Accounting

(a)What is cost accounting?

(b)What are its purposes??

(c)cost Accounting is a mixed blessing ..Discuss !

Generally Cost Accounting is the process of recording, classifying and

summarizing cost transactions and finding out results , interpretation of
cost sheets & cost control.

According to Bhabatosh Banerjee , Cost Accounting is a quantitative

method that accumulates , classifies , summarizes & interprets information
for three major purposes

Eg .

i)product or service costing..

ii)operational planning & control &

iii)Non-routine decisions.

The certified institute of Most Accountant of England (CIMAF) defines Cost

Accounting as --- That part of most accg that establishes budgets and
standard costs of operations processes, departments or products & the
analysis of variances, profitability or social use of funds.

According to J.Batty----Cost Accounting may be regarded as the systematic

approach to the measurement , recording & control of the sacrifice involved
in the transformation of resources , materials , labour and fixed assets.

**What are the purposes/necessity/advantages of Cost Accounting?

Ascertainment of cost: It will make possible ascertainment of cost--

(a)by products,processes,cost centers or departments in manufacturing

functions ;

(b)by services & departments in administrative function and

(c)by products , groups of products , salesman or areas in selling and

distribution function.

Accounting
Accounting
Inventory Management :

a) Systematic recording of materials.

b) Determination of stock level.
c) Ascertainment of optimum amount of materials to be ordered each time
an order is placed.
d) Materials and consumable stores are properly controlled and as a result
loss due to misappropriation , deterioration , absolerscence ,scrap and
defective worlss can be considerably reduced.

Labour Cost Control:

(a) A sound system of remuneration .

(b) An analysis of time-cost in production.
(c) Introduction of incentive scheme to reduce labour turmoil .

Cost Control : With the aid of standard costing in conjunction with

budgetary control cost may be predetermined , actual cost may be compared
with stsndard cost to develop variances according to originating causes. This
will reveal operating efficiency or inefficiency so that right action may be
taken by the right person at the right moment .

Managerial Decision Making : Cost data will be readily available add this
will facilitate many vital technical decisions such as-ISEWPURA

a) Introduction of new product .

b) Selection of most profitable product nux .
c) Exploration of additional Markets .
d) Whether to make or buy.
e) Problem of limiting factor.
f) Utilization of spare capacity.
g) Replacement of existing assets.
h) Appripal of proposed environment to meet expansion programme , etc
.

Report to Various Users : Adequate information is available for repoats to

various interested parties , such as-

a) Custories .
b) Creditories.
c) .

Accounting
Accounting
d) .
e) Share holders .
f) Government .
g) Trade associations .

Cost Comparison : Interfirm and Intrafirm cost consumption is facilitated .

Expenses are classified according to functions , elements of costs and

variability of these classifications will show the controllable or non-
controllable positions of costs .

(c) C/A is a mixed blessing Discuss High+ B.B.6.

C/A is a mixed blessing because it offers certain benefits and it has certain inherent
limitations resulting as a concomitant.

Advantages:
1. Ascertainment of cost.
2. Inventory Mgf.
3. Labour cost control
4. Cost control
5. Managerial decision Making.
6. Report to various parties.
7. Cost comparision
8. Reduction & Avoidance of inefficiency, waste
9. Reduction of cost
10. Determination of price
11. Maintenance of quality(QC)
12. Sound production
13. Efficient utilization of resource

Limitations:
a) The cost determination and analysis are done based on various assumptions. Such
assumptions may vary from person to person and lead to produce different information
on similar items.
b) Various method of costing are applied by various C/A accountant and consequently
result may not be coincide.
c) Usage of various method of dept. valuation of R/ae apportionment of O/H.
d) Application of C/A is very Expensive because a separate set of books are to be uept and
at least an accountant is to be appointed for this purpose .

Inspite of these above limitations C/A may be used as an effective technique in

deciding managerial decisions if it is applied carefully .

Accounting
Accounting

Distinguish between Cost unit and Cost centre:

Cost unit: The expression of product or service into some measures.It is a quantitative unit
of product or servive in relation to which cost are ascertained. For asertainment of cost, it is
necessary to express them in terms of physical measurement like number, weight,
volume,area,length or any other convenient units.

Cost center:- Any part of an enterprise in respect of which costs are ascertained related to
cost units for control purpose. It may be a location, person or item of equipment. Broadly
speaking, a cost centre may be of two types : personal cost centre which consists of a
person or group of persons ; Imperson at cost centre which consists of allocation or item of
equipment . fot the standpoint of functions, a cost centre may be of two types: (1)
production cost centre& (2) service cost centre./ Responsibility centre, More cc prepenseuss
cc-hamper accuracy

(b) what are the features of a good costing system./ Factors to be considered in instalating a
costing system ?

(1) objective:-A good c/system should be objective oriented. ( Identify the objective to be
achieved). The system to be introduced should be adapted to suit the general nature of the
business slt certain unavoidable alterations.

(2) Technical Aspects:-All the technical aspects e.g., nature of products , methods of
stages of production cycle etc. should be studied thoroughly in order to select the proper
method of costing.

(3) Participatory Mst :-The participation from all levels of mst is a prerequisite to successful
epsortion of any costing system.

(4) Details of Records :-Details of records to be maintained should be arranged. Complete

analyses at reasonable cost are desirable . The system to be introduced should cover all
important function, such as production, administration and sales.

(5) Standardisation :-Forms to be used by foreman, wisieersetc. should be standardized as

far as practicable . It should involve only minimum clericalwisieat different stages.

(6) Sound Communication :-Information should be communicaled as early as possible so

that necessary steps can be taken at the right time.

(7) Every original entry should be authorized by responsible person. This will ensure
reliability of data to be used for decision making purposes in future.

(8) It costs &fin. a/cs are to be maintained separately, arrangement should be made for
reconciliation of cost & fin. Profits.

Accounting
Accounting
(9) Easy to understand &snipo

(10) IC

(11) Application of scientic method & tools sto costing & budgetary control .

(12) Flexible.

c) Give a brief description of the following and mention the names of introdustries in which
each of these would be suitably applied.
A) Contract Costing
B) Output Costing
C) Process Costing
D) Operating Costing

A) Contract Costing: Contract costing is that form of specific order costing which applies
where work is undertaken to customers' special requirements and each order is of long
duration.The work is usually constructional in nature and hence undertaken in the premises
of customer.It is also referred to as Terminal Costing.In general the method is similar to Job
Costing.
Examples of industries where applicable
1) Housing Industries
2) Contruction of Bridge
3) Ship-building industries
4) Building-

B) Output Costing/ Single output/Unit Costing: This is used when manufacture is

continuous and the units are identical.The total production cost is divided by no. of units
produced to get unit or single unit cost.
Examples-This method is usually used in
1) Steel works 5) Flour mills
2) Breweries 6) Paper mills
3) Brick Field 7) Cement industry
4) Mines & collieries 8) Bakery

C) Process Costing: It refers to costing of process or operation involved in converting

materials into finished products.Order this method,cost of operation of each process and
cost of transfer are ascertained.This method is suitable for those industries where product
passes through distinct stages or processes.For example in case of textile mill,there are 3
distinct processes viz (1) Spinning (2) Weaving (3) Dyeing.
Examples:
1) Chemicals 8) Rubber

Accounting
Accounting
2) Oil 9) Food processor
3) Textile 10) Glass
4) Plastics 11) Mining
5) Paints 12) Cement
6) Flour 13) Meat pacling
7) Canneries

(d) operating costing :- It is suitable render to those industrics which render series in stead
of producing goods. The management accounting technology (CIMA) replaces operating
costing service/ function costing. Under this method, cost of providing and operating service
is aseertained and unit cost is found out by diving total cost by units of services rendered.
Composite units, such as ton-miles, passenger-miles, kilowatt-hour, bed-days etc are
generally used.

Examples:

1. Transport industries
2. Canteen
3. Hospital
4. Educational purposes
5. Power generating concern- electricity
6. Railway

Q. state the methods of costing applicable to the following-

a) ship-building

b) railway

c) hospital

d) printer

a) Ship building: contract costing-

Reasons:
1. Undertaken to customers special requirement
2. Is of long duration
3. Constructional relationship

b) Railway: operating costing- rendering services

c) Hospital: operating costing- rendering services
d) Printers: job costing- customers orders

Accounting
Accounting

1. Printers/ garments job costing

2. BRTC/railway- opareting
3. Food processor/ confectionary/ drag- batch/unit
4. Water/molercar/plane/cycle/equip- composit
5. Suger mill/ oil/ cloth.ruber mill- process
6. Houses/ bridge/ buildings- contract
7. Coal, oil,mine- unit costing

Q. (b) distinguish between Exp & cost

In general expired expenditure is exp and unexpired expenditure is cost.

The AICPA (American Institute of Cost field Public Accountants) committee on terminology
defines expenses as including all expired costs. The committee also suggests to use the the
expenses in case of fen accg bat the term cost in case of c/a.

In c/a, we use the term cost & not expenses.

Fineey & Millers- cost is the measure of the expenditure.

Q. explain brifly the measuring of the following types of costs:

1. historical cost 2. std cost 3. estimated cost 4. direct cost 5. Prime cost

6. opportunity cost 7. Sunle cost 8. Relevant cost 9. Policy cost

1. historical cost: it represents the actual cash payments or their equivalent at the time
of outlay for acquisition of assests. One of the mentionable limitation of h/c is that it
ignores market prices. It is usually not helpful in managerial decision making.

2. std cost: it is one of the most important control devices used in c/a. it is most
significally predetermined cost. Here std is set for each elements of cost in accordance with

Accounting
Accounting
past experience and future expectation for one unit of output. This std is compared with
actual cost later on to develop variances according to originating causes. It involves no cash
outlay.

3. estimated cost: it is predetermined cost. It does not involve any cash outlay. It plays a
vital role in managerial decision making. It is estimated or predetermined based on past
experiences and future expectation.

Suppose in 2002, a firm used 1000kgs of r/ms for tk 10000 @ tk 10ps leg. It is past
experience. Now if it is assumed that the cost of r/ms will increase by 5%, then the amount
for r/m will be 10500 for 2003.

4. direct cost: it includes direct mankind, direct labour and direct expenses. Direct
means that which can be identified with and allocated to cost centres or cost units.

5. Prime cost: the sum of DM,DL & DE is konown as prime cost & is found as follows:

Opening stock of r/m xx

add purchase of r/m xx

carring cost xx

________________________________________

Closing sale of r/m xx

________________________________________

d r/m consumed xx

add DL xx

DE xx

________________________________________

Prime cost xx

Accounting
Accounting
6. Opportunity is a hypothetical cost . It is the measurable advantage foregone as a result of
the rejection of alternative uses of resources , whether of R/Ms , labour or facilities. It does
not involve any cash outlay and is computed only for the purpose of comparision in the
contest of manages decision,hence does not find place in Fin. a/cs.

7. Sunk Cost : It represents historical cost which is irrecoverable in a given situation.For

example while concidering the replacement of an asset the capital loss or depreciated book
value of the existing asset may not be taken into a/c on the ground that this portion of the
cost having been already incurred in the past has no relevance to the present decision.

8. Relevent cost:They represent costs which are relevant/appropriate to adding the malling
of specific myt decision.These are expected future costs that will differ under
alternatives.Future vcs generally become revelent in a decision contest while Fes may be
irrelevant if they do not change in total.

9.Policy Cost : It represents cost inaccurance as a result of taking a particular policy

dicision.For example,owenership of assets will creat a change for dep.If the assets was not
purchased,the dep might not arise. Dep is therefore a policy cost,other terms used include
Fes &Period costs.

Q3.Classify Cost [FC,VC,DI,ID]

Cost classification is the process of grouping costs according to their common features or
characteristics . Cost can be classified according to:

1.Elements

2.Function

3.Behavior

4.Control variable

5.Normality

6.time basis

7.Decision making

A) Elements of Costs: Costs are classified primarily according to the factors upon which
expenditure is encoured , viz:

a) Material cost , i.e. the cost of commodities supplied to an undertaking.

b) Labour cost or wages, salaries,coms,bonuses etc for the employees of an undertaking:and

c)Expenses, the cost of services provided to an undertaking and the national cost of the use
of owned assets (eg.dep on plant & mach & building etc)

Accounting
Accounting
Tow droad further subdivisions of the elements of costs may be made as follows:

1.Direct Expenditure in

a.Materials

b.Labour and

c.Expenses

2.Indirect Expenditure in

a.Materials

b.Labour and

c.Expenses

Derect(MLE) means than which can be identified with allocated to cost centres or cost
units.

Indirect(MLE) means that which can not be identified with allocated to but can be
opportioned to or absorbed by,cost centres or cost units.

DM- clay in bricles,the wood in furniture,the leather shoes used in the factory.

IM-Sundry stores;

-small tools for general use;

-Materials consumed for repair and maintenance work.

-Fuel, lubricating oil etc, required for operating & maintaining plant &machinery.

DW-wages to supervisors.

Idle time wages

Misc allowances to labour

Wages payable to storeweeps, clarical stags

DE- Cost of special pattern, drawing or layout ;

-Exp. Leading to the receipt of acontract

IE- Ins.

-Rent,rates & taxes

Accounting
Accounting
-canteem Exp

-hospital

B) Funtionwise Classification : Costs which are generally incurred can be traced to the main
fanctions and named as :

a) Production Cost

b) Administrative Cost

c)

a) Production cost represent prime cost plus absorbed production O/H while Prime Cost
means the total cost of DMs,DL,DEs, absorbed production O/H refers to production O/H
such as of factory plant, indirect wages.

b) Administrative Cost: it refers to the cost of mgt and of secretarial, accg and administrative
service, which cannot be directly related to # Production, marketing, R&D functions of the
enterprise. In short, administrative costs are in the nature of indirect cost and include the
following :

a. Salaries of office staff, accountants & directors.

b. Maintenance of factory estate.

c. General administrative expenses.

d. Office supplies and exp.

e. Postage, stationary and telephone.

f. Rent rates and dep. of office building.

#C.MARKETING COST :
This is defined in the terminology of the CIMAE as follows:
The cost incurred in researching the potential markets and promoting products in
suitably attractive and at acceptable prices.

Marketing cost further analysed into-

a. Selling Cost,
b. Publicity Cost (Adv. & promotion)
c. Distribution Cost( warehosing delivering )

Selling Cost:

Accounting
Accounting
The cost incurred in securing orders usually including salesmen salaries, come and
travelling expenses, rent of sales rooms & offices training of salesmen and sales staff .

Publicity Cost (advertise & promotion) :

Cost incurred in advertising and promotion .

Distribution Cost :
The cost incurred in advertising saleable products and in delivering products to customers.
It includes rent, rates & dep. of warehouses; cost of ins, freight, export duty, packing,
shipping, maintenance of transport vans etc.

[*] Behaviourwise Classification:

Costs can be grouped according to their behavior as :

1. Variable cost
2. Fixed Cost
3. Semivariable or Semi-fixed cost
1.Variable Cost:
Cost which tends to follow (in the short term) the level of activity. It will tend to vary
directly with output. Examples of variable cost are,
a.DM, b.DL, c.DE, d. Variable O/H eg. Power, Fuel etc .

2.Fixed Cost:
It represent the cost which tend to remain unaffected by fluctuations in volume
within a relevant range and during a defined period of time .Examples,
a. Rent & rates ins, dep. of building,
b. office exp. Like postage, stationary ,
c. legal exp.
d. banee change, int on capital & debit.

3.Semi-Variable Cost:
These costs contains partly fixed and partly variable elements. These cost are thus
partly affected by fluctuations in the level of activity.
Examples include-
a. Normal maintenance of building and plant.
b. Salary of superiors
c. Dep of PEM
d. Service department wages.
e. Telephone charges.

Accounting
 Accounting

Cost
Element Function Variability/ Controllability
behaviour
Material Labour Expense Production Administrative Marketing Semi FC VC Non- con
--> --> --> --> VC controllable
#IM #IL #IE #Selling
#DM #DL #DE #Distribution
#Publicity

Accounting
Accounting
****Ques.# Distinguish between costing methods and costing techniques.Explain the
different methods & techniques of costing.

Method : means the way of asertaing some thing.

Technique: when a method is used to perform certain function then,

Methods of Costing
A.Job Costing B.Process Costing C.Firm Costing

Contract Batch Output Departmental Operation Operating

Costing Costing Costing costing Costing Costing

A.Job Costing : Many companies produce goods against orders.Job costing is suitable for
those enterprises where the world is under taken according to the order of customers & in
their case each order is known as Job Costing. Example, printer ,foundries.
a.Batch Costing : A batch of similar products is treated as a job . Costs are collected
according to batch order number and TC are divided by total numbers in a batch to arrive at
unit cost of each job.
Example, pharmaceuticals, biscuit,bokaries.

a) Contract Costing: It is that form of specific order costing which applies where work
is. Undertaken to customers special requirements and each order is of long duration.
The work is usually constructional and hence undertaken in the premises of customer
terminal Costing

B. Process Costing:

It refers to costing of process or operation involved in converting materials into finished

goods. Example: chemicals, textile, oil, plastic, paints, flour, rubber, canaries, food processor,
glass, mines etc.

a) Output, single output or unit costing: This is used when manufacture is continuous
and the units are identical. The TC is divided by the no. of units produced to get unit
cost. Example: steel work, breweries, brick field, mines & collieries, paper, flour,
mills etc.
b) Departmental Costing: The method of ascertaining the cost of operating a dept or cost
center. TC for each dept is ascertained and this is divided by total units produced in
that dept to arrive at unit cost.
c) Operation Costing: Cost of each operation in each stage of production or process is
separately ascertained. Thereafter the cost of F/Gs is determined.

Accounting
Accounting
d) Operating Costing: It is suitable to those industries which render services instead of
producing goods. The most accountant terminals function costing. Composite units,
such as bed-days, ton-miles, passenger-miles, kilowatt-hour etc. are generally used.
e) Composite or multiple costing: When job & process costing are used in conjunction
with each other, the method is known as composite costing. Example: motor cars,
aeroplane, cycles, tv, engines, radio & other complex products.
f) Farm costing: Here, the cost of produce is determined instead of product and
emphasis is given on time period. It is also known as period costing. Some of the
contributions come from nature and cost of them can not be measured in terms of
money.

TECHNIQUES

1. Absorption Costing:

In absorption costing fixed and variable costs are allocated to cost units and total
overheads are absorbed according to activity level. It is also termed as historical or traditional
costing. Since costs are across field after they have been incurred, it does not help to exercise
control on costs.

2. Standard Costing:

Control device standards are most scientifically fixed for each element of costs and
for revenues and actuals are compared with standards to develop variance in accordance with
originating causes. It is usually employed with conjunction with budgetary control. BC refers
to the establishment of budgets relating to responsibly of executives to the requirements of a
policy & the continuous comparison of actual with budgeted results, either to secure by
individual action the objective of that policy or to provide a basis for its revision.

3. Marginal Costing:

It refers to a principle whereby VCs are changed to cost units and the FCs
attributable to the relevant period is written off in full against the contribution for that period.
FCs are not treated as product costs. They are recorded from contribution. It is a valuable aid
to most in taking many important policy decisions, such as product pricing in times of
competition, whether to buy or make. Marginal costing is also known as variable or direct
costing.

4. Uniform Costing:

It means a common method & terminology used by a number of firm in the same
industry. The chief advantage is facility of inter-unit & inter-firm comparision.

Accounting
Accounting
COST

Q: Define cost, explain the following with suitable example:

1) Direct & indirect cost [p- identified with allocated to specific c/c]
2) Fixed & variable cost [level of activity] DN, DL, DE
3) Actual & standard cost [actually incurred on => prediction]
4) Commuted & discretionary cost.

Ans:

COST:

Cost is a sacrifice which is measurable in terms of money or moneys worth.

According to C I MAE,

Cost is the amount of expenditure (actual or notional) incurred on, or attributable to a

specific thing or activity.

Cost computably defined as a sacrifice, a foregoing or a release of something of value.

TC= The sum of all cost (actual or notional) incurred on or attributable to a

given volume under consideration.

AC= Unit cost computed by dividing TC by the volume involved.

MC= is the rate of change in TC per unit change in volume of output.

Differential Cost:

It represents change in TC at a particular level of activity with respect to another. It is

also known as incremental cost. Say, for producing 2000 units, TC is Tk 4000. For producing
5000 units TC is 9500. Here, Tk 5500 for additional 3000 units is differential cost.

Replacement Cost:

This is current cost of replacing an asset.

Imputed Cost:

It is a hypothetical cost and does not appear in the financial records. Nevertheless,
such costs involve a foregoing on the part of the person whose costs are being calculated. For
example, interest on own company, rent on premises etc. do not find their place in the ACs
as they are not payable but for determining cost figures at a comparable basis they may be
often included in costs.

Discretionary Cost:

They are FCs that arise from periodic, usually yearly, appropriation decisions that
directly reflect top most policies. These costs may not have any particular relation to volume

Accounting
Accounting
of activity. Examples: advertising, R&D, employee training etc. In contrast to committed
cost, these costs could be reduced almost entirely for a given year if circumstances demand.

Controllable Cost:

It is one of the most importantobjectives of Cost Accounting. These are the costs
which can be influenced by the action of an individual in an enterprise within a given time
span.

Q: Financial Accounting vs Cost Accounting

1. Definition
2. Objectives- Ascertainment of cost- Definition of profit in a specified period
3. Transaction- Only production and distribution cost transaction- Various transaction
4. Scope of transaction- Internal transaction- External transaction
5. Scope/ Manufacturing loan- Any concern
6. Time- Kept of production basis- Kept on periodic basis
7. Valuation of sale According to production cost- Conservation principles
8. Apportioned of O/H- According to predetermined rate- Based on actual count
9. Legal aspects- Not mandatory- Company law & tax law must be followed

**Cost accounting has been evolved from the limitations of financial accounting- critically
discuss

Relationship F/A & C/A

Recording
Supply information
Determine gross export of product/ labor
Influence of law

Accounting
Accounting

Accounting