MASTER MINDS - QUALITY EDUCATION BEYOND YOUR IMAGINATION

1. BASIC CONCEPTS
S.No.

Question

1.

Compare cost accounting with financial accounting.

2.

Compare cost accounting and management accounting?

3.

Define the term cost. Compare it with Value and Price?

4.

What are the advantages/ objectives of a cost accounting system.

5.

Discuss the role of the cost accountant in a manufacturing organisation

6.

How are costs classified?

7.

Give different classifications of overheads.

8.

Write short notes on explicit and implicit costs.

9.

Distinguish between committed fixed costs and discretionary fixed

costs?

10.

Distinguish between conversion cost and added value?

11.

How are costs classified on the basis of normality?

12.

Write short notes on period costs and product costs. Why should
product costs be computed?

13.

Distinguish between period costs and product costs?

14.

How is cost ascertainment classified, based on the fine period of

ascertaining costs?

15.

Methods of Costing.

16.

Write about unit cost method for ascertaining product cost.

17.

What are the essential features of a good Cost Accounting System?

18.

Steps involved in installing a costing system in a manufacturing unit.

19.

Factors that you will consider before installing a costing system.

20.

You have been asked to install a costing system in a manufacturing

business. What practical difficulties, apart from technical costing
problems, would you expect to meet and how would you propose to
overcome them?

21.

Reports provided by the cost accounting department.

22.

Items not regarded as cost and not included in cost sheet.

23.

Production account Vs. Cost sheet

24.

What is cost reduction & what are its advantages

25.

Distinguish between cost reduction and cost control

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26.

What are the precautions in implementation of cost reduction

programme?

27.

Write about long range and short range cost control and cost
reduction programme?

28.

Write short notes on uniform costing & objectives

29.

Write short notes on Uniform Cost Manual?

30.

Write four limitations of inter firm comparison.

31.

Write short notes on value Analysis.

32.

Write a short note on Direct Expenses?

33.

What are the methods of segregating semi valuable costs in to fixed

and variable costs?

34.

Define the followings:

.COMPARE COST ACCOUNTING WITH FINANCIAL ACCOUNTING (OR) DOES COST

ACCOUNTING SUPPLEMENT FINANCIAL ACCOUNTING? DISCUSS.
Q.NO.1

Particulars
Users

Statutory
Requirements
Nature
Cost Analysis
Results into

Stock Value
Time period

Audit
Focus
Nature of
Costs

Financial Accounting
Financial statements are used by
internal management and also by
outsiders (Creditors, Shareholders,
Customers, Government).
Requirements of Companies Act and
the Income Tax Act are to be met.
Accounting
of
the
monetary
transactions of the business.
Costs and Profits are shown as a
whole for the period.
Leads to preparation of income
statement & balance sheet at
periodical interval.
At Cost or NRV whichever is less.
Financial Statements are generally
prepared at the end of the financial
period, generally one year.
Subject to financial audit.
Focus of accounting is on recording
the transactions.
Generally historical costs are used
for recording purposes.

Cost Accounting
Detailed cost information is used by
internal management for proper
planning, decision-making and control.
This is voluntary except when Cost
Accounting Records Rules apply.
Accounting of product or service
cost.
Costs are analysed product-wise,
department-wise, activity-wise etc.
Leads to development of product or
service cost, indicating the profitability
of each product or service.
Stocks are valued at cost.
Cost reports are presented on a
continuous basis for the cost period.
The cost period is usually < 1 year.
Cost audit in not compulsory except
for a few industries.
Focus of accounting is to control cost.
It considers both historical and future
costs for control & decision making.

Q.NO.2. COMPARE COST ACCOUNTING AND MANAGEMENT ACCOUNTING?

(IY)

Points of distinction: A comparison of the above definitions of Cost Accounting on the one hand,
and management accounting, on the other, given by the C.I.M.A. Official terminology, reveals that
it is no longer worthwhile to distinguish between the two inter related disciplines as two branches
of accounting. It is, in fact, safe to adopt the view of Dobson that management accounting is so
broad and comprehensive as to include both financial and cost accounting.

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From the academic point of view, however, the following points may be cited to distinguish one from
the other:
a. Cost accounting provides just cost information for managerial purposes, while management
accounting provides all accounting information, i.e., not merely cost information but financial
information as well.
b. The scope of management accounting is much wider than that of cost accounting. Relatively,
therefore, management accounting uses more advanced techniques of management reporting.
c. In providing cost information, cost accounting uses financial information provided by financial
accounting by classifying the expenses under heads of performance, after minutely dissecting
every item of expenditure. Management accounting uses both cost and financial information.
d. Cost accounting evolved out of financial accounting, while management accounting evolved out
of cost accounting.
e. The main purpose of cost accounting is the reporting of current and prospective costs of
product, service, department, hob, process and operations. It is oriented towards managerial
control of current and future operations of an enterprise.
Management accounting, on the other hand, is concerned with the provision of accounting
information to management at all levels for the purpose of formulation of policies, planning,
execution of plans, controlling the activities of an enterprise through measurement of
performance, investigation of the potential costs and benefit of alternative future courses of
action, and there by ensure maximization of profit.
f.

The cost accountant is interested in preparing budgets, setting standards, measuring actual
performance with the set standards, and reporting significant deviations for necessary action,
besides cost ascertainment.
However, the management accountant will go a step further in making variance analysis and
suggesting ways suggesting ways and means of improving the efficiency of operations. He
concentrates his attention on matters relating to finance, profitability and productivity.

g. While stewardship accounting led to the evolution of cost accounting a sound system of cost
accounting led to the evolution of management accounting.
h. While cost accounting may also be called control accounting, management accounting may be
called decision making accounting
Q.NO.3. DEFINE THE TERM COST. COMPARE IT WITH VALUE AND PRICE?

(P)

1. Meaning of Cost:
a) Cost refers to the expenditure incurred in producing a product or in rendering a service.
b) It is expressed from the producer or manufacturers viewpoint. (not that of consumer/ end
user).
c) Cost ascertainment is based on uniform principles and techniques. Hence cost is objectively
(and subjectively) determined.
2. Comparative Analysis between Value, Price and Cost:
Particulars
Meaning

Ascertainment
Differentiation /
Subjectivity

Value
Relative Worth of
a commodity to
an individual at a
particular point
of time
Users viewpoint
Different persons
attach different
values
to
a

Price
Amount
paid
by
consumer in exchange
for a product/service.

Cost
Expenditure incurred
in
producing
a
product
or
in
rendering a service.

Consumers viewpoint
Price differentiation /
discrimination
is
possible on customer /

Producers viewpoint.
Ascertained on the
basis
of
uniform
principles. Hence it is

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Inference

product
at
different points of
time.
Opinion

time basis

objectively
determined.

Policy

Fact

Q.NO.4.WHAT ARE THE ADVANTAGES/ OBJECTIVES OF A COST ACCOUNTING SYSTEM?

(MAY 01,03,08)(NOV 02)
a. It is useful for identifying the exact causes for decrease or increase in the profit / loss of the
business.
b. The application of cost reduction techniques helps in achieving the objective of economy in
concerns operations.
c. Cost comparison helps in cost control. Such a comparison may be made from period to period
by using the figures in respect of the same firm or of several units in an industry.
d. It helps in identifying unprofitable activities or losses, so that appropriate actions are taken.
The use of Standard Costing points out the deviations from pre-determined level and thus
facilitate the taking of appropriate action.
e. Managers can obtain relevant information from the Cost Accounting System, which helps in
making decisions.
f.

Cost Accounting is quite useful for price fixation.

g. A good cost accounting system provides cost figures for the use of Government, labour courts
and other bodies for dealing and solving issues like price fixation, wages level fixation, etc.
Exam questions:
a. A factory manufactures only one product in one quality and size. Its owner states that he has a
sound system of financial accounting which can provide him with unit cost information and as
such he does not need a cost accounting system. State your arguments to convince him the need
to introduce a cost accounting system. Ans.: Write the above answer.
b. What is the importance of the cost accounting to business concerns? Ans.: Write the above answer.

Q.NO.5.DISCUSS THE ROLE OF THE COST ACCOUNTANT IN A MANUFACTURING

ORGANISATION.
a. The Cost Accountant establishes the Cost Accounting Department in the firm.
b. The Cost Accountant develops the Cost Accounting Manual. This specifies the functions of the
Cost Accounting Department, the format of various documents, forms and reports.
c. Cost of products & services are ascertained by effective implementation of the costing system.
d. The Cost Accountant is responsible for generation of various cost reports. These reports assist
managers in reviewing their own performance.
e. The Cost Accountant provides cost comparison information which is useful for decision making.
Some bases of comparison may be (a) Standard Costs with Actual Costs (b) Budget figures with
actual figures (c) Financial and Costing Profits etc.
f.

Cost analysis is also performed by the Cost Accountant, which is useful for decision making.

g. The Cost Accountant suggests techniques for cost reduction and cost control.

Q.NO.6.HOW COSTS ARE CLASSIFIED?

1. On the basis of Elements:
a. Materials: Cost of tangible, physical input used in relation to production.
b. Labour: Cost incurred in relation to human resources of the enterprise.

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MASTER MINDS - QUALITY EDUCATION BEYOND YOUR IMAGINATION

c. Expenses: Cost of operating and running the enterprise, other than materials and labour.
This is the residual category of costs.
2. On the basis of Functions:
a. Production Cost: The cost of the set of operations commencing with supply of materials,
labour and services and ends with the primary packing of product. Thus it is equal to the
total of Direct Materials, Direct Labour, Direct Expenses and Production Overheads.
b. Administration Cost: The cost of planning, organizing, controlling and general
management expenses of the organisation, which is not directly related to production,
selling & distribution. E.g.s: Office Rent, Audit & Legal Expenses, Directors Remuneration
etc.
c. Selling Cost: The cost of creating the demand and of securing sales orders. These are also
called marketing costs. E.g.s: Advertisement, Salesmen remuneration, Show-room Expenses.
d. Distribution Cost: The cost incurred in making the product available to reach the
customers destination and getting back any returned empty packages. E.g.s: Carriage
outwards, maintenance of delivery vans.
e. Conversion cost: The sum of direct wages, direct expenses and overhead cost of
converting raw materials to the finished stage.
3. As Direct & Indirect:
a. Direct cost means which can be identified and allocated to a particular unit of cost, i.e.,
for a job, product or process. Examples are: the cost of cloth in the ready-made shirt, wages
payable to a worker who is directly involved in production, etc. The term indirect cost
means which is of general character and that cannot be identified with a particular unit of
cost. It has to be distributed or shared. Examples are: The salary of chief manager who looks
after the entire business, Factory rent. All indirect costs are collectively called as Overheads.
b. Impracticability: There are certain costs which can be identified with a particular unit of
cost but the process of identifying them is so costly and difficult that it is not worth while to
do so and, therefore, they are treated as indirect costs. For example, in the case of thread
used in stitching a shirt, though it is possible to find out the amount of thread used in a
particular shirt, but it would not be of much use, therefore, it is treated as indirect.
4. Classification according to variability:
A. Fixed Cost: It refers to those costs which do not vary with the volume of production
within certain limits. For example, rent of office, salaries. It has the following characteristics:
a. They remain constant whether activity increases or decreases. Even when there is no
production, they are to be incurred.
b. Fixed costs are not absolutely fixed. For example, if a concern decides to go in for
additional equipment, building and staff, fixed cost will also increase.
c. Total Fixed cost shall always remains fixed. Fixed cost per unit varies with the volume.
With increase in volume, fixed cost per unit decreases and vice versa.
d. Fixed costs are, by and large, uncontrollable.
e. Change in the price levels affects the fixed nature of fixed cost. E.g. Revision of rent.
B. Variable Costs: Variable costs vary in direct proportion (one to one relation) to the volume
of production. However, variation may not always be in the same proportion. In terms of
degree of variability, there are three types of variable costs.
a. A 100% variable cost which varies directly with output.
b. The variable cost per unit of production is high at lower level of production but
gradually decreases as production goes up.
c. The V.C./unit is low at levels of production but gradually increases with the
production.

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C. Semi Variable Cost/Mixed costs: These are the items of cost which are neither fixed nor
variable. These have the characteristics of both the fixed and the variable. For instance,
telephone bill consist of hire charges (Fixed) & call expenses (Variable). This is of 2 types:
a. Costs vary in relation to the output but the variation in cost is less proportional to
change of output. For example, Repairs and Maintenance, Power and Fuel, Stores
handling, etc.
b. Costs tend to remain constant within certain range of output, then jump up and remain
constant for another range.
5. Classification according to controllability: (V.IMP)
a. Controllable costs: Costs which can be influenced and controlled by managerial action.
However, Controllability is a relative term and is subject to the following factors.

Time: Certain costs are controllable in the long run and not in the short run.

Location: Certain costs are not influenced and decided at a particular location / cost
centre. If rent agreements of all factory premises are executed centrally at the Head
Office, factory managers cannot control the incurrence of cost.

Nature: Variable costs are generally controllable by department heads.

b. Uncontrollable Costs: These are other than controllable costs. Fixed costs are generally
uncontrollable. For example, it is very difficult to control costs like factory rent.
6. Classification on the basis of time:
a. Historical Costs: These are the costs which are ascertained after they have been incurred.
Historical costs are thus nothing but actual costs. These costs are not available until after
the completion of the manufacturing operations.
b. Pre-determined costs: These are future costs which are ascertained in advance of
production on the basis of various estimations.

Q.NO.7.GIVE DIFFERENT CLASSIFICATIONS OF OVERHEADS.

1. Classification by Function:
a. Factory Overheads, Office & Administrative Overheads & Selling and Distribution Overheads.
b. Base for classification: Whether an expense belongs to one class or another depends
entirely on the benefit derived from it. For instance, salaries of clerks will be Factory
expenses, when the clerks concerned work in the factory office, Office and administrative
expense when the clerks work in the general office and Selling and distribution expense when
the clerks work in the sales office.
2. Classification of overheads by nature:
a. Fixed or Constant: These are expenses that are not affected by any variation in the
volume of activity. E.g.: Managerial remuneration, rent etc.
b. Variable expense: Variable Expenses that change in proportion to the change in the
volume of activity. When output goes up by 10% the variable expenses also go up by 10%.
But Variable expenses are constant per unit of output.
c. Semi variable: The expenses that does not change in the same direction as change in the
level of activity but not in the same proportion. Semi-variable expenses usually have
two parts-fixed and variable. For instance, one view is, the amount of depreciation
usually depends on two factors - one on time (Fixed) and the other on wear and tear
(Variable). These two together make depreciation (as a whole) semi-variable.

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MASTER MINDS - QUALITY EDUCATION BEYOND YOUR IMAGINATION

Q.NO.8.WRITE SHORT NOTES ON EXPLICIT AND IMPLICIT COSTS.
Particulars
Meaning
Otherwise known as
Measurement

Recording in books
Purpose
Examples

Explicit Costs
Costs which involve immediate
cash payment.
Out of pocket costs.
These are actually incurred
and hence can be easily
measured.
These are recorded in books.
Accounting, Reporting, Cost
Control & Decision Making.
Salaries, advertisement etc.

(MAY 01,05,07)

Implicit Costs
Cost which do not involve
immediate cash payment.
Notional costs/imputed costs.
They are not actually incurred
and cant be measured easily and
involve estimation.
These are not recorded in books.
For taking investment decisions.
Interest on own capital, rent of
own
premises,
salary
of
proprietor

Q.NO.9. DISTINGUISH BETWEEN COMMITTED FIXED COSTS AND DISCRETIONARY FIXED

COSTS?
(P)
Particulars
Meaning

Committed Fixed Costs

These are Fixed Costs that arise
From the possession of
Plant, building and equipment
(e.g. Depreciation, rent, Taxes,
Insurance Premium etc.) or
A basic organisation (e.g.
Salaries of Staff)

Short
Control

These costs remain unaffected by

any short term changes in
volume of production.
Any reduction in Committed fixed
Costs under normal activities of
the concern would have adverse
effects on the concerns Long
term objectives.
Such costs cannot be controlled
Also known as unavoidable
Fixed Costs

Run

Effect on Long

term
Objectives

Control
Inference

Discretionary Fixed Costs

These are Fixed Costs Incurred
as a result of managements
discretion.
It arises from periodic (usually
yearly) decisions regarding the
maximum
outlay
to
be
incurred, and
It is not fixed to a clear cause
and effect relationship between
inputs and outputs.
These cannot be changed in the
very short run.

Discretionary Fixed Costs can

change from year to year, without
disturbing
the
long

term
objectives.
These costs can be controlled
Also known as Avoidable fixed
Costs

Q.NO.10. DISTINGUISH BETWEEN CONVERSION COST AND ADDED VALUE?

(P)
(NOV 86)(MAY 03)
Particulars
Meaning

Conversion Cost
It is the cost of converting raw
materials to the finished stage or
converting a material from one
stage of production to the other

Included Items

Direct Wages + Direct Expenses +

Production Overheads.

Added Value
It is the change in market value
resulting from any alteration in
the form, location or availability of
a product or service, excluding the
cost of bought out materials or
services.
Difference in sales Value of a
product or service between two
places, two versions, two markets,
etc.

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Excluded Items

It totally excludes Materials and

Components Cost, but includes
cost resulting from variations in
Direct Materials weight or volume

It
excludes
only
cost
of
purchased
bought

out
components and services, but
includes profit element.

Q.NO.11. HOW ARE COSTS CLASSIFIED ON THE BASIS OF NORMALITY?

(P)

On the basis of Normality / Expectation, Costs are classified into

1. Normal Cost: Costs which can be reasonably expected to be incurred under normal, routine,
and regular operating conditions.
2. Abnormal Costs: Costs over and above normal cost, which is not incurred under normal
operating conditions, e.g. fines and penalties.
Q.NO.12. WRITE SHORT NOTES ON PERIOD COSTS AND PRODUCT COSTS.
WHY SHOULD PRODUCT COSTS BE COMPUTED?

(NOV 97) (P)

On the basis of attributability to the product, Costs are classified into

1. Period Costs: These are costs which are not assigned to the products but are charged as
expenses against the revenue of the period in which they are incurred. Non Manufacturing
Costs, e.g. Selling and Distribution Costs are generally recognized as Period Costs. These
costs are not included in inventory valuation.
2. Product Costs: These are costs which are assigned to the product and are included in
inventory valuation. These are also called as Inventorable Costs. Under absorption costing,
total manufacturing costs are regarded product costs while under marginal costing, only
variable manufacturing costs are considered. The purposes of computing product costs are as
under
a. Preparation of Financial Statements focus on Inventory Valuation and reporting
profits.
b. Product Pricing focus on costs assigned and incurred on the product till it is made
available to the customer / user.
c. Cost plus Contracts with Government Agencies focus is on reimbursement of
costs specifically assigned to the particular job / contract.
Q.NO.13. DISTINGUISH BETWEEN PERIOD COST AND PRODUCT COST?
Particulars
Meaning
Examples

Inclusion
Inventory
Valuation

in

Product Cost
Costs which become part of
production costs.
Cost of Raw Materials, Direct
Wages, Depreciation of Plant,
Equipments etc.
These are included in inventory
valuation. They are treated as
assets till the goods to which
they are assigned are actually
sold.

(P) (MAY 06,09)

Period Cost
Costs which are not associated
with production
General Administration Costs,
Sales men Salary, Depreciation
of Office Assets, etc.
These are not included in
Inventory Valuation. They are
written off as expense in the
period in which they are
incurred

Q.NO.14. HOW IS COST ASCERTAINMENT CLASSIFIED, BASED ON THE TIME PERIOD OF

ASCERTAINING COSTS?
(P)
Based on the time period at which cost information is collected, there are two methods of
ascertaining costs ---

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1. Post Costing: Post Costing means analysis of actual information as recorded in financial
books. It is accurate and is useful in the case of Cost Plus Contracts where price is to
be determined finally on the basis of actual cost.
2. Continuous Costing: Continuous Costing aims at collecting information about cost as
when the activity takes place. This ensures that the cost of a job will be known, as soon as
the job is completed. This type of costing involves careful estimates of Overheads.
Note: Cost ascertained by the above two methods may be compared with the Standard Costs
which are target figures already compiled on the basis of past experience and experiments.
Q.NO.15.METHODS OF COSTING.
Costing Methods: The cost method will depend on the nature of industry.
1. Job Costing: In this method costs are collected & accumulated for each job separately. This
is done because each job requires different work and production in according to customers
requirements. Each job is the cost unit. Industries where this method of costing is used are:
printing presses, ship-building, repair shops, etc.
There are some methods which are based on the principle of job costing:
a. Contract Costing: A contract is a big job and spread over number of years. This method is
applied to find out the costs incurred on each contract separately (Contact wise). This is used
in industries carrying out the building or construction work. Contract is a big job and,
therefore, the principles of job costing are applied here. Contract is the cost unit.
b. Batch Costing: Under this method, the required production is carried in number of batches
and each batch is treated as one job and cost is calculated separately for each batch
(Batch wise). Industries where this method of costing is used are: biscuit manufacture,
garments manufacture and spare parts manufacture. Each batch is the cost unit.
2. Process Costing: This method is applied to find out the costs incurred on each process
separately and such cost is divided by the quantity of production to arrive at cost per unit
(process wise). This method is used in the industries like paper, soap, textiles, chemicals, etc.
Other methods which are based on the principle of process costing but vary due to some special
characteristics are:
a. Operation Costing: This involves costing of every operation instead of a process. In other
words, this is a refinement and more detailed application of process costing. This method
provides minute analysis of costs.
b. Single, Output or Unit Costing: The method is applied where production is uniform and
consists of only a single product. It is a simple method of costing in which the total cost is
divided by the number of units produced to determine the cost per unit. This method is
applied in industries like mines, quarries etc.
c. Operating costing: This method is applicable to service rendering undertakings. This is
used to determine the cost of rendering services by airways, railways, road transport,
hospital, power house, etc.
3. Multiple Costing: It is a combination of two or more methods outlined above. Suppose a firm
manufactures bicycles including its components, the parts will be costed by the system of
batch costing but the cost of assembling the bicycle will be computed by the single costing
method. The whole system of costing is known as Multiple Costing.
Q.NO.16.WRITE ABOUT UNIT COST METHOD FOR ASCERTAINING PRODUCT COST.
a. It is a method/form of costing.
b. Suitable where only one product or different grades/models of the same product is produced.
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c. Under this system the expenditure is not analysed that much, because the whole of the
expenditure is normally incurred for only one type of product.
d. Cost per unit is ascertained by dividing the total expenditure with the number of units
produced.
This system of costing is suitable for cement industry, soft drinks etc.
Q.NO.17.WHAT ARE THE ESSENTIAL FEATURES OF A GOOD COST ACCOUNTING SYSTEM?
(OR) FEATURES OF AN IDEAL COST ACCOUNTING SYSTEM.
(NOV 05)(MAY 04)
a. Simple: The system of costing should be easy to understand and operate.
b. Suitability: The system must be suitable to the nature, requirements, size of the company.
c. Relevant data: It should provide the necessary information for ascertaining the cost, decision
making and control.
d. Managements support: The management should have a faith on it & also support in various
for its successful implementation.
e. Cooperation from various departments: Employees of various departments must co-operate
both in development and implementation of cost accounting system.
f.

Flexibility: It should be flexible to change in the circumstances.

expansion/contraction comparing with needs.

It must be capable of

g. Comparability: The information provided by the cost accounting system must be comparable
with past figures and the figures of the other companies in the same industry.
h. Reconciliation: The cost and financial accounts should preferably be integrated. If not,
arrangements must be made for the periodical reconciliation of the profits.
i.

Cost-effective: The benefits from the system should exceed the amount to be spent on it.

Q.NO.18.OUTLINE THE STEPS INVOLVED IN INSTALLING A COSTING SYSTEM.

a. The objectives of installing a costing system and the expectations of the management from
such a system should be identified first. (The system will be a simple one in the case of a single
objective but it will be an elaborate one in the case of multiple objectives.)
b. A study of the organisation structure, its size and layout etc., is also necessary.
c. Selecting a proper method of costing for manufacturing unit.
d. Overheads: An appropriate overhead recovery method shall be devised for allocation,
apportionment and absorption of overheads.
e. The costing system should be designed in consultation with the staff and should be
introduced only after meeting their objections and doubts, if any.
f.

The forms to be used by various departments should be standardized.

g. Details of records to be maintained should be documented.

h. Necessary arrangements should be made for proper flow of information to various
departments.
i.

Reconciliation of cost & financial accounts, if they are maintained separately.

The system of costing to be installed should be easy to understand and operate.

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Q.NO.19.FACTORS TO BE CONSIDERED BEFORE INSTALLING A COSTING SYSTEM. OR
ESSENTIAL FACTORS FOR DESIGNING & INSTALLING A COST ACCOUNTING SYSTEM?
(NOV 99)
a. Nature of business: The system of costing should suit the nature of the business.
b. Layout aspects: The size & design of the organisation should be studied before designing the
system.
c. Methods & Procedures: The system designers should also study various methods and
procedures relating purchase of materials, payment of wages etc.
d. Overheads: An appropriate overhead recovery method shall be devised for allocation,
apportionment and absorption of overheads.
e. Introduction of budgetary control techniques so that actual performance may be compared
with budgetary figures, for measuring efficiency of performance.
f.

Management's expectations and policies: Due regard/respect shall be given for the
management's expectations and their policies.

g. Simple: The system of costing to be installed should be easy to understand and operate.
h. Forms Standardization: Various forms to be used in the organisation should be standardized.
Q.NO.20. YOU HAVE BEEN ASKED TO INSTALL A COSTING SYSTEM IN A MANUFACTURING
BUSINESS. WHAT PRACTICAL DIFFICULTIES, APART FROM TECHNICAL COSTING
PROBLEMS, WOULD YOU EXPECT TO MEET AND HOW WOULD YOU PROPOSE TO OVERCOME
THEM?
(MAY 97,02) (P)
Apart from technical costing problems, there are other practical difficulties which arise during
installation of a costing system. Some difficulties and the ways to overcome them are as under
Problem
Lack of Support from
Top Management

Resistance
from
Accounting Staff

Lack
of
co
operation
operating levels

Description of Problem
Top Management may not fully
support the costing system.
Line Managers may view the
costing
procedures
as
interference in their work or
additional work. Also Managers
may not view it seriously if top
management does not endorse
the system.
Existing accounting staff may
feel that they would lose their
importance. Hence, they may
resist the system as they may
be unsure of their position in
the Firm.

at

The successful operation of the

costing system depends upon
the active participation of staff
like foremen, supervisors, time
keepers, stores officials etc.
These staff
may not
immediately
provide
basic
activity
data
in
various
documents and reports.

Shortage of Trained
Staff

Sufficient staff may not be

available to perform specialized

Remedial Measure
Before installation, the top
management should be made
cost conscious. They must be
made aware of the need for
operating a costing system and
their full support and co
operation to the costing system
should be obtained.
Staff
must
be
made
to
understand that the costing
system is only supplementary
and not a substitute to the
financial accounting system.
Participative approaches and
positive confidence building
measures should be used.
The Cost Accountant should
educate the staff on the
importance of the data to be
provided from their department.
They should be made to
understand that providing data
is not additional work but only
part of their routine work.
Attitudinal problems, if any,
should be set right first.
The
personnel
department
should recruit adequate staff

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Costs of operating
the system

functions
like
Cost
ascertainment, analysis and
control,
which
calls
for
technical knowledge, adequate
knowledge support & training.
The Costing system involves
initial installation cost and
regular operating cost. Use of
new forms and documents may
lead to duplication of efforts
and frustration among the
employees. Some reports my
provide
unnecessary
and
redundant data.

possessing the requisite skills.

Shortage of staff may be
overcome by devising and
implementing a good overall
personnel policy.
The costing system should be
implemented only when the
benefits exceed costs thereof.
Also, forms, procedures and
documents should be designed
so as to effectively capture the
required information without
much difficulty. Reports should
provide timely, adequate and
reliable information.

Q.NO.21.LIST OUT THE REPORTS PROVIDED BY THE COST ACCOUNTING DEPARTMENT FOR
DECISION-MAKING PURPOSE.
1. General:
a. Cost Sheets.
b. Reconciliation of actual profit earned with estimated or budgeted profit.
c. Reconciliation of financial profits with cost accounting profits.
2. Materials:
a. Materials Consumption Statements.
b. The number of months for which stocks would be sufficient.
3. Labour:
a. Labour utilization statements.
b. Labour turnover, the cost of recruitment and training of new employees.
c. Labour Overtime payment statement and the causes thereof.
4. Overheads:
a. Overheads recovery rates based on estimates.
b. Overheads actually charged to production and the difference between the amount actually
incurred (Actual Overheads) and the amount charged (absorbed Overheads).
5. Sales:
a. Actual Sales compared with budgets.
b. Statement of reasons for difference between budgeted and actual sales.
Q.NO.22.ITEMS NOT REGARDED AS COST AND NOT INCLUDED IN COST SHEET.
a. Expenses or profits of capital nature like profit or loss on sale of investments.
b. Appropriation of profits for dividends and transfers to reserves.
c. Provisions for taxes.
d. Amortizations like goodwill, preliminary expenses.
e. Amounts representing loss on account of inefficiency of a particular activity e.g. bad debts.
f.

Abnormal expenditures and costs e.g. penalties, fines.

g. Expenses relating to the raising of capital.

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MASTER MINDS - QUALITY EDUCATION BEYOND YOUR IMAGINATION

Q.NO.23.PRODUCTION/MANUFACTURING ACCOUNT VS. COST SHEET.
Manufacturing Account
It is prepared on the basis of double entry
system of book keeping.
The primary objective of preparation is
Reporting.
It has two parts one showing the cost of
manufacture and the other part showing Sales
and Gross Profit.
Total Cost is shown in aggregate. Product wise
analysis is not given.
This is not useful for preparing tenders or
quotations.

Cost Sheet
It is only a statement and hence double entry
system is not applicable.
The primary objective is Decision-making.
It is a step by step presentation of total cost
and shows Prime Cost, Works Cost, Cost of
Production, Cost of Goods Sold, Cost of Sales
and Net Profit.
Product wise analysis is given.
Estimated Cost Sheets can be prepared
based on past experience, and useful for
submitting tenders.

Q.NO.24. WHAT IS COST REDUCTION & WHAT ARE ITS ADVANTAGES?

Cost Reduction:
a. Cost reduction is defined as the achievement of real reduction in the cost of goods
manufactured or services rendered without diminution in the quality of the product.
b. Cost reduction should not be a temporary reduction but a permanent reduction.
c. Cost reduction implies the retention of quality of the product and genuine savings in the cost of
manufacture administrative and selling brought out by elimination of wasteful and non
essential elements from the design of the product and from the cost reduction techniques
carried out in connection therewith.
d. Reduction in cost due to reduction in taxation does not mean cost reduction.
Need for Cost Reduction: These days the cost of production is increasing day by day. But the
selling price of finished goods can not be increased proportionately due to governmental control or
stiff competition. This naturally reduces profit margin. Thus there is a need to reduce cost of
production.
Advantages of Cost Reduction:
a. The society is to be provided with goods of proper quality at reasonable prices.
b. Cost reduction requires better utilizations of resources like men, machinery and money,
improved methods of production and latest manufacturing techniques.
c. Efficiency increases & the rate of return to shareholders increase. This increases the share
value.
Q.NO.25. DISTINGUISH BETWEEN COST REDUCTION AND COST CONTROL?
(NOV -01) (MAY 03)
Particulars
Permanence
Product Quality
Aim

Scope
Tools & Techniques

Cost Reduction
Permanent, Genuine savings in cost.
Quality and characteristics of the
product is retained.
It aims at improving standards and
assumes existence of potential
savings.
Very broader in scope.
Value engineering, Work study,

Cost Control
Could be a temporary saving also.
Quality maintenance is not
guaranteed.
It aims at achieving standards (i.e.
targets)
Very narrow in scope.
Budgetary Control, Standard

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Function

Standardization, Variety reduction,

Quality research, Operations
research, Market research,
Job Evaluation and Merit rating,
Improvement in design,
Mechanization and automation.
It is a corrective function

Costing.

It is a preventive function.

Q.NO.26.WHAT ARE THE PRECAUTIONS IN IMPLEMENTATION OF COST REDUCTION

PROGRAMME?
(K&J)
Precautions in Implementation of Cost Reduction Programme
Before implementation of the cost reduction programme, the following points should be given a
careful consideration:
a. Its introduction and implementation must be planned soundly.
b. The success of cost reduction programme would depend upon the co operation of all those
involved, whether directly or indirectly. Its effects and results should be monitored regularly and
closely.
c. The mechanics and operation of such programmes must be communicated clearly and
concisely to organizational members preferably in writing.
d. Reluctance of the managers and workers should be recognized to change the patterns of their
behaviour.
e. There should not be any overlap between the cost reduction programme or double counting of
reductions or savings.
f.

The cost reduction measures should not have any undesirable effects on external parties, for
example, suppliers of raw material, buyers of finished products and so on.

g. The programmes are within the letter and spirit of national or local legislation and
regulations, for example, in the areas of health and safety standards.
h. Generally, when the enterprise is facing difficulty in trying conditions, the attention of the
managers should focus on costs; when conditions improve, there may be less inclination to
control costs and their impacts. It must be recognized, cost reduction is a continuous process.
i.

It must be appreciated that perfect scheme covering all eventualities will be both expensive
and complicated to implement. This calls for realistic appreciation of the cost and benefits
involved in any cost reduction programme.

j.

It must result in reduced unit costs.

k. Cost reduction campaigns are often introduced as a rushed, desperate measure instead of a
carefully organized, well thought out exercise.
l.

Cost reduction does not happen of its own accord, and managers must make positive decisions
to reduce costs.

Q.NO.27.WRITE ABOUT LONG RANGE AND SHORT RANGE COST CONTROL AND COST
REDUCTION PROGRAMME?
(K&J)
Long range and Short range Cost Control and Cost Reduction Programmes
Long range Programmes Long range cost control and cost reduction programmes mainly arise
due to huge capital expenditure designed towards a continual reduction in costs, depending upon
better layout, relocation of plant, modernization programmes, material handling and so on. They
often operate as perspective plan during which all the aspects of business and the whole sphere of
its operation would be covered.
Short range Programmes: Short range programmes may arise from the following considerations:

BASIC CONCEPTS__________________________________________1.14

MASTER MINDS - QUALITY EDUCATION BEYOND YOUR IMAGINATION

a. A temporary fall in profits which has to be corrected promptly.
b. An impending unfavorable competitive situation.
c. Identification of certain products which competitors are selling at a lower price in the market.
d. Adverse cost variance which calls for immediate action.
e. Some operations which appear to be inefficient and provide opportunities for quick and
substantial cost savings.
f.

Some operations or functions which appear to costing too much

Q.NO.28.WRITE SHORT NOTES ON UNIFORM COSTING & OBJECTIVES.

Meaning: The use by several undertakings of the same costing principles and/or practices".
Thus when a number of companies, decide to adhere to one set of accepted costing principlesespecially in matters where there can be two opinions - they are said to be following uniform costing.
Objectives:
a. Inter-firm Comparison: To facilitate comparison of costs and performances of different
companies in the same industry.
b. Common Good of Industry: To promote healthy competition among different participating
units.
c. Improvement in Production Capacity: To improve production capacity level and labour
efficiency by comparing the production costs of different units with each other.
d. Cost Information to Government: To provide relevant cost information/data to the government
for fixing and regulating the prices of essential products.
e. Standardization: To bring Standardization in the operation of participating units.
A great deal of ground work is required to be done, for the introduction of uniform costing in an
industry (not company).
Q.NO.29.WRITE SHORT NOTES ON UNIFORM COST MANUAL?

(SA)(NOV 94) (MAY 07)

Uniform Cost Manual: It is written document, which may be in the form of a booklet or bulletin,
containing the principles, methods and procedures for the ascertainment and control of cost in
uniform costing. It is necessary for the successful operation of uniform costing system. Such a
manual provide guidelines to the participating firms to be organize their cost accounting system on a
uniform basis.
The following are the salient features of a uniform cost manual.
a. It includes statement of objectives and purpose of the system, scope of the system, advantages
and extent of co-operation necessary.
b. It contains the general principles of accounting, nature coding, terminology to be followed,
classification, and description of accounts. This section also includes details of stock control,
labour and overhead cost collection and control.
c. Essential cost data and various rations to be computed for comparison of performance and
efficiency in the operation of the participating units.
d. Mode, format, and time for presenting cost data and reports to the management.
It provides necessary guidelines about the treatment of depreciation, interest on capital, wastage,
scrap, by-product, etc.

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Q.NO.30. WRITE FOUR LIMITAITONS OF INTER FIRM COMPARISON?

(MAY 97 )(SA)

Limitations of Inter-firm comparison:

The following are the limitations in the implementation of a scheme of inter-firm comparison:
a. Top management feels that secrecy will be lost.
b. Middle management is usually not convinced with the utility of such a comparison.
c. In the absence of a suitable cost accounting system, the figures supplied may not reliable for
the purpose of comparison.
d. Suitable basis of comparison may not be available.
Q.NO.31.WRITE SHORT NOTES ON VALUE ANALYSIS?

(SA) (NOV 97)

Value Analysis: It is one of the important tools of modern management in the area of cost reduction.
It is also known by other names such as value engineering. Value control and product research.
Value analysis is the process of systematic analysis and evaluation of various techniques and
functions with a view to improve organizational performance. It aims at reducing and controlling
the cost of a product from the point of view of its value by analysis, believes in a planned action to
improve performance and thereby, generates higher value in a product and ultimately causes
reduction in its cost.
The meaning of the term value may vary from person to person, time to time and place to place.
However, in the context of cost reduction and control it refers to the use value.
The reduction in the costs of a product and thus increasing the profitability of a concern is the main
advantage of value analysis.
The benefits of value analysis are being derived in many industries, e.g., engineering, building
construction and the Oil industry. It is being applied to components of a product, finished product
and also to be methods of packaging.
The various steps involved in value analysis are;
a. Identification of the problem
b. Collecting information about the function, design, material, labour, overhead costs, etc., of the
product and finding out the availability of the competitive products in the market; and
c. Exploring and evaluating alternatives and developing them.
Q.NO.32. WRITE A SHORT NOTES ON DIRECT EXPENSES?

(NOV 94,02) (P)

1. Direct Expenses or Chargeable Expenses: These are expenses other then materials and
labour which can be allocated directly jobs, products, processes, cost centers or cost units.
Direct Expenses are cost other than material and wages which are incurred for a specific
product or saleable services
2. Nature of Direct Expenses: (a) These are expenses other than Direct Materials and Direct
Labour, (b) These are either allocated or charged completely to Cost Centers or Cost Units, (c)
These are included in the Prime Cost of a product.
3. Examples:
(a) Hire Charges of special machinery or
plant for a particular production order or
job.

(d) Sub Contracting Expenses or

outside work costs, where jobs are
sent out for special processing.

(b) Payment of Royalties.

(e)
Experimental
undertaking the job.

(c) Cost of special moulds, designs &

patterns.

cost

before

(f) Travel & Conveyance Exps for a

particular job.

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MASTER MINDS - QUALITY EDUCATION BEYOND YOUR IMAGINATION

4. Documentation: The basic document which is used for charging of Direct Expenses to products
or batches or work order is the invoice received from suppliers of such service. The payment to
supplier of service is made on the basis of the invoice and the expenses are booked in the
accounts.
5. Identification of Direct Expenses: For the identification of Direct Expenses with the main
product or service, the code number of that product or service should be inscribed on invoice
receive from supplier of services. For example, if a machine is hired to complete a particular
product, then the Hire Charges paid for that machine is a Direct Expense of that particular
product. For charging these Hire Charges should be coded / inscribed with the Product Code, to
ensure that this expense is charged to that particular product. Alternatively, if cash is paid, then
the Cash Book Analysis will show the Product Code which is to be charged with the cost of
hiring machinery.
Q.NO.33.WHAT ARE THE METHODS OF SEGREGATING SEMI VARIABLE COSTS IN TO FIXED
AND VARIABLE COSTS?
(PCC BOOK)
Methods of segregating Semi variable costs into fixed and variable costs - The segregation of
semi variable costs into fixed and variable costs can be carried out be using the following methods:
(a) Graphical method
(b) High points and low points method
(c) Analytical method
(d) Comparison by period or level of activity method
(e) Least squares method
a. Graphical method: Under this method, a large number of observations regarding the total costs
at different levels of output are plotted on a graph with the output on the X axis and the total
cost on the Y-axis. Then, by judgment, a line of best fit, which passes through all or most of
the points is drawn. The point at which this line cuts the Y-axis indicates the total fixed cost
component in the total cost. If a line is drawn at this point parallel to the X-axis, this indicates the
fixed cost. The variable cost, at any level of output, is derived by deducting this fixed cost element
form the total cost. The following graph illustrates this:
b. High points and low points method:Under this method in the following illustration the difference between the total cost at highest
and lowest volume is divided by the difference between the sales value at he highest and
lowest volume. The quotient thus obtained gives us the rate of variable cost in relation to sales
value. The fixed cost is the remainder. See the following illustration.
Illustration:

At the Highest volume

At the Lowest volume

Sales value
Rs.
1,40,000
80,000
60,000

Total cost
Rs.
72,000
60,000
12,000

Thus, Variable Cost (Rs. 12,000/Rs. 60,000) = 1/5 or 20% of sales value
= Rs. 28,000 (at highest volume)
Fixed cost:
Alternatively:
c.

Rs. 72000 Rs. 28,000 i.e., (20% of Rs. 1, 40,000) = Rs. 44,000
Rs. 60,000 Rs. 16,000 (20% of Rs. 80,000) = Rs. 44,000

Analytical method: Under this method an experienced cost accountant tries to judge
empirically what proportion of the semi variable cost would be variable and what would be
fixed. The degree of variability is ascertained for each item of semi variable expenses. For
example, some semi variable expenses may vary to the extent of 20% while others may vary to
the extent of 80%. Although it is very difficult to estimate the extent of variability of an expense,
the method is easy to apply. (Go through the following illustration for clarity).

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Illustration:
Suppose, last month the total semi variable expenses amounted to Rs. 3,000. if the degree of
variability is assumed to be 70% then variable cost = 70% of Rs. 3,000 = Rs. 2,100. Fixed cost =
Rs. 3,000 Rs. 2,100 = Rs. 900.
Now in the future months, the fixed cost will remain constant, but the variable cost will vary
according to the change in production volume. Thus, if in the next month production increases by
50%, the total semi variable expenses will be:
Fixed cost of Rs. 900, plus variable cost viz., Rs. 3,150 i.e., (Rs. 2,100(V.C.) plus 50% increase of
V.C. i.e., Rs. 1,050) i.e., Rs. 4,050.
d.

Comparison by period or level of activity method: Under this method, the variable overhead
may be determined by comparing two levels of output with the amount of expenses at those
levels. Since the fixed element does not change, the variable element may be ascertained with the
help of the following formula.
Change in the amount of expense
change in the quantity output
Suppose the following information is available:

Production Units
January
February
Difference

100
140
40

Semi variable expenses

Rs.
260
300
40

The variable cost:

Change in Semi - variable expenses

Change in production volume

Rs. 40
40 units

= Re. 1/unit

Thus, in January, the variable cost will be 100 X Re. 1 = Rs. 100 and the fixed cost element will be
(Rs. 260 Rs. 100) or Rs. 160. In February, the variable cost will be 140X Re. 1 = Rs. 140 whereas
the fixed cost element will remain the same, i.e., Rs. 160.
e.

Least squared method: This is the best method to segregate semi variable costs into its fixed
and variable components. This is a statistical method and is based on finding out a line of best
fit for a number of observations. The method uses the linear equation y = mx + c, where ma
represents the variable element of cost per unit, c represents the total fixed cost, y
represents the total cost, x represents the volume of output. The total cost is thus split into
its fixed and variable elements by solving this equation. By using this method, the expenditure
against an item is determined at various levels of output and values of x and y are fitted in the
above formula to find out the values of m and c. The following illustration may be helpful to
understand this method.

Capacity %
Volume (Labour hours)X
Semi variable expenses

Level of activity
60%
80%
150
200
Rs. 1,200
Rs. 1,275

Substituting the values of x and y in the equation, y = mx + c, at both the level of activity, we get
1,200 = 150 m + c
1,275 = 200 m + c
(Fixed cost) = Rs. 975 and m (Variable cost) = Rs. 1.50 per labour hour.

BASIC CONCEPTS__________________________________________1.18

MASTER MINDS - QUALITY EDUCATION BEYOND YOUR IMAGINATION

Q.NO.34. DEFINE THE FOLLOWING.
1. Research Cost: The cost of researching for new or improved products, new applications of
materials or improved methods.
(Nov - 92,98,00) (May - 96)
2. Pre Production Cost: The part of development cost incurred in making a trial production
(Nov - 00)
run prior to formal production
3. Out of pocket Costs: These are costs which entail current or near future outlays of cash for
the decision at hand as opposed to costs which do not require any cash outlay like depreciation.
Such costs are relevant for decision making, as these will occur in near future. It is that
portion of total cost which involves cash outflow. This cost concept is a short run concept
and is used in decisions relating to fixation of selling price in recession, make or buy, etc. Out
of pocket Costs can be avoided or saved if a particular proposal under consideration is not
accepted.
4. Replacement Cost: It is the cost at which there could be purchase of an asset or material
identical to that which is being replaced or revalued. It is the cost of replacement at current
market price and is relevant for decision making.
5. Engineered Costs: These are costs that result specifically from a clear cause and effect
relationship between inputs and outputs. The relationship is usually directly and personally
observable. Examples of inputs are Direct Material Costs, Direct Labour Costs, etc. Examples of
output are the products.
6. Absolute costs and Alternative costs: Absolute costs which are also known as outlay costs,
involve an outlay of funds, and are recorded in the books of account. Alternative or opportunity
costs, on the other hand, refer to the cost of forgone opportunities, or a comparison between the
policy chosen ad the policy rejected. Accordingly, these costs are not recorded in the books of
account.

Alternative cost is more important than outlay cost for the solution of many managerial
problems. The concept is applicable to all situations where a thing can have alternative uses. If
there is no alternative use, opportunity cost is zero. If, for instance, a firm decides to stay in
business, it must make a certain amount of profit which is not less than that it could make in
an alternative line of activity. Thus, the alternative cost of any resource is measured by the
revenue it can fetch in the alternative use.
7. Past and future costs: Actual costs incurred in the past and recorded in the books of account
are known as past costs. Income is measured on the basis of past costs, and an analysis of the
same is merely a post mortem examination of what has happened in the past. All that
management could do about past costs is to find out the cause of excessive costs, if any, and
nothing more.

Future costs are those that are likely to be incurred in a future period. These are not recorded
in the books of account, and hence, have to be estimated. Their estimation depends upon past
costs. Thus, past costs serve as the basis for estimating future costs.
Managerial decision making centers round future costs and not past costs. Future costs can
be controlled and reduced, met or avoided. Accordingly, they are relevant for a variety of
managerial decisions: capital expenditure, pricing, profit, expense control, etc.
8. Shut down and Abandonment costs:
Costs which should be incurred in the event of a temporary cessation of activities, and which
can be saved if activities are allowed to continue are known as shut down costs. If, for instance,
business operations are temporarily suspended, there is still the need to incur costs of
construction of shelter for property exposed. Further, if machinery has been purchased out of
borrowed funds, interest on such funds should also be considered as shut down cost which
must be incurred.

Unlike shutdown costs, abandonment costs are those that result from a permanent cessation of
business activities. In other words, when a fixed asset is retired from service and is a to be
disposed of, the costs connected with disposal are known as abandonmen costs.
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9. Escapable and Inescapable costs:
Escapable costs refer to those costs that may not only be postponed but may also be avoided
entirely as a result of contraction of business activity. Such costs are the net costs arrived at after
deducting from the decreased cost by terminating an activity, the costs incurred as a result of
increase in activity in any other part of the organisation. For example, the escapable cost of
eliminating middlemen is the cost resulting from such elimination minus the increased cost of
the selling unit which is not sufficiently equipped to handle the extra work.
Inescapable costs or unavoidable costs are those that must be met even if there is contraction of
business activity. Manufacturing plants, for instance, must incur minimum power costs
regardless of the volume of sales. Such costs cannot be avoided and cannot also be postponed.
10. Distinguish between Estimated cost and standard cost
Estimated cost and standard cost:
Kohler defines estimated costs as the expected cost of manufacture or acquisition, often in
terms of a unit of product computed on the basis of information available in advance of actual
production or purchase Estimated cost are prospective costs since they refer to prediction of
costs.
Standard Cost means a pre determined cost. It attempts to show what the cost should be for
clearly defined conditions and circumstances. Standard costs represent planned cost of a
product. They are expected to be achieved under a particular production process under normal
conditions.
Although pre determination is the essence of both standard costs and estimated costs, but
they differ from each other in the following respects:
a) Difference in computation
b) Difference in emphasis
c) Difference in use
d) Difference in records
e) Applicability
11. Synergetic effects help in reduction in costs:
(May - 2007)
Two or more products are produced and managed together. The result of combined efforts are
higher than sum of the results of individual products. Analysis of synergetic effect is helpful
in cost control
12. Relevant costs:
(Nov - 2007)
Relevant costs are those expected future cost which are essential but differ for alternative
course of action.
a. Historical cost or sunk costs are irrelevant as they do not play any role in the decision
making process.
b. Variable costs which will not differ under various alternatives are irrelevant.
13. Capitalized Cost: These are costs which are initially recorded as assets and subsequently
treated as expenses.
(Nov - 2007)
14. Opportunity Cost: When we decide to follow one alternative, we are also deciding not to follow
another. The value of sacrifice made or benefit of opportunity foregone in accepting an
alternative in preference to other is called opportunity cost. For example, a company owns a
building, it could be either used for business or rented to others. If a decision is taken to use the
building, the rent foregone becomes opportunity cost.
(May - 03)
15. Sunk Cost: It is a cost which has already been incurred in the past. It is not relevant for
decision-making. Thus, if a firm has obsolete stock of materials amounting to Rs.10,000 which
can be sold as scrap for Rs.2,000 or can be utilised in a special job, the value of opening stock of
Rs.10,000 is a sunk cost and is not relevant for decision-making. Dont cry over split milk
should be the managements attitude towards such cost.
(May 03,05)(Nov - 00)

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MASTER MINDS - QUALITY EDUCATION BEYOND YOUR IMAGINATION

16. Cost Unit: It is a unit of product/service in relation to which costs may be expressed. For e.g.
cost expressed as cost per tone of steel, per tone kilometer. Sometimes a job or contract
constitutes a Cost Unit. A few examples of cost units are given below: Refer to the last question.
17. Imputed Costs: These are notional costs appearing in the cost accounts only e.g. notional rent,
interest on own capital. Where investment projects are being evaluated, it is necessary to
consider the interest on capital before a decision is arrived at, as to which is the most profitable
project.
(Nov - 09)
18. Discretionary costs: These are escapable or avoidable costs. These can be avoided if a
particular course of action is not chosen.
19. Differential cost: It represents the change (increase or decrease) in total cost (variable as well
as fixed) due to change in activity level, technology, process or method of production, etc. For
example if any change is proposed in one existing level or in the existing method of production,
the increase or decrease in total cost will be known as incremental cost or decremental cost.
20. Absorption Costing: It is the practice of charging all costs, both variable and fixed to operations,
processes or products. This differs from marginal costing where fixed costs are excluded.
21. Marginal costing: It is defined as the ascertainment of marginal cost by differentiating
between fixed and variable costs. It is used to ascertain effect of changes in volume or
type of out put on profit.
22. Responsibility Centers: It is defined as an activity centre/department of an organisation
assigned with a special task. These are mainly established for the purpose of control. By the
nature of responsibility assigned, responsibility centers can broadly be classified into three
categories. They are: Cost centers, Profit centers & Investment centers.
23. Cost Centre:

(Nov- 02)

a. It is a segment of the organisation. These are created for computation of the cost centre wise
and for the control of the cost. For example, in a laundry, various activities such as
collecting, sorting and washing are performed. For the purpose of cost computation each of
these activities may be treated as cost centre.
b. Such centers make all possible efforts to reduce/minimize costs. Budgeted/Standard cost to
be incurred by each centre is predetermined. Then the actual cost will be compared to
measure the performance of each centre.
c. While judging the performance of managers of cost centers, it is essential to differentiate
between controllable costs and uncontrollable costs.
d. Types of cost centers are of:

A Personal cost centre consists of a person or group of persons.

Impersonal cost centre consists of a plant (Machine A) or location (like Hyderabad

factory) (or group of these).

Production cost centre: It is a Cost Centre where raw material is handled for
conversion into finished product. Here both direct and indirect expenses are
incurred.

Service cost centre: It is a Cost Centre which serves as an ancillary unit to a

production Cost Centre. Power house, gas production shop, material service
centers, plant maintenance centers are examples of Service cost centers.

24. Profit centre:

(May - 06)

a. It is a segment of the organisation. These are created for computation of profits centre wise. It
is responsible for both revenues and expenses.
b. Such centers make all possible efforts to maximize the profits. Budgeted profits to be
achieved by each centre are predetermined. Then the actual profit will be compared to
measure the performance of each centre.
c. The authority of each such centre enjoys certain powers to adopt such policies as are
necessary to achieve its targets.
IPCC_ Costing theory_ 2010____________________________________1.21

WWW.GNTMASTERMINDS.COM
25. Investment Centre: A centre whose managers are responsible for some capital investment
decisions. Return on investment (ROI) is usually used to evaluate the performance of them.
(May - 06)
26. Cost Centre: It is defined as

(Nov 91,02)(May 95,97)

(a) A location e.g. Chennai Factory, Kolkata Factory etc.

(b) A person e.g. Sales Manager L, M etc
(c) An item of equipment e.g. Machinery P,Q or Process I, II etc.
Or a group of these, for which cost may be ascertained and used for the purpose of Cost
Control.
Based on Activity:
Operation Cost Centre
It consists of machines and / or
persons,
carrying
out
similar
operations.
All machines / operators performing
the same operation are brought
together under a cost centre, the
purpose being ascertainment of cost
of each operation irrespective of its
location inside the factory.

Process Cost Centre

It consists of machines and / or
persons, engaged on a specific
process or a continuous sequence
of operations.
Cost is analysed and related to a
series of operations in sequence.
Generally, these constitute a single
location, as in Oil Refineries and
other process industries.

Give the method of costing & cost unit against each industry
Industry
Method
Operating costing
Nursing Home
Operating costing
Road transport
Process costing
Steel
Single costing
Coal
Multiple costing
Bicycles
Contract costing
Bridge construction
Job costing
Interior Decoration
Job costing
Advertising
Multiple costing
Furniture
Sugar company having its own sugar-cane fields Process costing
Job costing
Aircraft
Process costing
Automobile
Process costing
Beer
Process costing
Carpets
Process costing
Cement
Job costing
Dry cleaning
Process costing
Ice cream
Process costing
Petrochemicals
Batch costing
Pharmaceuticals
Education
Electricity
Brick works
Toy making
Radio
Ship building
Hospitals

Operating costing
Operating costing
Single or output
Batch
Multiple
Contract
Operating

(Nov 98,99,08)
Cost Unit
Per Bed per week/Day
Per Ton Kilometer/ per mile
Per Ton
Per Ton
Each unit
Each contract
Each Job
Each Job
Each unit
Per Quintal/Ton
Number
Number
Per Bottle/Per gallon
Per square foot
Per ton cement
Per cloth/garment
Per gallon, per case or cup
Tons, gallons litres
1,000 nos., tablets,
Strips, capsules
Per Student hour
Per Kilo watt-hour
1,000 bricks
Per Batch
Per radio or per batch
Per ship
Per bed per day or
per patient per day

BASIC CONCEPTS__________________________________________1.22

MASTER MINDS - QUALITY EDUCATION BEYOND YOUR IMAGINATION

PAST EXAM QUESTIONS:
S.No.

Question

Appearing in year

1.

What are the advantages/ objectives of a cost accounting system.

2.

Write short notes on explicit and implicit costs.

3.

Distinguish between conversion cost and added value?

4.

Write short notes on period costs and product costs. Why should
product costs be computed?

5.

Distinguish between period costs and product costs?

6.

What are the essential features of a good Cost Accounting System?

7.

Factors that you will consider before installing a costing system.

8.

You have been asked to install a costing system in a manufacturing

business. What practical difficulties, apart from technical costing
problems, would you expect to meet and how would you propose to
overcome them?

9.

Distinguish between cost reduction and cost control

Nov 01, May 03

10.

Write short notes on Uniform Cost Manual?

Nov 94, May 07

11.

Write four limitations of inter firm comparison.

May 97

12.

Write short notes on value Analysis.

Nov 97

13.

Define the following

1. Pre production cost
2. Cost centre
3. Synergetic effects help in reduction in costs
4. Relevant costs
5. Capitalized Cost
6. Opportunity Cost
7. Sunk Cost
8. Imputed costs
9. Cost centre
10. Profit centre
11. Investment centre

May -03,01,08, Nov 02

May - 05,01,07
Nov 86,May 03
Nov 97
May 06,09
May 04, Nov 05
Nov 99

May 97,02

Nov 00
Nov 97,02 May 95,97
May 07
Nov 07
Nov 09
May 03
May 03,05 Nov 00
Nov 09
Nov 02
May 06
May 06

ABC Analysis
A. Category: 9, 12, 13, 17, 18, 19, 20, 24, 25, 28, 29, 30, 31, 32
B. Category: 4, 5, 8, 10, 15, 16, 21, 26
C. Category: 1, 2, 3, 6, 7, 11, 14, 22, 23, 27, 33

The end
IPCC_ Costing theory_ 2010____________________________________1.23