JAIIB Paper 3 • Accounting & Financial Management for Bankers (AFM) ⭐⭐⭐⭐⭐
Cost & Management Accounting
How businesses actually work out what something cost to make — and the four different costing methods used depending on how it's produced. This guide covers Elements of Cost, Cost Centre & Cost Unit, Management Accounting's relationship with Cost/Financial Accounting, Job Costing, Batch Costing, Contract Costing, Process Costing, and Joint Products/By-Products/Service Costing — with 50 exam-style MCQs with hidden answers.
📅 Updated: September 2026 • 30 min read
1 Meaning, Evolution & Objectives of Cost Accounting
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Definition
Cost Accounting is the process of accounting for cost — from the point it is incurred through to ascertaining the cost of a specific product, service or activity — evolving out of financial accounting's inability to provide the detailed cost control needed by growing industrial enterprises.
Ascertain Cost
Determine the actual cost of a product/service.
Control Cost
Compare actual vs standard/budgeted cost, and act on variances.
Pricing Support
Provide a cost basis for setting selling prices.
Decision Support
Aid make-or-buy, discontinuation and other operational decisions.
2 Concepts, Classification & Elements of Cost
Costs are classified by nature (Material, Labour, Expenses), by function (Production, Administration, Selling & Distribution), by behaviour (Fixed, Variable, Semi-Variable), and by controllability (Controllable vs Uncontrollable).
Prime Cost = Direct Material + Direct Labour + Direct Expenses
+ Factory Overheads = Works/Factory Cost → + Admin Overheads = Cost of Production → + Selling & Distribution Overheads = Total Cost
3 Cost Centre & Cost Unit
Cost Centre
A location, person, department or piece of equipment for which costs are separately ascertained (e.g., the Machining Department).
Cost Unit
The unit of product or service to which cost is ultimately charged (e.g., per tonne, per kWh, per room-night).
4 Management Accounting & Its Relationships
Management Accounting uses both financial and cost accounting data — plus other quantitative/qualitative information — for internal planning, control and decision-making. It is broader in scope than Cost Accounting, which itself is a specialised subset of the wider accounting discipline.
JAIIB tip: The natural hierarchy runs: Financial Accounting (external, historical, statutory) → Cost Accounting (cost ascertainment/control) → Management Accounting (broadest, decision-focused) — all of which ultimately feed into the wider Financial Management function.
5 Job Costing & Batch Costing
Job Costing
Costs are accumulated separately for each specific, identifiable job/order (e.g., custom furniture) on a Job Cost Card, tracking material, labour and overhead.
Batch Costing
A variant of Job Costing where a batch (group of identical units) is the cost unit — cost per unit = Batch Cost ÷ Batch Size.
6 Contract Costing
Used for large, long-duration projects (construction, shipbuilding), tracked via a separate Contract Account.
Progress Payments
Periodic payments by the contractee, based on work certified by an architect/engineer.
Retention Money
A percentage withheld by the contractee as security until the defect-liability period expires.
Escalation Clause
Allows the contract price to be adjusted if material/labour costs rise beyond an agreed threshold.
Notional Profit Recognition
On incomplete contracts, only a conservative fraction of notional profit is taken to P&L, based on percentage completion — the rest is deferred as a reserve.
7 Process Costing
Used for continuous, mass production of identical/homogeneous units (chemicals, textiles), where cost is accumulated per process and averaged over units produced.
Normal Process Loss
Expected loss, absorbed by the cost of good units produced.
Abnormal Loss/Gain
Unexpected deviation from normal loss — charged/credited directly to the Costing P&L Account.
Equivalent Units
Converts partially completed WIP units into their equivalent fully-completed units, for fair cost allocation.
Inter-Process Profit
When output is transferred to the next process at a price above cost — requiring elimination of unrealised profit in closing WIP for external reporting.
8 Joint Products, By-Products & Service Costing
Joint Products
Two or more products of significant value, produced simultaneously from the same process/inputs (e.g., petrol, diesel and kerosene from crude oil refining).
By-Products
Products of relatively minor value, incidentally produced alongside the main product.
Service (Operating) Costing
Used for service industries (transport, hospitals, hotels) — cost per unit of service, such as cost per passenger-km or cost per bed-day.
✓ Key Takeaways
The elements of cost build up as: Prime Cost → Works Cost → Cost of Production → Total Cost.
A Cost Centre is where costs are ascertained; a Cost Unit is what costs are charged to.
Management Accounting is broader than Cost Accounting, which is broader than pure Financial Accounting.
Job Costing suits unique orders; Batch Costing suits identical-unit groups; Contract Costing suits large projects; Process Costing suits continuous mass production.
Joint Products share significant value from one process; By-Products are incidental, minor-value outputs.
📝 Top 50 JAIIB-Style MCQs on Cost & Management Accounting
Test your understanding with these 50 practice MCQs, closely modelled on the pattern expected in the JAIIB AFM exam — including combination-answer questions. Each question has 5 options — the correct answer is hidden by default; tap "Show Answer" to reveal it along with a short explanation.
🏭 Meaning, Evolution & Objectives of Cost Accounting
1 Cost Accounting evolved primarily because financial accounting could not provide:
A. Any information whatsoever
B. Detailed cost control information
C. Tax computation
D. Share price data
E. GST returns
Answer: B. Detailed cost control was the gap Cost Accounting filled.
2 Which of these are objectives of Cost Accounting? (i) Ascertain cost (ii) Control cost (iii) Support pricing decisions
A. (i) only
B. (i) and (ii) only
C. (iii) only
D. All of (i), (ii) and (iii)
E. None of these
Answer: D. All three are core Cost Accounting objectives.
3 Cost Accounting primarily helps with:
A. External statutory reporting only
B. Internal cost ascertainment and control
C. Setting the RBI's repo rate
D. Issuing currency notes
E. Filing GST returns exclusively
Answer: B. Cost Accounting supports internal cost ascertainment/control.
4 Comparing actual costs against standard/budgeted costs to identify variances is part of:
A. Cost control
B. GST filing
C. Statutory audit only
D. Transfer pricing
E. Forex arithmetic
Answer: A. Variance analysis is part of cost control.
5 Cost Accounting can support which business decision?
A. Make-or-buy decisions
B. Only marketing slogans
C. Only office decor choices
D. Only employee dress code
E. Nothing of operational relevance
Answer: A. Cost data supports make-or-buy decisions.
📊 Concepts, Classification & Elements of Cost
6 Prime Cost consists of:
A. Direct Material + Direct Labour + Direct Expenses
B. Only Factory Overheads
C. Only Selling Expenses
D. Only Administration Overheads
E. Total Cost minus Profit
Answer: A. Prime Cost = Direct Material + Direct Labour + Direct Expenses.
7 Works/Factory Cost equals:
A. Prime Cost + Factory Overheads
B. Prime Cost − Factory Overheads
C. Only Selling Overheads
D. Only Direct Labour
E. Total Cost + Profit
Answer: A. Works Cost = Prime Cost + Factory Overheads.
8 Costs classified by behaviour include:
A. Fixed, Variable and Semi-Variable
B. Only Direct costs
C. Only Administration costs
D. Only Selling costs
E. Only Prime costs
Answer: A. Fixed/Variable/Semi-Variable classify cost by behaviour.
9 Total Cost is calculated by adding to Cost of Production:
A. Selling & Distribution Overheads
B. Direct Material only
C. Direct Labour only
D. Nothing further
E. GST payable
Answer: A. Total Cost = Cost of Production + Selling & Distribution Overheads.
10 Classification of cost by function includes:
A. Production, Administration, Selling & Distribution
B. Only Fixed and Variable
C. Only Controllable and Uncontrollable
D. Only Normal and Abnormal
E. Only Direct and Indirect
Answer: A. Production/Admin/Selling & Distribution classify by function.
📍 Cost Centre & Cost Unit
11 A Cost Centre is:
A. A location/department/equipment for which costs are ascertained
B. Always identical to a Cost Unit
C. A tax filing category
D. A type of bank account
E. A GST registration category
Answer: A. A Cost Centre is a location/department for cost ascertainment.
12 A Cost Unit is:
A. The unit of product/service to which cost is charged
B. Always identical to a Cost Centre
C. A type of bank guarantee
D. A GST rate slab
E. A tax deduction
Answer: A. A Cost Unit is the unit to which cost is charged.
13 "Per kWh" or "per passenger-km" are examples of:
A. Cost Centres
B. Cost Units
C. Tax deductions
D. GST rates
E. Cost Accounting Standards
Answer: B. These are examples of Cost Units.
14 A "Machining Department" within a factory would typically be treated as a:
A. Cost Unit
B. Cost Centre
C. A tax return
D. A GST invoice
E. A Bill of Exchange
Answer: B. A department is typically a Cost Centre.
15 Identifying appropriate Cost Centres and Cost Units primarily supports:
A. Accurate cost ascertainment and control
B. Filing income tax returns only
C. Setting exchange rates
D. Determining GST rates
E. Issuing bank guarantees
Answer: A. These concepts support accurate cost ascertainment/control.
📈 Management Accounting & Its Relationships
16 Management Accounting is used primarily for:
A. External statutory reporting only
B. Internal planning, control and decision-making
C. Filing GST returns exclusively
D. Setting the repo rate
E. Issuing share certificates
Answer: B. Management Accounting serves internal decision-making.
17 Compared to Cost Accounting, Management Accounting is:
A. Narrower in scope
B. Broader in scope
C. Identical in scope
D. Unrelated entirely
E. Only used by banks
Answer: B. Management Accounting is broader than Cost Accounting.
18 The hierarchy from narrowest to broadest is:
A. Financial Accounting → Cost Accounting → Management Accounting
B. Management Accounting → Cost Accounting → Financial Accounting
C. Cost Accounting → Management Accounting → Financial Accounting
D. All three are identical in scope
E. There is no defined hierarchy
Answer: A. Financial → Cost → Management Accounting is the natural hierarchy.
19 Management Accounting draws data from:
A. Only financial accounting records
B. Both financial and cost accounting data, plus other information
C. No accounting data whatsoever
D. Only GST returns
E. Only tax filings
Answer: B. Management Accounting draws on both FA and CA data.
20 All three accounting disciplines ultimately feed into the broader:
A. Financial Management function
B. GST Council
C. RBI's monetary policy
D. Companies Act, 2013
E. Negotiable Instruments Act
Answer: A. All feed into the broader Financial Management function.
🛠️ Job Costing & Batch Costing
21 Job Costing is most suitable for:
A. Continuous, mass production of identical units
B. Specific, identifiable jobs/orders (e.g., custom furniture)
C. Large infrastructure projects only
D. Bank interest calculations
E. GST computation
Answer: B. Job Costing suits specific, identifiable jobs.
22 A Job Cost Card tracks:
A. Material, labour and overhead for a specific job
B. Only tax deductions
C. Only GST rates
D. Only bank interest
E. Nothing of relevance
Answer: A. Job Cost Cards track material/labour/overhead per job.
23 Batch Costing treats which unit as the cost unit?
A. A single individual item
B. A batch (group of identical units)
C. An entire year's production
D. A department
E. A tax return
Answer: B. A batch is the cost unit in Batch Costing.
24 Cost per unit under Batch Costing is calculated as:
A. Batch Cost ÷ Batch Size
B. Batch Cost × Batch Size
C. Batch Size ÷ Batch Cost
D. Total Cost − Batch Cost
E. Batch Cost + Batch Size
Answer: A. Cost per unit = Batch Cost ÷ Batch Size.
25 Batch Costing is best described as a variant of:
A. Process Costing
B. Job Costing
C. Contract Costing
D. Service Costing
E. Standard Costing
Answer: B. Batch Costing is a variant of Job Costing.
🏗️ Contract Costing
26 Contract Costing is used for:
A. Small, identical daily transactions
B. Large, long-duration projects like construction
C. Bank interest calculations only
D. Continuous chemical production only
E. Retail sales tracking
Answer: B. Contract Costing suits large, long-duration projects.
27 "Progress Payments" in Contract Costing are based on:
A. Work certified by an architect/engineer
B. A fixed amount unrelated to progress
C. The contractor's personal preference
D. Government tax rates
E. GST filings
Answer: A. Progress payments are based on certified work.
28 "Retention Money" is:
A. Paid in full immediately, with no withholding
B. Withheld as security until the defect-liability period ends
C. A type of tax deduction
D. A GST component
E. Paid only to the government
Answer: B. Retention money is withheld as security.
29 An "Escalation Clause" allows:
A. Contract price adjustment for cost increases beyond a threshold
B. Automatic contract cancellation
C. No price adjustment under any circumstances
D. A GST rate change
E. A tax exemption
Answer: A. Escalation clauses allow price adjustment for cost rises.
30 On incomplete contracts, profit recognition is generally:
A. 100% recognised immediately, regardless of completion
B. A conservative fraction of notional profit, based on percentage completion
C. Never recognised at all until 20 years later
D. Recognised only after the contractor's retirement
E. Recognised only for government contracts
Answer: B. A conservative fraction based on completion is recognised.
⚙️ Process Costing
31 Process Costing is best suited for:
A. Continuous, mass production of homogeneous units
B. Unique, one-off custom orders
C. Large infrastructure projects only
D. Bank loan appraisal
E. GST filing
Answer: A. Process Costing suits continuous, mass production.
32 Normal Process Loss is:
A. Charged directly to the Costing P&L Account
B. Absorbed by the cost of good units produced
C. Ignored entirely
D. Refunded by the government
E. Treated as a capital expense
Answer: B. Normal loss is absorbed by good units' cost.
33 Abnormal Loss/Gain in Process Costing is:
A. Absorbed silently into good units' cost
B. Charged/credited directly to the Costing P&L Account
C. Ignored entirely
D. Treated as GST
E. Never occurs in practice
Answer: B. Abnormal loss/gain goes to the Costing P&L directly.
34 "Equivalent Units" are used to:
A. Convert partially completed WIP into equivalent fully-completed units for costing
B. Eliminate all WIP entirely
C. Calculate GST liability
D. Determine tax deductions
E. Set exchange rates
Answer: A. Equivalent Units convert WIP for fair cost allocation.
35 "Inter-Process Profit" arises when:
A. Output is transferred to the next process at a price above cost
B. No transfer between processes ever occurs
C. All processes are combined into one
D. GST is charged internally
E. Tax is deducted at source
Answer: A. Inter-process profit arises from above-cost internal transfer pricing.
🔗 Joint Products, By-Products & Service Costing
36 Joint Products are:
A. Two or more significant-value products from the same process/inputs
B. A single product with no by-products
C. Only tax-related outputs
D. Only financial instruments
E. Only services, never goods
Answer: A. Joint Products are significant-value outputs of a shared process.
37 By-Products are characterised by:
A. Being of relatively minor value, produced incidentally
B. Being the primary, most valuable output always
C. Never being produced alongside a main product
D. Being identical to Joint Products in every respect
E. Requiring a separate factory always
Answer: A. By-Products are minor-value, incidental outputs.
38 Petrol, diesel and kerosene from crude oil refining are examples of:
A. Joint Products
B. By-Products only
C. Service costing units
D. Job costing outputs
E. Contract costing outputs
Answer: A. These are classic Joint Products.
39 Service (Operating) Costing is used for industries such as:
A. Transport, hospitals and hotels
B. Only chemical manufacturing
C. Only textile mills
D. Only shipbuilding
E. Only mining
Answer: A. Service Costing suits transport, hospitals, hotels.
40 "Cost per bed-day" is an example of a cost unit used in:
A. Job Costing
B. Service Costing (for hospitals)
C. Contract Costing
D. Process Costing for chemicals
E. Batch Costing
Answer: B. Cost per bed-day is a Service Costing unit for hospitals.
🔁 Comprehensive Review
41 A shipbuilding company constructing one large vessel over 3 years would most likely use:
A. Process Costing
B. Contract Costing
C. Service Costing
D. Standard Costing exclusively
E. No costing method at all
Answer: B. A long-duration vessel build fits Contract Costing.
42 A pharmaceutical company producing tablets in identical batches would use:
A. Batch Costing
B. Contract Costing
C. Service Costing
D. No costing method at all
E. Only Standard Costing
Answer: A. Identical-unit batch production fits Batch Costing.
43 A chemical plant running continuous production would use:
A. Job Costing
B. Process Costing
C. Contract Costing
D. No costing method at all
E. Only Batch Costing
Answer: B. Continuous chemical production fits Process Costing.
44 A custom furniture maker producing one-off pieces to order would use:
A. Job Costing
B. Process Costing
C. Service Costing
D. No costing method at all
E. Only Contract Costing
Answer: A. Unique, custom orders fit Job Costing.
45 A bank appraising a construction contractor's project should be aware that reported "profit" on an ongoing contract:
A. Reflects 100% of eventual contract profit, always
B. Is typically only a conservative, percentage-of-completion-based estimate
C. Has no relationship to the contract's progress
D. Is fixed permanently at contract signing
E. Is irrelevant to credit appraisal
Answer: B. Reported profit is a conservative, completion-based estimate.
46 The elements-of-cost buildup (Prime Cost → Works Cost → Cost of Production → Total Cost) is important for:
A. Understanding how overheads progressively load onto direct costs
B. Calculating GST rates
C. Setting the RBI's repo rate
D. Filing income tax returns
E. Issuing bank guarantees
Answer: A. This buildup shows how overheads load onto direct costs.
47 Both Joint Products and By-Products share the feature of:
A. Arising from a completely separate, unrelated process
B. Arising simultaneously from a shared process/inputs
C. Never being produced together
D. Having identical value always
E. Being irrelevant to costing
Answer: B. Both arise simultaneously from a shared process.
48 A hotel calculating its "cost per occupied room-night" is applying:
A. Job Costing
B. Service (Operating) Costing
C. Contract Costing
D. Process Costing for chemicals
E. Standard Costing exclusively
Answer: B. Cost per room-night is Service Costing.
49 The correct costing method to use depends primarily on:
A. The nature of the production/service process itself
B. The company's registered office address
C. The promoter's personal preference alone
D. The GST rate applicable
E. The RBI's repo rate
Answer: A. The nature of production/service dictates the costing method.
50 For JAIIB purposes, the single most important reason bankers study Cost Accounting is to:
A. Understand how a borrower's costing method affects reported profitability and appraisal
B. Personally set the borrower's product prices
C. Replace the need for financial statement analysis entirely
D. Avoid any interaction with manufacturing borrowers
E. Set GST rates for the borrower's industry
Answer: A. Understanding costing's impact on reported profitability aids appraisal.
Disclaimer: This article is prepared for educational and exam-preparation purposes only, as of September 2026. Candidates should cross-check the latest official IIBF syllabus and current notifications before the exam.