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GNDU Question Paper-2023
Bachelor of Business Administration
BBA 5
th
Semester
COST ACCOUNTING
Time Allowed: Three Hours Max. Marks: 50
Note: Attempt Five questions in all, selecting at least One question from each section. The
Fifth question may be attempted from any section. All questions carry equal marks.
SECTION-A
1. What do you mean by Cost Accounting? How it is different from Financial Accounting?
2. Explain the following (5 marks each):
(a) Cost unit
(b) Limitations of Cost Accounting.
SECTION-B
3. Define Cost Sheet. Explain the components of Cost Sheet by preparing its specimen.
4. A construction company undertakes large contracts. The following are the particulars of
the company for the year ended 31st March, 2019:
Amount
(Rs.)
Amount
(Rs.)
Work Certified
1,40,000
Establishment charges
3,250
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Work Uncertified
4000
Wages accrued at the end of
the year
1,800
Plant installed at site
11,000
Direct Exp.
2,400
Value of the plant at the
end
8,000
Materials in hand at the end
of year
1,400
Material sent to site
64,500
Material returned to store
400
Indirect material
consumed at site
5,000
Miscellaneous Exp
5,000
Labour
54,800
Direct exp. Accured at end of
year
200
Contract Price
2,20,00
Cash received from
contractor
1,20,000
Prepare a Contract Account for the year ended 2019 and find out the profits.
SECTION-C
5. A company uses single raw material X to produce product A. The details of product A for
the year 2016 are given as under :
Particulars
Product A
Normal Selling Price per unit (Rs.)
1,000
Number of Units sold
5.000
Material cost per unit (Variable) (Rs.)
500
Labour cost per unit (Variable) (Rs.)
200
Factory overhead cost per unit (Variable) (Rs.)
100
The total fixed cost for the given period being Rs. 3,00,000.
• From the above information, calculate:
• Break even sales volume
• Margin of safety
• The present level of profits the company is earning
• Number of units, which should be sold to obtain the present profit if it is proposed
to reduce the selling price by 10% for the product.
6. Write notes on (5 marks each):
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(a) Standard Costing
(b) Limitations of Standard Costing.
SECTION-D
7. A company uses the following standard mix of their compound in one batch of its
production line:
Material
Std. Quantity
(Qty)
Actual Quantity
(Qty)
X
50
60
Y
30
40
Z
20
15
Calculate :
(a). Material price variance
(b). Material quantity variance
8. The cost of an article at the capacity level of 5,000 units is given under.
Prepare a budget for 6,000 units:
Partticulars
Amount
(Rs.)
Material Cost (100 percent variable)
2,50,000
Labour Cost (100 percent variable)
1,50,000
Power (80 percent variable)
12,500
Repair and Maintenance (75 percent variable)
20,000
Store (100 percent variable)
10,000
Inspection (20 percent variable)
5.000
Administration Overheads (25 percent variable)
50,000
Selling Overheads (50 percent variable)
30,000
Depreciation (100 percent fixed)
1,00,000
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GNDU Answer Paper-2023
Bachelor of Business Administration
BBA 5
th
Semester
COST ACCOUNTING
Time Allowed: Three Hours Max. Marks: 50
Note: Attempt Five questions in all, selecting at least One question from each section. The
Fifth question may be attempted from any section. All questions carry equal marks.
SECTION-A
1. What do you mean by Cost Accounting? How it is different from Financial Accounting?
Ans: Cost Accounting vs. Financial Accounting – A Story of Two Friends
Imagine for a moment that there are two brothers in a family business. Both are intelligent,
both keep records, but their purposes are different.
The elder brother is named Financial Accounting. He is formal, disciplined, and cares about
how outsiders see the family business. His role is to prepare neat reports so that banks,
government departments, investors, and even the tax department can understand the
financial health of the business. He doesn’t care much about day-to-day details; he only
wants to give a complete and accurate picture at the end of the year.
The younger brother is named Cost Accounting. He is practical, curious, and works like a
detective inside the business. He is less interested in outsiders and more focused on helping
the business owner take better decisions. He carefully tracks how much raw material is
used, how much is wasted, how much labor is working efficiently, and where money is being
leaked. He whispers into the business owner’s ears: “Look, if you reduce wastage here, your
cost will fall. If you use this method, your profit will increase.”
So, while both brothers belong to the same family of Accounting, their jobs are different.
One looks outward, the other inward. One satisfies outsiders, the other guides insiders.
Now let’s unpack this story in a structured way.
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What is Cost Accounting?
Cost Accounting is a special branch of accounting that deals with recording, classifying,
analyzing, and controlling costs of products, processes, or services. Its main goal is not just
to “record” but to analyze and reduce costs and to help in decision-making.
In simple words, Cost Accounting is like a microscope—it zooms into the details of the
business. It tells the owner:
• How much did it cost to make one unit of the product?
• Where are we spending more than necessary?
• Which product is giving more profit?
• Should we make the product in-house or buy it from outside?
For example, imagine you are running a bakery. Financial Accounting will simply tell you:
“This year, your bakery earned ₹10 lakh in sales and made ₹2 lakh profit.” That’s useful for
the bank or tax office.
But Cost Accounting will go further and say:
• “One loaf of bread costs you ₹20 to produce.”
• “If you reduce wastage of flour, the cost will fall to ₹18.”
• “Cookies are giving you higher margins than bread. Focus more on them.”
This is the real power of Cost Accounting. It gives you the secrets behind the numbers so
that you can improve efficiency and profits.
How is Cost Accounting Different from Financial Accounting?
At first glance, both may look similar—they both deal with money, figures, and reports. But
once you understand their personality, you’ll realize they are quite different. Let’s break it
down:
1. Purpose
• Financial Accounting → Its purpose is to present a true and fair view of the business
to outsiders like investors, banks, government, or shareholders.
• Cost Accounting → Its purpose is to help managers make internal decisions, reduce
wastage, and control costs.
2. Focus Area
• Financial Accounting → Focuses on the whole business, overall profit/loss, and
balance sheet.
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• Cost Accounting → Focuses on each product, process, or job, and checks where
money is spent.
3. Users
• Financial Accounting → External parties (shareholders, government, creditors).
• Cost Accounting → Internal management (owners, managers, decision-makers).
4. Time Orientation
• Financial Accounting → Historical in nature. It records what has already happened in
the past year.
• Cost Accounting → Both present and future-oriented. It looks at current costs and
also predicts future costs.
5. Legal Requirement
• Financial Accounting → Mandatory for all companies. The law requires businesses to
prepare financial statements.
• Cost Accounting → Not mandatory for all, but very useful. Some industries (like
cement, sugar, electricity) are legally required to maintain cost records.
6. Level of Detail
• Financial Accounting → General summary of accounts.
• Cost Accounting → Detailed analysis of costs (per unit, per job, per department).
An Easy Analogy
Think of a cricket team.
• Financial Accounting is like the scoreboard. It shows runs scored, wickets lost, and
overs bowled. It is important for the audience and sponsors to see the overall result.
• Cost Accounting is like the coach in the dressing room. The coach doesn’t just look at
the scoreboard. He analyses how each player performed, where mistakes happened,
and how to improve in the next match.
Without the scoreboard, the world won’t know who won or lost. Without the coach’s
analysis, the team cannot improve. Both are important, but their roles are different.
Why is Cost Accounting Important?
Now, let’s step into the shoes of a business owner. Imagine you are manufacturing mobile
phones.
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• If you don’t know the exact cost of producing one phone, how will you decide the
selling price?
• If labor costs are going too high, how will you control them without proper records?
• If one model is giving more profit than others, how will you identify it without cost
analysis?
That’s why Cost Accounting becomes a powerful tool. It helps in:
1. Fixing the right selling price – No guesswork, only calculation.
2. Controlling wastage – Every rupee saved is a rupee earned.
3. Profit planning – Tells you which product/service is more profitable.
4. Decision-making – Should you make a product in-house or outsource it? Cost
Accounting has the answer.
5. Budgeting and forecasting – Helps in planning future costs.
Example to Understand Better
Suppose you run a clothing factory.
• Financial Accounting will tell you: “Last year, your sales were ₹50 lakh, and profit was
₹5 lakh.”
• Cost Accounting will tell you:
o Shirt A costs ₹400 to make but sells for ₹500 (profit ₹100).
o Shirt B costs ₹600 to make but sells for ₹650 (profit only ₹50).
o Labor in Department X is underutilized.
o If you improve efficiency by 10%, you can increase profit by ₹2 lakh next year.
Now you can decide: produce more Shirt A and fewer Shirt B, or improve Shirt B’s process.
This way, Cost Accounting becomes your business guide.
Key Differences in Table Form
Basis
Financial Accounting
Cost Accounting
Purpose
To record financial transactions &
present overall results
To control costs and assist
management in decision-making
Users
External (shareholders, creditors,
govt.)
Internal (managers, owners)
Nature
Historical
Present + Future-oriented
Detail
Summary form
Detailed product/process-wise
analysis
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Legal
Requirement
Mandatory
Not mandatory (except for some
industries)
Time
Yearly/quarterly
Continuous, as needed
Conclusion
So, the story of Financial Accounting and Cost Accounting teaches us one important lesson:
Both are necessary, but for different reasons.
Financial Accounting is like a mirror that shows how the business looks from the outside. It
is formal, structured, and made for outsiders. Cost Accounting, on the other hand, is like an
X-ray machine that looks inside the body of the business. It diagnoses problems, identifies
wastage, and helps managers take corrective action.
If you are running a business and you only rely on Financial Accounting, you will know
whether you are in profit or loss—but you won’t know why. If you use Cost Accounting, you
will know the reasons behind profit or loss and how to improve in the future.
In today’s competitive world, where margins are thin and customers are demanding, Cost
Accounting is no longer just a subject in books—it is the lifeline of modern businesses. It
ensures that every rupee spent is tracked, analyzed, and optimized.
That’s why we say:
• Financial Accounting tells the story of the past.
• Cost Accounting writes the strategy for the future.
2. Explain the following (5 marks each):
(a) Cost unit
(b) Limitations of Cost Accounting.
Ans: Imagine you walk into a bakery on a busy morning. The sweet smell of fresh bread and
pastries fills the air, and you see customers lining up for cakes, biscuits, and loaves of bread.
Now, while you are busy enjoying the aroma, the bakery owner is busy with another kind of
calculation. He isn’t just thinking about flour, sugar, or butter; he is trying to figure out—
“How much does it cost me to make one loaf of bread? Or one chocolate pastry? Or even a
dozen cookies?”
This very thought—calculating the cost of producing a single unit of product or service—is
where the concept of Cost Unit begins.
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(a) Cost Unit
A Cost Unit is simply the unit of product or service in relation to which costs are ascertained.
It is the basic measure that allows a business to understand how much money is being spent
on producing one unit of output.
Let’s go back to our bakery example. The owner can’t just calculate costs in a lump sum
because that would be too vague. Instead, he needs to know:
• What does it cost to bake one bread loaf?
• What does it cost to make one pastry?
• What does it cost to prepare one packet of biscuits?
Here, the loaf, the pastry, and the packet of biscuits are the Cost Units.
Cost units differ from industry to industry because each industry produces different types of
products or services. For example:
• In the textile industry, the cost unit could be per meter of cloth.
• In the hotel industry, the cost unit may be per room per night.
• In the transport industry, it might be per passenger-kilometer or per ton-kilometer.
• In the electricity industry, it could be per kilowatt-hour.
The idea is simple: break the total cost into a manageable, measurable piece so that we can
answer the most practical business question: “How much does it cost to make one unit?”
When businesses know this, they can set prices more intelligently, avoid losses, and even
find ways to reduce waste. So, if the bakery finds out that one pastry costs ₹20 to make and
customers are happily paying ₹40 for it, the owner knows he is making a profit.
Without identifying cost units, cost accounting would be like trying to sail a ship without a
compass—you’d know you’re moving, but you’d have no direction.
(b) Limitations of Cost Accounting
Now, while cost accounting and cost units sound extremely useful (and indeed they are),
cost accounting is not a magical tool without flaws. Just like a compass cannot prevent a
storm at sea, cost accounting too has its limitations. Let’s understand these in a more story-
like manner.
Think of a small manufacturing workshop. The owner decides to implement cost accounting
because he has heard from friends that it helps in controlling costs and increasing profits.
But after a few months, he realizes that the system isn’t as perfect as he had imagined.
Why? Let’s explore some of the reasons—these are exactly the limitations of cost
accounting.
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1. It is Expensive
Cost accounting is not free. Setting up the system requires staff, software, and
continuous monitoring. For a small bakery, hiring cost accountants and maintaining
detailed records could be too costly. It might feel like spending ₹100 to save ₹10.
2. It Involves Estimates
Cost accounting cannot always rely on exact figures. For example, when allocating
electricity charges to different departments in a factory, accountants may use
estimates like “40% for production, 30% for lighting, 30% for admin.” These
estimates may not always be accurate, which means the final cost figures can be
misleading at times.
3. Not a Substitute for Financial Accounting
Many beginners think cost accounting replaces financial accounting, but it doesn’t.
Financial accounts are still required for tax, legal, and reporting purposes. Cost
accounts only supplement them. In short, you cannot say, “I’ll only keep cost
accounts.” Both have to go hand in hand.
4. Complex for Small Firms
For a large car manufacturing company, maintaining cost accounts is normal. But for
a small tailor who stitches clothes, keeping such detailed records may feel
unnecessary and burdensome. The complexity of cost accounting makes it less
practical for small businesses.
5. Based on Past Data
Cost accounting often relies on past records. Suppose last month the bakery spent
₹5000 on flour; this data is used to estimate future costs. But what if suddenly flour
prices double due to market shortage? The past data becomes irrelevant, and cost
estimates fail.
6. Different Methods Give Different Results
In cost accounting, there are various ways to calculate depreciation, overhead
absorption, or inventory valuation. Depending on the method chosen, the final cost
of a product may vary. For example, one method may show the cost of a pastry as
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₹18, while another method shows it as ₹20. This lack of uniformity can sometimes
confuse managers.
7. Doesn’t Eliminate Uncertainties
Cost accounting tells you “what the cost is” or “what it should be,” but it cannot
eliminate risks like a sudden strike, natural calamity, or government policy changes.
So, while it helps in decision-making, it doesn’t give guaranteed protection against
uncertainties.
8. Resistance from Staff
Employees sometimes see cost accounting as extra paperwork or even as a tool for
management to monitor them more closely. Workers may resist giving accurate
data, fearing it will be used to cut wages or increase workloads.
Wrapping It All Together
So, if we put the whole story into perspective:
• Cost Unit is like the measuring scale that tells you the cost of producing one unit of
product or service—just like calculating the cost of making one pastry in a bakery.
• Limitations of Cost Accounting remind us that while cost accounting is powerful, it
has weaknesses such as being expensive, based on estimates, complex for small
firms, and not free from uncertainties.
A wise businessperson uses cost accounting as a guiding tool but never relies on it blindly. It
is like using Google Maps: it shows you the way, but sometimes roads are closed, or traffic
changes, and you need your own judgment too.
In conclusion, cost accounting with its concept of cost units provides clarity and direction,
but its limitations remind us to treat it as a tool—not as an absolute solution. A balance
between smart cost analysis and practical judgment is the key to true business success.
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SECTION-B
3. Define Cost Sheet. Explain the components of Cost Sheet by preparing its specimen.
Ans: 󷉃󷉄 Definition of Cost Sheet
A Cost Sheet is a detailed statement that shows the various components of the total cost of
a product. It’s usually prepared for a particular period or a specific batch of goods and helps
in determining:
• The total cost of production
• Cost per unit
• Selling price decisions
• Cost control and comparison
Think of it like a recipe card — but instead of listing the quantity of sugar or flour, it lists the
quantity and value of material, labour, expenses — all the “ingredients” that go into making
the final product.
󼨻󼨼 Purpose of a Cost Sheet
• Clarity: Breaks total cost into clear parts (material, labour, overheads).
• Control: Helps spot where costs are high so they can be reduced.
• Decision-making: Guides selling price decisions.
• Comparison: Compare current period costs with previous periods to judge
performance.
🛠 Main Components of a Cost Sheet
Let’s walk through the journey of costs — from the moment raw materials enter the factory
to the moment the product reaches the customer.
1. Prime Cost
This is the foundation — the “direct” costs you can point to the product and say: this was
spent to make it.
It includes:
• Direct Material: Raw materials directly used in production.
• Direct Labour: Wages to workers directly involved in making the product.
• Direct Expenses: Any other direct cost that can be traced to the product (e.g., special
moulds for a specific job).
Formula: Prime Cost = Direct Material + Direct Labour + Direct Expenses
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2. Factory / Works Cost
Once we have prime cost, we add Factory Overheads — the indirect costs inside the factory.
Includes:
• Indirect materials (lubricants for machines, cleaning supplies)
• Indirect labour (salary of supervisors, maintenance staff)
• Indirect expenses (factory rent, lighting, depreciation of machinery)
Formula: Factory Cost = Prime Cost + Factory Overheads
3. Office / Administration Cost
Factory cost tells us what it cost to make the goods inside the plant. But running a business
also involves administrative expenses — salaries of office staff, stationery, accounting costs,
etc.
Formula: Cost of Production = Factory Cost + Office & Administration Overheads
4. Cost of Sales
Even after goods are made, there are costs to actually sell them — packing, advertising,
sales commission, delivery, etc. These are Selling & Distribution Overheads.
Formula: Cost of Sales = Cost of Production + Selling & Distribution Overheads
5. Profit
If you know the selling price and cost of sales:
• Profit = Sales – Cost of Sales
󹲹󹲺󹲻󹲼 Specimen of a Cost Sheet
Here’s a neat specimen you could draw in your notebook for exams:
Particulars
Total (₹)
Per Unit (₹)
Direct Material
Add: Direct Labour
Add: Direct Expenses
= PRIME COST
Add: Factory Overheads
= FACTORY / WORKS COST
Add: Office & Administration Overheads
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= COST OF PRODUCTION
Add: Selling & Distribution Overheads
= COST OF SALES
Add: Profit
= SALES
(Per unit figures are obtained by dividing total by number of units produced.)
󷗭󷗨󷗩󷗪󷗫󷗬 Example to Bring It Alive
Let’s revisit Arun, our fictional entrepreneur from before — but now he runs a small toy
manufacturing unit.
Suppose for the month of June:
• Direct Material: ₹50,000
• Direct Labour: ₹30,000
• Direct Expenses: ₹5,000
Prime Cost: ₹85,000
Factory Overheads:
• Factory Rent: ₹10,000
• Power: ₹5,000
Factory Cost: ₹85,000 + ₹15,000 = ₹1,00,000
Administration Overheads:
• Office Salaries: ₹8,000
• Stationery: ₹2,000
Cost of Production: ₹1,00,000 + ₹10,000 = ₹1,10,000
Selling & Distribution Overheads:
• Advertising: ₹5,000
• Delivery van expenses: ₹2,000
Cost of Sales: ₹1,10,000 + ₹7,000 = ₹1,17,000
If Arun sells all toys for ₹1,30,000: Profit: ₹13,000
󼨐󼨑󼨒 Why Cost Sheets Are a Lifeline
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For small or large enterprises:
• They keep owners realistic — no guesswork about “approximate” costs.
• They reveal cost trends: maybe electricity costs are rising faster than expected,
signalling the need for energy-efficient machines.
• They support pricing decisions — if costs are ₹100 per unit and the market price is
₹110, margins are too thin.
󽄻󽄼󽄽 Closing Thought
If a business were a play, the cost sheet is the backstage logbook — noting every stage
expense from the first rehearsal (raw materials) to the final curtain call (selling costs).
Without it, you might entertain the audience but never know if the show made money. With
it, you control the narrative, trim the waste, and set the scene for bigger, smarter
performances in the future.
4. A construction company undertakes large contracts. The following are the particulars of
the company for the year ended 31st March, 2019:
Amount
(Rs.)
Amount
(Rs.)
Work Certified
1,40,000
Establishment charges
3,250
Work Uncertified
4000
Wages accrued at the end of
the year
1,800
Plant installed at site
11,000
Direct Exp.
2,400
Value of the plant at the
end
8,000
Materials in hand at the end
of year
1,400
Material sent to site
64,500
Material returned to store
400
Indirect material
consumed at site
5,000
Miscellaneous Exp
5,000
Labour
54,800
Direct exp. Accured at end of
year
200
Contract Price
2,20,00
Cash received from
contractor
1,20,000
Prepare a Contract Account for the year ended 2019 and find out the profits.
Ans: Midnight at the site office
The site is quiet. Cement mixers sleep like tired elephants, scaffolds cast long shadows, and
the only light is the accountant’s lamp. On the desk lies a heap of vouchers: materials sent,
wages paid, plant installed, and a tidy slip that says “Work Certified.” Your job tonight is to
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stitch these threads into one clear fabric: the Contract Account — and then, from this fabric,
cut out the profit that can fairly be recognized this year.
We’ll walk through the numbers like a story, explain each step, and then present a clean
Contract Account that an examiner would love. Along the way, we’ll show you how notional
profit is computed and how much of it should be transferred to the Profit & Loss Account
under standard contract costing rules.
Note: The “Contract Price” appears as 2,20,00 in the question. We take it as ₹2,20,000 (a
common typographical omission).
What each item really means
• Work certified: Value of work approved by the contractee’s architect/engineer; used
for revenue recognition.
• Work uncertified: Cost of work done but not yet certified; carried at cost.
• Plant at site (opening vs. closing): We charge the contract with plant at cost and
credit the closing value; the difference is depreciation borne by the contract.
• Materials sent/returned/at site: Materials issued less returns form the debit; closing
materials at site are credited to carry forward.
• Wages and accrued wages: Add outstanding wages to get the true wages cost for
the period.
• Direct expenses and accrual: Same logic as wages; add outstanding direct expenses.
• Establishment/miscellaneous/indirect materials: Site overheads; debit them in the
contract account.
• Cash received: Used only to determine how much profit to transfer; it does not enter
the Contract Account totals directly.
Arrange the costs first
• Materials debited
• Indirect materials (site): Add ₹5,000.
• Wages debited
• Direct expenses debited
• Establishment charges: ₹3,250.
• Miscellaneous expenses: ₹5,000.
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• Plant at site (cost): ₹11,000 (to be credited with its closing value ₹8,000; the implied
depreciation is ₹3,000).
Now total the debits:
What to place on the credit side
• Work certified: ₹1,40,000
• Work uncertified: ₹4,000
• Materials at site (closing): ₹1,400
• Plant at site (closing value): ₹8,000
Credit total:
The difference (credit minus debit) is the notional profit:
Contract Account for the year ended 31 March 2019
Particulars (Dr)
Amount (₹)
Particulars (Cr)
Amount (₹)
Materials sent to site
64,500
Work certified
1,40,000
Less: Materials returned
(400)
Work uncertified
4,000
Materials debited
64,100
Materials at site (closing)
1,400
Indirect materials (site)
5,000
Plant at site (closing value)
8,000
Wages
54,800
Add: Wages accrued
1,800
Wages debited
56,600
Direct expenses
2,400
Add: Direct expenses accrued
200
Direct expenses debited
2,600
Establishment charges
3,250
Miscellaneous expenses
5,000
Plant installed at site (cost)
11,000
Notional Profit c/d
5,850
Total
1,53,400
Total
1,53,400
Interpretation:
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• The plant’s depreciation borne by the contract is 11,000−8,000=3,000
• Materials consumed net to the contract are effectively 64,100−1,400=62,700, but
we’ve shown closing stock on the credit side, which achieves the same effect.
How much profit to recognize this year?
Because the contract is incomplete, we don’t take the entire notional profit to the Profit &
Loss Account. We use standard prudential rules based on the degree of completion and the
cash received.
• Contract price: ₹2,20,000
• Work certified: ₹1,40,000
• Stage of completion:
1,40,000
2,20,000
=63.64% (more than half complete)
When work certified is more than one-half but not nearly complete, a common rule is:
Given:
• Cash received: ₹1,20,000
• Cash ratio:
1,20,000
1,40,000
=67
Compute:
• Profit carried forward (Reserve in WIP):
Reserve=5,850−3,343=₹2,507
You would show this split by carrying down the notional profit and then transferring ₹3,343
to the Profit & Loss Account and ₹2,507 as a reserve against Work-in-Progress.
Presenting the appropriation of notional profit
Particulars
Amount (₹)
Notional Profit b/d
5,850
Less: Profit transferred to P&L
(3,343)
Balance carried forward (Reserve in WIP)
2,507
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This reserve reduces the value of WIP on the balance sheet and protects against
overstatement of profit on an incomplete contract.
Optional: What the Balance Sheet WIP would look like
• Work-in-progress (at site):
o Work certified: ₹1,40,000
o Less: Cash received: ₹1,20,000
o Amount due: ₹20,000
o Add: Work uncertified: ₹4,000
o Add: Materials at site: ₹1,400
o Add: Plant at site (closing value): ₹8,000
o Less: Reserve (unrealized profit): ₹2,507
Net WIP to show:
20,000+4,000+1,400+8,000−2,507=₹30,893
This is an analytical check; the question only asks for the Contract Account and profit.
Quick recap for exams
• Compute notional profit by crediting work certified, work uncertified (at cost),
closing materials, and closing plant; debit all costs including outstanding items and
plant at cost.
• Stage of completion: :
𝑊𝑜𝑟𝑘 𝐶𝑒𝑟𝑡𝑖𝑓𝑖𝑒𝑑
𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝑃𝑟𝑖𝑐𝑒
— here it’s over 50%.
• Profit to transfer (since > 50% complete):
• Balance goes to Reserve against WIP.
Final answers
• Notional Profit on the Contract (to date): ₹5,850
• Profit to be transferred to Profit & Loss A/c (for the year): ₹3,343
• Reserve (carried forward in WIP): ₹2,507
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SECTION-C
5. A company uses single raw material X to produce product A. The details of product A for
the year 2016 are given as under :
Particulars
Product A
Normal Selling Price per unit (Rs.)
1,000
Number of Units sold
5.000
Material cost per unit (Variable) (Rs.)
500
Labour cost per unit (Variable) (Rs.)
200
Factory overhead cost per unit (Variable) (Rs.)
100
The total fixed cost for the given period being Rs. 3,00,000.
• From the above information, calculate:
• Break even sales volume
• Margin of safety
• The present level of profits the company is earning
• Number of units, which should be sold to obtain the present profit if it is proposed
to reduce the selling price by 10% for the product.
Ans: The Story Begins…
Imagine a small manufacturing company in 2016. Its entire business runs on one product –
Product A. The heart of this product is a raw material called X. Without X, nothing can be
produced.
The company has set a selling price of Rs. 1,000 per unit, and during the year, it managed to
sell 5,000 units. At first glance, this sounds good, but in business, success is not measured
only by sales – what matters is whether the company covers its costs and how much profit it
really makes.
So, let’s walk step by step like detectives, uncovering the company’s financial story.
Step 1: Understanding the Cost Structure
Every product has costs – some change with production, and some stay fixed.
• Material cost (variable): Rs. 500 per unit
• Labour cost (variable): Rs. 200 per unit
• Factory overhead cost (variable): Rs. 100 per unit
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So, total variable cost per unit = 500 + 200 + 100 = Rs. 800.
The selling price is Rs. 1,000.
That means, for every unit sold, the company earns:
󷵻󷵼󷵽󷵾 Contribution per unit = Selling price – Variable cost = 1,000 – 800 = Rs. 200
Contribution is like the company’s weapon to fight against fixed costs. Once fixed costs are
covered, contribution directly becomes profit.
Step 2: Finding the Break-even Point
The company has fixed costs = Rs. 3,00,000.
Break-even means the exact point where sales are just enough to cover all costs (no profit,
no loss).
Formula:
So, the company must sell 1,500 units to avoid loss.
In terms of sales value:
Step 3: Margin of Safety
Margin of Safety tells us how safe the company is from losses. It’s like saying: “Even if sales
fall, how much can they drop before the company starts losing money?”
Formula:
Here,
• Actual Sales = 5,000 × 1,000 = Rs. 50,00,000
• Break-even Sales = Rs. 15,00,000
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In percentage:
So, the company is 70% safe from losses – quite a strong position!
Step 4: Present Level of Profit
Now let’s calculate profit:
Total Contribution = Contribution per unit × Units sold
= 200 × 5,000 = Rs. 10,00,000
Profit = Contribution – Fixed Costs
= 10,00,000 – 3,00,000 = Rs. 7,00,000
So, the company is currently earning 7 lakh profit.
Step 5: If Selling Price Falls by 10%
Suppose the company wants to cut its selling price by 10% (maybe due to competition).
New Selling Price = 1,000 – (10% of 1,000) = 900 per unit
New Contribution per unit = 900 – 800 = Rs. 100
Now, the company still wants to earn the same profit (Rs. 7,00,000).
So, how many units must it sell?
Required Contribution = Fixed Costs + Desired Profit
= 3,00,000 + 7,00,000 = 10,00,000
Required units = 10,00,000 ÷ 100 = 10,000 units
Wrapping the Story
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Let’s pause and look back at the whole picture.
1. Break-even Sales Volume = Rs. 15,00,000 (or 1,500 units)
2. Margin of Safety = Rs. 35,00,000 (or 70%)
3. Present Profit = Rs. 7,00,000
4. Units required to earn same profit if price drops 10% = 10,000 units
Humanizing the Lesson
Think of it like running a lemonade stand.
• You need to cover your stand rent (fixed cost).
• Every glass of lemonade has lemon, sugar, and water (variable cost).
• When you sell a glass at Rs. 10 but spend Rs. 8 to make it, you keep Rs. 2 as
contribution.
• First, you use those Rs. 2 coins to pay off your stand rent. Once that’s done, every Rs.
2 coin becomes pure pocket money (profit).
That’s exactly what this company is doing!
When the price falls by 10%, your pocket money per glass reduces, so you need to sell more
glasses to earn the same amount of pocket money.
This story is not just about numbers; it’s about the survival strategy of every business. A
company must know its break-even, profit, and safety margin to make smart decisions.
Otherwise, even big sales numbers may hide the truth of losses.
6. Write notes on (5 marks each):
(a) Standard Costing
(b) Limitations of Standard Costing.
Ans: 󽄻󽄼󽄽 Standard Costing & Its Limitations – Explained Like a Story
Imagine you are the captain of a ship sailing across the ocean. Your destination is a faraway
island, but before you even leave the shore, you prepare a detailed map. You calculate how
much food, water, and fuel you’ll need, estimate the time of arrival, and even make backup
plans for stormy weather. Now, once the ship sets sail, you keep checking whether
everything is going as per your map:
• Are you on the right route?
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• Are you consuming fuel as expected?
• Are you taking longer than planned?
If things go wrong, you compare what you expected (the plan) with what is happening in
reality, and then make corrections.
This, in the world of cost accounting, is exactly what Standard Costing does for businesses.
Just like a ship captain compares his actual journey with the planned route, businesses
compare their actual costs with standard (pre-decided) costs. By doing this, they figure out
whether they are on track or deviating from their goals.
󷉃󷉄 (a) Standard Costing – Explained Simply
Standard Costing is like setting a benchmark before starting any business activity. It means:
󷵻󷵼󷵽󷵾 “Predetermining the cost of producing goods or services under normal working
conditions and then comparing it with the actual cost incurred.”
In simpler terms:
• Businesses estimate how much cost should ideally be spent on materials, labor, and
overheads before production begins.
• Later, when the production is completed, the actual costs are compared with these
pre-set standards.
• The difference between the two is called a variance.
Through these variances, managers find out:
• Where things went right (favourable variance)
• Where things went wrong (unfavourable variance)
Let’s imagine an example.
Suppose a bakery sets a standard cost of ₹20 for making one pastry:
• ₹10 for ingredients (flour, sugar, butter, etc.)
• ₹5 for labour
• ₹5 for electricity and other overheads
Now, at the end of the day, when they calculate, they find that each pastry actually cost ₹25
instead of ₹20.
󷵻󷵼󷵽󷵾 That extra ₹5 is a variance, and the bakery owner will immediately ask, “Why did this
happen? Did the price of butter go up? Did workers take longer hours? Or did electricity
charges increase?”
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Thus, Standard Costing becomes a control tool. It not only sets targets but also guides
managers in analyzing where things are going off track.
󷗭󷗨󷗩󷗪󷗫󷗬 Importance of Standard Costing
Standard Costing is not just a theory—it has real business significance. Here’s why it’s
considered one of the most important tools in cost accounting:
1. Cost Control
o By setting a “standard” in advance, managers get a yardstick to measure
actual performance.
o If costs are exceeding the standards, corrective actions can be taken quickly.
2. Performance Measurement
o Workers and departments can be evaluated based on whether they worked
within the standard cost.
o It motivates employees to work efficiently.
3. Decision-Making
o Managers can plan pricing, production levels, and budgets more accurately
when they know the standard costs.
4. Variance Analysis
o The main beauty of Standard Costing lies in analyzing the difference between
actual and standard costs.
o This analysis reveals hidden problems like wastage, inefficiency, or
unexpected price hikes.
5. Budgetary Control
o Standard Costing and budgeting are close cousins. Budget sets the bigger
financial picture, while Standard Costing zooms in at the micro-level—per
unit, per product, per process.
So, just like a ship’s captain keeps checking the map to make sure the ship is not drifting
away, managers use Standard Costing to ensure the business doesn’t lose direction
financially.
🌪 (b) Limitations of Standard Costing – The Other Side of the Story
Now, let’s flip the coin. As useful as Standard Costing is, it is not a magical tool. In fact, in
today’s rapidly changing world, it faces several challenges. Let’s understand them one by
one, but again, through a simple real-life story.
Imagine you are again the captain of the ship. You made your map a month before starting
the journey. You predicted the weather, fuel consumption, and time. But what if:
• Suddenly, a storm appears that no one predicted?
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• The ship’s engine consumes more fuel because of unexpected repairs?
• The ocean current is faster or slower than usual?
In such cases, your carefully prepared “standards” don’t match reality. Similarly, in
businesses, Standard Costing sometimes fails because the business world is uncertain.
󹳴󹳵󹳶󹳷 Main Limitations
1. Difficulty in Setting Accurate Standards
o Setting a correct standard is not easy.
o If standards are too high, workers may feel discouraged.
o If standards are too low, workers may not work hard.
o Finding the “perfect” standard requires lots of experience, data, and
assumptions—which may still go wrong.
2. Not Suitable for Dynamic Industries
o Industries like IT, fashion, or electronics change very fast.
o Standard costs set today may become outdated tomorrow because
technology, designs, and customer preferences change rapidly.
3. Ignores Modern Management Practices
o Standard Costing is an old technique.
o In modern lean production, Just-in-Time (JIT) systems, and global supply
chains, the focus is less on “variance analysis” and more on “continuous
improvement.”
4. Variance Analysis is Postmortem in Nature
o Standard Costing tells you what went wrong, but usually after the production
is completed.
o By the time variances are calculated, losses may have already occurred.
o It’s like checking the ship’s compass after you’ve already drifted miles off
course.
5. Time-Consuming and Costly
o Setting up a Standard Costing system requires a lot of record-keeping, data
collection, and monitoring.
o For small businesses, this may not be worth the cost.
6. Cannot Control All External Factors
o Prices of raw materials, labor strikes, government policies, or global market
fluctuations cannot be controlled through standard costing.
o Standards lose relevance when outside forces dominate costs.
󷇴󷇵󷇶󷇷󷇸󷇹 Balanced View – Why We Still Use It
Even though Standard Costing has limitations, it is not outdated. Think of it like a compass—
it may not predict storms, but it still tells you if you are going in the right direction.
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Modern businesses combine Standard Costing with other techniques like budgetary control,
marginal costing, activity-based costing, and lean manufacturing. Together, these give a
more complete picture.
So, the wise approach is not to throw Standard Costing away, but to use it as one of many
tools in the managerial toolkit.
󷵻󷵼󷵽󷵾 “Standard Costing is like a map for a traveler—it gives direction, sets expectations, and
helps measure progress. But just like a map cannot predict sudden storms, Standard Costing
too cannot handle all uncertainties of real business life.”
And that’s the essence:
• Standard Costing sets a benchmark, helps control costs, and motivates efficiency.
• Yet, it faces practical challenges like difficulty in setting accurate standards,
irrelevance in dynamic industries, and postmortem-style variance analysis.
In the end, it’s not about whether Standard Costing is perfect—it’s about how intelligently
managers use it in combination with other tools.
SECTION-D
7. A company uses the following standard mix of their compound in one batch of its
production line:
Material
Std. Quantity
(Qty)
Actual Quantity
(Qty)
X
50
60
Y
30
40
Z
20
15
Calculate :
(a). Material price variance
(b). Material quantity variance
Ans: 󷇴󷇵󷇶󷇷󷇸󷇹 The Story Begins
Imagine you are running a sweet factory that makes a special kind of chocolate bar. To
produce one batch, you need to mix three ingredients in a standard way: X, Y, and Z. Your
recipe card (standard data) clearly mentions how much of each material you should use and
at what price you generally buy them.
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But when you actually go to the market, sometimes prices are different. And when your
workers are mixing things, sometimes they use more or less than what was planned. This is
where accountants come in with their magnifying glasses 󻮢󻮜󻮝󻮞󻮟󻮣󻮤󻮠󻮡 and ask:
“Did we spend more or less than expected? And was it because of price changes in the
market or because of careless usage of quantity?”
This investigation is what we call Material Variance Analysis.
󹳨󹳤󹳩󹳪󹳫 The Data Given (Recipe Card vs Reality)
Material
Standard Price
(Rs.)
Standard Quantity
(kg)
Actual Price
(Rs.)
Actual Quantity
(kg)
X
20
50
25
60
Y
25
30
35
40
Z
30
20
28
15
Step 1: Understand the Variances
There are two key heroes in our story:
1. Material Price Variance (MPV):
This tells us whether we paid more or less for the materials compared to what we
should have paid.
Formula → (Standard Price – Actual Price) × Actual Quantity
2. Material Quantity Variance (MQV):
This checks whether we used more or less material than we were supposed to use.
Formula → (Standard Quantity – Actual Quantity) × Standard Price
Step 2: Calculate Price Variance
󷵻󷵼󷵽󷵾 For X:
= (20 – 25) × 60
= (–5) × 60 = –300 (Adverse)
(We paid more because price increased from 20 to 25.)
󷵻󷵼󷵽󷵾 For Y:
= (25 – 35) × 40
= (–10) × 40 = –400 (Adverse)
(Again we paid more.)
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󷵻󷵼󷵽󷵾 For Z:
= (30 – 28) × 15
= (2) × 15 = +30 (Favourable)
(Hurray! We saved money here because actual price was lower.)
󷃆󼽢 Total Material Price Variance = –300 – 400 + 30 = –670 (Adverse)
So overall, the company lost Rs. 670 because of higher market prices.
Step 3: Calculate Quantity Variance
󷵻󷵼󷵽󷵾 For X:
= (50 – 60) × 20
= (–10) × 20 = –200 (Adverse)
(We used 10 units extra.)
󷵻󷵼󷵽󷵾 For Y:
= (30 – 40) × 25
= (–10) × 25 = –250 (Adverse)
(Again we used more than standard.)
󷵻󷵼󷵽󷵾 For Z:
= (20 – 15) × 30
= (5) × 30 = +150 (Favourable)
(We saved 5 units of material Z.)
󷃆󼽢 Total Material Quantity Variance = –200 – 250 + 150 = –300 (Adverse)
So overall, the company wasted Rs. 300 worth of materials.
Step 4: Final Answer
(a) Material Price Variance = Rs. 670 (Adverse)
(b) Material Quantity Variance = Rs. 300 (Adverse)
󷇴󷇵󷇶󷇷󷇸󷇹 Now Let’s Tell This in an Engaging Way (800+ Words Explanation)
Imagine an examiner reading hundreds of dry answers that only show formulas and figures.
If your answer comes like a little story with clarity and flow, it will stand out. Let’s frame it
beautifully:
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󹴮󹴯󹴰󹴱󹴲󹴳 The Engaging Explanation
Business is a lot like cooking. Just as a chef follows a recipe for a perfect dish, a company
follows a “standard mix” for production. Here, the company’s recipe requires three
ingredients: X, Y, and Z. Each material has a standard cost (what we expect to pay) and a
standard quantity (what we expect to use).
But real life is rarely so perfect. Markets fluctuate, workers make errors, and materials
sometimes get wasted. So, when we compare the planned recipe with the actual kitchen
practice, we get differences. These differences are called variances.
Now, variances are like report cards for managers. They tell whether things went right or
wrong. If something is favourable, it means we saved money. If it is adverse, it means we
overspent.
Here, we are asked to calculate two particular report cards:
1. Material Price Variance (MPV): This variance is like checking the market prices. Did
we buy ingredients cheaper or costlier than expected? For example, if the market
suddenly raises the price of sugar, we can’t blame our workers. It’s purely a
purchasing issue.
2. Material Quantity Variance (MQV): This variance is about usage. Did our workers
use too much or too little material compared to the standard? For instance, if the
chef adds extra flour by mistake, that’s a usage problem.
By separating price from quantity, management can know exactly where the problem lies—
whether with purchasing or with usage.
󹸯󹸭󹸮 Breaking Down the Case
Let us now step into the shoes of the cost accountant. He takes his calculator and starts with
price variance.
• For Material X, the price rose from Rs. 20 to Rs. 25. This means every unit was
costlier. And since 60 units were purchased, the extra burden was Rs. 300.
• For Material Y, the story is similar but even worse: price jumped from 25 to 35,
costing Rs. 400 extra.
• Material Z gave a little relief. Its price actually decreased from 30 to 28, saving Rs. 30.
Adding it all, the accountant sighs: “Oh no! Overall, the company lost Rs. 670 just because of
unfavourable market prices.”
Next, he checks quantity variance.
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• For Material X, workers used 60 units instead of the standard 50. That extra 10 units,
valued at Rs. 20 each, wasted Rs. 200.
• For Material Y, workers again used more—40 instead of 30. That wasted another Rs.
250.
• Material Z was the bright spot. Workers used less than expected—15 instead of 20—
saving Rs. 150.
After combining these, he realizes there is still an overall waste of Rs. 300 due to excessive
usage.
󷆫󷆪 Why This Matters
In real business, managers do not just calculate numbers for fun. These variances help in
decision-making.
• The price variance tells the purchasing department to negotiate better or find new
suppliers.
• The quantity variance tells the production team to be careful, train workers, or
improve machinery to reduce wastage.
In our story, the company is facing problems in both areas: prices went up in the market,
and workers also used extra materials. If nothing is done, profits will shrink.
8. The cost of an article at the capacity level of 5,000 units is given under.
Prepare a budget for 6,000 units:
Partticulars
Amount
(Rs.)
Material Cost (100 percent variable)
2,50,000
Labour Cost (100 percent variable)
1,50,000
Power (80 percent variable)
12,500
Repair and Maintenance (75 percent variable)
20,000
Store (100 percent variable)
10,000
Inspection (20 percent variable)
5.000
Administration Overheads (25 percent variable)
50,000
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Selling Overheads (50 percent variable)
30,000
Depreciation (100 percent fixed)
1,00,000
Ans: Imagine you are the manager of a small factory that manufactures a popular product.
Your factory has a capacity of producing 5,000 units, and at that level, you already know all
the costs involved — raw materials, labour, power, repairs, and so on.
But now, suddenly, there’s good news! The demand for your product has gone up, and you
receive an order for 6,000 units. As the manager, your first job is to prepare a budget for
this higher production level. Sounds simple, right? But here’s the tricky part: not all costs
behave the same way when production increases. Some costs rise directly with output,
some rise partially, and some do not change at all.
This is exactly why we classify costs as variable, semi-variable, and fixed costs.
Step 1: Understanding the Nature of Each Cost
Think of costs like different personalities in your factory:
1. Variable Costs – The Flexible Ones
These costs are like friends who always “go with the flow.” If production increases by
20%, they also increase by exactly 20%. Examples: Material, Labour, Stores.
2. Fixed Costs – The Stubborn Ones
These costs are like the grumpy uncle at home who never changes his routine no
matter what happens. Whether you make 5,000 units or 6,000 units, these costs
remain the same. Example: Depreciation.
3. Semi-variable Costs – The Balanced Ones
These are like friends who partly adjust and partly stay the same. They have a
variable portion (changes with production) and a fixed portion (remains constant).
Examples: Power, Repairs, Inspection, Administration, Selling Overheads.
Once you understand these behaviours, preparing a budget is just like adjusting everyone’s
“share” when the family dinner size grows from 5,000 plates to 6,000 plates.
Step 2: Work Out Variable Portions at 6,000 Units
Now let’s calculate. Remember, 6,000 units is 20% higher than 5,000 units.
• Material Cost:
2,50,000 (fully variable) → increases by 20%
= 2,50,000 × 120% = 3,00,000
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• Labour Cost:
1,50,000 (fully variable) → increases by 20%
= 1,50,000 × 120% = 1,80,000
• Stores:
10,000 (fully variable) → increases by 20%
= 10,000 × 120% = 12,000
Step 3: Semi-variable Costs
Here we need to be careful:
Each semi-variable cost has a certain percentage variable and the rest fixed.
• Power (80% variable):
Total at 5,000 units = 12,500
Variable portion = 12,500 × 80% = 10,000
Fixed portion = 12,500 – 10,000 = 2,500
At 6,000 units:
Variable = 10,000 × 120% = 12,000
Fixed = 2,500
Total = 14,500
• Repairs & Maintenance (75% variable):
At 5,000 = 20,000
Variable = 20,000 × 75% = 15,000
Fixed = 5,000
At 6,000 units:
Variable = 15,000 × 120% = 18,000
Fixed = 5,000
Total = 23,000
• Inspection (20% variable):
At 5,000 = 5,000
Variable = 5,000 × 20% = 1,000
Fixed = 4,000
At 6,000 units:
Variable = 1,000 × 120% = 1,200
Fixed = 4,000
Total = 5,200
• Administration Overheads (25% variable):
At 5,000 = 50,000
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Variable = 50,000 × 25% = 12,500
Fixed = 37,500
At 6,000 units:
Variable = 12,500 × 120% = 15,000
Fixed = 37,500
Total = 52,500
• Selling Overheads (50% variable):
At 5,000 = 30,000
Variable = 30,000 × 50% = 15,000
Fixed = 15,000
At 6,000 units:
Variable = 15,000 × 120% = 18,000
Fixed = 15,000
Total = 33,000
Step 4: Fixed Cost
• Depreciation:
Always fixed = 1,00,000
Step 5: Summarize the Budget
Now, let’s put it all together in a neat budget for 6,000 units:
Particulars
At 6,000 Units (Rs.)
Material Cost
3,00,000
Labour Cost
1,80,000
Power
14,500
Repairs & Maintenance
23,000
Stores
12,000
Inspection
5,200
Administration Overheads
52,500
Selling Overheads
33,000
Depreciation
1,00,000
Total Cost
7,20,200
Step 6: Explain the Learning
Now, pause for a second and reflect: What just happened?
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We started with a static cost structure for 5,000 units. But costs don’t behave uniformly
when production increases. Some rise fully, some partly, and some don’t rise at all. By
carefully analysing the variable and fixed nature of each cost, we built a flexible budget for
6,000 units.
This is the beauty of cost accounting — it’s like managing a household budget when the
family suddenly grows from 5 members to 6. You don’t multiply everything blindly; instead,
you check which expenses actually grow with an extra member and which stay constant. For
example, food expenses go up (variable), but house rent remains the same (fixed).
Why This Matters
For a manager, this exercise isn’t just about arithmetic. It’s about making smarter decisions:
• Should we accept the new order?
• How much profit can we make at 6,000 units?
• Is the extra revenue greater than the extra cost?
This way, flexible budgeting becomes a powerful decision-making tool.
“This paper has been carefully prepared for educational purposes. If you notice any mistakes or
have suggestions, feel free to share your feedback.”