Cost Accounting Question And Answers Pdf

[Gusatavo Lussier]

2Determination of selling price: A business unit is required to determine the selling price at which its products are to be sold. In doing so, a unit should fix up the selling price for its products in such a way so that the costs of the product are recovered. Moreover, in fixing selling prices, regard must be had to the cost structure, conditions of the market, types of consumers and the demand and supply of the product.

3. Analysis and classification of cost of production: Cost Accounting helps to analyse and classify various items of cost incurred which lead to the revelation of various forms of waste, whether of materials, time or expense. Analysis of the causes of unsatisfactory results may suggest possible remedial measures to attain efficiency in the utilisation of resources.

Ans. Cost Accounting helps management in making revenue decisions like pricing new products or reducing or increasing the price of a product. It also helps the management in taking short-term and long-term product mix decisions. Cost data also helps the management in achieving the best combination of factors being used in the business enterprises.

Cost data assists the management in making sound decisions like reducing price, increasing the volume of sales, increasing the price or improving turnover. In fact, the problem of properly regulating prices and output is largely dependent upon a knowledge of production, distribution and administrative costs per unit of product or of service.

Ans. (i) The cost accounting system provides data about profitable and unprofitable products or activities. By studying and interpreting cost data, the management can take corrective measures to improve the profitability of the concern.

(v) Cost data can be compared with the standard costs by the introduction of standard costing. Inter-firm comparisons will enable the management to study the causes of unfavorable developments and to institute procedures for their elimination.

(vi) Inefficiencies in plant operation are very costly. The inefficiencies do occur due to wastage of materials, use of obsolete machinery and wrong man power planning. Proper use of cost accounting may remove these inefficiencies.

(vii) Cost accounting helps the management in knowing the costs of different alternatives and selecting the most advantageous course of action. Decisions like produce or buy, continue or drop a product, operate or shut down, etc. and other short-term decisions can be made easily with the help of cost accounting data.

(x) An effective cost accounting system ensures maximum utilization of physical and human resources and helps the employees in achieving their basic goal of earning higher wages. It also helps the employer in maximising the profit of the concern.

Ans. Cost Accountancy is an art which has developed in course of time through theories and practices. The theories are based on reasoning and practical experience of cost accountants. Many of the theories have been recognised and accepted in due course of time. So, the accepted theories have grown up through changes to be recognised as conventions.

It is not a full proof system. Cost Accountancy is not regarded as an exact science in the sense that accepted principles of cost accounting still keep on changing with the passage of time. It suffers, like any other branch of accounting, from some limitations.

The greatest limitation of cost accounting is its failure to conform to any uniform procedure. No cost can be said to be exact as they involve a large number of conventions and flexible factors like, materials issue pricing based on FIFO, LIFO, Average or Standard costs; arbitrary allocation of overheads to cost centres; arbitrary allocation of joint costs; adoption of Marginal costs and Standard costs etc.

Ans. Every undertaking which wants to install costing system has to design the system in such a manner so that it can satisfy the needs of the concern. But there are certain principles which are to be considered before the introduction of costing system.

(c) Since the success of an efficient costing system depends on the cooperation of the staff, they should be taken into confidence and made to understand the utility of the system. So, confidence building is an essential factor for the installation of costing system; and

The selection of a cost centre depends upon a number of factors, namely, organisational division of work, condition of incidence of cost, communication aids and availability of information and needs of costing and management policy regarding the choice of a course of action from various alternatives.

(i) Cost centres identify the spheres of responsibilities. The manager of a particular cost centre is assigned the responsibility for the control of costs in relation to that particular cost centre. He remains accountable to the higher authority for cost escalation or wastage.

These centres are engaged in production work. It is a centre where production is carried on. Machine shops and welding shops are examples of production cost centre. Cost of direct materials, direct labour, chargeable expenses and factory overheads are charged to this centre.

The managers want to know the cost of something which helps them to take decisions in various areas of operation. The costs are accumulated and grouped in ways to help managers make decisions, such as evaluating the performance of subordinates and sub-units of the organisation, expanding or deleting products or territories, and replacing equipment etc.

Ans. Cost sheet is a statement wherein detailed information about costs is depicted and a total cost of product manufactured during a particular period of time is ascertained. The cost sheet is prepared for a particular period, e.g. monthly, quarterly etc.

The above definition clarifies that an efficient material control system should aim at efficient purchasing of materials, their efficient storing and efficient use and maintenance of proper records to provide material cost information for decision making and financial reporting to the management of a business firm.

Preventive costs are incurred to keep the labour turnover minimum. These costs are the costs of benefits extended to the working force for keeping them satisfied so that they do not leave the organisation.

Ans. I.C.M.A. London has defined Batch Costing as that form of specific order costing which applies where similar articles are manufactured in batches either for sale or use within the Company. In most of the cases the costing is similar to job costing. This is used when production consists of limited repetition work and a definite number of articles are manufactured in one batch.

Ans. Materials issued are allocated directly to the batch. Wages are also charged to the batch. For the calculation of wages, Time tickets are used which show the amount of time devoted on each batch order number by direct workers. Overheads are absorbed according to the suitable basis of absorption. Per unit cost is determined by dividing the total cost of the batch by the total batch quantity.

Contract costing is generally applied to business engaged in building or other construction work. The basic principles of contract costing are similar to those that are applied in job costing system.

(iii) Since a contract may run for a longer period, the question of assessment of profit on incomplete contract at the end of the accounting period naturally arises while such a question does not arise in case of job costing.

Ans. Job costing is used by organisations whose products or services can readily be identified by individual units or batches. Each receives varying inputs of direct materials, direct labour and factory overhead. Industries that use job order methods include construction, printing, aircraft, furniture and machinery.

Ans. Process costing is used in a variety of industries which include oil refining, food processing, paper, chemical and drug manufacture, paint and varnish manufacture, soap making, biscuit works, textiles, canning factories, box making, milk dairy etc.

Ans. Operating costing may be defined as the cost of the undertakings which provide and operate services. It is also known as service costing. Operating costing is a method of costing applied to determine the cost of rendering services by such undertakings as Airways, Railways, Road Transport, Hospitals, Electricity companies etc.

The unit of cost in these industries is not the job, product or process but the services rendered. So, it is a method of costing applied to undertaking which provides services. These services may be internally used e.g., Canteen, delivery van, boiler house etc. Some undertakings render services to the public like transport corporations, electricity generating companies, hospitals etc.

These services are known as external services. Therefore, operating or service costing is a method of determining the cost of services. Generally, operating costs are period costs. Expenses accumulated for a period, say, quarterly, monthly are related to the quantum of services rendered during the period.

In operating costing the main problem is to determine the suitable cost unit to be used for ascertainment of cost. A proper unit of cost must be selected in order to ascertain the cost per unit of services provided; this is a very difficult job.

After determining the unit of cost to which the total expenditure is to be allocated, the cost relating to the service rendered is collected. The cost thus collected is presented under the heads suitable for the purposes of control, i e, fixed expenditure and variable expenditure.

Thus, under operating costing method all costs are collected and classified as fixed and variable expenses. This distinction between fixed and variable costs helps cost control by drawing the attention of the management to the fixed costs.

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