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ACCOUNTS THEORY

Q1) WHAT DO YOU MEAN BY ACCOUNTING EQUATION?

ANS) An Accounting Equation is a formula of accounting which shows the assets and
liabilities of a firm as equal. It is also known as Balance Sheet Equation. An
Accounting Equation is based on the dual aspect concept of accounting. In the dual
aspect concept. we had discussed that every business transaction has a two-sided
effect. i.e.. on the assets and also as claims on assets. The total claims or liabilities
(both internal and external) will always equal the total assets of the firm. The claims or liabilities. also
known as equities, are of two types:
1. Internal liabilities or Owner's capital or equity; and
2. External liabilities or Liabilities or amounts due to outsiders.

We can express the equation as follows:

Assets = Equities (Total Claims or Liabilities)

Or

Assets= Liabilities (External Liabilities) + Capital (Internal Liabilities)

Or

Liabilities = Assets - Capital

Or

Capital = Assets – Liabilities

Q2) WRITE A SHORT NOTE ON BASIS OF ACCOUNTING. (EXPLAIN BOTH CASH & ACCURAL BASIS)

ANS) The basis of accounting refers to the time when transactions are recorded in financial
statements. There are two main bases: cash basis and accrual basis.

1. Cash Basis of Accounting:

Cash basis of accounting is referred to as that method of accounting where the

accounting system recognises revenues and expenses only when there is inflow and
outflow of cash. In other words, the cash basis of accounting recognises the expenses
incurred and revenues earned immediately when money changes hands between two
parties involved in the transaction.

2. Accrual Basis of Accounting:

Accrual basis of accounting is one of the two methods of accounting, the other method
being the cash basis of accounting. Accrual basis of accounting is a slightly more complex
process of recording of transactions. It is based on the concept that transactions are
recorded as and when they occur. In other words, businesses that follow the accrual basis
of accounting need to record revenues and expenses when a transaction occurs regardless
of when payment for the same is received or made.
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Q3) WHAT IS MATCHING CONCEPT? WHY SHOULD A BUSINESS CONCERN FOLLOWS THIS CONCEPT?

ANS) The matching principle states that a business should report the expenses incurred during an
accounting period in which the related revenues are earned. This principle recognizes the fact that
without incurring expenses revenue cannot be earned.

_ The business entities follow this concept primarily to establish verity profit or loss
throughout associate accounting amount. This results in either overcast or under casting of
the profit or loss, which can not reveal verity potency of the business and its activities within
the involved accounting amount.

Q4) WHAT IS GAAP? WHAT ARE THE FEATURES OF GAAP?

ANS) Generally Accepted Accounting Principles (GAAP or US GAAP) are a collection of commonly-
followed accounting rules and standards for financial reporting. The specifications of GAAP, which is
the standard adopted by the U.S. Securities and Exchange Commission (SEC), include definitions of
concepts and principles, as well as industry-specific rules. The purpose of GAAP is to ensure that
financial reporting is transparent and consistent from one organization to another.

• GAAPS are classified as :

➢ Accounting Concepts
➢ Accounting Conventions

Features of GAAP are:

➢ Relevance - All information required for decision making must be present on the financial
statements. Nothing should be omitted or misstated if it would cause the interpretation of
the statements to change. The information must also be prepared in a timely manner.

➢ Reliability - All information must be free of error and bias. Information must be objective
and be verifiable.

➢ Understandability - Readers of the financial statements must be able to understand the

reports. Companies will usually provide an extensive set of notes to accompany the financial
statements.

➢ Comparability - A company’s financial statements should be comparable from year to year.

Financial statements will usually have last year’s financial printed alongside this year’s
financials.

Q5) WHY IS IT IMPORTANT TO ADOPT A CONSISTENT BASIS FOR PREPARATION OF FINANCIAL

STATEMENT? EXPLAIN.

ANS) Financial statements are drawn to provide information about growth or decline of business
activities over a period of time or comparison of the results, i.e. intra-firm (comparison within

the same organisation) or inter-firm comparisons (comparison between different firms).

Comparisons can be performed only when the accounting policies are uniform and consistent.
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According to the Consistency Principle, accounting practices once selected should be continued

over a period of time (i.e. years after years) and should not be changed very frequently. These

help in a better understanding of the financial statements and thus make comparisons easy. For

example, if a firm is following FIFO method for recording stock, and switches over to the

weighted average method, then the results of this year cannot be compared to that of the

previous years. Although consistency does notprevent change in the accounting policies, but if

change in the policies is essential for better presentation and better understanding of the

financial results, then the firm must undertake change in its accounting policies and must fully

disclose all the relevant information, reasons and effects of those changes in the financial

statements.

Q6) DIFFERENCIATE BETWEEN:

I. TRADE DISCOUNT & CASH DISCOUNT.

ANS)
Basis Trade Discount Cash Discoun
Nature It is allowed on a certain quantity It is allowed on payment being
being purchased. made on or before a specified date.
Nature of It is allowed both on cash and It is allowed only on payment.
Transaction credit purchases.
Recording Trade discount is not recorded Cash discount is recorded
separately in the books of account separately in the books of account.
Deduction from The amount of the trade discount is It is not deducted from the invoice.
Invoice deducted from the invoice.
Consideration The consideration for allowance is The consideration for allowance is
purchases. payment.
Relation It is related to sale and purchase of It is related to payment.
goods.
II. CAPITAL EXPRNDITURE AND REVENUE EXPENDITURE.

ANS)
Basis Capital Expenditure Revenue Expenditure
Purpose It is incurred for acquisition of It is incurred for conduct of
fixed assets for use. business. in business.
Capacity It increases the earning capacity of It is incurred for earning profits.
the business
Period Its benefit extends to more than one Its benefit extends to only one year.
year.
Debited It is debited to an asset account. It is debited to an expense account.
Nature of It is a real account. It is a nominal account.
Account
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Depiction It is shown in the Balance Sheet. It is part of the Trading or Profit and
Loss Account.
Transaction It is always an external transaction. It may be internal(e.g.,depreciation)
or external transaction.
When Incurred It may be incurred even before the It is always incurred only after the
commencement of business commencement of the business.
Matched Capital Expenditure is not matched Revenue expenditures are matched
against capital receipts. against revenue receipts
Recurring It is of non-recurring nature. It is of recurring naure.
Example (a) Cost of Plant and Machinery. (a) Depreciation on Plant and
(b) Cost of Land and Building. Machinery.
(c) Cost of Furniture and Fixtures. (b) Rent.
(c) Repairs and Insurance.

III. CAPITAL RECIEPT & REVENUE RECIEPT.

ANS)

Capital Receipt Revenue Receipt

It is the amount realised by sale of fixed assets
or by issue of shares or debentures or by
secured or unsecured loans taken
It is an item of Balance Sheet.
Capital receipts are normally of non-recuring
nature.
Capital receipts are the receipts which are not
obtained in Course of normal business
activities.
Capital receipts are normally not available for
payment as profit to the owner of the business.
It is the amount realised by sale of goods or
rendering of services.
It is an item of Trading and Profit and Loss
Account
Revenue receipts are normally of recuring
nature.
Revenue receipts are obtained in the course of
normal trading operations.
Revenue receipts or net of revenue expenses
and expired portion of capital
expenditure/deferred revenue expenditure are
available for distribution to the owner of the
business.

IV. PROVISION & RESERVE.

Appropriation or It is an appropriation of profit It is a charge on profit.

Charge
Financial Position It is created to strengthen the
financial position and to meet
unforeseen liabilities or losses.
Charge It is debited to the Profit and Loss
Appropriation Account.
lt is made to meet known liability or
contingency, if the amount is not
determined.
It is debited to the Profit and Loss
Account.
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Investment It may be invested outside the It is not invested.

business.
Distribution Unutilised part can be distributed as It cannot be used for distribution as
dividend. It reduces divisible profits. profit/dividend. It reduces net
profits.
Prudence It is created as a matter of prudence It is made out of legal necessity.
out of profits.

Q7) WHAT DO YOU MEAN BY DEPRECIABLE ASSETS?

ANS) A depreciable asset is property that provides an economic benefit for more than one
reporting period. As long as this asset exceeds a firm’s capitalization limit, it is recorded as a
fixed asset in the organization’s accounting records. It is then depreciated over its useful life,
which gradually reduces its book value over the period when it is presumed to be providing an
economic benefit to the business.

Q8) WHAT DO YOU MEAN BY ACCOUNTING INFORMATION? WHO ARE THE USERS OF ACCOUNTING
INFORMATIONS?

ANS) The objective of accounting is to provide information relevant for decision making of the
various user-groups. Preparation of financial statements and communicating to the user-groups is
not an end in itself. Users need to process it further for the purpose of decision making.

The users of accounting information-:

Users are the parties interested in information about entity’s financial information like

• Investors - are the people who are ready to invest their money in a business.

• Creditors – are the persons who have extended credit to the company.

• Government - tax and regulatory purposes.

• Customers – ability to stay in business and deliver promises.

• Public – Mostly interested in employment generation and societal contribution.

• Employees - look forward for stability and continued profitability of the employer entity.

• Management – for operational and strategic decision.

Q9) SHORT NOTE

i. DEFERRED REVENUE EXPNDITURE

ANS) Deferred Revenue Expenditure is a revenue expenditure by nature that is incurred

an accounting period but is not treated as revenue expenditure on the basis
that benefit arising from it extends beyond that accounting period. Such an
expenditure is unusually larger than the normal expenditure under the head. An
example of this is large expense on advertising for introducing a new product. The
expenditure so incurred gives benefit in more than one accounting period. It is thus
spread over the period and is not charged wholly to the Profit and Loss Account for the
year in which the expense is incurred.
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ii. PROFIT & LOSS ACCOUNT.

ANS) It is prepared to find out net profit or net loss of a business during each accounting period. Its
aim is determination of income by matching expenses against revenues. It is prepared at the end of
an accounting period to ascertain the net operating result of transactions taking place during such
period.

The Gross Profit or Gross Loss is transferred to this Account. Incomes not considered in the Trading
Account like Interest or Dividends from Investments, Rent received from house property Bank
interests received, Profit on sale of assets, etc., are also credited here. On the debit side of this
Account the Administration, Selling and Distribution expenses, Maintenance Charges like repairs and
depreciation, Financial Charges like Bank Interest, Discount Allowed, etc., are recorded Any loss on
sale of asset or net accidental loss, etc., is also debited to this Account. But it does not contain any
transfer to reserve or for payment of tax, etc.

iii. ACCOUNTING CYCLE

ANS) The accounting cycle is a multistep process used by businesses to create an accurate record of
their financial position, as summarized on their financial statements. During the cycle’s various
stages, companies will record their financial transactions in a journal, transfer the details into
a general ledger, analyze the entries and make sure the books are balanced and error-free before
generating financial statements and closing the books for the period.

iv. IFRS (International Financial Reporting Standards)

➢ International Financial Reporting Standards (IFRS) are a set of accounting rules for the
financial statements of public companies that are intended to make them consistent,
transparent, and easily comparable around the world.

➢ A set of financial reporting standards issued by the International Accounting Standards Board
(IASB) is recognised under the brand name IFRSs. ‘IFRSs’ is a trade mark of the international
Accounting Standards Committee Foundation.

Q10) ALL ACCOUNTING CONCEPTS & ACCOUNTING CONVENTIONS (IMP)

ANS) ACCOUNTING CONCEPTS

• Business Entity Concept

Business entity concept is one of the accounting concepts that states that business and the owner
are two separate entities and therefore, should be considered separate from each other. As per this
concept, the financial transactions pertaining to the business entity should be recorded separately
from the business owners transactions. This concept is also known as the Economic Entity Concept,
which means that the owner of the business and the business itself are considered as two separate
entities.

• Going Concern Concept

Going concern concept is one of the accounting principles that states that a business entity will
continue running its operations in the foreseeable future and will not be liquidated or forced to
discontinue operations for any reason.
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• Dual Aspect Concept

➢ The dual aspect concept indicates that each transaction made by a business impacts the
business in two different aspects which are equal and opposite in nature. This concept form
the basis of double-entry accounting and is used by all accounting frameworks for generating
accurate and reliable financial statements.

➢ The accounting equation used in this concept is : Assets = Liabilities + Equity

• Money Measurement Concept

➢ Money measurement concept is an important accounting concept that is based on the

theory that a company should be recording only those transactions that can be measured or
expressed in monetary terms on the financial statement.

➢ Money measurement concept is also known as Measurability Concept, which states that
during the recording of any financial transactions, those transactions should not be recorded
which cannot be expressed in terms of monetary value.

• Matching Concept

The matching principle states that a business should report the expenses incurred during an
accounting period in which the related revenues are earned. This principle recognizes the fact that
without incurring expenses revenue cannot be earned.

• Accounting Period Concept

Accounting period concept is based on the theory that all accounting transactions of a business
should be divided into equal time periods, which are referred to as accounting periods.

The purpose of such a time period is that financial statements can be prepared and presented to the
investors and also help in comparing performance of the business with each time period.

• Cost Concept

The cost concept of accounting states that all acquisitions of items (e.g., assets or items needed for
expending) should be recorded and retained in books at cost.

Therefore, if a balance sheet shows an asset at a certain value, it should be assumed that this is its
cost unless it is categorically stated otherwise.

• Realization Concept

The realization concept is a concept that states the revenue can only be recognized after it has been
earned. In simple words, revenue can only be calculated once the underlying goods or services
associated with the revenue have been delivered or rendered, respectively.

ACCOUNTING CONVENTIONS

• Conservatism

It is a concept in accounting which refers to the idea that expenses and liabilities should be
recognised as soon as possible in a situation where there is uncertainty about the possible outcome
and in contrast record assets and revenues only when they are assured to be received.
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• Full Disclosure

It refers to the concept that suggests that a business should report all the necessary information in
their financial statements, so that the users who are able to read the financial information are in a
better position to make important decisions regarding the company.

• Consistency

It is a principle that the same accounting principles should be used for preparing financial statements
over a number of time periods. This enables the management to draw important conclusions
regarding the working of the concern over a longer period. It allows a comparison in the
performance of different periods.

• Materiality

Materiality concept in accounting refers to the concept that all the material items should be reported
properly in the financial statements. Material items are considered as those items whose inclusion or
exclusion results in significant changes in the decision making for the users of business information.

COST ACCOUNTING

Q1) CLASSIFICATION OF COST.

ANS) (A) Classification According to Cost Behaviour or Variability

i. Fixed Costs:
These costs remain fixed in total and do not increase or decrease with the volume of
production, but the fixed cost 'per unit` increase when the volume of production decrease,
and vice versa. Some examples are Factory Rent, Insurance etc.
ii. Variable Costs
These costs change in proportion to the volume of production. In other words when volume
of output increase, total variable cost also increase, and vice versa . But the variable cost per
unit remains fixed. Some examples are cost of raw materials, direct wages, etc.

(B)Classification According to Traceability (Relation to Cost Central)

i. Direct Costs:
These are those costs which are incurred for and may, be conveniently identified with. a
particular cost unit, process or department. Costs which are directly related to/identified
with attributable to a Cost Centre or a Cost unit. E.g. Cost of basic raw material used in the
finished product, wages paid to site labour in a construction contract ete.
ii. Indirect Costs:
These costs cannot be conveniently identified with a particular cost unit, process or
Department. Costs which are not directly identified with a cost center or a cost unit. These are
general costs and incurred for the benefit of a number cost units or cost center. Such costs
are apportioned over different cost centres using appropriate basis, e.g., Factory Rent
incurred over various departments, Salary of supervisor engaged in overseeing various construction
contracts, repairs, depreciation, managerial salaries, coal, lubricating oil, wages of foreman etc.
Note: All indirect costs are collectively called as Overheads.
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(C) Classification on the basis of Nature:

(i) Materials –
Costs of tangible, physical input used in relation to output / production; e.g., cost of raw materials,
consumable stores, maintenance items etc.
A. Direct Material:
Material which is easily identified on a product e.g. iron ore in steel, cloth in garments.
B. Indirect Material:
Material not identified on a production e.g. Coal in steel industry, grease, fuel etc.

(ii) Labour -
Cost incurred in relation to human resources of the enterprise: e.g., wages to workers, Salary to
Office Staff, Training Expenses etc.
A. Direct Labour:
Who changes the form, shape, size of the product . e.g. workers in machining,
assembling. polishing, department.
B. Indirect Labour:
Who only provide supporting services e.g. supervisor, attendance keeper, helper etc.

(iii) Expenses:
Cost of operating and running the enterprise, other than materials and labour; this is the residual
category of costs, e.g., Factory Rent, Office Maintenance, Salesmen Salary etc.
A. Direct Expenses:
Expenses which are identified Labour e.g. Royalty on production sub contracting expenses.
B. Indirect Expenses:
Expenses not identified e.g. rent insurance depreciation, electricity etc.

(D) Classification according to Normality :

(i) Normal Cost:

Cost which can be reasonable expected to be incurred under normal, routine and regular operating
conditions.

(ii) Abnormal cost:

Costs over and above normal cost: which is not incurred under normal operating conditions e.g. fines
and penalties.

(F) Classification according to Controllability :

(i) Controllable Costs :

These are the costs which may be directly regulated at a given level of management authority.
Variable costs are generally controllable by department heads. For example, cost of of raw material
may be controlled by purchasing in larger quantities.

(ii) Uncontrollable costs :

Uncontrollable costs are expenses that a business cannot easily influence or manage directly. These
costs are typically fixed and not easily subject to changes through managerial decisions. Examples
include rent, insurance premiums, and certain types of salaries. Unlike controllable costs, which can
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be adjusted through managerial actions, uncontrollable costs remain relatively stable regardless of
management decisions.

Q2) DEFINATION OF COST ACCOUNTING.

Cost accounting is the process of accounting for costs. It embraces the accounting procedures
relating to recording of all income and expenditure and the preparation of periodical statements and
reports with the object of ascertaining and controlling cost. It is thus the formal mechanism by
means of which costs of products or services are ascertained and controlled. Cost accounting is the
analyzing , recording, standardizing, forecasting, comparing, reporting and recommending and the
role of a cost accounting is that of" 'a historian, news agent and prophet.

Q3) QUALITIES OF A GOOD COST ACCOUNTING SYSTEM.

ANS)

1. Simplicity
The costing system should be simple to operate and easy to understand. The facts, figures, and other
information revealed by cost accounts should be presented in a way that makes them easy to grasp.

As such, the needless elaboration of costing records should be avoided.

2. Suitability to the Business

The costing system should be devised so as to suit the conditions, requirements, nature, and size of
the business.

A costing system that serves the enterprise's purposes and supplies necessary information for running
the business is an ideal system for that business.

3. Economy
For the costing system to become a profitable investment for the business, the cost of installing and
operating the system must be within the organization's financial capacity.

4. Elasticity
The costing system should be elastic and capable of adapting to changing conditions. As such, it must
not be rigid.

It should, in particular, be capable of handling a large volume of work and also dealing with changes
in the nature of business.

5. Accuracy
The costing system should ensure the accuracy of the records that are maintained.

If the costing records maintained are not correct or accurate, the results or conclusions drawn from
them are bound to be inaccurate and misleading.

6. Comparability
Costing records must be presented in a standardized form, enabling a comparative study of costing
results across different periods.
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7. Promptness
An ideal system of costing is one in which information necessary for its functioning are promptly,
easily, and punctually available.

Promptness can be ensured if arrangements are made for the timely supply of records from different
business units (e.g., records concerning materials, labor, or overheads) to the costing office.

Once the costing office receives the information, the obtained data should also be analyzed and
recorded in a timely way to ensure promptness.

8. Reconciliation of Results
The costing system should be maintained so as to make the task of reconciling cost accounts with
financial accounts easy and simple.

This reconciliation is essential for checking the accuracy of cost accounts and also for measuring the
efficiency of the costing system.

Q4) OBJECTIVE OF COST ACCOUNTING.

ANS) OBJECTIVE OF COST ACCOUNTING ARE:-

(i)Ascertainment of cost - Control of cost This is the primary objective of cost accounting. For cost
ascertainment, different techniques and systems of costing are used in different industries.

(ii)Control of cost- Cost control aims at improving efficiency by controlling and reducing cost.

(iii) Guide to business policy- Cost accounting aims at serving the needs of management in
conducting the business with utmost efficiency. Cost data provide guidelines for various managerial
decisions like make or buy, selling price - Cost accounting provides cost information on the basis of
which selling prices of products or services may be fixed.

Q5) DIFFERENCE BETWEEN COST ACCOUNTING AND FINANCIAL ACCOUNTING.

ANS)

Basis Financial Accounting Cost Accounting

Purposes To Prepare P & L A/c and balance To provide detailed cost
sheet tor presentation to information to management i.e.
shareholders and other external internal user.
users.
Statutory This is mandatory under Companies It is voluntary except in specified
requirement Act, Income Tax Act etc. industries.
Cost and profit It reveals overall profit/loss and cost. It reveals cost and profit or loss of
Analysis each product, department etc.
Control aspect It lays emphasis on recording of It lays emphasis on cost control.
Transactions.
Periodicity reporting P& L Account and Balance Sheet are Çost statements are regularly and
reported annually. frequently prepared at Short
intervals and presented for
management.
Past and Future It is concerned with past records. It is concerned with past and
Costs. future costs.
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Degree of Accuracy Financial accounting provides Cost accounting provides

information which is more useful to information for the insiders i.e. the
the outsiders hence greater accuracy management hence lesser
is required. accuracy may also serve the
purpose.

Q6) DEFINATION OF SUNK COST.

ANS) These are historical costs which are incurred in the past. These costs are the costs of resources
already acquired which will be unaffected by choice between various alternatives. These costs were
incurred for a decision made in the past and cannot be changed by any decision that will be made in
future. In other words, these costs play no role in decision making, in the current period. While
considering the replacement of a plant, the depreciated book value of the old plant is irrelevant, as
the amount is a sunk cost, which is to be written off at the time of replacement. Another example of
sunk cost is that of development cost incurred.

Q7) DEFINATION OF COST UNIT , RESPONSIBILITY CENTERS.

ANS) COST UNIT- A cost unit is "a unit of product service or time in relation to which costs may be
ascertained or expressed". It is a unit of quantity in terms of which costs may be computed. For
example, the cost of steel manufactured is ascertained in terms of per tone, cost of carrying a
passenger in terms OI per kilometer.

RESPONSIBILITY CENTRE- It is defined as an activity centre of a business organisation entrusted with

a special task. Under modern budgeting and control, financial executives tend to develop
responsibility centres for the purpose of control. Responsibility centres can broadly be classified into
three categories.

They are:
• Cost centers
• Profit centers
• Investment center

Q8) DEFINATION OF OPPORTUNITY COST.

ANS) This refers to the value of sacrifice made or benefit of opportunity foregone in accepting an
alternative course ol action. Fr example. a firm may finance its expansion plan by withdrawing money
from its bank deposits. In such a case the loss of interest on the bank deposit is the opporuniy cost
for carrying out the expansion plan. Opportunity cost is a relevant cost where alternatives are
available. However, opportunity cost does not find any place in formal accounts and is computed
only for decision making and analytical purposes.

Q9) ITEM NOT BE INCLUDED IN COST ACCOUNTING.

ANS)

• An item that cannot be included in cost accounting is the profit or loss on the sale of fixed
assets.
• Cost accounting means recording all the business transactions which are related to the cost
or the cost incurred in a business.
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• This type of accounting helps to determine the actual cost which was incurred for the
manufacturing of a product or a service.
• All types of costs like rent, depreciation and other expenses are recorded in cost accounting.
• Cost accounting is very important for business as it helps to understand analyze and improve
efficiency by controlling the cost.

Q10) EOQ (ECONOMIC ORDER QUANTITY).

ANS) The economic Order Quantity is that quantity which is ordered at a time such that the total cost
of procurement (purchase) of such quantity is minimum.

Q11) ABC ANALYSIS OR ACTIVITY BASED COSTING.

ANS) ABC analysis in cost accounting is a method where items are categorized based on their
significance in terms of cost. "A" items are the most valuable, "B" items are moderately important,
and "C" items are the least critical. This helps prioritize resources and focus on managing high-impact
costs more efficiently.

Q12) LABOUR TURNOVER

ANS) Labour Turnover is an organisation is the rate of change in the composition of labour force
during a specific period. There are three methods of calculating labour turnover:-

(i)Replacement Method

(ii)Separation Method

(iii)Flux Method

Q13) IDLE TIME

ANS) Ideal time refer to the labour time paid for but not utilised on production. It does represented
the time for which wages are paid but no output is obtained. Ideal time is classified into two
categories: (i)Normal- uncontrollable and controllable (ii) Abnormal- Treatment in costing P/L
account.

Q14) OVERHEAD

ANS) "Overhead" typically refers to the ongoing operational costs or expenses incurred by a business
that are not directly tied to the production of goods or services. These costs include items like rent,
utilities, salaries of employees not directly involved in production, and other general expenses. In
project management, overhead can also refer to indirect costs associated with a project that are not
directly attributable to a specific task or activity.

Q15) CONCEPT OF UNDER ABSORBTION AND OVER ABSORBATION.

Under absorption and over absorption are terms related to the allocation of overhead costs in a
manufacturing or production environment.

1. Under Absorption:

- Occurs when the actual overhead costs incurred are greater than the overhead costs absorbed
into the products.

- This leads to an understatement of the total product cost.

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- Typically happens when the actual production is less than the expected level used for calculating
the predetermined overhead rate.

2. Over Absorption:

- Occurs when the actual overhead costs incurred are less than the overhead costs absorbed into
the products.

- This leads to an overstatement of the total product cost.

- Usually happens when the actual production exceeds the expected level used for calculating the
predetermined overhead rate.

Q15) DISCUSS THE CONCEPT OF MARGINAL COST.

ANS) Margin of safety is the excess of sales over the break even sales. It may also be considered as
excess of production over the break even point.

Small margin of safty indicates that the firm is more vulnerable to change in sales. Further, it MOS is
large a small decrease in sales may not affect the business profit to a large extent.

Q16) DEFINE BREAK EVEN POINT.

ANS) The break-even point is the point at which total cost and total revenue are equal, meaning
there is no loss or gain for your small business. In other words, you've reached the level of
production at which the costs of production equals the revenues for a product.

Q17) IMPORTANCE OF MARGINAL COSTING.

ANS) Marginal costing is important for several reasons:

1. Decision-Making: It helps in making short-term decisions by analyzing the impact of producing

additional units on costs and profits.

2. Pricing Strategy: Businesses can set prices more effectively by understanding the cost of producing
one additional unit and its impact on overall profitability.

3. Profit Planning: It aids in planning and budgeting by providing insights into how changes in
production levels affect costs and profits.

4. Performance Evaluation: It allows for a clearer evaluation of the performance of different products
or segments within a business.

5. Cost Control: Focusing on variable costs helps in better cost control as it separates fixed and
variable costs, making it easier to manage and reduce variable costs.

6. Inventory Valuation: Marginal costing is often used for valuing inventory, particularly in situations
where production levels fluctuate.

Q18) DEFINATION OF STANDARD COSTING.

ANS) Standard costing is all about setting up or fixing a standard cost and then applying it to measure
the varients from the actual cost. It also involves analysing the causes of such variation to maintain
efficiency in the operation.
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Q19) IMPORTANCE OF STANDARD COSTING.

ANS) 1. Cost Control: Standard costing helps businesses set benchmarks for costs. By comparing
actual costs to these standards, companies can identify and control areas where expenses are higher
than expected.

2. Performance Evaluation: It provides a basis for evaluating the performance of different

departments or processes. Variances between standard and actual costs highlight areas that may
need attention or improvement.

3. Budgeting: Standard costing aids in the budgeting process. It allows businesses to estimate costs
for future periods more accurately, helping in the creation of realistic and achievable budgets.

4. Decision Making: It assists in decision-making by providing a clear picture of the cost structure.
This is crucial when considering changes in production methods, product pricing, or resource
allocation.

5. Motivation and Accountability: Employees can be motivated to meet or exceed standards, as their
performance is measured against these benchmarks. It fosters accountability within the organization.

Q20) DEFINE VARIANCE.

ANS) A variance in accounting is the difference between actual and budgeted, or standard, amounts.
Variances are computed to identify and analyze the reasons for differences between expected and
actual results. This information can be used to improve decision-making and control costs.

Q21) STEPS OF STANDARD COSTING.

ANS) (i) Fixing up of the standard cost (for each element ex- material, labour, overhead).

(ii) Measuring the actual preformance.

(iii) Comparision the natural post with the standard cost.

(iv) Analysing the course of such variation, if any If M1 -M3 = value get -ve the favourable , and M1-
M3= +ve then Adverse.

Q22) DEFINATION OF BUDGET.

ANS) Budget is a financial or quantitive statement which is prepared and approved prior to a defined
period of time of the policy to be persued during that period for the purpose of atlaining a given
objective.

Q23) SHORTNOTE ON FIXED AND FLEXIBLE BUDGET.

ANS) Fixed Budget: A fixed budget is like a financial plan set in stone. It outlines expected revenues
and expenses based on a fixed level of activity. It's rigid and doesn't change, regardless of actual
production or sales variations.

Flexible Budget: A flexible budget is the adaptable cousin. It adjusts to changes in activity levels,
allowing for different production or sales volumes. It's like having a budget that can stretch or shrink
based on real-world circumstances.

Q24) DIFF. BETWEEN FIXED AND FLEXIBLE BUDGET.
ANS)
FIXED BUDGET
(i)It does not change with actual volume of
activity.
(ii)It assume that there will be no change in the
prevailing conditions which is unrealistic.
(iii)Variance analyse does not give useful
information .
(iv)This is rigid or inflexible in nature.
(v)Comparion of actual performance with the
budgeted target is meaningless when there is a
difference between two activities levels.
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FLEXIBLE BUDGET
(i)It can be redrafted on the basis of activity
level to be achived.
(ii)It consist of different budgets for different
levels of activity.
(iii)Analyse of variance provides a useful
information.
(iv)This is rigid in nature.
(v)It provides a meaningful basis of comparision
of the actual performance with the target.