Q. What is meant by Cost Accounting?

How does Cost Accounting differ in

technique and procedure from Financial Accounting?

Cost Accounting is the process of recording, classifying, analyzing, and

allocating all costs related to a product or service to determine the total cost
of production and help management in cost control and decision-making.
🔹 It helps in:
• Fixing selling prices
• Controlling operational costs
• Increasing efficiency
• Identifying wastages
Difference Between Cost Accounting and Financial Accounting:
Basis Cost Accounting Financial Accounting
To determine profit or loss and
Purpose To ascertain, control, and reduce cost
financial position
External users (shareholders,
Users Mainly internal users (management)
govt, banks)
Detailed analysis of cost per unit, process, Overall financial results of the
Scope
department business
Mostly future-oriented (budgeting, Historical (records past
Time Focus
forecasting) transactions)
Reporting As required by management (can be
Generally annual or quarterly
Frequency monthly/weekly)
Legal Legally mandatory under
Not mandatory, unless specified by law
Requirement Companies Act, etc.
Standard format prescribed by
Format No fixed format – as needed by business
law
 Q. What are various methods and techniques of Cost Accounting?

Cost Accounting methods are used to ascertain the cost of production or services.
The selection depends on the nature of the business.
1. Job Costing 5. Operation Costing
Used when production is done as per specific orders. Used when identical items are produced
Example: Furniture, printing press, construction. through different operations.
2. Contract Costing Example: Manufacturing industries.
Used for long-term construction contracts. 6. Unit or Output Costing
Example: Building bridges, roads, or buildings. Used when identical units are produced.
3. Batch Costing Example: Cement, bricks, bottles.
Used when products are made in batches. 7. Service Costing
Example: Medicines, bakery items. Used in service-based industries.
4. Process Costing Example: Transport, hospitals, hotels.
Used where production is done in a continuous
process.
Example: Oil refining, sugar, paint.
 Q. What are various methods and techniques of Cost Accounting?

Techniques are used for cost control and decision-making:

1. Standard Costing 4. Uniform Costing

Comparison of actual cost with standard cost to find Using the same costing principles across
variances. similar industries.
2. Marginal Costing 5. Historical Costing
Focuses on variable cost and helps in decision- Records costs after they are incurred.
making.
3. Absorption Costing
Considers both fixed and variable costs in product
costing.
 Q. Define the term COST. Discuss the interrelationship between Cost,
Expense and Loss?
Meaning of Cost:
"Cost is the value of resources sacrificed to achieve a specific objective like production or service."
It includes material, labor, and other overheads.

Term Meaning Nature Impact on Profit Example

Interrelationship Between Cost, Expense, and Loss:

Expenditure for making May or may not Cost of raw

Cost Productive
products/services reduce profit materials, wages

Cost charged to Profit &

Non-productive Rent, salaries,
Expense Loss A/c in the same Reduces profit
(in short-term) electricity
period

Cost without benefit or Reduces profit Loss from fire,

Loss Unproductive
failed revenue activity directly obsolete stock
Q. Define the term COST. Discuss the interrelationship between Cost,
Expense and Loss?
Meaning of Cost:
"Cost is the value of resources sacrificed to achieve a specific objective like production or service."
It includes material, labor, and other overheads.

Relationship Explained:
 Cost becomes Expense when the benefit is consumed in the same
period.
🔸 Example: If raw material is used to produce goods and the goods are
sold — it becomes an Expense.
 If goods are not sold, the cost is treated as Inventory/Asset, not Expense.
 Loss occurs when there is no benefit received from cost incurred or due
to accidental or abnormal activities.
 Q. Write Short-Notes on the Following:-
o Product Cost and Period Cost
o Relevant Range
o Difference between Cost Unit and Cost Centre
o Prime Cost and Conversion Cost
o Sunk Cost and Out of Pocket Costs
Product Cost and Period Cost:
• Product Cost:
Costs directly related to the production of goods (e.g., raw materials, direct labor, factory overhead).
These are inventoried until the product is sold.
• Period Cost:
Costs not directly tied to production. They are expensed in the period incurred (e.g., office rent, admin
salaries).

Relevant Range:
Definition:
The level of activity (production/sales) within which the cost behavior assumptions (fixed or variable) are valid.
For example, rent may remain constant for 0–10,000 units but may increase if production exceeds this level.
Q. Write Short-Notes on the Following:-
o Product Cost and Period Cost
o Relevant Range
o Difference between Cost Unit and Cost Centre
o Prime Cost and Conversion Cost
o Sunk Cost and Out of Pocket Costs
Difference between Cost Unit and Cost Centre:

Basis Cost Unit Cost Centre

A location, person, or item
Meaning Unit of product/service measured for costing
where costs are collected
Department, machine,
Example Per ton, per km, per student
employee
Helps in controlling and
Purpose Helps in costing products
assigning costs
Q. Write Short-Notes on the Following:-
o Product Cost and Period Cost
o Relevant Range
o Difference between Cost Unit and Cost Centre
o Prime Cost and Conversion Cost
o Sunk Cost and Out of Pocket Costs
Prime Cost and Conversion Cost:
• Prime Cost:
= Direct Material + Direct Labor + Direct Expenses
(Basic direct costs of production)
• Conversion Cost:
= Direct Labor + Factory Overheads
(Costs required to convert raw materials into finished goods)
 Q. Write Short-Notes on the Following:-
o Product Cost and Period Cost
o Relevant Range
o Difference between Cost Unit and Cost Centre
o Prime Cost and Conversion Cost
o Sunk Cost and Out of Pocket Costs

Sunk Cost and Out of Pocket Costs:

• Sunk Cost:
Past cost that cannot be recovered. It is irrelevant for decision-making.
E.g., Cost of a machine already purchased.
• Out of Pocket Cost:
Actual future cash outflows that will be incurred. It is relevant for decisions.
E.g., Payment of wages, electricity.
Q. What do you understand by Material Control? Explain about the Stage of
Material Control?

Material Control refers to the systematic and scientific control over the purchase,
storage, and usage of materials in such a way that:
• Materials are available whenever needed,
• No overstocking or understocking occurs,
• Wastage and theft are minimized, and
• Cost efficiency is maintained.
It ensures that the right material, in the right quantity, at the right time, and at
the right price is available for production.
Q. What do you understand by Material Control? Explain about the Stage of
Material Control?

Stages of Material Control:

Purchase Control: Receiving Control:
• Selecting reliable suppliers. • Inspection of received materials.
• Purchasing at the right price and • Checking against purchase order and invoice.
quality. • Preparing Goods Received Note (GRN).
• Ensuring timely delivery.
• Issuing purchase requisition and Issue and Usage Control:
placing purchase orders. • Issue of materials using Material Requisition
Slip.
Storage Control: • FIFO (First-In-First-Out) or LIFO (Last-In-First-
• Proper classification and coding of Out) methods.
materials. • Monitoring and preventing wastage and
• Safe and secure storage. pilferage.
• Use of stores ledger and bin cards.
• Maintaining minimum, maximum,
and reorder levels.
Q. Write Short-Notes on the Following:-
a) Economic Order Quantity(EOQ)
b) Stock Level
c) Just-In-Time Purchases
d) Inventory turnover Ratio
a) Economic Order Quantity (EOQ):
EOQ is the optimal order quantity that minimizes the total cost of ordering and holding inventory.
It helps avoid both stockouts and overstocking.
Formula:

2𝐴𝑂 Where:
EOQ = A = Annual demand
𝐶
O = Ordering cost per order
C = Carrying cost per unit per year
 Q. Write Short-Notes on the Following:-
a) Economic Order Quantity(EOQ)
b) Stock Level
c) Just-In-Time Purchases
d) Inventory turnover Ratio
b) Stock Level:
Stock levels refer to the quantity of materials maintained in inventory at different control points.
Types of Stock Levels:
• Minimum Level – The lowest quantity that must be maintained.
• Maximum Level – The highest quantity that should not be exceeded.
• Reorder Level – The level at which new stock should be ordered.
• Danger Level – Critical level below which emergency steps are needed.
• Average Stock Level – Average inventory maintained over a period.
Q. Write Short-Notes on the Following:-
a) Economic Order Quantity(EOQ)
b) Stock Level
c) Just-In-Time Purchases
d) Inventory turnover Ratio
c) Just-In-Time (JIT) Purchases:
JIT is an inventory management system where materials are ordered and received only when needed for
production.
It reduces carrying costs, wastage, and storage space.
Benefits:
• No excess inventory
• Saves storage cost
• Improved efficiency
Risk: Delay in supply can halt production.
Q. Write Short-Notes on the Following:-
a) Economic Order Quantity(EOQ)
b) Stock Level
c) Just-In-Time Purchases
d) Inventory turnover Ratio
d) Inventory Turnover Ratio:
This ratio indicates how many times inventory is sold or used during a period.
Formula:

Cost of Goods Sold (COGS)

Inventory Turnover Ratio= 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦

High ratio means fast movement of stock (good control),

Low ratio indicates slow movement or overstocking.
Q. Define the terms Spoilage & Defectives?

Spoilage:
Spoilage refers to materials or units that are damaged or ruined during production and cannot
be repaired or used in any form. These are permanent losses and often sold as scrap.
• Example: A glass bottle that breaks during production.
• Normal Spoilage: Expected loss, usually included in cost.
Abnormal Spoilage: Unexpected loss, charged to Profit & Loss account.
Defectives:
Defectives are products that do not meet quality standards but can be reworked or repaired to
bring them up to standard. These are not total losses.
Example: A shirt with loose stitching that can be fixed.
• Cost of rework is treated separately.
• If excessive, it may indicate quality control issues.
Q. What do you mean by Scrap? How will you treat it in Cost Accounts?
Scrap refers to the residual or waste material generated during the manufacturing process which has
low or no recoverable value. It is not the main product, but it can often be sold at a nominal price.
Examples: Metal shavings, sawdust, cuttings, trimmings, etc.

Treatment in Cost Accounts:

There are three main ways to treat scrap in cost accounting:
• Credited to Factory Overhead (Indirect Income)
 When scrap value is insignificant.
 Reduces the total factory overheads.
• Deducted from the Cost of Production
 When scrap is related to a particular job or process.
 Lowers the cost of that specific job.
• Shown as Other Income in Costing P&L Account
 When scrap sale has monetary value.
 Recorded separately as costing profit.
 Q. LIFO and FIFO Methods of Pricing Material Issues?
1. FIFO (First-In, First-Out) Method: 2. LIFO (Last-In, First-Out) Method:
Meaning: Meaning:
Under FIFO, the materials purchased first are issued first. It Under LIFO, the materials purchased last are issued
is based on the assumption that oldest inventory is used or first. It is based on the assumption that newest
sold first. inventory is used first.
Features: Features:
• Closing stock consists of the most recent purchases. • Closing stock consists of the oldest purchases.
• Material issues are priced at old cost, while closing • Material issues are priced at recent cost, while
stock is valued at new cost. closing stock is valued at old cost.
• Reflects actual physical flow in many businesses. • Useful in inflationary conditions.
Advantages: Advantages:
• Simple and logical. • Material cost reflects current prices.
• Closing stock reflects current prices. • Lower taxable income during price rise due to
• Acceptable under most accounting standards. higher cost of goods issued.
Disadvantages: Disadvantages:
• In times of inflation, profit appears higher, increasing • Closing stock may be undervalued.
tax liability. • Not accepted by some accounting standards
• Cost of goods issued may be undervalued. (e.g., IFRS).
Q. A firm requires 50 items every day for a machine. A fixed cost of 50 Rupees per order is
incurred for placing on order. The inventory carrying
Cost per item amount to rupees 0.02 per day. The lead period is 32 days. You are required to
compute:
 Daily demand (D) = 50 units/day
 Ordering cost (S) = ₹50 per order
a) Economic Order Quantity  Carrying cost per unit per day (H) = ₹0.02
b) Re-Order Level  Lead time (L) = 32 days

(a) Economic Order Quantity (EOQ):

Formula: 2𝐷𝑆
EOQ = 𝐻 First, calculate the annual demand (assuming 365 days):
D= 50 X 365 = 18,250 units/year

2𝑥 18250𝑥50
EOQ = = 500 Units
0.02𝑥365

(b) Re-order Level (ROL):

ROL = D x L = 50x32 = 1600 Units
Q. 2. (a) An employee of ABC Co. gets the following emoluments and benefits:
(i) Salary ₹25,000 pm
(ii) Dearness allowances: pm
• 1st ₹10,000 of salary ₹4,000
• On next ₹10,000 of salary ₹1,000
• On balance of every ₹10,000 ₹5,000 per part thereof
(iii) Employer's contribution
• to provident fund-------------------- 8% of salary and D.A.
• to ESI -------------------- 4% of salary and D.A.
(iv) Bonus 20% or salary and D.A.
(v) Other allowances ₹2,725 per annum
A, an employee works for 2000 hours per annum, out of which 175 hours are non-productive but
are treated as normal idle time. You are required to find out effective hourly cost of A
 Computation of Effective Hourly Cost of A Per Annum
Salary = 25,000 PM
Dearness Allowance = (4k+1k+2.5K) 7,500 PM
Salary + DA 32, 500 PM 3,90,000
Contribution to PF 8% of Salary & DA 31,200
Contribution to ESI 4% of Salary & DA 15,600
Bonus 20% of Salary & DA 78,000
Annual Allowances 2,725
Total Emoluments 5,17,525

Effective Annual Working Hours = Total Working Hours- Normal idle time hours
= 200 – 175 = 1825 hours
Effective Annual Working Hours = Total Working Hours- Normal idle time hours
= 200 – 175 = 1825 hours

Total Emoluments 𝑝𝑒𝑟 𝑦𝑒𝑎𝑟

Effective Hourly Rate = Effective Annual Working Hours

5,17,225
= = 283.57
1825
Q. What do you mean by Labour Turnover? What are costs associated with it? How
will you treat its cost in cost accounts?
Labour Turnover refers to the rate at which employees leave an organization and are
replaced by new employees within a given period. It is a measure of employee
stability and reflects the movement of workers in and out of the organization.
 It can occur due to:
• Resignation
• Retirement
• Dismissal
• Death
• Transfers
High labour turnover is generally undesirable as it affects productivity and increases
recruitment and training costs.
 Q. What do you mean by Labour Turnover? What are costs associated with it? How
will you treat its cost in cost accounts?

Costs Associated with Labour Turnover:

Idle Time
Recruitment Costs
Machines or operations
Advertising, placement charges, interview
remain idle due to shortage of
expenses.
skilled workers.
Training Costs
Increased Scrap & Defects
Cost of training new workers and trainers’
Due to inexperienced workers.
salaries.
Loss of Efficiency
Loss of Productivity
Reduced team coordination
Reduced output due to untrained or new
and morale.
workers.
Q. What do you mean by Labour Turnover? What are costs associated with it? How
will you treat its cost in cost accounts?

Treatment of Labour Turnover Cost in Cost Accounts:

Normal Labour Turnover:
Considered as a part of factory overheads.
Treated as indirect cost and distributed across all units.
Abnormal Labour Turnover:
Considered abnormal loss.
Not included in cost of production.
Debited directly to Costing Profit & Loss Account.
 Q. What is idle Time? Explain Various Courses leading to idle time and its treatment
in cost account?
Idle Time refers to the time during which workers are paid but no productive work
is performed. It is the difference between the time for which employees are paid
and the time they actually spend on productive work.
Idle time may arise due to internal or external reasons and is considered a loss to the
organization as it increases the cost without corresponding output.

Causes of Idle Time:

🔹 A. Normal Causes (Unavoidable):

🔹 B. Abnormal Causes (Avoidable or Unexpected):
These are routine causes and part of regular operations.
These are unusual and can often be controlled.
• Time lost between jobs
• Machine breakdown
(e.g., waiting for next job instructions or material)
• Power failure
• Machine setting and maintenance
• Shortage of raw materials or tools
• Tea breaks / rest intervals
• Strikes, lockouts, or poor supervision
• Time spent in checking and inspecting work
• Floods, fires, or accidents
• Waiting for tools or raw materials
Q. What is idle Time? Explain Various Courses leading to idle time and its treatment
in cost account?
Treatment of Idle Time in Cost Accounts:
🔹 A. Normal Idle Time:
• Treated as part of factory overheads.
• Distributed over all jobs using a suitable overhead absorption
rate.
• Example: Tea breaks, time between jobs, inspection time.
🔹 B. Abnormal Idle Time:
• Treated as a separate loss.
• Not included in product cost.
• Debited to Costing Profit and Loss Account.
• Example: Machine breakdown, strikes, power failure.
 Q. State the Basic Points in Halsey Incentive Scheme. What are the advantages and
disadvantages of the scheme?
Basic Points of Halsey Incentive Scheme:
 Purpose:
The Halsey Incentive Scheme is a wage incentive plan designed to motivate workers to increase their productivity by
paying extra wages for saving time.
 Time Standard:
A standard time (fixed time) is set for completing a job or task.
 Wages for Time Taken:
 If a worker completes the task in the standard time, he gets the normal wages.
 If the worker completes the task before the standard time, he is paid full wages for the actual time taken plus a
bonus.
 Bonus Calculation:
 The bonus is usually 50% of the wages saved (i.e., the time saved multiplied by the standard wage rate).
 Formula for bonus:
Bonus = 50% × (Time saved × Standard hourly rate)
 Payment:
The worker gets:
Total wages = Wages for actual time taken + Bonus for time saved
 Q. State the Basic Points in Halsey Incentive Scheme. What are the advantages and
disadvantages of the scheme?

Advantages of Halsey Incentive Scheme:

1.Encourages Efficiency:
Workers are motivated to complete tasks faster, improving overall productivity.
2.Simple and Easy to Understand:
The scheme is straightforward to calculate and explain.
3.Fair Bonus Sharing:
Both employer and employee share the benefits of increased efficiency (employer saves
costs; employee gets bonus).
4.No Risk to Worker:
If the worker does not save time, he still gets the full wage for actual time worked.
5.Improves Morale:
Incentives improve worker satisfaction and morale.
 Q. State the Basic Points in Halsey Incentive Scheme. What are the advantages and
disadvantages of the scheme?

Disadvantages of Halsey Incentive Scheme:

1.Time Standard May Not Always Be Accurate:
Setting a correct standard time is difficult and may lead to unfair bonuses.
2.Encourages Speed, Not Quality:
Workers may focus on speed and neglect quality or safety.
3.Not Suitable for Complex Jobs:
Tasks that are complex or have unpredictable times are difficult to apply this scheme to.
4.Bonus Rate Fixed:
The 50% bonus rate may not be motivating enough for some workers.
5.Limited to Time Saved Only:
Does not reward other improvements like better quality or innovation.
M/s SJBA Private Limited manufactures 20,000units of a product per month.
The cost of placing an order is ₹1,500. The purchase price of the raw material
is 100 per kg. The re-order period is 5 to 7 weeks. The consumption of raw
materials varies from 200 kg to 300 kg per week, with the average
consumption being 250 kg. The carrying cost of inventory is 9.75% per
annum. Lead time for emergency purchases is 5 days.
You are required to Calculate:
i) Re-order quantity
ii) Re-order level
iii) Maximum level
iv) Minimum level
v) Average stock level
vi) Danger level
The following particulars relate to a contract undertaken by Ali
Developers Engineers:
Material sent to site Rs. 85349
Labour engaged on site Rs. 74375
Plant installed at cost Rs. 15,000
Direct Expenditure Rs. 3167
Establishment Charges Rs. 4126
Material returned to stores Rs. 549
Work certified Rs. 195,000
Cost of work not certified Rs. 4500
Material in hand at the end of the year Rs. 1883
Wages accrued at the end of the year Rs. 2400
Direct expenses accrued at the end of the year Rs. 240
Value of plant at the end of year Rs. 11,000
The contract price has been agreed at Rs. 250,000
Cash received from contractee was Rs. 180,000

You are required to prepare Contract Account showing profit, Contractees’s

Account and to show suitable entries in the Balance sheet of contractor.
 Dr.

Contract Account
Particulars Particulars Cr. Rs.
Rs.
Materials Sent on site 85349 Material Closing 1883
Labor engaged on
Work in Process:
site 74375
Add Work
76775
Outstanding 2400 Certified 195,000
Plant installed at cost 15000 Add Work Uncertified 4500 199500
Direct
Material returned to store 549
Expenses 3167
Add
3407 Ending Value of Plant 11000
Outstanding 240
Establishment Charges 4126

Profit c/d 28275

212932 212932
Profit & Loss Profit b/d 28275
(28275 (23)(180000195000)
17400
(28275 (32​)(195000180000​)
Work in Progress (Reserve) 10875

28275 28275
 Contractee’s Account
Particulars Dr. Rs. Particulars Cr. Rs.
Balance c/d 180,000 Cash A/c 180,000

180,000 180,000
 Balance Sheet
As on 31st December 2010
Liabilities Rs. Assets Rs.
Outstanding Wages 2400 Material in hand 1883

Outstanding Direct Expenses 240 Work in Progress:

Work
Profit & Loss A/C 17400 Certified 195,000

Work
Uncertified 4500

Less Reserve for

contingencies (10875)

Less Cash
8625
Received (180000)

Material in store 549

Plant 11000
Q. What do you understand by Overtime Premium in Cost Accounting? What is the treatment of overtime
and how to control it? The time card of a worker shows that in a normal week of 40 hours, he worked for
52 hours at the rate of ₹15 per hour. Taking overtime premium at 100% of time rate of ₹15 per hour,
calculate the amount of group wages.
Overtime means the time worked beyond the normal working hours (e.g., over 40 hours per week).
Overtime Premium is the extra amount paid to a worker for working overtime, over and above the normal
wage rate.
✅ Example:
If normal rate = ₹15/hour
And overtime premium = 100%
Then, overtime wage = ₹15 (normal) + ₹15 (premium) = ₹30/hour
Q. What do you understand by Overtime Premium in Cost Accounting? What is the treatment of overtime
and how to control it? The time card of a worker shows that in a normal week of 40 hours, he worked for
52 hours at the rate of ₹15 per hour. Taking overtime premium at 100% of time rate of ₹15 per hour,
calculate the amount of group wages.

Treatment of Overtime in Cost Accounting:

1.Job-Specific Overtime:
If overtime is for a specific job, the full overtime wages (normal + premium) are charged to
that job cost.
2.General Overtime:
If overtime is due to general work pressure or lack of planning, the premium part is treated as
overhead and distributed over all jobs.
3.Abnormal Overtime:
If overtime is due to unusual reasons (e.g., machine breakdown, strikes), it is treated as a loss
and transferred to the Costing Profit & Loss Account.
 Q. What do you understand by Overtime Premium in Cost Accounting? What is the treatment of overtime
and how to control it? The time card of a worker shows that in a normal week of 40 hours, he worked for
52 hours at the rate of ₹15 per hour. Taking overtime premium at 100% of time rate of ₹15 per hour,
calculate the amount of group wages.

How to Control Overtime: Calculation of Group

• Proper Planning of Work Schedules Wages:
• Hiring Additional Staff if Regular Overtime Occurs • Normal Wages =
• Preventing Idle Time by Good Supervision
40 hrs × ₹15 =
• Using Workload Forecasts for Better Manpower Management
• Keeping Records & Analyzing Overtime Reasons ₹600
• Overtime Wages =
Numerical Problem: 12 hrs × ₹30 =
Given:
• Normal working hours = 40 hours/week ₹360
• Actual hours worked = 52 hours • ✅ Total Group
• Time rate = ₹15/hour Wages = ₹600 +
• Overtime premium = 100% of ₹15 = ₹15/hour
• So total overtime wage = ₹15 (normal) + ₹15 (premium) = ₹30/hour
₹360 = ₹960
• Overtime hours = 52 - 40 = 12 hours
 Q. Write Short-Notes on the Following-
a) Over-absorption of Overheads
b) Under-absorption of Overheads
Over-absorption of Overheads:
Over-absorption of overheads occurs when the overheads charged (or absorbed) to products are
more than the actual overheads incurred.
📌 Formula:
Over-absorption = Absorbed Overheads – Actual Overheads
📌 Reason:
Happens when the predetermined overhead rate is higher than required or production was higher
than estimated.
📌 Treatment in Cost Accounts:
• The excess amount is deducted from the total cost.
• Adjusted through Costing Profit & Loss A/c if significant.
📌 Example:
If actual overhead = ₹10,000 and absorbed overhead = ₹12,000 → Over-absorption = ₹2,000
 Q. Write Short-Notes on the Following-
a) Over-absorption of Overheads
b) Under-absorption of Overheads
Under-absorption of Overheads:
Under-absorption occurs when the overheads charged (absorbed) to products are less than the
actual overheads incurred.
📌 Formula:
Under-absorption = Actual Overheads – Absorbed Overheads
📌 Reason:
Happens when the overhead rate is set too low or the actual production is less than expected.
📌 Treatment in Cost Accounts:
• The short amount is added to the total cost.
• If the amount is large, it is transferred to the Costing Profit & Loss A/c.
📌 Example:
If actual overhead = ₹10,000 and absorbed = ₹8,000 → Under-absorption = ₹2,000
Q. Write a short-note on unit costing method pf cost ascertainment?
Unit costing is a costing method used to ascertain the cost per unit of a product. It is
suitable for companies that produce identical, standardized, and continuous products.
📌 Also known as Output Costing.
Features:
• Used for Homogeneous Products
– Products are identical and produced in large quantities (e.g., bricks,
cement, sugar).
• Cost Per Unit = Total Cost ÷ Total Units Produced
• Costs are Collected Period-wise
– Direct and indirect costs are collected weekly, monthly, or annually.
Q. Write a short-note on unit costing method pf cost ascertainment?
Unit costing is a costing method used to ascertain the cost per unit of a product. It is
suitable for companies that produce identical, standardized, and continuous products.
📌 Also known as Output Costing.
Format of Cost Sheet in Unit Costing:
• Prime Cost = Direct Material + Direct
Labour + Direct Expenses
• Factory Cost = Prime Cost + Factory
Overheads
• Total Cost = Factory Cost + Administration
& Selling Overheads
• Cost per Unit = Total Cost ÷ Total Units
Produced
Q. What is a Cost Sheet? What are various purpose of preparing Cost-Sheet?
A Cost Sheet is a statement that shows the detailed cost of producing a product or service during a
specific period.
It includes all types of costs such as:
• Direct Costs (like material, labour)
• Indirect Costs (like factory and office expenses)
📌 It helps to find out the total cost and the cost per unit of the product.
Q. What is a Cost Sheet? What are various purpose of preparing Cost-Sheet?

Purpose of Preparing a Cost Sheet:

1.To Find Total and Per Unit Cost:
It helps to calculate the exact cost per unit of a product.
2.To Control Costs:
By comparing past and present cost sheets, unnecessary expenses can be identified and controlled.
3.To Fix the Selling Price:
Helps in setting a reasonable selling price after adding desired profit.
4.To Compare Cost Performance:
Useful for comparing costs of different periods or different departments.
5.For Decision-Making:
Useful in budgeting, tendering, pricing, and profitability analysis.
6.To Analyze Each Cost Element:
Helps in breaking down costs into material, labour, overheads etc., and understanding where money is being
spent.
7.To Provide Information to Management:
Management can use the cost sheet for planning and control purposes.
Q. Explain the treatment of administration overheads?
Administration Overheads refer to the indirect costs related to the general management and
administration of the business.
These do not relate directly to production, selling, or distribution.
📌 Examples include:
• Office salaries
• Rent of office building
• Printing & stationery
• Telephone & internet bills
• Depreciation of office equipment
Treatment of Administration Overheads:
There are two main approaches for treating administration overheads in cost
accounting:

1. Apportioned to Cost of Production:

2. Treated as Period Cost or Charged to Costing Profit & Loss A/c:
Q. Explain the treatment of administration overheads?
1. Apportioned to Cost of Production:
When the administrative work is related to production (e.g., factory management), the
administration overheads are added to the cost of production.
✅ These overheads become part of total product cost.
📌 Formula:
Cost of Production = Factory Cost + Administration Overheads

2. Treated as Period Cost or Charged to Costing Profit & Loss A/c:

When administration expenses are not related to production (like general management,
policy-making), they are considered period costs.
✅ These are not included in product cost but are transferred to Costing Profit & Loss
Account.
Q. Describe the factors which determine the choice between using process costing
and specific order costing(Job Costing) in a manufacturing Organisation?
🔹 Process Costing:
Used when production is continuous and units are identical (homogeneous). Example: cement, paint, oil
industries.
🔹 Job Costing (Specific Order Costing):
Used when products are made as per customer’s order, and each job is different. Example: printing press,
furniture, machine tools.

Factors Determining the Choice Between Process Costing and Job Costing:
Nature of Product:
• Job Costing: Used when products are custom-made or different from one another.
• Process Costing: Used for standardized and mass-produced goods.
Production Type:
• Job Costing: Suitable for intermittent or non-repetitive production (one job at a time).
• Process Costing: Suitable for continuous production of the same product.
Customer Orders, Cost Collection, Nature of Work, Volume of Production & Cost Control.
Q. Distinguish between Job, Batch and Contract Costing. Explain Clearly the reason
why these methods are different?

Basis Job Costing Batch Costing Contract Costing

Customised and specific to one Mass production of similar units Big construction or civil
Nature of Work
order in one batch projects

Size of Work Small to medium Medium Very large

Work done at different sites

Location of Work Usually in factory In factory
(off-site)

Cost Unit Per Job Per Batch Per Contract

Cost Collection Costs collected job-wise Costs collected batch-wise Costs collected contract-wise

Duration Short-term Medium-term Long-term

Road construction, buildings,
Examples Furniture, printing orders Toys, garments, electronic parts
dams
Customer Specific Yes Sometimes Yes
Q. Distinguish between Job, Batch and Contract Costing. Explain Clearly the reason
why these methods are different?
Why These Methods Are Different:
Nature & Type of Work:
– Each method suits a different type of work:
📌 Job = Custom work,
📌 Batch = Identical units in groups,
📌 Contract = Long-term large projects.
Volume & Production Scale:
– Job costing suits low volume,
– Batch costing suits medium volume,
– Contract costing suits high-value, long-duration work.
Cost Collection Method:
– Job-wise, batch-wise, and contract-wise cost tracking differs as per the structure and scale of work.
Execution Location:
– Job & Batch work is usually done in a factory,
– Contract work is done at the client’s site.
Q. What is Job Cost-Sheet? Prepare a proforma statement of Job Cost-Sheet?
A Job Cost Sheet is a detailed statement that shows the costs incurred on a specific job
or work order.
It is used in Job Costing system to record and control costs for each individual job.
Purpose of Job Cost Sheet:
• To ascertain the total cost of a particular job.
• To help in cost control and cost comparison.
• To determine the selling price of a job.
• To maintain records job-wise.
 JOB COST SHEET
-------------------------------------------------------
Job No.: ______ Customer Name: ______________
Order Date: ______ Completion Date: ____________
Proforma of Job Cost Sheet:
Particulars Amount (₹)
Component Explanation
------------------------------------------------------- Raw materials used in that particular
1. Direct Materials XXXX Direct Material
2. Direct Labour XXXX job
3. Direct Expenses XXXX
------------------------------------------------------- Wages paid to workers directly
Direct Labour
**Prime Cost** XXXX involved in the job
-------------------------------------------------------
4. Factory/Works Overheads XXXX Any direct cost other than material
------------------------------------------------------- Direct Expenses
and labour
**Factory Cost / Works Cost** XXXX
------------------------------------------------------- Factory Indirect costs like electricity,
5. Administration Overheads XXXX
------------------------------------------------------- Overheads depreciation, etc.
**Cost of Production** XXXX
Administration
------------------------------------------------------- Office expenses related to the job
6. Selling & Distribution Overheads XXXX Overheads
-------------------------------------------------------
**Total Cost / Cost of Sales** XXXX Selling & Marketing, packing, transportation
------------------------------------------------------- Distribution OH costs
7. Profit (if any) XXXX
------------------------------------------------------- Profit Added as margin
**Selling Price** XXXX
------------------------------------------------------- Selling Price Final price quoted to the customer
Q. Explain briefly the distinguish features of Contract Costing?
Contract Costing is a method of cost accounting used for large, long-term construction projects such
as roads, buildings, dams, or bridges.
Here, each contract is treated as a separate cost unit, and costs are recorded contract-wise.
Distinguishing Features of Contract Costing:
Work is Done at Customer's Site
• Unlike factory-based jobs, in contract costing the work is executed on-site, usually at the
client's location.
Large-Scale and Long-Duration Projects
• Contracts are generally huge in size and take several months or years to complete.
Each Contract is a Separate Cost Unit
• Costs are maintained separately for each contract (i.e., Contract No. 101, 102, etc.).
Direct Costs are High
• Most of the costs like materials, labour, and plant are directly assigned to the contract.
Progress Payments (Work Certified)
• Payments are usually made in installments based on work completed and certified by an
engineer.
Q. What do you understand by Contact Costing? In which Industries is it applied?
Contract Costing is a method of cost accounting used to calculate the cost of large, long-
term projects known as contracts.
In this system, each contract is treated as a separate cost unit, and all costs related to that
contract (materials, labour, overheads) are recorded contract-wise.
It is suitable for construction work carried out at the client’s location, often taking several
months or years to complete.
Features of Contract Costing:
• Work is executed on-site (outside the factory).
• Contracts are large-scale and long-duration.
• Each contract has separate cost tracking.
• Costs include direct materials, direct labour,
subcontracting, equipment, and overheads.
• Payments are received in instalments based on
work completed (work certified).
Q. What do you understand by Contact Costing? In which Industries is it applied?

Industries Where Contract Costing is Applied:

Industry Example of Contract
Construction Industry Roads, bridges, tunnels, highways
Residential buildings, commercial
Real Estate & Building
complexes
Shipbuilding Industry Manufacturing of ships or submarines
Civil Engineering Firms Dams, canals, irrigation projects
Installation of plants, pipelines, power
Mechanical/Electrical Contracting
stations
Interior or Design Contractors Complete office or home interior work
Tower installation or laying underground
Telecom or Tower Contractors
cables
 Q. What is meant by retention money in the context of contract costing? What is its
Objective?
In Contract Costing, Retention Money refers to the portion of the contract amount that is withheld by
the contractee (client) until the full completion and satisfactory performance of the contract.
It is generally a fixed percentage (e.g., 10%) of the value of work certified, and is not paid immediately
to the contractor.
Objective Explanation
It acts as a security deposit to ensure that the contractor
1. To Ensure Proper Completion
completes the work as per the agreement.
If any defect or fault is found after completion, the client
2. To Cover Defects or Repairs
can use the retention money to get it corrected.
3. To Ensure Contractor Encourages the contractor to maintain quality and follow
Accountability specifications strictly.
Prevents contractors from leaving the job midway or after
4. To Prevent Early Exit
receiving most payments.
5. To Cover Final Inspection Retention money is only released after final inspection and
Issues satisfaction of the contractee.
Q. Write briefly the procedure of preparing abnormal loss and normal loss
Account?
What is Normal Loss?
Normal Loss is the unavoidable loss that naturally occurs
during the production process due to reasons like:
 Evaporation,
 Breakage,
 Shrinkage,
 Spoilage, etc.
🔸 It is expected and planned, so its cost is absorbed by the
remaining good units.
What is Abnormal Loss?
Abnormal Loss is the unexpected loss that occurs due to:
 Accidents,
 Negligence,
 Fire,
 Machine failure, etc.
🔸 It is not part of normal cost, so it is separately recorded and debited to the Profit &
Loss Account.
Q. Write briefly the procedure of preparing abnormal loss and normal loss
Account?
Procedure to Prepare Normal Loss & Abnormal Loss Account:
🔹 A. Normal Loss Treatment:
• No Separate Account is Prepared for normal loss.
• The cost of normal loss is distributed over the good units.
• Scrap value (if any) from normal loss is credited to the Process Account.
Example Entry (in Process Account):
Scrap Value from Normal Loss A/c Dr.
To Process Account
Q. Write briefly the procedure of preparing abnormal loss and normal loss
Account?
Procedure to Prepare Normal Loss & Abnormal Loss Account:
🔹 B. Abnormal Loss Account Procedure:
 Open a separate Abnormal Loss Account.
 Calculate the cost per unit of good units.
 Multiply that cost with units lost abnormally.
 Debit the Abnormal Loss Account and credit the Process Account.
 If any scrap value is realized from abnormal loss, it is credited to Abnormal Loss A/c.
 Net loss is transferred to Profit & Loss A/c.
Transaction Journal Entry
Abnormal Loss A/c Dr.
To record abnormal loss
To Process A/c
Bank A/c Dr.
Scrap value from abnormal loss
To Abnormal Loss A/c
Profit & Loss A/c Dr.
Transfer to P&L
To Abnormal Loss A/c
Q. Write a short note on Cost Ledger Control Account?
The Cost Ledger Control Account is an important account maintained in non-integrated cost
accounting systems (i.e., when financial and cost accounts are kept separately).
It acts as a link between cost books and financial books, and it records all financial transactions
that affect the cost accounts, such as materials purchased, wages paid, overheads, etc.
🔸 It is also called the General Ledger Adjustment Account.

Feature Description
Type of Account Real Account (Asset/Liability)
Debited when expenses are incurred, credited when
Side of Entry
payments are made
Maintained In Cost Ledger (non-integrated accounting system)
The balance represents net transactions between
Balancing
cost and financial books
Q. Write a short note on Cost Ledger Control Account?
The Cost Ledger Control Account is an important account maintained in non-integrated cost
accounting systems (i.e., when financial and cost accounts are kept separately).
It acts as a link between cost books and financial books, and it records all financial transactions
that affect the cost accounts, such as materials purchased, wages paid, overheads, etc.
🔸 It is also called the General Ledger Adjustment Account.

Purpose of Cost Ledger Control Account:

• To keep track of all entries coming from the financial books into the cost books.
• To balance the cost ledger with the financial ledger.
• To ensure that cost accounts are self-contained and can show a full picture of
costing records.
Q. What are Cost Control Accounts? Describe their Advantages?
Cost Control Accounts are summary accounts maintained in cost accounting systems,
especially in non-integrated accounts, to record, monitor, and control various cost elements
like:
• Material costs
• Labour costs
• Overheads
• Work-in-progress (WIP)
• Finished goods
These accounts help track and control costs in a systematic and classified manner.
They are usually maintained in the Cost Ledger.
Q. What are Cost Control Accounts? Describe their Advantages?

No. Advantage Explanation

Helps monitor costs under each head separately
1 Better Cost Control
and identify overspending.
Proper classification of materials, labour, and
2 Clarity and Classification
overheads for analysis.
Reduces chances of errors and improves
3 Accuracy in Costing
accuracy in cost data.
Easier to reconcile cost accounts with financial
4 Quick Reconciliation
accounts.
Efficiency in Decision Provides reliable data for pricing, budgeting, and
5
Making management decisions.
Supports internal checks by providing individual
6 Internal Control
control accounts.
Q. Insert specimen entries in the following accounts of cost ledger, explaining from
what sources such entries are normally obtained:
a) Stores Ledger Control A/c
b) Factory Over Head Control A/c
c) Wages Control A/c
d) W-I-P Ledger Control A/c
e) Finished Goods Ledger Control A/c
f) Cost Ledger Control A/c
g) Cost of ales A/c
1. Stores Ledger Control Account
👉 Purpose: Records all material transactions.

Date Particulars Dr. (₹) Cr. (₹)

To Cost Ledger
Control A/c
20,000
(Materials
Purchased)
By W-I-P Control
A/c (Direct Material
Issued)
By Factory
Overhead Control
A/c (Indirect
Material Issued)
📌 Source: Purchase records, material requisition notes.
2. Wages Control Account
👉 Purpose: Records all direct and indirect wages.

Date Particulars Dr. (₹) Cr. (₹)

To Cost Ledger
Control A/c (Total 15,000
wages paid)
By W-I-P Ledger
Control A/c (Direct
wages)
By Factory
Overhead Control
A/c (Indirect wages)
📌 Source: Wage sheets, payroll registers.
3. Factory Overhead Control Account
👉 Purpose: Records all indirect production costs.

Date Particulars Dr. (₹) Cr. (₹)

To Stores Ledger
Control A/c 2,000
(Indirect material)
To Wages Control
5,000
A/c (Indirect wages)
By W-I-P Control
A/c (Overhead
absorbed)
📌 Source: Factory overhead vouchers, wage analysis sheets.
4. W-I-P Ledger Control Account
👉 Purpose: Tracks cost of incomplete production.
Date Particulars Dr. (₹) Cr. (₹)
To Stores Ledger
Control A/c (Direct 12,000
materials)
To Wages Control
10,000
A/c (Direct wages)
To Factory
Overhead Control
6,500
A/c (Factory OH
absorbed)
By Finished Goods
Ledger Control A/c
(Completed jobs)
📌 Source: Job cards, production reports.
5. Finished Goods Ledger Control Account
👉 Purpose: Records value of completed goods.

Date Particulars Dr. (₹) Cr. (₹)

To W-I-P Ledger
Control A/c
25,000
(Completed
production)
By Cost of Sales A/c
(Goods sold)
📌 Source: Production reports, stock issue notes.
6. Cost Ledger Control Account
👉 Purpose: Interface between cost accounts and financial accounts.

Date Particulars Dr. (₹) Cr. (₹)

By Stores Ledger
Control A/c
(Materials
Purchased)
By Wages Control
A/c (Wages Paid)

📌 Source: Financial books.

7. Cost of Sales Account
👉 Purpose: Records cost of goods sold.

Date Particulars Dr. (₹) Cr. (₹)

To Finished Goods
Ledger Control A/c 20,000
(Cost of goods sold)
By Costing Profit &
Loss A/c (Transfer
to P&L)
📌 Source: Sales records, stock issues.
 Q. What do you understand by reconciliation of cost and financial accounts. Why is
reconciliation of cost and financial accounts of an organization is necessary? Explain
the possible reason for the difference btw profits shown by both the accounts?
Reconciliation of cost and financial accounts means matching the profit or loss as per the cost accounts with
the profit or loss as per the financial accounts, and identifying the reasons for the difference between the two.
This is done by preparing a Reconciliation Statement or Memorandum Reconciliation Account.

Reas
Why Reconciliation is Necessary?

on Purpose Explanation
No.

1 To ensure accuracy It helps verify the correctness of cost and financial records.

2 To detect errors It reveals errors or omissions in either set of accounts.

3 To identify cost control issues Shows where costs may have been over or under-recorded.

4 For management decisions Ensures reliable data is used for budgeting and pricing decisions.

Legal or statutory In some cases, companies must reconcile both accounts

5
requirement periodically.
 Q. What do you understand by reconciliation of cost and financial accounts. Why is
reconciliation of cost and financial accounts of an organization is necessary? Explain
the possible reason for the difference btw profits shown by both the accounts?

No. Reason Explanation

Different treatment of Cost accounts may exclude financial incomes (e.g., interest received) or expenses
Reasons for Differences in Profits of Cost and Financial Accounts:

1
certain items (e.g., loss on sale of assets).
Over/Under-Absorption of In cost accounts, overheads are often estimated and may differ from actuals in
2
Overheads financial accounts.
Stock Valuation Opening and closing stock may be valued differently in cost and financial books
3
Differences (e.g., FIFO vs. LIFO).
Items like dividends, goodwill written off, interest paid/received are in financial
4 Purely Financial Items
accounts only.
These are excluded from cost accounts but included in financial accounts (e.g., fire
5 Abnormal Gains or Losses
loss, theft).
Different Depreciation Cost accounts may use machine hour method, while financial accounts may use
6
Methods straight-line or WDV method.
Notional Charges in Cost Sometimes cost accounts include notional rent or interest that do not appear in
7
Accounts financial accounts.