Course Pack

COURSE PACK
Subject Title: COST ACCOUNTING

Course Code: 204
BBA-II SEM- 2023-24
Instructors: Dr. Aarushi Kataria
Mr. Sourabh Bansal
Mr. Rahul Gupta
Course Leader: Dr. Aarushi Kataria
Forwarded by: HOD Approved by: Director
Bharati Vidyapeeth Institute of Management & Research, New Delhi

An ISO 9001:2015 & 14001:2015 Certified Institute
A-4, Rohtak Road, Paschim Vihar-110063
(Ph.: 011-25284396, 25285808 FAX: 011-25286442)
1|P age For Internal Circulation

BVIMR SNAPSHOT
Established in 1992, Bharati Vidyapeeth (Deemed to be University) Institute of Management and Research (BVIMR), New Delhi
focuses on imbibing the said values across various stakeholders through adequate creation, inclusion and dissemination of
knowledge in management education.
The institute has over the past few years emerged in the lead with a vision of Leadership in professional education through
innovation and excellence. This excellence is sustained by consistent value enhancement and initiation of value-added academic
processes in institutue's academic sytems.
Based on the fabulous architecture and layout on the lines of Nalanda Vishwa Vidyalaya, the institute is a scenic marvel of lush
green landscape with modern interiors. The Institute which is ISO 9001:2015 certified is under the ambit of Bharati Vidyapeeth
University (BVU), Pune as approved by Govt. of India on the recommendation of UGC under Section 3 of UGC Act vide its letter
notification No. F. 9 – 16 / 2004 – U3 dated 25th February, 2005.
Strategically located in West Delhi on the main Rohtak Road, BVIMR, New Delhi has splendid layout on sprawling four acres of
plot with 'state-of-art' facilities with all class rooms, Library Labs, Auditorium etc., that are fully air-conditioned. The Institute that
has an adjacent Metro station “PaschimVihar (East)”, connects the entire Delhi and NCR.
We nurture our learners to be job providers rather than job seekers. This is resorted to by fostering the skill and enhancement of
knowledge base of our students through various extracurricular, co-curricular and curricular activities by our faculty, who keep
themselves abreast by various research and FDPs and attending Seminars/Conferences. The Alumni has a key role here by
inception of SAARTHI Mentorship program who update and create professional environment for learners centric academic
ambiance and bridging industry-acdemia gap.
Our faculty make distinctive contribution not only to students but to Academia through publications, seminars, conferences apart
from quality education. We also believe in enhancing corporate level interaction including industrial projects, undertaken by our
students under continuous guidance of our faculty. These form the core of our efforts which has resulted in being one of the premier
institutes of management.
At BVIMR, we are imparting quality education in management at Doctorate, Post Graduate and Under Graduate levels.

PROFILE OF COURSE INSTRUCTORS
Dr. Aarushi Kataria is working as an Assistant Professor at BVIMR, New Delhi since last 11 years till date. She has enriched
experience in the field of finance and marketing. She has been qualified UGC-NET and completed her Ph.D. in Management in
2016. She has one book and 11 research papers to her credit in the renowned journals. She has attended many Conferences and
FDPs at National and International level.
Mr. Rahul Gupta is working as Assistant professor (Finance) in BVIMR from last seven years. He is graduated from Delhi
University in commerce stream. He has done post-graduation from Guru Gobind Singh Indraprastha University in finance
specialization. He has cleared National Eligibility Test conducted by University Grants Commission two times, not only this he
has also been awarded with JRF from University Grants Commission. He has attended many conference and earned best presenter
award in two conferences. He has published more than 10 research papers in various journals, which includes UGC care journals
as well. He has also attended many webinars and FDPs to enhance his knowledge.
Mr. Sourabh Bansal is working as Assistant Professor at BVIMR, New Delhi having a experience of 6 years in education industry.
He is pursuing his PhD from Jamia Millia Islamia University in field of Finance. His education background includes MBA
(Finance), UGC NET, BBA along with he is certified in Financial Modelling from IMS Pro School. He has good number of
publication in Scopus and ABDC journals and hands on experience in organizing National and International Conference. He is an
enthusiastic researcher learning different statistical tools like Eviews, SmartPLS and Python to gain insights about research world
and can explore to education industry extensively.

Index
Unit Topic Page No.
Course Outline
 Course Overview
 Learning Outcomes
 List of Modules
 Evaluation Criteria 4-14
 Books Recommendation
 Session Plan
 Mapping lecture with course learning outcomes
 Contact Details
Introduction
 Definition
 Nature of Cost Accounting
 Scope of Cost Accounting
 Objectives of Cost Accounting
1  Tools & Techniques of Cost Accounting 15-23
 Advantages of Cost Accounting
 Limitations of Cost Accounting
 Limitations of Financial Accounting
 Difference between Financial & Cost
accounting

Introduction of Cost Accounting
 Definition of Costing, Cost Accounting and Cost
Accountancy
 Need for costing / objectives of cost accounting
 Advantages of Cost Accounting
 Limitations of Cost Accounting
 Financial Accounting vs. Cost Accounting
2  Cost: its meaning & role 24 – 42
 Cost Classification
 Structure of Cost Sheet
 Importance of Cost Sheet
 Components of Cost
 Performa of Cost Sheet
 Practice Questions
 Additional Notes (if any)
Budget & Budgetary Control
 Meaning & Definition
 Objectives of Budgetary Control
 Advantages of Budgetary Control
3 43 – 52
 Limitations of Budgetary Control
 Types of budgets
 Practice Questions
 Additional Notes (if any)
Marginal Costing
 Meaning & definition of Marginal Costing
 Advantages of Marginal Costing
 Disadvantages of Marginal Costing
4.  Absorption Costing Vs Marginal Costing 53 – 58
 Cost Volume Profit Analysis
 Break Even Analysis
 Assumptions underlying break even analysis
 Margin of Safety

5.
Standard Costing
 Definition & meaning of Standard Costing

 Advantages of Standard Costing
 Limitations of Standard Costing 59-72
 Variance Analysis
 Material Cost Variance
 Labour Cost Variance
 Practice Questions
Previous Year Question Papers

 Template Internal Examination
6. 73-125
 Sample Internal Examination Papers old template
 University Examination
7 Case studies 126-

BHARATI VIDYAPEETH DEEMED UNIVERSITY
INSTITUTE OF MANAGEMENT AND RESEARCH
Course Outline
BBA- Sem II
ACADEMIC YEAR 2023-24
1. Course Code: 204
2. Course Title: COST ACCOUNTING

3. Course Overview:
To provide students with a firm foundation in both theoretical and practical concepts and applications to
meet the various needs of business organizations at a global level. Also, to provide students with an in-
depth knowledge of management and business concepts.
This course seeks to give an understanding of the ways in which management accountants can provide
relevant information for a variety of decisions to be made in managing any organisation. On completion
of this course, students should be able to identify, use and interpret the results of costing techniques
appropriate to different activities and decisions; formulate and use standards and budgets for planning and
control purposes and transfer pricing systems in businesses; appreciate the need to relate cost accounting
systems to contemporary thinking about organisational planning and control.
Programme Objectives (PO):
1. Developing Critical and Analytical Thinking Abilities
2. Creating Social Sensitivity and Understanding CSR, Ethical and Sustainable Business Practices
Demonstrate sensitivity to social, ethical and sustainability issues
3. Developing Entrepreneurship Acumen
4. To impart basic managerial accounting knowledge
5. To develop your leadership capabilities to undertake key roles in the management of
organisations.
6. To provide you with the ability and method to analyse a cost accounting and controlsystem
7. Demonstrate Ability to work in Groups
8. Demonstrate understanding of social cues and contexts in social interaction
9. Develop Ethical Practices and Imbibe Values for Better Corporate Governance.
10. Understand ethical challenges and choices in a business setting
11. Demonstrate understanding of sustainability related concerns in varied areas and analyze Global
Environment and its Impact on Business

4. Learning Outcomes (CO):
After undergoing this course, the students will be able to:

CO1: Students will learn the basic fundamental terms used in cost accounting and business.
CO2: Students will understand the cost accounting procedures.

CO3: Students will be able to analyze the use of relevant cost accounting models, standardsand
information to analyze given business scenarios.
CO4: Students will be able to comprehend the leadership capabilities to undertake key roles in the
management of organizations.
CO5: Students will be able to synthesis the cost accounting and control system.
6. CO-PO Mapping
CO/PO PO 1 PO 2 PO 3 PO 4 PO 5 PO 6 PO 7 PO 8 PO 9 PO10 PO11
CO 1 2 1 2
CO 2 1 3 2 2 3
CO 3 1 2
CO 4 2 3
CO 5 1 2 2 2
7. List of Topics/ Modules:

Topic/ Module Contents/ Concepts
 Definition, nature and scope of cost

accounting
 Limitations of financial accounting
 Need of cost accounting
Module I: Introduction
 Advantages and limitations of cost
accounting
 Difference between financial and cost
accounting.

 Material, Labour and other expenses
Module II: Cost accounting an
 Classification of cost and types of costs
introduction
 Preparation of cost sheet
 Methods and techniques of costing
 Definition, meaning and objectives of Budgetary
control
Module III: Budget and Budgetary
 Advantages and disadvantages of budgetary control
Control
 Types of budget
 Preparation of flexible budget and cash budget
 Meaning and various concepts
 Marginal cost
 Contribution, P/V Ratio, breakeven point
Module IV: Marginal Costing  Margin of safety
 Definition and meaning of standard costing

Module V: Standard Costing  Advantages and Limitations of standard costing
 Variance Analysis- Material and Labour Variances

only

8. Evaluation Criteria:
Component Description Weightage for

100 marks
It will be based on conceptual questions and situation specific
application oriented questions. End term exam will cover both
1.End term Exams 60 %
pre mid-term and post mid-term course coverage. Course
readings are an integral component of learning in this course.
There will be two Internal exams of 10 % weight age each. They
will be based on conceptual questions and situation specific
2.Mid Term application oriented questions. Course readings are an integral
20 %
Exams component of learning in this course. At least one of the
questions will be based on these readings which will not be
specified to the students.
Students will be awarded marks for active and constructive
3.Class
participation in class. Students are also required to submit
Participation & 10%
reflective notes individually at the end of each class.
Reflective Notes
(Reflective notes are collection of notes, observation, thoughts
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and learning that the students have experienced after attending
the class. The reflective notes will include only the key learning
and key takeaways which the students got from the
class.)
Students shall be Evaluated 2 times through any of the CES
5. Continuous activities which includes Class test, Case Studies, Quiz on
Evaluation Moodle, Presentations etc.

10 %
System
(CES)
7. Recommended/ Reference Text Books and Resources:
1. Cost & Cost accounting (Theory & Problems) by M.N Arora 4th Ed,Vikas
Text Books
Publishing House.
1. Advanced Cost Accounting by S.P.Jain & Narang

2. Cost Accounting by S.N. Maheshwari
Course Reading
3. Cost accounting by Robert N Anthony
4. Cost accounting by Paul S Kumar.
1. www.cimaglobal.com
2. www.accountancyage.com
Internet
3. www.reuters.com
Resource:
4. www.businessweek.com
5. www.acca.co.uk

6. Session Plan:
Reading Due by the
Lecture
Topic to be discussed students before Learning outcome
No.
coming to the class
Cost accounting
(Theory, Problems & Solutions) by M.N Arora 4th edition
Module 1 : Introduction
1 Definition, Nature & Scope of cost Chapter-1 LO1

Accounting Page no. 1.6 - 1.9
Limitations of Financial Accounting,
2 Difference between Financial & Chapter-1 LO1
Cost Accounting Page no. 1.9 - 1.11
3 Advantages & Limitations of cost Chapter-1 LO2

Accounting Page no. 1.5
Meaning of Cost Accounting, Need of Cost
4 Chapter-1 LO3
Accounting Difference between Financial
Page no. 1.2 - 1.3
& Cost Accounting
Module 2 : Cost Accounting an Introduction
5 Classification & Types of costs Chapter-2 LO3

Page no. 2.1 - 2.3
6 Methods & techniques of costing Chapter-2 LO3
Page no. 2.4 - 2.16
7 Preparation of cost sheet Chapter-2 LO2
Page no. 2.17 - 2.18
Page no. 2.17 - 2.18
Page no. 2.17 - 2.18
10 CES-1 Class Test-1
Module 3 : Budget and Budgetary Control
11 Meaning, Advantages, Limitations of Chapter-12 LO1 & LO2

Budgetary Control, Types of Budgets Page no. 12.1 - 12.17
12 Chapter-12 LO3
Preparation of Flexible Budget
Page no. 12.18 - 12.22
13 Chapter-12 LO3
Preparation from Flexible Budget
Page no. 12.27 - 12.52
14 Chapter-12 LO3
Preparation of Cash Budget
Page no. 12.27 - 12.52

15 Chapter-12 LO3
Preparation of Cash Budget
Page no. 12.27 - 12.52
16 CES-2 Class Test-2
Module 4 : Marginal Costing
Marginal Costing-meaning, advantages,

17 Chapter-9 LO1 & LO2
disadvantages. difference between marginal
Page no. 9.1 - 9.19
costing & absorption costing
Cost-Volume Profit Analysis, Break Even-

Analysis, Practical Application of CVP
Page no. 10.1 - 10.3
Analysis
19 Chapter-10 LO3
Marginal Cost, Contribution, P/V Ratio
Page no. 10.4 - 10.3
20 Practice on problems based on concepts of Chapter-10 LO3

C-V-P Analysis Page no. 10.26 - 10.52
21 Practice on problems based on concepts of Chapter-10 LO3

C-V-P Analysis Page no. 10.26 - 10.52
Module 5 : Standard Costing
22 Definition, Meaning, advantages, Chapter-10 LO1 & LO2

Limitations of Standard Costing Page no. 10.1 - 10.6
Difference between standard costing &
budgetary control; Standard Cost &
Page no. 10.1 - 10.7
Estimated Cost
Difference between standard costing &
budgetary control; Standard Cost &
Page no. 10.1 - 10.8
Estimated Cost
Meaning of variance analysis, Variance
Analysis for Material Variances-
Page no. 13.9 - 13.11
Introduction
Problems on Material Variances
Page no. 13.12 - 13.18
Problems on Material Variances
Page no. 13.12 - 13.18
Labour Variances- Introduction
Page no. 13.19 - 13.25
Problems on Labour Variances
Page no. 13.19 - 13.25
Problems on Labour Variances
Page no. 13.19 - 13.25
8. Contact Details:
Name of the Instructors: Dr. Aarushi Kataria, Mr. Sourabh Bansal and Mr. Rahul Gupta
aarushi.malhotra@bharatividyapeeth.edu
Email: rahul.gupta@bharatividyapeeth.edu
sourabh.bansal@bharatividyapeeth.edu
8447810000- Dr. Aarushi Kataria

Contact Number: 9716246561- Mr. Rahul Gupta
7206461344- Mr. Sourabh Bansal
Office Location: Paschim Vihar New Delhi
Telephone: 011-25284396
Website: Bvimr.com
Office Hours: 9.00 am to 5.00 pm

UNIT-1
Introduction to Cost Accounting
Definition
Cost Accounting is that branch of accounting which deals with presenting and providing accounting information
to the management in a systematic way so that it can perform its management functions of planning, controlling
and decision-making in an effective and efficient manner. It acts as a ‘decision-making support system’ to the
management.
It assists the management in creation of policy and day-to-day operation of an undertaking. Thus, it relates to
the use of accounting data collected with the help of financial accounting and cost accounting for the different
purposes such as:
1) Formulation & setting up of plans/ strategies.
2) Planning & controlling the operations of the firm.
3) Taking decisions & selecting the best course of action.
4) Communicating information to the employees.
5) Optimizing the use of resources.
According to American Accounting Association, Cost Accounting is “the application of appropriate techniques
and concepts in processing historical and projected economic data of an entity to assist management in
establishing plans for reasonable economic objectives and in the making of rational decisions with a view towards
these objectives”.
Nature of Cost Accounting

Cost Accounting is the most effective tool of the management for planning and decision-making. The features of
cost accounting are as follows:
1) Analysis & Interpretation of data: It deals with the collection of accounting and other data and analyses,
interprets and communicates the relevant information to the management which is effectively required by
the organization for taking decisions on various aspects of the business.
2) Future-oriented: It is a forward-looking tool of the management. It analyses and interprets historical data
for projecting the future trends of the different activities of the enterprise.
3) Serves as a yardstick: It acts as a yardstick for measuring the effectiveness of managerial performance
as well as the level of performance of various operational and non-operational activities of the business.

Scope of Cost Accounting
The scope of cost accounting covers the following areas:
1) Financial Accounting: Financial Accounting provides historical information useful for future planning
and financial forecasting. Designing a proper financial accounting system is must for obtaining full control
and coordination of operations of the business.
2) Forecasting and budgeting: Cost accounting exercises the tool of forecasting and budgeting in the
process of planning, controlling and decision-making. Forecasting makes an estimate of the probable event
with a set of given information. Budgeting prepares a number of plans for any future project by setting
definite goals. Forecasting helps to prepare the budget and budgeting helps to exercise the budgetary
control techniques on future projects.
3) Tax accounting and tax planning: In the process of decision-making, the analysis of implication of tax
provisions on future projects comes under cost accounting. In order to take advantages of various tax
provisions, management accountant should have vast knowledge of tax laws and their accounting
procedures to minimize the tax burden of the enterprise.
4) Internal Control & Audit: Cost accounting highly depends on internal control system existing in the
organization like internal check and internal audit to identify the weaker sections of the organization.
5) Cost Control Procedures: These procedures are the integral part of the cost accounting process and
include inventory control, cost control, budgetary control, variance analysis etc.
6) Financial Analysis and Interpretation: Various financial analysis techniques such as Ratio Analysis,
Fund Flow Analysis, Trend analysis, Cash Flow Analysis, Comparative Financial Statement etc are widely
used in Cost accounting to analyze and interpret financial data to make them easily understandable and
usable to the management.
7) Reporting to Management: The Management Accountant is required to submit reports to the top
management, middle management and operating level management depending upon their requirements
on various aspects of the organization.
8) Office Services: Management Accountant is expected to maintain and control office routines and
procedures like filing, copying, communicating, data processing etc.
9) Statistical Tools: Various statistical tools like graphs, charts, diagrams, time series, regression analysis
etc are used in Cost accounting in the process of planning, controlling and decision-making.

Objectives of Cost Accounting
The prime objective of Cost Accounting is to provide necessary information to the management for an
effective and efficient execution of managerial functions. Various objectives of Cost Accounting are as
follows:
1) Analysis and Interpretation of Financial Statements: Cost accounting collects analyses and interprets
the necessary data from the results shown by financial and cost accounting system and provides necessary
and relevant information to the management in a systematic and useful manner which is to be applied by
the management in the process of its planning, controlling and decision- making. Various tools like Ratio
Analysis, Fund Flow Analysis, Cash Flow Analysis, Comparative Financial Statement, Common-size
Statement and Trend Analysis are widely used in Cost accounting for analyzing and interpreting those
data to make them easily understandable and usable to the management.
2) Planning and policy-making: Cost accounting provides necessary and relevant information to the
management in the process of its planning and policy-making to achieve organizational goals. Various
statistical forecasting like Time Series Analysis and Regression Analysis are used in Cost accounting to
guide proper planning and policy- making.
3) Decision-Making: Cost Accounting provides necessary and relevant information to the management in
the process of its decision-making. The success of the management highly depends upona perfect decision-
making. Such decision-making broadly depends on the effectiveness of information network. Cost
accounting provides the above information to the management by applying Marginal Costing Technique,
Differential Costing Technique and Absorption Costing Technique for effective and accurate decisions
such as pricing of products, make or buy, discontinuance of product lineetc.
4) Controlling: Cost Accounting applies various useful techniques such as Standard Costing, Budgetary
Control, Responsibility Accounting and Management Audit to ensure an effective managerialcontrol over
the use of resources of the enterprise. Management control is a control system which assures that the
resources of the enterprise are effectively and efficiently used for achieving its goals and objectives. Cost
accounting plays a significant role to the management in ensuring the existence of a proper managerial
control system.
5) Coordinating: Cost accounting helps the management in coordinating the activities of the concern by
getting prepared functional budgets and then coordinating the whole activities of the concern by integrating
all functional budgets into one known as master budget. Thus, cost accounting is a useful tool in
coordinating the various operations of the business.

6) Communicating: Cost accounting assists the management in communicating the financial facts about
the enterprise to the persons who are interested in these facts so that they may be guided to a line of action
to be pursued. Management needs information for taking decisions and for evaluating performance of the
business. The required information can be made available to the management by means of reports which
are an integral part of the cost accounting. Reports are means of communication of facts which should be
brought to the notice of various levels of management so that they may be guided for taking suitable action
for the purposes of control.
7) Helps in evaluating the efficiency and effectiveness of policies: Cost accounting also lays emphasis on
management audit which means evaluating the efficiency and effectiveness of management policies.
Management policies are reviewed from time to time to make an improvement in them so that maximum
efficiency may be achieved.
Tools & Techniques of Cost accounting
Cost accounting uses various tools and techniques for providing necessary and effective information to the
management for performing its managerial functions. Various tools and techniques that are commonly used in
Cost accounting are as follows:
1) Financial Statement Analysis: It is a methodical and systematic analysis and interpretation of the data
disclosed in the balance sheet and income statement with a view to extract necessary and relevant
information for proving them to the management for determining liquidity, solvency, profitability, activity
and the managerial performance of the enterprise. Various tools of financial statement analysis such as
Ratio Analysis, Comparative Financial Statement, Common Size Statement and Trend analysis are
frequently used in Cost accounting for analysis and interpretation of Financial Statements.
2) Fund Flow Analysis: It is a detailed analysis of inflows and outflows of fund (working capital) of an
enterprise during a particular accounting period. The Fund Flow exhibits inflows and outflows of fund
from various activities of the enterprise. As working capital is considered as life-blood of every business
concern, efficient management of working capital is highly effective for smooth working of all operating
activities of the concern. For an effective and efficient management of working capital of a concern, Fund
Flow Analysis is frequently used as a tool of Cost accounting.
3) Cash Flow Analysis: It is a detailed analysis of inflows and outflows of cash and cash equivalents (i.e
cash in hand, cash at bank and short-term investments) of an enterprise during a particular accounting
period. Such analysis is done by preparing a Cash Flow Statement at the end of an accounting period. The
Cash Flow Statement so prepared exhibits the inflows and outflows of cash from various activitiesof the
enterprise. As the movement of cash is very significant to every business concern, an efficient management
of cash is highly effective for the liquidity planning of the concern. For an effective and
efficient management of cash of a concern, Cash Flow Analysis is frequently used as a tool of Cost
accounting.
4) Budgetary Control: Budgetary Control involves framing of budgets, comparison of actual results with
budgeted estimates, ascertainment of any deviation of actual results from the budgeted by computation
of variances and adoption of necessary remedial measures against deviations. It is an essential tool widely
used in Cost accounting in the process of its controlling, planning and performance evaluation of an
enterprise.
5) Standard Costing: It is the establishment of standard costs under most efficient operating conditions,
comparison of actual with the standard, calculation and analysis of variance in order to know the reasons
and to pin point the responsibility and to take remedial action so that adverse things may not happen again.
This aspect is necessary to have cost control.
6) Marginal Costing: The management accountant uses the technique of marginal costing, differential
costing and break-even analysis for cost control, decision making and profit maximization.
7) Management Reporting: It involves preparation and submission of reports of performance of various
activities of a concern to the management on regular intervals for its effective planning, controlling,
performance evaluation and decision-making. Management Reporting is widely used as an essential tool
in Cost accounting.
8) Statistical and Operations Research techniques: Various statistical and operational research techniques
such as charts, graphs, index numbers time series, trend analysis, regression analysis etc are frequently
used a stools of Cost accounting in its process of performance evaluation and decision-making.
Advantages of Cost accounting

Cost accounting provides very valuable services to the management in the course of its functioning. Various
advantages of cost accounting are as follows:
1) Planning: It formulates policies and programmes by setting definite goals and prepares a systematic plan
for achieving these goals. It makes such plans for achieving organizational goals and targets.
2) Controlling: It plays a most significant role in the process of controlling. Cost accounting in the process
of controlling involves framing of budgets, comparison of actual with budgeted estimates, ascertainment
of any deviation of actual results from budgeted estimates by computation of variances and adoption of
necessary remedial measures against such deviation.
3) Coordination: It plays the most vital role in the process of coordinating of different divisions of an
enterprise. Its techniques of planning make a very good coordination between the various activities of a

concern. Proper reporting of different business activities are also made by Cost accounting through
coordination between various sections of the enterprise.
4) Performance Evaluation: Cost accounting evaluates the performance of employees of theorganization by
comparing target estimates with the actual performances of the employees.
5) Organizing: Cost accounting divides the whole organization into suitable cost or profit centers. A sound
system of internal control and internal audit is assigned to each cost or profit center for ensuring a planned
organizing system.
6) Motivating: It helps the management in the process of motivating the employees by setting various targets
to achieve organizational goals.
7) Communicating: Cost accounting communicates the performances of various divisions and employees of
the enterprise with the help of management information system to the different levels ofthe management
by preparing reports of performance of those sections and employees of the enterprise. Such
communication is essentially required for planning, controlling and decision-making of the enterprise.
8) Decision-making: The success of the management highly depends upon the perfect decision-making and
such decision-making depends on the effectiveness of information network. It provides necessary and
relevant information to the management for effective and accurate decision-making.
Limitations of Cost accounting

Cost accounting suffers from the following limitations:
1) Reliance on accounting data: Cost accounting collects the basic data from the records maintained by
financial and cost accounting, if those basic data are incorrect, then the entire effort of management
accountant becomes useless.
2) Based on historical data: It guides the management in the process of decision-making for the future
activities on the basis of the historical data as supplied by the Financial Accounting and Cost
Accounting. Therefore, the future decisions made on the basis of historical data may be incorrect.
3) Highly Expensive: the installation of sound Cost accounting System in a concern is highly expensive
as it essentially requires a wide network of management information system. Moreover, the operating
expense of the department is so high that a small concern cannot afford to install this system.
4) Complicated application: The proper application of cost accounting system is complicated when
compares to other branches of accounting because of the usage of various tools and techniques

and also because a number of accounting and non-accounting subjects are required to be analyzed and
interpreted.
5) Lack of objectivity: It uses both quantitative and qualitative data for analyses and interpretation and
prepares reports on the basis of such interpretation. The information may be influenced by a personal
bias of the interpreter, which may reduce the utility of cost accounting.
Limitations of Financial Accounting

1) Financial accounting does not provide timely information: Financial accounting is designed to supply
information in the form of statements (Balance Sheet and Profit and Loss Account) for a period normally
one year. So the information is, at best, of historical interest and only 'post-mortem' analysis ofthe past
can be conducted. The business requires timely information at frequent intervals to enable the management
to plan and take corrective action. For example, if a business has budgeted that during the current year
sales should be Rs. 12,00,000 then it requires information whether the sales in the first month of the year
amounted to Rs. 1,00,000 or less or more?
2) Financial accounting ignores important non-monetary information: Financial accounting does not
consider those transactions of non- monetary in nature. For example, extent of competition faced by the
business, technical innovations possessed by the business, loyalty and efficiency of the employees;
changes in the value of money etc. are the important matters in which management of the business is
highly interested but accounting does not take into account such matters.
3) Financial Accounting does not provide detailed analysis: The information supplied by the financial
accounting is in reality aggregates of the financial transactions during the course of the year. Of course,
it enables to study the overall results of the business the information is required regarding the cost, revenue
and profit of each product but financial accounting does not provide such detailed information product-
wise.
Difference between Financial & Cost accounting

Financial accounting & cost accounting are closely interrelated since cost accounting is to a large extent the
rearrangement of data provided by financial accounting. Financial accounting provides historical data which
helps management to forecast & plan its financial activities for the future period. Thus, for an effective &
successful cost accounting there should be proper & well-designed financial accounting system. In spite of such
a close relationship there are differences between the two:

S.No. Point of Financial Accounting Cost accounting
Distinction
1. Purpose/ The main objective of financial The main objective of cost
Objective accounting is to provide information in accounting is to provide useful
the form of profit & loss account & information to internal parties i.e. to
balance sheet to external users like the management for planning &
shareholders, creditors etc. decision-making.
2. Periodicity of The financial statements in financial The information provided by cost
reporting accounting are prepared usually accounting is available as and
annually or half-yearly. when required by
the management.
3. Regulation & Financial Accounting system is Cost accounting system is not
Standardization regulated & standardized by the regulated by anybody as it is internal
Generally Accepted Accounting to the management.
Principles.
4. Type of Financial Accounting makes use of only Cost accounting makesuse of both
information quantitative information for making quantitative as well as qualitative
financial statements. information for planning
& decision-making.
5. Legal Compulsion Financial Accounting is compulsory for Any business is free to install or not
any business on account of the to install the system of cost
provisions made by the Companies Act. accounting.
6. Precision The information requires more The information requires less
precision as it is meant for external precision as it is meant for internal
consumption consumption.
7. Audit The financial statements provided by The reports provided by the cost
the business are compulsorily audited accounting system need not be
by a professional called Chartered audited as it is for use by the internal
Accountant because it is necessary to management.
provide accurate information to
external users.

NOTES

UNIT-2
Definition of Costing, Cost Accounting and Cost Accountancy
Costing is "the technique and process of ascertaining costs". It means finding cost by any process or technique.
It consists of principles & rules which are used for determining the cost of manufacturing a product, e.g. furniture,
car, paper, steel etc. or the cost of providing a service, e.g. education, transport, electricity etc.
Cost accounting is defined as the process of determining the cost of some particular products or services which
begins with the recording of income and expenditure and ends with the preparation of periodical statements and
reports for ascertaining and controlling costs. It denotes the formal accounting mechanism by means of which
costs are ascertained & controlled by recording them in the books of accounts.
Cost accountancy has been defined as "the application of costing and cost accounting principles, methods and
techniques to the science, art and practice of cost control and the ascertainment of profitability. It includes the
principles, conventions, techniques which are employed in the business to plan & control the utilization of
resources and ensure effective decision- making.
NEED FOR COSTING / OBJECTIVES OF COST ACCOUNTING:

The main objectives of Cost Accounting are as follows:
1) Determination of Selling Price: The total product cost & cost per unit of product are important in
deciding the selling price of a product. Cost Accounting helps in ascertaining the cost per unit of the
different products manufactured by a business concern and provides information which helps in
determining the selling price of the product according to relevant situation.
2) Controlling costs: Cost Accounting aims at improving the profitability by controlling cost by using
various techniques such as budgetary control, standard costing, inventory control etc. Each item of the
cost (material, labour, overhead) is budgeted at the beginning of the period & actual expenses incurred are
compared with the budget. This increases the efficiency of the enterprise.
3) Providing information for decision- making: Cost Accounting helps in supplying useful data to the
management for taking various financial decisions & formulating operative policies such as introduction
of new products, replacement of labour by machine etc.
4) Ascertainment of cost & profit: The primary objective of cost accounting is to ascertain the cost per unit
of product, job, process or department. It pre- determines the cost by employing various methods &

techniques under different situations. It also helps in ascertaining the profitability of each of the products
and advises the management as to how these profits can be maximized.
5) Facilitates preparation of financial & other statements: Cost Accounting helps to produce statements
at short intervals as the management may require. In order to operate the business at high efficiency, it is
essential for management to have a review of production, sales & operating results. Cost Accounting
discloses the 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.
6) Facilitates reliability: Cost Accounting provides specialized services of cost audit in order to prevent the
errors and frauds and to facilitate prompt and reliable information to the management.
7) Others:
a) To exercise effective control of stocks of raw materials, work-in-progress, consumable stores and
finished goods in order to minimize the capital locked up in these stocks.
b) To reveal sources of economy by installing and implementing a system of cost control for materials,
labour and overheads.
c) To advice management on future expansion policies and proposed capital projects.
d) To help in the preparation of budgets and implementation of budgetary control.
e) To organize an effective information at the right time in right form for carrying out their individual
responsibilities in an efficient manner.
f) To guide management in the formulation and implementation of incentive bonus plans based on
productivity and cost savings.
g) To help in supervising the working of punched card accounting or data processes through
computers.
h) To organize cost reduction programme with the help of different departmental managers.
i) To find out costing profit or loss by identifying with revenues the costs of those products or services
by selling which the revenues has resulted.
ADVANTAGES OF COST ACCOUNTING
The main advantages of cost accounting are given below:
1) Importance to management: Cost accounting helps the management in carrying out efficiently its
functions (i.e. planning, budgeting, decision-making, organizing, control, pricing and evaluation of
operating efficiency) by developing practical cost procedures that provide information useful in
controlling the operations of the business enterprise. Cost accounting does this by analyzing, recording,
standardizing, forecasting, comparing, reporting and recommending. Cost accounting methods supply

the basis of factual information on which management can build up its presentation of planning and
control.
2) Importance to employees: Cost Accounting discloses the relative efficiencies of different workers and
thereby facilitates the introduction of suitable plans of wage payment to rewards efficiency and to provide
adequate incentive to the less efficient workers. A good system of costing promotes prosperity of the
business and thus ensures greater security of service and adequate reward to workers.
3) Importance to consumers: The ultimate aim of costing is to reduce cost of production to the minimum
and maximize the profits of the business. A part of the benefit resulting from the reduction of the cost is
usually passed on to the consumers in the form of lower prices. Besides, the installation of a costing system
will infuse confidence in the minds of the public about the fairness of the prices charged.
4) Helpful to creditors: It enables the creditors and investors to judge the financial strength and
creditworthiness of the business. A sound business concern with a good system of costing can attract more
investors than a similar concern without an adequate system of costing.
5) Importance to national economy: An effective costing system benefits the economy by stepping up the
government revenue by achieving higher production. The overall economic development of a country
takes place due to efficiency of production.
6) Classification and Sub-divisions of Costs: Costs are collected and classified by various ways in order to
provide information to the management for control purposes and to ascertain the profitability of each area
of activity. It enables a concern to measure the efficiency, and then to maintain and improve it.
Unprofitable activities are disclosed and steps can be taken to make an improvement in those activities.
7) Help in formulating business Policies: Business Policy may require the consideration of alternative
methods and procedures and this is facilitated by cost information correctly presented. For example, by
the aid of cost reports, management can decide whether the manufacture of certain products increases
overhead expenditure disproportionately. Thus, it helps the management to take vital decisions such as
introduction of a new product, selection of a most profitable product mix, utilization of spare capacity,
exploration of additional market, whether to make or buy, problem of limiting factor, replacement of
existing assets, appraisal of proposed investment to meet expansion programme etc. with the help of
marginal costing techniques and differential cost analysis.
8) Budgeting: It provides the use of budgets and performance reports and enables the management to correct
inefficiencies before they enter into business. It is a co-ordinate plan of action for everyresponsible person
for comparing the actual results with the budgets. Two important cost accounting tools for helping
managers are budgets and performance reports. Budgets are financial and/or quantitative statements
prepared and approved prior to a defined period of time, of the policies to be
pursued during that period for the purpose of attaining objectives of the management. Thus, budgets are
the formal quantifications of the plans of the management. Performance reports measure actual
performance and give accounts of comparisons of budgets with actual results, which facilitate action
against those persons whose performance is less than the performance specified in the budgets. The
technique of control through performance reports is technically known as management by exception,
which is the practice of concentrating on areas whose performance is not up to the mark as it was planned
and ignoring areas that are running smoothly as these were planned.
9) Best use of Limited Resources: In all varied fields we are concerned to make the best use of limited
resources that are available to us. Thus the intention is to obtain the maximum output from a given
input. Cost accounting provides the reliable data of costs with regards to materials, wages and other
expenses. These help management to get maximum output at the minimum cost by indicating where
economics may be affected, waste eliminated and efficiency increased; some of the loss occasioned by
reduced turnover and falling prices may be avoided.
10) Cost Audit: The operation of a system of cost audit in the organization will assist in prevention of errors
and frauds. It will help to improve cost accounting methods and techniques to facilitate prompt and reliable
information to the management.
Limitations of Cost Accounting
Cost accounting like other branches of accountancy is not an exact science but is an art that has developed through
theories and accounting practice based on reasoning and common sense. Many theories can be proved or
disproved in the light of conventions and basic principles of cost accounting. These principles are not static but
changing with the change of time and circumstances. The following are the main limitations of cost accounting:
(i) Cost accounting lacks a uniform procedure. It is possible that two equally competent cost accountants may
arrive at different results from the same information. Keeping in view this limitation, all cost accounting
results can be taken as mere estimates.
(ii) There are a large number of conventions, estimates and flexible factors such as classification of cost into
its elements, issue of materials on average or standard price, apportionment of overhead expenses,
arbitrary allocation of joint cost, division of overheads into fixed and variable costs, division of costs
into normal and abnormal and controllable and non- controllable and adoption marginal and standard costs
due to which it becomes difficult to have exact costs.
(iii) For getting the benefits of cost accounting many formalities are to be observed by a small and medium
size concern due to which the establishment and running costs are so much that it becomes difficult for
these concerns to afford its cost. Thus cost accounting can be used only by big concerns.

(iv) The results shown by cost accounts differ from those shown by financial accounts. Preparation of
reconciliation statement frequently is necessary to verify the accuracy. This leads to unnecessary increase
in the workload.
Financial Accounting vs. Cost Accounting
Both Financial and cost accounting are the branches of accounting whose main object is to provide information
by recording the business transactions systematically and scientifically so that it may serve the purpose of the
management for policy formulation and controlling and to provide necessary protection to the outsiders. Both are
based on double entry system and their roles are supplementary.
The main differences between financial and cost accounting are given as under:
S.No. Point of Financial Accounting Cost Accounting
Distinction
1. Purpose / It provides information about the It provides information to the
Objective business in a general way. It tells about management for proper planning,
the profit and loss and financial position operation, control and decision-
of the business to owners and making.
other outside parties.
2. Statutory These accounts are kept in such a way as These accounts are generally kept
requirement to meet the requirement of Companies voluntarily to meet the requirements
Act and Income Tax Act. of the management. But now
Companies Act has made itobligatory
to keep cost records in
some manufacturing industries.
3. Recording It classifies records and analyses the It records the expenditure in an
transactions in a subjective manner i.e. objective manner i.e. according to the
according to the nature of expenses. purposes for which the costs are
incurred.
4. Control It lays emphasis on the recording It provides a detailed system ofcontrol
aspect without attaching anyimportance for materials, labour and overhead
to control. costs with the help of standard costing
and budgetary
control.
5. Periodicity of It reports operating results and financial It gives information through cost

reporting position usually at the end of the year. reports to management as and when
desired.
6. Analysis of profit Financial accounts are the accounts of Cost Accounting is only a part of the
the whole business. They are financial accounts and disclosesprofit
independent in nature and disclose the or loss of each product, job or service.
net profit or loss of the business as a
whole.
7. Reporting of costs The costs are reported in aggregate in The costs are broken down on a unit
financial accounts. basis in cost accounts.
8. Nature of Financial accounts relate to economic Cost Accounts relate to transactions
transactions transactions of the business and include connected with the manufacture of
all expenses viz., manufacturing, office, goods and services and include only
selling and distribution etc. Financial those expenses which enter into the
accounts are concerned with external production. Cost accounts are
transactions i.e. transactions between concerned with internal transactions
the business concern on one side and which do not form the basis of
third parties on the other. These payment or receipt of cash.
transactions form the basis for
payment or receipt of cash.
9. Information Monetary information is only used(i.e. Non-monetary information like units
only monetary transactions are is also used (i.e. it deals with monetary
recorded) as well as non- monetary
information).
10. Fixation of selling Financial accounts are not maintained Cost accounting provides sufficient
Price with the object of fixing selling prices. data for fixation of selling prices.
11. Figures Financial accounts deal mainly with Cost accounting deal partly with facts
actual facts and figures. and figures and partly with estimates.
12. Evaluation of The information provided by financial The cost data helps in evaluating the
efficiency accounting is not sufficient to evaluate efficiency of business.
the efficiency of the business.
13. Stock valuation Stocks are valued at cost or market Stocks are valued at cost.
price whichever less is.

Cost: its meaning & role
The literal meaning of cost is the amount paid or required in payment for a purchase or for the production or
upkeep of something. It is the amount of resources given up in exchange for some goods or services. Cost is
generally measured in monetary terms. It means the amount of expenses (actual or notional) incurred on or
attributable to a specified thing or activity. Thus, material cost of a product will mean the expenses incurred in
procuring, storing & using material in the product. Similarly, labor cost will represent that part of payment made
to the workmen for time spent on the product during its manufacture. The term ‘cost’ does not mean the same
thing under all circumstances. Cost is always ascertained with reference to some object such as material, labor,
job, process etc.
The interpretation of the term cost depends on:
1) The nature of business or industry.
2) The context in which it is used.
In a business, where selling & distribution cost are quite nominal, the cost of an article may be calculated without
considering these overheads, However, in a business where the product requires heavy selling & distribution
expenses, calculation of cost without taking into account selling & distribution expenses may prove very costly
to the business. The context in which the term cost is used is also important. Cost may mean prime cost, office
cost, selling cost etc.
Cost Classification: Classification refers to the process of grouping the costs according to their common
characteristics. The different bases of cost classification are:
1) Classification by nature or elements: Material, Labor, Expenses
To produce or manufacture, material is required. For example to manufacture shirt, cloth is required and to
produce flour, wheat is required. All material which becomes an integral part of finished product and which
can be conveniently assigned to specific physical unit is termed as “Direct Material”. It is also described as
raw material, process material, prime material, production material, stores material, etc. The substance from
which the product is made is known as material. It may be in a raw or manufactured state. Material is
classified into two categories:
 Direct Material
 Indirect Material
Direct Material is that material which can be easily identified and related with specific product, job, and
process. Timber is a raw material for making furniture, cloth for making garments, sugarcane for making
sugar, and Gold/ silver for making jwellery, etc are some examples of direct material.

Indirect Material is that material which cannot be easily and conveniently identified and related with a
particular product, job, process, and activity. Oil and waste, printing and stationery etc, are some examples
of indirect material. Indirect materials are used in the factory, office, or in selling and distribution department.
Labour
Labour is the main factor of production. For conversion of raw material into finished goods, human resource
is needed, and such human resource is termed as labour. Labour cost is the main element of cost in a product
or service. Labour can be classified into two categories:
 Direct Labour, and
 Indirect labour
Labour which takes active and direct part in the production of a commodity. Direct labour is that labour which
can be easily identified and related with specific product, job, process, and activity. Direct labour costis easily
traceable to specific products. Direct labour varies directly with the volume of output. Direct labour is also
known as process labour, productive labour, operating labour, direct wages, manufacturing wages, etc. Cost
of wages paid to carpenter for making furniture, cost of a tailor in producing readymade garments, cost of
washer in dry cleaning unit are some examples of direct labour.
Indirect labour is that labour which cannot be easily identified and related with specific product, job, process,
and activity. It includes all labour not directly engaged in converting raw material into finished product. It
may or may not vary directly with the volume of output. Labour employed for the purpose of carrying out
tasks incidental to goods or services provided is indirect labour. Indirect labour is used in the factory, the
office, or the selling and distribution department. Wages of store-keepers, time-keepers, salaryof works
manager, salary of salesmen, etc, are all examples of indirect labour cost.
Expenses
All cost incurred in the production of finished goods other than material cost and labour cost are termed as
expenses. Expenses are classified into two categories:
 Direct expenses, and
 Indirect expenses
Direct expenses:
These are expenses which are directly, easily, and wholly allocated to specific cost center or cost units. All
direct cost other than direct material and direct labour are termed as direct expenses. Direct expenses are
also termed as chargeable expenses. Some examples of the direct expenses are hire of special machinery,

cost of special designs, moulds or patterns, fees paid to architects, surveyors and other consultants, inward
carriage and freight charges on special material, cost of patents and royalties.
Indirect expenses:
These expenses cannot be directly, easily, and wholly allocated to specific cost center or cost units. All
indirect costs other than indirect material and indirect labour are termed as indirect expenses.
Thus, Indirect Expenses = Indirect cost – Indirect material – Indirect labour.
Indirect expenses are treated as part of overheads. Rent, rates and taxes of building, repair, insurance and
depreciation on fixed assets, etc, are some examples of indirect expenses.
2) Classification by Activity/Volume: Fixed, variable, semi-variable and step costs.
Costs that tend to be constant at different volumes of output is called fixed costs. These costs do not have any
significant relation with the output. E.g., rent, insurance charges, manager’s salary etc.
Costs that tend to vary with output & have a major relation with output are termed as variable costs. e.g., wages
of laborers, power cost of material etc.
Costs which neither vary proportionately nor remain stationery are called as semi-variable or semi-fixed costs.
E.g. repairs, supervision charges, telephone rent, depreciation etc.
Costs which remain fixed over a certain range of activity & then shifts to a new level as activity changes are
termed as step costs. These are taken as a type of semi-variable costs. E.g., foremen supervising a given number
of employees, if the number of employees increases more foreman are required to be appointed.
3) Classification by association with the product: Product costs & Period costs
Costs that become part of the cost of the product are called as product costs. E.g., direct material, direct labor etc.
Costs that are not traceable to the product & are treated as expense in the period in which they are incurred.
E.g., rent, insurance, salaries etc. They cannot be attributed to a product because they are incurred for several
products at a time.
4) Classification by traceability: Direct costs & indirect costs.
Costs which can be easily traceable to a product, service, job or process is called direct cost. In the process of
manufacture or production of an article, materials are purchased, laborers are employed & wages paid to them,
certain other expenses are also incurred directly. All these take an active & direct part in the manufacture of a
commodity, hence are called direct costs.
Expenses which are not directly chargeable to production are called as indirect costs. E.g. salaries of time- keepers,
storekeepers etc. They are common to several products & have to be apportioned to different products on a suitable
basis.

5) Classification by time: Historical costs & predetermined costs.
Historical costs are computed after they are incurred. Such costs are available only after the production or
manufacturing is over.
Predetermined costs are computed in advance of production on the basis of factors influencing costs. Such costs
may be estimated costs & standard costs. Estimated costs are based on lot of guess work. They help to ascertain
what the cost will be, based on certain factors. They are less accurate as only past experience is taken into account.
Standard costs are based on technical estimate for material, labour and other expenses & for specifies set of
working conditions. They help us to ascertain what the cost should be.
6) Classification by controllability: Controllable cost & uncontrollable cost
Costs which can be influenced by the action of a specified member of an undertaking are called as controllable
costs e.g. direct material, direct labour etc.
Costs which cannot be influenced are termed as uncontrollable costs e.g. rent, taxes, salary etc.
7) Cost classification by decision-making purposes:
 Opportunity cost: It is the cost of the next best alternative foregone. It is the value of benefit sacrificed in
favor of choosing a particular action. For e.g. if an owned building is proposed to be utilized for a new project,
the likely revenue that it could fetch if rented out is the opportunity cost which should be considered while
evaluating the profitability of the project. It is the net benefit that would have been received from an asset if
put to its next best use.
 Sunk cost: These are the costs which have been created by a decision made in the past & which could not
be changed by any decision that will be made in the future. Investments in plant & machinery, amount spent
on research & developments are the examples of sunk costs. Since they cannot be altered by later decisions
they are irrelevant for decision making.
 Differential cost: The difference in total cost from selecting one option over another is called differential
cost. In case the choice of alternative results in increase in total cost such increased cost is called incremental
cost & in case it results in decrease in total cost such decrease is called decremental cost.
 Imputed or hypothetical cost: These are the cost which do not involve cash outlay but are considered while
making decisions. E.g. interest on capital, rent of owned building.
 Out-of-pocket cost: It is the cost which involves cash outlays or requires the utilization of current resources.
E.g. Wages, material cost, insurance etc. these are also known as explicit costs. Costs which do not require
any immediate cash outlay are known as implicit costs. E.g. Depreciation on plant & machinery.
 Marginal cost: It is the additional cost of producing one additional unit. Marginal costing is the technique
of charging only variable cost to products. It helps in decisions like make or buy, pricing of product etc.

 Relevant & irrelevant costs- Relevant costs are the future costs that will differ depending upon the actions
of the management. Irrelevant costs are the costs that will not be affected by the actions of the management.
 Replacement costs- It is the current market cost of replacing an asset. It is the cost at which an asset could be
purchased identical to one being replaced. The management has to consider the replacement cost of an asset
& not the price at which the asset was purchased earlier. Suppose equipment was purchased in 2000 for
Rs.10, 00,000, the company is planning to discard it & replace it with new machinery in 2010 for
Rs.30, 00,000. The replacement cost of the equipment is Rs.30, 00,000. These costs are relevant for decision
making.
 Shut-down costs- These represent the fixed costs which have to be incurred even during the period when a
factory is shut down on account of some temporary difficulties, viz., shortage of raw materials, non-
availability of requisite labour force, etc. during this period, though no work is done, the fixed costs, such as
rent, insurance, depreciation, maintenance, etc. for the entire plant have still to be incurred. Such costs of the
idle plant are known as shut down costs.
 Avoidable and unavoidable cost: Avoidable costs are those, which can be eliminated if a particular product
or department, with which they are directly related, is discontinued. For example, salary of the clerks
employed in particular department can be eliminated, if the department is discontinued. Unavoidable costs
are those which cannot be eliminated if a product or department is discontinued e.g. rent.
8) Classification on the basis of normality: Normal costs & Abnormal costs
Costs that are expected to be incurred under normal operating conditions at a given level of output are called
normal costs. These costs are the part of cost of production.
Costs which are not incurred under normal operating conditions are called as abnormal costs e.g. fines,
penalties etc.
9) Classification on the basis of functions or operations:
Production cost- It is the cost of operations commencing with supply of material, labour, services & ends with
packing of the product. It includes total cost of raw material, labor, production overheads etc.
Selling & distribution cost- It is the cost of creating, stimulating the demand, securing orders & making the
packed product available for dispatch e.g. advertisement, showroom expenses, warehouse cost, transportation
cost, carriage outward, cost of samples etc.
Development cost- It is the cost of process which begins with the implementation of a decision to produce a new
product or to employ a new or improved method & ends with the commencement of formal production of that
product or employment of that method.

10) Traceable Cost: These are costs which can be identified or traced to specific products, services or units of the
company such as raw material and labour, etc.
Untraceable Costs: These are costs which cannot be identified with a department process or product. Such costs
are also termed as common costs, as they are incurred collectively for a number of products or cost centers e.g.,
overheads incurred for the factory as a whole. As such they are apportioned among various products or cost
centers using suitable criterion.
11) Conversion costs: It is the cost of transforming direct material into finished goods. It is the aggregate of direct
labor, direct material, and direct expenses.
12) Committed Costs: These are the fixed costs that arise as a result of consequences of commitments previously
made or are incurred to maintain certain facilities and cannot be quickly eliminated. The management has little
or no discretion in such type of costs e.g. rent, insurance, depreciation on building or equipment purchased.
13) Discretionary Costs: These costs are not related to the operation but can be controlled by the management.
These costs arise from some policy decisions, new researches etc. and can be eliminated or reduced to a desirable
level at the discretion of the management. E.g. advertising costs, R&D costs.
Structure of Cost Sheet:
Cost Sheet is a statement designed to show the output of a particular accounting period along with the breakup of
costs. It analyzes & classifies the expenditure on different items for a particular period. It may also depict the data
for the preceding period along with the data for the present period to know the trend. Cost data for more than two
periods can also be depicted for comprehensive study. It may also be prepared for making inter firm comparison
by including cost data for different firms.
Importance of Cost Sheet
A cost sheet helps in ascertainment & control of costs. It also provides data on the basis of which the selling price
of products can be fixed. Thus, a cost sheet performs the following functions:
1) Ascertainment of cost- it ascertains total cost per unit at different stages of production. The information
provided by cost sheet helps the management in taking various decisions like make or buy a product, to sell
or not to sell in a foreign market etc.
2) Controlling costs: - A cost sheet presents the cost data for two or more periods in comparative form. Such
presentation helps in identifying the elements whose costs have gone up & where control is required.
3) Fixation of selling price- A cost sheet provides data about the cost of a job, product or process. The business
can fix appropriate selling price for its products on the basis of such data.
4) Submitting of tenders- Costs have to be ascertained for submitting of tenders, giving price quotations etc.
Preparation of an estimated cost sheet about the relevant product or job facilitates this work.

Components of Total Cost
The total cost is made up of cost of production & cost of distribution. The total cost is also known as selling
cost which consists of:
a) Prime Cost
b) Factory Cost or Work Cost
c) Administration Cost or Office Overheads
d) Selling & Distribution Cost
Prime Cost: The sum total of direct material, direct labor & overheads are called as Prime Cost. In this, the
opening & closing stock of raw material is adjusted. It is calculated as:
Opening Stock of raw material xxxx
Add: Purchase of material xxxx
Add: Direct Expenses xxxx
Less: Closing Stock of raw material xxxx
Material Consumed xxxx
Add: Direct Wages xxxx
PRIME COST xxxx
Factory Cost or Work Cost: The sum total of prime cost plus the total factory overheads or works overheads
is factory cost or works cost. Woks overheads includes all expenses incurred in production of goods such as
factory rent, factory insurance, depreciation on plant & machinery, coal, gas , water, electricity, work manager’s
remuneration, consumable stores etc. In this, opening & closing work-in-progress is adjusted. It is calculated as:
Prime Cost xxxx
Add: Factory Overheads xxxx
Add: Opening work-in-progress xxxx
Less: Closing work-in-progress xxxx
Less: Sale of scrap xxxx
FACTORY COST xxxx
Administration Overheads: Administration cost is obtained by adding the office or administration overheads
to works cost. It is also known as office cost or total cost. Office overheads includes all expenses incurred in
carrying on the administration work of the concern such as salaries of office staff, depreciation on office building,
rent & rates, taxes & insurance, audit fees, legal expenses, director’s fees & remuneration, printing & stationery,
postage, telegram, telephone repairs etc. The administration overheads when added to works costs gives cost of
production. The cost of goods sold is arrived after adjusting opening & closing stock of finished goods. It is
calculated as:
Factory Cost xxxx
Add: Office overhead xxxx
Cost of Production xxxx
Add: Opening stock of Finished Goods xxxx
Less: Closing stock of Finished Goods xxxx
COST OF GOODS SOLD xxxx
Selling Cost: The selling cost or cost of sales is obtained by adding the selling & distribution overheads to cost
of goods sold. The selling & distribution overhead includes advertisement, selling expenses, salesman’s salaries
& commission, travelling expenses, bad debts, discounts, packing expenses, distribution expenses, carriage
outward, transporting charges etc. It is calculated as:
Cost of Goods Sold xxxx
Add: Selling & Distribution Expenses xxxx
COST OF SALES xxxx
The difference between the sales & cost of sales is net profit earned for that period.
Items excluded from cost accounts
1) Dividends paid
2) Taxes on incomes & profits
3) Donations
4) Transfers to reserves
5) Amount written off- goodwill, preliminary expenses
6) Losses on sale of investments, buildings etc.
7) Penalties & fines
8) Damages payable
9) Expenses on transfer of company’s office
10) Interest on bank loan, mortgages etc.
11) Remuneration paid to proprietor in excess of fair reward for services rendered.
12) Interest received on bank deposits
13) Brokerage received
14) Rent receivable
15) Interest, dividends, commission, discount received
16) Profits made on sale of fixed assets, investments etc.

Performa of Cost Sheet
Cost Sheet of ................ for the year ended 31st Mar, 20xx
Output: xxxxx
Particulars Rs. Per Unit
Opening Stock of raw material

Add: Purchase of material
Add: Direct Expenses
Less: Closing Stock of raw material
Material Consumed/ Direct Material
Add: Direct Wages
Prime Cost
Add: Factory Overheads
Add: Opening work-in-progress
Less: Closing work-in-progress
Less: Sale of scrap
Factory or Works Cost
Add: Office overhead
Cost of Production
Add: Opening stock of Finished Goods
Less: Closing stock of Finished Goods
Cost of Goods Sold
Add: Selling & Distribution Expenses
Cost of Sales
Profit
Sales

Practice Questions
Q 1. Find out: -
A) Prime cost
B) Works cost
c) Cost of sales
Particulars Job (A) Job (B)
Direct Material 1, 00,000 2, 50,000
Direct Labour 80,000 2, 00,000
Direct Expenses 50,000 1, 00,000
Additional Information:-
The factory overheads are absorbed at 40% of direct labour cost, Administrative overheads are absorbed at
20% of works cost.
Selling and distribution overheads are absorbed at 15% of cost of production.
Q.2 From the following information:
A) Prepare cost sheet
B) Find out Profit and Cost per unit.
Raw materials consumed Rs. 1, 60,000
Direct Wages Rs. 80,000
Factory Overheads Rs. 16,000
Units Produced Rs. 4,000
Units sold Rs. 3,600
Office Overheads 10% of factory cost
Selling price Rs. 100 per unit
st
Q 3. ABC ltd. Company discloses the following information year ending 31 Dec. 2012.
Materials used Rs. 1, 50,000

Direct wages Rs. 1, 20,000
Factory overhead expenses Rs. 24,000
Office expenses Rs. 17,640
Prepare a cost sheet of the machines and calculate the price which the company should quote for the
manufacture of a machine requiring materials valued at Rs.1,250 and expenditure on productive wages
of Rs.750, so that the price may yield a profit of 20% on selling price.
For the purpose of price quotation, charge factory overhead as a percentage of direct wages and charge
office overhead as a percentage of works cost.

Q 4. Prepare cost sheet and calculate profit?
Direct Labor Cost 16,000(160% of factory cost)
Cost of goods sold 56,000
Opening stock of raw material 8,000
Opening stock of W.I.P 8,000
Opening stock of Finished goods 14,000
Closing stock of raw material 8,600
Closing stock of W.I.P 12,000
Closing stock of Finished goods 18,000
Selling expenses 3,400
General and administrative Expenses 2,600
Sales of the Month 75,000
Q.5 Prepare Cost Sheet from the following information:
st
Stock of raw materials on 1 April 75,000
th
Stock of raw materials on 30 April 91,500
Direct wages 52,500
Indirect Wages 2,750
Sales 2, 00,000
st
Work In progress on 1 April 28,000
th
Work In progress on 30 April 35,000
Purchases of Raw Materials 66,000
Factory rent, rates and power 15,000
Depreciation of Plant and machinery 3,500
Expenses on purchases 1,500
Carriage Outward 2,500
Advertising 3,500
Office rent and taxes 2,500
Traveler's wages and commission 6,500
Stock of finished goods on 1st April 54,000
Stock of finished goods on 30th April 31,000

NOTES

UNIT-3
Budget and Budgetary Control
Budget
Meaning of budget: A budget is a detail plan of operations for a specific period of time. A budget is prepared
for the effective utilization of resources, which will help in achieving the set objectives. The following are
the essential of budget:
(a) It is prepared in advance and is based on future plan of action.
(b) It relates to a future period and is based on objectives to be attained.
(c) It is a statement expressed in monetary or physical unit prepared for the formulation of policy.
Types of budgets.
1. Functional basis of budgets.
a. Sales budget: Sales budget is the primary budget. It is the most important budget to prepare and the other
budgets are prepared on the basis of sales budget. In this budget the in charge or expert forecast the future expected
sales of the firm. The sales manager is responsible for the accuracy of the budget. The sales budgets may prepare
on basis of product, type of customers, salesman, locality etc. for the preparation of sales budget the following
things should be taken under care like past sales, sales man estimates, plant capacity, raw material, orders
in hand, seasonal fluctuations, competition etc.
b. Production budget: After preparing sales budget the next budget will be production budget. In this budget
works manager prepare schedule of production by breaking large production in small units to fulfill the target
production. A properly operated budgets leads to inventory control, improved maintenance of production
schedules and production targets. Suppose, if the estimated opening stock is 5000 units and estimated sales are
25000 units and closing stock of the product is 3000 units the estimated production will be 25000 + 3000 – 5000
=23000 units (sales + closing stock – opening stock).
c. Material budget: In the production budget material is the first requirement to be considered. Materials are
basically divided into two categories as direct and indirect material. It includes the preparation of estimates of
different types of the raw material needed for various products and purchasing raw material in required number
at a required time. There are few factors which should be taken under care like requirement of raw material;
company’s stocking policies, price trend, and cost of raw material.
d. Labour budget: labour is an important factor in every production organization. Labour plays an important
role in converting raw material into finished product. The labour requirement budgets prepared on basis of
production budget. Labour may be of two types direct and indirect labour. In this budget company has to budget
the required number of hours and the expected pay scales of the employees. This budget gives information
about personnel specifications for the job for which workers are to be recruited, the degree of skill and experience
required and rates of pay.
e. Manufacturing Overhead budgets: this budget gives the works overhead expenses to be incurred in a budget
period to achieve the production target. The cost of indirect material, indirect labour etc can becalculated with
the help of this budget. For making proper control it can be divided into departmental overhead budget. Variable
expenses are estimated on the basis of the budgeted output because these expenses are boundto change with the
change in output.
f. Administration Expenses budget: The budget covers the expenses incurred in framing policies, directing the
organization and controlling the business operations. In budget an estimate of expenses is prepared regarding
central office and of management salaries. The budget may be prepared at department level for effectiveness in
budgeting system. The budget can be prepared with the past experience and anticipated changes.
g. Selling and Distribution budgets: This expense is related to the selling and distribution of material. In this
budget experts have to plan for the expected selling and distribution expenses of the firm. Certain items of selling
and distribution costs as cost of transportation, salesman salaries etc.
h. Cash budget: this budget is prepared to predict the inflow and outflow of cash during the budget period. In
cash receipt we consider cash sales, credit collection and other receipts in cash payments we consider cash
payments, tax payable, dividend payable etc. Without cash organizations cannot work so prediction about cash
is very important. A cash budget makes provision for a minimum cash balance which will be available at all times.
2. On the basis of flexibility
a. Fixed budget: This is the rigid budget and it is drawn on the assumption that there will be no change in
the budgeted time period. A fixed budget will be helpful only when actual level of activity is equal to
budgeted level of activities. According to charted institute of management accountants.” A fixed budget
is defined as a budget designed to remain unchanged irrespective of activity actually attained.
b. Flexible budget: It is also called as variable budget. A flexible budget gives different budgeted costs for
different budgeted costs for different levels of activities. This budget is applicable in where activity levels
vary from period to period. Where the business is new and it is difficult to predict. Where industry is
influenced by change in fashion. Where there are changes in sales.
3. On the basis of period:
a. Long time budgets: long-term budgets are prepared for those organizations, which deal in regular product
line. Here organizations are not supposed to change their proceedings in short time periods.
b. Short time budgets: Short-term budgets are prepared for small time periods which work for seasonal product
line. Here products may change in near future.

Budgetary control
Budgetary control is the process of determining various actual results with budgeted figures for the enterprise for
the future period and standards set then comparing the budgeted figures with the actual performance for
calculating variances, if any. First of all, budgets are prepared and then actual results are recorded.
The comparison of budgeted and actual figures will enable the management to find out discrepancies and take
remedial measures at a proper time. The budgetary control is a continuous process which helps in planning and
co-ordination. It provides a method of control too. A budget is a means and budgetary control is the end-result.
Definitions:
“According to Brown and Howard, “Budgetary control is a system of controlling costs which includes the
preparation of budgets, coordinating the departments and establishing responsibilities, comparing actual
performance with the budgeted and acting upon results to achieve maximum profitability.” Weldon characterizes
budgetary control as planning in advance of the various functions of a business so that the business as a whole is
controlled.
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. Weldon relates budgetary control with day-to-day control
process.” According to him, “Budgetary control involves the use of budget and budgetary reports, throughout the
period to co-ordinate, evaluate and control day-to-day operations in accordance with the goals specified by the
budget.”
From the above given definitions it is clear that budgetary control involves the follows:
(a) The objects are set by preparing budgets.
(b) The business is divided into various responsibility centres for preparing various budgets.
(c) The actual figures are recorded.
(d) The budgeted and actual figures are compared for studying the performance of different cost centres.
(e) If actual performance is less than the budgeted norms, a remedial action is taken immediately.
Objectives Of Budgetary Control Are The Follows:
1. To ensure planning for future by setting up various budgets, the requirements and expected performance
of the enterprise are anticipated.
2. To operate various cost centers and departments with efficiency and economy.
3. Elimination of wastes and increase in profitability.
4. To anticipate capital expenditure for future.
5. To centralize the control system.
6. Correction of deviations from the established standards.
7. Fixation of responsibility of various individuals in the organization.
Advantages of Budgetary Control:
The budgetary control system help in fixing the goals for the organization as whole and concerted efforts are
made for its achievements. It enables ‘economies in the enterprise.
Some of the advantages of budgetary control are:
1. Maximization of Profits:
The budgetary control aims at the maximization of profits of the enterprise. To achieve this aim, a proper planning
and coordination of different functions is undertaken. There is a proper control over various capitaland revenue
expenditures. The resources are put to the best possible use.
2. Co-ordination:
The working of different departments and sectors is properly coordinated. The budgets of different departments
have a bearing on one another. The co-ordination of various executives and subordinates is necessary for
achieving budgeted targets.
3. Specific Aims:
The plans, policies and goals are decided by the top management. All efforts are put together to reach the common
goal, of the organization. Every department is given a target to be achieved. The efforts are directed towards
achieving some specific aims. If there is no definite aim then the efforts will be wasted in pursuing different aims.
4. Tool for Measuring Performance:
By providing targets to various departments, budgetary control provides a tool for measuring managerial
performance. The budgeted targets are compared to actual results and deviations are determined. The performance
of each department is reported to the top management. This system enables the introduction of management by
exception.
5. Economy:
The planning of expenditure will be systematic and there will be economy in spending. The finances will be put
to optimum use. The benefits derived for the concern will ultimately extend to industry and then to national
economy. The national resources will be used economically and wastage will be eliminated.
6. Determining Weaknesses:
The deviations in budgeted and actual performance will enable the determination of weak spots. Efforts are
concentrated on those aspects where performance is less than the stipulated.
7. Corrective Action:
The management will be able to take corrective measures whenever there is a discrepancy in performance. The
deviations will be regularly reported so that necessary action is taken at the earliest. In the absence of a budgetary
control system the deviations can be determined only at the end of the financial period.

8. Consciousness:
It creates budget consciousness among the employees. By fixing targets for the employees, they are made
conscious of their responsibility. Everybody knows what he is expected to do and he continues with his work
uninterrupted.
9. Reduces Costs:
In the present day competitive world budgetary control has a significant role to play. Every businessman tries to
reduce the cost of production for increasing sales. He tries to have those combinations of products where
profitability is more.
10. Introduction of Incentive Schemes:
Budgetary control system also enables the introduction of incentive schemes of remuneration. The comparison
of budgeted and actual performance will enable the use of such schemes.
Limitations of Budgetary Control:

Despite of many good points of budgetary control there are some limitations of this system.
Some of the limitations are discussed as follows:
1. Uncertain Future:
The budgets are prepared for the future period. Despite best estimates made for the future, the predictions may
not always come true. The future is always uncertain and the situation which is presumed to prevail in future may
change. The change in future conditions upsets the budgets which have to be prepared on the basis of certain
assumptions. The future uncertainties reduce the utility of budgetary control system.

2. Budgetary Revision Required:
Budgets arc prepared on the assumptions that certain conditions will prevail. Because of future uncertainties,
assumed conditions may not prevail necessitating the revision of budgetary targets. The frequent revision of
targets will reduce the value of budgets and revisions involve huge expenditures too.
3. Discourage Efficient Persons:
Under budgetary control system the targets are given to every person in the organization. The common tendency
of people is to achieve the targets only. There may be some efficient persons who can exceed the targets but they
will also feel contented by reaching the targets. So budgets may serve as constraints on managerial initiatives.
4. Problem of Co-ordination:
The success of budgetary control depends upon the co-ordination among different departments. The performance
of one department affects the results of other departments. To overcome the problem of coordination a Budgetary
Officer is needed. Every concern cannot afford to appoint a Budgetary Officer. The lack of co-ordination among
different departments results in poor performance.
5. Conflict among Different Departments:
Budgetary control may lead to conflicts among functional departments. Every departmental head worries for his
department goals without thinking of business goal. Every department tries to get maximum allocation of funds
and this raises a conflict among different departments.
6. Depends Upon Support of Top Management:
Budgetary control system depends upon the support of top management. The management should be enthusiastic
for the success of this system and should give full support for it. If at any time there is a lack of support from top
management then this system will collapse.

Practice Questions
Q1. Prepare a Cash-Budget of a company for April, May and June 2016 using the following information:
Month Sales Purchases Wages Expenses

January (Actual) 100,000 45,000 10,000 5,000
February (Actual) 80,000 40,000 18,000 6,000
March (Actual) 60,000 45,000 12,000 7,000
April (Budgeted) 90,000 50,000 20,000 7,000
May (Budgeted) 70,000 45,000 14,000 6,000
June (Budgeted) 100,000 55,000 22,000 5,000
You are further informed that:

(a) 30% of the purchases and 40% of the sales are for cash;
(b) The average collection period of the company is 1 month and the credit purchases are paid off regularly after
two months;
(c) Wages are paid twice in a month, and the rent of Rs. 2000 included in expenses is paid monthly.
(d) Cash Balance as on 1st April is expected to be Rs. 10,000 and the company wants to keep it at the end of
every month approximately this figure, the excess cash being put in fixed deposits in the bank.
Q2. Prepare a Cash-Budget of a company for April, May and June 2016 using the following information:

January (Actual) 80,000 45,000 20,000 5,000
February (Actual) 80,000 40,000 18,000 6,000
March(Actual) 75,000 42,000 22,000 6,000
April(Budgeted) 90,000 50,000 24,000 7,000
May(Budgeted) 85,000 55,000 20,000 6,000
June(Budgeted) 80,000 35,000 18,000 5,000

(a) 10% of the purchases and 20% of the sales are for cash;
(b) The average collection period of the company is ½ month and the credit purchases are paid off regularly
after one month;
(c) Wages are paid half monthly, and the rent of Rs. 500 included in expenses is paid monthly, remaining
expenses are paid after one month.
(d) Cash and Bank Balance as on 1st April is expected to be Rs 15,000 and the company wants to keep it at the
end of every month approximately this figure, the excess cash being put in fixed deposits in the bank.
Q 3. Popular Automobile Parts Makers currently are producing 6000 units at 40% capacity. The following
particulars relating to cost structure are available.
Per Unit (Rs.)
Direct Materials 5
Direct Labour 2
Manufacturing Overheads (60% fixed) 5
Administration overheads (fixed) 2
Selling and distribution overheads (40% variable) 3
17
Profit 3
Selling Price 20
Prepare a flexible budget and calculate profit at 50 %, 75 % and 100 % production capacity.
Q 4. Popular Automobile Parts Makers currently are producing 12000 units at 60% capacity. The following
particulars relating to cost structure are available.
Per Unit (Rs.)
Direct Materials 15
Direct Labour 20
Manufacturing Overheads (60% fixed) 25
Administration overheads (fixed) 20
Selling and distribution overheads (40% variable) 30
110
Profit 10
Selling Price 120

Prepare a flexible budget and calculate profit at 50 %, 80 % and 90 % production capacity.

Q-5 The expenses budgeted for the production of 10000 units in a factory are furnished below:
Material 70
Labour 25
Variable overheads 20
Fixed Overheads (Rs. 100000) 10
Variable expenses (Direct) 5
Selling Expenses (10% fixed) 13
Distribution Expenses (20% fixed) 7
Administrative Expenses (Rs. 50000) 5
Total 155
Prepare a Budget for the production of
a) 8000 units and
b) 6000 units.
Assume that administrative expenses are rigid for all levels of production.
Q-6 The following data are available in a manufacturing company for a yearly period:
Fixed Expenses: Amount (Rs. Lakhs)
Wages & Salaries 9.5
Rent, Rates & Taxes 6.6
Depreciation 7.4
Sundry administration expenses 6.5
Semi Variable Expenses (At 50 % capacity):
Maintenance & Repairs 3.5
Indirect Labour 7.9
Sales Department Salaries 3.8
Sundry administration salaries 2.8
Variable Expenses: (At 50 % capacity)
Material 21.7
Labour 20.4
Other Expenses 7.9
Total 98.0
Assume that fixed expenses are rigid for all levels of production; semi variable expenses remain
constant between 45 % and 65 % capacity, increasing by 10 % between 65 % and 80 % capacity and by
20 % between 80 % and 100 % capacity. Prepare a flexible budget and forecast profit at 60 %, 75 %, 90
% and 100 % capacity.
Sales is variable and at 50 % capacity it is Rs. 100 Lakhs.

NOTES

Unit 4
Marginal Costing
Marginal Cost
CIMA defines, “Amount at any given volume of output by which aggregate costs are changed if volume of output
is increased or decreased by one unit .It relates to change in output in particular circumstances under
consideration”. In cost accounting, variable costs represent marginal cost.
Meaning Marginal Costing

According to CIMA: “Marginal costing is the ascertainment of marginal cost and of the effect on profit of
changes in volume or type of output by differentiating fixed cost &variable cost .In this technique of costing only
variable cost are charged to operation, processes or products leaving all indirect cost to be written off against
profits in period in which they arise”.
Advantages of Marginal Costing

 Help in Managerial Decision Making
 Cost Control
 Simple Technique
 No under and over absorption of cost
 Constant cost per unit
 Realistic value of stocks
 Aid to profit planning
Disadvantages of Marginal Costing

 Difficult analysis
 Ignores time factor
 Difficulty in application
 Less effective in capital intensive industries
 Improper basis of pricing

Absorption Costing Vs Marginal Costing
Absorption Costing Marginal Costing
All costs fixed &variable are included for ascertaining the Only variable cost are included .fixed cost are
cost. recovered from contribution.
Different unit costs are obtained at different levels of output Marginal cost per unit will remain same at
because of fixed expenses remaining same. different levels of output because variable
expenses vary in the same proportion in
which output varies.
Difference between sales &total cost is profit Difference between sales and marginal cost is
contribution and difference between
contribution and fixed cost is profit or loss.
A portion of fixed costs is carried forward to the next period Stock of work- in-progress and finished
because closing stock of work -in -progress & finished goods are valued at marginal cost which does
goods is valued at cost of production which is inclusive of not include fixed cost .Fixed cost of a
fixed cost. In this way costs of a particular period are particular period is charged to that very
vitiated because fixed cost being period cost should be period and is not carried forward to next
charged to the period concerned & should not be carried period by including in closing stock .Being so
over to next period. ,cost of a particular period are not vitiated.
The apportionment of fixed expenses on an arbitrary basis Only variable cost are charged to products
given rise to over or under absorption which ultimately .marginal cost technique does not lead to over
makes the product cost inaccurate and unreliable or under absorption of fixed overheads.
Absorption costing is not very helpful in taking managerial The technique of marginal costing is very
decision such as whether to accept the export order or not, helpful in taking managerial decisions
whether to buy or manufacture, the minimum price to be because it takes into consideration the
charged during depression etc. additional cost involved only assuming fixed
expenses remaining constant.
Costs are classified according to functional basis such as Cost are classified according to the behavior
production cost, office and administrative cost and selling of cost i.e. fixed cost and variable cost.
and distribution cost.
Absorption costing fails to establish relationship of cost Cost, volume and profit relationship is an
volume and profit as costs are seldom classified into fixed integral part of marginal cost studies as costs
&variable. are classified into fixed and variable costs.

Cost Volume Profit Analysis
Cost-volume-profit (CVP) analysis is a technique that examines changes in profits in response to changes in sales
volumes, costs, and prices. Accountants often perform CVP analysis to plan future levels of operating activity
and provide information about:
● which products or services to emphasize
● the volume of sales needed to achieve a targeted level of profit
● the amount of revenue required to avoid losses
● whether to increase fixed costs
● How much to budget for discretionary expenditures
● Whether fixed costs expose the organization to an unacceptable level of risk
Definition Contribution
Contribution is the excess of sales revenue over the variable cost, i.e.
Contribution = Sales - Variable cost.
It is called so, since it initially contributes towards recovery of fixed costs and thereafter towards profit of the
business. The contribution forms a fund for fixed expenses and profit. The contribution concept is based on the
theory that the profit and fixed expenses of a business is a ‘joint cost’ which cannot be equitably apportioned to
different segments of the business. Hence contribution serves as a measure of efficiency of operations of
various segments of the business.
Definition P/v ratio
The Profit Volume Ratio (P/V Ratio) is the relationship between Contribution and Sales Value. It is also termed
as Contribution to Sales Ratio.
Mathematically, it may be defined as:
CONTRIBUTION
P/V Ratio = -----------------------------------------------------------------------------------
SALES
OR
CHANGE IN PROFITS OR CONTRIBUTION

P/V Ratio = -----------------------------------------------------------------------------------
CHANGE IN SALES

Significance of P/V Ratio:
 P/V Ratio is considered to be the basic indicator of the profitability of the business.
 The higher the P/V Ratio, the better it is for a business. In the case of a firm enjoying steady business
conditions over a period of years, the P/V Ratio will also remain stable and steady.
 If P/V Ratio is improved, it will result in better profits.
Improvement of P/V Ratio

 P/V Ratio can be improved by the following means:
 By reducing the variable cost,
 By increasing the selling price, or
 By increasing the share of products with higher P/V Ratio in the overall sales mix. (where a firm
produces a number of products)
Uses of P/V Ratio:

 To compute the variable costs for any volume of sales.
 To measure the efficiency or to choose a most profitable line. The overall profitability of the firm can be
improved by increasing the sales/output of a product giving a higher PV ratio.
 To determine break-even point and the level of output required to earn a desired profit.
 To decide more profitable sales-mix.
Break Even Analysis

The Break – Even Point is the point of sales or a business situation at which there is neither a profit nor a loss
to the firm. In other words, at this point, the total contribution equals total fixed costs.
Fixed Cost
Break Even Point in units = ---------------------------------------
Contribution per unit
Fixed Cost
Break Even point in Rs. = --------------------------------------
P/V Ratio
Fixed Cost
Break Even point in Rs. = -----------------------------------------× Sales
Contribution

Assumptions underlying break even analysis
1. Total costs can be easily classified into Fixed and Variable categories.
2. Selling Price per unit remain constant, irrespective of quantity sold.
3. Variable Costs per unit remain constant. However total variable costs increase as output increases.
4. Fixed Costs for the period remains same irrespective of output.
5. Productivity of the factors of production will remain the same.
6. The state of technology process of production and quality of output will remain unchanged.
7. There will be no significant change in the level of opening and closing inventory.
8. The company manufactures a single product. In the case of a multi-product company, the sales-mix remains
unchanged.
9. Both revenue and cost functions are linear over the range of activity under considerations.
Definition Margin of Safety

The margin of safety is the excess of an organization’s expected future sales (in either revenue or units) above
the breakeven point. The margin of safety indicates the amount by which sales could drop before profits reach
the breakeven point:
The margin of safety is computed using actual or estimated sales values, depending on the purpose. To evaluate
future risk when planning, use estimated sales. To evaluate actual risk when monitoring operations, use actual
sales. If the margin of safety is small, managers may put more emphasis on reducing costs and increasing sales to
avoid potential losses. A larger margin of safety gives managers greater confidence in making plans such as
incurring additional fixed costs. The margin of safety percentage is the margin of safety divided by actual or
estimated sales, in either units or revenues. This percentage indicates the extent to which sales can decline before
profits become zero.
Margin of safety = Actual sales -Break Even point sales
Or
Profit
Margin of Safety = -----------------------------------------
PV Ratio

Margin of safety in units = Actual or estimated units of activity - Units at breakeven point
Margin of safety in revenues = Actual or estimated revenue - Revenue at breakeven point
Margin of safety in units

Margin of safety percentage in units = ------------------------------------------
Actual or estimated units
Margin of safety in revenue

Margin of safety percentage in revenues = ------------------------------------------
Actual or estimated revenue
Calculation of Sales for desired profits:
Fixed Cost + Desired profit

Sales for desired profit = --------------------------------------
P/V Ratio
Calculation of Profits at a given level of sales:
Profit = (Sales * PV Ratio) – Fixed Cost

Unit-5
Standard Costing
Definition Standard Costing

Standard Costing is one of the most important tools to control costs. In this technique, all costs are pre-
determined, i.e. costs are determined in advance of production. Such pre-determined costs are then compared with
the actual costs. The difference between the actual costs and pre-determined costs, known as variances, arethen
analyzed and investigated to know their reasons. Variances are reported to management for taking remedial steps
so that actual costs adhere to pre-determined or standard costs.
It is a special technique to control costs and can be used in conjunction with any other system like job costing,
process costing or marginal costing etc.
CIMA, London, defines standard costing ‘as the pre-determined cost based on technical estimates of
materials, labour and overheads for a selected period of time for a prescribed set of working conditions’.
It can also be understood as:
 Standard costing is a technique which is used in many industries, where production is of repetitive nature.
⚫ Standard costing is developed due to the shortcomings of historical costing.
⚫ Standard costing is that technique in which the standard cost is determined before starting the production.
⚫ Standard cost is a predetermined cost and such cost indicates what a product should cost.
⚫ Standard cost is calculated by considering all the situations ideal in nature.
⚫ Standard costs have been defined as the normal costs for normal production efficiency at normal level of
output.
Objectives of Standard Costing
 To establish control
⚫ To set standards for various elements of cost
⚫ To fix responsibility
⚫ To make budgetary control more effective
Need For Standards
⚫ Cost control
⚫ Pricing decisions
⚫ Performance Appraisal
⚫ Cost awareness
⚫ Management by objective

Applications of Standard Costing
⚫ Process industries
⚫ Service industries
⚫ Engineering industries
⚫ Textile industries
⚫ Extraction industries
Advantages of Standard Costing
• Formulation of price and production policies
• Comparison and analysis of data
• Management by exception
• Delegation of authority and responsibility
• Cost consciousness
• Better capacity to anticipate
• Better economy, efficiency, and productivity
• Preparation of periodical financial statements
• Facilities budgeting
Limitations of Standard Costing
⚫ high degree of technical skill
⚫ segregation of variances into controllable and non-controllable factors
⚫ duplication in recording,
⚫ Either too strict or too liberal.
Variance Analysis
Standard Costing guides as a measuring rod to the management for determination of "Variances" in order to
evaluate the production performance. The term "Variances" may be defined as the difference between Standard
Cost and actual cost for each element of cost incurred during a particular period.
The term "Variance Analysis" may be defined as the process of analyzing variance by subdividing the total
variance in such a way that management can assign responsibility for off-Standard Performance.
The variance may be favorable variance or unfavorable variance. When the actual performance is better than the
Standard, it resents "Favorable Variance." Similarly, where actual performance is below the standard it is called
as "Unfavorable Variance." Variance analysis helps to fix the responsibility so that management can ascertain –
(a) The amount of the variance
(b) The reasons for the difference between the actual performance and budgeted performance

(c) The person responsible for poor performance
(d) Remedial actions to be taken
• The deviation of actual from standard is called variance.
• When the actual cost is less than standard cost or actual result is better than standard set, it is known as
favourable variance.
• On the other hand, when actual cost exceeds standards cost or actual result is not up to standard, it is
known as unfavourable or adverse variance.
Classification of Variances
⚫ Functional Basis
⚫ Measurement Basis
⚫ Result Basis
⚫ Controllability Basis
Functional Basis
Measurement Basis Result Basis
⚫ Absolute variance: Difference between the standard cost and the actual cost in terms of money is known
as absolute variance.
⚫ Relative variance: difference is expressed as a percentage of the standard cost, it is known as relative
variance.

1. Material Cost Variance (MCV)
I. Direct Material Cost Variance (DMCV): Direct Material Variances are also termed as Material Cost
Variances. The Material Cost Variance is the difference between the Standard cost of materials for the Actual
Output and the Actual Cost of materials used for producing actual output.
The Material Cost Variance is calculated as:
Material Cost Variance = Standard Cost of actual output - Actual Cost

MCV = SC - AC
(Or)
Material Cost Variance = Standard Quantity X Standard - Actual X Actual
for actual output Price Quantity Price
= (SQ x SP) - (AQ x AP)

The material cost variance is further classified into:
(a) Material Price Variance
(b) Material Usage Variance
(c) Material Mix Variance
(d) Material Yield Variance
a) Direct Material Price Variance: This is that portion of the material cost variance which is due to the
difference between the standard price specified and the actual price paid. If the actual price is higher than the
standard price, it would result in adverse price variance and if the actual price is lower than standard price, the
result is favorable price variance.
⚫ Material price variance = Actual quantity (Standard price – Actual price)

MPV = AQ* (SP-AP)
b) Direct Material Usage Variance
This is that portion of material cost variance which is due to the difference between the standard quantity of
actual production and the actual quantity used.
 Material Usage Variance = Standard price (Standard quantity for actual output – Actual quantity)
MUV = SP*(SQ-AQ)
c) Direct Material Mix Variance (MMV): This is sub variance of material usage variance. It arises only
when more than one type of material is used for producing the finished product. It is the portion of the
material usage variance which is due to the difference between the Standard and the actual composition
of materials.
 Material Mix Variance (MMV) = Standard Price {Revised Standard Quantity –Actual Quantity}
MMV = SP (RSQ - AQ)
Standard quantity of one material

RSQ = --------------------------------------------------------- * Total of actual quantities of all materials
Total of standard quantities of all materials
d) Material Sub-usage (or Material Revised Usage) Variance (MRUV): This is a sub variance of material
usage variance and represents that portion of the material usage variance which is attributed to reasons
other than those give rise to material mix variance.
Conceptually
MUV = MMV + MRUV
Material Revised Usage Variance = (Standard Quantity- Revised Standard Quantity) * Standard Price
MRUV = (SQ – RSQ) * SP
e) Material Yield Variance (MYV): This is also a sub variance of material usage variance. It arises in
process industries like chemicals where loss of materials in production is inevitable. While setting
standards, the normal or standard loss is taken into account, but actual loss may differ from normal loss.
This results in actual yield or output being different from standard yield.
Thus material yield variance is that portion of the material usage variance which is due to the difference
between standard yield specified & actual yield obtained.
Material Yield Variance = (Actual Yield - Standard Yield) * Standard Output Price
MYV = (AY - SY) * SOP
Standard output price (SOP) is the standard material cost per unit of output.
Note:Either MRUV or MYV is computed. These two are always equal.

2. Labor Cost Variance (LCV)
a. Direct Labour Cost Variance
This is the difference between the standard direct labour cost specified for the activity achieved and the actual
direct labour cost incurred.
Labour Cost Variance = Standard Labour Cost of actual output – Actual Labour Cost
LCV = SC - AC
Or
Labour Cost Variance = (Standard Hours for actual output * Standard Rate per Hour) –
(Actual Hours * Actual rate per Hour)
LCV = (SH * SR) – (AH * AR)
b. Direct Labour Rate Variance
This is that portion of the labour cost variance which is caused due to the difference between the standard rate
of labour specified and the actual rate paid.
⚫ Labour rate variance = (Standard rate – Actual rate) * Actual hours

LRV = (SR – AR) * AH
c. Labour Efficiency Variance
This is that portion of labour cost variance which is due to the difference between labour hours specified for actual
output and the actual labour hours spent. It is the difference between the standard time and the actual time spent
multiplied by standard wage rate.
 Labour efficiency variance = (Standard hours for actual output – Actual hours) * Standard rate
LEV = (SH – AH) * SR
d. Labour Idle Time Variance
It is that portion of labour cost variance which is due to the abnormal idle time of workers. Whilecalculating
labour efficiency variance, abnormal idle time is deducted from the actual time spent to determine the real
efficiency of the workers.
 Idle time variance = Idle time × Standard rate
ITV = IH * SR

e. Labour Mix Variance
Labour mix variance arises only when more than one grade of workers are employed and the composition of
actual grade of workers differ from those specified.
Labour mix variance = (Revised standard hours – Actual Hours) * Standard Rate
LMV = (RSH – AH) * SR
f) Labour Revised Efficiency (or Labour Sub-efficiency) Variance (LREV): This is similar to Material
Revised usage variance and is a sub variance of labour efficiency variance. It arises due to factors other
than those which gives rise to idle time variance and labour mix variance. Thus this is a residual of labour
efficiency variance left after idle time and mix variance have been separated.
Labour Revised Efficiency Variance = (Std. Hrs for actual output- Revised Standard Hrs) * Std Rate
LREV = (SH – RSH) * SR
f. Labour Yield Variance
Labour Yield Variance is a sub variance of labour Efficiency Variance. This variance reveals the effect on
labour cost of actual output or yield being more or less than the standard yield.
Labour yield variance = Actual Yield – Standard Yield from * Standard Labour
Actual input Cost per unit of output

Practice Questions
Q 1. The following particulars are available of X Ltd for the year 2009
Selling Price Rs. 20 per unit
Variable Manufacturing cost Rs. 11 per unit
Variable selling costs Rs. 3 per unit
Fixed factory overheads Rs. 5,40,000
Fixed Selling costs Rs. 2,52,000
You are required to find out:

a) Break-even point expressed in amount of sales in rupees.
b) No. of units that must be sold to earn a profit of Rs. 60,000 per year.
c) How many units must be sold to earn a net income of 10 % of sales?
Q 2. The following particulars are available of X Ltd for the year 2009
Fixed Cost Rs. 10,00,000
Marginal Cost Rs.15 per unit
Units sold 3,00,000 units

a) Profit earned during the year
b) P/V Ratio
c) Break Even Point
d) Margin of Safety
e) Profit if sales are Rs. 80,00,000

Q 3. The operating results of a company for the last two years are as follows:
Sales Profits
Year 2011 Rs. 2, 70,000 Rs. 6,000
Year 2012 Rs. 3, 00,000 Rs. 15,000
You are required to calculate:
a) P/V Ratio
b) Break-even point
c) Margin of safety at a profit of Rs. 24,000
Q 4. A company budget for a production of 1, 50,000 units. The variable cost per unit is Rs. 14 and fixed cost
is Rs. 2 per unit. The company fixes its selling price to fetch a profit of 15 % on cost.
a) What is the break-even point?
b) What is the profit volume ratio?
c) If it reduces its selling price by 5 %, how does the revised selling price affect the break-even point
and profit volume ratio?
d) If a profit increase of 10 % is desired more than the budget, what should be the sales at the reduced
prices?
Q 5. From the following data, you are required to calculate the break-even point and the net sales value at this
point:
Selling price per unit Rs. 25

Direct material cost per unit Rs. 8
Direct Labour cost per unit Rs. 5
Fixed overheads Rs. 24000
Variable overheads@ 60 % on direct labour
Trade discount 4%
If sales are 15 % and 20 % above the break-even volume, determine the net profits.

Q 6. A manufacturing firm furnishes the following information:
CalculaStet:andard Actual
Material for 70 kg of finished

100 kg Output 2,10,000 kg
products
Price of material Rs. 1 per kg Material used 2,80,000 kg
Cost of materials Rs. 2,52,000
1) Material Cost Variance

2) Material Price Variance
3) Material Usage Variance
Q. 7 From the following data, calculate material variances:
Material Standard Quantity Standard Rate Actual Quantity Actual Rate
X 8000 Kg Rs. 1.05 7500 Kg Rs. 1.20
Y 3000 Kg Rs. 2.15 3300 Kg Rs. 2.30
Z 2000 Kg Rs. 3.30 2400 Kg Rs. 3.50
Q 8. A gang of workers usually consists of 10 men, 5 women and 5 boys paid at standard hourly rates of Re.
1.25, Re. 0.80, and Re. 0.70 respectively. In a normal working week of 40 hours, the gang is expected to
produce 1000 units of output.
In a certain week the gang consisted to 13 men, 4 women and 3 boys; actual hourly rates being Re.
1.20, Re. 0.85 and Re. 0.65 respectively. Two hours were lost due to abnormal idle time and 960 units of
output were produced. Calculate appropriate labour variances.

Q 9. From the following calculate labour variance for department A and B.
Dept. A Dept. B
Actual Direct Wages Rs. 2000 Rs. 1800
Standard hours produced 8000 6000
Standard rate per hour 30 paise 35 paise
Actual hours worked 8200 5800
Q 10. The details regarding the composition and weekly wage rates of labour force engaged on a job scheduled
to be completed in 30 weeks are as follows:
Category of Standard Actual

workers No. of Workers Weekly wage rate No. of Weekly wage rate
per worker (Rs.) Workers per worker (Rs.)
Skilled 75 60 70 70
Semi-Skilled 45 40 30 50
Unskilled 60 30 80 20
The work is actually completed in 32 weeks. Calculate the all labour variances.
Q 11. From the following compute:

a) Material Price Variance
b) Material Quantity Variance
c) Material Mix Variance
d) Material Cost Variance
Material Standard Actual

Quantity (Kg) Unit Price (Rs.) Quantity (Kg) Unit Price (Rs.)
A 10 2 5 3
B 20 3 10 6
C 20 6 5 5

NOTES

Bharati Vidyapeeth (Deemed to be University)
Institute of Management and Research (BVIMR), New Delhi
1st Internal Examination (February 2019)
Course: Semester:
Subject: Course Code:
Max. Marks: 40 Max. Time: 2 Hours
Instructions (if any) :- (Calculator is allowed)
Question No. 1 is compulsory. Attempt any two questions from Q2 to Q5. And attempt any two question
from section 2.
Section 1
Answer in 400 words. Each question carry 06 marks.
Q. 1
Q. 2
Q. 3
Q. 4
Q. 5 Write Short Note on any two. Answer in 300 words. Each carry 03 marks.
a)
b)
c)
Section 2
Attempt any 2 questions. Each question carry 11 marks
Q 6.
Q 7.
Q 8.
Bharati Vidyapeeth (Deemed to be University)
2nd Internal Examination (March 2019)
Course: Semester:
Subject: Course Code:
Instructions (if any) :- (Calculator is allowed)
Question No. 1 is compulsory. Attempt any two questions from Q2 to Q5. And attempt any two question
from section 2.
Section 1
Answer in 400 words. Each question carry 06 marks.
Q. 1
Q. 2
Q. 3
Q. 4
Q. 5 Write Short Note on any two. Answer in 300 words. Each carry 03 marks.
a)
b)
c)
Section 2
Attempt any 2 questions. Each question carry 11 marks
Q 6.
Q 7.
Q 8.
Bharati Vidyapeeth Deemed University,
1st Internal Examination January 2018
Subject Cost Accounting BBA-II Sem Course Code: JO10104
Instructions: 1. Attempt all questions
2. Show the detailed calculations, wherever required
Q. 1 Attempt any five questions. Answer in 50 words. [5 x 2]
a) Define Cost accounting?
b) Differentiate between prime cost and factory cost?
c) What is opportunity cost?
d) What are the methods of costing?
e) Explain any two advantages of budgets?
f) Give Performa of cost sheet?
g) Differentiate between Explicit Cost & Implicit Cost?
h) What do you mean by semi variable overheads?
Q. 2 Attempt any two questions. Answer in 200 words [2 x 5]

a) What is budget? Explain the types of budgets?
b) Differentiate between financial accounting and Cost accounting?
c) Explain the Elements of cost on the basis of nature?
Q.3 Attempt any two questions. [2 x 5]

a) You are require to prepare a cost sheet from the data, showing:-
(i) the cost per unit
(ii) cost per unit sold and profit for the period.
Raw material consumed Rs. 15,000
Direct labour charges Rs. 9,000
Machine hours worked 900 hours
Machine hour rate 5 Rs.
Administration overheads 20% on works cost
Selling overheads 0.50 per unit
Units produced 17,100
Units sold 16000 at Rs. 4 per unit
b) Prepare a flexible budget for the production of 1,100 and 1,600 units. The budgeted expenses for
1000 units are as follows:-
Particulars Per unit (Rs.)
Direct material 500
Direct labor 300
Direct Expenses 200
Variable Overheads 250
Fixed Administrative overheads 50
Selling and distribution overheads (40% Fixed) 15
c) Find out:-
A) Prime cost B) Works cost c) Cost of sales
Particulars Job (A) Job (B)
Direct Material 2, 00,000 1, 50,000
Direct Labour 60,000 1, 00,000
Direct Expenses 90,000 50,000
Additional Information:-
The factory overheads are absorbed at 60% of direct labour cost, Administrative overheads are absorbed at 30%
of works cost. Selling and distribution overheads are absorbed at 15% of cost of production.
Q.4 Attempt any one. [10 x 1]

a) Prepare cost sheet and calculate profit.
Purchases 36,000
Direct Labor Cost 16,000(160% of factory overheads)
Opening stock of raw material 8,000
Opening stock of W.I.P 8,000
Opening stock of Finished goods 12,000
Closing stock of raw material 8,600
Closing stock of W.I.P 11,000
Closing stock of Finished goods 17,000
General and administrative Expenses 3,600
Sales of the Month 75,000
b) Prepare a flexible budget for production at 80% and 100% activity on the basis of the following
information-:
Production at 50% capacity 5,000 units
Raw materials Rs. 80 per unit
Direct labor Rs. 50 per unit
Direct expenses Rs. 15 per unit
Factory expenses 50,000 (50% Fixed)
Administration expenses 60,000 (60% variable)
c) Prepare a Cash-Budget of a company for April, May and June 2016 using the following information:

January (Actual) 100,000 45,000 10,000 5,000
February (Actual) 80,000 40,000 18,000 6,000
March (Actual) 60,000 45,000 12,000 7,000
April (Budgeted) 90,000 50,000 20,000 7,000
May (Budgeted) 70,000 45,000 14,000 6,000
June (Budgeted) 100,000 55,000 22,000 5,000

I. 20% of the purchases and 30% of the sales are for cash;
II. The average collection period of the company is 1 month and the credit purchases are paid off regularly
after two months;
III. Wages are paid every month, and the rent of Rs. 2000 included in expenses is paid after one month.
IV. Cash Balance as on 1st April is expected to be Rs. 40,000.
1st Internal (January 2016)
Subject………Cost Accounting Course: ……BBA IInd SEM
Max. Marks: 40 Max. Time: 2 hours
Q.1 Attempt any five questions. Answer in 50 words. (5x2)
i) Define Marginal Cost
ii) Explain Opportunity cost
iii) Define budgetary control
iv) Differentiate between Fixed cost and Variable cost
v) What are the different elements of Cost, explain?
vi) Write down the Performa of Cost sheet
vii) Write down the Performa of Cash Budget
viii) Calculate cost of production if Direct Material consumed is Rs. 45000, Direct Labour is 40 % of
Material Consumed, office overheads 30 % of prime cost & factory overheads are 50 % of prime cost.
Q.2 Attempt any two questions. Answer in 200 words. (2x5)
a) Define cost accounting. How it differs from financial accounting?
b) State the differences between Cost Accounting and Financial Accounting.
c) How you will classify the costs on the basis of Managerial Decision making?
Q.3 Attempt any two questions (practical oriented) (2x5)
a) From the following information pertaining to companies A Ltd & B Ltd find out:
I. Prime Cost
II. Works Cost
III. Cost of sales
Particulars A Ltd. B Ltd

Direct Material 1,00,000 2,50,000
Direct Labor 80,000 2,00,000
Direct Expenses 50,000 1,00,000
Additional Information:
The factory overheads are absorbed at 40% of direct labor cost. Administrative overheads are absorbed at 20 %
of works cost. Selling and distribution overheads are absorbed at 15% of cost of production.
b) The expenses budgeted for the production of 10,000 units in a factory is as follows:
Particulars Cost per unit

Materials 70
Labour 25
Variable factory overhead 20
Fixed factory overheads (Rs. 100,000) 10
Variable expenses (Direct) 5
Selling expenses 10% fixed 13
Distribution expenses (Fixed) 7
Administration expenses (fixed Rs. 50,000) 5
Total cost of sales per unit 155
You are required to prepare a budget for the productions of 6000 and 8000 units.
c) The following data relate to the manufacturing of a standard product during the four weeks
ending on 31st march, 2012.
Raw Materials Consumed Rs. 20000

Direct Wages Rs. 12000
Machine Hours Worked 1000 hours
Machine Hour Rate Rs. 2 Per Hour
Office overhead 20% on works cost
Selling overhead Re. 0.40 per unit
Units produced 20000 units
Units sold at Rs 3 each 18000 units
Prepare a cost sheet to show:

i. Prime cost
ii. Works cost
iii. Cost of production
iv. Cost of goods sold
v. Cost of sales
vi. Profit
Q.4 Attempt anyone question with 600 words. (10x1)
a) Prepare a cash budget for the three months ending 30th June from the following information:-
Month Sales Materials Overheads

February 14000 9600 4700
March 15000 9000 4900
April 16000 9200 5200
May 17000 10000 5800
June 18000 10400 6300
Other relevant information is:-
10% sales are on cash, 50% of credit sales are collected next month and the balance in the following month.
Creditors are paid after 2 months
Overheads are paid after ½ month
Cash and bank balance on 1st April is expected to be Rs.6, 000.
The monthly installment of Rs.2, 000 is payable from April Onwards.
Dividend of 10,000 will be paid on 1st June.
Advance to be received for sale of vehicles Rs.9, 000 in June.
Income tax (advance) to be paid in June is Rs. 2,000.
b) Define Cost and explain different types of cost classification in detail.

2nd Internal Examination (March 2016)
Subject Cost Accounting Course Code: JO10104
Instructions: 1. Attempt all questions
2. Show the detailed calculations, wherever required
Q. 1 Attempt any five questions. Answer in 50 words (Recall) [5 x 2]
a) Define Marginal costing
b) State the formulas of any two labour variances?
c) What is Margin of safety?
d) What is P/V RATIO?
e) Which ratios are used to test the short term liquidity of a company?
f) Define liquid assets?
g) State any four application of marginal costing?
h) Give two limitations of ratio analysis?
i) Differentiate between cash flow and fund flow statement
Q. 2 Attempt any two questions. Answer in 200 words (Theoretical Concept) [2 x 5]
a) Explain in brief the break-even analysis with the help of a chart.
b) Describe any five advantages and five disadvantages of Break Even Analysis
c) Describe any five advantages and five disadvantages of standard costing?
Q.3 Attempt any two questions. [2 x 5]

a) A manufacturing firm furnishes the following information:
Standard Actual
Material for 70 kg of finished products 100 kg Output 2,10,000 kg
Price of material Rs. 1 per kg Material used 2,80,000 kg
Cost of materials Rs. 2,52,000
Calculate:
1. Material Cost Variance
2. Material Usage Variance
3. Material Price Variance
b) The following particulars are available of X Ltd for the year 2009

Variable Manufacturing cost Rs. 11 per unit
Variable selling costs Rs. 3 per unit
Fixed factory overheads Rs. 5,40,000
Fixed Selling costs Rs. 2,52,000
a) Break-even point expressed in amount of sales in rupees.
b) No. of units that must be sold to earn a profit of Rs. 60,000 per year.
c) How many units must be sold to earn a net income of 10 % of sales?
c) The following particulars are available of X Ltd for the year 2009
Fixed Cost Rs. 10,00,000

Marginal Cost Rs.15 per unit
Units sold 3,00,000 units

i. Profit earned during the year
ii. P/V Ratio
iii. Break Even Point
iv. Margin of Safety
v. Profit if sales are Rs. 80,00,000
d) From the following data calculate stock turnover ratio?
Opening stock 29,000

Purchases 2,42,000
Sales 3,20,000
Gross profit 25% of sales
Q.4 Attempt any one. Answer in 600 words [10 x 1]

a) The standard material input required for 1000 kg of a finished product are given below:
Material Standard Quantity Standard Rate per

(in Kg) Kg (in Rs)
P 450 20
Q 400 40
R 250 60
Total 1100
Less: Loss 100
Standard Output 1000
Actual production in a period was 20,000 kg. of finished product for which the actual quantities of
material used and the prices paid thereof were as under:
Material Actual Quantity Actual Purchase

(in Kg) price per Kg (in Rs)
P 10,000 19
Q 8500 42
R 4500 65
Calculate all Material Variances.
b) Explain the importance of ratio analysis in cost accounting? Define classification of ratios?
CVP Analysis Practice Questions
Multiple Choice
1. CVP Analysis is an important decision making tool for which reason?
a) Determining product mix
b) Setting selling price
c) Maximizing use of facilities
d) All of the above
2. A Company has a contribution margin of 40% and fixed costs of $120,000.What is the
break-even point in dollars?
a) $48,000
b) $300,000
c) $200,000
d) $72,000
3. P Company has fixed costs of $200,000, sales price of $50, and variable cost of
$30 per unit. How many units must be sold to earn profit of $50,000?
a) 2,500
b) 10,000
c) 12,500
d) 25,000
4. B Company has fixed costs of $20,000 and a contribution margin ratio of 40%.Currently,
sales are $75,000. What is Bowl's margin of safety?
a) $20,000
b) $25,000
c) $30,000
d) $50,000
5. Z Company makes two different products, Product A and Product B. They

currently sell 2,000 units of product A and 3,000 units of product B. What isthe sales
mix percentages?
a) Product A= 40%, Product B= 60%
b) Product A= 60%, Product B= 40%
c) Product A= 67%, Product B= 33%
d) Product A= 33%, Product B= 67%
6. Degree of operating leverage is calculated as
a) Net income divided by contribution margin
b) Break-even sales divided by net income.
c) Net income divided by break-even sales.
d) Contribution margin divided by net income
7. N Company sells two products. Product A sells for $100 per unit, and has unit variable
costs of $60. Product B sells for $70 per unit, and has unit variable costs of $50.
Currently, N Company sells three units of product A for every oneunit of product B
sold. N Company has fixed costs of $750,000. How many units would N Company
have to sell to earn a profit of $300,000?
a) 7,500 units of A and 22,500 units of B
b) 22,500 units of A and 7,500 units of B
c) 17,600 units of A and 12,400 units of B
d) 12,400 units of A and 17,600 units of B
8. Pear Company sells three products. Pear is having difficulty making all of the
required products because it only has limited hours available on the machinethat is
used to produce all products. Determine the order in which the products should be
made to produce the most profit based on the below information.
Tablets Phones Computers

Sales per unit $1000 $800 $2,500
Variable cost per unit $600 $250 $1,000
Machine Hours per unit 1 .5 1.5
a) Tablets, Phones, Computers

b) Computer, Phones, Tablet
c) Phones, Computer, Tablet
d) Computer, Tablet, Phone
9. Goat Company provide the following CVP income statement. What is the
degree of operating leverage?
Sales $850,000
Variable Costs 325,000
Contribution Margin 525,000
Fixed Costs 300,000
Net Income 225,000
a) 2.33
b) 1.61
c) 1.08
d) 0.57
10. A high degree of operating leverage means which of the following?

a) A company has higher fixed costs relative to variable costs
b) A company has higher variable costs relative to fixed costs
c) A company has higher net income in comparison to sales
d) A company has higher sales in comparison to net income
Practice Problems
Practice Problem #1
W Company sells only one product with a selling price of $200 and a variable cost of $80per unit. The
company’s monthly fixed expense is $60,000.
Required: A) Determine the breakeven point in units sold and sales

dollars.
B) Determine the breakeven point in units sold and sales
dollars if the company wants a net income of $30,000.
C) Determine margin of safety if current sales are $175,000.
Practice Problem #2
The H Company had wine sales for December as follows:
Red White
Bottles sold 100 40
Average selling price $80 $45
Average variable cost $40 $15
The only other cost is the wine director’s salary of $36,000 per year.
Required: a) Prepare an income statement by type of wine and in total for

December.
b) Calculate breakeven in sales dollars by type of wine using the
weighted average contribution margin ratio. Calculate breakeven
in sales dollars by type of wine using the weighted average unit
contribution margin.
Practice Problem #3
F Company is debating whether to purchase new equipment that would increase fixed costs from $96,000
to $196,000, and decrease variable costs from $14 per unit to $8 per unit. If it were to implement the
change at its current production level of 100,000,profit would not change. Selling price is $20 per unit.
Required: a) Prepare an income statement showing the changes to fixed andvariable

costs
b) Calculate the degree of operating leverage for each situation andexplain
the change.
Practice Problem #4
K Company produces three picnic products: koolers, baskets and grills. Each product requires a limited
resource of materials. In which order should the products be producedto maximize profits? A product line
income statement for the year is shown below:
Koolers Baskets Grills Total

Units Sold 2,000 2,500 1,500
Sales $360,000 $600,000 $240,000 $1,200,000
Variable expenses 198,000 420,000 120,000 738,000
CM 162,000 180,000 120,000 462,000
Fixed expenses 240,000
Operating income $262,000
Materials 8lbs 6lbs 4lbs
Solutions
1. D
2. B
3. C
4. B
5. A
6. D
7. B
8. C
9. A
10. A
Solution #1
A)
CM ratio = Sales – variable expenses = $200–80=120
Sales $200
= 60%
Breakeven sales = Fixed expenses + operating income = $60,000 + $0

Contribution margin ratio 60%
= $100,000
Breakeven units = Fixed expenses + operating income = $60,000 + $0

Contribution margin $ per unit $120
= 500 units
B)
Sales – variable expenses $200–80=120
CM ratio 60%
Sales $200
Fixed expenses + operating $60,000 +

Sales income $30,000 $150,000
Contribution margin ratio 60%
Fixed expenses + operating $60,000 +

Units income $30,000 750 units
Contribution margin $ per unit $120
OR
Units Sales $150,000
750 units
Selling price per unit $200
C)
Actual Sales- Breakeven Sales= Margin of Safety
$175,000 – 100,000 = $75,000
Solution #2
a) Current income statement:
Red White Total
Bottles sold 100 40
Average selling price $80 $45
Total sales $8,000 $1,800 $9,800
Average cost $40 $15

Total Cost $4,000 $600 4,600
Contribution margin $4,000 $1,200 5,200
Fixed expenses 3,000
Operating income $2,200
Break-even in Sales Dollars

Red White
Sales Dollars 8,000 1,800
Total Sales 9,800 9,800
Sales Mix 82% 18%
Contribution
Margin 4,000 1,200
Sales 8,000 1,800
Contribution
Margin Ratio 50% 67%
Sales Mix 82% 18%
Total
Weighted Average
Contribution
Margin Ratio 41% 12% 53%
Fixed Cost 3,000

/ Weighted Average
Contribution
Margin Ratio 53%
= Break-even in $
Sales Dollars 5,653.85
Break-even in Sales Dollars Per
Sales Mix * Break-even Product
$
Red 82% $ 5,653.85 4,615.38
$
White 18% $ 5,653.85 1,038.46
Break-even in units
Red White
Units Sold 100 40
Total Units 140 140
Sales Mix 71% 29%
Contribution
Margin per unit 40 30
Sales Mix 71% 29%
Total
Weighted Average
Unit Contribution $ $ $
Margin 28.57 8.57 37.14
Fixed Cost 3,000

/ Weighted Average
Unit Contribution
Margin 37.14
= Break-even in
Units 80.77
Break-
even in
* Break- unit Per Verify with Breakeven
Sales Mix even Product in sales dollars
4615.38
Red 71% 80.77 57.69 80 5
1038.46
White 29% 80.77 23.08 45 2
Solution #3
Units Sold 20,000 20,000
Sales $20.00 $400,000 $20.00 $400,000
Variable $14.00 280,000 $8.00 160,000
CM $6.00 140,000 $12.00 240,000
Fixed 96,000 196,000
Net $44,000 $44,000
Income
Degree of 3.18 5.45
Operating
Leverage
A higher degree of operating leverage exposes a company to greater earnings volatilityrisk. They
will earn more as sales increase, but have potential to lose more if there is adecrease in sales.
Solution #4
K Company produces three picnic products: koolers, baskets and grills. Each product requires a
limited resource of materials. In which order should the products be producedto maximize profits?
A product line income statement for the year is shown below:
Koolers Baskets Grills

Units Sold 2,000 2,500 1,500
Sales $360,000 $600,000 $240,000
Variable expenses 198,000 420,000 120,000
CM 162,000 180,000 120,000
CM per unit 81 72 80
Materials 8lbs 6lbs 4lbs
CM per Material 10.13 12 20
Production order: Grills, Baskets, Koolers
Variance Analysis under Standard Costing
MATERIAL VARIANCE
Problem – 1:
A manufacturing concern, which has adopted standard costing, furnished thefollowing
information:
Standard Material for 70 kg finished product: 100 kg.Price of
materials: Re. 1 per kg.
Actual Output: 2,10,000 kg.
Material used: 2,80,000 kg. Cost of
material: Rs. 2,52,000.Calculate:
(a) Material Usage Variance (b) Material Price Variance (c) Material
Cost Variance
Solution:
(1) Standard quantity For 70 kg standard output
Standard quantity of material = 100 kg.
2,10,000 kg. of finished products
2,10,000 x 100 = 3,00,000 kg.

70
(2) Actual price per kg. Rs.2,52,000 = Re.0.90

2,80,000
(a) Material Usage = Standard Rate (Standard quantity for actual

Variance output – Actual quantity)
=Re. 1 (3,00,000 – 2,80,000)
=Re. 1 x 20,000
=Rs. 20,000 (favorable)
(b) Material Price Variance =Actual quantity(Standard price ‐
Actual price)
2,80,000 (Re.1 – Re.0.90)
2,80,000 x Re.0.10
Rs. 28,000 (Favorable)
(c) Material Cost Variance = Standard quantity for actual output x

Standard rate) – (Actual quantity x Actual
rate)
=(3,00,000 x 1) – (2,80,000 x 0.90)
= Rs.3,00,000 x Rs. 2,52,000
Rs.48,000(favorable)
Verification:
MCV = MPV + MUV
Rs. 48,000 (F) = Rs.28,000 (F) + Rs.20,000 (F)
Problem – 2
The standard mix to produce one unit of product is as follows: Material A
60 units @ Rs. 15 per unit = Rs. 9,00
Material B 80 units @ Rs. 20 per unit = Rs. 1,600

Material C 100 units @ Rs. 25 per unit = Rs. 2,500
240 units Rs. 5,000

During the month of April, 10 units were actually produced and consumption was
as follows:
Material A 640 units @ Rs. 17.50 per unit = Rs. 11,200
Material B 950 units @ Rs. 18.00 per unit = Rs. 17,100

Material C 870 units @ Rs. 27.50 per unit =Rs. 23,925
2,460 units 52,225

Rs
.
Calculate all material variances.
Solution:‐
Material Standard for 10 units Actual for 10 units
Qty Rate Amt. Rs. Qty Rate Amt. Rs.
A 600 15 9,000 640 17.50 11,200
B 800 20 16,000 950 18.00 17,100
C 1,000 25 25,000 870 27.50 23,925
Total 2,400 50,000 2,460 52,225
(1) Material Cost Variance = Standard cost – Actual cost
=Rs. 50,000 – Rs.52,225
MCV = Rs.2,225(A)
(2) Material Price Variance =(St. Price – Actual Price) x Actual Qty
Material A = (15‐ 17.50) x 640 = Rs. 1,600 (A)
Material B = (20 – 18 ) x 950 = Rs. 1,900 (F)
Material C = (25 – 27.50) x 870 = Rs. 2,175 (A)
MPV = Rs.1,875 (A)

(3) Material Usage Variance = (St. Qty – Actual Qty.) x St. Price
Material A = (600 – 640) x 15 = Rs. 600(A)
Material B = (800‐ 950) x 20 = Rs.3,000 (A)
Material C = (1,000 – 870 ) x 25 = Rs. 3,250 (F)
MUV = Rs.350 (A)
Check:
MCV = MPV + MUV

Rs. 2,225 (A) = Rs. 1,875 (A) + Rs.350 (A)
(4) Material Mix Variance = (Revised St. Qty – Actual Qty.) x St. Price
Material A = (615* ‐ 640) x 15 = Rs.375 (A)
Material B =(820* ‐ 950) x 20 = Rs. 2,600 (A)
Material C = ( 1,025* ‐ 870) x 25 = Rs. 3,875 (F)
MMV = Rs. 900(F)
*Revised Standard Quantity is calculated as follows:
Material A = 2460 x 600 = 615 Units

2400
Material B = 2460 x 800 = 820 Units

2400
Material C = 2460 x 1,000 = 1,025 Units
2400
(5) Material Yield Variance = (Actual yield – Standard yield) x
St
. output price
= (10 ‐10.25 ) x 5000 = Rs. 1,250 (A)
Check
MCV = MPV + MMV + MYV
Rs. 2,225 (A) = Rs. 1,875 (A) + 900 (F) + Rs.1,250 (A)
Problem : 3
For making 10 kg. of yarn, the standard material requirement is:
Material Quantity (kg.) Rate per kg. (Rs.)
White 8 6.00
Black 4 4.00
In March, 1,000 kg. of yarn was produced. The actual consumption ofmaterials is as
under:
Material Quantity (kg.) Rate per kg. (Rs.)
White 750 7.00
Black 500 5.00
Calculate: (1) MCV (2) MPV (3) MUV
Solution:
Particular Standard for 1000 kgs. Actual for 1000 kgs.

Quantity Rate Amount Quantity Rate Amount
A 800 6 4,800 750 7 5,250
B 400 4 1,600 500 5 2,500
Total 1,200 6,400 1,250 7,750
(1) MCV: SC ‐ AC
= 6,400 ‐ 7,750 = Rs. 1,350 (A)
(2) MPV: (SP ‐ AP) x AQ
A = (6 ‐ 7) x 750 = Rs. 750 (A)
B = (4 ‐5) x 500 = Rs. 500 (A)
= 1,250(A)
(3) MUV: (SQ ‐ AQ) x SP
A = (800 ‐ 750) x 6 = Rs. 300 (F)
B = (400 ‐ 500) x 4 = Rs. 400 (A)
= Rs. 100 (A)
Labour Variance:
Problem‐4
Calculate Labour cost variance from the information:Standard
production : 100 units
Standard Hours : 500 hours

Wage rate per hour : Rs. 2
Actual production : 85 units
Actual time taken : 450 hours

Actual wage rate paid : Rs. 2.10 per hour
Solution:
Standard time for one unit = 500 hours ÷ 100 units = 5 hours Standard hours for
actual production 85 units = 85 x 5 = 425 hours
Labour cost Variance = (Std. Hours of Actual Production x Std. Rate) ‐‐‐
(Actual Hours x Actual Rate)
= (425 Hours x Rs. 2) ‐‐‐ (450 Hours x Rs. 2.10)

= ( Rs .850 ‐‐ Rs. 945)
= RS. 95 (U)
Problem – 5
Standard wage rate is Rs. 2 per hour and standard time is 10 hours. But actualwage rate is
Rs. 2.25 per hour and actual hours used are 12 hours.
Calculate Labour cost variance.
Solution:
Labour cost variance = (Std. Rate x Std. Hours) ‐‐‐ (Actual Rate x Actual Hours)
=(Rs. 2 x 10 ) – (Rs. 2.25 x 12)
= Rs. 20 – Rs. 27
=Rs. ‐‐‐ 7 (U)
Here labour variance is adverse because actual labour cost exceeds standard costby Rs. 7
Problem – 6
Standard labour hours and rate for production of one unit of Article P is givenbelow:
Per Unit Hour Rate per Hour Total (Rs.)

Skilled worker 5 1.50 7.50
Unskilled worker 8 0.50 4.00
Semi‐ skilled 4 0.75 3.00
worker
Actual Data Rate per Hour Total (Rs.)
Articles produced
1,000 units
Skilled 2.00 9,000
worker 4,500
hour
Unskilled worker 0.45 4,500
10,000 hour
Semi‐ skilled 0.75 3,150

worker 4,200 hour
Calculate Labour cost variance.
Solution:
Labour cost variance = (SH for actual production x SR) ‐‐‐ (AH x AR) Skilled
worker = (5,000 x 1.50) ‐‐‐ (4,500 x 2 )
= 7,500 – 9,000
= Rs. 1,500 (Adverse)
Unskilled worker = (8,000 x 0.50) ‐‐‐ (10,000 x 0.45)
= 4,000 ‐‐‐ 4,500

= Rs. 500 (Adverse)
Semi‐ skilled worker = (4,000 x 0.75) ‐‐‐ (4,200 x 0.75)
= 3,000 ‐‐‐ 3,150
= Rs. 150 (Adverse)

Total Labour cost variance = Rs. 2,150(Adverse)
Problem – 7
India Ltd. Manufactures a particular product, the standard direct labour costof which is Rs.
120 per unit whose manufacture involves the following:
Type of workers Hours Rate (Rs.) Amount (Rs.)
A 30 2 60
B 20 3 60
50 120
During a period, 100 units of the product were produced, the actual labourcost of which was
as follows:
Type of workers Hours Rate (Rs.) Amount (Rs.)
A 3,200 1.50 4,800
B 1,900 4.00 7,600
5,100 12,400
Calculate: (1) Labour cost variance (2) Labour Rate variance (3) LabourEfficiency
variance (4) Labour mix variance.
Solution:
Type of Worker Standard for 100 units Actual for 100 units
Hours Rate Amount Hours Rate Amount
A 3,000 2 6,000 3,200 1.50 4,800
B 2,000 3 6,000 1,900 4.00 7,600
Total 5,000 12,000 5,100 12,400
(1) LCV: SC ‐AC

LCV = 12,000 ‐ 12,400 = Rs. 400 (A)
(2) LRV: (SR ‐ AR) x AH

A = (2 ‐ 1.50) x 3,200 = Rs. 1,600 (F)
B = (3 ‐ 4) x 1,900 = Rs. 1,900 (A)
= Rs. 300 (A)
(3) LEV: (SH ‐ AH) x SR
A = (3,000 ‐ 3,200) x 2 = Rs. 400 (A)
B = (2,000 ‐ 1,900) x 3 = Rs. 300 (F)
= Rs. 100 (A)
(4) LMV: (RSH ‐ AH) x SR
A = (3,060 ‐ 3,200) x 2 = Rs. 280 (A)
B = (2,040 ‐ 1,900) x 3 = Rs. 420 (F)
= Rs. 140 (F)
Working: Revised standard Hours:
RSH = St. hours of the type x Total actual hours / Total St. hours A =
3,000 x 5,100 / 5,000 = 3,060 hrs.
B = 2,000 x 5,100 / 5,000 = 2,040 hrs.
Overhead Variance:
Problem – 8
MLM Ltd. has furnished you the following information for the month of
January:
Budget Actual
Outputs (units) 30,000 32,500
Hours 30,000 33,000
Fixed overhead 45,000 50,000
Variable overhead 60,000 68,000
Working days 25 26
Calculate overhead variances.
Solution:
Necessary calculations
Standard hour per unit = Budgeted hours = 30,000
Budgeted units 30,000
Standard hour for actual output = 32,500 units x 1 hour = 32,500
Standard overhead rate per hour = Budgeted overheads

Budgeted hours
For fixed overhead = 45,000/30000 = Rs. 1.50 per
unit
For variable overhead = 60,000/30000 = Rs. 2 per unit
Standard fixed overhead rate per day = Rs. 45,000 ÷ 25 days = Rs. 1,800 Recovered
overhead = Standard hours for actual output x Standard Rate
For fixed overhead = 32,500 hours x Rs. 1.50 = Rs. 48,750For
variable overhead = 32,500 hours x Rs. 2 = Rs. 65,000
Standard overhead =Actual hours x Standard Rate For
fixed overhead =33,000 x 1.50 =Rs. 49,500
For variable overhead =33,000 x 2 = Rs. 66,000 Revised
budgeted hours = Budgeted Hours x Actual
days
Budgeted Days
30,000 x 26 = 31,200 hours

25
Revised budgeted overhead = 31,200 x 1.50 = Rs. 46,800
Calculation of Variances
Fixed Overhead Variances:
Fixed Overhead Cost Variance = Recovered Overhead – Actual Overhead
= 48,750 – 50,000 =Rs. 1,250 (A)
 Fixed Overhead Expenditure Variance = Budgeted Overhead –
ActualOverhead
=45,000 – 50,000 =Rs. 5,000 (A)
Fixed Overhead Volume Variance = Recovered Overhead –
Budgeted Overhead
= 48,750 – 45,000 =Rs. 3,750 (F)
Fixed Overhead Efficiency Variance = Recovered Overhead –
Standard Overhead
= 48,750 – 49,500 = Rs. 750 (A)
Fixed Overhead Capacity Variance = Standard Overhead –
Revised Budgeted Overhead
= 49,500 – 46,800 =Rs. 2,700 (F)
Calendar Variance =(Actual days – Budgeted days)
xStandard rate per day=

(26—25) x 1,800 =Rs. 1,800 (F)
Variable Overhead Variances:
Variable Overhead Cost Variance = Recovered Overhead –
ActualOverhead
= 65,000 – 68,000 = Rs. 3,000 (A)
Variable Overhead Expenditure Variance = Standard Overhead –
ActualOverhead
= 66,000 – 68,000 =Rs. 2,000(A)
Variable Overhead Efficiency Variance = Recovered Overhead – Actual
Overhead = 65,000 ‐‐ 66,000 = Rs. 1,000 (A)
COST SHEET Illustrations and Solutions
Illustration -1
Bombay Manufacturing company submits the following

information on 31-3-2019
Particulars Rupees
Sales for the year 2,75,000
Inventories at the beginning of the year-
- Raw Materials 3,000
- Work in Progress 4,000
- Finished Goods 1,10,000
Purchase of materials 65,000
Direct Labour 6,000
Inventories at the end of the year -
- Raw Materials 4,000
- Work in Progress 6,000
- Finished Goods 8,000
Other expenses for the year –

Administrative expenses 13,000
Factory overheads 40,000
Prepare Statement of cost
Solution:
Bombay Manufacturing Company

Statement of cost for the year ended 31-3-2019
Rs. Rs.
Materials consumed
Opening stock: 3,000
+ Purchases 110000
113000
- Closing stock 4000
109000
Direct Labour 65000
Direct Expenses 6000
Prime cost 180000

Factory overheads 40000
+ Work in Progress (Opening) 4000
44000
- Work in Progress (Closing) 6000 38000
Works cost 2,18,000
Administrative expenses 13,000
Cost of Production 2,31,000
+ Opening Stock of finished goods 7,000
2,30,000
- Closing Stock of finished goods 8,000
Cost of Goods Sold 2,30,000
Selling & Distribution expenses 27,500
Cost of Sales 2,57,500
Profit (Bal. Fig) 17,500
Sales 2,75,000
Illustration -2
From the following information prepare a statement showing

(i) Prime cost (ii) Works cost (iii) Cost of Production (iv) Cost of Sales
(v) Net profit of X Ltd. which produced and sold 1000 units in June 2019.
Rs.
Opening Stock:
Raw Materials 24,000
Finished goods 16,000
Closing stock:
Raw Materials 20,000
Finished goods 15,000
Purchase of Raw Materials 80,000
Sales 2,00,000
Direct Wages 35,000
Factory Wages 2,000
Carriage Inward 2,000

Factory Expenses 4,000
Office Salaries 15,000
Office Expenses 12,000
Factory Rent & Rates 2,500
Depreciation - Machinery 2,500
Bad Debts 1,500
Solution
Ltd.
Cost Statement for June, 2019
Cost per
Particulars Rs. Total Cost Unit
Rs. Rs.
Opening stock of materials 24,000
Add: Purchase of materials 80,000
Add: Carriage Inward 2,000
1,06,000
Less: Closing stock of materials 20,000
Cost of Materials consumed 86,000 86.00
Direct Wages 35,000 35.00
(i) Prime Cost 121000 121.00
Factory overheads:
Factory Wages 2,000
Factory expenses 4,000
Factory Rent & Rates 2,500
Depreciation 2,500
11,000 11.00
(ii) Works Cost 1,32,000 132.00
Administrative Overheads:
Office Salaries 15,000
Office Expenses 12,000 27,000 27.00
(iii) Cost of Production 1,59,000 159.00
Selling & Distribution Overheads:

Bad Debts 1,500
2,500 2.50
Total Cost 1,61,500 161.50
Add: Opening Stock of finished goods 16,000
1,77,500
Less: Closing Stock of finished goods 15,000
(iv) Cost of Sales 1,62,500 162.50
(v) Net Profit (Bal.Fig) 37,500 37.50

Sales 2 ,00,000 200.00
Illustration – 3
NRC Ltd., manufactured and sold 1000 Radio sets during the year
2019. The summarized accounts are given below:
Mfg. / Trading & Profit & Loss A/c

Rs. Rs.
To Cost of Materials 40,000 By Sales 2,00,000
To Direct Wages 60,000
To Manufacturing Exp. 25,000
To Gross Profit 75,000
2,00,000 2,00,000
To Salaries 30,000 By Gross Profit 75,000

To Rent, Rates & Taxes 5,000
To General Expenses 10,000
To Selling & Distribution
Exp. 15,000
To Net Profit 15,000
75,000 75,000
It is estimated that output and sales will be 1200 Radio Sets in the
year 2020. Prices of Materials will rise by 20% on the previous year’s level.
Wages per unit will rise by 5% Manufacturing expenses will rise in
proportion to the combined cost of materials and wages. Selling and
distribution expenses per unit will remain unchanged. Other expenses will
remain unaffected by the rise in output. Prepare cost sheet showing the price
at which the Radio Sets should be sold so as to earn a profit of 20% on the
selling price.
Solution
COST SHEET
2019 2020
1000 Radios 1200 Radios
Total Per Unit Total Per Unit
Rs. Rs. Rs. Rs.
Direct Materials 40,000 40.00 57,600 48.00

Direct Wages 60,000 60.00 75,600 63.00
Prime Cost 1,00,000 100.00 1,33,200 111.00

Manufacturing Expenses 25,000 25.00 33,300 28.00
Works Cost 1,25,000 125.00 1,66,500 139.00

Salaries 30,000 30.00 30,000 25.00
Rent, Rates Insurance 5,000 5.00 5,000 4.00
General Expenses 10,000 10.00 10,000 8.00
Cost of Production 1,70,000 170.00 2,11,500 176.00

Selling & Distribution
Expenses 15,000 15.00 18,000 15.00
Cost of Sales 1,85,000 185.00 2,29,500 191.00

Net Profit 15,000 15.00 57,275 48.00
Sales 2,00,000 200.00 2,86,775 239.00

Illustration – 4.:
A factory can produce 60,000 units per year at its 100%

capacity. The estimated cost of production is as under:
Direct Material- Rs. 3 per unit

Direct Labour- Rs. 2 per unit
Indirect Expenses-
Fixed - Rs. 1,50,000 per year
Variable- Rs. 5 per unit
Semi- variable- Rs.50,000 per year up to 50% capacity and an
extra expense of Rs.10,000 for every 25% Increase in capacity
or part thereof.
The factory produces only against order and not for stock. If the
Production program of the factory is as indicated below and the
management desires to ensure a Profit of Rs. 1,00,000 for the
year, work out the average selling price at which per unit should be quoted:
First 3 months of the year 50% of capacity remaining 9 months 80%
of the capacity. Ignore selling, distribution and administration overheads.
Solution:
Particular First 3 months 9 Months Total
(7500 Units) (36000 Units)
Rs. Rs.
Direct Material 22500 108000 130500

Direct Labour 15000 72000 87000
37500 1,80,000 2,17,500

Add: Indirect Expenses:
Fixed (1: 3) 37500 112500 150000
Variable @ Rs.5 p.u. 37500 180000 217500
Semi –variable
For 3 months 12500 ----- ------
@ Rs.50,000 p.a.
For 9 months
@ Rs.70,000 p.a. -- 52500 65000
Total Cost 125000 525000 650000

Profit -- - 100000
Sales 750000
Illustration -5
The following figures have been taken from the books of M Ltd. as on
31.12.2019
Stock of Raw Materials on 1.1.2019 Rs. 35,000

Stock of Raw Materials on 31.12.2019 Rs. 5,000
Purchase of Materials Rs. 50,000
Factory Wages Rs. 45,000
Factory Expenses Rs. 17,500
Establishment Expenses Rs. 10,000
Finished Stock on 1.1.2019 Rs. 15,000
Finished stock on 31.12.2019 Rs. 7,500
Sales Rs. 2,00,000
The Company manufactured 4000 units during the year 2019. The
company is required to quote for the price for supply of 1000 units during
the year 2020. The cost of material will increase by 15% and factory
labour will cost more by 10% in the year 2020 Prepare a statement
showing the price to be quoted to give the same percentage of net profit on
sales as was realized during 2019.
Solution
a) Cost Sheet for the year 2019
Rs. Rs.
Opening Stock of Materials: 35,000
+ Purchases 50,000
85,000
- Closing stock of Materials 5,000

Materials Consumed 80,000 20.00
Factory Wages 45,000 11.25
Prime Cost 1,25,000 31.25
Factory Expenses 17,500 4.37
Works Cost 1,42,500 35.62
Establishment Expenses 10,000 2.50
Cost of Production 1,52,500 38.12
Add: Opening Stock of finished goods 15,000
1,67,500
Less: Closing stock of finished goods 7,500
Cost of Sales 1,60,000 40
Profit 40,000 10
Sales 2,00,000 50
b) Statement showing quotation Price for 1000 units
Rs.
Materials (20 x 1000) = 20,000
+ 15% increase 3,000 23,000
Factory wages (11.25 x 1000) = 11,250
10% increase 1,125 12,375
Prime Cost 35,375
Factory Expenses (4.375 x 1000) 4,375
Works Cost 39,750
Establishment Expenses (2.50 x 1000) 2,500
Total Cost 42,250

Profit (20% on Sale i.e., 25% of Cost) 10,563
Sales 52,813
Note: Percentage of Profit on sales earned during the year 2019 is 20%
40000
= 200000 X 100  20%
Illustration – 6.
In a factory two types of T.V sets are manufactured i.e. black

& white + colour. From the following particulars prepare a statement
showing cost and profit per T.V Set sold. There is no opening or closing
stock.
B&W Colour
Rs. Rs.
Materials 2,73,000 10,80,000
Labour 1,56,000 6,20,000
Works overhead is charged at 60% of Prime cost and Office

overhead is taken at 20% at Works cost. The selling price of B & W is
Rs.600 and that of colour is 10000. During the period 200 B & W and 400
colour T.V. sets were sold. The selling expenses are Rs. 50 per T.V. Set.
Solution
B) Statement of Cost and Profit
Particulars B&W Colour

Rs. Rs. Per Unit
Materials 273000 10,80,000 2700
Labour 156000 6,20,000 1550
Prime Cost 429000 17,00,000 4250
Add: Work Overheads 257400 10,20,000 2550
(60% of Prime Cost)
Works Cost 686400 27,20,000 6800
Add: Office overheads 137280 5,44,000 1360
(20% of Works cost)
Cost of Production 823680 32,64,000 8160
Add: Selling Expenses 10000 20,000 50
Cost of Sales 833680 32,84,000 8210
Profit (Bal. Fig) 366320 7,16,000 1790
Sales 1,20,000 40,00,000 10,000
Illustration – 7.
From the books of accounts of M/s. Tejas Enteprises, following details have been extracted
for the year ending 31st Dec, 2018:
Particulars Amount (Rs.)
Opening stock of raw material 2,88,000
Closing stock of raw material 3,00,000
Material purchased during the year 9,42,000
Direct labour cost 4,43,000
Indirect wages 54,000
Salaries to office staff 2,12,000

Freight outward 43,000
Repairs for plant and machinery 21,000
Factory rent and taxes 55,000
Distribution expenses 76,000
Salesman salaries and commission 54,000
Manager’s salary (40% of his time used in factory & rest in office)
60,000
Factory electricity charges 25,000
Office telephone expenses 5,000
Opening stock of finished goods 2,03,000
Closing stock of finished goods 1,12,000
Depreciation of office furniture 13,000
You are required to prepare cost sheet for the firm from the above given details.
Solution:
M/s. Tejas Enterprises Cost
Sheet
For the year ending 31st December 2018
Particulars Amount Amount
(Rs.) (Rs.)
(1) Direct Materials: Purchases
during the year 9,42,000
Add: Opening stock of raw material 2,88,000
Less: Closing stock of raw material (300,000)
Direct Material Consumed 9,30,000 9,30,000
(2) Direct labour cost 4,43,000
(3) Prime Cost (1+2) 13,73,000
Indirect wages 54,000
Repairs for plant and machinery 21,000
Factory rent and taxes 55,000
Manager’s salary – Factory 24,000
Factory electricity charges 25,000
(4) Total Factory Overheads 1,79,000 1,79,000
(5) Factory/Work Cost (3+4) 15,52,000
Add: Office and Administrative overheads
Salaries to office staff 2,12,000
Manager’s salary – Office 36,000
Office telephone expenses 5,000
Depreciation of office furniture 13,000
(6) Total Office and Administrative overheads 2,98,000 2,98,000
(7) Cost of Production/Office Cost (5+6) 18,50,000
(8) Add: Opening stock of finished goods 2,03,000
(9) Less: Closing stock of finished goods (112,000)
(10) Cost of Goods Sold 19,41,000
Add: Selling and Distribution Overheads
Freight outward 43,000
Distribution expenses 76,000
Salesman salaries and commission 54,000
(11) Total Selling and Distribution Overheads 1,73,000 1,73,000
(12) Total Cost/Cost of Sales (10+11) 21,14,000
Illustration – 8
Prepare a cost sheet to show the total cost and cost per unit of goods manufactured by M/s. Corona
Enterprises for the month of January 2015. Also, find out the cost of sales.
Particulars Amount (Rs.)
Stock of raw material (1.1.15) 4,000
Stock of raw material (31.1.15) 5,500
Raw material purchased 29,000
Manufacturing wages 8,000
Depreciation on plant 1,500
Factory rent and rates 4,000

Office rent 1,000
General expenses 1,200
Sales discount 1,000
Advertising expenses 5,000
The number of units produced during the month was 4,000. The stock of finished goods was 300 and 400
units on 1.1.15 and 31.1.15 respectively. The total cost of units in hand on 1.1.15 was Rs. 3,900. All these
had been sold during the month.
Solution:
M/s. Corona Enterprises Cost
Sheet
For the month ending 31st January 2015
Particulars Amount Amount Per Unit

(Rs.) (Rs.) (Rs.)
(A) Purchases during the year 29,000

(B) Add: Opening stock of raw material 4,000
(C) Less: Closing stock of raw material (5,500)
(D) Material Consumed (A+B-C) 27,500 27,500 6.87
(E) Manufacturing wages 8,000 2.00
(F) Prime Cost (D+E) 35,500 8.87
Depreciation on plant 1,500
Factory rent and rates 4,000
(G) Total Factory Overheads 5,500 5,500 1.37

(H) Factory/Work Cost (F+G) 41,000 10.25
Add: Office and Administrative Overheads
Office rent 1,000
General expenses 1200
(I) Total Office and Administrative Overheads 2,200 2,200 0.55
(J) Cost of Production/Office Cost (H+I) 43,200 10.8
(K) Add: Opening finished stock 3,900
(L) Less: Closing finished stock (10.8*400) (4320)
(M) Cost of Goods Sold (J+K-L) 42,780 10. 70
Add: Selling and Distribution Overheads
Sales Discount 1,000
Advertising Expenses 5000
(N) Total Selling and Distribution Overheads 6000 6,000 1.5
(O) Total Cost/Cost of Sales (M+N) 48,780 12. 20

Course Pack - Cost Accounting Bba 2 (1) - Revised - 5th Jan 2024

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Subject Title: COST ACCOUNTING

Forwarded by: HOD Approved by: Director

Bharati Vidyapeeth Institute of Management & Research, New Delhi

A-4, Rohtak Road, Paschim Vihar-110063

(Ph.: 011-25284396, 25285808 FAX: 011-25286442)

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 Definition & meaning of Standard Costing

Previous Year Question Papers

7 Case studies 126-

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2. Course Title: COST ACCOUNTING

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After undergoing this course, the students will be able to:

CO2: Students will understand the cost accounting procedures.

7. List of Topics/ Modules:

 Definition, nature and scope of cost

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 Definition and meaning of standard costing

 Variance Analysis- Material and Labour Variances

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Component Description Weightage for

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5. Continuous activities which includes Class test, Case Studies, Quiz on

Evaluation Moodle, Presentations etc.

7. Recommended/ Reference Text Books and Resources:

1. Advanced Cost Accounting by S.P.Jain & Narang

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1 Definition, Nature & Scope of cost Chapter-1 LO1

3 Advantages & Limitations of cost Chapter-1 LO2

5 Classification & Types of costs Chapter-2 LO3

Module 3 : Budget and Budgetary Control

11 Meaning, Advantages, Limitations of Chapter-12 LO1 & LO2

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Module 4 : Marginal Costing

Marginal Costing-meaning, advantages,

Cost-Volume Profit Analysis, Break Even-

20 Practice on problems based on concepts of Chapter-10 LO3

21 Practice on problems based on concepts of Chapter-10 LO3

Module 5 : Standard Costing

22 Definition, Meaning, advantages, Chapter-10 LO1 & LO2

8447810000- Dr. Aarushi Kataria

Office Location: Paschim Vihar New Delhi

Office Hours: 9.00 am to 5.00 pm

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Nature of Cost Accounting

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Advantages of Cost accounting

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Limitations of Cost accounting

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Limitations of Financial Accounting

Difference between Financial & Cost accounting

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NEED FOR COSTING / OBJECTIVES OF COST ACCOUNTING: