b.com 102.docx - Q1(i Cost accounting is the classifying recording and appropriate allocation of expenditure for the determination of the costs of

b.com 102.docx - Q1(i Cost accounting is the classifying...

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Q 1 (i) Cost accounting is the classifying, recording and appropriate allocation of expenditure for the determination of the costs of products or services, and for the presentation of suitably arranged data for purposes of control and guidance of management. objectives of cost accounting: 1. To ascertain the cost per unit of the different products manufactured by a business concern; 2. To provide a correct analysis of cost both by process or operations and by different elements of cost; 3. To disclose sources of wastage whether of material, time or expense or in the use of machinery, equipment and tools and to prepare such reports which may be necessary to control such wastage; 4. To provide requisite data and serve as a guide for fixing prices of products manufactured or services rendered; 5. To ascertain the profitability of each of the products and advise management as to how these profits can be maximised Q 1 (ii) Definition of EOQ EOQ is the acronym for economic order quantity. The economic order quantity is the optimum quantity of an item to be purchased at one time in order to minimize the combined annual costs of ordering and carrying the item in inventory . EOQ is also referred to as the optimum lot size. The formula to calculate the economic order quantity (EOQ) is the square root of [(2 times the annual demand in units times the incremental cost to process an order) divided by (the incremental annual cost to carry one unit in inventory)]. Example of EOQ Calculation Assume that a company has steady demand of 12,000 units per year for one of its products. The company purchases the product from its supplier at a cost of $100 each. The company's incremental cost to process an order is $144 and its incremental annual cost to carry the product in inventory is $16 per unit. (vi) While calculating overheads and especially working out overheads distribution sheet we came across the term “allocation” and during the distribution of overheads, we allocate, apportion and re-apportion overheads. Each term has separate meaning and should not be considered as one and the same. It must also not be confused with usual division of overheads. Allocation of overheads means charging a cost center with such overheads which can be measured and identified in relation to that specific cost center. In simple words, when a cost center is charged with such overheads which have been incurred by that cost center only and/or specifically then it means that overheads costs have been allocated to such cost center.
Usually when division of overheads is required its not allocation rather it is apportionment i.e. when overheads cannot be traced back to a particular cost center or cost unit then overheads are divided on arbitrary basis.

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