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GNDU QUESTION PAPERS 2022
B.com 4
th
SEMESTER
COST ACCOUNTING
Time Allowed: 3 Hours Maximum Marks: 50
Note: Aempt Five quesons in all, selecng at least One queson from each secon. The
Fih queson may be aempted from any secon. All quesons carry equal marks.
SECTION – A
1.Discuss classicaon of costs.
2.Prepare a cost sheet from the following:
• Direct Labour Cost (80% of Factory overhead) – Rs. 16,000
• Cost of Goods Sold – Rs. 56,000
Opening and Closing Stocks (Rs.)
Item
Opening
Closing
Raw Materials
8,000
8,600
Work in Progress
8,000
12,000
Finished Goods
14,000
18,000
Other Data:
• Selling Expenses – Rs. 3,400
• General and Administrave Expenses – Rs. 2,600
• Sales for the month – Rs. 75,000
SECTION – B
3.(a) Write short notes on:
• Ascertainment of prot on completed contracts
• Ascertainment of prot on contracts nearing compleon
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(b)The product of a manufacturing concern passes through three processes A, B and C.
The output of process A and B is charged to the next process to give a prot of 25% on
cost, while the output of process C is charged to Finished Stock Account which gives
process C a prot of 25% on cost.
From the following parculars, prepare the Process Accounts and Finished Stock Account
and calculate:
• Unrealized prot included in closing stock
• Actual prot made by the concern
Note:
• No opening stock
• Closing stock valued at prime cost
Processes Data (Rs.)
Parculars
A
B
C
Materials Used
14,000
21,000
7,000
Labour
21,000
14,000
28,000
Closing Stock
7,000
14,000
21,000
Sales
–
–
1,26,000
• Closing stock of nished goods = Rs. 14,000
SECTION – C
4.The net prot shown by nancial accounts of a company amounted to Rs. 28,550, while
the prots disclosed by cost accounts for that period were Rs. 38,660. On reconciliaon,
the following dierences were discovered:
Items not included in cost accounts:
• Director’s fees (Dr.) – Rs. 650
• Bank interest (Cr.) – Rs. 30
• Income tax (Dr.) – Rs. 8,300
Adjustments:
1. Provision for bad and doubul debts made in nancial books – Rs. 570 (not in cost
accounts)
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2. Overheads absorbed in cost accounts – Rs. 8,500
Actual overheads (nancial accounts) – Rs. 8,320
3. Expenditure on new factory – Rs. 16,000
Depreciaon @ 5% provided in nancial books
Required:
Prepare a statement reconciling the prot as per cost and nancial accounts.
SECTION – D
5.What is budgetary control? Explain dierent types of budgets.
6.Find out the following Material Variances:
• (a) Material Price Variance
• (b) Material Usage Variance
• (c) Material Mix Variance
• (d) Material Yield Variance
Standard Data:
Material
Standard Mix
Rate
Amount
X
60 kg @ Rs. 5
300
Y
40 kg @ Rs. 10
400
Total
100 kg
700
Loss 30%
30 kg
Output
70 kg
700
Actual Data:
Material
Actual Mix
Rate
X
56 kg @ Rs. 8
Y
44 kg @ Rs. 9
Total
100 kg
Loss 25%
25 kg
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Output
75 kg
7.Why is budgetary control needed? Explain dierent types of budgets.
8.Find out the following Material Variances:
• (a) Material Cost Variance
• (b) Material Price Variance
• (c) Material Usage Variance
• (d) Material Mix Variance
• (e) Material Yield Variance
GNDU ANSWER PAPERS 2022
B.com 4
th
SEMESTER
COST ACCOUNTING
Time Allowed: 3 Hours Maximum Marks: 50
Note: Aempt Five quesons in all, selecng at least One queson from each secon. The
Fih queson may be aempted from any secon. All quesons carry equal marks.
SECTION – A
1.Discuss classicaon of costs.
Ans: Classification of Costs
When we study cost accounting, one of the most important concepts is classification of
costs. At first, it may sound complicated, but in reality, it’s quite simple. Think of it like
organizing your expenses into categories so that you can understand where your money is
going and make better decisions.
What is Cost Classification?
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Cost classification means grouping costs into different categories based on their nature,
behavior, purpose, or function. This helps businesses:
• Control expenses
• Make better decisions
• Plan future activities
• Calculate profit accurately
Imagine running a small shop. You spend money on rent, salaries, electricity, and raw
materials. If you mix all expenses together, it becomes confusing. But if you classify them
properly, everything becomes easier to manage.
Main Types of Cost Classification
Costs can be classified in different ways depending on the purpose. Let’s understand each
one in a simple manner.
1. Classification by Nature (Material, Labour, Expenses)
This is the most basic classification.
(a) Material Cost
Money spent on raw materials used to make a product.
Example: Wood for furniture, cloth for clothes
(b) Labour Cost
Wages paid to workers who help in production.
Example: Salary of factory workers
(c) Expenses
Other costs apart from material and labour.
Example: Electricity, rent, maintenance
2. Classification by Function
Here, costs are grouped based on business activities.
(a) Production Cost
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Costs involved in manufacturing goods
Raw materials + wages + factory expenses
(b) Administrative Cost
Costs for managing the business
Office salaries, stationery
(c) Selling & Distribution Cost
Costs to sell and deliver products
Advertising, transport, packaging
3. Classification by Behavior
This classification is very important for decision-making.
(a) Fixed Costs
Costs that do not change with production level
Example: Rent, salary
Even if production is zero, these costs remain the same.
(b) Variable Costs
Costs that change with production
Example: Raw material
More production = more cost
(c) Semi-variable Costs
Costs that are partly fixed and partly variable
Example: Electricity bill (fixed charge + usage charge)
Simple Diagram for Cost Behavior
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Fixed cost = straight line
• Variable cost = increasing line
4. Classification by Controllability
This shows whether a cost can be controlled or not.
(a) Controllable Costs
Costs that managers can control
Example: Material usage
(b) Uncontrollable Costs
Costs that cannot be controlled
Example: Government taxes
5. Classification by Normality
(a) Normal Costs
Regular costs in normal business conditions
Example: Routine production expenses
(b) Abnormal Costs
Unexpected costs due to unusual events
Example: Loss due to fire
6. Classification by Time
(a) Historical Costs
Costs already incurred in the past
(b) Pre-determined Costs
Costs estimated in advance
Used for budgeting
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7. Classification by Decision-Making
This is very useful for managers.
(a) Relevant Costs
Costs that affect a decision
Example: Cost of raw material for a new product
(b) Irrelevant Costs
Costs that do not affect decisions
Example: Past expenses
Why is Cost Classification Important?
Understanding cost classification helps businesses:
• Set the right price for products
• Control unnecessary expenses
• Improve profits
• Plan future production
• Take smart decisions
For example, if a company knows which costs are variable, it can reduce production during
low demand and save money.
Conclusion
Cost classification is like organizing your financial life. Just as you separate your personal
expenses into food, travel, rent, etc., businesses also classify costs to understand and
control them better.
By dividing costs into categories like fixed, variable, production, administrative, and
relevant costs, companies can:
• Work more efficiently
• Avoid waste
• Increase profits
In simple words, cost classification turns confusion into clarity, helping businesses grow
smartly and successfully.
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2.Prepare a cost sheet from the following:
• Direct Labour Cost (80% of Factory overhead) – Rs. 16,000
• Cost of Goods Sold – Rs. 56,000
Opening and Closing Stocks (Rs.)
Item
Opening
Closing
Raw Materials
8,000
8,600
Work in Progress
8,000
12,000
Finished Goods
14,000
18,000
Other Data:
• Selling Expenses – Rs. 3,400
• General and Administrave Expenses – Rs. 2,600
• Sales for the month – Rs. 75,000
Ans: Step 1: Understand the Data
We are given:
• Direct Labour Cost = ₹16,000
• Factory Overheads = (Direct Labour ÷ 80%) = ₹20,000
• Cost of Goods Sold = ₹56,000
• Opening & Closing Stocks:
o Raw Materials: Opening ₹8,000, Closing ₹8,600
o Work in Progress: Opening ₹8,000, Closing ₹12,000
o Finished Goods: Opening ₹14,000, Closing ₹18,000
• Selling Expenses = ₹3,400
• General & Administrative Expenses = ₹2,600
• Sales = ₹75,000
Step 2: Build the Cost Sheet
(a) Prime Cost
Prime cost = Direct Materials + Direct Labour + Direct Expenses (if any). Here, we need to
calculate Direct Materials Consumed:
• Opening Raw Materials = ₹8,000
• Add Purchases (we’ll derive this from the cost structure)
• Less Closing Raw Materials = ₹8,600
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For now, let’s keep “Materials Consumed” as a balancing figure we’ll calculate later.
So, Prime Cost = Materials Consumed + Direct Labour (₹16,000).
(b) Factory Cost
Factory Cost = Prime Cost + Factory Overheads + Opening WIP – Closing WIP.
Factory Overheads = ₹20,000 Opening WIP = ₹8,000 Closing WIP = ₹12,000
So, Factory Cost = Prime Cost + 20,000 + 8,000 – 12,000.
(c) Cost of Production
Cost of Production = Factory Cost + Administrative Expenses. Administrative Expenses =
₹2,600.
(d) Cost of Goods Sold
Cost of Goods Sold = Cost of Production + Opening Finished Goods – Closing Finished Goods.
Opening FG = ₹14,000 Closing FG = ₹18,000
So, COGS = Cost of Production + 14,000 – 18,000. We are told COGS = ₹56,000. This will help
us back-calculate materials consumed.
(e) Cost of Sales
Cost of Sales = COGS + Selling Expenses. = ₹56,000 + ₹3,400 = ₹59,400.
(f) Profit
Sales = ₹75,000 Profit = Sales – Cost of Sales = ₹75,000 – ₹59,400 = ₹15,600.
Step 3: Back-Calculate Materials Consumed
We know COGS = ₹56,000. So, Cost of Production must be: COGS + Closing FG – Opening FG
= 56,000 + 18,000 – 14,000 = ₹60,000.
Now, Factory Cost = Cost of Production – Admin Expenses = 60,000 – 2,600 = ₹57,400.
Factory Cost = Prime Cost + 20,000 + 8,000 – 12,000 = Prime Cost + 16,000. So, Prime Cost =
57,400 – 16,000 = ₹41,400.
Prime Cost = Materials Consumed + Direct Labour (16,000). So, Materials Consumed =
41,400 – 16,000 = ₹25,400.
Final Cost Sheet
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COST SHEET
-------------------------------------------------
Direct Materials Consumed ₹25,400
Direct Labour ₹16,000
-------------------------------------------------
Prime Cost ₹41,400
Add: Factory Overheads ₹20,000
Add: Opening WIP ₹8,000
Less: Closing WIP ₹12,000
-------------------------------------------------
Factory Cost ₹57,400
Add: Administrative Expenses ₹2,600
-------------------------------------------------
Cost of Production ₹60,000
Add: Opening FG ₹14,000
Less: Closing FG ₹18,000
-------------------------------------------------
Cost of Goods Sold ₹56,000
Add: Selling Expenses ₹3,400
-------------------------------------------------
Cost of Sales ₹59,400
Sales ₹75,000
-------------------------------------------------
Profit ₹15,600
-------------------------------------------------
Conclusion
This cost sheet shows how each element—materials, labour, overheads, admin, and selling
expenses—builds up to the final cost of sales. By comparing with sales, we see the profit
clearly. Here, the company made a profit of ₹15,600.
SECTION – B
3.(a) Write short notes on:
• Ascertainment of prot on completed contracts
• Ascertainment of prot on contracts nearing compleon
(b)The product of a manufacturing concern passes through three processes A, B and C.
The output of process A and B is charged to the next process to give a prot of 25% on
cost, while the output of process C is charged to Finished Stock Account which gives
process C a prot of 25% on cost.
From the following parculars, prepare the Process Accounts and Finished Stock Account
and calculate:
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• Unrealized prot included in closing stock
• Actual prot made by the concern
Note:
• No opening stock
• Closing stock valued at prime cost
Processes Data (Rs.)
Parculars
A
B
C
Materials Used
14,000
21,000
7,000
Labour
21,000
14,000
28,000
Closing Stock
7,000
14,000
21,000
Sales
–
–
1,26,000
• Closing stock of nished goods = Rs. 14,000
Ans: 3 (a) Short Notes
1. Ascertainment of Profit on Completed Contracts
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Imagine a construction company building a house. When the house is fully completed, it
becomes very easy to calculate profit.
How profit is calculated:
• Total Contract Price (what client pays)
• Minus Total Cost of Contract (materials, labour, etc.)
Profit = Contract Price – Total Cost
Key Points:
• Entire profit is recognized only after completion
• No uncertainty remains
• This method is safe and accurate
Example:
If contract price = ₹10,00,000
Total cost = ₹8,00,000
Profit = ₹2,00,000
2. Ascertainment of Profit on Contracts Nearing Completion
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Now imagine the building is almost complete (say 80–90%), but not fully finished.
Should we wait till completion?
No! We estimate profit carefully.
Formula (basic idea):
Profit is calculated based on:
• Work completed
• Cash received
• Degree of completion
Common Formula:
Profit transferred =
(Estimated Profit × Work Certified / Contract Price)
Why partial profit?
• Some risk still exists
• So only part of profit is recorded
Key Idea:
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✔ More completion → More profit recognized
✔ Less completion → Less profit recognized
3 (b) Process Costing Problem (Step-by-Step Story)
Let’s imagine a factory where a product passes through 3 stages:
Process A → Process B → Process C → Finished Goods → Sold
Step 1: Understand Profit Rule
• Each process adds 25% profit on cost
• So:
o If cost = 100 → Transfer price = 125
Step 2: Process Flow Diagram
Raw Material
↓
Process A → Process B → Process C → Finished Stock → Sales
Step 3: Calculate Each Process
Process A
Cost:
• Materials = 14,000
• Labour = 21,000
Total Cost = 35,000
Add Profit (25%):
Profit = 25% of 35,000 = 8,750
Transfer Price = 43,750
Closing Stock = 7,000 (at cost)
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Process B
Input from A:
43,750
Add:
• Materials = 21,000
• Labour = 14,000
Total Cost = 78,750
Profit (25%):
19,687.5
Transfer Price = 98,437.5
Closing Stock = 14,000
Process C
Input from B:
98,437.5
Add:
• Materials = 7,000
• Labour = 28,000
Total Cost = 1,33,437.5
Profit (25%):
33,359.4
Transfer Price = 1,66,796.9
Finished Stock Account
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• Sales = 1,26,000
• Closing Stock = 14,000 (at cost)
Step 4: Unrealized Profit in Closing Stock
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4
Important Concept:
Closing stock is valued at cost, but inside it, there is hidden profit from previous processes.
This is called Unrealized Profit
Formula:
Unrealized Profit =
Closing Stock × Profit % on Transfer Price
Since profit is 25% on cost →
Profit on selling price = 20%
Calculate:
Process A:
Profit in stock = 7,000 × 20% = 1,400
Process B:
Profit = 14,000 × 20% = 2,800
Process C:
Profit = 21,000 × 20% = 4,200
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Finished Goods:
Profit = 14,000 × 20% = 2,800
Total Unrealized Profit:
1,400 + 2,800 + 4,200 + 2,800 = ₹11,200
Step 5: Actual Profit
Total Profit Earned:
(Add profits of A + B + C)
8,750 + 19,687.5 + 33,359.4 = 61,796.9
Less Unrealized Profit:
11,200
Actual Profit = ₹50,596.9 (Approx)
Final Understanding (Super Simple)
• Each process adds profit → increases value
• But unsold stock still contains profit → not real yet
• So we remove it → get true profit
4.The net prot shown by nancial accounts of a company amounted to Rs. 28,550, while
the prots disclosed by cost accounts for that period were Rs. 38,660. On reconciliaon,
the following dierences were discovered:
Items not included in cost accounts:
• Director’s fees (Dr.) – Rs. 650
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• Bank interest (Cr.) – Rs. 30
• Income tax (Dr.) – Rs. 8,300
Adjustments:
4. Provision for bad and doubul debts made in nancial books – Rs. 570 (not in cost
accounts)
5. Overheads absorbed in cost accounts – Rs. 8,500
Actual overheads (nancial accounts) – Rs. 8,320
6. Expenditure on new factory – Rs. 16,000
Depreciaon @ 5% provided in nancial books
Required:
Prepare a statement reconciling the prot as per cost and nancial accounts.
Ans: Step 1: Start with the Given Profits
• Profit as per Cost Accounts = ₹38,660
• Profit as per Financial Accounts = ₹28,550
We need to prepare a reconciliation statement to explain why these two figures differ.
Step 2: Identify the Differences
Items only in Financial Accounts (not in Cost Accounts):
• Director’s fees (Expense) = ₹650
• Bank interest (Income) = ₹30
• Income tax (Expense) = ₹8,300
• Provision for bad debts (Expense) = ₹570
• Depreciation on new factory (Expense) = 5% of ₹16,000 = ₹800
Adjustment for Overheads:
• Overheads absorbed in cost accounts = ₹8,500
• Actual overheads in financial accounts = ₹8,320
• Difference = ₹180 (over-absorbed in cost accounts → deduct from cost profit).
Step 3: Build the Reconciliation Statement
We start with Profit as per Cost Accounts (₹38,660) and adjust step by step.
Reconciliation Statement
-------------------------------------------------
Profit as per Cost Accounts ₹38,660
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Less: Director’s fees 650
Less: Income tax 8,300
Less: Provision for bad debts 570
Less: Depreciation on new factory 800
Less: Over-absorbed overheads 180
-------------------------------------------------
Subtotal after deductions ₹28,160
Add: Bank interest 30
-------------------------------------------------
Profit as per Financial Accounts ₹28,550
-------------------------------------------------
Diagram to Visualize
Cost Accounts Profit (₹38,660)
|
| - Director’s fees (₹650)
| - Income tax (₹8,300)
| - Bad debts provision (₹570)
| - Depreciation (₹800)
| - Over-absorbed overheads (₹180)
|
| + Bank interest (₹30)
|
↓
Financial Accounts Profit (₹28,550)
Explanation in Simple Words
Think of cost accounts as a factory-focused lens: they only care about production costs and
efficiency. Financial accounts, on the other hand, are a business-wide lens: they include
taxes, provisions, directors’ fees, and depreciation.
That’s why cost accounts showed a higher profit (₹38,660). Once we subtract the extra
expenses recorded in financial accounts and add the small income (bank interest), we arrive
at the financial accounts profit of ₹28,550.
Why Reconciliation Matters
• It ensures transparency between two accounting systems.
• It helps management understand where profits differ.
• It highlights costs ignored in cost accounts but crucial for financial reporting.
Conclusion
The reconciliation statement bridges the gap between cost and financial accounts. In this
case, the difference was mainly due to income tax, provisions, depreciation, and director’s
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fees—items that cost accounts don’t record. After adjusting, both systems align, showing
the financial accounts profit of ₹28,550.
SECTION – C
5.What is budgetary control? Explain dierent types of budgets.
Ans: Budgetary Control & Types of Budgets
Imagine you are managing your monthly pocket money. You decide in advance how much to
spend on food, travel, shopping, and savings. Then, at the end of the month, you compare
your actual spending with your plan. If you spent too much, you adjust next month.
This simple idea is exactly what budgetary control means in business.
What is Budgetary Control?
Budgetary control is a system where a company:
1. Plans its future income and expenses (budget)
2. Records actual performance
3. Compares actual results with the budget
4. Takes corrective actions if needed
In short:
“Plan → Compare → Control → Improve”
Simple Definition
Budgetary control is the process of preparing budgets and continuously comparing actual
performance with the budget to ensure organizational goals are achieved efficiently.
Why is Budgetary Control Important?
Think of it like a GPS for a company. Without it, the business may lose direction.
It helps in:
• Controlling costs
• Improving efficiency
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• Better decision-making
• Avoiding unnecessary spending
• Achieving business goals
Diagram of Budgetary Control Process
Planning (Budget)
↓
Implementation
↓
Actual Performance
↓
Comparison (Budget vs Actual)
↓
Analysis of Differences
↓
Corrective Action
↓
Better Control
Types of Budgets
There are different types of budgets depending on the purpose. Let’s understand them one
by one in a simple way.
1. Sales Budget
This is the starting point of all budgets.
It estimates:
• How many goods will be sold
• Expected sales revenue
Example:
A company expects to sell 1,000 units at ₹500 each = ₹5,00,000 sales
✔ It helps in planning production and income.
2. Production Budget
Once sales are estimated, the company decides:
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• How much to produce
Formula idea:
Production = Expected Sales + Closing Stock – Opening Stock
✔ Ensures there is no shortage or overproduction.
3. Cost of Production Budget
This budget calculates:
• Total cost of producing goods
It includes:
• Raw material cost
• Labour cost
• Factory expenses
✔ Helps in controlling manufacturing costs.
4. Purchase Budget
This tells:
• How much raw material needs to be purchased
Important for:
• Avoiding shortage of materials
• Proper inventory management
5. Cash Budget
One of the most important budgets.
It shows:
• Cash inflows (money coming in)
• Cash outflows (money going out)
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✔ Helps ensure the company never runs out of cash.
Example:
• Cash received from customers
• Payments for salaries, rent, etc.
6. Capital Expenditure Budget
This budget is for long-term investments.
It includes:
• Buying machinery
• Building construction
• Equipment purchase
✔ Helps in planning big investments wisely.
7. Flexible Budget
Unlike fixed budgets, this changes according to activity level.
Example:
• If production increases, expenses also increase
✔ Useful in real-life situations where business conditions change.
8. Fixed Budget
This budget:
• Does not change with production level
Example:
• Rent of ₹50,000 remains same whether production is high or low
✔ Simple but less practical in dynamic conditions.
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9. Master Budget
This is the main budget that combines all other budgets.
It includes:
• Sales budget
• Production budget
• Cash budget
• Profit estimates
✔ Gives a complete financial picture of the business.
6.Find out the following Material Variances:
• (a) Material Price Variance
• (b) Material Usage Variance
• (c) Material Mix Variance
• (d) Material Yield Variance
Standard Data:
Material
Standard Mix
Rate
Amount
X
60 kg @ Rs. 5
300
Y
40 kg @ Rs. 10
400
Total
100 kg
700
Loss 30%
30 kg
Output
70 kg
700
Actual Data:
Material
Actual Mix
Rate
X
56 kg @ Rs. 8
Y
44 kg @ Rs. 9
Total
100 kg
Loss 25%
25 kg
Output
75 kg
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Ans: Understanding the Question First
We are given:
Standard Data (What should happen)
• Total input = 100 kg
• Output = 70 kg
• Loss = 30 kg (30%)
• Cost = ₹700
Breakup:
• X → 60 kg @ ₹5 = ₹300
• Y → 40 kg @ ₹10 = ₹400
Actual Data (What actually happened)
• Total input = 100 kg
• Output = 75 kg
• Loss = 25 kg (25%)
Breakup:
• X → 56 kg @ ₹8
• Y → 44 kg @ ₹9
What We Need to Find
1. Material Price Variance (MPV)
2. Material Usage Variance (MUV)
3. Material Mix Variance (MMV)
4. Material Yield Variance (MYV)
STEP 1: Material Price Variance (MPV)
Formula:
𝑀𝑃𝑉 = (𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑𝑃𝑟𝑖𝑐𝑒 − 𝐴𝑐𝑡𝑢𝑎𝑙𝑃𝑟𝑖𝑐𝑒) × 𝐴𝑐𝑡𝑢𝑎𝑙𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦
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For Material X:
(5 − 8) × 56 = (−3) × 56 = −168
For Material Y:
(10 − 9) × 44 = 1 × 44 = 44
Total MPV:
−168 + 44 = −124
Answer: ₹124 (Adverse)
Why adverse? Because we paid more than standard price overall.
STEP 2: Material Usage Variance (MUV)
Formula:
𝑀𝑈𝑉 = (𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 − 𝐴𝑐𝑡𝑢𝑎𝑙𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦) × 𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑𝑃𝑟𝑖𝑐𝑒
But here total input is same (100 kg), so we compare mix.
For X:
(
60 − 56) × 5 = 4 × 5 = 20(𝐹𝑎𝑣𝑜𝑢𝑟𝑎𝑏𝑙𝑒
)
For Y:
(
40 − 44) × 10 = −4 × 10 = −40(𝐴𝑑𝑣𝑒𝑟𝑠𝑒
)
Total MUV:
20 − 40 = −20
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Answer: ₹20 (Adverse)
STEP 3: Material Mix Variance (MMV)
This tells us:
“Did we use materials in the correct proportion?”
Step 1: Calculate Revised Standard Quantity (RSQ)
Since actual total = 100 kg, standard proportions remain same:
• X = 60% → 60 kg
• Y = 40% → 40 kg
(So RSQ = same as standard here)
Formula:
𝑀𝑀𝑉 = (𝑅𝑆𝑄 − 𝐴𝑐𝑡𝑢𝑎𝑙𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦) × 𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑𝑃𝑟𝑖𝑐𝑒
For X:
(
60 − 56) × 5 = 20(𝐹
)
For Y:
(
40 − 44) × 10 = −40(𝐴
)
Total MMV:
20 − 40 = −20
Answer: ₹20 (Adverse)
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STEP 4: Material Yield Variance (MYV)
This tells us:
“Did we get expected output from input?”
Step 1: Standard Yield Rate
𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑𝐶𝑜𝑠𝑡/𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑𝑂𝑢𝑡𝑝𝑢𝑡 = 700/70 = 10𝑝𝑒𝑟𝑘𝑔
Step 2: Formula:
𝑀𝑌𝑉 = (𝐴𝑐𝑡𝑢𝑎𝑙𝑂𝑢𝑡𝑝𝑢𝑡 − 𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑𝑂𝑢𝑡𝑝𝑢𝑡) × 𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑𝑅𝑎𝑡𝑒
= (75 − 70) × 10 = 5 × 10 = 50
Answer: ₹50 (Favourable)
Why favourable? Because we got more output than expected.
FINAL ANSWERS SUMMARY
Variance
Amount
Nature
Material Price Variance
₹124
Adverse
Material Usage Variance
₹20
Adverse
Material Mix Variance
₹20
Adverse
Material Yield Variance
₹50
Favourable
EASY MEMORY TRICK
• Price Variance → Money problem
• Usage Variance → Quantity problem
• Mix Variance → Proportion problem
• Yield Variance → Output efficiency
FINAL UNDERSTANDING
Even though:
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• You paid more (bad )
• Your mix was not perfect (bad )
But:
• You reduced waste and got more output (good )
That’s why Yield Variance is favourable!
SECTION – D
7.Why is budgetary control needed? Explain dierent types of budgets.
Ans: Why is Budgetary Control Needed? + Types of Budgets
Imagine you get ₹10,000 pocket money for a month. If you spend randomly without
planning, you may run out of money before the month ends. But if you plan—like ₹3,000 for
food, ₹2,000 for travel, ₹2,000 for savings—you can manage your money better.
This planning and controlling of money is exactly what businesses do, and this process
is called Budgetary Control.
What is Budgetary Control?
Budgetary control is a system where a business:
1. Plans its income and expenses in advance (budget)
2. Compares actual performance with the plan
3. Takes corrective actions if needed
In simple words:
“Plan → Check → Improve”
Why is Budgetary Control Needed?
Let’s understand this in a very simple and practical way.
1. Helps in Planning the Future
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Budgetary control forces a business to think ahead.
For example:
• How much will we produce?
• How much will we sell?
• How much money is needed?
Without planning, a business works blindly.
2. Controls Costs and Expenses
When budgets are set, spending is controlled.
Example:
If a company sets ₹50,000 for advertising but spends ₹80,000, it will be noticed and
corrected.
This prevents unnecessary expenses.
3. Improves Efficiency
Employees work more carefully when targets are fixed.
Example:
• Sales team has a monthly target → they work harder to achieve it.
This increases productivity.
4. Helps in Performance Evaluation
Budgetary control compares:
• Actual performance vs Planned performance
Example:
• Budgeted sales = ₹1,00,000
• Actual sales = ₹80,000
Difference (₹20,000) is analyzed → why did it happen?
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5. Detects Problems Early
If something goes wrong, budgetary control helps detect it early.
Example:
• Rising costs
• Falling sales
Early detection = faster solution
6. Better Coordination Between Departments
Different departments (production, sales, finance) work together.
Everyone follows a common plan → smooth functioning
7. Helps in Profit Maximization
By controlling costs and increasing efficiency, profits increase.
Simple Diagram of Budgetary Control
Planning Stage
↓
Prepare Budget
↓
Compare Actual vs Budget
↓
Find Differences
↓
Take Correct Action
↓
Improved Results
This is a continuous cycle.
Types of Budgets
Now let’s understand the different types of budgets in a very easy way.
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1. Sales Budget
This is the most important budget.
It estimates:
• How much product will be sold
• Expected revenue
Example:
• 1,000 units × ₹100 = ₹1,00,000 sales
All other budgets depend on this.
2. Production Budget
This budget tells:
• How many units should be produced
Based on sales budget.
Example:
If expected sales = 1,000 units
Production = slightly more (to maintain stock)
3. Cost Budget
This includes all types of costs:
• Raw material cost
• Labor cost
• Overhead expenses
Helps in cost control.
4. Cash Budget
This shows:
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• Cash inflows (money coming in)
• Cash outflows (money going out)
Ensures the company has enough cash.
Example:
• Salary payments
• Rent
• Purchases
5. Flexible Budget
This budget changes according to activity level.
Useful when demand is uncertain.
Example:
• If production increases, costs increase accordingly.
6. Master Budget
This is a complete summary of all budgets.
It includes:
• Sales budget
• Production budget
• Cash budget
• Cost budget
Think of it as the final big plan of the business
7. Capital Expenditure Budget
This budget is for long-term investments.
Example:
• Buying machines
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• Building factories
Helps in expansion decisions.
8. Fixed Budget
This budget does not change.
It remains fixed regardless of production level.
Example:
• Rent
• Salaries (fixed portion)
9. Zero-Based Budget
Every expense must be justified from zero.
No assumption from past budgets.
Example:
• “Why do we need this expense?” → must be explained
Easy Way to Remember Types of Budgets
You can remember like this:
Sales → Production → Cost → Cash → Master
Final Conclusion
Budgetary control is like a roadmap for a business. Without it, a business may lose
direction, waste money, and fail to achieve its goals.
✔ It helps in planning
✔ Controls costs
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✔ Improves efficiency
✔ Increases profits
And different types of budgets help manage different areas of business smoothly.
8.Find out the following Material Variances:
• (a) Material Cost Variance
• (b) Material Price Variance
• (c) Material Usage Variance
• (d) Material Mix Variance
• (e) Material Yield Variance
Ans: Why Do We Study Material Variances?
Imagine you run a bakery. You expect to use 10 kg of flour at ₹50 per kg to bake 100 cakes.
But in reality, you used 12 kg of flour at ₹55 per kg. The difference between what you
planned and what you actually spent is a variance. Studying these variances helps managers
spot inefficiencies, control costs, and improve performance.
Types of Material Variances
There are five main types we need to understand:
(a) Material Cost Variance (MCV)
• Meaning: The overall difference between the standard cost of materials and the
actual cost of materials.
• Formula:
MCV = Standard Cost − Actual Cost
• Interpretation: If actual cost > standard cost, variance is adverse (bad). If actual cost
< standard cost, variance is favorable (good).
It’s like checking your grocery bill: Did you spend more or less than expected?
(b) Material Price Variance (MPV)
• Meaning: The difference caused by paying a different price per unit of material than
expected.
• Formula:
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MPV = (Standard Price − Actual Price) × Actual Quantity
• Interpretation: If you paid more per kg of flour than planned, that’s an adverse
variance.
Example: You expected flour at ₹50/kg but paid ₹55/kg for 12 kg.
(50 − 55) × 12 = −60(Adverse)
(c) Material Usage Variance (MUV)
• Meaning: The difference caused by using more or less material than expected.
• Formula:
MUV = (Standard Quantity − Actual Quantity) × Standard Price
• Interpretation: If you used more flour than the standard recipe required, that’s
adverse.
Example: Standard quantity = 10 kg, Actual = 12 kg, Standard price = ₹50.
(10 − 12) × 50 = −100(Adverse)
(d) Material Mix Variance (MMV)
• Meaning: The difference caused by changing the proportion (mix) of materials used
compared to the standard recipe.
• Formula:
MMV = (Revised Standard Quantity − Actual Quantity) × Standard Price
• Interpretation: If you used more sugar and less flour than the standard mix, the cost
changes.
It’s like altering the recipe—using more butter than planned increases cost.
(e) Material Yield Variance (MYV)
• Meaning: The difference caused by the output being more or less than expected
from the given input.
• Formula:
MYV = (Actual Yield − Standard Yield) × Standard Cost per Unit
• Interpretation: If you expected 100 cakes from 10 kg flour but only got 95 cakes,
that’s adverse.
Yield variance measures efficiency—did the inputs produce the expected outputs?
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Diagram to Visualize
Material Variances
-----------------------------------
| Material Cost Variance (MCV) |
| ↳ Price Variance (MPV) |
| ↳ Usage Variance (MUV) |
| ↳ Mix Variance (MMV) |
| ↳ Yield Variance (MYV) |
-----------------------------------
Think of MCV as the “umbrella variance.” Under it, we break down the reasons: Was it
because of price? Usage? Mix? Yield?
Example Bringing It All Together
Let’s say your bakery planned:
• Standard: 10 kg flour @ ₹50/kg = ₹500.
• Actual: 12 kg flour @ ₹55/kg = ₹660.
Now calculate:
• MCV = 500 – 660 = -160 (Adverse).
• MPV = (50 – 55) × 12 = -60 (Adverse).
• MUV = (10 – 12) × 50 = -100 (Adverse).
So, the total adverse variance of ₹160 is explained by price variance (₹60) and usage
variance (₹100).
Why Managers Care
• Price Variance tells if purchasing department is buying materials at the right price.
• Usage Variance tells if production is efficient or wasteful.
• Mix Variance tells if the recipe/proportion is being followed.
• Yield Variance tells if inputs are producing the expected outputs.
Together, these variances help managers pinpoint problems and take corrective action.
Conclusion
Material variances are like detective tools in cost accounting. They don’t just show that
costs are different—they explain why. By breaking down into price, usage, mix, and yield,
managers can identify whether the issue lies in purchasing, production efficiency, recipe
changes, or output levels.
“This paper has been carefully prepared for educaonal purposes. If you noce any
mistakes or have suggesons, feel free to share your feedback.”
