Cost and Management AccountingSubjectiveQuestion 6163 of 249
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Question 6 (a) In the following independent situations, identify the type of cost and state whether it is relevant/non-relevant in managerial decision making: (i) A Limited owns a commercial space of 1500 square feet and uses the same for its own office accommodation purposes. Similar office is available nearby on rent of ₹ 30,000 per month. (ii) MNC Limited has paid ₹ 1 Lakh as rent for a factory shed which is temporarily closed for the last two months. (iii) Beta Company has paid ₹ 3 Lakhs to a market research agency to find out the market demand of the innovative product developed by the company. COST AND MANAGEMENT ACCOUNTING (iv) Zen LLP has paid incentive of ₹ 5 Lakhs @ 1% on sales to the salesmen for achieving sales beyond the expected sales of ₹ 25 Lakhs per month per salesman. (v) A start-up company has invested ₹ 50 Lakhs in Project P. The company could have earned interest of ₹ 3 Lakhs by investing the amount in a bank fixed deposit @ 6% per annum. (5 Marks) (b) Cosmos Limited uses activity based costing and accumulates overhead costs in the following cost pools: (1) Human Resources (2) Maintenance of buildings (3) Parts Management (4) Plant security (5) Purchasing (6) Floor manager's salary (7) Quality control (8) Machine set-up (9) Designing the product (10) Receiving Department Classify each cost pool as per cost hierarchy i.e. unit level, batch level, product level or facility level. (5 Marks) (c) Describe briefly the methods for valuation of work-in-process followed in Process Costing. (4 Marks) OR (c) Contemplate the list of functions given below and identify each one of them with the most relevant scope of Cost Accounting: (i) It involves a detailed examination of each cost. (ii) Helps in planning and control, performance appraisal and managerial decision making. (iii) Cost involved in alternative courses of action. (iv) To find out factors responsible for variance in actual costs from the budgeted costs. (4 Marks)

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Detailed Solution & Explanation

(a) Situation Type of Cost Relevant / Non- Relevant (i) Opportunity Cost/ Imputed Cost/ Notional Cost Relevant (ii) Committed Cost/Shut Down Cost Non-Relevant (iii) Sunk Cost Non-Relevant (iv) Out of Pocket Cost Relevant (v) Opportunity Cost Relevant (b) S. No. Cost Pool Cost Hierarchy Level (1) Human Resources Facility-level (2) Maintenance of buildings Facility-level (3) Parts Management Batch-level/Product Level (4) Plant security Facility-level (5) Purchasing Batch-level (6) Floor manager’s salary Facility-level (7) Quality control Batch-level / Unit Level (8) Machine set-up Batch-level (9) Designing the product Product-level (10) Receiving Department Batch-level (c) Mainly two methods for valuation of work-in-process are followed: (i) First-in-first-out (FIFO) method: Under this method the units completed and transferred are taken from both opening work-in- process (WIP) and freshly introduced materials/inputs. The cost to complete the opening WIP and other completed units are calculated COST AND MANAGEMENT ACCOUNTING separately. The cost of opening WIP is added to cost incurred on completing the incomplete (WIP) units into complete one. The total cost of units completed and transferred is calculated by adding opening WIP cost to cost on freshly introduced inputs. In this method the closing stock of work in process is valued at current cost. (ii) Weighted Average (Average) Method: Under this method, the cost of opening work-in-process and cost of the current period are aggregated and the aggregate cost is divided by output in terms of completed units. The equivalent production in this case consists of work-load already contained in opening work-in-process and work- load of current period. The main difference between FIFO method and average method is that units of opening work in process and their cost are taken in full under average method while under FIFO method only the remaining work done now is considered. OR (c) Function Scope of Cost Accounting (i) Cost Control (ii) Cost Report (iii) Cost Comparison (iv) Cost Analysis

Key Concepts to Understand

Set

A well-defined collection of distinct objects (called elements or members). Sets are denoted by capital letters and elements are listed within curly braces. Key operations include Union (∪), Intersection (∩), and Complement.

Variance

A measure of dispersion equal to the average of the squared deviations of each data point from the mean. Formula: σ² = Σ(xᵢ − x̄)² / n. Standard Deviation = √Variance.

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