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30_costing Theory - CA Final

30_costing Theory - CA Final

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Published by pinsy

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Published by: pinsy on Jun 07, 2009
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ChapterTopicPage NumbeNo.
Basic cost concepts
Marginal Costing
Areas of decision making
Relevant Costing
Standard Costing
Pricing Policy
Costing of Service sector 
Transfer Pricing
Target Costing
Life Cycle costing
Just in Time
Material Requirement Planning
Enterprise Resource Planning
Activity Based Costing
Total Quality Management
Value Chain Analysis
Budgetary Control
All the chapters carry questions from past examinations (theory) at the end alongwith suggested answers
Meaning of Cost:
Cost refers to any amount of expenditure incurred / attributable to any particular thing.
The method of ascertaining the cost and thereby controlling it is referred to ascosting.
Cost Accounting:
The process of accounting for cost which begins with recording of incomeand expenditure or the bases on which they are calculated and ends with the preparation of periodical statements and reports for ascertaining and controlling costs.
Question I: State the objectives of Cost Accounting.
Objectives of Cost Accounting:
The primary objective of study of cost is to contribute to profitability through Cost Reductionand Cost Control. The following objective of Cost Accounting can be identified.1.
Ascertainment of Cost:
This involves collection of cost information, by recording themunder suitable heads of account and reporting such information on a periodical basis.2.
Determination of selling price:
Selling price is influenced by a number of factors.However prices cannot be fixed below cost save in exceptional circumstances. Hencecost accounting is required for determination of proper selling price.3.
Cost Control and Cost Reduction:
In the long run, higher profits can be achieved onlythrough Cost Reduction and Cost Control.4.
Ascertaining the profit of each activity:
Profit of each department / activity / productcan be determined by comparing its revenue with appropriate cost. Hence CostAccounting ensures profit measurement on an objective basis.5.
Assisting management in decision-making:
Business decisions are taken after conducting Cost-Benefit Analysis. Hence Cost and benefits of various options areanalysed and the Manager chooses the least cost option. Thus Cost Accounting andreporting system assists managers in their decision making process.
Question II: 
Classification of costs:a. On the basis of Time period:
1.Historical Costs: Costs relating to the past period, which has already been incurred.2.Current Costs: Costs relating to the present period.3.Pre-determined Costs: Costs relating to the future period; Cost, which is computed inadvance, on the basis of specification of all factors affecting it.
b. On the basis of Behaviour / Nature / Variability:
Variable Costs:
These are costs which tend to vary or change in relation to volume of production or level of activity. These costs increase as production increases and vice-versa e.g. cost of raw material, direct wages etc. However, variable costs per unit aregenerally constant for every unit of the additional output.CostsOutput2.
Fixed Costs:
The cost which remain fixed irrespective of the change in the level of activity / output. These costs are not affected by volume of production e.g. Factory Rent,Insurance etc. Fixed Costs per unit vary inversely with volume of production i.e. if production increases, fixed costs per unit decreases and vice-versa. Sometimes, theseare also known as Capacity Costs or Period Cost.CostOutputFor decision-making purpose Fixed Costs are further sub-classified into (a) CommittedFixed Costs and (b) Discretionary Fixed Costs.
Committed Fixed CostsDiscretionary Fixed Costs
These are costs that arise from thepossession of 
Plant, building and equipment(e.g. depreciation rent, taxesinsurance premium etc.) or 
A basic organization (e.g.salaries of staff)These are costs incurred as a result of management’s discretion.It arises from periodic (usually yearly)decisions regarding the maximum outlayto be incurred, andIt is not tied to a clear cause and effectrelationship between inputs and outputsThese costs remain unaffected by anyshort-term changes in the volume of production.These cannot be changed in the very short-run.Any reduction in committed fixed costsunder normal activities of the concernwould have adverse repercussions onthe concern’s long term objectives.Discretionary fixed Cost can change fromyear to year, without disturbing the long-termobjectives.Such costs cannot be controlled.These costs are controllable.3.
Semi-variable Costs:
These are those costs which are party fixed and partly variable.These are fixed upto a particular volume of production and become variable thereafter for the next level of production. Hence, they are also called Step Costs. Some examplesare Repairs and Maintenance, Electricity, Telephone etc.

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