Assignment

Q1. Define cost accounting. Explain the main objectives of introduction of cost accounting
system in a manufacturing organisation.

Ans. Cost accounting means a specialised applications of the general principles of accounting in order to ascertain
the cost of producing and marketing any unit of manufacture or of carrying out any particular job or contract.
Cost accounting is the classifying, recording and appropriate allocation of expenditure for the determination
of the costs of products or services, and for the presentation of suitably arranged data for purposes of control
and guidance of management. It includes the ascertainment of the cost of every order, job, contract, process,
service or unit as may be appropriate.

 OBJECTIVES OF COST ACCOUNTING

1. To ascertain cost: The basic objective of cost accounting is to ascertain cost of cost
center. Cost ascertainment is the process of determining costs after they have been
incurred. Basic ally there are two methods of cost ascertainment - Job costing and
Process costing. Different industries follow different methods of costing because of
the difference in the nature of their activity.

2. To control cost: Cost accounting aims at controlling costs by using various

techniques such as Budgetary control, Standard costing, Inventory control etc.

3. To provide information for decision making: Cost accounting aims at providing

information for various managerial decisions
1. Whether to make or buy component
2. Whether to retain or replace an existing machine
3. Whether to process further or not
4. Whether to shut down or continue operations

4. To determine selling price: Cost accounting provides cost information to determine

the selling price of products or services. During the period of depression, it guides the
management to decide, “ How much reduction in selling price may be made to meet
the situation? ”
 5. To ascertain costing profit: Cost accounting aims at ascertaining the costing profit
or loss of any activity on an objective basis by matching cost with the revenue of that
activity.

Q2. Enumerate the essential factors to be considered while installing a cost accounting
system. Also explain practical difficulties faced while installing cost accounting system in an
organisation.

Ans. FACTORS CONSIDERED WHILE INSTALLING A COST ACCOUNTING SYSTEM

1. Objectives: What are the objectives which the management wants to achieve and what sort of information
does it need for the achievement of its objectives? Information about costs meant for fixing prices would
be quite different from that intended to reveal efficiencies or inefficiencies in operations or that required to
make decisions on a rational basis.
2. Product: The nature of product should be considered to decide type of cost system. For example, if materials
used are insignificant, an elaborate system of materials control will not be necessary.
3. Type of Materials: The type of materials available and the timing of their supplies together with the storage
problem, should also be taken into consideration.

4. Factors: Factors that are or are not amenable to control should be considered. Attention has to be paid
to controllable factors. For instance, if a particular method of packing is prescribed by law, it is no use
trying to think of an alternative.

5. Use of Financial Books: The possibility of using financial books and procedures should also
be kept in mind. As stated above, cost accounting is to be treated as an investment and,
therefore, all existing useful procedures, books and records should be used. For example
financial accounts need adequate record of purchases and wages. With a little change, these
can be made to serve the needs of Cost Accounting also. As far as possible, cost records and
financial books should be well coordinated, even fully integrated.

6. Type of Labour: The type of labour which is required and the methods of their remuneration
should also be kept in mind.

7. Management: The character of management itself and the decision-making process should also
be taken into account. Modern managements usually need detailed information. The
information flows will have to be designed with reference to the sources and end uses of the
information. For example, if decisions are taken by a person who refuses to divulge any
information, the system must keep this in view.

8. Business Peculiarities: Any peculiarities of the business, that there may be, must be kept in
view. For instance, if purchases of particular item are to be made only from one particular
source or firm, the costing system need not build an adequate purchase procedure; it should
concentrate on the proper use of the concerned item.

DIFFICULTIES FACED WHILE INSTALLING COST ACCOUNTING SYSTEM

 1. Lack of Support from Top Management:

Effective functioning of nay system requires wholehearted support from the management.
Otherwise the system will fail or may not produce the desired results. Management has all
responsibility to receive the reports and feed backs and take necessary actions on the reports.
When management lacks interest in the system [i.e., may accept the system but may not
encourage], the system will fail miserably.

2. Lack of Cooperation from the Staff:

The tendency of the staff is to resist any new system at the beginning and may not extend full
cooperation for the system to function effectively. If the tendency continues further and refuse
to cooperate then problems may arise.

3.Different Authority Structure:

The costing system may be based on formal authority structure, but in reality there may exist a
different authority structure. For example, if trade unions have greater influence in the
decision-making process, then the system may run into difficulties.

4. Changing Environment:

Changing environment has greater influence on business operations. The market may change,
the production process may change and the management ideas may change. If the costing
system fails to take account of the changes, then the system will fail to deliver the desired
results and may run into difficulties.

5. Lack of Overall Control on the System:

The system should be watched continuously. When some part of the system breaks down, it
should be set right then and there. Otherwise the whole system will break down. For example,
if inventory is not properly controlled, then the whole material control system may break
down. Ultimately the whole cost accounting system may fail.

6. Lack of Clarity on Objectives:

The cost accounting department staff should be clear about the priorities and objectives of the
system. They should know the purpose of information collected and its end use. If not, they
may not collect correct information or may send wrong or inadequate information.

Q3. Explain concept of material control. What are its objectives ?

Ans. Material control is a systematic control over purchasing, storing and consumption of materials,
so as to maintain a regular and timely supply of materials, at the same time, avoiding
overstocking.Material control refers to the management function concerned with acquisition,
storage, handling and use of materials so as to minimise wastage and losses, derive maximum
 economy and establish responsibility for various operations through physical checks, record
keeping, accounting and other devices.

 OBJECTIVES

(a) To enable uninterrupted production: The main object of material control is to ensure
smooth and unrestricted production. Production stoppages and production delays cause
substantial loss to a concern

(b) To ensure requisite quality of materials: The quality of finished products depends
mainly on the quality of raw materials used. If quality of the raw materials is not up to
desired standards, the end product will not be of desired quality which affects the sale of
the product in the market resulting in loss of profits as well as goodwill of the concern. It is
of vital importance to exercise strict control and supervision over the purchases, storage
and handling of materials.

(c) To minimise wastage: The loss of material may occur on account of rust, dust, dirt or
moisture, bad and careless handling of materials, poor packing and many other reasons.
The causes responsible for such losses must be brought to light and utmost efforts should
be made to minimise the wastage of raw materials. This is possible only by introducing an
efficient materials control system.

(d) To fix responsibility: A proper system of materials control also aims at fixing
responsibility of operating units and individuals connected with the purchase, storage and
handling of materials.

(e) To provide information: Another objective of materials control is to provide accurate

information regarding material cost and inventory whenever needed by management.

Q4. Distinguish between time keeping and time booking. What are the various methods of time
keeping and time booking ?

Ans. DIFFERENCES BETWEEN TIME KEEPING AND TIME BOOKING

Meaning - Time-keeping is concerned with the recording of time of workers for the purpose of
attendance and wage calculations whereas time booking is the reporting of each worker’s time for
each department, operation and job for the purposes of cost analysis and apportionment of labour
costs between various jobs and departments.

Objective- The main objective of time keeping is to maintain discipline, regularly and punctuality
in the factory whereas the main objective of time booking is to ascertain labour cost of every job.

Use – The time keeping is used to record the arrival and departure time of labourers for making
distinction between normal time, overtime, delay in attendance and early leaving whereas time
booking is used to provide time basis for apportionment for overhead expenses.
 Methods of time keeping

1. Time Recording Clocks or Clock Cards: This is mechanized method of time recording.
Each worker punches the card given to him when he comes in and goes out. The time and
date is automatically recorded in the card. Each week a new card is prepared and given to the
worker so that weekly calculation of wages will be possible.

2. Disc Method: This is one of the older methods of recording time. A disc, which bears the
identification number of each worker, is given to each one. When the worker comes in, he
picks up his disc from the tray kept near the gate of the factory and drops in the box or hooks
it on a board against his number. Same procedure is followed at the time of leaving the
factory. The box is removed at starting time, and the time keeper becomes aware of late
arrivals by requiring the workers concerned to report him before starting. The time keeper
will record in an Attendance Register any late arrivals and workers leaving early. He will
also enter about the absentees in the register on daily basis.
3.Attendance Records: This is the simplest and the oldest method of marking attendance of
workers. In this method, every worker signs in an attendance register against his name.
Leaves taken by workers as well as late reporting is marked on the attendance register itself

Time Booking Methods: The following methods are used for time booking.

1. Daily Time Sheet: In this method, each worker records the time spent by him on the work
during the day, for which a sheet is provided to each worker. The time is recorded daily and
hence accuracy is maintained.

2. Weekly Time Sheets: The only difference between the daily time sheet and weekly time
sheet is that these time sheets are maintained on weekly basis. This means that each worker
prepares these sheets weekly rather than daily.

3. Job Ticket: Job tickets are given to all workers where time for commencing the job is
recorded as well as the time when the job is completed. The job tickets are given for each job
and the recording of the time as mentioned above helps to ascertain the time taken for each
job.

4. Labor Cost Card: This card is meant for a job, which involves several operations or
stages of completion. Instead of giving one card to each worker, only one card is passed on to
all workers and time taken on the job is recorded by each one of them. This card shows the
aggregate labor cost of the job or the product.

5. Time and Job Card: This card is a combined record, which shows both, the time taken
for completion of the job as well as the attendance time. Therefore there is no need to keep
separate record of both, time taken and attendance time. 

Q5. State how would you ascertain the actual profit on incomplete contracts . How far such profit is
taken to Costing Profit and Loss account ?

Ans. ASCERTAINMENT OF NOTIONAL AND ESTIMATED PROFIT

The computation of profit on incomplete contracts has two aspects:

(A) Computation of Notional Profit at the End of the Accounting Period on Incomplete
Contract.

For this purpose, the value of Certified Work and cost of Uncertified Work at the end of the
accounting year is credited to the Contract Account. The amount of notional profit shall be:

Value of work certified XXXXXX

Add Cost of work not yet certified XXXXXX

Less Cost of work to date XXXXXX

NOTIONAL PROFIT XXXXXX

(B) Computation of Estimated Profit at the end of accounting period for Incomplete
Contract

Estimated Profit represents the excess of the contract price over the estimated total cost of the
contract. It is computed as follows :-

Contract Price XXXXXX

Less Total cost already incurred XXXXXX

Less Estimated additional cost XXXXXX

ESTIMATED PROFIT XXXXXX

Computation of the Proportion of the Notional Profit and Estimated Profit to be

Transferred to Profit and Loss Account.

The entire amount of notional profit at the end of the accounting period is not transferred to
Profit and Loss Account. In view of the future uncertainties involved in contract work, only a
portion of the notional profit is transferred to Profit and Loss Account and the remaining
portion is kept by way of a provision to cover future contingencies. The following principles
are generally followed for the purpose of ascertaining the proportion of notional profit to be
transferred to Profit and Loss Account.

(i) Incomplete Contracts with Little Progress(0% TO 25%):-

These are the contracts which have just commenced or where only a small portion of the
contract (as a general rule, less than — ) has been finished. In case of such contracts, it is not
prudent to take credit for any profit made thereon, since it is impossible to see the future
position of such contracts clearly. The entire amount of notional profit on such contracts is
 kept by way of provision for contingencies and is transferred to the credit of Work-in-
Progress Account so as to bring it down to its actual cost.

(ii) Incomplete Contracts with Appreciable Progress(25% TO 90%):A contract is generally

said to have made appreciable progress if at least 1/4 of the contract has been
completed. The proportion of the notional profit to be transferred to Profit and Loss
Account in respect of such contracts is computed as follows:

(a) When work certified is 1/4 or more than 1/4 but less than 1/2 of the contract price(25%
TO 50%), the amount of profit to be transferred to profit and loss account should be:

NOTIONAL PROFIT X 1/3 X CASH RECEIVED/ WORK CERTIFIED

(b) When work certified is 1/2 or more than 1/2 of the contract price(50% TO 90%), but the
contract is not nearing completion, the profit to be transferred to Profit and Loss Account
should be:

NOTIONAL PROFIT X 2/3 X CASH RECEIVED/ WORK CERTIFIED

(iii) Incomplete Contracts Nearing Completion(90% OR ABOVE):

These are the contracts which are nearing completion. and the future costs to be incurred on
their completion can reasonably be estimated. The amount of profit to be transferred to Profit
and Loss Account, in this case, shall be ascertained on the basis of estimated profit.
Estimated Profit, in case of contract nearing completion, is the difference between the
contract price and the total estimated cost of contract on completion and can be ascertained
Moreover, only a proportion of the estimated profit is to be transferred to profit and Loss
Account, leaving the balance to guard against future contingencies. The proportion of
estimated profit to be transferred to Profit and Loss Account can be calculated by any of the
following formulae:

ESTIMATED PROFIT X WORK CERTIFIED/ CONTRACT PRICE

Q6. Distinguish between the following.

(a) Bin Card and Store ledger

Basis for Bin Card Stores Ledger

Comparison
Meaning Bin Card implies a quantity Stores ledger alludes to a subsidiary
record of the receipts, issue ledger, that keeps track of each and
and balance of materials in every transaction relating to materials
stores. in the stores.
What is it? It is a recording document. It is an accounting record.
 Responsibility Storekeeper Cost accounting department
Location Kept inside the stock room. Kept outside the stock room.
Details Contains quantitative details Contains both quantitative and
only. monetary details.
Interdepartmental Are not shown in bin card. Indicated in stores ledger.
transfer
Entries Entries are posted when Entries are posted after transaction
transaction takes place. took place.
Recording Transactions are recorded Summarized transactions are
individually. recorded.

(b) Waste and Scrap

Basis Waste Scrap

Meaning It represents that portion of the It is the material residue coming out
basic raw material which has of the manufacturing process.
been lost in the manufacturing
process.
Value It has almost no or negligible It has some monetary value.
monetary value.
Accounting  Normal Waste – Distributed  Other Income – Sales of scrap is
Treatment over good output units . treated as other income in costing
profit and loss account.
 Abnormal Waste – Debited
to costing profit and loss  Credit to overheads – Net value is
account. credited to production overhead of
department producing scrap.

 Credit to job or process – The

realisable value of scrap may be
credited to the job or process
which yields the scrap.

(c) Job Costing and Contract Costing

BASIS OF JOB COSTING CONTRACT COSTING

DIFFERENCE
MEANING Job costing is a Contract costing is a costing system where
system used for work is undertaken according to special
completion of specific requirements of customers in a location
customer orders where specified by the customer.
each unit produced is
 considered a job.
AREA OF Job costing generally Contract costing is used to calculate the
WORK calculate the cost for a cost for significant scale projects.
single or a few products.  
TIME PERIOD A job usually spans over a The work of a contract progresses for a
small period of time, thus long period time, thus contract costing is
job costing can be conducted within an extended time period.
completed within a short
period of time.
PLACE OF The product is completed Production or construction takes place in
WORK within the premises of the construction site selected by the customer.
company in a job.
TRANSFER OF When a job is done and In contract costing, costs and revenues are
PROFIT finished goods are sold to recorded in proportion to the degree of
the customer, the entire completion and the resulting profit is
profit will be transferred transferred to profit and loss account.
to profit and loss account.
SIZE OF JOB Generally jobs are smaller Jobs are big and complex.  
in size.
COST/  Less expenditure It requires huge expenditure.
EXPENDITURE required.
PAYMENTS Payments are made Payments are made in installment.  
immediately after the
completion of  work.
TRANSFER OF Job cannot be transferred Some part of contract can be given to
JOB to other parties. other parties or other sub-contractors.
SUITABILITY Job costing is suitable for Contract costing is suitable for
the manufacture of construction works.
products under the
customer’s specifications.

VALUE OF The value of work is less. The value of work is more.

WORK
ACCOUNT In job costing, we make In contract costing, we open contract
job account for every job. account for every contract. In this account,
In this account, we show we show all expenses relating to contract
different expenses which and it also show work in progress in the
are paid for completing form of work certified and work
that job.  uncertified. Difference of credit and debit
side of this account will show notional
profit or loss.