Commerce ePathshala NOTES
(IGNOU)
Important Questions & Answers
IGNOU
: BCOM
BCOC
138 – COST ACCOUNTING
Q – State the Difference Between Financial
Accounting & Cost Accounting.
Ans.
|
Sr No |
Financial Accounting |
Cost Accounting |
|
1 |
Records financial data of the
organization. So it records all relevant monetary data |
Records and summarizes cost
information and data. This includes information about labour, materials and
various overheads of the manufacturing process. |
|
2 |
Financial accounting only deals in
historical costs (onPly actual costs and figures) |
Cost accounting uses both
historical and pre-determined costs (standard costs, estimates etc.) |
|
3 |
The users of the information
provided by financial accounting are both internal and external users |
Information provided by cost
accounting is only meant for people within the firm like management,
employees etc. |
|
4 |
Financial accounting is mandatory
for all firms. Every organization has to keep some record of its financial
transactions |
Cost accounting is only done by
manufacturing firms. And in most cases, it is not mandatory. |
|
5 |
The emphasis here is on recording
the transactions/data and presenting it in the given format. |
Other than recording data it also
provides a system of cost control of labour, material, overhead costs |
|
6 |
Financial accounts deal with the
business in its entirety. So it provides us with profit or loss for the whole
concern |
Costing will enable us to get the
profit or loss for individual products, process, job etc. |
|
7 |
In financial accounting, there is
no aspect of forecasting. It is simply a record of the financial position of
the firm |
In Cost accounting, forecasting is
possible using some of the budgeting techniques |
|
8 |
Financial accounting is strictly a
positive science. There is rigidity in the process due to legal requirements |
Cost accounting is both a positive
and normative science. |
Q – State the advantages of
accounting.
Ans.
ADVANTAGES OF COST ACCOUNTING
Having learnt the need for costing, its meaning and
objects, and the difference between Cost Accounting and Financial Accounting,
it should not be difficult for you to list the advantages of Cost Accounting
and appreciate it as an invaluable aid to management. An effective and
organised system of costing helps:
1) Continuous flow of information regarding production,
cost, materials, labour, stores, plant capacity, etc., which assist output
planning.
2) Identification of unproductive activities, losses or
wastage of resources, obsolete machinery and points of inefficiency which
demand a quick remedial action.
3) Compilation of correct and reliable cost data.
4) Preparation of budgets and business forecasts.
5) Measurement of efficiency of operations through
establishment of standards and analysis of variances.
6) Fixation of selling prices.
7) Cost comparisons between different periods,
products, departments or firms.
8) Estimates of costs and revenue in advance.
9) Inventory control and periodical stock-taking.
10) Identification of idle capacity and the cost of
working below the installed capacity.
Q – State the Methods of
Costing.
Ans.
METHODS OF COSTING
Though, in all cases, the basic principles and
procedure of costing remain the same, but on account of the nature and
peculiarities of their business, different industries follow different methods
of ascertaining cost of their products and services. These methods can be
summarised as follows :
1.
Job
Costing : Under this method, costs are ascertained for each job
or work-order separately. It is suitable for industries like printing, car
repairs, foundries, painting and decoration, where each job has its own specifications.
2.
Contract
Costing : This method is used in case of big jobs described as
‘contracts’. The contract work usually involves heavy expenditure, stretches
over a long period, and is undertaken at different sites. Hence, each contract
is treated as a separate unit for purposes of cost ascertainment and control.
Contract costing (also termed as Terminal Costing) is most suited to industries
like ship-building, construction of buildings, roads and bridges.
3.
Batch
Costing: Where work-orders are arranged in batches and the
units produced in a batch are uniform in nature and design, each batch is
regarded as a job and treated as a separate unit for purposes of costing. In
such a situation, the method of costing adopted is known as ‘batch costing.’ It
is generally used in industries like pharmaceuticals, bakery, toy
manufacturing, etc.
4.
Unit
Costing: Under this method costs are ascertained for convenient
units of output. It applies to products which are turned out by continuous
manufacturing activity and can be expressed in identical quantitative units. It
is suitable for industries like brick making, mining, cement manufacturing,
dairy, flour mills, etc. This method is also called ‘Single Output Costing’.
5.
Process
Costing: In case of some industries, a product passes through
different stages of production called ‘processes’ and each process is distinct
and well-defined. The output of each process is used as a raw material for the
next process and may also be a marketable commodity. Take the case of cotton textile
mill where the finished product (cloth) passes through three distinct processes
viz., spinning, weaving and finishing. The output of spinning process is yarn,
which is used as a raw material for the weaving process and the output of
weaving process (coarse cloth) is transferred to finishing process.
6.
Operating
Costing: This method is used for ascertaining the cost of
operating a service such as bus, railways, water supply, nursing home, etc. In
such organisations, the unit of cost is a service unit e.g., in case of buses
the unit of cost is passenger kilometer, in case of nursing home it is per bed
per day. According to the latest Terminology, this is called ‘Service Costing’.
7.
Multiple
Costing: Where a produce comprises many assembled parts (or
components) as in cases of motor car, typewriter, television, refrigerators,
etc., costs have to be ascertained for each component as well as for the
finished product. This may involve use of different methods of costing for
different components and so it is known as ‘multiple’ or ‘composite’ costing.
8.
Uniform
Costing : The practice of using a common method of costing by a
number of firms in the same industry is known as ‘Uniform Costing’. Thus, it is
not a separate method of costing. It simply refers to a common system using
agreed concepts, principles and standard accounting practices. This helps in
making inter-firm comparisons and fixation of prices.
Q – Describe the functions of
the stores department.
Ans.
Functions of Storekeeping
The
following functions are performed by the stores department:
1) Receipt of material from the goods receiving
department and ensuring that every Item of stores received by a storekeeper is
duly supported by a indent, a purchase order, an inspection note and a goods
received note.
2) Issue purchase requisition to the purchase
department when the stock of material reaches the re-order level.
3) Maintain proper record of receipt, issue and balance
of all items of materials, and check the bin card balances with the physical
quantities in the bins.
4) Placing and arranging materials received at proper
and appropriate places and adhering to the golden principle of storekeeping,
i.e., a-place for everything and everything in its place.
5) Issue stores, against proper authorisation, in right
quantity of right specification, and at the right time. 6) Minimising the
storage handling and maintaining costs.
7) Ensuring that the stocks neither exceed the maximum
leve1 nor go below the minimum level at any point of time.
8) Preventing the entry of unauthorised persons into
the stores.
9) Co-ordination and supervision of staff in the stores
department.
10) Carrying out a regular review of the items of
stores in hand for locating slow moving and non-moving items so that the
necessary steps may be taken for their disposal before they become obsolete.
Q – What are the important
requirements of an efficient system of material control?
Ans.
Basic Requirements Materials control extends to all spheres of materials management
viz., buying, receiving, inspection, storage consumption and accounting. The
following are the basic requirements of a good system of materials control:
1) There should be proper co-ordination of all
departments which are involved in the purchasing, receiving, testing,
approving, storage of materials and payment of price.
2) The purchase of materials should be centralised.
3) Proper forms should be used with regard to receipt,
issue and transfer of materials from one job to another.
4) There should be a budget for materials and supplies
so that economy in purchasing and use of materials is realised.
5) A system of internal check should be introduced in
order to have proper check on the purchases of materials, and supplies.
6) A well organised system of storage of materials
should be undertaken in order to avoid deterioration, pilferage, wastage and
evaporation of materials.
7) There should be a system of perpetual inventory so
that it is possible to find out the quantity and value of materials in stock at
any point of time.
8) Minimum limit for each item of material should be
fixed below which the stock is not allowed to drop. Similarly, the maximum
limit should be fixed above which the stock should not be kept.
9) There should be a proper system for the issue of
materials so that there will be delivery of materials on requisition to the
department, processes or jobs in the right quantity and at the moment they are
needed.
Q – What do you understand by
ABC analysis? How is the control of stores items effected through ABC analysis?
Ans.
ABC Analysis For the purpose of exercising selective control over materials,
manufacturing concerns find it useful to divide materials into three
categories. An analysis of the annual consumption of materials of any
organisation would indicate that a handful to top high value items (less than
10 per cent of the total number) will account for a substantial portion of
about 70 per cent of total consumption value. Similarly, a large number bottom
items (over 70 per cent of the total number of items) account for only about 10
per cent of the consumption value. Between these two extremes will fall those
items the percentage number of which is more or less equal to their consumption
value. Items in the top category are treated as ‘A’ items, items in the bottom category
are called as ‘C’ category items and the items that lie between the top and the
bottom are called ‘B’ category items. Such an analysis of materials is known as
‘ABC analysis’ or ‘Proportional parts value analysis.
The logic behind this kind of analysis is that the
management should study each item of stock in terms of its usage, lead time,
technical or other problems and its relative money value in the total
investment in inventories. Critical i.e., high value items deserve very close
attention and low value items need to be devoted minimum expense and effort in
the task of controlling inventories. The material manager by concentrating on
‘A’ class items is able to control inventories and show visible results in a short
span of time. By controlling ‘A’ items and doing a proper inventory analysis,
obsolete stocks are automatically pinpointed. ABC analysis also helps in
reducing the clerical costs and results in better planning and improved
inventory turnover. ABC analysis has to be resorted to because equal attention
to A, B and C items will not be worthwhile and would be very expensive. The
following steps will explain to you the classification of the items into A, B
and C categories.
· Calculate
the unit cost and the usage of each material over a given period.
· Multiply
the unit cost by the estimated usage to obtain the net value.
· List
out all the items by rupee annual issues and arrange them in the descending
value.
· Accumulate
value and add up number of items and calculate percentage on total inventory in
value and in number.
· Draw
curve of percentage items and percentage value.
· Mark
off from the curve the rational limits of A, B and C categories
Q – Explain the terms minimum
level, maximum level, and ordering level of stock. What are the factors that
govern the fixation of these levels.
Ans.
Re-ordering level You should know the level at which the
storekeeper will initiate the requisition for the purchase of materials for
fresh supplies. This level is referred to as ‘re-order level’ or ‘ordering
level’. This level normally lies between the maximum and minimum stock level.
This level will usually be higher than the minimum stock level to cover for
emergencies as abnormal usage of material or unexpected delay in delivery of
fresh supplies. The fixation of this level normally takes into consideration
the lead time (period of supply or re-order period), rate of consumption and
the economic ordering quantity. Re-ordering level can be calculated according
to any one of the following formulas:
Re-order level = Maximum consumption × Maximum re-order
period OR,
Re-order level =
Minimum level + consumption during the time required to get fresh deliveries
Minimum
Stock level Minimum stock level points to the level of
an item of material below which the stock in hand is not normally allowed to
fall. In other words, it refers to the minimum quantity of a particular item of
materials which must be kept in stores at all times. This limit is fixed so as
to avoid the possibility of suspension of production due to shortage of
material. In fixing this level the following important factors, among others
are taken into consideration:
i)
Lead time i.e., time lag between indenting
and receiving of material
ii)
Rate of consumption of material during the
lead time
iii)
Re-order level Minimum stock level can be
determined by applying the following formula:
Minimum
stock level = Re-order level – (Normal consumption × Normal re-order period)
Maximum
stock level It is that quantity of material above which
the stock of any item should not be allowed to exceed. The main object of
fixing the maximum stock level is to avoid undue investment in stock and to use
the working capital in a proper way. Maximum stock level is fixed by taking
into consideration the following factors:
i)
Amount of working capital available
ii)
Normal rate of consumption of materials
during the lead time
iii)
Time necessary to obtain deliveries
iv)
Availability of storage space
v)
Economic ordering quantity
vi)
Cost of carrying the inventory
vii)
Possibility of loss due to evaporation,
deterioration etc.
viii)
Extent to which price fluctuations may be
important.
ix)
Possibility of change in fashion, habit
etc., which may necessitate the change in the specification of materials
x)
Incidence of insurance costs which may be
important for some materials.
Q – What is economic order
quantity? How is it calculated?
Ans.
Economic order quantity
(EOQ) is the ideal order quantity a company should purchase
to minimize inventory costs
such as holding costs, shortage costs, and order costs. This
production-scheduling model was developed in 1913 by Ford W. Harris and has
been refined over time. The formula assumes that demand, ordering, and holding
costs all remain constant.
Assumptions in the calculation of economic order
quantity The calculation of economic order quantity is subject to the following
conditions:
1) The quantity of the item to be consumed during a
particular period is known.
2) Cost per unit is known and is constant. Further
quantity discounts are not involved.
3) Ordering cost and carrying cost are known. They are
fixed per unit and will remain the same throughout.
4) Quantity ordered is delivered immediately. The
following illustration will explain to you the calculation of economic order
quantity.
Q – Explain LIFO Method of
Pricing. State It’s Advantages & Disadvantages.
Ans.
Under this method, the price of the latest consignment is taken into
consideration for pricing the issues of materials. This method is based on the
assumption that materials received last are issued first. Thus, when a
requisition is received for certain materials, the storekeeper will charge the
cost price of the latest consignment quantity required is more than the units
remaining from the latest consignment will apply the cost price of the
consignment immediately preceding the last lot so on.
This method is suitable in times of rising prices
because the materials charged to production will be higher leading to lower
profits and lower tax liability. The cost of production will also be closer
to-current prices.
Advantages
The following are the advantages of pricing the
material issues under LIFO:
1) It is simple and useful when transactions are few.
2) Since issues are based on the actual cost, no profit
nor loss arises by Pricing the issue of Materials using this method.
3) Production is charged at most recent prices so that
cost of production reflects current price levels.
4) During the period of rising prices, profits are
lowered down since production charged at current prices. The tax liability is
thus reduced.
5) This method will iron out fluctuations in profits
over a period of changing price levels.
Disadvantages
1) Sometimes more than one price has to be adopted for
pricing a single requisition.
2) As in the case of FIFO method, calculations become
complicated and cumbersome when rates of receipts are highly fluctuating.
3) When prices are falling, it will lead to low charge
to production.
4) As in the case of FIFO method, a substantial
difference is likely to be shown in the cost of two jobs, solely because the
stock of one happened to be drawn a few minutes before those for the other.
Thus it makes the comparison between different jobs very difficult.
5) Closing stock is valued at a cost which does not
represent current conditions.
Q – What do you mean by
Time-booking ? State It’s Methods.
Ans.
Time–Booking -
Under time keeping methods we simply record the time spent by a worker in the
factory. Such record does not show how that time was utilized by him i.e., how
much time he spent on the jobs entrusted to him and for how much time he
remained idle. Hence, in addition to recording his time of arrival and
departure, it is also necessary to record the time he spent on each job, order
or process. The system of maintaining such record is termed as ‘time booking’.
In other words, time booking is a method of recording time devoted by a worker
on a job, order or process.
Methods
of Time Booking
The system of time booking may be maintained either
manually or mechanically. In relatively bigger organisations, where a large
number of labourers work, or where there is a wide variety of jobs being
performed every day, Time Recording Clocks may be used to enter the time of
starting and finishing each job separately on the Job Cards.
The other methods of booking the time taken on separate
jobs are:
1)
Daily Time Sheets: This is a record for each worker
separately in respect of time spent by him on each job during the day. Daily
Time Sheet (also known as time cards) include details relating to:
i)
Name of the worker,
ii)
Work Order Number,
iii)
Description of Work,
iv)
Quantity Produced,
v)
Time of starting and finishing the job,
vi)
Total hours consumed on the job,
vii)
Rate of Wages per hour, and
viii)
Amount of wages.
2)
Weekly Time Sheets: It contains similar details of the record
of time for all jobs done by the workers during a complete week.
3)
Job Cards: It is prepared for each operation to be carried out on
every order. This helps in computing the exact time taken by a worker on a
particular job, operation or service. A job card authorises a worker to carry
out the specified assignment. It also assists in having a correct allocation of
wages to jobs, operations or processes.
Q – State the Difference
between Direct Labour & Indirect Labour.
Ans. Following the differences between direct
& indirect labour
1.
Direct labour can be conveniently identified with a particular cost centre or
cost unit but indirect labour cannot be identified.
2.
Direct labour can be allocated or charged entirely to a particular cost centre.
On the other hand, indirect labour cannot be allocated or charged fully to any
particular cost centre.
3.
Direct labour is directly concerned with production but indirect labour is not
directly concerned with production.
4.
Direct labour results in a productive operation itself but indirect labour does
not result in productive operation.
5.
Direct labour cost forms an essential part of total cost of production, whereas
indirect labour cost does not form an essential part of total cost.
6.
Direct labour cost can be ascertained easily but indirect labour cost cannot be
ascertained easily.
7.
Direct labour cost varies directly in proportion to output, whereas indirect
labour cost does not vary directly in proportion to output.
8.
Direct labour cost can be controlled easily. On the other hand, indirect labour
cost cannot be controlled easily.
9.
Direct labour cost forms part of direct cost or prime cost, whereas indirect
labour cost forms part of overheads, either Factory overheads or Administrative
overhead or Selling and distribution overhead.
10.
Direct labour cost is controlled through the technique of standard costing. But
indirect labour cost is controlled through budgetary control.
Q – Compare merits and
demerits of Time Wage System and Piece Wage system.
Ans.
Time Wage System
This is the most popular method of payment to workers.
Under this system, wages are based on the amount of time spent by a worker
inside the factory. He is paid at a specified rate per unit of time (for
example, per hour, per day, per week or per month) for his services rendered to
the organisation. Calculation of wages under this method of remuneration takes
into account: (i) the time for which the workers are engaged on the job and,
(ii) the rate per unit of time fixed for payment. For example, if a worker gets
Rs. 5 per hour, he works for 8 how per day and has been present for duties on
25 days during the month, his wage for the month on the basis of Time Rate will
be: Rs. 5 × 8 × 25 = Rs. 1,000.
The
main advantages of Time Rate method of wage payment are:
1) It offers a fixed minimum wage to the worker for a
defined period of time.
2) It simplifies calculation of the payable amount of
wages. 3) It makes a stable and secure return to the workers.
4) It encourages the workers to do their jobs with
utmost quality, care and efficiency and in the best possible manner.
5) It promotes a sense of equality and unity among the
workers.
6) It is an economical system to the organisation in
respect of wage administration material use, plant operation and quality control.
The
major disadvantages or limitations of Time method of wage payment are:
1) It ignores the individual quality and quantity of
output.
2) It reduces personal initiative to work faster.
3) It treats both efficient and inefficient workers at
par.
4) It increases the cost of labour per unit because of
the tendency to consume more time in finishing a job.
5) It needs a close supervision to ensure continuity of
operations
Piece
Wage System
When workers are paid on the basis of their output,
irrespective of the time consumed in completing the work, it is termed as Piece
Wage. The rate of payment under this method is related to the quantity of work
done i.e. per unit of output, per article per job or per commodity. Under this
system, the total units produced or manufactured by the worker during a given
period form the basis of computation of his wages for the period. For example,
if the rate of labour per chair is Rs.50 and the worker has completed 10 chairs
during a week, his wages for the week on the basis of piece rate will be: Rs.
50×10 = Rs. 500
The
major advantages of Piece Wages system are that it :
1) Places greater reliance on the merit and efficiency
of workers;
2) induces workers to be efficient, produce more and
earn higher wages;
3) facilitates prompt computation of cost for
quotations; and
4) maintains plant and equipment properly so as to
avoid disruption in work.
The
main demerits or disadvantages of the piece wage system of wage payment are at
it:
1) ignores quality of products in an effort to maximise
output;
2) kills a long-term interest and continuity of
engagement in the organisation of the workers;
3) treats workers as unsecure and uncertain in terms of
wages payable during different periods;
4) creates dissatisfaction among workers owing to
disparity in wages;
5) needs a continuous supervision over the quality of
operations;
6) enhances wastage of materials, wear and tear of
machines and absenteeism of workers; and
7) declines the level of labour discipline.
Q – State the requisites of a
good method of absorption.
Ans.
REQUISITES OF A GOOD METHOD OF ABSORPTION
A good method of absorption should possess the
following characteristics: It should be simple to understand and easy to
operate.
1) It should take into consideration the time factor.
2) It should distinguish between work done by manual
labour and the work done by machine.
3) It should distinguish between the work done by
skilled and unskilled workers.
4) The method should provide an equitable basis for
overhead absorption, it should not cause under or over absorption of overheads
to any cost centre.
5) The method should not involve much clerical work and
should be economical in application.
Q – Explain Over Absorption
& Under Absorption of Factory Overhead.
Ans.
Overhead absorption rate may be actual rate or pre-determined rate. Actual rate
is arrived at by dividing the actual overheads by the actual output or actual
labour hours or actual machine hours or the period. But the actual rate cannot
be computed till the end of the accounting period resulting in delay in
computing the cost of a product. This causes a problem in fixing the selling
price for quotations and tenders. To solve this difficulty, pre-determined
overhead absorption rates are calculated by dividing the estimated amount of
overheads by the estimated production units or labour hours or machine hours.
When actual rates are used, the absorbed overheads will
be exactly equal to the actual overheads incurred. There will be no
under-absorption or over-absorption of overheads. But. when pre-determined
rates are used, the overheads absorbed may be more than or less than the actual
overheads. This will result in over-absorption or under-absorption of
overheads. In other words, if the absorbed amount of overheads by the cost
units is less than the actual amount of overheads, it is a case of
inkier-absorption, and if, the absorbed amount of overheads by the cost units
is more than the actual amount of overheads, then it is a case of
over-absorption of overheads.
Q – State the Advantages
& Disadvantages of Machine Hour rate.
Ans.
ADVANTAGES AND LIMITATIONS
Advantages:
Following are the advantages of Machine Hour Rate:
1) Considering the costing view point, this is accurate
method of absorption of overheads.
2) In takes the actual running time of the machine and
thus gives accurate results.
3) Under this method, standing charges (fixed
overheads) and variable overheads are separately calculated, without any
difficulty, the cost of idle time can be ascertained.
4) This method is most suitable for absorption of
overheads, where large scale of the activity of production is carried out by
machines.
5) Computation is made fixed costs and variable costs
separately which facilitates cost analysis for cost control and other
decisions.
Limitations:
The following are the limitations of this method:
1) This method is applicable where cost centres mostly
due the production work on machines. Thus it is not universally applicable.
2) It demands addition staff for the clerical work
which involves additional costs.
3) Accuracy in estimation of machine hours well in
advance of production is a difficult task. Hence, there is a possibility of
misleading results.
Q – Explain the treatment of
the following hems of overheads in cost accounts: a) Interest on Capital b)
Depreciation c) Fringe benefits d) Defective and spoiled work
Ans. Interest on Capital
There is a great deal of controversy regarding the
inclusion of interest on capital in the cost accounts. There are arguments both
in favour and against it. These are summarised below:
For inclusion
· Interest
is as much a production cost as wages. Wages are the reward for labour and interest
is the reward for capital.
· Real
profit cannot be ascertained unit’ interest on capital (paid or provided) is
charged to cost units.
· Results
of different activities cannot be comparable unless interest factor is taken
into account.
· The
true cost of maintaining stocks cannot be ascertained without taking into
account the interest on capital invested in stocks.
· Where
management has to decide about the replacement of manual labour by machines, a
true comparison cannot be made unless interest on capital investment in machine
is taken into account.
Depreciation
Depreciation is the diminution in the value of a fixed
asset due to constant use or passage of time. In order to work out the exact
cost of manufacturing, depreciation of the fixed assets like machinery and
factory building must be taken into account. in order to determine the amount
of depreciation chargeable to productions it is necessary to estimate the
working life of the asset in terms of years or production hours and ascertain
its total cost by adding installation charges to its original cost minus estimated
scrap value.
There are various methods that can be used for
calculating depreciation such as straight line method. written down value
method, sum of years digits method, annuity method, production hours or
production units method. The choice of method usually depends upon the type of
asset and the nature of business. But, in cost accounts, mostly straight line
method or production hours method is used because of their simplicity and
convenience.
Fringe
Benefits
Besides basic wages and cash allowances like DA, HRA
and CCA, some indirect monetary benefits such as medical facilities, canteen
facilities, housing facilities (called fringe benefits) are enjoyed by the
workers in factories. They are not related to the quantity of work done. Hence,
the costs of such benefits will be created a production overheads and allocated
to different departments on the basis of number of workers employed.
Defective/Spoiled
Work
If the defective work and spoilage is inherent in the
process of manufacture, such loss should be included in the cost of production.
It is treated as normal loss and charged as an overhead. If these are due to
abnormal factors like fire, accident, machine break-down etc., the net loss
(sale/value realised by selling the spoiled work/scrap) should be charged to
Costing Profit and Loss Account.
Defective work is sometimes sent back to production
department for correction. In mat case, the cost of remedying the defect may be
treated as production overheads.
Q – Define Unit Costing.
Mention the industries to which this method of costing is applicable.
Ans.
Unit costing refers to a method of costing used by
industries engaged in mass production of homogeneous/identical products. The
basic feature of unit costing is that the cost units are identical. Unit
costing is also known as “Single Output Costing”. Single or Output Costing is
the form of Unit costing used when the enterprise produces basically one
homogeneous product or one homogeneous product in two or more grades. Under
this method, the cost per unit is arrived at by dividing the total cost by the
total number of units produced. Thus, the cost ascertainment involves the
following two stages:
i)
collection and functional analysis of all
costs,
ii)
division of total cost by the total number
of units produced in order to determine the cost per unit.
This procedure is
applicable only when the organisation produces only one product. If, however,
the organisation produces several grades of the same product, it becomes
imperative to apportion the various costs between the various grades so that
the Cost of each grade can be determined separately.
Unit costing method can be
successfully applied in those industries engaged in assembling, such as automobiles, electronics, typewriters,
etc., and also in those industries engaged in production of homogeneous
products, such as collieries, quarries,
brick making, brewaries, dairies, sugar, cement works etc.
Q - What do you mean by Job
Costing ? State It’s Characterstics.
Ans.
The ICMA Terminology provides an excellent description
of job costing which defines it as “that form of specific order costing which
applies where work is undertaken to customers’ special requirements and each
order is of comparatively short duration. The work is usually carried out
within a factory or work shop and moves through processes and operations as a
continuously identifiable unit”.
Thus, the special features relating to production and
cost ascertainment in industries where job costing can be applied are:
i)
Each job is unique, specific and
dissimilar.
ii)
Each job is undertaken to customer’s
special requirements and not for stock.
iii)
Each job is comparatively of a short
duration.
iv)
Each job is capable of identification at
all stages of production.
v)
Each job order is separately identified by
a job order number.
vi)
There is no uniformity in the flow of
production from department to department.
vii)
Direct costs of labour, materials and
expenses are booked directly against the job order.
viii)
Overheads are charged on the basis of
predetermined rates.
Q – State the Difference
between Job Costing & Contract Costing.
Ans.
Difference between Job and Contract Costing
There is a great deal of similarity between job and
contract costing because a contract is nothing but a job, though large in size.
In both cases, the unit of cost collection, cost determination and cost control
is the job itself. Contract costing, more or less, follows the same principles
as job costing. However, there are certain points of difference between the
two. These can be summarised as follows:
1) Jobs are generally performed within the factory
premises while contracts are usually location-bound, making site-operation an
important element in contract costing.
2) Many expenses which are treated as indirect costs in
job costing, are often treated as direct costs in contract costing. Thus, the
cost of supervision and indirect labour regarded as overheads in case of job
costing is charged as a direct cost to the contract.
3) Overheads constitute a substantial portion of the
total cost of a job. This creates problems of over or under absorption of
expenses. Under contract costing, overheads form only a small part of the total
cost and so over or under absorption of overhead costs is negligible.
4) In Job Costing, no profit is computed on
work-in-progress. But, as contracts may run for long periods, profit or loss
may have to be ascertained even on contracts that are incomplete at the end of
the accounting year.
5) Job Costing is applicable to repair shops, printing
presses, machine tools manufacturing units and foundries. But contract costing
is used by ship-builders. civil engineering contractors, constructional and
mechanical engineering firms, etc.
Q – State the Difference
between Job Costing & Process Costing.
Ans.
|
Particulars |
Job Costing |
Process Costing |
|
Meaning |
Job costing is the cost of a particular assignment or contract where
work is done based on the client’s needs and instructions. |
Process Costing is the cost calculated based on various processes. |
|
Production |
Customized; |
Standardized; |
|
Assignment |
Calculating the cost of each job |
The cost, in this case, is first determined based on the process and
then decided based on the units produced. |
|
Cost Calculation Basis |
The
cost calculation is done based on Job. |
The
cost calculation is done based on Process. |
|
Reduction in Cost |
There are fewer scopes of reduction in costs. |
There is a higher scope of reduction in costs. |
|
Cost Transfer |
The
cost cannot be transferred. |
The
cost can be transferred from one process to another. |
|
Individuality |
Since each job is different from another, all the products have their
individuality. |
Products are produced in large volumes; consequently, they do not have
any individuality. |
|
Industry |
This
process suits industries that customize products based on customers’ demands. |
This
process is suitable for industries where mass production is possible. |
|
Losses |
Losses cannot be segregated. |
Losses can be bifurcated based on processes. |
|
WIP(Work In Progress) |
WIP
may or may not exist |
WIP
in this process will always be present at the beginning and end of the
period. |
|
Examples |
Furniture, Interior Decoration, and Shipbuilding. |
Soap, paint, cold drinks, snacks; |
|
Size of Job |
Used
for small production units; |
Used
for large production units; |
|
Record Keeping |
For job costing, record keeping is a tedious task. |
For process costing, recordkeeping is an efficient task. |
Q – Explain the following
terms: A) Abnormal Effectiveness b) By-Products c) Joint Products
Ans. A) ABNORMAL
EFFECTIVENESS
It is quite possible that the actual output of a
process is more than the expected (normal) output. This will happen when the
actual loss is less than the normal loss which may be the result of efficiency
or overestimation of normal loss. In such a situation, the excess of actual
output over normal output is regarded as ‘abnormal Lain’. The presence of
abnormal effectiveness should not affect the cost per unit of output because it
will be calculated in the same manner as in case of abnormal loss.
Accounting treatment: The value of abnormal gain units
is calculated with the help of the Cost per unit of output. It will be shown on
the debit side of the respective process account and on the credit side of a
newly opened Abnormal Gain Account. Abnormal Gain Account is closed by transfer
to Costing Profit and Loss Account.
b)
By-Products
In the process of manufacturing main product, other
products of relatively small value which are unavoidably and incidentally
produced are termed By-products. The sale value of these products is very less
as compared to the main product or joint products.
By products are of two categories (a) those sold in
their original form without need of further processing (b) those which require
for the processing in order to be saleable. For example, in extraction of sugar
molasses is byproduct.
c)
Joint Products
Joint products are produced simultaneously along with
the main product and same raw material by a common process or series of
processes, with each product possessing almost equal value in the form it is
produced. These products are having equal importance. For example, in petrol
extraction, diesel and kerosene are Joint Products.
A Joint product cost is the cost that arises from
common processing or manufacturing of products produced from a common raw
material. When two or more different products are made from a single cost
factor, a joint product cost results. A joint cost is incurred before the point
at which separately identifiable products produced from the same process. In
some cases, Joint products may incur further costs after their point of separation
Q – What is Service Costing ?
State It’s Features.
Ans.
Service costing is a method of costing whereby the cost of
providing service per unit is calculated. Here it may be remembered that cost
unit is different from service to service e.g. a ton per kilometre or a
passenger per km in case of transport undertakings, a bed per patient per day
in hospitals, kw hours or h.p. hours in case of electricity or number of meals
in a hotel. Each undertaking is free to determine the cost unit most
appropriate for its own purpose.
CHARACTERISTICS OF SERVICE COSTING
Service or operating costing has special application to
undertakings, which provide services to the public as a whole, rather than
manufacture of products. Generally, following are the characteristics of
undertakings whose service is rendered.
1) Unique Services : the undertaking offer unique
services to their customers In case of internal service, the undertaking does
not depend on outsiders
2) Investment : In undertakings offering services have
to invest large proportion of their capital in fixed assets. In case of
railways, for example, the investment is made in laying down the track, build
stations and in engines, bogies etc.
3) Less Working Capital : As compared to other
undertakings, those offering services require less working capital.
4) Operating Costs : The operating cost is divided into
fixed, semi variable and variable costs. It is very important to fix the unit
cost
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