Previous Exams Trend Analysis
Year Question No. Chapter Name Marks Category May 2019 Q . 1( a) Budget a nd Budget ar y Cont r ol 5 Pr acti cal Q . 1( b) E mpl oyee Cost 5 Pr acti cal Q . 1( c) J oi nt pr oduct s a nd By pr oduct s 5 Pr acti cal Q . 1( d) Cost Acc o unti ng Syst e m 5 Pr acti cal Q . 2( a) Cost Sheet 10 Pr acti cal Q . 2( b) Pr ocess a nd Oper ati on Costi ng 10 Pr acti cal Q . 3( a) St a ndar d Costi ng 10 Pr acti cal Q . 3( b) Acti vi t y Bas e d Costi ng 10 Pr acti cal Q . 4( a) Ser vi ce Costi ng 10 Pr acti cal Q . 4( b) Mat eri al Cost 10 Pr acti cal Q . 5( a) Mar gi nal Costi ng 5 Pr acti cal Q . 5( b) Over hea ds: Abs or pti on Costi ng Met hod 5 Pr acti cal Q . 5( c) J ob Costi ng a nd Cont r act Costi ng 10 Pr acti cal Q . 6( a) I nt r oducti on t o Cost Acc o unti ng 5 the or y Q . 6( b) Budget a nd Budget ar y Cont r ol 5 the or y Q . 6( c) Cost Acc o unti ng Syst e m 5 the or y Q . 6( d) I nt r oducti on t o Cost Acc o unti ng 5 the or y Q 6( e) Mar gi nal Costi ng 5 the or y Nov. 2019 Q 1( a) Mat eri al Cost 5 Pr acti cal Q 1( b) J ob Costi ng a nd Cont r act Costi ng 5 Pr acti cal Q 1( c) J oi nt pr oduct s a nd By pr oduct s 5 Pr acti cal Q 1( d) Mar gi nal Costi ng 5 Pr acti cal Q 2( a) Acti vi t y Bas e d Costi ng 10 Pr acti cal Q 2( b) Over hea ds: Abs or pti on Costi ng Met hod 10 Pr acti cal Q 3( a) Ser vi ce Costi ng 10 Pr acti cal I-7
I-8 P rE vI OUS E xA MS t rE nD A nAlySI S Year Question No. Chapter Name Marks Category Q 3( b) Cost Sheet 10 Pr acti cal Q 4( a) E mpl oyee Cost 10 Pr acti cal Q 4( b) Pr ocess a nd Oper ati on Costi ng 10 Pr acti cal Q 5( a) Mar gi nal Costi ng 5 Pr acti cal Q 5( b) St a ndar d Costi ng 5 Pr acti cal Q 6( a) Ser vi ce Costi ng 5 the or y Q 6( b) Cost Acc o unti ng Syst e m 5 the or y Q 6( c) Mat eri al Cost 5 the or y Q 6( d) Cost Sheet 5 the or y Q 6( e) Budget a nd Budget ar y Cont r ol 5 the or y Nov. 2020 Q 1( a) Budget a nd Budget ar y Cont r ol 5 Pr acti cal Q 1( b) Mar gi nal Costi ng 5 Pr acti cal Q 1( c) J oi nt pr oduct s a nd By pr oduct s 5 Pr acti cal Q 1( d) J ob Costi ng a nd Cont r act Costi ng 5 Pr acti cal Q 2( a) Cost Sheet 10 Pr acti cal Q 2( b) Over hea ds: Abs or pti on Costi ng Met hod 10 Pr acti cal Q . 3( a) St a ndar d Costi ng 10 Pr acti cal Q . 3( b) Mat eri al Cost 10 Pr acti cal Q . 4( a) Pr ocess a nd Oper ati on Costi ng 10 Pr acti cal Q . 4( b) E mpl oyee Cost 6 Pr acti cal Q . 4( c) E mpl oyee Cost 4 the or y Q . 5( a) Ser vi ce Costi ng 10 Pr acti cal Q . 5( b) Acti vi t y bas e d Costi ng 6 Pr acti cal Q . 5( c) Acti vi t y bas e d Costi ng 4 the or y Q . 6( a) I nt r oducti on t o Cost Acc o unti ng 5 the or y Q . 6( b) Budget a nd Budget ar y Cont r ol 5 the or y Q . 6( c) Cost Acc o unti ng Syst e m 5 the or y Q . 6( d) I nt r oducti on t o Cost Acc o unti ng 5 the or y Q . 6( e) Mar gi nal Costi ng 5 the or y Jan. 2021 Q . 1( a) Mar gi nal Costi ng 5 Pr acti cal Q . 1( b) Over hea ds: Abs or pti on Costi ng Met hod 5 Pr acti cal Q . 1( c) Pr ocess a nd Oper ati on Costi ng 5 Pr acti cal Q . 1( d) Mat eri al Cost 5 Pr acti cal Q . 2( a) E mpl oyee Cost 10 Pr acti cal
P rE vI OUS E xA MS t rE nD A nAlySI S I-9 Year Question No. Chapter Name Marks Category Q 2( b) Cost Sheet 10 Pr acti cal Q 3( a) Mar gi nal Costi ng 10 Pr acti cal Q 3( b) Uni t & Bat c h Costi ng 10 Pr acti cal Q 4( a) J oi nt pr oduct s a nd By pr oduct s 10 Pr acti cal Q 4( b) Acti vi t y Bas e d Costi ng 10 Pr acti cal Q 5( a) Ser vi ce Costi ng 10 Pr acti cal Q 5( b) St a ndar d Costi ng 10 Pr acti cal Q 6( a) Mat eri al Cost 5 the or y Q 6( b) Budget a nd Budget ar y Cont r ol 5 the or y Q 6( c) Over hea ds: Abs or pti on Costi ng Met hod 5 the or y Q 6( d) I nt r oducti on t o Cost Acc o unti ng 5 the or y Q 6( e) I nt r oducti on t o Cost Acc o unti ng 5 the or y July 2021 Q 1( a) Mat eri al Cost 5 Pr acti cal Q 1( b) Over hea ds: Abs or pti on Costi ng Met hod 5 Pr acti cal Q 1( c) Uni t & Bat c h Costi ng 5 Pr acti cal Q 1( d) Mar gi nal Costi ng 5 Pr acti cal Q . 2( a) Cost Sheet 10 Pr acti cal Q . 2( b) J oi nt pr oduct s a nd By pr oduct s 5 Pr acti cal Q . 2( c) E mpl oyee Cost 5 Pr acti cal Q . 3( a) Cost Acc o unti ng Syst e m 10 Pr acti cal Q . 3( b) Acti vi t y Bas e d Costi ng 10 Pr acti cal Q . 4( a) Pr ocess a nd Oper ati on Costi ng 10 Pr acti cal Q . 4( b) Ser vi ce Costi ng 5 Pr acti cal Q . 4( c) J ob Costi ng a nd Cont r act Costi ng 5 Pr acti cal Q . 5( a) St a ndar d Costi ng 10 Pr acti cal Q . 5( b) Budget a nd Budget ar y Cont r ol 10 Pr acti cal Q . 6( a) I nt r oducti on t o Cost Acc o unti ng 5 the or y Q . 6( b) Mar gi nal Costi ng 5 the or y Q . 6( c) E mpl oyee Cost 5 the or y Q . 6( d) Ser vi ce Costi ng 5 the or y Q 6( e) Mat eri al Cost 5 the or y Dec. 2021 Q 1( a) Mat eri al Cost 5 Pr acti cal Q 1( b) Budget a nd Budget ar y Cont r ol 5 Pr acti cal Q 1( c) E mpl oyee Cost 5 Pr acti cal
I-10 P rE vI OUS E xA MS t rE nD A nAlySI S Year Question No. Chapter Name Marks Category Q 1( d) Pr ocess & Oper ati on Costi ng 5 Pr acti cal Q 2( a) Cost Sheet 10 Pr acti cal Q 2( b) Mar gi nal Costi ng 10 Pr acti cal Q 3( a) Ser vi ce Costi ng 10 Pr acti cal Q 3( b) Acti vi t y Bas e d Costi ng 10 Pr acti cal Q 4( a) J ob Costi ng a nd Cont r act Costi ng 10 the or y Q 4( b) Cost Acc o unti ng Syst e m 5 the or y Q 4( c) Mat eri al Cost 5 the or y Q 5( a) St a ndar d Costi ng 10 the or y Q 5( b) Over hea ds Abs or pti on Costi ng Met hod 10 the or y Q . 6( a) I nt r oducti on t o Cost Acc o unti ng 5 the or y Q . 6( b) J oi nt Pr oduct s a nd By Pr oduct s 5 the or y Q . 6( c) St a ndar d Costi ng 5 the or y Q . 6( d) Budget a nd Budget ar y Cont r ol 5 the or y Q . 6( e) I nt r oducti on t o Cost Acc o unti ng 5 the or y May 2022 Q . 1( a) Mat eri al Cost 5 Pr acti cal Q . 1( b) E mpl oyee Cost 5 Pr acti cal Q . 1( c) Mar gi nal Costi ng 5 Pr acti cal Q . 1( d) Ser vi ce Costi ng 5 Pr acti cal Q . 2( a) Over hea ds : Abs or pti on Costi ng Met hod 10 Pr acti cal Q . 2( b) J ob Costi ng a nd Cont r act Costi ng 5 Pr acti cal Q . 2( c) J ob Costi ng a nd Cont r act Costi ng 5 the or y Q 3( a) Budget a nd Budget or y Cont r ol 10 Pr acti cal Q 3( b) Cost Sheet 10 Pr acti cal Q 4( a) Pr ocess & Oper ati on Costi ng 10 Pr acti cal Q 4( b) Mar gi nal Costi ng 5 Pr acti cal Q 4( c) Cost Acc o unti ng Syst e m 5 Pr acti cal Q 5( a) Acti vi t y Bas e d Costi ng 10 Pr acti cal Q 5( b) St a ndar d Costi ng 5 Pr acti cal Q 5( c) J oi nt Pr oduct s a nd By Pr oduct s 5 Pr acti cal Q 6( a) I nt r oducti on t o Cost Acc o unti ng 5 the or y Q 6( b) Mat eri al Cost 5 the or y Q 6( c) E mpl oyee Cost 5 the or y
P rE vI OUS E xA MS t rE nD A nAlySI S I-11 Year Question No. Chapter Name Marks Category Q 6( d) St a ndar d Costi ng 5 the or y Q 6( e) I nt r oducti on t o Cost Acc o unti ng 5 the or y Nov. 2022 Q 1( a) Uni t a nd Bat c h Costi ng 5 Pr acti cal Q 1( b) Over hea ds: Abs or pti on Costi ng Met hod 5 Pr acti cal Q 1( c) Mat eri al Cost 5 Pr acti cal Q 1( d) Mar gi nal Costi ng 5 Pr acti cal Q 2( a) Over hea ds: Abs or pti on Costi ng Met hod 10 Pr acti cal Q 2( b) E mpl oyee Cost 6 Pr acti cal Q 2( c) Acti vi t y Bas e d Costi ng 4 Pr acti cal Q 3( a) J ob Costi ng a nd Cont r act Costi ng 10 Pr acti cal Q 3( b) Pr ocess a nd Oper ati on Costi ng 10 Pr acti cal Q 4( a) Mar gi nal Costi ng 10 Pr acti cal Q 4( b) Cost Sheet 10 Pr acti cal Q . 5( a) St a ndar d Costi ng 10 Pr acti cal Q . 5( b) Cost Acc o unt a nt Syst e m 5 Pr acti cal Q . 5( c) J oi nt Pr oduct a nd By Pr oduct s 5 Pr acti cal Q . 6( a) Mat eri al Cost 5 the or y Q . 6( b) Cost Acc o unti ng Syst e m 5 the or y Q . 6( c) Acti vi t y Bas e d Costi ng 5 the or y Q . 6( d) Budget a nd Budget ar y Cont r ol 5 the or y Q . 6( e) I nt r oducti on t o Cost Acc o unti ng 5 the or y May 2023 Q . 1( a) Uni t & bat c h Costi ng 5 Pr acti cal Q . 1( b) E mpl oyee Cost 5 Pr acti cal Q . 1( c) Mar gi nal Costi ng 5 Pr acti cal Q . 1( d) Ser vi ce Costi ng 5 Pr acti cal Q . 2( a) Mat eri al Cost 10 Pr acti cal Q . 2( b) J ob Costi ng a nd Cont r act Costi ng 10 Pr acti cal Q . 3( a) Budget a nd Budget ar y Cont r ol 10 Pr acti cal Q . 3( b) Cost Sheet 10 Pr acti cal Q . 4( a) J oi nt Pr oduct s a nd By pr oduct s 10 Pr acti cal Q 4( b) Acti vi t y Bas e d Costi ng 5 Pr acti cal Q 4( c) Mar gi nal Costi ng 5 Pr acti cal Q 5( a) St a ndar d Costi ng 10 Pr acti cal Q 5( b) Cost Acc o unti ng Syst e m 5 Pr acti cal
I-12 P re vi ous e xa ms T re nd a nalysi s Year Question No. Chapter Name Marks Category Q 5( c) e mpl oyee Cost 5 The or y Q 6( a) i nt r oducti on t o Cost acc o unti ng 5 The or y Q 6( b) over hea ds: abs or pti on Costi ng met hod 5 The or y Q 6( c) acti vi t y Bas e d Costi ng 5 The or y Q 6( d) over hea ds: abs or pti on Costi ng met hod 5 The or y Q . 6( e) Pr ocess a nd oper ati on Costi ng 5 The or y
PA GE Chapter-wise Marks Distribution I-5 Previous Exams Trend Analysis I-7 CHAPTER 1 I nt r o d ucti o n t o Cost a nd Ma nage me nt Acc o unti ng 1.1 CHAPTER 2 Mat eri al Cost 2.1 CHAPTER 3 E mpl oyee Cost 3.1 CHAPTER 4 Over he a ds : Abs or pti o n Costi ng Met ho d 4.1 CHAPTER 5 Acti vi t y Bas e d Costi ng 5.1 CHAPTER 6 Cost Sheet 6.1 CHAPTER 7 Cost Acc o unti ng Syst e m 7.1 CHAPTER 8 Uni t a nd Bat c h Costi ng 8.1 I-13 Contents
I-14 C OntE ntS CHAPTER 9 J o b a nd Co nt r act Costi ng 9.1 CHAPTER 10 Pr ocess Costi ng 10.1 CHAPTER 11 J oi nt Pr o d uct s & By Pr o d uct s 11.1 CHAPTER 12 Ser vi ce Costi ng 12.1 CHAPTER 13 St a ndar d Costi ng 13.1 CHAPTER 14 Mar gi nal Costi ng 14.1 CHAPTER 15 Budget a nd Budget ar y Co nt r ol 15.1 SOLVED PAPER - MAY 2022 (SUGGESTED ANSWERS) P.1 SOLVED PAPER - NOV. 2022 (SUGGESTED ANSWERS) P.27 SOLVED PAPER - MAY. 2023 (SUGGESTED ANSWERS) P.51 PA GE
2
1.Inventory Control Levels:
QUICK REVIEW
u Re-order Level (ROL): It i s t he l e vel at whi c h f r es h or der nee ds t o be pl ace d.
ROL = Max Co ns u mpti o n × Max Re- or der Peri o d Or
M i n. St oc k Le vel + ( Avg. Co ns u mpti o n × Aver age Re- or der peri o d) Or
Saf et y St oc k + Avg. l e a d ti me c o ns u mpti o n Re- or der peri o d i s al s o k no wn as Le a d Ti me
u Re-order Quantity/Economic Order Quantity (ROQ/EOQ): It i s t he si z e of t he or der f or whi c h t ot al or deri ng a nd t ot al c arr yi ng c ost s ar e m i ni mu m .
E OQ = () ××2Annual RequirementACost per order(O)
Carrying cost per unit p.a.(C)
u Minimum Stock Level: It i s t he m i ni mu m q ua nti t y whi c h must be r et ai ne d i n st oc k.
= ROL - ( Avg Co ns u mpti o n × Aver age Re- or der Peri o d)
u Maximum Stock Level: It i s t he maxi mu mli m i t up t o whi c h st oc k c a n be st or e d at a ny ti me
= ROL + ROQ - ( M i n. Co ns u mpti o n × M i n. Re- or der Peri o d)
u Average Inventory Level : It i s t he q ua nti t y of mat eri al t hat i s nor mall y hel d i n st oc k over a peri o d.
= M i ni mu m St oc k Le vel + 1/2 Re- or der Qua nti t y OR
= + Maximum Stock LevelMinimum Stock Level 2
u Danger Level: The l e vel wher e nor mal i ss ue of mat eri al s i s st oppe d a nd o nl y e mer ge nc y mat eri al s ar e i ss ue d.
MATERIAL COST CHAPTER 2.1
= Avg. Co ns u mpti o n * × Le a d ti me f or e mer ge nc y p ur c has e
* So me ti me m i ni mu m c o ns u mpti o n i s al s o us e d.
2. Classification of items in ABC Analysis:
A Category: Qua nti t y l ess t ha n 10 % b ut val ue mor e t ha n 70 %
B Category: Qua nti t y l ess t ha n 20 % b ut val ue a bo ut 20 %
C Category: Qua nti t y a bo ut 70 % b ut val ue l ess t ha n 10 %
3. Inventory Turnover Ratio: It i s us e d f or me as uri ng i nve nt or y perf or ma nce
H i g h i nve nt or y t ur nover - I ndi c at es t hat mat eri al i s a f ast movi ng o ne.
Lo wt ur nover r ati o - I ndi c at es over-i nvest me nt a nd l oc ki ng up of wor ki ng c a pi t al i n i nve nt ori es.
I nve nt or y Tur nover Rati o = Cost of Materials Consumed
Cost of Average Stock
Aver age St oc k = 1/2 ( ope ni ng st oc k + cl osi ng st oc k)
Aver age No. of days of I nve nt or y hol di ng = 365Days or12Months
Inventory turnover Ratio
THEORY QUESTIONS
Q1. State the objectives of system of material control. [ICAI Module]
Ans:
(i) Minimising interruption in production process: Mat eri al Co nt r ol s yst e m e ns ur es t hat no acti vi t y, parti c ul arl y pr oducti on , s uff ers f r o mi nt err upti on f or wa nt of mat eri al s a nd st or es. Thi s r e q ui r es c o nst a nt avail a bili t y of e ver y i t e m nee de d i n t he pr o d ucti o n pr ocess.
(ii) Optimisation of Material Cost: The over all mat eri al c ost s i ncl udes pri ce, or deri ng c ost s a nd hol di ng c ost s. Si nce all t he mat eri al s a nd st or es ar e ac q ui r e d at t hel o west possi bl e pri ce c o nsi deri ng t he r e q ui r e d q uali t y a nd ot her r el e va nt f act ors li ke r eli a bili t y i n r es pect of deli ver y, et c., hol di ng c ost t oo nee ds t o be m i ni m i z e d.
(iii) Reduction in Wastages:
It ai ms at av oi da nce of unnecess ar y l oss es a nd wast ages t hat may ari s e f r o m det eri or ati o n i n q uali t y d ue t o def ecti ve or l o ng st or age or f r o m o bs ol es ce nce.
(iv) Adequate Information:
The s yst e mof mat eri al c o nt r ol mai nt ai ns pr oper r ec or ds t o e ns ur e t hat r eli a bl e i nf or mati o n i s avail a bl e f or all i t e ms of mat eri al s a nd st or es. Thi s not o nl y hel ps i n det ecti ngl oss es a nd pil f er ages b ut al s o f acili t at es pr oper pr o d ucti o n pl a nni ng
(v) Completion of order in time: Pr oper mat eri al ma nage me nt i s ver y necess ar y f or f ul filli ng or ders of t he fi r m . Thi s a dds t o t he g oo d will of t he fi r m
2.2 MATE RI AL C OST
Q2. What is Bill of Material? Describe the uses of Bill of Material in following departments :
(i) Purchases Department
(ii) Production Department
(iii) Stores Department
(iv) Cost/Accounting Department [CA Inter Dec. 2021, 5 Marks]
Ans. It i s a det ail e d li st s peci f yi ng t he st a ndar d q ua nti ti es a nd q uali ti es of mat eri al s a nd c o mpo ne nt s r e q ui r e d f or pr o d uci ng a pr o d uct or c arr yi ng o ut of a ny j o b.
Uses of Bill of Material
Marketing (Purchase) Dept.
Production Dept.
Pr o ducti o n i s pl a nne d acc or di ng t o t he nat ur e, v ol u me of t he mat eri al s r e q ui r e d t o be us e d. Acc or di ngl y, mat eri al r e q ui si ti o n li st s ar e pr e par e d
Stores Dept.
Cost/Accounting Dept. Mat eri al s ar e pr oc ur e d ( p ur c has e d) o n t he basi s of s peci ficati o ns me nti o ne d i n i t.
It i s us e d as a r ef er e nce doc u me nt whil e i ss ui ng mat eri al s t o t he r e q ui si ti o ni ng de part me nt.
It i s us e d t o esti mat e c ost a nd pr o fit Any p ur c has e, i ss ue a nd us age ar e c o mpar e d / veri fie d agai nst t hi s doc u me nt
Q3. Distinguish between Bill of Material and Material Requisition note. [CA Inter May 2012, 4 Marks]
Ans. Differences between Bill of Material and Material Requisition Note
Bill of Material Material Requisition Note
It i s t he doc u me nt pr e par e d by t he e ngi neeri ng or pl a nni ng de part me nt.
It i s a c o mpl et e s c he dul e of c o mpo ne nt part s a nd r a w mat eri al s r e q ui r e d f or a parti c ul ar j o b or wor k or der.
It oft e n s er ves t he p ur pos e of a mat eri al r e q ui si ti o n as i t s ho ws t he c o mpl et e s c he dul e of mat eri al s r e q ui r e d f or a parti c ul ar j o b i.e. i t ca n r e pl ace mat eri al r e q ui si ti o n
It i s pr e par e d by t he pr o ducti o n or ot her c o ns u m i ng de part me nt.
It i s a doc u me nt as ki ng St or e- kee per t o i ss ue mat eri al s t o t he c o ns u m i ng de part me nt.
It ca nnot r e pl ace a bill of mat eri al s
It ca n be us e d f or t he p ur pos e of q uot ati o ns. It i s us ef ul i n arri vi ng hi st ori cal c ost o nl y
MATE RI AL C OST 2.3
Bill of Material Material Requisition Note
It hel ps i n kee pi ng a q ua nti t ati ve c o nt r ol o n mat eri al s dr a wn t hr o ug h mat eri al r e q ui si ti o n.
It s ho ws t he mat eri al act uall y dr a wn f r o m st or es.
Q4. Write the treatment of items associated with purchase of material:
(i) Cash discount
(ii) Subsidy/Grant/Incentives
(iii) GST
(iv) Commission brokerage paid [CA Inter May 2016, 4 Marks]
Ans.
(i) Cash discount: Cas h di s c o unt i s not de d uct e d f r o mt he p ur c has e pri ce. It i s t r e at e d as i nt er est a nd fi na nce c har ges. It i s t o be i g nor e d.
(ii) Subsidy/Grant/Incentive: Any s ubsi dy/gr a nt /i nce nti ve r ecei ve d f r o m t he Gover n me nt or f r o m ot her s o ur ces de d uct e d f r o m t he c ost of p ur c has e.
(iii) GST: It i s e xcl ude d f r o m t he c ost of p ur c has e i f cr e di t f or t he s a me i s avail a bl e. Unl ess me nti o ne d s peci fi c all y i t s ho ul d not f or m part of c ost of p ur c has e.
(iv) Commission or brokerage paid: Co mm i ssi o n or br oker age pai d i s a dde d w i t h t he c ost of p ur c has e
Q5. State how the following items are treated in arriving at the value of cost of material purchased:
(i) Detention Charges/Fines
(ii) Demurrage
(iii) Cost of Returnable containers
(iv) Central Goods and Service Tax (CGST)
(v) Shortage due to abnormal reasons. [CA Inter Jan. 2021, 5 Marks]
Ans: Tr e at me nt of i t e ms i n arri vi ng at t he val ue of c ost of mat eri al Pur c has e d
S. No. Items
1 Detention charges/Fine
Treatment
Det e nti o n c har ges / fines i mpos e d f or no n- c o mpli a nce of r ul e or l a w by a ny st at ut or y a ut hori t y It i s a n a bnor mal c ost a nd not included w i t h c ost of Pur c has e
2 Demurrage De murr agei s a pe nal t yi mpos e d by t he t r a ns port er f or del ay i n upl oa di ng or of floa di ng of mat eri al s. It i s a n a bnor mal c ost a nd not included w i t h c ost of p ur c has e.
2.4 MATE RI AL C OST
S. No. Items Treatment
3. Cost of returnable containers
If t he c o nt ai ners ar e r et ur ne d a ndt hei r c ost s ar e r ef unde d, t he n c ost of c o nt ai ners s ho ul d not be c o nsi der e d i n t he c ost of p ur c has e.
If t he a mo unt of r ef und o n r et ur ni ng t he c o nt ai ner i s l ess t ha n t he a mo unt pai d, t he n, o nl y t he s hort f all i s a dde d w i t h t he c ost of p ur c has e.
4
Central Goods and Service Tax (CGST)
5 Shortage due to abnormal reasons
Ce nt r al Go o ds a n d Ser vi c e Ta x ( C GS T) i s p ai d o n ma nuf act ur e a nd s uppl y of g oo ds a nd c oll ect e d f r o m t he b uyer. It is excluded f r o m t he c ost of p ur c has e i f t he i np ut cr e di t i s avail a bl e f or t he s a me. Unl ess me nti o ne d s peci ficall y C GS T i s not a dde d w i t h t he c ost of p ur c has e
Short age ari s es due t o a bnor mal r eas o ns s uc h as mat eri al m i s ha ndli ng, pil f er age, or due t o a ny av oi da bl e r eas o ns ar e not a bs or be d by t he g o o d uni t s. Los s es d ue t o a bnor mal r eas o ns ar e de bi t e d t o c osti ng pr o fit a nd l oss acc o unt.
Q6. State how the following items are treated in arriving at the value of cost of material purchased:
(i) Trade discount
(ii) Insurance charges
(iii) Freight inwards
(iv) Cost of non-returnable containers
(v) Shortage due to normal reasons [ICAI Module]
Ans:
S. No. Items Treatment
(i ) Tr a de di s c o unt Tr a de di s c o unt i s de duct e d f r o mt he p ur c has e pri ce i f i t i s not s ho wn as de ducti o n i n t he i nv oi ce
(ii ) I ns ur a nce c har ges I ns ur a nce c har ges ar e pai d f or pr ot ecti ng g oo ds duri ng t r a nsi t. It i s a dde d w i t h t he c ost of p ur c has e.
(iii ) Fr ei g ht i n war ds It i s a dde d w i t h t he c ost of p ur c has e as i t i s di r ectl y att ri but a bl e t o pr oc ur e me nt of mat eri al.
(iv ) Cost of no n- r et ur na bl e
c o nt ai ners
The c ost of no n- r et ur na bl e c o nt ai ners i s a dde d w i t h t he c ost of p ur c has e of mat eri al s.
MATE RI AL C OST 2.5
S. No. Items Treatment ( v ) Short age due t o nor mal r eas o ns
Good uni t s a bs or bt he c ost of s hort age due t o nor mal r eas ons Loss es due t o br eaki ng of bul k, evapor ati on , or due t o a ny unav oi da bl e c o ndi ti o ns et c. ar e t he r eas o ns of nor mal l oss.
Q7. Distinguish clearly between Bin Cards and Stores Ledgers.
[CA Inter Nov 2017, Nov 2004, May 2003, May 2002, May 2000, 4 Marks]
Ans. Bin cards Stores Ledger
Bi n Car ds i s mai nt ai ne d by t he st or e kee per i n t he st or e.
It c o nt ai ns o nl y q ua nti t ati ve det ail s of mat eri al r ecei ve d, i ss ue d a nd r et ur ne d t o st or es.
Ent ri es ar e ma de whe n t r a ns acti o n t a kes pl ace.
St or e l e dger i s mai nt ai ne di n c ost acc o unti ng de part me nt.
It c o nt ai ns i nf or mati o n bot h i n q ua nti t y a nd val ue.
It i s al ways post e d aft er t he t r a ns acti o n.
Eac ht r a ns acti oni s i ndi vi duall y post e d . Tr a ns acti o ns may be s u mmari z e d a nd t he n post e d.
I nt er- de part me nt t r a nsf er s do not a ppear i n Bi n Car d.
Mat eri al t r a nsf ers f r o m o ne j o b t o a not her j o b ar e r ec or de d f or c osti ng p ur pos es.
Q8. Define Inventory control and given its objectives. List down the basis to be adopted for inventory control. [CA
Inter Nov. 2019, 5 Marks]
Ans. The Chart er e d I nsti t ut e of Ma nage me nt Acc o unt s ( CI MA) defi nes I nve nt or y Co nt r ol as “ The f uncti o n of e ns uri ng t hat s uffi ci e nt g oo ds ar e r et ai ne d i n st oc k t o meet all r e q ui r e me nt s w i t ho ut c arr yi ng unnecess aril y l ar ge st oc ks”.
The o bj ecti ve of i nve nt or y c o nt r ol i s t o ma ke a bal a nce bet wee n s uffi ci e nt st oc k a nd over- st oc k. The st oc k mai nt ai ne d s ho ul d be s uffi ci e nt t o meet t he pr o d ucti o n r e q ui r e me nt s s o t hat uni nt err upt e d pr o d ucti o n fl o w c a n be mai n
t ai ne d. I ns uffi ci e nt st oc k not o nl y pa us e t he pr o d ucti o n b ut al s o c a us e a l oss of r e ve n ue a nd g oo d will.
On t he ot her ha nd, I nve nt or y r e q ui r es s o me f unds f or p ur c has e, st or age, mai nt e na nce of mat eri al w i t h a ri s k of o bs ol es ce nce, pil f er age et c. A t r a de- off bet wee n st oc k- o ut a nd over- st oc ki ngi s r e q ui r e d. The ma nage me nt may e mpl oy vari o us met ho ds of i nve nt or y a bal a nce.
Management may adopt the following basis for Inventory Control:
u
By Setti ng Qua nti t ati ve Le vel s
On t he basi s of Rel ati ve Cl assi fi c ati o n
MATE RI AL C OST
2.6
-
u
u
Usi ng Rati o Anal ysi s
u Physi c al c o nt r ol
Q9. Explain ‘Just In Time’ (JIT) approach of inventory management.
[CA Inter May 2018, 5 Marks]
Ans. JI T i s a s yst e m of i nve nt or y ma nage me nt w i t h a n a ppr oac h t o have a z er o i nve nt ori es i n st or es. Acc or di ng t o t hi s a ppr oac h mat eri al s ho ul d o nl y be p ur c has e d whe n i t i s act uall y r e q ui r e d f or pr o d ucti o n.
JI T i s bas e d o n t wo pri nci pl es
(i ) Pr o d uce g oo ds o nl y whe n i t i s r e q ui r e d a nd
(ii ) The pr o d uct s s ho ul d be deli ver e d t o c ust o mers at t he ti me o nl y whe n t he y wa nt
It i s al s o k no wn as ‘ De ma nd p ull’ or ‘ Pull t hr o ug h’ s yst e m of pr o d ucti o n I n t hi s s yst e m , pr o d ucti o n pr ocess act uall y st art s aft er t he or der f or t he pr o d uct s ar e r ecei ve d Bas e d o n t he de ma nd, pr o d ucti o n pr ocess st art s a nd t he r e q ui r e me nt f or r a w mat eri al s i s s e nt t o t he p ur c has e de part me nt f or p ur c has e The st e ps f oll o we d i n t hi s s yst e m ar e as f oll o ws:
Q10. Discuss ABC Analysis as a system of Inventory Control.
[CA Inter May 2000, Nov. 2004, Nov. 2005, May 2008, Nov. 2011, May 2017, 4 Marks] Ans. It i s a ni mport a nt t ec hni q ue of i nve nt or y c ont r ol on s el ecti ve basi s wher e by t he me as ur e of c o nt r ol over a n i t e m of i nve nt or y vari es w i t h i t s us age val ue. It e xer ci s es di s cri m i nat or y c o nt r ol over di ff er e nt i t e ms of st or es gr o upe d o n t he basi s of t he i nvest me nt i nv ol ve d. Us uall y t he i t e ms of mat eri al ar e gr o upe di nt o t hr ee c at e g ori es viz ; A , B a nd C acc or di ng t o t hei r us e val ue d uri ng a peri o d:
(i) ‘A’ Category of i t e ms c o nsi st s of o nl y a s mall per ce nt agei.e., a bo ut 10 % of t he t ot al i t e ms of mat eri al ha ndl e d by t he st or es b ut r e q ui r e he avy i nvest me nt i e , a bo ut 70 % of i nve nt or y val ue, bec a us e of t hei r hi g h pri ces a nd he avy r e q ui r e me nt
(ii) ‘B’ Category of i t e ms c o mpri s es of a bo ut 20 % of t he t ot al i t e ms of mat e - ri al ha ndl e d by st or es. The per ce nt age of i nvest me nt r e q ui r e d i s a bo ut 20 % of t he t ot al i nvest me nt i n i nve nt ori es.
MATE RI AL C OST 2.7
Demand
final
→ Production
process
demand
product → Material
→ Order
raw
to supplier → Supplier
material
for
product
starts to
the
for
requirement is sent to Purchase department
for
materials sent
sent the
for production
(iii) ‘C’ category of i t e ms does not r e q ui r e muc h i nvest me nt. It may be a bo ut 10 % of t ot al i nve nt or y val ue b ut t he y ar e ne arl y 70 % of t he t ot al i t e ms ha ndl e d by st or es.
Q11. What are the advantages of ABC analysis. [ICAI Module]
Ans:
(i) Continuity in production: It e ns ur es t hat, w i t ho ut t her e bei ng a ny da nger of i nt err upti o n of pr o d ucti o n f or wa nt of mat eri al s or st or es, m i ni mu m i nvest me nt will be ma de i n i nve nt ori es.
(ii) Lower cost: The c ost of pl aci ng or ders, r ecei vi ng g oo ds a nd mai nt ai ni ng st oc ks i s m i ni m i s e d s peci all y i f t he s yst e mi s c o upl e d w i t h t he det er m i - nati o n of pr oper ec o no m i c or der q ua nti ti es.
(iii) Less attention required: Ma nage me nt ti me i s s ave d si nce att e nti o n nee d t o be pai d o nl y t o s o me of t he i t e ms r at her t ha n all t he i t e ms.
(
iv) Systematic working: W i t h t he i nt r o d ucti o n of t he A BC s yst e m , muc h of t he wor k c o nnect e d w i t h p ur c has es c a n be s yst e mati z e d o n a r o uti ne basi s, t o be ha ndl e d by s ubor di nat e st aff
Q12. How is slow moving and non-moving item of stores detected and what steps are necessary to reduce such stocks? [CA Inter Nov. 2001, 4 Marks]
Ans.
Sl o w movi ng a nd no n- movi ng i t e ms of st or es c a n be det ect e d i n t he f oll o w i ng ways:
1. By pr e pari ng &s c a nni ng peri o di c r e port s s ho w i ng t he st at us of di ff er e nt i t e ms of st or es.
2. By c al c ul ati ng t he st oc k hol di ng of vari o us i t e ms i n t er ms of n u mbers of days / mo nt hs of c o ns u mpti o n as a per ce nt age.
3. By c o mp uti ng r ati os peri o di c all y, r el ati ng t o t he i ss ues of aver age st oc k hel d
4. By i mpl e me nti ng t he us e of a well desi g ne d i nf or mati o n s yst e m .
Steps to reduce stock of slow moving and non-moving items of stores :
1. Pr oper pr oce d ur es a nd g ui deli nes s ho ul d be l ai d do wn f or t he di s pos al of no n- movi ng i t e ms, bef or e t he y f urt her det eri or at es i n val ue.
2. Di versi t y i n pr o d ucti o n t o us e up s uc h mat eri al s.
3. Us e t hes e mat eri al s as s ubsti t ut e i n pl ace of ot her mat eri al s.
Q13. Write a short note on VED analysis of Inventory Control. [CA Inter July 2021, 5 Marks]
MATE RI AL C OST
2.8
Ans. Vital, Essential and Desirable (VED): Under t hi s s yst e m of i nve nt or y a nal ysi s, i nve nt ori es ar e cl assi fie d ont he basi s of i t s cri ti cali t y f or t he pr oducti on f uncti on a nd final pr o d uct. Thi s cl assi fic ati o n i s do ne f or s par e part s whi c h ar e us e d f or pr o d ucti o n.
Vital: It e ms ar e cl assi fie d as vi t al whe n i t s unavail a bili t y c a n i nt err upt t he pr o d ucti o n pr ocess a nd c a us e a pr o d ucti o n l oss It e ms under t hi s c at e g or y ar e st ri ctl y c o nt r oll e d by s etti ng r e- or der l e vel
Essential: It e ms under t hi s cat egor y ar e ess e nti al but not vi t al The unavail a bili t y c a n c a us e s ub- st a ndar di z ati o n a nd l oss of ef fici e nc y i n pr o d ucti o n pr ocess It e ms under t hi s c at e g or y ar e r e vi e we d peri o di c all y a nd get t he s ec o nd pri ori t y
Desirable: It e ms under t hi s c at e g or y ar e opti o nal i n nat ur e, unavail a bili t y does not c a us e a ny pr o d ucti o n or ef fici e nc y l oss.
Q14. Describe perpetual inventory records and continuous stock verification. [CA Inter May 2001, 3 Marks]
Ans.
Perpetual Inventory Records:
Per pet ual i nve nt or y r e pr es e nt s a s yst e m of r ec or ds mai nt ai ne d by t he st or es de part me nt. It c o mpri s es of: (i ) Bi n Car ds, a nd (ii ) St or es Le dger.
The s uccess of per pet ual i nve nt or y de pe nds upo n t he f oll o w i ng:
( a ) The St or es Le dger s ho w i ng q ua nti ti es a nd a mo unt of e ac h i t e m .
(b ) St oc k Co nt r ol c ar ds ( or Bi n Car ds).
( c ) Rec o ncili ng t he q ua nti t y bal a nces s ho wn by st or es l e dger a nd bi n c ar ds.
(d ) Chec ki ng t he p hysi c al bal a nces of a n u mber of i t e ms e ver y day s yst e m - ati c all y a nd by r ot ati o n.
( e ) Ex pl ai ni ng pr o mptl y t he ca us es of di s cr e pa nci es, i f a ny, bet wee n p hysi cal bal a nces a nd t he book fi g ur es
(f ) Ma ki ng c orr ecti ve e nt ri es wher e ver r e q ui r e d a nd
( g ) Re movi ng t he c a us es of t he di s cr e pa nci es.
Continuous Stock Verification:
The c hec ki ng of p hysi c al i nve nt or y i s a n ess e nti al f e at ur e of e ver y s o und s yst e m of mat eri al c o nt r ol. The s yst e m of c o nti n uo us st oc k- t a ki ng c o nsi st s of physical verification of items of inventory . The st oc k veri fi c ati o n may be do ne by i nt er nal a udi t de part me nt b ut ar e i nde pe nde nt of t he st or e a nd pr o - d ucti o n st aff. St oc k veri fi c ati o n i s do ne at a ppr opri at e i nt er val of ti me w i t ho ut pri or noti ce. The el e me nt of s ur pri s e i s ess e nti al f or eff ecti ve c o nt r ol of t he s yst e m .
MATE RI AL C OST 2.9
Q15. Discuss the advantages of perpetual inventory records and continuous stock verification. [CA Inter Nov. 2006, 4 Marks]
Ans.
Advantages of Perpetual Inventory Records:
1 Physi c al st oc ks c a n be c o unt e d a nd book bal a nces c a n be a dj ust e d as a nd whe n desi r e d w i t ho ut wai ti ng f or t he e nti r e st oc k- t a ki ng t o be do ne
2. Qui c k c o mpil ati o n of Pr ofi t a nd Loss Acc o unt f or i nt eri m peri o d d ue t o pr o mpt avail a bili t y of st oc k fi g ur es.
3. Di s cr e pa nci es ar e e asil y l oc at e d a nd t h us c orr ecti ve acti o n c a n be pr o mptl y t a ke n.
4. It r e ve al s t he e xi st e nce of s ur pl us, dor ma nt, o bs ol et e a nd sl o w- movi ng mat eri al s, s o t hat r e me di al me as ur es may be t a ke n i n ti me.
5. Fi xati o n of t he vari o us st oc k l e vel s a nd c hec ki ng of act ual bal a nces i n ha nd w i t h t hes e l e vel s assi st t he st or e kee per i n mai nt ai ni ng st oc ks w i t hi n li m i t s a nd i n i ni ti ati ng p ur c has e r e q ui si ti o ns f or c orr ect q ua nti t y at t he a ppr opri at e ti me.
Advantages of Continuous Stock Taking :
1. Cl os ur e of nor mal f uncti o ni ng i s not necess ar y.
2 St oc k di s cr e pa nci es ar e li kel y t o be br o ug ht t o t he noti ce a nd c orr ect e d muc h e arli er t ha n under t he a nn ual st oc k- t a ki ng s yst e m
3. The s yst e mge ner all y has a s o beri ngi nfl ue nce o n t he st or es st aff bec a us e of t he el e me nt of s ur pri s e pr es e nt t her ei n.
4. The move me nt of st or es i t e ms c a n be wat c he d mor e cl os el y by t he st or es a udi t or s o t hat c ha nces of o bs ol es ce nce b uyi ng ar e r e d uce d.
5. Fi nal Acc o unt s c a n be r e a dy q ui c kl y. I nt eri macc o unt s ar e possi bl e q ui t e c o nve ni e ntl y.
Q16. “Perpetual inventory system comprises Bin Card and Stores Ledger, but the efficacy of the system depends on continuous stock taking.” Comment.
[CA Inter May 2013, 4 Marks]
Per pet ual I nve nt or y s yst e mr e pr es e nt s a s yst e mof r ec or ds mai nt ai ne d by t he st or es de part me nt. Rec or ds c o mpri s e of (i ) Bi n Car ds a nd (ii ) St or es Le dger. Bi n Car d mai nt ai ns a q ua nti t ati ve r ec or d of r ecei pt s, i ss ues a nd cl osi ng bal a nces of e ac h i t e m of st or es. Li ke a bi n c ar d, t he St or es Le dger i s mai nt ai ne d t o r ec or d all r ecei pt a nd i ss ue t r a ns acti o ns i n r es pect of mat eri al s. It i s fill e d up w i t h t he hel p of g oo ds r ecei ve d not e a nd mat eri al r e q ui si ti o ns. But a per pet ual i nve nt or y s yst e m ’ s effi c ac y de pe nds o n t he s yst e m of c o nti n uo us st oc k t a ki ng.
Ans.
2.10 MATE RI AL C OST
Conti nuo us st oc k t aki ng mea ns t he physi cal c hec ki ng of t he r ec or ds i.e. Bi n car ds a nd st or e l e dger w i t h act ual p hysi c al st oc k. Per pet ual i nve nt or y i s ess e nti all y necess ar y f or mat eri al c o nt r ol. It i nci de nt all y hel ps c o nti n uo us st oc k t a ki ng.
The main advantages of continuous stock taking are as follows:
1. Cl os ur e of nor mal f uncti o ni ng i s not necess ar y.
2. St oc k di s cr e pa nci es ar e li kel y t o be br o ug ht t o t he noti ce a nd c orr ect e d muc h e arli er t ha n under t he a nn ual st oc k- t a ki ng s yst e m .
3. The s yst e mge ner all y has a s o beri ngi nfl ue nce o n t he st or es st aff bec a us e of t he el e me nt of s ur pri s e pr es e nt t her ei n.
4 The move me nt of st or es i t e ms c a n be wat c he d mor e cl os el y by t he st or es a udi t or s o t hat c ha nces of o bs ol es ce nce b uyi ng ar e r e d uce d
5. Fi nal Acc o unt s c a n be r e a dy q ui c kl y. I nt eri macc o unt s ar e possi bl e q ui t e c o nve ni e ntl y.
Q17. Explain FIFO and LIFO method of stores issue.
[CA Inter May 2018, 2.5 Marks]
Ans.
First-in First-out (FIFO) method: It i s a met ho d of pri ci ng t he i ss ues of mat e - ri al s, i n t he or der i n whi c h t he y ar e p ur c has e d. I n ot her wor ds, t he mat eri al s ar e i ss ue d i n t he or der i n whi c h t he y arri ve i n t he st or e or t he i t e ms l o ngest i n st oc k ar e i ss ue d fi rst. Th us e ac h i ss ue of mat eri al o nl y r ec overs t he p ur c has e pri ce whi c h does not r efl ect t he c urr e nt mar ket pri ce.
It i s s ui t a bl e i n ti mes of f alli ng pri ce si nce t he mat eri al c ost c har ge d t o pr o - d ucti o n will be hi g h whil e t he r e pl ace me nt c ost of mat eri al s will be l o w . But, i n c as e of ri si ng pri ces, i f t hi s met ho d i s a dopt e d, t he c har ge t o pr o d ucti o n will be hi g h whil e t he r e pl ace me nt c ost of mat eri al will be l o w .
Co ns e q ue ntl y, i t wo ul d be di ffi c ul t t o p ur c has e t he s a me v ol u me of mat eri al s ( as i n t he c urr e nt peri o d) i n f ut ur e w i t ho ut havi ng a ddi ti o nal c a pi t al r es o ur ces.
It i s a met ho d of pri ci ng t he i ss ues of mat eri al s o n t he basi s of ass u mpti o n t hat t he i t e ms of t he l ast bat c h (l ot) p ur c has e d ar e t he fi rst t o be i ss ue d Ther ef or e, under t hi s met ho d, t he pri ces of t he l ast bat c h (l ot) ar e us e d f or pri ci ng t he i ss ues, until i t i s e x ha ust e d Wher e t he q ua nti t y of i ss ue i s mor e t ha n t he q ua nti t y of t he l at est l ot, t he n e arli er l ot a nd i t s pri ce will al s o be t a ke n i nt o c o nsi der ati o n Duri ng i nfl ati o nar y peri o d or peri o d of ri si ng pri ces, t he us e of LI F O wo ul d hel p t o e ns ur e t hat t he c ost of pr o d ucti o n det er m i ne d o n t he a bove basi s i s a ppr oxi mat el y t he c urr e nt o ne
Last-in-First-out (LIFO) method:
MATE RI AL C OST 2.11
Q18. Explain, why the Last in First out (LIFO) has an edge over First in First out (FIFO) or any other method of pricing material issues.
[CA Inter Nov. 2007, 3 Marks]
Ans.
LI F O has f oll o w i ng a dva nt ages:
( a ) The c ost of t he mat eri al i ss ue d will be r efl ecti ng t he c urr e nt mar ket pri ce.
(
b ) The us e of t he met ho d d uri ng t he peri o d of ri si ng pri ces does not r efl ect und ue hi g h pr ofi t i n t he i nc o me st at e me nt.
(
c ) I n t he c as e of f alli ng pri ce, pr ofi t t e nd t o ri s e d ue t o l o wer mat eri al c ost, yet t he fi ni s he d g oo ds a ppe ar t o be mor e c o mpeti ti ve a nd ar e at mar ket pri ce.
(d ) Duri ng t he peri o d of i nfl ati o n, LI F O will t e nd t o s ho wt he c orr ect pr ofi t.
Q19. Explain the meaning of waste, spoilage, defectives and scrap and give the accounting treatment for each one.
[CA Inter Nov, 2019, Nov. 2015, May 2009, Nov. 2008, May 2007, May 2005, Nov. 2003, May 2003, May 2000, 8 Marks]
Ans.
Waste: It i s t he porti o n of r a w mat eri al whi c h i s l ost d uri ng st or age or pr o d ucti o n a nd di s c ar de d. The wast e may or may not have a ny val ue.
Accounting Treatment:
Normal Wastage: Cost of nor mal wast e i s a bs or be d by g oo d pr o d ucti o n uni t s
Abnormal Wastage: The c ost of a bnor mal l oss i s t r a nsf err e d t o Costi ng Pr ofi t a nd l oss acc o unt.
Spoilage: Spoil age i s t he t er m us e d f or mat eri al s whi c h ar e ba dl y da mage d i n ma n uf act uri ng oper ati o ns, a nd t he y c a nnot be r ecti fi e d ec o no m i c all y a nd he nce t a ke n o ut of t he pr ocess t o be di s pos e d of w i t ho ut f urt her pr ocessi ng.
Accounting Treatment:
Normal Spoilage: Nor mal s poil age (i.e., whi c h i s i nher e nt i n t he oper ati o n) c ost s ar e i ncl ude d i n c ost s, ei t her by c har gi ng i t t o t he pr o d ucti o n or der or t o t he pr o d ucti o n over he a d s o t hat i t i s s pr e a d over all t he pr o d uct s. Any val ue r e ali s e d f r o ms poil age i s cr e di t e d t o pr o d ucti o n or der or pr o d ucti o n over he a d acc o unt, as t he c as e may be.
Abnormal Spoilage: Abnor mal Spoil age (i.e., ari si ng o ut of c a us es not i nher e nt i n ma n uf act uri ng pr ocess) c ost s ar e c har ge d t o Costi ng Pr ofi t a nd Loss Acc o unt. Whe n s poil e d wor k i s t he r es ul t of ri gi d s peci fi c ati o n, t he c ost of s poil e d
2.12 MATE RI AL C OST
wor k i s a bs or be d by g oo d pr o d ucti o n whil e t he c ost of di s pos al i s c har ge d t o pr o d ucti o n over he a d.
Defectives: Def ecti ves ar e t hos e uni t s or porti o ns of pr o d ucti o n whi c h do not meet t he q uali t y st a ndar ds d ue t o s ub- st a ndar d mat eri al s, ba d- s uper vi - si o n, ba d- pl a nni ng, poor wor k ma ns hi p, i na de q uat e- e q ui p me nt a nd c ar el ess i ns pecti o n.
Accounting Treatment:
Normal Defects: An a mo unt e q ual t o t he c ost l ess r e ali s a bl e val ue o n s al e of def ecti ves i s c har ge d t o mat eri al c ost of g oo d pr o d ucti o n.
Abnormal Defects: Mat eri al Cost of a bnor mal def ecti ves ar e not i ncl ude d i n mat eri al c ost b ut t r e at e d as l oss aft er gi vi ng cr e di t t o t he r e ali s a bl e val ue of s uc h def ecti ves a nd i s t r a nsf err e d t o c osti ng pr ofi t a nd l oss acc o unt.
Scrap: Scr a ps ar e t he mat eri al s whi c h ar e di s c ar de d a nd di s pos e d- of w i t ho ut f urt her t r e at me nt. Ge ner all y, s cr a p has ei t her no val ue or i nsi g ni fi c a nt val ue. So meti mes, i t may be r ei nt r o d uce d i nt o t he pr ocess as r a w mat eri al.
Accounting Treatment:
Normal Scrap: The c ost of s cr a p i s bor ne by g oo d uni t s a nd i nc o me ari s es o n acc o unt of r e ali s a bl e val ue i s de d uct e d f r o mt he c ost.
Abnormal Scrap: The s cr a p acc o unt s ho ul d be c har ge d w i t h f ull c ost a nd t he cr e di t i s gi ve n t o t he j o b or pr ocess c o ncer ne d. The pr ofi t or l oss i n t he s cr a p acc o unt d ue t o r e ali z ati o n will be t r a nsf err e d t o t he Costi ng Pr ofi t a nd Loss Acc o unt.
Q20. Explain obsolescence and circumstances under which materials become obsolete, state the steps to be taken for its treatment.
[CA
Inter Nov. 2018, 5 Marks]
Obs ol es ce nce i s t he l oss i n t he i nt ri nsi c val ue of a n ass et d ue t o i t s s upers essi o n. I n ot her wor ds, i t r ef ers t o t he l oss i n t he val ue of a n ass et d ue t o t ec hnol ogi c al a dva nce me nt s.
Ans.
Mat eri al s may bec o me o bs ol et e under a ny of t he f oll o w i ng circumstances: u whe n i t i s a s par e part or c o mp o ne nt of a mac hi ner y us e d i n ma n uf act ur e a nd t hat mac hi ner y bec o me o bs ol et e, u wher e i t i s us e d i n t he ma n uf act ur e of a pr o d uct whi c h has no w bec o me o bs ol et e, u wher e t he mat eri al i t s el f i s r e pl ace d by a not her mat eri al d ue t o ei t her i mpr ove d q uali t y or f all i n pri ce.
Treatment: I n all t hr ee c as es, t he val ue of t he o bs ol et e mat eri al hel d i n a st oc k i s a t ot al l oss a nd i mme di at e st e ps s ho ul d be t a ke n t o di s pos e i t off at t he best avail a bl e pri ce The l oss ari si ng o ut of o bs ol et e mat eri al s i s a n a bnor mal l oss a nd i t does not f or m part of t he c ost of ma n uf act ur e.
MATE RI AL C OST 2.13
Q21. Differentiate between ‘scrap’ and ‘defectives’ and how they are treated in cost accounting. [CA Inter Nov. 2015, Nov. 2008, 4 Marks]
Ans. Difference between Scrap and Defectives
Scrap Defectives
It i s t he l oss c o nnect e d w i t h t he o ut p ut It i s t he l oss c o nnect e d w i t h t he o ut p ut as well as i np ut.
Scr a ps ar e not i nt e nde d but ca nnot be eli m - i nat e d due t o nat ur e of mat eri al or pr ocess i t s el f.
Def ecti ves al s o ar e not i nt e nde d but c a n be el i m i nat e d t hr o ug h pr o per c o nt r ol s yst e m .
Ge ner all y s cr a ps ar e not us e d or r ecti fi e d. Def ecti ves ca n be us e d aft er r ecti fi - cati o n.
Scr a ps have i nsi g ni fi ca nt r ec over a bl e val ue Def ecti ves ar e s ol d at a l o wer val ue f r o mt hat of t he g oo d o ne.
PRACTICAL QUESTIONS
VALUATION OF MATERIAL RECEIPTS
Q1. SKD Company Ltd., not registered under GST, purchased material P from a company which is registered under GST. The following information is available for the one lot of 1,000 units of material purchased: Listed price of one lot ` 50,000
Trade discount @ 10% on Listed price
CGST and SGST (Credit Not available) 12% (6% CGST + 6% SGST)
Cash discount @10%
(Will be given only if payment is made within 30 days.) Freight and Insurance
Amount deposited for returnable containers
Amount of refund on returning the container ` 4,000
Other Expenses @ 2% of total cost
20% of material shortage is due to normal reasons.
The payment to the supplier was made within 20 days of the purchases. You are required to calculate cost per unit of material purchased to SKD Company Ltd. [CA Inter RTP May 2022]
2.14 MATE RI AL C OST
`
Toll
`
`
`
3,400
Tax paid
1,000 Demurrage
1,000 Commission and brokerage on purchases
2,000
` 6,000
