Worked Solution
✓ VerifiedAnswer to (a): Steps to Exercise Control over Cost
Cost control is the process of regulating the costs of operating an undertaking. The following steps are involved:
Step 1 – Setting Standards or Budgets: Before costs can be controlled, targets must be established. These may be in the form of standard costs, budgets, or estimates for materials, labour, and overheads.
Step 2 – Recording Actual Costs: Actual costs incurred during the period are systematically recorded through the cost accounting system using documents like material requisition notes, job cards, and overhead absorption records.
Step 3 – Comparison of Actual with Standard: Actual costs are compared with the pre-determined standards or budgets. This comparison is done periodically — daily, weekly, or monthly — depending on the nature of the cost.
Step 4 – Variance Analysis: Differences between actual and standard costs are computed and analysed. Variances are classified as favourable (actual < standard) or adverse (actual > standard). Sub-variances like Material Price Variance, Material Usage Variance, Labour Efficiency Variance, etc., are calculated to pinpoint causes.
Step 5 – Reporting to Management: Variance reports are submitted to the concerned levels of management on the principle of management by exception, highlighting only significant deviations.
Step 6 – Corrective Action: Management investigates the causes of adverse variances and takes appropriate corrective action — renegotiating supplier prices, improving labour efficiency, reducing wastage, etc.
Step 7 – Revision of Standards: If variances persist due to changed conditions, standards are revised so that they remain realistic and meaningful for future control.
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Answer to (b): Distinction between Bill of Materials and Material Requisition Note
A Bill of Materials (BOM) is a complete and comprehensive list of all materials, components, and sub-assemblies required to manufacture a product or complete a job. It is prepared in advance by the Engineering or Design Department before production commences. It serves as an authorisation document for the storekeeper to issue materials and also acts as a basis for cost estimation. It is prepared in multiple copies for production planning, stores, costing, and purchase departments.
A Material Requisition Note (MRN) is a document raised by the Production Department during the course of production to draw specific materials from stores for a particular job or process. It is prepared at the time of actual requirement. It authorises the storekeeper to issue materials from stores and serves as the basis for posting to the Stores Ledger and Cost Ledger.
| Basis | Bill of Materials | Material Requisition Note |
|---|---|---|
| Prepared by | Engineering/Design Dept. | Production Dept. |
| Timing | Before production begins | During production |
| Purpose | Complete list for a product/job | Request for specific materials |
| Scope | All materials for the whole job | Materials needed at a specific point |
| Use in Costing | Cost estimation and control | Actual cost recording |
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Answer to (c): Financial Expenses Causing Differences in Financial and Cost Accounts
Certain items are recorded in Financial Accounts but are excluded from Cost Accounts because they are either purely financial in nature, non-operating, or appropriations of profit. Five such financial expenses are:
1. Interest on loans and debentures – This is a financing cost and is not included in product cost in cost accounts.
2. Income Tax and Advance Tax – These are appropriations of profit and are not considered a cost of production.
3. Goodwill written off – This is an intangible asset written off and has no relation to the cost of manufacturing.
4. Preliminary expenses written off – These are expenses incurred at the time of formation of a company and are purely financial in nature.
5. Dividend paid to shareholders – This is an appropriation of profit distributed to owners and is not a cost of production or operation.
Other examples include: losses on sale of fixed assets, donations and charities, penalties and fines, and discount on issue of shares/debentures written off.
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Answer to (d): Standing Charges and Running Charges in Transport Organisations
In transport costing, the total cost of operating a vehicle is divided into Standing Charges and Running Charges for purposes of cost ascertainment and control.
Standing Charges are those costs which are incurred irrespective of whether the vehicle is operated or not. They are fixed in nature and do not vary with the distance travelled or the number of trips made. They accrue with the passage of time.
Three examples of Standing Charges:
1. Road tax and vehicle licence fees
2. Insurance premium on the vehicle
3. Garage/depot rent and fixed establishment charges (e.g., driver's fixed salary)
Running Charges are those costs which are incurred only when the vehicle is actually operated. They vary with the distance travelled or the level of activity and are variable in nature.
Three examples of Running Charges:
1. Fuel and lubricants (petrol, diesel, oil, grease)
2. Tyre and tube expenses (wear and tear proportionate to distance)
3. Repairs and maintenance costs directly linked to usage
In transport costing, the cost per kilometre or cost per tonne-kilometre is computed by combining both standing charges (apportioned over estimated kilometres) and running charges (charged directly per kilometre).
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Answer to (e): Objectives of Budgetary Control System
A Budgetary Control System is a system of management control in which all operations are planned in advance in the form of budgets, and actual results are compared with budgeted figures to exercise control. Its key objectives are:
1. Planning: Budgets compel management to plan ahead, think systematically, and lay down policies and programmes for the future in quantitative terms.
2. Co-ordination: Budgetary control ensures that all departments of an organisation work in a co-ordinated manner towards common organisational goals. The activities of purchase, production, sales, and finance departments are integrated.
3. Control: By comparing actual performance with budgeted performance and identifying variances, management can exercise effective control over costs, revenues, and activities.
4. Communication: The process of budget preparation and communication of budgets to all levels ensures that every manager is aware of the targets, policies, and plans of the organisation.
5. Motivation: Budgets set clear performance targets for managers and employees, motivating them to achieve or exceed those targets. Participation in budget setting further enhances motivation.
6. Performance Evaluation: Budgets serve as a yardstick for measuring the efficiency and effectiveness of each department and individual manager by comparing actual results with budgets.
7. Optimum Utilisation of Resources: By pre-planning the use of human, material, and financial resources, budgetary control ensures that no resource is wasted and all resources are used to their optimum capacity.
Write it like this
1The skeleton
- Pick your four BEFORE you start writing — scan all five parts first and lock in the ones where you know 5+ distinct points; attempting all five and leaving one half-done is the single biggest time-waster in this question type.
- Open every part with a one-line definition — examiners give the first half-mark to a crisp definitional sentence (e.g., 'Cost control is the process of regulating costs to keep them within pre-determined standards'); don't jump straight into points.
- Number your points and bold the heading of each point — a numbered list with bold sub-headings (like Step 1 – Setting Standards) signals structure instantly and makes the examiner's tick-marking mechanical and fast.
- Use a table for any 'distinction' part — for BOM vs MRN, a 5-row comparison table with Basis / BOM / MRN columns earns more marks than two paragraphs because it shows you know the exact differentiators, not just general ideas.
- End with a 'rounding-off' line or additional examples — for parts like financial expenses or standing/running charges, one line listing 2-3 extra examples ('Other items include: penalties, donations, discount on shares written off') shows breadth and costs you zero extra time.
- Manage 5 marks = roughly 8-9 minutes per part — if you're still on Step 3 of a 7-step answer at the 10-minute mark, skip to the next part; an incomplete answer on two questions beats a perfect answer on one.
2Examiner-rewarded phrases
3Common trap
On 'answer any four' theory questions, students either attempt all five sub-parts and rush the last one, or they write continuous paragraphs with no numbering — both kill your marks. The examiner is scanning for numbered points with bold headings; a dense paragraph with seven correct ideas scores lower than a clean numbered list with five.