Question 1:
Define Price Level Accounting
Answer:
Price Level Accounting is a method used to
adjust financial records to account for changes
in the value of money over time, especially due
to inflation. In normal accounting, we record
items like assets and expenses at the price they
were bought—this is called historical cost. But
over the years, inflation can reduce the value of
money, and what we bought earlier may no
longer reflect its true worth in today’s terms.
For example, a machine purchased in 2015 for
₹2 lakhs might cost ₹4 lakhs now. But in
traditional accounting, it still shows as ₹2 lakhs.
Price level accounting updates this value using
a price index like the Consumer Price Index
(CPI), so that it reflects the current value of
money.
This method helps present a more realistic
picture of a company’s financial health. It
avoids showing inflated profits or undervalued
assets. It’s especially helpful in countries where
inflation is high or prices change frequently.
However, it also comes with challenges. It
requires accurate inflation data, can be more
complex to apply, and isn’t always accepted
under every accounting system. Still, it gives a
better idea of what the company actually owns
or owes in today’s money.
Question 2:
Differentiate Between Traditional Accounting
and Modern Accounting
Answer:
Traditional accounting and modern accounting
differ mainly in how they are practiced and
what they aim to achieve. Traditional
accounting is the older method, where the main
focus is on recording past financial
transactions. It usually involves manual entries,
ledgers, and preparing basic financial
statements like the income statement and
balance sheet. This approach is mainly used for
tax purposes, legal compliance, and showing
how money was spent or earned.
Modern accounting, on the other hand, goes
beyond just recording transactions. It includes
tools and software that help in tracking,
analyzing, and even predicting financial trends.
Modern accounting is not only about the past
but also about helping businesses make better
decisions for the future.
Key Differences:
• Traditional accounting focuses on
bookkeeping, while modern accounting focuses
on strategy and analysis.
• Traditional methods are more manual; modern
accounting uses software like Tally, SAP, or
QuickBooks.
• Modern accounting includes budgeting,
forecasting, performance tracking, and cost
management.
In short, traditional accounting is about
recording what has happened, and modern
accounting helps plan what should happen next.
Businesses today often use a mix of both, but
modern accounting provides better tools for
growth and control.
Question 3:
What is LCC?
Answer:
LCC stands for Life Cycle Costing. It is a
method used to calculate the total cost of an
asset, product, or project throughout its entire
life-from the moment it is bought or created
until it is no longer in use. Instead of just
looking at the initial purchase price, LCC
includes all future costs like operation,
maintenance, and disposal.
For example, when a company buys a machine,
the cheapest option may not always be the most
cost-effective. A machine that costs more at the
start but has lower running and repair costs may
be better in the long run. Life Cycle Costing
helps businesses make smarter financial
decisions by showing the total cost over time,
not just the cost right now.
LCC includes:
• Purchase or setup cost
• Operating cost (like electricity or fuel)
• Repair and maintenance cost
• Disposal or replacement cost
LCC is useful in budgeting, cost comparison,
and investment planning. It gives a full picture
of how much something will really cost over its
life span, which is very helpful in making long-
term business decisions.
Question 4:
Define – Activity-Based Costing, Opportunity
Costing, and Sunk Costing
Answer:
1. Activity-Based Costing (ABC):
ABC is a way of assigning costs to products or
services based on the activities involved in
making them. Instead of just dividing costs
evenly, it looks at how much time, effort, or
resources each product actually uses. For
example, if Product A needs more testing or
packaging than Product B, ABC will show that
Product A costs more to produce. This helps
companies find which products are more
expensive and why.
2. Opportunity Costing:
Opportunity cost is the benefit or value you
miss out on when you choose one option over
another. It’s not recorded in the books, but it’s
very important in decision-making. For
instance, if a business uses its space for storage
instead of renting it out, the rent it could have
earned is the opportunity cost. It helps
managers think about what they are giving up
when making a choice.
3. Sunk Costing:
Sunk costs are expenses that have already been
paid and cannot be recovered. For example, if a
company spends ₹30,000 on a marketing
campaign and later decides to stop it, that
30,000 is a sunk cost. These costs should not
influence future decisions, but many people still
let them affect how they choose. Good
decision-making focuses on future costs and
benefits, not on money that’s already gone.
Together, these costing methods help
businesses manage money better and make
smarter decisions.
