UNIT – IV

Part -A

1. What is Cost sheet?(Dec 2017)

According to CIMA, London, “Cost sheet is a document which provides for the assembly
of the estimated detailed cost in respect of a cost centre or cost unit”. It analyses and classifies in
a tabular from the expenses on different items for a particular period.

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2. Define Marginal cost.(Dec 2017)
According to ICMA, London, Marginal cost represents, “the amount of any given volume
of output by which aggregate costs are changed if the volume of output is increased or decreased
by one unit”. Marginal cost is the additional cost of producing an additional unit of a product.
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3. Define 'job order costing’.(Jan 2015)
Job-order costing is used when different types of products, jobs, or batches are
produced within a period. In a job-order costing system, direct materials costs and direct labor
costs are usually traced directly to jobs. Overhead is applied to jobs using a predetermined rate.
Where production is not highly repetitive and, in addition, consists of distinct jobs or lots
so that material and labor cost can be identified by order number, the method of job costing is
used.
This method of costing is very common in commercial foundries and drop forging shops
and in plants making specialized industrial equipments. In all these cases and account is opened
for each and all appropriate expenditure is charges thereto.
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4. State any four features of marginal costing. (Jan 2015)
 It is a method of recoding costs and reporting profits.
 It involves ascertaining marginal costs which is the difference of fixed cost and variable
cost.
 The operating costs are differentiated into fixed costs and variable costs. Semi variable
costs are also divided in the individual components of fixed cost and variable cost.
 Fixed costs which remain constant regardless of the volume of production do not find
place in the product cost determination and inventory valuation.
 Fixed costs are treated as period charge and are written off to the profit and loss account
in the period incurred.
 Only variable costs are taken into consideration while computing the product cost.
 Prices of products are based on variable cost only.
 Marginal contribution decides the profitability of the products.
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5. What is target costing? (June 2014)(Jan 2016)
Product costing method in which a final cost is determined after market analysis, and the
product is designed or redesigned to meet it

A target cost is the allowable amount of cost that can be incurred on a product and still
earn the required profit from that product. It is a market driven cost that is computed before a
product is produced.
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6. What is activity based costing? (June 2013)(Jan 2016)
Activity Based Costing (ABC) is a costing approach that designs costs to products,
services, or customers based on the consumption of resources caused by activities.
Activity Based Costing is a system that maintains and processes financial and operating
data about a firm’s resources based on activities, cost objects, cost drivers and activity
performance measures. It also assigns cost to activities and cost objects.
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7. Define variance. (June 2013)
Variance analysis is the process of analyzing variances by sub-dividing the total variance
in such a way that the contributory causes for any deviations are brought to light and the
management can pin point responsibility for cub-standard performance.
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8. From the following calculate gross profit ratio.
Sales 1000000, sales returns 100000, cost of goods sold 585000.

Gross profit = sales – sales returns – cost of goods sold

= 1000000- 100000-585000
= 315000
GP Ratio = GP/Sales X 100
= 315000/1000000 X 100
= 31.5%
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9. What are the essentials of a good costing system? (Jan 2014)
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.
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 (vi) A carefully phased programme 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.
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10. Define process costing. (Jan 2014)
The CIMA defines Process costing as “The costing method applicable where goods or
services result from a sequence of continuous or repetitive operations or processes. Costs are
average over the units produced during the period”. If a product passes through different stages,
each distinct and well-defined, it is desired to know the cost of production at each stage. In order
to ascertain the same, process costing is employed under which separate account is opened for
each process.
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11. What are the functions of cost accounting? (Jan 2012)
 Ascertainment of cost
 Fixation of selling price
 Cost control
 Cost reduction
 Matching revenue with cost
 Evaluation of performance
 Facilitating preparation of financial and other statements.
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12. Define standard costing.(Jan 2012)
ICMA, England, defines “Standard costing is the preparation and use of standard costs,
their comparison with actual costs, and the analysis of variance to their causes, and points of
incidence”.

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13. Define Costing.
Costing is the technique and process of ascertaining costs. The technique in costing
consists of the body of principles and rules for ascertaining the costs of products and services.
The process of costing is the day-to-day routine of ascertaining costs.

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14. Define Cost Accounting.

Cost Accounting is the process of accounting for cost, which begins with recording of
income and expenditure and ends with the preparation of cost sheet and other costing
information, which provide normal mechanism by means of which costs products or services are
ascertained and controlled.

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 15. What is cost control?
Cost control is the guidance and regulation by executive action of the costs of operating
an undertaking. It aims at guiding the actual towards the line of targets; regulates the actual if
they deviate or vary from the targets; this guidance and regulation is done by and executive
action, i.e., by the persons responsible for causing deviations.
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16. State advantages of cost accounting for management.
 Aids in price fixation
 Helps in estimates
 Wastages are eliminated
 Costing makes comparison possible
 Provides data for periodical profit and loss accounts
 Aids in determining and enhancing efficiency
 Helps in inventory control
 Helps in determining break-even point

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17. Distinguish between Cost accounting and Management accounting.

1. Purpose: The main objective of cost accounting is to ascertain and control the costs of
products or services. The function of management accounting is to provide information to
management for efficiently performing the functions of planning, directing and
controlling.
2. Emphasis: Cost accounting is based on both historical and present data, whereas
management accounting deals with future projections on the basis of historical and
present cost data.
3. Principles and Procedure: Established procedures and practices are followed in cost
accounting. No such prescribed practices are followed in management accounting. The
analysis is made and the resulting conclusions are presented in reports as per the
requirements of the management.
4. Data used: Cost accounting uses only quantitative information whereas management
accounting, budgeting, tax planning and reporting to management, whereas cost
accounting is concerned mainly with cost ascertainment.

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18. What is operating cost?
This method is employed where expenses are incurred for providing services such as
those rendered by bus companies, electricity companies, or railway companies. The total
expenses regarding operation are divided by the units as may be appropriate (e.g., in case of bus
company, total number of passenger kms) and cost per unit of services is calculated.
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 19. What is imputed cost (Notional cost)?
Those costs which appear only in cost accounts are notional cots or notional charges.
Notional rent charged on business premises owned by the proprietor, interest on capital for
which no interest has to be paid, etc., notional charges.
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20. Define Cost centre.
According to the Chartered Institute of Management Accounts (CIMA), London, Cost
centre means, “a location, person or item of equipment (or group of these) for which costs may
be ascertained and used for the purpose of cost control”. Thus, cost centre refers to one of those
convenient units into which the whole factory organization has been appropriately divided for
costing purposes.
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21. What is meant by Sunk cost?
A Sunk cost is a past cost and hence irretrievable by managerial actions and is, therefore,
not relevant to current decision-making. Cost of a fixed asset acquired is an example of sunk
cost. Generally, the book value of an asset, reduced by the estimated scrap value, is treated as
Sunk cost. Thus, if the book value of machine is Rs.5,00,000 and its estimated scrap value is
Rs.50,000, the net book value Rs.(5,00,000 – 50,000), i.e., Rs.4,50,000 should be considered as
sunk cost.
22. What is Opportunity cost?
Opportunity cost is defined as, “The value of a benefit sacrificed in favour of an
alternative course of action” (CIMA). The concept recognizes that resources are scare and have
alternative uses. The real cost of a resource consumed is the benefit foregone by rejecting the
next best alternative use of the same and not its historical cost.
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23. Define Differential Costing.
Differential costing is defined as, “A technique used in the preparation of ad-hoc
information in which only costs and income differences between alternative courses of action are
taken into consideration”. The difference in total cost between two alternatives is termed as
“different costs”.
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24. What is Out-of-pocket cost?
Out-of-pocket cost means the present or future cash expenditure regarding a certain
decision which varies depending upon the nature of decision made. For example, a company has
its own trucks for transporting raw materials and finished products from one place to another. It
seeks to replace the trucks by employment of public carrier of goods. In making this decision, of
course, the depreciation of the trucks is not to be considered, but the management must take into
account the present expenditure on fuel, salary to drivers and maintenance. Such costs are termed
as out-of-pocket costs.
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 25. What is Prime cost?
It consists of cost of direct material, direct labour and direct expenses. It is also known as
basic, first or flat cost.

Prime Cost = Direct + Direct + Direct

Material Labour Expense
s
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26. What are the elements of Cost?
These are three broad elements of cost, viz.
(i) Material – Direct Material and Indirect Material
(ii) Labour – Direct Labour and Indirect Labour
(iii) Expenses – Direct Expenses and Indirect Expenses
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27. Define Marginal costing.
Marginal costing is defined as, “the ascertainment of marginal costs and of the effect on
profit of changes in volume or type of output by differentiating between fixed costs and variable
costs. In this technique of costing only variable costs are charged to operations, processes or
products, leaving all indirect costs to be written off against profits in the period in which they
arise”.
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28. What is contribution?
Contribution is the difference between sales and variable cost or marginal cost of sales. It
may also be defined as the excess of selling price over variable cost per unit. Contribution is also
known as contribution margin or gross margin. Contribution being the excess of sales over
variable cost is the amount that is contributed towards fixed expenses and profit.
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29. What is P/V ratio?
This term important for studying the profitability of operations of a business, profit
volume ratio establishes a relationship between the contribution and the sales value. The ratio
can be shown in the form of a percentage also. The formula can be expressed them:
P/V Ratio = contribution/sales x 100
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30. What is Break Even point?
The Break-even point may be defined as that point of sales volume at which total revenue
is equal to total cost. It is a point of no profit, no loss. A business is said to break-even when its
total sales are equal to its total costs.
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31. Define Angle of Incidence.
The Angle of Incidence is the angle between the sales line and the total cost line formed
at the breakeven point where the sale line and total cost line intersect each other. The angle of
incidence indicates the profit earning capacity of a business.
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 32. Compare marginal costing with absorption costing.
1. Under absorption costing all costs whether available or fixed are treated as product costs
even though fixed costs are period costs and has no relevance to current operations. In
marginal costing technique only variable costs are treated as product costs, fixed costs is
treated as period cost and is charged to profit and loss account for that period.
2. In absorption costing, the stock of finished goods and work-in-progress is valued at total
cost which includes both variable and fixed cost. In marginal costing, such stocks are
valued at marginal cost i.e., variable cost only.
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33. Write a brief note on cost-volume-profit analysis.
Cost-volume-profit analysis is a technique for studying the relationship between cost,
volume and profit. Profits of an undertaking depend upon a large number of factors. But the most
important of these factors are the cost of manufacture, volume of sales and the selling prices of
the products. In cost-volume-profit analysis, an attempt is made to analyze the relationship
between variations in cost with variations in volume.
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34. What do you mean by a budget?
A Budget is a detailed plan of operations for some specific future period. It is an estimate
prepared in advance of the period to which it applies.
I.C.M.A defines a budget as “A financial and/or quantitative statement, prepared prior to
a defined period of time, of the policy to be pursued during that period for the purpose of
attaining a given objective”
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35. Define budgetary control
According to Brown and Howard, “Budgeting control is a system of controlling costs
which includes the preparation of budgets, co-coordinating the department and establishing
responsibilities, comparing actual performance with the budgeted and acting upon results to
achieve maximum profitability”.
J.Batty defines it as “a system which uses budgets as a means of planning and
controlling all aspects of producing and/or selling commodities and services”.
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36. What are the objectives of budgetary control?
1. To ensure planning for future by setting up various budgets.
2. To coordinate the activities of different departments.
3. To operate various cost centers and departments with efficiency and economy.
4. Elimination of wastes and increase in profitability.
5. To anticipate capital expenditures for future.
6. To centralize the control system.
7. Correction of deviations from the established standards.
8. Fixation of responsibility of various individuals in the organization.
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37. What is a “Key factor”?
“Key factor is the factor the extent whose influence must first be assesses in order to
ensure that functional budgets are reasonably capable of fulfillment” – The Institute of Cost and
Management Accountants (UK)
The budgets are prepared for all functional areas. These budgets are inter-dependent and
inter-related. A proper co-ordination among different budgets is necessary for making the
budgetary control a success. The constraints on some budgets may have an effect on other
budgets too. A factor which influences all other budgets is known as key factor or Principal
factor or limiting factor.
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38. What are operating budgets?
 Sales budget
 Production budget
 Production cost budget
 Purchase budget
 Raw material budget
 Manufacturing expenses or works overhead budget
 Plant utilization budget
 Administrative and selling expenses budget
 Labour budget
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39. Write a brief note on Programme Budget and Responsibility Budget.
(i) Programme Budget: It consists of expected revenues and costs of various products or
projects that are termed as the major programmes of the firm. Such a budget can be
prepared for each product line or project showing revenues, costs and the relative
profitability of various programmes.
(ii) Responsibility Budget: It is a budget which identifies the revenues and costs, with an
individual responsible for their occurrence. Such a budget is an excellent control device
since it identifies with the individual only such revenues and costs which are controllable
by him.
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40. What do you understand by flexible budgeting?
A flexible budget consists of a series of budgets for different level of activity. It
therefore, varies with the level of activity attained. A flexile budget is prepared after taking into
consideration unforeseen changes in the conditions of the business. A flexible budget is defined
as a budget which by recognizing the difference between fixed, semi-fixed and variable cost is
designed to change in relation to the level of activity.
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41. Write a note on Cash budget.
A Cash budget is an estimate of cash receipts and disbursements during a future period of
time. It precedes various others like materials budget and research and development budget.
“The cash budget is an analysis of flow of cash in a business over a future, short of long period
of time. It is a forecast of expected cash intake and outlay”. – Solomon.
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42. Write a short note on Performance budgeting.
Performance budget has been defined as a “budget based on functions, activities and
projects”. Performance budgeting may be described as the budgeting system in which input costs
are related to the performance, i.e., end results. It is a system of budgeting which provides for
appraisal of performance as well as follow up measures.
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43. What is Zero Base Budgeting (ZBB)?
Peter A.Pyhrr has defined ZBB as “a planning and budgeting process which requires
each manager to justify his entire budget request in detail from scratch (Hence Zero Base) and
shifts the burden of proof to each manager to justify why he should spend money at all”.
In ZBB every year is taken as a new year and previous year is not taken s a base. The
budget for this year will have to be justified according to present situation. Zero is taken as base
and likely future activities are decided according to the present situations.
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44. What do you understand by ‘rolling budgets’?
CIMA defines a rolling budget as “budget continuously updated by adding a further
period, say a month or quarter and deducting the earlier period”. The need for preparing a rolling
budget arises due to the element of uncertainty in budgeting particularly the price level changes.

45. Define Master Budget.

CIMA, London defines Master budget as “the summary budget, incorporating its
component functional budgets, which is finally approved, adopted and employed”.
The master budget is the summary of various functional budgets. It is prepared by
integrating various budgets into one consolidated budget so as to represent the budgeted profit
and loss account and budgeted balance sheet as at the end of the budget period.
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46. Define standard cost?

The standard cost is a predetermined cost which determines in advance what each
product or service should cost under given circumstances.

CIMA, London defines standard cost as “a predetermined cost which is calculated from
management’s standards of efficient operation and the relevant necessary expenditure”.

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47. What are the characteristics of standard costing?

 Pre-determination of standard costs

 Recording of actual costs.
 Comparison of actual costs with standard costs to find out the difference between the
two.
 Analysis of reasons for variances.
 Reporting to management for taking proper action.

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48. Define material cost variance.

The material cost variance is the difference between the standard cost of materials that
should have been incurred for manufacturing the actual output and the cost of materials that has
been actually incurred. Material cost variance comprises of:
(i) Material price variance
(ii) Material usage variance
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49. Give two possible causes of material quantity variance.
1. Negligence in use of materials.
2. More wastage of materials by untrained workers or defective methods of production.
3. Loss due to pilferage.
4. Use of material mix other than the standard mix.
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50. Why does material mixture variance arise?
Material mix variance is that part of material variance which arises due to changes in
standard and actual composition of mix. It results from a variation in the materials mix used in
production. If material mix used in production is of a higher price and larger in quantity than the
standard mix, cost of actual material mix will be more. On the other hand, the use of cheaper
materials in large proportions will mean lower material cost than the standard.
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51. What is yield variance?
This is the sub variance of material usage variance. It results from the difference between
actual yield and the standard yield. A standard output is expected from the raw materials put in.
the actual yield may be more or less than the specified standard. Material yield variance is
defined as “that portion of the direct material usage variance which is due to the standard yield
specified that actual yield obtained”.
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52. Write a note on idle time variance.
This variance is a sub-variance of labour efficiency variance. It is the standard cost of
actual time paid to workers for which they have not worked due to abnormal reasons. The
reasons for idle time may be power failure, defect in machinery, non-supply of materials, etc.

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idle time variance should be segregated from the labour efficiency variance otherwise it will
show inefficiency on the part of workers though they are not responsible for this.
Idle time variance = idle hours x standard rate.
53. Write a note on calendar variance.
This variance arises due to the difference between actual number of days and the
budgeted days. It may arise due to more public holidays announced than anticipated or working
for more days because of change in holidays schedule, etc. if actual working days are more than
budgeted, the variance will be favourable and it will be unfavourable if actual working days are
less than the budgeted number of days.
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PART- B
1. In respect of a Factory the following particulars have been extracted for the year
2015. (Dec 2017)

Particulars Amount in Rs.

Cost of materials 600000

Wages 500000

Factory overheads 336000

Administrative charges 224000

Distribution charges 140000

Profit 420000

A work order has to be executed in 2016 and the estimated expenses are:

Materials Rs. 8000, and Wages Rs. 5000.

Assuming that in 2016, the rate of factory overheads has gone up by 20%. Distribution charges
have gone down by 10% and Selling and administration charges have gone each up by 15%, at
what price should the product be sold so as to earn the same rate of profit on the selling price as
in 2015?

Factory overheads are based on wages and administration, selling and distribution overheads on
factory cost.

Ans : Class work,

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 2. A company manufactures three products. The budgeted quantity, selling prices and
unit costs are as under: (Dec 2017)

Particulars Product A Product B Product C

(Rs) (Rs) (Rs)

Raw materials @ Rs. 20 per kg 80 40 20

Direct wages @ Rs. 5 per hour 5 15 10

Variable overheads 10 30 20

Fixed overheads 9 22 18

Budgeted Production (in units) 6400 3200 2400

Selling price per unit (In Rs) 140 120 90

Required:

i) Present a statement of budgeted profit

ii) Set optimal product mix and determine the profit, if the supply of raw materials is
restricted to 18400 kg.

Ans: Refer class work

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3. What is budgetary control? Explain the objectives and characteristics of budgetary

control. (Dec 2016).

“Budgetary control is a system of controlling costs which includes the preparation of budget,
coordinating the departments and establishing responsibilities, comparing actual performance
with that budgeted and acting upon results to achieve maximum profitability.” —Brown and
Howard

CIMA defines budgeting control as “The establishment of departmental budgets relating

to responsibilities of executives to the requirements of a policy and the continuous
comparison of actual with budgeted results, either to secure by individual action the
objectives of that policy or to provide a firm basis for its revision”.

Characteristics of Budgetary Control:

1. Budgetary control assumes the existence of forecasts and plans of the business
enterprise.
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 2. Budgetary control presumes that management has made budgets for all
departments/units of the enterprise and these budgets are summarised into a master
budget.
3. Budgetary control needs recording of actual performance, its continuous comparison
with the budgeted performance, and the analysis of variations in terms of causes and
responsibility.
4. Budgetary control is a system suggesting suitable corrective action to prevent
deviations in the future.

Objectives of Budgetary Control:

Budgetary control is essential for policy planning and control. It also acts as an instrument of co-
ordination.

The main objectives are stated below:

1. To determine business policies for the attainment of desired objectives during a particular
period of time. It provides definite targets of performance and gives the guidance for the
execution of activities and effort.

2. To co-ordinate the activities and efforts of different departments in the enterprise so that the
policies are successfully implemented.

3. To regulate the activities and efforts of people to ensure that the actual results conform to the
planned results.

4. To operate various cost centres and departments with efficiency and economy.

5. To correct the deviations from the established standards, and to provide a basis for revision of
policies.

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4. “A costing system that simply records costs for the purpose of fixing sale prices has
accomplished only a small part of its mission”. Discuss what other functions costing
perform. (Dec 2016)

The Following are the Important 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.
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  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 deviations 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.

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5. A company is expected to have Rs. 25000 cash in hand on 1 st April 2013 and it
requires you to prepare cash budget for the three months, April to June 2013. The
following information is supplied to you.
Particulars Sales Purchases Wages Expenses
(Rs.) (Rs.) (Rs.) (Rs.)

February 70000 40000 8000 6000

March 80000 50000 8000 7000
April 92000 52000 9000 7000
May 100000 60000 10000 8000
June 120000 55000 12000 9000

Other information:
(v) Period of credit allowed by suppliers is two months.
(vi) 25% of sales are for cash and the period of credit allowed to customers
for credit sales is one month.
(vii) Delay in payment of wages and expenses one month.
(viii) Income tax Rs. 25000 is to be paid in June 2013.

Ans: refer class work note

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6. Explain the differences between standard costing budgetary controls. (Jan 2016)

Standard Costing: Standard Costing is a cost accounting technique, which helps to measure
the performance of material, labor & overhead and report the variances, to take corrective
actions. The variances are being analyzed in detail and reported by comparing the actual costs
with the standard cost for actual output along with determining the reasons for the same. There
are two types of variances i.e. favorable (actual cost is less than the standard cost) and adverse
(actual costs exceed standard costs).

The following steps are taken, in the process of Standard Costing:

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  Fixing Standards
 Determining Actual Costs
 Comparison between actual and standard figures
 Variance analysis and reporting
 Taking corrective action for the disposition of variances

Standard Costing is a tool for ascertaining and controlling the costs. With this technique, the
organization can make best possible use of the resources. In addition to this, the management can
keep a check on the organizational activities by assessing the deviations, i.e. analyzing the
difference between actual performance and the standard performance.

Budgetary Control

By Budgetary Control we mean, a management function in which an organization’s activities

are directed and regulated in such a way reach the desired objectives. It is a control technique, in
which the operations are planned in advance, and then they are compared with the actual results
to know whether the expected results are achieved or not. The following are the major
characteristics of this system:

 The budgets are designed in accordance with the policy requirements.

 Constant comparisons are made between the actual output and the budgeted targets to
review the performance.
 Revisions are made if in case the existing conditions are changed.
 Appropriate actions are taken if the expected results are not achieved.

Here, budget refers to a written financial statement expressed in monetary terms prepared in
advance for future periods, containing the details about the economic activities of the business
organization.

The Budgetary Control system facilitates the management to fix the responsibilities and
coordinate the activities to achieve the desired results. It helps the management to measure the
performance of the organization as a whole. Moreover, it helps in the formulation of future
policies by reviewing current trends.

Budgetary Control Standard Costing

(i) It is more extensive in its application It is intensive as it is applied to manufacturing

because it deals with the operations of the of a product or contributing a service.
entire business.
(ii) Budgets are prepared for sales, production, Standard costing is determined by classifying
cash etc. recording and apportionment expenses to
respective cost unit.
(iii) Budgetary control is related to financial It is related to cost accounts.
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accounts.
(iv) It can be operated without standards.
(v) It does not require standardisation of
products.
(vi) Budgets are expressed in total amounts.
(vii) Variances are not normally revealed
through the accounts.
It cannot be operated without budget.
It requires standardisation of products
Standards are for unit of production.
Variances are revealed through different
accounts.

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7. Explain some of the important applications of marginal costing for managerial

decisions.(Jan 2013)

Evaluation of Performance: The evaluation of the performance of various departments or

products can be evaluated with the help of marginal costing which is based on contribution
generating capacity.

Fixation of Selling Price: The technique of marginal costing assists the management to fix
the price in such a way so that prices fixed can cover at least the variable cost.

Make or Buy decision: Marginal cost analysis helps the management in making or buying
decision.

Optimizing Product Mix: To maximize profits and increase sales volume it is necessary to
decide an optimized mix or proportion in which various products of a company can be sold.

Cost Control: Marginal Costing is a technique of cost classification and cost presentation
which enable the management to concentrate on the controllable costs.

Flexible Budget preparation: As the marginal costing particularly classifies costs as fixed
and variable costs which facilitates the preparation of flexible budgets.

Cost Control

Closure of a department or discontinuing a product

Selection of a profitable product mix

Profit planning: This technique through the calculation of P/V Ratio helps the management
to plan the activities in such a way that the profit can be maximized.

Fixed Cost + Desired Profit

Desired Profit = ---------------------------------------------
P / V Ratio

Decision to take bulk order or foreign market order

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 8. Describe various methods of cost accounting. (Jan 2012)

I. METHODS OF COSTING

Meaning: The term 'methods' and 'systems' are used synonymously to indicate an
integrated set of procedures based on a complex concept of ideas, principles and concepts. The
term method of costing refers to cost ascertainment. Different methods of costing for different
industries depend upon the production activities and the nature of business. For these, costing
methods can be grouped into two broad categories: (1) Job costing and (2) Process costing.

(1) Job Costing

Job costing is also termed as Specific Order Costing (or) Terminal Costing. In job
costing, costs are collected and accumulated according to jobs, contracts, products or work
orders. Each job is treated as a separate entity for the purpose of costing. The material and labour
costs are complied through the respective abstracts and overheads are charged on predetermined
basis to arrive at the total cost. Job costing is used in printing, furniture making, ship building,
etc. Job costing is further classified into (a) Contract costing (b) Cost plus contract and (c) Batch
costing

(a) Contract Costing: This method of costing is applicable where the job work is big
like contract work of building. Under this method, costs are collected according to each
contract work. Contract costing is also termed as Terminal Costing. The principles of job
costing are applied in contract costing.
(b) Cost plus Contract: These contracts provide for the payment by the contracted of the
actual cost of manufacture plus a stipulated profit. The profit to be added to the cost. It
may be a fixed amount or it may be a stipulated percentage of cost. These contracts are
generally entered into when at the time of undertaking of a work, it is not possible to
estimate its cost with reasonable accuracy due to unstable condition of material, labour
etc. or when the work is spread over a long period of time and prices of materials, rates of
labour etc. are liable to fluctuate.
(c) Batch Costing: In Batch Costing, a lot of similar units which comprise the batch may
be used as a cost unit for ascertainment of cost. Separate Cost Sheet is maintained for
each batch by assigning a batch number. Cost per unit of product is determined by
dividing the total cost of a batch by the number of units of the batch. Batch Costing is
used in drug industries, ready-made garments industries, electronic components
manufacturing, T V Sets, etc.

(2) Process Costing:

This costing method refers to continuous operation or continuous process costing.
Process costing method is applicable where goods or services pass through different processes to
be converted into finished goods. Process costing is used in Cement industries, Sugar industries,
Textiles, Chemical industries etc.
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The following are the important variants of process costing system:
(a) Operation Costing: It is concerned with the determination of the cost of each
operation rather than process. It offers scope for computation of unit operation cost at the
end of each operation by dividing the total operation cost by total output of units.
(b) Operating Costing: Operating costing is also termed as service costing. Operating
costing is similar to process costing and is used in service industries. This method of
costing is suitable for concerns rendering services. For example, Hospitals, Transport,
Canteen, Hotels, etc.
(c) Output Costing: Output costing is also called Unit Costing (or) Single Costing. This
method of costing is applicable where a concern undertakes mass and continuous
production of single unit or two or three types of similar products or different grades of
the same products. Under this method cost per unit is measured by dividing the total cost
by number of units produced. Output Costing is used in industries like Cement,
Cigarettes, Pencils, and Quarries etc.
(d) Multiple Costing: This method of costing means combination of two or more
methods of costing like operation costing and output costing. Under this method the cost
of different sections of production are combined after finding out the cost of each and
every part manufactured. This method of costing is suitable for the industries
manufacturing motor cars, engines, aircraft, tractors, etc.

II. TECHNIQUES OF COSTING

Costing is the technique and process useful to allocation of expenditure, cost
ascertainment and cost control. In order to fulfill the needs of the management it supplies
necessary information to the management. The following are the various techniques of costing:
(a) Uniform Costing
(b) Marginal Costing
(c) Standard Costing
(d) Historical Costing
(e) Absorption Costing

(a) Uniform Costing: Uniform Costing is not a distinct method of costing. In fact when
several undertakings start using the same costing principles and or practices, they are said to be
following uniform costing. The basic idea behind uniform costing is that the different firms in an
industry should adopt a common method of costing and apply uniformly the same principles and
techniques for better cost comparison and common good.
(b) Marginal Costing: The C. I. M. A. London defines Marginal costing as "a technique
of costing which aims at ascertaining marginal costs, determining the effects of changes in costs,
volume, price etc. on the Company's profitability, stability etc. and furnishing the relevant data to
the management for enabling it to take various management decisions by segregating total costs
into variable and fixed costs."

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 (c) Standard Costing: Standard Costing is a technique of cost accounting which
compares the standard cost of each product or service with actual cost to determine the efficiency
of the operation, so that any remedial action may be taken immediately.
(d) Historical Costing: Historical costing is the ascertainment and recording of actual
costs when, or after, they have been incurred and was one of the first stages in the growth of the
Cost Accountant's work. Actual costs refer to material cost, labour cost and overhead cost.
(e) Absorption Costing: Absorption Costing is also termed as Full Costing (or)
Orthodox Costing. It is the technique that takes into account charging of all costs both variable
and fixed costs to operation processed or products or services.
______________________________________________________________________________

9. What is Cost Accounting? What are the Objectives of Cost Accounting?

Introduction

Cost Accounting is a branch of accounting and has been developed due to limitations of
financial accounting. Financial Accounting is primarily concerned with record keeping directed
towards the preparation of P&L A/c and Balance Sheet. It provides information regarding the
profit or loss that the business enterprise is making and also its financial position on a particular
date.

In fact it becomes difficult for the management to lay down management policies, to
guide the management decisions or evaluate operating management decisions or evaluate
operating management decisions or evaluate operating management performance with the
information provided by financial accounting.

Meaning

Cost Accounting is the classifying, recording and appropriate allocation of expenditure

for the determination of the costs of products or services and for the presentation of suitably
arranged data for purposes of control and guidance of management. It includes the
ascertainment of the cost of every order, job, contract, process, service or unit as may be
appropriate. It deals with the cost of production, selling and distribution.

Objectives of Cost Accounting

 To ascertain the cost per unit of the different products manufactured by a

business concern.
 To provide a correct analysis of cost both by process or operations and by
different elements of cost.
 To disclose sources of wastage whether of material, time or expense or in
the use of machinery, equipment and tools and to prepare such reports
which may be necessary to control such wastage.

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  To provide requisite data and serve as a guide to price fixing of products
manufactured or services rendered.
 To ascertain the profitability of each of the products and advise the
management as to how these profits can be maximized.
 To exercise effective control of stock of raw materials, work-in-progress,
consumable stores and finished goods in order to minimize the capital
locked up in these stocks.
 To reveal sources of economy by installing and implementing a system of
cost control for material labor and overheads.

______________________________________________________________________________

10. What are the Various Elements of Cost?

Elements of Cost

1. Direct Materials

All raw materials like jute in the manufacture of gunny bags and fruits in canning
industry.
a. Materials specifically purchased for a specific job, process or order like glue for
book-binding, starch powder for dressing yarn.
b. Parts / Components purchased or produced like batteries for transistor-radios
and tyres for cycles.
c. Primary packing materials like cartons, wrappings, card board boxes etc used to
protect finished product from climatic conditions or for easy handling inside the
factory.

2. Direct Labour

3. Overheads

Overheads may be sub-divided into:

(i) Manufacturing Overheads;

(ii) Administration Overheads;
(iii) Selling Overheads;
(iv) Distribution Overheads; and
(v) Research and Development Overheads.
______________________________________________________________________________
11. Discuss the ‘Cost Classification’.
 by Nature or Elements / Analytical Classification
o Manufacturing and Production Costs

 Commercial Costs.
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 o by degree of traceability to the product
o Direct Cost
o Indirect Cost
 by changes in Activity / Volume
o Fixed Costs
o Variable Costs are those which vary in total in direct proportion to the
volume of
o Semi-Variable Costs.
 by Controllability
o Uncontrollable Cost
o Controllable Costs
 by Normality
o Normal Cost
o Abnormal Cost
 By Relationship with Accounting Period
o Capital Costs
o Revenue Costs
 By Time
o Historical Costs
o Predetermined Costs
 According to Planning and Control
o Budgeted Costs
o Standard Costs.
 By Association with the Product
o Product Costs
o Period Costs
 for Managerial Decisions
o Marginal Costs
o Out-of-Pocket Costs
o Differential Costs
 Sunk Costs / Shut-Down Costs
o Imputed / Notional Costs.
o Opportunity Costs
o Replacement Costs
o Avoidable and Unavoidable Costs

______________________________________________________________________________

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 12. What is ‘Activity Based Costing’? What are the Steps Involved in Designing
‘Activity Based Costing System’?

Activity Based Costing (ABC) is a costing approach that designs costs to products,
services, or customers based on the consumption of resources caused by activities.

Resources are assigned to activities and activities are assigned to cost objects based on
the activities use. ABC recognizes the casual relationships of cost drivers to activities.

Activity Based Costing is a system that maintains and processes financial and operating
data about a firm’s resources based on activities, cost objects, cost drivers and activity
performance measures. It also assigns cost to activities and cost objects.

When an Activity - Based Costing System Needed?

An Activity Based Costing system provides better costing information and can help
management manage efficiently and understand and system’s competitive advantages, strengths
and weaknesses.

According to a recent survey conducted by the Cost Management Group of the Institute
of Management Accountants, more than half (54%) of responding companies that have tried
ABC are using it for decision-making outside the accounting function.

Steps Involved in Designing ‘Activity Based Costing System’

 Identify Resource Costs and Activities

 Assign Resource Costs to Activities

______________________________________________________________________________

13. What is Marginal Cost? What are the Advantages of Marginal Costing? (Or)

‘Marginal Costing Technique can be an Aid to Management’ – Explain.

Economists define marginal cost as the additional cost of producing one additional unit.
Marginal Cost = Total Cost – Fixed Cost
According to Dr. Joseph, “Marginal Costing is a technique of determining the amount of
change in the aggregate costs due to an increase of one unit over the existing level of production.
As such, it arises from the production of additional increments of output”.

Advantages:

o Constant in Nature
o Effective Cost Control
o Treatment of overheads simplified
o Uniform and Realistic Valuation
o Helps in production planning.
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 o Better Results
o Fixation of selling price
o Helpful in Budgetary Control
o Preparing Tenders
o Make or Buy Decision.
o Better Presentation.

Disadvantages of Marginal Costing

 Difficulty to analyze overhead

 Time element ignored
 Unrealistic Assumption.
 Difficulty in the fixation of price
 Complete information not given
 Significance of loss.
 Problem of variable overheads
 Sales Oriented
 Unreliable stock valuation
 Claim for loss of stock
 Automation
______________________________________________________________________________
14. What do you mean by CVP Analysis? (Or)

Explain Cost – Volume – Profit Analysis.

As the term itself suggests, the CVP Analysis is the analysis of three variables, viz., cost,
volume and profit. In CVP analysis, an attempt is made to measure variations of costs and profit
with volume. Profit as a variable is the reflection of a number of internal and external conditions
which exert influence on sales revenue and costs.

The CVP analysis helps or assists the management in profit planning. In order to
increase the profit, a concern must increase the output. When the output is at maximum, within
the installed capacity, it adds to the contribution. When volume of output increases, unit cost of
production decreases; and vice versa; because the fixed cost remains unaffected. When the
output increases, the fixed cost per unit decreases

Therefore, profit will be more, when sales price remains constant. Generally, costs may
not change in direct proportion to the volume. Thus, a small change in the volume will affect the
profit. The management is always interested in knowing that which product or product mix is
most profitable, what effect a change in the volume of output will have on the cost of production
and profit etc. All these problems are solved with the help of the CVP analysis.

1. Break - Even Analysis

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 Break – Even Analysis shows the relationship between the costs and profits with sales
volume. The sales volume which equates total revenue with related costs and results in neither
profit nor loss is called and break – even volume or point (BEP).

2. Break – Even Point (BEP)

A business is said to be break even when its total sales are equal to its total costs. It is a
point of no profits no loss. At this point, contribution is equal to fixed cost. A concern which
attains breakeven point at less number of units will definitely be better from another concern
where breakeven point is achieved at more units of production.

Total Fixed Cost

BEP = ---------------------------------------
Contribution Per unit
3. Break – Even Chart

The technique of break even analysis can be made easy with the help of graph or
mathematical formula. Graphical representation of breakeven point is known as the break even
chart. Break Even Chart shows the profitability at various levels of activity and indicates the
point at which neither profit nor loss is made. Breakeven point is known as ‘no profit, no loss
point’. So the chart is also known as break even chart. At this point, the total costs are
recovered and profit begins.

Marginal Costing Formula

Marginal Cost Statement:

Sales xxx
Less: Variable Costs xxx
--------

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 Contribution xxx
Less: Fixed Costs xxx
--------
Profit / Loss xxx
--------
Equations:

1. Contribution = Sales – Variable Cost

2. Contribution = Fixed Cost + Profit (or)
Fixed Cost – Loss
3. Profit = Contribution – Profit
= Contribution + Loss
4. Variable Cost = Sales – Contribution

Profit / Volume Analysis

Contribution
1. Profit / Volume Ratio (OR) P/V Ratio = -------------------------- X 100
Sales
Changes in Profit
2. P / V Ratio = --------------------------------- x 100
Changes in Sales

Fixed Cost
3. P / V Ratio = ------------------------- X 100
BEP Sales

Break – Even Analysis

Fixed Cost
1. Break Even Point (BEP) in units = -----------------------------
Contribution /unit

Fixed Cost
2. Break Even Sales (BES) in Rs. = -------------------------------- X Selling Price /unit
Contribution /unit

Fixed Cost
= -------------------------------- X Total Sales
Total Contribution

Fixed Cost
= --------------------------------
P / V Ratio

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Calculation of Sales for a given profit

Fixed Cost + Desired Profit

1. Sales (in Units) = ---------------------------------------------
Contribution /unit

Fixed Cost + Desired Profit

2. Sales (in Rs.) = --------------------------------------------- X Selling Price /unit
Contribution /unit

Fixed Cost + Desired Profit

= --------------------------------------------- X Total Sales
Total Contribution

Fixed Cost + Desired Profit

= ---------------------------------------------
P / V Ratio

Margin of Safety (MS)

1. Margin of Safety Sales (MS) = Total Sales – BEP Sales

Margin of Sales
2. Margin of Safety Ratio = ------------------------- X 100
Total Sales

Profit
3. Margin of Safety Sales (MS) = -------------------
P / V Ratio

General Ratios

1. Contribution = Sales X P / V Ratio

2. Profit = MS Sales x P / V Ratio

Contribution
3. Sales = -----------------------------
P / V Ratio
4. Fixed Cost = BEP Sales x P / V Ratio

______________________________________________________________________________

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 15. What are the Advantages and Limitations of Break-Even Analysis and Chart?

Advantages
o Total Cost, variable cost and fixed cost can be determined.
o Break Even Output or sales value can be determined.
o Cost, Volume and profit relationship can be studied, and they are very
useful to the managerial decision- making.
o Inter-firm comparison is possible.
o It is useful for forecasting plans and profit.
o The best products mix can be selected

Limitations

Break Even Chart is constructed under some unrealistic assumptions.

Exact and accurate classification of cost into fixed and variable is not possible.
Fixed cost varies beyond a certain level of output. Variable cost per unit is
constant and it varies in proportion to the volume.
 Constant selling price is not true.
 Detailed information cannot be known from the chart. To know all the
information about fixed costs, variable cost and selling price, a number of charts
must be drawn.
 No importance is given to opening and closing stocks.
______________________________________________________________________________
16. What is Variance Analysis? What are the Uses or Importance or Advantages of
Variance Analysis?

Variance Analysis is the process of measurement of the deviation of actual performance

from the intended performance. Variance Analysis is tool to measure performances and based
on the principle of management by exception.

Uses or Importance or Advantages of Variance Analysis

 Comparison of actual with standard cost which reveals the efficiency or inefficiency of
performance. The inefficiency or unfavorable variance is analyzed and immediate
action is taken.
 It is a tool of cost control and cost reduction.
 It helps the management to apply the principle of management by exception.
 It helps the management to maximize the profits by analyzing the variances into
controllable and uncontrollable.

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  Future planning and programme are based on the variance analysis, because standard
costing and variance analysis need a complete study of the organization. Thus, the
factors of profits can be known and future plan made.
 Within the organization, a cost consciousness is created along with the team spirit.
The variance analysis and fact finding further boost the profits of the organization.
______________________________________________________________________________

UNIT V
1. What is the need for codification of accounts? (Dec 2017)
 Easy accessibility
 It is essential for grouping.
 Well-defined coding system enables efficient management of accounts.

______________________________________________________________________________
2. Mention the uses of Pre-packaged Accounting Software. (Dec 2017)
 Easy to install
 Relatively inexpensive
 Easy to use
 Back-up procedure is simple.
 Certain flexibility of report formats provided by some of the software
 Very effective for small and medium size businesses.
______________________________________________________________________________
3. What is ledger?(Dec 2016)
A ledger in accounting is also known as the principal book of accounts as well as the
book of final entry. Ledger is a book in which all accounts are maintained in a summarized and
classified form. All accounts combined together become a ledger and form a permanent record of
all transactions.
______________________________________________________________________________
4. What are the significances of Computerized Accounting?(Dec 2016)
- It helps for the full control over every aspect of accounting system of a
company.
- Tally provides instant result about the financial status of the business. One
need not wait for many days to ascertain the financial status.
______________________________________________________________________________
5. How are accounts grouped for computerization?(Jan 2016)

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