CA Ipc Most Important Costing Theory

COSTING MOST IMPORTANT THEORY NOTES 2014
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CA SUKESH BHATIA CLASSES, 1/27, NEAR GURUDWARA, LALITA PARK, LAXMI NAGAR,
DELHI-110092, PH-9811270284, 9910021477
Page 1
About the Author:CA SUKESH BHATIA has graduated from University of Delhi as one of the top scorers in
Cost Accounting & Financial Management at University Level. Thereafter he raised his bars
further and qualified as a Chartered Accountant with amazing scores at each level. His teaching
career began after his much appreciated spell at NIPPON PAINTS (INDIA) PVT. LTD.
During his college education, his extra-curricular activities helped him stay ahead of the crowd.
Playing chess was his hobby and his participation in various chess competition won his various
acclaims.
He has served as visiting faculty member at several professional institutes, and has been taking
active steps to improve quality of teaching at many private educational bodies. He has also
pioneered a blog casukeshbhatiaclasses.blogspot.com which is with a purpose to provide
guidance to CA student community.
His friendly nature and helpful nature has popularized him as a friend-cum-coach and not just a
teacher among students.
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Why this book has been written?

In my classes I have many times observed that students normally ignore theory portion of the
Cost & FM syllabus. This leads to 2 losses to them:1) Less opportunity to get more marks.
2) Explanation skills are not developed.
Being a Chartered Accountant you must have good speaking skills which are developed by good
writing skills. Students explanation skills shall be developed by theory portion and this is the
reason for which ICAI asks theory in exams.
So, I am hoping this book will be a great medium to achieve the above said goals and it will be
appreciated by students.
We are happy to inform that the entire paper of

IPCC/PCC- May-2014, Nov-2013, May-2013, Nov2012 and May-2012 was covered in our books.
Human efforts are not perfect. In spite of my best efforts, I am aware of possible errors and
omissions that escaped my notice. I shall, therefore, be extremely thankful to the learned ones
who will extend their cooperation by sending their valuable criticism, suggestions and
observations for further improvement of the book. I am reachable at
[email protected]
JULY 2014.
CA. SUKESH BHATIA
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INDEX
Chapter No.
1
2
3
4
5
6
7
8
9
10
11
12
13
Chapter Name
BASIC CONCEPT
MATERIAL
LABOUR
OVERHEADS
BUDGETORY CONTROL
INTEGRATED & NON-INTEGRATED
ACCOUNTS
JOB COSTING & BATCH COSTING
JOINT PRODUCT & BY PRODUCT
MARGINAL COSTING
OPERATING COSTING
RECONCILIATION OF COST & ACCOUNTS
STANDARD COSTING
CONTRACT COSTING
Page No.
9-16
17-21
22-28
29-34
35-36
37-38
39-40
41-42
43-45
46-47
48-49
50
51-53
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IMPORTANCE OF THEORY IN COST &

FM IPCC (INTERMEDIATE) EXAM
CURRENT PATTERN OF EXAM
Q1. PRACTICAL (COMPULSORY) = 20 marks
Q2. PRACTICAL (OPTIONAL) = 16 marks
Out of these remaining 6 questions only 5 questions

are to be attempted.
TOTAL OPTIONAL WEIGHTAGE = 80 marks

OUT OF 80 MARKS THEORY WEIGHTAGE = 32 MARKS
HENCE, THEORY % = (32/80) x 100 = 40%
Q5. THEORY (OPTIONAL) = 16 marks

Q7. THEORY (OPTIONAL) = 16 marks
CONCLUSION:-
1. Theory covers 40% of Optional Paper.

2. Theory covers 32% of Total Paper.
3. Question No. 5 & Question No. 7 are theory questions.
4. Student has to attempt at least one theory question (either Q5 or
Q7). It means 16 marks theory is compulsory.
5. There is an internal choice in Question No. 7.
6. For what more are you waiting ? Why not to grab this opportunity
in the coming NOVEMBER ATTEMPT.
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TOPICS COVERED IN OUR COSTING

PRACTICAL CLASSES:SR.
NO.
1.
CHAPTER NAME
COST SHEET
TOPICS COVERED
(i)
(ii)
(iii)
(iv)
(v)
2.
MATERIALS
3.
LABOUR
4.
OVERHEADS
(i)
(ii)
(iii)
(iv)
(v)
(vi)
(vii)
(viii)
(i)
(ii)
(iii)
(iv)
(v)
(i)
(ii)
(iii)
(iv)
(v)
5.
INTEGRATED & NONINTEGRATED

ACCOUNTING
SYSTEM
(i)
(ii)
(iii)
6.
JOB & BATCH
(i)
Cost Sheet Basics & Cost Apportionment

Cost Estimation for New Jobs/Orders Question
Use of simultaneous Equation in Basic Cost Analysis
Semi-Variable Costs & Pricing Decisions using Cost
Sheet
Preparation of Income Statement and Basic Decision
Making
ABC Analysis
EOQ Computation and Discount Analysis
Stock Levels
Material Turnover Ratios
Landed Cost of Materials
Pricing of Material Issues & Valuation of Inventory
Stock-Out and Probability Analysis
Miscellaneous Illustrations
Treatment of Idle Time Cost & Overtime Premium
Labour Turnover Rates
Wage Payment System Time and Piece, Halsey and
Rowan, Others
Group Bonus Schemes
Miscellaneous Illustrations
Segregation of Semi-Variable Expenses
Capacity Concepts
Re-apportionment of Service Department Expenses
under 3 Methods
Recovery/Absorption using Different method and
Machine Hour Rate
Treatment of Absorption Differences
Non-Integrated Accounting System Journal Entries
and Ledger Accounts
Integrated Accounting System Journal Entries and
Ledger Accounts
Reconciliation of Costing and Financial profits with the
following special points/aspects WIP and FG
Valuation, Reconciliation with Losses, if any, Reserve
Working with given reconciliation Statement
Preparation of Job Cost Sheet and Estimation of Job
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COSTING
(ii)
(iii)
7.
CONTRACT COSTING
(i)
(ii)
(iii)
8.
JOINT PRODUCT &

BY PRODUCT
9.
PROCESS COSTING
(i)
(ii)
(iii)
(i)
(ii)
(iii)
(iv)
(v)
10.
OPERATING COSTING
(vi)
(i)
11.
STANDARD COSTING
(i)
(ii)
(iii)
(iv)
12.
MARGINAL COSTING
13.
BUDGETORY
CONTROL
(i)
(ii)
(iii)
(iv)
(v)
(vi)
(vii)
(i)
(ii)
(iii)
Costs for New Orders

Economic Batch Quantity and related computations
Preparation of Batch Cost Sheet and Estimation of Costs
and Profits of Batches
Profit Recognition with Notional Profit, and Balance
Sheet Abstract
Escalation clause
Profit Recognition using Notional Profit and Estimated
Total Profit
Joint Cost Apportionment Methods
Further Processing Decisions
By Product Revenue Accounting
Process Account Treatment of Normal loss, Abnormal
loss and Abnormal gains
Operation Costing & Routing Transfers through Process
Stock Account
Inter-Process Profits
Equivalent Production FIFO Method First and
Subsequent Processes
Equivalent Production WAC Method First and
Subsequent Processes
Equivalent Production Other Illustrations
Preparation of Operating Cost Statement, and
Computation of Cost/Fare/Takings
Computation of Cost Variances Materials, VOH, and
FOH
Computation of Budget Ratios or Control-Ratio
Computation of Sales Variances two approaches
Computation of All Variances/Multiple variances and/
or Reverse Working
Basics Computation of PVR, BEP, MOS, Profits etc.
Marginal Cost Statement two periods analysis
BEP in different Situations/Contexts
Effect of change in Costs, Volume and Prices
Indifference Point
Profits under Marginal & Absorption Costing Systems
Evaluation of Proposals and Decision Making Basics
Functional Budgets Production, Materials and Labour
Flexible Budgets Analysis of Semi-Variable Costs
Original and Revised Budgets & Misc. Illustrations
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CHAPTER BASIC CONCEPT

Ques1. Write short notes on essential factors/features for installing a Cost Accounting system.
(Nov 10) (Nov 12)
Ans. Essential Factors for installing a Cost Accounting System
Before setting up a system of cost accounting following factors should be studied:
Objective :
The objective of costing system, for example whether it is being introduced for fixing
prices or for insisting a system of cost control.
Type of business :
The areas of operation of business wherein the managements action will be most
beneficial. For instance, in a concern, which is anxious to expand its operations,
increases in production would require maximum attention.
On the other hand for a concern, which is not able, to sell the whole of its production
the selling effort would require attention. The system of costing in each case should be
designed to highlight, in significant areas, factors considered important for improving
the efficiency of operations in that area.
General organization :
The business, with a view of finding out the manner in which the system of cost control
could be introduced without altering or extending the organization appreciably.
The Technical Details :
Technical aspects of the concern and the attitude and behaviour that will be successful
in winning sympathetic assistance or support of the supervisory staff and workmen.
Change in operations
The manner in which different variable expenses would be affected with expansion or
cessation of different operations.
Methods of maintenance of cost records
The manner in which Cost and Financial accounts could be interlocked into a single
integral accounting system and in which results of separate sets of accounts, cost and
financial, could be reconciled by means of control accounts.
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Information
The maximum amount of information that would be sufficient and how the same should
be secured without too much clerical labour, especially the possibility of collection of
data on a separate printed from designed for each process; also the possibility of
instruction as regards filling up of the forms in writing to ensure that these would be
faithfully carried out.
Accuracy
How the accuracy of the data collected can be verified? Who should be made
responsible for making such verification in regard to each operation and the form of
certificate that he should give to indicate the verification that he has carried out?
Informative and Simple
The manner in which the benefits of introducing Cost Accounting could be explained to
various persons in the concern, especially those in charge of production department and
awareness created for the necessity of promptitude, frequency and regularity in
collection of costing data.
Support
Support of top management and employees are essential for installing a Cost
Accounting System in any organization.
Ques2. Distinguish between Controllable costs and Uncontrollable costs. (Nov 06)
Ans. Controllable costs :
Controller costs are the costs which can be influenced by the action of the specific
member of an undertaking.
Controllable costs incurred in a particular responsibility centre can be influenced by the
action of the executive heading that responsibility centre.
Uncontrollable costs :
Uncontrollable costs are the costs which cannot be influenced by the action of a
specified member of an undertaking.
The distinction between these two costs is a very thin line & is sometimes left to
individual that we may specify a particular cost to be either controllable uncontrollable.
Ques3. Distinguish between product cost and period cost. (May 06)
Ans. Product Costs:CA SUKESH BHATIA CLASSES, 1/27, NEAR GURUDWARA, LALITA PARK, LAXMI NAGAR,
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Product costs are associated with the purchase and sale of goods.
In the production scenario, such costs are associated with the acquisition and
conversation of materials and all other manufacturing inputs into finished product for
sale.
Hence under absorption cost, total manufacturing costs constitute inventoriable or
product cost.
Period Cost:
Periods costs are the costs, which are not assigned to the products but are charged as
expenses against revenue of the period in which they are incurred.
General Administration, marketing, sales and distribution overheads are recognized as
period costs.
Ques4. Briefly discuss, how the synergetic effect helps in reduction in costs. (May 07)
Ans. Cost reduction
It means achievement of real and permanent reduction in the unit cost of goods
manufactured or service rendered without impairing their suitability for the use
intended or diminution in the quality of the product.
Analysis of synergic effect is helpful in cost reduction.
Example :- When two or more products are produced and managed together. In such
cases the result of combined efforts are higher than sum of the results of individual
products.
Ques5. Explain in brief the explicit cost with examples. (May 07)
Ans. Explicit Cost:
These are also known as out of pocket costs.

They refer to costs involving immediate payment of cash.
Salaries, postage and telegram, printing and stationery, interest on loan etc., are some
of the examples of explicit costs involving immediate cash payment.
Ques6. What items are generally included in good uniform costing manual? (May 07)
Ans. A good uniform costing manual should contain:Introduction
Statement of objectives
Purpose of the systems
Scope of the systems
Need for the system
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Organization
Organizational structure for developing and operating the system

Stages or steps for implementing the system
System of Accounting
Principles of accounting to be followed

Span of accounting period
Classification of accounts
Description of accounts
Method of Costing
Costing period
Unit of Production
Departmentalization
Treatment of material cost, labour cost and OH cost,
Reconciliation between financial accounts and cost accounts
Reporting
Reporting period
Ratio
Levels of reporting
Cost statements
Ques7. Discuss briefly the relevant costs with examples. (Nov 07)
Ans. Relevant Cost:
Relevant cost helps in specific management decision making.

Business decisions involve planning for future and consideration of various alternative
courses of action.
In the planning process the costs which are affected by the decisions in hand.
The cost is said to be relevant if it helps the manager in taking a right decision in
furtherance of the companys objectives.
Relevant cost is a future cost which causes the difference alternatives.
For Example: For sales promotion if the company extends the period of warrantee, the
additional cost incurred during the extended period of warrantee.
Ques8. What are the main objectives of cost accounting? (May 08)
Ans. The objectives of cost accounting are as follows:CA SUKESH BHATIA CLASSES, 1/27, NEAR GURUDWARA, LALITA PARK, LAXMI NAGAR,
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To ascertain & analyses costs

To control costs
To reduce costs
To fix the Selling Price
To prepare Periodic Statements
To Provide Information
Ques9. Explain controllable and noncontrollable cost with examples. (May 08)
Ans. Controllable costs :
Controller costs are the costs which can be influenced by the action of the specific
member of an undertaking.
Controllable costs incurred in a particular responsibility centre can be influenced by the
action of the executive heading that responsibility centre.
Uncontrollable costs :
Uncontrollable costs are the costs which cannot be influenced by the action of a
specified member of an undertaking.
Ques10. State the method of costing that would be most suitable for (Nov 08)
Oil refinery
Bicycle manufacturing
Interior decoration
Airlines company
Ans. The suitable method of costing for the following is:
Oil Refinery :
Bicycle manufacturing :
Interior decoration :
Airlines company :
Process costing
Multiple costing
Job costing but if on a larger basis then Contract costing
Operating costing
Ques11. Define Imputed cost & Capitalized cost.

Ans. Imputed Cost :
Imputed costs are notional costs which do not involved any cash outlay.
Examples of imputed cost are Interest on capital, the payment for which is not actually
made; these costs are similar to opportunity costs.
Capitalized Cost:
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Capitalized are costs which are initially recorded as assets and subsequently treated as
expenses.
Ques12. What is Cost accounting? Enumerate its important objectives?

Ans. Cost Accounting
It 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 statements and reports for ascertaining and controlling costs.
Cost accounting preliminary deals with the collection and analysis of relevant cost data
for interpretation and presentation for various problems of management.
Cost accounting is the application of accounting and costing principles, methods and
techniques in the ascertainment of costs and analysis of saving and / or excess as
compared with previous experience or with standards.
CIMA defines cost accounting as the establishment of budgets, standard costs actual
costs of operation, processes, activities or products & the analysis of variances,
profitability or the social use of funds.
The objectives of cost accounting are as follows :
To ascertain and analyse costs : The primary objective of cost accountings is to

ascertain and
analyse costs incurred on the production of various products, jobs and services etc.
To control costs : There are a number of techniques in cost accounting like standard
costing and budgetary control for controlling cost.
To reduce costs : By now, the objective of cost accounting has been extended to reduce
costs. For cost reduction plan, products, processes, procedures, organization, and
methods are continuously reviewed or scrutinized in order to improve efficiency and to
reduce cost.
To fix the selling price : Under cost accounting, reliable data is provided to act as a base
for fixing selling prices.
To prepare periodic statements : In cost accounting system, periodic cost statements
(viz. monthly, quarterly) for review of operating results are prepared.
To provide information : Cost accounting provides useful information for planning and
control and for taking various decisions regarding increases in production, installation or
replacement of a machine, making or buying of a component, continuing or closing
down of a business etc.
To Ascertain the profit of each activity : The profit of any activity can be ascertained by
matching cost with the revenue of that activity. The purpose under this step is to
determine costing profit or loss of any activity on an objective basis.
Decision making is defined as a process of selecting a course of action out of two or
more alternative courses. For making a choice between different courses of action, it is
necessary to make a comparison of the outcomes, which may be arrived under different
alternatives.
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Ques13. Distinguish between cost units and cost centres.
Ans. Cost Units :
It is a unit of product, service or time (or combination of these) in relation to which costs
may be ascertained or express.
A batch which consists of a group of identical items and maintain its identity through
one or more stages of production may also be considered as a cost unit.
Cost units are usually the units of physical measurement like number, weight, area,
volume, weight, area, volume, length, time and value.
Cost Centre :
It is defined as a location , person or an stress of equipment ( or group of these) for
which cost may be ascertained and used for the purpose of cost control.
Cost centres are of two types, viz., personal and impersonal.
A personal cost centre consists of a person or group of persons and an impersonal cost
centre consists of a location or an item or equipment ( or group of these).
Ques12. How do you deal with the following in cost account ?
Packing Expenses
Fringe benefit
Ans. Packing Expenses :
Cost of primary packing necessary for protecting the product or for convenient handling,
should become a part of the prime cost.
The cost of packing to facilitate the transportation of the product from the factory to
the customer should become a part of the distribution cost.
The cost of fancy packing necessary to attract customers is an advertising expenditure.
Hence, it is to be treated as a selling overhead.
Fringe benefit :
These are the additional payments of facilities provided to the workers apart from their
salary and direct cost allowances like house rent and city compensatory allowances.
If the amount of fringe benefit is considerably large, it may be recovered as direct
charge by means of a supplementary wage or labour rate; otherwise may be collected
as part of production overheads.
Ques13. State the types of cost in the following cases: (May 12)
a) Interest paid on own capital not involving any cash outflow.
b) Withdrawing money from bank deposit for the purpose of purchasing new machine
for expansion purpose.
c) Rent paid for the factory building which is temporarily closed
d) Cost associated with the acquisition and conversion of material into finished
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product.
Ans. Type of costs
a)
b)
c)
d)
Imputed Cost
Opportunity Cost
Shut Down Cost
Product Cost
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CHAPTER MATERIAL
Ques1. Discuss the use of perpetual inventory records and continuous stock verification, and its
advantages. (Nov 06)
or
Ques1. Perpetual inventory system comprises Bin Card and Stores Ledger, but the efficacy of
the system depends on continuous stock taking. Comment. (May 13)
Ans. Use of Perpetual Inventory Records:
Under this system, a continuous of receipt and issue of materials is maintained by

the stores deptt. and the information about the stock of materials is always
available.
In this method stock records are maintained in such a way as to make an entry in the
records, the physical movement of stock on receipts and issue of materials and to
indicate the balance of each item of material in the stores at any point of time.
In this system, the entries are made in bin cards and stores ledger as and when the
receipts and issue of materials take place and the balance is ascertained after every
receipt or issue of materials.
The stocks as per dual records viz. bin cards and stores ledgers are reconciled on a
continuous basis.
Advantages:
This system facilities production planning and inventory control.

It helps in having a detailed and more reliable check on the stores.
The stock records are more reliable and stock discrepancies are invested &
immediate actions are taken.
Use of Continuous Stock Taking:
Under this system, physical stock verification is made for each item of stock on
continuous basis.
It is physical checking of stock on continuous basis.
It is a method of verification of physical stock on a continuous basis instead of at the
end of the accounting period.
It is a verification conducted round the year, thus covering each item of stores twice
or thrice.
Variable items are checked more frequently than the stocks with lesser value.
Advantages:
Any discrepancies, irregularities or charges are detected at early stage & brought to
the notice of management.
It acts as a moral check on stores staff.
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It insists on upto date maintaining of stock records.

The disruption in production caused by periodic stock taking is eliminated.
Ques2. Discuss the accounting treatment of spoilage and defectives? (May 07)
Ans. Treatment of spoilage in costing :
Normal Spoilage :
If the cost of spoiling is normal & inherent in the process or operation, then the cost
of spoilage is absorbed by charging either to the specific production order or to the
product overheads.
Abnormal spoilage :
If the cost of abnormal spoilage arises in the process then it is charged to costing Profit
& Loss A/c.
If spoilt units are reused as raw materials in the same process no, separate accounting
treatment is required.
But if, spoilage is used for any other process or job, a proper credit should be given to
relevant process A/c or job A/c
Treatment of Defective in costing :
1. Normal Defective :
Charged to Good Output : The entire cost of rectification of normal defective is
charged correctly, then the rectification costs are charged to general overheads.
Charged to departmental overheads : If department responsible for such defectives is
correctly identified, then rectification costs are charged to such departments.
Charged to specific jobs : If it is easily identified with specific job, the rectification costs
should be charged to that job.
2. Abnormal Defective :
The rectification cost should be charged to costing Profit & Loss A/c.
Ques3. Explain, why the Last in First out (LIFO) has an edge over First in First out (FIFO) or any
other method of pricing material issues. (Nov 07)
Ans. Last in First out (LIFO) has an edge over First in First out (FIFO) because:
Under LIFO method, production is charged with current market prices and hence pricing
of the production is facilitated whereas in case of FIFO method, production is charged
with old price (i.e. low price under inflationary trend).
In the same way, under weighted price method, the rise in prices is spread over a large
number of units and therefore its effect is much reduces. The average price is always
less than the current market price. However, determination of the average price
requires a lot of clerical work.
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Therefore we prefer to use LIFO method so the product cost is near to market price.
Ques4. Discuss ABC analysis as a technique of inventory control. (May 08)

Ans. ABC Analysis:It is an important technique of inventory control on selective basis.
Large manufacturing units have such a large number of items in their stores for
which it is often not possible for the management to pay the same attention to each
and every stock item.
A system is therefore required by which these items are classified according to their
importance & then selective control is exercised.
ABC analysis or selective control is a technique whereby the measure of control
over an item of inventory varies directly with its usage value.
In other words, the high value items are controlled more than the items of low
value.
Class A is made of items which are either very expensive or used in massive
quantities. Thus, these items though few in number contribute a high proportion of
the value of inventories.
Class B items are not few in numbers but also they are not too many either, value
wise also, they are neither very expensive not very cheap.
Class C contains a relatively large numbers of items, but they are either cheap
items or used in very small quantities so that they do not constitute more than a
negligible portion of the total inventory value.
This method is known as Always Better Control or the Alphabetic Approach.
ABC concept of classifying goods in an inventory is very commonly used for
exercising effective inventory control. Under this technique the items in inventory
are classified according to the value of usage.
Analysis and Control :

The three categories are classified & differential control is established as under:Category % in total
value
A
70%
% in total quantity
Extent of control
10%
20%
20%
10%
70%
Constant and strict control through

budgets, ratios, stock levels, EOQ etc.
Need based selective control periodic
review not strict as excessive.
Little controlFocus on saving associated
costs.
Comparative study of different class items

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Sr.
No.
Nature
A items having high

consumption value
1.
Extent of
control
Order
frequency
Very strict control is

Implemented
Frequent ordering
should be placed
Bitems having
moderate
consumption value
Moderate control
Implemented
Order should be
placed in 3 months
3.
Lead time
Maximum efforts to
reduce the lead time is
undertaken
Moderate efforts to
reduce lead time is
undertaken
4.
Level of
management
Review
Period
Must be taken care of

by senior officers
Reviewed after a
month
or every 15 days of
waste, obsolete &
surplus tems
There may be supply of
as many source as
possible for each item
Can be supervised by
middle management
Reviewed after every
3
months of waste,
obsolete & surplus
items
There may be supply
of three or more
reliable sources
Maximum follow up is
Required
Periodic follow up is
Required
2.
5.
6.
Supply
sources
7.
Followup
8.
Safety stock
Very low safety stock is

Needed
Centralization Centralized purchasing
is done
9.
10.
Value
Analysis
Rigorous value analysis

is made
Low safety stock is

Needed
Centralized &
decentralized
purchasing is done
Moderate value
analysis is made
Citems having low

consumption value
Loose control is
Implemented
Order should be
placed once in 6
months or in a year
Minimum clerical
efforts to reduce
lead time is
undertaken
Can be supervised
by the clerical staff
Reviewed annually
over obsolete &
surplus items
Three reliable
sources for each
item may be
supplied
Follow up is
required only in
exceptional
High safety stock is
Needed
Decentralized
purchasing is done
Minimum value
analysis is made
Advantages of ABC: The advantages are:
Smooth Flow: This method ensures that minimum investment will be made in
inventories of stock of materials or stocks to be carried, without any danger of
interruption of production for want of materials or stores requirement.
Cost Savings: The cost of placing orders, receiving goods & maintaining stocks is
minimized.
Control by Exception: Managements time is saved since attention need be paid only to
some of the items rather than all the items.
Standardization of Work: With the introduction of ABC system, much of the work
connected with purchase can be systematized on a routine basis.
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Limitation of ABC:
In order to be fully cost effective, ABC analysis should be carried out with standardized
and codification.
The result of ABC analysis should be reviewed periodically & should be up dated.
Ques5. Distinguish between bill of material and material requisition note. (May 12)
Ans. BOM verses MRN
Bills of material (BOM)
Material Requisition Note (MRN)
It is document by the drawing It is prepared by the foreman of the

office.
consuming department.
It is a complete schedule of It is a document authorizing Storecomponent parts and raw materials Keeper to issue Material to the
required for a particular job or work consuming department.
order.
It often serves the purpose of a It cannot replace a bill of material.
Store Requisition as it shown the
complete schedule of materials
required for a particular job i.e. it
can replace stores requisition.
It can be used for the purpose of It is useful in arriving historical cost

quotation.
only.
It helps in keeping a quantitative It shows the material actually
control on materials draw through drawn from stores.
stores Requisition.
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CHAPTER LABOUR
Ques1. Distinguish between Job Evaluation and Merit Rating. (May 08)
Ans. Distinguish between Job Evaluation and Merit Rating :
Job evaluation is the ascertainment of the relative worth of jobs within a company
whereas merit rating is the assessment of the relative worth of the man behind the job.
Job evaluation and its accomplishments are meant to set up a rational wage whereas
salary structure whereas, merit rating provides a scientific basis for determining fair
wages for each worker based on his ability whereas and performance.
Job evaluation simplifies wage administration by bringing uniformity in wage rates,
whereas, merit rating is used to determine fair rate of pay for different workers on the
basis of their performance.
Ques2. Enumerate the various methods of Time booking. (May 07)

Ans. The various methods of Time Booking are :
Piece work card

Daily time sheet
Weekly time sheet
Clock card
Time ticket
Job ticket
Combined ticket
Ques3. Enumerate the remedial steps to be taken to minimize the labour turnover. (Nov 07)
Ans. The following remedial steps may be adopted to minimize labour turnover :
Exit interview with each outgoing employee to ascertain the reasons for his leaving the
organization.
Job analysis and evaluation carried out even before recruitment to ascertain the
requirement of each job.
Scientific system of recruitment, placement and promotion, by fitting the right person in
the right job.
Use of committee, comprising of members from management and workers to handle
issue concerning workers grievance, requirements etc.
Enlightened attitude of management Mental revolution on the part of management by
taking workers into confidence and acting a healthy working atmosphere, with
measures such as :
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a) Training service rules after discussion between management and workers union.
b) Provisions of facilities for education, training and development of workers.
c) Introduction of procedures for settlement of workers grievance.
Ques4. Discuss the treatment of over time premium in cost accounting. (May 08)
Ans. Accounting treatment of overtime premium depends upon the circumstances of the work.
Case 1 : If the overtime is worked on customers instruction in order to complete the work
at the earliest then it should be directly charged to the job as a part of direct wages.
Case 2 : If the overtime is worked due to shortage of the labour or any other reason then
it is treated as a part of the labour cost and such overtime premium is appointed on the basis of
total hours work on different jobs.
Case 3 : If the overtime is worked to makeup the lost time due to unavoidable reason it
means it is a cost incurred for normal time and it should be treated as part of the production
OH and it can be recovered from the job completed during the accounting period.
Case 4 : If the overtime is worked to makeup the time lost due to avoidable reasons i.e.,
abnormal idle time then it is charged to costing Profit /Loss A/c.
Case 5 : If overtime is worked due to its management fault it should be charged to that
particular department.
Ques5. Describe briefly, how wages may be calculated under the following systems: Gantt task and bonus system
Emersons efficiency system
Rowan system
Halsey system
Barth system
(Nov 08)
Ans. The various systems of wage payment have been discussed below:Gantt task and bonus system :
This system, like Emersons system, involves, measurement of efficiency.
It is a combination of time and piece work system.
According to this system a high standard or task is set on the basis of careful time and
motion study.
The workers actual performance is compared with the standard and efficiency
determined.
Only time wages are paid to the worker to production below the set standards are
achieved or exceeded, the payment to the concerned worker is made at a higher price
rate.
The piece rate fixed under this system also includes an element of bonus to the extent
of 20%.
The figure of bonus to such workers is calculated over the time rate of the workers.
Thus, the system consists of paying a worker on time basis if he does not attain the
standard and on piece basis if he does.
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Wages payable to workers under this plan are calculated as under:Output
a) Output below standard
b) Output at standard
c) Output above standard
Payment
a) Guaranteed time rate
b) Time rate plus bonus of 20% (usually)
of time rate
c) High price rate on workers whole
output. It is so fixed, so as to include a
bonus of 20% of the time rate
Emersons Efficiency System:

Emerson was one of Taylors associates.
He guaranteed time wages but wanted to reward efficiency.
Under this system, minimum time wages are guaranteed.
But beyond a certain level of efficiency, bonus in addition to minimum day wages is
given.
A worker who is able to attain efficiency, measured by his output equal to 2/3rd of the
standard efficiency, or above, is deemed to be an efficient worker deserving
encouragement.
The scheme thus provides for payment of bonus at a rising scale at various levels of
efficiency, ranging from 66.67% to 150%.
For a performance below 66.67% only time rate wages without any bonus are paid.
Above 66.67% to 100% efficiency, bonus varies between 0.01% and 20%.
Above 100% efficiency, bonus of 20% of basic wages plus 1% for each 1% increase in
efficiency is admissible.
It can be summarized as below:
Less than 662/3 %

662/3 % to 100%
100%above
This system does not presuppose a high degree of average performance.

Wages on time basis are guaranteed.
Only time wages

Basic (100%) + Bonus (0.01% to 20%)
Basic (100%) + Bonus (20%) + 1% for
each 1% increase in efficiency
Rowan System :
In its essence, the plan is similar to the Halsey Plan Wages at the ordinary rate for actual
time put in a worker are guaranteed and a bonus given, if the worker saves time out of
the standard time, set for him.
According to this plan, the bonus is that proportion of wages of actual time taken which
time saved bears to the standard time.
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Formula for calculating wages under Rowan System :
(Time Saved / Time Allowed) x Time Taken x Rate Per Hour
Halsey System :
Under this method, standard time for doing job is determined and workers are
encouraged to do the job in less than the standard time.
A standard is fixed for each job or process.
If there is no saving on this standard time allowance, the worker is paid only his day
rate. He gets his time rate even if he exceeds the standard time limit, since his day rate
is guaranteed.
If however, he does the job in less than the standard time, he gets a bonus equal to 50
% of wages of time saved; the employer benefits by the other 50 percent.
The scheme also is sometimes referred to as the Halsey fifty percent plan.
Formula for calculating wages under Halsey system
=( Time Taken x Time Rate) + 50% of (Time saved x Time Rate)
Halsey Weir system : The Halsey Weir system is the same as the Halsey system except that the bonus paid to
workers is 30% of time saved.
This system is useful for capital intensive industry.
Barth System :
Barth System is particularly suitable for trainees and beginners and also for unskilled
workers.
The reason is that for low production efficiency, the earnings are higher than in the
piece work system but as the efficiency increases, the rate of increase in the earnings
falls.
Formula for calculating the remuneration under Barth Plan :
Earning = Hourly Rate x Standard hours x Hours worked
Ques6. Discuss accounting treatment of idle capacity costs in cost accounting. (May 09)
Ans. Idle Capacity :
It represents the difference between practical capacity and the actual capacity based on
long term sales expectancy.
If the actual capacity is different from the capacity based on sales expectancy, then the
idle capacity is the difference between the practical capacity and the actual capacity.
Idle capacity represents a part of practical capacity which has been utilized due to
regular interruptions and which may not be avoided.
Idle capacity cost can be determined as:-
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Idle capacity cost = Total capacity cost = Total OH related to plant / Normal capacity x
Idle capacity
It may be normal or abnormal. The treatment can be done in the following ways :
Type
Arising due to
unavoidable reasons
(Normal idle capacity)
Reason
Generally arises due to lack of
demand or due to seasonal
nature of the product.
Treatment
Production OHs are absorbed
into the cost of production
either by the inflated OH
absorption rate or the
supplementary OH rate.
Arising due to avoidable

reasons (Abnormal idle
capacity)
It may arise due to lack of

proper planning control or due
to lack of managements
forecasting.
The cost of such idle

treatment capacity should be
changed to costing Profit and
Loss A/c.
If arises due to trade

depression or any other
external factors
Then it being normal in nature
The cost should be charged to

costing P/L A/c.
Ques7. Which is better plan out of Halsey 50 percent bonus scheme and Rowan bonus scheme
for an efficient worker? In which situation the worker get same bonus in both schemes? (May
10)
Ans. Comparison between Halsey & Rowan
Rowan Bonus Scheme pays more bonus if the time saved is below the 50 percent of
time allowed and if the time saved is more than 50 percent of time allowed then Halsey
bonus scheme pays more bonus.
Normally, time saved by a worker is not more than 50 percent of time allowed.
Therefore, the Rowan bonus scheme is better for an efficient worker.
When the time saved is equal to 50 percent of time allowed then both plans pays bonus
to a worker.
Bonus under Halsey Plan

= Standard wage rate x 50/100 x Time saved .(i)
Bonus under Rowan Plan
= Standard wage rate x Time taken / Time allowed x Time taken (ii)
Bonus under Halsey Plan will be equal to the Bonus under Rowan Plan when the following
condition holds good:= Standard wage rate x 50/100 x Time saved = Standard wage rate x Time taken / Time allowed
x Time Saved
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or 1/2 = Time Taken / Time Allowed
or Time Taken = 1/2 of Time Allowed
Hence, when the time taken is 50% of the time allowed, the bonus under Halsey and Rowan
Plans is equal.
Ques8. Discuss the three different methods of calculating labour turnover. (Nov 10)
Ans. Three different methods of calculating labour turnover :
a) Separation Method =
Number of employees seperated during the period

Average number of employees during the period
b)
Replacement Method =
c) Flux Method =
X 100
Number of employees replaced during the period

X 100
Number of employees seperated +Number of employees replaced

X 100
d) Flux Method with new recruitment

=
Number of employees seperated + Number of Accessions

X 100
Ques9. Enumerate the causes of labour turnover

Ans. Causes of Labour Turnover : The main causes of labour turnover in an organisation/
industry can be broadly classified under the following three heads :
a) Personal Causes;
b) Unavoidable Causes ; and
c) Avoidable Causes
Personal causes are those which induce or compel workers to leave their jobs; such cause
include the following :
Change of jobs for betterment.
Premature retirement due to ill health or old age.
Domestic problems and family responsibilities.
Discontent over the jobs and working environment.
Unavoidable causes are those under which it becomes obligatory on the part of management
to ask one or more of their employees to leave the organization; such causes are summed up as
listed below :
Seasonal nature of the business;
Shortage of raw material, power, slack market for the product etc.;
Change in the plant location;
Disability, making a worker unfit work;
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Disciplinary measures;
Marriage (generally in the case of women)
Avoidable causes are those which require the attention of management on a continuous basis
so as to keep the labour turnover ratio as low as possible.
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CHAPTER OVERHEADS
Ques1. Write short notes on treatment of underabsorbed and overabsorbed overheads in
Cost Accounting. (Nov 10)
Ans. Treatment of Underabsorbed and Overabsorbed Overheads in Cost Accounting :
Overheads are usually applied to production on the basis of a predetermined rate.

The actual overhead rate will rarely coincide with the predetermined overhead rate
due to different spending pattern and activity level.
Such over or under absorption as arrived at under different situations may also be
termed as overhead variance.
The amount of overabsorption being represented by a credit balance in the account
and conversely, the amount of under absorption, being a debit balance.
If such balances are small, they should be transferred to costing Profit & Loss A/c where,
however the different is large and due to wrong estimation, it would be desirable to
adjust the cost of products manufactured, as otherwise the cost figures would convey a
misleading impression.
Such adjustments usually take the form of supplementary rates.
Ques2. Discuss the difference between allocation and apportionment of overhead. (May 08)
Ans. Cost Allocation:
The term allocation implies relating overheads directly to the various departments.
The estimated amount of various items of manufacturing overheads should be allocated
to various cost centre or departments.
Cost Apportionment:
Those items of estimated overheads (like the salary of the works manager) which cannot
be directly allocated to the various departments and cost centers are apportioned.
Apportionment implies the allotment of proportions of items of cost to cost centers or
departments.
It implies that the unallocable expenses are to be spread over the various departments
or cost centres on an equitable basis.
The difference between cost allocation and apportionment are as follows :
Meaning
Cost Allocation
Identifying a cost centre and
charging its expenses in full
Cost Apportionment
Allotment of propotions of
common cost to various cost
centre
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Nature of expenses
Number of centre (Dept.)
Basis
Amount of overhead
Assumption
Specific and identificable

One
Allocate directly
Change in full
Not required
General and common

Many
Allocate Indirectly
Change in proportionable
Required
Ques3. Distinguish between Fixed overheads and Variable overheads. (May 10)
Ans. Fixed Overheads v/s Variable Overheads :
Fixed overheads are not affected by any variation in the volume of activity, e.g.,
managerial remuneration, rent etc.
These remain the same from one period to another except when they are deliberately
changed.
Fixed overheads are generally variable per unit of output or activity e.g., Rent,
Insurance, Depreciation, Audit fees etc.
Whereas, the variable overheads that change in proportion to the change in the volume
of activity or output, e.g., power consumed, consumable stores etc.
The variable overheads are generally constant per unit of output or activity, e.g., direct
material, direct labour, commission on sale.
Ques4. Explain briefly the conditions when supplementary rates are used. (May 07)
Ans. Use of Supplementary OH Absorption Rates :
This method is used when it is caused due to normal or avoidable reasons.

When the amount of over and under absorbed POHEs is significant (i.e., more than 10%
of total O/H incurred), supplementary rate if over absorbed amount is to be deducted.
On the other hand, the supplementary rate if under absorbed amount is to be added,
therefore,
Negative Supplementary Rate = Over Absorbed POHEs/ Actual value of the Base output
Positive Supplementary Rate = Under Absorbed POHEs / Actual value of Base output
This method is preferred when :
There is a serious estimation errors

When there is a substantial change in the level of activities
When there is a major change in the production method
In case of contract on cost plus basis
Ques5. Explain Blanket overhead rate (Nov 07)

Ans. Blanket OH Rate :
It is also known as Single or Plant wise OH absorption Rate.
It is calculated as under :
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Blanket rate = OH cost for the entire factory / Total quantity of the base selected
This method is used when the size of the company is small or when the burden of O/H is
more or less uniform among all the production deptts.
These rates are easy to compute and require clerical cost but have a very limited use.
The limitations of such rates are as under

Such rates may give misleading results where several products are manufactured and
are required to be passed through various production departments.
As the performance of the individual deptt. cannot be assessed properly with this rate,
so no satisfactory managerial control is possible.
Such rate may render the valuation of WIP erroneous.
Ques6. Explain the cost accounting treatment of unsuccessful Research and Development. (Nov
07)
Ans. Research & Development Cost :
R & D expenditures is a deferred expenditure because it is incurred not for benefitting a
certain period, but for benefitting several accounting periods.
Such expenditure is incurred for innovating a new product or improving the existing
product or developing new methods of production.
Research Cost :
Research cost are incurred under 2 heads :
Basic research cost which is incurred for improving the existing scientific and /or
technical knowledge.
Applied research cost applied research is done for the purpose of achieving some
particular practical motto or objectives.
Treatment in Cost A/cs :
Basic Research Cost : It should be treated as production OH for a particular period and absorb
it in product cost because it is related to all existing products or methods or techniques of
production etc.
Applied Research Cost : It is further classified into 2 parts for the costing purpose. They are
If it is incurred for the improvement of the existing product and methods of production
it should be treated as POH and absorbed accordingly
If it is incurred for innovating new products or methods then such cost is absorbed on
the basis of amortization.
If whole of such expenditure is so huge, then it should be absorbed in subsequent years
in which some benefit is received by the producer.
If applied research work becomes a failure, then such research expenditure is charged
against profit in costing P & L A/c.
If size of such amount is heavy, then such amount is spread over in subsequent year
also.
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Ques7. Explain the treatment of over and under absorption of Overheads in Cost accounting.
(May 10)
Ans. Treatment of over and under absorption of overheads are :
If an enterprise uses actual rate for absorption of POHEs then the enterprise recover the
actual amount incurred regarding the POH.
It means no difference is there in between POHEs incurred and POHEs absorbed.
Therefore, there is no over and under absorption of OHEs but this method of absorption
creates a number of problems regarding costing.
Therefore, enterprises prefer to use budgeted or standard rate for absorption of POHEs
but it creates another problem i.e., over and under absorption.
It arises due to a number of reasons which may be normal or abnormal in nature.
The important ones are :

Wrong estimation of POHEs
Unexpected changes in the level of activities
Change in production method
Uncontrollable causes (due to govt. policies, environmental changes etc.)
Out of the above mentioned causes, volume of output plays an important role because it solely
depends upon the demand which is beyond the control of the enterprises.
There are varieties of methods used for over or under absorption of OHEs in accounts.
However, in the corporate sector 3 important methods are widely used for accounting of over
and under absorption of POHEs
Use of supplementary OH absorption rates
Write off to costing profit and loss A/c
Carry over to the next period accounts
1. Use of supplementary OH absorption rates : This method is used when it is caused due
to normal or avoidable reasons.
When the amount of over and under absorbed POHEs is significant (i.e., more than 10%
of total OH incurred), supplementary absorption rates are computed by the way of
addition or deduction.
This rate may be called negative supplementary rate if over absorbed amount is to be
deducted.
On the other hand, the supplementary rate may be called positive supplementary rate if
under absorbed amount is to be added, therefore,
Negative Supplementary Rate = Over Absorbed POHEs /Actual value of the Base output
Positive Supplementary Rate = Under absorbed POHEs/ Actual value of Base output
This method is preferred when :
There is a serious estimation error
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There is a substantial change in the level of activities

There is a major change in the production method
A case of contract on cost plus basis is there
2. Writing off to Costing Profit and Loss A/c. : When the amount of over and under
absorbed POHEs is not so significant, it may be written off to costing P/L, but, if it is
significant (sizeable) and it arises due to :
a) Some uncontrollable and abnormal factors
b) Contingent estimation of output
Then such over or under absorbed POHEs may be written off to costing P/L, but, it suffer
from some limitations like it cannot be adjusted in the value of WIP, unsold stock or sold
unit (it means pricing policy cannot be adjusted).
3.
Carryforward to next Periods Accounts : This method is used when:Balance amount is comparatively small
In case of new product whose output is low in initial years due to lack of demand
Normal business cycle I of more than one accounting period
Over under absorbed OH is carried over to next period in the hope that the same will
automatically be adjusted or absorbed.
But under this method, comparatibility of the performance is not properly feasible.
Ques8. What are the methods of reapportionment of service department expenses over the
production departments? Discuss? (Nov 10)
Ans. Methods of reapportionment of service department expenses over the production
departments:
Direct redistribution method
Step method or nonreciprocal method
Reciprocal Service method
Direct redistribution Method :
Service department costs under this method are apportioned over the production
departments only, ignoring services rendered by one service department to another.
Therefore, as compared to previous method, this method is more complicated because
a sequence of apportionments has to be selected here.
The sequence here begins with the department that maximum number of other service
departments.
Reciprocal Service Method :
This method recognizes the fact that where there are two or more service departments
they may render service to each other and, there these interdepartmental services are
to be given due weight while redistributing the expenses of service department.
The methods available for dealing with reciprocal services are :
a) Simultaneous equation method
b) Repeated distribution method
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c) Trial & Error method
Ques9. Distinguish between cost allocation and cost absorption. (May 13)
Ans. Distinguish between Cost allocation and Cost absorption:
Cost allocation is the allotment of whole item of cost to a cost center or a cost unit.
In other words, it is the process of identifying, assigning or allowing cost to a cost
center 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.
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CHAPTER BUDGETS & BUDGETORY

CONTROL
Ques1. Explain briefly the concept of flexible budget (Nov 08)
Ans. Flexible Budgets
Flexible Budgets show the expected results of a responsibility unless for several activity
levels.
It is a budget which by recognizing the difference between fixed, semivariable and
variable costs is designed to change in relation to level of activity attained.
It is not rigid as it can be recasted on the basis of activity level to be achieved.
It consists of services of static budgets for different levels of activity.
Variance analysis through flexible budget provides useful information as each cost is
analyzed according to its behaviour.
It facilitates the ascertainment of cost, fixation of selling price and submission of
quotations.
Flexible budgets provide a meaningful basis of comparison of the actual performance
with the budgeted targets.
Such budgets are especially useful in estimating and controlling factory costs and
operating expenses.
Flexible Budgeting may be resorted to in the following situations :

a) New Business :
In case of new business venture, due to its typical nature, it may be difficult to forecast
the demand of a product accurately.
b) Uncertain Environment :
Where the business is dependent upon the very of nature.
c) Factor Market Conditions :
In the case of Labour intensive industry where the production of the concern is
dependent upon the availability of labour.
Ques2. Discuss the components of budgetary control system. (May 09)
Ans. Components of budgetary control system :
There are a number of bases for classifying the budgets into two or more categories.
But the most important and widely used bases are functional classification and
classification according to flexibility.
The policy of a business for a defined period is represented by the master budget the
details of which are given in a number of individual budgets called functional budgets.
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The functional budgets are broadly grouped under the following heads.
Physical Budget : This budget contains information in terms of physical units e.g., Sales Qty,
Product Qty, Inventory, Manpower budget.
Cost Budgets : Manufacturing Cost, Administration Cost, sales & distribution cost, R & D Cost
Profit Budget : A budget which enable in the ascertainment of profit, e.g., Sales budget, Profit
& loss budget etc.
On the other hand, budgets may be classified into two categories on the basis of
flexibility as fixed budgets and flexible budgets.
Ques3. List the eight functional budgets prepared by a business. (Nov 09)
Ans. A functional budget is prepared according to the various functions of the organization e.g:
Sales, Production, and Administration Research & development etc.
Following are the most popular functional budgets :
a) Sales budget
b) Production budget
c) Materials budget
d) Labour budget
e) Manufacturing overhead budget
f) Administrative cost budget
g) Plant utilization budget
h) Research and Development budget
i) Capital expenditure budget
j) Cash budget
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CHAPTER INTEGRATED & NONINTEGRATED ACCOUNTS

Ques1. What are the essential prerequisites of integrated accounting system? Discuss? (Nov
05)
Ans. The success of an integrated system of accounting depends upon certain prerequisites
which should be ensured before the system is introduced. These are :
Deciding the extent of integrated of the two sets of books. Some companies find it
useful to integrate upto the stage of primary cost or factory cost while others prefer an
integration of the entire accounting records.
A suitable coding system must be developed to serve the purpose of both financial and
cost accounts.
To lay down the procedure for the treatment of provision for accruals prepaid expenses,
other adjustments necessary for preparing interim accounts.
Perfect coordination should exist between the staff responsible for financial aspects
and cost aspects of the accounts. An efficient of accounting documents is to be ensured.
Under this system, there is no need for a separate cost ledger of cause, there will be a
number of subsidiary ledgers. In addition to the useful customers ledgers and the
bought ledgers, there will be
a) Stores ledger
b) Stock ledger, &,
c) Job ledger
Ques2. What is an Integrated Accounting System? State its advantages. (May 10) (May 12)
Ans. Integrated Accounting System
Integrated Accounts is the name given to a system of accounting, where by cost and
financial accounts are kept in the same set of books.
There will be no separate sets of books for Costing and Financial records.
Integrated accounts provide or meet out fully the information requirement for Costing
as well as for Financial Accounts.
Main advantages of integrated accounts are as follows :
Since there is one set of accounts, thus there is one figure of profit. Hence, the question
of reconciliation of costing profit and financial profit does not arise.
Efforts in duplicate recording of entries & to maintain separate sets of books are saved.
Thus, there is saving of time and labour.
The operation of the system is facilitated with the use of mechanized accounting.
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Costing data are available from books of original entry and hence, no delay is caused in
obtaining information.
Combination of two sets of books and centralization of accounting function results in
economy.
Complete analysis of cost and sales is kept.
Complete details of all receipts and payments in cash are kept.
Complete details of all assets and liabilities are kept and this system does not use
national account to represent impersonal accounts.
Since financial books are subject to a rigorous accuracy, checking integrated accounts
ensures similar checks for cost account.
Ques3. Is reconciliation of cost accounts and financial accounts necessary in case of

integrated accounting system? (May 13)
Ans. Necessity of Reconciliation:
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 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 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.
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CHAPTER JOB COSTING & BATCH

COSTING
Ques1. Distinguish between Job Costing and Batching Costing (May 06)
Ans. The main difference between job costing and process costing are as follows:
S.No. Basic
Job Costing
Process Costing
1.
Method
Job costing is one of the
Process costing is one of the
methods of costing used to
methods of costing used to
ascertain cost of each job.
ascertain cost of a product at each
process or stage of manufacture.
2.
Cost
Cost is determined
Cost of a product is determined
determination
separately for each job.
by accumulating cost of each
process.
3.
End product
The end product of one job is The end product of a process
the finished product and may becomes the raw material for the
not become raw material for
next process.
other jobs.
4.
Cost collection
The cost is collected on the
The cost is collected by period i.e.,
basis of job order.
on time basis.
5.
Cost estimation Cost is computed or
Costs are computed for each
estimated
process at the end of each period.
before the production.
6.
Cost
The cost of each job is
The unit cost here is the average
compilation
complied separately by
cost of the process for a given
adding materials, labour and
period.
overhead period.
7.
WIP
There may or may not be
There is always some work in
work in progress at the end
progress at the beginning as well
of accounting period.
as end of accounting period.
8.
Supervision
Detailed supervision and
Supervision and control is
control is needed as each job
comparatively easier as the
is distinct and different from
process operations are
others.
standardize.
Ques2. Explain Equivalent Production and Inter-Process profit in relation to Process Costing.
(Nov 13)
or
Ques3. What is inter-process profit? State its advantages and disadvantages. (Nov 12)
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Ans. Equivalent Production:
When opening and closing stocks of Work-in-process exist, unit costs cannot be
computed by simply dividing the total cost by total number of units still in process.
We can convert the Work-in-process units into finished units called equivalent
production units so that the unit cost of these uncompleted (WIP) units can be obtained.
Equivalent Production Units = Actual number of units in production x % of work
completed.
It consists of balance of work done on opening work-in-process, current production
done fully and part of work done on closing WIP with regard to different elements of
costs viz., material, labour and overhead.
Inter-Process Profit
In some process industries 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:
Comparison between the cost of output and its market price at the stage of
completion is facilitated.
Each process is made to stand by itself as to the profitability.
Disadvantages:
The use of inter-process profits involves complication.

The system shows profits which are not realized because of stock not sold out.
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CHAPTER JOINT PRODUCT & BY

PRODUCT
Ques1. Describe briefly, how joint costs upto the point of separation may be apportioned
amongst the joint products under the following methods. (May 09)
Average unit cost method
Contribution margin method
Market value at the point of separation
Market value after further processing
Net realizable value method
Ans. Methods of apportioning joint cost among the joint products
Average Unit Cost Method :
In this method, total process cost (upto the point of separation ) is divided by total units
of joint products produced.
On division average cost per unit of production is obtained.
The effect of application of this method is that all joint products will have uniform cost
per unit.
Contribution Margin Method :
In this method joint cost are segregated into two parts variable and fixed.
The variable costs are apportioned over the joint products on the basis of units
produced (average method) or physical quantities.
When the products are further processed, then all variable cost incurred is added to the
variable cost determined earlier.
After that contribution is calculated by deducting variable cost from their respective
sales values.
The fixed costs are then apportioned over the joint products on the basis of contribution
ratios.
Market value at the Time of Seperation :
This method is used for apportioning joint costs to joint products upto the split off point.
This method is difficult to apply if the market values of the products at the point of
separation are not available.
The joint cost may be apportioned in the ratio of sales values of different joint products.
Net Realisable Value Method :
Under this method joint costs are apportioned on the basis of net realizable value of the
joint products.
Net Realizable Value = Sale value of joint products (at finished stage)
a) () estimated profit margin
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b) () selling & distribution expenses, if any
c) () post splitoff cost
Ques2. 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? (Nov 10)
Ans. Apportionment of Joint Cost amongst Joint Products using:
Market value at the point of separation
This method is used for apportionment of joint costs 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 realized value Method
From the sales value of the joint products (at finished stage) are deducted :
a) Estimated profit margins
b) Selling distribution expenses, if any
c) Post split off costs
The resultant figure so obtained is known as net realized value of joint products.
Joint costs are apportioned in the ratio of net realized value.
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CHAPTER MARGINAL COSTING

Ques1. Explain and illustrate cash break even chart (May 08)
Ans. Cash Breakeven Chart
A cash breakeven chart records Cash costs and revenues on the vertical axis and the
level of activity on the horizontal axis.
In this chart, variable cost are assumed to be payable in cash.
Beside this, the fixed expenses are divided into two groups viz.
Those expenses which involves cash outflow, e.g., rent, insurance, salaries etc.
Those expenses which do not involve cash outflow, e.g., depreciation, bad debts etc.
The making of the cash breakeven chart would require us to select appropriate axes.
Subsequently, we will mark costs/ revenues on the Y axis whereas the level of activity
shall be traced on the X axis.
Lines representing (i) Cash Fixed costs, (ii) Total costs at maximum level of activity and
(iii) Revenue at maximum level of activity (joined to the origin) shall be drawn next.
The cash breakeven point is that point where the sales revenue line intersects the total
cash cost line.
Other measures like the margin of safety and profit can also be measured from the
chart.
Ques2. What do you understand by key factor? Give two examples of it? (May 10)
Ans. Key Factor
Key factor is a factor which at a particular time or over a period limits the activities of an
undertaking.
It may be the level of demand for the products or service or it may be the shortage of
one or more of the productive resources.
a)
b)
c)
d)
e)
Examples of key factors are :

Shortage of raw material
Shortage of labour
Plan capacity available
Sales capacity available
Cash availability
Ques2. Elaborate the practical application of Marginal Costing. (Nov 13) (May 01)
Ans. Some areas where Marginal Costing Techniques is used by for decision-making are:-
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Determination of Selling Price Since marginal cost per unit is constant from period to
period; company decisions on pricing policy can be taken.
Product Mix Decisions In case of limited availability of resources product mix decisions
are taken.
Shut Down or Continue Decisions Whether to continue a product or shut down its
production is a decision which is taken with help of marginal costing.
Marketing Decisions Marketing of which product will give more benefit. These types
of decisions are based on marginal costing.
Change verses Status Quo Whether it is recommended to replace a machine or not is
resolved by marginal costing.
Expanding or Contracting Company may have an option either to expand its
production capacity or fulfill demand by entering into some contract. Marginal costing
helps in these types of decisions.
Ques3. What is Margin of Safety. (Nov 13) (Nov 01) (May 75) (May 97)
Ans. Margin of Safety (MOS):
It is the excess of total sales over the Break even Sales.

MOS can be expressed as a % of total sales (in value as well as in quantity).
It can be calculated as :MOS Sales = Total Sales BEP Sales
MOS Sales = Profit/PV Ratio
Ques4. Discuss basic assumptions of Cost Volume Profit analysis. (May 12)
Ans. CVP Analysis:-Assumptions
Changes in the levels of revenues and costs arise only because of changes in the
number of products (or service) units produced and sold.
Total cost can be separated into two components: Fixed and variable
Graphically, the behaviour of total revenues and total cost are linear in relation to
output level within a relevant range.
Selling price, variable cost per unit and total fixed costs are known and constant.
All revenues and costs can be added, sub traded and compared without taking into
account the time value of money.
Ques5. Short note on Angle of Incidence. (May 12)

Ans. Angle of incidence
This angle is formed by the intersection of sales line and total cost line at the breakeven point.
This angle shows the rate at which profits are being earned once the break-even point
has been reached.
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The wider the angle the greater is the rate of earning profits.
A large angle of incidence with a high margin of safety indicates extremely favorable
position.
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CHAPTER OPERATING COSTING

Ques1. Operation costing is defined as refinement of Process costing. Explain it. (May 07)
Ans. Operation costing is defined as refinement of Process costing because:
Operation costing is used for establishing cost of services rendered or service offered for
sale and no items are produced.
It is also applied to the operations concerned within an organization which provides
services to production departments. It is solely concerned with the determination of the
cost of each operation rather than the process costing.
Operation costing provides better control and facilities, the computation of unit
operation cost at the end of each operation.
So, it can be said that the method of operation costing is similar to output costing but
not as process costing.
Ques2. State the unit of cost for the following industries : (Nov 08) (May 13)
a) Transport
b) Power
c) Hotel
d) Hospital
e) Steel
f) Automobile
Ans. The unit of cost for various industries are as follows :
Industry
Transport
Power
Hotel
Hospital
Steel
Automobile
Unit of Cost
Goods Per ton km. or per
tonne km
Per kilo watt hour (Kwh) or
Horse Power (HP)
Per Roomday or Per Service
day
Per Patient day or Per Bed
day or per Operation
Tonne
Numbers
Ques3. Explain briefly, what do you understand by Operating Costing. How composite units are
computed ? (Nov 09) (Nov 12)
Ans. Operating Cost
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Operating costing is one of the methods of costing used to ascertain the cost of
generating and rendering services such as transport, hospital, canteens, electricity,
transport etc.
Operating Costing aims at ascertaining the operating costs.
The cost incurred to generate and render services such as hospital, canteen, electricity,
transport etc. is called operating cost.
Operating costs (in transport costing) are classified into three broad categories:
a) Operating and running cost
b) Standing cost
c) Maintenance cost
Operating and running cost : These are the costs which are incurred for operating and running
the vehicle. For eg., cost of diesel, petrol etc. These costs are variable in nature and vary with
operations in more or less same proportions.
Standing cost : Standing costs are the costs which are incurred irrespective of operation. For
eg., rent of garage, salary of drivers, insurance premium etc.
It is fixed in nature and thus the cost goes on accumulating as the time passes.
Maintenance cost : Maintenance costs are the costs which are incurred to keep the vehicle in
good or running condition.
For eg., Cost of repair, painting, overhauling etc. It is semivariable in nature and is influenced
by both time and volume of operation.
DELHI-110092, PH-9811270284, 9910021477
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CHAPTER RECONCILIATION OF COST &

ACCOUNTS
Ques1. Enumerate the factors which cause difference in profits as shown in Financial Accounts
and Cost Accounts (May 07)
Ans. Reasons for Disagreement:
The difference in profit or loss ascertained in cost accounts & financial account is due to the
following reasons :
1. Certain items are shown only in financial accounts and not in cost accounts. Like :
Profit or loss on sale of fixed assets
Discount on issue or redemption of shares and debentures
Receipt of interest and dividends on investments
Distribution of dividends
Donations and charities
Capital issue expenses
Cash discounts and bad debts
Preliminary expenses written off
Misc. income or expenditure not relating to business
Payment of income tax
Transfer of profits to reserves
Writing off intangible and fictitious assets like goodwill
Expenses relating to previous year
Lay off wages and retrenchment compensation
P /L relating to transactions of abnormal or nonrecurring nature
2.
Certain items are shown only in cost accounts and not in financial A/cs. Like :
National rent on premises owed
Notional interest on capital
Depreciation on fully depreciation assets
3. Disagreement due to under or over absorption of overhead items :

In cost accounts, overheads are generally absorbed on the basis of a predetermined
overhead rate, whereas in financial A/cs, actual expenditure on overheads is recorded,
this also causes a difference between the two figures.
4. Difference due to use of different methods of stock valuation
Different methods of valuation of closing stock adopted in cost and financial account
will also cause a difference in the results shown by the two sets of books. In financial
accounts the method generally followed is cost or market price whichever is lower,
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whereas in cost accounts different methods of pricing of material issues such as LIFO,
FIFO, average etc., are used.
5. Difference due to use of different rates of depreciation :
Use of different methods of depreciation is also responsible for the variation of profit
shown by two sets of books.
In financial accounts depreciation may be charged according to the provisions of
Companies Act or Income tax Act (i.e., WDV method or SLM) whereas in cost accounts
machine hour rate or production hour or unit method can be adopted.
6. Abnormal Gains & Losses :
Abnormal items not included in cost accounts also cause a difference in profit. If such
items of expenses are included, cost ascertained will not be correct.
Ques2. List the Financial expenses which are not included in cost. (May 09)
Ans. Financial expenses which are not included in cost accounting are as follows:
Preliminary expenses
Underwriting Commissions
Discount on issue of Share
Income Tax
Interest on debentures and deposit
Bonus of Employee
Pension
Gratuity
Ques3. When is the reconciliation statement of Cost and Financial accounts not required? (May
09)
Circumstances where reconciliation statement can be avoided is as follows:
When the Cost and Financial Accounts are integrated there is no need to have a
separate reconciliation statement between the two sets of accounts.
Integration means that the same set of accounts fulfill the requirement of both i.e, Cost
and Financial Accounts
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CHAPTER STANDARD COSTING

Ques1. Under the single plan, record the journal entries giving appropriate narration, with
indication of amounts of debits or credits alongside the entries, for the following transaction
using the respective control A/c (Nov 06)
Material price variance (on purchase materials)
Material usage variance (on consumption)
Labour rate variance
Ans. Under the single plan, Journal entries are:
(i) Material price variance (on purchase of materials)
Material Control A/c Dr.
Material price Variance A/c Dr. or Cr. (Bal. Fig)
To Creditor A/c
(Being price variance during purchase of materials)
(ii) Material usages variances (on consumption)
WIP Control A/c Dr.
Material usage variance Dr. or Cr. (Bal fig.)
To Material Control A/c
(Being recording of usage variance at Standard cost of over/under utilized quantity)
(iii) Labour Rate Variance
Wage Control A/c Dr.
Labour Rate Variance Dr. or Cr. (Bal. Fig)
To Cash
(Being entry to record wages at standard rate)
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CHAPTER CONTRACT COSTING

Ques1. Discuss briefly the principles to be followed while taking credit for profits on incomplete
contracts. (Nov 06)
Ans. Profit on uncompleted contract is computed on the basis of Notional Profit and the
percentage of work done. It is transferred to costing Profit & loss account and computed as
follows :
1. Stage of contract Initial (just began)
Percentage of work done Less than 25%
Profit Nil [ as it is impossible to foresee clearly the future position]
2. Stage of contract In course (but not substantial)
Percentage of work done upto or more than 25% but less than 50%
Profit =
Cash Received
1
X Notional Profit X
Work Certified
3
3. Stage of contract Substantially complete

Profit =
Cash Received
2
X Notional Profit X
Work Certified
3
4. Stage of contract Almost complete

Profit : Profit to be transferred to P&L A/c here is the proportion of the estimated profit.
The estimated profit is arrived at by deducting from the contract price the aggregate of
estimated cost and the expenditure incurred.
The proportion of estimated profit in computed by adopting any of the following formula:1.
2.
3.
4.
Work Certified
Contract Price
Work Certified
Contract Price
Work Certified
Contract Price
Cash Received
Work Certified
X Estimated Profit
X Estimated Profit X
Cash Received
Work Certified
Cost of work to date
Estimated Total Cost
Cost of work to date
Esti mated Total Cost
Note : If Notional Profit < Estimated Profit then only the notional profit is transferred to
Profit & Loss A/c.
DELHI-110092, PH-9811270284, 9910021477
Page 50

Ques2. Explain the importance of an Escalation Clause in contract cost. (Nov 07)
Ans. Escalation Clause :
Escalation clause is a stipulation in the contract that the contract price will be increased
by an agreed amount or percentage if the price of raw material, wages etc., rises
beyond a certain unit.
The object of this clause is to safeguard the interest of both side against unfavourable
change in price.
While due to loss of the contractors interest is safeguard as has profit percentage not
reduced. The customers interest is safeguard as quality is ensured because due to the
escalation, clause the contractor does not use materials of low quality
Accounting Treatment :
Step 1. The increased contract price is determined with reference to the escalation clause
Step 2. The amount due from the customer is recorded in contract A/c by passing the following
general entry:Customers A/c Dr.
To Contract A/c
Ques3. What are the main advantages of cost plus contract. (May 08)
Ans. Advantages of Cost plus Contracts :
In contracts where the probable cost of contract cannot be estimated with reasonable
accuracy, cost plus contract method helps in ascertaining the contract cost by adding a
percentage of profit to the total cost of contract.
It is preferable in those contracts whose cost of material and labour is unsteady and is
likely to change in future.
It is beneficial for both contractor as well as customer. It offers a fair price to the
customer and a reasonable profit to the contractor.
The different costs to be included in the contract are predecided so that no dispute
arise in future.
Ques4. Mention the main advantage of cost plus contracts. (May 09)
Ans. Main advantages of Cost Plus contracts are as follows :
It protects the contractor from risk of fluctuation in market price of material, labour
services etc.
Contractee gets a fair price of the market.
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Page 51
It is useful specially when the work to be done is not definitely fixed at the time of
making the estimate.
Contractee is empowered to examine the books and documents of the contractor to
ascertain the veracity of the cost of the contract and hence is ensured about cost of
contract.
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COSTING MOST IMPORTANT THEORY NOTES 2014

IMPORTANCE OF THEORY IN COST &

Out of these remaining 6 questions only 5 questions

Q3. PRACTICAL (OPTIONAL) = 16 marks

Q4. PRACTICAL (OPTIONAL) = 16 marks

HENCE, THEORY % = (32/80) x 100 = 40%

Q5. THEORY (OPTIONAL) = 16 marks

1. Theory covers 40% of Optional Paper.

COSTING MOST IMPORTANT THEORY NOTES 2014

TOPICS COVERED IN OUR COSTING

INTEGRATED & NONINTEGRATED

JOB & BATCH

Cost Sheet Basics & Cost Apportionment

COSTING MOST IMPORTANT THEORY NOTES 2014

JOINT PRODUCT &

Costs for New Orders

COSTING MOST IMPORTANT THEORY NOTES 2014

CHAPTER BASIC CONCEPT

The Technical Details :

Methods of maintenance of cost records

COSTING MOST IMPORTANT THEORY NOTES 2014

Informative and Simple

COSTING MOST IMPORTANT THEORY NOTES 2014

These are also known as out of pocket costs.

COSTING MOST IMPORTANT THEORY NOTES 2014

Organizational structure for developing and operating the system

Principles of accounting to be followed

Relevant cost helps in specific management decision making.

COSTING MOST IMPORTANT THEORY NOTES 2014

To ascertain & analyses costs

Ques11. Define Imputed cost & Capitalized cost.

COSTING MOST IMPORTANT THEORY NOTES 2014

Ques12. What is Cost accounting? Enumerate its important objectives?

The objectives of cost accounting are as follows :

To ascertain and analyse costs : The primary objective of cost accountings is to

COSTING MOST IMPORTANT THEORY NOTES 2014

Ans. Packing Expenses :

COSTING MOST IMPORTANT THEORY NOTES 2014

COSTING MOST IMPORTANT THEORY NOTES 2014

Under this system, a continuous of receipt and issue of materials is maintained by

This system facilities production planning and inventory control.

Use of Continuous Stock Taking:

COSTING MOST IMPORTANT THEORY NOTES 2014

It insists on upto date maintaining of stock records.

COSTING MOST IMPORTANT THEORY NOTES 2014

Ques4. Discuss ABC analysis as a technique of inventory control. (May 08)

Analysis and Control :

Constant and strict control through

Comparative study of different class items

COSTING MOST IMPORTANT THEORY NOTES 2014