Q.1 Define cost accounting. State its functions.

Ans. Definition:-
Cost accouting is concerned with recording, classifying and appropriate allocation of
expenditure for the determination of the costs of products or services and for the suitably
arranged data for purposes of control and guidance of information to management for
decision making.
Cost means "the price paid for something".
There Are Three Major Elements of Cost:
1. The value of material
2. The amount of labour
3. Other expenses incurre

Functions of cost accounting:-

 Ascertainment of cost of product: Cost Accounting ascertains cost of production of each job,
process, or work order by applying different methods of cost accounting, such as job costing,
process operation costing, contract costing etc. according to the suitability and needs of the
organization.
 Fixation of selling prices: Cost accounting helps to find out cost of production and fixation of
selling prices of the product or process job or operation. It also helps in preparing necessary
tenders or quotations.
 Measurement of efficiency: Cost accounting measures the efficiency of each product, process
or departments by applying standard cost method.
 Cost control procedure: Cost accounting controls cost by setting standards and compared
with the actual. The deviation between them are identified and if required necessary controlling
measures may be taken.
 Reporting to the Management: Cost accounting reports to the management periodically
which may be monthly, quarterly or half yearly. According to the reports of the cost accounting,
the management takes necessary decisions.

Q.2 Differentiate between Cost and Management Accounting

Ans. Cost Accounting:-
Cost accouting is concerned with recording, classifying and appropriate allocation of
expenditure for the determination of the costs of products or services and for the
suitably arranged data for purposes of control and guidance of information to
management for decision making.
Cost means "the price paid for something".
Management Accounting:-
 The process of preparing management reports and accounts that provide accurate
and timely financial and statistical information required by managers to make day-to-
day and short-term decisions.

Difference Between Cost Account And Management Account:-

Meaning The recording, classifying
and summarising of cost
data of an organisation is
known as cost accounting.
The accounting in which
the both financial and
non-financial information
are provided to managers
is known as Management
Accounting.

Information Type Quantitative. Quantitative and

Qualitative.
Objective Ascertainment of cost of Providing information to
production. managers to set goals and
forecast strategies.

Scope Concerned with Impart and effect aspect

ascertainment, allocation, of costs.
distribution and
accounting aspects of
cost.

Specific Procedure Yes No

Recording Records past and present It gives more stress on the
data analysis of future
projections.

Planning Short range planning Long range and short

range planning
Interdependency Can be installed without Cannot be installed
management accounting. without cost accounting.

Q.3 Write a note on classification of overheads

Ans:-Definition of Overhead:
Cost pertaining to a cost centre or cost unit may be divided into two portions direct
and indirect. The indirect portion of the total cost constitutes the overhead cost which
is the aggregate of indirect material cost, indirect wages and indirect expenses.
Indirect cost is defined as “expenditure on labour, materials or services which cannot
be conveniently identified with a specific saleable cost per unit.”
Indirect costs are those costs which are incurred for the benefit of a number of cost
centers or costs units. Indirect cost, therefore, cannot be conveniently identified with a
particular cost centre or cost unit but it can be apportioned to or absorbed by cost
centres or cost units.
Classification of Overhead Costs:
Cost classification is the process of grouping costs according to their common
characteristics and establishing a series of special groups according to which costs are
classified.
The various classifications are:
(i) Functional classification,
(ii) Classification with regard to behaviour of the expenditure,
(iii) Element-wise classification,
(iv) Classification according to nature of expenditure.

I. Functional Classification of Overhead:

When overhead expenses are classified with reference to major activity divisions of a
concern, it is called functional classification of overhead. This classification is
necessary for the segregation of the cost of each of the principal functional division of
the concern and for having separate methods of accounting and control for the diverse
nature of expenses in each division.
The main groups forming the basis of the classification are:
(a) Manufacturing Overhead,
(b) Administration Overhead,
(c) Selling Overhead,
(d) Distribution Overhead, and
(e) Research and Development Expenses

II. Classification with Regard to Behaviour of Expenditure:

Under this overheads are classified with reference to their tendency to vary with
production/sales volume or activity level. Some expenses vary directly with the rise
and fall in output, some remain constant in spite of change in the level of activity of
the concern whereas there are some other items which are constant only upto a certain
level and then change their character to become variable or which vary with volume
of output but less than proportionately.

Based on this behaviour, the expenses may be classified into:

(a) Fixed overhead

(b) Variable overhead,

(c) Semi-variable or Semi-fixed overhead.

III. Element-wise Classification:

This classification of overhead is done according to the nature and source of
expenditure and follows naturally from the definition of overhead.
According to this classification, the total expenses are broken up into:
(i) Indirect Materials;
(ii) Indirect Labour; and
(iii) Indirect Expenses

IV. Classification of Overhead According to Nature of Expenses:

 In order to have effective analysis of the expenses in detail, each of the
manufacturing, administration, selling and distribution overhead cost is classified into
smaller sub-divisions so that expenses of similar nature can be grouped together under
one head. This is achieved through Standing Order Numbers or Syllabus of Work
Order Numbers and Cost Account Numbers. It may be made clear that standing order
numbers are conventionally applied to factory overheads headings whereas cost
account numbers are customarily applied to administration, selling and distribution
and research development expenses.

Q.4 Discuss Benefits and Limitations of Cost Accounting.

Ans. . Definition:-
Cost accouting is concerned with recording, classifying and appropriate allocation of
expenditure for the determination of the costs of products or services and for the
suitably arranged data for purposes of control and guidance of information to
management for decision making.
Cost means "the price paid for something".
There Are Three Major Elements of Cost:
1. The value of material
2. The amount of labour
3. Otherexpenses incurre

Advantages of Cost Accounting:-

1. Elimination of Wastes, Losses and Inefficiencies: A good cost accounting system
eliminates wastes, losses and inefficiencies by fixing standard for everything.
2. Cost Reduction: New and improved methods of production are followed under cost
accounting system. It leads to cost reduction.
3. Identify the reasons for Profit or Loss: A good cost accounting system highlights the
reasons for increasing or decreasing profit. If so, the management can take remedial action
to maintain profitability of the concern. There is no possibility of shutting down of any
product or process or department.
4. Advises on Make or Buy Decision: On the basis of cost information, the management
can decide whether make or buy a product in open market. The management can rightly
choose the best out of many alternatives. Sometimes, spare capacity can be used profitably.
5. Price Fixation: The total cost of a product is available in the costing records. It is highly
useful for price fixation of a product.
6. Cost Control: Budgets are prepared and standards are fixed under cost accounting
system. The expenses are not permitted beyond the budget amount. The actual performance
is compared with standard to find the variation. If there is any variation, reasons are find
out and the management can exercise control. Period to period cost comparison also helps
cost control.
7. Assist the Government: Government can collect reasonable tax from the company and
exercise price control.
8. Help the Trade Union: Bonus calculation is very easy to the trade union. Reasonable
remuneration is also fixed on the basis of cost accounting information.
9. Marginal Analysis of Cost: It is done for facilitating the short-term decisions especially
during depression period.
 10. Fixation of Responsibility: Responsibility centers is fixed under cost accounting
system. If responsibility is fixed, it becomes difficult to evade responsibility of performance
and leads to effective performance.

Disadvantages or Limitations of Cost Accounting:-

The limitations or disadvantages of cost accounting are listed below:

1. Only past performances are available in the costing records but the management is taking
decision for future.
2. The cost of previous year is not same in the succeeding year. Hence, cost data are not
highly useful.

3. The cost is ascertained on the basis of full utilization of capacity. If capacity is partly
utilized, the cost may not be true.

4. Financial character expenses are not included for cost calculation. Hence, the calculated
cost is not correct always.

5. In cost accounting, costs are absorbed on pre-determined rate. It leads to over absorption
or under absorption of overheads.
6. Cost Accounting fails to solve the problems relating to work study, time and motion study
and operation research.

7. Installation of Cost Accounting System requires the maintenance of many costing

records. If results in heavy expenditure.
8. Delay in receiving costing information does not result in taking quality decision by the
management.

9. Rigid Cost Accounting System does not serve all purposes.

Q.5 Explain the difference between Joint and By product.

Ans. Definition:-
Joint Product

Joint products are the products that are simultaneously produced with the same input,
by a common process and each possesses considerably high sale value that none of
them can be recognized as the major product. In joint products, when raw material is
processed, it results in more than two products. The production of joint products is
performed consciously, by the management of the respective organization, i.e. the
management aims at producing all the products.

There is a separation point called as a split-off point, from where the products are
separated and identified. At this stage, either the products are sold directly or go for
further processing, to turn out as finished product. The amount incurred up to the
split-off point is termed as joint cost.

By-Product
 By Product can be understood as the subsidiary or secondary product which is
incidentally produced, along with the main product, and has saleable or usable value.
While producing the main product, there are instances when another product emanates
which are of minor importance, as compared to the main product, are the by-product.

These are produced from the discarded material, i.e. scrap or waste of the main
process. The split-off point is the stage, at which the by-products are separated from
the main product.

Diffrence

Meaning When the The term by-

production of two product means a
or more products product which is
of similar value, incidentally
are made together produced, during
with same input the processing
and process, is operation of
called joint another product.
product.

Economic Value Joint products Economic value of

have same by-product is
economic value. lower than the
main product.

Input Raw material Waste or scrap of

the main product.
Further Processing Required to turn Not required.
the joint products
into finished
product.

Q.6 Differentiate the Process Costing and Job Costing

Ans.

Meaning Job costing refers to A costing method, in

calculating the cost which the costs
of a special contract, which are charged to
work order where various processes
 work is performed as and operations is
per client's or ascertained, is
customer's known as Process
instructions. Costing.

Nature Customized Standardized

production production
Assignment of cost Calculating cost of First of all, cost is
each job. determined for the
process, thereafter
spread over the
produced units.

Cost Center Job Process

Scope of cost Less High
reduction

Q.7 What is operating costing. (Note:-Here examiner may ask to draw a specimen for
particular given cost as well.)

Ans. Meaning of Operating Costing:-

Operating costing is a process and technique of accumulating and ascertainment of

cost for providing a standardized service to the public or to an undertaking.

Definition of Operating Costing:-

ICMA, London,

Operating costing is that form of operation costing which applies where standardized
services are provided either by an undertaking or by a service cost center within an
undertaking.

Wheldon,

Operating costing is actually unit costing as applied to the costing of services.

Features of Operating Costing:-

The basic features of operating costing are presented below.

1. Uniform service is provided to all the customers.

2. The costs are classified into fixed and variable.

 3. The fixed and variable cost classification is necessary to ascertain the cost of
service and the unit cost of service.

4. There is no physical stock of article if an undertaking renders a service.

5. If a cost center is operating for an undertaking, there is no sale of service but render
the service. In other words, if a cost center is operating for public, it sells its service to
the public.

6. The cost unit may be simple in certain cases or composite or compound in other
cases like transport undertakings.

7. Total costs are averaged over the total amount of service rendered.

8. The costs are collected from the authentic documents like daily log sheet, operating
cost sheet, boiler house cost sheet, canteen cost sheets etc.

9. Operating cost is the cost of rendering service.

10. Operating costing is the method of ascertaining costs.

11. The productive enterprises can quote prices by ascertaining cost data.

Application of Operating Costing:-

Operating costing is applied by an organization, which provides service to the public

as a whole instead of manufacturing an article, and sells the same. For example,
Transport undertaking electricity, theatre, hospitals, schools and the like. Similarly,
the same type of an organization or cost center renders service to production
departments. For example, Electricity, powerhouse, canteen and the like.

The service cost in operating cost should be find out to understand whether an
organization or cost center render services to others or sell the services to the general
public. If the services are sold, the operating expenses and the extent of services
rendered are taken into consideration to find out the service cost. On the other hand, if
the services are sold, the service expenses should be apportioned to the production
department on a suitable basis.

Generally, the basis may be the extent of service availed by the production
departments. It may also become necessary to compare the cost of such a service with
the cost of an outside service for deciding whether it is profitable to buy a service
from outside rather than make the same available from within an organization.

Q.8 What is Marginal Cost? Discuss in detail the importance of marginal costing
Ans. Meaning:-
Marginal Cost is the additional cost that is incurred for producing one additional unit of
product. One of the classifications of cost divides all cost between fixed, semi-variable
and variable costs. In other words, marginal cost can be defined as variable part of the
total costs which is incurred for manufacturing a product. From another angle, marginal
cost can be termed as the amount of resources that can be saved by not making or
producing one unit of additional output.
EXAMPLE OF MARGINAL COST
A company manufactured 2000 units of toys and incurred a total expense of $ 20,000 and
for manufacturing 2001 units, the total cost was $20,006. The marginal cost is $6 whereas
the average cost manufacturing 2000 units is $10 which is quite lesser than the former. The
reason is quite interesting and simple too. Out of $20,000, there are some costs which have
not incurred for making that addition 2001st unit. These are fixed costs which do not
change with every change in output level.

CALCULATE MARGINAL COST

For the calculation of marginal cost, all the costs are segregated between fixed, variable
and semi-variable costs. The second step is to bifurcate the semi-variable into two parts
i.e. fixed and the variable part. Variable costs and the variable part of the semi-variable
costs from the marginal cost. It seems quite simple in words, but the actual calculation of
it is quite challenging.

Advantages of Marginal Costing:

The advantages claimed for marginal costing are:

(i) The technique is simple to understand and easy to operate because it avoids the
complexities of apportionment of fixed costs which, is really, arbitrary.

(ii) It also avoids the carry forward of a portion of the current period’s fixed overhead to

the subsequent period. As such cost and profit are not vitiated. Cost comparisons become
more meaningful.

(iii) The technique provides useful data for managerial decision-making.

(iv) There is no problem of over or under-absorption of overheads.

(v) The impact of profit on sales fluctuations are clearly shown under marginal costing.

(vi) The technique can be used along with other techniques such as budgetary control and
standard costing.
 (vii) It establishes a clear relationship between cost, sales and volume of output and
breakeven analysis.

(viii) It shows the relative contributions to profit which are made by each of a number of
products, and shows where the sales effort should be concentrated.

(ix) Stock of finished goods and work-in-progress are valued at marginal cost, which is
uniform.

Q.9 What do you understand by CVP Analysis? How CVP analysis is useful for the
management?
Ans. Definition & Meaning:
The cost volume profit analysis, commonly referred to as CVP, is a planning process
that management uses to predict the future volume of activity, costs incurred, sales
made, and profits received. In other words, it’s a mathematical equation that computes
how changes in costs and sales will affect income in future periods.
The CVP analysis classifies all costs as either fixed or variable. Fixed costs are
expenses that don’t fluctuate directly with the volume of units produced.
These costs effectively remain constant. An example of a fixed cost is rent. It doesn’t
matter how many units the assembly line produces. The rent expense will always be
the same.
Usefulness of CVP Analysis for Management:-

Common Uses
Managers frequently use CVP to estimate the level of sales that will allow the company to
make a particular profit, called targeted income. They add the targeted income to fixed costs
associated with production, then divide the total by the contribution margin ratio.
Alternatively, they divide the total by the contribution margin per unit, to learn how many
units they must sell. Using CVP, managers can also estimate how changes in the costs of their
products or volume of products affect the company's profits.

Representations
Managers can illustrate CVP using a graph, chart or equations. A graph allows managers to
present the information in an easy-to-understand format. A CVP profit-volume graph
demonstrates the relationship of profit to volume for a particular product. The graph shows
volume across the bottom and profits on the left. A line runs across it, with a slope equal to
the price per unit. The total cost line also runs across the graph, intersecting with the first line
at the break even point. The slope of the total cost line equals the variable cost per unit. The
rise of the first line above the total cost line represents the degree of profit. In other words,
the graph clearly shows how increasing the volume of sales affects the company's profits.
Considerations
Managers must conduct a more thorough analysis of the options that seem best, because CVP
simplifies the business environment. CVP serves as a useful tool for determining what may
be the best option, however.

Q.10 Define Budgetary control. State the objectives & limitation of budgetary control.
Ans. Meaning:-
Budgetary control is the process by which budgets are prepared for the future period
and are compared with the actual performance for finding out variances, if any. The
comparison of budgeted figures with actual figures will help the management to find
out variances and take corrective actions without any delay.
Advantages of Budgetary Control
Budgetary control has become an important tool of an organization to control costs and
to maximize profits. Some of the advantages of budgetary control are:
1. It defines the goals, plans and policies of the enterprise. If there is no definite aim
then the efforts will be wasted in achieving some other aims.

2. Budgetary control fixes targets. Each and every department is forced to work
efficiently to reach the target. Thus, it is an effective method of controlling the activities
of various departments of a business unit.

3. It secures better co-ordination among various departments.

4. In case the performance is below expectation, budgetary control helps the

management in finding up the responsibility.
5. It helps in reducing the cost of production by eliminating the wasteful expenditure.

6. By promoting cost consciousness among the employees, budgetary control brings

in efficiency and economy.
7. Budgetary control facilitates centralized control with decentralized activity.
8. As everything is planned and provided in advance, it helps in smooth running of
business enterprise.

9. It tells the management as to where action is required for solving problems without
delay.

Disadvantages or Limitations of Budgetary Control

The following are the limitations of budgetary control:

1. It is really difficult to prepare the budgets accurately under inflationary conditions.

2. Budget involves a heavy expenditure which small business concerns cannot afford.

3. Budgets are prepared for the future period which is always uncertain. In future,
conditions may change which will upset the budgets. Thus, future uncertainties
minimize the utility of budgetary control system.
 4. Budgetary control is only a management tool. It cannot replace management in
decision-making because it is not a substitute for management.

5. The success of budgetary control depends upon the support of the top management.
If there is lack of support from top management, then this will fail.

Q.11 State advantages and disadvantages of standard costing.

Ans. Advantages of Standard Costing:-

Standard costing is a very important managerial tool for cost control.

The chief advantages of standard costing are summarised as follows:

1. Standards set provide yardsticks against which actual costs are compared to

ascertain efficiency or inefficiency of actual performance. Thus, standard costing

helps in exercising cost control and provides information which is helpful in cost
reduction.

2. Analysis of variances will assist to single out inefficiency and locate persons who

are responsible for unfavourable variances. Thus, analysis of variances will fix the
responsibility for inefficiencies.

3. The principle of management of exception can be successfully applied by the

concerns which follow technique of standard costing. Management has got limited

time and it need not burden itself with respect to those activities of the concern which

proceed according to standard performance. It is only in case of below or above

standard performance that they have to concentrate their attention.

4. Setting standards require detailed study of various operations so that they may be

made efficient. This method results in improvements of methods of production of

sales, with resultant lower costs. For example, setting of standards or labour may

require the use of time and motion study, with consequent improvement in the
performance of labour.
5. Standard costing provides a valuable guidance to the management in the

formulation of price and production policies. It helps management in preparing price

lists, planning production of new products and furnishing costs estimates at higher
levels.

6. Standard costs, being pre-determined costs, are useful in planning and budgeting.
7. Standard costing makes all the executives cost conscious which increases efficiency
and productivity all round. All executives are motivated to achieve the standard
performance.
8. Standard costing makes the work of valuation of inventory easier because the
inventory is valued at predetermined costs.
9. An effective delegation of authority is possible because top executive may safely
delegate responsibility by telling the persons concerned what standard performance
they have to achieve.
10. The Standard Costing System enables the management to perform its functions of
planning, coordination, organisation, motivation and control more efficiently.
11. Standard costing and the variance analysis provide a ready means of interpretation
of information for the management for the purpose of control and decision making.
Ready reporting enhances the value of reports.
12. Standard costing involves a great deal of preliminary work for setting standards
but once standards have been established the clerical work of costing is considerably
reduced. Thus, it provides economical means of costing.
Disadvantages (or Limitations) of Standard Costing:-
1. The technique of standard costing may not be applicable in case of small concerns
because establishment of standards requires high degree of skill. Thus, fixation of
standards may prove costly which a small organisation may not afford. For example,
fixation of standard time may need a costly process of time and motion study.
2. For fixing responsibilities, variances should be segregated into controllable and
uncontrollable variances because executives can be made responsible for controllable
variances which arise from their action. But the division of variances into controllable
and uncontrollable variances is a difficult task.
3. The technique of standard costing may not be very effective in the industries which
deal with non-standardised products and the jobs which change according to
customers’ requirements. In such cases, standards are to be frequently revised so as to
render them comparable with actual results.
4. It is very difficult to establish standard costs of material, labour and overhead. So
sometimes inaccurate and out of date standards are set which do more harm than any
benefit as they provide wrong yardsticks. If the standard set is very high, its non-
achievement results in frustration and a built up of resistance from the employees. On
the other hand, if the standard set is very low it will be easily achieved without putting
any extra effort.
5. To make technique of standard costing successful, co-operation of all concerned is
required which may not be there sometimes in the organisation due to inter-
departmental rivalry.
Q.12 Write a short note on Standard Costing
Ans. Standard Costing:
Standard costing is an accounting technique that some manufacturers use to identify
the differences or variancesbetween 1) the actual costs of the goods that were
produced, and 2) the costs that should have occurred for those goods. The costs
that should have occurred for the actual good output are known as standard costs.

Standard costing is likely integrated with a manufacturer's budgets (profit plan, master
budget) for an accounting year and involve the product costs: direct materials, direct
labor, and manufacturing overhead. With standard costing, the accounts for
inventories and the cost of goods sold contain the standard costs of the inputs that
should have been used to make the actual good output.

If the company had incurred more than the standard costs for the direct materials,
direct labor, and manufacturing overhead, the company will not meet its projected net
income. In other words, the variances will direct management's attention to the
production inefficiencies or higher input costs. In turn, management can take action to
correct the problems or seek higher selling prices.

Since the external financial statements must reflect the historical cost principle, the
standard costs in the inventories and the cost of goods sold will need to be adjusted
for the variances. Since most of the goods manufactured will have been sold, most of
the variances will be reported on the income statement as part of the cost of goods
sold.
Q.13 Write a short note on Variance analysis
Ans. In accounting, a variance is the difference between an expected or planned amount and
an actual amount. For example, a variance can occur for items contained in a department's
expense report. Variance analysis attempts to identify and explain the reasons for the
difference between a budgeted amount and an actual amount.

Variance analysis is usually associated with a manufacturer's product costs. In this setting,
variance analysis attempts to identify the causes of the differences between a manufacturer's
1) standard costs of the inputs that should have occurred for the actual products it
manufactured, and 2) the actual costs of the inputs used for the actual products manufactured.
To illustrate, let's assume that a company manufactured 10,000 units of product (output). The
company's standards indicate that it should have used $40,000 of materials (an input), but it
actually used $48,000 of materials. This unfavorable variance needs to be analyzed. A
common variance analysis will divide the $8,000 into a price variance and a quantity
variance. The price variance identifies whether the company paid too much for each unit of
input. (Perhaps it paid more per pound of the input than it had planned.) The quantity
variance identifies whether the company used too much of the input. (Perhaps it used too
many pounds of the raw materials for the number of products it manufactured.)

Variance analysis for manufacturing overhead costs is more complicated than the variance
analysis for materials. However, the variance analysis of manufacturing overhead costs is
very important as manufacturing overhead costs have become a very large percentage of a
product's costs.