Write Advantages and Disadvantages of Cost Accounting

1. Write Advantages and disadvantages of Cost Accounting.
ANSWER: Advantages:
1. Elimination of Wastes, Losses and Inefficiencies
2.Identify the reasons for Profit or Loss
3. Price Fixation
4. Advises on Make or Buy Decision
5. Cost Control
DISADVANTAGES:
1. Only past performances are available in the costing records but
the management is taking decision for future.
2. The cost of previous year is not same in the succeeding year.
Hence, cost data are not highly useful.
3. The cost is ascertained on the basis of full utilization of capacity. If
capacity is partly utilized, the cost may not be true.
4. Financial character expenses are not included for cost calculation.
Hence, the calculated cost is not correct always.
5. In cost accounting, costs are absorbed on pre-determined rate. It
leads to over absorption or under absorption of overheads.
Q2. Explain the following cost concepts with examples:

A. Opportunity Cost: An opportunity cost is the economic concept
of potential benefits that a company gives up by taking an
alternative action. In other words, this is the potential benefit
you could have received if you had taken action A instead of
action B.
For example, you have rs.1,000,000 and choose to invest it in
product line that will generate a return of 5%. If you could have
spent the money on a different investment that would have
generated a return of 7%, then the 2% difference between the two
alternatives is the foregone opportunity cost of this decision.
B. Functional Classification of Cost:

i. Production or Manufacturing Costs: All the costs relating to
the production of goods or services, whether direct or
indirect, variable or fixed, are included in the production
cost. We can classify production costs into direct and
indirect production costs.
ii. Administration Costs: all those costs which are not related
to product manufacturing but are unavoidable for the
overall administration of the organization. These costs
support the primary activity of production.
iii. Marketing or Selling Costs: Selling costs include all kinds of
expenses incurred for achieving sales of the products and
services. These are also considered indirect expenses are
known as selling overheads.
iv. Distribution Costs: Distribution costs include all kinds of
expenses are incurred for distributing the products from its
point of production to its customers.
C. Relevant and Irrelevant Cost: Relevant price is a managerial

accounting term that describes avoidable fees which can be
incurred handiest whilst making precise enterprise decisions.
The idea of applicable price is used to remove pointless records
that might complicate the decision-making process. As an
example, applicable price is used to decide whether or not to
promote or maintain an enterprise unit. The contrary of an
applicable price is a sunk price, which has already been
incurred no matter the final results of the contemporary
decision.
Irrelevant costs are costs which are independent of the
various decisions or alternatives. They are not considered
in making a decision. For example, if a new machine is
purchased to replace an old machine; the cost of old
machine would be sunk cost.
Direct Cost and Indirect Cost: Any cost that's involved in producing a
good, even if it's only a portion of the cost that's allocated to the production
facility, are included as direct costs. Some examples of direct costs are listed
below:
 Direct labour
 Direct materials
 Manufacturing supplies
 Wages for the production staff
 Fuel or power consumption
Indirect cost is those costs that cannot be directly assigned

to/related to/identified with a particular cost center or cost object,
but they benefit multiple cost objects.
 Indirect Material
 Indirect Labour
 Indirect Expenses
Q3. Objectives of Job Costing.

ANSWER: The main objectives are of job costing are:
(1) The main objective of job costing is to ascertain the cost as well
as the profit or loss on each job.
(2) Another objective of job costing is to find out those jobs which
are more profitable and those which are not profitable or less
profitable.
(3) Control of costs, by comparing actual costs with estimated costs,
is also one of the objectives of job costing.
(4) Job costing is also intended to indicate, through the comparison
of actual cost of a job with its estimated cost, whether the
estimation is incorrect or the actual cost is excessive.
(5) Another objective of job costing is to provide a basis for
estimating or determining the cost of similar jobs undertaken in
future.
Q4. Explain the reasons for difference between the profits

as per Cost Accounting and Financial Accounting.
Answer: The profit or loss shown by the cost books differs from
profit or loss shown by financial accounting for a number of
reasons. The difference between cost and financial accounts results
arises due to the following reasons:
1.Items are shown only in the financial account,
2.Items are shown only in cost account,
3.Over or under absorption of overhead,
4.The difference in valuation of stock,
5.Difference methods of charging depreciation,
6.Abnormal gain or loss.
There are certain items of income and expenditures which are shown
only in financial accounts, not in cost accounts. As a result, the profit
or loss as per cost accounts would be quite different from the profit
or loss as per the financial accounts. These items of financial nature
can be divided into three groups:
(A) Items of expenditures shown only in financial account:
 Interest on capital
 Expenses on the issue of shares and debentures
 Discount on debenture
 Penalties and fine
 Goodwill, preliminary expenses, etc.
(B) Items of Income:
 Interest received, rent received, the commission received,

discount received
 Dividend received
 Share transfer fees
 Returned of income tax
 The gain of the sale of fixed assets
(C) Appropriation xof Profits:
 Income tax paid

 Dividend paid
 Transfer to general or specific reserves or funds
 Excess provision for depreciation
 Bonus.
There are very few items, which are shown in cost accounts but
not in the financial accounts as they do not represent any
transaction with outsiders. These items are:
 Rent or depreciation of the own building of the proprietor

 Remuneration of the proprietor
 Depreciation on fully depreciated assets
 Interest on capital employed in the production
 The losses due to defective and spoilage

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1. Write Advantages and disadvantages of Cost Accounting.

Q2. Explain the following cost concepts with examples:

B. Functional Classification of Cost:

C. Relevant and Irrelevant Cost: Relevant price is a managerial

Indirect cost is those costs that cannot be directly assigned

Q3. Objectives of Job Costing.

Q4. Explain the reasons for difference between the profits

(A) Items of expenditures shown only in financial account:

 Interest received, rent received, the commission received,

(C) Appropriation xof Profits:

 Income tax paid

 Rent or depreciation of the own building of the proprietor

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