Cost Accounting Important Questions 2

Essentials of effective budgetary control (any three):

1. Clear organisation structure with defined responsibility centres and authority.
2. Support from top management and proper communication of budgets to all concerned.
3. Accurate accounting system to provide timely actual data for comparison and variance reporting.

Other essentials include budget manual, budget committee, realistic estimates and follow-up corrective action.

Budgetary control offers many advantages. Any three are:

1. Planning and coordination: Budgets force departments to plan ahead and coordinate with each other (sales, production, purchase, finance).
2. Cost control: Targets are set and actual costs are compared with budgets to identify deviations and reduce wastage.
3. Performance evaluation: Departments/managers can be evaluated against budgeted targets, supporting responsibility accounting.

It also acts as an early warning system and improves profitability through better resource use.

Job costing procedure (long, exam-style):

1. Job order and job number

• On receipt of customer order, a Work Order/Job Order is issued to start work.
• A unique Job Number is allotted and a Job Cost Sheet is opened to collect costs job-wise.
• For quotation, an estimate may be prepared first; later actuals are compared.

2. Recording (charging) direct materials

• Materials required are issued from stores using a Material Requisition Note (MRN) mentioning the job number.
• The stores issues are priced and posted to the job cost sheet under ‘Direct materials’.
• If materials are returned, a Return Note is used and the job is credited.
• If scrap is generated and credited, it is shown as a deduction as per policy.

3. Recording direct labour

• Attendance is captured through time keeping; job-wise time is captured through time booking (job cards/time tickets).
• Wages are computed and labour cost is posted to the job cost sheet as ‘Direct labour’ if it is traceable.
• Indirect labour (supervisors, storekeepers) is not charged as direct labour; it is included in overhead.
• If overtime is worked specifically for the job, overtime premium may be charged to that job; otherwise treated as overhead.

4. Charging direct expenses

• Expenses that are specifically incurred for the job (special tool hire, design fee, royalty, testing charges) are charged directly to the job cost sheet.

5. Collection and absorption of overheads

• Overheads are first collected cost-centre wise (factory overhead, admin overhead etc.).
• A predetermined absorption rate is fixed (e.g., % of direct wages, labour hour rate, machine hour rate).
• Overhead absorbed for the job = rate × actual base of the job (wages/hours).
• The absorbed overhead is posted to the job cost sheet to obtain Works Cost and (if included) Cost of Production.

6. Completion, costing and pricing

• When the job is completed, total job cost is computed from the job cost sheet.
• Add profit (on cost or on sales, as specified) to arrive at quotation/selling price.

7. Closing and control

• Job is closed and actual cost is compared with estimated cost to identify inefficiencies (material wastage, excess labour time, abnormal overhead).
• Reports help in improving future estimates and controlling costs.

Thus, job costing records direct material/labour/expenses through source documents and charges overheads through absorption so that each job’s cost and profit can be measured accurately.