CA - IPCC

COST & MANAGEMENT

ACCOUNTING
GUESS QUESTIONS
NOV’18 (New syllabus)
- By Krishna Korada
FCA, CMA

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New Syllabus students has to refer these additional questions from ICAI Study
Material:

Cost and Management Accounting

Page no. Question
Chapter 1. Introduction to Cost and Management Accounting
1.11 Short notes on Installation of Costing System?
1.12 Cost Accounting with use of Information Technology?
1.16 Limitations of Cost Accounting?
Chapter 2. Material Cost
2.3 Objectives of System of material control?
2.34 Short notes on Vital, Essential and Desirable?
2.34 Short notes on Input Output Ratio and Inventory Turnover Ratio?
Chapter 3. Employee Cost and Direct Expenses
3.6 Methods of Time Keeping?
Chapter 5. Activity Based Costing
5.3 Define ABC and explain the terms Activity, Cost object, Cost Driver,
Cost pool?
5.5 Difference between Activity based Costing and Traditional
Absorption Costing?
5.7 Steps in ABC?
5.13 Advantages and Limitations of ABC?
5.13 Requirements in ABC Templates?
Chapter 6. Cost Sheet
6.7 Advantages of Cost Sheet or Cost Statements?
Chapter 7. Cost Accounting Systems
7.24 Essential pre -requisites for Integrated Accounts?
Chapter 11. Joint Products and By Products
11.2 Define Joint Products, By Products and Co-products?
Chapter 14. Marginal Costing
14.37 What is Limiting Factor?
Chapter 15. Budget and Budgetary Control
15.7 Short notes on Advantages of Budgetary Control Systems?
15.47 Short notes on Performance Budgeting?
 Costing
Chapter 1: Basic Concepts
Question 1: What is Cost accounting? Enumerate its important objectives.
Answer: Cost Accounting is defined as "the process of accounting for cost which
begins with the recording of income and expenditure or the bases on which they are
calculated and ends with the preparation of periodical statements and reports for
ascertaining and controlling costs."
The main objectives of the cost accounting are as follows:
a) Ascertainment of cost: There are two methods of ascertaining costs, viz., Post
Costing and Continuous Costing. Post Costing means, analysis of actual information
as recorded in financial books. Continuous Costing, aims at collecting information
about cost as and when the activity takes place so that as soon as a job is completed
the cost of completion would be known.
b) Determination of selling price: Business enterprises run on a profit making basis. It
is thus necessary that the revenue should be greater than the costs incurred. Cost
accounting provides the information regarding the cost to make and sell the product
or services produced.
c) Cost control and cost reduction: To exercise cost control, the following steps should
be observed:
 Determine clearly the objective.
 Measure the actual performance.
 Investigate into the causes of failure to perform according to plan;
 Institute corrective action.
Cost Reduction may be defined "as the achievement of real and permanent
reduction in the unit cost of goods manufactured or services rendered without
impairing their suitability for the use intended or diminution in the quality of the
product."
d) Ascertaining the profit of each activity: The profit of any activity can be ascertained
by matching cost with the revenue of that activity. The purpose under this step is to
determine costing profit or loss of any activity on an objective basis.
e) Assisting management in decision making: Decision making is defined as a process.
of selecting a course of action out of two or more alternative courses. For makl.ng a
choice between different courses of action, it is necessary to make a comparison of
the outcomes, which may be arrived.

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Question 2 Discuss the essential features of a good accounting system.
Answer:
The essential features, which a good cost accounting system should possess, are as
follows:
Informative and simple: Cost accounting system should be tailor-made, practical,
simple and capable of meeting the requirements if a business concern. The system
of costing should not sacrifice the utility by introducing meticulous and unnecessary
details.
Accuracy: The data to be used by the cost accounting system should be accurate,
otherwise it may distort the output of the system and a wrong decision may be
taken.
Support from management and subordinates: Necessary cooperation and
participation of executives from various departments of the concern is essential for
developing a good cost accounting system.
Cost-benefit: The cost of installing and operating the system should justify the
results.
Procedure: A carefully phased programme should be prepared by using network
analysis for the introduction of the system.
Trust: Management should have faith in the costing system and should also provide
a helping hand for its development and success.

Question 3: List the various items of costs on the basis of relevance decision
making.
Answer:
Costs for Managerial Decision Making: According to this basis, cost may be
categorized as:
a. Pre-determined Cost: A cost which is computed in advance before production or
operations start on the basis of specification of all the factors affecting cost, is known
as a pre-determined cost.
b. Standard Cost: A pre-determined cost, which is calculated from management's
expected standard of efficient operation and the relevant necessary expenditure. It
may be used as a basis for price fixing and for cost control through variance analysis.
c. Marginal Cost: The amount at any given volume of output by which aggregate
costs are changed if the volume of output is increased or decreased by one unit.
d. Estimated cost: Kohler defines estimated cost as" the expected cost of
manufacture, or acquisition, often in terms of a unit of product computed on the
basis of information available in advance of actual production or purchase".
Estimated costs are prospective costs since they refer to prediction of costs.
e. Differential cost: It represents the change (increase or decrease) in total cost,
(variable as well as fixed) due to change in activity level, technology, process or
method of production, etc.

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 f. Imputed Costs: These costs are notional Costs which does not involve any cash
outlay. Ex: Interest on capital, the payment for which is not made. These costs are
similar to opportunity costs.
g. Capitalised costs: These are costs are initially recorded as assets and subsequently
treated as expenses
h. Product costs: These are the costs which are associated with the purchase and
sale of goods in the production scenario, such costs are associated with the
acquisition and conversion of materials and all other manufacturing inputs into
finished product for sale.
i. Out-of-pocket costs:
• It is that portion of total cost, which involves cash out flow.
• Out-of-pocket costs can be avoided or saved if a particular proposal under
consideration is not accepted.
• j. Shut down costs: These costs are incurred even when a plant is temporarily shut
down. In other words, all fixed costs, which cannot be avoided during the temporary
closure of a plant, are known as shut down costs.

k. Absolute costs
• These costs refer to the cost of any product, processor unit in its totality.
• When costs are presented in a statement form, various cost components may be
shown in absolute amount or as a percentage of total cost or as per unit cost or all
together
• Here the costs depicted in absolute amount may be called absolute costs and these
are base costs on which further analysis and decisions are based.

l. Discretionary costs: These costs are not tied to a clear cause and effect relationship
between inputs and outputs. They usually arise from periodic decisions regarding
the maximum outlay to be incurred.
m. Period costs: These are the costs, which are not assigned to the products but are
charged as expenses against the revenue of the period in which they are incurred.
All non-manufacturing costs such as general and administrative expenses, selling
and distribution expenses are recognized as period costs.
n. Engineered costs: These are costs that result specifically from a clear cause and
effect relationship between inputs and outputs. The relationship is usually
personally observable.
o. Explicit Costs: These costs are also known as out-of-pocket costs and refer to costs
involving immediate payment, of cash.
p. Implicit Costs: These costs do not involve any immediate cash payment. They are
not recorded in the books of account. They are also known as economic costs.
q. Opportunity costs: This cost refers to the value of sacrifice made or benefit of
opportunity foregone in accepting an alternative course of action.

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r. Sunk Costs: Historical cost occurred in the past are known as sunk costs. They play
no role in decision making in the current period.
s. Conversion costs: It is the cost incurred to convert raw materials into finished
goods. It is the sum of direct wages, direct expenses and manufacturing overheads.

Question 4: Define cost unit, cost centre, cost object, profit centre & investment
centre
Answer:
1. Cost Unit:
• It is a unit of Product services or time in relation to which costs may be ascertained
or expressed.
• For example, we determine the cost per tonne of steel, per tonne kilometre of a
transport service or cost per machine hour. Sometimes, a single order or a contract
constitutes a cost unit. A batch which consists of a group of identical items and
maintains its identity through one or more stages of production may also be
considered as a cost unit. .
• Cost units are usually the units of physical measurement like number, weight, area,
volume, length, time and value. A few typical examples, of cost units are given
below:
Industry or Product Cost Unit Basis
Automobile Number
Cement Tonne/per bag etc.
Chemicals Litre, gallon, kilogram, tonne etc.
Power, Electricity Kilo-watt hour
Professional services Chargeable hour
Education Enrolled student

2. Cost Centres: It is defined as a location, person or an item of equipment for which

cost may be ascertained and used for the purpose of Cost Control. Cost Centres are
of two types - Personal and Impersonal
A personal cost center consists of a person or group of persons and an Impersonal
cost center consists of a location or an item of equipment.
In a manufacturing concern there are two main types of Cost Centres as indicated
below:
a. Production Cost Center: It is a cost centre where raw material is handled tor
conversion into finished product. Here both direct and indirect expenses are
incurred. Machine shops, welding shops and assembly shops are examples of
Production Cost Centres.
b. Service Cost Center: It is a cost centre which serves as an ancillary unit
to a production cost centre. Power house, gas production shop, material service
centres, plant maintenance centres are examples of service cost centres.

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3. Cost Objects: It is anything for which separate measurement of Cost is desired.
Examples of cost objects include a product a Service a project a Customer a Brand
category, an activity a department a programme

Cost Objects Example

Products Two Wheelers
Services An airline flight from Delhi to Mumbai
Project Metro Railway Line Constructed for Delhi
Government

4. Profit centre
a. It is a segment of the organisation. These are created for computation of profits
centre wise. It is responsible for both revenues and expenses.
b. Such centres make ail possible efforts to maximize the profits. Budgeted profits to
be, achieved by each centre are predetermined. Then the actual profit will be
compared to measure the performance of each centre.
c. The authority of each such centre enjoys certain powers to adopt such policies as
are necessary to achieve its targets.

5. Investment Centre: It is a center where managers are responsible for some capital
investment decisions. Return on investment (ROI) is usually used to evaluate the
Performance of them

Question 5 Distinguish Between Cost Reduction & Cost control.

Answer:

Particulars Cost reduction Cost control

Permanence Permanent, Genuine savings in Could be a temporary
cost. saving also
Emphasis on Present and Future. Past and Present
Product quality Quality and characteristics of Quality maintenance is
the product is retained not guaranteed
Aim It aims at improving standards It aims at achieving
and assumes existence of standards i.e, targets)
potential savings
Scope Very broader in scope Very narrow in scope
Tools and techniques Value engineering, Work study Budgetary Control,
Standardization, Variety Standard Costing.
reduction
Function It is a corrective function It is a preventive
function.

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 Question 6. What are the methods of costing?
Answer: Different follows different methods of costing because of nature of
difference in the work. The various methods of costing are as follows
a. Job Costing:
• In this case the cost of each job is ascertained separately.
• It is suitable in all cases where work is undertaken on receiving a customer's order
like a printing press, motor workshop, etc.
• In case a factory produces certain quantity of a part at a time, say 5,000rims of
bicycle, the cost can be ascertained like that of a job. The name then given is Batch
Costing.

b. Batch costing
• It is the extension of job costing.
• A batch may represent a number of small orders passed through the factory in batch.
• Each batch here is treated as a unit of cost and thus separately casted.
• Here cost per unit is determined by dividing the cost of the batch by the number of
units produced in the batch.

c. Contract Costing: Here the cost of each contract is ascertained separately. It is

suitable for firms engaged in the construction of bridges, roads, buildings etc.
d. Single or Output Costing: Here the cost of a product is ascertained, the product
being the only one produced like bricks, coals, etc.
e. Process Costing: Here the cost of completing each stage of work is ascertained,
like cost of making pulp and cost of making paper from pulp. In mechanical
operations, the cost of each operation maybe ascertained separately.
f. Operating Costing: It is used in the case of concerns rendering services like
transport, Supply of water, retail trade etc.
g. Multiple Costing: It is a combination of two or more methods of costing. Suppose
a firm manufactures bicycles including its components; the cost of the parts will be
computed by the system of job or batch costing but the cost of assembling the
bicycle will be computed by the Single or output costing method. The whole system
of costing is known as multiple costing.

Question 7: State the method of costing and the suggestive unit of cost for the
following industries
a) Transport b) Power c) Hotel d) Hospital e) Steel f) Coal g) Bicycles
h) Bridge Construction i) Interior Decoration j) Advertising k) Furniture
l) Brick-Works m) Oil refining mill n) Sugar Company having its own sugarcane
fields o) Toy Making p) Cement q) Radio assembling r) Ship building
Answer:
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 Industry Method of Costing Suggestive Unit of Cost
(a) Transport Operating Costing Passenger k.m. or tonne
k.m..
(b) Power Operating Costing Kilo-watt(kw) hours
(c) Hotel Operating Costing Room day
(d) Hospital Operating Costing Patient- day
(e) Steel Process Costing/ Tonne
Single Costing
(f) Coal Single Costing Tonne
(g) Bicycles Multiple Costing Number
(h) Bridge Construction Contract Costing Project/ Unit
(i) Interior Decoration Job Costing Assignment
(j) Advertising Job Costing Assignment
(k) Furniture Job Costing Number
(l) Brick-Works Single Costing 1000 Units/ units
(m) Oil refining mill Process Costing Barrel/Tonne/ Litre
(n) Sugar Company Process Costing Tonne
having its own
sugarcane fields
(o) Toy Making Batch Costing Units
(p) Cement Single Costing Tonne/ per bag
(q) Radio assembling Multiple Costing Units
(r) Ship building Contract Costing Project/ Unit

CA KRISHNA KORADA (9030557617) COSTING GUESS QUESTIONS PAGE NO: 7

 Chapter 2: Materials
Question 1: What is the treatment of defectives?
Answer:
Meaning: It means those units, which rectified and turned out as good units by the
application of additional material, labour or other service.
Arises: Defectives arise due to sub-standard materials, bad-supervision, and poor
workmanship, inadequate-equipment and careless inspection.
Action: Defectives are generally treated in two ways: either they are brought up to
the standard by incurring further costs on additional material and labour or they are
sold as. Inferior products (seconds) at lower prices.
Control: A standard % for defectives should be fixed and actual defectives should be
compared & appropriate action should be taken.

The costs of rectification may be treated in the following ways:

a. When Defectives are normal:

Charged to good products: The loss is absorbed by good units.
Charged to Jobs: When defectives are easily identifiable with specific jobs, the
rectification cost is added to the job cost.
Charged to the Department: If the department responsible for defectives can be
identified then the rectification costs should be charged to that department.
b. When Defectives are Abnormal: If defectives are due to abnormal causes, the
rectification costs should be charged to Costing Profit and Loss Account.

Question 2: Distinguish between Bill of materials and Material requisition note.

Answer:
Bill of materials Material requisition note
1.It is document or list of materials 1.It is prepared by the foreman of the
prepared by the engineering/ drawing consuming department.
department.
2.It is a complete schedule of component 2.It is a document authorizing Store-
parts and raw materials required for a Keeper to issue material to the
particular job or work order. consuming department.
3.It often serves the purpose of a Store 3.It cannot replace a bill of material.
Requisition as it shows the complete
schedule of materials required for a
particular job i.e. it can replace stores
requisition.

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 4.It can be used for the purpose of 4.It is useful in arriving historical cost
quotation. only.

5.It helps in keeping a quantitative control 5. It shows the material actually

on materials draw through Stores drawn from stores.
Requisition.

Question 3: How is slow moving and non-moving item of stores detected and what steps are
necessary to reduce such stocks?
Answer: Detection of slow moving and non-moving item of stores:
The existence of slow moving and non-moving item of stores can be detected in the following
ways.

(i) By preparing and perusing periodic reports showing the status of different items or stores.
(ii) By calculating the inventory turnover period of various items in terms of number of days/
months of consumption.
(iii) By computing inventory turnover ratio periodically, relating to the issues as a percentage of
average stock held.
(iv) By implementing the use of a well-designed information system.
Necessary steps to reduce stock of slow moving and non-moving item of stores:
(i) Proper procedure and guidelines should be laid down for the disposal of non-moving items,
before they further deteriorate in value.
(ii) Diversify production to use up such materials.
(iii) Use these materials as substitute, in place of other materials.

Question 4 Difference Between Bin Card and Stores Ledger

Answer: Both Bin cards and stores ledger are perpetual inventory records. None of
them is a substitute for the other. These two records may be distinguished from
the following point of view:
Bin card Stores ledger
It is maintained by the store keeper in It is maintained in the costing
the store department
It contains only quantitative details of It contains transactions both in
material received, issued and returned to quantity and value
the stores
Entries are made when transactions take It is always posted after the
place transaction

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 Each transaction is individually posted Transaction s may be summarized
and posted
Inter-department transfers do not appear Material transfer from one job to
in bin card another are recorded from costing
purpose
It is kept inside the stores It is kept outside the stores
Bin card is the stores recording document Where as It is an Accounting record

Question 5: Write a short note on perpetual inventory records

Answer: Perpetual inventory records represent a systematic group of records. It
comprises of bin cards, stock control cards, stores ledger,
a. Bin Cards: Bin card maintains quantitative record of receipts, issues and closing
balance of each item of stores. Separate bin cards are maintained for separate items
and attached other concerned bins. Each bin card is filled with the physical
movement of goods.
b. Stock control cards: These are similar to bin cards but contain further information
as regards to stock on order. Bins cards are attached to bins but stock control cards
are kept in cabinet sort rays or loose binders.
c. Stores Ledger: A stores ledger is a collection of cards or loose leaves specially ruled
for maintaining of record of both quantity and cost of stores received, issued and
those in stock. It is posted from goods received notes and material requisitions.
2. Advantages: The main advantages of perpetual inventory are as follows:
a. Physical stocks can be counted and book balances adjusted as and when desired
without waiting for the entire stock-taking to be done.
b. Quick compilation of Profit and Loss Account due to prompt availability of stock
figures.
c. Discrepancies are easily located and thus corrective action can be promptly taken
to avoid their recurrence

Question 6 Explain the concept of “ABC Analysis” as a technique of inventory

control.
Answer: ABC analysis:
1. It is a system of selective inventory control where by the measure of control over
an item of inventory varies with its value i.e. it exercises discriminatory control over
different items of stores
2. Usually the materials are grouped into the categories Viz. A, B and C according to
their value.
3. A Category-Highly Important, B Category-Relatively less important, C Category -
Least important.
4. ABC analysis is also called as Pareto Analysis or Selective Stock Control
The three categories are classified and differential control is established as under:

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 Category % of total % in total Extent of control
value quantity
A 60 % 10% Constant and strict control through
budgets, ratios, Stock levels, EOQs
etc.
B 30 % 30% Need based, periodical & selective
controls
C 10 % 60% Little control, focus is on saving &
associated costs

Advantages of ABC analysis: The advantages of ABC analysis are the following:
a. Continuity in production: It ensures that, without there being any danger of
interruption of production for want of materials or stores, minimum investment
will be made in inventories of stocks of materials or stocks to be carried.
b. Lower cost: The cost of placing orders, receiving goods and maintaining stocks
is minimized especially if the system is coupled with the determination of proper
economic order quantities.
c. Less attention required: Management time is saved since attention need be paid
only to some of the items rather than all the items as would be the case if the ABC
system was not in operation.
d. Systematic working: With the introduction ABC system, much of the work
connected with purchases can be systematized on a routine basis to be handled by
subordinate staff.

CA KRISHNA KORADA (9030557617) COSTING GUESS QUESTIONS PAGE NO: 11

 Chapter 3: Labour
Question 1: Discuss the objectives of timekeeping & time booking.
Answer:
Objectives of time keeping and time booking: Time keeping has the following two objectives:

(i) Preparation of Payroll: Wage bills are prepared by the payroll department on the basis of
information provided by the time keeping department.
(ii) Computation of Cost: Labour cost of different jobs, departments or cost centres are
computed by costing department on the basis of information provided by the time
keeping department.
The objectives are time booking are as follows:

(i) To ascertain the labour time spent on a job and the idle labour hours.
(ii) To ascertain labour cost of various jobs and products.
(iii) To calculate the amount of wages and bonus payable under the wage incentive scheme.
(iv) To compute and determine overhead rates and absorption of overheads under the labour and
machine hour method.
(v) To evaluate the performance of labour by comparing actual time booked with standard or
budgeted time.

Question 2: Distinguish between Job Evaluation and Merit Rating.

Answer:
Job Evaluation: It can be defined as the process of analysis and assessment of jobs to ascertain
reliably their relative worth and to provide management with a reasonably sound basis for
determining the basic internal wage and salary structure for the various job positions. In other
words, job evaluation provides a rationale for differential wages and salaries for different groups of
employees and ensures that these differentials are consistent and equitable.

Merit Rating: It is a systematic evaluation of the personality and performance of each

employee by his supervisor or some other qualified persons.

Thus the main points of distinction between job evaluation and merit rating are as follows:

1. Job evaluation is the assessment of the relative worth of jobs within a company and merit
rating is the assessment of the relative worth of the man behind a job. In other words job
evaluation rate the jobs while merit rating rate employees on their jobs.
2. Job evaluation and its accomplishment are means to set up a rational wage and salary
structure whereas merit rating provides scientific basis for determining fair wages for each
CA KRISHNA KORADA (9030557617) COSTING GUESS QUESTIONS PAGE NO: 12
 worker based on his ability and performance.
3. Job evaluation simplifies wage administration by bringing uniformity in wage rates. On the
other hand, merit rating is used to determine fair rate of pay for different workers on the
basis of their performance

Question 3: Write about the treatment of idle time in cost accounting.

Answer:
Normal idle time: It is treated as a part of the cost of production.
• In the case of direct workers an allowance for normal idle time is built into the labour
cost rates.
• In the case of indirect workers, normal idle time is spread over all the products or
jobs through the process of absorption of factory overheads.

Abnormal idle time: This cost is not included as a part of production cost and is
shown as a separate item in the Costing Profit and Loss Account so that normal costs
are not disturbed.
• Showing cost relating to abnormal idle time separately helps in drawing the
attention of the management towards the exact losses due to abnormal idle time.
• Basic control can be exercised through periodical on idle time showing a detailed
analysis of the causes for the same, the departments where it is occurring and the
persons responsible for it, along with a statement of the cost of such idle time.

Question 4: Write about overtime premium and its treatment.

Answer:
1. Overtime payment is the amount of wages paid for working beyond normal
working hours.
2. The rate for overtime work higher than the normal time rate; usually it is at double
the normal rates.
3. The extra amounts paid over the normal rate is called overtime premium.
4. Under Cost Accounting the overtime premium is treated as follows:
a. If overtime is resorted to at the desire of the worker, then overtime premium maybe
charged to the job directly
b. If overtime is required to with general production programmers’ or for meeting
urgent orders, the overtime premium should be treated as Overhead cost.
c. If overtime is worked in a department due to fault of another department, the
overtime premium should be charged to latter department.
d. Overtime worked on account of abnormal conditions such as flood, earthquake etc.
should not be charged to cost but charged to costing profit and loss account.
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 5. Overtime work should be resorted to only when it is extremely essential because
it involves extra cost.
6. The overtime payment increases the cost of production in the following ways:
a) The overtime premium paid is an extra payment in addition to normal rate
b) The efficiency of operator during overtime work may fall and thus output may be
less than normal output.
c) In order to earn more the workers may not concentrate on work during normal time
and thus the output during normal hours may also fall.
d) Reduced output and increased premium of overtime will bring about an increase in
cost of production.

Question 5: Define labour Turnover & How it is measures & Explain the causes for
labour turnover
1. It is the rate of change in the composition of labour force during a specified period
measured against a suitable index. It arises because every firm is a dynamic entity
and not static one.
2. The methods of calculating labour turnover are:
 Replacement method= No. of Replacements
Average no of workers
 Separation method: No of separations
Average no of workers

 Flux method:
• Alternative 1: Separations + replacements
Average no of workers
• Alternative 2: Separations + replacements + New recruitments
Average no of workers
 Recruitment Method: Recruitments other than replacements
Average no of workers
 Accessions Method: Total Recruitments
Average no of workers

CAUSES OF LABOUR TURNOVER

a. Personal causes:
• Change of jobs for betterment.
• Premature retirement due to ill health or old age
• Dissatisfaction over the jobs and working environment
b. Unavoidable causes:
• Seasonal nature of the business
CA KRISHNA KORADA (9030557617) COSTING GUESS QUESTIONS PAGE NO: 14
 • Shortage of raw material, power, slack market for the products;
• Change in the plant location;

c. Avoidable causes:
• 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

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 Chapter 4: Overheads
Question 1: Distinguish between allocation & apportionment
Answer: The differences between Allocation and Apportionment are:
Particulars Allocation Apportionment
1. Meaning Identifying a cost center Allotment of proportions of
and charging its expense common cost to various cost centres
in full
2. Nature of Expenses Specific and Identifiable General and Common
3. Number of Depts. One Many
4.Amount of OH Charged in Full Charged in Proportions

Question 2: Discuss in brief three main methods of allocating support departments costs
to operating departments. Out of these three, which method is conceptually preferable?
The three main methods of allocating support departments costs to operating departments
are:

1.Direct re-distribution method: Under this method, support department costs are directly
apportioned to various production departments only. This method does not consider the
service provided by one support department to another support department.
2.Step method: Under this method the cost of the support departments that serves the
maximum numbers of departments is first apportioned to other support departments and
production departments. After this the cost of support department serving the next largest
number of departments is apportioned. In this manner we finally arrive on the cost of
production departments only.
3.Reciprocal service method: This method recognises the fact that where there are two or
more support departments they may render services to each other and, therefore, these
inter-departmental services are to be given due weight while re-distributing the expenses of the
support departments. The methods available for dealing with reciprocal services are:
1. Simultaneous equation method
2. Repeated distribution method
3. Trial and error method.
The reciprocal service method is conceptually preferable. This method is widely used even
if the number of service departments is more than two because due to the availability
of computer software it is not difficult to solve sets of simultaneous equations.

CA KRISHNA KORADA (9030557617) COSTING GUESS QUESTIONS PAGE NO: 16

Question 3: Explain Single and Multiple Overhead Rates.

Single and Multiple Overhead Rates:

Single overhead rate: It is one single overhead absorption rate for the whole factory. It
may be computed as follows:

Single overhead rate = Overhead costs for the entire factory / Total quantity of the
base selected

The base can be total output, total labour hours, total machine hours, etc.

The single overhead rate may be applied in factories which produces only one major product
on a continuous basis. It may also be used in factories where the work performed in each
department is fairly uniform and standardized.

Multiple overhead rate: It involves computation of separate rates for each production
department, service department, cost center and each product for both fixed and variable
overheads. It may be computed as follows:

Multiple overhead rate = Overhead apportioned to each department or cost centre or product/
Corresponding base

Under multiple overheads rate, jobs or products are charged with varying amount of factory
overheads depending on the type and number of departments through which they pass.
However, the number of overheads rate which a firm may compute would depend upon two
opposing factors viz. the degree of accuracy desired and the clerical cost involved.

Question 4: State the treatment of Over Absorption and Under Absorption of

Overheads

Answer: OVER ABSORPTION: Absorbed OH is greater than actual OH.

UNDER ABSORPTION: Absorbed OH is less than actual OH.

ACCOUNTING TREATMENT:
1. Use of Supplementary Rate: Computation of supplementary rates is nothing but
a process of correction whereby an over absorption is brought down and under
absorption is pushed up to the correct figure of actual overhear cost. Accordingly,
there are two types of absorption rates:
Positive Supplementary Rate (In case of under absorption):
= Actual Overheads - Absorbed Overheads
Actual Base
CA KRISHNA KORADA (9030557617) COSTING GUESS QUESTIONS PAGE NO: 17
Negative Supplementary Rate (in case of over absorption):
= Absorbed Overheads - Actual Overheads
Actual Base

By using supplementary OH recovery rate, OH’s are appointed to

Units sold Closing stock of finished goods Closing stock of WIP

Cost of sales FG Control A/c WIP Control A/c

2. Carry Over of Overheads: In case of seasonal establishments or new projects.

3. Transfer to Costing P&L A/c: In case over or under absorption is of small value or
arises due to abnormal factors, e.g., heavy machine break-down, fire accidents,
strikes etc.

CA KRISHNA KORADA (9030557617) COSTING GUESS QUESTIONS PAGE NO: 18

 Chapter 5: Non-integrated accounts
Question 1: What do you mean by reconciliation between cost and financial
accounts? Explain the procedure for Reconciliation.
Answer:
• When the cost and financial accounts are kept separately, it is imperative that those
should be reconciled; otherwise the cost accounts would not be reliable.
• It is necessary that reconciliation of the two sets of accounts only can be made if
both the sets contain sufficient details 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 the cost accounts.
• The reconciliation of the balances generally, is possible preparing a Memorandum
Reconciliation Account.
• In this account, the items charged in one set of accounts but not in the other or those
charged in excess as compared to that in the other are collected and by adding or
subtracting them from the balance of the amount of profit shown by one of the
accounts, shown by the other can be reached.

Procedure for reconciliation: There are 3 steps involved in the procedure for
reconciliation.
a. Ascertainment of profit as per financial accounts
b. Ascertainment of profit as per cost accounts
c. Reconciliation of both the profits.

Circumstances where reconciliation statement can be avoided: 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 the same set
of accounts fulfil the requirement of both i.e., Cost and Financial Accounts.

CA KRISHNA KORADA (9030557617) COSTING GUESS QUESTIONS PAGE NO: 19

 Chapter 6: Job & Batch Costing
Question 1: Distinguish between job and batch costing?

Answer:
Basic Job Costing Batch Costing
Nature Job costing is a specific order Batch costing is a special type
costing. of job costing.
Applicability It is undertake such It is undertaken in such
industries where work is one industries where production is
as per the customer's of repetitive nature.
requirement.
Similarity No two jobs are alike. The articles produced in a
batch are alike.
Cost The cost is determined on The cost is determined on
determination job basis. batch basis.
Output quantity The output of a job may be 1 The output of a batch is
unit, 2 units of a batch. usually a large quantity.
Cost estimation The cost is estimated before The cost is estimated after the
the production. completion of production.
Examples Industries where job costing Industries where job costing is
is undertaken are repair undertaken are
workshop, furniture and pharmaceuticals, garment
general engineering works. manufacturing, radio, T.V.
manufacturing etc.

CA KRISHNA KORADA (9030557617) COSTING GUESS QUESTIONS PAGE NO: 20

 Chapter 7 – Contract Costing
Question 1: Write a short note on
(a) Retention money (b) Progress payments/Cash received
(c) Notional Profit (d) Escalation clause (e) cost plus contracts
(f) Recognizing profit/loss on incomplete contracts
Answer:
(a) Retention money:
• A contractor does not receive full payment of the work certified by the
surveyor.
• Contractee retains some amount (say 10% to 20%) to be paid, after some time,
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.,
(b) Progress Payments/Cash received:
Payments received by the Contractors when the contract is "in-progress" are
called progress payments or Running Payments. It is ascertained by deducting
the retention money from the value of work certified i.e., Cash received =
Value of work certified - Retention money.
c) Notional Profit: Notional profit in contract costing: It represents the difference
between the value of work certified and cost of work certified.
Notional profit = value of work certified – (cost of work to date – cost of work not
yet certified)
d) Escalation Clause
Meaning: If during the period of execution of a contract, the prices of materials, or
labour etc., rise beyond a certain limit, the contract price will be increased by an
agreed amount. Inclusion of such a clause in a contract deed is called an "Escalation
Clause".
Accounting Treatment:
a) The amount of reimbursement due should be determined by reference to the
Escalation Clause.
b) The amount due from the Contractee should be recorded by means of the following
journal Entry:

Date Contractee's A/c Dr XXXX

To Contract A/c XXXX

e) Cost Plus Contract

CA KRISHNA KORADA (9030557617) COSTING GUESS QUESTIONS PAGE NO: 21

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 r possible to estimate the Contract Cost with reasonable accuracy
due to unstable condition of material, labour services, etc.
Advantages:
a. The Contractor is assured of a fixed percentage of profit. There is no risk of
incurring any loss on the contract.
b. It is useful especially when the work to be done is not definitely fixed at the time
of making the estimate.
c. Contractee can ensure himself about the “cost of the contract”, as he is
empowered to examine the books and documents of the contract of the contractor
to ascertain the veracity of the cost of the contract.
Disadvantages: The contractor may not have any inducement to avoid wastages and
effect economy in production to reduce cost.
(f) Recognizing profit/loss on incomplete contracts
Estimated profit: It is the excess of the contract price over the estimated total cost
of the contract.
Profit/loss on incomplete contracts: Profit on incomplete contract is recognized
based on the Notional Profit and Percentage of Completion. To determine the profit
to be taken to Profit and Loss Account, in the case of incomplete contracts, the
following four situations may arise:
Description Percentage of Completion Profit to be recognized and
Transferred to P&L Account
Initial stages Less than 25% Nil
Work performed but Up to or more than 25% 1/3 * Notional Profit * (Cash
not substantial but less than 50% received/Work Certified)
Substantially Up to or more than 50% 2/3 * Notional Profit * (Cash
completed but less than 90% received/Work Certified)
Almost complete Up to or more than 90% > Profit is recognized on the
0 not fully complete basis of estimated total
profit

Note:
a. Percentage of completion = Value of work Certified / Contract Price
b. If there is a loss at any stage, i.e. irrespective of percentage of completion, the
same --should be fully transferred to the Profit and Loss Account.

CA KRISHNA KORADA (9030557617) COSTING GUESS QUESTIONS PAGE NO: 22

 Chapter 8: Operating costing

Question 1: What is the meaning of operating costing and Mention the Cost units
for Services under taken
Answer:
Meaning of Operating Costing:
• It 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.
• The emphasis is on the ascertainment of cost of services rather than on the cost of
manufacturing a product. This costing method is usually made use of by transport
companies, gas and water works departments, electricity supply companies,
canteens, hospitals, theatres, schools etc.

Operating costs are classified into three broad categories:

1. Operating and Running costs: These are the costs which are incurred for operating
and running the vehicle. For e.g. cost of diesel, petrol etc. These costs are variable in
nature and vary with operations in more or less same proportions.
2. Standing Costs: Standing costs are the costs which are incurred irrespective of
operation. It is fixed in nature and thus the cost goes on accumulating as the time
passes.
3. Maintenance Costs: Maintenance Costs are the costs which are incurred to keep the
vehicle in good or running condition.
For computing the operating cost, it is necessary to decide first, about the unit for
which the cost is to be computed. The cost units usually used in the following service
undertakings are as below:
Service Undertaking Cost Units
Transport Service Passenger km, quintal km or tonne km
Supply Service Kwh, Cubic metre, per kg, per litre
Hospital Patient per day, room per day or per bed, per
operation etc.,
Canteen Per item, per meal etc.,
Cinema Number of tickets, number of shows
Hotels Guest Days, Room Days
Electric Supply Kilowatt Hours
Boiler Houses Quantity of steam raised

CA KRISHNA KORADA (9030557617) COSTING GUESS QUESTIONS PAGE NO: 23

 Chapter 9: Process costing
Question 1: What is inter- process profits? State its advantages and disadvantages.

Answer: 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.
The advantages and disadvantages of using inter-process profit, in the case of
process type industries are as follows:

Advantages:
1. Comparison between the cost of output and its market price at the stage of
completion is facilitated.
2. Each process is made to stand by itself as to the profitability.

Disadvantages:
1. 1. The use of inter-process profits involves complication.
2. The system shows profits which are not realised because of stock not sold out

Question 2: Explain the concept of equivalent production units.

Answer:
• In the case of process type of industries, it is possible to determine the average
cost per unit by dividing the total cost incurred during a given period of time by the
total number of units produced during the same period.
• The reason is that the cost incurred in such industries represents the cost of work
carried on opening work-in-progress, closing work-in-progress and completed units.
Thus to ascertain the cost of each completed unit it is necessary to ascertain the cost
of work-in-progress in the beginning and at the end of the process.
• Work-in-progress can be valued on actual basis, i.e., materials used on the
unfinished units and the actual amount of labour expenses involved.
• However, the degree of accuracy in such a case cannot be satisfactory. An
alternative method is based on converting partly finished units into equivalent
finished units.
Equivalent production means converting the incomplete production units into their
equivalent completed units.
• Under each process, an estimate is made of the percentage completion of work-
in-progress with regard to different elements of costs, viz., material, labour and
overheads.
•Equivalent completed units = Actual no of manufactured units * % of work
completed.

CA KRISHNA KORADA (9030557617) COSTING GUESS QUESTIONS PAGE NO: 24

 Chapter 10: Joint products & By products

Question 1: Discuss the treatment of by-product cost in Cost Accounting.

Answer:
Treatment of by-product cost in Cost Accounting:
(i) When they are of small total value, the amount realized from their sale may be dealt as
follows:
 Sales value of the by-product may be credited to Costing Profit & Loss Account and no credit be
given in Cost Accounting. The credit to Costing Profit & Loss Account here is treated either as a
miscellaneous income or as additional sales revenue.
 The sale proceeds of the by-product may be treated as deduction from the total costs. The sales
proceeds should be deducted either from production cost or cost of sales.
(ii) When they require further processing:
In this case, the net realizable value of the by-product at the split-off point may be arrived at
by subtracting the further processing cost from realizable value of by-products. If the value is
small, it may be treated as discussed in (i) above.

Question 2: Describe briefly, how joint costs upto the point of separation may be
apportioned amongst the joint products under the following methods:
(i) Average unit cost method (ii) Contribution margin method (iii) Market value at
the point of separation (iv) Market value after further processing (v) Net realizable
value method.
Answer: Methods of apportioning joint cost among the joint products:
(i) Average Unit Cost Method: Under this method, total process cost (upto the point
of separation) is divided by total units of joint products produced. On division
average cost per unit of production is obtained. The effect of application of this
method is that all Joint products will have uniform cost per unit.
(ii) Contribution Margin Method: Under this method joint costs are segregated into
two parts - variable and fixed. The variable costs are apportioned over the joint
products on the basis of units produced (average method) or physical quantities. If
the products are further processed, then all variable cost incurred be added to the
variable cost determined earlier. Then contribution is calculated by deducting
variable cost from their respective sales values. The fixed costs are then apportioned
over the joint products on the basis of contribution ratios.
(iii) Market Value at the Time of Separation: This method is used for apportioning
joint costs to joint products upto the split off point. It is difficult to apply if the market

CA KRISHNA KORADA (9030557617) COSTING GUESS QUESTIONS PAGE NO: 25

values of the products at the point of separation are not available. The joint cost may
be apportioned in the ratio of sales values of different joint products.
(iv) Market Value after further Processing: Here the basis of apportionment of joint
costs is the total sales value of finished products at the further processing. The use
of this method is unfair where further processing costs after the point of separation
are disproportionate or when all the joint products are not subjected to further
processing.
V) Net Realisable Value Method: Here Joint costs is apportioned in the basis of net
realizable value of the joint products
Net Realisable Value = Sale Value of Joint products (at finished stage)
(-) estimated profit margin
(-) Selling & Distribution expenses, if any
(-) post-split Off Cost

CA KRISHNA KORADA (9030557617) COSTING GUESS QUESTIONS PAGE NO: 26

 Chapter 11: Standard Costing
Question 1: How is cost variances disposed of in a standard costing? Explain.

Answer:
Variances may be disposed of by any of the following methods:
Method Journal Entry Assumption
A. Write — off all variances Costing P&L A/c Dr All Variances are
to Costing Profit and Loss To Variances A/c s abnormal.
Account at the end of every (individually) (if adverse)
period.
B. Distribute all variances Cost of Sales A/c Dr. All Variances are
proportionately to: WIP Control A/c Dr. normal.
• Units Sold, Finished Goods Control A/c
• Closing Stock of WIP, and Dr. To Variance Accounts
• Closing Stock of Finished
Goods.

CA KRISHNA KORADA (9030557617) COSTING GUESS QUESTIONS PAGE NO: 27

 Chapter 12: Marginal Costing
Question 1: Explain and illustrate cash break-even chart.
Answer: In cash break-even chart, only cash fixed costs are considered. Non-cash
items like depreciation etc. are excluded from the fixed cost for computation of
break-even point. It depicts the level of output or sales at which the sales revenue
will equal to total cash outflow. It is computed as under:
Cash Fixed Cost
Cash BEP (Units) = Contribution per Units

Question 2: Write short notes on Angle of Incidence.

Answer: 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.

Question 3: Discuss basic assumptions of Cost Volume Profit analysis.

Answer: CVP Analysis: -Assumptions
a. Changes in the levels of revenues and costs arise only because of changes in the
number of products (or service) units produced and sold.
b. Total cost can be separated into two components: Fixed and variable
c. Graphically, the behaviour of total revenues and total cost are linear in relation to
output level within a relevant range.
d. Selling price, variable cost per unit and total fixed costs are known and constant.
e. All revenues and costs can be added, subtracted and compared without taking into
account the time value of money.

Question 4: Elaborate the practical application of Marginal Costing.

Answer: Practical applications of Marginal costing:

i. 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.
ii. Decision Making: Marginal costing helps the management in taking a number of
business decisions like make or buy, discontinuance of a particular product,
replacement of machines, etc.
iii. Determination of production level: Marginal costing helps in the preparation of
break-even analysis which shows the effect of increasing or decreasing production
activity on the profitability of the company.

CA KRISHNA KORADA (9030557617) COSTING GUESS QUESTIONS PAGE NO: 28

 Chapter 13: Budgets and Budgetary Control
Question 1: Explain the steps involved in the budgetary control technique?
Answer:
These are the steps involved in the budgetary control technique. They are follows:
(i)Definition of objective: A budget being a plan for achievement of certain
operational objectives. It is desirable that the same are defined precisely. The
objectives should be written out; the areas of control demarcated; and items of
revenue and expenditure to be covered by the budget stated.

(ii) Location of the key factor (or budget factor): There are usually one factor
(sometimes there may be more than one) which sets limit to the total activity Such
factor known as key factor. For proper budgeting, it must be located and estimated
properly.
(iii) Appointment of controller: Formulation of budget usually required whole time
services of senior executive known as budget controller; he must be assisted in this
work by a budget committee, consisting of all the heads of department along with
the managing director as chairman.
(iv) Budget manual: Effective budgetary planning relies on provision of adequate
information which is contained in the budgetary manual. A budget manual is
collection of documents that contains key information of those involved in the
planning process.
(v) Budget period: The period covered by a budget is known as budget period. The
budget committee decides the length of the budget period suitable for business. It
may be months or quarters or such period as coincide with period of trading activity.
(vi) Standard of activity or output: For preparing budgets for the future, past
statistics cannot completely relied upon, for the past usually represents a
combination of good and bad factors. Therefore, through result of past should be
studied but these should only have applied when there is a likelihood of similar
conditions repeating in the future.

Question 2 Distinguish between Fixed and Flexible Budgets.

Answer:

Particulars Fixed Budget Flexible budget

1. Definition It is a Budget designed to It is a Budget, which by
remain unchanged recognising the
irrespective of the level of difference between fixed,
activity actually attained. semi-variable and variable
costs is designed to change
CA KRISHNA KORADA (9030557617) COSTING GUESS QUESTIONS PAGE NO: 29
 in relation to level of
activity attained.
2. Rigidity It does not change with It can be re-casted on the
actual volume of activity basis of activity
achieved. Thus it is known as level to be achieved.
rigid or inflexible budget. Thus it is not rigid
3. Level of activity It operates on one level of It consists of various
activity and under one set of budgets for different
conditions. It assumes that levels of activity.
there will be no change in the
prevailing conditions, which
is unrealistic.
4. Effect of variance Variance Analysis does not give Variance Analysis provides
analysis useful information as all Costs useful information as each
(fixed, variable and semi- cost is analysed according
variable) are related to only to its behaviour.
one level of activity.
5. Use of decision If the budgeted and actual It facilitates the
making activity levels differ ascertainment of cost,
significantly, then aspects like fixation of Selling Price and
cost ascertainment and price submission of quotations.
fixation do not give a correct
picture.
6. Performance Comparison of actual It provides a meaningful
evaluation performance with budgeted basis of comparison of the
targets will be meaningless, actual performance with
especially when there is a the budgeted targets.
difference between two
activity levels.

All the very best………...

No one can separate the best pair in this world
– “SUCCESS and HARD WORK”
- CA Krishna Korada
CA KRISHNA KORADA (9030557617) COSTING GUESS QUESTIONS PAGE NO: 30
New Syllabus students has to refer these additional questions from ICAI Study
Material:

Cost and Management Accounting

Page no. Question
Chapter 1. Introduction to Cost and Management Accounting
1.11 Short notes on Installation of Costing System?
1.12 Cost Accounting with use of Information Technology?
1.16 Limitations of Cost Accounting?
Chapter 2. Material Cost
2.3 Objectives of System of material control?
2.34 Short notes on Vital, Essential and Desirable?
2.34 Short notes on Input Output Ratio and Inventory Turnover Ratio?
Chapter 3. Employee Cost and Direct Expenses
3.6 Methods of Time Keeping?
Chapter 5. Activity Based Costing
5.3 Define ABC and explain the terms Activity, Cost object, Cost Driver,
Cost pool?
5.5 Difference between Activity based Costing and Traditional
Absorption Costing?
5.7 Steps in ABC?
5.13 Advantages and Limitations of ABC?
5.13 Requirements in ABC Templates?
Chapter 6. Cost Sheet
6.7 Advantages of Cost Sheet or Cost Statements?
Chapter 7. Cost Accounting Systems
7.24 Essential pre -requisites for Integrated Accounts?
Chapter 11. Joint Products and By Products
11.2 Define Joint Products, By Products and Co-products?
Chapter 14. Marginal Costing
14.37 What is Limiting Factor?
Chapter 15. Budget and Budgetary Control
15.7 Short notes on Advantages of Budgetary Control Systems?
15.47 Short notes on Performance Budgeting?