VIVEKANANDA DEGREE COLLEGE, RAJAJINAGAR, BENGALURU

IV SEMESTER COSTING METHODS AND TECHNIQUES

THEORY QUESTIONS AND ANSWERS

Prepared by DR. BHAVANI H
Associate Professor, Dept. of Commerce, VDC.

SECTION A QUESTION ANSWERS

UNIT I JOB COSTING

1. What is Job Costing?

Job Costing is that form of specific order costing which applies to industries which manufacture
products or render services against specific orders. In job costing, costs are collected and
accumulated according to jobs, contracts, products or work orders. Each job is treated as a
separate entity for the purpose of costing.

2. State any two features of Job Costing.

• Production is undertaken against the order of customers.
• Each job is treated as a separate entity and is given a unique number that identifies the
job.
• Costs are collected and accumulated after the completion of each job or product in order
to find out profit or loss on each

UNIT I CONTRACT COSTING

3. What is contract costing?

Contract Costing is a special type of job costing where the unit of cost is a single contract.
Contract is executed under the customer’s specifications and costs are accumulated and
ascertained for each contract.

4. State the special features of Contract Costing.

• The cost unit is a specific contract and therefore, separate account is maintained for each
contract.
• Each contract takes a long time to complete and is of high value.
• The work is constructional in nature and the same is executed at client’s site, as per his
specifications.

5. What is meant by retention money?

The Contractee usually does not pay to the full value of the work certified. A portion of amount
(say 20% or 25%) shall be retained by the Contractee. The money so retained is called as
“Retention Money.”
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6. Distinguish between Work certified and Work uncertified.
Work Certified is that portion of the work completed each year and certified by the contractee’s
architect. Work Uncertified: Work uncertified is that portion of the work completed but not
certified by the contractee’s architect.

UNIT II PROCESS ACCOUNTS

7. What is process Costing?

Process costing is one of the methods of costing used for determining the total and unit cost of
a continuous production run, in which the costs are accumulated for each stage/process of
production. The product passes through several processes before it is converted into the finished
product. The unit cost is charged to each product as it passes through the processes in a given
period.

8. Any two Features of Process Costing

• Production process is continuous and homogeneous
• Processes and products are standardized.
• The output of one process is transferred to the next process as input till the finished product
is realized.

9. What is normal loss?

Normal loss is an unavoidable loss which occurs in processes due to the nature of the materials
under normal conditions. Normal Loss may be in the form of normal scrap or normal waste and
is expressed as a percentage of the input of the process.
Normal Loss Units = Input of the process X normal loss percentage

10. What is abnormal loss?

Abnormal Loss: The loss incurred over and above the normal loss is referred as abnormal loss.
Abnormal loss arises due to abnormal working conditions, carelessness, rough handling, lack of
knowledge, machine breakdown, unplanned operations, accidents etc., which are not
anticipated. Abnormal loss is a controllable loss and is valued at the cost of production of the
process and transferred to abnormal loss account.

11. What is abnormal gain?

Abnormal Gain: Abnormal gain arises when the actual output is more than the expected output.
In other words, when the actual loss is less than the expected loss provided for in the process
accounts, it is called abnormal gain. The cost of abnormal gain units is valued at cost of
production of the process And transferred to abnormal gain account.

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UNIT III OPERATING COSTING

What is Operating costing?

Operating costing is a method of costing used for providing a service. This method applies where
standardized services are provided by an undertaking. The various services are Transport, supply, welfare,
municipal services etc. the unit in terms of which costs are measured maybe a simple unit or composite
unit.

State the objectives of transport costing?

• To provide information about the efficiency of operating a transport service or renting a vehicle
• To provide accurate basis for quotation and fixing of rates o carry goods or passengers
• To provide cost comparison between own transport and hiring a transport service.
• To decide the price at which the vehicle usage can be charged.

UNIT IV MARGINAL COSTING

12. What is break-even point?

The break-even point is the point at which total cost and total revenue are equal, meaning there
is no loss or gain for the business.

13. What is marginal cost?

Marginal cost refers to the cost added by producing one additional unit of a product or service.

14. What is meant by contribution in marginal costing?

Contribution in marginal costing is the difference between sales and variable cost. It contributed
towards recovering the fixed cost and profit.

15. What if meant by margin of safety?

The margin of safety (MOS) is the difference between Actual sales and break-even sales. The
break-even point is where revenue covers costs but nothing more. Any sales beyond that point
earns profit and this difference between actual and break even sales is MOS.

UNIT V STANDARD COSTING

16. Define Standard costing?

Standard costing is a technique of cost control that uses predetermined standard costs for direct
material, direct labour, and factory overheads.

17. Define standard Cost.

A standard cost is a planned or budgeted cost. A standard cost is based on engineering designs
or estimates. It is fixed for material, labour, and overhead components so as to compare the
actual costs to these standards and variances can be identified and controlled
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SECTION B THEORY QUESTIONS AND ANSWERS

BRIEFLY EXPLAIN THE DIFFERENCE BETWEEN JOB AND CONTRACT COSTING

Bases Job Costing Contract Costing

1. Meaning Job Costing is a method of costing Contract Costing is a special type of
where production is against specific costing applicable for construction
orders. Each job is treated as a separate work. The unit of cost is a single
entity for the purpose of costing. contract. Costs are accumulated and
ascertained for each contract.

Nature Jobs are done for a single job or Contracts are undertaken for large
manufacturing a few products Construction works like buildings,
roads, apartments, dams etc.

2.Size Job is small in size as compared to Contracts are large in size with huge
contracts and o less value compared to investment
contracts.
3.Place of work Jobs are performed in the company Contract work is done at the customer’s
workshop/ plant as per order site/ location
4.Time of A job usually takes less time for A Contract usually takes more time for
completion completion(less than year) completion (more than a year)and is of
high value
5.Payment of The selling price is paid in full as soon as In contracts, the payment is done in
price the job is completed instalments each year depending on
the completion level.(work certified)
6.Nature of Costs incurred may be direct and Almost all costs are directly charges to
expense indirect costs the contract
Transferability Jobs cannot be transferred from one o Contracts can be transferred(some jobs
another can be sub-contracted to 3rd parties)

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 ➢ DIFFERENCES BETWEEN JOB COSTING AND PROCESS COSTING
Job Costing Process Costing
Cost is ascertained for every job Cost is ascertained for every process in the
department
Costs of the job can be calculated when the Cost of the product is calculated only at the end
job is completed or beforehand too of the process
Used in those firms where production is Used in those firms manufacturing mass
according to customer orders. production of homogeneous products.
There is no transfer of work from one job The cost of output of one process is transferred
to another to the next process as input and input cost
There may or may not be work-in-progress There is always some work-in-progress at the
at the end of the period beginning or at the end of the period
The time frame depends on the completion There is a time frame within which the processes
of job of production are completed
Job costing is used for very small Process costing is used for large production runs
production runs
Cost of each unit is separately identified The total cost of production is ascertained after
all the processes are completed, spread over the
number of units

➢ BRIEFLY EXPLAIN THE PROCEDURE FOR CALCULATION OF PROFIT ON INCOMPLETE CONTRACTS.

Accounting for profit on incomplete contracts:

Though there are no hard and fast rules, profits on incomplete contracts can be taken depending on
the stage of completion of the contract (as certified by the architect) and after making adequate
provision for contingencies.

For contracts which have just started: When value of WC is less than one fourth( 25% of contract
price) No profit is transferred to P&L Account. The entire amount is transferred to work-in-progress
account being reserve.

Contracts which have reached certain stage of completion: This includes contracts which have
sufficiently progressed and some part of the work is completed.
When value of WC is more than 25% but less than 50% of the contract price, One-third of the notional
profit, reduced in the ratio of cash received to work certified, should be transferred to profit and
Loss Account and the balance will remain in reserve to meet contingencies.
1 𝑐𝑎𝑠ℎ 𝑟𝑒𝑐𝑒𝑖𝑣𝑒𝑑
= 𝑁𝑜𝑡𝑖𝑜𝑛𝑎𝑙 𝑝𝑟𝑜𝑓𝑖𝑡 𝑋 3 𝑋 𝑤𝑜𝑟𝑘 𝑐𝑒𝑟𝑡𝑖𝑓𝑖𝑒𝑑

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Contracts which have reached more than 50 % stage of completion: When value of WC is equal to
or more than 50% but less than 90 % of contract price, Two-thirds of the notional profit, reduced in
the ratio of cash received to work certified, should be transferred to profit and Loss Account

2 𝑐𝑎𝑠ℎ 𝑟𝑒𝑐𝑒𝑖𝑣𝑒𝑑
=𝑁𝑜𝑡𝑖𝑜𝑛𝑎𝑙 𝑝𝑟𝑜𝑓𝑖𝑡 𝑋 3 𝑋 𝑤𝑜𝑟𝑘 𝑐𝑒𝑟𝑡𝑖𝑓𝑖𝑒𝑑

Contracts which are almost complete: Value of work certified is more than 90 % of the contract
price, then it is possible to estimate profit which is then transferred to Profit and Loss Account in
the ratio of cash received to work certified and further reduced in the ratio that work certified bears
to the contract price.
𝑐𝑎𝑠ℎ 𝑟𝑒𝑐𝑒𝑖𝑣𝑒𝑑 𝑤𝑜𝑟𝑘 𝑐𝑒𝑟𝑡𝑖𝑓𝑖𝑒𝑑
=𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑝𝑟𝑜𝑓𝑖𝑡 𝑋 𝑤𝑜𝑟𝑘 𝑐𝑒𝑟𝑡𝑖𝑓𝑖𝑒𝑑
𝑋 𝑐𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝑝𝑟𝑖𝑐𝑒

Alternately, estimate profit can be transferred to Profit and Loss Account in the ratio that cost of
work done to date bears to the estimated total cost, further reduced in the ration of cash received
to work certified
𝐶𝑜𝑠𝑡 𝑜𝑓 𝑤𝑜𝑟𝑘 𝑑𝑜𝑛𝑒 𝑡𝑜 𝑑𝑎𝑡𝑒 𝐶𝑎𝑠ℎ 𝑟𝑒𝑐𝑒𝑖𝑣𝑒𝑑
=𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑝𝑟𝑜𝑓𝑖𝑡 𝑋 𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑡𝑜𝑡𝑎𝑙 𝑐𝑜𝑠𝑡
𝑋
𝑊𝑜𝑟𝑘 𝑐𝑒𝑟𝑡𝑖𝑓𝑖𝑒𝑑

For Completed contracts: Work done is 100% of contract price, The entire profit is transferred to
P&L Account.

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SECTION D (Anyone of the following) ( 6X1=6)

STEPS IN STANDARD COSTING

Standard costing is a technique of cost control that uses predetermined standard costs for direct
material, direct labour, and factory overheads.
The steps in standard costing are as follows:
1. Setting of standards: Standards are set for different elements of cost (materials, labour
and overheads).
2. Ascertaining the actual costs: The actual costs incurred in production are measured.
3. Comparing actual costs with standards: The actual costs incurred are compared with the
standard costs fixed to find differences called the variance.
4. Analysis of variance: The variances are analysed and the causes for the variances are
identified (controllable or uncontrollable)etc.
5. Reporting: The analysis of variances and the causes are reported to the management for
appropriate action.
Thus, standard costing helps in controlling costs in the future and enables decision making. The
success of standard costing system is based on the genuineness, reliability and acceptance of
these standards.

OR

STATE THE METHOD OF COSTING APPLICABLE TO THE FOLLOWING INDUSTRIES WITH

JUSTIFICATION FOR EACH

Paper Mill: Method of costing used is Single costing is also known as unit costing or output
costing. Under single costing, the cost per unit of output or production is ascertained. Each
element constituting such a cost is determined separately. This costing method is suitable in
industries such as brick-making, paper mills, and flour mills.

Printing Press: The method of costing used is Job costing.

This method o costing is used by printing presses, motor repair shops, automobile garages, film
studios, engineering industries etc.

Sugar Mill: The method of costing used is process costing. This method is used in mass
production industries, as the material passes through different processes up to the completion
stage (sugar cane to sugar).

Hospitals: The method of costing used is service costing. In this method, the indirect costs are
allocated based on the services rendered (services or units of a hospital) as per patient days .

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Oil refinery: The method of costing used is process costing as the raw material undergoes
different stages of processing before being converted into oil (copra to coconut oil). Process
costing is suitable for industries that produce homogeneous products

Pickle manufacturing: The method of costing used is process costing. This method is used in
mass production industries like pickle making. The raw material passes through a number of
processes up to a completion of the final product-pickle.

KSRTC: The method of costing used is Transport costing/Operating costing. Transport Costing
is used or the determination of the cost per unit of services rendered by a vehicle run by KSRTC.
( Cost per unit may be cost per kilo meter or cost per passenger kilometer )

Hotel: The method of costing used is Service costing / Operating costing. This method is used
or the determination of the cost per unit of services rendered by the hotel for maintaining and
running he hotel ( cost per room day).

OR
BREAK EVEN CHART