CA Inter Cost Blast From The Past PDF
CA Inter Cost Blast From The Past PDF
SACHIN GARG
(Inspiration for me and all my students)
who left for heavenly abode on 3rd May, 2015
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Chandigarh Toppers of With ICAI(Cost)
Cost FM (May 2016) President Sh.
1. Shreshtha (on Left) – Kunal Banerjee
91 Marks (for getting All India
Rank 1)
2. Iram (on Right) – 73
Marks
“Economic & Labour Laws” book being released by Education Minister of UT Sh. VK Singh (IAS) in presence
of then Chairman of Chandigarh chapter of ICAI, ICSI, ICAI (Cost)
“Industrial, Labour & General Laws” book being released by Dr. Girish Ahuja (A Renowned Personality in
Direct Taxes) and Dr. D.C. Arya (Director Finance of Indian Railway)
Page |i
1. Broke LIMCA BOOK OF RECORDS by being youngest in India to clear all the 3
professional courses CA, CS, CMA at the age of 22 years 7 months with Ranks (A
Record).
2. 5 times All India Rankholder in Professional Exams (A Record).
3. Scored SINGLE DIGIT RANK 3 times (including All India Rank 1).
4. Undisputed achiever of all 3 professional exams with ALL INDIA RANK in ALL.
5. Achieved exemption in 40+ papers out of total 50 papers held by CA, CS, CMA
institutes in his academic career.
6. Awarded by Mr. Atal Bihari Vajpayee in 2010 for exceptional performance in
Academics.
7. One of the best motivator in India.
8. Covered by the National Magazine ‘Career 360’ amongst 12 National Toppers in
2010.
9. Specialist in Time management and Stress management skills.
CA Rahul Garg Gold Medalist All India Rankholder in CA, CS, CMA (incl Rank 1)
Best Lectures Regular as well as Fast Track, available at www.carahulgarg.com, (R.S.A.)
P a g e | ii
RANK Certificate for All India Rank 41 (May 06) in CA PE II Exam (now CA Inter)
CA Rahul Garg Gold Medalist All India Rankholder in CA, CS, CMA (incl Rank 1)
Best Lectures Regular as well as Fast Track, available at www.carahulgarg.com, (R.S.A.)
P a g e | iii
RANK Certificate for All India Rank 4 (June 08) in CS Inter Exam
CA Rahul Garg Gold Medalist All India Rankholder in CA, CS, CMA (incl Rank 1)
Best Lectures Regular as well as Fast Track, available at www.carahulgarg.com, (R.S.A.)
P a g e | iv
RANK Certificate for All India Rank 13 (June 09) in CS Professional (Final) Exam
CA Rahul Garg Gold Medalist All India Rankholder in CA, CS, CMA (incl Rank 1)
Best Lectures Regular as well as Fast Track, available at www.carahulgarg.com, (R.S.A.)
Page |v
RANK Certificate for All India Rank 1 (June 08) in CMA Inter Exams
CA Rahul Garg Gold Medalist All India Rankholder in CA, CS, CMA (incl Rank 1)
Best Lectures Regular as well as Fast Track, available at www.carahulgarg.com, (R.S.A.)
P a g e | vi
Institute’s Gold Medal for All India Rank 1 (June 08) in CMA Inter Exams
CA Rahul Garg Gold Medalist All India Rankholder in CA, CS, CMA (incl Rank 1)
Best Lectures Regular as well as Fast Track, available at www.carahulgarg.com, (R.S.A.)
P a g e | vii
RANK Certificate for All India Rank 3 (June 09) in CMA Final Exams
CA Rahul Garg Gold Medalist All India Rankholder in CA, CS, CMA (incl Rank 1)
Best Lectures Regular as well as Fast Track, available at www.carahulgarg.com, (R.S.A.)
P a g e | viii
Preface
Dear Students,
The book will specifically cater to the needs of CA Intermediate (IPCC) Students. It
covers the THOERY QUESTIONS asked by ICAI since Nov 2009 with SOLUTIONS in an
informative and lucid manner.
It’s difficult for the students to understand the theory portion, thus the effort has been
made to present the matter under suitable headings and sub headings with sufficient
detail in a manner that can be grasped by the students easily and quickly. The unique
style of presentation adopted makes the learning easy and interesting for the students.
The book has been drafted in a student friendly approach so as to facilitate easy and
quick understanding of the subject matter.
Though considerable care has been taken to make the book error free yet some
unintended errors may have crept in for which I feel apologies. But as ‘the road to
improvement is never ending’, I would welcome the suggestions, criticism and feedback
of this book for the incorporation of necessary changes in a timely manner.
I believe in words of Carlson Gracie “If you want to be a Lion, you must train with Lions”.
This publication stands as a tribute to my elder brother Beloved Sachin Garg, who left
for heavenly abode on 3rd May, 2015.
CA RAHUL GARG
CA Rahul Garg Gold Medalist All India Rankholder in CA, CS, CMA (incl Rank 1)
Best Lectures Regular as well as Fast Track, available at www.carahulgarg.com, (R.S.A.)
P a g e | ix
I am also thankful to
my mother Smt. Prem Lata Garg and father Sh. Pawan Kumar Garg,
who have provided me best education, constant love and affection since
childhood and making me what I am today.
CA Rahul Garg Gold Medalist All India Rankholder in CA, CS, CMA (incl Rank 1)
Best Lectures Regular as well as Fast Track, available at www.carahulgarg.com, (R.S.A.)
Page |x
INDEX
Chapter No. Chapter Name Theory Page No.
Questions
1 Basic Concepts 32 1 – 13
2 Cost Sheet 1 14 – 15
3 Material Costing 11 16 – 24
4 Labour Costing 3 25 – 27
5 Overheads 10 28 – 34
6 Budgetary Control 11 35 – 40
7 Contract Costing 8 41 – 45
9 Process Costing 2 48 – 49
11 Standard Costing 1 53 – 54
12 Marginal Costing 6 55 – 58
101
CA Rahul Garg Gold Medalist All India Rankholder in CA, CS, CMA (incl Rank 1)
Best Lectures Regular as well as Fast Track, available at www.carahulgarg.com, (R.S.A.)
Page |1
Chapter - 1
Basic Concepts
“Without inspiration the best powers of the mind remain dormant. There is a fuel
in us which needs to be ignited with sparks.”
Johann Gottfried Von Herder
Chapter Analysis
16
14 14
14
12
12
10
10
8
8 7.5
6 5 5 5
4 4 4 4 4 4 4 4 4 4
4
2
2
0
0
Theory Questions
Answer 1
a Imputed ✓ These costs are notional costs which do not involve any cash outlay.
cost ✓ Interest on capital, the payment for which is not actually made, is an
example of imputed cost.
✓ These costs are similar to opportunity costs.
b Capitalised ✓ These are costs which are initially recorded as assets and
Cost subsequently treated as expenses.
Answer 2
Cost ✓ Cost accounting may be regarded as “a specialised branch of
Accounting accounting which involves classification, accumulation, assignment and
control of costs.”
Answer 3
Basis Fixed Overheads Variable Overheads
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Relation with These tend to be unaffected by These tend to vary with the
output fluctuations in the levels of activity. volume of activity.
Nature w.r.t. The total fixed overheads remain The total variable overheads don’t
Totality same at various levels of output. remain same at various levels of
output.
Nature w.r.t. Fixed Overheads keep on changing Variable Overheads remain same
Per unit on per unit basis. on per unit basis.
Period or These overheads are incurred for a These are expressed in terms of
product period. units and not time period.
Answer 4
Objective ✓ The objective of costing system must be considered.
Nature of ✓ Every business industry has its own peculiar features and costing
Business objectives.
✓ According to its cost information requirement, cost accounting
methods are followed.
Cover all ✓ Costing system should fulfil the requirement of different levels of
levels management i.e. Top management, Strategic level management,
Operational level management.
Production ✓ A good costing system can never be established without the complete
process knowledge of the production process.
Maintenance ✓ The manner in which Cost and Financial accounts are kept.
of cost
records
Statutory ✓ Records are to be maintained to comply with statutory requirements,
requirement standards to be followed (Cost Accounting Standards and Accounting
Standards).
Answer 5
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Cost Unit
Meaning ✓ It is a unit of product, service or time (or combination of these) in
relation to which costs may be ascertained or expressed.
Cost Centres Production ✓ It is a cost centre where raw material is handled for
in a Cost Centre conversion into finished product.
manufac- ✓ Here both direct and indirect expenses are incurred.
turing ✓ For Example : Machine shops, welding shops and
concern assembly shops etc.
Mixed Cost ✓ Mixed cost centres are those which are engaged on
Centre productive works and also on service works.
✓ For instance, a tool shop serves as a productive cost
centre when it manufactures dies and jigs for specific
order, but serves as servicing cost centre when it does
repairs for the factory.
Answer 6
Basis Cost Control Cost Reduction
Main focus Cost control aims at maintaining Cost reduction is concerned with
the costs in accordance with the reducing costs. It challenges all
established standards. standards and tries to better them
continuously.
End Cost control ends when targets are Cost reduction has no visible end.
achieved.
Answer 7
a Imputed Cost
b Opportunity Cost
c Shut Down Cost
d Product Cost
Answer 8
Informative ✓ Cost Accounting System should be tailor-made, practical, simple and
capable of meeting the requirements of a business concern.
Cost-Benefit ✓ The Cost of installing and operating the system should justify the
results.
Trust ✓ Management should have faith in the Costing System and should also
provide a helping hand for its development and success.
Answer 9
a Tonne
b Numbers
c Passenger Kilo-meter/ Tonne Kilo-meter
d Kilo-watt hour (Kwh)
Answer 10
Please refer answer to Question 6.
Answer 11
Explicit costs ✓ These costs are also known as out of pocket costs and refer to costs
involving immediate payment of cash.
✓ Salaries, wages, postage and telegram, printing and stationery, interest
on loan etc. are some examples of explicit costs involving immediate
cash payment.
Engineered ✓ These are costs that result specifically from a clear cause and effect
costs relationship between inputs and outputs.
✓ The relationship is usually personally observable.
✓ Examples of inputs are direct material costs, direct labour costs etc.
✓ Examples of output are cars, computers etc.
Answer 12
a Per passenger k.m. or per tonne k.m.
b Per Kilo – watt (kw) hour
c Per room day / or per meal
d Per Patient – day / or per bed/day
Answer 13
a Job Costing
b Batch Costing
c Unit Costing or Single or Output Costing
d Multiple Costing
Answer 14
Sunk Cost ✓ Historical costs incurred in the past are known as sunk costs.
✓ They play no role in decision making in the current period.
✓ For example, in the case of a decision relating to the replacement of a
machine, the written down value of the existing machine is a sunk cost
and therefore, not considered.
Opportunity ✓ Opportunity cost is the cost of selecting one course of action and the
Cost losing of other opportunities to carry out that course of action.
✓ For example, a firm financing its expansion plan by withdrawing money
from its bank deposits.
✓ In such a case, the loss of interest on the bank deposit is the
opportunity cost for carrying out the expansion plan.
✓ Opportunity costs are not recorded in the books.
✓ It is important in decision making and comparing alternatives.
✓
Answer 15
Please refer answer to Question 6.
Answer 16
Method of Costing Unit of Cost
a Operating Costing Room day/ per bed
b Batch Costing Units/ Batch
c Process Costing/ Single Costing Per Tonne/ Per MT
d Contract Costing Project/ Unit
Answer 17
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Answer 18
Ascertain- ✓ The main objective of a Cost Accounting system is to ascertain cost for
ment of cost cost objects.
✓ Costing may be post completion or continuous but the aim is to arrive
at a complete and accurate cost figure to assist the users to compare,
control and make various decisions.
Determina- ✓ Cost Accounting System in a manufacturing organisation enables to
tion of selling determine desired selling price after adding expected profit margin
price with the cost of the goods manufactured.
Cost control ✓ Cost Accounting System equips the cost controller to adhere and
and Cost control the cost estimate or cost budget and assist them to identify
reduction the areas of cost reduction.
Ascertain- ✓ Cost Accounting System helps to classify cost on the basis of activity to
ment of ascertain activity wise profitability.
profit of each
activity
Assisting in ✓ Cost Accounting System provides relevant cost information and assists
managerial managers to make various decisions.
decision
making
Answer 19
✓ Profit Centres are the part of a business which is accountable for both cost and
revenue.
✓ These are responsible for generating and maximizing profits.
✓ Performance of these centres is measured with the volume of profit it earns.
Answer 20
Please refer answer to Question 14.
Answer 21
Please refer answer to Question 15.
Answer 22
Method of Costing Unit of Cost
A Operating Costing Passenger k.m. or tonne k.m.
B Process Costing/ Single or Unit Costing Tonne/ Metric Ton (MT)/ kg/ bar
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Answer 23
✓ It is the cost of transforming basic material into finished goods.
✓ Conversion Cost consists of direct wages, direct expenses and manufacturing
overheads.
✓ So, Conversion Cost = Direct Labour Cost + Direct Expenses + Manufacturing
Overhead
✓ Or Conversion Cost = Factory Cost – Direct Materials Cost
Answer 24
Please refer answer to Question 5.
Answer 25
Please refer answer to Question 4.
Answer 26
Basis Cost Accounting Management Accounting
Nature It records the quantitative aspect only. It records both qualitative and
quantitative aspect.
Recording of It uses both past and present figures. It is focused with the projection
data of figures for future.
Rules and It follows certain principles and It does not follow any specific
Regulation procedures for recording costs of rules and regulations.
different products.
Answer 27
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Answer 28
The operational level staffs like supervisors, foreman, team leaders require information
(i) to know the objectives and performance goals for them
(ii) to know product and service specifications like volume, quality and process etc.
(iii) to know the performance parameters against which their performance is measured
and evaluated.
(iv) to know divisional (responsibility centre) profitability etc.
Answer 29
Please refer answer to Question 14.
Answer 30
Parti- Cost Revenue Profit Contribu- Investment
culars Centre Centre Centre tion Centre Centre
Meaning It is a It is a It is a It is a It is a
responsibility responsibility responsibility responsibility responsibility
centre for centre for centre for centre for centre for
which costs which only which both which which costs,
are revenues are costs and variable costs revenues and
accumulated. accumulated. revenues are and revenues investment in
accumulated. are assets are
accumulated. accumulated.
Definition "A production "A centre "A part of "It is a profit "It is a profit
as per or service devoted to business centre whose centre whose
CIMA location, raising accountable expenditure is performance
function, revenue with for costs and reported on a is measured
activity or no revenues." marginal or by its return
item of responsibility direct cost on capital
equipment for production basis." employed."
whose costs e.g. a sales
may be centre."
attributed to
cost units."
Objective The main The main The main The main The main
objective of objective of objective of objective of objective of
cost centre is revenue profit centre is contribution investment
to minimize centre is to to maximize centre is to centre is to
the centre's maximize the the centre's maximize the maximize the
Answer 31
a Kilo-watt Hours
b Number
c Tonne per bag
d Tonne
e Cubic Feet
f 1000 Bricks
g Per tonne
h Contract, Job
i Chargeable per Hour, Job, Contract
j Patient Day
Chapter - 2
Cost Sheet
Chapter Analysis
6
5
5
0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
0
Theory Questions
1. M 19 (5 M) Explain Direct Expenses and how these are measured and their
treatment in cost accounting.
Answer 1
Meaning ✓ All direct costs other than direct material costs and direct labour costs
are termed as direct expenses.
✓ These can be readily identified with and thus, can be directly allocated
to a particular product, job or process.
✓ Thus, Direct expenses = Direct Costs - Direct Material Cost - Direct
Labour Cost
Features ✓ It can easily be identified with a specific job, contract or work order.
✓ It varies directly with the volume of output.
Chapter - 3
Material Costing
Chapter Analysis
8 7.5
6
5 5
5
4 4 4 4 4
4
3
2 2
2
1
0 0 0 0 0 0 0 0 0 0 0
0
Theory Questions
Answer 1
Meaning of ✓ It is a system of inventory control.
ABC ✓ It exercises discriminating control over different items of stores
classified on the basis of the investment involved.
✓ Usually, the items are divided into three categories according to their
importance, namely, their value and frequency of replacement during
a period.
Answer 2
Basis Bills of material Material Requisition Note
Prepared by It is prepared by the drawing office. It is prepared by the foreman of
the consuming department.
stores Requisition.
Answer 3
Perpetual Inventory system represents a system of records maintained by the stores
department. Records comprise of :
Bin Card ✓ Bin Card maintains a quantitative record of receipts, issues and
closing balances of each item of stores.
Stores Ledger ✓ The Stores Ledger is maintained to record all receipt and issue
transactions in respect of materials.
✓ It is filled up with the help of goods received note and material
requisitions.
But a perpetual inventory system’s efficacy depends on the system of continuous stock
taking. Continuous stock taking means the physical checking of the records i.e. Bin cards
and store ledger with actual physical stock. Perpetual inventory is essentially necessary
for material control. It incidentally helps continuous stock taking.
The main advantages of continuous stock taking are as follows :
Timely ✓ Physical stocks can be counted and book balances adjusted as and
Adjustment when desired without waiting for the entire stock-taking to be done.
Compilation ✓ Quick compilation of Profit and Loss Accounts (for interim period) due
of accounts to prompt availability of stock figures.
Easy location ✓ Discrepancies are easily located and thus corrective action can be
of promptly taken to avoid their recurrence.
discrepancies
Nature of ✓ A systematic review of the perpetual inventory reveals the existence
stock of surplus, dormant, obsolete and slow-moving materials, so that
remedial measures may be taken in time.
Better control ✓ Fixation of the various levels and check of actual balances in hand
with these levels assist the storekeeper in maintaining stocks within
limits and in initiating purchase requisitions for correct quantity at the
proper time.
Answer 4
Basis Scrap Defective
Occurrence It is the loss connected with output. It is connected with the output
but it can be in the input as well.
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Rectification Generally, scraps are not used or Defectives can be used after
rectified. rectification.
Answer 5
A ✓ Cash discount is not deducted from the purchase price.
B ✓ Any subsidy/ grant/ incentive received from the Government or from
other sources is deducted from the cost of purchase.
C ✓ State Sales Tax/ VAT is paid on intra-state sale and collected from the
buyers. It is excluded from the cost of purchase if credit for the same
is available. Unless mentioned specifically it should not form part of
cost of purchase.
D ✓ Commission or brokerage paid is added with the cost of purchase.
Answer 6
Please refer answer to Question 1.
Answer 7
Basis Bin Card Stores Ledger
Meaning The card tied to or placed outside Stores Ledger is a collection of
each bin to record the quantity of cards or loose leaves specially
materials received, issued, returned ruled for maintaining a record of
and in hand in the bin is called Bin both quantity and cost of stores
Card. received, issued and those in
stock.
Kept at It is kept outside the bin in store. It is kept outside the store
generally in costing department.
returned to stores.
Time of Entries are made when transactions It is always posted after the
recording take place. transaction.
Way of Each transaction is individually Transactions may be
posting posted. summarized and then posted.
Answer 8
Meaning ✓ Just in time purchasing means purchase when required only or
purchase immediately before use. It is also known as ‘Demand pull’ or
‘Pull through’ system of production.
Objective ✓ The main objective of JIT purchasing is to minimize the carrying costs,
storage costs, material handling costs, spoilage, obsolescence etc.
Mechanism ✓ In this system, production process actually starts after the order for the
products is received. Based on the demand, production process starts
and the requirement for raw materials is sent to the purchase
department for purchase.
Effect ✓ The effect of JIT purchasing is that the issue price of materials is likely
to be closer to market prices.
Answer 9
FIFO ✓ It is a method of pricing the issues of materials, in the order in which
they are purchased.
✓ In other words, the materials are issued in the order in which they
arrive in the store or the items longest in stock are issued first.
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Answer 10
Meaning ✓ Obsolescence is defined as the loss in the intrinsic value of an asset
due to its supersession.
Treatment ✓ The value of the obsolete material held in stock is a total loss and
immediate steps should be taken to dispose it off at the best available
price.
Answer 11
Meaning ✓ Material Control involves planning, organising and controlling the
procurement, storage & usage of materials so as to achieve the
objectives of efficiency & economy.
Objectives
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Avoid under ✓ One of the objective of material control is to avoid the situation of
stocking under stocking i.e. to provide continuous supply of required materials
so that the activities of production and service departments may
smoothly continue.
Avoid over ✓ Proper control over the material avoids the situation of over-stocking
stocking i.e. optimum investment is made in inventory considering the
operating requirements and financial resources so as to reduce
carrying costs.
Minimum ✓ Material control ensures that all the materials and stores are acquired
cost to at the lowest possible price considering the quality and other relevant
purchase factors.
Avoid ✓ A strict control over the materials ensures minimum wastages due to
wastages defective or long storage or from obsolescence.
Basis To Be Adopted
Proper Co- ✓ There should be proper co-ordination of all departments involved viz.
ordination Purchasing, Receiving, Inspection, Storage, Production, Cost and
Finance.
Proper ✓ There should be proper storage system to ensure a suitable place for
Storage every item and avoidance of losses.
System ✓ It must also lead to minimum storage cost.
Proper Issue ✓ There should be proper system for issue of materials to ensure the
System delivery of required materials at the required time.
Chapter - 4
Labour Costing
Chapter Analysis
4.5
4 4 4
4
3.5
2.5
1.5
0.5
0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
0
Theory Questions
Answer 1
Meaning of ✓ Labour turnover in an organisation is the rate of change in the
Labour composition of labour force during a specified period measured against
Turnover a suitable index.
✓ The standard of usual labour turnover in the industry or labour turnover
rate for a past period may be taken as the index or norm against which
actual turnover rate should be compared.
Flux method ✓ This method takes into account both the replacements as
well as no. of separations during the period.
Method 1
𝐍𝐨. 𝐨𝐟 𝐞𝐦𝐩. 𝐬𝐞𝐩𝐞𝐫𝐚𝐭𝐞𝐝+𝐍𝐨. 𝐨𝐟 𝐞𝐦𝐩. 𝐫𝐞𝐩𝐥𝐚𝐜𝐞𝐝 𝐝𝐮𝐫𝐢𝐧𝐠 𝐭𝐡𝐞 𝐲𝐞𝐚𝐫
× 100
𝐀𝐯𝐞𝐫𝐚𝐠𝐞 𝐧𝐮𝐦𝐛𝐞𝐫 𝐨𝐟 𝐞𝐦𝐩𝐥𝐨𝐲𝐞𝐞𝐬 𝐨𝐧 𝐫𝐨𝐥𝐥 𝐝𝐮𝐫𝐢𝐧𝐠 𝐭𝐡𝐞 𝐲𝐞𝐚𝐫
Method 2
Answer 2
Personal ✓ Personal causes are those which induce or compel workers to leave
causes their jobs at their will.
✓ Such causes include the following :
❖ Change of jobs for betterment
❖ Premature retirement due to ill health or old age
❖ Domestic problems and family responsibilities
❖ Discontent over the jobs and working environment
Unavoidable ✓ Unavoidable causes are those under which it becomes obligatory on the
causes part of management to ask one or more of their employees to leave
the organization.
✓ Such causes include the following :
❖ Seasonal nature of the business
❖ Shortage of raw material, power, slack market for the product etc.
❖ Change in the plant location
❖ Disability, making a worker unfit for work
Avoidable ✓ Avoidable causes are those which could prevent the worker from
causes leaving the job if timely action was taken by management. Thus, these
require the attention of management on a continuous basis so as to
keep the labour turnover ratio as low as possible.
✓ Such causes include the following :
❖ Dissatisfaction with job, remuneration, hours of work, working
conditions, etc.
❖ Strained relationship with management, supervisors or fellow
workers
❖ Lack of training facilities and promotional avenues
❖ Low wages and allowances
Answer 3
Please refer answer to Question 1.
Chapter - 5
Overheads
If you want to succeed in the world must make your own opportunities as you go
on. The man who waits for some seventh wave to toss him on dry land will find
that the seventh wave is a long time a coming. You can commit no greater folly
than to sit by the roadside until some one comes along and invites you to ride
with him to wealth or influence.
John B. Gough
Chapter Analysis
9
8 8
8
6
5
5
4 4 4
4
3
3
1
0 0 0 0 0 0 0 0 0 0 0 0 0 0
0
Theory Questions
Answer 1
Under-absorption has the effect of understanding the cost while over-absorption has
the effect of overstating the cost.
Over-absorption or under-absorption of overheads may be disposed of in any one of the
following ways :
Carry Forward ✓ The amount of under absorbed or over absorbed overheads is carried
to the Next over to subsequent years when management is sure that an over
Year absorption in the current period will be more or less neutralized by
under-absorption in the next.
✓ Accordingly, the amount of the current period is transferred to a
reserve account or suspense account.
✓ This method has a limited application because it is against the
costing principle that overhead should be absorbed in a particular
year in which it is incurred.
✓ However, this method may be followed when :
❖ the industry is seasonal with fluctuating demand and fluctuation
in production.
❖ normal business cycle extends beyond one year.
❖ the project is new and output is initially low but there will be
more output in the next year which will absorb more overheads.
Use of ✓ When the amount of under absorbed and over absorbed overhead is
Supplementary significant or large, because of differences due to wrong estimation,
Rates then the cost of product needs to be adjusted by using
supplementary rates (under and over absorption/ actual overhead)
to avoid misleading impression.
✓ It is calculated by dividing the amount of overabsorption or under-
absorption by the equivalent units usually.
✓ Under this method, the balance of under and over absorbed
overheads may be charged to cost of W.I.P., finished stock and cost
of sales proportionately with the help of supplementary rate of
overhead.
Answer 2
Please refer answer to Question 1.
Answer 3
Direct Method ✓ Service department costs under this method are apportioned over
the production departments only, ignoring services rendered by one
service department to another.
Step Method ✓ This method gives recognition to the service rendered by service
or Non- department to another service department.
Reciprocal ✓ Therefore, as compared to previous method, this method is more
Method complicated because a sequence of apportionments has to be
selected here.
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Reciprocal ✓ This method recognises that where there are two or more service
Service departments, they may render service to each other and, there these
Method inter-departmental services are to be given due weight while re-
distributing the expenses of service department.
✓ Thus, if a service department’s overhead has been distributed, then
the distribution shall be made in that service department also of
other service department’s overhead later on.
✓ The methods available for dealing with reciprocal services are :
❖ Simultaneous equation method
❖ Repeated distribution method
❖ Trial & Error method.
Answer 4
Packing As Prime ✓ Cost of primary packing necessary for protecting the
Expenses Cost product or for convenient handling, should become a
part of the prime cost.
Fringe Benefits ✓ These are the additional payments or facilities provided to the
workers apart from their salary and direct cost allowances like house
rent, dearness and city compensatory allowances.
✓ These benefits are given in the form of overtime, extra shift duty
allowance, holiday pay, pension facilities etc.
✓ These indirect benefits stand to improve the morale, loyalty and
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Answer 5
Basis Cost Allocation Cost Absorption
Meaning Cost allocation is the allotment of Cost absorption is the process of
whole item of cost to a cost absorbing all indirect costs or overhead
centre or a cost unit. costs allocated or apportioned over
particular cost centre or production
department by the units produced.
Answer 6
Basis Cost Allocation Cost Apportionment
Meaning The term ‘allocation’ refers to It is process of splitting up an
assignment or allotment of an item of overhead cost and
entire item of cost to a particular charging it to the cost centers on
cost centre or cost unit. an equitable basis.
Nature of This is possible when the nature of This is done in case of those
Expense expenses is such that it can be easily overhead items which can’t be
identified with a particular cost allocated to a particular
centre. department.
Example For example, the salary paid to a For example, salary paid to the
foreman of a particular production works manager of the factory
department can be directly cannot be charged wholly to a
identified with that department and particular production department
therefore it will be directly charged but will have to be charged to all
to that department. departments of the factory on an
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equitable basis.
Answer 7
Please refer answer to Question 1.
Answer 8
Meaning of ✓ It is that part of the capacity of a plant, machine or equipment which
Idle Capacity cannot be effectively utilised in production.
Nature of Such ✓ Costs associated with idle capacity are mostly fixed in nature.
Cost ✓ These costs remain unabsorbed or unrecovered due to under-
utilisation of plant and service capacity.
Treatment of If the idle capacity cost is due a supplementary overhead rate may
this cost to unavoidable reasons be used to recover the idle capacity
cost. In this case, the costs are
charged to the production capacity
utilised.
If the idle capacity cost is due the cost should be charged to Costing
to avoidable reasons such as Profit and Loss Account.
faulty planning, etc.
If the idle capacity cost is due the cost should also be charged to the
to trade depression, etc., - Costing Profit and Loss Account.
being abnormal in nature
Answer 9
Please refer answer to Question 1.
Answer 10
a. Floor Area
b. Number of Workers
c. Capital Value
d. Technical Estimates
e. Horse power of machines, or Number of machine hour, or value of machines
or units consumed.
Chapter - 6
Budgetary Control
All truly wise thoughts have been thought already, thousands of times; but to
make them truly ours, we must think them over again honestly, until they take
firm root in our personal experience.
Johann Wolfgang von Goethe
Chapter Analysis
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Answer 1
Meaning of ✓ Budgets which relate to the individual functions in an organisation
Functional are known as Functional Budgets.
Budget
Types ✓ The various commonly used Functional budgets are :
❖ Sales Budget
❖ Production Budget
❖ Plant Utilisation Budget
❖ Direct Material Usage Budget
❖ Direct Material Purchase Budget
❖ Direct Labour (Personnel) Budget
❖ Factory Overhead Budget
❖ Production Cost Budget
Answer 2
Basis Fixed Budget Flexible Budget
Flexibility It is inflexible and does not change It is flexible and changes
with the actual volume of output according to the level of activity.
achieved.
Classification of Costs are not classified according Costs are classified according to
Cost control It has limited applications and is It has more applications and can
ineffective as tool for cost control. be used as tool for cost control.
No. of budgets Only one budget at a fixed level of Under it, series of budgets are
activity is prepared. prepared at different level of
activity.
Answer 3
✓ Organisational structure must be clearly defined and responsibility should be assigned
to identifiable units within the organisation.
✓ Setting of clear objectives and reasonable targets. Objectives should be in consonance
with the long term plan of the organisation.
✓ Objectives and degree of responsibility should be clearly stated and communicated to
the management or person responsible for.
✓ Budgets are prepared for the future periods based on expected course of actions.
✓ Budgets are updated for the events that were not kept into the mind while
establishing budgets. Hence, budgets should be flexible enough for mid- term revision.
✓ The entire organisation must be committed to budgeting.
✓ Budgets should be quantifiable and master budget should be broken down into various
functional budgets.
✓ Budgets should be monitored periodically. Variances from the set yardsticks
(standards) should be analysed and responsibility should be fixed.
✓ Budgetary performance needs to be linked effectively to the reward system.
Answer 4
Meaning ✓ The capital expenditure budget represents the planned outlay on
fixed assets like land, building, plant and machinery, etc. during the
budget period.
✓ This budget is subject to strict management control because it
entails large amount of expenditure.
✓ The budget is prepared to cover a long period of years.
Answer 5
The steps involved in the budgetary control technique are as follows :
Definition of ✓ A budget is a plan for the achievement of certain operational
objectives objectives, so these should be defined precisely.
✓ The areas of control should be demarcated; and items of revenue
and expenditure to be covered by the budget stated.
Location of the ✓ The factor(s) which sets a limit to the total activity is known as key
key (or budget) factor.
factor ✓ For proper budgeting, it must be located and estimated properly.
Standard of ✓ For preparing budgets for the future, past statistics cannot be
activity or output completely relied upon.
✓ Therefore, though results of the past should be studied but these
should only be applied when there is a likelihood of similar
conditions repeating in the future.
Answer 6
A budget manual is a collection of documents that contains key information for those
involved in the planning process. Typical contents could include the following :
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Answer 7
Please refer answer to Question 2.
Answer 8
Meaning ✓ In a flexible budgetary control system, a series of budgets are
prepared one for each of a number of alternative production levels
or volumes.
Answer 9
Zero based budgeting is superior to traditional budgeting in the following manner:
✓ It provides a systematic approach for evaluation of different activities.
✓ It ensures that the function undertaken are critical for the achievement of the
objectives.
✓ It provides an opportunity for management to allocate resources to various activities
after a thorough – cost benefit analysis.
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Answer 11
Meaning ✓ ZBB is an activity based budgeting system where budgets are
prepared for each activities rather than functional department.
✓ Justification in the form of cost benefits for the activity is required to
be given.
✓ The activities are then evaluated and prioritized by the management
on the basis of factors like synchronisation with organisational
objectives, availability of funds, regulatory requirement etc.
Chapter - 7
Contract Costing
We learn wisdom from failure much more than success. We often discover what
we will do, by finding out what we will not do.
Samuel Smiles
Chapter Analysis
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Answer 1
Meaning ✓ Under cost plus contract, the contract price is ascertained by adding a
percentage of profit to the total cost of the work.
✓ Such types of contracts are entered into when it is not possible to
estimate the contract cost with reasonable accuracy due to unstable
condition of material, labour services etc.
Answer 2
The portion of profit to be credited to profit and loss account depends on the stage of
completion of the contract. THIS ANSWER IS RELEVANT FOR IPC STUDENTS ONLY. INTER
STUDENTS NEED NOT STUDY IT.
Contract less ✓ If the contract has just started or it is less than 25% complete, no
than 25% profit should be taken into account.
complete
Contract is ✓ In this case, one third of the notional profit reduced in the ratio of
25% or more cash received to work certified, may be transferred to the profit and
but less than loss account.
50% ✓ The amount of profit to be transferred to the profit and loss account
complete may be determined by using the following formula :
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1 Cash Received
× Notional Profit ×
3 Work certified
Contract is ✓ In this case, two third of the notional profit, reduced by the portion of
50% or more cash received to work certified may be transferred to the profit and
but less than loss account.
90% ✓ In this case the formula to be used is as under :
complete 2 𝐶𝑎𝑠ℎ 𝑅𝑒𝑐𝑒𝑖𝑣𝑒𝑑
× 𝑁𝑜𝑡𝑖𝑜𝑛𝑎𝑙 𝑃𝑟𝑜𝑓𝑖𝑡 ×
3 𝑊𝑜𝑟𝑘 𝑐𝑒𝑟𝑡𝑖𝑓𝑖𝑒𝑑
Contract Work Certified
a. 𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑃𝑟𝑜𝑓𝑖𝑡 ×
Contract price
nearing
completion, Cash Received
say between b. 𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑃𝑟𝑜𝑓𝑖𝑡 ×
Contract price
90% and c. 𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑃𝑟𝑜𝑓𝑖𝑡 ×
Cost of work to date
100% Estimated total cost
Work Certified
e. 𝑁𝑜𝑡𝑖𝑜𝑛𝑎𝑙 𝑃𝑟𝑜𝑓𝑖𝑡 ×
Contract price
Answer 3
Notional ✓ Notional Profit is the balancing figure of contract account prepared by
profit contractor if the total of credit side exceeds the total of debit side.
✓ It represents the difference between the value of work certified and
cost of work certified.
✓ It is determined as follows :
Notional profit = Value of work certified – (Cost of work to date –
Cost of work not yet certified)
Retention ✓ A contractor does not receive full payment of the work certified by the
Money surveyor.
✓ Contractee retains some amount (say 10% to 20%) to be paid, after
sometime, when it is ensured that there is no fault in the work carried
out by contractor.
✓ If any deficiency or defect is noticed in the work, it is to be rectified by
the contractor before the release of the retention money.
✓ Retention money provides a safeguard against the risk of loss due to
faulty workmanship.
✓ It is determined as follows :
Retention Money = Value of work certified – Payment actually
made/ cash paid
Answer 4
✓ This clause is usually provided in the contracts as a safeguard against any likely
changes in the price or utilization of material and labour.
✓ If during the period of execution of a contract, the prices of materials or labour rise
beyond a certain limit, the contract price will be increased by an agreed amount.
✓ Inclusion of such a term in a contract deed is known as an 'escalation clause'.
✓ An escalation clause usually relates to change in price of inputs, it may also be
extended to increased consumption or utilization of quantities of materials, labour etc.
(where it is beyond the control of the contractor).
✓ In such a situation, the contractor has to satisfy the contractee that the increased
utilization is not due to his inefficiency.
Answer 5
Please refer answer to Question 4.
Answer 6
Please refer answer to Question 1.
Answer 7
Please refer answer to Question 2.
Answer 8
Retention Money
Meaning ✓ Retention Money is that portion of value of work certified (usually 10%
to 20%) which is retained by the contractee as security for any
defective work which may be discovered later within the guarantee
period.
Purpose ✓ Its purpose is to provide a safeguard against the risk of loss due to
faulty workmanship.
✓ If any deficiency or defect is noticed in the work, it is to be rectified by
the contractor before the release of the retention money.
When Paid ✓ Retention Money is generally paid after the expiry of period specified
in the contract when it is ensured that there is no fault in the work
carried out by the contractor.
Chapter - 8
Every man, as to character, is the creature of the age in which he lives. Very few
are able to raise themselves above the ideas of their times.
Voltaire
Chapter Analysis
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Answer 1
Meaning ✓ It is a method of costing which is used when the work is undertaken as
per the customer’s special requirement.
✓ When an inquiry is received from the customer, costs expected to be
incurred on the job are estimated and on the basis of this estimate, a
price is quoted to the customer.
✓ Actual cost of materials, labour and overheads are accumulated and on
the completion of job, these actual costs are compared with the quoted
price and thus the profit or loss on it is determined.
Answer 2
Job Costing ✓ Refer Answer to Question 1
Batch ✓ Batch Costing is that form of specific order costing under which each
Costing batch is treated as a cost unit and costs are accumulated and
ascertained separately for each batch.
✓ Each batch consists of a number of like units.
✓ Each batch is treated as a cost unit.
✓ All costs are accumulated and ascertained for each batch.
✓ A separate Batch Cost Sheet is used for each batch and is assigned a
certain number by which the batch is identified.
✓ The cost per unit is ascertained by dividing the total cost of a batch by
the number of items produced in that batch.
Chapter - 9
Process Costing
All men dream but not equally. Those who dream by night in the dusty recesses
of their minds wake in the day to find that it was vanity; but the dreamers of the
day are dangerous men, for they may act their dream with open eyes to make it
possible.
T.E. Lawrence
Chapter Analysis
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Answer 1
Meaning ✓ In some process industries, the output of one process is transferred
to the next process not at cost but at market value or cost plus a
percentage of profit.
✓ The difference between cost and the transfer price is known as inter-
process profits.
Advantages ✓ Comparison between the cost of output and its market price at the
stage of completion is facilitated.
✓ Each process is made to stand by itself as to the profitability.
Answer 2
Equivalent ✓ When opening and closing stocks of work-in-process exist, unit costs
Production cannot be computed by simply dividing the total cost by total number
of units still in process.
✓ We can convert the work-in-process units into finished units called
equivalent production units so that the unit cost of these
uncompleted (W-I-P) units can be obtained.
✓ Equivalent Production units = Actual number of units in production
× Percentage of work completed
✓ It consists of
❖ balance of work done on opening work-in-process,
❖ current production done fully and
❖ part of work done on closing WIP with regard to different
elements of costs viz., material, labour and overhead.
Chapter - 10
Rely on your own strength of body and soul. Take for your star self-reliance,
faith, honesty and industry. Don't take too much advice — keep at the helm and
steer your own ship, and remember that the great art of commanding is to take
a fair share of the work. Fire above the mark you intend to hit. Energy, invincible
determination with the right motive, are the levers that move the world.
Noah Porter
Chapter Analysis
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Answer 1
Apportionment of Joint Cost amongst Joint Products
Market ✓ This method is used for apportionment of joint costs to joint products
value at the upto the split off point.
point of ✓ Under this, the market value of all the joint products is computed at
separation the point of separation and the joint cost is divided on the basis of
such market value.
✓ It is difficult to apply if the market value of the product at the point of
separation is not available.
✓ It is useful method where further processing costs are incurred
disproportionately.
Net ✓ Under this method, Net realizable value of each joint product is found
realizable out and Joint costs are apportioned in the ratio of such net realisable
value value.
Method ✓ Net realizable value is found out by deducting the following from the
sales value of the joint products (at finished stage i.e. after further
processing) :
❖ estimated profit margins,
❖ selling and distribution expenses, if any, and
❖ post-split off costs.
Answer 2
Where By- Credit to Profit ✓ The credit to the Profit and Loss Account here is
Products are and Loss treated either as miscellaneous income or as
of Small Account additional sales revenue.
Total Value
Credit to ✓ The sale proceeds of the By-product may be treated
Process as deductions from the total costs.
account
When the ✓ Where By-products are of considerable total value, they may be
by-products regarded as joint products rather than as By-products.
are of ✓ To determine exact cost of By-products, the costs incurred upto the
considerable point of separation, should be apportioned over By-products and joint
Where by- ✓ In this case, the net realisable value of the By-product at the split-off
products point may be arrived at by subtracting the further processing cost from
require the realisable value of by-products.
further
processing
Chapter - 11
Standard Costing
If your actions inspire others to dream more, learn more, do more and become
more, you are a leader.
John Quincy Adams
Chapter Analysis
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Answer 1
Setting of ✓ The first step is to set standards which are to be achieved.
Standards
Ascertainment ✓ The actual cost for each component of cost is ascertained.
of actual costs ✓ Actual costs are ascertained from books of account, material
invoices, wage sheet, charge slip etc.
Comparison of ✓ Actual costs are compared with the standards costs and variances are
actual cost & determined.
standard cost
Investigation ✓ Variances arising are investigated for further action.
of variances ✓ Based on this, performance is evaluated and appropriate actions are
taken.
Chapter - 12
Marginal Costing
Nothing can stop the man with the right mental attitude from achieving his
goal; nothing on earth can help the man with the wrong mental attitude.
Thomas Jefferson
Chapter Analysis
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Answer 1
Meaning ✓ Key factor is a factor which at a particular time or over a period limits
the activities of an undertaking.
✓ It may be the level of demand for the products or service or it may be
the shortage of one or more of the productive resources.
Answer 2
✓ This angle is formed by the intersection of sales line and total cost line at the break-
even point.
✓ This angle shows the rate at which profits are being earned once the break-even point
has been reached.
✓ The wider the angle, the greater is the rate of earning profits.
✓ A large angle of incidence with a high margin of safety indicates extremely favourable
position.
Answer 3
✓ Changes in the levels of revenues and costs arise only because of changes in the
number of products (or service) units produced and sold.
✓ Total cost can be separated into two components, Fixed and variable.
✓ Graphically, the behaviour of total revenues and total cost are linear in relation to
output level within a relevant range.
✓ Selling price, variable cost per unit and total fixed costs are known and constant.
✓ All revenues and costs can be added, subtracted and compared without taking into
account the time value of money.
Answer 4
Pricing Policy ✓ Since marginal cost per unit is constant from period to period, firm
decisions on pricing policy can be taken particularly in short term.
Answer 5
Meaning of ✓ Margin of Safety (MoS) is the excess of total sales over the Break
Margin of even sales.
Safety ✓ MoS defines the amount upto which level sales can decline before
occurring loss.
✓ The margin of safety is the difference between actual sales or output
and the break –even sales of production.
✓ It may also be expressed in percentage.
✓ A greater margin of safety reflects the soundness of the business.
✓ If the margin of safety is small, any fall in sales value may even
result in loss.
Formula ✓ Margin of safety = Actual sales or output – break –even sales or
production
𝐒𝐚𝐥𝐞𝐬 – 𝐁𝐫𝐞𝐚𝐤𝐞𝐯𝐞𝐧 𝐒𝐚𝐥𝐞𝐬
✓ Margin of safety Ratio =
𝐒𝐚𝐥𝐞𝐬
Answer 6
Difficulty in ✓ It is difficult to classify exactly the expenses into fixed and variable
classifying cost category.
✓ Most of the expenses are neither totally variable nor wholly fixed.
✓ For example, various amenities provided to workers may have no
relation either to volume of production or time factor.
Scope for Low ✓ Sales staff may mistake marginal cost for total cost and sell at a
Profitability price; which will result in loss or low profits.
✓ Hence, sales staff should be cautioned while giving marginal cost.
Ignores time ✓ The marginal cost of two jobs may be the same but the time taken
factor and for their completion and the cost of machines used may differ.
investment ✓ The true cost of a job which takes longer time and uses costlier
machine would be higher.
✓ This fact is not disclosed by marginal costing.
Chapter - 13
The greatest results in life are usually attained by simple means and the exercise
of ordinary qualities. These may for the most part be summed in these two:
common-sense and perseverance.
Owen Feltham
Chapter Analysis
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Answer 1
✓ Interest on loans or bank mortgages
✓ Expenses relating to the issue and transfer of share and debentures like stamps duty
expenses; discount on share and debentures etc.
✓ Losses on the sales of fixed assets and investments
✓ Fines and penalties
✓ Damages payable under law
✓ Legal charges
Answer 2
✓ When the Cost and Financial Accounts are integrated, there is no need to have a
separate reconciliation statement between the two sets of accounts.
✓ Integration means that same set of accounts fulfil requirement of both Cost and
Financial Accounts.
Answer 3
✓ In integrated accounting system, cost and financial accounts are kept in the same set
of books.
✓ Such a system will have to afford full information required for Costing as well as for
Financial Accounts.
✓ In other words, information and data should be recorded in such a way so as to enable
the firm to ascertain the cost (together with the necessary analysis) of each product,
job, process, operation or any other identifiable activity.
✓ It also ensures the ascertainment of marginal cost, variances, abnormal losses and
gains.
✓ In fact, all information that management requires from a system of Costing for doing its
work properly is made available.
✓ The integrated accounts give full information in such a manner so that the profit and
loss account and the balance sheet can be prepared according to the requirements of
law and the management maintains full control over the liabilities and assets of its
business.
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✓ Since, only one set of books are kept for both cost accounting and financial
accounting purpose so there is no necessity of reconciliation of cost and financial
accounts.
Answer 4
When the cost and financial accounts are kept separately, it is imperative that these
should be reconciled, otherwise the cost accounts would not be reliable. The
reconciliation of two set of accounts can be made, if both the sets contain sufficient detail
as would enable the causes of differences to be located. It is therefore, important that in
the financial accounts, the expenses should be analysed in the same way as in cost
accounts.
Chapter - 14
The difference between a successful person and others is not a lack of strength,
not a lack of knowledge, but rather a lack in will.
Vince Lombardi
Chapter Analysis
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Answer 1
Meaning ✓ It’s a system of accounting where both costing and financial
transactions are recorded in the same set of books.
Advantages No need for ✓ The question of reconciling costing profit and financial
Reconciliation profit does not arise, as there is only one figure of
profit.
Answer 2
Please refer answer to Question 1.
Answer 3
Please refer answer to Question 1.
Answer 4
Please refer answer to Question 1.
Chapter - 15
Service Costing
Every great dream begins with a dreamer. Always remember, you have within
you the strength, the patience, and the passion to reach for the stars to change
the world.
Harriet Tubman
Chapter Analysis
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Theory Questions
Answer 1
Meaning ✓ Operating Costing is a method of ascertaining costs of providing or
operating a service.
✓ This method of costing is applied by those undertakings which provide
services rather than production of commodities.
✓ This costing method is usually made use of by transport companies, gas
and water works departments, electricity supply companies, canteens,
hospitals, theatres, schools etc.
Computation ✓ When two units are merged into one, it is called Composite units.
of ✓ Composite units i.e. tonnes kms., quintal kms. etc. may be computed in
Composite two ways.
units
Absolute (weighted ✓ Absolute tonnes-kms., are the sum total of
average) tonnes- tonnes-kms., arrived at by multiplying various
kms. distances by respective load quantities carried.
Answer 2
Please refer answer to Question 1.
Answer 3
Please refer answer to Question 1.
Chapter - 16
Every great dream begins with a dreamer. Always remember, you have within
you the strength, the patience, and the passion to reach for the stars to change
the world.
Harriet Tubman
Chapter Analysis
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Theory Questions
Answer 1
Meaning ✓ Activity based budgeting analyses the resource input or cost for each
activity.
✓ It provides a framework for estimating the amount of resources
required in accordance with the budgeted level of activity.
✓ Actual results can be compared with budgeted results both in financial
and non-financial terms and the activities with major discrepancies can
be highlighted.
✓ It is a planning and control system which seeks to support the
objectives of continuous improvement.