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Cost and Management Accounting

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Cost and Management Accounting
Course Code—THM # 224

Prepared by
Md. Sohan Hossain
BBA
3rd Batch
Tourism and Hospitality Management
Islamic University, Kushtia.

1
 What Is Cost Accounting?

Cost accounting is a process of recording, analyzing and reporting all of a company’s costs (both
variable and fixed) related to the production of a product.
Cost accounting is the process of measuring, analyzing, and reporting financial and nonfinancial
information related to the costs of acquiring or using resources in an organization.
Cost Accounting is a business practice in which we record, examine, summarize, and study the
company’s cost spent on any process, service, product or anything else in the organization. This
helps the organization in cost controlling and making strategic planning and decision on
improving cost efficiency.

Define financial accounting.

Financial accounting focuses on reporting financial information to external parties such as

investors, government agencies, banks, and suppliers based on Generally Accepted Accounting
Principles (GAAP). The most important way financial accounting information affects managers’
decisions and actions is through compensation, which is often, in part, based on numbers in
financial statements.

Define management accounting

Management accounting is the process of measuring, analyzing, and reporting financial and
nonfinancial information that helps managers make decisions to fulfill the goals of an
organization. Managers use management accounting information to:
1. Develop, communicate, and implement strategies,
2. Coordinate product design, production, and marketing decisions and evaluate a company’s
performance.

Difference between Cost Accounting and Financial Accounting

Cost Accounting Financial Accounting

Cost Accounting aims at maintaining Financial Accounting aims at maintaining
cost records of an organization. all the financial data of an organization.
Cost Accounting Records both Financial Accounting records only
historical and per-determined costs. historical costs.
Users of Cost Accounting is limited to Financial Accounting are internal as well
internal management of the entity as external parties.
Cost Accounting is mandatory only for Financial Accounting is mandatory for all
the organization which is engaged in the organizations, as well as compliance

2
manufacturing and production with the provisions of Companies Act and
activities. Income Tax Act is also a must.

Cost Accounting information is Financial accounting information is

reported periodically at frequent reported after the completion of the
intervals financial year i.e. generally one year.
Cost Accounting information Financial Accounting, which
determines profit related to a determines the profit for the whole
particular product, job or process. organization made during a
particular period.

Differences between Management and Financial Accounting.

Management Accounting Financial Accounting

The accounting system which provides Financial Accounting is an accounting
relevant information to the managers system that focuses on the preparation of a
to make policies, plans and strategies financial statement of an organization to
for running the business effectively is provide financial information to the
known as Management Accounting. interested parties.
Historical Future

Only internal users Both internal and external users

Special purpose financial statements General-purpose financial statements
No fixed rules for the preparation of Rules of GAAP are followed
report
It is not meant to be published or Required to be published and audited by
audited. It is for internal use only. statutory auditors

Both financial and non-financial Only financial aspects

aspects
Management Reports are prepared Financial statements are prepared for a
whenever needed. fixed period, i.e. one year.
Managers of the organization External users such as investors, banks,
regulators, and suppliers

3
What is Value-Chain and Supply-Chain Analysis?
Value-Chain Analysis
The value chain is the sequence of business functions by which a product is made progressively more
useful to customers and development (R&D), design of products and processes, production, marketing,
distribution, and customer service. We illustrate these business functions with Sony Corporation’s
television division.

Research and Development-- Design of Products and Processes- Production- Marketing

Distribution- Customer Service

Supply-Chain Analysis
The supply chain describes the flow of goods, services, and information from the initial sources of
materials and services to the delivery of products to consumers, regardless of whether those activities
occur in one organization or in multiple organizations.
Collecting Ingredients-Manufacturing Product --Packaging-Wholesale Company-Retail
Company-Final consumer.

What are the Key Success Factors of Cost Accounting?

Customers want companies to use the value chain and supply chain to deliver ever-improving levels of
performance when it comes to several (or even all) of the following---

Cost and efficiency-- Quality- Time Innovation- Sustainability.

What are the Step Decision Making Process?

1. Identify the problem and uncertainties.
2. Obtain information.
3. Make predictions about the future.
4. Make decisions by choosing among alternatives.
5. Implement the decision, evaluate performance, and learn.

What are the Key Management Accounting Guidelines?

Three guidelines help management accountants provide the most value to the strategic and operational
decision making of their companies:

(1) Employ a cost–benefit approach,

(2) Give full recognition to behavioral and technical considerations,
(3) Use different costs for different purposes.

4
 What are Importance of Cost Accounting?
1] Classification of Costs
2] Cost Control

3] Price Determination
4] Fixing of Standards

What are advantages of Cost Accounting?

1. Cost Accounting Helps Businesses Accurately Ascertain Costs
2. Cost Accounting Can Improve Cost-Efficiency
3. Cost Accounting Forms the Foundation of an Effective Budget Plan
4. Cost Accounting Can Inform Better Decision Making
5. Cost Accounting Can Guide Pricing
6. Cost Accounting Improves Departmental Accountability

What are limitations of Cost Accounting?

1. It is expensive
2. The system is more complex
3. Inapplicability
4. Not suitable for small organizations
5. Lack of social accounting

Difference among other branches of accounting?

1. Financial accounting
2. Managerial accounting
3. Cost accounting
4. Auditing
5. Tax accounting
6. Fiduciary accounting
7. Project accounting
8. Forensic accounting
9. Fund accounting
10. Government accounting
11. Political campaign accounting
12. International accounting
What are the Need for management accounting information forplanning and control?
Managerial accounting provides the information needed to fuel the decision-making
process. Managerial decisions can be categorized according to three interrelated business
processes: planning, directing, and controlling. Correct execution of each of these activities
culminates in the creation of business value.

5
 What are the Functions of Management Accounting?

 Planning
 Decision Making
 Organizing
 Controlling

Define Cost
A cost is a resource sacrificed or forgone to achieve a specific objective. A cost (such as the cost of labor or
advertising) is usually measured as the monetary amount that must be paid to acquire goods or services.
Define Actual Cost
An actual cost is the cost incurred (a historical or past cost), as distinguished from a budgeted cost.
Define Beget cost
A budgeted cost, which is a predicted, or forecasted, cost (a future cost).
Define Cost accumulation
Cost accumulation is the collection of cost data in some organized way by means of an accounting system.

Define Direct Costs

Direct costs are the expenses a business incurs directly to make a product or service, or buy
a wholesale product for resale.
A direct cost is totally traceable to the production of a specific item, such as a product or service.
A direct cost is a cost that can be directly related to particular products or services being
produced.
Direct costs are expenses that can be connected to a specific product, while indirect costs are
expenses involved with maintaining and running a company.
Define Indirect Costs
Indirect costs represent the expenses of doing business that are not readily identified with a
particular grant, contract, project function or activity, but are necessary for the general operation of
the organization and the conduct of activities it performs.

Indirect costs are costs that are not directly accountable to a cost object (such as a particular project,
facility, function or product). Like direct costs, indirect costs may be either fixed or variable. Indirect
costs include administration, personnel and security costs.

Indirect costs are the costs of running a business and going to market with a product or
service—regardless of the volume manufactured and/or sold.

6
 Basic Steps of Cost Allocation

The key to successful cost allocation is to establish an allocation system that is fair,
equitable, and supported by current data. In particular, a cost allocation system should:
 Identify shared facilities or support services
 Identify the costs to be allocated
 Determine the allocation factors/methodology to distribute the costs equitably
 Allocate the costs
 Update and monitor the data and methodology to ensure the allocation remains fair
and equitable over time
Factors Affecting Direct/Indirect Cost Classifications
1. The materiality of the cost in question
2. Available information-gathering technology.
3. Design of operations.
Define Variable Costs and Fixed Costs
A variable cost changes in total in proportion to changes in the related level of total activity or volume of
output produced.
A fixed cost remains unchanged in total for a given time period, despite wide changes in the related level of
total activity or volume of output produced.
Define Cost driver
A cost driver is a variable, such as the level of activity or volume that causally affects costs over a given time
span.
Major classifications of costs:
Costs may simultaneously be as follows: ■ Direct and variable ■ Direct and fixed ■ Indirect and variable ■
Indirect and fixed.
Unit Costs
A unit cost, also called an average cost, is calculated by dividing the total cost by the related number of
units produced.
Types of Inventory
Manufacturing-sector companies purchase materials and components and convert them into finished
goods. These companies typically have one or more of the following three types of inventory:
1. Direct materials inventory. Direct materials in stock that will be used in the manufacturing process (for
example, computer chips and components needed to manufacture cellular phones).
2. Work-in-process inventory. Goods partially worked on but not yet completed (for example, cellular
phones at various stages of completion in the manufacturing process). This is also called work in progress.
3. Finished-goods inventory. Goods (for example, cellular phones) completed, but not yet sold.
Classifications of Manufacturing Costs
1. Direct materials costs
2. Direct manufacturing labor
3. Indirect manufacturing

7
 Period Costs
Period costs are all costs in the income statement other than cost of goods sold. Period costs, such as
design costs, marketing, distribution, and customer service costs, are treated as expenses of the accounting
period in which they are incurred because managers expect these costs to increase revenues in only that
period and not in future periods.
A Framework for Cost Accounting and Cost Management
The following three features of cost accounting and cost management can be used for a wide range of
applications:
1. Calculating the cost of products, services, and other cost objects.
2. Obtaining information for planning and control and performance evaluation.
3. Analyzing the relevant information for making decisions.

What does the CVP analysis tell us?

Cost-volume-profit (CVP) analysis is a way to find out how changes in variable and fixed
costs affect a firm's profit. Companies can use CVP to see how many units they need to
sell to break even (cover all costs) or reach a certain minimum profit margin.
Contribution Margin
The contribution margin can be stated on a gross or per-unit basis. It represents
the incremental money generated for each product/unit sold after deducting the
variable portion of the firm's costs.

Formula
C=R−V
Contribution margin = Total revenues - Total variable costs
Where C is the contribution margin, R is the total revenue, and V represents
variable costs.

Model CVP relationships:

1. The equation method

2. The contribution margin method

3. The graph method

Cost–Volume–Profit Assumptions
Now that you know how CVP analysis works, think about the following assumptions we made during the
analysis:

1. Changes in revenues and costs arise only because of changes in the number of product (or service) units
sold. The number of units sold is the only revenue driver and the only cost driver. Just as a cost driver is any
factor that affects costs, a revenue driver is a variable, such as volume, that causally affects revenues.

8
 2. Total costs can be separated into two components: a fixed component that does not vary with units sold
(such as Emma’s $2,000 booth fee) and a variable component that changes based on units sold (such as the
$120 cost per GMAT Success package).

3. When represented graphically, the behaviors of total revenues and total costs are linear (meaning they
can be represented as a straight line) in relation to units sold within a relevant range (and time period).

4. Selling price, variable cost per unit, and total fixed costs (within a relevant range and time period) are
known and constant

Breakeven Point
The breakeven point (BEP) is that quantity of output sold at which total revenues equal total costs—that is,
the quantity of output sold that results in $0 of operating income.

What do you mean by cost accounting?

Cost accounting is a process of assigning costs to cost objects that typically include a
company's products, services, and any other activities that involve the company. Cost
accounting is helpful because it can identify where a company is spending its money, how much it
earns, and where money is being lost.

"Cost and expenses are same". Do you agree with the statement? Why or why not?

NO, I don’t agree. Because

In accounting, costs are the monetary value of expenditures for supplies, services, labor,
products, equipment and other items purchased for use by a business or other accounting
entity.

An expense is the cost of operations that a company incurs to generate

revenue. It is simply defined as the cost one is required to spend on obtaining
something. As the popular saying goes, “it costs money to make money.”
Explain the scope of cost accounting briefly
1. Cost book-keeping: It involves maintaining complete record of all costs incurred from their incurrence to
their charge to departments, products and services. Such recording is preferably done on the basis of double
entry system.

2. Cost system: Systems and procedures are devised for proper accounting for costs.

3. Cost ascertainment: Ascertaining cost of products, processes, jobs, services, etc., is the important function
of cost accounting. Cost ascertainment becomes the basis of managerial decision making such as pricing,
planning and control.

4. Cost Analysis: It involves the process of finding out the causal factors of actual costs varying from the
budgeted costs and fixation of responsibility for cost increases.

9
 5. Cost comparisons: Cost accounting also includes comparisons between cost from alternative courses of
action such as use of technology for production, cost of making different products and activities, and cost of
same product/ service over a period of time.

6. Cost Control: Cost accounting is the utilisation of cost information for exercising control. It involves a
detailed examination of each cost in the light of benefit derived from the incurrence of the cost. Thus, we
can state that cost is analysed to know whether the current level of costs is satisfactory in the light of
standards set in advance.

7. Cost Reports: Presentation of cost is the ultimate function of cost accounting. These reports are primarily
for use by the management at different levels. Cost Reports form the basis for planning and control,
performance appraisal and managerial decision making.

Objectives of accounting
1. Determining selling price

2. Controlling cost

3. Providing information for decision-making

4. Ascertaining costing profit

5. Facilitating preparation of financial and other statements

What do you mean by management accounting?

Managerial accounting is the process of “identification, measurement, analysis, and interpretation
of accounting information” that helps business leaders make sound financial decisions and
efficiently manage their daily operations, according to the Corporate Finance Institute.

Discuss the role of management accountants in the management process .

Management accountants work for public companies, private businesses, and government
agencies. Their duties include recording and crunching numbers, helping to choose and
manage company investments, risk management, budgeting, planning, strategizing, and
decision making.

State the limitations of management accounting.

 Based on Financial and Cost Records.

 Personal Bias.
 Lack of Knowledge and Understanding of the Related Subjects.
 Provides only Data.
 Preference to Intuitive Decision Making.
 Management Accounting is only a Tool.
 Continuity and Participation.
 Broad Based Scope
10
 Show the classification of costs for managerial decisions with example.
According to this basis cost may be categorized as follows:
(a) Pre-determined Cost – A cost which is computed in advance before production
or operations start, on the basis of specification of all the factors
affecting cost, is known as a pre-determined cost.

(b) Standard Cost -A pre-determined cost, which is calculated from

managements ‘expected standard of efficient operation’ and the relevant
necessary expenditure. It may be used as a basis for price fixation and for
cost control through variance analysis.
(c) Marginal Cost -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.
(d) Estimated Cost – Kohler defines estimated cost as “the expected cost of
manufacture, or acquisition, often in terms of a unit of product computed
on the basis of information available in advance of actual production or
purchase”. Estimated costs are prospective costs since they refer to
prediction of costs.
(e) Differential Cost – (Incremental and decremental costs). It represents the
change (increase or decrease) in total cost (variable as well as fixed) due to
change in activity level, technology, process or method of production, etc.
For example, if any change is proposed in the existing level or in the
existing method of production, the increase or decrease in total cost or in
specific elements of cost as a result of this decision will be known as
incremental cost or decremental cost.
(f) Imputed Costs – These costs are notional costs which do not involve any
cash outlay. Interest on capital, the payment for which is not actually made,
is an example of imputed cost. These costs are similar to opportunity costs.
(g) Capitalized Costs -These are costs which are initially recorded as assets and
subsequently treated as expenses. Example, installation expenses on the
erection of a machine are added to the cost of a machine.
(h) Product Costs – These are the costs which are associated with the purchase
and sale of goods (in the case of merchandise inventory). In the production
scenario, such costs are associated with the acquisition and conversion of
materials and all other manufacturing inputs into finished product for sale.
Hence, under marginal costing, variable manufacturing costs and under
absorption costing, total manufacturing costs (variable and fixed) constitute
inventoriable or product costs.
(i) Opportunity Cost – This cost refers to the value of sacrifice made or benefit
of opportunity foregone in accepting an alternative course of action. For
example, a firm financing its expansion plan by withdrawing money from it bank deposits. In such
a case the loss of interest on the bank deposit is the

11
opportunity cost for carrying out the expansion plan.
(j) Out-of-pocket Cost – It is that portion of total cost, which involves cash
outflow. This cost concept is a short-run concept and is used in decisions
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.
(k) Shut down Costs – Those costs, which continue to be, incurred even when 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.
(l) Sunk Costs – Historical costs incurred in the past are known as sunk costs.
They play no role in decision making in the current period. For example, in
the case of a decision relating to the replacement of a machine, the written
down value of the existing machine is a sunk cost and therefore, not
considered.
(m) 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 altogether. Here the costs depicted in absolute
amount may be called absolute costs and are base costs on which further
analysis and decisions are based.
(n) Discretionary Costs – Such costs are not tied to a clear cause and effect
relationship between inputs and outputs. They usually arise from periodic
decisions regarding the maximum outlay to be incurred. Examples include
advertising, public relations, executive training etc.
(o) Period Costs – These are the costs, which are not assigned to the products
but are charged as expenses against the revenue of the period in which they
are incurred. All non-manufacturing costs such as general & administrative
expenses, selling and distribution expenses are recognised as period costs.
(p) Engineered Costs – These are costs that result specifically from a clear
cause and effect relationship between inputs and outputs. The relationship is
usually personally observable. Examples of inputs are direct material costs,
direct labour costs etc. Examples of output are cars, computers etc.

(q) Explicit Costs – These costs are also known as out of pocket costs and refer
to costs involving immediate payment of cash. Salaries, wages, postage and
telegram, printing and stationery, interest on loan etc. are some examples of
explicit costs involving immediate cash payment.
(r) Implicit Costs – These costs do not involve any immediate cash payment.
They are not recorded in the books of account. They are also known as
economic costs.

12
 Define cost-volume-profit (CVP) analysis.
The cost volume profit analysis, commonly referred to as CVP, is a planning
process that management uses to predict the future volume of activity, costs
incurred, sales made, and profits received. In other words, it’s a mathematical
equation that computes how changes in costs and sales will affect income in
future periods.

Discuss the assumptions underlying CVP analysis

The assumptions underlying CVP analysis are:

 The behavior of both costs and revenues is linear throughout the relevant range of activity. (This
assumption precludes the concept of volume discounts on either purchased materials or sales.)
 Costs can be classified accurately as either fixed or variable.
 Changes in activity are the only factors that affect costs.
 All units produced are sold (there is no ending finished goods inventory).
 When a company sells more than one type of product, the product mix (the ratio of each product to
total sales) will remain constant.

Distinguish between operating income and net income with example

Operating Income Net Income

Definition

Operating income is defined as the Net income of a company is defined as the income that
company’s profit after deducting the remains after factoring in all the debts, expenses,
operating expenses, which are the costs additional income streams and the operating costs. It is
of running its everyday operations. also known as its bottom line because it sits at the
bottom of the income statement.

Formula

The formula for operating income is as The formula for operating income is as follows:
follows:
Net Income = Operating Income + (Investment Income
Operating Income = Gross Income – – Interest Expense) + (Extraordinary Income –
(COGS + Operating Expenses + Extraordinary Expenses) – Taxes
Depreciation and Amortisation)

Significance

The operating income helps to identify The net income helps to identify the actual earning
the proportion of revenue that actually potential for any business. It is also used to calculate
13
 gets transformed into profits. It helps to the ratios like earnings per share, return on equity,
calculate the total return on capital return on assets, etc.
employed.

Taxes

Taxes are not considered while Taxes are considered while calculating the net income.
calculating the operating income.

Components

The main components of operating The main components of net income can also include
income include expenses like the additional income like the sale of assets or interest
depreciation and amortisation, selling income.
expenses, administrative expenses and
general expenses.

Define master budget.

A master budget is a financial document that includes how much an organization plans to make
and how much it plans to spend over a fiscal year.

What are the four elements of the budgeting cycle?

The budget cycle consists of four phases: (1) preparation and submission, (2) approval, (3)
execution, and (4) audit and evaluation.

Define rolling budget. Give an example

A rolling budget adds a future accounting period's budget to replace a budget for an
accounting period that has past. For example, a company's 2022 annual budget will become a
rolling budget if in February 2022 it adds the budget for January 2023 to replace the January 2022
budget.

Strategy, Plans and budgets are unrelated to one another." Do you agree?
Strategy, plans, and budgets are interrelated and affect one another. Strategy specifies how an
organization matches its own capabilities with the opportunities in the marketplace to accomplish
its objectives. Strategic analysis underlies both long-run and short-run planning. In turn, these
plans lead to the formulation of budgets. Budgets provide feedback to managers about the likely
effects of their strategic plans. Managers use this feedback to revise their strategic plans.

What do you mean by Kaizen budgeting?

What is Kaizen Budgeting? Kaizen is the practice of continually improving processes and
reducing costs. The concept tends to yield gradual improvements over a long period of time. This
concept can be applied to budgeting by incorporating expected cost reductions into the planned
results of a business.
14
 What is the key difference between a static budget and a flexible budget?

Parameters of
Static Budget Flexible Budget
Comparison

It’s is a predetermined estimate of It a flexible statement of income and

Definition income and expenditure of a certain expenditure that is free to change
period. according to changes in activity level.

The budget is made assuming there will It is designed to change according to

Assumption
be no changes in the conditions. needs

Degree of
None Can be changed at will i.e. it is Dynamic
adaptability

Highly sophisticated as a series of budgets

Ease of Easy to prepare as only one budget with
at different level of changes/activity levels
preparation fixed numbers is formed
have to be prepared.

Time of
Takes less time for preparation Takes more time of preparation
preparation

Costs are not classified into types

Classification of Costs are classified according to the
(variable, fixed or semi-variable) as there
costs nature of their variability.
exists no variability.

Comparison between budgeted and actual Comparison between budgeted and actual
Comparison
data is difficult if numbers differ data is easier and realistic.

It is easier to check degree of difference It is very difficult to check variance

Variance Check between actual and assumed figures between data as the budget itself changes
(variance) due to it’s static nature according to the activity level

If data varies, price fixation becomes Price fixation is easier as difference

Price Fixation
difficult. between data can be met

It is less effective as change is the only It is more effective due to its adaptive
Outcome
constant . nature.

15
 Describe the steps in developing a flexible budget.
1. Identify variable and fixed costs. The first step in creating a flexible budget is determining
fixed costs and variable costs. ...
2. Divide the budget. ...
3. Create your budget. ...
4. Update the budget. ...
5. Input and compare.
Discuss some important reasons for using standard costs.
 Efficiency.
 Allows for cost control.
 Helps management make decisions.
 Accurate budgets.
 Lower production costs.
Selling price variance
Sales price variance refers to the difference between a business's expected price of a product
or service and its actual sales price. It can be used to determine which products contribute most
to the total sales revenue and shed insight on other products that may need to be reduced in price
or discontinued.

Activity based budgeting

Activity-based budgeting (ABB) is a system that records, researches, and analyzes activities
that lead to costs for a company. Every activity in an organization that incurs a cost is
scrutinized for potential ways to create efficiencies. Budgets are then developed based on these
results.

Supply Chain
A supply chain is the network of all the individuals, organizations, resources, activities and
technology involved in the creation and sale of a product. A supply chain encompasses
everything from the delivery of source materials from the supplier to the manufacturer through to
its eventual delivery to the end user.

Cost-benefit approach
A cost-benefit analysis is the process of comparing the projected or estimated costs and benefits
(or opportunities) associated with a project decision to determine whether it makes sense from a
business perspective.

16
 What are the important techniques of costing?
1. Job Costing: ·

2. Contract Costing: ·
3. Batch Costing: ·

4. Process Costing: ·

5. One Operation (Unit or Output) Costing: ·

6. Service (or Operating) Costing

What is meant by the flow of costs?

What Is Flow of Costs? Flow of costs refers to the manner or path in which costs move
through a firm. Typically, the flow of costs is relevant with manufacturing companies whereby
accountants must quantify what costs are in raw materials, work in process, finished goods
inventory, and cost of goods sold.

Differential Cost
What is Differential Cost? Differential cost refers to the difference between the cost of two
alternative decisions. The cost occurs when a business faces several similar options, and a
choice must be made by picking one option and dropping the other.

Committed Cost
A committed cost is an investment that a business entity has already made and cannot
recover by any means, as well as obligations already made that the business cannot get out
of.

Product Cost
Product cost refers to the costs incurred to create a product. These costs include direct labor,
direct materials, consumable production supplies, and factory overhead. Product cost can also be
considered the cost of the labor required to deliver a service to a customer.

What do you understand by the cost sheet?

A cost sheet is a statement that shows the various components of total cost for a product
and shows previous data for comparison. You can deduce the ideal selling price of a product
based on the cost sheet. A cost sheet document can be prepared either by using historical cost or
by referring to estimated costs.

17
 How many steps are follows in preparing a cost sheet?
Method of Preparation of Cost Sheet:
Step I = Prime Cost = Direct Material + Direct Labour + Direct Expenses.

Step II = Works Cost = Prime Cost + Factory/Indirect Expenses.

Step III = Cost of Production = Works Cost + Office and Administration Expenses.

Step IV = Total Cost = Cost of Production + Selling and Distribution Expenses. Profit =
Sales – Total Cost.
What is mixed cost?
Costs that have both a fixed and variable component. For example, the cost of operating an
automobile includes some fixed costs that do not change with the number of miles driven (e.g.,
operating license, insurance, parking, some of the depreciation, etc.)
What is the major disadvantage of high-low method?
The high-low method assumes that fixed and unit variable costs are constant, which is not the
case in real life. Because it uses only two data values in its calculation, variations in costs are not
captured in the estimate.
Describe the different methods of segregating fixed costs from variable costs.
The fixed cost is estimated by taking the total average cost and subtracting the variable
cost for the average activity level. The variable cost is computed by multiplying the average
activity level by the variable cost per unit as determined above.
Define margin of safety and explain its significance
Margin of safety is a principle of investing in which an investor only purchases securities
when their market price is significantly below their intrinsic value. In other words, when the
market price of a security is significantly below your estimation of its intrinsic value, the difference
is the margin of safety.
Explain the different approaches for computation of break-even
When determining a break-even point based on sales dollars: Divide the fixed costs by the
contribution margin. The contribution margin is determined by subtracting the variable costs from
the price of a product. This amount is then used to cover the fixed costs.
Define sales budget.
A sales budget is a financial plan that estimates a company's total revenue in a specific time
period. It focuses on two things—the number of products sold and the price at which they are
sold—to predict how the company will perform

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