Questions on Costing
What is the difference between Cost Accounting and Financial Accounting?
| Cost Accounting | Financial Accounting | |
| Basis | To compute/predict production cost | To show the result of the transactions already incurred |
| Use | For decision making | For analyzing the position of the company |
| Stakeholders | Management is concerned | Shareholders, Banks, Investors and other stakeholders are concerned |
Have you heard of Activity Based Costing (ABC)?
Direct Costs like material and labor can be allocated directly to the production process but indirect costs like salary and rent are hard to assign. So in this type of costing, these are allocated on the basis of a principle. For e.g. machine depreciation can be allocated on the basis of machine hours attributable to that process, Salary of a person working on IT project can be allocated to that project.
What about Marginal costing?
It is used to analyze the relationship among Sales, variable cost, contribution, fixed cost, profit and price of the product.
Sales – Variable cost = ContributionContribution – Fixed Cost = Profit
What is Break-even point?
It is the number of units where total sales is equal to total cost. Here it would be when Contribution = Fixed Cost.
What is Margin of Safety?
As the name suggests, it is the level above break-even point. In other words, how much sales can be compromised before reaching break-even point. If 75 units is break-even sales and actual sales is 100 units then 25 units can be compromised and when presented in percentage form (here 25%) it is called margin of safety.
Explain different terms of cost sheet like cost of goods sold and cost of production?
COST SHEET – FORMAT (This will answer all questions related to cost sheet)
| Particulars | Amount | Amount |
| Opening Stock of Raw MaterialAdd: Purchase of Raw materials Add: Purchase Expenses Less: Closing stock of Raw Materials Raw Materials Consumed Direct Wages (Labor) Direct Expenses | ****** *** *** *** *** *** | |
| Prime cost | *** | |
| Add : Factory Over Heads:Factory Rent Factory Power Indirect Material Indirect Wages Supervisor Salary Drawing Office Salary Factory Insurance Factory Asset Depreciation | *** *** *** *** *** *** *** *** | |
| Works cost Incurred | *** | |
| Add: Opening Stock of WIPLess: Closing Stock of WIP | ****** | |
| Works cost | *** | |
| Add: Administration Over Heads:Office Rent Asset Depreciation General Charges Audit Fees Bank Charges Counting house Salary Other Office Expenses | *** *** *** *** *** *** *** | |
| Cost of Production | *** | |
| Add: Opening stock of Finished GoodsLess: Closing stock of Finished Goods | ****** | |
| Cost of Goods Sold | *** | |
| Add: Selling and Distribution OH:Sales man Commission Sales man salary Traveling Expenses Advertisement Delivery man expenses Sales Tax Bad Debts | *** *** *** *** *** *** *** | |
| Cost of Sales | *** | |
| Profit (balancing figure) | *** | |
| Sales | *** |
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