24

GENERAL PRINCIPLES
certain expenses for running the administration are incurred-all of these cannot be conveniently allocated
to production and hence are called indirect costs.'

Decision making costs and accounting costs

Decision making costs are special purpose costs that are applicable only in the situation in which
they are constructed. They have no universal application. "They need not tie into routine financial accounts
They do not and should not conform to the accounting rules" Accounting costs are compiled primarily
from financial statements. They have to be altered before they can be used for decision making. Moreover.
they are historical costs and show what has happened under an existing set of circumstances. While.
decision making costs ate future costs, they represent what is expected to happen under an assumed set
of conditions. For example, accounting costs may show the cost of the product when the
operations are
manual. While, decision making costs might be calculated to show the costs when the operations are
mechanised.

Relevant and irrelevant costs

Relevant costs are those which would be changed by the managerial decision, while irrelevant
costs are those which would not be affected by the decision. For example, if a manufacturer is considering
closing down of an unprofitable retail sales shop, wages payable to the workers of the shop are relevant
in thisconnection since they willdisappear on closing down of the shop. But prepaid rent for the shop of
unrecovered costs of any equipment which will have to be scrapped will be irrelevant costs which must
be ignored.
Shut-down and sunk costs
Amanufacturer or an organisation rendering service may have tosuspend its operations for a
period on account of some temporary difficulties e.g. shortage of raw-material,non-availability of requisite
labour etc. During thisperiod though no work is done yet certain fixed costs, such as, rent and insurance
of buildings, depreciation, maintenance etc. for the entire plant will have to be incurred. Such costs of
the idle plant are known as shut-down costs.
Sunk costs are historical or past costs. These are costs which have been created by a decision that
was made in the past that cannot be changed by any decisión that will be made in the future. Investments
in plant andmachinery are prime examples of such costs. Since sunk costs cannot be altered by later
decision, they are îrrelevant for decision making. For example, a departmental store is considering selling
a fleet of trucks it owns. It wants to buy delivery services from an outside firm in their place. The sunk
costs ofthe investment in delivery equipment (present book value minus present market value) is irrelevant
in making this decision. Relevant costs in the decision are operating costs such as gasoline, repairs, and
maintenance and the salaries of truck drivers that would be eliminated if a decision to buy delivery
services is made.
Controlable and uncontrollable costs
Controllable costs are those costs which can be influenced by the action of a specified member of
an undertaking. Costs which cannot be so influenced are termed as uncontrollable costs. Afactory is
usually divided into a number of responsibility centres each of which is in charge uf aspecified level of
management. The officer-in-charge of a particular department or cost centre can control costs only of
those matters which come directly under his charge, but not of othermatters. For example, the expenditure
incurred by the Tool Room is controllable by the Foreman-in-charge of that section but the share of the
tool room expenditure which is apportioned toa machine shop cannot be controlled by a machine shop
foreman. Thus, the difference between controllable and uncontrollable costs is only in relation to a
1. Joal Dean, "Managerial Economics" (Englewood cliffs, New Jersey, Prentice Hall, Inc. 195 1), p. 249.
GENERAL PRINCIPLES 25

particular individual or level of individual

which is controllable by one
maybe uncontroilable so far as management. An expenditure
another
individual is concerned.
Avoidable or escapable costs and unavoidable or inescapable OSts
AVOTdable costs are those which will be eliminated ifa segment of the business (e.g. a produ
department) with which they are directly related, is discontinued. Unavoidable costs are those wne
will not be eliminated with the segments. Such costs are merely reallocated if the segment is
For example. in case a product is discontinued, the salary of the factory manager or factory rent cannot
be eliminated. It will simply mean that certain other products will have to absorb a higher amount Ol
such overheads. However, salaryof clerks atached to the product or bad debts traceable to the produet
would be eliminated. Certain costs are partly avoidable and partly unavoidable e.g. closing Of one
departiment of a store might result in decrease in deliverv expenses but not in their altogether eliminatot.
It is to be noted that only avoidable costs are relevant for deciding whether to continue or eliminare
a segment of the business.
Imputed or hypothetical costs
These are costs which do not involve cash outlay. They are not included in cost accounts but are
important for taking into consideration while making management decisions. For example, interest on
capital is ignored in cost accounts though it is considered in financial accounts. In case two projects
require unequal outlays of cash, the management must take into consideration interest on capital to
judge the relative profitability of the projects.
Differential, incremental or decremental costs
The difference in total costs between two alternatives is termed as differential costs. In case the
choice of an alternative results in increase in total costs, such increased costs are known as incremental
costs. While assessing the profitability of a proposed change the incremental costs are matched with
incremental revenue. This is illustrated with the following example:
Incremental
Existing Situation Proposed Situation
Cost Revenue

Sales 10,000 12,000 2,000

Less : Variable costs 5,000 6,000
Fixed costs 4,000 9,000 4,000 10,000 1,000
1,000 2,000 1,000
Profit

The table shows that under the proposed situation there will be a net increase in revenue ofR
1,000. Hence, the proposed situation is acceptable. decremental
In case the choice results in decrease in total costs, such decreased costs are termed as
Costs.

Out-of-pocket costs decision

Out-of-pocket costs means the present or future cash expenditure regarding a certain
has its own truck
which will varydepending upon the nature of decision made. For example, a company
seeks to replace these
for transporting raw-materials and finished products from one place to another. It
trucks by employment of public carriers of goods. In making this decision, of course, the depreciation of
account thepresent expenditure on
the trucks is not to be considered, but the management must take into
out-of-pocket costs.
fuel, salary to drivers and maintenance. Such costs are termed as
 26

Opportunity costs
GENERAL PAINCIPLES
Opportunity costs refers to tlheadvantage, in measurable terms, whiclh has been foregone on acco.
of not using the facilities in the manner originally planned. For
to be utilised for housing a newv projcct plant, the likely revenueexample, if an owned building is proposed
which
out is the opportunity cost which should be taken into account while the building could fetch, ifrented
evaluating the profitability of the
project. Similarly. ifa manufacturer is confronted with the problem of selecting
two alternatives : any one of the following
(a) selling a semi-finished product at ? 2 per unit, and
() introducing it into a further process to make it inore refined and
prove to be remunerative only when after paying the cost of further valuable; alternatíve (b) will
the sale of the product is more than 2 per unit-the revenue which processing the amount realised by
could have been otherwise realised
The revenue of 2 per unit is foregone in case
refers to this alternative revenue foregone. alternative (b) is adopted. The term 'opportunity cost'

Traceable, untraceable or common costs

Costs which can be easily identified with a department, process or
product are termed as traceable
costs, e.g., the cost of direct material, direct labour etc. Costs which cannot be so
identified are termed as
untraceable or common costs. In other words, common costs are costs incurred collectively for a
of costcentres and are to be suitably apportioned for number
determining the cost of individual cost centres, e.g.
overheads incurred for a factory as a whole, combined purchase cost for purchasing several materials in
one consignment etc.
Joint costs are a sort of common costs. When two or more products are
produced out of one and
the same material or process, the costs of such material or process are called joint costs.
For example.
when cotton seed and cotton fibre are produced from the same raw-materials, the cost incurred til the
splitoff or separation point will be joint costs".
Expired cost and unexpired cost
Expired costs are those costs which relate to the current period as an expense or loss. For example,
the cost incurred for rent paid or materials consumed in the current period are expired costs.
While
unexpired costs are those costs which relate to the future period and therefore will be charged as an
expense or loss in the future period. For example, the cost of materials purchased for consumption in the
next month is an unexpired cost as far as the current nonth is concerned.

Production, administration and selling and distribution, etc., costs

A business organisation performs a number of functions, e.g., production, administration, selling
and distribution, research and development. Costs are to be ascertained for each of these functions. The
Chartered Institute of Management Accountants, London has defined each of the above costs as follows:
() Productioncost. The cost of the sequence of operations which begins with supplying materials,
labour andservices and ends with the primary packing of the product. Thus, it includes the cost of direct
material, direct labour, direct expenses and factory overheads.
(ii) Administration cost. The cost of formulating the policy, directing the organisation and controlling
the operations of an undertaking, which is not related directly to a production, selling, distribution,
research or development activity or function.
(i) Selling cost. The cost of seeking to create and stimulate demand (sometimes termed as
marketing) and of securing orders.
(iv) Distribution cost. The cost of sequence of operations which begins with making the packed
product available for despatch andends with making the reconditioned returnedempty package, if any,
available for re-use.
GENERAL PRINCIPLES 27

(v) Researchh cost. The cost of searching for new or improved products,new application of materials,
or new or improved methods.
(vi) Developmet cost. The cost of the process which begins with theimplementation of the decision
10 produce a new or improved product or to cmploy a new or improved method and ends with the
commencement of formal productionof that product or bythe method.
("M)re-production cost. That part of develonmentcost incurred in making a trial production
preliminary to formal production,.
Conversion cost
The cost of transforming direct materials into the fnished products, exclusive of direct material
cost is known as the conversion cost,.
ltis Usualy taken as the aggregate of the cost of direct labour, direct expenses and factory overneaus.
COST ASCERTAINMENT
The technique of costing involves :() collectionand classification of expenditure according to
cOst elements and (i7) allecation and apportionment of the expenditure to the cost centres or coSt unts,
or both. The elements of costs have already been discussed in the previous pages. The meanings ol uie
terms 'cost unit' and 'cost centre' are as follows :
Cost unit
In preparing cost accounts, it becomes necessary to select a unit with which expenditure may be
identified. The quantity upon which cost can be conveniently allocated is known as a unit of cost or cost
unit. The Chartered Institute of Management Accountants, London, defines a unit of cost as "a unit of
quantity of product, service or time in relation to which costs may be ascertained or expressed." The
examples of some cost units are given below :
(i) Brick Works -per 1,000 bricks made
(ii) Collieries -per tonne of coal raised
(iüi) Textile Mills -per yard or per lb. of cloth manufactured or yarn spun
(iv) Electricity Companies -per unit of electricity generated
(v) Transport Companies -per passenger-km., per tonne-km.
(vi) Steel Mills per tonne of steel imade
(vii) Screws manufacturing -per 1,000screws
(viii) Gas per cubic metre
-per unit manutactured
(ix) Car
(x) Nickel plating -per square metre

Cost centre
centre means "a
According to the Chartered Institute of Management Accountants, England, cost
which costs may be ascertained and used for
location, person or item of equipment or group of these for
purpose of cost control". Thus, cost centre refers to one of theconvenient units into which the whole
the such unit consists of a
purposes. Each
factory organisation has been appropriately divided for costing group of persons.
departmentor a sub-department or an item of equipment or machinery or a considered as one unit for
Sometimes, closely associated activities are combined together and
For example, in a laundry, activities
costing purposes, but at other times these activities may be segregated. Each activity may be considered
such as collecting, sorting, marking and washing of clothesare preformed. separately.
particular cost centre may be found out
as a separate cost centre and all costs relating to a
 28

Cost centres may be classified as follows :

GENERAL PRINCIPLES
() Productive, unproductive and mixed cost centres.
(ii) Personal and impersonal cost centres.
(iii)Operation and process cost centres.
Productive costcentres are those which are actually engaged in making the products. Service
unproductive cost centres do not make the products but are essentialaids to the product centres. Examnlo.
of such service centres are those of administration, repairs and
maintenance, stores and drawing offo
departments. Mixcd cost centres are those which are engaged one time on productive and the other time
on service jobs. For example, a tool shop serves as a productive cost centre when it
and jigs to be charged to specific jobs or orders but serves as service cost manufactures die
centre when it does repairs for
the factory.
Impersonal costcentre is one which consists of a department, plant or item of
equipment. While
a personal cost centre is one which consists of a person or
group of persons. In case a cost centre
consists of those machines and/or persons which carry out the same operation it is
cOsI cenlre. If a termed as operation
cost centre consists of a continuous sequence of operations, it is
Centre.
called process cost
In case of an operation cost centre all machines or operators
performing the same
brought together under one centre. The objective of such an analysis is to ascertain the operation are
cost of each
operation irrespective of its location inside the factory. In the process type cost centre the cost is analysed
and related to a series of operations in sequence, such as in chemical industries, oil
refineries and other
process industries.
Difference betwveen a Department and a Cost Centre. Cost centre may be a department or a
sub-department. Even an item of equipment of machinery or a person may be a cost centre. Whereas,
department is a distinct sphere of activity over which a manager is vested with distinct authority and
responsibility.
Profit centre
A centre in which both the inputs and outputs are measured in monetary terms is called a profit
centre. In other words both costs and revenues of the centre are accounted for. Since the difference of
revenus and costs is termed as profit, profit is automatically computed in respect of the centre-that is
why it is treated as aprofit centre. The managers of such centres are encouraged to act as if they were
running their ownseparate business. The revenue of a centre is accounted for not only when sales are
effected on the basis of recognition of revenue from the point of view of business, but also when output
of one centre is transferred to some other centre on the basis of the concept of notional charge or transfer
pricing, For example, a production department may be treated as a profit centre on the basis that it
"sells"goods to the sales department. The accounting system can be so designed as to record revenues
and profit on anotional basis immediately when the completedproducts are sent to the godown or sales
departinent. Similarly, service departmentsmay be profit centres, if a notional charge for the services
rendered to the productionor sales department is made from them and accounted for as sales value in the
books. Of course,these willbe simply book-keeping entries for fixing the responsibilities and evaluating
the performance of such centres. There is no question of actual cash inflow since the transactions are
simply in the nature of internal transfers, Sometimes, profit can be treated as a combined measure of
efficiency and effectiveness both and if so, expense centres may be turned into profit centres, whenever
i isfeasible to measure the output of acentre in monetary terms. i.e, in terms of revenue by assigning a
reasonable selling price to it. It is a very powerful force to measure the performance of the individual
responsible tor running and managing the centre, though it may not be a perfect measure. It may consist
of certain pitfalls, e.g, fixation of thenotional transtfer price may be arbitrary-it may show unreasonable
 29
GENERAL PRINCIPLES

profit made by one centre and a loss by the other and thus may lcad to wrong allegation of lack of
responsibility by the second centre.
Difference between Profit Centre and Cost Ccntre :
elre IS created for accounting coIvenience for ascertaining and controlling costs,
whereas a protit centre is created bccause of decentralisation of business operations.
()1 COSt centre does not have tarnet cnst 0f course efforts are made to minimise the costs.
However. a profit centre has a profit target and it enjoys authority to adopt such policies Winon a
necessary for achieving its target.
Cost estimation and cost ascertainment
Cost estination is the process of pre-deternining the costs of acertain product, job or order. Sucn
pre-determination may be required for several purposes such as budgeting, measurement of pertomance
eificiencies. preparation of financial statements (valuation of stocks, etc.) make or buy decision, fixation
of the sale prices of products etc.Cost ag "ertainment is the process of determining costs on the bas1s Or
actual data. Hence, computation of historical costs is cost ascertainment while computation of future
coSts IS COSt est1mation. Cost estimation as well as cost ascertainment both are inter-related and are of
imimense use to the management. In case a concern has asound costing system, the ascertained coss
WI. reatly help the management in the process of estimation of rational accurate costs which are so
necessary ior a variety of purposes stated above. Moreover, the ascertained costs may be compared with
the predetermined costs on a continuing basis and proper and timely steps be taken for controlling costs
and maximising profits.
Cost allocation and cost apportionment
Cost allocation and cost apportionment are the two processes which describe the identification
and allotment of costs to cost centres or cost units. Cost allocation refers to "the allotment of whole
items of cost to cost centres or cost units" while cost apportionment refers to "the allotment of proportions
of items of cost to cost centres or cost units" (CIMA London). Thus, the former involves the process of
charging direct expenditure to cost centres or cost units while the latter involves the process of charging
indirect expenditure to cost centres or cost units. For example, the cost of labour engaged in a service
department can be charged wholly and directly to it but the canteen expenses of the factory cannot be
in
charged directly and wholly to it. Its proportionate share will have to be found out. Charging of costs of
the former case will be termed as "Allocation of costs" while in the latter case as "Apportionment
costs."

Cost allocation and cost absorption

Cost allocation is the allotment of whole items of cost to cost centres or cost units, while cost
absorption is the process of charging allindirect costs or overheads of cost centres t different cost units.
Allocation and apportionment to cost centres take place first and thereafter absorption is done to cost
units in such a way that each cost unit bears an appropriate portion of its share of overheads. Thus
items.
allocatio is the process of identification to cost centres or cost units and that too of entire cost
direct and indirect.

Cost reduction and cost control

Cost reduction and cost control are two different concepts. Cost control has achieving the cost
targets as its objective while cost reduction is directed toexplore the possiblity of improving the targets
themselves. Thus, cost control ends when targets are achieved while cost reduction has no visible end, It
is acontinuous process. The difference between the two can be summaried as follows:
 30 GENERAL PRINCIPLE
() Cost control aims at imaintaining the costs in accordance with established standards. Whil.
cost reduction is concerned with reducing costs. It challenges all standards and endeavours to bete
then continuously.
(i)Cost control seceks to attain lowest possible cost under existing conditions. While, cost reduction
recognises no condition as permanent, since a change willresult in lower cost.
(iii) Incase of cost control, emphasis is on past and present while in case of cost reduction it ison
present and future.
(iv)Cost control is a preventive function, while cost reduction is a corrective function. It operates
evenwhen an efficient cost control system exists.
Cost reduction and cost management
Cost reduction is different from cost management. Cost reduction is basically concerned with real
and pernanent reduction in the unit cost of goods manufactured or services rendered without impairing
the suitability or the product or services. It is done through value analysis, work study, standardisation.
simplification, research and development etc.While cost management is a broader concept, it is basicaly
concerned with the optimum utilisation of resources toenhance and operating income of the firm. A
cost
management system does not focus on cost independent of revenue. It relates costs with revenue to get
an insight as to how various attributes generate revenue and create demand on resources. It is a continuous
process involving actions taken by executive to satisfy customers. It provides valuable information to
management to manage product attributes for optimising utilisation of firm's resources. Thus, cost
reduction focuses on products while cost management focuses on products, markets and customers.
Value analysis
According to Chartered Institute of Management Accountants, London, Value Analysis is "a
systematic inter-disciplinary examination of factors affecting the cost of aproduct or service, in order to
devise means of achieving the specified purpose most economically at the required standard of quality
and reliability." The cost of a product is influenced by a number of factors-production, marketing,
finance. etc. The material and labour costs both play an important role the quality of the product
depends on standard material and standardised process of manufacture through skilled personnel. The
different factors are required to be examined closely so that without in any way compromising with the
quality and usefulness of the product, the cost is reduced. It is, thus, a technique by the application of
which managenent can achieve cost reduction.
The usefulness of the techniques is in developing substitute materials, new methods of packaging,
1ransportation, marketing and in locating surplus labour, production processes, etc. to lower down the
COsts.

INSTALLATION OF COSTING SYSTEM

The installation ofa costing system requires careful consideration of the following two inter
related aspects :
() Overcoming the practical difficulties in introducing the system.
(i) Main considerations that should govern the installation of such a system.
Practical difficulties. The important difficulties in the installation of a costing system and the
suggestions to overcome the are listed below :
I. Lack of support form top management. Many a times the costing system is introduced at tne
behestof the managing director or the other director without first preparing the other members of the toP
management teaim. This results in opposition from the various managers as they consider it as a
 GENERAL PAINCIPLES 31

intenerence as well as uncalled for check on iheir nctivitics. They, therefore, resist the adddittona
involved in the cost accounting system.
The diffculty can be overcome by takingthe top management into confidence before installing
the system. A sense of cost
consciousness has to be installed in their minds.
b. Kesistance from the cxistine staff The existino inancial accounting
the systembecause of a feelingof their beino declared
staff may offer resistance to
redundant under the new system.
TnIs tear can be done away vith hy exnlaining to the staff that the costing system would not
replace but strengthen the existing system, It shall open them new areas for
S. NON-cOoperation at other leels The foreman and other supervisory staff development.
mayresent the additional
paper work and may not co0-operate in Drovidine the basic data which is so essential for the success oT
the system.
This needs re-orientation and education of emplovees. They have to be told the advantages that
will accrue to themand to the organisations as a whole on account of efficient
working of the system.
4. Shortage of trained staff. Costing is a specialised job in itself. In the beginning,
qualified staff may not be available. However, this difficultycan be overcome by giving thetheretore,
existing
stafÉ re 'isite training and recruiting additional staff if
required.
3. Heary costs. The costing system will involve heavy costs unless it has been suitably designed to
Su!i
Citic requirements. Unnecessary sophistication and formalities should be avoided. The costing
offieshould serve as a useful service department.
Main considerations. In view of the above difficulties and suggestions to overcome them, the
following should be the main considerations to be kept in mind while introducing a costing system in a
manufacturing organisation :
1. The product. The nature of the product determines to a great extent the type of costing system to
be adopted. Aproduct requiring high value of materialcontents requires an elaborate systems of materials
control. Similarly. a product requiring high value of labour content requires an efficient time-keeping
and wage system. The same is true in case of overheads.
2. The organisation. The existing organisation should be disturbed as iittle as possible. It becomes,
therefore, necessary to ascertain the size and type of organisation before introducing the costing system.
The scope of authority of each executive, the sources from which the cost accountant has to derive
information and the reports to be submitted at various managerial levels should be carefully gone through.
3. The objective. The objectives and information which the management wants to achieve and
acquire are also to be cared for. For example, if the concern wants to expand its operations, the system of
costing shouldbe designed in away so as togive maximum attention toproduction to sell its products,
the selling aspect would require greater attention.
4. The technical details. The system should be introduced after a detailed study of the technical
aspects of the business. Efforts should be made to secure the sympathetic assistance and support of the
principalmembers of the supervisory staff andworkmen.
5. Informative und simple. The system should be informative and simple. In this connection the
following points may be noted:
i) ltshould be capable of furnishing fullest information required, regularly and systematically so
that continuous study and check up of the progress of business is possible.
(i)Standard printed forms can be used so as to make the information detailed, clear and intelligible.
Over-elaboration, which willonly complicate matters, should be avoided.
(ii) Fullinformationabout departmentaloutputs, proceses and operations must be clearly presented
andevery item of expenditure must be properly classified.
(iv) Data, complete and reliable in all respects, should be provided in a lucid lorm so that
measurenment of the variations between actual and standard costs is possible.
32 GENERAL PRINCIPLES
6. Method of maintenance of cost records. Achoice has to be made between integral and non
integral accounting systems. In case of integral accounting system no separate sets of books are maintajned
for costing transaction but tley are interlocked with financial transactions into one set of books. In cacs
of non-integral system, separate books are maintained for cost and financial transactions. At the end o
the accounting period the results shown by the two set of books are reconciled. In case of abig business
it will be appropriate to maintain a separate set of books for cost transactions.
7. Elasticiy. The costing system should be elastic and cayable of adopting to the charging
requirements of the business.
8. Acuracy of data. The extent or degree of accuracy desired should be determined in respect of
costing data to be collected and analysed.
9. Current practices. The methods and procedures already in vogue in the concern should be fuly
studied e.g. the current procedures for procurement and payment of materials, labour etc. should be
carefully analysed.
It may, therefore, be concluded from the above discussion that costing system introduced in any
business willnot be asuccess if it is unduly complicated and expensive; if cost accountant does not get
co-operation of the staff; if cost statements cannot be reconciled with financial statements; and if the
results actually achieved are not compared with the expected ones.
METHODS OF COSTING

Costing has been defined as "the technique and process of ascertaining costs".
The principles in every type of costing are the same but the methods of analysing and presenting
the costs differ with the nature of business.

Job costing
that
Where production is not highly repetitive and, in addition,consists of different jobs or lots soThis
material and labour costs can be identified by order number, the system of job costing is used.
making
method of costing is very common in commercial foundries and drop forging shops and in plants
specialised industrial equipments. In allthese cases an account is opened for each job and all appropriate
expenditure is charged thereto.

Contract costing ajob is

Contact costing does not in principle differs from job costing. A contract is a big jobarewhile
contracts carried out.
asmallcontract. The term is usually applied where at different sites large scale
costing is used.
In case of ship-builders, printers, building contractors etc., this system of
Job or contract costing is also termed as Terminal Costing'.

Cost plus costing and profit is

In contracts where besides 'cost' an agreed sum or percentage to cover overheads
includes material,
paid to the contractor, the system is termed as cost plus costing. The term 'cost" here
labour, and expenses incurred directly in the process of production. The system is used generally in
cases where Government happens to be the contractee.

Batch costing
convenience of
Where orders or jobs are arranged in different batches after taking into account the
producing articles, batch costing is employed. Thus, in this method, the cost of a group of products is
ascertained. The unit of cost is a batch of group of identical products, instead of a single job order or
 GENERAL PRINCIPLES 33
contract. The imethod is
in
convenient economic particularly suitable for general engineeringfactories
batches and pharmaceutical industries.
which produce component
Process costing
the coste of passeS through different stages, each distinct and well-defined, it is desired to know
production at each stage. In order to ascertain the same, process costing is employed under
which separate account is opened for
e system ofcosting is suitableeach process.
for the extractive industries, e.&., chernical manutacture, paints,
foods, explosives, Soap
making etc.
Operation costing
Operation costing isa further refinement of
Where mass or repetitive production is carried out process costing, The system is employed in industries
or where articles or components have to be
semi-finished stage, to facilitate the execution of special orders, or for stoCKed
convenience of iSsue Tor later
operations. The procedure of costing is broadly the same as for process costing except that cost unit
operation instead of a process. For example. the manufacturing of handles for is an
of operations such as those of cutting steel sheets bicycles involves a number
into proper strips, moulding, machining ahd inaiiy
polishing. The cost of each one of these operations may be found out
separately.
Unit costing (output costing or single
costing)
In tnis method cost per unit of output or production is ascertained and the amount of each
element
constituting such cost is determined, Where the products can be expressed in identical
and where manufacture is continuous, this type of costing is applied. Cost quantitative units
statements of
prepared under which the various items of expense are classified and the totalexpenditurecost-sheets are
is divided by
totalquantity produced in order to arrive at per unit cost of production. The method is suitable in
such as brick-making,collieries, flour mills, paper mills,cement industries
manufacturing etc.
Operating costing
The system is employedwhere expenses are incurred for provision of services such as those rendered
by buscompanies, electricity companies, or railway companies. The total expenses
are divided by the units as may be appropriate (e.g., total number of regarding operation
passenger-kms. in case of bus
company) and cost per unit of service is calculated.

Departmental costing
Ascertainment of the cost of outputof each department separately isthe objective of departmental
costing. Where a factory is divided into a number of departments, this method is adopted.

Multiple costing (composite costing)

Under this system the costs of different sections of production are combined after finding out the
cost of each and every part manufactured. The system of ascertaining cost in this way is applicable
where a product comprises of many assembled parts, e.g, motor cars, engines, machine tools, typewriters,
radios, cycles etc.
As various components differ from each other in avariety of ways such as to price, materials used
and manufacturing process, a separate method of costing is employed in respect of each cormponent. It is
multiple costing in the sense that imnore than one methodof costing is employed.
J is to be noted that basically there are only two methods of costing viz., Job costing and Process
costing. Job costing is employed in cuses where lhe items of prime cost (ie. direct material, direet
34 GENERAL PRINCIPLES,
lahour and direct expenses) aretraceable to specific jobs or orders, eg., house butlding, ship buildine
cle. But where it is impossible to trace the items ofprime costto apartieularorder hecause their identit
is lost in manufacturing operations, rocess costing is used For example, In a refinery where severa
lonnes ofoil are being produced at the same time, the pricecost of specifie order of 10 tonnes cannotbe
traced The cost can befonnd out onh byfinding ot the cost per tonne of total oll produced and the
multiphing it by ten. lI ma, therefore, be conccluded tht the methods of batch, contract and cost plus
costing ore only the variants of job costing ,while the methods of nit, operation and operatinycostiny
arc onh the varianis of process costing
TECHNIQUES OF COSTING

Besides the above methods of costing, the following techniques of costing are used by management
onl for controlling costs and making some important managerial decisions. As amatter of fact they are
not independent methods of cost findings such as jobor process costing but are basicaly costing techniques
whichcan be used with advantage with any of the methods discussed above.

Marginal costing
It is a technique of costing in which allocation of expenditure to production is restricted to those
expenses
expenses which arise as a result of production i.e., direct materials, direct labour, direct variable
and variable overlheads. Fixed overheads are excluded on the ground that in cases where production
varies, the inclusion of fixed overheads may give misleading results.
This technique is useful in manufacturing industries with varying levels of output.

Direct costing
leaving allindirect costs
The practice of charging alldirect costs to operation, process or products,direct
arise, is termed as costing.
tobe written off against profits in the period in which they
fixed costs can be considered as direct
The technique differs from marginal costing because some
costs in appropriate circumstances.
Absorption costing
to operations, products or processes is
The practice of charging allcosts, both variable and fixed,
termed as absorption costing.
Institute of Cost and Works Accountant of India defines AbsorptionCosting as "a methodof
The
which all direct costs and applicable overheads are charged in products or cost centres for
costing by includes production cost as well as administrative
Absorbed cost
finding out the total cost of production.
and other costs."*]
discussed in detail in Section 4of the book.
Allthe above techniques have been

Uniform costing
standardised principles and methods of cost accounting are employed by toa
A technique, where is termed as uniform costing. Standardisation
may extend
companies and firms,
number of different
accounting, classification including codes,methods of defining costs andcharging
method of costing,
methods of allocatingor apportioning overheads to cost centres or cost units. The technquks
depreciaion, establishment of realistic pricing policies etc.
thus facilitates interfirm comparisons,

Terms (Sccond Revised Edition), 1998, p-l.

I.Glossary of Management Accounting
GENERAL PRINCIPLES 35

SYSTEMS OF COSTING
It nas already been stated that there are two main methods used to determine COstS :
1. The Job Cost
2. The
Method.
Process Cost Method.
IS possible to ascertainthe costs under eachof the above methods by two differentsystems :
1. Historical Costing.
2. Standard Costing.
Historical costing
Historical costing (conventional or orthodox cOsting) is the determination of cost by actuals. It
may be in the nature of (i) Post costing, or (ii) Continuous costing.
() Post costing. It means ascertainment of cost after the production is completed. This is done by
aialysing the financial accounts at the end of the period in such a way as to disclose the cost ofthe units
which have been produced. For instance, if the cost of product Ais to be calculated on this basis, one
must wait till the materials are actually purchased and used, labour actually paid, and overhead expenditure
actually incurred. This system is useful only for ascertaining the costs but not useful for exercising any
controlover cost,as one comes to know of things after they had taken place. It can serve as a guidance
for future productiononly when conditions in future continue to be the same.
(1) Continuous costing. In case of this system, cost is ascertained as soon as the job is completed
or even when the job is in progress. This is done usually by charging the job or product with actual
expenditure on materials and wages and estimated share of overheads.Hence, the figure of cost ascertained
in this case is not exact. But it has an advantage of providing cost information to the management
promptly thereby enabling it to take the necessary corrective action in time. However, it neither provides
any standard for judging current efficiency nor does it disclose what the cost of the job ought to have
been.

Standard costing
Standard costing is asystem under which the cost of the product is ascertained in advance on the
basis of certain pre-deiermined standards. Taking the above example, the cost of product A can be
calculated in advance if one is ina position to estimate inadvance the material, labour and overhead
costs that should be incurred over the product. Allthis requires an efficient system of cost accounting.
However, this system will not be useful ifa vigorous system of controlling cost and keeping it upto
standard cost is not in force.
Standard costing is becoming more and more popular now-a-days.
EMERGING AND INNOVATIVE TERMS

Cost accounting is agrowing and developing subject. In the changed economic scenario, its
importance is constantly increasing. In this process, some new innovative terms have emerged. These
terms are briefly explained in the following pages :
Activitybased costing
In is a recent technique basically used for apportionment of overheads costs in an organisation
having products that differ in volume and complexity of production. Under this technique, the overhead
costs of the organisation are identified with each activity which is acting as the cost driver i.e., the cause
for incurrence of overhead cost. Such cost drivers may by purchase orders issued, quality inspections,
maintenance requests, material receipts, inventory movements, power consumed, machine time, etc.
Having identified the overhead costs with each cost centre, cost per unit of cost driver can be ascertained.
 36
GENERAL PAINCIPLES
The overhead costs can now be assigned to jobs on the basis of the number of activities required for ih.
completion.
The utility of ABC technique can be appreciated with the following cxample :
ACompany is manufacturing two products A&B. Each of them requires two hoursof labour tin
at 20per hour. However,product Ais more sophisticated and requires four time more supervision and
two times more quality checks than product B. In such acase cost of the products will getdistoredi
case overheads like supervisioncosts, quality checking costsare simply chargedto products on the haci
of direct wages or direct labour hours. It will be appropriate to apportion the total overhead costs ower
different activities vz. supervision.quality checks etc. Cost per unit of activity may be ascertained. The
overheadcosts can now be charged toproducts onthe basis of number of units of the concerned activity
Activ ity Based Costing may. therefore, be defined as atechnique which involves identification cf
costs with each cost driving activity and making it as the basis for apportionment of costsover different
products or jobs. The Chartered Institute of Management Accountants (CIMA) London defines it as a
technique of'"cost attribution tocost units on the basis of benefits received from indirect activities eo
ordering. seting up. assuring quality.'*

Backflush costing
Concept. In case of conventionalcosting system, the cost of the product is computed in sequence
of the production process. Backflush costing, as its name indicates, is a system of computing costs by
working backwards. CIMA defines backflush costing as "a cost accounting system which focuses on
the output of an organisation and then works back to attribute costs to stock and cost of sales.'"
The backflush costing is also termed as delayed costing or post-deductcosting. This is because in
case of this system, costing of the inventories is delayed almost tillthe goods are sold.
The total manufacturing costs are charged to units sold and those in stock. As a result there is no
necessity of having a separate Work-in-progress Account.
Requirements of Backflush Costing. Backflush costing is used in case of an industry which
satisfies all of the following three conditions :
(i) Management desires to have a simple costing system without going into the intricacies of
allocating the cost todifferent operations involved in manufacturing the product.
(ii) Each product manufactured has a set of standard cost.
(ii) Material inventories are low because of adoption of JIT Inventory System' by the organisation.
Benefits. The system offers the following benefits:
() The focus of backflush costing is on sales rather than on production. As such the product
inventories
manager produces goods only in quantity which is likely to be sold away.This results in lower
of finished goods with consequential benefits.
(ii) Profit can be earned only when the goods are sold and not simply produced. As such the
overallobjective of the organisation gets supremacy over the individual department's objective which
otherwise might have been interested only in its efficients capacity utilisation.
Limitations. The system has the following limitations :
() Costing work is delayed. It is simply post-costing hence cannot help in controlling and
reducing
Costs.
departments,
(7) The technique does not measure the efficiency or inefficieacy of the individual
processes or operations.
lnother
(i) The system is useful only in case of industries which can adopt JIT inventory system.
cases it will be ineffective.

1.Please refer to the next chapter for JIT Inventory System.

 GENERAL PRINGIPLES 37
Life cycle costing
Concept. In case oftraditional costing system, the cost of product is usually computed on the basis
OT VIsibie costs which primarily consist of
Incurred ter the product during a Darticular period.anufacturingcosts v/z., materials, labour and overneads
costs, after services costs etc., Invisible costs such as research and
are usually ignored. Life cycle costing is based on this basicdevelopment
premise that
Tor decision making all costs whether canital or
revenue, whether upstream (e.g.,
developmnent) or down stream (e.k., customer service) incurred during all phases of theresearch and
CyCle are relevant. The product's life cycle starts from the product ne
manufacturer to abandonment of the product by the customer. time of inception of the product by the
Lite cycle of a product differs rom product to product. For
may be 10years, while in case of faslhion goods example in case of an automobile it
item it may be only one year. The costs incurred
the life cycle of a product or project can be during
(i) Rescarch and classified in the following categories :
six
Development
(ii) Product Design Costs. Costs.
(ii) Manufacturing Costs.
(iv) Marketing Costs.
(v) Distribution Costs.
(vi) Customer Service Costs.
Lifecycle costing, therefore, involves consideration of all
costs associated with the product during
its Iife span, i.e., cost incurred 'as' some people put it, from "cradle to grave'" or "womb to tomb.
CIMAdefines Life Cycle Costing as the practice of
physical assets at the lowest total cost to the entity."" This obtaining over their life times the best use of
is achieved through a combination of
management, financial and other disciplines.
Utility. Life Cycle Costing is helpful in managerial decision making as follows :
1. Pricing decision. Useful information is provided to the
the organisation. In caseof some products, the development management for pricing the products of
be short. Reverse may be the situation in case of period is long while in case of others, it may
manufacturing
take all these aspects into consideration while fixing the prices ofcosts. The management must therefore
the different products.
2. Focuses on both visible and invisible costs. Full costs
associated with each product, whether
visible or invisible, are given due focus. This considerably broadens the perspective of the business
manager and considerably helps him in decision-making.
3. Overallview. A cost statement prepared under traditional
other words, its information is limited to the accounting period forcosting has a calender based focus. In
which it has
statement prepared as per life cycle costing gives information regarding all costsbeen prepared. A cost
products over its total life span. Hence, the manageinent can take an overall view associated with the
4. Facilitates capital budget decision. Capital budgeting decision is about the product.
decision. The life cycle costing considers both capital and revenue costsbasically a long-term investment
over the entire life span of the
product or project. Hence, it helps in making better appraisal of different projects and
facilitates the capital budgeting decision process. considerably
Target costing
Meaning. The concept of target costing had its origin in Japan in 1960s as a result of difficult
market conditions. The Japanese companies were having a tough time due to
and industrial products of western firms in the Asian markets. It was proliferation of consumer
felt that the firms should bring out
products only after having a close interaction with thecustomers for
the challenge put forward by the western tirms. This required identification of their needs to face
and the target cost for the products.
fixation of the target price, the target profit
38 GENERAL PRINCIPLEs
The term "Target Price' is the estimated price of product or service which apotential customer wil
be willing to pay. The Target Profit' refers to the amount of profit which the firm will like to make f
a particular product, while the term "Target Cost' is the target price less target profit from the prod
This, as a matter of fact, is the estimated long run cost that will enable the organisation to achieve :
target operating income.
The technique of target costing deals with allthese aspects. It may, therefore, be defined as
managerialtool for making cost a key focus throughout the lifeof a product.
Stages in Target Costing. There are five main steps involved in target costing:
(i) ldentihing the product that satisftes the needs of the potential customers. This can be done ke.
the organisation by conducting market studies about the product features that the customers want and
the prices that they are willing to pay for them. In other words, understanding what customers value i.
a key aspect of target costing.
(ii) Reaction of the competitors. The orgarnisation must also research about the products offered hu
the competitors to beat them in the market. This requires understanding competitors' technologies
products, costs and financial conditions. This information can be obtained from the competitors!
customers, suppliers and employees or through reverse engineeringa process of taking apart and
analysing the competitors' products to determine the product design, materials and technologies used by
them.
(iii) Determination of target price. This is the estimated price for a product or service that the
potentialcustomers willbe willing to pay. This estimate is based on understanding of customers' percejved
value for a product and competitor's response.
(iv) Determination of targetoperating incomeper unit. This is the operating income that acompany
wants toearn per unit of aproduct or service sold. This will depend to a large extent upon the company's
cost of capital and the competing environment.
(v) Deriving targets cost pe unit. The target cost per unit is atarget, i.e., something a company
The target cost per
must shoot at. It is generally lower than the present full cost of a unit of a product.
unit is obtained by subtracting target operating profit per unit from the target price per unit. It may be
noted that in order toachieve the target cost per unit, a company must reduce the cost of its products or
services through value engineering as discussed below. aspects of value
(vi) Application of value engineering. It refers to systematic evaluation of all needs. It requires
chain business functions with the objective of reducing costs while satisfying customeris a cost which if
cost
identification of value-added cost and non-value added cost. A value added
service, e.g.
eliminated wouldreduce the value or utility the customers obtain from using the product or added
While a non-value cost is
specific product features, product reliability, prompt customer care etc.
obtain from using the
a cost which if eliminated would not reduce the utility or value the customers
re-engineering seeks to
product or service, e.g., cost of ordering, testing, rework, repair costs etc. Value
reduce non-value added activities and thus reduce the overall cost of the product or service.
:
The computation of target cost can be understood with the following example
Gross Target Sales Revenue = 2,000 units x 80 per unit
= 1,60,000
Gross Target Operating Income = 10% on Capital employed of ? 1,60,000
=7 16.000
TargetOperating Income per Unit = 16,000/2,000 =8
Target Cost per Unit = Target Price - Target Operating Income per Unit
=80-?8=7 72
Gross Current Cost = 1,50,000
Gross Current Cost per Unit = 1,50,000/2,000=75
GENERAL PRINCIPLES 39

g Cost per unit is 72 while the current ull cost is 15, The cost reduction eorS are
theretore needed to reduce the curent cnst of? 26 hy? 1to make it equal to the target cost or T
Advantages of Target Costing. The followingare the advantages of target costing
or servICes.
einerces at alllevels of management,commitment to produce or provide innovative products
() theips io give maximum value to the customers for the price they pay for the products. In
other words, it gives the customers
maximum satisfaction'"
()neips to create and maintain an organisation's competitive feature through market driven
technologes and strategies. This results in improving and enlarging the manufacturing operatios or
providing Scrviccs at minimal prices which enables the organisation to face and stay in the even growing
competitive environment.
Limitations of Target Costing. Unlcss properly managed, the target costing can have cerain
undesirable consequences
() In order to mect the requirements of different customers, the organisation may add too many
features tothe product or service some of which may be non-value added activities.
() The production may be delayedon account oflongtime being taken in evaluation of alternative
designs.
(iin)Conflicts within the organisation may develop since the burden of cutting cost may fall unevenly
on different divisions of the organisation.
In order to avoid limitations, efforts should be made to see that target costing focuses on customer.,
pays attention to the schedules and develops the culture of team work and cooperation across different
business functions or divisions.

Kaizen costing
Kaizen concept. Kaizen is a Japanese term meaning, 'continuous improvement". Some of the
key objectives of Kaizen are elimination of waste, quality control, Sust in time delivery, standardized
work and use of efficient equipment. The concept of Kaizen was first developed and implemented in
Japanese business after the second world war (1939-1945) with the active co-opera.ion of American
experts to rebuild the devasted Japanese industry. It has since spread over the world in many other areas
viz healthcare, government, banking etc. besides business.
Kaizen Costing Concept. Based on the concept of Kaizen, Yashihuro Monden of Japan developed
Kaizen costing. According to him Kaizen costing is the maintenance of present cost levels for products
being manufactured by systematic efforts to achieve the desired cost level."" It is thus a continual cost
reduction system that occurs after aproduct design has been completed and is now in production. The
time prior to Kaizen costing is called target costing which involves searching of a target cost for a
product before it reaches the market. Both these two concepts make up life cycle costing which involves,
as discussed earlier, all costs associated with the product during its life span i.e., from inception of the
product til its final abandonment.
Kaizen Costing and Standard Costing. Kaizen costing is a variant of standard costing. The
difference between the two is as follows :
I. In case of standard costing the costs are predetermined on the basis of carefully laid down
slandards, actual costs are compared with standard costs and variances are found as to their causes. The
standards are fixed for along time gener ally for 6months or ayear and variances are computed accordingly.
Kaizen costing involves philosophy of continuousimprovement. Asa result the new costreduction
largets are set every month. The gap between the targetcosts and current costsis toundout every month
and its causes are analysed.
 40
GENERAL PAINCIPLES
2. In case of standard costing, it is assumed that existing production conditions will
maintained and will not change. While in case of target costing therc is continuous review only be
production conditions in order to reduce costs.
Advantages of Kaizen Costing. KaizenCosting results into following advantages:
existing
1. Focus on customers. The Kaizen philosophy has cutomers satisfaction as its prime
permits no option i.e., either you provide best products and customer satisfaction or be prepared t Iobjective.
out of business.
2.Continuous improvement. There is always not asingle best way to do a thing. There is alwave
better way. Ina Kaizen company, the search for excellence just does not end but it continues for ve.
3. Open Acknowledgement of Problems. Every organization has certain problems related to financa
competition, change in demand ete. Kaizen companies are also no exception. The whole organizatio
works as a team to solve the problem. The problems are openly shared by the management with the
employees which avoids rumors. The simple rule is "Fight wth your problems, don't run away from
ihem.
4. Promotion of Openness. In case of Kaizen organization there is less functional ring fencing ie
´only the senior managers have private cabins. Otherwise the workplace is generally open.
3. Creation of work teams. Each individual in a Kaizen organization belongs to a work team
headed bya leader. Working in various overlapping teams bring employees much near to each other and
reinforces the mutual understanding.
KEY TERMS
Activity Based Costing. The technique of cost attribution to cost units on the basis of
benefits received from indirect activities.
Cost Accounting. The accounting mechanism through which the costs of the products or
services are ascertained and controlled,
Cost Sheet. A document which provides for assembly of different costs in respect of a cost
centre or acost unit.
Direct Labour. Labour which takes active and direct part in the production of a particular
commodity.
Direct Material. Material which becomes an integral part of the finished product and which
can beconveniently assigned to specific physicalunits.
Financial Accounting. The art of recording, classifying and summarising in significant
manner and in terms of money transactions and events which are at least in part of a financial
character and interpreting the results thereof.
Fixed Cost. Acost that remains constant within a given period of time and range of activity
in spite of fluctuations in production.
Material. The substance from which the product is made.
Overhead/ndirect Cost. The expenditure on labour, materials or services which cannot be
economicaly identified with specific saleable cost unit.
Semi-variable Cost. Acost containing both fixed and variable components and which is thus party
affected by fluctuations in the level of activity.

TEST QUESTIONS

1. Reconcile the following two statenents quoting exanples to illustrate the validity of each :
() "Costing is an instrument of manageiral control".
() "Costing is nothing more than a detailed analysis of expenditure."
 41
GENERAL PRINCIPLES

"Financial accounting procedures are generally profit or loss; butthere are

designcd to ascertainthe periodic
important limitations and deficiencies in the system." Discuss.
3. "Cost Accounting System is ncither expensive rather it is a profitable investment."Comment.
unnecessary nor
Describe brietly the various methods of costiny, Stnte tivino teasons which method of costin3 Y00
recommend for the use in the following:
i) Chemical Works (") Nursing Homc
wù Road Transport Company (") Painter and Decorator
(i) SteclCompany owning iron ore mines (l) Constructional Engineer
(ir) Coal
AS (/)Process, (ii) Operating, (ii) Process, (iv) Single, (v) Operating, (v) Job, (vil)Contract.)
6. (a) Explain the important objectives of Cost
Accounting.
(h) Given below is a list of ten industries, Give the method of costing and the unit of cost against cacn
industry.
() Nursing Home; (v/) Bridge Construction;
(ii) Road Transport: (vi) Interior Decoration;
(iii) Steel; (vi) Advertising;
(i) Coal: (ix) Furniture;
(v) Bicycles: (*) Sugar Company having its own sugarcane fields.
[Ans. (b)
(i) Operating: per bed per week or per day; (vi)) Contract; each contract;
(ii) Operating: per tonne-kilometer or (vi) Job;each job;
per passenger-km.;
(iii)) Process; per tonne; (vi) Job; cach job;
(iv) Single; per tonne; (ix) Job; each job;
(r) Multiple; each unit; (*) Process; per quintal/tonne.]
6. Suggest suitable cost units for the following enterprises :
(a) Trnasport Department (c) Electricity Boards
(b) Boiler House (d) Canteens
|Ans. (a) per passenger km. or per tonne-km. (b) per lb., (c) per kwh. or per unit, (d) per dish or per meal.]
7. (a) Match the following :
(i) Total Fixed Cost 1. What cost should be
(ii) Total Variable Cost 2. Incurred cost
(ii) Unit Variable Cost 3. Increases in proportion to output
(ir) Unit Fixed Cost 4, Cost of conversion
() Standard Cost S. What costs are expected to be
(r) Period Cost 6. Decreases with rise in output
(vii) Actual Cost 7. Remains constant in total
(rii)Labour and Overhead 8. Remains constant per unit
(ix) Incremental Cost 9. Cost not assigned to products
(r) Budgeted Cost 10. Added value of anew product.
|B. Com. (Hons), Delhi 2003]
(b) Indicate whether the following statements are True (T) or False (F):
() Allcosts are controllable.
(i) Conversion cost is equal to direct wages plus factory overhead.
(ii) Variable cost per unit varies with the increase or decrease in the volume of output.
(h) Depreciation is an out of pocket cost.
(") An item of cost that is direct for one business may be indirect for another.
(r0) Fixed cost per unit remains fixed.
(vii) Fixed Cost does not change in the same proportion in which output changes. [C.A. (Inter)]
(Ans. (0) (i) &(7): ()&(3); () &(8); (iv) &(6); (") &(); (v) &(9}; (vil) &(2); (vli) &(4); (ix) &
(10); (*) &(5), (0) () F(I) T(UI) F(V) F\v) T(C) F(wii) T].
42
GENERAL
8. State the unit of cost and method of costing gonerally used for accounting purposes in the following
PAINCIPLES
cases :
() Brick works; (i) Bi-cycle: (i) Oil Refining Mill; and (iv) Road Transport Company.
[C.A. (lnter))
. Specify the method of costing and cost unit applicable to the following :
) Toy making. (i))Cement. (ii) Radio, (hv) Cycle.(v) Ship-Building, (vi) Hospital.
[C.A. (Inter)]
[Ans. (i) Batch, per Batch, (i) Unit, Per ton or Per Bag, (iii) Multiple, Per radio or Per Batch, (iv)
Per Cycle. (v) Contract, Per Shift, (v}) Operating, Per Bed/Patient MulPertiday]ple,
10. Explain in brief the following:
Ü) Product costs;
(ii) Relevant Range;
(ii) Batch Costing: [B.Com (H) Delhi20011
(ir) Principle ains of classifying the costs; [B.Com (H) Delhi 200)
(V) "The cost must be qualified according to its context." [B.Com (H)Delhl 2002)
yes, how 2
TI. What purpose do cost centres serve ? Are cost centres and cost units related to each other ?If
[.C.A.I. (lnter) June 2001, B.Con (H) Delhi 20021
12. (a) Define Product costs. Describe three different purpose for computing product costs.
(6) Discuss the four different methods of costing alongwith their applicability toconcerned industry.
(c) Enumerate the factors which re to be considered before installing a systenm of cost accounting in a
manufacturing organisations. [C.A. (Inter)]
(d) Define cost objects and give three examples.
(e) Give three examples of Cost Drivers of following business functions in the value chain :
(i) Research and development;
(ii) Design of products, services and process;
(iüi) Marketing;
(iv) Distribution
(1) Customer Service. [C.A.(Inter) May. 2000)
[Ans. () Number of research projects, Personnel hours on a project, Technical complexities of the projects
(i) Number of products in design, Number of parts per product, Number of engineering
hours (iii) Number of advertisements run, Number of Sales personnel, Sales revenue
(iv) Number of items distributed, Nun1ber of customers, Weight of items distribute,
(r)Number of service calls, Number of products services, Hours spent in serv1cing of product.]
13. Explain :
(u) Sunk Costs
(b) Pre-production costs [C.A. (Inter), Nov. 2000)
14. (a) You have been asked to installa costing system in a manufacturing company. What practical difficulties
will you expect and how willyou prorose to Overcome the same?
(6) Select asuitable unit of cost to be used in the following:
() Hospital;
(ii) City Bus Transport;
(iii) Hotels providing lodging facilities. {C:A. (Inter), May 2002
[Ans.(i) Patient bed/per day, (ii) Per passenger/Km., (ii)Per room/day:]
15. (a) Differentiate between Cost Control and Cost Reduction. [C.A. (Final), Nov. 2001)
(6) Distinguish betvween Cost Reduction and Cost Management. [C.A. (Final), May. 2002
(c) Simple and Composite Cost Unit. [.C. WA. (nter)]
(d) 'Product Cost' and 'Period Cost.' [I.CWA. (lnter), Dec. 1999]
16. Distinguish between controllable costs and uncountrollable costs.
[C.A.PE. (E-1l). May 2003 &CS. Inter Dec, 2002)
17. Enumerate the main objectives of int-oduction of aCost Accounting System in a manufacturing organisation.
[C.A.PE. (E-I). Nov 2002/
18. What do you understand by the term Cost Centre ? /C.A.PE. (E-Il). Nov. 2002)
GENERAL PRINCIPLES 43

19. "LI
Limitations of financial accounting have nmade importance of cost accounting."
management to rcalisc the 2003; 2016]
Comment. [B.Com. (Hons) Dellhi
20. Explain the meaning of relevant costs in managerial
decisions. Give examplcs. 2004]
(B.Com (Hons.) Delhi2003,
21, Distiuguish between Cost Control and Cost Reduction.
(6. Com. (Hons.) Delhi 2003 CAPE E-l) Mav2003. AMay 2004; CAlPC NMay 21J
22, Explain briefly the following concepts :
2002/
(a)Sunk Costs; (b)Differential Costs; (c) Cost Reduction. [B. Com. (lons.) Dellhi 2002/
23. Distinguish between 'Cost Centre' and 'Profit Centre'. /B. Com. (Hons.) Delhi
24. Explain the general principles to be kept in mind while considering whether an item of(Hons,)
cxpenditure,
Delhiisg
2002]
treated as overhead. [B.Com.
25, Define and explain the terms (a) cost centre and (b) profit centre. [C.S. Inter Dec. 2002]
26. What are "Imputed Costs' and 'Common Costs'. [C.S. Inter Dec. 2003]
27. State with reasons whether the following statemcnts are correct or incorrect :
) Notional costs are imputed costs mean the same thing.
(ii) Conversion costs and overheads are interchangeable ternms. C.A. Inter, June. 2004]
28. What are the advantages of introducing a costing system in an industrial organisation.
/B.Com. (Hons.) Delhi 2004]
29. Mention the factors which should be considered in installing acosting system in(B.Com.
an organisation.
(Hons.) Delhi2004)
30. Distinguish between 'Costing' and 'Cost Accounting'. [CS. Inter June. 2004]
fC.A. PEE II May. 2004J
31. Discuss the essentials of agood Cost Accounting System.
32. (a) State whether the following statements are True (T) or False (F) :
() Cost of floopy disc used for office computer is administration overhaead.
(ii) Cost accounting provides only the basis and information for ascertainment of costs.
[CS Executive Programme, June 2014/
(ii)Direct cost and variable cost are not the same. [CS Executive Programme, Jiune 2014]
(b) Fill in the blanks correctly :
cost unit is treated a.
() Generally an item of expense when identified with aspecific [I.C.WA. Inter Dec. 2003)
(ii) Conversion cost is production cost less the cost of but including the gains and losses in weight
or volume of direct material arising due to production. /CS Executive Programme, Jiune 2014)
(ii) Indirect labour is included in [CS Executive Programme, June 2014]
Raw Material, (iii) Overhead Cost.]
[Ans. (a) ()True, (ii) True, (ii) True; (b) () Direct Expense, (i) realize the inportance of cost
management to
33. (u) "Limitations of financial accounting have made the
accounting." Comment.
necessarily the same.'" Comment.
(b) "Direct costs and variable costs are not [B. Com. (tlons.) Delhi, 2006]
cost.
(c) Explain the nature of product and period more relevant in the emerging economic scenario in India."
34. (a) "Cost Accounting is becoming more and
Comment.
examples :
(b) Explain the following with suitable
(i) Imputed cost; [B.Com. (Hons,) Delhi, 2007]
(ii) Sunk cost
costing generally used in the following cases :
35. Mention the unit of cost and the method of
i) Brick-works;
(ii) Textile production;
(ii)) Goods transportation;
(iv) Ship building;
(() Power generation [B.Com. (llons) Delhi, 2007 & 2010]
 44
GENERAL PRINCIPLES
[Ans.
Unit of Cost Method of Costing
() Per 1,000 bricks Single Costing
(ii) Per meter of cloth Process Costing
(iii) Per tone--km Operating Costing
(i) Per Ship Contract Costing
(") Per KHWof power Operating Costing
36. (a) Explain the importance of Cost Accounting as a managerial tool.
practical difficultie.
(6) You have been asked to install a costing system in a manufacturing company. What
same?
Will youexpect and how willyou propose to overcome the
(c) Explain (any two) with a suitable example :
(i) Imputed cost;
(ii) Cost unit;
(iii) Cost centre
[B.Com. (Hons,) Delhi,2007 &20081
37. Differentiate between :
() Cost allocation and cost apportionment.
[B.Com. (Hons,) Delhi, 2008
(ii) Cost Accounting and Financial Accounting. [B.Com. (Hons,) Delhi, 20061
(ii)) Operating Costing and Operation Costing. [B.Com. (Hons,) Delhi, 2009)
38. Explain the terms cost, expense and loss.
39. Distinguish between:
(i) Product cost and Period cost;
(ii) Imputed cost and Out of pocket cost; (B.Com. (Hons.) Delhi, 2009]
(iii) Prinme cost and Conversion cost;
(iv) Cost Centre & Cost Unit. [B.Com. (Hons.) Delhi, 2010)
system."" Discuss.
40. "Evolution of cost accounting is the outcome of deficiencies in the financial accounting
(B.Com. (Hons.) Delhi, 2011)
41. Distinguish between the following :
(Ü) Controllable and uncontrollable cost.
(ii) Cost Accounting and Financial Accounting. [B.Com. (tHons.) Delhi, 2011&2012)
42. "A cost accounting system that simply records costs for the purpose of fixing sale prices has accomplished
only a smallpart of its mission.'" Explain. [B.Com. (Hons) Delhi, 2012]
43. What is Cost Accounting? Enumerate its important objectives. [IPCC, ICAI, May, 2010]
44. What is the difference between cost accounting and financial accounting? [B.Com. (lons.) Delhi, 2013)
45. Explain the following terms in cost accounts :
(i) Opportunity cost
(ii) Conversion cost
(iii) Imputed cost
() Cost unit [B.Com. (Hons.) Delhi, 2013]
(r) Product cost [B. Com. (Hons.) Delhi, 2014)
(v0) Relevant range [B.Com. (HHons.) Delhi, 2014)
(ril)Sunk Cost [B.Com. (Hons.) Delhi, 2014/
46. "Limitations of financial accounting have made the management realize the importance of cost accounting.
Comment. [B.Com. (Hons.) Delhi, 2014)
47. Cost of aproduct or service is required to be expressed in suitable cost unit. State the cost units for the
following industries :
(i) Steel
(ii) Automobile
(i) Transport
(iv) Power
() Transport
 GENERAL PRINCIPLES 43

(r) Hotel
(vil) Hospital
[CAIPC, May 2013 & CAIPC, May 2014]
|Ans. (a) () Tonne, (i)) Numbers, ii) Per Passenger-km/Tonne-km
A8. Distinguish between cost ()Per kwh (v) Per Passenger-km/Tonne-km (v) Per room/meal (vii) Per patient
A9. Distinguish between allocation and cost absorption. (CAIPC, May 2013)
allocation and apportio:ment of cost. (CAIPC, May 2014]
50. Explain the follovwing :
(i) Explicit Costs
i) Enginecred Costs /CAIPC, May 2014)

PRACTICAL PROBLEMS
1. Fron: the following particulars prepare acost sheet showing the total cost per
Dec., 2016: tonne for the perioid enocu

Raw-Materials 2,000
33,000 Directors' fees (office)
Productive wages 35,000 Faclory cleaning 500
Direct expenses 200
3.000 Sundry office expenses
Unproducive wages 10,500 Estimating 800
Factory rent and taxes 7,500 750
Factory stationery
Factory lighting 2,200 Office stationery 900
Factory hcating 1,500 Factory insurance 1,100
Motive power 4,400 Office insurance 500
Haulage 3,000 Legal expenses 400
Directors' fees (works) 1,000 Rent of warehouse 300
Depreciation of Upkeeping of delivery vans 700
-Plant and Machinery 2,000 Bank charges 50
-0ffice Building 1,000 Commissionon sales 1,500
--Delivery Vans 200 Loose tools written off 600
Bad debts 100 Rent and taxes (Office) 500
Advertising 300 Water supply 1.200
Sales Department salaries 1,500
The total output for the period has been 10,000 tonnes.
[Ans. Prime cost 71,000, Works cost I,08,050, Ofice cost I,13,600, Total cost
?1,18,200, Cost per tonne 11.82]
2. Prepare a cost sheet to show the total cost of production and cost per unit of goods manufactured by acompany
for the month of July 2016. Also find out the cost of sales.

Stock of raw-materials 1-7-2016 3,000 Factory rent and rates 3,000

Raw-materials purchased 28,000 Office rent S00
Stock of raw-materials 31-7-2016 4,500 General expenses 400
7.000 Discount on sales 300
Manufacturing wages
Depreciation on plant 1,500 Advertisement expenses to be charged fully 600
Loss on sale of a part of plant 300 Income-lax paid 2,000
The number of units produced during July 2016 was 3,000.
The stock offinished goods was 200 and 400 units on 1-7-20 16 and 31-7-2016respectively. The total cost of
unitson band on 1-7-2016was 2,800. Allthese had been sold during the month.
(Ans. Prime Cost 33,500, Factory Cost 38,00; Cost of Production 38,900;Cost of Sales 37,4 13].
3. The folowing particulars relating to the year 2016 have been taken from the books of a chemical works
manufacturing and selling a chemical mixture :
46
GENERAL PRINCIPLES
Stock on lst Jan. 2016
Kg
Raw-materials 2,000
Finished mixture S00 2,000
Factory stores 1,750
Purchases 1,250
Raw-materials 1,60,000
Factorv stores 1,80,000
Sales 24,250
Finished mixture 1,53,050
Factory scrap 9,18,000
Factory wages 8,170
Power 1,78,650
Depreciation of machinery 30,400
18,000
Salaries :
Factory
Office 12.220
Selling 37,41,500
220
Expenses :
Direct 18,500
Office 18,200
Selling 18,000
Stock on 31st December, 2016
Raw-Material 1,200
Finished Mixture 450
Factory Stores 5,550
The stock of finished mixture at the end of 2016is to be valued at the factory cost ofthe mixture for that year.
The purchase price of raw-materials remained unchanged throughout 2016.
Prepare astatement giving the maximum possible information about cost and its break up for the year 2016.
(Ans. Prime cost 73.77,800, Factory Cost 5,16,200, Cost of production of finished miture sold ? 5,71,852,
Cost of sales 6,31,352].
4. Calculate (a) Valueof raw-materials consumed (b) Total cost of production, (c) Cost of goodssold and (d) The
amount of profit from the following particulars :

Opening Stock: Power 2,000

Raw-Materials 5,000 Factory Heating and Lighting 2,000
Finished Goods 4,000 Factory Insurance 1,000
Experimental Expenses 500
Closing Stock :
Raw-Materials 4,000 Sale of Wastage of Materials 200
Finished Goods 5,000 Office Management Salaries 4,000
50,000 Office Printing & Stationery 200
Raw-Materials Purchased
Wages paid to Labourers 20,000 Salaries of Salesmen 2,000
2,000 Commissionof Travelling Agents 1,000
Chargeable Expenses 1,00,000
Factory Rent, Rates and Taxes 5,000 Sales
(M. Com., Madras)
[Ans. (a) 50,800, (b) ? 87,500, (c) 89,500, (d) ? 10,500].
Fint. Sale of raw-materials wastage of? 200 has been deducted from the cost of raw-materials].
5. The cost of the sale of product 'X is made up as follows
10,200
Materials used in manufacturing 2,500
Materials used in packing materials 350
Materials used in selling the product 75
Materials used in office
GENERAL PAINCIPLES 47

Materials used in
Labour required infactory
125
producing
Salary paid to workS manager and other principalofficers of the
2.500
450
factory
Expenses-indirect-office 250

Expenses-directfactory
Bad debts
1,000
300
Packing expenses 150
Lighting and heating charges of the factory 200
Expenses--indirect--factory
ASsuming that all the products manufactured are sold. what should be the selling price to obtain a profit of
125

20% on cost price ?

ustrate in a chart form for presentation to your manager, the divisions of costs of product "X.
6.
[Ans. Prime cost 16,200; Works cost ?17,10; Cost of sales ? 18,225; Sales 21,870]).
Calculate the prime cost, factorycost, total cost of production and cost of sales from the following particulars:
Raw-materials consumed 12,000
Directly chargeable expenses 500
IVages paid to labourers 2,500
Grease, oil, cotton waste etc. 25
Salary of factory manager and clerks 1,750
Insurance of stock of raw-materials 300
Consumable stores 400
Printing and stationery :Factory 50
Office 200
Sales deptt. 100 350
Rent of office building 150
Depreciation: Factory premises 200
Office furniture 50
Delivery vans 75 325
Power and fuel 500
Contribution to provident fund of factory employees 1,000
Salaries of administrative directors 100
Bank charges 75
Cost of samples 250
Salaries of sales manager 300
Advertising 500
Packing material 350
Shortage instocks of finished goods 20
[Ans. Prinme cost ? 15,000; Factory cost ? 19,225; TotalCost of production 19,800, Cost of sales 21,395].
7 Calculate (a)value of raw-materials consumed, (b) totalcost of production,(c) cost of goods sold and () the
anmount of profit fron the following particulars :
Opening stock :Raw-Materials 1350
Finished goods 2,500
Closing stock : Raw-materials 750
Finished goods 1,500
Raw-materials puchased 20,000
Wages paid to labourers 8,000
Direct expenses 1,250
Experimental expenses 450
Factory printing and stationery 350
48 GENERAL PRINCIPLEs
Rent Factory 250
Office 120 370
IWages of fireman 1,000
Lightingoffice 125
Audit fees 150
Telephone expenses 500
Advertising 1,250
Market research expenses S50
Salary of godown-keepers 175
Travelling expenses 750
Commissionof travclling agcnis 500
Sales 50,000
[Ans. (a) Value of raw-materials consumed 20.600. (b) Total cost of production ?32,795, (c) Cost af
goods sold33,795, (cd) Profit? 12,9801
8. Prepare a statement of cost fronm the following trading and profit and loss account for the year ending 31st
March, 2016:
Particulars
Particulars
Opening stock: Sales 1,00,000
Materials 8.000 Closing stock :
25,000 Materials 15,000
Finished goods 30,000
Purchase of materials 70,000 Finished goods
Direct labour 10,000
Grense. oil etc. 500
700
Salary of storekecper
Pon er and fuel 800
Gross profit cld 30,000
1,45,000 1,45,000

Gross pro fit b/d 30,000

Lighing: Dividends received 2,000
500
Office
650 Interest on loan 600
Sales deptt.
Transfer fees received 1,400
Depreciation:
Office premises 1,000
750
Delivery vans
Fces of office manager 2,000
1,500
Bank charges
Selling expenses 1,500
Sales commission S00
Preliminary expenses 3,000
Packing expenses 1,100
Dividends paid on share capital of
Company 1,000
Discount on debentures 500
Net profit 20,000
34,000 34.000

[Ans. Prime Cost 73,000; Works Cost ? 75,000; Total Cost of production 80,000; Cost of Goods Sold
75,000; Cost of sales 79,000; Profit 21,000}.