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GNDU QUESTION PAPERS 2024
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.Dene cost accounng along with its objecves. Dierenate between cost accounng
and nancial accounng.
2.The books of ABC Company present the following data for the month April, 2022:
• Direct labour cost = Rs. 17,500 (being 175% of works overhead)
• Cost of goods sold (excluding administraon expenses) = Rs. 56,000
Inventory balances:
Item
April 1 (Rs.)
April 30 (Rs.)
Raw Materials
8,000
10,600
Work in Progress
10,500
14,500
Finished Goods
17,600
19,000
Other data:
• Selling expenses – Rs. 3,500
• General and administrave expenses – Rs. 2,500
• Sales for the month – Rs. 75,000
Required:
• Compute the value of materials purchased
• Prepare a cost statement showing various elements of cost and prot
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SECTION – B
3.Product Z is obtained aer it passes through three processes. The following informaon
is obtained for the month ending March 2022:
Process Data:
Items
Total (Rs.)
Process I
Process II
Process III
Direct material
7,542
2,600
1,980
2,962
Direct wages
9,000
2,000
3,000
4,000
Producon overheads
9,000
–
–
–
% of normal loss to input
–
5%
10%
15%
Output (units)
–
950
840
750
Value of scrap per unit (Rs.)
–
2
4
5
• 1,000 units @ Rs. 3 each were introduced in Process I
• No opening or closing stock of material or WIP
• Output of each process passes to next process and nally to nished stock
• Producon overheads are recovered at 100% of direct wages
Required:
Prepare process cost accounts and other related accounts.
4.What is contract account? How is it prepared? Discuss the various items that are
included in contract account.
SECTION – C
5.From the following details of Aditya Enterprises, compute prot as per Financial
Accounts as well as Cost Accounts and reconcile the two, showing clearly the reasons
responsible for the dierence:
• Sales – Rs. 2,50,000
• Purchases of raw materials – Rs. 60,000
• Opening stock of raw materials – Rs. 22,000
• Closing stock of raw materials – Rs. 25,000
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• Direct wages – Rs. 45,000
• Indirect wages – Rs. 5,000
• Factory expenses – Rs. 20,000
• Depreciaon on machinery – Rs. 15,000
• Salaries of oce sta – Rs. 12,000
• Oce rent – Rs. 5,000
• Other oce expenses – Rs. 7,000
• Bad debts – Rs. 2,000
• Interest on bank overdra – Rs. 2,000
• Prot on sale of old machine – Rs. 8,000
• Selling expenses – Rs. 18,000
• Distribuon expenses – Rs. 6,000
• Income from investments – Rs. 12,000
In cost accounts:
(a) Opening stock = Rs. 20,000, Closing stock = Rs. 24,000
(b) Works overheads recovered at 100% of direct wages
(c) Administraon overheads recovered at 20% of prime cost
(d) Selling and distribuon overheads recovered at 10% of sales
6.“Cost-volume-prot analysis is a very useful technique to management for cost control,
prot planning and decision making.” Explain.
SECTION – D
7.What do you mean by funconal budgets? Explain them in detail.
8.From the following informaon, calculate Material Variances:
Data:
Raw Material
Standard
Actual
Material A
40 units @ Rs. 50 per unit
50 units @ Rs. 50 per unit
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Material B
60 units @ Rs. 40 per unit
60 units @ Rs. 45 per unit
GNDU ANSWER PAPERS 2024
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.Dene cost accounng along with its objecves. Dierenate between cost accounng
and nancial accounng.
Ans: What is Cost Accounting?
Imagine you run a small tea stall . Every day, you spend money on milk, tea leaves, sugar,
gas, and labour. At the end of the day, you earn some money by selling tea.
Now, a question arises:
How much did it actually cost you to make each cup of tea?
Are you making profit or loss?
Where can you reduce expenses?
This is exactly where Cost Accounting comes in.
Definition:
Cost Accounting is the process of recording, analyzing, and controlling all costs involved in
producing goods or services.
In simple words:
It tells you “Where your money is going and how efficiently you are using it.”
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Objectives of Cost Accounting
Cost accounting is not just about calculating costs—it helps businesses make smart
decisions. Let’s understand its main objectives in a simple way:
1. To Determine Cost of Production
It helps calculate:
• Cost of raw materials
• Labor cost
• Overhead expenses
So, a business knows the exact cost per unit.
2. To Fix Selling Price
Once the cost is known, businesses can decide:
• Selling price
• Profit margin
Without cost accounting, pricing would be just guesswork.
3. Cost Control
It identifies:
• Wastage
• Unnecessary expenses
• Inefficiencies
Example: If too much sugar is wasted in your tea stall, cost accounting will highlight it.
4. Cost Reduction
After controlling costs, the next step is reducing them:
• Using cheaper alternatives
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• Improving processes
• Reducing waste
This increases profit without increasing price.
5. Helps in Decision Making
Managers use cost data to:
• Decide whether to produce or outsource
• Choose between alternatives
• Plan future strategies
6. Budgeting and Planning
It helps prepare:
• Budgets
• Cost estimates
This ensures better financial planning.
7. Inventory Control
It tracks:
• Raw materials
• Finished goods
Prevents overstocking or shortages.
Simple Diagram: How Cost Accounting Works
Raw Materials + Labour + Overheads
↓
Total Cost of Production
↓
Cost Per Unit Calculation
↓
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Pricing & Profit Decisions
↓
Cost Control & Cost Reduction
This flow shows how cost accounting moves from expenses → decisions → profit
improvement
Difference Between Cost Accounting and Financial Accounting
Now let’s understand an important part of your question—how cost accounting is different
from financial accounting.
Think of it like this:
Cost Accounting = Internal (for managers)
Financial Accounting = External (for outsiders like investors, government)
Key Differences (Simple Table)
Basis
Cost Accounting
Financial Accounting
Purpose
To calculate and control costs
To show overall financial
performance
Users
Internal (managers, employees)
External (investors, government,
banks)
Focus
Detailed cost of each
product/process
Overall profit & loss of business
Time Period
Can be daily, weekly, or monthly
Usually yearly or quarterly
Nature
Detailed and analytical
Summary and general
Legal
Requirement
Not compulsory
Compulsory by law
Data Type
Both past and future estimates
Only past financial data
Use
Helps in decision-making
Helps in reporting financial
position
Easy Example to Understand the Difference
Let’s go back to your tea stall :
Cost Accounting tells you:
• Cost of 1 cup of tea = ₹8
• Selling price = ₹12
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• Profit per cup = ₹4
Financial Accounting tells you:
• Total sales = ₹5,000
• Total expenses = ₹3,500
• Total profit = ₹1,500
So:
• Cost accounting = Detailed inside view
• Financial accounting = Overall outside view
Why Both Are Important?
Both systems work together like a team:
• Cost accounting helps improve efficiency
• Financial accounting shows final results
Without cost accounting → you don’t know where money is wasted
Without financial accounting → you can’t report your business performance
Final Conclusion
Cost accounting is like a microscope —it looks deeply into every cost and helps improve
efficiency.
Financial accounting is like a camera —it captures the overall picture of the business.
Together, they help a business:
• Understand costs
• Increase profits
• Make better decisions
• Grow successfully
2.The books of ABC Company present the following data for the month April, 2022:
• Direct labour cost = Rs. 17,500 (being 175% of works overhead)
• Cost of goods sold (excluding administraon expenses) = Rs. 56,000
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Inventory balances:
Item
April 1 (Rs.)
April 30 (Rs.)
Raw Materials
8,000
10,600
Work in Progress
10,500
14,500
Finished Goods
17,600
19,000
Other data:
• Selling expenses – Rs. 3,500
• General and administrave expenses – Rs. 2,500
• Sales for the month – Rs. 75,000
Required:
• Compute the value of materials purchased
• Prepare a cost statement showing various elements of cost and prot
Ans: Step 1: Understanding the Data
We are given:
• Direct labour cost = Rs. 17,500
• Direct labour is 175% of works overhead.
• Cost of goods sold (COGS) = Rs. 56,000 (excluding admin expenses).
• Inventory balances:
o Raw Materials: Opening Rs. 8,000, Closing Rs. 10,600
o Work in Progress (WIP): Opening Rs. 10,500, Closing Rs. 14,500
o Finished Goods: Opening Rs. 17,600, Closing Rs. 19,000
• Selling expenses = Rs. 3,500
• Administration expenses = Rs. 2,500
• Sales = Rs. 75,000
Step 2: Find Works Overhead
We know: Direct Labour = 175% of Works Overhead.
So,
Works Overhead =
𝐷𝑖𝑟𝑒𝑐𝑡𝐿𝑎𝑏𝑜𝑢𝑟
1.75
=
17,500
1.75
= 𝑅𝑠. 10,000
Step 3: Prime Cost and Factory Cost
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Prime Cost = Direct Materials + Direct Labour. But Direct Materials is not directly given—
we’ll compute it later using inventory balances.
Factory Cost = Prime Cost + Works Overhead.
Step 4: Cost of Production
We are given COGS = Rs. 56,000. COGS is derived from:
COGS = Cost of Production + Opening FG − Closing FG
So,
56,000 = Cost of Production + 17,600 − 19,000
56,000 = Cost of Production − 1,400
Cost of Production = 57,400
Step 5: Works Cost and Direct Materials
Cost of Production = Works Cost + Opening WIP – Closing WIP.
So,
57,400 = Works Cost + 10,500 − 14,500
57,400 = Works Cost − 4,000
Works Cost = 61,400
Now, Works Cost = Prime Cost + Works Overhead.
61,400 = (𝐷𝑖𝑟𝑒𝑐𝑡𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙𝑠 + 17,500) + 10,000
61,400 = 𝐷𝑖𝑟𝑒𝑐𝑡𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙𝑠 + 27,500
𝐷𝑖𝑟𝑒𝑐𝑡𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙𝑠 = 33,900
Step 6: Materials Purchased
Direct Materials consumed = Opening RM + Purchases – Closing RM.
So,
33,900 = 8,000 + 𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑠–10,600
33,900 = 𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑠–2,600
𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑠 = 36,500
Materials Purchased = Rs. 36,500
Step 7: Prepare Cost Statement
ABC Company – Cost Statement for April 2022
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Particulars
Amount (Rs.)
Direct Materials consumed
33,900
Direct Labour
17,500
Prime Cost
51,400
Works Overhead
10,000
Works Cost
61,400
Add: Opening WIP
10,500
Less: Closing WIP
(14,500)
Cost of Production
57,400
Add: Opening FG
17,600
Less: Closing FG
(19,000)
Cost of Goods Sold
56,000
Add: Selling Expenses
3,500
Add: Administration Expenses
2,500
Total Cost
62,000
Sales
75,000
Profit
13,000
Explanation in Simple Words
Think of this as a journey:
• First, the company buys raw materials (Rs. 36,500).
• These materials, along with labour and overheads, form the Prime Cost.
• Adding factory overheads gives the Works Cost.
• Adjusting for unfinished goods (WIP) gives the Cost of Production.
• Adjusting for finished goods inventory gives the COGS.
• Finally, adding selling and admin expenses gives the Total Cost.
• Comparing this with sales shows the Profit = Rs. 13,000.
Conclusion
So, we computed:
• Materials Purchased = Rs. 36,500
• Profit = Rs. 13,000
This problem shows how cost accounting carefully tracks every stage of production and
sales to arrive at profit. It’s like peeling an onion layer by layer until you reach the core
result.
Thought exercise: Imagine if selling expenses doubled—how would profit change? This
helps you see how sensitive profits are to cost elements.
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SECTION – B
3.Product Z is obtained aer it passes through three processes. The following informaon
is obtained for the month ending March 2022:
Process Data:
Items
Total (Rs.)
Process I
Process II
Process III
Direct material
7,542
2,600
1,980
2,962
Direct wages
9,000
2,000
3,000
4,000
Producon overheads
9,000
–
–
–
% of normal loss to input
–
5%
10%
15%
Output (units)
–
950
840
750
Value of scrap per unit (Rs.)
–
2
4
5
• 1,000 units @ Rs. 3 each were introduced in Process I
• No opening or closing stock of material or WIP
• Output of each process passes to next process and nally to nished stock
• Producon overheads are recovered at 100% of direct wages
Required:
Prepare process cost accounts and other related accounts.
Ans: Step 1: Understand the Flow
Here’s how the product moves:
Raw Material → Process I → Process II → Process III → Finished Goods
• 1000 units enter Process I
• Some units are lost in each process (normal loss)
• Remaining units move forward
• Final output = 750 units
Step 2: Key Concepts (Super Important)
1. Normal Loss
• Expected loss in each process
• It has scrap value (you can sell waste)
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2. Abnormal Loss / Gain
• If actual output differs from expected output
3. Overheads
• Given: 100% of direct wages
• So overhead = wages in each process
Step 3: Process I Calculation
Input:
• Units introduced = 1000 units
• Material = ₹2,600
• Wages = ₹2,000
• Overheads = ₹2,000 (100% of wages)
Total Cost:
= 2600 + 2000 + 2000 = ₹6,600
Normal Loss:
• 5% of 1000 = 50 units
• Scrap value = 50 × ₹2 = ₹100
Expected Output:
= 1000 – 50 = 950 units
✔ Actual output = 950 units → No abnormal loss
Cost per Unit:
Net cost = 6600 – 100 = ₹6,500
Cost per unit = 6500 / 950 = ₹6.84 (approx)
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Process I Account (Simplified)
Particulars
Units
Amount (₹)
Input
1000
6,600
Normal Loss
50
100
Output (to Process II)
950
6,500
Step 4: Process II Calculation
Input:
• Units = 950
• Cost = ₹6,500 (from Process I)
• Material = ₹1,980
• Wages = ₹3,000
• Overheads = ₹3,000
Total Cost:
= 6500 + 1980 + 3000 + 3000
= ₹14,480
Normal Loss:
• 10% of 950 = 95 units
• Scrap value = 95 × ₹4 = ₹380
Expected Output:
= 950 – 95 = 855 units
✔ Actual output = 840 units
So abnormal loss = 855 – 840 = 15 units
Cost per Unit:
Net cost = 14480 – 380 = ₹14,100
Cost per unit = 14100 / 855 = ₹16.49 (approx)
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Abnormal Loss Value:
= 15 × 16.49 = ₹247.35
Process II Account
Particulars
Units
Amount (₹)
Input
950
14,480
Normal Loss
95
380
Abnormal Loss
15
247
Output (to Process III)
840
13,853
Step 5: Process III Calculation
Input:
• Units = 840
• Cost = ₹13,853
• Material = ₹2,962
• Wages = ₹4,000
• Overheads = ₹4,000
Total Cost:
= 13853 + 2962 + 4000 + 4000
= ₹24,815
Normal Loss:
• 15% of 840 = 126 units
• Scrap value = 126 × ₹5 = ₹630
Expected Output:
= 840 – 126 = 714 units
✔ Actual output = 750 units
So abnormal gain = 750 – 714 = 36 units
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Cost per Unit:
Net cost = 24815 – 630 = ₹24,185
Cost per unit = 24185 / 714 = ₹33.87 (approx)
Abnormal Gain Value:
= 36 × 33.87 = ₹1,219
Process III Account
Particulars
Units
Amount (₹)
Input
840
24,815
Normal Loss
126
630
Output (Finished Goods)
750
25,405
Step 6: Final Output (Finished Goods)
• Units = 750
• Cost transferred = ₹25,405
Step 7: What Did We Learn?
Think of this like a production journey:
• Raw material enters → gets processed step by step
• Some material is naturally lost (normal loss)
• Sometimes unexpected loss or gain happens
• Cost keeps increasing as product moves forward
Final Insight
This question teaches you:
✔ How cost flows from one process to another
✔ How to treat normal loss (reduce cost)
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✔ How to handle abnormal loss/gain
✔ How to calculate cost per unit at each stage
4.What is contract account? How is it prepared? Discuss the various items that are
included in contract account.
Ans: What is a Contract Account?
A Contract Account is a special account prepared by contractors to record all costs,
revenues, and profits related to a particular contract.
In simple words: It’s like a “report card” for each construction project, showing how
much money was spent, how much work was completed, and how much profit was earned.
Since contracts are usually large, long-term projects (like roads, dams, or buildings), normal
costing methods don’t work well. That’s why a separate account is maintained for each
contract.
Why Do We Need a Contract Account?
• To keep track of huge expenses like materials, labour, and machinery.
• To calculate profit or loss on each contract.
• To help management know whether the project is on budget.
• To provide transparency for clients and auditors.
How is a Contract Account Prepared?
A Contract Account is prepared in the format of a cost statement. It includes all expenses on
the debit side and revenues/credits on the other side.
Steps in Preparation:
1. Record Direct Costs: Materials, labour, plant, and equipment used for the contract.
2. Add Indirect Costs: Overheads like supervision, site expenses, and depreciation.
3. Adjust Work-in-Progress (WIP): Value of work certified by engineers and work not
yet certified.
4. Account for Escalation/Retention: Sometimes part of the payment is withheld until
completion.
5. Calculate Profit: Transfer profit to the Profit & Loss Account based on stage of
completion.
Items Included in a Contract Account
1. Direct Costs
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• Materials: Cement, steel, bricks, etc. issued to the site.
• Labour: Wages of workers directly engaged in construction.
• Plant & Machinery: Cost of equipment used, depreciation, and repairs.
• Sub-contracts: Payments made to subcontractors.
2. Indirect Costs
• Site supervision expenses.
• Administrative overheads related to the contract.
• Insurance of site and workers.
3. Work-in-Progress (WIP)
• Work Certified: Value of work approved by the client’s engineer.
• Work Uncertified: Work completed but not yet approved.
4. Escalation Clause
• If material or labour costs rise unexpectedly, contractors may get extra payment.
5. Retention Money
• A portion of payment withheld by the client until the contract is fully completed.
6. Profit Recognition
• Since contracts take years, profit is recognized gradually:
o Notional Profit: Difference between value of work certified and cost of work.
o Estimated Profit: Based on total contract value and estimated costs.
Diagram to Visualize
Contract Account
-----------------------------------------
Debit Side (Expenses):
- Materials
- Labour
- Plant & Machinery
- Sub-contracts
- Overheads
Credit Side (Revenues):
- Work Certified
- Work Uncertified
- Escalation Claims
- Contract Price
Balance → Profit transferred to P&L
-----------------------------------------
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Example (Simplified)
Imagine ABC Constructions is building a highway:
• Materials used: Rs. 50,00,000
• Labour: Rs. 20,00,000
• Machinery depreciation: Rs. 5,00,000
• Overheads: Rs. 2,00,000
• Work certified by engineer: Rs. 90,00,000
• Work uncertified: Rs. 5,00,000
Contract Account would show:
• Debit side = Rs. 77,00,000 (all costs).
• Credit side = Rs. 95,00,000 (work certified + uncertified).
• Profit = Rs. 18,00,000 (transferred partly to P&L depending on completion stage).
How Profit is Transferred
Since contracts are long-term, profit is not transferred fully until completion. Instead:
• If work is less than 25% complete → No profit transferred.
• If work is 25–50% complete → Transfer 1/3rd of notional profit.
• If work is more than 50% complete → Transfer 2/3rd of notional profit.
• If contract is nearly complete → Transfer estimated profit after considering retention
money.
Conclusion
A Contract Account is a vital tool in cost accounting for construction and long-term projects.
It records all expenses, revenues, and profits related to a contract. By including items like
materials, labour, machinery, overheads, work certified, and retention money, it gives a
clear picture of the financial performance of each project.
SECTION – C
5.From the following details of Aditya Enterprises, compute prot as per Financial
Accounts as well as Cost Accounts and reconcile the two, showing clearly the reasons
responsible for the dierence:
• Sales – Rs. 2,50,000
• Purchases of raw materials – Rs. 60,000
• Opening stock of raw materials – Rs. 22,000
• Closing stock of raw materials – Rs. 25,000
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• Direct wages – Rs. 45,000
• Indirect wages – Rs. 5,000
• Factory expenses – Rs. 20,000
• Depreciaon on machinery – Rs. 15,000
• Salaries of oce sta – Rs. 12,000
• Oce rent – Rs. 5,000
• Other oce expenses – Rs. 7,000
• Bad debts – Rs. 2,000
• Interest on bank overdra – Rs. 2,000
• Prot on sale of old machine – Rs. 8,000
• Selling expenses – Rs. 18,000
• Distribuon expenses – Rs. 6,000
• Income from investments – Rs. 12,000
In cost accounts:
(a) Opening stock = Rs. 20,000, Closing stock = Rs. 24,000
(b) Works overheads recovered at 100% of direct wages
(c) Administraon overheads recovered at 20% of prime cost
(d) Selling and distribuon overheads recovered at 10% of sales
Ans: Step 1: Understand What We Need to Do
We have to:
1. Calculate profit as per Financial Accounts
2. Calculate profit as per Cost Accounts
3. Reconcile the difference (i.e., explain why both profits are different)
Step 2: Profit as per Financial Accounts
Financial accounts consider all expenses and incomes (including non-operating items like
interest, bad debts, etc.).
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(A) Calculate Cost of Raw Materials Consumed
Material Consumed = 𝑂𝑝𝑒𝑛𝑖𝑛𝑔𝑆𝑡𝑜𝑐𝑘 + 𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑠 − 𝐶𝑙𝑜𝑠𝑖𝑛𝑔𝑆𝑡𝑜𝑐𝑘
= 22,000 + 60,000 – 25,000
= ₹57,000
(B) Calculate Total Cost
Prime Cost:
• Materials = 57,000
• Direct Wages = 45,000
Prime Cost = ₹1,02,000
Add Factory Cost:
• Indirect wages = 5,000
• Factory expenses = 20,000
• Depreciation = 15,000
Factory Cost = 40,000
Works Cost = 1,02,000 + 40,000 = ₹1,42,000
Add Office/Admin Expenses:
• Salaries = 12,000
• Rent = 5,000
• Other expenses = 7,000
Admin Cost = 24,000
Cost of Production = 1,42,000 + 24,000 = ₹1,66,000
Add Selling & Distribution:
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• Selling = 18,000
• Distribution = 6,000
Total = 24,000
Total Cost = 1,66,000 + 24,000 = ₹1,90,000
(C) Profit Calculation (Financial)
Add Incomes:
• Sales = 2,50,000
• Profit on sale of machine = 8,000
• Income from investments = 12,000
Total Income = ₹2,70,000
Deduct Expenses:
• Total Cost = 1,90,000
• Bad debts = 2,000
• Interest = 2,000
Total Expenses = ₹1,94,000
Profit as per Financial Accounts:
2,70,000 − 1,94,000 = ₹76,000
Step 3: Profit as per Cost Accounts
Now comes the interesting part
Cost accounts do not include non-operating items and use estimated overheads.
(A) Prime Cost
• Materials = 57,000
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• Direct wages = 45,000
Prime Cost = ₹1,02,000
(B) Works Overheads
Given:
Overheads = 100% of direct wages
= 100% of 45,000 = ₹45,000
Works Cost = 1,02,000 + 45,000 = ₹1,47,000
(C) Admin Overheads
Given:
20% of Prime Cost
= 20% of 1,02,000 = ₹20,400
Cost of Production = 1,47,000 + 20,400 = ₹1,67,400
(D) Selling & Distribution
Given:
10% of Sales
= 10% of 2,50,000 = ₹25,000
Total Cost = 1,67,400 + 25,000 = ₹1,92,400
(E) Adjust Stock Difference
Stock differs:
• Financial closing stock = 25,000
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• Cost closing stock = 24,000
Cost accounts show ₹1,000 less stock, so cost is higher → profit reduces.
(F) Profit Calculation (Cost)
Profit = 𝑆𝑎𝑙𝑒𝑠 − 𝐶𝑜𝑠𝑡
= 2,50,000 − 1,92,400 = ₹57,600
Step 4: Reconciliation Statement
Now we explain why profits differ.
Financial Profit = ₹76,000
Cost Profit = ₹57,600
Difference = ₹18,400
Reconciliation Table
Particulars
Amount (₹)
Profit as per Cost Accounts
57,600
Add:
Profit on sale of machine
+8,000
Income from investments
+12,000
Over-absorption of admin overhead (24,000 – 20,400)
+3,600
Less:
Bad debts
-2,000
Interest on overdraft
-2,000
Over-absorption of factory overhead (45,000 – 40,000)
-5,000
Over-absorption of selling overhead (25,000 – 24,000)
-1,000
Stock difference
-1,200
Profit as per Financial Accounts
₹76,000
Step 5: Easy Concept Diagram
PROFIT DIFFERENCE
---------------------
| |
Financial Profit Cost Profit
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| |
Includes all Only production-related
incomes & expenses + estimated overheads
Step 6: Why Difference Happens (Very Important Theory)
The difference happens due to 3 main reasons:
1. Pure Financial Items
• Included only in financial accounts
• Example:
o Interest
o Bad debts
o Investment income
2. Over/Under Absorption of Overheads
• Cost accounts use estimates
• Financial accounts use actual figures
So differences arise:
• Factory overhead difference
• Admin overhead difference
• Selling overhead difference
3. Stock Valuation Difference
• Opening/closing stock values differ
• This affects profit directly
Final Answer Summary
• Profit as per Financial Accounts = ₹76,000
• Profit as per Cost Accounts = ₹57,600
• Difference = ₹18,400
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6.“Cost-volume-prot analysis is a very useful technique to management for cost control,
prot planning and decision making.” Explain.
Ans: What is Cost-Volume-Profit (CVP) Analysis?
CVP analysis studies the relationship between costs, sales volume, and profits. It helps
managers answer questions like:
• How many units must we sell to break even?
• What happens to profit if sales increase by 10%?
• Should we reduce price or increase advertising?
In simple words: CVP analysis is like a “profit calculator” that shows how changes in
sales, costs, or prices affect the bottom line.
Key Components of CVP Analysis
1. Fixed Costs: Costs that don’t change with output (e.g., rent, salaries).
2. Variable Costs: Costs that vary with output (e.g., raw materials, direct labour).
3. Sales Price per Unit: Revenue earned per unit sold.
4. Contribution Margin: Sales price – Variable cost. This margin contributes to covering
fixed costs and then generating profit.
5. Break-Even Point (BEP): The point where total revenue = total cost (no profit, no
loss).
Why CVP Analysis is Useful
1. Cost Control
• Managers can identify which costs are fixed and which are variable.
• Helps in controlling unnecessary overheads.
• Example: If rent is too high, managers may relocate to reduce fixed costs.
2. Profit Planning
• CVP shows how many units must be sold to achieve a target profit.
• Helps in setting realistic sales goals.
• Example: If a company wants Rs. 50,000 profit, CVP tells them exactly how many
units to sell.
3. Decision Making
• CVP helps managers decide:
o Should we change selling price?
o Should we add a new product line?
o Should we accept a special order at lower price?
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• Example: If reducing price increases sales volume enough to cover costs, CVP shows
whether it’s profitable.
Diagram to Visualize
Cost-Volume-Profit Analysis
-----------------------------------------
Sales Revenue
↓
(-) Variable Costs
↓
Contribution Margin
↓
(-) Fixed Costs
↓
Profit
-----------------------------------------
Key Tools:
- Break-Even Point
- Contribution Margin Ratio
- Target Profit Analysis
-----------------------------------------
Techniques in CVP Analysis
1. Break-Even Analysis
• Formula:
Break-Even Point (units) =
Fixed Costs
Contribution per Unit
• Shows minimum sales needed to avoid losses.
2. Contribution Margin Ratio
• Formula:
CM Ratio =
Contribution
Sales
• Helps in analyzing profitability of sales changes.
3. Margin of Safety
• Difference between actual sales and break-even sales.
• Shows how much sales can drop before the company incurs losses.
4. Profit-Volume Graph
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• A visual tool showing how profit changes with sales volume.
Example (Simplified)
Suppose a company sells a product at Rs. 100 per unit.
• Variable cost = Rs. 60 per unit.
• Contribution = Rs. 40 per unit.
• Fixed costs = Rs. 40,000.
Break-even point = 40,000 ÷ 40 = 1,000 units.
• If they sell 1,200 units → Profit = (200 × 40) = Rs. 8,000.
• If they sell only 800 units → Loss = (200 × 40) = Rs. 8,000.
This shows how CVP helps managers plan sales and profits.
Applications in Real Life
• Manufacturing: Deciding production levels.
• Retail: Setting discounts and promotions.
• Service Industry: Pricing services to cover costs.
• Startups: Planning survival by knowing break-even point.
Conclusion
Cost-Volume-Profit analysis is indeed a very useful technique for management. It connects
costs, sales, and profits in a simple framework. By using CVP, managers can:
• Control costs by identifying fixed and variable components.
• Plan profits by calculating break-even and target sales.
• Make smart decisions about pricing, production, and expansion.
In essence: CVP analysis is like a compass—it guides managers through the complex
world of costs and profits, helping them stay on course toward success.
SECTION – D
7.What do you mean by funconal budgets? Explain them in detail.
Ans: Imagine you are running a small business or even managing your monthly expenses at
home. You don’t just make one big plan for everything—you divide your planning into parts:
how much you will earn, how much you will spend on food, rent, travel, etc. Similarly, in a
business, planning is done department-wise. These individual plans are called functional
budgets.
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Meaning of Functional Budgets
A functional budget is a budget prepared for a specific function or department of an
organization, such as sales, production, purchase, finance, or administration.
In simple words:
Functional budgets are detailed plans for each department that help the business run
smoothly and achieve overall goals.
Each department creates its own budget, but all these budgets are connected and together
form the master budget of the company.
Why Functional Budgets are Important
Functional budgets help businesses:
• Plan activities in advance
• Control costs and avoid unnecessary spending
• Coordinate between departments
• Set clear targets for each team
• Improve efficiency and performance
Easy Example to Understand
Suppose a company manufactures shoes
• The sales team plans how many shoes they can sell → Sales Budget
• The production team plans how many shoes to produce → Production Budget
• The purchase department plans how much raw material to buy → Purchase Budget
All these are functional budgets, and together they ensure the business runs smoothly.
Types of Functional Budgets
Let’s understand the main types one by one in a simple way:
1. Sales Budget
This is the starting point of all budgets.
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It estimates how much the company expects to sell in a future period.
Includes:
• Expected sales quantity
• Selling price
• Total sales revenue
Example:
If a company plans to sell 1,000 units at ₹500 each → Sales = ₹5,00,000
2. Production Budget
Once sales are estimated, the company decides how much to produce.
It ensures that enough goods are produced to meet demand.
Formula:
Production = Expected Sales + Closing Stock – Opening Stock
This helps avoid shortages or overproduction.
3. Purchase Budget
This budget is related to raw materials.
It estimates how much material is needed and purchased.
Includes:
• Quantity of raw materials required
• Cost of materials
Example:
If 1 shoe needs 2 units of material, and 1,000 shoes are produced → 2,000 units needed
4. Labour Budget
This budget focuses on workers.
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It estimates the number of labor hours and cost required for production.
Includes:
• Number of workers
• Working hours
• Wage rates
Helps in managing workforce efficiently.
5. Overhead Budget
This includes indirect costs (not directly linked to production).
These costs are necessary but not directly traceable to a product.
Examples:
• Electricity
• Rent
• Maintenance
• Supervisor salaries
6. Cash Budget
This is very important for financial planning.
It shows expected cash inflows and outflows.
Includes:
• Cash receipts (sales, loans)
• Cash payments (expenses, salaries)
Helps ensure the company has enough cash to operate.
7. Administrative Budget
This budget relates to office and management expenses.
Covers general expenses required to run the business.
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Examples:
• Office salaries
• Stationery
• Legal expenses
8. Capital Expenditure Budget
This is for long-term investments.
It includes spending on assets like machinery, buildings, etc.
Example:
Buying a new machine for ₹5 lakh.
Diagram to Understand Functional Budgets
Here is a simple structure showing how functional budgets are connected:
MASTER BUDGET
│
┌───────────────┼───────────────┐
│ │ │
Sales Budget Production Budget Cash Budget
│ │
│ ┌──────┼──────┐
│ │ │
Purchase Labour Budget Overhead Budget
Budget
This diagram shows that:
• Sales budget is the base
• Other budgets depend on it
• All together form the master budget
Relationship Between Functional Budgets
All functional budgets are interconnected:
• Sales budget affects production
• Production affects purchase and labour
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• All budgets affect cash flow
So, if one budget changes, others must also adjust.
Key Features of Functional Budgets
• Prepared department-wise
• Based on future estimates
• Helps in coordination
• Acts as a control tool
• Leads to better decision-making
Conclusion
Functional budgets are like individual building blocks of a company’s financial planning.
Each department prepares its own budget, but all are connected and work towards a
common goal.
By using functional budgets, a business can:
• Plan efficiently
• Avoid wastage
• Improve performance
• Achieve its financial targets
In simple terms:
Functional budgets help turn big business goals into manageable, practical plans.
8.From the following informaon, calculate Material Variances:
Data:
Raw Material
Standard
Actual
Material A
40 units @ Rs. 50 per unit
50 units @ Rs. 50 per unit
Material B
60 units @ Rs. 40 per unit
60 units @ Rs. 45 per unit
Ans: Step 1: Recall What Material Variances Mean
In Standard Costing, material variances measure the difference between what materials
should have cost (standard) and what they actually cost.
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There are three main types:
1. Material Price Variance (MPV) → Difference due to change in price. Formula:
(Standard Price − Actual Price) × Actual Quantity
2. Material Usage (Quantity) Variance (MUV) → Difference due to change in quantity
used. Formula: (Standard Quantity − Actual Quantity) × Standard Price
3. Material Cost Variance (MCV) → Overall difference. Formula: Standard Cost −
Actual CostOr simply: MPV + MUV.
Step 2: Write Down the Data
We have two materials:
• Material A
o Standard: 40 units @ Rs. 50 = Rs. 2,000
o Actual: 50 units @ Rs. 50 = Rs. 2,500
• Material B
o Standard: 60 units @ Rs. 40 = Rs. 2,400
o Actual: 60 units @ Rs. 45 = Rs. 2,700
Step 3: Calculate Variances
Material A
• Price Variance: (50 − 50) × 50 = 0→ No price variance.
• Usage Variance: (40 − 50) × 50 = −10 × 50 = −500(Adverse). Used 10 units
more than standard.
• Cost Variance: Standard Cost – Actual Cost = 2,000 – 2,500 = -500 (Adverse).
Material B
• Price Variance: (40 − 45) × 60 = −5 × 60 = −300(Adverse). Paid Rs. 5 more
per unit.
• Usage Variance: (60 − 60) × 40 = 0→ No usage variance.
• Cost Variance: Standard Cost – Actual Cost = 2,400 – 2,700 = -300 (Adverse).
Total Variances
• Material Price Variance = 0 (A) + (-300) (B) = -300 (Adverse).
• Material Usage Variance = (-500) (A) + 0 (B) = -500 (Adverse).
• Material Cost Variance = -500 + -300 = -800 (Adverse).
Diagram to Visualize
Material Variances
-----------------------------------------
Material A:
- Price Variance = 0
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- Usage Variance = -500 (Adverse)
- Cost Variance = -500 (Adverse)
Material B:
- Price Variance = -300 (Adverse)
- Usage Variance = 0
- Cost Variance = -300 (Adverse)
Total:
- Price Variance = -300 (Adverse)
- Usage Variance = -500 (Adverse)
- Cost Variance = -800 (Adverse)
-----------------------------------------
Explanation in Simple Words
Think of it like shopping:
• For Material A, the price was exactly as expected, but you bought more than
planned (extra 10 units), so cost went up.
• For Material B, you bought the right quantity, but the price was higher than
expected (Rs. 45 instead of Rs. 40), so again cost went up.
Together, these differences caused an overall adverse variance of Rs. 800. “Adverse” means
the company spent more than the standard cost.
Conclusion
So, the variances are:
• Material Price Variance = Rs. 300 (Adverse)
• Material Usage Variance = Rs. 500 (Adverse)
• Material Cost Variance = Rs. 800 (Adverse)
This analysis helps management see where the extra cost came from—whether from
paying higher prices or using more material than planned. That’s why material variance
analysis is such a useful tool for cost control.
“This paper has been carefully prepared for educaonal purposes. If you noce any
mistakes or have suggesons, feel free to share your feedback.”
