II INTERNALMANAGEMENT ACCOUNTING AND CONTROL SYSTEMS

I(a) Distinguish between Job and Process costing. 3 marks

Job Costing Process Costing1. It is used where production is

undertaken under specific orders.2. Cost is determined for each job

separately3. Each job is separate and independent

of the other.4. Each job is usually a single complete

unit and there is no work in progress after completion.

5. There are no transfers from one job to another unless there is a surplus or excess production.

6. Job costs are ascertained only when jobs are completed.

7. The items of prime cost can be traced with job cost.

8. Cost control is difficult due to diverse nature of jobs.

1. It is used in continuous and mass production industries producing homogenous products.

2. Costs are compiled for each process on time basis.

3. Products are manufactured continuously and they lose their individual identity.

4. There can be work in progress at the end of the costing period.

5. As the product moves from one process to another the cost is transferred to next process.

6. The costs are ascertained at the end of the costing period.

7. Prime cost cannot be traced with a particular order due to continuous production.

8. Cost control is comparatively easier because the products are homogenous and production is stable.

(b) What are the assumptions and uses of Marginal Costing? 7 marks

According to the Terminology of Cost Accountancy of the Institute of Cost and Management Accountants, London, Marginal Cost represents “the amount of any given volume of output by which aggregate costs are changed if the volume of output is increased by one unit”.

The Institute of Cost and Management Accountants, London, has defined Marginal Costing as “the ascertainment of marginal costs and of the effect on profit of changes in volume or type of output by differentiating between fixed costs and variable costs”.

Assumptions:

1. All elements of cost- production, administration and selling and distribution- can be segregated into fixed and variable components.

2. Variable cost remains constant per unit of output irrespective of the level of output and thus fluctuates directly in proportion to changes in the volume of output.

3. The selling price per unit remains unchanged or constant at all levels of activity.4. Fixed costs remain unchanged or constant for the entire volume of production.5. The volume of production or output is the only factor which influences the costs.

II INTERNALMANAGEMENT ACCOUNTING AND CONTROL SYSTEMS

Uses:

1. Helps management in Production Planning.2. Facilitates calculations of important factors like B.E.P.3. Valuable aid to management for decision making.4. Facilitates study of relative profitability.5. Helps in cost control.6. Profit planning.

(c) What is Transfer Pricing? Under what conditions transfer prices are necessary? Explain briefly the types of transfer pricing. 10 marks

“A transfer price is a price used to measure the price of goods or services furnished by a profit centre to other responsibility centres within a company”. The evaluation of managerial performance within the company through profit centres is impossible without determining transfer price. In case various profit centres of the company exchange goods and services. In such situations, there is need to determine the monetary values, called transfer price, at which the transfer should take place so that costs and revenues could be properly assigned.

Types:

1. Cost price2. Cost plus a normal mark-up3. Incremental cost4. Shared profit relative to the cost5. Market price6. Standard price7. Negotiated price8. Dual or two-way price.

II. Differentiate between Marginal and Absorption Costing. 5 marks

Absorption Costing Marginal Costing

1. All costs whether variable or fixed are treated as product costs even though fixed cost are period costs and have no relevance to current operations.

2. The stock of finished goods and work in progress is valued at total cost.

3. In absorption costing arbitrary apportionment of fixed costs, over the products, results in under or over-absorption of such costs.

4. Managerial decision-making is based upon ‘profit’ which is the excess of sales value over total cost.

1. Only variable costs are treated as product costs, fixed cost is treated as period cost & is charged to P/L a/c for that period.

2. FG and WIP are valued at marginal cost ie variable cost only.

3. It excludes fixed costs and the question of under or over absorption of fixed costs does not arise.

4. The managerial decisions are guided by ‘contribution’ which is the excess of sales value over variable cost.

II INTERNALMANAGEMENT ACCOUNTING AND CONTROL SYSTEMS

Part B

I (a) From the following particulars find the most profitable product mix and prepare a statement of profitability of that product mix. 10 marks

Particulars Product A Product B Product C

Units budgeted to be produced and sold 1800 3000 1200

Selling price/ unit Rs. 60 Rs. 55 Rs. 50

Requirements/units; direct material 5 kg 3 kg 4 kg

Direct labour 4 hrs 3 hrs 2 hrs

Variable OHs Rs. 7 Rs. 13 Rs. 8

Fixed OHs Rs. 10 Rs. 10 Rs. 10

Cost of Direct material/kg Rs. 4 Rs. 4 Rs. 4

Direct labour hour rate Rs. 2 Rs. 2 Rs. 2

Maximum possible units of sales 4000 5000 1500

All the three products are produced from the same direct material using the same type of machines and labour. Direct labour, which is the key factor, is limited to 18600 hrs.

Particulars Product A Product B Product C

II INTERNALMANAGEMENT ACCOUNTING AND CONTROL SYSTEMS

(b) Your company has a production capacity of 2lakhs units per year. Normal capacity utilization is reckoned is 90%. Variable production costs are Rs.11 per unit. The fixed cost are Rs. 360000/year. Variable selling costs are Rs. 3 per unit and fixed selling costs are Rs. 270000/year. The unit selling price is Rs. 20. In the year which ended on 31.3.2012, the production was 160000units and sales were 150000 units. The closing inventory on 31.3.2012 was 20000 units. The variable production costs for the year were Rs. 35000 higher than the standard. Calculate the profit for the year by the Absorption and Marginal Costing methods and comment on the results. 15 marks

Particulars Absorption costing Marginal Costing

(A)Sales in units

Selling price per unit

Sales

(B) Variable production costs

Variable selling costs (3*150000)

Fixed cost

Fixed selling cost

Total cost

+ opening inventory

- Closing inventory

Cost of goods sold

Operating profit

- Fixed cost

- Fixed selling cost

Net profit

1,50,000

20

1,50,000

20

30,00,000 30,00,000

17,95,000

4,50,000

3,60,000

2,70,000

17,95,000

4,50,000

_

_

28,75,000

_

22,45,000

_

28,75,000

3,60,000(18*20000)

22,45,000

2,80,000(14*20000)

25,15,000 19,65,000

4,85,000

_

_

10,35,000

3,60,000

2,70,000

4,85,000 4,05,000

II INTERNALMANAGEMENT ACCOUNTING AND CONTROL SYSTEMS