Worked Solution
✓ VerifiedAnswer any FOUR of the following:
(a) Cost Units for Service Industries
A cost unit is a unit of product or service in relation to which costs are ascertained. The following are the appropriate cost units for the given service industries:
Hospital: Per patient per day; per bed per week; per operation; per out-patient treated.
Electricity Supply Service: Per kilowatt hour (kWh) of electricity generated or supplied.
Cinema: Per seat per show; per ticket issued.
Canteen: Per meal served; per cup of tea/coffee; per dish.
Hotels: Per room per day; per bed per night; per guest per day.
These cost units help management ascertain the cost of each service rendered and exercise control over expenditure.
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(b) Purely Financial Expenses Included Only in Financial Accounts
Certain items of expenditure are purely financial in nature and are, therefore, excluded from cost accounts. They appear only in financial (profit & loss) accounts. Five such purely financial expenses are:
1. Interest on loans, debentures, and bank borrowings — these relate to financing decisions, not production.
2. Losses on sale of fixed assets or investments — capital losses not relevant to cost ascertainment.
3. Discount on issue of shares and debentures — a financing cost, written off in financial accounts.
4. Penalties, fines, and damages — irregular and non-recurring in nature; excluded from cost accounts.
5. Donations and charities — entirely non-productive expenditure with no relationship to manufacturing activity.
Other examples include goodwill written off, preliminary expenses written off, and provision for taxation.
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(c) Unit Costing — Description and Applicability
Unit Costing (also called Output Costing or Single Output Costing) is a method of costing used where production is uniform, continuous, and consists of a single product or a few varieties of the same product. Under this method, cost is ascertained per unit of output produced.
The total cost of production is divided by the total number of units produced to arrive at the cost per unit. A Cost Statement or Cost Sheet is prepared showing Prime Cost, Works Cost, Cost of Production, Cost of Goods Sold, and Cost of Sales.
Formula: Cost per unit = Total Cost of Production ÷ Number of Units Produced
Industries that follow Unit Costing:
- Brick manufacturing (cost per thousand bricks)
- Cement manufacturing (cost per tonne)
- Paper manufacturing (cost per ream or per tonne)
- Steel manufacturing (cost per tonne)
- Coal mining (cost per tonne of coal extracted)
- Sugar manufacturing (cost per quintal)
- Textile mills producing standard cloth (cost per metre)
Unit costing is ideal where the production process is standardised and the output is homogeneous in nature.
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(d) Cost Drivers for Activity Cost Pools
In Activity-Based Costing (ABC), costs are accumulated in activity cost pools and then allocated to products using appropriate cost drivers — the factors that cause or drive costs.
| Activity Cost Pool | Cost Driver |
|---|---|
| Inspecting and Testing Costs | Number of inspections; Number of units inspected; Number of tests conducted |
| Setting-up Machines Cost | Number of set-ups; Number of production runs |
| Machining Costs | Machine hours; Number of machine operations |
| Supervising Costs | Number of employees supervised; Direct labour hours; Number of departments |
| Ordering and Receiving Materials Cost | Number of purchase orders placed; Number of material receipts/deliveries |
Selecting the right cost driver is critical in ABC as it ensures that overhead costs are traced to products on the basis of actual resource consumption, resulting in more accurate product costing compared to traditional methods.
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(e) Treatment of Items in Calculating Purchase Cost of Material
The purchase cost of material (also called landed cost) includes all costs incurred to bring material to its present location and condition. The treatment of the following items is:
1. Trade Discount: Trade discount is a deduction allowed by the supplier on the list/catalogue price. It is always deducted from the invoice price before recording in cost accounts. It is NOT shown separately — only the net price after trade discount is considered as purchase cost.
2. Cash Discount: Cash discount is allowed for prompt/early payment. It is a financing incentive and is not deducted from purchase cost in cost accounts. Cash discount is treated as a purely financial item and credited to a separate account (Discount Received) in financial accounts.
3. Penalty: Penalty imposed by the supplier (e.g., for breach of contract terms by the buyer) is generally treated as a financial charge and is excluded from the purchase cost of material. However, if the penalty is directly and necessarily related to procurement, some firms may include it — in standard practice, it is excluded.
4. Insurance Charges: Insurance charges paid to protect materials in transit are a direct cost of procurement and are included in the purchase cost of material. They form part of the landed cost.
5. Commission Paid: Commission paid to agents, brokers, or buying agents for procuring materials is included in the purchase cost of material, as it is a necessary cost incurred to bring the material to the stores. It forms part of the total cost of acquisition.
Summary: Deduct trade discount; Include insurance and commission; Exclude cash discount and penalty from material purchase cost.
Write it like this
1The skeleton
- Pick your four BEFORE you write anything — spend 30 seconds scanning all five parts and lock in the ones where you can give 3+ points confidently; examiners reward completeness within a part, not heroic attempts at all five.
- Open each sub-part with a one-line definition — for (a) write 'A cost unit is a unit of product or service in relation to which costs are ascertained' before listing examples; that one sentence alone signals to the examiner you know the anchor concept.
- Use a mini-table or numbered list for enumeration questions — for (d) draw a two-column table: Activity Cost Pool | Cost Driver; for (e) bold each item name and give the treatment on the same line; this makes scanning easy and gets you structured-answer marks.
- Always close each sub-part with a one-line 'so what' — e.g., 'These cost units help management ascertain cost per service and exercise control over expenditure'; examiners are trained to look for application/utility lines at the end, and it signals answer completeness.
- For (e) specifically, write the summary line last — 'Deduct trade discount; Include insurance and commission; Exclude cash discount and penalty'; a crisp summary shows you have conceptual grip, not just rote recall, and secures the final half-mark many students drop.
2Examiner-rewarded phrases
3Common trap
The single biggest trap in 'any four' theory questions is writing thin, half-page answers for all five parts instead of four solid ones — you end up scoring 2/5 on each instead of 4/5 on four. Pick four, go deep, walk away.