Assignment Code: BCOC – 138/TMA/2023-24

Course Code: BCOC -138

Assignment Name: Cost Accounting

Year: 2023-2024

Verification Status: Verified by Professor

SECTION A

Q1) Define ‘Cost Accounting’. State its main objects.

Ans) Cost accounting is a branch of accounting that focuses on the identification, measurement, analysis, and control of costs associated with the production of goods or services within an organization. It involves the systematic recording and analysis of cost data to facilitate informed decision-making, planning, and control within the organization.

The main objects of cost accounting are:

1) Cost Ascertainment: The primary objective of cost accounting is to ascertain the cost of producing goods or services accurately. This involves identifying and recording all relevant costs incurred in the production process, including direct costs (such as materials and labour) and indirect costs (such as overheads).

2) Cost Control: Cost accounting aims to control and minimize costs within the organization by identifying inefficiencies, cost variances, and areas of waste. By monitoring costs closely and implementing cost control measures, organizations can optimize their resources and improve profitability.

3) Cost Planning: Another objective of cost accounting is to assist in the process of cost planning and budgeting. By forecasting future costs based on historical data and expected changes in operations, organizations can develop realistic budgets and set targets for cost reduction or cost containment.

4) Decision Making: Cost accounting provides valuable information for decision-making at various levels within the organization. Managers use cost data to evaluate the profitability of products or services, make pricing decisions, determine product mix, assess investment proposals, and evaluate performance.

5) Performance Evaluation: Cost accounting helps in evaluating the performance of different departments, products, or processes within the organization. By comparing actual costs against budgeted costs or standard costs, managers can identify areas of inefficiency or underperformance and take corrective actions.

6) Inventory Valuation: Cost accounting is essential for valuing inventory accurately in financial statements. By assigning costs to inventory items based on specific costing methods (such as FIFO, LIFO, or weighted average), organizations can determine the cost of goods sold and the value of ending inventory for reporting purposes.

Q2) From the following transactions, prepare separately the stores ledger accounts using the following pricing methods:

i) FIFO and ii) LIFO

January 1 Opening balance 100 units @ Rs. 5 each

January 5 Received 500 units @ Rs. 6 each

January 3 Issued 300 units.

February 5 Issued 200 units.

February 6 Received 500 units @ Rs. Each

March 10 Issued 300 units.

March 12 Issued 250 units.

Ans) The stores ledger accounts using FIFO method is:

Q3) What is Labour Turnover? State the major causes of labour turnover.

Ans) Labor turnover refers to the rate at which employees leave a company and are replaced by new hires over a specific period. It is a critical metric used by organizations to assess workforce stability, employee satisfaction, and the effectiveness of recruitment and retention strategies. Labor turnover is typically expressed as a percentage and can be calculated using the following formula:

Causes of labour turnover:

Job Dissatisfaction: Employees may leave a company due to dissatisfaction with their job roles, responsibilities, working conditions, or organizational culture. Factors such as low pay, limited opportunities for advancement, poor management, and lack of recognition or appreciation can contribute to job dissatisfaction.

Better Job Opportunities: Employees may leave a company in search of better job opportunities elsewhere, including higher salaries, improved benefits, career advancement prospects, or a better work-life balance. Competitive job markets and industry demand can drive employees to seek out more favourable employment options.

Workplace Conflict: Workplace conflict, including interpersonal conflicts with colleagues or supervisors, can contribute to employee turnover. Poor communication, lack of teamwork, discrimination, harassment, or bullying behaviour can create a toxic work environment that prompts employees to leave.

Career Advancement: Employees may leave a company if they feel their career growth or development opportunities are limited. Organizations that fail to provide clear paths for advancement, training, or skill development may experience higher turnover rates as employees seek opportunities for professional growth elsewhere.

Personal Reasons: Employees may leave a company for personal reasons, such as relocation, family obligations, health issues, or retirement. These factors may be beyond the organization's control but can still contribute to turnover.

Organizational Changes: Changes within the organization, such as mergers, acquisitions, restructuring, or downsizing, can lead to uncertainty and job insecurity among employees. This can result in voluntary turnover as employees seek more stable employment elsewhere.

Mismatched Expectations: Employees may leave a company if their expectations regarding job duties, career progression, or organizational culture are not met. Misalignment between employee expectations and organizational reality can lead to dissatisfaction and turnover.

Q4) Define Overheads. What are the various methods of classifying overheads. Discuss functional classification.

Ans) Overheads refer to indirect costs incurred in the production or operation of goods and services that cannot be directly attributed to specific units of output. These costs are necessary for the functioning of the business but are not directly tied to the production process. Overheads typically include expenses such as rent, utilities, administrative salaries, depreciation, and maintenance costs.

Various Methods of Classifying Overheads:

Function-Based Classification: Overheads are classified based on the functions or activities they support within the organization, such as production, administration, selling, and distribution.

Nature-Based Classification: Overheads are classified based on their nature or characteristics, such as fixed overheads, variable overheads, semi-variable overheads, and step-fixed overheads.

Behaviour-Based Classification: Overheads are classified based on their behaviour in relation to changes in production levels or activity levels, such as fixed, variable, and semi-variable overheads.

Controllability-Based Classification: Overheads are classified based on the degree of control that management has over them, such as controllable overheads (which can be influenced by management decisions) and uncontrollable overheads (which cannot be influenced by management decisions).

Production Process-Based Classification: Overheads are classified based on their relationship to the production process, such as factory overheads (related to manufacturing activities), administrative overheads (related to general administrative activities), and selling and distribution overheads (related to sales and distribution activities).

Functional Classification of Overheads:

Functional classification involves categorizing overheads based on the functions or activities they support within the organization. The main categories of overheads under functional classification are:

Production Overheads: These overheads are incurred in the production or manufacturing process and are directly related to the manufacturing activities. Examples include expenses for factory rent, depreciation of factory equipment, utilities, maintenance of machinery, and raw material handling costs.

Administrative Overheads: Administrative overheads are associated with the general administration and management of the organization. They include expenses such as salaries of administrative staff, office rent, office supplies, utilities for office premises, insurance, and legal expenses.

Selling and Distribution Overheads: These overheads are incurred in the marketing, sales, and distribution of products or services. Examples include expenses for advertising, sales commissions, sales salaries, transportation costs, packaging costs, and warehousing expenses.

Q5) Calculate the machine hour rate to recover the overhead expenses given below:

Ans) To calculate the machine hour rate to recover the overhead expenses, we need to consider all the relevant overhead costs and allocate them based on the machine's running hours. The formula to calculate the machine hour rate is:

Machine Hour Rate = Total Annual Overhead Expenses/Total Running Hours

Let's calculate each component of the total annual overhead expenses:

1. Electric Power: 75 Paise per hour

2. Steam: 10 Paise per hour

3. Water: 2 Paise per hour

4. Repairs: Rs. 530 per annum

5. Rent: Rs. 270 per annum

6. Depreciation: (Original cost - Book value) / Useful life

First, let's calculate the depreciation:

Original cost = Rs. 12,500

Book value = Rs. 2,870

Depreciation = (12,500 - 2,870) * 2% = Rs. 195.6 per annum

Now, let's calculate the total annual overhead expenses:

Total Annual Overhead Expenses = Electric Power + Steam + Water + Repairs + Rent + Depreciation

= (75 + 10 + 2) paise/hour + Rs. 530 + Rs. 270 + Rs. 195.6

= 87 paise/hour + Rs. 530 + Rs. 270 + Rs. 195.6

= Rs. 995.6

Next, we need to calculate the total running hours, which is given as 10 hours.

Now, let's calculate the machine hour rate:

Machine Hour Rate = Total Annual Overhead Expenses/Total Running Hours

Machine Hour Rate} = Rs. 995.6/10

Machine Hour Rate} = Rs. 99.56

Therefore, the machine hour rate to recover the overhead expenses is Rs. 99.56 per hour.

SECTION B

Q6) Explain the different methods of absorption of administrative overheads. Which method would you prefer and why?

Ans) Absorption of administrative overheads involves allocating or absorbing these indirect costs to the products or services produced by a company. There are several methods for absorbing administrative overheads, each with its own advantages and disadvantages. The main methods include:

1) Direct Method: Under this method, administrative overheads are allocated directly to production departments or cost centres based on a predetermined allocation basis, such as the number of employees, square footage, or machine hours. This method does not involve any allocation to intermediate service departments.

2) Step-Down Method: Also known as the sequential allocation method, the step-down method allocates administrative overheads sequentially to different cost centres or departments. It starts with allocating overheads to the most significant or primary cost centres and then allocates the remaining overheads to subsequent cost centres based on predetermined allocation bases.

3) Reciprocal Method: The reciprocal allocation method accounts for the mutual services provided between service departments by simultaneously solving a system of equations. This method considers the interrelationships between service departments and allocates overheads based on the usage of services provided by each department.

4) Percentage of Direct Labor Cost: In this method, administrative overheads are allocated to production departments based on the percentage of direct labour cost incurred in each department. The rationale is that administrative overheads are often related to the labour-intensive activities of the production process.

5) Machine Hour Rate: Administrative overheads can be absorbed using a machine hour rate, where the overheads are allocated to production departments based on the number of machine hours used by each department. This method is suitable for manufacturing environments where machinery usage directly correlates with administrative support requirements.

6) Cost of Labor Hours: Similar to the machine hour rate method, this approach allocates administrative overheads based on the number of labour hours worked in each production department. It assumes that administrative overheads are driven by the labour-intensive activities of the production process.

7) Activity-Based Costing (ABC): ABC allocates administrative overheads based on the activities or processes that consume these resources. It identifies cost drivers associated with administrative activities and allocates overheads to production departments based on the level of activity consumption.

Q7) Define unit costing. Mention the industries to which this method of costing is applicable.

Ans) Unit costing, also known as unit cost accounting or unit cost calculation, is a method of costing used to determine the cost per unit of a product or service. It involves allocating the total cost incurred by a business over a given period to individual units of production or output. The goal of unit costing is to accurately determine the cost of producing each unit of output, which is essential for pricing decisions, profitability analysis, and performance evaluation.

Industries to which unit costing is applicable include:

1) Manufacturing Industry: Unit costing is commonly used in manufacturing industries where products are produced in batches or on a continuous basis. It helps manufacturers determine the cost per unit of finished goods, which is crucial for pricing decisions, inventory valuation, and cost control.

2) Construction Industry: Unit costing is applicable in the construction industry for estimating the cost per unit of construction projects, such as buildings, roads, bridges, and infrastructure projects. It helps construction companies assess project profitability, budgeting, and resource allocation.

3) Service Industry: Unit costing can also be applied in service industries, such as healthcare, hospitality, transportation, and utilities. In these industries, unit costing helps service providers determine the cost per unit of service delivered, such as cost per patient, cost per room night, cost per passenger, or cost per kilowatt-hour.

4) Retail Industry: In the retail sector, unit costing is used to determine the cost per unit of inventory items sold. It helps retailers assess product profitability, set pricing strategies, and monitor margins.

5) Agriculture and Farming: Unit costing is applicable in agriculture and farming for calculating the cost per unit of agricultural products, such as crops, livestock, and dairy products. It helps farmers assess production costs, evaluate crop yields, and make informed decisions about crop selection and resource allocation.

Q8) Explain the use of a production order and give its specimen.

Ans) A production order is a document used in manufacturing and production environments to authorize and track the production of a specific quantity of goods or components. It serves as a directive from the management or production planning department to the production floor, detailing the specifications, quantities, and timelines for the production process. The primary purpose of a production order is to ensure efficient and organized execution of the manufacturing process, allowing businesses to meet customer demands, control inventory levels, and optimize resource utilization.

Key Components of a Production Order Typically Include:

a) Order Number: A unique identifier assigned to the production order for tracking and reference purposes.

b) Product Details: Description of the product to be produced, including product name, code, specifications, and any special instructions or requirements.

c) Quantity: The quantity of units or components to be produced as per the order.

d) Production Schedule: The start date, due date, and timeline for completing the production order.

e) Bill of Materials (BOM): A list of all the materials, components, and subassemblies required to manufacture the product, along with their quantities and specifications.

f) Routing or Work Instructions: Detailed instructions outlining the sequence of operations, workstations, machinery, tools, and labour requirements for each step of the production process.

g) Quality Standards: Any quality control procedures, inspection points, or testing requirements to ensure product quality and conformity to specifications.

h) Resource Allocation: Allocation of resources such as machinery, equipment, tools, and manpower required to complete the production order.

i) Cost Estimates: Estimates of production costs, including direct materials, direct labour, overheads, and total production cost.

j) Authorization: Signature or approval from the production manager or authorized personnel authorizing the commencement of production.

Here's a specimen of a production order:

Production Order Number: PO-20220212

Product: Widget XYZ

Description: High-quality widgets used in automotive applications

Quantity: 1000 units

Production Schedule:

Start Date: February 15, 2022

Due Date: February 28, 2022

Bill of Materials (BOM):

Widget XYZ Body (Qty: 1000 units)

Widget XYZ Components A (Qty: 2000 units)

Widget XYZ Components B (Qty: 1500 units)

Widget XYZ Components C (Qty: 3000 units)

Routing:

1. Fabricate Widget XYZ Body

2. Assemble Widget XYZ Components A, B, and C

3. Quality Control Inspection

4. Packaging and Labelling

Quality Standards:

All components must meet dimensional and performance specifications.

Final products must undergo rigorous quality control testing to ensure functionality and durability.

Resource Allocation:

Production Line 1: Widget XYZ Body Fabrication

Production Line 2: Component Assembly

Quality Control Department: Inspection and Testing

Packaging Department: Packaging and Labelling

Cost Estimates:

Direct Materials: $10,000

Direct Labor: $5,000

Overheads: $2,000

Total Production Cost: $17,000

Authorization:

__________________________

[Signature]

Production Manager

Q9) How does contract costing differ from job costing?

Ans) Contract costing and job costing are both methods used to allocate costs to specific projects or contracts within a business. While they are similar in nature, there are some key differences between the two:

Scope:

a) Job Costing: Job costing is used to allocate costs to individual jobs or orders that are distinct and separate from each other. Each job has its own unique characteristics, specifications, and requirements.

b) Contract Costing: Contract costing is used to allocate costs to long-term projects or contracts that span over an extended period and involve multiple units of work or phases. Contracts typically involve complex arrangements and may include several jobs or tasks within the same project.

Duration:

a) Job Costing: Jobs in job costing are usually short-term and completed within a relatively short period, ranging from hours to a few weeks.

b) Contract Costing: Contracts in contract costing are long-term and can span over several months or even years, involving multiple stages or phases of work.

Unit of Costing:

a) Job Costing: The unit of costing in job costing is typically a single job or order, with costs allocated to each job separately.

b) Contract Costing: The unit of costing in contract costing is the entire contract or project, with costs allocated to the contract.

Level of Detail:

a) Job Costing: Job costing involves detailed tracking and allocation of costs to individual jobs, with a focus on capturing direct costs, indirect costs, and overheads specific to each job.

b) Contract Costing: Contract costing also involves detailed tracking and allocation of costs, but it may include additional complexities such as progress billing, stage payments, and variations/change orders.

Billing and Revenue Recognition:

a) Job Costing: Billing and revenue recognition in job costing are typically based on the completion of individual jobs or milestones within a job.

b) Contract Costing: Billing and revenue recognition in contract costing are based on the completion of contract stages, milestones, or specific criteria outlined in the contract agreement.

Examples:

a) Job Costing: Examples of industries where job costing is commonly used include construction, custom manufacturing, printing, and consulting services.

b) Contract Costing: Examples of industries where contract costing is commonly used include construction of infrastructure projects, engineering projects, shipbuilding, and large-scale manufacturing contracts.

Q10) State the main characteristics of process costing and outline the costing procedure thereof.

Ans) Process costing is a costing method used to determine the cost of producing homogeneous products or services in a continuous production process, where units of output are identical or indistinguishable from each other. It is commonly used in industries such as chemicals, food and beverage, pharmaceuticals, and utilities, where production occurs in continuous or repetitive processes.

Main Characteristics of Process Costing:

1) Homogeneous Products: Process costing is suitable for industries where the products or services produced are homogeneous or uniform in nature. This means that each unit of output is identical or indistinguishable from others.

2) Continuous Production: Process costing is used in industries where production occurs continuously or in large batches, with goods passing through various stages or processes in a sequential manner.

3) Standardization of Costs: Costs are standardized across all units of output within a production process, as each unit undergoes similar processing steps and incurs similar costs.

4) Accumulation of Costs by Process: Costs are accumulated and allocated to production processes or departments rather than individual units of output. This allows for the averaging of costs over all units produced within each process.

5) Multiple Costing Departments: Process costing often involves multiple costing departments, each responsible for a specific stage or process in the production cycle. Costs are accumulated and allocated separately for each department.

6) Use of Equivalent Units: Process costing involves the concept of equivalent units, which represents the amount of work done on partially completed units. Equivalent units are used to determine the total units of output and allocate costs to units completed and transferred out, as well as units in ending work in process inventory.

Costing Procedure of Process Costing:

1) Identify Cost Centres or Processes: The first step in process costing is to identify the various cost centres or processes involved in the production cycle. Each cost centre represents a distinct stage or phase in the production process.

2) Accumulate Costs: Costs are accumulated for each cost centre or process, including direct materials, direct labour, and manufacturing overheads. Costs may be accumulated using job cost sheets, departmental accounts, or cost ledgers.

3) Calculate Equivalent Units: Equivalent units are calculated for each cost centre to account for partially completed units in ending work in process inventory. Equivalent units represent the proportion of work completed on partially completed units.

4) Determine Cost per Equivalent Unit: The cost per equivalent unit is calculated by dividing the total cost incurred in each cost centre by the total equivalent units of production.

5) Allocate Costs: Costs are allocated to units completed and transferred out, as well as units in ending work in process inventory, based on the cost per equivalent unit determined in step 4.

6) Prepare Cost of Production Report: A cost of production report is prepared for each cost centre or process, summarizing the costs incurred, equivalent units produced, and cost per equivalent unit. This report provides valuable insights into the cost structure of each process and helps in decision-making and performance evaluation.

SECTION C

Q11) Distinguish between the following:

a) Cost Accounting and Financial Accounting

b) Direct Expenses and Indirect Expenses

c) Centralised Purchasing and Decentralised Purchasing

d) Minimum Stock Level and Maximum Stock Level

Q12) Write short notes on the following:

a) Cost Sheet

Ans) A cost sheet is a document that provides a detailed breakdown of all the costs associated with producing a product or providing a service. It serves as an essential tool for management to understand and control costs, as well as for financial reporting purposes. A typical cost sheet includes various cost components such as direct materials, direct labour, manufacturing overheads, and other indirect costs. It summarizes the total cost incurred at each stage of production and helps in determining the cost per unit of output. Cost sheets are used in cost accounting to analyse cost behaviour, calculate product costs, assess profitability, and make informed decisions regarding pricing, budgeting, and resource allocation.

b) Time Keeping

Timekeeping refers to the process of recording and tracking employees' working hours for payroll, attendance, and labour costing purposes. It involves accurately capturing the time spent by employees on various activities, tasks, or projects using timekeeping systems such as time clocks, electronic timekeeping software, or manual timesheets. Timekeeping is essential for ensuring compliance with labour laws, calculating wages and salaries, and monitoring employee productivity. It provides valuable data for workforce management, scheduling, and resource allocation, enabling organizations to optimize their labour costs, improve efficiency, and maintain accurate records for payroll and accounting purposes.

c) Job Costing

Job costing is a costing method used to determine the cost of producing individual jobs, projects, or custom-made products. It involves tracking and allocating costs to specific jobs based on the materials, labour, and overheads consumed during production. Job costing is commonly used in industries such as construction, manufacturing, and professional services where each job is unique and requires customized inputs. This method enables businesses to accurately estimate the cost of each job, assess profitability, and make pricing decisions. Job costing provides insights into cost variations, helps in identifying cost-saving opportunities, and supports project management by monitoring costs against budgeted estimates.

d) Service Costing

Service costing is a costing method used to determine the cost of providing services to customers. Unlike product costing, which focuses on manufacturing costs, service costing considers the costs associated with delivering services such as labour, materials, overheads, and other direct and indirect costs. Service costing is applied in service-oriented industries such as healthcare, hospitality, consulting, and transportation, where services are the primary output. It helps service providers understand the cost structure of their services, price services effectively, allocate resources efficiently, and assess the profitability of different service lines or offerings. Service costing enables organizations to make informed decisions regarding service pricing, resource allocation, and process improvement initiatives.