END TERM EXAMINATION

Paper Code: BBA 102

Subject: COST ACCOUNTING
EXAMINATION May/June 2018
Time: 3 Hours Maximum Marks: 75

Ans 1. The costs are classified on the following bases-

Classification by Nature
Direct cost-Direct cost is that cost which can be identified with a cost centre or a cost unit. For
e.g. cost of direct materials, cost of direct labour. Indirect cost-Cost which cannot be identified
with a particular cost centre or cost unit is called indirect costs. For e.g. wages paid to indirect
labour.

Classification by Behaviour

Fixed cost-Fixed cost is that cost which remains constant at all levels of production .For e.g. rent,
insurance. Variable cost-The cost which varies with the level of production is called variable cost
i.e., it increases on increase in production volume and vice-versa. For e.g. cost of materials, cost
of labour.Semi-variable cost-This cost is partly fixed and partly variable in relation to the output.
For e.g. telephone bill, electricity bill.

Classification by Function
Production cost-It is the cost of the entire process of production. In other words it is nothing but
the cost of manufacture which is incurred up to the stage of primary packing of the product.
Administrative cost-It is the indirect cost pertaining to the administrative function which
involves formulation of policies, directing the organization and controlling the operations of an
undertaking. This cost is not related to any other functions like selling and distribution, research
and development etc. Selling cost-Selling cost represents the indirect cost which is incurred for
(a) seeking to create and stimulate demand, (b) securing orders. Distribution cost-It is the cost of
the sequence of operations which begins with making the packed product available for dispatch.
V.R&D cost-"Research Cost"and"Development cost “are two different types of costs. Research
cost is the cost of researching for new products, methods and applications. Development cost is
the cost of the process which begins with the implementation of the decision to produce the new
product or apply the new method and ends with the commencement of formal production of that
product or by that method. Pre-production cost-It is that part of the development cost which is
incurred for the purpose of a trial run, before the commencement of formal
production.Conversion cost-It is the cost incurred for converting the raw material into finished
product .It comprises of direct labour cost, direct expenses and factory overheads. Prime cost-
Prime cost is the aggregate of direct material cost, direct labour cost and direct expenses. The
term„ directs “indicates that the elements of cost are traceable to a particular unit of output.

Ans 2-
Ans 4- Absorbed overhead is manufacturing overhead that has been applied to products or other
cost objects. Overhead is usually applied based on a predetermined overhead allocation rate.
Overhead is over absorbed when the amount allocated to a product or other cost object is higher
than the actual amount of overhead incurred, while the amount is under absorbed when the
amount allocated is lower than the actual amount of overhead incurred.
Over time, the overhead allocation rate should be adjusted to bring the amount of overhead
absorbed into alignment with the amount of overhead actually incurred. This means the amount
of over absorbed and under absorbed overhead should eventually offset each other.
These are the manufacturing costs other than direct materials and direct labor. Theactual
overhead refers to the indirect manufacturing costs actually occurring and recorded. ...
Manufacturing overhead is usually applied, assigned, or allocated by using a predetermined
annual overhead rate.
Ans8- Operating costs are key components of operating income calculation (and
operating income is a crucial component of many financial measures). Thus, the
lower a company's operating costs are, the more profitable it generally is.

Several things can affect operating costs (such as pricing strategy, prices for raw
materials or labor costs), but because these items directly relate to the day-to-
day decisions managers make, financial measures based on operating
expenses are also measures of managerial flexibility and competency,
particularly during rough economic times.

It is also important to note that some industries have higher operating costs than
others. This is why comparing operating costs or income is generally most
meaningful among companies within the same industry, and the definition of
"high" or "low" costs should be made within this contex.

Operating costs are expenses associated with running a business's core

operations on a daily basis. Common examples are cost of goods sold and labor
costs. Operating costs typically exclude interest expense, nonrecurring items,
and other income statement items not directly related to a company's core
business operations