Question 1

Under-absorption of overhead tends to make profit as per cost accounts (compared to financial profit):

Accepted Answer

Under-absorption means cost accounts charged less overhead than actual, so cost profit tends to be higher.

Question 2

Time booking is used primarily for:

Accepted Answer

Time booking allocates labour time to specific jobs/processes.

Question 3

In batch costing, unit cost is found by:

Accepted Answer

Batch costing computes batch cost first, then divides by units to get per-unit cost.

Question 4

Costs that can be influenced by a manager in the short period are called:

Accepted Answer

Controllable costs are those that a responsible manager can influence within a given period.

Question 5

If profit is stated as 20% on cost, selling price equals:

Accepted Answer

Profit on cost means SP = Cost + 20% of Cost = 1.20 × Cost.

Question 6

A budget is best described as:

Accepted Answer

Budget is a quantified plan prepared for a future period.

Question 7

In Halsey plan (50% sharing), bonus is based on:

Accepted Answer

Halsey bonus is a share (commonly 50%) of time saved valued at hourly rate.

Question 8

Normal loss in a process is the loss which:

Accepted Answer

Normal loss is unavoidable and expected under efficient operating conditions.

Question 9

In flexible budget, fixed cost is generally:

Accepted Answer

Fixed cost remains constant in total within the relevant range.

Question 10

Flexible budget is prepared for:

Accepted Answer

Flexible budgets adjust costs for varying levels of activity/output.

Question 11

Factory rent is classified by function as:

Accepted Answer

Factory rent relates to production activity, hence factory overhead.

Question 12

A good control report should be:

Accepted Answer

Good control reports are timely, clear and highlight exceptions/variances.

Question 13

Piece rate system primarily encourages:

Accepted Answer

Piece rate links pay to units produced, motivating output.

Question 14

Profit on sale of fixed assets is generally:

Accepted Answer

Profit/loss on sale of fixed assets is recorded in financial accounts.

Question 15

Which of the following is a cost unit?

Accepted Answer

Cost unit is the unit of product/service for which cost is expressed (e.g., per kg, per litre).

Question 16

Contribution is defined as:

Accepted Answer

Contribution = Sales − Variable cost; it covers fixed cost and profit.

Question 17

Budgetary control involves:

Accepted Answer

Budgetary control includes preparation, comparison, variance analysis and corrective action.

Question 18

Absorption of overhead refers to:

Accepted Answer

Absorption is the process of charging overhead to output using a rate.

Question 19

Normal idle time is generally treated as:

Accepted Answer

Normal idle time is unavoidable and absorbed as overhead (or built into labour rate).

Question 20

Cost of normal loss is generally borne by:

Accepted Answer

Normal loss units are not given cost; the cost is spread over good output.

Question 21

What is apportionment of overhead?

Accepted Answer

Apportionment is distributing a common overhead among two or more cost centres on an equitable basis.

Question 22

What is normal loss?

Accepted Answer

Normal loss is the expected and unavoidable loss under normal efficient operating conditions in a process.

Question 23

Define marginal costing.

Accepted Answer

Marginal costing is a technique in which variable costs are charged to units and fixed costs are treated as period costs; decisions are based on contribution.

Question 24

Define job costing.

Accepted Answer

Job costing is a method of costing in which costs are collected and ascertained separately for each job or work order.

Question 25

What is a job number?

Accepted Answer

Job number is a unique identification number assigned to a job to record and control all costs related to that job.

Question 26

What is margin of safety (MOS)?

Accepted Answer

Margin of safety is the excess of actual sales over break-even sales; it indicates the safety cushion before losses start.

Question 27

Define time keeping.

Accepted Answer

Time keeping is the process of recording the attendance and total time spent by workers in the factory/premises.

Question 28

What is cost classification?

Accepted Answer

Cost classification is the process of grouping costs into suitable categories for analysis, control and decision-making.

Question 29

Give one example of variable cost.

Accepted Answer

Direct material cost is a common example of variable cost.

Question 30

What is costing?

Accepted Answer

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

Question 31

Explain ABC analysis and how control differs for A, B and C items.

Accepted Answer

ABC analysis classifies items by annual consumption value (quantity × price).

- A items: high value, strict control, frequent review, tight authorization.
- B items: moderate control and periodic review.
- C items: low value, simple controls, bulk ordering and less frequent review.

Question 32

What are the causes of under/over absorption of overheads? (any three)

Accepted Answer

Causes include: inaccurate budgeting/estimation, change in capacity utilisation (actual activity differs from budget), seasonal fluctuations, inefficiency/abnormal idle time, and wrong choice of absorption base.

Question 33

Differentiate between fixed budget and flexible budget (any three points).

Accepted Answer

Fixed budget vs flexible budget:

| Basis | Fixed budget | Flexible budget |
|---|---|---|
| Activity level | One level only | Multiple levels |
| Adjustment | Not adjusted for actual output | Adjusted for actual output |
| Usefulness | Limited when activity changes | Useful when output varies |

Hence, flexible budget provides a fairer comparison of cost performance when volume changes.

Question 34

State the main features of process costing (any three).

Accepted Answer

Main features of process costing (any three):

1) Continuous and homogeneous production: output is standardised/identical and production flows continuously from one process to another.
2) Process-wise cost collection: costs are accumulated for each process/department for a period (month/quarter) rather than job-wise.
3) Average unit cost: cost per unit is obtained by dividing total process cost (after scrap credit) by units produced.

Other features include inter-process transfers and frequent existence of WIP and normal loss.

Question 35

Explain batch costing and state how unit cost is determined.

Accepted Answer

Batch costing is a special form of job costing in which a batch of identical units is treated as one job. It is used when production is done in lots/batches (e.g., 500 identical bolts, 1,000 pens).

How costs are collected:
1) A batch number is allotted and a batch cost sheet is opened (similar to a job).
2) Direct materials, direct labour and direct expenses are charged for the entire batch.
3) Factory overhead is absorbed for the batch using an appropriate base (labour hours/machine hours/% wages).

Determination of unit cost:
- Total batch cost = Direct materials + Direct labour + Direct expenses + Absorbed overheads
- Unit cost = Total batch cost ÷ Number of units in the batch

Thus, batch costing helps to find economical batch-wise cost and then per-unit cost for pricing and control.

Question 36

Explain the treatment of normal loss, abnormal loss and abnormal gain in process costing (exam-style).

Accepted Answer

Treatment in process costing (exam-style):

A) Normal loss
- Meaning: expected/unavoidable loss under efficient conditions (e.g., evaporation, shrinkage).
- Cost treatment: normal loss units are not given any cost; the cost is absorbed by good output.
- Scrap value: if normal loss has scrap value, the process account is credited with scrap value (reducing process cost).
- Effective output = Input − Normal loss.

B) Abnormal loss
- Meaning: loss over and above normal loss due to abnormal reasons (fire, theft, major breakdown, negligence).
- Valuation: abnormal loss units are valued at the same cost per unit as good units (after considering scrap credit of normal loss).
- Accounting: Abnormal Loss Account is debited; process account is credited. Any scrap value realised is credited to Abnormal Loss Account. The net loss is transferred to Costing Profit & Loss A/c.

C) Abnormal gain
- Meaning: actual loss is less than normal loss (better-than-normal performance).
- Valuation: abnormal gain is valued at process cost per unit like good output.
- Accounting: process account is credited with abnormal gain; Abnormal Gain Account is credited. The notional scrap value corresponding to the normal loss not occurring is adjusted, and net gain is transferred to Costing Profit & Loss A/c.

Thus, normal loss is part of regular costing, while abnormal loss/gain is treated separately to avoid distorting product cost and to highlight efficiency/inefficiency.

Question 37

Explain the procedure of job costing in detail and show how direct material, direct labour and overheads are recorded for a job.

Accepted Answer

Job costing procedure (long, exam-style):

1) Job order and job number
- On receipt of customer order, a Work Order/Job Order is issued to start work.
- A unique Job Number is allotted and a Job Cost Sheet is opened to collect costs job-wise.
- For quotation, an estimate may be prepared first; later actuals are compared.

2) Recording (charging) direct materials
- Materials required are issued from stores using a Material Requisition Note (MRN) mentioning the job number.
- The stores issues are priced and posted to the job cost sheet under ‘Direct materials’.
- If materials are returned, a Return Note is used and the job is credited.
- If scrap is generated and credited, it is shown as a deduction as per policy.

3) Recording direct labour
- Attendance is captured through time keeping; job-wise time is captured through time booking (job cards/time tickets).
- Wages are computed and labour cost is posted to the job cost sheet as ‘Direct labour’ if it is traceable.
- Indirect labour (supervisors, storekeepers) is not charged as direct labour; it is included in overhead.
- If overtime is worked specifically for the job, overtime premium may be charged to that job; otherwise treated as overhead.

4) Charging direct expenses
- Expenses that are specifically incurred for the job (special tool hire, design fee, royalty, testing charges) are charged directly to the job cost sheet.

5) Collection and absorption of overheads
- Overheads are first collected cost-centre wise (factory overhead, admin overhead etc.).
- A predetermined absorption rate is fixed (e.g., % of direct wages, labour hour rate, machine hour rate).
- Overhead absorbed for the job = rate × actual base of the job (wages/hours).
- The absorbed overhead is posted to the job cost sheet to obtain Works Cost and (if included) Cost of Production.

6) Completion, costing and pricing
- When the job is completed, total job cost is computed from the job cost sheet.
- Add profit (on cost or on sales, as specified) to arrive at quotation/selling price.

7) Closing and control
- Job is closed and actual cost is compared with estimated cost to identify inefficiencies (material wastage, excess labour time, abnormal overhead).
- Reports help in improving future estimates and controlling costs.

Thus, job costing records direct material/labour/expenses through source documents and charges overheads through absorption so that each job’s cost and profit can be measured accurately.

Question 38

Compute normal loss and show how scrap value affects cost per unit: Input 1,000 units; normal loss 10%; scrap value ₹2/unit; total process cost ₹16,000. Find effective output and cost per good unit.

Accepted Answer

Given:
Input = 1,000 units
Normal loss = 10% of input
Scrap value = ₹2 per normal loss unit
Total process cost (before scrap credit) = ₹16,000

Step 1: Compute normal loss units and effective output
Normal loss units = 10% of 1,000 = **100 units**
Effective output (good units) = 1,000 − 100 = **900 units**

Step 2: Compute scrap value credit
Scrap value of normal loss = 100 × ₹2 = **₹200**

Step 3: Compute net cost to be borne by good units
Net process cost = Total process cost − scrap value credit
= 16,000 − 200 = **₹15,800**

Step 4: Cost per good unit
Cost per good unit = Net process cost / Effective output
= 15,800 / 900
= **₹17.56 per unit (approx.)**

Conclusion: Scrap value reduces the process cost and therefore reduces the cost per good unit.

Question 39

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 40

Prepare a flexible budget for 8,000 and 10,000 units. Variable costs: DM ₹30/unit, DL ₹20/unit, VOH ₹10/unit. Fixed OH ₹1,00,000. Show total cost at each level.

Accepted Answer

Given:
Normal capacity = 10,000 units
Variable cost per unit: DM 30, DL 20, VOH 10
Fixed overhead = ₹1,00,000 (constant in total)

Step 1: Compute total variable cost per unit
Variable cost/unit = 30 + 20 + 10 = **₹60 per unit**

Step 2: Flexible budget at 8,000 units
Total variable cost = 8,000 × 60 = **₹4,80,000**
Add fixed OH = ₹1,00,000
Total cost = 4,80,000 + 1,00,000 = **₹5,80,000**

Step 3: Flexible budget at 10,000 units
Total variable cost = 10,000 × 60 = **₹6,00,000**
Add fixed OH = ₹1,00,000
Total cost = 6,00,000 + 1,00,000 = **₹7,00,000**

Flexible Budget Summary:

| Particulars | 8,000 units (₹) | 10,000 units (₹) |
|---|---:|---:|
| Direct materials (30/unit) | 2,40,000 | 3,00,000 |
| Direct labour (20/unit) | 1,60,000 | 2,00,000 |
| Variable OH (10/unit) | 80,000 | 1,00,000 |
| Fixed OH | 1,00,000 | 1,00,000 |
| **Total cost** | **5,80,000** | **7,00,000** |

Hence, flexible budget shows cost at different activity levels.

Cost Accounting — Question Paper

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