Cost Accounting Quiz - Theory

The purchase department procures materials, supplies, services, machines, and tools at the most favorable terms consistent with quality standards. It's vital because purchasing commits a substantial part of company finance, impacting cash flow and influencing manufacturing, quality, cost, efficiency, and prompt delivery.

Centralized purchasing means all purchase functions are routed through one department. Advantages include obtaining favorable terms due to large quantity purchases, better control over purchasing, and uniform purchasing policies and procedures.

Centralized purchasing can cause delays, especially for geographically distant branches, and may lead to misunderstandings between the purchasing department and branches regarding specific material requirements.

The purchase department receives purchase requisitions, explores sources of supply and chooses suppliers, prepares and executes purchase orders, receives and inspects materials, and checks and passes bills for payment.

A purchase requisition is a formal request to the purchasing department to purchase materials. The storekeeper usually prepares it for regular stock materials, while departmental heads prepare it for special or non-regular items.

Follow-up of purchase orders is crucial to ensure materials are received on time, prevent factory closures due to non-receipt of materials, and allow for suitable remedial measures or alternative sourcing if suppliers face difficulties.

The receipt and inspection department is responsible for receiving, unloading, unpacking, and checking the quantity and physical condition of delivered materials against purchase orders and delivery challans, as well as checking the quality of materials received.

A bin card is a record kept for each item of stores, usually hung on or near the bin where material is kept. Its purpose is to record the receipt, issue, and current balance of material quantities, assisting the storekeeper in stock control and timely material requisitioning.

A stores ledger is maintained in the costing department and records receipts, issues, and balances of materials in both quantity and money values. It differs from a bin card primarily because a bin card records only quantities and is kept by the storekeeper, whereas the stores ledger records both quantity and value and is managed by the costing department.

Standardization aims to allot clear specifications to each item, ensuring uniform quality and increasing supplier options, which can lead to lower costs and continuous supply. Simplification, a corollary, seeks to reduce the number of items stocked, thereby lowering carrying costs and investment in materials. Both contribute to optimizing the number of items and reducing the size of materials held in stores.

Direct labour is directly engaged in the production of goods or services and its cost can be conveniently allocated to specific jobs or processes (e.g., a brick maker's wages). Indirect labour, conversely, helps direct labour indirectly but its cost cannot be conveniently allocated to a specific job (e.g., supervisors, mechanics, sweepers).

The main objective of management regarding labour costs is their economic utilization to reduce the cost of production. This is a critical need in present-day industry due to high labour costs and difficulties in reducing them without affecting efficiency.

Three departments involved are the Personnel Department, Engineering Department, and Time-keeping Department (others include Rate or Time and Motion Study Department, Pay-roll Department, and Cost Accounting Department).

Labour turnover denotes the percentage change in an organization's labour force. A high percentage is undesirable because it indicates instability, leads to reduced production, increased costs for selection and training new workers, higher scrap rates, and increased depreciation of tools and machinery.

Preventive costs are incurred to avoid excessive labour turnover by keeping workers satisfied (e.g., good working conditions, welfare facilities). Replacement costs are incurred when workers leave and need to be replaced, including recruitment, training, and loss of production/profit due to new workers' inefficiency.

The purpose of time study is to determine the standard time required to perform a specific operation or job. It involves observing and analyzing the movements of an average worker and allowing for fatigue and personal needs.

Job analysis is the process of studying and reporting pertinent information about a job, determining its tasks, required skills, and responsibilities. Job evaluation, on the other hand, is a systematic technique used to determine the worth of a job, often for establishing a fair wage structure, by evaluating its characteristics.

Normal idle time is the unavoidable time during which employees are paid but are not engaged in productive work (e.g., time taken to move from gate to department, tea breaks). Its cost is considered an unavoidable cost and is usually included in the cost of production, often treated as a factory expense.

Time cards primarily record a worker's overall attendance, including arrival and departure times, used for payroll calculation for time-paid workers. Job cards, in contrast, record the time a worker spends on specific jobs or work orders, used for ascertaining labour cost per job and for cost allocation.

Fraud in wages payment can occur through the inclusion of "ghost workers" (non-existent persons) on the payroll, with their wages misappropriated, or through collusion with time-keepers or foremen to claim wages for unworked hours. One measure to minimize this risk is to have multiple, independent individuals involved in the preparation and verification of wage sheets, and separating these duties from the payment process itself.

A good wage system should be fair both to the employer and the employee, based on scientific time and motion study to ensure a fair output to the employer and a fair amount of wages to the workers.

The two principal wage systems are: (1) Payment on the basis of time spent in the factory (Time wage system), and (2) Payment on the basis of the amount of work done, irrespective of time (Piece rate system).

Two disadvantages are: it gives no incentive to produce more (as payment is based on time, not output), and workers get paid for idle time.

The core principle is to penalize slow workers with a low piece rate for low production and reward efficient workers with a higher piece rate for higher production. It penalizes inefficient workers by paying them much less due to both lower output and a lower wage rate.

Merrick's system improves on Taylor's by applying three piece rates instead of two, and the penalty for slow workers is relatively lower. This makes it less harsh compared to Taylor's system.

Workers who achieve the standard task (100% efficiency) are given wages for the standard time plus a bonus of 20% of those wages. If they complete it in less than standard time (over 100% efficiency), they get piece wages plus the 20% bonus on wages for standard time.

In a premium plan, a standard time is fixed for a job, and if a worker completes it in less time, they are paid for the time taken plus a bonus for the time saved. This benefits both employer (by saving on wages for time saved) and worker (by earning extra wages for saved time).

In the Halsey Plan, bonus is a fixed percentage (usually 50%) of the wages for the time saved. In the Rowan Plan, bonus is a proportion of the wages of the time taken, determined by the ratio of time saved to standard time (Time Saved / Standard Time * Time Taken * Rate).

Two advantages are: they create a team spirit among workers, leading to higher collective output, and they can eliminate excessive waste of time as group members coordinate to achieve overall efficiency.

The primary objective of the Towne Plan is to encourage cost reduction by foremen and workers. Bonus is paid when actual labour cost per unit is less than the standard labour cost; 50% of this saving is distributed among workers and foremen in proportion to their wages.

Overhead cost is the aggregate of indirect material cost, indirect wages, and indirect expenses. Unlike direct costs, which can be economically identified with a specific saleable cost per unit, overheads cannot be conveniently or economically identified directly with a particular cost unit or center.

Overhead expenses have gained added importance because increasing automation and the use of costlier, specialized machines lead to heavy expenditures that cannot be directly charged to individual units. These common costs constitute a significant proportion of the total cost and require careful analysis for ascertainment and control.

No, a high overhead cost is not always an indication of inefficiency. It can be justified if accompanied by factors such as large-scale or mass production, increased efficiency and productivity of labour, reduced human effort due to automation, or higher depreciation and maintenance due to increased machinery use.

The two primary classifications are: (1) Functional Classification, which divides overheads based on major management activities like manufacturing, administration, selling, and distribution. (2) Classification with Regard to Behaviour of Expenditure, which categorizes overheads based on how they vary with production/sales volume (fixed, variable, semi-variable).

Manufacturing overhead is the indirect expense of operating the manufacturing divisions, covering all indirect expenditure from order receipt to completion. Examples include depreciation and insurance on plant and machinery, and wages of indirect workers.

Fixed overhead remains constant in total amount within certain limits, irrespective of changes in output volume, while fixed overhead cost per unit decreases as production increases. Variable overheads, conversely, vary in total direct proportion to the volume of output, while their cost per unit remains relatively constant.

Semi-variable overhead costs are those that contain both fixed and variable elements, meaning they are partly affected by the passage of time and partly by fluctuations in activity level. An example is telephone expenses, which include a fixed annual charge plus a variable charge based on calls made.

This segregation is important for: (1) Fixation of Selling Price: It helps determine pricing policies, especially for minimum acceptable prices that cover variable costs. (2) Framing Flexible Budgets: It is crucial for preparing budgets that adapt to various levels of capacity utilization.

Element-wise classification groups overhead based on the nature and source of expenditure. Its three main components are: (i) Indirect Materials, (ii) Indirect Labour, and (iii) Indirect Expenses.

The purpose of codification of overheads is to intelligently describe cost accounting heads using numbers/letters to facilitate recording and control of cost data, and to group similar overhead items. Two basic requirements are: it should classify expenses by nature, object, or function to distinguish elements/groups; and it should be simple, easy to comprehend, and preferably numerical for mechanization.