Introduction to Cost Accounting: Meaning, Objectives, Scope and Cost Concepts Questions

Question 1

Define cost.

Accepted Answer

Cost is the amount of expenditure (actual or notional) incurred on producing a product or providing a service.

Question 2

What is costing?

Accepted Answer

Costing is the technique and process of ascertaining the cost of a product, service or operation.

Question 3

State the meaning of cost accounting.

Accepted Answer

Cost accounting is a system of accounting that records, classifies and analyses costs and supplies cost information for control and decision-making.

Question 4

What is prime cost?

Accepted Answer

Prime cost is the total of direct material, direct labour and direct expenses.

Question 5

Mention one example of fixed cost.

Accepted Answer

Factory rent is a common example of fixed cost.

Question 6

Mention one objective of cost accounting.

Accepted Answer

One objective of cost accounting is to ascertain unit cost of a product or service.

Question 7

Distinguish between cost accounting and financial accounting (any three points).

Accepted Answer

Cost accounting and financial accounting differ in the following ways:

1) Purpose: Cost accounting is meant for cost ascertainment, cost control and managerial decision-making, whereas financial accounting is meant to determine overall profit/loss and financial position.
2) Users: Cost accounting information is mainly for internal users (management). Financial accounting is primarily for external users such as shareholders, lenders and regulators (and also for management).
3) Detail: Cost accounting provides detailed analysis by product/job/process/department. Financial accounting reports aggregated results for the business as a whole.

Question 8

Explain any three objectives of cost accounting.

Accepted Answer

Any three objectives of cost accounting are:

1) Ascertainment of cost: To determine total cost and cost per unit by collecting and classifying material, labour and overhead costs.
2) Cost control: To keep costs within standards/budgets by comparing actual cost with planned cost and taking corrective action.
3) Decision-making: To provide relevant cost information for decisions such as pricing, make-or-buy, product mix and acceptance of special orders.

Question 9

Explain direct cost and indirect cost with examples.

Accepted Answer

Direct costs are those that can be identified and traced to a specific product/job/service. Example: direct materials and wages of workers directly making the product.

Indirect costs cannot be conveniently traced to a single unit and must be allocated/apportioned. Example: factory rent, supervisor salary and depreciation of factory building (overheads).

Question 10

What is a cost sheet? State its uses.

Accepted Answer

A cost sheet is a statement showing the total cost and cost per unit by grouping costs under direct material, direct labour, direct expenses and overheads.

Uses: (i) helps determine unit cost and total cost, (ii) supports price fixation/quotations by adding profit, (iii) enables comparison of costs over time and helps identify areas for control.

Question 11

Differentiate between cost control and cost reduction.

Accepted Answer

Cost control means keeping costs within predetermined standards/budgets. It is preventive and involves continuous monitoring and corrective action.

Cost reduction means achieving a real and permanent reduction in unit cost without affecting quality. It focuses on continuous improvement and eliminating unnecessary costs.

Question 12

Explain fixed, variable and semi-variable costs with examples.

Accepted Answer

Fixed cost remains constant in total within a relevant range irrespective of output (e.g., rent).

Variable cost changes in total in proportion to output (e.g., raw materials).

Semi-variable cost has both fixed and variable parts (e.g., electricity with a minimum charge plus usage charges).

Question 13

Explain the scope of cost accounting.

Accepted Answer

The scope of cost accounting is wide because it covers the complete flow of cost information—from collection of cost data to reporting for control and decision-making. It generally includes:

1) Cost classification and recording: Developing procedures to record and classify costs into materials, labour and overheads, and further into direct/indirect, fixed/variable, etc.

2) Cost ascertainment and costing methods: Using suitable methods such as job costing, batch costing, process costing and service costing to determine total cost and unit cost.

3) Cost sheets and statements: Preparing cost sheets to show prime cost, works cost, cost of production and cost of sales for analysis and pricing.

4) Overhead accounting: Collection, allocation/apportionment and absorption of overheads, including treatment of under/over absorption.

5) Cost control and cost reduction: Establishing standards/budgets, analysing variances and preparing control reports to reduce wastage and improve efficiency.

6) Decision support: Providing relevant cost information for decisions like pricing, make-or-buy, shutdown, and product mix.

Thus, cost accounting supports planning, controlling and decision-making throughout the organisation.

Question 14

Define cost accounting and explain its objectives and importance.

Accepted Answer

Cost accounting is a system of accounting that records, classifies and analyses costs and provides cost information to management for cost control and decision-making.

Objectives include: (i) ascertainment of total and unit cost, (ii) cost control by comparing actual with standards/budgets, (iii) cost reduction through continuous improvement, (iv) pricing and profitability analysis, and (v) decision-making support (make-or-buy, product mix, special orders).

Importance: It improves efficiency by identifying wastage in materials, labour time and overheads; supports planning and budgeting; helps evaluate performance of departments/cost centres; and provides reliable cost data for competitive pricing and profit planning.

Question 15

Prepare a brief format of a cost sheet and explain each major heading.

Accepted Answer

A cost sheet shows total cost and cost per unit in a logical order. A brief format is:

| Particulars | Amount (₹) |
|---|---:|
| Direct Material | |
| Add: Direct Labour | |
| Add: Direct Expenses | |
| **Prime Cost** | |
| Add: Factory/Works Overheads | |
| **Works (Factory) Cost** | |
| Add: Office & Administration Overheads | |
| **Cost of Production** | |
| Add: Selling & Distribution Overheads | |
| **Cost of Sales** | |
| Add: Profit | |
| **Sales** | |

Explanation: Direct material/labour/expenses are direct costs; their total is prime cost. Factory overheads added give works cost. Admin overheads added give cost of production. Selling & distribution overheads added give cost of sales, and profit added gives sales value.

Introduction to Cost Accounting: Meaning, Objectives, Scope and Cost Concepts

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