1.How do you differentiate between fixed and variable costs?

Provide real-
world examples of each and explain how understanding cost behavior can aid
in decision-making.
Differentiating Between Fixed and Variable Costs

Fixed Costs: Fixed costs are expenses that remain constant regardless of the level of production or
sales. These costs do not fluctuate with the volume of output. Examples of fixed costs include rent,
salaries of permanent employees, insurance premiums, and annual subscription fees.

Variable Costs: Variable costs are expenses that change in direct proportion to the level of
production or sales. These costs increase as production or sales volume increases and decrease as
production or sales volume decreases. Examples of variable costs include raw materials, direct labor,
sales commissions, and shipping costs.

Understanding Cost Behaviour for Decision-Making

Understanding cost behaviour is crucial for decision-making in business. By differentiating between

fixed and variable costs, businesses can make informed decisions in various areas:

 Pricing: Understanding the behaviour of costs helps in setting appropriate prices for products
or services. By knowing the variable costs, businesses can ensure that the selling price covers
these costs and contributes to covering fixed costs, ultimately leading to profitability.

 Production Planning: Knowledge of fixed and variable costs aids in determining the optimal
level of production. It helps in identifying the point at which the contribution margin from
each unit sold exceeds the variable cost per unit, thus covering fixed costs and generating
profit.

 Budgeting: Understanding cost behaviour is essential for creating accurate budgets. It allows
businesses to forecast total costs based on the expected level of activity, enabling better
financial planning and resource allocation.

 Cost Control: By distinguishing between fixed and variable costs, businesses can focus on
controlling variable costs through efficiency improvements and cost reduction initiatives,
while also managing fixed costs through strategic decisions such as renegotiating contracts or
consolidating resources.

2. What are the different methods of allocating overhead costs? Discuss the
advantages and disadvantages of each method, and when would you use one
over the other?
Different Methods of Allocating Overhead Costs
1. Direct Allocation Method
 In this method, overhead costs are directly allocated to the cost objects based on a specific
cost driver, such as machine hours or labor hours.

 Advantages: Simple and easy to understand.

 Disadvantages: May not accurately reflect the actual usage of resources.

  Use: Suitable when the overhead costs are directly traceable to the cost objects.
2. Step-Down Allocation Method
 This method allocates service department costs to other service departments and producing
departments in a sequential manner.

 Advantages: Recognizes the interdependencies between service departments and producing

departments.

 Disadvantages: Can be complex and time-consuming.

 Use: Appropriate when there are multiple service departments and a need to allocate costs
in a more realistic manner.

3. Activity-Based Costing (ABC)

 ABC allocates overhead costs based on the activities that drive those costs, providing a more
accurate allocation.

 Advantages: Reflects the actual consumption of resources, leading to more accurate product
costs.

 Disadvantages: Requires detailed data and can be more complex to implement.

 Use: Useful when there are significant variations in the consumption of resources across
different products or services.

4. Absorption Costing
 This method allocates all manufacturing costs, including both variable and fixed overhead, to
products.

 Advantages: Aligns with external reporting requirements and provides a clear picture of
total product costs.

 Disadvantages: May not reflect the actual consumption of resources by different products.

 Use: Commonly used for external financial reporting purposes and for inventory valuation.

3. How does ABC differ from traditional costing systems? Explain the
benefits of using ABC and the challenges associated with its
implementation
ABC vs. Traditional Costing Systems
ABC (Activity-Based Costing) differs from traditional costing systems in the way it assigns overhead
costs to products. While traditional costing systems use a single, volume-based cost driver (such as
direct labor hours or machine hours) to allocate overhead costs, ABC identifies multiple cost drivers
based on activities. This means that ABC provides a more accurate allocation of overhead costs by
considering the specific activities that drive those costs.
Benefits of Using ABC
 Accurate Cost Allocation: ABC provides a more accurate allocation of overhead costs
to products or services, leading to better decision-making.
 Insight into Cost Drivers: It helps in identifying the activities that consume resources,
allowing for better management of those activities.
 Enhanced Cost Control: By understanding the true cost of activities, organizations
can better control and reduce costs.
Challenges of ABC Implementation
 Complexity: Implementing ABC can be complex and time-consuming, requiring a
thorough understanding of the organization's processes and activities.
 Costly Implementation: It may require significant investment in resources and time
to implement ABC effectively.
 Resistance to Change: Employees and management may resist the shift from
traditional costing methods to ABC, leading to implementation challenges.

3.Read the hypothetical text given and answer the following questions: Raman Shankar Reddy, an
Ex-Indian cricketer decided to start a cricket academy to train the young enthusiastic players down
south. With the support and guidance of his family, he started the Star cricket academy at
Tirunelveli township area on 1st April 2020. The land was donated by his grandfather worth Rs.
10,00,000 as per his will. His father Shankar donated Rs.5,00,000 for the construction and running
of the academy. He spent Rs.3,00,000 on the construction of the pavilion. 200 players of Tirunelveli
joined the academy, and they paid a yearly subscription of Rs.1200 each. 10 players paid in
advance for the next year 2021 -22. Raman Reddy appointed a well-experienced coach for them,
the coach fee amounted to Rs. 1,20,000 p.a. The maintenance expenses amounted to Rs.75,000.
Bats and balls purchased during the year amounted to Rs.14,000. Closing stock of bats and ball
amount to Rs.1000.

1. Identify the Primary source of income for the academy & which Profession is it related?

2. The amount of subscription to be credited to income and expenditure account———— & what is
the exact amount of yearly subscription?

The liability towards advance subscription & amounted to construction of the pavilion:

Identify amount charged to the Income and Expenditure account for bats and balls consumed during
the year & Closing stock of bats & Ball
Questions and Answers

1. What is the total amount of donation received for the academy?

 The total amount of donation received for the academy is Rs. 15,00,000, which includes Rs.
10,00,000 from Raman's grandfather and Rs. 5,00,000 from his father Shankar.

2. What is the total revenue from player subscriptions?

 The total revenue from player subscriptions is calculated as follows:

 200 players paid Rs. 1200 each for the yearly subscription, totalling Rs. 2,40,000.

 Additionally, 10 players paid in advance for the next year, totalling Rs. 12,000.

 Therefore, the total revenue from player subscriptions is Rs. 2,52,000.

3. What is the total expenditure on the coach and maintenance?

 The total expenditure on the coach is Rs. 1,20,000 per annum.

 The maintenance expenses amounted to Rs. 75,000.

 Therefore, the total expenditure on the coach and maintenance is Rs. 1,95,000.

4. What is the total amount spent on the construction of the pavilion?

 The total amount spent on the construction of the pavilion is Rs. 3,00,000.

5. What is the total amount spent on the purchase of bats and balls?

 The total amount spent on the purchase of bats and balls is Rs. 14,000.

6. What is the value of the closing stock of bats and balls?

 The value of the closing stock of bats and balls is Rs. 1,000.

4. Samarth and Jayesh started with Cash 10,000 and Machinery 1,00,000. They decided to set up a
production line for PPE kits for. the protection from Covid 19 virus. As their demand rose, they
decided to buy one more piece of machinery. For the same, they took bank overdraft and
purchased the machinery. The quality of the company’s product was extremely high and therefore,
it could develop a reputation for itself in the market and business was flourishing. After 1.5 years,
their old machinery became obsolete, so they decided to sell the same. They sold it and got some
cash proceeds. To further increase the brand presence among the concerned stakeholders, they
decided to run advertisements from the cash proceeds of machinery sold. As more and more
customers demanded their product, they decided to launch a discount for bulk purchases. The
discount was not to be recorded in the books of accounts. This campaign was successful, and they
earned a lot of profits from the same.

Q1. Which type of discount is being discussed in the last part of the passage?
 Q2. Which asset is discussed in the line, “The quality of the company’s product was very high and
therefore, it could develop a reputation for itself in the market and business was flourishing”?

Q3. Which type of liability is discussed in the passage?

Q4. What was the capital initially invested?

Q5. Identify the receipt which is involved in the passage apart from initial capital invested)

1. Type of Discount & Investment

The type of discount being discussed in the last part of the passage is a Trade Discount as it is given
on bulk purchases and is not recorded in the books of accounts. The type of investment discussed in
the first passage is an Initial Capital Investment as Samarth and Jayesh started with cash and
machinery.

2. Asset Type & Machinery Classification

The asset discussed in the line, "The quality of the company’s product was very high and therefore, it
could develop a reputation for itself in the market and business was flourishing" is
an Intangible asset. This is because reputation is not a physical asset but holds significant value for
the company. Machinery is known as a Fixed Asset as it is a long-term tangible piece of property or
equipment that a firm owns and uses in its operations to generate income.

3. Type of Liability & Form

The type of liability discussed in the passage is a Current Liability in the form of a Bank Overdraft.
This is because a bank overdraft is a short-term borrowing facility provided by the bank, making it a
current liability.

4. Initial Capital Investment

The capital initially invested in the form of Cash & Machinery is 110000 (10000 cash + 100000
machinery).

5. Concept Dependency

This case is dependent on the concept of Accounting and Financial Management. It involves
understanding and managing the financial resources and commitments of a business, including
capital investment, asset management, and liabilities.

5. Ram and Shyam are two friends who both have just attended their first class of
accountancy. The friends were intrigued by the different branches of accounting and their
widespread application. Ram personally liked the branch of accounting in which fund flow
statement and budgetary control is used and that branch helps in planning and controlling
of operations. As the concept of accounting was further explored, they began discussing
 the different users of accounting. Ram said that he finds it interesting that even the
employees demand information relating to business. Shyam said he finds more interesting
the fact that even competitors want information on the relative strengths and weaknesses
of the enterprise and for making comparisons, Shyam further said that even accounting
helps owners to compare one year’s costs, expenses, and sales with those of other years.
However, they were quite shocked by the fact that the management-worker relations were
not taken into consideration in the accounting. Meanwhile, Ram and Shyam had an
argument at the end of the discussion. Ram was saying that accounting is an art whereas
Shyam was saying that accounting is a science. Their teacher came in and said something
to them which made them stop the argument.

Q1. What might their teacher have said to solve their argument?

Q2. Shyam talked about which type of users of accounting.

Q3. Which limitation of accounting is being talked about by them?

Q4. Which advantage of accounting is being talked about by Shyam in the last part of the first
para?

Q5. Which branch of accounting is liked by Ram?

Q1. What might their teacher have said to solve their argument?

Their teacher might have said that accounting is both an art and a science. It involves principles and
techniques (science) but also requires creativity and judgment in its application (art).

Q2. Shyam talked about which type of users of accounting.

Shyam talked about external users of accounting, such as competitors, who use accounting
information for making comparisons and assessing the strengths and weaknesses of the enterprise.

Q3. Which limitation of accounting is being talked about by them?

The limitation of accounting being discussed is the lack of consideration for management-worker
relations, indicating that accounting does not fully capture the human aspect of the business.

Q4. Which advantage of accounting is being talked about by Shyam in the last part of the first para?

Shyam is talking about the advantage of accounting in facilitating comparisons of costs, expenses,
and sales between different years, which helps owners in assessing the performance and trends of
the business over time.

Q5. Which branch of accounting is liked by Ram?

Ram likes the branch of accounting that involves fund flow statement and budgetary control, which
helps in planning and controlling operations. This branch is known as "Financial Accounting."

7.Rahul started the business of running an agency of Cutting Tools products a year back. He is new
to the business, although he researched well. He took suggestions from his family members and
friends who run different types of businesses. The agency business was quite an easy one as it just
included receiving manufactured and packed goods from FMCG products manufacturing
companies and then getting the goods distributed to the retailers as per the demand of products.
Rahul appointed two employees to help him in the business. He gave the responsibility for
recording the sale of the products to one of the employees. The employee had no knowledge of
accounting, so he simply recorded the cash sales and did not record any credit sales. Although
Rahul had recorded transactions, yet he was unable to know the profit and loss from his business.
He also had to apply to the bank for financial assistance as he wanted to expand his business.
When Rahul approached the bank to apply for a loan, he was asked for the financial report of his
business which depicted the profit or loss of the business. Rahul was in a complex situation and
wanted to improve the situation so that he could focus on his business with the right approach.

Identify the knowledge which employee don’t have & employee did not record the one of the
following

Choose Which of the two entries are involved in above case.

Identify the situation & Rahul applied for which loan.

-Knowledge Employee Lacks and Unrecorded Entry

The employee lacks knowledge of accrual accounting, which requires recording both cash and credit
sales. The unrecorded entry is the credit sales.

Involved Entries

The two entries involved in the case are:

1. Cash Sales: Recorded by the employee.

2. Credit Sales: Not recorded by the employee.

Situation and Loan Applied For

Rahul is in a situation where he lacks accurate financial information due to incomplete recording of
sales. He applied for a business loan to expand his agency of Cutting Tools products.