ECO 10 Solved Assignment 2021 – 22
IGNOU B.COM SOLVED ASSIGNMENT 2021 – 22
ELEMENTS OF COSTING SOLVED ASSIGNMENT 2021 – 22
TUTOR MARKED ASSIGNMENT
COURSE CODE: ECO-10
COURSE TITLE: ELEMENTS OF COSTING
ASSIGNMENT CODE: ECO-10/TMA/2021-22
COVERAGE: ALL BLOCKS
Maximum Marks: 100
Attempt all the questions:
1. What are the objectives of cost accounting? State its major advantages to a manufacturing concern. (20)
Ans: Objectives/functions of Cost Accounting
According to Blocker and Weltemer, “Cost Accounting is to serve management in the execution of polices and in comparison of actual and estimated results in order that the value of each policy may be appraised and changed to meet the future conditions”. The main objectives/functions of cost accounting are:
1) Ascertain Cost: To ascertain the cost of product or a services reveled and enable measurement of profit by proper valuation of inventory.
2) Analyse Costs: To analysis costs or to classify the expenses under different heads of accounts viz. material, labour, expenses etc.
3) Allocate and Apportion the Costs: To allocate or charge the direct expenses or specific costs such as Raw Material, Labour to particular product, contract or process and to distribute common expenses to each product, contract or process on a suitable basis.
4) Cost Reporting: Cost Reporting or presentation includes:
a) What to report i.e. what is the nature of information to be presented?
b) Whom to Report i.e. to whom the report is to be addressed.
c) When to Report i.e. when the report is to be presented i.e. Daily weekly monthly yearly etc.
d) How to Report i.e. in what format the report is to be presented.
Advantages of Cost Accounting (Aid to Management)
a) Helps in Decision Making: Cost accounting helps in decision making. It provides vital information necessary for decision making. For instance, cost accounting helps in deciding:
1. Whether to make a product buy a product?
2. Whether to accept or reject an export order?
3. How to utilize the scarce materials profitably?
b) Helps in fixing prices: Cost accounting helps in fixing prices. It provides detailed cost data of each product (both on the aggregate and unit basis) which enables fixation of selling price. Cost accounting provides basis information for the preparation of tenders, estimates and quotations.
c) Formulation of future plans: Cost accounting is not a post-mortem examination. It is a system of foresight. On the basis of past experience, it helps in the formulation of definite future plans in quantitative terms. Budgets are prepared and they give direction to the enterprise.
d) Avoidance of wastage: Cost accounting reveals the sources of losses or inefficiencies such as spoilage, leakage, pilferage, inadequate utilization of plant etc. By appropriate control measures, these wastages can be avoided or minimized.
e) Highlights causes: The exact cause of an increase or decrease in profit or loss can be found with the aid of cost accounting. For instance, it is possible for the management to know whether the profits have decreased due to an increase in labour cost or material cost or both.
f) Reward to efficiency: Cost accounting introduces bonus plans and incentive wage systems to suit the needs of the organization. These plans and systems reward efficient workers and improve productivity as well improve the morale of the work -force.
g) Prevention of frauds: Cost accounting envisages sound systems of inventory control, budgetary control and standard costing. Scope for manipulation and fraud is minimized.
h) Improvement in profitability: Cost accounting reveals unprofitable products and activities. Management can drop those products and eliminate unprofitable activities. The resources released from unprofitable products can be used to improve the profitability of the business.
i) Preparation of final accounts: Cost accounting provides for perpetual inventory system. It helps in the preparation of interim profit and loss account and balance sheet without physical stock verification.
j) Facilitates control: Cost accounting includes effective tools such as inventory control, budgetary control and variance analysis. By adopting them, the management can notice the deviation from the plans. Remedial action can be taken quickly.
2. Explain the various steps that are usually taken in connection with the purchase of materials in a manufacturing concern. (20)
Ans: Process of purchasing and receiving goods
Purchase procedure differs from business to business, but all of them follow a general pattern or procedure. There should be proper Purchase Procedure to ensure that right type of material is purchased at right time, in right quantity, at right prices and at right place. All these things require a well-defined procedure of purchasing. The steps in Purchase Procedure are explained below.
Purchase Requisition: A form known as ‘Purchase Requisition’ is commonly used as a format requesting the purchase department to purchase the required material. Normally the purchase requisition is issued by the Stores Department when the quantity of the concerned material reaches the minimum level. Only in the cases of materials, which are not kept in the stores on regular basis, the requisition is issued by the concerned department. Purchase requisition has information like the quantity required, the expected date of receipt, the department in which the material is required, description of material etc. Copies of the purchase requisition are sent to the Accounts department and the concerned department who is in need of the material.
Purchase Order: After the receipt of purchase requisition, the purchase department places an order with a supplier, offering to buy certain material at stated price and terms. However before issuing the purchase order, quotations may be invited from various suppliers for arriving at the best deal. The purchase department usually keeps a list of suppliers from whom the quotations are invited. The quotations received are examined on various parameters like price, delivery period, terms and conditions, quality of material etc. After this, purchase order is issued to the selected supplier. It should be remembered that a purchase order is a legal document and it results into a contract between the company and the supplier. Hence the terms and conditions in the purchase order should be drafted clearly without any ambiguity.
Receiving the Materials: The receiving department performs the function of unloading and unpacking materials which are received by an organization. This will need an inspection report which is sometimes incorporated in the receiving report, indicating the items accepted and rejected with reasons. Copies of the receiving report along with the inspection report are sent to various departments like purchase, stores, concerned department, accounts department and costing department.
Approval of invoice: Approval of invoice indicates that goods according to the purchase order have been received and payments can be made for the same. However, if the goods are not according to the quality ordered or are in excess of the quantity specified or are damaged or are of inferior quality, payment is withheld.
Making the Payment: After the invoice is approved the payment is made to the supplier. The purchase procedure is completed with the payment released.
Also Read: IGNOU B.Com Solved Assignment 2021 – 22
3. A product passes through three processes A, B 15 and C. 10,000 units were issued to process A in the beginning of November 2020 at the cost of 1 per unit. The other particulars are given
Prepare the Process Accounts (A, B and C), assuming that there was no opening or closing stocks. (20)
4. What are the factors taken into account for installation of a system of costing? State the possible difficulties faced in installing such a system. (20)
Ans: Steps in Installation of a Costing System
The costing system of an organization should be carefully planned in order to achieve its objectives. The important steps for the installation of a costing system are discussed below:
1) Determination of objectives: The first step is to clearly lay down the objectives of the costing system. If the objective is only to ascertain the cost, a simple system will be sufficient. However, if the objective is to get information for decision making, planning and control, a more elaborate system of costing is necessary.
2) Study of the nature of business: The nature of the business and other technical aspects like nature of the products, methods and stages of production cycle should be carefully analyzed. Such an analysis is necessary to decide the method of costing to be adopted. For example, contract costing is suitable for large construction projects. Operating costing is adopted by service industries like transport.
3) Study of the nature of the organization: The costing system should be designed to meet the requirements of the organization. Hence, it is necessary to study the nature, size and layout of the organization. The factors to be considered are:
a. Size of the organization and the size of the departments.
b. The physical layout of the organization.
c. The different levels of management.
d. The extent of decentralization of authority.
e. The nature of authority relationships.
4) Deciding the structure of cost accounts: A suitable costing system can be developed on the basis of the study of the nature of business and organization. The structure of cost accounts should be simple and in accordance with the natural production process.
5) Determination of cost rates: This step involves a thorough study of the following points for developing an integrated costing system.
a. Classification of costs into direct and indirect costs.
b. Grouping of indirect costs (overheads) into production, administration, selling and distribution etc.
c. Methods of pricing issues.
d. Treatment of wastes of all types.
e. Absorption of overheads.
f. Calculation of overhead rates.
6) Organization of the cost office: The cost office is responsible for the efficient operation of the costing system. The cost office, with adequate staff must be located a close as possible to the factory. The following are the major functions of the cots office.
a. Stores accounts.
b. Labour accounting
c. Recording of cost data and
d. Cost control.
7) Further, the role and duties and responsibilities of the cost accountant must be clearly defined. He must have the necessary authority to discharge his duties effectively.
8) Introducing the system: After completion of the above steps, the costing system may be formally introduced.
Introduction of the system in an existing organization should be done gradually. Before introduction, the feature of the systems, its working and advantages must be explained to the concerned employees to secure their co-operation.
5. Write short notes on the following: (4 x 5) = 20
(a) Cost Centre
Ans: Cost Centre: A large business is divided into a number of functional departments (such as production, marketing and finance) for administrative convenience. These departments are further divided into smaller divisions for cost ascertainment and control. These smaller divisions are called cost centers. A cost centre is a location, person or item of equipment (or group of these) in relation to which cost can be ascertained and controlled. In simple words, it is a subdivision of the organization to which cost can be charged.
The determination of suitable cost centre is very important for the purpose of cost ascertainment and control. The manager of a cost centre is held responsible for control of cost of his cost centre. The number and size of cost centers vary from organization to organization. The selection of a suitable cost centre depends on the following factors:
a. Nature and size of the business.
b. Layout and organization of the factory.
c. Availability of various cost data and information.
d. Management policy regarding cost ascertainment and control.
(b) Bin card
Ans: Bin Card: Bin is a place where materials are kept in. It may be a rack, container, shelf or space where stores are kept. Bin card is a document showing the particulars of materials kept in the bin. It is a document attached to the
bin disclosing the quantitative details of materials received, issued and the closing balance. A bin card is used for each item of material. Each receipt and issue is recorded on the bin card in a chronological order and the latest balance is shown after each receipt and issue. Bin card is maintained by the store keeper. It indicates information like different stock levels. No, name of material, material code number, stores ledger folio number, quantity of materials received, issued and the balance in hand.
(c) Inventory turnover Ratio
Ans: Inventory Turnover: Inventory Turnover is a ratio of the value of the materials consumed during a period to the average value of inventory held during that period.
If the inventory turnover rate in terms of value of materials is high, or if the length of the inventory turnover period is short, the material is said to be fast moving. So if the rate of consumption is fast or if the inventory turnover rate is good, it is a healthy measure of efficiency of materials control, as the capital employed is properly utilized.
(d) Centralized Purchasing
Ans: In organisation where production centres are many in number situated at distant places, it may be an important issue to decide whether there should be one purchase department to purchase for all the production centres or there should be one purchase department for each production centre. Where there is one purchase department to purchase for all, it is referred to as centralised purchase.
Centralised purchase brings economy of staff and accommodation and also of finance, because excess of stores need not be held. It is easy to regulated purchase policy and give prompt effect to any change in case of centralised purchase.