16 Marks: -

1. What is significance of the term Variance in standard costing? Explain

all the Material Variances with numerical illustration.

 Performance Evaluation: Variances allow businesses to measure performance by

comparing actual results with predetermined standards. A favorable variance indicates
better-than-expected performance, while an unfavorable variance points to areas
needing improvement.

 Cost Control and Efficiency: Variance analysis identifies deviations in cost or

efficiency, enabling management to pinpoint inefficiencies and implement corrective
actions to control future costs.

 Budgetary Control: Variance analysis helps maintain budgetary discipline by

highlighting deviations from the planned budget, fostering accountability at different
managerial levels.

 Decision-Making: Managers use variances to make informed decisions regarding

pricing, production methods, resource allocation, and cost reduction strategies.

 Early Problem Detection: Variances act as early warning signs for potential
issues, such as price fluctuations, production bottlenecks, or inefficient resource
usage.

 Improved Forecasting: By analyzing past variances, businesses can improve their

standard-setting processes and refine their future forecasts.

 Strategic Insights: Variances can provide insights into external factors such as
market changes, supplier pricing trends, or competitive pressures.

Material Variances
1. Material Cost Variance (MCV):
MCV=(Standard Cost of Materials−Actual Cost of Materials)
2. Material Price Variance (MPV):
MPV=(Standard Price−Actual Price)×Actual Quantity
3. Material Usage Variance (MUV):
MUV=(Standard Quantity−Actual Quantity)×Standard Price
Material Mix Variance (MMV):
MMV=(Actual Quantity at Standard Proportion−Actual Quantity)×Standard Price\
text{MMV} = (\text{Actual Quantity at Standard Proportion} - \text{Actual
Quantity}) \times \text{Standard
Price}MMV=(Actual Quantity at Standard Proportion−Actual Quantity)×Standard Pric
e
4. Material Yield Variance (MYV):
MYV=(Standard Output for Actual Input−Actual Output)×Standard Price per Unit\
text{MYV} = (\text{Standard Output for Actual Input} - \text{Actual Output}) \times \
 text{Standard Price per
Unit}MYV=(Standard Output for Actual Input−Actual Output)×Standard Price per Unit
Numerical Illustration:
 Standard Price per kg = ₹50
 Actual Price per kg = ₹55
 Standard Quantity = 100 kg
 Actual Quantity = 110 kg
 Standard Output = 95 units
 Actual Output = 90 units
Calculations:
1. Material Cost Variance:
MCV=(100 kg×₹50)−(110 kg×₹55)=₹5,000−₹6,050=−₹1,050(U)\text{MCV} = (\
text{100 kg} \times \text{₹50}) - (\text{110 kg} \times \text{₹55}) = ₹5,000 - ₹6,050 =
-₹1,050 (U)MCV=(100 kg×₹50)−(110 kg×₹55)=₹5,000−₹6,050=−₹1,050(U)
2. Material Price Variance:
MPV=(₹50−₹55)×110 kg=−₹5×110=−₹550(U)\text{MPV} = (\text{₹50} - \text{₹55}) \
times \text{110 kg} = -₹5 \times \text{110} = -₹550 (U)MPV=(₹50−₹55)×110 kg=−
₹5×110=−₹550(U)
3. Material Usage Variance:
MUV=(100 kg−110 kg)×₹50=−10×₹50=−₹500(U)\text{MUV} = (\text{100 kg} - \
text{110 kg}) \times \text{₹50} = -10 \times ₹50 = -₹500
(U)MUV=(100 kg−110 kg)×₹50=−10×₹50=−₹500(U)
4. Material Yield Variance:
MYV=(95 units−90 units)×₹50=5×₹50=−₹250(U)\text{MYV} = (\text{95 units} - \
text{90 units}) \times ₹50 = 5 \times ₹50 = -₹250
(U)MYV=(95 units−90 units)×₹50=5×₹50=−₹250(U)

2. Describe briefly the main features of Process costing. Compare Job

Costing with process costing.

Continuous Production Flow:

a. Process costing is suitable for industries where production is continuous, and

identical or similar products are manufactured, such as chemicals, textiles, and
food processing.

Sequential Processes:

b. Production is carried out in a series of processes or stages, and costs are

accumulated for each process.

Cost Accumulation by Process:

c. Costs are collected and assigned to each process or department rather than
individual products or jobs.
 Homogeneity of Products:

d. The output from each process is standardized and indistinguishable, making it

unnecessary to track costs by individual units.

Average Cost Per Unit:

e. The total costs for a process are divided by the number of units produced to
determine the average cost per unit.

Work-in-Progress (WIP):

f. At the end of a period, there may be incomplete units in a process. These are
valued using the concept of equivalent units of production (EUP).

Normal and Abnormal Losses:

g. Normal Loss: A part of the process and included in cost calculation.

h. Abnormal Loss/Gain: Treated separately in costing and not included in the
cost of production.

Cost Transfer Across Processes:

i. Costs incurred in one process are transferred to the next process until the final
stage, where the finished product is valued.

Division of Costs:

j. Process costing divides costs into direct material, direct labor, and overheads.
These are accumulated for each process.

Joint and By-Products:

k. In some cases, process costing also accounts for joint products and by-
products, allocating costs appropriately based on relative sales value or other
methods.
3. Job Costing Process Costing
A costing method used to
A costing method used for continuous
Definition determine the cost of specific,
production processes with identical units.
unique jobs or orders.
Nature of Customized or unique production, Continuous and standardized
Production tailored to specific customer orders. production with uniform products.
Unit of Costs are accumulated for each Costs are accumulated for each process
Costing specific job or order. or department.
Suitable for industries like construction, Suitable for industries like oil
Industries
furniture making, shipbuilding, and custom refining, cement manufacturing,
Using It
manufacturing. and textiles.
Cost Costs are directly traced to Costs are allocated to processes and
Assignment individual jobs. averaged over all units.
Type of Product Unique, heterogeneous products. Homogeneous, identical products.
Production Volume Low volume, high variety. High volume, low variety.
WIP is generally not significant WIP is valued using the concept of
Work-in-
because jobs are tracked equivalent units of production
Progress (WIP)
individually. (EUP).
Cost per job = Total costs of the job Cost per unit = Total costs of the
Costing
(direct materials, direct labor, process / Total units produced (or
Methodology
overheads). equivalent units).
Losses and Losses are not commonly recorded Normal and abnormal losses are
Gains at the job level. accounted for separately.
Cost Cost reconciliation is done at Costs are reconciled for each process,
Reconciliation the job level. considering losses and WIP.
Construction of a building, a custom- Manufacturing of chemicals, beverages, or
Examples
made machine. pharmaceuticals.
Time Costs are accumulated over the time taken Costs are accumulated for a specific
Period to complete a job. accounting period.

4. What do you understand by Absorption of overhead? Describe various

methods of absorption of factory overhead.
Absorption of overhead refers to the process of allocating or apportioning overhead
costs to individual units of production, departments, or cost centers. Overheads
typically include indirect costs like rent, utilities, maintenance, and administrative
expenses, which cannot be directly attributed to a specific product or service.
Absorption ensures that every unit produced or service delivered includes a fair
share of these costs, thereby determining accurate product costs for pricing,
profitability analysis, and financial reporting.
1. Direct Material Cost Percentage Method
Overheads are absorbed based on the percentage of direct material cost incurred.
 Formula:
OAR=Total OverheadsTotal Direct Material Cost×100\text{OAR} = \frac{\text{Total
Overheads}}{\text{Total Direct Material Cost}} \times
100OAR=Total Direct Material CostTotal Overheads×100
 Example: Total Overheads = ₹50,000; Total Material Cost = ₹2,00,000
OAR=₹50,000₹2,00,000×100=25%\text{OAR} = \frac{\text{₹50,000}}{\text{₹2,00,000}} \
times 100 = 25\%OAR=₹2,00,000₹50,000×100=25%
If a product uses ₹10,000 worth of material, the absorbed overhead = ₹10,000 × 25% =
₹2,500.
2. Direct Labor Cost Percentage Method
Overheads are allocated based on the percentage of total labor cost.
 Formula:
OAR=Total OverheadsTotal Direct Labor Cost×100\text{OAR} = \frac{\text{Total Overheads}}
{\text{Total Direct Labor Cost}} \times 100OAR=Total Direct Labor CostTotal Overheads×100
 Example: Total Overheads = ₹60,000; Total Labor Cost = ₹1,50,000
OAR=₹60,000₹1,50,000×100=40%\text{OAR} = \frac{\text{₹60,000}}{\text{₹1,50,000}} \
times 100 = 40\%OAR=₹1,50,000₹60,000×100=40%
If labor cost for a job is ₹8,000, the absorbed overhead = ₹8,000 × 40% = ₹3,200.
3. Prime Cost Percentage Method
Overheads are absorbed as a percentage of the prime cost, which is the sum of direct
materials, direct labor, and direct expenses.
 Formula: OAR=Total OverheadsTotal Prime Cost×100\text{OAR} = \frac{\text{Total
Overheads}}{\text{Total Prime Cost}} \times
100OAR=Total Prime CostTotal Overheads×100
4. Direct Labor Hour Method
Overheads are absorbed based on the number of labor hours worked.
 Formula:
OAR=Total OverheadsTotal Labor Hours\text{OAR} = \frac{\text{Total Overheads}}{\text{Total
Labor Hours}}OAR=Total Labor HoursTotal Overheads
 Example: Total Overheads = ₹80,000; Total Labor Hours = 10,000
OAR=₹80,00010,000=₹8 per hour.\text{OAR} = \frac{\text{₹80,000}}{\text{10,000}} = ₹8 \
text{ per hour.}OAR=10,000₹80,000=₹8 per hour.
If a job takes 15 labor hours, absorbed overhead = ₹8 × 15 = ₹120.
5. Machine Hour Rate Method
Overheads are absorbed based on machine hours used, suitable for automated industries.
 Formula:
OAR=Total OverheadsTotal Machine Hours\text{OAR} = \frac{\text{Total Overheads}}{\
text{Total Machine Hours}}OAR=Total Machine HoursTotal Overheads
 Example: Total Overheads = ₹1,00,000; Machine Hours = 20,000
OAR=₹1,00,00020,000=₹5 per hour.\text{OAR} = \frac{\text{₹1,00,000}}{\text{20,000}} = ₹5 \
text{ per hour.}OAR=20,000₹1,00,000=₹5 per hour.
If a job uses 50 machine hours, absorbed overhead = ₹5 × 50 = ₹250.
6. Units of Output Method
Overheads are allocated based on the number of units produced.
  Formula:
OAR=Total OverheadsTotal Units Produced\text{OAR} = \frac{\text{Total Overheads}}{\
text{Total Units Produced}}OAR=Total Units ProducedTotal Overheads
 Example: Total Overheads = ₹40,000; Units Produced = 8,000
OAR=₹40,0008,000=₹5 per unit.\text{OAR} = \frac{\text{₹40,000}}{\text{8,000}} = ₹5 \
text{ per unit.}OAR=8,000₹40,000=₹5 per unit.

5. Define EOQ? Explain the method of computing EOQ with the help of
graph. What are the benefits of EOQ in terms of costs, time and
transparency in procurement of materials?
6. Analyse and evaluate both marginal costing and absorption costing in
relation to their appropriateness.
Aspect Marginal Costing Absorption Costing
Considers only variable Considers both variable and
Cost Focus
production costs. fixed production costs.
Allocated to products and
Fixed Costs Treated as period costs, directly
included in inventory
Treatment charged to P&L.
valuation.
Inventory Valued at variable production Valued at total production
Valuation cost. cost (variable + fixed).
Profit Profit depends on contribution Profit depends on full cost
Calculation margin. recovery.
Focuses on contribution margin
Decision- Provides a long-term view
for pricing and short-term
Making by including fixed costs.
decisions.
Best for short-term decision- Suitable for financial
Suitability
making. reporting and compliance.
Appropriateness of Each Method
Marginal Costing:
 Appropriate For:
o Short-term decision-making, such as pricing, accepting special orders, or
evaluating profitability of product lines.
o Situations where fixed costs are sunk and do not affect decision outcomes.
o Internal management purposes like CVP and breakeven analysis.
 Inappropriate For:
o External financial reporting due to non-compliance with standards.
o Long-term decisions where fixed cost recovery is crucial.
 Absorption Costing:
 Appropriate For:
o External financial reporting and statutory compliance.
o Long-term strategic planning, where fixed costs must be fully recovered.
o Industries with high fixed costs, ensuring their inclusion in product pricing.
 Inappropriate For:
o Short-term decisions requiring marginal cost analysis.
o Situations where inventory levels fluctuate significantly, as it may distort
profitability.

7. Evaluate various methods of absorption of overhead expenses in a

factory. Justify apportionment of common expenses into different
heads giving appropriate reasons.
8. Compare and contrast among financial accounting, cost accounting
and management accounting.
Financial Accounting
 Definition: Focuses on recording, summarizing, and reporting the financial
transactions of an organization to external stakeholders like investors, regulators, and
creditors.
 Purpose: To provide a true and fair view of the financial position and performance of
a company in compliance with accounting standards and regulations.
Cost Accounting
 Definition: Deals with the recording, classification, analysis, and allocation of costs
associated with production or operations.
 Purpose: To determine the cost of products, services, or processes and to assist in
cost control and decision-making.
Management Accounting
 Definition: Involves the use of financial and non-financial data to provide information
for internal management for planning, decision-making, and control.
 Purpose: To aid in strategic and operational decision-making, focusing on the future
and optimizing performance.

2. Key Areas of Focus

Financial Management
Aspect Cost Accounting
Accounting Accounting
Cost
Historical financial Decision-making
Focus determination and
performance. and strategy.
control.
Internal
External Internal
Audience management and
stakeholders. management.
executives.
 Financial Management
Aspect Cost Accounting
Accounting Accounting
Governed by No mandatory
No mandatory
Regulation standards (GAAP, rules; company-
rules; flexible.
IFRS). specific.
Time Past and present-
Past-oriented. Future-oriented.
Orientation oriented.
Financial Budgets,
Cost sheets,
Output statements (P&L, forecasts, variance
reports.
balance sheet). reports.

9. Write notes on Balanced score card and EVA.

Balanced Scorecard (BSC)
Definition:
The Balanced Scorecard, developed by Robert Kaplan and David Norton, is a
performance management framework that goes beyond traditional financial metrics.
It incorporates both financial and non-financial measures across four perspectives to
provide a balanced view of organizational performance.

Key Perspectives of BSC:

1. Financial Perspective:
o Focuses on profitability and value creation for shareholders.
o Typical Metrics:
 Revenue growth.
 Operating income.
 Return on investment (ROI).
 Economic Value Added (EVA).
2. Customer Perspective:
o Measures customer satisfaction, retention, and market share.
o Typical Metrics:
 Customer satisfaction index.
 Customer retention rates.
 Market share.
3. Internal Business Processes Perspective:
o Evaluates the efficiency and quality of internal processes.
o Typical Metrics:
 Cycle time.
 Defect rates.
 Process improvement initiatives.
4. Learning and Growth Perspective:
o Focuses on employee development, innovation, and organizational culture.
o Typical Metrics:
  Employee satisfaction and retention.
 Training hours per employee.
 Innovation index.

Advantages of BSC:
1. Comprehensive Approach:
o Combines financial and non-financial metrics, providing a holistic view.
2. Strategic Alignment:
o Links operational activities to long-term organizational strategy.
3. Focus on Continuous Improvement:
o Encourages innovation and learning to sustain growth.
Limitations of BSC:
1. Implementation Complexity:
o Requires significant effort to identify relevant metrics and ensure alignment.
2. Subjectivity:
o Non-financial measures may be subjective and harder to quantify.
Practical Application:
 Widely used by companies to translate strategic objectives into actionable goals.
 Example: A manufacturing firm uses BSC to improve customer satisfaction while
ensuring financial profitability and operational efficiency.

2. Economic Value Added (EVA)

Definition:
Economic Value Added (EVA) is a financial performance metric developed by Stern
Stewart & Co. that measures a company's true economic profit. It represents the
value created above the cost of capital employed in the business.

Formula:
EVA=Net Operating Profit After Taxes (NOPAT)−(Capital Employed×Cost of Capital)\
text{EVA} = \text{Net Operating Profit After Taxes (NOPAT)} - (\text{Capital Employed}
\times \text{Cost of Capital})EVA=Net Operating Profit After Taxes (NOPAT)−
(Capital Employed×Cost of Capital)
 NOPAT: Net profit adjusted for taxes and non-operating items.
 Capital Employed: Total capital invested in the business.
 Cost of Capital: Weighted average cost of debt and equity financing.

Interpretation:
 Positive EVA: Indicates value creation, as the company earns more than the cost of
capital.
 Negative EVA: Suggests value destruction, as the company fails to cover its cost of
capital.

Advantages of EVA:
1. Focus on Value Creation:
 o Aligns performance evaluation with shareholder wealth maximization.
2. Disciplined Capital Use:
o Encourages efficient use of capital by highlighting its cost.
3. Comprehensive Metric:
o Adjusts for accounting distortions to reflect true economic profit.
Limitations of EVA:
1. Complex Calculation:
o Requires adjustments to financial statements, making it resource-intensive.
2. Short-Term Bias:
o May discourage long-term investments due to a focus on immediate returns.

Practical Application:
 Used by organizations to evaluate performance and incentivize managers.
 Example: A retail chain uses EVA to assess the profitability of individual stores,
ensuring they generate returns exceeding their cost of capital.

6 Mark: -
1. Distinguish between cost centre and cost unit.
Cost Centre:
 Definition: A cost centre is a department, location, or individual activity within an
organization where costs are incurred but not directly linked to revenue generation.
 Purpose: Used for tracking and controlling costs in specific areas of operation.
 Types:
o Production Cost Centres: Directly involved in production (e.g., assembly
lines).
o Service Cost Centres: Provide support services (e.g., maintenance, canteen).
 Examples:
o A machine shop in a factory.
o The IT department of an organization.
Cost Unit:
 Definition: A cost unit is a unit of measurement used to ascertain the cost of a
product, service, or activity.
 Purpose: Helps in determining the cost per unit of output or service.
 Examples:
o For electricity generation: Kilowatt-hour.
o For transport services: Passenger kilometer.
Key Differences:

Aspect Cost Centre Cost Unit

A location or function A unit of product/service for cost
Definition
incurring costs. calculation.
Purpose Cost control and Cost calculation per unit of output.
 Aspect Cost Centre Cost Unit
accountability.
Abstract (department,
Nature Tangible (units like kg, hours).
activity).
Assembly line, maintenance
Examples Tonne of cement, unit of electricity.
unit.

2. What is inter process profit?

Definition:
Inter-process profit refers to the notional profit added when transferring goods or
services from one process to another within the same organization. This is commonly
used in process costing systems to evaluate the profitability and efficiency of
individual processes.
Purpose:
1. Encourages efficiency and accountability for each process.
2. Helps in comparing process profitability as if they were standalone units.
3. Assists in managerial decision-making by evaluating the performance of each
process.
Example:
 A manufacturing company has two processes:
1. Process A produces semi-finished goods costing $50/unit and transfers them
to Process B.
2. Process B adds further value and sells the final product for $120/unit.
o If a notional profit of $20/unit is added during the transfer from Process A to
Process B, the cost for Process B becomes $70/unit instead of $50/unit.

3. Briefly describe Labour Variance.

Labour variance is a component of variance analysis in standard costing, focusing on
differences between actual and standard labor performance.
Types of Labour Variances:
1. Labour Rate Variance (LRV):
o Measures the difference between the actual wage rate paid and the standard
wage rate.
o Formula: LRV=(Standard Rate−Actual Rate)×Actual Hours Worked\text{LRV} =
(\text{Standard Rate} - \text{Actual Rate}) \times \text{Actual Hours
Worked}LRV=(Standard Rate−Actual Rate)×Actual Hours Worked
2. Labour Efficiency Variance (LEV):
o Measures the efficiency of labor in terms of time taken.
o Formula:
LEV=(Standard Hours Allowed−Actual Hours Worked)×Standard Rate\
text{LEV} = (\text{Standard Hours Allowed} - \text{Actual Hours Worked}) \
 times \text{Standard
Rate}LEV=(Standard Hours Allowed−Actual Hours Worked)×Standard Rate
3. Labour Idle Time Variance (LITV):
o Measures the cost of idle or unproductive time.
o Formula: LITV=Idle Hours×Standard Rate\text{LITV} = \text{Idle Hours} \
times \text{Standard Rate}LITV=Idle Hours×Standard Rate
4. Labour Yield Variance (LYV):
o Evaluates the impact of labor yield on production output.
Significance:
 Identifies inefficiencies in wage payments and productivity.
 Helps control costs and improve labor management.

4. Distinguish between Budgetary control and standard costing

Aspect Budgetary Control Standard Costing
A system that sets budgets and A technique that determines standard
Definition monitors actual performance against costs for operations and analyzes
them. variances.
Achieving overall financial and operational Controlling costs and analyzing
Purpose
targets. deviations.
Focus Broader, covering all financial aspects. Specific to costs and variances in production.
Includes revenue, expenses, and non-cost Focuses on material, labor, and overhead
Scope
items. costs.
Time Forward-looking with periodic Past-oriented with detailed variance
Orientation comparisons. analysis.
Example Annual sales budget. Labour efficiency variance for a production line.

5. Explain Machine Hour Rate.

Explain Machine Hour Rate
Definition:
The Machine Hour Rate (MHR) is the cost of operating a machine for one hour. It
includes both fixed and variable costs associated with running a machine.
Formula:
MHR=Total Costs of Operating the MachineTotal Machine Hours\text{MHR} = \frac{\
text{Total Costs of Operating the Machine}}{\text{Total Machine
Hours}}MHR=Total Machine HoursTotal Costs of Operating the Machine
Components of Costs:
1. Fixed Costs:
o Depreciation, insurance, and maintenance.
2. Variable Costs:
o Power, fuel, and operator wages.
Steps to Calculate:
1. Compute total fixed and variable costs.
2. Determine machine hours available.
3. Apply the formula.
 Advantages:
 Accurate cost allocation to products or jobs.
 Facilitates cost control by identifying machine-related inefficiencies.
Example:
 A machine incurs $10,000 in annual fixed costs and $5/hour in variable costs. If it
operates 2,000 hours annually: MHR=10,000+(5×2,000)2,000=10 per hour.\
text{MHR} = \frac{10,000 + (5 \times 2,000)}{2,000} = 10 \text{ per
hour.}MHR=2,00010,000+(5×2,000)=10 per hour.

6. Distinguish between Joint Product and Byproduct.

Aspect Joint Product Byproduct
Two or more products of nearly equal value A secondary product of lesser value
Definition
produced from the same process. from the same process.
Significant, forming a main source of Insignificant, often incidental to
Value
revenue. production.
Purpose of Produced intentionally as primary Produced unintentionally as a
Production outputs. residual output.
Butter and cheese from milk; petrol Molasses from sugar production; sawdust
Examples
and diesel from crude oil. from timber processing.
Cost Costs are allocated based on a rational Costs may be negligible or
Allocation basis, e.g., sales value. allocated minimally.
Accounting Treated as major revenue items in Treated as incidental revenue or
Treatment financial statements. credited to main product costs.

7. What do you mean by Cost Reduction?

Definition:
Cost reduction is the process of identifying and implementing measures to lower the
per-unit cost of goods or services without compromising their quality or
functionality. It is a continuous process that focuses on efficiency, waste elimination,
and innovation.
Key Features:
1. Permanent Reduction:
o Seeks lasting cost savings rather than temporary cuts.
2. No Quality Compromise:
o Ensures that cost savings do not affect product or service quality.
3. Focus on Efficiency:
o Involves improving processes, utilizing resources effectively, and eliminating
waste.
Techniques of Cost Reduction:
1. Process Improvement:
o Streamlining production processes.
2. Material Substitution:
o Using cost-effective alternatives without impacting quality.
3. Technology Upgradation:
 o Automating processes to reduce labor costs.
4. Standardization:
o Reducing variations in product design or components.
Example:
 A manufacturing company replaces a costly material with a cheaper alternative of
similar quality, resulting in a 5% cost reduction per unit.

8. Discuss the functional Budgets.

Definition:
Functional budgets are detailed budgets prepared for individual business functions,
aligning with the master budget. Each budget focuses on specific aspects of
operations like sales, production, or marketing.
Key Types of Functional Budgets:
1. Sales Budget:
o Estimates revenue from sales.
o Example: Monthly sales forecast of $500,000 for Q1.
2. Production Budget:
o Projects the quantity of goods to be produced based on sales forecasts.
o Formula:
Production Requirement=Sales Forecast+Desired Closing Inventory−Opening I
nventory\text{Production Requirement} = \text{Sales Forecast} + \
text{Desired Closing Inventory} - \text{Opening
Inventory}Production Requirement=Sales Forecast+Desired Closing Inventory
−Opening Inventory
3. Material Budget:
o Estimates the quantity and cost of raw materials required for production.
o Example: 1,000 kg of steel @ $5/kg.
4. Labour Budget:
o Estimates labor hours and costs.
o Example: 500 hours @ $20/hour.
5. Overhead Budget:
o Projects factory overheads like power, maintenance, and rent.
o Example: $10,000/month for utilities.
6. Cash Budget:
o Plans inflows and outflows of cash.
o Ensures liquidity to meet expenses.
Importance:
 Facilitates detailed planning.
 Aligns resources with organizational objectives.
 Helps monitor performance and control deviations.

9. Explain Break Even Analysis in brief.

Explain Break-Even Analysis in Brief
 Definition:
Break-even analysis determines the point where total revenue equals total costs,
resulting in no profit or loss. It helps in understanding the sales volume required to
cover costs.
Formula:
Break-Even Point (Units)=Fixed CostsSelling Price per Unit−Variable Cost per Unit\
text{Break-Even Point (Units)} = \frac{\text{Fixed Costs}}{\text{Selling Price per Unit} -
\text{Variable Cost per Unit}}Break-
Even Point (Units)=Selling Price per Unit−Variable Cost per UnitFixed Costs
Key Components:
1. Fixed Costs:
o Costs that remain constant irrespective of production (e.g., rent, salaries).
2. Variable Costs:
o Costs that vary with production (e.g., raw materials, direct labor).
Example:
 Fixed costs = $10,000.
 Selling price = $50/unit.
 Variable cost = $30/unit.
BEP (Units)=10,00050−30=500 units.\text{BEP (Units)} = \frac{10,000}{50 - 30} =
500 \text{ units.}BEP (Units)=50−3010,000=500 units.
Importance:
 Assists in pricing and cost control.
 Aids in decision-making for production planning.

10.Explain Labour Hour Rate with example.

Definition:
The Labour Hour Rate is the cost of direct labor for one hour of work. It is calculated
by dividing the total labor costs by the total labor hours worked.
Formula:
Labour Hour Rate=Total Labour CostsTotal Hours Worked\text{Labour Hour Rate} = \
frac{\text{Total Labour Costs}}{\text{Total Hours
Worked}}Labour Hour Rate=Total Hours WorkedTotal Labour Costs
Example:
 Total labor cost = $12,000.
 Total hours worked = 1,000 hours.
Labour Hour Rate=12,0001,000=$12/hour.\text{Labour Hour Rate} = \frac{12,000}
{1,000} = \text{\$12/hour.}Labour Hour Rate=1,00012,000=$12/hour.
Application:
 Used for job costing and resource allocation in manufacturing and service industries.

11.How do you apportion the overhead? With examples?

Definition:
 Overhead apportionment is the process of distributing indirect costs (e.g., rent,
utilities) across departments or cost centers based on rational bases.
Methods of Apportionment:
1. Direct Allocation:
o Assigns overhead directly to a department based on usage.
o Example: Power cost allocated to departments based on machine hours.
2. Proportionate Basis:
o Allocates overhead using a common base.
o Bases include:
 Floor Area: Rent distributed based on space occupied.
 Number of Employees: HR expenses based on the number of workers.
Example:
 Total rent = $10,000.
 Floor area:
o Dept A: 1,000 sq. ft.
o Dept B: 2,000 sq. ft.
Rent Apportioned to A=1,0003,000×10,000=3,333\text{Rent Apportioned to A} = \
frac{1,000}{3,000} \times 10,000 = 3,333Rent Apportioned to A=3,0001,000
×10,000=3,333 Rent Apportioned to B=2,0003,000×10,000=6,667\text{Rent
Apportioned to B} = \frac{2,000}{3,000} \times 10,000 =
6,667Rent Apportioned to B=3,0002,000×10,000=6,667
12.How do you treat Abnormal Loss in Process Costing?
Definition:
Abnormal loss refers to losses exceeding the expected level due to unforeseen
circumstances like equipment failure or material wastage.
Treatment:
1. Valuation:
o Valued at the same cost per unit as normal output.
o Abnormal loss = Units lost × Cost per unit.
2. Accounting Treatment:
o The cost of abnormal loss is transferred to a separate abnormal loss account.
o The realizable value (if any) from abnormal loss is deducted.
Example:
 Normal output = 1,000 units @ $5/unit.
 Abnormal loss = 50 units.
 Scrap value = $2/unit.
Abnormal Loss Cost=50×5=250\text{Abnormal Loss Cost} = 50 \times 5 =
250Abnormal Loss Cost=50×5=250 Net Loss=250−(50×2)=150\text{Net Loss} = 250 -
(50 \times 2) = 150Net Loss=250−(50×2)=150
The net loss of $150 is debited to the Profit & Loss account.
Significance:
 Highlights inefficiencies or unexpected issues in the production process.
 Helps management take corrective actions.
13.What is cost accounting? Discuss its important objectives in a business
entity?
Definition:
Cost accounting is a branch of accounting that focuses on recording, analyzing, and
controlling costs associated with production, operations, or services. It provides
detailed insights into cost structures to assist in decision-making and performance
evaluation.
Objectives of Cost Accounting:
1. Ascertainment of Cost:
o Determines the cost of a product, service, or activity by analyzing material,
labor, and overhead expenses.
2. Cost Control:
o Identifies inefficiencies and implements measures to reduce waste and
unnecessary expenditure.
3. Cost Reduction:
o Focuses on reducing costs through process improvements, better resource
utilization, and innovation.
4. Profitability Analysis:
o Assesses the profitability of different products or services by comparing costs
with revenues.
5. Inventory Valuation:
o Helps in determining the value of raw materials, work-in-progress, and
finished goods for accurate financial reporting.
6. Decision-Making Aid:
o Provides cost data for decisions like pricing, outsourcing, or discontinuing a
product line.
7. Budget Preparation:
o Facilitates the preparation of budgets to forecast expenses and revenues.
8. Performance Evaluation:
o Compares actual costs with standard costs to evaluate departmental and
employee efficiency.
Importance in Business:
 Enhances resource efficiency.
 Aids in competitive pricing strategies.
 Supports strategic planning and policy-making.

14.Difference between fixed cost and variable cost? Give suitable

examples, how these costs do affect the price of the good?
Definition:
 Fixed Costs: Costs that remain constant regardless of production levels (e.g., rent,
salaries).
 Variable Costs: Costs that vary directly with production levels (e.g., raw materials,
direct labor).
 Key Differences:

Aspect Fixed Cost Variable Cost

Remains constant in the short Fluctuates with production
Nature
term. volume.
Per-unit cost decreases with
Behavior Per-unit cost remains constant.
volume.
Factory rent, insurance Raw materials, power
Examples
premiums. consumption.
Effect on Does not vary with Directly impacts unit cost and
Price production. pricing.
Effect on Pricing:
 Fixed costs spread over more units as production increases, reducing per-unit costs.
 Variable costs determine the incremental cost of producing additional units.
Example:
1. Fixed cost = $10,000; production = 1,000 units:
o Cost per unit = $10.
2. If production increases to 2,000 units:
o Cost per unit = $5.

15.Comparison between performance budgeting and zero-based

budgeting?
Zero-Based Budgeting
Aspect Performance Budgeting
(ZBB)
Allocates resources based on Starts budgeting from zero
Definition
departmental performance. for all activities.
Incremental budgeting with Requires justification for all
Approach
performance evaluation. expenses.
Achieving objectives and Eliminating unnecessary
Focus
outcomes. expenditures.
Evaluation Based on past performance Based on activity necessity
Criteria metrics. and priority.
Funds allocated based on last Each department justifies
Example
year's performance. its need for funding.

16.Compare between FIFO and LIFO method of inventory valuation and

their implications?
Aspect FIFO (First-In, First-Out) LIFO (Last-In, First-Out)
 Oldest inventory items are used or sold Latest inventory items are used or sold
Definition
first. first.
Impact on Lower cost during inflation (older Higher cost during inflation (newer
Costing costs used). costs used).
Tax Lower cost of goods sold (COGS), higher Higher COGS, lower taxable
Implications profit. income.
Reflects actual physical flow of Suitable for matching current costs with
Relevance
inventory. revenue.
Example Stock bought at $10 and $12; COGS = $10 first. COGS = $12 first.
 FIFO is preferred for accurate balance sheets (lower COGS during inflation).
 LIFO reduces tax liability during inflation but is less common due to global
accounting standards.
17.Briefly explain ABC method of material procurement and its
advantages for the organization?
Definition:
The ABC (Always, Better Control) method classifies inventory into three categories
based on importance:
 A Items: High value, low quantity.
 B Items: Moderate value and quantity.
 C Items: Low value, high quantity.
Advantages:
1. Efficient Resource Allocation:
o Focuses managerial attention on high-value items.
2. Cost Control:
o Minimizes storage and handling costs for low-value items.
3. Stock Optimization:
o Reduces overstocking and understocking risks.
4. Time Management:
o Simplifies procurement and monitoring of less critical items.
Example:
 A: Machines ($50,000/unit), 10 units.
 B: Components ($1,000/unit), 100 units.
 C: Screws ($0.50/unit), 10,000 units.

18.What are the problems associated with marginal costing?

Exclusion of Fixed Costs:

a. Ignores fixed costs, which are crucial for long-term decision-making.

Unsuitable for External Reporting:

b. Not accepted under GAAP or IFRS for financial reporting.

Simplistic Assumptions:
 c. Assumes linear cost and revenue behavior, which may not hold in real-world
scenarios.

Short-Term Focus:

d. Prioritizes short-term contribution over long-term profitability.

Difficult in Multi-Product Businesses:

e. Allocating fixed costs across multiple products is challenging.

No Incentive for Cost Control:

f. Ignores fixed cost efficiencies or inefficiencies.

Example:

A company eliminates a product based on marginal cost analysis but incurs losses due
to unallocated fixed costs.

19. Describe briefly the main features of process costing?

Process costing is a method used in industries where production is continuous and
units of output are homogeneous. It is commonly applied in industries like chemicals,
oil refining, and food processing, where identical or similar products are produced in
large quantities.
Key Features:
1. Continuous Production:
o Process costing is suitable for businesses where production is continuous and
products are indistinguishable from one another.
2. Cost Flow:
o Costs (materials, labor, and overhead) are accumulated by department or
process rather than by individual job or product.
3. Unit Costs:
o Cost per unit is calculated by dividing the total cost for a period by the
number of units produced.
4. Inventory Valuation:
o Work-in-progress inventory is valued using weighted average or FIFO (first-in,
first-out) methods.
5. Process Accounts:
o Separate accounts are maintained for each stage of the production process,
with costs transferred from one process to another.
6. Standard Costing:
o In many cases, standard costs are used to control and measure variances in
production costs.
7. Abnormal Losses and Gains:
 o Any losses or gains during production (e.g., due to spoilage) are separately
accounted for and valued.
8. Cost Allocation:
o Costs such as direct materials, labor, and overheads are allocated to the
processes based on usage or predefined rates.

20.What is meant by methods of costing? Discuss any two?

Methods of costing are techniques used to determine the cost of production or
services, helping businesses analyze their profitability. The choice of costing method
depends on the nature of production processes, products, or services.
Common Methods of Costing:
1. Job Costing:
o Definition: Job costing is used when products or services are produced based
on specific customer requirements. Each job or order is treated as a separate
cost unit.
o Key Features:
 Costs are traced to specific jobs (e.g., construction projects, custom
manufacturing).
 A job cost sheet is maintained for each order, recording direct
materials, labor, and overheads.
 Suitable for industries like construction, shipbuilding, and custom
furniture manufacturing.
o Example: A custom car manufacturer records costs for each car built for a
specific client.
2. Process Costing:
o Definition: Used when production is continuous and products are
homogeneous. Costs are assigned to a process, and the cost of each unit is
derived by averaging the total costs.
o Key Features:
 Production is done in continuous processes (e.g., chemical production,
food processing).
 Costs are accumulated by process and then divided by the number of
units produced to compute cost per unit.
 Suitable for industries where products are identical or similar.
o Example: A company producing soft drinks continuously allocates costs to
each process in the production line (e.g., mixing, bottling).

21.What are the techniques of costing? Explain one technique commonly

used by the management?
Techniques of costing are methods or approaches used by businesses to allocate and
control costs. These techniques ensure that a business can monitor its financial
performance and make informed decisions.
Common Techniques of Costing:
1. Marginal Costing:
o Definition: Marginal costing involves calculating the cost of producing one
additional unit, focusing on variable costs.
o Key Features:
 Only variable costs (direct materials, direct labor, and variable
overheads) are considered in the calculation of cost.
 Fixed costs are treated as period costs and are not included in the cost
of goods produced.
 It is useful for decision-making, especially in pricing and break-even
analysis.
o Example: A company producing T-shirts calculates the additional cost for
producing one more T-shirt (marginal cost).
2. Standard Costing:
o Definition: Standard costing involves assigning predetermined costs to
various elements of production, and then comparing these standards with
actual costs to analyze variances.
o Key Features:
 Helps businesses to control costs by setting benchmarks.
 Standard costs are established for materials, labor, and overheads.
 Variances are analyzed regularly to identify areas of inefficiency.

22.What is process costing and its features? Give examples of four

industries where it is applied?
Process costing is a method used to allocate costs to products that are produced in a
continuous, repetitive process, resulting in homogeneous products.
Key Features of Process Costing:
 Continuous Production: Products move through a series of processes with a constant
flow.
 Homogeneous Products: All units produced are identical or nearly identical.
 Accurate Cost Allocation: Costs are accumulated for each department or process and
are then divided by the number of units produced.
 Use of Process Accounts: Costs are tracked in separate process accounts for each
stage of production.
 Handling of Abnormal Loss: Abnormal losses are separated and treated as a special
expense.
Examples of Industries:
1. Oil Refining: Continuous production of refined petroleum products from crude oil.
2. Pharmaceuticals: Manufacturing of medicines through continuous processes.
3. Chemicals: Production of chemicals like acids, dyes, or fertilizers.
4. Cement: Cement production involves several stages such as crushing, grinding, and
packaging.
23.Difference between job costing and contract costing? Explain various
methods of calculations of notional profit in contract costing?
Aspect Job Costing Contract Costing
Nature of Used for specific, custom Used for large-scale, long-term
Work jobs or orders. projects.
Short-term or one-time Long-term, often spanning
Duration
production. multiple years.
Cost is assigned to a specific Cost is assigned to a specific
Costing Basis
job. contract or project.
Example Furniture manufacturing. Construction projects.
Methods of Calculating Notional Profit in Contract Costing:
1. Percentage Completion Method:
o Notional profit is calculated based on the percentage of contract completion.
The formula is:
Notional Profit=(Contract Cost to DateTotal Estimated Cost)×Total Profit\
text{Notional Profit} = \left(\frac{\text{Contract Cost to Date}}{\text{Total Estimated
Cost}}\right) \times \text{Total
Profit}Notional Profit=(Total Estimated CostContract Cost to Date)×Total Profit
2. Sales Method:
o Profit is recognized based on the value of work certified or sales invoiced up
to a certain date.
3. Completion Method:
o Notional profit is recognized only when the contract is completed, meaning
all costs have been incurred.

24.What are the advantages of setting up a budgetary control in a

manufacturing industry?
Definition:
Budgetary control is a system where management sets financial targets (budgets)
and compares actual performance to ensure that operations are conducted within
planned parameters.
Advantages:
1. Improved Financial Planning:
o Budgeting helps in projecting future financial needs, enabling better
allocation of resources.
2. Cost Control:
o By comparing actual costs with budgeted costs, any deviations can be
promptly identified and corrective action taken.
3. Motivation and Accountability:
 o Employees and departments are more motivated to meet targets and are
held accountable for their performance.
4. Efficient Resource Allocation:
o Helps management in allocating resources to areas with the highest priority
and need, ensuring optimum utilization.
5. Performance Evaluation:
o Regular comparison of actual performance with budgeted performance
highlights areas of inefficiency and provides a basis for corrective action.
6. Forecasting and Flexibility:
o Budgetary control helps in forecasting future trends, allowing businesses to
remain flexible in adjusting to market or production changes.
7. Improves Decision-Making:
o With clear financial targets and regular reports, management can make
informed decisions regarding production, pricing, and investments.

25.What are merits of flexible budget?

A flexible budget is a financial plan that adjusts for variations in production or sales
volume, unlike a fixed budget that remains unchanged regardless of these factors.
Flexible budgets are particularly useful in environments where activity levels can vary
significantly. This tool allows businesses to adapt to changing circumstances and
provides more accurate and meaningful performance analysis.
Merits of Flexible Budget:
1. Adjusts for Activity Levels:
o A flexible budget automatically adjusts for changes in the volume of activity,
such as changes in production levels, sales, or services rendered. This ensures
that budgeted figures are more in line with the actual performance, providing
a more realistic picture.
2. Improved Performance Evaluation:
o Flexible budgeting allows for a more accurate comparison of actual
performance against expected results. Since it adjusts to the actual level of
activity, it avoids the unrealistic comparison of budgeted figures that were
based on a different activity level.
3. More Accurate Cost Control:
o By adjusting for fluctuations in volume, the flexible budget helps managers
control costs more effectively. For example, if the volume of production
decreases, the budget will reflect a decrease in variable costs, which helps to
manage the costs of production more accurately.
4. Helps in Variance Analysis:
o It makes it easier to analyze variances because the flexible budget provides
updated budget figures based on actual activity levels. Variances in both fixed
and variable costs can be analyzed, which gives managers insight into which
areas need improvement.
5. Better Forecasting:
 o It assists in revising future budgets based on actual operational data, thereby
providing more accurate forecasts. Since the flexible budget adapts to actual
operational levels, it gives a clearer picture of future needs and potential
risks.
6. Promotes Accountability:
o With flexible budgets, it becomes easier to assess the performance of
departments or managers based on their specific contributions. Since the
budget reflects actual output, it encourages departments to stay within their
variable cost limits while aiming for efficiency.
7. Helps in Decision Making:
o It provides more useful information for decision-making. Since the flexible
budget adjusts for changes in activity levels, managers can use it to make
decisions about pricing, production, and resource allocation.
8. Helps in Identifying Cost Drivers:
o It enables identification of cost behavior (variable vs. fixed costs), allowing
businesses to understand what drives costs and to focus on managing those
areas more effectively.

26.Which items are not included while computing total cost of goods or
services?
Items Not Included in Total Cost of Goods or Services:
1. Non-Operating Expenses:
o Examples: Interest on loans, taxes, and other financial costs not directly tied
to the production process.
o These costs relate to financing and operating a business but do not impact
the direct cost of producing goods or services.
2. Capital Expenditures:
o Examples: Purchase of land, machinery, or other long-term assets.
o These are treated as capital investments and are depreciated over time. They
are not included in the cost of production, but the depreciation of assets may
be factored in.
3. Distribution and Marketing Costs:
o Examples: Advertising, sales commissions, delivery costs.
o These costs are part of the operating expenses of the business, but they are
not directly related to manufacturing or providing services.
4. Administrative Expenses:
o Examples: Salaries of office staff, utilities for administrative offices, general
office supplies.
o While necessary for running the business, these expenses are not directly
involved in producing goods or services.
5. Research and Development (R&D) Costs:
o Examples: Expenses incurred in developing new products or improving
existing products.
 o R&D is a significant cost for many companies, but it is treated as a period
expense and is not included in the cost of individual goods or services unless
the R&D is directly linked to the product’s production process.
6. Interest Expense:
o Example: Interest paid on loans or credit used to finance the production
process.
o Interest expense is related to financing and does not reflect the cost incurred
during production.
7. Income Taxes:
o Example: Corporate income taxes based on the company’s overall
profitability.
o Taxes are not directly tied to production and are excluded from the cost of
goods sold or services provided.
8. Non-Manufacturing Labor:
o Examples: Salaries for HR, accounting, or marketing staff.
o These labor costs are important for the business, but they are considered part
of operating expenses, not directly related to the production of goods or
services.
9. Abnormal Losses:
o Examples: Wastage or spoilage that occurs outside of normal production.
o Abnormal losses are typically excluded from the cost of goods sold and are
treated separately for accounting purposes.
10. Dividend Payments:
o Example: Payments to shareholders in the form of dividends.
o These are financial allocations from profits and do not form part of the direct
cost of manufacturing goods or providing services.