COST ACCOUNTING

CONTENTS

Question 1 .................................................................................................................................................... 2
Solution ..................................................................................................................................................... 2
Question 2 .................................................................................................................................................... 4
Solution ..................................................................................................................................................... 4
Question 3 .................................................................................................................................................... 5
SOLUTION ............................................................................................................................................... 5
Question 4 .................................................................................................................................................... 6
Solution ..................................................................................................................................................... 6
Question 5 .................................................................................................................................................... 7
Solution ..................................................................................................................................................... 7
Question 6 .................................................................................................................................................... 7
Solution ..................................................................................................................................................... 7
Question 7 .................................................................................................................................................... 8
Solution ..................................................................................................................................................... 9
Question 8 .................................................................................................................................................. 10
Solution ................................................................................................................................................... 11
Reference .................................................................................................................................................... 12

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QUESTION 1

DISCUSS IN DETAIL CO ST ACCOUNTING, OBJECTIV ES OF COST ACCOUNTIN G,

ESSENTIALS OF A GOOD COSTING SYSTEM AND CLASSIFICATION OF CO STS?

SOLUTION

COST ACCOUNTING is the process of recording, classifying, analyzing, summarizing, and allocating costs
associated with a process, and then developing various courses of action to control the costs. Its goal is to advise the
management on how to optimize business practices and processes based on cost efficiency and capability. Cost
accounting provides the detailed cost information that management needs to control current operations and plan for
the future.

OBJECTIVES

1. To ascertain cost: The basic objective of cost accounting is to ascertain cost of cost center.
Cost ascertainment is the process of determining costs after they have been incurred.
Basically, there are two methods of cost ascertainment - Job costing and Process costing.
Different industries follow different methods of costing because of the difference in the
nature of their activity.

2. To control cost: Cost accounting aims at controlling costs by using various techniques such
as Budgetary control, Standard costing, Inventory control etc.

3. To provide information for decision making: Cost accounting aims at providing

information for various managerial decisions
• Whether to make or buy component
• Whether to retain or replace an existing machine
• Whether to process further or not
• Whether to shut down or continue operations

4. To determine selling price: Cost accounting provides cost information to determine the
selling price of products or services. During the period of depression, it guides the
management to decide, “How much reduction in selling price may be made to meet the
situation?”

5. To ascertain costing profit: Cost accounting aims at ascertaining the costing profit or loss
of any activity on an objective basis by matching cost with the revenue of that activity.

6. Formulating Policies: Cost accounting plays important role to formulate policies of the
organization. It provides necessary information and data to the top-level management which
are essential for framing marketing policies of the company.

7. Basis of Financial Statement: Cost accounting is the foundation for the preparation of
different financial statements (profit and loss account, balance sheet, trial balance etc.) of the
company.

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ESSENTIAL OF GOOD COSTING SYSTEM

The essential features, which a good Cost Accounting System should possess, are as follows:

(i) Cost Accounting System should be tailor-made, practical, simple and capable of meeting the requirements
of a business concern.

(ii) The data to be used by the Cost Accounting System should be accurate; otherwise it may distort the
output of the system.

(iii) Necessary cooperation and participation of executives from various departments of the concern is
essential for developing a good system of Cost Accounting,

(iv) The Cost of installing and operating the system should justify the results.

(v) The system of costing should not sacrifice the utility by introducing meticulous and unnecessary details.

(vi) A carefully phased programmed should be prepared by using network analysis for the introduction of the
system.

(vii) Management should have a faith in the Costing System and should also provide a helping hand for its
development and success.

CLASSIFICATION OF COSTS

Operating costs of a transport undertaking comprising different items, which are classified
under the following three groups.

1. Standing or fixed charges: These charges are incurred in spite of the kilometers run. It is
fixed in nature. e.g. Insurance, Motor vehicle tax, license fee, rent, salary of operating
manager etc.

2. Maintenance charges: It includes semi variable expenses e.g. Tires and tubes, repairs
and paintings etc.

3. Operating and running charges: These charges vary more or less in direct proportion to
kilometers. All the variable charges of running vehicles are included in this group.
Generally, it includes, petrol, oil, grease etc., wages of driver, attendant if payment is
related to time or distance of trip etc.

In the place of the above classification, all expenses can be divided into two – fixed cost
and variable costs. Here, both maintenance charges and running charges are considered
as variable charges

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QUESTION 2

DIFFERENCE BETWEEN C OST ACCOUNTING AND FINANCIAL ACCOUNTING?

SOLUTION

DIFFRENTIATE BETWEEN FINANCIAL ACCOUNTING VS COST ACCOUNTING

The main differences between Financial and Cost Accounting are as follows:

Financial Accounting Cost Accounting

(a) It provides the information about the business in a

(a) It provides information to the management for proper
general way. i.e. Profit and Loss Account, Balance Sheet
planning, operation, control and decision making.
of the business to owners and other outside partners.

(b) It classifies, records and analyses the transactions in a (b) It records the expenditure in an objective manner, i.e.
subjective manner, i.e. according to the nature of expense. according to the purpose for which the costs are incurred.

(c) It provides a detailed system of control for materials,

(c) It lays emphasis on recording aspect without attaching
labor and overhead costs with the help of standard costing
any importance to control.
and budgetary control.

(d) It reports operating results and financial position (d) It gives information through cost reports to
usually at the end of the year. management as and when desired.

(e) Cost Accounting is only a part of the financial

(e) Financial Accounts are accounts of the whole
accounts and discloses profit or loss of each product, job
business. They are independent in nature.
or service.

(f) Financial Accounts records all the commercial (f) Cost Accounting relates to transactions connected
transactions of the business and include all expenses i.e. with Manufacturing of goods and services, means
Manufacturing, Office, Selling etc. expenses which enter into production.

(g) Financial Accounts are concerned with external (g) Cost Accounts are concerned with internal
transactions i.e. transactions between business concern transactions, which do not involve any cash payment or
and third party. receipt.

(h) Only transactions which can be measured in monetary (h) Non-Monetary information likes No of Units / Hours
terms are recorded. etc are used.

(i) Financial Accounting deals with actual figures and (i) Cost Accounting deals with partly facts and figures
facts only. and partly estimates / standards.

(j) Financial Accounting do not provide information on (j) Cost Accounts provide valuable information on the
efficiencies of various workers/ Plant & Machinery. efficiencies of employees and Plant & Machinery.

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(k) Stocks are valued at Cost or Market price whichever is

(k) Stocks are valued at Cost only.
lower.

(l) Financial Accounting is a positive science as it is (l) Cost Accounting is not only positive science but also
subject to legal rigidity with regarding to preparation of normative because it includes techniques of budgetary
financial statements. control and standard costing.

(m) These accounts are kept in such away to meet the Generally Cost Accounts are kept voluntarily to
requirements of Companies Act 2013 as per Sec 128 & meet the requirements of the management, only in
Income Tax Act, 1961 Sec 44AA. some industries Cost Accounting records are kept as
per the companies Act

QUESTION 3

EXPLAIN THE SIMILARI TIES AND DIFFERENCES BETWEEN JOB ORDER COST
AND PROCESS COST SYSTEMS ?

SOLUTION

Job-Order v. Process Costing

Job-Order Costing Process Costing
• Many jobs are worked on during each period, • A homogeneous product is produced on a
with each job having different production continuous basis or for long periods of time.
requirements.

• Costs are accumulated by department.

• Costs are accumulated by job.
• The departmental production report is the key
document showing the accumulation and
• The job cost sheet is the key document for disposition of costs.
accumulating costs.

• Units costs are computed by job on a job cost • Unit costs are computed by department on
sheet. production reports.

Job costing and process costing have important similarities:

• Both job and process cost systems have the same goal: to determine the cost of products.
• Both job and process cost systems have the same cost flows. Accountants record production
in separate accounts for materials inventory, labor, and overhead. Then, they transfer the
costs to a Work in Process Inventory account.
• Both job and process cost systems use predetermined overhead rates to apply overhead.

Job costing and process costing systems also have their significant differences:

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• Types of products produced. Companies that use job costing work on many different jobs with
different production requirements during each period. Companies that use process costing
produce a single product, either on a continuous basis or for long periods. All the products that
the company produces under process costing are the same.
• Cost accumulation procedures. Job costing accumulates costs by individual jobs. Process
costing accumulates costs by process or department.
• Work in Process Inventory accounts. Job cost systems have one Work in Process Inventory
account for each job. Process cost systems have a Work in Process Inventory account for
each department or process.

QUESTION 4

DEFINE AND DISCUSS T HE ECONOMIC ORDER QU ANTITY (EOQ) TECHNIQUE,

INCLUDING ASSUMPTION AND ACCOUNTING DATA USED THERE IN?

SOLUTION

ECONOMIC ORDER QUANTITY (EOQ) ECONOMIC ORDER QUANTITY (EOQ) is a decision tool
used in cost accounting. It’s a formula that allows you to calculate the ideal quantity of inventory to order
for a given product. The calculation is designed to minimize ordering and carrying costs. It goes back to
1913, when Ford W. Harris wrote an article called “How Many Parts to Make at Once.”

EOQ is based on the following set of assumptions:

• Reorder point: The REORDER POINT is the time when the next order should be
placed. EOQ assumes that you order the same quantity at each reorder point.

• Demand, relevant ordering cost, and relevant carrying cost: Customer demand for
the product is known. Also, the ordering and carrying costs are certain. A RELEVANT
COST refers to a cost you need to consider when you make a decision. The term is
used throughout this book.

• Purchase order lead time: The lead time is the time period from placing the order to
order delivery. EOQ assumes that the lead time is known.

• Purchasing cost per unit: The cost per unit doesn’t change with the amount ordered.
This removes any consideration of quantity discounts. Assume you’ll pay the same
amount per unit, regardless of the order size.

• Stockouts: No stockouts occur. You maintain enough inventory to avoid a stockout

cost. That means you monitor your customer demand and inventory levels carefully.

• Quality costs: EOQ generally ignores quality costs.

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Economic order quantity uses three variables: demand, relevant ordering cost, and relevant
carrying cost. Use them to set up an EOQ formula:

• Demand: The demand, in units, for the product for a specific time period.

• Relevant ordering cost: Ordering cost per purchase order.

• Relevant carrying cost: Carrying costs for one unit. Assume the unit is in stock for the
time period used for demand.
Here’s the formula for economic order quantity:

Q is the economic order quantity (units). D is demand (units, often annual), S is ordering
cost (per purchase order), and H is carrying cost per unit.
QUESTION 5

WHY HAS THE SUBJECT OF INFLA TION BEEN RECEIVING EVER INCREASING
ATTENTION THROUGHOUT THE NATION AND THE WORLD?

SOLUTION

QUESTION 6

WHAT IS ABC ANALYSIS? DISCUSS ITS ROLE IN A SOUND SYSTEM OF

MATERIAL CONTRO L?

SOLUTION

ABC ANALYSIS (Always Better Control)

In any retail organization there are large numbers of inventories to be maintained. It is not practical to
have very stringent inventory control system for each and every item. So with the modus of having
effective purchase and stores control we implemented ABC inventory.
Divides inventory into two classes based on consumption class:
Class A: High Consumption Value
Cass B: Medium Consumption Value
Class C: Low Consumption Value

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QUESTION 7

THE ZEE MANUFACTURING COMPANY PRODUCES A SINGLE PRODUCT WHICH

GOES THROUGH ONE PRO CESS ONLY. THE MANUFACTURING CYCLE TAKES A
MONTH. THE COMPANY S TARTED ITS MANUFACTURING OPERATION ON
1 S T FEBRUARY, 2018 AND COSTS OF PRODUCTION FOR THIS MONTH WERE A S
FOLLOWS:

MATERIAL RS. 41,412; LABOR RS. 32,054; FOH RS. 23,870

THE PRODUCTION STATI STICS FOR THE MONTH WERE AS FOLLOW:

UNITS COMPLETED AND TRANSFER TO FINISHED GOODS STORE RS. 6,500

UNIT IN PROCESS ON F EBRUARY 31, 2018 WAS 1,600 (MATERIAL 40%, LABOR
AND FOH 20 PER CENT)

REQUIREMENT: PREPARE THE COST OF PRODUCTION REPORT AT THE END OF

FEBRUARY, 2018

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SOLUTION

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QUESTION 8

A PRODUCT IS MANUFAC TURED AS A RESULT OF TWO PROCES SES, A AND B.

DETAILS OF PROCESS B FOR THE MONTH OF AUGUST WERE AS FOLLOWS

MATERIALS TRANSFERRED FROM 10,000 KG VALUED AT £ 40,500

PROCESS A

LABOR COSTS 1,000 HOURS @ £ 5.616 PER HOUR

CLOSING WORK IN PROG RESS 50% OF LABOR COSTS

8,000 KG 8,000 KG

1,000 HOURS @ £ 5.616 PER HOUR 900 KG

NORMAL LOSS IS 10 PE R CENT OF INPUT AND LOSSES DO NOT HAVE A SCRAP

VALUE.

CLOSING WORK IN PROG RESS IS 100 PER CENT COMPLETE FOR MATERI AL,
AND 75 PER CENT COMP LETE FOR BOTH LABOR AND OVERHEADS.

I. WHAT IS THE VALUE OF THE ABNORMAL LOSS ( TO THE NEAREST £)?

A) NIL

B) £ 489

C) £ 544

D) £ 546

II. WHAT IS THE VALUE OF THE OUTPUT (TO THE NEAREST £) ?

A) £ 39,139

B) £ 43,488

C) £ 43,680

D) £ 43,977

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III. WHAT IS THE VALUE OF THE CLOSING WORK IN PROGRESS (TO THE
NEAREST £)?

A) £ 4,403

B) £ 4,698

C) £ 4,892

D) £ 4,947

SOLUTION

i. D

Value of abnormal loss = 100 × ($4.50 + $0.96) = $546.

ii. C

Value of output = 8,000 × ($4.50 + $0.96) = $43,680.

iii. B

Value of closing WIP = (900 × $4.50) + (675 × $0.96) = $4,698

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REFERENCE

Q:01

https://en.wikipedia.org/wiki/Cost_accounting

https://www.quora.com/What-are-the-objectives-of-cost-accounting

http://www.preservearticles.com/201103234644/7-essentials-of-a-good-cost-accounting-system.html

classification of cost: from handouts

Q:02

From handouts

Q:03

From handouts

Similarities and dis similarities https://courses.lumenlearning.com/tcc-managacct/chapter/chapter-1/

Q:04

https://www.dummies.com/business/accounting/cost-accounting-the-economic-order-quantity-
formula/

Q:05 ……………….

Q:06

https://www.slideshare.net/madihaahmed7165/material-management-49342369

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