Costing and Financial Management

Q&A-3.
1
STUDY MATERIAL BASED CONTENTS

Paper 3 Cost Accounting and Financial Management
Part A (Cost Accounting)
# Syllabus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Q&A-3.2
# Bird's-Eye View . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Q&A-3.5
# Line Chart . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Q&A-3.8
# Table Showing Importance of Chapter on the Basis of Marks . . . . . . . . Q&A-3.9
# Table Showing Importance of Chapter on the Basis of Marks of
Compulsory Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Q&A-3.10
C.N. Study Chapters Scanner Chapters P.N.
1. (Chapter 1) Basic Concepts . . . . . . . . . . . . . . . . . . . . . . . Q&A-3.11
2. (Chapter 2) Material Cost . . . . . . . . . . . . . . . . . . . . . . . Q&A-3.27
3. (Chapter 3) Employee Cost . . . . . . . . . . . . . . . . . . . . . . . Q&A-3.69
4. (Chapter 4) Overheads . . . . . . . . . . . . . . . . . . . . . . . Q&A-3.103
5. (Chapter 5 Unit 5.1 to 5.3)Integrated & Non-Integrated Accounts . . . . Q&A-3.155
6. (Chapter 5 Unit 5.4) Reconciliation of Cost and Financial Accounts Q&A-3.175
7. (Chapter 6 Unit 6.2, 6.4,
6.5)
J ob Costing & Batch Costing. . . . . . . . . . . . Q&A-3.189
8. (Chapter 6 Unit 6.3) Contract Costing . . . . . . . . . . . . . . . . . . . . . Q&A-3.197
9. (Chapter 6 Unit 6.6, 6.7) Operating Costing . . . . . . . . . . . . . . . . . . . . Q&A-3.219
10. (Chapter 7 Unit 7.1 to 7.5)Process Costing . . . . . . . . . . . . . . . . . . . . . . Q&A-3.237
11. (Chapter 7 Unit 7.6) J oint Products & By Products . . . . . . . . . . . Q&A-3.271
12. (Chapter 8) Standard Costing . . . . . . . . . . . . . . . . . . . . . Q&A-3.293
13. (Chapter 9) Marginal Costing . . . . . . . . . . . . . . . . . . . . . Q&A-3.341
14. (Chapter 10) Budgets & Budgetary Control . . . . . . . . . . . Q&A-3.417
Question Paper of May, 2009 . . . . . . . . . . . Q&A-3.449
Question Paper of November, 2009 . . . . . . . Q&A-3.452
Question Paper of May, 2010 . . . . . . . . . . . Q&A-3.454
Question Paper of November, 2010 . . . . . . . Q&A-3.457
Q&A-3.2

SYLLABUS

Paper 3 Cost Accounting and (100 marks)
Financial Management
(One Paper - Three Hours)
Part A Cost Accounting (50 marks)
Level of Knowledge: Working knowledge
Objectives :
(a) To understand the basic concepts and processes used to determine product costs;
(b) To be able to interpret cost accounting statements;
(c) To be able to analyse and evaluate information for cost ascertainment, planning, control and
decision making; and
(d) To be able to solve simple cases.
Contents:
1. Introduction to Cost Accounting
(a) Objectives and scope of cost accounting
(b) Cost centres and cost units :
(c) Cost classification for stock valuation, profit measurement, decision making and
control
(d) Coding systems
(e) Elements of cost
(f) Cost behaviour pattern, separating the components of semi-variable costs
(g) Installation of a costing system
(h) Relationship of cost accounting, financial accounting, management accounting and
financial management.
2. Cost Ascertainment
(a) Material Cost
(i) Procurement procedures - store procedures and documentation in respect of
receipts and issue of stock, stock verification
(ii) Inventory control - techniques of fixing of minimum, maximum and; reorder
levels, economic order quantity, ABC classification; stocktaking; and
perpetual inventory
(iii) Inventory accounting .
(iv) Consumption - identification with products of cost centres, basis for
consumption entries in financial accounts, monitoring consumption.
(b) Employee Cost
(i) Attendance and payroll procedures, overview of statutory requirements,
overtime, idle time and incentives
(ii) Labour turnover
Q&A-3.3
(iii) Utilisation of labour, direct and indirect labour, charging of labour cost,
identifying labour hours with work orders or batches or capital jobs
(iv) Efficiency rating procedures
(v) Remuneration systems and incentive schemes.
(c) Direct Expenses
Sub-contracting - control on material movements, identification with the main product
or service.
(d) Overheads
(i) Functional analysis factory, administration, selling, distribution, research
and development Behavioural analysis - fixed, variable, semi variable and step
cost
(ii) Factory overheads - primary distribution and secondary distribution, criteria
for choosing suitable basis for allotment, capacity cost adjustments, fixed
absorption rates for absorbing overheads to products or services
(iii) Administration overheads method of allocation to cost centres or products;
(iv) Selling and distribution overheads - analysis and absorption of the expenses
in products/customers, impact of marketing strategies, cost effectiveness of
various methods of sales promotion.
3. Cost Book-keeping
Cost ledgers - non-integrated accounts, integrated accounts, reconciliation of cost and
financial accounts.
4. Costing Systems
(a) Job Costing
J ob cost cards and databases, collecting direct costs of each job, attributing overhead
costs to jobs, applications of job costing.
(b) Batch Costing
(c) Contract Costing
Progress payments, retention money, escalation clause, contract accounts, accounting
for material, accounting for plant used in a contract, contract profit and balance sheet
entries.
(d) Process Costing
Double entry book keeping, process loss, abnormal gains and losses, equivalent units,
inter-process profit, joint products and by products.
(e) Operating Costing System
5. Introduction to Marginal Costing
Marginal costing compared with absorption costing, contribution, breakeven analysis and
profit volume graph.
6. Introduction to Standard Costing
Various types of standards, setting of standards, basic concepts of material and labour
standards and variance analysis.
7. Budgets and Budgetary Control
Q&A-3.4
The budget manual, preparation and monitoring procedures, budget variances, flexible
budget, preparation of functional budget for operating and non-operating functions, cash
budget, master budget, principal budget factors.
Bird's - Eye View

Paper 3A Cost Accounting
Question Paper Based Contents of Last Five Examinations
Years Q. No. Compulsory Chapter Marks Category Page
No.
No. Name
2008
Nov.
1. (i)
(ii)
(iii)
(iv)
(v)
(vi)
2.
3. (b)
4. (i)
(ii)
All
Questions
Compulsory
2
4
9
1
2
14
5
3
10
13
Material Cost
Overheads
Operating Costing
Basic Concepts
Material Cost
Budgets & Budgetary Control
Integrated & Non-Integrated Accounts
Employee Cost
Process Costing
Marginal Costing
2
2
2
2
2
2
15
9
3
3
Practical
"
Descriptive
"
Dt. Between
Descriptive
Practical
Descriptive
Practical
"
64
151
221
23
30
422
171
77
264
411
(iii)
(iv)
8
12
Contract Costing
Standard Costing
3
3
"
"
215
334
2009
May
1. (i)
(ii)
(iii)
(iv)
(v)
(vi)
2.
3. (a)
(b)
All
Questions
Compulsory
3
1
9
12
14
4
14
6
11
Employee Cost
Basic Concepts
Operating Costing
Standard Costing
Overheads
Reconciliation of Cost and Financial Accounts
J oint Products & By Products
2
2
2
2
3
2
15
7
9
Practical
Dt. Between
Practical
"
Descriptive
Practical
"
"
Descriptive
99
14
233
335
423
152
444
186
271
Q&A-3.5
4. (i)
(ii)
(iii)
(iv)
2
3
8
13
Material Cost
Employee Cost
Contract Costing
Marginal Costing
3
3
3
3
"
"
Practical
"
41
79
216
411
2009
Nov.
1. (i)
(ii)
(iii)
(iv)
(v)
(vi)
2.
3. (a)
(b)
All
Questions
Compulsory
1
14
6
8
13
6
13
10
12
Basic Concepts
Contract Costing
Marginal Costing
Marginal Costing
Process Costing
Standard Costing
2
2
2
2
2
2
15
8
3
Descriptive
Practical
Descriptive
"
Practical
Descriptive
Practical
"
"
24
448
179
200
412
179
412
264
336
4. (i)
(ii)
(iii)
(iv)
3
9
2
14
Employee Cost
Operating Costing
Material Cost
3
3
3
3
"
Descriptive
Practical
Descriptive
100
221
65
423
2010
May
1. (i)
(ii)
(iii)
(iv)
(v)
2.
3. (a)
(b)
4. (i)
(ii)
(iii)
All
Questions
Compulsory
1
4
2
13
5
12
10
9
13
4
3
Basic Concepts
Overheads
Material Cost
Marginal Costing
Integrated & Non-Integrated Accounts
Standard Costing
Process Costing
Operating Costing
Marginal Costing
Overheads
Employee Cost
2
2
2
2
2
15
8
8
3
3
3
Descriptive
Dt. Between
Practical
Descriptive
"
Practical
"
"
"
Descriptive
"
24
104
65
354
157
337
266
233
414
117
80
Q&A-3.6
Q&A-3.7
2010
Nov.
1. (a)
(b)
2. (a)
3. (a)
4. (b)
5. (a)
6. (b)(i)
(ii)
7. (a)
(b)
(e)
{C}
{C}
12
2
8
10
13
6
1
4
4
11
3
Standard Costing
Material Cost
Contract Costing
Process Costing
Marginal Costing
Basic Concepts
Overheads
"
J oint Products & By Products
Employee Cost
5
5
8
8
8
8
4
4
4
4
4
Practical
"
"
"
"
"
Short note
"
Descriptive
"
"
340
66
217
269
415
187
12
104
119
273
80
Note : Bird's-Eye View is based on PCC/IPCC Examination.
Q&A-3.8
Table Showing Importance of Chapter on the Basis of Marks
Chap.
No.
Years
Chapter Name
06
May
06
Nov.
07
May
07
Nov.
08
May
08
Nov.
09
May
09
Nov.
10
May
10
Nov.
Total Ave.
1. Basic Concepts 4 2 7 2 4 2 2 2 2 4 31 3.1
2. Material Cost 8 14 5 3 11 4 3 3 2 5 58 5.8
3. Employee Cost 4 4 3 7 9 5 3 3 4 42 4.2
4. Overheads 10 17 17 12 2 2 2 5 8 75 7.5
5. Integrated & Non-Integrated Accounts 3 3 15 2 23 2.3
6. Reconciliation of Cost and Financial.. 6 3 7 4 8 28 2.8
7. J ob & Batch Costing 2 2 0.2
8. Contract Costing 10 4 8 2 2 3 3 2 8 42 4.2
9. Operating Costing 2 3 2 2 2 2 8 21 2.1
10. Process Costing 10 14 8 8 3 8 8 8 67 6.7
11. J oint Products & By Products 8 9 4 21 2.1
12. Standard Costing 4 14 15 15 3 2 8 15
5 81 8.1
13. Marginal Costing 26 27 3 6 3 3 17 5 8 98 9.8
14. Budgets & Budgetary Control 11 2 2 17 5 37 3.7
Q&A-3.9
Table Showing Importance of Chapter on the Basis of Marks of Compulsory Questions
Chap.
No.
Years
Chapter Name
06
May
06
Nov.
07
May
07
Nov.
08
May
08
Nov.
09
May
09
Nov.
10
May
10
Nov.
Total Ave.
1. Basic Concepts 0 0.0
2. Material Cost 5 5 0.5
3. Employee Cost 0 0.0
4. Overheads 0 0.0
5. Integrated & Non-Integrated Accounts 0 0.0
6. Reconciliation of Cost and Financial.. 0 0.0
7. J ob & Batch Costing 0 0.0
8. Contract Costing 0 0.0
9. Operating Costing 0 0.0
10. Process Costing 0 0.0
11. J oint Products & By Products 0 0.0
12. Standard Costing
5 5 0.5
13. Marginal Costing 0 0.0
14. Budgets & Budgetary Control 0 0.0
Q&A-3.10 O IPCC Gr. I Paper - 3A
* Questions upto November - 2006 are from PE - II Gr. II and from May - 2007 onwards are from PCC Gr. II
Q&A-3.10
Star Rating
On the basis of Maximum marks from a chapter Nil
On the basis of Questions included every year from a chapter jjj
On the of Compulsory questions from a chapter jj
CHAPTER
Basic Concepts
1
THIS CHAPTER COMPRISES OF
L Evolution L Cost Accounting & Inventory Valuation L Objectives & Importance of Cost
Accounting L Essential factors for establishing a Cost Accounting System and its
advantages L Relationship between Cost, Financial, Management Accounting & Financial
Management L Cost Concepts and terms L Elements and Classification of cost L Coding
system L Type & methods of Costing L Direct Expenses.
Marks of Objective, Short Notes, Distinguish Between, Descriptive & Practical Questions
[Chapter # 1] Basic Concepts O Q&A-3.11
SHORT NOTES
2003 - May [2] (b) Write short notes on any two of the following :
(i) Conversion cost [S.A. 7]
(ii) Sunk cost [S.A. 8]
(iii) Opportunity cost. (2+2 =4 marks) [S.A. 8]
Answer :
(i) Conversion cost: The sum of direct wages, direct expenses & O/H cost of converting
raw material to the finished stage or converting a material from one stage of production
to other.
(ii) Sunk cost: Sunk costs are the historical costs which are incurred in the past. They play
no role in decision making in the current period. It is also known as historical cost.
(iii) Opportunity cost: Opportunity costs refers to the value of sacrifice made or benefit of
opportunity foregone in accepting alternative course of action. For e.g. a company
accepts an expansion plan and for financing, withdraws money from its bank deposits.
Then, the loss of interest on the bank deposits is the opportunity cost for carrying out the
expansion plan. This cost plays an important role in managerial decision making process
although these costs are not recorded in books of accounts.
2010 - Nov [6] (b) Write short notes on the following :
(i) Essential factors for installing a Cost Accounting system. (4 marks)
DISTINGUISH BETWEEN
2001 - Nov [1] {C} (a) Distinguish between:
(i) Cost control and Cost reduction. (2 marks)
(ii) Cost allocation and Cost absorption. (2 marks)
(iii) Controllable costs and Uncontrollable costs. (2 marks) [S.A. 3]
Answer :
S. No. Basis of
Difference
Cost Control Cost Reduction
1 Meaning Cost control is the guidance and
regulation by executive action of
the cost of operating an
undertaking.
Cost reduction is the achievement
of real and permanent reduction in
the unit cost of goods and services
without impairing their suitability.
2 Emphasis I t emphasi ses on past
performance and variance
analysis.
It emphasises on present and future
performance without considering
the past performance.
3 Approach It is a conservative approach
which stresses on the conformity
to the set norms.
It is a dynamic approach where in
every function is analysed in view
of its contribution.
4 Focus It is a short term review with
focus on reducing cost in a
particular period.
It seeks to reduce unit cost on a
permanent basis based on a
systematic approach.
5 Nature of
Function
It is a corrective function It is a preventive function
(ii) Cost allocation: It is defined as the process of allotment or identification or assignment
of whole items to cost centres or costs units. Thus the charging of direct cost to a cost
centre or a cost unit is the process of allocation of costs.
Cost absorption : It is the process of absorbing all indirect costs (or Overheads)
allocated or apportioned over particular cost centre or production deptt. by the units
produced.
(iii) Controllable costs & uncontrollable costs: Controllable costs are the costs which can
be influenced by the action of the specified member of an undertaking. Controllable costs
incurred in a particular responsibility centre can be influenced by the action of the
executive heading that responsibility centre.
Uncontrollable costs are the costs which cannot be influenced by the action of a specified
member of an undertaking.
The distinction between these two costs is a very thin line & is sometimes left to individual
judgment infact no cost is controllable, it is only a relation to a particular individual that we may
specify a particular cost to be either controllable or uncontrollable.
2003 - May [1] {C} (b) Distinguish between cost control and cost reduction.
(3 marks) [S.A. 3]
Answer :
Please refer 2001 - Nov [1] (a) (i) on page no. 12
2003 - May [5] (a) Distinguish between the following:
(iv) Controllable cost and Uncontrollable costs. (2 marks) [S.A. 18]
Answer :
Please refer 2001 - Nov [1] (a) (iii) on page no. 12
2005 - May [2] (a) Distinguish between :
(i) Explicit and Implicit cost (3 marks) [S.A. 6]
Answer :
Differences between Explicit cost and Implicit cost are:
(i) Explicit costs involves immediate outflow of cash whereas implicit costs do not involve
immediate cash payment.
(ii) Explicit costs are entered in the books of accounts, whereas implicit costs are not
recorded in the books of accounts.
2006 - May [3] (b) Distinguish between the following :
(i) Profit Centres and Investment Centres (2 marks) [S.A. 10]
(ii) Product Cost and Period Cost (2 marks) [S.A. 10]
Answer :
(i) Differences between profit centres and investment centres : Profit centre is an
organisational sub-units for which both cost and profit can be traced which are engaged
mainly on maximization of profit where as investment centre is an organisational
sub!unit for which both profit and return on investment are considered for performance
appraisal which are mainly engaged to earn return on investment. In investment centres,
the manager is responsible for investment, revenue and cost.
(ii) Differences between product cost and period cost : Product costs are those cost
which are assigned to the product and are included in inventory valuation. It is also
known as inventoriable cost where as period costs are those costs which can not be
assigned against a particular product but charged as expenses against the revenue of the
period in which they are incurred. For example administrative overhead, selling and
distribution overhead etc.
2006 - Nov [4] (a) Distinguish between the following :
(ii) Controllable costs and Uncontrollable costs. (2 marks) [S.A. 12]
Answer :
Please refer 2001 - Nov [1] (a) (iii) on page no. 12
2009 - May [1] Answer the following :
(ii) Distinguish between product cost and period cost. (2 marks) [S.A. 1]
Answer :
(ii) Product costs are associated with the purchase and sale of goods. In the production
scenario, such costs are associated with the acquisition and conversion of materials and
all other manufacturing inputs into finished product for sale. Hence under absorption
cost, total manufacturing costs constitute inventoriable or product cost.
Periods costs are the costs, which are not assigned to the products but are charged as
expense against revenue of the period in which they are incurred. General
Administration, marketing, sales and distributor overheads are recognized as period
costs.
DESCRIPTIVE QUESTIONS
1998 - Nov [7] (a) Specify the methods of costing and cost units applicable to the following
industries:
(i) Toy making
(ii) Cement
(iii) Radio
(iv) Bicycle
(v) Ship building
(vi) Hospital. (3 marks) [S.A. 20]
Answer :
Industry Method Cost unit
Toy making Batch Per batch
Cement Unit Per tonne or per bag
Radio Multiple Per radio or per batch
Bicycle Multiple Per bicycle
Ship building Contract Per ship
Hospital Operating Per bed per day or per patient per day
1999 - Nov [5] (a) Discuss the four different methods of costing alongwith their applicability to
concerned industry. (4 marks) [S.A. 17]
Answer :
The various method of costing can be summarised as under :
1. Batch Costing: This costing is based on the concept of contract costing. This method is
used to determine the cost of a group of identical or similar products. The batch costing of
similar products is the unit and not single item within the batch. This method can be applied
for the production of nuts, bolts, medicines and other items which are manufactured in
distinct batches.
2. Job costing: This method is used in those concerns where production is carried out as per
specific orders and specifications. Each job is separate and distinct from other jobs and
products. This method is popular in enterprises engaged in house building, ship-building,
machinery production and repairs etc.
3. Contract costing: This method of costing, based on the principle of job costing, is used by
builders and civil contractors. The contract becomes the cost unit for which relevant costs
are accumulated.
4. Single or unit costing: This method is used where a single item is produced and the final
production is composed of homogenous units. The per unit cost is obtained by dividing the
total cost by the total number of unit of units manufactured.
5. Process costing: Under this method of costing, the cost of completing each stage of work
is ascertained, like cost of making pulp and cost of making paper from pulp. This method
is used in those industries where manufacturing is done continuously like chemicals, oil,
gas paper etc.
6. Multiple costing: This method is used in those industries where the nature of product is
complex such as motor cars, aeroplanes etc. In such cases costs are accumulated for
different component making the final product and then totaled to ascertain total cost of
product.
7. Operating costing: Ascertainment of cost of rendering or operating a service is called
service or operating costing. It is used in case of concerns rendering services like
transport, cinema, hotels etc. where there is no identifiable tangible cost limit.
1999 - Nov [7] (c) Enumerate the factors which are to be considered before installing a system
of cost accounting in a manufacturing organisation. (5 marks) [S.A. 22]
Answer :
To be successful, a good cost accounting system should process the following essential
features :
1. Simple and easy to operate: The system to be simple practical, flexible and capable of
meeting the requirements of a concern.
2. Accuracy: The data to be used by the cost accounting system should be exact and accurate
otherwise the output of the system will not be correct.
3. Cost-effective: The cost of installing and operating the system should justify the results.
The benefit from the system should exceed the amount to be spent on it.
4. Managements Role: The top management should have full faith in the costing system and
should provide help towards its development and success.
5. Relevance of Data: The system should handle and report relevant data for use of managers
for decision making. It should not sacrifice its utility by introducing meticulous and
unnecessary details.
6. Participation by executives: Necessary co-operation and participation of executives from
various deptts of the concern is essential for developing a good system of cost accounting.
2000 - May [1] {C} (c) Define cost object and give three examples. (2 marks) [S.A. 4]
Answer :
Cost Object: It can be any thing for which separate calculation or measurement of cost is
required. e.g. product, service, process, activity, machine, deptt, programme, project etc.
2000 - May [7] (a) Give three examples of Cost Drivers of following business functions in the
value chain:
(i) Research and development
(ii) Design of products, services and processes
(iii) Marketing
(iv) Distribution
(v) Customer service. (5 marks) [S.A. 25]
Answer :
Business Functions Cost Drivers
(i) Research and development No. of Research Projects
Personal hours on a Project
Technical complexities of the project
(ii) Design of products,
services & processes No. of Products in design
No. of parts per product
No. of engineering hours
(iii) Marketing No. of advertisement run
No. of sales personnel
Sales Revenue
(iv) Distribution No. of items distributed
No. of customers
Weight of items distributed
(v) Customer service No. of services calls
No. of products serviced
Hours spent in servicing of products
2000 - Nov [1] {C} (a) Explain :
(i) Sunk Costs (2 marks)
(ii) Pre-production Costs (2 marks) [S.A. 3]
Answer :
Please refer 2003 - May [2] (b) (ii) on page no. 12
2001 - May [2] (a) What are the main objectives of Cost Accounting? (2 marks)
(b) Explain controllable and non-controllable costs with illustrations. (2 marks)
(c) Define Explicit costs. How is it different from Implicit costs? (2 marks) [S.A. 7]
Answer :
(a) The objectives of cost accounting are as follows :
1. To ascertain & analyse costs.
2. To control costs.
3. To reduce costs.
4. To fix the Selling Price.
5. To prepare Periodic Statements.
6. To Provide Information.
(b) Controllable costs & uncontrollable costs: Controllable costs are the costs which can be
influenced by the action of the specified member of an undertaking. Controllable costs
incurred in a particular responsibility centre can be influenced by the action of the executive
heading that responsibility centre.
Uncontrollable costs are the costs which cannot be influenced by the action of a specified
member of an undertaking.
(c) Explicit costs: These are also known as out of pocket costs. They refer to costs involving
immediate payment of cash. Salaries, postage and telegram, printing and stationery, interest
on loan etc. are some of the examples of explicit costs involving immediate cash payment.
Implicit costs: These costs do not involve any immediate cash payment . they are not recorded
in the books of accounts. They are also known as economic costs or imputed costs.
2002 - May [3] (a) You have been asked to install a costing system in a manufacturing company.
What practical difficulties will you expect and how will you propose to overcome the same?
(4 marks) [S.A. 9]
Answer :
Practical difficulties which a cost accountant faces in installing a costing system are :
1. Lack of top management support: Installation of a costing system do not receive the
support from top level management. They believe that by installing such system paperwork
will increase and thus will interfere in their work. They have a mis-concept that the system
is meant for keeping a check on their activities.
2. Resistance from cost Accounting staff: The staff resists because of their fear of loosing
jobs and importance after the installation.
3. Non-co-operation at other level of organizations: The foreman, supervisors and other
staff members may not co-operate in providing required data as this can increase their
responsibility and add the paper work.
4. Shortage of trained staff: Since installation of this system requires specialized work, there
may be shortage of trained and skilled staff.
To overcome the above difficulties, following steps are suggested:
1. Support from top management: Before the installation or operation of the costing system
management must be convinced of the utility of the system.
2. Utility of system to existing staff: The existing accounting staff should be convinced about
the need to supplement the existing financial accounting system.
3. Workers confidence for cooperation: Resistance and non-co-operation should be
overcome by behavioral approach by dealing with the staff concerned effectively.
4. Training to the staff: Proper training should be given to the staff at each level.
5. Proper supervision: regular meetings should be held with the cost accounting staff, user
deptt, staff and top management to clarify their doubts and suspicious.
2002 - May [6] (a) Discuss the treatment in cost accounts of the cost of small tools of short
effective life. (4 marks) [S.A. 18]
Answer :
Small tools are mechanical appliances used for various operations on a work place specially in
engineering industries. Such tools include drill bits, chisels, screw cutters, files etc.
Treatment of cost of small tools of short effective life:
(i) Small tools purchased may be capitalized and depreciated over their life. Revaluation
method of depreciation may be used in respect of very small tools of short effective life.
Depreciation of small tools may be charged to-
factory overheads
overheads of the deptt. using the small tool.
(ii) Cost of small tools should be charged fully to the deptts. to which they have been issued,
if their life is not ascertainable.
2002 - Nov [1] {C} (a) Enumerate the main objectives of introduction of a Cost Accounting
System in a manufacturing organisation. (3 marks) [S.A. 3]
Answer :
Please refer 2001 - May [2] (a) on page no. 17
2002 - Nov [4] (a) Explain, what do you mean by Chargeable Expenses and state its treatment
in Cost Accounts. (3 marks)
(b) What do you understand by the term Cost Centre? (2 marks) [S.A. 11]
Answer :
(a) Chargeable expenses: These are the expenses which can be directly charged to jobs,
products, process, costs centers a unit. These are also called direct expenses. Depending on
the situation, the same item of an expense may be treated as a chargeable expenses or an
indirect cost. For example the hiring charges of a machine specifically hired to complete
a particular job will be a direct charge on the job, but if the same machine is used for
various other purposes, then the hiring charges will be treated as an indirect cost and will
be apportioned to costs centres on reasonable basis. These expenses in costs are treated as
apart of prime cost.
(b) Cost Centre
It is defined as :
A location eg. Noida plant, Hyderabad factory etc.
A person eg. Area sales officer, Manager etc.
An item or equipment eg. Machine 1,2, or Process A, B, etc.
Or, a group of these, for which cost can be ascertained used for the purpose of cost control.
centres are of two types viz. Personal & Impersonal.
In a manufacturing concern there are 2 types of cost centres :
2004 - May [1] {C} (b) Discuss the essentials of a good Cost Accounting system.
(2 marks) [S.A. 4]
Answer :
To be a successful, a good cost accounting system should process the following essential
features:
1. Simple and easy to operate: The system to be simple practical, flexible & capable of
meeting the requirements of a concern.
2. Accuracy: The data to be used by the cost accounting system should be exact & accurate
otherwise the output of the system will not be correct.
3. Cost-effective: The cost of installing and operating the system should justify the results.
The benefit from the system should exceed the amount to be spent on it.
4. Managements Role: The top management should have full faith in the costing system and
should provide help towards its development and success.
5. Relevance of Data: The system should handle and report relevant data for use of managers
for decision making. It should not sacrifice its utility by introducing meticulous and
unnecessary details.
6. Participation by executives: Necessary co-operation and participation of executives from
various deptts of the concern is essential for developing a good system of cost accounting.
2004 - Nov [2] (a) Discuss cost classification based on variability and controllability.
(4 marks) [S.A. 7]
Answer :
1. Classification on the basis of variability:
On the basis of variability, cost are classified into three types:
(i) Fixed cost
(ii) Variable cost
(iii) Semi-variable cost.
(i) Fixed Cost: CIMA defines fixed cost as A cost which accrues in relation to the
passage of time and which within certain output or turnover limits, tends to be
unaffected by fluctuation in volume of output or turnover.
Characteristics of fixed cost:
(a) A mount of fixed cost remains constant for every level of output.
(b) Average fixed cost (i.e. fixed cost per unit) will decreases with increased
output.
(c) Fixed cost is generally managed and controlled by the higher management.
Examples of F. C.: Insurance, salary, rent etc.
(ii) Variable cost: CIMA defines variable cost as A cost which in aggregate tends
to vary indirect proportion to changes in the volume of output or turnover.
Characteristics of Variable cost:
(a) Variable cost varies directly with output/Sales.
(b) Variable cost is easily chargeable output or department.
(c) Variable cost is generally managed and controlled by the department heads.
Examples of V. C.: Direct materials cost Direct Labour Cost.
(iii) Semi variable Cost: CIMA defines semi variable cost as A cost containing both
fixed and variable elements, which is, therefore, partly affected by fluctuations
in the volume of output or turnover
Characteristics of semi-variable cost:
(a) Amount of semi-variable cost is neither fixed nor varies directly along with
the output.
(b) Semi-variable expenses is generally managed by various level of
management jointly.
Example of semi variable cost: Telephone bill, electricity bill etc.
2. Classification on the basis of Controllability:
On the basis of controllability cost is classified into two types:
(i) Controllable cost
(ii) Non-controllable cost
(i) Controllable cost: CIMA defines controllable cost as Cost chargeable to a cost
centre, which can be influenced by the action of the person in whom control of
the centre is vested.
In practices all variable costs are controllable cost.
Example: Direct cost i.e. direct material cost, direct labour cost.
(ii) Non-Controllable Cost: CIMA defines non-controllable cost as a Cost
chargeable to a cost centre which cannot be influenced by the action of the person
in whom control of the centre is vested.
In practice all fixed costs are non-controllable cost. Therefore such cost cannot
be controlled by the responsible manager.
Example: Expenditure on any service department is controlled by the manager of that
service department but if such expenditure is apportioned to production on dept. then
manager of that production dept. cannot control the expenditure of the service
department.
2005 - May [5] (a) Explain :
(ii) Sunk cost. (3 marks) [S.A. 17]
Answer :
Please refer 2003 - May [2] (b) (ii) on page no. 12
2005 - Nov [1] {C} (b) Discuss the essentials of a good cost Accounting system. (4 marks)
Answer :
Please refer 2004 - May [1] {C} (b) on page no. 20
(ii) Briefly discuss, how the synergetic effect help in reduction in costs. (2 marks) [S.A. 3]
(iii) Explain in brief the explicit cost with examples. (2 marks) [S.A. 3]
Answer :
(ii) Cost reduction means "achievement of real and permanent reduction in the unit cost of
goods manufactured or service rendered without impairing their suitability for the use
intended or diminution in the quality of the product". Analysis of synergetic effect is
helpful in cost reduction e.g. when two or more products are produced and managed
together. In such case the result of combined efforts are higher than sum of the results
of individual products.
(iii) Please refer 2001 - May [2] (c) on page no. 17
(ii) What items are generally included in good uniform costing manual? (3 marks) [S.A. 12]
Answer :
A good uniform costing manual should contain
1. Introduction
(i) Statement of objectives.
(ii) Purpose of the systems.
(iii) Scope of the system.
(iv) Need for the system.
2. Organisation
(i) Organisational structure for developing and operating the system.
(ii) Stages or steps for implementing the system.
3. System of Accounting
(i) Principles of accounting to be followed.
(ii) Span of accounting period.
(iii) Classification of accounts
(iv) Description of accounts.
4. Method of Costing
(i) Costing period
(ii) Unit of Production
(iii) Departmentisation
(iv) Treatment of material cost, labour cost and OH cost,
(v) Reconciliation between financial accounts and cost accounts.
5. Reporting
(i) Reporting period
(ii) Ratio
(iii) Levels of reporting
(iv) Cost statements.
2007 - Nov [1] Answer the following :
(i) Discuss briefly the relevant costs with examples. (2 marks) [S.A. 3]
Answer :
Relevant cost helps in specific management decision making. Business decisions involve
planning for future and consideration of various alternative courses of action. In the planning
process the costs which are affected by the decisions are future costs. Such future costs are called
relevant cost because they are pertinent to the decisions in hand. The cost is said to be relevant
if it helps the manager in taking a right decision in furtherance of the companys objectives.
Relevant cost is a future cost which causes the difference between alternatives.
For example : For sales promotion if the company extends the period of warrantee, the
additional cost incurred during the extended period of warrantee.
(i) What are the main objectives of cost accounting ?
(iii) Explain controllable and non-controllable cost with examples. (2 marks each) [S.A. 1]
Answer :
(i) Please refer 2001 - May [2] (a) on page no. 17
(iii) Please refer 2001 - May [2] (b) on page no. 17
(iv) State the method of costing that would be most suitable for :
(a) Oil refinery
(b) Bicycle manufacturing
(c) Interior decoration
(d) Airlines company (2 marks) [S.A. 1]
Answer :
The suitable method of costing for the following is :
(a) Oil Refinery : Process costing
(b) Bicycle manufacturing : Multiple costing
(c) Interior decoration : J ob costing but if on a larger basis then Contract costing
(d) Airlines company : Operating costing
(i) Define the following :
(a) Imputed cost
(b) Capitalised cost. (2 marks) [S.A. 39]
Answer :
(i) (a) Imputed Cost: Imputed costs are notional costs which do not involve any cash outlay.
Examples of imputed cost are Interest on capital, the payment for which is not
actually made, these costs are similar to opportunity costs.
(b) Capitalised Cost: Capitalised are costs which are initially recorded as assets and
subsequently treated as expenses.
(i) What is Cost accounting ? Enumerate its important objectives. (2 marks) [S.A. 37]
Answer :
Cost Accounting is defined as the process of accounting for cost which begins with the
recording of income and expenditure or the bases on which they are calculated and ends with the
preparation of periodical statements and reports for ascertaining and controlling costs.
1. Cost accounting primarily deals with collection and analysis of relevant cost data for
interpretation and presentation for various problems of management.
2. Cost accounting is the application of accounting and costing principles, methods and
techniques in the ascertainment of costs and analysis of saving and /or excess as compared
with previous experience or with standards.
3. CIMA defines cost accounting as the establishment of budgets, standard costs and actual
costs of operation, processes, activities or products,& the analysis of variances,
profitability or the social use of funds.
The objectives of cost accounting are as follows :
1. To ascertain and analyse costs: The primary objective of cost accounting is to
ascertain and analyse costs incurred on the production of various products, jobs and
services etc.
2. To control costs: There are a number of techniques in cost accounting like standard
costing and budgetary control for controlling cost.
3. To reduce costs: By now, the objective of cost accounting has been extended to
reduce costs. For cost reduction plan, products, processes, procedures, organisation,
and methods are continuously reviewed or scrutinized in order to improve efficiency
and to reduce cost.
4. To fix the selling price: Under cost accounting, reliable data is provided to act as a
base for fixing selling prices.
5. To prepare periodic statements: In cost accounting system, periodic cost statements
(viz. monthly, quarterly) for review of operating results are prepared.
6. To provide information: Cost accounting provides useful information for planning
and control and for taking various decisions regarding increase in production,
installation or replacement of a machine, making or buying of a component,
continuing or closing down of a business etc
7. To Ascertain the profit of each activity : The profit of any activity can be
ascertained by matching cost with the revenue of that activity. The purpose under this
step is to determine costing profit or loss of any activity on an objective basis.
8. To Assist the management in decision making : Decision making is defined as a
process of selecting a course of action out of two or more alternative courses. For
making a choice between different courses of action, it is necessary to make a
comparison of the outcomes, which may be arrived under different alternatives.
Similarly Asked Questions*
No. Category Question Marks Frequency
1 Distinguish
Between
Distinguish Between Cost control and Cost
reduction.
01 - Nov [1] (a) (i), 03 - May [1] (b) 2, 3 2 Times
2 Distinguish
Between
Distinguish Between Controllable costs and
uncontrollable costs.
01 - Nov [1] (a) (iii), 03 - May [5] (a) (iv), 06 -
Nov [4] (a) (ii) 2, 2, 2 3 Times
3 Distinguish
Between/
Descriptive
Distinguish Between Explicit and Implicit cost.
01 - May [2] (c), 05 - May [2] (a) (i)
2, 3 2 Times
4 Short Notes/
Descriptive
Explain : Sunk Cost.
03 - May [2] (b) (ii), 00 - Nov [1] (a) (i), 05 -
May [5] (a) (ii) 2, 2, 3 3 Times
5 Descriptive What are the main objectives of Cost
Accounting?
01 - May [2] (a), 08 - May [1] (i), 10 - May [1]
(i) 2, 2, 2 3 Times
6 Dt. Between Distinguish between product cost and period cost.
06 - May [3] (b) (ii) 09 - May [1] (ii) 2, 2 2 Times
7 Descriptive Discuss the essentials of a good cost Accounting
system. 04 - May [1], 05 - Nov [1] (b) 2, 4 2 Times
8 Short Notes/
Descriptive
Write short notes on Essential factors for
installing a Cost Accounting system.
99 - Nov [7], 2010 - Nov [6] (b) (i) 5, 4 2 Times

Costing and Financial Management

Caricato da

Informazioni sul documento

Titolo originale

Copyright

Formati disponibili

Condividi questo documento

Condividi o incorpora il documento

Opzioni di condivisione

Hai trovato utile questo documento?

Questo contenuto è inappropriato?

Copyright:

Formati disponibili

Costing and Financial Management

Caricato da

Copyright:

Formati disponibili

Q&A-3.

Potrebbero piacerti anche