UNIT III and IV

1. Cost
The Institute of Cost and Management Accountants, (ICMA) London defines Cost as `
the amount of expenditure incurred on a given thing`.
2. Costing
The technique and process of ascertaining cost. As a technique, costing refers to the body
of principles and rules for ascertaining the cost of a product or service. As a process it
refers to the procedure for ascertaining cost.
3. Cost accounting
Cost accounting is the process of classifying, recording, allocating and reporting the
various costs incurred in the operation of an enterprise.
4. Cost accountancy
It is the application of costing and cost accounting principles, methods and techniques to
the science, art and practice of cost control and ascertainment of profitability.
5. Cost unit
Cost unit is the unit of output for which cost is ascertained. For example, the cost of air
conditioner is ascertained per unit.
6. Cost centre
A large business is divided into a number of functional departments (such as production,
marketing and finance) for administrative convenience. These departments are further
divided into smaller divisions are called cost centres.
7. Profit centre
A profit centre is a responsibility centre which accumulates revenues as well as costs. For
instance, if there are two divisions in textile company, say ready-mades and clothing,
each one may be regarded as a profit centre.
8. Direct costs
Direct costs are those costs which can be identified with and allocated directly to a
particular product, process or job. These costs are known as prime cost.
9. Indirect costs
Indirect costs are those costs which cannot be allocated but can be apportioned to or
absorbed by a particular product, process or job. The costs are known as overheads.
10. Opportunity cost
It is the value of benefit sacrificed in favor of an alternative course of action. Example
The fixed deposit is withdrawn and invested in a project. The interest of fixed deposit
which is sacrificed is the opportunity cost. This cost should be taken into account which
evaluating the profitability of the project.
11. Sunk cost
A sunk cost is an irrecoverable cost and is caused by the complete abandonment of a
particular plant. Such cost is irrelevant in decision making as it is already incurred.
12. Capital costs
Capital costs are those costs which are incurred in purchasing some asset for the propose
of increasing the earning capacity of the business.
13. Revenue costs
Revenue costs are those costs which are incurred to maintain the earning capacity of the
business. Example cost of maintaining assets.
14. Job costing
It is also called specific order costing. It is adopted by industries where there is no
standard product and each job or work order is different from the others. The job is done
strictly according to the specifications given by the customer and usually the job takes
only a short time for completion.
Job costing is used by printing process, motor repair shops, automobile garages, film
studios, engineering industries etc.
15. Contract costing
It is also known as terminal costing. Basically, this method is similar to job costing.
However, it is used where the job is big and spread over a long period of time. The work
is done according to the specifications of the customer. The purpose of contract costing is
to ascertain the cost incurred on each contract separately. This method is used by firms
engaged in ship building, construction of buildings, bridges, dams and roads.
16. Batch costing
It is an extension of job costing. A batch is a group of identical products. All the units in
a particular batch are uniform in nature and size. The total cost of a batch is ascertained
and it is divided by the number of units in the batch to determine the cost per unit. Batch
costing is adopted by manufacturers of biscuits, ready made garments, spare parts,
medicines. Etc.
17. Process costing
It called continuous costing. In certain industries, the raw material passes through
different processes before it takes the shape of a final product.
Process costing is applied in continuous process industries such as chemicals, textiles,
paper, soap, leather etc.
18. Unit costing
This method is also known as single or output costing. It is suitable to industries where
production is continuous and units are identical. The objective of this method is to
ascertain the total cost as well as the cost per unit.
Unit costing is applicable in the case of mines, oil drilling units, cement works, brick
works and units manufacturing cycles, radios, washing machines etc.
19. Historical costing
In this, actual costs are ascertained after they have been incurred. This is a conventional
method of cost ascertainment.
20. Standard costing
Standard cost is predetermined cost. The costs are determined in advance of production.
Standard performance is set in terms of costs. Actual costs are compared with standards
and variations are found. Then, reasons for variations are investigated and remedial
actions are taken. This system enables control of costs and also measurement of
efficiency of operations.
21. Material control or inventory
It means control over purchases receipts, inspection, storage and consumption. It is
defined as a systematic control over purchasing, storage and consumption of material, so
as to maintain a regular and timely supply of materials and avoiding at the same time
over stocking.
22. Perpetual inventory system
This system is also known as automatic inventory system. It is an important aid to
material control. Its main object is to make available details about the quantity and value
of stock of each item, at all times it consists of maintaining records for each type of
material showing the quantities and value of material received, issued and in stock. It also
covers continuous stock taking.
23. Bin card
Bin is a place, rack or cupboard, where materials are kept. Each bin has a card to show
the position of stock in the bin. This card is known as bin card or stores card. Only
quantities are entered in the bin card. These cards are used not only for recording of
receipts and issues of stores but also to assist the store keeper to control the stock.
24. Stores ledger
Stores ledger is kept in the costing department. It contains accounts for each class of
material. It is usually maintained in the loose leaf form. It is written up by a stores
accountant or stores clerk. In the stores ledger, stores received and issued are recorded
both in quantity and value.
25. ABC
ABC analysis envisages varied degree of care and control for different categories of
materials, according to their value. Hence, it is known as selective value approach. It is
also referred to as Always Better Control system.
Category A – High value materials
Category B – Medium value materials
Category C – Low value materials.
26. EOQ
It is the ideal quantity of materials to be purchased at any time. If purchases are made in
large quantities, the cost of holding the stock will be higher but the cost of purchasing
would be less. On the other hand if purchases are made in small quantities, the cost
holding the stock will be less while the cost of purchasing would be high.
The most economical size of order is that the costs of purchasing as well as the costs of
holding will be at the minimum.
27. Scrap
According to ICMA scrap refers to discarded material ( from any job or process) having
some value. It is sold without further treatment or used as raw material for another
process. It is a material loss
Examples of scrap are: Saw dust, small pieces of cloth, short pieces from wood working
operations, short pieces from metal cutting operations etc. scrap may be sold or reused.
28. Job costing
Job costing is a method of ascertaining costs of an individual job or work order
separately. Each job is treated as a cost unit for which costs are accumulated.
Job costing is useful in industries which manufacture a variety of products according to
the specifications of customers.
29. Batch costing
Batch costing is a special type of job costing. It is used in industries where goods are
manufactured in definite batches. For example, in a ready made garments factory, shirts
are made in batches according to size or type.
30. Economic Batch Quantity (EBQ)
EBQ refers to the optimum quantity that should be manufactured in a batch. In other
words it is the ideal quantity of production that will minimize cost of production.
31. Work in progress
When the contract is not yet complete, to ascertain the profit, on the contract for an
accounting period, value of work in progress is found out. It is credited to the contract
account. Work in progress includes Work certified and work uncertified
32. Work certified
Large contracts take a long time for completion and require huge investments. To enable
the contractor to continue with work, periodic payments are made by the contractee. Such
payments are made only after inspection of the work by the contractee`s engineer or
archite4ct. The value of work approved by the contractee`s engineer/ architect is known
as work certified.
33. Work uncertified
Work completed but not yet approved by the contractee`s engineer or architect is known
as uncertified work. It is valued at cost.
34. Notional profit
The contract account shows the notional profit which is the excess of the value of work in
progress over the cost of work done.
The exact profit can be ascertained only on completion of the contract. Hence, the entire
notional profit is not taken to profit and loss account. A suitable proportion based on the
of work certified is taken to profit and loss account. The balance of notional profit is
treated as reserve.
35. Cost plus contract
Cost plus contract is a contract in which the contractee agrees to pay the cost of work
done plus a percentage of it towards profit. Such contracts are undertaken when it is not
possible to fix the contract price in advance. It is common in the case of special articles,
machinery not usually manufactured and unique. Contracts like construction of a ship,
dam, powerhouse etc. government prefers to give contracts on cost plus basis.
36. Escalation clause
Escalation clause is a clause in the contract agreement. Under this clause, the contractee
agrees to pay the contractor any increase in cost of the contract due to rise in price of
material and labour.
37. Retention money
The entire value of work certified at the end of a period is not paid to the contractor. The
contractee retains a specified percentage, say 10 percent and pays the balance. The
amount retained by the contractee is known as retention money. It is a form of security
against defective work which may be found later.
Retention money is paid to the contractor after the expiry of a stipulated time from the
date of completion of contract.
38. Process costing
It is method of costing used to find out the cost of a product at each stage or process of
production. There are certain industries where the raw material passes through different
stages of production, before it becomes a finished product.
39. Normal loss
Normal loss refers to the loss which is unavoidable in a manufacturing process. It arises
under normal conditions due to the nature of the materials or production process. The
causes of normal loss are evaporation, chemical reaction, shrinkage, spoilage etc.
40. Abnormal loss
Abnormal loss refers to the loss which is avoidable. It arises due to abnormal or unusual
factor. The causes of abnormal loss are sub-standard materials, bad design, accidents;
break down of machines, carelessness etc.
41. Abnormal gain
In process costing, normal loss is estimated on the basis part experience. When the actual
loss is less than the estimated normal loss, it gives rise to abnormal gain.
42 Activity Based Costing
ABC system is a system based on activities linking spending on resources to the products
or services produced or delivered to customers.
43. JIT or Lean production
Just in time refers to acquiring materials and manufacturing goods only as needed to fill
customer orders.
44. Non value added activities
It refers to those functions that do not directly increase the worth of a product to a
customer Eg. Storing direct material, setting up machinery, employees’ idle time.
Value added activities
It increases the value of the product to the customer. E.g. Product design, all
manufacturing processes, manufacturing to customer specifications and convenient
channels of distribution.
UNIT 2
45. Funds flow statement
A statement of sources and application of funds is a technical device designed to analyze
the changes in the financial condition of a business enterprise between two dates. Foulke.
46. Funds.
The term fund has been defined in a number of ways. In a narrow sense, it means cash
only. A fund flow statements prepared on cash basis is called a cash flow statements. In a
broader sense, the term funds refer to all financial resources.
47. Adjusted profit and loss account
To ascertain the funds generated by operations the adjusted profit and loss account is
prepared by taking into account only the non fund and non operating items.
Non fund items refer to expenses and income which do not involve any changes in
working capital Eg. Depreciation, transfer to general reserve, writing back of
provision for tax etc.
Non operating items refer to expenses and income which are not directly related to the
business operation of the company Eg. Dividend received, refund of tax, profit or loss
on sale of assets etc.
The balancing figure in adjusting profit and loss account is either funds from
operation or funds lost in operations.
48. Working capital
Working capital refers to the capital required for day to day operations of a business. It is
the excess of current assets over current liabilities. Adequate working capital is necessary
for the successful running of any organization.
49. Funds flow statement
A statement prepared from the historical data (i.e. income statement and balance sheet)
showing sources and uses of cash is called cash flow statement. It reveals the inflow and
outflow of cash during the particular period.
50. Financial statements
The term financial statements refer to a package of statements such as balance sheets,
income statements, statement of retained earnings, funds flow statements, cash flow
statement.
51. Ratio
The relationship between two figures expressed mathematically is called a ratio.It is a
numerical relationship between two numbers which are related in some manner. It is
calculated by dividing one by another.
52. Ratio analysis
It is a technique of analysis and interpretation of financial statements. It is the process of
determining and interpreting various ratios for helping in making certain decisions.
53. Liquidity ratios or short term solvency ratios
Liquidity ratios measure the ability of the firm to meet tits current obligations. This
indicates whether the firm has sufficient liquid resources to meet its short term liabilities.
54. Solvency ratios
Solvency ratios assess the long term financial conditions of the firm. Bankers and
creditors are most interested in liquidity. But share holders, debenture holders, and
financial institutions are concerned with the long term financial prospects.
55. Profitability ratios
Profitability ratios measure the profitability of firm’s business operations.
56. Activity or turnover ratios
Activity ratios measure the efficiency of asset management. The efficiency in (asset
utilization) the use of assets would be reflected by the speed with which they are
converted into sales. Activity ratios indicate the relationship between sales and various
assets of the firm

UNIT 5
57. Marginal costing
Marginal costing is also known as direct costing or variable costing or incremental
costing.
Marginal costing is defined as, the ascertainment of marginal cost and of the effect on
profit of changes in volume or type of output by differentiating between fixed and
variable costs.
58. Break even point
It is the point at which total revenue is equal to total cost. It is the point of no profit, no
loss, or the minimum of production where total cost is recovered.
59. Fixed cost
Expenses that do not vary with the volume of production are known as fixed expenses.
Eg. Managers salary, rent and taxes, insurance etc. fixed charges are fixed only within a
certain range of plant capacity.
Total fixed is fixed and fixed cost per unit is not fixed.
60. Variable cost:
Expenses that vary almost in direct proportion to the volume of production or sales are
called variable expenses.
Eg. Electric power and fuel, packing materials, consumable stores. Variable cost per unit
is fixed.
61. Contribution
Contribution is the difference between sales and variable costs and it contributes towards
fixed costs and profit.
Contribution = sales – variable cost
Contribution = fixed cost + profit
Contribution = sales x P.V. Ratio
62. Margin of safety
Excess of sales over the break even sales. It indicates the extent to which the sales can be
reduced without resulting in loss.
63. Profit volume ratio or P.V. Ratio
It is one of the most useful ratios for studying the profitability of business. The ratio of
contribution to sales is the P/V ratio. The concept of P.V. ratio helps in determining break
even point.
64. Budget
A budget is a plan of action expressed in financial terms or non financial terms. It is a
planned estimate of future business conditions such as the sales, cost and profit. A budget
is a tool which helps the management in planning and control of business activities.
65. Budgetary control
It is a system which uses budgets as a means of planning and controlling all aspects of
producing and or selling commodities and services.
66. Sales budget
A sales budget is an estimate of expected sales during the budget period. It may be stated
in terms of money or quantity or both. It contains information relating to sales month
wise, product wise and area wise.
67. Production budget
The preparation of production budget is dependent on the sales budget. Production
budget is an estimate of quantity of goods that must be produced during the budget
period.
68. Materials requirement budget
It is an estimate of total quantities of material required for production during the budget
period. The material purchase budget is an estimate of quantities of raw materials to be
purchased for production during the budget period.
69. Cash budget
This budget gives an estimate of receipts and payments of cash during the budget period.
It shows the cash available and needed from time to time to meet the capital requirements
of the organization.
This budget is prepared in two parts. One showing an estimate of receipts and the other
showing an estimate of payments.
70. Master budget
Master budget is prepared incorporating all functional budgets. It is defined as the
summary budget incorporating the functional budgets which is finally approved, adopted
and employed. The budget may take the form of budgeted profit and loss account and
balance sheet.
71. Flexible budget
It may be defined as a budget designed to change in accordance with the level of activity
actually attained. It shows estimated costs and profit at different levels of output. It
facilitates comparison of actual performance with the budget at any level of output. To
prepare flexible budget all costs should be classified into fixed and variable and semi
variable.
72. Zero Base Budgeting ZBB
It is defined as a planning and budgeting process which require each manager to justify
his entire budget request in detail from scratch (hence Zero base) and shifts the burden of
proof to each manager to justify why he should spend the money at all. The approach
requires that all activities be analyzed in decision packages which are evaluated by
systematic analysis and ranked in the order of importance.
73. Standard costing
Standard cost is a pre determined cost which is calculated from management’s standards
of efficient operation and the relevant necessary expenditure.
74. What is variance is standard costing?
Difference between a standard cost and the comparable actual cost incurred during a
period.
UNIT I
75. Money measurement concept
It stipulates recording of only those transactions which can be expressed in monetary
terms. It provides a homogeneous measuring yardstick for heterogeneous items.
76. Duality concept
Accounting records should be based on the double entry system or duality concept in that
there are two aspects or impacts of each accounting transaction.
76. Going concern concept
It assumes that the business entity would continue to operate indefinitely.
78. Accrual concept
It requires that expenses incurred or revenues earned should be considered as expenses or
revenues of the same period whether paid or realized in cash or are in arrears or
outstanding in that year.
79. Capital expenditure
All expenses whose benefit accrues beyond are accounting year.
80. Revenue expenses
Expenses which benefit one accounting year.
81. Deferred revenue expenditure
Deferred Revenue expenses are revenue expenses which benefit benefit more than one
accounting year, Eg. Research and development expenditure.
82. Accounting rules
Personal account
Debit the receiver
Credit the giver
Real account
Debit what comes in
Credit what goes out
Nominal account
Debit all expenses and losses
 Credit all incomes and gains
83. Journal
Journalizing is the process of recording transactions in journal – the book of original
entry.
84. Trial balance
It is a statement of account balances and their totals.
85. Balance sheet
It provides information about financial position in terms of assets, liabilities and
shareholders equity at a point of time.
86. Assets
It is a valuable resource owned by a firm acquired at measurable money cost.
87. Fixed assets
Such assets are long term i8n the sense that they are acquired to be retained in the
business on a long term basis to produce goods and services, and are not for resale.
88. Tangible fixed assets
Tangible assets have a physical existence and are shown net of depreciation
89. Intangible fixed assets
Intangible fixed assets do not generate goods and services directly in a way, they reflect
the rights of the firm. This category of assets comprises patents, copyrights, trade marks
and good will.
90. Current assets
Current assets are assets held for a period not exceeding one year. They generate
liquidity.
91. Marketable securities
These are short term investments which are both readily marketable and which are
expected to be converted into cash within a year.
92. Current liabilities
Current liabilities are obligations which mature within a year.
93. Deferred income
It represents the liability that arises out of receipt of income in advance, for example, rent
received in advance.
94. Liabilities
Liabilities are the claims of outsiders against the firm.
95. Long term liabilities
Obligations of a firm payable after one year.
96. Owner’s equity
It is the claim of the owners of business against its assets consisting of capital and
retained earnings.
97. Fictitious assets
Expenses or losses incurred at the time of commencement of the business like
preliminary expenses, discount on issue of debenture etc.,
98. Stake holders
Stake holders are those who are interested in knowing the financial performance of the
financial performance of the firm. Eg. Equity share holders, preference share shoulders,
debenture holders, creditors, common public, financial institutions.
99.Target costing.