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Cost Accounting
UNIT - 1
INTRODUCTION
Q1(A): Fill in the blanks with most appropriate words:
(i)________is the main function of cost accounting.
Ans: Cost ascertainment.
(ii) ________is the aggregate of indirect material cost, indirect wages and indirect expenses.
Ans: Overhead
(iii) The aggregate of direct materials, direct wages and direct expenses is known as
Ans: Prime cost.
(iv) ________is a unit of product, service or time in relation to which cost may be ascertained.
Ans: Cost Unit
(v) Prime cost + Factory overhead =
Ans: Works cost.
(vi) Cost accounting records both monetary and_______unit.
Ans: Physical.
(vii) ________is a statement whose detailed information about total cost is depicted.
Ans: Cost sheet.
Q1(B): State whether the following statements is True or False:
(i) Differential cost is the change in the cost due to change in activity from one level to another.
Ans: True
(ii) Depreciation is the example of semi-variable cost.
Ans: False
(iii) Costing systems are classified according to nature of operations.
Ans: False
(iv) Sunk costs are not relevant to decision making.
Ans: True.
(v) A cost unit is regarded as a unit of product, service or time in relation to which cost may be ascertained or expressed.
Ans:- True.
Q1(C): Choose the correct alternative:
(i) Which of the following statement is correct :
(a) Cost accounting helps in ascertaining accounting profit for income tax purpose.
(b) Cost accounting provides information to all those who are internal and external to the firm.
(c) Costing and cost accounting are not same term.
(d) Cost accounting helps the management in earning extra profit.
Ans: (c) Costing and cost accounting are not same term.
(ii) Cost centres are created for
(a) Inventory valuation.
(b) Product pricing.
(c) Control and fixation of responsibility.
(d) Revenue generation.
Ans: (c) Control and fixation of responsibility.
(iii) According to CIMA, London, "the technique and process of ascertaining cost" is called
(a) Costing
(b) Cost Accounting
(c) Cost Accountancy
(d) Cost
Ans: (a) Costing
(iv) Which among the following cost are not useful for managerial decision making?
(a) Sunk cost
(b) Marginal cost
(c) Standard cost
(d) None of the above
Ans: (a) Sunk cost
(v) The main objective of cost accounting is
(a) Reducing cost
(b) Fixation of selling price
(c) Cost control
(d) Maximise profit.
Ans: Cost control
(vi) In costing stock is valued at
(a) Market price
(b) Cost price
(c) Selling price
(d) Standard price
Ans: (b) Cost price
(vii) The installation of a________system will create confidence in the minds of public about fairness of the prices charged.
(a) Costing
(b) Financial accounting
(c) Management accounting
(d) Cost accounting
Ans: (a) Costing
(viii) _______is the application of costing and cost accounting principles, methods and techniques to the art, science and practice of cost control and the ascertainment of profitability.
(a) Cost Accounting
(b) Cost Accountancy
(c) Cost Control
(d) Cost Ascertainment
Ans: (b) Cost Accountancy
(ix) Data required for fixation of selling price is provided by______
(a) Management Accounting
(b) Financial Accounting
(c) Cost Accounting
(d) All of these
Ans: (c) Cost Accounting
(x) Batch costing is suitable for_______
(a) Sugar Industry
(b) Chemical Industry
(c) Pharma Industry
(d) Oil Industry
Ans: (c) Pharma Industry
Short Answer Type Questions :
Q2. State the meaning of 'cost' in respect of cost accounting.
Ans: Cost is a measurement in monetary terms of the amount of resources used for the purpose of production of goods or rendering services. Cost in simple words, means the total of all expenses. Cost is also defined as the amount of expenditure (actual or notional) incurred on or attributable to a given thing or to ascertain the cost of a given thing.
Q3. Define costing.
Ans : According to ICMA, London, costing is "The process of accounting for cost which begins with the recording of income and expenditure and ends with the preparation of periodical costs."
Q4. What is Cost Accounting?
Ans :According to Kohler, cost accounting, "is that branch of accounting dealing with the classification, recording, summarization and reporting of current and prospective costs."
In simple words, cost accounting is the process of accounting for cost which begins with the incurrence of costs and ends with the control of costs. It is a formal system of accounting by means of which cost of products, services or activities are ascertained and controlled.
Q5. What is cost unit?
Ans: A cost unit refers to a units of product, service or time in relation to which costs may be ascertained or expresses. In other words, cost unit is the units of output for which cost is ascertained. For example, the cost of air-conditioner is ascertained per unit.
Q6. What is cost centre?
Ans: A cost centre is a location, person or item of equipment for which cost may be ascertained or used for the purpose of control. In simple words, it is a sub-division of the organization to which costs can be charged. A cost centre can be (a) Location (b) Person (c) an item of equipment.
Q7. What are the elements of cost?
Ans : Total cost of a product is composed of three elements. They are material, labour and expenses. Each of these elements may be further divided into two parts - Direct and Indirect, i.e., direct materials, direct labour, direct expenses and indirect materials, indirect labour and indirect expenses.
Q8. What is prime cost?
Ans: Costs are primarily divided into direct costs and indirect costs. Direct costs consist of direct materials, direct wages (labour) and direct expenses. The sum of these three direct expenses is known as prime cost. Prime cost - Direct material + Direct labour + Direct expenses.
Q9. What is a cost sheet?
Ans: Cost sheet or statement of cost is a statement prepared at a given interval of time showing the various elements of cost of a product or a service or a job in total as well as per unit of output produced during the period. Costs are shown in an analytical and in detailed form. It is presented in a columnar form.
Q10. State the meaning of cost apportionment.
Ans: When items of cost cannot directly charge to or accurately identifiable with any cost centres, they are distributed amongst the cost centres on some predetermined basis. This method is known as cost apportionment. The predetermination of suitable basis of apportionment is very important and usually following principles are adopted i) Service or use, (ii) Survey method, (iii) ability to bear
Q11. State the meaning of cost classification.
Ans: Classification of cost is the process of grouping the components of cost under a common designation on the basis of similarities of nature, attributes or relations. It is the process of identification of each item and the systematic placement of like items together according to their common features.
Q12. State the meaning of cost drivers.
Ans: Cost driver is any factor which causes a change in the cost of an activity. According to CIMA, "Cost drivers are the structural determinants of the cost of an activity, reflecting any linkages or interrelationships that affect it." Therefore we could assume that the cost drivers determine the cost behaviour within the activities, reflecting the links that these have with other activities and relationships that affect them.
Q13. What is marginal costing?
Ans: Marginal cost is the aggregate of variable costs, i.e., prime cost plus variable overhead. Marginal cost per unit is the change in the amount at any given volume of output by which the aggregate cost changes if the volume of output is increased or decreased by one unit. Marginal costing system is based on the system of classification of costs into fixed and variable.
Q14. What is batch costing?
Ans: Batch costing is the aggregate cost related to a cost unit which consist of a group of similar articles which maintains its identity throughout one or more stages of production. In this method, the cost of a group of products is ascertained. The unit cost is a batch or group of identical products instead of a single job order or contract. This method is applicable to general engineering factories which produces components in convenient economical batches.
Q15. What is Job Costing?
Ans :According to this method, costs are collected for each job, product or project separately. This method of costing is used where production is not repetitive and costs can be identified with a particular job. A job card is prepared for each job. This method is applicable to printing machine tool manufacturing, general engineering workshop, house building, ship building, garage etc.
Long Answer Type Questions:
Q16. State the characteristics of a good cost Accounting System.
Ans: The main characteristics of cost accounting can be summarized as follows:
(i) Cost accounting is a branch of accounting.
(ii) Cost accounting is both art and science.
(iii) Cost accounting is classifying, recording and appropriate allocation of expenditure.
(iv) Total or per unit cost of the product or service can also be known from cost accounting.
(v) Work-in-progress can also be find out from this system.
(vi) The information provided by this system can be used in solving several management problems.
(vii) Cost accounts are also helpful in controlling the costs.
Q17. Explain the various objectives of cost accounting.
Ans: The main objectives of cost accounting are as follows:
(i) Cost Determination: The main objective of cost accounting is to know the total and per unit cost of products, services, contracts or processes.
(ii) Cost Control: The second objective of cost accounting is to control the cost so that maximum and better production on minimum cost may be possible. To achieve this objective, the technique of budgetary and standard cost control is adopted.
(iii) Cost Reduction: Cost accounting system controls the expenditure with the objective of cost reduction.
(iv) Guidance to Management: The informations provided by the cost accounting guide the management in policy decision.
(v) Determination of selling price: One of the objectives of cost accounting is to fix the reasonable selling price so that the competition may be faced and profit may be earned.
Q18. Write the differences between cost accounting and financial accounting.
Ans:- "DOWNLOAD" PDF FOR COMPLETE SOLUTION
Q19. Write the relationship or similarities between cost accounting and financial accounting.
Ans: The similarities between cost accounting and financial accounting are:
(i) Both the systems of accounting are based on double entry system.
(ii) Their basic documents are bills, vouchers etc.
(iii) In both the systems only monetary transactions are taken into account.
(iv) Both the systems shows the profit or loss of the business.
(v) In both the systems, a comparative study of expenditure and profit/loss of various periods is made.
(vi) Both the systems are complementary to each other.
(vii) In both the systems transactions are collected, classified and tabulated and information is supplied to the management for their use.
(viii) Operating information is useful in financial as well as cost accounting. Thus financial accounting has significant influence on cost accounting.
Q20. Explain the advantages of cost accounting.
Ans: The major advantages of cost accounting are stated below:
(i) Disclosure of unprofitable activities: A cost system reveals unprofitable activities, losses or inefficiencies occurring in any form such as:
(a) Wastage of man power, idle time and lost time.
(b) Wastage of material in the form of spoilage, excessive scrap etc.
(c) Wastage of resources, e.g. inadequate utilization of plant, machinery and other facilities.
(ii) Basis for fixing selling price: Cost accounting is useful for price fixation purposes. Although sale price is generally related more to economic conditions prevailing in the market than to cost, latter serves as a guide to test the adequacy of selling prices.
(iii) Helps in decision making: Cost accounts furnish suitable data and information to the management to serve as guides in making decisions involving financial considerations.
(iv) Cost Control: Cost accounting provides budgets and standards which are techniques of cost control. With the application of standard costing and budgetary control methods, the optimum level of efficiency is set and the management can control cost.
(vi) Helpful to government: Cost accounting helps the government in fixing economic policies and assessing excise duties and income tax. It is also helpful to the government for preparing national plan.
(vi) Helpful to consumers: Cost accounting reduces cost of product or service to the minimum and enables the producer to sell the product at a lower price in a competitive market.
(vii) Marginal costing: Marginal costing is employed for suggesting courses of action to be taken. It is a useful tool for the management in taking short term decision.
Q21. What are the various limitations of cost accounting?
Ans: Following are the limitations of cost accounting :-
(i) Only past performances are available in the costing records the management is taking decision for future.
(ii) The cost of previous year is not same in the succeeding year. Hence, cost data are not highly useful.
(iii) The cost is ascertained on the basis of full utilization of capacity. If capacity is partly utilized, the cost may not be true.
(iv) Financial character expenses are not included for cost calculation. Hence, the calculated cost is not correct always.
(v) In cost accounting, costs are absorbed on pre-determined rate. It leads to over absorption or under absorption of overheads.
(vi) Cost accounting fails to solve the problems relating to work study, time study, motion study and operation research.
(vii) Installation of cost accounting system requires the maintenance of many costing records. It results in heavy expenditure.
(viii) Delay in receiving costing information does not result in taking quality decision by the management.
(ix) Rigid cost accounting system does not serve all purposes.
Q22. Give the specimen of cost sheet.
Ans : DOWNLOAD" EBOOK FOR COMPLETE SOLUTION
Q23. Distinguish between cost centre and cost unit.
Ans: The following table shows the distinctions between cost centre and cost unit:
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Q24. What are the differences between job costing and batch costing?
Ans: "DOWNLOAD" EBOOK FOR COMPLETE SOLUTION
Very Long Answer Type Questions:
Q25. What is meant by Cost Accounting? Discuss the characteristics of an ideal system of cost accounting.
Ans: According to Kohler, cost accounting, "is that batch of accounting dealing with the classification, recording, summarization and reporting of current and prospective costs."
In simple words, cost accounting is the process of accounting for cost which begins with the incurrence of costs and ends with the control of costs. It is a formal system of accounting by means of which cost of products, services or activities are ascertained and controlled.
Characteristics of an ideal cost accounting system:
(i) Simplicity: Cost accounting system should be simple and clear so that it may be understood even by a man of general wisdom. If its procedure is complex it would be difficult to get the cooperation employees in its successful implementation. Thus the system should be quite simple (ii) Elasticity: The system should be quite elastic so that the necessary changes may be possible as are required from time to time in the business.
(iii) Adaptability: The necessities of various types of businesses are different from each other. Thus, the system should be as per requirements, nature, conditions, necessities and size of the concerned business. The system should be capable of fulfilling all the necessities so that the product cost may be easily ascertained.
(iv) Accuracy: The utility of the system depends on its accuracy. Thus, to obtain the desired results, the system should be quite.
(v) Comparability: The system should be such which can provide necessary information and facts and figures to the management for critical and analytical examinations of the work done. It is possible only when cost accounts provide past data of the concerned business, data of other similar businesses, jobs or departmental information etc. controlling the cost, the characteristics of comparability is essential. Thus, the system should possess the characteristics of comparability.
(vi) Prompt reports: The system should be such which can provide the concerned business reports promptly so that the management may take decisions at the right time to control the cost.
(vii) Reconciliation with Financial Accounts :- The system should provide all those informations which may be required to reconcile its results with the financial accounts so that causes of differences in results if any, may be find out.
(viii) Classification and Analysis: For the success of the system, it is necessary that the correct and appropriate classification of expenses relating to the production, administration, selling and distribution should be done to lay their reasonable burden on each product, process or job. It helps in determining their total cost and per unit cost.
Q26. Explain the different methods of cost accounting and state the industries in which they can be applied.
Ans: The main methods of cost accounting are as follows :-
(i) Unit Costing Method: This method is also known as single or output costing method. This method is applied in those industries continuous production is carried out and all the manufactured units are identical. This method is adopted in industries such as brick making, flour mills, cloth mills, paper mills, sugar mills, cement industries, wine factories etc. The main objective of this method is to determine per unit cost at each stage of production.
(ii) Job Costing: In businesses where goods are produced on the basis of order or job work, job costing method is adopted. The objective of this system is to ascertain the cost and profit or loss of each job or work. In this method, job cards are separately prepared for each job. This method is adopted by printer, manufacturers of machinery parts and general engineering workshops.
(iii) Contract Costing: When the form of business is large and it continuous for a longer period, contract costing method is adopted. For each contract a separate account is maintained. This method is mainly employed in construction works.
(iv) Process Costing method: This method is adopted in industries where there is a continuous production and the product of each process becomes the raw material for the next process. In this method, the product is received at the end of each process. Thus it is necessary to ascertain the total cost and the per unit cost at the end of each process. Separate account, for each process is opened in this method. This method is generally used in industries such as soap making, chemical and medicine manufacturing, paints, foods etc.
(v) Batch Costing method: Where for the sake of convenience, the production work is completed in different batches and it is necessary to know the separate cost of each batch, this method is employed. In this method, every batch is treated as a unit of production and to ascertain per unit cost by dividing the total expenses of the batch by the number of units produced. This method is mainly used in industries such as bakeries, pharmaceuticals, general engineering etc.
(vi) Departmental Costing method: In organisation where productive work is divided into different departments, this method is employed. In this method separate cost of each department is ascertained.
(vii) Cost Plus method: This method is used in industries or undertakings where work is completed earlier and its cost cannot be correctly ascertained in advance. In this method an agreed sum or percentage to cover costs and profit is added in the actual cost.
(viii) Target Costing method: This method is mainly employed in government manufacturing units. In this method, before starting manufacturing work, probable cost is estimated with the help of experienced persons. The cost so estimated is termed as estimated or target cost.
Q27. What do you understand by 'Elements of Cost'? Explain different elements of cost.
Ans: Elements of cost means all those expenses which contribute in the production of goods or services. These expenses may also be said as components or essential parts of cost of a product. As a matter of fact, elements of cost are the primary classifications of cost according to the factors upon which expenditure is incurred. The various elements of cost may be conveniently divided into three parts viz, (1) Material (2) Labour and (3) Expenses. Each of these can be direct or indirect.
(1) Material: In the elements of cost, material has an important place because no goods can be produced without material. Material cost is usually a larger part of the total cost of a product. It can be direct as well as indirect.
(a) Direct Material: The material which is directly used in production and which becomes an integral part of the finished goods is termed as direct material. Direct material has physical existence in the goods produced. In simple words, it is the material with which the goods are manufactured. For example sugar is manufactured by sugarcane, furniture by timber, cloth by yarn, etc.
(b) Indirect Material: Material which is used indirectly in production is known as indirect material. In simple words, the material which is neither directly used in production nor becomes the integral part of the finished goods is termed as indirect material. The oil is used to keep the machinery in working order, the cloth is used for cleaning the machinery parts, etc. are the examples of indirect material.
(2) Labour: Labour is another important element of cost. The wages paid to the labour employed in production are included in the production cost as labour cost. Like material, labour can be divided into two parts viz., direct labour and indirect labour.
(a) Direct labour: Labour which are directly engaged in production or manufacture of goods is termed as direct labour. In simple words, it is the labour which can be specifically related to particular product, job or process. For example, labour employed to manufacture furniture or to work on machines is direct labour. Direct labour is also termed as productive labour, factory labour, operating labour etc.
(b) Indirect labour: Labour which are not directly engaged in production operations but which helps in production operations is indirect labour. Such labour does not alter the condition or composition of the product. Wages paid to foremen, inspectors, time-keeper, store- keeper, gate-keeper, etc. are the examples of indirect labour.
(3) Expenses: All expenses other than material and labour which are incurred in production, administration, selling and distribution are termed as expenses. These expenses can be direct or indirect.
(a) Direct expenses: All expenses other than direct material and direct labour which are directly incurred on a specific product, job or process are called direct expenses. In other words, expenses which can be directly related to the cost of a particular product are termed as direct expenses. Payment of royalties for extracting minerals from mines, excise duty, rent for equipments used in a specific production, fee for drawing designs and charts for a specific job etc. are few examples of direct expenses.
(b) Indirect expenses: Expenses which cannot be related to specific work, job or process but which are related to the whole production, several jobs or processes are termed as indirect expenses. The remuneration paid to the expert for repairing the machines of all the departments is an example of indirect expenses.
The different elements of cost can be presented in the form of the following chart table:
Table
Q28. Explain the different components of total cost with examples.
Ans: Classification of cost or components of total cost: A cost statement is prepared to know the total cost of production. In this statement, the total cost is classified on the basis of elements of cost, as follows:
(1) Prime cost: Prime cost is also called direct cost, first cost or flat cost. The main objective of knowing the prime cost is to divide the total cost into direct and indirect costs. The total of all direct costs is known by the sum of direct material, direct labour and direct expenses and is called prime cost.
Prime cost Direct material + Direct Labour + Direct expenses
(2) Works cost or Factory cost: The objective of knowing the works cost or factory cost is to control the factory cost and to know the efficiency of the factory. Works cost is also known production cost or manufacturing cost. If cost of indirect material, indirect labour and indirect expenses of the factory are added to prime cost, works cost or factory cost is arrived at.
Works cost or factory cost = Prime cost + Indirect material + Indirect labour + Indirect expenses of the factory.
(3) Office and Administrative cost: If administrative and office overheads are added to works cost or factory cost, office and administrative cost arrived at.
This cost is also termed as total cost of production, and administrative cost works cost + office and administrative overheads.
(4) Total cost: If the selling and distribution overheads are added to office cost, the total cost is arrived at. It is also termed as cost of sales.
Total cost Office and administrative cost + selling and distribution expenses.
(5) Selling price: If the desired profit is added to the total cost or cost of sales, the selling price is arrived at. The difference between the selling price and the total cost shall be the profit or loss.
Selling price Total cost or cost of sales + profit Profit Sales Total cost or cost of sales.
PRACTICAL PROBLEMS
Q1. From the following particulars prepare Cost Sheet. Direct materials Rs. 8,000, Direct wages Rs. 6,000, Direct expenses Rs. 2,500, Administrative overheads Rs. 4,000, Factory overheads Rs. 5,000, Selling and Distribution expenses Rs. 2,500 and Sales Rs. 40,000.
Solution:
Cost Sheet
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Q2. From the following particulars prepare a statement showing (a) Raw materials consumed (b) Prime cost (c) Works cost (d) Cost of production (e) Cost of sales and (f) profit.
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