Education

Cost Concept Concept – CA IPCC, CS Executive & CMA Intermediate

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Define the term “Cost”. Compare it with value and price.

Meaning of cost:-

  • Cost refers to the expenditure incurred in producing a product or in rendering a service.
  • It is expressed from the producer or manufacturer’s viewpoint. (Not that of consumer/end user.)
  • Cost ascertainment is based on uniform principles and techniques. Hence cost is objectively.

Define the terms costing? Cost Accounting and cost Accountancy

 

  1. Costing: – The technique and process of ascertaining costs.
  2. Cost Accounting: – The process of accounting for cost which begins with recording of income and expenditure or the bases on which they are calculated and ends with the preparation of periodical statements and reports for ascertain and controlling costs
  3. Cost Accountancy: – The application of costing and cost accounting principles methods and techniques to the science, art and practice of cost control and the ascertainment of profitability. It includes the presentation of information derived there from for the purpose of managerial decision-making.

 

 

  • List the objectives of Cost Accounting.

 

The primary objective of study of cost is to contribute to profitability through Cost Reduction and Cost Control. The following objective of Cost Accounting can be identified:-

  • (1) Ascertainment of cost: – This involves collection of cost information, by recording them under suitable heads of accounts and reporting such information on a periodical basis.
  • (2) Determination of selling price: – Selling price is influenced by a number of factors. However, prices cannot be fixed below cost, save in exceptional circumstances. Hence cost accounting is required for determination of proper selling price.
  • (3) Cost control and Cost Reduction: – In the long run, higher profits can be achieved only through Cost Reduction and Cost Control. These terms are discussed in detail in a separate Chapter.
  • (4) Ascertaining the profit of each activity: – Profit on each department/ activity/ product can be determined by comparing its revenue with appropriate cost. Hence Cost Accounting ensures profit measurement on an objective basis.
  • (5) Assisting management in decision-making:- Business decisions are taken after conducting Cost –Benefit Analysis. Hence Cost and benefits of each option are analyzed and the Manager chooses the least cost option. Thus Cost Accounting and reporting system assists manager in their decision making process.

 

 

 

  • Define Cost Accounting, its advantages and limitations?

Cost Accounting: –

Cost Accounting is accounting for cost aimed at providing cost data, statements and reports for the purpose of managerial decision making. Cost Accounting “is the application of costing and cost accounting and cost accounting principles, methods and techniques to the science, art and practice of cost control and ascertainment of profitability. It includes the presentation of information derived there from the purpose of managerial decision –making.

The term ‘Costing’ and ‘Cost Accounting’ are many times used interchangeably. However, the scope of cost accounting is broader than that of costing which merely focuses on cost ascertainment. Following functional activities are included in the scope of Cost Accounting:-

  • (1) Cost Book-keeping it involves maintaining complete record of all costs incurred from their incurrence to their charge to departments’ products and service.
  • (2) Cost System Systems and procedures are devised for proper accounting of costs.
  • (3) Cost Analysis It involves and investigation into the uses of actual cost varying form the planned costs and fixation of responsibility for cost increase.
  • (4) Cost Comparisons Cost Accounting also includes comparisons between cost from alternative technologies, cost of different products and activities, and cost of same product or service over a period of time.
  • (5) Cost Control An important function of cost accounting is utilization of cost information for exercising control. This involves an examination of each cost in the light of benefit derived from in finding new and improved methods for reducing costs.
  • (6) Cost Comparison and Cost Control: Cost comparison helps in cost control. Such a comparison may be made from period to period by using the figures in respect of the same firm or of several units in an industry by employing uniform costing and inter –firm comparison methods.
  • (7) Identification of losses and inefficiencies: A good Cost Accounting system helps in identifying unprofitable activities, losses or incurrence of the cost.

 

Importance and Advantage of Cost Accounting:-

The primary advantages of a Cost Accounting System are as under:-

  • (1) Profit Measurement and Analysis: – Costs should be accurately ascertained and matched with revenues to measure profits of a firm. Further, Cost Accounting is useful for identifying the exact causes for decrease or increase in the profit/loss of the business.
  • (2) Cost Reduction: The application of cost reduction techniques operations research techniques and value analysis technique, helps in achieving the objective of economy in concern’s operations. Continuous efforts are being made by the business organization for inefficiencies in any form, so that appropriate actions are taken. The use of Standard Costing and Variances Analysis techniques points out the deviations from pre-determined level and thus demands suitable action to eliminate its recurrence. The cost of idle capacity can be easily worked out, when a concern is not working to full capacity.
  • (3) Financial Decision Making: Manager can obtain relevant information from the Cost Accounting System to serve as guides in making decisions involving financial considerations. Guidance may also be given by the Cost Accountant on various considerations. Guidance may also be given by the Cost Accountant on various decision making issues viz. whether to purchase or manufacture a given component whether to accept orders below cost which machine to purchase when a number of choices are available. The use of Marginal Costing techniques helps managers in taking short –term decisions.
  • (4) Price Determination: – Cost Accounting is quite useful for price fixation. It serves as guide to test the adequacy of selling price. The price determined may be useful for preparing estimates or filling tenders.
  • (5) Dispute and Issue –Solving:- A good cost accounting system provides cost figures for the use of Government, Wages Tribunal and other bodies for dealing and solving issues price taxation, price tariff protection, wages level fixation.

 

Limitations of Cost Accounting

  • (1) Cost Accounting lacks uniformity. Different organizations prepare cost records and reports in different depths detail and form. Even assumptions made regarding various costs differ.
  • (2) There is arbitrariness in apportionment of overheads, allocation of joint costs, and division of costs between controllable, determinations of overhead absorption rates.
  • (3) Cost accounts are prepared in addition to financial accounts. There are, number of costs, e.g. notional costs and decision making costs which do not appear in financial accounts. This necessitates reconciliation of financial profits and cost profit.
  • (4) Cost accounting is only one of the means of achieving cost control, efficiency improvement and motivation. It does not by itself achieve these objectives.
  • (5) Cost accounting has only a limited us in projecting future costs. It needs to be supplemented by various statistical tools.

 

  • What are the essential features of a good Cost Accounting system?

 

To be successful a good Cost Accounting System possesses the following essential features.

  1. Simple and easy to operate: – The system should be tailor-made, practical, simple and capable of meeting the requirement of business concern.
  2. Accuracy of data: – The data to be used by the Cost Accounting System should be accurate. Otherwise it may distort the output of the system.
  3. Relevance of data: The system should handle and report relevant data in use of manager for decision making. It should not sacrifice its utility by introducing meticulous and unnecessary, details.
  4. Management’s Role: The top Management should have a faith in the Costing System and should also provide a helping hand for its development and success.
  5. Participate Role of executives:- Necessary cooperation and participation of executives from various departments of the concern is essential for developing a good system of Cost Accounting.
  6. Cost –effective: – The cost of installing and operating the system should justify the results. The benefits from the system should exceed the amount to be spin on it.
  7. Smooth implementation: The system should be effectively implemented. A carefully phased program should be prepared by using network analysis for the introduction of the system.

 

 

 

 

 

  • What are the Pre-requisites for Installation of Cost Accounting System?

 

Installation of a Costing System:-

A cost accounting system is a set of plans, programs procedures and documentation designed to accumulate costs, assigns them to products, processes and jobs, and report cost information to management at all levels. It assists management in planning, control performance appraise analysis of   product profitability and optimum utilization of physical and financial resources for achieving organizational objectives.

The following consideration should be specifically taken into account:-

  • Design to suit specific needs: – The system should be designed as to serve the specific needs of the organization.
  • In-depth examination or production details: – Before installing the system management should make an, in-depth study of nature of products and processes, technologies, Plant layout, nature of materials used so that the cost accounting system is tuned to the requirement of the business.
  • Cost Benefit Analysis: – The benefit from the proposed cost accounting system far exceeds the cost involved. The best system, if cost exceeds benefits becomes useless.
  • Location of cost Office: – Costing department obtains basic data mainly from accounts department; Most of this data is related to production activity.
  • Codification: – All costs relating to all products of al departments should preferably be coded. This will increase speed in handling and processing of costs. Codification also facilitates computerization of costing system.
  • Continuous Monitoring: – Operation of cost accounting system should be continuously monitored so that deficiencies do not creep in, methodical work is not replaced by short cuts and the system is always kept up –to –date.

Difficulties in Installing Cost Accounting System:-

  1. Lack of enthusiasm and support from top management because they are not fully convinced about the benefits from such system.
  2. Resistance from production staff and people at different levels in other departments because they are fear getting subjected to additional controls.
  3. Resistance from accounting staff as they believe that their work would increase.
  4. Shortage of trained and well qualified staff.
  5. Over enthusiasm to have an unnecessarily detailed costing structure or keeping it too simple due to too much concern for cost.
  6. High cost of installing the system.
  7. Failing to keep the system up-to –date.

 

 

 

 

  • How are costs classified on the basis of Time Period?

 

On the basis of Time Period: – Costs are classified into:-

  • (1) Historical Costs: – Costs relating to the past time period; Cost which has already been incurred.
  • (2) Current Costs: – Costs relating to present period.
  • (3) Pre –determined Cost: – Costs relating to the future period; cost which is computed in advance, on the basis of specification of all factors affecting it.

 

  • How are costs classified on the basis of Behavior, Nature & Variability?

 

On the basis of Behavior/ Nature/ Variability: Costs are classified into:-

  • (1) Variable Costs: – These are costs which tend to vary or change in relation to volume of production. They increase in total as production increase and vice versa e.g. cost of raw material direct wages etc. However, variable costs per unit are generally constant for every unit of the additional output.
  • (2) Fixed cost: – Theses are costs which remain constant at various levels of production. They are not affected by volume of production e.g. Factory Rent, Insurance etc. Fixed costs per unit vary inversely with the volume of production i.e. if production increases fixed cost per unit decrease and vice –versa. Sometimes, these are also known as Capacity Costs or Period Costs.

 

  • (3) Semi- Variable Costs: – These are costs which are partly fixed and partly variable. Theses are fixed up to a particular volume of production and become variable thereafter for that next level of production. Hence they are also called Step Costs. Some examples are Repairs and Maintenance, Electricity, Telephone etc…

 

  • How are costs classified on the basis of Elements?

On the basis of Elements: – Costs are Classified into:-

  • (1) Materials: – Cost of tangible, physical input used in relation to output/ production; e.g. cost of raw materials, consumable stores, maintenance items etc.
  • (2) Labour :– Cost incurred in relation to human resources of the enterprises; e.g. wages to workers, Salary to office staff, Training Expenses etc.
  • (3) Expenses: – Cost of operating and running the enterprise, other than materials and labour; this is the residual category of costs e.g. Factory Rent, Office Maintain Nance Sales man salary etc.

 

  • How are costs classified on the basis of Relationship?

 

On the basis of relationship: Costs are classified into:-

  • (1) Direct Costs:- Costs which are directly related to /identified with/ attributable to a Cost Center or a Cost unit g. Cost of basic raw material used in the finished product wages paid to site labour in a construction contract etc.
  • (2) Indirect Costs- Costs which are not directly identified with a cost center or a cost unit. Such costs are apportioned over different cost centers using appropriate basis e.g. Factory Rent incurred over various departments; Salary of supervisor engaged in overseeing various construction contracts etc.

 

Note: – All indirect costs are collectively called as Overheads, since they are generally incurred over various products (cost unit), various departments (cost centers) and over various head of expenditure accounts.

 

 

  • How are costs classified on the basis of Controllability? What are the aspects affecting Control?

 

On the basis of Controllability: Costs are Classified into:-

  • (1) Controllable Costs: – Costs which can be influenced and controlled by managerial action. However, Controllability is a relative term and is subject to the following factors.
  1. Time: – Certain costs are controllable in the long run and not in the short run.
  2. Decided at a particular location/cost center. If rent agreements of all factory premises are executed centrally at the Head Office, factory manager cannot control the incurrence of cost.
  3. Product/ Output: – Certain costs are controllable by reference to one product or market segment and not by reference to the other. For example, cost of common raw material input for exports is lower than that of domestically sold goods since excise duty concession/duty drawback is available for export sales.
  • (2) Non-controllable Costs- These are costs that cannot be influenced and controlled by a specific member of organization. The line of difference between controllable and non-controllable costs is thin.

 

              Note: – No cost is uncontrollable. Controllability is subject to the factor laid down above.

  • How are costs classified on the basis of Normality?

        On the basis of normality: Costs are classified into;-

  • (1) Normal Cost: – Cost which can be reasonably expected to be incurred under normal, routine and regular operating conditions.
  • (2) Abnormal Cost: -Costs over and above normal cost; which is not incurred under normal operating conditions e.g. fines and penalties.

 

  • Enumerate the types of Costs on the basis of Functions.

 

         On the basis of Functions: Costs are classified as under:-

  • Production Cost: – The cost of the set of operations commencing with supply of materials, labour and services and ends with the primary packing of product. Thus it is equal to the total Direct Materials, Direct Labour, Direct Expenses and Production Overheads.
  • Administration Cost :- The cost of formulating the policy, directing the organization and controlling the operations of the undertaking, which is not directly related to production, selling, distribution, research or development activity or function. Some examples are Office Rent. Accounts Department Expenses, Audit and Legal Expenses, Directors Remuneration etc.
  • Selling Cost: – The cost of seeking to create and stimulate demand and of securing orders. These are sometimes called marketing costs. Some examples are Advertisement, salesman Remuneration, Show –room expenses, Cost of samples etc.
  • Distribution Cost: – The cost of the sequence of operations which begins with making the packed product available for dispatch and ends with making the reconditioned returned empty package, if any available for re-use. Some examples are Distribution Packing (secondary packing), carriage outwards, maintenance of delivery vans, expenditure incurred in transporting articles to central or local storage, expenditure incurred in moving articles to and from prospective customers (as in Sale or Return) etc.
  • Research Cost: – The cost of researching for new or improved products, new applications or materials or improved methods.
  • Development Cost: – The cost of the process which begins with the implementation of the decision to produce anew or improved product, or to employ a new or improved method and ends with commencement of formal production of that product of by that method.
  • Pre-production Cost: – The part of development cost incurred in making a trial production run prior to formal production.
  • Conversion Cost: – The sum of direct wages, direct expenses and overhead cost of converting raw materials to the finished stage or converting a material from one stage of production to the other.

 

  • Write short notes on period costs and product cost. Why should product costs be computed?

 

On the basis of Attributability to the product: – Costs are classified into

  • Period Costs: – Theses are costs which are not assigned to the product but are charged as expenses against the revenue of the period in which they are incurred. Non-manufacturing costs e.g. Selling and Distribution Costs are generally recognized as period costs. These costs are not included in inventory valuation.
  • Product Costs:Theses are costs which are assigned to the product and are included in inventory valuation. These are also called as Inventorial costs. Under absorption Costing, total manufacturing costs are regarded product costs while under marginal costing, only variable manufacturing costs are considered.

The Purpose of computing products costs are as under:-

  1. Preparation of Financial Statements: – Focus on inventory valuation and reporting profits.
  2. Product Pricing: – Focus on costs assigned and incurred on the product till it is made available to the customer/ user.
  3. Cost- plus Contracts with Government Agencies: – Focus is on reimbursement of costs specifically assigned to the particular job/contract.

 

 

 

  • List out the various items of costs on the basis of relevance to decision making.

 

On the basis of Relevance to decision making: – costs are classified into:-

  1. Relevant costs viz., Managerial Costs, Differential Costs, Opportunity Costs etc.
  2. Irrelevant Costs viz., Absorbed Fixed costs, Sunk Costs, Committed Costs etc.

Relevant Costs: – These are costs which are relevant and useful for decision making purpose.

 

  • Marginal Cost –Marginal costs is the total variable cost i.e. prime cost plus variable overheads. It is assumed that variable cost varies directly with productions whereas fixed cost remains fixed irrespective of volume production. Marginal Cost is relevant cost for decision making as this cost will be incurred in future for additional units of production.

Differential Cost- It is the change in costs due to change in the level of activity or pattern or method of production. Where the change results in increase in cost it is called incremental cost, where if costs are reduced due to decrease of output, the difference is called decremental costs.

  • Opportunity Costs- This refers to the value of sacrifice made or benefit of opportunity foregone in accepting an alternative course of action, for example a firm may finance its expansions plan by withdrawing money from its bank deposits. In such a case the loss of interest on the bank deposit is the opportunity cost for carrying out eh expansion plan. Opportunity cost is relevant cost where alternatives are available. However, opportunity cost does not find nay place in formal accounts and is computed only for decision making and analytical purpose.
  • Out of pocket costs- These are costs which entail current or near future outlays of cash for the decision at hand as opposed to costs which do not require any cash outlay such as depreciation. Such costs are relevant for decision making as these will occur in near future. It is that portion of total cost s which involves cash outflow. This concept is a short –run concept and is used in decision relating to fixation of selling price in recession, make or buy, etc. Out of pocket costs can be avoided or saved if a particular proposal under consideration is not accepted.
  • Replacement cost – It is the cost at which there could be purchase of an asset or material identical to that which is being replaced or revalued. It is the cost of replacement at current market price and is relevant for decision making.
  • Imputed Costs – These are notional cots appearing in the cost accounts only e.g. notional rent charges, interest on capital for which no interest has been paid. Where alternative capital investment projects are being evaluated, it is necessary to consider the imputed interest on capital before a decision is arrived at, as to which is the most profitable project.
  • Discretionary costs – These are “escapable” or “avoidable” Costs. These can be avoided if a particular course of action is not chosen. In other words, these are costs, which are essential for the accomplishment of a managerial objective.

 

  1. Irrelevant Cost:These are costs which are not relevant or useful for decision –making.
    • Sunk Cost: – It is a cost which has already been incurred or sunk in the past. It is not relevant for decision making and is caused by complete abandonment as against temporary shut down. Thus, if a firm has obsolete stock of materials amounting to Rs 10,000 which can be sold as scarp for Rs 2,000 or can be utilized in a special job, the value of opening stock of Rs 10,000 is a sunk cost and it not relevant for decision making.

 

  • Committed cost: – A cost which has been already committed by the management is not relevant for decision making. This should be contrasted with discretionary costs, which are avoidable costs.

 

  • Absorbed Fixed Costs- Fixed costs which do not change due to increase or decrease in activity is irrelevant for decision –making. Although such fixed costs are absorbed in cost of production at a normal rate, they are irrelevant for managerial decision –making. However if fixed costs are specific, they become relevant.

Write short notes on Explicit and Implicit Costs.

  1. Explicit Costs – These are also known as out of pocket costs. They refers to costs involving/ immediate payment of cash, Salaries, wages, postage, and telegram, printing and stationery, interest on loan, etc. are some example of explicit costs involving immediate cash payments.
  2. Implicit Costs – These costs do not involve any immediate cash payment. They are not recorded in the books of accounts. They are also known as economic costs or imputed costs.

 

  • Define the terms (a) Estimated Costs (b) Shut down Costs and (c) Absolute Costs
  1. Estimated Costs ;- Kohler defines estimated costs as “the expected cost of manufacture or acquisition , in terms of a unit of product computed on the basis on information available in advance of actual production or purchase”. Estimated costs are prospective costs since they refer to prediction of costs.
  2. Shut down costs- These are costs which continue to be incurred even whine a plant is temporarily shut-down e.g. rent, rates, depreciation, etc. These costs cannot be eliminated with the closure of the plant. In other words, all fixed costs which cannot be avoided during the temporary closure of a plant will be known as shut down costs.
  3. Absolute cost: – These costs refer to the cost of any product, process or unit in its totality. When costs are presented in a statement form, various cost components may be shown in absolute amount or as a percentage of total cost or as per unit cost or all together. Here the costs depicted in absolute amount may be called absolute costs and are base costs on which further analysis and decision are based.

 

  • Explain various types of Cost in Brief?

Total Cost: – This is the sum of all the items of expenses whether paid or not which have been insured in the production sale or distribution or in rendering of a service.

 

  • What are the parameters of Cost expressions?

Cost is expressed by reference to the following parameters:

  1. Time parameter- Cost period
  2. Location parameter – Cost center
  3. Output/ Product parameter – Cost unit

 

  • What is meant by Cost Period?

The period to which the Costs relates is called Cost period. It is also called the Control period since cost ascertainment is for the purpose of control. Generally, the cost period is shorter than the financial period used for reporting purposes.

For example, if the production process for converting raw material into finished product requires 15 days, it may be considered as a Cost period.

  • Define a Cost Unit. Give suitable illustrations.

Cost unit: – It is a unit of production, services or time or combination of these, in relation to which costs may be ascertained or expressed. It should be one with which expenditure can be most readily associated.

An appropriate cost unit should be selected keeping in view of the following:-

  • Cost units should suit the business
  • It should be most natural to the business
  • Cost unit should be readily understood and accepted by all
  • Cost unit should be uniformly maintained over a period of time and should be same or similar products

Cost units differ from one business to the other. They are usually units of physical measurement like number, weight, area, volume, time length and value. Some illustration of cost units are as follows:-

Examples of Cost units and Methods of Costing In various industries.

 

Bricks Per 1,000 bricks Unit Costing
Cement Per ton Process Costing
Road Construction Per kilometer or per mile Job costing
Advertising Each job Job
Interior Decoration Each job Job
Made to Order Number Job costing
Readymade Number Batch costing
Tyres and Tubes Batch Each Batch costing
Toy Each batch Batch costing
Pharmaceuticals 1,000 nos.., tablets, strips, capsules, Batch Costing
Water supply Per 1,000 liter Operating Costing
Bus service Passenger –kilometer Operating Costing
Education Per student hour Operating costing
Electricity Per kilowatt hour Operating costing
Goods Transport Per ton-mile or per ton –kilometer Operating costing
Hospital Per bed per day / per out patient Operating Costing
Hotel Per guest per day or per guest, per meal etc Operating costing
Bridge Construction Each contract Contracting costing
Ship Building Each ship Contract costing
Mining Per ton Process costing
Petrochemical Tons, Gallons liters Process costing
Steel Per ton Process Costing
Textile Per meter Process costing
Sugar Per tone Process
Paper Per kg/tone Process
Chemical Per kg/liter/tone Process
Fertilizer Per tone Process
Oil Refinery Per gallon Process
Automobile Number Processing
Colliery Per tone Output
Bicycle Manufacturing Number Multiple costing

 

What is a Responsibility Center? What are its types?

Meaning:

  • It is an activity center of a business organization entrusted with a special task.
  • It is a unit of function of a business organization headed by an executive responsible for its performance.

Types of Responsibility Centers: –

Particulars Cost Center Revenue Center Profit Centers Investment Centers
Meaning A Center for which a standard amount of cost is predetermined and used for control. A center devoted to raising revenue (no responsibility for production) A center whose performance is measured in terms of income earned and cost incurred (profit earning) A center responsible for earning profits and also for asset utilization.
Primary Responsibility Cost reduction and cost control. Generation of sale revenue. Budgeted profits less actual profits Budgeted ROI less actual ROI
Performance evaluation        

 

  • Write short notes on Cost Center? Discuss the various types of Cost Centers.

Cost Centre: A center refers to a section, segment or subdivision of an organization of which costs are charged. A cost centre is “location, person or it’s of equipment (or group of these) for which costs may be ascertained and used for the purpose of control”. For example a cost center may be

  • Allocation e.g.., department’s sales territories etc.
  • A person e.g., engineers salesman, machine operators etc.
  • An item of equipment, e.g., machines delivery vans etc.

 

Classification:-

Based on type: –

Personal Cost Center Impersonal Cost Center
It consists of a person of group of persons. It Consists of a location or an item of equipment (or group of these)

 

Based on Role:-

 

Production cost center Service Cost center
It is a cost centre where raw material is processed and converted into finished product. It is a cost centre which serves as an ancillary unit and renders service to a production cost centre.
Here both direct and indirect costs are incurred. Here only indirect costs are incurred. There are no direct costs as there is no measurable and saleable output.
Machine shops, welding shops and assembly shops are examples of production Cost Centers. Power- house, Gas production shop, material service centers, plant maintenance centers are example of since cost centers.

 

  • Based on Activity : –

 

Operation Cost Center Process Cost Center
It consists of machines and or persons carrying out similar operations. It consists of machines and /or persons, engaged on a specific process or a continuous sequence of operations.
All machines operations performing the same operations are brought together under a Cost Center, the process being ascertainment of cost of each operation irrespective of its location inside the factory. Cost is analyzed and related to a series of operations in sequence. Generally, these constitute a single location, as in Oil Refineries and other process industries.

 

  • Define the Advantages of Value Analysis

Advantages of value analysis are:-

  • It is a powerful tool of cost reduction which leads to direct improvement in profitability.
  • It improves customer goodwill and thereby helps to maintain and increase sales. This is because value analysis makes a close study of the product to provide higher satisfaction to customers in respect of use value and esteem value.
  • Value analysis ensures higher productivity by continuous process of searching for improvement in all fields.
  • It helps in achieving greater production from a given amount of resources of capital employee time, space etc.
  • Simplification and standardization of design and methods solve crisis caused by extensive verity and complex methods.
  • It raises the moral of employee and infuses in them a spirit of co-operation.
  • Distinguish Cost Accounting and Financial Accounting?

Comparison of Cost Accounting and Financial Accounting

Basis Financial Accounting Cost Accounting
Purposes To prepare P & L A/c and Balance sheet for presentation to shareholders and other external users. To provide details cost information to management i.e. internal user.
Statutory requirement This is mandatory under Companies Act. Income Tax Act etc. It is voluntary except in specified in specified industries
Cost & Profit Analysis It is reveals overall profit /loss and cost. It reveals cost and profit or loss of each product, department etc.
Control aspect It lays emphasis on recording to Transactions. It lays emphasis on cost control.
Periodicity P & L A/c and Balance sheet Reported Annually. Cost statements are regularly and frequently prepared at short intervals and presented to management.
Past and Future Cost It is concerned with past records. It is concerned with past and future costs.

 

  • What is Direct Expenses or chargeable Expenses

Direct Expenses or Chargeable Expenses:These are expense which can be allocated directly to jobs, products, processes, cost centers or cost units. According to CIMA, London, Direct Expenses are cost other than material and wages which are incurred for a specific product or saleable services.

    Nature of Direct Expenses:

  • These are expenses other than Direct Material and Direct Labour
  • These are either allocated or charged completely to cost center or cost unit.
  • These are included in the prime cost of a product.

Examples:-

  • Hire charges of special machinery or plant for a particular production order or job.
  • Payment of royalties
  • Cost of special models, designs and patterns
  • Experimental cost before undertaking the concerned job
  • Traveling and conveyance expenses incurred in connection with a particular job
  • Sub- contracting expenses or outside work costs, where jobs are sent out for special processing.

 

  • Explain various methods of costing.

Businesses vary in their nature and in the type of products or service they produce. Hence different methods of cost ascertainment are used in different business. The output has to be cost so that costing methods to be employed are also determined with due regard to the method of production and the unit of cost used. The various methods of costing can be summarized as under:

Job Costing – Under this method, the cost of each job is ascertained separately. It implies that the direct cost of each job is traceable and identifiable. It is suitable in all cases where work is undertaken on receiving a customers order/ assignment. Some examples are: printing press, motor workshop, etc

Batch Costing: – it is extension of job costing. It is used where the output under a particular work order consists of similar units. It may not be economically feasible to ascertain cost per unit. Hence a collection or lot of units called a batch is taken for cost ascertainment purposes. Each batch is treated as unit of cost and thus separately coasted. Here cost per unit is determined by dividing the cost of the batch by the number of units produced in the batch. Examples: – Pharmaceuticals, production of component parts like cycle rims, TV monitor screens etc in bulk for subsequent assembly.

Contract Costing: – A larger job is called a contract. Generally, execution of work is distributed over two or more financial years. Hence, the cost of each contract is ascertained separately. It is suitable for firms engaged in the construction of bridges, roads building etc.

Single or Output Costing: – Cost is ascertained for a product, the product being the only one produced like bricks, coals, etc.

Process Costing and Operation Costing: – The cost of completing each stage of work is ascertained like cost of making pulp and cost of making paper from pulp. In mechanical operations, the cost of each operation may be ascertained separately the name given is operation costing.

 

Operation or Service costing: – Ascertainment of cost of rendering or operating a service is called Service Costing or Operating Costing. It is used in the case of concerns rendering service like transport, cinema, hotels, etc where there is no identifiable tangible Cost unit.

Multiple Costing: – It represents a combination of two or more methods of costing outlined above. For example, if a firm manufacturing bicycles including its components; the parts will be costed by batch costing system but the cost of assembling the bicycle will be computed by the single or output costing method. This whole system of costing is known as multiple costing.

The following table summarizes the various methods of costing applied in different industries:-

Nature of output Method Cost Ascertainment Examples of Industries
Customers Specifications: –

Single unit

Job Costing For each order/ assignment/ job Automobile workshop/ Interior Decoration
Number of similar units Batch Costing For each batch/ lot of units produced Printing press- for Cards invitations etc/pharmaceuticals
Execution of work Contract Costing For each contract Civil Construction /Ship Building
Similar units of a single product produced by : single process Unit or output or single costing For the entire activity, but averaged for the output Quarries, Brickworks, Colliery, Paints etc
A series of process Process Costing  or Operation Costing For each process or operation Oil, Refining, Breweries, Chemicals etc
Consisting of multiple varieties of activities and processes Multiple Costing Combinations of any of the methods listed above. Bicycle Assembly
Rendering  of Services Operating Costing For every type of service Transport, Hotels, Cinema

 

 

 

 

 

 

  • What do you mean by “Technique of Costing”?

 

       

In addition to the above methods of costing there are certain techniques of costing which are used along with any of the above method. Theses techniques serve the special purpose of managerial control and policy. Some of the important techniques are as follows:-

1)   Standard Costing It is a valuable technique of cost control.
2)   Budgetary Control It is also a technique that is used to control costs
3)   Managerial costing

 

 

It is also technique to help the management in decision making and profit planning. In this technique, only variable costs are charged to products and fixed costs are treated as period costs and transferred to P & L A/c.
4)   Absorption costing

 

As against marginal costing in this technique total cost i.e. fixed and variable charged to products.
5)   Uniform costing

 

 

It is a system whereby several undertaking uses the same costing principles and practices so as to make cost data comparable.

 

  • What are the types of cost ascertainment?

 

For ascertaining cost following types of costing are usually used: –

  • Uniform Costing:When a number of firms in an industry agree among themselves to follow the same system of costing, by adopting common technology for various items and processes they are said to follow a system of uniform costing. Such a system of cost ascertainment facilitates inter-firm comparison, determination of true costs of the industry.
  • Marginal costing: – It is defined as the ascertainment of marginal cost by differentiating between fixed and variable costs. It is used to ascertain effect of changes in volume or type of output on profit. It is a tool of decision making on various management issues. Under this method, stocks are valued at variable cost. Fixed costs are treated as period costs and are not included in Stock valuation.
  • Absorption Costing:It is the practice of charging all costs, both variable and fixed to operations, process or products. Stocks are valued at cost inclusive of proportionate amount of fixed cost. This differs from marginal costing where fixed costs are excluded.
  • Direct costing:It is practice of charging all direct costs to operations processes or products leaving all indirect costs to be written off against profits in which they arise. It may be distinguished form Marginal costing, where only variable costs are identified with products.
  • Standard Costing: – It is the name given to the technique whereby actual costs are compared with already set standards. It thus a technique of both cost ascertainment and cost control. This technique may be used along with any method of costing. It is especially suitable where the manufacturing method involves production of standardized goods of repetitive nature.
  • Historical Costing:It is the ascertainment of costs after they have been incurred. This type of costing has limited utility.

 

  • What is difference between Cost estimation and Cost ascertainment?

 

Cost estimation: – Cost estimation is the process of predetermining the cost of the certain product or job. This predetermination of cost is based upon budgetary control, standard costing and variance analysis. Cost estimation is made to take the decision regarding buy/make or to fix the sale price of the product etc.

Cost ascertainment:Cost ascertainment is the process of determining the cost on the basis of actual data. Hence, computation of historical cost is called Cost ascertainment. Cost estimation and ascertainment are interrelated and very important to the management to have a sound costing system. The ascertainment of cost greatly helps in cost estimation of future period.

 

  • List some reports provided by the Cost Accounting department for decision making purpose.

The following is an illustrative list of reports and statements provided by the Cost Accounting Department for the use of managers for decision making purpose.

  1. General : –
    • Cost sheet: Setting out the total cost, analyzed into various elements of cost, giving comparative figures for various periods and or various departments.
    • Reconciliation of actual profit earned with estimated or budgeted profit.
    • Reports of Capital Expenditure, R & D Expenditure etc., compared with budgets.
  2. Material :
  • Materials Consumption Statements, showing total quantity of material issued for production, materials actually used in production and wastage.
  • The total cost of abnormally spoiled work in the factory and abnormal losses in the store. The total cost of inventory carried of raw materials, work in process and finished stock; the number of months for which stocks would be sufficient ( on the basis of average consumption)
  1. Labour
  • Labour utilization statements providing details about the total number of hours paid for, standard hours for the output, idle time hours, cost and causes thereof.
  • Labour turnover and the cost of recruitment and training of new employees.
  • Labour Overtime payment statement and the causes thereof.
  1. Overheads :
  • Overheads incurred compared with budgets.
  • The difference between the amount actually incurred (Actual Overheads) and The amount charged (Absorbed Overheads)
  1. Sales: –
  • Sales effected compared with budgets.
  • Statement or reasons for difference between budgeted and actual sales viz.., price, Quantity, Sales Mix etc.

CPT Law Concept – Contract Act

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INDIAN CONTRACT ACT, 1872

UNIT- 1:- NATURE OF CONTRACT

 

What is Law?

 

Law means a ‘set of rules’ which governs our behaviours and relating in a civilized society. So

there is no need of Law in a uncivilized society.

 

Why Should One Know Law?

One should know the law to which he is subject because ignorance of law is no excuse.

 

 

Section 1:-

 

Commencement and applicability:-

 

  Short Title

 

Extent and                   commencement
The Indian

contract Act 1872

 

Applicable     to

whole      Indian

except the state

of    Jammu    &

Kashmir

 

First     day     of September 1872(1st Sept. 1872)

 

 

*   Prior to this English law of contract was followed in India.

*   It has XI chapter.

*   Law of contract creates jus in personem and not in jus in rem.

*   The Indian Contract Act consists of the following two parts:

(a)  General principals of the Law of Contract.

(b) Special kinds of contracts.

*   The  general  principals  of  the  Law  of  Contract  are  contained  in  Sections  1  to  75  of  the Indian Contract Act. These principles apply to all kinds of contracts irrespective of their nature.

*   Special contracts are contained in Sections 124 to 238 of the Indian Contract Act. These  special contracts are Indemnity, Guarantee, Bailment, pledge and Agency.

Note: In our discussion on this part of the book, unless otherwise stated, the sections mentioned  are those of the Indian Contract Act, 1872.

 

 

Contracts as Defined by Eminent Jurists

1. “Every agreement and promise enforceable at law is a contract.” – Pollock

2. “A Contract is an agreement between two or more persons which is intended to be

enforceable at law and is contracted by the acceptance by one party of an offer made to  him by the other party to do or abstain from doing some act.” – Halsbury

3. “A contract is an agreement creating and defining obligation between the parties” –

Salmond

 

 

1.      DEFINITIONS (Sec 2)

 

1.       Offer(i.e.   Proposal)   [section   2(a)]:-When   one   person   signifies   to   another   his  willingness  to  do  or  to  abstain  from  doing  anything,  with  a  view  to  obtaining  the  assent  of  that  other  person  either  to  such  act  or  abstinence,  he  is  said  to  make  a  proposal.

EXAMPLE

 

 

2. Acceptance  2(b):-  When  the  person  to  whom  the  proposal  is  made,  signifies  his

assent there to , the proposal is said to be accepted.

EXAMPLE

 

 

 

 

3. Promise  2(b)  :-  A  Proposal  when  accepted  becomes  a  promise.  In  simple  words,

when an offer is accepted it becomes promise.

EXAMPLE

 

 

 

 

4. Promisor and promise 2(c) :- When the proposal is accepted, the person making the

proposal  is  called  as  promisor  and  the  person  accepting  the  proposal  is  called  as

promisee.

EXAMPLE

 

 

 

 

5. Consideration 2(d):- When at the desire of the promisor, the promisee or any other

person has done or abstained from doing something or does or abstains from doing

something   or   promises   to   do   or   abstain   from   doing   something,   such   act   or

abstinence or promise is called a consideration for the promise.

™   Price paid by the one party for the promise of the other Technical word meaning QUID-

PRO-QUO i.e. something in return.

EXAMPLE

 

 

 

6. Agreement 2(e) :- Every promise and set of promises forming the consideration for  each other. In short, agreement = proposal or offer + acceptance.

EXAMPLE

A offers to sell his car to B for `50,000. B agrees to it. Here there are 2 parties, A (offeror) and B (acceptor). The offer to sell car for `50,000 is a definite offer. This agreement gives to an obligation on part of A to deliver the car to B and on part of B to pay the price.

 

 

 

7.   Contract 2(h) :- An agreement enforceable by Law is a contract.

 

Agreement is  a  wider  term  than  contract  where  as  all  contracts  are  agreements.  Al agreements are not contracts.

 

All Contracts are Agreements, but all Agreements are not Contracts

 

The various agreements may be classified into two categories:

 

Agreement not enforceable by law

 

Any essential of

a valid contract

is not available.

Agreement enforceable by law

 

All essentials of

a valid contract

are available

Conclusion:

Thus we see that an agreement may be or may not be enforceable by law, and so all agreement

are not contract. Only those agreements are contracts, which are enforceable by law, In short.

 

Contracts = Agreement + Enforceability by Law

Hence, we can conclude “All contracts are agreement, but all agreements are not contracts.”

 

EXAMPLE

·         In the morning we go to a milk booth, buy milk and pay for it. It is an agreement whereby we pay or agree to pay the vendor on delivery of milk. Non-delivery of milk or non-payment of price to the vendor may amount to breach of contract, for which remedy can be sought. It has all the elements of a valid agreement/contract.

 

·         After sometime we hire a car to go to our work place, we pay or agree to pay the car hire charges for using the service of car. This is also an agreement/contract between the car service provider and us.

 

·          On reaching the office an invitation for attending the family function of an office colleague is received which we accept. Again this is also another type of agreement though social in nature not resulting into a contract.

 

8.   Void agreement 2(g):- An agreement not enforceable by law is void.

EXAMPLE

 

 

 

9.   Voidable contract 2(i):- An agreement is a voidable contract if it is enforceable by Law

at the option of one or more of the parties there to (i.e. the aggrieved party), and it is

not enforceable by Law at the option of the other or others.

EXAMPLE

 

 

10.    Void  contract  :-  A  contract  which  ceases  to  be  enforceable  by  Law  becomes  void  when it ceases to be enforceable.

EXAMPLE

 

 

 

– Sec.10.

2.  ESSENTIALS OF A VALID CONTRACT

 

“All agreements are contracts, if they are made –

by free consent of the parties, competent to contract,

for a lawful consideration and

with a lawful object, and

not hereby expressly declared to be void.”

 

 

 

 

 

2.       LEGAL RULES/ ESSENTIAL ELEMENTS REGARDING CONTRACT

1.      Proper offer and proper acceptance with intention to create legal relationship.

 

A and B agree to go to a movie on coming Sunday. A does not turn in resulting in loss of B’s time B cannot claim any damages from B since the agreement to watch a movie is a domestic agreement which does not result in a contract.

 

·         In case of social agreement there is no intention to create legal relationship and  there the is no contract (Balfour v. Balfour)

·         In  case  of  commercial  agreements,  the  law  presume  that  the  parties  had  the intention to create legal relations.

[an agreement of a purely domestic or social nature is not a contract ]

 

Example 1: A husband promising his wife to buy her a ‘necklace’ on occasion of her birthday is not a contract. This is so, because parties never intended to create legal relationship and breach of this promise is not enforceable in any court of law.

 

Example 2: Mr. X promised to pay his wife a household allowance of `5,000 per month. Later the parties separated and the husband failed to pay the amount. Wife sued for monthly household allowance. Held not to be an agreement culminating into a contract enforceable. [Balfour V Balfour (1919)2KB 571]

Example 3: K promised to pay ` 30 to his wife every month. Later, K failed to pay the amount. The wife filed a suit against the husband to recover the amount. The Court held that she could not recover as the promise was not made with an intention to create any legal relationship.

 

2.      Lawful  consideration 

 

consideration  must  not  be  unlawful,  immoral  or  opposed  to

the public policy.

 

For example, a consideration to murder somebody would not be a lawful consideration

3.      Capacity The  parties  to  a  contract  must  have  capacity  (legal  ability)  to  make  valid

contract.

 

1.      Section  11:-  of  the  Indian  contract  Act  specify  that  every  person  is  competent  to contract provided.

·         Is of the age of majority according to the Law which he is subject, and  Who is of sound mind and  Is not disqualified from contracting by any law to which he is subject.

EXAMPLE

 

 

 

·         Person of unsound mind can enter into a contract during his lucid interval.

 

EXAMPLE

 

 

 

 

·          An alien enemy, foreign sovereigns and accredited representative of a foreign state. Insolvents and convicts are not competent to contract.

 

EXAMPLE

 

 

 

 

4.      Free  consent  consent  of  the  parties  must  be  genuine  consent  means  agreed  upon

samething in the same sense i.e. there should be consensus – ad – idem. A consent is  said   to   be   free   when   it   is   not   caused   by   coercion,   undue   influence,   fraud,  misrepresentation or mistake.

 

Example 1 :  X asked Y to sell his car worth ` 2 lakh to him for ` 20,000 otherwise he will expose his illicit relationship. Y signed the agreement in favour of X selling his car to him for ` 20,000. This is not a valid contract as the consent of Y is not free.

 

Example 2 : X claimed that his horse is of Arabian racing breed. Y believing on his statement agreed to purchase his horse for ` 5 lakh. However, later the horse was found to be not of Arabian Racing breeds. This is also not a valid contract as the consent of Y was obtained through misrepresentation of fact

 

5.      Lawful object Ø  The object of agreement should be lawful and legal.

Ø  Two persons cannot enter into an agreement to do a criminal act.

Ø  Consideration or object of an agreement is unlawful if it is

·         forbidden by law; or

·         is  of  such  nature  that,  if  permitted,  would  defeat  the  provisions  of  any law; or

·         is fraudulent; or

·         Involves or implies, injury to person or property of another; or

·         Court regards it as immoral, or opposed to public policy

 

Example 1 :  X promises to help Y in smuggling of goods if Y pays him ` 5,100. This is not a valid agreement as the object is unlawful.

 

Example 2 :  X promises to pay Y ` 51,000 if Y promise to never get married during the life of X. This is also not a valid contract as the object is opposed to public policy.

 

6.      Possibility of performance ·         The terms of the agreement should be capable of performance.

·         An agreements to do act, impossible in itself cannot be enforced.

 

EXAMPLE A agrees to B to discover treasure by magic. The agreement is void because of the act in itself is impossible to be performed from the very beginning.

 

7. The terms of the agreements are certain or are capable of being made certain [29]

 

The terms of agreement must be certain and capable of performance. The meaning of the agreement must be certain or capable of being made certain otherwise the agreement will not be enforceable by law.

 

 For example, D agrees to sell C’ garments. The type, quality, value etc. are not discussed. The agreement cannot be enforced as terms are uncertain. Similarly, if A promises B to bring rainfall through magic. Such agreement cannot be enforced.

 

Example: G has two cars – Maruti and Fiat. He agrees to sell one of his cars to H for ` 20,000. It is not clear as to which of the cars G has agreed to sell. G might be thinking to sell the Maruti car while H might be thinking to purchase the Fiat car. The offer is not definite.

8. Not declared Void

 

·         The agreement should be such that it should be capable or being enforced by law.

·         Certain agreements have been expressly declared illegal or void by the law under various sections of the Contract Act, like agreement in restraint of marriage, trade or legal proceedings, wagering agreement etc.

Example 1 : A knowing that B has committed Bank robbery obtain a promise from B for transferring his flat worth ` 5 lakh to A for ` 2 lakh. This agreement is void and illegal.

 

Example 2 :  A promise to pay B ` 11,000 if B secures him employment in the public service. The agreement is void because of illegality of objects

9. Necessary legal formalities ·         A contract may be oral or in writing.

·         Where  a  particular  type  of  contract  is  required  by  law  to  be  in  writing  and registered,  it  must  comply  with  necessary  formalities  as  to  writing,  registration and attestation.

·         If legal formalities are not carried out then the contract is not enforceable by law.

 

EXAMPLE

 

 

Where it requires an agreement to make a gift for natural love and affection, there it must be in writing and registered, to be valid.

 

 

  1. TYPES OF CONTRACT

Types of Contracts on the basis of

 

 

Validity Formation Performation
Valid Contract Express Contract Executed Contract
Void Contract Implied Contract Executory Contract
Voidable Contract Quasi Contract Unilateral Contract
Illegal Agreement   Bilateral Contract

 Unenforceable Agreement

 

A.ON THE BASIS OF VALIDITY
1. VALID CONTRACT A contract which contains all the essential elements.
2. VOID CONTRACT [SEC. 2(j)] A contract which ceases to be enforceable by law becomes void when it ceases to be enforceable.
EXAMPLE
A contracts with B (owner of the factory) for the supply of 10 tons of sugar, but before the supply is effected, the fire caught in the factory and everything was destroyed.

Here the contract becomes void.

 

3.VOIDABLE CONTRACT 

[SEC. 2(i)]

An agreement, which is enforceable by law at the option of one more of the parties, but not at the option of the other (s) is a voidable contract.
EXAMPLE- A promise to sell his farm to B for ` 5.0 lakh. B was not prepared for this but A by force compelled B to sign the agreement. Here the consent of B was obtained by coercion or fraud. The contract is voidable at the option of B.

A contract brought about as a result of Coercion, Undue influence, Fraud or misrepresentation would be voidable at the option of the person whose consent was caused by any one of these factors.

Basis of difference Void Contract Voidable Contract
Definition Contract ceases to be enforceable by law. Contract is enforceable at the option of the aggrieved party.
Nature Contract becomes void either because of sudden and unexpected events or of law changes, before the performance becomes due. Contract becomes voidable when it is caused by coercion, undue influence, fraud and misrepresentation.
Rights Does not provide any legal remedy for the parties to the contract. The aggrieved gets a right to rescind the contract and to declare it void otherwise it remains valid.
4. UNENFORCEABLE CONTRACT An unenforceable contract is one which is actually valid but cannot be enforced by law due to some technical defects. i.e  under stamping, absence of writing, barred by limitation.
EXAMPLE
 
5. ILLEGAL CONTRACT A contract which is forbidden by law.
For example: – Contract to commit crime. Contract that is immoral or opposed to public policy are illegal in nature. Similarly, R agrees with S, to purchase brown sugar is an illegal agreement.

to commit crime.

Basis of difference Void agreement Illegal agreement  
Scope A void agreement is not necessarily illegal. An illegal agreement is always void.  
Nature Not forbidden under law. Are forbidden under law.  
Punishment Parties are not liable for any Parties to illegal agreements are punishment under the law.  
Collateral agreement It’s not necessary that agreements collateral to void agreements may also be void. It may be valid also. Agreements collateral to illegal agreements are always void. liable for punishment.
Effects Void agreement is not void-ab-initio but may subsequently become void. All illegal agreements are void from the very beginning.  

 

 

B.CLASSIFICATION ON THE BASIS OF CREATION/FORMATION
1. EXPRESS CONTRACT                 A contract which is created either by word spoken or written.
For example: – (i) If ‘A’ of Agra offers to sell his car for Rs. 150000 to ‘B’ of Delhi by a letter and ‘B’ accepts the offer by writing a letter. Thus the contract between ‘A’ and ‘B’ is said to be an express contract.

(ii) P says to Q, “Will you purchase my car for ` 17,000?” It is an oral offer.

(iii) P, through a letter asks Q to buy his car for ` 17,000. It is a written offer.

(iv) A tells B on telephone that he offers to sell his house for ` 2 lacs and B in reply informs A that he accepts the offer, this is an express contract.

 

2.IMPLIED

CONTRACT

The contract which is created otherwise than by words spoken or written. i.e. these contracts are:-

Eg. A delivers by mistake goods at B’s warehouse instead of at C’s place. Here there is an obligation on the part of B to return the goods to A, though they never intended to enter into a contract.

  Tacit   Contract A contract which is inferred from the conduct of the parties is said to be tacit contract.
For example: – (i) When we enter into a bus without asking any question from bus conductor, we enter into implied contract.

(ii) Obtaining cash through automatic teller machine, sale by fall of hammer at an auction sale.

 

3.Quasi Contracts These are the contracts, which are created neither by word spoken, nor written, nor by the conducts of the parties, but these are created by the law.
For example: – If ‘A’ leaves his goods at ‘B’’s shop by mistake, then it is ‘B’’s duty to return the goods or to compensate the price.

In fact, these contracts depends upon the principle that nobody will be allowed to become rich at the expense of the others. This principle is known as doctrine of unjust enrichment.

 

Example: Obligation of finder of lost goods to return them to the true owner or liability of person to whom money is paid under mistake to repay it back cannot be said to arise out of a contract even in its remotest sense, as there is neither offer and acceptance nor consent.

These are said to be quasi-contracts.

 

4. E-CONTRACT An e-contract is one, which is entered into between two parties via internet.

 

C.CLASSIFICATION ON THE BASIS OF PERFORMANCE
1. Executed        Contract An executed contract is a contract in which both the parties have performed their obligation. This is a contract which has been completed.
EXAMPLE When a grocer sells a sugar on cash payment it is an executed contract because both the parties have done what they were to do under the contract.
2. Executory          Contract An Executory contract is the contract which is to be performed in future.
EXAMPLE Where G agrees to take the tuition of H, a pre-engineering student, from the next month and H in consideration promises to pay G ` 1,000 per month, the contract is executory because it is yet to be carried out.

 

3. Unilateral       Contract Where obligation is pending on the part of one of the parties.
EXAMPLE M advertises of payment of a reward of ` 500 to anyone who finds his missing boy and brings him.As soon as B traces the boy, there comes into existence an executed contract because B has performed his share of obligation and it remains for M to pay the amount of reward to B. This type of executed contracts are also called unilateral contract.
4.  Bilateral          Contract A Bilateral Contract is a contract in which obligation is pending on the part of both of the parties.
EXAMPLE Where A promises to sell his plot to B for ` 1 lacs cash down, but B pays only 25,000 as earnest money and promises to pay the balance on next Sunday. On the other hand A gives the possession of plot to B and promises to execute a sale deed on the receipt of the whole amount. The contract between the A and B is executory because there remains something to be done on both sides. Executory contracts are also known as Bilateral contracts.

 

D.ENGLISH LAW CLASSIFICATION
1. Simple Contracts A simple contract is the contract that is not formal. These can be made orally or in writing and must be supported by consideration.
2. Formal Contracts A formal contract is one which is entered into the prescribed form. These contracts may be sub-divided as follows:
a. Contract of Record (i)     Judgment of Court:- It is an obligation imposed by the court upon one or more persons in favour of the other/s.

 

(ii)   Recognizance:-It is a written acknowledgement of a debt due to state. It is met in connection with criminal proceedings.

 

b. Contract under Seal It is a contract which derives its binding force from its form alone. It is also known as deed or specialty contract.

 

CS Executive Conecpt – Membership a Company

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14.1     DEFINITION OF ‘MEMBER’                                               (Sec. 2(55) of 2013 Act)

 

‘Member’, in relation to a company, means –

(i)         the subscriber to the memorandum of the company who shall be deemed to have agreed to become member of the company, and on its registration, shall be entered as member in its register of members; (Subscriber to memorandum)
(ii)        every other person who agrees in writing to become a member of the company and whose name is entered in the register of members of the company; (Person named in the register of members)
(iii)       every person holding shares of the company and whose name is entered as a beneficial owner in the records of a depository. (Beneficial owner of shares)

 

 

14.2     DISTINCTION BETWEEN A MEMBER AND A SHAREHOLDER

 

Nov. 2005       “Every shareholder of a company is also known as a member, while every member may not be known as a shareholder,” Examine the validity of the statement and point out the distinction between a ‘member’ and a ‘shareholder’.

 

May 2012        In what way a ‘Member’ of a company is different from that of a ‘shareholder’ of the company?

Nov. 2012       State whether the following statements are correct or incorrect:

Every shareholder is a member, but every member may not be a shareholder of the company.

 

Basis of distinction Member Shareholder
1.      Definition The term ‘member’ is defined u/s 2(55) of the Companies Act, 2013. The term ‘shareholder’ has not been defined under the Companies Act.
2.      Meaning The term ‘member’ generally means a person whose name is entered in the register of members. The term ‘shareholder’ means a person who holds shares in a company.
3.      Nature of company Every company shall have the minimum number of members, whether it is limited by share capital or guarantee. Only a company having a share capital can have shareholders. A company limited by guarantee and having no share capital does not have any shareholders.
4.      Signatory to memorandum A person who signs the memorandum is a deemed to be a member from the date of registration of the company . A   person   who   signs   the   memorandum  becomes a  shareholder only when the shares are actually allotted to him.
5.      Transferor of shares until change in the register A transferor of shares continues to be a member until his name is removed from the register of members, although he may not be a shareholder. Where a person transfers his shares, he immediately ceases to be a shareholder, even though his name continues to appear in the register of members.

 

14.3     MODES OF ACQUIRING MEMBERSHIP or HOW TO BECOME A MEMBER

 

1.      By subscribing to memorandum §  The fact that a person is a subscriber to memorandum is sufficient to constitute such person a member of the company. The subscribers to memorandum’ of association become members by the fact of subscription (i.e. signing on the memorandum), and not by reason of allotment of shares to him.

§  the subscribers to memorandum become the members of the company immediately on incorporation of the company.

§  No application in writing is required from a subscriber to memorandum.

§  It is immaterial as to whether the shares have actually been allotted to him or not.

§  No entry in the register of members is required to constitute him a member.

§  A subscriber cannot deny his obligation to take shares on the ground that he was induced to sign the memorandum by fraud or misrepresentation.

§  Generally, the subscribers to memorandum are called as ‘founder members’.

2.      By allotment of shares Where shares are allotted to an applicant he becomes a holder of shares. However, he becomes a member only when his name is entered in the register of members.
3.      By transfer The transferee of shares becomes a member only when the transfer of shares is registered by the company, and the name of the transferee is entered in the register of members.
4.      By transmission A person entitled to the shares of a member, as a consequence of transmission, becomes a member when he gives a notice of fact of transmission to the company, and his name is entered in the register of members.
5.      By becoming a beneficial owner of shares A beneficial owner of shares whose name is entered in the records of the depository is called as a member.
6.      By estoppel or acquiescence A person who knowingly permits entering his name in the register of members, becomes a member by estoppel or acquiescence. In other words, if the name of a person is entered in the register of members, although he is not a member, but such person does not object to it (i.e., he does not apply for rectification of register of members), he becomes a member by estoppel.

 

Nov. 2006       Whether a person who does not object to including his name in the register of members is liable to pay unpaid calls on shares?

(Sec. 164)

 

P 14.3A. X had applied for the allotment of 1,000 shares in a company. No allotment of shares was made to him by the company. Later on, without any further application from X, the company transferred 1,000 partly-paid shares to him and placed his name in the Register of Members. X, knowing that his name was placed in the Register of Members, took no steps to get his name removed from the Register of Members. The company later on made final call. X refuses to pay for this call. Referring to the provisions of the Companies Act, examine whether his (X’s) refusal to pay for the call is tenable and whether he can escape himself from the liability as a member of the company.

Ans.

Register of members is a prima facie evidence –        of any matters directed or authorised to be inserted therein by the Act (Sec. 164).
X is a member by estoppels –        since he knowingly permitted entering his name in the register of members.
X is liable to pay the final call –        since a member by estoppel is liable to pay the unpaid calls.

 

14.4     CAPACITY TO BECOME A MEMBER (WHO CAN BECOME A MEMBER)?

 

Nov. 2011       Examine the position of a minor in relation to obtaining membership in a company under the provisions of the Companies Act.

 

1.      Minor Consequences where a company allots shares to a minor If the company allots shares to a minor in ignorance of minority, following consequences shall follow:

(i)     The minor shall not be liable to pay any calls remaining unpaid on the shares held by him.

(ii)   The guardian cannot be compelled to pay the calls due on the shares held by a minor.

(iii) The minor can repudiate the allotment made to him. The minor shall be entitled to receive back the money paid by him.

(iv) The company can repudiate the allotment made to the minor. The minor shall be entitled to receive back the money paid by him.

Consequences where minor attains majority (i)     On attaining majority, the minor does not automatically become a member in a company.

(ii)   If on attaining majority, the minor does anything which shows that he has accepted the membership, the minor shall be henceforth deemed to be a member.

A minor can hold fully paid shares §  There is no legal bar on minor becoming a member of a company, provided minor acquires the shares by way of transfer and the shares
are fully paid up, and no further obligation or liability is attached to such shares [Devan Singh v Minerva Films Ltd.]. Similar judgement
was delivered in S. L. Bagree v Britannia Industries Ltd.

§  In such a case, the shares shall be registered in the name of the minor, i.e. the share certificate shall be made in the name of the minor and the name of the minor shall be entered in the register of members. There is no question of entering the name of the guardian in the share certificate or register of members.

2.      Company §  A company can become a member of any other company only if it is specifically authorised by the memorandum to purchase shares of any other company.

§  A subsidiary company cannot become a member of its holding company (Sec. 19 of the Companies Act, 2013).

3.      Co-operative Society and Society §  A cooperative society is a legal person, and so it has power to hold property. Therefore, a cooperative society can become a member in a company.

§  A society when registered under the Societies Registration Act, 1860 is a legal person, and so it can become a member in a company.

4.      Trade union A Trade Union registered under the Trade Unions Act, 1926 is legal person (i.e., a body corporate) capable of holding property. Therefore, a trade union can become a member in a company.
5.      Partnership firm §  A firm is not a legal person. It cannot hold property in its own name; the property is held in the names of the partners on behalf of the firm. Therefore, a firm cannot become a member in a company.

§  However, a partnership firm may become a member in a company licensed u/s 8.

6.      HUF Hindu Undivided Family (HUF) is not a separate legal person. Therefore, an HUF cannot become a member in a company in its own name.
7.      Trust A trust is not a separate legal person. Therefore, the shares cannot be allotted or transferred in the name of a trust.
8.      Joint holders Two or more persons may hold the shares in a company in their joint names.
9.      Foreigner §  A foreigner can become a member in a company by complying with the requirements of Foreign Exchange Management Act, 1999.

§  In case a war breaks out with such foreign country, the foreigner cannot enforce any right available to the members.

10.  Government CG or SG can become a member in a body corporate.
11.  Insolvent §  The shares of the insolvent vest in the official assignee or the official receiver, as the case may be. However, an insolvent continues as a member until his shares are sold by the official assignee or the official receiver, as the case may be.

§  Until an insolvent is discharged, he cannot become a member.

§  Notice of general meeting is also given to the official assignee or official receiver, as the case may be. However, the insolvent has the right to vote in the general meeting.

 

Nov. 2002       Whether a minor on his father is liable to pay calls where shares are allotted to a minor in response to an application signed by the father of minor?

 

P 14.4A. A company issued 20partly paid equity shares and registered them in the name of the minor describing him as minor. The father of the minor signed the application on the minor’s behalf. After some time company went into liquidation. The company filed a suit against father of the minor to recover the remaining amount on the shares. Whether the company will succeed? Advise.

Ans.

The company cannot recover unpaid calls on shares –        from the minor since an allotment of partly paid shares to a minor does not bind him to pay the unpaid calls;

–        from the father of the minor since signing an application for shares on minor’s behalf does not create any contractual relationship between the father of minor and the company.

 

Nov. 2004       Whether shares can be allotted to a minor and what Is the contractual liability of a minor?

 

P 14.4B. M/s Honest Cycles Ltd. has received an application for transfer of 1,000 equity shares of Rs. 10 each fully paid up in favour of Mr. Balak On scrutiny of the application form it was found that the applicant is minor. Advise the company regarding the contractual liability of a minor and whether shares can be allotted to Balak by way of transfer.

Ans.

The company is advised to transfer fully paid, shares to Mr. Balak –        since a minor can become a member, if the shares are fully paid up;

–        since there is no question of liability of minor if the shares are fully paid up.

 

June 2009       Whether partly paid shares can be transferred to a minor?

 

P 14.4C. X, a minor purchased 500 equity shares of Rs. 10 each of a company, on which only Rs. 5 per share were paid, from the Mumbai Stock Exchange, and submitted an application to the company for transfer of these shares in his name. Examining the provisions of the Companies Act, decide whether these shares can be transferred to X.

Ans.

The company is advised not to transfer portly paid shares to X, the minor –        since a minor is not bound to pay the unpaid calls;

–        since such transfer does not create any contractual relations between the minor and the company;

–        since, if the shares are transferred to the minor, the minor or the company may afterwards, repudiate such transfer.

 

Nov. 2010       Whether the cancellation of allotment of fully paid shares to minor is valid, and whether company is entitled to forfeit the money paid by minor?

 

P 14.4D. RSP Limited allotted 500 fully paid-up shares of Rs. 100 each to Z, a minor, in response to his application without knowing that he was a minor and entered his name in the Register of members. Later on, the company came to know of the fact. The company cancelled the allotment and struck-off his name from the Register of members and also forfeited his entire share money. He filed a suit against the action of the company. Decide whether Z would be given any relief by the court under the provisions of the Companies Act.

Ans.

The cancellation of allotment of shares to minor is not valid –        since a minor can become a member, if the shares are fully paid up;

–        since there is no question of liability of minor if the shares are fully paid up.

Forfeiture of money paid by the minor is not valid –        since the company has no right to cancel the allotment to minor;

–        since even in a case where partly paid shares are allotted to a minor, and afterwards such allotment is repudiated by the company, the company has no right to forfeit the money paid by the minor, i.e. the minor is entitled to receive back the money paid by him.

 

14.5 RIGHTS OF A MEMBER UNDER THE COMPANIES ACT, 2013

  1. Right to obtain the share certificate from the company (Sec. 56).
  2. Right to have his name entered in the register of members (Sec. 88).
  3. Right to transfer his securities (subject to the restrictions contained in the articles and the Act) (Sec. 44 and 58).
  4. Right to receive the notice of general meetings, attend the general meetings and vote thereat (Sec. 101).’
  5. Right to receive the dividend, where a dividend is declared by the company (Sec. 123).
  6. Right to apply to the Court seeking an injunction restraining the directors from paying dividend out of capital (Sec. 123).
  7. Right to inspect and obtain extracts and copies of the registers and indices of members, debenture-holders and other security holders, and annual returns (Sec. 94).
  8. Right to obtain copies of Memorandum and Articles (Sec. 17).
  9. First tight to have the shares offered to him in case of further issue of shares (i.e. the right of pre-emption) (Sec. 62).
  10. Right to apply to the Court to set aside any variation in the rights attached to any class of shares (Sec. 107 of the Companies Act, 1956).
  11. Right to give a special notice so as to move a resolution requiring special notice (provided he is eligible as per the provisions of Sec. 115) (Sec. 115).
  12. Right to receive a copy of special notice when special notice is served on the company (Sec. 115).
  13. Right, to obtain a copy of the minutes of the genera! meeting (Sec. 119).
  14. Right to requisition an Extra-ordinary General Meeting (EGM) of the company (provided he is eligible as per the provisions, of Sec. 100) (Sec. .100).
  15. Right to vote at a.general meeting in respect of any matter requiring an ordinary resolution or a special resolution (Sec. 107 and 109).
  16. Right to vote by means of electronic mode in respect of any matter requiring an ordinary resolution or a special resolution. (Sec. 108).
  17. Right to vote by postal ballot when a resolution is put to vote by the company by way of postal ballot (Sec. 110).
  18. Right to obtain copies of profit and loss account, balance sheet, auditor’s report and other documents (Sec. 136).
  19. Right to- make an application.to CLB seeking an order for calling the AGM (Sec. 167 of the Companies Act, 1956).
  20. Right to make an.application to CLB seeking an order for calling an EGM (Sec. 186 of the Companies Act, 1956).

 

 

 

14.6     HOLDING SHARES BY A COMPANY IN ITS HOLDING COMPANY

(Sec. 19 of 2013 Act)

 

1.      Prohibitions w.r.t. shares in holding company (a)    A company shall not ( either by itself or through its nominees)  hold any shares in its holding company.

(b)   a holding company shall allot or transfer its shares to any of its subsidiary companies.

2.      Effects of contravention Any allotment or transfer of its shares by a holding company to any of its subsidiary companies shall be void.
3.      Exceptions The prohibitions shall not apply in the following 3 cases:
(a)   Shares held as a legal representative Where the subsidiary company holds such shares as the legal representative of a deceased member of the holding company.
(b)   Shares held as a trustee Where the subsidiary company holds such shares as a trustee.
(c)    Shares held before the company became a subsidiary Where the subsidiary company is a shareholder even before it became a subsidiary company of the holding company.
Out of above 3 cases, the subsidiary shall have a right to vote at a meeting of the holding company only in case (a) and case (b).

 

 

May 2014        Company already holding shares in another Becomes a subsidiary of such other company – Consequences                          (Sec.  19 of 2013 Act)

 

P 14.5A. Anson Limited held equity shares in Booban Limited. Later on Anson Limited became a subsidiary company of Booban Limited. Decide under the Companies Act, whether it is necessary for Anson Limited to surrender the equity shares of Booban Limited?

Ans.

Anson Limited con continue to hold equity shares in Booban Limited –        since Anson Limited became a shareholder in Booban Limited even before it became a subsidiary company of Booban Limited.
Anson Limited shall not have any right to vote –        in any general meeting of Booban Limited.

 

14.7     CESSATION OR TERMINATION OF MEMBERSHIP

  1. Forfeiture of shares
  2. Surrender of shares
  3. Transfer of shares
  4. Transmission of shares
  5. Sale of shares of a member by the company, where the company has exercised lien on shares.

 

14.7     ‘TRUE OR FALSE’

 

State whether the following statements are True or False and give reasons (1 Mark each):

 

1. May 2007 A Minor also can become a member of a Company.

Ans. The given statement is false.

Reason: A minor Has no capacity to contract or to incur any obligation. So, he cannot become a member. However, transfer of fully paid up shares to a minor is permissible.

2. Nov. 2009 A transferee becomes a member of the company when the instrument of transfer is submitted with the company.

Ans. The given statement is false,

Reason: As per Sec. 2(55) of the Companies Act, 2013, every person who agrees in writing to become a member of a company and whose name is entered in its register of members, shall be a member of the company. Thus, the transferee becomes a member only when the company gives effect to the transfer deed and enters the name of the transferee in the register of members.

 

Cost Concept – CMA Intermediate

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Define the term “Cost”. Compare it with value and price.

Meaning of cost:-

  • Cost refers to the expenditure incurred in producing a product or in rendering a service.
  • It is expressed from the producer or manufacturer’s viewpoint. (Not that of consumer/end user.)
  • Cost ascertainment is based on uniform principles and techniques. Hence cost is objectively.

Define the terms costing? Cost Accounting and cost Accountancy

 

  1. Costing: – The technique and process of ascertaining costs.
  2. Cost Accounting: – The process of accounting for cost which begins with recording of income and expenditure or the bases on which they are calculated and ends with the preparation of periodical statements and reports for ascertain and controlling costs
  3. Cost Accountancy: – The application of costing and cost accounting principles methods and techniques to the science, art and practice of cost control and the ascertainment of profitability. It includes the presentation of information derived there from for the purpose of managerial decision-making.

 

 

  • List the objectives of Cost Accounting.

 

The primary objective of study of cost is to contribute to profitability through Cost Reduction and Cost Control. The following objective of Cost Accounting can be identified:-

  • (1) Ascertainment of cost: – This involves collection of cost information, by recording them under suitable heads of accounts and reporting such information on a periodical basis.
  • (2) Determination of selling price: – Selling price is influenced by a number of factors. However, prices cannot be fixed below cost, save in exceptional circumstances. Hence cost accounting is required for determination of proper selling price.
  • (3) Cost control and Cost Reduction: – In the long run, higher profits can be achieved only through Cost Reduction and Cost Control. These terms are discussed in detail in a separate Chapter.
  • (4) Ascertaining the profit of each activity: – Profit on each department/ activity/ product can be determined by comparing its revenue with appropriate cost. Hence Cost Accounting ensures profit measurement on an objective basis.
  • (5) Assisting management in decision-making:- Business decisions are taken after conducting Cost –Benefit Analysis. Hence Cost and benefits of each option are analyzed and the Manager chooses the least cost option. Thus Cost Accounting and reporting system assists manager in their decision making process.

 

 

 

  • Define Cost Accounting, its advantages and limitations?

Cost Accounting: –

Cost Accounting is accounting for cost aimed at providing cost data, statements and reports for the purpose of managerial decision making. Cost Accounting “is the application of costing and cost accounting and cost accounting principles, methods and techniques to the science, art and practice of cost control and ascertainment of profitability. It includes the presentation of information derived there from the purpose of managerial decision –making.

The term ‘Costing’ and ‘Cost Accounting’ are many times used interchangeably. However, the scope of cost accounting is broader than that of costing which merely focuses on cost ascertainment. Following functional activities are included in the scope of Cost Accounting:-

  • (1) Cost Book-keeping it involves maintaining complete record of all costs incurred from their incurrence to their charge to departments’ products and service.
  • (2) Cost System Systems and procedures are devised for proper accounting of costs.
  • (3) Cost Analysis It involves and investigation into the uses of actual cost varying form the planned costs and fixation of responsibility for cost increase.
  • (4) Cost Comparisons Cost Accounting also includes comparisons between cost from alternative technologies, cost of different products and activities, and cost of same product or service over a period of time.
  • (5) Cost Control An important function of cost accounting is utilization of cost information for exercising control. This involves an examination of each cost in the light of benefit derived from in finding new and improved methods for reducing costs.
  • (6) Cost Comparison and Cost Control: Cost comparison helps in cost control. Such a comparison may be made from period to period by using the figures in respect of the same firm or of several units in an industry by employing uniform costing and inter –firm comparison methods.
  • (7) Identification of losses and inefficiencies: A good Cost Accounting system helps in identifying unprofitable activities, losses or incurrence of the cost.

 

Importance and Advantage of Cost Accounting:-

The primary advantages of a Cost Accounting System are as under:-

  • (1) Profit Measurement and Analysis: – Costs should be accurately ascertained and matched with revenues to measure profits of a firm. Further, Cost Accounting is useful for identifying the exact causes for decrease or increase in the profit/loss of the business.
  • (2) Cost Reduction: The application of cost reduction techniques operations research techniques and value analysis technique, helps in achieving the objective of economy in concern’s operations. Continuous efforts are being made by the business organization for inefficiencies in any form, so that appropriate actions are taken. The use of Standard Costing and Variances Analysis techniques points out the deviations from pre-determined level and thus demands suitable action to eliminate its recurrence. The cost of idle capacity can be easily worked out, when a concern is not working to full capacity.
  • (3) Financial Decision Making: Manager can obtain relevant information from the Cost Accounting System to serve as guides in making decisions involving financial considerations. Guidance may also be given by the Cost Accountant on various considerations. Guidance may also be given by the Cost Accountant on various decision making issues viz. whether to purchase or manufacture a given component whether to accept orders below cost which machine to purchase when a number of choices are available. The use of Marginal Costing techniques helps managers in taking short –term decisions.
  • (4) Price Determination: – Cost Accounting is quite useful for price fixation. It serves as guide to test the adequacy of selling price. The price determined may be useful for preparing estimates or filling tenders.
  • (5) Dispute and Issue –Solving:- A good cost accounting system provides cost figures for the use of Government, Wages Tribunal and other bodies for dealing and solving issues price taxation, price tariff protection, wages level fixation.

 

Limitations of Cost Accounting

  • (1) Cost Accounting lacks uniformity. Different organizations prepare cost records and reports in different depths detail and form. Even assumptions made regarding various costs differ.
  • (2) There is arbitrariness in apportionment of overheads, allocation of joint costs, and division of costs between controllable, determinations of overhead absorption rates.
  • (3) Cost accounts are prepared in addition to financial accounts. There are, number of costs, e.g. notional costs and decision making costs which do not appear in financial accounts. This necessitates reconciliation of financial profits and cost profit.
  • (4) Cost accounting is only one of the means of achieving cost control, efficiency improvement and motivation. It does not by itself achieve these objectives.
  • (5) Cost accounting has only a limited us in projecting future costs. It needs to be supplemented by various statistical tools.

 

  • What are the essential features of a good Cost Accounting system?

 

To be successful a good Cost Accounting System possesses the following essential features.

  1. Simple and easy to operate: – The system should be tailor-made, practical, simple and capable of meeting the requirement of business concern.
  2. Accuracy of data: – The data to be used by the Cost Accounting System should be accurate. Otherwise it may distort the output of the system.
  3. Relevance of data: The system should handle and report relevant data in use of manager for decision making. It should not sacrifice its utility by introducing meticulous and unnecessary, details.
  4. Management’s Role: The top Management should have a faith in the Costing System and should also provide a helping hand for its development and success.
  5. Participate Role of executives:- Necessary cooperation and participation of executives from various departments of the concern is essential for developing a good system of Cost Accounting.
  6. Cost –effective: – The cost of installing and operating the system should justify the results. The benefits from the system should exceed the amount to be spin on it.
  7. Smooth implementation: The system should be effectively implemented. A carefully phased program should be prepared by using network analysis for the introduction of the system.

 

 

 

 

 

  • What are the Pre-requisites for Installation of Cost Accounting System?

 

Installation of a Costing System:-

A cost accounting system is a set of plans, programs procedures and documentation designed to accumulate costs, assigns them to products, processes and jobs, and report cost information to management at all levels. It assists management in planning, control performance appraise analysis of   product profitability and optimum utilization of physical and financial resources for achieving organizational objectives.

The following consideration should be specifically taken into account:-

  • Design to suit specific needs: – The system should be designed as to serve the specific needs of the organization.
  • In-depth examination or production details: – Before installing the system management should make an, in-depth study of nature of products and processes, technologies, Plant layout, nature of materials used so that the cost accounting system is tuned to the requirement of the business.
  • Cost Benefit Analysis: – The benefit from the proposed cost accounting system far exceeds the cost involved. The best system, if cost exceeds benefits becomes useless.
  • Location of cost Office: – Costing department obtains basic data mainly from accounts department; Most of this data is related to production activity.
  • Codification: – All costs relating to all products of al departments should preferably be coded. This will increase speed in handling and processing of costs. Codification also facilitates computerization of costing system.
  • Continuous Monitoring: – Operation of cost accounting system should be continuously monitored so that deficiencies do not creep in, methodical work is not replaced by short cuts and the system is always kept up –to –date.

Difficulties in Installing Cost Accounting System:-

  1. Lack of enthusiasm and support from top management because they are not fully convinced about the benefits from such system.
  2. Resistance from production staff and people at different levels in other departments because they are fear getting subjected to additional controls.
  3. Resistance from accounting staff as they believe that their work would increase.
  4. Shortage of trained and well qualified staff.
  5. Over enthusiasm to have an unnecessarily detailed costing structure or keeping it too simple due to too much concern for cost.
  6. High cost of installing the system.
  7. Failing to keep the system up-to –date.

 

 

 

 

  • How are costs classified on the basis of Time Period?

 

On the basis of Time Period: – Costs are classified into:-

  • (1) Historical Costs: – Costs relating to the past time period; Cost which has already been incurred.
  • (2) Current Costs: – Costs relating to present period.
  • (3) Pre –determined Cost: – Costs relating to the future period; cost which is computed in advance, on the basis of specification of all factors affecting it.

 

  • How are costs classified on the basis of Behavior, Nature & Variability?

 

On the basis of Behavior/ Nature/ Variability: Costs are classified into:-

  • (1) Variable Costs: – These are costs which tend to vary or change in relation to volume of production. They increase in total as production increase and vice versa e.g. cost of raw material direct wages etc. However, variable costs per unit are generally constant for every unit of the additional output.
  • (2) Fixed cost: – Theses are costs which remain constant at various levels of production. They are not affected by volume of production e.g. Factory Rent, Insurance etc. Fixed costs per unit vary inversely with the volume of production i.e. if production increases fixed cost per unit decrease and vice –versa. Sometimes, these are also known as Capacity Costs or Period Costs.

 

  • (3) Semi- Variable Costs: – These are costs which are partly fixed and partly variable. Theses are fixed up to a particular volume of production and become variable thereafter for that next level of production. Hence they are also called Step Costs. Some examples are Repairs and Maintenance, Electricity, Telephone etc…

 

  • How are costs classified on the basis of Elements?

On the basis of Elements: – Costs are Classified into:-

  • (1) Materials: – Cost of tangible, physical input used in relation to output/ production; e.g. cost of raw materials, consumable stores, maintenance items etc.
  • (2) Labour :– Cost incurred in relation to human resources of the enterprises; e.g. wages to workers, Salary to office staff, Training Expenses etc.
  • (3) Expenses: – Cost of operating and running the enterprise, other than materials and labour; this is the residual category of costs e.g. Factory Rent, Office Maintain Nance Sales man salary etc.

 

  • How are costs classified on the basis of Relationship?

 

On the basis of relationship: Costs are classified into:-

  • (1) Direct Costs:- Costs which are directly related to /identified with/ attributable to a Cost Center or a Cost unit g. Cost of basic raw material used in the finished product wages paid to site labour in a construction contract etc.
  • (2) Indirect Costs- Costs which are not directly identified with a cost center or a cost unit. Such costs are apportioned over different cost centers using appropriate basis e.g. Factory Rent incurred over various departments; Salary of supervisor engaged in overseeing various construction contracts etc.

 

Note: – All indirect costs are collectively called as Overheads, since they are generally incurred over various products (cost unit), various departments (cost centers) and over various head of expenditure accounts.

 

 

  • How are costs classified on the basis of Controllability? What are the aspects affecting Control?

 

On the basis of Controllability: Costs are Classified into:-

  • (1) Controllable Costs: – Costs which can be influenced and controlled by managerial action. However, Controllability is a relative term and is subject to the following factors.
  1. Time: – Certain costs are controllable in the long run and not in the short run.
  2. Decided at a particular location/cost center. If rent agreements of all factory premises are executed centrally at the Head Office, factory manager cannot control the incurrence of cost.
  3. Product/ Output: – Certain costs are controllable by reference to one product or market segment and not by reference to the other. For example, cost of common raw material input for exports is lower than that of domestically sold goods since excise duty concession/duty drawback is available for export sales.
  • (2) Non-controllable Costs- These are costs that cannot be influenced and controlled by a specific member of organization. The line of difference between controllable and non-controllable costs is thin.

 

              Note: – No cost is uncontrollable. Controllability is subject to the factor laid down above.

  • How are costs classified on the basis of Normality?

        On the basis of normality: Costs are classified into;-

  • (1) Normal Cost: – Cost which can be reasonably expected to be incurred under normal, routine and regular operating conditions.
  • (2) Abnormal Cost: -Costs over and above normal cost; which is not incurred under normal operating conditions e.g. fines and penalties.

 

  • Enumerate the types of Costs on the basis of Functions.

 

         On the basis of Functions: Costs are classified as under:-

  • Production Cost: – The cost of the set of operations commencing with supply of materials, labour and services and ends with the primary packing of product. Thus it is equal to the total Direct Materials, Direct Labour, Direct Expenses and Production Overheads.
  • Administration Cost :- The cost of formulating the policy, directing the organization and controlling the operations of the undertaking, which is not directly related to production, selling, distribution, research or development activity or function. Some examples are Office Rent. Accounts Department Expenses, Audit and Legal Expenses, Directors Remuneration etc.
  • Selling Cost: – The cost of seeking to create and stimulate demand and of securing orders. These are sometimes called marketing costs. Some examples are Advertisement, salesman Remuneration, Show –room expenses, Cost of samples etc.
  • Distribution Cost: – The cost of the sequence of operations which begins with making the packed product available for dispatch and ends with making the reconditioned returned empty package, if any available for re-use. Some examples are Distribution Packing (secondary packing), carriage outwards, maintenance of delivery vans, expenditure incurred in transporting articles to central or local storage, expenditure incurred in moving articles to and from prospective customers (as in Sale or Return) etc.
  • Research Cost: – The cost of researching for new or improved products, new applications or materials or improved methods.
  • Development Cost: – The cost of the process which begins with the implementation of the decision to produce anew or improved product, or to employ a new or improved method and ends with commencement of formal production of that product of by that method.
  • Pre-production Cost: – The part of development cost incurred in making a trial production run prior to formal production.
  • Conversion Cost: – The sum of direct wages, direct expenses and overhead cost of converting raw materials to the finished stage or converting a material from one stage of production to the other.

 

  • Write short notes on period costs and product cost. Why should product costs be computed?

 

On the basis of Attributability to the product: – Costs are classified into

  • Period Costs: – Theses are costs which are not assigned to the product but are charged as expenses against the revenue of the period in which they are incurred. Non-manufacturing costs e.g. Selling and Distribution Costs are generally recognized as period costs. These costs are not included in inventory valuation.
  • Product Costs:Theses are costs which are assigned to the product and are included in inventory valuation. These are also called as Inventorial costs. Under absorption Costing, total manufacturing costs are regarded product costs while under marginal costing, only variable manufacturing costs are considered.

The Purpose of computing products costs are as under:-

  1. Preparation of Financial Statements: – Focus on inventory valuation and reporting profits.
  2. Product Pricing: – Focus on costs assigned and incurred on the product till it is made available to the customer/ user.
  3. Cost- plus Contracts with Government Agencies: – Focus is on reimbursement of costs specifically assigned to the particular job/contract.

 

 

 

  • List out the various items of costs on the basis of relevance to decision making.

 

On the basis of Relevance to decision making: – costs are classified into:-

  1. Relevant costs viz., Managerial Costs, Differential Costs, Opportunity Costs etc.
  2. Irrelevant Costs viz., Absorbed Fixed costs, Sunk Costs, Committed Costs etc.

Relevant Costs: – These are costs which are relevant and useful for decision making purpose.

 

  • Marginal Cost –Marginal costs is the total variable cost i.e. prime cost plus variable overheads. It is assumed that variable cost varies directly with productions whereas fixed cost remains fixed irrespective of volume production. Marginal Cost is relevant cost for decision making as this cost will be incurred in future for additional units of production.

Differential Cost- It is the change in costs due to change in the level of activity or pattern or method of production. Where the change results in increase in cost it is called incremental cost, where if costs are reduced due to decrease of output, the difference is called decremental costs.

  • Opportunity Costs- This refers to the value of sacrifice made or benefit of opportunity foregone in accepting an alternative course of action, for example a firm may finance its expansions plan by withdrawing money from its bank deposits. In such a case the loss of interest on the bank deposit is the opportunity cost for carrying out eh expansion plan. Opportunity cost is relevant cost where alternatives are available. However, opportunity cost does not find nay place in formal accounts and is computed only for decision making and analytical purpose.
  • Out of pocket costs- These are costs which entail current or near future outlays of cash for the decision at hand as opposed to costs which do not require any cash outlay such as depreciation. Such costs are relevant for decision making as these will occur in near future. It is that portion of total cost s which involves cash outflow. This concept is a short –run concept and is used in decision relating to fixation of selling price in recession, make or buy, etc. Out of pocket costs can be avoided or saved if a particular proposal under consideration is not accepted.
  • Replacement cost – It is the cost at which there could be purchase of an asset or material identical to that which is being replaced or revalued. It is the cost of replacement at current market price and is relevant for decision making.
  • Imputed Costs – These are notional cots appearing in the cost accounts only e.g. notional rent charges, interest on capital for which no interest has been paid. Where alternative capital investment projects are being evaluated, it is necessary to consider the imputed interest on capital before a decision is arrived at, as to which is the most profitable project.
  • Discretionary costs – These are “escapable” or “avoidable” Costs. These can be avoided if a particular course of action is not chosen. In other words, these are costs, which are essential for the accomplishment of a managerial objective.

 

  1. Irrelevant Cost:These are costs which are not relevant or useful for decision –making.
    • Sunk Cost: – It is a cost which has already been incurred or sunk in the past. It is not relevant for decision making and is caused by complete abandonment as against temporary shut down. Thus, if a firm has obsolete stock of materials amounting to Rs 10,000 which can be sold as scarp for Rs 2,000 or can be utilized in a special job, the value of opening stock of Rs 10,000 is a sunk cost and it not relevant for decision making.

 

  • Committed cost: – A cost which has been already committed by the management is not relevant for decision making. This should be contrasted with discretionary costs, which are avoidable costs.

 

  • Absorbed Fixed Costs- Fixed costs which do not change due to increase or decrease in activity is irrelevant for decision –making. Although such fixed costs are absorbed in cost of production at a normal rate, they are irrelevant for managerial decision –making. However if fixed costs are specific, they become relevant.

Write short notes on Explicit and Implicit Costs.

  1. Explicit Costs – These are also known as out of pocket costs. They refers to costs involving/ immediate payment of cash, Salaries, wages, postage, and telegram, printing and stationery, interest on loan, etc. are some example of explicit costs involving immediate cash payments.
  2. Implicit Costs – These costs do not involve any immediate cash payment. They are not recorded in the books of accounts. They are also known as economic costs or imputed costs.

 

  • Define the terms (a) Estimated Costs (b) Shut down Costs and (c) Absolute Costs
  1. Estimated Costs ;- Kohler defines estimated costs as “the expected cost of manufacture or acquisition , in terms of a unit of product computed on the basis on information available in advance of actual production or purchase”. Estimated costs are prospective costs since they refer to prediction of costs.
  2. Shut down costs- These are costs which continue to be incurred even whine a plant is temporarily shut-down e.g. rent, rates, depreciation, etc. These costs cannot be eliminated with the closure of the plant. In other words, all fixed costs which cannot be avoided during the temporary closure of a plant will be known as shut down costs.
  3. Absolute cost: – These costs refer to the cost of any product, process or unit in its totality. When costs are presented in a statement form, various cost components may be shown in absolute amount or as a percentage of total cost or as per unit cost or all together. Here the costs depicted in absolute amount may be called absolute costs and are base costs on which further analysis and decision are based.

 

  • Explain various types of Cost in Brief?

Total Cost: – This is the sum of all the items of expenses whether paid or not which have been insured in the production sale or distribution or in rendering of a service.

 

  • What are the parameters of Cost expressions?

Cost is expressed by reference to the following parameters:

  1. Time parameter- Cost period
  2. Location parameter – Cost center
  3. Output/ Product parameter – Cost unit

 

  • What is meant by Cost Period?

The period to which the Costs relates is called Cost period. It is also called the Control period since cost ascertainment is for the purpose of control. Generally, the cost period is shorter than the financial period used for reporting purposes.

For example, if the production process for converting raw material into finished product requires 15 days, it may be considered as a Cost period.

  • Define a Cost Unit. Give suitable illustrations.

Cost unit: – It is a unit of production, services or time or combination of these, in relation to which costs may be ascertained or expressed. It should be one with which expenditure can be most readily associated.

An appropriate cost unit should be selected keeping in view of the following:-

  • Cost units should suit the business
  • It should be most natural to the business
  • Cost unit should be readily understood and accepted by all
  • Cost unit should be uniformly maintained over a period of time and should be same or similar products

Cost units differ from one business to the other. They are usually units of physical measurement like number, weight, area, volume, time length and value. Some illustration of cost units are as follows:-

Examples of Cost units and Methods of Costing In various industries.

 

Bricks Per 1,000 bricks Unit Costing
Cement Per ton Process Costing
Road Construction Per kilometer or per mile Job costing
Advertising Each job Job
Interior Decoration Each job Job
Made to Order Number Job costing
Readymade Number Batch costing
Tyres and Tubes Batch Each Batch costing
Toy Each batch Batch costing
Pharmaceuticals 1,000 nos.., tablets, strips, capsules, Batch Costing
Water supply Per 1,000 liter Operating Costing
Bus service Passenger –kilometer Operating Costing
Education Per student hour Operating costing
Electricity Per kilowatt hour Operating costing
Goods Transport Per ton-mile or per ton –kilometer Operating costing
Hospital Per bed per day / per out patient Operating Costing
Hotel Per guest per day or per guest, per meal etc Operating costing
Bridge Construction Each contract Contracting costing
Ship Building Each ship Contract costing
Mining Per ton Process costing
Petrochemical Tons, Gallons liters Process costing
Steel Per ton Process Costing
Textile Per meter Process costing
Sugar Per tone Process
Paper Per kg/tone Process
Chemical Per kg/liter/tone Process
Fertilizer Per tone Process
Oil Refinery Per gallon Process
Automobile Number Processing
Colliery Per tone Output
Bicycle Manufacturing Number Multiple costing

 

What is a Responsibility Center? What are its types?

Meaning:

  • It is an activity center of a business organization entrusted with a special task.
  • It is a unit of function of a business organization headed by an executive responsible for its performance.

Types of Responsibility Centers: –

Particulars Cost Center Revenue Center Profit Centers Investment Centers
Meaning A Center for which a standard amount of cost is predetermined and used for control. A center devoted to raising revenue (no responsibility for production) A center whose performance is measured in terms of income earned and cost incurred (profit earning) A center responsible for earning profits and also for asset utilization.
Primary Responsibility Cost reduction and cost control. Generation of sale revenue. Budgeted profits less actual profits Budgeted ROI less actual ROI
Performance evaluation

 

  • Write short notes on Cost Center? Discuss the various types of Cost Centers.

Cost Centre: A center refers to a section, segment or subdivision of an organization of which costs are charged. A cost centre is “location, person or it’s of equipment (or group of these) for which costs may be ascertained and used for the purpose of control”. For example a cost center may be

  • Allocation e.g.., department’s sales territories etc.
  • A person e.g., engineers salesman, machine operators etc.
  • An item of equipment, e.g., machines delivery vans etc.

 

Classification:-

Based on type: –

Personal Cost Center Impersonal Cost Center
It consists of a person of group of persons. It Consists of a location or an item of equipment (or group of these)

 

Based on Role:-

 

Production cost center Service Cost center
It is a cost centre where raw material is processed and converted into finished product. It is a cost centre which serves as an ancillary unit and renders service to a production cost centre.
Here both direct and indirect costs are incurred. Here only indirect costs are incurred. There are no direct costs as there is no measurable and saleable output.
Machine shops, welding shops and assembly shops are examples of production Cost Centers. Power- house, Gas production shop, material service centers, plant maintenance centers are example of since cost centers.

 

  • Based on Activity : –

 

Operation Cost Center Process Cost Center
It consists of machines and or persons carrying out similar operations. It consists of machines and /or persons, engaged on a specific process or a continuous sequence of operations.
All machines operations performing the same operations are brought together under a Cost Center, the process being ascertainment of cost of each operation irrespective of its location inside the factory. Cost is analyzed and related to a series of operations in sequence. Generally, these constitute a single location, as in Oil Refineries and other process industries.

 

  • Define the Advantages of Value Analysis

Advantages of value analysis are:-

  • It is a powerful tool of cost reduction which leads to direct improvement in profitability.
  • It improves customer goodwill and thereby helps to maintain and increase sales. This is because value analysis makes a close study of the product to provide higher satisfaction to customers in respect of use value and esteem value.
  • Value analysis ensures higher productivity by continuous process of searching for improvement in all fields.
  • It helps in achieving greater production from a given amount of resources of capital employee time, space etc.
  • Simplification and standardization of design and methods solve crisis caused by extensive verity and complex methods.
  • It raises the moral of employee and infuses in them a spirit of co-operation.
  • Distinguish Cost Accounting and Financial Accounting?

Comparison of Cost Accounting and Financial Accounting

Basis Financial Accounting Cost Accounting
Purposes To prepare P & L A/c and Balance sheet for presentation to shareholders and other external users. To provide details cost information to management i.e. internal user.
Statutory requirement This is mandatory under Companies Act. Income Tax Act etc. It is voluntary except in specified in specified industries
Cost & Profit Analysis It is reveals overall profit /loss and cost. It reveals cost and profit or loss of each product, department etc.
Control aspect It lays emphasis on recording to Transactions. It lays emphasis on cost control.
Periodicity P & L A/c and Balance sheet Reported Annually. Cost statements are regularly and frequently prepared at short intervals and presented to management.
Past and Future Cost It is concerned with past records. It is concerned with past and future costs.

 

  • What is Direct Expenses or chargeable Expenses

Direct Expenses or Chargeable Expenses:These are expense which can be allocated directly to jobs, products, processes, cost centers or cost units. According to CIMA, London, Direct Expenses are cost other than material and wages which are incurred for a specific product or saleable services.

    Nature of Direct Expenses:

  • These are expenses other than Direct Material and Direct Labour
  • These are either allocated or charged completely to cost center or cost unit.
  • These are included in the prime cost of a product.

Examples:-

  • Hire charges of special machinery or plant for a particular production order or job.
  • Payment of royalties
  • Cost of special models, designs and patterns
  • Experimental cost before undertaking the concerned job
  • Traveling and conveyance expenses incurred in connection with a particular job
  • Sub- contracting expenses or outside work costs, where jobs are sent out for special processing.

 

  • Explain various methods of costing.

Businesses vary in their nature and in the type of products or service they produce. Hence different methods of cost ascertainment are used in different business. The output has to be cost so that costing methods to be employed are also determined with due regard to the method of production and the unit of cost used. The various methods of costing can be summarized as under:

Job Costing – Under this method, the cost of each job is ascertained separately. It implies that the direct cost of each job is traceable and identifiable. It is suitable in all cases where work is undertaken on receiving a customers order/ assignment. Some examples are: printing press, motor workshop, etc

Batch Costing: – it is extension of job costing. It is used where the output under a particular work order consists of similar units. It may not be economically feasible to ascertain cost per unit. Hence a collection or lot of units called a batch is taken for cost ascertainment purposes. Each batch is treated as unit of cost and thus separately coasted. Here cost per unit is determined by dividing the cost of the batch by the number of units produced in the batch. Examples: – Pharmaceuticals, production of component parts like cycle rims, TV monitor screens etc in bulk for subsequent assembly.

Contract Costing: – A larger job is called a contract. Generally, execution of work is distributed over two or more financial years. Hence, the cost of each contract is ascertained separately. It is suitable for firms engaged in the construction of bridges, roads building etc.

Single or Output Costing: – Cost is ascertained for a product, the product being the only one produced like bricks, coals, etc.

Process Costing and Operation Costing: – The cost of completing each stage of work is ascertained like cost of making pulp and cost of making paper from pulp. In mechanical operations, the cost of each operation may be ascertained separately the name given is operation costing.

 

Operation or Service costing: – Ascertainment of cost of rendering or operating a service is called Service Costing or Operating Costing. It is used in the case of concerns rendering service like transport, cinema, hotels, etc where there is no identifiable tangible Cost unit.

Multiple Costing: – It represents a combination of two or more methods of costing outlined above. For example, if a firm manufacturing bicycles including its components; the parts will be costed by batch costing system but the cost of assembling the bicycle will be computed by the single or output costing method. This whole system of costing is known as multiple costing.

The following table summarizes the various methods of costing applied in different industries:-

Nature of output Method Cost Ascertainment Examples of Industries
Customers Specifications: –

Single unit

Job Costing For each order/ assignment/ job Automobile workshop/ Interior Decoration
Number of similar units Batch Costing For each batch/ lot of units produced Printing press- for Cards invitations etc/pharmaceuticals
Execution of work Contract Costing For each contract Civil Construction /Ship Building
Similar units of a single product produced by : single process Unit or output or single costing For the entire activity, but averaged for the output Quarries, Brickworks, Colliery, Paints etc
A series of process Process Costing  or Operation Costing For each process or operation Oil, Refining, Breweries, Chemicals etc
Consisting of multiple varieties of activities and processes Multiple Costing Combinations of any of the methods listed above. Bicycle Assembly
Rendering  of Services Operating Costing For every type of service Transport, Hotels, Cinema

 

 

 

 

 

 

  • What do you mean by “Technique of Costing”?

 

       

In addition to the above methods of costing there are certain techniques of costing which are used along with any of the above method. Theses techniques serve the special purpose of managerial control and policy. Some of the important techniques are as follows:-

1)   Standard Costing It is a valuable technique of cost control.
2)   Budgetary Control It is also a technique that is used to control costs
3)   Managerial costing

 

 

It is also technique to help the management in decision making and profit planning. In this technique, only variable costs are charged to products and fixed costs are treated as period costs and transferred to P & L A/c.
4)   Absorption costing

 

As against marginal costing in this technique total cost i.e. fixed and variable charged to products.
5)   Uniform costing

 

 

It is a system whereby several undertaking uses the same costing principles and practices so as to make cost data comparable.

 

  • What are the types of cost ascertainment?

 

For ascertaining cost following types of costing are usually used: –

  • Uniform Costing:When a number of firms in an industry agree among themselves to follow the same system of costing, by adopting common technology for various items and processes they are said to follow a system of uniform costing. Such a system of cost ascertainment facilitates inter-firm comparison, determination of true costs of the industry.
  • Marginal costing: – It is defined as the ascertainment of marginal cost by differentiating between fixed and variable costs. It is used to ascertain effect of changes in volume or type of output on profit. It is a tool of decision making on various management issues. Under this method, stocks are valued at variable cost. Fixed costs are treated as period costs and are not included in Stock valuation.
  • Absorption Costing:It is the practice of charging all costs, both variable and fixed to operations, process or products. Stocks are valued at cost inclusive of proportionate amount of fixed cost. This differs from marginal costing where fixed costs are excluded.
  • Direct costing:It is practice of charging all direct costs to operations processes or products leaving all indirect costs to be written off against profits in which they arise. It may be distinguished form Marginal costing, where only variable costs are identified with products.
  • Standard Costing: – It is the name given to the technique whereby actual costs are compared with already set standards. It thus a technique of both cost ascertainment and cost control. This technique may be used along with any method of costing. It is especially suitable where the manufacturing method involves production of standardized goods of repetitive nature.
  • Historical Costing:It is the ascertainment of costs after they have been incurred. This type of costing has limited utility.

 

  • What is difference between Cost estimation and Cost ascertainment?

 

Cost estimation: – Cost estimation is the process of predetermining the cost of the certain product or job. This predetermination of cost is based upon budgetary control, standard costing and variance analysis. Cost estimation is made to take the decision regarding buy/make or to fix the sale price of the product etc.

Cost ascertainment:Cost ascertainment is the process of determining the cost on the basis of actual data. Hence, computation of historical cost is called Cost ascertainment. Cost estimation and ascertainment are interrelated and very important to the management to have a sound costing system. The ascertainment of cost greatly helps in cost estimation of future period.

 

  • List some reports provided by the Cost Accounting department for decision making purpose.

The following is an illustrative list of reports and statements provided by the Cost Accounting Department for the use of managers for decision making purpose.

  1. General : –
    • Cost sheet: Setting out the total cost, analyzed into various elements of cost, giving comparative figures for various periods and or various departments.
    • Reconciliation of actual profit earned with estimated or budgeted profit.
    • Reports of Capital Expenditure, R & D Expenditure etc., compared with budgets.
  2. Material :
  • Materials Consumption Statements, showing total quantity of material issued for production, materials actually used in production and wastage.
  • The total cost of abnormally spoiled work in the factory and abnormal losses in the store. The total cost of inventory carried of raw materials, work in process and finished stock; the number of months for which stocks would be sufficient ( on the basis of average consumption)
  1. Labour
  • Labour utilization statements providing details about the total number of hours paid for, standard hours for the output, idle time hours, cost and causes thereof.
  • Labour turnover and the cost of recruitment and training of new employees.
  • Labour Overtime payment statement and the causes thereof.
  1. Overheads :
  • Overheads incurred compared with budgets.
  • The difference between the amount actually incurred (Actual Overheads) and The amount charged (Absorbed Overheads)
  1. Sales: –
  • Sales effected compared with budgets.
  • Statement or reasons for difference between budgeted and actual sales viz.., price, Quantity, Sales Mix etc.

IPCC – Tax – Residential Status

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Fundamental

 

  • Residential status is determined for each category of person separately e.g. there are separate set of rules for determining the residential status of an individual and separate status for companies
  • Residential status must not be confused with the nationality or citizenship of the assessee. These are entirely different concepts.
  • It is not necessary that a person who is resident in India can’t become resident in any other country for the same AY. A person may be resident in more than one country at the same time for tax purpose as well as she/he may also enjoy two domiciles simultaneously.
  • The residential status under I.T Act has no connection with the provisions for residency under the Foreign Exchange Management Act or any other law in India. A person may be resident under FEMA and yet be non-resident under the T. Act and vice versa
  • Residential status of person is to be determined for every Previous Year because it may change fm year to year.
  • If a person is resident in India in a PY relevant to an AY in respect of any source of income, he shall be deemed to be resident in India in the PY relevant to the AY in respect of each of his other sources. [Section-6(5)]
  • Residential status of assessee does not depend upon the residential status of his/ her relative.

For example:-

If assessee’s husband is resident in India, it does not mean that assessee is also resident in India.

  • India includes territorial water of India.

   For example:

If an individual says on a ship, which is in territorial water of India , then It would be treated as his  presence in India.

KEY POINTS

  1. “Territorial water” means that portion of the sea which is adjacent to the shores of the country. Territorial water extends up to 12 nautical miles from the base line on the coast of India . [1NM=1.853 KM]

Indian Citizen has not been defined in the I.T .Act. As per Citizenship Act, 1955, the various modes of acquisition of citizenship are as follows:

  1. Every person who born in India’
  2. A person born outside India , but at the time of his/her birth any of his parents is a citizen of India;
  • Person who are married to citizen of India
  1. Person after residing in India 5 Years makes an application for citizenship;
  2. If a new territory becomes a part of India , person residing in that territory;
  3. By application for naturalization to the Govt. of India

 

 

 

Residential Status

 

 

                                                                                               Ordinary Resident                            OR/ROR

                                               Resident in India

                                                                                              Not Ordinary Resident

 Person                                                                                                              NOR/RNOR

                                                               NR

                                             Non – Resident in India

 

 

 

Person                                 Individual

                                               HUF

                                            Company             

Who can earn                      Firm/LLP/AOP/BOI s

                                               Others

  Residential Status of HUF-section6( 2)

Family Business or Family Income

 

 Karta

 

 

 

Section 6(2):- Residential Status of HUF-

If Control and management of Family is situated

 

 

                             

                                            Wholly or                                                                                     Wholly Outside

                                             Partly in India                                                                             OUTSIDE India

              

                                                HUF= Resident                                                               HUF =     Non –Resident

Case law –CIT vs Nandlal Gandalal[1960]

As per supreme court,control means de-facto control & not mere right to control.Therefore,if  karta has delegated his power to other person(known as De-facto karta),place where decision have been by such de-facto karta,shall also be considered while checking residential status.

NOTE-for determining whether HUF is resident or not, the residential status of the Karta is not at all relevant. But for determining whether the HUF is ordinarily Resident in India or not, Karta (including all successive karta)status for the preceding year become important.

Problem 1.HUF is situated in Delhi whose karta is Mr.John.Mr. john has been in India  since 1.1.2011 and before that he was in UK. Mr.john takes all decision regarding the working of HUF in India. Determine residential status of HUF for the AY 2016-17.                                                                                                                                       [R & OR]

Problem2.HUF is situated in Mumbai.Its karta is Mr.David,who is 92 years of age has delegated power to his eldest son Mr.john. Mr.David is in USA for his Medical treatment and left India for the 1st time on 18.09.2014.Mr.john has full control over affairs of HUF.Mr.john exercises partial control from India and partially from Nepal.calculate residential status of HUF and karta Mr.David for the A.Y 2016-17.                            [ Karta -David-NR,HUF-R & OR]

 

 

 

 

Section6 (4):- Residential Status of Firm /LLP  /AOPs / BOI /Other

                                                                                             Partnership firm                                                      Body Of  Individual

                                                                                                           Limited liability Firm 

                                                                                                                                                      Association of person

Note-Firm & AOP/BOI ,if resident,are not to be classified as ROR & RNOR.

 

 

Section 6(3):- Residential Status of Company

Company

                                                                                  Indian Company                                                                Foreign Company

 

 

 

                                                                          Always Resident                                                                            POEM

 Outside India
    In India

 

 

 

 

    Non –     Resident

 

Resident

 

 

 

 

 

 

  • Indian Company

. Registered office in India

.Company Registered under Indian company act.2013 or any previous law

  • Place of Effective Management[POEM] ………FA.2015

It means A place where Key management and commercial decisions that are necessary for the conduct of business of an entity as a whole  are ,in substance mode.

A set of principle to be followed in determination of POEM would be issued for the guidance of the taxpayer as well as tax administration.

 

Problem3.Tata limited is a company incorporated in India and which has its registered office in Mumbai. For the P.Y  2015-16,The place of effective management  of it is situated in Nepal. Determine its residential status for the A.Y  2016-17.

Problem4. Vijay ltd.is incorporated in India .it carries on  business in new Delhi and London. Th place of effective management is situated in USA. 80% of total income of the company is from the business in London .Prakash ltd.is incorporated in Nepal but its place of effective management holds in India. Discuss the residential status of  vijay ltd. & prakash ltd for A.Y 2016-17.

 

  • section 6(1) Resident in india

An individual is said to be resident in India in any PY if he satisfies any one of the following two basic condition –

  • If he/she is physically present in India at least 182 days or more during the RPY.

or

  • If he /she were physically present in India at least 60 days or more during the RPY & 365 days during last 4 years immediately preceding the RPY.

 

Key Points

 

  • Exception- Special Person
  1. Indian citizen who leaves India during the PY for employment purpose
  2. Indian Citizen who leaves India during the PY as a crew member of an India ship.
  3. An Indian citizen or a person of Indian origin, who normally reside outside India, comes on a visit to India during the PY

 

  • Non resident in India

If an individual does not satisfy any of the above condition given u/s 6(1) she/he will be a non-resident  in India for the relevant PY.

 

  • Resident and ordinarily resident (ROR). [Section 6(6)]

 

As per section 6(6) A resident individual is said to be ROR in India if he satisfies both the following additional conditions :-

  1. He/she has been resident in India at least 2 out of 10 PY immediately preceding the RPY.

And

  1. He/she has been in India for at least 730 days during 7 years immediately preceding the RPY.

 

 

  • Resident but not ordinarily Resident (RNOR)

If an individual does not satisfy any one or both the additional conditions, then he/she will be treated as resident but not ordinarily resident.

 

 

Section 6(1):- Residential Status of INDIVIDUAL

 

Stay in India at least 182 days or more during RPY
Basic Condition
Stay in India at least 60 days or more during RPY +365 days or more during last 4 PY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Example -1

 

 

      10                    11             12               13               14                15                      16

 

                                         60           70           100               —                190

 

 

 

                                                                                                                          ?

 

 

 

 

Find out the residential Status for the Previous Year 2015-16

 

Example-2

10        11           12                  13               14                     15                        16 

 

 

200             —                  —               100                            70

?                     

 

Find out the residential Status for the previous year 2015-16

Example-3

10             11          12                   13                14                     15                        16     

                         100              —                  200              70                        90

 

 

Find out the residential Status for the Previous Year 2015-16

Example:4-

10              11                  12                13                     14                     15                       16

                          —                   90              100                   200                  55

 

 

                                                                                                                      ?                              

Find out the Residential status for the Previous Year 2015-16

Answer:        

 

Section 6(1):- Residential Status of Individual

                                                          Special Person                                               Normal Person                   

                                                        He satisfies first                                              He satisfies any one out of

                                                          Basic condition                                               two basic Condition                     

 

 

                                    

                                    No                                                 Yes                      Yes                                                      NO

                                    

 

Resident

                                                                   

                                                                                 Both Additional Conditions

 

 

                                 Yes                ROR                                                                                       NOR                     NO

 

Points to be remembered

  1. Bothe the day of arrival and the day of departure should be taken as the day of stay in India.
  2. Official tours abroad in connection with employment in India shall not be regarded as employment outside India
  3. “Relevant PY” means the PY for which the residential status is being determined.
  4. Stay at the same place in India is not necessary.
  5. Continuous stay in India is not necessary
  • Meaning of Person of Indian Origin[115C(e)]

A person shall be deemed to be a person of Indian origin if he or either of his parents or any of his grandparents , was born in undivided  India [ i.e. Before 1947 ].India includes Pakistan and Bangladesh.Grand -parents includes paternal grandparentd or maternal grand parents.

Problem5.Mr. john is unemployed in India and get a job in the US.He leaves India to join his duties in the US.Now Mr.John is leaving India for employment outside India. Discuss his  residential status?

Problem6.Mr.Ram is working  in MNC in India.He sent to the Uk by the company for 3 years. Now Mr.Ram is leaving India for employment outside India. Discuss his residential status?

Problem7.Mr. jai an Indian citizen, who is appointed as auditor  by a reputed company of USA, and leaves India for the 1st time on 13.09.2014.During P.Y 2015-16,he comes to India on a visit for 175 days. Determine  his residential status of Mr.jai for A.Y 2016-17.                                                              [NR]

Problem 8.An Indian company deputes its employee Mr.Manoj to the UK for a period of two years starting from 1.07.2015.Income tax authorities contended that Mr.manoj is not unemployed at the time of leaving India,hence the provision of 60days stay in India would be applicable and therefore Mr.manoj is a resident in India.Decide whether he is resident or a non resident.

Problem9.Mrs. Sunita Williams (citizen of USA), a famous astronaut,comes to India on 2.10.2015 to visit her grandmother who was born in Gujrat in 1935.she stay in India till 26.01.2016 and then leaves for USA. Calculate her Resedential status for A.Y 2016-17                                                                               .[NR]

Problem10.Mr.john is a foreign cricketer and has been coming to India for 100 days every year since 2008-09.Determine his residential status for A.Y2016-17.                                                        [R&NOR]

Problem 11.Determine the residential status of Mr.R who is citizen of Australia,for the AY.206-17,who stays in India as follows-

    Previous  year No of days in India      Previous year No of days in india
      2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

        100

86

91

80

91

89

      2010-11

2011-12

2012-13

2013-14

2014-15

2015-16

 

            90

89

94

197

75

85

                                                                                                                                                                      [R&NOR]

Problem12.Mr.john is a citizen of Australia and has been staying in India since 1.01.2009.He leaves India on 16.07.2015 to visit Australia and return on 4.01.2016.Determine his residential status for the A.Y 2016-17.                                                                                                                                                  [ R&OR]

                                                                                                                                                 

Problem13.Mr.R and Mrs.R are citizen of USA. They come to India on 1.10.2015. for a seven month.Both have been coming to India earlier and the data for their stay is given to you-

       Previous year  No of days in India of Mr.R  No of days in India of Mrs.R
          2011-12

2012-13

2013-14

2014-15

         118

Nil

330

235

               120

28

30

365

Calculate the residential status of Mr.R and Mrs.R for A.Y  2016-17.        [Mr.R & Mrs.R both …R&NOR]

 

 

Section 5

Scope of Income Tax Incidence

 

Types of Income                R& OR             R & NOR                    NR
Income accrues India from Profession which Is setup in India.  

 

 

 

 

 

Income Received or deemed to be received in India.

 

 

 

Income accrues or deemed to be accrued in India

 

 

           ×
Income from business situated outside India it has been controlled from India or

 

 

           ×
 

Other Incomes

 

                    ×            ×

 

Sec.7

Income Deemed to be Received in India

 

The following incomes shall be deemed to be received in the previous year:-

  1. The annual accretion in the previous year by way of employer’s contribution to recognized provident fund, in excess of 12% of salary of employee.
  2. Interest credited on the balance of recognized provident fund in excess of 9.5% p.a.
  3. The transferred balance in a recognized provident fund, to the extent provided in Rule 11(4) of part A of the Fourth Schedule;
  4. The contribution made, by the central Government or any other employer in the previous year, to the account of an employee under a pension scheme referred to in section 80 CCD.

 

ANALYSIS OF SECTION 9 Income Deemed to be earned in India

     The following incomes shall be deemed to accrue in India-

  1. Income arising from any business connection in India.

Note1: Business connection shall not include any business activity carried out through independent Agent.

Note2: If all operation of business are not carried out in India , the reasonably attributable income to the operations carried out in India shall be deemed to accrue in India.

Note3: Following incomes shall not be deemed to accrue in India (Only for NR)

(a) Income from operation which are limited to purchase of goods in India for export.                                                 (b)  Income from news agency or publishing new papers, magazines or journals, which are confined to the          collection of news and views in India for transmission out of India.

(c)  Income from operations which are limited to shooting of cinematograph film in India.

Assessee (NR) for point no. (c)

…Individual (must be foreign citizen)

…Firm (all partner are NR & foreign citizen)

…company (all share holders are NR & foreign citizen)

  1. Income arising from any property or source situated in India.
  2. Income arising from transfer of capital asset situated in India.
  3. Income from salary, which is payable by Government to citizen of India for services outside India.
  4. Dividend income paid by Indian Company outside India [However it is exempt from tax u/s 10(34)]
  5. Income by way of interest which is payable by-
  • Government of India ,or
  • Any resident of India, if loan is used for any purpose in India.
  • Any NR of India,if loan is used for business or profession carried on in india.
  1. Income by way of royalty or fees for technical services payable by…
  • Government of India;
  • Any resident of India, if right or property used in India or services utilized in India.
  • Any NR of India, if right or property or services utilized in India.

     Practical Questions

problem 1. Compute taxable income,Mr.A has furnished the following information if he is  a)ROR b)RNOR C)NR

1) interest on German development bonds (TWO –fifth is received in India)…………………………………………….…  60,000

2) income from agriculture in Bangladesh, received there but later on  Rs.50,000 is remitted to India

(Agricultural activity control from Bangladesh)………………………………………………………………………………..………1,81,000

3) income earned from business in Kampala(Uganda) which is controlled from Delhi (Rs.15,000 received in India)…………………………………………………………………………………………………………………………………………………………………. 65,000

4) dividend paid by a foreign company but received in India on April 10,2015…………………………………………… 40,000

5) profit from business in madras and managed from outside India………………………………………………………….. 27,000

6) profit on sale of building in India but received in sri lanka……………………………………………………………………. 50,000

7.pension from a former employer in India ,received in Rangoon(net of standard deduction)…………………….30,000

8.income from business situated in Nepal & controlled from India (40% received in India & 60%

Received outside India)…….……………………………………………………………………………………………………………………….30,000

9.intersest received from  govt of India (received outside India)  ……………………………………………………………….20,000

10.interest received from a foreign company outside India (on capital which is utilized outside India )…..….15,000

11.royality received in India from  NR in respect of technology used by such person outside India………………20,000

12.income from a business in Bangalore controlled from USA ………………………………………………………………. …. 35,000

13.salary income received in India for service rendered in Pakistan  ………………………………………………………….25,000

14.Dividend received from an Indian company   ………………………………………………………………………………………. 10,000

15.Agricultural income in India  ……………………………………………………………………………………………………………….20,000

16.profit of past years (past untaxed profit) brought in this year    ……………………………………………………..…..…..5,000

 

Problem 2.

Compute  taxable income of an individual if he is…………1) ROR 2) RNOR 3) NR

1)profit from business in India ,but controlled from England………………………………………………………………….…..55,000

2)salary for service rendered in Pakistan, but received in India……………………………………………………………….….56,000

3)pension from Indian govt. against service rendered in India,but received in Nepal……………………………..…….35,000

4)interest on foreign Govt.securities,received in foreign…………………………………………………………………..……..…..40,000

5)profit from business in Africa,controlled from India………………………………………………………………………………..45,000

6)profit from business in Delhi but half of the income is received outside India……………………………………..…….45,000

 

Problem 3.

Gopinath furnished the following information for the previous year, compute his total income if he is…….1)ROR 2)RNOR 3)NR

1)salary received in India for 9 months……………………………………………………………………………………………….….…1,80,000

2) income from house property in London (received there)……………………………………………………………………..….2,60,000

3) interest on saving bank deposited in a bank in new Delhi…………………………………………………………………………20,000

4) Income from business in Nepal , being controlled in India, half of the income received in India………………….40,000

5)Gift in foreign currency from a relative received in India………………………………………………………………………..….80,000

6) past untaxed foreign income brought to India in the previous year………………………………………………………..….30,000

 

Problem 4.

Ram has furnished the following information in the previous year, compute taxable income if he is …..1)ROR 2)RNOR 3)NR

1)Income from salary in India from lanka limited ……………………………………………………………………………….………84,000

2)dividend from an Indian company received in U.S.A and spent there…………………………………………………………14,000

3) income from house property in Pakistan and received there………………………………………………………………….…45,000

4)income from business in Kolkata, which is controlled from U.S.A……………………………………………………………….55,000

5 )$ 2,000 earned in U.S.A during the previous year 2006-07 was brought to India

6) Received $1,000 draft as gift from his uncle in U.S.A for his daughter`s marriage [1$=Rs 44]

 

Problem 5.

Gopal has furnished the following information, compute taxable income if he is……………1)ROR 2)RNOR 3)NR

1) profit on sale of plant at London (one-half  is received in India)…………………………………………………………1,43,000

2) profit on sale of plant at Mumbai (one-half is received in London)……………………………………………………..1,42,000

3) salary from an Indian company received  in UK (one-half is paid for rendering service in India…………..1,60,000

4) Interest on U.k development bonds(entire  amount is received in London)…………………………………………….50,000

5) income from property in London received there……………………………………………………………………………………34,000

6) profit from a business in Mumbai  managed from there…………………………………………………………………………39,000

7) Income from agriculture in London received there, half of which is used for meeting hostel

Expenses of Gopi-son is U.k and remaining amount is later on remitted to India…………………………………………90,000

8) Dividend (Gross) received in London on May 2015 from a company registered in India but mainly operating in  U.K……………………………………………………………………………………………………………………………………………………………………………………………17,000

9) Rental income from a property in Nepal deposited by the tenant in a foreign branch of an Indian bank operating there………………………………………………………………………………………………………………………………………………………….38,000

 

Problem 6.

Ram has furnished the following information, compute taxable income if is………………….1)ROR 2)RNOR 3)NR

1) interest on German development Bond (one-third is received in India)…………………………………………………..55,000

2) income from agriculture in Bangladesh, received there and remitted to India………………………………………..31,000

3) income from property  in Canada received in U.S.A………………………………………………………………………………1,10,000

4)income earned from business in Kuwait,business being controlled from india(Rs.26,000 is received in India)…………………………………………………………………………………………………………………………………………………………66,000

5)Dividend from an Indian company ………………………………………………………………………………………………………….25,000

6)Royalty received in Singapore from Mr. john ,resident in India for technical service provided for a business carried in Singapore…………………………………………………………………………………………………………………………………………….…33,000

7)profit from a business  in Chennai, this business is controlled from Singapore………………………………………….1,25,000

8)profit on sale of a building in Mumbai ,but received in Nepal…………………………………………………………….…..1,50,000

9)income from agriculture in Punjab ,received in Delhi ………………………………………………………………………..…….40,000

10)profit from business situated in Uk which is controlled from Delhi (60% of the profit deposited in a bank there and 40% is remitted in India)…………………………………………………………………………………………………………….….….4,10,000

11)interest received from Mr.daya, a non-resident, on the loan provided to him for a business in India…….25,0000

 

Problem 7.

Mr.kush came to India for the 1st time on 1st july 2008 and been staying here since then what will be his residential status for p.y 2015-16.

 

Problem 8.

Mr. Mohan, an Indian citizen, leaves India on 18th September 2015, after a stay of 10 years , to work as an officer of a company in japan. Determine his residential status for the A.Y 2016-17.

 

Problem 9.

Mr.Om, an Indian citizen ,is appointed as a senior executive by a company in Canada .He left India, for the 1st time on September 16,2013 to join his duty in Canada. During the previous year 2014-15, he comes to India for 96 days. Determine the residential status of Mr. Om for the A.y 2014-15 and A.Y 2016-17.

 

Problem 10.

Mr. David, a foreign citizen , a scientist from U.K was appointed as a  senior scientist in India on 1.4.2013. on 31.1.2014, he went to Pakistan but left his family in India. On 1.5.2015,he came to India and took his family in 31.10.2015. Determine his residential status for the A.Y  2014-15 to 2016-17.

 

 

Problem 11.

Mr.Ramjee and Mrs.Ramjee came to india on October 12,2015 for a visit of 7 months. Both of them are Indian citizen. In the earlier years they in india as follows-

Year                                                           Mr. Ramjee                                                            Mrs. Ramjee

2014-15                                                       243 days                                                                 365 days

2013-14                                                        343 days                                                                  29 days

2012-13                                                           nil                                                                            18 days

2011-12                                                         115 days                                                                   126 days                                                                       Determine their residential status for the A.Y 2016-17.

 

Problem 12.

Mr. Bhanudev, an Indian citizen, is appointed as a senior executive by a company in Canada. He left India ,for the 1st time ,on September 27,2014  to join his duty in Canada. During the P.Y 2015-16, he comes to India for 94 days. state the residential status of Mr. Bhanudev for the A.Y 2015-16 and 2016-17.

 

Problem 13.

Ram Ltd. And Krishna Ltd. Companies are registered in Nepal and India respectively. All meeting of Board of director of Ram ltd. were held in India, whereas all Board meeting of Krishna Ltd. were held in Nepal during the P.Y 2015-16. Determine their residential status for the A.Y 2016-17.

 

Problem 14.

Mrs. Asmi was born in 1976 in Delhi. Her father and mother were also born in India in 1949. Her grandparents were however born in London. Mrs.  Asmi left  India 1st time in last 32 years on 15.06.2012 and migrated to England . she took the citizenship of uk. She visit India during 2015-16 for 60 days. determine the residential status of Mrs.Asmi for A.y 2016-17.

CMA Maths – Ratio Concept and Questions

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Chapter 1

Ratio and proportion

 Indices and Logarithm

 

RATIO

 

A ratio is a comparison of the sizes of two or more quantities of the same kind by division.

If a and b are two quantities of the same kind (in same units), then the fraction a/b is called the ratio of a to b. It is written as a : b. Thus, the ratio of a to b = a/b or a : b. The quantities a and b are called the terms of the ratio, a is called the first term or antecedent and b is called the second term or consequent.

 

REMARKS

  • Both terms of a ratio can be multiplied or divided by the same (non-zero) number. Usually a ratio is expressed is lowest terms (or simplest form).

 

            The order of the terms in a ratio is important.

           

Ratio exists only between quantities of the same kind.

           

  • Quantities to be compared (by division) must be in the same units.
  • To compare two ratios, convert them into equivalent like fractions.

 

INVERSE RATIO

One ratio is the inverse of another if their product is 1. Thus a: b is the inverse of b: a and vice – versa.

  1. A ratio a: b is said to be of greater inequality if a>b and of less inequality if a<b.
  2. The ratio compound of the two ratios a: b and c: d is ac: bd.
  3. A ratio compounded of itself is called its duplicate ratio.

Thus a2 : b2 is the duplicate ratio of a : b.

Similarly, the triplicate ratio  of a : b is a3 : b3.

  1. The sub-duplicate ratio of a : b is √a : √b and

the sub triplicate ratio of a : b is 3√a : 3√b.

  1. If the ratio of two similar quantities can be expressed as a ratio of two integers, the quantities are said to be commensurable; otherwise, they are said to be incommensurable. √3 : √2 cannot be expressed as the ratio of two integers and therefore, √3 and √2 are incommensurable quantities.
  2. Continued Ratio is the relation (or compassion) between the magnitudes of three or more quantities of the same kind. The continued ratio of three similar quantities a, b, c n

PROPORTION

 

  1. An equality of two ratios is called a proportion. Four quantities a, b, c, d are said to be in proportion if a : b = c : d (also written as a : b :: c : d) i.e. if a/b = c/d i.e. if ad = bc.
  2. The quantities a, b, c, d are called terms of the proportion; a, b, c and d are called its first, second, third and fourth terms respectively. First and fourth terms are called extremes (for extreme terms). Second and third terms are called means (or middle terms).a

If a : b = c : d then d is called fourth proportional.

Product of extremes = Product of means

If a : b = c : d are in proportion then a/b = c/d i.e. ad = bc

i.e.

this is called cross product rule.

Three quantities a,b,c of  the same kind (in same units) are said to be in continuous proportion

If a : b = b : c  i.e. a/b = b/c i.e. b2 = ac

If a,b,c are in continuous proportion, then the middle term b is called the mean proportional between a and c, a is the first proportional and c is the third proportional between a and c, a is the first proportional and c is the third proportional.

  1. Note: In a ratio at a : b, both quantities must be of the same kind while in a proportion a : b = c : d, all the four quantities need not be of the same type. The first two quantities should be of the same kind and last two quantities should be of the same kind.
  2. PROPERTIES OF PROPORTION
  3. If a : b = c : d, then ad :: bc (By cross-multiplication)
  4. If a : b = c : d, then b : a = d : c (Invertendo)
  5. If a : b = c : d, then a : c = b : d (Alternendo)
  6. If a : b = c : d, then a + b : b = c + d : d (Componendo)
  7. If a : b = c : d, then a – b : b = c – d : d (Dividendo)
  8. If a : b = c : d, then a + b : a – b = c + d : c – d (Componendo and Dividendo)
  9. If a : b = c : d = e : f = ………….., then each of these ratios (Addendo) is equal

(a + c + e + …….) : (b + d + f + …….)

  1. a : b = c : d = a + c : b + d (Addendo)

(a / b = c / d = a + c / b + d)

  1. a : b = c : d = a – c : b – d (Subtrahendo)

(a/b = c/d = a – c / b – d)

  1. If a : b = c : d = e : f = …… Then each of these ratios =

(a – c – e – …) :    (b – d – f – ……..)   

 

LAWS OF INDICESG

  • (i) am × an = am+n (base must be same)
  • (ii) am ÷an = am-n
  • (am)n = amn
  • (ab)m= am bm
  • (v) (a/b)m = am /bm
  • ao = 1
  • a-m = 1 / am and   1 / a-m = am
  • m√a = a1/m
  • (ix) if ax = ay,  then  x = y
  • (x) if xa = ya,  then  x = y

 

 

 

 

 

 

MULTIPLE CHOICE QUESTIONS (M.C.Q)

 

Note : Pick up the correct answer from the following.

Q.1.     If a : b = 2 : 3 and b : c = 5 : 7, find a : c & a : b : c.

(a) (i) 10:21  (ii) 10 : 15 : 21                       (b) (i) 10 : 15  (ii) 10 : 15 : 21

(c) (i) 10 : 12 (ii) 10 : 12 : 21                      (d) None

Q.2.     Find:

            (i)   Fourth proportional to 3, 7, 15.          (ii)  Third proportional to 16 and 36.

(iii) Mean proportion between 8 and 32.

(a) (i) 35 (ii) 81  (iii) 16                                     (b) (i) 25 (ii) 81 (iii) 16

(c) (i) 16 (ii) 81  (iii) 16                                     (d) None

Q.3.     Find:

            (i)   The duplicate ratio of 3 : 5.

(ii)  The triplicate ratio of 2 : 3.

(iii) The sub-duplicate ratio of 16 : 25.

(iv)                             The sub-triplicate ratio of 27 : 8.

(v) The compounded ratio of (2 : 5) and (3 : 4).

            (a)  (i) 9 : 25 (ii) 8 : 27  (iii) 4:5  (iv) 3 : 2  (v) 3 : 10

(b)  (i) 8 : 27 (ii) 9 : 25  (iii) 4 : 5  (iv) 2 : 3  (v) 3 : 10

(c) (i) 3 : 10 (ii) 9 : 25 (iii) 8 : 27 (iv) 4: 5 (v) 3: 2

(d)                              None

Q.4.     If a : b = 2 : 5, find (3a + 4b) : (4a + 5b).

            (a) 26 : 33                  (b)  26 : 30                      (c) 25 : 35                  (d) None

 

Q.5.     Divide Rs.1024 in the ratio 9 : 7.

            (a) Rs.576, Rs.448                                            (b) Rs.550, Rs.660

(c) Rs.570, Rs.450                                            (d) None

 

Q.6.     Divide 581 among A, B, C so that 4A = 5B = 7C.

            (a) Rs.245, 196, 140    (b)                           Rs.140, 160, 240       (c) 200, 250, 280               (d) None

 

Q.7.     A bag contains rupee, 50 paise and 25 paise coins in the ratio 5 : 6 : 7. If the total amount is Rs.390, find the number of coins of each kind.

            (a) 200, 240, 280       (b)  200, 220, 260           (c) 200, 250, 280       (d) None

 

Q.8.     In a mixture of 28 litres, the ratio of milk and water is 5 : 2. If 2 litres of water is added to the mixture, find the ratio of milk and water in the new mixture.

            (a) 3 : 1                      (b)  2 : 1                          (c) 3 : 2                      (d) None

 

Q.9.     A and B are two alloys of gold and copper prepared by mixing metals in the ratio 7 : 2 and 7 : 11 respectively. If equal quantities of alloys are melted to form a third alloy C, find the ratio of gold and copper in C.

            (a) 7 : 4                      (b)  4 : 7                          (c) 7 : 5                     (d) 5 : 7

 

Q.10.   Find three numbers in the ratio 2 : 3 : 5, the sum of whose squares is 608.

            (a) 8, 12 and 20         (b)  8, 20, 60                   (c) 12, 8, 22               (d)       None

 

Q.11.   A mixture contains alcohol and water in the ratio 4 : 3. If 7 litres of water is added to it, the ratio of alcohol and water becomes 3 : 4. Find the quantity of alcohol in the mixture.

(a) 12 litres.               (b)  13 litres                    (c) 18 litres                (d) None

 

Q.12.   If A : B = 3 : 4, B : C = 5 : 6 and C : D = 11 : 9, then A : D is:

            (a) 50 : 60                  (b)  55 : 72                      (c) 60 : 70                  (d) 65 : 75

 

Q.13.   If a : b = 3 : 4, then (6a + b) : (4a + 5b) is:

            (a) 1 : 2                      (b)  3 : 5                          (c) 7 : 8                      (d) 11 : 16

 

Q.14.   If : : (1 +  ) : : : x , then x is equal to :

            (a) –3                    (b)  1 +                      (c) 1 –                   (d) + 3

 

Q.15.   If X and Y shared Rs.1100 in the ratio 1 : 10, how much did X get ?

            (a) Rs.99                    (b)  Rs.100                      (c) Rs.101                  (d) Rs.110

 

Q.16.   If 2x = 3y = 4z, then x : y : z is :

            (a) 2 : 3 : 4                 (b)  4 : 3 : 2                     (c) 6 : 4 : 3                 (d) 3 : 4 : 2

 

Q.17.   If x : y = 7 : 9 and y : z = 5 : 4, then x : y : z is :

            (a) 7 : 45 : 36             (b)  35 : 45 : 36               (c) 28 : 36 : 35           (d) None

 

Q.18.   The fourth proportional to 3, 5, and 21 is :

            (a) 35                         (b)                               (c)                           (d) 12.6

 

Q.19.   Mean proportional between 7 and 28 is:

            (a) 17.5                      (b) 12                              (c) 14                         (d) 16

 

Q.20.   Third proportional to 9 and 12 is:

            (a) 6                     (b)  10.5                          (c) 16                         (d) None

 

Q.21.   What must be added to each term of the ratio 49 : 68 so that it becomes 3 : 4 ?

            (a) 3                           (b)  5                               (c) 8                           (d) 9

 

Q.22.   What least number must be added to each one of 6, 14, 18, 38 to make them in proportion?

            (a) 1                           (b)  2                               (c) 3                           (d) 4

 

Q.23.   What least number must be subtracted from each of the numbers 14, 17, 34, 42 so that the remainders may be proportional ?

            (a) 0                           (b)  1                               (c) 2                           (d) 7

 

Q.24.   A fraction bears the same ratio to as does to. The fraction is:

            (a)                        (b)                             (c)                         (d)

 

Q.25    Rs.1980 are divided among A, B, C so that half of A’s part, one-third of B’s part and one-sixth of C’s part are equal. Then, B’s part is:

            (a) Rs.660                  (b)  Rs.360                      (c) Rs.1080                (d) Rs.540

 

Q.26.   If A’s money is to B’s money as 4 : 5 and B’s money is to C’s money as 2 : 3 and A has Rs.800, then C has:

            (a) Rs.1000                (b)  Rs.1200                    (c) Rs.1500                (d) Rs.2000

 

Q.27.   94 is divided into two parts in such a way that the fifth part of the first and the eighth part of the second are in the ratio 3 : 4. The first part is :

            (a) 27                         (b)  30                             (c) 36                         (d) 48

 

Q.28.   Rs.1360 have been divided among A, B, C such that A gets of what B gets and B gets of what C gets. Then, B’s share is:

            (a) Rs.120                  (b)  Rs.160                      (c) Rs.240                  (d) Rs.320

 

Q.29.   Rs.770 have been divided among A, B, C in such a way that A receives th of what B and C together receive. Then A’s share is:

            (a) Rs.140                  (b)  Rs.154                      (c) Rs.165                  (d) Rs.170

 

Q.30.   Rs.4850 have been divided among A, B, C such that if their shares be diminished by Rs.15, Rs.10 and Rs.25 respectively, the remainders are in the ratio 3 : 4 : 5. Then, B’s share is:

            (a) Rs.1595                (b)  Rs.1610                    (c) Rs.1626.66           (d) Rs.1600

 

Q.31.   A sum of Rs.7000 is divided among A, B, C in such a way that shares of A and B are in ratio 2 : 3 and those of B and C are in the ratio 4 : 5. The amount received by C is:

            (a) Rs.2600                (b)  Rs.2800                    (c) Rs.Rs.3000           (d) Rs.3900

 

Q.32.   A sum of Rs.53 is divided among A, B, C in such a way that A gets Rs.7 more than what B gets and B gets Rs.8 more than what C gets. The ratio of their shares is :

            (a) 16 : 9 : 18             (b)  25 : 18 : 10               (c) 18 : 25 : 10           (d)       15 : 8 : 30

 

Q.33.   A bag contains Rs.600 in the form of one-rupee, 50-paise and 25-paise coins in the ratio 3 : 4 : 12. The number of 25-paise coins is:

            (a) 600                       (b)  900                           (c) 1200                     (d)       1376

 

Q.34.   A sum of money is divided among A, B, C such that to each rupee A gets, B gets 65 paise and C gets 35 paise. If C’s share is Rs.560, the sum is:

            (a) Rs.2400                (b)  Rs.2800                    (c) Rs.3200                (d) Rs.3600

Q.35.   Rs.5625 are divided among A, B, C so that A may receive one-half as much as B and C together receive and B receives one-fourth of what A and C together receive. The share of A is more than that of B by :

            (a) Rs.750                  (b)  Rs.775                      (c) Rs.1500                (d) Rs.1600

 

Q.36.   A certain amount was divided between X and Y in the ratio 4 : 3. If B’s share was Rs.4800, the total amount was :

            (a) Rs.11,200             (b)  Rs.6,400                   (c) Rs.19,200             (d) Rs.39,200

 

Q.37.   The ratio of number of boys and girls in a school of 720 students is 7 : 5. How many more girls should be admitted to make the ratio 1 : 1?

            (a) 90                         (b)  120                           (c) 220                       (d) 240

 

Q.38.   A boy 1.4 m tall casts a shadow 1.2 m long at the time when a building casts a shadow 5.4 m long. The height of the building is:

            (a) 4.63 m                  (b)  3.21 m                      (c) 6.3 m                    (d) 5.6 m

 

Q.39.   The incomes of A and B are in the ratio 3 : 2 and their expenditures in the ratio 5 : 3. If each saves Rs.1500 then B’s income is:

            (a) Rs.6000                (b)  Rs.4500                    (c) Rs.3000                (d) Rs.7500

 

Q.40.   The prices of scooter and a moped are in the ratio 9 : 5. If a scooter costs Rs.6800 more than a moped, the price of a scooter is:

            (a) Rs.17,000             (b)  Rs.13,600                 (c) Rs.15,300             (d) None

 

Q.41.   The cost of making an article is divided between materials, labour and overheads in the ratio of 5 : 3 : 1. If the materials cost Rs.6.90, the cost of the article is:

            (a) Rs.13.80               (b)  Rs.12.42                   (c) Rs.11.56               (d) Rs.9.83

 

Q.42.   The ratio of zinc and copper in a brass piece is 13 : 7. How much zinc will be there in 100 kg of such a piece?

            (a) 20 kg                    (b)  35 kg                        (c) 55 kg                    (d) 65 kg

Q.43.   What is the ratio whose terms differ by 40 and the measure of which is ?

            (a) 16 : 56                  (b)  14 : 56                      (c) 15 : 56                  (d) 16 : 72

 

Q.44.   Two numbers are in the ratio 3 : 5. If 9 be subtracted from each, then they are in the ratio of 12 : 23. The second number is:

(a) 52                         (b)  53                             (c) 54                         (d) 55

 

Q.45.   In a mixture of 60 litres, the ratio of milk and water is 2 : 1. If the ratio of milk and water is to be 1 : 2, then the amount of water (in litres) to be further added is:

            (a) 20                         (b)  30                             (c) 40                         (d) 60

 

Q.46.   A mixture contains milk and water in the ratio 5 : 1. On adding 5 litres of water, the ratio of milk and water becomes 5 : 2. The quantity of milk in the original mixture is:

(a) 16 litres                (b)  25 litres                    (c) 22.75 litres           (d) 32.5 litres

 

Q.47.   20 litres of a mixture contain milk and water in the ratio 5 : 3. If 4 litres of this mixture are replaced by 4 litres of milk, the ratio of milk to water in the new mixture will become:

            (a) 2 : 1                      (b)  6 : 3                          (c) 7 : 3                      (d) 8 : 3

Q.48.   An alloy contains zinc and copper in the ratio 5 : 8 and another alloy contains zinc and  copper in the ratio 5 : 3. If equal amounts of both the alloys are melted together, then the ratio of zinc and cooper in the resulting alloy is:

            (a) 25 : 24                  (b)  3 : 8                          (c) 103 : 105              (d) 105 : 103

 

Q.49.   If ==, then = ?

(a) 7                           (b)  2                               (c)                           (d)

 

Q.50.   If (a + b) : (a – b) = 1: 5, then (a2 – b2) : (a2 + b2) equals:

            (a) 2 : 3                      (b)  3 : 2                          (c) 5 : 13                    (d) 13 : 5

 

Q.51.   Two whole numbers whose sum is 64 can not be in the ratio :

            (a) 5 : 3                      (b)  7 : 1                          (c) 3 : 4                      (d) 9 : 7

INTRODUCTION OF ACCOUNTS

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SECTION –1
  1. Definition:-

ACCOUNTING is the art of  :

(1) Recording;  (2) Classifying and (3) Summarizing.

– of all the transactions of a financial character.

– in a significant manner.

– and to interpret the results thereof.

Accounting is different from Book-Keeping. Book-Keeping is merely recording of the transactions and maintaining the records WHEREAS  Accounting means to analyse these results. Accounting begins where Book-Keeping ends.

  1. Meaning of Accountancy

Accountancy

The knowledge of how to make accounting is called accountancy. Accountancy tells us how to maintain various books of account, how to prepare them and how to communicate accounting information to the parties interested n them. Thus, Accounting is a systematic knowledge like other academic subjects such as Economics, Physics, Chemistry, etc., and puts such knowledge into practice.

.3. Users

There are many users of Accounting information :

  1. Owners : To know Profitability and financial soundness of business.
  2. Investors : To know about their money’s safety.
  3. Prospective Investor : To know how safe it would be to invest.
  4. Creditors : To know credit worthiness of business.
  5. Employees : To demand Profits/Bonus.
  6. Government : For collecting Taxes.
  7. Researchers : For researches into business or industry as a whole.

 

 

  1. Fundamental accounting assumption as per AS-1

            Fundamental accounting assumptions underlie the preparation and presentation of financial statements. They are usually not specifically stated because their acceptance and use are assumed. Disclosure is necessary if they are not followed. The Institute of Chartered Accountants of India issued Accounting Standard (AS-1) ‘Disclosure of Accounting Policies” according to which the following have been generally accepted as fundamental accounting assumptions:

  • Going concernThe enterprise is normally viewed as a going concern, i.e. as continuing operations for the foreseeable future. It is assumed that the enterprise has neither the intention nor the necessary of liquidation or of curtailing materially the scale of the operations.
  • Consistency It is assumed that accounting policies are consistent from one period to another.
  • Accrual – Guidance Note on Terms used in Financial Statements defines accrual basis of accounting as “the method of recording transactions by which revenue, costs, assets and liabilities are reflected in the accounts in the period in which they accrue.” The accrual ‘basis of accounting’ includes considerations relating to deferrals, allocations, depreciation and amortizsation. Financial statements prepared on the accrual basis inform users not only of past events involving the payment and receipt of cash but also of obligations to pay cash in future and of resources that represent cash to be received in the future. Hence, they provide the type of information about past transactions and other events that is most useful to users in making economic decisions. Accrual basis is also referred to as mercantile basis of accounting.

 

  1. Accounting words (Terminology) :
  2. Capital –        Amount invested by owner in the business.
  3. Liability –        Amount to be given to the outsiders.
  4. Assets –        Things owned by the business.
  5. Debtors –        Persons from whom business has to take money.
  6. Creditors –        Persons to whom business has to pay money.
  7. Proprietor –        Owner of business.
  8. Drawings –        Money or Goods used by proprietor for personal use.
  9. Transaction –           Any business event to be recorded.
  10. Entry –        Record to be made in books for any transaction.
  11. Stock –        Goods lying unsold with the business on a particular date.
  12. Expense –        Amount spent to produce and sell the goods.

                              THREE GOLDEN RULES OF ACCOUNTANCY

 

(1) DEBIT THE RECEIVER CREDIT THE GIVER

(For all personal A/c’s like Ram, Shyam, Mohan, Sita, Geeta, etc.)

(Can See, Can Touch, Can Talk)

 

(2) DEBIT WHAT COMES IN CREDIT WHAT GOES OUT

(For all Real A/c’s like Cash, Table, Plant, Furniture, Building, etc.)

(Can see, Can Touch, CANNOT TALK)

(3) DEBIT ALL EXPENSES AND LOSSES, CREDIT ALL INCOME AND GAINS

(For all Nominal A/c’s like Profit, Loss, Salary, Rent, Depreciation, etc.)

(CANNOT SEE, CANNOT TOUCH, CANNOT TALK)

INTRODUCTION TO MICRO ECONOMICS

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Economics:

Economics is a subject matter that studies different economic activities as directed towards the maximization of satisfaction or maximization of profit at the level of an individual, and maximization of social welfare at the level of the country as a whole.

 

Economics is a study of an economy

‘Economics can be defined as a study of an economic system in all its aspects – structure, working, performance, problems, and their possible solutions. The meaning of the term, “study of an economy”.

 

Economic Activity:

By an economic activity we mean that activity which is based on or is related to the use of scarce resources for the satisfaction of human wants.

Examples- Consumption, Investment

 

Economic want:

Wants which can be satisfied by the consumption of goods and services, are economic wants.

 

Characteristics of economic wants:               

  1. even if satisfied, they have a tendency to re-emerge
  2. With the passage of time, they tend to increase in number and variety.

 

Non-Economic want:

Non- economic want are those do not need the consumption of goods and service.

Scarcity:

It is a situation when demand for a good exceeds its supply even at a zero price.

Demand > Supply, at zero price = Scarcity

 

Economic Problem:

It is the problem of choice arising out of the fact that-

  1. Resources are scarce
  2. Resources can be allocated to alternative uses.

 

Some leading definitions are as follows: 

  • Economics as a Science of Wealth: This preference of viewing economics as a science of wealth is highlighted in the stand taken by the “Father of Economics”, namely, Adam Smith. In this classic work an Enquiry into the Nature and Causes of the Wealth of Nations, published in 1776, he maintains that the discipline of economics is meant to identify the factors (that is causes) which make one economy richer than the other.

Evaluation:

Merits:

  • Adam Smith was primarily concerned with the question of creation of wealth, that is, the means of consumption and the capacity to produce such means.
  • During Smith’s days, most economies were so poor that the problem of income inequalities did not attract sufficient attention. Therefore, Adam Smith also chose to ignore this problem.

Demerits

  • Critics of the wealth definition of economics are unhappy about the fact that it accords primary place to ‘wealth’ to the neglect of the welfare aspects of man.
  • Though Adam Smith could ignore the problem of income distribution because of the underdevelopment of the economy during his days, it could not be ignored for long, particularly because the fruits of economic growth and riches were not long, particularly because the fruits of economic growth and riches were not reaching the masses. With growing national income, the rich were becoming richer and the poor were becoming poorer.
  • Adam Smith’s definition of economics in terms of wealth was also criticized by philosophers and social thinkers for ignoring the ‘higher’ value of life and reducing it to a ‘dismal science’.
  • The concept of wealth has also been subjected to severe criticism. It is maintained that what matters is not just the production and consumption of tangible goods, but services also matter. The relevance of services can be judged by this fact that provision of certain services is essential even for the maintenance and addition to the productive capacity of the economy. Examples, education, health, medical care, defenses, law and order, efficient systems of administration and justice also add to the security and working capacity of the society and thereby add to its riches.

 

  • Economics as a Science of Material well-being:

Professor Dr. Alfred Marshall was the first economist who gave a logical definition of economics. He defined economics as: “A study of mankind in ordinary business of life, it examines that part of individual and social actions which is closely related with attainment and use of material requisites”.

 

            CHARACTERISTICS OF DEFINITION:

i). A Social Science

This Definition makes economics a social science. It is a subject that is concerned with the people living in society.

 

ii). Study of Man

Economics is related to man; therefore it is living subject. It discusses economic problems and behavior of man. According to Marshall it studies the behavior of man in ordinary business of life.

 

iii). Wealth as a means of Material Well Being

According to Marshall, wealth is not the ultimate objective of human activities and therefore we do not study wealth, for the sake of wealth. Therefore according to this definition we study wealth as a source of attainment of material welfare.

 

iv). Economics and Welfare

This definition makes economics welfare oriented subject. We are concerned only with those economic activities which promote welfare and the activities which do not promote welfare of human beings are out of the scope of economics.

 

v). Materiality

Marshal stresses upon the concept of “material requisite of well being”. Therefore according to this definition all economic activities resolve around the acquisition and use of material goods like food, clothing etc. because they increase welfare of human beings. On the other hand non-material requisites of human life like education, recreation are ignored.

 

vi). Normative Outlook

According to this definition economics should take care of good and bad aspects of economic activities and therefore involve itself in “what should be and what should not be”. This is called normative aspect of economics.

 

CRITICISM

“Robbins and other many economists severely criticized this definition on following grounds.”

i). Limited To Material Welfare

This definition limits the subject of economics to material welfare of people. But the subject of economics is not limited to the study of material welfare of human beings. In reality both material and non material aspects of wellbeing are studies in economics.

ii). Vague Concept of Welfare

The concept of welfare used in this definition is also not clear. The welfare of human beings is not limited to the attainment of material requisites. There are many other factors which affect the human welfare. Further the word “welfare” has different meaning for different persons and different societies. Therefore we cannot define economics using an unclear concept of welfare.

 

iii). Limited Scope

This definition has made the scope of economics limited. Only those activities are studied in economics which are aimed at the attainment of material requisites of well being. Further it ignores the economic activities of a person not living in society. Attainment of non material requisites of human well being fall out of the scope of economics. This division of material and non material aspects of human welfare is not correct.

 

iv). Economics and Welfare

According to Robbins the study of economic activities on the basis of welfare is not good. It is not the duty of an economist to pass verdict that what is conducive to welfare and what is not. Thus according to Robbins “Whatever Economics is concerned with, it is not concerned with causes of material welfare as such.

 

  • Economics as a Science of Choice Making:

 “Economics is the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses.”                                                                                                                                                                                                       –  Lionel Robbins

Feature of definition:

  1. Economics is a human science: According to Robbins, economics is a human science means that economics studies every human being whether he forms a part of the society or not he performs social action or not. For e.g., a saint living in the caves of the Himalayas also form the part of economics studies.
  2. Economics is a Science : According to Robins, economics is a science because of follows characteristics :
    1. Systematized study
    2. Based on cause Study & effect relationship
  • Existence of Laws and Principles
  1. Practical verification possible
  1. Human wants are unlimited : According to Robbins, human wants are unlimited. It is all because of his highly development brain. He cares for what he not, without caring for what he has. As a result want keeps on cropping.
  2. Means are Scarce : Means to satisfy human wants are less in number as compared to the volume of wants.
  3. Means Have alternative uses : According to Robbins, means satisfy human wants have alternative uses as well. For e.g., Electricity can have numerous uses.
  4. Economic Problems : Economic Problems is also called “The problems of Choice Making” arises on account of unlimited human wants to be satisfied with scarce having alternative uses. Thus a person under such situation has to make choice between various wants on the basis of their urgency. This problem of choice making is called Economics Problem.
  5. Positive Science : According to Robbins, positive science is a science which studies what is the realistic situation? Robin’s says in this context that “Economics is entirely neutral between its ends” i.e., an economist has nothings to do with goodness or badness of wants.

Criticism of Robbins Definition:

  1. Even abundance of resources may create problem: It can be illustrated by following e.g., 1. World Trade Depression (1929-30) 2. Problem of Unemployment. These two economic problems are due to excessive availabilities of resources. Hence, Robbin’s concept of scarcity does not hold well every time.
  2. Wants and means are interchangeable: Robbin’s has treated wants and means differently. But these two concepts can be used interchangeably e.g., if the present want of a students is to acquire CS degree. The time he become CS, the CS degree so obtained will become a means to secure employment. So, today’s want, become tomorrow’s means.
  3. Economics can’t be a perfect positive science: According to Robbins, Economics is a positive science but economics is a normative science.

 

Points of distinction between Robin’s Marshall’s Definitions

The scarcity definition by Robbins has the virtue of universal applicability, rich and poor as well as developed and under developed nations faces the problem of choice. However, many critics believe that there is no fundamental difference between the scarcity and welfare definitions of economics because both look at the same things from the different angles. There are primarily two concepts in questions, viz. the source of enjoyment (or wealth) and its limitations. The welfare definition emphasizes the former, while the scarcity definition stresses the later.

  1. Robbins emphasizes the choice making aspect as a means of optimization of human satisfaction but does not emphasize either welfare or material well-being.
  2. Marshal and Pigou are concerned with subjective or personal considerations of welfare, whereas Robin adopts a more scientific approach lying down emphasis or positive aspects of science.
  3. Economics according to Robbin is neutral between ends. It studies several activities which are hardly conductive to welfare.
  4. Robbins definition shows that economics is concerned not only with the material things but also non-material things such as income of singers, actors, dancers, etc. The welfare definition is basically concerned with materials things alone.
  5. Pigou’s definition is narrow in its scope as its make Economics a purely social science and deals with only certain groups of activities, Robbins, on the other hand, makes Economics a human science which analyses certain aspects of every activity without making a distinction between material and non-material or welfare and non-welfare activities.

 

  • Economics as a Science of Dynamic growth and development:

“Economics is the study of how men and society choose, with or without the use of money, to employ scarce productive resources which could have alternative uses, to product various commodities time and distribute them for consumption now and in the future amongst various people and groups of society. It analyses the costs and benefits of improving patterns of resource allocations.”

  • Paul A. Samuelson

 

Nature of Economics

Economics – As a Science and an Art

Economics hold different view as regards the questions whether economics is science or an art.

The term ‘science’ connotes the following:

  1. Systematized body of knowledge.
  2. Based on cause and effect relationship.
  3. Existence of laws and principles.
  4. Practical verification possible.

 

If we analyses economics as a discipline we find that it fulfills to all the features of science. Like science, economics is also a systematized body of Knowledge. The various facts relevant to it are systematically collected, classified and analyzed.

For e.g., the famous law of demand, explain the cause and effect relation ship between price and demand for a commodity. As the price rises the demand for a commodity falls, and vice versa. Here, rise in price is the cause and resultant fall in demand is the effect.

Further Economics as a Science can be broadly classified as:

  1. Positive science: In pure science the analysis is confined to cause and effect relationship. Economics is not to suggest but simply state in terms of cause and effect relations and leave the matter of choice to the individual concerned whether it suites his requirements or not.

This aspect is given by Robbins.

  1. Normative Science : In this model Economics emphasize for finding out and prescribing course of action which is desirable and necessary to achieve certain social goals.

This aspect is given by marshal.

 

Some criteria for maximizing welfare (Normative aspect of Economics)

  1. Goods should be exchanged in such a way that a consumer is made better off without rendering someone worse off. It is also possible by proper allocation of goods between consumers.
  2. If the firm is enabled to produce more with the same factors through better organization of production and judicious use of resources.
  3. Proper distribution of national income.
  4. The allocation of resources between present and the future should also be optimum.
  5. There should be marginal cost pricing, when the law of diminishing returns or that of increasing cost is operates.
  6. In the field of public finance it has taken the name of maximum social gain which can be achieved by adopting suitable methods of raising public revenue and incurring public expenditure.

 

Economics as an Art:

A discipline of study is termed an art if it tells us how to do a thing, which is to achieve an end (objective). It is noteworthy that the final justification for studying economics lies in the possibility of our ability to use it for solving economic problems faced by us.

Positive or Normative Economics

A division of economics, corresponding to the one of it being a science or an art, runs in terms of it being positive or normative. We should note that to say that economics is a science and to say that ‘economics is a positive science’ means the same thing. However, the terms ‘an art’ and ‘normative’ can be interpreted to mean two related but different things. The term ‘normative’ is derived from the word ‘norm’ or a ‘standard’ implying ‘what ought to be’. And the term ‘art’ denotes the method of achieving that objective.

The above mentioned distinction may be stated in the following words:

  • When we consider economics only as a science or a positive science, we only try to investigate ‘What is’ and stop there.
  • When we adopt a normative approach, we decide the ‘norms’ or ‘standards’ which the economy should adhere to or should aim at. The ‘what ought to be’ aspect of our decision-making stands for the ‘normative’ dimension of economics.
  • Having decided the norms or the standards to be achieved, we treat economics as an ‘art’. We work out the measures for achieving the selected goals.
  • In practice, however, the ‘normative’ and ‘art’ dimensions of economics are so intermixed that it is often difficult to draw a clear cut line of division between them. Accordingly, in general, these two dimensions of economics are considered to represent one segment in contrast to its being a positive science.

 

 

CENTRAL ECONOMIC PROBLEMS

These central problems may be summarized as follows:

  • What to produce? : Since the economy is not able to produce every thing, therefore it has to decide between which goods and services to produce and which ones to leave out.
  • How much to produce? : It has also to decide the respective quantities of the goods and services to be produced.
  • How to produce? : Since the available resources can be used in several ways for producing goods and services, it has to decide allocation of resources that is which resources should be employed for producing which goods and services. A society has to decide whether to use labour intensive techniques or capital intensive techniques. Obviously, the choice would depend on the availability of different factors of production and their relative prices. It is in the society’s interest to use those techniques of production that make best use of the available resources.
  • For whom to produce? Another important decision which a society has to take for whom to produce. The society can not satisfy all wants of all the people.

                                           

How different economies solved their central economic problem?

Capital Economy: Capitalism is an economic system in which all the means of production are owned and controlled by private individuals for profit. In short, private property is the mainstay of capitalism and profit motive is its driving force. The government is not supposed to interfere in the management of economic affairs under this system. An economy is called capitalist or a free market economy if it has the following characteristics:

  • The right of private property: the right of private property means that productive factors such as land, factories, machinery, mines, etc. are under private ownership. The owners of these factors are free to use them in the manner in which they like. The government may, however, put some restrictions for the benefit of the society in general.
  • Freedom of enterprise: This means that everybody engages in any economic activity he likes. More specifically he is free to set up any firm to produce goods.
  • Freedom to choice by the consumers: this means people in a capitalist economy are free to spend their income as they like. This is known as consumer sovereignty. Consumers are sovereign in the sense producers produce only those goods which consumers wish to buy.
  • Profit motive: In a capitalist economy it is the profit motive which forces or induces people to work and produce.
  • Competition: Competition prevails among sellers to sell their goods and among buyers to obtain goods to satisfy their wants. Advertisement, price-cutting, discounts, etc. are very common methods of competition in a capitalist economy.
  • Inequalities of income: There is generally a wide gap of income between the rich and the poor in the economy which mainly arises due to unequal distribution of property in such economies.

 

How capitalist economies solve their central problems?

A capitalist economy has no central planning authority to decide what, how and for whom to produce. In absence of any central authority it looks like a miracle as to how such an economy functions. If the consumers want cars, producers choose to make cloth and workers choose to work for the furniture industry, there will be total confusion and chaos in the country. But this is not so. Such an economy uses the impersonal forces of the market demand and supply or the price mechanism to solve its central problems.

 

Deciding what to produce: The aim of an entrepreneur is to earn as much profits as possible. This causes businessmen to compete with one another to produce those goods which consumers wish to buy. Thus, if consumers want more cars, there will be an increase in the demand for cars and as a result their prices will increase. A rise in the price of cars, cost remaining the same, will lead to more profits. This will induce producers to produce more cars. On the other hand, if the consumers’ demand for cloth decreases, its price would fall and profits would go down and hence its production would also go down. Thus, more of cars and less of cloth will be produced in such an economy. Thus, in a capitalist economy (like the USA, UK, and Germany) the question regarding what to produce is ultimately decided by consumers who show their preferences by spending on the goods which they want.

Deciding how to produce: An entrepreneur will produce his goods with that technique of production which renders his cost of production minimum. If labour is relatively cheap he will use labour intensive method and if labour is relatively costlier he will use capital intensive method. Thus, the relative prices of factors of production help in deciding how to produce.

Deciding for whom to produce: Goods and services in a capitalist economy will be produced for those who have the buying capacity. The buying capacity of an individual depends upon his income. How much income he will be able to make depends not only on the amount of work he does and the prices of the factors he owns but also on how much property he owns. Higher the income, higher will be his buying capacity and higher generally will be his demand for goods in general.

Deciding about consumption, saving and investment: Consumption and savings are done by consumers and investments are done by entrepreneurs. Consumer’s savings, among other factors, are governed by the rate of interest prevailing in the market. Higher the interest rate, higher the savings. An investment decision depends upon the rate of return on capital. The greater the profit expectation (i.e. the return on capital), the greater will be the investment in a capitalist economy. The rate of interest on savings and the rate of return on capital are nothing but the prices of capital.

Thus, we see above what goods are produced, by which methods they are produced, for whom they are produced and what provisions should be made for economic growth are all decided by price mechanism or market mechanism.

Merits of Capitalist Economy:

  • To attract the consumer the producer will bring out newer and finer varieties of goods.
  • The existence of private property and the driving force of profit motive results in high standard of living.
  • Capitalism works automatically through the price mechanism.
  • The freedom of enterprise results in maximum efficiency in production.
  • All activities under capitalism enjoy the maximum amount of liberty and freedom.
  • Under capitalism freedom of choice brings maximum satisfaction to consumers.
  • Capitalism preserves fundamental rights such as right to freedom and right to private property.
  • It rewards men of initiative and enterprise.
  • Country as a whole benefits through growth of business talents, development of research, etc.

Demerits of Capitalism

  1. In capitalism the enormous wealth produced in apportioned by a few. This causes rich, richer and poor, poorer.
  2. Welfare is not protected under capitalism, because here the aim is profit and not the welfare of the people.
  3. Economic instability in terms of over production, economic depression, unemployment, etc., is very common under capitalism.
  4. the producer spends huge amounts of money on advertisement and sale promotion activities like fair, exhibitions, etc.
  5. Class conflict arises between employer and employee. They will be paid low wages and this leads to strikes and lock-outs.
  6. Productive resources are misused under capitalism. They are used for the production of luxuries as they will bring high profits.
  7. ‘Capitalism leads to the formation of monopolies.
  8. There is no security of employment under capitalism.

 

Socialist economy: In this economy, the material means of production i.e. factories, capital, mines, etc. are owned by the whole community represented by the State. All members are entitled to get benefit from the fruits of such socialized planned production on the basis of equal rights. Some important characteristics of this economy are:

Here, production and distribution of goods are aimed at maximizing the welfare of the community as a whole.

  1. There is collective ownership of all means of production except small farms, workshops and trading firms which may remain in private hands. As a result of social ownership, profit-motive and self-interest are not the driving force of economic activity as it is in the case of a market economy. The resources here are used to achieve certain socio-economic objectives.
  2. There is a central authority to set and accomplish socio-economic goals; that is why it is called a centrally planned economy. Major economic decisions, such as what to produce, when and how much to produce, etc., are taken by the central authority.
  3. Freedom from hunger is guaranteed but consumers’ sovereignty gets restricted by selective production of goods. The range of choice is limited by planned production. However, within that range an individual is free to choose what he likes most.

The right to work is guaranteed but the choice of occupation gets restricted because these are determined by some authority on the basis of certain socio-economic goals before the nation.

  1. A relative equality of income is an important feature. Among other things, differences are narrowed down by lack of opportunities to accumulate private capital. Educational and other facilities are enjoyed more or less equally; thus the basic causes of inequalities are removed.
  2. Price mechanism exists in a socialist economy but it has only a secondary role, e.g., to secure disposal of accumulated stocks. Since allocation of productive resources is done according to a predetermined plan, the price mechanism as such does not influence these decisions. In the absence of the profit motive, price mechanism loses its predominant role in economic decisions. The erstwhile U.S.S.R. is an example of socialist economy. In today’s world there is no country which is purely socialist.

 

Merits of Socialism

  1. Equitable distribution of wealth and income and provision of equal opportunities for all help to maintain social justice.
  2. In socialistic economy there will be better utilization of resources and it ensures the maximum production. Socialist economy means planned economy.
  3. Waste of all kinds is avoided through strict economic planning.
  4. In planned economy unemployment is removed, business fluctuation are eliminated and stability is brought about and maintained.
  5. The absence of profit motive helps the community to develop a co-operative mentality and avoids class war.
  6. Socialism ensures right to work and minimum standard of living to people.
  7. Under socialisms the labourers and consumers are protected from the exploitation by the employer and monopolies respectively.

 

Demerits of Socialism

  1. Socialism involves the predominance of bureaucracy. Moreover, there may also be corruption, redtapism, favoritism, etc.
  2. It restricts the freedom of individuals as there is state ownership of the material means of production and state direction and control of economic activity.
  3. Socialism takes away such right as the right of private property.
  4. It will not provide necessary incentive to hard work in the form of profit.
  5. There is no proper basis for cost calculation. In the absence of such practice, the most economic and scientific allocation of resources and the efficient functioning of the economic system are impossible.
  6. State monopolies created by socialism will sometime become uncontrollable. This will be more dangerous than the private monopolies under capitalism.
  7. Under socialism the consumers have no freedom of choice. Therefore what state produces has to be accepted by the consumers.
  8. The extreme form of socialism is not at all practicable.

 

The Mixed Economy

In a mixed economy the aim is to develop a system which tries to include the best features of both the controlled economy and the market economy while excluding the demerits of both. It appreciates the advantages of private enterprise and private property with their emphasis on self-interest and profit motive. Vast economic development of England, the USA etc. is due to private enterprise. At the same time, it is noticed that private property, profit motive and self-interest of the market economy may not promote the interests of the community as a whole and as such the government should remove these defects of private enterprise. For this purpose, the government itself must run important and selected industries and eliminate the free play of the profit motive and self-interest. Private enterprise which has its own significance is also allowed to play the positive role in a mixed economy.

The concept of mixed economy is of recent origin. J.M. Keynes, one of the greatest economists of the 20th century favoured the idea of a mixed economy as a compromise between socialism and capitalism.

Features of a mixed economy

  1. In mixed economy there is the co-existence of both private and public enterprise. In fact, in a mixed economy, there are three sectors of industries :
    • Private sector

Production and distribution are managed and controlled by private individuals and groups. Industries in this sector are based on self-interest and profit motive. The system of private property exists and personal initiative is given full scope. However, private enterprise may be regulated by the government directly and or indirectly by a number of policy instruments.

  • Public sector

Industries in this sector are not primarily profit-oriented but are set up by the State for the welfare of the community.

  • Combined sector

A sector in which both the government and the private enterprises have equal access, and join hands to produce a commodity, leading to the establishment of joint sectors.

  1. Planned Economy: a mixed economy is a planned economy, i.e. an economy in which the government has a clear and definite economic plan. Public sector enterprises have to work according to a plan and to achieve the objectives laid down. The government has also to create necessary atmosphere for the private sector to develop on its own. Thus, it must prepare plans of development for both the private and the public sector enterprises. Allocation of resources in a mixed economy should be better since it attempts to combine the productive efficiency of capitalism and distributive justice of socialism.
  2. Balanced Regional Development: in a mixed economy balanced regional development is expected. Public sector enterprises may be located in the backward regions so as to ensure its development. Further by way of subsidies and other incentives private sector may be lured to establish and develop industries in backward regions.
  3. A Dual System of Pricing exists: in a mixed economy, a dual system of pricing exists. In private sector, prices of goods and factors of production are determined through the free play of market forces of demand and supply. In public sector, the state determines prices of various products. The state reserves itself the right to keep different prices for public sector units and private sector units. The state may also fix the prices of certain essential commodities which are used by the common man. For example, in India, the prices of essential commodities like diesel, LPG, are fixed by government. Overall planning is done by the State Authority called Planning Commission in countries like India who have adopted mixed economy.

 

Merits of Mixed Economy:

  1. Mixed economy secures the merits of both capitalism and socialism while avoiding the evils of both.
  2. Mixed economy protects individual freedom. Under the system, individuals have the freedom of consumption, choice of occupation, freedom of enterprise and freedom of expression.
  3. Price mechanism is allowed to operate under mixed economy.
  4. Reducing the inequalities of wealth and class struggle is one of the aims of mixed economy.
  5. Economic fluctuations can be avoided due to centrally planned economy.
  6. Mixed economy helps under-developed countries to have rapid and balanced economic development.

 

 

 

De-merits of Mixed Economy

  1. Mixed Economy is difficult to operate. Balancing and adjusting the public and private sector is often difficult.
  2. Excessive controls and heavy taxes are likely to prevail under mixed economy. These will discourage production in the private sector.
  3. Problems of red-tapism, nepotism, favouritism, officialdom, etc. are also found in this type of economic system.
  4. Mixed economy is described by Schumpeter as “Capitalism in the oxygen tent”. According to him it is only a trick of the capitalists to cheat the working class by offering them some temporary advantage like social security, uplift of the depressed classes, etc.

CPT – Full Syllabus Test

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Fundamentals of Accounting (FOA)

 

Test Paper 1

 

Answer all questions. Each question carries 2 marks.

 

Choose the correct answer among the alternatives given. Suitable justification needs to be provided.

 

Section A: Fundamentals of Financial Accounting [60 marks]

 

Q1. The basic concepts related to Balance Sheet are

(a)Cost Concept

(b)Business Entity Concept

(c)Accounting Period Concept

(d)Both (a) and (b) above

 

Q2. As per the Double entry concept

(a)Assets+ Liabilities = Capital

(b)Capital = Assets – Liabilities

(c )Capital – Liabilities = Assets

(d )Capital + Assets = Liabilities

 

Q3. Only the significant events which affect the business must be recorded as per the principle of

(a)Separate Entity

(b)Accrual

(c )Materiality

(d )Going Concern

 

Q4. The underlying accounting principle(s) necessitating amortization of intangible asset(s) is/are

(a)Cost Concept

(b)Realization Concept

(c)Matching Concept

(d)Both (a) and (c) above.

 

Q5. Recording of Fixed Assets at cost ensures adherence of

(a)Conservatism Concept

(b)Going Concern Concept

(c)Cost Concept

(d)Both (a) and (b) above.

 

Q6. Which of the following is an example of Personal Account?

(a)Machinery

(b)Rent

(c )Cash

(d )Creditor.

 

Q7. Payment received from Debtor

(a)Decreases the Total Assets

(b)Increases the Total Assets

(c )Results in no change in the Total Assets

(d)Increases the Total Liabilities

 

Q8. Cash Purchases

(a)Increases Assets

(b)Results in no change in the Total Assets

(c )Decreases Assets

(d )Decrease Liability.

 

Page 1

 

 

Q9. Journal is a

(a)Book of original entry

(b)Classified summery of all transactions

(c)Permanent record

(d)Both (a) and (b) above.

 

Q10. Goods returned from X is entered as

(a)Debit X A/c; Credit Purchase Return A/c

(b)Debit X A/c; Credit Cash A/c

(c)Debit Sales Return A/c; Credit X A/c

(d)Debit X A/c; Credit Sales A/c

 

Q11. Debit side of Bank Pass book corresponds to –

(a)Credit side of Cash Book

(b)Debit side of Cash Book

(c)Debit side of Trial Balance

(d)Credit side of Balance Sheet.

 

Q12. Debit balance as per bank pass book mean —

(a)Surplus cash

(b)Bank Overdraft

(c)Terms deposits with bank

(d)None of these.

 

Q13. Provision is created for —

(a)Unknown Liabilities

(b)Known Liabilities

(c)Creation of Secret Reserves

(d)All the above.

 

Q14. The main objective of providing depreciation is to

(a)Calculate the true profit

(b)Show the true financial position in the Balance Sheet

(c)Provide funds for replacement of fixed assets

(d)Both (a) and (b) above

 

Q15. In which of the following methods, the cost of the asset is spread over in equal proportion during its useful

economic life?

(a)Straight-line method

(b)Written down value method

(c )Units-of-production method

(d )Sum-of-the years’-digits method

 

Q16. Depreciation is calculated on the

(a)Cost price of asset

(b)Market price

(c )Cost+ Transport+ Installation expenses

(d )Cost or market values whichever is less.

 

Q17. Cost of goods sold excludes-

(a)Opening Stock

(b)Carriage inward

(c )Wages & Salary

(d )Postage & Stamps.

 

Q18. Which of the following is not classified as inventory in the financial statements?

(a)Finished goods

(b )Work-in-process

(c )Stores and spares

(d )Advance payments made to suppliers for raw materials.

 

Page 2


 

Q19. The creation of provision for doubtful debts given as an adjustment requires

(a )Debit Profit and Loss Account and deduct the provision from debtors

(b)Credit Profit & Loss Account and deduct the provision from debtors

(c )Credit Profit and Loss Account and add the provision to debtors

(d )Debit Profit & Loss Account and add the provision to debtors.

 

Q 20. Property, Plant and Equipment are conventionally presented in the Balance Sheet at

(a )Replacement cost – Accumulated Depreciation

(b)Historical cost – Salvage Value

(c )Historical cost – Depreciation portion thereof

(d )Original cost adjusted for general price-level changes.

 

Q 21. Outstanding salaries is shown as

(a)An Asset in the Balance Sheet

(b )A Liability

(c )By adjusting it in the P & L A/c

(d )Both (b) and (c) above.

 

Q 22. A club paid subscription fees of `1,400. Out of which ` 200 is prepaid. In such case

(a)P&L A/C is debited with ` 1,400

(b)P&L A/C is debited with ` 1,200

(c )`200 is shown as current asset

(d )Both (b) and (c) above.

 

 

Q 23. Early payment of a Bill of Exchange is known as —

(a )Retirement

(b)Renewal

(c )Discount

(d )Endorsement.

 

Q24. A consignor is entitled to ——————

(a) Profit on consignment

(b) Commission on Sales

(c) Reimbursement of expenses

(d) Interest on capital

 

Q25. What does the balance in Memorandum Joint Venture A/c shows—

(a) Profit or Loss

(b) Closing Stock

(c) Balance due from other Co-venturer

(d) Difference in Trial Balance.

 

Q26. Joint Bank A/c is a –

(a) Nominal A/c

(b) Personal A/c

(c) Real A/c

(d) Dummy A/c

 

Q 27. For loose tools which method of depreciation is more appropriate

(a )Annuity Method

(b )Reducing Balance Method

(c )Production Method

(d )Revaluation Method

 

 

 

 

 

 

 

 

 

Page 3


Q28. Which of these will cause change in working capital

(a )Payment of Creditors in cash

(b )Realization of amount due from the Debtors

(c )Sale of office equipment for cash

(d )Providing depreciation on Plant and Machinery.

 

Q29. Which of the following accounting treatments is/are true in respect of accrued commission appearing on

the debit side of a Trial Balance?

(a)It is shown on the debit side of the Profit and Loss Account

(b)It is shown on the credit side of the Profit and Loss Account

(c)It is shown on the liabilities side of the Balance Sheet

(d)It is shown on the assets side of the Balance Sheet.

 

Q30. Accounting for Fixed Assets is related to

(a)AS 7

(b )AS 14

(c )AS 10

(d )AS 21.

 

 

Section B: Fundamentals of Cost and Management Accounting [40 marks]

 

Q 31. Which of the following is not a function of Cost Accounting?

(a)Cost ascertainment

(b)Planning and control

(c) Decision – making

(d)External reporting.

 

Q32. A cost is

(a ) A sacrifice

(b) Release of something

(c)Measure of consumption of resources

(d) All of the above.

 

Q33. The total cost incurred in the operation of a business undertaking other than the cost of manufacturing and

production is known as

(a)Direct cost

(b )Variable cost

(c )Commercial cost

(d )Conversion cost.

 

Q34. The cost of obsolete inventory acquired several years ago, to be considered in a keep vs. disposal decision

is an example of :

(a)Uncontrollable cost

(b)Sunk cost

(c)Avoidable cost

(d)Opportunity cost.

 

Q35. Which of the following is an accounting record?

(a)Bill of Material

(b)Bin Card

(c)Stores Ledger.

(d)All of these.

 

Q36. Which of the following best describes the manufacturing costs?

(a)Direct materials, direct labor and factory overhead

(b)Direct materials and direct labor

(c )Direct materials, direct labor, factory overhead, and administrative overhead

(d )Direct labor and factory overhead.

 

 

 

Page 4


Q37. Which of the following is to be called product cost ?

(a )Material cost

(b )Labor cost

(c )FOH cost

(d )All of the above.

 

 

Q38. Which of the following cannot be used as a base for the determination of overhead absorption rate?

(a)Number of units produced

(b)Prime cost

(c )Conversion cost

(d)Discount Allowed.

 

Q39. PVC Company has ordering quantity 10,000 units. They have storage capacity 20,000 units, the average

inventory would be:

(a )20,000

(b )5,000

(c )10,000

(d )25,000

 

Q40. While transporting petrol, a little quantity will be evaporated; such kind of loss is termed as:

(a)Normal Loss

(b)Abnormal Loss

(c)It is incremental loss

(d)It cannot be abnormal loss

 

Q41. Which of the following element must be taken into account while calculating total earnings of a worker

under different incentive wage schemes?

(a)Rate per unit

(b )Units of production

( c )Extra time taken by employee to complete the production

(d )Number of workers employed.

 

Q42. Which of the following is considered as basic systems of remunerating labor?

(a)Time rate system

(b )Piece rate system

(c )Halsey Premium plan

(d )Both time rate and piece rate system

 

Q43. If, Gross profit = ` 40,000 GP Margin = 20% of sales What will be the value of cost of goods sold?

(a)`160,000

(b)`120,000

(c)`40,000

(d)`90,000.

 

Q44. Where—————- is equal, that point is called Economic order quantity.

(a )Ordering cost

(b )Carrying cost

(c )Ordering and carrying cost

(d )Per unit order cost.

 

Q45. Prime cost is :

(a)The total of direct costs

(b)All costs incurred in manufacturing a product

(c )The material cost of a product

(d )The cost of operating a department

 

 

 

 

 

 

 

 

Page 5


Q46. A segment of the business that generates both revenue and cost is called:

(a )Profit Center

(b )Cost Center

(c )Cost driver

(d )All of the above.

 

Q47. Operating cost in often named as:

(a )Manufacturing cost plus commercial expenses

(b )Prime cost plus factory overheads

(c )Direct material plus direct labour

(d )Selling plus administrative expenses.

 

Q48. At break-even point of 400 units sold the variable costs were ` 400 and the fixed costs were `200. What will

be the 401 units sold contributing to profit before income tax?

(a )`0.50

(b )`1.00

(c)`1.50

(d )None of the above.

 

Q49. Depreciation based on the number of units produced would be classified as:

(a )Out of pocket cost

(b )Differential cost

(c )Variable cost

(d )Fixed cost

 

Q50. Under perpetual Inventory system the Inventory is treated as:

(a)Assets

(b)Liability

(c)Income

(d)Expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Page 6


Fundamentals of Accounting(FOA)

 

Test Paper 2

 

Answer all questions. Each question carries 2 marks.

 

Choose the correct answer among the alternatives given. Suitable justification needs to be provided.

 

Section A: Fundamentals of Financial Accounting [60 marks]

 

Q1. Accounting does not record non- financial transactions because of

(a) Entity Concept

(b) Accrual Concept

(c) Cost Concept

(d) Money Measurement Concept.

 

Q2. Which of the following is not a Fixed Asset?

(a)Building

(b)Bank balance

(c)Plant

(d)Goodwill.

 

Q3. The basic concepts related to P & L Account are

(a )Realization Concept

(b)Matching Concept

(c )Cost Concept

(d )Both (a) and (b) above.

 

Q4. Under which of the following concepts are shareholders treated as creditors for the amount they paid on the

shares they subscribed to?

(a)Cost Concept

(b)Duality Concept

(c)Business Entity Concept

(d)Since the shareholders own the business, they are not treated as creditors.

 

Q5. Which of the following is an example of Capital Expenditure?

(a) Insurance Premium

(b) Taxes and Legal expenses

(c) Discount allowed

(d) Customs duty on Import of Machinery.

 

Q6. Which of the following events is/are not recorded in the books of a business?

(a)Significant monetary events after the Balance Sheet date

(b)Death of a Chief Executive of the Business

(c)Government investigations into the pricing policies of the Business

(d)Both (b) and (c) above.

 

Q7. Payment of Salary is recorded by

(a)Debiting Salary A/c, Crediting Cash A/c

(b)Debiting Cash A/c, Crediting Salary A/c

(c)Debiting Employee A/c, Crediting Cash A/c

(d)Debiting Cash A/c, Crediting Employee A/c.

 

Q8. Which of the following transactions would cause a change in “owners’ equity”?

(a) Repayment of a Bank Loan

(b) Payment of Dividends and Unprofitable Operations

(c) Sale of Land on Credit

(d) Purchase of Assets and incurrence of Liabilities

 

 

 

 

Page 7


Q9. Which of the following is not an Asset?

(a) Stock of stationery

(b) Goodwill

(c) Profit and Loss Account (Credit Balance)

(d) Accounts Receivable.

 

Q10. The periodical total of discount column on receipts side of a Triple Column Cash Book is recorded to the

(a) Credit side of Discount Account

(b) Credit side of provision for Discount Account

(c) Debit side of Discount Account

(d) Credit side of Debtor’s Account.

 

Q11. Which of the following statements is correct?

(a) The Trial Balance shows the profit earned by the concern during a period

(b )The Trial Balance shows only balances of Assets and Liabilities

(c )The Trial Balance shows only Nominal Account balances

(d )The Trial Balance has no statutory importance from the point of view of law.

 

Q12. ` 5101 received from M but credited to S A/c . This is an error of-

(a)Principle

(b)Omission

(c )Commission

(d )Compensating.

 

Q13. Legacy are generally-

(a) Capitalized

(b) Treated Loss

(c) Revenue Expenses

(d) Deferred Revenue expenses.

 

Q14. Which of the following is false?

(a) Owners Equity + Outsiders Liability = Assets

(b) Asset – Capital = Liability

(c) Assets + Capital = Liabilities

(d) Both (a) and (b) above.

 

Q15. A book wherein various accounts are opened is called—

(a) Subsidiary books

(b) Journal

(c) Ledger

(d) Trial Balance.

 

Q16. Bank reconciliation is a statement prepared to reconcile—

(a) Trial balance

(b) Cash book

(c) Bank A/c

(d) Cash as per cash book with bank balance as per bank pass book.

Q17. Which of the following is not a method of charging depreciation

(a) Straight line Method

(b) Written down value Method

(c) Discounted present value Method

(d) Sum of digits Method.

 

Q18. Bad debts recovered is

(a) Credited to P&L A/c

(b) Debited to P&L A/c

(c) Reduced from debtors in Balance Sheet

(d) Added to debtors in Balance Sheet.

 

 

 

Page 8


 

Q19. Sundry debtors as per Trial Balance is ` 43,000 which includes ` 2,200 due from ‘H’ in respect of goods sent to

him on approval basis, the cost price of which is ` 1,800. Rectification would involve:

(a) Adding ` 2,200 to closing stock

(b) Deducting ` 1,800 from closing stock and deducting ` 2,200 each from debtors and sales

(c) Adding ` 1,800 to closing stock and deducting ` 2,200 each from debtors and sales

(d) Deducting ` 1,800 from debtors.

 

Q20. Which of the following will not appear in Profit and Loss Account of a business?

(a) Drawings

(b) Bad debts

(c) Accrued expenses

(d) Reserve for discount on Sundry Creditors.

 

Q21. Which of the following statements is/are false?

(a) Accommodation bills are drawn for the benefit of drawer only

(b) Bills sent for collection is an asset

(c) Bills of exchange cannot be drawn on a banker

(d) Both (a) and (c) above.

 

Q22. When a B/R is endorsed by the Drawer what entry is passed by the Drawee—

(a) B/R A/c Dr. to Drawer A/c Cr.

(b) B/P A/c Dr. to Drawer A/c Cr.

(c) 3rd Party’s A/c Dr. to B/P A/c Cr.

(d ) No entry at all.

 

Q23. Loss on Joint venture is —

(a) Credited to Profit and Loss A/c

(b) Debited to co-venturers capital A/c

(c) Credited to Capital Fund A/c

(d) Debited to Suspense A/c.

 

Q24. Which of these accounts are not opened in a joint venture

(a) Stock reserve

(b) Joint bank A/c

(c) Joint venture A/c

(d) Co-venturers personal A/c.

 

Q25. AS ———— replaced AS 8

(a) 29

(b) 30

(c) 28

(d) 26

 

Q26. On 1st January 2013 X paid `120,000 being rent upto 31.12.2013. If the accounts are closed on 31.03.12.

`90,000 will be shown as –

(a)Accrued rent

(b)Prepaid rent / Expenses

(c )Accrued expenses

(d )Accrued income.

 

Q27. The capital of a non-profit organization is generally known as

(a) Equity

(b) Accumulated Fund

(c) Finance Reserve

(d) Cash Fund.

 

 

 

 

 

 

 

Page 9


 

Q28. Loss of goods in transit is borne by—

(a) Consignee

(b) Consignor

(c) Both (a) and (b) proportionately

(d ) Insurance company

 

Q29. Closing stock appearing in the Trial Balance is shown in –

(a)Trading A/c and Balance Sheet

(b )Profit and Loss A/c

(c )Balance Sheet only

(d )Trading A/c only.

 

Q30. Tax deducted at source appears in the Balance Sheet

(a) On the assets side under current assets

(b) On the assets side under loans and advances

(c) On the liabilities side under current liabilities

(d) On the liabilities side under provisions.

 

 

Section B : Fundamentals of Cost and Management Accounting [40 marks]

 

Q31. One of the most important tools in cost planning is:

(a)Direct cost

(b)Cost Sheet

(c)Budget

(d)Marginal Costing.

 

Q32. Conversion cost is equal to the total of

(a)Material Cost and direct wages

(b)Material Cost and indirect wages

(c)Direct wages and factory overhead

(d)Material cost and factory overhead.

 

Q33. Which of the following is not a relevant cost?

(a)Replacement cost

(b)Sunk cost

(c)Marginal cost

(d)Standard cost.

 

Q34. Input in a process is 4000 units and normal loss is 20%. When finished output in the process is only 3240 units,

there is an :

(a)Abnormal loss of 40 units

(b)Abnormal gain of 40 units

(c)Neither abnormal loss nor gain.

(d)Abnormal loss of 60 units.

 

Q35. Idle capacity of a plant is the difference between:

(a)Maximum capacity and practical capacity

(b)Practical capacity and normal capacity

(c )Practical capacity and capacity based on sales expectancy

(d)Maximum capacity and actual capacity.

 

Q36. When P/V ratio is 40% and sales value is `10,000, the variable cost will be

(a)` 4000

(b)` 6000

(c)`10000

(d)Variable Cost cannot be calculated from data given.

 

 

 

 

 

 

 

Page 10


Q 37. When production is below standard specification or quality and cannot be rectified by incurring additional

cost, it is called

(a)Defective

(b)Spoilage

(c)Waste

(d)Scrap

 

Q38. Selling and distribution overhead does not include:

(a)Cost of warehousing

(b)Repacking cost

(c)Transportation cost

(d)Demurrage charges.

 

Q39. If, Sales =`800,000 , Markup rate = 25% of cost , What would be the value of Gross profit?

(a)` 200,000

(b)` 160,000

(c)`480,000

(d)` 640,000.

 

Q40. EOQ is a point where:

(a)Ordering cost is equal to carrying cost

(b)Ordering cost is higher than carrying cost

(c)Ordering cost is lesser than the carrying cost

(d)Total cost is maximum.

 

Q41. Which of the following best describe piece rate system?

(a)The increased volume of production results in decreased cost of production

(b)The increased volume of production in minimum time

(c)Establishment of fair standard rates

(d)Higher output is a result of efficient management.

 

Q42. The term Cost apportionment is referred to:

 

(a)The costs that cannot be identified with specific cost centers.

(b)The total cost of factory overhead needs to be distributed among specific cost centers but must be divided

among the concerned department/cost centers.

(c)The total cost of factory overhead needs to be distributed among specific cost centers.

(d)None of the above.

 

Q43. The time lag between indenting and receiving material is called:

(a)Lead time

(b)Idle time

(c)Stock out time

(d)None of the above.

 

Q44. While preparing the Cost of Goods Sold and Income Statement, the over applied FOH is;

(a)Add back, subtracted

(b)Subtracted, add back

(c )Add back, add back

(d)Subtracted, subtracted.

 

Q45. Data of a company XYZ is given below


Particulars

Sales

Variable cost

Fixed Cost

Break Even Sales in `__________

(a)`1, 00,000

(b)` 2, 00,000

(c)` 13, 00,000

(d)None of the given options .

`

15,00,000

9,00,000

4,00,000


 

 

Page 11


 

Q46. Which of the following represents a CVP equation?

(a)Sales = Contribution margin (Rs.) + Fixed expenses + Profits

(b)Sales = Contribution margin ratio + Fixed expenses + Profits

(c )Sales = Variable expenses + Fixed expenses + profits

(d)Sales = Variable expenses –Fixed expenses + profits .

 

Q47. Group bonus schemes are generally suitable where :

(a)Output depends on individual efforts

(b)Output of individual workers can be measured easily

(c)It is necessary to create a collective interest in the work

(d)Normal loss rate is high.

 

Q48. Overtime premium may be treated, depending on the circumstances, as :

(a)Part of direct wages

(b)Part of production overheads

(c)Part of capital order

(d )All of the above.

 

Q49. CAS 8 requires each type of utility to be treated as :

(a)separate cost object.

(b)not part of cost as not included in material.

(c)not part of cost as they donot form part of product.

(d)treated as administrative overheads.

 

Q50. Which of the following systems of inventory valuation computes cost of goods sold as a residual amount?

(a)Weighted Average.

(b)Last-in-First-out.

(c)Periodic Inventory System.

(d)Specific Identification.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Page 12


 

Fundamentals of Accounting (FOA)

 

Test Paper 3

 

Answer all questions. Each question carries 2 marks.

 

Choose the correct answer among the alternatives given. Suitable justification needs to be provided.

 

Section A: Fundamentals of Financial Accounting [60 marks]

 

Q1. Recording of Capital contributed by the owner as liability ensures the adherence of principle of

(a )Double Entry

(b)Going Concern

(c)Separate Entry

(d)Materiality.

 

Q2. P & L Account is prepared for a period of one year by following

(a)Consistency Concept

(b)Conservatism Concept

(c )Accounting Period Concept

(d)Cost Concept.

 

Q3. The accounting measurement that is not consistent with the Going Concern concept is

(a)Historical Cost

(b)Realization

(c)The Transaction Approach

(d)Liquidation Value.

 

Q4. Provision for bad debt is made as per the

(a) Entity Concept

(b) Conservatism Concept

(c) Cost Concept

(d) Going Concern Concept

 

Q5. Purchase of goods on credit from A is recorded as

(a) Debit Purchases A/c; Credit Cash A/c

(b) Debit A A/c; Credit Purchases A/c

(c) Debit Purchases A/c; Credit A A/c

(d )Debit A A/c; Credit Stock A/c.

 

Q6. When Fixed Assets are sold

(a)The Total Assets will increase

(b)The Total Liabilities will increase

(c)The Total Assets will decrease

(d)There is no change in the Total Assets.

 

Q7. Withdrawals by proprietor would

(a)Reduce both Assets and Owner’s Equity

(b)Reduce Assets and increase Liabilities

(c)Reduce Owner’s Equity and increase Liabilities

(d)Have no affect on the Balance Sheet.

 

Q8. Trade discount allowed at the time of Sale of goods.

(a)Is recorded in Sales Book

(b)Is recorded in Cash Book

(c)Is recorded in Journal

(d)Is not recorded in Books of Accounts.

 

 

 

 

 

Page 13


 

Q9. R Ltd. makes purchases on credit. If the purchases are not as per the specifications, the company returns

them to the suppliers. The book, that is used to record such returns is

(a) Returns Inward Book

(b) Returns Outward Book

(c) Cash Book

(d) Journal Proper.

 

Q10. Which of the following statements is false?

(a) Credit side total of Discount column of Cash Book is an income

(b) Credit balance of Bank Pass Book is an overdraft

(c) Debit balance of Bank column of Cash Book is an Asset

(d) Debit balance of Cash column of Cash Book is an Asset.

 

Q11. Purchase of Fixed Assets on credit is originally recorded in

(a) Purchases Book

(b) Ledger

(c) Cash Book

(d) Journal Proper.

 

Q12. Bank Overdraft is shown as a

(a) Current Liability

(b) Contingent Liability

(c) Unsecured Loan

(d) Provision.

 

Q13. `500 paid as cartage on new Plant and Machinery, this was debited to Carriage Inward A/c. This is an error

of-

(a)Principle

(b)Omission

(c)Commission

(d)Compensating.

 

Q14. Which of the following assets is a fictitious asset

(a) Goodwill A/c

(b) Prepaid Rent A/c

(c) Outstanding Salary A/c

(d) Preliminary expenses A/c.

 

Q15. Which of these is not a process of Accounting-

(a) Printing

(b) Summarizing

(c) Classifying

(d) Journals.

 

Q16. Endowment fund receipt is traded as-

(a) Casual Receipt

(b) Revenue Receipt

(c) Loss

(d) Expenses.

 

Q17. Opening entries are generally passed through-

(a) General Journal

(b) Purchase Journal

(c) Profit and Loss A/c

(d) Suspense A/c.

 

Q18. Which of the following is not a contingent liability?

(a) Claims against the company not acknowledged as debts

(b) Debts included on debtors which are doubtful in nature

(c) Uncalled liability on partly paid shares

(d) Arrears of cumulative fixed dividends.

Page 14

 

 

 

Q19. Closing stock is generally valued at

(a) Cost Price

(b) Market Price

(c) Cost price or Market price whichever is higher

(d) Cost price or Market price whichever is lower.

 

Q20. The concept of conservatism will have the effect of

(a) Overstatement of Assets

(b) Understatement of Assets

(c) Overstatement of Liabilities

(d) Understatement of Liabilities.

 

Q21. Closing stock in the Trial Balance implies that

(a) It is already adjusted in the opening stock

(b) It is adjusted in the Purchase A/c

(c) It is adjusted in the Cost of Sale A/c

(d) It is adjusted in the Profit &Loss A/c.

 

Q22. Which of the following should not be treated as revenue expenditure?

(a) Interest on loans and debentures

(b) Annual fire insurance premiums on Plant and Equipment

(c) Sales tax paid in connection with the purchase of office equipment

(d) Small expenditures on long- lived assets, such as `20 for a paper weight.

 

Q23. From the accounting point of view, loss means

(a) Increase in Liability

(b) Decrease in asset

(c) Increase in owner’s equity

(d) Decrease in Owner’s equity.

 

Q24. Which of the following is a Real A/c

(a) Salary A/c

(b) Bank A/c

(c) Building A/c

(d) Goodwill A/c.

 

Q25. Depreciation is a process of

(a) Valuation

(b) Valuation and allocation

(c) Allocation

(d) Appropriation

 

Q26. The drawer of a trade bill passes relevant entries with regard to the transaction involved in it. But, in case of

an accommodation bill, he passes an entry in addition to the usual entries. The additional entry so passed is with

respect to

(a) Discounting of the bill with the bank

(b) Payment of the bill on due date

(c) Remitting or receiving the amount

(d) Sending the bill to bank for collection

 

Q27. A consignee is entitled to ———————

(a) Commission on sales

(b) Reimbursement of the expenses

(c) Del credere commission

(d) All of the above.

 

 

 

 

 

Page 15


Q28. Joint Venture is a ——

(a) Personal A/c

(b) Nominal A/c

(c) Real A/c

(d) Memorandum A/c.

 

Q29. Which of these is not a feature of a Joint venture

(a) Continuing business

(b) No firm name

(c) Partners called co-venturer

(d) Partnership for limited purpose.

 

Q30. Opening Stock ` 15,000, Closing Stock ` 6,000, Total Purchase during the year ` 30,000. Given that Opening

Stock inadvertently includes postage stamps of ` 1,500. Find the cost of goods sold

(a)` 40,000

(b)` 39,000

(c)` 37,500

(d)` 36,000.

 

Section B : Fundamentals of Cost and Management Accounting [40 marks]

 

 

Q31. A cost centre is :

(a)A unit of product or service in relation to which costs are ascertained

(b)An amount of expenditure attributable to an activity

(c)A production or service location, function, activity or item of equipment for which costs are accumulated

(d)A centre for which an individual budget is drawn up.

 

Q32. The cost of electricity bill of the factory is treated as:

(a)Fixed cost

(b)Variable cost

(c)Step cost

(d)Semi variable cost.

 

Q33. A store ledger card is similar to the ________ .

(a)Stock ledger

(b)Bin card

(c)Material card

(d)Purchase requisition card.

 

Q34. The forex component of imported material cost is converted

(a)At the rate on the date of settlement

(b)At the rate on the date of transaction

(c)At the rate on date of delivery

(d)None of the above.

 

Q35. Total unit costs are

(a)Independent of the cost system, used to generate them

(b)Needed for determining product contribution

(c)Irrelevant in marginal analysis

(d)Relevant for cost-volume-profit analysis.

 

Q36. A company maintains a margin of safety of 25% on its current sales and earns a profit of ` 30 lakhs per

annum. If the company has a profit volume (P/V) ratio of 40%, its current sales amount to

(a)`200 lakhs

(b)`300 lakhs

(c)`325 lakhs

(d)None of the above.

 

 

 

 

 

Page 16


Q37. H Ltd. Manufactures product BM for last 5 years. The company maintains a margin of safety of 37.5% with

overall contribution to sales ratio of 40%. If the fixed cost is ` 5 lakh, the profit of the company is

(a)`24.00 laks

(b)`12.50 lakh

(c)` 3.00 lakh

(d) None of the above.

 

Q38. Maximum possible productive capacity of a plant when no operating time is lost , is its

(a)Practical capacity

(b)Theoretical capacity

(c)Normal capacity

(d)Capacity based on sales expectancy.

 

Q39. When overtime is required for meeting urgent orders, overtime premium should be

(a)Charged to Costing Profit and Loss A/c

(b)Charged to overhead costs

(c)Charged to respective jobs

(d)None of the above.

 

Q40. Average consumption x Emergency time is a formula for the calculation of:

(a)Lead time

(b)Re-order level

(c)Maximum consumption

(d)Danger level.

 

Q41. Which of the following is not true about differential costs?

(a)It is a broader concept than variable cost as it takes into account additional fixed costs caused by

management decisions

(b)With the passage of time and change in situation, differential costs will vary

(c)The difference in cost between buying them from outside or make them in the company is differential cost,

irrelevant for decisions

(d)They are extra or incremental costs caused by a particular decision.

 

Q42. Which of the following statement is TRUE about historical cost?

(a)It is always relevant to decision making

(b)It is always irrelevant to decision making

(c)It is always an opportunity cost

(d)It is always realizable value.

 

Q43. ABC Company makes a single product which it sells for `20 per unit. Fixed costs are `75,000 per month and

product has a profit/volume ratio of 40%. In that period actual sales were`225,000.

Required: Calculate ABC Company Break Even point in `

(a)`187, 500

(b)`562, 500

(c)` 1,500,000

(d)None of above.

 

Q44. All of the following are true EXCEPT:

(a)Profit + Fixed cost + Variable cost = Sales

(b)Profit + Fixed cost = Sales – Variable cost

(c)Contribution margin – Fixed cost = Profit

(d)Profit + Fixed cost = Sales + Variable cost.

 

Q45. The components of total factory cost are:

(a)Direct Material + Direct Labor

(b)Direct Labor + FOH

(c)Prime Cost only

(d)Prime Cost + FOH

 

 

 

 

 

Page 17


 

Q46. Which of the following is not a method of costing ?

(a)Marginal costing

(b)Job costing

(c)Process costing

(d)Operating costing.

 

Q47. In a shutdown decision, one has to consider :

(a)Contribution

(b)Identifiable fixed cost, if any

(c)Impact of shutdown on other products, if any

(d)All of the above.

 

Q48. Any activity for which a separate measurement of costs is desired is called :

(a)Cost unit

(b)Cost centre

(c)Cost object

(d)Profit unit.

 

Q49. The firms monthly cost of production is`1,46,000 at an output level of 8,000 units. If it achieves an output level

of 12,000 units it will incur production cost of ` 1,94,000 cost of production for 15,000 units is :

(a` 1,80,000

(b)` 2,00,000

(c)`50,000

(d)`2,30,000.

 

Q50. The basic research cost should be treated as :

(a)Product cost

(b)Production cost

(c)Production overhead

(d)Period cost.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Page 18


 

Fundamentals of Accounting(FOA)

 

Test Paper 4

 

Answer all questions. Each question carries 2 marks.

 

Choose the correct answer among the alternatives given. Suitable justification needs to be provided.

 

Section A: Fundamentals of Financial Accounting [60 marks]

 

Q1. Which of the following is true?

(a) Bank Account is a Personal Account

(b) Stock of stationery Account is a Nominal Account

(c) Returns Inward Account is a Personal Account

(d) Outstanding rent Account is a Nominal Account.

 

Q2. Gross Profit is the difference between

(a) Net Sales and Cost of goods sold

(b) PAT and Dividends

(c) Net Sales and Cost of production

(d) Net Sales and Direct costs of productions.

 

Q3. If the Going Concern concept is no longer valid, which of the following is true?

(a)All prepaid assets would be completely written-off immediately

(b)Total contributed Capital and Retained Earnings would remain unchanged

(c)Intangible Assets would continue to be carried at net Amortized historical cost

(d)Land held as an Investment would be valued at its realizable value.

 

 

Q4. Which of the following concept is not considered as basic principle of accounting?

(a)Materiality Concept

(b)Consistency Concept

(c)Matching Concept

(d)Logical Concept.

 

Q5. Withdrawal of goods from stock by the owner of the business for personal use should be recorded by

(a)Debiting Stock Account and crediting Capital Account

(b)Debiting Capital Account and crediting Drawings Account

(c)Debiting Drawings Account and Crediting Stock Account

(d)Debiting Stock Account and Crediting Drawings Account.

 

Q6. If the Petty Cash fund is not reimbursed just prior to year end and an appropriate adjusting entry is not made,

then

(a)The petty cash account is to be returned to the company’s cashier

(b)Expenses are overstated and Cash is understated

(c)Cash is overstated and expenses are understated

(d)Cash is overstated and expenses are overstated.

 

Q7. Purchase of goods on credit

(a) Increases Liabilities

(b) Increases Assets

(c) Increases both Assets and Liabilities

(d) Decreases Assets.

 

Q8. If Office Equipment is purchased for cash, what effect will this transaction have on the financial position of the

company?

(a) There is no change in the Assets, Liabilities and Owners’ Equity

(b) There is a decrease in Assets, increase in Liabilities and no change in Owners’ Equity

(c) There is a decrease in Assets, no change in Liabilities and a decrease in Owners’ Equity

(d) There is an increase in Assets, decrease in Liabilities and no change in Owners’ Equity

Page 19

 

Q9. Which of the following is/are fixed asset(s)?

(a) Closing inventory

(b) Fixed Deposits in a bank

(c) Patents

(d) Prepaid expenses.

 

Q10. Which of the following is a liability of a firm?

(a) Debit balance of analytical Petty Cash Book

(b) Credit balance of Bank Pass book

(c) Debit balance of Bank column of Cash Book

(d) Credit balance of Bank column of Cash Book

 

Q11. Which of the following errors is an error of principle?

(a) Total sales figure was taken as `19,373 instead of ` 19,733

(b) A discount of ` 30 allowed to Mr.A was not recorded in the discount allowed account

(c) Legal charges for acquisition of building for ` 500 was entered in the Legal Expenses Account

(d) ` 1,000 received from Mr. X was posted to the credit of Mr. M.

 

Q12. Which column of Cash Book is never balanced?

(a) Discount Column

(b) Cash

(c) Bank

(d) Petty Cash.

 

Q13. Interest Account will have-

(a) Debit balance only

(b) Credit balance only

(c) Debit or Credit balance

(d) No balance at all.

 

Q14. If goods worth ` 1,750 returned to a supplier is wrongly entered in sales return book as `1,570 , then

(a) Net Profit will decrease by `3,140

(b) Gross Profit will increase by` 3,320

(c) Gross Profit will decrease by ` 3,500

(d) Gross Profit will decrease by ` 3,320.

 

Q15. AS 4 deals with

  1. a) Prior period adjustments.

b)Fixed assets

c)Current assets

  1. d) Contingencies and Events occurring after the Balance Sheet Date.

 

Q16. The portion of the acquisition cost of the asset yet to be allocated is known as

(a) Written down value

(b) Accumulated value

(c) Salvage value

(d) Residual Value.

 

Q17. Which of the following is an external cause of depreciation

(a) Routine repair and maintenance

(b) Misuse

(c) Obsolescence

(d) Wear and tear.

 

 

 

 

 

 

 

 

 

Page 20


 

Q18. Which of the following is not depreciated

(a)Building

(b)Land

(c)Plant and Machinery

(d)Office equipment.

 

Q19. Prepaid expenses are valued on the Balance Sheet at

(a) Replacement cost

(b) Current cost

(c) Cost to acquire less accumulated amortization

(d) Cost less expired portion.

 

Q20. If unexpired insurance appears in the Trial Balance, it should be

(a) Credited to the Profit & Loss Account

(b) Debited to the Profit & Loss Account

(c) Shown on the liabilities side of the Balance Sheet

(d) Shown on the assets side of the Balance Sheet.

 

Q21. Which of the following is not an intangible asset?

(a) Trade mark

(b) Franchise

(c) Accounts Receivable

(d) Secret Profit.

 

Q22. A Bill of Exchange is drawn on 1st April, 2013 payable after 3 months. The due date of the bill is

(a) 30th June,2013

(b) 1st July,2013

(c) 4th July,2013

(d) 4th August,2013.

 

Q23. A foreign bill of exchange is generally drawn up in —

(a)Triplicate

(b)Duplicate

(c)Single

(d)Quadruplicate.

 

Q24. Consignment Account is a ———————— A/c

(a)Personal

(b)Nominal

(c)Real

(d)Dummy.

 

Q25. Profit or loss on joint venture business is shared by the co-venturers ——

(a) Equally

(b) In the ratio of capital contributed

(c) In the agreed upon ratio

(d) As per seniority.

 

Q26. AS 30 deals with

(a)Accounting Policy

(b)Financial Investment presentation

(c)Financial Investment Reinvestment Measurement

(d)Financial Investment disclosure.

 

Q27. Under casting of the total of Sales A/c will affect —

(a)Gross Profit and Loss

(b)Debtors A/c

(c)Closing Stock

(d)Working Capital.

 

 

 

Page 21


Q28. XYZ send goods worth ` 1,00,000 to Y on consignment basis at 20% above the cost price. The goods are sold

by the consignee on a mark of 15% on invoice price. Find the total mark up % over the cost price of the goods —

(a)30%

(b)38%

(c)35%

(d)25%.

 

Q29. Business expenses excludes…

(a)Fire insurance premium of office building

(b)LIC premium on the life of proprietor

(c)Interest on capital

(d)Repair of office furniture.

 

Q30. Narrations are usually given at the end of

(a)Each journal entry

(b)Each page

(c)Each column

(d)Each account.

 

 

Section B: Fundamentals of Cost and Management Accounting

 

 

Q31. In cost accounting, unavoidable loss is charged to which of the following?

(a)Factory over head control account

(b)Work in process control account

(c)Marketing overhead control account

(d)Administration overhead control account .

 

Q32. A typical factory overhead cost is:

(a)Distribution

(b)Internal audit

(c)Compensation of plant manager

(d)Design.

 

Q33. Which of the given units can never become part of first department of Cost of Production Report?

(a)Units received from preceding department

(b)Units transferred to subsequent department

(c)Lost units

(d)Units still in process.

 

 

Q34. While constructing a Break even chart, the gap between sales line and variable cost line shows which of the

following?

(a)Fixed cost

(b)Break even point

(c)Contribution margin

(d)Variable cost.

 

Q35. A machine cost ` 60,000 five years ago. It is expected that the machine will generate future revenue of

40,000. Alternatively, the machine could be scrapped for `35,000. An equivalent machine in the same condition

cost 38,000 to buy now. Required: Identify the realizable value with the help of given data.

(a)`60,000

(b)` 40,000

(c)` 35, 000

(d)`38,000.

 

 

 

 

 

 

 

Page 22


 

Q36. Which of the following is not included in the administration cost ?

(a)Salaries of general office staff

(b)Salaries of foremen

(c)Office supplies and expenses

(d)Postage, stationary, telephone etc.

 

Q37. Cost of sales is :

(a)Total costs incurred in production, administration and marketing functions

(b)Works cost plus administration overheads

(c)Aggregate of works, administration and marketing overheads

(d)Prime costs plus marketing overheads.

 

Q38. A standard rate is paid to the employee when he completed his job:

(a)In time less than the standard

(b)In standard time

(c)In time more than standard

(d)Both in standard time and more than the standard time.

 

Q39. Store incharge after receiving the material as per the goods received note, places the material at its

location and makes an entry in_______ .

(a)Bin Card

(b)Store Ledger Card

(c)Stock Ledger

(d)None of the above.

 

Q40. Overtime that is necessary in order to fulfill customer orders is called:

(a)Avoidable overtime

(b)Unavoidable overtime

(c)Premium Overtime

(d)Flex time.

 

Q41. What will be the impact of normal loss on the overall per unit cost ?

(a)Per unit cost will increase

(b)Per unit cost will decrease

(c)Per unit cost remain unchanged

(d)Normal loss has no relation to unit cost.

 

Q42. Direct materials cost is `80,000. Direct labor cost is ` 60,000. Factory overhead is`90,000. Beginning goods in

process were ` 15,000. The cost of goods manufactured is `245,000. What is the cost assigned to the ending goods

in process?

(a)` 45,000

(b)`15,000

(c)` 30,000

(d)There will be no ending Inventory.

 

Q43. The contribution margin increases when sales volume and price remain the same and:

(a)Variable cost per unit decreases

(b)Variable cost per unit increases

(c)Fixed costs per unit increase

(d)All of the above.

 

Q44. While calculating the finished goods ending inventory, what would be the formula to calculate

per unit cost?

(a)Cost of goods sold / number of units sold

(b)Cost of goods to be manufactured/ number of units manufactured

(c)Cost of goods manufactured / number of units manufactured

(d)Total manufacturing cost / number of units manufactured .

 

 

 

 

 

 

 

Page 23


Q45. Percentage of Margin of Safety can be calculated in which one of the following ways?

(a)Based on budgeted Sales

(b)Using budget profit

(c)Using profit & Contribution ratio

(d)All of the above.

 

Q46. Interest on own capital is a:

(a)Cash cost

(b)Notional cost

(c)Sunk cost

(d)Part of prime cost.

 

Q47. Normal stores losses are :

(a)Part of prime cost

(b)Part of production overheads

(c)Part of selling and distribution overheads

(d)Written-off to costing and profit and loss account.

 

Q48. The methods of treating cost of small tools in cost accounts include :

(a)Charging to expense

(b)Charging to stores

(c)Capitalizing in a small tools account

(d)All of the above .

 

Q49. Angle of incidence defines :

(a)Systematic risk in CAPM model

(b)Post BEP relationship between total cost and total revenue

(c)Incidental factors in investments

(d)Marginal cost of production.

 

Q50. The process of distribution of overheads allotted to a particular department or cost centre over the units

produced is called :

(a)Allocation

(b)Apportionment

(c)Absorption

(d)Departmentalization.

How to Bill for Support Tax

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There are several companies who need to pay support tax. They have to get authorized, pay tax as required and computer file a regular come back with the support tax regulators. To make sure conformity with these conditions of law, a appropriate system of invoicing, or offering invoices for expenses made by clients, should be in place.

Add tax, cess

While creating an bill for the support delivered, add the support tax and knowledge cess individual items, which are measured on the amount due for the support.

List the number

Ensure that the PAN-based support tax variety plate is estimated on the bill. This allows you and the person taking the transaction to declare a set-off. This helps you to use the support tax obtained on invoices to pay those who do the same in readiness their invoices.

Details

Your bill should have a variety, time frame and deal with, which should coordinate those offered on the support tax signing up.

Record

Maintain a list of the support tax compensated and obtained, and make sure this is available as assisting papers while processing the support taxes under Type ST-3.