Cost Accountancy Interview Preparation Guide

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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.

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

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 The machine was used to make the product for which it was bought and now it is obsolete and cannot be sold.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.

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.

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.

Errors in accounting are placed in the following main groups:

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

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.

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.

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.

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.