Costing PDF

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INSPIRE Academy ( 8888881719) Chapter 1 : Basic Cost Concepts 1.1
1 BASIC COST CONCEPTS

‘
1. WHAT IS COST
Cost can be either real or imaginary
Imaginary cost are called as notional cost.

All opportunity cost are notional cost.
Costing by Raj Awate – Amazing journey of logic and concept

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2. WHAT IS COSTING
3. WHAT IS COST ACCOUNTING
Costing is just calculation cost

Whereas cost accounting involves calculation of cost &
keeping control on cost.

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4. CLASSIFICATION OF COST

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1) As per elements :
2) As per tracability :
3) As per function :

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4) As per nature :
5) As per payment :
6) As per time :

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7) As per decision making :
8) As per association to product :
9) As per normality

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5. HISTORICAL COSTS AND PRE-DETERMINED COSTS
Historical Costs:
These costs are ascertained after they are incurred. Such costs are available only
when the production of a particular thing has already been done.
Pre-determined Costs:
These costs are calculated before they are incurred on the basis of a specification
of all factors affecting cost. Such costs may be:
(i) Estimated costs

(ii) Standard costs
6. FIXED COST
Fixed cost can be classified into the following categories for the purpose of
analysis:
(a) Committed Costs: These costs are incurred to maintain certain facilities and
cannot be quickly eliminated. The management has little or no discretion in this cost,
e.g., rent, insurance
(b) Policy and Managed Costs: Policy costs are incurred for implementing particular
management policies such as executive development, housing, etc. Such costs are
often discretionary.
(c) Discretionary Costs: These are not related to the operations and can be
controlled by the
management. These costs result from special policy decisions, new researches etc.,
and can be
eliminated or reduced to a desirable level at the discretion of the management.
(d) Step Costs: Such costs are constant for a given level of output and then increase
by a fixed
amount at a higher level of output.

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Committed
Costs
Step Costs
FIXED Policy and
Managed
COST
Costs
Discretionary
Costs
7. METHODS OF COST ING
Job costing: ascertains the cost of a job that is produced as per the requirements
of the customers._ considers job a cost unit. A job is a cost unit which consists of a
single order or contract.
Batch costing: system is used when production is in batches. _A batch is a cost

unit.
Contract costing: is that form of specific order costing which applies where work
is undertaken as per customers’ special requirements and each order is of long
duration.
Process costing method: is applicable where the output results from a sequence
of continuous or repetitive operations or processes and products are identical and
cannot be segregated.
Service Costing: is a Method Costing applied to undertaking which provides

service rather than production of commodities.

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8. TECHNIQUES OF COST ING
Historical (or Conventional) Costing _Standard Costing_Marginal Costing_Uniform

Costing_Direct Costing_Absorption Costing_Activity Based Costing
9. MANAGEMENT ACCOUNTING
Management accounting is an integral part of management concerned with

identifying, presenting and interpreting information used for: (a) formulating
strategy; (b) planning and controlling activities; (c) decision taking; (d) optimisin the
use of resources; (e) disclosure to shareholders and others external to the entity; (f)
disclosure to employees; (g) safeguarding assets
The tools and techniques of management accounting includes - financial

planning, financial statement analysis, marginal costing, differential costing,
capital budgeting, cash flow analysis, standard costing and budgetary control,
techniques of linear programming, statistical quality control, investment chart,
sales and earning chart, etc.
Financial accounting, cost accounting and management accounting are distinct
from each other.
10. COST CENTERS MAY BE CLASSIFIED AS FOLLOWS:
1) Productive, Unproductive
and Mixed Cost Centres
2) Personal and Impersonal

COST CENTERS
Cost Centre
3) Operation and Process

Cost Centre

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11. IMPORTANT CONCEPTS -
Cost as per
• material, labour, expenses
element
• Direct Material +Direct Labour+Direct expense

prime cost
• Indirect Material +Indirect Labour+Indirect

overheads expense
• Direct material + Direct wages + Direct expenses +

Production production overhead
cost
• Direct Labour+Direct expense + Production

Conversion Overhead
cost
• income forgone due to taking another option =

Opportunity
cost
non real cost = imaginary cost = notional cost.
• These are incurred even though business is shut-down,

Shutdown e.g. rent, rates, depreciation. They are fixed cost.
cost
• Normal loss : unavoidable loss_ loss due to

evaporation_ absorbed by remaining units_ due to this
Normal loss rate per unit increases.
• avoidable loss_ loss due to fire and theft_ transferred

Abnormal to costing P & L a/c_ due to this rate per unit remains
loss
same

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• They requires immediate payment of cash _also

Explicit cost called as out of pocket cost.
• They do not require immediate payment of cash

Implicit
_also called as economic cost or notional cost or
cost imputed cost.
• It is a cost which has already been incurred or sunk
in the past _ not relevant for decision making.
Sunk Cost
12. COST UNIT:
Particulars` Cost Units
For production industries
Automobile Per car, per scooter
Sugar industry Kg / tonne
Chemical industry Litre
Furniture Per article
Telemarketing Per customer calls made
Construction per contract
For service industry ( composite units )
Transportation industry Tonne-kms
Hospital Patient -day, bed-days
Hotel Per person-per plate

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13. IMPORTANCE OF COST ACCOUNTING
(a) Costing as an Aid to Management
1. Cost accounting helps in periods of trade depression and trade competition :

2. Cost accounting aids price fixation
3. Cost accounting helps in making estimates :
4. Cost accounting makes comparisons possible :
5. Cost accounting provides data for periodical Profit and Loss Account:
6. Cost accounting helps in determining and enhancing efficiency :
7. Cost accounting helps in inventory control
(b) Costing as an Aid to Creditors

Investors, banks and other money-lending institutions
(c) Costing as an Aid to Employees
(d) Costing as an Aid to National Economy
14. OBJECTIVES OF COST & MANAGEMENT ACCOUNTING
1. To ascertain the cost per unit of different products manufactured by a business

concern;
2. To provide a correct analysis of cost by finalizing process, operations and by
different elements of cost;
3. To disclose sources of wastage of material, time or expense, or in the use of
machinery, equipments and tools, and to prepare such reports as may be
necessary to control such wastage;
4. To provide requisite data and serve as a guide for fixing prices of products
manufactured, or services rendered;
5. To ascertain the profitability of each of the products and advise management as
to how these profits can be maximized;
6. To exercise effective control on the stocks of raw materials, work-in-progress,
consumable stores and finished goods in order to minimize the capital locked
up in these areas;

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7. To reveal sources of economy by installing and implementing a system of cost-

control for materials, labour and overheads;
8. To advise the management about future expansion policies and proposed
capital projects;
9. To present and interpret data for management planning, evaluation of
performance and control;
10. To guide the management in the formulation and implementation of incentive
bonus plans based on productivity and cost savings;
11. To supply useful data to the management for taking various financial decisions,
such as introduction of new products, replacement of labour by machine etc.;
12. To help in introduction and, supervising biometric as, accounting or data
processing through computers;
13. To organize the internal audit system to ensure effective working of different
departments;

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INSPIRE Academy ( 888888 1719) Chapter 2 : RATIO ANALYSIS .1
2 RATIO
MATERIAL
ANALYSIS
1. OBJECTIVE OF RATIO
1. To determine Liquidity (Short-term Solvency) (i.e., ability of the enterprise to

meet its short-term obligations as and when they become due).
2. To determine Long-term Solvency (i.e., ability of the enterprise to pay the
interest regularly and to repay the principal on maturity or in pre-determined
instalments at due dates).
3. To determine Operating Efficiency with which Resources are utilised in
generating Revenue
4. To determine Profitability with respect to Revenue from Operations and
Investment
5. To compare Intra Firm Position (i.e., Evaluating the Financial Position and
Performance of thesame enterprise over a period of time) and to identify the strong
and week areas (if any) and to take the necessary corrective action.
6. To compare Inter Firm Position (i.e., Evaluating the Relative Financial Position
and Performance of the enterprise in the industry) and to identify the strong and
week areas r(if any) and to take the necessary corrective action.

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2. CLASSIFICATION OF RATIO BASED ON POSITION
1. Income These ratios are calculated on the basis of Income Statement

Statement Ratios Items.
Example: Gross Profit Ratio, Operating Profit Ratio, Net Profit
Ratio
2. Position These ratios are calculated on the basis of Position Statement
Statement Ratios (i.e. Balance Sheet) Items.
Example: Current Ratio, Quick Ratio, Debt-Equity Ratio,
3. Composite These ratios are calculated on the basis of Items of both the
Ratios Income Statement and Position Statement.
Example: Inventory Turnover Ratio, Debtors Turnover Ratio,
Creditors Turnover Ratio, Return on Investment
3. CLASSFICATION OF RATIO BASED ON FUNCTION
Classification of Ratios
1. Liquidity Ratios
2. Solvency Ratios
3. Activity Ratios
4. Profitability Ratios

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SUMMARY CHART

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4. LIQUIDITY RATIO
The terms 'liquidity' and 'short-term solvency' are used synonymously.

Liquidity or short-term solvency means ability of the business to pay its short-term
liabilities.
Various Liquidity Ratios are:

(a) Current Ratio
(b) Quick Ratio or Acid test Ratio
(c) Cash Ratio or Absolute Liquidity Ratio
(d) Basic Defense Interval or Interval Measure Ratios
(e) Net Working Capital Ratio
(a) Current Ratio:

Current Assets
Current Ratio = Current Liabilities
(b) Quick Ratios: T

Quick Assets
Quick Ratio or Acid Test Ratio = Current Liabilities
Quick Assets = Current Assets - Inventories Current Liabilities = As mentioned under

Current Ratio.
5. LONG TERM SOLVENCY OR LEVERAGE RATIO
The leverage ratios may be defined as those financial ratios which measure
the long term stability and structure of the firm. These ratios indicate the mix of
funds provided by owners and lenders and assure the lenders of the long term
funds with regard to:
(i) Periodic payment of interest during the period of the loan and
(ii) Repayment of principal amount on maturity.

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Leverage ratios are of two types:

1. Capital Structure Ratios
(a) Equity Ratio
(b) Debt Ratio
(c) Debt to Equity Ratio
(d) Debt to Total Assets Ratio
(e) Capital Gearing Ratio
(f) Proprietary Ratio
2. Coverage Ratios
(a) Debt-Service Coverage Ratio (DSCR)
(b) Interest Coverage Ratio
(c) Preference Dividend Coverage Ratio
(d) Fixed Charges Coverage Ratio
Shareholders′ Equity
(a) Equity Ratio: Equity Ratio = Capital Employed
Total outside liabilities Total Debt

(b) Debt Ratio: Debt Ratio = Total Debt + Net worth or Net Assets
This ratio is used to analyse the long-term solvency of a firm.
(c) Debt to Equity Ratio:

Total Outside Liabilities Total Debt∗ Long−term Debt∗∗
Debt to Equity Ratio = = Shareholders′ Equity or = Shareholders′ equity
Shareholders′ Equity
The shareholders' equity is equity and preference share capital + post

accumulated profits (excluding fictitious assets etc).
Total Outside Liabilities

(d) Debt to Total Assets Ratio: = Total Assets
(e) Capital Gearing Ratio: In addition to debt-equity ratio, sometimes capital gearing
ratio is also calculated to show the proportion of fixed interest (dividend) bearing capital
to funds belonging to equity shareholders i.e. equity funds or net worth.
(Preference Share Capital + Debentures + Other Borrowed funds)
Capital Gearing Ratio = (Equity Share Capital + Reserves & 𝑆𝑢𝑟𝑝𝑙𝑢𝑠 − 𝐿𝑜𝑠𝑠𝑒𝑠)
Proprietary Fund
(f) Proprietary Ratio: =
Total Assets
Proprietary fund includes Equity Share Capital + Preference Share Capital + Reserve
& Surplus. Total assets exclude fictitious assets and losses.

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(a) Debt Service Coverage Ratio (DSCR): Lenders are interested in debt service
coverage to judge the firm's ability to pay off current interest and instalments.
Earnings available for debt services
Debt Service Coverage Ratio = Interest + Instalments
Earnings before interest and taxes (EBIT)

(b) Interest Coverage Ratio: = Interest
Net Profit⁄Earning after taxes (EAT)

(c) Preference Dividend Coverage Ratio: =
Preference dividend liability
6. ACTIVITY RATIO
Activity Ratio/ Efficiency Ratio/ Performance Ratio/ Turnover Ratio

These ratios are employed to evaluate the efficiency with which the firm manages and
utilises its assets. For this reason, they are often called 'Asset management ratios'. T
Activity Ratio/ Efficiency Ratio/ Performance Ratio/ Turnover Ratio:
(a) Total Assets Turnover Ratio
(b) Fixed Assets Turnover Ratio
(c) Capital Turnover Ratio
(d) Current Assets Turnover Ratio
(e) Working Capital Turnover Ratio
(i) Inventory/ Stock Turnover Ratio
(ii) Receivables (Debtors) Turnover Ratio
(iii) Payables (Creditors) Turnover Ratio.
These ratios are usually calculated with reference to sales/cost of goods sold and are
expressed in terms of rate or times.

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Asset Turnover Ratios:

Sales⁄Cost of Goods Sold
Total Asset Turnover Ratio = Total Assets
Fixed Assets Turnover Ratio = Fixed Assets

Capital Turnover Ratio/ Net Asset Turnover Ratio: = Net Assets

Working Capital Turnover Ratio:= Working Capital
Cost of Goods Sold⁄Sales

Inventory/ Stock Turnover Ratio: = Average Inventory∗
Raw Material Consumed

Raw Material Inventory Turnover Ratio = Average Raw Material Stock
Credit Sales
Receivables (Debtors) Turnover Ratio:= Average Accounts Receivable
12 months⁄52 weeks⁄360 days
Receivable Velocity/ Average Collection Period = = DTR
Annual Net Credit Purchases

Creditors Turnover Ratio = Average Accounts Payables

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7. PROFITABILITY RATIOS
The profitability ratios measure the profitability or the operational efficiency of the firm.
These ratios reflect the final results of business operations.
1. Profitability Ratios based on Sales
(a) Gross Profit Ratio
(b) Net Profit Ratio
(c) Operating Profit Ratio
(d) Expenses Ratio
2. Profitability Ratios related to Overall Return on Assets/ Investments
(a) Return on Investments (ROI)
(i) Return on Assets (ROA)
(ii) Return of Capital Employed (ROCE)
(iii) Return on Equity (ROE)
3. Profitability Ratios required for Analysis from Owner's Point of View
(a) Earnings per Share (EPS)
(b) Dividend per Share (DPS)
(c) Dividend Payout Ratio (DP)
4. Profitability Ratios related to Market/ Valuation/ Investors
(a) Price Earnings (P/E) Ratio
(b) Dividend and Earning Yield
(c) Market Value/ Book Value per Share (MV/BV)
(d) Q Ratio

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8. PROFITABILITY RATIO BASED ON SALES
Gross Profit
Gross Profit Ratio = × 100
Sales
Net Profit Earnings after taxes (EAT)

Net Profit Ratio = ×100 or ×100
Sales Sales
Operating Profit Earnings before interest and taxes (EBIT)

Operating Profit Ratio = × 100 = × 100
Sales Sales
Where,
Operating Profit = Sales - Cost of Goods Sold(COGS) – Expenses
Expenses Ratio:
COGS
(i) Cost of Goods Sold (COGS) Ratio = × 100
Sales
Administrative exp.+ Selling & 𝐷𝑖𝑠𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑
(ii) Operating Expenses Ratio = × 100
Sales
COGS + Operating expenses
(iii) Operating Ratio = × 100
Sales
9. PROFITABILITY RATIO BASED ON RATURN ON ASSETS
Return on Investment (ROI): ROI is the most important ratio of all. It is the percentage
of return on funds invested in the business by its owners. In short, this ratio tells the
owner whether or not all the effort put into the business has been worthwhile. It
compares earnings/ returns/ profit with the investment in the company. The ROI is
calculated as follows:
𝐑𝐞𝐭𝐮𝐫𝐧⁄𝐏𝐫𝐨𝐟𝐢𝐭⁄𝐄𝐚𝐫𝐧𝐢𝐧𝐠𝐬
Return on Investment = ×100
𝐈𝐧𝐯𝐞𝐬𝐭𝐦𝐞𝐧𝐭
𝐑𝐞𝐭𝐮𝐫𝐧⁄𝐏𝐫𝐨𝐟𝐢𝐭⁄𝐄𝐚𝐫𝐧𝐢𝐧𝐠𝐬 𝐒𝐚𝐥𝐞𝐬
= × 𝐈𝐧𝐯𝐞𝐬𝐭𝐦𝐞𝐧𝐭
𝐒𝐚𝐥𝐞𝐬
So, ROI = Profitability Ratio × Investment Turnover Ratio.

The concept of investment varies and accordingly there are three broad categories of
ROI i.e.
(i) Return on Assets (ROA),
(ii) Return on Capital Employed (ROCE) and
(iii) Return on Equity (ROE).
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(i) Return on Assets (ROA):

Net Profit after taxes Net Profit after taxes Net Profit after taxes
ROA = Average Total Assets or Average Tangible Assets or Average Fixed Assets
(ii) Return on Capital Employed (ROCE):

It is another variation of ROI. The ROCE is calculated as follows:
Earnings before interest and taxes(EBIT)
ROCE (Pre-tax) = × 100
Capital Employed
EBIT(1 − t)
ROCE (Post-tax) = Capital Employed × 100
(iii) Return on Equity (ROE):

Return on Equity measures the profitability of equity funds invested in the firm. This
ratio reveals how profitably of the owners' funds have been utilised by the firm.
Net Profit after taxes−Preference dividend (if any)
ROE = Net worth × 100
equity shareholders′ fund
Return on Equity using the Du Pont Model:

(i) Profitability/Net Profit Margin margin in a bid to attract higher sales.
Profitability Profit Sales
= Net Income ÷ Revenue
Net profit margin
(ii) Investment Turnover/Asset Turnover/Capital Turnover:

= Sales/Revenue ÷ Investment/Assets/Capital
(iii) Equity Multiplier: I
Equity Multiplier = Investment/Assets/Capital ÷ Shareholders' Equity

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10. PROFITABILITY RATIO FROM OWNER POINT OF VIEW
Net profit available to equity shareholders

(a) Earnings per Share (EPS): Number of equity shares outstanding
Total Dividend paid to equity shareholders

(b) Dividend per Share (DPS): = Number of equity shares outstanding
Dividend per equity share(DPS)
(c) Dividend Payout Ratio (DP): = Earning per Share (EPS)
Profitability Ratios related to market/ valuation/ Investors

These ratios involve measures that consider the market value of the company's
shares. Frequently share prices data are punched with the accounting data to
generate new set of information. These are (a) Price- Earnings Ratio, (b) Dividend
Yield, (c) Market Value/ Book Value per share, (d) Q Ratio.
Market Price per Share(MPS)

Price-Earnings per Share (P/E Ratio) = Earning per Share(EPS)

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QUESTION 1 :
The following are the summarized profit & loss A/C of Hind products ltd. for the year
ending 31st march 2009 and the balance sheet as on that date.
Profit & loss A/C
To opening stock 99,500 By sales (Credit) 8, 50,000
To purchases 5, 45,250 By closing stock 1, 49,000
To incidental 14,250
expenses
To gross profit 3, 40,000
9, 99,000 9, 99,000
To operating 1, 95,000 By gross profit 3, 40,000

expenses
To non operating 4,000 By non operating 9, 000
expenses incomes
To net profit 1, 50,000
3, 49,000 3, 49,000
Balance sheet
Liabilities Rs. Assets Rs.
Share capital 2,000 2,00,000 Land and building 1,50,000
equity share of Rs. 10
each
Reserves 90,000 Plant and machinery 80,000
Other current liabilities 90,000 Stock in trade 1,49,000
Profit and loss a/c 60,000 Sundry debtors 41,000
Bills payable 40,000 Cash and bank balance 30,000
Bills receivable 30,000
4,80,000 4,80,000
From the above statements you are required to calculate the following ratios:
(1) Gross profit ratio.
(2) Net profit ratio.
(3) Operating profit ratio.
(4) Operating ratio.
(5) Return on capital employed.
(6) Net profit to fixed assets ratio.
(7) Stock turnover ratio.
(8) Receivable turnover ratio.
(9) Creditors’ turnover ratio.
(10) Sales to working capital.
(11) Sales to fixed assets.
(12) Sales to capital employed.
(13) Turnover on total assets.
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Additional information:
Average receivables Rs. 85,000
Average payables Rs. 80,000
Solution :
(1) Gross profit ratio.
(2) Net profit ratio.
(3) Operating profit ratio.
(4) Operating ratio.
(5) Return on capital employed.
(6) Net profit to fixed assets ratio.
(7) Stock turnover ratio.
(8) Receivable turnover ratio.
(9) Creditors’ turnover ratio.
(10) Sales to working capital.
(11) Sales to fixed assets.
(12) Sales to capital employed.
(13) Turnover on total assets.

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QUESTION 2 :
Andy Company’s equity shares are being traded in the market at Rs.54 per share with
a price earning ratio of 9 . The company’s dividend payout is 72 % .It has 1,00,000
equity share of 10 each and no preference shares .Book value per share is Rs.42
calculate:
(i) Earning per share
(ii) Net Income
(iii) Dividend yield ; and
(iv) Return on equity
Solution :

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QUESTION 3 :
Working capital – Rs. 10,000. Current Ratio – 1.50. Compute Current Assets.
a) Rs. 20,000 c) Rs. 50,000

b) Rs. 40,000 d) Rs. 30,000
QUESTION 4 :
Current Assets Rs. 100,000 Current Liabilities Rs. 40,000 including Bank Overdraft of Rs.
10,000. Liquid Ratio, 1.50. Determine the amount of Closing Stock.
a) Rs. 35,000 c) Rs. 55,000

c) Rs. 45,000 d) Rs. 86,667
QUESTION 5 :
Liquid Ratio is 1.25. Current assets are Rs. 10,000. Current liabilities Rs. 6,000. Compute
the value of stock.
a) Rs. 17,500 c) Rs. 2,000

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b) Rs. 3,750 d) Rs. 2,500.
QUESTION 6 :
Current ratio is 3.75 and liquid ratio is 1.25. Stock is Rs. 25,000 current assets are :
a) (a) Rs. 25,000 (b) Rs. 20,000

b) (c) Rs. 15,000 (d) Rs. 10,000
QUESTION 7 :
P/E Ratio is 4 times. Market price is Rs. 100. Compute EPS :
a) Rs. 400 b) Rs. 300 c) Rs. 200 d) Rs. 25.
QUESTION 8 :
Dividend yield ratio is 20%. Market price is Rs. 50. Calculate dividend per share.
a) Rs. 10 b) Rs. 150 c) Rs. 105 d) None of the above.

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QUESTION 9 :
Opening debtors – Rs. 30,000, Closing debtors are more than opening debtors by Rs. 20,000.
Cash sales are Rs. 400,000 and amount to 40% of total sales. Compute DTR.
a) 10 times c) 18 times
b) 12 times d) 15 times.
QUESTION 10 :
Proprietary ratio is 0.75 and reserves are Rs. 40,000 working capital is Rs. 60,000. Capital
should be :
(a) 2,40,000 (b) 2,00,000
(c) 4,00,000 (d) 1,80,000

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INSPIRE Academy ( 88883 88886) Chapter 3 : Marginal Costing .1
2
3 MARGINAL
MATERIAL
COSTING
1. MARGINAL COSTING
Marginal costing is the accounting system in which variable costs is charged to

cost units and fixed costs of the period are written-off in full against the aggregate
contribution. Its special value is in decision-making.This technique of costing is also
known as “Variable Costing”, “Differential Costing” or “Out-of-pocket”
costing

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2. ABSORPTION COSTING
Absorption costing is a method of costing by which all direct costs and applicable
overheads are charged to products or cost centres for finding out the total cost of
production. Absorbed cost includes production cost as well as administrative and
other costs. It is a principle whereby fixed as well as variable costs are allotted to
cost units, i.e. full costs are charged to production.
3. FORMAT OF MARGINAL COSTING
Sales
- Variable cost
---------------
Contribution
- Fixed cost
---------
Profit
4. CONTRIBUTION
Contribution = Sales - Variable cost of sales

= Fixed cost + Profit

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5. P V RATIO
P / v ratio = Contribution / sales * 100

= Change in profit / change in sale * 100
6. BREAK EVEN POINT
BEP : At break-even point, there is no profit no loss.

If actual sales level is below break-even point the company will incur loss.
If actual sales level is above break-even point the company will incur profit.
B.E.P ( in units ) = Fixed cost / contribution per unit
B.E.P ( In Rs) = Fixed cost / PV ratio
Actual Sales –B.E.P. sales = Margin of safety.

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7. CVP ANALYSIS (COST-VOLUME-PROFIT ANALYSIS):
It is the analysis of three variables, viz. cost, volume and profit _As quantity
increases VC increases but FC remains same. So total cost also increases_ As
quantity increases value of sale also increases PInitially when company sells small
quantity of units total cost is greater than sales. So it incurs loss _ As it sells more
& more quantity, sales exceeds total cost. So it makes profit _Level at which there
is no profit no loss is called as B.E.P. (break even point )
Analysis of cost-volume-profit involves consideration of the interplay of the following

factors:
(i) Volume of sales;

(ii) Selling price;
(iii) Product mix of sales;
(iv) Variable costs per unit; and
(v) Total fixed costs.
8. ANGLE OF INCIDENCE
It is angle between sales line & cost line. _ Greater is the angle of incidence, lower
is the B.E.P. smaller is the angle of incidence, more is the BEP _If the break-even
point is low and angle of incidence is large, the margin of safety is large and the
business enjoys financial stability.

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9. BREAK-EVEN POINT CAN BE DETERMINED BY THE

FOLLOWING METHODS:
1. Algebraic methods:
(i) Contribution Margin Approach
(ii) Equation technique
2. Graphic presentation:
(i) Break-even chart
(ii) Profit volume chart
10. APPLICATION OF MARGINAL COSTING TECHNIQUE:
Application of Marginal Costing Technique: Marginal cost is essentially a technique

of decision-making. It is used in following fields.
1. Fixation of selling price :
2. Decision relating to the most profitable product mix :
3. Decision relating to make or buy,
4. Shut down or continue of determination or output level in period of recession
of depression

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QUESTION 1.
The fixed cost for the year are Rs.60,000, variable cost per unit for the single product
being made is Rs.20. Selling Price per unit is Rs. 25.
Find- B.E.P. & margin of safety.Find sales required to earn a profit of Rs. 30,000.
QUESTION 2.
A Ltd. Maintains Margin of safety of 80% with an overall contribution to sales ratio of
20% its fixed costs amount to RS. 5 lakhs Calculate the following (a) Break Even
Sales (b) Total Sales (c) Total Variable Cost (d) Current Profit .
Ans :

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QUESTION 3.
A company produces single product which sells for ₹ 20 per unit. Variable cost is ` 15 per
unit and Fixed overhead for the year is ₹ 6,30,000.
Required:
(a) Calculate sales value needed to earn a profit of 10% on sales.
(b) Calculate sales price per unit to bring BEP down to 1,20,000 units.
(c) Calculate margin of safety sales if profit is ₹ 60,000.
Solution :

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QUESTION 4.
A company has fixed cost of ₹ 90,000, Sales ₹ 3,00,000 and Profit of ₹ 60,000.
Required:
(i) Sales volume if in the next period, the company suffered a loss of ₹ 30,000.
(ii) What is the margin of safety for a profit of ₹ 90,000?
Solution :
Sales 3,00,000
-variable cost
Contribution
-fixed cost 90,000
Profit 60,000
P/v ratio=contribution/sales*100
(i) If in the next period company suffered a loss of ` 30,000, then
Sales
-variable cost
Contribution
-fixed cost
Profit/loss
(ii) Margin of Safety=profit/P/v ratio

Page 9
QUESTION 5.
Following informations are available for the year 2013 and 2014 of PIX Limited:
Year 2013 2014
Sales ₹ 32, 00,000 ₹ 57, 00,000
Profit/ (Loss) (₹ 3,00,000) ₹ 7, 00,000
Calculate – (a) P/V ratio, (b) Total fixed cost, and (c) Sales required to earn a Profit of
₹ 12,00,000.

Page 10
QUESTION 6
A company sells its product at Rs. 15 per unit. In a period, if it produces and sells 8,000
units, it incurs a loss of Rs. 5 per unit. If the volume is raised to 20,000 units, it earns a profit
of Rs. 4 per unit. The break-even point of the company in rupee terms will be :
a) Rs. 1,60,000 c) Rs. 1,80,000

b) Rs. 2,00,000 d) Rs. 2,20,000
QUESTION 7
A company which has a margin of safety of Rs. 4,00,000 makes a profit of Rs. 1,00,000. If its
fixed cost is Rs. 5,00,000, then break-even sales is :
a) Rs. 20 lakhs b) Rs. 25 lakhs c) Rs. 12.5 lakhs d) Rs. 15 lakhs

Page 11
QUESTION 8
There are two similar plants under the same management The
Management desires to merge these two plants The following
Particulars are available
Details Plant-1 Plant-2
Capacity operation 100% 60%
₹ in lakh ₹in lakh
Sales 600 240
Variable cost 440 180
Fixed cost 80 40
The capacity of the merged plan to be operated for the purpose of break-even will be
(a) 45.14%
(b) 48.12%
(c) 50.76%
(d) 46.16%

Page 1
INSPIRE Academy ( 8888881719) Chapter 4 : BUDGET 4.1
4 BUDGET
1. WHAT IS BUDGET
The budget is a blue-print of the projected plan of action expressed in quantitative terms for a
specified period of time
budgetary control involves:

(a) Establishment of budgets;
(b) Continuous comparison of actual result with the previous made budget for the
achievement of targets; thereby placing the responsibility for failure; and
(c) Revision of budget in the light of changed circumstances.

Page 2
2. TYPES OF BUDGET
Budgets may be classified on the following basis:
1. Time period
2. Condition
3. Capacity
4. Coverage
budget
Time
condition capacity coverage
period
shourt
Long term Basic current fixed flexible Master functional
term

Page 3
Sales Budget
Production
Budget Material Budget
Prodction Cost
Budget
Budget
Factory
Overhead Budget
Functions Wise
Selling &
Distribution
Budget
Overhead Budget
Administration
Budget
Development
Master Budget
Financial Budget
Cash Budget
Capital
Expenditure
Budget
Fixed Budget
Capacitywise
Flexible Budget

Page 4
Functional budget
Physical Financial
Profit budget Cost budget
budget
budget
3. STEPS IN BUDGET
4. DIFFERENCE BETWEEN FIXED AND FLEXIBLE BUDGET
FIXED BUDGET FLEXIBLE BUDGET
According to CIMA of England, "a fixed i. It is defined as "a budget which by

budget is a budget designed to remain recognising the difference between fixed,
unchanged irrespective of the level of semi-variable and variable costs is designed
activity actually attained". to change in relation to the level of activity
attained".
It is also known as Rigid Budget or ii. It can be reeasted on the basis of activity
Inflexible budget. level to be achieved. Thus it is not rigid.

Page 5
It operates for one level of activity and iii. It consists of various budgets for different
under one set of conditions. levels of activity.
Variance analysis does not give useful iv. Variance analysis provides useful
information. information. BB
If the budgeted and actual activity levels v. It facilitates the ascertainment of cost,
differ significantly, then the aspects like fixation of selling price and submission of
cost ascertainment and price fixation do quotations.
not give a correct picture.
Comparison of actual performance with vi. It provides a meaningful basis of

budgeted targets will be meaningless comparison of the actual performance with
specially when there is a difference the budgeted targets.
between two activity levels.

Page 6
5. DIFFERENCE BETWEEN FUNCTIONAL AND MASTER

BUDGET
FUNCTIONAL BUDGET MASTER BUDGET
Budgets which relate to the individual It is a consolidated summary of the various

functions in an organisation are known as functional budgets.
Functional Budgets.
For example, purchase budget; sales It serves as the basis upon which budgeted
Budget; production budget; plant- P&L A/c and forecasted Balance Sheet are
utilisation budget and cash budget. built up.
6. IMPORTANT TERMS IN BUDGET
The budget manual is a written document or booklet which specifies the objectives of the
budgeting organization and procedures.
Budget Period means the period for which a budget is prepared and employed.
The budget key factor or principal budget factor is described by the CIMA London
terminology as: “a factor which will limit the activities of an undertaking and which is taken into
account in preparing budgets”.
The Master budget is “a summary of the budget schedules in capsule form made for the
purpose of presenting, in one report, the highlights of budget forecast”.
The Chartered Institute of Management Accountants, London defines flexible budget as a

budget which by recognising different cost behaviour patterns, is designed to change as
volume of output changes. It is a budget prepared in a manner so as to give the budgeted cost
for any level of activity. It is a budget which by recognising the difference between fixed, semi-
fixed and variable cost is designed to change in relation to the activity attained.
Zero base budgeting as “a method of budgeting whereby all activities are re-evaluated each
time a budget is set. Discrete levels of each activity are valued and a combination chosen to
match funds available.”

Page 7
Performance budgeting, is looked upon as a budget based on functions, activities and

projects and is linked to the budgetary system based on objective classification of expenditure.
- Performance budgeting involves evaluation of the performance of an organization in
the context of both specific as well as overall objectives of the organization.
A budget variance is the difference between the budgeted or baseline amount of expense or
revenue, and the actual amount. The budget variance is favourable when the actual revenue
is higher than the budget or when the actual expense is less than the budgeted expense.
Negative variances can be caused by an efficiency problem, utilization problem, or due to

unexpected or unavoidable occurrence whereas positive variance can provide insight why you
did so well and what processes are working for your business.
7. FORMAT PRODUCTION BUDGET
Particulars Product A Product B Product C
Sales Qty XXX XXX Xxx
Add: Closing Stock of Finished Goods XXX XXX xxx
Lass: Opening Stock of Finished Goods XXX XXX xxx
Production XXX XXX Xxx
8. FORMAT PURCHASE BUDGET
Particulars RM "X" RM "Y" RM "Y"
RM Consumption Qty XXX XXX XXX
Add: Closing Stock of RM XXX XXX XXX
Less: Opening Stock of RM XXX XXX XXX
Purchase XXX XXX XXX

Page 8
QUESTION 1
Particulars 60% 80%
Output (in units) 12,000 16,000
Costs: Rs. Rs.
Material 1,20,000 1,60,000
Labour 30,000 40,000
Factory Overhead 50,000 66,000
Factory Cost 2,00,000 2,66,000
Find factory cost at capacity level of 90%.

a) 2,50,000 b) 2,99,000 c) 3,05,000 d) none

Page 9
QUESTION 2
Administration overhead at 50% capacity is 40,000, and 90% capacity is 50,000, fixed
overhead is :
(a) 40,000 (b) 12,500
(c) 50,000 (d) None of these
QUESTION 3
The following are the estimated sales of a company for eight months ending 30.11.1998 :
Months Estimated Sales (units)
April 98 15,000
May 98 18,000
June 98 12,000
July 98 18,000
August 98 9,000
As a matter of policy, the company maintains the closing balance of finished goods
and raw materials as follows :
Stock item Closing balance of a month
Finished goods 2/3 rd of the estimated sales for the next

month
Raw materials 50 % of Estimated consumption for the next

month.
Every unit of production requires 2 Kg. of raw material costing Rs. 5 per Kg.
Page 10
Prepare Production Budget [in units] and Raw Material Purchase Budget (in units and
cost) and answer the Q.
✓ Find number of units produced in the month of June.

a) 16000 b) 12000 c) 18000 d) none
✓ Find total number of units produced in first 4 months.

a) 60000 b) 56000 c) 59000 d) none
✓ Find number of units purchased in the month of april.

a) 31000 b) 28000 c) 34000 d) none
QUESTION 4
An organisation sold 4000 units and have closing finished goods 3500 units and opening
finished goods units were 1000.The quantity of units produced would be:
a. 7500 units
b. 6500 units
c. 4500 units
d. 8500 units

Page 11
QUESTION 5
The budgeted sales for the next four quarters are Rs. 1,92,000, Rs. 2,88,000; Rs. 2,88,000 &
Rs. 3,36,000; respectively. It is estimated that sales will be paid for as follows : 75% of the
total will be paid in the quarter that the sales were made. Of the balance 50% will be paid in
the quarter after the sale was made. The remaining 50% will be paid in the quarter after
this. The amount of cash received in quarter 3 will be ………………………..
a) Rs. 2,76,000 c) Rs. 3,24,000

b) Rs. 1,44,000 d) Rs. 2,40,000

Page 1
INSPIRE Academy ( 888888 1719) Chapter 5 : CASHFLOW STATEMENT .1
2
5 CASHFLOW
MATERIAL
STATEMENT
Basic Proforma of cash flow statement :
1. FORMAT OF CASHSLOW
Particulars Rs. Rs.
A] Cash flow from operating activity
B] Cash flow from investment activity
C] Cash flow from Financial Activity

--------------------------------------------------
D] Net Increase in cash or cash
equivalent (A + B + C)
E] Opening Cash balance

---------------------------------------------------
F] Closing Cash balance (D + E)
❖ Methods of calculating operating cash flow :
There are two methods of calculating operating cash flow :
1. Direct method
2. Indirect method

Page 2
2. DIRECT METHOD
❖ DIRECT METHOD:
THIS METHOD IS APPLICABLE WHEN INCOME STATEMENT OR P & L IS

GIVEN.
PARTICULARS RS. RS.
CASH FLOW FROM OPERATING ACTIVITY :
CASH RECEIVED FROM CUSTOMERS
LESS : CASH PAID TO SUPPLIER
LESS : CASH PAID TO EMPLOYEE
LESS : CASH PAID FOR OTHER OPERATING

EXPENSES
_______________________________
CASH GENERATED FROM OPERATIONS
LESS : TAX PAID

________________________________
CASH FLOW FROM OPERATING ACTIVITY
• IMPORTANT WORKING NOTES FOR DIRECT METHOD :
( WORDS IN BOLD WRITING REPRESENT BALANCE FIGURES WHICH MAY

BE WRITTEN IN CASH FLOW STATEMENT)
1. TO FIND CASH RECEIVED FROM CUSTOMERS:
DEBTORS A/C
TO BAL B/D (OPENING ) BY CASH RECEIVED FROM

CUSTOMERS
TO SALES BY BAL C/D ( CLOSING )
2. TO FINDCASH PAID TO SUPPLIERS

STOCK ACCOUNT
TO BAL B/D BY COGS (COST OF
SALES)
TO PURCHASES BY BAL C/D
CREDITORS

Page 3
TO CASH PAID TO BY BAL B/D

SUPPLIERS
TO BAL C/D BY PURCHASE
3. TO FIND CASH PAID TO EMPLOYEE (OR CASH PAID FOR OTHER

EXPENSES) :
A. IF OUTSTANDING SALARY (OR EXPENSES) ARE GIVEN :
O/S SALARY (OR EXPENSE) A /C
TO CASH PAID TO BY BAL B/D

EMPLOYEE (OR FOR
OTHER EXPENSES)
TO BAL C/D BY P & L A/C
( CURRENT YEAR SALARY
OR EXPENSES )
B. IF
ADVANCE SALARY OR EXPENSES ARE GIVEN :
ADVANCE SALARY (OR EXPENSE) A /C
TO BAL B/D BY P & L A/C ( CURRENT

YEAR SALARY OR
EXPENSES
TO CASH PAID TO By bal c/d
EMPLOYEE (OR FOR
OTHER EXPENSES)
4. TO FIND TAX PAID :
PROVISION FOR TAXATION A/C ORTAX PAYABLE

ACCOUNT
TO TAX PAID BY BAL B/D

TO BAL C/D BY P & L A/C (CURRENT
YEAR TAX )
5. FOR PURCHASE & SALE OF ASSET
Assets A/c
To bal b/d By depreciation a/c
To profit on sale (P & L a/c By loss on sale ( P & L a/c)

)
Page 4
To Purchase By sale
By bal c/d
Depreciation
To depreciation on By bal b/d

assets sold (asset
account)
To bal c/d By current year depreciation (P & L

a/c
6. TO FIND DIVIDED PAID :
To dividend paid By bal b/d
To bal c/d By profit & loss appropriation a/c

( current year dividend )
• ITEMS WHICH SHOULD NOT BE CONSIDERED WHILE USING DIRECT

METHOD :
A. PRELIMINARY EXPENSES
B. P & L APPROPRIATION A/C OR RESERVE & SURPLUS
C. GENERAL RESERVE

Page 5
INDIRECT METHOD
❖ Indirect Method :
Particulars Rs Rs
. .
Net profit before tax& dividend
Add : Changes for non cash& non - operating

items
( adjustment for P & L a/c)
________________________________________
_
Net operating profit before working capital
changes
Add :Changes for working capital

___________________________________
______
Cash generated from operations
Less : Tax paid
________________________________________
Cash flow from operating activity
Note :
a. Changes for non-cash & non-operating items :
It normally includes those figures which affect P & L a/c.
Normally it includes :
Depreciation on asset( +)
Profit on sale of asset / investment ( -)

Page 6
Loss on sale of asset/ investment ( + )
Preliminary expenses written off ( +)
Goodwill written off ( +)
Interest expenses if any ( +)
Interest income if any ( - )
Amortization on capital asset ( + )
Amortization on capital fund ( -)
Foreign exchange loss ( + )
b. Changes for working capital :
Increase in current asset( -)
Decrease in current asset ( +)

Increase in current liability ( + )
Decrease in current liability ( -)
Following items should not be considered in changes for working capital

:
Provision for taxation
Provision for dividend
Preliminary expenses
Provision for depreciation

Page 7
❖ Working notes for Indirect Method :
1. To find Net Profit before tax

P & l appropriation account
To Provision for tax By bal b/d
To provision for dividend By net profit before tax &
dividend
To General Reserve
To bal c/d
2. To find tax paid

To tax paid By bal b/d
To bal c/d By profit & loss
appropriation a/c
3. To find divided paid

To dividend paid By bal b/d
To bal c/d By profit & loss
appropriation a/c
4. For purchase & sale of asset

Assets Account
To bal b/d By depreciation a/c
To profit on sale By loss on sale
To Purchase By sale
By bal c/d
Depreciation
To depreciation on By bal b/d

assets sold (asset
account)
To bal c/d By current year
depreciation (P & L a/c [this
amount should be taken at
non – cash items place )

Page 8
1. Extracts of cash flow statement prepared by Z Ltd. are as follows :

Cash generated from operation is Rs. 5,41,000. Income tax paid Rs. 1,80,000.
Sale of fixed assets Rs. 50,000. Voluntary separation payment paid Rs. 80,000 and Law
compensation suit received is Rs. 1,25,000.
Cash flow from operating activities = ?
a) Rs. 4,06,000 c) Rs. 5,36,000
b) Rs. 3,56,000 d) Rs. 4,16,000.
2. Accounts of S Ltd. shows that balance of cash and cash equivalents has been increase by
Rs. 19,200 as compared to last year. If cash flow statement revels net cash inflow from
financing activities is Rs. 19,200 and cash outflow from investing activities is Rs.
4,80,000.
Cash from operating activities = ?
a) Rs. 5,18,400 c) Rs. 4,60,800
b) Rs. 4,99,200 d) Rs. 4,80,000
3. Cash flow statement of BB Ltd. shows the following position :

Cash inflows from operating activities Rs. 4,06,000, Cash outflow from investing
activities Rs. 3,18,000 and Cash outflows from financing activities Rs. 18,000. Cash &
cash equivalent at the end was Rs. 1,35,000.
Cash & cash equivalent at the beginning = ?
a) Rs. 6,07,000 c) Rs. 5,71,000
b) Rs. 29,000 d) Rs. 65,000

Page 9
4. Net profit before working capital changes of N Ltd. is Rs. 3,52,000. Changes in working
capital during the year is as follows :
Rs.
Decrease in stock 2,68,800
Decrease in creditors 9,600
Increase in debtors 28,800
Increase in advances 1,920
Increase in outstanding exp. 38,400
Cash generated from operation = ?

a) Rs. 5,61,280 c) Rs. 1,47,720
b) Rs. 6,18,880 d) Rs. 5,61,280
5. From the following details calculate the cash flow from operating activities.
31.12.2014 31.12.2015
Creditors 95,000 1,10,000
Bills payable 70,000 50,000
Outstanding expenses 75,000 1,00,000
Provision for tax 1,80,000 1,70,000
Proposed dividend 60,000 72,000
Sundry debtors 2,85,000 2,65,000

Page 10
Bills receivable 1,02,000 1,10,000

Stock 1,20,000 1,50,000
Net profit before working capital changes is Rs. 5,39,000. Cash flow from operation =
?
a) Rs. 5,41,000 c) 3,41,000
b) Rs. 3,61,000 d) 3,99,000
6. From the following details calculate the cash generated from operations.
Net profit before working capital changes is Rs. 3,051 lakhs. Net increase in current
assets was Rs. 3,205 lakhs, while there is net increase in current liabilities by Rs. 9
lakhs.
a) + Rs. 6,247 lakhs
b) – Rs. 145 lakhs
c) + Rs. 6,256 lakhs
d) – Rs. 6,265 lakhs
7. N Ltd. provides following information :

Net income 1,00,000
Accounts receivable increased 9,000

Page 11
Prepaid insurance decreased 3,000

Depreciation expenses 15,000
Gain on sale of land 2,000
Wages payable decreased 7,000
Outstanding expenses increased 11,000

a) Rs. 89,000 c) Rs. 1,25,000
b) Rs. 1,15,000 d) Rs. 1,11,000
8. S. Ltd. provides following information :

Net income 3,00,000
Accounts receivable increased 24,000
Prepaid insurance decreased 10,000
Depreciation expenses 35,000
Gain on sale of land 11,000
Wages payable decreased 21,000
Outstanding expenses increased 44,000

a) Rs. 2,59,000 c) Rs. 3,47,000
b) Rs. 3,27,000 d) Rs. 3,81,000

Page 12
62. From the following transactions list, determine net cash from investing activities.
Purchase of fixed assets Rs. 120,000
Sale value of fixed assets Rs. 66,500
Workmen compensation payments Rs. 125,000
Inter company deposits made with other Rs. 90,000

companies.
Dividend received on shares held in subsidiary Rs. 120,000
a) Rs. (148,500) c) Rs. 23,500

b) Rs. (23,500) d) None of the above.
63. Following is the summary provided by Shared Ltd. :

Cash and cash equivalents at the beginning of the Rs. 25,00,000
period
Cash and cash equivalents at the end of the period Rs. 32,50,000
Net cash from investing activities Rs. 15,50,000
Net cash from financing activities Rs. (850,000)
Compute Net cash from Operating Activities.

a) Rs. 50,000 c) Rs. 100,000
b) Rs. (50,000) d) Rs. (100,000)

Page 1
INSPIRE Academy ( 888888 1719) Chapter 6 : ACTIVITY BASED COSTING 6.1
2
6 ACTIVITY
MATERIAL
BASED COSTING
1. MEANING
o Activity Based Costing is an accounting methodology that assigns costs to

activities rather than products or services.
o This enables resources and overhead Costs to be more accurately assigned to
products and services that consume them.
o ABC assigns cost to activities based on their use of resources and then
assign cost to the cost Objects.
o It can track the flow of activities in Organization by Creating a link between the
activity and the cost object.
o According to CIMA, it is defined as “Cost attribution to cost units on the basis of
benefits received form indirect activities ie ordering, Setting- up, assuring quality
etc,”

Page 2
2. DEFINITIONS
TERM MEANING
Cost o An item for which Cost measurement is required is called Cost object.
Object o e.g. Product, Customer, Job, Assignment, etc.
Cost Driver o A Factor that causes a change in the cost of an activity is called cost
driver
o It can be classified into two types;
1. Resource Cost Driver
2. Activity Cost Driver
e.g.
Business Functions Cost Driver
Research and i) Number of Research Products

Development or
ii) Personnel hours on a project or
iii) Technical complexities of
projects
Customer Service i) Number of service calls or

ii) Number of Products serviced or
iii) Hours spent on servicing
products
Designing i) Number of product designed

ii) Number of engineering hours
Distribution i) Number of items distributed

ii) Number of Customers
Marketing i) Number of advertisement run

ii) Number of sales personnel
Resource o It is a measure of the quantity of resources consumed by an activity.

Cost Driver o It is used to assign the cost of a resource to an activity or cost pool.
Activity o It is a measure of the frequency and intensity of demand, placed on

Cost Driver activities by cost objects.
o It is used to assign activity costs to cost objects.

Page 3
3. NEED FOR ABC
o Production Overheads are high in relation to direct costs .

o There is a great diversity in the product range.
o Products Used different amounts of overhead resources.
o Consumption of overhead resources is not primarily driven by volume or hours.
4. STEPS INVOLVED IN ACTIVITY BASED COSTING
1. Identification of various activities in the organization

• E.g purchasing, Production process set up, Material handling, Quality
Control, Maintenance etc.
1. Classification of activities into Primary activities and Supporting activities
2. Compute Cost Pool of each activity (cost pool = Total cost)
3. Transfer the Supporting activities cost to Primary activities on suitable basis
4. Determine Activity Cost Driver for each activity
5. Compute Activity Cost Driver Rate
Cost Pool
• Activity CostDriver Rate = Cost Driver
6. Assign costs to cost object Based on the cost driver rate (i.e.
Resources Consumed × Activity Cost Driver Rate )

Page 4
5. TRADITIONAL ABSORPTION COSTING VS. ABC
Traditional Absorption Costing Activity Based Costing
In this system, overheads are related to In this system, overheads are related to
cost center activities
Costs are assigned to Cost Units, ie. To Costs are assigned to Cost Objectives, ie
Products, or jobs customers,
Only two levels of activities are identified All four levels of activities are identified, Viz.
in this system: a) Unit Level Activities,
a) Unit Level Activities (Variable) b) Batch Level Activities,
and c) Product Level Activities and
b) Facility Level Activities (Fixed) d) Facility Level Activities.
Time is assumed as the only factor Activity wise Cost Drivers are identified.
governing cost in all cost centers. Time is one of Cost Driver.
Usage of Recovery rate may be either:- Specific Activity wise recovery rates are
1. Multiple rates (for each used. There is no “Single” or “overall” ABC

department) or Rate .
2. Single rate (for the entire factory).

Page 5
CONCEPT 1
Classify the following items under appropriate type of activities in Activity Based Costing;
a) Maintenance of Buildings
b) Use of indirect materials
c) Material ordering
d) Indirect Consumables
e) Inspection of products – like first item of every batch
f) Producing parts to a certain specification
g) Advertising costs, if advertisement is for individual products
Answer:
Item Types of Activity
a) Maintenance of buildings Facility level
b) Use of indirect Materials Unit level activities
a) Material ordering Batch level activities
b) Indirect consumables Unit level activities
c) Inspection of products – like first item of every Batch level activities

batch
d) Producing parts to a certain specification Product level
e) Advertising Costs, if advertisement is for Product level

individual Products
f) Production manager’s salaries Facility level
g) Advertising campaigns promoting the company Facility level

Page 6
CONCEPT 2
Indicate any two activity Cost drivers in respect of each of the following activity cost pools:
1) Manufacturing Cost
2) Human resources Cost
3) Marketing and Sales Costs
4) Accounting Costs
Activity Cost Pools Cost Driver
Manufacturing Cost • Number of machine hours

• Number of direct labour hours
• Number of machine setups
• Number of purchase orders
Human resources Cost • Number of employee

• Number of training Hours
• Number of recruiting contacts
Marketing and Sales Costs • Number of Customer Service

contacts
• Number of orders processed
• Number of advertisement
• Number of Sales Personnel
Accounting Costs • Number of billings

• Number of Cash receipts

Page 7
1. A company produces three products A, B, and C, with standard costs and

quantities per unit are as follows :
Products A B C
Quantity produced 10,000 20,000 30,000
Direct material per unit (Rs.) 50 40 30
Direct labour per units (Rs.) 30 40 50
Labour hours required per unit 3 4 5
Machine hours required per 4 4 7
unit
Number of purchase 1,200 1,800 2,000
requisitions
Number of set ups 240 260 300
Production overhead split by activity :

Receiving / inspecting = Rs. 14 lakhs
Production scheduling/ machine set up = Rs. 12 lakhs
Number of batches received / inspected = 5,000; Number of batches for
scheduling and set-up = 8000.
Required :
a) Prepare product cost statement under activating based costing
method.

Page 8
1. The following tasks are associated with an activity based costing system :
(1) Calculation of cost application rates
(2) Identification of cost drivers
(3) Assignment of cost to products
(4) Identification of cost pools
Which of the following choices correctly expresses the proper order of

the preceding tasks ?
a) (1), (2), (3), (4),

b) (4), (2), (1), (3),
c) (4), (2), (3), (1),
d) (2), (4), (1), (3).
2. ……………………. an item for which cost measurement is required e.g.

product, job or a customer :
Page 9
a) Cost Pool,
b) Cost Driver
c) Cost Absorption
d) Cost Object.
3. In an ABC system, the allocation bases that are used for applying costs to
services or procedure are called ………………….
a) Cost Pool c) Cost Absorption
b) Cost Driver d) Cost Object.
4. Which of the following tasks is not normally associated with an activity

based costing system?
a) Calculation of cost application rates
b) Identification of cost pools
c) Preparation of allocation matrices
d) Identification of cost drivers.
5. Which of the following is not a broad, cost classification category typically

used in activity based costing?
a) Facility Level
b) Product Level
c) Organizational Level
d) Management Level.
6. In an activity-based costing system, direct materials used would typically

be classified as a …………………….
a) Unit Level Cost.
b) Batch Level Cost
c) Product Level Cost
d) Facility Level Cost.
7. Which of the following is least likely to be classified as a batch level activity

in an activity based costing system?
a) Quality assurance,
b) Receiving and inspection
c) Property taxes,
d) Production set up.
8. The salaries of a manufacturing plan’s management are said to arise from

…………….
a) Unit Level Activities
b) Batch Level Activities
c) Product Sustaining Activities
Page 10
d) Facility Level Activities.
9. Of the following organizations, activity based costing can be used by

……………..
a) Manufacturers
b) Financial services firms
c) Book publishers
d) All of the above.
10. Performing periodic maintenance on general use equipment is an

example of a__________
(a)Facility level activity (b)Production facility

cost
(c)Customer profitability (d)none of the above
11. Cost driver is type of___________
(a) Pure Volume (b) Weighted volume
(c) Situational (d) All of these
12. Activity based costing is a ___________
(a) Costing system (b) Accounting system
(c) Management system (d) None of the above
13.Activity cost driver rate:
a) Total cost of activity cost driver

b) Total unit level cost Activity cost driver
c) Total cost driver Activity cost driver
d) None of the above
14. Objectives of activity based costing are:
(a) To improve product costing

(b) To identify non-value adding activities in the production process
(c) To reduce the frivolous use of common resource
(d) All of these
15.Terminology of ABC are:
(a) Cost driver (b) Batch level cost

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(c) Cost pool (d) All of the above

CHAPTER 7
Cost Accounting Records & Cost Audit under Companies Act 2013
Rule 1: When the Cost Records and Audit Rules came into force
• They shall come into force from the date of their publication in the Official
Gazette issued on 30.06.2014.
Rule 2: Definition
• Act- means the Companies Act, 2013 (18 of 2013)
• Central Excise Tariff Act Heading- It means the heading as referred to
in the Additional Notes in the First Schedule to the Central Excise Tariff
Act, 1985 [5 of 1986];
• Cost Accountant in practice- It means a cost accountant as defined in
clause (b) of sub-section (1) of Section 2 of the Cost and Works
Accountants Act, 1959 (23 of 1959), who holds a valid certificate of
practice under Sub-section (1) of Section 6 of that Act and who is deemed
to be in practice under Sub- Section (2) of Section 2 thereof, and includes
a firm or limited liability partnership of cost accountants
• Cost Auditor- means a Cost Accountant in practice, as defined in clause
(b), who is appointed by the Board
• Cost Audit Report- means the duly signed Cost Auditor’s report on the
cost records examined and cost statements which are prepared as per
these rules, including attachment, annexure, qualifications or observations
attached with or included in such report
• Cost Records- means books of account relating to utilization of
materials, labour and other items of cost as applicable to the production of
goods or provision of services as provided in Section 148 of the Act and
these rules;
• Form- means a form annexed to these rules
• Institute- means the Institute of Cost Accountants of India constituted
under the Cost and Works Accountants Act, 1959 (23 of 1959)
• All other words and expressions used in these rules but not defined, and
defined in the Act or in the Companies (Specification of Definition Details)
Rules, 2014 shall have the same meanings as assigned to them in the Act
or in the said rules.
What does cost records means -
As per Rule 2(e) the Companies (Cost Records and Audit) Rules, 2014, “Cost
Records” means books of account relating to utilization of materials, labour and
other items of cost as applicable to the production of goods or provision of
services under the provisions of Section 148 of the Act.
Who is liable to get cost records audited-
Every company specified in item (A) of rule 3 shall get its cost records audited in
accordance with these rules if the overall annual turnover of the company from
all its products and services during the immediately preceding financial year is
rupees fifty crore or more as the aggregate turnover of the individual.
CHAPTER 7
Rule 3: Explain who is liable to maintain cost records as per sec 148 of
the act
For the purposes of Sub-Section (1) of Section 148 of the Act, the class of
companies, including foreign companies defined in clause (42) of Section 2 of
the Act, engaged in the production of the goods or in rendering services, having
an overall turnover from all its products and services of rupees thirty five crore
or more during the immediately preceding financial year, shall include cost
records for such products or services in their books of account.
Applicability for maintenance of Cost Records
Domestic or Foreign Company
Listed in Table of Rule 3
Regulated & Non-Regulated Sector
Engaged in Production of Goods or Providing Services
Overall Turnover from all of its Products & Services>=Rs.35 Crore (Preceding
Financial Year)
Companies engaged in the Production of following Goods or providing following Services:

(A) Companies Engaged in Strategic Sectors
• Machinery, mechanical appliances used in defence, space and atomic
energy sectors such as: (A) Nuclear reactors; fuel elements (cartridges),
non-irradiated, for nuclear reactors; machinery and apparatus for isotopic
separation (B) Steam or other vapour generating boilers (other than
central heating hot water boilers capable also of producing low pressure
steam); super -heated water boilers (C) aircraft, spacecraft and parts
thereof ( D) ships, boats and floating structures
• Turbo jets and turbo propellers
• Arms and ammunition
• Propellant powders; prepared explosives, (other than propellant
powders); safety fuses; detonating fuses; percussion or detonating caps;
igniters; electric detonators
• Radar apparatus, radio navigational aid apparatus and radio remote
control apparatus
• Tanks and other amoured fighting vehicles, motorized, whether or not
fitted with weapons and parts of such vehicles that are funded
(investment made in the company) to the extent of 90% or more by the
Government or Government Agencies
(B) Companies Engaged in an Industry Regulated by a Sectoral Regulator or a
Ministry of Department of Central Government
• Port services of stevedoring, pilotage, hauling, mooring, remooring,
CHAPTER 7
hooking, measuring, loading and unloading services rendered by a Port in

relation to a vessel or goods regulated by the Tariff Authority for Major
Ports under Section 111 of the Major Port Trusts Act, 1963
• Aeronautical services of air traffic management, aircraft operations,
ground safety services, ground handling, cargo facilities and supplying
fuel, etc., rendered by airports and regulated by Airports Economic
Regulatory Authority (“AERA” aeronautical) under the Airports Economic
Regulatory Authority of India Act, 2008
• Telecommunication services made available to users by means of any
transmission or reception of signs, signals, writing, images and sounds or
intelligence of any nature (other than broadcasting services) and
regulated by the Telecom Regulatory Authority of India (“TRAI”) under the
Telecom Regulatory Authority of India Act, 1997
• Generation, transmission, distribution and supply of electricity regulated
by the Central Electricity Regulatory Commission (CERC) under The
Electricity Act, 2003, other than for captive generation (as defined under
The Electricity Rules)
• Roads and other infrastructure projects that are recipients of concessions
• Active pharmaceutical ingredients or bulk drugs & formulations
• Fertilizers under administered price mechanism (urea) or subsidized
• Sugar and industrial alcohol
• Petroleum products under administered price mechanism (Diesel, PDS
Kerosene, Domestic LPG and Cooking Gas) or subsidized
(C) Other Companies
• Railway or Tramway locomotives, rolling stock, railway or tramway
fixtures and fittings, mechanical (including electro mechanical) traffic
signaling equipment’s of all kind
• Mineral products
• Ores
• Mineral Fuels, mineral oils;
• Base metals;
• Inorganic chemicals, organic or inorganic compounds of precious metals,
of rare-earth metals, of radioactive elements or isotopes;
• Aircraft, spacecraft that are funded (investment made in the company) to
the extent of 90% or more by the Government or Government Agencies;
• Vehicles, aircraft, vessels and associated transport equipment, that are
funded (investment made in the company) to the extent of 90% or more
by the Government or Government Agencies;
• Jute and Jute Products;
• Edible Oil under Administrative Price Mechanism;
• Construction Industry where there is any government concession or grant
in any form;
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• Provision of healthcare services including check-up and preventive

services, diagnostic services, disease management and patient care
services including in corporate hospitals.
RULE 4: Who is liable to get cost records audited maintained as per rule
3 of Sec 148
• Every company specified in item (A) of rule 3 shall get its cost records
audited in accordance with these rules if the overall annual turnover of the
company from all its products and services during the immediately
preceding financial year is rupees fifty crore or more and the aggregate
turnover of the individual product or products or service or services for
which cost records are required to be maintained under rule 3 is rupees
twenty five crore or more.
• Every company specified in item (B) of rule 3 shall get its cost records
audited in accordance with these rules if the overall annual turnover of the
company from all its products and services during the immediately
preceding financial year is rupees one hundred crore or more and the
aggregate turnover of the individual product or products or service or
services for which cost records are required to be maintained under rule 3
is rupees thirty five crore or more.
Explain which companies are not liable to get his records audited as per rule 4 of
this act
The requirement for cost audit under these rules shall not apply to a company
which is covered in rule 3 and
(i) Whose revenue from exports, in foreign exchange, exceeds seventy five
per cent of its total revenue or
(ii) Which is operating from a special economic zone
(iii) Which is engaged in generation of electricity for captive consumption
through Captive Generating Plant. For this purpose, the term “Captive
Generating Plant” shall have the same meaning as assigned in rule 3 of
the Electricity Rules 2005. Even for regulated sectors like
Telecommunication, Electricity, Petroleum and Gas, Drugs and Pharma,
Fertilizers and Sugar cost audit requirement has been made subject to a
turnover based threshold of ₹ 50 crores for all product and services and ₹
25 crores for individual product or services. For non-regulated sector the
threshold is ₹ 100 crores and ₹ 35 crores, respectively.
Rule 4: Diagrammatic Representation

CHAPTER 7
Applicability of
Cost Audit
Non-regulatory
Sector (B)
Overall
Annual Overall
Turnove If If Annual
r during evenu Revenu If Turnov
If
e from e from er
ly operati
Export Export during
precedin ng
(Foreig (Foreig from Immedi
g from
n n Special ately
financial Special
Exchan xchan Econo Precedi
year Econo
ge ge)>= mic ng
mic
)>=75 75% of Zone Financi
Zone
% of total (SEZ) al year
(SEZ)
total >=100
crore
Aggregat
e
Aggregate turnover
turnover of of the
the individual
individual product
product or or
products products
or service or service
or or
services>
=25 crore crore
CHAPTER 7
Rule 5: Maintenance of Cost Records

• Every company under these rules including all units and branches thereof
shall in respect of each of its financial year commencing on or after the
1st day of April, 2014, will maintain cost records in form CRA-1. Provided
that company is covered in serial number 12 and serial numbers 24 to 32
of item (B) of rule 3, the requirement under this rule shall apply in respect
of each of its financial year commencing on or after 1st day of April, 2015.
• The cost records referred to in the sub-rule (1) shall be maintained on
regular basis in such a manner as to facilitate calculation of per unit cost
of production or cost of operations, cost of sales and margin for each of its
products and activities for every financial year on monthly or quarterly or
half yearly or annual basis.
• The cost records shall be maintained in such a manner so as to enable the
company to exercise, as far as possible, control over the various
operations and costs to achieve optimum economies in utilization of
resources and these records shall also provide necessary data which is
required to be furnished under these rules.
Rule 6: Cost Audit
(1) The category of companies specified in rule 3 and the thresholds limits laid
down in rule 4, shall within one hundred and eighty days of the commencement
of every financial year, appoint a cost auditor.
Provided that before such an appointment is made, the written consent of the
cost auditor, and a certificate from him, as provided in sub-rule (1A), shall be
obtained
(1A) the cost auditor appointed under the sub-rule (1) shall submit a certificate
that—
(a) the individual or the firm, as the case may be, is eligible for appointment
and is not disqualified for appointment under the Act, the Cost and Works
Accountants Act, 1959 (23 of 1959) and the rules or regulations made
thereunder;
(b) the individual or the firm, as the case may be, satisfies the criteria
provided in Section 141 of the Act, so far as may be applicable;
(c) The proposed appointment is within the limits laid down by or under the
authority of the Act; and
(d) The list of proceedings against the Cost Auditor or audit firm or any
partner of the audit firm pending with respect to professional matters of
conduct, as disclosed in the certificate, is true and correct.”
(2) Every company referred to in the sub-rule (1) shall inform the cost auditor
concerned of his appointment as such and file a notice of such appointment with
the Central Government within a period of thirty days of the Board meeting in
which such appointment is made, or within a period of one hundred and eighty
days of the commencement of the financial year, whichever is earlier, through
electronic mode, in form CRA-2, along with the fee as specified in Companies
(Registration Offices and Fees) Rules, 2014.
(3) Every cost auditor appointed as such shall continue in such capacity till the
expiry of one hundred and eighty days from the closure of the financial year or
CHAPTER 7
till he submits the cost audit report, for the financial year for which he has been
appointed.
Provided that the cost auditor appointed under these rules may be removed
from his office before the expiry of his term, through a Board resolution after
giving a reasonable opportunity of being heard to the Cost Auditor and recording
the reasons for such removal in writing;
Provided further that the Form CRA-2 to be filed with the Central Government
for intimating appointment of another Cost Auditor shall enclose the relevant
Board Resolution to the effect;
Provided also that nothing contained in this sub-rule shall prejudice the right of
the cost auditor to resign from such office of the company.
(3A) Any casual vacancy in the office of a Cost Auditor, whether due to
resignation, death or removal, shall be filled by the Board of Directors within
thirty days of the occurrence of such vacancy and the company shall inform the
Central Government in Form CRA-2 within thirty days of such appointment of
cost auditor.
(3B) The cost statements, including other statements to be annexed to the cost
audit report, shall be approved by the Board of Directors before they are signed
on behalf of the Board by any of the director authorized by the Board, for
submission to the Cost Auditor to report thereon.
(4) Every Cost Auditor, who conducts an audit of the cost records of a company,
shall submit the cost audit report along with his or its reservations or
qualifications or observations or suggestions, if any, in form CRA-3.
(5) Every Cost Auditor shall forward his duly signed report to the Board of
Directors of the company within a period of one hundred and eighty days from
the closure of the financial year to which the report relates and the Board of
Directors shall consider and examine such report, particularly any reservation or
qualification contained therein.
(6) Every company covered under these rules shall, within a period of thirty days
from the date of receipt of a copy of the cost audit report, furnish the Central
Government with such report along with full information and explanation on
every reservation or qualification contained therein, in Form CRA-4 in Extensible
Business Reporting Language (XBRL) format in the manner as specified in the
Companies (Filing of Documents and Forms in Extensible Business Reporting
language) Rules, 2015 along with fees specified in the Companies (Registration
Offices and Fees) Rules, 2014.
CHAPTER 7
Rule 6: Diagrammatic Representation
-(Appointment within 180 days of the

commencement of Financial Year)
The company shall inform

the Cost Auditor concerned Whichever is earlier
of his or its appointment
File a notice of such File a notice of such

appointment with a CG appointment with a CG
within a period of 30 days within a period of 180
of Board meeting in which days from the
commencement of the
such appointment is Financial year
made.
Auditor shall continue in office till the expiry of 180 days from the closure
of Financial year or till he submit the report
Casual vacancy can be filled by

BOD within 30 days
Inform the CG in CRA-2 within 30

days of such
appointment
Company within 30 days from the date of receipt of a

copy of Cost Audit Report furnished to the
CG in CRA-4
Purpose of Cost Audit

The primary purpose of Cost Audit is to express an opinion on the cost accounts
CHAPTER 7
of the company whether these have been properly maintained and compiled
according to the cost accounting system followed by the enterprise or not.
However, the purposes of Cost Audit may be segregated into general and social
objectives.
The general objectives can be described to include the following:
(1) Verification of cost accounts with a view to ascertaining that these have been
properly maintained and compiled according to the cost accounting system
followed by the enterprise.
(2) Ensuring that the prescribed procedures of cost accounting records rules are
duly adhered to.
(3) Detection of errors and fraud.
(4) Verification of the cost of each “cost unit” and “cost centre” to ensure that
these have been properly ascertained.
(5) Determination of inventory valuation.
(6) Facilitating the fixation of prices of goods and services.
(7) Periodical reconciliation between cost accounts and financial accounts.
(8) Ensuring optimum utilization of human, physical and financial resources of
the enterprise.
(9) Detection and correction of abnormal loss.
(10) Inculcation of cost consciousness.
(11) Advising management, on the basis of inter firm comparison of cost records,
as regards the areas where performance calls for improvement.
(12) Promoting corporate governance through various operational disclosures.
Social Purposes of Cost Audit

The following deserve special mention:
1. Facilitate in fixation of reasonable prices of goods and services produced
by the enterprise.
2. Improvement in productivity of human, physical and financial resources of
the enterprise.
3. Channelize enterprise resources to most optimum, productive and
profitable areas.
4. Availability of audited cost data as regards contracts containing escalation
clauses.
5. Facilitate in settlement of bills in the case of cost-plus contracts entered
into by the Government.
6. Pinpointing areas of inefficiency and mismanagement, ifanyfor the benefit
of shareholders, consumers, etc., such that necessary corrective action
could be taken in time.
CRA-1: Forms in which cost records shall be maintained
The form CRA-1 prescribes the form in which cost records shall be maintained.
CHAPTER 7
The form categorizes the requirement of maintaining proper details as per 30

headings. The headings are as follows:
(1) Material Cost
(2) Employee Cost
(3) Utilities
(4) Direct Expenses
(5) Repair and Maintenance
(6) Fixed Assets and Depreciation
(7) Overheads
(8) Administrative Overheads
(9) Transportation Cost
(10) Royalty and Technical Know-how
(11) Research and Development expenses
(12) Quality Control Expenses
(13) Pollution Control Expenses
(14) Service Department Expenses
(15) Packing Expenses
(16) Interest and Financing Charges
(17) Any other item of Cost
(18) Capacity Determination
(19) Work-in-progress and finished stock
(20) Captive Consumption
(21) By - Products and Joint Products
(22) Adjustment of Cost Variances
(23) Reconciliation of Cost and Financial Accounts
(24) Related Party Transactions
(25) Expenses or Incentives on Exports
(26) Production records
(27) Sales records
(28) Cost Statements
(29) Statistical Records
(30) Records of Physical Verification.
CRA-2: Forms of Intimation of appointment of Cost Auditor by the

company to Central Government
(1) Corporate Identity Number (CIN) or Foreign Company Registration Number
(FCRN) of the company
CHAPTER 7
(2) General Information

(3) Product(s)/Service(s) to which Cost Audit relates
(4) Details of all the Cost Auditor(s) appointed
(5) Financial year to be covered under the Cost Audit
(6) Details of previous Cost Auditor which has not been reappointed
(7) Attachments
- Copy of the Board resolution of the company
- Optional attachment - if any
CRA-3: Form of Cost Audit Report
Clause (vii) has been added to auditor’s report as under:
Detailed unit wise and product/service wise cost statements and schedules
thereto In respect of the product/ services under reference of the company duly
audited and certified by me/us are/are not kept in the company.
Annexure to Cost Audit Report

Annexure has been reclassified into Four Parts as under:
Part-A General Information,
General Details of Cost Auditors,
Cost Accounting Policy,
Product/Service Details - of the company as a whole.
Part-B for Manufacturing Sector
Quantitative Information, Abridged Cost Statement, Details of Materials
Consumed, Details of Utilities Consumed, Details of Industry Specific Operating
Expenses.
Part-C for Service Sector
Quantitative Information,
Abridged Cost Statement,
Details of Materials Consumed,
Details of Utilities Consumed,
Details of industry specific operating expenses.
Part-D Product and Service Profitability Statement, Profit
RECONCILIATION, VALUE ADDITION AND
DISTRIBUTION OF EARNINGS,
Financial Position and Ratio Analysis,
Related Party Transactions,
Reconciliation of Indirect taxes.
CHAPTER 7
CRA-4: Form for filing Cost Audit Report with the Central Government
1. Corporate Identity Number (CIN) or Foreign Company Registration
Number (FCRN) of the company.
2. General Information
3. Details of industries/ sectors/product(s)/ service(s) (CETA headling level,
wherever applicable as per Rules for Regulated and Non-regulated sector)
for which cost audit report is being submitted.
4. Details of industries/ sectors/product(s)/ service(s) (CETA headling level,
wherever applicable as per Rules for Regulated and Non-regulated sector)
not cover in cost audit report.
5. Details of cost auditor(s) appointment.
6. Details of observation of cost audit report.
7. Attachments:
• XBRL document in respect of the cost audit report and Company’s
information and explanation on every qualification and reservation
contained therein.
• Optional attachment, if any.
Questions
1. What does cost records means?
2. Who is liable to maintained cost records?
3. Who is liable to get cost records audited?
4. What are the general objectives of cost audit?
5. What are the social purposes of cost Audit?
6. What are the rights and responsibilities of a Cost Auditor?
7. Whether maintenance of cost accounting records and cost audit thereof,

subject to threshold limits prescribed, is applicable to products which are
for 100% captive consumption?
8. Which Form is used to keep cost records?
9. Which form is used to intimate government about appointment of cost

auditor?
10. Form………….. is the Cost Audit Report.
11.Form…………… is for filling Cost Audit Report with the Central Government.
CHAPTER 7
12. As per Rule 4 of Companies Act 2013 explain the applicability of Cost
Audit?
CHAPTER 7

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Page 1

INSPIRE Academy ( 8888881719) Chapter 1 : Basic Cost Concepts 1.1

1 BASIC COST CONCEPTS

Cost can be either real or imaginary

Imaginary cost are called as notional cost.

Costing by Raj Awate – Amazing journey of logic and concept

INSPIRE Academy ( 8888881719) Chapter 1 : Basic Cost Concepts 1.2

3. WHAT IS COST ACCOUNTING

Costing is just calculation cost

Costing by Raj Awate – Amazing journey of logic and concept

INSPIRE Academy ( 8888881719) Chapter 1 : Basic Cost Concepts 1.3

Costing by Raj Awate – Amazing journey of logic and concept

INSPIRE Academy ( 8888881719) Chapter 1 : Basic Cost Concepts 1.4

Costing by Raj Awate – Amazing journey of logic and concept

INSPIRE Academy ( 8888881719) Chapter 1 : Basic Cost Concepts 1.5

Costing by Raj Awate – Amazing journey of logic and concept

INSPIRE Academy ( 8888881719) Chapter 1 : Basic Cost Concepts 1.6

7) As per decision making :

8) As per association to product :

Costing by Raj Awate – Amazing journey of logic and concept

INSPIRE Academy ( 8888881719) Chapter 1 : Basic Cost Concepts 1.7

5. HISTORICAL COSTS AND PRE-DETERMINED COSTS

(i) Estimated costs

Costing by Raj Awate – Amazing journey of logic and concept

INSPIRE Academy ( 8888881719) Chapter 1 : Basic Cost Concepts 1.8

7. METHODS OF COST ING

Batch costing: system is used when production is in batches. _A batch is a cost

Service Costing: is a Method Costing applied to undertaking which provides

Costing by Raj Awate – Amazing journey of logic and concept

INSPIRE Academy ( 8888881719) Chapter 1 : Basic Cost Concepts 1.9

8. TECHNIQUES OF COST ING

Historical (or Conventional) Costing _Standard Costing_Marginal Costing_Uniform

Management accounting is an integral part of management concerned with

The tools and techniques of management accounting includes - financial

10. COST CENTERS MAY BE CLASSIFIED AS FOLLOWS:

2) Personal and Impersonal

3) Operation and Process

Costing by Raj Awate – Amazing journey of logic and concept

INSPIRE Academy ( 8888881719) Chapter 1 : Basic Cost Concepts 1.10

11. IMPORTANT CONCEPTS -

• Direct Material +Direct Labour+Direct expense

• Indirect Material +Indirect Labour+Indirect

• Direct material + Direct wages + Direct expenses +

• Direct Labour+Direct expense + Production

• income forgone due to taking another option =

• These are incurred even though business is shut-down,

• Normal loss : unavoidable loss_ loss due to

• avoidable loss_ loss due to fire and theft_ transferred

Costing by Raj Awate – Amazing journey of logic and concept

INSPIRE Academy ( 8888881719) Chapter 1 : Basic Cost Concepts 1.11

• They requires immediate payment of cash _also

• They do not require immediate payment of cash

12. COST UNIT:

Particulars` Cost Units

For production industries

Automobile Per car, per scooter

Sugar industry Kg / tonne

Chemical industry Litre

Furniture Per article

Telemarketing Per customer calls made

Construction per contract

For service industry ( composite units )