Define Cost Accounting and state two main objectives.

Objectives of Cost Accounting Cost Accounting is the specialized branch of accounting dedicated to ascertaining, analyzing, and controlling cost of products, services, and operations. Objectives: 1. Ascertaining accurate unit cost of goods manufactured or services rendered. 2. Providing cost data for managerial planning, cost control, and product pricing.

What is a Cost Sheet? List any four components of prime cost.

Cost Sheet and Prime Cost A Cost Sheet is a periodic document that presents cost elements in a logical sequence to compute Prime Cost, Works Cost, Cost of Production, and Cost of Sales. Prime Cost Components: 1. Direct Materials consumed 2. Direct Labor wages 3. Direct chargeable expenses 4. Royalty on production

What is the formula for Break-Even Point in Units and in Revenue?

Break-Even Point Formulas \text{BEP (Units)} = \frac{\text{Total Fixed Cost}}{\text{Selling Price per Unit} - \text{Variable Cost per Unit}} = \frac{\text{Fixed Cost}}{\text{Contribution Margin per Unit}} \text{BEP (Revenue)} = \frac{\text{Total Fixed Cost}}{\text{P/V Ratio}}

Differentiate between fixed budget and flexible budget.

Fixed vs. Flexible Budget • Fixed Budget: Prepared for a single fixed level of business activity; remains static regardless of changes in actual output. • Flexible Budget: Designed to adjust dynamically to any level of activity attained by segregating costs into fixed and variable components.

What is meant by 'room-day' in hotel service costing?

Room-Day in Hotel Costing A room-day is the composite cost unit in the hospitality industry representing one hotel room occupied by a guest for one day (24-hour period). Total operating costs divided by total room-days yields the cost per occupied room.

The following information is provided by Himalayan Paradise Hotel for the year ended Chaitra 2080: • Total rooms available: 100 rooms • Normal occupancy rate: 80% throughout the year (365 days) • Annual Operating Expenses: - Staff Salaries and Management: Rs 3,500,000 - Room Linen and Laundry: Rs 650,000 - Power, Light, and Water: Rs 850,000 - Repairs, Renovation, and Maintenance: Rs 500,000 - Depreciation on Building & Furniture: Rs 1,200,000 - Administrative and Miscellaneous Overhead: Rs 500,000 The hotel seeks to earn a profit of 25% on total revenue (cost plus profit). Required: a. Calculate total room-days occupied during the year b. Compute total annual operating cost c. Determine the room tariff per occupied room-day to achieve the desired profit margin.

Hotel Room Costing & Tariff Determination a. Total Room-Days Occupied \text{Total Available Room-Days} = 100 \text{ rooms} \times 365 \text{ days} = 36{,}500 \text{ room-days} \text{Occupied Room-Days} = 36{,}500 \times 80\% = 29{,}200 \text{ room-days} b. Total Operating Cost Statement • Staff Salaries & Management: Rs 3,500,000 • Linen and Laundry: Rs 650,000 • Power, Light, and Water: Rs 850,000 • Repairs and Maintenance: Rs 500,000 • Depreciation: Rs 1,200,000 • Administrative Overhead: Rs 500,000 • Total Operating Cost: \text{Rs } 7{,}200{,}000 \text{Cost per Occupied Room-Day} = \frac{7{,}200{,}000}{29{,}200} = \text{Rs } 246.58 c. Tariff per Room-Day for 25% Profit on Revenue Let Total Revenue be R. \text{Revenue} = \text{Cost} + \text{Profit} = 7{,}200{,}000 + 0.25R 0.75R = 7{,}200{,}000 \implies R = \frac{7{,}200{,}000}{0.75} = \text{Rs } 9{,}600{,}000 \text{Room Tariff per Occupied Room-Day} = \frac{\text{Total Revenue}}{\text{Occupied Room-Days}} = \frac{9{,}600{,}000}{29{,}200} = \textbf{Rs 328.77 per room-day}

Annapurna Bakers produces artisan fruit cakes with the following cost structure: • Selling price per cake: Rs 400 • Direct materials per cake: Rs 140 • Direct labor per cake: Rs 60 • Variable selling commission per cake: Rs 20 • Fixed factory overhead: Rs 360,000 per annum • Fixed administrative expenses: Rs 180,000 per annum Required: a. Profit-Volume (P/V) ratio b. Break-even point in units and sales revenue c. Sales volume required to earn an annual target profit of Rs 180,000 d. Margin of safety if current sales are 5,000 cakes.

Cost-Volume-Profit Analysis: Annapurna Bakers a. Contribution Margin & P/V Ratio • Selling Price (SP) = Rs 400 • Total Variable Cost (VC) = 140 + 60 + 20 = \text{Rs } 220 • Contribution Margin (CM) = 400 - 220 = \text{Rs } 180 \text{P/V Ratio} = \frac{CM}{SP} \times 100 = \frac{180}{400} \times 100 = 45\% b. Break-Even Point (BEP) • Total Fixed Cost (FC) = 360{,}000 + 180{,}000 = \text{Rs } 540{,}000 \text{BEP (Units)} = \frac{540{,}000}{180} = 3{,}000 \text{ cakes} \text{BEP (Revenue)} = \frac{540{,}000}{0.45} = \text{Rs } 1{,}200{,}000 c. Sales Required for Target Profit of Rs 180,000 \text{Required Output} = \frac{FC + \text{Target Profit}}{CM} = \frac{540{,}000 + 180{,}000}{180} = \frac{720{,}000}{180} = 4{,}000 \text{ cakes} \text{Required Sales Revenue} = 4{,}000 \times 400 = \text{Rs } 1{,}600{,}000 d. Margin of Safety (at 5,000 cakes) \text{Margin of Safety (Units)} = 5{,}000 - 3{,}000 = 2{,}000 \text{ cakes} \text{Margin of Safety (Rs)} = 2{,}000 \times 400 = \text{Rs } 800{,}000 \text{Margin of Safety (\%)} = \frac{2{,}000}{5{,}000} \times 100 = 40\%

Explain the difference between Absorption Costing and Marginal (Variable) Costing. How is the reconciliation of profits under both systems carried out when opening and closing inventories differ?

Absorption Costing vs. Marginal Costing & Profit Reconciliation 1. Key Differences: • Treatment of Fixed Overhead: In absorption costing, fixed manufacturing overhead is treated as a product cost and included in inventory valuation. In marginal costing, it is treated entirely as a period cost and charged directly to P&L. • Inventory Value: Closing stock is valued higher under absorption costing. • Reporting Purpose: Absorption costing is required for external financial reporting (NAS/IFRS); marginal costing is preferred for internal managerial decision-making. 2. Profit Behavior Principles: • When \text{Production} = \text{Sales}: Both systems report identical profits. • When \text{Production} > \text{Sales}: Absorption costing profit > Marginal costing profit (because some fixed overhead is capitalized in unsold closing stock). • When \text{Sales} > \text{Production}: Marginal costing profit > Absorption costing profit. 3. Profit Reconciliation Statement: \text{Profit as per Marginal Costing} \text{Add: Fixed Manufacturing Overhead in Closing Stock} \text{Less: Fixed Manufacturing Overhead in Opening Stock} = \textbf{Profit as per Absorption Costing}

Explain the concepts of Standard Costing and Variance Analysis. State the formulas for Material Cost Variance, Material Price Variance, and Material Usage Variance.

Standard Costing and Material Variances Standard Costing is a control technique that establishes predetermined target costs for materials, labor, and overhead, comparing them against actual costs to isolate variances and assign operational accountability. Direct Material Variances: 1. Material Cost Variance (MCV): MCV = (SQ \times SP) - (AQ \times AP) 2. Material Price Variance (MPV): MPV = AQ \times (SP - AP) (Measures procurement performance; favorable when actual price is below standard). 3. Material Usage Variance (MUV): MUV = SP \times (SQ - AQ) (Measures operational shop-floor efficiency; favorable when actual consumption is below standard). \text{Verification: } MCV = MPV + MUV

Dean's Office Official Model Question Paper – ACC 201

Group A

Brief Answer Questions. Attempt ALL questions. (5 × 2 = 10)

[5*2=10]

Define Cost Accounting and state two main objectives.

[2]
View model solution
Objectives of Cost Accounting

Cost Accounting is the specialized branch of accounting dedicated to ascertaining, analyzing, and controlling cost of products, services, and operations.

Objectives:
1. Ascertaining accurate unit cost of goods manufactured or services rendered.
2. Providing cost data for managerial planning, cost control, and product pricing.
What is a Cost Sheet? List any four components of prime cost.

[2]
View model solution
Cost Sheet and Prime Cost

A Cost Sheet is a periodic document that presents cost elements in a logical sequence to compute Prime Cost, Works Cost, Cost of Production, and Cost of Sales.

Prime Cost Components:
1. Direct Materials consumed
2. Direct Labor wages
3. Direct chargeable expenses
4. Royalty on production
What is the formula for Break-Even Point in Units and in Revenue?

[2]
View model solution
Break-Even Point Formulas

$\text{BEP (Units)} = \frac{\text{Total Fixed Cost}}{\text{Selling Price per Unit} - \text{Variable Cost per Unit}} = \frac{\text{Fixed Cost}}{\text{Contribution Margin per Unit}}$
$\text{BEP (Revenue)} = \frac{\text{Total Fixed Cost}}{\text{P/V Ratio}}$
Differentiate between fixed budget and flexible budget.

[2]
View model solution
Fixed vs. Flexible Budget
- Fixed Budget: Prepared for a single fixed level of business activity; remains static regardless of changes in actual output.
- Flexible Budget: Designed to adjust dynamically to any level of activity attained by segregating costs into fixed and variable components.
What is meant by ‘room-day’ in hotel service costing?

[2]
View model solution
Room-Day in Hotel Costing

A room-day is the composite cost unit in the hospitality industry representing one hotel room occupied by a guest for one day (24-hour period). Total operating costs divided by total room-days yields the cost per occupied room.

Group B

Descriptive Answer Questions. Attempt any THREE questions. (3 × 10 = 30)

[3*10=30]

The following information is provided by Himalayan Paradise Hotel for the year ended Chaitra 2080:
- Total rooms available: 100 rooms
- Normal occupancy rate: 80% throughout the year (365 days)
- Annual Operating Expenses:
  - Staff Salaries and Management: Rs 3,500,000
  - Room Linen and Laundry: Rs 650,000
  - Power, Light, and Water: Rs 850,000
  - Repairs, Renovation, and Maintenance: Rs 500,000
  - Depreciation on Building & Furniture: Rs 1,200,000
  - Administrative and Miscellaneous Overhead: Rs 500,000
The hotel seeks to earn a profit of 25% on total revenue (cost plus profit).

Required: a. Calculate total room-days occupied during the year b. Compute total annual operating cost c. Determine the room tariff per occupied room-day to achieve the desired profit margin.
[10]
View model solution
Hotel Room Costing & Tariff Determination

a. Total Room-Days Occupied

$\text{Total Available Room-Days} = 100 \text{ rooms} \times 365 \text{ days} = 36{,}500 \text{ room-days}$
$\text{Occupied Room-Days} = 36{,}500 \times 80\% = 29{,}200 \text{ room-days}$
b. Total Operating Cost Statement
- Staff Salaries & Management: Rs 3,500,000
- Linen and Laundry: Rs 650,000
- Power, Light, and Water: Rs 850,000
- Repairs and Maintenance: Rs 500,000
- Depreciation: Rs 1,200,000
- Administrative Overhead: Rs 500,000
- Total Operating Cost: $\text{Rs } 7{,}200{,}000$ $\text{Cost per Occupied Room-Day} = \frac{7{,}200{,}000}{29{,}200} = \text{Rs } 246.58$ $
c. Tariff per Room-Day for 25% Profit on Revenue

Let Total Revenue be $R$ .
$\text{Revenue} = \text{Cost} + \text{Profit} = 7{,}200{,}000 + 0.25R$

$0.75R = 7{,}200{,}000 \implies R = \frac{7{,}200{,}000}{0.75} = \text{Rs } 9{,}600{,}000$

$\text{Room Tariff per Occupied Room-Day} = \frac{\text{Total Revenue}}{\text{Occupied Room-Days}} = \frac{9{,}600{,}000}{29{,}200} = \textbf{Rs 328.77 per room-day}$
Annapurna Bakers produces artisan fruit cakes with the following cost structure:
- Selling price per cake: Rs 400
- Direct materials per cake: Rs 140
- Direct labor per cake: Rs 60
- Variable selling commission per cake: Rs 20
- Fixed factory overhead: Rs 360,000 per annum
- Fixed administrative expenses: Rs 180,000 per annum
Required: a. Profit-Volume (P/V) ratio b. Break-even point in units and sales revenue c. Sales volume required to earn an annual target profit of Rs 180,000 d. Margin of safety if current sales are 5,000 cakes.
[10]
View model solution
Cost-Volume-Profit Analysis: Annapurna Bakers

a. Contribution Margin & P/V Ratio
- Selling Price ( $SP$ ) = Rs 400
- Total Variable Cost ( $VC$ ) = $140 + 60 + 20 = \text{Rs } 220$
- Contribution Margin ( $CM$ ) = $400 - 220 = \text{Rs } 180$ $\text{P/V Ratio} = \frac{CM}{SP} \times 100 = \frac{180}{400} \times 100 = 45\%$ $
b. Break-Even Point (BEP)
- Total Fixed Cost ( $FC$ ) = $360{,}000 + 180{,}000 = \text{Rs } 540{,}000$ $\text{BEP (Units)} = \frac{540{,}000}{180} = 3{,}000 \text{ cakes}$ $
  $\text{BEP (Revenue)} = \frac{540{,}000}{0.45} = \text{Rs } 1{,}200{,}000$
c. Sales Required for Target Profit of Rs 180,000

$\text{Required Output} = \frac{FC + \text{Target Profit}}{CM} = \frac{540{,}000 + 180{,}000}{180} = \frac{720{,}000}{180} = 4{,}000 \text{ cakes}$
$\text{Required Sales Revenue} = 4{,}000 \times 400 = \text{Rs } 1{,}600{,}000$
d. Margin of Safety (at 5,000 cakes)

$\text{Margin of Safety (Units)} = 5{,}000 - 3{,}000 = 2{,}000 \text{ cakes}$
$\text{Margin of Safety (Rs)} = 2{,}000 \times 400 = \text{Rs } 800{,}000$
$\text{Margin of Safety (\%)} = \frac{2{,}000}{5{,}000} \times 100 = 40\%$
Explain the difference between Absorption Costing and Marginal (Variable) Costing. How is the reconciliation of profits under both systems carried out when opening and closing inventories differ?

[10]
View model solution
Absorption Costing vs. Marginal Costing & Profit Reconciliation

1. Key Differences:
- Treatment of Fixed Overhead: In absorption costing, fixed manufacturing overhead is treated as a product cost and included in inventory valuation. In marginal costing, it is treated entirely as a period cost and charged directly to P&L.
- Inventory Value: Closing stock is valued higher under absorption costing.
- Reporting Purpose: Absorption costing is required for external financial reporting (NAS/IFRS); marginal costing is preferred for internal managerial decision-making.
2. Profit Behavior Principles:
- When $\text{Production} = \text{Sales}$ : Both systems report identical profits.
- When $\text{Production} > \text{Sales}$ : Absorption costing profit > Marginal costing profit (because some fixed overhead is capitalized in unsold closing stock).
- When $\text{Sales} > \text{Production}$ : Marginal costing profit > Absorption costing profit.
3. Profit Reconciliation Statement:

$\text{Profit as per Marginal Costing}$
$\text{Add: Fixed Manufacturing Overhead in Closing Stock}$
$\text{Less: Fixed Manufacturing Overhead in Opening Stock}$
$= \textbf{Profit as per Absorption Costing}$
Explain the concepts of Standard Costing and Variance Analysis. State the formulas for Material Cost Variance, Material Price Variance, and Material Usage Variance.

[10]
View model solution
Standard Costing and Material Variances

Standard Costing is a control technique that establishes predetermined target costs for materials, labor, and overhead, comparing them against actual costs to isolate variances and assign operational accountability.

Direct Material Variances:
1. Material Cost Variance (MCV):
  $MCV = (SQ \times SP) - (AQ \times AP)$
2. Material Price Variance (MPV):
  $MPV = AQ \times (SP - AP)$
  (Measures procurement performance; favorable when actual price is below standard).
3. Material Usage Variance (MUV):
  $MUV = SP \times (SQ - AQ)$
  (Measures operational shop-floor efficiency; favorable when actual consumption is below standard).
$\text{Verification: } MCV = MPV + MUV$

Group C

Comprehensive Answer / Case Analysis Question. (1 × 20 = 20)

[1*20=20]

Case Study: Strategic Cost Management & Outsourcing at Pokhara Resort & Spa

Pokhara Resort operates an in-house laundry plant washing 120,000 kg of guest and banquet linen annually. The annual operating costs of the in-house laundry are recorded as:

Laundry detergent and chemical supplies: Rs 480,000
Direct laundry staff wages: Rs 720,000
Water, gas, and electricity: Rs 360,000
Maintenance of washers and dryers: Rs 120,000
Allocated resort administrative overhead: Rs 240,000
Depreciation on laundry machinery: Rs 180,000
Total annual cost: Rs 2,100,000 (Rs 17.50 per kg)

A commercial eco-laundry provider in Pokhara offers to wash all resort linen under a 3-year service contract for Rs 13.50 per kg, including daily doorstep collection and delivery. If outsourced:

All direct chemical supplies, laundry staff wages, utility costs, and machine maintenance will be completely eliminated.
The laundry equipment can be sold immediately for Rs 250,000.
The 2,000 sq. ft. laundry space can be converted into a luxury Ayurvedic spa facility generating an estimated net operating profit of Rs 350,000 per year.
The allocated administrative overhead will remain unchanged.

As Financial Controller: a. Perform a Differential Relevant Cost Analysis to determine whether the resort should continue in-house laundry or outsource. b. Calculate the net annual financial advantage/disadvantage of outsourcing. c. Identify three qualitative/operational risks of outsourcing laundry operations. d. Formulate Service Level Agreement (SLA) terms to protect resort linen quality and delivery reliability.

[20]

View model solution

Differential Cost Analysis & Strategic Outsourcing Review

a. & b. Differential Cost Analysis (for 120,000 kg of Linen)

Cost Element	Continue In-House	Outsource Option	Differential Impact
Outside Contractor ( $120{,}000 \times 13.50$ )	-	Rs 1,620,000	+Rs 1,620,000
Detergent & Chemicals	Rs 480,000	-	-Rs 480,000
Direct Staff Wages	Rs 720,000	-	-Rs 720,000
Water, Gas, Electricity	Rs 360,000	-	-Rs 360,000
Machine Maintenance	Rs 120,000	-	-Rs 120,000
Allocated Admin Overhead	Rs 240,000	Rs 240,000	Rs 0 (Irrelevant)
Machinery Depreciation	Rs 180,000	-	Rs 0 (Sunk/Non-cash)
Opportunity Cost (Spa Net Income)	Rs 350,000	-	-Rs 350,000
Total Relevant Operational Costs	Rs 2,030,000	Rs 1,620,000	Net Benefit to Outsource: Rs 410,000

Capital Gain: Sale of decommissioned equipment yields an immediate one-time cash inflow of Rs 250,000.

Financial Recommendation: Outsourcing yields an ongoing annual operational savings of Rs 410,000 plus Rs 250,000 immediate equipment liquidation cash. Management should proceed with outsourcing.

c. Qualitative and Operational Risks

Loss of Quality Control: Risk of linen graying, tearing, or harsh chemical wear that degrades guest comfort.
Turnaround and Transit Delays: Transport bottlenecks during monsoon floods or festival holidays could cause clean linen stockouts on peak weekend turnover days.
Sanitization Compliance: Ensuring the contractor adheres strictly to healthcare-grade disinfection temperatures (71°C+).

d. Essential Service Level Agreement (SLA) Clauses

Guaranteed Delivery Window: 12-hour turnaround for standard linen and 3-hour emergency expedited return.
Rejection & Penalty Terms: 100% replacement cost charged to contractor for damaged or lost linen, plus a 5% billing deduction if delivery is delayed beyond 60 minutes.
Microbiological Hygiene Audits: Monthly unannounced laboratory fabric swab testing.