TYBAF SEM-6 Cost Accounting (April 2019 Question Paper with Solutions)

Paper/Subject Code: 85602/Cost Accounting - IV

TYBAF SEM-6: 

Cost Accounting

(April 2019 Question Paper with Solutions)

Course: TYBAF

Semester : VI

Subject : Cost Accounting

University : University of Mumbai

Exam : April 2019

Introduction

This article provides the TYBAF Semester 6 Cost Accounting question paper for the April 2019 examination along with detailed solutions. The solutions are explained step-by-step to help students understand the method used to solve each problem and prepare for their university examination.

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NOTE: 

1- All questions are compulsory.

2- Figures to the right indicate marks.

3- Working notes are forming part of your answers.

Q.1A) State whether the statements are True or False (Rewrite the sentence) Any eight (08)

1) Sales budget can be prepared only area wise

Ans: False

2) Purchase Budget can be determined only in quantity

Ans: False

3) Absorption costing and Marginal costing are same

Ans: False

4) Effect of price reduction always improves profit volume ratio

Ans: False

5) Under Marginal Costing stocks are over valued

Ans: False

6) Variable cost per unit remains constant at all level of activity

Ans: True

7) Imputed cost is also known as Notional cost

Ans: True

8) Margin of Safety determines profit of the Organization

Ans: True

9) Increase in Profit Volume ratio decreases Break Even Point

Ans: True

10) Cash Budget determines budgeted receipts and payments

Ans: True

B) Match the Following Any seven:                (07)

Column A	Column B
1) Key factor	A) Non cash item
2) Marginal Cost	B) Gang composition
3) Sale Mix	C) In quantity
4) Budgetary Control	D) Part of Material usage variance
5) Standard Costing	E) Fixed and variable overheads
6) Flexible Budget	F) Predetermined
7) Material yield variance	G) Budget Manual
8) Production budget	H) Multiple products
9) Labour mix variance	I) Prime cost + variable overheads
10) Depreciation	J) Limiting factor

 Ans:

Column A	Column B
1) Key factor	J) Limiting factor
2) Marginal Cost	I) Prime cost + variable overheads
3) Sale Mix	H) Multiple products
4) Budgetary Control	G) Budget Manual
5) Standard Costing	F) Predetermined
6) Flexible Budget	E) Fixed and variable overheads
7) Material yield variance	D) Part of Material usage variance
8) Production budget	C) In quantity
9) Labour mix variance	B) Gang composition
10) Depreciation	A) Non cash item

 

Q2) ABC Ltd Furnishes you the following income information for the Year 2018     (15)

	First Half	Second Half
Total cost	8,00,000	14,00,000
Profit earned	2,00,000	6,00,000

From the above you asked to compute the following assuming that the fixed cost remains the same in both the periods

1. Profit/Volume Ratio

2. Fixed cost Annual

3. Sales, required to earn the profit of 7,50,000.

4. Profit required to earn, at sales of 45,00,000

5. BEP for the whole year

Solution

OR

Q.2 Akash Ltd produces three Product I,J, and K From the same manufacturing facilities. The cost and other details of the three products are as follows: (15)

Particulars	I	J	K
Selling Price Per Unit (₹)	250	200	150
Variable Cost Per unit (₹)	150	150	60
Fixed Cost per month 3,00,000
Maximum Production per month (units)	6000	10000	8000
Total Hours available for the month 400 hours
Maximum Demand per month (units)	4000	6000	4800

The Processing hours cannot be increased beyond 400 hour per month

You are required

a) Compute the most profitable product mix

b) Compute the overall break even sales of the company for the month based on the mix Calculated in (a) above

Solution

Q3) Prepare a Cash Budget of Raigad Ltd. for March, April and May 2019 from the following information given below: (15)

Months	Sales (Rs.)	Purchases (Rs.)	Wages (₹)	Expenses (Rs.)
Jan	1,80,000	70,000	20,000	5,000
Feb	1,50,000	60,000	18,000	8,000
March	1,40,000	80,000	25,000	9,000
April	1,00,000	60,000	24,000	8,000
May	90,000	50,000	20,000	6,000
June	80,000	40,000	18,000	5,000

1. 20% of the purchases and 10% of sales are for cash.

2. The average collection period of the company is month.

3. Credit purchases are paid regularly after one month.

5. Sales commission of 2% of Total Sales is to be paid in the month following actual sales.

4. Delay in payment of wages ½ month.

6. Rent of 2000 included in expenses is paid monthly and other expenses are paid after one month lag.

7. Cash balance on May 31, 2019 may be assumed to be 65000.

8. Dividend of 5,000 will be received in May 2019.

Solution

OR

Q3 Prepare a Flexible budget of Kothaligad Ltd at 50% & 75% capacity with per unit and calculation profit, on the basis of the following data.     (15)

Variable overheads:	At 60% capacity- (6000 units) (₹)
Direct Material	15
Labour	9
Semi-variable overheads:
Electricity: (40% Fixed)	10
Repairs: (20% Variable)	15
Fixed overheads:
Depreciation	25,000
Insurance	12,500
Salaries	30,000

Profit 25% on Sales.

Estimated direct labour hours- 72,000.

Solution

Q.4 From the following information about sales calculate:

(a) Sales Value Variance

(b) Sales Price Variance

(c) Sales Volume Variance

(d) Sales Mix Variance

(e) Sales Quantity Variance

Product	Standard		Actual
	Units	Price p.u.	Units	Price p.u
X	50,000	6	60,000	7
Y	22,000	7	30,000	8
Z	28,000	8	30,000	8

Solution

OR

Q4. From the following, calculate Labour Variances:            (15)

Type of workers	Standard			Actual
	No. of workers	No. of Hours	Rate per (Rs.) Hours	No. of workers	No. of Hours	Rate per (Rs.) Hours
Skilled	40	50	4	35	50	4.50
Semi-skilled	20	20	3	30	30	3
Unskilled	20	30	2	26	25	2.50

Budgeted and Actual outputs are same

Solution

Q.5 A) Distinguish between Absorption costing and Marginal costing

Absorption Costing

Absorption costing, also known as full costing, is a managerial accounting method that captures all manufacturing costs associated with a product. This includes direct materials, direct labor, and both variable and fixed manufacturing overheads. Under this method, all costs are absorbed by the units produced, meaning that inventory on hand includes all manufacturing costs.

Marginal Costing

Marginal costing, also referred to as variable costing or direct costing, is a costing technique that only considers variable costs in the calculation of product costs. This method includes direct materials, direct labor, and variable manufacturing overheads, while fixed manufacturing overheads are treated as period costs and are expensed in the period incurred.

Features

Absorption Costing

• Inclusion of Costs: Absorption costing includes both variable and fixed manufacturing costs in product costs.

• Inventory Valuation: Inventory is valued at full cost, which can lead to higher inventory values on the balance sheet.

• Profit Reporting: Profit can vary based on inventory levels, as unsold inventory absorbs fixed costs.

• Compliance: Generally accepted accounting principles (GAAP) and International Financial Reporting Standards (IFRS) require absorption costing for external financial reporting.

Marginal Costing

• Inclusion of Costs: Marginal costing includes only variable costs in product costs, treating fixed costs as period expenses.

• Inventory Valuation: Inventory is valued at variable cost, leading to lower inventory values on the balance sheet.

• Profit Reporting: Profit is more directly related to sales volume, as fixed costs do not affect the cost of goods sold.

• Decision-Making: Marginal costing is often used for internal decision-making, such as pricing and product mix decisions.

Advantages

Absorption Costing

1. Comprehensive Costing: Provides a complete view of product costs, including fixed overheads.

2. Financial Reporting: Aligns with external reporting requirements, making it suitable for financial statements.

3. Inventory Management: Encourages production to meet demand, as fixed costs are spread over more units.

Marginal Costing

1. Simplicity: Easier to understand and apply, focusing on variable costs.

2. Decision-Making: Facilitates better decision-making regarding pricing, product discontinuation, and cost control.

3. Profitability Analysis: Provides clearer insights into the contribution margin and break-even analysis.

Disadvantages

Absorption Costing

1. Complexity: More complex to implement and maintain due to the allocation of fixed costs.

2. Profit Manipulation: Can lead to profit manipulation through inventory management, as producing more can inflate profits.

3. Less Useful for Decision-Making: May not provide relevant information for short-term decision-making.

Marginal Costing

1. Exclusion of Fixed Costs: Ignores fixed costs in product costing, which can lead to underestimating total costs.

2. Not GAAP Compliant: Not suitable for external financial reporting, limiting its use in formal financial statements.

3. Potential Misleading Profitability: Can mislead management if fixed costs are significant and not considered in pricing strategies.

Applications

Absorption Costing

• Used for external financial reporting and compliance with accounting standards.
• Suitable for manufacturing companies where fixed overheads are a significant portion of total costs.
• Helps in assessing profitability over longer periods, especially when inventory levels fluctuate.

Marginal Costing

• Commonly used for internal decision-making, such as pricing strategies and cost control.
• Useful in break-even analysis and determining the impact of sales volume on profitability.
• Employed in scenarios where management needs to make quick decisions based on variable costs.

B) Explain budgetary control along with its advantage and disadvantage

Budgetary control is a financial management tool that helps organizations plan their expenditures and revenues. It involves creating budgets that serve as benchmarks for measuring performance. The process typically includes:

1. Budget Preparation: Developing a detailed financial plan for a specific period, usually a year.

2. Budget Implementation: Executing the budget by allocating resources according to the plan.

3. Performance Measurement: Regularly comparing actual financial performance with the budgeted figures.

4. Variance Analysis: Identifying discrepancies between budgeted and actual figures and analyzing the reasons behind them.

5. Corrective Actions: Making necessary adjustments to align actual performance with budgetary goals.

Advantages of Budgetary Control

1. Enhanced Planning: Budgetary control facilitates better planning by providing a clear financial roadmap. It helps organizations set realistic financial goals and allocate resources effectively.

2. Performance Measurement: By comparing actual results with budgeted figures, organizations can assess their performance. This helps in identifying areas of improvement and recognizing achievements.

3. Resource Allocation: Budgetary control ensures that resources are allocated efficiently. It helps in prioritizing expenditures based on organizational goals and objectives.

4. Cost Control: Organizations can monitor their spending and identify areas where costs can be reduced. This leads to better financial discipline and helps in avoiding overspending.

5. Motivation and Accountability: Setting budgets can motivate employees to achieve financial targets. It also fosters a sense of accountability, as individuals and departments are responsible for adhering to their budgetary limits.

6. Improved Decision-Making: With accurate financial data and performance metrics, management can make informed decisions regarding investments, expansions, and other strategic initiatives.

Disadvantages of Budgetary Control

1. Rigidity: Budgets can be inflexible, making it difficult for organizations to adapt to changing circumstances. Unexpected events may require adjustments that are not easily accommodated within a fixed budget.

2. Time-Consuming: The process of preparing and monitoring budgets can be time-intensive. It requires significant effort from various departments, which may divert attention from other critical tasks.

3. Inaccuracy: Budgets are based on estimates and assumptions, which can lead to inaccuracies. If the initial assumptions are flawed, the entire budget may become irrelevant.

4. Short-Term Focus: Budgetary control often emphasizes short-term financial goals, which can lead to neglecting long-term strategic objectives. This may hinder innovation and growth.

5. Potential for Manipulation: Employees may manipulate budget figures to meet targets, leading to unethical practices. This can undermine the integrity of the budgeting process.

6. Resistance to Change: Employees may resist budgetary control measures, viewing them as restrictive. This can create a negative organizational culture and hinder collaboration.

OR

Q5 Write short notes (any three):                (15)

a. Zero based budgeting

Zero-Based Budgeting is a powerful financial tool that promotes efficiency and accountability in resource allocation. By requiring organizations to justify every expense from scratch, ZBB encourages a thorough examination of costs and benefits, fostering a culture of financial discipline. 

Principles of Zero-Based Budgeting

1. Start from Zero: Each budgeting cycle begins with a clean slate, meaning that all expenses must be justified anew, rather than relying on historical data.

2. Justification of Expenses: Every department must provide a detailed explanation of its budget requests, focusing on the necessity and impact of each expense.

3. Prioritization of Needs: ZBB encourages organizations to prioritize their needs based on strategic goals, ensuring that resources are allocated to the most critical areas.

4. Involvement of All Levels: ZBB requires input from various levels of the organization, promoting a collaborative approach to budgeting.

5. Focus on Outcomes: The emphasis is on achieving specific outcomes and results, rather than merely adhering to budgetary constraints.

Advantages of Zero-Based Budgeting

1. Cost Efficiency: By scrutinizing every expense, organizations can identify and eliminate unnecessary costs, leading to more efficient use of resources.

2. Alignment with Strategic Goals: ZBB ensures that budgeting aligns with the organization’s strategic objectives, allowing for better resource allocation.

3. Enhanced Accountability: Departments are held accountable for their budget requests, fostering a culture of responsibility and transparency.

4. Flexibility: ZBB allows organizations to adapt to changing circumstances and priorities, making it easier to respond to new challenges and opportunities.

5. Improved Decision-Making: The detailed analysis required in ZBB leads to better-informed decisions regarding resource allocation.

b. Cost volume Profit relationship

CVP analysis is a tool that assists managers in making informed decisions regarding pricing, product mix, and cost management. By examining the interplay between costs, sales volume, and profit, businesses can forecast their financial outcomes under various scenarios. The primary elements of CVP analysis include fixed costs, variable costs, sales price per unit, and the contribution margin.

Components of CVP Analysis

1. Fixed Costs: These are costs that do not change with the level of production or sales volume. Examples include rent, salaries, and insurance. Fixed costs remain constant regardless of how many units are produced or sold.

2. Variable Costs: Unlike fixed costs, variable costs fluctuate with production levels. These costs include materials, labor, and shipping. As production increases, total variable costs rise proportionally.

3. Sales Price per Unit: This is the amount charged to customers for each unit of product sold. The sales price directly impacts revenue and, consequently, profit.

4. Contribution Margin: This is calculated as sales revenue minus variable costs. The contribution margin indicates how much revenue is available to cover fixed costs and contribute to profit.

The CVP Formula

The CVP relationship can be summarized with the following formula:

[Profit = (Sales Price per Unit) - Variable Cost per Unit) x{Quantity Sold} - Fixed Costs]

This formula illustrates how profit is influenced by sales volume, sales price, variable costs, and fixed costs.

Break-Even Analysis

One of the most critical applications of CVP analysis is break-even analysis, which determines the sales volume at which total revenues equal total costs, resulting in zero profit. The break-even point can be calculated using the formula:

[ Break-Even Point (in units) = Fixed Costs}/{Contribution Margin per Unit}]

Understanding the break-even point helps businesses set sales targets and evaluate the feasibility of new products or services.

Importance of CVP Analysis

1. Decision-Making: CVP analysis provides valuable insights for pricing strategies, product line decisions, and cost control measures. It helps managers assess the financial implications of various business scenarios.

2. Profit Planning: By analyzing different sales volumes and their impact on profit, businesses can develop effective profit planning strategies. This includes setting sales targets and identifying necessary cost reductions.

3. Risk Assessment: CVP analysis allows businesses to evaluate the risk associated with changes in costs and sales volume. Understanding how sensitive profits are to these changes can inform risk management strategies.

4. Budgeting: CVP analysis aids in the budgeting process by providing a framework for estimating revenues and costs based on different sales scenarios.

Limitations of CVP Analysis

While CVP analysis is a powerful tool, it does have limitations:

1. Assumptions: CVP analysis is based on several assumptions, such as constant sales price and variable costs, which may not hold true in real-world scenarios.

2. Linear Relationships: The model assumes linear relationships between costs, volume, and profit, which may not accurately reflect complex business environments.

3. Short-Term Focus: CVP analysis typically focuses on short-term decision-making and may not account for long-term strategic considerations.

Practical Applications of CVP Analysis

1. Product Pricing: Businesses can use CVP analysis to determine optimal pricing strategies that cover costs and achieve desired profit margins.

2. Sales Mix Decisions: Companies with multiple products can analyze the contribution margin of each product to optimize their sales mix for maximum profitability.

3. Cost Control: By understanding the relationship between costs and volume, businesses can identify areas for cost reduction and efficiency improvements.

4. Investment Decisions: CVP analysis can assist in evaluating the financial viability of new projects or investments by forecasting potential profits and break-even points.

c. Budget manual

Budget manual serves as a comprehensive guide for individuals and organizations looking to effectively manage their financial resources. It outlines the principles of budgeting, provides step-by-step instructions for creating a budget, and offers tips for monitoring and adjusting financial plans. Whether you are a student managing personal finances or a business leader overseeing an organization’s budget, this manual aims to equip you with the tools necessary for sound financial decision-making.

Table of Contents

1. Introduction to Budgeting

2. Types of Budgets

3. Steps to Create a Budget

4. Monitoring and Adjusting Your Budget

5. Common Budgeting Mistakes

6. Conclusion

1. Introduction to Budgeting

Budgeting is the process of creating a plan to manage your income and expenses over a specific period. It helps individuals and organizations allocate resources effectively, ensuring that financial goals are met while avoiding overspending. A well-structured budget provides clarity on where money is going and helps in making informed financial decisions.

2. Types of Budgets

There are several types of budgets, each serving different purposes:

2.1 Personal Budget

A personal budget focuses on an individual's income and expenses, helping to manage day-to-day finances. It typically includes categories such as housing, food, transportation, and entertainment.

2.2 Business Budget

A business budget outlines the expected revenues and expenses for a company over a specific period. It is crucial for strategic planning and financial forecasting.

2.3 Zero-Based Budget

In a zero-based budget, every dollar is assigned a specific purpose, ensuring that income minus expenses equals zero. This method encourages careful spending and prioritization of needs.

2.4 Flexible Budget

A flexible budget adjusts based on actual activity levels, making it useful for businesses with variable costs. It allows for more accurate financial planning in response to changing circumstances.

3. Steps to Create a Budget

Creating a budget involves several key steps:

3.1 Gather Financial Information

Collect all relevant financial data, including income sources, fixed expenses (like rent or mortgage), variable expenses (like groceries), and any debts.

3.2 Set Financial Goals

Define short-term and long-term financial goals. These could include saving for a vacation, paying off debt, or building an emergency fund.

3.3 Categorize Expenses

Organize expenses into categories to better understand spending habits. Common categories include housing, transportation, food, entertainment, and savings.

3.4 Create the Budget

Using the gathered information, create a budget that allocates income to each expense category. Ensure that total expenses do not exceed total income.

3.5 Review and Adjust

Regularly review the budget to track spending and make necessary adjustments. This may involve cutting back on certain expenses or reallocating funds to meet financial goals.

4. Monitoring and Adjusting Your Budget

Monitoring your budget is essential for staying on track. Here are some strategies:

4.1 Track Spending

Use budgeting apps or spreadsheets to track daily expenses. This helps identify areas where spending may exceed the budget.

4.2 Monthly Reviews

Conduct monthly reviews of your budget to assess progress toward financial goals. Adjust categories as needed based on actual spending patterns.

4.3 Stay Flexible

Life circumstances can change, requiring adjustments to your budget. Be open to revising your budget to reflect new income sources or unexpected expenses.

5. Common Budgeting Mistakes

Avoid these common pitfalls when budgeting:

5.1 Underestimating Expenses

Many individuals underestimate their monthly expenses. Be thorough in accounting for all costs, including irregular expenses like car maintenance or medical bills.

5.2 Not Setting Realistic Goals

Setting overly ambitious financial goals can lead to frustration. Ensure that goals are achievable and align with your current financial situation.

5.3 Ignoring Irregular Income

If your income varies, such as in freelance work, create a budget that accounts for fluctuations. Consider using an average income over several months for more stability.

5.4 Failing to Review Regularly

A budget is not a one-time task. Regular reviews are crucial for staying on track and making necessary adjustments.

d. Fixed Overhead variance

Fixed overhead costs are expenses that do not change with the level of production or sales. These costs remain constant regardless of the volume of goods or services produced. Common examples include rent, salaries of permanent staff, and depreciation of fixed assets.

Types of Fixed Overhead Variance

1. Budget Variance: This measures the difference between the budgeted fixed overhead and the actual fixed overhead incurred.

2. Volume Variance: This reflects the impact of the actual production level compared to the expected production level on fixed overhead costs.

Calculation of Fixed Overhead Variance

The fixed overhead variance can be calculated using the following formulas:

1. Total Fixed Overhead Variance

[ Total Fixed Overhead Variance = Actual Fixed Overhead - Budgeted Fixed Overhead]

2. Fixed Overhead Budget Variance

[Budget Variance = Actual Fixed Overhead - Applied Fixed Overhead]

Where:

• Applied Fixed Overhead is calculated based on the standard rate multiplied by the actual hours worked.

3. Fixed Overhead Volume Variance

[Volume Variance = Budgeted Fixed Overhead - Applied Fixed Overhead]

Example Calculation

Assume a company budgeted $100,000 for fixed overhead costs but incurred $120,000 in actual fixed overhead costs. The applied fixed overhead based on actual production was $90,000.

• Total Fixed Overhead Variance:

  [ 120,000 - 100,000 = 20,000 (Unfavorable) ]

• Budget Variance:

  [ 120,000 - 90,000 = 30,000 (Unfavorable) ]

• Volume Variance:

  [ 100,000 - 90,000 = 10,000 (Favorable)]

Significance of Fixed Overhead Variance

Understanding fixed overhead variance is vital for several reasons:

1. Performance Evaluation: It provides insights into how well a company is managing its fixed costs relative to its budget.

2. Cost Control: Identifying variances helps management pinpoint areas where costs can be reduced or controlled.

3. Decision-Making: Accurate variance analysis aids in strategic planning and resource allocation.

4. Operational Efficiency: By analyzing fixed overhead variances, companies can improve their operational processes and enhance productivity.

e. Standard cost

Standard costing involves assigning a predetermined cost to products or services, which serves as a benchmark for measuring performance. These costs are based on historical data, industry standards, and management expectations. The primary components of standard costing include:

1. Standard Material Costs: The expected cost of raw materials required for production.

2. Standard Labor Costs: The anticipated cost of labor, including wages and benefits, needed to produce goods or services.

3. Standard Overhead Costs: The estimated indirect costs associated with production, such as utilities, rent, and administrative expenses.

Importance of Standard Costing

Standard costing is essential for several reasons:

• Budgeting and Planning: It aids in creating budgets by providing a clear picture of expected costs.

• Performance Measurement: Organizations can compare actual costs against standard costs to assess efficiency and productivity.

• Variance Analysis: Identifying variances helps management understand the reasons behind cost discrepancies and take corrective actions.

• Pricing Decisions: Standard costs inform pricing strategies, ensuring that products are priced competitively while maintaining profitability.

Advantages of Standard Costing

1. Cost Control: By establishing benchmarks, businesses can monitor and control costs more effectively.

2. Enhanced Decision-Making: Management can make informed decisions based on accurate cost data.

3. Improved Efficiency: Identifying variances encourages continuous improvement in processes and operations.

4. Simplified Financial Reporting: Standard costing simplifies the accounting process, making it easier to prepare financial statements.

Disadvantages of Standard Costing

Despite its advantages, standard costing has some drawbacks:

1. Inflexibility: Rigid standards may not adapt well to changing market conditions or production processes.

2. Potential for Misleading Information: If standards are set inaccurately, they can lead to poor decision-making.

3. Time-Consuming: Establishing and maintaining standard costs can be labor-intensive and require regular updates.

4. Focus on Cost Reduction: An excessive focus on cost control may compromise quality or employee morale.