BASIC CONCEPTSBASIC CONCEPTS
Question 3 Define Cost Centres and describe its types ? describe its types ?
Question 3 Define Cost Centres and describe its types ?describe its types ?
Answer:-
Answer:- It is dept. product o It is dept. product or job for which cost is r job for which cost is ascertained. Cost Centres are of two typesascertained. Cost Centres are of two types 1.
1. Personal Cost CentrePersonal Cost Centre:: It consists of a person or group of persons e.g. machine operator.It consists of a person or group of persons e.g. machine operator. 2.
2. Impersonal Cost Centre:Impersonal Cost Centre: It consists of a location or an equipment e.g. location of factoryIt consists of a location or an equipment e.g. location of factory Cost Centre in a manufacturing concern: 2 Types
Cost Centre in a manufacturing concern: 2 Types 1.
1. Production Cost Centre:Production Cost Centre:-- where raw material is convertedwhere raw material is converted into finished product.into finished product. 2.
2. Service Cost Centre:Service Cost Centre: It is a cost centre which provide service to a productionIt is a cost centre which provide service to a productioncost centre.cost centre. Question 4 Write Short note on
Question 4 Write Short note on Cost Objects?Cost Objects? Answer:-
Answer:- Cost object is anything for which a separate measurement of cost is required. Cost object may be aCost object is anything for which a separate measurement of cost is required. Cost object may be a product (Computer, TV) a service (Transport service) a project, a customer (Metro rail project) etc.
product (Computer, TV) a service (Transport service) a project, a customer (Metro rail project) etc. Question 5 Describe objectives of
Question 5 Describe objectives of Cost Accounting?Cost Accounting? 1.
1. Ascertainment of Cost:Ascertainment of Cost: To determine cost for a job, process or product.To determine cost for a job, process or product.
2.
2.
Determination of Selling PriceDetermination of Selling Price::
Aims at earning profit so good mark-up on cost. Aims at earning profit so good mark-up on cost. 3.3. Cost ControlCost Control
::
Actual cost incurred in producing a product does not exceed its standard cost. Actual cost incurred in producing a product does not exceed its standard cost. 4.4. Cost ReductionCost Reduction
::
Reducing cost further from standard cost level.Reducing cost further from standard cost level. 5.5. Ascertaining the profit of each activity:Ascertaining the profit of each activity: Match cost with the revenue & dMatch cost with the revenue & determine costing P&Letermine costing P&L 6.
6. Assisting management in decision making:Assisting management in decision making: Help Selection a course of action out of two or moreHelp Selection a course of action out of two or more alternative courses.
alternative courses.
Question 6 State difference between Cost
Question 6 State difference between Cost Control and Cost Reduction?Control and Cost Reduction? Cost
Cost Control Control Cost Cost ReductionReduction Actual
Actual cost cost should should not not exceed sexceed standard ctandard cost ost IfIf it exceeds, investigation is needed.
it exceeds, investigation is needed.
Reducing cost further from standard cost Reducing cost further from standard cost level without impairing product quality.
level without impairing product quality. Main objective - Control cost so as not to
Main objective - Control cost so as not to exceed the standard limits.
exceed the standard limits.
Main objective - Achieve real and permanent Main objective - Achieve real and permanent reduction in cost p.u. of goods mfd.
reduction in cost p.u. of goods mfd. Standards
Standards are are treated treated as as milestone milestone Standards Standards are are assumed assumed to to have have much much extraextra cost.
Preventive
Preventive function function Corrective Corrective function.function. Emphasis
Emphasis on on past past and and present. present. Emphasis Emphasis on on present present and and future.future. Question 7 State difference between Financial
Question 7 State difference between Financial Accounting and Cost AccountingAccounting and Cost Accounting Sl
Sl No. No. Basis Basis Financial Financial Accounting Accounting Cost Cost AccountingAccounting 1.
1. ObjectiveObjective To provide information about financialTo provide information about financial performance.
performance.
To provide information of ascertainment To provide information of ascertainment of cost
of cost for the for the purpose of purpose of cost controlcost control and decision making.
and decision making. 2.
2. NatureNature Records all expenses as direct orRecords all expenses as direct or indirect
indirect
Records all expenses as material, labour Records all expenses as material, labour and OH cost. and OH cost. 3. 3. Recording ofRecording of Data Data Records
Records Historical Historical data. data. Use Use of of both both historical historical costs costs & & pre-pre- determined costs. determined costs. 4. 4. Users ofUsers of information information
Users are shareholders, creditors, Users are shareholders, creditors, financial analysts and government financial analysts and government and its agencies etc.
and its agencies etc.
User is only internal mgt User is only internal mgt
5.
5. Analysis of Analysis of costs and profits costs and profits
Shows
Shows total total profit profit or or loss loss of of company company Shows Shows profit profit or or loss loss of of each each productproduct 6.
6. Time Period Time Period Financial Financial statements statements are are preparedprepared usually for a year.
usually for a year.
Its reports and statements are prepared Its reports and statements are prepared as and when required.
as and when required. Question 8 State difference between Cost
Question 8 State difference between Cost Accounting and Management Accounting?Accounting and Management Accounting? Basis
Basis Cost AccountingCost Accounting Management AccountingManagement Accounting
1111
Nature
Nature ItIt recordsrecords thethe quantitative It records both qualitative andquantitative It records both qualitative and aspect only
aspect only quantitative aspect.quantitative aspect.
22 It records the cost of It records the cost of ItIt Provides informationProvides information toto Objective
Objective producingproducing a producta product andand management for planning andmanagement for planning and providing a service
providing a service co-ordinationco-ordination 33
Area Area
It only deals with cost
It only deals with cost It is wider in scope as itIt is wider in scope as it Ascertainment.
Ascertainment. includes F.A., budgeting, Tax,includes F.A., budgeting, Tax, Planning.
Planning. 44
Recording of data
Recording of data ItIt usesuses bothboth pastpast andand
ItIt is focused withis focused with thethe present figures.
present figures. projection of figures for future.projection of figures for future. 55 It’s development is related toIt’s development is related to It develops in accordance toIt develops in accordance to
Development
Development industrial revolution.industrial revolution. the need of modern businessthe need of modern business world.
world.
66 Rules and RegulationRules and Regulation ItIt followsfollows certain principlescertain principles It does not follow any specificIt does not follow any specific and
and proceduresprocedures for for rules and regulations.rules and regulations. recording
recording costscosts of differentof different products
products Question 9 Describe advantages of
Question 9 Describe advantages of Cost Accounting System?Cost Accounting System? 1.
1. Cost Determination:-Cost Determination:- To determine total cost and unit cost of a product or service.To determine total cost and unit cost of a product or service. 2.
3.
3. Product Profitability Analysis:Product Profitability Analysis:- To eliminate - To eliminate unprofitable products unprofitable products and identify exact causes and identify exact causes forfor decrease or increase in the profit/loss of the business.
decrease or increase in the profit/loss of the business. 4.
4. Determination of selling price:-Determination of selling price:- Good mark up for profit earning.Good mark up for profit earning. 5.
5. Cost Control and Variance Analysis:-Cost Control and Variance Analysis:- check adverse variance and avoid in future.check adverse variance and avoid in future. 6.
6. Cost Cost Comparison Comparison and and Benchmarking:-Benchmarking:- Cost comparison Cost comparison helps ihelps in cost n cost control. control. UniformUniform costing & inter-firm comparison methods are used for comparison between same industry firms. costing & inter-firm comparison methods are used for comparison between same industry firms. Question 10 Describe Limitations of Cost
Question 10 Describe Limitations of Cost Accounting?Accounting? 1.
1. Expensive:Expensive: Detailed analysis in allocation & absorption of overheadsDetailed analysis in allocation & absorption of overheads need additional work & henceneed additional work & hence additional salary.
additional salary. 2.
2. Requirement of Reconciliation:Requirement of Reconciliation: Profit as per cost & financial records is different.Profit as per cost & financial records is different. 3.
3. Duplication WorkDuplication Work: Maintain two sets: Maintain two sets of accounts i.e. Financial Account and Cost Account.of accounts i.e. Financial Account and Cost Account. 4.
4. Inefficiency:Inefficiency: Costing system itself does not control costs but its usage does.Costing system itself does not control costs but its usage does. Question 11 Describe importance of
Question 11 Describe importance of Cost Accounting?Cost Accounting? 1.
1. Control of Direct and Indirect costControl of Direct and Indirect cost:: Control over material cost (avoid over stocking), labour cost Control over material cost (avoid over stocking), labour cost (Avoid high labour turnover rate) & overheads cost (avoid unnecessary exp.)
(Avoid high labour turnover rate) & overheads cost (avoid unnecessary exp.) 2.
2. MeasuringMeasuring efficiency & fixing responsibilityefficiency & fixing responsibility:: Compare actual with std and fix responsibility for anyCompare actual with std and fix responsibility for any deviations.
deviations. 3.
3. BudgetingBudgeting:: Actual performance is compared with budgeted performance like sales budget. Actual performance is compared with budgeted performance like sales budget. 4.
4. Price determinationPrice determination:: Good mark up for profit earning. Good mark up for profit earning. 5.
5. Curtailment of loss during off-seasonCurtailment of loss during off-season:: Reduce overhead by utilising idle capacity during off-season.Reduce overhead by utilising idle capacity during off-season. 6.
6. ExpansionExpansion:: Production estimation help in deciding future expansion.Production estimation help in deciding future expansion. 7.
7. Arriving at decisionsArriving at decisions:: Decision need correct cost information otherwise without proper costDecision need correct cost information otherwise without proper cost accounting decision would be like taking a jump in the dark.
accounting decision would be like taking a jump in the dark.
Question 12 Describe the factors to be considered before installation of Costing system? Question 12 Describe the factors to be considered before installation of Costing system?
1.
1. Objective:Objective: Whether to fix selling prices or control costs or both.Whether to fix selling prices or control costs or both. 2.
2. Nature of Business:Nature of Business: The costing system, suitable to company, should be introduced. The costing system, suitable to company, should be introduced. 3.
3. Organisational Hierarchy:Organisational Hierarchy: Instant information about Costs to different level of Instant information about Costs to different level of management.management. 4.
4. Knowing the product:Knowing the product: Nature of product determines the type of costing system to beNature of product determines the type of costing system to be implemented. In case of perishable or short self- life, marginal costing method is required to know implemented. In case of perishable or short self- life, marginal costing method is required to know the contribution and minimum selling price.
the contribution and minimum selling price. 5.
5. Knowing the production process:Knowing the production process: Prior complete knowledge of all production process isPrior complete knowledge of all production process is required. Cost apportionment can be done on the most appropriate and scientific basis.
required. Cost apportionment can be done on the most appropriate and scientific basis. 6.
6. Method of maintenance of cost records:Method of maintenance of cost records: Integrated accounts should be maintained soIntegrated accounts should be maintained so difference in profit of cost and financial accounts.
difference in profit of cost and financial accounts. 7.
7. Statutory compliances and auditStatutory compliances and audit: Books & Accounts to comply : Books & Accounts to comply with statutorywith statutory requirements.requirements. Question 13 Explain Essential requirements of
Question 13 Explain Essential requirements of a Good costing System (GCS)?a Good costing System (GCS)? 1.
1. Informative and Simple:Informative and Simple: GCS should be tailor-made, practical, simpleGCS should be tailor-made, practical, simple & easy to operate.& easy to operate. 2.
2. Accuracy:Accuracy: Data provided by GCS should be accurateData provided by GCS should be accurate otherwise wrong decision may be taken.otherwise wrong decision may be taken. 3.
3. Support from Management & subordinates:Support from Management & subordinates: Necessary cooperation and participationNecessary cooperation and participation of variousof various depts of company is required.
depts of company is required. 4.
4. Cost-Benefit:Cost-Benefit: The Cost of installing and operating the system should justify the results.The Cost of installing and operating the system should justify the results. 5.
5. Trust:Trust: Management should trust Costing System & provide aManagement should trust Costing System & provide ahelp in its development & success.help in its development & success. 6.
7.
7. Detail:-Detail:- It should provide information in detail and also avoid unnecessary details.It should provide information in detail and also avoid unnecessary details. Question 14 Classify Costs on the basis of nature or element?
Question 14 Classify Costs on the basis of nature or element? 1.
1. Direct Materials:Direct Materials: Those materials which can be conveniently identified with and can be directlyThose materials which can be conveniently identified with and can be directly allocated to a particular product, job or process e.g. Refill in Pen, Milk in ice cream.
allocated to a particular product, job or process e.g. Refill in Pen, Milk in ice cream. 2.
2. Direct Labour:Direct Labour: Those labour which can be conveniently identified with and can be directlyThose labour which can be conveniently identified with and can be directly allocated to a particular product, job or process e.g. Halwai in confectionary.
allocated to a particular product, job or process e.g. Halwai in confectionary. 3.
3. Direct Expenses:Direct Expenses: All All direct direct costs costs other other than than direct direct material material cost cost and and direct direct labour labour costs costs areare termed as direct expenses e.g. royalty based on output produced.
termed as direct expenses e.g. royalty based on output produced. 4.
4. Indirect Materials:Indirect Materials: Those materials which cannot be conveniently identified with and cannot beThose materials which cannot be conveniently identified with and cannot be directly allocated to a particular product, job or process e.g. lubricant oils used in machine.
directly allocated to a particular product, job or process e.g. lubricant oils used in machine. 5.
5. Indirect LabourIndirect Labour Those labour which cannot be conveniently identified with and cannot be directlyThose labour which cannot be conveniently identified with and cannot be directly allocated to a particular product, job or process e.g. labour employed in security department
allocated to a particular product, job or process e.g. labour employed in security department 6.
6. Indirect Expenses:Indirect Expenses: All indirect costs other than indirect material cost and indirec All indirect costs other than indirect material cost and indirect labour costs aret labour costs are termed as direct expenses e.g. rent of building.
termed as direct expenses e.g. rent of building. 7.
7. Overheads:Overheads: It is sum of indirect material costs, indirect labour costs and indirectIt is sum of indirect material costs, indirect labour costs and indirect expenses. OH =expenses. OH = Production OH + Admin OH + Selling OH and Distribution OH.
Production OH + Admin OH + Selling OH and Distribution OH. Question 15 Classify Costs on the basis of Functions?
Question 15 Classify Costs on the basis of Functions? 1.
1. Prime CostPrime Cost = Direct material cost + Direct = Direct material cost + Direct Labour Cost + Direct ExpensesLabour Cost + Direct Expenses 2.
2. Factory Cost or Works CostFactory Cost or Works Cost = Prime Cost + factory overheads = Prime Cost + factory overheads + opening WIP+ opening WIP – – closing WIP closing WIP 3.
3. Cost of ProductionCost of Production = works costs + Administrative overheads= works costs + Administrative overheads 4.
4. Cost of Goods SoldCost of Goods Sold = Cost of production + opening stock of FG= Cost of production + opening stock of FG – – closing stock of FG closing stock of FG 5.
5. Cost of SalesCost of Sales = Cost of = Cost of goods sold + goods sold + selling and selling and distribution expensesdistribution expenses Question 16 Classify Costs on the basis of Variability or Behaviour?
Question 16 Classify Costs on the basis of Variability or Behaviour? 1.
1. Fixed costsFixed costs – – Those costs which remain same in totality and do not increase or decrease with Those costs which remain same in totality and do not increase or decrease with volume of output but fixed cost per unit of output produced increases with a decrease in volume of volume of output but fixed cost per unit of output produced increases with a decrease in volume of production and vice-versa.
production and vice-versa. 2.
2. Variable CostsVariable Costs – – Those costs which vary in direct proportion to volume of production. Direct Those costs which vary in direct proportion to volume of production. Direct material cost, direct labour cost and direct expenses are variable costs. Variable cost per unit material cost, direct labour cost and direct expenses are variable costs. Variable cost per unit remain same whether production volume is increased or decreased.
remain same whether production volume is increased or decreased. 3.
3. Semi-variable costsSemi-variable costs – – Those costs which varies with the volume of output but not in sameThose costs which varies with the volume of output but not in same proportion in which output is increased e.g. telephone expenses.
proportion in which output is increased e.g. telephone expenses. Question 17 Classify Costs on the basis of Controllability?
Question 17 Classify Costs on the basis of Controllability? 1.
1. Controllable CostsControllable Costs:-Costs which can be controlled by management e.g. cost of raw materials.:-Costs which can be controlled by management e.g. cost of raw materials. 2.
2. Uncontrollable CostsUncontrollable Costs – – Costs which cannot be controlled by man Costs which cannot be controlled by management e.g. Rent of factory.agement e.g. Rent of factory. Question 18 Classify Costs on the basis of Normality?
Question 18 Classify Costs on the basis of Normality? (a)
(a) Normal Cost - Cost which is normally incurred at a given level of output. It is treated as part of costNormal Cost - Cost which is normally incurred at a given level of output. It is treated as part of cost of production e.g. cost of materials and labour.
of production e.g. cost of materials and labour. (b)
(b) Abnormal CostAbnormal Cost - Cost which is not normally incurred at a given level of output. It is charged to- Cost which is not normally incurred at a given level of output. It is charged to Costing Profit and loss Account e.g. cost of abnormal material losses.
Costing Profit and loss Account e.g. cost of abnormal material losses. Question 19 Classify Costs on the basis of Management Decision Making? Question 19 Classify Costs on the basis of Management Decision Making?
1.