IMPORTANT QUESTIONS.

I. SHORT NOTE.

1) Define cost accounting?

2) Calculate EOQ from the following
Annual consumption=3600 units, ordering cost 144 rs per order, carrying cost 20% price
per unit 400 rs
3) List out the various methods of costing?
4) Write about FIFO Method?
5) What is direct material cost?
6) what is HALSEY PLAN? List out the merits of HALSEY PLAN?
7) Define machine hour rate? what are the types of machine hour rate?
8) Define contract costing?
9) What is meant by Normal and Abnormal Loss?
10) What do you mean by process costing?

II LONG QUESTIONS.

1) Define cost accounting. Discuss its advantages and limitations?

2) Explain the various elements of cost accounting?
3) Discuss the differences between cost accounting and financial accounting?
4) What is material control and inventory control? explain the objectives of material control
and techniques of inventory control ?
5) The following is a summary receipts and issues of materials in factory during a month in
2015.
Jan 1 opening balance 1000 units at 5 rs per unit
Jan 3 issues 500 units
Jan 9 issues 300 units
Jan 10 received from suppliers 400 units at 4.50 rs per unit
Jan 25 issue 120 units
Compute the inventory value by using LIFO method .
6) Two components A and B are used as follows,
Normal usage 300 units per week each
Maximum usage 450 units per week each
Minimum usage 150 units per week each
Re-order quantity A- 2400 units B- 3,600 units
Re-order period A-4 to 6 weeks B- 2 to 4 weeks
Calculate for each component:
 (a) Re-order level
(b) Minimum level
(c)Maximum level
(d) Average stock level

7) Write about various incentives plans.

(I) Halsey and rowan plan
(II) Merrick plan.
(III) Taylor’s differential piece rate system.

8) What is unit costing? Explain its features?

9) What is a cost sheet? Explain its purpose and advantages?
10) What is contract costing? Explain its features and types of contract?
11) Give the proforma of contract accounts?
12) Explain the recording procedure of costs of contract?
13) The input of a product in process A is 10,000 units at a cost of rs.1/ and the other direct
expenses were sundry material rs.1000/-,direct labour rs.5000/-,direct expenses rs.1050/-
the wastage of 5% was sold at rs.0.25 per unit,the output was 9400units.from the above
information prepare process account
14) A building contractor have undertaken construction work at contract price of 600000/- the
following are the particulars from 1st January 2012 to 31-12-2012
Materials 120000/-
Wages 138000/-
Plant 30000/-
General expenses 11000/-
Cash received upto to dec 201 270000/- being 80% of the work certified the value of
material on hand 8100/- .the wrok not yet certified 7500/- depreciation on plant 10% per
annum,prepare contract account and state the proportion of profit credited to profit and
loss account .
 UNIT - I ( THEORY )

Cost Accounting
Following are the main concepts of cost accounting:
Cost
There is a cost involved to purchase or produce anything. Costs may be different for
the same product, depending upon the stages of completion. The cost changes
according to the stage a product is in, for example, raw material, work in progress,
finished goods, etc. The cost of a product cannot be perfect and it may vary for the
same product depending upon different constraints and situations of production and
market.
Expenses
Some costs are actual, such as raw material cost, freight cost, labor cost, etc. Some
expenses are attributable to cost. To earn revenue, some expenses are incurred like
rent, salary, insurance, selling & distribution cost, etc. Some expenses are variable,
some are semi-variable, and some of fixed nature.
Loss
Expenses are incurred to obtain something and losses are incurred without any
compensation. They add to the cost of product or services without any value addition
to it.
Cost Center
Cost center refers to a particular area of activity and there may be multiple cost centers
in an organization. Every cost center adds some cost to the product and every cost
center is responsible for all its activity and cost. A cost center may also be called a
department or a sub-department. There are three types of cost centers:
• Personal and Impersonal Cost Centers - A group of persons in an
organization responsible as a whole for a group activity is called a personal cost
center. In case of impersonal call center, the activities are done with the help of
plant and machinery.
• Operation and Process Cost Centers - The same kind of activity is done in an
operation department. In a process cost center, as the name suggests, different
kinds of processes are involved.
• Product and Service Cost Centers - A department where all activities refer to
product is called a product department. When the centers render their services
to a product department for its smooth functioning, they are called service cost
centers.
DEFINATIONS , FEATURES , OBJECTIVES
DEFINE
Cost Accounting is a business practice in which we record, examine, summarize, and
study the company’s cost spent on any process, service, product or anything else in
the organization. This helps the organization in cost controlling and making strategic
planning and decision on improving cost efficiency. Such financial statements and
ledgers give the management visibility on their cost information. Management gets
the idea where they have to control the cost and where they have to increase more,
which helps in creating a vision and future plan.

Features of Cost Accounting

• It is a sub-field in accounting. It is the process of accounting for costs

• Provides data to management for decision making and budgeting for the
future

• It helps to establish certain standard costs and budgets.

• provides costing data that helps in fixing prices of goods and services

• Is also a great tool to figure out the efficiency of a unit or a process. It can
disclose wastage of time and resources

Objectives of Cost Accounting

The objective of the cost accounting is to determine the methods by which

expenditure on materials, wages and overhead are recorded, classified and allocated.
This is necessary so that the
cost of products and services may be accurately ascertained. Thus, the following are
the main objectives of cost accounting:

1. Ascertainment of the cost per unit of the different products that a business
concern manufacturers.

2. To correctly analyze the cost of both the process and operations.

3. Disclosure of sources for wastage of material, time, expenses or in the use of

the equipment and the preparation of reports which may be necessary to
control such wastage.

4. Provide requisite data and help in fixing the price of products manufactured
or services rendered.

5. Determination of the profitability of each of the products and help

management in the maximization of these profits.

6. Exercise effective control of stocks of raw material, work-in-progress,

consumable stores, and finished goods so as to minimize the capital invested
in them.

7. Present and interpret data for management planning, decision-making, and

control.

8. Help in the preparation of budgets and implementation of budgetary control.

 FUNCTIONS AND SCOPE OF COST ACCOUNTING

Functions of Cost Accounting

To understand the entire cost structure of a firm, cost accounting is crucial. It

ascertains the costs of various products, processes etc.

So we can compare them to the sales and arrive at the true profitability of the firm.
This is one of the main objectives or functions of cost accounting. To achieve this the
actual functions of cost accounting change daily. Let us take a look,

• ascertain the cost per unit of every product that the company manufactures

• to identify any wastages whether in material, expense, time, tools and spares
etc. Also, suggest ways to minimize this wastage

• also, provide data that helps in the process of price fixing

• calculate with accuracy the profitability of each of the company’s products.

And figure out ways to maximize these profits

• cost accounting is also responsible for the control of raw material and raw
material ordering. So it must ensure that we are not over ordering which leads
to capital being locked-up unnecessarily. And under ordering will lead to
inefficiency in the manufacturing process, perform the functions of cost
control for materials, labor, and other miscellaneous expenses
• present data to the management that allows them to interpret the data and
make business decisions

• help management with incentive plans that are based on efficiency

• also, help the management with the preparation of budgets and setting up
budgetary controls

Scope of Cost Accounting

• The scope of cost accounting is actually quite wide. It mainly consists of three
main aspects. Let us take a brief look at them.

• 1] Cost Ascertainment
• This is one of the main criteria for cost accounting. Cost ascertainment is the
process of collection of expenses and by analysis of these expenses. It links up
the production of various products at their different stages of production with
such expenses.
• Over time we have seen the development of a variety of production processes,
and so different systems of costing were also developed.
• Examples include historical cost, actual costs, standard costs etc. And linking
of these expenses with the manufacturing process occurs via many techniques
such as marginal cost technique, direct cost technique etc.

2] Cost Accounting
This is the process of accounting for the costs of a firm. Classifying and recording of
costs is the first step in the process. The end result is the preparation and presentation
of this statistical data in an acceptable format. Cost accounting is almost as crucial to
management as financial accounting. It allows them to make decisions. And if the cost
accounting and financial recording statements are separate, they must be reconciled at
year-end.

3] Cost Control

Cost control is the process by which action is taken to reduce the costs and expenses
to boost profitability and efficiency.The idea is to bring the actual figures as close to
the target or budgeted figures as possible. This involves the regulation of any costs
that deviate from the target.

ADVANTAGES OF COST ACCOUNTING

Benefits to the Management:

Guide in Reducing Prices – In certain periods it becomes necessary to reduce the price
even below the total cost. This will be so when there is a depression or slump. Costs,
properly ascertained, will guide management in this direction

. Facilitates Decision-Making – It provides necessary data along with information to the

management to take decision on any matter, relating to the business.

. Assists in Fixing Prices – The various types of cost accounting are much helpful in
fixing the cost and selling price of a product. Thus the desired volume of production is
secured at the minimum possible cost

Facilitates Cost Control – It facilitates cost control possible by comparisons, product-

wise or firm-wise

Check on Accuracy – A good system of cost accounting affords an independent and most
reliable check on the accuracy of financial accounts. The check operates through
reconciliation of profits shown by cost accounts and financial accounts.

Budgeting – As cost accounting reveals actual cost, estimated cost and standard cost of
products, preparation of budget is easy. Effective budget control is also possible. Thus
“Cost accounting is a system of foresight and not a post-mortem examination; it turns
the losses into profits, speeds up activities and eliminates wastes”.

To the Creditors:

Bankers, creditors, investors etc., can have a better understanding of the firm, as regards

the progress and prosperity, before they offer financial landings.

To the Government:

1. The proper systems of cost accounting are of great use in the preparation of national

plans, economic developments etc.

2. By studying the trend of cost, the government can make policies like taxation, import,

export, price ceiling, granting subsidy etc.

3. Costing system has stability and cost reduction in industries. Cost audit is important

and industries have to keep books of accounts to show the utilization of materials, labor

and other costs.

To the Public:

1. Cost accounting removes all types of wastages and inefficiencies. These will enable the

consumers to get goods at better quality and cheaper rates.

2. The public feels that the costing system facilitates the customers to pay fair price.

3. Development and prosperity of industries will create employment opportunities.

4. Cost reduction will help in curbing inflationary trends in economy.

5. A steady progress is essential for an economic growth. There are many industries

closed down because of inefficient and incompetent management. All these will be

removed by cost accounting.

LIMITATIONS OF COST ACCOUNTING

Expensive – Highly paid cost accountants and the organisation of costing system
Involve additional expenditure. However, before installing it, care must be taken to
ensure that the benefits derived are more than the investment made on this system of
accounting.
More Complex – Cost accounting system involves a number of steps in ascertaining cost
such as collection and classification of expenses, allocation and apportionment of
expenses etc. These steps are considered as complicated and requires several forms and
documents in preparing the reports. This will lead to delay in the preparation of
accounts.

Not applicable to Small Concerns – A cost accounting system is applicable only to large
sized business and not suitable for small sized business because it is more expensive.

Confusion regarding Non-cost Items – There may be confusion regarding non-cost

items for e.g., interest in capital, cash discount etc., should be included or to be excluded
from cost accounts.

Failure in many Cases – It is argued that the adoption of costing system failed to
produce the desired results in many cases and so it was not effective .

It presents the base for taking the best decisions, but it does not give outright solution to
the problem.

If the system is not revised as per the changing circumstances, it will become a matter of
routine forms and statements.

Many formalities are to be observed to obtain benefit from Costing System. Small and
medium concerns may not be in a position to install a costing system.

Essential of Good Accounting System

(i) Cost Accounting System should be tailor-made, practical, simple and capable of
meeting the requirements of a business concern.

(ii) The data to be used by the Cost Accounting System should be accurate; otherwise it
may distort the output of the system.

(iii) Necessary cooperation and participation of executives from various departments of

the

concern is essential for developing a good system of Cost Accounting,

(iv) The Cost of installing and operating the system should justify the results.

(v) The system of costing should not sacrifice the utility by introducing meticulous and
unnecessary details.

(vi) A carefully phased programme should be prepared by using network analysis for the
introduction of the system.

(vii) Management should have a faith in the Costing System and should also provide a
helping hand for its development and success.

D / W COST ACCOUNTING / FINANCIAL COSTING

The following table broadly covers the most important differences between financial
accounting and cost accounting.

Point of Financial Accounting Cost Accounting

Differences

Recoding of transactions is part of Cost accounting is used to

financial accounting. We make calculate cost of the product and
financial statements through these also helpful in controlling cost. In
Meaning transactions. With the help of cost accounting, we study about
financial statements, we analyze the variable costs, fixed costs, semi-
profitability and financial position of a fixed costs, overheads and capital
company. cost.

Purpose of the financial statement is To calculate cost of each unit of

Purpose to show correct financial position of product on the basis of which we
the organization. can take accurate decisions.

Estimation in recording of financial In cost accounting, we book actual

transactions is not used. It is based transactions and compare it with
on actual transactions only. the estimation. Hence costing is
Recording
based on the estimation of cost as
well as on the recording of actual
transactions.

Correctness of transaction is Cost accounting done with the

important without taking care of cost purpose of control over cost with
Controlling
control. the help of costing tools like
standard costing and budgetary
 control.

Period of reporting of financial Reporting under cost accounting is

accounting is at the end of financial done as per the requirement of
Period
year. management or as-and-when-
required basis.

In financial accounting, costs are In cost accounting, minute reporting

Reporting
recorded broadly. of cost is done per-unit wise.

Fixation of selling price is not an Cost accounting provides sufficient

Fixation of
objective of financial accounting. information, which is helpful in
Selling Price
determining selling price.

Relative Relative efficiency of workers, plant, Valuable information about

Efficiency and machinery cannot be efficiency is provided by cost
determined under it. accountant.

Valuation of Valuation basis is ‘cost or market Cost accounting always considers

Inventory price whichever is less’ the cost price of inventories.

Journal entries, ledger accounts, trial Cost of sale of product(s), addition

Process balance, and financial statements of margin and determination of
selling price of the product
METHODS OF COSTING

Method # 1 Job Costing:

It is also called specific order costing. It is adopted by industries where there is no

standard product and each job or work order is different from the others. The job is

done strictly according to the specifications given by the customer and usually the job

takes only a short time for completion. The purpose of job costing is to ascertain the cost

of each job separately. Job costing is used by printing presses, motor repair shops,

automobile garages, film studios, engineering industries etc.

Method # 2 Contract Costing: It is also known as terminal costing. Basically, this

method is similar to job costing. However, it is used where the job is big and spread over

a long period of time. The work is done according to the specifications of the customer.

The purpose of contract costing is to ascertain the cost incurred on each contract

separately. Hence a separate account is prepared for each contract. This method is used

by firms engaged in ship building, construction of buildings, bridges, dams and roads.

Method # 3 Batch Costing:

It is an extension of job costing. A batch is a group of identical products. All the units in

a particular batch are uniform in nature and size. Hence each batch is treated as a cost

unit and costed separately. The total cost of a batch is ascertained and it is divided by

the number of units in the batch to determine the cost per unit. Batch costing is adopted

by manufacturers of biscuits, ready-made garments, spare parts medicines etc.

Method # 4 Process Costing: It is called continuous costing. In certain industries,

the raw material passes through different processes before it takes the shape of a final

product. In other words, the finished product of one process becomes the raw material
for the subsequent process. Process costing is used in such industries. A separate

account is opened for each process to find out the total cost as well as cost per unit at the

end of each process. Process costing is applied to continuous process industries such as

chemicals, textiles, paper, soap, lather etc.

Method # 5 Unit Costing:

This method is also known as single or output costing. It is suitable to industries where

production is continuous and units are identical. The objective of this method is to

ascertain the total cost as well as the cost per unit. A cost sheet is prepared taking into

account the cost of material, labour and overheads. Unit costing is applicable in the case

of mines, oil drilling units, cement works, brick works and units manufacturing cycles,

radios, washing machines etc.

Method # 6 Operating Costing:

This method is followed by industries which render services. To ascertain the cost of

such services, composite units like passenger kilometers and tone kilometers are used

for ascertaining costs. For example, in the case of a bus company, operating costing

indicates the cost of carrying a passenger per kilometer. Operating costing is adopted by

airways railways, road transport companies (goods as well as passengers) hotels, cinema

halls, power houses etc.

Method # 7 Operation Costing:

This is a more detailed application of process costing. It involves costing by every

operation. This method is used where there is mass production of repetitive nature

involving a number of operations. The main purpose of this method is to ascertain the

cost of each operation.

For instance, the manufacture of handles for bicycles involves a number of operations

such as cutting steel sheets into proper strips, molding, machining and finally polishing.

The cost of these operations may be found out separately. Operation costing provides a

minute analysis of costs to achieve accuracy and it is applied in industries such as spare

parts, toy making and engineering.

Method # 8 Multiple Costing:

It is also known as composite costing. It refers to a combination of two or more of the

above methods of costing. It is adopted in industries where several parts are produced

separately and assembled to a single product.

TECHNIQUES OF COSTING

Techniques of Costing:
Following are the main types or techniques of costing for ascertaining

costs:

1. Uniform Costing:

It is the use of same costing principles and/or practices by several undertakings for

common control or comparison of costs.

2. Marginal Costing:

It is the ascertainment of marginal cost by differentiating between fixed and variable

cost. It is used to ascertain the effect of changes in volume or type of output on profit.

3. Standard Costing:

A comparison is made of the actual cost with a pre-arranged standard cost and the cost

of any deviation (called variances) is analysed by causes. This permits management to

investigate the reasons for these variances and to take suitable corrective action.

4. Historical Costing:

It is ascertainment of costs after they have been incurred. It aims at ascertaining costs

actually incurred on work done in the past. It has a limited utility, though comparisons

of costs over different periods may yield good results.

5. Direct Costing:

It is the practice of charging all direct costs, variable and some fixed costs relating to

operations, processes or products leaving all other costs to be written off against profits

in which they arise.

6. Absorption Costing:

It is the practice of charging all costs, both variable and fixed to operations, processes or

products. This differs from marginal costing where fixed costs are excluded.

Any of the methods of costing like unit or output costing, service costing, process costing

etc. can be used under any techniques of costing.

COST CONCEPTS
Concept of Costs

In order to understand the general concept of costs, it is important to know the following types of

costs:

1. Accounting costs and Economic costs

2. Outlay costs and Opportunity costs

3. Direct/Traceable costs and Indirect/Untraceable costs

4. Incremental costs and Sunk costs

5. Private costs and Social costs

6. Fixed costs and Variable costs

. Accounting costs

Accounting costs are those for which the entrepreneur pays direct cash for procuring resources for

production. These include costs of the price paid for raw materials and machines, wages paid to

workers, electricity charges, the cost incurred in hiring or purchasing a building or plot, etc.

Accounting costs are treated as expenses. Chartered accountants record them in financial statements.

2. Economic costs

There are certain costs that accounting costs disregard. These include money which the entrepreneur

forgoes but would have earned had he invested his time, efforts and investments in other ventures.
For example, the entrepreneur would have earned an income had he sold his services to others

instead of working on his own business

Similarly, potential returns on the capital he employed in his business instead of giving it to others,

the output generated by his resources which he could have used for others’ benefits, etc. are other

examples of economic costs.

Economic costs help the entrepreneur calculate supernormal profits, i.e. profits he would earn above

the normal profits by investing in ventures other than his.

Concept of Costs in terms of the Nature of Expenses

1. Outlay costs

The actual expenses incurred by the entrepreneur in employing inputs are called outlay costs. These

include costs on payment of wages, rent, electricity or fuel charges, raw materials, etc. We have to

treat them are general expenses for the business.

2. Opportunity costs

Opportunity costs are incomes from the next best alternative that is foregone when the entrepreneur

makes certain choices.

For example, the entrepreneur could have earned a salary had he worked for others instead of

spending time on his own business. These costs calculate the missed opportunity and calculate

income that we can earn by following some other policy.

Concept of Costs in terms of Traceability

1. Direct costs

Direct costs are related to a specific process or product. They are also called traceable costs as we can

directly trace them to a particular activity, product or process.

They can vary with changes in the activity or product. Examples of direct costs include

manufacturing costs relating to production, customer acquisition costs pertaining to sales, etc.

2. Indirect costs

Indirect costs, or untraceable costs, are those which do not directly relate to a specific activity or

component of the business. For example, an increase in charges of electricity or taxes payable on

income. Although we cannot trace indirect costs, they are important because they affect overall

profitability.

Concept of Costs in terms of the Purpose

1. Incremental costs

These costs are incurred when the business makes a policy decision. For example, change of product

line, acquisition of new customers, upgrade of machinery to increase output are incremental costs.

2. Sunk costs
Suck costs are costs which the entrepreneur has already incurred and he cannot recover them again

now. These include money spent on advertising, conducting research, and acquiring machinery.

Concept of Costs in terms of Payers

1. Private costs

These costs are incurred by the business in furtherance of its own objectives. Entrepreneurs spend

them for their own private and business interests. For example, costs of manufacturing, production,

sale, advertising, etc.

2. Social costs

As the name suggests, it is the society that bears social costs for private interests and expenses of the

business. These include social resources for which the firm does not incur expenses, like atmosphere,

water resources and environmental pollution.

Concept of Costs in terms of Variability

1. Fixed costs

Fixed costs are those which do not change with the volume of output. The business incurs them

regardless of their level of production. Examples of these include payment of rent, taxes, interest on a

loan, etc.

2. Variable costs
These costs will vary depending upon the output that the business generates. Less production will

cost fewer expenses, and vice versa, the business will pay more when its production is greater.

Expenses on the purchase of raw material and payment of wages are examples of variable costs.

Solved Examples on Concept of Costs

Question: Describe the nature of the following costs and give reasons for your answers.

Answer:

1. The cost incurred in advertising: This expense can be –

• Direct cost (traceable to sales)

• Sunk cost (not recoverable)

• Private cost (spent for business interests)

• Variable cost (will vary depending on the volume of output)

2. Income earned from a job: This expense can be –

• Economic cost (the person could earn more money by working for his business)

• Opportunity cost (same reason as above)

3. Rent paid for factory premises: This expense can be –

 • Accounting cost (spent on procuring facilities for production)

• Direct cost (directly affects manufacturing)

• Outlay cost (spent on procuring access to input, i.e. factory)

TYPES OF COST CENTRES

according to the Terminology of CIMA, London, a cost centre “is a location, person or

item of equipment or group of these, for which cost may be ascertained and used for the

purpose of cost control.”Thus, a Cost Centre covers a location (e.g., a department,

person—e.g., machine operator), and a item of equipment (e.g., plant/machine).
CLASSIFICATION OF COST

ELEMENTS OF COST

Direct or Indirect Materials

The materials directly contributed to a product and those easily identifiable in the
finished product are called direct materials. For example, paper in books, wood in
furniture, plastic in water tank, and leather in shoes are direct materials. They are also
known as high-value items. Other lower cost items or supporting material used in the
production of any finished product are called indirect material. For example, nails in
shoes or furniture.

Direct Labour
Any wages paid to workers or a group of workers which may directly co-relate to any
specific activity of production, supervision, maintenance, transportation of material, or
product, and directly associate in conversion of raw material into finished goods are
called direct labour. Wages paid to trainee or apprentices does not comes under
category of direct labour as they have no significant value.

Overheads
Indirect expenses are called overheads, which include material and labor. Overheads
are classified as:

• Production or manufacturing overheads

• Administrative expenses
• Selling Expenses
• Distribution expenses
• Research and development expenses

SHORT QUESTIONS ANSWERS

4 ) Write about FIFO Method?

First In, First Out (FIFO) is an accounting method in which assets purchased or acquired first are
disposed of first.FIFO assumes that the remaining inventory consists of items purchased last.An
alternative to FIFO, LIFO is an accounting method in which assets purchased or acquired last are
disposed of first.Often, in an inflationary market, lower, older costs are assigned to the cost of goods
sold under the FIFO method, which results in a higher net income than if LIFO were used.

5 ) What is direct material cost?

Direct material cost is the cost of the raw materials and components used to create a product. The
materials must be easily identifiable with the resulting product (other wise they are considered to be
joint costs). The direct material cost is one of the few variable costs involved in the production
process; as such, it is used in the derivation of throughput from production processes. Throughput is
sales minus all totally variable expenses.
Examples of Direct Material Costs: Examples of direct materials are the timber used to
construct a house, the steel included in an automobile, the circuit board included in a radio,
and the fabric used to assemble clothing

6 )what is HALSEY PLAN? List out the merits of HALSEY PLAN?

.Definition: Under Halsey Plan, the standard time for the completion of a job is fixed and the

rate per hour is then determined. If the time taken by a worker is more than the standard time,
then he shall be paid according to the time rate, i.e. time taken multiplied by the rate per hour.
In Halsey plan, the time wages are guaranteed even if the output of a worker is below the
standard. In case, the worker completes the works in less than the standard time, then he/she
will be paid according to the actual time, i.e. time-rate plus the bonus calculated at a specified
percentage of the saved time. Generally, the bonus percentage varies from 30-70 percent. The
usual bonus share paid to the worker is 50% of the time savedmultiplied by the rate per hour
(time-rate).
MERITS

1. It is simple to understand and relatively simple to operate.

2. It guarantees time wages to workers.

3. The wages of time saved are shared by both employers and workers, so it is helpful
in reducing labour cost per unit.

4. It makes distinction between efficient and inefficient workers because it provides

increasing incentive to efficient workers.

5. Fixed overhead cost per unit is reduced with increase in production.

6. The employer is able to reduce cost of production by having reduction in labour cost

and fixed overhead cost per unit. Lower cost gives him incentive to provide the best

possible equipment’s and working conditions.

 11) Define machine hour rate? what are the types of machine hour rate?

A machine hour rate is the hourly cost in terms of factory overheads to operate a

particular machine. It is obtained by dividing the factory expenses associated with the

machine for a given period by the number of hours worked by the machine during that

period.

(i) Base Period

A base period is taken for every machine to compute the machine hour rate. This base
period is the period for which the hourly rate is to be computed (it may be a
year, quarter, month, or week).

(ii) Normal Hours of Working

The number of normal or standard working hours of each machine in the base period
has to be estimated.

(iii) Distribution of Expenses

The departmental expenses to be considered when calculating the machine hour rate
are divided into two parts:

• Standing charges (or fixed expenses)

• Running charges (or variable expenses or machine expenses)

12) Define contract costing?

Contract costing is the tracking of costs associated with a specific contract with a customer.
For example, a company bids for a large construction project with a prospective customer, and
the two parties agree in a contract for a certain type of reimbursement to the company. This
reimbursement is based, at least in part, on the costs incurred by the company in order to
fulfill the terms of the contract. The company must then track the costs associated with that
contract so that it can justify its billings to the customer.

13) What is meant by Normal and Abnormal Loss?

 BASIS FOR
NORMAL LOSS ABNORMAL LOSS
COMPARISON

Meaning Normal Loss is a loss that takes Abnormal Loss refers to a loss that
place due to the inherent nature of arises due to unexpected events
the raw materials and process of like defective material,
production under ordinary carelessness, machinery
circumstances. breakdown, etc.

What do you mean by process costing?

Process costing is a method of costing used mainly in manufacturing where units are
continuously mass-produced through one or more processes. Examples of this include
the manufacture of erasers, chemicals or processed food.

In process costing it is the process that is costed (unlike job costing where each job is
costed separately). The method used is to take the total cost of the process and
average it over the units of production.

LONG QUESTIONS

7) Write about various incentives plans.

Halsey and rowan plan
Merrick plan.
Taylor’s differential piece rate system.

Halsey and Rowan Premium Plans was introduced by F.A. Halsey in 1981. It is a simple
combination of time and piece rate system. The main features of this plan are a follows-

1. Workers are paid at a rate per hour for the actual time taken by them.

2. A standard time is set for each piece of work, job or operation.

3. If a worker takes standard time or more than standard time to his work he is paid
wages for the actual time taken by him the time rate.

In other words, under this method time wages are guaranteed.

4. If a worker takes less than standard time, he is paid a bonus equal to 50% of the time
saved at the time rate fixed.

Thus, under this system, total earnings of a worker are equal to wages for the actual
time taken by him plus a bonus.

Halsey Premium Plan Formula

The formula for calculating bonus and total earnings is as follows-

(a) Bonus = 50% of [Time saved Time rate]

(b) Total Earnings = Time rate Time taken + 50% of [Time Saved * Time rate]

Advantages of Halsey Premium Plan

1. It is easy to understand and easy to work.

2. Under this system efficiency is not penalized.

3. It records efficiency so it is more profitable for efficient workers.

4. As bonus is given only for the time saved, incentive is given to workers to save time.

5. The saving in time results in reduction in labour cost per unit and fixed overhead cost
per unit.

6. This scheme is beneficial for both employer and employee.

Disadvantages of Halsey Premium Plan

The main disadvantages of this method are:

1. Extra efficiency of a worker is not fully rewarded.

2. Fixation of standard time is really a difficult task.

3. If standard time is not correctly fixed, there may be disputes between employer and
the employee.

4. Workers do not like the employer to share the benefit of time saved the by them.

5. Under this method the quality of the product is deteriorated.

What is Rowan Premium Plan

This plan is also similar to Halsey plan except the calculation of bonus. The main
features of Rowan Plan are as follows:

1. Wages are paid on time basis for the actual time worked by the workers.
2. A standard time is determined for each piece of work.

3. If a worker completes his work in standard time or in more than the standard time, he
is paid wages for the time actually taken by him.

4. If a worker completes his work in less than the standard time. he is entitled to a
bonus.

5. Bonus is that proportion of wages of actual time taken which the time saved bears to
the standard time.

Rowan Premium Plan formula

(a) Bonus = Time Saved / Time allowed x Time taken x Time rate

(b) Earnings = (Time taken Rate) + Bonus

Advantages of Rowan Premium Plan

1. Like Halsey plan, it provides guaranteed minimum wage to workers. That means,
inefficiency is not penalized.

2. It provides quarter incentive (bonus) than Halsey plan up to 50% of the time saved.

3. It protects the employer against loose rate setting, i.e.. against errors in the setting up
of standards.

4. The gain arising from the time saved by the worker is shared by both employer and
employee.

5. It results in reduction in labour cost per unit.

6. It contributes to reduction in fixed overheads cost per unit.

7. It acts as a check on over-earnings.

Disadvantages of Rowan Premium Plan

The main disadvantages of this system are:

1. This system can not be easily understood by the workers.

2. This method of incentive wage payment is not easy to operate.

3. This system encourages inaccuracies in rate fixing.

4. The incentive given to workers, under this method, is low at higher levels of
efficiency. That means the incentive given to a more efficient worker is very low.
5. The sharing of the gain arising from the time saved by both the employer and the
workers provided for under this method workers.

Difference Between Halsey and Rowan Method

The main difference these two schemes are-

1. Halsey scheme is simple to understand and execute, whereas Rowan difficult to

understand and execute.

2. Under the Halsey scheme, the gains arising from the time saved is shared by
employer and employees equally but under Rowan scheme it not shared equally.

3. Under Halsey plan, bonus is given for 50% of the time saved at the hourly rate. But
under the Rowan plan, bonus is given for that portion of the time taken which time
saved bears to the standard time at the hourly rate .

4. Under the Halsey plan, bonus increases steadily with rise in efficiency But under the
Rowan plan, bonus increases rapidly up to a saving of 50% of the standard time and
thereafter it decreases .

5. When the work is completed less than half of the standard time. Halsey plan provides
more bonus than Rowan plan On the other hand, when the work is completed in more
than 50% of standard time, Rowan plan provides more bonus than Halsey plan.

6. The labour cost pp. under the Rowan plan is more than that under the Halsey plan up
to a saving of 50% of the standard time But beyond 50% of the saving of the standard
time, the labour cost p u under the Halsey plan is more than that under the Rowan plan.

Merrick plan.

Definition: The Merrick Differential Piece-Rate System is a modification of Taylor’s differential piece-
rate system in which three piece-rates are used to distinguish between the beginners, the average
workers, and the superior workers, against two piece-rates in Taylor’s system.

The worker is paid the straight price rate up to 83% of the standard output, 10 % above the normal
rate for producing between 83% – 100% and 20% above the normal rate for producing more than
100% of the standard output. Here also, the minimum wages of the worker are not guaranteed.

The Merrick Differential Piece-Rate System can be illustrated by the example given below:

Standard Output = 200 units

Piece-rate = 10 paise

Case (1): Output = 160 units

Efficiency = 160/200 x 100 = 80%
Since the efficiency is less than 83%, the worker is paid only the basic rate, i.e. 10 paise. Thus, earnings
will be Rs 8 (80 x 0.1).

Case (2): Output= 180 units

Efficiency = 180/200 x 100 = 90%

As the efficiency is more than 83% but less than 100 percent, 10% above the normal rate is paid to the
worker. Thus,
Earnings = 90 x 110/100 x 0.1 = Rs 9.9

Case (3): Output = 220 units

Efficiency = 220/200 x 100 = 110%

As the efficiency is 110%, 20% above the normal rate is paid to the worker. Thus,
Earnings = 110 x 120/100 x 0.1 = Rs 13.30

Note: Under Merrick differential piece-rate system the workers are not penalized for producing below the
standard output up to 83%.

Taylor’s differential piece rate system.

Definition: Taylor’s Differential Piece-Rate System was introduced by F.W. Taylor, who believed that the
workers should be paid on the basis of their degree of efficiencies. Under this method, with the help of Time
and Motion Study, the standard time for the completion of a job is fixed on the basis of which the performance
of the workers is evaluated.Taylor’s differential piece-rate system posits that the worker who exceeds the
standard output within the stipulated time must be paid a high rate for high production. On the other hand, the
worker is paid a low rate if he fails to reach the level of output within the standard time. Thus, there are two
piece-rates, one who reach the standard output or exceeds it, is paid 120 percent of the piece rate. While the
one who fails to reach the standard level of output, is paid 80 percent of the piece-rate. The minimum wages
of the worker are not guaranteed.

8)What is unit costing? Explain its features?

Unit costing is known as “output” or “single output” costing. Unit costing is followed by the concern,
which produces a single product on large scale continuously. The cost units are identical costs.
Moreover, the products are having uniform homogeneous character. This product is not produced
through continuous process. This is the main difference between unit costing and process costing.

Sometimes, two or more grades of one product is produced by a concern. If so, the single or
output costing is followed. If one product is produced, the cost collection and cost ascertainment
is very easy.

Under this method, the total costs incurred is divided by total production to determine the cost
per unit. Moreover, the cost is collected element wise and the cost of each element is divided by
total production to determine the cost per unit of each element.
The statement of cost is prepared which includes the figures for previous period to provide
comparison and control. Unit costing is successfully followed in the production of homogeneous
products like bricks, pencil, pen, books, computer, laptop and the like

9 ) What is a cost sheet? Explain its purpose and advantages?

A cost sheet is a statement that shows the various components of total cost for a product and shows
previous data for comparison. You can deduce the ideal selling price of a product based on the cost
sheet.

A cost sheet document can be prepared either by using historical cost or by referring to estimated
costs. A historical cost sheet is prepared based on the actual cost incurred for a product. An estimated
cost sheet, on the other hand, is prepared based on estimated cost just before the production begins.
Importance and objectives of cost sheet
Cost sheets help with a number of essential business processes:

1. Determining cost: The main objective of the cost sheet is to obtain an accurate product cost. It gives
you both the total cost and cost per unit of a product.

2. Fixing selling price: In order to fix the selling price of a product, you need to create a cost sheet so
you can see the details of its production cost.

3. Cost comparison: It helps the management compare the current cost of a product with a previous per
unit cost for the same product. Comparing the costs helps management take corrective measures if costs
have increased.

4. Cost control: The cost sheet is an important document for a manufacturing unit, as it helps in
controlling production costs. Using an estimated cost sheet aids in monitoring labour, material and
overhead costs at each step of production.

5. Decision-making: Some of the most important decisions management makes are based on the cost
sheet. Whenever a business needs to produce or buy a component, or quote prices for its goods on a
tender, managers refer to the cost sheet.

Types of costs in cost accounting

Costs are broadly classified into four types: fixed cost, variable cost, direct cost, and indirect cost.

1. Fixed cost: These are costs that do not change based on the number of items produced. For
example, the depreciating value of a building or the price of a piece of equipment.

2. Variable cost: These costs are tied to a company’s level of production. For example, a bakery spends
$10 on labor and $5 on raw materials to produce each cake. The variable cost changes based on the
number of cakes the company bakes.

3. Operating costs: These are those expenses incurred by an organisation to maintain the product on a
day to day basis. Traveling cost, telephone expenses, office supplies are some of things that come
under operating costs.

4. Direct costs: These costs can be directly associated with production. For example, if a furniture
manufacturing company takes five days to produce a couch, then the direct cost of the finished product
includes the raw material cost and labor charges for five days.

Components & elements of total cost

Components of total cost are constituted mainly of prime cost, factory cost, office cost and cost of sales.
Let us take a detailed look at each of these elements:
1. Prime cost: This comprises direct material, direct wages, and direct expenses. It is also called basic
cost, first cost, or flat cost. It can be defined as an aggregate of the price of the material
consumed, the wages involved in production, and the direct expenses.

Prime cost = Direct material + Direct wages + Direct expenses

Direct material cost usually refers to the cost of raw materials used or consumed during a given
period. To calculate the amount of raw material actually consumed during a given period, you add the
opening stock and the amount of material purchased, and deduct the closing stock. Here is the formula
for material consumed:

Material consumed = Material purchased + Opening stock of material – Closing stock of material

2. Factory cost: This is made up of prime cost plus factory overhead, which includes indirect wages,
indirect material and indirect expenses. Factory cost is also known as works cost, production cost, or
manufacturing cost.

Factory cost = Prime cost + Factory overhead

3. Office cost: This is also called administration cost or total cost of production. Office cost is equal
to factory cost plus office and administration overhead.

4. Total cost or cost of sales: This is the sum of the total cost of production and the total of selling
and distribution overhead.

Total cost = Cost of goods sold + Selling and distribution overhead

In the production process, some units of a product are scheduled to be finished at the end of a
period. Such incomplete units are called work-in-progress. In such situations, while calculating the
factory cost of a product unit, it is necessary to make adjustment for opening and closing stock to
arrive at net factory cost of the product. Generally, the cost of these unfinished units include direct
material, direct expenses, and factory overheads.

Besides this, the adjustments for inventories need to be made in the following manner

1. Direct material consumed = Opening stock of direct material + Purchases of direct material –
Closing stock of direct

2. Works cost = Gross works cost + Opening work in progress – Closing work in progress

3. Cost of production of goods sold = Cost of production + Opening stock of finished goods – closing
stock of finished goods
What is contract costing? Explain its features and types of contract?

Contract costing is the tracking of costs associated with a specific contract with a customer. For
example, a company bids for a large construction project with a prospective customer, and the
two parties agree in a contract for a certain type of reimbursement to the company. This
reimbursement is based, at least in part, on the costs incurred by the company in order to fulfill
the terms of the contract. The company must then track the costs associated with that contract
so that it can justify its billings to the customer.
11 ) Give the proforma of contract accounts?
12 ) Explain the recording procedure of costs of contract?

Procedure # 1. Materials:

Materials purchased directly or supplied from the store or transferred from other contracts will

appear on the debit side. Materials returned to store will appear on the credit side. Amount

received from the sale of surplus materials will appear on the credit side, any profit or loss

arising from the sale will be transferred to the Profit and Loss Account.

Procedure # 2. Labour or Wages:

All labour employed at the contract site should be regarded as direct labour and charged direct

to the contract concerned. Where possible, separate wages sheets should be prepared for each
contract. If this is not possible, a Wages Analysis Sheet should be prepared wherein should be

entered the particulars of the daily or weekly time sheets

Procedure # 3. Site Expenses:

All site expenses (other than materials and wages) are charged to individual contract as and

when they are incurred.

Procedure # 4. Indirect Expenses:

There are certain expenses (such as engineers, surveyors, supervisors etc. engaged on various

contracts) which cannot be directly charged to contracts. Such expenses may be distributed on

several contracts on some suitable basis as a percentage of materials or labour.

Procedure # 5. Plant and Machinery:

Careful records of plant and machinery must be maintained to ensure that none is lost or

improperly disposed of and that the contract is duly charged for the use of plant.