Suggested Answer - Syl2008 - June2015 - Paper - 8 Intermediate Examination

Download as pdf or txt
Download as pdf or txt
You are on page 1of 14

Suggested Answer_Syl2008_June2015_Paper_8

INTERMEDIATE EXAMINATION
GROUP II
(SYLLABUS 2008)

SUGGESTED ANSWERS TO QUESTIONS


JUNE 2015

Paper- 8: COST AND MANAGEMENT ACCOUNTING


Time Allowed : 3 Hours Full Marks : 100

The figures in the margin on the right side indicate full marks.
Question No. 1 is compulsory and Answer any five from the rest.
Working notes should form part of your answer.

1. (a) Match the statement in Column I with the appropriate statement in Column II: 1×5=5
Column I Column II
(i) VED Analysis (A) Contract Costing
(ii) Reverse cost Method (B) Inventory Control
(iii) Key Factor (C) Group Bonus Plan
(iv) Escalation clause (D) Cost Method for by- product Accounting
(v) Pristman system (E) By – Product Cost Accounting
(F) Absorption Costing
(G) Process Costing
(H) Budgeting

(b) State whether the following statements are ‘True' or 'False': 1×5=5
(i) The allocation of joint cost on by-products affects the total profit or loss.
(ii) For decision making, absorption costing is more suitable than marginal costing.
(iii) Overhead and conversion cost are inter-changeable terms.
(iv) Only one set of accounting records is kept in integrated accounting system of
financial and Cost Accounts.
(v) Profit Planning and control is not a part of budgetary control mechanism.

(c) Fill in the blanks suitably: 1×5=5


(i) ____________ Cost is the difference in total cost that results from two alternative
courses of action.
(ii) _______ is must for meaningful inter-firm comparison.
(iii) Idle time variance is always _________.
(iv) Generally an item of expense, when identified with a specific cost unit is treated
as __________.
(v) In ‘make or buy’ decisions, it is profitable to buy from outside only when the
suppliers price is below the firm’s own ____________.

Academics Department, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
Page 1 Page 1
Suggested Answer_Syl2008_June2015_Paper_8
(d) In the following cases, one out of the four answers is correct. You are required to
indicate the correct answer (= 1 mark) and give brief workings (= 1 mark): 2×5=10

(i) A JBC machine was used on a contract site for the period of 7 months and
depreciation on it was charged to the contract `78,750. If the working life of the
machine is 5(five) years and salvage value is `25,000, then the cost of JBC
machine will be:
(a) `7,00,000
(b) `4,18,750
(c) `6,75,000
(d) `3,93,750
(ii) In a factory the monthly requirement for a material is 20,000 units, ordering cost
`225 per order, purchase price `20 per unit and annual carrying cost is 15%, then
economic order quantity will be:
(a) 3,000 units
(b) 2,683 units
(c) 6,000 units
(d) 1,732 units
(iii) In a company, opening stock of material was 14,000 units, closing stock required
to be maintained. 14,000 units and sale is expected to be maintained at 28,000
units, what would be the production units during the period?
(a) 56,000
(b) 14,000
(c) 28,000
(d) 30,000
(iv) When in a company, sale price per unit is `69.50, Variable cost `35.50 and Fixed
cost is 18,02,000, the break-even volume would be:
(a) 58,500 units
(b) 53,000 units
(c) 63,250 units
(d) 28,750 units
(v) The actual machine hours worked in June’ 2014, is for 35,000 units and the
predetermined overhead recovery is @ `3 per unit, when actual overhead is
`1,57,500, the outcome will be:
(a) ` 52,500 under absorbed
(b) ` 53,500 over absorbed
(c) `1,57,500 over absorbed
(d) `1,05,000 under absorbed

Answer:

1. (a) Matching:
Column I Column II
(i) VED Analysis (B) Inventory Control
(ii) Reverse cost Method (E) By – Product Cost Accounting
(iii) Key Factor (H) Budgeting
(iv) Escalation clause (A) Contract Costing
(v) Pristman system (C) Group Bonus Plan

Academics Department, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
Page 2 Page 2
Suggested Answer_Syl2008_June2015_Paper_8
(b) (i) False
(ii) False
(iii) False
(iv) True
(v) False

(c) (i) Differential


(ii) Uniform Costing
(iii) Adverse
(iv) Direct expenses
(v) Variable cost

(d) (i) (a) ` 7,00,000;


Depreciation for one year 78,750 × 12/7 = `1,35,000
Depreciation for 5 years 1,35,000 × 5 = `6,75,000
Cost of Machine = Total Depreciation plus salvage value
`6,75,000 + 25,000 = `7,00,000

(ii) (c) 6000 units;


2uc
EOQ = = (2 × 20,000 ×12 × 225)/ 15% of 20
IC
10,80,00,000
= = 3, 60, 00, 000 = 6000 Units
3

(iii) (c) 28,000


Expected sale during the period = 28,000 Units
Closing stock to be maintained 14,000 Units
Less: Opening Stock 14,000 Units
Production to be carried out 28,000 Units

(iv) (b) 53,000 units


Contribution = SP VC
`69.50 - `35.50 = `34
FC `18, 02, 000
So, Breakable volume = 
C `34
= 53,000 units.
(v) (a) `52,500
35,000 × 3 = `1,05,000
Actual Overhead – Pre-determined overhead
= under absorbed overhead
So, `1,57,500 – `1,05,000 = `52,500

Academics Department, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
Page 3 Page 3
Suggested Answer_Syl2008_June2015_Paper_8
2. (a) M/s. Sun & Moon Company Ltd. is experiencing high labour turnover in recent years.
Management of the company would like you to submit a statement on the loss
suffered by the company due to such labour turnover. Following facts are available
from the records:
Sales `800 lakhs, Direct Materials `200 lakhs, Direct Labour `48 lakhs on 4,80,000
labour hours,. other variable expenses ` 80 lakhs, Fixed Cost `90 lakhs.
Direct Labour hours include 10,000 Labour hours spent on trainees and replacement,
only 50% of which were productive.
Further during the year 15,000 Labour hours of potential work could not be availed of,
because of delayed replacement. Cost incurred due to separation and replacement
amounted to `2 lakhs.
With these information, you are required to prepare a statement showing actual profit
against profit which would have been realised had there been no labour turnover.
2+3+1+1+3 =10
(b) Write a note on ‘Just-in-Time’ Inventory 5

Answer:

2. (a) (I) Calculation of direct labour cost if there was no labour turnover:
Actual direct labour cost per hour: = 48,00,000 ÷ 4,80,000
= `10 per direct labour hour.
Cost of man hours of potential work Lost due to delayed replacement
= 15,000 × 10 = -1,50,000.
Direct labour cost of there was no labour turnover = 48,00,000 + 1,50,000
= `49,50,000

(II) Calculation of potential total sales if there was no labour turnover


Particulars Hours
Hours lost for delayed replacement 15,000
Unproductive hours (50% of 10,000) 5,000
Total hours lost 20,000
Actual Labour hours spent: 4,80,000
Less: Unproductive hours 5,000
Productive hours worked 4,75,000

Sales related to 4,75,000 productive hours = 800 Lakhs.

(III) Potential Sales lost due to loss of 20,000


Direct labour hours: 8,00,00,000/4,75,000 (DLH) × 20,000 DLH. = `33,68,421
Total sales if there was no labour turnover.
`8,00,00,000 + `33,68,421 = `8,33,68,421.

(IV)Variable expenses if there was no labour turnover:`2,80,000/8,00,000 × 8,33,68,421


= `2,91,78,947.

Academics Department, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
Page 4 Page 4
Suggested Answer_Syl2008_June2015_Paper_8
Comparative statements showing actual profit vis – a- vis profit, which would
have been realised if there was no labour turnover:
Particulars Actual (`) If no labour turnover (`)
Sales 8,00,00,000 8,33,68,421
Cost:
Variable Cost 2,80,00,000 2,91,78,947
Direct Labour cost 48,00,000 49,50,000
Fixed Cost 90,00,000 90,00,000
Separation cost 2,00,000 -
4,20,00,000 4,31,28,947
Profit (Sales – Cost) 3,80,00,000 4,02,39,474

Thus loss of profit due to labour turnover:


`4,02,39,474 – `3,80,00,000 = `22,39,474

(b) Just in Time Inventory: This is the latest trend in inventory management. This principle
envisages that there should not be any intermediate stage like storekeeping. Material
purchased from supplier should directly go to the assembly line, i.e. to the production
department. There should not be any need of storing the material. The storing cost
can be saved to a great extent by using this technique. However, the practicality of
this technique in Indian conditions should be verified before practicing the same.
The benefits of just in time system are as follows,
 Right quantities are purchased or porduced at right time.
 Cost effective production or operation of correct services is possible.
 Inventory carrying costs are eliminated totally.
 The stores function is eliminated and hence there is a considerable saving in the
stores cost.
 Losses due to breakage, wastage, pilferage etc. are avoided.

3. (a) M/s Starlight Co. Ltd. specialises in the manufacturing of small components. Cost
structure is given below:
Material `60 (per unit)
Labour `100 (per unit)
Variable cost 75% of Labour Cost
Fixed over head of the Co, `3 lakhs per annum. Unit price of small component is `
260.
(i) Determine the number of components that have to be manufactured and sold in
a year in order to break-even.
(ii) How many components have to be manufactured and sold to make a profit of `1
lakh (one lakh) per year?
(iii) If the sale price is reduced by `20 per unit, how many components have to be
sold to break even? 3+3+4=10
(b) What are the limitations of a zero-based budgeting? 5

Answer:

3. (a) (i)

Academics Department, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
Page 5 Page 5
Suggested Answer_Syl2008_June2015_Paper_8
Sales Price per unit `260

Less variable cost per unit: -

Material `60

Labour `100

V. of Head (75% labour) 75 `235

Contribution per unit `25

Fixed cost `3,00,000

FC 3, 00, 000
Break even (unit) =
C 25
12,000 Unit

(ii) Fixed overhead = `3,00,000


Required Profit = `1,00,000
Revised total contribution required = `4,00,000
4, 00, 000
Breakeven(units) = 16,000 units
25

(iii) If sale price is reduced by `20 per unit:


Revised contribution –
S. P. = `240
Less V. C. = `235
Contribution = `5 (per unit)
FC 3, 00, 000
BE (Volume) = = = 60,000 Units
C 5

(b) The following are the limitation of Zero Based Budgeting:


(i) It is a very detailed procedure and naturally it is time consuming and lot of paper
work is involved.
(ii) Cost involved in preparation and implementation of this system is very high.
(iii) Morale of staff may be very low as they might feel threatened if a particular activity
is discontinued.
(iv) Ranking of activities and decision - making may become subjective at times.
(v) It may not be advisable to apply this method when there are non financial
considerations, such as ethical and social responsibility because this will dictate
rejecting a budget claim on low ranking projects.

Academics Department, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
Page 6 Page 6
Suggested Answer_Syl2008_June2015_Paper_8
4. (a) The net profit of Dhura Ltd. shown by cost accounts for the year ended 31st March
2015 was ` 10,35,000 and by financial accounts for the same period was ` 5,00,200.
A scrutiny of the figures of the financial accounts and the cost accounts revealed the
following facts:
Particulars (`)
(i) Administrative overhead under recovered in cost accounts 14,800
(ii) Factory overhead-over-recovered in cost accounts 20,000
(iii) Depreciation-over charged in financial accounts 40,000
(iv) Interest on Investment 20,000
(v) Loss due to obsolescence charged in financial accounts 24,000
(vi) Abnormal Labour wastage charged in financial accounts 2,00,000
(vii) Income Tax provided in financial accounts 2,80,000
(viii) Bank Interest credited in financial accounts 4,000
(ix) Stocks adjustment credited in financial accounts 28,000
(x) Loss due to depreciation in stock values charged in financial
accounts 48,000
10
(b) State the essentials of a good costing system? 5

Answer:

4. (a) Memorandum Reconciliation Account


As on 31st March, 2015
` `
To Administrative overhead under By Profit as per cost accounts 10,35,000
recovered in cost accounts 14,800
To Depreciation over-charge in By Factory overhead over-
financial accounts 40,000 recovered in cost accounts 20,000
To Loss due to obsolescence 24,000 By Interest on Investment 20,000
To Abnormal labour wastage By Bank interest credited in fin.
charged in fin. accounts 2,00,000 account 4,000
To Income tax provided in financial By Stores adjust credit in fin
accounts 2,80,000 account 28,000
To Loss due to depreciation in stock
values in fin accounts 48,000
To Profit as per financial accounts 5,00,200
11,07,000 11,07,000

Alternative

Reconciliation Statement as on 31.03.2015


Particulars ` `
Profit as per financial accounts 5,00,200
Add:
(i) Administration overhead under recovered 14,800
(ii) Over recovery of depreciation 40,000
(iii) Loss due to obsolescence considered 24,000
(iv) Abnormal labour wastage 2,00,000
(v) Income Tax 2,80,000
(vi) Loss due to depreciation in stock 48,000 6,06,800
11,07,000

Academics Department, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
Page 7 Page 7
Suggested Answer_Syl2008_June2015_Paper_8
Less:
(i) Factory overhead over recovery 20,000
(ii) Interest on investment 20,000
(iii) Bank Interest 4,000
(iv) Stock adjustment 28,000 72,000
Profit as per Cost Accounts 10,35,000

(b) Essentials of a good costing system: - For availing of maximum benefits, a good costing
system should possess the following characteristics:-
(a) Costing system adopted in any organization should be suitable to its nature and
size of the business and its information needs.
(b) A costing system should be such that it is economical and the benefits derived
from the same should be more than the cost of operating of the same.
(c) Costing system should be simple to operate and understand. Unnecessary
complications should be avoided.
(d) Costing system should ensure proper system of accounting for material, labour and
overheads and there should be proper classification made at the time of recording
of the transaction itself.
(e) Before designing a costing system, need and objectives of the system should be
identified.
(f) The costing system should ensure that the final aim of ascertaining of cost as
accurately as possible should be achieved.

5. (a) Prince Hotel has three types of rooms viz. super deluxe, deluxe and semi-deluxe.
Detail information are given below:
(i) There are 20 super deluxe rooms, 80 deluxe rooms and 180 semi-deluxe rooms.
(ii) The rent/tariff of super deluxe rooms is to be fixed as twice the deluxe rooms and
that of semi-deluxe rooms as 2/3rd of the deluxe rooms.
(iii) Normally 80% of super deluxe; 75% of deluxe and 70% of semi-deluxe rooms are
occupied in summer of 7(seven) months. In winter of 5(five) months 40% of super
deluxe, 50% of deluxe and 60% of semi-deluxe rooms are occupied.
Normal days in a month may be taken as 30 days.
(iv) Total actual expenses for the year ended 31st March 2015 are ` 4,73,85,000.
Your are required to suggest what rent should be charged for each type of room if
profit is 25% on gross receipts/room rent. 6+4=10
(b) What is inter- process profit? Explain it clearly. 5

Answer:
5. (a)

(i) Calculation of room days - Equivalent to Deluxe


Supper Deluxe Summer 20 ×30 × 7×80/100 = 3360
1, 200
Winter 20×30×5×40/100 = = 9,120
4, 560  2
Deluxe Summer 80×30×7×75/100 = 12,600

Academics Department, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
Page 8 Page 8
Suggested Answer_Syl2008_June2015_Paper_8
6, 000
Deluxe Winter 80×30×5×50/100 = = 18,600
18, 600 1
Semi- Deluxe Summer 180 ×30 ×7 ×70/100 = 26,460
16, 200
Semi- Deluxe Winter 180 ×30 × 5 × 60/100 = = 28,440
2
42, 660 
3

Total room days equivalent to deluxe rooms ………………. 56,160

(ii) Total amount to be recovered as rent `4,73,85,000 + Profit 25% on rent or 33/1/3% in
cost = 4,73,85,000 + 1,57,95,000 = 6,31,80,000
Room rent per Deluxe Room – 6,31,80,000/56,160 = `1,125
Room rent per Super Deluxe Room – 1,125 × 2 = `2,250
Room rent per semi Deluxe room = (1,125 × 2/3) = `750

(b) Inter Process Profits:


The output of one process is transferred to next process at cost price. However,
sometimes, the transfer is made at cost + certain percentage of profit. This is done
when each process is treated as a profit center. In such cases, the difference between
the debit and credit side of the process account represents profit or loss and is transferred
to the Profit and Loss Account. The stocks at the end and at the beginning contain an
element of unrealized profits, which have to be written back in this method. If the profit
element contained in the closing inventory is more than the profit element in the
opening inventory, profit will be overstated and vice versa. Profit is realized only on the
goods sold, thus to obtain the actual profit the main task would be to calculate the profit
element contained in the inventories.

6. (a) M/s Zenith Co. Ltd. operating at normal capacity produces 1,00,000 units of a product
which supplies the following particulars:
Particulars (`) Per unit
Direct Materials 32
Direct labour 12
Variable overhead 16
Fixed overhead 15
75

Sale Price per unit `100.


In addition, selling and distribution cost of ` 5 per unit is incurred for selling each unit
of product.
As the company faces recession in the market, the Marketing Department desires to
produce only 5000 units.
But, management is of the opinion to shut down the plant.
If the plant is shutdown the loss due to fixed cost could be avoided for ` 4,00,000, but
the committed unavoidable cost would be estimated at ` 2,95,000.
Required: Advise whether the plant should be shut down or not. 4+4+2=10
(b) What is Integrated Accounting System? What are its advantages? 2+3=5
Answer:

Academics Department, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
Page 9 Page 9
Suggested Answer_Syl2008_June2015_Paper_8
6. (a) Marginal cost statement during recession
Sales 5,000 units @ `100 `5,00,000
Less: Marginal cost (per unit)
Direct materials `32
Direct labour `12
Variable overhead `16
AddI. Variable OH `5
`65 `3,25,000
Contribution `1,75,000
Less: Fixed Cost `15,00,000
Operating Loss `13,25,000

Computation of Shutdown cost


`
Fixed cost 15,00,000
Less: avoidable fixed cost 4,00,000
11,00,000
Add: Addl. Fixed cost 2,95,000
Shutdown cost 13,95,000

Advice: It is apparent that the shutdown costs is higher


(`13,95,000 – `13,25,000) = 70,000. So, it is not justified to Shutdown.

(b) Advantages of Integrated Accounting:


Integrated Accounting is the name given to a system of accounting whereby cost and
financial accounts are kept in the same set of books. Such a system will have to afford full
information required for costing as well as for Financial Accounts. In other words, information
and data should be recorded in such a way so as to enable the firm to ascertain the cost
(together with the necessary analysis) of each product, job, process, operation or any
other identifiable activity. For instance, purchases are analysed by nature of material and
its end-use. Purchases account is eliminated and direct postings are made to stores
control account, work-in-progress accounts, or overhead account. Payroll is straightway
analysed into direct labour and overheads. It also ensures the ascertainment of marginal
cost, variances, abnormal losses and gains. In fact all information that management requires
from a system of costing for doing its work properly is made available. The integrated
accounts give full information in such a manner so that the profit and loss account and the
balance sheet can be prepared according to the requirements of law and the
management maintains full control over the liabilities and assets of its business.

The main advantages of integrated accounting are as follows:-


(i) Since there is one set of accounts, thus there is one figure of profit. Hence the
question of reconciliation of costing profit and financial profit does not arise.
(ii) There is no duplication of recording of entries and efforts to maintain separate set of
books.
(iii) Costing data are available from books of original entry and hence no delay is caused
in obtaining information.
(iv) The operation of the system is facilitated with the use of mechanized accounting.
(v) Centralization of accounting function results in economy.

Academics Department, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
Page 10 Page 10
Suggested Answer_Syl2008_June2015_Paper_8
7. (a) Draw-up a Flexible Budget for over head expenses of M/s Black & White Co. Ltd, on
the basis of the following data and determine the over head rate at 70%, 80% and
90% of plant capacity level (based on direct labour hours).
Variable overhead At 80% capacity
(`)
Indirect labour 12,000
Indirect Material 4,000
Semi- variable overheads
Power (30% fixed, 70% variable) 20,000
Repairs & Maintenance
(60% Fixed, 40% variable) 2,000
Fixed Overhead
Depreciation 11,000
Insurance 3,000
Others 10,000
Total overheads expenses 62,000

Estimated direct labour hours 1,24,000 hrs. 3+3+4=10

(b) State the accounting treatment of abnormal process loss and abnormal process gain.
3+2=5

Answer:
7. (a)
FLEXIBLE BUDGET FOR OVERHEAD
CAPACITY LEVEL
70% 80% 90%
` ` `
Variable overhead
1. Indirect Labour 10,500 12,000 13,500
2. Indirect Martial 3,500 4,000 4,500
Variable portion of semi variable overhead
1. Power 12,250 14,000 15,750
2. Repair & Maintenance 700 800 900
(A) Total variable O/H 26,950 30,800 34,650
Fixed portion of semi variable overhead -
1. Power 6,000 6,000 6,000
2. Repair & Maintenance 1,200 1,200 1,200
Fixed overhead -
1. Depreciation 11,000 11,000 11,000
2. Insurance 3,000 3,000 3,000
3. Others 10,000 10,000 10,000
(B) Total Fixed Overhead 31,200 31,200 31,200
Total Overhead 58,150 62,000 65,850
Estimated direct labour hours 1,08,500 1,24,000 1,39,500
Overhead recovery rate per direct labour
charges 0.5359 0.5000 0.4720

Academics Department, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
Page 11 Page 11
Suggested Answer_Syl2008_June2015_Paper_8
Working Variable Overhead `

12,000  70
1. Indirect Labour = `10,500
80

12,000  90
= `13,500
80
4, 000  70
2. Indirect materials = `3,500
70

4, 000  90
= `4,500
80
Semi-variable overhead
Power (70% variable 30% fixed)
20, 000  70
Variable overhead = `14,000
100

14, 000  90
= `12,250
80
14, 000  90
= ` 15,750
80

Repair & maintenance (40% variable 60% fixed)


20, 000  40
Variable overhead = `800
100
800  70
= `700
80

800  90
= `900
80
Estimated direct labour from at 80% capacity = 1,24,000
1, 24, 000  70
For 70% = = `1,08,500
80

1, 24, 000  90
For 90% = `1,39,500
80

(b) Treatment of abnormal loss & abnormal gain:


Abnormal Loss: If the units lost in the production process are more than the normal loss,
the difference between the two is the abnormal loss. The relevant process account is
credited and abnormal loss account is debited with the abnormal loss valued at full cost
of finished output. The amount realized from sale of scrap of abnormal loss units is
credited to the abnormal loss account and the balance in the abnormal loss account is
transferred to costing profit and loss account.

Abnormal Gain: If the actual production units are more than the anticipated units after
deducting the normal, loss, the difference between the two is known as abnormal gain.
The valuation of abnormal gain is done in the same manner like that of the abnormal loss.
The units and the amount is debited to the relevant process account and credited to the
Abnormal Gain Account.

Academics Department, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
Page 12 Page 12
Suggested Answer_Syl2008_June2015_Paper_8
8. Write short notes on any three of the following: 5×3=15
(a) VED Analysis.
(b) Material handling cost.
(c) Cost Reduction.
(d) Opportunity Cost.
(e) Cost-volume-Profit Analysis.

Answer:
8. (a) VED Analysis: This analysis divides items into three categories in the descending order
of their criticality as follows: -
o ‘V’ stands for vital items and their stock analysis requires more attention. The
reason is that if these items are not available, the resulting stock outs will cause heavy
losses due to stoppage of production. Thus these items are required to be stored
adequately to ensure smooth operation of the plant.
o 'E' means essential items. Such items are considered essential for efficient running but
without these items, the system will not fail. Care must be taken to see that they are
always in stock.
o 'D' stands for desirable items, which do not affect production immediately but
availability of these items will lead to more efficiency and less fatigue.
o Thus VED analysis can be very useful to capital intensive process industries. As it analysis
items based on their importance and it can be used for those special raw materials
which are difficult to procure.

(b) Material handling cost refers to the expenses involved in receiving, storing, issuing and
handling materials to deal with this cost in cost accounts. There are two prevalent
approaches to deal with this cost as under:
First one suggests the inclusion of these costs as part of the cost of materials by
establishing a separate material handling rate, e.g., at the rate of percentage of the
cost of material issued or by using a separate material handling rate which may be
established on the basis of weight of material issued.
Under another approach, these costs may be included along with those of
manufacturing overhead and be charged over the products on the basis of direct
labour or machine hours.

(c) Cost reduction: -


Cost reduction: The goal of cost reduction can be achieved in two ways, first is
reducing the cost per unit and the second one is increasing productivity. Reducing
wastages, improving efficiency, searching for alternative materials, and a constant
drive to reduce costs, can effect cost reduction. The following tools and techniques
are normal used for cost reduction.
(A) Value analysis or value engineering.
(B) Setting standards for all elements of costs and constant comparison of actual with
standard and analysis of variances.
(C) Work study.
(D) Job evaluation and merit rating.
(E) Quality control.

Academics Department, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
Page 13 Page 13
Suggested Answer_Syl2008_June2015_Paper_8
(F) Use of techniques like Economic Order Quantity.
(G) Classification and codification
(H) Standardization and simplification.
(I) Inventory Management.
(J) Benchmarking
(K) Standardization
(L) Business Process Re-engineering.
(d) Opportunity cost is the value of a benefit sacrificed in favour of an alternative course
of action. It is the maximum amount that could be obtained at any given point of
time if a resource was sold or put to the most valuable alternative use that would be
practicable. Opportunity cost of good or service is measured in terms of revenue
which could have been earned by employing that good or service in some other
alternative uses. Opportunity cost can be defined as the revenue foregone by not
making the best alternative use.
Opportunity costs represent income foregone by rejecting alternatives. They are,
therefore not incorporated into formal accounting systems because they do not
incorporate cash receipts or outflows. Opportunity costs are, however, very relevant
when examining alternative proposals or projects. When deciding whether or not to
allocate capital to a project it is highly desirable to consider if the money could
produce a better or worse return if invested elsewhere.

(e) Cost-volume-profit analysis. Profit of an undertaking depends upon a large number


of factors, the most importance of which are cost of manufacture, volume, of sales
and selling prices of product sold. The three factors of cost, volume and profit are
inter-connected and dependent on one another. For example, profit depends upon
sales, selling price to a large extent depends upon cost, and volume of sales
depends upon volume of production which in turn is related to cost. In cost-volume
profit analysis an attempt is made to measure variations in cost with variations in
volume. Of all these factors, which influence cost, often, outside factors, over which
management usually has no control, necessitate changes in volume and costs do not
always vary in proportion to the volume of output. This type of situations poses special
problems for management.
The cost-volume-profit relationship may be shown in statement form as shown below:
- Statement of Marginal cost and Profit
Product X (`)
Sales X
Less: Marginal cost:
Direct Materials X
Direct Labour X
Variable Overhead X
Contribution: X
Less: Fixed cost X
Profit X
Sales les marginal cost = Contribution
Contribution less Fixed Cost = Profit.

Academics Department, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
Page 14 Page 14

You might also like