21101150

MAHATMA GANDHI UNIVERSITY KOTTAYAM

Scheme of Valuation - VI Semester B.Com. April 2021
CORE - CO6CRT17 - Cost Accounting 2
Part A: Answer any ten questions. Each question carries 2 marks.
1) What is work certified? In a contract, all the whole work done (WIP) may not be certified by the
engineer/architect. Work certified is the portion of the work certified by the engineer. In order to
calculate the value of WIP, both work uncertified and uncertified are added together.
2) Calculation of Economic Batch Quantity (EBQ):
2𝐴𝑆 2 × 𝐴𝑛𝑛𝑢𝑎𝑙 𝑑𝑒𝑚𝑎𝑛𝑑 × 𝑆𝑒𝑡𝑢𝑝 𝑐𝑜𝑠𝑡
EBQ = √ =√
C 𝐶𝑎𝑟𝑟𝑦𝑖𝑛𝑔 𝑐𝑜𝑠𝑡

2 × 50,000 × 100 1,00,00,000

=√ =√ = √40,00,000 = 2,000 units
0.50+(20 ×10%) 2.5

3) Calculation of total kilometres run and passenger kilometres.

Total kilometers = 4 Buses x 100 KMs x 2 (up & down) x 3 round trips = 2,400 KMs
Passenger KM = 2,400 KMs x 50 passengers x 80% capacity = 96,000 KMs
4) What is operation costing? Operation costing is the category of basic costing method applicable where
standardised goods or services result from a sequence of repetitive and more or less continuous
operations or process to which costs are charged before being averaged over the units produced during
the period. This category includes process costing and service costing.
5) What are the limitations of Cost Plus Contract to the Contractor? Under cost-plus contract, the contract
price is determined by adding a certain amount or percentage of profit with the actual cost incurred for
the contract. The following are the advantages of cost plus contract to the contractor:
➢ Advantage of favourable market, bulk purchase benefit etc. price is denied
➢ No advantage for cost control and cost reduction
➢ The profit earned is usually low. (Give full marks for any two points)
6) What is process costing? Process costing is a form of operations costing which is used where
standardized homogeneous goods are produced. This costing method is used in industries like
chemicals, textiles, steel, rubber, sugar, shoes, petrol etc. CIMA London defines process costing as “that
form of operation costing which applies where standardize goods are produced”
7) What is Normal Process Loss? The normal loss in process refers to the unavoidable loss of units in a
processes which occurs due to the nature of raw materials being processed or due to the nature of
production process. The cost of normal loss is being spread over the number of good units which results
in an increased per unit cost for total output of the concerned processing department.
8) Why are P/V ratio and Margin of safety calculated?
➢ P/V ratio is used to evaluate the proportion of contribution on sales. For value-based calculations of
BEP and Margin of Safety, P/V ratio is used.
➢ Margin of Safety is used to evaluate how much the firm’s position is safe as compared to the point
of ‘no profit or loss’. It can be expressed in terms of quantity as well as value.
(Half marks may be awarded if the candidate has written the formulas only)
9) Impact on the break even point and profit volume ratio:
a) Increase in sales quantity: Will not affect both BEP and P/V Ratio
b) Increase in sales price per unit: Contribution per unit will also be increased according to the increase
in selling price. Therefore, BEP (units & value) will be reduced and P/V Ratio will be increased.
10) Marginal Costing is a costing technique wherein the marginal cost (variable cost) is charged to units of
cost, while the fixed cost for the period is completely written off against the contribution.
Limitations of Marginal Costing:
a) Segregation of costs into fixed and variable elements involves considerable technical difficulty.
b) The linear relationship between output and variable costs may not always true at different capacity.
c) Pricing decisions cannot be based on contribution alone.
d) The elimination of fixed costs renders cost comparison of jobs difficult.
 21101150 VI Semester B.Com. - Cost Accounting 2 (April 2021)

e) Stock valuation under marginal costing is accepted by taxation authorities.

f) It cannot be applied in the case of contract costing where the value of WIP will always be high.
g) It cannot be used in the case of cost plus contracts unless fixed costs and profits are considered.
h) The distinction between fixed and variable costs holds good only in the short run.
(Marks: 1 + 1. For second part of the answer, give full marks for any two limitations)
11) What is budgeting? CIMA defines a budget as, “A budget is a financial and/or quantitative statement,
prepared prior to a defined period of time, of the policy to be pursued during that period for the purpose
of attaining a given objective.” Budgeting is the process of designing, implementing and operating
budgets. It is a managerial process of planning and preparation of budget, budgetary control and the
related procedures. (Definition of budget is not expected)
12) What are the advantages and disadvantages of ZBB? (any two)
Advantages:
a) Accuracy: It helps to ensure that all the departments are appropriately funded.
b) Efficiency: It helps judge the actual needs rather than the momentum of previous budgets.
c) Reduced waste: It can remove redundant spending by re-examining potentially unnecessary
expenditures.
d) Coordination and Communication: It allows for better communication within departments by involving
employees in decision-making and budget prioritization.
Disadvantages
a) High cost: It takes enormous amounts of time, effort, and analysis that would require extra staff.
b) Bloat: Managers can skew proposed budgets to characterise expenditures on pet projects as vital
activities, inventing a "necessity" for them.
c) Intangible Justifications: ZBB requires departments to justify their budget, which can be difficult on
many levels.
d) Managerial Time: ZBB comes at the cost of time and training for managers. This means spending
significantly more time every period on the budget.
e) Slower Response Time: Due to the amount of time and training is required to do ZBB, managerial staff
could be less likely to revise the budget in response to a changing market.
Part B: (Q. Nos. 13 to 21) Answer any six questions. Each question carries 5 marks.
13) Calculation of Cost of Job Nos. 101 and 102
Job 101 Job 102
Materials supplied 2,100 1,400
Materials transferred 100 -100
Materials returned -50
Materials consumed 2,200 1,250
Wages 900 600
Cost of the Job 3,100 1,850
(This may be prepared and presented in account format also)
14) Calculation of cost per running kilometer of the vehicle
Standing Charges Total Per KM
Garage rent 6,000
Insurance charges 1,000
Road license 5,000
Driver's wage (2,000 x 12) 24,000
Total Standing Charges 36,000
Estimated KMs to run p.a. 6,000
Standing charges per running KM 6.00

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 21101150 VI Semester B.Com. - Cost Accounting 2 (April 2021)

Running Charges
Cost of diesel (8 / 8) 1.00
Tyre maintenance 2.00
Depreciation (1,50,000 / 1,50,000 1.00
Total Running Charges per KM 4.00
Cost per Running KM 10.00
15) Write short notes on:
a) Physical Unit Method: Under this method, cost apportionment is made in proportion to the volume
of production. These physical measures may be units, kilograms, liters, tones, gallons etc.
b) Average Unit Cost Method: The average unit cost is computed by dividing the total manufacturing
cost by the total number of units produced of all products. This method is useful where all the
products produced are uniform with each other in all the respects.
c) Survey Method: This method assumes that the difference in costs of joint products arises due to
certain qualitative and quantitative factors like raw materials used, labour operations performed,
time consumed for production and technical difficulties in manufacture. Based on technical
evaluation, weights are assigned to each product in the form of points and the apportionment of
joint costs is made on the basis of these point values.
d) Contribution Margin Method: The contribution margin is computed as the selling price per unit,
minus the variable cost per unit.
e) Standard Cost Method: The by-product is valued at the standard cost determined for each product,
which may be based on technical assessment.
16) Apportionment of joint cost under Reverse cost method
Calculation of Selling and distribution overheads
Particulars A B C Total
Sales 28,000 22,000 15,000 65,000
Less: Profit on sales 7,000 4,400 4,500 15,900
Cost of Sales 21,000 17,600 10,500 49,100
Less Post separation cost 6,000 5,000 4,100 15,100
Balance 15,000 12,600 6,400 34,000
Joint cost 28,900
Difference (assumed as Selling and Distribution O/Hs) 5,100
Apportionment of Joint costs
Particulars A B C Total
Sales 28,000 22,000 15,000 65,000
Less: Profit on sales 7,000 4,400 4,500 15,900
Cost of Sales 21,000 17,600 10,500 49,100
Less: Selling and distribution O/Hs (sales ratio) 2,197 1,726 1,177 5,100
Cost of Production 18,803 15,874 9,323 44,000
Less: Post separation expenses 6,000 5,000 4,100 15,100
Joint Cost 12,803 10,874 5,223 28,900
17) Preparation of budgets for the original and revised levels of output
Capacity Revised (60%) Original (100%)
Units of production 60,000 units 1,00,000 units
Particulars Per unit Total Per unit Total
Raw materials 10.08 6,04,800 10.08 10,08,000
Direct labour 3.00 1,80,000 3.00 3,00,000
Direct expenses 0.40 24,000 0.40 40,000
Prime Cost 13.48 8,08,800 13.48 13,48,000

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 21101150 VI Semester B.Com. - Cost Accounting 2 (April 2021)

Works overhead: - -
Fixed 10.00 6,00,000 6.00 6,00,000
Variable 4.00 2,40,000 4.00 4,00,000
Administrative overhead: - -
Fixed 2.13 1,28,000 1.28 1,28,000
Variable 0.32 19,200 0.32 32,000
Sales overhead: - -
Fixed 0.67 40,000 0.40 40,000
Variable 0.40 24,000 0.40 40,000
Total Cost 31.00 18,60,000 25.88 25,88,000
(Need not expect ‘per unit’ column. However, showing the calculation is important. If the answer is not
fully correct, give proportionate marks based on the number of correct cost elements)
18) Calculation of profit at 75% level of capacity.
Capacity 100% 75%
Sales 5,00,000 3,75,000
Variable cost (60%) 3,00,000 2,25,000
Contribution 2,00,000 1,50,000
Fixed Cost 80,000 80,000
Net profit 1,20,000 70,000
P/V ratio = 1 – VC ratio = 1 – 60% = 40% or (2,00,00 ÷ 5,00,000) x 100
BEP = Fixed cost ÷ P/V ratio = 80,000 ÷ 40% = Rs. 2,00,000
Percentage of B.E. sales = 2,00,000 ÷ 5,00,000 = 40%
(Marks allocation: 2 + 2 + 1)
19) Preliminaries taken for the installation of a system of Budgetary Control: Preliminary steps to be taken
for the implementation of budgetary control system are as follows:
a) Appointment of Budget controller
b) Establishment of budget committee comprises of the various department heads. Some of the
functions are preparing the budget manual, provision of historical data, general policies, budget
estimates from the various departments for consideration and review, evaluate and revise the
estimates before preparing the final budget, prepare master budget after the functional budgets have
been approved, coordinate all budget work, analyze variances and recommend corrective actions.
c) Creation of budget centres with a responsible personnel
d) Introduction of adequate accounting records so as to make comparison between the budgeted plan
and the actual transaction.
e) Preparation of an organization chart showing clearly the authority and responsibility of various
involved in the system.
f) Preparation of budget manual, which is considered as a reference document which set out the
responsibility for the persons engaged in the routine of and the forms and records required for
budgetary control.
g) Budget period which can be prepared for short term, long term or annually.
h) Determination of key factors such as sales, materials, labor, plant capacity etc.
20) Features of absorption costing: In absorption Costing, all costs, whether variable or fixed, are charged
to the operations/products/processes. The following are the features of absorption costing:
a) The cost is determined on the basis full cost, i.e., variable and fixed cost are taken into account.
b) Overhead or indirect costs are absorbed with the help of a fair absorption rate, based on units
produced, labor hours, machine hours etc.
c) The cost of inventory will be higher in absorption costing as the product cost includes fixed factory
overhead.

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 21101150 VI Semester B.Com. - Cost Accounting 2 (April 2021)

21) Break Even Chart showing the Break Even Point

Part C: (Q. Nos. 22 to 25) Answer any two questions. Each question carries 15 marks.
22) Contract accounts of Contract No.1 and Contract No. 2
Contract Accounts
Particulars Contract 1 Contract 2 Particulars Contract 1 Contract 2
To Raw materials 5,80,000 10,80,000 By Plant at site (Closing) 1,44,000 2,70,000
To Wages 11,24,000 16,50,000 By Materials at site 40,000 60,000
Wages accrued 36,000 54,000 By Work-in-progress
To Other expenses 28,000 60,000 Certified 16,00,000 30,00,000
To Plant (opening) 1,60,000 3,00,000 Uncertified 80,000 90,000
To Expenses due 4,000 9,000
To Notional profit C/d 2,67,000 By Costing P/L A/c (Loss) 68,000
19,32,000 34,20,000 19,32,000 34,20,000
To WIP Reserve 1,33,500 By Notional Profit B/d 2,67,000
To Costing P/L A/c 1,33,500
2,67,000 2,67,000
2 22,50,000
Profit transferred to Costing P/L A/c = 2,67,000 x 3
x 30,00,000
= 1,33,500

23) Preparation of process Accounts

Process I Account
Particulars Qnty @ Value Particulars Qnty @ Value
To Basic raw materials 1,000 3.0 3,000 By Scrap 50 2.0 100
To Direct materials 2,600 By Process II A/c 950 10.0 9,500
To Direct labour 2,000
To Production O/Hs 2,000
1,000 9,600 1,000 9,600
9,600 − 100
Calculation of output per unit of Process I = = Rs. 10
1,000 − 50
Process II Account
Particulars Qnty @ Value Particulars Qnty @ Value
To Process I A/c 950 10.0 9,500 By Scrap 95 4.0 380
To Direct materials 1,980 By Process III A/c 840 20.0 16,800
To Direct labour 3,000 By Abnormal Loss A/c 15 20.0 300
To Production O/Hs 3,000
950 17,480 950 17,480

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 21101150 VI Semester B.Com. - Cost Accounting 2 (April 2021)

17,480 − 380 17,100

Cost of output per unit of Process II = = = Rs. 20
950 − 95 855

Value of Abnormal loss = 15 x 20 = Rs. 300

Process III Account
Particulars Qnty @ Value Particulars Qnty @ Value
To Process II A/c 840 16,800 By Scrap 126 5.0 630
To Direct materials 2,962 By Finished Stock 750 38.0 28,500
To Direct labour 4,000
To Production O/Hs 4,000
To Abnormal Gain A/c 36 38.0 1,368
876 29,130 876 29,130
27,762 − 630 27,132
Cost of output per unit of Process III = = = Rs. 38
840 − 126 714

Value of Abnormal gain = 36 x 38 = Rs. 1,368

Abnormal Loss A/c
Particulars Qnty @ Value Particulars Qnty @ Value
To Process II A/c 15 20.00 300 By Normal Loss A/c 15 4.00 60
By Costing P/L A/c 240
15 300 15 300
Abnormal Gain A/c
Particulars Qnty @ Value Particulars Qnty @ Value
To Normal Loss A/c 36 5.00 180 By Process III A/c 36 38.00 1,368
To Costing P/L A/c 1,188 -
876 1,368 36 1,368
(Award 1 ½ each for Abnormal Gain & Loss A/cs and 4 marks each for process A/cs and per unit calculation)
24) Evaluation of the new proposal
Production Capacity 60% 70% 80% 90% 100%
Production (units) 60,000 70,000 80,000 90,000 1,00,000
Selling price per unit 90 80 75 67 61
Variable cost per unit 15 15 15 15 15
Contribution per unit 75 65 60 52 46
Total Contribution 45,00,000 45,50,000 48,00,000 46,80,000 46,00,000
Total Fixed Cost 40,00,000 40,00,000 40,00,000 40,00,000 40,00,000
Net profit/Loss 5,00,000 5,50,000 8,00,000 6,80,000 6,00,000
1) The net profit is maximum at 80% capacity and hence, the firm may produce 80000 units and sell @
Rs. 75 to earn a profit of Rs. 8,00,000.
2) The balance capacity (20%) is available to produce 20000 units. If the firm accepts the additional
order, additional profit will be as follows:
Production Capacity Existing (80%) Additional (20%) Total (100%)
Production (units) 80,000 20,000 1,00,000
Selling price per unit 75 40
Variable cost per unit 15 15
Contribution per unit 60 25
Total Contribution 48,00,000 5,00,000 53,00,000
Total Fixed Cost 40,00,000 1,00,000 41,00,000
Net profit/Loss 8,00,000 4,00,000 12,00,000

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 21101150 VI Semester B.Com. - Cost Accounting 2 (April 2021)

The above analysis shows that the firm can earn an additional profit of Rs. 4,00,000 if the additional
order for 20,000 units is accepted @ Rs. 40 per unit.
25) Preparation of Cash budget.
Apr May Jun
Opening balance 8,500 14,500 6,500
Sales 1,00,000 95,000 80,000
Total cash inflows 1,08,500 1,09,500 86,500
Cash outflows:
Purchases 86,000 70,000 87,000
Wages 3,000 6,000 4,000
Overheads 5,000 5,000 7,200
Purchase of plant 22,000
Total cash outflows 94,000 1,03,000 98,200
Closing balance of cash 14,500 6,500 -11,700
-11,700 indicates bank overdraft
(Apportion the marks based on the number of items of inflows and outflows and not based on months)
_______________________________________________________________________________________
Prepared by:
CMA Dr. RAJU V. P.
Associate Professor
Nirmala College Muvattupuzha
Mobile: 9495608176