Costing Methods 2 Marks Questions with Answers
2 Marks (IMP)
1) What do you mean by costing methods?
The costing methods refers to the methods used in the ascertainment of costs of goods and services.
2) State any four methods of costing?
a) Job costing
b) Batch costing
c) Contract costing
d) Process costing
e) Operating costing
3) What is job costing (or) Define Job Costing?
According to CIMA London defines, “job costing method applies where work is undertaken to customers’ special requirements”. For example: printing press, general engineering work shops, repair shops, interior decorators, painters etc.
4) Name any four industries in which Job Costing is used.
a) Printing press
b) Dry cleaning
c) Painters
d) Engineering works
5) State any two features of job costing?
- Production against customer’s orders not for stock.
- Each job its own characters and requires special attention.
- The flow of production from one department to another is not uniform.
- Direct purchases are charged against an activity.
6) State any two advantages of Job costing?
- Profitability of each job can be individually determined.
- It provides a basis for estimating the cost of similar jobs which are to be
taken in future.
7) State any two limitations of job costing?
- It expensive to operate as it requires considerable detailed clerical work.
- With the increase in the clerical work the chances of errors are increased.
8) Give the meaning of Job cost sheet?
Job cost sheet is a document used to record manufacturing costs and is prepared by companies that use job-order costing system to compute and allocate costs to products and services.
9) Give the meaning of Process Costing? Give an example.
It is the method used in mass production industries, which produce standardized products in which raw material passes through a number of processes of manufacturing process in particular sequence to completion stage.
For example: Textile, sugar, oil refining, chemical, cement, paper steel,
paint and soap industries
10) State any two features of Process costing?
- Costs are accumulated by processes.
- The products are standardized and homogeneous.
- The finished product of each but last process becomes the input for next process.
- Some losses of materials in process is unavoidable.
11) What is meant by Joint product? Give an example.
Several products are produced from the same raw materials may be termed as joint products. For example: Oil refining industry. In raw oil producing of petrol, diesel, kerosene, crude oil etc.
12) What is meant by By-product? Give an example.
By products are the products of relatively small value which are incidentally and unavoidably produced in the course of manufacturing the main product. For example: In sugar mills.
13) Distinguish between process costing and job costing?
| Process Costing | Job Costing |
| Costs are compiled process wise and cost per unit is the average cost | Costs are separately ascertained for each job, which is cost unit. |
| Production is of standardized products and cost units are identical. | Production of non-standardized items with specifications and instructions from the customers |
| Production is for stock. | Production is against orders from customers. |
| Costs are computed at the end of a specific period. | Costs are calculated when a job is completed. |
| Cost control is comparatively easier. | Cost control is comparatively more difficult. |
14) Give the meaning of Normal production?
Normal production refers to the units produced after deducting normal loss and scrap from the units issued to each process. This is the number of units required to manufacture in each process.
15) Distinguish between Normal waste and scrap?
| Normal wastage | Scrap |
| It is not realizable. | It is realizable. |
| Normal wastage is determined in advance. | It is not determined in advance. |
| It is compulsory in each stage of the manufacture | It is not compulsory may / may not be arise in each stage of manufacture. |
16) What is Normal process loss or Normal loss?
The amount of loss which cannot be avoided because of the nature of materials or process is called normal process loss. It is caused by factors like chemical change, evaporation etc.
17) How is abnormal loss treated in process costing?
- The cost of abnormal loss is not treated as part of cost of production.
- It is treated as loss deducted from total profits.
18) Name any four industries in which process costing used?
It is used in textile industries, soap, biscuits, paint, cement, chemicals, medicines, oil refinery, steel, sugar industries etc.
19) What is abnormal loss?
Abnormal process loss refers to the difference of units when the actual production is lower than the normal production. It is treated as loss and deducted from total profits.
20) What is abnormal gain?
Abnormal gain refers to the difference of units when the actual production is more than the normal production. It is treated as abnormal gain and added to the total profits.
21) Distinguish between Joint product and By product?
| Joint product | By product |
| Joint products have some economic value. | Economic value of By product is lower than the main product. |
| For producing of joint product raw material used as input. | Waste or scrap of the main product is the input. |
| Production can be done consciously. | Production can be done consequently. |
22) What is contract?
Contract is an agreement between contractor and contracted in order to performing of construction work. It is used in construction of roads, railways, bridges, dams etc.
23) Who is contractor and contractee?
- Contractor is a person who takes the responsibility in order to completion of any work.
- Contractee is a person who gives an opportunity to the contractor in order to completion of any work relating to construction.
24) Give the meaning of Contract costing?
Contract costing is the costing method applied to determine the cost of construction work performed as per a customers’ specification. It is also called as terminal costing.
For example: construction of bridges, buildings, roads etc.
25) Distinguish between contract costing and job costing?
| Contract Costing | Job Costing |
| Generally contract is big in size. | Generally job is small in size |
| The number of contracts cannot be undertaken at a time, because they are big in size. | The number of jobs can be undertaken at a time |
| In contract costing most of the costs are chargeable direct to contract accounts. | In job costing direct allocation of cost cannot be possible. |
| Contract work is done at site | Jobs are usually carried out in factory premises. |
26) State any two features of Contract costing?
- Contracts are generally large in size.
- A contract generally takes more than one year to complete.
- Each contract undertaken is treated as a cost unit.
- A separate account is prepared for each contract in the books of contractor.
- Most of materials are specially purchased for each contract.
- Nearly all labour cost will be direct.
27) Give the meaning of works on cost?
Actual cost incurred for the work performed in a given period of time, including all labour, materials, other direct costs, overheads etc.
28) What is meant by work certified?
Work certified is the part of work in progress which has been approved by the contractee’s architect or engineer for payment. Work certified is valued at contract price, and includes an element of profit.
29) What is meant by work uncertified?
This is the part of the work in progress which is not approved by the architect or engineer. This is valued at cost and thus does not include an element of profit.
30) What is sub-contract cost?
It is the cost which is incurred to get some facilities from outsiders those facilitates are not available internally is called sub-contract cost. For example: steel work, glass work, painting, etc.
31) What is Cash ratio in contract costing?
It is usually practice not to pay the full amount of work certified. The Contractee may pay a fixed percentage, say 80%, or 90% of the work certified, depend upon the terms of the contract. This is called as Cash ratio.
32) What is retention money?
Retention money is a type of security for any defective work which may be found in the contract later on. It may be adjusted against penalties that become due if the contract in not completed within the stipulated time as per terms of agreement.
33) What is Notional profit?
Notional profit is the difference between the value of work in progress certified and the cost of such work in progress certified. The notional profit will be arise, when contract is not fully completed.
34) What is Estimated profit?
Estimated profit refers to the excess of the contract price over the estimated total cost of the contract. It will be arise, when contract is fully completed.
35) What is cost plus contracts?
Cost-plus contract is a contract in which the contract price is ascertained by adding a specified amount or percentage of profit to the costs allowed in the contract.
36) Give the meaning of Contract price?
Contract price is a price at which the contractor agrees to do the construction work for the Contractee. It is to be credited with contract account when work will be completed.
37) Who is a sub-contractor?
A subcontractor is a person who is hired by a general contractor to perform a specific task as part of the overall project and is normally paid for services provided to the project by the originating general contractor.
38) What are standing charges in operating costing?
Standing charges are the expenses which are more or less fixed in nature. These expenses are incurred irrespective of the fact whether vehicle is running or not. For example: depreciation, insurance, taxes, license etc.
39) What is operating costing?
Operating costing is a method of cost ascertainment used in those undertakings which are engaged in providing services, such as transport, electricity etc. These undertakings do not manufacture tangible products.
For example: Road transport companies, railways, airways, electricity companies, shipping companies, water supply companies, gas supply companies, cinemas, canteens and hotels, computer Centers, schools and colleges, local authority etc.
40) State any two features of operating costing?
- Services rendered to customers are of unique and standardized type.
- A large proportion of the capital is invested in fixed assets and comparatively less working capital.
41) What is meant by Transport costing?
Transport undertakings provide transport service and the method of ascertaining cost in these undertakings is known as transport costing.
42) State any two objectives of Transport costing?
- To ascertain the operating cost of running a vehicle per kilometer.
- To fix the rates of cartage of goods and passengers on the basis of operating costs.
- To decide the hire charges where vehicles are given on hire.
- To compare the cost of using own motor vehicles with that of using alternative modes of transport.
43) Give the meaning of daily log sheet?
A log sheet is a record which is generally maintained by driver of the vehicle on daily basis. In this log sheet are recorded most of the details required for transport costing, i.e. details of journeys, running time, capacity, distance covered in kilometers, cost of petrol/diesel, lubricants, accidents, loading and unloading time etc.
44) What are operating charges in operating costing?
Operating charges are those expenses which are incurred on the actual running of the vehicle. For example: petrol, diesel etc.
45) What is absorption costing?
Absorption costing is a costing method in which total cost is treated as product cost or production cost. It is also known as conventional costing and full costing.
46) What do you mean by marginal cost?
Marginal cost means, an additional cost incurred for producing an additional unit of product.
47) What is marginal costing?
Marginal costing is the amount at any given volume of output by which aggregate costs are changed, if the volume of output is increased (or) decreased by one unit.
48) What is fixed cost?
Fixed costs are those costs which are fixed or constant over a wide range of production level. Ex: building rent, permanent staff salary etc.
49) What is variable cost?
Variable costs are those costs which are variable or changes over a wide range of production level. Ex: raw material cost, wages etc.
50) What is semi variable cost?
Semi variable costs are those costs which are partly fixed and partly variable over a wide range of production level. Ex: telephone bill, electricity bill etc.
51) What is contribution?
Contribution refers to the differences between sales and variable cost.
Formulas: Contribution = sales - variable cost
Contribution = fixed cost + profit
Contribution = fixed cost – loss.
52) Give the meaning of P/V Ratio?
P/v ratio is also called as contribution ratio. It represent the relationship between contribution and sales and which is always calculated in percentage.
53) What is break even point?
Break even point is a point of sale at which total revenue is equal to total cost. It means “No profit and No loss”.
54) What is break even chart?
Break even chart is a chart which shows the point of sale at which the total revenue is equal to total cost.
55) What is break even analysis?
Break even analysis is a method or technique used to analyses the operations where the total revenue is equal to total cost.
56) What is margin of safety?
Margin of safety refers to the differences between actual sales and BEP sales.
MOS = Actual sales – BEP sales.
57) Give the meaning of angle of incidence?
It is an angle at which the sales line makes with the total cost line. The angle indicates the profit earning capacity of a company over a break-even point. The large angle of incidence indicates high profit margin and vice versa.
58) What is ABC system?
According to Kaplan and cooper, ABC system calculate the cost of individual activities and assign cost to cost object. Such as product and services on the basis of activities undertaken to produce each product or service.
59) Who developed ABC and when?
ABC is a new scientific method developed by “Kaplan and cooper” in the year 1988.
60) What do you mean by cost driver?
Cost driver means, any factor or element that causes for changes in the cost of an activity.
61) What is cost pool?
Cost pool is an account used to total the cost incurred for a group of activities.
62) What are the benefits / advantages of ABC system?
a. It provides accurate costing of goods and services.
b. It helps the management in decision making
c. It helps the management in cost control and cost reduction.
d. It helps the management to perform well.
e. It helps to utilize the unit cost rather than total cost.
63) What do you mean by standard cost?
Standard cost is a pre-determined cost based on technical estimation of material, labour and overheads for a particular period of time for a particular working condition.
64) State the steps involved in standard costing?
1) Establish the selling price based on customer expectation and sales forecasting.
2) Establish desired profit based on desired objective
3) Anticipate cost per unit
4) Compute actual cost incurred in the production of goods and services.
5) Compare actual cost with standard cost for each component by using value analysis and value engineering.
65) What do you mean by variance?
Variance refers to the differences between standards specified and actuals incurred during a given period of time.
66) State any two types of variances?
- Material variances
- Labour variances
- Overhead variances.
67) What is material cost variance?
Material cost variance refers to the differences between standard cost of materials specified and actual cost of materials used.
MCV = Standard cost – Actual cost
68) What is material price variance?
Material price variance refers to the differences between standard price of materials specified and actual price paid for the materials.
MPV = (standard price – actual price) x Actual quantity.
69) What is Material usage variance?
Material usage variance refers to the differences between standard quantity of materials specified and actual quantity of materials used.
MUV = (standard quantity – actual quantity)x standard price
70) What is Material mix variance?
Material mix variance refers to the differences between standard composition of materials specified and actual composition of materials used at different prices.
MMV = (Revised standard proportion – actual proportion)x standard price
71) What is Material yield variance?
Material yield variance refers to the differences between standard yield specified and actual yield achieved.
MYV= (Actual yield – standard yield)x standard price per unit
72) What is Labour cost variance?
Labour cost variance refers to the differences between standard cost of labours specified and actual cost of labours used.
LCV = standard cost – actual cost
73) What is Labour rate variance?
Labour rate variance refers to the differences between standard rate of labours specified and actual rate paid to the labours.
LRV = (standard rate – actual rate)x actual hours.
74) What is Labour efficiency variance?
Labour efficiency variance refers to the differences between standard time specified and actual time used.
LEV= (standard hours – actual hours)x standard rate
75) What is Idle time variance?
Idle time variance refers to the abnormal time or wastage of time due to power failure, machine breakdowns, industrial accidents etc.
Idle time variance = abnormal idle time X standard rate
76) What is Labour mix variance?
Labour mix variance refers to the differences between standard composition of labours specified and actual composition of labours used.
LMV = (revised standard hours – actual hours)x standard rate
77) What is Labour yield variance?
Labour yield variance refers to the differences between standard yield specified and actual yield achieved.
LYV = (Actual yield – Standard yield) x standard cost per unit.