Course Name: Cost and Management

Accounting
Module 2: Cost Concepts

1. What do you mean by controllable cost?

Answer: The cost, which is influenced, by the action of a given person (budget holder) of
the firm is controllable cost. Sometimes the time factor and the decision making authority
can make a cost controllable. If the time period is long enough, all costs can be
controlled.

2. What are the objectives of cost accounting?

Answer:
• To analyse and classify all expenditures with reference to the cost of products and
operations.
• To arrive at the cost of production of every unit, job, operation, process, department or
service and to develop cost standard.
• To indicate to the management any inefficiencies and the extent of various forms of
waste.
• To provide data for periodical profit and loss accounts and balance sheets at intervals as
may be desired by the management.
• To reveal sources of economies in production having regard to methods, types of
equipment, design, output and layout.
• To provide actual figures of cost for comparison with estimates and to serve as a guide
for future estimates or quotations and to assist the management in their price-fixing
policy.
• To show, where standard costs are prepared, what the cost of production ought to be and
with which the actual costs which are eventually recorded may be compared.
• To present comparative cost data for different periods and various volumes of output.
• To provide a perpetual inventory of stores and other materials so that interim profit and
loss account and balance sheet can be prepared without stock taking and checks on stores
and adjustments are made at frequent intervals.
 • To provide information to enable management to make short-term decisions of various
types, such as quotation of price to special customers or during a slump, make or buy
decision, assigning priorities to various products, etc.

3. Define overheads.
Answer: It is the aggregate of indirect material costs, indirect labour costs and indirect
expenses.

4. Briefly state the differences between cost accounting and financial accounting.
Answer:
i. Purpose: The purpose of cost accounting is the ascertainment of cost at each stage of
production. The puspose of management accounting is to provide information to the
management for decision making.

ii. Basis: Cost accounting is prepared mainly on the basis of past and less emphasis is given
on the future. Management accounting aims at future based on the past information.

iii. Preparation: Cost accounting is prepared on the basis of some rules and regulations
prescribed by ICWAI. Management accounting is prepared without adopting any specific
and rigid rules. It may be prepared according to the will of the managerial personnels.

iv. Reports: The reports of cost accounting are subject to statutory audit whereas the reports
of management accounting are not.

v. Usefulness: The reports of the Cost accounting are useful both to the internal and
external parties, while those of management accounting are useful only to the internal
parties.

vi. Scope: Cost accounting does not include tax planning and tax accounting whereas
management accounting includes them.

vii. Maintenance of records: Cost accounting record maintenance is compulsory for

complying the statutory requirements in selected industries as notified by government.
Management accounting record maintenance is purely voluntary and for internal use of
management of the company.
viii. Planning aspect: Cost accounting is mainly concerned with short term planning and
management accounting is concerned with short term as well as long term planning of the
organisation.

ix. Installation of system: Cost accounting can be installed without the help of management
accounting in the organisation, but management accounting cannot be properly installed
without a proper cost accounting system.

x. Derivation of data: Cost accounting data are derived basically from financial accounts,
while management accounting data are derived from both financial as well as cost
accounts.

5. Why is cost accounting important?

Answer:
• Cost accounting provides detailed costing information to the management to enable them
to maintain effective control over stores and inventory, to increase efficiency of the
organisation and to check wastage and losses.
• Investors, banks and other money lending institutions can base their judgment about the
profitability and future prospects of the enterprise on the costing records.
• Employees are benefited, through continuous employment and higher remuneration by
way of incentives, bonus plans, etc. that is possible by an efficient system of costing.
• Control of costs, elimination of wastages and inefficiencies led to the progress of the
industry and, in consequence of the nation as a whole.

6. Write a short note on costing.

Answer: The process of ascertaining the cost is known as costing. It consists of
principles and rules governing the procedure of finding out the costs of goods/ services. It
aims at ascertaining the total cost and also per unit cost. It provides for analysis of
expenditure in such a way that the management gets complete idea about even the
smallest item of cost. The main object of costing is the analysis of financial records, so as
to subdivide expenditure and to allocate it carefully to selected cost centers, and hence to
build up a total cost for the departments, processes or jobs or contracts of the
undertaking.
7. What so you understand by cost?
Answer: Cost is the amount of resource given up in exchange for some goods or
services. The resources given up are money or money’s equivalent expressed in monetary
units. The Chartered Institute of Management Accountants, London defines cost as “the
amount of expenditure (actual or notional) incurred on, or attributable to a specified thing
or activity”. For a consumer, cost means price. For management, cost means 'expenditure
incurred' for producing a particular product or rendering a particular service.

8. Classify cost on the basis of variability.

Answer:
a. Fixed cost: A cost which tends to be unaffected by variations in volume of output
(e.g. Rent, Insurance etc). The cost which is incurred for a period, and which, within
certain output and turnover limits, tends to be unaffected by fluctuations in the levels
of activity (output or turnover). Its types are committed costs; policy and managed
costs; discretionary costs and step costs.
b. Variable cost: A cost which tends to vary directly and proportionately with the
volume of output (e.g. Direct material, Labour & overheads). It should be kept in
mind that the variable cost per unit is constant but the total cost changes
corresponding to the levels of output. It is always expressed in terms of units, not in
terms of time.
c. Semi-fixed (Semi-variable) cost: The cost, which is partly fixed and partly variable,
is semi-fixed or semi-variable cost (e.g. Telephone charges etc.). Because of the
variable element, they fluctuate with volume and because of the fixed element; they
do not change in direct proportion to output. Semi-variable costs change in the same
direction as that of the output but not in the same proportion.

9. How is cost management important for management?

Answer: Cost accounting provides detailed costing information to the management to
enable them to maintain effective control over stores and inventory, to increase efficiency
of the organisation and to check wastage and losses. Proper costing information makes it
possible for the management to distinguish between profitable and non-profitable
activities to maximise profits. It also provides a reliable basis for making estimates and
quoting tenders.
The producer can take necessary guidance from his costing records in case he is in a
position to fix or change the price charged.
 Proper maintenance of costing records provides costing data for comparisons which helps
the management in formulation of future lines of action and data as may be necessary for
preparation of profit and loss account and balance sheet at such intervals as may be
desired by the management.

10. Describe function of cost acounting in control of cost.

Answer: It is essential to examine each individual item of cost in the light of the services
or benefits obtained so that either the cost may be utilised to the fullest or it may be
recovered. This requires planning and use of standard for each item of cost for locating
deviations, if any, and taking remedial measures.

11. Classify cost on the basis of degree of traceability to the product.

Answer:
a. Direct Costs: The direct costs are those which can be easily traceable to a product or
costing unit or cost center or some specific activity, e.g. cost of wood for making
furniture. It is also called traceable cost. Direct cost can be allocated directly to
costing unit or cost center.
b. Indirect Costs : The indirect costs are difficult to trace to a single product or it is
uneconomic to do so. They are common to several products, e.g. salary of a factory
manager. It is also called common costs. Indirect costs have to be apportioned to
different products, if appropriate measurement techniques are not available. These
may involve some formula or base which may not be totally correct or exact.

12. Explain the concept of cost accounting?

Answer: Cost accounting may be regarded as “a specialised branch of accounting which
involves classification, accumulation, assignment and control of costs.”
The Costing terminology of C.I.M.A. London defines cost accounting as “The
establishment of budgets, standard costs and actual costs of operations, processes,
activities or products, and the analysis of variances, profitability or the social use of
funds.”
Cost accounting is different from costing in the sense that the former provides only the
basis and information for ascertainment of costs. Once the information is made available,
costing can be carried out arithmetically by means of memorandum statements or by
method of integral accounting.
13. How is cost management important to creditors of the company?
Answer: Investors, banks and other money lending institutions can base their judgment
about the profitability and future prospects of the enterprise on the costing records.

14. Explain cost ascertainment.

Answer: Ascertainment of cost of product or services rendered includes collection,
analysis of expenses and measurement of production at different stages of manufacture.
Cost ascertainment can be done either by post costing where the ascertainment of cost is
done based on actual information as recorded in financial books or by continuous costing
where the process of ascertainment is of a continuous nature i.e. cost information is
available as and when a particular activity is completed, so that the entire cost of a
particular job is available the moment it is completed.