Padma Coaching Classes Qa Ans: 205 c) i) Costing Costing is the technique-and precess FE A |!) Cost Accounting Cost Accounting is tha ‘of accounting for cost whicl What is cost and cost accounting? A) Meaning of cost: __, monetary tee vices IGWA, India defines Cost as “measurement ‘os or render of resources used for the purpose of production of 20° d sh The word ‘Cost’ can rarely stand on its OM” 2Trelated : id on i ate limitation (e.g. historical, Yatabis, etc) and shoul feces perform ‘activity’ (e.g, a given quality or unit of goods produe™ Nn. to its nature and jimitatio! The main characteristics s of cost are: lified aS Je concept. The term ‘cost’ is not complete unless itis fully U2 jtuation. itdoes not represent the same contents under ever! S21 flex No costs true, exact or accurate under all ciroumstanee®: it may vary with time, volume, firm, method or purse: * i if costing Meaning of Cost Accounting: uthe application © “CMIA, London, defines Cost Accountancy 8 the app science, art ard and cost accounting principles, methods and techMiaUee piity, It includes practice of cost control and the ascertainment of profitar managerial decision- Presentation of information derived therefrom for the purpose © making.” Scope of Cost accounting: Cost Accountancy is broader in scope an Cost Control, Cost Reduction and Cost Audit. so cael Sh ae a es oes of ascertaining costs d compriges'costing, Cost Accounting, tha process Of ache begins with the Targhee ‘costand ends with the control ofcost. << te iii) Cost Control Cost. Contral Favsies “the _ establishment of target actual performance, comparing erformante, ‘measuring : inst target performance and taking ‘(actual psrforinahee: agall Ww) CostReduction \ | Cost Reduction is the achievement of real and permanent <[Rorfeetive-action. eduction in the unit cost of products manufactured or ‘services rendered without imparting diminution in the quality of the product. _ v) Cost Audit T Cost Audits the verification of cost accounts and a check on | the adherence to the Cost Accounting Plan. Thus, it involves | Verification of cost accounting records, and | Examining these records to ensure that they adhere to the | { cost accounting principles, plans, procedures and objectives. |Q2 wh, *18 Cost Accounting? Explain its objectives. (Oct. 2019) Ans: A) Me Cosa. of Cost Accountina: ich be i Cost Accounting is the process of accounting for cost which begins yi th NCurrence Of cost and ends with the control of cost. In other words, it isa fore ® exetem of accounting by means of Which costs of products, Services or actyg°™ @scertained and controlled, = ICMA, London, defi the point at which fines Cost Accounting as ‘the process of accounting for O8t fi. B) a) °) d) expenditure is incurred or committed to the establishment ol ultimate relationshi 7 ip with cost centres and cost units Qhbjectives Of Cost Accounting: The main objectives of cost accounting are as follows: To Ascertain Cost: The basic obj location, per ining costs afier they h; methods of cost ascertainment - Job Costir follow different methods of costin lave been incurred. Basically ng and Process costing. Different inde ties 9 because of the differences in the Nature of thes ‘To Control Cost: Gost Accounting aims at controling Costs by using various techniques sy Budgetary Control, Standard Costing, | 1 bas Inventory Control ete, Ze provide information for Decision-making: Gost Accounting aims at providing informationtor various mana i gerial decision; Whether to make or buy a component tied Whether to retain or replace an existing machine. Whether to process further or not Whether to shut down or continue operations, To Determine Sellin; Price: Cost Accounting Provides cost information to determine the services. During the period of depression, it guises the ma P 5 inagement to y much reduction in selling price may be made to Meet the situation? preted To Ascertain Costing Profit: \ Cost Accounting aims at ascertaining the costing prof ‘or | joss-ét'ainy activity on an Objective basis by matching cost with \ the revenuig ofthat atiyty Distinguish Between Financial Accounting and Cost Accounting? ae) (Mar. 2015 , Nov. 2017) Basis Distinction of | Financial Accounting Cost Accounting ; 1) Objective Its\\ objéctive is to provide information about overall \financial’ performance and financial position of the business Its objective is to ascertain cost, to control cost and to provide information for decision-making, 2) Analysis of costs and profit It shows the overall profit/ioss of the entire organization Wt shows the detailed cost & profits for each product, process, | job, contract,’ete. It emphasis is on control on material cost, labour cost and overheads Its emphasis is on reporting and not on control.Pee oS eel Padma Coaching Classes making Use in decision-making 5) Responsibility | Financial aocounts do not offer fixation any effective help in responsibility fixation because various expenses are not | identified as controllable and | non-controllable Tis focus is on historical data. |6) Focus on | Presentfuture 7) General Vs if generates general purpose ent reports like income statem balance sheet, cash flo” |__| statement __— 8) Legal Financial accounts of Requirements | companies have to meet requirements of the Companies ‘Act and the Income Tax Act. Tit mainly records external transactions with outsiders, like purchase of materials. Special reports 9) Transactions — Recorded —T Virtually the whole world is | interested in financial information — the top costing in management, workers, the shareholders, lenders, | | prospective investors, the government. eae Es eee 70) Persons | interested | a \ccount 0.4 What are the advantages / necessity Cmportance) of Ott ors, 2016, 2029) A) Advantages to Management: 4) Helps in Ascertainment of cost: Be Yost ofeach product, contract, activity ete. by using afferent meth process costing F VY) Nee 2) Helps in Control of Cost; | \> Ne it helps in the control of material-costs, labour costs an techniques of contol such ag Standard Costing and Budgetary Control. 3) Helps in Decision-making: It helps the management in making various de a) Whether to make or buy a component b) Whether to retain or replace an existing machine c) ‘Whether to process further or not d) Whether to shut down or continue operations e) Whether to accept orders below cost or not f) Whether to expand or not g) How much reduction in the selling price should be made in case of depression. cisions such as — Not ‘ocess, job ant ‘of By weet Cost accounting helps in the ascertainmel tase Sting arenras job costing and .d overheads by using different5) 6) 7) 8) 9) 10) 11) 12) Control: using yy, i | by tious Hols in vey conta MY avels pe desi in inv quantit, Lae Order Query Tumover Ratlo ete, took Taking, Inver duction: FE reduc tae not SHON roramm, and findi bat “i a nding out new and improved m i. measurement of hm E ts measure © e' iretearce anahs® "ety; Perati Ons through Sstablishment Of stands lards ets: tion of B Hous by jelps in Pret a yaration of val Udgets, Such as sg; ale Be Phrcase Budget ManPO"e" Burget Overheads Budget,“ “8* Product udget, ips in Identifying Unprofitable Activitieg. Helps it y le activities 5, itnelps in identifying unprofitad SO that the Necessary corrective action m, be taken. ay ses: lps in identifyin tena oa aie It helps in identifying mate 168888 $0 thet 'S Wastage, Scrap, Spoilage an, Rarauoh feoon, Urn the necessary Corrective act taken Bite id Lab ; Identifying Idle Time and Labour Tumover, ines in identifying ie tmes and labour uh ‘over through t labour turnover so that the necessary correctiy, Ih the rey ‘on may be. action mey a oe On idle time and in Identifying Idle Capacity: piers in identifying idle capacity so that the Necessary Hoes action may be Helps in improving Productivity: a Ithelps in improving productivity of Materials and labours Helps in Cost Comparison: Nhe Ithelps in cost comparison such as— \ SY \ Comparison with standard figuresi-Comparison, of actual figures with standard or budgeted figures for the same. = Period'and tha same firm. Intra-firm comparison: Comparison, of actual figures of one Period with those of the Amother period for the same fms, ee Inter-firm ‘comparison:-Cormparison. of?actual figu another standard firm béloriging {6 the same industry; and Fattem Comparisons Comparison of actual figures of one firm with those of industry to which the firm belongs.» res of one firm with those of the Helps in checki Ithelps in checkin, statement prepare financial accounts, the accuracy of financial accounting: Ig the accuracy of financial accounts with the help of ‘conc ata) d to reconcile the profit as per cost accounts with the profit as per Sarno : Jans. me An efficent an ‘syslem benefits employees by introducing incentive pl AS a result both the productivity and eamings increase. ~iN efficie neP at lower pret Costing system benefits the soci PY ee Prices due to lower cost of production D) Ady: ae an i 3 itages to National Economy: a nears oa hi An eficent costing system benefits national 0°60 by sie 10 the igher productivity because progress of enterprises industry which lead to progress ofthe national @c0%27™” E) Advantages to Government, ts Asenles 34 82s (KO WORE Toque 28 ‘An effcdent costing system helps govemmenttS 20s) by. providing rere fixation: others (like Chamber of Commerce and indUst) gation, Wad? ie information Such cost information is useful f ECs etc settlement of industrial disputes, framing various POO” Q.5 What are the objections (Criticisms) of Co*t A Ans: Objection / Criticisms: 1) Duplication: sa financial Accounting Pranacrted tht Cost Accounting is aupicaton WHE” fs Gasic ata 7 books system is already in operation. Cost Accounting takes " accounts and just rearranges it in a different waY- 2) Inapplicable: In @ concern producing a single joing 0 i product inv’ Accounting is inapplicable. tt is also of no use in non-Pr° agriculture ete. complex itable OT9* 3 Not useful for Decision Making: Cost ‘Accounting In many cases, the decisions of the management are not basso Gata, Thus the decision regarding which item to produce 8° sorces of demand depends upon the licence given by the Government ‘and the mark and supply. Expensive and Routine: 4) Expensive and Routine rate. At time the Cost ‘A cost Accounting system is quite expensive to instal and opel ; i fandard ‘accounting systems becomes a mere routine of fling in forme a eubens Saran) reports. Non-cooperation from staff also may lead to ‘allure me concerns 26 What are the essentials of Good Cost Accounting #Y5#E r ting systentare-as follows: The essential features of a good cost accou! eto te nature | 1. Suitability The cost accounting system $hquld be Su _[ottusiness: AN hs oF 2. Simplicity TTahould be easy To undbystand ahd simple to operete 3. Economical Tt should be economical to install and operate. Its cost should | be justified by the benefits derived. 4, Flexibility FI shouldbe ‘Texible“fo adopt the changing requirements of | © {the business 5. Accuracy itshould-provide the aocurate information. Promptness -irhould provide prompt information at regular intervals. | 7, Support of staff Ttshould receive the necessary cooperation and participation | of the staff | 8. Cost control if should ensure cost control overthe various fields. | Clearly definedcost | There should be cleanly defined cost centres and ‘centres responsibility centres.276: — information in detail to the ext id avoid unnecessary detail. ai —rovide should Pr hou Coe ag son SF Decision making and control. ich di which differ under different alternatives. In case of Ans: © é pt COSI, tyre cO8tS WY mac yent decisi>”* replace , They cannot be ch ‘anged by managerial decisions. In 10. 11. 42. 13. costs: + releva” sproteyant 2S of rele. depreciated by by These lace rent decision . ¥ book value of old machine is irrelevant: case O sts: sts. These are past c suk Se the ristorea er ee rnakinpener cannot basher ia is not rele’ decision. I! incurred even if the plant is shut down. For example, costs: shut Doe cosis which $e Fase ae Soe dreraeon building rent, in pocket Costs: as Out ‘the costs which ne a ash outay ae grample, wages Of workers: Teta cn beanie a rtunity Costs: . ppenteofice made in accepting aN alternative course of action uted Costs: ‘i These are the national costs which do not involve any cash outlay. pifforential Costs: ( Leese or decrease in total cost due to change in activity level. It is also itis the inci known as incremental cost Je, cost under alternative | is © 1,50,000 and alternative II is € 1,90,000, For examp! differential cost will be %40,000. Marginal Costs: itis that part of aggregate cost which changes due to ch; ig the total variable cost : ae \ ae Fe Replacement Costs: itis the current purchase price of an identical asset. Oh For example, old machine was purchased for %1,59;009 In 2004, it 2009 for 2,50,000. Hence, replacement cost is < '2,50,000.\\, ° igA6’be teplaced in Conversion cost: BY itis the cost of converting raw matétials into finished goods. terial, is 4,000 ‘direct Abour & 3,000, direct expenses % 2,000, For example, direct mi f Manufacturing overheads’ 1,000, cofverting-céstis 6,000. Committed Cost: Aa Those are the costs which cannot be avoided in the short run once the decision to incur them has been taker” For example, depreciation of machinery. ns for example Discretionary Costs: ided by managerial decisio These are the costs which cé an advertising costs, R&D costs. aLS Lf an Padma Coaching Classes os ‘huts the Clanatcation of Cont by BoarOO™™ Ans: Classification of costs by Variability / Beha io¥" A) Fixed Costs: a) Meaning of fixed Costs: Fad cous are those costs which dont Y9 production upto a given range. «dia Examples: Rent and Insurance of uilding: Salary of manager etc b) Characteristics of Fixed Costs: Fixed costs have to characteristics: () Total fixed costs do not vary with the © given range. (i) Fixed cost per unit varies with the chang cost per unit decreases as the production nange | e of ine volume & © versa. es and vee i B) Variable Costs: ; ° jon to t a) Meaning of Variable Costs: + proportion 19 Varable costs are those costs which var " Cee “ect Expenses: production. Our Dires Bramples: Direct Material Costs, Direct te Variable Overheads b) Characteristics of variable costs: Variable costs have two characteristics: volume of productio! (i) Total variable cost vary IN direct proportion to the nd vice versa variable cost decrease as the production jecreases a! (i) Variable cost per unit remains fixed ¢) _ Somi-variable costs / Somi-Fixed costs: upto a given Meaning of Semi-Variable Costs: ae rsrmtable cost are those costs of which ore part roma od ction but range and the other part varies with in the volu! not in the same proportion. Examples: Telephone exp variable, ) 1» 2044, 0.9 Explain the ctaseification on the basis of Elements: co ) ‘ans: A) Cost Classification on the basis of elements: the change hire part is fixed and fee for calls IS yenses of which ney : ¢ puirpose of production of rial of any natGreibed fer thelp a) Material Cost: inwards, the cost of mate Material cost is r a product or a service Material cost includes, c8st ‘ofiprosurement, freigh! faxes and duties, insurance et directly attrbuteble to the acquisition. Trade discounts, rebates, duty drawbacks), refunds ‘pnvatcount of GST and other similar items are deducted in determinin the gosts‘of materia b) Labour cost: oi ON Tabour cost means thé payment ‘made to the employees, permanent or temporary, for their services. Labour cast includes salaries and wages paid to permanent employees, Temporary employees, and also to employees of the contractet Here, salaries and wages include all fringe benefits lke Provident Fund Contribution, Gratuity, ES! ert so incentives, Bonus, ex-gralia, leave encashment, wages for holidays and the idle time ets.Dr, Lal N.Tanwani ) terial cost or labour cost which are involved in an tha’ of utilities, payment for brought out services, job thé in acre germed as expenses aitand Cort Contre, (Mar. 2015, Nov 2017) costilE 55 product service or time in terms of which costs are yosnin Es unt yg basically a unit of measurement like number (per 1000 es A) unit sed. I coal), length (per meter of cloth), volume (per litre of ye OF of power), area (per square foot of construction). Its r tor ight Pow tne and type of industry e it: as follows: of cost unl 10 types oe = Types LS re of wo | Examples: | ese ate used in| A tone of coal steel, ranufacturing industries 4 | hese are used in service | Passenger km,, bee ey | A) Cost Cente? tre: Meaning of Cost Cen! ‘a location, PeTson or item of equipment (or group of these) for is Accost centre i$ © ertained and used for the purpose of cost control. In other be as wien costs Tgenive is a converient Unit ofthe organization for which cost may be words, ascertained. ose of Cost Centre: eres es main purpose of ascertaining the cost of a cost centre is to control the cost ‘and to fix the responsibility of the person in charge of a cost centre for the control of cost of that centre. - Types of Cost Centre: Basically cost centres are of two types as following: _ ae Type Meaning Examples a) Personal Cost| It consists of person or a | Machine operator, Driver ofa | | Centre group of persons delivery van, Salesman, as Foreman | [b) Impersonal Cost | It consists of a location or an | Location: Factory, Sales area | Centre item of equipment or group of | Equipment: Machine, | | these Delivery Van | Q.11 Write short note on Direct Costs. r |X @et. 2014) ect Costs: 2 \ Direct cost has three components, direct. material ost) ditect-labour cost and direct expenses, sum of all direct costs is called prima cost, Direct Material Gost: \ Its the cost of basic raw material used for manufacturing a product. it becomes part of the product. No finished product tan be rrianufactured without basic raw materials. It is easily identifiablé.and chargeable to-the product. For example leather in leather wares, pulp in paper, sugareane’in sugar etc. Direct Labour cost /Bitect Wages: It is the amount of wages paid to those workers who are engaged on manufacturing line of conversion of raw materials into finished goods. The amount of wages can bei lllll..,dLadt_ Eee ee Ee Padma Coa ching Classes Dr. Lal! easily identified and charged Direct wages are also known as Productive labo ged to the product ; / ur : Mageying unit, Carpenter in rari Example of direct labour, Weaver IO Wert Oi aking, Labour in Q12 Ans: eens re making, Tailor i ff Construction wink ailor in ready made wear unit Direct Expenses: ne ie amount of expenses which is directly cha! Sc whieh may be allocated to product det. Eo ine used for manufacturing a cost Patterns etc. eo ae fractured Je to the product manu foe rarle hire charges of special “sf designing the product, cost of Write short note on Coding system in cost Accommting: Coding System: c Codification means assigning code numbers so 28 10 make it easier Oe a group of overheads. It has become increasingly important in are ogame also Known machine accounting system is adopted, the overead_ 268 "Tar. Seo) as standing order numbers. The following are the different systems being codification of overheads: The Numerical System. The Decimal System. The Mnemonic system. The Combined Code system. The Numerical System: The numerical coding system uses numbers so as to indic expenditure as well as specified account. It may use sequel group codes. Numerical coding may be done as under: ate the general category Of intial codes, block codes OF Manufacturing Overheads: 100 Manufacturing overheads control 101 Salaries Foreman 102 Overtime Bonus The Decimal System The decimal method also uses full number as well a6 the decimal number. i this thathod the full number indicates the specific group code and the decimal number represents sub group code. Decimal method can be used as shown below: 70 Factory Overheads 70.1 Rent of factory 70.2. Depreciation on Machinery The Mnemonic system cee nemanic system of coding uses alphabets and letters. These codes are c25/ to remember and are subjected less to error. on™ ees Coding can be done as follows: tn Distribution Expenses Administrative Expenses AE The Combined Code system: © \ The combined code system-uses lettersior ‘alphabets and numbers for identification of airneads. The letters.or alphabets indicate the specific group of overheads and the number represents the sUb group of bvarheads. Coding can be done under this. system as follows: SO-1: ‘SO inidicates selling overheads and 1 represents salaries to Salesmai RM-3: — RMindicat Repairs and Maintenance and 3 represents plant.8 Dr. Lal N.Tanwani ae eadma Coaching Classes Te PERO) CCS a. ke tion of Financial Ace: iting. 9.13 Write short note on Limitat ae Ans: Limitations of Financial Accounting: Limitations of Finan cal developed 28 2,ceparate branch of accounting out of the limitations of financial accounting Both Cost accounting and finanial accounting ate concerned with systematic ea Ahe bs nd presentation of financial data. Financial accounting reveals profit / loss of We f ences 8s a whole for a certain period. Cost accounting reveals proft / loss Of diferent product lines. It helps to’ decide the profitabilty of each process or each Product. Financial management does not help in Gay to day management of the organization. it suffers from the following limitations 4 It does not reveal profit or loss of ae department or product or process. It provides : information about the business as 4 whole. 2. Materials and supplies can not be controlled effectively. 3. Wages are not recorded by jobs, departments or services. 4. It does not provide information for fixation of prices, , 5. It can not measure the efficiency of the organization, 6. Financial accounting is a historical record. It does not help in controlling cost 7. Pricing is an important matter which can not be solved with the help of financial accounting 8. _It does not help in deciding break even point 9. Financial accounting does not help in forecasting, planning and budgeting. 10. It does not provide adequate information to outside agencies like the Government, Banks etc 11, It does not facilitate cost reduction which is very much necessary for cost control. It does not provide for control of material and labour 12. tis historical in nature | 13. Itdoes not classify expenses in direct and indirect, fixed and variable, controllable and non-controllable. 14. It does not help in decision making as it finds all the trading results during a certain period 415. _ It does not provide any control over idle capacity, idle time ete. | 16. _ It does not provide any data for inter firm comparison - ] Q.14 Explain the classification of cost on the basis of fuiietions.” (Oct 2018) } Ans: Classification of Cost on the basis of Functionsh\ \ \\ As per CAS-1 Costs should be classified according t:the ‘miajér functions for which the elements are used into the following‘mafor tunctidns*,1)Production 2) Administration 3) Selling 4) Distribution 5) Reséarch and Development. 4. Production Cost’ Ney 71 Production cost isthe: Gost) of all-item involved in the production of a product or service. It includes*all ‘diréct Eosts and all indirect costs related to the production. Production overhead, is\,the ‘indirect costs involved in the production process “Production overhead i8.also termed as factory overhead or manufacturing overhead _ For example: Deprecation of plant and machinery, Labour welfare expenses Insurance, Salaries of staff for production planning,QT 0 CtUO0©0)@C“C“—= Padma Coaching Classes 8 Dr. Lal N.Tanwani 2 Administra ion Costs: it iministratic ie ie SEE ae ED hares incurred st costs and also eee 8 Salaries of administrative and. accounts sta, General office SYP stn lighting, rates and taxes, telephone, stationary, postage eto eae a 3, ad repair and maintenance of office bulding ete Selling Costs: Selling costs are indirect costs related to selling of P! indirect costs in sales management for the organization. Selling relating to regular sales and sales promotion activities. Exampi— are included in selling cost are, salaries, commission and taver! personnel, Advertisement cost, Market research cost, Royalty services and include all ‘Costs include all costs Jes of expenses which 1g expenses for sales oducts OF 4. Distribution Costs: Distribution costs are the costs inc handling @ costs are completed in the works until it reaches the timate consumer. vist oF dictbution the costs incurred for distribution of product to consumers. EXSTP costs, transportation cost, Cost of delivering the products to customer S product from the time it is 5. _ Research and Development Costs. Research and Development costs are the costs for un Quality of present product or improve process of manufactur Market research ete. Research costs include cost of finding MN Tt Products, solving technical problems in manufacture etc. Developmen Costs for commercialization / implementation of research findings dertaking research to improve ‘2, develop anew product, ‘ig new uses of known ts include 1 What do you mean by Process Costing? Explain its applicability and necessity. ‘Ans: Meaning: A process means a distinct manufacturing operation or stage. In prt the raw material goes through a number of processes in a sequ finished product is finally produced. e.g, Production of coconut following distinct processes: (1) Copra crushing (2) Refining & (3) Finishing ocess Industries, lence before the oil involves the Process Costing: ‘ Process costing is a method of costing used to find out thé ost of process. Wheldon has defined Process costing, as ia tmethod of costing use ascertain the cost of the product at each stage ¢r operation of manufacture” According to ICMA, London “It tha form \af “Operation Costing where f the product in each d to Process Cost: RN According to.CAS-1)\vihen”the "pyodtiction process is such that goods are produced from a sequencé sf continyots-or repetitive operations or processes, the cost incurred during a period is eonsideréd as process cost. Applicability and-hecessity of Process Costing Process costing is applicable fo several mining, manufacturing and public utility industries e.g. mines and quarries producing minerals and ores; industries producingradina Coaching CASE 182: Dr. Lal N.Tanwani Q2. Ans: textiles, chemicals, soaps, pape’, Plastics, alcohol, refined oil, electricity, gas and so on. It becomes necessary to apply Process Costing to the industries belonging to any of the following categories: One Product. Many Processes! 1 A factory may produce a single UGH a number of procestes of dena It becomes necessary to find out the cost of each proce: partments 8S or department se control wastages, etc. parately fo Many Products, Many Cycles: A Bakery can use the same equipments to produce either bread produce only bread in one cycle and change over to production of Cakes ihe ae cycle. Each cycle is treated as a SeParate process so as to find out the cost of the tenn produced in a particular cycle or process, Many Products, Same Process: _ An Oil Refinery can obtain many Joint Products such as Refined Oil, Gas, Steam, etc in the same process. Process costing is employed t F esncie eoaia yed to ascertain the individual cost of What are the advantages and disadvantages of Process Costing? Process Costing has following advantages Tea 1g 'ges and disadvantages as compare to other Advantages: Periodical Determination of Costs: Process Costs can be allocated and determined for even a short period like a day, a week or a month. In Job Costing, on the other hand, costs can be colle + 5 Cte determined only after the job is complete, which may take months or even ea s Simple & Cheap: Process Costing is a much simple, easy and less ext ” pensive mett compared to other methods. There is no need for an elaborate ene a the direct costs of a job or a batch, \dentifying Managerial Control: Being a simple system to establish and operate, process Costing faciitates greater control of the management over costs, wastage, ete. Standard Processes and Products: & Since the processes and products are standard, it sreasy to’make. decisions regarding Pricing, quotations, tenders, etc. aN Bos Disadvantages: “A No Detailed Analysis: » Process Costing does not give.a detailed analysis of the costs as (a) It emphasizes the period rather than the-unlt drsthe:product/and (b) it gives an average cost rather than specific cost ofttie prodyct. Historical Costs; << \~ Process Costing gives only historical costs which are not useful for forecast of future trends, etc. . ination of percentage of Normal Loss, Wastage, distribution of costs over iets and joint products, valuation of work-in-progress involve estimates based decisions of the management.——————_ tC Padma Coachin Classes a3 83 Dr. Lal N.Tanwani Explain the term Wastes and losses in Process Costing. Ans: WASTES AND Losses manufacturing process is likely to give to some waste and losses, Waste: Waste may be invi i visible or visible. Invisible Waste means the loss of material by way of de etation, shrinkage, ete. This is also called Weight Loss as the material physically Aisappears, Invisible waste, obviously, has no sale value, Visible Waste means Tesidue such as sla¢ whether visible, has no ig also having no . Thus, Waste, sale value. oe eee ee Losses: Losses means scrap. It's avays lover than the cost of production leading to financial loss. ©, The cost of production ofa defective untt may be Rs 100, while it can be sold as Scrap for Rs 20 leading to financial loss of Rs 80. Q4, Explain the meaning of and Distinguish between then 9 Of Joint poset ba product {March 2019) Ans: Joint Products and By-Products According to CAS ~ 1, when a production process is such that from a set of same input, two or more distinguishably di duced together, products life ducts are produ of greater importance are termed as fom ates and products of minor importance are termed as by-products. e.g. In a petroleum refinery industry, petrol, diese! kerosene, naptha, etc. are produced jointly in the refinery process. The costs incurred prior to the poi joIntor bieproducts oe point of separation of the joi termed as Joint Costs. Joint Costs are (yon: costs of facilities or services employed in the output of two or more simultaneously produced or otherwise closely related ‘Operations, commodities or services. Difference between Joint Product & By Product: No. | Joint Product By-Product | 1. | Joint Product has equal economic | By product has less economic importance. importance. | |2. | Joint Product is produced at the same | By product are produced incidentally or | time. additionally." | 3. _| Joint product is produced from the same | By Product if produced from scarp. input ROOT oe 4, | Joint Product has greater effect on costs.\| By Pfoduct have small effect on costs. | Q5. How is apportionment of Joint Costs dond?\.> RIN NOR, Write a short note of apportionment of Joint cost. eee Ans: JointProductsi, “.” \ 5 Recording to CAS-4{in case joint products are produced, joint costs are allocated between the products’on a rational and consistent basis, Examples of such methods are (A) Physical Unit Method . (2) Average Unit Cost Method | (3) Survey Method | (4) Contribution Margin Method ——Neal Cait Classes 84 Dr. LalN, ey (5) Market Value Method (2) At the point of separation (b) After further processing and (©) Net Realizable Value Physical Unit Method: Many Joint products can be measured in the Physical units such as Number, volume, etc. Accordingly joint costs can be €pportioned on the basis of SUCH Units ¢ Sumber of units, in Kg, in Litres, ef6. The joint cost ig charged to the joint Products > the ratio of such units present in the joint products at the Point of separation, cag” ges an example of physical unis Used fr petoleum products whe each product; feughed certain value based on Its certain properties, may be caloric value ang these values become the basis of SPportionment of joint cost among petroleum Products. This method is simple and easy. It ig also technically right. H Method cannot be applied if the physical units of the two joint products The main defect of this method is that it Sves equal importance and val joint products Weight lowever, this are different ue to all the Average Unit Cost Method: Under this Method, joint cost (up to the point of Separation} Joint products Produced, to arrive at the Average cost per tHEPle method. Under this method all the products lower price, ) is divided by total units of * Unit of production. This is the oducts will have uniform cost per unit All May have mote or less the same price, High quality items may have a Survey Method: his method is based on AIS, BPPortioned over the joint the basis of (Weights), assigned to the prose nthe bas NG. The joint costs are divided into Fie costs ate €pportioned over the joint average method) or physical Quantities. In ther processed after the point of Separation, then all variables dded to the variable costs determined earlier. In this Way total 5. Market Value Method: Market Value Method: This is the most popular method because it makes\use| ofa apportioning joint costs. Under this method joint costs are ‘apportioned cn the basis of the respective market values of the products“ Hisher| priced pioducts are charged more costs because they can ‘absorb!_more eats Matket Wal Value i. units product x pice ofa upto joint produch. Market value at the point of Separation: \._/ ‘ 4 The joint costs up to the-splif ofnant ate apportioned in the ratio of market values e joint products at such,point, CAS-4.also mentions that for allocation of joint costs to roduc. joint products, the sales ‘values of products at the split off point ie. when the x become separately itlentifiable:niay become the basis. (b) Market value at finishéd state: total sales value of finished is iment of joint cost is the Bid fetes The a tal cons for further processing the as Ald ste es Bid a product separately. This method is useful wi point ai Tealistic basis forne Dr. Lal N.Tanwatih Padma Coaching Classes ie he use of this method are not sak it in saleable at the split-off state without further mee aration fre disproportionate is unfair where further it further processing costs after PO! or when all the joint products are not subjected t {c) Net Realizable Value: ‘ . are deducted From the sales valve of joint produets (at fini CE ae (i) Estimated profit margins (il) Selling and distribution expenses (ii) Post split off point costs. ished stage) the 8. Write. short note on Abnormal Loss. ee ‘Ans: Abnormal Loss j the Abnormal Loss ‘al circumstances in is part of the process loss, which is caused 4 oy owe! failure, Accidents 4 j factory, for example labour strike, Break down etc. {Abnormal loss is avoidable. It can be controled by the 1 precautionary measures. Abnormal loss occurs '" Cid determined according to the following formula Step 1 - Calculation of number of units of abnormal Joss: Input xX Units Less- % Normal Loss x Standard Output x x x by taking proper jement ae | loss. It is to normal Less- Actual Output Abnormal Loss Step 2 - Calculation of cost per unit gest Cost per unit = Total Process Cost_- Sorap Value of Normal Loss formal Loss Units Input Units = Ne ‘Step 3 - Calculation of cost of abnormal loss loss X Cost per unit Cost of Abnormal Loss = No. of units ‘of abnormal I (March 2019) Q7. Write a short note on Abnormal Gain. difference is ted production then the .cted loss, the Ans: Abnormal Gain .g is less than expe’ if the actual pro¢ called abnormal gain. difference is called as abr Calculation of cost of ‘abnormal gain Step 1 - Calculation Of Number Of Units Of Abnormal Gain. duction is more than the expe In other words when actual los: normal gain. Input x Units Ieee a Normal Loss © X_—units Standard Output x __Units Less- Actual Output X__Units ‘Abnormal Gain x_Units ep 2 - Calculation of cost per unit "Cost Per Unit = Total Proves Cast — Scrap value of normal loss tnput Unis = Normal Loss Units ~Calculation of cost of abnormal gain Cost of abnormal gain = No. of units of abnormal gain X cost per unitF Padma Coaching Classes 86 Padina Coaching Classs == 86: __Dr. Laf N.Tanwanl a Marginal. Costing i f Costing’ ’ Q1. What is meant by ‘Methods Of Costing’ and ‘Techni Distinguish between ‘Methods of Costing’ and ‘Techniques ques of Costing’? of Costing’, Ans: Methods of Costing: ¢ Methods of Costing mean the methods used for ascertainmentof bosts, Ascertainment of costs covers the collection of costs, classification-of Sosts, allocation of direct costs. to products, and the apportionment and absorption of oletheads’by products. There are the different methods of costing such “as Unit Costing, Contract and Process Costing, These methods of costing.efiabléthe ttanagement to determine the Total Cost of a Product, Contract or feces Nae Techniques of Costing: |) S\ ~ Costing methods are main|\\ Useful for,coltéction of cost data and determining the total cost of a prodiict, ‘Suct) costWaté must be analysed further for assisting the management in taking-decisions regarding production, selling, etc. Several Costing Techniques have been, developed for analysis of cost data for the purpose of management. Differént“Costing techniques have been developed for analysis of cost for different purposes. The main Costing Techniques are - Absorption Costing, Marginal Costing and Standard Costing, Q2,_ Whatis meant by Absorption Costing? State its limitations. Ans: Meaning: Absorption Costing refers to the analysis of the cost data for the purpose of allotment Of costs to cost units. In Absorption Costing Fixed as well as Variable Costs are charged to products. The technique of Absorption Costing thus refers to the principle of allocation, apportionment and absorption of costs used for ascertaining the cost of a product, process or contract. imitations: The technique of Absorption Costing suffers from the following limitations: Includes Fixed Costs in Closing Stocks: The principle of Revenue-Cost Matching is ignored in Absorption Costing. According to the matching principle, the costs of one period should not be carried forward to the next period. In Absorption Costing the Fixed Costs are charged to products and hence included in valuation of the closing stock. Thus the fixed costs of one year are carried forward through the closing stock to the next year which is against the matching principle, Arbitrary Absorption of Fixed Costs: In case a concern produces a number of products, the Fixed Costs are charged to each product on an arbitrary basis. This may give a misleading picture to the management. The management, may be for example, discontinue a product as a loss- making one, on the basis of data furnished by Absorption costing, while in fact it may be eaming gross profits Ignores Cost - Volume ~ Profit Relationship: Absorption costing ignores the Cost - Volume — Profit Relationship. Absorption Costing cannot reveal the effect of change in volume on costs and profits. It cannot assist the management in taking important decisions regarding production and sales policies Unsuitable for Management Decision Making: 7 Management has to take many decisions such as which product to produce more which product to discontinue, what is the lowest price to be charged for a special order oF an export order and so on. For such decisions, the management must know (a) thePadma Coaching Classes 287: DritatNn Tanveant direct, variable cost of each unit of product and (b) the relationship between Cost - Volume _Profits or how the costs and profits will change due to a change in volume or output. Absorption Costing fails to provide such analysis Q3, What is Marginal Costing? State its Characteristics. it ignores the distinction between inal (Casting is, on the other hand, entirely based on the distinction between Fixed\Costs and “Variable Costs Marginal Costing classifies the total costs into Fixed Costs and Variable Costs. In Marginal Costing only Variable Costs are chargéd,to.the product | Variable Costs vary with level of output and hence are ‘Product: Gusts \theretarssorily Variable Costs are charged directly to the products. the Fixed Gost are Got charged to the product. Fixed crater are related to period rather than Yeval of output. In Margina) Costing, Fixed Coste ‘peing ‘Petiod Costs’, Bre, drecty transferred to the Costing Profit & Loss A/c forthe relevant period. “| SJ NA Ans: Introduction: whack of Absorption Costing is that The basic dra Fixed Costs and Variable Costs. The technique of Margi Definition: \ According to ICMA, \ “the ascertainment, \by> differentiating betw marginal costs, and of the effect on profit of ¢ output.” een fixed and variable costs, of hanges in the volume and type of Characteristi The above definition brings out the followin; Costing: (1) Marginal Costing is the ascertainment of Marginal Cost by differentiating betws Fixed Costs and Variable Costs. (2) Marginal Costing is also the ascertainment of the effect on profit of changes in the volume and type of output. 9 characteristics/aspects of Marginal een Q4. State the application/advantages of Marginal Costing. (IMP) ‘Ans: Marginal Costing is an effectively applied by the management in taking several policy decisions and in controlling the costs. The application/advantages of the Marginal Costing Technique are as follows: Decision Regarding the Marginal Unit: Marginal unit refers to a single additional unit batch of products, an order, a process, etc. Manage! decisions regarding the additions or discontinuance 0} Management has to decide whether to Increase or decrease the production of a single product. as it or single additional block of unit such as ment has to frequently take f the Marginal Unit. Thus, a) b) Continue or discontinue a batch of product. c) Accept or reject a specific order. d) Continue or discontinue a specific process e) Add or discontinue a department, and so on. These decisions are finalised on the basis of Marginal Cost of each option. Marginal Cost denotes the cost of doing or not doing a certain thing Marginal Cost helps the Management in ascertaining the cost of an option and taking decisions as to which Cptionitorscceptior reject. Thus, by analysing the Marginal Costs, management can Continue op aicconninngrease or decrease the production of a product, whether to inue a process or a department and so on. 2 cision Reaardi ‘lisa s im Pro Marginal Costing helps the managemenp nagement The Break-even chart and the ProfitsVolunie eenaing th t profit , Sent in: deci ¢ most profitable product-mix. decide upon the quantity of each product te ratio for each product ean be studied 10 to in the maximum Contribution and Profits. That Product-M js the optimum Product-Mix. lx Which yields the maximum possible profitsSE core ee. Padma Coaching Classes 2 BB: Dr. Lal N.Tanway S. Decision Regarding Utilisation of Scarce Resources; Hany resouoss such ae leu MACKEY, ra Material or MANE I9 In shen Py Supply, the contribution in a relation to the Key factor can be worked out. The Product - which yields the highest Contribution Per unit ofthe scarce factor can be produced large quantities to derive the maximum profits possible. 4 4. Decision Reaarding Pricing: Marginal Costing helps the management in taking price decisions. In Absorption Costing, the prices are fixed 80 88 t0 cover the total costs which include Fixed Costg a well as Variable Costs. In Marginal Costing, however, the price can be fixed on the basis of only Variable Costs 5. Decision Regarding Make or Buy: ce Management has to decide whether it would be more profitable to manufacture a product ot a component in-house rather than buying it from outside, Hence, The concern should make an article itself if its Marginal Cost is lower than the market price of the article on a 6 Cost Control: ¢ ‘S A Marginal Costing deals with Variable Costs.wifich\ ate Sasjer.t6 ebhtrol, Fixed Costs arise in relation to time and hence are not conttgliablé.in the short run. Thus, once the rent of the factory premises is fixed”by agreement, thé-fanagement has no control over it. The Variable Costs, on thetlier hand, ‘aré,ditéct costs of material, labour and SxPenses which are agreeable.to tontrol) Flexible Budgets help the management in controlling the marginal costs. “Break-eveh Charts and PV Ratios also help the management in, eontrallig cost’and) ‘Maximising the profits. QS. Explain the limitationsidisedvantages of Marginal Costing. (March 2019) Ans: Marginal Costing Teetinique has certain limitation taking any major decisions on disadvantages are: } is which should be considered before the basis of Marginal Costs, etc. These limitations or Fixed Costs Cannot be Ignored in Long Run: Marginal Costing completely ignores Fixed Costs. While this may be accepted in the short term, Fixed Costs must be considered in the long run. With large scale mechanisation, Fixed Costs are the major costs of a business which cannot be ignored by any prudent management while taking important decisions regarding production and sale. In the end, the business must cover its Variable as well as Fixed Costs. Thus the price of a specific order may be quoted on the basis of the Marginal Costs, but normal prices must be so fixed as to cover the Marginal as well as the Fixed Costs in the long run. Fixed Costs should be considered in Stock Valuatior Marginal Costing ignores the fixed Costs for the purpose of valuation of stocks. However, Fixed Costs are also costs incurred in order to produce the products and should be apportioned to the products on some reasonable basis. \t is, therefore not correct to entirely disregard Fixed Costs while valuing the closing stocks, Since the stocks are undervalued, a Profit & Loss Account based on Marginal Costing does not give a true and fair view of profits of business for the relevant year. _ Notapplicable to Contract Costing: _ Marginal Costing is not useful in Contract Costing, since it ignores Fixed Costs in5. Assumes Fixed Production Fixed Costs are fixed only is Capacity: rig ingrean Telation ¢ duction capacity. If the production capacity ‘ed or decreaseg Substantial, the Fixed Costs also change ally. Thu ay aereaks nea egarding adding a new process or a new department lI Marginal Cueto” capa increase in the Fixed Costs. This will change all Marginal Cost Equatio city and hence ns 6. Profit Volume Ratio lanores pric, The Profit Volume Ratio ignoreese changes: oe oe es the effact af changing process on costs and pi Thus the costs of raw mater ect Oa GARG Gnd if tut change the PV Ratio. ial, labour or the selling prices may chang Q6, Explain the importance of Break Even point analysis. (IME) Ans: Break Even point analysis Break even point is the point at whi nue is equal to total cost. It is that level of output (or sale) where there ety no loss. At this stage contribution is Just sufficient to absorb the fixed cost. “The organisation starts eaming profit when the Output or sale activity crosses this point, Output or sales below this point results in loss a) Calculations of B.E,P. in Units Fixed Cost \ ee oar isons af ee Cont ae | (in units) Selling price- Variable” S\N | er unit b) Calculation of B.E.P. in Rupses (Aihou! ts) | BEP. Be Bay (inRs.) \ Fixodeodk PRIVY Following are the importance of BEP: It facilitates determination of selling price which will give the desired profits. 4 2. __ It makes it possible to divide the sales volume to cover a given rate of return on capital employed. 3. The management can forecast profit and volume at different levels of activity. 4. It suggests to make a change in sales mix. 5. _Ithhelps management to do inter firm comparison of profitability 6. _It shows the impact of changes in costs on profits. 7. It enables the management to plan for the optimum utilization of capacity Q7. Write a short note on P/V Ratio. (IMP) Ans: Profit / Volume Rati Marginal costing, by its definition means, ascertainment of effect on profit by changing the volume of output. Such ascertainment of impact of changes in the volume of output on profit is calculated by profit volume ratio. FORMULAS 1) PIVRatio = Contribution x 100 Sales OR 2) PIVRatio = _ Fixed cost+ Profit x 100 SalesPP Patna Cochin Casa 80: De a a OR 3. 8 = Changes inproft_ x 199 ) IV Ratio ‘Changes in sale P Uses of PIV PN ratio helps to decide Variable cost for any given sales volums. . \ Contribution for any given sales volume, ™\s. \ Mee Sales volume for any given variakle-cost.\\ \\.\ 7 Sales volume required to.earn'desired profit, > Break even point. ee) Fixed cost for any'bre x yen pat. Oo ad A OARON= \ Write a short.note on Margin of Safety, Ans: Margin of Safety: Margin of safety is the difference between the a ji i Ctual sales and the by Margin of safety indicates the strength of a business, High aa a Lani the profit will be earned even if the fall in the sell r ° ing price. Margin of safety is also popularly known as Mle. 2 Qs. (IMP) EORMULA a) Calculation of Margin of Safety in Rupees (Amounts) Margin of safety (Rs.) Actual Sale — BEP Sale OR , Profit Margin of safety P/V Ratio Calculation of Margin of Safety in Units Margin of safety (units) = Actual sales (units) - BEP (units) Withe margin of safety is large the business prospects are strong and if the margin of ‘safety is small the business prospects are weak Significance of Margin of Safety: Being sales beyond break even point, it indicates the safety margin available to the _ firm in terms of sales revenue fgin of Safety is the cushion available in business cycles. When sales start falling, € firm will not incur losses till its margin of safety is reached. Thus, firms with high N of safety can survive ups and downs in business whereas those firms 19 with very low margin of safety can not face severe competition ctive of the management should always be to maximize the margin of safety, oviding stability and safety to the firm.at. Ans: ens Q2. Ans: pat do you mean by Standard costing? wt tion: Intro ee : The teonnique of standard costing has been developed '0 help the management in Cost Gontrol. Actual cost of production can be controlled if the ‘management in Cost Control. ual cost of production can be P anagement is aware of what the 8 controled if the MANGE nique of standard costing costs ought to be’, before startin rn. the management in eee eee the Standard Costs oF what the cost g in advance Tm is are set uP for each product, helps ought to be. In standard costing first the standa hen the Actual Costs ar standard Costs and finally, the tt re compared with cate tual Costs |S ‘analysed. This rence (variance) between the Standard an helps in controlling the costs as and when they are actually incurred i ,-determined standard costing is a system which make use of Pre of cost aosounting MCh TE abour and overhead 12 tandard costs relating to e fF st ig to each element of or a for each product then actual costs et UP ‘ance) between standard costing first the standard costs are s siercompared with such standard costs and finaly the difference (var Sandards and actual costs is analysed DEFINITION " as “the preparation and use of According to I.C.M.A., Standard Costing is define ; Fs standard: costs, their comparison with actual costs yah their causes anc point of incidence”. and analysis Stages: Thus, from rd Costing System involves the following stages Preparation and Use of Standard Costs, Comparison of Standard Costs with Act. Analysis of Variances as to their causes and where they arise) the above definition, itis clear that Standal ial Costs & point of yy and f incidence (reasons wh} (March2019) (IMP) .s of Standard Costing. ‘osting System: Rs Cost Control: Rae Seevad Costing enables the management.t9, Combate: trol actual costs.8s anckwhigh they.orcur Explain the advantage: lowing are the advantages of Standard Foll adtial costs with Standard costs in order to cont Prompt Evaluation of performah \ ETerdord Costs act as the yardstick, for,evaluation of performance of a concern eraivjard costs derfote-what the” costs "ought to De’ The actual costs are compared With the standard cost td evalyat6 the actual performane® of the concer. The reasons Tor difference between‘the Standard and actual costs investigated to control wastages and inefficency. Further, the evaluation © ‘done quite promptly. Thus as oon as material is received, its actual price is compared with Standard price to | is consumed, its actual usage is ascertain the price variance. As soon as the matelia ‘compared with the Standard usage to ascertain the usage variance and so on. Thus, the variances are investigated promptly and remedial acton is taken in time. ‘Planning: xcellent tool for management planning. Standard costing dard Costing is an © 3g with budgets help management in planning the future activities of production , ete, of the concern. PY epeeDY, LAIN Sanwanj - 92 ‘Padma Coaching Classes es: > Tet fa oat 7 a ates from period to period, The actual cost canno, actual i i Id be based on fixing selling price. Selling prices shou! 4 sabe Senin Standard Cost provides such stable basis for fixation of Prices, 5. Standardisation of Operation: i f the process t of Standard costing system involves a deep study o of Frodieten cell up different standards for input-output, labour efficiency, budgets for overheads and so on. This in itself leads to Standardisation and simplification of products, methods and operations of the concern and elimination of waste ang inefficiency 6. Fixes Responsibility: Standard costing system fixes the responsibility for each department or manager. The department or manager has to explain the difference between the standards set and the actual performance. This Increases the productivity and efficleicy of the organisation Standards act as Incentives: ‘The standards set act as powerful incentives and ‘Motivation to work harder to achieve them, 8. Simple Record keeping: Standard Costing involves simple records slice materials and labour records are kept In terms of Standard Rates which are constant, This simplifies book-keeping and Q3. Explain the Dis-advantages of Standard Costing. (March 2019) Ans: Disadvantages of Standard Costing: a Difficult and ensive to Establish Standards: itis very difficult to correctly establish standards. Establishm management. Standards Need Revision: ao The standards once set cannot be continued forever, The Stafidards, need revision at regular intervals along with market conditions. * 4. Actual Cost Records Cannot be Eliminated: \s, \ bE The organisation needs to maintain -beside StandarcsCost Records, the routine cost to determine actual costs also. Actual dosis are renuired fo compute Variances, reconcile Cost profits with financial profits, to détermine sealistic prices, to prepare budgets and So on. So it is not possible to eliminate actuaf or historic costing altogether. This leads to duplication of work since the costing:départment has to maintain two sets of records for actual as well ag standard)cost 5. Variance Analysis 8 Complex: Variance between Standard and actual costs is not due to a single factor. Thus ‘Material Cost Variance may be due to both Price and quantity Variance. Further Price | Variance may be due to inflation, inefficiency of purchase department and wrong production planning, Quantity Variance may be due to wrong mixture and excess wastage. The exact role of each factor in causing the final material cost variance is difficult to judge and compute.—— a Padma Coach Classes f Dr. Laf'N.Tanwant 6. pifficuld to Fix Ree onsibility: 3 It to ascertai . fe it is. diffu in the material cost variance purchase department or the production department or the I Gifficut tO fIX exact responsibilty for Variance, Stand" advantage Of cost control and cost reduction ibility is on the ‘oon. Since, it is es its main This respons! abour and S 'd Costing [0s qa, What are the different types of Standards? nd Price Standard standard of Standards IS determined in ns: Standards are broadly divided into Quantity standard ‘es of standards — means a pre-determined specification. The specification respect of quantity as well as price. Thus, there f° Quantity and Price. Both Standards taken together 9° ring a pi Standard Quantity of raw material required for manufacturing 7 turing a product Standard Price will give the Standard Cost of raw material for m2? Other types of Standards: fferent standards can be laid down on the basis of . Period or length . Level of attainment sp dard or dard, Current Stan e Basic sta storical Standard. The of the above types According to the length of period, there may b' Combined Standard, Normal Standard, Expected Standard Quantity Standards and Price Standards thus may be of nY On the basis of Period or Length: 4. Basic Standai fal Bae em Standard is the Standard which is “established for ues Unstone gesie ‘Adetite period which may be a long petiod of time.” — CMA. nee mall concern standard is hardly changed. Though a basic standard is suitable for a small conc sith stable business concitions it may become outdated due to changes ale business conditions. 2. Current Standard: A civent standard is the standard which is “established for use over a short period of time, and is related to current conditions” — ICMA, Though such current standard is Useful and relevant, itis expensive for a small concern to regularly study the current conditions and frequently revise and update its Standard 3. Combined Standard: Cos P combined standard uses both the Basic as well.as'the Culfent Standard. It thus Combines the advantages of both Standards~ The, actual performance can be compared with the basic as well as the current Standart 1S,assgss the long term and short term efficiency. EES NO NDS For example, the quantity Standard’for-raw inateriahmay be a basic standard or a current standard, or it maybe the ideal standard or normal standard Before determining Standard Costs), mariagement-mnust decide which type of Standard is to be used. Y ~ Ithelps in assigning responsibilities \\ to individuals \ 5 . It provides motivation to individuals” -—~. Q8. Write a note on miterjal Varisinoes.>~ (mp) Ans: Material Variances; (1) Material Cost Variance (mcv) Material Cost Variance is the difference between th 'e Standard Cost of material specified for the output achieved and the actual cost of direct material used. MCV = (SQX SP) - (AQ X AP) = Material Cost Variance = Standard Quantity of Material SP = Standard Price Per Unit = Actual Quantity of Material Used = Actual Price Per Unit, (2) Material Usage Variance (MUV) i hich arise due to the Material Usage Variance is that portion of material cost var lance w difference between Standard Quantity specified for Actual Output and Actual Quantity used for the actual output. MUV = (SQ- AQ) x S.P. 1UV Material Usage Variance teeta ctancors Goss of Material AQ = Actual Quantity of Material Used ‘SP = Standard Price Per Unitee ee aa Dr. Lal N.Tanwani ching Classes Wee: Coa jal Price Variance (MPV) ? : er tra’ hich arise due to the difference teri al Meween Standard Price specified fr the Actual Output and t MPV = (SP - AP) XAQ Material Price Variance Standard Price Per Unit Actual Price Per Unit Actual Quantity of Material used Verification MCV = MUV + MPV Here, MPV = SP