CA IPCC Costing Guess Questions 2016 THEORY

8/18/2019 CA IPCC Costing Guess Questions 2016 THEORY

1/34

CA-IPCC Costing and FM Guess questions – May 2016(Theory)

CA rishna orada Conta!t no" #0$0%%&61&' 01$6166 Page *o (Costing)" 1

Cost accounting+asi! !on!e,ts

1 .hat is Cost a!!ounting/ nuerate its i,ortant o3e!ti4es Ans5er" Cost Accounting is defined as "the process of accounting for cost

which begins with the recording of income and expenditure or the bases on which

they are calculated and ends with the preparation of periodical statements and reports

for ascertaining and controlling costs."

The main objectives of the cost accounting are as follows:

a) As!ertainent o !ost" There are two methods of ascertaining costs vi!. ost

Costing and Continuous Costing. ost Costing means analysis of actual information

as recorded in financial boo#s. Continuous Costing aims at collecting information

about cost as and when the activity ta#es place so that as soon as a job is completed

the cost of completion would be #nown.

b) 7eterination o se88ing ,ri!e" $usiness enterprises run on a profit ma#ing basis.

%t is thus necessary that the revenue should be greater than the costs incurred.

Cost accounting provides the information regarding the cost to ma#e and sell the

product or services produced.

c) Cost !ontro8 and !ost redu!tion" To exercise cost control the following steps

should be observed:

a.

&etermine clearly the objective.b. 'easure the actual performance.

c. %nvestigate into the causes of failure to perform according to plan(

d. %nstitute corrective action.

d) Cost eduction may be defined "as the achievement of real and permanent

reduction in the unit cost of goods manufactured or services rendered without

impairing their suitability for the use intended or diminution in the *uality of the

product."

e)

As!ertaining the ,roit o ea!h a!ti4ity" The profit of any activity can beascertained by matching cost with the revenue of that activity. The purpose

under this step is to determine costing profit or loss of any activity on an objective

basis.

f) Assisting anageent in de!ision a9ing" &ecision ma#ing is defined as a

process. of selecting a course of action out of two or more alternative courses. +or


2/34



ma#l.ng a choice between different courses of action it is necessary to ma#e a

comparison of the outcomes which may be arrived.

2 :ist the 4arious ites o !osts on the asis o re8e4an!e de!ision

a9ing Ans5er"

Costs or Manageria8 7e!ision Ma9ing" According to this basis cost may be

categori!ed as:

a Pre-deterined Cost" A cost which is computed in advance before production

or operations start on the basis of specification of all the factors affecting cost is

#nown as a pre,determined cost.

;tandard Cost" A pre,determined cost which is calculated from management-s

expected standard of efficient operation and the relevant necessary expenditure. %tmay be used as a basis for price fixing and for cost control through variance analysis.

! Margina8 Cost: The amount at any given volume of output by which aggregate

costs are changed if the volume of output is increased or decreased by one unit.

d stiated !ost" ohler defines estimated cost as" the expected cost of

manufacture or ac*uisition often in terms of a unit of product computed on the

basis of information available in advance of actual production or purchase".

/stimated costs are prospective costs since they refer to prediction of costs.

e 7ierentia8 !ost" %t represents the change 0increase or decrease) in total cost

0variable as well as fixed) due to change in activity level technology process or

method of production etc.

I,uted Costs" -These costs are notional Costs which does not involve any cash

outlay. /x: %nterest on capital the payment for which is not made. These costs are

similar to opportunity costs.

g Ca,ita8ised !osts" These are costs are initially recorded as assets and

subse*uently treated as expenses

h Produ!t !osts" These are the costs which are associated with the purchase and sale

of goods in the production scenario such costs are associated with the ac*uisition andconversion of materials and all other manufacturing inputs into finished product for

sale.

i


3/34


CA rishna orada Conta!t no" #0$0%%&61&' 01$6166 Page *o (Costing)" $

• %t is that portion of total cost which involves cash out flow.

• This cost concept is a short,run concept and issued in decisions relating to fixation of

selling price in recession ma#e or buy etc.

• 1ut,of,poc#et costs can be avoided or saved if a particular proposal under

consideration is not accepted.

9 ;hut do5n !osts" These costs are incurred even when a plant is temporarily

shutdown. %n other words all fixed costs which cannot be avoided during the

temporary closure of a plant are #nown as shut down costs.

8. ;un9 !osts" 2istorical cost occurred in the past are #nown as sun# costs. They

play no role in decision ma#ing in the current period.

Con4ersion !ost" %t is the cost incurred to convert raw materials into finished

goods. %t is the sum of direct wages direct expenses and manufacturing overheads.

n Aso8ute !osts• These costs refer to the cost of any product processor unit in its totality.

• 3hen costs are presented in a statement form various cost components may be

shown in absolute amount or as a percentage of total cost or as per unit cost or all

together

• 2ere the costs depicted in absolute amount may be called absolute costs and 4 These

are base costs on which further analysis and decisions are based.

o. 7is!retionary !osts" These costs are not tied to a clear cause and effect

relationship between inputs and outputs. They usually arise from periodic decisionsregarding the maximum outlay to be incurred.

, Period !osts" These are the costs which are not assigned to the products but are

charged as expenses against the revenue of the period in which they are incurred. All

non,manufacturing costs such as general and administrative expenses selling and

distribution expenses are recogni!ed as period costs.

q ngineered !osts" These are costs that result specifically from a clear cause and

effect relationship between inputs and outputs. The relationship is usually personally

observable.r =,8i!it Costs" These costs are also #nown as out,of,poc#et costs and refer to

costs involving immediate payment of cash.

s I,8i!it Costs" These costs do not involve any immediate cash payment. They are

not recorded in the boo#s of account. They are also #nown as economic costs.

$ >o5 !osts are !8assiied ased on !ontro88ai8ity/


4/34


CA rishna orada Conta!t no" #0$0%%&61&' 01$6166 Page *o (Costing)"

Ans5er: $ased on Controllability Costs here may be classified in to controllable and

uncontrollable costs

a Contro88a8e !osts" These are the costs which can be influenced by the action of

specified member of an underta#ing. A business organi!ation usually divided in to a

number of responsibility centers and an executive heads each such centre.Controllable costs incurred in a particular responsibility centre can be influenced by

the action of the executive heading that responsibility centre.

?n!ontro88a8e !osts" Costs which cannot be influenced by the action of a

specified member of an underta#ing are #nown as uncontrollable costs.

The distinction between controllable cost and uncontrollable cost is not very sharp

and it some times left to individual judgment. %n fact no cost is uncontrollable it is

only in relation to a particular individual that we may specify a particular cost to be

either controllable or uncontrollable.

.hat are the ethods o !osting/

Ans5er" &ifferent follows different methods of costing because of nature of

difference in the wor#. The various methods of costing are as follows

a @o Costing"

• %n this case the cost of each job is ascertained separately.

• %t is suitable in all cases where wor# is underta#en on receiving a customer-s order li#e

a printing press motor wor#shop etc.

• %n case a factory produces certain *uantity of a part at a time say 5666rims of bicycle

the cost can be ascertained li#e that of a job. The name then given is $atch Costing.

+at!h !osting

• %t is the extension of job costing.

• A batch may represent a number of small orders passed through the factory in batch.

• /ach batch here is treated as a unit of cost and thus separately casted.

• 2ere cost per unit is determined by dividing the cost of the batch by the number of

units produced in the batch.! Contra!t Costing" 2ere the cost of each contract is ascertained separately. %t is

suitable for firms engaged in the construction of bridges roads buildings etc.

d ;ing8e or


5/34


CA rishna orada Conta!t no" #0$0%%&61&' 01$6166 Page *o (Costing)" %

e Pro!ess Costing" 2ere the cost of completing each stage of wor# is ascertained

li#e cost of ma#ing pulp and cost of ma#ing paper from pulp. %n mechanical

operations the cost of each operation maybe ascertained separately.


6/34



2 Cost Centers" %t is defined as a location person or an item of e*uipment for

which cost may be ascertained and used for the purpose of Cost Control. Cost

Centers are of two types , ersonal and %mpersonal

A personal cost center consists of a person or group of persons and an %mpersonal

cost center consists of a location or an item of e*uipment.In a anua!turing !on!ern there are t5o ain ty,es o Cost Centers as

indi!ated e8o5 :

a Produ!tion Cost Center" %t is a cost centre where raw material is handled tor

conversion into finished product. 2ere both direct and indirect expenses are

incurred. 'achine shops welding shops and assembly shops are examples of

roduction Cost Centers.

;er4i!e Cost Center" %t is a cost centre which serves as an ancillary

unit to a production cost centre. ower house gas production shop material servicecenters plant maintenance centers are examples of service cost centers.

$ Cost


7/34


CA rishna orada Conta!t no" #0$0%%&61&' 01$6166 Page *o (Costing)" &

6 7istinguish et5een Cost redu!tion and !ost !ontro8

Parti!u8ars Cost Bedu!tion Cost Contro8

ermanenceermanent ;enuine savingsin cost. Could be a temporary saving also

/mphasison resent and +uture. ast and resentroduct*uality


8/34


9/34


CA rishna orada Conta!t no" #0$0%%&61&' 01$6166 Page *o (Costing)" #

(iii) ?se these materials as substitute in place of other materials.

$ =,8ain the !on!e,t o A+C Ana8ysisD as a te!hnique o in4entory !ontro8

Ans5er" A+C ana8ysis"

>. %t is a system of selective inventory control where by the measure of control overan item of inventory varies with its value i.e. it exercises discriminatory control over

different items of stores

@. ?sually the materials are grouped into the categories =i!. A $ and C according to

their value. .

. A Category,2ighly %mportant $ Category,elatively less important C Category ,

east important.

B. A$C analysis is also called as areto Analysis or 7elective 7toc# Control

The three categories are classified and differential control is established as under:

Category E o tota8 4a8ue

E in tota8quantity

=tent o !ontro8

A 6 D >6D Constant and strict control through budgetsratios 7toc# levels /16 D 6D ittle control focus is on saving E associated

costs

Ad4antages o A+C ana8ysis" The advantages of A$C analysis are the following:

a Continuity in ,rodu!tion" %t ensures that without there being any

danger of interruption of production for want of materials or stores minimum

investment will be made in inventories of stoc#s of materials or stoc#s to be carried.

:o5er !ost" The cost of placing orders receiving goods and maintaining stoc#s

is minimi!ed especially if the system is coupled with the determination of proper

economic order *uantities.

! :ess attention required" 'anagement time is saved since attention need be paid

only to some of the items rather than all the items as would be the case if the A$Csystem was not in operation.

d ;ysteati! 5or9ing" 3ith the introduction A$C system much of the wor#

connected with purchases can be systemati!ed on a routine basis to be handled by

subordinate staff.


10/34



7ieren!e +et5een +in Card and ;tores :edger

Ans5er: $oth $in cards and stores ledger are perpetual inventory records. 8one of

them is a substitute for the other.these two records may be distinguished from the

following point of view:

+in !ard stores 8edger%t is maintained by the store #eeper inthe store

%t is maintained in the costingdepartment

%t contains only *uantitative details ofmaterial received issued and returned tothe stores

%t contains transactions both in *uantityand value

/ntries are made when transactions ta#eplace

%t is always posted after the transaction

/ach transaction is individually posted Transaction s may be summari!ed and

posted%nter,department transfers do not appearin bin card

'aterial transfer from one job toanother are recorded from costingpurpose

%t is #ept inside the stores %t is #ept outside the stores$in card is the stores recordingdocument

3here as %t is an Accounting record

% .rite a short note on Per,etua8 in4entory re!ords

Ans5er" erpetual inventory records represents a systematic group of records. %t

comprises of bin cards stoc# control cards stores ledger.

a. +in Cards" $in card maintains *uantitative record of receipts issues and closing

balance of each item of stores. 7eparate bin cards are maintained for separate items

and attached other concerned bins. /ach bin card is filled with the physical movement

of goods.

b. ;to!9 !ontro8 !ards" These are similar to bin cards but contain further information

as regards to stoc# on order. $ins cards are attached to bins but stoc# control cards

are #ept in cabinet sort rays or loose binders.

c. ;tores :edger" A stores ledger is a collection of cards or loose leaves speciallyruled for maintaining of record of both *uantity and cost of stores received issued

and those in stoc# .%t is posted from goods received notes and material re*uisitions.

@. Ad4antages" The main advantages of perpetual inventory are as follows:

a .hysical stoc#s can be counted and boo# balances adjusted as and when desired

without waiting for the entire stoc#,ta#ing to be done.


11/34



b.


12/34



:aour

>. &iscuss the objectives of time #eeping E time boo#ing.7olution:1bjectives of time #eeping and time boo#ing: Time #eeping has the following two objectives:0i)"reparation of "ayroll: 3age bills are prepared by the payroll department on the basis ofinformation provided by the time #eeping department.0ii)Computation of Cost: abour cost of different jobs departments or cost centers are computedby costing department on the basis of information provided by the time #eeping department. The objectives of time boo#ing are as follows:

(i) To ascertain the labour time spent on a job and the idle labour hours. (ii) To ascertain labour cost of various jobs and products. (iii) To calculate the amount of wages and bonus payable under the wage incentive scheme.

(iv) To compute and determine overhead rates and absorption of overheads under the labour andmachine hour method. (v) To eva luate the performance of labour by comparing actual time boo#ed with standard or budgeted

time.

2 7istinguish et5een @o 04a8uation and Merit Bating

7olution: Fob /valuation: %t can be defined as the process of analysis and assessment of jobs to ascertain reliablytheir relative worth and to provide management with a reasonably sound basis for determiningthe basic internal wage and salary structure for the various job positions. %n other words jobevaluation provides a rationale for differential wages and salaries for different groups of employees andensures that these differentials are consistent and e*uitable. 'erit ating: %t is a systematic evaluation of the personality and performance of each employee by his supervisor or some other *ualified persons. Thus the main points of distinction between job evaluation and merit rating are as follows:

1. Fob evaluation is the assessment of the relative worth of jobs within a company and merit rating isthe assessment of the relative worth of the man behind a job. %n other words job evaluation rate thejobs while merit rating rate employees on their jobs.

2. Fob evaluation and its accomplishment are means to set up a rational wage and salary structure

whereas merit rating provides scientific basis for determining fair wages for each wor#er basedon his ability and performance.

3. Fob evaluation simplifies wage administration by bringing uniformity in wage rates. 1n the other

hand merit rating is used to determine fair rate of pay for different wor#ers on the basis of their

performance


13/34


CA rishna orada Conta!t no" #0$0%%&61&' 01$6166 Page *o (Costing)" 1$

$ .rite aout the treatent o id8e tie in !ost a!!ounting

Ans5er"

*ora8 id8e tie" %t is treated as a part of the cost of production.

• %n the case of direct wor#ers an allowance for normal idle time is built into the labor

cost rates.

• %n the case of indirect wor#ers normal idle time is spread over all the products or jobs

through the process of absorption of factory overheads.

Anora8 id8e tie" This cost is not included as a part of production cost and is

shown as a separate item in the Costing rofit and oss Account so that normal costs

are not disturbed.

• 7howing cost relating to abnormal idle time separately helps in drawing the attention

of the management towards the exact losses due to abnormal idle time.

•

$asic control can be exercised through periodical on idle time showing a detailedanalysis of the causes for the same the departments where it is occurring and the

persons responsible for it along with a statement of the cost of such idle time.

.rite aout o4ertie ,reiu and its treatent

Ans5er"

>. 1vertime payment is the amount of wages paid for wor#ing beyond normal

wor#ing hours.

@. The rate for overtime wor# higher than the normal time rate( usually it is at doublethe normal rates.

. The extra amounts paid over the normal rate is called overtime premium.

B. ?nder Cost Accounting the overtime premium is treated as follows:

a. %f overtime is resorted to at the desire of the wor#er then overtime premium maybe

charged to the job directly

b. %f overtime is re*uired to with general production programmersG or for meeting

urgent orders the overtime premium should be treated as 1verhead cost.

c. %f overtime is wor#ed in a department due to fault of another department the

overtime premium should be charged to latter department.

d. 1vertime wor#ed on account of abnormal conditions such as flood earth*ua#e etc.

should not be charged to cost but charged to costing profit and loss account.

5. 1vertime wor# should be resorted to only when it is extremely essential because it

involves extra cost.

. The overtime payment increases the cost of production in the following ways:


14/34



a) The overtime premium paid is an extra payment in addition to normal rate

b) The efficiency of operator during overtime wor# may fall and thus output may be less

than normal output.

c) %n order to earn more the wor#ers may not concentrate on wor# during normal time

and thus the output during normal hours may also fall.d) educed output and increased premium of overtime will bring about an increase in

cost of production.

% 7eine 8aour Turno4er >o5 it is easures =,8ain the !auses or

8aour turno4er/

>. %t is the rate of change in the composition of labour force during a specified period

measured against a suitable index . %t arises because every firm is a dynamic entity and

not static one.@. The methods of calculating labour turnover are:

a. eplacement methodH 8o. 1f eplacements

Average no of wor#ers

b. 7eparation method: 8o of separations


c. +lux method:

Alternative >: 7eparations I replacements


Alternative @: 7eparations I replacements I 8ew recruitments


d. ecruitment 'ethod : ecruitments other than replacements


e. Accessions 'ethod: Total ecruitments


CA?;;


15/34


CA rishna orada Conta!t no" #0$0%%&61&' 01$6166 Page *o (Costing)" 1%

• Change in the Jplant location(

! A4oida8e !auses"

• &issatisfaction with job remuneration hours of wor# wor#ing conditions etcK.

• 7trained relationship with management supervisors or fellow wor#ers(

• ac# of training facilities and promotional avenues


16/34




17/34


CA rishna orada Conta!t no" #0$0%%&61&' 01$6166 Page *o (Costing)" 1&

7ingle overhead rate H 1verhead costs for the entire factory 9 Total *uantity of the base selected

The base can be total output total labour hours total machine hours etc. The single overhead rate may be applied in factories which produces only one major product on acontinuous basis. %t may also be used in factories where the wor# performed in each department

is fairly uniform and standardi!ed. 'ultiple overhead rate: %t involves computation of separate rates for each production department service department cost center and each product for both fixed and variable overheads . %t may be computed as follows:'ultiple overhead rate H 1verhead apportioned to each department or cost centre or product9

Corresponding base

?nder multiple overheads rate jobs or products are charged with varying amount of factory overheads depending on the type and number of departments through which they pass. 2owever the number of overheads rate which a firm may compute would depend upon two

opposing factors vi!. the degree of accuracy desired and the clerical cost involved.


18/34



*on-integrated a!!ounts1 .hat are the essentia8 ,re-requisites and ad4antages or integrated

a!!ounting syste/

Ans5er: ssentia8 ,re-requisites or Integrated A!!ounts" >. The management-s decision about the extent of integration of the two sets of

boo#s.

@. A suitable coding system must be made available so as to serve the accounting

purposes of financial and cost accounts.

. An agreed routine with regard to treatment of provision for accruals prepaid

expenses other adjustment necessary preparation of interim accounts.

B. erfect coordination should exist between the staff responsible for the financial and

cost aspects of the accounts and an efficient processing of accounting documents

should be ensured.5. ?nder this system there is no need for a separate cost ledger.

. There will be a number of subsidiary ledgers( in addition to the useful Customers-

edger and the $ought edger there will be 7tores edger 7toc# edger and Fob

edger.

Ad4antages" The main advantages of %ntegrated Accounts are:

a. *o need or Be!on!i8iation" The *uestion of reconciling costing profit and

financial profit does not arise as there is only one figure of profit.

b. :ess eort" &ue to use,of one set of boo#s there is a significant extent of savingin efforts

c. :ess Tie !onsuing" 8o delay is caused in obtaining information as it is

provided from boo#s of original entry.

d. !onoi!a8 ,ro!ess" %t is economical also as it is based on the concept of

"Centrali!ation of Accounting function".

2 .hat do you ean y re!on!i8iation et5een !ost and inan!ia8 a!!ounts/

Ans5er"

•

3hen the cost and financial accounts are #ept separately it is imperative that those

should be reconciled( otherwise the.cost accounts would not be reliable.

• %t is necessary that reconciliation of the two sets of accounts only can be made if both

the sets contain sufficient details as would enable the causes of differences to be

located.


19/34


CA rishna orada Conta!t no" #0$0%%&61&' 01$6166 Page *o (Costing)" 1#

• %t is therefore important that in the financial accounts the expenses should be

analysed in the same way as in the cost accounts.

• The reconciliation of the balances generally is possible preparing a 'emorandum

econciliation Account.

•

%n this account the items charged in one set of accounts but not in the other or those

charged in excess as compared to that in the other are collected and by adding or

subtracting them from the balance of the amount of profit shown by one of the

accounts shown by the other can be reached.

$ .hy is it ne!essary to re!on!i8e the ,roits et5een the !ost a!!ounting and

inan!ia8 A!!ounts/

Ans5er" 3hen the cost and financial accounts are separately .%t is imperative that

these should be reconciled otherwise the cost account would not be reliable .Thereconciliation of two set of accounts can be made .if both set contain sufficient details

as would enable the causes of difference to located it therefore important in the

financial accounts the expenses should be analysed in the same way in cost accounts

. it is important to #now the causes which generally give rise to difference in the cost

and financial accounts. These are

0i) %tems included in financial accounts but not in cost accounts

%ncome Tax

Transfer to reserves &ividend paid

;oodwill and preliminary expenses write off

ure financial items

%nterest dividend

osses on sale of investments

/xpenses of CoLs shares transfer office

&amages E penalties

0ii) %tems included in cost accounts but not in financial accounts

1pportunity cost of capital

8otional rent

0iii) ?nder 9 1ver absorption of expenses in cost accountant

0iv) &ifferent bases of inventory valuation

'otivation for reconciliation is:


20/34



To ensure reliability of cost data

To ensure reliability of correct product cost

To ensure correct decision ma#ing by management based on cost and financial data

To report fruitful financial 9cost data

=,8ain the ,ro!edure or re!on!i8iation and !ir!ustan!es 5here

re!on!i8iation !an e a4oided

Pro!edure or re!on!i8iation" There are steps involved in the procedure for

reconciliation.

>. Ascertainment of profit as per financial accounts

@. Ascertainment of profit as per cost accounts

. econciliation of both the profits.

Cir!ustan!es 5here re!on!i8iation stateent !an e a4oided" 3hen the Costand +inancial Accounts are integrated( there is no need to have a separate

reconciliation statement between the two sets of accounts. %ntegration means that the

same set of accounts fulfill the re*uirement of both i.e. Cost and +inancial Accounts.


21/34



@o and at!h !osting1 7istinguish et5een 3o and at!h !osting/

Ans5er"

+asi! o Costing +at!h Costing8ature Fob costing is a specific ordercosting.

$atch costing is a special type ofjob costing.

Applicability %t is underta#e such industries where wor# is one as per thecustomer-s re*uirement.

%t is underta#en in such industries where production is of repetitivenature.

7imilarity 8o two jobs are ali#e. The articles produced in a batchare ali#e.

Costdetermination

The cost is determined on jobbasis.

The cost is determined on batchbasis.

1utput*uantity

The output of a job may be >unit @ units of a batch.

The output of a batch is usually alarge *uantity.

Costestimation

The cost is estimated before theproduction.

The cost is estimated after thecompletion of production.

/xamples %ndustries where job costing isunderta#en are repair

wor#shop furniture and generalengineering wor#s.

%ndustries where job costing isunderta#en are pharmaceuticalsgarment manufacturing radio

T.=. manufacturing etc.


22/34



Contra!t !osting1 .rite a short note on

(a) Betention oney () Progress PayentsCash re!ei4ed

(!) Be!ogniHing ,roit8oss on in!o,8ete !ontra!ts(d) Cost ,8us Contra!t (e) *otiona8 Proit () s!a8ation !8ause

Ans5er"

(a) Betention oney"

• A contractor does not receive full payment of the wor# certified by the surveyor.

• Contractee retains some amount 0say >6D to @6D) to be paid after some time when

it, is ensured that there is no fault in the wor# carried out by contractor.

• %f any deficiency or defect is noticed in the wor# it is to be rectified by the contractor

before the release of the retention money.

•

etention money provides a safeguard against the ris# of loss due to faulty

wor#manship.

() Progress PayentsCash re!ei4ed"

ayments received by the Contractors when the contract is "in,progress" are called

progress payments or unning ayments. %t is ascertained by deducting the retention

money from the value of wor# certified i.e. Cash received H =alue of wor# certified ,

etention money.

(!) Be!ogniHing ,roit8oss on in!o,8ete !ontra!ts

stiated ,roit" %t is the excess of the contract price over the estimated total costof the contract.

Proit8oss on in!o,8ete !ontra!ts" rofit on incomplete contract is recogni!ed

based on the 8otional rofit and ercentage of Completion. To determine the profit

to be ta#en to rofit and oss Account in the case of incomplete contracts the

following four situations may arise:

7es!ri,tion Per!entage o Co,8etion Proit to ere!ogniHed andTranserred to P:

A!!ount%nitial stages ess than @5D 8il

3or#performed butnot substantial

?p to or more than @5D but lessthan 56D

>9 M 8otional rofit M0Cash received93or#Certified)


23/34


CA rishna orada Conta!t no" #0$0%%&61&' 01$6166 Page *o (Costing)" 2$

7ubstantiallycompleted

?p to or more than 56D but lessthan N6D

@9 M 8otional rofit M0Cash received93or#Certified)

Almost

complete

?p to or more than N6D O 6 not

fully complete

rofit is recogni!ed on

the basis of estimatedtotal profit

*ote"

a. ercentage of completion H =alue of wor# Certified 9 Contract rice

b. %f there is a loss at any stage i.e. irrespective of percentage of completion the same

,,should be fully transferred to the rofit and oss Account.

0d) Cost P8us Contra!t

Meaning" ?nder Cost plus Contract the contract price is ascertained by adding apercentage of profit to the total cost of the wor#. 7uch types of contracts are entered

into when it is not r possible to estimate the Contract Cost with reasonable accuracy

due to unstable condition of material labour services etc.

Ad4antages"

a. The Contractor is assured of a fixed percentage of profit. There is no ris# of

incurring any loss on the contract.

b. %t is useful especially when the wor# to be done is not definitely fixed at the time of

ma#ing the estimate.c. Contractee can ensure himself about the Lcost of the contractP as he is empowered

to examine the boo#s and documents of the contract of the contractor to ascertain

the veracity of the cost of the contract.

7isad4antages: The contractor may not have any inducement to avoid wastages and

effect economy in production to reduce cost.

(e) *otiona8 Proit" 8otional profit in contract costing: %t represents the difference

between the value of wor# certified and cost of wor# certified.

8otional profit H value of wor# certified Q 0cost of wor# to date Q cost of wor# not

yet certified)() s!a8ation C8ause

Meaning" %f during the period of execution of a contract the prices of materials or

labour etc. rise beyond a certain limit the contract price will be increased by an

agreed amount. %nclusion of such a clause in a contract deed is called an "/scalation

Clause".


24/34


25/34


CA rishna orada Conta!t no" #0$0%%&61&' 01$6166 Page *o (Costing)" 2%

.


26/34



Pro!ess Costing1 .hat is inter- ,ro!ess ,roits/ ;tate its ad4antages and disad4antages

Ans5er" %n some process industries the output of one process is transferred to

the next process not at cost but at mar#et value or cost plus a percentage ofprofit. The difference between cost and the transfer price is #nown as inter,

process profits.The advantages and disadvantages of using inter,proces profit in the

case of process type industries are as follows:

Ad4antages"

>. Comparison between the cost of output and its mar#et price at the stage of

completion is facilitated.

@. /ach process is made to stand by itself as to the profitability.

7isad4antages"

>.

>. The use of inter,process profits involves complication.@. The system shows profits which are not realised because of stoc# not sold out

2 =,8ain the !on!e,t o equi4a8ent ,rodu!tion units

Ans5er"

4 %n the case of process type of industries it is possible to determine the average cost

per unit by dividing the total cost incurred during a given period of time by the total

number of units produced during the same period.

4 The reason is that the cost incurred in such industries represents the cost of wor#carried on opening wor#,in,progress closing wor#,in,progress and completed units.

Thus to ascertain the cost of each completed unit it is necessary to ascertain the cost

of wor#,in,progress in the beginning and at the end of the process.

4 3or#,in,progress can be valued on actual basis i.e. materials used on the unfinished

units and the actual amount of labour expenses involved.

4 2owever the degree of accuracy in such a case cannot be satisfactory. An alternative

method is based on converting partly finished units into e*uivalent finished units.

/*uivalent production means converting the incomplete production units into their

e*uivalent completed units.

4 ?nder each process an estimate is made of the percentage completion of wor#,in,

progress with regard to different elements of costs vi!. material labour and

overheads.

4/*uivalent completed units H Actual no of manufactured units M D of wor#

completed.


27/34


28/34



available. The joint cost may be apportioned in the ratio of sales values of

different joint products.

0iv) Mar9et a8ue ater urther Pro!essing" 2ere the basis of apportionment

of joint costs is the total sales value of finished products at the further processing.

The use of this method is unfair where further processing costs after the point ofseparation are disproportionate or when all the joint products are not subjected to

further processing.

=) *et Bea8isa8e a8ue Method" 2ere Foint costs is apportioned in the basis of net

reali!able value of the joint products

8et ealisable =alue H 7ale =alue of Foint products 0at finished stage)

0,) estimated profit margin

0,) 7elling E &istribution expenses %f any

0,) post split 1ff Cost


29/34


CA rishna orada Conta!t no" #0$0%%&61&' 01$6166 Page *o (Costing)" 2#

;tandard Costing1 >o5 are !ost 4arian!es dis,osed o in a standard !osting / =,8ain

Ans5er"

arian!es ay e dis,osed o y any o the o88o5ing ethods"ethod ourna8 ntry ssu,tion A. 3rite off all variances to Costingrofit and oss Accountat the end of everyperiod.

Costing E A9c &r To =ariances A9c s0individually) 0if adverse)

All =ariances areabnormal.

$. &istribute all variancesproportionately to:

4 ?nits 7old4 Closing 7toc# of 3%and4 Closing 7toc# of+inished ;oods.

Cost of 7ales A9c &r. 3% Control A9c &r.+inished ;oods Control

A9c &r. To =ariance Accounts

All =ariances arenormal.


30/34


CA rishna orada Conta!t no" #0$0%%&61&' 01$6166 Page *o (Costing)" $0

Margina8 Costing1 =,8ain and i88ustrate !ash rea9-e4en !hart.

Ans5er" %n cash brea#,even chart only cash fixed costs are considered. 8on,cash

items li#e depreciation etc. are excluded from the fixed cost for computation ofbrea#,even point. %t depicts the level of output or sales at which the sales revenue

will e*ual to total cash outflow. %t is computed as under:

Cash $/ 0?nits) H

2 .rite short notes on Ang8e o In!iden!e.

Ans5er" This angle is formed by the intersection of sales line and total cost line at the

brea#, even point. This angle shows the rate at which profits are being earned once

the brea#,even point has been reached. The wider the angle the greater is the rate ofearning profits. A large angle of incidence with a high margin of safety indicates

extremely favourable position.

$ 7is!uss asi! assu,tions o Cost o8ue Proit ana8ysis

Ans5er" C= Analysis:,Assumptions

0i) Changes in the levels of revenues and costs arise only because of changes in the

number of products 0or service) units produced and sold.

0ii) Total cost can be separated into two components: +ixed and variable

0iii)

;raphically the behaviour of total revenues and total cost are linear in relation tooutput level within a relevant range.

0iv) 7elling price variable cost per unit and total fixed costs are #nown and constant.

0v) All revenues and costs can be added subtracted and compared without ta#ing into

account the time value of money.

8aorate the ,ra!ti!a8 a,,8i!ation o Margina8 Costing

Ans5er" ractical applications of 'arginal costing:

i

Pri!ing Po8i!y" 7ince marginal cost per unit is constant from period to period

firm decisions on pricing policy can be ta#en particularly in short term.

ii

7e!ision Ma9ing" 'arginal costing helps the management in ta#ing a

number of business decisions li#e ma#e or buy discontinuance of a particular

product replacement of machines etc.

iii As!ertaining Bea8isti! Proit" ?nder the marginal costing techni*ue the

stoc# of finished goods and wor#,in,progress are carried on marginal cost basis

Cash +ixed Cost

Contribution per ?nits


31/34



and the fixed expenses are written off to profit and loss account as period cost. This

shows the true profit of the period.

i4

7eterination o ,rodu!tion 8e4e8" 'arginal costing helps in the preparation of

brea# even analysis which shows the effect of increasing or decreasing production

activity on the profitability of the company


32/34



+udgets and +udgetary Contro81 .hat is +udget Manua8/ .hat atters are in!8uded or eatures its Manua8/

Ans5er"

1

Meaning" $udget 'anual is a schedule document or boo#let which shows in writtenform the budgeting organisation and procedures. %t is a collection of documents thatcontains #ey information for those involved in the planning process.

2 Contents" The 'anual indicates the following matters , 0a) $rief explanation of the ,rin!i,8es of $udgetary Control 7ystem its o3e!ti4es and

eneits 0b) Pro!edure to be adopted in operating the system , in the form of instructions and steps. 0c)


33/34


CA rishna orada Conta!t no" #0$0%%&61&' 01$6166 Page *o (Costing)" $$

wor# by a budget committee consisting of all the heads of department along with the

managing director as chairman.

(i4) +udget anua8" /ffective budgetary planning relies on provision of ade*uate

information which are contained in the budgetary manual .A budget manual is

collection of documents that contains #ey information of those involved in theplanning process.

(4) +udget ,eriod: The period covered by a budget is #nown as budget period .the

budget committee decides the length of the budget period suitable for business. %t

may be months or *uarters or such period as coincide with period of trading activity.

(4i) ;tandard o a!ti4ity or out,ut" +or preparing budgets for the future past

statistics cannot completely relied upon for the past usually represents a combination

of good and bad factors . Therefore through result of past should be studied but

these should only applied when there is a li#elihood of similar conditions repeating inthe future

$ 7istinguish et5een Fi=ed and F8e=i8e +udgets

Ans5er"

Parti!u8ars Fi=ed +udget F8e=i8e udget&efinition %t is a $udget designed

to remain unchangedirrespective of the level of

activity actually attained.

%t is a $udget which byrecognising the differencebetween fixed semi,variable

and variable costs isdesigned to change inrelation to level of activityattained.

igidity %t does not change withactual volume of activityachieved. Thus it is #nownas rigid or inflexible budget.

%t can be re,casted on thebasis of activitylevel to be achieved. Thusit is not rigid

evel of activity %t operates on one level ofactivity and under one set of

conditions. %t assumes thatthere will be no change inthe prevailing conditions

which is unrealistic.

%t consists of variousbudgets for different levels

of activity.

/ffect of variance analysis =ariance Analysis does notgive useful information as allCosts 0fixed variable and

=ariance Analysis providesuseful information as each


34/34


semi,variable) are related toonly one level of activity.

cost is analysed accordingto its behaviour.

?se of decision ma#ing %f the budgeted and actualactivity levels differ

significantly then aspectsli#e cost ascertainment and ,ri!e fixation do not give acorrect picture.

%t facilitates theascertainment of cost

fixation of 7elling rice andsubmission of *uotations.

erformance evaluation Comparison of actualperformance withbudgeted targets will bemeaningless especially

when there is a dieren!eet5een two activity levels.

%t provides a meaningfulbasis of comparison of theactual performance with thebudgeted targets.

Remember…

“No one can separate the best pair in this world – Hardwork and success”

All the best…

Urs Krish…

Date post:	07-Jul-2018
Category:	Documents
Upload:	krishnakorada
View:	216 times
Download:	0 times

CA IPCC Costing Guess Questions 2016 THEORY

Documents