Estimation And Costing

Step 1: Start with Net Profit as per Cost Accounts.
Net Profit as per Cost Accounts = ₹ 35,000

Step 2: Add items which reduce financial profit but not cost profit.
Provision for Doubtful Debts (Financial Only): ₹ 2,000
Director Remuneration (Financial Only): ₹ 2,000
Income Tax paid (Financial Only): ₹ 9,250
Depreciation overcharged in Financial Accounts: 5,950 – 4,550 = ₹ 1,400
Administrative Overheads overcharged in Financial Accounts: 3,900 – 2,450 = ₹ 1,450

Total Additions:
= 2,000 + 2,000 + 9,250 + 1,400 + 1,450 = ₹ 16,100

Step 3: Deduct items which increase financial profit but not cost profit.
Rent received from own building (Cost Accounts Only): ₹ 2,750
Dividend Received (Financial Only): ₹ 550

Total Deductions:
= 2,750 + 550 = ₹ 3,300

Step 4: Prepare the Reconciliation Statement.



Therefore, the Net Profit as per Financial Accounts is ₹ 47,800 after reconciliation.

Step 1: Calculate expenses for generation of steam used for power.
Total cost for steam generation:
Coal cost: ₹ 10,000
Water cost: ₹ 150
Wages for coal handling: ₹ 750
Repair for boiler: ₹ 350
Lubricating oil: ₹ 50
Depreciation (Boiler): ₹ 850
Supervisory labour: ₹ 400
Total cost for steam generation: ₹ 12,550
Proportion of steam used for power generation:
10,000 lbs out of 15,000 lbs = 10,000 / 15,000 = 2/3
So, cost of steam used for power = 2/3 × ₹ 12,550 = ₹ 8,366.67
Step 2: Add expenses incurred in the power house.
Wages (operator): ₹ 1,000
Depreciation (generator): ₹ 900
Repairs: ₹ 500
Supervision charges: ₹ 500
Total power house expenses: ₹ 2,900
Step 3: Find total cost of power generation.
Cost of steam used for power: ₹ 8,366.67
Add: Power house expenses: ₹ 2,900
Total cost: ₹ 11,266.67
Step 4: Calculate cost per unit of electricity generated.
Total units generated = 500 units
Cost per unit = Total cost / Units generated
= ₹ 11,266.67 / 500 = ₹ 22.53 per unit
Cost Sheet

So, the total cost of generating 500 units of electricity is ₹ 11,266.67 and the cost per unit is ₹ 22.53.

Input material = 12,000 kg
Normal loss = 10% of input = 10% of 12,000 kg = 1,200 kg
So, normal expected output = Input – Normal loss = 12,000 kg – 1,200 kg = 10,800 kg
Actual output = 10,920 kg
Since actual output is more than expected output, there is an abnormal gain.
Abnormal gain = Actual output – Normal output = 10,920 kg – 10,800 kg = 120 kg
Therefore, there is an abnormal gain of 120 kg.

Process costing and job costing are two major methods of costing used for different types of production.
In process costing, costs are accumulated for each process or department for a given period.
Total cost is divided by the number of units produced to arrive at an average cost per unit.
This is suitable for continuous, mass production where identical units are produced.
In job costing, costs are recorded separately for each specific job or order.
Each job is treated as a unique unit, and all costs — materials, labour, and overheads — are traced and allocated to that job alone.
This is used for custom orders or projects where work varies from job to job.
Therefore, the main distinction is that process costing uses average cost per unit, while job costing determines the exact cost for each job.

In cost accounting, the Reverse Cost Method is also called the Working Backward Method.
This method is used when the final selling price and profit margin are known, but the cost elements need to be worked out backward.
It is commonly applied in industries where by-products or joint products are produced and costs need to be apportioned in reverse order.
By working backward, firms can calculate how much cost should be assigned to various stages or by-products to meet target profits.
This helps in proper cost allocation and price setting.
Therefore, the correct answer is Working backward method.

In manufacturing, sometimes secondary products are produced alongside the main product during the same production process.
These secondary outputs are called By-products.
By-products usually have a lower value compared to the main product and may arise from the same raw materials used for the main output.
Examples include molasses from sugar production or sawdust from timber production.
By-products may be sold, used within the factory, or discarded depending on their value and usability.
Proper accounting for by-products helps in accurate cost allocation and may reduce the total cost of the main product if by-product sales generate revenue.

Given:
Total Profit = ₹ 60,000
Work Certified = 60%
Retention Money = 20%
Work Certified net of retention = 80% of 60% = 48%
Amount of profit to be credited = Total Profit × ×
So,
Profit to P & L = ₹ 60,000 × 60% × 80%
= ₹ 60,000 × 0.6 × 0.8
= ₹ 28,800
Therefore, the prudent amount of profit to be credited to Profit or Loss Account is ₹ 28,800.

In contract costing, profit on incomplete contracts is transferred to the Profit and Loss Account only if a reasonable portion of the contract work has been completed and certified.
Generally, if the work certified is less than 25% of the contract price, no profit is transferred to the Profit and Loss Account.
This conservative approach ensures that no profit is recognized too early, avoiding the risk of overstating profits on work that is not yet sufficiently progressed.
Therefore, when completion is less than 25%, no profit is taken to Profit and Loss Account.

An Escalation Clause is a special provision in a contract agreement that allows the contractor to claim extra payment if the cost of materials, labour, or other inputs increases beyond a certain limit during the contract period.
It protects the contractor from unexpected cost rises that may occur due to inflation, price hikes, or changes in market conditions.
This clause ensures that the contractor does not suffer a loss due to factors beyond their control and that the contract remains fair to both parties.
Escalation clauses are commonly used in long-term construction or supply contracts.

In contract costing, when a contract is incomplete at the end of an accounting period, a portion of profit may be taken to the profit and loss account.
However, it is important to consider that unexpected expenses or losses may arise before the contract is fully completed.
To ensure that the profit recognized is not overstated, a provision is made for unknown contingencies — possible costs or losses that cannot be exactly predicted.
This conservative approach avoids the risk of overstatement of profit on work not yet finished.
Therefore, profit on incomplete contracts is considered only after providing for unknown contingencies.

Direct costs are those costs that can be directly traced to the production of a specific product.
In the case of manufacturing pista burfi chocolate, pistachios are a direct raw material used in the product.
Costs like the salary of an accountant, electricity, or depreciation are indirect costs — they help run the factory but cannot be traced directly to a single unit of product.
Therefore, Pistachios are a direct cost in this context.
Identifying direct costs correctly is important for accurate product costing and profit measurement.

A wage abstract is a statement prepared to record the details of labour time spent on different jobs, batches, or processes.
It helps allocate direct labour cost correctly to each cost unit or cost center.
In batch costing, it is very important to prepare a wage abstract to know the total direct labour cost incurred for each batch.
Without this, accurate costing of each batch is not possible.
Therefore, the statement is False — a wage abstract is indeed prepared in batch costing.

Job costing is a costing method used when work is undertaken according to specific customer orders.
Each job is treated as a separate unit of cost, and all costs are traced and allocated to that specific job.
One major advantage is that it helps the business know the exact cost and profit or loss for each job completed.
This information helps in quoting accurate prices for future jobs and in effective cost control.
Therefore, job costing provides clear cost information for individual customer orders.

The formula for calculating the value of raw material consumed is:
Raw Material Consumed = Opening Stock + Purchases – Closing Stock
Substituting the given values:
= ₹ 25,000 + ₹ 1,00,000 – ₹ 40,000
= ₹ 1,25,000 – ₹ 40,000
= ₹ 85,000
So, the total value of raw material consumed during the period is ₹ 85,000.
This helps in determining the cost of production accurately.

In cost accounting, a cost sheet is a statement that shows the various elements of cost related to a product for a specific period or quantity.
When the cost sheet is prepared using actual figures of past costs, it is called a Historical Cost Sheet.
But when the figures are not actual but are based on forecasts and estimates for future production, it is called an Estimated Cost Sheet.
An Estimated Cost Sheet helps management plan for the future by giving an idea about expected costs and profits.
It is prepared before starting production, so that pricing, budgeting, and cost control measures can be planned in advance.
Therefore, the correct answer is Estimated Cost Sheet.

Direct cost refers to costs that can be directly traced to a specific product, such as raw materials or direct wages.
Work cost is the total of prime cost plus factory overheads, representing the cost incurred up to the factory stage.
First cost usually means the initial cost incurred to acquire or produce an asset or product.
All these are recognized costing terms used in cost accounting.
However, Flat cost is not a standard cost accounting term — it is a general term sometimes used to mean a fixed or unchanging cost, but it does not have a precise technical meaning in cost accounts.
Therefore, the odd one out in the list is Flat cost.

Output costing, also known as single or unit costing, is used for industries that produce identical products in bulk, like bricks, bottles, or paper.
Under this system, the total production cost is calculated for a specific period and then divided by the total units produced to find the cost per unit.
Marketers then use this cost per unit as the base to determine the selling price by adding a suitable profit margin.
Setting the right price is crucial because it must cover costs, generate profit, and remain competitive in the market.
Therefore, output costing ultimately helps marketers decide the final price of the product.

A cost sheet is a statement that shows various cost elements and the total cost of production and sales.
It provides detailed information about material cost, labour cost, overheads, and total cost per unit.
However, it does not measure or describe the quality of the product or the labour efficiency directly.
Such performance indicators are covered by other production and quality control reports, not by the cost sheet.
Hence, the given statement is False.

In cost accounting, when cost elements are shown in a detailed list arranged vertically, it is called the Statement Method.
In this method, all cost items like direct material, direct labour, direct expenses, and overheads are listed step by step in a column format.
It helps in presenting total cost and cost per unit clearly for management use.
Therefore, the method used for presenting cost elements vertically is the Statement Method.

Job costing and contract costing are both methods used to ascertain the cost of specific work orders, but they differ in several ways.
Job Costing:
1. Job costing is used when production is carried out according to specific customer orders.
2. The work is usually done inside the factory premises.
3. Jobs are small in size and shorter in duration.
4. Each job is treated as a separate cost unit and costs are collected for each individual job.
5. Examples include printing, repair jobs, or manufacturing customized parts.
Contract Costing:
1. Contract costing is used for large-scale, long-duration work carried out at the contract site.
2. The work is generally performed outside the contractor’s premises.
3. Contracts are bigger in size and may last several months or years.
4. Costs are collected for each contract and payments may be made in installments based on work certified.
5. Examples include construction of buildings, roads, bridges, or shipbuilding.
Thus, the main difference is the scale, duration, and location of the work involved.

To calculate the Economic Batch Quantity (EBQ), we use the formula:

where:
D = Annual demand = 18,000 units
S = Setup cost per batch = ₹ 220
C = Carrying cost per unit per annum
Carrying cost per unit per annum = 10% of cost per unit = 10% of ₹ 1,250 = ₹ 125
Now, putting the values into the formula:




Therefore, the Economic Batch Quantity is **252 units**.
This means the company should produce 252 units per batch to minimize total setup and carrying costs.

A Reconciliation Statement is prepared to match the profit shown by cost accounts with the profit shown by financial accounts.
This is needed because of the differences in recording certain items.
The steps involved are:
1. Start with the profit as per cost accounts or financial accounts as the base figure.
2. Add items shown only in financial accounts like incomes or gains not recorded in cost accounts (e.g. interest received).
3. Deduct items shown only in financial accounts like purely financial expenses not in cost accounts (e.g. losses on investments).
4. Adjust under or over absorption of overheads if any, since these cause differences.
5. Add or subtract stock valuation differences if opening or closing stock is valued differently in cost and financial accounts.
6. Calculate the net profit or loss after all adjustments to ensure both accounts match.
This helps check the accuracy and reliability of both sets of accounts.

Lot costing is a type of batch costing used when goods are produced in definite lots or batches.
A lot refers to a specific quantity of identical units produced together at one time.
In lot costing, the total cost of producing a lot is calculated by adding up all direct and indirect costs like materials, labour, and overheads.
Then, the cost per unit is found by dividing the total cost by the number of units in the lot.
This method is commonly used in industries like garments, toys, or spare parts where production is done in lots based on customer orders or stock requirements.
Lot costing helps businesses control production costs and set competitive prices.

Progress advice is a document used in manufacturing industries where jobs or products pass through different departments or workstations.
It records the movement and progress of a job or batch within the factory.
This document is prepared to ensure that each job is tracked properly at every stage.
It helps the management monitor the work status, check delays, and maintain smooth workflow.
Progress advice also helps in scheduling future tasks and preparing cost reports accurately.
Thus, it is an important tool for production planning and control.

In process costing, a normal loss is expected due to unavoidable reasons like evaporation or wastage during production.
However, sometimes the actual loss is less than the normal loss.
When the actual output is more than the expected normal output, this excess gain is called abnormal effectives.
It means that the process was more efficient than planned, resulting in an extra output.
Abnormal effectives are credited to the Costing Profit and Loss Account because they are considered a gain for the business.
They help managers identify improvements in production efficiency.

Under power house costing, costs are classified to find out the total cost of producing utilities like steam, electricity, or gas.
The two main types of costs involved in producing steam are:
1. Fixed Costs: These are the costs that do not change with the level of steam production.
They include depreciation of boilers, salaries of permanent staff, and insurance charges for equipment.
2. Variable Costs: These change according to the amount of steam produced.
Examples include cost of fuel (coal, oil, or gas), water treatment, lubricants, and wages for temporary workers if required.
Accurately classifying these costs helps determine the cost per unit of steam and supports efficient cost control.

In cost accounting, different subsidiary ledgers are maintained to record detailed information about specific elements of cost.
The Work-in-Progress (WIP) ledger is an important subsidiary ledger used to keep track of incomplete jobs, contracts, or processes still under production.
It records the costs incurred on each incomplete unit or batch, including materials, labour, and overheads.
This helps determine how much cost is tied up in unfinished work at any time.
Debtor or Creditor ledgers are part of financial accounting, not cost accounting.
So, the Work-in-Progress ledger is the correct answer.

Stock valuation means determining the value of materials or goods in hand at the end of an accounting period.
In cost accounting, two widely used methods are:
1. FIFO (First In First Out): The oldest items are issued first and closing stock is valued at the latest purchase price.
2. LIFO (Last In First Out): The latest items purchased are issued first and closing stock is valued at the earliest purchase price.
Other methods include Weighted Average Price Method and Standard Cost Method.
Choosing the right method affects cost of goods sold and inventory valuation, which impacts profit calculation.

A Memorandum Reconciliation Account is a statement or account prepared when a business keeps separate cost and financial accounts.
Due to differences in the treatment of certain items like overhead absorption, stock valuation, or non-cost items, profit as per cost accounts often differs from profit as per financial accounts.
The purpose of preparing this reconciliation is to explain the reasons for these differences and ensure both sets of accounts match in the end.
It is called a memorandum because it is often prepared as an internal statement, not as part of formal accounts.
This helps management check the accuracy of costing records and maintain consistency with financial books.

Donations are not related to the production of goods or provision of services.
They are purely financial expenditures made for charitable, social, or promotional purposes.
As a result, donations are never charged to the Costing Profit and Loss Account because they do not affect cost control or cost computation.
Instead, they are debited to the Financial Profit and Loss Account as a non-operating expense.
This ensures that the cost data remains pure and only includes production-related costs.
So, the correct answer is that donations are debited to the Financial Profit and Loss Account.

Cost accounting deals with recording and controlling costs related to production and operations.
It includes expenses that are directly or indirectly connected with manufacturing and services.
Transfer to general reserve is not an operating expense but an appropriation of profit which is made after profits have been determined.
This item belongs to the profit and loss appropriation account in financial accounts, not in cost accounts.
Therefore, it is not included while computing the cost of products or services.
So, the statement is False.

In transport costing, different composite units are used depending on the nature of service.
When a transporter carries goods, the cost is usually measured in tonne-kilometres or quintal-kilometres.
This unit shows the cost of moving a certain weight over a certain distance.
'Cost per km' alone is too general but can still be used for internal cost per vehicle km.
However, 'Cost per passenger-km' is used only for passenger transport services like buses or trains that carry people, not goods.
Therefore, for a goods transporter, 'Cost per passenger-km' is not a valid service unit.
So, the correct answer is 'Cost per passenger-km'.

Operating costing is used for service industries to find the cost of services rendered.
It is not just a tool but a complete method of costing because it involves systematic steps to collect and calculate cost data for operations.
This method applies to transport, hospitals, hotels, power houses, and similar undertakings.
It helps find the cost per service unit like per km, per meal, per room night, or per patient day.
So, operating costing is rightly classified as a method of costing.

A Composite Unit is used in operating costing where the service provided cannot be measured by a single simple unit.
It combines two or more related measures to express the output more accurately.
For example, in transport costing, output may be measured in ‘ton-kilometres’ or ‘passenger-kilometres’ — here, distance and weight or number of passengers are combined.
Similarly, in hotels, ‘room days’ or ‘bed nights’ are used.
Composite units help in realistic cost calculation where both capacity and service time are important.
They ensure correct cost per unit of complex services.

In canteen costing, the aim is to calculate the cost of providing food and related services to employees or customers.
To find the cost per service unit, an appropriate unit must be selected which represents the output of the canteen.
One common service unit used is the meal served because each meal represents one complete service provided.
Sometimes other units like ‘per plate’ or ‘per lunch’ or ‘per dinner’ may also be used, depending on how the canteen operates.
Calculating cost per meal helps in controlling canteen expenses and setting reasonable rates.

Operating costing is a method of costing used to ascertain the cost of providing services, not for manufacturing tangible products.
It is applied in transport companies, hospitals, hotels, power houses, and similar service industries.
Its main aim is to determine the cost per unit of service, such as per kilometer, per patient day, or per room night.
Manufactured tangible products are costed using other methods like job costing, batch costing, or process costing — not operating costing.
Therefore, the statement given is False.

In process costing, some loss of material is unavoidable and is treated as normal loss.
This normal loss is expected due to factors like evaporation, wastage, or spoilage during the process.
However, if the actual loss is more than the normal loss, the excess loss is called abnormal loss.
Therefore, abnormal loss is calculated as:
Abnormal Loss = Actual Loss – Normal Loss
This extra loss is charged separately to the Costing Profit and Loss Account to find the true cost of production.
So, abnormal loss helps in identifying inefficiencies in the process.