Prepared by SM Nahidul Islam 1

Dept. of Finance & Banking

1. Definition of cost and costing

Cost: Cost is an expenditure that has actually been incurred or that can be notionally attributed to a specified
thing or activity. It is measured and recorded on the basis of some historical or pre-determined standard.
According to American Accounting Association '' Cost may be defined as a foregoing, measured in
monetary terms, incurred or potentially to be incurred to achieve a specific objective."
Costing: Costing is the techniques and processes of ascertaining costs. Techniques are used as principles and
rules for the ascertainment of cost. For example, Marginal Costing, Standard Costing, Budgetary Control,
Uniform Costing, etc., are applied as techniques. A process is used to lead to the method (or procedure) of
ascertaining costs. For example, Job Costing, Batch Costing, Process Costing, Operating Costing, Operation
Costing, etc., are Basic Concepts on Cost and Management Accounting used as methods of costing.

2. Difference between Cost and expense

Answer: The differences between Cost and expense are given below:

Cost
Cost is an expenditure that has actually been incurred
or that can be notionally attributed to a specified thing
or activity.
Cost is used on something that has returns.
Cost is reported in the balance sheet.
Cost is used when one is buying assets.
Expense
An expense may be defined as an expired cost
with a matching economic benefit (such as
postage paid, rent paid, depreciation, etc.).
Expenses are expenditures used on things that
depreciate.
Expense is reported on the income sheet.
Expense is used on buying liabilities or things that
eventually expire.

3. Describe the needs for costing

Answer: Needs for costing is given below:

1. Helps to record and analysis the expenses with a view to know the cost of a unit of output, of a job, of
a process or of an operation.
2. Helps to exercise control over cost
3. Formulating policies
4. Helps in fixing the selling price
5. Helps for cost negotiation
6. Forecasting
7. Helps to face depression
8. Helps to choose between making and buying.

4. Describe the requisites or essentials of Cost Accounting System

Answer: The following are the essentials of an ideal cost accounting system:
1. Accuracy: The system of cost accounting must provide for accuracy in terms of both cost ascertainment
and presentation. Otherwise it will prove to be misleading.
2. Simplicity: To avoid complications in the procedure of cost ascertainment an elaborate system of costing
should be avoided and every care must be taken to keep it as simple as possible.

Islamic University, Kushtia

 Prepared by SM Nahidul Islam 2
Dept. of Finance & Banking

3. Elasticity: The costs accounting system should be capable of adapting itself to the changing situations of
business.
4. Economy: The cost of operating costing system must be less. It must result in increased benefit when
compared to the expenditure incurred in installing it.
5. Comparability: The records to be maintained must facilitate comparison over a period of time. The past
records must serve as a basis to guide the future.
6. Promptness: All the departments of a factory must analyze and record the relevant items of cost promptly
in order to furnish cost information on a regular basis to various levels of management.
7. Periodical preparation of accounts: With a view to facilitate the comparison of results frequently, it is
desirable to prepare accounts periodically.
8. Reconciliation with financial accounts: The system of cost accounts must be capable of reconciling with
financial accounts so as to check accuracy of both the system of accounts.
9. Uniformity: The various forms and documents used under costing system must be uniform in size and
quality of paper.
10. Equity: The basis of apportioning indirect expenses to products, departments or jobs must be fair and
equitable.

5. Differences between Cost Accounting and Management Accounting

Answer: The differences between cost accounting and management accounting are given below:

Points of Cost Accounting Management Accounting

differences
Definition Cost accounting is that branch of
accounting dealing with the classification,
recording, allocation, summarization and
reporting of current and prospective costs.
Objective The primary object is to ascertain the cost
of a product (or service) and to control the
cost after careful analysis.
Emphasis The main emphasis is on cost determination
and cost control.
System of Double entry system of recording
recording transactions can be adopted.
Nature of It generally deals with current operations.
approach
Utility of reports Cost reports are meant for management and
even useful to external parties.
Type of data It uses quantitative cost data only.
used
Term of It is concerned with short-term planning.
Planning
Management accounting is a field of
accounting that analyzes and provides
cost information to the internal
management for the purposes of
planning, controlling and decision
making.
The primary object is to provide the
relevant information to the
management to take an appropriate
decision.
The main emphasis is on the efficient
operation of business
Double entry system is not adopted
while submitting reports to the
management.
It looks ahead through long-term
planning apart from current operations.
Management reports are useful only to
the management.
It uses both quantitative and qualitative
data.
It is equally concerned with short-term
and long-term planning.

Islamic University, Kushtia

 Prepared by SM Nahidul Islam 3
Dept. of Finance & Banking

Installation of It can be installed without management It cannot be installed without a proper

the accounting system. cost accounting system.
system
Coverage of data It deals with cost data only. It deals with both cost and finance-
related data.
Accounting It is done for a specific accounting period It does not follow any specific
period accounting period as such.

6. Differences between Cost Accounting and Financial Accounting

Answer: The differences between Cost Accounting and Financial Accounting are given below:

Points of Cost Accounting Financial Accounting

Differentiation
Definition Cost accounting is that branch of Financial accounting is the preparation
accounting dealing with the classification,and publication of financial
recording, allocation, summarization and statements, earnings reports, and other
reporting of current and prospective costs.forms for disclosure to
shareholders, regulators and any
other stakeholders.
Nature of analysis It is concerned not only with historical It is concerned with historical transactions
costs but also with estimated costs. only (i.e. post-mortem analysis).
Applicability Cost Accounting is applicable to Financial Accounting is applicable to all
manufacturing concerns. types of accounting entities.
Objective Serve the following three purpose: Serve the following two purposes:
a. Cost ascertainment a. To disclose the end results of the
b. Cost control business, and
c. Decision making b. To depict the financial condition
of the business on a particular
date.
Scope of It measures the cost of each product line, It measures the financial performance of
measurement department, process, etc. the entity as a whole during a particular
period.
Periodicity of Cost reporting is a continuous process and Financial reports are prepared
reporting it may be prepared as and when desired. periodically, usually at the end of an
accounting period.
Party to be It is mainly meant for providing detailed It is mainly meant for providing
served cost information to the management. information to shareholders, creditors,
government, employees, etc.
Valuation of stock Stocks are always valued at cost. Stocks are valued at cost or market price,
whichever is lower.
Analysis of profit It reveals the profit (or loss) of each It fails to show profit for each product,
product, department, process, etc. department, process, etc.
Control aspect It provides for a detailed system of control It does not provide for adequate control on
on costs. expenses.

Islamic University, Kushtia

 Prepared by SM Nahidul Islam 4
Dept. of Finance & Banking

7. Describe the Methods of Costing

Answer: Different industries follow different methods for ascertaining cost of their products. The method to
be adopted by business organisation will depend on the nature of the production and the type of output. 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 of costing is used in the factories which produce the
machine tool and other engineering products.
2. Batch Costing: Under batch costing, a batch (group) of similar products is treated as a separate unit
for the purpose of ascertaining cost. The total cost of a batch is divided by the total number of units in
a batch to arrive at the costs per unit.
3. Contract Costing: Contract costing is applied for contract work like construction of dam building,
civil engineering contract etc. Each contract or job is treated as separate cost unit for the cost
ascertainment and control.
4. Process Costing: This method is used in industries where production is carried on through different
stages or processes before becoming a finished product. Costs are determined separately for each
process.
5. Unit costing: This method is used where a single article is produced (or a service is rendered) by
continuous manufacturing activities.
6. Operating Costing: This method is used in those industries which rendered services instead of
producing goods. Under this method cost of providing a service is determined. It is also called service
costing.
7. Operation Costing: This is suitable for industries where production is continuous and units are
exactly identical to each other. This method is applied in industries like mines or drilling, cement
works etc.
8. Multiple Costing: It means combination of two or more of the above methods of costing.

8. Describe the techniques of Costing

Answer: In each of the costing methods, various techniques may be used in ascertaining costs. These
techniques may be grouped according to their approaches as follows:
1. Absorption Costing: Under absorption costing system, the product cost consists of all variable as
well as all fixed manufacturing costs i.e., direct materials, direct labor and factory overhead. It is also
known as full costing or traditional costing. It provides information that is used by internal
management as well as by external parties like creditors, government agencies and auditors etc.
2. Variable costing: Under variable costing system, the fixed cost (both manufacturing and non-
manufacturing) is treated as a period or capacity cost and therefore is not included in the product cost.
The product cost only includes variable costs such as direct material, direct labour, variable
manufacturing overhead. It is also known as direct costing or marginal costing. The information
provided by variable costing method is mostly used by internal management for decision making
purposes.
3. Standard Costing: It refers to a technique which uses standards for costs and revenues for the
purpose of control through variance analysis. It is very helpful for cost control.
It is usually employed in conjunction with Budgetary Control.

Islamic University, Kushtia

 Prepared by SM Nahidul Islam 5
Dept. of Finance & Banking

4. Uniform Costing: Cost principles and or practices being uniformly followed by a number of
undertakings under common control may be known as uniform costing. It is a technique for studying
comparative efficiency and for promoting efficiency.

9. Describe the steps involved in the installation of cost accounting

Answer: The steps involved in the installation of a cost accounting system are as follows:
1. Identify the objective to be achieved. The system to be introduced should be adapted to suit the
general nature of the business subject to certain unavoidable alterations.
2. All the technical aspects e.g. nature of products, methods and stages of production cycle etc. should
be studied thoroughly in order to select the proper method of costing.
3. Details of records to be maintained should be arranged. Complete analyses at reasonable cost are
desirable. The system to be introduced should cover all important functions, such as production,
administration and sales.
4. Forms to be used by foremen, workers etc. should be standardized as far as practicable. It should
involve only minimum clerical work at different stages.
5. Every original entry on factory forms should be supported by au examiners signature. This will
ensure reliability of data to be used for decision-making purposes in future.
6. Arrangements should be made to ensure that costs and other data are presented to different levels of
management concerned regularly and promptly.
7. If cost and financial accounts are to be maintained separately, arrangement should be made for
reconciliation of cost and financial profits.

10. Describe the advantages of cost accounting

Answer: The advantages of cost accounting are given below:

1. Elimination of Wages, losses, inefficiencies: Idle time, lost time, idle facilities, wastage of materials
in the form of spoilage, excessive scraps etc. can be eliminated by employing a good costing system.
2. Cost Reduction: By operational research new and improved methods of production are invented by a
good costing system so as to reduce cost.
3. Detection of reasons for profit or loss: A costing System finds out the actual reasons for reduction
in profit or increase in profit.
4. Advices on Various Matters: Cost accountant can advise the management in such a way that the
management can rightly choose the best out of many alternatives.
5. Fixation of Price: Cost accounting helps the management to fix price and to prepare estimates for
submission of tenders etc.
6. Cost Control: Cost accounting points out to the management the weak and strong points so that the
management can exercise control. Period-to-period cost comparison also helps control.
7. Assisting the Government, Trade Unions etc.: The Government uses cost information for
maximum price fixation, price control, tariff protection, minimum wage fixation etc. Trade unions
also use cost information for solving trade disputes etc.
8. Marginal Analysis of Cost: It is done for facilitating short-term decisions particularly in times of
trade depression.
9. Fixation of Responsibility: For appropriate cost accounting, cost cents and responsibility centres are
determined.

Islamic University, Kushtia

 Prepared by SM Nahidul Islam 6
Dept. of Finance & Banking

10. Helping preparation of Final Accounts under Financial Accounting System: Cost accounts
readily supplies the figures for closing materials, work-in progress and finished goods. So, final
accounts can be prepared without any delay for ascertaining such values.

11. Describe the Limitations of Cost Accounting

Answer: Some objections are raised against the cost accounting system in spite of its numerous benefits.
These objections are as follows:
1. It is expensive: The system of cost accounting involves additional expenditure to be incurred in
installing and maintaining it.
2. Duplication of work: It is argued that the cost accounting system is not necessary as it involves
duplication of work. So it is unnecessary and creates a burden on the organisation.
3. Unsuitable for many industries: It cannot advantageously be applied to all types of industries.
There is no such cost accounting system which can be readily applied to all industries.
4. Not suitable for small-scale units: A cost accounting system is applicable only to a large-sized
business but not to small-sized one.
5. Inapplicability of same costing method and technique: All business enterprises cannot make use
of a single method and technique of costing.
6. Lack of accuracy: The accuracy of cost accounts get distorted owing to the use of notional cost
such as standard cost, estimated cost, etc.
7. Excessive estimation: Cost computation involves a large number of conventions, estimations,
arbitrary allocation of joint costs, etc,.
8. Relative approach: Accuracy in cost accounting is relative. Certain assumptions are always made
while ascertaining cost to suit a particular situation.
9. It lacks social accounting: Cost accounting fails to take into account the social obligation of the
business.

12. Discuss the development of cost accounting

Answer: The history of cost accounting can be traced back to the fourteenth century. In the course of its
evolution it passed through following stages:
1. In the first stage of its development, cost accounting was concerned only with the three prime cost
elements, viz., direct material cost, direct labour cost and direct expenses. For recording the
transactions relating to materials the important documents used were (a) stores ledger, (b) a material
requisition note, and (c) materials received note. To account for labour cost, employee time card and
labour cost card were devised by Mr. Metcalfe. Later on a distinction between manufacturing and
non-manufacturing cost was made by Mr. Norton.
2. Secondly, around the turn of the nineteenth century, the importance of nonmanufacturing cost
(overheads) was recognized as one of the distinct element of cost. The method of charging non-
manufacturing cost to the production cost was devised under this stage.
3. Thirdly, the techniques of estimation and standards are devised. Instead of using actual cost, standard
costs are used and by comparing with the actual cost the differences are noted, analysed and disposed
off accordingly. This helps in knowing the efficiency of the business undertaking.
4. Fourthly, cost accounting methods were applied to all types of business undertakings. The costing
principles and techniques were also extended to important functions of a business.
5. In modern times the development of electronic data processing has occupied significant stage in the
growth of cost accounting system.

Islamic University, Kushtia