Business Accounting and Costing Assignment

Q1. Difference between Cost Accounting and Management Accounting?

Ans:

S.No. Cost Accounting Management Accounting

1 The main objective of cost The primary objective of management accounting is

accounting is to assist the to provide necessary information to the management
management in cost control and in the process of its planning, controlling, and
decision-making. performance evaluation, and decision-making.

2 Cost accounting system uses Management accounting uses both quantitative and
quantitative cost data that can be qualitative data. It also uses those data that cannot
measured in monitory terms. be measured in terms of money.

3 Determination of cost and cost Efficient and effective performance of a concern is

control are the primary roles of the primary role of management accounting.
cost accounting.

4 Success of cost accounting does Success of management accounting depends on

not depend upon management sound financial accounting system and cost
accounting system. accounting systems of a concern.

5 Cost-related data as obtained Management accounting is based on the data as

from financial accounting is the received from financial accounting and cost
base of cost accounting. accounting.

6 Provides future cost-related Provides historical and predictive information for

decisions based on the historical future decision-making.
cost information.

7 Cost accounting reports are Management accounting prepares reports

useful to the management as well exclusively meant for the management.
as the shareholders and creditors
of a concern.

8 Only cost accounting principles Principals of cost accounting and financial

are used in it. accounting are used in management accounting.

9 Statutory audit of cost accounting No statutory requirement of audit for reports.

reports are necessary in some
cases, especially big business
houses.

10 Cost accounting is restricted to Management accounting uses financial accounting

cost-related data. data as well as cost accounting data.

Examples to Determine the Differences Between Cost and Management Accounting

In business, there are two main types of accounting: Cost accounting and management accounting. Cost
accounting focuses on the direct costs associated with manufacturing a product or service, while
management accounting provides information that can be used to make decisions about running the
business. Both types of accounting are important, but they serve different purposes.
For example, let's say that a company makes widgets. The cost accountant would track the direct costs of
making the widgets, such as the cost of raw materials and labour. The management accountant would
track other costs, such as the cost of advertising and marketing, and use this information to make
decisions about allocating resources.

In general, cost accounting is more focused on the past, while management accounting is more focused on
the future. Cost accounting looks at how much it costs to produce a widget, while management
accounting tries to predict how much it will cost to produce a widget in the future.

This difference is important because it can help managers to make decisions about where to allocate
resources. For example, if a company is trying to decide whether to invest in new machinery, the
management accountant would use forecasting techniques to estimate the future costs of production and
make a recommendation based on that information.

Both cost and management accounting are important tools for business decision-making. By
understanding the differences between these two types of accounting, you can choose the right method for
the job at hand.

Q2. What do you mean by Cost Volume Analysis and what information do we get from this
analysis?

Ans: The cost-volume-profit analysis, also commonly known as breakeven analysis, looks to determine
the breakeven point for different sales volumes and cost structures, which can be useful for managers
making short-term business decisions. CVP analysis makes several assumptions, including that the sales
price, fixed and variable costs per unit are constant. Running a CVP analysis involves using several
equations for price, cost, and other variables, which it then plots out on an economic graph.

The CVP formula can also calculate the breakeven point. The breakeven point is the number of units that
need to be sold or the amount of sales revenue that has to be generated in order to cover the costs required
to make the product.

Besides providing management with general information on the cost-volume-profit relationship of their
firms, accountant can be also use it to provide management with useful information necessary for selling,
certain planning, control and special decision problems. The decision areas where this analysis include:
profit planning budgetary control, control, product replacement, pricing decision, selecting of distribution
channels, setting volume, sensitive retain on investment target, entry into foreign marking performance
measurement.

Profit Planning: A firm first decides its sales, cost and activity before computing the profit that will
emerge, but it profit planning, the firm first decides what profit it wants and then considers the sales, cost
and activity required to produce that profit. The items under consideration on profit planning are cost
volume-profit variables.

Product Mix Decision: The selection of which products to products, which to abandon, and which to
postpone is one of the most critical decision confronting a firm’s management. The products selected
from the product mix decision determine the revenue, profit and cash flow of firm’s operations. Perhaps
equally important, the products selected determine on part the firm’s competitive position vis-à-vis its
competitive position from the products selected currently provide the funds required to develop and
produce products in the future.

Cost-volume-profit analysis is used to measure the economics characteristics of manufacturing a

proposed product. Based on accounting data, the cost-volume-profit analysis is used to determine the
sales quantity needed to break even as well as the sales quantity required to earn a desired profit margin.
Manager then compare a product’s expected sales with the sales quantities required to break-even and
earn a target profit margin to determine whether the product should be produced.

Budgetary Control: Budgetary control is the establishment of a budget relating to the responsibility of
the executives and to the requirement of the policy and the continuous comparison of actual with
budgeted result. Budgetary control takes off from where budget planning stops and aspirations continued
in budget are achieved. Budgetary control is concerned with use of budget to control a firm’s operational
activity either to secure by individual action the objective of policy or to provide a basis for its revision.

Cost-volume-profit analysis can be used in area of budgetary control to compare budgeted sales, volume,
cost and profit with actual. The analysis of the variance is being computed only for cost-volume-profit.
The process of comparing actual result with planned results and reporting budgetary control sets or
control framework which helps expenditure to be kept within agreed limits. Deviations are also noted so
that corrective measure can be taken provided with a given data, one can compute the breakeven point,
margin of safety and p/v ration for the budgeted and actual revenue. This helps management to know
when it is deviated from its target point, it causes and how to take corrective measures.

Pricing Decision: Pricing decision are strategic decision that affect the quality produced and sold, and
therefore the cost and revenues. To make these decisions, managers need to understand cost behaviour
patterns and cost drivers, they can then evaluate the value chain and over a products life cycle to achieve
profitability.

Q3. What do you understand by the following terms:

i. Margin of safety
ii. Angle of Incidence
iii. Contribution/Gross Margin
iv. PV Ratio

Ans: i. Margin of Safety: the margin of safety is equal to the difference between current or forecasted
sales and sales at the break-even point. The margin of safety is sometimes reported as a ratio, in which the
aforementioned formula is divided by current or forecasted sales to yield a percentage value. The figure
is used in both break-even analysis and forecasting to inform a firm's management of the existing cushion
in actual sales or budgeted sales before the firm would incur a loss.

To calculate the margin of safety, determine the break-even point and the budgeted sales. Subtract the
break-even point from the actual or budgeted sales.

ii. Angle of Incidence: The Angle of Incidence in accounting occurs when the entire sales line crosses
the cost line from below in the break-even chart. Or, it is an angle that gets created due to the sale and
cost line. Usually, this angle starts forming at the break-even point, indicating how efficiently the
company is making a profit. Further, the angle suggests that the rate at which the company is making
profits.

A general rule of thumb is the higher the angle, the more the profit and vice versa. A large angle of
incidence means the company is making profits at a higher rate. Similarly, a small angle suggests the
profit is being earned at a lower rate.

Additionally, it gives one more significant information. If the angle of incidence is small, it means the
company is incurring more variable costs. Thus, for a business, a desirable situation is a large angle of
incidence with a high margin of safety. It could further indicate that the business might have a monopoly
status in its industry.
iii. Contribution Margin Vs Gross Margin: Gross margin is the amount of profit left after subtracting
the cost of goods sold from revenue, while contribution margin is the amount of profit left after
subtracting variable costs from revenue.

Gross margin encompasses an entire company’s profitability, while contribution margin is more useful on
a per-item profit metric.

Contribution margin can be used to examine variable production costs and is usually expressed as a
percentage. While gross profit is generally an absolute value, gross profit margin is expressed as a
percentage.

Contribution margin is used to determine the breakeven point, while gross margin is more likely to be
used to set operating targets for divisions to achieve.

iv. PV Ratio: Profit-volume ratio indicates the relationship between contribution and sales and is usually
expressed in percentage.
The ratio shows the amount of contribution per rupee of sales. Since, in the short-term, fixed cost does
not change, the profit-volume ratio also measures the rate of change of profit due to change in the volume
of sales.
It is influenced by sales and variable or marginal cost. If the sale price increases without a corresponding
increase in marginal cost, the contribution increases—and the profit-volume ratio improves. Similarly, if
the marginal cost is reduced with sale price remaining same— profit-volume ratio improves.
The advantages of profit-volume ratio are that it can be used to measure profitability of each product, or
group of them, separately so that the necessity for continuance of such production can be examined. It
may also be used to measure the profitability of each production centre, process or operation.

Q4. Differentiate between Financial Accounting and Cost Accounting.

Ans.

BASIS FOR
COST ACCOUNTING FINANCIAL ACCOUNTING
COMPARISON

Meaning Cost Accounting is an accounting Financial Accounting is an

system, through which an
organization keeps the track of
various costs incurred in the
business in production activities.
accounting system that captures the
records of financial information
about the business to show the
correct financial position of the
company at a particular date.

Information type Records the information related to Records the information which are in
material, labour and overhead, monetary terms.
which are used in the production
process.

Which type of cost Both historical and pre- Only historical cost.
is used for determined cost
recording?
 BASIS FOR
COST ACCOUNTING FINANCIAL ACCOUNTING
COMPARISON

Users Information provided by the cost Users of information provided by the

accounting is used only by the
internal management of the
organization like employees,
directors, managers, supervisors
etc.
financial accounting are internal and
external parties like creditors,
shareholders, customers etc.

Valuation of Stock At cost Cost or Net Realizable Value,

whichever is less.

Mandatory No, except for manufacturing Yes for all firms.

firms it is mandatory.

Time of Reporting Details provided by cost Financial statements are reported at

accounting are frequently the end of the accounting period,
prepared and reported to the which is normally 1 year.
management.

Profit Analysis Generally, the profit is analysed Income, expenditure and profit are
for a particular product, job, batch analysed together for a particular
or process. period of the whole entity.

Purpose Reducing and controlling costs. Keeping complete record of the

financial transactions.

Forecasting Forecasting is possible through Forecasting is not at all possible.

budgeting techniques.

Q5. Classification of cost on the following basis:

i. On the basis of variability

ii. On the basis of Normality
iii. On the basis of Time
iv. On the basis of Planning and Control
v. On the basis of Managerial Decision

Ans: i. Classification of cost on the basis of variability: Variability of cost is estimated in relation to
the volume of production. Some costs vary in accordance with production while some remain constant.
Under this classification, costs are classified into three groups:
. Fixed cost
a. Variable cost
b. Semi-variable cost
Fixed Cost: Fixed cost is that cost that is not affected by any variation in the volume of output. The
amount of fixed cost tends to remain constant for all volumes or production within the fixed capacity of
the plant.

Example: Rent of the office, the salary of the factory manager remains the same even if the production
goes up or comes down.

Variable Cost: This is a cost that varies directly with variations in the volume of output. Such cost
increases when the production goes up and correspondingly the cost decreases when the production
declines. However, variations may not always be in the same proportion.

Semi-Variable Cost: This cost is partly variable and partly fixed. It possesses the characteristics of both
the fixed and variable.
Example: Maintenance of building and plant.

ii. Classification of cost on the basis of Normality: There are two types of costs under this classification
that display the normality characteristics. They are
. Normal Cost
a. Abnormal Cost

Normal Cost: This cost is normally incurred at a given level of output in the conditions in which that
level of output is normally attained.

Abnormal Cost: This cost is incurred at a given level of output under unfavourable conditions like
destruction due to fire or shutdown or machinery, etc.

The normal cost is part of the cost of production, whereas abnormal cost is excluded from the cost of
production.
iii. Classification of cost on the basis of Time: Under this classification, there are two types of costs:
. Historical Cost
a. Predetermined cost

Historical Cost: This cost is the actual cost that is ascertained after it has been incurred. Historical costs
are available only after the completion of production. Such cost figures have only historical value.

Predetermined Cost: Predetermined costs are estimated costs. These costs are determined prior to
production on the basis of actual cost and the factors affecting the cost. Predetermined costs made on a
more or less scientific basis result in a standard cost.

Standard costs are compared with actual costs to find out the differences or variances. These variances are
analysed and facilitate the management to take remedial actions, if necessary.

iv. Classification of cost on the basis of Managerial Decision: Costs under managerial decisions are
classified into the following types:
. Marginal Costs.
a. Out of Pocket Costs.
b. Differential Costs.
c. Imputed Costs.
d. Opportunity Costs.
e. Replacement Costs.
f. Avoidable and Unavoidable Costs.
g. Sunk Costs.
h. Conversion Costs.
Marginal Cost: It is the variable cost that comprises the major cost and variable cost. It is incurred when
there is an increase in the volume of production. When there is an increase in one unit of output, the total
cost is increased and this resultant increase in the total cost from the existing level to the new level is
known as marginal cost.

Out of Pocket Cost: This cost arises depending upon the managerial decision to do cash expenditure for
a particular operation. Example: A decision taken in order to make price fixation during trade recession or
a decision taken for buying any asset.

Differential Cost: This cost is the difference in total cost that arises as result from any variation in
operation. This cost is incurred when there is a change in the level pattern, method of production. It could
be increment or decrement depending upon whether the operations increase cost or decrease in cost.

Imputed Cost: This cost does not involve any cash outlay and as a consequence, it is not included in the
financial records. It is a hypothetical cost that is estimated only for the purpose of decision-making. For
example, interest on capital not payable, rent on own banking, etc.

Opportunity Cost: This cost arises when one alternative is rejected or sacrificed to use another
alternative. It depends upon the managerial decision to give up on one alternative to choose something
else.

Replacement Cost: This cost is incurred when an asset is purchased at the current market rate and not at
the earlier market cost at which it was purchased. So this cost is related to the current market.

Avoidable and Unavoidable Cost: Avoidable costs are the costs that could have been escaped or
eliminated under any given condition of performance efficiency. Unavoidable costs are the costs that are
essential and could not have been escaped or eliminated from its occurrence.

Sunk Cost: This is the cost that is already acquired and which is not affected by the decision-making
process. This is a historical cost and is sunk in the past. For example: when the management decides to
replace old machinery then the depreciation value of the old machine is not taken into account during the
decision-making process.

Conversion Cost: This cost is incurred during the process of converting raw materials into finished
products. It includes both direct labour cost and manufacturing overheads.

v. Classification of cost on the basis of Planning and Control: Cost accounting provides the
management with important information that helps them perform managerial functions of planning and
control. On the basis of these costs can be classified as budgeted costs and standard costs.

Budgeted Costs: As the name suggests this is a future expense that the firm expects to incur. So it is an
estimated expense.
For various phases and cost centers firm prepares various budgets. Like there is a production budget, sales
budget, marketing budget etc.
It allows for constant comparisons between actual and budgeted costs to identify the variances and help
control costs.
Standard Costs: Predetermined cost based on a technical estimate for material costs, labour costs and
some overhead costs for a selected period of time and for a prescribed set of working conditions are
called standard cost

Top of Form

Q6. What are the requirements and benefits of ABC?

Ans: Requirements of Activity Based Costing (ABC)

The ABC system of cost accounting is based on activities, which are any events, units of work, or tasks
with a specific goal, such as setting up machines for production, designing products, distributing finished
goods, or operating machines. Activities consume overhead resources and are considered cost objects.

Under the ABC system, an activity can also be considered as any transaction or event that is a cost driver.
A cost driver, also known as an activity driver, is used to refer to an allocation base. Examples of cost
drivers include machine setups, maintenance requests, consumed power, purchase orders, quality
inspections, or production orders.

There are two categories of activity measures: transaction drivers, which involves counting how many
times an activity occurs, and duration drivers, which measure how long an activity takes to complete.
Unlike traditional cost measurement systems that depend on volume count, such as machine hours and/or
direct labour hours to allocate indirect or overhead costs to products, the ABC system classifies five broad
levels of activity that are, to a certain extent, unrelated to how many units are produced. These levels
include batch-level activity, unit-level activity, customer-level activity, organization-sustaining activity,
and product-level activity.
Benefits of Activity-Based Costing (ABC)
Activity-based costing (ABC) enhances the costing process in three ways. First, it expands the number of
cost pools that can be used to assemble overhead costs. Instead of accumulating all costs in one company-
wide pool, it pools costs by activity.

Second, it creates new bases for assigning overhead costs to items such that costs are allocated based on
the activities that generate costs instead of on volume measures, such as machine hours or direct labour
costs.

Finally, ABC alters the nature of several indirect costs, making costs previously considered indirect—
such as depreciation, utilities, or salaries—traceable to certain activities. Alternatively, ABC transfers
overhead costs from high-volume products to low-volume products, raising the unit cost of low-volume
products.

Q7. What are the different stages of ABC?

Ans: ABC involves the following steps:

Step # 1. Identifying the Activities:

The first step in ABC is to identify the major activities which take place in an organisation. The number
of activities in production may differ from product to product and organisation to organisation.

The number of activities in the organisation should neither be too large or too small. An activity may be a
very small activity but it should justify the cost incurred for it. An activity may be a single activity or
combination of several activities. Cost-benefit analysis of each and every activity may be undertaken to
judge the worthiness of activity.
Step # 2. Determining Cost Pool/Cost Centres for Each Major Activity:
Cost pool means grouping of total cost for each major activity. It simply means allocation and
apportionment of various costs to a particular activity or group of activities. For example, total cost of
placing orders may be grouped under ordering cost.

Step # 3. Determining Cost Driver for Each Major Activity:

Cost drivers are that activities which determine the cost. These activities result in occurrence of Overhead
cost. Thus, cost driver is a factor or an event which results in consequential change in the total cost of the
object.

Some of the example of cost driver are:

i. Number of setups is cost driver for setup related cost
ii. Number of production runs is cost driver for production cost
iii. Number of purchase orders is the cost driver for ordering cost
iv. Quality inspections is the cost driver for inspection cost
v. Maintenance requests
vi. Kilometre driven etc.

The activity cost drivers can be classified into 3 categories:

(a) Transaction drivers – Transaction drivers include number of transaction which results in overhead
costs e.g., inspections performed, setups undertaken, number of purchase orders etc.

(b) Duration drivers – Duration drivers determine the duration of time required to perform an activity.
Examples are number of setup hours, inspection hours etc.

(c) Intensity drivers – It refers to the drivers which directly charge for the resource used each time an
activity is performed. So the basic difference between duration driver and activity driver, is that duration
charge cost on an average duration (average rate of time) in performing an activity while intensity driver
is based on actual activity relevant to a product.

Step # 4. Calculation of Activity Cost Driver Rate:

Next step would be to obtain activity cost driver rate by dividing the total cost of an activity by cost driver
as shown below –
Activity driver rate = Total cost of an activity/Cost driver

Step # 5. Charging Activity Cost to the Product Cost:

Cost of activity will be charged to the product using cost driver rate according to the requirement of
activities of each product. For instance, a product may require 10 machine setups and 1 inspection related
activity. Thus, product will be charged for both machine related set up activity cost and inspection
activity cost.

Q8. Discuss the advantages and disadvantages of ABC.

Ans: The following are the advantages of ABC:

1. Accurate Product Cost: ABC brings accuracy and reliability in product cost determination by
focusing on cause and effect relationship in the cost incurrence. It recognises that it is activities
which cause costs, not products and it is product which consume activities. In advanced
manufacturing environment and technology where support functions overheads constitute a large
share of total costs, ABC provides more realistic product costs.
 ABC produces reliable and correct product cost data in case of greater diversity among the
products manufactured such as low-volume products, high-volume products. Traditional costing
system is likely to bring errors and approximation in product cost determination due to using
arbitrary apportionment and absorption methods.

2. Information about Cost Behaviour: ABC identifies the real nature of cost behaviour and helps
in reducing costs and identifying activities which do not add value to the product. With ABC,
managers are able to control many fixed overhead costs by exercising more control over the
activities which have caused these fixed overhead costs. This is possible since behaviour of many
fixed overhead costs in relation to activities now become more visible and clear.

3. Tracing of Activities for the Cost Object: ABC uses multiple cost drivers, many of which are
transaction based rather than product volume. Further, ABC is concerned with all activities within
and beyond the factory to trace more overheads to the products.

4. Tracing of Overhead Cost: ABC traces costs to areas of managerial responsibility, processes,
customers, departments besides the product costs.

5. Better Decision Making: ABC improves greatly the manager’s decision making as they can use
more reliable product cost data. ABC helps usefully in fixing selling prices of products as more
correct data of product cost is now readily available.

6. Cost Management: ABC provides cost driver rates and information on transaction volumes
which are very useful to management for cost management and performance appraisal of
responsibility centres. Cost driver rates can be used advantageously for the design of new products
or existing products as they indicate overhead costs that are likely to be applied in costing the
product.

7. Use of Excess Capacity and Cost Reduction: ABC, through the processes of pooling of activity
costs and the identification of cost drivers, can lead to a range of applications. These include the
identification of spare capacity and the fostering of cost reduction by comparing the resources
required under ABC with the resources that are currently provided. This provides a platform for
the development of activity-based budgeting in which the resource relationships identified by
ABC are used to project future resource requirements.

8. Benefit to Service Industry: Service organizations, such as banks, hospitals and government
departments, have very different characteristics than manufacturing firms. Service organizations
have almost no direct costs, most of the costs are overheads and they do not hold stocks of service
as the service is consumed when it is produced. Traditional costing has generally been considered
inappropriate for these organizations, whereas ABC offers the potential of benefits from improved
decision making and cost management.

Demerits of Activity Based Costing (ABC):

The following are the demerits of ABC:
1. Expensive and Complex: ABC has numerous cost pools and multiple cost drivers and therefore
can-be more complex than traditional product costing systems. It can prove costly to manage ABC
system.
 2. Selection of Drivers: Some difficulties emerge in the implementation of ABC system, such as
selection of cost drivers, assignment of common costs, varying cost driver rates etc.
3. Disadvantages to Smaller Firms: ABC has different levels of utility for different organisation
such as large manufacturing firm can use it more usefully than the smaller firms. Also, it is likely
that firms depending on cost-plus pricing can take advantages from ABC as it gives accurate
product cost. But those firms who use market based prices may not favour ABC. The level of
technology and manufacturing environment prevailing in different firms also affect the application
of ABC.
4. Measurement Difficulties: The main costs and limitations of an ABC system are the
measurements necessary to implement it. ABC systems require management to estimate costs of
activity pools and to identify and measure cost drivers to serve as cost allocation bases. Even basic
ABC systems require many calculations to determine costs of products and services. These
measurements are costly. Activity cost rates also need to be updated regularly.

Q9. Differentiate between Standard Cost and Estimated Cost.

Ans: Although both estimated costs and standard costs stand computed in advance of production, and are,
therefore, predetermined costs, estimated costs differ from standard costs in the following respects;

1. Objective Difference: Estimated costs exist intended to ascertain what the costs will be while
standard costs aim at what costs should be.

2. Calculation Difference: Estimated costs stand calculated based on past performance standing
adjusted in the light of anticipated changes in the future. Standard costs, on the other hand, stand
ascertained on a scientific basis keeping in view certain conditions of efficiency.

3. Computation Difference: Estimated costs stand for predetermined costs based on past
performance and adjusted for anticipated future changes. They stand thus established in advance
as the best estimates subject to the assumption that costs are free to move as they like. Standard
costs, on the other hand, represent a carefully formulated advance estimate of what future costs
should be under conditions expected to prevail. They are based on technical and engineering
estimates. As such, they stand for planned costs expected to achieve in a particular production
process under normal conditions.

4. Aid to Management Difference: Estimated costs are not helpful to management in

accomplishing management functions as they stand not scientifically predetermined costs. But
standard costs involve operational analysis and evaluation and a comprehensive review of internal
and external factors. They become reliable yardsticks for product costing, product pricing,
planning, coordination, and price control purposes.

5. Emphasis Difference: Estimated costs emphasize the cost with which it stands compared at the
end of the accounting period. If the estimated costs stand found higher or lower than actual costs,
they stand revised for use in the next accounting year. In standard costing the emphasis stands to
put on standard costs, i.e., what costs of material labour and overhead should incur if the factory is
to operate as a highly efficient unit.

Under standard costing, actual costs stand ascertained only to facilitate their comparison with
standard costs. Historical costs emphasize what the ‘costs are’ while estimated costs emphasize
what the ‘cost will be’. Standard costs, on the other hand, emphasize what the ‘costs should be’.
 6. Use Difference: The estimated costs stand used only as statistical data, whereas standard costs
exist used as a regular system from which variances stand ascertained and the reasons for such
variances exist analysed, and corrected measures stand taken promptly. In an estimated costing
system, the emphasis is on cost ascertainment for fixing selling prices.

As such, estimated costs are not of much practical significance from the point of view of cost
control. Standard costing, on the other hand, being precise, provides a scientific basis with which
actual costs stand compared. Accordingly, standard costs serve as an effective tool for cost
control.

7. Accuracy Difference: Being based on the average of past costs adjusted for anticipated changes
in the future, estimated costs are less likely to be precise. However, standard costs stand fixed only
after scientific analysis of relevant factors having a bearing upon costs. As such, standard costs
tend to be more precise and accurate than estimated costs.

8. Accuracy and Reliability Difference: Standard costing is a scientific method of cost control and
it is more reliable and accurate, whereas estimated costs are not so precise and reliable.

9. Records Difference: Estimated costs are statistical. As such, they are not a part of the accounting
system. They stand only posted in the cost sheet for comparison. They stand used as statistical
data for future costs. But, standard costs are a part of the accounting system. They have a place in
the accounting records and stand used for ascertaining variances from the actual costs.

10. Revision Difference: The estimated cost stands adjusted to the actual cost and expected changes
in the coming period. While Standard Cost exists not generally revised unless it has existed set
incorrectly or it has become irrelevant to the changed situations. Thus, Standard Cost is free from
frequent changes or modifications.

11. Stability Difference: Standard costs are more stable than estimated costs because estimated costs
stand set on the assumptions of free movement of cost.

12. Barometer of Efficiency Difference: Estimated Cost—being only an expression of likely cost in
the future—cannot use to measure efficiency or otherwise. But the standard cost stands used as a
barometer of efficiency since it compares with the actual cost.

13. Applicability Difference: Estimated costs are generally applicable to concerns engaged in
construction work such as buildings, factories, bridges, ships, and other types of concerns such as
bakeries, bottling companies, medicines, and dairy products. Although the principles underlying
standard costing can apply to any industry, standard costs are most suitable for industries engaged
in mass production.

Q10. List the differences between Standard Cost and Estimated Cost.

Ans:
Standard Cost Estimated Cost
 Standard Cost Estimated Cost
1. It gives an emphasis on "What should be the
1. It presumes that what will be the cost.
Cost".
2. It uses the parameter of efficiency 2. It uses the perception of efficiency applied.
3. It cannot be revised since there is no need of
3. It is revised at frequent intervals
revision.
4. It is ascertained on the assumption that free 4. It is ascertained-on the assumption that free
movement of cost will not be allowed. movement of cost.
5. It is more flexible and changed at every
5. It is more stable in nature.
change of situation.
6. It is a reliable tool of cost control. 6. It cannot be used as a cost control.
7. It is used only when complete cost data are
7. It can be used in every situation.
available.
8. Variances cannot be find out from the
8. It is used for finding variances.
estimated costs.
9. Scientific basis is applied to set standard There is no scientific basis used but only
cost. approximations are used to set estimated cost.
10. It is applied if the organisation has
10. It is applied in every business organization
standard costing system.

Q11. Explain the following Variances:

1. Cost Variance
2. Material Cost Variance
3. Labour Cost Variance

Ans: 1. Cost variance: Cost variance analysis is an accounting tool that investigates budgeting
irregularities. It involves determining the difference between allocated funds and actual money spent, then
researching and reporting the cause of the difference. Many variables can affect a cost variance analysis,
such as the cost of materials or the number of products sold. The most simplified representation of cost
variance is the difference between your planned and actual spending amount. Calculating the total cost
variance can help you determine if the difference was a one-time occurrence or evidence of a larger
problem.

Budgeting issues can occur in many industries, so analysing cost variance is beneficial for many types of
jobs, including:
● Cashier at a convenience store
● Accountant for a business-to-business sales company
● Caterer for major events
● Coordinator of an annual industry conference
● Driver for a ride-share service
● Owner of an independent book store

Multiple factors can contribute to cost variance, so there are several additional formulas you may use
before you can find the total cost variance. It's important to have detailed expense reports for your
analysis since the actual costs and budgeted costs can be much easier to find when you can separate
individual expense items.
ii. Material Cost variance (MCV): It is the difference between the standard cost of direct materials
specified for the output achieved and the actual cost of direct materials used.

This difference in material cost maybe partly due to difference in usage of raw material and partly due to
difference in prices.

= Standard cost for actual output- Actual Cost

= (Standard Quantity for actual output * Standard Price) - (Actual Quantity * Actual Price)
= (SQ * SP) - (AQ * AP)

Material Price Variance (MPV):

● It is that portion of the Materials cost variance which is due to the difference between the standard
price specified and the actual price paid for the direct materials used.
● The reasons for price variance can be fluctuations in market prices, increase or decrease in prices
on account of agreement between various suppliers or on account of government interference,
buying efficiency or inefficiency, high or low cost of transportation and carriage of goods etc.
● =Actual Quantity* (Standard Price-Actual Price)
● = AQ* (SP-AP)

Material Usage (Quantity) Variance (MUV):

● It is that portion of the materials cost variance which is the difference between the standard
quantity specified for the production achieved, whether completed or not, and the actual quantity
used, both valued at standard prices.
● The reasons for price variance can be inefficiency, lack of skills or training and faulty
workmanship, incorrect processing of materials whereby wastages may occur, pilferage, use of
defective or substandard material, use of substitute material etc.
● = Standard Price* (Standard quantity for Actual Output-Actual Quantity)
● = SP (SQ-AQ)

iii. Labour Cost Variance: A labour variance arises when the actual cost associated with a labour
activity varies (either better or worse) from the expected amount. The expected amount is typically a
budgeted or standard amount. The labour variance concept is most commonly used in the production area,
where it is called a direct labour variance. This variance can be subdivided into two additional variances,
which are noted below.

The labour variance can be used in any part of a business, as long as there is some compensation expense
to be compared to a standard amount. It can also include a range of expenses, beginning with just the base
compensation paid, and potentially also including payroll taxes, bonuses, the cost of stock grants, and
even benefits paid.

Problems with Labour Variances: The use of the labour variance is questionable in a production
environment, for two reasons. First, other costs usually comprise by far the largest part of manufacturing
expenses, rendering labour immaterial. And second, direct labour costs have proven to be considerably
less than variable, and therefore less subject to change than might be expected, which leaves one to
wonder why the variance is being calculated for what is essentially a fixed cost.

The labour variance is particularly suspect when the budget or standard upon which it is based has no
resemblance to actual costs being incurred. For example, the engineering department may set labour
standards at the theoretically attainable level, which means that actual results will almost never be as
good, resulting in an ongoing series of very large unfavourable variances. Alternatively, a manager might
use political pressure to artificially increase labour standards; this makes it easy to improve upon the
standards, resulting in perpetually favourable variances that artificially enhance the performance of the
manager.
Q12. What are the steps involved in the process of standard costing? Explain.

Ans: Following are the steps involved in the standard costing process:

1. Establishing Standards: First and foremost, the standards are to be set on the basis of
management’s estimation, wherein the production engineer anticipates the cost. In general, while
fixing the standard cost, more weight is given to the past data, the current plan of production and
future trends. Further, the standard is fixed in both quantity and costs.

2. Determination of Actual Cost: After standards are set, the actual cost for each element, i.e.
material, labour and overheads is determined, from invoices, wage sheets, account books and so
forth.

3. Comparison of Actual Costs and Standard Cost: Next step to the process, is to compare the
standard cost with the actual figures, so as to ascertain the variance.

4. Determination of Causes: Once the comparison is done, the next step is to find out the reason for
the variances, to take corrective actions and also to evaluate the overall performance.

5. Disposition of Variances: The last step to this process, is the disposition of variances by
transferring it to the costing profit and loss account.

Standard costing can be helpful in ascertaining the profitability of the business at any level of
production. Further, it is also useful in practical management functions, i.e. planning and
controlling.

Q13. What do you mean by Budget? Briefly discuss its elements. Also explain Budgeting and
Budgetary control.

Ans: A budget is a plan of action for a future period. Managerial actions that follow their decisions with
regard to the aspects of business are based on a budget. The budget pertaining to any of the activities of
business is always forward- looking. It is prepared prior to a defined period of time.

The CIMA Official Terminology defines a budget as “A quantitative statement, for a defined period time,
which may include planned revenues, expenses, assets, liabilities and cash flows.” A budget is thus, a
plan quantified in monetary terms. It is prepared for a defined period of time.

The Chartered Institute of Management Accountants (CIMA), London defines budget as:

“A plan expressed in money. It is prepared and approved prior to the budget period and may show
income, expenditure and the capital employed. May be drawn up showing incremental effects on former
budgeted and actual figures, or be compiled by zero-based budgeting”

Thus a budget is a quantitative and/or monetary interpretation of the policies and aims of a business for a
predetermined period and indicates how aims and objects are to be achieved.

The budget should not be confused with forecasts. A forecast is a mere prediction, which can be made by
anybody. Moreover, a forecast need not always be expressed in rupees or quantities. Forecast may be in
respect of anything. As against this a budget is a plan of action prepared by an authorised person and may
be expressed in terms of rupees and/or quantities.
A budget is a detailed plan of operations for some specific future period. It is an estimate prepared in
advance of the period to which it applies, it acts as a business barometer as it is a complete programme of
activities of the business for the period covered.

A budget is defined as a “comprehensive and coordinated plan of action, expressed in monetary terms, for
the operations and utilisation of resources of an organisation for some specified period in the future.”

Essential Elements for the Success of a Budget Plan in an Organization

The success of the budget plan in an organization depends on the following essential elements:

Element # (a) Accurate Forecasting of Business Activities:

Forecasting is an integral part of the budgeting process. It is not only the starting point, but is also critical
to the development of an accurate budget.

Element # (b) Coordinating Business Activities:

Budgeting needs to coordinate all the individual budgets into an integrated plan, as each budget has
certain implications for other budgets. There must be coordination between sales, production, purchasing,
and personnel budgets.

Element # (c) Communicating the Budgets:

The success of a comprehensive budgeting programme depends on communication of individual budgets
to the different units in the organization. The basic point is that the preparation of the budget is of no
value unless it is known to the person for whom it is meant.

Managers are not responsible for budget unless the budget is communicated clearly, concisely, and in an
authoritative manner to them.

Element # (d) Acceptance and Cooperation:

Successful budgeting also requires that budgets should be accepted by the people who must execute them.
Budgeting should have the active cooperation of the entire organization from top to bottom.

Element # (e) Reasonable Flexibility:

The budgeting programme should contain reasonable flexibility if the situation so demands. However, it
should be noted that too much flexibility and too much tightness are both undesirable. Too much
flexibility will weaken the cost control and the budget will become inoperative.

Similarly, too much rigidity, not permitting reasonable deviations, will create problems and restrictions in
the implementation of the budget. If conditions have changed making the estimates and budgets
inaccurate, the budgets should be revised.

Element # (f) Providing a Framework for Evaluation:

Budgeting provides a basis to evaluate the performance of different departments. A comprehensive
budget, properly developed, will initially contain organizational goals and expectations, and subsequently
can be used as an effective evaluation technique.

Meaning of Budgeting: Budgeting is the process of designing, implementing and operating budgets. It is
the managerial process of budget planning and preparation, budgetary control and the related procedures.
Budgeting is the highest level of accounting in terms of future which indicates a definite course of action
and not merely reporting.

It is an integral part of such managerial policies as long-range planning, cash flow, capital expenditure
and project management.
It must be remembered that budgeting is not forecasting. It is true that budgeting does involve some sort
of forecasting particularly in the area of sales budget. But the process is physically one of detailed
analyses and planning not merely prognosticating future results.

Budgetary Control: Budgetary control is a system of controlling cost which includes preparation of
Budgets coordinating the departments and establishing responsibilities comparing performance with
budgeted and acting upon results to achieve the maximum profitable.

The process of budgetary control includes:

● Preparation of various budgets.

● Continuous comparison of actual performance with budgetary performance.
● Revision of budgets in the light of changed circumstances.

A system of budgetary control should not become rigid.

There should be enough scope of flexible individual initiative and drive. Budgetary control is an
important device for making the organization an important tool for controlling costs and achieving the
overall objectives.

Budgetary control serves 4 control purposes:

1. They help the manager’s co-ordinate resources;

2. They help define the standards needed in all control systems;
3. They provide clear and unambiguous guidelines about the organization’s resources and
expectations, and
4. They facilitate performance evaluations of managers and units.

Q14. Write a short note on the following terms:

a. Cash Budget
b. Fixed Budget
c. Flexible Budget
d. Production Budget
e. HR Budget

Ans: a. Cash Budget: A cash budget itemizes the projected sources and uses of cash in a future period.
This budget is used to ascertain whether company operations and other activities will provide a sufficient
amount of cash to meet projected cash requirements. If not, management must find additional funding
sources.

The inputs to the cash budget come from several other budgets. The results of the cash budget are used in
the financing budget, which itemizes investments, debt, and both interest income and interest expense.

The cash budget is comprised of two main areas, which are Sources of Cash and Uses of Cash. The
Sources of Cash section contains the beginning cash balance, as well as cash receipts from cash sales,
accounts receivable collections, and the sale of assets. The Uses of Cash section contains all planned cash
expenditures, which comes from the direct material budget, direct labour budget, manufacturing overhead
budget, and selling and administrative expense budget. It may also contain line items for fixed asset
purchases and dividends to shareholders.

b. Fixed Budget: Fixed budget also known as a static budget can be defined as a budgetary plan which
remains fixed i.e. do not changes with the increase/ decrease in volume of input and output like sales,
production units, activity level etc.
A fixed budget can be defined as a roadmap laid down by the management at the beginning of any
financial period which draws an estimate of various activities like sales, production etc. along with
required costs/ revenue figures. A fixed budget is the conjecture of the income and expenditure for a
given period which remains unchanged with the increase and decrease in actual production level. When
the actual outcomes are compared with the fixed budget data, the actual outcomes may vary from the
figures laid down in fixed budget. It is used by the management, financial experts and accountants of the
organisation to develop a roadmap and set guideline according to which company will function in future.
Management uses fixed budget as a source document with which they can compare actual cost/ sales
volume and other figures so as to determine variations and its reasons thereof.

c. Flexible Budget: The flexible budget also known as variable budget can be defined as a financial
estimate revenues and expenses on the basis of current/actual volume of sales/ production/ activity level
which changes with the change in the actual input and outputs levels.

A flexible budget is a redrafted budget prepared in accordance with different activity levels or at different
capacity utilization levels which changes with each change in change activity levels of the organisation.
Here, actual revenues and other cost details are placed during or after the completion of a financial period.
Flexible budget is prepared from fixed budget and is therefore known as revised budget. Once after
preparation of flexible budget, management compare actual figures and determine variances. Performing
this activity helps management to analyse reasons for deviations at an early stage and take suitable
corrective actions at the earliest. Basic objective of flexible budget is to develop a standard level of costs
which should be incurred for actual manufacturing outputs. A flexible budget is prepared taking into
considerations nature of various cost incurred as like fixed or variable. An entity can draw multiple
flexible budgets based on different capacity utilization as per different business scenarios.

d. Production Budget: A production budget is a calculation of how many units of a specific product a
company can make within a budgetary time period. The production or manufacturing manager usually
prepares this budget by collaborating with other team members, like data analysts and other managers, to
obtain information and properly implement the information gained from the budget. If your work
involves making financial or production-related decisions on behalf of an organization, knowing how to
calculate a budget for production may help improve your managerial performance.

e. HR Budget: The human resources budget refers to the funds that HR allocates to all HR processes
enterprise-wide. The HR budget will include funds allocated to hiring, salaries, benefits, talent
management, training, succession planning, workforce engagement, and employee wellness planning.

HR budgets use financial information, performance results and historical data from every department.
Since the HR budget considers HR activities company-wide, it is an incredibly complex yet essential
document to determining a company’s future HR activities.

How to make an HR budget?

There’s no single way to prepare an HR budget. HR budgets are highly unique to a company’s strategic
direction. That said, most HR budgets will involve the following steps:
1. Review historical financial performance: To budget for the future, you’ll have to review past
budgets and the strategic plan. You can then establish goals and identify capital expenditures
based on historical performance.
2. Choose a budgeting strategy: You’ll have to choose the best budgeting strategy for your
organization. Typically, organizations choose to create incremental budgets or zero-based
budgets.
3. Analyse real-time performance data: Before you can create your budget, you’ll have to perform an
analysis of HR performance data and budget actuals as they are in real-time. This analysis should
 include revenue, both departmental and organizational expenses, staffing (recruiting, hiring, turn-
over), and employee compensation.
4. Get a comprehensive view of how finance impacts operations: A single source of performance
data will aid your analysis. When you can easily see a 360* view of all financial and non-financial
information, you can:
● Set more realistic budget caps.
● Understand where you can build flexibility into your budget.
● Monitor your budget’s performance in real-time.

Q15. Solve anyone numerical on Material Cost Variance.

Q16. Solve anyone numerical on Labour Cost Variance.

Q17. Solve the numerical on the topic BEP.

Q18. Solve all the numericals of Costing.