Amity Campus

Uttar Pradesh
India 201303
ASSIGNMENTS
PROGRAM: BFIA
SEMESTER-II
Subject Name:
Study COUNTRY:
Roll Number (Reg. No.):
Student Name:

COST AND MANAGEMENT ACCOUNTING

SOMALIA
BFIA01512010-2013019
MOHAMED ABDULLAHI KHALAF

INSTRUCTIONS
a) Students are required to submit all three assignment sets.
ASSIGNMENT
Assignment A
Assignment B
Assignment C

DETAILS
Five Subjective Questions
Three Subjective Questions + Case Study
Objective or one line Questions

MARKS
10
10
10

b) Total weight-age given to these assignments is 30%. OR 30

Marks
c) All assignments are to be completed as typed in word/pdf.
d) All questions are required to be attempted.
e) All the three assignments are to be completed by due dates
and need to be submitted for evaluation by Amity University.
f) The students have to attach a scanned signature in the form.
Signature : _________________________
Date: 30. Dec. 2011
( ) Tick mark in front of the assignments submitted
Assignment A

Assignment B

Assignment C

Cost and Management Accounting

SECTION A: Five subjective questions
Q: 1).
What is Activity Based costing? How is it different from
Traditional costing system?
Answer:
Activity-based costing (ABC) is a method of assigning costs to products or
services based on the resources that they consume and the activities of
production process. Its aim, The Economist once wrote, is to change the
way in which costs are counted.
ABC is intended to overcome the weakness of the traditional method by
having various pools of costs and then allocating each pools costs on the
basis of its root cause.
Under ABC a manufacturer will use many cost drivers to assign overhead
costs to products. The objective of Activity Based Costing is to assign the
overhead costs based on their root causes rather than merely spreading
the costs on the basis of direct labor hours or production machine hours.
ABC is an alternative to traditional costing in which a businesss
overheads indirect costs such as lighting, heating and marketing are
allocated in proportion to an activitys direct costs. This is unsatisfactory
because two activities that absorb the same direct costs can use very
different amounts of overhead. A mass-produced industrial robot, for
instance, can use the same amount of labour and materials as a
customized robot. But the customized robot uses far more of the
company engineers time (an overhead) than does the mass-produced
one.
This difference would not be reflected in traditional costing systems.
Hence a company that makes more and more customized products and
bases its pricing on historic costings can soon find itself making large
losses. As new technologies make it easier for firms to customize
products, the importance of allocating indirect costs accurately
increases.
Difference Between ABC and Traditional Costing
The difference between Activity Based Costing and Traditional Costing is
that ABC is complex and TC is simple.
3

The ABC system began in 1981, whereas TC methods were designed and
developed between; 1870 1920. In the TC system, the cost objects and
used up resources are required to evaluate the cost whereas in the ABC
system the cost is dependent upon the activities used up by the cost
objects.
Activity Based Costing is accurate and preferred over the Traditional
Costing system. The ABC method is adopted when the overheads of the
company are high and there are large numbers of miscellaneous
products. Inaccuracy or errors are most unwanted and undesirable
because of the competitive rates set by the competitors in the market.
Due to this heavy and stiff competition, a highly reliable and accurate
method is required for the cost management.
Traditional Costing uses a single overhead pool and is not able to
calculate the true cost. The costs of the objects are allocated randomly
based upon the labor or machine hours etc. ABC costing includes
identifiable products parts or labor whereas TC arbitrarily accumulates
expenses, salaries, depreciations etc.
Smaller targeted costs that are built upon activities are calculated with
the help of the ABC system. The ABC system is advantageous since it
helps in simplifying the decision making process and it makes
management concepts become clear and target -oriented. It also helps in
evaluating performances and sets standards which can help the manager
to use this information for comparison purposes.
In the Traditional Costing System, the company determines the cost of
production after the products have been produced whereas in the target
or Activity Based Costing System, the value or cost of the product is
determined on the basis of customer feedback and pocket range. The
ABC system helps the company to determine whether to lower or raise
the activities cost to grab the consumers. The ABC system also helps in
keeping up with the competitors without sacrificing the quality and the
quantity of the products.
1) Traditional Costing is obsolete whereas Activity Based Costing is
used more by various target-oriented companies.
2) ABC methods help the company to identify the needs of keeping or
eliminating certain activities to add value to the products.
3) Traditional Costing methods focus on the structure rather than on
processes while ABC methods focus on the activities or processes
rather than on the structure.
4) ABC provides accurate costs whereas TC accumulates values
arbitrarily.
4

5) TC is almost obsolete whereas ABC methods are largely in use

since 1981.
Q: 2).

Briefly explain the different ways of classifying cost.

Answer:
Cost classification is the process of grouping costs according to their
common characteristics. A suitable classification of costs is of vital
importance in order to identify the cost with cost centres or cost units.
Cost may be classified accounting to their nature, i.e., material, labour
and expenses and a number of other characteristics. The same cost
figures are classified according to different ways of costing depending
upon the purpose to be achieved and requirements of particular concern.
The important ways of classification are:
On the basis of Identity: According to this classification, the costs are
divided into there categories i.e., Materials, Labour and Expenses. There
can be further sub-classification of each element; for example, material
into raw material components, and spare parts, consumable stores,
packing material etc. This classification is important as it helps to find
total cost, how such total cost is constituted and valuation of work-inprogress.
On the basis of Function: Production, Administration, Selling &
Distribution are three important functions of a business concern. Taking
these functions into consideration, costs have been classified by:
a) Production or Manufacturing Cost: Manufacturing costs are
those costs which are incurred in the course of manufacture. It
includes cost of raw material, cost of labour, other direct cost and
factory indirect cost. Example of production or manufacturing
costs may be power, lighting, heating, rent, depreciation etc.
b) Office and Administration Cost: These costs are incurred for the
general administration of the enterprise. It includes office costs as
well as administration cost. For example, salary of office staff, rent
of office building, electricity charges, audit fee, printing and
stationeries etc.
c) Selling and Distribution Cost: It includes both selling cost as well
as distribution cost. Selling costs are those costs which are
incurred in connection with the selling of goods and services
Distribution costs are those costs which are incurred on despatch
of finished goods to the consumers. Example of selling and
distribution costs are: sales men salary, packing charges, carriage,
out ward, advertisement, ware house charges etc.
5

On the basis of Variability: The behaviour of cost varies from one

another as production increases, some cost remains constant or varies in
direct proportion to the volume of out put, or others may vary partially.
Thus on the basis of variability, costs can be classified into the following
three categories.
a) Fixed Cost/Period Cost: Fixed costs are those costs which remain
fixed irrespective of the change in volume of out put. As production
increases cost per unit of the fixed cost decreases and as
production decreases fixed costs are, rent of the factory building
depreciation, salary of the office manager etc.
b) Variable Cost/Product Cost: Variable costs are that costs which
very in direct proportion to the volume of out put. As production
increases total cost increases but also per unit remains constant.
As production decreases total cost decreases and cost per unit also
decreases. Examples of variable costs are; cost of raw materials
labour etc.
c) Semi-Variable Cost/Semi-Fixed cost: These costs are partly fixed
and partly variable. Examples of variable costs are telephone rent.
It includes partly fixed charge up to a certain level and then varies
according to the calls.
On the basis of controllability: From the point of view of controllability,
the cost has been classified in to two categories as controllable cost and
uncontrollable cost.
a) Controllable Cost: These costs are regulated or controlled by
specified member of an organisation. Most of the variable costs are
controllable. Generally direct material, direct labour and direct
expenses are controlled by the lower level of the management.
b) Uncontrollable Cost: These costs can not be regulated or
controlled by specified member of an undertaking. Most of the
fixed costs are uncontrollable. Examples of uncontrollable costs
are factory rent, managers salary etc.
On the basis of normality: On this basis the costs have been classified
in to two categories as.
a) Normal cost: It is the cost which is normally incurred at a given
level of out put. These costs are part of cost production.
b) Abnormal cost: It is the cost which is not normally incurred at a
given level of out put. These costs are not charged to the cost of
production. It is transferred to the costing profit and loss account.
On the basis of Time: On this basis the costs have been classified as;
6

a) Historical Cost: These costs are ascertained after they have been
incurred such costs are available only when the production of a
particular thing has already been done.
b) Pre-determined Cost: Pre-determined costs are estimated costs
which are set in advance on a scientific way. It becomes standard
cost and compared with the actual for adopting controlling
measures.
Q: 3).
What do
advantages.

you

mean

by

EOQ

analysis?

State

its

Answer:
Economic Order Quantity (EOQ) is the quantity of inventory to
purchase with each order to minimize inventory costs. It is that size of
the order which gives maximum economy in purchasing any material
and ultimately contributes towards maintaining the materials at the
optimum level and at the minimum cost. In other words, the EOQ is the
amount of inventory to be ordered at one time for purposes of minimizing
annual inventory cost.
The quantity to be ordered at a given time must be determined by
balancing two factors:
1) The cost of possessing or carrying materials.
2) The cost of acquiring or ordering materials.
Purchasing larger quantities may decrease the unit cost of acquisition,
but this saving may not be more than the cost of carrying materials in
stock for a long time and that is one of many inventory management
problems called order quantity problems, and the task is to determine
the optimum or economic order quantity (or economic lot size).
Assumptions of Economic Order Quantity models are:
1) Constant or uniform demand: The EOQ model assumes constant
demand, but it may vary from time to time. If demand is
stochastic, not known in advance the model must be modified with
the inclusion of a safety stock.
2) Constant unit price: The EOQ model is based on the assumption
that the purchase price is constant.
3) Constant carrying costs: Unit carrying costs may vary
substantially as the size of the inventory rises, perhaps decreasing
because of economies of scale or storage efficiency or increasing as
storage space runs out and new warehouses have to be rented.
7

This situation can be handled through a modification in the

original model similar to the one used for variable unit price.
4) Constant ordering costs: While this assumption is generally valid,
its violation can be accommodated by modifying the original EOQ
model in a manner similar to the one used for variable unit price.
5) Instantaneous delivery: If delivery is not instantaneous, which is
generally the case; the original EOQ model must be modified by
including of a safety stock.
6) Independent orders: If multiple orders result in cost savings by
reducing paperwork and transportation cost, the original EOQ
model must be further modified. While this modification is
somewhat complicated, special EOQ models have been developed
to deal with this.
Determining an optimum inventory level involves two types of costs:
Ordering costs and Carrying costs. The economic order quantity is that
inventory level, which minimizes the total of ordering and carrying costs.
Ordering Costs are costs incurred for ordering raw materials, this
include the entire costs of acquiring it. They include costs of the following
activities: requisitioning, purchase ordering, transporting, receiving,
inspecting and storing.
Ordering costs increase with the number of orders; thus the more
frequently inventory is acquired, the higher the firm's ordering costs. On
the other hand, if the firm maintains large inventory levels, there will be
few orders placed and ordering costs will be relatively small. Thus,
ordering costs decrease with increasing size of inventory.
Carrying Costs are costs incurred for maintaining a given level of
inventory are called carrying costs. They include storage, insurance,
taxes, deterioration and obsolescence. The storage costs comprise cost of
storage space (warehousing cost), stores handling costs and clerical and
staff service costs (administrative costs) incurred in recording and
providing special facilities such as fencing, lines, racks etc.
Companies making purchasing decisions often compute the EOQ, which
represents the least costly number of units to order. It indicates the
optimal balance between ordering and carrying costs by mathematically
equating total ordering costs to total carrying costs.
The EOQ formula is:

Where EOQ = economic order quantity in units

8

A = estimated annual demand.

O = estimated cost of placing one order.
C = estimated cost to carry one unit in stock for one year.
The unit purchase cost is not included in the EOQ formula.
All inventory-related costs must be evaluated when purchasing or
production decisions are made. The costs of ordering and carrying
inventory offset each other when estimating the economic order quantity.
Advantages of EOQ:
The advantage of the EOQ formula is that:

It provides a baseline for getting the best deal.

It helps you purchase what you're going to use and keeps you from
over purchasing to get 'deals' from vendors.
It provides specific numbers particular to the business regarding
how much inventory to hold, when to re-order it and how many
items to order.
The main advantage of the EOQ model is the customized
recommendations provided regarding the most economical number
of units per order.

Q: 4).
What is idle time? What are the causes for idle time?
How should idle time wages be treated in cost Accounts?
Answer:
Idle time is Non-productive time (during which an employee is still paid)
of employees or machines, or both, due to work stoppage from any cause.
It is also called waiting time, allowed time, or downtime.
Generally idle time means that time for which the employer pays, but
from which he obtains no production. In Other words its the difference
between the time for which workers are paid and the time they actually
worked. So it is a loss to the organization. It can be minimized but,
cannot be controlled during idle time; the workers remain due and
contribute nothing towards production. It is the difference between
actual hour and actual hour worked. There are two types of idle times:
1) Normal idle time: The normal idle time is that idle time which
cannot be fully avoided but effective effort should be made to
reduce it.
2) Abnormal idle time: Abnormal idle time arises due to various
causes which can be avoided. Abnormal idle time can be avoided if
9

proper precautions are taken. Thus the factors which are

responsible for controlling and avoiding idle time must be taken
care of.
Normal idle time is permitted but abnormal idle time should be avoided.
Causes of idle time:
There are many causes of idle time. The normal idle time is caused by:
a) Moving from one job to another.
b) Waiting for materials or instructions.
c) Temporary absence from duty because of minor accidents,
personal breaks tea breaks etc.
d) Traveling form one department to another.
The causes of Abnormal Idle Time are:a) Breakdown of machinery.
b) Lack of materials.
c) Bottlenecks in production, resulting in a temporary absence of
parts for further processing.
d) Strikes, lockout, fire etc.
In many cases, the causes of idle time can be as simple as a poor bill of
materials or assembly drawing, unclear work instructions, lack of the
proper production, stock out on material and parts needed to perform
the work task, and even machine downtime. There are many causes of
idle time and companies must become accustomed to identifying them
and quantifying their costs.
Idle time represents the time for which wages are paid but no production
is resulted. Idle time can be classified as controllable and uncontrollable,
and /or normal and abnormal. The normal and controllable idle time
cost should be collected through a standing order number and charged
off as an overhead. If the idle time can be allocated to a particular
department its cost should be charged off to such departmental overhead
and recovered over the units produced. For the normal and
uncontrollable idle time such as tool setting up time, tea/Tiffin breaks
etc. the labour cost should be calculated after allowing for such cost time
and should be properly adjusted. The cost of idle time which is abnormal
and uncontrollable should be charged off directly to the Costing profit
and Loss Account.
Idle time wages denote the wages paid for the period during which no
work was done. Such costs are dealt with in the following manners:10

a) Charge to factory overheads: If the idle time is of such a nature

that it cannot be avoided and the magnitude of idle time is normal,
it forms part of the overhead. According to nature of business
activities, and for effective control, each type of idle time should be
booked to a separate standing order number. Idle time will, thus,
conspicuously appear as part of overhead to attract the attention
of management for necessary remedial measure.
b) Debit to the Profit & Loss Account: If the idle time is abnormal,
the resultant expenditure cannot be regarded as part of cost of
manufacture. Payment of such idle time of abnormal nature is
charged directly to costing profit and loss A/c. If such expenditure
is included as part of cost, it will render figures relating to the two
periods incomparable. Abnormal overtime arises in cases like
strike, lockout, fire, failure of power supply, breakdown of
machinery due to inefficiency of maintenance management,
bottlenecks in production etc.
Q: 5).
What is Marginal costing? Explain and how is it different
from Absorption costing?
Answer:
Marginal Cost: Marginal cost is the additional cost to be incurred if an
additional unit is produced. In other words, marginal cost is the total of
variable costs, i.e. prime cost plus variable overheads. It is based on the
distinction between fixed and variable costs.
The marginal costing and absorption costing are two techniques of
calculating profits. The net profits of the two are not the same because of
the following reasons:
1) Over and Under Absorbed Overheads: In absorption costing, fixed
overheads can never be absorbed exactly because of difficulty in
forecasting costs and volume of output. If these balances of under
or over absorbed/recovery are not written off to costing profit and
loss account, the actual amount incurred is not shown in it. In
marginal costing, however, the actual fixed overhead incurred is
wholly charged against contribution and hence, there will be some
difference in net profits.
2) Difference in Stock Valuation: In marginal costing, work in
progress and finished stocks are valued at marginal cost, but in
absorption costing, they are valued at total production cost. Hence,
profit will differ as different amounts of fixed overheads are
considered in two accounts.

11

The profit difference due to difference in stock valuation is summarized

as follows:
a) When there is no opening and closing stocks, there will be no
difference in profit.
b) When opening and closing stocks are same, there will be no
difference in profit, provided the fixed cost element in opening and
closing stocks are of the same amount.
c) When closing stock is more than opening stock, the profit under
absorption costing will be higher as comparatively a greater portion
of fixed cost is included in closing stock and carried over to next
period.
d) When closing stock is less than opening stock, the profit under
absorption costing will be less as comparatively a higher amount of
fixed cost contained in opening stock is debited during the current
period.

12

SECTION B:
Three subjective questions + case study
Q: 1).
What is Job costing? How is it different from contract
costing? Explain.
Answer:
JOB COSTING: is a type of specific order costing where work is
undertaken as an identifiable unit and manufactured according to
customers specific requirement is known as Job Costing. Under job
costing method cost of an individual job or work order is ascertained
separately. Job costing is ideal where the products are dissimilar and
non-repetitive in nature. It is suitable for ship building, printing, interior
decoration and advertising industries.
The main objectives of job costing are to establish the profit or loss on
each job and to provide a valuation of WIP.
The main advantages of job costing are as follows:
Advantages
a) It provides detailed analysis of costs which enable the management
to determine the operating efficiency of the different factors of
production.
b) Profitability of a job can be known by following this method.
c) It provides a useful basis for making estimates for similar jobs in
the future.
d) It is very useful in cost plus contracts.
e) It facilitates comparison.
f) It helps the management in minimizing the spoilage.
Disadvantages
a) It is expensive as it involves great deal of clerical work.
b) It does not facilitate control of costs unless it is used with standard
costing.
DIFFERENCE BETWEEN JOB COSTING AND CONTRACT COSTING
Job costing and contract costing both are the methods of costing and
used when we receive specific order for performing any work. But after
this, there are many differences between job costing and contract costing
which we are explaining in four points.
13

Following are four points which shows as basis of difference between

job costing and contract costing:1) Area of Work: Job costing is used for calculating cost in very small
work like making of specific type of product. While Contract costing is
used for calculating the cost in very big work.
2) Period: In job costing, we take that job which can finish within short
period. Whereas In contract costing, we include that contracts which
can finish within one year or more than one year.
3) Account: In job costing, we make job account for every job. In this
account, we show different expenses which are paid for completing
that job. And In contract costing, we open contract account for every
contract. In this account, we show all expenses relating to contract
and it also show work in progress in the form of work certified and
work uncertified. Difference of credit and debit side of this account
will show notional profit or loss.
4) Transfer of Profit: If specific job is done and finished goods of this
job are sold to customers, its profits will be transferred to profit and
loss account. But In contract costing, we check how much work is
done and on the basis of work certified, we calculate the proportion of
notional profit which is transferred to profit and loss account.
Q: 2).
What is to be considered in developing information and
reporting system? Explain.
Answer:
Information is a corporate resource, as important as the capital, labor,
and all other inputs of every business, and is being used for decisionmaking. Its quality, therefore, is required to be very high. Low quality
information would adversely affect the organizational performance as it
affects decision-making. The quality of information is the result of the
quality of the input data, processing design, system design, system and
procedures which generate such a data, and the management of the data
processing function.
Like information, reporting system is another crucial determinant of
organizational success.
Due to its importance, organizations must buy close attention to the
developing information and reporting system. Managers should take all
the steps involved in that process, and consider the followings:
Hierarchy: The reporting structure should be such that at successively
higher levels reports become broader in scope, but also more
summarized in nature.
14

The reporting structure is effective when reports at different levels: (i)

generally employ the same analytical, accounting, and financial
conventions, (ii) use the same basic assumptions in the areas of
uncertainty, and (iii) convey a connected story.
Contents: In determining the contents of reports, among other things,
the following considerations must be borne in mind: comprehensiveness,
exception reporting, and materiality.
Comprehensiveness: The reports should reflect the financial and the
operating performances so that the overall information needs of
managers are satisfied. The monitoring process tends to be more effective
when the managers review both types of performance indicators.
Exception: The time available to management is limited. So the
reporting system should operate on the principle of exception. It should
highlight only those things which are out of control and require
managerial attention.
Materiality: The reporting system should provide information that is
materially significant for the users. What is materially significant
depends largely on the level of responsibility of the user.
Frequency: The frequency of reporting is to be considered, which will
depend on the significance and criticality of the information
communicated with respect to time.
Reports must be timely and their frequency should be geared to the
period of time needed for corrective action on the kinds of problems being
reported.
Format: The reporting formats should be designed in such a way that
they: (i) highlight the actual achievement or performance in relation to
the original plan or budgets for respective items, (ii) facilitate the easy
and quick identification of primary reasons for shortfall, and (iii) indicate
the nature of detailed reports that might be required for further analysis
of the particular activity or operation resulting in the shortfall.
Readability: The readability of a report is influenced by its size and the
measurement of unit adopted for reporting.
Conciseness: The reports should be concise. Whenever possible, a report
should not exceed two pages in length. If it is unduly long, it creates an
information overload which diminishes its effectiveness.

15

Significant Unit of Measure: The unit of measure chosen for reporting

purposes must be intelligible to the reader. It should enable him to reach
proper conclusions and formulate appropriate courses of action.
Q: 3).
What is responsibility
responsibility centers.

accounting?

Explain

the

Answer:
a) RESPONSIBILITY ACCOUNTING
Responsibility accounting is a management control system based on the
principles of delegating and locating responsibility. The authority is
delegated on responsibility centre and accounting for the responsibility
centre. Responsibility accounting is a system under which managers are
given decisions making authority and responsibility for each activity
occurring within a specific area of the company. Under this system,
managers are made responsible for the activities of segments. These
segments may be called departments, branches or divisions etc. one of
the uses of management accounting is managerial control. Among the
control techniques responsibility accounting has assumed considerable
significance. While the other control devices are applicable to the
organization as a whole, responsibility accounting represents a method of
measuring the performance of various divisions of an organization. The
term division with reference to responsibility accounting is used in
general sense to include any logical segment, component sub-component
of an organization. Defined in this way, it includes a decision, a
department, a branch office, a service centre, a product line, a channel of
distribution, for the operating performance it is separately identifiable
and measurable is somewhat of practical significance to management.
According to the Institute of Cost and Works Accountants of India
(ICWAI) Responsibility Accounting is a system of management accounting
under which accountability is established according to the responsibility
delegated to various levels of management and management information
and reporting system instituted to give adequate feed back in terms of
the delegated responsibility. Under this system divisions or units of an
organization under a specified authority in person are developed as
responsibility centers are evaluated individually for their performance.
b) RESPONSIBILITY CENTRE:
For control purposes, responsibility centers are generally categorized
into: Cost centers, Profit centers and Investment centers.

16

1) Cost Centre: is a responsibility centre in which inputs are

measured in monetary terms. Responsibility accounting is based
on financial information relating to inputs and outputs. In a cost
centre of responsibility, the accounting system records only the
costs incurred by the centre but the revenues earned are excluded.
A cost centre measures financial performance in terms of cost
incurred by it. In other words, the performance measured in a cost
centre is efficiency of operation in that centre in terms of the
quantity of inputs used in producing some given output.
2) Profit Centre: is a centre in which both the inputs and outputs
are measured in monetary terms is called a profit centre. In other
words both costs and revenues of the centre are accounted for.
Since the difference of revenues and costs is termed as profit, this
centre is called profit centre. In a centre, there are financial
measures of the outputs as well as of the inputs; it is possible to
measure the effectiveness and efficiency of performance in
financial terms. Profit analysis can be used as a basis for
evaluating the performance of divisional manager.
3) Measurement of Expenses: Another problem with profit centers
may relate to the measure of certain type of expenses which have
to be involved in the computation of profit centers. There is a scope
for difference of opinion relating to the treatment of those types of
expenses which are not traceable or attributable should be ignored
in working out the profit of the division as a profit centre.
4) Investment Centers: is a centre in which assets employed are
also measured besides the measurement of inputs and outputs is
called an investment centre. Inputs are accounted for in terms of
costs and outputs are calculated on investment centre. It is the
broadest measurement, in the sense that the performance is
measured not only in terms of profits but also in terms of assets
employed to generate profits.
An investment centre differs from a profit centre in that as investment
centre is evaluated on the basis of the rate of return earned on the assets
invested in the segment while a profit centre is evaluated on the basis of
excess revenue over expenses for the period.

17

CASE STUDY:
A retail dealer in garments is currently selling 24000 shirts annually. He
supplies the following details for the year ended 31 st December, 2007.
Rs
Selling Price per shirt

40

Variable Cost per shirt

25

Fixed cost:
Staff salaries for the year

120000

General office cost for the year

80000

Advertising costs for the year

40000

As a cost accountant of the firm, you are required to answer the following
each part independently:(i)
(ii)
(iii)

Calculate the break-even point and margin of safety in sales

revenue and no of shirts sold.
Assume that 20000 shirts were sold in a year. Find out the net
profit of the firm.
If it is decided to introduce selling commission of Rs 3 per shirt,
how many shirts would require to be sold in a year to earn a net
income of Rs 15000/-.

Solution:
(i)

Calculate the break-even point and margin of safety in sales

revenue and no of shirts sold.
Break-even point is the point where total sales revenue equals
total costs, i.e., the point of zero profits. The formula is:

Breakeven point =
=
=

Fixed costs
Price Variable cost
240,000
40 25
16,000 Shirts or

16,000 x Rs. 40 = Rs. 6,40,000

18

Also
Breakeven point =

Fixed costs
Contribution per unit

240,000
15

16,000 Shirts or

16,000 x Rs. 40 = Rs. 6,40,000

To cover all its costs this retail dealer in garments must sell 16,000
shirts. By doing so it covers all its costs and earns no profit.
So the breakeven point of the retailer in unit of shirts is 16,000

Margin of safety is a tool to help management understand how far

sales could change before the company would have a net loss.

Margin of safety

= Actual sales Break even sales.

= 24,000 x Rs. 40 Rs. 6,40,000
= Rs. 9,60,000 Rs. 6,40,000
= Rs. Rs. 320,000

The margin of safety in sales revenues for retail dealer in garments

equals Rupees 320,000

(ii)

Assume that 20000 shirts were sold in a year. Find out the net
profit of the firm.
Net profit when 20,000 shirts are sold
Contributions (20,000 x Rs. 15)

Rs. 300,000

Less Fixed Cost

Rs. 240,000

Net Profit

Rs. 60,000

19

(iii)

If it is decided to introduce selling commission of Rs 3 per shirt,

how many shirts would require to be sold in a year to earn a net
income of Rs 15000/-.

Sales for Desired profit

fixed costs + Desired profit

New contribution per unit

Rs. 2,40,000 + Rs. 15,000

Rs. 15 Rs. 3

Rs. 2,55,000
Rs. 12

21,250 Shirts.

So, to earn net income of Rs. 15,000 the retail dealer must sell 21,250
shirts.

20

SECTION C (40 MCQs)

Q: 1).
a)
b)
c)
d)
Q: 2).
a)
b)
c)
d)

The prime function of management accounting is to

Assist tax authorities
Assist the management in performing its functions
effectively ().
Interpret the financial data
Record business transactions
P/v Ratio is an indicator of
The rate at which goods are sold
The volume of sales
The volume of profit
The rate of profit ().

Q: 3).
Which of the following best describes a fixed cost? A cost
which:
a)
b)
c)
d)

Represents a fixed proportion of total costs

Remains at the same level up to a particular level of output
Has a direct relationship with output
Remains at the same level when output increases ().

Q: 4).
A business's telephone bill should be classified into which
one of these categories?
a)
b)
c)
d)

Fixed cost
Stepped fixed cost
Semi-variable cost ().
Variable cost

Q: 5).
The total production cost for making 20,000 units was
21,000 & total production cost for making 50,000 was 34,000.
When production goes over 25,000 units, more fixed costs of
4,000 occur. So full production cost per unit for making 30,000
units is:
a)
b)
c)
d)

0.30
0.68
0.84
0.93 ().

Q: 6).
Which of the following is least likely to be an objective of cost
accounting system?
21

a)
b)
c)
d)

Product Costing
Optimum Sale Mix determination
Maximization of profits
Sales Commission determination ().

Q: 7).
The classification of costs as either direct or indirect depends
upon
a)
b)
c)
d)

The timing of the cash outlay for the cost

The cost object to which the cost is being related ().
The behavior of the cost in response to volume changes
Whether the cost is expensed in the period in which it is
incurred.

Q: 8).
Which of the following is false with regard to the
supplementary rate method for accounting of under or over
absorption of overheads?
a)
b)
c)
d)
e)

It facilitates the absorption of actual overhead for production

Correction of costs through supplementary rates is
necessary for maintaining data for comparison
The supplementary rate can be determined only after the end
of the accounting period
It requires a lot of clerical work
The value of stock is distorted under this method ().

Q: 9).
Which of the following factors should not be taken into
consideration for determining the basis for applying overheads to
products?
a)
b)
c)
d)
e)
Q: 10).
a)
b)
c)
d)
e)

Adequacy
Convenience
Time factor
Seasonal fluctuation of overhead costs ().
Manual or machine work.
Storekeeping expenses are to be apportioned on the basis of
Floor area of the production departments
Direct labor hours of each product
Number of units manufactured of each product
Number of material requisitions ().
Sales price of each product.

22

Q: 11). A company has a margin of safety of Rs.40 lakh and earns

an annual profit of Rs.10 lakh. If the fixed costs amount to Rs.20
lakh, the annual sales will be
a)
b)
c)
d)
e)

Rs.160 lakh
Rs.140 lakh
Rs.120 lakh ().
Rs.200 lakh
Rs.180 lakh

Q: 12). Which of the following statements is false with respect to the

use of predetermined overhead absorption rates?
a)
b)
c)
d)
e)

Product cost can be worked out promptly

Use of predetermined overhead rate will provide data
available for decision making but not for cost control
Product costs are not affected unnecessarily due to the
vagaries of the calendar or seasonal fluctuations ().
By using normal capacity as base while determine the
overhead rate, losses due to idle capacity is highlighted and
real cost of production is reflected
Product cost can be estimated prior to commencement of
production and can help the management in price quotation
and fixing selling price well in advance.

Q: 13). In process costing, equivalent units, using first in first out

(FIFO) are a measure of
a)
b)
c)
d)
e)
Q: 14).
a)
b)
c)
d)

Work done on the beginning as well as ending work-inprocess inventory

Work done on units started in the production process during
the period
Work done in the department during the period ().
Work required to complete the beginning work-in-process
inventory
Work performed on the ending work-in-process inventory.
A companys approach to a make or buy decision
Depends on whether
break-even level
Depends on whether
normal volume
Depends on whether
capacity level
Involves an analysis

the company is operating at or below

the company is operating at or below
the company is operating at practical
of avoidable costs ().
23

e)
Q: 15).
a)
b)
c)
d)
e)

Requires use of absorption costing.

Which of the following statements is false?
Historical costs are useful solely for estimating costs
that lie ahead ().
Abnormal cost is controllable
Conversion cost is the production cost minus direct material
cost
Administrative expenses are mostly fixed
Notional costs are not included while ascertaining costs.

Q: 16). Ramesha Ltd. manufactures product DN for last seven years.

The company maintains a margin of safety of 37.5% with an overall
contribution to sales ratio of 40%. If fixed cost is Rs. 5 lakh, the
profit of the company is
a)
b)
c)
d)
e)

Rs.12.50 lakh
Rs. 4.25 lakh
Rs. 3.00 lakh ().
Rs.24.00 lakh
Rs.20.00 lakh.

Q: 17). Which of the following statements is true for a firm that uses
variable costing?
a)
b)
c)
d)
e)

Profits fluctuate with sales ().

An idle facility variation is calculated
Product costs include variable administrative costs
Product costs include variable selling costs
The cost of a unit of product changes because of changes in
number of units manufactured.

Q: 18). If the price rises, which of the following methods of valuing

stock will give the highest profit?
a)
b)
c)
d)
e)

LIFO method
Replacement cost method
FIFO method ().
Simple average method
Specific order method.

Q: 19). An accounting system that collects financial and operating

data on the basis of underlying nature and extent to the cost
drivers is
24

a)
b)
c)
d)
e)

Direct costing
Target costing
Activity based costing ().
Variable costing
Cycle-time costing.

Q: 20). In allocating factory service department costs to producing

departments, which of the following items would most likely be
used as an activity base?
a)
b)
c)
d)
e)
Q: 21).
a)
b)
c)
d)
e)

Salary of service department employees

Units of electric power consumed ().
Direct materials usage
Units of finished goods shipped to customers
Units of product sold.
Apportionment of overhead cost may be defined as
Charge to a cost center of an overhead cost item with no
estimation
Charge to cost center for the use of an overhead cost
Charge to cost units for the use of an overhead cost
Classification of overhead cost as fixed or variable
Charge each cost center with a share of an overhead cost
using an apportionment basis to estimate the benefit
extracted by each cost center ().

Q: 22). An increase in variable costs where selling price and fixed

cost remain constant will result in which of the following?
a)
b)
c)
d)
e)

An increase in margin of safety

No change in margin of safety
A fall in the sales level at which break even point will occur
A rise in the sales level at which breakeven point will
occur ().
No change in the sales level at which breakeven point will
occur.

Q: 23). Which of the following transfer pricing methods will preserve

the sub-unit autonomy?
a)
b)
c)
d)
e)

Cost-based pricing
Negotiated pricing ().
Variable-cost pricing
Full-cost pricing
Marginal cost pricing.
25

Q: 24). The most fundamental responsibility center affected by the

use of market-based transfer prices is
a)
b)
c)
d)
e)
Q: 25).
a)
b)
c)
d)

Revenue center
Cost center
Profit center ().
Investment center
Production center.
All of the following statements are correct except that
Activity-based costing has been widely adopted in service
industries.
The objective of installing ABC in service firms is
different than it is in a manufacturing firm ().
A larger proportion of overhead costs are company-wide
costs in service industries.
The general approach to identifying activities and activity
cost pools is the same in a service company as in a
manufacturing company.

Q: 26). A segment of an organization is referred to as a profit center

if it has
a)
b)
c)
d)
e)

Responsibility for developing markets and selling the output

of the organization
Responsibility for combining materials, labor and other
factors of production into a final output
Authority to provide specialized support to other units within
the organization
Authority to make decisions affecting the major
determinants of profit, including the power to choose its
markets and sources of supply ().
Authority to make decisions affecting the major
determinants of profit, including the power to choose its
markets and sources of supply and significant control over
the amount of invested capital.

Q: 27). Activity-based costing has been found to be useful in each of

the following service industries except
a)
b)
c)
d)

Banks.
Hospitals.
Telephone companies.
ABC has been useful in any of these industries ().
26

Q: 28). Which of the following service departments

apportioned on the basis of rate of labor turnover?
a)
b)
c)
d)
e)

costs

is

Payroll department
Personnel department ().
Canteen service
Store-keeping department
Maintenance department.

Q: 29). Which of the following bases is appropriate to apportion the

cost incurred on supervision of machine?
a)
b)
c)
d)
e)

Floor area occupied by each machine

Equitable basis
Value of each machine ().
On the basis of past experience
Estimated time devoted.

Q: 30). Which of the following bases is used for apportionment of

overtime premium of workers engaged in a particular department?
a)
b)
c)
d)
e)

Direct allocation ().

Direct labor hours
Number of workers
Technical estimates
Relative areas of departments.

Q: 31). The rate used in addition to the original rates for

ascertaining the true profit for adjusting the under or over
absorption of overheads is known as
a)
b)
c)
d)
e)

Predetermined rate
Blanket rate
Moving average rate
Supplementary overhead rate ().
Multiple overhead rate.

Q: 32). Any activity for which a separate measurement of costs is

desired is known as
a)
b)
c)
d)
e)

Cost unit
Cost center
Cost object ().
Cost pool
Cost allocation.
27

Q: 33). Which of the following is true regarding the difference

between marginal costing and absorption costing?
a)
b)
c)
d)
e)

Q: 34).
a)
b)
c)
d)
e)

Under marginal costing, fixed costs are treated as product

costs while it is excluded under absorption costing
Under absorption costing, under absorption or over
absorption of overhead occurs but it does not occur
under marginal costing ().
The net income under absorption costing is always more
than the net income under marginal costing
If production is equal to sales, net income under absorption
costing is greater than net income under marginal costing
In case of decreased inventory, the net income under
marginal costing is less than the net income under
absorption costing.
Which of the following statements is false?
The aggregate of indirect material, indirect wages and
indirect expenses is overhead costs
Direct costs are never treated as overhead costs even in
cases where efforts involved in identifying and accounting
are disproportionately large
The overheads can be apportioned to a cost center in
accordance with the principles of benefit and/or
responsibilities
Capital expenditure should be excluded from costs and
should not be treated as overhead
Expenditure that does not relate to production shall not
be treated as overhead ().

Q: 35). An increase in variable costs where selling price and fixed

cost remain constant will result in which of the following?
a)
b)
c)
d)
e)

An increase in margin of safety

A fall in the sales level at which break even point will occur
A rise in the sales level at which breakeven point will
occur ().
No change in the sales level at which break even point will
occur
No change in angle of incidence.

Q: 36). Which of the following statements is true for a firm that uses
variable costing?
a)

Product costs include variable selling costs

28

b)
c)
d)
e)
Q: 37).
a)
b)
c)
d)
e)
Q: 38).
I.
II.
III.
a)
b)
c)
d)
e)
Q: 39).
a)
b)
c)
d)

An idle facility variation is calculated

The cost of a unit of product changes because of changes in
number of units manufactured
Profits fluctuate with sales ().
Product costs include variable administrative costs.
Which of the following can improve break-even point?
Increase in variable cost
Increase in fixed cost
Increase in sale price
Increase in sales volume ().
Increase in production volume.
Which of the following statements is/are true?
A cost unit is a unit of output in the production of which
costs are incurred.
A cost center is the smallest segment of activity or area of
responsibility for which costs are accumulated.
Typically departments are cost centers and there may be
many departments in a cost center.
Only (I) above
Only (II) above
Both (I) and (III) above
Both (I) and (II) above ().
Both (II) and (III) above.
The Rowan Plan
Is the best for efficient workers
Pays lower bonus than that of Halsey beyond 50% saving
in time ().
Pays increased bonus at an increasing rate as the efficiency
None of the above

Q: 40). Which of the following is a limitation of activity-based

costing?
a)
b)
c)
d)

More cost pools ().

Less control over overhead costs
Poorer management decisions
Some arbitrary allocations continue

29