Cost Accountancy Interview Preparation Guide

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Cost centre is defined as a location, machine, person, department, division, or any equipment or group of these, in relation to which direct and indirect costs may be ascertained and used for the purpose of cost control. Thus, an organisation for the costing purposes is divided in convenient units and one of the convenient units is known as cost centre. Example: collecting, sorting, washing of clothes are the various activities which are separate cost centre in a laundry. The cost centre facilitates this function of cost control. Thus, correct identification of cost centre is a prerequisite for the successful implementation of cost accounting process. This also facilitates the fixation of responsibility in the correct manner.

Costing is the process of ascertaining costs whereas cost accounting is the process of recording various costs in a systematic manner, in order to prepare statistical date to ascertain cost.

Following are the objects of Cost Accountancy:

-Ascertainment of Cost and Profitability
-Determining Selling Price
-Facilitating Cost Control
-Presentation of information for effective managerial decision
-Provide basis for operating policy
-Facilitating preparation of financial or other statements

Cost accountancy is 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 as well as the presentation of information for the purpose of managerial decision making.

Indirect Cost are all the expenses which cannot be identified with the individual product, service or job cost centre. The totals of indirect costs are termed as overheads. Example: salaries of storekeepers, foremen, work manager’s salary etc.

Direct Cost are all the expenses which can be identified with the individual product, service or job cost centre. In the manufacturing process of products, materials are purchased, labours are hired and wages are paid to them. All these take active and direct part in the manufacturing process.

Production Cost Centre: is the place where the production activity is carried on. Example of Production Cost Centre: a assembly shop, a paint shop etc.

Service Cost Centre: is the place where all types of assistance are given to the production activities. Example of Service Cost Centre: the store department, the labour office, the account/costing department etc.

Impersonal Cost Centre: consist items of impersonal nature like an equipment or location. Example of Impersonal Cost Centre: a department, a branch, a region of sale, etc.

Personal Cost Centre: consist items of personal nature like a person or a group of persons. Example of Personal Cost Centre: Regional Manager, Sales Manager, Marketing Manger, etc.

Uncontrollable Cost are the costs which cannot be influenced by the action of a specified member of the undertaking. For example: a foreman incharge of a tool room can only control costs pertaining to the same department and the matters which come directly under his control, not the costs apportioned to other department. The expenditure which is controllable by an individual may be uncontrollable by another individual.

Controllable Cost are the costs which can be influenced by the action of a specified member of the undertaking. They are incurred in a particular responsibility centres can be influenced by the action of the executive heading that responsibility centre. For example: Direct labour cost, direct material cost, direct expenses controllable by the shop level management.

Semi-variable Cost is the cost which is neither fixed nor variable in nature. These remain fixed at certain level of operations while may vary proportionately at other levels of operations. Example: maintenance cost, repairs, power, etc.

Variable Cost is the cost which varies directly in proportion with every increase or decrease in the volume of output with a given a period of time. Example: Wages paid to labours, cost of direct material, consumable stores, etc.

Fixed Cost is the cost which remains constant or unaffected by variations in the volume of output within a given period of time. Example: Rent or rates, Insurance charges, etc.

While installing a Costing System an Organisation may face the following problems:

-Lack of Support from Top Management Resistance and non cooperation from the Staff

-Shortage of trained staff

-Non suitability for the nature of product and nature of business

-The cost involved in installing this system may be too high.

Following things should be taken into consideration while installing a costing system:

-Nature of the Product is a very important deciding factor in installing an effective costing system.

-Nature of the Organisation should be considered before installing costing system.

-Objectives of the Organisation should be met with the installed costing system.

-Manufacturing Process: Before installing the costing system the technicalities of the manufacturing process should be studied carefully.

-Technical Details of the business must be studied before introducing new costing system.

-The system should be informative and simple. The system should be simple and easy to use in order to maintain various cost records.

-Reporting Systems: The costing system should be designed in such a way that reports are generated in a proper way to facilitate the cost control decisions.

-The costing system should be elastic and capable of adapting according to the changing environment.

Errors in accounting are placed in the following main groups:

- Error of Omission
- Error of Commission
- Error of Principle
- Compensating Error

Abnormal Cost are the costs which are unusual or irregular which are not incurred due to abnormal situation s of the operations or productions. Example: destruction due to fire, shut down of machinery, lock outs, etc.

Normal Cost are the normal or regular costs which are incurred in the normal conditions during the normal operations of the organization. They are the sum of actual direct materials cost, actual labour cost and other direct expense. Example: repairs, maintenance, salaries paid to employees.

Sunk Cost is the sum that has already been incurred and cannot be recovered by any decision made now or in future. This cost is also called stranded cost. Example: A special purpose machine was bought by a company for Rs. 100000. The machine was used to make the product for which it was bought and now it is obsolete and cannot be sold. And it will be unwise to continue using that obsolete product to recover the original cost of the machine. In order words, Rs. 100000 already spent on that machine cannot be recovered in future. Such costs are said to be sunk costs and should be ignored in decision making process.

Differential Cost is the difference between the costs of two alternatives. It includes both cost increase and cost decrease. It can be either variable or fixed. Example: Cost of first alternative = 10000; Cost of second alternative = 5000; Differential Cost = 10000 – 5000 = 5000

Opportunity Cost is the cost incurred by the organisation when one alternative is selected over another. For example: A person has Rs. 100000 and he has two options to invest his money, either invests in fixed deposit scheme or buy a land with the money. If he decides to put is money to buy the land then the loss of interest which he could have received on fixed deposit would be an opportunity cost.