Cost and Management Accounting

505 Pages·2016·6.18 MB·English

EXECUTIVE PROGRAMME
MODULE 1, PAPER 2

PRACTICE MANUAL

Cost and Management Accounting
APRIL 2016
Price : Rs. 300/-
© THE INSTITUTE OF COMPANY SECRETARIES OF INDIA
No part of this Publication may be translated or copied in any form or by any means
without the prior written permission of The Institute of Company Secretaries of India.

The PRACTICE MANUAL has been prepared by competent persons and the
Institute hopes that it will facilitate the students in preparing for the
Institute's examinations. It is, however, to be noted that the answers are to be
treated as model answers and not as exhaustive and there can be alternative
solutions available for a questions provided in this practice manual. The
Institute is not in any way responsible for the correctness or otherwise of the
answers.
The Practice Manual contains the information based on the Laws/Rules
applicable at the time of preparation. Students are expected to be well versed
with the amendments in the Laws/Rules made upto six months prior to the
date of examination.
Please note that the paper of Cost and Management Accounting is in
Optical Mark Recognition (OMR) format, but to give an insight into the
problem solving technique, this practice manual is prepared to build
competency in practical aspects by providing the students with a pool of
solved practical problems.

ISBN No. : 978-93-82207-70-2
Printed at : Chandu Press/1,000/April 2016
(ii)
PREFACE
“Knowledge is a treasure, but practice is the key to it”
-Lao Tzu

In the contemporary era, the global business is exemplified under the intense competition from
domestic as well as transnational players. Competitive advantages of the inclusive economy can
be achieved by placing right strategy in right direction. The successful achievement of the goals
requires constant update and brushing up of one’s specializations and skills. It is observed time
and again that the updating of knowledge is fundamental to development of changing times. In
line with the dynamic nature of the economy, the students must be equipped and thorough in
their analytical abilities to work in the dynamic environment. This demands the development of
basic theoretical concepts as well as practical aspects of this growing and competitive
specialization.
In lines with updating the information, the Institute in the past brought Practice Manual on
Financial Treasury and Forex Management (Professional Programme) and Company Accounts
and Auditing Practices (Executive Programme). Now, we are presenting the Practice Manual
prepared specifically for the subject “Cost and Management Accounting” to the students of
Executive Programme. This Practice Manual is a learning instrument which serves as a refresher.
Though the pattern of the paper will be in OMR format, but to give an insight into the problem
solving technique, this Practice Manual is prepared to build competency in practical aspects by
providing the students with a pool of solved practical problems.
This Practice Manual is not intended to replace the study material but to supplement the same.
Therefore, the students are expected to make a holistic study of both the study material and
Practice Manual to gain maximum benefit and acquire in-depth knowledge of the subject.
I acknowledge with thanks all those experts, authors and institutions whose material has been
consulted and referred in preparation of this Practice Manual. I place on record my sincere
appreciation to Ms. Akansha Rawat, Executive (Academics) in the Academic Team at the Institute
headed by Ms. Sonia Baijal, Director for this initiative.
I have great pleasure in introducing this practice manual to the students. I am sure, this manual
will prove to be useful and beneficial to the students. Therefore, I advise all the students to take
maximum benefit out of it by meticulously practicing the questions given therein. As the saying
goes “Practice makes a man perfect”, practicing more will develop clear knowledge of
fundamental concepts to solve practical questions correctly and give a stronger hold in the
subject.
My best wishes to you all!
New Delhi CS Mamta Binani
25th April, 2016 President, ICSI
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CONTENTS
Sl. No. Subject Page No.
1 Introduction to Cost and Management Accounting 1
2 Material Cost 9
3 Labour Cost 55
4 Direct Expenses and Overheads 86
5 Activity Based Costing 132
6 Cost Records 192
7 Costing Systems 259
8 Marginal Costing 303
9 Standard Costing 354
10 Budget, Budgeting and Budgetary Control 391
11 Cost Accounting Records and Cost Audit 428
12 Analysis and Interpretation of Financial Statement 434

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Introduction to Cost and
Question 1
Management Accounting

Question 1
Define costing and discuss its objectives.
Answer
Costing is defined as the technique and process of ascertaining costs. The technique refers
to principles, which are applied for ascertaining cost of products, jobs, processes and
services. Costing involves the classifying, recording, and appropriate allocation of
expenditure for the determination of costs of products or services; the relation of these
costs to sales values and the ascertainment of profitability.
In practice, the terms costing, cost accounting and cost accountancy are most often used
interchangeably although they are defined differently. The main objectives of costing may
be summarised as follows:
(i) To analyse and classify all expenditures with reference to the cost of products and
operations.
(ii) To arrive at the cost of production of every unit, job, operation, process,
department or service and to develop cost standard.
(iii) To indicate to the management any inefficiencies and the extent of various forms of
waste, whether of materials, time, expenses or in the use of machinery, equipment
and tools. Analysis of the causes of unsatisfactory results may indicate remedial
measures.
(iv) To provide data for periodical profit and loss accounts and balance sheets and also,
to explain in detail the exact reasons for profit or loss revealed in total in the profit
and loss account.
(v) To reveal sources of economies in production having regard to methods, types of
equipment, design, output and layout.
(vi) To provide actual figures of cost for comparison with estimates and to serve as
guide for future estimates or quotations and to assist the management in their
price fixing policy.
(vii) To analyse the variance between budgeted and actuals so that corrective action
may be taken.
(viii) To present comparative cost data for different periods and various volumes of
output.
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(ix) To record the relative production results of each unit of plant and machinery in use
as a basis for examining its efficiency.
(x) To provide information to enable management to make short-term decisions of
various types.
Question 2
The scope of Cost accounting is very wide. Discuss
Answer
The Scope of Cost Accounting is very wide and includes:

(a) Cost Ascertainment: The main function of cost accounting is the ascertainment of
cost of product or services rendered. It includes collection, analysis of expenses and
measurement of production at different stages of manufacture. The collection,
analysis and measurement requires different methods of costing for different types
of production such as Historical costs, Standard costs, Process cost, Operation cost
etc. It can be done in two ways, namely
(i) Post Costing, where the ascertainment of cost is done based on actual
information as recorded in financial books.
(ii) Continuous Costing, where the process of ascertainment is of a continuous
nature i.e. where cost information is available as and when a particular
activity is completed, so that the entire cost of a particular job is available
the moment it is completed.
(b) Control of Costs: In the era of competition, the goal of every business is to sustain; in
costs at the lowest point with efficient operating conditions. To sustain, It is
essential to examine each individual item of cost in the light of the services or
benefits obtained so that maximum utilisation of the money expended or- it may be
recovered. This requires planning and use of standard for each item of cost for
locating deviations, if any, and taking remedial measures.
(c) Proper matching of cost with revenue: In cost accounting manager prepares monthly
or quarterly statements to reflect the cost and income data identified with the sale
of that period.
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(d) Aids to Management Decision-making: Decision-making is a process of choosing
between two or more alternatives, based on the resultant outcome of the various
alternatives. A Cost Benefit Analysis also needs to be done. All this can be achieved
through a good cost accounting system
Question 3
The limitations of financial accounting have made the management to realize the
importance of cost accounting. In the light of the above briefly discuss the various
advantages of cost accounting.
Answer
Cost accounting increases the overall productivity of an organisation and serves as an
important tool, in bringing prosperity to the nation. Thus, the importance of cost
accounting can be discussed as under:

(a) Costing as an Aid to Management
Cost accounting provides invaluable aid to management. It provides detailed costing
information to the management to enable them to maintain effective control over
stores and inventory, to increase efficiency of the organisation and to check wastage
and losses. It facilitates delegation of responsibility for important tasks and rating of
employees.
(b) Costing as an Aid to Creditors
Investors, banks and other money lending institutions have a stake in the success of
the business concern and are, therefore, benefited immensely by the installation of
an efficient system of costing. They can base their judgment about the profitability
and future prospects of the enterprise on the costing records.
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(c) Costing as an Aid to Employees
Employees have a vital interest in their employer’s enterprise in which they are
employed. They are benefited by a number of ways by the installation of an efficient
system of costing. They are benefited, through continuous employment and higher
remuneration by way of incentives, bonus plans, etc.
(d) Costing as an Aid to National Economy
An efficient system of costing brings prosperity to the business enterprise which in
turn results in stepping up of the government revenue. The overall economic
development of a country takes place as a consequence increase in efficiency of
production.
Question 4
Define and explain the term (a) cost centre and (b) cost unit.
Answer
(a) Cost centre
According to the Chartered Institute of Management Accountants, London, cost
centre means, “a production or service location, function, activity or item of
equipment whose costs may be attributed to cost units”. Cost centre is the smallest
organisational sub-unit for which separate cost collection is attempted. Thus cost
centre refers to one of the convenient unit into which the whole factory organisation
has been appropriately divided for costing purposes.
Cost centres may be classified as follows:
(i) Productive, Unproductive and Mixed Cost Centres
(ii) Personal and Impersonal Cost Centre
(iii) Operation and Process Cost Centre
(b) Cost unit
The Chartered Institute of Management Accountants, London, defines a unit of cost
as “a unit of product or service in relation to which costs are ascertained”. A cost
unit is a devise for the purpose of breaking up or separating costs into smaller sub-
divisions. These smaller sub-divisions are attributed to products or services to
determine product cost or service cost or cost of time spent for a particular job etc.
For example:
Industry/Product Cost unit
Automobile Number
Brick works 1000 bricks
Cement Tonne
Transport Tonne - Kilometre
Passenger - Kilometre
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Question 5
Distinguish between:
(a) Cost accounting and management accounting
(b) Imputed Costs and Common Costs
Answer
(a) Cost accounting and management accounting
Cost Accounting Management Accounting
1. Cost accounting is concerned Management accounting is concerned with
with the ascertainment, impact and effect aspect of costs.
allocation, distribution and
accounting aspects of costs.
Cost accounting data generally
2. The management accounting data is
serves as a base to which the tools
derived both, from the cost accounts and
and techniques of management
financial accounts.
accounting can be applied to
make it more purposeful and
management oriented.
3. A cost accountant collects and Management accountant analyses and
presents costing data. decides specific business problems on the
basis of data available.
4. The cost accountant is generally The management accountant generally is
placed at a lower level of placed at a higher level of hierarchy.
hierarchy.
5. The approach of the cost The approach of management
accountant is much narrower accountant is wider as it includes
interpretation of economic and
statistical data along with the costing data.
6. Tools and techniques like Management accounting, in addition to
variable costing, break-even the techniques of cost accounting, uses
analysis, standard costing, etc., other techniques like cash flow, ratio
are used. analysis, etc.
7. Cost accounting does not include Management accounting includes both
financial accounting and has financial accounting as well as tax
nothing to do with tax accounting. It also embraces tax
accounting. planning and tax accounting.
8. Cost accounting is more Management accounting is concerned
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