1.

Define the term ratio analysis.

Ans. Ratio analysis is a process of determining and presenting the quantities relationship
between two accounting figures to calculate the strength and weaknesses of a business. In
simple word, ratio analysis is quotient of two numerical variables, which shows the relationship
between the two figures, accordingly, accounting ratio us a relationship between two numerical
variable obtains from financial statements such as income statement and the balance sheet.
Accounting ratios are used as an important tool of analysing the financial performance of the
company over the yearsansdas comparative position among other companies in the industry.
According to Kennedy and McMullan, the relationship of one term to another expressed in
simple mathematical form is known as ratio.
 
2.
Point out the advantages of ratio analysis.
Ans. The following are the important advantages of the accounting ratios.
Analysing financial statement: Ratio analysis an important technique of financial statement
analysis. Accounting ratios are useful for understanding the financial position of the company.
Different users such as investors, management, bankers and creditors use the ratios to analyse
the financial statement of the company for their decision making purpose.
Judging efficiency: Accounting ratios are important for judging the company's efficiency in
terms of its operations and management. They help judge how well the company has been able
to utilize its assets and earn profits.
Locating weakness: Accounting ratios can also be used in locating weakness of the company's
operations even though its overall performance may be quite good. Management can then pay
attention to the weaknesses and take remedial measures to overcome them.
Formulating plans: Although accounting ratios are used to analyze the company's past financial
performance, they can also be used to establish future trends of its financial performance. As a
result, they help formulate the company's future plans.
 
3.
What are the limitations of ratio analysis?
Ans. The limitations of ratio analysis are given below;
Ratios are tools of quantitative analysis, which ignores qualitative points of view.
Ratios are generally distorted by inflation.
Ratios give false result, if they are calculated from incorrect accounting data.
Ratios calculated on the basis of past data. Therefore, they do not provide complete
information for future forecasting.
Ratios may be misleading, if they are based on false or window-dressed accounting information.
 
4.
What do you mean by current assets?
Ans. Current ratio is also known as short-term solvency ratio or working capital ratio. This ratio
is used to assets the short-term financial position of the business. In other words, it is an
indicator of the firm's ability to meet its short-term obligations;
It is calculated by;
Current ratio: CurrentassetsCurrentliabilitiesCurrentassetsCurrentliabilities
 
5.
What is meant by current liabilities?
Ans. A current liability is an obligation that is 1) due within one year of the date of a company's
balance sheet and 2) will require the use of a current assets or will create another current
liability. If a company's operating cycle is longer than one year, current liabilities are those
obligation's due within the operating cycle.
 
6.
How do you compute current ratio?
Ans. Current ratio is computed by,
Current ratio=  CurrentassetsCurrentliabilitiesCurrentassetsCurrentliabilities
 
7.
How do you compute acid test ratio?
Ans.we compute acid test ratio by,
 Quick ratio/liquidity ratio =CurrentassetsCurrentliabilitiesCurrentassetsCurrentliabilities
 
8.
Why do you calculate liquidity ratios?
Ans. Liquidity represents one's ability to pay its current obligations or short-term debts within a
period less then a year. Liquidity ratios, therefore, measure a a company's liquidity positions.
The ratios are important from the viewpoint of its creditors as well as management.
 
9.
Write the meaning of long-term debt.
Ans. The debt which is payable after current year is called long term-debt. Long-term debt
refers to borrowed funds. Long-term debts include term loans, debentures, bonds, mortgage
loans and secured loans.
 
10.
Write the meaning of equity or shareholders fund.
Ans. Shareholders fund is also called as net worth or shareholders' equity. Shareholders fund is
the amount, which belongs to the company's shareholders or owners. It includes equity share
capital, preference share capital, reserve and surplus, accumulated profits, reserve funds,
general reserves, capital reserve, share premium, share forfeiture, retained earnings, reserve
for contingency, sinking fund for renewal of fixed assets and fixed assets and redemption of
debenture. The fictitious assets such as preliminary expenses, underwriting commissions,
discount on issue of shares, or debentures are deducted while determining shareholders' fund.
 
11.
Explain briefly the meaning of working capital.
Ans. Ans. Working capital is calculated by subtracting current liabilities from current assets.
That is, one takes the value of all debts and obligations for the current year and subtracts that
from the value of all cash and assets that might reasonably be converted into cash in the
current year. This is a good measure of the short and medium-term financial health of a
company, and may indicate by how much it can expand its operations without resorting to
borrowing or another capital raising tactic. Working capital is also called operating assets or net
current assets.
 
12.
Explain briefly the meaning of capital employed.
Ans. Capital employed turnover ratio is the ratio, which establishes the relationship between
the amount of sales and capital employed. It shown how efficiently capital employed in the
company has been utilized in generating sales revenue.
Capital employed turnover ratio =  SalesCapitalemployedSalesCapitalemployed
 
13.
How do you compute debt-equity ratio?
Ans.  Debt-equity ratio is computed by,
Debt-equity ratio =   LongtermdebtshareholderfundLongtermdebtshareholderfund
Alternatively,
Debt-equity ratio =  TotaldebtshareholderfundTotaldebtshareholderfund
 
14.
How do you compute stock turnover ratio?
Ans. stock turnover ratio is computed by,
Inventory turnover ratio = SalesClosingInventorySalesClosingInventory
 
15.
What is meant by debtor’s turnover ratio?
Ans. It is also termed as receivable turnover ratio. This ratio establishes the relationship
between net credit sales and average debtor for the year. It shows how quickly the credit
(debtor or receivables) of the company has been converted into cash. This ratio is calculated by
using the following formula
Debtor turnover
ratio= NetCreditSalesAverageAccountReceivableNetCreditSalesAverageAccountReceivable
 
16.
Write the meaning of debtor’s collection period?
Ans. It is also called debt collection period or average age of debtors and receivables. It
indicates how long it takes to realize the credit sales. It also measures the average creditor
period enjoyed by the customers. It indicates the average time lag between credit sales and
their conversion into cash.
 
17.
What does gross profit ratio indicate?
Ans. Gross profit ratio is also termed as gross profit margin. This ratio shows the relationship
between gross profit and net sales and it measures the overall profitability of the company in
terms of sales. It is generally expressed in percentage.
It is calculated by,
Gross profit =GrossProfitNetSaleGrossProfitNetSale * 100
 
18.
What does net profit ratio indicate?
Ans. This ratio is also called net profit margin. This ratio measures the overall profitability of a
business by establishing the relationship between net profit and net sales. This ratio is
calculated by dividing net profit tax by net sales and multiply into 100.
 
19.
Write the meaning of return on assets.
Ans. This ratio measures the relationship between the total assets and net profit after tax plus
interest. It measures the productivity of the assets and determines how effectively the total
assets have been used by the company.
Return of assets =NetProfitaftertax+InterestTotalAssetsNetProfitaftertax+InterestTotalAssets
 
20.
Write the meaning of earning per share.
Ans. Earning per share measures the profit available to equity shareholder on per share basis.
This ratio express the earning power of the company in terms of a share held by the equity
shareholders. This ratio computed by dividing the net profits after preference dividend by the
number of equity shares outstanding.
Earning per share
= NetProftafterTax−PreferenceDividendNoofequitysharesoutstandingNetProftafterTax−Prefere
nceDividendNoofequitysharesoutstanding
 
21.
Write the meaning of dividend per share.
Ans. The profits earned by the company finally belong to the equity shareholder. Therefore,  all
or some of them are distributed to them which are known as dividends. This ratio shows how
much share of stock held by them is paid out as dividend. The amount of earning distributed
and paid as cash dividend is considered for calculating the dividend per share.
Dividend per share
=DividendavailabletoshareholdersNoofequityshareoutstandingDividendavailabletoshareholders
Noofequityshareoutstanding
 
22.
What is meant by cost of goods sold?
Ans. The direct costs attributable to the production of the goods sold by a company. This
amount includes the cost of the materials used in creating the good along with the direct labor
costs used to produce the good. It excludes indirect expenses such as distribution costs and
sales force costs. COGS appears on the income statement and can be deducted from revenue to
calculate a company's gross margin. Also referred to as "cost of sales."
 
23.
What is meant by net credit sales?
Ans. Net credit sales arerevenues generated by an entity that it allows to customers on credit,
less all sales returns and sales allowance. Net credit sales do not include any sales for which
payment is made immediately in cash. The concept is useful as the foundation for other
measurements, such as days sales outstanding and accounts receivable turnover, and also as an
indicator of the total amount of credit that a company is granting to its customers.Net credit
sales are likely to be highest when a company has a loose credit policy, where it grants large
amounts of credit to even those customers with suspect payment histories.
 
24.
Write in brief the meaning of current liabilities and long-term liabilities.
Ans. A current liability is an obligation that is 1) due within one year of the date of a company's
balance sheet and 2) will require the use of current assets or will create another current
liability. If a company's operating cycle is longer than one year, current liabilities are those
obligations due within the operating cycle.

1.
Write the meaning of a fund flow statement on three to five effective sentences.
Ans. The funds flow statement are prepared to show the changes in financial position between
two balance sheet dates so that decision maker and analyst use it more purposefully. The word
funds flow statement consists two different words ‘funds’ and ‘flow’. The funds have different
meaning in their places like cash or working capital or all the other financial resources. Flow
means changes occurred in fund from one specific date to another date under review. Flow
may be inflows and outflows. Thus it can be said that statement prepared to show the flow of
funds on working capital basis is known as funds flow statement. It shows the different sources
of funds and application of fund in the business.
According to Roy Foulke,“A statement of sources and application of funds is a technical device
designed to analyse the changes in the financial position of a business enterprise between two
dates.”
 
2.
What do you mean by funds?
Ans. The term “funds” has more than one meaning. In its narrow sense, the term funds are
used to mean cash, as most people think that funds and cash are the same thing. In funds flow
statement, however, cash is not used as basis, because it concentrates only on changes in a
single asset, cash. Instead, the term funds are used in the broader sense of working capital, as it
focuses on changes in broader category of working capital. Funds mean all the financial
resources in the business.
 
3.
What do you mean by working capital?
Ans.A measure of both a company's efficiency and its short-term financial health. The working
capital is calculated as: The working capital ratio (Current Assets/Current Liabilities) indicates
whether a company has enough short term assets to cover its short term debt. The amount of
money a company has on hand, or will have, in a given year. Working capital is calculated by
subtracting current liabilities from current assets. That is, one takes the value of all debts and
obligations for the current year and subtracts that from the value of all cash and assets that
might reasonably be converted into cash in the current year. This is a good measure of the
short and medium-term financial health of a company, and may indicate by how much it can
expand its operations without resorting to borrowing or another capital raising tactic. Working
capital is also called operating assets or net current assets.
 
4.
How is working capital related with current assets and current liabilities?
Ans. Working capital is an indicator of how well the company can meet its financial obligations
and therefore how solvent or liquid (able to convert assets to cash) the company is. With assets
exceeding liabilities, the company is in a liquid position.
If you hope to borrow money for your company, potential lenders will examine your working
capital to assess the health of your ratio of current assets to current liabilities.
It is calculated by,
Working capital = current asset - current liabilities
 
5.
State any three objectives of funds flow statement.
Ans.  Any three objectives of a funds flow statement are as follows:
To identify the changes in working capital level of a firm.
To show the relationship of net profit to the changes in fund from business operation.
To show the firms ability to generate long term financial to satisfy the investment.
 
6.
Write any three items of non-operating and non-cash expenses.
Ans. Three items of non-operating and non-cash expenses are as follows:
Depreciation for the year.
Amortization of goodwill, copyright, patents, trademarks, preliminary expenses.
Discount on issue of shares and debentures written off.
 
7.
List out three items of current assets and current liabilities.
Ans. The three items of current assets are cash in hand, cash at bank, sundry debtors whereas
three items of current liabilities are bills payable, account payable, sundry creditors.
 
8.
Write any five sources of funds.
Ans. Any five sources of funds are credit, venture capital, donations, savings, tax and other so
on.
 
9.
Write any five uses of funds.
Ans. Any five uses of funds are donations, subsidies, saving, venture capital and grants
 
10.
Represent the relationship between net profits and operating profits.
Ans. The relationship between net profits and operating profits is inverse. Operating profit is
the top line of the balance sheet, and all deductions and additions begin with this figure while
net profit is the bottom of the balance sheet and reflects the amount of profit that remains
after accounting for all expenditures.
 
11.
What do you mean by funds from operation?
Ans. The funds or loss from operations is determined by adjusting the firm’s net income in a
statement called the statement of funds from operations. It refers to the funds or loss, which is
generated or suffered in the business as a result of its regular operations during the period. The
funds from operations are an important source of funds, while loss from operations is one of
the important applications of funds. 

What is cash flow statement?

Ans. The statement that shows inflow and outflow of cash associated to different activities of a
business firm for a specific period. Cash flow is the flow of cash in an accounting year or over
two dates of balance sheet. Cash flow statements shows the inflows and outflows of cash from
different business activities like operating, investing and financing activities. It is the indicator of
the amount of cash receipt and amount of cash payment or disbursement during an accounting
period in different activities of an organization. It shows the causes of increase or decrease in
cash and net change in cash position during a particular period.
According to S.P Gupta,” Cash flow statement is a statement designed to highlight upon the
causes, which bring changes in cash position between two balance sheet dates.
 
 2.
Differentiate between cash flow and funds flow statement?
Ans. Differentiation between cash flow and funds flow statement are as given below:
FUNDS FLOW
CASH FLOW STATEMENT
STATEMENT
Cash flow statement is It is based on the changes
based on narrow concept in working capital, which
of funds, which considers considers both the
 changes in cash as well as
other components of
changes in cash.
current assets and
current liabilities.
It is prepared on cash It is prepared in accrual
basis. basis.
It does not require use of
changes in net working It requires to use of a
capital because all the separate statement of
changes in assets and changes in net working
liabilities are summarized capital.
in cash flow statement.
The preparationof funds
The preparation of cash
flow statement considers
flow statement considers
those transactions that
only those transaction
are linked with flow of
that are linked with flow
funds along with actual
of cash.
cash.
This statement is more
This is more useful in
useful in short term
long-term analysis of
analysis and cash
financial planning.
planning.
 
 
 3.
Describe the importance of cash flow statement.
Ans. The importance of cash flow statement are;
To show the various activities where in the cash was utilized.
To identify the sources from where cash inflows have risen within in a particular period,
To shows the efficiency of the firm in generating cash inflows from its regular operations.
To reports the amount of cash used during the period in various long term investing activities.
To reports the amount of cash received during the period through various financing activities
such as issue of shares, debentures and raising long-term loan.
 
 4.
What do you mean by cash from operating activities?
Ans. Operating activities refer to the revenue generating activities of a firm. These activities are
considered to be the major sources of internally generated cash. Cash inflows from operating
activities include the cash from sales and collection from debtors. Cash outflows for operating
activities include cash purchase, payment of suppliers, payment for other operating expenses,
payment for interest and taxes thus consist of all cash revenue expenses.
 
 5.
In how many ways cash from operating activities is determined? Explain with suitable examples.
Ans. Cash from Operating activities is determined into 2  ways. They are direct methods and
direct method and indirect method.
1.Cash flow from operating activities under direct method
Under direct method only those items from income statement are selected that result into
actual flow of cash. So, non-cash expenses such as depreciation and amortized amount
appeared in income statement are ignored. The change in some components of current assets
and current liabilities except cash balance are also incorporated that result into cash inflows
and outflows.
2.Cash flows from operating activities under indirect method
Under indirect method first the funds from operation is ascertain by adjusting the net income
by non-cash expenses and non-operating incomes and expenses included in the income
statement. The funds from operation so ascertained are again adjusted by the changes in
current assets and the changes in current liabilities to determine cash flows from operating
activities.
 
 6.
What is meant by cash from investing activities?
Ans. Investing activities refer to those activities, which are concerned with acquisition or sales
of lone-term assets or investment. Cash inflows from investing activities include the cash
received from sales of fixed assets as well as investment and cash outflows include cash paid for
the purchase of fixed assets and investment made.
 
7.
Mention the items relating to cash flows from financing activities.
Ans. The items relating to cash flows from financing activities are issue of equity share,
debentures, repayment of long-term loan, payment of cash dividend and so on. 

1Write a paragraph giving the meaning of costing.

Ans. The process of fixing costs of activity is defined as costing. The activity refers to
manufacture products/articles or services rendered, or function performed. Each activity needs
cost. The procedure applied to ascertain unit cost of product or service is costing. So, costing
comprises of collection, classification and analysis of cost for ascertaining unit cost of product
and services. Manufacturing and service industries follow costing to ascertain cost of products
or services.
According to W.H Wheldon, Costing is the classifying, recording and appropriate allocation of
expenditure for the determination of the costs of products or services, and for the presentation
of suitability arranged data for purpose of control and guidance of management.
 
2.
Define direct and indirect cost with examples.
Ans.
Direct costs
Direct costs are those materials, labour and other expenses, which can easily be attributed or
identified with a unit of product, process or operation. The cost of raw materials, productive
labour, and carriage of materials paid are the examples of direct cost. The total of direct cost is
termed as prime cost.
Indirect costs
Indirect costs are those types of cost, which cannot easily be attributed to or identified with a
unit of product, process or operation. Therefore, the total of costs of indirect materials, indirect
labour and indirect expenses is referred to as indirect costs. They are also called overhead
costs. The examples of indirect costs are repair charges, salaries, rent, telephone and water.
 
3.
Briefly write the meaning of cost accounting.
Ans. Cost accounting is one of the branches of accounting, which has been developed due to
the limitation of financial accounting. Financial accounting communicates economic
information of an organization as a whole and that is used for external reporting purpose. The
reporting of financial accounting may not be sufficient for internal reporting i.e. for the
formulation of policy and strategy, decision making and control.
According to C.Gilespie “cost accounting is a set of producers for determining the cost of a
product and various activities involved in its manufacture and sales and for planning and
measuring performance.
 
 4.
State three objectives of cost accounting.
Ans. The three objectives of accounting are given below;
To ascertain cost:The important objective  of cost accounting is to ascertain cost of a product or
services or jobs. Ascertainment of cost is process of determining cost after they have been
incurred. Generally, there are two methods of determining the cost i.e. job costing and process
costing. Due to the different in the nature of activity of industry, different methods of cost may
be applied.
To control cost:The objectives of cost accounting is to control over the cost by using various
techniques such as standard costing, inventory control, marginal costing etc.
To provide information for decision making: Cost accounting is the formal system of
accounting and provides information for various managerial decisions like
i.Whether to accept or reject the offer
ii.Whether to make or buy a product
iii.Whether to continue or replace the existing machine and
iv.Whether to drop or continue the product or services
 
 6.
Give three limitations of cost accounting.
Ans. The three limitations of cost accounting are;
Unnecessary: It is unnecessary because it involves duplication of work, many good enterprise
are functioning without any costing system.
Expensive: It is expensive because the installation of cost accounting system involves additional
cost.
Inapplicable to many industry: It is inapplicable to many industries. A single costing system
may not be applicable to all industries because the costing system may be specially designed to
meet the need of a specific industry.
 
 7.
Define variable cost and give at least one example of variable cost.
Ans. Costs which change proportionality with volume of output or services are called variable
costs. They increase or decrease in total amount with the increase or decrease in volume of
output. However, the per-unit variable cost is constant. Variable manufacturing cost are also
called product cost and include direct material, direct labour and fluctuating indirect materials,
labour and manufacturing overheads.
One Example of variable cost is direct and indirect materials.
 
8.
What do you mean by functional classification of cost?
Ans.  The classification of costs based on the functions like manufacturing, administrative,
selling and distribution is called functional classification. Functional classification of cost focuses
on the different activities and segregate costs accordingly. Production (manufacturing) and non-
production (non-manufacturing) costs are the major costs division made after prime cost under
this classification.
Prime cost known as Basic, Flat or Direct cost comprises direct material, direct labour, direct
expenses. They are attributable to and are identified to particular finished goods.
 
9.
Define fixed cost with suitable examples.
Ans. Cost that does not change with output is cost. It remains fixed for a stipulated period and
for a specific capacity output. Fixed cost is called constant or capacity cost. It is also called
create cost as it remains unchanged for a stipulated period. Fixed cost in total amount remains
constant whereas fixed cost per unit changes inversely with output changes. Therefore,
increase in output decreases fixed cost per unit and decrease in output increases fixed cost per
unit. For example: depreciation, rent and salaries.
 
 10.
Define variable and semi-variable cost.
Ans.
Variable Cost
Cost which change proportionality with volume of output or services are called variable costs.
They increase or decrease in total amount with the increase or decrease in volume of output.
However, the per unit variable cost is constant. Variable manufacturing cost are also called
product cost and include direct material, direct labour and fluctuating indirect materials, labour
and manufacturing overheads.
Semi-variable cost
Those cost which do not change proportionately like variable costs but their increase will be
less than proportionate unlike the variable costs is termed as semi-variable cost. The examples
of semi-variable costs are salary of supervisors, travelling salesman salary, repair and
maintenance costs. Such costs contain fixed and variable portions. So, semi variable cost is also
called mixed costs.
 
 11.
Mention the objectives of financial accounting.
Ans. The objectives of financial accounting are;
To show financial position:
Financial accounting also discloses the financial condition of organization on given period. For
this a statement of assets and liabilities is called balance sheet is prepared.
To provide necessary financial information:
Financial accounting provides necessary financial information to the interested parties such as
government, investors, creditors and owners through various financial statement.
To help take decision:
Financial accounting also helps for taking decision by the use of historical data.
 
12.
Differentiate between cost accounting and financial accounting.
Ans. Differentiate between cost accounting and financial accounting are:
COST ACCOUNTING FINANCIAL ACCOUNTING
The main objectives of
The main objective of financial accounting are
cost accounting is to to report financial results
record and report costs in terms of profit or loss
of output. and financial position of a
firm.
Financial accounting does
Cost accounting
not segregate costs into
segregates cost into fixed
fixed and variable
and variable portion.
portion.
Its users are owners,
Its user are mainly
managers, creditors,
managers who use the
employees, workers,
cost data for their
consumers and
decision making purpose.
government.
It is voluntarily required It is legally required for
for the firm to keep cost the firm to maintain
accounts. financial accounts.
It is generally applied in
It is primarily applied in
all types of business
manufacturing concerns.
concerns.
It values inventory based
It values inventory on
either on cost or market 
cost basis.
price whichever is low.
 
 
13.
Give a brief note about controllable and uncontrollable costs.
Ans.
Controllable cost:In simple way controllable cost are those cost which can be controlled .The
cost subject to control or substantial influence of a particular manager or individual is called
controllable cost. In controllable cost, the cost can be changed or altered by the action of
specific managers. Example; direct materials, direct labour, other overheads such as indirect
labour, factory supplies, cutting tools, power costs, repair and maintenance etc. are
controllable costs.
Uncontrollable costs: Costs that are not subject to influence by the action of manager is called
uncontrollable costs. These costs remain unchanged or unaltered. Example: managerial salaries,
staff salaries, depreciation after purchase of equipment, rent.
Notes
Concept of cost accounting
There are three branches of accounting. i.e Financial Accounting, cost accounting and
management accounting. Cost accounting is one of the branches of accounting, which has been
developed due to the limitation of financial accounting. Financial accounting communicates
economic information of an organization as a whole and that is used for external reporting
purpose. The reporting of financial accounting may not be sufficient for internal reporting i.e for
the formulation of policy and strategy, decision making and control.
According to C.Gilespie “cost accounting is a set of producers for determining the cost of a
product and various activities involved in its manufacture and sales and for planning and
measuring performance.
FEATURES OF COST ACCOUNTING
The following are the main features of cost accounting
Nature: Cost accounting is a branch of accounting. It is concerned with recording and reporting
costs of output to the firms management.
Objective: Its main objectives is to accumulate costs of output, job, process, unit and
department and report them for different  uses.
Status: It is complementary to financial accounting as it provides cost data of different kinds of
stock for preparing financial statements.
Basis: It is the basis for cost estimate, cost control, price determination of output.
Usefulness: It is useful for decision making and performance evaluation as it uses absorption or
valuation costing technique in preparing income statements.
 
Objectives of cost accounting
There can be several objectives of cost accounting. However, the following are its important
objectives:
To ascertain cost:
The important objective  of cost accounting is to ascertain cost of a product or services or jobs.
Ascertainment of cost is process of determining cost after they have been incurred. Generally,
there are two methods of determining the cost i.e job costing and process costing. Due to the
different in the nature of activity of industry, different methods of cost may be applied.
To control cost :
The objectives of cost accounting is to control over the cost by using various techniques such as
standard costing, inventory control, marginal costing etc.
To provide information for decision making:
Cost accounting is the formal system of accounting and provides information for various
managerial decisions like
i.Whether to accept or reject the offer
ii.Whether to make or buy a product
iii.Whether to continue or replace the existing machine and
iv.Whether to drop or continue the product or services
To fix the selling price:
Cost accounting can be provide the detailed information about the cost of a product or service
to determine the selling price.
To ascertain costing profit or loss:
Cost accounting ascertains total cost and total revenue of every product or services or job and
calculates profit or loss by comparing with revenue and cost.
To provide information in preparation of financial statements:
Inventory should be valued for preparation of financial statements by comparing cost price and
market price.
 
 
Importance and advantages of cost accounting
Cost accounting provides immense advantages to a firm. It also can be explained in terms of
importance:
Helping in ascertaining of cost:
Cost accounting uses different methods of costing such as job costing, process costing etc.
applying this costing method cost of each product, process or job is ascertained.
Helps in inventory control:
It helps in inventory control using various techniques like ABC analysis, economic order
quantity, stock level etc
Helps in measurement of efficiency:
It helps in measurement of efficiency of operations through establishment if standards and
various analysis.
Helps in preparation of budget:
It helps  in preparation of various budgets such as sales budget, production budget, material
purchase budget, flexible budget etc.
 
 
LIMITATIONS OF COST ACCOUNTING
Cost accounting also suffers from a number of limitations such as follows:
unnecessary: It is unnecessary because it involves duplication of work, many good enterprise
are functioning without any costing system.
Expensive: It is expensive because the installation of cost accounting system involves additional
cost.
Inapplicable to many industry: It is inapplicable to many industries. A single costing system
may not be applicable to all industries because the costing system may be specially designed to
meet the need of a specific industry.
Lack of uniform procedure : it is possible that two equally competent cost accounts may arrive
at different result from the same information.
Result shown by cost and financial accounting may not be equal to each other: In cost
accounting certain incomes such as interest, dividend, share transfer fee etc. are not recorded
and certain expenses such interest paid, dividend, loss on sale of fixed assets are not shown but
these items are shown in financial accounting.
 
MEANING OF FINANCIAL ACCOUNTING
Business firms for earning profit perform business activities. Each business activity involves
financial transactions. Such financial transaction need proper recording and systematic
classification and analysis to know profit or loss and financial position usually at the end of each
year. Financial accounting is the account which keeps records of financial transaction. It shows
profit or loss and financial position at the end of each year.
In  other word , financial accounting is an art of recording, classifying and summarizing the
financial transactions of a firm in such a manner that its profit or loss and financial position are
ascertained at the end year an communicated to the user.
 
OBJECTIVES OF FINANCIAL ACCOUNTING
The main objectives of financial accounting are;
To keep systematic  record of financial transaction:
The main objective of financial accounting is to record the financial transaction of a business in
a systematically and scientific order. The need of recording due to limitation memory power of
human being.
To disclose the result of operation of business organizaion: Profit is the main motive of every
firm. Everyone who is related to the firm is keen to know its profit or loss at the end of each
year. It is also one of the importance objective of Financial accounting.
To show financial position: The firm is not only keen to know its profit or loss at the end of
each year, but also its financial health on that date. The firms financial health is judged on the
basis of financial position.
To protect assets and properties: Financial accounting not only keeps records of all assets and
properties acquired by the firm , but also records of their use and transfer from one place to
another. Recording of the firm’s assets and properties and their audit helps to protect from
misuse and misappropriation.
 
Limitations of financial accounting
Financial accounting also suffers from limitations. Some notable ones are as follows:
No detailed cost information:
Financial accounting does not provide Detailed cost information for different department,
processes, product, job, different services and functions. But, financial accounting does not
make evaluation performances of units, departments, and processes.
No classification and analysis of cost:
Segregation of costs by nature and behavior are essential for controlling cost and identifying
responsibilities. Financial accounting does not segregate cost in terms of behavior such as
variable or fixed costs, nor does it classify in terms of nature such as direct and indirect costs.
No price determination:
Every firm must determine prices of its outputs in order to sell them. But, financial accounting
does not determine the selling prices of the firms output.
No use of standards:
It does not provide any standard costing to measure the efficiency in the use of material, labour
and expenses.
No control over cost:
No information over loss of productivity:
Historical data:
 
DIFFERENCE BETWEEN FINANCIAL ACCOUNTING AND COST ACCOUNTING
COST ACCOUNTING FINANCIAL ACCOUNTING
The main objectives of
The main objective of financial accounting is to
cost accounting is to report financial results in
record and report costs terms of profit or loss
of output. and financial position of a
firm.
Financial accounting does
Cost accounting
not segregate costs into
segregates cost into fixed
fixed and variable
and variable portion.
portion.
Its user are mainly Its users are owners,
managers who use the managers, creditors,
cost data for their employees, workers,
 consumers and
decision making purpose.
government.
It is voluntarily required It is legally required for
for the firm to keep cost the firm to maintain
accounts. financial accounts.
It is generally applied in
It is primarily applied in
all types of business
manufacturing concerns.
concerns.
It values inventory based
It values inventory on
either on cost or market 
cost basis.
price whichever is low.
 
 
 
METHODS OF ACCOUNTING
Methods of costing are the procedures of ascertaining costs of output, process or operation.
Since the nature  of industry differs from one another, the methods of costing also differ.
Important methods of costing are as follows:
Job order costing: Thismethods is used to gathers and accumulates costs for each job order or
work order received from customers. Since each job order is specific and terminates after it is
completed, therefore all costs that are incurred in the job or order are accumulated after its
termination.
Process costing: The costing method that ascertains the cost of each process or stage of
producing output is called process costing. Under this method, a separate account is opened 
for each process to which all costs incurred thereon are charged.
Service costing: The method of costing which is used for ascertaining the costs of service
rendered is known as service costing. Under this method, the cost of per unit of service
rendered such as cost per passenger kilometer, cost per ton kilometer, cost per kilo-watt, or
cost per patient day is determined. Therefore, this method is popular in industries and
institutions that provide services instead of manufacturing products.
Contract costing: This costing refers to the form of specific  order costing, which applies, where
work is undertaken to customer requirements and each order is long duration as compared to
job order costing. A job which is big and spreads over long periods of time is known as a
contract. The method of costing which is used in a contract is called contract costing. This
method is used by builders, civil engineering contractors and construction firms.
Batch costing: A batch consists of a lot of common units. Therefore, a number of identical
units/articles manufactured on lot basis is called batch. A uniform size of product is produced in
each batch. The costing method used to determine cost of products produced on lot wise basis
is called batch costing.
Multiple costing: An ascertainment of cost of product by using more than one costing method
is defined as multiple costing. It is also called composite costing. It is adopted in those industries
where several components are used to produce a final product.
 
CONCEPT OF COST
Cost is frequently used word. Since all use the word cost as per their own need and purpose,
therefore the meaning of cost differs depending upon the need and purpose. An accountant,
economist, engineer and a manager define it according to their need. Therefore, it is not easy
to define the term “cost”. However, in simple words, cost is defined as an amount of  money
spent for obtaining any thing, goods or service. Cost is a resource foregone or sacrifice in
monetary terms, to achieve a particular objectives.
According  tou.s.a , it is defined as an exchange price, the foregoing, a sacrifice made to source
some benefits.
 
CONCEPT OF COSTING
The process of fixing costs of activity is defined as costing. The activity refers to manufacture
products/articles or services rendered, or function performed. Each activity  needs cost. The
procedure applied to ascertain unit cost of product or service is costing. So, costing comprises
of collection, classification and analysis of cost for ascertaining unit cost of product and
services. Manufacturing and service industries follow costing to ascertain cost of products or
services.
According to W.H Wheldon, Costing is the classifying, recording and appropriate allocation of
expenditure for the determination of the costs of products or services, and for the presentation
of suitability arranged data for purpose of control and guidance of management.
 
Classification of costs
Classification of cost refers to the division of cost on the basis of characteristics of costs. it is
concerned with dividing cost into different types. it is fact grouping of cost according to their
common characteristics. A suitable classification of cost is important to identify cost by product,
process or operation. Cost can mainly be classified on the following bases:
1.Element/Nature
2.Functions or activities
3.Variability or bahaviour
4.Controllability
 
Elements/ Nature
Cost of product of an industry comprises of material cost, labour cost and expenses. Therefore,
cost appears into material cost, labour cost, expenses under the classification of costs based or
physical characteristics. Cost has three main elements such as raw materials, labour and other
expenses. It can be classified into materials, labour and expenses based on physical
characteristics.
 
Material cost
Material cost represents the total of costs of main raw materials, components, consumable
stores and packing materials. Materials cost also includes import  duties, dock charges,
transport cost, storing cost receiving and inspection cost, and other costs associated with the
materials purchased.
 
Labour cost
Labour cost is the total of wages incurred for the effort or services made by labours in the
productions of goods and services. Therefore, wages paid to the workers are termed as labour
costs.
 
Expenses
Expenses are the total of costs incurred for production, administration and selling and
distributing operations. Such expenses include the cost of drawing, cost of special tools, cost of
trial production, royalties, rent, lighting and welfare expenses.
All the three elements of cost can further be divided or grouped into two types based on their
nature such as direct and indirect costs.
 
Direct costs
Direct cost are those materials, labour and other expenses which can easily be attributed or
identified with a unit of product, process or operation. The cost of raw materials, productive
labour, and carriage of materials paid are the examples of direct cost. The total of direct cost is
termed as prime cost.
 
Indirect costs
Indirect costs are those types of cost which cannot easily be attributed to or identified with a
unit of product, process or operation. Therefore, the total of costs of indirect materials, indirect
labour and indirect expenses is referred to as indirect costs. They are also called overhead
costs. The examples of indirect costs are repair charges, salaries, rent, telephone and water.
 
Direct materials cost: The cost of materials having physical identity with the end product is
defined as direct materials cost. Main raw materials and necessary components are a few
examples of direct materials.
Indirect materials cost: Materials are not used as input of product are called indirect materials.
Cost of materials incurred for repair of a machine used for printing of textbook is defined as
indirect materials cost.
Direct labour cost:Labour or wages incurred for the operative workers engaged in production
process are categorized as direct labour cost. Wages paid to the workers involved in production
and handling materials, workers engaged in productive operation by way of supervision and
maintenance etc are direct labour costs.
Indirect labour cost: Smooth operation of an organization needs operation of account
department, marketing department, internal transport also besides production department.
Indirect labour cost mean salary paid to staff.
Direct expenses: Direct expenses are charged directly to finished product like direct materials
cost. It is also called designed chargeable expenses. These includes special layout cost, drawing
and designed charges, royalties and so on.
 
Indirect expenses:
The cost which are not directly connected with finished product but occur on account of
operation are termed as indirect expenses. Indirect expenses are also more frequently called on
cost or overheads and include expenses such as canteen expenses, lighting, heating charge,
rent, insurance and so on.
Components of indirect materials:   Production supplies and consumable stores, greases,
waste, Non-durable tools and equipments, maintenance material and supplies, inspection and
testing materials.
Components of indirect labour:  Managerial salary, supervisory salary, foremen salary, clerical
salary, general labour, unallocated times wages, over-time wages and so on.
Components of indirect expenses: factory rent, electricity, lighting, conveyance and travelling,
postage and telegrams, insurance, depreciation of plants and machinery.
 
Functions or activities
The classification of costs based on the functions like manufacturing, administrative, selling and
distribution is called functional classification. Functional classification of cost focuses on the
different activities and segregate costs accordingly. Production (manufacturing) and non-
production (non-manufacturing) costs are the major costs division made after prime cost under
this classification.
Prime cost known as Basic, Flat or Direct cost comprises direct material, direct labor, direct
expenses. They are attributable to and are identified to particular finished goods.
 
Production Cost
Production cost is the sum of the cost incurred for realizing finished goods. It includes direct
material cost and conversion cost needed to convert such direct material into finished goods.
So, it is the sum of Prime cost plus manufacturing expenses or factory overhead or work
overhead. It is also called manufacturing cost or factory cost or work cost.
Manufacturing expenses include indirect materials, indirect labor and indirect expenses
associated with manufacturing operations. Conversion cost includes direct labor cost and
manufacturing expenses need to convert input material into finished goods.
 
Process cost
Production cost depending upon the stage of production operation can be categorized into
different costs.The output of one process becomes input cost of immediate next process. Costs
of each individual process are collected separately and are term as cleaning process cost,
cooking process cost and so on. Each process cost is divided by the number of units produced
by the same process. It goes on cumulating and total manufacturing cost equals the sum of all
cost accumulated at the final process. The cost so accumulated is divided bt the number of
units produced to ascertain cost per unit of finished goods.
 
Components of manufacturing overheads: Work manager’s salary, factory supervisory salary,
Foremen salary, Work Clerks’ salaries, Provident fund contribution of factory employees, Leave
and holiday wages of factory employees, Unallocated time wages, over-time wages, Production
supplies and consumable stores, Non-durable tools and equipments, Maintenance material and
supplies, Greases, Waste, Inspection and testing materials, Inspection and testing labor, Repairs
of maintenance of factory plant and equipments, Depreciation of factory plant and machinery,
Factory rent, Factory electricity, Factory lighting, Factory insurance.
 
Non-Production cost
Non-production cost refers to the expenses incurred for running  administrative and selling and
distribution works. So, non-production cost is known as operation cost or non-manufacturing 
cost that include administrative overhead and selling and distribution overheads. Such costs
keep no direct link with production operation therefore defined as non-production cost.
However, cost of production comprises manufacturing cost and administrative expenses.
 
Administrative overheads
The expenses incurred for administrative work like planning, coordinating, directing,
controlling, are called administrative overheads. It is also called office cost.
 
Components of administrative overheads:
Director's fees, office rent, rates and taxes, office repairs and maintenance  general and
miscellaneous , executive salary, staff salary telephone charges, postage and telegrams, printing
and stationery, electricity, audit fee, office insurance and so on.
 
Selling and distribution expenses
The expenses paid for selling and distribution of finished goods are called selling and
distribution overheads. It can be categorized into selling overheads and distribution overheads.
 
Selling overheads
The expenses incurred for selling finished goods to customers are termed as selling expenses.
 
Components of selling overheads: cost of catalogues/price lists, salaries of sales staff,
Salesman’s commission, Training of salesmen, Travelling expenses of sales representatives,
Commission, rent of sales office office and showrooms, Warehouse expenses, Provident fund,
Entertainment and treatment to customers, Samples products, Bad debts and collection
charges, Neon light posts, Customers’ service and service after sales.
 
DISTRIBUTION OVERHEADS:  The expenses associated with transporting finished goods from
warehouse to sales depot, showroom and customers are termed as distribution overheads.
 
Components of distribution overheads: Packing expenses, Freight outwards, Loading and
unloading, Depreciation of delivery vans, Insurance outward.
Total Cost includes cost of production plus a reasonable proportion of selling and distribution
expenses. It is normally called cost of sales or selling cost.
 
Variability or Behavior
Knowledge of variability or behavior of cost is essential for decision making and forecasting of
cost. This helps to study how costs react with volume changes. Management needs to identify
costs from their behavior to formulate forward planning and select profitable course of action.
 
Variable Cost
Cost which change proportionality with volume of output or services are called variable costs.
They increase or decrease in total amount with the increase or decrease in volume of output.
However, the per unit variable cost is constant. Variable manufacturing cost are also called
product cost and include direct material, direct labor and fluctuating indirect materials, labor
and manufacturing overheads.
 
Fixed Cost
Cost that does not change with output is cost. It remains fixed for a stipulated period and for a
specific capacity output. Fixed cost is called constant or capacity cost. It is also called create
cost as it remains unchanged for a stipulated period. Fixed cost in total amount remains
constant whereas fixed cost per unit changes inversely with output changes. Therefore,
increase in output decreases fixed cost per unit and decrease in output increases fixed cost per
unit. For example, depreciation, rent and salaries.
 
Semi-variable cost
Those cost which do not change proportionately like variable costs but their increase will be
less than proportionate unlike the variable costs is termed as semi-variable cost. The examples
of semi-variable costs are salary of supervisors, travelling salesman salary, repair and
maintenance costs etc. such costs contain fixed and variable portions. So, semi variable cost is
also called mixed costs.
 
Step-fixed costs (semi-fixed/ moving fixed costs)
Fixed costs are fixed either to a capacity volume or to a period of time. Therefore, change in
capacity volume or lapses of time create change in fixed cost.  It will changes by the original
amount remaining constant for the specific relevant range. Changes take the shape of steps at
the different levels so it is called the step fixed cost. Repairs and maintenance cost;
depreciation of additional machine purchase are some examples of step fixed costs.
 
Controllability
Controllability may be defined in terms of change or alternation of costs. An effective cost
control requires knowledge of cost controllability. A sharp division of cost into controllable and
uncontrollability cost is a relative one and is influenced by the action of a person at
management hierarchy. The term controllable cost should not be used as synonymous of
variable cost and direct costs. Knowledge of controllability of cost is important to control cost.
 
Cost under controllability may be categorized into controllable and uncontrollable costs.
Controllable cost:  The cost subject to control or substantial influence of a particular manager
or individual is called controllable cost. In controllable cost, the cost can be changed or altered
by the action of a specific managers. Example; direct materials, direct labour, other overheads
such as indirect labour, factory supplies, cutting tools, power costs, repair and maintenance etc
are controllable costs.
Uncontrollable costs: Costs that are not subject to influence by the action of manager is called
uncontrollable costs. These costs remain unchanged or unaltered. Example; managerial salaries,
staff salaries, depreciation after purchase of equipment, rent. Some costs may be controllable
in the short run but not in the long run.

What do you mean by materials?

Ans. Materials is one of the most important elements of production. The term "material" refers
to raw materials used for production, sub-assemblies, and fabricated parts. Materials includes
components, consumable stores, maintenance material, spare parts, are used in manufacturing
industry in their fundamental forms and they constitute a part of the physical form of a
product.
Materials should be properly controlled at the time of placing the order for the purchase of
materials until they have been consumed. In other words, materials cost should be controlled
at the time of purchasing, storing and consuming. The main objectives of material control are to
attack materials cost on all fronts so that the cost of material may be reduced.
 
2.
What does material control mean?
Ans. It is a system, which helps to provide the right quality of materials in the right quantity at
the right time and right place with the right amount of investment. Effective control also
requires the systematic preparation of periodic summaries and reports. It can be defined as a
systematic control over purchasing, storing and consumption of materials. It helps to maintain a
regular and timely supply of materials by avoiding over and under stocking. Material control
involves the planning, operating, organizing and controlling the purchasing, storing and using of
materials so as to achieve the objectives of minimizing possible cost of materials and
uninterrupted production.
 
3.
Give, in brief, any three objectives of materials control.
Ans. The following are the objectives of material control;
To ensure better quality of materials at right quantity and at right time for efficient and
uninterrupted production of output.
To maintain the cost of materials at the minimum level.
To purchase materials at a reasonable price.
 
4.
What are centralized and decentralized purchase.
Ans.
Centralized purchasing
Centralized purchasing refers to the purchase of materials by a single purchase department.
This department is headed and managed by a purchasing manager. Under centralized
purchasing, all purchase s are made by the purchase department to avoid duplication,
overlapping and the non-uniform procurements. Under this system, the purchasing department
purchases the required materials for all the departments and branches of the company.
Decentralized purchasing
Decentralized purchasing refers to purchasing materials by all departments and branches
independently to fulfil their needs. Such a purchasing occurs when departments and branches
purchase separately and individually. Under decentralized purchasing, there is no one
purchasing manager who has the right to purchase materials for all departments and divisions.
The defects of centralized purchasing can be overcome by the decentralized purchasing system.
It helps to purchase the materials immediately in case of an urgent situation.
 
 5.
What is a purchase requisition?
Ans. Purchasing requisition
Purchasing requisition is a form used to make a formal request to purchase department to
purchase the materials specified there in. Purchase requisition is received from the store
keeper for all items in regular use, production department for specific items not regularly used
and stored, production regular use, production department development, plant engineer for
material required for special maintenance and departmental heads for any materials required
for their department. The purpose of purchase requisition to authorized the purchasing the
materials specified there in and provides written record of details of material required.
 
7.
What is store keeping? List out its objectives.
Ans.Store keeping refers to the act of storing materials for their safe custody till these are
issued to the production and other departments. It involves receiving, storing and issuing of
materials. The place where materials are kept is known as 'store'. The term 'stores' has wide
meaning and includes raw materials used in production, consumable store such as oil, grease
etc., tools, patterns, maintenance materials etc., stock of work in progress and stock of finished
goods.
Objectives of storekeeping:
To avoid over-and under-stocking of materials
To protect the materials from losses and damages
To maintain systematic records of materials
To minimize the storage costs of materials
 
8.
What is a centralized store? List out its advantages.
Ans. This is a mix store system, a mix of centralized and decentralized stores, under this store
system, sub-stores are established in different departments according to the requirement of
the company. Sub-store are maintained at each department when the central store is at a
distance from the production department. Such sub-stores are managed and controlled by the
central store itself. At the beginning of a period, the central store issues a fixed quantity of
materials to the sub-stores. At the end of the period, sub-stores send a filled requisition from to
the central store to maintain the stock to a pre-determined level.
Advantages:
Overcoming the demerits of centralized store
Offering an easier location for storing of materials.
Avoiding delay in issuing materials.
Providing services to meet the special needs of individual departments.
Reducing the internal transportation cost.
 
9.
What do you mean by the location of a store?
Ans. It refers to the place where stores are situated. The location of stores should be near to
the receiving department so that the materials handling charges are at a minimum. There
should be easy excess to all other department so that the minimum of expenses is incurred in
unloading. The stores should be located considering the nature of materials; the bulky materials
should be stored nearer to the user's department to minimize the labour and transport, the
planned location charges.
 
10.
What are the duties of a storekeeper? Mention them.
Ans. The duties of a storekeeper are mentioned below:
Maintaining a proper record of materials relating to the receipt and issue of materials.
Checking the physical quantity of materials and verify with a bin card.
Preventing unauthorized entrance into the storeroom.
Maintaining the stock registers, entering therein all receipts, issues and balance of materials.
Checking and controlling losses due to evaporation, leakage, theft, and so on.
Arranging for physical verification of store items periodically.
Keeping the stores always neat clean and tidy.
Supplying information of materials, stock position, and so on whenever needed.
 
 11.
What do you mean by classification and codification of materials?
Ans. A good system of store keeping requires an appropriate classification codification.
Materials are classified either on the basis of their  nature or on the basis of their consumption.
On the basis of nature is most commonly used such as materials are classified as construction
materials, consumable stores, spare parts, lubricating oils etc. After the classification of
materials, these are codified alphabetically or numerically each  item of store by giving it a
separate stores code number are used to indicate the main group and the decimals to indicate
primary, secondary and other groups. The main code consists of first two digits, sub-code
consists of the next two or three digits upon the requirement and last one or two digits indicate
to details of the size, quality etc upon the requirements.
 
12.
What does a bin card mean?
Ans. Bin card is a document used in the stores department to show receipt, issue and balance
of each item of materials is called bin card. In the bin card, the stock level like minimum stock
level, maximum stock level, reorders level of each items are mentioned. All the receipts and
issues entries made in bin card can supported by relevant documents such as good received
note, materials return note, stores requisition note etc. An entry is made at the time of each
receipt or issue and the balance in hand of the stock is calculated. The bin card shows the
quantity of materials but not the value of materials.
 
13.
Differentiate between a bin card and a store ledger.
Ans. Differentiation between a bin card and a store ledger are:
                                        Bin
Stores ledgers
cards
It is maintained by the It is prepared by cost
storekeeper. accounting department.
It is a record of quantity It is record of quantities
only. and values.
Entries are made
Entries are made
immediately after each
periodically.
transaction.
Posting are made before Posting are made after a
a transaction. transaction
It is kept outside the
It is kept inside the store.
store.
 
 
14.
Write a short note on perpetual inventory system.
Ans. It is also known as Automatic inventory system. Perpetual inventory system is a technique
of controlling stock items by maintaining store records in a manner such that stock balances at
any point of time are readily available. The terms "Perpetual inventory" refer to the system of
record keeping and a continue physical verification of the stocks, with reference to store-
records.
According to Wheldon, perpetual inventory system is a method of recording stores balance
after every receipt and issue to facilitate regular checking and to obviate closing down for stock-
taking.
What is meant by labour cost?
Ans. Labour is human resources and participates in the process of production. It is an essential
factor of production. The amount, which is paid to the labour, is known as labour cost and it is a
significant element of cost of a product. Labour cost includes monetary benefit e.g. basic wages
and fringe benefit such as fooding, housing, education to the children of workers, holiday pay,
medical facilities etc.In other words, labour cost is the amount of remuneration paid to a
worker or an employee for his work or service in producing goods and services.
 
2.
What are the types of labour cost? Explain in brief with examples.
Ans. The types of labour cost are:
Direct cost
Direct cost is that labours, which can be easily,identified with specified product, job or work
order. It includes all labour engaged in converting raw materials into finished goods or in
altering two form of labour which is incurred wholly or specifically for any particular job or work
order. For example: carpenter in furniture house, tailors in garments industry, washer in dry
clinic etc. Remuneration paid to direct labour is termed as direct labour cost. It is treated as
part of prime cost.
Indirect cost
It is that labour which cannot be easily identified with a specific product or job. It includes all
labour indirectly involved in converting raw materials into finished goods or in altering the
construction, consumption or condition of the product. For example: labour employed in repair
and maintenance, time keeping, cost accounting, store department etc. Remuneration paid to
indirect labour is termed as indirect labour cost and it treated as part of overheads. Payments
made to the sweepers, watchmen, cleaners, supervisors and accounting personnel are the
examples of indirect cost.
 
3.
Why is labour cost importance?
Ans. Labour cost is importance because of following reasons:
Labour cost is a main element of cost, which covers one of the major portions of the total cost
of a product or job.
It is more difficult to control as compared to material cost due to the involvement of human
element.
It is affected due to a change in government policy and requirement of trade union.
It is adversely affected due to dissatisfaction, irregularity, inefficiency, idle time, and high labour
of the workers.
It is important from the fact that the direct labour cost is taken as the basis for estimating the
amount of factory overheads while determining the product cost.
 
4.
What is labour cost control?
Ans.Labour cost is an element of cost of production. It may be excessive due to the various
reasons such as lack of supervision on the labours, high labour turnover, inefficiency of labour
etc. Reducing the cost of production, an optimum utilization of labours is needed for each and
individual firm. Therefore, labour cost control refers to the system that ensures effective
employment and proper utilization of labours. Management is concerned with controlling
labour cost. Labour cost control involves such systems, procedures, techniques and tools used
by the management in order to keep the labour cost of the product or job as minimum as
possible.
 
5.
How is labour cost controlled?
Ans. Labour cost is controlled by following ways;
By making economic utilization of labour force in production processes.
By obtaining maximum quantity of output with the least amount of materials and other
resources.
By obtaining better quality output with the least effort and time of the workers.
By reducing the cost of production of the products manufactures or services rendered.
 
6.
State the functions of a personnel department.
Ans. The main functions of personnel department are as follows:
To estimate the number and type of needed manpower considering the expansion program of
the organisation.
To recruit needed manpower through a proper selection process, train and to place them in the
departments and jobs to which they are best suited.
To promote, demote and to transfer the employees and terminate their employment on the
basis of proper evaluation of their performance and need of the organisation.
To keep complete records of all the employees.
To prepare and submit reports to the management.
 
 7.
Why is an employee history card maintained? Give its specimen.
Ans. An employee history card maintained because it gives detailed information about an
employee like name, address, education, marital status, number of children, concerned
department, previous employer, reasons of leaving, starting pay, category and the like.
 
8.
State the function of engineering department.
Ans. Its main functions are as follows:
To adopt the best methods of production.
To prepare plans and specifications for each job and to complete the job in efficient manner.
To inspect and monitor the jobs at each stage of production to ensure the things done as per
plans.
To create sound working conditions in the factory to improve efficiency of the workers.
To conduct research and experimental work for devising the best methods of production.
 
 9.
What is motion study? What is its purpose?
Ans. It is a study of the movement id a workers i n performing a given task in order to
determine and eliminate wasteful motions or movements. A worker or a machine makes
various moments of the part of his body while performing a job or a work. Motion study is also
known as methods study because its main objectives are to find out the best method of
completing the job. It is a study of moments of workers in performing a job or work for the
propose of eliminating useless, ill directed and inefficient motions to improve the productivity.
It is conducted while the worker in the job.
 
 10.
What is time study? What is its purpose?
Ans.it is the act of observing and recording the time required to do each detailed element or
part of a given work. It is conducted after the motion study. The main objectives of the time
study are to determine the required time for performing the job or work. Various methods are
used for the determination of basic time. Standard or basic time is fixed for a job or operation
providing allowances to worker for drinking water, smoking and other so on selecting an
average workers as model rather than exceptionally fast or slow workers.
 
11.
State the functions of time and motion study department.
Ans. Main functions of time and motion study department are ;
To divide a given job into detailed elements or parts.
To make a study of the movements of a worker while performing each element of job.
To determine and eliminate unnecessary or wasteful motions or movements.
To observe and record the time required for each necessary movement and to fix standard time
required to complete a given job.
To set reasonable piece rate for different job.
 
 12.
What is the time keeping? What recordsare used for time keeping?
Ans. The time keeping is concerned with recording the time of each worker with the aim of
keeping his attendance record and calculating the correct amount of wages. Time card or
attendance registers are the record used for time keeping.
 
13.
What is time booking? How does it differ from time keeping?
Ans.  It is concerned with recording the time spent by each worker in the factory on different
jobs is work orders. It determines the exact time spent by the worker in different departments
or processes or products or jobs for the purpose of calculating the correct amount of labour
cost. When the workers spends his time on several jobs or work orders then the need of time
booking arises for the purpose of cost analysis and apportionment.
 
14.
What are the records of time booking? What is the main difference between time card and job
card?
Ans. Daily time sheet,Weekly time sheet,Jobcard,Piece work card,Idle time card are the records
of time booking. The main difference between time card and job card is that job card record the
time spent by each worker on each job whereas time card records time period wasted by the
each workers.
 
15.
State the functions of a time keeping department.
Ans. The main functions of time keeping department are ;
To keep attendance record of each worker showing arrival time, departure time and overtime.
To keep an accurate record of time spent by each worker  in the factory for calculating wages.
To maintain discipline to ensure a regular attendance of the workers.
To record and determine the exact time spent by the workers on different jobs or work orders
for calculating the correct amount of labour cost,
To ascertain the unproductive or idle time of each worker and to minimise it.
 
 16.
What is a pay roll? Why is it prepared?
Ans. A pay roll is department, which involves in verifying the time of the workers, calculating
wages due to each worker and preparing the pay-roll or wage sheet. It prepares the pay roll or
wage sheet for each department separately and distributed wages and salaries to the workers.
 
17.
State the functions of pay-roll department.
Ans. The main functions of the pay-roll department are as follows:
To keep the records of the workers, departments, jobs and wages rate of each worker.
To verify and summarise the time of each worker as shown on the Time Card.
It should provide more wages to efficient and skilled workers.
It should follow the government policy and trade unions' norms.
It should be simple and understandable to all the workers.
It should help in improving performance and productivity of the workers.
It should be flexible enough to suit the needs of an organization.
 
 
18.
State the functions of a cost accounting department.
Ans. The functions of a accounting department are;
To collect, record and classify the labour cost.
To analyse, allocate and apportion the labour costs of different products or jobs.
To determine the correct amount of labour cost, process, job.
To supply information regarding labour cost through cost reports to the management when
required.
 
19.
What is meant by system of wages? Why are they important?
Ans. System of wages payment is the method adopted by manufacturing concerns to
remunerate workers. It is the way of giving financial compensation to the workers for the time
and efforts invested by them in converting materials into finished product.
It is important because of following reasons;
It facilitates the preparation of a wage plan for future.
It helps to determine the cost of production and the profitability of the organisations.
It determines the amount of earning of the workers and their living standards.
It affects the interest and attitude of the workers.
 
20.
What are the essential criteria of a good wage system?
Ans. The essential criteria of a good wage system are
It should be fair and justifiable to the workers and organisation.
It should help in maximising workers satisfaction and minimisinglabour turnover.
It should assure minimum guaranteed wages to all workers.
It should assure equal pay for equal work.
 
21.
What is the piece rate system of wage payment? How is wage calculated under it ?
Ans. The piece is that system of wages payment in which the workers are paid on the basis of
the units of output produced. It does not consider the time spent by the workers. It is a 
method of remunerating the workers according to the number of units produced or job
completed. It is also known as payment by result or output. It pays wages at a fixed piece rate
for each unit of output produced.
It is calculated by,
Total wages earned = output * Piece rate
 
22.
What is the time rate system of wage payment? How is wage calculated under it?
Ans. The time rate is that system of wages payment in which the workers are paid on the basis
of time spent by them in the factory. Under this system, the workers and employees are paid
wages on the basis of the time they have worked rather than the volume of output they have
produced. Hence, according to this system, wages are paid on hourly, weekly or monthly basis.
Under it, the wages earned by a worker is determined by using the following formula;
Wages earned = hours spent* wages rate per hour
 
 
23.
What are the disadvantages of a time rate system?
Ans. The disadvantages of a time rate system are
It does not help in increasing output and improving as there is no correlation between effort
and reward.
It is not justifiable to differentiate between efficient and inefficient workers and skilled and
unskilled workers.
It pays for idle time, which increase the cost of production.
It encourages a go-slow tendency among workers during working hours and encourages them
to work for overtime.
It is difficult to estimate exact labour cost in advance.
 
24.
What are the main differences between piece rate and time rate systems of wage payment?
Ans. Differences between piece rate and time rate system
Piece rate system Time rate system
Piece rate system is a Time rate system is a
method of wage payment method of wage payment
to workers based in the to workers based on time
quantity of output they spent by them for the
have produced. production of output.
It pays the workers It pays the work
according to the units of according to the time
output produced. spent in the factory.
It does not pay for idle
It pays for idle time.
time.

1.
What is overhead cost?
Ans. Overhead cost is the aggregated of indirect of indirect material cost, indirect labour costs
and indirect expenses which cannot be easily identified with and directly allocated to particular
cost centre or cost object. It is known as indirect cost or on cost.
According to Weldon, overheads may be defined as the cost of indirect materials, indirect
labour and such other expenses including services as cannot conveniently charged to a
specified unit.
2.                                                      
What is meant by manufacturing overheads? Give any three of its examples.
Ans.They are also known as production overheads or works or factory overheads. These are
indirect expenses which are incurred in carrying out manufacturing activities of the concern.
Manufacturing overheads include all the indirect expenses incurred in converting raw materials
into finished goods. Powers, factory rent, factory insurance, are the three examples of it.
 
3.
What are administrative overhead? Mention any three examples.
Ans. These are indirect expenses that are incurred in connection with the general
administration of the whole concern. These overheads incur while carrying out office and
administrative activities. Example: office salaries, rent, printing and stationary, telephone and
electricity, depreciation and repair and maintenance of office building, furniture and other
office expenses.
These overheads are also called period costs or capacity costs. They are incurred for creating an
output capacity of the concern for a fixed period of time, say, month or a year. They are the
costs that remain fixed or constant in total despite changes in the volumes of production or
sale. Examples: rent, salaries, depreciation, interest and legal expenses.
 
4.
What are selling and distribution overheads? Mention any three examples of it .
Ans. All the indirect expenses incurred for selling and distribution of finished goods are known
as selling and distribution overheads. Selling overheads are incurred for creating demand,
attracting present and potential customers and retaining old customers. Examples: free gift,
advertisement, showroom expenses, and so on.
Distribution overheads are incurred in maintaining stocks and carrying the goods to customer
destinations. Examples: packing charges, carriage and freight out, warehouse expenses,
depreciation and others.
 
5.
What is fixed cost? Give any three examples of it.
Ans. These overheads are also called period costs or capacity costs. They are incurred for
creating an output capacity of the concern for a fixed period of time, say, month or a year. They
are the costs, which remain fixed or constant in total despite changes in the volumes of
production or sale. Examples: rent, salaries, depreciation, interest and legal expenses.
 
 
6.
Increase production lower the per unit fixed cost justify.
Ans. Increase production is lower the per unit fixed cost. Fixed overhead remain fixed in total
up to a certain level of activity but fixed overheads per unit always vary with the production or
sales volume in an opposite direction. Decrement in per unit fixed overhead leads to increase in
the production or sales volume. There is inverse relation between production and per unit fixed
cost.
 
7.
What is variable overhead? States its features.
Ans. These are the overheads, which vary positively with the production and sales volume.
Hence, they vary directly in proportion to the volume. They increase in total with the increase
in volume and vice versa. Examples: indirect materials, indirect wages, indirect expenses.
 
8.
What are the differences between fixed and variable overhead?
Ans. The difference between fixed and variable overhead are fixed overhead always remains
constant in despite changes in the volume of production or sales whereas variable overhead
vary positively.
 
9.
What is semi-variable overhead? How does it differ from variable overhead?
Ans. These variables are neither completely fixed nor variable. Therefore, they are also called
semi-fixed costs. These overheads comprise the quality of both the fixed and variable costs.
They vary disproportionately with the change in the volume of output. Examples: salesman
remuneration, heating, lighting, supervision etc.
 
10.
What is step fixed overhead cost? How does it differ from fixed overhead cost?
Ans. These overhead remain fixed within a certain range of output level and jump up once the
range of output level exceeds. They remain constant for a given volume, but increase by
another fixed amount the moment there is addition of volume, and keep on focusing by a fixed
amount with the addition of volume.
 
11.
What is meant by controllable overhead? State any three examples of controllable overhead.
Ans. These are the indirect expenses that the management of a manufacturing concern can
keep under its control, as they are influenced by its decisions. Therefore, those overheads,
which vary due to the management decisions, are called controllable overheads. Examples:
indirect materials, power expenses and lighting expenses.
 
12.
'Management is different to uncontrollable costs'. Comment.
Ans. Management is different to uncontrollable costs because the indirect expenses are beyond
the control of the management. The management cannot influence such expenses by its
decision. Examples; factory rent, office salaries, depreciation and legal expenses.
 
13.
Why is allocation of overhead important?
Ans. Allocation of overheads important because it is the process of charging overhead costs to a
particular department or cost centre. It is the allotment or assignment of an overhead cost to a
particular cost unit. If the overhead cost is associated with a single department or cost centre,
the whole amount is charged or distributed among the units of output of that particular
department
 
14.
What is apportionment of overheads?
Ans. Distribution of an overhead cost to several department or cost centre is known as
apportionment of overheads. It is the process of charging or apportioning costs to a number of
cost centres or cost units. If a given cost is common to two or more departments or cost
centres, such cost should be apportioned or divided among theses departments on an equitable
basis. For examples, the amount of factory rent should be apportioned to all the departments.
Similarly, the amount of remuneration to the general manager should be distributed to the
production, administration and marketing departments, as the general manager is associated
with all these departments.
 
15.
Differentiate between allocation and apportionment of overhead.
Ans.
Differences between allocation and apportionment of overheads
Allocation Apportionment
It involves a particular It involves two or more
department or cost department of=r cost
centre. centres.
The process of charging The process of charging
the costs to a particular the costs to a number of
department or cost departments or cost
centre is allocation of centres is apportionment
overheads. of overheads.
It is distributed on some
equitable bases like
It is based on direct direct labour hours,
distribution. number of workers,
machine hours and space
and area occupied.
It is applicable when the It is applicable when the
overhead cost is overhead cost is
associated with a single associated with two or
department or cost more departments or
centre. cost centres.
Apportionment of
Allocation of overhead is
overhead is done when
done when the most
the cost centres use only
centre uses while of the
a portion of the benefits
benefits of the expenses.
of the whole expenses.
 
 
 
16.
What are absorption do you prefer and why?
Ans. The absorption of overheads is the process of sharing the overhead costs by all products of
a particular department. It is the application of overheads to each unit of output. In other
words, the process of ascertaining the total overhead costs if each unit of output or job by using
overhead rate is known as the absorption of overhead. Thus, the distribution of the overhead
expenses allotted to a department over the units produced in that department is absorption of
overheads.
 
17.
What are the methods of absorption of overheads? How do you determine overhead rate?
Ans. Labour hour rate and machine hour rate are the methods of overheads. We determine
overhead by the units of output of a particular department.
 
18.
Which method of absorption do you prefer and why?
Ans. I would prefer both labour hour rate and machine hour rate method of absorption in order
to absorb the overheads by the units of a particular department.
 
19.
In five to seven sentences, write the meaning of fixed overhead.
Ans. Fixed overhead is a set of costs that do not vary as a result of changes in activity. These
costs are needed in order to operate a business. One should always be aware of the total
amount of fixed overhead costs that a business incurs, so that management can plan to
generate a sufficient amount of contribution margin from the sale of products and services to at
least offset the amount of fixed overhead. Otherwise, it is impossible to generate a profit.
 
20.
Classify overheads according to its functions.
Ans. Overhead is the aggregated of indirect of indirect material cost, indirect labour costs and
indirect expenses which cannot be easily identified with and directly allocated to particular cost
centre or cost object. It is known as indirect cost or on cost.
According to Wheldon, overheads may be defined as the cost of indirect materials, indirect
labour and such other expenses including services as cannot conveniently charged to a
specified unit.
 
21.
Write in brief the meaning of allocation of overhead.
Ans. Allocation of overheads is the process of charging overhead costs to a particular
department or cost centre. It is the allotment or assignment of an overhead cost to a particular
cost unit. If the overhead cost is associated with a single department or cost centre, the whole
amount is charged or distributed among the units of output of that particular department. For
example, the whole amount of repair and maintenance expenses for a machine is charged per
allocated to that department where the machine has been installed
 
22.
What do you understand by allocation and apportionment of overhead?
Ans. Allocation of overheads is the process of charging overhead costs to a particular
department or cost centre. It is the allotment or assignment of an overhead cost to a particular
cost unit. If the overhead cost is associated with a single department or cost centre, the whole
amount is charged or distributed among the units of output of that particular department. For
example, the whole amount of repair and maintenance expenses for a machine is charged per
allocated to that department, where the machine has been installed.
Distribution of an overhead cost to several department or cost centre is known as
apportionment of overheads. It is the process of charging or apportioning costs to a number of
cost centres or cost units. If a given cost is common to two or more departments or cost
centres,such cost should be apportioned or divided among theses departments on an equitable
basis. For examples, the amount of factory rent should be apportioned to all the departments.
Similarly, the amount of remuneration to the general manager should be distributed to the
production, administration and marketing departments, as the general manager is associated
with all these departments
 
24.
Give the meaning of fixed overhead with appropriate example.
Ans. These overheads are also called period costs or capacity costs. They are incurred for
creating an output capacity of the concern for a fixed period of time, say, month or a year. They
are the costs, which remain fixed or constant in total despite changes in the volumes of
production or sale. Examples: rent, salaries, depreciation, interest and legal expenses.
 
25.
Write about the controllable and uncontrollable cost with examples.
Ans. Controllable overhead: These are the indirect expenses, which the management of a
manufacturing concern can keep under its control, as they are influenced by its decisions.
Therefore, those overheads, which vary due to the management decisions, are called
controllable overheads. Examples: indirect materials, power expenses and lighting expenses.
Uncontrollable overhead: On the other hand, those indirect expenses that are beyond the
control of the management are known as uncontrollable overheads. Examples; factory rent,
office salaries, depreciation and legal expenses
What do you mean by output costing?
Ans. Output or unit costing is one of the important methods of costing under which cost of
production and in turn the selling price unit are determined. This costing method is used by the
manufacturing concern which produces homogeneous products such as sugar, cloth, cement
and so on. A costing method used to ascertain unit cost output is called output costing method
 
2.
What is cost sheet? What are the components of a cost sheet?
Ans. A cost sheet is a periodical statement that is designed to show in detail all the elements of
cost of good manufactured. The elements of costs are prime cost, factory cost, cost of
production and total cost. In simple words, a statement which is designed to show the total
cost as well as cost per unit of output for the given period of time is called cost sheet.
Components of cost sheet
Cost sheet is a statement, which collects the detail information about the cost of different cost
centre for determining the total cost and unit cost of production. It is prepared for the specific
period of of time.
The main components of statement of cost are as follows;
Prime cost, Factory cost , Cost of production, Total costs
 
3.
How the cost of materials consumed is determined?
Ans. Opening stock of raw materials value is added to the raw materials purchased and closing
stock of raw materials value is subtracted  therefrom in order to calculate cost of raw materials
consumed. Cost of materials consumed is then considered as direct material cost.
 
 4.
What is prime cost?
Ans. Prime cost of product is the sum of direct costs, which varies in proportion to volume of
production. Prime cost includes direct expenses like cost of materials, direct labour and direct
expenses. These costs are directly identifiable with the product and constitute the major part of
total cost of the product.
5.
State the importance of a cost sheet.
Ans. The importance of a cost sheet is inorder to keep the record relates to the cost such as
consumed raw materials, opening and closing stock and so on.
 
6.
What do you understand by work-in-progress? How do you treat it while preparing a cost
sheet?
Ans. The stock of work-in-progress is those units of commodities on which some work has been
done but are in process of completion. These units can neither be treated as raw materials nor
finished product, because such units requires further process to be completely finished
products. Stock of work-in-progress may be both opening and closing.
 
7.
Explain the treatment of stock of finished goods in cost sheet.
Ans. All types of overhead other than selling and distribution overhead are absorbed by finished
goods. Therefore, stock of finished goods is adjusted after calculating cost of production.
Opening stock of finished goods is added to cost of production and closing stock is subtracted
there from.
 
8.
How do you generally absorb factory overhead, office overhead and selling and distributing
overheads?
Ans. We absorb factory overhead, office overhead and selling and distributing overheads by
factory cost.
 
9.
What are the item of expenses and incomes which are excluded  from cost sheet?
Ans. The items of expenses and incomes which are excluded from cost sheet are
salary,rent,wages, equity share, bank overdraft.
 
10.
What do you understand by tender sheet?
Ans. It is the price to be quoted for the supply of the particular product or for executing the
work order as quotation invited. The manufacturer has to quote price of its product in advance.
In the preparation of tender sheet, direct materials, direct wages and overhead are
predetermined on the basis of the costs of the proceeding period. It takes into account the
possible changes in price in future.
 
11.
What do you understand by manufacturing account? How it is prepared?
Ans. Manufacturing account is the alternative method of determination of total cost and
fixation of selling price. The manufacturing needs to ascertain the cost of goods manufactured
and manufacturing profit or loss during the year. Therefore, an account is prepared for the
purpose that is known as manufacturing account. Generally, it is prepared by such concerns
which do not have cost office and maintain any cost account.
Preparation of manufacturing account would depend upon the purpose that is sought to be
obtained information therefrom. The purpose may be either to ascertain cost of manufactured
or manufacturing profit or loss. However it is prepared in two different formats;
For showing cost of production
For showing manufacturing profit of loss
 
12.
What is trade price? Which is it used by the manufacturing concern?
Ans. Trade price is the price at which similar product can be brought from other
manufactures.Cost of production is used by manufacturing concern.

1.
What do you mean by profit reconciliations statement?
Ans. Profit reconciliations statements is the reconciliation of net profit of cost and financial
accounts which helps to find the reasons of difference in net profits shown by cost and financial
accounts.
 
2.
What are the purposes of reconciling the profits of cost and financial account?
Ans. The purpose of reconciling the profits of cost and financial account are
i)To find out the causes for the difference in profit and loss revealed by cost and financial
accounts.
ii)To ensure the mathematical accuracy and reliability of cost accounts in order to have cost
ascertainment, cost control and to have a check on the financial accounts.
 
3.
Give the reasons for the differences in profits shown by cost and financial account.
Ans. The reasons the differences in profits shown by cost and financial account are as follows:
1.Transaction shown in one book
i)Transactions shown in financial account
Transfer from profit
Financial charges
Financial incomes
ii)Transaction shown in cost account
2.Indirect expenses recovered
3.Difference in inventory valuation
4.Difference in depreciation charged
5.Abnormal loss on gain
 
4.
Explain briefly the process of preparing reconciliation statement.
Ans. The processes of preparing reconciliation statement are:
Start with the use of a net profit or net loss shown by any one of account either cost or financial
account.
Verify the net profit or net loss and find out the reasons for differences and make note for each
items of differences.
Find out the decrease or increase in the net profit due to the reasons of differences.
Add the amount of differences if the net profit is decreasing and deduct if the profit is
increasing due to the reason of difference.
Complete the difference in a statement and find out the net profit shown by another account.
 
5.
Mention the items shown only in financial account.
Ans. The items own only in financial account are given below:
1.Profit or loss on sale of fixed assets
2.Income tax paid
3.Interest paid on capital and loan
4.Interest received on investment
5.Divindend paid or received.
6.Underwriting commission