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Amity CampusUttar PradeshIndia 201303

ASSIGNMENTSPROGRAM: BFIA

SEMESTER-II

Subject Name: COST AND MANAGEMENT ACCOUNTINGStudy COUNTRY: SOMALIARoll Number (Reg. No.): BFIA01512010-2013019Student Name: MOHAMED ABDULLAHI KHALAF

INSTRUCTIONS

a) Students are required to submit all three assignment sets.

ASSIGNMENT DETAILS MARKSAssignment A Five Subjective Questions 10Assignment B Three Subjective Questions + Case Study 10Assignment C Objective or one line Questions 10

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

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Cost and Management Accounting

SECTION A: Five subjective questions

Q: 1). What is Activity Based costing? How is it different fromTraditional costing system?

Answer:

Activity-based costing (ABC) is a method of assigning costs to products orservices based on the resources that they consume and the activities of production process. Its aim, The Economist once wrote, is “to change theway 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 pool‘s costs on thebasis 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 theoverhead 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 business’soverheads – indirect costs such as lighting, heating and marketing – areallocated in proportion to an activity’s 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, forinstance, can use the same amount of labour and materials as acustomized robot. But the customized robot uses far more of thecompany engineers’ time (an overhead) than does the mass-producedone.

 This difference would not be reflected in traditional costing systems.Hence a company that makes more and more customized products andbases it’s pricing on historic costings can soon find itself making largelosses. 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 isthat ABC is complex and TC is simple.

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 The ABC system began in 1981, whereas TC methods were designed anddeveloped between; 1870 – 1920. In the TC system, the cost objects and

used up resources are required to evaluate the cost whereas in the ABCsystem the cost is dependent upon the activities used up by the costobjects.

Activity Based Costing is accurate and preferred over the TraditionalCosting system. The ABC method is adopted when the overheads of thecompany are high and there are large numbers of miscellaneous

products. Inaccuracy or errors are most unwanted and undesirablebecause of the competitive rates set by the competitors in the market.Due to this heavy and stiff competition, a highly reliable and accuratemethod is required for the cost management.

 Traditional Costing uses a single overhead pool and is not able tocalculate the true cost. The costs of the objects are allocated randomly 

based upon the labor or machine hours etc. ABC costing includesidentifiable products parts or labor whereas TC arbitrarily accumulatesexpenses, salaries, depreciations etc.

Smaller targeted costs that are built upon activities are calculated withthe help of the ABC system. The ABC system is advantageous since ithelps in simplifying the decision making process and it makes

management concepts become clear and target -oriented. It also helps inevaluating performances and sets standards which can help the managerto 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 targetor Activity Based Costing System, the value or cost of the product is

determined on the basis of customer feedback and pocket range. TheABC system helps the company to determine whether to lower or raisethe activities cost to grab the consumers. The ABC system also helps inkeeping up with the competitors without sacrificing the quality and thequantity 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 oreliminating certain activities to add value to the products.

3) Traditional Costing methods focus on the structure rather than onprocesses while ABC methods focus on the activities or processesrather than on the structure.

4) ABC provides accurate costs whereas TC accumulates valuesarbitrarily.

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5) TC is almost obsolete whereas ABC methods are largely in usesince 1981.

Q: 2). Briefly explain the different ways of ‘classifying cost’.

Answer:

Cost classification is the process of grouping costs according to theircommon characteristics. A suitable classification of costs is of vitalimportance in order to identify the cost with cost centres or cost units.Cost may be classified accounting to their nature, i.e., material, labourand expenses and a number of other characteristics. The same costfigures 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 aredivided into there categories i.e., Materials, Labour and Expenses. Therecan be further sub-classification of each element; for example, materialinto raw material components, and spare parts, consumable stores,

packing material etc. This classification is important as it helps to findtotal cost, how such total cost is constituted and valuation of work-in-progress.

On the basis of Function: Production, Administration, Selling &Distribution are three important functions of a business concern. Takingthese functions into consideration, costs have been classified by:

a) Production or Manufacturing Cost: Manufacturing costs arethose costs which are incurred in the course of manufacture. Itincludes cost of raw material, cost of labour, other direct cost andfactory indirect cost. Example of production or manufacturingcosts may be power, lighting, heating, rent, depreciation etc.

b) Office and Administration Cost: These costs are incurred for thegeneral administration of the enterprise. It includes office costs aswell as administration cost. For example, salary of office staff, rentof office building, electricity charges, audit fee, printing andstationeries etc.

c) Selling and Distribution Cost: It includes both selling cost as wellas distribution cost. Selling costs are those costs which areincurred in connection with the selling of goods and servicesDistribution costs are those costs which are incurred on despatchof finished goods to the consumers. Example of selling anddistribution costs are: sales men salary, packing charges, carriage,

out ward, advertisement, ware house charges etc.

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On the basis of Variability:  The behaviour of cost varies from oneanother 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 followingthree categories.

a) Fixed Cost/Period Cost: Fixed costs are those costs which remainfixed irrespective of the change in volume of out put. As productionincreases cost per unit of the fixed cost decreases and as

production decreases fixed costs are, rent of the factory buildingdepreciation, salary of the office manager etc.

b) Variable Cost/Product Cost: Variable costs are that costs whichvery in direct proportion to the volume of out put. As productionincreases total cost increases but also per unit remains constant.

As production decreases total cost decreases and cost per unit alsodecreases. 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 variesaccording 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 anduncontrollable cost.

a) Controllable Cost: These costs are regulated or controlled by 

specified member of an organisation. Most of the variable costs arecontrollable. Generally direct material, direct labour and directexpenses are controlled by the lower level of the management.

b) Uncontrollable Cost: These costs can not be regulated orcontrolled by specified member of an undertaking. Most of thefixed costs are uncontrollable. Examples of uncontrollable costsare factory rent, managers’ salary etc.

On the basis of normality: On this basis the costs have been classifiedin to two categories as.

a) Normal cost: It is the cost which is normally incurred at a givenlevel of out put. These costs are part of cost production.

b) Abnormal cost: It is the cost which is not normally incurred at agiven 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;

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a) Historical Cost: These costs are ascertained after they have beenincurred 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 controllingmeasures.

Q: 3). What do you mean by EOQ analysis? State itsadvantages.

Answer:

Economic Order Quantity (EOQ) is the quantity of inventory topurchase 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 theoptimum 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 minimizingannual 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 managementproblems called order quantity problems, and the task is to determinethe 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 constantdemand, but it may vary from time to time. If demand isstochastic, 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 asstorage space runs out and new warehouses have to be rented.

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 This situation can be handled through a modification in theoriginal 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 EOQmodel in a manner similar to the one used for variable unit price.

5) Instantaneous delivery: If delivery is not instantaneous, which isgenerally 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 EOQmodel must be further modified. While this modification issomewhat complicated, special EOQ models have been developedto 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, thisinclude the entire costs of acquiring it. They include costs of the followingactivities: requisitioning, purchase ordering, transporting, receiving,

inspecting and storing.

Ordering costs increase with the number of orders; thus the morefrequently inventory is acquired, the higher the firm's ordering costs. Onthe other hand, if the firm maintains large inventory levels, there will befew 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 andstaff service costs (administrative costs) incurred in recording andproviding 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

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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 orproduction decisions are made. The costs of ordering and carryinginventory 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 fromover purchasing to get 'deals' from vendors.

It provides specific numbers particular to the business regardinghow 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 numberof 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, butfrom which he obtains no production. In Other words it’s the differencebetween 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 andcontribute 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 whichcannot be fully avoided but effective effort should be made toreduce it.

2) Abnormal idle time: Abnormal idle time arises due to variouscauses which can be avoided. Abnormal idle time can be avoided if 

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proper precautions are taken. Thus the factors which areresponsible 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 theproper 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 themand quantifying their costs.

Idle time represents the time for which wages are paid but no productionis resulted. Idle time can be classified as controllable and uncontrollable,and /or normal and abnormal. The normal and controllable idle timecost should be collected through a standing order number and chargedoff as an overhead. If the idle time can be allocated to a particulardepartment its cost should be charged off to such departmental overheadand recovered over the units produced. For the normal and

uncontrollable idle time such as tool setting up time, tea/Tiffin breaksetc. the labour cost should be calculated after allowing for such cost timeand should be properly adjusted. The cost of idle time which is abnormaland uncontrollable should be charged off directly to the Costing profitand 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:-

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a) Charge to factory overheads: If the idle time is of such a naturethat it cannot be avoided and the magnitude of idle time is normal,

it forms part of the overhead. According to nature of businessactivities, and for effective control, each type of idle time should bebooked to a separate standing order number. Idle time will, thus,

conspicuously appear as part of overhead to attract the attentionof 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 ischarged directly to costing profit and loss A/c. If such expenditureis included as part of cost, it will render figures relating to the twoperiods incomparable. Abnormal overtime arises in cases likestrike, 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 differentfrom Absorption costing?

Answer:

Marginal Cost: Marginal cost is the additional cost to be incurred if anadditional 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 thedistinction 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, fixedoverheads can never be absorbed exactly because of difficulty inforecasting costs and volume of output. If these balances of under

or over absorbed/recovery are not written off to costing profit andloss account, the actual amount incurred is not shown in it. Inmarginal costing, however, the actual fixed overhead incurred iswholly 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 inabsorption costing, they are valued at total production cost. Hence,profit will differ as different amounts of fixed overheads areconsidered in two accounts.

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 The profit difference due to difference in stock valuation is summarizedas follows:

a) When there is no opening and closing stocks, there will be nodifference in profit.

b) When opening and closing stocks are same, there will be nodifference in profit, provided the fixed cost element in opening andclosing 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 portionof fixed cost is included in closing stock and carried over to nextperiod.

d) When closing stock is less than opening stock, the profit underabsorption costing will be less as comparatively a higher amount of 

fixed cost contained in opening stock is debited during the currentperiod.

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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 isundertaken as an identifiable unit and manufactured according tocustomer‘s specific requirement is known as Job Costing. Under jobcosting method cost of an individual job or work order is ascertainedseparately. Job costing is ideal where the products are dissimilar andnon-repetitive in nature. It is suitable for ship building, printing, interiordecoration and advertising industries.

 The main objectives of job costing are to establish the profit or loss oneach 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 managementto 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 andused when we receive specific order for performing any work. But afterthis, there are many differences between job costing and contract costing

which we are explaining in four points.

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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 smallwork 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 shortperiod. Whereas In contract costing, we include that contracts whichcan finish within one year or more than one year.

3) Account: In job costing, we make job account for every job. In thisaccount, we show different expenses which are paid for completingthat job. And In contract costing, we open contract account for every contract. In this account, we show all expenses relating to contractand it also show work in progress in the form of work certified and

work uncertified. Difference of credit and debit side of this accountwill 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 andloss account. But In contract costing, we check how much work isdone 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 andreporting 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 decision-

making. 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 moresummarized in nature.

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 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 theoperating performances so that the overall information needs of 

managers are satisfied. The monitoring process tends to be more effectivewhen the managers review both types of performance indicators.

Exception:  The time available to management is limited. So thereporting system should operate on the principle of exception. It should

highlight only those things which are out of control and requiremanagerial attention.

Materiality:  The reporting system should provide information that ismaterially significant for the users. What is materially significantdepends largely on the level of responsibility of the user.

Frequency:  The frequency of reporting is to be considered, which willdepend on the significance and criticality of the informationcommunicated with respect to time.

Reports must be timely and their frequency should be geared to theperiod of time needed for corrective action on the kinds of problems being

reported.

Format:  The reporting formats should be designed in such a way thatthey: (i) highlight the actual achievement or performance in relation tothe original plan or budgets for respective items, (ii) facilitate the easy and quick identification of primary reasons for shortfall, and (iii) indicatethe 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 themeasurement of unit adopted for reporting.

Conciseness: The reports should be concise. Whenever possible, a reportshould not exceed two pages in length. If it is unduly long, it creates aninformation overload which diminishes its effectiveness.

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Significant Unit of Measure: The unit of measure chosen for reportingpurposes 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 accounting? Explain the

responsibility centers.

Answer:

a) RESPONSIBILITY ACCOUNTING

Responsibility accounting is a management control system based on theprinciples of delegating and locating responsibility. The authority isdelegated on responsibility centre and accounting for the responsibility centre. Responsibility accounting is a system under which managers aregiven 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. Thesesegments 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 considerablesignificance. While the other control devices are applicable to theorganization as a whole, responsibility accounting represents a method of measuring the performance of various divisions of an organization. Theterm “division” with reference to responsibility accounting is used in

general sense to include any logical segment, component sub-componentof 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 identifiableand 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 accountingunder which accountability is established according to the responsibility delegated to various levels of management and management informationand 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 categorizedinto: Cost centers, Profit centers and Investment centers.

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1) Cost Centre: is a responsibility centre in which inputs aremeasured in monetary terms. Responsibility accounting is based

on financial information relating to inputs and outputs. In a costcentre of responsibility, the accounting system records only thecosts incurred by the centre but the revenues earned are excluded.

A cost centre measures financial performance in terms of costincurred by it. In other words, the performance measured in a cost

centre is efficiency of operation in that centre in terms of thequantity of inputs used in producing some given output.

2) Profit Centre: is a centre in which both the inputs and outputsare measured in monetary terms is called a profit centre. In otherwords both costs and revenues of the centre are accounted for.Since the difference of revenues and costs is termed as profit, thiscentre is called profit centre. In a centre, there are financialmeasures of the outputs as well as of the inputs; it is possible tomeasure the effectiveness and efficiency of performance in

financial terms. Profit analysis can be used as a basis forevaluating the performance of divisional manager.

3) Measurement of Expenses: Another problem with profit centersmay relate to the measure of certain type of expenses which haveto be involved in the computation of profit centers. There is a scopefor 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 iscalled an investment centre. Inputs are accounted for in terms of 

costs and outputs are calculated on investment centre. It is thebroadest measurement, in the sense that the performance ismeasured not only in terms of profits but also in terms of assetsemployed to generate profits.

An investment centre differs from a profit centre in that as investmentcentre is evaluated on the basis of the rate of return earned on the assetsinvested in the segment while a profit centre is evaluated on the basis of 

excess revenue over expenses for the period.

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CASE STUDY:

A retail dealer in garments is currently selling 24000 shirts annually. Hesupplies the following details for the year ended 31st 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 followingeach part independently:-

(i) Calculate the break-even point and margin of safety in salesrevenue and no of shirts sold.

(ii) Assume that 20000 shirts were sold in a year. Find out the netprofit of the firm.

(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 netincome of Rs 15000/-.

Solution:

(i) Calculate the break-even point and margin of safety in salesrevenue and no of shirts sold.

Break-even point is the point where total sales revenue equalstotal costs, i.e., the point of zero profits. The formula is:

Breakeven point = Fixed costsPrice – Variable cost

= 240,00040 – 25

= 16,000 Shirts or

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

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Also

Breakeven point = Fixed costsContribution per unit

= 240,00015

= 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 16,000shirts. 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 farsales 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 garmentsequals Rupees 320,000

(ii) Assume that 20000 shirts were sold in a year. Find out the netprofit 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

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(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. 15,000Rs. 15 – Rs. 3

= Rs. 2,55,000Rs. 12

= 21,250 Shirts.

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

shirts.

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SECTION C (40 MCQs)

Q: 1). The prime function of management accounting is to

a) Assist tax authorities

b) Assist the management in performing its functionseffectively (√).c) Interpret the financial datad) Record business transactions

Q: 2). P/v Ratio is an indicator of 

a) The rate at which goods are soldb) The volume of salesc) The volume of profit

d) The rate of profit (√).

Q: 3). Which of the following best describes a fixed cost? A costwhich:

a) Represents a fixed proportion of total costsb) Remains at the same level up to a particular level of outputc) Has a direct relationship with output

d) Remains at the same level when output increases (√).

Q: 4). A business's telephone bill should be classified into whichone of these categories?

a) Fixed costb) Stepped fixed cost

c) Semi-variable cost (√).d) 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 30,000units is:

a) £0.30b) £0.68c) £0.84d) £0.93 (√).

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

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a) Product Costingb) Optimum Sale Mix determination

c) Maximization of profitsd) Sales Commission determination (√).

Q: 7). The classification of costs as either direct or indirect dependsupon

a) The timing of the cash outlay for the costb) The cost object to which the cost is being related (√).c) The behavior of the cost in response to volume changes

d) Whether the cost is expensed in the period in which it isincurred.

Q: 8). Which of the following is false with regard to thesupplementary rate method for accounting of under or over

absorption of overheads?

a) It facilitates the absorption of actual overhead for productionb) Correction of costs through supplementary rates is

necessary for maintaining data for comparisonc) The supplementary rate can be determined only after the end

of the accounting periodd) It requires a lot of clerical worke) 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 toproducts?

a) Adequacy  b) Conveniencec) Time factord) Seasonal fluctuation of overhead costs (√).e) Manual or machine work.

Q: 10). Storekeeping expenses are to be apportioned on the basis of 

a) Floor area of the production departmentsb) Direct labor hours of each productc) Number of units manufactured of each productd) Number of material requisitions (√).e) Sales price of each product.

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Q: 11). A company has a margin of safety of Rs.40 lakh and earnsan annual profit of Rs.10 lakh. If the fixed costs amount to Rs.20

lakh, the annual sales will be

a) Rs.160 lakh

b) Rs.140 lakhc) Rs.120 lakh (√).d) Rs.200 lakhe) Rs.180 lakh

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

use of predetermined overhead absorption rates?

a) Product cost can be worked out promptly b) Use of predetermined overhead rate will provide data

available for decision making but not for cost control

c) Product costs are not affected unnecessarily due to thevagaries of the calendar or seasonal fluctuations (√).d) By using normal capacity as base while determine the

overhead rate, losses due to idle capacity is highlighted andreal cost of production is reflected

e) 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) Work done on the beginning as well as ending work-in-process inventory 

b) Work done on units started in the production process duringthe period

c) Work done in the department during the period (√).d) Work required to complete the beginning work-in-process

inventory e) Work performed on the ending work-in-process inventory.

Q: 14). A company’s approach to a make or buy decision

a) Depends on whether the company is operating at or belowbreak-even level

b) Depends on whether the company is operating at or belownormal volume

c) Depends on whether the company is operating at practicalcapacity level

d) Involves an analysis of avoidable costs (√).

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e) Requires use of absorption costing.

Q: 15). Which of the following statements is false?

a) Historical costs are useful solely for estimating costs

that lie ahead (√).b) Abnormal cost is controllablec) Conversion cost is the production cost minus direct material

costd) Administrative expenses are mostly fixede) 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 overallcontribution to sales ratio of 40%. If fixed cost is Rs. 5 lakh, theprofit of the company is

a) Rs.12.50 lakhb) Rs. 4.25 lakhc) Rs. 3.00 lakh (√).d) Rs.24.00 lakhe) Rs.20.00 lakh.

Q: 17). Which of the following statements is true for a firm that usesvariable costing?

a) Profits fluctuate with sales (√).

b) An idle facility variation is calculatedc) Product costs include variable administrative costs

d) Product costs include variable selling costse) 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 valuingstock will give the highest profit?

a) LIFO methodb) Replacement cost method

c) FIFO method (√).d) Simple average methode) Specific order method.

Q: 19). An accounting system that collects financial and operatingdata on the basis of underlying nature and extent to the costdrivers is

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Q: 24). The most fundamental responsibility center affected by theuse of market-based transfer prices is

a) Revenue center

b) Cost center

c) Profit center (√).d) Investment centere) Production center.

Q: 25). All of the following statements are correct except that

a) Activity-based costing has been widely adopted in serviceindustries.

b) The objective of installing ABC in service firms isdifferent than it is in a manufacturing firm (√).

c) A larger proportion of overhead costs are company-wide

costs in service industries.d) The general approach to identifying activities and activity 

cost pools is the same in a service company as in amanufacturing company.

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

a) Responsibility for developing markets and selling the outputof the organization

b) Responsibility for combining materials, labor and other

factors of production into a final outputc) Authority to provide specialized support to other units within

the organization

d) Authority to make decisions affecting the majordeterminants of profit, including the power to choose itsmarkets and sources of supply (√).

e) Authority to make decisions affecting the majordeterminants of profit, including the power to choose itsmarkets and sources of supply and significant control overthe amount of invested capital.

Q: 27). Activity-based costing has been found to be useful in each of the following service industries except

a) Banks.b) Hospitals.c) Telephone companies.

d) ABC has been useful in any of these industries (√).

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Q: 28). Which of the following service departments’ costs isapportioned on the basis of rate of labor turnover?

a) Payroll department

b) Personnel department (√).

c) Canteen serviced) Store-keeping departmente) Maintenance department.

Q: 29). Which of the following bases is appropriate to apportion thecost incurred on supervision of machine?

a) Floor area occupied by each machine

b) Equitable basisc) Value of each machine (√).d) On the basis of past experience

e) 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) Direct allocation (√).b) Direct labor hoursc) Number of workersd) Technical estimatese) Relative areas of departments.

Q: 31). The rate used in addition to the original rates forascertaining the true profit for adjusting the under or over

absorption of overheads is known as

a) Predetermined rateb) Blanket ratec) Moving average rated) Supplementary overhead rate (√).e) Multiple overhead rate.

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

desired is known as

a) Cost unitb) Cost center

c) Cost object (√).d) Cost poole) Cost allocation.

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Q: 33). Which of the following is true regarding the differencebetween marginal costing and absorption costing?

a) Under marginal costing, fixed costs are treated as product

costs while it is excluded under absorption costing

b) Under absorption costing, under absorption or overabsorption of overhead occurs but it does not occurunder marginal costing (√).

c) The net income under absorption costing is always more

than the net income under marginal costingd) If production is equal to sales, net income under absorption

costing is greater than net income under marginal costinge) In case of decreased inventory, the net income under

marginal costing is less than the net income under

absorption costing.

Q: 34). Which of the following statements is false?

a) The aggregate of indirect material, indirect wages andindirect expenses is overhead costs

b) Direct costs are never treated as overhead costs even incases where efforts involved in identifying and accountingare disproportionately large

c) The overheads can be apportioned to a cost center inaccordance with the principles of benefit and/orresponsibilities

d) Capital expenditure should be excluded from costs and

should not be treated as overheade) Expenditure that does not relate to production shall not

be treated as overhead (√).

Q: 35). An increase in variable costs where selling price and fixedcost remain constant will result in which of the following?

a) An increase in margin of safety b) A fall in the sales level at which break even point will occurc) A rise in the sales level at which breakeven point will

occur (√).d) No change in the sales level at which break even point will

occure) No change in angle of incidence.

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

a) Product costs include variable selling costs

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