Cost ing Assignment 3a1ko

Amity Campus Uttar Pradesh India 201303

ASSIGNMENTS PROGRAM: MFC SEMESTER-II Subject Name

: Cost ing

Study COUNTRY

: Somalia

Roll Number (Reg.No.)

: MFC001512010-2012005

Student Name

:Abdulahi Hassan Herzi

INSTRUCTIONS a) Students are required to submit all three assignment sets. ASSIGNMENT DETAILS

MARKS

Assignment A

Five Subjective Questions

10

Assignment B

Three Subjective Questions + Case Study

10

Assignment C

Objective or one line Questions

10

b) c) d) e)

Total weightage given to these assignments is 30%. OR 30 Marks All assignments are to be completed as typed in word/pdf. All questions are required to be attempted. All the three assignments are to be completed by due dates and need to be submitted for evaluation by Amity University. f) The students have to attached a scan signature in the form. Signature

:

_________________________________

Date

:

___________40/7/2011_____________

( √ ) Tick mark in front of the assignments submitted Assignment ‘A’ √

Assignment ‘B’

√

Assignment ‘C’

√

ANSWER ONE: SECTION A Cost ing is an approach to evaluating the overall costs that are associated with conducting business. Generally based on standard ing practices, cost ing is one of the tools that managers utilize to determine what type and how much expenses is involved with maintaining the current business model. At the same time, the principles of cost ing can also be utilized to project changes to these costs in the event that specific changes are implemented. When it comes to measuring how wisely company resources are being utilized, cost ing helps to provide the data relevant to the current situation. By identifying production costs and further defining the cost of production by three or more successive business cycles, it is possible to note any trends that indicate a rise in production costs without any appreciable changes or increase in production of goods and services. By using this approach, it is possible to identify the reason for the change, and take steps to contain the situation before bottom line profits are impacted to a greater degree. In the management of a company's finances, the relationship between spending expenses and profitability is weighed against its success or failure. Cost ing is the branch of managerial ing that systematically assists managers in the internal balancing of spending and profits, as well as assessing operational costs and budget analyses These are the following important objectives of cost ing: • •

• • •

Ascertainment of Cost: The primary objectives of the cost ing is to ascertain cost of each product, process, job, operation or service rendered. Ascertainment of Profitability: Cost ing determines the profitability of each product, process, job, operation or service rendered. The statement of profit or losses and Balance Sheet also submitted to the management periodically. Classification of Cost: Cost ing classifies cost in to different elements such as materials, laborer and expenses. It has further been divided as direct cost and indirect cost for cost control and recording. Control of Cost: Cost ing aims at controlling cost by setting standards and compared with the actual, the deviation or variation between two is identified and necessary steps are taken to control them. Fixation or Selling Prices: Cost ing guides management in regard to fixation of selling prices of the products. It is also helpful for preparing tender and quotations. ANSWER 2. Cost classification is the process of grouping costs according to their common characteristics. A suitable classification of costs is very helpful in identifying a given cost with cost centers or cost units. Costs may be classified according to their nature, i.e., material, labor and expenses and a number of other characteristics. Ist : Direct Material Cost Direct material cost comes in the first part of cost classification. Its cost is also important for calculation of prime cost of any product. Raw material is the main source of any finished product. So, it may be 70% to 90% of total cost of production.

2nd : Direct Labour Cost Direct labor cost also the part of cost classification. Without use of labor, we can not convert raw material into finished product. Like direct material cost, labor cost is also important for calculating the prime cost of production. What % of total cost will be the labour cost? It depends only the nature of production. If nature of production need large numbers of processes, then we need large labor and cost may be very high % of total cost. 3rd : Overhead Overhead may be indirect material, factory overheads and other overheads. These do not effect production directly but without this production may be delay. Suppose, you want to produce cable in night, at that time, you need light for doing production activities. So, you have to pay more bill for supply of electricity in night also. Costs can also be classified in the following ways:

g)

By nature By function By traceability By variability Controllability By Normality Capital and Revenue etc.

•

ANSWER 3:

•

The ABC inventory control method determines the importance of inventory items based on usage, sales or costs criteria. This inventory control method provides companies the ability to give individual stock keeping units (SKUs) different levels of inventory control based on the SKUs relative importance. Companies perform a Pareto analysis to determine ABC item classifications. The ABC inventory method offers advantages over non-classification methods in the areas of cost-control, SKU level management and order fulfillment.

a) b) c) d) e) f)

Advantages of ABC Analysis Control •

Costs

Utilizing the ABC inventory method gives a company more control over the inventory it stores. A company that uses annual costs of goods sold (COGS) as its basis for the ABC classification method stocks less of the "A" class items (identified as having higher annual COGS) and stocks more of the "B" and C" class items (identified as having lower annual COGS). On the other hand, a company that uses annual usage as its basis for classification stocks more of the "A" class items because of their higher usage and less of the lower use "C" class items. Stocking a better mix of the right inventory allows a company to control over-supply and under-supply of important SKUs.

•

Because the ABC inventory method makes use of Pareto's law (the basic 80/20 rule), companies can focus on containing the cost of the 20% of items that make up 80% of a companies annual spend. Once a company has determined which items fall into each ABC category it can establish cost-reduction initiatives at the SKU level. These initiatives can include reducing the SKU's leadtime, reducing safety-stock levels and negotiating reduced pricing with suppliers. Additionally, even without implementing cost-savings initiatives a company experiences cost-reductions from eliminating excess stock for less important, but sometimes-costly SKUs.

Improved service •

One of the greatest benefits comes from the improvement in customer service levels and order fulfillment. ABC analysis provides a company with information to stock the right-mix of inventory. If a company uses customer demand as its basis for analysis, it ends up stocking a better mix of the items customers require. When a company has the right inventory at the right time it reduces backorders and unfilled orders. This has a positive impact on customer service and gives a competitive advantage to the company that uses this methodology.

Warehouse •

ABC inventory extends to warehouse management has well. Companies utilizing ABC analysis in the warehouse give priority space to faster moving SKUs. This allows workers to rapidly find, pick and pack fast moving items. Implementing ABC inventory management in the warehouse reduces labor cost and increases productivity.

ANSWER 4: Idle time is the time for which the Employer pays , but from which he obtains no production. For example if out of eight hours that worker supposed to work , the worker’s job card shows only six hours work the rest of the time is called idle time. Idle time can be of two types. Normal idle time it is unavoidable of normal nature and is inherited in production environment. And abnormal idle time which is not caused by usual production routine. Causes of idle time include: a) Power outage which affects most business b) Natural disaster like what happen in Japan if is not restored for days c) The ways employers structure the work or schedule employee’s results in certain amount of idle time. d) Lack of attendance time sheet /poor management. e) Tea break f) Moving from one department to another department g) Temporary absence from duty due to accident. h) Time lost through lack of Materials.

ANSWER 5: CVP analysis involves the analysis of how total costs, total revenues and total profits are related to sales volume, and is therefore concerned with predicting the effects of changes in costs and sales volume on profit. It is also known as 'breakeven analysis. Cost-volume-profit (CVP) analysis expands the use of information provided by breakeven analysis. A critical part of CVP analysis is the point where total revenues equal total costs (both fixed and variable costs). At this breakeven point, a company will experience no income or loss. This BEP can be an initial examination that precedes more detailed CVP analysis. Cost-volume-profit analysis employs the same basic assumptions as in breakeven analysis. The assumptions underlying CVP analysis are: The behavior of both costs and revenues is linear throughout the relevant range of activity. (This assumption precludes the concept of volume discounts on either purchased materials or sales.) Costs can be classified accurately as either fixed or variable. Changes in activity are the only factors that affect costs. All units produced are sold (there is no ending finished goods inventory). When a company sells more than one type of product, the sales mix (the ratio of each product to total sales) will remain constant. Cost Volume Profit CVP analysis is applied in the following situations: Planning and forecasting of profit at various levels of activity. Useful in developing flexible budgets for cost control purposes. Helps the management in decision-making in the following typical areas: Identification of the minimum volume of activity that the enterprise must achieve to avoid incurring loss.

This analysis presumes that costs can be reliably divided into fixed and variable category. This is very difficult in practice. This analysis presumes an ability to predict cost at different activity volumes. In practice, a lot of experience may be required to reliably develop this ability. A series of break-even charts may be necessary where alternative pricing policies are under consideration. Therefore, differential price policy makes break-even analysis a difficult exercise. It assumes that variable cost fluctuates with volume proportionally, while in practical life the situation may be different.

SECTION B ANSWER 1: STANDARD COSTING Since one of the most important objectives of cost ing is to provide information to the management for cost control, then cost control will be effective only if it is preceded by cost planning. In order management to indicate what they want to achieve they to have planned cost and this is where standard costing comes in, as it is one of the ways used for planning. Standard costing refers to the principles and procedure which involve the use of predetermined standard costs relating to each element of cost, and for each line of product manufactured or service rendered. A standard cost is an estimated cost which suggests what the cost should be under given conditions. The significance of standard costing can be understood better if it is viewed in contrast to actual historical costing. However, a standard cost can be defined as “A pre-determined cost calculated with respect to a prescribed set of working conditions, correlating technical specifications and scientific measurements of materials and labor to the price and wage rates expected to apply during the period to which the standard cost is expected to relate, with an addition of an appropriate share of budgeted overhead. Its main objective is to provide bases of control through variance ing for the valuation of stocks and work-in-progress and in exceptional cases for fixing selling prices. The need for standard costs include: Cost control Pricing decision Performance appraisal Cost awareness Management by objective

The difference between Standard Costing and Historical Costing is that the standard costing is much related to historical costing because in the above definition of standard costing says that the significance of standard costing can be understand well if it is viewed in contrast to actual historical costing. So, the system of costing in which costs are recorded after they incurred is knows as historical costing. Historical costing provides to management records of what has happened.

ANSWER 2: A flexible budget is a budget that adjusts or flexes for changes in the volume of activity. The flexible budget is more sophisticated and useful than a static budget, which remains at one amount regardless of the volume of activity.

Flexible budget is defined as “a budget which by recognizing the difference between fixed, semi-fixed and variable costs. It is designed to change in relation to the level of activity attained.” A flexible budget is defined as ―a budget which by recognizing the difference between fixed, semi-fixed and variable costs, is designed to change in relation to the level of activity attained. Characteristics of Flexible Budgets Flexible budgets have several desirable characteristics. They Cover a range of activity Are dynamic Facilitate performance measurement.

Steps in flexible budgeting The following are the steps taken during flexible budgeting. •

Deciding the range of activity to which the budget is to be prepared.

•

Determining the cost behavior patterns (fixed, variable, semi-variable) for each element of cost to be included in the budget.

•

Selecting the activity levels (generally in of production) to prepare budgets at those levels.

•

Preparing the budget at each activity level selected by associating the activity level with corresponding costs. The corresponding costs to be attached with each activity level are determined in of their behavior, i.e., fixed, variable and semi-variable

Answer 3:

Responsibility ing is an underlying concept of ing performance measurement systems. The basic idea is that large diversified organizations are difficult, if not impossible to manage as a single segment, thus they must be decentralized or separated into manageable parts. These parts or segments are referred to as responsibility centers that include: 1) revenue centers, 2) cost centers, 3) profit centers and 4) investment centers. This approach allows responsibility to be assigned to the segment managers that have the greatest amount of influence over the key elements to be managed. These elements include revenue for a revenue center (a segment that mainly generates revenue with relatively little costs), costs for a cost center (a segment that generates costs, but no revenue), a measure of profitability for a profit center (a segment that generates both revenue and costs) and return on investment (ROI) for an investment center (a segment such as a division of a company where the manager controls the acquisition and utilization of assets, as well as revenue and costs). Responsibility ing is ―a system of management ing‖ under which ability is established according to the responsibility delegated to various levels of management and management information and reporting system instituted to give adequate feed back in of the delegated responsibility. Below is an example of how an organization which is separated into segments showing how the information flows and managed.

Significance of Responsibility ing The significance of responsibility ing for management can be explained in the following way: Easy Identification: It enables the identification of individual managers responsible for satisfactory or unsatisfactory performance. Motivational Benefits : If a system of responsibility ing is implemented, consider- able motivational benefits are assured. Data Availability : A mechanism for presenting performance data is provided. A framework of managerial performance appraisal system can be established on that basis, besides motivating managers to act in the best interests of the enterprise. Ready-hand Information: Relevant and up to the minutes information is made available which can be used to estimate future costs and or revenues and to fix up standards for departmental budgets. Planning and Decision Making: Responsibility ing helps not only in control but in planning and decision making too. Delegation and Control: The twin objectives of management are delegating responsibility while retaining control are achieved by adoption of responsibility ing system. Principles of responsibility ing The main features of responsibility ing are that it collects and reports planned and actual ing.

CASE STUDY ANSWER 1: Breakeven Quantity =

Fixed cost Selling price – Variable cost = Fixed cost Unit contribution

240,000 40-25

= 240, 000 = 16, 000 15

X Unit selling price a) Breakeven Sales = Fixed Cost Unit contribution = (240,000/15) 40

= 640, 0000

b) Margin of safety = (Profit*Selling price) Selling price –Variable cost

Profit = Selling price – Total cost = 960,000- 840,000 =120 Then Margin of safety = Profit*selling price Selling-variable cost = 120*960,000 960,000-600,000

ANSWER 2: Given: No. of shirts sold = 20,000 Profit = ? Profit = Selling price –Total cost = Selling price –(Variable cost + Fixed cost) = 20,000*40 _(20,000*25-240,000) = 800,000-500,000-240,000 =60,000

ANSWER 3: Given: Variable cost = 28 Price

= 40

Fixed cost = 240,000 Profit

= 15,000

Q=? Q = Sales Price Sales = Profit + Fixed cost Therefore: Q = profit + fixed cost Unit price = 15,000 + 240,000 12 =255,000 12

= 21,250

= 320,000

SECTION C

Q1

Which of the following best describes a fixed cost? A cost which:

(a) (b) (c) (d)

Represents a fixed proportion of total costs Remains at the same level up to a particular level of output Has a direct relationship with output Remains at the same level when output increases

Q2 A business's telephone bill should be classified into which one of these categories? (a) Fixed cost (b) Stepped fixed cost (c) Semi-variable cost (d) Variable cost Q3 The total production cost for making 20,000 units was £21,000 & total production cost for making 50,000 was £34,000. When production goes over 25,000 units, more fixed costs of £4,000 occur. So full production cost per unit for making 30,000 units is: (a) (b) (c) (d)

£0.30 £0.68 £0.84 £0.93

Q4 Which of the following is least likely to be an objective of cost ing system? (a) Product Costing (b) Optimum Sale Mix determination © Maximization of profits (d) Sales Commission determination

Q5 The classification of costs as either direct or indirect depends upon (a) The timing of the cash outlay for the cost (b) The cost object to which the cost is being related (c) The behavior of the cost in response to volume changes (d) Whether the cost is expensed in the period in which it is incurred

Q6 Which of the following is false with regard to the supplementary rate method for ing of under or over absorption of overheads? (a) It facilitates the absorption of actual overhead for production (b) Correction of costs through supplementary rates is necessary for maintaining data for comparison (c) The supplementary rate can be determined only after the end of the ing period (d) It requires a lot of clerical work (e) The value of stock is distorted under this method.

Q7 Which of the following factors should not be taken into consideration for determining the basis for applying overheads to products? (a) Adequacy (b) Convenience (c) Time factor (d) Seasonal fluctuation of overhead costs (e) Manual or machine work.

Q8 Storekeeping expenses are to be apportioned on the basis of (a) Floor area of the production departments (b) Direct labor hours of each product (c) Number of units manufactured of each product (d) Number of material requisitions (e) Sales price of each product.

Q9 A company has a margin of safety of Rs.40 lakh and earns an annual profit of Rs.10 lakh. If the fixed costs amount toRs.20 lakh, the annual sales will be (a) Rs.160 lakh (b) Rs.140 lakh

(c) Rs.120 lakh (d)Rs.200 lakh (e) Rs.180 lak

Q10 Which of the following statements is false with respect to the use of predetermined overhead absorption rates? (a) Product cost can be worked out promptly (b) Use of predetermined overhead rate will provide data available for decision making but not for cost control (c) Product costs are not affected unnecessarily due to the vagaries of the calendar or seasonal fluctuations (d) By using normal capacity as base while determine the overhead rate, losses due to idle capacity is highlighted and real cost of production is reflected (e) Product cost can be estimated prior to commencement of production and can help the management in price quotation and fixing selling price well in advance.

Q11 In process costing, equivalent units, using first in first out (FIFO) are a measure of (a) Work done on the beginning as well as ending work-in-process inventory (b) Work done on units started in the production process during the period (c) Work done in the department during the period (d) Work required to complete the beginning work-in-process inventory (e) Work performed on the ending work-in-process inventory.

Q12 A company’s approach to a make or buy decision (a) Depends on whether the company is operating at or below break-even level (b) Depends on whether the company is operating at or below normal volume (c) Depends on whether the company is operating at practical capacity level (d) Involves an analysis of avoidable costs

(e) Requires use of absorption costing.

Q13 Which of the following statements is false? (a) Historical costs are useful solely for estimating costs that lie ahead (b) Abnormal cost is controllable (c) Conversion cost is the production cost minus direct material cost (d) istrative expenses are mostly fixed (e) Notional costs are not included while ascertaining costs.

Q14 Ramesha Ltd. manufactures product DN for last seven years. The company maintains a margin of safety of 37.5%with an overall contribution to sales ratio of 40%. If fixed cost is Rs.5 lakh, the profit of the company is (a) Rs.12.50 lakh (b) Rs. 4.25 lakh (c) Rs. 3.00 lakh (d) Rs.24.00 lakh (e) Rs.20.00 lakh.

Q15 Which of the following statements is true for a firm that uses variable costing? (a) Profits fluctuate with sales (b) An idle facility variation is calculated (c) Product costs include variable istrative costs (d) Product costs include variable selling costs (e)The cost of a unit of product changes because of changes in number of units manufactured.

Q16 If the price rises, which of the following methods of valuing stock will give the highest profit? (a) LIFO method

(b) Replacement cost method (c) FIFO method (d) Simple average method (e) Specific order method.

Q17 An ing system that collects financial and operating data on the basis of underlying nature and extent to the cost drivers is (a) Direct costing (b) Target costing (c) Activity based costing (d) Variable costing (e) Cycle-time costing.

Q18 In allocating factory service department costs to producing departments, which of the following items would most likely be used as an activity base? (a) Salary of service department employees (b) Units of electric power consumed (c) Direct materials usage (d) Units of finished goods shipped to customers (e) Units of product sold.

Q19 Apportionment of overhead cost may be defined as (a) Charge to a cost center of an overhead cost item with no estimation (b) Charge to cost center for the use of an overhead cost (c) Charge to cost units for the use of an overhead cost (d) Classification of overhead cost as fixed or variable (e) Charge each cost center with a share of an overhead cost using an apportionment basis to estimate the benefit extracted by each cost center.

Q20 An increase in variable costs where selling price and fixed cost remain constant will result in which of the following? (a) An increase in margin of safety (b) No change in margin of safety (c) A fall in the sales level at which break even point will occur (d) A rise in the sales level at which break even point will occur (e) No change in the sales level at which break even point will occur.

Q21 Which of the following is a cause of materials usage variance? (a) Emergency buying in smaller quantities (b) Carriage, freight and other charges absorbed instead of being charged to suppliers (c) Cash discount not taken (d) Rectification required when many components do not through inspection (e) Claims not made on suppliers for substandard materials or short receipt of materials.

Q22 The following are the causes of labour efficiency variance except (a) Bad working condition (b) Defective tools, equipment and materials (c) Defective supervision (d) Bad workmanship due to dissatisfaction among the workers (e) Employing people of different grades than planned.

Q23: Which of the following transfer pricing methods will preserve the sub-unit autonomy? (a) Cost-based pricing (b) Negotiated pricing (c) Variable-cost pricing

(d) Full-cost pricing (e) Marginal cost pricing.

Q24 The most fundamental responsibility center affected by the use of market-based transfer prices is (a) Revenue center (b) Cost center (c) Profit center (d) Investment center (e) Production center.

Q25 Target pricing (a) Is a pricing strategy used to create competitive advantage (b) Considers the variable costs and excludes fixed costs (c) Is often used when costs are difficult to control (d) Is more appropriate when applied to mature and long-established products (e) Is well suited for complex products that require many sub-assemblies.

Q26 A segment of an organization is referred to as a profit center if it has (a) Responsibility for developing markets and selling the output of the organization (b) Responsibility for combining materials, labor and other factors of production into a final output (c) Authority to provide specialized to other units within the organization (d) Authority to make decisions affecting the major determinants of profit, including the power to choose its markets and sources of supply (e) Authority to make decisions affecting the major determinants of profit, including the power to choose its markets and sources of supply and significant control over the amount of invested capital.

Q27 Which of the following is false about standard costing system?

(a) It is based on a cost control concept (b) It assumes stability in the current manufacturing process (c) The goal is to meet cost performance standards (d) It assumes production workers have the best knowledge to reduce costs (e) It motivates employees to try to reach target established.

Q28 Which of the following service departments’ costs is apportioned on the basis of rate of labor turnover? (a) Payroll department (b) Personnel department (c) Canteen service (d) Store-keeping department (e) Maintenance department.

Q29 Which of the following bases is appropriate to apportion the cost incurred on supervision of machine? (a) Floor area occupied by each machine (b) Equitable basis (c) Value of each machine (d) On the basis of past experience (e) Estimated time devoted.

Q30 Which of the following bases is used for apportionment of overtime of workers engaged in a particular department? (a) Direct allocation (b) Direct labor hours (c) Number of workers (d) Technical estimates (e) Relative areas of departments.

Q31 The rate used in addition to the original rates for ascertaining the true profit for adjusting the under or over absorption of overheads is known as (a) Predetermined rate (b) Blanket rate (c) Moving average rate (d) Supplementary overhead rate (e) Multiple overhead rate.

Q32 Any activity for which a separate measurement of costs is desired is known as (a) Cost unit (b) Cost center (c) Cost object (d) Cost pool (e) Cost allocation.

Q33 Which of the following is true regarding the difference between marginal costing and absorption costing? (a)Under marginal costing, fixed costs are treated as product costs while it is excluded under absorption costing (b)Under absorption costing, under absorption or over absorption of overhead occurs but it does not occur under marginal costing (c)The net income under absorption costing is always more than the net income under marginal costing (d)If production is equal to sales, net income under absorption costing is greater than net income under marginal costing (e)In case of decreased inventory, the net income under marginal costing is less than the net income under absorption costing.

Q34 Which of the following statements is false?

(a) The aggregate of indirect material, indirect wages and indirect expenses is overhead costs (b)Direct costs are never treated as overhead costs even in cases where efforts involved in identifying and ing are disproportionately large (c)The overheads can be apportioned to a cost center in accordance with the principles of benefit and/or responsibilities (d) Capital expenditure should be excluded from costs and should not be treated as overhead (e) Expenditure that does not relate to production shall not be treated as overhead.

Q35 An increase in variable costs where selling price and fixed cost remain constant will result in which of the following? (a) An increase in margin of safety (b) A fall in the sales level at which break even point will occur (c) A rise in the sales level at which break even point will occur (d) No change in the sales level at which break even point will occur (e)No change in angle of incidence.

Q36 Which of the following statements is true for a firm that uses variable costing? (a) Product costs include variable selling costs (b) An idle facility variation is calculated (c) The cost of a unit of product changes because of changes in number of units manufactured (d) Profits fluctuate with sales (e) Product costs include variable istrative costs.

Q37 Which of the following can improve break-even point? (a) Increase in variable cost (b) Increase in fixed cost (c) Increase in sale price (d) Increase in sales volume

(e) Increase in production volume.

Q38 Which of the following statements is/are true? I. A cost unit is a unit of output in the production of which costs are incurred. II. A cost center is the smallest segment of activity or area of responsibility for which costs are accumulated. III. Typically departments are cost centers and there may be many departments in a cost center. (a) Only (I) above (b) Only (II) above (c) Both (I) and (III) above (d) Both (I) and (II) above (e) Both (II) and (III) above.

Q39 The Rowan Plan (a) (b) (c) (d)

Is the best for efficient workers Pays lower bonus that that of Halsey beyond 50% saving in time. Pays increased bonus at an increasing rate as the efficiency None of the above

Q40 A written request to a supplier for specified goods at an agreed upon price is called a (a) (b) (c) (d)

Receiving Report Purchase order Material requisition form Purchase requisition