Summary points for objective questions i.e. MCQs

1.       Cost refers to consumption of resources in order to produce some goods or provide some services.

2.       Fixed Cost remain unchanged even when there is a change in sales volume

3.       Fixed cost per unit increases with decrease in level of output and vice-versa.

4.       Variable cost varies with level of output i.e. increases with sales and decreases with decrease in sales.

5.       Variable cost per unit remains constant despite change in sales.

6.       Monthly salary of office staff and monthly rent of building are examples of fixed cost.

7.       Raw material consumed and direct labour are examples of variable cost.

8.       Relevant cost is relevant to the decision making i.e. impacts the choice of various alternatives.

9.       Sunk cost has already been incurred in past and does not affect future decision making.

10.   Opportunity cost is in fact opportunity lost in the form of next best alternative use of resources/funds.

11.   Out-of-pocket costs are real and explicit costs actually incurred.

12.   Notional or implicit costs are not real and do not involve actual outflow of funds.

13.   Relevant costs are present or future costs and which are different for different alternatives. Thus, they definitely have an impact on future decisions. 

14.   Cost accounting emerged to overcome the limitations of financial accounting.

15.   Financial accounting mainly aims to satisfy needs of outside stakeholders, while, cost accounting primarily provide information to internal management for cost ascertainment, control and decision making.

16.   Product costs are linked to output while period costs are linked to time period.

17.   Cost centre is any department, section, group of people, activity in respect of which costs are accumulated, assigned and ascertained.

18.   Cost unit is any physical or logical quantity, which is generally accepted as a unit of value both by seller/provider and buyer and in respect of which costs are accumulated, assigned and ascertained.

19.   1 metre cloth, 1 litre diesel etc are example of simple cost units while, 1 Kilowatt-hour, 1 patient-day, 1 room-day, 1 passenger-km are examples of composite cost units.

20.   Composite cost units are generally used in operating or service costing method.

21.   Direct costs have a direct cause and affect relationship with the core activity of cost centre. Such costs are incurred to run that cost centre or in other words such cost centre is directly benefitted by that cost.

22.   All other support costs having no direct bearing or relationship with the concerned cost centre are indirect costs with reference to that cost centre.

23.   Historical costs are already incurred and are precisely known while predetermined costs are yet to happen i.e. be incurred

24.   Cost sheet is a basic cost report presenting the total cost incurred as well as per unit cost incurred in the production of any goods or services under suitable classifications.

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

26.   Indirect costs i.e. indirect material, indirect labour and indirect expenses are known as overheads.

27.   Total cost = Prime cost + overheads

28.   Also, Total costs = direct costs + indirect costs

29.   Indirect costs may be indirect Factory cost + Indirect Office & Administrative cost + Indirect Selling and Distribution cost

30.   Main components of cost sheet are: Prime cost, Works cost, Cost of production, Cost of goods sold, Cost of Sales and Sales

31.   All physical material subjected to conversion/manufacturing process(es) or consumed in the process of provision of service is referred to as raw material i.e. first component of cost.

32.   Raw material is purchased, stored and issued and consumed in the production process.

33.   Purchase, store and production department are the three channels through which raw material passes.

34.   Production department raises indent or requisitions for demanding raw material from stores.

35.   If available, raw material is issued, otherwise referred to purchase department for carrying out purchases from market.

36.   Through quotations from suppliers and issue of purchase order to the best supplier, purchase department purchases requisite raw material in desired quantities.

37.   A purchase order contains various terms and conditions under which supplier agrees to supply and buyer agrees to purchase the raw material. This may include conditions with respect to: Material specifications, time limits, price, discounts, transportation and other charges etc.

38.   Other documents in the purchase process are delivery challan, goods receive note, inspection reports, debit and credit notes, copies of invoices etc.

39.   Stores generally issue raw material to production departments following either FIFO or LIFO methods. There are, however, other methods too.

40.   Bin cards are affixed to bins, racks, containers etc as a ready reference showing the name, code number, quantity in hand of the material contained in that bin, rack, container etc.

41.   Stores ledger are either maintained at the stores or cost accounting department showing detailed quantitative and financial information i.e. value in rupees with respect to each item in the stores.

42.   ABC analysis is based on the principle to closely monitor costly and sensitive items. Lesser attention is given to small value items. This reduces wastages, mishandling, thefts etc in case of costly items.

43.   Perpetual inventory system ensures constant efforts in maintaining correct balances of stock items both in physical and value terms. This helps in providing value of stock readily.

44.   Periodic inventory system takes quantity and valuation of stock at periodic rests, generally a year.

45.   Economic Order quantity tries to achieve a balance between ordering and carrying costs associated with size of the order.

46.   Economic order quantity is arrived at the order size, where ordering and carrying costs are equal and at this point total of these costs is least.

47.   Incidence or amount of carrying and non-carrying costs of inventory decides the level of inventory to be maintained by the stores manager.

48.   Carrying costs include rent of warehouse, cost of bins, handling, loading and unloading costs, costs associated with mishandling, theft and pilferage.

49.   Ordering costs include all costs of placing the order i.e. costs related to purchase process and implicit costs of not having the material, causing production department to remain idle.

50.    Material processing losses include waste, scrap, spoilage and defectives.

51.   Labour cost represent compensation in whatever form of human efforts directed towards production of goods or provision of services.

52.   labour costs include both monetary payments and Non-monetary benefits. Examples of monetary benefits include: (i) Basic Wages (ii) DA (iii) Production or profit bonus (iv) ESI/PF benefits (v) Gratuity (vii) Pension (viii) Holiday pay (ix) Allowances (x) Commissions

Non-monetary benefits include: (i) Recreation facilities (ii) Medical & Health facilities (iii) Canteen, free or subsidized (iv) Educational facilities to children of employees (v) Training and development programmes (vi) Housing facilities (vii) other free benefits like car, cell phone etc.

53.    Job Evaluation is the assessment of the relative worth of jobs within a business enterprise and Merit Rating is the assessment of the employees with respect to a job.

54.   Method study, Time study and Motion study are part of work study carried out by engineering and work study department to improve overall working performance of employees.

55.   Number of workers, their attendance and time spent or devoted on a job is recorded by Time Keeping department.

56.   Major wage system for arriving at the wage amount of an employee include either time rate, piece rate or incentive plans.

57.   Inventive plans based on time saved are Halsey, Halsey-wier, Rowan, Emmerson efficiency plan etc.

58.   Incentive focussing on increased production include Taylor’s differential piece rate, Merrik’s plan, Gantt’s task an bonus plans etc.

59.   Labour turnover means the rate at which existing employees leave and new employees join an organization with in a given time period. High labour turnover is not desirable as it reduces productivity.

60.   Time during which worker does no work but for which payment of wages/salary has to be made by employer is known as Idle time.

61.   Work done beyond normal working hours is known as Overtime. Overtime is extra time devoted by worker on production process during the course of day. Overtime is generally rewarded by a higher wage rate than normal wage rate.

62.   Costs of normal idle time and overtime should be added to production process. Abnormal instances be recorded and checked and not allowed to affect routine production process. Instead, they should be charged to costing profit and loss account.

63.   XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX

64.   Overhead cost is the aggregate of all indirect costs, i.e. indirect materials, indirect wages and indirect expenses.

65.   Overhead costs may be classified according to function i.e. production, office & administration and selling & distribution overheads, or according to variability i.e. fixed, variable and semi-variable overheads, or according to elements of cost i.e. indirect material, indirect labour and indirect expenses

66.   For distribution of overheads, departments are classified as production departments i.e. engaged in core business activity and service departments i.e. departments engaged in providing support facilities to production departments.

67.   The main steps in dealing with overheads are: (i) collection and classification of overheads(ii) Allocation and apportionment of overheads to production and service departments also known as primary distribution (iii) Re-apportionment of total overheads of service departments to production departments also known as secondary distribution (iv) Absorption of overheads.

68.   Allocation is the allotment of whole of directly related overheads to cost centres or departments.

69.   Apportionment is the allotment of parts or portions of overheads to various cost centres or departments based on some suitable criteria say on the basis of share of benefit derived by the department or cost centre.

70.   Reapportionment is the distribution or transfer of overheads of service departments to production departments

71.   Absorption of overheads is the process of charging of all the overhead expenses to the product or output of that department.

72.   When overheads are absorbed on the basis of pre-determined overhead absorption rate, there may arise a situation of over or under absorption of overheads.

73.   When absorbed overheads are greater than actual overheads, it is said that overheads are over absorbed or over-recovered. Similarly, when absorbed overheads are less than actual overheads, it is said that overheads are under absorbed or under-recovered.

74.   When difference between absorbed overheads and actual overheads is minor or due to abnormal reasons, it is written off to costing profit and loss account. However, if the difference is significant, supplementary rates are used to adjust the amount of work-in-progress, finished stock and cost of sales.

75.   Capacity of a factory or production unit is the potential or ability of the production unit expressed either in terms of number of units it can produce or number of production hours it can operate in a given period of time.

76.   Licensed capacity is the capacity for which license is given by an appropriate authority and operations beyond which are legally invalid.

77.   Installed capacity (also maximum capacity) is the capacity representing the strength of machines or plant or infrastructure installed.

78.   Practical or Operating capacity is the maximum capacity less output or time lost due to unavoidable factors like normal repair & maintenance, setting up time etc.

79.   Normal capacity is the long-term average of the capacity based on operating capacity, sales expectancy and other surrounding factors. This is generally used for deriving pre-determined overhead absorption rates.

80.   Interest on capital is not considered routinely in costing records except for special reports.

81.   Depreciation is an example of implicit or notional cost which is routinely included as an expense while costing.

82.   Depreciation on working assets retained in use after being fully depreciated is charged as an expense in costing, however equivalent credit is given to costing profit and loss account.

83.   Loss on condemning an asset which is not fully depreciated, is not charged to production and the difference between cost of the asset and depreciated value of the asset is treated as an abnormal loss to be transferred to costing profit and loss account.

84.   Rent on building or machinery is a cost. Notional rent on owned building or machinery is also charged as a cost to maintain comparability and arrive at fair costing.

85.   Cash discount being a form of interest on capital is generally not considered in costing.

86.   Primary packing is treated as part of cost of production i.e. added to the cost of direct material.

87.   Secondary packing is generally treated as part of distribution overheads.

88.   Royalties payable for using a patented process are direct expenses while royalties payable on the basis of sales quantity are treated as selling overheads.

89.   Drawings and designs prepared for specific jobs are direct expenses and charged to production. If treated as service activity then allocation or apportionment on some suitable basis needed.

90.   Subsidized canteen or mess is an overhead and should be distributed on the basis of either number of employees or wage bill of benefitted departments.

91.   Directors’ fees and salaries is an administrative overhead to be apportioned suitably.

92.   Research and Development costs are charged to production if they are of small amount. If the amount is large then proportionate amount is charged over a number of years. If the R&D costs are unsuccessful, then entire amount is charged to costing profit and loss account.

93.   Statutory bonus payable to workers is treated as direct labour cost. Any additional or excess bonus or bonus payable to administrative staff is treated as labour overhead.

94.   Advertisement expenses is a selling overhead. Costs of heavy advertisement campaigns are deferred over a number of years during which benefit is supposed to spread. Advertisement for recruitment, purchase tenders, legal notices are administrative overheads.

95.   After sales service is generally treated as selling overhead. After sales guarantees involving huge expenditure are charged to costing profit and loss account.

96.   Bad debts are generally excluded from costing. However, if bad debts are included, they are treated as selling overheads. Abnormal and exceptional bad debs are excluded and charged to costing profit and loss account.

97.   Output costing is also known as Single Costing or Unit Costing. It is used where output is same or identical to one another and the process of production is of continuous nature.

98.   The main objective of output costing is to arrive at the total cost of production on one hand and to calculate the per unit cost on the other.

99.   Output or Unit costing is generally applied in case of brick works, stationery, FMCG, breweries, dairies, distilleries, steel, cement, paper etc.

100.  Job costing is a method of cost used where production is against the specifications of customer, where each job is different from one another and flow of production process is not uniform.

101.  Examples of industries where job costing is generally used include printing, advertising, customised software, furniture, interior decoration, with or with out material events like catering, food preparation etc.

102.  Contract costing is applied to large scale contracts which are logically long-time jobs encompassing many years. Like jobs, they are also unique and are carried out as per the specification of the customer.

103.  Jobs are different from contracts on following counts i.e. jobs are small while contracts are big. Jobs take less time to complete while contracts take long times for completion. Jobs are carried out in factory premises while contracts are executed on sites outside factory premises.

104.  Contract price is generally a large amount and is released in phases on the basis of certification of architects or engineers. Depending upon the percentage of completion, work is certified by the architect or engineer and is known as ‘work certified’

105.  Work uncertified represent work done on the contract but for which certificate by architect or engineer is not issued yet.

106.  Escalation clause is used in contracts to cover increase in costs on account of inflation on account of long periods of execution involved in the contracts.

107.  Retention money represent security against bad work and is equal to excess of value of work certified over actual money paid by the contractee i.e. customer. This is usually released once the customer is satisfied about the quality of the work done.

108.  Notional profit on contract is equal to value of work-in-progress certified less cost of work-in-progress.

109.  When % of completion of contract is less than 25% OR work certified is less than 25% of the contract price: No profit is recognized.

110.  Cost-plus contracts is a pricing method of contracts where pricing is done by adding a suitable percentage to cost of contract i.e. for arriving at the profit on the execution of contract. This method is suitable where contract is undertaken for a new task and it is very difficult to estimate the costs.

111.  Process costing is used for ascertaining cost of various process through which a product passes and ultimately ascertaining the cost of the product itself.

112.  Process costing is most widely used costing method where mass scale of standard (identical) products takes place through a series of continuous and standardized processes such that output of one process becomes the input of next process.

113.  Process costing differs from unit costing on account of separately ascertaining the cost of every process through which the final product passes. This feature makes process costing more analytical.

114.  Generally, process costing is used in textile, metal, chemical, oil refining, sugar, paper and the like.

115.  Normal process loss refers to natural and unavoidable loss which is inherent with the type of raw material or to the processing.

116.  Normal loss is spread over the cost of good units rateably and as a result cost of production of good units inflates.

117.  Abnormal loss is either due to human error i.e. avoidable or contingencies like fire, theft, flood etc. i.e. unavoidable. Thus, abnormal loss can both be avoidable as well as unavoidable.

118.   Abnormal loss is charged to costing profit and loss account and not to production account.

119.  Equivalent production is a method to value work-in-progress by treating it as equal to finished units. It substitutes unfinished units notionally with finished units by applying percentage of completion with respect to material, labour and expenses.

120.  Products derived from same raw material and same manufacturing process are known as Joint product if they are equal or equivalent in terms of output value or quantity.

121.  Products derived from same raw material and same manufacturing process are known as bye-product if they are inferior to the main product in terms of output value or quantity.

122.  Examples of Joint products are Petroleum, Diesel, Kerosene, LPG etc as all these products are derived while refining crude petroleum oil.

123.  Bagasse and Molasses are examples of by-product which are produced while deriving white cane sugar.

124.   Operating costing is a method of costing used in those undertakings which are engaged in providing services such as transport, electricity distribution, telephone services, hospitals, hotels, banking etc.

125.  Operating costing is also known as service costing.

126.  In service industry cost units are generally composite cost units and not simple cost units as in the case of manufacturing units. For example, an electricity distribution company uses its cost unit as Kilo-watt-hour.

127.  Under operating costing, operating cost sheet is prepared and costs are generally classified as standing or fixed charges and running or variable charges.