Internal Assignment April 2023 Exam.

: Cost & Management Accounting

Answer for Question 1:

Introduction:

The costing accounting is very important for a firm to achieve competitive advantage. It deals
with identifying cost per unit, cost allocation, and cost monitoring and control; determining selling
price; etc. Various cost control and cost reduction measures help a firm to improve its profitability
and thus achieve financial efficiency in business.

Managerial accounting is a different kind of mechanism which is being used as a decision-making

science. It is an integral part of management process where the managers decide various strategies
based on financial accounting and cost accounting information and data. The process involves
identification of relevant information, measurement and analysis of data and its interpretation
from a decision point of view.

Concepts and applications:

Marginal costing also called as variable costing is a concept where all the variable costs of
production are charged to the units produced and the total fixed cost is charged against the
contribution (total sales revenue minus total variable cost). In this concept the cost is ascertained
only based on the variable cost. Marginal cost can be understood as a change in the total cost of
production producing one additional unit.

Variable cost:

These variable costs can be specified as those that alter with the sales volume. Therefore,
the variable cost is critical in determining earnings when taken care of costs is constant.

The features of variable costs are that per unit variable cost remains the same whereas the
total variable cost will change with production.

Fixed cost:

The costs that remain fixed up to a particular level of production irrespective of changes in
the production volume are known as fixed costs. The peculiarity of fixed cost is that the
total costs remain same while per unit fixed cost comes down with the increased level of
production.
 Contribution:

Contribution is the difference between sales and variable cost. It is on the basis of the
contribution of a product that production and sales policies are designed by a firm.

a) Profit volume ratio-

The PV or profit volume ratio calculates the price of change of gains due to the distinction
in the sales volume. So, basically P/V ratio is used to measure the level of contribution
made at different volumes of sales.

It is influenced by sales and variable or marginal cost. If the sale price increases without a
corresponding increase in marginal cost, the contribution increases-and the profit-volume
ratio improves. Similarly, if the marginal cost is reduced with sale price remaining same-
profit-volume ratio improves.

To calculate the PV ratio, the following formula is used-

1. PV ratio= Contribution/Sales revenue

Whereas,

Contribution= Sales revenue - Total variable cost

Sales = Fixed Cost + Variable cost + Net Profit

2. Total cost =Sales- Net profit

3. Total cost= Fixed cost+ variable cost

PV Ratio Calculation:

Inputs parameters from X Ltd.

a. Sales = ₹1,00,000
b. Net profit = ₹10,000 and
c. Fixed overheads/Cost = ₹15,000.

Variable cost for the period:

Sales = Fixed Cost + Variable cost + Net Profit

₹1,00,000 = ₹10,000 + Variable cost + ₹15,000.

Variable cost = ₹1,00,000 - ₹10,000 - ₹15,000.

 = ₹75,000/-

Contribution for the period:

= Sales revenue - Total variable cost

= 1,00,000 - 75,000

= ₹ 25,000/-

PV ratio for the period:

= ₹ 25,000 / ₹1,00,000

= 1:4 or 25%

The major advantage of profit-volume ratio is that it can be used to measure profitability
of each product, or group of them, to examine the necessity for continuance of such
production. It may also be used to measure the profitability of each production or
Manufacturing Centre, process, or operation.

One fundamental property of profit-volume ratio is that it remains same at various levels
of operation and, thus, break-even point; required selling prices to maintain profits at
various levels etc. can be easily calculated by suitable application of this ratio.

b) Breakeven point sales (Cost-Volume-Profit) analysis-

A break-even point for a business refers to a stage where total revenue equals the total cost
and is an important tool for business. It will help to determine when the business will
become profitable.

The breakeven factor formula is computed by splitting the total costs related to
Manufacturing by the income per specific unit minus the variable cost of each.

CVP analysis makes several assumptions, including that the sales price, fixed and variable
costs per unit are constant.

In this situation, the taken care cost can be specified as those that do not change with the
sales volume adjustment.

Breakeven point = Fixed cost/ Contribution margin

= ₹15000 / ₹25000
 = 0.6

c) Volume of sales to earn a profit of ₹15,000-

The volume of sales can decide the future of a business and growth of the organization. If
a firm can make a greater sales volume, it is more likely to make even more profits from
its sales, keeping in view the significance of the expense it must sustain for its sales. On
the other hand, the company has to offer its products at high volumes to gain substantial
profits, which is the primary demand of running an organization.

P/V Ratio = Contribution/Sales revenue

or, P/V Ratio = Fixed Cost + Profit/Sales

or, Sales = Fixed Cost + Profit/P/V ratio = F + P/P/V ratio

The volume of sales to earn a targeted profit of ₹15,000

Target Sales = Fixed Cost + Targeted Profit / P/V ratio

= (₹15,000 + ₹15,000) / 25%

= ₹ 1,20,000/-

d) Net profit from the revised sales of ₹1,50,000-

To calculate the revised Net Profit, the following formulas shall be used.

P/V ratio = Contribution / Sales revenue

And

Contribution= Fixed Cost + Net Profit

Considering that the PV ratio remain unchanged with increase sale volume.

Sale revenue * P/V Ratio = Fixed Cost + Net Profit

₹1,50,000 x 25% = ₹15,000 + Net Profit

Net Profit = ₹ 22,500/-

Answer for Question 2:

Introduction:

In accounting, a typical costing system can be specified as a device for handling and regulating
costs, planning budgets, and evaluating cost administration performance.

Chartered Institute of Management Accountants defines standard costing as “the pre-determined

cost based on technical estimate of material, labor and overheads for a selected period of time and
for the prescribed set of working conditions.”

It can be defined as the costs for normal production efficiency at a standard level of output.
It is also known as Ideal Cost.

The Standard costing measures the variances from standard cost under various costs and find out
the reasons for variances to enable organizations to take corrective actions and finding ways to
enhance cost control, functional efficiency, and cost monitoring.

Concepts and applications:

The standard costing tool is vital for the company's success, and it must be mounted. It helps in
doing performance check of work.

The main aims of Standard Costing are:

• Cost determination
• Cost comparison
• Control on Variances
• Reporting to Management
• Revision of cost if needed

The followings are the various steps involved in adopting standard costing.

1. Determination of cost Centre-

The cost center is necessary for fixing responsibility and taking care of costs. Cost facilities in the
manufacturing and manufacturing departments are developed according to the number of items
produced and the variety of areas, number of sections, or divisions involved in the production
process.
A cost center associated with a person is called a personnel cost center, and a cost center linked to
products and equipment is called an impersonal cost.

2. Classification of accounts-

The costs are incurred in various stages of the production process. These costs should be taped
systematically and correctively for the exact estimation of overall costs incurred by the firm. For
cost control under standard costing system classification of accounts is must.

3. Codification of accounts-

The different accounts shall be codified using different symbols to facilitate quick collection,
communication, and reporting. The following codes can be used for elements of cost.

4. Setting of standards-

A standard can be specified as a suitable forecast and attained over a future duration of time,
generally in the following financial year. The success of a standard costing system is based on the
validity, reliability, and acceptance of these standards.

Three types of standards i.e., basic standard, the current standard, and the typical standard exist in
the standard costing system. The current standard is divided into two i.e., ideal standard and
expected or attainable standard.

5. Establishing Standard Cost-

Standard costs are established for each element of cost separately. In general. the Cost elements
are organized as material, work or labor, expenses, and products. In addition, the standard price
for sales is also established likewise.
6. Preparing a standard cost card or basic cost sheet-

Basic cost sheet or standard cost card is ready separately process-wise or product-wise.

7. Setting physical standards-

To operate the system properly, the standards of physical activity for various departments should
be worked out. For direct materials, the standards quantity after a product study or engineering
study must be determined with reference to quality and size of material is required for each unit of
production.

8. Study for labor and Machine operations-

Each product must be assessed carefully from manufacturing requirement point of view to
discover numerous operations to be implemented by machines and grades of labor required. To
carry out the various operations, the plant machinery and tools are needed in departments and a
standard time is required to perform such operations. This study will help in establishing machine
and labor cost standards.

9. Study of market conditions-

The study of market condition and the price trend for a definite period is required to set cost
standards. This study will be significant in establishing product price standards. The labor cost
standards can be established by examining and reviewing information about the ongoing wage
rates in market. The cost standard for overhead costs and the degree of dividing forecasted activity
in budget plan duration should be anticipated. The standard expenses rate will be acquired by
splitting forecasted expenses by the approximated degree of the task for the budget period.

10. Organization for standard costing-

A committee is formed to establish the standards. If so, the objectives and goals of the
conventional costing system can be quickly accomplished.

Conclusion:

Standard costing system provides standard cost for budgeting purpose to plan future performance
of an organization. Standards are pre-determined, and it helps organization to achieve its
objectives in economic and efficient manner. It has great advantage in motivating employee to
achieve set standards of production/expenses level i.e., ideal standards. A standard costing system
initially records the cost of production at standard. Standards are compared with actual outcomes
to find deviations and reasons for these deviations, so that corrective action can be taken. Rewards
can be given, and Disciplinary action can be taken based on pre-defined criteria.
Answer for Question 3a:

Introduction:
An integrated accounting system is a type of software that combines major financial accounting
functions into one application. Integrated accounts can be declarations in which the cost
accounting and monetary deals are combined. When the monetary accounts and the cost are
incorporated and taped in the same collection of books, it is called integrated accounts.

Concept &Application:
Managerial accounting has been termed as a decision-making science is an integral part of
management process where the managers decide various strategies based on financial accounting
and cost accounting information and data. Thus, management accounting uses accounting
information and other provisions for arriving at various operational decisions to bring efficiency
in the functioning of a firm.

The management accounting strategies use the decision-making tools such as the value chain
system, allocation of costing through activity-based costing (ABC), target costing and cost
analysis for pricing decisions, responsibility centres and linking balanced score card to
organizational strategies. And to achieve the successful implementation of above-mentioned
management accounting strategies, the role of integrated accounting system comes in picture.

Features of an integrated accounting system-

Integrated accounting allows all business systems of an organization to connect so that they work
together seamlessly. In the past, the businesses used separate tools for separate purposes…
accounting, invoicing, sales, customer management, and so on. The Management of all these
different data streams and ensuring consistency across reports was resource-intensive, often
inaccurate, and frustrating and evolvement of Cloud-based accounting platforms nowadays have
changed all that.

Advantages of integral accounting-

Integrated accounting has grown in popularity alongside the boom in cloud-based accounting.
And after the Covid-19 pandemic which forced businesses to move away from outdated processes
and embrace efficiency. Now, the integral accounting is considered as a requirement and essential
part of finance function.

1. Maintain data integrity through inputs and outputs:

- Avoid duplication of work

In a combined statement, a single entry for one transaction is passed. Thus, there is no
requirement to record transactions at multiple places. Consequently, it helps in avoiding
duplication of work. There are two problems with duplicacy, first it costs labor and time
that could otherwise be committed to more reliable tasks. The other trouble is that it
invites omissions and errors that either demand more labor or time to deal with and find or
require correction.

The other advantages are-

- Accuracy of data
- Centralization of accounts
- Improved coordination between different department.
2. No reconciliation required
There is no need for Reconciliation as we get only one profit and loss figure in the set of
accounts.

3. Economical
Instead of multiple ledgers, we need to maintain only one set of books, saving time and
money. The added benefit of these time-saving automations is a reduction in operational
costs otherwise spent on manual tasks.

4. Cumulative Knowledge
A combination of cost and financial knowledge results in better output.

5. Integrated accounting provides real-time information-

Standalone accounting is always behind as it gives a possibility or waits for somebody to

get information from the buying system and reenter it in the accounting system by hand.

Integrated accounting helps us obtain a complete real-time photo of the business at any
moment. A web-based business management system with integrated accounting also
provides us with complete and precise financials.

6. Scalability through automation

Cloud-based automations and integration make it possible for businesses to scale quickly
providing the real time information.

7. Free up time for value added tasks

Cloud accounting and integrated systems are now changing the way accountants work for
the benefit of both the business and their own pleasure in the task at hand. Previously,
accounting functions such as VAT returns and bank reconciliation were laborious and time
intensive. Now, most of the manual work is done with the help of computers and
accountants can be better utilized. Now accountants can focus on reporting, trends and
advisory work rather than tasks like admin and data entry.

Conclusion:

An integrated accounting system is maintaining of cost and financial accounts into one. It
retrieves data and information from both departments and prepares a summary of all the costs and
financial transactions.
With the help of an integrated accounting system, one can reduce duplication of work, it saves
costs as the preparation of accounts takes place in a consolidated form.

The integrated accounting systems can be adopted by all companies irrespective to the sizes they
have. Large firms might develop customized systems internally; although, such systems are the
most expensive and are designed to work with in-house customer service and support.
Answer for Question 3b:

Introduction:

1. Halsey premium plan:

Halsey premium plan developed by F. A. Halsey, an engineer in USA is a technique entails

standard time for doing each unit or job and the worker’s earnings are calculated for the real-time
he worked to finish the job or operation at the concurred price per hour plus extra money as perk
equal to one-half of the incomes of the time saved. In truth, the costs are between 33 cents to 66
percent of the salaries of the moment held.

Total earnings by worker = H X R + [50%× (S – H) X R]

where H are the hours worked or consumed to complete the work, R is the rate per hour and S is
the standard time.

2. Rowan plan:

In this plan, bonus hours are calculated in proportion to the time taken, which the time saved bears
to the time allowed and they are paid for at time rate. If the time consumed by the worker exceeds
the standard time, worker is paid according to the moment price. That is, the time consumed
increased by the price per hour.

where H are the hours worked or consumed to complete the work, R is the rate per hour and S is
the standard time.

Concepts and applications:

Inputs: From M/s ABC Private Limited

Standard time (S): 40 hours

Actual time taken /Hours Worked (H): 30 hours

Time saved by worker: 40- 30 = 10 hours

Rate per hour (R): Rs. 75/hour

1. Total Earnings as per Halsey Premium Plan:

Halsey premium= Hours worked*rate per hour + (50%*time saved*rate per hour)

=30x75 + (50/100 x 10 x 75)

=2250 + 375 (½ x 10 x 75)

=₹ 2625

2. Total Earnings as per Rowan Plan:

Rowan plan = Hours worked*rate per hour + (time taken/time allowed*time

saved*rate per hour)

=30 x 75+ (30/40 x 10 x 75)

=2250+ (30/4 x 75)

=2250+562.5

=₹ 2812.5

If the worker finishes the job before the standard time, he is qualified for an incentive and the
moment wage. An incentive can be the percentage of a worker's time limit. This means the
premium/bonus is established on the price of salary earned for working and is not determined for
the time saved, as when it comes to Halsey's plan, the perk portion is equal to the percentage of
the time dedicated to the standard time.

Conclusion:

Under the Rowan plan when time saved is less than 50% of standard time, earnings per hour is
higher whereas under the Halsey plan when time saved is more than 50% of standard time,
earnings per hour is higher.

In this case study, the time saved (10 hours) by the ABC’s worker is less than the 50% of standard
time (40 hours), the Rowan plan will provide higher earnings per hour to the worker.

Under Halsey plan, the bonus increases steadily with increase in efficiency. But in Rowan's plan,
the bonus increases up to a certain point and starts declining thereafter.