University Industry Interaction Center (UIIC)

COST ACCOUNTING
3rd Trimester Assignment – I
Prepared By: Shafiulhaq Kaoon ID =19UICPG022
-----------------------------------------------------------------------------------------------------------
1. What do you mean by Costing and Cost Accounting?
Answer 1: Costing refers to the practice of identifying costs of any product, service or activity, at
various times and stages of production.

Cost Accounting is a method of accounting that records, classifies, allocates, summarizes, analyzes,
interprets and controls the cost incurred on any product, process, service or activity.

Cost refers to the actual or estimated amount of expenses incurred or to be incurred on a particular
article, or activity. The concepts of costing and cost accounting are related to cost accountancy, which
is commonly juxtaposed by the students.

Costing is concerned with the method of assessing the cost of goods produced and services rendered,
at different stages of the production process.

On the contrary, cost accounting is associated with the recording of income and expenses,
determination of costs, preparing periodical statements and reports, so as to present the same to the
management of the firm, to assist them in the decision making of the process.

Now, if we talk about cost accountancy, it is the basic application of costing techniques and cost
accounting process in a business organization. So, without further ado, we are going to talk about the
differences between costing and cost accounting.

Or Costing is the technique and process of ascertaining costs. These techniques consist of principles
and rules which govern the procedure of ascertaining cost of products or services. The techniques to
be followed for the analysis of expenses and the processes of different products or services differ from
industry to industry.

The main object of costing is the analysis of financial records, so as to subdivide expenditure and to
allocate it carefully to selected cost centers, and hence to build up a total cost for the departments,
processes or jobs or contracts of the undertaking.
Cost accounting is associated with the recording of income and expenses, determination of costs,
preparing periodical statements and reports, so as to present the same to the management of the firm,
to assist them in the decision making the process.

Cost accounting may be regarded as “a specialized branch of accounting which involves classification,
accumulation, assignment and control of costs.”

“Cost accounting is a quantitative method that accumulates, classifies, summarizes and interprets
information for three major purposes: (i) Operational planning and control; (ii) Special decision; and
(iii) Product decision

2. What are the main objectives of Cost Accounting?

Answer 2: Objectives of cost accounting are ascertainment of cost, fixation of selling price, proper
recording and presentation of cost data to management for measuring efficiency and for cost control
and cost reduction, ascertaining the profit of each activity, assisting management in decision making
and determination of break.

Or: The main objectives of cost accounting are as follow in short terms:

 To ascertain the cost per unit of each product or service.

 To minimize wastages.
 To determine the selling price.
 To compute the profit or loss made on each product, department or process.
 To ascertain the profitability.
 To provide data for inventory valuation.
 To set up perpetual inventory system.

3. What is the scope of Cost Accountancy?

Answer 3: The scope of cost accounting is very wide. There are lots of techniques, tools, procedures,
processes; programs are used in cost accounting for calculating cost and its control. But basically, we
divide its scope within three major parts.

Cost Audit: To verify the cost sheets and ensure the efficient application of cost accounting principles
in the industries, cost audits are done. Cost Report: Cost reports are prepared from the data acquired
through cost accounting to be analyzed by the management for strategic decision making.

Or: These are the scope of cost accounting in short terms:

 Analysis and ascertainment of costs.

 Presentation of costs for cost reduction and cost control
 Planning
  Accumulation and utilization of cost data.
 Preparation of budgets and implementation of budgetary control.
 Ascertaining profitability of each product.
 Providing useful data to the management for taking decision.
4. What are the advantages of Cost Accounting?
Answer 4: Cost accounting is the process of collecting and interpreting information to determine how
an organization earns and uses funds. There are multiple advantages to using cost accounting, since it
provides vastly more actionable information than the financial statements produced through financial
accounting.

The advantages of cost accounting are as follow:

 Disclosure of profitable and unprofitable activities

 Guidance for future production policies
 Periodical determination of profit and losses
 To find out exact cause of decrease or increase in profit
 Classification and subdivision of cost
 To find out adequate selling price
 Proper investment in inventory
 Correct valuation of inventory
 Decision on manufacturing or purchasing from outside
 Reliable check on accounting
 Budgeting
 Control over material and supplies
 Relative efficiency of different workers
 Reliable comparison
 Helpful to government
 Helpful to consumers

And also: The key advantages of cost accounting are as follow:

1- Cost object analysis. Revenues and expenses can be clustered by cost object, such as by
product, product line, and distribution channel, to determine which ones are profitable or
require further support
2- Investigate causes. An effective cost accountant not only locates problems within a company,
but also drills down through the data to determine the exact cause of the issue, and also
recommends solutions to management.
 3- Trend analysis. Costs can be tracked on a trend line to discover expense surges that may be
indicative of long-term trends.
4- Modeling. Costs can be modeled at different activity levels. For example, if management is
contemplating the addition of a second shift, cost accounting can be used to derive the
additional costs associated with that shift.
5- Acquisitions. The cost structures of possible acquisition candidates can be examined to see if
costs can be pruned in some areas, thereby justifying the cost of the acquisition.
6- Project billings. If a company is billing a customer based on costs incurred, cost accounting
can be used to accumulate costs by project and roll this information into customer billings.
7- Budget compliance. Actual costs incurred can be compared to budgeted or standard costs, to
see if any part of a business is spending more than expected.
8- Capacity. The ability of a business to support increased sales levels can be examined by
exploring the amount of its excess capacity. Conversely, equipment that is idle can be sold off,
thereby reducing the asset base of the organization.
9- Outsourcing. One can determine whether certain tasks or processes should be handled in-
house or outsourced, based on an analysis of the relevant costs.
10- Inventory valuation. The cost accountant is usually tasked with accumulating the cost of
inventory for financial reporting purposes. This includes charging direct labor to inventory, as
well as allocating factory overhead to inventory.
5. What are the limitations of Cost Accounting?
Answer 5: Notable limitations of cost accounting system can be expressed as follows:
1. Lack of Fixed Principles
Generally, cost accounting system is practiced on presumed notions. It does not follow fixed
accounting principles. So, there is a lack of uniformity in this system.
2. Costly System
This is another major drawback of cost accounting. There is a need of highly skilled and qualified
manpower and resources to maintain cost accounting system in the organization. A lot of clerical
works and various procedures make cost accounting more expensive.
3. Complex System
It is very complicated system of accounting. It requires various formulas to record cost related data. It
needs specific knowledge to prepare different reports. Due to numerous steps and rules, it is
considered as complex system of accounting.
4. Not Suitable For Small Business.
Small business firms with less number of production or transactions do not prefer cost accounting
because of higher cost and complexity.
5. Ignores Financial Items
Actual profit or loss of the business cannot be ascertained by cost accounting because it ignores
income and expenses of financial nature.
6. Lack of Accuracy
Cost accounting avoids financial character expenses at the time of cost calculation. It does not follow
double entry system to check the accuracy. So, result obtained from cost accounting may lack
accuracy.
7. Not Helpful In Decision Making
Only cost related past data and information can be obtained from cost accounting. So, top level
management cannot be benefited from cost accounting to make future decision and plans. Delay in
data and information may also hamper decision making process.
8. Dependent
Cost accounting cannot be installed and maintained without other accounting system. It is totally
dependent with other branches of accounting, especially with financial accounting.
6. Write the difference between Financial Accounting and Cost Accounting?
Answer 6: The differences between Financial Accounting and Cost Accounting are as follow:
Financial Accounting Cost Accounting
1. It provides the information about the 1. Cost Accounting provides information to
business in a general way. i.e. Profit and Loss the management for proper planning,
Account, Balance Sheet of the business to operation, control and decision making.
owners and other outside partners. 2. It records the expenditure in an objective
2. It classifies, records and analyses the manner, i.e. according to the purpose for
transactions in a subjective manner, i.e. which the costs are incurred.
according to the nature of expense. 3. It provides a detailed system of control for
3. It lays emphasis on recording aspect materials, labor and overhead costs with the
without attaching any importance to control help of standard costing and budgetary
4. It reports operating results and financial control.
position usually at the end of the year. 4. It gives information through cost reports to
5. Financial Accounts are accounts of the management as and when desired.
whole business. They are independent in 5. Cost Accounting is only a part of the
nature. financial accounts and discloses profit or loss
6. Financial Accounts records all the of each product, job or service.
commercial transactions of the business and 6. Cost Accounting relates to transactions
include all expenses i.e. Manufacturing, connected with Manufacturing of goods and
Office, Selling etc. services, means expenses which enter into
7. Financial Accounts are concerned with production.
external transactions i.e. transactions between 7. Cost Accounts are concerned with internal
business concern and third party. transactions, which do not involve any cash
8. Only transactions which can be measured payment or receipt.
in monetary terms are recorded. 8. Non-Monetary information likes No of
9. Financial Accounting deals with actual Units /Hours etc. are used.
figures and facts only. 9. Cost Accounting deals with partly facts and
10. Financial Accounting does not provide figures and partly estimates / standards.
information on efficiencies of various 10. Cost Accounts provide valuable
workers/ Plant & Machinery. information on the efficiencies of employees
11. Stocks are valued at Cost or Market price and Plant & Machinery.
whichever is lower 11. Stocks are valued at Cost only.
12. Financial Accounting is a positive science 12. Cost Accounting is not only positive
as it is subject to legal rigidity with regarding science but also normative because it includes
to preparation of financial statements. techniques of budgetary control and standard
13. These accounts are kept in such a way to costing.
meet the requirements of Companies Act 13. Generally Cost Accounts are kept
2013 as per Sec 128 & Income Tax Act, 1961 voluntarily to meet the requirements of the
Sec 44AA. management, only in some industries Cost
Accounting records are kept as per the
Companies Act.

7. What are the essentials of a good Cost Accounting system?

Answer 7:

 Cost Accounting System should be tailor-made, practical, simple and capable of meeting the
requirements of a business concern.
 The data to be used by the Cost Accounting System should be accurate; otherwise it may
distort the output of the system.
 Necessary cooperation and participation of executives from various departments of the concern
is essential for developing a good system of Cost Accounting,
 The Cost of installing and operating the system should justify the results.
 The system of costing should not sacrifice the utility by introducing meticulous and
unnecessary details.
 A carefully phased program should be prepared by using network analysis for the introduction
of the system.
  Management should have a faith in the Costing System and should also provide a helping hand
for its development and success.
8. Explain the elements of Cost with examples?
Answer 8: The following chart shows the various elements of cost and how they are classified.

Direct or Indirect Materials

The materials directly contributed to a product and those easily identifiable in the finished product are
called direct materials. For example, paper in books, wood in furniture, plastic in water tank, and
leather in shoes are direct materials. They are also known as high-value items. Other lower cost items
or supporting material used in the production of any finished product are called indirect material. For
example, nails in shoes or furniture.
Direct Labor
Any wages paid to workers or a group of workers which may directly co-relate to any specific activity
of production, supervision, maintenance, transportation of material, or product, and directly associate
in conversion of raw material into finished goods are called direct labor. Wages paid to trainee or
apprentices does not comes under category of direct labor as they have no significant value.
Overheads
Indirect expenses are called overheads, which include material and labor. Overheads are classified as:
 Production or manufacturing overheads
 Administrative expenses
 Selling Expenses
  Distribution expenses
 Research and development expenses

9. What do you mean by Overheads?

Answer 9: All indirect expenses are called overheads, like indirect Materials, indirect labour and
indirect expense. Overhead refers to the ongoing business expenses not directly attributed to creating a
product or service. It is important for budgeting purposes but also for determining how much a
company must charge for its products or services to make a profit. In short, overhead is any expense
incurred to support the business while not being directly related to a specific product or service?

10. From the following details, Prepare Cost Sheet for 1,000 units
Stocks Opening Closing
Raw Materials 50,000 30,000
Work-in-Progress (WIP) 15,000 10,000
Finished Goods 60,000 80,000

Particulars Amount
Purchases of raw materials 250000
Direct wages 60000
Indirect materials and consumables 40000
Other factory expenses 70000
Office rent 40000
Selling expenses 10000
Office expenses 50000
Sales 700000
Answer 10: Cost sheet for the above information. (No. of Units=1000)

Particulars Amount Amt/Unit

Raw Materials
Opening stock of Materials 50000
Purchases of raw material 250000

(-) Closing stock of raw material 30000 270000 270

Direct labour/ direct wages 60000 60
Prime cost/direct expenses 330000 330
Factory overheads
Indirect materials and consumables 40000 40
Other factory expenses 70000 70
Opening stock of Work-in-Progress (WIP) 15,000 15
(-) Closing stock of Work-in-Progress (WIP) (10,000) (10)
Factory cost 445000 445
Office and Admin overhead
Office rent 40000 40
Office expenses 50000 50
Cost of production 535000 535
Opening stock of Finished Goods 60,000 60
(-) Closing stock of Finished Goods (80,000) (80)
Cost of Goods sold 515000 515
Selling and distribution overheads
Selling expenses 10000 10
Total cost / Cost of sales 525000 525
Add: Profit 175000 175
Sales 700000 700