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ECO-10: Elements of Costing

ECO-10: Elements of Costing

IGNOU Solved Assignment Solution for 2021-22

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Assignment Code: ECO-10/TMA/2021-22

Course Code: ECO-10

Assignment Name; Elements of Costing

Year: 2021-2022

Verification Status: Verified by Professor

Marks: 100

Q1) What are the objectives of cost accounting? State its major advantages to a

manufacturing concern.

Ans) The main objects of cost accounting are as follows :

  1. To determine the cost of products and services; to assist in the determination of a selling price or tender quotation; to analyse and classify the various cost elements that make up the total cost; to assist in the determination of a selling price or tender quotation; to assist in the determination of a selling price or tender quotation; to assist in the determination of a selling price or tender quotation; to assist in the determination of

  2. To determine the causes of wastage and to take suitable measures to prevent it;

  3. Analysis and comparisons will be used to keep expenditures under control.

  4. To communicate to management all cost-related information and aid managerial decision-making; to assess the relative efficiency of various departments, branches, products, units, factories, and machinery and design ways to improve their productivity; and to

  5. Produce cost statements as needed by management for an interim analysis of production, sales, and profit, as well as to plan future actions.

As a result, the aims of coking prove that it is a necessary branch of accounting. It is the key to cost-cutting in manufacturing and an important tool for maintaining managerial efficiency.


  1. After learning the importance of costing, its definition and objectives, and the distinction between Cost Accounting and Financial Accounting, you should be able to identify the benefits of cost accounting and recognise it as a vital management tool.

  2. Continuous flow of information about production, cost, materials, labour, inventories, plant capacity, and other factors that aid output planning are all aided by an effective and well-organized costing system.

  3. Identification of inefficient activities, resource losses or waste, old machinery, and other inefficiencies that require immediate attention.

  4. Compilation of accurate and dependable pricing information.

  5. Budgets and company predictions are prepared.

  6. The setting of standards and the study of deviations are used to measure the efficiency of activities.

  7. Selling pricing are set.

  8. Comparisons of costs between different time periods, goods, departments, or companies.

  9. Cost and income estimates are made in advance.

  10. Inventory monitoring and stock-taking on a regular basis.

  11. Identification of idle capacity and the expense of operating at less than full capacity.

  12. Cost and profit should be determined more often, and their causes should be thoroughly investigated.

Decisions based on facts and figures, as well as the design of appropriate policies for a variety of issues, such as:

  1. Level of output

  2. Make or buy decision

  3. Replacement or modernisation of old equipment

  4. Shut down or continue during depression'

  5. Introduction of new products or elimination of old ones

  6. Acceptance of a special order

  7. Replacement of labour with machinery

Because of the benefits of cost accounting mentioned above, it is no longer limited to industrial companies. Costing is now employed by a variety of organisations, including hospitals, transportation companies, local governments, offices, banks, and educational institutions, among others.

Furthermore, price is a significant benefit to consumers. Due to a proper costing strategy, they are able to obtain things at cheap prices. Costing is advantageous to the organization's employees in terms of providing incentives for good work, such as bonuses and increased compensation.

Investors, bankers, lenders, and shareholders can use costing to assess a company's historical profitability and future prospects. Because of the effectiveness of industrial operations, effective mobilisation of resources, balanced use of finances, and timely attainment of targets, it eventually promotes the country's economic development.

Q2) Explain the various steps that are usually taken in connection with the purchase of materials in a manufacturing concern.


Steps Involved in Purchase

The following are the many processes that are normally followed in conjunction with the acquisition of materials, while the details of the buying procedure may vary depending on individual circumstances.

Purchase Requisition

  1. As a formal request to the buy department to order products or services, a form known as a 'purchase requisition' is widely employed. The buy requisition has two purposes: it authorises the purchasing department to make a purchase and it serves as a record of the required materials' description and amount.

  2. For ordinary stock materials, the storekeeper prepares the buy requisition; for special materials not stocked as regular products, the departmental head prepares the purchase requisition.

  3. When stock falls below the re-order level, or the point at which a replenishment order should be placed, regular purchase requisitions are created. An executive approves the requisition.

  4. Purchase requisitions are usually written in three copies. The original copy is sent to the buying department, and the storekeeper keeps the record. Alternatively, an executive may initiate a purchase requisition, with a third copy submitted to the costing department.

  5. The request number, date, department, code number, description and amount of materials required, signature of the person initiating the requisition, and signature of one or more executives authorising the purchase requisition are all included on the purchase requisition.

Selecting the Supplier

The buying department, having made the decision to purchase the material, issues a request for tenders or quotations for the delivery of materials. After receiving the quotations from the suppliers, a comparative statement known as a "schedule of quotations" should be developed in order to choose a suitable supplier.

When making a decision, the buying manager should avoid automatically selecting the lowest-priced supplier. He should make an informed decision on who he should place the order with, taking into account criteria such as price, quality, delivery time, supplier dependability, discount, credit facility, payment terms, and so on.

Purchase Order

The procurement department creates a purchase order for the supply of stores after selecting a supplier. The order is a written request to the supplier to provide a certain substance or products. The purchase order is a crucial document not just from a legal standpoint, but also from an accounting standpoint. It is the evidence of the buyer-supplier contract that binds both the buyer and the supplier. The supplier is bound by the terms on which the order is placed. It also gives the receiving department power to receive the materials ordered and the account department authority to accept the supplier's bill for payment.

Date, name and address of the supplier, description and specification of the material, quantity ordered, date, time, and place of delivery, price, terms of payment, transportation charges, packing and shipping instructions, buyer's name and address, and purchase manager's signature should all be included on the purchase order.

The number of copies of the purchase order is determined by the organization's size. A large corporation will normally print five copies. The original copy is forwarded to the supplier, the second to the receiving department, the third to the department that initiated the purchase requisition, the fourth to the accounts department, and the fifth to the purchasing department. The copy kept in the procurement department is used to keep track of the order's development and guarantee that the delivery promises are kept.

Receiving and Inspection of Materials

The receiving department is in charge of accepting parcels and doing a physical inspection of the contents. When the parcels are delivered, the receiving official opens them and inspects the contents in detail. The specifics of the materials received are included in a Goods Received Note after the contents of the shipments have been examined. The note is printed in five copies. The receiving department keeps one copy, while the purchasing department, the department that issued the purchase requisition, the stores department, and the accounts department all get copies.

When the Factory has its own inspection department, its primary responsibility is to test the material received for quality and standards. To inspect the materials' quality, an engineer or chemist may be brought in. He is responsible for ensuring that the quality meets the requirements of the purchase order. After inspecting the items, the department will produce a report detailing the quality and, if any materials are rejected, the grounds for rejection. The purchasing department uses an unfavourable inspection report to demand changes or authorization to return products to the vendor. This is the foundation for issuing a debit note.

Checking and Passing of Bills for Payment

  1. The invoice is a document that lists the goods that have been delivered as well as the amount that must be paid.

  2. The Accounting Department checks the legitimacy and arithmetical accuracy of the invoices received by the buying department. With reference to the products received note and the purchase order, the amount and price on the invoice are double-checked. For the purpose of adjusting disparities.

  3. The inspection report and products returned notice should be compared to the invoice, and extensions and totals should be double-checked.

  4. If the contents of the invoice are confirmed to be correct, a rubber stamp is used to affix an endorsent to it. The invoice is sent to the accounts department for payment when the buying manager signs it.

Q3: A product passes through three processes A, B 15 and C. 10,000 units were issued to process A in the beginning of November 2020 at the cost of 1 per unit. The other particulars are given below:






Sundry Materials








Direct Expenses




Actual Output

9500 units

9100 units

8100 units

Normal Wastage




Wastage Sold (per unit)




Prepare the Process Accounts (A, B and C), assuming that there were no opening or closing stocks.


Books of …..


Process A Account



Quantity (Units)

Amount (Rs.)


Quantity (Units)

Amount (Rs.)

To Units Introduced



By Normal Loss

(10,000 Units x 3/100) – (300 Units x Rs. 0.25)



To Sundry Materials



By Abnormal Loss A/c



To Labour



By Process B A/c



To Direct Expenses








Process B Account



Quantity (Units)

Amount (Rs.)


Quantity (Units)

Amount (Rs.)

To Process A A/c



By Normal Loss

(9,500 Units x 5/100) – (475 Units x Rs. 0.50)



To Sundry Materials



To Labour



By Process C A/c



To Direct Expenses



To Abnormal Gain A/c








Process C Account



Quantity (Units)

Amount (Rs.)


Quantity (Units)

Amount (Rs.)

To Process B A/c



By Normal Loss

(9,100 Units x 8/100) – (728 Units x Rs. 1)



To Sundry Materials


By Abnormal Loss A/c



To Labour


By Finished Stock A/c



To Direct Expenses






Q4) What are the factors taken into account for installation of a system of costing? State the possible difficulties faced in installing such a system.


Factors to be Considered

Before installing a costing system, the following aspects should be considered:

  1. The costing system's goal is to:

  2. The nature of the company

  3. The standard of management

  4. Organizational size and kind, authority, information sources, and reports to be submitted

  5. Aspect of the business that is technical

  6. The staff's attitude and behaviour in terms of extending cooperation to the system and the organisation.

  7. Variable expenses and the impact of various operations

  8. Methods of reconciling cost and financial accounts, as well as the possibility of integrating them into a single accounting system via control accounts

  9. Quantum of data 'needs and the process of gathering data without a lot of effort

  10. The product's nature and the type of costing mechanism that will work best for it

  11. The extent to which the supporting staff understands the importance of the system and is aware of the importance of collecting data on a regular basis.

Possible Difficulties

We must be aware of the challenges that will be encountered in implementing the costing system and that they must be overcome. Typically, these issues are:

  1. The system's lack of backing from top management and the antagonism of some officials

  2. Staff involved in the operation of the financial accounting system are resisting.

  3. Other layers of management are resentful of the additional effort that the costing method will necessitate.

  4. The new system will be difficult to operate due to a lack of qualified and licenced employees.

  5. Significant costs are associated with the installation process.

Q5) Write short notes on the following:

(a) Cost Centre

Ans) A Cost Centre is a location, person, or piece of equipment (or a set of these) for which costs can be calculated and used for cost management purposes.

To put it another way, a cost centre can be made up of one or more of the following:

  1. Factory, office, warehouse, stores, sales depot, and so on.

  2. Foreman, Salesman, Customer, and so on.

  3. Machines, cars, trucks, cranes, and other machinery are examples of equipment.

  4. In reality, the entire company might be divided into cost centres that each contribute to the total cost.

We can benefit ourselves by identifying cost centres:

  1. Ascertaining the centre-wise costs,

  2. Comparing the centre-wise costs periodically,

  3. Finding out the major trends of variance, and

  4. Applying the techniques of control to check undue, undesirable, or unexpected movements in costs.

A cost centre is a convenient organisational unit. It divides operations, "demarcates activity," and allocates costs. This aids in the assignment of responsibility for each cost centre.

Types of Cost Centres

Cost centre; may be divided into the following four types:

  1. Process Cost Centre (based on sequence of operations)

  2. Production Cost Centre (for regular production in a factory)

  3. Operation Cost Centre (where various operations are involved in the production process)

  4. Service Cost Centre (for activities supporting the main production)

Thus, identification or selection of cost centres depends on the nature and type of E industry,

(b) Bin card

Ans) A bin card is a numerical record of material receipts, issues, and balance. A bin is a storage location for products. Depending on the nature of the item, a bin could be a shelf, an almirah, or an open space. These cards are frequently attached to or placed near the bin, allowing receipts and issues to be input as soon as they occur. If two distinct materials are housed in the same almirah, separate bin cards are made for each item of merchandise. Two bin cards are made, one for each item, and the almirah is treated as two bins.

The bin card keeps track of the stock in each bin and helps the storekeeper keep track of the goods. The maximum stocks that can be held for each commodity are listed on the card. If the materials are of a type that requires advance ordering, an ordering level is also given so that new supplies can be ordered before the minimum is met. These cards also serve as a separate check on the store's ledger.

The storekeeper in large organisations also keeps ‘store control cards,' which are similar to bin cards and are maintained close to hand. This eliminates the hassle of 'going to bins' to get the information you need when you need it.

(c) Inventory turnover Ratio

Ans) It's one of the methods for keeping inventories under control. The proportion denotes the link between the average inventory and the cost of the material consumed held during the time frame The following formula is used to compute the ratio:

Cost of material consumed during the period / Cost of average stock maintained during the period = Inventory turnover ratio

By summing the starting and closing stocks, the average stock may be computed dividing it by two is a good way to start.

Opening Stock + Closing Stock / 2 Equals Average Stock

The inventory turnover ratio is a measure of how efficient or inefficient a business is with which inventory are kept up to date It is in the organization's best interests to compare the turnover of various types and grades of materials as a metric of productivity detection of stock that does not move on a regular basis, hence reducing capital or Unfavourable stock investment. A low ratio reflects poor purchasing decisions and the growth of debt. Stock that is outmoded, stock that is carried in excess, and so on. A high ratio, on the other hand, is a bad thing. sign of a fast-moving stock with little investment.

(d) Centralized Purchasing

Ans) Centralised purchasing refers to the placement of authority for the entire purchasing function in the purchasing department headed by the purchase manager. Purchases are made at one central point for the entire organisation, and materials are issued from that central point to respective departments or jobs as and when required. The purchasing function is usually centralised in medium-sized and pig enterprises.


  1. Purchasing is more cost-effective when it is centralised. Because the amount involved will be considerable, a higher trade discount or transportation cost savings can be gained.

  2. The purchasing crew focuses solely on purchases and develops specialised knowledge and expertise, resulting in expert and cost-effective purchasing. I

  3. It ensures that purchasing policies are consistent. It prevents random purchasing, which has a negative impact on the company's budget.

  4. Centralised purchasing allows for the creation of a single set of records for all purchase transactions, allowing management to have a better and more effective control over purchases.

  5. It relieves department heads of the burden of acquiring a wide range of materials. As a result, they can focus on the tasks that have been assigned to them.

  6. Vendors benefit from the centralization of purchasing. Because they can simply coordinate and supply goods to a single buyer rather than a huge number of buyers, their selling expenses are decreased.


  1. The system for purchasing materials is less flexible, which could result in unnecessary delays in acquiring supplies.

  2. Setting up a separate purchasing department will almost certainly come at a considerable expense in terms of administrative overhead.

  3. There is a risk of miscommunication between the department that requires the item and the purchasing department, resulting in a material purchase that is incorrect.

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