Cost Accounting Fundamentals

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Questions and Answers

What is the primary focus of historical costing?

Ascertaining costs after they have been incurred (correct)

Allocating costs to income statements

Minimizing variable costs

Predicting future costs

How does absorption costing treat fixed manufacturing overheads?

They are excluded from product costs

They are calculated separately for administrative purposes

They are expensed immediately

They are allocated to products and included in stock valuation (correct)

Which of the following is a characteristic of direct costing?

It is primarily used for external reporting

It includes all indirect costs in product valuation

It disregards variable costs in inventory valuation

It only charges variable costs to the product (correct)

What is the purpose of the contribution margin in direct costing?

To indicate recovery of fixed costs before contributing to operational profit Signup and view all the answers

What type of costs are excluded from inventory valuation in direct costing?

Fixed costs Signup and view all the answers

Which costing method is best suited for internal management decision-making?

Direct costing Signup and view all the answers

What is a key limitation of historical costing?

It does not allow for comparison with standards Signup and view all the answers

Which type of overheads are treated as fixed costs and recorded only when incurred in absorption costing?

Selling and distribution overheads Signup and view all the answers

What is the main purpose of standard costing?

To provide a base for control through variance accounting Signup and view all the answers

What was the main objective of establishing the Institute of Cost Accountants of India?

To promote, regulate, and develop the profession of Cost Accountancy Signup and view all the answers

What does uniform costing facilitate among organizations in the same industry?

Valid comparisons and elimination of inefficiencies Signup and view all the answers

Which quality is NOT essential for a good cost accounting system?

Employing complex procedures for accuracy Signup and view all the answers

Which board was constituted by the Institute of Cost Accountants of India to formulate Cost Accounting Standards?

The Cost Accounting Standards Board Signup and view all the answers

When does a cost accounting system track and record the use of materials?

After production begins Signup and view all the answers

How is historical cost primarily characterized?

As a retrospective measure reflecting real past expenditures Signup and view all the answers

Which of the following is a key characteristic of standard costs?

They are predetermined based on various factors. Signup and view all the answers

What does the term 'Out-of-Pocket Cost' refer to?

Actual expenditures or payments made for goods or services Signup and view all the answers

What type of costs does the classification of cost in cost accountancy include?

Historical costs and economic costs Signup and view all the answers

Why is cooperation from various departments important in a cost accounting system?

To meet the requirements of the business effectively Signup and view all the answers

What happens to the raw materials in the cost accounting system once production begins?

They are credited to the raw material account. Signup and view all the answers

What primary characteristics does economic cost emphasize?

The opportunity cost associated with a decision Signup and view all the answers

Which of the following defines cost in terms of production or service rendering?

Cost is the measurement of resources used in monetary terms Signup and view all the answers

What aspect of costing is NOT addressed by uniform costing?

Price fixing for raw materials Signup and view all the answers

In which year was the Cost Accounting Standards Board established?

2001 Signup and view all the answers

What differentiates controllable costs from non-controllable costs?

Controllable costs are subject to direct managerial control. Signup and view all the answers

Which of the following best describes a cost object?

An item or service for which cost measurement is required. Signup and view all the answers

What is the primary function of a cost unit?

To break down costs into smaller subdivisions related to products or services. Signup and view all the answers

What are joint costs in the context of cost management?

Costs of common resources used for producing two or more products Signup and view all the answers

According to CIMA terminology, what is a cost unit primarily focused on?

A unit of production or service for cost determination. Signup and view all the answers

When costs are traced to cost centres, what is the next step in the cost analysis process?

Analyzing costs to establish the cost per cost unit. Signup and view all the answers

Which of the following describes a fixed cost?

A cost that remains fixed over a relevant range of activity Signup and view all the answers

Which of the following is NOT considered a cost object?

A financial audit of the company. Signup and view all the answers

How do variable costs behave with changes in the level of activity?

They increase proportionately with increased activity Signup and view all the answers

What does GACAP23 define as a cost unit?

A measurement of volume for production of products or services. Signup and view all the answers

What is a semi-variable cost?

A cost that has a fixed and a variable component Signup and view all the answers

Which principle regarding cost units should be observed?

Cost units should be appropriate for the type of business. Signup and view all the answers

What does cost behavior analysis aim to understand?

How operating costs change with organization activity levels Signup and view all the answers

What is an example of an appropriate cost unit for a car manufacturer?

Particular brand of car Signup and view all the answers

Which of the following accurately describes total variable costs?

They change directly in relation to increased activity levels Signup and view all the answers

Which option correctly defines a composite cost unit?

A unit that helps compare costs across varying distances. Signup and view all the answers

What is one potential behavior of costs aside from fixed and variable?

Step changes in costs based on milestones of production Signup and view all the answers

What composite cost unit could a freight transport company use?

Tonne - kilometre Signup and view all the answers

Why is understanding cost behavior significant in accounting?

It influences the treatment of fixed and variable costs in costing systems Signup and view all the answers

What does the abbreviation GACAP stand for?

Generally Accepted Cost Accounting Principles Signup and view all the answers

In cost accounting, what is a cost centre?

A department or unit where costs are collected Signup and view all the answers

When delivering goods, why is the cost per tonne delivered not a valid measure between different distances?

Distance is a significant factor affecting delivery costs Signup and view all the answers

Which composite cost unit is relevant for hospitals?

Patient - Day Signup and view all the answers

What is the connection between cost units and cost centres?

Cost centres collect costs that will be analyzed through cost units Signup and view all the answers

Study Notes

Historical Costing

Focuses on the actual cost incurred in acquiring an asset.
Emphasizes the actual outlay made to acquire assets.
Limitation: Doesn't reflect the current market value or the value of the asset in future.

Absorption Costing

Treats fixed manufacturing overheads as product costs.
Allocates fixed overheads to units produced based on a predetermined overhead rate.

Direct Costing

Characteristic: Only considers variable costs as product costs.
Excludes fixed manufacturing overhead from product costs.
Purpose of Contribution Margin: Measures the contribution of each unit sold towards covering fixed costs and generating profit.
Excluded from Inventory Valuation: Fixed manufacturing overheads.

Costing Methods for Decision-Making

Best for Internal Management Decision-Making: Direct costing, as it provides a clearer picture of the contribution margin and profitability of each product.

Standard Costing

Main Purpose: To establish predetermined costs for each unit of production.
Used to compare actual costs with planned costs, identifying variances and improving efficiency.

Institute of Cost Accountants of India

Main Objective: To promote and enhance the professional competency of cost and management accountants in India.

Uniform Costing

Facilitates among Organizations in the Same Industry: Standardization of costing practices, improving comparability of financial data and promoting fair competition.

Cost Accounting System

Essential Qualities: Accuracy, Relevance, Timeliness, Flexibility, Simplicity.
Non-Essential Quality: Absolute accuracy, as minor errors are inevitable.

Cost Accounting Standards Board

Constitution: By the Institute of Cost Accountants of India to formulate Cost Accounting Standards.
Role: To develop and issue standards for cost accounting practices in India.

Cost Accounting System Tracking

Material Use Tracking: When materials are received, stored, issued for production, consumed in production, and used in finished goods.

Economic Cost

Primary Characteristics: Emphasizes opportunity costs and the value of resources used in production.

Cost in Production/Service

Defines Cost: As the resources consumed in producing goods or services.

Uniform Costing Limitations

Not Addressed: The unique characteristics of different businesses within the industry.

Cost Accounting Standards Board Establishment

Year: 1976.

Controllable Costs

Differentiation from Non-Controllable Costs: Controllable costs can be influenced by the actions of a specific manager, while non-controllable costs are beyond their control.

Cost Object

Definition: An item for which costs are measured and accumulated.

Cost Unit

Primary Function: To measure the consumption of resources in production.

Joint Costs

Definition: Costs incurred in producing two or more products jointly.

CIMA Terminology - Cost Unit

Focus: On the quantity of output produced, such as a unit of product, a batch, or a job.

Cost Analysis Process

Step after Tracing Costs to Cost Centres: Cost allocation, where costs are distributed to different cost objects based on a predetermined formula.

Fixed Cost

Definition: A cost that remains constant regardless of the level of activity.

Cost Object Examples

Not Considered: A department (departments are cost centres, not objects).

Variable Costs

Behaviour with Changes in Activity: Increase or decrease proportionally with changes in the level of activity.

GACAP23 Definition of Cost Unit

Definition: A measurable unit of output, product, or service for which costs are collected and analyzed.

Semi-Variable Cost

Definition: A cost that has both fixed and variable components.

Cost Unit Principle

Principle: All costs should be associated with a specific cost unit to ensure accurate cost measurement and analysis.

Cost Behaviour Analysis

Aim: To understand how different costs behave in relation to changes in the level of activity.

Cost Unit for Car Manufacturer

Example: A car, as it represents a distinct unit of output for which costs are incurred.

Total Variable Costs

Accurate Description: Increase in direct proportion to the increase in the level of activity.

Composite Cost Unit Definition

Definition: A cost unit that combines multiple elements, such as units produced, labor hours, or machine hours.

Cost Behaviour Aside from Fixed and Variable

Potential Behaviour: Step cost, which remains constant at a specific level of activity and then increases or decreases in discrete steps.

Composite Cost Unit for Freight Transport

Example: Tonne-kilometre, which combines the weight of goods transported with the distance covered.

Significance of Understanding Cost Behaviour

Significance: Enables organizations to make informed decisions about pricing, production, and investment.

GACAP Abbreviation

Meaning: Generally Accepted Cost Accounting Principles.

Cost Centre

Definition: A location, department, or activity for which costs are accumulated and controlled.

Cost Per Tonne Delivered

Not a Valid Measure over Different Distances: Because it doesn't account for the varying costs associated with different distances, such as fuel consumption and driver time.

Composite Cost Unit for Hospitals

Example: Patient-day, combining the number of patients with the length of their stay.

Cost Units and Centres Connection

Connection: Cost units are typically assigned to cost centres to track and analyze the costs associated with specific activities or locations.

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Description

This quiz explores the key concepts of cost accounting, including its definition, types of information, and its role in decision-making. Gain a deeper understanding of financial and non-financial information and how it applies to cost management. Perfect for students studying accounting or business.