SHORT ANSWER QUESTIONS AND ANSWERS
1.
Define Cost Accounting.
Cost accounting is a systematic process of
recording, classifying, analyzing, and reporting costs associated with a
business's operations. Its primary goal is to help management in planning,
controlling, and decision-making regarding cost efficiency and profitability.
2. What is meant by cost centre?
A cost centre is a segment of an organization
to which costs can be attributed. It can be a department, a production line, or
an activity. Managers of cost centres are responsible for the costs incurred
within their area but do not directly generate revenue.
3. Define EOQ.
EOQ is an inventory management formula that
determines the optimal order quantity to minimize the total inventory costs,
including ordering costs and holding costs. It aims to strike a balance between
frequent small orders and infrequent large orders.
4. Explain ABC
analysis.
s: ABC analysis is an
inventory categorization technique. It classifies inventory items into three
categories (A, B, and C) based on their value and importance. 'A' items are
high-value, 'B' are medium-value, and 'C' are low-value, allowing for
differentiated control efforts.
5. Define Direct labour.
Direct labour refers to the wages paid to
employees who are directly involved in the manufacturing process or the
creation of a product. Their work can be directly traced to the final output,
such as assembly line workers or machinists.
6. What is meant by
differential piece rate system?
This is
a wage payment system where workers are paid varying piece rates based on their
output level. Higher rates are offered for achieving or exceeding a set
standard of production, incentivizing greater efficiency and productivity.
7.
What is meant by primary distribution?
In cost
accounting, primary distribution refers to the allocation of service department
overheads to production departments. This initial allocation is based on
suitable bases like floor area, machine hours, or employee numbers, before
further allocation to products.
8.
Explain the basic classification of overheads.
In cost
accounting, primary distribution refers to the allocation of service department
overheads to production departments. This initial allocation is based on
suitable bases like floor area, machine hours, or employee numbers, before
further allocation to products.
9.
Define Absorption of overheads.
Absorption
of overheads is the process of charging indirect costs (overheads) to products
or services using a predetermined overhead absorption rate. This rate helps in
determining the full cost of a product and for inventory valuation.
10.
What is meant by machine hour rate?
The
machine hour rate is an overhead absorption rate calculated by dividing the total
overheads attributable to a machine by the total estimated operating hours of
that machine. It's used to allocate overheads to products based on machine
usage.
ANSWER
1. State any three objectives of cost accounting.
Three key
objectives of cost accounting are:
(1) Ascertainment of
Cost: To determine the cost of products,
services, or activities, aiding in pricing decisions and profit measurement.
(2) Cost Control and
Reduction: To identify areas where costs can be
minimized without sacrificing quality, promoting efficiency and profitability.
(3) Aid to Management
Decision-Making: To provide relevant cost data for various
managerial decisions, such as product mix, make-or-buy choices, and strategic
planning, thereby enhancing overall business performance.
2. What is cost centre?
A cost centre is a
functional location, department, or unit within an organization to which costs
are separately assigned and accumulated. The manager of a cost centre is
accountable for the costs incurred in their area, though they may not directly
generate revenue. Examples include a production department, a maintenance shop,
or an administrative office. Identifying cost centres helps in better cost control,
performance evaluation, and pinpointing areas of inefficiency within the
business operations.
3. Write a short note
on VED analysis.
VED analysis is an
inventory management technique used to categorize spare parts and components
based on their criticality to production or operations. VED stands for:
V - Vital: Items whose
stock-out would halt or severely disrupt production.
E - Essential: Items whose
stock-out would cause temporary disruption but not a complete stoppage.
D - Desirable: Items whose
stock-out would not immediately affect production, and can be easily procured.
This classification helps in prioritizing inventory control efforts, focusing
more on vital items to ensure operational continuity.
4. What is simple
average method?
The simple average method
is a technique used for valuing inventory issues and closing stock. Under this
method, the average price of all the purchases made during a specific period
(or up to the point of issue) is calculated by summing the unit prices of each
lot purchased and then dividing by the number of lots. This average price is
then applied to all materials issued from the store. It is generally less
accurate than other methods like weighted average as it doesn't consider the
quantity purchased at each price point.
5. What is time rate
system?
The time rate
system is a wage payment method where employees are paid based on the amount of
time they work, rather than the quantity of output they produce. Wages are
typically calculated hourly, daily, weekly, or monthly. This system provides
stable income for workers and is easy to calculate. It is suitable for jobs
where quality is more important than quantity, or where output is difficult to
measure, such as supervisory roles, skilled craftsmanship, or in service
industries.
6. List out the
methods of wage payment.
Methods of wage
payment primarily fall into two categories: time-based systems and output-based
(incentive) systems. Common methods include: Time Rate System: Payment based
on hours worked (e.g., hourly, daily wages). Piece Rate System: Payment based
on the number of units produced (e.g., straight piece rate, differential piece
rate). Incentive Plans: These combine
a basic time wage with bonuses for efficiency, such as the Halsey Plan, Rowan
Plan, Taylor's Differential Piece Rate, and Merrick's Multiple Piece Rate.
Other methods include group incentive schemes and profit-sharing plans.
7. What are the
classifications of overhead?
Overheads, which
are indirect costs not directly traceable to a specific product or service, can
be classified in several ways. Common classifications include:
o By Function: Production Overheads
(factory-related), Administration Overheads (office & management), Selling
Overheads (marketing & sales), Distribution Overheads (delivery).
o By Behaviour: Fixed Overheads (remain
constant irrespective of activity level), Variable Overheads (change in
proportion to activity level), Semi-Variable Overheads (partially fixed,
partially variable).
o By Nature: Indirect Materials,
Indirect Labour, Indirect Expenses.
8. State the meaning
of primary distribution of overhead.
Primary
distribution of overhead is the initial step in allocating indirect costs to
cost centres, particularly from service departments to production departments.
It involves apportioning general overhead costs (like factory rent,
electricity, insurance) among all production and service departments based on
appropriate and equitable bases. For example, factory rent might be distributed
based on the floor area occupied by each department. This process ensures that
each department bears a fair share of the common overheads before these costs
are further absorbed into products.
9. Define Machine hour
rate.
The machine hour
rate is an overhead absorption rate used to charge factory overheads to
production, particularly in industries where production is predominantly
machine-driven. It is calculated by dividing the total estimated overheads
related to operating a specific machine or a group of machines by the total
estimated operating hours of that machine(s) for a period. This rate is then
applied to products based on the actual machine hours spent on their
production, providing a more accurate allocation of overheads to products that
extensively use machinery.
10. What are the
methods of absorption?
Methods of overhead
absorption refer to the techniques used to charge indirect costs to products or
jobs. The primary methods typically involve calculating a predetermined
overhead absorption rate, which is then applied to the output. Common methods
include:
o Percentage of
Direct Material Cost: Overheads
are absorbed as a percentage of the direct material cost.
o Percentage of
Direct Labour Cost: Overheads
absorbed as a percentage of direct labour cost.
o Percentage of Prime
Cost: Overheads
as a percentage of the combined direct material and direct labour costs.
o Direct Labour Hour
Rate: Overheads
absorbed per direct labour hour worked.
o Machine Hour Rate: Overheads absorbed per
machine hour operated.
o Unit of Production
Method: Overheads
absorbed per unit produced.
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