Unit 1: Introduction to Cost and Management Accounting

Objectives
In this unit you will learn -

 Concept of cost and costing

 Meaning of Cost accounting and management accounting
 Objectives of Cost Accounting
 Cost accounting v/s Financial Accounting
 Cost Accounting v/s Management Accounting
 Advantages and Limitations of cost accounting

Learning outcome
 Describe and discuss the nature, scope and utility of cost accounting and management
accounting.

1.1 Introduction

Cost Leadership is one of the three dimensions to achieve competitive advantage in the
industry, according to Michael E. Porter's theory of competitive strategies. Cost Leadership
entails manufacturing of goods and services at the lowest possible cost while keeping a high
level of quality in order to offer a more competitive price. As a result, achieving Cost
Leadership necessitates a robust cost and management accounting system.

1.2 Concept of Cost

Cost is the amount of resource given up in exchange for some goods or services. In other
terms, it is the total monetary value of the work, materials, threats, and opportunity costs.
A consumer's understanding of cost is that it refers to the price of the product purchased or
services consumed.
For the purposes of management, cost refers to the 'expenditure incurred' in the
production of a certain product or the rendering of a specific service.
It is vital to define the term "cost" precisely. When the term is used in a specific context, it is
amended with terms like prime cost, fixed cost, sunk cost, and so on. Each description
suggests a certain quality that aids in cost analysis.
1.3 Concept of Costing

Costing refers to the process and technique of ascertaining the cost of products produced or
services rendered. These techniques are made up of principles and rules that control the
process of determining cost.

Costing is a method of allocating or quantifying costs to different aspects of a business. It's a

way of evaluating costs.
The primary goal of costing is to analyse financial records in order to segregate expenditure
and properly distribute it to designated cost centres. This builds up the total cost which is
related to a particular department, job, contract or process in an organisation.

1.4 Meaning of Cost accounting and Management accounting

1.4.1 Cost Accounting

Wheldon defines cost accounting as “classifying, recording and appropriate allocation of
expenditure for determination of costs of products or services and for the presentation of
suitably arranged data for purposes of control and guidance of management”.
In simple terms, the process of cost accounting begins with the recording of incomes and
expenditures with proper allocation or the grounds on which they are computed and
finishes with the preparation of periodical statements and reports for cost ascertainment
and control.
1.4.2 Management Accounting
According to CIMA, London: “Management accounting is an integral part of management
concerned with identifying, presenting and interpreting information used for:
(a) formulating strategy
(b) planning and controlling activities
(c) decision taking
(d) optimising the use of resources
(e) disclosure to shareholders and others external to the entity
(f) disclosure to employees
(g) safeguarding assets
Management accounting therefore, is the processing and presentation of accounting, cost
accounting, and other economic data in a way that it helps in the performance of
managerial activities such as planning strategies, decision-making, controlling, etc.
This processing and reporting of data involves the use of different cost accounting
techniques such as Budgetary control, standard costing, ratio analysis, cash flow analysis
etc.

1.5 Objectives, Scope and Utility of Cost Accounting

1.5.1 Objectives
 Provide necessary information and assistance in determining the pricing of
manufactured goods or services delivered.
 Identifying the profitability of each product and assisting management in maximising
these revenues.
 To calculate the cost per unit of the various products that a company manufactures.
 Assist in the creation of budgets and the implementation of budgetary control measures.
 To accurately accumulate, ascertain and allocate costs amongst departments, processes
or operations.
 To exercise effective control over utilisation of resources such as material, labour etc. to
ensure minimum wastage.
 To provide management with appropriate and relevant information required for
strategic decision making.
 To perform a thorough cost analysis of both the process and the operations.
 Assist management in the creation and implementation of productivity and cost-cutting
incentive bonus plans.

1.5.2 Utility of Cost Accounting

 Cost Ascertainment - The primary goal of cost accounting is to accumulate and
determine costs. For each cost object, costs are accumulated, allocated, and
determined. A department, division, activity, project, contract, or process could be the
cost object.
 Determination of selling price and profitability - By accurately allocating all expenses,
cost accounting provides information regarding the cost of manufacturing the product
as a whole and the number of units produced. The cost per unit and consideration
of market demand and supplies, availability of a substitute helps management in
determining the per unit selling price of the product and thus, profitability.
 Cost Reduction - The attainment of a real and permanent reduction in the per unit cost
of the product produced or services rendered without compromising their
appropriateness for intended use or lowering the product's quality is described as cost
reduction. With the help of cost accounting techniques, any inefficiencies and the level
 of waste, whether of materials, time, money are reported to management and remedial
actions are taken.
 Cost Control - By employing procedures such as budgetary control, standard costing,
inventory management, cost accounting aids in the achievement of the goal of cost
control. For each cost element a standard budget is set at the start of the year, and the
actual performance is compared to it at the end, finding different variances.  This
improves the company's efficiency as correctives measures are taken immediately.
 Assisting Management in decision making - Cost and management accounting support
management in planning, implementing, monitoring, regulating, and evaluating various
activities by providing essential information. A well-designed cost and management
accounting system delivers data both from internal and external sources which is
necessary for making informed decisions. For instance, decide whether to shut down or
continue the operation, or whether to make or but a component.

1.5.3 Scope of Cost Accounting

 Cost Computation - When a manufacturer is producing bulk pieces of a product, cost
accounting is used to determine the actual per unit cost.
 Cost Audit - Cost audit is conducted to validate the cost sheets and ensure effective and
efficient request of cost accounting principles
 Cost Analysis - Cost accounting determines the difference between actual and budgeted
costs, as well as the cause for the difference.
 Cost Comparisons - It consider alternative product lines or operations, as well as the
costs associated with them, in order to find a better way to generate higher revenue.
 Cost Reports - Cost reports are created from data gathered through cost accounting and
evaluated by management for making rational decision.
 Cost control - The actual cost of a product or service might occasionally exceed the
standard or projected cost. Cost accounting is essential to eliminate the discrepancy and
monitor the actual cost.
 Cost System - It allows for ongoing monitoring and assessment of the expenses involved
in producing goods and services, as well as the generation of reports for management
 Statutory compliance - Maintenance of cost accounting books as per the guidelines of
the statute, such as cost records related to the utilisation of raw material, manpower, or
other cost items as applicable.

1.6 Cost accounting v/s Management Accounting

Although the terms cost accounting and management accounting are often used
interchangeably, there are some distinctions. Management accounting is a broad term that
refers to a discipline that allows managers to make well-informed decisions. It incorporates
data from cost and financial records.
 BASIS COST ACCOUNTING MANAGEMENT ACCOUNTING
Definition Cost accounting is a process Management accounting is the process
assuring cost-effectiveness by of identifying, evaluating, assessing,
gathering, categorizing, and delivering financial information to
collecting, computing, analysing, the management in order to make
and evaluating the total strategic decisions that will help in
expenses incurred on a product, realising the organization's goals.
process, or project, among other
things.
Objective To maximize profit, the main The main focus is on profitability and
focus is on cost estimation and growth through planning, controlling,
cost control. and decision-making.
Scope Cost accounting's scope is Management accounting has a wider
constrained to supplying cost scope than cost accounting because it
related information for gives all types of information for
managerial purposes. managerial purposes, including cost
accounting and financial accounting
information.
Nature It basically keeps a record of It keeps records of both qualitative and
quantitative data. quantitative aspects of data.
Techniques Budgetary control, standard It uses all techniques of cost
costing, variance analysis, accounting as well as others. Cash flow
uniform costing, marginal analysis, ratio analysis, other statistical
costing etc. and mathematical tools.
Statutory Cost records have been made Management accounting is entirely
Requirement mandatory in a number of optional, and its use is defined by its
industries, as notified by the usefulness to management.
government from time to time.
Data It is based on financial account Data is based on cost accounting,
data, including historical and financial accounting, and a variety of
current information. other sources. It focuses on data
projections for the future.
Dependence Without management Without a competent cost accounting
accounting, a cost accounting system, management accounting
system can be installed. cannot be implemented.

1.7 Cost Accounting v/s Financial Accounting

Cost accounting analyses, assesses, and allocates the cost of goods sold, as well as inventory
control. It gives you the information you need to record costs in a financial accounting.

BASIS FINANCIAL ACCOUNTING COST ACCOUNTING

 Definition
Objective The financial statement's Calculate the cost per unit of o
objective is to disclose the produced for the purpose of decision
organization's true financial making and cost control.
position.
Nature It classifies records, presents and It categorizes cost records,
interprets transactions in terms presents and interprets them in a
of money so that the financial relevant way to provide information
status of the company is visible. for decision-making.
Users The shareholders, the creditors, The main user is the internal
investors, market researchers etc. management of the organisation at
are the users. different levels. Regulatory authorities
may form the part.
Cost-Profit It displays the organization's It provides statement with cost
analysis profit or loss by segment or allocated on relevant basis to each cost
overall results for the object such as department wise
organisation. statement, process, job etc.
Data Historic or past data is used. Both historical or pre-determined costs
are used.
Period of Generally Financial statements Cost reports and statements are
Recording are prepared on yearly basis. generated as needed.

1.8 Advantages of cost accounting

 Lower production cost: By applying cost control and cost reduction, a competent cost
accounting system aids management in lowering the entity's production costs.
 Cost control and reduction opportunities: Comparing expenses over time for the same
product or against competitors, cost accounting assists in identification of cost-control
and reduction opportunities.
 Fixation of appropriate price: By distinguishing between fixed and variable costs, which
is not provided in financial accounting systems, cost accounting allows for the
establishment of appropriate prices.
 Reduction in labour cost: By determining workforce requirements in different
departments or business units, an effective labour cost control system can assist to:
Recognize and remove issues of under or overstaffing.
 Cost saving: Detection and prevention of unusual or abnormal losses and wastes during
storage or production results optimum utilisation of resources, minimal wastes and cost
saving.
 Establishes Control: Cost accounting enables better tracking of resource usage and
performance level achieved by different cost centres and therefore, helps establishing
control over departments.
1.9 Limitations of Cost Accounting

 Complex: In order to generate reports in cost accounting, a lot of specific data is

required. Allocating expenses like as direct and indirect material costs, labour costs, and
overhead costs to distinct product categories is difficult.
 Expensive: Building a comprehensive management accounting system is quite
expensive, and it necessitates both a complex system and competent and skilled
personnel with sufficient expertise.
 Lack of Reconciliation: There are no duplicate entries in cost accounting, therefore it is
difficult to demonstrate the impact of reports or perform any reconciliation to verify the
data on the statement.
 No readymade solution: Cost accounting can only inform us whether costs have
increased or decreased, but it cannot control them. It is only a tool for informing
management and expecting them to take actions.
 Duplication: It entails duplication of effort because the business has to keep and
maintain two different sets of accounts: financial and cost.

1.10 Users of Cost and Management Accounting

Different stakeholders use the cost and management accounting and are divided into two
groups: internal and external to the company.
1.10.1 Internal Users
a) Managers – Cost and management accounting provides managers with information and
techniques that enables:
 Calculation of cost of goods produced.
 Determination of selling price for the product.
 Profitability Reports of departments, particular products, jobs, contracts,
processes etc.
 Cost-profit analysis reports which helps in significant decision making.
b) Operational level staff – Supervisors, foreman requires information regarding:
 the objectives and goals to be achieved.
 performance targets to be met.
 profitability of their division.
 other product related specifications like quantity and quality of goods to be
produced.
c) Employees – The system provides employees with data related to their attendance, pays
and incentives available, performance targets and their over progress in achievement of
goals.
1.10.2 External Users
a) Shareholders – Shareholders are the owners of the company and therefore, invested
funds in it. Any information that effects their investment value is required by the
shareholders. This data is delivered through annual reports, statements etc.
b) Creditors and Lenders – Creditors and lenders needs to know about company’s
repayment capacity. For example: If loan is secured against debtors, the lender is
concerned with information related to sales.
c) Regulatory Bodies – The authorities require data and information from cost accounting
system that helps in decisions such as price fixation, price control, rates for duties and
taxes etc.
d) Auditors – During an audit of financial accounts or cost audit, auditor review and verifies
various reports and documents with required cost reports or statements.

1.11 Other Concepts

 Cost objects - Any element for which a cost must be determined independently is
referred to as a cost object. A product, a service, a process, an activity, a program, or a
department can all be considered cost objects.
For Example: Purchase department, finance department, sales department are all
different cost objects.
 Cost unit - It is a unit of goods, service, or time in relation to which costs are ascertained
and allocated. Cost units are generally the units for physical measurement like quantity,
weight, numbers, duration etc.
For Example: For electricity, the unit is Kilo-watt hour and for water, it is litre or gallon.
 Cost drivers - A cost driver is a factor that influences the cost level. Any activity that
causes a cost to occur, and the level of that activity has an impact on the cost level, that
activity is a cost driver.
For Example: Number of purchase orders placed, number of machines set up for
production etc.
 Cost centres - CIMA defines Cost Centre as “a production or service, function, activity or
item of equipment whose costs may be attributed to cost units. A cost centre is the
smallest organizational sub-unit for which separate cost allocation is attempted.”
For Example: Activities such as collecting, sorting, marketing, and washing garments are
undertaken in a laundry. Each action can be thought of as a separate cost centre, and all
costs associated with that cost centre can be calculated separately.

1.12 Classification of Costs

1. Based on Nature
a) Material cost - Material costs are the costs of any material used in the manufacturing
of products.
For example: cost of wood for furniture manufacturer.
b) Labour cost - The wages and salaries paid by the employer to its employees involved
directly or indirectly in production of goods or rendering of services.
For example: wages paid to craftsmen or artisans.
c) Expenses - This category contains all costs related with producing and selling the
services or goods, other than material and labour.
For example: Rent paid for factory.

2. Based on Functions
a) Production cost - These are the expenses associated with the direct production or
manufacturing of the product.
For example: Material, labour.
b) Non-Production cost - It cover the costs of running a business excluding all costs
related to production. It includes administrative, transportation, finance cost and
selling expenses.
For example: Selling and distribution, marketing expense.

3. Based on Traceability
a) Direct cost - Direct costs are those that can be directly linked to a particular unit of
production in full.
For example: Direct material cost- material used in manufacturing of a product.
b) Indirect cost – Indirect costs are costs which are not directly related to one particular
cost unit. These costs are shared among different cost centres or units.
For example: Indirect material cost – cleaning supplies or safety equipment used by
employees not involved in production.

4. Based on Normality
a) Normal cost - Costs that are generally incurred at a certain output level under the
conditions within which that level of output is normally achieved. These are
unavoidable in nature.
For example: 5% of stock perishes by the end of every month due to nature of
material.
b) Abnormal cost - Costs that are not generally incurred at a certain output level under
the conditions that within which that level of output is normally achieved. This
expense is charged from the Costing profit and loss statement.
For example: Machine Breakdown, strike by workers.

5. Based on Control
a) Controllable cost -A cost that can be changed based on a business choice or
requirement is referred to as a controllable cost.
For example: Raw material used, selling and distribution expenses incurred.
b) Uncontrollable cost - Uncontrollable cost, on the other hand, is a cost that cannot be
changed based on a personal management decision or requirement.
For example: Depreciation, duties and taxes.
 6. Based on Behaviour
a) Fixed cost - Costs that are incurred on constant basis regardless of any fluctuation in
activity level. Such costs are independent of volume and continues to incur even
when no units are produced.
For example: Rental expense, interest payments.
b) Variable cost - A variable cost is a business expense that fluctuates in relation to
output. Variable costs rise or fall when a company's output level increases or
declines.
For example: Material cost per unit, labour cost.
c) Semi-Variable cost - Costs that have both fixed and variable components and are
accordingly influenced in part by activity levels.
For example: Electricity and gas bills.

7. Based on costs used for Managerial decision-making

a) Marginal cost - The incremental costs spent when producing additional units of a
good or service are referred to as marginal cost. All variable costs are marginal costs.
b) Differential cost - The difference in the costs of two different decisions is referred to
as differential cost. When a company is faced with multiple similar choices, it must
choose one and reject the others.
c) Notional cost - Costs that are not incurred but are useful when making decisions
about specific situations.
d) Capitalised cost
e) Opportunity cost - The expense of choosing one course of action and foregoing other
alternatives to carry out that action is known as opportunity cost. It's the amount
that could be received if the resource is put to its next best use.
f) Shutdown cost - Costs that continues to incur even when a plant is temporarily shut
down. This comprises all fixed costs that cannot be avoided, regardless of whether
the firm is temporarily not in operation.
g) Sunk cost - A sunk cost is one that has already been incurred and cannot be avoided
by future decisions. Such costs are irrelevant for decision making as are incurred
irrespective of outcome.
h) Replacement cost - The cost of replacing an existing asset with a similar asset at
current market pricing is known as replacement cost.
i) Implicit cost - Expenditures that may not necessitate immediate cash payments and
are also known as economic cost. Such costs are not recorded in books.
j) Out-of-pocket cost or Explicit cost - Expenditures that necessitate immediate
payments and results in outflow of cash. These are recorded in books of accounts
like wages or salaries etc.

1.13 Methods and Techniques of Costing

1.13.1 Methods of Costing

1) Unit costing - When a single product is manufactured or a single service is provided
by continuous manufacturing activity, this method is used. The entire production cost is
determined and the cost per unit is computed by dividing the overall cost by the number
of units produced. Suitable for: Brick-making industries.
2) Job costing - Method of costing where cost for each job is determined separately. It
is appropriate for any firm that performs work on the customer's order and according to
his specifications. Suitable for: Printing press.
3) Batch costing - It is an extension of job costing. A batch of similar products is treated as
a single job, and the total cost of the batch is calculated. It is then used to calculate the
unit cost of the goods produced. Suitable for: Drugs and pharmaceuticals.
4) Process costing - When the product to be produced requires a sequential flow of
processes to be undertaken, then it becomes essential to ascertain cost at every level of
production process. Such is the situation where output of process one becomes input of
process two. Suitable for: Chemical industries.
5) Contract costing - When large-scale contracts are carried out across multiple sites,
contract costing method is used. For each contract, cost is calculated individually.
Suitable for: Construction of roads.
6) Operating costing -This method is used when cost related to a particular operation is to
be ascertained in rendering a service. Suitable for: Transportation.
7) Multiple costing - It is employed when a complicated production requires a range of
components to be manufactured separately and then assembled. The total cost is
calculated by adding component costs, which are obtained through job or process
costing, and then adding them together. Suitable for: Production of automobiles.

1.13.2 Techniques of Costing

1) Historical Costing - It is the process of determining costs after they have been incurred.
It indicates that the cost of a product can only be calculated after it has been
manufactured. This system is only for ascertaining cost and not useful for controlling
costs.
2) Standard Costing - It refers to the process of preparing standard cost sheets and using
them to measure and analyse deviations from standard costs of actual cost incurred in
order to maintain maximum efficiency.
3) Marginal Costing - It relates to determining marginal costs by distinguishing between
fixed and variable expenses, as well as the impact of changes in quantities or kind of
output on profit. Only the variable costs are associated to goods produced and fixed
costs are charged against profit directly in statement of profit and loss.
4) Uniform Costing - Uniform costing is a cost accounting strategy in which standardized
concepts and methodologies are used by a number of different enterprises and firms.
This aids in the comparison of one company results to that of another.
5) Direct Costing - This technique allows all direct costs associated with a product, be
charged to the product and all indirect expenses be charged directly against profit in
statement of profit or loss in the period they occur.
6) Absorption Costing - Absorption costing is the technique of allocating all variable and
fixed expenses to an activity, process, or product.

1.14 Conclusion

 The amount of money incurred on production of a certain product or activity is referred

to as cost.
 Costing refers to the methods and procedures for determining costs.
 Budgeting, standard costs, and actual costs of operations, processes, activities, or
products, as well as variance analysis, profitability, and social use of funds, are all part of
cost accounting.
 Historical costing, uniform costing, absorption costing, marginal costing, direct costing
and standard costing are examples of costing techniques.
 Single or unit costing, job costing, process costing, contract costing, operation costing,
batch costing, multiple or composite costing, departmental costing, and so on are all
examples of costing methods.
 Financial planning, cash flow analysis, marginal costing, financial statement analysis,
budgetary control, linear programming techniques and so on are some of the methods
and techniques used in management accounting.
 There is a distinction between financial accounting, cost accounting, and management
accounting.

1.15 Glossary

 Cost - Cost is the amount of resource given up in exchange for some goods or services.
 Costing - The process of ascertaining, apportioning and allocating the cost to respective
cost centres is known as costing.
 Cost Accounting - It is the process of discovering, evaluating, recording, and reporting
cost data using methods and techniques of costing for preparation reports and
statements as and when required by management
 Management Accounting - Management accounting is Management accounting is the
process of finding, measuring, evaluating, and conveying financial information to an
organization's management in order to make appropriate decisions that will help them
accomplish the organization's goals. Managerial accounting is another name for
management accounting.
 Cost Reduction – The real and not temporary reduction in the cost per unit of the
product is known as cost reduction.
 Cost control – Cost control means keeping the costs under control by preparing budgets
and setting standards for comparison and depicting if further reduction in cost is
possible or not.

1.16 Short Answers

1. What are the two basic types of cost-behavior patterns? Explain.

2. Why is it important to define the term cost precisely and how does its classification aid
cost analysis?
3. Define cost accounting and management accounting stating their functional differences.
4. What do you mean by cost center? Explain with example.
5. What is the primary objective of cost and management accounting?

1.17 Questions for discussion forum

1. The roles of cost accounting, management accounting and financial accounting are
similar but different. Discuss and differentiate.
2. The scope of cost and management accounting is widening and becoming more relevant
in the emerging economic scenarios. How?
3. Discuss and state the costing methodologies and suggested cost unit for the following:
i. Power and electricity
ii. Hospitals
iii. Coal mining
iv. Professional services
v. Transportation
vi. Automobiles
vii. Brick making
viii. Chemical industry

1.18 Multiple choice questions

1. Because of the ________, cost accounting was introduced.

a) Limitation under Financial accounting
b) Limitation under Management accounting
c) The human resource accounting system's limitations.
d) Limitation of double entry system.
(Explanation: Financial accounting aims at preparing financial accounts and less relevance is
given to ascertainment and allocation of cost, cost control and cost reduction.)

2. The techniques and practices of _________ are referred to as costing.

a) cost allocation.
b) cost ascertainment
c) cost apportionment
d) cost distribution.
(Explanation: Costing is defined as the process of ascertaining product cost by applying
techniques and principles.)
3. Classification of cost is helpful to management
a) Increases efficiency
b) Calculation of profit
c) Cost ascertainment
d) Cost Analysis
(Explanation: Understanding the nature of costs is vital for taking informed decisions. Cost
Analysis helps to determine profitability of different cost objects.)

4. Scope of cost accounting includes

a) Cost audit
b) Cost control
c) Cost analysis
d) All the above
(Explanation: Scope of cost accounting has broadened over years as it is used in cost control,
cost reduction, cost ascertainment, cost analysis and so on.)
5. Following is not a function of cost and management accounting
a) Collection and accumulation of costs
b) Ascertainment and apportionment of costs
c) Reporting of financial information
d) Preparation of budgets and standard costs

(Explanation: Reporting of financial information is the function of financial accounting and not cost
and management cost.)

6. Cost and management accounting is an application of financial management for decision making
a) True
b) False

(Explanation: Cost and management accounting is an extension of financial accounting that provides
additional information about costs required for taking informed cost related decisions.)

7. Sunk costs are

a) Historical costs
b) Irrelevant for decision making
c) Both (a) and (b)
d) None of the above

(Explanation: Sunk costs are costs that have already been incurred in the past and plays no role
decision making since there is no impact of any future decisions on such costs.)

8. Cost reduction and cost control are same

a) True
b) False

(Explanation: Cost reduction is the real and permanent reduction in cost per unit of goods while cost
control aims to ensure the actual expenditure in consonance with predetermined set standards.)

9. Users of Cost and management accounting includes

a) Managers
b) Regulatory bodies
c) Employees
d) All the above
(Explanation: All of them are users of cost and management accounting.)

10. ________________ defines cost accounting as “classifying, recording and appropriate

allocation of expenditure for determination of costs of products or services and for the
presentation of suitably arranged data for purposes of control and guidance of
management.”
a) Porter
b) CIMA, London
c) Wheldon
d) Nicholson

Explanation: Wheldon defines cost accounting as “classifying, recording and appropriate

allocation of expenditure for determination of costs of products or services and for the
presentation of suitably arranged data for purposes of control and guidance of management
11. Advantages of cost accounting:
a) Lower production cost
b) Fixation of appropriate price
c) Reduction in labour cost
d) All the above

Explanation: All of them are benefits of cost accounting.

12. Any activity that causes a cost to occur, and the level of that activity has an impact on
the cost level, that activity is a _______________.
a) Cost driver
b) Cost centre
c) Cost unit
d) Cost object

Explanation: Any activity that causes a cost to occur, and the level of that activity has an
impact on the cost level, that activity is a cost driver.
13. Full form of CIMA:
a) Chartered Institute for Managing Accounts
b) Chartered Institute of Management Accountants
c) Chartered Institution of Managing Accounts
d) Chartered Institution of Management & Accountancy

Explanation: Full form of CIMA is Chartered Institute of Management Accountants.

14. _________________ is one of the three dimensions to achieve competitive advantage in

the industry, according to Michael E. Porter's theory of competitive strategies.
a) Financial Accounting
b) Cost Accounting
c) Management Accounting
d) Cost Leadership

Explanation: Cost Leadership is one of the three dimensions to achieve competitive

advantage in the industry, according to Michael E. Porter's theory of competitive strategies.
Cost Leadership entails manufacturing of goods and services at the lowest possible cost
while keeping a high level of quality in order to offer a more competitive price.

15. ________________ is the processing and presentation of accounting, cost accounting,

and other economic data.
a) Financial Accounting
b) Cost Accounting
c) Management Accounting
d) None of the above
Explanation: Management accounting therefore, is the processing and presentation of
accounting, cost accounting, and other economic data in a way that it helps in the
performance of managerial activities such as planning strategies, decision-making,
controlling, etc.
16. When a manufacturer is producing bulk pieces of a product, cost accounting is used to
determine the_________________.
a) Total cost
b) Per unit cost
c) Selling price
d) All the above
Explanation: When a manufacturer is producing bulk pieces of a product, cost accounting is
used to determine the actual per unit cost, total cost, and selling price.
17. ___________________ is conducted to validate the cost sheets and ensure effective and
efficient request of cost accounting principles.
a) Cost audit
b) Cost analysis
c) Cost Comparisons
d) Cost Control
Explanation: Cost audit is conducted to validate the cost sheets and ensure effective and
efficient request of cost accounting principles

18. Select the incorrect statement

a) Cost accounting and management accounting are always used interchangeably.
b) Cost reports are created from data gathered through cost accounting and evaluated by
management for making rational decision.
c) Management accounting is entirely optional, and its use is defined by its usefulness to
management.
d) The financial statement's objective is to disclose the organization's true financial
position.

Explanation: All the other statements are correct.

Correct Statement: Cost accounting and management accounting are often used
interchangeably, there are some distinctions.
19. External users of Cost and Management Accounting:
a) Operational Level staff
b) Shareholders
c) Creditors & Lenders
d) Both b) and c)
Explanation: External users of Cost and Management Accounting are Shareholders,
Creditors and Lenders, Regulatory bodies and Auditors.
20. When a single product is manufactured or a single service is provided by continuous
manufacturing activity, this method is used. Identify the method.
a) Job Costing
b) Batch Costing
c) Process Costing
d) None of the above
Explanation: When a single product is manufactured or a single service is provided
by continuous manufacturing activity, Unit Costing method is used. The entire production
cost is determined and the cost per unit is computed by dividing the overall cost by the
number of units produced.