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 COST ACCOUTING

Cost accounting is a process of recording,

analyzing and reporting all of a company’s
costs (both variable and fixed) related to the
production of a product. This is so that a
company’s management can make better
financial decisions, introduce efficiencies and
budget accurately. The objective of cost
accounting is to improve the business’s net
profit margins. In simple words we can say
that It is a process by which we determine the
costs of goods and services.
Features of Cost Accounting
• It is a sub-field in accounting. It is the
process of accounting for costs
• Provides data to management for decision
making and budgeting for the future
• It helps to establish certain standard costs
and budgets which are compared with the
actual cost to find out deviations or
variances .
• It records income and expenditure relating
to production of goods and services
• It is concerned with cost ascertainment,
cost presentation , cost control and cost
reduction
• provides costing data that helps in fixing
prices of goods and services.
 COST
Cost is also defined as by the expenditure incurred to
produce a given good or service. The cost will be the
expenditure that is attributable to something.
 COSTING
Costing is essentially a technique or a system of
ascertaining costs.
 COST ACCOUTANCY
Cost accountancy is the application of the principles
of costing and accounting. It is the science, art, and
practice with which a cost accountant practices cost
ascertainment and cost control.
objectives of cost accounting:
• Ascertainment of the cost per unit of the different
products that a business concern manufacturers.
• Disclosure of sources for wastage of material, time,
expenses or in the use of the equipment and the
preparation of reports which may be necessary to
control such wastage.
• Provide requisite data and help in fixing the price
of products manufactured or services rendered.
• Determination of the profitability of each of the
products and help management in the
maximization of these profits.
• Present and interpret data for management
planning, decision-making, and control.
• Help in the preparation of budgets and
implementation of budgetary control.
• To provide specialized services for cost audit in
order to prevent errors and frauds.
• To facilitate prompt and reliable information to
management.
• Determination of costing profit or loss by linking
the revenues to costs of those products or services
by selling which the revenues have arisen.
Advantages of Accounting
1] Measuring and Improving Efficiency
2] Identification of Unprofitable Activities
3] Fixing Prices
4] Price Reduction
5] Control over Stock
6] Aids Future Planning
Limitations Of Cost Accounting
1. It is Expensive:
2. It is not Reliable: It is stated that cost accounting is
based on estimates and therefore cannot be relied
upon.
3.Not applicable to Small Concerns – A cost
accounting system is applicable only to large sized
business and not suitable for small sized business
because it is more expensive.
 ELEMENTS OF COST

The elements of cost are those elements which

constitute the cost of manufacture of a product. We
can broadly divide these elements of cost into three
categories. These services are Material, Labour and
Expenses.
Again, we can bifurcate these elements of cost into
two categories such as Direct Material and Indirect
Material, Direct Labour and Indirect Labour, Direct
Expenses and Indirect Expenses.
1. Direct Material
It represents the raw material or goods necessary to produce or
manufacture a product. The cost of direct material varies
according to the level of output. For example, wood is a direct
material for Table.
2. Indirect Material
It refers to the material which we require to produce a product
but is not directly identifiable. It does not form a part of a
finished product. For example, the use of nails to make a table.
The cost of indirect material does not vary in the direct
proportion of product.
3. Direct Labour
It refers to the amount which paid to the workers who are
directly engaged in the production of goods. It varies directly
with the level of output.
4. Indirect Labour
It represents the amount paid to workers who are indirectly
engaged in the production of goods. It does not vary directly
with the level of output.
5. Direct Expenses
It refers to the expenses that are specifically incurred by
the enterprises to produce a product. The production cannot
take place without incurring these expenses. It varies directly
with the level of production.
6. Indirect Expenses
It represents the expenses that are incurred by
the organization to produce a product. These expenses cannot
be easily identified accurately. For example, Power expenses for
the production of pens.
7. Overhead
It refers to all indirect materials, indirect labour, or and
indirect expenses.
8. Factory Overhead
Factory overhead or Production Overhead or Works
Overhead refers to the expenses which a firm incurs in the
production area or within factory premises.
Indirect material, rent, rates and taxes of factory, canteen
expenses etc.are example of factory overhead.
9. Administration Overhead
Administrative or Office Overhead refers to the expenses
which are incurred in connection with the general
administration of the organizations.
Salary of administrative staff, postage, telegram and
telephone, stationery etc.are examples of administration
overhead.
10. Selling Overhead
All expenses that a firm incurs in connection with sales are
selling overheads. Salary of sales department staff,
travelers’ commission, advertisement etc.are example of
selling overhead.
11. Distribution Overhead
It represents all expenses incurred in connection with the
delivery or distribution of finished goods and services from
the manufacturer to the consumer. F Delivery van expenses.
loading and unloading, customs duty, the salary of
deliverymen are examples of distribution overhead.
 COST SHEET
A cost sheet is a statement prepared at periodical
intervals of time, which accumulates all
the elements of the costs associated with a product or
production job. It is used to compile the margin earned
on a product or job and forms the basis for the setting
of prices on similar products in the future.
IN SIMPLE WORDS , it is a sheet which shows the total
cost of a product.

A Cost Sheet depicts the following facts:

• Total cost and cost per unit for a product.
• The various elements of cost such as prime cost,
factory cost, production cost, cost of goods sold, total
cost, etc.
• Compare the cost of any two periods and ascertain
the inefficiencies if any.
• Information to management for cost control
• Calculate and summarize the total cost of the
product.
 Objectives of Cost Sheet
1. For determining the selling price
2. Facilitating in managerial decision making
3. Preparation of budgets
 Elements of cost Sheet
• Prime Cost: It comprises of direct material, direct
wages, and direct expenses.
Prime Cost = Direct material + direct labour + direct
expense

• Factory Cost: Factory cost or works cost or

manufacturing cost or production cost includes in
addition to the prime cost the cost in indirect
material, indirect labor, and indirect expenses.
Factory cost = Prime Cost + Factory overheads

• Cost of Production: When Office and

administration cost at the end of the period are
added to the Factory cost, we arrive at the cost of
production or cost of goods sold.
Cost of Production = Works Cost + Administration
Overheads

• Total Cost: Total cost or alternatively cost of sales is

the cost of production plus selling and distribution
overheads.
Total cost or Cost of Sales = Cost of Production +
Selling and distribution overheads
Note – If profit is also calculated by deducting cost of sales from sales
in the statement of cost, then it is called Statement of Cost and Profit
 CLASSIFICATION OF COST
ON THE BASIS OF ELEMENTS
ON THE BASIS OF DEGREE OF TRACEABILITY
OF THE PRODUCT
ON THE BASIS OF CHANGE IN VOLUME
ON THE BASIS OF CONTROLLABILITY
ON THE BASIS OF NORMALITY
ON THE BASIS OF ACCOUTING PERIOD
ON THE BASIS OF PLANNING AND
CONTROL
ON THE BASIS OF ASSOCIATION WITH THE
PRODUCT
ON THE BASIS OF MANAGERIAL DECISION
 Classification by Traceability
This aspect one of the most important classification of costs,
into direct costs and indirect costs. This classification is based on
the degree of traceability to the final product of the firm.
Direct Costs: So these are the costs which are easily identified
with a specific cost unit or cost centers. Some of the most basic
examples are the materials used in the manufacturing of a
product or the labor involved with the production process.
Indirect Costs: These costs are incurred for many purposes, i.e.
between many cost centers or units. So we cannot easily identify
them to one particular cost center. Take for example the rent of
the building or the salary of the manager. We will not be able to
accurately determine how to ascertain such costs to a particular
cost unit.
 Classification by Normality
This classification determines the costs as normal
costs and abnormal costs..
Normal Costs: This is a part of the cost of production
and a part of the costing profit and loss. These are the
costs that the firm incurs at the normal level of
output in standard conditions.
Abnormal Costs: These costs are not normally
incurred at a given level of output in conditions in
which normal levels of output occur. These costs are
charged to the profit and loss account, they are not a
part of the cost of production.
 CLASSIFICATION BY ACTIVITY OR VARIABILITY
(i) Fixed costs are commonly described as those which remain
fixed in total amount with increase or decrease in the volume of
output or productive activity for a given period of time. Fixed
cost per unit decreases as production increases and increases as
production declines. Examples of fixed costs are rent, insurance
of factory building, factory manager’s salary etc.
(ii) Variable costs are those which vary in total in direct
proportion to the volume of output. These costs per unit
remain relatively constant with changes in production. Examples
are direct material costs, direct labour costs, power, repairs etc.
(iii) Semi-variable costs are those which are partly fixed and
partly variable. For example, telephone expenses included a
fixed portion of annual charge plus variable charge according to
calls; thus total telephone expenses are semi- variable.
 CLASSIFICATION BY CONTROLLABILITY
(i) Controllable Costs:
Controllable costs are those which can be influenced by the
action of a specified member of an undertaking, that is to say,
costs which are at least partly within the control of
management. Generally speaking, all direct costs including
direct material, direct labour and some of the overhead
expenses are controllable by lower level of management.
(ii) Uncontrollable Costs :
Uncontrollable costs are those which cannot be influenced by
the action of a specified member of an undertaking that it is to
say, which are not within the control of management. Most of
the fixed costs are uncontrollable. For example, rent of the
building is not controllable
 CLASSIFICATION BY NORMALITY
(a) Normal Cost:
It is the cost which is normally incurred at a given level of
output in the conditions in which that level of output is normally
attained. It is a part of cost of production.
(b) Abnormal Cost:
It is the cost which is not normally incurred at a given level of
output in the conditions in which that level of output is normally
attained. It is not a part of cost of production and charged to
Costing Profit and Loss Account.

 CLASSIFICATION BY ACCOUNTING PERIOD

• Capital Cost - The cost which is incurred in purchasing assets
either to earn income or increasing the earning capacity of
the business is called capital cost. For example, the cost of a
manufacturing machine, such cost is incurred at one point of
time but the benefits accruing from it are spread over a
number of accounting years.
• Revenue Cost - It any expenditure is done in order to
maintain the earning capacity of the concern such as cost of
maintaining an asset or running a business it is revenue
expenditure e.g. cost of materials used in production, labour
charges paid to convert the material into production, salaries,
depreciation, repairs and maintenance charges
 CLASSIFICATION BY PLANNING AND CONTROL
(a) Budgeted cost -Budgeted costs represent an estimate of
expenditure for different phases of business operations
such as manufacturing, administration, sales, research and
development etc. coordinated in a well-conceived framework
for a period of time in future which subsequently becomes
the written expression of managerial targets to be
achieved. Continuous comparison of actual performance (i.e.
actual cost) with that of the budgeted cost is made so as to
report the variations from the budgeted cost to the
management for corrective action.
(b) Standard cost- Standard cost is the predetermined cost
based on a technical estimate for materials, labour and
overhead for a selected period of time and for a prescribed
set of working conditions”. Thus, standard cost is a
determination, in advance of production of what should be
the cost.
 Association with the product
Product cost - Product cost is identifiable in any product. It
includes direct material, direct labor and direct overheads. Up to
sale, these products are shown and valued as inventory and they
form a part of balance sheet. Any profitability is reflected only
when these products are sold. The Costs of these products are
transferred to costs of goods sold account.
Time/Period base cost - Selling expenditure and Administrative
expenditure, both are time or period based expenditures. For
example, rent of a building, salaries to employees are related to
period only. Profitability and costs are depends on both, product
cost and time/period cost.
 By Managerial Decision
(a) Shut Down Cost :
A cost which is incurred irrespective of plant is in
operation or is shutdown, e.g., the cost of rent, rates,
depreciation, maintenance expenses, etc.
In simple words , it is the cost of temporary closure
during off season/ recession in your business.
(b) Sunk Cost:
A cost which is incurred in the past and is not
relevant to the current decision making, e.g., written
down value of plant is irrelevant for replacement of
machinery.
(c) Opportunity Cost:
It refers to that cost in which amount is lost when one
alternative is selected over another. The costs which
are related to the sacrifice made or the benefits
foregone are opportunity costs.
(d) Imputed Cost:
It is the notional cost to be considered for making
costs comparable. For example – rent of own
building, interest on own capital, etc., are not actually
paid but may be taken as costs notionally.
(e) Out-of-Pocket Cost:
This is the cost which is payable in cash as against
costs such as depreciation which do not involve cash
payment.
(f) Replacement Cost:
It is the ‘current cost’ at which an asset or material
can be ‘replaced’ with identical one from the market.
It reflects the present market price of such asset or
material.
(g) Marginal cost
Marginal cost refers to the change in total cost due to
the change in total cost due to the increase or
decrease in the volume of output by one unit.
 METHODS OF COSTING
Every business and organization has
different nature and characteristics. So
it also needs to employ different
costing systems to ascertain the cost of
their products.
Following are the various methods:
• Job costing
• Unit costing
• Contract costing
• Batch costing
• Process costing
• Operating costing
• Operation Costing
• Multiple Costing
1 Job Costing:
It is also called specific order costing. It is adopted by
industries where there is no standard product and each job or
work order is different from the others. The job is done strictly
according to the specifications given by the customer and
usually the job takes only a short time for completion. The
purpose of job costing is to ascertain the cost of each job
separately. Job costing is used by printing presses, motor
repair shops, automobile garages, film studios, engineering
industries etc.
2 Contract Costing:
It is also known as terminal costing. Basically, this method is
similar to job costing. However, it is used where the job is big
and spread over a long period of time. The work is done
according to the specifications of the customer.
The purpose of contract costing is to ascertain the cost
incurred on each contract separately. Hence a separate
account is prepared for each contract. This method is used by
firms engaged in ship building, construction of buildings,
bridges, dams and roads.
3 Batch Costing:
It is an extension of job costing. A batch is a group of identical
products. All the units in a particular batch are uniform in
nature and size. Hence each batch is treated as a cost unit and
costed separately. The total cost of a batch is ascertained and
it is divided by the number of units in the batch to determine
the economic batch quantity . Batch costing is adopted by
manufacturers of biscuits, ready-made garments, spare parts
medicines etc.
4 Process Costing:
It is called continuous costing. In certain industries,
the raw material passes through different processes
before it takes the shape of a final product. In other
words, the finished product of one process becomes
the raw material for the subsequent process. Process
costing is used in such industries.
A separate account is opened for each process to find
out the total cost as well as cost per unit at the end
of each process. Process costing is applied to
continuous process industries such as chemicals,
textiles, paper, soap, lather etc.
5 Unit Costing:
This method is also known as single or output
costing. It is suitable to industries where production
is continuous and units are identical. The objective
of this method is to ascertain the total cost as well as
the cost per unit. A cost sheet is prepared taking into
account the cost of material, labour and overheads.
Unit costing is applicable units brick making ,
manufacturing cycles, radios, washing machines etc.
6 Operating Costing:
This method is followed by industries which render
services. To ascertain the cost of such services, composite
units like passenger kilometers and tone kilometers are
used for ascertaining costs. For example, in the case of a
bus company, operating costing indicates the cost of
carrying a passenger per kilometer. Operating costing is
adopted by airways railways, road transport companies
(goods as well as passengers) hotels, cinema halls, power
houses etc.
7.Operation costing
It is a further refinement of process costing. It is
suitable to industries where mass or repetitive
production is carried out or where the goods have to
be stocked in semi-finished stage, to enable the
execution of special orders, or for the convenient use
in later operations. In this method, the cost unit is an
operation. It is used in cycle manufacturing,
automobile units, etc.
8.Multiple Costing:
It is also known as composite costing. It refers to a
combination of two or more of the above methods of
costing. It is adopted in industries where several parts are
produced separately and assembled to a single product.
 Techniques Of Costing
1. Marginal Costing – It is the ascertainment of
marginal cost differentiating between fixed cost and
variable cost. The ascertainment by differentiating
between fixed costs and variable costs, of marginal
costs and of the effect on profit of changes in
volume or type of output.
2. Standard Costing – The preparation and use of
standard costs, their comparison with actual costs
and the analysis of variance to their causes and
points of incidence. This permits the management to
investigate the reasons for these variances and take
necessary corrective action.
3. Direct Costing – It is a practice of charging all direct
costs into, variable and fixed cost relating to
operations process or products leaving all other cost
to be written off against profits in which they arise.
4. Absorption Costing – Absorption costing is also
referred to as full costing. It is a costing technique in
which all manufacturing cost (fixed and variable) are
considered as cost of production and are used in
determining the cost of goods manufactured and
inventories. The fixed production costs are treated as
part of the actual production costs.
5. Uniform Costing – It is the use of the same costing
principles and practices for common control or
comparison of cost by different business units. CIMA
has defined uniform costing as “the use by several
undertakings of the same costing principles and or
practices.” This helps to compare the performance
one business with the other and to derive the benefit
of anyone’s better experience and performance.
6. Budgetary Control – A Budget is used for
controlling and co-ordination of business operations.
A Budget is a quantitative or financial statement
prepared for definite period of time. Budgetary
control is a use of comprehensive system of
budgeting to aid management in carrying out its
functions of planning, coordinating, and controlling
operations. A budgetary control is one of the
important tools of control.
 MCQ on Cost Accounting
1. What is the basic concept of cost concept?
A) Cost ascertainment. B) Tax compliance.
C) Financial audit D) Profit analysis
2. Process costing is appropriate for which firm?
A) Bricklaying firms B) Transport firms
C) Hospitals D) Oil refining firms
3. In how many ways cost classification can be done?
A) Three ways B) Two ways
C) Four ways D) Many ways
4. Which cost is incurred even if the company is
closed?
A) Sunk cost B) Historical cost
C) Shutdown cost D) Imputed cost
5. Direct expenses are also known as
A) Overhead expenses B) Sundry expenses
C) Chargeable expenses D) Major expenses
6. Warehouse rent is a part of which cost?
A) Production cost B) Distribution cost
C) Prime cost D) Factory cost
7. Toy manufacturing companies use what type of
costing?
A) Multiple costing B) Process costing
C) Unit costing D) Batch costing
8. A total of all the direct costs is known as
A) Cost of production B) Cost of sales
C) Prime cost D) Works cost
9. Indirect material used in production is known as
A. office overhead B. selling overhead
C. distribution overhead D. factory overhead
10 Use of same costing principles and practices by several
undertakings for cost ascertainment and control is called
_____ costing.
a. Uniform b. Composite
c. Single d. Standard
11 Fixed cost per unit increases with
A. variable cost per unit increases
B. variable cost per unit decreases
C. production volume increases
D. production volume decreases
12. Which of the following is a example of semi - variable
cost
A.Salary B.Tax
C.Telephone expenses D.Office expenses
13. Batch costing helps to determine
A. maximum quantity of output
B. minimum quantity of output
C. economic batch quantity
D. profit of batches
14. Difference between job time and attendance time is
known as
A. job time B. actual time
15. Which industry is suitable for using operating
costing method?
a. Textile b. Sugar
c. Toy d. Transport
16. Total cost plus profit is
a. Sales b. Cost of sales
c. Cost of production d. Works cost
17. Which technique of costing distinguishes costs
into fixed and variable?
a. Standard b. Uniform
c. Absorption d. Marginal
18. Batch costing is suitable for
a. Sugar industry b. Chemical industry
c. Pharma industry d. Oil industry
19. Cost of production is _____
a. Factory cost + Office OH b. Office OH + Selling OH
c. Works cost + Op. WIP d. Office OH – Closing WIP
20. Period costs are
a. Fixed cost b. Variable cost
c. Overhead cost d. Prime cost
21. An example of normal loss of materials is
a. Loss due to accidents b. Pilferage
c. Loss due to breaking the bulk
d. Loss due to careless handling
22 Direct material is a _____
a. Fixed cost b. Variable cost
c. Semi-variable cost d. None of the above
23. Thread in garments is an example of _____
a. Direct materials b. Prime cost
c. Variable cost d. Indirect materials
24. Rent on own building is an example of _____
a. Imputed cost b. Explicit cost
c. Standard cost d. Abnormal cost
25 Overheads or on cost is the total of
a. All direct expenses b. All indirect expenses
c. Direct Expenses + Factory OH d. None of the
above
26. Cost to be incurred at present or in future to
replace an asset or material is
a. Development cost b. Research cost
c. Expired cost d. Replacement cost
27. Change in costs due to change in the level of
activity is called _____
a. Marginal cost b. Differential cost
c. Abnormal cost d. Uncontrollable cost
28. Which among the following costs are not useful
for managerial decision making?
a. Sunk Cost b. Marginal Cost
c. Standard Cost d. None of the above
29 The main function of cost accounting is _______
reporting
a. Internal b. External
c. Government d. Bank
30.Cost accounting has developed due to the ___________
of financial accounting
a. Advantages b. Limitations
c. Merits d. Expansion
31 The method adopted by builders and civil engineering
contractors for jobs involving huge capital expenditure
and long time for completion is called _____ costing.
a. Process b. Contract
c. Operating d. Composite
32 Bad debts is an example of
a. Factory OH b. Administration OH
c. Selling OH d. Distribution OH
33 Primary packing is part of
a. Prime cost b. Factory OH
c. Selling OH d. Distribution OH
34 Idle Time is
a. Time spent by workers to take lunch
b. Time spent by workers on their jobs
c. Time spent by workers in the factory
d. The difference between time paid for and time spent on
job
35 Which of the following is a direct worker?
a. Foreman b. Sweeper
c. Machine operator d. Watchman
36 He sum of direct wages, direct expenses and overhead
costs of converting raw materials in to finished products is
called
a. Prime cost b. Works cost
c. Direct cost d. Conversion cost
37 Which of the following is correct about normal cost?
a. Irregular and unexpected cost
b. Charged to Costing P & L a/c
c. Part of Cost of Production
d. All of the above
38 Expired cost is recorded in _____
a. Balance Sheet b. Profit & Loss A/c
c. Cash flow statement d. None of the above
39. Unexpired cost is recorded in _____
a. Balance Sheet b. Profit & Loss A/c
c. Cash flow statement d. None of the above
40. Cost accountancy is considered an art because it _____
a. Has systematic body of knowledge
b. requires necessary ability and skills
c. involves continuous efforts of cost accountant
d. None of the above
41 Cost accountancy is considered a science because _____
a. It has a systematic body of knowledge
b. It requires necessary ability and skills
c. Involves continuous efforts of a cost accountant
d. None of the above
42 On the basis of “Relationship with accounting period”
costs are classified as
a. Historical Costs and contract cost
b. Capital Costs and fixed cost
c. Capital Costs and Revenue Costs.
d. Product Costs and Period Costs
43 Costs incurred in the past and has no effect on future
decision making is called _____
a. Opportunity cost b. Imputed cost
c. Conversion cost d. Sunk Cost
44 Depreciation on machinery is an example of
a. Imputed cost b. Capital cost
c. Shut down cost d. Discretionary cost
45 Which among the following is correct about abnormal
cost?
a. Expected at a given level of output
b. Charged to Costing P&L a/c
c. Part of Cost of Production
d. None of the above
46 Costs are classified between direct and indirect costs
according to method
a. Element b. Functions
c. Degree of traceability to product
d. Change in Activity or Volume
47 Costs required for production and will not be incurred if
there is no production are
a. Product cost b. Direct cost
c. Period cost d. All of These
48 Hotel industry is covered in which method of costing ?
A multiple operation costing b job costing
c standard costing d operating costing
49 which method is suitable for automobile repair
workshop ?
A multiple operation costing b job costing
c standard costing d operating costing
50 Which of the following is not a direct expense ?
A royalty paid b carriage on purchase
C wages of machine operator d wages of watchman
Based on question 51 – 53
Factory exp. 30000 ; administration Exp. 20000 ; Direct
labour 20000; Direct material 35000; selling expenses
10000; Direct expenses 5000
51. What will be the Prime cost
A 40000 b 30000
C 60000 d 80000
52 What will be the Cost of Production
A 120000 b 110000
C 100000 d 80000
53 What should be the selling price of the product if he has
to earn profit of 10 % on total cost
A 132000 b 144000
C 120000 d 121000
54 If cost of production of 1000 units is 20000 . What is the
cost of closing stock ? The units sold are 800 units .
A 4000 b 5000
C 3000 d 4500
55 Prime cost may be correctly termed as
a. The sum of direct material and labour cost with all other
cost
b. The total of all cost items which can be directly
charged to production units.
c. The total costs incurred in producing a finished unit.
d. The sum of the large costs there in a product cost.
56 For exercising control over cost, the best system is
______ costing.
a. Standard b. Historical
c. Marginal d. Estimated
57 Mention the item of expense which is excluded from
cost accounts. a. Raw materials b. Office
supplies
c. Salaries d. Income Tax
58 specify the expense which are excluded from cost
A direct cost b expense of raising capital
C selling overheads d indirect labour
59 when cost price is Rs 800 and profit on sale is 20 %,
the profit shall be
A 160 b 80
C 150 d 200
60 Factory overheads are 80 % of direct labour cost . If
factory overheads are 64000 then direct cost will be :
A 51200 b 80000
C 8000 d 5120
61 The works cost plus administration expenses represents
a. Total cost b. Cost of production
c. Cost of sales d. Factory cost
62 Indirect material used in production is classified as
a. Office overhead b. Selling Overhead
c. Distribution Overhead d. Factory Overhead
63 Variable costs increase in total due to
a. Increase in sales b. Increase in volume of production
c. Increase in profit d. All of the above
64 Cost incurred by undertakings which do not manufacture
any product but services is
a. Operation cost b. Operating cost
c. Joint cost d. Sunk cost
65 Economic order quantity is a tool for controlling
___________
a. Inventory b. Price
c. Machinery d. Cost
66 Calculate overhead rate using prime cost method –
Factory OH – Rs. 80,000, Direct materials – Rs. 1, 20,000 &
Direct wages – Rs.80,000.
a. 66.67% b. 100%
c. 40% d. 60%
67 Rent receivable is ______
a. Purely cost charge b. Purely financial income
c. Notional charge d. None of these
68 Advertisement expenses are treated as
a. Selling overhead b. Distribution overhead
c. Cost of production d. Direct expenses
69 In cost terms , direct manufacturing labour cost is included
in
A. manufacturing costs B . prime costs
C. conversion costs D. both B and C
70 Total cost of a product: Rs. 10,000 Profit: 25% on Selling
Price Profit is:
(a) Rs. 2,500 (b) Rs. 3,000
(c) Rs. 3,333 (d) Rs. 2,000
71 Costing is a technique of
a) Inventory control
b) Management control
c) Ascertainment of cost
d) Calculation of cost e) Reduction of cost
72 .........is an extension of job costing.
a) Process costing b) Batch costing
c) Contract costing d) Operation costing
73 When job is very big and spread over long periods of time
the method of costing adopted is
a) Process b) Job
c) Contract d) Operation e) Batch
74. Continuous costing is also called
a) Operation costing b) Process costing
c) Batch costing d) Contract costing
75 In ............. costing the cost of a group of products is
ascertained.
a) Process b) Job
c) Batch d) Service
e) Marginal
76 The quantity of material to be ordered at one time is known
as
a) EOQ b) BOQ
c) EBQ d) Re-order period
e) All of these
77 In a shutdown decision, one has to consider :
a. Contribution b. Identifiable fixed cost, if any
c. Impact of shutdown on other products, if any
d. All of the above
78 Interest on own capital is a:
a. Cash cost b. Notional cost
c. Sunk cost d. Part of prime cost
79 Secondary packing expenses are:
a. Part of prime cost b. Part of production overheads
c. Part of distribution overheads
d. Written-off to costing profit and loss account
80 under marginal costing:
a. All costs are classified into two groups – variable and fixed
b. Variable costs form part of the product cost and inventory
valuation
c. Fixed costs are treated as period costs
d. All of the above
81 Non-monetary incentives may include the following except:
a. Health and safety b. Housing facilities
c. Education and training d. Dearness allowance
82 Example of semi-variable items include the following
except:
a. Telephone b. Repairs and maintenance
c. Insurance of plant and building d Electricity charges
83 If Direct Material = 12,000; Direct Labor = 8000 and other
Direct Cost = 2000 then what will be the Prime Cost?
a. 12000 b. 14000
c. 20000 d. 22000
84 In furniture manufacturing use of nail, pins, glue, and polish
which use to increase its esteem value that cost is treated as:
a. Direct material cost b. Indirect material cost
c. Factory Overhead cost d. Prime cost
85 The margin of safety can be defined as:
a. The excess of budgeted or actual sales over budgeted or
actual variable expenses
b. The excess of budgeted or actual sales over budgeted or
actual fixed expenses
c. The excess of budgeted sales over the break-even volume of
sales
d. The excess of budgeted net income over actual net income
86 What is Margin of Safety if Sales is 20,000 units and B.E.P is
15,000 units.
a. 35,000 units b. 5,000 units
c. Rs 5,000 d. Rs 35,000
87 Estimate amount of profit if Sales is 10,000 units Fixed cost
is Rs 50,000, Variable cost per unit is Rs 12 and selling price per
unit is Rs 20.
a. Rs 12,000 b. Rs 5,000
c. Rs 30,000 d. None of the above
88 What will be the impact on B.E.P if variable costs are
reduced?
a. Decrease b. No change
c. Increase d. None of the above
89 What will be the impact on B.E.P if fixed cost is increased?
a. Decrease b. No change
c. Increase d. None of the above
90 The break-even point is the point where:
a. Total sales revenue equals total expenses (variable and
fixed)
b. Total contribution margin equals total fixed expenses
c. Total sales revenue equals to variable expenses only
d. Both a & b
91 The difference between total revenues and total variable
costs is known as:
a. Contribution margin b. Gross margin
c. Operating income d. Fixed costs
92 A variable cost is?
a. One which varies in proportion to the level of fixed cost
incurred.
b. One which tends to vary with the level of activity.
c. One which changes over time.
d. One which cannot be estimated with any great degree of
accuracy.
93 Which of the following is the objective of cost sheet
1. For determining the selling price
2. Facilitating in managerial decision making
3. Preparation of budgets
4. All of these
94 Which of the following is not the element of Cost Sheet
A. Prime cost b Factory cost
C Cost of production d Contribution
95 When a company uses two or more than two
methods of costing , then it is known as _____
A. Process costing b multiple costing
c. Combination d complex
96 Multiple costing is also known as
a. Composite costing b. complex costing
c. Combination costing d all of these
97 Classification of cost is useful .
A. to find gross profit. B. to find net profit.
C. to identify costs. D. to identify efficiency
98 What is Tender ?
A estimation of cost b estimation of profit
C estimation of selling price d estimation of units
99 The objective of standard costing is to________
A) Determine profitability of a product
B) Determine break-even production level
C) Control costs D) Allocate costs with more
accuracy
100 Contract costing is also known as
A terminal costing b direct cost
C hamper costing d all of these
 TAXATION
• What is Tax ?
A tax is a mandatory fee or financial charge levied by
any government on an individual or an organization
to collect revenue for public works providing the best
facilities and infrastructure. The collected fund is then
used to fund different public expenditure programs. If
one fails to pay the taxes or refuse to contribute
towards it will invite serious implications under the
pre-defined law.

• Types of taxes ?
Be it an individual or any business/organization, all
have to pay the respective taxes in various forms.
These taxes are further subcategorized into
• direct Tax
• indirect taxes
Direct Tax
• The definition of direct tax is hidden in its name
which implies that this tax is paid directly to the
government by the taxpayer
• The general examples of this type of tax in India
are Income Tax and Wealth Tax.
• It is progressive in nature.
 Indirect Tax
• Indirect taxes are slightly different from direct
taxes and the collection method is also a bit
different. These taxes are consumption-based that
are applied to goods or services when they are
bought and sold.
• The indirect tax payment is received by the
government from the seller of goods/services.
• The seller, in turn, passes the tax burden on to the
end-user i.e. buyer of the good/service.
• Thus the name suggest indirect tax as the end-user
of the good/service does not pay the tax directly
to the government.
• Some general examples of indirect tax include sales
tax, Goods and Services Tax (GST), Value Added
Tax (VAT), etc.
• Also known as consumption tax
Features of Indirect Tax
• Payment and Tax Load - The service provider makes payment
of indirect taxes and this is transferred to a final consumer.
• Liability of Tax – Here the seller or service provider makes
payment on indirect taxes which are transferred to final
consumer.
• Nature – Initially, indirect taxes used to have a regressive
nature.
• Evasion - Indirect taxes are hard to evade due to direct
implementation through goods and services.
• Investment and Saving - Most indirect taxes are largely
growth-oriented since they de-motivate the consumer and
encourage savings.
• Social Coverage - The indirect tax has a much larger coverage
since their charge falls upon each individual buying products
or services.
• Tax on commodity and services
Features of Direct Tax
• Progressive in nature.
• Leived on the same person who bear the burden of tax
• The Central Board of Direct Taxes deals with matters
related to levying and collecting Direct Taxes and
formulation of various policies related to direct taxes.
• A taxpayer pays a direct tax to a government for different
purposes, including real property tax, personal property
tax, income tax or taxes on assets,Gift Tax, Capital Gains
Tax, etc.
Recent Reforms in Taxes
In the year 2017, the government introduced Goods
and Services Tax (GST) which is considered as the
most revolutionary tax reform in independent India to
date. Earlier also, governments levied various state
and central taxes for availing various services or
buying different goods. The problem with the earlier
reforms was the taxation process was complex and
the contradicting rules enabled some people to
evade taxes through loopholes in the system. After
the introduction of GST, a higher percentage of
assessees was brought under the taxation umbrella
and it took a toll on evaders as escaping from paying
taxes became tougher.
HISTORY
The Income Tax was introduced in India for the first time in 1860
by British rulers following the mutiny of 1857. The period
between 1860 and 1886 was a period of experiments in the
context of Income Tax. This period ended in 1886 when first
Income Tax Act came into existence. The pattern laid down in it
for levying of Tax continues to operate even to-day though in
some changed form. In 1918, another Act- Income Tax Act, 1918
was passed but it was short lived and was replaced by Income
Tax Act, 1922 and it remained in existence and operation till
31st. March, 1961.
PRESENT ACT
On the recommendation of Law Commission & Direct
Taxes Enquiry Committee and in consultation with
Law Ministry a Bill was framed. This Bill was referred
to a select committee and finally passed in Sept.
1961. This Act came into force from 1st.April 1962 in
whole of the country. Income Tax Act, 1961 is a
comprehensive Act and consists of 298 Sections. Sub-
Sections running into thousands Schedules, Rules,
Sub-Rules, etc. and is supported by other Acts and
Rules. This Act has been amended by several
amending Acts since 1961. The Annual Finance Bills
presented to Parliament along with Budget make
far-reaching amendments in this Act every year.

Rule No. 1
As per the Income Tax law
the income earned in current
year is taxable in the next year.
Important terms
• Assessment Year
 Assessment Year is the financial year, in which the income of
the assessee / person earned during the previous year is
evaluated and taxed.
 The year in which income tax liability for the previous year
arises.
 Its term is always 12 months.
• Previous Year
 Previous Year is the financial year, in which the
assessee/ person earns income.
 Its term can be 12 months or less.

5 Cases where Income earned & assessed in same

Assessment Year
1. Shipping business income of non-resident ship-
owners
2. In cases of persons leaving India
3. Assessment of any association of persons, body of
individuals or Artificial Juridical person formed or
established only for a limited period
4. In case of persons who are likely to transfer their
assets to avoid tax
5. In case of discontinued business
Assessee
An income tax assessee is a person who pays tax or any sum of
money under the provisions of the Income Tax Act, 1961. The
term ‘assessee’ covers everyone who has been assessed for his
income, the income of another person for which he is
assessable, or the profit and loss he has sustained.
let us get deeper and understand the types of assessees as per
the Income Tax Act:
1. Normal Assessee
An individual who is liable to pay taxes for the income earned
during a financial year is known as a normal assessee. Every
individual who has earned any income earned or losses incurred
during the previous financial years are liable to pay taxes to the
government in the current financial year.
2. Deemed Assessee
A person may not be liable only for his own income or loss but
also on the income or loss of other person. Such persons are
called Representative Assessee. Deemed assessees can be:
• The eldest son or a legal heir of a deceased person who has
expired without writing a will.
• The executor or a legal heir of the property of a deceased
person who has passed on his property to the executor in a
writing.
• The guardian of a lunatic, an idiot, or a minor.
• The agent of a non-resident Indian receiving income from
India.
3.Assessee-in-default
Assessee-in-default is a person who has failed to fulfil his
statutory obligations as per the income tax act such as not paid
taxes to the government or not file his income tax return.
For example, an employer is supposed to deduct taxes from the
salary of his employees before disbursing the salary. He is, then,
required to pay the deducted taxes to the government by the
specified due date. If the employer fails to deposit the tax
deducted, he will be considered as an assessee-in-default.

Person
There are seven categories covered under the term
“Person”. This means -
• An Individual
• HUF(Hindu Undivided Family)
• A Company
• A Firm
• An Association of persons(AOP) / Body of
Individuals(BOI)
• A Local Authority
• Every Artificial Judicial Person, not covered above
1. Individual
> Male/Female
> In case of Minor/Unsound Mind – Guardian or Manager
> Deceased Person – Legal Representative
E.g – Mr. Rakesh as Individual
2. HUF – (Hindu Undivided Family)
> Governed by Hindu law, consist of all males lineally
descended from common ancestor and includes wives and
daughters
> Member of HUF called as Co-Parceners. Further Son and
Daughter of HUF have same right in Coparcenary Property.
> Arises from Status, no need of Contract.
E.g Kunal shah Huf consist of Father, Son, Daughter, Wife,
3. Company
> For the purpose this Act, Word Company has much wider
connotation than Under Companies Act,
Indian Company defined under 2(26)
Body corporate incorporated by or under law of Country
Outside India.
Any Body, Association incorporated or not, Indian or not,
which declared by general or specific order of CBDT to be
Company for such Assessment Year
E.g Reliance Industries ltd, Adani Ltd, Kalupur Bank
4. Firm
> Persons agree to share Profit of business carried by
all or any of them acting for all. Individually known as
Partners and collectively known as Firm.
5. AOP
> Persons combine together for promotion of Joint Enterprise
> Must have common Purpose or action for formation of AOP.
BOI
> Status of person like Executors and Trustees
E.g Co-operative Society, Trust
6. Local Authority
> Authority Legally entitled or entrusted by Government
> Municipal Committee, District Board etc
7. Artificial Person
> Establish under specific Act or Legislation
> Covered all person not falling other like wise idol or deity
E.g ICAI, University,

Block Of Assets
Block of assets is a group of assets falling within a class of assets
comprising of:
• Tangible assets, being building, machinery, plant or furniture,
• Intangible assets, being know how, patents, copyrights, trade-
marks, licenses, franchises or any other business or
commercial rights of similar nature
In respect of which same percentage of depreciation is
prescribed.
Eg. – all machines having 15 % rate of depreciation would form
one block of assets and all machines having 40 % rate of
depreciation would fall in another block of assets.
 Residential Status

Resident
A taxpayer would qualify as a resident of India if he
satisfies one of the following 2 conditions :
1. Stay in India for a year is 182 days or more in the
previous Year
or
2. Stay in India for the immediately 4 preceding years
is 365 days or more and 60 days or more in the
relevant previous year
Resident = Satisfy any one of the above 2 conditions
Step 2: Determining whether resident
and ordinarily resident or resident but
not ordinarily resident
A resident individual will be treated as ordinarily
resident in India during the year if he satisfies both of
the following conditions:
1) He is resident in India for at least 2 years out of 10
years immediately preceding the relevant year;
2) His stay in India is for 730 days or more during 7
years immediately preceding the relevant year.
In short, following test will determine the residential
status of an individual:
1. If the individual satisfies any one or both the conditions
specified at step 1 and satisfies both of the conditions
specified at step 2, then he will become ordinarily resident
in India.
2. If the individual satisfies any one or both the conditions
specified at step 1 and satisfies none or one condition
specified at step 2, then he will become resident but not
ordinarily resident in India.
3. If the individual satisfies none of the conditions specified at
step one, then he will become non-resident.

Note : both the day of departure and arrival are

counted as stay in India
 INCOME TAX
Everyone who earns or gets an income in India is
subject to income tax. Your income could be salary,
pension or could be from a savings account that’s
quietly accumulating a 4% interest. Even, winners of
‘Kaun Banega Crorepati’ have to pay tax on their
prize money. For simpler classification, the Income
Tax Department breaks down income into five heads:
 Difference Between Heads of Income and Sources
of Income
Heads of income are the ways to classify the income or
profits earned by a person during a taxable year . The five
heads of income as follows -Income from salaries, income
from house property, Profits And gains from business or
profession Capital Gains Income from other sources.
Sources of income are monetary sources from which
income can be earned by an individual or a business.
Sources of income for an individual maybe salary,
Commission, interest etc. Sources of income for a
business maybe profits, return on Investments, grants
from the government.
1. What is income tax slab ?
Indian Income tax levies tax on individual taxpayers on the
basis of a slab system. Slab system means different tax
rates are prescribed for different ranges of income.. Such
income tax slabs tend to undergo a change during every
budget.These slab rates are different for different
categories of taxpayers. Income tax has classified three
categories of “individual “taxpayers such as:
• Individuals (aged less than of 60 years) including
residents and non-residents
• Resident Senior citizens (60 to 80 years of age)
• Resident Super senior citizens (aged more than 80
years)
 Tax Slabs For Individuals ( below 60 )

Tax Slabs For Senior Citizen ( 60 – 80 years )

Tax Slabs For Super Senior Citizen ( above

80 years)
 Income tax rate for Partnership firm or LLP as per old/ new
regime.
A partnership firm/ LLP is taxable at 30%.
* 12% Surcharge is levied on incomes above Rs 1 crore. Health
and Education cess at the rate of 4 %
 For Companies
Taxes on Income The following rates are applicable to
the domestic companies for AY 2020-21 based on their
turnover:

Plus surcharge - The rate of surcharge is 7% in case

the total income is above one crore rupees and up
to Rs 10 crore. The surcharge is 12% in case total
income is above Rs 10 crore.
• Foreign company
Tax Rate – 40 %
If total income exceeds Rs. 1 crore but not Rs. 10 Crore- 7% of
tax calculated on domestic company/ 2 % of tax calculated on
foreign company as per above rates
If total income exceeds Rs. 10 crore - 12% of tax calculated on
domestic company/ 5 % of tax calculated on foreign company
as per above rates
• Local Authority
Tax Rate – 30 %

How to Calculate Income Tax

Slab System

Tax on total income of 12 lakh

0 – 250000 Nil
250000 – 500000 @5 % 12500
500000 – 1000000 @20 % 100000
1000000 – 1200000 @30 % 60000
total 172500
PROCESS OF COMPUTATION OF
TOTAL INCOME
Total Income (TI) or Gross Total Income (GTI) are the
terms used interchangeably but differ in substance.
Where Gross Total Income is calculated by summing
up earnings received as per all five heads of income.
Total income is arrived at after deducting from Gross
Total Income deductions under Section 80C to 80U
(namely, Chapter VI A deductions) under the Income
Tax Act 1961. Which means GTI is a large component
out of which on subtracting certain specified amount
we can arrive at the TI.
Why the calculation of Total Income (TI) important
under the Income Tax Act?
Tax is calculated on total income or net income of a
person and not on Gross Total Income. If the
computation of Total Income is made wrong i.e.
either it is calculated higher than actual income or
lower, following consequences shall follow

• In case TI has been calculated more than the

actual amount. Then the tax would also be HIGH.
• The other side is even more distressing. Computing
lower Total Income and resultantly paying lower
income tax will be an open invite for tax notices,
penalties & prosecution.
 In short , WE can say That
 What is difference between gross income and
total income?
Ans. Gross income is the aggregate income and a
wider term from which total income can be arrived at
after subtracting the decutions under section
80C to 80U of the income tax act.

 Is total income and taxable income different?

Ans. No, total income/net income and taxable income
are one and the same thing.

Clubbing of Income
Clubbing of income means including the income of
any other person in Assessee's total income.
The Income-tax Act has specified certain cases where
income of one person is statutorily required to be
included in the income of another person if some
conditions are satisfied. This inclusion is known as
“Clubbing of Income”.
For Example, if a husband diverts some part of his
income to his wife to reduce his tax burden. Then,
such transferred income of a wife is added and taxed
as income of husband only and not his wife.
Set off of losses
Set off of losses means adjusting the losses against
the profit or income of that particular year. Losses
that are not set off against income in the same year
can be carried forward to the subsequent years for
set off against income of those years. A set-off
could be an intra-head set-off or an inter-head set-
off.
a. An intra-head set-off
b. b. An inter-head set-off
a. Intra-head Set Off
The losses from one source of income can be set off
against income from another source under the
same head of income. For eg: Loss from Business A
can be set off against profit from Business B, where
Business A is one source and Business B is another
source and the common head of income is
“Business”.
b. Inter-head Set Off
After the intra-head adjustments, the taxpayers can
set off remaining losses against income from other
heads. Eg. Loss from house property can be set off
against salary income
Carry forward of losses
After making the appropriate and permissible
intra-head and inter-head adjustments, there
could still be unadjusted losses. These
unadjusted losses can be carried forward to
future years for adjustments against income
of these years.
What Is a Tax Deduction?
A tax deduction is a deduction that lowers a
person or organization's tax liability by
lowering their taxable income. Deductions are
typically expenses that the taxpayer incurs
during the year that can be applied against or
subtracted from their gross income in order
to figure out how much tax is owed.
 Some Important Deductions
1. Section 80C
Deductions on Investments
Section 80C : You can claim a deduction of Rs 1.5 lakh
your total income under section 80C. In simple terms,
you can reduce up to Rs 1,50,000 from your total
taxable income, and it is available for individuals and
HUFs.
Eligible Deductions Under Section 80C
• Life Insurance
• Public Provident Fund
• National Savings Certificate
• Home Loan Principal Repayment
• Payment of Tuition Fees of 2 children
2. Section 80 TTA – Interest on Savings Account
If you are an individual or an HUF, you may claim a
deduction of maximum Rs 10,000 against interest
income from your savings account with a bank, co-
operative society, or post office. Do include the
interest from savings bank account in other income.
Section 80TTA deduction is not available on interest
income from fixed deposits, recurring deposits, or
interest income from corporate bonds.
3. Section 80E – Interest on Education Loan
Deduction for Interest on Education Loan for Higher
Studies
A deduction is allowed to an individual for interest on
loans taken for pursuing higher education. This loan
may have been taken for the taxpayer, spouse or
children or for a student for whom the taxpayer is a
legal guardian.
80E deduction is available for a maximum of 8 years
(beginning the year in which the interest starts
getting repaid) or till the entire interest is repaid,
whichever is earlier. There is no restriction on the
amount that can be claimed.

4. Section 80U – Physical Disability

Deduction for Person suffering from Physical
Disability
A deduction of Rs.75,000 is available to a resident
individual who suffers from a physical disability
(including blindness) or mental retardation. In case
of severe disability, one can claim a deduction of Rs
1,25,000.
 Rebate
Tax rebate refers to the relief you can claim to reduce
income tax burden. It refers to the amount
of tax liability that you, as a taxpayer, do not have to
pay.

Rebate u/s 87 A
Cess
A cess imposed by the central government is a tax on
tax, levied by the government for a specific purpose.
For example, a cess for financing primary education –
the education cess (which is imposed on all central
government taxes) is to be spent only for financing
primary education (SSA) and not for any other
purposes.
Rate - Additional Health and Education cess at the
rate of 4 % will be added to the income tax liability in
all cases. (increased from 3% since FY 18-19)

 Surcharge
Surcharge is a charge on any tax, charged on the tax
already paid. As the name suggests, surcharge is an
additional charge or tax. The main surcharges are
that on personal income tax (on high income slabs
and on super rich) and on corporate income tax.
Surcharge applicable as per tax rates below in all categories
mentioned above:
• 10% of Income tax if total income > Rs.50 lakh
• 15% of Income tax if total income > Rs.1 crore
• 25% of Income tax if total income > Rs.2 crore
• 37% of Income tax if total income > Rs.5 crore
What is TDS
TDS stands for tax deducted at source. As per the Income
Tax Act, any company or person making a payment is
required to deduct tax at source if the payment exceeds
certain threshold limits. TDS has to be deducted at the
rates prescribed by the tax department.
The company or person that makes the payment after
deducting TDS is called a deductor and the company or
person receiving the payment is called the deductee. It is
the deductor’s responsibility to deduct TDS before making
the payment and deposit the same with the government.
What is Advance Tax?
Advance tax means income tax should be paid in advance
instead of lump sum payment at year end. It is also known as
pay as you earn tax. These payments have to be made in
instalments as per due dates provided by the income tax
department.
Who should pay Advance Tax?
If your total tax liability is Rs 10,000 or more in a
financial year you have to pay advance tax. Advance
tax applies to all taxpayers, salaried, freelancers, and
businesses. Senior citizens, who are 60 years or older,
and do not run a business, are exempt from paying
advance tax.

What is income tax return?

ITR (Income Tax Return) is a form in which the
taxpayers file information about his income earned
and tax applicable to the income tax department. The
department has notified 7 various forms i.e. ITR 1,
ITR 2, ITR 3, ITR 4, ITR 5, ITR 6 & ITR 7 till date. Every
taxpayer should file his ITR on or before the specified
due date. The applicability of ITR forms varies
depending on the sources of income of the taxpayer,
the amount of the income earned and the category
the taxpayer belongs to like individuals, HUF,
company, etc.
What is tax audit?
As the name itself suggests, tax audit is an
examination or review of accounts of any
business or profession carried out by
taxpayers from an income tax viewpoint.
• A business man has to go for mandatory
tax audit if Total sales, turnover or gross
receipts exceed Rs 1 crore in the FY
• And for professionals this limit is set at 50
lakh.
 INDIRECT TAX
The indirect taxes are the levies made by Central and
State government on the expenditure, consumption,
services, rights and privileges yet not on the
property or income. This includes duties of customs
paid on imports, as well as excise duty paid on
production and value added tax on certain stages of
production and distribution of products etc.
FEATURES
Payment and Tax Load - The service provider makes payment of
indirect taxes and this is transferred to a final consumer.
Liability of Tax – Here the seller or service provider makes
payment on indirect taxes which are transferred to final
consumer.
Nature – Initially, indirect taxes used to have a regressive nature.
Yet, now with the coming of GST, they have become quite
progressive.
Evasion - Indirect taxes are hard to evade due to direct
implementation through goods and services.
Investment and Saving - Most indirect taxes are largely growth-
oriented since they de-motivate the consumer and encourage
savings.
Social Coverage - The indirect tax has a much larger coverage
since their charge falls upon each individual buying products or
services.
 TYPES OF INDIRECT TAX

GST
CUSTOM
DUTY
MISC. AND OTHER
TAXES

Taxes subsumed
The single GST subsumed several taxes and levies, which
included central excise duty, services tax, additional customs
duty, state-level value added tax and Octroi.[Other levies which
were applicable on inter-state transportation of goods have also
been done away with in GST regime.GST is levied on all
transactions such as sale, transfer, purchase, barter, lease, or
import of goods and/or services.
What is GST in India?
GST is known as the Goods and Services Tax. It is an
indirect tax which has replaced many indirect taxes in
India such as the excise duty, VAT, services tax, etc.
The Goods and Service Tax Act was passed in the
Parliament on 29th March 2017 and came into effect
on 1st July 2017.
In other words, Goods and Service Tax (GST) is levied
on the supply of goods and services. Goods and
Services Tax Law in India is a comprehensive, multi-
stage, destination-based tax that is levied on
every value addition. GST is a single domestic indirect
tax law for the entire country.
The Journey of GST in India
The GST journey began in the year 2000 when
a committee was set up to draft law. It took
17 years from then for the Law to evolve. In
2017, the GST Bill was passed in the Lok
Sabha and Rajya Sabha. On 1st July 2017, the
GST Law came into force.
Advantages of GST
1. Upcoming of Common National Market
Under the Pre – GST scenario, state and local self
governments practiced notable sovereignty in taxation. With
individual states having strong taxation rights, each used to
levy indirect taxes such as VAT, Central Sales Tax, Service Tax,
Excise etc in many different forms. Not only that, to attract
investment in their respective states, state governments
depended on incentives. This leads to different prices of the
same goods and services in different states. While states
benefited from such a tax structure, the economy as a whole
suffered.
2. Elimination of Cascading Effect of Taxes
Cascading tax effect, also known as tax on tax, occurs when a
good is taxed on every stage of its production, until it is sold
to the final consumer. In such a situation, each succeeding
transfer of good is taxed inclusive of the taxes charged on the
preceding transfer. Consequently, the final consumer bears
the burden of multiple taxes imposed on every stage of
production
3 Registration and Filing Returns Under GST Made Simple as
Everything is Done Online
Be it GST registration or return filing, a registered business
owner can do everything online. This is certainly opposed to
the earlier indirect tax regime, where a business owner had
to get himself registered separately for various indirect taxes.
4. One Nation One Tax
What are the components of GST?
There are three taxes applicable under this
system: CGST, SGST & IGST.
• CGST: It is the tax collected by the Central
Government on an intra-state sale (e.g., a
transaction happening within Maharashtra)
• SGST: It is the tax collected by the state
government on an intra-state sale (e.g., a
transaction happening within Maharashtra)
• IGST: It is a tax collected by the Central
Government for an inter-state sale (e.g.,
Maharashtra to Tamil Nadu)
 CASCADING EFFECT
1. Buys raw material cost 100
VAT @10 % 10
110
2. Manufacturer cost 110
add Profit 40
VAT @10 % 15
3. Wholesaler cost 165
add Profit 15
VAT @ 10 % 18
4. Retailer cost 198
add profit 12
VAT @10 % 21
CONSUMER RATE 231
 UNDER GST
1. Buys raw material cost 100
GST @10 % 10
110
RS. 100 belongs to him and 10 will be paid to govt.
2. Manufacturer cost 100
add Profit 40
GST @10 % 14
154
(output tax 14 and input tax 10) rs. 4 will be paid to
govt.
3. Wholesaler cost 140
add Profit 15
GST @ 10 % 16 (approx.)
171
(output tax 16 and input tax 14) tax paid to govt. rs.
2
4. Retailer cost 155
add profit 12
GST@10 % 17(approx.)
CONSUMER RATE 184
(Output tax 17 and input tax 16 ) tax paid to Govt.
Rs. 1
Now, let us understand the definition of Goods and Service
Tax, as mentioned above, in detail.
 Multi-stage
An item goes through multiple change-of-hands along its
supply chain: Starting from manufacture until the final sale to
the consumer.
Let us consider the following stages:
• Purchase of raw materials
• Production or manufacture
• Warehousing of finished goods
• Selling to wholesalers
• Sale of the product to the retailers
• Selling to the end consumers
 Value Addition
A manufacturer who makes biscuits buys flour, sugar and
other material. The value of the inputs increases when the
sugar and flour are mixed and baked into biscuits.
The manufacturer then sells these biscuits to the
warehousing agent who packs large quantities of biscuits in
cartons and labels it. This is another addition of value to the
biscuits. After this, the warehousing agent sells it to the
retailer.
 Destination-Based
Consider goods manufactured in Maharashtra and sold to the
final consumer in Karnataka. Since the Goods and Service Tax
is levied at the point of consumption, the entire tax revenue
will go to Karnataka and not Maharashtra.
Who is Liable to get Registered under GST?
• Any business involved in the supply of services
whose turnover in a financial year exceeds Rs 20
lakhs for Normal Category states (Rs 10 lakhs for
Special Category states)
• Every person who is registered under an earlier law
(i.e., Excise, VAT, Service Tax etc.) needs to register
under GST, too.
• for inter state Sale
• For e- commerce

GST Identification Number

 GST Slab
The GST council has fitted over 1300 goods and 500
services under four tax slabs of 5%, 12%, 18% and
28% under GST. This is aside the tax on gold that is
kept at 3%.
Items which doesn’t come under GST
• Crude oil
• Petroleum
• Diesel
• natural gas
• aviation turbine fuel
• Alcohol
• Tobacco
• Electricity

GST Council?
The GST council is the key decision-making
body that will take all important decisions
regarding the GST. The GST Council dictates
tax rate, tax exemption, the due date of
forms, tax laws, and tax deadlines, keeping in
mind special rates and provisions for some
states. The predominant responsibility of the
GST Council is to ensure to have one uniform
tax rate for goods and services across the
nation
 It consists of the following members ( Total - 33)
• Chairperson – Finance Minister of India
• Vice Chairperson – will be elected out of State
Finance ministers.
• 31 members are from 28 state and 3 union
territories with legislation.
What is Custom Duty?
Custom duty is a type of indirect tax that is levied on
all the goods that are imported to the country as well
as some goods exported from the country. The duty
levied on the former is referred to as import duty
while that on the latter is referred to as the export
duty.
To simplify it, any tariff that is introduced on goods
across national borders is referred to as custom duty.
• Custom Duty in the country falls under the
Customs Act, 1962.
• Custom Tariff Act, 1975 provides the rate at which
the export and import duty are to be charged.
• It is only imposed on goods and not on services.
Types of Custom Duty
Customs duties are charged almost universally on
every good which are imported into a country.
These are divided into:
• Basic Customs Duty (BCD)
• Countervailing Duty (CVD)
• Additional Customs Duty or Special CVD
• Protective Duty,
• Anti-dumping Duty
• Excise Duty is a form of indirect tax which is generally
collected by a retailer or an intermediary from its
consumers and then paid to the government. Although
this duty is payable on manufacture of goods, it is usually
payable when the goods are ‘removed’ from the place of
production or from the warehouse for the purpose of sale.
There is no requirement for the actual sale of the goods
for imposing the excise duty because it is imposed on the
manufacture of such goods. note that GST has now
subsumed a number of indirect taxes including excise
duty.
Who is liable to pay Excise Duty?
According to the law, there are three parties which are liable
to pay the excise duty-
• The person/entity that manufactured the goods in
question
• The person/entity that got the goods manufactured by
hiring labour
• Person/entity that got the goods manufactured by other
parties
Note - excise duty is levied by the central government except
on some items such as narcotics and alcohol which is levied
by state government.

 Stamp Duty: Levied on the transfer of immovable

property located within the state, charged by the State
Government and may vary in rates. Also applicable on all
legal documents.
 Service Tax in India
Service Tax is a tax which is levied on the Services
provided by an entity. If an entity is providing any
service, they are required to levy Service Tax on the
same. This service tax is collected from the recipient
of service and deposited with the Central Govt.
 Entertainment Tax
In India, Entertainment Tax is levied on every financial
transaction that is related to entertainment and is
reserved primarily for the state governments. Some
forms of entertainment on which entertainment tax is
levied include Amusement Parks, Video Games,
Arcades, Exhibitions, Celebrity Stage Shows, Sports
Activities etc.
 MCQ ON TAXATION
1) Which of the following is indirect tax?
(A) Income tax (B) Wealth tax
(C) Corporation tax (D) Sales tax
2) If 'Tata Company' imports a product from abroad, then
which tax will be levied on it?
(A) VAT (B) Custom duty
(C) Income tax (D) Corporation tax
3) Which of the following tax is imposed by the Central
Government but the state government collects it?
(A) VAT (B) Income tax
(C) Corporation tax (D) Stamp Duty
4) What of the following taxes is applicable in the case of
supply of goods from Gujarat to Assam?
a) CGST b) SGST
c) UTGST d) IGST
5) which of the following taxes have been subsumed in GST?
a. Central Sales Tax
b. Central Excise Duty and Service Tax
c. Value Added Tax D) All of Above
6) GST was implemented in India from
a) 1st January 2017 b) 1st April 2017
c) 1st March 2017 d) 1st July 2017
7) What does ―’I’ in IGST stands stand for?
a) Internal b) Intregrated
c) Internal d) Intra
8 )The chairman of GST Council
a) Nominated by the Govt
b) Nominated by the GST Council
c) Union Finance Minister d) Elected by the GST council
9) Tax rate on goods under GST are determined by
a) Union budget b) State budget
c) GST council d) Central Govt in consultation with
state Govt. 10. Integrated Goods and Services Tax Act is
applicable to
a) All the States b) All the Union territories
c) The whole of India d) All the states except Jammu and
Kashmir
11 The rate of IGST is equal to the rate of
a) CGST b) SGST
c) CGST plus the rate of SGST d) SGST plus UTGST
12. IGST collected belong to
a) Central Government
b) To the State in which supply occurs
c) to the State to which supply occurs
d) The Centre and state to which supply occurs
13 Constitution Amendment Act, 2016 for GST was
a) 80th b) 101st c) 122nd d) None of these
14. The incidence of tax on tax is called
a) Tax Cascading b) Tax Pyramidding
c) Tax evasion d) Indirect tax
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15 The tax which was not merged into GST
a) Counterveiling Duty b) Excise duty
c) Basic Customs Duty d) Purchase tax
16 The highest GST rate applicable now is ---
a) 100% b) 18%
c) 28% d) 50%
17 Person includes
a) Individual b) HUF
c) LLP d) All the above
18 GST is a __________________ based tax.
(A)Territory (B) Origin
(C) Destination (D) None of the above
19 ) Health and Education Cess is charged at what
rate –
A 3% b 4%
C 5% d 2%
20 ) What is the maximum rebate you can avail u/s
87A ?
A 3500 b 10000
C 12500 d 15000

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 Budgetary Control
Budgetary control is the process of preparation of
budgets for various activities and comparing the
budgeted figures with the actual results for arriving
at deviations if any, which are to be eliminated in
future.

Budgets , Budgeting & budgetary control

• Budgets are business estimates for future period .
It is a blue Print of a plan expressed in
quantitative terms.
• budgeting is the process of preparing these
estimates . It is a technique for formulating
Budgets.
• budgetary control is a system of achieving
performance on the basis of budgets. It refers to
the principles, procedures and practices of
achieving given objectives through budgets.

Note - Budget and budgeting are the parts of

planning whereas as budgetary control is linked with
co-ordination & control.
Reason for Preparing Budget
1.To aid the planning of annual operations,
2. To co-ordinate the activities of the various parts of
the organisation and to ensure that the parts are in
harmony with each other,
3. To communicate plans to the various responsibility
center managers,
4. To motivate managers to strive to achieve the
organisational goals,
5. To control activities,
6. To evaluate the performance of managers.

Objectives of Budgetary Control

• Planning
• Co-ordination
• Communication
• Motivation
• Control
• Performance Evaluation
• Help to Administrators – Budgetary control helps
administrations in smooth running of the business.
It can be used in production, administration, sales
and in estimating financial requirements.
Characteristics of a Successful Budget
1. Must be realistic.
2. Should be flexible.
3. Should be evaluated regularly.
4. Must be well planned and clearly communicated.
5. Should have a financial format.
6. There should be proper fixation of authority and
responsibility.
7. It should have a whole hearted support of the top
management
8. Good accounting System
9. Participation- All the key employees should be made involved
in the preparation of the budget.
Process Of Budgetary Control
The process of controlling budgets can be
broken down into several steps:
• Preparing Budgets
• Calculating actual Performance
• Comparing actual with budget
• Calculating variances
• Establishing reasons for variances
• Taking action to exert control
 Developing Budgets
The first stage in budgetary control is developing various
budgets. It will be necessary to identify the budget centers in
the organization and budgets will have to develop for each one
of them.
Thus budgets are developed for functions like purchase, sale,
production, manpower planning as well as for cash, capital
expenditure, machine hours, labor hours and so on.
 Recording Actual Performance
There should be a proper system of recording the actual
performance achieved. This will facilitate the comparison
between the budget and the actual. An efficient accounting and
cost accounting system will help to record the actual
performance effectively.
 Comparison of Budgeted and Actual Performance
One of the most important aspects of budgetary control is the
comparison between the budgeted and the actual performance.
The objective of such a comparison is to find out the deviation
between the two and provide the base for taking corrective
action.
 Corrective Action
Taking appropriate corrective action based on the comparison
between the budgeted and actual results is the essence of
budgeting.
A budget is always prepared for the future and hence there may
be a variation between the budgeted results and actual results.
There is a need for investigation of the same and take
appropriate action so that the deviations will not repeat in the
future. Responsibilities can be fixed on proper persons so that
they can be held responsible for any such deviations.

Techniques Of Budgetary Control

1. Variance Analysis
First of all, budgets of different departments are made with
estimated figures. After this, it is compared with actual
accounting figures. In this technique, we find variances. These
variances may be favourable and unfavourable. For example,
we have recorded actual quantity and cost of our raw material,
after this, it is compared with budgeted value of raw material
quantity and cost. Result of this will be material cost variance.
Like this, we will find the variance of labour cost and overhead
cost. This technique of budgetary control is helpful for reducing
the cost of business.
2. Responsibility Accounting
Responsibility accounting is also a good budgetary control
technique. In this technique, we create cost centre, profit
centre and investment centre. All these centres are just like
department of any organisation. Now, we classify our all
employees work on the basis of their centres. Every employee’s
responsibility is fixed on the basis of his target or performance.
After this, we record their performance manually. Then, we fix
their accountability. For example, we have fixed the target of
sales department is of Rs. 5 Lakh per month. For this, we have
appointed expert salesman. But sales department’s total per
month sales is Rs. 3 Lakh which is Rs. 2 Lakh less than our sales
department target. Through this budgetary control, we can
take the decision of promotion and demotion of our
employees or find other reasons if we do not obtain our
targets.

3. Adjustment of Funds
In this technique of budgetary control, top management take
the decision to adjust fund from one project to other project.
For example, when Govt. of India makes budget for allocation of
its total fund in different projects, at that time, it has to take
decision for adjustment of funds. For example, railway
department needs money for specific new project. If Govt. of
India sees that project of IT has excess money, then it can be
utilized for railway budget. In adjustment of funds, we also use
fund flow analysis. We can also decrease misuse of funds by
forecasting proper amount.
4. Zero Base Budgeting (ZBB)
As the name says “Zero-based budgeting” is an approach to
plan and prepare the budget from the scratch. Zero-based
budgeting starts from zero, rather than a traditional budget that
is based on previous budgets.
With this budgeting approach, you need to justify each and
every expense before adding it to the actual budget. The
primary objective of zero-based budgeting is the reduction of
unnecessary cost by looking at where costs can be cut.
To create a zero base budget involvement of the employees is
required. You can ask your employees what kind of expenses
the business will have to bear and figure out where you can
control such expenses. If a particular expense fails to benefit
the business, the same should be axed from the budget. This
method for the first time was used by the Department of
Agriculture, U.S.A. in the 19th century
Types Of Budgets
A) On the Basis of Time : 1) Long Term Budget
2) Short Term Budget
3) Current Budgets

B) On the Basis of Functions : Sales Budget ,

Production Budget, Purchase Budget , Raw Material
Budget , Labour Budget, Plant Utilization Budget etc.

c) On the Basis Of Flexibility : 1) Fixed 2) Flexible

 Time Budget
(a) Long‐term Budget: These budgets are prepared on the basis
of long‐term projection and portray a long‐range planning.
These budgets generally cover plans for three to ten years.
In this regard it is mostly prepared in terms of physical
quantities rather than in monetary values.
(b) Short‐term Budget: In this budget forecasts and plans are
given in respect of its operations for a period of about one to
three years. They are generally prepared in monetary units and
are more specific than long‐term budgets.
(c) Current Budgets: These budgets cover a very short period,
may be a month or a quarter or maximum one year. The
preparation of these budgets requires adjustments in short‐term
budgets to current conditions.
1. Sales Budget:
It includes a forecast of total sales during a period expressed in
money and/or quantities in the organisation. The forecast
relates to the total volume of sales and also its break-up
product-wise and area-wise in the organisation. The
responsibilities for making sales budget lies with the sales
manager in the organisation.
The following factors are relevant for preparing the sales
budget:
1. Past sales figures and trend,
2. Salesman’s estimates,
3. General economic conditions,
4. Orders on hand,
5. Seasonal fluctuations,
6. Competition, and
7. Government’s control and policy.

2. Cash Budget
In the organisation, the cash budget usually gives detailed
estimates of (a) cash receipts and (b) cash disbursements for
the budget period. In the organisation, it is prepared (i) to
ensure that cash is available in time for meeting the financial
commitments and (ii) to use cash available in the best possible
manner.

3.Production Budget:
It includes a forecast of the output during a particular period
analyzed according to (a) products, (b) manufacturing
departments, to schedule its production according to sales
forecast in the organisation.
4.Materials Budget:
It generally deals with the direct materials for budgeted output
in the organisation. It is based on the production budget.
Material requirement for a unit of production is determined and
is multiplied by the budgeted output to arrive at total quantity
of direct materials required in the organisation.

5. Labor Budget:
It is based upon the estimates of the production budget in the
organisation. It reveals the requirements of labor for a given
period of time and the financial requirements to meet the wage
bills of workers for the specified budget period.
On the basis Of Flexibility
1. FIXED BUDGET: A fixed budget is prepared for one level of
output and one set of condition. This is a budget in which
targets are tightly fixed. It is known as a static budget. It is
firm and prepared with the assumption that there will be
no change in the budgeted level of motion. Thus, it does
not provide room for any modification in expenditure due
to the change in the projected conditions and activity.
Fixed budgets are prepared well in advance. This budget is
not useful because:
• The conditions go on the changing and cannot be expected
to be firm.
• It does not provide any space for alteration in the budgeted
figures as a result of change in cost due to change in the level
of activity.
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2. FLEXIBLE BUDGET: This is a dynamic budget. In
comparison with a fixed budget, a flexible budget is
one “which is designed to change in relation to the
level of activity attained.” An equally accurate use of
the flexible budgets is for the purposes of control.
Flexible budgeting has been developed with the
objective of changing the budget figures so that they
may correspond with the actual output achieved. It is
more sensible and practical, because changes
expected at different levels of activity are given due
consideration. Thus a budget might be prepared for
various levels of activity in accord with capacity
utilization.

Master Budget:
The master budget is the summary budget
incorporating its component functional budgets,
which is finally approved, adopted and employed in
the organisation. Thus, master budget incorporate all
functional budgets. It projects a comprehensive
picture of the proposed activities and anticipated
results during the budget period. The top
management of the enterprise approves it.
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 Budgetary Control
1. The objective of budgetary control is…
a. To define the goal of the firm
b. To coordinate different departments
c. To plan to achieve its goals
d. All of the above
2. Budget is prepared for a…
a. Indefinite period b. Definite period
c. Period of one year d. Six months
3. On the basis of period, budgets may be classified
into _________ groups.
a. Five b. Four
c. Three d. Two
4. Budgetary control system acts as a friend, philosopher
and guide to the…
a. Management b. Share holders
c. Creditors d. Employees
5. Budgetary control system defines the objectives and
policies of the…
a. Production department b. Finance department
c. Marketing department d. All of the above
6. Fixed budget is useless for comparison when the level
of activity…
a. Increases b. Fluctuates both ways
c. Decreases d. Constant
7. Budgetary control facilitates easy introduction of the…
a. Marginal costing b. Ratio analysis
c. Standard costing d. Subjective matter
8. Sales Budget is a forecast expressed in –
(a) Quantity (b) Money
(c) Both (a) and (b) (d) None of the above
9 The budgets are classified on the basis of –
(a) Time (b) Function
(c) Flexibility (d) All of the above
10 Sales budget is a
a. expenditure budget b. functional budget
c. Master budget d. None of these
11 Budgeting is based upon
(A) Past statistical data (B) Present conditions
(C) Both (A) and (B) (D) None of the above
12 A budget is an instrument of management used
as an aid in the
(A) Planning (B) Programming
(C) Control of business activity (D) All of the above
13 Following may be regarded as a summary budget
a. Production budget b. Master budget
c. Cash budget d. Sales budget
14. A master budget consist of :
A. Sales budget B. Production budget
C. Material budget D. All of the above
15 Zero based budgeting was first used by
A Jimmy Carter b Hamper Louis
16. Master Budget incorporates all ____________ budget
A Period b Functional
C Flexible d Cash budget
17 A flexible budget requires careful study and classification of
expenses into:
a) Past and current expenses
b) Fixed, Semi-variable and variable expenses
c) Administrative, selling and factory expenses
D None of these
18 Which of the following are tools of management
accounting?
A) Standard costing
B) Decision accounting
C) Human Resources Accounting
D) Budgetary control
a) A, C and D
b) A, B and D
c) A, B , C, D
d) A, B and C
19 A budget should be
(A) Rigid (B) Flexible
(C) Both (A) and (B) (D) None of the above
20 Production budget is based upon
(A) sales budget (B) Factory capacity
(C) Availability of raw material and labor
(D) All of the above
 Indian Financial Management
System
The Indian Financial System is one of the most
important aspects of the economic development of
our country. This system manages the flow of funds
between the people (household savings) of the country
and the ones who may invest it wisely
(investors/businessmen) for the betterment of both
the parties. The financial system enables lenders and
borrowers to exchange funds.
The Financial System is a set of institutions, markets or
instruments that promotes savings by channelising
them to the most efficient use.
the features of the Indian Financial system:
• It plays a vital role in the economic development of
the country as it encourages both savings and
investment
• It helps in mobilising and allocating one’s savings
• It facilitates the expansion of financial institutions
and markets
• Plays a key role in capital formation
• It helps form a link between the investor and the
one saving
Components of Indian Financial System
There are four main components of the Indian
Financial System. This includes:
• Financial Institutions
• Financial Assets
• Financial Services
• Financial Markets

FINANCIAL INSTITUTIONS
Financial institutions are the intermediaries who facilitate
smooth functioning of the financial system by making
investors and borrowers meet. They mobilize savings of
the surplus units and allocate them in productive activities
promising a better rate of return.
Financial institutions are also termed as financial
intermediaries because they act as middle between savers
by accumulating Funds them and borrowers by lending
these fund.

TYPES OF FINANCIAL INSTITUTIONS

Financial institutions can be classified into two categories:
A. Banking Institutions
B. Non - Banking Financial Institutions
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A.BANKING INSTITUTIONS (Reserve Bank of
India)
Indian banking industry is subject to the control of the Central
Bank. The RBI as the apex institution organises, runs,
supervises, regulates and develops the monetary system and
the financial system of the country.
The Indian banking institutions can be broadly classified into
two categories:
1. Organised Sector 2. Unorganised Sector.

Organised Sector
a. Commercial Banks:These banks help the entrepreneurs
and businessmen by giving them financial services like
debit cards, banks accounts, short-term deposits, etc. with
the money people deposit in such banks.
b. Cooperative Banks: Co-operative banks are financial
entities which belong to their members, who are the
owners and the customers of their bank, at the same time.
(c) Regional Rural Banks (RRBs): Regional Rural Banks
were set by the state government and sponsoring
commercial banks with the objective of developing the
rural economy. Regional rural banks provide banking
services and credit to small farmers, small entrepreneurs
in the rural areas. The regional rural banks were set up
with a view to provide credit facilities to weaker sections.
They constitute an important part of the rural financial
architecture in India.
4.Foreign Banks: Foreign banks as banks that have
branches in the other countries and main Head
Quarter in the Home Country. With the deregulation
(Elimination of Government Authority) in 1993, a
number of foreign banks are entering India. Foreign
Banks are: Citi Bank. Bank of Ceylon.
Unorganised Sector.
In the unorganised banking sector are the Indigenous
Bankers, Money Lenders.
1. Indigenous Bankers Indigenous Bankers are
private firms or individual who operate as banks
and as such both receive deposits and given
loans. Like bankers, they also financial
intermediaries. They should be distinguished
professional money lenders whose primary
business is not banking and money lending.

2. Money lenders depend entirely to on their one

funds. Money Lenders may be rural or urban,
professional or non-professional. They include large
number of farmer, merchants, traders. Their
operations are entirely unregulated. They charge very
high rate of interest.
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B. NON – BANKING INSTITUTIONS
The non – banking institutions may be categorized broadly into
two groups:
(a) Organised Non – Banking Financial Institutions.
(b) Unorganised Non – Banking Financial Institutions.
(a) Organised Non – Banking Financial Institutions The
organised non - banking financial institutions include:
1. Development Finance Institutions. These include: The
institutions like IDBT, ICICI, IFCI, IIBI, IRDC at all India level.
The State Finance Corporations (SFCs), State Industrial
Development Corporations (SIDCs) at the state level.
Agriculture Development Finance Institutions as
NABARD,LDBS etc. Development banks provide medium and
long term finance to the corporate and industrial sector and
also take up promotional activities for economic
development
2. Investment Institutions. These include those financial
institutions which mobilise savings at the public at large
through various schemes and invest these funds in
corporate and government securities. These include LIC,
GIC, LTT, and mutual funds.. (b) Unorganised Non - Banking
Financial Institutions The unorganised non - banking
financial institutions include number of non - banking
financial companies (NBFCs) providing whole range of
financial services. These include hire - purchase 300
consumer finance companies, leasing companies, housing
finance companies, factoring companies, Credit rating
agencies, merchant banking companies etc. NBFCs mobilise
public funds and provide loanable funds.
(b) Unorganised Non - Banking Financial Institutions The unorganised
non - banking financial institutions include number of non - banking
financial companies (NBFCs) providing whole range of financial
services. These include hire - purchase 300 consumer finance
companies, leasing companies, housing finance companies, factoring
companies, Credit rating agencies, merchant banking companies etc.
NBFCs mobilise public funds and provide loanable funds.
Financial Markets
The marketplace where buyers and sellers interact
with each other and participate in the trading of
money, bonds, shares and other assets is called a
financial market.
These organised markets can be further classified into
two they are
(i) Capital Market (ii) Money Market
• CAPITAL MARKET The capital market is a market
for financial assets which have a long or indefinite
maturity. Generally, it deals with long term
securities which have a maturity period of above
one year. Capital market may be further divided
into three namely:
(I) Industrial securities market
(II) Government securities market and
(III) Long term loans market

1. INDUSTRIAL SECURITIES MARKET: As the very

name implies, it is a market for industrial
securities namely:
(i) Equity shares
(ii) Preference shares and
(iii) Debentures or bonds.
It is a market where industrial concerns raise their capital
or debt by issuing appropriate instruments. It can be
further subdivided into two. They are:
(i) Primary market or New issue market
(ii) Secondary market or Stock exchange
• Primary Market Primary market is a market for new
issues or new financial claims. Hence, it is also called
New Issue market. The primary market deals with
those securities which are issued to the public for the
first time. In the primary market, borrowers exchange
new financial securities for long term funds. Thus,
primary market facilitates capital formation.
• Secondary Market Secondary market is a market for
secondary sale of securities. In other words, securities
which have already passed through the new issue
market are traded in this market. Generally, such
securities are quoted the Stock Exchange and it
provides a continuous and regular market to buying
and selling of securities. This market consists of all
stock exchanges recognised by the Government of
India. The stock exchanges in India are regulated under
the Securities Contracts (Regulation) Act 1956. The
Bombay Stock Exchange is the principal stock
exchange in India which sets the tone of the other
stock markets.
II. GOVERNMENT SECURITIES MARKET
It is otherwise called Gilt - Edged securities market.
It is a market where Government securities are
traded. In India there are many kinds of Government
Securities - short term and long term. Long term
securities are traded in this market while short term
securities are traded in the money market.
Securities issued by the Central Government, State
Governments, Semi Government authorities like City
Corporations, Port Trusts etc. Improvement Trusts,
State Electricity Boards, All India and State level
financial institutions and public sector enterprises are
dealt in this market.

• MONEY MARKET
Money market is a market for dealing with financial
assets and securities which have a maturity period of
upto one year. In other words, it is a market for
purely short term funds. The money market may be
subdivided into four. They are:
(i) Call money market
(ii) Commercial bills market
(iii) Treasury bills market
(iv) Short term loan market
• Call Money Market The call money market is a market for
extremely short period loans say one day to fourteen
days. So, it is highly liquid. The loans are repayable on
demand at the option of either the lender or the borrower.
The special feature of this market is that the interest rate
varies from day to day and even from hour to hour and
Centre to Centre. It is very sensitive to changes in demand
and supply of call loans.
• Commercial Bills Market It is a market for Bills of Exchange
arising out of genuine trade transactions. In the case of
credit sale, the seller may draw a bill of exchange on the
buyer. The buyer accepts such a bill promising to pay at a
later date specified in the bill. The seller need not wait
until the due date of the bill. Instead, he can get
immediate payment by discounting the bill.
• Treasury Bills Market It is a market for treasury bills which
have ' short - term ' maturity. A treasury bill is a
promissory note or a finance bill issued by the
Government. It is highly liquid because its repayment is
guaranteed by the Government. It is an important
instrument for short term borrowing of the Government
• Short - Term Loan Market It is a market where short - term
loans are given to corporate customers for meeting their
working capital requirements. Commercial banks play a
significant role in this market. Commercial banks provide
short term loans in the form of cash credit and overdraft
Over draft facility is mainly given to business people
whereas cash credit is given to industrialists.
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 FINANCIAL INSTRUMENTS
Financial instruments refer to those documents
which represents financial claims on assets. As
discussed earlier, financial asset refers to a claim to a
claim to the repayment of a certain sum of money at
the end of a specified period together with interest or
dividend. Examples: Bill of exchange, Promissory
Note, Treasury Bill, Equity shares, debentures, bonds
etc.
Financial securities can be classified into:
(i) Primary or direct securities. (ii) Secondary or
indirect securities
• Primary Securities - These are securities directly
issued by the ultimate investors to the ultimate
savers. Eg. shares and debentures issued directly
to the public.
• Secondary Securities - These are securities issued
by some intermediaries called financial
intermediaries to the ultimate savers. Again these
securities may be classified on the basis of
duration as follows:
(i) Short - term securities
(ii) Medium term securities
(iii) Long - term securities
Short - term securities are those which mature within
a period of one year. Eg, Bill of Exchange, Treasury
bill, etc. Medium term securities are those which
have a maturity period ranging between one and five
years. Eg. Debentures maturing within a period of 5
years, Long - term securities are those which have a
maturity period of more than five years. Eg,
Government Bonds maturing after 10 years.

Financial Services
Services provided by Asset Management and Liability
Management Companies. They help to get the required
funds and also make sure that they are efficiently invested.
The financial services in India include:
Banking Services – Any small or big service provided by
banks like granting a loan, depositing money, issuing
debit/credit cards, opening accounts, etc.
Insurance Services – Services like issuing of insurance,
selling policies, insurance undertaking and brokerages, etc.
are all a part of the Insurance services
Investment Services – It mostly includes asset
management
Foreign Exchange Services – Exchange of currency, foreign
exchange, etc. are a part of the Foreign exchange services
 MCQ ON IFMS
1.) Financial institutions are also known as ______________.
a) Financial organization
b) Financial intermediaries
c) Financial system d) Any of the above
2) Which of the following combinations is correct?
a) NABARD--------Industrial Loan
b) RBI---------------Long term Finance
c) RRB---------------Agriculture Finance
d) IDBI---------------Short Term Loans
3) Which of the following is not related with Money Market?
a) Treasury Bills b) Commercial Bills
c) Certificates of Deposit d) Shares
4) Which of the following is related with Money Market?
a) Treasury Bills b) bonds
c) Debentures d) Shares
5)What is Call Money?
a) It is an overnight loan in the Money Market
b) It is loan of above1 day to 14 days in the money market
c) It is loan of above14 day to 364 days in the money market
d) It is an amount charged on ISD
6) What is Notice Money?
a) It is an overnight loan in the Money Market
b) It is loan of above1 day to 14 days in the money market
c) It is loan of above14 day to 364 days in the money market
d) It is an amount charged on ISD
7) What is the maximum validity of a cheque?
a) 90 days b) 30 days
c) 60 days d) 180 days
8) Which of the following statement is false about Treasury
Bills?
A. It is a secure Instrument B. It is a promissory note
C. It is issued by government D. It is issued maximum for
maturity of 1 year
a) Option A & B are false b) Only option C is true
c) Option A & D are correct d) All the options are correct
9) ) Capital market regulator is:
a) R B I b) I R D A c) N S E
d) B S E e) S E B I
10) Which of the following is least risky?
a) Equity b) Corporate Bonds
c) Treasury Bills d) Certificate of Deposit
11) In primary market, the first time issued shares to be
publicly traded, in stock market is considered as:
a) Traded Offering b) Public Markets
c) Issuance Offering d) Initial Public Offering
12 The exchange rate is
a) the price of one currency relative to gold.
b) the value of a currency relative to inflation.
c) the change in the value of money over time.
d) the price of one currency relative to another
13)The Securities and Exchange Board of India was established
in _______.
a) 1992 b) 1988
c) 1987 d) 1990
14) A ………… is authorized to buy, sell or deal in securities.
a) Depository b) Credit rating agency
c) Stock broker d) All of the above
15) SEBI stands for –
a) Securities and E-commerce Board of India
b) Securities Exchange Board of India
c) Securities and Exchange Board of India
d) None of the Above
16) In order to protect the interests of investors and
regulate the working of stock exchanges, the Government in
1988 set up the
[a] SEBI [b] SIDBI
[c] RBI [d] Bank of India
17 The financial market for long-term funds is known as
[a] Capital market [b] Money market
[c] Primary market [d] Secondary market
18 The unorganized financial system includes
_____________.
[a] Commercial banks [b] Merchant banks
[c] Indigenous banks [d] All of the above
19 ) Which of the following is the example of capital
Markets
A Shares b bonds
C Debentures d All of These
20 ) Which of the following is the component of IFMS ?
A Financial Intermediaries b Financial Instruments
C Financial Markets D All of these
 EVOLUTION IN ACCOUNTING
Modem accounting is not an overnight result of a sudden
change in any event. It has reached the present stage through an
evolutionary process of thousands of years.
Based on the data received from the history of evolution and -
the features of gradual development, history of Accounting can
chronologically be classified into 4 stages, e.g.
• Emergent stage (from a primitive age to 1494 AD),
• Preanalytic stage (1495 – 1799),
• Development i.e. analytic stage (1800-1950),
• Modem age (1951- onward).
The Emergent Stage (Primitive to 1494)
The emergent stage of Accounting emerged keeping pace with
the following chronological stages of the history of human
civilization.
• Stone stage.
• Primitive stage.
• Barter stage.
• Currency stage.
1. Stone Age
They kept accounts of their collected fruits, hunted animals and
lent goods to others by marking ticks on the trees, on the walls
of the caves of mountains and stones, or making holes or
symbols as per their need.
2.Primitive stage
This stage started just with the beginning of the social life of
human beings. People of this stage, kept their accounting
marking ticks on the walls and making rope-knots.
3. Barter stage
Exchange of Goods with Goods
4. Currency stage
Through the evolutionary process at one stage the use of
money started. At this stage agriculture, industry and
trade and commerce flourished.
Possibly the concept of debit and credit came into being
from that time. Luca Pacioli is considered the father of
Accounting
He also explained the main principles and methods of
double entry system in detail in his first book “Summa de
Arithmetica Geometria, Proportionate Proportionality”.
He was indeed the first man who explained the double-
entry system in detail in written form but he cannot claim
to be the innovator of this system because the available
evidence proves that this system was in a practice
haphazardly at the beginning of the fourteenth century.

Pre-analytic Stage (1495-1799)

The 3rd chapter of the famous book of Loca Pacioli i.e.
accounting was reprinted in 1504 wherein he discussed
and explained the rules of determining debit and credit
and preparation of journal, ledger and trial balance.
• Introduction of going concern concept
• Introduction of the periodic concept
• Introduction of money measurement concept
 Development or Explanatory Period (1800 –
1950)
As a result of the industrial revolution and
appearance of the Joint Stock company, large-
scale production, multi-scale production, and
wider competition, the desire to earn a maximum
profit and government control created new
problems and various complexities in the field of
the accounting system.
The necessity of the accounting analysis process
was felt to find out the solutions to these
problems and complexities.
• The concept of depreciation and cost-
accounting came into force because the
business concerns became long term.
• Father of Scientific Management F. W.
Taylor emphasized efficiency increase in the
field of production.
• a standard costing-system was introduced as
an effective means of cost control rather than
cost determination.
• Taxation on business
 Modern Period
• National and international professional
organizations together introduced some accounting
principles which are known as Generally Accepted
Accounting Principles (GAAP) to make the
accounting principles equally meaningful to
processors and users of accounting information.
• Accounting Standards are formulated on the
national and international levels.
• Mechanized Accounting and Auditing

Important Points

• It is associated with Mesopotamia civilization. But it

was started in Egypt. And they uses Clay Tablets.
• In 1854, Queen Victoria created the profession of
chartered accountants after granting a royal charter
to the Institute of Accountants in Glasgow and laid
the way for the modern, formal accounting
profession.
• Institute of Chartered Accountants of India (ICAI) -
1949
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 Recent Trends
• Human resources accounting
Human resource is an important component like other components of
production.
Since it cannot be measured in terms of money the true picture of an
organization is not reflected in the statements of accounts.
Human Resources Accounting is the process of identifying and
measuring data about human resources and communicating, this
information to interested parties”.
• Responsibility Accounting
Budgetary control and standard accounting can measure
whether the employees of an organization are discharging their
responsibility properly or not; responsibility accounting has
emerged to determine the responsibilities of responsible
persons.
Social Accounting:
Business is a socio-economic activity and it draws its inputs from
the society, hence its objective should be the welfare of the
society. It should owe a responsibility towards solving many of
the social problems.
Social Accounting is the process of measuring, monitoring, and
reporting to stakeholders the social and environmental effects of
an organization’s actions.
Forensic Accounting is an art of investigation
over accounting records, financial statements, and other related
financial records. The result of investigation mostly use for legal
support, and resolving conflict. This job requires technical skills
in accounting, investigation and legal.
• Cloud Accounting
its a new way of accessing your accounting software
from the web browser without actually installing it.
Its also referred to as online accounting.
With a cloud-based accounting software, a company
does not have to set up individual desktops with
software because everyone in the company can
access the cloud on their own devices. This also
allows remote teams or branches to access the same
data and the same version of the software.
A major benefit of cloud-based accounting software is
the data backup and disaster recovery is often a part
of your account.

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 You can’t go back and
change the beginning, but
you can start where you
are and change the
ending.

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