SUGGESTED ANSWERS

TO
QUESTIONS
SET AT THE
INTERMEDIATE EXAMINATION
MAY, 1996 GR. II
Question 1.
(a) A Company had incurred fixed expenses of 4,50,000, with sales of rs.15,00,000 and earned a
profit of Rs.,00,000 durin! the first half year. "n the second half, it suffered a loss of
Rs.1,50,000.
Calculate #
(.i) $he profit%&olume ratio, 'rea(%e&en%point and mar!in of safety for the first half year.
(ii) expected sales%&olume for the second half year assumin! that sellin! price and fixed
expenses remained unchan!ed durin! the second half year.
(iii) $he 'rea(%e&en point and mar!in of safety for the whole year.
(') A company manufactures and mar(ets three products ), * and +. All the three products are
made from the same set of machines. ,roduction is limited 'y machine capacity. -rom the data
!i&en 'elow, indicate priorities for products ), * and + with a &iew to maximisin! profits #

,roducts
) * +
Raw material cost per unit (Rs.) 11..5 1/..5 .1..5
0irect la'our cost per unit (Rs.) ..50 ..50 ..50
1ther &aria'le cost per unit (Rs.) 1.50 ...5 .55
2ellin! price per unit (Rs.) .5.00 0.00 5.00
2tandard machine time re3uired 4 .0 .5
.per unit in minutes
(c) An article passes throu!h fi&e operations as follows #

1peration 6o. $ime per article 7rade of wor( 8a!e rate per hour
1 15 minutes A Re.0./5
. .5 minutes 9 Re.0.50
10 minutes C Re. 0.40
4 0 minutes 0 Re.0.5
5 .0 minutes : Re.0.0
$he factory wor(s 40 hours a wee( and the production tar!et is /00 do;ens per wee(. ,repare a
statement showin! for each operation and in total the num'er of operators re3uired, the la'our
cost per do;en and the total la'our cost per wee( to produce the total tar!et output.
Anse! 1
(a) "i# $!o%it &o'u(e !)tio, *!e)+ e&en, -oint )n. ()!/in o% s)%et0 1
(for the first half year )

Contri'ution
,rofit <&olume ratio = ) 100
2ales
(-ixed :xpenses > ,rofit )
= ) 100
2ales
(Rs. 4,50,000 > Rs. ,00,000)
= ) 100
Rs. 15,00,000
= 50?
-ixed expenses
9rea( <e&en point =
,@& Ratio
Rs. 4,50,000
=
50?
= Rs. 4,00,000
Aar!in of 2afety = Actual sales %% 9rea( e&en sales
= Rs. 15,00,000 %% Rs. 4,00,000
= Rs. /,00,000.
(ii) E2-e3te. S)'es ,4o'u(e ( for the second half year assumin! that sellin! price and fixed
expenses remained unchan!ed durin! the second half year. )
-ixed expenses %% Boss
:xpected sales &olume =
,@& Ratio
Rs. 4,50,000 %% Rs. 1,50,000
=
50?
= Rs. /,00,000.
(iii) 5!e)+ e&en -oint )n. ()!/in o% s)%et0
(for the whole year)
-ixed expenses for the whole year
9rea( e&en point =
,@& Ratio
Rs. 4,00,000
= = Rs. 15,00,000
50?
,rofit for the year
Aar!in of safety =
,@& ratio
Rs. ,00,000 %% Rs. 1,50,000
=
50?
= Rs. ,00,000
A'te!n)ti&e Anse! 1
Aar!in of safety = 2ales a'o&e the 'rea( e&en point
= Actual sales %% 9rea( e&en sales
= CRs. 15,00,000 > Rs. /,00,000D %% Rs. 15,00,000
= Rs. ,00,000
"*#
St)te(ent in.i3)tin/ -!io!ities %o! -!o.u3ts X, Y )n. 6
To ()2i(i7e -!o%its
,roducts ) * +
2ellin! price per unit (Rs.) .5.00 0.00 5.00
Bess # Earia'le cost per unit (Rs.) 15..5 .1.00 .F.0
(Refer to 8or(in! note)
Contri'ution per unit (Rs.) (A) 4.F5 4.00 F.F0
2td. Aachine time re3uired in
Ainutes per unit (9) 4.00 .0.00 .5.00
Contri'ution per minute (Rs.) (A) @ (9) 0..5 0.45 0..F5
,riorities for products """ " ""
Wo!+in/ Notes 1
4)!i)*'e 8ost -e! unit 1
,roducts
) * +
Rs. Rs. Rs.
Raw materials cost 11..5 1/..5 .1..5
0irect la'our cost ..50 ..50 ..50
1ther &aria'le cost 1.50 ...5 .55

$otal &aria'le cost per unit 15..5 .1.00 .F.0
(c)
St)te(ent s9oin/ tot)' nu(*e! o% o-e!)to!s !e:ui!e. ;
T9e ')*ou! 3ost -e! .o7en )n. t9e tot)' ')*ou! 3ost -)! ee+
To -!o.u3e t)!/ete. out-ut un.e! e)39 o-e!)tion
1peration 6o. of Ba'our Cost of Ba'our Cost per
6o. operators /00 do;ens
re3uired G per wee(
Rs. Rs.
1 45 1,1F0 1.45
( 45 ) 40 ) 0./5 p) (Rs. 1,1F0 @ /00)
. F5 1,500 ..50
(F5 ) 40 ) 0.50 p) ( Rs. 1,500@ /00)
0 450 0.50
(0 ) 40) 0.40p) (Rs. 450 @ /00 )
4 40 1,./0 ..10
(40 ) 40 ) 0.5p) (Rs. 1,./0 @ /000
5 /0 F.0 1..0
( /0 ) 40 ) 0.0p) ( Rs. F.0 @ /00 )

00 5,10 5.55
< Wo!+in/ Note
O-e!)tion No. No. o% o-e!)to!s !e:ui!e.
/00 do;ens ) 1. 15
1 ) = 45
40 /0
/00 do;ens ) 1. .5
. ) = F5
40 /0
/00 do;ens ) 1. 10
) = 0
40 /0
/00 do;ens ) 1. 0
4 ) = 40
40 /0
/00 do;ens ) 1. .0
5 ) = /0
40 /0
Question =.
(a) -rom the particulars !i&en 'elow, compute # Aaterial ,rice Eariance, Aaterial Hsa!e Eariance,
Ba'our Rate Eariance, "dle $ime Eariance and Ba'our :fficiency Eariance with full wor(in!
details #
1 tonne of material input yields a standard output of 1,00,000 units. $he standards price of
material is Rs..0 per (!. 6um'er of employees en!a!ed is .00. $he standard wa!e rate per
employee per day is Rs./. $he standard daily output per employee is 100 units. $he actual
3uantity of material used is 10 tonnes and the actual price paid is rs..1 per (!. Actual output
o'tained is 4,00,000 units. Actual num'er of days wor(ed is 50 and actual rate of wa!es paid is
Rs./.50 per day. "dle time paid for and included in a'o&e time is 1. day.
(') 8rite short notes on #
(i) Hniform Costin!.
(ii) "nter%firm Comparison.
Anse! =
(a) 9asic data #
Actual 1utput # 4,00,000 units.
St)n.)!. D)t) A3tu)' .)t)
M)te!i)'s 1
Aaterial Rate Amount Aaterial RateAmount
Ity. (Rs.) (Rs.) Ity. (Rs.) (Rs.)
4,000 (! .0 1,50,000 10,000 (! .1.,10,000
>)*ou!
2td.6um'er Rate Amount 6o. of $ime "dle Rate Amount
1f man days per man employees in time per
day days in daysman day
Rs. Rs. Rs. Rs.
4,000 / 54,000 .00 50 J /.50 /5,000
Computation of &ariance #
Aaterials price &ariance = Actual 3ty 2td. Rate %% Actual rate
1f material per (! per (!
= 10,000 (! (Rs. .0 < Rs. .1)
= Rs. 10,000 (Ad&erse)
Aaterials usa!e &ariance = 2td. rate 2td. 3ty %% Actual
,er (! of of material 3ty. of material
material
= Rs. .0 ( 4,000 (!. < 10,000 (!.)
= Rs. .0,000 (Ad&erse)
Ba'our rate &ariance = Actual man 2td. rate %% Actual
0ays wor(ed per day rate per day
= 10,000 man days (Rs. / < Rs. /.50)
= Rs. 5,000 (Ad&erse)
"dle time &ariance = "dle man days ) 2td. rate per man day
= .00 men ) J days ) Rs. /.00
= Rs. /00 (Ad&erse)
Ba'our efficiency = 2td. rate 2td. no %% Actual no.
&ariance per man day of man of man
days days wor(ed
= Rs. / (4,000 < 4,400 )
= Rs. 5,400 (Ad&erse)
"*# (i) Uni%o!( 8ostin/ 1 "t has 'een defined 'y the "nstitute of cost and 8or(s Accountants of
:n!land as K$he use 'y se&eral underta(in!s of the same costin! principles and @or practicesL.
$hus when a num'er of underta(in!s, whether under the same mana!ement or not, decide to
adhere to one set of accepted costin! principles < especially in matters where there can 'e two
opinions < they are said to 'e followin! uniform costin!. "t ma(es inter firm comparison easy
and, of course, one of the aims of uniform costin! is to introduce inter < firm comparison. Hse of
uniform costin! is comparati&ely easy amon! concerns manufacturin! the same type of products.
A !reat deal of spade wor( is re3uired to 'e done 'efore the introduction of uniform costin! in an
industry. "ts introduction helps the firms to su'mit relia'le cost data to price fixin! 'odies to
determine the a&era!e cost and fixin! the fair sellin! prices of &arious products. "t ser&es as a
pre <re3uisite to cost audit.
(ii) Inte! %i!( 3o(-)!ison 1 "t is a techni3ue of e&aluatin! the performance, efficiency, costs and
profits of firms in an industry. "t consists of &oluntary exchan!e of information@data concernin!
costs, prices, profits, producti&ity and o&er all efficiency amon! firms en!a!ed in similar type of
operations of the purpose of 'rin!in! impro&ement in efficiency and indicatin! the wea(ness.
2uch a comparison will 'e possi'le where uniform costin! is in operation.
An inter < firm comparison indicates the efficiency of production and sellin!, ade3uacy of profit,
wea( spots in the or!anisations, etc. and thus demands from the firmMs mana!ement an
immediate suita'le action. "nter firm comparison may ena'le the mana!ement to challen!e the
standards which it has set for itself and to impro&e upon them in the li!ht of the current
information !athered from more efficient units. 2uch a comparison may 'e carried out in
electrical industry, printin! firms, cotton spinnin! firms, pharmaceuticals, cycle manufacturin! etc.
inter firm comparison de&elops cost consciousness amon! mem'ers of the industry. "t also
helps !o&ernment in effectin! price re!ulations.
Question ?.
(a) A company is ma(in! a study of the relati&e profita'ility of the two products < A and 9. "n
addition to direct cost, indirect sellin! and distri'ution costs to 'e allocated 'etween the two
products are as under #

Rs.
"nsurance chan!es for in&entory (finished) F5,000
2tora!e costs 1,40,000
,ac(in! and forwardin! char!es F,.0,000
2ales salaries 5,50,000
"n&oicin! costs 4,50,000
1ther details are #

,roduct A ,roduct 9
2ellin! price per unit (Rs.) 500 1,000
Cost per unit (exclusi&e of indirect
. sellin! and distri'ution costs) (Rs.) 00 /00
Annual sales in units 10,000 5,000
A&era!e in&entory (units) 1,000 500
6um'er of in&oices .,500 .,000
1ne unit of product A re3uires a stora!e space twice as much as product 9. $he cost to pac(
and forward one unit is the same for 'oth the products. 2alesmen are paid salary plus
commission N 5? on sales and e3ual amount of efforts are put forth on the sales of each of the
products.
Re3uired #
(.i) 2et up a schedule showin! the apportionment of the indirect sellin! and distri'ution costs
'etween the two products.
(ii) ,repare a statement showin! the relati&e profita'ility of the two products.
(') Oow would you threat the followin! in Cost Accounts P
(i) :mployee welfare costs
(ii) Research and de&elopment costs
(iii) 0epreciation.
Anse! ?
")# (i)
S39e.u'e s9oin/ t9e )--o!tion(ent o% t9e in.i!e3t se''in/
An. .ist!i*ution 3osts *eteen t9e to -!o.u3ts.

"tems 9asis of apportionment $otal ,roducts

A 9
Rs. Rs. Rs.

"nsurance A&era!e in&entory &alue F5,000 0,000 45,000

Char!es (1000 ) Rs. 500 ) # (500 ) Rs. 100)
2tora!e A&era!e in&entory stora!e 1,40,000 1,00,000 40,000
Costs space
(1000 ) . ) # ( 500 ) 1)
,ac(in! Q Annual sales in units F,.0,000 4,00,000 ,.0,000
-orwardin! (10000 ) # (5000)
char!es
2alesmen :fforts of salesmen 5,50,000 4,.5,000 4,.5,000
2alaries (1 # 1)
2alesmen Annual sales &alue /,50,000 .,50,000 4,00,000
Commission (5# 5)
"n&oicin! 6o. of in&oices 4,50,000 .,50,000 .,00,000
Costs (.500 # .000)

.5,55,000 14,55,000 14,,000
(ii)
St)te(ent s9oin/ t9e !e')ti&e -!o%it)*i'it0 o% t9e to -!o.u3ts

,roducts A 9
Rs. Rs.

Annual sales &alue 50,00,000 50,00,000

(10,000 units ) Rs. 500) (5,000 units ) Rs. 1000)
Bess# Cost of sales 0,00,0000 45,00,000
(10,000 units ) Rs. 00) (5,000 units ) Rs. /00 )

G!oss $!o%it 1 .0,00,000 .,00,000
Bess# "ndirect sellin! Q 14,55,000 14,,000
0istri'ution cost
RRefer to a (i) S
,rofit 5,45,000 1F,/F,000
,rofita'ility as percenta!e of sales 10.4? ...05?
Rs. 5,45,000 Rs. 1F,/F,000
) 100 ) 100
Rs. 50,00,000 Rs. 50,00,000
"*# "i# E(-'o0ee We'%)!e 3osts 1 "t includes those expenses, which are incurred 'y the employers on
the welfare acti&ities of their employees. $he welfare acti&ities on which these expenses are
usally incurred may include canteen, hospitalT play !rounds etc. these expenses should 'e
separately recorded as 8elfare 0epartment Costs. $hese Costs may 'e apportioned to
production cost centres on the 'asis of total wa!es or the num'er of men employed 'y them.
"ii# Rese)!39 )n. .e&e'o-(ent 8osts 1 "t is the cost@expenses incurred for searchin! new or
impro&ed products, production methods@techni3ues or plants@e3uipments. Research cost may
'e incurred for carryin! 'asic or applied research. 9oth 'asic and applied research relates ot
ori!inal in&esti!ations to !ain from new scientific or technical (nowled!e and understandin!,
which is not directed towards any specific practical aim (under 'asic research) and is directed
towards a specific practical aim or o'Uecti&e (under applied research).
T!e)t(ent in 8ost A33ounts 1 Cost of 9asic Research (if it is a continuous acti&ity) 'e char!ed
to the re&enues of the concern. "t may 'e spread o&er a num'er of years if research is not a
continuous acti&ity and amour is lar!e.
Cost of applied research, if relates to all existin! products and methods of production then it
should 'e treated as a manufacturin! o&erhead of the period durin! which it has 'een incurred
and a'sor'ed. 2uch costs are directly char!ed to the product, it is solely incurred for it.
"f applied research is conducted for searchin! new products or methods of production etc., then
the research costs treatment depends upon the outcome of such research. -or example, if
research findin! are expected to produce future 'enefits or if it appears that such findin!s are
!oin! to result in failure then the costs incurred may 'e Amortised 'y char!in! to the costin!
,rofit and Boss Account of one or more years dependin! upon the si;e of expenditure. "f
research pro&es successful, then such costs will 'e char!ed to the concerned product.
De&e'o-(ent 8osts 1 'e!ins with the implementation of the decision to produce a new or
impro&ed product or to employ a new or impro&ed method. $he treatment of de&elopment
expenses is same as that of applied research.
"iii# De-!e3i)tion 1 "t represents the fall in the asset &alue due to its use, wear and tear and passa!e
of time. 0epreciation is an indirect cost of production and operations. "t is an important element
of cost and without this true cost of production cannot 'e o'tained. "n costin! depreciation on
plant and machinery is normally treated as part of the factory o&erheads.
Question @.
(a) -rom the details !i&en 'elow, calculate #
(.i) Re%orderin! le&el
(ii) Aaximum le&el
(iii) Ainimum le&el
(i&) 0an!er le&el.
Re%orderin! 3uantity is to 'e calculated on the 'asis of followin! information #
Cost of placin! a purchase order is Rs..0
6um'er of units to 'e purchased durin! the year is 5,000.
,urchase price per unit inclusi&e of transportation cost is Rs.50.
Annual cost of stora!e per unit is Rs.5
0etails of lead time # A&era!e 10 days, maximum 15 days, Ainimum / days.
-or emer!ency purchases 4 days.
Rate of consumption # A&era!e # 15 units per day, Aaximum # .0 units.
(') $he input to a purifyin! process was 1/,000 (!s. 1f 'asic material purchased N Rs.1..0 per V!.
,rocess wa!es amounted to Rs.F.0 and o&erhead was applied N .40? of the la'our cost.
"ndirect materials of ne!li!i'le wei!ht introduced into the process at a cost of Rs./. $he actual
output from the process wei!ht 15,000 (!s. $he normal yield of the process is 4.?. Any
difference in wei!ht 'etween the input of 'asic material and output of purified material (product)
is sold N re.0.50 per (!.
$he process is operated under a licence which pro&ides for the payment of royalty N Re.0.15
per (!. 1f the purified material produced.
,repare #
(.i) ,urifyin! ,rocess Account
(ii) 6ormal 8asta!e Account
(iii) A'normal 8asta!e @ *ield Account
(i&) Royalty ,aya'le Account.
Anse! @
(a) 5)si3 .)t) 1
Co (1rderin! Cost per order ) = Rs. .0
2 (6um'er of units to 'e purchased annually) = 5,000 units
C1 ( ,urchase price per unit inclusi&e
of transportation cost ) = Rs. 50
iC1 (Annual cost of stora!e per unit ) = Rs. 5
8o(-ut)tion 1
(i) Re <orderin! le&el = Aaximum usa!e ) Aaximum re%order
(R1B) per period period
= .0 units per days ) 15 days
= 00 units
(ii) Aaximum le&el =R1B > R1I %% Ain rate ) Ain. re <order
of consumption period
(Refer to 8or(in!
6otes 1 Q . )
= 00 units > .00 units %% 10 units ) / days
per day
= 440 units
(iii) Ainimum le&el =R1B %% A&era!e rate ) A&era!e reorder
of consumption period
= 00 units %% (15 units per days ) 10 days )
= 150 units.
(i&) 0an!er le&el = A&era!e consumption ) Bead time for emer!ency
purchases
= 15 units per days ) 4 days
= /0 units
Wo!+in/ Notes 1
.2co . ) 5,000 units ) Rs. .0
1. R1I = =
iC1 Rs. 5
= .00 units
.. A&era!e rate of
consumption = Ainimum rate of consumption (x) > Aaximum rate
of consumption

.
x > .0 units per days
15 units per day =
.
or x = 10 units per day.
"*# (i)
$u!i%0in/ $!o3ess A33ount
0r. Cr.

Ity Rate Amount Ity Rate Amount

per (! per (!.
(!. Rs. Rs. (!. Rs. Rs.

$o 9asis materials 1/,000 1..0 14,.00 'y 6ormal 1,.50 0.50 /40
wasta!e
5? of 1/,000 (!.
$o 8a!es F.0 'y ,urified 15,000 1./0 .4,000
stoc(
$o 1&erhead .40? of
Rs. F.0 1,F.5
$o "ndirect materials /
$o Royalty paya'le .,.05
on normal yield
14,F.0 (! ) 0.15
$o A'normal .50 1./0 445
yield

1/,.50 .4,/40 1/,.50 .4,/40

(ii)
No!()' W)st)/e A33ount
0r. Cr.

Ity. Rate Amount Ity. Rate Amount
per (! per (!.
(!. Rs. Rs. (!. Rs. Rs.

$o ,urifyin! 1,.50 0.50 /40 'y ,urifyin! .50 0.50 140

process process
(6ormal wasta!e) (A'. *ield)
reduction
'y Cash sale 1,000 0.50 500
of wasta!e

1,.50 /40 1,.50 /40
(iii)
A*no!()' Yie'. A33ount
0r. Cr.

Ity. Rate Amount Ity. Rate Amount

per (! per (!.
(!. Rs. Rs. (!. Rs. Rs.

$o 6ormal 8asta!e A@c .50 0.50 140 'y ,urifyin!

,rocess A@c .50 1./0 445
$o Royalty paya'le (on
A'normal yield) 0.15 4.
$o 9alance ( ,rofit Q
Boss A@c ) .//

.50 445 .50 445
(i&)
Ro0)'t0 -)0)*'e A33ount
0r. Cr.

Ity. Rate Amount Ity. Rate Amount

per (! per (!.
(!. Rs. Rs. (!. Rs. Rs.

$o 9alance 15,000 0.15 .,.50 'y ,urifyin! 14,F.0 0.15 .,.05

process A@c
'y A'normal .50 0.15 4.
yield A@c

15,000 .,.50 15,000 445
Question A.
A company operates on historic Uo' cost accountin! system, which is not inte!rated with the
followin! accounts. At the 'e!innin! of a month, the openin! 'alances in cost led!er were #

Rs. (in la(hs)
2tores Bed!er Contract Account 50
8or(%in%,ro!ress Control Account .0
-inished 7oods Control Account 40
9uildin! Construction Account 10
Cost Bed!er Control Account 540
0urin! the month, the followin! transaction too( place #
Aaterials %% ,urchased 40
"ssued to production 50
"ssued to !eneral maintenance /
"ssued to 'uildin! construction 4
8a!es %% 7ross wa!es paid 150
"ndirect wa!es 40
-or 'uildin! construction 10
8or(s 1&erheads %% Actual amount incurred (excludin!
. items shown a'o&e)
A'sor'ed in 'uildin! construction .0
Hnder a'sor'ed 5
Royalty paid 5
2ellin!, distri'ution and administration o&erheads. .5
2ales 450

At the end of the month, the stoc( of raw material and wor(%in%pro!ress was Rs.55 la(hs and
Rs..5 la(hs respecti&ely. $he loss arisin! in the raw material account is treated as factory
o&erheads. $he 'uildin! under construction was completed durin! the month. CompanyMs !ross
profit mar!in is .0? on sales.
,repare the rele&ant control accounts to record the a'o&e transactions in the cost led!er of the
company.
Anse! A
8ost 'e./e! 8ont!o' AB3
0r. Cr.

Rs. Rs.

$o Costin! , Q B A@c 450 9y 9alance '@d 540

$o 2tores Bed!er Control A@c 55 9y 2tores Bed!er Control A@c 40
$o 8", Control A@c .5 9y 8a!es Control A@c 150
$o 9uildin! Const. A@c 44 9y 8or(s 1&erhead Control A@c 1/0
$o -inished 7oods Control A@c 40. 9y 2ellin!, 0istri'ution .5
and Administration
1&erhead A@c
9y Costin! profit Q Boss A@c 5F

4FF 4FF
Sto!es >e./e! 8ont!o' AB3
0r. Cr.

Rs. Rs.

$o 9alance '@d 50 9y 8", Control A@c 50

$o Cost Bed!er Control A@c 40 9y8or(s 1&erhead Control A@c /
9y 9uildin! Const. A@c 4
9y Closin! 9alance 55
9y 8or(s 1&erhead Control A@c 5
(Boss)

1.0 1.0
Wo!+,in,$!o/!ess AB3
0r. Cr.

Rs. Rs.

$o 9alance '@d .0 9y -inished 7oods control A@c

$o 2tores Bed!er Control A@c 50 9y Closin! 9alance .5
$o 8a!e Control A@c 100
$o 8or(s 1&erhead Control A@c 15
$o Royalty A@c 5

55 55
Cinis9e. Goo.s 8ont!o' AB3
0r. Cr.

Rs. Rs.

$o 9alance '@d 40 9y Cost of 7oods sold A@c /0

(Refer to 8or(in! 6ote)
$o 8", Control A@c 9y 9alance 40

F/ F/
8ost o% S)'es AB3
0r. Cr.

Rs. Rs.

$o Cost of 7oods 2old A@c /0 9y Costin! , Q B A@c 55

$o 2ellin! , 0istri'ution .5
and administration o&erheads A@c

55 55
8ostin/ $ D > AB3
0r. Cr.

Rs. Rs.

$o Cost of 2ales A@c 55 9y Cost Bed!er Control A@c 450

$o 8or(s 1&erhead Control A@c 5
$o Cost Bed!er Control A@c 5F
(,rofit)

450 450
5ui'.in/ 8onst!u3tion AB3
0r. Cr.

Rs. Rs.

$o 9alance '@d 10 9y Cost led!er Control A@c 44

$o 2tores Bed!er Control A@c 4
$o 8a!e Control A@c 10
$o 8or(s 1&erhead Control A@c .0

44 44
Wo!+s O&e!9e). 8ont!o' AB3
0r. Cr.

Rs. Rs.

$o 2tores Bed!er Control A@c / 9y 9uildin! Construction A@c .0

$o 8a!e Control A@c 40 9y 8", Control A@c 15
$o Cost Bed!er Control A@c 1/0 9y9alance (Costin! , Q B A@c ) 5
$o 2tores Bed!er Control A@c (Boss) 5

.11 .11
W)/es 8ont!o' AB3
0r. Cr.

Rs. Rs.

$o Cost Bed!er Control A@c 150 9y8or(s 1&erhead Control A@c 40

9y 9uildin! Cons. A@c 10
9y 8", Control A@c 100

150 150
Ro0)'t0 AB3
0r. Cr.

Rs. Rs.

$o Cost Bed!er Control A@c 5 9y 8", Control A@c

5

5 5
8ost o% Goo.s So'. AB3
0r. Cr.

Rs. Rs.

$o -inished 7oods Control A@c /0 9y Cost of 2ales A@c /0

/0 /0
Se''in/, Dist!i*ution )n. A.(inist!)tion O&e!9e).s AB3
0r. Cr.

Rs. Rs.

$o Cost Bed!er control A@c .5 9y Cost of 2ales A@c
.5

.5 .5
(Rs. in la(hs)
T!i)' 5)')n3e
0r. Cr.
$o 2tores Bed!er Control A@c 55
$o 8", Control A@c .5
$o -inished 7oods Control A@c 40
$o Cost Bed!er AdUustment A@c 45

45 45
Wo!+in/ Note 1
"f 2.,. Rs. 100 then C.,. = Rs. 50
"f 2.,. is Rs. 450 then C.,. = Rs. 50@100 ) Rs. 450 = Rs. /0 la(hs.
Question 6.
(a) 8hat are the essential of a !ood Cost Accountin! 2ystem P
(') 6arrate the essential factors to 'e considered while desi!nin! and installin! a Cost Accountin!
2ystem.
Anse!
")# Essenti)'s o% ) Goo. 8ost A33ountin/ S0ste(
$he essential features of a !ood Cost Accountin! system are as follows #%
(i) $he Cost Accountin! 2ystem should 'e tailor made, practical, simple and capa'le of
meetin! the re3uirements of a 'usiness concern.
(ii) $he method of costin! should 'e suita'le to the industry and ser&e its o'Uecti&es.
(iii) $he Costin! 2ystem should recei&e co < operation and participation of executi&es from
&arious departments.
(i&) $he Cost of installin! and operatin! the system should Uustify the results.
(&) $he system of costin! should not sacrifice the utility 'y introducin! meticulous and
unnecessary details.
(&i) $he system should consider the or!anisational structure of the 'usiness and it should 'e
desi!ned as a su' < system of the o&erall or!anisation.
(&ii) $here should 'e a harmonious relationship 'etween costin! system and financial accounts.
Hnnecessary duplication should 'e a&oided. A sin!le inte!rated accountin! system would
'e ideal.
(&iii) $he system should pro&ide ade3uate chec(s on orderin!, receipts, stoc(in!, issuin! and
recordin! of materials. $he pricin! method and the issue of materials should 'e efficient.
(ix) $he costin! system should ensure proper recordin! of wor(erMs time and their wa!es. 8a!e
costs should 'e determined from wa!e analysis sheets. ,roper attention should 'e paid in
preparin! payrolls and in the payment of wa!es. $he treatment of idle time, o&er < time and
holiday < pay should not 'e o&erloo(ed.
(x) $he cost accountin! system should ensure that o&erheads are collected, accumulated
apportioned and a'sor'ed and e3uita'ly.
"*# Essenti)' %)3to!s %o! .esi/nin/ ) 8ost A33ountin/ S0ste(.
$he essential factors to 'e considered while desi!nin! a Cost Accountin! 2ystem are as
follows#%
(i) A thorou!h understandin! of < or!anisational manufacturin! procedure and processT sellin!
and distri'ution procedureT and type of cost information re3uirement.
(ii) 2election of a suita'le costin! techni3ue (2tandard or actual, mar!inal or a'sorption)
(iii) ,ricin! method suita'le, for the material, to 'e issued to production.
(i&) Aethod suita'le for 'oo(in! la'our cost on Uo's.
(&) A sound plan should 'e de&ised for the collection, allocation, apportionment and a'sorption
of o&erheads.
(&i) 0ecidin! on ways of treatin! waste, scrap and idle time.
(&ii) 0esi!nin! of suita'le forms to 'e used for collectin! and dissemination of cost
data@information.
(&iii) "ntroduction of 'ud!etary control techni3ue so that actual performance may 'e compared
with 'ud!etary fi!ure, for measurin! efficiency of performance.
Essenti)' %)3to!s %o! inst)''in/ ) 8ost A33ountin/ S0ste(.
$he essential factors for installin! a Cost Accountin! system are listed as 'elow#%
(i) $he o'Uecti&es of installin! a Costin! 2ystem and the expectation of the mana!ement from
the system should 'e identified first.
(ii) "t is important to ascertain the si!nificant &aria'les of the manufacturin! unit which are
amena'le to control and affect the concern. -or example, 3uite after the production costs
control may 'e more important than control of its mar(etin! cost. Hnder such a situation,
the costin! system should de&ote !reater attention to control production cost.
(iii) A thorou!h study of the nature of 'usiness, its technical aspects, products, methods and
sta!es of production should 'e made. $his will help in selectin! a proper method of
costin!.
(i&) A study of the or!anisation structure, its si;e and layout etc., is also necessary. $his is
useful to mana!ement to determine the scope of responsi'ilities of &arious mana!ers.
(&) $he costin! system should 'e e&ol&ed in consultation with the staff and should 'e
introduced only after meetin! their o'Uections and dou'ts, if any. $he co < operation of staff
is essential for the successful operation of the system.
(&i) 0etails of the records to 'e maintained 'y the costin! system should 'e carefully wor(ed
out. $he de!ree of accuracy of the data to 'e supplied 'y the system should 'e
determined.
(&ii) $he forms to 'e used 'y foreman, wor(ers etc., should 'e standardised. $hese forms 'e
suita'ly desi!ned and must ensure minimum clerical wor( at all sta!es.
(&iii) 6ecessary arran!ements should 'e made for the flow of information@data to all concerned
mana!ers, at different le&els, re!ularly and promptly.
(x) $he costin! system to 'e installed should 'e easy to understand and simple to operate..
Question E
8rite short notes on #
(a) A9C Analysis
(') Ba'our $urno&er
(c) Cost Bed!er Control Account
(d) 1peration Costin!.
Anse!
")# A58 An)'0sis 1 "t is a system of in&entory control. "t exercises discriminatin! control o&er
different items of stores classified on the 'asis of the in&estment in&ol&ed. Hsually the items are
di&ided into three cate!ories accordin! to their importance, namely, their &alue and fre3uency of
replenishment durin! a period.
(i) WAM cate!ory of items consists of only a small percenta!e i.e., a'out 10? of the total items
handled 'y the stores 'ut re3uire hea&y in&estment a'out F0? of in&entory &alue, 'ecause
of their hi!h prices and hea&y re3uirement.
(ii) W9M cate!ory of items are relati&ely less importantT they may 'e .0? of the total items of
material handled 'y stores. $he percenta!e of in&estment re3uired is a'out .0? of the
total in&estment in in&entories.
(iii) WCM Cate!ory of items do not re3uire much in&estmentT it may 'e a'out 10? of total
in&entory &alue 'ut they are nearly F0? of the total items handled 'y store.
WAM cate!ory of items can 'e controlled effecti&ely 'y usin! a re!ular system which ensures
neither o&er < stoc(in! nor stora!e of materials for production. 2uch a system plans its total
material re3uirements 'y ma(in! 'ud!ets. $he stoc(s of materials are controlled 'y fixin!
certain le&els li(e maximum le&el, minimum le&el and re < order le&el. A reduction in in&entory
mana!ement costs is achie&ed 'y determinin! economic order 3uantities after ta(in! into
accountin! orderin! cost and carryin! cost. $o a&oid shorta!e and to minimi;e hea&y in&estment
in in&entories, the techni3ues of &alue analysis, &ariety reduction, standardisation etc., may 'e
used.
"n the case of W9M cate!ory of items, as the sum in&ol&ed is moderate, the same de!ree of control
as applied in WAM cate!ory of items is not warranted. $he orders for the items, 'elon!in! to this
cate!ory may 'e placed after re&iewin! their situation periodically.
-or WCM cate!ory of items, there is no need of exercisin! constant control. 1rders for items in this
!roup may 'e placed either after six months or once in a year, after ascertainin! consumption
re3uirements. "n this case the o'Uecti&e is to economise on orderin! and handlin! costs.
$he ad&anta!es of A9C analysis are the followin! #%
(i) "t ensures that, without there 'ein! any dan!er of interruption of production for want of
materials or stores, minimum in&estment will 'e made on in&entories of stoc(s of materials
or stoc(s to 'e carried.
(ii) $he cost of placin! orders, recei&in! !oods and maintainin! stoc(s is minimised specially if
the system is coupled with the determination of proper economic order 3uantities.
(iii) Aana!ement time is sa&ed since attention need 'e paid only to some of the items rather
than all the items as would 'e the case if the A9C system was not in operation.
"*# >)*ou! Tu!no&e! 1 "t is the rate of chan!e in the la'our force durin! a specified period measured
a!ainst a suita'le index. $he standard or usual la'our turno&er in the industry or locally or the
la'our turno&er rate for a past period may 'e ta(en as the index or norm a!ainst which actual
turno&er rate is compared. $he methods of calculatin! la'our turno&er are !i&en 'elow#
Ba'our $urno&er =
or

=
=
6um'er of employees replaced
A&era!e num'er of employees on roll
6um'er of employees separated durin! a year
A&era!e num'er of employees on rolls durin! the year
6o. of employees separated > 6o. of employees replaced
A&era!e num'er of employees on rolls durin! the period
8)uses o% ')*ou! tu!no&e! 1 $he main causes of la'our turno&er in an or!anisation@industry can
'e 'roadly classified under the followin! three heads #
(a) ,ersonal Causes
(') Hna&oida'le Causes, and
(c) A&oida'le Causes
,ersonal causes are those which includes or compel wor(ers to lea&e their Uo's such causes
includes the followin! #
(i) Chan!e of Uo's for 'etterment
(ii) ,remature retirement due to ill health or old a!e.
(iii) 0omestic pro'lem and family responsi'ilities.
(i&) 0iscontentment o&er the Uo's and wor(in! en&ironment.
"n all the a'o&e cases the employee lea&es the or!anisation at his will and, therefore, it is difficult
to su!!est any possi'le remedy in the first three cases. 9ut the last one can 'e o&ercome 'y
creatin! conditions leadin! to a healthy wor(in! en&ironment. -or this, officers should play a
positi&e role and ma(e sure that their su'ordinates wor( under healthy wor(in! conditions.
Hna&oida'le causes are those under which it 'ecomes o'li!atory on the part of mana!ement to
as( some or more of their employees to lea&e the or!anisation, such causes are summed up as
listed 'elow#
(i) 2easonal nature of the 'usinessT
(ii) 2horta!e of raw material, power, slac( mar(et for the product etc T
(iii) Chan!e in he plant locationT
(i&) 0isa'ility, ma(in! a wor(er unfit for wor(T
(&) 0isciplinary measuresT
(&i) Aarria!e (!enerally in the case of women)
A&oida'le causes are those which re3uire the attention of mana!ement on continuous 'asis so
as to (eep the la'our turno&er ratio as low as possi'le. $he main causes under this case are
indicated 'elow #
(1) 0issatisfaction with Uo', remuneration, hours of wor(, wor(in! conditions, etc.
(.) 2trained relationship facilities and promotional a&enuesT
() Bac( of trainin! facilities and promotional a&enuesT
(4) Bac( of recreational and medical facilitiesT
(5) Bow wa!es and allowances.
,roper and timely mana!ement action can reduce the la'our turno&er apprecia'ly so far as
a&oida'le causes are concerned.
E%%e3ts 1 $he effect of la'our turno&er on cost of production is that is that hi!h la'our turno&er
increases the cost of production in the followin! ways #
(i) :&en flow of production is distur'edT
(ii) :fficiency of new wor(ers is lowT producti&ity of new 'ut experienced wor(ers is low in the
'e!innin!T
(iii) $here is increased cost of trainin! and inductionT
(i&) 6ew wor(ers cause increased 'rea(a!e of tools, wasta!e of materials etc.
"n some companies, the la'our turno&er rates is as hi!h as 100?T it means that on the a&era!e,
all the wor( is 'ein! done 'y new and inexperienced wor(ers. $his is 'ound to lower efficiency
and production and increases the cost of production.
Re(e.i)' ste-s to (ini(ise ')*ou! tu!no&e!1
$he followin! steps are useful for minimisin! la'our turno&er,.
1. E2ist Inte!&ie 1 An inter&iew may'e arran!ed with each out!oin! employee to ascertain
the reasons of his lea&in! the or!anisation.
.. Fo* )n)'0sis )n. e&)'u)tion 1 9efore recruitin! wor(ers, Uo' analysis and e&aluation may
'e carried out to ascertain the re3uirements of each Uo'.
. S3ienti%i3 S0ste( o% !e3!uit(ent, -')3e(ent )n. -!o(otion 1 $he or!anisation should
ma(e use of a scientific system of recruitment selection, placement and promotion for
employees.
4. En'i/9tene. )ttitu.e o% ()n)/e(ent 1 $he mana!ement should introduce the followin!
steps for creatin! a healthy wor(in! atmosphere.
(i) 2er&ice rules should 'e framed, discussed and appro&ed amon! mana!ement and
wor(ers, 'efore their implementation.
(ii) ,ro&ide facilities for education and trainin! of wor(ers.
(iii) "ntroduce a procedure for settlin! wor(ers !rie&ance.
5. Use o% 8o((ittee 1 "ssues li(e control o&er wor(ers handlin! their !rie&ances etc., may 'e
dealt 'y a committee, comprisin! of mem'ers from mana!ement and wor(ers.
"3# 8ost >e./e! 8ont!o' A33ount 1 $his control account is also popularly (nown as W7eneral
Bed!er AdUustment statement AccountM is opened in Cost Bed!er to complete dou'le < entry. All
items of income and expenditure ta(en from financial accounts and all transfers from cost
accounts to financial 'oo(s are recorded in this account. 2ince the purpose of this account is to
complete dou'le entry in the cost led!er, therefore all transactions in the cost led!er must 'e
recorded throu!h the WCost Bed!er Control AccountM. $he 'alance in this account will always 'e
e3ual to the total of all the 'alances of the impersonal accounts.
".# O-e!)tion 3ostin/ 1 "t is defined as the refinement of process costin!. "t is concerned with the
determination of the cost of each operation rather than the process. "n those industries where a
process consists of distinct operations, the methods of costin! applied or use is called operation
costin!. 1peratin! costin! offers 'etter scope for control. "t facilitates the computation of unit
operation cost at the end of each operation 'y di&idin! the total operation cost 'y total output
units. "t is the cate!ory of the 'asic costin! method, applica'le, where standardised !oods or
ser&ices result from a se3uence of repetiti&e and more or less continuous operations, or
processes to which costs are char!ed 'efore 'ein! a&era!e o&er the units produced durin! the
period. $he two costin! methods included under this head are process costin! and ser&ice
costin!.