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Lecturer dept. of commerce and Management.

Contact :- 9164786273, 9538385538,

SR COMMERCE ACADEMY
SHIVARAJ M lecturer of commerce Dept. SR Commerce academy-Hiriyur Cell No:-
9164786273 Page 1
 Near Arun Textiles, lakkavanahally Road, Hiriyur
Shivaraj MLecturer of commerce and Management Dept. Cell no:- 9164786273

SUB: - ELEMENTS COST ACCOUNTING (5th Sem )

1. Define cost accounting.

Ans:- Wheldon – “It is the classifying, recording and appropriate
allocation of expenditure for the determination of the costs of products or
services, the relation of these costs to sales values and the ascertainment
of profitability”.

Kohler – “It is that branch of accounting dealing with the classification,

recording, allocation, summarisation and reporting of current and
prospective costs”.
2. What is material control
Ans:- “Material control is a systematic control over purchasing, storing
and consumption of materials, so as to maintain a regular and timely
supply of materials, at the same time, avoiding overstocking.”
Materials control refers to managerial activities relating to giving
instructions or directions to ensure maintaining adequate quality and
quantity of materials for uninterrupted production process with the
objective of minimizing material cost per unit. Both materials control and
inventory control are not one and the same.
3. What is time booking?
Ans:- Time booking is recording the time actually spent by a worker on
various jobs done by him in the factory for cost analysis and dividing
labour cost into various jobs and departments. It also helps in control over
wastage of time- idle time.
Time spent by the worker on different jobs and works is called
time booking.
4. What is ABC analysis?
Ans:- For selective inventory control, three classes of materials and not
more than that have been found to be convenient. This is known in
general as the ABC Classification. The alphabets A, B & C stand for the

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 three different classes and it is popularly known as Always Better
Control.
ABC analysis is a basic analytical management tool. The greatest
effort for the greatest results is ultimate yield of such analysis of
materials. There are areas in material management which need selective
control such as inventory, criticality of items, obsolete stocks, purchasing
order, receipt of materials, inspection, store-keeping and verification of
bills.
5. Define overhead
Ans:- Eric L. Kholer – any cost of doing business other than a direct cost
of an output of product or service.
W M Harper – overheads are cost of an which do not result solely from
the existence of individual cost units.
6. Write any four reasons for disagreement in profit of cost and
financial accounting
Ans:- The disagreement between the costing and financial profit is
caused by the following:
1. Items Shown Only in Financial Accounts:
There are a number of items which are included in financial accounts but
find no place in cost accounts. These may be items of expenditure or
appropriation of profit or items of income. The former reduce the profit
while the latter have the reverse effect.

The items may be classified as under:

(a) Purely Financial Charges:
(i) Loss arising from the sale of fixed assets,
(ii) Loss on investments,
(iii) Discount on debentures,
(iv) Interest on bank loan, mortgages and debentures,
(v) Expenses of the company’s share transfer office,
(vi) Damages payable,
(vii) Penalties and fines,
(viii) Losses due to scrapping of machinery,
(ix) Remuneration paid to the proprietor in excess of a fair reward for
services rendered.

(b) Appropriations of Profit:

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 (i) Donations and Charities,
(ii) Taxes on income and profits,
(iii) Dividend paid,
(iv) Transfers to reserves and sinking funds,
(v) Additional provision for depreciation on fixed assets and for bad
debts,
(vi) Capital expenditure specially charged to revenue.
(c) Writing off Intangible and Fictitious Assets:
Goodwill, Patents and Copyrights, Advertisement, Preliminary Expenses,
Organisation Expenses, Underwriting Commission, Discount on Issue of
Shares/Debentures etc.

(d) Purely Financial Incomes:

(i) Rent receivable,
(ii) Profits on the sale of fixed assets,
(iii) Transfer fees received,
(iv) Interest received on bank deposits,
(v) Dividend received,
(vi) Brokerage received,
(vii) Discount, commission received etc.
2. Items Shown Only in Cost Accounts:
There are certain items which are included in cost accounts but not
in financial accounts. These items are very few and usually are notional
charges. For example, interest may be calculated on capital employed in
production to show the nominal cost of employing the capital though, in
fact, no interest has been paid.

Similarly production may be charged with a nominal rent for

premises owned to enable the concern to compare its cost of production
with that of a rented factory. Depreciation on assets is charged even when

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 the book value is reduced to negligible figure. Salary of the proprietor
where he works but salary is not charged to Profit and Loss A/c.

3. Over or Under-absorption of Overheads:

Overheads absorbed in cost accounts on the basis of estimation like
percentage on direct materials, percentage on direct wages, etc. may be
more or less than the actual amount incurred. If overheads are not fully
absorbed i.e. the amount in cost accounts is less than the actual amount,
the shortfall is called under-absorption. On the other hand, if overhead
expenses in cost accounts are more than the actual, it is called over-
absorption.

4. Different Bases of Stock Valuation:

The valuation of all stocks in financial accounts is done on the
basic principle of cost or realisable value whichever is less. The valuation
of stock in cost accounts is dependent on this fact whether it is raw
material, work-in-progress and finished goods. In case of raw material,
value of stock will depend on whether FIFO or LIFO or Average method
is adopted.
Work-in-progress inventory may be valued at prime cost or works
cost or cost of production basis. Finished goods are generally valued at
total cost of production basis. Thus different bases adopted for valuation
of raw materials, work-in-progress and finished goods may differ and
cause disagreement in the results.
5. Different Methods of Charging Depreciation:
The methods of charging depreciation may differ in financial
accounts and cost accounts and may cause disagreement in profits of the
two books of accounts. For example, Straight Line or Diminishing
Balance Method (as per provisions of the Companies Act or Income Tax
Act) is adopted in financial accounts whereas in cost accounts machine
hour rate or production hour or unit method may have been adopted.
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 6. Abnormal Gains and Losses:
Abnormal items as abnormal wastage of material by theft, wages of
abnormal idle time, cost of abnormal idle facilities, exceptional bad debts,
abnormal gain on manufacturing may be shown in financial accounts but
are excluded from the cost accounts and are taken directly to the costing
and profit and loss account. This causes difference in profits as per two
books of accounts.

7. What is cost unit

Ans:- A cost unit refers to the unit of quantity of product, service or time
(or combination of these) in relation to which costs may be ascertained or
expressed.
A cost unit is a device for the purpose of breaking up or separating costs into
smaller sub-divisions.
8. What is meant by EOQ
Ans:- it is the size of the order which gives maximum economy in
purchasing any materials and ultimately contribute towards maintaining
the material at the optimum level and the minimum cost.
9. Write the meaning of Idle time
Ans:- Idle time refers to the labour time paid for but not utilized on
production. It, in fact, represents the time for which wages are paid, but
during which no output is given out by the workers. This is the period during
which workers remain idle.In other words Idle time is the time for which
employees are paid, but for which they are not doing actual work. It's
basically the unproductive time of employees, for which they're still
compensated.
10.State the meaning and example of overhead
Ans :- Overheads are business costs that are related to the day-to-day
running of the business. Unlike operating expenses, overheads cannot be
traced to a specific cost unit or business activity. Instead, they support the
overall revenue-generating activities of the business.

Some examples of overhead costs are:

Rent ,Utilities, Insurance, Office supplies, Travel, Advertising expenses,

Accounting and legal expenses

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 11. Give the meaning of reconciliation statement
Ans :- A statement which is prepared for reconciling the profit between
financial and cost account is known's as cost reconciliation statement
statement. A cost reconciliation statement is a statement recording the profit
or losses shown by the cost accounts and financial account. It is a statement
where the causes for the difference in net profit or net loss between cost and
financial accounts are established and suitable adjustments are made to
remove them.
12.What is cost sheet
Ans:- Cost Sheet is a statement which presents detailed information relating
to the various stages of cost. It also shows the total cost of the product
manufactured during a particular period of time. Thus, the cost sheet is
prepared for a particular period of time monthly, quarterly, yearly etc.
13.Give the meaning of store ledger
Ans:- Stores Ledger refers to a document or statement that keeps the records
of the value and quantity of different stock items issued, received and their
closing balance. It is often compared with Bin Cards as both of these
statements are used to record stock materials.
14.What is primary distribution of overhead
Ans:- Primary distribution involves apportionment or allocation of overhead
to all departments in a factory on logical and rational basis. This process of
apportionment is also known as departmentalisation of overhead. It is to be
carefully noted that at the time of making primary distribution, the
distinction between production and service departments is ignored.
15.What do you mean by cost accounting standards
Ans:- Cost Accounting Standards (CAS) are a set of standards that are
designed “to achieve uniformity and consistency in cost accounting
practices.”
16.Write any four functions of store keeping officer
Ans:- (i) To receive the materials from receiving department.
(ii) To maintain proper records of stores.
(iii) To make arrangement for proper storage of materials and finished
goods.
(iv) To issue materials to production departments against proper and
authorised requisition.

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 (v) To keep an eye on different stock levels and issue purchase requisition
to the purchase department in time.
(vi) To report on waste, scrap and obsolete stock.
(vii) To prevent unauthorized persons from entering the stores.
(viii) Periodic comparison of physical stocks and book figures and to
reconcile the discrepancies, if any.
(ix) To keep stores clean, tidy.
(x) To make suitable arrangement for maintenance and preservation of
the materials during storage.
(xi) To take back surplus materials returned from departments or shops.
17.What do you mean by labour turnover

Ans:- Labour turnover is the movement of people into and out of the
organization. It is usually convenient to measure it by recording movements
out of the firm on the assumption that a leave is eventually replaced by a
new employee. The term separation is used to denote an employee who
leaves for any reason. Labour turnover is the rate of change in the number of
employees of a concern during a definite period.

18. Write a note an Halsey Premium plan

Ans:- This premium plan was originated by Mr. F. A. Halsey. Under this
worker is paid at the time rate if the actual time taken is equal to or more
standard time.
Thus the worker is not penalised for his inefficiency and he gels for the
actual time worked. If the time taken is less than the standard time, l saved is
shared by the worker and the employer. Besides the wages for the actual
worked, he gets bonus usually at 50% of the time saved at time rate.

19.Give the meaning of direct labour

Ans:- direct labour (DL) costs are the costs associated with paying workers
to make a product or provide a service. The workers must be clearly
involved in producing the product or providing the service. Direct labour
costs are one of the costs associated with producing a product or providing a
service.

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 20.What Is HIFO
Ans:- Highest in, first out (HIFO) is an inventory distribution and
accounting method in which the inventory with the highest cost of purchase
is the first to be used or taken out of stock. This will impact the company's
books such that for any given period of time, the inventory expense will be
the highest possible for the cost of goods sold (COGS), and the ending
inventory will be the lowest possible

21.Give the meaning of cost accounting

Ans:- Cost accounting is the classifying, recording and appropriate
allocation of expenditure for the determination of the costs of products or
services, and for the presentation of suitably arranged data for purposes of
control and guidance of management.

22.What is Bin Card

Ans:- Bin card is the statement of all the receipts and issue of the stock from
the store department. It is also called stock card or bin tag. It is the
responsibility of the store keeper to write every in and out of stock from the
store. The physical stock count and the stock quantity reported according to
the bin card should be equal; otherwise internal audit department will have
the right to investigate the matter with management.

23.What is direct expenses

Ans:-. Direct expenses are costs that can be traced back to a specific
department, often called an object, and are incurred only to benefit that
department.

In other words, a direct expense is an expense that is related to the

purchase of products. Many companies are in the trade for resale, and they
have to buy bulk stock to operate. Direct expenses would refer to anything
that is related to what you have bought.

24.What is FIFO Method of pricing

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 Ans:- FIFO as “a method of pricing the issue of material using, the
purchase price of the oldest unit in the stock”. Under this method
materials are issued out of stock in the order in which they were first
received into stock. It is assumed that the first material to come into stores
will be the first material to be used.

25.Write any two objectives of cost accounting

Ans:- 1. Ascertainment of Cost:

The basic objective of cost accounting is to ascertain the cost of a
product, job or service. Expenses relating to a product are collected from
diverse sources. In addition to direct expenses relating to a product, joint
expenses pertaining to several products are also taken into consideration
(apportioned on some equitable basis) while ascertaining the cost of a
product.
2. Control of Cost:
The second objective of cost accounting is to control the cost so
that the maximum and better production at minimum cost may be made
possible. To achieve this objective, the techniques of budgetary control
and standard costing are adopted.
3. Reduction in Cost:
Costs are not only to be controlled but constant efforts are to be
made for reducing them. Cost reduction implies real and permanent
reduction in the unit cost of goods manufactured or service rendered
without impairing their (products or goods) suitability for the use
intended. Value analysis, time and motion study, standardisation,
simplification, etc. are the major techniques of cost reduction.
4. Determination of Selling Price:
Cost accounting provides cost information on the basis of which
selling prices of products or services can be determined. In the event of
depression or recession, cost accounting guides in deciding the extent to
which the selling price may be reduced to meet special situations.
5. Matching Cost with Revenue:
The profit of any activity can be ascertained by matching cost with
the revenue of that activity. The purpose of this step is to determine profit
or loss of any activity on an objective basis.
6. Providing Basis for Operating Policy:
Cost accounting is an essential tool for the management to
formulate operating policies and to take business decisions like

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 determination of cost-volume-profit relationship; whether to buy or to
make an article, etc.
26.What is meant by cost centre
Ans:- Cost Centre as “a production or service, function, activity or item of
equipment whose costs may be attributed to cost units. A cost centre is the
smallest organizational sub-unit for which separate cost allocation is
attempted.”

According to E. L. Kohler, a cost centre is “an organisational division,

department or self-division, a group of machines, men or both. It includes
any unit of activity into which a manufacturing plant or other operating
organisation is divided for purposes of cost assignment and allocation”.

27.What do you mean by fixed cost

Ans:- A fixed cost is a cost that does not change with an increase or decrease
in the amount of goods or services produced or sold. Fixed costs are
expenses that have to be paid by a company, independent of any specific
business activities.

28.Give two examples for both the direct material and direct labour

Ans:- examples of direct labor include quality control engineers, assembly

line workers, production managers and delivery truck drivers.

Examples of direct materials are:

The timber used to construct a house

The steel included in an automobile
The circuit board included in a radio
The fabric used to assemble clothing

29.Write the methods of absorption overhead

Ans:- Meaning of Overhead Absorption:

Absorption of Overheads as “the process of absorb, overhead costs
allocated or apportioned over a particular cost centre or production
department by the units produced”.

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Methods of Overhead Absorption:
1. Production Unit or Cost Unit Method
This method is followed under historical costing. The rate is calculated by
dividing the overhead by the number of units produced. The following formula
is used to calculate the rate.

OH Rate = Budgeted or Actual Overhead / No. of units budgeted or produced

Advantages of Production Unit or Cost Unit Method

1. This method is suitable for the department which produces only one product
or homogeneous products or products measured in terms of a common
yardstick.
2. It is applicable to the company where the manufacturing methods are simple.
3. This method is simple to understand and easy to apply.
2. Percentage of Direct Material or Direct Material Cost Method

Under this method, the rate is calculated by expressing the overhead cost as a
percentage of direct materials for the same period. The following formula is
used to calculate the rate.

OH Rate = Budgeted or Actual Overhead / Budgeted or Actual Direct Material

Cost x 100
Advantages of Direct Material Cost Method

1. This method is very simple to understand and easy to apply.

2. This method is suitable to the cost unit or cost centre where materials are
formed as major part of the finished product.
3. This method is useful if grades of materials and prices of materials do not
widely fluctuate.
Disadvantages of Material Cost Method
1. There is no logical relationship between the items of overhead and material
cost.
2. Time factor item of overhead is not considered under this method. For
example: Rent.
3. This method is not suitable if some materials passes through all processes and
some materials passes through few processes.
4. The price fluctuation of material will not be accompanied by similar
fluctuations in overhead.
5. Time spent on the completion of product is ignored in this method. For
example cheap raw materials or inferior quality material requires more time
than quality raw material. If so, cheap raw materials absorb high overhead and
quality raw material absorb less overhead. This is undesirable.

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3. Percentage of Direct Wages Method (or) Direct Labour Cost Method

Under this method, the rate is calculated by expressing the overhead cost as a
percentage of cost of direct labour for the same period. The following formula is
used to calculate the rate.

OH Rate = Budgeted OR Actual Overhead / Budgeted OR Actual Direct Labour

Cost x 100
Advantages of Direct Labour Cost Method

1. This method is used where labour cost forms a major portion of the total cost.
2. If different grades of labourers are employed to produce a product, this
method is fair.
3. It is simple to understand and easy to apply.
4. This method is better than percentage of direct material cost method since
the labour cost is less flexible than material cost.
5. There is a direct relationship between time factor and direct wages. If more
time is required to finish a product, there must be a payment of high amount of
wages.
6. Comparison of direct wages from one period to another is more dependable.

Disadvantages of Direct Labour Cost Method

1. This method is not suitable if the workers are paid on piece rate basis. The
reason is that overhead depends upon the time instead of output.
2. Sometimes, workers are employed with costly equipment and hand tools. If
costly equipment is used, the overhead is high and vice versa in the case of
using hand tools. But, overhead absorbed on direct wages basis is equal. This is
not acceptable.
3. If skilled workers perform a job, the wages is high. If unskilled worker
performs the same job, the wages is low. These practices lead to absorption of
overhead in different rate. This is unfair.

4. Percentage of Prime Cost Method

This method is the combination of both percentage of direct material cost
method and percentage of direct labour cost method. The following formula is
used to calculate the rate.

OH Rate = Budgeted OR Actual Overhead / Budgeted Prime Cost x 100

Advantages of Percentage of Prime Cost Method

1. This method is very simple to understand and easy to apply.

2. It gives equal importance to direct material and direct labour.
3. It recognizes time factor.
Disadvantages of Percentage of Prime Cost Method
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1. This method suffers from the limitation of both percentage of direct material
cost method and percentage of direct labour cost method.
2. If the portion of direct material cost is more than direct labour cost, giving
equal importance is not acceptable.
3. If the portion of direct labour cost is more than direct material cost,
insufficient allowance is given for the time factor.
Suitability of Percentage of Prime Cost Method
This method is suitable if the following conditions are satisfied.
1. A standard product is produced.
2. A standard quantity of materials at standard rate is consumed.
3. A standard number of labour hours at standard rate is required for production.

5. Direct Labour Hour Rate Method:

Generally, time is the key factor, which determines the amount of indirect
expenses. Hence, any recovery rate calculated on the basis of the hours of work
shall give accurate result. In a manufacturing process, if handwork is the rule,
the rate of overhead per direct labour hour is worked out and applied suitably.
The following formula is used to calculate the rate.

OH Rate = Budgeted OR Actual Overhead / Budgeted OR Actual Direct Labour

Hour
A direct labour hour rate may be calculated for each department or for each
group of workers.

Advantages of Direct Labour Hour Rate Method

1. If the production units are heterogeneous, the time spent by the labour is
considered in the calculation of overhead rate.
2. This method can be easily adopted if proper records of time booking are
maintained.

Disadvantages of Direct Labour Hour Rate Method

1. If mechanical production is followed, this method is not suitable.
2. The maintenance of direct labor hours are required for overhead rate
calculation. This is very difficult.
3. There is no difference between the time spent by the skilled labour and
unskilled labour.
Suitability of Direct Labour Hour Rate Method
This method is highly suitable if the following conditions are satisfied.
1. Labour is very important in production process.
2. Output is not uniform.
3. Any percentage method fails to suit the condition.

6. Machine Hour Rate Method

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If automatic and semi-automatic machines are used in the manufacturing
process, machine hour rate is applied in the case of overhead absorption.

CIMA defines machine hour rate as an

actual or pre-determined rate of cost apportionment or overhead absorption,

which is calculated by dividing the cost to be apportioned or absorbed by a
number of hours for which a machine or machines are operated or expected to
be operated.
Now a day, machine, production is getting importance and, therefore, the
overhead may be absorbed on the basis of machine hour rate.

30.State any two needs for reconciliation

Ans:- (i) To find out the difference existing in cost accounts and financial
accounts.
(ii) To ensure the mathematical accuracy and to have a check on both the
cost and financial books.
(iii) To adhere to the convention of consistency where all the policies should
be kept constant with regard to valuation of inventory or depreciation etc.
(iv) To help the management in taking decisions with regard to profitability
of the concern.
(v) To help the management to take people internal control.
(vi) To promote coordination between the two departments namely the
costing departments and financial department.
(vii) To identify and detect the variation in profit caused by the difference in
the books of cost and financial system.
(viii) To detect if any mistakes are made in recording the translations in both
the books namely the cost or financial books of accounts.
31.What is quotation

Ans:- A quotation is also often known as a quote. It is a document that a

supplier will submit to a potential client that lists the proposed prices for the
supplier's goods or services.

32.State the advantages of cost accounting

Ans:- To the Management:

1. Guide in Reducing Prices – In certain periods it becomes necessary to reduce
the price even below the total cost. This will be so when there is a depression or
slump. Costs, properly ascertained, will guide management in this direction.

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2. Measuring Efficiency – Cost accounting will enable a concern to measure its
efficiency and then to maintain and improve it. This is done by comparisons and
analysis of the differences that may be observed. For instance, material costs
have been increased: the increase may be due to increase in price of materials or
may be due to greater wastage or may be due to inefficiency at the time of
buying or unnecessarily high price paid.
3. Action against Unprofitable Activities – It reveals unprofitable activities,
inefficiencies such as wastage of materials—spoilage, leakage, pilferage, scrap
etc. and wastage of resources—inadequate utilisation etc. The management is
able to concentrate on profitable jobs and consider change or closure of the
unprofitable jobs.
4. Facilitates Decision-Making – It provides necessary data along with
information to the management to take decision on any matter, relating to the
business.
5. Assists in Fixing Prices – The various types of cost accounting are much
helpful in fixing the cost and selling price of a product. Thus the desired volume
of production is secured at the minimum possible cost.
6. Improves Efficiency – Through the standard cost and budgetary control,
remedial action can be chosen in order to improve the efficiency and implement
new principles.
7. Facilitates Cost Control – It facilitates cost control possible by comparisons,
product-wise or firm-wise.
8. Establishes Standard Cost – It enables the managers to find out the cost of
each job and to know what it should have cost; it indicates where the losses and
wastes occur before the work is finished. Standard cost is a pre-determined cost
and offers a number of advantages to the management.
9. Inventory Control – An effective system and check are provided on all
materials and stores. Interim profit and loss account and balance sheet can be
prepared without checking the physical inventory.
10. Prevents Fraud – An effective costing system prevents frauds and
manipulation, and supplies reliable cost data to the management.
11. Tool of Management Control – It provides systematic and comparative
reports to the management; and in turn, corrective measures can be applied
immediately. It aims to reduce waste, better selling, higher profits etc.
12. Measuring Rods – It records the performance of different groups of workers,
plant, machinery etc. for measuring their comparative efficiency.
13. Future Prospects – The cost accountant not only provides the present trend,
but future prospects also. On this basis, bankers, debenture holders, financial
agencies etc., form an idea of the soundness of the firm before granting credits.

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14. Budgeting – As cost accounting reveals actual cost, estimated cost and
standard cost of products, preparation of budget is easy. Effective budget
control is also possible. Thus “Cost accounting is a system of foresight and not
a post-mortem examination; it turns the losses into profits, speeds up activities
and eliminates wastes”.
To the Employees:
1. Sound Wage Policy – Cost accounting introduces incentive wage schemes,
bonus plans etc. which bring better reward to sincere and efficient workers. Cost
data aid the management in devising a suitable wage policy for the workers.
Time wage system and piece rate system can be blended to provide higher
wages and at the same time increasing productivity rate.
2. Higher Bonus Plans – Cost accounting leads to an increase in productivity,
lowering of costs and increase in profitability. Workers get their share in profits
in the form of bonus. Higher profits naturally allow higher bonus distribution.
3. Distinction Between Efficient and Inefficient Workers – Cost accounting pro-
vides standards for the measurement of efficiency of workers. Efficient workers
can be distinguished and their efficiency recognised and rewarded. Employees
have been initiated and recommended for higher promotions. This means,
increase in earnings, through the motion study and time study in doing jobs.
Others get the encouragement to be more efficient and to earn more wages in
the given time of work.
4. Security of Job – Employees get better remuneration, security of job etc., due
to the increasing prosperity of the industries. Monetary appreciation of the
efficiency of a worker is a good tonic which leads to higher rate of productivity.
To the Creditors:
Bankers, creditors, investors etc., can have a better understanding of the firm, as
regards the progress and prosperity, before they offer financial landings.
To the Government:
1. The proper systems of cost accounting are of great use in the preparation of
national plans, economic developments etc.
2. By studying the trend of cost, the government can make policies like taxation,
import, export, price ceiling, granting subsidy etc.
3. Costing system has stability and cost reduction in industries. Cost audit is
important and industries have to keep books of accounts to show the utilisation
of materials, labour and other costs.
To the Public:
1. Cost accounting removes all types of wastages and inefficiencies. These will
enable the consumers to get goods at better quality and cheaper rates.

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2. The public feels that the costing system facilitates the customers to pay fair
price.
3. Development and prosperity of industries will create employment
opportunities.
4. Cost reduction will help in curbing inflationary trends in economy.
5. A steady progress is essential for an economic growth. There are many
industries closed down because of inefficient and incompetent management. All
these will be removed by cost accounting.

33. What is piece rate system?

Ans:- Piece rate refers to a wage determination system in which the workers
get paid by result like each unit of production at a fixed rate.

A piece-rate pay system means that the worker is paid per unit of creation.
Whether the "unit of creation" is a clay pot or a piece of writing, a person is
paid by individual output, no matter how long it takes. Although at first
glance working by piece-rate may seem easier,
34. Give the meaning of prime cost
Ans:- Prime costs are the costs directly incurred to create a product or
service. These costs are useful for determining the contribution margin of
a product or service, as well as for calculating the absolute minimum
price at which a product should be sold. However, since prime costs do
not include overhead costs, they are not good for calculating prices that
will ensure long-term profitability.

LONG QUESTIONS
1. Write any 10 difference between the cost accounting and financial
accounting.
Cost Accounting refers to that branch of accounting which deals with costs
incurred in the production of units of an organization. On the other hand,

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 financial accounting refers to the accounting concerned with recording
financial data of an organization, in order to exhibit exact position of the
business.

BASIS FOR
COST ACCOUNTING FINANCIAL ACCOUNTING
COMPARISON

Meaning Cost Accounting is an Financial Accounting is an

accounting system, through accounting system that captures
which an organization keeps the records of financial
the track of various costs information about the business
incurred in the business in to show the correct financial
production activities. position of the company at a
particular date.

Information type Records the information Records the information which

related to material, labor and are in monetary terms.
overhead, which are used in
the production process.

Which type of cost Both historical and pre- Only historical cost.
is used for determined cost
recording?

Users Information provided by the Users of information provided

cost accounting is used only by the financial accounting are
by the internal management internal and external parties like
of the organization like creditors, shareholders,
employees, directors, customers etc.
managers, supervisors etc.

Valuation of Stock At cost Cost or Net Realizable Value,

whichever is less.

Mandatory No, except for manufacturing Yes for all firms.

firms it is mandatory.

Time of Reporting Details provided by cost Financial statements are

accounting are frequently reported at the end of the

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 BASIS FOR
COST ACCOUNTING FINANCIAL ACCOUNTING
COMPARISON

prepared and reported to the accounting period, which is

management. normally 1 year.

Profit Analysis Generally, the profit is Income, expenditure and profit

analyzed for a particular are analyzed together for a
product, job, batch or particular period of the whole
process. entity.

Purpose Reducing and controlling Keeping complete record of the

costs. financial transactions.

Forecasting Forecasting is possible Forecasting is not at all

through budgeting possible.
techniques.

2. Explain briefly causes for labour turnover

Ans:- The various causes of labour turnover can be classified under the
following three heads:
1. Personal causes;

2. Unavoidable causes; and

3. Avoidable causes.

1. Personal Causes:
Workers may leave the organisation purely on personal grounds, e.g.

a. Domestic troubles and family responsibilities.

b. Retirement due to old age.

c. Accident making workers permanently incapable of doing work.

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d. Women workers may leave after marriage in order to take up household
duties.

e. Dislike for the job or place.

f. Death.

g. Workers finding better jobs at some other places.

h. Workers may leave just because of their roving nature.

i. Cases involving moral turpitude.

In all such cases, labour turnover is unavoidable and the employer can
practically do nothing to reduce the labour turnover.

2. Unavoidable Causes:
In certain circumstances it becomes necessary for the management to ask some
of the workers to leave the organisation.

These circumstances may be as follows:

a. Workers may be discharged due to insubordination or inefficiency.

b. Workers may be discharged due to continued or long absence.

c. Workers may be retrenched due to shortage of work.

3. Avoidable Causes:
(a) Low wages and allowances may induce workers to leave the factory and join
other factories where higher wages and allowances are paid.

(b) Unsatisfactory working conditions e.g., bad environment, inadequate

ventilation etc. leading to strained relations with the employer.

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(c) Job dissatisfaction on account of wrong placement of workers may become a
cause of leaving the organisation.

(d) Lack of accommodation, medical, transport and recreational facilities.

(e) Long hours of work.

(f) Lack of promotion opportunities.

(g) Unfair methods of promotion.

(h) Lack of security of employment.

(i) Lack of proper training facilities.

(J) Unsympathetic attitude of the management may force the workers to leave.

3. State any five methods of costing

Ans:- 1. Unit Costing – If production is made in different grades, costs are
ascertained grade wise. Per unit cost is calculated on the basis of units
produced. This method is applicable to steel production bricks, mines and flour
mills etc.
2. Job Costing – This method is applicable where work is undertaken to
customers. This method is used in repair shops printing press and interior
decoration etc.
3. Contract Costing – Unit cost in a contract is of a long duration and it may
continue for more than a year. It is most suitable in roads, bridge, shop building
etc.
4. Process Costing – The method is used in mass production industries. The raw
material passes through a number of processes up to a completion stage. The
finished product of one process passed through a number of process for the next
process. This method is used in chemical works, sugar mills etc.
5. Service Costing – This method is used where services are provided such as
hotels, cinemas, hospitals, transport, electricity companies etc.
6. Composite Costing – This method is used where a number of components are
manufactured separately and then assembled in a final product such as in
Scooters, Cars, Air Conditioners etc.

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7. Batch Costing – The cost of a batch is ascertained and each batch is a cost
unit. This method is used in readymade garments, shoes, tyres and tubes etc.
8. Operation Costing – This system is followed where number of operations are
involved. It provides minute analysis of costs and ensures greater accuracy and
better control.
4. Difference between Bin Card and store ledger
Ans:- Bin Card implies a document which records the quantity of material
received by, issued to and remained in stores. Conversely,
Stores Ledger is a ledger account (accounting record), that maintains the
record of the transit of goods in and out, the stores, both in quantitative and
monetary terms.

BASIS FOR
BIN CARD STORES LEDGER
COMPARISON

Meaning Bin Card implies a Stores ledger alludes to a

quantity record of the subsidiary ledger, that keeps
receipts, issue and balance track of each and every
of materials in stores. transaction relating to materials
in the stores.

What is it? It is a recording It is an accounting record.

document.

Responsibility Storekeeper Cost accounting department

Location Kept inside the stock Kept outside the stock room.
room.

Details Contains quantitative Contains both quantitative and

details only. monetary details.

Interdepartmental Are not shown in bin Indicated in stores ledger.

transfer card.

Entries Entries are posted when Entries are posted after

transaction takes place. transaction took place.

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 BASIS FOR
BIN CARD STORES LEDGER
COMPARISON

Recording Transactions are recorded Summarized transactions are

individually. recorded.

5. What are the steps involved in the purchase of materials

Ans:- 1. Receiving and analysing purchasing requisition:
Purchase requisitions start with the department or person who will be the
ultimate user. In the material requirements planning environment, the planner
releases a planned order authorising the purchasing department to go ahead and
process a purchase order.

The purchase requisition contains, at least, the following information:

a. Identity of originator, signed approval, and account to which cost is assigned.

b. Material specification.
c. Quantity and unit of measure.
d. Required delivery date and place.
e. Any other supplementary information required
2. Selecting suppliers:
Identifying and selecting suppliers are important responsibilities of the
purchasing department. For routine items or those that have not been purchased
in the past, a list of approved suppliers is kept. If the item has not been
purchased before or there is no acceptable supplier on file, a search must be
made.

If the order is of small value or for standard items, a supplier can probably be
found in a catalogue, trade journal, or directory.

Step # 3. Requesting quotations:

For major items, it is usually desirable to issue a request for quotation. This is a
written inquiry that is sent to many suppliers to ensure that competitive and
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reliable quotations are received. It is not a sales order. After the suppliers have
completed the quotations and returned it to the buyer, the quotations are
analysed for price, compliance to specification, terms and conditions of sale,
delivery, and payment terms.

For items where specifications can be accurately written, the choice is probably
made on price, delivery, and terms of sale. For items where specifications
cannot be accurately written, the items quoted will vary. The quotations must be
evaluated for technical factors and price. Usually both the issuing and
purchasing departments are involved in the decision.

Step # 4. Determining the right price:

This is the responsibility of the purchasing department and is closely tied to the
selection of suppliers. The purchasing department is also responsible for price
negotiation and will try to obtain the best price from the supplier.

Step # 5. Issuing a purchasing order:

A purchase order is a legal offer to purchase. Once accepted by the supplier, it
becomes legal contract for delivery of the goods according to the terms and
conditions specified in the purchase agreement. The purchase order is prepared
from the purchase requisition or the quotations and from any other additional
information needed.

A copy is sent to the supplier; copies are retained by purchasing and are also
sent to other departments such as accounting, the originating department, and
receiving.

Step # 6. Following-up and delivery:

The supplier is responsible for delivering the items ordered on time. The
purchasing department is responsible for ensuring that suppliers do deliver on
time. If there is doubt that delivery dates can be met, purchasing must find out
the problem in time and take corrective action.

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This might involve expediting transportation, alternate sources of supply,
working with the supplier to solve its problems, or rescheduling production.

The purchasing department is also responsible for working with the supplier on
any changes in delivery requirements. Demand for items changes with time, and
it may be necessary to expedite certain items or push delivery back on some
others. The buyer must keep the supplier informed of the true requirements so
that the supplier is able to provide what is wanted and when.

Step # 7. Receiving and accepting goods:

When the goods are received, the receiving department inspects the goods to
ensure that correct ones have been sent, are in the right quantity, and the bill of
lading supplied by the carrier. The receiving department then accepts the goods
and writes up a receiving report noting any variance. If further inspection is
required, such as by quality control, the goods are sent to quality control or held
there for inspection.

If the goods are received damaged, the receiving department will advise the pur-
chasing department and hold the goods for further action. Provided the goods
are in order and require no further inspection, they will be sent to the originating
department or to inventory.

A copy of the receiving report is then sent to the purchasing department noting
any variance or discrepancy from the purchase order. If the order is considered
complete in all respects, the receiving department closes out its copy of the
purchase order and advises the purchasing department accordingly.

If it is not, the purchase order is held open awaiting completion. If the goods
have also been inspected by the quality control department, they, too, will
advise the purchasing department whether the goods have been accepted or not.

8. Approving supplier’s invoice for payment:

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When the supplier’s invoice is received, there are three pieces of information
that should agree – the purchase order, the receiving report, and the invoice. The
items and the quantities should be the same on all; the prices, and extensions to
prices, should be the same on the purchase order and the invoice.

6. Explain briefly the techniques of inventory control

Ans:- 1. ABC analysis:
The basic work in this always better control analysis is the classification and
identification of different types of inventories, for determining the degree of
control required for each. In many firms it is found that they have stocks which
are used at very different rates. So items are classified under three broad
categories A, B and C, on the basis of usage, bulk, value, size, durability, utility,
availability, criticality etc.; and should be controlled with due weightage to
differential characteristics.

2. Economic order quantity model:

The basic decision in an economic order quantity (EOQ) procedure is to
determine the amount of stock to be ordered, at a particular time so that the total
of ordering and carrying costs may be reduced to a minimum point. A firm
should place optimum orders and neither too large nor to small. The EOQ is the
level of inventory order that minimizes the total cost associated with inventory.
3. Minimum Safety Stocks:
To avoid stock-outs firms maintain safety stocks of inventory. The safety stock
is the minimum level of inventory desired for an item given the expected usage
rate and the expected time to receive an order.

4. Maintaining Perpetual Inventory System:

This is another technique to exercise control over inventory. It is also known as
automatic inventory system. The basic objective of this system is to make
available details about the quantity and value of stock of each item at all times.
Thus, this system provides a rigid control over stock of materials as physical
stock can be regularly verified with the stock records kept in the stores and the
cost office.

5. Just In Time (JIT) Method

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 In Just in Time method of inventory control, the company keeps only as
much inventory as it needs during the production process. With no excess
inventory in hand, the company saves the cost of storage and insurance. The
company orders further inventory when the old stock of inventory is close to
replenishment. This is a little risky method of inventory management because a
little delay in ordering new inventory can lead to stock out situation. Thus this
method requires proper planning so that new orders can be timely placed.
6. VED Analysis
VED stands for Vital Essential and Desirable. Organizations mainly use
this technique for controlling spare parts of inventory. Like, a higher level of
inventory is required for vital parts that are very costly and essential for
production. Others are essential spare parts, whose absence may slow down the
production process, hence it is necessary to maintain such inventory. Similarly,
an organization can maintain a low level of inventory for desirable parts, which
are not often required for production.
7. Fast, Slow & Non-moving (FSN) Method
This method of inventory control is very useful for controlling
obsolescence. All the items of inventory are not used in the same order; some
are required frequently, while some are not required at all. So this method
classifies inventory into three categories, fast-moving inventory, slow-moving
inventory, and non-moving inventory. The order for new inventory is placed
based on the utilization of inventory.

7. State the classification of overheads

Ans:- Function wise classification of overheads
The overheads can be classified into in the following ways on the basis of
function wise classification.

1. Production Overhead
It is otherwise called as manufacturing overhead, works overhead and factory
overhead. All the indirect expenses, which are incurred in the factory premises
in connection with the production of any goods and services, are treated as
production overhead. Factory rent, rates, lighting, heating, idle time wages,
depreciation of factory, building, plant and machinery, canteen expenses and the
like are some of the examples of production overhead.
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2. Administration Overhead
The term administration refers to the formulation of policy, direction, control
and management of affairs. The general functional expenses are included in the
administration overhead. In other words, administrative services are necessary
for the effective operation of any business. Hence, such service expenses are
treated as administration overhead. The printing and stationary for
administration, rent, rates, insurance of general office, bank charges, telephone,
postage, and the like are the examples of administration overhead.

3. Selling Overhead
The selling overhead refers to the cost of selling function ie the cost of activities
relating to create and stimulate demand for company products and to secure
orders. Salaries, Commission and traveling expenses of sales representatives
and executives, advertising and publicity expenses, samples, printing of price
lists, discounts, rebates, bad debts and the like are the examples of selling
overhead.

4. Distribution Overhead
The term distribution refers to the activities relating to the sequence of operation
starts from making the packed product available for dispatch and ends with
making reconditioned returned empty package available for reuse.

Distribution is also one of the functions like manufacturing, administration and

selling. Running expenses of delivery van, wages of packers, carriage and
freight outwards, rent, rates and insurance of warehouses and the like are some
of the examples of distribution overhead.

5. Research and Development Overhead

Research overhead is the cost of searching for new products, new techniques for
production or finding new equipment. The development overhead is the cost of
implementation of research result on commercial basis. Cost of raw materials
used for research, salaries and wages of R and D department staff, subscription
to books and journals, subscription to research association, patent feeds and the
like are examples of research and development overhead.

Behavior wise classification of overheads

The overheads can be classified on behavior wise basis also. They are presented
below:

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1. Fixed Overhead
Fixed overhead represents indirect cost, which remains constant for a specific
period regardless of changes in volume of production. In other words, the fixed
overhead may be increased after a certain level of production. The fixed
overheads do not vary in total in a certain level of production.

The fixed overhead cost per unit decreases if the volume of production increases
and vice versa. The fixed overhead is otherwise called as period cost, stand-by
cost and fixed cost. Rent of building, depreciation of plant and machinery,
salaries and remuneration of management executives, legal fees, audit fees and
the like are the examples of fixed overhead.

Types of fixed overhead

There are three types of fixed overhead. They are briefly explained below.

1. Long Run Capacity Fixed Overhead: These are expired cost of plant and
machinery and other facilities used. It means that these expenses are incurred
over a long period of time.
2. Operating Fixed Overhead: These types of expenses are incurred to
maintain and use the fixed assets. Heat, light, insurance and property taxes are
paid in order to maintain and use the fixed assets.
3. Programmed Fixed Overhead: Some special programmes may be approved
by the management. For which, the expenses are incurred by the management.
The expenses like advertisement is issued to increase the volume of sales and
research are carried on to improve the quality of the product. These are
examples of programmed fixed overhead.
2. Variable Overhead
Variable overhead is a portion of indirect cost, which varies directly with
change in the volume of production. If varies in total but remains constant in per
unit, power, fuel, transport expenses, lubricants, tools and spares and the like
are the examples of variable overhead.

3. Semi-Variable Overhead
Semi-variable overhead is a portion of indirect cost, which is partly fixed and
partly variable. It means that this type of overhead has the characteristics of
both fixed overhead and variable overhead. Semi-variable overheads may
remain fixed up to a certain level of production and vary after that level of
production. In other words, semi-variable overheads do not fluctuate in direct
proportion to the volume of production.

Elements wise classification of overheads

The overheads may be classified on the basis of element wise in the following
ways.

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1. Indirect Materials
Some materials are used in the production process, which cannot be traced in
the end product. In other words, materials used in the production process do not
form part of end product. This type of material is called indirect material.
Moreover, the cost of such material is insignificant and cannot be considered as
worth for analyzing. For example: Threads and buttons used in stitching cloths
and lubricants used in maintenance of plant and machinery.
2. Indirect Labor
Some laborers are employed for the purpose of helping the workers to produce
goods and services. These laborers are not permitted to engage in the production
process directly. Moreover, salaries and wages paid to such type of laborers are
not included in the salaries and wages paid to workers who are working in the
production process directly. This type of labor is called indirect labor.
For example: Salaries and wages paid to store keepers, sales representatives,
personnel manager, accountant, supervisors, and the like. These indirect labor
costs can not be identified with any particular job, process, cost unit or cost
centre.
3. Indirect Expenses
Some expenses are incurred by the organization in order to run the business but
not connected with the production of any goods and services. Without incurring
such expenses, nothing will be happen. Moreover, these expenses cannot be
conveniently allocated to job, process, cost unit or cost centre. Hence, these
expenses are treated as indirect expenses. Rent, rates, postage, insurance, light,
depreciation and the like are the examples of indirect expenses.

Control wise classification of overheads

Overheads may be classified in the control wise basis in the following ways.
1. Controllable Overhead
Overheads, which can be easily controlled by management through exercising
various steps, are called controllable overhead.
2. Uncontrollable Overhead
Overheads, which cannot be, controlled whatever the steps taken by the
management are called uncontrollable overhead.
8. Explain the significance of cost accounting
Ans:- 1- Cost control by collecting and recording all the cost elements of the
company.
2- Cost classification through cost accounting methods, which enables us to
differentiate between all types of costs.
3- Pricing of products in cost accounting plays a significant role in controlling
the pricing of products, as it provides cost reports, it is also possible to take
advantage of modern methods of pricing of products such as the target costing
method, through which the price of products can be determined and the target
profit margin added before starting production.
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4- Contributing to increasing the company's profits and increasing its
competitiveness, had it not been for the presence of cost accounting, the
companies would not have been able to know the costs of products and control
these costs, and thus the ability to reduce costs to the lowest possible extent and
increase profits to the maximum possible profit.
5- Creating the budgeting, through the methods of cost accounting, the company
can create budgeting, and so that such budgeting can be created, the actual
activity costs of the company must be examined for previous years so that the
company can forecast what the future cost will be and can also be through
budgeting of tightening control and control of cost elements by comparing
actual costs with standard costs and detecting variances, then analyzing these
variances and working on resolve shortcomings of costs.
6- Assisting the department in making decisions by providing the essential cost
reports, whether it is for the production elements or activities (cost centers) to
assist the department in excluding the avoidable costs, and supporting the
important cost centers that achieve the customer’s desires and increase the
product’s ability to compete in the market.

9.What are the essential of material control

Ans:-1. Co-Ordination:
Effective control of material requires effective co-ordination among the
departments involved in purchasing – receiving, and inspection, storage,
production, sales and accounting departments so that adequate materials are
available for continuous production and sales. At the same time excessive
investment in materials and over stocking are avoided.
2. Centralised Purchasing:
In order to economise the buying and to avoid reckless buying of raw materials
the purchasing function is to be centralised.
3. Proper scheduling of materials requirements ensures availability of materials
at the right time.
4. Classification and codification of material leads to easy identification and
proper control of materials.
5. Receipt of Materials:
Checking and inspection of material by receiving department ensure correct
quantity and quality of material as ordered by the organisation.
6. Usage of Forms:
Standard forms are to be designed and used for purchase requisition, purchase
order, receiving of materials, requisition of materials and transfer of material
from jobs to stores or to other jobs.

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7. Storage of materials should be entrusted to a qualified store keeper to plan
effective storage and avoid losses due to obsolescence, pilferage and theft.
8. Issue of Materials:
A good method of issue of materials to various jobs, processes and orders
should be devised to ensure delivery of right material at the right time and right
quantity and quality for smooth flow of production.
9. Stock Taking:
Perpetual inventory should be followed for stock verification to reveal
differences in stock due to pilferage theft and wastage. Moreover perpetual
inventory system avoids closing down of factory for stock verification and
valuation.
10. Levels of stocks are to be maintained in the form of reorder level, maximum
level and minimum level to avoid shortage and over stocking of materials.
11. Economic ordering quantity is to be operated for each type of materials to
optimise the cost of buying and storage.
12. Pricing of Issues:
A suitable method of pricing is to be followed for correct, valuation of material
cost of jobs, orders, processes and valuation of closing stocks.
13. Control of Materials during the Production Process:
Proper Accounting and records are to be maintained to avoid wastage of
materials during consumption.
14. Suitable reporting system helps management to take decisions regarding
investment in materials and avoidance of obsolete, dormant and slow moving
materials.
Prepared BY:-
SHIVARAJ M
Lecturer Dept. of Commerce and Management
Cell no:- 9164786273

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