Cost and Management Accounting Question Bank

Unit I

1.What is Cost centre and cost unit ?

A large business is divided into a number of functional

departments (such as production, marketing and finance) for administrative
convenience. These departments are further divided into smaller divisions for
cost ascertainment and control. These smaller divisions are called cost centre.

A cost unit refers to a unit of product, service or time in

relation to which costs may be ascertained or expressed. In other words,
cost units is the unit of output for which cost is ascertained. For example,
the cost of air-conditioner is ascertained per unit.

2.What is Prime Cost?

Prime cost of any product comprises of all direct comprises of all direct
comprises of all direct costs, viz. direct material ,direct labour and direct
expenses, specially attributable to a job. Prime cost is also known as flat cost or
first cost or direct cost

3.Discuss the various Elements of cost

4.Explain the scope and objectives of cost accounting

Scope of Cost Accounting

Cost accountancy is broader in scope and comprises Costing, Cost Accounting,

Cost Control, Cost Reduction and Cost Audit

1.Costing
Costing is the technique and process of ascertaining costs.

2.Cost Accounting

Cost Accounting is the process of accounting for cost which begins with the
incurrence of cost and ends with the control of cost.
3.Cost Control

Cost control involves the establishment of target performance, measuring actual

performance, comparing actual performance against target performance and
taking corrective action.
4.Cost Reduction

Cost reduction is the achievement of real and permanent reduction in the unit
cost of products manufactured or services rendered without imparing their
suitability for the use intended or diminution in the quality of the product.
5.Cost Audit

Cost Audit is the verification of cost accounts and a check on the adherence to
the cost accounting plan. Thus it involves-

(i) verification of cost accounting records and

(ii) examining these records to ensure that they adhere to the cost accounting
principles, plans, procedure and objectives.

Objectives of Cost Accounting

The main objectives of cost accounting are cost ascertainment furnishing of cost
data for decision making and control of cost. The objectives are listed below
1.To find out the total cost and cost per unit of various products manufactured.
2. To disclose the proportion of different elements (such as material, labour and
overheads ) in the total cost.

3.To provide necessary data for fixing the selling price.

4.To ascertain the profitability of each product and advise the management as to
how these profits can be maximised.

5.To supply estimates of cost data ,on the basis of historical data for the
preparation of tenders ,quotations etc.

6.To present important cost data to the management for decision making
planning and control.

7.To adopt a suitable system of inventory control to avoid excessive locking up

of working capital in stocks.

8.To identify the sources of wastages and losses in the business.

9.To formulate incentive bonus plans and implement them to improve labour
productivity and reduce costs.

10.To exercise effective control on the idle times of men and machines.
11.To help in the preparation of budgets and implementation of budgetary
control.

12.To compare the actual cost with the standard cost and analyse the cause of
variance.
13.To supply useful data to the management to take vital decisions such as
introduction of new products, replacement of labour and machines.

14.To advise the management on future expansion policies and proposed capital
projects.

5. Define cost accounting

Cost Accounting

Cost Accounting is the process of accounting foe cost which begins with the
incurrence of cost and ends with the control of cost.
It is a formal system of accounting by means of which costs of products,
services or activities are ascertained and controlled.

CIMA ,London defines cost accounting as the process of accounting from the
point at which expenditure is incurred or committed to the establishment of its
ultimate relationship with cost centres and cost units.

6.Explain the various Types of costing

Types of Costing

Costing is the technique and process of ascertaining costs. The objective of cost
accounting is the determination of all cost. The cost may be allocated on the
basis of actual cost incurred or costs may be assigned on a standard cost basis.
A system of cost accounting implies that there is a planned and coordinated
arrangement of all matters relating to costing, i.e., a systematic and planned
procedure is to be followed. The following are the systems generally in use.

1.Historical Costing-Batty says that ,Historical costing ,the ascertaining and

recording of actual costs when or after they have been incurred, was one of the
first stages in the growth of the cost accountants work. It refers to the
ascertainment of costs after they have been incurred. It is also known as
Traditional Costing. It is also known as Traditional costing.
2.Standard Costing-Standard cost is pre-determined cost. The costs are
determined in advance of production. Standard performance is set in terms of
costs and actual costs are compared with the standards. The difference between
the actual cost and the standard one is known as variations, which are recorded
and causes there of are investigated and remedial steps are taken. |This system
enables control of costs and also measuring the efficiency of operation.

3.Uniform Costing It is not a distinctive form of costing, but the cost system
is designed by trade associations followed by several undertakings. This system
enables inter-firm comparisons.

4.Marginal Costing-This system of costing differentiates between fixed costs

and variable costs. Under this system, fixed costs are not treated as product
costs. |The cost is thus the aggregate of direct material, direct wages, direct
expenses and variable overhead. This type of costing is useful in taking
important policy decisions- price fixing during competition time, make or buy
decisions, product mix etc. It is also known as variable for direct costing.

Problems

1.Preparation of Cost Sheet

Unit II

1.What is Perpetual Inventory System?

Perpetual Inventory System - This system is also known as Automatic

Inventory System. It is an important aid to material control. Its main object is to
make available details about the quantity and value of stock of each item, at all
time. It consists of maintaining records for each type of material showing the
quantities and values of material received ,issued and in stock. It also covers
continuous stock taking.

2. Explain the term Periodical Inventory system.

Under this system stocks are verified only at the end of the accounting period,
usually a year.

3. Explain the documents used in the process of material control.

Documents used in the Process of Material Control

The following documents are used in the process of material control

1.Purchase Requisition- Purchase requisition is a document which authorities
the purchase department to purchase goods. The purchase department receives
purchase requisition from various sources, namely, store keeper, production
department, plant and maintenance engineer and heads of their departments
.The purchase requisition contains code number, description and quantity of
materials required and the signature of the requisitioner.

2.Purchase Order- A purchase order is a requisition made by the purchaser to

the supplier to deliver certain goods of requisite quantity and quality at the
terms and conditions agreed upon. Purchase order is an evidence of the contract
between the purchaser and the supplier. It contains name and material and
quantity ,price ,discount, terms of payment etc.

3.Goods Received Note- Goods received note is prepared is prepared by the

department receiving the goods from the supplier. The physical quantity and
quality of materials are carefully checked before they are sent to stores. The
goods received note is a proof of the receipt of the goods by the store keeper.

4.Material Requisition Note-It is a document which authorities and records the

issue of materials for use. Materials should be issued by the storekeeper only on
the presentation of a duly authorised material requisition note. The material
requisition note should be signed by the requisitioner and authorised by a higher
authority.

5.Bin Card- Bin card is a card attached to each bin. Only quantities of materials
received, issued and the balance are recorded in the bin card. It is maintained by
the store keeper. It shows the stock of material at any time. It is very useful in
material control.

6.Stores Ledger- Stores Ledger is kept in the costing department. It contains

accounts for each class of material. It is usually maintained in the loose leaf
form. It is written up by a stores accountant or stores clerk. In the stores ledger,
stores received and issued are recorded both in quantity and value.

7.Material Return Note-Materials supplied to a job may be in excess of its

requirement or may be defective. In such a case the concerned job will return
the material to stores along with a material return note. On receiving the
materials the store keeper will make an entry on the receipt side of the bin card.
Then their materials received note will be sent to the cost office which will give
necessary credit to the concerned job.
8.Material Transfer Note- Material transfer note is a document which records
transfer of surplus materials from one job to another or from one department to
another. Such should be discouraged because it will make control materials
difficult.

4. Explain the Record Maintaining System in Inventory.

Record Maintaining System in Inventory (Stock)

Inventory means stock. Every manufacturing concern has to maintain proper

and accurate records regarding the quantity and value of inventory in hand. The
records may be maintained according to any one of the following two systems.
1.Periodical Inventory system and

2.Perpetual Inventory system.

1.Periodical Inventory System Under this system stocks are verified only at
the end of the accounting period, usually a year.

2.Perpetual Inventory System - This system is also known as Automatic

Inventory System. It is an important aid to material control. Its main object is to
make available details about the quantity and value of stock of each item, at all
time. It consists of maintaining records for each type of material showing the
quantities and values of material received ,issued and in stock. It also covers
continuous stock taking.

Problems

1. Maximum, Minimum Stock Levels

2. Stores Ledger Account ( LIFO,FIFO)

Unit- III

1.Explain the term Cost Apportionment,Allocation, Absorption

Cost Apportionment

Cost apportionment is defined as the allotment of proportion of cost to cost

centres or cost units. In other words it is the process of distribution of overheads
to various departments or cost centres on some equitable basis.
E.g. Factory rent is an expense which cannot be allocated to any one department
but is to be shared by all production departments on the basis of floor area.

Cost Allocation

Cost allocation is defines as the allotment of whole amount of cost to cost

centres or cost units. In other words it is the process of charging the full amount
of overhead without division, to a particular department or cost centre. E.g.
Salary of sales manager is allocated to sales department. Similarly, overtime
premium of a particular department can be allocated to that department

Cost Absorption

Cost absorption means allotment of overheads to jobs. In other words,

distribution of the overhead expenses of a particular department, over the units
produced in that department is called cost absorption.

2. Explain the term Indirect Labour , Direct Labour,Labour Turnover

Indirect Labour

On the other hand, indirect labour cannot be conveniently identified with cost
unit or cost centre. ICMA defines wages as cost other than direct wages cost
.Therefore indirect labour cost is the amount of wages paid to workmen who are
not engaged in production of goods or services, but at the same time, indirectly
help the direct labour. In short wages paid to such workers cannot be identified
with any particular work. Examples of indirect labour cost are wages paid to
supervisors, inspectors, foreman, watchmen, timekeepers, repairers, cleaners
etc. If a worker is employed to perform a job a day, the remuneration is treated
as direct wages, when his job is identical to the job assigned. If not it is indirect
wages. One distinction is that direct labour cost , charged to a job, forms part of
prime cost, whereas indirect cost becomes a part of overhead.

Direct Labour

According to ICMA, Direct Labour cost is that cost which can be identified
with and allocated to cost centres or cost units. The labour spent in altering the
construction, composition or condition of product i.e, converting raw material
into finished product, is known as Direct Labour. The direct labour cost can
easily be identified and allocated to cost units. It varies directly with production,
thus creating a closeness to production
Labour turnover may be defined as change in labour force i.e., percentage
change in the labour force during a specific period. High labour turnover
indicates that labour is not stabilised and there are frequent changes by way of
workers leaving the organisation. High labour turnover is to be avoided. At the
same time very low labour turnover indicates inefficient workers are being
retained in the organisation

3.Explain the various premium or Bonus Methods of payment to workers

4.Explain the various types of Idle Time and its causes

Types of Idle Time

Based on causes or reasons for its occurrence, idle time can be divided into two
categories i.e

(a)Normal Idle Time

(b)Abnormal Idle Time

(a) Normal Idle Time- This is inherent in all kinds of employment and cannot
be avoided. The cost of this time is borne by the respective jobs or products or
departments. Examples of normal idle time are given below:
1.Time consumed by the workers to walk from gate to department.
2.Time taken to pick up tools, change of dress and picking up instructions for
work.
3. Time consumed for changing from one job to another.
4.Time taken for personal needs and tea break.
5.Waiting time when the machine is made ready for production work, called
Setting up Time.

Treatment of Normal Idle Time: Normal idle time is unavoidable and its cost
is charged to production. There are two ways of charging normal idle time to
production.
(1)Normal idle time cost is taken as factory expensed and recovered as indirect
charge.
(2) The normal idle time cost is directly charged to production as direct wages.
(b)Abnormal Idle Time: The abnormal idle time is avoidable idle time which
occurs due to conditions which can be prevented. The reasons for abnormal idle
time are as follows:
1.Time lost due to machine break down

2.Time lost due to power failure

3.Time lost on account of shortage of materials

4.Time wasted due to lack of instructions

5.Time lost on account of strikes and lock outs

Treatment of Abnormal Idle Time

A basic principle of cost accounting is to eliminate the effect of all abnormal

losses and gains on jobs or processes or operations by transferring all abnormal
costs and gains to profit and loss account. They should not form part of the cost
of production. Wages paid for abnormal idle time is charged to costing Profit
and loss Account.

Control of Idle Time

The abnormal idle time can be controlled by effective planning. The reasons for
idle time are to be analysed and steps are to be taken to provide for all
contingencies like preventive maintenance of machinery, proper arrangement
for providing sufficient materials, preparation of job instructions in advance,
avoidance of strikes etc. Even normal idle time can be controlled by efficient
administrative planning and supervision.

5. Explain the Essentials of good wage system

Essentials of a Good Wage System /Principles of Labour Remuneration

The features of a good wage system are listed below:
1.The wage system has to be fair to employees and the employer.

2.The workers are to be assured of minimum guaranteed wages irrespective of

work done.

3.Workers are to be compensated on the basis of their relative efficiency.

4.The wage system should be flexible to incorporate future changes.

5.The wage system should encourage higher productivity and reduce labour
turnover.

6.The wage system should be as per the labour policy of the government and
follow the legislation applicable.

7.The wage system should equate with industry wage levels.

8.The method of computation of wages, wages rates and incentive system

should be simple and easy for workers to understand.

6. Explain the classification of Overheads

Classification of overheads

Classification is the process of grouping of costs according to their common

characteristics. Classification of overhead is important in order to identify costs
with cost units or cost centres. There are various methods for the classification
of overhead. The method to be rendered and policy of management. Overheads
may be classified in the following ways.

1.Classification according to Nature:

Indirect Materials: Indirect materials are those materials which do not form a
part of the finished product. Cost of indirect materials cannot be identified with
and allocated but can be apportioned to a particular product, process or jobs.
E.g. Cotton waste, Lubricant , Grease, Small tools etc.

Indirect Labour: Indirect labour is that labour which is not directly engaged in
production of goods or services. It indirectly helps the direct labour engaged in
production. The wages paid for indirect labour is known as indirect wages.
Indirect wages are those which cannot be identified with and allocated but can
be apportioned to a particular product, process or job. E.g. Wages of mechanics,
supervisors, watchman, sweepers, time keeper etc.

Indirect Expenses : Expenses (other than indirect material and indirect labour)
that are not directly charged to production are indirect expenses. E.g. Office
expenses ,selling and distribution expenses.
2.Classification according to Function:

Factory overheads: These are also called manufacturing overheads, works

overheads or factory on cost. Factory overheads cover all expenses incurred
from the stage of raw materials to finished foods. It includes indirect material,
indirect labour and indirect expenses in producing an article .E.g. Factory rent,
supervisors salary ,power and fuel, heating and lighting, depreciation of factory
building, consumable stores etc.

Administration overheads: These are expenses incurred for running the

administrative office. E.g. Office rent and salaries, printing and stationery,
telephone expenses, depreciation of office building etc.

Selling overheads : These are expenses incurred for actual sales and
promotion of sales. E.g. Salaries of sales manager, commission , travelling
expenses of salesman and promotion expenses like advertisement and publicity,
after sales service etc.

Distribution overheads : These are expenses concerned with packing and

delivery of goods to the customer. E.g. Packing charges, warehouse expenses,
delivery van depreciation , loading charges etc.

3.Classification according to Variability:

Fixed overheads: Expenses that do not vary with volume of production are
known as fixed overheads. E.g Salary, rent , insurance etc.

Variable overheads: Expenses that vary with the volume of production are
known an variable overheads. These are direct costs. E.g. material , wages ,
selling commission, electricity charges etc.

Semi- variable overheads : Expenses that are partly fixed and partly variable
are called semi- variable overheads. These expenses do not vary in the same
ratio in which the output changes.

4. Classification according to Normality

Normal overheads: Normal overheads refer to such overheads which are

expected to be incurred in attaining a given output. These overheads are
unavoidable. They are therefore included in production costs.
Abnormal overheads : Abnormal overheads refer to such overheads which are
not expected to be incurred in attaining a given output. such overhead costs are
charged to costing profit loss account . E.g.Cost of abnormal idle time
,abnormal wastage.

5.Classification according to controllability

Controllable overheads : Controllable costs are variable costs which can be

controlled. E.g. Cost of power used in a particular department is controllable by
the departmental manager.

Uncontrollable overheads : Uncontrollable costs are fixed costs which cannot

be controlled. E.g. Rent, salaries etc. These expenses are incurred on time basis.

7. Methods of distribution of overheads.

Distribution of Overhead

Distribution of overhead consists of apportioning and allocation of overhead to

the different departments. The distribution is followed by redistribution of the
costs assigned to certain departments. The distribution is of two types:
1.Primary Distribution and

2.Secondary Distribution

1.Primary Distribution of Overheads

Primary distribution of overheads is the process of allocating and apportioning

the costs on suitable basis to all the departments or cost centres. Primary
distribution is done without distinction between production and service
departments.

Bases of Apportionment

In order to ascertain the correct cost of cost centre and cost units, suitable bases
have to be adopted for allocation and apportionment of manufacturing
overheads.
2.Secondary Distribution of overheads
Secondary distribution is the process of redistribution of service department
costs to production departments.

This is done as output or jobs pass through one or more production cost centres
only. This kind of distribution is called secondary apportionment. Suitable bases
have to be adopted for redistribution of service department cost to production
department.

Problems

1.Calculation of Rate of Labour Turnover

2.Computation and treatment of Labour cost

3.Calculation of Time Wages and Piece Wages

4.Calculation of Premium Wages under Rowan plan and Halsey Plan, Merricks
Multiple System, Taylors Differentials piece rate system.

5. Preparation of Primary Distribution Summary in overheads.