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Bismillahir Rahmanir Rahim

Cost and Management Accounting


Course code: FIN-313
Chapter note 1
Prepared by ABM Fahad Hossain
Dept. of Finance & Banking (5th Batch)
Islamic University, Kushtia
In need: abmfahadhossain@gmail.com
Chapter 1 Introduction
1. Define Costing.
2. What is cost accounting?
3. What is Management Accounting?
4. Why does management need cost information?
5. Describe the types of cost.
6. What are the differences between cost and expenditure?
7. What are the purposes of Financial Accounting?
8. What are the differences between cost and financial accounting?
9. What are the differences between cost accounting and Management accounting?
10. Describe the methods of costing.
11. Describe the techniques of costing.

Chapter 2 Cost Sheet


1. Definition of cost sheet.
2. What are the Features of cost sheet?
3. What are the advantages of cost sheet?

Chapter 3 Remuneration, stock and overheads


1. Which factors should be considered while selecting a system of payment?
2. Write the essential features of an effective wage plan.
3. State the differences between time rate system and price rate system.
4. Describe the different types of premium bonus scheme.
5. Making a comparison between Halsey and Rowan scheme with imaginary
examples.
6. Short note Re-order level
7. Short note Maximum stock level
8. Short note Minimum stock level
9. Define Lead time
10. Define overheads.
11. State the classification of overheads.
12. What is Economic Order Quantity (EOQ)? Why it is needed to determine?
Prepared by ABM Fahad Hossain
Dept. of Finance & Banking (5th Batch)
1. Define Costing.
Ans: Costing is the techniques and processes of calculating costs. Techniques are the principles and
rules for the calculation of cost. Marginal Costing, Standard Costing, Budgetary Control, Uniform
costing etc are applied as techniques. A process is the method for calculating costs. Job Costing, batch
costing, process costing, operating costing, operation costing etc are the basic concepts of cost and
management accounting. These are used as methods of costing.

2. What is cost accounting?


Ans: Cost accounting is a quantitative process of collecting, recording, classifying, analyzing, allocating
and evaluating of financial and non-financial information. It also evaluates various alternative courses
of action and control of costs. It has three main purposes. These are given below:
Calculation of cost of a product or service
Operational planning and control
Decision making.

3. What is Management Accounting?


Ans: Management accounting is a field of accounting that analyzes and provides cost information to the
internal management for planning, controlling and decision making. It acts as a decision making
support system to the management.

According to ICWAI, Management Accounting is a system of the collection and presentation of


relevant economic events of an enterprise for planning, controlling and decision-making.

From the above discussion we can say that

Management Accounting is concerned with the collection of data from both internal and
external sources.
It analyzes and interprets the data.
It helps in planning, controlling and decision making.

4. Why does management need cost information?


Ans: In business, cost is usually a monetary valuation of effort, material, resources, time and utilities
consumed and risks incurred. The managers need cost information for the following reasons:
1. Periodic profit determination including (valuation of inventory).
2. Budgeting and planning operations (in money terms)
3. Cost control
4. Pricing
5. Day to day application of plans and policies.
Prepared by ABM Fahad Hossain
Dept. of Finance & Banking (5th Batch)
5. Describe the types of cost.
Ans: The types of cost are described below:
1. Historical cost: It is measured by actual cash payments at the time of acquiring assets, or
goods and services.
2. Estimated cost: It is a predetermined cost.
3. Standard cost: Most scientifically predetermined cost.
4. Total cost: The sum of all costs to a given volume.
5. Average cost: It is the unit cost which is computed by dividing the total cost by the volume.
6. Marginal cost: Marginal cost is measured by the change in cost due to change in output by
one unit.
7. Differential cost: Change in total costs at a particular level of activity with respect to another.
This is also known as incremental cost.
8. Replacement cost: This is the client cost of replacing an asset.
9. Opportunity cost: Opportunity cost is the cost of choosing the best alternatives.
10. Sunk cost: It represents historical cost which is unrecoverable in a given situation.
11. Discretionary costs: They are fixed costs that arise from periodic, usually yearly, set up by top
management.
12. Controllable costs: Costs which can be controlled by some actions are called controllable
costs.
13. Relevant costs: These are expected future costs that will differ under alternatives.
14. Policy costs: These costs are incurred due to taking a particular policy decision.

6. What are the differences between cost and expenditure?


Ans: The differences between cost and expenditure are given below:
Points Cost Expenditure
Definition Cost is the exchange amount that has to be Expenses are the using of goods and
paid or spent to buy something. services for earning profits.
Reported Costs are reported on balance sheet Expenses are reported on income
statement.
Link Costs are always linked with economic Expenses are always linked with
sacrifice to obtain something generation of revenue.
Types Historical cost, Estimated cost, Total cost , It has two types- revenue expense and
Average cost, Marginal cost, Opportunity capital expense.
cost, Sunk cost etc
Examples If one person purchases raw materials for When the raw materials are used for
using overtime time, it is considered as cost. generating revenue, it is considered as
expense.
7. What are the purposes of Financial Accounting?
Ans: The main purposes of financial accounting are given below:
1. Recording transactions of a particular business.
2. Preparation of necessary accounts and balance sheet of companies.
3. Apprising the owners of the status of business.
4. Showing the results of operations over a period through reports.
5. Analyze and interpretation of financial statements.
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Dept. of Finance & Banking (5th Batch)
8. What are the differences between cost and financial accounting?
Ans: The differences between cost and financial accounting are given below:
Points Cost Accounting Financial Accounting
Definition Cost accounting is a quantitative process Financial accounting is the preparation and
of collecting, recording, classifying, publication of financial statements and
allocating and evaluating of financial and earnings reports for disclosing to
non-financial information. shareholders.
Concerned It is concerned not only with historical It is concerned with historical transactions
with costs but also with estimated costs. only
Measures It measures the cost of each product line, It measures the financial performance of the
department, and process. entity at a particular period.
Applicable It is applicable to manufacturing concerns. It is applicable to all types of accounting
entities.
Objectives Cost ascertainment , Cost control, Decision To disclose the results of the business, and to
making show the financial condition of the business.
Prepared Cost reports may be prepared when it is Financial reports are prepared periodically,
desired. usually at the end of an accounting period.

9. What are the differences between cost accounting and Management accounting?
Ans: The differences between Cost accounting and Management accounting are given below:
Points Cost accounting Management Accounting
Definition Cost accounting is a quantitative process of Management accounting analyzes and
collecting, recording, classifying, allocating provides cost information to the internal
and evaluating of financial and non- management for planning, controlling and
financial information. decision making.
Emphasis The main emphasis is on cost determination The main emphasis is on the efficient
and cost control. operation of business.
Objectives Cost ascertainment , Cost control, Decision To provide the relevant information to the
making management to take an appropriate
decision.
Double Double entry system is used for recording Double entry system is not used for
entry transactions. recording transactions.
system
Deals with It deals with current operations. It deals with long-term planning.
Data It uses quantitative cost data only. It uses both quantitative and qualitative
data.
Useful It is useful for both management and It is useful only to the management.
external parties.
Concerned It is concerned with short term planning It is concerned with long term planning.
with
Prepared by ABM Fahad Hossain
Dept. of Finance & Banking (5th Batch)
10. Describe the methods of costing.
Ans: Different industries follow different methods for ascertaining cost of their products. The following
are the important methods of costing:
1. Job Costing: Job costing is concerned with the finding of the cost of each job or work order.
So, this is the part of specific order costing. This method is used in the factories which produce
the machine tool and other engineering products.
2. Batch Costing: Under batch costing, a batch of similar products is treated as a separate unit for
the purpose of ascertaining cost.
3. Contract Costing: Contract costing is applied for contract work. Such as, construction of
building, civil engineering contract etc.
4. Process Costing: Process costing is a process that converting raw materials into finished
product. It is also knows as continuous operating costing.
5. Unit costing: This method is used where a single article is produced by continuous
manufacturing activities.
6. Operating Costing: This method is used in those industries which provide services instead of
producing goods. That is why; it is also called service costing.
7. Operation Costing: This is suitable for those which are connected with mass production and
units are identical to each other.
8. Multiple Costing: It means combination of two or more of the above methods of costing.
9. Activity based Costing: Activity based costing focuses on fundamental cost objects. It is
suitable where amount of overhead is relatively high, product diversity and volume diversity.

11. Describe the techniques of costing.


Ans: In costing methods, various techniques may be used in ascertaining costs. These techniques are
described below:
1. Absorption Costing: Absorption costing is known as historical or traditional costing. It includes
the product cost consists of all variable and fixed manufacturing costs. Such as, direct materials,
direct labor and factory overhead etc.
2. Standard Costing: Standard costing is a technique which uses standards for controlling costs
and revenues through variance analysis. It is very helpful for controlling costs.
3. Marginal costing: Under marginal costing, variable costs are changed but fixed costs are not
treated as product costs. It helps management to take many important decisions on production
and pricing. It is also known as variable or direct costing.
4. Life cycle costing: Life cycle costing is a technique for evaluating the total cost of a product
over its economic life (from start to finish a product). That is why, it is also known as cradle to
grave costing.
5. Target Costing: Target costing is a technique which is used in a competitive environment to
control costs. It helps a firm to operate with market based prices. It is determined by the
following formula:
Target costs= Target price-Target profit

6. Uniform Costing: Cost principles and practices are being uniformly followed by a number of
undertakings to control costs. It is a technique for studying comparative efficiency and
promoting efficiency.
Prepared by ABM Fahad Hossain
Dept. of Finance & Banking (5th Batch)
Cost Sheet

1. Definition of cost sheet.


Ans: A cost sheet is a statement of cost incurred, or to be incurred for producing a given volume of
output. It is the statement of cost according to elementwise.

The following points help to understand the concept of cost sheet-

1. It is a detailed statement that showing the total cost and profit or loss for the period.
2. Total expenditure, cost per unit, and the various stages of cost are shown on cost sheet
systematically.

2. What are the Features of cost sheet?


Ans: The features of cost sheet are given below:

1. Cost sheet relates to a particular period.


2. It includes total cost as well as various stage of cost.
3. It also indicates cost per unit of each element.
4. It is prepared productwise separately.

3. What are the advantages of cost sheet?


Ans: The advantages of cost sheet are given below:
1. It shows the total cost and the cost per unit of the units produced during the given period.
2. It helps the producers to control over the cost of production.
3. It helps the manufacturer to formulate a definite and profitable production policy.
4. It helps in fixing up the selling price more accurately.
5. It helps the businessman to minimize the cost of production.
Prepared by ABM Fahad Hossain
Dept. of Finance & Banking (5th Batch)
Methods of Remuneration

1. Which factors should be considered while selecting a system of payment?


Ans: For selecting a system of payment, the following factors should be considered:
1. Simplicity: The wage system should be simple and easy to understand by general workers in the
organization.
2. Quantity and quality of output: The wage system should be based on the quantity and quality
of output. The method of remuneration should be such that it encourages increased production.
3. Incidence of overhead: It should be marked that an increased volume of production decreases
the unit fixed costs whereas a decrease in production increases the cost of production. The
factors of incidence of overhead are lies at the scheme of remuneration. Here two things should
be considered:
i. Expected volume of output
ii. Expected saving in time in producing it.
4. Effect upon workers: High wages will affect the efficient workers from outside and retain those
who are already in employment. It reduces the cost of labour turnover. The labour union should
consider these factors in selecting the wage system.
5. Statutory provisions: The statutory provisions should be taken into consideration in selecting
the wage system.

2. Write the essential features of an effective wage plan.


Ans: The essential features of an effective wage plan are given below:
1. It should be based upon scientific time and motion study to ensure a fair output and a fair
remuneration.
2. There should be guaranteed minimum wages at satisfactory level.
3. The wages should be fair to both the employees and employer.
4. The scheme should be flexible.
5. There must be continuous flow of work.
6. The scheme should help to increases the production level.
7. It should increase the moral of worker and reduces labour turnover.
8. The scheme should not violate any local or national trade agreements.
9. The cost of scheme should be kept at a minimum.

3. State the differences between time rate system and price rate system.
Ans: The differences between Time rate system and Price rate system

Time rate system Price rate system


Under this system, earrings of a worker are In this system, earnings of a worker are calculated
calculated on the basis of time spent on the job. on the basis of number of units produced.

In this system, minimum guaranteed time rate is Under this system, no guarantee of minimum
paid to every worker. payment to every worker.

Under this system. remunerations are not directly Remuneration of workers directly linked with
linked with productivity, productivity
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Dept. of Finance & Banking (5th Batch)
Under piece rate system, there is no consideration
This system emphasis on high quality of work
for the quality of work.

Under time rate system. strict supervision is


essential In this system, close supervision is not required.

4. Decribe the different types of premium bonus scheme.


Ans: There are three schemes under the premium bonus scheme. These are described below:

1. The Halsay scheme: The main features of this scheme are given below:
1. Standard time is fixed for each job
2. Time rate is guaranteed and the worker receives the guaranteed wages.
3. If the job is completed in less than the standard time, a worker get bonus of 50% of the
time saved.

The formula for calculating this scheme: Guaranteed wage + Bonus (50% of time saved)

The advantages and disadvantages are given below:

Advantages:
1. It is simple to understand and operate
2. The efficient workers will be able to increase hourly rate of earnings by hours saved.
3. Inefficient workers are not penalized.
4. The employer will share 50% of the bonus due to time saved by the workers.

Disadvantages:
1. The earning per unit will come down with the increase in efficiency. The workers object
to share their bonus with the employer.
2. The incentive is not strong enough to induce the more efficient workers to work harder.

2. The Halsay weir Scheme: Under this scheme, a worker will get bonus of 30% of time saved.
Both Halsay and Halsay-weir Scheme are similar.
3. Rowan scheme: This scheme was introduced by David Rowan in 1901. Here, the bonus is
paid percentage base. It takes into account a proportion as follows:


Advantages:
1. The workers share benefit with the employer.
2. It is suitable for learners and beginners.
3. It provides safeguard against loose fixation of standard.

Disadvantages:
1. Efficiency beyond certain point is not rewarded.
2. A beginner and a more efficient worker may get the same amount of bonus.
3. It is more complicated than the Halsay system.
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Dept. of Finance & Banking (5th Batch)
5. Making a comparison between Halsey and Rowan scheme with imaginary examples.
Ans: In case Halsey scheme, the bonus is paid on the basis of time saved but in case of Rowan
scheme, bonus is paid as percentage basis. The following table is making the comparison between
these two premium bonus schemes:

Rate Time Time Time Time Bonus Total Earning Earnings per
per allowed Taken saved wages hour
hour (2) (3) (4) (5) = Halsey Rowan Halsey Rowan Halsey Rowan
(1) 13 (6) (7) (8)=5+6 9= 5+7 10=8311=93
2 10 10 NIL 20 -- -- 20.00 20.00 2.00 2.00
2 10 8 2 16 2.00 3.20 18.00 19. 20 2.25 2.40
2 10 6 4 12 4.00 4.80 16.00 16.80 2.67 2.80
2 10 5 5 10 5.00 5.00 15.00 15.00 3.00 3.00
2 10 4 6 8 6.00 4.80 14.00 12.80 3.50 3.20
2 10 2 8 4 8.00 3.20 12.00 7.20 6.00 3.60
Bonus earned: In case of bonus, the main points are summarized below:
1. In the Halsey scheme, the bonus increases steadily with increase in efficiency. But in
the Rowan scheme, the bonus increase up to a certain stage and then decreasing.
2. Rowan scheme provides better bonus than the Halsey scheme until the work is
completed in 50% of standard time.
3. When the work is completed within 50% of the standard time, the bonus is same under
both schemes.
4. When the work is completed is less than 50% of the standard time, bonus under Halsey
is greater.

Total Earnings: In case of total earnings, the following points are available:
Below 50% efficiency, earnings of rowan scheme are greater than Halsey scheme.
At 50% efficiency, earnings of both schemes are equal.
Above 50% efficiency, earnings of rowan scheme are lower than Halsey scheme.

Earnings per share: In the Halsey scheme the earning per hour increase at a fast rate.
Under the rowan scheme, it increases slowly.
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Dept. of Finance & Banking (5th Batch)
Storing of Materials
1. Why efficient storing?
Ans: In small industries, the investment in material is up to 90% of total capital. Therefore, serious
losses may be occurred in companies due to inefficient storing. So, to obtain the maximum
advantage of a cost accounting system, there should be an efficient storing is required. Efficient
storing also provides-

Hold in proper custody all stores to be issued.


Protect all kinds of stores from theft, destruction, wastage etc.
Maintain a smooth and regular flow of stores to the production process.

2. Re-order level
Ans: Re-order level is the point which is fixed between maximum and minimum stock level. It is
the excess of ordering level ever the minimum level is sufficient to meet the requirement during the
lead time. It is also known as reorder point. When stock of materials reach at this point, the
storekeeper will purchase materials. The re-order level is higher than minimum stock level to guard
against abnormal usage and unexpected delay in supply. The formula for reorder level is given
below:
Re-order level = Maximum re-order period Maximum usage

3. Maximum stock level


Ans: Maximum stock level represents the stock level which stock should not be allowed to rise
although there may be low demand for materials. The main purpose of this level is to ensure that
capital is not blocked up unnecessary in stocks. The factory should not keep materials more than the
maximum stock level because it increases the carrying cost. The maximum level of stock can be
calculated by the following formula:
Maximum level = Reorder level + reorder quantity (minimum consumption minimum
delivery time).
4. Minimum stock level
Ans: Minimum level of stock is the level of inventory below that should not be fall. In other words,
the minimum level represents the minimum quantity of the stock that should be hold at all times. If
the stock goes below the minimum level, the production may be interrupted due to shortage of
materials. The formula for calculating minimum level of stock is given below:
Minimum level = Reorder level-(Normal usage Normal reorder period)

5. Lead time
Ans: Lead time is the time that indicates the interval between placing an order and receiving
delivery.
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Dept. of Finance & Banking (5th Batch)
6. What is Economic Order Quantity (EOQ)? Why it is needed to determine?
Ans: EOQ stands for Economic Order Quantity. It represents the most favorable quantity to be ordered
each time when supplies are required.
In purchasing materials, an important problem is how much to buy at a time. If large quantities are
bought, the carrying costs would be high. On the other hand, if small quantities are bought, ordering
costs will be high. For solving this problem, economic order quantity method is used. The formula for
Economic order quantity is given below:

2
EOQ =

Where,
A = Annual usage in units
C = Carrying costs per unit of inventory
S = Ordering cost per unit

Overheads
1. Define overheads.
Ans: Any expenditure incurred over and above prime cost is known as overheads. Overheads include
the total cost of indirect materials, indirect labour and indirect expenses. The term indirect means that
which cannot be allocated but apportioned. So, overheads is the over the direct or over the factory
costs.
2. State the classification of overheads.
Ans: Any expenditure incurred over and above prime cost is known as overheads. Overheads cost can
be classified according to Functions, elements and behavior. These are described below:
1. Functionalize classifications: It includes the following classifications:
Production overheads: All costs incurred in the factory over the direct material cost, direct
labour and direct expenses are known as production overheads. Lubricant oil, repairs and
maintenance to plant and machinery, factory rent etc are the examples of production costs.
Administrative overheads: It refers to cost of management. Salaries of staffs, bank
charges, stationary, telephone, directors salary etc are the example of administrative
overheads.
Selling and distribution overheads: It is known as marketing costs. Selling, advertising,
transportation warehousing etc are the examples of selling and distribution costs.
2. Elementwise classifications: It includes the following classifications:

Indirect material: Consumable stores, fuel, lubricant oil, small tools for general use, loss,
deficiencies of stores etc.
Indirect labour: Salary of the foreman, supervisory staff and works manager, wages for
maintenance workers, payment for overtime, Employers contribution to provident fund
etc.
Indirect expenses: Repairs and maintenance to plant and machinery, factory rent,
depreciation of plant and machinery, rates and taxes, insurance, canteen expenses etc.
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Dept. of Finance & Banking (5th Batch)
3. Behaviorwise classifications: It includes the following classifications:
Variable overheads: It includes indirect material, indirect labour, power and fuel,
salesmens commission etc.
Fixed overheads: It includes rent and rates, insurance, depreciation of machinery and
buildings, office expenses, bank charges interest on capital etc.
Semi-variable/fixed overheads: They represent partly variable and partly fixed overheads.
Examples are repairs and maintenance, depreciation of plant and machinery, salary payable
to a supervisor, telephone expenses.
Bismillahir Rahmanir Rahim

Cost and Management Accounting


Course code: FIN-313
Chapter note 2
Prepared by ABM Fahad Hossain
Dept. of Finance & Banking (5th Batch)
Islamic University, Kushtia
In need: abmfahadhossain@gmail.com
Chapter 4 Process costing
1. Definition of process costing.
2. Describe the characteristics of process costing.
3. Describe the application of process costing.
4. Describe the elements of costs of processing
5. Define joint product and by product.
6. State the differences between abnormal loss and abnormal gain.
7. Describe the advantages of process costing.
8. When you prepare abnormal loss account?
9. Differences between joint product and by product.
10. Define Scarp and its treatment in costs. How would you control scarp?

Chapter 5 CVP Analysis


1. Define CVP analysis. Which factors affect the profit according to CVP analysis?
2. What are the relationship among contribution margin, fixed cost and net operating
income?
3. How change in sales volume affects contribution margin, and net operating
income?
4. Define contribution margin ratio.
5. Define Margin of Safety.
6. What are the differences between contribution margin and net operating income?
7. State the assumptions of CVP analysis.

Chapter 6 Transfer price


1. Define Transfer Price.
2. Define transfer price at cost.
3. Describe the shortcomings of transfer price at cost.
4. State the guidelines for using market prices to control transfer?
5. What do you mean by Transfer price at market price?
6. Which types of organization use market price approach to transfer price and why?
7. How price are transferred at market in a well defined intermediate market?
8. Define Negotiated market price.
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Dept. of Finance & Banking (5th Batch)
1. Definition of process costing.
Ans: Process costing is the methods of costing that used in industries. It is a continuous process where
the material has to pass through two or more processes for converting into finished goods. The output of
one process becomes the input of another process. This costing method is useful in the manufacturing of
products such as steel, soap, rubber, chemical, vegetable oil etc.

2. Describe the characteristics of process costing.


Ans: Process costing is a continuous process where the materials pass through two or more processes
for converting into finished goods. The characteristics of process costing are given below:

1. The products are processed in one or more processes.


2. The products are standardized and homogeneous.
3. The products are distinguishable in processing stage.
4. When a product is produced through different processes the output of each process is
transferred to the next process. The last process is transferred to the finished stock.

3. Describe the application of process costing.


Ans: Process costing may be used in a wide number of industries. It is suitable where the product is
manufactured through a continuous process of operations.
For example:
1. Manufacturing industries, such as iron and steel, flour milling, cement, food products, milk
dairy, textiles, soap-making, paper, box-making, biscuits, meat products etc.
2. Mining industries, such as oil, coal, cooking works etc.
3. Chemical industries.
4. Public utility services, such as generation of electricity, water supply etc.

4. Describe the elements of costs of processing


Ans: The costs of processing include the following elements:

1. Materials: Raw materials which are required for each process are debited to process account.
The output of the first process becomes the raw materials of the second process.
2. Labour: Labour cost that paid to labour should be debited in the process account.
3. Direct Expense: Each process account should be debited with the direct expenses. It includes
depreciation, repairs, insurance etc.
4. Production Overhead: Expenses such as rent, telephone, lighting, gas, water etc which are
known as production overheads. These expenses are to be allocated to each process on certain
basis.

5. Define joint product and by product.


Ans: The joint product is also known as main product. The term main product represents those products
which have higher importance and higher market value. It is the basic intension of every firm to produce
this product. Here, the differences between prices of products are not significant.
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By-products: The term by product represents those products which have lower importance and lower
market value. It is not the basic intension to produce them. Here, the differences between prices of
products are significant.

The following example can help to understand the concept of joint product and by product-
In oil exploration project, produces like petrol, diesel, kerosene and gas. Out of these, petrol and diesel
are the main products and kerosene and gas are the by-products.

6. State the differences between abnormal loss and abnormal gain.


Ans: The differences between abnormal loss and abnormal gain are described below:
Points Abnormal loss Abnormal gain
Definition Abnormal loss is the loss which is caused Abnormal gain is the difference between
by abnormal conditions such as accident, actual and expected production.
machine breakdown etc.
Reduces This loss should be reduced by increase It is a sign of efficient business.
efficiency.
Occurs Abnormal loss occurs because of an Abnormal gain arises because of an abnormal
avoidable or abnormal reason. efficiency in the performance.
Account Process costing is to be credited by Process costing is to be debited by abnormal
abnormal loss account. gain account.
Formula Abnormal loss = Expected output-Actual Abnormal gain = Actual output Expected
output. output

7. Describe the advantages of process costing.


Ans: The advantages of process costing are described below:
1. Costs are computed at the end of a particular period.
2. Average costs are easily computed.
3. It involves less clerical work than job costing.
4. Cost data are available process for exercising managerial control.
5. It helps to the management in determining the price quotations.

8. When you prepare abnormal loss account?


Ans: When abnormal gain is existed in the process, it is necessary to maintain separate abnormal loss
account.

9. Differences between joint product and by product.


Ans: The differences between joint product and by product are given below:
Points Joint product By product
Definition When two or more equal importance products A product which is recovered incidentally
are produced from one process, these are at the time of producing is known as by
known as joint products. product.
Motive Joint products are the main motive of But there is no tendency to produce by
manufacturing. products
Produce It is produced intentionally It is produced incidentally.
Value It has more economic value. It has less economic value
Examples Gasoline, fuel oil, lubricants etc kerosene, Diesel etc
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10. Define Scarp and its treatment in costs. How would you control scarp?
Ans: The term scarp means discarded materials which has some recovery value. This value is
recoverable without further treatment or reintroduced into the production process. The following points
help to understand the concept of scarp value-

1. Scarp is the discarded material obtained from manufacturing process.


2. It is usually small value and this value is recoverable without further processing.

Treatments: The accounting treatments of costs are given below:

1. Treatment by neglect: When value of scarp is negligible, it may be excluded from costs.
2. Credit to overheads: The sales value of stock is deducted from overheads to reduce the
overhead rate.
3. Charging scarp account with cost: When scarp is identifiable with a particular job and its value
is significant, the scarp account should be charged with full cost. The profit or loss of the scrap
account will be transferred to costing profit and loss account.

Control:

Control means the maximum effective utilization of raw material. Scarp control does not start at the
production department but it starts from the stage of producing. Thus, the most suitable type of
materials, the right type equipment and personnel would help to set maximum quantity of finished
products. A standard allowance of scarp should be fixed and actual scarp should be collected and
reported the department which is responsible for it. A periodic scarp report would serve for this purpose.
Prepared by ABM Fahad Hossain
Dept. of Finance & Banking (5th Batch)
1. Define CVP analysis. Which factors affect the profit according to CVP analysis?
Ans: CVP analysis stands for Cost-Volume-Profit analysis. It is a powerful tool that helps managers to
understand the relationship among cost, volume and profit. CVP analysis focuses on how profits are
affected by the following factors:
1. Selling price: Selling price affects the profit of a firm. If selling price increases with lower level
of cost, the profit of the firm increases. On the other hand, if selling price decreases with higher
level of cost, the profit decreases.
2. Sales Revenue: Seles revenue also affects the profit of a firm. If sales revenue increases with
lower level of cost, the profit of the firm increases. On the other hand, if sales revenue decreases
with higher level of cost, the profit decreases.
3. Unit variable cost: Unit variable cost is an important factor that affects profit. If unit variable
cost increases, the contribution margin and net profit of the firm decreases. On the other hand, if
unit variable cost decreases, the contribution margin and net profit increases.
4. Total fixed cost: Total fixed cost is also affects the profit of the firm. If fixed cost increases, the
net profit of the firm decreases. On the other hand, if fixed cost decreases, the net profit
increases.
5. Mixed of products sold: If mixed of products sold increases with the lower cost, the profit of
the firm increases. On the other hand, if mixed of products sold decreases, profit decreases.

2. What are the relationship among contribution margin, fixed cost and net operating income?
Ans: There is a close relationship among contribution margin, fixed cost and net operating income.
Contribution margin is the amount remaining from sales revenue after deducting variable expense. It is
the amount that covers fixed expense and profit for the period. If the contribution margin is not
sufficient to co cover the fixed expense, loss occurs for the period.
If contribution margin is higher with a lower fixed cost, the net operating income will be increased. On
the other hand, if contribution margin is lower with a higher fixed cost, the net operating income will be
decreased.
3. How change in sales volume affects contribution margin, and net operating income?
Ans: Contribution margin is the differences between sales revenue and variable costs. After deducting
the fixed costs from contribution margin, we get net income. That is why, the change in sales volume
and fixed costs affect the contribution margin and net operating income. This can be cleared by the
following imaginary example:
Sales per unit 250
Variable expense per unit 150
Fixed expense 35000
If the firm produce one unit, then,
Sales revenue 250
- Variable cost 150
Contribution margin 100
- Fixed costs 35000
Net income (34900)
If the firm produces two units
Sales revenue 500
- Variable cost 300
Contribution margin 200
Prepared by ABM Fahad Hossain
Dept. of Finance & Banking (5th Batch)
- Fixed costs 35000
Net income (34800)
If enough units can be sold to 35000 in contribution margin, then all the fixed expense will be covered.
Then these units are known as break even points in which the profit is 0. After the break points, if the
firm increases its sales volume, the amount of contribution margin and net income also increases.

So, form the above we can say that the change in sales volume affects the contribution margin and net
profits.

4. Define contribution margin ratio.


Ans: The contribution margin as a percentage of sales is known as contribution margin ratio. It
computes the changes in contribution margin and net operating income due to changes in sales volume.
It can also be used in cost volume profit calculations. The formula for calculating contribution margin
ratio is given below:

CM Ratio =

5. Define Margin of Safety.
Ans: The margin of safety is the differences between total budgeted sales and break even sales. The
higher the margin of safety, the lower the risk of incurring a loss
The formula for margin of safety is given below:
Margin of Safety = Total budgeted/ actual sales Break even sales.

The margin of safety can also be expressed by percentage by the following ways:

Margin of safety percentage =

6. What are the differences between contribution margin and net operating income?
Ans: The differences between contribution margin and net operating income are given below:
Points Contribution margin Net operating income
Meaning Contribution margin is the difference Net operating income is the differences
between sales revenue and variable cost. between contribution margin and fixed cost.
Nature It is not actual income for a firm It is the actual income for a firm.
Effect The lower the variable cost, the higher the The lower the fixed cost, the higher the net
contribution margin. operating income.
Value If sales revenue is lower than variable If contribution margin is lower than fixed
cost, the contribution margin is negative cost, the net operating income is negative and
and vice versa. vice versa.
7. State the assumptions of CVP analysis.
Ans: The assumptions of CVP analysis are given below:
1. Selling price is constant. The price of a product or service will not change as volume changes.
2. Costs are linear and can be divided into variable and fixed elements. The variable cost is constant
per unit and fixed cost is constant in total range.
3. In multiproduct companies, the sales mix is constant.
4. In manufacturing companies, inventories do not change. The number of units produced equals
the number of units sold.
Prepared by ABM Fahad Hossain
Dept. of Finance & Banking (5th Batch)
Transfer Price

1. Define Transfer Price.


Ans: A transfer price can be defined as the price charged when one segment of a company provides
goods or services to another segment of the company.

2. Define transfer price at cost.


Ans: A transfer price at cost is based only variable cost. Here, fixed cost might be considered. Many
firms make transfers between divisions on the basis of accumulated costs of goods. It ignores the all
kinds of profits and transfer price from one division to another at cost basis.

3. Describe the shortcomings of transfer price at cost.


Ans: Transfer price at cost ignores the all kinds of profits and transfer price from one division to
another at cost basis. Although the cost approach is simple to apply, it has some shortcomings also.
These are given below:
1. The first important defects of cost approach is setting transfer price. It is very difficult to set the
price of transfer.
2. Cost based pricing can lead to dysfunctional decisions in a company.
3. This approach has no ability to tell the manager when transfer should or should not be made.
4. By using cost approach, profits for the company may be adversely affected by managers never
know about it.
5. Only final division can show its profits but other divisions cant show any profits.
6. Another important shortcoming of cost based approach is that it has no ability to provide
incentive for controlling cost. That is why; the final division is burdened with the huge
accumulated cost. It also decreases the profit of the final divisions.

4. State the guidelines for using market prices to control transfer?


Ans: There are certain guidelines for using market prices to control transfer between divisions. These
are given below:
1. The buying division must purchase internally if the selling divisions meet bona fide outsides
prices and wants to sell internally.
2. If the selling division does not meet this, the buying division is free to purchase outside.
3. The selling division must be free to reject internal business if it sells outsides.
4. An impartial board must be established to solve the disputes between divisions.

5. What do you mean by Transfer price at market price?


Ans: Market price means the price charged for an item in the open market. When materials are
transferred from one process to another at market price is known as market price approach. It is
regarded as the best approach because of the following reasons-
1. Transfer at market price is a profit center concept.
2. In this approach, all divisions are able to show profits for their efforts
3. This approach also helps manager to decide when transfer should be made.
Prepared by ABM Fahad Hossain
Dept. of Finance & Banking (5th Batch)

6. Which types of organization use market price approach to transfer price and why?
Ans: The market price approach is designed for using highly decentralized organization. It means that it
is used those organizations where divisional managers have enough right to take decision. In this
organization, the various divisions can be viewed as independent and they have independent profit
responsibility. The use of market price is to create competitive market conditions.

7. How price are transferred at market in a well defined intermediate market?


Ans: Price can be transferred under a well intermediate market place. An intermediate market is a
market in which an item can be sold immediately to outside customers. It is occurred when the profit of
transferred is lower than intermediate market. So, if an intermediate market exists, a division will
choose between two matters:
i. Selling its products to outside customers or
ii. Selling its products to other divisions.

8. Define Negotiated market price.


Ans: A negotiated market price is an agreed price between the buying and selling divisions. It reflects
unusual situations. The use of negotiated market price in those situations where no intermediate market
prices are available.
For example, one division may require an item that is not available from any outside source. Therefore
it must be produced internally. Under this circumstance, the buying division must negotiate with selling
division to set price of this item.
Bismillahir Rhmanir Rahim

Cost and Management Accounting


Course code: FIN-313
Chapter note 3
Prepared by ABM Fahad Hossain
Dept. of Finance & Banking (5th Batch)
Islamic University, Kushtia

Chapter 7 Flexible Budget


1. What is budget?
2. Define flexible budget.
3. Describe the characteristics of flexible budgets.
4. Define Static Budget.
5. Deficiencies of static budget.
6. How flexible budget works?
7. What are the main differences between flexible and static budget?
8. Definition of Master Budget
Chapter 8 Decentralization
1. Define Decentralization.
2. State the advantages and disadvantages of decentralization.
3. Describe the types of responsibility center.
Prepared by ABM Fahad Hossain
Dept. of Finance & Banking (5th Batch)
1. What is budget?
Ans: A budget is a quantitative expression of a financial plan for a defined period of time. It may
also include planned sales volumes and revenues, resource quantities, costs and expenses, assets,
liabilities and cash flows.
According to Business Dictionary, A budget is an estimation of revenue and expenses over a
specified future period of time.
From the above we can determine the following features of budget:
1. A budget is a financial or quantitative statement.
2. It is an estimate of income and expenditure for a set period of time
3. It is prepared for a certain period for attainting a given objective.

2. Define flexible budget.


Ans: A flexible budget is a budget that adjusts for changing in the volume of activity. It takes into
account how changes in activity affect costs. It helps to estimate what costs should be for any level
of activity within a given range. The flexible budget is useful than a static budget.

3. Describe the characteristics of flexible budgets.


Ans: A flexible budget is a budget that adjusts for changing in the volume of activity. The
important characteristics of flexible budget can be pointed as follows:
1. Flexible budget covers a range of activities
2. It is easy to change according to variations of production and sales levels.
3. Flexible budget helps to measure and evaluate the financial position.
4. It takes into account the changes in the volume of activity.
5. Flexible budget replaces a static budget for control.

4. Define Static Budget.


Ans: A static budget is a budget that does not change as volume changes. If a company's annual
master budget is a static budget, the budget for sales commissions expense will be one amount. In
other words, in a static budget the budgeted amount for sales commission expense will remain at
$200,000 even if the actual sales during the year are $3 million, $4 million or $5 million.

5. Deficiencies of static budget.


Ans: Static budget is a budget that does not change with the level of activity. It has some limitations
also. These are given below:
1. The greatest disadvantage of the static budget is its lack of flexibility.
2. It relates with a single level of activity.
3. It cant be used whether variable cost is under control.
4. Static budgets are based on previous data; newer businesses face difficulty for establishing
and implementing them.
5. Another important deficiency of static budget is that it fails to distinguish between the
production control and cost control. The deficiencies of the static budget can be explained
with the help of the following example:
Prepared by ABM Fahad Hossain
Dept. of Finance & Banking (5th Batch)

6. How flexible budget works?


Ans: A flexible budget is a budget that adjusts for changing in the volume of activity. The basic
steps in preparing a flexible budget are:
1. Determine the relevant range in which activity is expected to fluctuate during the coming
period.
2. Analyze costs that will be incurred over the relevant range in terms of cost patterns (variable,
fixed, or mixed).
3. Determining the formula for variable and mixed costs.
4. Using the formula for the variable portion of the costs and prepare a budget.
Prepared by ABM Fahad Hossain
Dept. of Finance & Banking (5th Batch)
7. What are the main differences between flexible and static budget?
Ans: The main differences between flexible and static budget are given below:
Points Flexible budget Static budget
Definition A flexible budget is a budget that A static budget is a budget that does not
adjusts for changing in the volume of change with the volume of activity.
activity.
Scope Flexible budget can easily ascertain A static budget cannot ascertain costs any
costs in different levels of activities. level of activities.
Determination Flexible budget is prepared at different Static budget is prepared under the
of cost levels of activities considering the assumption that all conditions are
possible changes. unchanged.
Importance Flexible budget has a wide application Static budget has a limited application and
as an effective tool for cost control. an ineffective tool for cost control.
Classification Flexible budget is prepared by Static budget is prepared without classifying
classifying the costs according to their the costs.
variable nature.

8. Definition of Master Budget


Ans: A master budget is a set of interconnected budgets of a company for various functional areas.
It includes budget of sales, production costs, purchases, incomes, etc. It also includes pro forma
financial statements. The master budget is typically presented in either a monthly or quarterly, or a
yearly format. A master budget provides planning and control tool to the management. At the end of
each period, actual results can be compared with the master budget and necessary actions should be
taken.

Components of Master Budget


Master budget has two major sections. They have following components:
Operational Budget
1. Sales Budget
2. Production Budget
3. Direct Material Purchases Budget
4. Direct Labor Budget
5. Overhead Budget
6. Selling and Administrative Expenses Budget
7. Cost of Goods Manufactured Budget

Financial Budget
1. Expected Cash Receipts from Customers
2. Expected Cash Payments to Suppliers
3. Cash Budget
4. Budgeted Income Statement
5. Budgeted Balance Sheet
Prepared by ABM Fahad Hossain
Dept. of Finance & Banking (5th Batch)
1. Define Decentralization.
Ans: Decentralization is the transfer of authority from central to local managers. In a
decentralization organization, decision making authority is spread throughout the organization. In a
decentralization organization, lower level managers and employees participate in decision making.
2. State the advantages and disadvantages of decentralization.

Advantages of Decentralization:

1. Lower level managers solve day to day problem. It reduces the burden on top executives
and they can concentrate on bigger issues.
2. Empowering lower level managers to make decisions and puts the most detailed and up-to-
date information.
3. By eliminating delay in decision making, organization can respond more quickly to
customers and changes the operating environment.
4. Granting decision making authority helps lower-level managers for higher level positions.
5. Decentralization can increase the motivation and job satisfaction of lower level managers.

Disadvantages of decentralization

1. Lower level managers may make decisions without fully understanding the big picture.
2. If lower level managers make their own decisions, coordination may be lacking.
3. The objectives of lower level managers may clash with the objectives of entire
organization.
4. Spreading innovative ideas may be difficult in a decentralized organization.

3. Describe the types of responsibility center.


Ans: The term responsibility center is used for any part of an organization whose manager has
control over and is accountable for cost, profit, or investments. It has three types. These are
described below:
1. Cost center: The manager of a cost center has control over costs but not over revenue or the
use of investment funds. Service departments such accounting, finance, general
administration personnel are classified as cost centers. Manufacturing facilities are also
considered as cost centers. The managers of cost centers are expected to minimize cost.
Standard cost variances and flexible budget variances are used to determine the performance
of the cost center.
2. Profit center: The manager of a profit center has control over both costs and revenue but not
over the use of investment funds. Profit center managers are evaluated by comparing actual
profit to targeted profit.
3. Investment center: The manager of an investment center has control over cost, revenue and
investments. For example, the vice president of truck division at general motors. Investment
center managers are evaluated by using return on investment (ROI)