1. Answer the following as directed: (any ten).

(a) Costing is a technique of Control cost. (Fill in the blank with appropriate
word)
(b) Cost Accounting is based on Estimated figures. (Fill in the blank with
appropriate word)
(c) Variable cost per unit remains constant. (State whether the statement is
true or false) Ans : True.
(d) Wages paid to factory supervisor is overhead. (State whether the
statement is true or false) Ans : True.
(e) Re-ordering level = Minimum consumption ✖ Minimum re-order period.
(State whether the statement is true or false) Ans : False.
(f) Which methods of valuing materials is suitable in terms of raising prices?
(1) LIFO.
(2) FIFO.
(3) HIFO.
(4) FILO. (Select the correct answer)
Ans : (1) LIFO.
(g) In which industry process costing is not used?
(1) Chemical.
(2) Textiles.
(3) Cement.
(4) Oil refinery. (Select the correct answer)
Ans : (1) Chemical.
(h) An abnormal loss is :
(1) due to the nature of process.
(2) due to the abnormal factors.
(3) None of the above two. (Select the correct answer)
Ans : (2) due to the abnormal factors.
(i) Costing provides all of the following information, except _______. (Fill in
the blank from the following options)
(1) product costs.
(2) cash forecasts.
(3) inventory value.
(4) cost of goods sold.
Ans : (2) cash forecasts.
(j) Define the term ‘costing’.
Ans: Costing is the process of determining the cost of a product, service, or
activity by analyzing all expenses involved, including materials, labour, and
overhead. It provides detailed insights into cost components to aid in
budgeting, pricing, and financial decision-making.
 (k) What is idle time?
Ans : Idle time refers to the period during which employees, machinery, or
production resources are unproductive or not in use due to factors such as
machine breakdowns, lack of materials, or scheduling inefficiencies. It
represents a loss of productive capacity and can impact overall efficiency and
costs.
(l) What is meant by cost-plus contract?
Ans : A cost-plus contract is an agreement where the contractor is paid for
all construction-related expenses plus an additional payment for profit. This
additional payment can be a fixed fee or a percentage of the costs incurred. It
ensures that all costs are covered while providing a profit margin to the
contractor.
OR.
A cost-plus contract is an agreement where the buyer pays the contractor for
all actual costs incurred plus an additional fee for profit.
(m) Write the meaning of ‘Imputed cost’ / ‘Notional cost’ in Cost Accounting.
Ans : In Cost Accounting, an imputed cost is a hypothetical cost that doesn’t
involve actual cash payment but represents the value of resources used, such
as the opportunity cost of using company-owned assets.
(n) What is meant by Cost Ledger Accounting?
Ans : Cost Ledger Accounting is a system that records and tracks all
cost-related transactions in a separate ledger. It helps in maintaining detailed
accounts of materials, labor, and overheads to determine the cost of products
or services.
(o) Identify the types of Specific Order Costing:
(1) Batch costing.
(2) Job costing.
(3) Process costing.
(4) Both (1) and (2) . (Select the correct answer)
Ans : (4) Both (1) and (2) . (Select the correct answer).

2. Answer the following questions:

(a) Write any two distinguishing features of cost unit and cost centre.
Ans:- Certainly! Here are two distinguishing features of cost unit and cost centre:

1. Purpose and Function:

- A cost centre is a segment or location within an organization, such as a department or
machine, where costs are accumulated and controlled. It is used for cost control and
budgeting purposes within the company.
- A cost unit, on the other hand, is a measure or quantity (like meter, kilogram, hour) in
which the costs of products or services are expressed. It is used for the valuation of
production and for comparison purposes.
2. Role in Cost Analysis:
- Cost centres are established to help in the analysis and understanding of operating costs,
and they do not directly contribute to profit but are responsible for incurring costs.
- Cost units are used to quantify the costs associated with a product or service, allowing for
the assessment of cost efficiency and profitability.

These features highlight the different roles that cost units and cost centres play in the
accounting and management of costs within an organization.

(b) What is economic order quantity?

Ans:- Economic Order Quantity (EOQ) is the ideal order quantity that a company should
purchase to meet demand while minimizing total inventory costs, which include holding
costs, shortage costs, and order costs. The EOQ model helps businesses determine the
optimal number of units to order so that they can minimize the costs associated with buying,
storing, and managing inventory.

The formula for calculating EOQ is:

where:
- Q = EOQ units
- D = Demand in units (typically on an annual basis)
- S = Order cost (per purchase order)
- H = Holding costs (per unit, per year)

This formula assumes that demand, ordering, and holding costs remain constant over time.
EOQ is a crucial part of inventory management, ensuring that the inventory level is optimal,
avoiding both excess stock and stockouts.

(c) State the meaning of overtime.

Ans:- Overtime refers to the hours an employee works beyond their regular scheduled
working hours³. In the context of employment, overtime typically means any time worked
over the standard workweek hours, which in many countries is 40 hours per week.
Employees who work overtime are often entitled to extra pay, commonly known as "overtime
pay," which is usually calculated at a higher rate than the normal hourly wage.

For instance, under the Factories Act, 1948 in India, employees are not allowed to work
more than 48 hours in a week, and any hours worked beyond this limit are considered
overtime. The employees are entitled to be paid at twice their ordinary rate of wages for the
overtime hours. The specific rules and rates for overtime pay can vary depending on the
country's labor laws and the individual's employment contract.

(d) State two features of indirect labour.

Ans:- There are two features of indirect labour:

1. Non-attributable to Specific Products: Indirect labour costs cannot be directly associated

with the production of specific goods or services. Unlike direct labour, which can be traced
back to individual products, indirect labour supports the production process but is not
involved in the actual creation of the products.

2. Treated as Overhead Costs: The costs of indirect labour are considered overheads. They
are necessary for the functioning of the production process but are not directly tied to the
hands-on manufacturing of goods. Instead, they are allocated across products and
processes as part of the overall overhead costs.

These features distinguish indirect labour from direct labour, which directly contributes to the
manufacture of specific products and can be directly allocated to those products.

(e) State two important features of contract costing.

Ans:- Certainly! Here are two important features of contract costing:

1. Project-Specific Accounting: Contract costing is typically used for project-oriented

businesses like construction and engineering projects. Each contract is treated as a
separate unit of cost for cost ascertainment, and all costs and revenues related to the project
are tracked and managed through the contract account.

2. Long-Term and Customized Contracts: Contracts under this costing method often involve
a long duration, sometimes spanning multiple accounting periods, and are tailored to the
customer's specific requirements. This includes a fixed period and price, with payments
made either upon completion or in installments based on the progress of the work.

These features help businesses evaluate and manage the costs associated with individual
projects, ensuring long-term efficiency and effectiveness.

(f) What is meant by 'minimum level' in stock control?

Ans:- The minimum level in stock control, also known as the minimum inventory level, is the
lowest quantity of a particular item that should be kept in stock at all times. It acts as a buffer
to prevent stockouts and ensure smooth operations, even if there are unexpected
fluctuations in demand or supply³. This level is calculated based on factors such as demand
forecasting, supplier lead time, and order costs. Maintaining the minimum level is crucial for
avoiding interruptions in production or service delivery due to a lack of inventory.

(g) What is machine hour rate?

Ans:- The machine hour rate is a measure used in cost accounting to allocate factory
overheads to products based on the number of hours a machine is operated. It is calculated
by dividing the total factory overheads incurred by a machine over a specific period by the
total number of hours the machine is run during that period. This rate helps in determining
the cost of operating a machine per hour and is particularly useful in industries where
machinery plays a significant role in production.

(h) What is meant by absorption of overheads?

 Ans:- Absorption of overheads is the process of allocating or charging overhead costs to
cost units. It involves distributing the overheads that have been accumulated for each cost
center over the products or services that pass through it. This ensures that each product or
service bears a fair share of the total overhead costs, making the cost accounting more
accurate and reflective of the actual expenses involved in production.

The overhead absorption rate is calculated using various bases such as direct labor hours,
machine hours, or direct materials, and is applied to the cost units to recover the overhead
costs in the cost of production. This method is essential for providing a complete view of the
total costs associated with the production of goods or services.

3. Answer any four of the following questions:

(a) Write five differences between Financial Accounting and Cost Accounting.
Ans:- Certainly! Here are five key differences between Financial Accounting and Cost
Accounting:

1. Purpose:
- Financial Accounting is designed to provide a snapshot of the financial health and
performance of a business to external stakeholders.
- Cost Accounting focuses on the internal management of costs for production, planning,
and control, helping in setting prices and managing budgets.

2. Type of Costs:
- Financial Accounting records only historical costs associated with financial transactions.
- Cost Accounting may use both historical and predetermined costs to estimate the cost of
production and services.

3. Users:
- Financial Accounting information is used by external parties such as creditors,
shareholders, customers, etc.
- Cost Accounting information is primarily used by the internal management of the
organization.

4. Valuation of Stock:
- In Financial Accounting, stock is valued at cost or net realizable value, whichever is less.
- In Cost Accounting, stock is always valued at cost.

5. Reporting Frequency:
- Financial Accounting reports are typically generated at the end of an accounting period,
which is usually annually.
- Cost Accounting reports are prepared more frequently and are used for operational
decision-making.

(b) Write a short note on ABC analysis of inventory control.

Ans:- ABC analysis is a method of inventory control that categorizes inventory items based
on their importance to the business. It's a technique that ranks items on demand, cost, and
risk data, and groups them into three classes: A, B, and C.
Here's a brief overview of each class:
- Class A: These are the most important items, usually representing about 10-20% of the
total inventory items but accounting for 70-80% of the annual consumption value. They
require tight controls and high accuracy in records.
- Class B: These items have a medium value, making up about 30% of the total inventory
and contributing to 15-20% of the annual consumption value. They have good records and
medium level controls.
- Class C: These are the least important items, often comprising 50% of the total inventory
but only accounting for about 5% of the annual consumption value. They have minimal
records and basic controls.

The ABC analysis is grounded in the Pareto Principle, which suggests that a small
percentage of items typically accounts for a large percentage of the value. This method
helps businesses focus on the most critical items that contribute the most to the revenue,
ensuring efficient use of resources and optimizing stock management.

(e) How is profit of an incomplete contract ascertained? Explain.

Ans:- The profit of an incomplete contract is ascertained using the percentage of completion
method. This method involves recognizing profit proportionally to the extent of work
completed on the contract. Here's a step-by-step explanation:

1. Determine the Stage of Completion: Assess how much of the contract has been
completed. This is typically done by comparing the cost incurred to date with the total
estimated cost.

2. Calculate Notional Profit: This is the profit that would be recognized if the contract were
completed. It's calculated by subtracting the cost incurred to date from the value of work
certified.

3. Ascertain Profit to be Recognized:

- If the work certified is less than 25%, no profit is recognized.
- If the work certified is 25% or more but less than 50%, then one-third of the notional
profit, adjusted for the cash received, is recognized.
- If the work certified is 50% or more, two-thirds of the notional profit, adjusted for the cash
received, is recognized.

4. Adjust for Cash Received: The profit recognized is further adjusted based on the
percentage of cash received from the contractee compared to the value of work certified.

5. Transfer to Profit and Loss Account: The calculated profit is then transferred to the Profit
and Loss Account, with the remaining profit treated as a provision for future uncertainties.

This method ensures that profit is recognized in a manner that reflects the actual work done
and helps in presenting a fair view of the company's financial performance during the
contract period.

(f) Explain the needs for reconciliation of cost and financial accounts.
 Ans:- Reconciliation of cost and financial accounts is a crucial process in accounting,
especially when both sets of accounts are maintained separately. Here are the needs for
reconciliation:

1. Identifying Discrepancies: It helps in identifying the reasons for differences in profit or loss
between cost and financial accounts.

2. Ensuring Completeness: Reconciliation ensures that no income or expenditure item has

been omitted and that there is no under- or over-recovery of overheads.

3. Verifying Accuracy: It aids in checking the arithmetical accuracy of both sets of accounts,
which is essential for effective cost ascertainment and control.

4. Reliability of Accounts: The process ensures the reliability of cost accounts for the correct
ascertainment of the cost of production.

5. Internal Control: It facilitates internal control by highlighting the variations causing an

increase or decrease in profit.

6. Coordination and Cooperation: Reconciliation promotes coordination and cooperation

between cost and financial accounting departments to generate correct and reliable
accounting data.

7. Managerial Decision-Making: It enables management to formulate policies regarding

overheads, depreciation, and stock valuation, which are crucial for managerial
decision-making.

The reconciliation process typically involves preparing a Reconciliation Statement or a

Memorandum Reconciliation Account to adjust the differences and ensure both sets of
accounts reflect the same financial position.

(g) Explain the concept of perpetual inventory system as a technique of effective material
control.
Ans:- The perpetual inventory system is a method of inventory management that records
inventory transactions in real-time as they occur. This system provides several advantages
as a technique of effective material control:

1. Real-Time Inventory Tracking: It continuously updates inventory levels, providing

immediate insight into stock quantities, which helps prevent stockouts and overstocking.

2. Accurate Financial Records: Since the inventory records are updated instantly, the
financial records reflect the current value of inventory, aiding in accurate financial reporting.

3. Improved Efficiency: The use of automated systems like barcode scanners and
point-of-sale systems reduces the need for manual counts and data entry, increasing
operational efficiency.
4. Better Decision Making: With up-to-date inventory information, managers can make
informed decisions about purchasing, production scheduling, and sales strategies.

5. Cost Savings: By minimizing the chances of excess inventory and optimizing stock levels,
businesses can save on storage and insurance costs.

6. Enhanced Customer Satisfaction: Knowing the exact inventory levels allows for better
customer service by providing accurate information on product availability.

Overall, the perpetual inventory system is a powerful tool for businesses to maintain control
over their materials and ensure that inventory levels are managed effectively.

(h) Mention five special features of a good costing system.

Ans:- A good costing system is essential for accurate cost determination and effective
management decision-making. Here are five special features of a good costing system:

1. Simplicity: The system should be simple to operate and easy to understand, avoiding
unnecessary complexity to ensure that it can be used effectively by all relevant personnel.

2. Relevance: It must be relevant to the specific needs of the business, reflecting the nature
and size of the company, and providing information that is useful for decision-making.

3. Accuracy: The data provided by the costing system should be accurate and reliable, as
this is critical for making informed business decisions and maintaining profitability.

4. Flexibility: A good costing system should be flexible enough to adapt to changes in the
business environment, including variations in production methods, product lines, and
economic conditions.

5. Economical: The benefits derived from the system should outweigh the costs of its
implementation and operation. It should provide cost information efficiently without becoming
a financial burden itself.

These features ensure that the costing system supports the business in controlling costs,
setting prices, and ultimately contributing to the strategic goals of the organization.

4. Answer any four of the following questions:

(a) What is cost accounting? Explain the objectives of cost accounting.
Ans:- Cost Accounting is a branch of accounting that focuses on recording, classifying,
analyzing, summarizing, and allocating costs associated with a process, and then
developing various courses of action to control the costs. Its goal is to advise the
management on the most appropriate course of action based on the cost efficiency and
capability.

The objectives of cost accounting are:

1. Ascertainment of Cost: Determining the cost per unit of different products or services by
accurately analyzing all costs involved in the production process³.

2. Cost Control: Identifying areas where costs can be reduced without sacrificing quality or
performance, and implementing measures to maintain optimal expenses³.

3. Determination of Selling Price: Helping in setting the selling price of products or services
by considering the cost of production and the desired profit margin³.

4. Budget Preparation: Assisting in the preparation of budgets by estimating future costs and
revenues, which aids in financial planning³.

5. Decision Making: Providing detailed cost information that helps management make
informed decisions regarding expansions, reductions, or modifications of operations³.

6. Cost Reduction: Identifying and eliminating unnecessary expenses to improve profitability

without compromising on quality or output³.

7. Performance Evaluation: Evaluating the efficiency of various departments or units by

comparing actual costs with standard costs³.

8. Financial Statement Analysis: Assisting in the analysis and finalization of financial

statements by providing detailed insights into operational costs³.

These objectives highlight the role of cost accounting in strategic planning, effective
resource utilization, and overall financial management within an organization..

(e) What is material control? Explain the purchase procedure to be maintained under
material control system.
Ans:- Material Control is a systematic approach to managing the procurement, storage, and
usage of materials in a way that maintains a regular and uninterrupted flow of materials in
the production pipeline. It ensures that the right quantity of materials of the required quality is
available at the right time, with minimal capital investment. This control is crucial for reducing
material costs, maintaining production schedules, meeting market demand, and avoiding
excessive investment in inventories.

The purchase procedure under a material control system typically involves the following
steps:

1. Recognition of Need: Identifying the requirement for materials based on production

schedules or stock levels.
2. Supplier Selection: Choosing suppliers based on criteria such as price, quality, reliability,
and service.
3. Placing the Order: Issuing purchase orders for the required materials with detailed
specifications and delivery schedules.
4. Follow-Up: Monitoring the status of the order to ensure timely delivery.
5. Receiving and Inspection: Accepting delivery of materials and inspecting them for quality
and quantity.
6. Invoice Payment: Processing the payment for the materials after verifying the invoice
details.
7. Record Maintenance: Keeping accurate records of all purchases, receipts, and payments
for future reference and audit purposes.
8. Vendor Relations: Maintaining good relationships with suppliers for future transactions.

These steps are designed to ensure that materials are available when needed, without tying
up too much capital in inventory, and to prevent production delays due to material shortages.

(f) What is labour turnover? What are various causes of labour turnover? Explain in brief.
Ans:- Labour turnover, also known as employee or staffing turnover, is the rate at which
employees leave an organization and are replaced by new employees. It encompasses all
separations, including voluntary resignations, layoffs, and dismissals.

The causes of labour turnover can be categorized into avoidable and unavoidable reasons:

1. Avoidable Causes: These are factors within the organization's control and often include:
- Lower wages compared to the market rate.
- Poor working conditions.
- Lack of recognition and appreciation for employee contributions.
- Limited opportunities for career advancement.
- Insufficient training and development programs.
- Inadequate incentives and benefits.
- Poor management and employee relations.

2. Unavoidable Causes: These are factors outside the organization's control and include:
- Employees leaving for better job opportunities.
- Personal reasons such as marriage, relocation, or health issues.
- Retirement due to old age.
- Termination due to indiscipline or organizational restructuring.

Understanding these causes helps organizations to implement strategies to reduce turnover,

thereby retaining valuable employees and maintaining operational efficiency.

(g) Discuss various bases for apportionment of overheads to cost centres.

Ans:- The apportionment of overheads to cost centres is a critical step in cost accounting,
ensuring that overhead costs are allocated fairly and accurately across different parts of the
organization. Various bases are used for this apportionment, depending on the nature of the
overhead and the cost centre. Here are some of the common bases for apportionment:

1. Floor Area: Overheads like rent, rates, heating, and lighting are often apportioned based
on the floor area occupied by each department.

2. Direct Labour Hours: Costs related to employee welfare, supervision, and labor insurance
can be apportioned on the basis of direct labor hours worked in each cost centre.

3. Machine Hours: Overheads such as depreciation, repair, and maintenance of machinery

are typically apportioned based on the machine hours used by each department.
4. Capital Values of Assets: Insurance and depreciation on plant and machinery can be
apportioned based on the capital values of assets in each department.

5. Number of Employees: Costs like canteen expenses, medical facilities, and personnel
department expenses can be apportioned based on the number of employees in each
department.

6. Output or Quantity Produced: Some overheads may be apportioned based on the quantity
of output or products produced by each department.

7. Value of Materials Used: Overheads can also be apportioned based on the value of
materials used in each cost centre.

8. Power Consumed: If the overheads are related to power consumption, they can be
apportioned based on the kilowatt-hours of electricity used by each department.

These bases are selected to reflect the extent to which each cost centre utilizes resources or
incurs costs, ensuring a fair and equitable distribution of overheads across the organization.

(h) What is job costing? What are the source documents used in job-costing? Explain the
procedure of job costing.
Ans:- Job costing is a method of costing where costs are assigned to specific jobs or
batches that are unique and typically carried out according to the customer's specifications.
It is particularly suitable for industries where products or services are produced on a
per-order basis rather than for mass production.

The source documents used in job costing include:

- Job Cost Sheet: Records and accumulates all costs assigned to a specific job.
- Materials Requisition Slips: Document the cost of direct materials used on a specific job.
- Time Tickets: Record the amount of labor time used for a specific job.
- Production Order: Authorizes the production department to produce a specified quantity of
a product.
- Other documents: Such as tools and spares order, inspection orders, etc., which are used
as control mechanisms to carry out the dispatching functions.

The procedure of job costing typically involves the following steps:

1. Order Receipt: A job begins when a customer places an order, and the job is assigned a
unique number.
2. Production Order: The production department is given an order to start work on the job.
3. Cost Accumulation: As the job progresses, all costs related to materials, labor, and
overheads are recorded using the source documents.
4. Cost Allocation: Indirect costs are allocated to the job using a predetermined overhead
rate.
5. Job Completion: Once the job is completed, the total costs are summed to determine the
job's total cost.
6. Cost Analysis: The actual costs are compared with the estimated costs to determine the
job's profitability and to identify any variances.
This process helps in ascertaining the cost of each job accurately, which is crucial for pricing,
cost control, and financial reporting.

(i) What is abnormal loss? State the causes of abnormal loss. Also explain the procedure of
calculating abnormal loss in process costing.
Ans:- Abnormal loss in process costing refers to the loss of units or spoilage that occurs
beyond what is expected under normal and efficient working conditions. It is not a part of the
regular production process and is considered an exception rather than the rule.

The causes of abnormal loss can include:

- Natural calamities like fire, floods, or earthquakes.
- Machine failure or faulty equipment.
- Unskilled labor or errors in implementing the production plan.
- Theft of goods or bad handling/storage of goods.

The procedure for calculating abnormal loss in process costing involves several steps:

1. Calculate Normal Loss: Determine the expected normal loss for the process, which is
usually a percentage of the input.

2. Determine Actual Output: Measure the actual output from the process.

3. Identify Abnormal Loss: Subtract the expected output (input minus normal loss) from the
actual output. If the actual output is less than expected, the difference is the abnormal loss.

4. Value the Inputs: Assign costs to the inputs of the process, including materials, labor, and
overheads.

5. Value the Normal Loss: If there is any scrap value associated with the normal loss, credit
it to the process account to offset the process costs.

6. Calculate the Average Cost Per Unit: Divide the total cost of the process by the expected
output to find the average cost per unit.

7. Value the Good Output and Abnormal Loss: Assign the average cost per unit to both the
good output and the abnormal loss units.

8. Account for Scrap Value of Abnormal Loss: If the abnormal loss units have any scrap
value, credit it to the abnormal loss account to reduce the loss amount.

9. Transfer to Financial Statements: The cost of abnormal loss, after accounting for scrap
value, is transferred to the Profit and Loss Account as it represents a loss to the business.

This process ensures that the abnormal loss is properly accounted for and reflected in the
company's financial statements, providing a true and fair view of the production costs.