS, as he is empowered to examine the boo#s anddocument of the contractor to ascertain the veracity of the cost of the contract.

Q $.*+ain rief+y@ !hat do you understand y :*erating Costing$ =o! are com*osite units com*uted$ (#CC %o& ,9 - Marks)

A. :*erating Costing' It is method of ascertainin! costs of providin! or operatin! a service. This method of costin! is appliedby those underta#in!s which provide services rather than production of commodities. This method of costin! is used bytransport companies, !as and water wor#s departments, electricity supply companies, canteens, hospitals, theatres, schoolsetc.Composite units may be computed in two ways'(a) %bsolute (wei!hted avera!e) tones #ms, quintal #ms etc.(b) Commercial (simple avera!e) tones #ms, quintal #ms etc.%bsolute tonnes"#ms are the sum total of tonnes #ms arrived at by multiplyin! various distances by respective load quantitiescarried.

Commercial tonnes"#ms, are arrived at by multiplyin! total distance #ms, by avera!e load quantity.Q 1%.8*ecify the methods of costing and cost units a**+ica+e to the fo++o!ing industries

A.Indstr" Method of

costing#nit of cost

Toy ma#in! Eatch &er batchCement Unit &er tonne or per ba!8adio 1ultiple &er 8adio or per batchEicycle 1ultiple &er Eicycle*hip buildin! Contract &er *hip6ospital


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"

&etho- o Cost'/ (II)(Pro0ess Cost'/ O5erat'o Cost'/ o't Pro-+0ts a- By65ro-+0ts)

Q 1.Distinguish et!een 6o costing and *rocess costing. (%o& 91 - 4 marks)(May 95 - 4 marks)(%o& 9 - 4marks)

A.

+ob Costin! Process Costin!. Nob costin! is a specific order costin! &rocess costin! is a method of costin! used to ascertain the cost of a

product at each sta!e of manufacture/. Cost here is determined on ob basis Costs are accumulated for each process separately for a !iven period of

time.2. 0ach ob needs special treatment and no

two obs are ali#e+inished product of one process becomes the raw material for the nextprocess.

3. The cost of each ob is compiled separatelyby addin! materials, labour and overheadcosts

The unit cost here is the avera!e cost of the process for a !iven period.Its correct computation requires the measurement of production atvarious sta!es of manufacture.

4. Costs are computed when ob is completed. Costs are computed for each process at the end of each period.5. %s each ob is distinct or is of different

nature, more detailed supervision andcontrol are necessary

%s the process operations are standardised accumulation of costs and

supervision and control are comparatively easier.

Q 2.;he &a+ue of scra* generated in a *rocess shou+d e credited to the *rocess account. Do you agree !ith thisstatement$ Ki&e reasons. (%o& 95 - marks)

A. This statement is not correct The value of scrap (as normal loss) received from its sale is credited to the process account.Eut the value of scrap received from its sale under abnormal conditions should be credited to %bnormal >oss %ccount.

Q 3.*+ain rief+y the *rocedure for the &a+uation of Work-in-*rocess. (%o& , - marks)

A. The valuation of wor#"in"process can be made in the followin! three ways, dependin! upon the assumptions madere!ardin! the flow of costs.

7+irst"in"first out (+I+ast"in"first out (>I+


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of manufactureIt consists of balance of wor# done on openin! wor#"in"process, current production done fully and part of wor# done on closin!I& with re!ard to different elements of costs vi., material, labour and overhead.

Q .=o! !ou+d you account for y-*roduct in cost accounting(i) When they are of sma++ tota+ &a+ue. ( marks)

(ii) When they are of considera+e tota+ &a+ue. (4 marks)

(iii) When they reuire further *rocessing. (May 9' - 4 marks)

Discuss the treatment of y-*roduct Cost in Cost 7ccounting. (%o& ,' - Marks)

A. Treatment of !"product in Cost Accounting:

(i) When they are of sma++ tota+ &a+ue If the amount realised from the sale of by"product is small, it may be dealt inany one of the followin! two ways'() The sale value of the by"product may be credited to the &rofit and >oss %ccount and no credit be !iven in the costaccounts. The credit to the &rofit and >oss %ccount here is treated either as miscellaneous income or as additional salesrevenue.(/) The sale proceeds of the by"product may be treated as deductions from the total costs. The sale proceeds in fact shouldbe deducted either from the production cost or from the cost of sales.

(ii) When they are of considera+e tota+ &a+ue In this case by"products may be re!arded as oint products. To determineexact cost of by"products the costs incurred

ipcc costing theory

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