INTRODUCTION TO COST AND MANAGEMENT ACCOUNTING THEORY QUESTIONS Qi. What is Cost Accounting? Enumerate its important objectives. {CA Inter May 2016, May 2010, May 2008, Nov. 2002, May 2001, 3 Marks] Ans.: Cost Accounting is defined as “the process of accounting for cost which begins with the recording of income and expenditure or the bases on which they are calculated and ends with the preparation of periodical statements and reports for ascertaining and controlling costs.” The main objectives of the cost accounting are as follows: @) Ascertainment of Cost: The main objective of Cost Accounting is accumulation and ascertainment of cost. Costs are accumulated, assigned and ascertained for each cost object which may be a unit, job, operation, process, department or service. (i) Determination of Selling Price and Profitability: The cost accounting system helps in determination of selling price and thus profitability of a cost object. Cost accounting system provides a basis for price fixation and rate negotiation. (ii) Cost Control: It ensures that expenditures are in consonance with predetermined set standard and any variation from these set stan- dards is noted and reported on continuous basis. To exercise control over cost, following steps are followed: Determination of pre-determined standard or results. Measurement of actual performance. Comparison of actual performance with set standard or target. @ Analysis of variance and action. (iv) Cost Reduction: It may be defined “as the achievement of real and permanent reduction in the unit cost of goods manufactured or services rendered without impairing their suitability for the use intended or diminution in the quality of the product.” (v) Assisting management in decision making: Cost and Management Accounting by providing relevant information, assist management in 1a1.2 RIRODICHIONTO COST AND UNAGEAIENT ACCOUNTING planning. implemcoting. measuring. convllinganderaluatingofarious alanning. lee SoS and anager actouniing sete eee ii Gai Siate ile difference between Financial Accounting and Cost sti. A rou afcrmation vot iesry which wil eres oo Recountlng.| Fpdctson maine ceo ‘ EL Dintinguch beeen Con Control and Coat Reduction, ‘jaws Difference between Financial Accounting and Gost Accounting [CA Inter Dee. 2021, Mey 2019, May 2016, [iia [—Fimcta Accounting [Cost Aesountng 2015, Nov. 2011, § Marks) Fay Ohne | Ryerss nfrmanumabont | Acerainment of cost for | Jnarbiffercace bewcen Govt Control and Cost Reduction Weer |pws oe sot a i con Reduston Tar [Recording af] scons Hore dan] makes use of toch store] ce Sam eta [ones kaso ae Tass minis owen posite co [IF recognises no condiion ae pemanen| Socea change wil revel in lercon Fs nd pestered cost Tay | es an | iomcnolonncatacqane | The cost acura ie Holic, creditor. finance} intergal management. But hls cesta | emer olor aor Jods FA, budgeting, Ta, is Fs Baha ol pc oc he pH [67 [Pesos dco we wo decay asda val sean, the sce of modern tne co [zpos one 1d present S| [agi acon | tows wot To othe rons oe el fis re see feres cease seboaida “P procaine | aR ees) | ome ome seem cee a ES wT a | pcess prepared usually fora year. | prepared as and when re- QE. State the difference between Cost Accounting and Management Find | Presentation of | A sot format & used for pee | In general, no set formats For | Secounting, {6A Jnter Now 2020, May 2077, 4 Marks) IMocmation | sentmpinancelsnlormaton | presenting cost information| ‘fens Dffercace between Cost Accounting and Management Accounting, [otowes a) Dass Cont Accounting | Management Accounting. ‘Cost and Management Accounting information are required by San ee oe eeeeataeel ae penne feat ‘& to know prodct and service specifications like volume, quallty and prox + to kn the performance parameters against which tei performance {8 messed and eased, 1 toknov divisional exponstoiiy centre) prottbih [G6 Describe the uses of Gost and Management Accounting information bythe managers. ICAL Modu) [6] Ruan | fiscal] I dows wa lossy ops Regsatins_| snd proces for fecrding| rule roto coil dilero aio ‘Ans The managers se he wformaton: " toknow the con ofa cont object and cost contre14 ——_asrmopUcTIONTO COST AND MANAGEMENT ACCOUNTING 4+ 10 know the prise for the product or service, {Sse mente and evaluate performance of responsibility centres, ‘to know te profitably. producti, departmentvise, ew omerwvise 4 tocanlate the strates options and to make decisions, gt mealuiemmecrierel meted Se = eae Se Se cnn eee ee a es ea Ieformatn et Tapabl of meeting te requirements tees ose aE An, a ocean oe aaa ee cer tt deell tr petra ei omc Se reac arene results of the system for both horizontal and vertical analysis. si! px Seagate near retest meg ag cen gr srering te aoe te results, ” a a ain ano art rtp es Hema eotcascodment and medientons la he eae ame rel © foto nem rey sl ero rn and scone chasse ta efoto rong contin In log (GE SRE ae the ese factors Tor naling a cost accoundlng pain TCA Inder May 2017, Now. 2010, 4 Marks} 0 tee tote Said er ar (Nw an Dr of na nd Te ny shih ei eee ec ts inrnoovenioso cosraupsunnceMENraceouNTins 1S wine cont accounts to find out the cont incurred 09 a particular proces "Yiierade retnement proces et (it, Organeattonal Terarehy: Costing 9 i esas af afren lev of tanagerment Top MARABEMEN Feat ch the corporate step, sree Evel MANREEMENE FB comcerre wh rdcing ster, product diversification, produc sores pcratoal level management needs the Information om Prt arty tobe comumed report on tle ie ny Keverng the product: Nature of the product determines, the Ops of On esto be mmpemanted The prod! whe as by-products se ng sytem nich aesourns for by-products a wel 1 case TyRuGhabic of shert sae prodoct, marginal cowing Is appeOPr ate ore coninaion and minimum price at whic products could tesa () Knowing the prodcion process: A good eaiehed without the complete knowledge of he ‘Sntaprronmen com beac a he mow spproprit Ces pre ccminnt can acnty degre of efor or resures Cm beak fin potcular proces, The sso Inches some basic technical howshow and process pecllary, Informationsynehronisaton: Establishment ofadepartmentorasyatr qefetes substan smu of organisational resources While drafting ree ar tatormaton ects of earious other departmentshoud SSSRLEE Tw account For cxample, na peal business organioalon este department needs to cubit monthly stock statement 1 TeNier baat quanny wane sock details a the time of ing tora 1 Method of maintenance of cost records: The orzanisation meetin beforehand ine manner n which Cost and Financial accounts seg otter locked iio sngl integral sccountng syst and Bow Fee sf acparte cee of accounte re. comand financial, could Be econlle by means of onto account, (itty Statutory compliances ad aut: Recs are to be maintained to Stein th sautony requirements and applicable cost accounting ‘Sind should be followed Gx) Information Attributes Information outa povacs al the atutes of wa Semaplete accurate, timely elevant toads am Sete Information System (8), crm should fulfil dhe informa se an seca o on vast serated fromthe Costingsysten Fat information te should be 100, Give any five exauples ofthe inpat of wae af formation Technol A “ER nce Jonnary 2020, 8 ark) ogy in Com Revoltingane teample of rpoct fInfraton Tecnology In cost coun kr elaine ie my {Aerie nmedacionof RP ren Gon acthage tery tert nr gents nec see I ser nan roe Serums = ‘ron enar pcm an en hich hg S Dihessopveldacumentcbitalsinenar Fonds Received Note, lsbouruillaaton ee w Agave uy eens ecog ithe spf inert ica ‘erin ree i curacy tp eta ara nom cheno na ee Fatal mutation note plicit Siar, purchase orders can be aera eae auppliers wi the help of exiranct Thisenables enataee integra asain Or?) apprsch a enon mana ‘nufestcton Ge) doe Horm for x ctor a eit cin be exaratod ‘Chargeable hour, sntact, (9) Pte sie TSE Neaia and rplain pes of revponeblly conten. Gia Mention and cxlain pes of FerponsTlity centres ICA Inter Nov. 2018, § Marte, SSR T Raison eos eet wiki ety Ce a nsconna tee tac memued asia pe detrioed nani eprint loobya esl ae vee Cents The ray cn acura Emo entrails sera hh Eien re pt ae ee aoe ed i a ee Cane a ree rpm es cick hee Pe ete rtcradenel mormon tod Locmrenecch penta ey Sees Tere aero ara yee eee ipemmn hella Eee ‘branches of an organisation. a — ncn cee araeheryomiblly cee whic ee creas a elena cere cece Seay elena GIS Sach the tex oF ResponsTlity centres under the Following] (Purchase of bonds, stocks stocks or real estate property, Gi) Tike counter ina Haway station, Gt) Decentralized branches of an organtsatton, (G0) Maharstn,Navratnn and Mi i Ualgyayez Neato an Minraina Muli Sector Undertaking (0) Sates Department ofa organisation. iy w Ans 1a) rvestment Cece i) Revenue Centre (iy Prot Centre (0) rvestment Cente (0) Revenue Centre Gua that is meant by Cont Come? What are the dierent PS oF (3002. 4 Marks Gis. What ie meant by < Oui centres? [CA Inter Nov. 2016, May 2015. Nov de erE rcs the mapa centre which i eld sccounabis pee com ec of costs which are under Ws control The performance of tht {or inf conre mesure soa preterm standards or Budsets ‘The cost centre are of 60 978 Triste ont centre where ourput is measurable Fidithpurcantespecied. Anestimateof standard Init of outputs sot and the actual ost for ndipatredutredton Sts fino pce i of o cco rene oie tmenpured oth he standard cost. Any deviation (oaance) aa ca ad analyod inte conrliabe and uncontrlable cost Sena rene cone come capt to cory withthe standard a ere omic fr adverse com warances. The inpuoutPut Fa BeeNMandan cost sont ley tentible (6) Discretionary Cost Centre: The cost centre whose output cannot be Pees in ancl rms thus input output ratio cannox dened [BRTEr of tapars compared wth allocated budget forthe ati BiSsples are Research & Development department, Adserdaement Acpartment ‘Oi6: What do you mean by ‘Prof Contre? i {ICA Inter May 2016, 2 Marks) “Amst Proft Contre Is the responsiblity centre which fas both responsibilty Talon of revenue and incurence of expenditures, Since, manazers of er Esteentnes are accountable for both costs all as revenue, romtailty PreK hacks for measurement of pevformance of these responsibility centes. Ecamples are decenteliged branches of an organisation IF. Distinguish between Profit Centres and Tnvestinent Centres TCA Inder May 2006, 2 Marks) “Fru Profit centres ave the vesponabii centres which have both responsibil aan reant ion of revensean inurence of expenditure, Profitability he Tease Siement of periormance of these responsibility centres Investment centre ae the responsibility centres which are not only respons Ianetteneet Fats bat abso have the stant to make capital investmenta0 —_srRopic 08 TO COSTAND MANAGEMENT ACCOUNTING formance ofthese responsibil eine There gnenmcnt (RD besides prof, ESET rerum tein ae or perwecn cost units and cost eentreas > 8, Distinguish Beeson ost wh nee pines ICA Inter May 2011, 4 Markap Taal of pont, SNS OF time (or comb centres are meas on the aac eae oe wsdl nem and maintain is ent through oe eta also be considered as cost unt. Cost nn seal measurement ike number weight area, volo Jans: Contos oui ssc a ie ane fe incre 0 ont sured againe pre-determined standards or budgets een ee eo etter aaa TE ee ee tee cates ie a cr a ako a aon a ee a 5: Duplication of work: It evolves duplication of work ae organisation has 2 Ramla ues of accnums fe Financial Accounts and Cost Accounts THAT Module “G20. Dicuss con clnsiication based on variably and controllabii 164 Jer May 2018, Noy 2008, Nov. 2006, Now. 2008, ‘ay 2003, Now. 2001, May 2001, 8 Marke} ‘as: Gt casification aed on variability ‘aed cost: The are the costa which are incured for pt, and Sei, within certs outpal and turnover mits tend vo bo tnalfsted Eicon inh aco acts ior tornovar They dont tendo intease or dcresne with he changes It Output, Far example, Fen insurance of factory balding tes a a + Yriabe cot: These conis end ovary withthe volume of acti: Any Sncrene inthe act ress iam nero nc varie cont sd ee ‘am For champ, dee mater cont dee labour coals ‘+ Scmbvarablecone These hus coss contain bth fined and aviablecomypo- nts an ate spr aflected by Hachalons inthe etl of act Forcampktleptone bi gas and cesses ae cont classification based on controllbilty "> Controllable costs: Cost that can be controlled. ‘investment contre manager called controllable eos, Controllable Coste incurred ina part rexponsibiity centre can be infioced By thctton ofthe manger heading that rsportibiy centre ei direct ‘+ Uncontrollable costs: Costs hich cannot be inflaenced by the action ‘1's spied member of an undertaking are Known 90 uncontrollable Costs For eps espenditure incurred by the tool room controllable tthe foreman in chee of that scton but the share of the tooloor ‘kpenaiture which (s apportioned to 8 machine shop isnot controlled tye machine shop foreman, scaly bya cost, profit ‘O21: Explain the Following: 1, Explicit costs 2. Impliett conte [cA Inter May 2014, Mey 2005, Mas 2001, 2 Marks} aise Known a out of pocket costs and ‘Ans: Explieit coats These cose a ‘ice to Cons inslving melo payment of cash, Salaries, wages, poste Sn telegram, printing and station, interest on Toan ete. are some examples ‘Step cowsinvolsing immediate cash payment “Implicit cost: Thexs costs do not invelve an immediate cash payment. They Srenotrscondednsheoksol account Thevareahoknoweas cconomiccosts, a ee ee () Product Cost Gi) Sunk Cost Gi) Opportunity Cost, ICA tutor May 2018, Nov. 2016, ‘May 2003. 2 Marks} ‘ans: G Product Gost These ae the costs which are ssuciated withthe pur ‘Sinssanasheol pons inthe caseofmerchanaine inventor) tnthe proton ‘SComaro-suchcesteareansoctated withthe acgusion and conversion of hate ‘Saison all tise manaturing ipa into ished prouct forse, Hence, ner marginal costing, yaa mromufacaring cst and nce abortion Costing ta monulactsing cons (arable an fed) consteventortle ‘Srproduct ete i) Suk Cost Hitoical cons sncured in the past are kno as unk costs ‘Ficyry morse indacieton king tnsheeurvent pie. Porexarmple, lease (OT deeision relating tothe replacement of s machine the WV 0 the existing Imachine sami costa thereon nt considered Lat Opportunity Cost This cox reer othe wale of serifce made oF bene Sie st epertnity foregone in accepeing an steratie course of ation, For “nl fin inane hs eypamston pla by wthdrsing money fom IsJon 10 COST AND AANAGEATENT ACCOUNTING jaz TROUT vy dp nah cae te ow feet onthe ek depo ingore pian SN EE Deine te Town: ic) Imputed Cat capac Cost {tte No, 2009, 2 co ane ped conse tna con which dont ees seth ln Fa rca oppor css a et apie Conte arco which are ally pitino ed se capone, ample eaaton ee amet and mt adc othe cit facie Gea. Eaplain the folowing: =a 1. oakpocket cont / 2, Shut down costs | 13 Discretionary costs | “4, Eagincered costs HCAE Motte) Jac 1 Ouraf-pocket Cost Hf thot portion of toal cost which invahes oN ed indecision eating to fixation of sling price oh ae or ge Outabpocket costs ean be avoided or sed i ASSIS prop under consideration isnot accepted. 2 Shutdown Coss: Thowe costs, which continue tobe, 2 etd erparariy shutdown eg fo rcs, depreciation cte- Those cous ifr be elma withthe closure ofthe plans. 4 4 Discretionary Costs: Suc conte are not ied toa clear cause and eect rela, jomfipbccen naan pt Ty sally ars fom pei dione ‘purine th mun tla 1 be inetaeed. Examples include advertsng prions, xceve training te ‘ 4 4 Engineered Conte: These ar costs thal result specifically from clear care Sud leer cabooship been np and ontpate. The roltionsip esa esonslvonerable Esmplsofinputsarediret materialcostdifctIabout sis te samples of utp ae cay comptes te “G2. Disngush between product ox and period cox ee CA er Sune 2009, ay 2006, 2 orks), Proc Gn ae ase with he purchase and male of goods. I the ‘elution parc ote scat th he eqn Cone $e often ocr maton ps none prot oF SSE gs mal conn vnc mama cot ode Dorin cont tl manatring costs arable or xed) cost IntRoDucTION 10 COSTANDAUNAGEMENT ACCOUNTING E13 land 0 the products but are which thes are Incurred he conte, which ate not as Teed on enponue spainet reve ofthe period Slnemamutactring costs seh as geneva ge drminstra A pafarition expenses ar rcrnised os per cons "Q2E, State the types of cost inthe following eases: (i) Interest paid on own eapltal not involving any eash outflow: (Gi) Withdrawing money from bank deposit for the purpose Of Pr ‘Shasing new machine for expansion purpose. (Gi) Rent pal forthe factory building whieh Is temporary closed (is) Cost assocated with the acquisition and conversion of material (0 Sie finished product. “Tek ter May 2012, 4 Maris) ‘ans lenputed Cost i) Oppaetnity cost (i) Shutdown cost (i) Product cost (027, Describe the various methods of coting HEAT Modeled ‘Ans (@ Single or Output Costing: Under dhis method, the cost of a predict BEShaimel he product Being the only one produced like brisk, coals et (i) Bateh Costing In his method batch represonsa numberof smal orders OES rough he fatony i batch and eed batch ts ated gs unit of cst En cste sparatly. The cst per nit deter by dividing the cst of ihe batch bythe numberof unis produced in the bath. li Job Costing: In this method, ost of cach job is ascrianed separately 1) Stable inal cases whe work fe undertaken on receiving a customer’ ‘hdr ikea panting pest, motor workshop, et (és) Contract Costing: Unser his mth, the cont ofeach ontractisascetaned devel issuable for rms engaged inthe constrction of bridges, roads, ‘ings ete (6) Process Coming: Under this method, dhe cost of completing ech sage of okisesesrnined. ie costof making paipandcostof making paper rom pulp (Gi) Operating Costing: 1 sed in the case of concems rendering sees Ake rsport pps of ater rtal ade et (Git) Multiple Costing I is sombination of two oF more enethods of iRise sxe. Suppose em mamactures byes dacuding ie Smmponems he pars willbe seated By Jo or arch ceating bu che cost of ‘Stoning the bigyte wil be compated by Single oF output costing method. resid eosts arenae [Qa Sane the tod of costing that would be owt salable ag {e) Ollrefinery ] (@) Biysle manufacturing (6) Interior decoration OSS (chime 205 > wall ee OT Rene ies Operating centing “Gab Tien the methods of costing forthe Foliowings > () Where al costs are directly charged toa specific fob, Gi) Where all cots are directly charged to a group of product Gi) Where cost is ascertained for a single product. a Fe reas anaes titra ee wad sy ad where ote tes cle Sed ad ane fl Haws) Job Costing (Batch Costing (i) Vit Coming or Single oF Outpt Costing (i) Mp Costing 30, State the method of eonlng and also the unit of cost for 225, Sg etd a on an lo the wl a eon Tor the a ( Hote! (i) Toy-making (ii) Steet inte ‘Method of Goning Tait of Gan Room dipper be Poco Gouna |e TinnefPer MT "OBE Give the method of costing and the wait of cont against the wader” pote Industrie: 1G) Road transport (i) ice i) Beyer Ep mips cooereioe {ch tter No, 2016 4 Sark) Inga a cng Sapa] co |e snes tect fiecrne | [in | rge construc "032, State the ft (@ Real Estate (Gd) Motor Repairing Workshop (Gi) Chomleal Industry x) Transport service (©) Assembly of Bicycles (Gi) Biscuit Manulacturing Industry (ity Power Supply Comps Gili) Car Manufacturing Indes od of Conting to Be used inthe folowing idustios= (Gs) Coment Industry es (2) Peinting Press ICA Inter Now. 2020, 5 Marks) [ Tada Nato of Conn Seno Operating Cong ‘Unig utr aap Costing SenoOpeating Costing Sune Costing Aes eyes | |‘tho of Contng ls Contin (@ of Refnery Ai tmeror Decoration i) anes Company (Ge) Advertsing : (9) Car Asser ICA Inter January 2021, § Marks) co Method ot Coane) tu | sins Company Operation Service Costing to) [Aarne Job costing fo) Leora Muliple Costing Tea ner 2028, Marka) “ras Unllors Coalng Whena rarer offimsinan industry agrecamong Een Disethe ne sem olontng, theyre sid to fallowa sary tani coving 5 Marcial Cotiog Is defined a he aucerisinment of marginal cost by JaezeRieleten ed and varale cone tsuneo ascorstn ceo Savon aaa ora af outpt on prof 4 tandard Contig: Here wndardconeare pre determinedandaubsequey enared wi the eordc acon cons ins chnlque sf co sea, ‘sem and com contra especialy sable where the manafectung ‘mth ive run of sndrdsed good cf tpi ntare 4s an Costing: It is the ascertainment of costs after they have been [Link] Costing isthe practi ofchrangall nts, bothvarisbleand ise operat, rctaes oF prodte. Tis ir ems mail cos ‘where fixed costs are excluded. pe aa ne “G35: Answer any Tour of the Following Explain very briefly the following terms used In Cost and Management Iecountings i) Predetermined Cost i) Extimated Cost Git) tmpated Cost (is) Discretionary Cost (ow, 2025, 4 Marks} {jaw Predetermined Cost =A cos which is computed in advance before ‘Mtsigtton or operations start onthe asi of specification ofall he Factors Bfecing cost, shnonn ava predetermined cont Estimated Cost - Kohler defines eaimated cont as “the expected cost of man Elites or acisivon, often interme af unit af product computed 20 the Mem er intormotion vata In advance of actual production or purchase Emsted cote are prospostne cose nnce they ree to prediction of costs Imputed Costs These conte are notional costs which do not involve any cash ‘nly Interest on eapita the payment for which fs not actally made, isa ‘time of imputed cost Thess cost ate sian to opportunity costs Diteretionary Costs ~ Such cons are not ted toa clear cause and effect rla- orehipbemeeninputsandovtpats They usally arse rom periodic decisions Fegaing the maximum autos vo be Incurred: Eeamples Include adversain, pull rations, executive taining ee