CA Inter Costing Blast From The Past by Rahul Garg Sir

Tribute to my Beloved Elder Brother
SACHIN GARG
(Inspiration for me and all my students)
who left for heavenly abode on 3rd May, 2015
Rahul sir always believes that
“IF YOU WANT TO BE A LION,

YOU MUST TRAIN WITH LIONS”
A Brief About Rahul Garg
Cleared all the 3 professional courses CA, CS, CMA at the age of 22 years
7 months with Ranks.
5 times All India Rankholder in Professional Exams (A Record).
Scored SINGLE DIGIT RANK 3 times (including All India Rank 1).
Achieved exemption in 40+ papers out of total 50 papers held by CA, CS,
CMA institutes in his academic career.
Awarded by Mr. Atal Bihari Vajpayee in 2010 for exceptional performance
in Academics.
One of the best motivator in India.
Covered by the National Magazine 'Career 360-Outlook Group' amongst
12 National Toppers (across all streams) in 2010.
Specialist in Time management and Stress management skills.
Love for the subject ACCOUNTING, COST and FM ECO

Only one in India to cover maximum Practical Questions in Cost, FM, Accounts.
Only one in India to give Homework for all Practical Subjects (to instill
discipline and condence) and check the same even in online class.
Tabular and Diagrammatic presentation of Theory to create interest.
Important points of theory Specially marked for last minute revision.
Simple and lucid language in theory for easy understanding.
Focus on 100% conceptual clarity.
Special Tips on Presentation and “How to Attempt” the paper to score
wonderful marks.
Fully Exam Oriented Lectures.
Maximum students scoring Exemptions in each attempt.
Started MARATHON Sessions in country for benet of students.
Free Test Series, Doubt Sessions & Revision Support for all students of profession.
Outstanding Reviews by students regarding all the subjects.
Exhaustive Material covering all questions of Module, RTPs, MTPs, Past Exams.
RANK Certiﬁcate for All India Rank-41
(May 06) in CA PE II Exam (now CA Inter)
(June 08) in CS Inter Exam
(June 09) in CS Professional (Final) Exam
(June 08) in CMA Inter Exams
Institute's Gold Medal for All India Rank-1
(June 08) in CMA Inter Exams
(June 09) in CMA Final Exams
A Special thanks to my biggest strength,
my wife SHIKHA GARG;
who has always been my side in all the challenges.
This publication could not have been possible without her.
I am also thankful to
my mother Smt. Prem Lata Garg and father Sh. Pawan Kumar Garg,
who have provided me best education, constant love and affection since
childhood and making me what I am today.
INDEX
Chapter No. Chapter Name Theory Page No.
Questions
1 Basic Concepts 32 1 – 14
2 Cost Sheet 1 15 – 16
3 Material Costing 11 17 – 25
4 Labour Costing 3 26 – 29
5 Overheads 10 30 – 36
6 Budgetary Control 11 37 – 43
7 Contract Costing 8 44 – 48
8 Job & Batch costing 2 49 – 51
9 Process Costing 2 52 – 53
10 Joint Product and By Product 2 54 – 56
11 Standard Costing 1 57 – 58
12 Marginal Costing 6 59 – 63
13 Reconciliation of Cost & 4 64 – 66

Financial Accounts
14 Integral & Non-Integral 4 67 – 69
System
15 Operating Costing 3 70 – 71
16 Activity Based Costing 1 72 – 74
101
CA Rahul Garg Gold Medalist All India Rankholder in CA, CS, CMA (incl Rank 1)
Best Lectures Regular as well as Fast Track, available at www.carahulgarg.com, (R.S.A.)
Study from the Best and
Add special touch to your preparation
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Chapter - 1
Basic Concepts
“Without inspiration the best powers of the mind remain dormant. There is a fuel
in us which needs to be ignited with sparks.”
Johann Gottfried Von Herder
Analysis of Past 22 Attempts
Theory Questions Analysis
Chapter Analysis
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14 14
14
12
12
10 10
10
8
8 7.5
6 5 5 5
4 4 4 4 4 4 4 4 4 4
4
2
2
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Theory Questions
1. N 09 (2 M) Define the following :

a. Imputed cost
b. Capitalised cost
2. M 10 (2 M) What is Cost accounting? Enumerate its important objectives.
3. M 10 (2 M) Distinguish between Fixed overheads and Variable overheads.
4. N 10 (4 M) Write note on Essential factors for installing a Cost Accounting
system.
5. M 11 (4 M) Distinguish between cost units and cost centres.
6. N 11 (4 M) Distinguish between Cost control and cost reduction.
7. M 12 (4 M) State the types of cost in the following cases :
a. Interest paid on own capital not involving any cash outflow.
b. Withdrawing money from bank deposit for the purpose of
purchasing new machine for expansion purpose.
c. Rent paid for the factory building which is temporarily closed.
d. Cost associated with the acquisition and conversion of material
into finished product.
8. N 12 (4 M) Briefly explain the essential features of a good cost accounting
system.
9. M 13 (4 M) Cost of a product or service is required to be expressed in
suitable cost unit. State the cost units for the following
industries :
a. Steel
b. Automobile
c. Transport
d. Power
10. M 14 (4 M) Distinguish between cost control and cost reduction.
11. M 14 (4 M) Explain the following :
a. Explicit costs
b. Engineered costs
12. M 14 (2 M) State the unit of cost for the following :
a. Transport
b. Power
c. Hotel
d. Hospital
13. N 14 (4 M) Identify the methods of costing for the following :
a. Where all costs are directly charged to a specific job.
b. Where all costs are directly charged to a group of products.

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c. Where cost is ascertained for a single product.

d. Where the nature of the product is complex and method can
not be ascertained.
14. M 15 (4 M) Explain 'Sunk Cost' and 'Opportunity Cost'.
15. M 15 (4 M) Define 'Cost Centre' and state its types.
16. N 15 (4 M) State the method of costing and also the unit of cost for the
following industries:
a. Hotel
b. Toy-making
c. Steel
d. Ship Building
17. M 16 (4 M) State the difference between cost control and cost reduction.
18. M 16 (4 M) Narrate the objectives of cost accounting.
19. M 16 (2 M) Explain what do you mean by Profit Centres.
20. N 16 (4 M) Write short notes on :
a. Sunk Cost
b. Opportunity Cost
21. N 16 (4 M) What is meant by “cost centre”? What are the different type of
cost centres?
22. N 16 (4 M) Give the method of costing and the unit of cost against the under
noted industries :
a. Road transport
b. Steel
c. Bicycles
d. Bridge construction
23. N 16 (2 M) Explain the Conversion cost.
24. M 17 (4 M) Explain Cost Unit & Cost Centre.
25. M 17 (4 M) What are the essential factors for installing a cost accounting
system? Explain.
26. M 17 (4 M) State the difference between Cost Accounting & Management
Accounting.
27. N 17 (4 M) Identify the methods of costing for the following :
a. Where all costs are directly charged to a specific job.
b. Where all costs are directly charged to a group of products.
c. Where cost is ascertained for a single product.
d. Where the nature of the product is complex and method can
not be ascertained.
28. M 18 (5 M) Why are cost and management accounting information are
required by the staff at operational level? Describe.
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29. M 18 (2.5 Explain Opportunity Cost.

M)
30. N 18 (5 M) Mention and explain types of responsibility centres.
31. M 19 (5 M) Differentiate between Cost Control and Cost Reduction.
32. N 19 (5 M) Mention the cost unit of following industries :
a. Electricity
b. Automobile
c. Cement
d. Steel
e. Gas
f. Brick Making
g. Coal Mining
h. Engineering
i. Professional Services
j. Hospital
33. N 20 (5 M) Differentiate between Cost Accounting and Management
Accounting.
34. N 20 (5 M) State the method of costing to be used in the following
industries:
i. Real Estate
ii. Motor Repairing Workshop
iii. Chemical Industry
iv. Transport Service
v. Assembly of Bicycles
vi. Biscuits manufacturing Industry
vii. Power Supply Companies
viii. Car manufacturing Industry
ix. Cement Industry
x. Printing Press
Answer 1
a Imputed ✓ These costs are notional costs which do not involve any cash outlay.
cost ✓ Interest on capital, the payment for which is not actually made, is an
example of imputed cost.
✓ These costs are similar to opportunity costs.
b Capitalised ✓ These are costs which are initially recorded as assets and
Cost subsequently treated as expenses.

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Answer 2
Cost ✓ Cost accounting may be regarded as “a specialised branch of
Accounting accounting which involves classification, accumulation, assignment and
control of costs.”
Objectives ✓ Ascertainment of Cost

✓ Determination of Selling Price
✓ Cost Control
✓ Cost Reduction
✓ Ascertaining the profit of each activity
✓ Assisting management in decision making
Answer 3
Basis Fixed Overheads Variable Overheads
Relation with These tend to be unaffected by These tend to vary with the
output fluctuations in the levels of activity. volume of activity.
Nature w.r.t. The total fixed overheads remain The total variable overheads don’t
Totality same at various levels of output. remain same at various levels of
output.
Nature w.r.t. Fixed Overheads keep on changing Variable Overheads remain same
Per unit on per unit basis. on per unit basis.
Period or These overheads are incurred for a These are expressed in terms of
product period. units and not time period.
Answer 4
Objective ✓ The objective of costing system must be considered.
Nature of ✓ Every business industry has its own peculiar features and costing
Business objectives.
✓ According to its cost information requirement, cost accounting
methods are followed.
Cover all ✓ Costing system should fulfil the requirement of different levels of
levels management i.e. Top management, Strategic level management,
Operational level management.
Nature of ✓ Nature of product determines the type of costing system to be

product implemented.
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✓ The product which has by-products requires costing system which

account for by-products as well.
Production ✓ A good costing system can never be established without the complete
process knowledge of the production process.
Maintenance ✓ The manner in which Cost and Financial accounts are kept.
of cost
records
Statutory ✓ Records are to be maintained to comply with statutory requirements,
requirement standards to be followed (Cost Accounting Standards and Accounting
Standards).
Answer 5
Cost Unit
Meaning ✓ It is a unit of product, service or time (or combination of these) in
relation to which costs may be ascertained or expressed.
Insights ✓ A cost unit is a devise for the purpose of breaking up or separating

costs into smaller subdivisions.
✓ These smaller sub-divisions are attributed to products or services to
determine product cost or service cost or cost of time spent for a
particular job etc.
Example Industry or Product Basis of Cost Unit

Automobile Number
Cement Tonne/ per bag etc.
Chemicals Litre, gallon, kilogram, tonne etc.
Power Kilo-watt hour
Steel Tonne
Cost Centre
Meaning ✓ It is defined as a location, person or an item of equipment (or group of
these) for which cost may be ascertained and used for the purpose of
Cost Control.
Personal & Personal ✓ It consists of a person or group of persons.

Impersonal Cost Centre ✓ For Example : Mr. X, supervisor, foreman, accountant,
Cost Centre engineer, process staffs, mining staffs, doctors etc.
Impersonal ✓ It consists of a location or an item of equipment (or

Cost Centre group of these).
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✓ For Example : Ludhiana branch, boiler house, cooling

tower, weighing machine, canteen, and generator set
etc.
Cost Centres Production ✓ It is a cost centre where raw material is handled for
in a Cost Centre conversion into finished product.
manufac- ✓ Here both direct and indirect expenses are incurred.
turing ✓ For Example : Machine shops, welding shops and
concern assembly shops etc.
Service Cost ✓ It is a cost centre which serves as an ancillary unit to a

Centre production cost centre.
✓ Only indirect expenses are incurred.
✓ For Example : Payroll processing department, HRD,
Power house, gas production shop, material service
centres, plant maintenance centres etc.
Mixed Cost ✓ Mixed cost centres are those which are engaged on
Centre productive works and also on service works.
✓ For instance, a tool shop serves as a productive cost
centre when it manufactures dies and jigs for specific
order, but serves as servicing cost centre when it does
repairs for the factory.
Answer 6
Basis Cost Control Cost Reduction
Main focus Cost control aims at maintaining Cost reduction is concerned with
the costs in accordance with the reducing costs. It challenges all
established standards. standards and tries to better them
continuously.
Temporary or Cost control seeks to attain lowest Cost reduction recognises no

permanent possible cost under existing condition as permanent, since a
conditions. change will result in lower cost.
Emphasis In case of Cost Control, emphasis is In case of cost reduction, it is on

on past and present. present and future.
Prevention or Cost Control is a preventive Cost reduction is a corrective

detection function. function. It operates even when an
efficient cost control system exists.
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End Cost control ends when targets are Cost reduction has no visible end.
achieved.
Answer 7
a Imputed Cost
b Opportunity Cost
c Shut Down Cost
d Product Cost
Answer 8
Informative ✓ Cost Accounting System should be tailor-made, practical, simple and
capable of meeting the requirements of a business concern.
Precise ✓ The system of costing should not have unnecessary details.
Accurate ✓ The data to be used by the Cost Accounting System should be

accurate; otherwise it may distort the output of the system and a
wrong decision may be taken.
Support from ✓ Necessary cooperation and participation of executives from various
Management departments of the concern is essential for developing a good system
of Cost Accounting.
Cost-Benefit ✓ The Cost of installing and operating the system should justify the
results.
Procedure ✓ A carefully phased programme should be prepared by using network

analysis for the introduction of the system.
Trust ✓ Management should have faith in the Costing System and should also
provide a helping hand for its development and success.
Answer 9
a Tonne
b Numbers
c Passenger Kilo-meter/ Tonne Kilo-meter
d Kilo-watt hour (Kwh)
Answer 10
Please refer answer to Question 6.

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Answer 11
Explicit costs ✓ These costs are also known as out of pocket costs and refer to costs
involving immediate payment of cash.
✓ Salaries, wages, postage and telegram, printing and stationery, interest
on loan etc. are some examples of explicit costs involving immediate
cash payment.
Engineered ✓ These are costs that result specifically from a clear cause and effect
costs relationship between inputs and outputs.
✓ The relationship is usually personally observable.
✓ Examples of inputs are direct material costs, direct labour costs etc.
✓ Examples of output are cars, computers etc.
Answer 12
a Per passenger k.m. or per tonne k.m.
b Per Kilo – watt (kw) hour
c Per room day / or per meal
d Per Patient – day / or per bed/day
Answer 13
a Job Costing
b Batch Costing
c Unit Costing or Single or Output Costing
d Multiple Costing
Answer 14
Sunk Cost ✓ Historical costs incurred in the past are known as sunk costs.
✓ They play no role in decision making in the current period.
✓ For example, in the case of a decision relating to the replacement of a
machine, the written down value of the existing machine is a sunk cost
and therefore, not considered.
Opportunity ✓ Opportunity cost is the cost of selecting one course of action and the
Cost losing of other opportunities to carry out that course of action.
✓ For example, a firm financing its expansion plan by withdrawing money
from its bank deposits.
✓ In such a case, the loss of interest on the bank deposit is the
opportunity cost for carrying out the expansion plan.
✓ Opportunity costs are not recorded in the books.

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✓ It is important in decision making and comparing alternatives.

✓
Answer 15
Answer 16
Method of Costing Unit of Cost
a Operating Costing Room day/ per bed
b Batch Costing Units/ Batch
c Process Costing/ Single Costing Per Tonne/ Per MT
d Contract Costing Project/ Unit
Answer 17
Answer 18
Ascertain- ✓ The main objective of a Cost Accounting system is to ascertain cost for
ment of cost cost objects.
✓ Costing may be post completion or continuous but the aim is to arrive
at a complete and accurate cost figure to assist the users to compare,
control and make various decisions.
Determina- ✓ Cost Accounting System in a manufacturing organisation enables to
tion of selling determine desired selling price after adding expected profit margin
price with the cost of the goods manufactured.
Cost control ✓ Cost Accounting System equips the cost controller to adhere and
and Cost control the cost estimate or cost budget and assist them to identify
reduction the areas of cost reduction.
Ascertain- ✓ Cost Accounting System helps to classify cost on the basis of activity to
ment of ascertain activity wise profitability.
profit of each
activity
Assisting in ✓ Cost Accounting System provides relevant cost information and assists
managerial managers to make various decisions.
decision
making
Answer 19
✓ Profit Centres are the part of a business which is accountable for both cost and
revenue.
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✓ These are responsible for generating and maximizing profits.

✓ Performance of these centres is measured with the volume of profit it earns.
Answer 20
Answer 21
Answer 22
Method of Costing Unit of Cost
A Operating Costing Passenger k.m. or tonne k.m.
B Process Costing/ Single or Unit Costing Tonne/ Metric Ton (MT)/ kg/ bar
C Multiple Costing Number/ per piece
D Contract Costing Project/ Unit
Answer 23
✓ It is the cost of transforming basic material into finished goods.
✓ Conversion Cost consists of direct wages, direct expenses and manufacturing
overheads.
✓ So, Conversion Cost = Direct Labour Cost + Direct Expenses + Manufacturing
Overhead
✓ Or Conversion Cost = Factory Cost – Direct Materials Cost
Answer 24
Answer 25
Answer 26
Basis Cost Accounting Management Accounting
Nature It records the quantitative aspect only. It records both qualitative and
quantitative aspect.
Objective It records the cost of producing a It provides information to

product and providing a service. management for planning and
co-ordination.
Area It only deals with cost ascertainment. It is wider in scope as it includes

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F.A., budgeting, Tax, Planning.
Recording of It uses both past and present figures. It is focused with the projection
data of figures for future.
Development It’s development is related to It develops in accordance to the

industrial revolution. need of modern business world.
Rules and It follows certain principles and It does not follow any specific
Regulation procedures for recording costs of rules and regulations.
different products.
Answer 27
Answer 28
The operational level staffs like supervisors, foreman, team leaders require information
(i) to know the objectives and performance goals for them
(ii) to know product and service specifications like volume, quality and process etc.
(iii) to know the performance parameters against which their performance is measured
and evaluated.
(iv) to know divisional (responsibility centre) profitability etc.
Answer 29
Answer 30
Parti- Cost Revenue Profit Contribu- Investment
culars Centre Centre Centre tion Centre Centre
Meaning It is a It is a It is a It is a It is a
responsibility responsibility responsibility responsibility responsibility
centre for centre for centre for centre for centre for
which costs which only which both which which costs,
are revenues are costs and variable costs revenues and
accumulated. accumulated. revenues are and revenues investment in
accumulated. are assets are
accumulated. accumulated.
Definition "A production "A centre "A part of "It is a profit "It is a profit
as per or service devoted to business centre whose centre whose
CIMA location, raising accountable expenditure is performance

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function, revenue with for costs and reported on a is measured

activity or no revenues." marginal or by its return
item of responsibility direct cost on capital
equipment for production basis." employed."
whose costs e.g. a sales
may be centre."
attributed to
cost units."
Objective The main The main The main The main The main
objective of objective of objective of objective of objective of
cost centre is revenue profit centre is contribution investment
to minimize centre is to to maximize centre is to centre is to
the centre's maximize the the centre's maximize the maximize the
costs. centre's profit. centre's centre's
revenue. contribution. Return on
investment
(ROI) or
Return on
Capital
Employed
(ROCE).
Answer 31
Answer 32
a Kilo-watt Hours
b Number
c Tonne per bag
d Tonne
e Cubic Feet
f 1000 Bricks
g Per tonne
h Contract, Job
i Chargeable per Hour, Job, Contract
j Patient Day
Answer 33
Answer 34
i Contract Costing
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ii Job Costing
iii Process Costing
iv Operating Costing
v Multiple Costing
vi Unit Costing
vii Operating Costing
viii Multiple Costing
ix Unit Costing
x Job Costing

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Chapter - 2
Cost Sheet
The ultimate measure of a man is not where he stands in moments of comfort,

but where he stands at times of challenge and controversy.
Martin Luther King, Jr.
Chapter Analysis
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Theory Questions
1. M 19 (5 M) Explain Direct Expenses and how these are measured and their
treatment in cost accounting.
Answer 1
Meaning ✓ All direct costs other than direct material costs and direct labour costs
are termed as direct expenses.
✓ These can be readily identified with and thus, can be directly allocated
to a particular product, job or process.
✓ Thus, Direct expenses = Direct Costs - Direct Material Cost - Direct
Labour Cost
Features ✓ It can easily be identified with a specific job, contract or work order.
✓ It varies directly with the volume of output.
Examples ✓ Excise Duty based on output produced

✓ Royalty based on output produced
✓ Job Processing Charges
✓ Cost of special Moulds
✓ Designs and Hiring Charges for machines
Treatment ✓ Direct expenses from part of prime cost.

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Chapter - 3
Material Costing
The ultimate measure of a man is not where he stands in moments of comfort,

but where he stands at times of challenge and controversy.
Martin Luther King, Jr.
Chapter Analysis
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4
3
2 2
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1
0 0 0 0 0 0 0 0 0 0 0 0
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Theory Questions
1. N 11 (4 M) Discuss ABC analysis as a system of inventory control.

2. M 12 (4 M) Distinguish between bill of material and material requisition note.
3. M 13 (4 M) “Perpetual inventory system comprises Bin Card and Stores
Ledger, but the efficacy of the system depends on continuous
stock taking.” Comment.
4. N 15 (2 M) Distinguish between 'Scraps' and 'Defectives' in costing.
5. M 16 (4 M) Write treatment of items associated with purchase of material :
a. Cash discount
b. Subsidy/ Grant/ Incentives
c. VAT or State Sales Tax
d. Commission/ brokerage paid
6. M 17 (2 M) Explain ABC Analysis.
7. N 17 (4 M) Distinguish between 'Bin Card' and 'Stores Ledger'.
8. M 18 (5 M) Explain 'Just In Time' (JIT) approach of inventory management.
9. M 18 (2.5 Explain FIFO and LIFO method of stores issue.
M)
10. N 18 (5 M) Explain obsolescence and circumstances under which materials
become obsolete. State the steps to be taken for its treatment.
11. N 19 (5 M) Define Inventory Control and give its objectives. List down the
basis to be adopted for Inventory Control.
Answer 1
Meaning of ✓ It is a system of inventory control.
ABC ✓ It exercises discriminating control over different items of stores
classified on the basis of the investment involved.
✓ Usually, the items are divided into three categories according to their
importance, namely, their value and frequency of replacement during
a period.
Category of A Category ✓ A’ category of items consists of any small percentage i.e.

items about 10% of the total items handled by the stores but
requires heavy investments about 70% of inventory
value, because of their high prices and heavy
requirement.
B Category ✓ ‘B’ category of items are relatively less important; they

may be 20% of the total items of material handled by
stores.

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✓ The percentage of investment required is about 20% of

the total investment in inventories.
C Category ✓ ‘C’ category of items do not require much investment; it

may be about 10% of total inventory value but they are
nearly 70% of the total items handled by store.
Advantages Continuity ✓ It ensures that minimum investment will be made in

in stocks of materials without there being any danger of
production interruption of production due to materials or stores.
Lower cost ✓ The cost of placing orders, receiving goods and

maintaining stocks is minimised specially if the system is
coupled with the determination of proper economic
order quantities.
Less ✓ Management time is saved since attention need be paid

attention only to some of the items rather than all the items.
required
Systematic ✓ Much of the work connected with purchases can be
working systematized on a routine basis to be handled by
subordinate staff.
Answer 2
Basis Bills of material Material Requisition Note
Prepared by It is prepared by the drawing office. It is prepared by the foreman of
the consuming department.
Meaning It is a complete schedule of It is a document authorizing

component parts and raw materials Store-Keeper to issue material to
required for a particular job or work the consuming department.
order.
Superiority It often serves the purpose of a It cannot replace a bill of

Store Requisition as it shows the material.
complete schedule of materials
required for a particular job i.e. it
can replace stores requisition.
Relevant It helps in keeping a quantitative It shows the material actually

control control on materials draw through drawn from stores.
P a g e | 20
stores Requisition.
Answer 3
Perpetual Inventory system represents a system of records maintained by the stores
department. Records comprise of :
Bin Card ✓ Bin Card maintains a quantitative record of receipts, issues and
closing balances of each item of stores.
Stores Ledger ✓ The Stores Ledger is maintained to record all receipt and issue
transactions in respect of materials.
✓ It is filled up with the help of goods received note and material
requisitions.
But a perpetual inventory system’s efficacy depends on the system of continuous stock
taking. Continuous stock taking means the physical checking of the records i.e. Bin cards
and store ledger with actual physical stock. Perpetual inventory is essentially necessary
for material control. It incidentally helps continuous stock taking.
The main advantages of continuous stock taking are as follows :
Timely ✓ Physical stocks can be counted and book balances adjusted as and
Adjustment when desired without waiting for the entire stock-taking to be done.
Compilation ✓ Quick compilation of Profit and Loss Accounts (for interim period) due
of accounts to prompt availability of stock figures.
Easy location ✓ Discrepancies are easily located and thus corrective action can be
of promptly taken to avoid their recurrence.
discrepancies
Nature of ✓ A systematic review of the perpetual inventory reveals the existence
stock of surplus, dormant, obsolete and slow-moving materials, so that
remedial measures may be taken in time.
Better control ✓ Fixation of the various levels and check of actual balances in hand
with these levels assist the storekeeper in maintaining stocks within
limits and in initiating purchase requisitions for correct quantity at the
proper time.
Answer 4
Basis Scrap Defective
Occurrence It is the loss connected with output. It is connected with the output
but it can be in the input as well.
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Elimination Scraps cannot be eliminated due to Defectives can be eliminated

nature of material or process itself. through proper control.
Rectification Generally, scraps are not used or Defectives can be used after
rectified. rectification.
Sale Value Scraps have insignificant Defectives are sold at lower

recoverable value. value from that of good one.
Answer 5
A ✓ Cash discount is not deducted from the purchase price.
B ✓ Any subsidy/ grant/ incentive received from the Government or from
other sources is deducted from the cost of purchase.
C ✓ State Sales Tax/ VAT is paid on intra-state sale and collected from the
buyers. It is excluded from the cost of purchase if credit for the same
is available. Unless mentioned specifically it should not form part of
cost of purchase.
D ✓ Commission or brokerage paid is added with the cost of purchase.
Answer 6
Answer 7
Basis Bin Card Stores Ledger
Meaning The card tied to or placed outside Stores Ledger is a collection of
each bin to record the quantity of cards or loose leaves specially
materials received, issued, returned ruled for maintaining a record of
and in hand in the bin is called Bin both quantity and cost of stores
Card. received, issued and those in
stock.
Maintained by It is maintained by the storekeeper. It is maintained by costing

department.
Kept at It is kept outside the bin in store. It is kept outside the store
generally in costing department.
Recording It contains only quantitative details It contains information both in

aspects of material received, issued and quantity and value.
returned to stores.
P a g e | 22
Time of Entries are made when transactions It is always posted after the
recording take place. transaction.
Way of Each transaction is individually Transactions may be
posting posted. summarized and then posted.
Answer 8
Meaning ✓ Just in time purchasing means purchase when required only or
purchase immediately before use. It is also known as ‘Demand pull’ or
‘Pull through’ system of production.
Definition ✓ As per CIMA, JIT Purchase is "matching receipts of materials closely

with usage so that raw materials inventory is reduced to near zero
level."
Objective ✓ The main objective of JIT purchasing is to minimize the carrying costs,
storage costs, material handling costs, spoilage, obsolescence etc.
Principles ✓ JIT is based on two principles

❖ Produce goods only when it is required and
❖ the products should be delivered to customers at the time only
when they want.
Mechanism ✓ In this system, production process actually starts after the order for the
products is received. Based on the demand, production process starts
and the requirement for raw materials is sent to the purchase
department for purchase.
Essential ✓ An essential requirement of JIT purchasing is to enter into long term

Requirement agreements with suppliers to deliver the materials even in smaller
quantity timely as and when required.
Effect ✓ The effect of JIT purchasing is that the issue price of materials is likely
to be closer to market prices.
Answer 9
FIFO ✓ It is a method of pricing the issues of materials, in the order in which
they are purchased.
✓ In other words, the materials are issued in the order in which they
arrive in the store or the items longest in stock are issued first.
✓ Cost of Materials issued represents the cost of earlier purchases.
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✓ Cost of Closing Stock represents the cost of latest purchases.

✓ This method is considered suitable in times of falling price because the
material cost charged to production will be high while the replacement
cost of materials will be low.
LIFO ✓ It is a method of pricing the issues of materials, on the assumption that
the items of the last batch (lot) purchased are the first to be issued.
✓ Cost of Materials Issued represents the cost of latest purchases.
Cost of Closing Stock represents the cost of earlier purchases.
✓ During inflationary period or period of rising prices, the use of LIFO
would help to ensure that the cost of production determined on the
above basis is approximately the current one.
Answer 10
Meaning ✓ Obsolescence is defined as the loss in the intrinsic value of an asset
due to its supersession.
Reason ✓ Where it is a spare part or a component of a machinery used in

manufacture and that machinery becomes obsolete.
✓ Where it is used in the manufacture of a product which has become
obsolete.
✓ Where the material itself is replaced by another material due to either
improved quality or fall in price.
Treatment ✓ The value of the obsolete material held in stock is a total loss and
immediate steps should be taken to dispose it off at the best available
price.
Control ✓ Losses due to obsolescence can be minimised through careful

forethought and reduced stocking of spares, etc.
✓ Stores records should be continuously gone through to see whether
any item is likely to become obsolete.
✓ There will be such likelihood if an item has not been used for a long
time.
Answer 11
Meaning ✓ Material Control involves planning, organising and controlling the
procurement, storage & usage of materials so as to achieve the
objectives of efficiency & economy.
Objectives
Avoid under ✓ One of the objective of material control is to avoid the situation of
P a g e | 24
stocking under stocking i.e. to provide continuous supply of required materials

so that the activities of production and service departments may
smoothly continue.
Avoid over ✓ Proper control over the material avoids the situation of over-stocking
stocking i.e. optimum investment is made in inventory considering the
operating requirements and financial resources so as to reduce
carrying costs.
Minimum ✓ Material control ensures that all the materials and stores are acquired
cost to at the lowest possible price considering the quality and other relevant
purchase factors.
Avoid ✓ A strict control over the materials ensures minimum wastages due to
wastages defective or long storage or from obsolescence.
Proper ✓ Maintenance of proper records ensures that reliable information is

records available for all items of materials and stores that not only helps in
detecting losses and pilferages but also facilitates proper production
planning.
Timely ✓ Proper material management is very necessary for fulfilling orders of

completion the firm.
Basis To Be Adopted
Proper Co- ✓ There should be proper co-ordination of all departments involved viz.
ordination Purchasing, Receiving, Inspection, Storage, Production, Cost and
Finance.
Proper ✓ There should be proper purchase system to ensure the procurement of

Purchase materials and stores of the required quality at minimum cost from a
System reliable source.
Proper ✓ There should be proper storage system to ensure a suitable place for
Storage every item and avoidance of losses.
System ✓ It must also lead to minimum storage cost.
Proper Issue ✓ There should be proper system for issue of materials to ensure the
System delivery of required materials at the required time.
Perpetual ✓ There should be perpetual inventory system so as to determine the

P a g e | 25
Inventory quantity and value of each item of materials in stock at any point of
System time.
Continuous ✓ There should be continuous stock taking system so as to ensure

Stock Taking accuracy of perpetual inventory records.
Internal ✓ There should be internal check system so that all transactions

Check concerning materials are automatically checked.
System
Budgetary ✓ There should be proper budgetary control system to ensure economy
Control in purchasing and usage of materials and stores.
System
Standard ✓ There should be use of proper forms with regard to Purchase
Forms Requisition, Purchase Order, Material Received Note, Material
Requisition, Bill of Materials, Material Returned Note, Material Transfer
Note, Bin Card, Stores Card etc.
Accounting ✓ There should be proper accounting system so as to determine the cost

System of materials at time of receipt and consumption.
Proper ✓ These should be proper reporting system to ensure regular reporting

Reporting to the management regarding :
System ❖ Materials purchased
❖ Materials issued
❖ Materials in hand
❖ Slow-moving stock
❖ Obsolete stock
✓ Defective units

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Chapter - 4
Labour Costing
Knowing is not enough; we must apply.

Willing is not enough; we must do.
Johann Wolfgang von Goethe
Chapter Analysis
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Theory Questions
1. N 10 (4 M) Discuss the three different methods of calculating labour

turnover.
2. M 11 (4 M) Enumerate the causes of labour turnover.
3. N 14 (4 M) Define ‘Labour Turnover’. How is it measured? Explain.
4. N 20 (4 M) Discuss any four objectives of “Time Keeping” in relation to
attendance and payroll procedures.
Answer 1
Meaning of ✓ Labour turnover in an organisation is the rate of change in the
Labour composition of labour force during a specified period measured against
Turnover a suitable index.
✓ The standard of usual labour turnover in the industry or labour turnover
rate for a past period may be taken as the index or norm against which
actual turnover rate should be compared.
Methods of Separation ✓ In this method, labour turnover is measured by dividing

calculation method the total no. of separations during the period by average
no. of workers on payroll during the same period.
𝐍𝐮𝐦𝐛𝐞𝐫 𝐨𝐟 𝐞𝐦𝐩𝐥𝐨𝐲𝐞𝐞𝐬 𝐬𝐞𝐩𝐚𝐫𝐚𝐭𝐞𝐝 𝐝𝐮𝐫𝐢𝐧𝐠 𝐭𝐡𝐞 𝐲𝐞𝐚𝐫

× 100
𝐀𝐯𝐞𝐫𝐚𝐠𝐞 𝐧𝐮𝐦𝐛𝐞𝐫 𝐨𝐟 𝐞𝐦𝐩𝐥𝐨𝐲𝐞𝐞𝐬 𝐨𝐧 𝐫𝐨𝐥𝐥 𝐝𝐮𝐫𝐢𝐧𝐠 𝐭𝐡𝐞 𝐲𝐞𝐚𝐫
No. of employees separated = No. of employees Left + No.

of employees discharged
Replacement ✓ This method takes into consideration actual replacement

method of labour irrespective of no. of workers leaving.
𝐍𝐮𝐦𝐛𝐞𝐫 𝐨𝐟 𝐞𝐦𝐩𝐥𝐨𝐲𝐞𝐞𝐬 𝐫𝐞𝐩𝐥𝐚𝐜𝐞𝐝 𝐝𝐮𝐫𝐢𝐧𝐠 𝐭𝐡𝐞 𝐲𝐞𝐚𝐫

× 100
No. of employees Replaced = No. of employees Joined in

place of those separated
Flux method ✓ This method takes into account both the replacements as
well as no. of separations during the period.
Method 1
𝐍𝐨. 𝐨𝐟 𝐞𝐦𝐩. 𝐬𝐞𝐩𝐞𝐫𝐚𝐭𝐞𝐝+𝐍𝐨. 𝐨𝐟 𝐞𝐦𝐩. 𝐫𝐞𝐩𝐥𝐚𝐜𝐞𝐝 𝐝𝐮𝐫𝐢𝐧𝐠 𝐭𝐡𝐞 𝐲𝐞𝐚𝐫
× 100

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Method 2
𝐍𝐨. 𝐨𝐟 𝐞𝐦𝐩. 𝐬𝐞𝐩𝐞𝐫𝐚𝐭𝐞𝐝 + 𝐍𝐨. 𝐨𝐟 𝐚𝐜𝐜𝐞𝐬𝐬𝐢𝐨𝐧𝐬 𝐝𝐮𝐫𝐢𝐧𝐠 𝐭𝐡𝐞 𝐲𝐞𝐚𝐫
× 100
No. of Accessions = No. of employees joined in place of
those separated + No. of employees joined as expansion
programme
Answer 2
Personal ✓ Personal causes are those which induce or compel workers to leave
causes their jobs at their will.
✓ Such causes include the following :
❖ Change of jobs for betterment
❖ Premature retirement due to ill health or old age
❖ Domestic problems and family responsibilities
❖ Discontent over the jobs and working environment
Unavoidable ✓ Unavoidable causes are those under which it becomes obligatory on the
causes part of management to ask one or more of their employees to leave
the organization.
❖ Seasonal nature of the business
❖ Shortage of raw material, power, slack market for the product etc.
❖ Change in the plant location
❖ Disability, making a worker unfit for work
Avoidable ✓ Avoidable causes are those which could prevent the worker from
causes leaving the job if timely action was taken by management. Thus, these
require the attention of management on a continuous basis so as to
keep the labour turnover ratio as low as possible.
❖ Dissatisfaction with job, remuneration, hours of work, working
conditions, etc.
❖ Strained relationship with management, supervisors or fellow
workers
❖ Lack of training facilities and promotional avenues
❖ Low wages and allowances
Answer 3
Answer 4
The objectives of time-keeping are as follows :
P a g e | 29
(i) For the preparation of payrolls.

(ii) For calculating overtime.
(iii) For ascertaining and controlling employee cost.
(iv) For ascertaining idle time.
(v) For disciplinary purposes.
(vi) For overhead distribution.

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Chapter - 5
Overheads
If you want to succeed in the world must make your own opportunities as you go
on. The man who waits for some seventh wave to toss him on dry land will find
that the seventh wave is a long time a coming. You can commit no greater folly
than to sit by the roadside until some one comes along and invites you to ride
with him to wealth or influence.
John B. Gough
Chapter Analysis
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Theory Questions
1. M 10 (3 M) Explain the treatment of over and under absorption of Overheads

in Cost accounting.
2. N 10 (4 M) Write short note on Treatment of under–absorbed and over–
absorbed overheads in Cost Accounting.
3. N 10 (4 M) What are the methods of re–apportionment of service
department expenses over the production departments? Discuss.
4. M 11 (4 M) How do you deal with the following in cost account?
a. Packing Expenses
b. Fringe benefits
5. M 13 (4 M) Distinguish between cost allocation and cost absorption.
6. M 14 (4 M) Distinguish between allocation and apportionment of cost.
7. N 14 (4 M) Explain the treatment of over and under absorption of overheads
in cost accounts.
8. N 15 (4 M) How would you account for idle capacity cost in Cost Accounting?
9. N 15 (4 M) Explain the treatment of over and under absorption of overheads
in cost accounting.
10. N 18 (5 M) State the bases of apportionment of following overhead costs :
a. Air Conditioning
b. Time Keeping
c. Depreciation of Plant & Machinery
d. Power/ Steam Consumption
e. Electric Power (Machine Operation)
Answer 1
Under-absorption has the effect of understanding the cost while over-absorption has
the effect of overstating the cost.
Over-absorption or under-absorption of overheads may be disposed of in any one of the
following ways :
Transfer to ✓ The amount of under-absorbed or over-absorbed overheads is
Costing Profit transferred (credited or debited) to costing profit and loss account at
And Loss the end of accounting period when
Account ❖ the amount of under-absorbed or over-absorbed overheads is
minor and insignificant or
❖ the under-absorption or over-absorption has been caused by
abnormal circumstances i.e., the factors beyond the control of
management.
Carry Forward ✓ The amount of under absorbed or over absorbed overheads is carried

P a g e | 32
to the Next over to subsequent years when management is sure that an over
Year absorption in the current period will be more or less neutralized by
under-absorption in the next.
✓ Accordingly, the amount of the current period is transferred to a
reserve account or suspense account.
✓ This method has a limited application because it is against the
costing principle that overhead should be absorbed in a particular
year in which it is incurred.
✓ However, this method may be followed when :
❖ the industry is seasonal with fluctuating demand and fluctuation
in production.
❖ normal business cycle extends beyond one year.
❖ the project is new and output is initially low but there will be
more output in the next year which will absorb more overheads.
Use of ✓ When the amount of under absorbed and over absorbed overhead is
Supplementary significant or large, because of differences due to wrong estimation,
Rates then the cost of product needs to be adjusted by using
supplementary rates (under and over absorption/ actual overhead)
to avoid misleading impression.
✓ It is calculated by dividing the amount of overabsorption or under-
absorption by the equivalent units usually.
✓ Under this method, the balance of under and over absorbed
overheads may be charged to cost of W.I.P., finished stock and cost
of sales proportionately with the help of supplementary rate of
overhead.
Answer 2
Answer 3
Direct Method ✓ Service department costs under this method are apportioned over
the production departments only, ignoring services rendered by one
service department to another.
Step Method ✓ This method gives recognition to the service rendered by service
or Non- department to another service department.
Reciprocal ✓ Therefore, as compared to previous method, this method is more
Method complicated because a sequence of apportionments has to be
selected here.
✓ The sequence begins with the department that renders service to
the maximum number of other service departments.
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✓ However, if once a service department’s overhead has been

distributed, then no distribution shall be made in that service
department of other service department’s overhead later on.
Reciprocal ✓ This method recognises that where there are two or more service
Service departments, they may render service to each other and, there these
Method inter-departmental services are to be given due weight while re-
distributing the expenses of service department.
✓ Thus, if a service department’s overhead has been distributed, then
the distribution shall be made in that service department also of
other service department’s overhead later on.
✓ The methods available for dealing with reciprocal services are :
❖ Simultaneous equation method
❖ Repeated distribution method
❖ Trial & Error method.
Answer 4
Packing As Prime ✓ Cost of primary packing necessary for protecting the
Expenses Cost product or for convenient handling, should become a
part of the prime cost.
As ✓ The cost of packing to facilitate the transportation of

Distribution the product from the factory to the customer should
Cost become a part of the distribution cost.
On Specific ✓ If the cost of special packing is at the request of the

Job customer, the same should be charged to the specific
work order or the job.
As Selling ✓ The cost of fancy packing necessary to attract

Overhead customers is an advertising expenditure. Hence, it is to
be treated as a selling overhead.
Fringe Benefits ✓ These are the additional payments or facilities provided to the
workers apart from their salary and direct cost allowances like house
rent, dearness and city compensatory allowances.
✓ These benefits are given in the form of overtime, extra shift duty
allowance, holiday pay, pension facilities etc.
✓ These indirect benefits stand to improve the morale, loyalty and
stability of employees towards the organisation.
✓ Expenditure incurred on fringe benefits in respect of factory workers
P a g e | 34
should be apportioned among all the production and service

departments on the basis of the number of workers in each
department.
✓ If the amount of fringe benefit is considerably large, it may be
recovered as direct charge by means of a supplementary wage or
labour rate; otherwise these may be collected as part of production
overheads.
Answer 5
Basis Cost Allocation Cost Absorption
Meaning Cost allocation is the allotment of Cost absorption is the process of
whole item of cost to a cost absorbing all indirect costs or overhead
centre or a cost unit. costs allocated or apportioned over
particular cost centre or production
department by the units produced.
Sequence Allocation of overheads occurs Absorption of overheads is the last step

before absorption in the process in the entire process of distribution of
of distribution of overheads overheads and result in an ultimate
charge to products, jobs or orders etc.
Answer 6
Basis Cost Allocation Cost Apportionment
Meaning The term ‘allocation’ refers to It is process of splitting up an
assignment or allotment of an item of overhead cost and
entire item of cost to a particular charging it to the cost centers on
cost centre or cost unit. an equitable basis.
Nature of This is possible when the nature of This is done in case of those
Expense expenses is such that it can be easily overhead items which can’t be
identified with a particular cost allocated to a particular
centre. department.
Example For example, the salary paid to a For example, salary paid to the
foreman of a particular production works manager of the factory
department can be directly cannot be charged wholly to a
identified with that department and particular production department
therefore it will be directly charged but will have to be charged to all
to that department. departments of the factory on an
equitable basis.

P a g e | 35
Basis of No basis is required for allocation. Apportionment is made on some

distribution basis which may be area, assets
value, number of workers etc.
Answer 7
Answer 8
Meaning of ✓ It is that part of the capacity of a plant, machine or equipment which
Idle Capacity cannot be effectively utilised in production.
Why does it ✓ The idle capacity may arise due to

arise? ❖ lack of product demand,
❖ no availability of raw-material,
❖ shortage of skilled labour,
❖ shortage of power, etc.
Nature of Such ✓ Costs associated with idle capacity are mostly fixed in nature.
Cost ✓ These costs remain unabsorbed or unrecovered due to under-
utilisation of plant and service capacity.
Treatment of If the idle capacity cost is due a supplementary overhead rate may
this cost to unavoidable reasons be used to recover the idle capacity
cost. In this case, the costs are
charged to the production capacity
utilised.
If the idle capacity cost is due the cost should be charged to Costing
to avoidable reasons such as Profit and Loss Account.
faulty planning, etc.
If the idle capacity cost is due the cost should also be charged to the
to trade depression, etc., - Costing Profit and Loss Account.
being abnormal in nature
Answer 9
Answer 10
a. Floor Area
b. Number of Workers

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c. Capital Value
d. Technical Estimates
e. Horse power of machines, or Number of machine hour, or value of machines
or units consumed.

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Chapter - 6
Budgetary Control
All truly wise thoughts have been thought already, thousands of times; but to
make them truly ours, we must think them over again honestly, until they take
firm root in our personal experience.
Johann Wolfgang von Goethe
Chapter Analysis
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Theory Questions
1. N 09 (3 M) List the eight functional budgets prepared by a business.

2. N 11 (4 M) Distinguish between Fixed and flexible budget.
3. N 11 (2 M) Explain the Essentials of budget.
4. N 12 (4 M) State the considerations on which capital expenditure budget is
prepared.
5. N 13 (4 M) Describe the steps involved in the budgetary control technique.
6. M 14 (4 M) Describe the salient features of budget manual.
7. M 16 (4 M) State the difference between Fixed Budget and Flexible Budget.
8. N 17 (2 M) Explain flexible budget.
9. M 18 (5 M) Why is 'Zero Base Budgeting' (ZBB) considered superior to
'Traditional Budgeting'? Explain.
10. M 19 (5 M) What are the cases when a flexible budget is found suitable?
11. N 19 (5 M) Define 'Zero Base Budgeting' and mention its various stages.
12. N 20 (5 M) What are the important points an organization should consider if
it wants to adopt Performance Budgeting?
Answer 1
Meaning of ✓ Budgets which relate to the individual functions in an organisation
Functional are known as Functional Budgets.
Budget
Types ✓ The various commonly used Functional budgets are :
❖ Sales Budget
❖ Production Budget
❖ Plant Utilisation Budget
❖ Direct Material Usage Budget
❖ Direct Material Purchase Budget
❖ Direct Labour (Personnel) Budget
❖ Factory Overhead Budget
❖ Production Cost Budget
Answer 2
Basis Fixed Budget Flexible Budget
Flexibility It is inflexible and does not change It is flexible and changes
with the actual volume of output according to the level of activity.
achieved.
Conditions It assumes that conditions would It is prepared according to

remain static. changing conditions.

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Classification of Costs are not classified according Costs are classified according to
Costs to their variability i.e., fixed, their variability i.e., fixed,
variable and semi variable. variable and semi variable.
Cost control It has limited applications and is It has more applications and can
ineffective as tool for cost control. be used as tool for cost control.
No. of budgets Only one budget at a fixed level of Under it, series of budgets are
activity is prepared. prepared at different level of
activity.
Answer 3
✓ Organisational structure must be clearly defined and responsibility should be assigned
to identifiable units within the organisation.
✓ Setting of clear objectives and reasonable targets. Objectives should be in consonance
with the long term plan of the organisation.
✓ Objectives and degree of responsibility should be clearly stated and communicated to
the management or person responsible for.
✓ Budgets are prepared for the future periods based on expected course of actions.
✓ Budgets are updated for the events that were not kept into the mind while
establishing budgets. Hence, budgets should be flexible enough for mid- term revision.
✓ The entire organisation must be committed to budgeting.
✓ Budgets should be quantifiable and master budget should be broken down into various
functional budgets.
✓ Budgets should be monitored periodically. Variances from the set yardsticks
(standards) should be analysed and responsibility should be fixed.
✓ Budgetary performance needs to be linked effectively to the reward system.
Answer 4
Meaning ✓ The capital expenditure budget represents the planned outlay on
fixed assets like land, building, plant and machinery, etc. during the
budget period.
✓ This budget is subject to strict management control because it
entails large amount of expenditure.
✓ The budget is prepared to cover a long period of years.
Considerations ✓ Overhead on production facilities of certain departments as

indicated by the plant utilisation budget.
✓ Replacement requests from the concerned departments.
✓ Future development plans to increase output by expansion of
P a g e | 40
plant facilities.
✓ Factors like
❖ sales potential to absorb the increased output,
❖ possibility of price reductions,
❖ increased costs of advertising and sales promotion to absorb
increased output, etc.
Answer 5
The steps involved in the budgetary control technique are as follows :
Definition of ✓ A budget is a plan for the achievement of certain operational
objectives objectives, so these should be defined precisely.
✓ The areas of control should be demarcated; and items of revenue
and expenditure to be covered by the budget stated.
Location of the ✓ The factor(s) which sets a limit to the total activity is known as key
key (or budget) factor.
factor ✓ For proper budgeting, it must be located and estimated properly.
Appointment of ✓ Formulation of a budget usually requires whole time services of a

controller senior executive known as budget controller; he must be assisted
in this work by a Budget Committee, consisting of all the heads of
department along with the Managing Director as the Chairman.
Budget Manual ✓ Effective budgetary planning relies on the provision of adequate

information which are contained in the budget manual.
✓ A budget manual is a collection of documents that contains key
information for those involved in the planning process.
Budget period ✓ The period covered by a budget is known as budget period.

✓ The Budget Committee determines the length of the budget period
suitable for the business.
✓ It may be months or quarters or such periods as coincide with
period of trading activity.
Standard of ✓ For preparing budgets for the future, past statistics cannot be
activity or output completely relied upon.
✓ Therefore, though results of the past should be studied but these
should only be applied when there is a likelihood of similar
conditions repeating in the future.
Answer 6
P a g e | 41
A budget manual is a collection of documents that contains key information for those
involved in the planning process. Typical contents could include the following :
✓ An introductory explanation of the budgetary planning and control process, including
a statement of the budgetary objective and desired results.
✓ A form of organisation chart to show who is responsible for the preparation of each
functional budget and the way in which the budgets are interrelated.
✓ A timetable for the preparation of each budget. This will prevent the formation of a
‘bottleneck’ with the late preparation of one budget holding up the preparation of all
others.
✓ Copies of all forms to be completed by those responsible for preparing budgets, with
explanations concerning their completion.
✓ A list of the organization’s account codes, with full explanations of how to use them.
✓ Information concerning key assumptions to be made by managers in their budgets, for
example the rate of inflation, key exchange rates, etc.
Answer 7
Answer 8
Meaning ✓ In a flexible budgetary control system, a series of budgets are
prepared one for each of a number of alternative production levels
or volumes.
Definition ✓ According to CIMA, “a flexible budget is defined as a budget which,

by recognizing the difference between fixed, semi-variable and
variable costs is designed to change in relation to the level of
activity attained.”
Features ✓ It is prepared for different levels of activity.

✓ It changes with the change in the level of activity.
✓ Expenses are classified into fixed, variable and semi – variable.
Semi – variable expenses are further segregated into fixed and
variable expenses.
✓ Flexible budgets show the expected results of a responsibility center
for different activity levels.
Answer 9
Zero based budgeting is superior to traditional budgeting in the following manner:
✓ It provides a systematic approach for evaluation of different activities.
✓ It ensures that the function undertaken are critical for the achievement of the
objectives.
P a g e | 42
✓ It provides an opportunity for management to allocate resources to various activities

after a thorough – cost benefit analysis.
✓ It helps in the identification of wasteful expenditure and then their elimination.
✓ If facilitates the close linkage of departmental budgets with corporate objectives.
✓ It helps in the introduction of a system of Management by Objectives.
Answer 10
✓ When there are seasonal fluctuations in sales and/ or production, for example in soft
drinks industry.
✓ When a company keeps on introducing new products or makes changes in the design
of its products frequently.
✓ Industries which are engaged in make-to-order business like ship building.
✓ An industry which is influenced by changes in fashion.
✓ When there are general changes in sales.
Answer 11
Meaning ✓ ZBB is an activity based budgeting system where budgets are
prepared for each activities rather than functional department.
✓ Justification in the form of cost benefits for the activity is required to
be given.
✓ The activities are then evaluated and prioritized by the management
on the basis of factors like synchronisation with organisational
objectives, availability of funds, regulatory requirement etc.
Stages in Zero Based Budgeting

Identification ✓ Decision packages are the programmes or activities for which
and decision is required to be taken.
description of ✓ The programmes or activities are described for technical
Decision specifications, financial impact in the form of cost benefit analysis and
packages other issues like environmental, regulatory, social etc.
Evaluation of ✓ Once Decision packages are identified and described, it is evaluated

Decision against factors like synchronisation with organisational objectives,
packages availability of funds, regulatory requirement etc.
Ranking ✓ After evaluation of the decision packages, it is ranked on the basis

(Prioritisation) priority of the activities.
of the ✓ Because of this prioritization feature ZBB is also known as Priority-
Decision based Budgeting.
packages
Allocation of ✓ After ranking of the decision packages, resources are allocated for
resources decision packages.
P a g e | 43
✓ Budgets are prepared like it is done first time without taking

reference to previous budgets.
Answer 12
a. The objectives of the enterprise are spelt out in concrete terms.
b. The objectives are then translated into specific functions, programmes, activities
and tasks for different levels of management within the realities of fiscal
constraints.
c. Realistic and acceptable norms, yardsticks or standards and performance indicators
should be evolved and expressed in quantifiable physical units.
d. A style of management based upon decentralised responsibility structure should be
adopted, and
e. An accounting and reporting system should be developed to facilities monitoring,
analysis and review of actual performance in relation to budgets.

P a g e | 44
Chapter - 7
Contract Costing
We learn wisdom from failure much more than success. We often discover what
we will do, by finding out what we will not do.
Samuel Smiles
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Theory Questions
1. N 09 (2 M) Mention the main advantage of cost plus contracts.

2. M 11 (4 M) Discuss the process of estimating profit/ loss on incomplete
contracts.
3. N 11 (4 M) Explain the terms notional profit and retention money in contract
costing.
4. N 13 (2 M) State the escalation clause in contract costing.
5. M 15 (4 M) Write notes on 'Escalation Clause'.
6. M 16 (4 M) What is cost plus contract? What are its advantages?
7. M 17 (4 M) Discuss briefly the principles to be followed while taking credit
for profit on incomplete contract.
8. N 17 (4 M) Explain 'Retention Money' and 'Progress payment' in contract.
Answer 1
Meaning ✓ Under cost plus contract, the contract price is ascertained by adding a
percentage of profit to the total cost of the work.
✓ Such types of contracts are entered into when it is not possible to
estimate the contract cost with reasonable accuracy due to unstable
condition of material, labour services etc.
Advantages ✓ The contractor is assured of a fixed percentage of profit. There is no

risk of incurring any loss on the contract.
✓ It is useful specially when the work to be done is not definitely fixed
at the time of making the estimate.
✓ Contractee can ensure himself about the ‘cost of contract’ as he is
empowered to examine the books and documents of the contractor
to ascertain the veracity of the cost of contract.
Answer 2
The portion of profit to be credited to profit and loss account depends on the stage of
completion of the contract. THIS ANSWER IS RELEVANT FOR IPC STUDENTS ONLY. INTER
STUDENTS NEED NOT STUDY IT.
Contract less ✓ If the contract has just started or it is less than 25% complete, no
than 25% profit should be taken into account.
complete
Contract is ✓ In this case, one third of the notional profit reduced in the ratio of
25% or more cash received to work certified, may be transferred to the profit and
but less than loss account.
50% ✓ The amount of profit to be transferred to the profit and loss account
complete may be determined by using the following formula :
P a g e | 46
1 Cash Received
× Notional Profit ×
3 Work certified
Contract is ✓ In this case, two third of the notional profit, reduced by the portion of
50% or more cash received to work certified may be transferred to the profit and
but less than loss account.
90% ✓ In this case the formula to be used is as under :
complete 2 𝐶𝑎𝑠ℎ 𝑅𝑒𝑐𝑒𝑖𝑣𝑒𝑑
× 𝑁𝑜𝑡𝑖𝑜𝑛𝑎𝑙 𝑃𝑟𝑜𝑓𝑖𝑡 ×
3 𝑊𝑜𝑟𝑘 𝑐𝑒𝑟𝑡𝑖𝑓𝑖𝑒𝑑
Contract Work Certified
a. 𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑃𝑟𝑜𝑓𝑖𝑡 ×
Contract price
nearing Cash Received
completion, b. 𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑃𝑟𝑜𝑓𝑖𝑡 ×
Contract price
say between c. 𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑃𝑟𝑜𝑓𝑖𝑡 ×
Cost of work to date
90% and Estimated total cost
Cost of work to date Cash Received
100% d. 𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑃𝑟𝑜𝑓𝑖𝑡 × ×
Estimated total cost Work Certified
complete Work Certified
e. 𝑁𝑜𝑡𝑖𝑜𝑛𝑎𝑙 𝑃𝑟𝑜𝑓𝑖𝑡 ×
Contract price
Answer 3
Notional ✓ Notional Profit is the balancing figure of contract account prepared by
profit contractor if the total of credit side exceeds the total of debit side.
✓ It represents the difference between the value of work certified and
cost of work certified.
✓ It is determined as follows :
Notional profit = Value of work certified – (Cost of work to date –
Cost of work not yet certified)
Retention ✓ A contractor does not receive full payment of the work certified by the
Money surveyor.
✓ Contractee retains some amount (say 10% to 20%) to be paid, after
sometime, when it is ensured that there is no fault in the work carried
out by contractor.
✓ If any deficiency or defect is noticed in the work, it is to be rectified by
the contractor before the release of the retention money.
✓ Retention money provides a safeguard against the risk of loss due to
faulty workmanship.
✓ It is determined as follows :
Retention Money = Value of work certified – Payment actually
made/ cash paid
Answer 4
✓ This clause is usually provided in the contracts as a safeguard against any likely

P a g e | 47
changes in the price or utilization of material and labour.

✓ If during the period of execution of a contract, the prices of materials or labour rise
beyond a certain limit, the contract price will be increased by an agreed amount.
✓ Inclusion of such a term in a contract deed is known as an 'escalation clause'.
✓ An escalation clause usually relates to change in price of inputs, it may also be
extended to increased consumption or utilization of quantities of materials, labour etc.
(where it is beyond the control of the contractor).
✓ In such a situation, the contractor has to satisfy the contractee that the increased
utilization is not due to his inefficiency.
Answer 5
Answer 6
Answer 7
Answer 8
Retention Money
Meaning ✓ Retention Money is that portion of value of work certified (usually 10%
to 20%) which is retained by the contractee as security for any
defective work which may be discovered later within the guarantee
period.
Purpose ✓ Its purpose is to provide a safeguard against the risk of loss due to
faulty workmanship.
✓ If any deficiency or defect is noticed in the work, it is to be rectified by
the contractor before the release of the retention money.
When Paid ✓ Retention Money is generally paid after the expiry of period specified
in the contract when it is ensured that there is no fault in the work
carried out by the contractor.
Computation ✓ Retention Money = Value of Work Certified – Cash Received
Progress Payment/ Running Payment

Meaning ✓ It refers to the amount received by contractor from contractee for a
particular period.

P a g e | 48
Computation ✓ Value of Work Certified – Retention money – Payment to date
Cash ✓ The total amount received by contractor on a particular date is referred

Received Vs. to as Cash received whereas the amount received by contractor from
Progress contractee for a particular period is called Retention money.
Payment ✓ Thus, Cash received is for all the collective periods whereas retention
money is not.

P a g e | 49
Chapter - 8
Job & Batch Costing
Every man, as to character, is the creature of the age in which he lives. Very few
are able to raise themselves above the ideas of their times.
Voltaire
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Theory Questions
1. N 16 (4 M) What is meant by Job Costing? Give examples of (any four)

industries where it is used.
2. M 18 (5 M) Explain 'Job Costing' and 'Batch Costing'.
Answer 1
Meaning ✓ It is a method of costing which is used when the work is undertaken as
per the customer’s special requirement.
✓ When an inquiry is received from the customer, costs expected to be
incurred on the job are estimated and on the basis of this estimate, a
price is quoted to the customer.
✓ Actual cost of materials, labour and overheads are accumulated and on
the completion of job, these actual costs are compared with the quoted
price and thus the profit or loss on it is determined.
Examples ✓ Job costing is applicable in

❖ printing press,
❖ hardware,
❖ ship-building,
❖ heavy machinery,
❖ foundry,
❖ general engineering works,
❖ machine tools,
❖ interior decoration,
❖ repairs
❖ and other similar work.
Answer 2
Job Costing ✓ Refer Answer to Question 1
Batch ✓ Batch Costing is that form of specific order costing under which each
Costing batch is treated as a cost unit and costs are accumulated and
ascertained separately for each batch.
✓ Each batch consists of a number of like units.
✓ Each batch is treated as a cost unit.
✓ All costs are accumulated and ascertained for each batch.
✓ A separate Batch Cost Sheet is used for each batch and is assigned a
certain number by which the batch is identified.
✓ The cost per unit is ascertained by dividing the total cost of a batch by
the number of items produced in that batch.

P a g e | 51

P a g e | 52
Chapter - 9
Process Costing
All men dream but not equally. Those who dream by night in the dusty recesses
of their minds wake in the day to find that it was vanity; but the dreamers of the
day are dangerous men, for they may act their dream with open eyes to make it
possible.
T.E. Lawrence
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Theory Questions
1. N 12 (4 M) What is inter-process profit? State its advantages and

disadvantages.
2. N 13 (4 M) Explain the following terms in relation to process costing :
a. Equivalent Production
b. Inter-process profit
Answer 1
Meaning ✓ In some process industries, the output of one process is transferred
to the next process not at cost but at market value or cost plus a
percentage of profit.
✓ The difference between cost and the transfer price is known as inter-
process profits.
Advantages ✓ Comparison between the cost of output and its market price at the
stage of completion is facilitated.
✓ Each process is made to stand by itself as to the profitability.
Disadvantages ✓ The use of inter-process profits involves complication.

✓ The system shows profits which are not realised because of stock
not sold out.
Answer 2
Equivalent ✓ When opening and closing stocks of work-in-process exist, unit costs
Production cannot be computed by simply dividing the total cost by total number
of units still in process.
✓ We can convert the work-in-process units into finished units called
equivalent production units so that the unit cost of these
uncompleted (W-I-P) units can be obtained.
✓ Equivalent Production units = Actual number of units in production
× Percentage of work completed
✓ It consists of
❖ balance of work done on opening work-in-process,
❖ current production done fully and
❖ part of work done on closing WIP with regard to different
elements of costs viz., material, labour and overhead.
Inter-process Please refer answer to Question 1.

profit

P a g e | 54
Chapter - 10
Joint Product & By Product
Rely on your own strength of body and soul. Take for your star self-reliance,
faith, honesty and industry. Don't take too much advice — keep at the helm and
steer your own ship, and remember that the great art of commanding is to take
a fair share of the work. Fire above the mark you intend to hit. Energy, invincible
determination with the right motive, are the levers that move the world.
Noah Porter
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Theory Questions
1. N 10 (4 M) How apportionment of joint costs upto the point of separation amongst

the joint products using market value at the point of separation and net
realizable value method is done? Discuss.
2. N 18 (5 M) How are By-products treated in Costing?
Answer 1
Apportionment of Joint Cost amongst Joint Products
Market ✓ This method is used for apportionment of joint costs to joint products
value at the upto the split off point.
point of ✓ Under this, the market value of all the joint products is computed at
separation the point of separation and the joint cost is divided on the basis of
such market value.
✓ It is difficult to apply if the market value of the product at the point of
separation is not available.
✓ It is useful method where further processing costs are incurred
disproportionately.
Net ✓ Under this method, Net realizable value of each joint product is found
realizable out and Joint costs are apportioned in the ratio of such net realisable
value value.
Method ✓ Net realizable value is found out by deducting the following from the
sales value of the joint products (at finished stage i.e. after further
processing) :
❖ estimated profit margins,
❖ selling and distribution expenses, if any, and
❖ post-split off costs.
Answer 2
Where By- Credit to Profit ✓ The credit to the Profit and Loss Account here is
Products are and Loss treated either as miscellaneous income or as
of Small Account additional sales revenue.
Total Value
Credit to ✓ The sale proceeds of the By-product may be treated
Process as deductions from the total costs.
account
When the ✓ Where By-products are of considerable total value, they may be
by-products regarded as joint products rather than as By-products.
are of ✓ To determine exact cost of By-products, the costs incurred upto the
considerable point of separation, should be apportioned over By-products and joint
total value products by using a logical basis.
P a g e | 56
✓ Sale proceeds of By-products are credited to the By-product Account.

✓ Profit/ loss arising in By-product Account is transferred to Costing Profit
& Loss Account.
Where by- ✓ In this case, the net realisable value of the By-product at the split-off
products point may be arrived at by subtracting the further processing cost from
require the realisable value of by-products.
further
processing

P a g e | 57
Chapter - 11
Standard Costing
If your actions inspire others to dream more, learn more, do more and become
more, you are a leader.
John Quincy Adams
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Theory Questions
1. N 15 (4 M) Describe the various steps involved in adopting standard costing

system in an organization.
Answer 1
Setting of ✓ The first step is to set standards which are to be achieved.
Standards
Ascertainment ✓ The actual cost for each component of cost is ascertained.
of actual costs ✓ Actual costs are ascertained from books of account, material
invoices, wage sheet, charge slip etc.
Comparison of ✓ Actual costs are compared with the standards costs and variances are
actual cost & determined.
standard cost
Investigation ✓ Variances arising are investigated for further action.
of variances ✓ Based on this, performance is evaluated and appropriate actions are
taken.
Disposition of ✓ Variances arising are disposed off by transferring to the relevant

variances accounts (costing profit and loss account) as per the accounting
method (plan) adopted.

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Chapter - 12
Marginal Costing
Nothing can stop the man with the right mental attitude from achieving his
goal; nothing on earth can help the man with the wrong mental attitude.
Thomas Jefferson
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Theory Questions
1. M 10 (2 M) What do you understand by Key factor? Give two examples of it.

2. M 12 (2 M) Write short note on Angle of lncidence.
3. M 12 (4 M) Discuss basic assumptions of Cost Volume Profit analysis.
4. N 13 (4 M) Elaborate the practical application of Marginal Costing.
5. N 13 (4 M) What is the meaning of Margin of Safety (MOS)? State the
relationship between Operating Leverage & Margin of Safety
Ratio.
6. M 19 (5 M) What are the limitations of Marginal Costing?
7. N 20 (5 M) Differentiate between Marginal and Absorption Costing.
Answer 1
Meaning ✓ Key factor is a factor which at a particular time or over a period limits
the activities of an undertaking.
✓ It may be the level of demand for the products or service or it may be
the shortage of one or more of the productive resources.
Examples ✓ Shortage of raw material

✓ Shortage of Labour
✓ Plant capacity available
✓ Sales capacity available
Answer 2
✓ This angle is formed by the intersection of sales line and total cost line at the break-
even point.
✓ This angle shows the rate at which profits are being earned once the break-even point
has been reached.
✓ The wider the angle, the greater is the rate of earning profits.
✓ A large angle of incidence with a high margin of safety indicates extremely favourable
position.
Answer 3
✓ Changes in the levels of revenues and costs arise only because of changes in the
number of products (or service) units produced and sold.
✓ Total cost can be separated into two components, Fixed and variable.
✓ Graphically, the behaviour of total revenues and total cost are linear in relation to
output level within a relevant range.
✓ Selling price, variable cost per unit and total fixed costs are known and constant.
✓ All revenues and costs can be added, subtracted and compared without taking into
account the time value of money.
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Answer 4
Pricing Policy ✓ Since marginal cost per unit is constant from period to period, firm
decisions on pricing policy can be taken particularly in short term.
Decision ✓ Marginal costing helps the management in taking a number of

Making business decisions like make or buy, discontinuance of a particular
product, replacement of machines, etc.
Ascertaining ✓ Under the marginal costing technique, the stock of finished goods
Realistic Profit and work-in-progress are carried on marginal cost basis and the
fixed expenses are written off to profit and loss account as period
cost.
✓ This shows the true profit of the period.
Determination ✓ Marginal costing helps in the preparation of break-even analysis
of production which shows the effect of increasing or decreasing production
level activity on the profitability of the company.
Answer 5
Meaning of ✓ Margin of Safety (MoS) is the excess of total sales over the Break
Margin of even sales.
Safety ✓ MoS defines the amount upto which level sales can decline before
occurring loss.
✓ The margin of safety is the difference between actual sales or output
and the break –even sales of production.
✓ It may also be expressed in percentage.
✓ A greater margin of safety reflects the soundness of the business.
✓ If the margin of safety is small, any fall in sales value may even
result in loss.
Formula ✓ Margin of safety = Actual sales or output – break –even sales or
production
𝐒𝐚𝐥𝐞𝐬 – 𝐁𝐫𝐞𝐚𝐤𝐞𝐯𝐞𝐧 𝐒𝐚𝐥𝐞𝐬
✓ Margin of safety Ratio =
𝐒𝐚𝐥𝐞𝐬
Relationship ✓ Operating leverage is calculated as Contribution ÷ Operating profit

between and contribution margin plays an important role in it.
Operating ✓ If sales are expected to increase, higher operating leverage will
Leverage and result in higher profit.
Margin of ✓ When sales are expected to decrease, lower operating leverage will
Safety result in higher profit.
✓ Higher variable cost and lower fixed cost will result into higher MoS
and risk will be lower and vice versa.
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✓ So, like Operating leverage, MoS is a measure of risk as to what

extent an organisation is exposed to change in sales volume.
Answer 6
Difficulty in ✓ It is difficult to classify exactly the expenses into fixed and variable
classifying cost category.
✓ Most of the expenses are neither totally variable nor wholly fixed.
✓ For example, various amenities provided to workers may have no
relation either to volume of production or time factor.
Dependence ✓ Contribution of a product itself is not a guide for optimum

on key factors profitability unless it is linked with the key factor.
Scope for Low ✓ Sales staff may mistake marginal cost for total cost and sell at a
Profitability price; which will result in loss or low profits.
✓ Hence, sales staff should be cautioned while giving marginal cost.
Faulty ✓ Overheads of fixed nature cannot altogether be excluded particularly

valuation in large contracts, while valuing the work-in- progress.
✓ In order to show the correct position, fixed overheads have to be
included in work-in-progress.
Unpredictable ✓ Fixed cost will remain static throughout is not correct.

nature of Cost ✓ Fixed cost may change from one period to another.
✓ For example, salaries bill may go up because of annual increments or
due to change in pay rate etc.
✓ The variable costs do not remain constant per unit of output.
✓ There may be changes in the prices of raw materials, wage rates etc.
after a certain level of output has been reached due to shortage of
material, shortage of skilled labour, etc.
Ignores time ✓ The marginal cost of two jobs may be the same but the time taken
factor and for their completion and the cost of machines used may differ.
investment ✓ The true cost of a job which takes longer time and uses costlier
machine would be higher.
✓ This fact is not disclosed by marginal costing.
Apportionment ✓ In case of multiple products, separate break even points are to be

of Fixed Costs calculated.
✓ This poses a problem of apportionment of fixed costs to each
product.

P a g e | 63
Answer 7
Basis Absorption Costing Marginal Costing
Product All variable manufacturing costs and Only variable manufacturing costs
Costs fixed production overheads are are treated as product costs and
treated as product costs and hence, hence, are charged to products,
are charged to product, processes or processes or operations.
operations.
Period Costs Only administration, selling and All fixed costs i.e. Production/
distribution overheads are treated as Administration/ Selling/
period costs and hence, are written Distribution Overheads are treated
off against the profits in the period in as period costs and hence are
which they arise. written off against profits in the
period in which they arise.
Value of Value of closing stock includes fixed Value of closing stock comprises
Stock production overheads. only variable costs.
Under/ over Under/ over recovery of fixed The question of under/ over
Recovery overheads generally arises. recovery of fixed overheads does
not arise.
Basis of Managerial Decisions are based on Managerial Decisions are based on
Managerial total profit i.e. excess of total sales contribution i.e. excess of sales
Decisions revenue over total costs. revenue over over variable costs.
Cost per unit The cost per unit reduces, as the In case of marginal costing, the cost
production increases as it is fixed cost per unit remains the same,
which reduces, whereas the variable irrespective of the production as it
cost remains the same per unit. is valued at variable cost.

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Chapter - 13
Reconciliation of Cost & Financial Accounts
The greatest results in life are usually attained by simple means and the exercise
of ordinary qualities. These may for the most part be summed in these two:
common-sense and perseverance.
Owen Feltham
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Theory Questions
1. N 09 (2 M) List the Financial expenses which are not included in cost.

2. N 09 (2 M) When is the reconciliation statement of Cost and Financial
accounts not required?
3. M 13 (4 M) “Is reconciliation of cost accounts and financial accounts
necessary in case of integrated accounting system?”
4. N 17 (4 M) What are the motivational factors for adopting a reconciliation
process? Explain.
Answer 1
✓ Interest on loans or bank mortgages
✓ Expenses relating to the issue and transfer of share and debentures like stamps duty
expenses; discount on share and debentures etc.
✓ Losses on the sales of fixed assets and investments
✓ Fines and penalties
✓ Damages payable under law
✓ Legal charges
Answer 2
✓ When the Cost and Financial Accounts are integrated, there is no need to have a
separate reconciliation statement between the two sets of accounts.
✓ Integration means that same set of accounts fulfil requirement of both Cost and
Financial Accounts.
Answer 3
✓ In integrated accounting system, cost and financial accounts are kept in the same set
of books.
✓ Such a system will have to afford full information required for Costing as well as for
Financial Accounts.
✓ In other words, information and data should be recorded in such a way so as to enable
the firm to ascertain the cost (together with the necessary analysis) of each product,
job, process, operation or any other identifiable activity.
✓ It also ensures the ascertainment of marginal cost, variances, abnormal losses and
gains.
✓ In fact, all information that management requires from a system of Costing for doing its
work properly is made available.
✓ The integrated accounts give full information in such a manner so that the profit and
loss account and the balance sheet can be prepared according to the requirements of
law and the management maintains full control over the liabilities and assets of its
business.
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✓ Since, only one set of books are kept for both cost accounting and financial
accounting purpose so there is no necessity of reconciliation of cost and financial
accounts.
Answer 4
When the cost and financial accounts are kept separately, it is imperative that these
should be reconciled, otherwise the cost accounts would not be reliable. The
reconciliation of two set of accounts can be made, if both the sets contain sufficient detail
as would enable the causes of differences to be located. It is therefore, important that in
the financial accounts, the expenses should be analysed in the same way as in cost
accounts.
Motivation for reconciliation is :

✓ To ensure reliability of cost data.
✓ To ensure ascertainment of correct product cost.
✓ To ensure correct decision making by the management based on Cost & Financial
data.

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Chapter - 14
Integral & Non Integral System
The difference between a successful person and others is not a lack of strength,
not a lack of knowledge, but rather a lack in will.
Vince Lombardi
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Theory Questions
1. M 10 (2 M) What are the main advantages of integrated accounts?

2. M 12 (4 M) What is an Integrated Accounting System? State its advantages.
3. M 15 (4 M) State benefits of Integrated Accounting.
4. M 19 (5 M) Explain Integrated Accounting System and state its advantages.
5. N 20 (5 M) Explain what are the pre-requisites of integrated accounting.
Answer 1
Meaning ✓ It’s a system of accounting where both costing and financial
transactions are recorded in the same set of books.
Advantages No need for ✓ The question of reconciling costing profit and financial
Reconciliation profit does not arise, as there is only one figure of
profit.
Less efforts ✓ Due to use of one set of books, there is significant

saving in efforts made.
Less time ✓ No delay is caused in obtaining information provided

consuming in books of original entry.
Economical ✓ It is economical also as it is based on the concept of

Process ‘Centralization of Accounting Function’.
Answer 2
Answer 3
Answer 4
Answer 5
Decision as ✓ The management must decide about the extent of integration of the
to extent of two sets of books.
Integration ✓ Some concerns find it useful to integrate upto the stage of prime cost
or factory cost while others prefer full integration of the entire
accounting records.

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Suitable ✓ A suitable coding system must be made available so as to serve the

Coding accounting purposes of financial and cost accounts.
System
Accounting ✓ An accounting policy with regard to the treatment of provision for
Policy accruals, prepaid expenses, other adjustment necessary for
preparation of interim accounts, must be laid down in advance.
Co- ✓ Perfect coordination should exist between the staff responsible for the
ordination financial and cost aspects of the accounts and an efficient processing of
accounting documents should be ensured.

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Chapter - 15
Service Costing
Every great dream begins with a dreamer. Always remember, you have within
you the strength, the patience, and the passion to reach for the stars to change
the world.
Harriet Tubman
Chapter Analysis
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0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
0

P a g e | 71
Theory Questions
1. N 09 (3 M) Explain briefly, what do you understand by Operating Costing. How

are composite units computed?
2. N 12 (4 M) What do you understand by operating costing? How are composite
units computed?
3 N 19 (5 M) Describe Composite Cost Unit as used in Service Costing and
discuss the ways of computing it.
Answer 1
Meaning ✓ Operating Costing is a method of ascertaining costs of providing or
operating a service.
✓ This method of costing is applied by those undertakings which provide
services rather than production of commodities.
✓ This costing method is usually made use of by transport companies, gas
and water works departments, electricity supply companies, canteens,
hospitals, theatres, schools etc.
Computation ✓ When two units are merged into one, it is called Composite units.
of ✓ Composite units i.e. tonnes kms., quintal kms. etc. may be computed in
Composite two ways.
units
Absolute (weighted ✓ Absolute tonnes-kms., are the sum total of
average) tonnes- tonnes-kms., arrived at by multiplying various
kms. distances by respective load quantities carried.
Commercial (simple ✓ Commercial tonnes-kms., are arrived at by

average) tonnes- multiplying total distance kms., by average load
kms. quantity.
Answer 2
Answer 3

P a g e | 72
Chapter - 16
Activity Based Costing
Every great dream begins with a dreamer. Always remember, you have within
you the strength, the patience, and the passion to reach for the stars to change
the world.
Harriet Tubman

(chapter newly added from May 2018)
Chapter Analysis
6
5
5
4
4
0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
0

P a g e | 73
Theory Questions
1. N 18 (5 M) Explain Activity Based Budgeting.

2. N 20 (5 M) Describe the various level of activities under ABC methodology.
Answer 1
Meaning ✓ Activity based budgeting analyses the resource input or cost for each
activity.
✓ It provides a framework for estimating the amount of resources
required in accordance with the budgeted level of activity.
✓ Actual results can be compared with budgeted results both in financial
and non-financial terms and the activities with major discrepancies can
be highlighted.
✓ It is a planning and control system which seeks to support the
objectives of continuous improvement.
Insights ✓ The traditional budgeting is based on traditional cost accounting i.e. on

the basis of allocation, apportionment and absorption of overheads in
the products.
✓ However, the Activity Based Budgeting is different from the traditional
budgeting in the sense that it provides a strong link between the
objectives of organisation and objectives of a particular activity.
✓ In other words, it involves identification of activities and dividing them
in value adding and non value adding activities.
✓ The non value adding activities are eliminated in due course of time.
✓ Activity Based Budgeting thus requires identification of activities of the
organisation, establishing the factors which cause costs, the cost
drivers and then collecting the costs of the activities in cost pools.
Features ✓ It uses the activity analysis to relate costs to activities.

✓ It identifies cost improvement opportunities.
✓ There is a clear link between strategic objectives & planning and the
strategic planning of the ABC process.
Key ✓ Type of work to be done

Elements ✓ Quantity of work to be done
✓ Cost of work to be done
Answer 2
Unit level Meaning ✓ These are activities for which the consumption of
activities resources can be identified with the number of units
P a g e | 74
produced.
✓ It is performed each time a unit is produced.
Example ✓ Use of indirect materials/ consumables
Batch level Meaning ✓ The costs of some activities are driven by the number of
activities batches of units produced.
✓ These are activities related to setting up of a batch or
production run.
✓ It is performed each time a batch is processed.
Example ✓ Material ordering

✓ Inspection of Products.
Product level Meaning ✓ These are the activities which are performed to support
activities different products in product line.
Example ✓ Designing the product

✓ Producing parts specifications and
✓ Keeping technical drawings of products up to date.
Facility Level Meaning ✓ These are the activities which cannot be directly
Activities attributed to individual products.
✓ These activities are necessary to sustain the manufacturing
process and are common and joint to all products
manufactured.
Example ✓ Maintenance of buildings

✓ Plant Security
✓ Production Manager’s Salary


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Tribute to my Beloved Elder Brother

“IF YOU WANT TO BE A LION,

Love for the subject ACCOUNTING, COST and FM ECO

This publication could not have been possible without her.

8 Job & Batch costing 2 49 – 51

10 Joint Product and By Product 2 54 – 56

13 Reconciliation of Cost & 4 64 – 66

16 Activity Based Costing 1 72 – 74

Analysis of Past 22 Attempts

Theory Questions Analysis

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1. N 09 (2 M) Define the following :

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c. Where cost is ascertained for a single product.

29. M 18 (2.5 Explain Opportunity Cost.

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Objectives ✓ Ascertainment of Cost

Nature of ✓ Nature of product determines the type of costing system to be

✓ The product which has by-products requires costing system which

Insights ✓ A cost unit is a devise for the purpose of breaking up or separating

Example Industry or Product Basis of Cost Unit

Personal & Personal ✓ It consists of a person or group of persons.

Impersonal ✓ It consists of a location or an item of equipment (or

✓ For Example : Ludhiana branch, boiler house, cooling

Service Cost ✓ It is a cost centre which serves as an ancillary unit to a

Temporary or Cost control seeks to attain lowest Cost reduction recognises no

Emphasis In case of Cost Control, emphasis is In case of cost reduction, it is on

Prevention or Cost Control is a preventive Cost reduction is a corrective

Precise ✓ The system of costing should not have unnecessary details.

Accurate ✓ The data to be used by the Cost Accounting System should be

Procedure ✓ A carefully phased programme should be prepared by using network

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✓ It is important in decision making and comparing alternatives.

✓ These are responsible for generating and maximizing profits.

Objective It records the cost of producing a It provides information to

Area It only deals with cost ascertainment. It is wider in scope as it includes

F.A., budgeting, Tax, Planning.

Development It’s development is related to It develops in accordance to the

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function, revenue with for costs and reported on a is measured

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The ultimate measure of a man is not where he stands in moments of comfort,

Analysis of Past 22 Attempts

Theory Questions Analysis

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Examples ✓ Excise Duty based on output produced

Treatment ✓ Direct expenses from part of prime cost.

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The ultimate measure of a man is not where he stands in moments of comfort,

Analysis of Past 22 Attempts

Theory Questions Analysis

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1. N 11 (4 M) Discuss ABC analysis as a system of inventory control.

Category of A Category ✓ A’ category of items consists of any small percentage i.e.

B Category ✓ ‘B’ category of items are relatively less important; they

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✓ The percentage of investment required is about 20% of

C Category ✓ ‘C’ category of items do not require much investment; it