Chapter:- 10
Cost Accounting
1. What is cost accounting?
Ans:-Cost Accounting is the process of identifying the costs involved in producing goods and services, keeping a records of costs, finding out the total cost and cost per unit and controlling costs. Its main objective is to calculate costs of products and services.
2. State any five objectives or functions of cost accounting.
Ans:-The objectives of cost accounting are as follows:
a. Ascertainment of cost:-The main objective of cost accounting is to find out the cost of product manufactured and services given.
b. Managerial decision:-Cost accounting provide guideline for various decisions like make or buy a product, accept or reject a project, continue or drop a product.
c. Cost control:-Cost accounting aims to control cost by comparing the actual cost with standard cost.
d. Preparation of financial statement:-Cost accounting help to preparation of financial statements because it provides immediate and accurate information regarding cost of raw material, work in progress, final product and cost of various services rendered by an organization.
e. Fixation of selling price:-The objective of cost accounting is to help in calculating the selling price through the total cost of production.
3. State five importance/advantage of cost accounting.
Ans:-Following are the three importance/advantage of cost accounting:
a. Discloses the operating result of individual activity:-Cost accounting provides the costing information in terms of product, department, process etc.
b. Helps in controlling cost:-Cost accounting helps in controlling cost by applying some techniques such as standard costing and budgetary control.
c. Provides necessary cost information:-It provides necessary cost information to the management for planning, implementation and controlling.
d. Advantages to government:-Cost accounting helps the government in many ways like: determination of tax, fixation and control of price etc.
e. Helpful in increasing profit:-It helps to introduce and implement different cost reduction programs to increase profit.
4. Write any five limitation of cost accounting.
Ans:-The three limitation of cost accounting are as follows:
a. Lack of uniformity:-In cost accounting different costing methods are used to determine the profit. Different results can be found from the same information used by different persons.
b. Expensive:-Small organization cannot take many advantages from cost accounting department because of high cost.
c. Lack of double entry system:-Under cost accounting, double entry system is not adopted. So, cost accounting does not help to check the arithmetic accuracy of the transactions and locate the errors.
d. Confusion regarding Non-cost item:-There is always a confusion regarding non cost items while ascertaining the cost.
e. Limited applicability:-If a wrong technique is used to ascertain the cost then it may be mis-lead the results of business.
5. What financial accounting?
Ans:-Financial Accounting is mainly concerned with the preparation of financial statements and communicating them to various users. Financial statements are prepared to know the results of business operations during a period and the financial position on a particular date. Financial Accounting includes Record in journal, ledger posting, Trial Balance, Trading Account, Profit and Loss Account and Balance sheet.
6. Write five limitations of financial accounting.
Ans:-The three limitation of cost accounting are as follows:
a. Based on historical information:-Financial accounting only includes historical and
b. Disclose the overall result only:-Financial accounting discloses the overall result of a business. It fails to reveal the result of each department, process, products, jobs etc.
c. Based on historical information:-Financial accounting records the past transactions and prepares financial statements accordingly. So it is based on historical information.
d. No control on cost:-Financial accounting does not provide proper system of controlling various elements of cost like material, labor and other expenses.
e. Fails to ascertain cost of products and services:-Financial accounting fails to ascertain cost of products and services due to lack of cost information.
7. State any three differences between financial accounting and cost accounting.
Ans:-The differences between financial accounting and cost accounting are mentioned in the following table:
| Financial accounting | Cost accounting |
| Its main objective is to ascertain the profit or loss as well as financial position of a firm. | Its objective is to provides costing information to the management for planning, policy making and decision making. |
| Under financial accounting, the costs are not classified on various basis. | Under cost accounting, the costs are classified on various basis. |
| It is maintained in almost all types of business concern. | It is mostly used by manufacturing concern. |
| It records only monetary translations. | It records both monetary and non-monetary transactions. |
| It records the past transaction only. | It records both past and future transactions. |
| It provides information to both external and internal user. | It provides information to internal user only. |
8. What do you mean by cost?
Ans:-Cost is amount of expenditure incurred to product or services. In other words, cost is the amount of resources given up in exchange for some goods or services.
9. What are the elements of cost?
Ans:-The elements of cost are as follows:
a. Material cost:-Material costs are also two types i.e. direct material cost and indirect material cost.
b. Labour cost:-It also may be of two types i.e. direct labour cost and indirect labour cost.
c. Overhead cost:-Overheads include factor overheads, office and administrative overheads, selling and distribution overheads etc.
10. Classify cost according to its function.
Ans:-According to function, costs are classified into three parts which are as under:
a. Factory cost:-Factory cost are those cost which are include in factory for manufacturing purposes. Like direct material, direct labour, direct expenses etc.
b. Office and administrative cost:-The cost which are spent for office operation and management purposes are called office and administrative cost.
c. Selling and distribution cost:-The cost which are incurred for the promotion of business or delivery of goods and services up to the final consumer are known as selling and distribution cost.
11. What do you mean by direct materials?
Ans:-The materials which are directly involved in production of goods are called direct materials. For examples:-wood in table, leather in shoes, clay in bricks etc.
12. What do you mean by indirect materials?
Ans:-The materials which are do not directly involved in production of goods are called indirect materials. For examples:-nuts, bolt in furniture, button in cloth etc.
13. Clarify the meaning of direct expenses with a suitable example.
Ans:-The costs which are directly chargeable to the units of output are known as direct cost. It is the expenses of particular job, product or process like raw material, royalties, wages, excise duty etc. are the example of direct expenses.
14. Write the meaning of indirect cost with an example.
Ans:-The costs which are not directly chargeable to the units of output are known as indirect cost. It is not the expenses of particular job, product or process like rent, depreciation, salary etc. are the examples of indirect cost.
15. Differences between direct cost and indirect cost.
Ans:-The differences between direct cost and indirect cost are as follows:
| Direct cost | Indirect cost |
| (a)The costs which are directly chargeable to the units of output are known as direct cost. | (a)The costs which are not directly chargeable to the units of output are known as indirect cost. |
| (b)It is generally variable in nature. | (b)It may be of fixed, variable or semi-variable in nature. |
| (c)It is the expenses of particular job, product or process like raw material, royalties, wages, excise duty etc. | (c)It is not the expenses of particular job, product or process like rent, depreciation, salary etc. |
16. Define fixed cost.
Ans:-The cost which does not vary but remain constant within a given period of time and range of activity in spite of fluctuation in production is called fixed cost. Example of fixed costs include depreciation on fixed assets, rent, insurance, salary etc.
17. What is variable cost?
Ans:-The cost which varies directly in production to every increase or decrease in the volume of output is called variable cost. Examples of variable costs include direct material, direct labour etc.
18. Write the three features of variable cost.
Ans:-The three features of variable cost are as given below:
a. Per unit variable cost remains constant.
b. Total amount of variable cost changes according to changes in level of production.
c. Variable cost is a controllable cost.
19. Define semi-variable cost. Write two example of it.
Ans:-Semi-variable costs are those costs, which are partly fixed and partly variable. Both fixed and variable costs are included in these cost. It is also known as semi-fixed cost. For example: Telephone charges, electricity charges, insurance charges, repair and maintenance.
20. What are controllable costs?
Ans:-Controllable costs are those costs that can be controlled by management over a short time period. For example, direct material, direct labour.
21. What are uncontrollable costs?
Ans:-No-controllable costs are those costs that cannot be controlled by management over a short time period. For example: rent, rates, taxes.
22. What is batch costing?
Ans:-Batch costing is a method of costing which is used in industries where production is carried out in bathes. It is generally applied in pharmaceutical industries, snack food industries, toys manufacturing industries and spare parts industries.
23. What is process costing?
Ans:-Activities those are related in each other is known as process and recording cost of all these activities is known as process costing.