Costing Theory Questions-TH

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COSTING FREE THEORY QUESTION

BOOKLET
This booklet contains a compilation of all the important

Theory Questions compiled from Study Material, Past
papers, RTP’s, MTP’s for CA Inter Costing (New Syllabus).
Theory Questions will constitute 14 marks in CA Inter

Costing Exams. And it is normally noticed that majorly
repetitive questions (from past papers, RTP, MTP) are asked
by ICAI as far as theory is concerned. So, it is recommended
to revise these questions 2-3 times before the exams.
The PDF is hardly 35 pages & can be revised in just 2-3

hours. Do refer the same.
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Question No. 1 (Past Paper May 22, 5 marks)

Distinguish between Job costing and Process Costing. (Any five points of differences)
Answer:
Job Costing Process Costing

(i) A Job is carried out or a product is The process of producing the product has a
produced by specific orders. continuous flow and the product produced is
homogeneous.
(ii) Costs are determined for each job. Costs are compiled on time basis i.e., for
production of a given accounting period for
each process or department.
(iii) Each job is separate and independent Products lose their individual identity as they
of other jobs. are manufactured in a continuous flow.
(iv) Each job or order has a number and The unit cost of process is an average cost for
costs are collected against the same the period.
job number.
(v) Costs are computed when a job is Costs are calculated at the end of the cost
completed. The cost of a job may be period. The unit cost of a process may be
determined by adding all costs against computed by dividing the total cost for the
the job. period by the output of the process during that
period.
(vi) As production is not continuous and Process of production is usually standardized
each job may be different, so more and is therefore, quite stable. Hence control
managerial attention is required for here is comparatively easier.
effective control.

Briefly explain the essential features of a good Cost Accounting System.
Answer:
The essential features, which a good cost accounting system should possess, are as follows:
a. Informative and simple: Cost accounting system should be tailor-made, practical simple
and capable of meeting the requirements of a business concern. The system of costing
should not sacrifice the utility by introducing inaccurate and unnecessary details.
b. Accurate and authentic: The data to be used by the cost accounting system should be
accurate and authenticated; otherwise it may distort the output of the system and a wrong
decision may be taken.
c. Uniformity and consistency: There should be uniformity and consistency in classification,

treatment and reporting of cost data and related information. This is required for
benchmarking and comparability of the results of the system for both horizontal and
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vertical analysis.
d. Integrated and inclusive: The cost accounting system should be integrated with other
systems like financial accounting, taxation, statistics and operational research etc. to have
a complete overview and clarity in results.
e. Flexible and adaptive: The cost accounting system should be flexible enough to make
necessary amendment and modifications in the system to incorporate changes in
technological, reporting, regulatory and other requirements.
f. Trust on the system: Management should have trust on the system and its output. For
this, an active role of management is required for the development of such a system that
reflects a strong conviction in using information for decision making.

Write down the treatment of following items associated with purchase of materials.
i. Cash discount
ii. IGST
iii. Demurrage
iv. Shortage
v. Basic Custom Duty
Answer:
S.No. Items Treatment

i. Cash Discount Cash discount is not deducted from the purchase price. It is
treated as interest and finance charges. It is ignored.
ii. Integrated Goods Integrated Goods and Service Tax (IGST) is paid on inter-
and Service Tax state supply of goods and provision of services and collected
(IGST) from the buyers. It is excluded from the cost of purchase if
credit for the same is available. Unless mentioned specifically
it should not form part of cost of purchase.
iii. Demurrage Demurrage is a penalty imposed by the transporter for delay
in uploading or offloading of materials. It is an abnormal cost
and not included with cost of purchase
iv. Shortage Shortage in materials are treated as follows:
Shortage due to normal reasons: Good units absorb the cost
of shortage due to normal reasons. Losses due to breaking of
bulk, evaporation, or due to any unavoidable conditions etc. are
the reasons of normal loss.
Shortage due to abnormal reasons: Shortage arises due to
abnormal reasons such as material mishandling, pilferage, or
due to any avoidable reasons are not absorbed by the good
units. Losses due to abnormal reasons are debited to costing
profit and loss account.
v Basic Custom Duty Basic Custom duty is paid on import of goods from outside
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India. It is added with the purchase cost.

Explain the treatment of Overtime Premium in following situations:
i. SV & Co. wants to grab some special orders, and overtime is required to meet the same.
ii. Dept. X has to work overtime to make up a shortfall in production due to some fault of
management in dept. Y.
iii. S Ltd. has to work overtime regularly throughout the year as a policy due to the workers'
shortage.
iv. Due to flood in Odisha, RS Ltd. has to work overtime to complete the job.
v. A customer requested the company MN Ltd. to expedite the job because of his urgency of
work.
Answer:
Treatment of Overtime premium in different situations

Situation Treatment
i. SV & Co. wants to grab some If overtime is required to cope with general
special orders, and overtime is production programmes or for meeting urgent
required to meet the same. orders, the overtime premium should be
treated as overhead cost of the particular
department or cost center which works
overtime.
ii. Dept. X has to work overtime to If overtime is worked in a department due to
make up a shortfall in production the fault of another department, the overtime
due to some fault of management premium should be charged to the latter
in dept. Y. department (Y).
iii. S Ltd. has to work overtime The overtime premium is treated as a part of
regularly throughout the year as employee cost and job is charged at an
a policy due to the workers’ effective average wage rate.
shortage.
iv. Due to flood in Odisha, RS Ltd. Overtime worked on account of abnormal
has to work overtime to complete conditions such as flood, earthquake etc.,
the job. should not be charged to cost, but to Costing
Profit and Loss Account.
v A customer requested the Where overtime is worked at the request of
company MN Ltd. to expedite the the customer, overtime premium is also
job because of his urgency of charged to the job/ customer directly.
work.

Discuss briefly some of the criticism which may be levelled against the Standard Costing System.
Answer:
Criticism of Standard Costing
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i. Variation in price: One of the chief problem faced in the operation of the standard costing
system is the precise estimation of likely prices or rate to be paid. The variability of prices
is so great that even actual prices are not necessarily adequately representative of cost.
But the use of sophisticated forecasting techniques should be able to cover the price
fluctuation to some extent. Besides this, the system provides for isolating uncontrollable
variances arising from variations to be dealt with separately.
ii. Varying levels of output: If the standard level of output set for pre-determination of
standard costs is not achieved, the standard costs are said to be not realised. However,
the statement that the capacity utilisation cannot be precisely estimated for absorption
of overheads may be true only in some industries of jobbing type. In vast majority of
industries, use of forecasting techniques, market research, etc., help to estimate the
output with reasonable accuracy and thus the variation is unlikely to be very large. Prime
cost will not be affected by such variation and, moreover, variance analysis helps to
measure the effects of idle time.
iii. Changing standard of technology: In case of industries that have frequent technological
changes affecting the conditions of production, standard costing may not be suitable. This
criticism does not affect the system of standard costing. Cost reduction and cost control
is a cardinal feature of standard costing because standards once set do not always remain
stable. They have to be revised.
iv. Attitude of technical people: Technical people are accustomed to think of standards as
physical standards and, therefore, they will be misled by standard costs. Since technical
people can be educated to adopt themselves to the system through orientation courses, it
is not an insurmountable difficulty.
v. Mix of products: Standard costing presupposes a pre-determined combination of products

both in variety and quantity. The mixture of materials used to manufacture the products
may vary in the long run but since standard costs are set normally for a short period, such
changes can be taken care of by revision of standards.
vi. Level of Performance: Standards may be either too strict or too liberal because they may
be based on (a) theoretical maximum efficiency, (b) attainable good performance or (c)
average past performance. To overcome this difficulty, the management should give
thought to the selection of a suitable type of standard. The type of standard most
effective in the control of costs is one which represents an attainable level of good
performance.
vii. Standard costs cannot possibly reflect the true value in exchange: If previous historical
costs are amended roughly to arrive at estimates for ad hoc purposes, they are not
standard costs in the strict sense of the term and hence they cannot also reflect true
value in exchange. In arriving at standard costs, however, the economic and technical
factors, internal and external, are brought together and analysed to arrive at quantities
and prices which reflect optimum operations. The resulting costs, therefore, become
realistic measures of the sacrifices involved.
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viii. Fixation of standards may be costly: It may require high order of skill and competency.
Small concerns, therefore, feel difficulty in the operation of such system.

Identify the methods of costing from the following statements:
i. Costs are directly charged to a group of products.
ii. Nature of the product is complex and method cannot be ascertained.
iii. Costs ascertained for a single product.
iv. All costs are directly charged to a specific job.
v. Costs are charged to operations and averaged over units produced.
Answer:
Method of costing followed:

Situation Method of costing
i. Costs are directly charged to a group of products. Batch costing
ii. Nature of the product is complex and method cannot Multiple costing
be ascertained.
iii. Cost is ascertained for a single product. Unit/ Single/Output costing
iv. All costs are directly charged to a specific job. Job costing
v. Costs are charged to operations and averaged over Job costing
units produced.
Question No. 7 (Past Paper Nov 22, 5 marks)

Which system of inventory management is known as 'Demand pull' or 'Pull through' system of
production? Explain. Also, specify the two principles on which this system is based.
Answer:
Just in Time (JIT) Inventory Management is also known as ‘Demand pull’ or ‘Pull through’ system
of production. In this system, production process actually starts after the order for the products
is received. Based on the demand, production process starts and the requirement for raw materials
is sent to the purchase department for purchase.
It is a system of inventory management with an approach to have zero inventories in stores.

According to this approach material should only be purchased when it is actually required for
production.
JIT is based on two principles

i. Produce goods only when it is required and
ii. The products should be delivered to customers at the time only when they want.
Question No. 8 (Past Paper Nov 22, 5 marks)

Indicate, for following items, whether to be shown in the Cost Accounts or Financial Accounts:
i. Preliminary expenses written off during the year
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ii. Interest received on bank deposits

iii. Dividend, interest received on investments
iv. Salary for the proprietor at notional figure though not incurred
v. Charges in lieu of rent where premises are owned
vi. Rent receivables
vii. Loss on sale of Fixed Assets
viii. Interest on capital at notional figure though not incurred
ix. Goodwill written off
x. Notional Depreciation on the assets fully depreciated for which book value is Nil.
Answer:
S. No. Items Accounts

Preliminary expenses written off during the year Financial Accounts
Interest received on bank deposits Financial Accounts
Dividend, interest received on investments Financial Accounts
Salary for the proprietor at notional figure though not Cost Accounts
incurred
Charges in lieu of rent where premises are owned Cost Accounts
Rent receivables Financial Accounts
Loss on the sales of Fixed Assets Financial Accounts
Interest on capital at notional figure though not Cost Accounts
incurred
Goodwill written off Financial Accounts
Notional Depreciation on the assets fully depreciated Cost Accounts
for which book value is nil
Question No. 9 (Past Paper, Nov 22, 5 marks)

PP Limited is in the process of implementation of Activity Based Costing System in the
organisation. For this purpose, it has identified the following Business Functions in its organisation:
i. Research and Development
ii. Design of Products, Services and Procedures
iii. Customer Service
iv. Marketing
v. Distribution
You are required to specify two cost drivers for each Business Function Identified above.
Answer:
Business functions Cost Driver

Research and Development • Number of research projects
• Personnel hours on a project
• Technical complexities of the project
Design of products, services and procedures • Number of products in design
• Number of parts per product
• Number of engineering hours
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Customer Service • Number of service calls

• Number of products serviced
• Hours spent on servicing products
Marketing • Number of advertisements
• Number of sales personnel
• Sales revenue
Distribution • Number of units distributed
• Number of customers
• Weight of items distributed
(Any two cost drivers of each business function)
Question No. 10 (Past Paper, Nov 22. 5 marks)

Define Budget Manual. What are the salient features of Budget Manual?
Answer:
Budget Manual: The budget manual is a booklet specifying the objectives of an organisation in
relation to its strategy. The budget is made to decide how much an organisation would earn and
spend and in what manner. In the budget, the organisation sets its priorities too.
Effective budgetary planning relies on the provision of adequate information to the individuals
involved in the planning process. Many of these information needs are contained in the budget
manual. A budget manual is a collection of documents that contains key information for those
involved in the planning process .
CIMA London defines budget manual as, 'A document which sets out the responsibilities of the
persons engaged in, the routines of, and the forms and records required for, budgetary control'.
Contents of a budget manual: Typical budget manual may include the following:
i. A statement regarding the objectives of the organisation and how they can be achieved
through budgetary control;
ii. A statement about the functions and responsibilities of each executive, both regarding
preparation and execution of budgets;
iii. Procedures to be followed for obtaining the necessary approval of budgets. The authority
of granting approval should be stated in explicit terms. Whether, one two or more
signatures are required on each document should be clearly stated;
iv. A form of organisation chart to show who are responsible for the preparation of each
functional budget and the way in which the budgets are interrelated.
v. A timetable for the preparation of each budget.
vi. The manner of scrutiny and the personnel to carry it out;
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vii. Reports, statements, forms and other record to be maintained.
viii. The accounts classification to be employed. It is necessary that the framework within
which the costs, revenue and other financial accounts are classified must be identical both
in the accounts and budget department.
ix. The reporting of the remedial action.
x. The manner in which budgets, after acceptance and issuance, are to be revised or amended,
these are included in budgets and on which action can be taken only with the approval of
top management
xi. This will prevent the formation of a ‘bottleneck’ with the late preparation of one budget
holding up the preparation of all others.
xii. Copies of all forms to be completed by those responsible for preparing budgets, with
explanations concerning their completion.
xiii. A list of the organization’s account codes, with full explanations of how to use them.
xiv. Information concerning key assumptions to be made by managers in their budgets, for
example the rate of inflation, key exchange rates, etc.
(Any four points)
Question No. 10 (Past Paper, Nov 22, 5 marks)

Mention the cost units (physical measurements) for the following Industry/product:
i. Automobile
ii. Gas
iii. Brick works
iv. Power
v. Steel
vi. Transport (by road)
vii. Chemical
viii. Oil
ix. Brewing
x. Cement
Answer:
Industry or Product Cost Units

Automobile Number
Gas Cubic feet
Brick works 1,000 bricks
Power Kilo-watt hour (kWh)
Steel Tonne
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Transport (by road) Passenger- kilometer or Tonne-kilometer

Chemical Litre, gallon, kilogram, tonne etc.
Oil Barrel, tonne, litre
Brewing Barrel
Cement Ton/ per bag etc.
Question No. 11 (Past Paper, May 23, 5 marks)

How does the high employee turnover increase the cost of production? Explain.
Answer:
High Employee Turnover increases the cost of production

Replacement costs are the costs which arise due to employee turnover. If employees leave soon
after they acquire the necessary training and experience of good work, additional costs will have
to be incurred on new workers, i.e., cost of recruitment, training and induction, abnormal breakage
and scrap and extra wages and overheads due to the inefficiency of new workers.
It is obvious that a company will incur very high replacement costs if the rate of employee turnover
is high. Similarly, only adequate preventive costs can keep Employee turnover at a low level. Each
company must, therefore, work out the optimum level of Employee turnover keeping in view its
personnel policies and the behaviour of replacement cost and preventive costs at various levels of
Employee turnover rates.

Define cost objects and give examples of any four cost objects,
Answer:
Definition of cost objects

Cost object is anything for which a separate measurement of cost is required. Cost object may be
a product, a service, a project, a customer, a brand category, an activity, a department or a
programme etc.
Examples of cost objects

Product Smart phone, Tablet computer, SUV Car, Book etc.
Service An airline flight from Delhi to Mumbai, Concurrent audit assignment,
Utility bill payment facility etc.
Project Metro Rail project, Road projects etc.
Activity Quality inspection of materials, Placing of orders etc.
Process Refinement of crudes in oil refineries, melting of billets or ingots in
rolling mills etc.
Department Production department, Finance & Accounts, Safety etc.

Explain what is meant by Practical capacity and Normal capacity. How is normal capacity
determined?
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Answer:
Meaning of Practical capacity and Normal capacity

Practical capacity is defined as actually utilised capacity of a plant. It is also known as operating
capacity. This capacity takes into account loss of time due to repairs, mainte - nance, minor
breakdown, idle time, set up time, normal delays, Sundays and holidays, stock taking etc. Generally
practical capacity is taken between 80 to 90% of the rated capacity. It is also used as a base for
determining overhead rates. Practical capacity is also called net capacity or available capacity.
Normal capacity is the volume of production or services achieved or achievable on an average

over a period under normal circumstances taking into account the reduction in capacity
resulting from planned maintenance.
Normal capacity is determined as under:

Installed Capacity Adjustments for: xxx
(i) Time lost due to scheduled preventive or planned maintenance xxx
(ii) Number of shifts or machine hours or man hours
(iii) Holidays, normal shut down days, normal idle time xxx
(iv) Normal time lost in batch change over xxx xxx
Normal Capacity xxx

What is meant by Activity Based Management (ABM) and discuss how Activity Based Management
can be used in the business?
Answer:
Meaning of Activity Based Management (ABM)

The term Activity based management (ABM) is used to describe the cost management application
of ABC. The use of ABC as a costing tool to manage costs at activity level is known as Activity
Based Cost Management (ABM). ABM is a discipline that focuses on the efficient and effective
management of activities as the route to continuously improving the value received by customers.
ABM utilizes cost information gathered through ABC.
Activity based management can be used in the following ways:

i. Cost Reduction: ABM helps the organisation to identify costs against activities and to find
opportunities to streamline or reduce the costs or eliminate the entire activity, especially
if there is no value added.
ii. Business Process Re-engineering: Business process re-engineering involves examining

business processes and making substantial changes to how organisation currently operates.
ABM is a powerful tool for measuring business performance, determining the cost of
business output and is used as a means of identifying opportunities to improve process
efficiency and effectiveness.
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iii. Benchmarking: Benchmarking is a process of comparing of ABC-derived activity costs of

one segment of company with those of other segments. It requires uniformity in the
definition of activities and measurement of their costs.
iv. Performance Measurement: Many organizations are now focusing on activity performance
as a means of facing competitors and managing costs by monitoring the efficiency and
effectiveness of activities.

Suggest any one basis of re-apportionment of service department overheads over production
departments in the following instances:
Cost of Service Department Basis

(i) Maintenance and Repair Shop
(ii) Hospital and Dispensary
(iii) Fire Protection
(iv) Stores Department
(v) Transport Department
(vi) Computer Section
(vii) Power House (Electric Power Cost)
(viii) Inspection
(ix) Tool Room
(x) Time- keeping
Answer:
Basis of re-apportionment of service department overheads over production departments

Cost of the Service Departments: Basis
i. Maintenance and Repair shop Direct labour hours, Machine hours, Direct labour
wages, Asset value x Hours worked
ii. Hospital and Dispensary No. of employees, No. of direct workers etc.
iii. Fire Protection Capital values
iv. Stores Department No. of requisitions, Weight or value of Materials
issued.
v. Transport Department Crane hours, Truck hours, Truck mileage, Truck
tonnage, Truck ton- hours, Tonnage handled.
No. of packages of Standard size
vi. Computer Section Computer hours, Specific allocation to
departments
vii. Power House (Electric Power Horse power, Kwh, Horse power × Machine
Cost) hours, Kwh × Machine hours
viii. Inspection Inspection hours, number of inspections.
ix. Tool room Direct labour hours, Machine hours, Direct labour
wages, Asset value x Hours worked
x. Time-keeping No. of card punched, No. of employees
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How will you treat normal loss, abnormal loss and abnormal gain in process costing? Explain
Answer:
Treatment of normal loss, abnormal loss and abnormal gain in process costing
Treatment of Normal loss in Cost Accounts: The cost of normal process loss in practice is
absorbed by good units produced under the process. The amount realised by the sale of normal
process loss units should be credited to the process account.
Treatment of Abnormal loss in Cost Accounts: The cost of an abnormal process loss unit is equal
to the cost of a good unit. The total cost of abnormal process loss is credited to the process
account from which it arises. Cost of abnormal process loss is not treated as a part of the cost of
the product. In fact, the total cost of abnormal process loss is debited to costing profit and loss
account.
Treatment of Abnormal Gain in Cost Accounts: The process account under which abnormal gain
arises is debited with the abnormal gain and credited to abnormal gain account which will be closed
by transferring to the Costing Profit and Loss account. Th cost of abnormal gain is computed on
the basis of normal production.
RTP QUESTIONS
Question No. 17 (RTP, May 21)

WRITE note on cost-plus-contracts.
Answer:
These contracts provide for the payment by the contractee of the actual cost of construction
plus a stipulated profit, mutually decided between the two parties.
The main features of these contracts are as follows:
i. The practice of cost-plus contracts is adopted in the case of those contracts where the
probable cost of the contracts cannot be ascertained in advance with a reasonable
accuracy.
ii. These contracts are preferred when the cost of material and labour is not steady and the
contract completion may take number of years.
iii. The different costs to be included in the execution of the contract are mutually agreed,
so that no dispute may arise in future in this respect. Under such type of contracts,
contractee is allowed to check or scrutinize the concerned books, documents and accounts.
iv. Such a contract offers a fair price to the contractee and also a reasonable profit to the
contractor.
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The contract price here is ascertained by adding a fixed and mutually pre-decided
component of profit to the total cost of the work.

HOW apportionment of joint costs upto the point of separation amongst the joint products using
market value at the point of separation and net realizable value method is done? DISCUSS.
Answer:
Apportionment of Joint Cost amongst Joint Products using:
Market value at the point of separation: This method is used for apportionment of joint costs to
joint products upto the split off point. It is difficult to apply if the market value of the product
at the point of separation is not available. It is useful method where further processing costs are
incurred disproportionately.
Net realizable value Method: From the sales value of joint products (at finished stage) the
followings are deducted:
• Estimated profit margins

• Selling & distribution expenses, if any
• Post split off costs.
The resultant figure so obtained is known as net realizable value of joint products.
Joint costs are apportioned in the ratio of net realizable value.

DISCUSS cost classification based on variability and controllability.
Answer:
Cost classification based on variability

Fixed Costs – These are the costs which are incurred for a period, and which, within certain output
and turnover limits, tend to be unaffected by fluctuations in the levels of activity (output or
turnover). They do not tend to increase or decrease with the changes in output. For example, rent,
insurance of factory building etc., remain the same for different levels of production.
Variable Costs – These costs tend to vary with the volume of activity. Any increase in the activity
results in an increase in the variable cost and vice-versa. For example, cost of direct labour, etc.
Semi-variable Costs – These costs contain both fixed and variable components and are thus partly
affected by fluctuations in the level of activity. Examples of semi variable costs are telephone
bills, gas and electricity etc.
Cost classification based on controllability

Controllable Costs - Cost that can be controlled, typically by a cost, profit or investment centre
manager is called controllable cost. Controllable costs incurred in a particular responsibility centre
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can be influenced by the action of the executive heading that responsibility centre. For example,
direct costs comprising direct labour, direct material, direct expenses and some of the overheads
are generally controllable by the shop level management.
Uncontrollable Costs - Costs which cannot be influenced by the action of a specified member of
an undertaking are known as uncontrollable costs. For example, expenditure incurred by, say, the
tool room is controllable by the foreman in-charge of that section but the share of the tool-room
expenditure which is apportioned to a machine shop is not to be controlled by the machine shop
foreman.

DESCRIBE the salient features of budget manual.
Answer:
Salient features of Budget Manual
• Budget manual contains much information which is required for effective budgetary
planning.
• A budget manual is a collection of documents that contains key information for those
involved in the planning process.
• An introductory explanation of the budgetary planning and control process, including a

statement of the budgetary objective and desired results is included in Budget Manual.
• Budget Manual contains a form of organisation chart to show who is responsible for the
preparation of each functional budget and the way in which the budgets are interrelated.
• In contains a timetable for the preparation of each budget.
• Copies of all forms to be completed by those responsible for preparing budgets, with
explanations concerning their completion is included in Budget Manual.
Question No. 21 (RTP, Nov 21)

DIFFERENTIATE between Cost Control and Cost Reduction.
Answer:
S.No. Cost Control Cost Reduction

1 Cost control aims at maintaining the Cost reduction is concerned with
costs in accordance with the established reducing costs. It challenges all
standards. standards and endeavours to
improvise them continuously.
2 Cost control seeks to attain lowest Cost reduction recognises no
possible cost under existing conditions. condition as permanent, since a
change will result in lower cost.
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3 In case of cost control, emphasis is on In case of cost reduction, it is on

past and present. present and future.
4 Cost control is a preventive Cost reduction is a corrective
function. It operates even when an
efficient cost

‘Like other branches of accounting, cost accounting also has certain limitations’ . EXPLAIN the
limitations.
Answer:
"Like other branches of accounting, cost accounting also has certain limitations". The limitations
of cost accounting are as follows:
i. Expensive: It is expensive because analysis, allocation and absorption of overheads

requires considerable amount of additional work, and hence additional money.
ii. Requirement of reconciliation: The results shown by cost accounts differ from those shown
by financial accounts. Thus, preparation of reconciliation statements is necessary to verify
their accuracy.
iii. Duplication of work: It involves duplication of work as organization has to maintain two
sets of accounts i.e. Financial Accounts and Cost Accounts.

DIFFERENTIATE between Job Costing and Batch Costing.
Answer:
S.No. Job Costing Batch Costing

1 Method of costing used for non- standard Homogeneous products produced in a
and non-repetitive products produced as continuous production flow in lots.
per customer specifications and against
specific orders.
2 Cost determined for each Job. Cost determined in aggregate for
the entire Batch and then arrived at
on per unit basis.
3 Jobs are different from each other and Products produced in a batch are
independent of each other. Each Job is homogeneous and lack of individuality.
unique.

DISCUSS the treatment of by-product cost in Cost Accounting when they are of small total value.
Answer:
When the by-products are of small total value, the amount realised from their sale may be dealt
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in any one the following two ways:
i. The sales value of the by-products may be credited to the Costing Profit and Loss Account
and no credit be given in the Cost Accounts. The credit to the Costing Profit and Loss
Account here is treated either as miscellaneous income or as additional sales revenue.
ii. The sale proceeds of the by-product may be treated as deductions from the total costs.
The sale proceeds in fact should be deducted either from the production cost or from the
cost of sales.

EXPLAIN the difference between controllable & uncontrollable costs?
Answer:
Controllable costs and Uncontrollable costs: Cost that can be controlled, typically by a cost,
profit or investment centre manager is called controllable cost. Controllable costs incurred in a
particular responsibility centre can be influenced by the action of the executive heading that
responsibility centre.
Costs which cannot be influenced by the action of a specified member of an undertaking are known
as uncontrollable costs.

DEFINE cost plus contract? STATE its advantages.
Answer:
Cost plus contract: Under cost plus contract, the contract price is ascertained by adding a
percentage of profit to the total cost of the work. Such types of contracts are entered into when
it is not possible to estimate the contract cost with reasonable accuracy due to unstable condition
of material, labour services etc.
Following are the advantages of cost plus contract:

i. The contractor is assured of a fixed percentage of profit. There is no risk of incurring
any loss on the contract.
ii. It is useful specially when the work to be done is not definitely fixed at the time of making
the estimate.
iii. Contractee can ensure himself about the ‘cost of contract’ as he is empowered to examine
the books and documents of the contractor to ascertain the veracity of the cost of
contract.

“Is reconciliation of cost accounts and financial accounts necessary in case of integrated
accounting system?” EXPLAIN.
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Answer:
In integrated accounting system cost and financial accounts are kept in the same set of books.
Such a system will have to afford full information required for Costing as well as for Financial
Accounts. In other words, information and data should be recorded in such a way so as to enable
the firm to ascertain the cost (together with the necessary analysis) of each product, job,
process, operation or any otheridentifiable activity. It also ensures the ascertainment of marginal
cost, variances, abnormal losses and gains. In fact all information that management requires from
a system of Costing for doing its work properly is made available. The integrated accounts give
full information in such a manner so that the profit and loss account and the balance sheet can be
prepared according to the requirements of law and the management maintains full control over
the liabilities and assets of its business.
Since, only one set of books are kept for both cost accounting and financial accounting purpose so
there is no necessity of reconciliation of cost and financial accounts.
Question No. 28 (RTP, (May 22)

DISCUSS the impact of Information Technology in Cost Accounting.
Answer:
The impact of IT in cost accounting may include the following:
i. After the introduction of ERPs, different functional activities get integrated and as a
consequence a single entry into the accounting system provides custom made reports for
every purpose and saves an organisation from preparing different sets of documents.
Reconciliation process of results of both cost and financial accounting systems become
simpler and less sophisticated.
ii. A move towards paperless environment can be seen where documents like Bill of Material,
Material Requisition Note, Goods Received Note, labour utilization report etc. are no longer
required to be prepared in multiple copies, the related department can get e-copy from
the system.
iii. Information Technology with the help of internet (including intranet and extranet) helps
in resource procurement and mobilisation. For example, production department can get
materials from the stores without issuing material requisition note physically. Similarly,
purchase orders can be initiated to the suppliers with the help of extranet. This enables
an entity to shift towards Just-in-Time (JIT) approach of inventory management and
production.
iv. Cost information for a cost centre or cost object is ascertained with accuracy in timely
manner. Each cost centre and cost object is codified and all related costs are assigned to
the cost object or cost centre. This process automates the cost accumulation and
ascertainment process. The cost information can be customised as per the requirement.
For example, when an entity manufactures or provide services, it can know information job-
wise, batch-wise, process-wise, cost centre wise etc.
19
v. Uniformity in preparation of report, budgets and standards can be achieved with the help
of IT. ERP software plays an important role in bringing uniformity irrespective of location,
currency, language and regulations.
vi. Cost and revenue variance reports are generated in real time basis which enables the
management to take control measures immediately.
vii. IT enables an entity to monitor and analyse each process of manufacturing or service
activity closely to eliminate non-value-added activities.
The above are examples of few areas where Cost Accounting is done with the help of IT.

Health Wealth Hospital is interested in estimating the cost for each patient stay. The hospital
offers general health care facility i.e. only basic services.
You are required to:
(i) CLASSIFY each of the following costs as either direct or indirect with respect to each patient.
(ii) CLASSIFY each of the following costs as either fixed or variable with respect to hospital
costs per day.
Direct Indirect Fixed Variable
Electronic monitoring
Meals for patients
Nurses' salaries
Parking maintenance
Security
iii. Answer:
Item Direct Indirect Fixed Variable

Electronic monitoring YES YES
Meals for patients YES YES
Nurses' salaries YES YES
Parking maintenance YES YES
Security YES YES

Differentiate between Cost Control and Cost Reduction.
iv. Answer:
Cost Control Cost Reduction

1. Cost control aims at maintaining the costs 1. Cost reduction is concerned with reducing
in accordance with the established costs. It challenges all standards and
standards. endeavours to improvise them continuously
2. Cost control seeks to attain lowest 2. Cost reduction recognises no condition as
20
possible cost under existing conditions. permanent, since a change will result in
lower cost.
3. In case of cost control, emphasis is on 3. In case of cost reduction, it is on present
past and present and future.
4. Cost control is a preventive function 4. Cost reduction is a corrective function. It
operates even when an efficient cost control
system exists.
5. Cost control ends when targets are 5. Cost reduction has no visible end and is a
achieved. continuous process.

Though Cost Accounting and Management Accounting is used synonymously but there are a few
differences. Elaborate those differences.
v. Answer:
Basis Cost Accounting Management Accounting

i. Nature It records the quantitative aspect It records both qualitative and
only. quantitative aspect.
ii. Objective It records the cost of producing a It provides information to
product and providing a service. management for planning and co-
ordination.
iii. Area It only deals with cost It is wider in scope as it includes
Ascertainment. financial accounting, budgeting,
taxation, planning etc.
iv. Recording of data It uses both past and present It is focused with the projection
figures. of figures for future.
v. Development Its development is related to Its development is related to the
industrial revolution. need of modern business world.
vi. Rules & Regulation It follows certain principles and It does not follow any specific
procedures for recording costs of rules and regulations.
different products.

What are cost units? Write the cost unit basis against each of the following Industry/Product-
Automobile, Steel, Cement, Chemicals, Power and Transport.
vi. Answer:
Cost units are usually the units of physical measurement like number, weight, area, volume, length,
time and value.
Industry or Product Cost Unit Basis

Automobile Number
Steel Ton
Chemicals Litre, gallon, kilogram, ton etc.
21

Transport Passenger- kilometer

SUGGEST the unit of cost for following industries:
i. Transport
ii. Power
iii. Hotel
iv. Hospital
v. Steel
vi. Coal mining
vii. Professional Services
viii. Gas
ix. Engineering
x. Oil
vii. Answer:

Hotel Room
Hospital Patient day
Steel Ton
Coal mining Tonne/ton
Professional Services Chargeable hour, job, contract
Gas Cubic feet
Engineering Contract, job
Oil Barrel, tonne, litre

DISCUSS the difference between Job costing and Batch costing.
viii. Answer:
Differences between Job costing and Batch costing:
Sr. No Job Costing Batch Costing

1. Method of costing used for non- standard Homogeneous products produced in a
and non- repetitive products produced as continuous production flow in lots.
per customer specifications and against
specific orders.
2. Cost determined for each Job. Cost determined in aggregate for the
entire Batch and then arrived at on per
unit basis.
3. Jobs are different from each other and Products produced in a batch are
22
independent of each other. Each Job is homogeneous and lack of individuality.

unique.

EXPLAIN what are the essential pre-requisite for Integrated Accounting system?
Answer:
Essential pre-requisites for Integrated Accounts: The essential pre-requisites for integrated
accounts include the following steps-
i. The management’s decision about the extent of integration of the two sets of books. Some
concerns find it useful to integrate up to the stage of prime cost or factory cost while
other prefers full integration of the entire accounting records.
ii. A suitable coding system must be made available so as to serve the accounting purposes of
financial and cost accounts.
iii. An agreed routine, with regard to the treatment of provision for accruals, prepaid
expenses, other adjustment necessary for preparation of interim accounts.
iv. Perfect coordination should exist between the staff responsible for the financial and cost
aspects of the accounts and an efficient.

DISCUSS the difference between cost control and cost reduction.
Answer:
S. No. Cost Control Cost Reduction

1. Cost control aims at maintaining the Cost reduction is concerned with reducing
costs in accordance with the established costs. It challenges all standards and
standards. endeavours to improvise them continuously
2. Cost control seeks to attain lowest Cost reduction recognises no condition as
possible cost under existing conditions. permanent, since a change will result in
lower cost.
3. In case of cost control, emphasis is on In case of cost reduction, it is on present
past and present and future.
4. Cost control is a preventive function Cost reduction is a corrective function. It
operates even when an efficient cost
control system exists.
5. Cost control ends when targets are Cost reduction has no visible end and is a
achieved. continuous process.

What is cost plus contract? What are its advantages?
23
Answer:
Following are the advantages of cost-plus contract:

the estimate.
iii. Contractee can ensure himself about the ‘cost of contract’ as he is empowered to examine
contract.

Narrate the objectives of cost accounting.
Answer:
The main objectives of introduction of a Cost Accounting System in a manufacturing organization
are as follows:
i. Ascertainment of cost: The main objective of a Cost Accounting system is to ascertain
cost for cost objects. Costing may be post completion or continuous but the aim is to arrive
at a complete and accurate cost figure to assist the users to compare, control and make
various decisions.
ii. Determination of selling price: Cost Accounting System in a manufacturing organisation

enables to determine desired selling price after adding expected profit margin with the
cost of the goods manufactured.
iii. Cost control and Cost reduction: Cost Accounting System equips the cost controller to
adhere and control the cost estimate or cost budget and assist them to identify the areas
of cost reduction.
iv. Ascertainment of profit of each activity: Cost Accounting System helps to classify cost
on the basis of activity to ascertain activity wise profitability.
v. Assisting in managerial decision making: Cost Accounting System provides relevant cost
information and assists managers to make various decisions.

How would you account for idle capacity cost in Cost Accounting?
24
Answer:
Idle capacity costs are treated in the following ways in Cost Accounts:
i. If the idle capacity cost is due to unavoidable reasons: A supplementary overhead rate
may be used to recover the idle capacity cost. In this case, the costs are charged to the
production capacity utilised.
ii. If the idle capacity cost is due to avoidable reasons: Such as faulty planning, etc. the
cost should be charged to Costing Profit and Loss Account.
iii. If the idle capacity cost is due to trade depression, etc.: Being abnormal in nature the
cost should also be charged to the Costing Profit and Loss Account.
iv. If the idle capacity cost is due to seasonal factors, then the cost should be charged to
cost of production by inflating overhead rate.

Explain the treatment of over and under absorption of overheads in cost accounts.
Answer:
Treatment of over and under absorption of overheads are:
i. Writing off to costing P&L A/c: Small difference between the actual and absorbed amount
should simply be transferred to costing P&L A/c, if difference is large then investigate
the causes and after that abnormal loss/ gain shall be transferred to costing P&L A/c.
ii. Use of supplementary Rate: Under this method the balance of under and over absorbed
overheads may be charged to cost of W.I.P., finished stock and cost of sales
proportionately with the help of supplementary rate of overhead.
iii. Carry Forward to Subsequent Year: Difference should be carried forward in the
expectation that next year the position will be automatically corrected.

Distinguish between cost allocation and cost absorption.
Answer:
Distinguish between Cost allocation and Cost absorption:
Cost allocation is the allotment of whole item of cost to a cost centre or a cost unit. In other
words, it is the process of identifying, assigning or allowing cost to a cost centre or a cost unit.
Cost absorption is the process of absorbing all indirect costs or overhead costs allocated or
apportioned over particular cost center or production department by the units produced.
MTP QUESTIONS
Question No. 42 (MTP, Mar 22, 5 marks)

DISTINGUISH clearly between Bin cards and Stores Ledger.
25
Answer:
Bin Card Stores Ledger

It is maintained by the storekeeper in the It is maintained in cost accounting
store. department.
It contains only quantitative details of It contains information both in quantity and
material received, issued and returned to value.
stores.
Entries are made when transaction takes It is always posted after the transaction.
place.
Each transaction is individually posted. Transactions may be summarized and then
posted.
Inter-department transfers do not appear in Material transfers from one job to another
Bin Card. job are recorded for costing purposes.

Some of the items of PR Company, a manufacturer of corporate office furniture, are provided
below. As the company is in the process of developing a formal cost accounting system, you are
required to CLASSIFY the items into three categories namely: (i) Cost tracing (ii) Cost allocation
(iii) Non- manufacturing item.
Carpenter wages, Depreciation - office building, Glue for assembly, Lathe department supervisor,
Metal brackets for drawers, Factory washroom supplies, Lumber, Samples for trade shows, Lathe
depreciation, Lathe operator wages.
Answer:
Item Cost Tracing Cost Allocation Non-manufacturing

Carpenter wages √
Depreciation - office building √
Glue for assembly √
Lathe department supervisor √
Metal brackets for drawers √
Factory washroom supplies √
Lumber √
Samples for trade shows √
Lathe depreciation √
Lathe operator wages √

In Batch Costing, STATE how is Economic Batch Quantity determined?
Answer:
The economic batch size or Economic Batch Quantity may be determined by calculating the total
26
cost for a series of possible batch sizes and checking which batch size gives the minimum cost.
The objective here being to determine the production lot (Batch size) that optimizes on both set
up and inventory holding cots formula. The mathematical formula usually used for its determination
is as follows:
EBQ = √
2𝐷𝑆
𝐶
Where,
D= Annual demand for the product
S =Setting up cost per batch
C=Carrying cost per unit of production

EXPLAIN what are the essential pre-requisites of Integrated accounting system?
Answer:
Essential pre-requisites for Integrated Accounts: The essential pre-requisites for integrated
accounts include the following steps-
i. The management’s decision about the extent of integration of the two sets of books.
Some concerns find it useful to integrate up to the stage of prime cost or factory cost
while other prefers full integration of the entire accounting records.
ii. A suitable coding system must be made available so as to serve the accounting purposes
of financial and cost accounts.
iii. An agreed routine, with regard to the treatment of provision for accruals, prepaid
expenses, other adjustment necessary for preparation of interim accounts.
iv. Perfect coordination should exist between the staff responsible for the financial and
cost aspects of the accounts and an efficient processing of accounting documents should
be ensured.

WHAT is inter-process profit? STATE its advantages and disadvantages.
Answer:
Inter-Process Profit: To control cost and to measure performance, different processes within
an organization are designated as separate profit centres. In this type of organizational structure,
the output of one process is transferred to the next process not at cost but at market value or
cost plus a percentage of profit. The difference between cost and the transfer price is known as
inter-process profits.
The advantages and disadvantages of using inter-process profit, in the case of process type
industries are as follows:
Advantages:
27
i. Comparison between the cost of output and its market price at the stage of completion is
facilitated.
ii. Each process is made to stand by itself as to the profitability.
Disadvantages:
i. The use of inter-process profits involves complication.
ii. The system shows profits which are not realised because of stock not sold out.
Question No. 47 (MTP, Apr 22, 5 marks)

BRIEF OUT advantages and disadvantages of Halsey Premium Plan.
Answer:
Advantages Disadvantages
Time rate is guaranteed while there is Incentive is not so strong as with piece rate
opportunity for increasing earnings by system. In fact the harder the worker works,
increasing production. the lesser he gets per piece.
The system is equitable in as much as the The sharing principle may not be liked by
employer gets a direct return for his efforts employees.
in improving production methods and
providing better equipment.

STATE the method of costing for the following industries:
i. Sugar manufacturing
ii. Bridge Construction
iii. Advertising
iv. Car Assembly
Answer:
S. No. Industry Method of costing

(i) Sugar manufacturing Process costing
(ii) Bridge Construction Contract Costing
(iii) Advertising Job costing
(iv) Car Assembly Multiple Costing (Combination of any method)

STATE the unit of cost for the following service industries:
i. Electricity Supply service
ii. Hospital
iii. Cinema
iv. Hotels
Answer:
28
S. No. Service industry Unit of cost

(i) Electricity Supply service Kilowatt- hour (kWh)
(ii) Hospital Patient per day, room per day or per bed, per operation
etc.
(iii) Cinema Per ticket.
(iv) Hotels Guest Days or Room Days

BRIEF OUT advantages of Integrated Accounts.
Answer:
Advantages of Integrated Accounts are as follows:
i. No need for Reconciliation- The question of reconciling costing profit and financial profit
does not arise, as there is only one figure of profit.
ii. Less efforts- Due to use of one set of books, there is a significant saving in efforts made.
iii. Less time consuming- No delay is caused in obtaining information as it is provided from
books of original entry.
iv. Economical process- It is economical also as it is based on the concept of “Centralization

of Accounting function”.
BRIEF OUT difference between Fixed and Flexible Budget.
Answer:
S. No. Fixed Budget Flexible Budget

1. It does not change with actual volume of It can be re-casted on the basis of
activity achieved. Thus it is known as rigid activity level to be achieved. Thus it is
or inflexible budget. not rigid.
2. It operates on one level of activity and It consists of various budgets for
under one set of conditions. It assumes different levels of activity.
that there will be no change in the
prevailing conditions, which is unrealistic.
3. Here as all costs like - fixed, variable and Here analysis of variance provides useful
semi-variable are related to only one level information as each cost is analysed
of activity so variance analysis does not according to its behaviour.
give useful information.
4. If the budgeted and actual activity levels Flexible budgeting at different levels of
differ significantly, then the aspects like activity facilitates the ascertainment of
cost ascertainment and price fixation do cost, fixation of selling price and
not give a correct picture. tendering of quotations.
5. Comparison of actual performance with It provides a meaningful basis of
budgeted targets will be meaningless comparison of the actual performance
specially when there is a difference with the budgeted targets.
29
between the two activity levels.
Question No. 52 (MTP, Sep 22, 5 marks)

LIST OUT cost unit examples of following service industry.
Hospital, Electricity Supply service, Cinema, Canteen, Hotels
Answer:
Service industry Unit of cost (examples)

Hospital Patient per day, room per day or per bed, per operation etc.
Electricity Supply service Kilowatt- hour (kWh)
Cinema Per ticket
Canteen Per item, per meal etc.
Hotels Guest Days or Room Days

LIST OUT five purely financial expenses that are included only in Financial Accounts.
Answer:
Purely Financial Expenses included in Financial Accounts only:
i. Interest on loans or bank mortgages.
ii. Expenses and discounts on issue of shares, debentures etc.
iii. Other capital losses i.e., loss by fire not covered by insurance etc.
iv. Losses on the sales of fixed assets and investments
v. Income tax, donations, subscriptions
vi. Expenses of the company’s share transfer office, if any.

DESCRIBE Unit Costing. WHAT kind of industries follow this method of costing?
Answer:
Unit costing: It is that method of costing where the output produced is identical and each unit
of output requires identical cost. Unit costing is synonymously known as single or output costing,
but these are sub-division of unit costing method.
This method of costing is followed by industries which produce single output or few variants of a
single output, therefore, this method of costing, finds its application in industries like paper,
cement, steel works, mining, breweries etc. These types of industries produce identical products
and therefore have identical costs.

WRITE DOWN the corresponding cost drivers related to the following activity cost pools:
Inspecting and testing costs, Setting-up machines cost, Machining costs, Supervising Costs,
Ordering and Receiving Materials cost
Answer:
30
Activity Cost Pools Related Cost Drivers

Inspecting and testing costs Number of tests
Setting up machines cost Number of set-ups
Machining costs Machine hours
Supervising Costs Direct labour hours
Ordering and Receiving Materials cost Number of purchase orders

BRIEF the treatment of following while calculating purchase cost of material:
Trade Discount, Cash Discount, Penalty, Insurance charges, Commission paid.
Answer:
Trade Discount Trade discount is deducted from the purchase price if it is not
shown as deduction in the invoice.
Cash Discount Cash discount is not deducted from the purchase price. It is
treated as interest and finance charges. It is ignored.
Penalty Penalty of any type is not included with the cost of purchase
Insurance charges Insurance charges are paid for protecting goods during transit. It
is added with the cost of purchase.
Commission paid Commission or brokerage paid is added with the cost of purchase.
Question No. 57 (MTP, Oct 22, 5 marks)

DISCUSS the essentials of good Cost Accounting System.
Answer:
The essential features, which a good cost and management accounting system should possess, are
as follows:
i. Informative and simple: Cost and management accounting system should be tailor-made,
practical, simple and capable of meeting the requirements of a business concern. The
system of costing should not sacrifice the utility by introducing meticulous and
unnecessary details.
ii. Accurate and authentic: The data to be used by the cost and management accounting
system should be accurate and authenticated; otherwise it may distort the output of the
system and a wrong decision may be taken.
iii. Uniformity and consistency: There should be uniformity and consistency in classification,
treatment and reporting of cost data and related information. This is required for
benchmarking and comparability of the results of the system for both horizontal and
vertical analysis.
iv. Integrated and inclusive: The cost and management accounting system should be
integrated with other systems like financial accounting, taxation, statistics and operational
31
research etc. to have a complete overview and clarity in results.
v. Flexible and adaptive: The cost and management accounting system should be flexible
enough to make necessary amendments and modification in the system to incorporate
changes in technological, reporting, regulatory and other requirements.
vi. Trust on the system: Management should have trust on the system and its output. For this,
an active role of management is required for the development of such a system that reflect
a strong conviction in using information for decision making.

STATE various causes of and treatment of Overtime Premium in Cost Accounting.
Answer:
Causes Treatment
The customer may agree to bear the If overtime is resorted to at the desire of the
entire charge of overtime because customer, then overtime premium may be
urgency of work. charged to the job directly.
Overtime may be called for to make up any If overtime is required to cope with general
shortfall in production due to some production programmes or for meeting urgent
unexpected development. orders, the overtime premium should be
treated as overhead cost of the particular
department or cost centre which works
overtime.
Overtime work may be necessary to make If overtime is worked in a department due to
up a shortfall in production due to some the fault of another department, the overtime
fault of management. premium should be charged to the latter
department.
Overtime work may be resorted to, to Overtime worked on account of abnormal
secure an out-turn in excess of the normal conditions such as flood, earthquake etc.,
output to take advantage of an expanding should not be charged to cost, but to Costing
market or of rising demand Profit and Loss Account.

STATE Direct Expenses with examples.
Answer:
Expenses other than direct material cost and direct employee cost, which are incurred to
manufacture a product or for provision of service and can be directly traced in an economically
feasible manner to a cost object. The following costs are examples for direct expenses:
a) Royalty paid/ payable for production or provision of service;
b) Hire charges paid for hiring specific equipment;
c) Cost for product/ service specific design or drawing;
d) Cost of product/ service specific software;
e) Other expenses which are directly related with the production of goods or provision of
32
service.

EXPLAIN the difference between product cost and period cost.
Answer:
Product costs are those costs that are identified with the goods purchased or produced for
resale. In a manufacturing organisation they are attached to the product and that are included in
the inventory valuation for finished goods, or for incomplete goods. Product cost is also known as
inventoriable cost. Under absorption costing method it includes direct material, direct labour,
direct expenses, directly attributable costs (variable and non-variable) and other production
(manufacturing) overheads. Under marginal costing method Product Costs includes all variable
production costs and the all fixed costs are deducted from the contribution.
Periods costs are the costs, which are not assigned to the products but are charged as expense
against revenue of the period in which they are incurred. General Administration, marketing, sales
and distributor overheads are recognized as period costs.

STATE the advantages of Zero-based budgeting.
Answer:
The advantages of zero-based budgeting are as follows:
• It provides a systematic approach for the evaluation of different activities and ranks them
in order of preference for the allocation of scarce resources.
• It ensures that the various functions undertaken by the organization are critical for the
achievement of its objectives and are being performed in the best possible way.
• It provides an opportunity to the management to allocate resources for various activities

only after having a thorough cost-benefit-analysis. The chances of arbitrary cuts and
enhancement are thus avoided.
• The areas of wasteful expenditure can be easily identified and eliminated.
• Departmental budgets are closely linked with corporation objectives.
• The technique can also be used for the introduction and implementation of the system of
‘management by objective’. Thus, it cannot only be used for fulfillment of the objectives
of traditional budgeting but it can also be used for a variety of other purposes.

DIFFERENTIATE between Cost Accounting and Management Accounting.
Answer:
33
Difference between Cost Accounting and Management Accounting
Basis Cost Accounting Management Accounting

i. Nature It records the quantitative It records both qualitative and
aspect only. quantitative aspect.
ii. Objective It records the cost of It Provides information to
producing a product and management for planning and co-
providing a service. ordination.
iii. Area It only deals with cost It is wider in scope as it includes
Ascertainment. financial accounting, budgeting,
taxation, planning etc.
iv. Recording of data It uses both past and It is focused with the projection
present figures. of figures for future.
v. Development Its development is related It develops in accordance to the
to industrial revolution. need of modern business world.
vi. Rules and It follows certain It does not follow any specific
Regulation principles and procedures rules and regulations.
for recording costs of
different products.

Is reconciliation of cost accounts and financial accounts necessary in case of integrated
accounting system?” EXPLAIN.
Answer:
the firm to ascertain the cost (together with the necessary analysis) of each product, job,
process, operation or any other identifiable activity. It also ensures the ascertainment of marginal
cost, variances, abnormal losses and gains. In fact all information that management requires from
a system of Costing for doing its work properly is made available. The integrated accounts give
full information in such a manner so that the profit and loss account and the balance sheet can be

DEFINE cost units? WRITE the cost unit basis against each of the following Industry/Product-
Automobile, Steel, Cement, Chemicals, Power and Transport.
Answer:
Cost units are usually the units of physical measurement like number, weight, area, volume, length,
34
time and value.

Automobile Number
Steel Ton
Chemicals Litre, gallon, kilogram, ton etc.

DISTINGUISH clearly between Bin cards and Stores Ledger.
Answer:
Bin Card Stores Ledger

It is maintained by the storekeeper in the It is maintained in cost accounting
store. department.
It contains only quantitative details of It contains information both in quantity and
material received, issued and returned to value.
stores.
Entries are made when transaction takes It is always posted after the transaction.
place.
Each transaction is individually posted. Transactions may be summarized and then
posted.
Inter-department transfers do not appear Material transfers from one job to another
in Bin Card. job are recorded for costing purposes.

EXPLAIN the difference between controllable & uncontrollable costs?
Answer:
Controllable costs and Uncontrollable costs: Cost that can be controlled, typically by a cost,
profit or investment centre manager is called controllable cost. Controllable costs incurred in a
particular responsibility centre can be influenced by the action of the executive heading that
responsibility centre.
Costs which cannot be influenced by the action of a specified member of an undertaking are known
as uncontrollable costs.

DEFINE cost plus contract? STATE its advantages.
Answer:
35
Following are the advantages of cost plus contract:

the estimate.
iii. Contractee can ensure himself about the “cost of contract’ as he is empowered to examine
contract.

“Is reconciliation of cost accounts & financial accounts necessary in case of integrated accounting
system?” Explain.
Answer:
the firm to ascertain the cost (together with the necessary analysis) of each product, job process,
operation or any other identifiable activity. It also ensures the ascertainment of marginal cost,
variances, abnormal losses and gains. In fact all information that management requires from a
system of Costing for doing its work properly is made available. The integrated accounts give full
information in such a manner so that the profit and loss account and the balance sheet can be

DISCUSS the impact of Information Technology in Cost Accounting.
Answer:
The impact of IT in cost accounting may include the followings:
i. After the introduction of ERPs, different functional activities get integrated and as a
consequence a single entry into the accounting system provides custom made reports for
every purpose and saves an organisation from preparing different sets of documents.
Reconciliation process of results of both cost and financial accounting systems become
simpler and less sophisticated.
ii. A move towards paperless environment can be seen where documents like Bill of Material,
36
Material Requisition Note, Goods Received Note, labour utilisation report etc. are no longer
required to be prepared in multiple copies, the related department can get e -copy from
the system.
iii. Information Technology with the help of internet (including intranet and extranet) helps
in resource procurement and mobilisation. For example, production department can get
materials from the stores without issuing material requisition note physically. Similarly,
purchase orders can be initiated to the suppliers with the help of extranet. This enables
an entity to shift towards Just-in-Time (JIT) approach of inventory management and
production.
iv. Cost information for a cost centre or cost object is ascertained with accuracy in timely
manner. Each cost centre and cost object is codified and all related costs are assigned to
the cost object or cost centre. This process automates the cost accumulation and
ascertainment process. The cost information can be customised as per the requirement.
For example, when an entity manufacture or provide services, it can know information job-
wise, batch-wise, process-wise, cost centre wise etc.
v. Uniformity in preparation of report, budgets and standards can be achieved with the help
of IT. ERP software plays an important role in bringing uniformity irrespective of location,
currency, language and regulations.
vi. Cost and revenue variance reports are generated in real time basis which enables the
management to take control measures immediately.
vii. IT enables an entity to monitor and analyse each process of manufacturing or service
activity closely to eliminate non value added activities.
The above are examples of few areas where Cost Accounting is done with the help of IT .
37

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Costing Theory Questions-TH

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COSTING FREE THEORY QUESTION

This booklet contains a compilation of all the important

Theory Questions will constitute 14 marks in CA Inter

The PDF is hardly 35 pages & can be revised in just 2-3

HAPPY LEARNING MY DEAR WARRIORS!!

To purchase our Recorded Classes/Books for CA Inter

Question No. 1 (Past Paper May 22, 5 marks)

Job Costing Process Costing

Question No. 2 (Past Paper May 22, 5 marks)

c. Uniformity and consistency: There should be uniformity and consistency in classification,

Question No. 3 (Past Paper May 22, 5 marks)

S.No. Items Treatment

India. It is added with the purchase cost.

Question No. 4 (Past Paper May 22, 5 marks)

Treatment of Overtime premium in different situations

Question No. 5 (Past Paper May 22, 5 marks)

Criticism of Standard Costing

v. Mix of products: Standard costing presupposes a pre-determined combination of products

Question No. 6 (Past Paper May 22, 5 marks)

Method of costing followed:

Question No. 7 (Past Paper Nov 22, 5 marks)

It is a system of inventory management with an approach to have zero inventories in stores.

JIT is based on two principles

Question No. 8 (Past Paper Nov 22, 5 marks)

ii. Interest received on bank deposits

S. No. Items Accounts

Question No. 9 (Past Paper, Nov 22, 5 marks)

Business functions Cost Driver

Customer Service • Number of service calls

Question No. 10 (Past Paper, Nov 22. 5 marks)

v. A timetable for the preparation of each budget.

vi. The manner of scrutiny and the personnel to carry it out;

vii. Reports, statements, forms and other record to be maintained.

ix. The reporting of the remedial action.

Question No. 10 (Past Paper, Nov 22, 5 marks)

Industry or Product Cost Units

Transport (by road) Passenger- kilometer or Tonne-kilometer

Question No. 11 (Past Paper, May 23, 5 marks)

High Employee Turnover increases the cost of production

Question No. 12 (Past Paper, May 23, 5 marks)

Definition of cost objects

Examples of cost objects

Question No. 13 (Past Paper, May 23, 5 marks)

Meaning of Practical capacity and Normal capacity

Normal capacity is the volume of production or services achieved or achievable on an average

Normal capacity is determined as under:

Question No. 14 (Past Paper, May 23, 5 marks)

Meaning of Activity Based Management (ABM)

Activity based management can be used in the following ways:

ii. Business Process Re-engineering: Business process re-engineering involves examining

iii. Benchmarking: Benchmarking is a process of comparing of ABC-derived activity costs of

Question No. 15 (Past Paper, May 23, 5 marks)

Cost of Service Department Basis

Basis of re-apportionment of service department overheads over production departments

Question No. 16 (Past Paper, May 23, 5 marks)

Question No. 17 (RTP, May 21)

The main features of these contracts are as follows:

Question No. 18 (RTP, May 21)

• Estimated profit margins