Question 1. What Is Marginal Cost And Marginal Costing?
Marginal Cost :is the amount at any given volume of output by which aggregate costs are changed if the volume of output is increased or decreased by one unity. The aggregate costs consists of both, fixed cost and variable cost. In simple words, marginal cost indicates the per unit variable cost.
Marginal Costing :is on the other hand is the ascertainment, by differentiating between fixed costs, variable costs, of the marginal costs and of the effect on profit of changes in volume and type of output.
Question 2. What Is Sunk Cost?
Sunk cost indicates the historical cost which has been incurred in the past. This type of cost is not relevant in the decision making process. For example-while deciding about the replacement of a machine, the depreciated book value of the machine may not be relevant in the form of sunk cost.
Question 3. What Do You Understand By Cost Accountancy? What Are The Objectives Of Cost Accountancy?
Cost accountancy is the application of Costing and Cost accounting principles, methods, and techniques to the science, art and practice of cost control and the ascertainment of profitability as well as the presentation of information for the purpose of managerial decision making.
Following are the objective of cost accountancy:
- Ascertainment of cost and profitability with the help of various principles, methods and techniques.
- Cost control
- Presentation of information to enable managerial decision making.
Question 4. What Do You Understand By Cost Center? What Are The Types Of Cost Centers?
Cost center is defined as a location, person, or item of equipment in relation to which costs may be ascertained and used for the purpose of cost control. Identification of a cost center is a prerequisite for the successful implementation of the cost accounting process as the costs are ascertained and controlled with respect tot the cost centers. In many cases cost centers are termed as Responsibility Centers.
Types of cost centers:
1. Impersonal cost center – Consists of location or item of equipment.
Example – department, branch etc.
2. Personal cost center – Consists of a person or a group of persons.
Example – finance manager, sales manager etc.
3. Production cost center – Is the one where the production activity is carried on.
For example – paint shop, a machine shop, etc.
4. Service cost centers – Is the one which assists the production activity.
For example – store department, internal transport department, labour office, accounts department, etc.
Question 5. What Are The Different Types Of Cost?
Cost indicates the amount of expenditure incurred on a given thing.
Following are the different types of cost:
Direct Cost – also termed as Prime cost. It indicates that cost which can be identified with the individual cost center. It consists of direct material cost, direct labour cost and direct expenses.
Indirect Cost – also termed as Overhead. It indicates that cost which cannot be identified with the individual cost center. It consists of indirect material cost, indirect labour cost and indirect expenses.
Fixed Cost – indicates that portion of total cost which remains constant at all the levels of production. As the volume of production increases, per unit fixed cost may reduce, but not the total fixed cost.
Variable – indicated that portion of the total cost which varies directly with the level of production. The higher the volume of production, the higher the variable cost and vice versa, though per unit variable cost remains constant at all the levels of production.
Semi-variable cost – indicates that portion of the total cost which is partly fixed and partly variable in relation to the volume of production.
Controllable cost – indicates that cost which can be controlled by a specific number of persons in the organization
Uncontrollable cost – indicates that cost which cannot be controlled by a specific number of persons in the organization.
Normal cost – indicates that cost which is normally incurred at a certain level of output under normal circumstances.
Abnormal cost – indicates that cost which is normally not incurred at a certain level of output under normal circumstances.
Question 6. Which Factors Should Be Considered Before Installing A Costing System?
- Nature of the Product
- Nature of the Organization
- Manufacturing Process
- Simplicity and Cost
- Reporting Systems
Question 7. What Are The Elements Of Costs?
Elements of costs
- Material Cost – is the cost of commodities and material used by the organization. It can be direct and indirect material. Direct material indicates that material which can be identified with the individual cost center and which becomes an integral part of the finished goods. Indirect material indicates that material which cannot be identified with the individual cost center. This material assists the manufacturing process and does not become an integral part of finished goods.
- Labour Cost – is the cost of remuneration paid to the employees of the organization. It can be direct or indirect. Direct labour cost indicates that labour cost which can be identified with the individual cost center and is incurred for those employees who are engaged in the manufacturing process. Indirect labour cost indicates that labour cost which cannot be identified with the individual cost center and is incurred for those employees who are not engaged in the manufacturing process but only assist in the same.
- Expenses – is the cost of services provided to the organization. It can be direct or indirect. Direct expenses are those expenses which can be identified with the individual cost centers. Indirect expenses are those expenses which cannot be identified with that individual cost centers.
Question 8. What Items Are Included In Prime Cost?
Prime Cost is an aggregate of direct material cost, direct labour cost and direct expenses.
Question 9. What Is Overhead? What Items Are Included In Overhead?
Overhead is an aggregate of indirect material cost, indirect labour cost and indirect expenses.
Overheads are further classified as:
- Factory Overheads – Consists of all overhead costs incurred from the stage of procurement of material till the stage of production of finished goods
- Office and Administration Overheads – Consists of all overhead costs incurred for the overall administration of the organization.
- Selling and Distribution Overheads – Consists of all overhead costs insured from the stage of final manufacturing of finished goods till the stage of sale of goods in the market and collection of dues from the customers.
Question 10. What Are Non Operating Financial Incomes And Non Operating Financial Expenses?
Non operating financial income represents that income which arises not as a part of regular operations of the organization. Due to these incomes operating profit as per cost statement may be less than profit as per Profit and Loss account. For example: profit on the sale of assets, dividend received etc.
Non operating financial expense represents that expense which arises not as a part of regular operations of the organization. Due to these expenses the operating profit as per the cost statement may be more than the profit as per Profit and Loss Account. For example: a loss on the sale of assets, provision for income tax, interest paid etc.
Question 11. What Are The Main Consequences Of Overstocking?
- It will block a large amount of working capital.
- More storage facilities will be required.
- Risk of deterioration of quality and obsolescence of material.
- More attention will be required in material handling and up keeping.
- Additional Insurance cost.
Question 12. What Is The Difference Between Bin Card And Stores Ledger?
- Bin Card is a quantitative record of receipts, issues and closing balance of an item of material. Whereas Stores ledger records not only quantities received or issued or in stock but also the financial expressions of the same.
- Bin Card is maintained by stores department while stores ledger is maintained by costing department.
- Maintenance of stores ledger provides a second check on maintenance of bin cards.
Question 13. What Are The Various Ways To Classify Overhead?
Element wise Classification:
- Indirect Material
- Indirect Labour
- Indirect Expenses
Function wise Classification:
- Factory Overheads
- Administration Overheads
- Selling and Distribution Overheads
Variability wise Classification:
- Fixed Overheads
- Variable Overheads
- Semi-variable Overheads
Controllability wise Classification:
- Controllable Overheads
- Uncontrollable Overheads
Normality wise Classification:
- Normal Overheads
- Abnormal Overheads
Question 14. What Is The Difference Between Simple Average Method And Weighted Average Method?
Under Simple average method: the simple average of the prices of the lots available for making the issues is considered for pricing the issues. After the receipt of new lot, a new average price is worked out. This method is suitable if the material is received in uniform quantity.
Under Weighted average method: the price of each lot and the quantity of the same is considered. This method proves to be very useful in the event of varying prices and quantities. It is very simple to calculate.
Question 15. What Are The Limitations Of Marginal Costing?
- The classification of total cost as variable cost and fixed cost is difficult as no cost can be completely variable or completely fixed.
- Fixed costs are eliminated for the valuation of inventory of finished goods and semi-finished goods in spite of the fact that they might have been actually incurred.
- It does not provide any standard for the evaluation of performance.
- Fixation of selling price on marginal cost basis may be useful for short term only and may be dangerous in the long run.
- It does not consider the fixed overheads.
- It can be used for assessment of profitability only in the short run.
Question 16. What Is P/v Ratio?
P/V Ratio is Profit Volume Ratio which indicates the contribution earned with respect to one rupee of sales. The fundamental property of P/V Ratio is that it remains constant at all the levels of activities, provided per unit sales price and variable cost remains constant. A high P/V ration indicates that a slight increase in sales without corresponding increase in fixed costs will result in higher profits whereas a low P/V ratio indicates low profitability so that efforts can be made to increase the profits by increasing selling price or by reducing variable cost.
Question 17. What Are The Basic Assumptions Made By Marginal Costing?
Marginal Costing is based on the following the basic assumptions
- Variable cost varies in direct proportion with the level of activity whereas per unit variable cost remains constant at all the levels of activities.
- Per unit selling price remains constant at all the levels of activities.
- There are no variations due to the stock.
Question 18. What Do You Understand By Margin Of Safety?
Margin of safety are the sales beyond Break Even Point. In simple words, this is the amount of sales which generates profits. The soundness of the business is indicated by the margin of safety. A high margin of safety indicates that the Break Even Point is much below the actual sales and even if there is reduction in sales, business will be still in profits whereas a low margin of safety accompanied by high fixed cost and high P/V ration indicates that efforts are required to be made for reducing the fixed cost or increasing sales volume.
Question 19. What Are The Different Methods Of Remunerating The Workers?
Remuneration on time basis
- High Wage Plan
- Differential Time Rate
Remuneration on work basis
- Straight Piece Rate System
- Piece Rate with Guaranteed Time Rate
- Differential Piece Rate System
- Individual Incentive systems
- Group Incentive systems
Indirect monetary remuneration
- Profit Sharing
Question 20. Explain Maximum Level And What Are The Main Factors Considered While Fixing This Level?
Maximum level is the level above which the actual stock show Following factors are considered while fixing this level:
- Maximum Usage.
- Lead Time
- Price of Material
- Cost of Storage
- Availability of Funds
- Economic Order Quantity.
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