COST AND MANAGEMENT ACCOUNTING
Unit 1
Q1.
What is the meaning of cost?
Ans.
Something of value, usually an amount of money, given up in exchange for something
else, usually goods or services. All expenses are costs, but not all costs are expenses.
(An expense is the cost of resources used to produce revenue.) As a verb, cost means to
estimate the amount of money needed to produce a product or perform a service.
Q2.
What is the meaning of costing?
Ans.
Costing is a technique and process of ascertaining costs. System of computing cost of
production or of running a business, by allocating expenditure to
various stages of production.
Q3.
Explain cost accounting.
Ans.
A type of accounting process that aims to capture a company's costs of production by
assessing the input costs of each step of production as well as fixed costs such as
depreciation of capital equipment. Cost accounting is the classifying, recording and
appropriate allocation of expenditure for the determination of the costs of
products/services, and for the presentation of suitably arranged data for purposes of
control and guidance of management.
Q4.
Explain the features of cost accounting.
Ans.
The important features of Cost Accounting are stated below:
a) It is a process of accounting to determine costs.
b) It records incomes and expenditures, incurred for manufacturing prowl and rendering
services.
c) It provides ^statistical data for preparing estimates and submitting quotations.
d) It is the basis to ascertain and control costs.
e) -. It evaluates efficiency by comparing actual performance with the stander
performance fixed for the purpose.
f) It involves recording, analysis, comparison and reporting of co, information for day-today managerial decision.
Q5.
Explain the scope of cost accounting.
Ans.

Q6.
What are the various functions of cost accounting?
Ans.
The Following Are The Important Functions of Cost Accounting:
Ascertainment of cost of product: Cost Accounting ascertains cost of production of each job,
process, or work order by applying different methods of cost accounting, such as job costing,
process operation costing, contract costing etc. according to the suitability and needs of the
organization.

Fixation of selling prices: Cost accounting helps to find out cost of production and fixation of
selling prices of the product or process job or operation. It also helps in preparing necessary
tenders or quotations.

Measurement of efficiency: Cost accounting measures the efficiency of each product, process or
departments by applying standard cost method.

Cost control procedure: Cost accounting controls cost by setting standards and compared with
the actual. The deviations between them are identified and if required necessary controlling
measures may be taken.

Reporting to the Management: Cost accounting reports to the management periodically which
may be monthly, quarterly or half yearly. According to the reports of the cost accounting, the
management takes necessary decisions.
Q7.
What are the advantages of cost accounting?
Ans.
Advantages of Cost Accounting are:
Fixation of responsibility, measures economic performance, fixation of price, aids in
decision making, minimization of wastages and losses, facilitates comparison, helps in
increasing profitability, reconciliation with financial accounts,
Q8.
What are the limitations of cost accounting?
Ans.
Limitations of cost accounting are:
Expensive, complex, inapplicability of same costing method, not suitable for small scale
units, lack of accuracy,
Q9.
Explain management accounting.
Ans.
Management Accounting is the presentation of accounting information in such a way as
to assist management in the creation of policy and in the day-to-day operations of an
undertaking. Management Accounting includes the methods and concepts necessary for
effective planning, for choosing among alternative business performances.
Q10.
What is the scope of management accounting?
Ans.
The scope of Management Accounting is very wide. Some of the areas included within
the ambit of Management Accounting are:
1. General Accounting (Financial accounting)
2. Cost Accounting
3. Budgeting and forecasting
4. Cost control procedure
5. Cost and statistics
6. Taxation
7. Methods and procedures
8. Audit
9. Office services
10. Legal Provisions
Q11.
Difference between financial and management accounting.
Ans.
Format:
Financial accounts are
supposed to be in
accordance with a specific
format by IAS so that
financial accounts of
different organizations can
be easily compared.
No specific format is
designed for management
accounting systems.
Planning and control:
Financial accounting helps
in making investment
decision, in credit rating.
Management Accounting
helps management to
record, plan and control
activities to aid decisionmaking process.
External Vs. Internal:
A financial accounting
system produces
information that is used by
parties external to the
organization, such as
shareholders, bank and
creditors.
A management accounting
system produces
information that is used
within an organization, by
managers and employees.
Focus:
Financial
accounting focuses on
history.
Management accounting
focuses on future.
Users:
Financial accounting
reports are primarily used
by external users, such as
shareholders, bank and
creditors.
Management accounting
reports are exclusively
used by internal users viz.
managers and employees.
department:
preparing financial
accounting is the work of
finance department.
Managerial accounting is
not specific task of
particular department. Coordiantion of all
departments creates
management accounting.
Mandatory Vs. optional:
Preparing
financial accounting
reports are mandatory
especially for limited
companies.
There are no legal
requirements to prepare
reports on management
accounting.
Time span:
Financial
No specific time span is
accounting statements are
required to be produced
for the period of 12
months.
fixed for
producing financial
statements.
Monetary Vs. nonmonetary:
Most financial accounting
information is of a
monetary nature.
Management accounting
information may be
monetary or alternatively
non monetary.
Objectives:
The main objectives of
financial accounting are
:i)to disclose the end
results of the business, and
ii)to depict the financial
condition of the business
on a particular date.
The main objectives of
Management Accounting
are to help management by
providing information that
used by management to
plan, evaluate, and control.
Accounting process:
Follows a full process of
recording, classifying, and
summmarising for the
purpose of analysis and
interpretation of the
financial information.
Cost accounts are not
preserved under
Management Accounting
but analyses necessary data
from financial
statements and cost
ledgers.
Center of importance:
The financial accounting ,
the origin of preservation
of knowledge gives
emphasis on recording
keeping on a whole firm
basis for the purpose of
decisions by all the users
of accounting information,
both external and internal.
Management accounting
uses cost data for provision
of information for strategic
management decisions. It
is mainly concerned with
the provision of help to the
managers to asses them in
the process of decision
making and design
business strategies.
Unit 6
Q1.
Explain the meaning of budget.
Ans.
An estimate of costs, revenues, and resources over a specified period, reflecting a reading
of future financial conditions and goals.
One of the most important administrative tools, a budget serves also as a (1) plan of
action for achieving quantified objectives, (2) standard for measuring performance, and
(3) device for coping with foreseeable adverse situations.
Q2.
Explain the objective of budget.
Ans.
Provide structure, Predict cash flows, Allocate resources, Measure performance.
Allocate resources in a manner consistent with the vision, goals, strategies and priority
projects
outlined in the Strategic Plan
-term fiscal sustainability
-recovery and contracting opportunities
Q3.
Explain budgetary control.
Ans.
Budgetary control is that type of control in which actual result is compared with budgeted
data and indentifies the difference and correcting the cause of difference. Methodical control of
an organization's operations through establishment of standards
and targets regarding income and expenditure, and a
continuous monitoring and adjustment of performance against them.
Q4.
What are the characteristics of budgetary control?
Ans.
Following are the characteristics of Budgetary control:
-It deals with the establishment of the budgets.
-A control technique where actual results are extracted from the organisation’s operations
and compared with the budget prepared.
-Any differences or variations are computed and made the responsibility of key
individual who can either take actions for maintain the favourable variations or revise the
budgets.
Q5.
Explain the advantages of budgetary control.
Ans.
There are a number of advantages to budgetary control:
· Compels management to think about the future, which is probably the most important
feature of a budgetary planning and control system. Forces management to look ahead, to
set out detailed plans for achieving the targets for each department, operation and
(ideally) each manager, to anticipate and give the organisation purpose and direction.
· Promotes coordination and communication.
· Clearly defines areas of responsibility. Requires managers of budget centres to be made
responsible for the achievement of budget targets for the operations under their personal
control.
· Provides a basis for performance appraisal (variance analysis). A budget is basically a
yardstick against which actual performance is measured and assessed. Control is provided
by comparisons of actual results against budget plan. Departures from budget can then be
investigated and the reasons for the differences can be divided into controllable and noncontrollable factors.
· Enables remedial action to be taken as variances emerge.
· Motivates employees by participating in the setting of budgets.
· Improves the allocation of scarce resources.
· Economises management time by using the management by exception principle.
Q6.
Explain limitations of budgetary control.
Ans.
The major problem occurs when budgets are applied mechanically and rigidly. Budgets
can demotivate employees because of lack of participation. If the budgets are arbitrarily
imposed top down, employees will not understand the reason for budgeted expenditures,
and will not be committed to them. Budgets can cause perceptions of unfairness. Budgets
can create competition for resources and politics. A rigid budget structure reduces
initiative and innovation at lower levels, making it impossible to obtain money for new
ideas.
Q7.
What is a master budget?
Ans.
It is a summary of company’s plan that sets specific targets for sales, production,
distribution and financing activities. It usually consists of a number of separate interdependent
budgets. One budget may be necessary before the other can be initatited.
Q8.
Explain sales budget.
Ans.
The sales budget contains an itemization of a company's sales expectations for
the budget period, in both units and amount. The sales budget will help to determine how many
units will have to be produced.
Q9.
Explain production budget.
Ans.
The production budget calculates the number of units of products that must be
manufactured, and is derived from a combination of the sales forecast and the planned amount
of finished goods inventory to have on hand (usually as safety stock to cover for unexpected
increases in demand).
Q10.
Explain zero based budgeting.
Ans.
A method of budgeting in which all expenses must be justified for each new period. Zero-
based budgeting starts from a "zero base" and every function within an organization is analyzed
for its needs and costs. Budgets are then built around what is needed for the upcoming period,
regardless of whether the budget is higher or lower than the previous one.