FAQ Cost accounting.

1. What is the difference between financial and cost accounting?

Financial accounting is a summary since it is for the benefit of outsiders, while cost accounting is
for insiders so it is in detail.

2. What is a cost object?

Cost object is an item for which cost is to be ascertained, it can be either a product, service or
process.

3. What are various classifications of cost?

Materials which can be identified to cost object is called as direct materials.

Labour which can be identified with cost object is called as direct labour.
Expenses which can be identified with cost object is called as direct expenses
The sum of direct material, labour and direct expenses is called as prime cost
Expenses which cannot be directly identified to cost object is called as overheads
Overheads can be classified based on function like
Production overhead, administration overhead and selling and distribution overheads
Cost can be classified based on variability as fixed cost variable cost and semi variable cost
Fixed cost remains same within given capacity irrespective of change in volume
Variable cost remains same per unit of production and directly changes with volume
Semi variable cost is partly fixed and partly variable.
Cost can be classified based on controllability like controllable cost and uncontrollable cost.
Cost is uncontrollable for a particular level, for example overtime is uncontrollable cost for
factory foremen but controllable cost for factory manager. The person who has the authority
should take responsibility for the cost this is known as responsibility accounting.
Cost can be classified as sunk cost which is already incurred and which do not affect the decision
and relevant cost which affects the decision.
Cost can be classified as imputed cost or opportunity cost or out of pocket cost. For example a
proprietor who works for his own business the salary he would have earned by himself is an
opportunity cost which must be taken into consideration.
Past cost are cost already incurred, by studying the same we can get good knowledge about
business, while future cost are estimated cost.
Marginal costs are cost which will change by increasing the output by one unit which is
theoretical, while incremental costs are change in cost if the output goes up by particular
volume.
 Avoidable cost are cost which could have been avoided and incurred due to inefficiency of the
business and it should be borne by the business and not passed on to customer, for example
abnormal loss.
Unavoidable cost cannot be avoided and has to be borne by the customer, normal loss.

Standard costs are cost which should be, while actual cost are cost which are as it is

Committed fixed cost is cost which should be continued to be incurred in future once
committed.
Discretionary fixed cost like R&D, training, advertisement can be incurred in one year and
discontinued in another year.

4. What is cost centre?

Cost centre is Person, place or equipment to which a overhead can be identified and collected.

5. What is allocation and apportionment?

If an overhead can be identified to a particular cost centre it is called as allocation, but if

overhead cannot be directly identified to cost centre it has to apportion to various cost centres
on suitable basis.
6. What is absorption?
Absorption is identifying overheads to cost object. Usually it is done based on volume.

7. Give few examples of production overhead?

Foremen salary, Factory Manager’s salary, Factory Lighting, Factory Rent

8. Give few examples of administration overheads?

Office Managers salary, accountants salary, electricity

9. Give few examples of selling and distribution overheads?

Sales Men’s salary, salesmen’s commission, carriage outwards.

10. What is job costing giving few examples of job costing?

Job costing is employed where each job is unique, ship building, aircraft building, tailoring cloth
etc. An estimate of price is furnished in terms of cost sheet.

11. What is cost sheet?

Direct Material + Direct wages + Direct Expenses = Prime cost + production over head + opening
WIP – Closing WIP = Factory Cost + Factory administration expense = Cost of production+
opening stock of finished goods- closing stock of finished goods = cost of goods sold + selling and
general administration expenses = cost of sales + profit = price.

12. What is batch costing?

In factories where different goods are produced, there are two opposing cost, set up cost and
carrying cost, by balancing them economic batch quantity to be determined by optimizing cost

𝑎𝑛𝑛𝑢𝑎𝑙 𝑑𝑒𝑚𝑎𝑛𝑑
EBQ = √2 ∗ 𝑠𝑒𝑡𝑢𝑝𝑐𝑜𝑠𝑡 𝑝𝑒𝑟𝑠𝑒𝑡𝑢𝑝 ∗ 𝑢𝑛𝑖𝑡 𝑐𝑎𝑟𝑟𝑦𝑖𝑛𝑔 𝑐𝑜𝑠𝑡

13. What are peculiarities of contract accounting?

Contract extends for more than one period and contract accounting is a compromise between
matching and realization principle. Up to 25 to 30% of completion of contract no profits are
recognized, 25 to 30 to 50% 1/3 profits realized is recognized, 50 to 75% 2/3 profit realized is
recognized, > 75% estimated profit with suitable provision for contingency is recognized. This
profit is further discounted by
Cash received/ work certifies, work received/ total contract value. Cash received / total contract
value and only that profit is taken to P& L account. This is called as partial completion
method. Accounting standard is AS 7.

14. Explain various types of contracts?

Fixed Price contract: Here the contractor is expected to quote a fixed price in tender and
expected to bear uncontrollable risks.
 Cost plus profit: Here the contractor is promised profits based on cost incurred, higher the cost
higher the profit, so no incentive to control cost, but excess cost will be identified and
disallowed at the end due to audit clause which will lead to dispute and litigation

Cost + Escalation: Here escalation is allowed for items beyond the control of contractor like
Steel, cement, labour making it fair for both the parties.

Time and Material contract: Here the contractor is asked to quote value of material supplied
and number of hours based on which quote will be made, usually these types of quotes are
made for software contracts.

Turnkey contract: In this the entire job is given to single contractor, even though initial cost
appears high life cycle cost is far less.

15. What is process costing, give few examples?

In process the cost object is a process instead of job thus it is called as process costing or
operation costing.
Steel, cement, readymade garment.

16. What is Joint product, by product, scrap and waste?

Joint product: Joint products are products which jointly emerge and all products have high value
like sugar and molasses.

By Products: By products are products which emerge jointly but one product has far lesser value
than other product like sugar and bagasse.

Scrap: Scrap emerges in course of production, which fetches some value, steel scrap.

Waste: Waste like carbon soot in power station, for which cost should be incurred to dispose.

But all these classification changes as technology emerges, thus when bagasse was used for
making newsprint it became a joint product, when steel scrap was used as raw material for
making steel through electric arc furnace it became joint product, fly ash when it was used as
raw materials for making low cost bricks it became joint product.
17. What are the peculiarities of service industry?
a. No inventory b. Service is usually done in presence of customer c. Fluctuating workload in
the absence of inventory buffer d. More capital investment instead of reducing man power
like in manufacturing increases man power e. Composite cost unit f. till now no methods
found for measuring high skilled services.

18. What is activity based costing?

In traditional costing which came with mass production, overheads were fixed costs which were
called as sunk cost and allocated on single cost driver volume.
In modern industries where the value addition has shifted outside factory and is done by
knowledge workers, overhead is no more sunk cost and it is driven by complexity, no more it is
driven by volume.
Absorbing overheads based on actual cost drivers is called as activity based costing.
Activities can be classified as value added activity, value enabling activities, value supporting
activities and non value added activity.

19. What is cost driver?

Cost drivers are activities that drive cost, by eliminating cost driver cost can be eliminated.

20. What is mass production?

No customer, standard product, volume drives cost.

21. What is Tender, EMD, SD, Liquidated Damages, and Incentives, performance guarantees?

Tender: For big contracts the customer invites competitive quotation called as tender
EMD: Earnest Money Deposits which the contractor has to furnish, in the event of non
acceptance of his tender this will be returned. If the tender is accepted and contractor is
unwilling to fulfill his obligations then this will be forfeited.
SD: Security deposit, in the event of contractor’s tender being accepted then materials and
equipments of customer will be used by contractor for carrying out work, for this he will have to
furnish security deposit, both EMD and SD are usually given in the form of bank guarantees.

Liquidated Damages: If there is time delay the customer can ask for damages, if estimating
damages are time consuming process then the parties agree for reasonable estimation of
damages without actually ascertaining damages , this is called as liquidated damages.
 What are incentives: Instead of going for damages which results in blame game and litigation,
contract contains incentive clauses for early completion, which motivates the contractor to
overcome hurdles and complete.

Performance Guarantees: In big contracts like installing power plants, the performance of
equipment can be judged only after it runs for reasonable period. Performance guarantees are
given specifying various performance parameters in the contract, usually this backed by bank
guarantees.

22. What are various methods by which materials are valued?

Specific identification, FIFO , weighted average , Standard cost

23. What is conversion cost?

Overheads incurred in converting raw material and component into Work in progress or finished
goods are called as conversion cost.
24. What is period cost and inventorial cost?
Cost like administration and selling and distribution, which are charged to P&L account in the
period in which they are incurred are called as period cost, while all production overhead
necessary to bring the product to it’s place of storage are called as inventorial cost

25. What is absorption costing?

In absorption costing both variable and fixed overhead needed to bring inventory to the place of
it’s storage are added to material cost to arrive at he value.

26. What is direct costing?

In direct costing variable production overhead necessary to bring inventory to it’s place of
storage are added to inventory and all fixed overheads are treated as period cost.

27. What is Acronym for ABC?

Always better control
28. What is ABC analysis?
It is based on Pareto’s principle of vital few and trivial many. Item constituting 70% of value of
consumption constitutes only 20% in terms of numbers, item constituting 20% value
constitute 10% of numbers, while item constituting 70% of number constitute 10% of value. A
 items will be monitored by top management, B by middle level management, while activities of
C should be automated.
29. What is VED analysis?
V item is vital which may be even a small value item; E is essential while D is desirable
30. What are assumptions behind EOQ?
No lead time, annual consumption is deterministic, no quantity discount
31. What is three point estimation of inventory?
Here materials are managed as separate function as against inventory.
32. Maximum level?
Beyond this stock should not be accumulated for any item. Once inventory reaches this level red
flag will be raised to put on hold any further procurement
Maximum level = Reorder Level+ Reorder Quantity- (Minimum lead time* minimum
consumption during lead time)
33. Reorder level?
Once inventory reaches reorder level stores department will raise indent
Theoretical reorder level = Maximum consumption* maximum reorder level
Practical reorder level = Normal consumption* normal lead time + safety stock
34. Minimum level?
Once stock level reaches minimum, emergency procurement order to be taken.

Minimum Stock = Reorder level – (normal consumption* normal lead time)

35. What is stochastic system of inventory?

Here consumption becomes probabilistic, safety stock trades off stock holding and stock out
cost.
36. What is MRP I?
MRP is Material requirement planning, in discrete manufacturing production quantity is blown
up based on bill of material, from which inventory is subtracted to ascertain quantum of
manufacture/ procurement. This treats material management as integral part of production.
This was greatly facilitated by emergence of powerful computers.
37. What is MRP II?
This is manufacturing resource planning, this apart from planning for materials schedules
machines and offloading using bill of operations.
38. What is ERP?
Enterprise wide resource planning, in which all functions are integrated.
39. What is SCM?
Supply chain management, here suppliers are hooked into Company’s production planning
40. What is Bar code?
Here based on barcode material is identified for invoicing and inventory accounting. This is used
in super market.
41. What is RFID?
Radio Frequency Identification device, this can be used to tackle material in transit.
42. What is JIT?
Just in time, here common components are produced as per forecast, while special items are
procured from suppliers after receipt of order. It is modular form of production
43. What are two method of remuneration of labour?
Time, piece rate.
44. What is the problem of using time rate?
Time rate will not incentivize the worker to accelerate production
45. What are various methods of piece rate?
Taylor, Emerick, Emerson and Beaudex point system.
46. What is Taylor System?
In Taylor system production below standard got paid 90% of guaranteed wages, while
production above standard got paid 110% of guaranteed wages
47. Who determined the standards?
Industrial Engineering department determined the standard based on time and motion studies ,
without participation of the worker.
48. What is Emerick System?
Here up to 83% of standard guaranteed wages were paid, from 83 to 100% 10% of guaranteed
wages was paid as bonus, and above 100% 30% of guaranteed wages was paid as bonus.
49. What is Emerson efficiency plan?
Up to 662/3% standard wages, 662/3 to 75% 1% bonus, 76% to 80% 2%, 81% to 85% 4%, 86%
to 95% 10%, 96% to 100% 20%, every increase above this the bonus % will raise.
50. What is Gnatt task bonus?
For achieving standards 20% bonus paid and for higher output is paid at same higher piece rate
including bonus
51. What is beaudex point system?
Every minute is defined as one beudex point and for every beaudex point saved compared to
standard proportionate bonus is paid on standard wages.
52. Which are the methods by which gain in productivity is shared between employer and
employees?
Hasley, Hasley weir, Rowan, Barth
53. What is Hasley System?
In Hasley system only 50% time saved is shared with employees
54. What is Hasley Weir system?
In Hasley Weir system only 30% of time saved is shared with employees.
55. What is Rowan System?
In Rowan system bonus is (time saved/ time allowed) * standard rate
56. What is Barth system?
In Barth system bonus is Hourly rate *√time allowed* time taken
57. When team based bonus commenced?
When Hawthorne studies showed it is team and not individuals perform team based bonus was
introduced.
58. What is team based bonus?
 Preistman plan, Rucker plan, Scanlon Plan, Townsend plan
59. What is Preistman’s plan?
Here if the monthly production is 1200 units as against standard of 1000 units all members of
team get 20% bonus on standard wages
60. Rucker plan?
Here wages are determined as % of value added on production; suppose the standard is 75%
and actual 72% 3% of value added on production will be paid as bonus.
61. What is Scanlon Plan?
Scanlon plan the labour cost is determined as % of sales instead of value addition on production
62. What is Townsend plan?
Here 50% of labour saved is paid as bonus to team.
63. What are Fringe benefits?
Fringe benefits are work environment like canteen, snacks, transportation etc
64. What is profit sharing bonus?
When markets dominated performance shifted from efficiency to effectiveness, profit based
bonus where paid.
65. What are various classifications of capacity?
Theoretical capacity, normal capacity, capacity based on sales
66. Theoretical capacity?
It is based on maximum use of capacity without any constraint

67 Practical capacities?

Practical capacity takes into consideration in evitable breaks like planned maintenance, shift
change, breaks and weekly holidays. Fixed overheads are absorbed based on normal capacity

67. Capacity based on sales ?

If sales is a constraint, capacity based on sales can be used.

68. What is break even point?

A point at which no profit no loss
69. What is P/V ratio?
Contribution/ SALES

70 Formula for breakeven point?

Breakeven point in value = Fixed cost/ P/V ratio

Break even point in volume = Fixed cost/ contribution per unit

70. What is margin of safety?
Sales above break even point
71. What are the uses of marginal costing?
Make or buy, profit planning, differential pricing, product mix, fixing sales incentives, technology
choice, decision making under constraint.
72. What are various types of budgets?
Functional budgets like Sales budget, production budget, material budget, man power budget,
Capital budget , over head budget and master budget like budgeted P&L, Balance Sheet and
cash flow.
73. What is budget committee?
It consists of heads of various departments as members and CEO as chairman.
74. What is line, staff budget?
Line budget is prepared by all departments, while staff budget is prepared by Finance
department only with input from MD office
75. When line budget is needed?
For existing products where the experience of front line staff is invaluable line budget is
desirable.
76. What is staff budget?
Staff budget is prepared for new products where the contribution of front line staff will be
minimum.
77. What is Performance Budget?
In commercial organization where revenue and cost is measured target can be set in the form of
profits. No need to measure physical performance, but in non commercial organization where
revenue is not there apart from comparing cost against budget actual performance should be
measured physically.
78. What is Zero based budgeting?
For service departments whose performance cannot be measured all major expenses should be
justified in budget instead of incremental approach.
79. What is flexible budget?
Since external environment is not within the control of organization, budgets will be prepared
for multiple contingencies and action plan will be kept ready for each one of them
80. What are benefits of budgeting?
It is planning, coordinating and controlling device
81. What is disadvantage of budget?
Main disadvantage is slack building
82. What is the difference between budget and standards?
Budget is based on what it is, while standard is based on what it should be. Budget focuses on
effectiveness, while standards focus on efficiency, budget is mostly participatory, while
standards are non participatory, results are measured in budget for longer period say a month,
while in standard it is for shorter period say day.
83. How standards should be set?
 Standards should neither be easy nor impossible to achieve. It should have sufficient stretch to
act as challenge to employee.
84. What is variance?
As against standards actual is compared and they are further analyzed.
85. What is material cost variance?

Material cost variance consists of material price + material usage variance

Material usage consist of Material Mix+ Yield variance

86. What is Labour cost variance?

Labour cost variance consist of rate variance + efficiency variance
Efficiency variance = Gang Mix variance + idle time variance + labour yield variance
87. What is variable overhead variance?
It consist of Variable overhead expenditure+ efficiency variance
88. What is fixed overhead variance?
Fixed overhead expenditure + Volume variance
Volume variance consist of Capacity + Calendar + efficiency variance
89. What is sales variance?
Sales variance consist of Price + volume variance
Volume variance = Quantity + mix variance

90 What is profit reconciliation?

From budgeted profit prepared as per standards, all favourable variance are added, adverse variances
are deducted to arrive at actual profit.

90. What is top down and bottom up budget?

Top down budgets are imposed by top management, it is usually done in build business
Kaizen budget is top down budget
Bottom up budget is for harvest business, in which employees participate
91. What is Kaizen costing?
Standard costing is based on achieving standards
It creates inertia , since once standard is achieved it do not focus on improving standards
Since monetary incentives are linked with standards, it is difficult to revise the same
Standards are set by person other than the one who achieves it
In Kaizen costing the basic aim is continuous improvement
Work group set their own standards and they are not linked to monetary reward
This is part of Kaizen culture
92. Explain various activities under activity based costing?
Value added activity : This is the goods/ service provided to customers
Value enabling activity : This activities involve customer contact other than for provision of
goods and service
Value supporting activities : This involves activity supporting people who serve customers
 Non value added activity : Waste should be eliminated

93 What are Demings 14 points?

1. Have consistency of purpose

2. Remove fear
3. Abolish Piece work
4. Replace with pride in workman ship
5. Abolish performance appraisal
6. Replace it with leader ship
7. Lead but don’t cheer lead
8. Have single supplier
9. Break barriers between departments
10. Don’t inspect for quality
11. Institute training
12. Institute continuous improvement
13. Get every one on board
14. Sustain it

94 What is Hoshin Kanri?

Tools employed to implement principle

95 What are the Hoshin’s employed to implement Deming’s 14 principle

1. Just in time is the objective of Toyota which means to produce number of piece the customer
wants at the time he wants
2. Abolish fear is implemented through Obeya that is a white board in which all problems faced by
a work centre is highlighted for every one to see
3. All Toyota companies pay fixed salary to all its work force
4. All workers are considered as problem solvers and improvers of system , not merely producers
5. No performance appraisals are there
6. Leadership is practiced through immersion techniques like Gemba Walk which wants
management to be there always in work place and Genchi Gembutsu which is taking the
position of customer in work place and observing inconvenience so as to remove the same.
Supervisor is Sensei that is coach and not boss
7. Since most of the quality related problem can be solved by management all slogans regarding
productivity and quality to be removed from work place
8. Quality to be built in to process called as Poke Yoke which means mistake proofing or Taguchi
rough designing instead of inspection
9. Barriers between department is removed through quality circle and team design
 10. Life time employment and having one supplier removes variability and encourages participation
of every one in continuous improvement
11. Almost 25% of time is spent every day in learning skills from each other, training is treated as
investment and not as expense
12. A culture raising the bar and learning through PDCA inculcated in every one
13. Participation of every one is ensured through basic philosophy of WA which means harmony
implemented through tools like life time employment, linking salaries of each position to other
position, restricting dividend
14. Sticking to basic principles to sustain it

96 What are seven deadly sins called as Muda?

1. Overproduction
2. Waiting
3. Excess processing
4. Unnecessary transportation
5. Unnecessary movement
6. Rejection/ Rework
7. Inventory

97 What are the Hoshins employed to remove Muda?

This is called as Functional Kaizen

1. Kanban for over production

2. Balancing various process to remove imbalance and waiting
3. Using techniques like value engineering to remove unwanted features
4. Cell system to reduce internal transportation, logistics like warehousing to reduce external
transportation
5. 5S (Seiri, Seiton, Seiso, Seikitsu and Shitshuke to ensure proper house keeping
6. Using quality circle and root cause analysis
7. Once all defects are eliminated inventory which is a buffer will automatically get eliminated

98 What are tools employed by workers to solve problem?

1. Line chart
2. Deming control chart
3. Flow chart
4. Bar chart
5. Pareto Chart
6. Ishikawa fishbone diagram
7. Regression chart
 99 What is Mura, Muri and heijunka?

Mura is imbalance, Muri is overburden, heijunka is a tool to even out imbalance to reduce over burden
which causes quality problems

100 What is flow kaizen?

Once functional kaizen seven dealy sins are solved we should move to solve flow related problem

The Hoshins are Jidoka, Andon, Cycle time, lead time , take time and lotsize

101 What is Kobetsu Kaizen?

Kobetsu Kaizen means machine related Kaizen. It is known as Total Productive Maintenance or Jishu
Oshen which means cleaning with meaning

It was found most quality problems are due to slowing down of machine

This is caused by contamination like loose contact, loosely hanging wire, brittleness, splashing, splurging,
over hearing, discoloring brittleness, most of which can be discovered through five senses.

The workers begin their day by cleaning the machine. All defects which they can cure they give green
tag, those which needs expert maintenance staff they give red tag.

Once the defects are cured the tags are removed

This ensures zero break down, zero slow down and zero defects.

101 What is cost of quality?

Deming asked Japanese to view quality as human problem and not a process problem

The goal was zero defect

For most of western organization who are used to weigh cost against benefit this was unacceptable.

Joseph Juran classified quality cost into 4 categories

1. Prevention like training

2. Appraisal like Poke Yoke, inspection

He called them as upstream cost

3 Cost of internal failure ( Rejection, Rework)

4 Cost of external failure ( warranty, bad mouthing)

Bad mouthing is biggest cost to business which cannot be measured

To prevent it upstream cost should be viewed as investments

102 What is constraint?

Constraint is also called as bottle neck. It is the weakest link in chain which restrict through put
Japanese call imbalance as Mura and rebalance it through flexibility
Many western organization due to legacy were not able to rebalance and have to live with
constraints
Isreali Physicist showed how to achieve maximum efficiency within constraint
This is known as theory of constraint
Identify the the constraint
Subordinate every thing to constraint
Exploit constraint by producing maximum profitable product
Enhance constraint
Repeat the steps
He used DRB method
Drum is every body should be aware of constraint
Rope is tying every operation to constraints through signal
Buffer is keeping some inventory in front of constraint to ensure constraint never idle
He classified all production process in to VAT
V means same material with multiple products where production planning is constraint
T is many sub assembly and one assembly as in automobile where assembly is constraint
A is ETO items with multiple components and multiple assemblies where anything is constraint
He used through put accounting which treat material alone as product cost and all others as
variable cost which is called as super variable costing

103 What is divisionalisation?

Large organization suffers from free riding.

This means a profitable product will carry non profitable product, profitable geographic
area will carry non profitable geographic area and hard working employees will carry slackers
To avoid this organization divide themselves into smaller units called as SBUs
SBUs can be cost centre ,profit centre , revenue centre and investment centre .

Nothing but philosophy of large in size but small in spirit

104 What is Dysfunctional behavior?

Dysfunctional behavior is unintended consequence of divisionalisation. Employees get attached to part
at the expense of the whole

105 What is cooptetion?

Cooptetion is a philosophy of competing and cooperating simultaneously.

106 What are structural cost drivers?

Structural cost drivers are basis of competitive advantage which is decided when the enterprise is set up

Scale: Large scale manufacturing leads to cost reduction due to learning curve like Texas instrument
manufactured large scale integrated circuits and used experience as a structural cost driver to reduce
cost

Scope: How many varieties to be produced, which leads to complexity which increases cost

Technology: Sometimes skill of set up is built into men as SMED or through technology in the form of
one touch set up

106 What are executional cost driver?

Competitive advantage used at the time of execution

Layout: Like U shaped and Z shaped to reduce internal transportation which is muda

Design 70% of cost and 80% quality problem can be solved at the time of design. Target costing means
arriving cost as Price- profit and achieving change through design change

Employee Engagement: Engaged employee committed to continuous improvement than satisfied

employee

Capacity: Understanding capacity as OEE that is overall equipment effectiveness which is a multiple of
availability, quality and efficiency

Internal linkage: All activities within organization are integrated called as Lifecycle costing and price is
not cost for durables in case of whole life costing

External linkage: Cost / value can be added at any stage of manufacturing called as value chain costing

107 What is strategic cost management?

Using cost drivers to implement strategy. Replace hard work with smart work.