Work Book : Cost Accounting
Chapter – 1 INTRODUCTION TO COSTING ACCOUNTING
1. Choose the correct answer:
(i) (d) (ii) (a)
2. Match the following:
Answer:
3. True or false:
1. Cost centre is a location, person or item of equipment for which cost may be ascertained.
1. Choose the correct answer:
- (i) Which of the following items is not included in preparation of Cost Sheet?
(a) Carriage inward (b) Purchase returns (c) Sales commission (d) Interest paid
- (ii) Cost Control represents:
(a) Efforts made towards achieving target or goal
(b) the achievement in reduction of cost
(c) existence of concealed potential savings in standards or norms (d) a corrective function
(i) (d) (ii) (a)
2. Match the following:
Answer:
3. True or false:
1. Cost centre is a location, person or item of equipment for which cost may be ascertained.
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A
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Automobile
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Accounts Handled
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B
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Cement
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Number of vehicles
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C
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BPO
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Kilometre, Passenger-Kilometre
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D
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Transport
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Tonne
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A
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Automobile
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Number of vehicles
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B
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Cement
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Tonne
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C
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BPO
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Accounts Handled
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D
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Transport
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Kilometre, Passenger-Kilometre
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Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 1
Work Book : Cost Accounting
Answer:
1.True
4. Fill in the blanks:
(i) Costs which involves immediate payment of cash. Salaries, wages, etc is known as ..........
(ii) Centre is a segment of a business that is responsible for all the activities involved in the production and sales of products, systems and services is called ..........
Answers:
The main differences between Financial and Cost Accounting are as follows:
1.True
4. Fill in the blanks:
(i) Costs which involves immediate payment of cash. Salaries, wages, etc is known as ..........
(ii) Centre is a segment of a business that is responsible for all the activities involved in the production and sales of products, systems and services is called ..........
Answers:
- (i) Explicit Cost;
- (ii) Cost Centre
The main differences between Financial and Cost Accounting are as follows:
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Financial Accounting
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Cost Accounting
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(a) It provides the information about the business in a general way. i.e Profit and Loss Account, Balance Sheet of the business to owners and other outside partners.
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(a) It provides information to the management for proper planning, operation, control and decision making.
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(b) It classifies, records and analyses the transactions in a subjective manner, i.e according to the nature of expense.
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(b) It records the expenditure in an objective manner, i.e according to the purpose for which the costs are incurred.
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(c) It lays emphasis on recording aspect without attaching any importance to control.
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(c) it provides a detailed system of control for materials, labour and overhead costs with the help of standard costing and budgetary control.
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(d) It reports operating results and financial position usually at the end of the year.
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(d) It gives information through cost reports to management as and when desired.
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(e) Financial Accounts are accounts of the whole business. They are independent in nature.
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(e) Cost Accounting is only a part of the financial accounts and discloses profit or loss of each product, job or service.
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(f) Financial Accounts records all the commercial transactions of the business and include all expenses i.e Manufacturing, Office, Selling etc.
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(f) Cost Accounting relates to transactions connected with Manufacturing of goods and services, means expenses which enter into production.
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(g) Financial Accounts are concerned with external transactions i.e transactions between business concern and third party.
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(g) Cost Accounts are concerned with internal transactions, which do not involve any cash payment or receipt.
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(h) Only transactions which can be measured in monetary terms are recorded.
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(h) Non-Monetary information like No of Units/ Hours etc are used.
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Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
Page 2
Work Book : Cost Accounting
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(i) Financial Accounting deals with actual figures and facts only.
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(i) Cost Accounting deals with partly facts and figures and partly estimates / standards.
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(j) Financial Accounting do not provide information on efficiencies of various workers / Plant & Machinery.
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(j) Cost Accounts provide valuable information on the efficiencies of employees and Plant & Machinery.
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(k) Stocks are valued at Cost or Market price whichever is lower.
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(k) Stocks are valued at Cost only.
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(l) Financial Accounting is a positive science as it is subject to legal rigidity with regarding to preparation of financial statements.
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(l) Cost Accounting is not only positive science but also normative because it includes techniques of budgetary control and standard costing.
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(m) These accounts are kept in such away to meet the requirements of Companies Act as per Sec 128 & Income Tax Act Sec 44AA.
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(m) Generally Cost Accounts are kept voluntarily to meet the requirements of the management, only in some industries Cost Accounting records are kept as per the Companies Act.
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6. What are the different elements of cost
Answer:
The elements of cost are shown in the following table:
Direct Material + Direct Labour + Direct Expenses = Prime Cost Indirect Material+ Indirect Labour + Indirect Expenses = Overheads
7. Write short notes on Cost Centre, Profit Centre, Responsibility Centre and Cost Unit.
Answer:
Cost centre: cost centre can be termed as a location, a person, or an item of equipment (or a group of them) in or connected with an undertaking, in relation to which costs ascertained and used for the purpose of cost control. The determination of suitable cost centres as well as analysis of cost under cost centres is very helpful for periodical comparison and control of cost. In order to obtain the cost of product or service, expenses should be suitably segregated to cost centre. In a manufacturing concern, the cost centres generally follow the pattern or layout of the departments or sections of the factory and accordingly, there are two main types of cost centres as:- (i) Production Cost Centre: These centres are engaged in production work i.e engaged in converting the raw material into finished product, for example Machine shop, welding shops...etc (ii) Service Cost Centre: These centres are ancillary to and render service to production cost centres, for example Plant
Answer:
The elements of cost are shown in the following table:
Direct Material + Direct Labour + Direct Expenses = Prime Cost Indirect Material+ Indirect Labour + Indirect Expenses = Overheads
7. Write short notes on Cost Centre, Profit Centre, Responsibility Centre and Cost Unit.
Answer:
Cost centre: cost centre can be termed as a location, a person, or an item of equipment (or a group of them) in or connected with an undertaking, in relation to which costs ascertained and used for the purpose of cost control. The determination of suitable cost centres as well as analysis of cost under cost centres is very helpful for periodical comparison and control of cost. In order to obtain the cost of product or service, expenses should be suitably segregated to cost centre. In a manufacturing concern, the cost centres generally follow the pattern or layout of the departments or sections of the factory and accordingly, there are two main types of cost centres as:- (i) Production Cost Centre: These centres are engaged in production work i.e engaged in converting the raw material into finished product, for example Machine shop, welding shops...etc (ii) Service Cost Centre: These centres are ancillary to and render service to production cost centres, for example Plant
Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 3
Work Book : Cost Accounting
Maintenance, Administration...etc The number of cost centres and the size of each vary from one undertaking to another and are dependent upon the expenditure involved and the requirements of the management for the purpose of control.
Responsibility Centre: A responsibility centre in Cost Accounting denotes a segment of a business organization for the activities of which responsibility is assigned to a specific person. Thus a factory may be split into a number of centres and a supervisor is assigned with the responsibility of each centre. All costs relating to the centre are collected and the Manager responsible for such a cost centres judged by reference to the activity levels achieved in relation to costs. Even an individual machine may be treated as responsibility centre for cost control and cost reduction.
Profit Centre: Profit centre is a segment of a business that is responsible for all the activities involved in the production and sales of products, systems and services. Thus a profit centre encompasses both costs that it incurs and revenue that it generates. Profit centres are created to delegate responsibility to individuals and measure their performance. In the concept of responsibility accounting, profit centres are sometimes also responsible for the investment made for the centre. The profit is related to the invested capital. Such a profit centre may also be termed as investment centre.
Cost Unit: Cost Unit is a device for the purpose of breaking up or separating costs into smaller sub divisions attributable to products or services. Cost unit can be defined as a ‘Unit of product or service in relation to which costs are ascertained’. The cost unit is the narrowest possible level of cost object. It is the unit of quantity of product, service of time (or combination of these) in relation to which costs may be ascertained or expressed. We may, for instance, determine service cost per tonne of steel, per tonne-kilometre of a transport service or per machine hour. Sometimes, a single order or contract constitutes a cost unit which is known as a job. A batch which consists of a group of identical items and maintains its identity through one or more stages or production may also be taken as a cost unit. A few typical examples of cost units are given below:
Responsibility Centre: A responsibility centre in Cost Accounting denotes a segment of a business organization for the activities of which responsibility is assigned to a specific person. Thus a factory may be split into a number of centres and a supervisor is assigned with the responsibility of each centre. All costs relating to the centre are collected and the Manager responsible for such a cost centres judged by reference to the activity levels achieved in relation to costs. Even an individual machine may be treated as responsibility centre for cost control and cost reduction.
Profit Centre: Profit centre is a segment of a business that is responsible for all the activities involved in the production and sales of products, systems and services. Thus a profit centre encompasses both costs that it incurs and revenue that it generates. Profit centres are created to delegate responsibility to individuals and measure their performance. In the concept of responsibility accounting, profit centres are sometimes also responsible for the investment made for the centre. The profit is related to the invested capital. Such a profit centre may also be termed as investment centre.
Cost Unit: Cost Unit is a device for the purpose of breaking up or separating costs into smaller sub divisions attributable to products or services. Cost unit can be defined as a ‘Unit of product or service in relation to which costs are ascertained’. The cost unit is the narrowest possible level of cost object. It is the unit of quantity of product, service of time (or combination of these) in relation to which costs may be ascertained or expressed. We may, for instance, determine service cost per tonne of steel, per tonne-kilometre of a transport service or per machine hour. Sometimes, a single order or contract constitutes a cost unit which is known as a job. A batch which consists of a group of identical items and maintains its identity through one or more stages or production may also be taken as a cost unit. A few typical examples of cost units are given below:
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Industry/ Product
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Cost Unit
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Automobile
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Number of vehicles
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Cable
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Metres / kilometres
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Cement
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Tonne
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Chemicals/ Fertilizers
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Litre / Kilogram
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Gas
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tonne Gas Cubic Metre
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Power/ electricity
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Kilowatt Hour
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Transport
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Kilometre, Passenger-Kilometre
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Hospital
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Patient Day Hotel Bed Night
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Education
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Student year
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Telecom
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Number of Calls
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BPO Service
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Accounts handled
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Professional Service
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Chargeable Hours
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8. Distinguish between cost reduction and cost control
Answer:
Both Cost Reduction and Cost Control are efficient tools of management but their concepts and procedure are widely different. The differences are summarised below:
Answer:
Both Cost Reduction and Cost Control are efficient tools of management but their concepts and procedure are widely different. The differences are summarised below:
Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 4
Work Book : Cost Accounting
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Cost Control
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Cost Reduction
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(a) Cost Control represents efforts made towards achieving target or goal.
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(a) Cost Reduction represents the achievement in reduction of cost.
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(b) The process of Cost Control is to set up a target, ascertain the actual performance and compare it with the target, investigate the variances, and take remedial measures.
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(b) Cost Reduction is not concern with maintenance of performance according to standard.
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(c) Cost Control assumes the existence of standards or norms which are not challenged.
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(c) Cost Reduction assumes the existence of concealed potential savings in standards or norms which are therefore subjected to a constant challenge with a view to improvement by bringing out savings.
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(d) Cost Control is a preventive function. Costs are optimized before they are incurred.
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(d) Cost Reduction is a corrective function. It operates even when an efficient cost control system exists. There is room for reduction in the achieved costs under controlled conditions.
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(e) Cost Control lacks dynamic approach.
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(e) Cost Reduction is a continuous process of analysis by various methods of all the factors affecting costs, efforts and functions in an organization. The main stress is upon the why of a thing and the aim is to have continual economy in costs.
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9. Define Explicit costs. How is it different from implicit costs?
Answer:
Explicit costs: These costs are also known as out of pocket costs. They refer to those costs which involves immediate payment of cash. Salaries, wages, postage and telegram, interest on loan etc. are some examples of explicit costs because they involve immediate cash payment. These payments are recorded in the books of account and can be easily measured. Main points of difference:
The following are the main points of difference between explicit and implicit costs. (i) Implicit costs do not involve any immediate cash payment. As such they are also known as imputed costs or economic costs. (ii) Implicit costs are not recorded in the books of account but yet, they are important for certain types of managerial decisions such as equipment replacement and relative profitability of two alternative courses of action.
Answer:
Explicit costs: These costs are also known as out of pocket costs. They refer to those costs which involves immediate payment of cash. Salaries, wages, postage and telegram, interest on loan etc. are some examples of explicit costs because they involve immediate cash payment. These payments are recorded in the books of account and can be easily measured. Main points of difference:
The following are the main points of difference between explicit and implicit costs. (i) Implicit costs do not involve any immediate cash payment. As such they are also known as imputed costs or economic costs. (ii) Implicit costs are not recorded in the books of account but yet, they are important for certain types of managerial decisions such as equipment replacement and relative profitability of two alternative courses of action.
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