COST & MANAGEMENT ACCOUNTING

REVIEWER

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Cost & Management Accounting Reviewer
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 YOU MUST BE WONDERING

How to Read this book?

Step 1 Step 2 Step 3 Step 4
Prioritize more time for Identify key concepts Solve questions Focus on solving LDR
'A' chapters in the ABC in each chapter. in order, from questions during the
analysis easy to difficult. final revision

Step 1: Prioritize your chapters Step 2: Identify key concept

Chapters in the index are Identify the key concepts for each
categorized as A, B, or C based on chapter using the list provided at
their importance. Focus more on 'A' the start of the chapter. Ensure you
chapters, as they carry the most understand them thoroughly. If you
weight, and give adequate struggle with a question, revisit the
attention to 'B' chapters. While all concepts, review them, and
chapters must be covered, this strengthen your understanding
approach helps manage time before moving forward.
efficiently for better results.

Step 3: Start easy Step 4: Last Day Revision (LDR)

Start with Question 1, as they Focus on solving LDR questions
progress from easy to difficult, during the final revision. In the 1.5
helping you build confidence days before the exam, prioritize
throughout the chapter. Pay close these questions as they cover the
attention to the “EXAM INSIGHTS” most critical concepts from each
to avoid common mistakes. chapter. You'll find a quick summary
Questions are segregated topic of LDR question numbers listed right
wise where possible. before each chapter for easy
reference.
 Last Day Revision Questions
Last Day Revision Questions mentioned right at the beginning of
each chapter
Easy to find 1 day before the exam

Master Every Concept!

A quick concept list shows what's covered, helping you pinpoint

areas if you stumble on related questions
Prioritize using ABC Analysis
Each chapter is categorized as A , B or C
A : Very Important, Read on priority
B : Moderately Important
C : Less Critical but still essential
Concept Summary
Sharpen your memory with lightning-fast
concepts recap before you hit the questions.
Also perfect for the final 1.5-day revision!
All chapters include MCQs
Complete each chapter with a collection of MCQs
Your one-stop spot to learn, test and master key
concepts!
 Exam Insights
Use exam insights to learn common mistakes and avoid them.
Stay ahead of others

Reference’s to Attempts in all

Questions
Each question includes references and duplicates
are removed — with all prior attempts noted.

Questions arrange in easy to

difficult way
Building your confidence step-by-step. Question 1 in
any chapter is the easiest slowly progressing to more
difficult questions
ABC Analysis
Each chapter is categorized as A , B or C
A : Very Important, Read on priority
B : Moderately Important
C : Less Critical but still essential
Table of Contents
s

Sr. Particulars PAGE NO. IMP

1 Introduction to Cost and Management Accounting 1.1 – 1.14 B
2 Material Cost 2.1 – 2.31 B
3 Employee Cost and Direct Expenses 3.1 – 3.32 B
4 Overheads – Absorption Costing Method 4.1 – 4.37 B
5 Activity Based Costing 5.1 – 5.42 A
6 Cost Sheet 6.1 – 6.42 B
7 Cost Accounting Systems 7.1 – 7.33 C
8 Unit & Batch Costing 8.1 – 8.17 C
9 Job Costing 9.1 – 9.11 C
10 Process & Operation Costing 10.1 – 10.40 A
11 Joint Products and By Products 11.1 – 11.28 C
12 Service Costing 12.1 – 12.38 A
13 Standard Costing 13.1 – 13.32 A
14 Marginal Costing 14.1 – 14.44 A
15 Budgets and Budgetary Control 15.1 – 15.41 B
16 Case Scenarios 16.1 – 16.26 A

ABC Analysis

Very Important, Moderately Less critical but still

A Read on priority
B Important
C essential

Ensure you thoroughly read all chapters without skipping any. The ABC analysis is
designed to help you prioritize based on past trends, but it should not replace
comprehensive preparation.
 A
CHAPTER 5: ACTIVITY BASED COSTING

CONCEPTS OF THIS CHAPTER

• Problems of Traditional Costing System.
• Usefulness of Activity Based Costing (ABC).
• Cost allocation under ABC.
• Different levels of activities under ABC. LDR Questions
• Stages, advantages, and limitations of ABC. Q 14 Q 22
• Requirements for ABC implementation. Q 23 Q 26
• Concept of Activity Based Management (ABM).
• Concept of Activity Based Budgeting (ABB).
UICK REV
QUICK REVIEW OF IMPORTANT CONCEPTS
Meaning Of Activity Based Costing
• An accounting method that allocates costs to activities instead of products or services.
• Costs are allocated based on the resources they consume.
• Establishes a connection between the activity (resource consumption) and the cost object.
• Beneficial for organizations with multiple products.
Stages in Activity-Based Costing (ABC)
1. Identifying Activities: Break down the organization into numerous distinct activities.
2. Allocating Overheads: Assign overhead costs to the identified activities, forming 'cost pools' or 'cost
buckets.'
3. Distributing Support Costs: Allocate support activities across primary activities based on their usage,
determined by cost drivers.
4. Identifying Cost Drivers: Establish the cost drivers for each activity to link overheads in cost pools to cost
objects.
5. Calculating Cost Driver Rates: Compute the cost driver rate for each activity using the formula:
Activity Cost Driver Rate = (Total Cost of Activity) / (Activity Driver)
Questions & Answers

Theory Questions
Question 1
WRITE DOWN the corresponding cost drivers related to the following activity cost pools:
Inspecting and testing costs, Setting-up machines cost, Machining costs, Supervising Costs, Ordering and
Receiving Materials cost (MTP 5 Marks Sep’22)
Answer 1
Activity Cost Pools Related Cost Drivers
Inspecting and testing costs Number of tests
Setting up machines cost Number of set-ups
Machining costs Machine hours
Supervising Costs Direct labour hours
Ordering and Receiving Materials cost Number of purchase orders

Question 2
PP Limited is in the process of implementation of Activity Based Costing System in the organization. For this
purpose, it has identified the following Business Functions in its organization:
(i) Research and Development
(ii) Design of Products, Services and Procedures

5.1 Chapter 5 Activity Based Costing

(iii) Customer Service
(iv) Marketing
(v) Distribution
You are required to specify two cost drivers for each Business Function Identified above.
(PYP 5 Marks Nov’22)
Answer 2
Business functions Cost Driver
Research and Development • Number of research projects
• Personnel hours on a project
• Technical complexities of the project
Design of products, services and • Number of products in design
procedures • Number of parts per product
• Number of engineering hours
Customer Service • Number of service calls
• Number of products serviced
• Hours spent on servicing products
Marketing • Number of advertisements
• Number of sales personnel
• Sales revenue
Distribution • Number of units distributed
• Number of customers
• Weight of items distributed
(Any two cost drivers of each business function)
EXAM INSIGHTS: This theory question on Activity Based Costing requiring examinees to specify two cost
drivers for each given business function. Most of the examinees answered it only partially correct.
Performance of the examinees was below average.

Question 3
What is meant by cost driver? Give its different categories. Suggest suitable cost drivers (at least two) in the
following business functions:
(i) Distribution
(ii) Research and Development
(iii) Customer services (PYP 5 Marks Nov’23)
Answer 3
Meaning of Cost Driver: A Cost driver is a factor or variable which effect level of cost. Generally, it is an activity
which is responsible for cost incurrence. Level of activity or volume of production is the example of a cost
driver. An activity may be an event, task, or unit of work etc.
There are two categories of cost driver.
• Resource Cost Driver - It is a measure of the quantity of resources consumed by an activity. It is used to
assign the cost of a resource to an activity or cost pool.
• Activity Cost Driver - It is a measure of the frequency and intensity of demand, placed on activities by cost
objects. It is used to assign activity costs to cost objects.
Business Function Cost drivers
Distribution Number of units distributed, Number of customers
Research and Development Number of research projects, personnel hours on a project, technical
complexities of the projects.
Customer service Number of service calls, number of products serviced, hours spent in servicing
of products.

EXAM INSIGHTS: Theory question requiring examinees to explain the meaning of cost driver and suggest
suitable cost drivers for the given business functions. Most of the examinees could not explain the meaning
of cost driver correctly. However, some of the cost drivers suggested were correct. Performance of the
examinees was below average.

Chapter 5 Activity Based Costing 5.2

 Question 4
EXPLAIN the Usefulness/Suitability of ABC. (MTP 4 Marks Aug’24)
Answer 4
ABC is particularly needed by organisations for product costing in the following situations:
1. High amount of overhead: When production overheads are high and form significant costs, ABC is more
useful than traditional costing system.
2. Wide range of products: ABC is most suitable, when, there is diversity in the product range or there
are multiple products.
3. Presence of non-volume related activities: When non-volume related activities e.g. material handling,
inspection set-up, are present significantly and traditional system cannot be applied, ABC is a superior
and better option. ABC will identify non-value- adding activities in the production process that might be
a suitable focus for attention or elimination.
4. Stiff competition: When the organisation is facing stiff competition and there is an urgent requirement
to compute cost accurately andto fix the selling price according to the market situation, ABC is very
useful. ABC can also facilitate in reducing cost by identifying non- value-adding activities in the production
process that might be a suitable focus for attention or elimination.
Question 5
DISCUSS in brief three main methods of allocating support departments costs to operating departments.
(MTP 4 Marks Dec’24)
Answer 5
The three main methods of allocating support departments costs to operating departments are:
(i) Direct re-distribution method: Under this method, support department costs are directly apportioned to
various production departments only. This method does not consider the service provided by one support
department to another support department.
(ii) Step method: Under this method the cost of the support departments that serves the maximum numbers of
departments is first apportioned to other support departments and production departments. After this the
cost of support department serving the next largest number of departments is apportioned. In this manner
we finally arrive on the cost of production departments only.
(iii) Reciprocal service method: This method recognises the fact that where there are two or more support
departments they may render services to each other and, therefore, these inter-departmental services are
to be given due weight while re-distributing the expenses of the support departments. The methods
available for dealing with reciprocal services are:
(a) Simultaneous equation method
(b) Repeated distribution method
(c) Trial and error method.
Practical Questions
Question 6
KD Ltd. is following Activity based costing. Budgeted overheads, cost drivers and volume are as follows:
Cost pool Budgeted overheads Cost driver Budgeted volume
(₹)
Material procurement 18,42,000 No. of orders 1,200
Material handling 8,50,000 No. of movement 1,240
Maintenance 24,56,000 Maintenance hours 17,550
Set-up 9,12,000 No. of set-ups 1,450
Quality control 4,42,000 No. of inspection 1,820
The company has produced a batch of 7,600 units, its material cost was ₹24,62,000 and wages ₹4,68,500.
Usage activities of the said batch are as follows:
Material orders 56
Material movements 84
Maintenance hours 1,420 hours
Set-ups 60
No. of inspections 18

5.3 Chapter 5 Activity Based Costing

 Required:
(i) CALCULATE cost driver rates.
(ii) CALCULATE the total and unit cost for the batch.
(MTP 5 Marks Apr’23) (Same concept different figures RTP Nov’20)
Answer 6
(i) Calculation of cost driver rate:
Cost pool Budgeted overheads Cost driver Cost driver rate
(₹) (₹)
Material procurement 18,42,000 1,200 1,535.00
Material handling 8,50,000 1,240 685.48
Maintenance 24,56,000 17,550 139.94
Set-up 9,12,000 1,450 628.97
Quality control 4,42,000 1,820 242.86
(ii) Calculation of cost for the batch:
Particulars Amount (₹) Amount (₹)
Material cost 24,62,000.00
Wages 4,68,500.00
Overheads:
- Material procurement (₹1,535×56 orders) 85,960.00
- Material handling (₹685.48×84 movements) 57,580.32
- Maintenance (₹139.94×1,420 hours) 1,98,714.80
- Set-up (₹628.97×60 set-ups) 37,738.20
- Quality control (₹242.86×18 inspections) 4,371.48 3,84,364.80
Total Cost 33,14,864.80
No. of units 7,600
Cost per units 436.17
Question 7
ABY Ltd. manufactures four products, namely A, B, C and D using the same plant and process. The following
information relates to production period December, 2020:
Product A B C D
Output in units 1,440 1,200 960 1,008
Cost per unit:
Direct Materials Rs. 84 Rs. 90 Rs. 80 Rs. 96
Direct Labour Rs. 20 Rs. 18 Rs. 14 Rs. 16
Machine hours per unit 4 3 2 1
The four products are similar and are usually produced in production runs of 48 units per batch and are sold
in batches of 24 units. Currently, the production overheads are absorbed using machine hour rate. The
production overheads incurred by the company for the period December, 2020 are as follows:
(Rs.)
Machine department costs:
Rent, deprecation and supervision 2,52,000
Set-up Costs 80,000
Store receiving costs 60,000
Inspection 40,000
Material handling and dispatch 10,368
During the period December, 2020, the following cost drivers are to be used for allocation of overheads cost:
Cost Cost driver
Set-up Costs Number of production runs (batches)
Stores receiving Requisition raised
Inspection Number of production runs (batches)
Material handling and dispatch Orders executed
It is also determined that:
(i) Machine department costs should be apportioned among set-up, stores receiving and inspection
Chapter 5 Activity Based Costing 5.4
 activities in proportion of 4 : 3 : 2.
(ii) The number of requisitions raised on stores is 50 for each product. The total number of material
handling and dispatch orders executed during the period are 192 and each order being for a batch size
of 24 units of product.
Required:
i.CALCULATE the total cost of each product, if all overhead costs are absorbed on machine- hour rate
basis.
ii.CALCULATE the total cost of each product using activity-based costing (MTP 10 Marks, Mar’21)
Answer 7
(i) Total Overhead = Rs. (2,52,000 + 80,000 + 60,000+40,000+10,368) = Rs. 4,42,368
Total Machine hours = 1,440 X 4 + 1,200 X3 + 960 X2 + 1,008 X1
= 5,760 + 3,600+1,920 +1,008 = 12,288 M. Hrs.
Rs.4,42,369
∴ Overhead recovery rate/M.H.= = Rs. 36
12,228 M./hours
Cost Statement when overheads are absorbed on machine hours rate basis
Product A B C D
Output in units 1,440 1,200 960 1,008
(Rs.) (Rs.) (Rs.) (Rs.)
Cost per unit:
Direct material 84 90 80 96
Direct labour 20 18 14 16
Overhead (@ Rs. 36) 144 108 72 36
(4 × Rs.36) (3 × Rs.36) (2 ×Rs.36) (1×Rs.36)
Total cost per unit 248 216 166 148
Total cost 3,57,120 2,59,200 1,59,360 1,49,184
(ii) (1) Machine department costs of Rs. 2,52,000 to be apportioned to set-up cost, store receiving and
inspection in 4: 3: 2 i.e. Rs. 1,12,000, Rs. 84,000 and Rs. 56,000 respectively.
(2) One production run = 48 units. Hence, the number of production runs of different products:
1,440 1,200 960 1,008
A= = 30, B = = 25, C = = 20, D = = 21, OR TOTAL 96 Runs.
48 48 48 48

(3) One batch order is of 24 units. So the number of batches of different products:
1,440 1,200 960 1,008
A= = 60 , B = 24 = 50 , C = 24 = 40 , D = 24 = 42 Or total 192 batches.
24

(4) Computation of Cost driver rates

Activity Activity Cost (Rs.) Cost driver Quantity Cost driver rate
Set-up 80,000 + 1,12,000 No. of 96 Rs. 2,000 per
= 1,92,000 production run production run
Store- 60,000 + 84,000 Requisition raised 50 × 4 = 200 Rs. 720 per
receiving = 1,44,000 requisition
Inspection 40,000 + 56,000 No. of 96 Rs. 1,000 per
= 96,000 production run production run
Material 10,368 Orders executed 192 Rs. 54 per batch
handling (No. of batches)
(5) Cost statement under Activity Based Costing:
Product A B C D
Output in units 1,440 1,200 960 1,008
(Rs.) (Rs.) (Rs.) (Rs.)
Material 1,440 × 84 1,200 × 90 960 × 80 1,008 × 96
= 1,20,960 = 1,08,000 = 76,800 = 96,768
Labour 1,440 × 20 1,200 × 18 960 × 14 1,008 × 16
= 28,800 = 21,600 = 13,440 = 16,128
1,49,760 1,29,600 90,240 1,12,896
Overhead cost:

5.5 Chapter 5 Activity Based Costing

 Set up 2,000 × 30 2,000 × 25 2,000 × 20 2,000 × 21
= 60,000 = 50,000 = 40,000 = 42,000
Store receiving 720 × 50 720 × 50 720 × 50 720 × 50
= 36,000 = 36,000 = 36,000 = 36,000
Inspection 1,000 × 30 1,000 × 25 1,000 × 20 1,000 × 21
= 30,000 = 25,000 = 20,000 = 21,000
Material handling 54 × 60 54 × 50 54 × 40 54 × 42
= 3,240 = 2,700 = 2,160 = 2,268
Total overhead cost 1,29,240 1,13,700 98,160 1,01,268
Total cost 2,79,000 2,43,300 1,88,400 2,14,164
Total cost per unit 193.75 202.75 196.25 212.46
(Total cost / Output)
Question 8
Wavelength Cinema provides the following data for the year 2020-21:
Particulars Premium Recliner 7D Cafeteria
Hall Hall Hall (Rs.)
(Rs.) (Rs.) (Rs.)
Revenue 11,55,000 18,75,000 9,30,000 5,25,000
Cost of Goods sold - - - 4,51,125
Digital media cost 6,19,800 9,46,875 4,02,900 -
Number of Credit Card transactions 75,000 90,000 60,000 45,000
Number of Tests 12,000 18,000 15,000 7,500
Number of Setups 225 450 150 75
Area in Square feet 3,000 4,500 2,250 750
Number of Customer contacts 2,62,500 3,00,000 1,50,000 37,500
Number of Customer online orders 2,10,000 2,47,500 1,20,000 22,500
Cost analysis has revealed the following:
Activity Activity Activity Driver Activity
Cost (Rs.) Capacity
Marketing Expenses 2,25,000 Number of Customer contacts 7,50,000
Website Maintenance 1,50,000 Number of Customer online 6,00,000
Expenses orders
Credit Card Processing Fees 1,35,000 Number of Credit Card 2,70,000
transactions
Cleaning Equipment Cost 3,15,000 Number of square feet 10,500
Inspecting and testing costs 2,62,500 Number of tests 52,500
Setting up machine's costs 4,50,000 Number of set-ups 900
Required:
(i) If Wavelength Cinema allocates all costs (other than Cost of Goods sold and Digital Media costs) to the
departments on the basis of Activity Based Costing system, CALCULATE the operating income and
percentage of operating income of each department.
(ii) Wavelength Cinema operated for years under the assumption that profitability can be increased by
increasing net revenue from Cafeteria. However, the Supervisor of Wavelength Cinema wants to shut
down Cafeteria. On
the basis of (i) above, STATE whether the contention of the Supervisor is valid or not. (MTP 10 Marks,
Apr’21) (SM)
Answer 8
Computation showing Rates for each Activity
Activity Activity Activity driver Activity Activity
Cost (Rs.) Capacity Rate
(A) (B) (A/B)
Marketing Expenses 2,25,000 Number of Customer Contacts 7,50,000 0.30
Website Maintenance Expenses 1,50,000 Number of Customer Online orders 6,00,000 0.25

Chapter 5 Activity Based Costing 5.6

 Credit Card Processing Fees 1,35,000 Number of Credit card 2,70,000 0.50
transactions
Cleaning Equipment Cost 3,15,000 Number of Square Feet 10,500 30.00
Inspecting and Testing Cost 2,62,500 Number of Tests 52,500 5.00
Setting up machine's cost 4,50,000 Number of set-ups 900 500.00
Activity based Cost for each Department
Activity Premium Hall (Rs.) Recliner Hall (Rs.) 7D Hall (Rs.) Cafeteria (Rs.)
Marketing Expenses 78,750 90,000 45,000 11,250
(2,62,500 x 0.3) (3,00,000 x 0.3) (1,50,000 x 0.3) (37,500 x 0.3)
Website 52,500 61,875 30,000 5,625
Maintenance (2,10,000 x 0.25) (2,47,500 x 0.25) (1,20,000 x 0.25) (22,500 x 0.25)
Expenses
Credit Card 37,500 45,000 30,000 22,500
Processing Fees (75,000 x 0.5) (90,000 x 0.5) (60,000 x 0.5) (45,000 x 0.5)
Cleaning Equipment 90,000 1,35,000 67,500 22,500
Cost (3,000 x 30) (4,500 x 30) (2,250 x 30) (750 x 30)
Inspecting and 60,000 90,000 75,000 37,500
Testing Cost (12,000 x 5) (18,000 x 5) (15,000 x 5) (7,500 x 5)
Setting up 1,12,500 2,25,000 75,000 37,500
machine's cost (225 x 500) (450 x 500) (150 x 500) (75 x 500)
Total 4,31,250 6,46,875 3,22,500 1,36,875
(i) Statement of Operating Income and Operating Income percentage for each Department
Particulars Premium Recliner 7D Cafeteria
Hall Hall Hall (Rs.)
(Rs.) (Rs.) (Rs.)
Revenues (Given) (A) 11,55,000 18,75,000 9,30,000 5,25,000
Cost of Goods Sold (given) (B1) - - - 4,51,125
Digital Media Cost (given) (B2) 6,19,800 9,46,875 4,02,900 -
Activity Based Cost (as per Workings) (B3) 4,31,250 6,46,875 3,22,500 1,36,875
Operating Cost (B) (B1+ B2 + B3) 10,51,050 15,93,750 7,25,400 5,88,000
Operating Income/(Loss) (C = A – B) 1,03,950 2,81,250 2,04,600 (63,000)
Percentage of profit/(loss) on sales 9% 15% 22% (12%)
(ii) Contention of Supervisor is valid as operating income of Cafeteria is negative i.e. (Rs. 63,000) or
percentage of profit/loss is (12%).

Question 9
SMD Limited manufactures four products namely A, B, C and D using the same production and process
facilities. The company has been following conventional method of costing and wishes to shift to activity-
based costing system.
The data pertaining to four products are:
Product Units Material per unit Labour hours per unit Machine hours per unit
produced (₹)
A 1,500 140 1 3
B 2,500 90 3 2
C 10,000 180 2 6
D 6,000 150 1.5 4
The following activity volumes are associated to the production process for the relevant period -
Number of Inspections Number of Material Movements Number of set-ups
A 200 15 100
B 250 20 125
C 900 100 600
D 650 85 400
The cost data also states that:

5.7 Chapter 5 Activity Based Costing

 B
CHAPTER 6: COST SHEET

CONCEPTS OF THIS CHAPTER LDR

• Classify and ascertain cost by function. Questions
• Prepare cost sheet/statement for production and services. Q 21 Q 25
Q 27 Q 29
UICK REV
QUICK REVIEW OF IMPORTANT CONCEPTS
Cost Sheet- Specimen Format
SR.NO Particulars Total Cost (₹) Cost Per Unit (₹)
1. Direct materials consumed:
Opening Stock of Raw Material xxx
Add: Additions/ Purchases xxx
Less: Closing stock of Raw Material xxx
xxx xxx
2. Direct employee (labour) cost xxx
3. Direct expenses xxx
4. Prime Cost (1+2+3) xxx xxx
5. Add: Works/ Factory Overheads xxx
6. Gross Works Cost (4+5) xxx
7. Add: Opening Work in Process xxx
8. Less: Closing Work in Process (xxx)
9. Works/ Factory Cost (6+7-8) xxx xxx
10. Add: Quality Control Cost xxx
11. Add: Research and Development Cost xxx
12. Add: Administrative Overheads (relating to xxx
production activity)
13. Less: Credit for Recoveries/Scrap/By-Products/ misc. (xxx)
income
14. Add: Packing cost (primary) xxx
15. Cost of Production (9+10+11+12-13+14) xxx xxx
16. Add: Opening stock of finished goods xxx
17. Less: Closing stock of finished goods (xxx)
18. Cost of Goods Sold (15+16-17) xxx xxx
19. Add: Administrative Overheads (General) xxx
20. Add: Marketing Overheads :
Selling Overheads xxx
Distribution Overheads xxx
21. Cost of Sales (18+19+20) xxx xxx

Questions & Answers

Theory Questions

Question 1
EXPLAIN the treatment of following items in cost sheet.
(i) Credit for Recoveries

6.1 Chapter 6 Cost Sheet

(ii) Packing Cost (primary)
(iii) Joint Products and By-Products
(iv) Quality Control Cost (MTP 4 Marks July’24)
Answer 1
Treatment is as follows:
(i) Credit for Recoveries: The realised or realisable value of scrap or waste is deducted as it reduces the cost
of production.
(ii) Packing Cost (primary): Packing material which is essential to holdand preserve the product for its use by
the customer is added in the factory cost.
(iii) Joint Products and By-Products: Joint costs are allocated between/among the products on a rational and
consistent basis. In case of by-products, the net realisable value of by-products is deducted from the cost
of production.
(iv) Quality Control Cost: It is added in the factory cost as this is the costof resources consumed towards quality
control procedures.

Practical Questions

Question 2
The following data relates to the manufacturing project received for the budgeted output of 19,600 units.
You are required to CALCULATE the selling price per unit covering a profit of 25% on the selling price.
Direct materials: 40 sq. m. per unit @ ₹ 10.60 per sq. m.
Direct wages: Bonding department 48 hours per unit @ ₹ 25 per hour
Finishing department 30 hours per unit @ ₹ 19 per hour
Budgeted costs and hours per annum- Variable overhead:
(₹) Total hours
Bonding department 15,00,000 10,00,000
Finishing department 6,00,000 6,00,000
Fixed overhead-
(₹)
Production 15,68,000
Selling and distribution 7,84,000
Administration (General) 3,92,000
(MTP 10 Marks, Mar’22)
Answer 2
Decision making Cost Sheet (per unit)
Particulars (Amount in ₹) (Amount in ₹)
Direct materials 40 m at ₹ 10.60 per m
2 2
424
Direct wages:
Bonding department- 48 hours at ₹ 25 per hour 1,200
Finishing department- 30 hours at ₹ 19 per hour 570 1,770
Prime Cost 2,194
Variable overhead:*
Bonding department- 48 hours at ₹ 1.50 per hour 72
Finishing department- 30 hours at ₹ 1.00 per hour 30 102
Variable production cost 2,296
Fixed production overhead# 80
Total production cost 2,376
Selling and distribution cost$ 40
Administration cost$ 20 60
Total Cost 2,436
100
Selling price per unit = Rs. 2,436 X = Rs. 3,248
75
Working Notes:
* Variable overhead rates –

Chapter 6 Cost Sheet 6.2

 15,00,000
Bonding : 10,00,000 ℎ𝑜𝑢𝑟𝑠 = Rs. 1.50
6,00,000
Finishing : = Rs. 1.00
6,00,000 ℎ𝑜𝑢𝑟𝑠
15,68,000
# Fixed production overhead rate per unit of output = 19,600 ℎ𝑜𝑢𝑟𝑠 = Rs. 80
7,84,000
$ Selling and production cost per unit of output = = Rs. 40
19,600 ℎ𝑜𝑢𝑟𝑠
3,92,000
Administration cost per unit of output = = Rs. 20
19,600 ℎ𝑜𝑢𝑟𝑠

Question 3
A factory can produce 1,80,000 units per annum at its 60% capacity. The estimated costs of production are as
under:
Direct material ₹300 per unit
Direct employee cost ₹160 per unit
Indirect expenses:
- Fixed ₹32,50,000 per annum
- Variable ₹50 per unit
- Semi- variable ₹20,000 per month up to 50% capacity and ₹2,500 for every 20% increase in
the capacity or part thereof.
If production program of the factory is as indicated below and the management desires to ensure a profit of
₹1,00,00,000 for the year, DETERMINE the average selling price at which each unit should be quoted:
First three months of the year- 50% of capacity;
Remaining nine months of the year- 75% of capacity. (MTP 10 Marks Oct’22)
Answer 3
Statement of Cost
First three Remaining nine Total (Rs.)
months (Rs.) months (Rs.)
37,500 units 1,68,750 units 2,06,250 units
Direct material 1,12,50,000 5,06,25,000 6,18,75,000
Direct employee cost 60,00,000 2,70,00,000 3,30,00,000
Indirect- variable expenses 18,75,000 84,37,500 1,03,12,500
Indirect – fixed expenses 8,12,500 24,37,500 32,50,000
Indirect- semi-variable expenses
- For first three months @ Rs.20,000 p.m. 60,000
- For remaining nine months @ Rs.25,000 p.m. 2,25,000 2,85,000
Total cost 1,99,97,500 8,87,25,000 10,87,22,500
Desired profit - - 1,00,00,000
Sales value - - 11,87,22,500
Average selling price per unit 575.62

Question 4

From the following data CALCULATE (i) Administration cost, (ii) Selling cost and (iii) Distribution cost:
Amount (₹)
(i) Rent paid for factory building 96,000
(ii) Salary paid to office staffs 8,20,000
(iii) Fees paid to auditors 92,000
(iv) Salary paid to sales manager 8,00,000
(v) Vehicle hire charges paid for directors attending general meeting 10,200
(vi) Wages paid to workers engaged in storing goods at sales depot 7,200
(vii) Travelling allowance paid to sales staffs 9,600
(viii) Cost paid for secondary packing 8,200
(ix) Electricity bill paid for sales office 1,800
(x) Depreciation on goods delivery vehicles 13,000

6.3 Chapter 6 Cost Sheet

 (xi) Bonus paid to sales staffs for achieving targets 96,000
(xii) Fees paid to independent directors 1,02,000
(MTP 6 Marks Dec’24)
Answer 4
(i) Calculation of Administration cost:
Particulars Amount (₹)
Salary paid to office staffs 8,20,000
Fees paid to auditors 92,000
Vehicle hire charges paid for directors attending general meeting 10,200
Fees paid to independent directors 1,02,000
10,24,200
(ii) Calculation of Selling cost:
Particulars Amount (₹)
Salary paid to sales manager 8,00,000
Wages paid to workers engaged in storing goods at sales depot 7,200
Travelling allowance paid to sales staffs 9,600
Electricity bill paid for sales office 1,800
Bonus paid to sales staffs for achieving targets 96,000
9,14,600
(iii) Calculation of Distribution cost:
Particulars Amount (₹)
Cost paid for secondary packing 8,200
Depreciation on goods delivery vehicles 13,000
21,200

Question 5
From the following data of Appu Ltd., CALCULATE (i) Material Consumed; (ii) Prime Cost and
(iii) Cost of production. (RTP Sep’24)
Amount (₹)
(i) Repair & maintenance paid for plant & machinery 9,80,500
(ii) Insurance premium paid for inventories 26,000
(iii) Insurance premium paid for plant & machinery 96,000
(iv) Raw materials purchased 64,00,000
(v) Opening stock of raw materials 2,88,000
(vi) Closing stock of raw materials 4,46,000
(vii) Wages paid 23,20,000
(viii) Value of opening Work-in-process 4,06,000
(ix) Value of closing Work-in-process 6,02,100
(x) Quality control cost for the products in manufacturing process 86,000
(xi) Research & development cost for improvement in production process 92,600
(xii) Administrative cost for:
- Factory & production 9,00,000
- Others 11,60,000
(xiii) Amount realized by selling scrap generated during the manufacturing process 9,200
(xiv) Packing cost necessary to preserve the goods for further processing 10,200
(xv) Salary paid to Director (Technical) 8,90,000
Answer 5
Calculation of Cost of Production of Appu Ltd.
Particulars Amount (₹)
Raw materials purchased 64,00,000
Add: Opening stock 2,88,000
Less: Closing stock (4,46,000)
Material consumed 62,42,000
Chapter 6 Cost Sheet 6.4
 Wages paid 23,20,000
Prime cost 85,62,000
Repair and maintenance cost of plant & machinery 9,80,500
Insurance premium paid for inventories 26,000
Insurance premium paid for plant & machinery 96,000
Quality control cost 86,000
Research & development cost 92,600
Administrative overheads related with factory and production 9,00,000
1,07,43,100
Add: Opening value of W-I-P 4,06,000
Less: Closing value of W-I-P (6,02,100)
1,05,47,000
Less: Amount realised by selling scrap (9,200)
Add: Primary packing cost 10,200
Cost of Production 1,05,48,000
Notes:
(i) Other administrative overhead does not form part of cost of production.
(ii) Salary paid to Director (Technical) is an administrative cost.

Question 6
The following information pertains to A Limited for the year 1st April 2021 to 31st March 2022:
Particulars Amount (₹)
Sales 50,00,000
Direct labour 10,50,000
Administrative overheads (relating to production activity) 1,50,000
Selling expenses 2,50,000
Inventory details are as follows:
As on 1st April 2021 (Amount in ₹) As on 31st March 2022 (Amount in ₹)
Raw materials 5,00,000 6,30,000
Finished goods 9,80,000 10,50,000
Work in Progress 6,00,000 8,00,000
Additional Information:
• Direct labour would be 175% of works overheads.
• Cost of goods sold would be ₹ 6,900 per unit
• Selling expenses would be ₹ 500 per unit.
You are required to PREPARE a cost sheet for the year ended 31st March, 2022 showing:
(i) Value of material purchased
(ii) Prime cost
(iii) Works cost
(iv) Cost of production
(v) Cost of goods sold
(vi) Cost of Sales
(vii) Profit earned
(viii) Profit as a percentage of sales (MTP 10 Marks Sep’22)
Answer 6
Cost Sheet of A Limited for the year ended 31st March 2022
Particulars Amount (₹) Amount (₹)
Opening Stock of Raw materials 5,00,000
Add: Purchases (balancing figure) 20,50,000
Less: Closing stock of raw materials 6,30,000
Direct material consumed (balancing figure) 19,20,000
Direct labour 10,50,000
Prime Cost 29,70,000

6.5 Chapter 6 Cost Sheet

Add: Factory Overheads (10,50,000 / 175%) 6,00,000
Add: Opening Stock of Work in Progress 6,00,000
41,70,000
Less: Closing Stock of Work in Progress 8,00,000
Works Cost 33,70,000
Add: Administrative Overheads (relating to production activity) 1,50,000
COST OF PRODUCTION 35,20,000
Add: Opening stock of finished goods 9,80,000
Cost of Goods available for sale 45,00,000
Less: Closing Stock of finished goods 10,50,000
COST OF GOODS SOLD (Working Note: (iv)) 34,50,000
Add: Selling and Distribution Overhead 2,50,000
COST OF SALES 37,00,000
Add: Profit (Balancing figure) [ Sales - Cost of Sales] 13,00,000
SALES 50,00,000
13 𝐿𝑎𝑘ℎ𝑠
Profit as a % of sales = 50𝐿𝑎𝑘ℎ𝑠 × 100 = 26%
Working Notes:
(i) The cost sheet is completed by Reverse Working. Purchases amount is the balancing figure.
(ii) Direct labour = 175% of factory overhead (given). Hence, if direct labour = 10,50,000, then Factory
Overhead = 10,50,000 / 175% = ₹ 6,00,000
(iii) Selling Overhead ₹ 2,50,000 (total), selling per unit ₹ 500.
Number of units sold = ₹ 2,50,000/ ₹ 500 = 500 units
(iv) Cost of goods sold = 500 units x ₹ 6,900 = ₹ 34,50,000

Question 7
A Ltd. produces a single product X. During the month of December 2021, the company has produced 14,560
tonnes of X. The details for the month of December 2021 are as follows:
(i) Materials consumed ₹ 15,00,000
(ii) Power consumed 13,000 Kwh @ ₹ 7 per Kwh
(iii) Diesels consumed 1,000 litres @ ₹ 93 per litre
(iv) Wages & salary paid – ₹ 64,00,000
(v) Gratuity & leave encashment paid – ₹ 44,20,000
(vi) Hiring charges paid for HEMM- ₹ 13,00,000
(vii) Hiring charges paid for cars used for official purpose – ₹ 80,000
(viii) Reimbursement of diesel cost for the cars – ₹ 20,000
(ix) The hiring of cars attracts GST under RCM @5% without credit.
(x) Maintenance cost paid for weighing bridge (used for weighing of final goods at the time of despatch) –
₹ 7,000
(xi) AMC cost of CCTV installed at weighing bridge (used for weighing of final goods at the time of despatch)
and factory premises is ₹ 6,000 and ₹ 18,000 per month respectively.
(xii) TA/ DA and hotel bill paid for sales manager- ₹ 16,000
(xiii) The company has 180 employees works for 26 days in a month.
Required:
(a) PREPARE a Cost sheet for the month of December 2021.
(b) COMPUTE Earnings per manshift (EMS) and Output per manshift (OMS) for the month of
December 2021. (RTP May’22)
Answer 7
Cost Sheet of A Ltd. for the month of December 2021
Particulars Amount (₹) Amount (₹)
Materials consumed 15,00,000
Wages & Salary 64,00,000
Gratuity & leave encashment 44,20,000 1,08,20,000
Power cost (13,000 kwh × ₹ 7) 91,000

Chapter 6 Cost Sheet 6.6

 Diesel cost (1,000 ltr × ₹ 93) 93,000 1,84,000
HEMM hiring charges 13,00,000
Prime Cost 1,38,04,000
AMC cost of CCTV installed at factory premises 18,000
Cost of Production/ Cost of Goods Sold 1,38,22,000
Hiring charges of cars 80,000
Reimbursement of diesel cost 20,000
1,00,000
Add: GST @5% on RCM basis 5,000 1,05,000
Maintenance cost for weighing bridge 7,000
AMC cost of CCTV installed at weigh bridge 6,000 13,000
TA/ DA & hotel bill of sales manager 16,000
Cost of Sales 1,39,56,000
(a) Man shift = 180 employees × 26 days = 4,680 man shifts
Computation of earnings per man shift (EMS):
𝑇𝑜𝑡𝑎𝑙 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑒 𝑏𝑒𝑛𝑒𝑓𝑖𝑡𝑠 𝑝𝑎𝑖𝑑
EMS =
𝑀𝑎𝑛𝑠ℎ𝑖𝑓𝑡
𝑅𝑠.1,08,20,000
= = Rs. 2,312
4,680
Computation of Output per man shift (OMS):
𝑇𝑜𝑡𝑎𝑙 𝑂𝑢𝑡𝑝𝑢𝑡 / 𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛
OMS =
𝑀𝑎𝑛𝑠ℎ𝑖𝑓𝑡
14,560 𝑇𝑜𝑛𝑛𝑒
= 4,680
= 3.11 tonne

Question 8
CT Limited is engaged in producing medical equipment. It has furnished following details related to its
products produced during a month:
Units Amount (₹)
Raw materials
Opening stock 1,000 90,00,000
Purchases 49,000 44,10,00,000
Closing stock 1,750 1,57,50,000
Works-in-progress
Opening 2,000 1,75,50,000
Closing 1,000 94,50,000
Direct employees' wages, allowances etc. 6,88,50,000
Primary packaging cost (per unit) 1,440
R&D expenses & Quality control expenses 2,10,60,000
Consumable stores, depreciation on plant 3,42,00,000
Administrative overheads related to production 3,15,00,000
Selling expenses 4,84,30,800
Royalty paid for production 3,64,50,000
Cost of web-site (for online sale) maintenance 60,75,000
Secondary packaging cost (per unit) 225
There was a normal scrap of 250 units of direct material which realized ₹ 5,400 per unit. The entire finished
product was sold at a profit margin of 20% on sales. You are required to PREPARE a cost sheet showing:
(i) Prime cost
(ii) Gross works cost
(iii) Factory costs
(iv) Cost of production
(v) Profit
(vi) Sales. (RTP Nov’22)

6.7 Chapter 6 Cost Sheet

 C
CHAPTER 7: COST ACCOUNTING SYSTEM

CONCEPTS OF THIS CHAPTER

• Cost Accounting System: overview.
• Difference: Integral vs Non-Integral system.
• Ledgers maintained in both systems.
• Reasons for profit differences in Financial and Cost Accounting. LDR Questions
• Prepare reconciliation statement for profit differences. Q9
• Accounting for Management Information and Cost Control. Q 33
Q 35

UICK REV
QUICK REVIEW OF IMPORTANT CONCEPTS

Non-integrated Accounting System

• SEPARATE LEDGERS are maintained for both Cost and Financial accounts.
• This system is also known as COST LEDGER ACCOUNTING SYSTEM.
• Items of Accounts Excluded Are Represented By Cost Ledger Control Account.

Integrated Accounting System

• COST AND FINANCIAL ACCOUNTS are kept in the SAME SET of books.
• PROVIDES RELEVANT INFORMATION necessary for preparing profit and loss account and the balance sheet.

Reconciliation of Cost and Financial Accounts

• Reconciliation is done when Cost and Financial accounts are kept separately
• Reconciliation of the balances of two sets of accounts is possible by preparing a MEMORANDUM
RECONCILIATION ACCOUNT.

Causes of differences in Financial and Cost Accounts

Items included in Financial Accounts only
➢ Purely Financial Expenses
• Expenses and discounts on issue of shares • Loss by fire not covered by insurance
• Losses on the sales of Fixed assets • Income tax, donations • Interest on loans
➢ Purely Financial Income
• Interest received on bank deposits • Rent receivables
• Dividends received • Profits on the sale of fixed assets

Items included in Cost Accounts only (notional expenses)

• Charges in lieu of rent where premises are owned • Notional Depreciation on the assets fully depreciated
• Interest on capital at notional figure though not incurred • Salary for the proprietor at notional Figure

Items whose treatment is different in the two sets of accounts

➢ LIFO may be adopted for cost accounts ➢ Different method of depreciation may be followed

Varying basis of valuation

➢ Valuation of stock (at cost in cost accounting)

7.1 Chapter 7 Cost Accounting System

Procedure for Reconciliation
• Ascertainment of profit as per financial accounts • Ascertainment of profit as per cost accounts
• Reconciliation of both the profits

Questions & Answers

Theory Questions

Question 1
WHEN is the reconciliation statement of Cost and Financial accounts not required?
(MTP 2 Marks Apr’24,SM)
Answer 1
When the Cost and Financial Accounts are integrated - there is no need to have a separate reconciliation
statement between the two sets of accounts. Integration means that the same set of accounts fulfil the
requirement of both i.e., Cost and Financial Accounts.

Question 2
LIST DOWN certain financial income included in Financial Accounts only. (RTP Jan’25)
Answer 2
Purely Financial Income
(i) Interest received on bank deposits, loans and investments
(ii) Dividends received
(iii) Profits on the sale of fixed assets and investments
(iv) Transfer fee received
(v) Rent receivables

Question 3
BRIEF OUT advantages of Integrated Accounts. (MTP 5 Marks Apr’22, SM)
Answer 3
Advantages of Integrated Accounts are as follows:
(i) No need for Reconciliation- The Question of reconciling costing profit and financial profit does not arise,
as there is only one figure of profit.
(ii) Less efforts- Due to use of one set of books, there is a significant saving in efforts made.
(iii) Less time consuming- No delay is caused in obtaining information as it is provided from books of original
entry.
(iv) Economical process- It is economical also as it is based on the concept of “Centralization of Accounting
function”.

Question 4
LIST five financial expenses that causes differences in Financial and Cost Accounts.
(MTP 5 Marks, Oct’20, MTP 5 Marks Sep’22) (RTP Jan’25)
Answer 4
Financial expenses causing differences in Financial and Cost Accounts:
(i) Interest on loans or bank mortgages.
(ii) Expenses and discounts on issue of shares, debentures etc.
(iii) Other capital losses i.e., loss by fire not covered by insurance etc.
(iv) Losses on the sales of fixed assets and investments.
(v) Goodwill written off.
(vi) Preliminary expenses written off.
(vii) Income tax, donations, subscriptions.
(viii) Expenses of the company’s share transfer office, if any.

Question 5
Indicate, for following items, whether to be shown in the Cost Accounts or Financial Accounts:
(i) Preliminary expenses written off during the year

Chapter 7 Cost Accounting System 7.2

(ii) Interest received on bank deposits
(iii) Dividend, interest received on investments
(iv) Salary for the proprietor at notional figure though not incurred
(v) Charges in lieu of rent where premises are owned
(vi) Rent receivables
(vii) Loss on sale of Fixed Assets
(viii) Interest on capital at notional figure though not incurred
(ix) Goodwill written off
(x) Notional Depreciation on the assets fully depreciated for which book value is Nil.
(PYP 5 Marks Nov’22)

Answer 5
Sr. No. Items Accounts
(i) Preliminary expenses written off during the year Financial Accounts
(ii) Interest received on bank deposits Financial Accounts
(iii) Dividend, interest received on investments Financial Accounts
(iv) Salary for the proprietor at notional figure though not incurred Cost Accounts
(v) Charges in lieu of rent where premises are owned Cost Accounts
(vi) Rent receivables Financial Accounts
(vii) Loss on the sales of Fixed Assets Financial Accounts
(viii) Interest on capital at notional figure though not incurred Cost Accounts
(ix) Goodwill written off Financial Accounts
(x) Notional Depreciation on the assets fully depreciated for which book Cost Accounts
value is nil

EXAM INSIGHTS: This theory question to indicate whether the given items to be shown in the Cost
Accounts or Financial Accounts. Most of the items were indicated correctly by the examinees.
Performance of the examinees was good.

Question 6
DISCUSS the essential features of a good cost accounting system?
(MTP 5 Marks Apr’24, MTP Oct’19, 5 Marks, SM)
Answer 6
The essential features, which a good Cost Accounting System should possess, are as follows:
(a) Informative and Simple: Cost Accounting System should be tailor- made, practical, simple and capable of
meeting the requirements of a business concern. The system of costing should not sacrifice the utility by
introducing meticulous and unnecessary details.
(b) Accuracy: The data to be used by the Cost Accounting System should be accurate; otherwise it may distort
the output of the system and a wrong decision may be taken.
(c) Support from Management and subordinates: Necessary cooperation and participation of executives
from various departments of the concern is essential for developing a good system of Cost Accounting.
(d) Cost-Benefit: The Cost of installing and operating the system should justify the results.
(e) Procedure: A carefully phased programme should be prepared by using network analysis for the
introduction of the system.
(f) Trust: Management should have faith in the Costing System and should also provide a helping hand for
its development and success.

Question 7
“Is reconciliation of cost accounts and financial accounts necessary in case of integrated accounting
system?” EXPLAIN. (MTP 5 Marks, Mar ’19, Mar’23, Apr’23 & Sep’23 RTP May’22 & May’24)

Answer 7
In integrated accounting system cost and financial accounts are kept in the same set of books.
Such a system will have to afford full information required for Costing as well as for Financial Accounts. In other

7.3 Chapter 7 Cost Accounting System

words, information and data should be recorded in such a way so as to enable the firm to ascertain the cost
(together with the necessary analysis) of each product, job, process, operation or any other identifiable activity.
It also ensures the ascertainment of marginal cost, variances, abnormal losses and gains. In fact, all information
that management requires from a system of Costing for doing its work properly is made available. The integrated
accounts give full information in such a manner so that the profit and loss account and the balance sheet can be
prepared according to the requirements of law and the management maintains full control over the liabilities
and assets of its business.
Since, only one set of books are kept for both cost accounting and financial accounting purpose so there is no
necessity of reconciliation of cost and financial accounts.

Question 8

What are the important ledgers to be maintained under non-integrated accounting system in the Cost
Accounting? (MTP 4 Marks Mar’24)

Answer 8
The important ledgers to be maintained under non-integrated accounting system in the Cost Accounting are
the followings:
(a) Cost Ledger - This is the principle ledger of the cost department in which impersonal accounts are recorded.
This ledger is made self- balancing by maintaining therein a Control Account for each subsidiary ledger.
(b) Stores Ledger - It contains an account for each item of stores. The entries in each account maintained in
this ledger are made from the invoice, goods received note, material requisitions, material received note
etc. Accounts in respect of each item of stores show receipt, issue and balance in physical as well as in
monetary terms.
(c) Work-in-Process Ledger - This ledger is also known as job ledger, it contains accounts of unfinished jobs
and processes. All material costs, wages and overheads for each job in process are posted to the respective
job accounts in this ledger. The balance in a job account represents total balance of job/work-in-process,
as shown by the job account.
(d) Finished Goods Ledger - It contains an account for each item of finished product manufactured or the
completed job. If the finished product is transferred to stock, a credit entry is made in the work- in-process
ledger and a corresponding debit entry is made in this ledger.

Question 9 LDR
WHAT are the essential pre-requisites for integrated accounts? (MTP 4 Marks July’24) (PYP 5 Marks Nov’20,
RTP May’23, SM May’22, MTP 5 Marks Mar’22)
Answer 9
The essential pre-requisites for integrated accounts include the following steps:
1. The management’s decision about the extent of integration of thetwo sets of books. Some concerns
find it useful to integrate up to the stage of prime cost or factory cost while other prefers full integration
of the entire accounting records.
2. A suitable coding system must be made available so as to servethe accounting purposes of financial
and cost accounts.
3. An agreed routine, with regard to the treatment of provision for accruals, prepaid expenses, other
adjustment necessary for preparation of interim accounts.
4. Perfect coordination should exist between the staff responsible for the financial and cost aspects of the
accounts and an efficient processing of accounting documents should be ensured.
Under this system there is no need for a separate cost ledger. Of course, there will be a number of
subsidiary ledgers; in addition to the useful Customers’ Ledger and the Purchase Ledger, there will be: (a)
Stores Ledger; (b) Stock Ledger and (c) Job Ledger.
Question 10
Management of Tillu manufacturing co. is thinking of installing a costing system its company. What practical
DIFFICULTIES management will expect and how management will OVERCOME the same?
(MTP 5 Marks Aug’24)

Chapter 7 Cost Accounting System 7.4

Answer 10
The Practical difficulties with which a Cost Accountant is usually confronted with while installing a costing
system in a manufacturing company are as follows:
(i) Lack of top management support: Installation of a costing system does not receive the support of top
management. They considerit as interference in their work. They believe that such, a system will
involve additional paperwork. They also have amisconception in their minds that the system is
meant for keepinga check on their activities.
(ii) Resistance from cost accounting departmental staff: The staff resist because of fear of loosing their
jobs and importance afterthe implementation of the new system.
(iii) Non co-operation from user departments: The foremen, supervisor and other staff members may
not cooperate in providing requisite data, as this would not only add to their responsibilities but will also
increase paper work of the entire team as well.
(iv) Shortage of trained staff: Since cost accounting system’s installation involves specialised work, there
may be a shortage of trained staff.
To overcome these practical difficulties, necessary steps required are:
- Sell the idea to top management and convince them of the utilityof the system.
- Resistance and non co-operation can be overcome by behavioural approach. To deal with the
staff concernedeffectively.
- Proper training should be given to the staff at each level
- Regular meetings should be held with the cost accounting staff,user departments, staff and top
management to clarify their doubts/ misgivings.

Question 11
Why is it necessary to reconcile the Profits between the Cost Accounts and Financial Accounts?
(MTP 5 Marks Apr’24,SM)
Answer 11
When the cost and financial accounts are kept separately, It is imperative that these should be reconciled,
otherwise the cost accounts would not be reliable. The reconciliation of two set of accounts can be made, if
both the sets contain sufficient detail as would enable the causes of differences to be located. It is therefore,
important that in the financial accounts, the expenses should be analyzed in the same way as in cost accounts.
It is important to know the causes which generally give rise to differences in the costs & financial accounts.
These are:
(i) Items included in financial accounts but not in cost accounts
• Income-tax
• Transfer to reserve
• Dividends paid
• Goodwill / preliminary expenses written off
• Pure financial items
• Interest, dividends
• Losses on sale of investments
• Expenses of Co’s share transfer office
• Damages & penalties
(ii) Items included in cost accounts but not in financial accounts
• Opportunity cost of capital
• Notional rent
(iii) Under / Over absorption of expenses in cost accounts
(iv) Different bases of inventory valuation
Motivation for reconciliation is:
• To ensure reliability of cost data
• To ensure ascertainment of correct product cost
• To ensure correct decision making by the management based on Cost & Financial data
• To report fruitful financial / cost data.

7.5 Chapter 7 Cost Accounting System

 Question 12
Answer any four of the following: Briefly explain the essential features of a good Cost Accounting System.
(PYP 5 Marks May’22, RTP Nov’18, MTP 5 Marks Oct’22)
Answer 12
(a) The essential features, which a good cost accounting system should possess, are as follows:
(a) Informative and simple: Cost accounting system should be tailor-made, practical, simple and capable of
meeting the requirements of a business concern. The system of costing should not sacrifice the utility by
introducing inaccurate and unnecessary details.
(b) Accurate and authentic: The data to be used by the cost accounting system should be accurate and
authenticated; otherwise it may distort the output of the system and a wrong decision may be taken.
(c) Uniformity and consistency: There should be uniformity and consistency in classification, treatment and
reporting of cost data and related information. This is required for benchmarking and comparability of the
results of the system for both horizontal and vertical analysis.
(d) Integrated and inclusive: The cost accounting system should be integrated with other systems like
financial accounting, taxation, statistics and operational research etc. to have a complete overview and
clarity in results.
(e) Flexible and adaptive: The cost accounting system should be flexible enough to make necessary
amendment and modifications in the system to incorporate changes in technological, reporting, regulatory
and other requirements.
(f) Trust on the system: Management should have trust on the system and its output. For this, an active role
of management is required for the development of such a system that reflects a strong conviction in using
information for decision making.
EXAM INSIGHTS: This theory question on essential features of good cost accounting system was not
answered well. Performance of the examinees was poor.

Question 13

As a consultant hired by a manufacturing company, HOW would you go about assessing the critical factors
for designing and implementing a cost accounting system? (MTP 5 Marks Dec’24)

Answer 13
Before installation of a system of cost accounting in a manufacturing organisation the under mentioned factors
should be studied:
(a) Objective: The objective of costing system, for example whether it is being introduced for fixing prices or for
insisting a system of cost control.
(b) Nature of Business or Industry: The Industry in which business is operating. Every business industry has
its own peculiar feature and costing objectives. According to its cost information requirement cost
accounting methods are followed. For example Indian Oil Corporation Ltd. has to maintain process wise cost
accounts to find out cost incurred on a particular process say in crude refinement process etc.
(c) Organisational Hierarchy: Costing system should fulfill the requirement of different level of management.
Top management is concerned with the corporate strategy, strategic level management is concerned with
marketing strategy, product diversification, product pricing etc. Operational level management needs the
information on standard quantity to be consumed, report on idle time etc.
(d) Knowing the product: Nature of product determines the type of costing system to be implemented. The
product which has by- products requires costing system which account for by-products as well. In case of
perishable or short self- life, marginal costing method is required to know the contribution and minimum
price at which it can be sold.
(e) Knowing the production process: A good costing system can never be established without the complete
knowledge of the production process. Cost apportionment can be done on the most appropriate and scientific
basis if a cost accountant can identify degree of effort or resources consumed in a particular process. This
also includes some basic technical know-how and process peculiarity.
(f) Information synchronisation: Establishment of a department or a system requires substantial amount of
organisational resources. While drafting a costing system, information needs of various other departments

Chapter 7 Cost Accounting System 7.6

 should be taken into account. For example in a typical business organisation accounts department needs to
submit monthly stock statement to its lender bank, quantity wise stock details at the time filing returns to
tax authorities etc.
(g) Method of maintenance of cost records: The manner in which Cost and Financial accounts could be inter-
locked into a single integral accounting system and in which results of separate sets of accounts, cost and
financial, could be reconciled by means of control accounts.
(h) Statutory compliances and audit: Records are to be maintained to comply with statutory requirements,
standards to be followed (Cost Accounting Standards and Accounting Standards).
(i) Information Attributes: Information generated from the Costing system should be possess all the attributes
of an information i.e. complete, accurate, timeliness, confidentiality etc. This also meets the requirements of
management information system.

Practical Questions

Question 14

Following information is available as per the cost accounts of a company for the year ended 31st March:
Particulars Amount (₹)
Profit 7,77,150
Factory expenses under-charged 2,35,500
Administrative expenses under-charged 1,17,750
Selling & distribution expenses under-charged 31,400
Income from interest and dividends (not adjusted in cost 2,35,500
statement)
You are required to PREPARE a reconciliation statement to ascertain Profit as per Financial Accounts
(MTP 4 Marks Dec’24)

Answer 14
Statement of Reconciliation
(to ascertain Profit as per Financial Accounts)
Particulars (₹) (₹)
Profit as per Cost Account 7,77,150
Add: Income from interest and dividends 2,35,500
10,12,650
Less: Factory expenses under-charged in Cost Accounts 2,35,500
Administrative expenses under-charged in Cost Accounts 1,17,750
Selling & distribution expenses under- charged in Cost Accounts 31,400 (3,84,650)
Profit as per Financial Accounts 6,28,000

Question 15

Following information is extracted as a result of scrutiny of the figures from both the financial accounts and
cost accounts of CK Ltd. for the year ending 31st March:
Particulars Amount
(₹)
Net Profit (as per cost accounts) 57,71,840
Under recovery of selling overheads in cost accounts 1,16,800
Under valuation of closing stock in cost accounts 1,64,000
Rent received credited in financial accounts 87,200
Bad debts provided in financial accounts 52,000
Income tax provided in financial accounts 2,54,400
Under recovery of administration overheads in cost accounts 1,50,400
You are required to PREPARE a Statement of Reconciliation showing the profit as per financial records.
(RTP Jan’25)

7.7 Chapter 7 Cost Accounting System