COST ACCOUNTING
Chapter No.1 Cost, Classifications and Concepts
Q.1 What is cost Accounting?
Cost accounting is the collection. processing and evaluation of operating data e.g. costs of products, operations. Processes, jobs. materials consumed. labor time used etc for internal planning & control as well as for external reporting.
Q. 2 What are importance of cost accounting?
· Planning and decision making.
· Controlling the cost of product.
· Providing standard and budgets to management.
· Best use of resources.
· Useful to Government is setting tax.
Q.3 What is Cost?
A cost is an unexpired expenditure and defines by the committee on cost Concepts as 'Cost is foregoing, measured in monetary terms incurred or potentially to be incurred to achieve a specific cost object.
Q.4 What is Expense?
Expense is an expired expenditure actually when resources given up have no future potential benefit, we call them as expense. In other words, when total amount of money is spent to achieve some objective, we can say this an expense. Furthermore. it is an expired cost which are deducted from current year revenue.
Q. 5 Define Product or manufacturing cost?
Product costs are the costs incurred for manufacturing. Product cost are said to be attached to the units produced. In case of manufacturing business '. product costs it consists of i) Direct Material. ii) Direct labor and iii) Factory Overhead.
These are also called inventoriable costs
Q. 6 What is period cost?
Costs which are not related to production and are matched against revenues on time period basis are called period costs, non-manufacturing costs or non-inventoriable costs. These costs include marketing or selling cost and administrative costs.
Q.7 What is Direct and Indirect Cost?
A Direct Cost is one that can be conveniently and economically identified with a cost objective or can be associated with a particular segment under consideration. For instance, wood used in furniture. clothes in making shirts etc.
An Indirect cost is one that cannot be conveniently and economically identified with cost objective. for instance. polish on furniture. thread used in shirts etc.
Q.8 Define Fixed and Variable Cost?
Fixed Cost are costs which do not respond to changes in activity level within a limited range e.g. depreciation of assets rent of building.
Variable Cost are costs which change in total in direct proportion to changes in activity level e.g. direct material. direct labor etc.
Q.9 What is differential Cost?
Differential costs are those items of total costs of two or more alternatives. which have different magnitude under each alternative items of differential cost may variable cost items or may he fixed cost items.
Q. 10 What is Opportunity Cost?
Opportunity cost is the net return that could be obtained from the second-best alternative that has been rejected.
Q. 11 Explain Standard Cost?
Standard cost means what the cost should be Standard cost is the predetermined cost of a unit of product, or an operation. Standard cost is mainly used for evaluation of actual performance. Standard cost is the cost target to be achieved.
Q. 12 What is term cost objectives?
Cost objectives means an item or activity or division for which we make a separate measurement of costs. E.g. manufacturing costs of a product etc.
Q. 13 Define Cost Accounting System.
The system of classifying and recording costs under double entry system of book-keeping and their processing different accounts for ultimate presentation in the form of income statement.
Q. 14 Non-integrated or interlocking System.
In a non-integrated system of accounting for costs, cost accounting department maintains separate books of accounts in such a way that memorandum cost ledger control account maintain in financial accounting books, and financial ledger control account maintained in cost accounting books showing same amount of balance but on the opposite sides of the respective accounts. These two accounts are called interlocking accounts making the whole system.
Q. 15 What is integrated system?
Integrated system is one in which only one set of books of accounts in maintained and the features for costs are incorporated into financial accounting books by accommodating the control accounts in financial ledger.
Q. 16 What is chart of accounts?
A chart of accounts is a list of all accounts titles and account codes used by the organization chart of accounts provides aids in evaluation of relative performance of segments or make the work of posting convenient.
Q. 17 What is voucher?
Voucher means any documentary evidence in support of a transaction. Voucher in voucher system denotes written authorization fur the payment of a liability
Q.18 What is voucher system?
Voucher system is a system of internal control over cash payment. It provides management with means of ensuring that every cash payment is properly authorized and correct amount is being paid. It also provides special journal to classify and records cost and expense.
Q. 19 What is voucher Register?
Voucher system provides a special journal that is called voucher register. It classifies and record cost and expenses for which present or future cash payment is to be made and a cash payment journal in the form of cheque register.
Q. 20 How errors are corrected in voucher system?
The voucher is removed from unpaid vouchers file. An entry is made to the general ledger to cancel the voucher. The voucher is also marked as cancelled. New voucher is prepared and recorded in voucher register. In "paid" column of voucher register word "cancelled by voucher No……: "are recorded.
Chapter No. 2 Cost Accounting Cycle
Q1 Define cost accounting cycle? Cost accounting cycle embraces activities connected with verification and preparation of source documents. Their journalizing, then posting to control accounts and subsidiary ledgers, closing of accounts and presenting results of operations of accounting period in the form of income statement. it covers all activities followed to record cost of goods manufactured and sold through proper summary accounts.
Q2. What is accounting period?
Accounting period means the time period covered by an income statement. For external reporting a period of 12 months is adopted. In text book, it is common to take one month as accounting period.
Q. 3 What is source document?
A source document is the written evidence of a transaction and serves as basis of initial entry in the books of accounts. e.g. cash memos, purchase and sale invoice etc.
Q.4 What is perpetual Inventory System?
It is the system of maintaining detailed running records of each item in the inventory. Inventory record show each transaction affecting the inventory position. Information as opening balance, issued and closing balance in the form of units, unit cost and total amount on each date when transaction fall e.g. FIFO method, LIFO method & average material ledger cards method.
Q.5 What is periodic Inventory System?
Periodic Inventory system, adopted by financial accounting, shows during the year only opening balance of stock account, closing balance of stock account is taken into by means of adjusting entry at the end of accounting period. Under this system cost of material used and cost of ending inventory is calculated as: Cost of opening balance of stock xxxxx
Add cost of purchases of stock xxxxx
Less cost of closing balance of stock xxxxx
Cost of material used xxxxx
• NOTE: closing stock is taken physical counting
Q.6. what is factory ledger?
The control account and subsidiary ledger that accumulate data relating to manufacturing operations are maintained at factory in a separate ledger called factory ledger. These accounts include; material, FOH. FOH applied, WIP and finished goods.
Q. 7 What is general ledger?
General ledger is maintained at head office. General ledger includes all the accounts except material, FOH, WIP. and Finished Goods accounts.
Q. 8 Enlist the names of control accounts?
i. Material Control
ii. Payroll Control
iii. Factory Overhead Control
iv. Work in Process Control
v. Factory Overhead Applied
vi. Finished Goods Control
vii. Cost of Goods sold Control
viii. Sales Control
ix. Marketing Overhead Control
x. Administration Overhead Control
xi. Income Summary Account
Exercise
1. Goods costing Rs, 100,000 sold at Profit of 20% at profit of 20% at sale price. Make necessary Journal Entries in Head Office Book and Factory Office Book.
Solution:
Head Office Book Factory Office Book
Cost of Goods Sold a/c 100,000 General Ledger a/c 100,000
To Factory Ledger 100,000 To Finished Goods a/c 100,000
Account Receivable a/c 120,000
To Sale a/ c 120,000 No Entry
100.000 + (100,000 x 20%)
Account Receivable 125,000
To Sales 125,000 No Entry
100,000 x 100/80 = 125,000
Chapter. No. 3 Financial Statements
Q 1. Write the name of Financial Statements.
These are:
i. Income Statement
ii. Balance Sheet
iii. Statement of changes in Financial Position
iv. Cash Flow Statement
Q.2 Define Prime Colt & Conversion Cost.
As there is direct relationship between finished product and direct materials and direct labor so these two costs are jointly called as prime cost.
Similarly, as direct labor and FOH cost are incurred to convert raw material to finished goods so these are called conversion cost.
Prime Cost = Material + labor
Conversion Cost = Labor + FOH
Q.3 Enumerate the Five Parts of cost of goods sold statement.
i. Direct Material Section
ii. Direct Labor Suction
iii. Factory Overhead Section
iv. Work in process section
v. Finished Goods Section.
Q.4 How to Calculate cost per unit manufactured?
Cost of goods manufactured = Cost Per unit
Nos. of units manufactured
Q. 5 How to calculate number of units manufactured if opening, closing and sold units are given
Unit sold during the year xxxxx
Add Nos. of Unit closing xxxxx
Total Number of Units available xxxxx
Less opening number of units xxxxx
Nos. of units manufactured xxxxx
Chapter No. 5 Process Costing
Q.1 What is process costing?
The costing system that collects department wise data of quantities produced and product costs incurred during the costing period and reports an average unit cost of output in a situation, where there is mass production of homogeneous articles by performance of uniform manufacturing operations, is known as process costing. A cost of production report is prepared under this system which includes flow of quantity and costs.
Q.2 Write few characteristics of process costing system?
The characteristics of process costing system are as follows:
1. There is mass production of a single product or two or more products.
2. All units of output are identical and are produced by the same manufacturing process.
3. Entire manufacturing process is divided into departments.
4. Completed output of one department is the raw materials for the next department.
5. Production is not in response to customers order but in anticipation of overall demand.
Q.3 What is cost of production report?
The cost of production report summaries the data of quantity produced and cost incurred by each producing department. It also serves as a source document for passing control account entries at the end of costing period. The purpose of this report is to provide data about quantity flow, total cost and unit cost during specific period
Q. 4 Write four sections of cost of production report?
1. The first section 'Quantity Schedule' Contains input and output data in terms of quantities.
2. The second section Cost charged to departments shows total cost for which departments are accountable and the cost per unit.
3. 'The third section cost accounted for as follows presents data for passing credit entries in departmental work in process control accounts
4. The last section computations explained presents to management detailed computations about cost per unit and equivalent production
Q.5 How normal loss is treated in Cost of Production Report?
Whenever, normal loss occurs in the first department it requires no separate calculation. The cost of normal loss is absorbed by the good units produced and this is done by omitting lost units from equivalent production. Same procedure apples when units are lost during processing in a department.
subsequent to first. However, an adjustment in unit cost from preceding department is also necessary. The decrease in number of units will cause an increase in unit cost from preceding department which is called adjustment for lost units.
6 What is abnormal loss in CPR?
Abnormal loss is the loss of units not expected to arise under efficient operating conditions. It represents inefficiencies in the manufacturing process. Cost of abnormal loss is treated as separate item and is shown in the third section of CPR under the heading of abnormal loss.
Exercise
1. Dept# B received 10,000 units from department # A at Rs. 4 per unit of which 7,000 units were transferred to Finished Goods, 2000 units were in process. Find out the adjusted cost per unit of department # A.
Solution:
Total Cost of Department # A
Nos. of Units remained
= Rs. 40,000________ = Rs, 40,000____
10,000 Units — 1000 units 9000 Units
2. In Department # 2, 20,000 units were received from Department # 1 at unit cost of Rs. 8 of which 16,000 units were transferred to Finished Goods and 3,000 units were still in process converted as 50%. Materials are added at the end of process. Find out the equivalent production.
Solution.
Materials Labor & FOH
Units transferred out 16,000 16,000
Units in process -- 1,500_____
16,000 17,500
Q 3. In question # 2 above if materials were added at the beginning of process. Find out the equivalent production.
Solution:
Materials Labor & FOH
Units transferred out 16,000 16,000
Units in process 3,000 15,00______
19,000 17,500
Chapter No. 6 Material — Costing & Accounting
Q.1 Define Materials
Materials means goods in inventory kept as input for the production of finished output. It is classified into direct and indirect materials.
Q.2 What is direct materials and Indirect Materials?
The Materials that become the part of finished product and can be economically and conveniently identified with it are called direct materials whereas indirect materials refer to those which may become part of finish products but their cost can be traced only at unreasonably high cost and inconvenience. For example. cloth used in making shirts is direct material whereas button, thread and other materials used are called indirect materials.
Q.3 What factory supplies or manufacturing supplies?
Materials used for proper working of machinery like lubricants or cotton waste as well as perishable tools of small value like files, drilling tolls etc and loose tools like hammers, spanners, screw drivers etc. are collectively termed as factory supplies or manufacturing supplies.
Q.4 Define FIFO Method?
The method that assumes the first cost received in stores is the first cost that goes out from stores is called First in First out (FIFO) method. In other words. cost of materials is charged to production in the order of purchases.
Q.5 Define LIFO Method?
The method which assumes. the last cost received in stores is the first cost the goes out from stores is known as last in First Out (LIFO) method. Cost of materials is charged to production in the reverse order of purchase.
Q.6 Define Avenge Cost Method?
Average cost method follows the concept of "total stock and total valuation”. The weighted average unit cost is used for costing material requisitions and charging cost of materials to production. It is computed by dividing total cost of the items on total units of the item.
Q.7 How to choose the method in International Accounting Standard?
In order to make a choice between the three costing methods. the pros and cons of each method must be evaluated by the management. The method which satisfies most of the conditions of a good method of valuing material issue and smooth out fluctuation in prices is normally adopted.
Q. 8 What is discount on purchase?
The discount offered by suppliers is classified into two. namely trade discount and cash discount. Trade discount is a reduction from list price offered to whole-seller. retailers or industrial users of the product whereas cash discount is offered to the buyer for early settlement of account or payment made before due date.
Q.9 Why reworking cost Is charged to Factory Overhead Control Account?
The cost of rework on defective units spreads over all of the units produced because reworking cost is a necessary cost for the production of all of the good units. This is done by debiting additional materials, labor and applied FOH to FOH Control A/c. That's why reworking cost is charged to Factory Overhead Control Account. It shows the normal loss of goods.
Q.10 Why Reworking cost is charged to the Job?
Reworking cost is charged to the job in those cases where much of the rework is done to meet peculiar specifications of the customer. Therefore. only that customer should be billed for the extra cost. For this reason. reworking cost is charged to the job. It shows the abnormal loss of goods.
Q.11 Exercise
1. Spoiled work received in Storeroom with the total manufacturing cost Rs. 3,000 and market value of this product Rs. 1800 pass the necessary entry if:
a) Loss is charged to Job.
b): Loss is charged to entire production of period.
Solution:
a) Spoiled Goods account Rs. 1,800
Work in Process account 1,800
b) Spoiled Goods account Rs. 1,800
FOH Control account 1,200
Work in Process account 3,000
2. Spoiled Goods recorded at Rs 1,800 sold for
(a) Rs. 2,000 (b) Rs. 1,700
Make necessary Journal Entry. if loss is charged to Job and if loss is charged to all production.
Solution:
a) Cash account Rs. 2,000
Spoiled Goods 1,800
Work in process 200
OR
2. Entry If reworking cost charted to all Production.
FOH Control account 6,800
To Materials account 2,000
To Payroll account 3,000
To FOH Control account 1,800
Q.5. Taking into account question # 4, if factory overhead applied rate includes 10% allowances for defective work.
Make necessary Journal Entries.
Solution:
Entry if reworking cost charged to same Job
Work in Process account 6,500
To Materials account 2,000
To Payroll account 3,000
To FOB Control account 1,500
NOTE: Overhead rate is charged at 50% (60%-10%)
Entry if reworking cost charged to same Jobs.
FOH Control account 6,800
To Materials account 2,000
To Payroll account 3,000
To FOH Control account 1,800
Q.12 Define EOQ?
EOQ (Economic Order Quantity) is the number of units per order to be purchased which helps in minimizing ordering costs and carrying costs of the period EOQ is that level where carrying costs are just equal to ordering costs and total costs are at lower level. EOQ is ascertained by the following formula:
Where, AR = Annual Demand per year
CU = Cost per unit
CO = Cost per order
CC = carrying cost which includes interest on investment
Q.13 What is carrying?
Inventory carrying cost includes:
i) The storage cost comprising rent of storage space, salaries of stores personnel. depreciation of storeroom equipment etc. and
ii) The cost of capital invested in average inventory.
Q.14 What is ordering cost?
Inventory ordering cost refers to the cost of purchasing department comprises salaries. rent and depreciation of purchase department, traveling expenses of purchase officer. postage and telephone charges. cost of advertising tender notices etc.
Q.15 Exercise
1. AB company purchases 6000 units for six-month supply. Cost per unit Rs. 80, cost per order Rs. 400 and carrying cost Rs. 10
Find out the Economic Order Quantity Solution:
3. AB Company purchases 1000 units for 3 months consumption. Cost per unit Rs. 40, cost per order Rs. 100. and carrying cost 8%. Find out the Economic Order Quantity
Solution:
Q.16 Define Order Level?
Order Level is the inventory level at which the storekeeper must issue a purchase requisition so that fresh supply of the material can be secured before the existing inventory is exhausted.
Q.17 What is Maximum Level of Inventory?
Maximum level of inventory signifies the upper limit and any inventory above this limit is an indication to overstocking. The formula for computation is as follows:
Maximum level = Order Level - Minimum Consumption during lead time + EOQ
Q.18 What is Minimum Level of Inventory?
Minimum level is the inventory level below which the inventory should not fall. In other words, it is a safety stock that management intends to keep all the times. Formula for it is given by:
Minimum Level = Order Point - Average Consumption during lead time
Q.19 What is danger Level?
If the inventory of an item falls below the minimum level, then the next caution is set at danger level. It means that the material is near to complete depletion and every possible effort must be made to save the production from stoppage of materials.
Q.20 Exercise
1. Maximum daily consumption 100 units minimum daily consumption 20 units Lead time 7 to 9 days.
Find out ordering point over minimum limit.
Solution:
Ordering Point = Maximum Daily Consumption x Lead Time
= 100 units x 9 days
= 900 units
Minimum Limit = Ordering Point - (minimum consumption x lead time)
= 900 units - (60 units x 7 days)
= 900 units - 420
=480 units
2. Taking Into account Q # 13 if EOQ is 2000 units.
Find out Maximum limit.
Solution:
Maximum Limit = Ordering Point - Minimum consumption) + EOQ
= 900 units - (20 units x 7 days) + 2000 units
= 900 units - 140 units + 2000 units
=760 units + 2000 units
= 2760 units.
3. How to determine ordering keep safety stock. S point if store manager keeps safety stock or not keep safety stock.
Solution: Ordering Point
Maximum daily consumption x lead time
Ordering Point
Average daily consumption x lead time + safety stock.
4. If Economic order Quantity is 2000 units, cost per order Rs. 100. cost per unit Rs. 40 and carrying cost 10%. Find out annual consumption company.
Solution:
NOTE: Students are instructed to find out any missing figure by using EOQ formula.
21 Define Bin Card, Material Ledger Card?
Bin Card is a quantitative record of receipts, issues and closing balances of particular items of stores. It is maintained by store keeper.
"Material ledger card is maintained by cost accountant. It consists of 3 portions:
1) Purchases 2) Issue 3) Balance
and every portion is further divided into three parts i.e. quantity, unit cost and amount.
22 What is Materials Requisition?
Materials are held in stores and the storekeeper issues materials at a proper written authority the request for the issue of materials is usually made by the foreman of the production department on a form known as materials requisition.
23 Define Defective Goods?
The defective goods or units are those units which arc reworked to meet quality specifications. These goods have certain imperfections due to which, they are called defective goods. I these units are sent back into manufacturing department for reworking to restore back at standard quality: Journal entries are
a) If loss is charged to job
WIP - Control a/c
To Material a/c
To Payroll a/c
To FOH Control a/c
b) If loss is charged to entire production
FOH Control a/c
To Material a/c
To Payroll a/c
To FOH Control a/c
24 What is Spoiled Production?
Spoiled production denotes those faulty units of output which cannot be reworked to bring them upto the quality specification. These units are sold as second hand at cut price and instructed to dealer to use their own labels.
Journal entry for spoiled production:
a) If loss is charged to job
Spoiled Goods a/c xxxx
WIP a/c xxxx
b) If loss is charged to entire production
Spoiled Goods a/c xxxx
FOH Control a/c xxxx
WIP a/c xxxx
Chapter No.7 Factory Costing
Q.1 Define Factory Overhead cost?
The term factory overhead is a collective noun used to refer to all indirect products cost i.e. indirect material, indirect labor and other indirect manufacturing costs. e.g. salaries of foremen, training cost. Cost of normal spoilage and rework, overtime premiums, rent of factory building, insurance of plant etc. however all the cost of factor other than direct materials and direct labor are known factory overhead cost.
Q.2 Which expenses include in FOH?
FOH includes Indirect materials e.g. cotton waste. fuel, oil, coal. etc. Indirect Labor Such as cleaners, helpers idle time wages. overtime premiums. factory, office staff, other indirect expense which are depreciation. electricity bills utility bills. insurance, rent etc.
Q.3 Define Flexible Budgeting?
While preparing the budget (cost) of factory overhead the items are classified as fixed, semi-variable. variable such a budget is called flexible budgeting. It permits management to prepare estimates of factory overheads at different activity levels. It is also helpful for the analysis of causes of variance.
Q.4 What is plant wide and departmental FOR rate?
Plant wide or Blanket rate means a single factory overhead absorption rate established for the entire factory Departmental rates means separate factory overhead absorption rates for all departments of factory through which the products pass.
Plant wide rate = Budgeted Overhead of Factory
Budgeted Activities of Factory
Department FOH Rate = Budgeted FOH of Department
Budgeted activity of department
Q.5 Define Primary apportionment of FOH?
Many items of factory overhead like fire insurance depreciation of building, maintenance of building, accident insurance etc are incurred for common benefit of more than on departments. At this stage such items are apportioned to benefiting departments. After this all the direct & Indirect department FOH assigned to relevant production & service department.
Q.6 Define Secondary apportionment of FOH?
The ultimate cost objective is the products job to which all products cost rate are assigned. Therefore, the costs allocated and apportioned to service departments are re-apportioned to production departments. Such re-apportionment is called or termed as secondary apportioned.
Q.7What Is Non-Reciprocal apportionment?
The secondary apportionment in such a way that once cost of a service department has been apportioned; cost of one service department is not apportioned to other service department. It is called non-reciprocal apportioned.
Q.8 What Is reciprocal apportionment?
Reciprocal apportionment means the secondary apportionment in such a way that interdependence among service departments is recognized while prorating the cost. It involves lengthy and laborious calculation for determining total cost of interdependent service departments. In such case service department costs are allocated to production department and also another service department through simultaneous equation method or repeated methods.
Q.9 Define Cost Driver?
Cost drivers can be defined as a measure of activity the magnitude of which influences the magnitude of cost of relevant cost objectives. In other words, FOH application base should be a measure of activity which has causal relation with incurrence of FOH.
Q.10 What are basis of selection of FOH Rate?
The selection of FOH rate in manufacturing concern is directly depending upon number of units produced either there is mass production or batch costing industries. On the other hand, in job costing industries each unit is quite different from the other. FOH frequency is measure by Direct Labor cost, direct labor hour, machine hours. Direct Material cost and prime cost.
Q.11 What is capacity level?
Capacity level means ability to produce. The term is synonymous as activity level or volume. Industries producing homogenous units may express their capacity level in terms of units of output. whereas, job costing industries may measure it in terms of direct labor cost, direct labor hours, machines hours. etc. it means the power of plant to produce goods or services by utilizing different resources.
Q.12 Define theoretical capacity?
IT is the maximum capacity level that could be attained if there were 100% utilization of time. This capacity level can never be achieved because of unavoidable interruption e.g holidays, repair and maintenance machines breakdown, lack of demand etc.
Q.13 What Is Practical capacity?
It is the maximum capacity level that could be attained under efficient working condition when loss of time due to unavoidable interruption is deducted front theoretical capacity remainder is practical capacity.
Q.14 What is expected actual capacity?
It is the activity level expected to be attained during the accounting year for which the budget is being prepared. It is heavily dependent on market demand for the products. It may be equal to or less than the practical capacity. It can also be termed as Annual Budget Volume & Muster Budget Volume.
Q.15 What is normal capacity?
Normal capacity is the average of expected actual capacity over a number of years. The object of computing such as average activity level is to smooth out the effect of seasonal, cyclical and trend variation.
Q.16 Why the appropriate capacity level is selected?
Selection of an appropriate capacity level is necessary because:
i) Fixed factory overheads are inversely related with the capacity level.
ii) Amount of unabsorbed fixed FOH at the end of an accounting period is used to denote cost of failing to achieve the target production.
Q.17 Write three cases of closing FOH control?
Case 1: In Job costing industries where sale price is dependent on cost.
The journal entry is passed:
FOH Applied a/c xxxxx
To FOH Control a/c xxxxx
Case 2: Posting of under or over applied FOH to subsidiary ledger of finish goods and WIP - control a/c entry is passed as:
FOH Control a/c xxxxx
CGS Control a/c xxxxx
CGS Control a/c xxxxx
FOH Control xxxxx
Case 3: When FOH is under-applied due to abnormal factors like poor utilization of production facilities etc the entry is:
In case of over applied FOH:
FOH Control A/c xxxxx
To WIP a/c xxxxx
To Finished goods a/c xxxxx
To Cost of goods sold a/c xxxxx
In case of under applied FOH
WIP a/c xxxxx
Finished goods a/c xxxxx
Cost of goods sold a/c xxxxx
To FOH Control xxxxx
Q.18 What is capacity variance?
Capacity variance is an account of presence of fixed FOH predetermined FOH absorption rate is the sum of fixed rate and variable rate. The total FOH fixed remains unchanged within a designed range of activity level and the fixed rate change inversely with changes in activity level. Capacity variance is the difference of fixed FOH Applied to production and fixed FOH budgeted. It is calculated as
Normal Capacity hours - Actual capacity hours = Difference of hours x fixed FOH rate
If the capacity utilized is greater than budget. the variance is said to be favorable and vice versa.
Q.19 What is budget variance?
Budget variance is the difference between FOH for capacity attained and actual FOH incurred. It represents either overspending or under spending. If actual FOH is more than the budgeted. It is un favorable budget variance and vice versa. This variance exists between budgeted variable cost and actual variable cost of activity level.
20 Exercise
1. Normal operating capacity of company is estimated to be 20,000 direct labor hours. At this level, fixed factory overhead estimated to be Rs. 100,000 and variable Rs. 200,000. The actual work showed 22000 hours.
Find out predetermined FOH Rate.
Solution:
Fixed FOH Rate
Rs. 100,000 / 20,000 hours Rs. 5
Variable FOH RateRs. 200,000 / 20,000 hours Rs. 10
Applied FOH Rate Rs. 15
Chapter No. 8 Labor Costing
Q.1 Define Direct & Indirect Labor?
Direct labor refers to labor engaged directly in the production of goods or services and which can be conveniently allocated to the job process or commodity unit.
Indirect labor: Indirect labor is that which is not directly engaged in the production of good & service but which are indirectly helps the direct labor engaged in production. e.g. sweeper's foreman, clearance etc.
Q.2 Define time study?
Time study is based on observation of workers under actual working conditions and time taken by the workers to complete an operation is ascertained by using stop watch or clock cards or job tickets. In manufacturing situation where motion study time is not available, time study is used to determine standard production time.
Q.3 Define Motion Study?
Motion study analysis an operation into its basis motions. The object of motion study is to find out most efficient method of performing an operation by eliminating all unnecessary motions. It is called the study of flow of work through different processes.
Q.4 What is incentive wage system?
The term incentive wage system refers to methods of remuneration whereby wages earned by the workers vary with their output. The worker producing more units get more wages and vice versa.
Earned wages = piece rate x piece produced
Q.5 Define two-piece rates?
i) Straight piece rates: under this rate, workers are paid at fixed standard rates for the piece produced by studying time and motion. As efficiency of different workers is different.
ii) Differential- piece rate: under this system workers are paid with progressive price rate.
Q.6 Define Choice of an incentive wage system?
Following are important considerations while marking the incentive wage system;
1) It should provide enough incentives to induce to workers to increase the productivity.
2) The system should be cast' for the workers to understand.
3) It should be simple to operate.
4) It should be able to understand the change i.e. changes in articles produced and production methods.
Q.7 Define clock cards & job ticket?
Clock cards are used to regulate in time arrival and departure of worker and to record “IN” and "OUT” time of the workers.
Job tickets are used to record the time work on job or work. Worker time is recorded when he starts the work and ended when he finishes the work.
Q.8 What Is 100% bonus plan?
Group Bonus Plan
100% bonus plan, instead of a piece rate, a standard time is allowed to complete a job or unit, and the worker is paid for standard time at hourly rate if the job or unit is completed in standard time or Iess. Thus, if a worker produces 100 units in 8 hours and the standard output is 80 units or 10 units per hour. the worker would be paid hourly rate for 10 hours. When the output of individual worker is not conveniently identified separately that standard is set for whole group. Thus, all workers are paid accordingly.
Q.9 What is Rowan Premium Plan?
Under this method, the worker is guaranteed wages at the ordinary rate for time taken by him to complete the job or operations under this plan bonus is that proportion of the wages of the time taken which the time saved bears to the standard time allowed.
Under this system the earning of worker is calculated is
Normal wages of workers (hours worked x hourly rate)
Plus, bonus under following scheme
Bonus = Time taken x time saved x hourly rate
Standard time
Q.10 What is Halsey Premium Plan?
Under this method, standard time for doing each job or operation is fixed and the worker is given wages for the actual time he takes to complete the jobs or operation at the agreed rate per hour plus a bonus equal to (usually) one half of the wages of the time saved.
Earning of worker = time worked x hourly rate + 1/2(time saved x hourly rate)
