COST ACCOUNTING IMPORTANT THEORY QUESTIONS

    (ix)Information Attributes: Information generated from the Costing system should be possess all the attributes of an information i.e. complete, accurate, timeliness, confidentiality etc. This also meets the requirements of management information system.

Q 3.Explain ‘Sunk Cost’ and ‘Opportunity Cost’.
ANS. Sunk cost: Historical costs or the costs incurred in the past are known as sunk cost. They play no role in the current decision making process and are termed as irrelevant costs. 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.

Opportunity cost: It 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 its bank deposits. In such a case the loss of interest on the bank deposit is the opportunity cost for carrying out the expansion plan.

Q 3. Briefly explain the essential features of a good cost accounting system.
ANS  Essentials of a good Cost Accounting System: The essential features, which a good Cost Accounting System should possess, are as follows:
 (a) Informative and Simple: Cost Accounting System should be tailor-made, practical, simple and capable of meeting the requirements of a business concern.
 (b) Accuracy: The data to be used by the Cost Accounting System should be accurate; otherwise it may distort the output of the system.
(c) Support from Management: Necessary cooperation and participation of executives from various departments of the concern is essential for developing a good system of Cost Accounting.
 (d) Cost- Benefit: The Cost of installing and operating the system should justify the results.
(e) Precise Information: The system of costing should not sacrifice the utility by introducing meticulous and unnecessary details.
 (f) Procedure: A carefully phased programme should be prepared by using network analysis for the introduction of the system.

Q 4.Discuss cost classification based on variability and controllability.
ANS. Cost classification based on variability
Fixed cost – these are costs, which do not change in total despite changes of a cost driver. A fixed cost is fixed only in relation to a given relevant range of the cost driver and a given time span. Rent, insurance, depreciation of factory building and equipment are examples of fixed costs where the final product produced is the cost object.
Variable costs- these are costs which change in total in proportion to changes of cost driver. Direct material, direct labour are examples of variable costs in cases where the final product produced is the cost object.
Semi-variable costs – These are partly fixed and partly variable in relation to output e.g. telephone and electricity bill.

Cost classification based on controllability
Controllable costs – are incurred in a particular responsibility center and relate to a defined time span. They can be influenced by the action of the executive heading the responsibility center e.g. direct costs.
Uncontrollable costs – are costs which are not influenced by the action of the responsibility manager e.g. expenditure incurred by the tool room is controllable by the foreman in charge of that section, but the share of tool room expenditure which is apportioned to the machine shop is not controllable by machine shop foreman.

Q 5.Explain the area of cost reduction at product design stage. (3 Marks, May 2005)
ANS.
Products design offers the greatest scope of cost reduction of a permanent nature. The impact of a decision made at the beginning stage on costs can be revealed at every stage of manufacture or processing of the product in the factory. The design function, therefore, offers an extremely important area for cost reduction action.
Before making new designs, a design policy has to be settled by top management. The design policy may be selected towards objectives such as:
(a) Low cost and functional efficiency
(b) Widest possible application
(c) Quality and life and
(d) Appearance.
Any attempt to achieve cost reduction through design economies may come into conflict with the overriding design policy and hence a firm policy concerning design has to be settled by overcoming, as far as possible, conflicts.
Potential areas for cost reduction in the field of design are:
(i) Introduction of new designs
(ii) Improvement in the existing designs and
(iii) Standardisation and simplification.

Q 6. Narrate the objectives of cost accounting.
ANS. The main objectives of introduction of a Cost Accounting System in a manufacturing organization are as follows:
(i) Ascertainment of cost: The main objective of a Cost Accounting system is to ascertain cost for cost objects. Costing may be post completion or continuous but the aim is to arrive at a complete and accurate cost figure to assist the users to compare, control and make various decisions.
(ii) Determination of selling price: Cost Accounting System in a manufacturing organisation enables to determine desired selling price after adding expected profit margin with the cost of the goods manufactured.
(iii) Cost control and Cost reduction: Cost Accounting System equips the cost controller to adhere and control the cost estimate or cost budget and assist them to identify the areas of cost reduction.
(iv) Ascertainment of profit of each activity: Cost Accounting System helps to classify cost on the basis of activity to ascertain activity wise profitability.
(v) Assisting in managerial decision making: Cost Accounting System provides relevant cost information and assists managers to make various decisions.

Q 7.Discuss the area of activity in respect of which cost accounting records are to be maintained.
ANS. The areas of activity in respect of which cost accounting records are to be maintained under cost accounting record rules are:
 Raw materials, components, stores and spare parts
 Salaries and wages
 Service department expenses
 Utilities
 Depreciation
 Other overheads
 Conversion cost
 R & D expenses
 Interest
 Joint products and by products
 Work-in-progress and finished goods stocks
 Cost statements
 Record of physical verification
 Packing
 Production records.

Q 8.  EXPLAIN PROFIT CENTRES 
ANS Profit Centres are the part of a business which is accountable for both cost and revenue. These are responsible for generating and maximizing profits. Performance of these centres is measured with the volume of profit it earns.

Q 9.Distinguish between Explicit and Implicit cost
ANS. Explicit costs, which are also known as out of pocket costs, refer to costs involving immediate payment of cash. Salaries, wages, interest on capital, etc. are some of the examples of explicit costs. They can be easily measured.
Implicit costs (also known as economic costs) do not involve any immediate cash payment.

The main points of difference between Explicit and Implicit costs are:
 Implicit costs do not involve immediate cash payment whereas Explicit costs involves immediate outgo of cash.
 Implicit costs are not recorded in the book of account whereas explicit costs are entered in the books of Accounts.

Q 10. What is meant by “cost centre”? What are the different type of cost centres?
ANS. It is defined as a location, person or an item of equipment (or group of these) for which cost may be ascertained and used for the purpose of Cost Control.

Cost Centres are of two types:
Personal Cost Centre: It consists of a person or group of persons e.g. Mr. X, supervisor, foreman, accountant, engineer, process staffs, mining staffs, doctors etc.
Impersonal Cost Centre: It consists of a location or an item of equipment (or group of these) e.g. boiler house, cooling tower, weighing machine, canteen, and generator set etc.

Cost Centres in a manufacturing concern are of two types:
Production Cost Centre: it is a cost centre where raw material is handled for conversion into finished products. Here both direct and indirect expenses are incurred. Machine shops, welding shops and assembly shops etc. are examples of production cost centres.
Service Cost Centre: It is a cost centre which serves as an ancillary unit to production cost centre. Payroll processing department, HRD, Power house, Gas production shops, Plant maintenance centres etc. are example of service cost centres.

Q 11.Distinguish between
(i) Profit Centres and Investment Centres.
(ii) Product Cost and Period Cost.
ANS.(i) Profit Centres and investment centres
A profit centre is a centre where the manager has the responsibility of generating and maximising profits. In such centres, the manager is responsible for revenue and cost.
Investment centres are those centres which are concerned with earning an adequate ROI. In such centres, the manager is responsible for investment, revenue and cost.

(ii) Product costs and period costs
Product costs are costs which are associated with purchase and sale of goods. These are costs are used for inventory valuation and incurred up to factory stage.
Period costs are costs, which are not assigned to the products but are charged as expenses against revenues of the period in which they are incurred e.g. Selling, General Administrative and Distribution overheads.

Q 12.Discuss the various reports provided by Cost Accounting Department
ANS. Various reports provided by Cost Accounting Department
(i) Cost sheet setting out the total cost, analysed into various elements.
(ii) Consumption of material statements.
(iii) Labour utilization statements.
(iv) Overheads incurred compared with the budget and overheads actually charged to production.
(v) Sales effected compared with budgets.
(vi) Reconciliation of actual profits earned with budgeted profits.
(vii) The total cost of abnormally spoiled work in factory and abnormal losses.
(viii) Labour turnover, cost of recruitment and training new employees.
(ix) Expenses incurred on R & D as compared with those budgeted.

Q 13.Identify the methods of costing for the following:
         .(i) Where all costs are directly charged to a specific job.
         (ii) Where all costs are directly charged to a group of products.
        (iii) Where cost is ascertained for a single product.
        (iv) Where the nature of the product is complex and method can not be ascertained.
ANS- (i) Job Costing
(ii) Batch Costing
(iii)Unit Costing or Single or Output Costing
(iv)Multiple Costing

Q 14.State the types of cost in the following cases:
(i) Interest paid on own capital not involving any cash outflow.
(ii) Withdrawing money from bank deposit for the purpose of purchasing new machine for expansion purpose.
(iii) Rent paid for the factory building which is temporarily closed
(iv) Cost associated with the acquisition and conversion of material into finished product.
ANS.Type of costs
(i) Imputed Cost
(ii) Opportunity Cost
(iii) Shut Down Cost
(iv) Product Cost

Q.15 -Explain ‘Cost Unit’ and ‘Cost Centre’?
Ans- 1.Cost Units: It is a unit of product, service or time (or combination of these) in relation to which costs may be ascertained or expressed.
We may for instance determine the cost per tonne of steel, per tonne kilometre of a transport service or cost per machine hour. Sometime, a single order or a contract constitutes a cost unit. A batch which consists of a group of identical items and maintains its identity through one or more stages of production may also be considered as a cost unit.
Cost units are usually the units of physical measurement like number, weight, area, volume, length, time and value.

2.Cost Centre: It is defined as a location, person or an item of equipment (or group of these) for which cost may be ascertained and used for the purpose of Cost Control.
Cost Centres are of two types:

•       Personal Cost Centre: It consists of a person or group of persons e.g. Mr. X, supervisor, foreman, accountant, engineer, process staffs, mining staffs, doctors etc.
•       Impersonal Cost Centre: It consists of a location or an item of equipment (or group of these) e.g. boiler house, cooling tower, weighing machine, canteen, and generator set etc.

OR

Cost Centres in a manufacturing concern are of two types:

•       Production Cost Centre: it is a cost centre where raw material is handled for conversion into finished products. Here both direct and indirect expenses are incurred. Machine shops, welding shops and assembly shops etc. are examples of production cost centres.
•       Service Cost Centre: It is a cost centre which serves as an ancillary unit to production cost centre. Payroll processing department, HRD, Power house, Gas production shops, Plant maintenance centres etc. are example of service cost centres.

Q18 .What are the main objectives of cost accounting?
ANS.The Main objectives of Cost Accounting are
1. Ascertainment of cost.
2. Determination of selling price.
3. Cost control and cost reduction.
4. Ascertaining the project of each activity.
5. Assisting management in decision-making.
6. Determination of break- even point.

2.MATERIAL

Q 24.Distinguish between ‘Scraps’ and ‘Defectives’ in costing
ANS. 

Q 35.Explain the treatment of over and under absorption of overheads in cost accounts.
ANS. Treatment of over and under absorption of overheads are:-
(i) Writing off to costing P&L A/c:– Small difference between the actual and absorbed amount should simply be transferred to costing P&L A/c, if difference is large then investigate the causes and after that abnormal loss/ gain shall be transferred to costing P&L A/c.
(ii) Use of supplementary Rate: Under this method the balance of under and over absorbed overheads may be charged to cost of W.I.P., finished stock and cost of sales proportionately with the help of supplementary rate of overhead.
(iii) Carry Forward to Subsequent Year: Difference should be carried forward in the expectation that next year the position will be automatically corrected.

Q 36.How do you deal with the following in cost account?
(i) Packing Expenses
(ii) Fringe benefits
ANS.Packing expenses: Cost of primary packing necessary for protecting the product or for convenient handling, should become a part of the prime cost. The cost of packing to facilitate the transportation of the product from the factory to the customer should become a part of the distribution cost. If the cost of special packing is at the request of the customer, the same should be charged to the specific work order or the job. The cost of fancy packing necessary to attract customers is an advertising expenditure. Hence, it is to be treated as a selling overhead.

Fringe benefits: These are the additional payments or facilities provided to the workers apart from their salary and direct cost-allowances like house rent and city compensatory allowances. If the amount of fringe benefit is considerably large, it may be recovered as direct charge by means of a supplementary wage or labour rate; otherwise these may be collected as part of production overheads.

Q 37.Distinguish between allocation and apportionment of cost.
ANS. Distinguish between allocation and apportionment of cost.

 Cost allocation: The term ‘allocation’ refers to assignment or allotment of an entire item of cost to a particular cost centre or cost unit. It implies relating overheads directly to the various departments. The estimated amount of various items of manufacturing overheads should be allocated to various cost centres or departments. For example- if a separate power meter has been installed for a department, the entire power cost ascertained from the meter is allocated to that department.

Cost apportionment: There are some items of estimated overheads (like the salary of the works manager) which cannot be directly allocated to the various departments and cost centres. Such unallocable expenses are to be spread over the various departments or cost centres on an appropriate basis. This is called apportionment.

Q38.Discuss the step method and reciprocal service method of secondary distribution of overheads.
ANS. Step method: This method gives cognisance to the service rendered by service department to another service dep’t, thus sequence of apportionments has to be selected. The sequence here begins with the dep’t that renders service to the max number of other service dep’t. After this, the cost of service dep’t serving the next largest number of dep’t is apportioned.
Reciprocal service method : This method recognises the fact that where there are two or more service dep’t, they may render service to each other and, therefore, these inter dep’t services are to be given due weight while re-distributing the expense of service dep’t. The methods available for dealing with reciprocal servicing are:
– Simultaneous equation method
– Repeated distribution method
– Trial and error method.

Q 39.Explain: Single and multiple overhead rate.
ANS.Single and multiple overhead rate: A single overhead rate, when computed for the entire factory is known as the blanket rate.
Blanket rate = Overhead cost of entire factory / total quantum of the base selected
The blanket rates can be utilised in the following cases;
 Where only one major product is being produced.
 Where several products are produced but: (a) all products pass through all departments and (b) all products require the same length of time in each department.
When the above conditions are not applicable, separate departmental rates should be used.

Multiple rates involve computation of separate rates for each production department, service department, cost-centre, each product or line and each production factor.

Q 40.Discuss the treatment of research and development expenditures in cost accounting.
ANS. If research is conducted in the methods of production, the expenses should be charged to production overhead. If the research relates to administration, the expenses are charged to administration overheads. If it is related to market research, the expenses are charged to S&D overheads. Development costs incurred in connection with a particular product should be charged directly to that product. Such expenses are usually treated as deferred revenue expenditure and recovered as cost per unit of the product when production is fully established. Routine nature research expenses are charged to general overheads.

Q 41.Discuss the accounting of Selling and Distribution overheads.
ANS. It is difficult to determine an entirely satisfactory basis for computing the overhead rate for absorbing selling and distribution overheads. The basis usually adopted is:
 Sales value of goods
 Cost of goods sold
 Gross profit on sales
 Number of orders or units sold

Q 42.What are the methods of re-apportionment of service department expenses over the production departments? Discuss.
ANS. Methods of re-apportionment of service department expenses over the production departments
(i) Direct re-distribution method.
(ii) Step method or non-reciprocal method.
(iii) Reciprocal Service method

Direct re-distribution Method: Service department costs under this method are apportioned over the production departments only, ignoring services rendered by one service department to another. The basis of apportionment could be no. of workers. H.P of machines.

Step Method or Non-Reciprocal Method : This method gives cognizance to the service rendered by service department to another service department. Therefore, as compared to previous method, this method is more complicated because a sequence of apportionments has to be selected here. The sequence here begins with the department that renders service to the maximum number of other service departments.

Reciprocal Service Method : This method recognises the fact that where there are two or more service departments they may render service to each other and, there these inter-departmental services are to be given due weight while re-distributing the expenses of service department. The methods available for dealing with reciprocal services are:
 Simultaneous equation method
 Repeated distribution method
 Trial & Error method.

Q 43.Explain the cost accounting treatment of unsuccessful Research and Development cost.
ANS. Cost of unsuccessful research is treated as factory overhead, provided the expenditure is normal and is provided in the budget. If it is not budgeted, it is written off to the profit and loss account. If the research is extended for long time, some failure cost is spread over to successful research.

5. NON-INTEGRATED ACCOUNTING

Q 44.State benefits of Integrated Accounting.
ANS.  Integrated Accounts is the name given to a system of accounting, whereby cost and financial accounts are kept in the same set of books. There will be no separate sets of books for Costing and Financial records. Integrated accounts provide or meet out fully the information requirement for Costing as well as for Financial Accounts.

The main advantages of Integrated Accounting are as follows:
1.No need for Reconcilation: The question of reconciling costing profit and financial profit does not arise, as there is only one figure of profit.
2. Less efforts: Due to use of one set of books, there is significant saving in efforts made.
3. Less time consuming: No delay is caused in obtaining information provided in books of original entry.
4.Economical Process: It is economical also as it is based on the concept of ‘Centralization of Accounting Function’

Q 45.“Is reconciliation of cost accounts and financial accounts necessary in case of integrated accounting system?”
ANS. In integrated accounting system cost and financial accounts are kept in the same set of books. Such a system will have to afford full information required for Costing as well as for Financial Accounts. In other words, information and data should be recorded in such a way so as to enable the firm to ascertain the cost (together with the necessary analysis) of each product, job, process, operation or any other identifiable activity. It also ensures the ascertainment of marginal cost, variances, abnormal losses and gains. In fact all information that management requires from a system of Costing for doing its work properly is made available. The integrated accounts give full information in such a manner so that the profit and loss account and the balance sheet can be prepared according to the requirements of law and the management maintains full control over the liabilities and assets of its business.
Since, only one set of books are kept for both cost accounting and financial accounting purpose so there is no necessity of reconciliation of cost and financial accounts.

Q 46.Why is it necessary to reconcile the Profits between the Cost Accounts and Financial Accounts?
ANS .When the cost and financial accounts are kept separately, it is imperative that these should be reconciled, otherwise the cost accounts would not be reliable. The reconciliation of two set of accounts can be made, if both the sets contain sufficient detail as would enable the causes of differences to be located. It is, therefore, important that in the financial accounts, the expenses should be analysed in the same way as in cost accounts. It is important to know the causes which generally give rise to differences in the costs & financial accounts. These are:

(i) Items included in financial accounts but not in cost accounts Appropriation of profits
 Income-tax
 Transfer to reserve
 Dividends paid
 Goodwill / preliminary expenses written off
 Pure financial items
 Interest, dividends
 Losses on sale of investments
 Expenses of Co’s share transfer office
 Damages & penalties

(ii) Items included in cost accounts, but not in financial accounts
 Opportunity cost of capital
 Notional rent

(iii) Under / Over absorption of expenses in cost accounts

(iv) Different bases of inventory valuation
Motivation for reconciliation are:
 To ensure reliability of cost data
 To ensure ascertainment of correct product cost
 To ensure correct decision making by the management based on cost & financial data
 To report fruitful financial / cost data

Q 47.What are the essential pre-requisites of integrated accounting system? Discuss.
ANS. (i) The management’s decision about the extent of integration of the two sets of books.
(ii) A suitable coding system must be made available so as to serve the accounting purposes of financial and cost accounts.
(iii) An agreed routine, with regard to the treatment of provision for accruals, pre-paid expenses, other adjustments necessary for preparation of interim accounts.
(iv) Perfect coordination should exist between the staff responsible for the financial and cost aspects of the accounts and an efficient processing of accounting documents should be ensured.

Q 48.Enumerate the factors which cause difference in profits as shown in Financial Accounts and Cost Accounts.
ANS. (a) Items included in financial accounts but not in cost accounts such as: Interest received on bank deposits, loss/profit on sale of fixed assets and investments, dividend, rent received.
(b) Items included in cost accounts on notional basis such as rent of owned building, interest on own capital etc.
(c) Items whose treatment is different in the two sets of accounts such as inventory valuation.

6. JOB AND BATCH COSTING

Q 59.What do you understand by operating costing? How are composite units computed?
ANS.Meaning of Operating Costing:
Operating Costing is a method of ascertaining costs of providing or operating a service. This  method of costing is applied by those undertakings which provide services rather than production of commodities. This costing method is usually made use of by transport companies, gas and water works departments, electricity supply companies, canteens, hospitals, theatres, schools etc.

Computation of composite units: When two units are merged into one it is called Composite units. It is explained with example as follows.

Composite units i.e. tonnes kms., quintal kms. etc. may be computed in two ways.
(i) Absolute (weighted average) tonnes-kms.
Absolute tonnes-kms., are the sum total of tonnes-kms., arrived at by multiplying various distances by respective load quantities carried.
(ii) Commercial (simple average) tonnes-kms.
Commercial tonnes-kms., are arrived at by multiplying total distance kms., by average load quantity.

9. PROCESS COSTING , JOINT AND BY PRODUCTS

Q 67.Describe the various steps involved in adopting standard costing system in an organization.
ANS. The Steps of standard costing is as below:
(i) Setting of Standards: The first step is to set standards which are to be achieved.
(ii) Ascertainment of actual costs: Actual cost for each component of cost is ascertained. Actual costs are ascertained from books of account, material invoices, wage sheet, charge slip etc.
(iii) Comparison of actual cost and standard cost: Actual costs are compared with the standards costs and variances are determined.
(iv) Investigation of variances: Variances arises are investigated for further action. Based on this performance is evaluated and appropriate actions are taken.
(v) Disposition of variances: Variances arise are disposed off by transferring it the relevant accounts (costing profit and loss account) as per the accounting method (plan) adopted.

11.MARGINAL COSTING

Q 68.Elaborate the practical application of Marginal Costing.
ANS. Practical applications of Marginal costing:
(i) Pricing Policy: Since marginal cost per unit is constant from period to period, firm decisions on pricing policy can be taken particularly in short term.
(ii) Decision Making: Marginal costing helps the management in taking a number of business decisions like make or buy, discontinuance of a particular product, replacement of machines, etc
(iii) Ascertaining Realistic Profit: Under the marginal costing technique, the stock of finished goods and work-in-progress are carried on marginal cost basis and the fixed expenses are written off to profit and loss account as period cost. This shows the true profit of the period.
(iv) Determination of production level: Marginal costing helps in the preparation of break-even analysis which shows the effect of increasing or decreasing production activity on the profitability of the company.

Q 69.Explain and illustrate cash break-even chart.
ANS In cash break-even chart, only cash fixed costs are considered. Non-cash items likedepreciation etc. are excluded from the fixed cost for computation of break-even point. It depicts the level of output or sales at which the sales revenue will equal to total cash outflow.
It is computed as under:
Cash BEP (Unit)= Cash Fixed Cost/Cost per Units

Hence for example suppose insurance has been paid on 1st January, 2006 till 31st December, 2010 then this fixed cost will not be considered as a cash fixed cost for the period 1st January, 2008 to 31st December, 2009.

Q 70.What do you understand by Key factor? Give two examples of it.

ANS. Key factor is a factor which at a particular time or over a period limits the activities of an undertaking. It may be the level of demand for the products or service or it may be the shortage of one or more of the productive resources.

Examples of key factors are:

(a) Shortage of raw material.

(b) Shortage of Labour.

(c) Plant capacity available.

(d) Sales capacity available.

(e) Cash availability.

12.BUDGET AND BUDGETARY CONTROL

Q 71.State the considerations on which capital expenditure budget is prepared.
ANS. The preparation of Capital Expenditure Budget is based on the following considerations:
1. Overhead on production facilities of certain departments as indicated by the plant utilisation budget.
2. Future development plans to increase output by expansion of plant facilities.
3. Replacement requests from the concerned departments
4. Factors like sales potential to absorb the increased output, possibility of price reductions, increased costs of advertising and sales promotion to absorb increased output, etc.

Q 72.Describe the salient features of budget manual.
ANS. Salient features of Budget Manual
• Budget manual contains many information which are required for effective budgetary planning.
• A budget manual is a collection of documents that contains key information for those involved in the planning process.
• An introductory explanation of the budgetary planning and control process, including a statement of the budgetary objective and desired results is included in Budget Manual
• Budget Manual contains a form of organisation chart to show who is responsible for the preparation of each functional budget and the way in which the budgets are interrelated.
• In contains a timetable for the preparation of each budget.
• Copies of all forms to be completed by those responsible for preparing budgets, with explanations concerning their completion is included in Budget Manual.

Q 73.Describe the steps involved in the budgetary control technique.
ANS. There are certain steps involved in the budgetary control technique. They are as follows:
(i) Definition of objectives: A budget being a plan for the achievement of certain operational objectives, it is desirable that the same are defined precisely. The objectives should be written out; the areas of control demarcated; and items of reve-nue and expenditure to be covered by the budget stated.
(ii) Location of the key (or budget) factor: There is usually one factor (sometimes there may be more than one) which sets a limit to the total activity. Such a factor is known as key factor. For proper budgeting, it must be located and estimated properly.
(iii) Appointment of controller: Formulation of a budget usually required whole time services of a senior executive known as budget controller; he must be assisted in this work by a Budget Committee, consisting of all the heads of department along with the Managing Director as the Chairman.
 (iv) Budget Manual: Effective budgetary planning relies on the provision of adequate information which are contained in the budget manual. A budget manual is a collection of documents that contains key information for those involved in the planning process.
  (v) Budget period: The period covered by a budget is known as budget period. The Budget Committee determines the length of the budget period suitable for the business. It may be months or quarters or such periods as coincide with period of trading activity.
 (vi) Standard of activity or output: For preparing budgets for the future, past statistics cannot be completely relied upon, for the past usually represents a combination of good and bad factors. Therefore, though results of the past should be studied but these should only be applied when there is a likelihood of similar conditions repeating in the future.

Q 74. State the difference between Fixed Budget and Flexible Budget.
ANS.

Q 76.Discuss the components of budgetary control system.
ANS. The policy of a business for a defined period is represented by the master budget the details of which are given in a number of individual budgets called functional budgets. The functional budgets are broadly grouped under the following heads:
(a) Physical Budgets – Sales Qty, Product Qty., Inventory, Manpower budget.
(b) Cost Budgets – Manufacturing Cost, Administration Cost, sales & distribution cost, R & D Cost.
(c) Profit Budget

Q 77.List the eight functional budgets prepared by a business.
ANS. The various commonly used Functional budgets are:
 Sales Budget
 Production Budget
 Plant Utilisation Budget
 Direct Material Usage Budget
 Direct Material Purchase Budget
 Direct Labour (Personnel) Budget
 Factory Overhead Budget
 Production Cost Budget