Short Notes — Ch 24 Cost Accounting
⚡ Ch 24 — Cost Accounting ⭐
PYQ: 3 questions — 2024·Q31, Q32, Q60. (Zero in 2022 — new in 2024.) MCQ bank: 26 questions (Q451–476). Formula-driven — the most learnable of the Part-2 chapters. All three 2024 questions were straight formula work.
1️⃣ ⭐⭐ THE COST SHEET — learn this ladder
Direct Material + Direct Labour + Direct Expenses = PRIME COST
+ Factory/Works Overheads = WORKS (FACTORY) COST + Administration Overheads = COST OF PRODUCTION + Selling & Distribution Overheads = COST OF SALES (Total Cost) + Profit = SALES
| Stage | Formula |
|---|---|
| ⭐ Prime Cost | Direct Material consumed + Direct Labour + Direct Expenses |
| Works/Factory Cost | Prime Cost + Factory Overheads |
| ⭐ Cost of Production | Works Cost + Administration Overheads |
| Cost of Sales | Cost of Production + Selling & Distribution Overheads |
⚠️ The trap in 2024·Q32: use material CONSUMED, not material purchased, and exclude manufacturing overheads from prime cost.
2️⃣ ⭐ Cost behaviour
| Type | In TOTAL | PER UNIT |
|---|---|---|
| ⭐ Fixed Cost | constant | decreases as output rises |
| ⭐ Variable Cost | varies proportionately | constant |
| Semi-variable | partly fixed, partly variable | — |
⭐ Fixed cost is fixed in TOTAL but varies PER UNIT — that inversion is the single most-asked idea. Examples: Fixed = rent, insurance, manager's salary · Variable = direct material, direct labour, power.
Other classifications
| Basis | Types |
|---|---|
| By element | Material · Labour · Expenses |
| By traceability | ⭐ Direct vs Indirect |
| By behaviour | Fixed · Variable · Semi-variable |
| By controllability | Controllable vs Uncontrollable (most fixed costs) |
| By normality | Normal (part of cost of production) vs Abnormal (→ Costing P&L) |
⭐ All indirect costs together = OVERHEADS. ⭐ Opportunity cost = the maximum alternative earning foregone by using capacity elsewhere. Out-of-pocket cost = involves actual payment to outsiders · Imputed/notional cost = no actual payment. ⭐ An item that is direct for one business may be INDIRECT for another.
3️⃣ ⭐ Methods vs Techniques — the classic confusion
| METHODS (how you compute cost) | TECHNIQUES (how you use cost) |
|---|---|
| Job Costing — custom orders | Marginal Costing |
| ⭐ Batch Costing — toys, pharmaceuticals | Absorption Costing |
| Contract Costing — construction | Standard Costing |
| ⭐ Process Costing — refineries, chemicals | Budgetary Control |
| Operating Costing — transport, hospitals | Uniform Costing |
⚠️ Process costing is a METHOD, not a technique (MCQ Q462). ⭐ Toy-making → BATCH costing (MCQ Q461).
4️⃣ ⭐ Marginal Costing & Break-Even
| Concept | Formula |
|---|---|
| Marginal cost | total variable cost (prime cost + variable overheads) |
| ⭐ Contribution | Sales − Variable Cost (per unit: SP − VC) |
| P/V Ratio | (Contribution ÷ Sales) × 100 |
| ⭐ Break-Even Point (units) | Fixed Cost ÷ Contribution per unit |
| ⭐ Units for a target profit | (Fixed Cost + Desired Profit) ÷ Contribution per unit |
| Margin of Safety | Actual Sales − Break-Even Sales |
Marginal costing: only variable costs are charged to production; fixed costs are written off to the Costing P&L. Absorption costing: both fixed and variable costs are charged to products.
5️⃣ 🎯 PYQs from this chapter — all three worked
2024 · Q31 — Fixed cost is a cost:
a) which changes in total in proportion to output b) partly fixed, partly variable c) which does not change in total during a given period despite changes in output d) which remains same for each unit of output → Ans: C ⚠️ Option D is the trap — fixed cost does not stay the same per unit.
2024 · Q32 — Calculate prime cost: material purchased ₹1,00,000 · material consumed ₹90,000 · direct labour ₹60,000 · direct expenses ₹20,000 · manufacturing overheads ₹30,000
a) 1,80,000 b) 2,00,000 c) 1,70,000 d) 2,10,000 → Ans: C Prime Cost = 90,000 + 60,000 + 20,000 = ₹1,70,000 Ignore purchased (use consumed) and ignore overheads (not direct).
2024 · Q60 — Sale ₹25/unit · variable mfg ₹12 · variable selling ₹3 · fixed factory ₹5,00,000 · fixed selling ₹3,00,000 → units to earn ₹1,80,000 profit
a) 60,000 b) 88,000 c) 98,000 d) 1,00,000 → Ans: C Contribution/unit = 25 − (12 + 3) = ₹10 Units = (8,00,000 + 1,80,000) ÷ 10 = 98,000 ✓
6️⃣ High-frequency MCQ traps
| MCQ | Point |
|---|---|
| Q451 | All indirect costs = overheads |
| Q458 | Classification, recording, allocation of costs = Cost Accounting |
| Q459 | Direct vs indirect → classification by traceability |
| Q460 | ⭐ Output ↑ → fixed cost per unit DECREASES |
| Q461 | Toy making → Batch Costing |
| Q462 | ⭐ Process costing is NOT a technique |
| Q463 | Works cost + admin = Cost of Production |
| Q464 / Q475 | Prime cost = all costs directly chargeable to production |
| Q473 | Opportunity cost |
| Q474 | Direct for one business = indirect for another |
| Q476 | Semi-variable = partly fixed, partly variable |
| Q472 | Out-of-pocket cost = payment to outsiders |
| Q500 | Loss from the inherent nature of the product = Normal Loss |
7️⃣ If you remember nothing else
Prime Cost = Direct Material CONSUMED + Direct Labour + Direct Expenses · + Factory OH = Works Cost · + Admin = Cost of Production · + S&D = Cost of Sales · + Profit = Sales · Fixed cost: constant in TOTAL, decreases PER UNIT · Contribution = Sales − Variable Cost · BEP units = Fixed ÷ Contribution per unit · Target-profit units = (Fixed + Profit) ÷ Contribution per unit · Toys → Batch · Refinery → Process · Construction → Contract · Process costing is a METHOD, not a technique · all indirect costs = overheads
🔗 Related
- Full notes: L-24-COST ACCOUNTING · MCQs Q451–476 in MCQs
- Prev: SN-23-Taxation · Next: SN-25-Budgetary-Control
