Q1 What is cost centre . Explain the main purpose of any there cost centre ?

Ans. A cost center is a role or department that costs the business money but does not
generate revenue on its own. They are often administrative, service and support roles.
These positions cannot be eliminated to cut costs because they are vital to a smoothly
operating organization.

Cost centers can be individual roles, like janitors or human resource personnel, or full
departments, like IT departments or warranty departments. The size of a cost center and
how many cost centers there are will vary due to company size and industry. Cost
centers are listed as separate units in the business so that the resources they use can be
easily monitored. Managers are responsible for ensuring that the centers run efficiently
and stay within budget.

1. Impersonal cost center

Impersonal cost centers deal with equipment, machinery or locations. They may focus
on locations, equipment, production or machines. For example, a research and
development department has a budget to find innovative solutions to consumer
problems or design new products.

2. Operation cost center

Operation cost centers are concerned with people or machines engaged in similar
activities. For example, IT departments make sure that hardware, software and
networks are all working correctly, properly updated and secure.

3. Personal cost centers

Personal cost centers deal with a particular person or group of people. For example, a
company’s HR department works across departments to deal with employee needs and
recruitment.

4. Product cost center

Product cost centers deal with a specific product or manufacturing area. For example, a
publishing company may have a production department responsible for the actual
printing of its books, newspapers or magazines. A manufacturer might have assembly,
painting or welding shops.

5. Process cost center

Process cost centers focus on a specific process or event. For example, customer
service departments handle customer complaints, improve customer experience and
manage any warranties or rebates that might be available.

6. Service cost center

Service cost centers provide services to the company. For example, a janitorial staff
maintains clean, orderly facilities so that employees can be healthy, safe and productive.

Q2 What are the chargeable expenses. Distinguish between prime cost, chargeable
expense and overheads
Ans. Chargeable expenses

 All expenses other than direct materials and direct labour which can directly be
identified with a particular product, job or process termed as "Direct Expenses".
Examples: production, royalty, hire charges of special equipment etc.

All expenses, other than direct materials and direct labour cost, which are specifically
and solely incurred on production, process or job are treated as direct or chargeable
expenses. These are charged direct to the product, process or job, etc., as part of prime
cost.

Prime costs are all of the costs that are directly attributed to the production of each
product. Prime costs are direct costs, meaning they include the costs of direct materials
and direct labor involved in manufacturing an item. Companies use prime costs to price
their products.

Aside from direct work costs as above, instances of conversion costs for a similar show
producer incorporate lease of plant building, indirect plant staff, for example, creation
director, housekeeping staff, security and industrial facility power, and so forth.

Instances of prime expenses for a shoe producer incorporate calfskin, elastic,

shoestrings, wages of all work associated with the sequential construction system, and
pressing.

Conversion costs then again can be affected by a few factors, for example, market
property rates affecting rental, machinery mileage level or wear and tear affecting
deterioration, machine use viability affecting support costs and immediate and indirect
work adequacy, and so on.

Prime expense is principally affected by two factors that are issues connected with the
materials production network or materials supply chain and issues of direct work or
direct labour and its adequacy.

Assurance of conversion costs is more perplexing as it incorporates overheads that

should be amassed and apportioned across items in view of laid out and suitable
expense drivers.

As the great expense has a balanced relationship with completed or finished

merchandise, estimating and computing such expenses is genuinely straightforward

Q3 Distinguish between product and period cost.

Ans. Product costs are any costs incurred in the manufacture of a product. These costs
include direct materials, direct labor, and factory overhead.

A period cost is any cost consumed during a reporting period that has not been
capitalized into inventory, fixed assets, or prepaid expenses

The key difference between product costs and period costs is that product costs are only
incurred if products are acquired or produced, and period costs are associated with the

passage of time. Thus, a business that has no production or inventory purchasing

activities will incur no product costs, but will still incur period costs.

Product costs are initially recorded within the inventory asset. Once the related goods are
sold, these capitalized costs are charged to expense. This accounting is used to match
the revenue from a product sale with the associated cost of goods sold, so that the entire
effect of a sale transaction appears within one reporting period’s income statement.

Examples of Product Costs and Period Costs

Examples of product costs are direct materials, direct labor, and allocated factory
overhead. Examples of period costs are general and administrative expenses, such as
rent, office depreciation, office supplies, and utilities.

Categories of Period Costs and Product Costs

Period costs are sometimes broken out into additional subcategories for selling activities
and administrative activities. Administrative activities are the most pure form of period
costs, since they must be incurred on an ongoing basis, irrespective of the sales level of
a business. Selling costs can vary somewhat with product sales levels, especially if sales
commissions are a large part of this expenditure.

Product costs are sometimes broken out into the variable and fixed subcategories. This
additional information is needed when calculating the break even sales level of a
business. It is also useful for determining the minimum price at which a product can be
sold while still generating a profit.

Q4 Distinguish between bin card and store ledger ?

Ans. Bin card is also known as” Stock Card” which we use to keep a record of all the
receipts and issues of the stocks from the company’s stock department.
Stores ledger is called the subsidiary ledger of the costing ledger that keeps a record of
the movements of inventory with the valued terms.

The bin card only keeps a record of the quantity of the materials. Such as- receipts,
issues, and balances of materials
Stores ledger keeps a record of the movements of inventory in rate, quantity, and value
and the balance of the material after every movement happens.

Storekeeper maintains the bin card who also takes responsibility for the rest of the
goods in the store
The costing department maintains the stores ledger who also maintains other books of
accounts of the company

In accounting, a bin card has to keep inside the store.

In accounting, stores ledger has to keep outside the store

In the case of bin card, storekeeper makes the entry immediately, so that he knows if
there is any shortage of goods

 In the case of stores ledger, the entries are made periodically so it takes time to know
about the exact amount of possible goods in the store

The term bin card is a document that expresses the specifics of materials that are being
kept in the bin. To reveal the measurable details of materials that are received, issued,
and the closing balance, a document paper is attached to the bin.
In accounting, by the term “stores ledger” we understand that it is a document that
shows the amount of quantity and value of the received, issued, and in balanced
materials at the end. To each component of the material, “stores ledger” is assigned.

Q5 Define cost object and give its example.

Ans. [A cost object is any item for which costs are being separately measured. It is a key
concept used in managing the costs of a business. Several types of cost objects are
noted below.

Output-Related Cost Objects

The most common cost objects are a company's products and services, since it wants to
know the cost of its output for profitability analysis and price setting.

Operational Cost Objects

A cost object can be within a company, such as a department, machining operation,
production line, or process. For example, you could track the cost of designing a new
product, or a customer service call, or of reworking a returned product.

Business Relationship Cost Objects

A cost object can be outside of a company - there may be a need to accumulate costs for
a supplier or a customer, to determine the cost of dealing with that entity. Another
variation on the concept is the cost of renewing a license with a government agency.
Accounting for Cost Objects
A cost object may be the subject of considerable ongoing scrutiny, but more commonly a
company will only accumulate costs for it occasionally, to see if there has been any
significant change since the last analysis. This is because most accounting systems are
not designed to accumulate costs for specific cost objects, and so must be reconfigured
to do so on a project basis. An annual review is common for many cost objects. If an
analysis is especially complex, the review may be at an even longer interval.

It may be necessary to have a cost object in order to derive pricing from a baseline cost,
or to see if costs are reasonable, or to derive the full cost of a relationship with another
entity.

Q6 What is the objective of cost accounting and state out its advantage and challenges
Ans. OBJECTIVES OF COST ACCOUNTING
Cost accounting was born to fulfill the needs of manufacturing companies. It is a
mechanism of accounting through which costs of goods or services are ascertained and
controlled for different purposes. It helps to ascertain the true cost of every operation,
through a close watch, say, cost analysis and allocation. The main objectives of cost
accounting are as follows:-

 • Cost Ascertainment: The main objective of cost accounting is to find out the cost of
product, process, job, contract, service or any unit of production. It is done through
various methods and techniques.
• Cost Control: The very basic function of cost accounting is to control costs.
Comparison of actual cost with standards reveals the discrepancies (Variances).
The variances reveal whether cost is within control or not. Remedial actions are
suggested to control the costs which are not within control.
• Cost Reduction: Cost reduction refers to the real and permanent reduction in the
unit cost of goods manufactured or services rendered without affecting the use
intended. It can be done with the help of techniques called budgetary control,
standard costing, material control, labor control and overheads control.
• Fixation of Selling Price: The price of any product consists of total cost and the
margin required. Cost data are useful in the determination of selling price or
quotations. It provides detailed information regarding various components of cost.
It also provides information in terms of fixed cost and variable costs, so that the
extent of price reduction can be decided.
• Framing business policy: Cost accounting helps management in formulating
business policy and decision making. Break even analysis, cost volume profit
relationships, differential costing, etc are helpful in taking decisions regarding key
areas of the business.
LIMITATIONS OF COST ACCOUNTING

• It is based on estimation: as cost accounting relies heavily on predetermined data,

it is not reliable.
• No uniform procedure in cost accounting: as there is no uniform procedure, with
the same information different results may be arrived by different cost accounts.
• Large number of conventions and estimate: There are number of conventions and
estimates in preparing cost records such as materials are issued on an average
(or) standard price, overheads are charged on percentage basis, Therefore, the
profits arrived from the cost records are not true.
• Formalities are more: Many formalities are to be observed to obtain the benefit of
cost accounting. Therefore, it is not applicable to small and medium firms.
• Expensive: Cost accounting is expensive and requires reconciliation with financial
records.
• It is unnecessary: Cost accounting is of recent origin and an enterprise can survive
even without cost accounting.
• Secondary data: Cost accounting depends on financial statements for a lot of
information. Any errors or short comings in that information creep into cost
accounts also.

advantages ;

1) Aid to Management -
Cost accounting helps the management in taking various decision regarding different
functions. The data provided by the cost accounting help the management in determining
unprofitable activities. It also helps in measuring efficiency of various process and
functions.

Cost accounting provide information which may be used for submitting lenders. It also
aids in the process of farming policies. Elimination of wasteful activity lead to higher
profit. A well-established cost accounting system helps in producing reliable data. The
cost accounting system serve the management in following ways :
a) Help in eliminating and turning unprofitable activities.
b) Helpful in comparison of data.
c) Provide information on Cost estimates.
d) Helps in managerial decision making.
e) Helps to locating wasteful activity.
f) Periodic view of result.
g) Provide reliable data.

2) Useful for Outsider -

An efficient cost accounting system is good for outsiders as well. The data provided by
cost accounting system helps them in evaluating financial soundness of the
organisation. Organisation with well-established accounting system are considered to be
more efficient. This can help the firm in attracting more investment.

3) Advantage to Employee -
There are some advantages of cost accounting for the employees of the
organisation.Cost accounting help in reducing cost and increasing profitability with
regard to cost incurred and production unit required in different department and
processes. It is also helpful for the purpose of introducing incentive compensation
system and bonus plans.

4) Useful for Government and the Society -

Cost accounting also useful for the government and society for various reasons.Cost
accounting helps organisation in reducing cost and increasing profit. It results in
payment of higher taxes which is the society and economy. Cost control help in providing
goods at lower costs. Cost accounting also help in making national policies.

Q7 Discuss the main activities of cost center and give importance of cost accounting in
managerial decision making ?

Ans. The Cost Center is a department or a distinct unit or division within the framework
of a company. These cost centers indirectly contribute to the organization’s profits. For
accounting, all expenses of that particular division are gathered at these cost centers’
levels. These departments are not engaged in production directly. They may assist in
production or associated with other functions such as sales, marketing, human
resources, research, development, etc. Many cost centers may not generate any revenue
at all for the company. Therefore, they generate profits indirectly for the company.

Cost center requires money to operate, and most of them function within their pre-
decided budget. The managers and other personnel in these departments are
responsible for keeping their costs within the budget. They have the authority to incur
expenses for regular business activities. At the same time, they work in tandem to
contribute to the profitability of the company. Costs attribution can happen to each of the
different cost centers as they work as separate units within the broad framework of an
organization. Therefore, they act as a tool for cost control for any organization.

Key cost centers in an organization are the marketing department, human resources
department, finance department, research, development department, quality control and
testing department, logistics, and procurement department.

Importance of Cost Centres

Creation of a Responsibility Center
Cost centers are distinctly identifiable and separate units or departments or
responsibility centers with their own set of responsibilities and duties. Each one of them
is individually answerable to the management for their activities, expenditures, and
results. They cannot pass on their failures to other cost centers, and identification is
possible separately. Therefore, it becomes easy for the management to check and
analyze the activities of every cost center separately.

Increase in Operational Efficiency

As said earlier, cost centers have their own set of duties and responsibilities carefully
planned and drafted by the management. Hence, there is an exact distribution of
responsibilities, which leads to creating synergies between different departments. There
is increased efficiency within the organization since each department is clear about their
respective scope of work and availability of resources. It helps in gaining customer trust
and confidence, as well as delivering enhanced product value. Also, employee
confidence and satisfaction can be achieved, which is essential for the success of any
department and organization.

Better Implementation of Innovation and Technology

A company can go for the latest process-oriented technology tailor-made for an

individual cost center. It is easier to implement new methodology and innovation with the
work assigned to each cost center. It results in increased efficiency, higher output, and
profitability for companies.

Q8 Give cost classification as per. A. managerial decision. B.Controlability. C. By

change in volume

Ans. Cost Classification by Management Decision Making

Cost is not just a price paid to generate some value, but it is also used as a tool by the
management for decision making.

Managerial decisions are framed depending upon the following types of cost involved in
carrying out of business:

Marginal Cost: Marginal cost is the cost of producing an additional unit and its impact on
the total cost of production.

Differential Cost: When there is an increment or decrement in the cost of bulk

production, the change in the cost of a single unit is also determined which is known as
differential cost.

Opportunity Cost: The value of one or more products given up to acquire the desired
product or service is known as opportunity cost. For instance; while choosing green tea,
a person has to give up the value he must have derived from coffee or regular tea.

Replacement Cost: When machinery or any other asset becomes obsolete or involve high
maintenance cost, and simultaneously a better asset is available in the market which
can replace it, then the cost involved in such substitution is known as replacement cost.
For example; a transportation company needs to replace its trucks from time to time to
avoid excessive repairing expenses.

Sunk Cost: The cost which has been born by the organisation in the past and cannot be
recovered at any stage of the business process is termed as a sunk cost. Freight inwards
paid at the time of buying machinery has to be written off at the time of selling it.

Normal Cost: The routine cost associated with the manufacturing of goods or services
under usual circumstances is called a normal cost. It includes all direct expenses such
as salary, material, rent, etc.

Abnormal Cost: The cost that arises suddenly and unknowingly under unfavourable
situations is known as abnormal cost. For instance; workers go on strike, theft or
robbery, fire in the premises, etc.

Avoidable Cost: Such costs are under the control of management and can be prevented
as per the organisational need. For example; an enterprise upgrades its technology by
installing self-operative machines to avoid the labour charges it pays.

B. CONTROLLABILITY

this category, costs are classified based on whether or not they are influenced by the
action of a given member of an undertaking. The classes of costs are:

• Controllable costs
• Uncontrollable costs

Controllable costs are costs that an entity in an undertaking can influence through their
action. An undertaking is usually divided into several departments or cost centers that
are placed under the direct control and supervision of specified persons.

The person in charge of a particular department or cost center can control only those
costs that come directly under their control.

Uncontrollable costs, on the other hand, are costs that cannot be influenced by the action
of a specified member of an undertaking. Costs that are controllable for one person may
be uncontrollable for another person.

Therefore, the issue of whether a cost is controllable or uncontrollable is determined by

the individual or level of management in question.

C. By change in volume

By Change in Activity or Volume

Under this category, the cost is divided as fixed, variable, and semi-variable costs:
• Fixed cost - It mainly relates to time or period. It remains unchanged irrespective
of volume of production like factory rent, insurance, etc. The cost per unit
fluctuates according to the production. The cost per unit decreases if production
increases and cost per unit increases if the production decreases. That is, the cost
per unit is inversely proportional to the production. For example, if the factory rent
is Rs 25,000 per month and the number of units produced in that month is 25,000,
then the cost of rent per unit will be Rs 1 per unit. In case the production increases
to 50,000 units, then the cost of rent per unit will be Rs 0.50 per unit.
• Variable cost - Variable cost directly associates with unit. It increases or
decreases according to the volume of production. Direct material and direct labor
are the most common examples of variable cost. It means the variable cost per
unit remains constant irrespective of production of units.
• Semi-variable cost - A specific portion of these costs remains fixed and the
balance portion is variable, depending on their use. For example, if the minimum
electricity bill per month is Rs 5,000 for 1000 units and excess consumption, if any,
is charged @ Rs 7.50 per unit. In this case, fixed electricity cost is Rs 5,000 and the
total cost depends on the consumption of units in excess of 1000 units. Therefore,
the cost per unit up to a certain level changes according to the volume of
production, and after that, the cost per unit remains constant @ Rs 7.50 per unit.
•