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ADVANCED COST ACCOUNTING - III

CAG 201

YASHWANTRAO CHAVAN MAHARASHTRA OPEN UNIVERSITYDnyangangotri, Near Gangapur Dam, Nashik 422 222, Msharashtra

Copyright © Yashwantrao Chavan Maharashtra Open

University, Nashik.

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The information contained in this book has been obtained byauthors from sources believed to be reliable and are correct to the bestof their knowledge. However, the publisher and its authors shall in noevent be liable for any errors, omissions or damagearising out of use of this information and specially disclaim any im-plied warranties or merchantability or fitness for anyparticular use.

YASHWANTRAO CHAVAN MAHARASHTRA OPEN UNIVERSITY

Vice-Chancellor : Dr. M. M. SalunkheDirector (I/C), School of Commerce & Management : Dr. Prakash DeshmukhState Level Advisory Committee

Dr. Pandit Palande Dr. Suhas Mahajan Dr. V. V. MorajkarHon. Vice Chancellor Ex-Professor Ex-ProfessorDr. B. R. Ambedkar University Ness Wadia College of Commerce B.Y.K. College, NashikMuaaffarpur, Bihar Pune

Dr. Mahesh Kulkarni Dr. J. F. Patil Dr. Ashutosh RaravikarEx-Professor Economist Kolhapur Director, EDMU,B.Y.K. College, Nashik Ministry of Finance

New Delhi

Dr. A. G. Gosavi Dr. Madhuri Sunil Deshpande Dr. Prakash DeshmukhProfessor Professor Director (I/C)Modern College, Shivaji Nagar, Pune Swami Ramanand Teerth Marathwada School of Commerce & Management

University, Nanded Y.C.M.O.U., Nashik

Dr. Parag Saraf Dr. S. V. Kuvalekar Dr. Surendra PatoleChartered Accountant Sangamner Associate Professor and Assistant ProfessorDist. AhmedNagar Associate Dean (Training)(Finance ) School of Commerce & Management

National Institute of Bank Management , Y.C.M.O.U., Nashik

Pune

Dr. Latika Ajitkumar AjbaniAssistant ProfessorSchool of Commerce & Management

Y.C.M.O.U., Nashik

Author Editor Instructional Technology Editing &

Programme Co-ordinator

1) Prof. V. V. Morajkar Dr. Mahesh A. Kulkarni Dr. Latika Ajitkumar Ajbani10, Vidya Society, Shikhare Wadi, Research Guide, Assistant ProfessorNashik Road - 422 101. BYK College of Commerce, School of Commerce & Management

2) Dr. Suhas Mahajan Nashik - 422 005. Y.C.M.O.U., NashikResearch Guide,Ness Wadia College of Commerce,Pune - 411 001.

Production

Shri. Anand YadavManager, Print Production CentreY.C.M. Open University, Nashik - 422 222.

Copyright © Yashwantrao Chavan Maharashtra Open University, Nashik.

(First edition developed under DEC development grant)

First Publication : September 2015

Type Setting : Omkar Computers and Printers, Nashik Road.

Cover Print :

Printed by :

Publisher : Dr. Prakash Atkare, Registrar, Y.C.M.Open University, Nashik - 422 222.

CONTENTS

Topic 1 Methods of Costing

Unit 1 Introduction and Job Costing 1-30

1.0 Introduction 1.1 Unit objectives 1.2 Introduction of methods of Costing 1.2.1 Installation of Costing

system 1.2.2 Overview of costing methods 1.3 Job Costing - Meaning and Definition 1.4 Features of Job

Costing 1.5 Advantages of Job Costing 1.6 Limitations of Job Costing 1.7 Procedure followed in Job

Costing 1.8 Preparation of Job Cost Sheet 1.9 Forms used in Job Costing 1.10 Industries which use Job

Costing 1.11 Illustrations 1.12 Summary 1.13 Key Terms 1.14 Questions and Exercises 1.15 Further

Reading

Unit 2 Batch Costing (Theory) 31-38

2.0 Introduction 2.1 Unit objectives 2.2 Meaning of batch costing 2.3 Features of batch costing 2.4

Advantages of batch costing 2.5 Disadvantages of batch costing 2.6 Industries which use batch costing 2.7

Accounting recording for batch costing 2.8 Economic Batch Quantity (EBQ) 2.9 Summary 2.10 Key

Terms 2.11 Questions 2.12 Further Reading

Unit 3 Batch Costing (Practical Problems) 39-50

3.0 Introduction 3.1 Unit objectives 3.2 Illustrations 3.3 Summary 3.4 Exercises 3.5 Further Reading

Unit 4 Contract Costing (Theory) 51-66

4.0 Introduction 4.1 Units objectives 4.2 Meaning of Contract Costing 4.3 Difference between Job

Costing and Contract Costing 4.4 Features of Contract Costing 4.5 Industries which use Contract Costing

4.6 Accounting recording in Contract Costing 4.7 Calculation of profit to be transferred to Profit & Loss.

Account in respect of contracts in different stages of completion 4.8 Summary 4.9 Key Terms 4.10

Theory Questions 4.11 Further Reading

Unit 5 Contract Costing (Practical Problems) 67-80

5.0 Introduction 5.1 Unit objectives 5.2 Illustrations on Contract Costing 5.3 Summary 5.4 Exercises

Unit 6 Process Costing (Theory) 81-96

6.0 Introduction 6.1 Units objectives 6.2 Meaning of Process Costing 6.3 Features of Process Costing

6.4 Difference between Job Costing and Process Costing 6.5 Advantages of Process Costing 6.6

Disadvantages of Process Costing 6.7 Collection of costs and procedure followed 6.8 Normal and Abnormal

Loss or gain 6.9 Inter- process profit 6.10 Summary 6.11 Key Terms 6.12 Questions 6.13 Further

Reading

Unit 7 Process Costing (Practical Problems) 97-118

7.0 Introduction 7.1 Unit Objectives 7.2 Illustrations on process costing 7.3 Summary 7.4 Exercises 7.5

Further Reading

Topic 2 Methods of CostingUnit 8 Operating or Service Costing 119-134

8.0 Introduction 8.1 Unit Objectives 8.2 Meaning of Operating Costing 8.3 Features of Operating Costing

8.4 Industries which use Operating Costing 8.5 Operating Cost Units 8.6 Formats of Operating Cost

Sheets 8.7 Summary 8.8 Key Terms 8.9 Questions 8.10 Further Reading

Unit 9 Operating Costing (Practical) 135-162

9.0 Introduction 9.1 Unit Objectives 9.2 Preparation of Operating Cost Sheets 9.2.1 Operating Cost Sheet

in Transport Organisations (Illustrations 1 To 7) 9.2.2 Operating Cost Sheet in Power Generating Organisations

(Illustrations 8 To 9) 9.2.3 Operating Cost Sheet in Canteens (Illustration 10) 9.3 Summary 9.4 Exercises

Topic 3 Cost Books

Unit 10 Cost Journal and Ledger 163-181

10.0 Introduction 10.1 Unit Objectives 10.2 Cost Accounting Record and Processes 10.3 Cost Accounting

Records Rules 10.4 Companies ( Cost Accounting Records) Rules, 2011 10.5 Cost Ledger and Control of

Cost 10.5.1 Cost Ledgers 10.2.2 Control Accounts 10.5.3 Accounting Treatment of Journal Entries 10.6

Summary 10.7 Key Terms 10.8 Questions 10.9 Further Reading

Unit 11 Integral and Non-integral Accounting System 182-236

11.0 Introduction 11.1 Unit Objectives 11.2 Integral and Non-integral accounting systems 11.2.1 Integral

System 11.2.2 Non-integral system 11.2.3 Accounting Treatment of Journal Entries 11.3 Reconciliation

and integration between Financial Account and Cost Account 11.3.1 Reasons for differences 11.3.2

Reconciliation of Cost and Financial Accounts 11.3.3 Methods of Reconciliation of Cost and Financial

Accounts : (I) Preparation of Reconciliation Statement (II) Preparation of Memorandum Reconciliation

Account 11.3.4 Illustrations 11.4 Key Terms 11.5 Questions and Exercises 11.6 Further Reading

INTRODUCTION

This book of self - instructional material is based on the syllabus for the

subject Advanced Cost Accounting (M.Com : CAG 201). It is written by taking

into consideration the revised syllabus prescribed for the M.Com students of

Yashwantrao Chavan Maharashtra Open University, Nashik from June, 2015.

This book contents 11 Units and these Units deal with mainly methods of

costing and also cost books and Integral and Non-integral Accounting system.

The authors have provided theoratical information related to the particular method

of costing which is followed by illustrations providing practical knowledge in the

subsequent Unit. It is hoped that this arrangement will help the students in

understanding the theory as well as the practical related to each method of costing

in an easy way. The students who register for the M.Com course are distant -

education students and are able to contact the teachers only few times and keeping

this point in mind, the authors have included a large number of practical illustrations

and sufficient exercises in each Unit.

Any valuable suggestions made by the teachers as well as the students will

definitely be welcomed by the authors.

The authors and editors are sincerely thank the authorities of YCMOU for

the guidance and co-operation given by them.

Editor Authors


Unit 1 Introduction and Job Costing

Unit 2 Batch Costing (Theory)

Unit 3 Batch Costing (Practical

Problems)

Unit 4 Contract Costing (Theory)

Unit 5 Contract Costing

(Practical Problems)

Unit 6 Process Costing (Theory)

Unit 7 Process Costing (Practical

Problems)

Unit 1 Introduction and Job Costing

Structure

1.0 Introduction

1.1 Unit objectives

1.2 Introduction of methods of Costing

1.2.1 Installation of Costing system

1.2.2 Overview of costing methods

1.3 Job Costing - Meaning and Definition

1.4 Features of Job Costing

1.5 Advantages of Job Costing

1.6 Limitations of Job Costing

1.7 Procedure followed in Job Costing

1.8 Preparation of Job Cost Sheet

1.9 Forms used in Job Costing

1.10 Industries which use Job Costing

1.11 Illustrations

1.12 Summary

1.13 Key Terms

1.14 Questions and Exercises

1.15 Further Reading

1.0 Introduction :

The method of cost accumulation and identifying them to products and

services depends upon the nature of operations in an enterprise. Therefore, cost

accounting procedure varies from one enterprise to another. For example, a non -

manufacturing enterprise may not follow the procedure of accumulating costs

which may be followed by a specific customer orders enterprise. Similarly, a hospital

may prefer to accumulate costs in a manner as to provide cost of outpatient treatment

or a specific medical treatment; a concern organising exhibitions and fairs may be

interested in knowing the cost of an exhibition to be organised in a particular

season. On the contrary, a contractor accumulates costs for each separate contract.

Although the procedure of accumulating costs may differ for different types of

Introduction & Job Costing

Advanced Cost Accounting - III

NOTES

1

organisations, the basic principles underlying cost accumulating procedures are

applicable to all types of organisations. Each cost accounting procedure or system

aims to provide information that is needed by the management of an enterprise.

1.1 Unit Objectives

After studying the information provided in this Unit you should be able to

understand :-

• Methods of costing ;

• Meaning of job costing ;

• Features of job costing ;

• Advantages and limitations of job costing; and,

• Documents which are prepared and used in job costing.

1.2 Introduction of methods of costing

According to the type of work preformed and the manner in which it is

preformed, for different types of industries different arrangements become

necessary for accumulation of cost data and accordingly different methods of

costing have come into existence. A brief information about the costing methods

is provided in this Unit.

1.2.1 Installation of Costing System

Cost Accounting is the process of accounting for cost, from the point at

which expenditure is incurred or to be incurred to the point of charging to the cost

centres and cost units. It has many uses which includes the preparation of statistical

data, the application of cost control methods and the ascertainment of the

profitability of activities carried out or planned. It is the means which consists of

concepts, methods and procedures used to measure, analyse or estimate the cost,

profitability and performance of individual products, departments and other sectors

of a company’s operations. It has internal and external use or both and it answers

to all the questions to the concerned parties. Thus, Cost Accounting is the process

and technique of determination of a product costs. It is a system of cost accumulation,

ascertainment and classification for product costing and managerial planning,

control and decision-making process. In short, Cost Accounting is a dynamic and

diverse field of activity.

Need of Costing Methods :

Methods of costing indicates a systematic procedure established for

ascertaining cost of a product, job, process or services by using the principles of

costing. A cost Accounting method is merely the process of ‘collecting and

presenting costs’. The nature of industries differs. Some are very simple and



NOTES

2

produce only one product e.g. brick-making. Some industries may produce only

one product but it may really be an assembly of numerous components e.g. bicycle,

motor car etc. Again there may be a homogeneous product but involving many

distinct stages and processes such as vegetable oil. In some case there may be

important by-products or joint products. e.g. petroleum products, sugar etc. It is

therefore, natural that the exact method employed to ascertain cost per unit should

depend on the nature of the industry. The general principle of ascertaining cost of

production per unit is the same, but the methods of ascertaining and presenting

the costs vary with the type of production. Hence, various methods are required

for ascertaining the costs because every business is different in its nature, in its

type of products, in methods of production etc.

1.2.2 Overview of Costing Methods

In manufacturing organisations, the principles of cost accumulation and

their identification with products are more clear and visible and therefore the

principles used by a manufacturing enterprise is often used by other organisations

also for accumulating costs. In manufacturing concerns, costs are accumulated

and assigned to products on the basis of the following cost accounting methods :

(A) Specific Order Costing and

(B) Operation Costing.

But according to Mr. Batty, “ Many costing systems do not fall neatly into

the category of either job or process costing. Often, systems use some features

of both the main costing systems”. It is, for this reason, that he uses the term’’

hybrid costing systems’’ for all those methods that combine the features of the

basic costing methods.

(A) Specific Order Costing :

The terminology of ICMA defines Specific Order Costing as

“the category of basic costing methods applicable where the work

consists of separate contracts, jobs or batches each of which is authorised

by a special order or contract.’’ This method is adopted in made-to-order type

of products which depends entirely on the specification of customers. As such

there is no standardization in the production process for want of uniformity. This

method may take any of the following :

1) Job Costing :

The terminology of ICMA defines Job Costing as “that form of specific

order costing which applies where work is undertaken to customers’

special requirements’’. Under this method, costs are collected and

accumulated for each job work order or project separately. Each job can

be separately identified, so it becomes essential to analyse the cost according

to each job. A Job Card is prepared for each job for cost accumulation.

This method is applicable to printers, machine tool manufacturers, foundries



NOTES

3

and general engineering workshops, interior decorator, painters, repair shops

etc.

2) Batch Costing :

The terminology of ICMA defines Batch Costing as “that form of specific

order costing which applies where similar articles are manufactured

in batches either for sale or use within the undertaking”. This method

is a variation of Job Costing. In this method, the cost of a batch or group of

identical products is ascertained and, therefore, each batch of products is a

unit of cost for which costs are accumulated. This method is used in biscuit

factories, bakeries, ready-made garments, hardwares like nuts, bolts, screws,

shoes, toys, drugs and pharmaceuticals etc.

Methods of costing

The following figure indicates different methods of Cost Ascertainment



NOTES

4

Fig. 1.1 Methods of Costing

1.ProcessCosting

2.Operating

orServiceCosting

3.Unit or

Single oroutput

Costing

4.Departm-

entalCosting

5.OperationCosting

Methods of Costing

Specific Order Costing

i.e. Job Costing

B

Operation Costing

i.e. Process Costing

A

Job Costing1.

BatchCosting

2.

ContractCosting

3.

Multiple OrComposite

Costing4.

Class CostMethod

5.

3) Contract Costing :

The terminology of ICMA defines Contract Costing as “ that form of

specific order costing which applies where work is undertaken to

customers’ special requirements and each order is of long duration”.

The cost unit here is a contract which is of a long duration and may continue

over more than one financial year. A separate account is kept for each

contract. This method is used by builders, civil engineering contractors,

constructional and mechanical engineering firms etc.

4) Multiple or Composite Costing :

It is an application of more than one method of cost ascertainment in respect

of the same product. This method is used in industries where a number of

components are separately manufactured and then assembled into a final

product. In such industries each component differs from the others as to

price, material used and process of manufacture undergone. So it will be

necessary to ascertain the cost of each component for this purpose, process

costing may be applied. To ascertain the cost of the final product, batch

costing may be applied. This method is used in factories manufacturing

cycles, automobiles, engines, radios, TVs, typewriters, aeroplanes, etc. This

method has been completely dropped from the latest ICMA Terminology.

5) Class Cost Method :

It is the method of Job Costing where the costing of goods is done by

classes instead of the unit or piece. Instead of the cost being separately

accumulated for each article or piece, the cost will cover a group of orders

of the same class of product.

B) Operation Costing :

The terminology of ICMA defines Operation Costing as

“The category of basic costing methods applicable where standardised goods

or services result from a sequence of repetitive and more or less continuous

operations or process to which costs are charged before being averaged

over the units produced during the period”. The following are the different

method of costing which fall under this category.

1) Process Costing :

The terminology of IMCA defines Process Costing as “that form of

operation costing which applies where the standardised good are produced”.

It is a method of costing where cost is ascertained at the stage of every

process and also after completing the finished production. It is used in

concerns where production follows a series or sequential process. Process

type of industries do not manufacture individual item to the specific

requirements of customers. As such, production is not intermittent but

continuous. Each process represents a distinct stage of manufacture and

the output of one process becomes the input of the following process. The

unit cost is arrived at by averaging the cost over the units produced, and



NOTES

5

Check Your Progress

i) Why different costingmethods are required indifferent industries

ii) What is meant by‘specific order costing’ ?Which methods areincluded under SpecificOrder Costing?

iii) What is meant by‘process costing’ ? Whichcosting methods areincluded under processcosting ?

cost per unit of each process is ascertained. Process Costing is used in a

variety of industries such as chemicals, oil refining, paper making, flour

milling, cement manufacturing, sugar, rubber, textiles, soap, glass, food

processing etc.

2) Operating or Service Costing :

The terminology of ICMA defines Service Costing as “that form of

Operation Costing which applies where - standardised services are

provided either by an undertaking or by a service cost centre within

an undertaking”. This method of costing is used by those undertakings

which render service as against manufacturing and supply of tangible

products. It is an essential method of costing where only the services are

rendered. It ascertains the cost of one unit of service rendered. This method

is applicable to transport undertakings, electricity supply undertakings,

hospitals, hotels, canteen, water works, gas companies, educational

institutions, etc. The cost unit depends upon the service provided. Usually,

a composite cost unit is used. For example tonne km. passenger km, patient

day or bed day, KWH, meal served, student hours etc.

3) Unit or Single or Output Costing :

It is a method of costing by the unit of production where manufacturing is

continuous and the units are identical. In some cases the units may differ in

terms of size, shape, quality, etc. This method is also called as Single Costing

because only one type of product alone is manufactured. Examples of

industries where this method is applicable are : Collieries, quarries, flour-

mills, paper mills, textile mills, brick-making, radio, cameras, pencils, slates,

dairy products etc. No separate set of books is generally required and

costing information is presented in the form of a statement known as Cost

Sheet.

4) Departmental Costing :

A factory may be divided into a number of departments and sometimes

good results are obtained by allocating expenditure first to different

departments and then to different products manufactured in that department.

Under this method, the cost incurred in maintaining a particular department

is ascertained. There are two objectives for using this method viz. to control

the cost of department and to charge the cost of a department to the finished

product.

5) Operation Costing :

It is a special type of Process Costing. It refers to the determination of cost

of operations, the cost unit is the ‘operation’ instead of the process. The

per unit cost is arrived at by dividing the cost of an operation by the number

of units completed in the operation centre. For large undertakings it is

frequently necessary to ascertain the cost of various operations. Cost control

can be exercised more effectively with operation costing.



NOTES

6

1.3 Job Costing

Meaning and definition :

The industries which manufacture articles or products or render services

against specific orders, use the Job Costing method for ascertaining the cost per

job or service. e.g. specific requirement of a customer, fabrication, repairs etc.

Each job has a separate identity. Under this method, individual jobs are identifiable

and each job become a separate cost centre. ICMA London defines Job Costing

as, “It is that category of basic costing method which is applicable where is

the work consists of separate contract, job or batches each of which is

authourised by specific order or contract.’’ Examples of Job order industries

are printing press, construction of buildings, bridges, ship-building, furniture making,

machine tool manufacturing, repair shops, painting works etc.

1.4 Features of Job Costing

i) Production is made or services are rendered against specific orders.

ii) A Job is clearly identifiable throughout the production process.

iii) Each job has its own characteristics and requires special attention.

iv) A distinguishing number is allotted to each Job order undertaken.

v) Each of the job becomes a separate cost centre.

vi) Costs are charged directly to individual job orders.

vii) The manufacturing cost of a Job order can be found out only after the Job

order is completed irrespective of the time taken for the same.

viii) Production is not made in anticipation of demand and for storing purpose.

1.5 Advantages

i) Cost of each job as per order is ascertained separately. This helps in finding

out the profit or loss on each individual job.

ii) It enables management to detect those jobs which are more profitable and

those which are not profitable.

iii) It provides a basis for determining the cost of similar jobs undertaken in

future. It thus helps in future production planning.

iv) It enables the management to know the trends in costs.

v) Profitability ratio of different jobs can be found out.

vi) It helps the managements to fix selling price of specific job on the basis of



NOTES

7

costs.

vii) It enables the management to provide quotations for similar type of jobs.

viii) Spoilage and defective work can be easily identified with specified jobs or

products.

ix) It enables the management to take corrective steps for improving the

efficiency in future.

x) It is essential for cost plus contracts.

1.6 Limitations

i) Calculations are more and hence there is possibility of errors which may

cause a serious loss.

ii) A system of budgetary control may not be used effectively.

iii) The system does not indicate any standard of performance efficiency.

iv) Comparison of cost of a job over any period of time cannot be made if

certain economic changes takes place in between.

v) It is expensive to operate as there is increase in clerial works.

vi) Job costing is a historical costing which ascertains the cost of job or product

after it has been manufactured.

1.7 Procedure followed in Job Costing

Job Costing is designed to show in detail their cost components of the total

cost executing a job. A Job Cost sheet is prepared for every job which is undertaken.

Material cost is accounted for in the job cost sheet on the basis of material requisition

concerned. Labour cost on the basis of time clocked in respect of the job with the

help of time tickets and factory overheads are added to those cost components

according to some reasonable methods of overhead absorption. Thus, the total

cost of the job consists of partly of direct costs and partly of costs arrived at by

assignments, allocation, apportionment and finally by absorption. Thus, the

procedure for Job Order Cost System may be summarised as follows:

1) Receiving an Enquiry :

Before placing an order with the manufacturer, usually the customer will

enquire about the price, quality to be maintained, the duration within which the

order is to be executed and other specifications of the job.

2) Estimation of the price of the job :

The cost accountant estimates the cost of Job after considering the various

elements of cost and keeping in mind the specification of customers. This is based



NOTES

8

on the cost of execution of similar Job in the previous year and considering the

possible changes in the various element of cost. The estimated cost of the job is

then communicated to the prospective customer.

3) Receiving of Order :

If the prospective customer accepts the quotation, the intention of

acceptance is forwarded to the respective departments so that preparation work

may begin even before the issue of the formal Production Order. The production

control department receives the order.

4) Job Number :

When an order has been accepted, an individual work order number must

be assigned to each such Job so that separate orders are capable of being identified

at all stages of production. Assignment of Job numbers also facilitates reference

for costing purposes in the ledger and convenient for use in various forms and

documents.

5) Production Order :

Once the job is accepted the Planning department prepares Production

Order. The Production Order is nothing but a form of instructions issued to the

foreman to proceed with the manufacture of the articles. Several copies of

Production Order are prepared and passed on to the following:

i) All departmental foremen connected with the job.

ii) Store-keeper for issuance of materials.

iii) Tool room - an advance notification of tools required.

A Production Order contains all the information that is relevant to the job

or products or service. It gives information about the following :

i) Particulars of job, product or service.

ii) Quantity to be produced.

iii) Date of starting and required date of completion of the job.

iv) Particulars of materials required.

v) Particulars of various operations involved in the perfomance and execution

of the job.

A specimen form of Production Order for a job is as follows :



NOTES

9

PRODUCTION ORDER

Name of Customer ......... Job No. .......

Date of Commencement ......... Date ........

Date of Completion ........ Bill of Material No. ........

Special instructions ........ Drawing attached - Yes/No ........

Quantity (Units) Description Machines to be used Tools required

sd/-

.............

Production Authorised by :

Head of Production Control Dept.

Fig. 1.2 Production Order for a job

The columns provided in the Production Order differ widely, depending

largely upon the nature of production. Some such orders are accompanied by the

blue prints and contain a bill of materials and detailed instructions as to which tools

and machineries are to be used.

6) Recording of Costs :

There are various costs required for the job. The raw material, the labour

costs, overhead charges etc. are directly chargeable to that particular production

order number. General Job Cost Sheet is prepared for each job.

The basis of collection of costs are :

i) Materials : Materials Requisition, Bills of Materials or Material Issue

Analysis Sheet.

ii) Wages : Operation Schedule, Job Card or Wages Analysis Sheet.

iii) Direct Expenses : Direct Expenses Vouchers.

iv) Overheads: Standing Order Number or Cost Account Number.

v) Completion of Job : On completion of a Job report is sent to Costing

Department. The expenditure under each element of cost is totalled and

the total job cost ascertained.



NOTES

10

7) Profit or Loss on Job : It is determined by comparing the actual expenditureof cost with the price obtained.

The Figure below is a diagram showing Job Order Execution Procedure. :

Fig 1.3 Diagram showing Job Order execution procedure

1.8 Preparation of Job Cost Sheet

A Job Cost Sheet is a cost statement prepared to analyse and ascertain the

actual cost incurred with respect to the individual jobs. Thus, a card for each Job

is maintained where in the total cost of the job is accumulated. A separate Job

Enquiry by a Customer

Preparation of Estimate by

the Estimating Department

Submission of Tender orQuotation to the customer

Receipt of Order by the SalesDepartment if Quotation isaccepted by the customer

Copies of Work Order toshop foreman, store-keeper, cost office andProduction Control de-partment

Preparation of WorkOrder by the ProductionControl Department oninformation from theSales Department

Copies of Invoice toCustomner, Cost Officeand Financial Account-ing Department

Preparation of Invoice by the Sales Department

Flow of information toCost Office regardingmaterial usage, labourand machine time

Execution of the Job andInspection

Completion of the Job

and Despatch

Completion Reportto Cost Office



NOTES

11

Cost Sheet is prepared to find out profit or loss on each job. It records with the

actual costs incurred on direct material, direct labour, direct expenses and overheads

on the Job as it passes through the factory. The total constitutes the cost of the

Job Order or operation. Cost of Material Consumed is collected from invoices

and material requisition note. The Direct Labour Cost is found out by operating

each workmen’s wages according to the time he spends on each job, as recorded

on job sheets. Overheads may be allocated as a simple percentage of material

cost or by some such other method as is appropriate and practicable for the

organisation concerned. On completion of a job the various elements of costs are

summed together and the total cost is ascertained. The total cost is then divided

by the number of jobs completed or units produced to ascertain the cost per job or

unit.

A specimen of Job Cost Sheet is as follows :

JOB COST SHEET

Customer ........ Job No. ............

Date of Commencement ....... Date of Completion .......

Material Cost Labour Cost Factory Overheads

Date Material Amount Date Hour Rate Amount Date Hours Rate Amount

Req. No. ` ` ` ` `

Total Total Total

Profit or Loss Cost Summary

` `

Price Quoted ........ Material

Less: Cost ......... Add : Labour (+)

......... Add : Factory Overhead (+)

Profit or Loss ........ Add : Administration Overhead (+)

......... Add : Selling Overhead (+)

Total Cost

Fig. 1.4 : Job Cost Sheet



NOTES

12

(Absorbed)

1.9 Forms used in Job Costing (Documentsprepared for recording job costing)

Following are the various forms used in Job Costing method :

i) Production Order : It is a written authority to factory foreman to proceed

with a job.

ii) Bill of Materials : It is a complete schedule of materials, parts etc. required

for a particular Job or Production order.

iii) Operation Schedule : There are various operations of a job, e.g. turning,

drilling, milling, assembling, etc. It contains name of Job, Name of operation,

Description of operation, starting time and Completion time, etc.

iv) Tool List : It is a list of all types of tools required for a particular job. It is

given alongwith schedule and instruction cards.

v) Planning Board : It is nothing but a time-table of a particular job to be

done. It sets the time for processing the various jobs.

vi) Move Tickets : There are various steps in completion of the job. There is

a progress of each job which is checked off on the operations schedule.

The move tickets are sent alongwith each lot at the time of transfer to the

next department.

1.10 Industries which use job costing

Job costing method is generally applied in following industries :-

i) Construction Industries.

ii) Engineering Industries.

iii) Ship Building Industries.

iv) Fertilizer Making Industries.

v) Automobile Service industries.

vi) Repair shops Industries.

vii) Machine Manufacturing Industries

viii) Tool Manufacturing Industries.



NOTES

13

Check Your Progress

i) Explain the meaning of‘Job Costing’ and givedefinition of Job Costing.

ii) What are the features ofJob Costing ? Mentionadvantages andlimitations of JobCosting.

iii) Briefly mention theprocedure followed underJob Costing.

iv) Which documents areprepared and used in JobCosting ? Give theformats of ‘ProductionOrder’ and ‘Job CostSheet’.

v ) In which industries use of‘job costing’ is made ?

1.11 Illustrations

ILLUSTRATION 1

Denso India Ltd. Dombivali provides the following information in respect

of Job No. 346, you are required to prepare a Job Cost Sheet for the period ended

31st March, 2012 showing the cost of job and selling price to give a profit of 20%

on sales.

`

Productive Wages 90,000

Materials used directly for job 90,000

Sundry Work Expenses 3,400

Selling Commission 1,200

Machinery Repairs 5,700

Advertising 2,500

Coal and Coke 3,000

Consumable stores 12,800

Directors Fees 3,000

Factory Insurance 1,400

Carriage Outward 9,200-

Unproductive Wages 24,200

Chargeable Expense 4,500

Depreciation on Office Furniture 3,700

Selling on Cost 10,000

Motive Power 10,100

Packing Charges 7,500

Technical Directors Fees 1,700

Salary to works Manager 5,400

Heating and Lighting 700

Office Rent 9,500

Direct Expenses Payable 500



NOTES

14

SOLUTION

Working Notes :

1. Calculation of Profit i.e.20% on Sales

SP = CP + P

100 = 80 + 20

If 80 CP = 20P

` 3,00,000 = ?

=` 3,00,000 x 20

80

= ` 75,000

In the books of Denso India Ltd., Dombivali

Job Cost Sheet for Job No. 346 for the period ended 31st March, 2012

Particulars Amount Amount

` `

Materials used directly 90,000

Add : Productive Wages 90,000

Add : Direct Expenses :

(i) Chargeable expenses 4,500

(ii) Direct expenses payable (+) 500

PRIME COST 1,85,000 1,85,000

Add : Factory Overheads :

(i) Sundry Works Expenses 3,400

(ii) Machine Repairs 5,700

(iii) Coal and Coke 3,000

(iv) Consumable Stores 12,800

(v) Factory Insurance 1,400

(vi) Unproductive Wages 24,200

(vii) Motive power 10,100

(viii) Technical Directors Fees 1,700

(ix) Salary to works Manager 5,400

(x) Heating and Lighting (+) 700

WORKS COST 2,53,400 2,53,400

Add : Administration Overheads :

(i) Directors Fees 3,000

(ii) Depreciation on office Furniture 3,700

(iii) Office Rent (+) 9,500

COST OF PRODUCTION 2,69,600 2,69,600



NOTES

15

Add : Selling and Distribution Overheads :

(i) Selling Commission 1,200

(ii) Advertising 2,500

(iii) Carriage Outward 9,200

(iv) Selling on Cost 10,000

(v) Packing charges (+) 7,500

COST OF JOB (1) 3,00,000 3,00,000

Add : Profit (20% Sales) + (+) 75,000

SELLING PRICE (2) 3,75,000 3,75,000

ILLUSTRATION 2

Following information relates to two different jobs of a manufacturing

concern Hikal Engineering Co. Ltd., Himmatpur for the month of March 2012 :

Job. No. 367 Job No. 376

Chargeable Expenses Payable 250 400

Process Materials 6,200 7,500

Cost of Special Designs 700 650

Direct Labour 4,800 1,700

Other Direct Expenses 2,050 3,950

Operating Labour 1,300 5,200

Prime Cost Materials 3,800 10,500

Productive Wages Outstanding 900 100

Additional Information :

(i) Distribution on Cost - 3% on Office Cost

(ii) Management Expenses - 20% on Works Cost

(iii) Works Overheads - 50% on Basic Cost

(iv) Selling Expenses - 7% on Cost of Production

Find out the Cost of Sales and Value of Sales to get a profit of 25% on

Value of turnover.



NOTES

16

SOLUTION

Working Notes :

1. Calculation of Profits i.e. 25% on Value of turnover

SP = CP + P

(i.e. value of turnover)

100 = 75 + 25

(a) Job No. 367 :

If 75 CP = 25P

` 39, 600 C.P. = ?

=` 39,600 x 25

= ` 13,200 75

(b) Job No. 376 :

If 75 CP = 25P

` 59,400 CP = ?

=` 59,400 x 25

= ` 19,800 75



NOTES

17

In the books of Hikal Engineering Co., Ltd. Himmatpur

Job Cost Sheet for the month of 31st March, 2012.

Job No. 367 Job No. 376

Particulars Amount Amount Amount Amount

` ` ` `

Direct Materials : 10,000 18,000

(i) Process Materials 6,200 7,500

(ii) Prime Cost Materials (+) 3,800 (+) 10,500

7,000 7,000

Add :Direct Wages 4,800 1,700

(ii) Operating Labour 1,300 5,200

(iii) Productive Wages

Outstanding (+) 900 (+) 100

Add :Direct Expenses : 3,000 5,000

(i) Chargeable Expenses Payable 250 400

(ii) Cost of Special Designs 700 650

(iii) Other Direct Expenses (+) 2,050 (+) 3,950

PRIME COST / BASIC COST 20,000 30,000

Add :Works Overheads

(50% on Basic Cost) (+) 10,000 (+) 15,000

WORKS COST/FACTORY COST 30,000 45,000

Add :Management Expenses

(20% on Works Cost) (+) 6,000 (+) 9,000

COST OF PRODUCTION/

OFFICE COST 36,000 54,000

Add :Selling Expenses

(7% on Cost of production) (+) 2,520 (+) 3,780

Add :Distribution on Cost

(3% on Office Cost) (+) 1,080 (+) 1,620

COST OF SALES (1) 39,600 59,400

Add :Profits

(25% on value of turnover) (+) 13,200 (+) 19,800

VALUE OF SALES (2) 52,800 79,200



NOTES

18

ILLUSTRATION 3

Globle Paper Mills Ltd., Gulbarga provides the following information relating

to a special job undertaken in the month of March 2012 from which you are

required to prepare a Job Cost Sheet showing separately the cost of the job and

value of the job. Also calculate the selling price per ton of the special paper

manufactured.

Direct Materials -

• Paper pulp - 500 tons @ ` 50 per ton.

• Other materials - 100 tons @ ` 30. per ton

• Raw paper - 75 tons @ ` 20 per ton

Direct Wages -

• Skilled workers- 100 workers @ ` 10 per day - worked for 5 days.

• Semi-skilled workers - 75 workers @ ` 8 per day - worked for 6 days

• Unskilled workers - 50 workers @ ` 5 per day - worked for 4 days.

• Administrative Overheads - 40% on Factory Cost.

Works on Cost -

• Fixed - 30% on Prime Cost Wages

• Variable - 15% on Basic Wages

• Semi - variable - 5% on Operating Wages

Selling on the Cost - 7% on Works Cost

Distribution Overheads - 3% on Manufacturing Cost

Operating Wages due but not paid ` 400

Defective Materials Returned - Direct Materials ` 1,500

Chargeable Expenses Payable ` 300

Special Paper Manufactured Tone 1,250

Prime Cost Expenses ` 6,700

Profits - 25% on value of sales



NOTES

19

SOLUTION

Working Notes :

1. Calculation of profits i.e. 25% on value of sales

SP = CP + P

(i.e. value of sales)

100 = 75 + 25

If 75 CP = 25 P

` 75,000 CP = ?

=` 75,000 x 25

75

= ` 25.000

2. Calculation of Selling price per ton of special paper manufactured -

If 1,250 Tons = 1,00,000

1 Ton = ?

=1 x 1,00,000

1,250

= ` 80 per ton

In the books of Global paper Mills Ltd., Gulbarga

Job Cost-Sheet for the month of March 2012

Units Produced - 1,250 Tons

Units Sold - 1,250 Tons

Particulars Amount Amount Amount

` ` `

Direct Materials : 28,000

(a) Paper Pulp - 500 x 50 25,000

(b) Other Materials - 100 tons x 30 3,000

(c) Raw Paper - 75 tons x 20 (+) 1,500

29,500

Less: Defective materials returned -

Direct Materials (-) 1,500



NOTES

20

Add : Direct Wages :

(a) Skilled workers - 10,000

100 workers x 10 x 5 days 5,000

(b) Semi - skilled workers -


(c) Unskilled workers -


Add : Operating wages due but not paid (+) 400

Add : Direct Expenses : 7,000

(i) Prime Cost Expenses 6,700

(ii) chargeable Expenses payable (+) 300

PRIME COST 45,000 45,000

Add : Works on Cost 5,000

(a) Fixed - 30% on Prime Cost

Wages i.e. 10,000 3,000

(b) Variable - 15% on Basic Wages

i.e. 10,000 1,500

(c) Semi-variable 5% on Operating wages

i.e. 10,000 (+) 500

FACTORY COST (+) 50,000 50,000

Add : Administrative Overheads

(40% of Factory Cost i.e. 50,000) (+) 20,000

COST OF PRODUCTION 70,000 70,000

Add : Selling on Cost

(7% of Works Cost i.e. 50,000) 3,500

Add : Distribution Overheads

(3% of Manufacturing Cost

i.e. 50,000) (+) 1,500

TOTAL JOB COST (1) 75,000 75,000

Add : Profit (25% on value of Sales) (+) 25,000 25,000

VALUE OF JOB

(@ Rs.80 per ton) (2) 1,00,000 1,00,000



NOTES

21

ILLUSTRATION 4

Ceekay Engineering Ltd., Churuchgate undertake jobs as per customer’s

requirements. In March. 2012 they have received an order from Kunal Enterprises,

Kandivali for a job order No. 243. The management expects 30% profit on value

of sales. The cost estimates for the Job No. 243 shows the following information.

`

Direct Materials 1,35,000

Direct Wages 35,000

Chargeable Expenses 10,000

Factory Overheads : 50% of Direct Cost

Administration oncost : 50% of Works Oncost

Selling and Distribution Expenses : 10% of cost of sales

Prepare a Cost Sheet for Job No. 243 showing clearly the cost built - up at

each stage and advise the management about the price to be quoted for the job.

SOLUTION

Working Notes :

1. Calculation of Selling and Distribution Expenses i.e. 10% of cost of

Sales.

Cost of production + Selling and Distribution Expenses = Cost of sales.

90 + 10 = 100

If 90 C. of P. = 10 S & D. E.

` 3,15,000 C. of P. = ?

=` 3,15,000 x 10

90

= ` 35,000

2. Calculation of Profit i.e. 30% on Value of Sales

SP = CP + P

(i.e. value of sales) (i.e. cost of sales)

100 = 70 + 30

If 70 CP = 30 P

` 3,50,000 C.P. =` 3,50,000 x 30

70

= ` 1,50,000



NOTES

22

In the books of Ceekey Engineering Ltd., Churchgate

Estimated Job Cost-Sheet for Job No. 243 for the month of

March 2012

Particulars Amount

`


Add : Direct Wages 35,000

Add : Chargeable Expenses (+) 10,000

DIRECT COST/PRIME COST 1,80,000

Add : Factory Overheads (50% of D.C. i.e. 1,80,000) (+) 90,000

WORKS COST (+) 2,70,000

Add : Administration Oncost

(50% of Works Oncost i.e. 90,000) (+) 45,000

COST OF PRODUCTION 3,15,000

Add : Selling and Distribution Expenses

(10% of Cost of sales) (+) 35,000

COST OF SALES 3,50,000

Add : Profit (30% of value of sales) (+) 1,50,000

PRICE TO BE QUOTED FOR THE JOB (1) 5,00,000

1.12 Summary

The nature of work to be performed differs from industry to industry and so

it becomes necessary to follow separate methods of costing for accumulation of

costs and for presenting the information as needed by the management. The methods

of costing are divided in two groups - specific order costing and operating costing.

In the group of Specific Order Costing the methods included are job costing, batch

costing, contract costing, multiple or composite costing and class cost method. In

the second group of operation costing the methods included are process costing,

operating or service costing, unit or single or output costing, departmental costing

and operation costing.

Job costing is that form of specific order costing which applies where work

is undertaken to customers’ special requirements. Job costing method is adopted

where the job, order or a project is undertaken and completed as per the

requirements of the customer and so cost data is accumulated and recorded for

each job, order or a project separately. Since costs are recorded for each job

separately it becomes possible to ascertain profit or loss for each job. A customer

makes enquiry with the concern to find out whether a certain work will be

undertaken by the concern as per the specifications mentioned by the customer

and how much price the concern will charge for doing that work. When the price

quoted by the concern is acceptable to the customer, he places an order for the

job. The work is completed by the concern as per the specification and is handed

over to the customer on receiving the quoted price. For each job a separate Job



NOTES

23

Cost Sheet is prepared in which costs incurred on account of materials used,

labour employed and overheads of the job are recorded separately and by comparing

total cost of the job with the price quoted for the job profit earned or loss suffered

is calculated.

1.13 Key Terms

i) Production Order : It is a document prepared by Planning Department

after receiving order from the customer and contains instructions and orders

to the foremen of sections to start production of articles for which order is

received from the customer.

ii) Job Cost Sheet : It is a sheet or card prepared for each job separately to

accumulate and analyse actual costs incurred for the specific job.


I - Theory Questions

(1) What is meant by ‘job costing’ ? Explain the features of job costing.

(2) What is ‘job costing’ ? Explain its advantages and limitations.

(3) What are the main features of job costing. Describe briefly the procedure

of recording costs under job costing.

(4) What is a job cost sheet ? What data is generally recorded in a job cost

sheet?

(5) Explain the documents which are prepared in job costing.

II - Multiple Choice Questions

(1) Which of the following is not ‘Process Costing’ -

(a) Service Costing

(b) Departmental Costing

(c) Operating Costing

(d) Contract Costing

(2) Special Order Costing is not related to -

(a) Job Costing

(b) Batch Costing



NOTES

24

(c) Service Costing

(d) Composite Costing

(3) In biscuit factories bakeries -------- method is used.

(a) Job Costing

(b) Batch Costing

(c) Multiple Costing

(d) Contract Costing

(4) Match the pairs.

Group I Group II

(i) Process Costing (a) quarries

(ii) Service Costing (b) automobiles

(iii) Batch Costing (c) bakeries

(iv) Composite Costing (d) hospitals

(e) paper making

Ans. : (i) - (e), (ii) - (d), (iii) - (c), (iv) - (b).

Ans. : (1 - d), (2 - c), (3 - b).

III - Exercises :

(1) Shreyas Engineering Works has received an enquiry for performing an

engineering job. The costing department has estimated that materials cost of the

job will amount to ` 6,000 and direct wages for the job will be ` 7,500. Factory

overheads are absorbed at 60% of direct wages and office and administration

overheads are absorbed at 20% of the prime cost. Assuming that the basis for

absorption of factory overheads and office and administration overheads remain

unchanged calculate the price to be quoted the job if a profit of 30% is to earned

on the cost of production of the proposed job.

(2) A factory uses job costing. The following data are available from the book

for the year ended 31st Dec. 2014.

`


Direct wages 7,50,000

Profit 6,09,000



NOTES

25

Selling and Distribution Overheads 5,25,000

Administration Overheads 4,20,000

Factory Overheads 4,50,000

Prepare a cost sheet showing Prime Cost, Factory Cost, Cost of Production,

Cost of Sales and Sales Value for the year ended 31st December, 2014.

The factory has received an order for a job to be completed in January,

2015. It is estimated that direct materials costing ` 1,20,000 and direct wages of

` 75,000 would be required for the job. The factory absorbs factory overheads as

a percentage of direct wages and administration overheads and selling and

distribution overheads as a percentage of factory cost and the same basis will be

used in the year 2015-2016. In the year 2015-2016, selling and distribution overheads

are expected to go up by 15% Assuming that the factory desires to earn profit at

the same rate on sales, how much price the factory should quote for the job to be

performed in January, 2015.

(3) X Ltd. has to quote a price for Job No. 338. The costing department has

provided following information about estimated costs for Job No. 338.

Direct Materials : 34 units at ` 15 per unit.

Direct Labour : Department A - 12 hours at ` 15 per hour

Department B - 10 hours at ` 8 per hour

The following additional information is available from the books of X Ltd.

Department A - Variable Overheads 1,80,000

Hours worked 36,000

Department B - Variable overheads Rs.80,000

Hours worked 20,000

Fixed overheads for the company ` 4,20,000

Total Hours worked 70,000

Profit desired from Job No. 338 is at 25% on the price quoted.

You are required to calculated price to be quoted for Job No. 338.

(4) From the following particular prepare Cost-Sheet for Job No. 55 and find

out the selling price of the job.

`

Materials directly issued for the job 21,400

Direct Expenses 5,000




NOTES

26

Provide 70% on Productive wages for works overheads,10% on Works

Cost for office Oncost and 5% on Cost of Production and Selling and Distribution

overheads, Profits shall be 25% on Selling price.

(5) From the following information in respect on Job No. 6379, you are required

to prepare a Job Cost Sheet showing the cost of the job and also calculate the

selling price to give a profit of 20% on Selling price.

`

Wages to different jobs 90,000

Materials used on jobs 95,000

General works overheads 6,400

Selling Commission 1,200

Machinery Repairs 5,700

Advertising 2,500

Consumable Stores 12,800

Directors Fees 3,000

Factory Insurance 1,400

Carriage Outwards 9,200

Wages to Indirect Labourers 24,200

Depreciation on Office Furniture 3,700

Selling on Cost 10,000

Motive Power 10,100

Packing Charges 7,500

Technical Directors Fees 1,700

Salary of work Manager 5,400

Heating and Lighting 700

Office Rent 9,500

(6) The following information relates to two different jobs of a manufacturing

business, Jamy Engineeing Works, Jamner for the month of May, 2012

Particulars Job No. 786 Job No. 687

` `

Cost of materials consumed 5,000 8,500

Direct expenses 3,500 5,000

Chargeable expenses 1,500 1,500



NOTES

27

Works overheads are 40% of Prime cost and Administrative on costs are

20% of Works cost.

You are required to prepare a Job Cost Sheet showing the cost of the job

and also calculate the selling price to give a profit of 20% on the selling price.

(7) The Production department of a manufacturing company provides the

following information for the month of October, 2012 :

Particulars

Direct Materials ` 54,000

Direct Labour ` 45,000

Labour hours worked Hrs. 36,000

Machine Operation Hrs. 30,000

Factory overheads ` 36,000

For a job order executed by the concern department during the period the

relevant information was as under :

Particulars

Direct Materials ` 12,000

Direct wages ` 6,400

Labour hours worked Hrs. 6,400

Machine Operation Hrs. 4,800

Prepare Job Cost Sheet, calculating the overhead charges chargeable to

the job by the following methods:

1. Direct Material Percentage rate. 2. Direct Wages Percentage rate.

3. Labour Hour rate. 4. Machine Hour rate.

(8) The following information relates to the activities of a production department

of a factory for the month of March, 2012 :-

Materials consumed ` 36,000

Productive wages ` 30,000

Direct labour hours worked Hrs. 25,000

Hours of machine operation Hrs. 20,000

Overheads chargeable to the department ` 25,000

If the cost of materials consumed on Job No. 123 is ` 2,000 and labour

charges amounted to 1,650 ascertain the Total Job Cost by the following methods

of allocating overheads.



NOTES

28

1. Percentage on direct wages

2. Machine hour rate

3. Direct labour hour rate

Labour hours worked for the job were 1,650 and hours of machine operated

for the job were 1,200.


1. ‘Advanced Cost Accounting’ - Nigam and Sharma

2. ‘Cost Accounting - Priciples and Practice’ - N. K. Prasad

3. ‘Cost Accounting’ - Jawahar Lal

4. ‘Theory and Practice of Cost Accounting’ - M. L. Agrawal

5. ‘Cost Accounting’ - B. K. Bhar



NOTES

29

UNIT 2 Batch Costing (Theory)

Structure

2.0 Introduction

2.1 Unit objectives

2.2 Meaning of batch costing

2.3 Features of batch costing

2.4 Advantages of batch costing

2.5 Disadvantages of batch costing

2.6 Industries which use batch costing

2.7 Accounting recording for batch costing

2.8 Economic Batch Quantity (EBQ)

2.9 Summary

2.10 Key Terms

2.11 Questions


2.0 Introduction

A batch is a cost unit consisting of a group of identical items which maintain

their identity through out one or more stages of production. When production is

done in batches accumulation of costs is done by following ‘batch costing method’.

Like job costing method, batch costing method is also a specific order costing.

Quantity produced in a batch is known as a lot and costs incurred for producing

the quantity in a lot are accumulated and recorded as cost of a batch. Theoritical

information related to the batch costing method is provided in this Unit.

2.1 Unit Objectives

After studying the information provided in this Unit you should be able to :

• Know the meaning of batch costing;

• Understand features, advantages and disadvantages of batch costing;

• Know the industries which use batch costing;

• Know how costs are recorded in batch costing;

Batch Costing (Theory)


NOTES

31

• Understand meaning and formula used for calculation of Economic Batch

Quantity.

2.2 Meaning of Batch Costing

Batch costing is that form of specific order costing under which each batch

is treated as a cost unit and costs are accumulated and ascertained separately for

each batch. Each batch consists of a number of like units.

Batch costing is a method of costing used by the concerns which produce

an identical product or a component in a very large number at a time. All units

produced at one time are collectively known as a batch and the cost of production

is calculated for a batch because a batch is regarded as a unit. When the batch

production becomes complete, production of the next batch is started. On the

basis of batch cost calculated, the cost of single unit of the product is decided and

selling price of that single unit of product is fixed by adding expected margin of

profit to the cost of production of the single unit of the product. In order to distinguish

a unit produced in one batch from the units produced in other batches, each batch

is given a separate number and that batch number is recorded on all the units of

the product belonging to that batch.

2.3 Features of Batch Costing

Batch costing which is also known as ‘lot costing’ has following important

features :

1. Batch costing is a variation of job costing. In job costing work of production

is carried out according to the specifications and instructions given by a

customer whereas in batch costing a large number of units of an identical

product are produced as ordered by a customer or for storage and sale in

the market.

2. Batch is a unit for cost calculation. In a batch the units of identical product

may be in hundreds or in thousands but each batch is regarded as an

independent unit and its total cost is equally divided by the number of units

produced in that batch in order to decide the cost of production of a single

unit of the product.

3. Each batch is given a separate number and the output of a batch is identified

by the number of the batch recorded on each unit of output of the batch.

Therefore a unit of the product is output of which batch can be easily found

out by referring to the batch number recorded on the unit, e.g. the number

of the batch in which bottle of medicine has been produced is recorded on

the bottle of medicine. If the contents of bottles of a batch are found harmful

to the patients, all bottles of that batch can be taken out of market for

investigation and if necessary for destruction, on the basis of the batch

number recorded on the bottles.



NOTES

32

4. Unit cost of a product varies with the size of the batch. If quantity produced

in a batch is small, the unit cost of the product is more and if the quantity

produced in a batch is large, the unit cost of the product of that batch is

less. Therefore, it is necessary to find out the economic batch quantity by

producing which the cost of production of a unit of the product can be kept

to the minimum.

2.4 Advantages of Batch Costing

Use of batch costing provides following advantages :

i) The accounting work is considerably reduced as a group of homogeneous

jobs constitute a batch.

ii) The variations in the costs arising under job costing is smoothened by means

of averaging such costs and spreading over the batch of articles. This

gives a consistent cost of production of every article in the batch.

iii) It takes the benefit of reduced cost of production arising out of EBQ.

iv) Supervision becomes very easy and effective. So idle time is eliminated.

v) The loss of time due to inter job transfer of materials, labourers and tools is

minimised under batch costing.

2.5 Disadvantages of Batch Costing

i) Determination of a batch from various jobs often poses problem. It is difficult

to come across absolute homogenity of jobs.

ii) When quantity of goods to be manufactured differs from customer to

customer, it becomes difficult to determine the batch.

iii) If the production of a batch is wrongly undertaken due to sub-standard of

materials or defective operation, the whole batch of articles are required to

be discarded which causes a great loss to the manufacturing concern.

2.6 Industries which use Batch Costing

All those industries which are engaged in the production of identical type

of product or component a large quanity at one time use a method of batch costing.

Such industries are pharmaceutical industry, industries engaged in production of

components used in radio sets, television sets, watches, manufacture of bicycles,

two-wheelers, automobiles, industries producing nuts, bolts, screws, etc.



NOTES

33

2.7 Accounting recording for Batch Costing

A batch consists of a number of units of a product which are of identical

nature. When a batch production is to be stared, the machines and equipment to

be used for the production are required to be set. The time required for setting -

up is recorded and the operator’s wages for such time are calculated. Overheads

to be charged according to the overhead absorption rate used are calculated for

the set-up time. The operator’s wages and the overhead charges for set-up time

are added to calculate the setting-up cost. (The setting -up cost is of fixed nature

and it remains same irrespective of the actual quantity to be produced in a batch.)

For batch production material is issued from the stores and all materials

issued for a batch is recorded against the particular number issued to the batch.

Direct workers working on a batch prepare time sheets showing the number

of batch and the starting time and finishing time for the work performed by them

for the batch production. As per the rate of remuneration applicable to the workers

the labour cost is calculated by the costing department and the total amount of the

labour cost is charged to the particular batch as direct labour cost.

Any expenses specially incurred for the batch are charged to the batch

cost as direct or chargeable expenses. Overheads are charged to the batch

according to the method seleted for aborption of overheads.

The setting-up cost, the direct material cost, direct labour cost, direct

exspenses and the amount of overheads charged are added together to find out

the total cost of production of a batch. This cost is divided by the quantity produced

in that batch to find out the cost per unit of the product. When a unit of the

product is sold to a customer at a certain selling price, the difference between the

selling price and total cost of the unit of product indicates the amount of profit

earned per unit.

2.8 Economic Batch Quantity (EBQ)

In order to control batch cost it is important to decide the quantity to be

produced in each batch which enables to keep the batch cost at optimum level.

Economic batch quantity is that quantity of a batch which enables the management

to keep the batch cost at minimum level. If the quantity of a batch is either

increased or decreased from the economic batch quantity determind the batch

cost will increase and become more than the batch cost incurred when economic

batch quantity is produced.

It has already been mentioned that the batch cost consists of two types of

costs as under :

i) Setting-up cost : This is the cost incurred before the batch production is

started. In order to do the production machines are used and it is necessary to

check the machines and do necessary adjustments in them so that they are ready

for operations. Oiling and supplying the required consumables must be taken care



NOTES

34

of. This work is generally done by the operator of the machine or the direct

worker who is appointed to do the work of production or to complete the expected

activity with the help of the machine.

The time taken by the worker and the rate at which he is paid wages decide

setting - up cost. The amount of the setting - up cost remains same and does not

change according to the quantity to be produced in each batch. Setting - up cost is

a fixed cost and therefore if the quantitty of the batch is small the per unit of

product cost increases and when the quantity to be produced in a batch increases,

the setting - up cost per unit of product becomes less.

ii) Carrying Cost : Carrying cost means the cost to be incurred for carrying one

unit of the product in inventory per annum. For deciding this cost, the cost of

production per unit of the product and the interest amount blocked up in the value

of the product when it is being stored for the year are taken into consideration . If

the cost of production of one unit of the product is large and the rate of intersest

is also high, it is obvious that the cost of carrying will become more.

When both these costs are added the batch cost becomes available. In

economic batch cost the setting-up cost and the carrying cost are approximately

equal and the total batch cost is the minimum. If batch quantity is increased or

decreased compared to the economic batch quantity the batch cost will be more

as compared to the batch cost calculated by using the economic batch quantity for

batch production.

Economic batch quantity can be calculated by following formula which is

similar to the formula used for calculating the economic order quantity (EOQ) in

respect of materials. Depending upon the details provided for calculating the

economic batch quantity two different formulas are required to be used. These

formulas are given below :-

1) When annual requirement of the product, the setting-up cost per batch and

the cost of carrying one unit of the product for the year is the information provided.

Economic Batch Quantity = 2 R.S

C

where R = Annual requirement of the product

S = Setting-up costs per batch

C = Carrying cost per unit of product for a year expressed in rupees.

2) When information about annual requirement of the product, setting-up costs

per batch, rate of interest p.a. on capital blocked in the product during storage and

the cost of production per unit of the product is provided :-

EBQ = 2 R.S

IC



NOTES

35

Check Your Progress

i) Define ‘Batch Costing’and explain the meaningof batch costing.

ii) What are the features of‘Batch Costing’ ?

iii) State the advantages anddisadvantages of ‘BatchCosting’.

iv) In which industries ‘BatchCosting’ is used ?

v) What do you understandby the terms ‘setting-upcosts’ and ‘carryingcosts’?

vi) What is meant by‘Economic BatchQuantity’ ? Give andexplain the formula usedfor calculating EconomicBatch Quantity.

vii) Briefly explain howaccounting recording isdone under ‘batchcosting’.

where EBQ = Economic Batch Quantity

R = Annual requirement of the product

S = Setting-up costs per batch

I = Rate of interest on capital

C = Cost of production per unit of product

2.9 Summary

Batch costing is a method of costing used for accumulation and ascertainment

of costs when a number of identical units of a product are produced by completing

one or more stages of production. The units produced are homogeneous and are

produced at the same time. The quantity which is produced constitutes batch

quantity. Each batch is separete and after completion of production of one batch

the production of the next batch is undertaken. Each batch is given a separate

batch number and the batch number is recorded on each unit of the product

manufactured in that batch. This helps in identification of a unit of product as

belonging to a particular batch. A batch cost sheet is prepared for each batch and

it records the batch number, date of commencement of the batch production, the

date of completion of the batch production and the quantity produced in the batch.

Materials cost, labour cost, direct expenses and proportionate amount of overheads

to be charged to the batch are recorded in the Batch Cost Sheet and total cost of

the batch production is calculated by adding the amounts of costs incurred for the

batch. As per small or large quantity produced in a batch, the unit cost of the

product increases or decreases. To minimise such variations in the unit cost

Economic Batch Quantity is calculated and actual production quantity is kept near

the EBQ.

2.10 Key Terms

i) Batch Costing : It is that form of specific order costing under which each

batch is treated as a cost unit. Each batch consists of a number of identical

units of the product and accumulation and recording of costs is done for

each batch separately.

ii) Economic Batch Quantity (EBQ) : Economic Batch Quantity is that quantity

of a batch at which the ‘setting up costs’ and ‘carrying costs’ are almost

equal and cost of the batch becomes minimum. Formula used for EBQ is :

E B Q = 2 R.S

C

where R = Annual Requirement of the product

S = Setting-up cost per batch

C = carrying cost unit of product for a year expreesed in rupees.



NOTES

36

2.11 Questions


(1) What is ‘Batch Costing’? Explain the features of batch costing.

(2) What do you understand by ‘batch costing’? Explain the procedure followed

for cost calcuation in batch costing.

(3) What is meant by Economic Batch Quantity? Explain the formula used for

calculating EBQ.

(4) Explain the meaning of batch costing. In which industries batch costing

method is used ?

(5) Explain the features, advantages and disadvaneages of batch costing.

(6) Write notes on.

(a) Setting - up costs.

(b) Production costs.

(c) Calculation of unit cost of a product in batch costing.

(d) Documents prepared in batch costing.


(1) Batch Costing is a ------- of job costing.

(a) variable

(b) valuation

(c) verification

(d) opposite

(2) Batch is a ------------- of cost calculation.

(a) price

(b) cost

(c) unit

(d) value

(3) Which of the following statement is ‘wrong’ ?

(a) ‘Setting-up cost’ is the cost incurred before the batch production is

started.

(b) ‘Setting-up cost’ is a fixed cost.



NOTES

37

(c) ‘Setting-up cost’ is divided by the quantity produced in the batch to

find out the cost per unit of the product.

(d) ‘Setting-up Cost’ is the variable nature and it fluctuates as per actual

quantity to be produced in a batch.

(4) ‘Carrying cost’ means the cost to be incurred for carrying ------ of the

product in inventory per annum.

(a) all units

(b) two units

(c) one unit

(d) 100 units

(5) Any expenses specially incurred for the batch are charged to the batch

cost as ----------

(a) indirect expenses

(b) unchargeable expenses

(c) direct expenses

(d) emergency expenses


Group I Group II

(a) Batch Costing (i) Example of Process Costing

(b) Setting up Cost (ii) Control batch cost.

(c) Carrying Cost (iii) Cost for carrying one unit of the

production.

(d) Economic Batch Quantity (iv)‘incurred before batch production’.

(v) ‘Variation of job costing’.

Ans. : (a) = (v); (b) = (iv); (c) = (iii); (d) = (ii).

Ans. : (1 - a), (2 - c), (3 - d), (4 - c), (5 - c).






NOTES

38

Unit 3 Batch Costing (Practical Problems)

Structure

3.0 Introduction

3.1 Unit objectives

3.2 Illustrations

3.3 Summary

3.4 Exercises

3.5 Further Reading

3.0 Introduction

In the previous Unit we have considered theoretical information related to

Economic Batch Quantity and preparation of Batch Cost Sheet for calculation of

batch cost and cost per unit of the product produced in a batch. In this Unit, a few

Illustrations are provided to understand how Economic Batch Quantity is calculated

and how Batch Cost Sheet is prepared to ascertain costs incurred for a batch

production.

3.1 Unit Objectives

After completing study of the various illustrations provided in this Unit you

should be able to :-

• Use the formula for calculating the Economic Batch Quantity; and

• Prepare Batch Cost Sheet showing total cost of a batch production and

calculate per unit cost of the product from the batch.

3.2 Illustrations

ILLUSTRATION 1

A firm engaged in the production of Y product uses batch costing. It has

given you following information :

Annual requirement of Y product is 9600 units. Setting-up costs per batch

amounts to `300. Annual cost of carrying one unit of Y product in the inventory

is ` 25.

You are required to calculate economic batch quantity for production of Y

product.

Batch Costing(Practical Problems)


NOTES

39

SOLUTION

Since rate of interest on capital and cost of production of one unit of Y

product is not provided in the problem following formula is used for calculating the

economic batch quantity for Y product :

EBQ = 2 R.S Where EBQ = Economic Batch Quantity

C R = Annual requirement of the product

S = Setting - up cost per batch

C = Cost of carrying one unit of the

product in the inventory for a year

EBQ = 2 x 9600 x `300

` 25

= 230400

= 480 units

480 units of Y product should be produced in each batch.

ILLUSTRATION 2

A manufacturer has accepted from a customer an order to supply him 600

components during one year. The setting - up cost per batch is estimated as 400

irrespective of the quantity of components produced in a batch. Production cost

of one component amounts to `120 and the interest rate is 10% p.a.

Calculate the economic batch quantity.

SOLUTION


IC

R = Annual requirement of the component

S = Setting - up cost per batch

I = Rate of interest p. a.

C = Cost of production of one

component.

EBQ = 2 x 600 x 400

.10 x 120

= 480000

12

= 40000

= 200 units

200 components should be produced in each batch.



NOTES

40

ILLUSTRATION 3

A factory which uses batch costing has entered into a contract with a

manufacturing concern to supply to it 1000 units of a component per month for

next three month. Costing department of the factory opens a batch cost sheet to

which the actual cost of materials issued for the batch production is charged. The

actual amount of direct wages incurred for the batch production is also charged

to the batch sheet. Factory overheads are incurred for the entire factory and are

charged to the batch production on the basis of direct labour hours. The component

is supplied to the manufacturing concern at a price of ` 48 per component.

Following details are provided to you for three months period.

Month Batch Output Material Cost Direct Wages Direct Labour Hours(Units) ` `

1st 1040 21,800 6,800 1360

2nd 1030 22,000 6,600 1340

3rd 1070 22,400 7,200 1420

The factory overheads and total direct labour hours for the same three

months were :

Month Factory Overheads Total Direct Labour Hours`

1st 65,000 13,000

2nd 72,000 14,500

3rd 70,000 14,000

You are required to show the total cost and total amount of profit per batch

as well as total cost per unit of the component and profit per unit of the component.

Also show the position of cost and profit for the order of 3000 units of the

component.

SOLUTION

Factory Overheads are charged to the batch production on the basis of

direct labour hour. The calculation of factory overheads to be charged to each

batch are calculated as under :-

Factory Overheads x Direct labour hours of the batch

Total direct labour hours

For 1st month : 65,000x 1360 = ` 6,800

13,000

For 2nd month : 72,000 x 1340 = ` 6653.80

14,500

For 3rd month : 70,000 x 1420 = ` 7,100

14,000



NOTES

41

Batch Cost Sheets for three months

Month 1st 2nd 3rd Total

Batch output (Units) 1040 1030 1070 3140

Sales value @ Rs.48 per unit ` 49,920 49,440 51,360 1,50,720

Materials Cost 21,800 22,000 22,400 66,200

Direct Wages ` 6,800 6,600 7,200 20,600

Factory overheads ` 6,800 6653.80 7,100 20553.80

Total Cost ` 35,400 35,253.80 36,700 107353.80

Profit per batch 14,520 14,186.20 14,660 43366.20

Total Cost per unit ` 34.04 34.23 34.30 34.19

Profit per unit ` 13.96 13.77 13.70 13.81

Overall position of the order for 3000 units of components :

Sales value of 3000 units at ` 48 per unit ` 1,44,000

Total cost of 3000 units at ` 34.19 ` 1,02,570

Profit from the order ` 41,430

(Note : Total units produced in three batches are 3140 units out of which 3000

units are supplied to the manufacturing concern. There remain 140 units

of the components in stock which can be sold by the factory and earn

profit from the sale.)

ILLUSTRATION 4

B Company manufactures component P-109 in one of its department fully.

The company uses batch costing method for calculation of cost for the component.

Materials used for manufacturing one unit of p-109 cost `45 and the operator

takes 30 minutes for producing one unit and he is paid wages at the rate of `20

per hour. Overheads are charged to the batch production at the rate of `10 per

machine hour. The operator spends 2 hours 30 minutes time for setting - up of the

machine irrespective of the actual number of units included in a batch.

Using the above information prepare batch cost sheets showing setting -

up cost, production cost and total cost of the batch assuming that the batch size is

(i) 10 units, (ii) 50 units and (iii) 100 units. Also calculate per unit setting-up cost,

production cost and total cost for each of the batch size mentioned above.



NOTES

42

SOLUTION

i) Cost sheet for a batch of 10 units of P- 109 component

Cost of Cost perthe batch unit

` ` `

Setting - up cost :

Wages of operator for 2 hours 30 minutes

at 20 per hour 50

Overheads for 2 hours 30 minutes at

` 10 per machine hour 25 75 7.50

Production cost : `

Materials cost 10 units at ` 45 per unit 450 45.00

Direct wages 5 hours at ` 20 per hour 100 10.00

Overheads for 5 machine hours at Rs 10 per hour 50 5.00

600

Total Cost (Setting - up cost + production cost) 675 67.50

ii) Cost Sheet for a batch of 50 units of P-109 Component


` ` `

Setting - up Cost :


at 20 per hour 50



Production Cost : `

Materials cost 50 units at ` 45 per unit 2250 45.00

Direct wages 25 hours at ` 20 per hour 500 10.00

Overheads for 25 machine hours at Rs 10 per hour 250 5.00

3000

Total cost (setting - up cost + production cost) 3075 61.50



NOTES

43

iii) Cost Sheet for a batch of 100 units of component P-109


` ` `

Setting - up cost :


at 20 per hour 50



Production Cost :

Materials Cost 100 units at ` 45 per unit 4500 45.00

Wages of operator for 50 hours at ` 20 per hour 1000 10.00

Overheads for 50 hours at Rs 10 per machine hour 500 5.00

6000

Total Cost (Setting-up Cost + Production Cost) 6075 60.75

(Note that the Setting-up Cost of the batch reduces as the number of units included

in the batch increase while the Production Cost per unit remains same at different

quantities in the batches.)

ILLUSTRATION 5

From the following information relating to Camlin India Ltd., find out

Economic Batch Quantity :-

i) Total number of units to be produced in a year 9000 units.

ii) Set-up Cost per batch `200

iii) Carrying Cost per unit of production 0.10

SOLUTION

EBQ = 2 US Where, EBQ = Economic Batch Quantity

C U = Units to be produced in a year

S = Set-up Cost per batch

C = Carrying Cost per unit of production.

EBQ = 2 x 9000 units x ` 200

` 0.10

=360000 units x

100

10

= 36000000 units

= 6000 units



NOTES

44

ILLUSTRATION 6

Balaji Industries has to supply 1000 paper cones per day to a textile Industry.

They find that when they start a production run they can produce 2500 paper

cones per day. The cost of building a paper cone in stock for a year of 360

working days is 0.80 and the set-up cost of production run is 10 How frequently

should production run be made ?

SOLUTION

EBQ = 2 US Where, EBQ = Economic Batch Quantity

C U = Units to be produced in a year, i.e.

360 days x 1000 paper cones

= 3,60,000 paper cones

S = Set-up Cost per batch, i.e. ` 10

C = Carrying Cost per unit of production

i.e. ` 0.80

EBQ = 2 x 360000 paper cones x ` 10

` 0.80

= 7200000 paper cones x 100

80

= 90,00,000 paper cones

= 3000 paper cones

Production run in terms of days :

= EBQ

Production per day

= 3000 paper cones

1000 paper cones

= 3 days

ILLUSTRATION 7

In Aarti Drugs Manufacturing Co. Ltd., a component Z oxan - 100 is made

entirely in a cost centre FDC. Materials cost ` 0.50 per component and each

component takes 10 minutes to produce. The machine operator is paid at 3 per

hour and the machine hour rate is ` 6 per hour. The setting-up of the machine to

produce Zoxan - 100 takes 140 minutes.

You are required to prepare a Cost Sheet showing the Production Cost,

Setting-up Cost and Total Cost assuming that a batch of

(i) 10 components, (ii) 100 components and (iii) 1000 components is produced

separately.



NOTES

45

SOLUTION

In the Books of Aarti Drugs Manufacturing Co. Ltd.,

Cost Sheet

For the period ended ------------

Component : Zoxan - 100

Batch : 10 components

Particulars Amount Total cost of Cost perthe Batch unit

` ` `

Production Cost (A) 20.00 2.00

Materials cost 5.00

(` 0.50 x 10 components)

Add Wages to machine operator 5.00

(` 3 x 1 hour 40 minutes

Add Machine Expenses 10.00

(` 6 x 1 hour 40 minutes)

Setting-up Cost (B) 21.00 2.10

Wages to Machine Operator 7.00

(` 3 x 2 hours 20 minutes)



Total Cost (A + B) (C) 41.00 4.10

In the Books of Aarti Drugs Manufacturing Co. Ltd.

Cost Sheet

For the period ended ----------



Particulars Amount Total cost of Cost perthe Batch unit

` ` `

Production Cost (A) 200.00 2.00

Materials Cost 50.00


Add Wages to Machine Operator 50.00




Setting-up Cost ----- (B) 21.00 0.21



Add Machine Expenses

(` 6 x 2 hours 20 minutes) 14.00

Total Cost (A + B) (C) 221.00 2.21



NOTES

46

In the Books of Aarti Drugs Manufacturing Co. Ltd.

Cost Sheet

For the period ended ----------



Particulars Amount Total Cost of Cost perthe Batch unit

` ` `

Production Cost (A) 2,000.00 2.00

Materials Cost 500.00


Add Wages to machine operator 500.00




Setting-up Costs (B) 21.00 0.021





Total Cost (A + B) (C) 2021.00 2.021

3.3 Summary

In this Units we have considered only Illustrations on the batch costing.

Two types of practical problems Viz. Calculation of Economic Batch Quantity

and preparation of Cost Sheet for finding out the Total Cost of batch and Unit

Cost of a product from the batch, we have considered. The formula used for

calculation of EBG is one of the following depending upon the information

provided :


C


S = Setting-up Cost per batch

C = Cost of carrying one unit of

the product in the inventory

for a year.

OR



NOTES

47


IC


S = Setting-up cost per batch

I = Rate of interest per annum

C = Cost of production of one unit

of the product.

[Some times in the formula, instead of R, U is used which stands for Units to be

produced in a year.]

While preparing Cost Sheet for batch production, details of element-wise

costs incurred for the batch production are shown under Production Cost and

Setting-up Cost and by adding these Production Cost and Setting-up Costs, Total

Cost for each unit of the product are shown in columnar form.

3.4 Exercises

(i) Henley Co. Hazaribag intends to produce 40000 units during a year in batches.

The Setting-up Cost for each batch is 160. The carrying cost per unit has

been estimated at ` 20 p.a.

Calculate Economic Batch Quantity.

(ii) Vasant Auto, Bangaluru are producing various parts of a passenger car in

batches. Annual demand of the part is 72000 units. The cost of setting-up

of tools for each new batch is ` 450. The cost of each batch is ` 30.

Company borrows for financing stocks @ 10% p.a. other carrying costs

are ` 2 per part p.a.

Calculate Economic Batch Quantity.

(iii) A jobbing factory has undertaken to supply 200 pieces of a component per

month for the ensuing six months. Every month a batch order is opened

against which material and labour hours are booked at actual. Overheads

are levied at a rate per labour hour. The selling price contracted for is `8

per piece. From the following data present the profit per piece of each

batch order and overall position of the order for 1200 pieces.

Month Batch output Material cost Direct wages Direct labour

Units ` ` Hours

January 210 650 120 240

February 200 640 140 280

March 220 680 150 280

April 180 630 140 270

May 200 700 150 300

June 220 720 160 320



NOTES

48

The other details are

Month Overheads Direct labour

` hours

January 12,000 4800

February 10,560 4400

March 12,000 5000

April 10,580 4600

May 13,000 5000

June 12,000 4800

3.5 Further Reading








NOTES

49

Unit 4 Contract Costing (Theory)

Structure

4.0 Introduction

4.1 Unit objectives

4.2 Meaning of Contract Costing

4.3 Difference between Job Costing and Contract Costing

4.4 Features of Contract Costing

4.5 Industries which use Contract Costing

4.6 Accounting recording in Contract Costing

4.7 Calculation of profit to be transferred to Profit & Loss. Account in respect

of contracts in different stages of completion.

4.8 Summary

4.9 Key Terms

4.10 Theory Questions


4.0 Introduction

Contract Costing is a method of costing which is included under the group

of specific order costing. It is a method of costing used in construction work or

mining work where the volume of work involved is very large and the period

required to carry on and complete the work is very long and the work may be

carried on over a number of years. The person or organisation which wants to get

the work done generally invites tenders from the interested parties requesting

them to mention the price at which they are ready to do the work as per the terms

and conditions mentioned in the advertisement or the tender form. A tender found

proper and acceptable is accepted and a contract is entered into with the party.

The person or organisation for whom the work is to be done is called ‘contractee’

and the person of organisation which is given the contract is called a ‘contractor’

Cost accumulation, recording of costs and ascertainment of profit of loss is done

separately for each contract and the method of costing used for this is called

‘contract costing’. Theoratical information about various aspects of contract costing

is provided in this Unit.

Contract Costing (Theory)


NOTES

51



NOTES

52

4.1 Unit Objectives

After studying the information provided in this Unit you should be able to :

• Understand meaning of contract costing ;

• Understand how contract costing differs from job costing ;

• Know features of contract costing;

• Understand exactly the meaning of different terms used in contract costing;

• Understand the accounting recording done in contract costing; and

• Understand how profit from contract is decided to be transferred to Profit

and Loss Account in respect of contracts which are in different stages of

completion.

4.2 Meaning of Contract Costing

The terminology of ICMA defines Contract Costing as “ that form of specific

order costing which applies where work is undertaken to customers’ special

requirements and each order is of long duration”. The cost unit in contract

costing is a contract which is of a long duration and may continue over more than

one financial year. In contract costing as the contract of each customer may be

different from the other contracts, it becomes necessary to open a separate contract

account for each contract.

Contract costing is a type of job costing. A contract is accepted by a contractor

to do a certain work for the contractee ( i.e. customer ) during an agreed time for

a certain price mentioned in the contract. A contract is regarded as a unit and the

costs incurred for a contract are recorded to an account opened for that contract

and profit or loss is calculated by comparing the total cost of the contract with the

contract price agreed upon at the time of signing the contract. Method used for

recording of costs related to the contract work and for ascertainment of profit /

loss on the contract is known as ‘contract costing’ which is also known as ‘terminal

costing’, Contract costing is, thus, a method of costing.

4.3 Difference between Job Costing and ContractCosting

Though contract costing is regarded as a type of job costing, there are

some important points of differences between contract costing and job costing.

These differences are as under :

1) Contract is a large work of construction or building undertaken by a contractor

and so at a time only a very few contracts are started by the contractor. In

case of job the work to be done is on small scale and so in job costing a


NOTES

53

Contract Costing (Theory)number of jobs are accepted and work related to them is carried out by the

owner.

2) Contract work is generally performed at the site of the contractee since it is

mostly construction work to be performed at a certain place owned by the

contractee. In job work it is performed in the factory or workshop of the

concern which has accepted the job order.

3) A contract takes a considerable time for completion and may go on over a

period of one year or more. A job on the other hand becomes complete in

few hours, days, weeks or months.

4) In case of contract majority of items of expenses are directly debited to the

contract account since they are incurred exclusively for the particular

contract. Only office and administration overheads of the head office are

required to be apportioned to the contract on some suitable basis. In case of

job work as the work is done in the factory premises only few expenses are

charged directly and exclusively to the job account and all other expenses

are required to be apportioned among a number of jobs which are carried

on and completed at the same time.

5) In case of contract as the work continues over a long period of time and

may not become complete in One financial year, amount of profit on a

contract cannot be easily calculated and transferred to the Profit and Loss

Account. Special rules and formulas are required to be used for this purpose.

In job costing since the accepted work/order can be finished in a short

period of time, profit / loss from each job completed can be easily calculated

and transferred to the Profit and Loss Account.

6) In case of a contract the contractor gives some part of the contract work to

sub-contractors who are specialists in these fields; e.g. in case of construction

of a building the contractor may give sub-contracts for work like plumbing,

electric-fittings, colouring etc. In job costing, generally, the need for giving

sub-contracts does not arise.

Even though there exist the above mentioned differences between contract

costing and job costing there is similarity between job costing and contract costing

and therefore it is said that ‘a contract is a big job and a job is a small contract’.

4.4 Features of Contract Costing

(1) In contract costing each contract is a separate unit of cost and the cost data

related to each contract is recorded as cost of that unit.

(2) Each contract is given a separate number for identification and the contract

account opened in the cost ledger bears that number.

(3) Contract is entered between contractor (who undertakes to do a certain

work) and contractee (who is the customer for whom the contract work is

to be performed ). The contract includes all the details such as name of the


NOTES

54

Contract Costing (Theory) contractor, name of the contractee, nature of work to be done with

specifications, period in which the contract is to be completed by the

contractor, contract price and the manner in which it is to be paid by the

contractee, penalties for non-completion and defective work, etc.

(4) Contract work is normally done at the site of the contractee and not in the

factory or premises of the contractor.

(5) Contract work is a huge work and so a contractor undertakes only a few

contracts at the same time. In some cases a new contract is undertaken

only after completion of the present contract.

(6) A contract being a large work needs a long period for its completion. Some

contracts are continued for a number of years before they become complete.

(7) As the contract work is performed at the site of the contractee most of the

items of cost such as material cost, labour cost and expenses for electricity,

telephone, insurance, etc. are incurred for each contract separately. All

these cost can be directly allocated to the contract. Only expenses incurred

by the head office/central office on office and administration work need

appointment among the different contracts which are being carried on

simultaneously by the contractor.

(8) In case of some contracts the contractor may give sub-contracts to specialists

in performing certain works. Thus sub-contracts may be given for electrical

fittings, plumbing work, glass fitting work, lift fitting work, etc.

(9) Since a contract may not become complete at the end of the financial year,

calculation of profit on incomplete contract and transferring it to Profit and

Loss Account at the end of the financial year needs careful consideration.

Special rules and formulas are required to be used for this.

(10) Contractee makes payment to contractor as the work of contract progresses.

The basis of the payment is the certificate issued by the architect of the

contractee for the work completed by the contractor upto the date of issue

of such certificate. A certain percentage of the value of work certified by

the architect is deducted as ‘retention money’ by the contractee and balance

amount is paid to the contractor.

4.5 Industries Which Use Contract Costing

The method of contract costing is used in construction industry where the

construction of roads, construction of dams, construction of bridge, multi storey

building, etc. is accepted as contract work. Contract costing is also used in ship-

building industry where the contract of building a cargo ship or a passenger ship is

accepted by the ship building company. Contract costing is also adopted when a

government agency gives contracts for completion of certain projects on cost-

plus basis because estimating contract price is not possible either for the contractors

or for the government agency giving such contract.

Check Your Progress

i) What is meant by‘contract costing’ ? Givedefinition of ‘contractcosting’.

ii) What is the differencebetween ‘job costing’ and‘contract costing’ ?

iii) Briefly mention thefeatures of ‘contractcosting’. In whichindustries contractcosting is used ?

iv) Explain how accountingrecording is done incontact costing.

v) Explain the followingterms :-

a) Contractee

b) Contract Price

c) Retention Money

d) Escalation Clause


NOTES

55

Contract Costing (Theory)4.6 Accounting recording in Contract Costing

When a contract is accepted by contractor a separate contract account

bearing a distinct number is opened in the Cost Ledger of the contractor. As

explained in the features of contract costing majority items of cost incurred for

the contract are treated as the direct expenses and are allocated to the contract.

They include materials cost, wages and direct expenses like electricity expenses,

telephone bill, insurance, etc. because they are incurred specifically for the contract.

Office and administration overheads of the head office are apportioned to the

contract by using percentage of materials cost or percentage of labour cost or

percentage of prime cost. If sub-contracts are given for some specialised work

the amount paid to the sub-contractors is also charged to the contract. If the

contract is completed in the financial year, the contract price received from the

contractee is credited to the contract account. Any material remaining unused at

the end of contract work is valued and recorded on the credit side of the contract

account. Similarly any material transferred to other contract or returned back to

the stores is also credited to the contract account. Contract account is closed to

find out amount of profit / loss on the contract which is transferred to profit and

loss account of the year. In case of incomplete contract the costing procedure is

different and it is explained at a later stage. The recording for the various costs is

explained in detail as under :

Material Cost :

As per the nature of contract work materials of different types are required

to be used. These can be provided from one or more of the following sources :-

a) Materials purchased from market and directly delivered at the site :

Materials required on large scale and which are to be used for a specific contract

may be purchased from the market and the supplier is instructed to give delivery

of such materials directly at the contract site. This helps in avoiding unnecessary

transport expenses in moving the materials to the store house and from there to

the contract site and also delay in providing the materials for contract work. The

invoices received from the suppliers are used for recording the materials cost.

b) Materials suppiled from store room : If materials required for contract

work are available in the store room of the contractor they are made available

form the store room against the materials requisition notes and the costing of such

materials is done in the usual way.

c) Materials transferred from other contracts : Sometimes a material at the

site of a contract is found in excess of the requirement of that contract. If such

excess material can be used on some other contact it is transferred to the site of

the other contract. A Material transfer note is prepared showing the details such

as nature, quality, quantity of materials transferred, the contract number of the

contract transferring it and contract number of the contract receiving it and other

relevant information. Costing department debits the value of the materials received

to the contract account receiving the materials and credits the contract account of

the contract which has transferred it. Sometimes material urgently required by a

contract and not immediately available in the market or store room may be


NOTES

56

Contract Costing (Theory) transferred from some other contract which possesses that material.

d) Materials supplied by contractee : If the contractee is in possession of

some materials which he wishes to be utilised for his contract, he may supply such

materials to the contractor by sending them to the contract site. Cost of such

materials is not debited to the contract account but is shown in a separate

memorandum record. The cost of materials received for contract from any one

or more sources mentioned above is debited to the contract account. Contract

account is credited with the cost of materials returned to the store room, materials

transferred to other contracts, materials unused lying at the contract site and cost

of materials sold. Cost of materials destroyed in accident at the contact site is also

credited to the contract account as abnormal loss.

Labour cost :

Wages of workers employed at site of the contract are recorded as direct

wages and charged to the contract account. Salaries of supervisors, engineers

and managerial personnel working at the site of the contract are also charged to

the contract account as direct wages. Pay roll is prepared for each contract

separately so that it becomes easy to calculate and charge the wages to the

contract account. If two or more contracts are started by the contractor at the

same time the payroll may be sectionalised, each section recording the names,

time spent on work and wages payable to the workers working on one contract.

When some workers work on two or more contracts, they are provided with time

sheets for recording the time spent by each worker on each job and on the analysis

of the time sheets of such workers the proportionate amount of wage to be charged

to each contract account is worked out and debited to the contract account. Along

with the wages paid any wages which are outstanding at the time of closing the

contract account should also be debited to the contract account.

Direct Expenses :

Direct expenses incurred for a contract are directly debited to the contract

account on the basis of voucher for payments made. These direct expenses are

telephone bills paid, electricity bill, item of stationery purchased for the contract,

cost of construction maps and plans, expenses of blue-prints, hire charges of plant

and special equipment used for the contract, etc.

Plant and Machinery :

For contract work a plant and machinery may be used. Depreciation on

such plant and machinery used for a contract can be recorded in one of the

following ways :-

a) Full value of the plant and machinery is debited to the contract account. When

the contract is complete or when the contract account is to be closed at the end of

the financial year the plant and machinery is revalued and this amount is credited

to the contract account. This recording result in contract account being debited

with the amount of depreciation on the plant and machinery.

If the plant and machinery is no longer required for the contract work it may be


NOTES

57

Contract Costing (Theory)sold at site and the sales proceeds are credited to the contract account. Instead of

selling the used plant and machinery if it is sent to some other contract site or

returned to the stores, it is recorded accordingly on the credit side of the contract

account with the revalued amount of the plant and machinery.

b) According to the second way of recording, only the amount of depreciation

calculated on the value of the plant and the machinery at a certain rate for the

period for which it has been used is debited to the contract amount.

Instead of purchasing the plant and machinery for a contract if it is obtained

and used on hire basis, only the hire charges are debited to the contract account.

Sub-contracts :

When the contractor give some specialised work of the contract on sub-

contract basis, the amount paid to the sub-contractor is directly debited to the

contract account.

Contact Price :

Contract price is an amount to be paid by contractee to contractor on

satisfactory completion of contract work. Contract price is decided at the time of

entering into a contract and agreed upon by both, contractor and contractee. If it

is a small contract which can be completed in a short period, say few months, the

contract price is paid to the contractor after deducting a certain agreed percentage

of it as retention money on completion of the contract. However, in case of a

large contract which may take a few years time for completion the full amount of

contract price cannot be paid on completion of the contract as it will create a

financial strain on the contractor. Therefore the contractee agrees to pay part of

the contract price as per the progress of the contract work.This results in creation

of ‘work’ certified and ‘cost of uncertified work’ in contract costing.

Work Certified :

When a contract takes more than one year for completion, the contractee

has to pay part amount of the contract price on completion of part of the contract

work. For this purpose the contractee appoints an architect (or a surveyor) to

decide how much of the contract work has been completed by the contractor.

The architect or surveyor does the inspection of work completed by the contractor

in respect of quantity as well as quality and issues a certificate stating the value of

work completed upto a particular date. This value includes some portion of profit

and so it is not the cost amount but a proportionate amount of the contract price.

This amount is called value of work certified.

Cost of uncertified work :

As stated above the architect issues a certificate for value of work completed

in respect of the contract upto a certain date. The contractor does not stop his

work on that date but continues his work after that date date upto the close of the

period. However, as this work is not inspected by the architect he does not certify

it. The cost incurred for this work is called ‘cost of uncertified work’. This amount

does not include any amount of profit but it is calculated at the actual cost incurred


NOTES

58

Contract Costing (Theory) by the contractor for the work done after the date of certificate issued by the

artchitect upto the date on which the contract account is being closed. The

contractee does not pay any amount to the contractor for the amount of cost of

uncertified work since this work will be considered and included in the next

certificate issued by the architect.

The amount of work certified and the cost of uncertified work are credited

to the contract account when contract account is closed at end of the year.

Retection Money :

A contractee does not make payment to the contractor for full amount of

work certified by the architect but deducts a certain percentage of this amount as

agreed and pays the net amount to the contractor. This amount deducted and not

paid to the contractor is called ‘retention money’. Retention money is usually 20

to 25 percent of the work certified. The contractee keeps this amount with him as

a reserve to compel the contractor to do rectification work in case some contract

work is found defective later on or to see that the contractor dose not leave the

contract work incomplete. The retention money can also be used by the contractee

to recover any penalty or fine levied against the contractor for delay in completing

the contract work or for unsatisfactory work performed by the contractor. The

retention money is paid to the contractor after completion of a specific period

mentioned in the terms of contract after the completed contract work is handed

over by the contractor to the contractee; e.g. in case of contract for construction

of a building the contractee keeps the retention money with himself for one rainy

season after the possession of the completed building is given to him.

Work-in-progress :

Instead of crediting contract account with the items of value of work

certified, cost of uncertified work, plant at site at the time of closing of contract

account and materials unused remaining at the site separately, it is possible to

record all these items to Work-in-progress account and show work-in-progress as

one item on credit side of the contract account. Work-in-progress account is debited

and contract Account is credited with the full amount of the work-in-progress. At

the begining of the next year the entry is reversed so that the amount of work-in-

progress is shown on the debit side of the contract account and costs incurred

during the next year appear below this item of work-in-progress account.

Work-in-progress also appears on assets side of the Balance Sheet. The

recording appears as under :


NOTES

59

Contract Costing (Theory)Balance Sheet as on ------

Assets

Work-in-progress :

Value of work certified ----------

Cost of uncertified work ----------

Plant at site ----------

Materials at site ----------

----------

Less : Amount received from the contractee ----------

----------

Less : Reserve for unrealised profit ---------- ----------

4.7 Calculation of profit to be transferred to Profitand Loss Account in respect of contracts indifferent stages of completion

In case of small contracts which are started and also completed in the

same financial year, there is no difficulty in calculation and transfer of profit to

Profit and Loss Account. If the credit side of a contract account is heavier than its

debit side, the difference is the amount of profit and the entire amount of profit is

transferred to Profit and Loss Account. In case a contract account shows a debit

balance it is the amount of loss on the contract account and is transferred to

Profit and Loss Account.

When a contract takes more than one financial year to complete

complications are created in calculation of profit on contract and in transferring a

certain part of it to Profit and Loss Account of the year. If a contract is expected

to be completed in 2 or more financial years, a ‘notional profit’ is first calculated at

the end of each financial year. Amount of notional profit is decided as under :

Value of work certified -----------

Add : cost of uncertified work -----------

-----------

Less : cost of work done to date -----------

Notional Profit -----------

Out of notional profit a certain amount is kept aside as a reserve to meet

any unexpected costs or losses and the balance of notional profit is transferred to

Profit and Loss Account.


NOTES

60

Contract Costing (Theory) If majority of work has been completed, insted of calculating notional profit

‘estimated profit’ is calculated as under :-

Contract Price ----------

Less : Total cost of contract incurred upto date ----------

----------

Less : Estimated cost for completion of remaining work ----------

Estimated Profit on contract ----------

Out of estimated profit amount a certain portion is transferred as a reserve

to meet any contingencies which may arise in respect of the contract and balance

of estimated profit is transferred to Profit and Loss Account.

On the basis of stage of completion of contract how much amount of notional

profit should be transferred to Profit and Loss Account is decided. Stage of

completion of a contract is decided by comparing the amount of work certified

with the contract price, e.g. if work certified in respect of a contract is 24,00,000

and its contract price is 36,00,000 stage of completion of the contract is

24,00,000 =

2

36,00,000 3

Rules that are generally followed while calculating amount of notional profit

to be transferred to Profit and Loss Account are as under :-

1) If stage of completion of a contract is less than one-fourth of the contract,

no profit should be transferred to Profit and Loss Account.

2) If stage of completion of a contract is more than one-fourth of the contract,

amount to be transferred to Profit and Loss Account is calculated as under:

Notional Profit x 1

3

If more conservative view is taken by the contractor following formula is

adopted :

Notional Profit x 1

x Cash received

3 Work certified

3) If stage of completion of a contract is one-half or more of the contract,

amount to be transferred to Profit and Loss Account is calcualated as under :

Notional Profit x 2 x Cash received

3 Work certified

4) If contract work is almost complete and estmated profit is calculated, the

amount of profit to be transferred to Profit and Loss Account can be decided in

any of the follwoing ways :

i) Estimated Profit x Work Certified

Contract price


NOTES

61


ii) Estimated Profit x Work Certified

x Cash received

Contract price Work certified

iii) Estimated Profit x Cost of work to date

Estimated total cost of contract

iv) Estimated Profit x Cost of work to date

x Cash received

Estimated total cost of contract Work certified

5) If a contract account shows loss, the entire amount of loss should be

transferred to Profit and Loss Account irrespective of the stage of completion of

the contract.

Escalation Clause :

This clause is sometimes included in contracts to protect interests of

contractors. Contract price is estimated and inclued in terms and conditions of a

contract at the time of entering into contract. However sometimes situation in the

economy is such that price of materials and wage rates applicable to labour are

likely to rise in near future and accurate estimation of such increase is not possible.

While fixing the contract price contractor tries to estimate the prices of materials

and wages rates as accurately as possible but if the prices increase beyond this

estimated limit, the cost of contract work is likely to exceed the contract price and

instead of earning profit from the contract he may be required to suffer loss. To

take care of this risk, escalation clause is inculed in the contract and this clause

makes provision for increasing the contract prices if the price of materials and/or

wage rates increase beyond a certain limit agreed upon by the comtractor and the

contractee. The escalation clause thus provides an upward revision in the contract

price and the contractor and the contractee agree to such revision under a certain

situation and upto a specific limit.

Along with the escalation clause, there may be a de-escalation clause included

in the contract to protect interests of the contractee. De-escalation clause provides

for a downward revision of conrtract price. When The prices of materials and

wage rates of labour decrease beyand an agreed limit, the contract price of the

contract is reduced by an agreed amount and the contractee is required to pay this

new (reduced) contract price to the contractor instead of the original contract

price which was decided before begining of the contract work.

Cost-plus Contracts :

Sometimes because of new nature of work or because of fluctuations in

market prices of materials or beacuse of difficully in deciding the exact period in

which the contract work can be completed, it becomes difficult for contractors to

estimate cost of contract work accuartely and quote a definite contract price.

Contractors may not be willing to take risk of doing the contract work under such

uncertain condition. Therefore to induce them to accept the contract and complete

the work, contract is offered to them on ‘cost-plus contract’ basis. Beginning of

cost-plus contracts can be traced to the second world war period when such

contracts were offered by the defence ministry and other Government

departments.

Check Your Progress

i) How profit is calculationin contract costing ?

ii) Explain, with the help offormulas, how amount ofprofit to be transferred toProfit and Loss Accountis calculated in case ofcontracts in differentstages of completion.

iii) What is meant by ‘cost-plus contracts’ ? Underwhich circumstancesthese contracts areentered into ?


NOTES

62

Contract Costing (Theory) In cost-plus contract, contract price is not agreed upon between contractor

and contractee. The contarctor is allowed to incur whatever costs are necessray

for completion of contract work and re-imburesement of such total costs together

with a certain fixed amount of profit or profit calculated at an agreed percentage

of total cost is made to the contractor by the contractee. In such contracts the

contractee is allowed to audit the books of accounts of the contractor to satisfy

himself that the costs incurred by the contractor are proper and the contractee is

not making payment for unnecessary and excessive expenses incurred by the

contractor. The contractor is also benefitted because he receives payment for all

costs incurred by him for the contract work and receives a definite profit as

agreed in the beginning.

Cost-plus contracts are generally given by the Central Government and

departments of State Governments when contract work is likely to take several

years for completion and in which the requirement of quantity of materials and

number of direct and indirect workers to be employed cannot be accurately decided.

Over such a long period prices of materials and wage rates for labour are also

likely to change serval times and estimation of cotract prices becomes very difficult.

So for works like construction of high-ways, construction of dams and canals,

building-up thermal power stations, laying down rails and constructions of railway

stations, etc. cost-plus contructs are given by the Government departments.

4.8 Summary

Contract costing is a method of costing followed by organisations which

accept Contracts from customers. A contract is accepted for construction of a

building, construction of road, construction of a bridge and construction of a dam.

A contract is a big job and an organisation accepts a few contracts at a time.

According to the nature of the contract work a long time-more than one year and

upto 5 or 6 years - is required to complete a contract. The contract is entered into

between the contractee (cutomber for whom the work is to be performed) and

the contractor (who agrees to do the work for the contractee) and it is in writing

containing information such as names of the contractor and contractee, the nature

of work, the site where the work is to be performed, specifications about the

work, time limit for completion of the contract, the contract price and manner in

which it will be paid by the contractee to the contractor, guarantee period, penalties

for delay in completion of the contract and for defective work, etc.

For every contract a separate contract account is opened in the Ledger. As

contract work is done at the site of the contractee, majority items of costs incurred

for the contract can be easily identified with the comtract and they are debited to

the contract account. Material cost, labour cost, direct expenses are debited to

the contract account. Office and administration overheads are apportioned to the

contract account by using the method of absorption of overheads followed by the

organisation.

Plant installed at the site is debited to the contract account with full value of

the plant and at the end of the financial year the value calculated for the used


NOTES

63

Contract Costing (Theory)plant is credited to the contract account. Alternatively, depreciation on plant is

calculated at decided rate for the period for which the plant has been used for

contract work and the amount of depreciation is debited to the contract account.

If there are any outstanding wages or expenses, they are debited to the contract

account. If the contract is completed in the financial year, the contract price is

credited to the contract account. Items of material returned to stores or sent to

the site of other contract, material remaining unused at the end of the year are

credited to the contract account and the diffrence between debit and credit side

total of the contract account indicates profit earned or loss suffered on the contract

and is transfered to the Profit and Loss Account.

In case of contracts which are incomplete at the end of the financial year,

the full contract price can not be credited to the contract account but the amount

of work-in-progress (total of work certified by the architect of the contractee and

work uncertified at cost price) is calculated and credited to the contract account.

If the contract account shows notional loss, the entire amount of the notional loss

is transferred to the Profit and Loss Account of the year. If contract account

shows notional profit, depending upon the stage of completion of the contract a

certain protion of the notional profit, calculated by using appropriate formula, is

tranferred to Profit and Loss Account of the year and remaining balance of the

notional profit is transferred to the Work-in-Progress Account.

When prices of materials and wage rates are rising but exact amount cannot

be determined, to protect the interests of the contractor, a clause called ‘escalation

clause’ is included in the terms and conditions of the contract. This clause gives

the right to the contractor to increase the contract price upto a certain limit, if the

price of materials and wage rates increase beyond a certain amount. De-escalation

clause included in the contract terms is opposite of the escalation clause which

protects the interest of the contractee by allowing him to reduce the contract

price upto a certain limit if the material prices and wage-rates fall up to a certain

amount as compared to the rates mentioned in the original contract.

When the exact cost of a contract can not be ascertained properly because

of new type of contract work or due to unpredictable changes in the economy, the

contractor and the contractee agree to a contract on ‘cost plus contract’ basis. In

such case the actual cost incurred by the contractor for the contract is ascertained

and an agreed margin of profit is added to the contract cost to decide the contract

price of the contract.

4.9 Key Terms

i) Contractor : Contractor is a person or group of persons who undertakes to

complete a certain work as per the requirements of a customer

within a particular time limit.

ii) Contractee : Contractee is the customer for whom the contract work is to

be completed.

iii) Contract Price : It is the amount agreed to be paid by the contractee to the


NOTES

64

Contract Costing (Theory) contractor on completion of the contract. [Part amount of

contract price is generally paid as per the progress of the

contact work.]

iv) Work Certified : It is the value of work completed by the contractor upto a

certain date. It is certified by the Architect of the Contractee.

v) Work Uncertified : It is the cost of work done by the Contractor from the

date of work certified upto the date on which contract account

is closed for calculation of profit/loss in respect of the contract.

vi) Retention Money : It is a certain percentage of the amount of Work Certified

which is not paid to the contractor but retained by the

contractee to cover any defective work or as a reserve for

delay in completion of the contract by the contractor.

The amount of the retention money is completely paid to the

contractor on expiry of an agreed period after entire contract

is completed.

4.10 Questions


1) What is ‘contract costing’ ? Explain the features of contract costing.

2) “A job is a small contract and the contract is a big job”. Explain.

3) Explain how accounting recording is done in contract costing.

4) Who are sub contractors ? What work they perform ? How will you treat

payments made to sub-contractors in contract costing ?

5) With the help of formulas explain how notional profit or loss shown by

contract accounts in different stages of completion is treated in contract

costing ?

6) What is meant by ‘escalation clause’ and ‘de-escalation clause’ ? Why

these clauses are included in terms and conditions of contract ?

7) Write notes on :

a) Work certified

b) Work completed but not certified

c) Escalation and de-escalation clauses

d) Cost-plus contracts

8) Explain the treatment given to materials and plant in contract costing.

9) Explain the following in context of contract costing :-


NOTES

65

Contract Costing (Theory)a) Work-in-progress

b) Retention money


(1) The cost unit in contract costing is -------- which is of a long duration and

may be continued over more than one financial year.

(a) a customer

(b) the contractee

(c) a contractor

(d) a contract

(2) In case of contract majority of expenses are directly --------

(a) debited to the contrat account.

(b) credited to the contract account.

(c) debited to the contractor account.

(d) debited to the contractee’s account.

(3) Contract work is normally done at the site of the ----------

(a) contractor

(b) contractee

(c) factor of the contractor

(d) premises of the contractor

(4) The amount paid to the sub-contractor is debited to the -----------

(a) Contractor Account

(b) Contractee Account

(c) Contract Account

(d) Customer Account

(5) Contract work takes a considerable time for completion and may --------

(a) be completed in one financial year

(b) go on over a period of one year or more

(c) be completed in a period of 90 days

(d) be completed in a one calender year


NOTES

66

Contract Costing (Theory) (6) Which of the following statement is ‘Wrong’ ?

(a) In case of some contracts the contractor may give sub-contracts

(b) The contract work is performed at the site of the contractee

(c) Contractee makes payment to contractor as the work of contract

progress

(d) Contractor makes payment to contractee as ‘retention money’


Group I Group II

(a) Contract Costing (i) part amount paid by the contractor

(b) Contract work (ii) amount paid by contractee to contractor

(c) Retention money (iii) amount with contractee as a reserve

(d) Contract Price (iv) at the site of contractee

(v) type of job costing

Ans. (a) - (v), (b) - (iv), (c) - (iii), (d) - (ii).

(8) A de-escalation clause is included in the contrat to ----------

(a) protect interests of the contractree

(b) protect interests of the contractor

(c) protect interests of the society

(d) control fluctuations in market price

Ans. : (1 - d), (2 - a), (3 - b), (4 - c), (5 - b), (6 - d), (8 - a).




3. ‘Cost Accounting - Principles and Practice’ - N. K. Prasad


Unit 5 Contract Costing (Practical)

Structure

5.0 Introduction

5.1 Unit objectives

5.2 Illustrations on Contract Costing

5.3 Summary

5.4 Exercises

5.0 Introduction

In Unit 4, we have considered theoratical information about various aspects

of Contract Costing such as meaning, features, industries which use Contract

Costing, Accounting Recording in Contract Costing and explanation of terms used

in Contract Costing. Also in respect of contracts in different stages of completion

how much of notional profit should be transferred to Profit and Loss Account was

also mentioned with the help of formulas. Now, in this Unit, we shall study a few

illustrations to understand how the contract accounts are actually prepared.

5.1 Unit Objectives

After understanding the recording shown in the Illustrations you should be

able to :

• Understand how different items are recorded in the Contract Account;

• Understand how the stage of completion of a contract is determined ; and

• Know how the amount of profit to be transferred to Profit and Loss Account

is calculated and recorded in case of contracts in different stages of

completion at the end of the financial year.


NOTES

67

Contract Costing (Practical)

5.2 Illustrations on Contract Costing

1) Buildwell Company has undertaken a contract to construct a 12 storey

building for a contract price of 15 crores. Construction work started on 1st April,

2008 and following data is available for the year ending on 31st March, 2009 :

`

Materials sent to site 80,00,000

Materials supplied from the store 9,50,000

Wages paid 1,17,00,000

Direct expenses 4,50,000

Plant installed at site 20,00,000

Overheads charge to the contract 3,00,000

Plant at site on 31-03-2009 16,00,000

Materials unused at site on 31-03-2009 52,000

Wages accrued on 31-03-2009 4,00,000

Work certified 3,60,00,000

Cost of work uncertified 17,20,000

Cash received from the contractee is 75% of work certified. Prepare

Contract Account for the year ending 31st March, 2009.

SOLUTION

In the Books of Buildwell Company

Dr. Contract Account for the year ended 31st March, 2009 Cr.

` `

To Materials sent to site 80,00,000 By Work-in- progress

To Materials supplied from Work certified 3,60,00,000

the store 9,50,000 Cost of uncertified

To Wages paid 1,17,00,000 work 17,20,000 3,77,20,000

To Direct expenses 4,50,000 By Plant at site on

To Overheads charged 3,00,000 31-3-2009 16,00,000

To Plant installed at site 20,00,000 By Materials unused

To Wages accrued on at site on 31-3-2009 52,000

31-3-2009 4,00,000

To Reserve A/c transferred

(Profit in reserve) 1,55,72,000

3,93,72,000 3,93,72,000

Note : Contract price is ` 15 crores and work certified is ` 3,60,00,000 which

means it is less than one-fourth of the contract price and so no profit is transferred

to Profit and Loss Account and the entire amount of profit is transferred to Reserve

Account.Advanced Cost Accounting - III

NOTES

68


2) A building contractor has accepted a contract for construction of a small

bunglow at a contract price of ` 1,20,00,000. The work started on 1-1-2001 and

upto 31-12-2001 the books of the contractor showed the following position :-

`

Materials sent to site 22,00,000

Wages paid 35,00,000

Plant installed at site an 1-1-2001 6,00,000


Overheads charged to the contract 65,000

Cash received from the contractee 64,00,000

(being 80% of work certified

Cost of uncertified work on 31-12-2001 3,10,000

Materials at site on 31-12-2001 1,82,000

Plant has been used throughout the year and is to be depreciated at 15%

per annum.

Prepare Contract Account showing the amount of profit to be transferred

to Profit and Loss Account for the year 2001.

SOLUTION

Dr. Contract Account for the year ended 31st March, 2001 Cr.

` `

To Materials sent to site 22,00,000 By work-in- progress

To Wages paid 35,00,000 Work certified 80,00,000

To Direct expenses 2,25,000 Cost of uncertified

To Overheads charged 65,000 Work on 31-12-2001

To Plant installed at site 6,00,000 3,10,000 83,10,000

To Notional Profit c/d 24,12,000 By Plant at site on 5,10,000

31-12 2001 (6,00,000 -

Depreciation 90,000)

By Materials at site

on 31-12-2001 1,82,000

90,02,000 90,02,,000

To Profit transferred to By Notional Profit b/d 24,12,000

Profit and Loss A/c 12,86,400


(Profit in Reserve) 11,25,600

24,12,000 24,12,000

Notes:- (1) Cash received from the contractee is 80% of work certified since

cash received is ` 64,00,000 amount of work certified is


NOTES

69


64,00,000 x 100

= 80,00,000 80

(2) Work certified is 80,00,000 and the contract price is 1,20,00,000 which

means more than half work has been completed. So the profit to be transferred to

Profit and Loss A/C is taken as 2/3 rd of notional profit as reduced by percentage

of cash received to work certified.

24,12,000 x

2 x 80

= ` 12,86,400 3 100

3) The following information relates to a building contract which was accepted

by B Ltd. for a contract price of `20,00,000 :

Year 2004 Year 2005

` `

Materials sent to site 2,00,000 5,68,000

Wages paid 1,70,000 5,00,000

Direct expenses 24,000 40,000

Overheads charged 4,000 10,800

Work certified 6,00,000 20,00,000

Cost of uncertified work 16,000 -

Materials at site 12,000 14,000

Plant sent to site 28,000 4,000

Contractee paid cash equal to 80% of work certified at the end of 2004 and

balance amount of the contract price in 2005 when the completed building was

handed over to him.

The value of plant at site at the end of 2004 was 14,000 and at the end of

2005 was 10,000

Prepare Contract A/c and Contractee’s A/c for the years 2004 and 2005

showing the amount of profit transferred to Profit and Loss A/c.


NOTES

70


SOLUTION

Dr. Contract Account for the year ended 2004 Cr.

` `

To Materials sent to site 2,00,000 By Work-in progress :

To Wages paid 1,70,000 Work certified 6,00,000

To Direct expenses 24,000 Cost of

To Overheads charged 4,000 uncertified work 16,000 6,16,000

To Depreciation on Plant 14,000 By Materials at site 12,000

(` 28,000 - 14,000)

To Notional Profit c/d 2,16,000

6,28,000 6,28,000

To Profit transferred to By Notional Profit b/d 2,16,000

Profit and Loss A/c 57,600


(Profit in Reserve) 1,58,400

2,16,000 2,16,000

Dr. Contract Account for the year ended 2005 Cr.

` `

To Work-in-Progress : By Contractee’s Account 20,00,000

Work certified 6,00,000 By Materials at site 14,000

Cost of uncertified

work 16,000

6,16,000

Less Profit in Reserve

1,58,400 4,57,600

To Materials at site b/d 12,000

To Materials sent to site 5,68,000

To Wages paid 5,00,000

To Direct expenses 40,000

To Overheads charged 10,800

To Depreciation on Plant 8,000

(` 14,000 + 4,000 - 10,000)

To Profit transferred to

Profit and Loss A/c 4,17,600

20,14,000 20,14,000


NOTES

71


Dr. Contractee’s Account Cr.

Year Year

2004 To Balance c/d 4,80,000 2004 By Bank A/C 4,80,000

4,80,000 4,80,000

Year Year

2005 To Contract A/c 2005 By Balance b/d 4,80,000

transferred 20,00,000 By Bank A/c 15,20,000

20,00,000 20,00,000

Notes : (i) Profit transferred to Profit and Loss A/c in the year 2004.

Notional Profit x 1

x Cash Received

3 Work certified

2,16,000 x 1

x 80

= ` 57,600 3 100

1/3rd portion of notional profit is taken since the work certified is more than 1/4th

but less than 1/2 of the contract price.

(ii) In the year 2005 the contract has been fully completed and so the entire

amount of profit `4,17,600 is transferred to Profit and Loss A/c.

(iii) In the year 2004 value of Plant sent to site is 28,000 and at the end of year

2004 value of Plant at site is mentioned as `14,000. So Plant depreciation is

`28,000 - 14,000 = 14,000.

(iv) For the year 2005, Plant at site brought down on debit side of the Contract

A/c is Rs.14,000 and in 2005 Plant of ` 4000 is sent to the site which makes the

value of Plant 18,000. At the end of the year value of Plant is given as 10,000.

So the amount of depreciation on Plant is `18000 - `10,000 = 8,000.

4) From the following particulars taken from Contract Ledger of a contractor

on 30-6-2012 prepare Contract Account and show the relevent recording as it

would appear in the Balance Sheet as on 30-6-2012 :

`

Materials sent to site by suppliers 82,000

Materials sent to site from the store 25,000

Wages paid 94,000

Direct expenses paid 11,500

Proportionate establishment expenses charged to contract 6,300

Plant installed at site 40,000

Wages accrued on 30-6-2012 5,200

Work certified 1,90,000

Cost of uncertified work 18,000

Materials at site on 30-6-2012 3,000

Plant at site on 30-6-2012 38,000Advanced Cost Accounting - III

NOTES

72


Out of materials sent to site, materials costing 6000 were found unsuitable

for the contract work and were sold for `4500.

Contractee pays cash equal to 90% of work certified.

Contract price is 8,00,000.

SOLUTION

Dr. Contract Account for the year ended 30th June, 2012 Cr.

` `

To Materials from suppliers 82,000 By Work-in-progress :

To Materials from the store 25,000 Work certified 1,90,000

To Wages paid 94,000 Cost of uncertified

Add accured 5,200 99,200 work 18,000 2,08,000

To Direct expenses 11,500 By Plant at site 38,000

To Establishment expenses By Materials at site 3,000

charged 6,300 By Materials sold 4,500

To Plant installed 40,000 By Profit and Loss A/c 1,500

(Loss on sale of materials)

By Loss transferred to

Profit and Loss A/c 9,000

2,64,000 2,64,000

Balance Sheet as on 30th June, 2012.

Capital & Liabilities ` Assets & properties `

Work-in- progress:

Wages occurred 5,200 Work certified 1,90,000

Work uncertified 18,000

2,08,000

Less Cash received

from contractee 1,71,000 37,000

Plant at site 38,000

Materials at site 3,000

Profit & Loss A/c

Loss from contract 9,000

Loss on sale of

materials 1,500 10,500

5) Illustration on contract almost complete and estimated profit from the

contract on completion is calculated :

A firm of contractors obtained a contract for construction of a portion of a

road, the contract price being ` 6,00,000. Work started on 1-1-2005 and cost

incurred during the year ended 31-12-2005 was as under :-


NOTES

73


`

Stores and materials issued 1,88,000

Wages paid 1,52,000

Sundry expenses 14,000

Establishment expenses charged 22,550

Plant installed 55,000

Out of materials issued, materials costing 18,000 were found unsuitable

for the contract work and were sold for ` 21,750.

A part of the plant costing ` 4000 was damaged and sold for ` 2,300.

On 31-12-2005, materials at the site were of ` 5,250 and value of plant at

site was ` 37,000.

Value of work certified was Rs.4,00,000 and cost of uncertified work was

` 38,000.

80% of work certified was paid by the contractee in cash.

The firm decided to estimate further expenditure to be incurred for completing

the contract work on 31-5-2006, to estimate the profit that will be available on

completion of the contract and transfer to Profit and Loss Account for the year

ending on 31-12-2005 a portion of estimated profit such amount which the work

certified on 31-12-2005 bears to the contract price.

The estimated costs for completion of the contract work were as under :-

1) In addition to stores and materials at site on 31-12-2005, stores and materials

of 52,000 will be required,.

2) Additional wage cost will amount to 45,000.

3) Sundry expenses to be incurred will be 3000 and establishment expenses

of ` 5,450 will have to be charged to the contract.

4) In addition to the Plant at site on 31-12-2005, Plant costing `12000 will

have to be installed at the site. On completion of the contract the residual

value of the Plant is estimated to be ` 4,500.

5) A provision of `25,000 will have to be made to take care of any

contingencies.

You are required to prepare Contract Account for the year ending 31st

December, 2005 and an estimated contract account on completion of the contract.


NOTES

74


SOLUTION

Dr. Contract Account for the year ending 31st Dec., 2005 Cr.

` `

To Stores and materials issued 1,88,000 By Materials sold 21,750

To Wages paid 1,52,000 By Plant sold 2,300

To Sunday expenses 14,000 By Profit and Loss A/c 1,700

To Establishment expenses 22,550 (Loss on Plant sold)

To Plant installed 55,000 By Work -in-progress

To Profit and Loss A/c 3,750 Work certified 4,00,000

(Profit on materials sold) Work uncertified 38,000 4,38,000

To Balance c/d 70,700 By Plant at site on

31-21-2005 37,000

By Materials at site

on 31-12-2005 5,250

5,06,000 5,06,000

To Profit transferred to By Balance b/d 70,700

Profit & Loss A/c 35,000

To Reserve A/c transferred 35,700

(Profit in Reserve)

70,700 70,700

Dr. Estimated Contract A/c on Completion Cr.

` `

To stores and Material 2,40,000 By Materials sold (Cost) 18,000

(188000 + 52000) By Plant sold (cost) 4,000

To Wages 1,97,000 By Plant at site 4,500

(1,52,000 + 45,000) (residual value )

To Sundry expenses 17,000 By Cost of contract c/d 5,47,500

(14,000 + 3,000)

To Establishment expenses 28,000

(22,550 + 5,450)

To Plant installed 67,000

(55,000 + 12,000)

To Reserve for contingencies 25,000

5,74,000 5,74,000

To Cost of Contract b/d 5,47,500 By Contractee’s A/c 6,00,000

To Estimated profit on Contract 52,500 ( Contract price)

6,00,000 6.00,000

Note : Amount of profit transferred to Profit and Loss Account for the year

ending 31st December, 2005 is calculated by using the following formula as stated

in the problem :- Advanced Cost Accounting - III

NOTES

75


Estimated Profit x Work Certified

Contract Price

= 52,500 x 400000

6,00,000

= Rs 35,000

In absence of specific instruction, any of the following formulas can be

used :-

1) Estimated Profit x Work Certified

x Cash received

Contract Price Work Certified

2) Estimated Profit x Cost of Work to date

Estimated Total Cost of Contract

3) Estimated Profit x Cost of work to date

x Cash received

Estimated Total Cost of Contract Work certified

5.3 Summary

For each contract a separate Contract Account is prepared. On the debit

side of the Contract Account materials purchased for the contract, materials supplied

from stores of the contractor, wages paid and payable, direct expenses, overhead

amount charged to the contract, plant installed at the site of the contract (or

depreciation on plant used for the contract) are items of costs related to the contract

are recorded. On the credit side of the Contract Account amount of work-in-

progress (consisting of amount of work certified and cost of uncertified work),

Value of plant at the site at the end of the period and Value of materials unused at

the site are the usual items recorded. If some material is returned to the store or

sold out or transferred to some other contract, recording for these items is also

shown on credit side of the Contract A/c. If there is any profit earned or loss

suffered on sale of material which was supplied for contract work, it should be

calculated and recorded separately to the Contract Account. By closing Contract

Account’s first part notional profit or loss is calculated. Notional profit amount is

brought down on credit side of Contract Account and depending upon the stage of

completion of the contract an appropriate portion of the notional profit is transferred

to Profit and Loss Account of the current year and remaining portion of the notional

profit is transferred to Reserve Account as profit in reserve. In case the Contract

Account shows a loss at the end of the financial year, the entire amount of loss is

transferred to Profit and Loss Account of the current year.


NOTES

76


5.5 Exercises

(1) The Swadeshi Construction Company has undertaken a Contract No. 185

and has provided following data related to the contract :-

`

Work certified by the architect 1,43,000

Cost of work completed but not certified 3,400

Plant installed at the site 11,300

Value of plant on 31-12-2013 8,200

Cost of materials sent to the site 64,500

Direct wages paid 54,800

Establishment overheads charged to the contract 3,250

Wages occurred on 31-12-2013 1,800

Direct expenses incurred for the contract 2,400


Materials returned to the store 400

Direst expenses accrued on 31-12-2013 200

Contract price 2,00,000


Prepare Contract No. 185 Account for the year ending 31st Dec., 2013 and

show how much profit you will transfer to Profit and Loss Account for the year

ending 31st December, 2013.

(2) Modern Contractors have undertaken two contracts A and B on 1-1-2006,

Following information has been supplied for the year ending 31-12-2006 in respect

of the two contracts :-

Contract A Contract B

` `

Materials sent to sites 85,349 73,267

Direct wages paid 74,375 68,523

Plants installed at sites at cost 15,000 12,500

Direct Expenditure 3,167 2,859

Establishment charges 4,126 3,852

Materials returned to store 549 632Advanced Cost Accounting - III

NOTES

77


Value of work certified 1,95,000 1,45,000

Cost of uncertified work 4,500 3,000

Materials at site on 31-12-2006 1,883 1,736

Wages accrued on 31-12-2006 2400 2100

Direct expenditure accrued on 31-12-2006 240 180

Value of plants on 31-12-2006 11,000 9,500

The Contract prices are agreed at 2,50,000 for Contract A and 2,00,000

for contract B. Cash received from the contractee is ` 1,80,000 and ` 1,40,000

respectively for Contract A and Contract B.

Prepare :

a) Contract Accounts for Contract A and Contract B,

b) Contractee’s’ Accounts, and

c) Show how work-in-progress shall appear in the Balance Sheet of the Contractor.

(3) Reliable Construction Company has undertaken contract no. 42 an 1st July,

2012. The contract price was ` 27,00,000 and the data related to the contract

upto 30th June, 2013 is as under :-

`


Wages Paid 9,24,000

Other expenses 28,000




Other expenses accrued on 30-06-2013 3,000

Work certified by the architect 16,00,000


Cost of uncertified work 70,000

The Plant of site is to be depreciated at 10%.

Prepare Contract No. 42 Account for the year ended 30th June, 2013 showing

clearly the working for profit transferred to Profit and Loss A/c for the year

ending 30th June, 2013.


NOTES

78


(4) A firm of contractors has undertaken a contract for construction of a building

on 1st October, 2014. The contract price is ` 2,50,00,000 and the contractee has

agreed to pay cash to the extent of 60% of work certified by the architect. Upto

31st March, 2015, the end of the financial year of the firm following information

about the contract is available:-

`

Materials sent to the site 15,00,000

Wages paid 18,00,000



Materials returned to store 90,000


Establishment overheads charged to the contract 1,30,000

Value of work certified 60,00,000

Cost of uncertified work 2,10,000

Plant is to be depreciated at 10% p.a..

Prepare Contract Account for the year ended 31st March, 2015

(5) A contractor commenced a building contract on October 1, 1997. The

contract price is 4,40,000. The following data pertaining to the contract for the

year 1998-99 has been compiled from his books and is as under :-

`

April 1, 1998 work - in- progress not certified 55,000

April 1, 1998 Materials at site 2,000

1998 - 99 Expenses incurred :

Materials issued 1,12,000

Wages paid 1,08,000

Hire of plant 20,000

Other expenses 34,000

March 31, 1999 Materials at site 4,000

Work - in- progress : Not certified 8,000

Work - in progress : Certified 4,05,000

The cash received represents 80% of the work certified. It has been

estimated that further costs to complete the contract will be ` 23,000 includingAdvanced Cost Accounting - III

NOTES

79


the materials at site as on March 31, 1999.

Required :

Determine the profit on the contract for the year 1998-99 on prudent basis,

which has to be credited to Profit % Loss A/c. (C.A. Inter, Nov. 1999)


NOTES

80


Unit 6 Process Costing (Theory)

Structure

6.0 Introduction

6.1 Unit objectives

6.2 Meaning of Process Costing

6.3 Features of Process Costing

6.4 Difference between Job Costing and Process Costing

6.5 Advantages of Process Costing

6.6 Disadvantages of Process Costing.

6.7 Collection of costs and procedure followed

6.8 Normal and Abnormal Loss or Gain

6.9 Inter- process profit.

6.10 Summary

6.11 Key Terms

6.12 Questions


6.0 Introduction

In this Unit we will consider a method of costing which is followed by those

concerns which manufacture a product or products on a continuous basis through

stages or processes in a certain sequence and the finished product becomes ready

after completion of the last stage or process. Accumulation and recording of costs

is done by these concerns processwise and for a certain period. The units of first

process are transferred to second process as input and further costs incurred for

completion of work of the second process are added in the second process and

this procedure goes on till the last process becomes complete and the finished

product becomes available. For this purpose a method of costing known as ‘process

costing’ is followed. In this Unit only theoratical information about process costing

is provided and practical illustrations will be provided in the next Unit.


NOTES

81

Process Costing (Theory)

6.1 Unit Objectives

After studying the information given in this Unit, you should be able to

understand :

• Meaning of process costing;

• Features of process costing;

• How process costing differs from job costing;

• Advantages and disadvantages of process costing; and

• Procedure followed in process costing for recording costs.

6.2 Meaning of process costing

Process Costing refers to a method of accumulating cost of production by

process. It represents a method of cost procedure applicable to continuous or

mass production industries producing standard products. Costs are compiled for

each process or department by preparing a separate account for each process.

According of ICMA, Process Costing is “that form of operating costing

which applies where standardised goods are produced”. Kohler defines

Process Costing as “a method of cost accounting whereby costs are charged

to processes or operations and averaged over units produced.” Like unit

costing, Process costing is also a form of Operation costing as distinguished from

specific order costing. In case of Unit costing, production of a single product is

brought about by setting up a separate plant. In the case of Process costing,

however, production follows a series of sequential processes for either a single

product or a limited range of product. The aim of process costing is to determine

the total cost of each operation and to apply this cost to the product at each state

of process. It will then be possible to ascertain cost per unit for each operation or

process and in total.

Applicability

Process costing is suitable for a large number of industries like mines and

quarries, cotton, wool and jute textiles, chemicals, soap-making, paper plastics,

distilleries, oil refining, screws, bolts and revets, food products, dairy, breweries,

suger works, confectionaries, cement, flour mill/gas etc.

In short, Process Costing is easily applicable in those industries where

manufacture of product is of uniform standards and there is continuous production.


NOTES

82


6.3 Features of Process Costing

Process costing has the following important features :

i) Each plant is divided into number of process cost centres or departments

and each such division is a stage of production or a process.

ii) The finished products are uniform in all respects such as shape, size, weight,

quality, colour, chemical content etc. so unit cost is calculated by dividing

the total cost by the number of units produced.

iii) Output of one process is the input of the next process.

iv) It is not possible to distinguish finished products while they are in the stage

of processing.

v) Costs follow the flow of production i.e. costs incurred in the earlier process

are transferred to the later process alongwith the output.

vi) Total cost of the finished product in the last process is cumulative i.e. it

comprises of costs of all processes.

vii) The cost of any particular unit is the average cost of manufacture over a

period.

viii) Production of one article may give rise to two or more by-products.

ix) Occurrence of process losses e.g. evaporation, shrinkage, chemical reaction

etc.

x) The semi-finished products are expressed in terms of complete products.

This is technically termed as equivalent production.

xi) Production accumulated and reported by process.

xii) Production process is predetermined and a definite sequence of production

is followed.

xiii) The unit of cost is the “process” under this mehtod of costing.

xiv) The production is continuous and on large scale basis in anticipation of

demand.


NOTES

83


6.4 Difference between Job Costing and ProcessCosting

Difference between Job costing and Process Costing can be stated as follows:


NOTES

84


Job Costing

Production is against spectificorders and instructions from thecustomers.

Cost are determined separatelyfor each unit or job.

Jobs are independent of eachother.

Unit cost of a job is calculatedby dividing the total costsincurred into the units producedin the lot or batch.

Costs are ascertained when a jobis complete.

Cost of a job is not transferred toanother.

There may or may not be work-in-progress at the beginning or atthe end of the accounting period.

Cost control is comparativelydifficult and needs more attention.

It requires more forms anddocuments.

Diversification is possiable in JobCosting.

In Job Costing, Reporting is aftercompletion of job.

Investment of capital is less.

i)

ii)

iii)

iv)

v)

vi)

vii)

viii)

ix)

x)

xi)

xii)

i)

ii)

iii)

iv)

v)

vi)

vii)

viii)

ix)

x)

xi)

xii)

Process Costing

Production is in continuous flowand is for stocks.

Costs are compiled for eachprocess or department and unitcost is the average cost.

Products lose their individualidentity beacuse of continuousflow.

The unit of cost of a process iscomputed by dividing the totalcost for the period into the outputof the process during that period.

Costs are calculated at the endof the cost period.

The cost of process is transferredto the next process.

Due to continuous production,work-in-progress is a regularfeature.

Production is standardisedmaking it comparatively easier toexercise cost control.

It requires less paper work.

Diversification is not possibleunder process costing unlessaltogether a new set ofmachineries are installed.

In Process Costing, Reporting isprogresswise and in respect oftime.

Investment of capital is more.

6.5 Advantages

The advantages of Process Costing are as follows :

i) It helps in computation of costs of the process as well as of the end product

at short intervals.

ii) Average costs of homogeneneous products can easily be computed.

iii) Allocation of expenses can be easily made and this results into a more

accurate costing.

iv) It involves less clerical labour because of the simplicity of cost records.

v) Quotation can be submitted more promptly with standardisation of processes.

vi) Managerial control is possible by evaluating the performance of each process

and by ascertaining the abnormal losses.

vii) It is easier to establish the standards in case of continuous production, Hence,

Standard costing system can be followed easily in process costing.

viii) As cost of production is ascertained periodically, management is in a position

to receive various reports periodicallly and review the progress and efficiency

of the production process.

6.6 Disadvantages

The disadvantages of Process Costing are as follows

i) The average cost ascertained under this method is not true cost per unit. As

such, it conceals weaknesses and inefficiencies in processing.

ii) Since, it is based on historical costs, it has all the weaknesses of historical

costing.

iii) The valuation of work-in- progress on the basis of the degree of completion

may sometimes, be a more guess work.

iv) The emergence of joint products may present the problem of apportionment

of joint cost and if apportionment is not properly done cost results may not

be accurate.

v) It may not always be possible to indicate the suitable units for showing

quantity figuress in process cost statements.

vii) The method does not permit evaluation of efforts of individual workers or

supervisors.

viii) It involves difficulty in ascertaining closing stock value when output of one

process is transferred to another process at transfer price or market price.


NOTES

85


Check Your Progress

i) Explain the meaning of‘Process Costing’ anddefine the term ‘ProcessCosting.

ii) Briefly mention features,advantages anddisadvantages of processcosting.

iii) What is the differencebetween ‘job costing’ and‘process costing’ ?

6.7 Collection of Costs and procedure followed

The whole industrial unit is divided into distinct processes to which all amounts

of direct material, direct labour, direct expenses and overheads are debited.

i) Direct Materials : With the help of material requisition, costs of raw

materials are debited to the process concerned.

ii) Direct Labour : Wages paid to the labourers and other staff engaged in

particular process are charged to the concerned process. Sometimes, many

workers are engaged in more than one process, the gross wages paid

concerned are to be allocated on the basis of time spent.

iii) Direct Expenses : There are certain expenses chargeable to the process

concerned e.g. electricity bill, depreciation etc.

iv) Overheads : There are many expenses which are incurred for more than

two processes the total of such expenses may be apportioned either on

suitable basis or at predetermined rate based on direct labour charges or

prime cost etc.

Procedure :

i) For the purpose of cost accounting, process industries are divided into

departments, each department representing a particular process. A process

may consist of a separate operation or series of operations. A foreman or

supervisor is appointed for each department. He is responsible for efficient

functioning of his department.

ii) A separate account is maintained for each process and it is debited with

the value of raw material, labour and overheads relating to the process.

iii) Output is recorded in terms of units (e.g. tons, litres, kg., etc.) on daily,

weekly or suitable periodical basis depending upon processing time.

iv) Average cost per unit is found out by dividing the total cost of each process

by total production of that process. In arriving at average unit costs/costs

normal loss in production and incomplete units in the beginning and at the

end of the period, are taken into consideration.

v) Cost of previous process is transferred to the subsequent process so that

the total cost and unit cost of products are accumulated.

vi) Products remaining unfinished in the process at the close of the period are

to be assessed in terms of equivalent completed units on the basis of

percentage/degree of completion.

In making process accounts, columns are generally provided on both debit

side and credit side for total cost, per unit cost and for material quantities.

The figure below indicates the diagram showing Process Cost Flow.


NOTES

86


Process Cost Flow

Fig. 6.1 : Process Cost Flow

6.8 Normal and Abnormal Loss or gain

In many of the industries which employ Process Costing, a certain amount

of loss or wastage occurs at various stages of production. This loss may be due to

evaporation, chemical change, change in moisture content,, carelessness, accident

or any other reason. It is therefore, necessary to keep accurate records for both

input and output of each process. Where loss occurs at a last stage of manufacture

it is apparent that financial loss is greater than the mere cost of raw materials.

This is becasue more and more labour and overhead are expanded in process as

the products move towards completion stage.

The term “Process Loss” may be defined as the difference between the

input quantity of raw material and the output quantity.

The I.C.M.A. defines ‘waste’ and ‘scarp’ from the recovery value point of

view as follows :

Waste : “Discarded substances having no value”.

Scrap : “Discarded material having some recovery value which is usually

disposed of without further treatment or re-introduced into the production process

in the place of raw material”.

Process losses and wastages are of two types viz. Normal Process Loss

and Abnormal Process Loss.

a) Normal Loss

Normal Process Loss represents the loss which is expected under normal

conditions. This type of loss is unavoidable and is inherent in the process of

manufacture. It is often caused by such factors as evaporation, chemical change,

withdrawals for test or sampling, unavoidable spoilage quantities or other physical Advanced Cost Accounting - III

NOTES

87


Input InputInput

By-product

Work-in process

By-product

Work-in process

Process 1

Finished Output

Process 3

Process 2

Process

loss/gain

Process

loss/gain

Process

loss/gain

reasons. It often includes scrap and waste. These types of losses can be estimated

from the nature of materials, nature of operation, previous experience or technical

data. Normal Loss is generally calculated at a certain percentage of the input of

units introduced in the respactive process.

Accounting Treatment :

The normal process loss is borne by the good units produced.

Unit Cost = Total Process Cost - Value of Normal Wastage

Good Units Produced

The units of normal wastage are recorded on the credit side of a process

account in quantity column only. The value of normal wastage, if any, should be

included in the amount column on the credit side as saleable value. This reduces

the cost of normal output. Process loss is shared by saleable units.

The accounting entries in respect of Normal Loss may be passed as follows:

For arising normal loss :

Normal Loss A/c ... Dr.

To Process A/c

For adjustment of the deficiency in the sale of normal loss :

Abnormal Gain A/c ... Dr.

To Normal Loss A/c

For sale of scrap, if any :

Cash A/c ... Dr.

To Normal Loss A/c

b) Abnormal Loss :

Where the loss is caused by unexpected or abnormal conditions and if it is

beyond limit, it is called “Abnormal Loss”. In other words, any wastage arising

in excess of the normal wastage is known as “Abnormal Wastage”. It arises

due to abnormal causes or unforseen factors. Use of defective materials,

carelessness, fire, machine breakdown, power failure, strike etc. may give rise to

abnormal process losses.

Abnormal Loss is avoidable. It can be controlled by the management by

taking proper care. Units of Abnormal Loss is calculated as follows :

Units Introduced (entered) ------

Less : Normal Loss in units (-) ------

Normal Output ------

Less : Actual Output (-) ------

Units of Abnormal Loss ------Advanced Cost Accounting - III

NOTES

88


Thus, in short, the difference between the normal output and the actual

output is the abnormal loss.

Normal Output = Units entered - Normal Loss in units.


Accounting procedure for abnormal loss is different. Abnormal loss

(wastage) is valued at the end at which the good units would be valued if there

were only normal loss (wastage). The amount of abnormal loss is credited to a

process concerned. A separate Abnormal Loss A/c is opened and the scrap value,

if any is credited to Abnormal Loss A/c and the balance on it ultimately transferred

to Costing Profit and Loss Account. The value of abnormal wastage is calculated

as follows :

Value of Abnormal Loss (Wastage)

= Normal Cost of Normal Output

x Units of Abnormal Loss Normal Output

[ where, Normal Cost = Total Process Cost - Value of normal loss, if any

Normal Output = Units entered - Normal loss in units]

The Accounting entries may be passed as follows :

For the value of Abnormal Loss :

Abnormal Loss A/c ... Dr.

To Concerned Process A/c

If any amount is received from sale of scrap :

Cash / Bank A/c ... Dr.

To Abnormal Loss A/c

For Closing Abnormal Loss A/c

Costing Profit and Loss A/c ... Dr.

To Abnormal Loss A/c

c) Abnormal Gain :

The Normal Loss is an estimated figure. The actual loss may be more or

less than the normal loss. If the actual loss is more than the normal loss, it is

treated as abnormal loss. But if the actual loss is less than the normal loss,

it is known as abnormal gain or abnormal effectives. The abnormal gain is

calculated in a similar manner as an abnormal loss.

Units of Abnormal Gain is to be calculated as under :

Actual Output ------

Less : Normal Output (-) ------

Units of Abnormal Gain ------ Advanced Cost Accounting - III

NOTES

89


Normal Output = Units entered (Introduced) - Normal loss in units


Like Abnormal loss, Abnormal gain also does not affect the cost of normal

output as this is also valued in the same manner as abnormal loss. The process

account is debited with the quantity and value of Abnormal Gain and Abnormal

Gain A/c is credited. Finally, it is seen that the Process account is credited with

the quantity and value of normal scrap. But the actual quantity is less. Hence, the

difference is credited to Normal Loss Account by debiting the Abnormal Gain

Account. Then, the balance to the credit of Abnormal Gain A/c is transferred to

Costing Profit and Loss Account as Abnormal Gain.

The value of Abnormal Gain is calculated as follows :

Value of Abnormal Gain =

Total Process Cost - Value of Normal Wastage x Units of Abnormal Gain

Normal Units Produced

The Accounting entries may be passed as follows :

For value of Abnormal gain :

Concerned Process A/c ... Dr.

To Abnormal Gain

For adjustment of scrap value of Abnormal gain :


To Normal Loss A/c

For Closing Abnormal Gain Account :


To Costing Profit and Loss A/c

Usually the form of Process Account, Normal Loss Account, Abnormal

Loss Account and Abnormal Gain Account is as follows :


NOTES

90


Dr. Process Account Cr.

Particulars Quantity Cost per Amount Particulars Quantity Cost per Amount

units unit ` units unit `

` `

To Earlier Process A/c ......... ......... ......... By Normal Loss A/c ......... ......... .........

(In the case of later Process A/c) (% of input)

To Raw Materials ......... ......... ......... By Loss in Weight .........

To Direct Labour (Wages) ......... ......... By Scrap Value .........

To Direct Expenses ......... ......... By Sale of by-product ......... .........

To Indirect Exp. (Overheads) ......... ......... By Abnormal Loss A/c ......... ......... .........

To Abnormal Gain ......... ......... By Next Process A/c or

Finished Stock A/c (in the

case of last process)

......... ......... ......... ......... ......... .........

Advanced Cost Accounting - III 91


Dr. Normal Loss Account Cr.

Particulars Quantity Amount Particulars Quantity Amount

Units ` Units `

To Process A/c ......... ......... By Abnormal Gain A/c ......... .........

By Cash (Sale) .........

......... ......... ......... .........

Dr. Abnormal Loss Account Cr.


Units ` Units `

To Process A/c ......... ......... By Cash (Sale) ......... .........

By Costing P & L A/c .........

......... ......... ......... .........

Dr. Abnormal Gain Account Cr.


Units ` Units `

To Normal Loss A/c ......... ......... By Process A/c ......... .........

To Costing Profit and Loss A/c .........

......... ......... ......... .........

6.9 Inter Process Profit

Sometimes, the output from one process is transferred to the next process

at market value or cost plus certain percentage of profit. It is considered desirable

by a manufacturing concern to value output of each process at a price corresponding

to a market price of comparable goods . Thus, profit or loss made by each process

is revealed. The market price of the output processed being generally higher than

that the cost to the process, each process will show some profit. The profit is

termed as ‘Inter Process Profit’. In other words, inter process profits can be

defined as profits made by the transfer of process from transfer of output to the

subsequent process. The advantages and disadvantages of inter process profit

are as follows :

Advantages :

i) To show whether the cost of production competes with the market price.

ii) On the basis of this conclusion a management can decide whether a product

should be processed internally or to be brought in the market. In short, it

assists the management in make or buy decision.

iii) To make each process self-efficient because the transfer processes are

not given the benifits of economies effected in the earlier process.

iv) The true profit or loss of each process can be ascertained and appropriate

action can be taken if profit of any process is insufficient.

Disadvantages :

i) It becomes necessary to adjust closing stock value to its cost price because

closing stock is valued in the balance sheet at cost price.

ii) If the adjustment is not effected in the closing stock, such valuation is not

accepted by auditor and tax authorities.

iii) The method involves additional clerical work by way of calculating transfer

price and then ascertaining the value of closing stock at its cost price.

But it creates complexity in accounts inter-process profits so introduced

remain included in the price of process stocks, finished stocks and work-in-progress.

For the Balance Sheet purpose, inter process profit cannot be included in stock, as

a firm cannot make a profit by trading itself. To avoid these complications a provision

must be created to reduce the stock to actual cost price. This problem arises only

in respect of closing stock because goods sold will have realised the internal profits.

Alternative Treatment :

In order to compute the profit element in closing stock and to obtain net

realised profit for a period, three columns (total column, cost column and profit

column) are shown on each side of process accounts and closing stock has been

deducted from the debit side of the process accounts instead of showing it on

credit side. Cost of closing stock can be easily obtained if we compare theAdvanced Cost Accounting - III

NOTES

92


Check Your Progress

What do you mean by ‘interprocess profit ? What are theadvantages and disadvantagesin using inter process profitrecording ?


NOTES

93

Process Costing (Theory)accumulated cost column and total column in any process. The cost of stock can

be obtained by the formula :

= Cost

x Closing Stock Total

The profit on closing stock can be obtained by deducting the cost of stock

thus arrived from the value of stock.

Sometimes opening stock and production overheads are given. We should

add the Opening stock at the beginning with transfer cost, materials and wages.

From the total of these Closing stock should be deducted to calculate Prime Cost.

Then Production overheads are added. This becomes the cost of the process to

which is added the desired percentages of profit.

6.10 Summary

Process Costing is a method of costing which is used by those industries

which are engaged in manufacture of a product or products on a continuous basis.

The product becomes ready after it goes through the operations carried on in

stages or processes. The processes are carried out in a particular sequence.

Materials are put in the first process and the necessary operations or work is

performed by the workers employed in the first process. Direct expenses,indirect

labour cost is also incurred in the first process and when the work of first process

becomes complete, the processed material which is the output of the first process

is transferred to the second process as input of the second process. If necessary

materials required to do the work of the second process is added and workers

employed to work in the second process do the work. Wages paid to these workers

and also direct expenses and overheads incurred in the second process are recorded

to the second process account and output of second process is transferred to the

next process. When the last process work becomes complete, the output of that

process is transferred to the store as finished goods. Unit cost of output of each

process is calculated on average basis by dividing the total cost of the process by

the number of units in the output of that process. Normal loss units are considered

on the basis of past experience and they are deducted from the input units to

calculate normal units of output. If actual output units are less than the normal

output units, the shortage units is regarded as abnormal loss units and if the actual

output units are more than the normal units of output, the excess units of output

are known as abnormal gain units. Value of abnormal loss units is debited to

costing Profit and Loss Account and value of abnormal gain units is credited to

costing Profit and Loss Account. Normal loss units are recorded on credit side of

the process account in ‘units column’ but no value for the normal loss units is

recorded in the amount column of the process account.

Check Your Progress

i) How costs are collectedand recorded in processcosting ?

ii) What procedure isfollowed for recording ofcosts in process costing ?

iii) How normal andabnormal gain or loss isdetermined ? What is theaccounting treatmentgiven to these items ?


NOTES

94

Process Costing (Theory) 6.11 Key Terms

(i) Normal Loss in Process Costing : Normal Loss is the expected loss in

normal conditions. It is unavoidable.

(ii) Abnormal Loss in Process Costing : It is a loss caused by abnormal

conditions and it is calculated by deducting actual output of the process

from the normal output.

(iii) Abnormal Gain : When the actual output of a process is more than the

normal output of the process, the excess of units is called abnormal gain

units and the saleable value of such excess units is the amount of abnormal

gain.

6.12 Questions


(1) What is meant by ‘process costing’ ? How process costing differs form job

costing ?

(2) What is ‘Process Costing’ ? Explain the features of process costing.

(3) In which industries process costing is followed ? What are the advantages

and disadvantages of process costing ?

(4) How costs are collected in process costing ? Explain the procedure used in

the process costing for recording the costs.

(5) What do you understand by ‘normal loss’ in process costing ? What are the

usual causes of such normal loss ? How normal loss is accounted for in

process costing ?

(6) What is meant by ‘abnormal loss’ and ‘abnormal gain’ in process costing ?

Taking an imaginery example explain how abnormal loss and abnormal gain

units are calculated. How accounting treatment is given for abnormal loss

and abnormal gain ?

(7) Give a specimen of a Process Account. Which are the items recorded on

debit side and credit side of Process Account ?

(8) What do you mean by inter-process profit ? State the advantages and

disadvantages of inter-process profit.


(1) Process Costing is a form of -----------------

(a) Job Costing.

(b) Special Order Costing.

(c) Class Cost Method.

(d) Operation Costing.

(2) Process Costing is easily applicable in industries like -----------

(a) mines and quarries.

(b) construction.

(c) machine tools manufacturing.

(d) bakeries.

(3) In Process Costing costs are calculated ---------

(a) when a job is started.

(b) when a job is completed.

(c) at the beginning of cost period.

(d) at the end of the cost period.

(4) In Process Costing “work in progress” is -----------

(a) not possible.

(b) a regular feature.

(c) at the beginning of the accounting period.

(d) at the end of the accounting period.

(5) Which of the following statement is ‘wrong’.

(a) In process costing allocation of expenses can be easily made.

(b) In process costing average costs of homogeneous products can be easily

computed.

(c) It is easier to establish the standards in case of continuous production in

process costing.

(d) Standard costing system cannot be followed easily in process costing.

(6) Any wastage arising in excess of the normal wastage is known as ------

(a) Abnormal wastage.

(b) Normal loss.Advanced Cost Accounting - III

NOTES

95


(c) Actual loss.

(d) Normal wastage.

(7) For adjustment of the deficiency in the sale of normal loss, the following

account is credited.

(a) Process Account

(b) Abnormal gain Account

(c) Concerned process Account

(d) Normal Loss Account


Group I Group II

(a) Process Costing (i) Profit on Closing Stock.

(b) Normal Loss (ii) transfer of process frm transfer of output.

(c) Abnormal Loss (iii) unforseen factors.

(d) Inter process profit (iv) evaporation.

(v) Distinguished from specific order costing.

Ans. (a) - (v), (b) - (iv), (c) - (iii), (d) - (ii).

Ans. : (1 - d), (2 - a), (3 - d), (4 - b), (5 - d), (6 - a), (7 - d).








NOTES

96


Unit 7 Process Costing (Practical Problems)

Structure

7.0 Introduction

7.1 Unit Objectives

7.2 Illustrations on process costing

7.3 Summary

7.4 Exercises

7.5 Further Reading

7.0 Introduction

In this Unit illustrations on process costing are provided. Theoratical

information about various items related to the process costing, we have considered

in Unit 6. Preparation of Process Accounts, calculation of normal loss in the process,

calculation of abnormal loss and abnormal gain quantity and accounting treatment

to be given to these items was explained in theory in unit 6. In this Unit actual

recording to be made to the process accounts and calculation at total cost of a

process and also cost per unit of the process is explained with the help of a few

illustrations.

7.1 Unit objectives

After considering the illustrations provided in this Unit you should be able

to :

• Prepare process accounts;

• Calculate the quantity of normal loss in processes;

• Calculate the quantity of abnormal loss and abnormal gain involved in the

processes;

• Calculate the amount of abnormal loss and abnormal gain; and

• Find out the total cost and per unit cost of each process.


NOTES

97

Process Costing(Practical Problems)

7.2 Illustrations on Process Costing

ILLUSTRATION 1 (Preparation of a process account of simple type.)

Information given below is related to Process X for the month of September,

2014 :

`

Materials consumed 7,500

Wages 12,800

Direct expenses 3,600

Overheads are to be charged at 40% of wages. Output of Process X is 1000 units.

You are required to prepare Process X Account for the month of September,

2014 showing total cost of the process. Also calculate per unit cost of the output.

SOLUTION

Dr. Process X Account ( For Sept. 2014) Cr.

Output 1000 units

Amount Amount

` `

To Materials consumed 7,500 By Output transferred to

To Wages 12,800 next process 29,020

To Direct expenses 3,600

To Overheads 5,120

( 40% of wages)

29,020 29,020

Calculation of cost per unit :

Per unit cost = Total Cost of the process

Output of the process

= ` 29,020

1000 units

= ` 29.020

ILLUSTRATION 2 (Processes having normal loss)

A manufacturing concern produces finished product P after carrying out

Process A and Process B. Direct material is introduced at the beginning of Process

A and after completing Process A, its output is transferred to Process B for

further work. Output of Process B is transferred to the store as the finished

product P. There is normal loss at 2% of input in Process A and at 5% of input in

Process B. Scrap arising due to the normal loss in both the processes has no

saleble value.Advanced Cost Accounting - III

NOTES

98


Following information about costs is provided to you :

Process A Porcess B

` `

Wages 26,000 22,000

Indirect Materials - 4,500

Direct Expenses 6,800 6,095

Overheads incurred by the concern amounted to ` 11,200 and they are to

be changed to the processes as a percentage of wages.

At the beginning 2000 units of material were put in the Process A at 3 per

unit.

You are required to prepare Process A Account and Process B Account

showing the cost per unit of output.

SOLUTION

Dr. Process A Account Cr.

Particulars Units Amount Particulars Units Amount

` `

To Direct Materials 20000 60000 By Normal Loss 400 -

To Wages 26000 (2% of input of 20,000 units)

To Direct Expenses 6800 By Output transferred

To Overheads 5200 to Process B A/C 19600 98000

(20% of wages) at cost of ` 5 per unit

20000 98000 20000 98000

Dr. Process B Account Cr.

Particulars Units Amount Particulars Units Amount

` `

To Process A A/c 19600 98000 By Normal Loss 980 -

Output transferred (5% of 19600 units)

To Indirect Materials 4,500 By Transfer to the

To wages 22000 store as Finished

To Direct Expenses 6095 Product P at cost 18620 134995

To Overheads 4400 of 7.25 per unit

(20% of wages)

19600 134995 19600 134995


NOTES

99


Notes :

(i) Calculation of per unit cost of output of process A

Normal Cost=

Total Cost - Scrap Value =

` 98000 - Nil

Normal Output Input - Normal Loss 20000 units - 400 units

` 98000

= ` 5 per unit19600 units

(ii) Calculation of per unit cost of the finished product P

Normal Cost =

Total Cost - Scrap Value realised

Normal Output Input units of the process - Normal Loss units

= ` 134995 - Nil

19600 units - 980 units

= 134995

18620 units

= ` 7.25 Per unit

(iii) Overhead absorption percentage

Overheads are to be absorbed as percentage of wages.

Total wages = ` 26,000 of Process A + ` 30,000 of Process B

= ` 56,000

Total Overheads incurred are ` 11,200.

Therefore percentage is calculated as 11,200 x 100

56,000

= 20% of wages

ILLUSTRATION 3

A product passes through two distinct processes A and B. From the following

information you are required to prepare Process ‘A’ Account, Process ‘B’ Account,

Abnormal Loss Account and Abnormal Gain Account.

Particulars Process Process

‘A’ ‘B’

Materials (introduced 20,000 units in Process ‘A’) ` 30,000 3,000

Labour ` 10,000 12,000

Overheads 7,000 9,850

Normal Loss 10% 4%

Scrap value of Normal Loss ` 1 per unit 2 per unit

Output Units 17,500 17,000

There is no stock or work in progress in any process :Advanced Cost Accounting - III

NOTES

100


SOLUTION

In the books of a Factory

Dr. Process ‘A’ Account Cr.


Units Units

To Materials 20,000 30,000 By Normal Loss 2,000 2,000

To Labour 10,000 (10% of 20,000 units)

To Overheads 7,000 (2,000 units x 1)

By Abnormal Loss 500 1,250

(Balancing Figure

By Process ‘B’ A/c 17,500 43,750

20,000 47,000 20,000 47,000

Dr. Process ‘B’ Account Cr.


Units Units

To Process ‘A’ A/c 17,500 43,750 By Normal Loss 700 1,400

To Materials 3,000 (4% of 17,500 units)

To Labour 12,000

To Overheads 9,850 (700 units x 2)

To Abnormal Gain* 200 800 By Finished Stock A/c 17,000 68,000(Balancing Figure)

17,700 69,400 17,700 69,400



Units Units

To Process ‘A’ By Bank 500 500

A/c 500 1,250 (500 units x 1)

By Costing Profit

and Loss A/c*

Balancing Figure) - 750

500 1,250 500 1,250


NOTES

101




Units Units

To Normal Loss 200 400 By process ‘B’ A/c 200 800

(200 units x 2)

To Costing Profit

and Loss A/c *

(Balancing Figure) - 400

200 800 200 800

Working Notes :

1) Calculation of cost of Abnormal Loss in Process ‘A’ Account :

Dr. - Cr. = Balance

Quantity : Units 20,000 - 2,000 Units = 18,000 Units : Normal Output

Amount : ` 47,000 - ` 2,000 = ` 45,000 : Normal Cost

If 18,000 Units = ` 45,000

500 Units = ?

=5000 units x 45,000

18,000 units

= ` 1,250

2) Calculation of cost of Abnormal Gain in Process ‘B’ Account :

Dr. - Cr. = Balance

Quantity : 17,500 Units - 700 Units = 16,800 units : Normal Output


If 16,800 Units = ` 67,200

200 Units = ?

=

200 units x 67,200

16,800 units

= ` 800

ILLUSTRATION 4

The product of a manufacturing concern passes through two processes A

and B and then to finished stock. It is ascertained that in each process normally

5% of the total weight is lost and 10% is scrap which from process A and B

realises ` 80 per ton and ` 200 per ton respectively.


NOTES

102


The following are the figures relating to both the process.

Particulars Process Process

‘A’ ‘B’

Materials Tons 1,000 70

Cost of materials per ton 125 200

Wages 28,000 10,000

Manufacturing Expenses 8,000 5,250

Output Tons 830 780

Prepare process Cost Account showing cost per ton of each process. There

was no stock or work-in- progress in any process.

SOLUTION

In the books of a Manufacturing Concern



Tons Tons

To Cost of Materials 1,000 1,25,000 By Loss in weight 50 -

(1,000 Tons x 125) (5% of 1,000 Tons.)

To Wages 28,000 By Normal Scarp 100 8,000

To Manufacturing (10% of 1,000 Tons.)

Expenses 8,000 (100 Tons x 80)

By Abnormal Loss* 20 3,600

(Balancing Figure)

By process ‘B’ A/c 830 1,49,400

1,000 1,61,000 1,000 1,61,000



Tons Tons

To Process’ A’ A/c 830 1,49,400 By Loss in weight 45 -

To Cost of (5% of 900 Tons.)

Materials 70 14,000 By Normal Scrap 90 18,000

(70 Tons x 200) (10% of 900 Tons.)

To wages 10,000 (90 Tons x 200)

To Manufacturing

Expenses 5,250 By Finished stock A/c 780 1,63,800

To Abnormal Gain * 15 3,150

(Balancing Figure)

915 1,81,800 915 1,81,800


NOTES

103




Tons Tons

To Process ‘A’ A/c 20 3,600 By Bank 20 1,600

(20 Tons x 80)

By Costing Profit

and Loss A/c * - 2,000

(Balancing Figure)

20 3,600 20 3,600



Tons Tons

To Normal Loss 15 3,000 By Process ‘B’ A/c 15 3,150

(15 Tons x 200)

To Costing Profit

and Loss A/c * - 150(Balancing Figure)

15 3,150 15 3,150

Working Notes :

1) Calculation of cost of Abnormal Loss in Process ‘A’ Account:

Dr. - Cr. = Balance

Quantity : 1,000 Tons - 150 Tons. = 850 Tons : Normal Output

Amount : ` 1,61,000 - 8,000 = ` 1,53,000 : Normal Cost

If 850 Tons = 1,53,000

20 Tons = ?

=

20 Tons x ` 1,53,000

850 Tons.

= ` 3,600

2) Calculation of cost of Abnormal Gain in Process ‘B’ Account :

Dr. - Cr. = Balance

Quantity : 900 Tons - 135 Tons. = 765 Tons : Normal Output


If 765 Tons = 1,60,650

15 Tons = ?Advanced Cost Accounting - III

NOTES

104


=

15 Tons x 1,60,650

765 Tons.

= ` 3,150

3) Calculation of cost per ton in Process ‘A’ Account :

If 830 Tons = 1,49,400

1 Tonne = ?

= 1 Tons x ` 1,49,400

830 tons.

= ` 180 per ton

4) Calculation of cost per ton in Process ‘B’ Account :

If 780 Tons = ` 1,63,800

1 Ton = ?

=

1 Ton. x 1,63,800

780 tons.

= ` 210 per ton

ILLUSTRATION 5

A product ‘Bee’ passes through three processes A, B and C. 10,000 units

were issued to Process ‘A’ in the beginning at cost of ` 10 per unit. Prepare

Process Account assuming that there was no opening or closing stock. The

following information is made available :-

Particulars Process ‘A’ Process ‘B’ Process ‘C’

Sundry Materials ` 10,000 15,000 5,000

Wages ` 50,000 80,000 65,000

Direct Expences ` 15,300 18,100 30,828

Normal Scrap % 3 5 8

Value of Scrap per unit ` 2.50 5.00 8.50

Actual Output Units 9,500 9,100 8,100


NOTES

105


SOLUTION




Units Units

To Cost of Units By Normal Scrap 300 750

Issued 10,000 1,00,000 (3% of 10,000 units)

(10,000 units x 10) (300 units x 2.50)

To Sundry Materials 10,000 By Abnormal Loss * 200 3,599

To Wages 50,000 (Balancing Figure)

To Direct Expenses 15,300 By Process ‘B’ A/c 9,500 1,70,951

10,000 1,75,300 10,000 1,75,300



Units Units

To Process ‘A’ A/c 9,500 1,70,951 By Normal Scrap 475 2,375

To Sundry Materials 15,000 (5% of 9,500 units)

To Wages 80,000 (475 units x 5)

To Direct Expenses 18,100 By Process ‘C’ A/c 9,100 2,84,017

To Abnormal Gain* 75 2,341

(Balancing Figure)

9,575 2,86,392 9,575 2,86,392

Dr. Process ‘C’ Account Cr.


Units Units

To Process ‘B’ A/c 9,100 2,84,017 By Normal Scrap 728 6,188

To Sundry Materials 5,000 (8% of 9,100 units)

To Wages 65,000 (728 units x 8.50)

To Direct Expenses 30,828 By Abnormal Loss * 272 12,302

(Balancing Figure)

By Finished Stock A/c 8,100 3,66,355

9,100 3,84,845 9,100 3,84,845


NOTES

106




Units Units

To Process ‘A’ A/c 200 3,599 By Bank 200 500

(200 Units x 2.50)

By Costing Profit


(Balancing figure)

200 3,599 200 3,599



Units Units

To Normal Loss 75 375 By Process ‘B’ A/c 75 2,341

(75 units x 5)

To Costing Profit


(Balancing Figure

75 2,341 75 2,341



Units Units

To Process ‘C’ A/c 272 12,302 By Bank 272 2,312

(272 units x 8.50)

By Costing Profit


(Balancing Figure)

272 12,302 272 12,302

Working Notes :

1) Calculation of cost of Abnormal Loss in Process ‘A’ Account:

Dr. - Cr. = Balance

Quantity : 10,000 Units - 300 Units. = 9,700 Units : Normal Output

Amount : ` 1,75,300 - ` 750 = ` 1,74,550 : Normal Cost

If 9,700 Units = ` 1,74,000

200 Units = ?


NOTES

107


=200 Units x 1,74,550

9,700 units

= ` 3,599

2) Calculation of cost of Abnormal Gain in Process ‘B’ Account:

Dr. - Cr. = Balance



If 9,025 Units = ` 2,81,676

200 Units = ?

=75 Units x 2,81,676

9,025 units

= ` 2,341

3) Calculation of cost of Abnormal Loss in Process ‘C’ Account:

Dr. - Cr. = Balance


Amount : ` 3,84,845 - 6,188 = Rs.3,78,657 : Normal Cost

If 8,372 Units = ` 3,78,657

272 Units = ?

=272 Units x 3,78,657

8,372 units

= ` 12,302

ILLUSTRATION 6

The finished product of a factory has to pass through process 1, 2 and 3.

During August 2006 data relating to this product was as shown below :

Particulars Process Process Process Total

1 2 3

Basic Raw Materials

(10,000 Units) ` 6,000 - - 6,000

Direct Materials added ` 8,500 9,500 5,500 23,500

Direct Wages ` 4,000 6,000 12,000 22,000

Direct Expenses ` 1,200 930 1,340 3,470

Production Overheads ` - - - 16,500

(absorbed as a percentage of

direct wages)Advanced Cost Accounting - III

NOTES

108


Output Units 9,200 8,700 7,900 -

Normal Loss % 10 5 10 -

Scrap Value of Normal

Loss per unit ` 0.20 0.50 1.00 -

There was no stock at the beginning or at the end of any process. You are

required to prepare -

i) Process ‘1’ Account, ii) Process ‘2’ Account iii) Process ‘3’ Account iv)

Abnormal Loss Account and v) Abnormal Gain Account.

SOLUTION


Dr. Process ‘1’ Account Cr.


Units ` Units

To Cost of basic By Normal Loss 1,000 200

Raw Materials 10,000 6,000 (10% of 10,000 units)

To Direct Materials 8,500 (1,000 units x 0.20)

To Direct Wages 4,000

To Direct Expenses 1,200

To Production 3,000

Overheads

(` 16,500 x 2 /11)

To Abnormal Gain * 200 500

(Balancing Figure) By Process ‘2’ A/c 9,200 23,000

10,200 23,200 10,200 23,200



Units ` Units

To Process ‘A’ A/c 9,200 23,000 By Normal Loss 460 230

To Direct Materials 9,500 (5% of 9,200 units)

To Direct Wages 6,000 (460 units x 0.50)

To Direct Expenses 930 By Abnormal Loss* 40 200

To Production 4,500 (Balancing Figure)

Overheads By Process ‘3’ A/c 8,700 43,500

(` 16,500 x 3 /11)

9,200 43,930 9,200 43,930


NOTES

109




Units ` Units

To Process ‘2’ A/c 8,700 43,500 By Normal Loss 870 870

To Direct Materials 5,500 (10% of 8,700 units)

To Direct Wages 12,000 (870 units x 1)

To Direct Expenses 1,340

To Production 9,000

Overheads

(`16,500 x 6 /11)

To Abnormal Gain* 70 630

(Balancing Figure) By Finished stock A/c 7,900 71,100

8,770 71,970 8,770 71,970



Units ` Units

To Normal Loss 200 40 By Process ‘1’ A/c 200 500

(200 Units x 0.20)

To Costing Profit

and Loss A/c - 460

(Balancing Figure)

200 500 200 500



Units ` Units

To Process ‘2’ A/c 40 200 By Bank 40 20

(40 Units x 0.50)

By Costing Profit and

Loss A/c * - 180

(Balancing Figure)

40 200 40 200


NOTES

110




Units ` Units

To Normal Loss 70 70 By Process ‘3’A/c 70 630

(70 Units x 1)

To Costing Profit

and Loss A/c * - 560

(Balancing Figure)

70 630 70 630

Working Notes :

1) Calculation of cost of Abnormal Gain in Process ‘1’ A/c:

Dr. - Cr. = Balance

Quantity : 10,000 Units - 1,000 Units. = 9,000 Units : Normal Output

Amount : ` 22,700 - ` 200 = ` 22,500 : Normal Cost

If 9,000 Units = 22,500

200 Units = ?

= 200 Units x ` 22,500

9,000 units

= ` 500

2) Calculation of cost of Abnormal Loss in Process ‘2’ A/c:

Dr. - Cr. = Balance



If 8,740 Units = ` 43,700

40 Units = ?

=

40 Units x 43,700

8,740 units

= ` 200

3) Calculation of cost of Abnormal Gain in Process ‘3’ A/c:

Dr. - Cr. = Balance




NOTES

111


If 7,830 Units = 70,470

70 Units = ?

=70 Units x 70,470

7,830 units

= ` 630

ILLUSTRATION 7

Product X is obtained after it passes through three distinct processes. You

are required to prepare Process Account from the following information.

Particulars Total Process

` I II III

` ` `

Materials 15,084 5,200 3,960 5,924

Direct Wages 18,000 4,000 6,000 8,000

Production Overheads 18,000 - - -

Actual Output Units 950 840 750

Normal Loss % 5 10 15

Value of scrap per unit 4 8 10

1,000 units @ ` 6 per unit were introduced in Process ‘I’ Account.

Production Overheads to be distributed as 100 % of Direct Wages.

SOLUTION


Dr. Process ‘I’ Account Cr.


Units ` Units

To Cost of Units 1,000 6,000 By Normal Loss 50 200

Introduced (5% of 1,000 units)

(1,000 Units x 6)

To Materials 5,200 (50 units x 4)

To Direct Wages 4,000 By Process ‘II’ A/c 950 19,000

To Production

Overheads 4,000

(` 4,000 x 100%)

1,000 19,200 1,000 19,200


NOTES

112


Dr. Process ‘II’ Account Cr.


Units ` Units

To Process ‘I’ A/c 950 19,000 By Normal Loss 95 760

To Materials 3,960 (10% of 950 units)


To Production 6,000 By Abnormal Loss * 15 600

Overheads (Balancing Figure)

(` 6,000 x 100%) By Process ‘III’ A/c 840 33,600

950 34,960 950 34,960

Dr. Process ‘III’ Account Cr.


Units ` Units

To Process ‘II’ A/c 840 33,600 By Normal Loss 126 1,260

To Materials 5,924 (15% of 840 units)


To Production

Overheads 8,000

To Abnormal Gain* 36 2,736

(Balancing Figure) By Finished stock A/c 750 57,000

876 58,260 876 58,260



Units ` Units

To Process ‘II’ A/c 15 600 By Bank 15 120

(15 Units x 8)

By Costing Profit

and Loss A/c * - 480

(Balancing Figure)

15 600 15 600



Units ` Units

To Normal Loss 36 360 By Process ‘III’ A/c 36 2,736

(36 Units x 10)

To Costing Profit


(Balancing Figure)

36 2,736 36 2,736Advanced Cost Accounting - III

NOTES

113


Working Notes :

1) Calculation of cost of Abnormal Loss in Process ‘II’ Account :

Dr. - Cr. = Balance

Quantity : 950 Units - 95 Units. = 855 Units : Normal Output


If 855 Units = ` 34,200

15 Units = ?

=

15 Units x 34,200

855 units

= ` 600

2) Calculation of cost of Abnormal Gain in Process ‘III’ Account:

Dr. - Cr. = Balance

Quantity : 840 Units - 126 Units. = 714 Units : Normal Output


If 714 Units = ` 54,264

36 Units = ?

=

36 Units x ` 54,264

714 units

= ` 2,736

7.3 Summary

In this Unit, illustrations on Process Costing have been provided. In process

costing there is continuous flow of production and there may be two or three or

more processes through which the material introduced in the first process goes till

the last process becomes complete and the finished product becomes available as

the output of the last process. Production in process industries is for stock. The

quantity as well as the amount is to be accounted for in each process and so on

Debit side and credit side of each process account quantity column and amount

column is prepared. On Debit side of the process account material cost, wages,

direct expenses and overheads charged to the process account as per the method

of absorption followed by the concern are recorded. If there is normal loss in the

process, its quantity and if the normal loss (scrap) has any saleble value such

value is recorded on credit side of the process account. Output of the process is

recorded on the credit side of the process account as transferred to the next

process. If the output quantity is less then the normal quantity (i.e. Input quantity

- normal loss quantity) the difference which is shortage is recorded on credit sideAdvanced Cost Accounting - III

NOTES

114


of the process account as quantity of abnormal loss. On the other hand if actual

quantity of the output of the process is more than the normal output quantity of the

process, there is excess quantity of output obtained and it is recorded on debit side

of the process account as ‘abnormal gain’. Per unit cost of the process is calculated

as under :- Normal / Net Cost

Normal Output

Normal or Net Cost means Total Cost of the process minus saleble value of

normal loss quantity, if any and Normal Output means input quantity minus normal

loss quantity. Valuation of output quantity and abnormal loss or abnormal gain,

quantity is done at the per unit cost calculated for the process as explained above.

7.4 Exercises

1) A product passes through three processes A, B and C. Normal wastege in

each process is as follows :

Process A 3% of input

Process B 5% of input

Process C 8% of input

Wastage of Process A was sold at ` 2.50 per unit, that of Process B at `

5 per unit and that of Process C at ` 10 per unit.

10000 units were issued to Process A at ` 10 per unit in the beginning of

April, 2012. The other expenses were as under :

Process A Process B Process C

Sundry Materials 10,000 Rs.15,000 ` 5,000

Labour 50,000 80,000 65,000

Direct Expenses 10,500 11,880 20,090

Actual Output was 9500 units 9100 units 8100 units

Prepare the Process Accounts assumming that there were no opening or

closing stocks. Also prepare Abnormal Wastage and Abnormal Gain Accounts.

2) A manufacturing firm produces its finished product Q - 20 after carrying

out two processes X and Y. Past experience shows that normal loss occurs at 5%

of input units in process X and at 10 % of units entering into process Y. Wastage

due to normal loss is sold at ` 16 per 100 units and at ` 20 per 100 units in

Process X and Process Y respectively. The other data related to the two processes

is as under :

Process X Process Y

`

Sundry Materials consumed 6,000 3,000

Wages 7,000 4,000

Manufacturing Expenses 2,000 2,000Advanced Cost Accounting - III

NOTES

115


5000 units were brought into Process X costing ` 5,000. The output of

Process X was 4700 units and output of Process Y was 4150 units.

Prepare Process X A/c, Process Y A/c showing cost per unit of the output

in each process.

3) Finished product A-03 becomes ready after completion of two processes

Process I and Process II. Basic material is put in Process I and output of

Process I is transferred to Process II as input and output of Process II is transferred

to the store as the finished product A -03.

At the beginning of May, 2014, 6,000 kg. of basic material was put into

Process I at the cost of ` 150 per kg. Normal loss in Process I is 4% of input and

normal loss in process II is 10% of input of process II Normal Loss of both

processes has no sale value.

Other information about the two processes is as under.

Process I Process II

` `

Wages 4,80,000 3,20,000

Direct Expenses 54,000 13,200

Manufacturing overheads incurred amount to ` 2,50,000 and are to be

charged to the processes on the basis of percentage of wages.

Actual output of process I was 5700 kgs. and that of process II 5200 kgs.

You are required to prepare process I A/c, process II A/c and abnormal

Loss / Gain Accounts showing the cost per kg of output in both the processes.

4) An article passed through three processes. From the figures shown the

cost of each of the three processes during the month of January 2010. Prepare

Process Account.

Particulars Process I Process II Process III

Materials Used ` 1,500 5,000 2,000

Labour ` 8,000 20,000 6,000

Direct Expenses ` 2,600 7,200 2,500

The indirect expenses amounting to ` 1,500 may be apportioned on the

basis of wages.

The number of articals produced during the month are 240.

5) A product passes through two distinct processes A and B and then to finished

stock. The output of A passes direct to B and that of B to finished stock. From the

following information you are required to prepare the process accounts.


NOTES

116


Particulars Process A Process B

Materials Consumed ` 12,000 6,000

Direct Labour ` 14,000 8,000

Manufacturing Expenses ` 4,000 4,000

Output Units 9,400 8,300

Input in Process A Units 10,000 -

Input in Process A Value in 10,000 -

Normal Wastage (%of input) 5% 10%

Value of Normal Wastage (Per 100 units) ` 8 Rs.10

No opening or closing stock is held in process.

6) A product passes through three processes X, Y and Z before its completion.

From past experience it is realised that wastage is incurred in each process as

under :

X - 2%, Y - 5% and Z - 10% of the units introduced in the process.

Scarp value : X ` 10 for 100 units

Y ` 15 for 150 units

Z ` 40 for 100 units

Other details are :

Particulars X Y Z

Materials ` 6,000 3,000 1,500

Direct Wages ` 9,000 6,000 4,500

Manufacturing Expenses ` 1,500 1,500 2,200

30,000 units are issued to Process ‘X’ at a cost of `15,000. The output of

Process ‘X’ - 29,200 units, ‘Y’ - 28,200 units and ‘Z’ - 24,000 units.

Show the Process Accounts.

7) A product passes through three processes to completion in January 1999,

the cost of production were given as below :

Particulars Process I Process II Process III

Direct Materials ` 2,000 3,020 2,462

Wages ` 3,500 4,226 5,000

Production Overheads ` 1,500 2,000 2,500

1000 units were issued to Process I at ` 5 each

Particulars I II III

Normal Loss % 10% 5% 10%

Wastage Realised per unit ` 3 ` 5 ` 6

Actual production units 920 870 800

Prepare the necessary process accounts.Advanced Cost Accounting - III

NOTES

117


8) The product ‘X’ is obtained after it is produced through three distinct

processes. The following cost information is available for the operation:

Particulars Total Process I Process II Process III

Materials ` 5,625 2,600 2,000 1,025

Direct Wages ` 7,330 3,500 4,226 5,000

Production Overheads ` 7,330 - - -

500 units at 4 per unit were introduced in Process I. Production overheads

are absorbed at 100% of direct wages. The actual output and normal loss of the

respective processes are:

Particulars Output Normal Loss Value of Scrap

Units on Input per unit

%

Process I 450 10% 2

Process II 340 20% 4

Process III 270 25% 5

There is no stock of work-in-progress in any process.

Show the three process accounts and abnormal loss and abnormal gain

account.

9) In a manufacturing concern the output of ‘A’ process is transferred to ‘B’

process. It has been the experience that normal wastage in process A is 5% and

in case of B 10% of the units entering the process. The scrap value of normal

wastage ` 50 per hundred units in Process A and ` 80 per hundred units in

Process B.

Particulars Process A Process B

Materials 10,000 6,000

Wages 8,000 4,000

Manufacturing Expenses 2,000 2,000

In process A one thousand units were entered at a cost of ` 5,000. The

output of Process A is 900 units and Process B 750 units.

Prepare Process ‘A’ Account and Process ‘B’ Account.

7.5 Further Reading





5. ‘Cost Accounting’ - B. K. BharAdvanced Cost Accounting - III

NOTES

118



Unit 8 Operating or Service Costing

Unit 9 Operating Costing (Practical)

Unit 8 Operating or Service Costing

Structure

8.0 Introduction

8.1 Unit Objectives

8.2 Meaning of Operating Costing

8.3 Features of Operating Costing

8.4 Industries which use Operating Costing

8.5 Operating Cost Units

8.6 Formats of Operating Cost Sheets

8.7 Summary

8.8 Key Terms

8.9 Questions


8.0 Introduction

There are some organisations which are established with an objective of

providing some service to the customers. These organisations do not manufacture

and sell any product but they render service to the people who want to make use

of such service and they charge a price for the service provided to the customers.

These organisations have to calculate cost incurred by them for creating and

providing the service and on the basis of cost calculated, they have to decide how

much charge should be made to the customers. For such organisations a separate

method of costing has been created and it is called ‘Operating’ or ‘Service’ Costing.

In this Unit information about the operating costing is provided.

8.1 Unit Objectives

After studying the information given in this Unit, you should be bale to :-

• Understand meaning and nature of operating costing,

• Know in which industries use of operating costing is made,

• Understand different cost units used in operating costing, and

• Calculate cost for the units used in operating costing.


NOTES

119

Operating Or Service Costing(Theory)

8.2 Meaning of Operating Costing

In simple words it can be stated that operating costing is a method of costing

which is used for calculating cost per unit in those industries which do not produce

an article or product but which create and provide a service which is needed by

people in the society.

According to the Institute of Cost and Management Accountants (U.K.)

operating costing is “that form of operation costing which applies where

standardised services are provided either by an undertaking or by a service

cost centre within an undertaking.” Thus operating costing method can be used

by an undertaking in two types of situations; when an undertaking provides a

standardised service to outside customers at a certain price per unit of such service

and secondly when there exists a service cost centre which creates a service and

provides it to the other departments of the same undertaking. Example of the first

situation is a public transport organisation which provides service to those who

want to travel or send goods from one place to other place; the example of the

second situation is of a boiler house which is a service cost centre creating steam

and providing it to the production departments of the same undertaking for running

their plants and machines. Since in both these situations the output is not a product

but a service the operating costing is also known as ‘service costing’.

8.3 Features of Operating Costing

Operating Costing is similar to single or output costing with one major

difference that while in single or output costing cost of a unit of product

manufactured is calculated, in operating costing cost is calculated for a unit of

service rendered. Due to this difference there are some special features of

operating costing which are mentioned below :-

i) Operating Costing is a method of costing which is used for calculating cost

of a unit of service provided by an undertaking. The undertakings do not

produce any articles but create and provide a standardised service to

customers by charging a certain price per unit.

ii) Selection of Unit in operating costing is difficult and is required to be done

carefully. Units are to be selected for measuring service created and provided

to customers and as there are various types of services, for each type of

service a different unit is required to be used. The unit may be a simple unit

or it may be a complex or compound unit made up of two different factors.

As cost per unit of service is calculated in operating costing, selection of

unit must be done in a careful manner. In case of a transport organisation

which provides transport service to passengers, a simple unit can be cost

per passenger but when all passengers do not travel the same distance it

becomes necessary to use a compound unit such as per passenger per

kilometer so that fixation of fares for different distances can be done in a

proper way.


NOTES

120


iii) In operating costing costs are accumulated under suitable headings and

then they are spread over the cost units and total cost of per unit service is

calculated. The headings under which costs are accumulated may be fixed

costs, semi-fixed costs and variable costs or standing costs, maintenance

costs and operating or running costs or some other headings depending

upon the nature of service provided by the undertaking.

iv) Operating Costs are mostly period costs. These costs are incurred for a

specific period and they are recorded as costs incurred for a specific period

and they are accumulated under suitable headings for that period. On the

basis of number of cost service units that are calculated for the period, the

costs are divided among the cost service units and cost per service unit is

ascertained. In case of a transport organisation costs such as insurance,

rent of garage, salaries of drivers, conductors, managers, licence fee, road

taxes, depreciation of vehicles, etc. are periodic costs. Similarly in other

service rendering undertakings also most of the costs are period costs.

v) In those undertakings which use operating costing a lot of statistical data is

required to be collected and used for presentation as well as calculation of

cost per service unit. For example, in case of a transport organisation statistical

data such as number of passangers carried, distance travelled, number of

days in a month or quarter year for which the vehicle was operated, number

of trips made by the vehicle, life of the vehicle in years, time lost due to

accidents and maintenance, number of drivers and other personnel working

for the vehicle, period for which road taxes and taxes are paid, quantity of

petrol/diesel consumed, etc. is required to be collected and analysed for

finding out the cost per service unit.

8.4 Industries which use Operating Costing

Opertating Costing is used by those industries which are engaged in the

activity of rendering service to customers. Undertakings which function in the

following fields make use of operating costing :-

Transport - motor, rail, water and air. They may be providing service to passangers

who wish to travel from one place to other placer or they may provide

service for transporting goods.

Public Utility Services - supply of water, gas, electricity, communication etc.

Education - establishing and running schools, colleges, universities, technical

institutes etc.

Entertainment - sports clubs, theatres, dramas, liabraries, orchestras, Restuarants,

hotels, lodges, boardings, cafeteria, canteens.

Health - Hospitals, nursing-homes, diagnostic centres etc.

Some undertakings may be doing the work of creating the service and

providing the service to customers while some undertakings may buy the serviceAdvanced Cost Accounting - III

NOTES

121


from outside and merely provide it to customers. For example an electricity company

may itself generate electricity and provide it to its customers while some other

company may buy electricity from electricity generating company or power-station

and distribute it among its customers. Undertakings which create/produce the

service and then sell it to the customers will have to follow more elaborate costing

system than the undertaking which buys the service from outside and merely sells

it to its customers.

8.5 Operating Cost Units

Undertakings which use operating costing are interested in finding out cost

per service unit incurred by them so that they can take proper decisions about rate

or price to be charged to customers whom the service is provided. Information

about cost per service unit also enables them to compare such cost with their own

costs incurred in the past and to judge their efficiency in creating and providing

the service to the customers. If there are options available regarding the method

to be used or equipments to be used, cost per service unit in each option enables

them to decide which option is more profitable since use of it results in bringing

the cost per service unit to the minimum.

As the type of service created is different in different organisations which

use operating costing, it is obvious that the cost service unit cannot be same in

different organisations. For some of the organisations the cost units used are

given below :-

Type of organisation/undertaking Cost Unit

Transport organisations - i) Passangers Per Passanger Kilometre

Per Passanger Mile

ii) Goods Per Ton Kilometre

Hospitals Per Patient - day / Per bed /

Per Operation

Electricity Supply Per Kilowatt Hour (KWH)

Canteens Per Tea-cup, Per Meal

Cinema Per Man show

Hotels (Rent) Per Room / Per person bed

Gas works 1000 cubic feet produced

Boiler house (department) 1000 Kilo

8.6 Formats of Operating Cost Sheets

Operating cost sheet is prepared to show the costs incurred for providing

service to customers. It is prepared for a specific period (a month or a quarter of

year) and the costs are recorded under suitable headings such as fixed or standing

costs, maintenance costs, variable or operating costs. Total amount incurred forAdvanced Cost Accounting - III

NOTES

122


Check Your Progress

i) What is meant by‘operating’ or ‘servicecosting’ ? Give definitionof ‘operating costing’.

ii) What are the features ofoperating costing ?

iii) In which industries use ofoperating costing is done?

iv) What is ‘an operatingcost unit’ ? Give examplesof different industrie andoperating cost units usedin them.

each item of cost under each heading during the specific period is shown and by

adding the total cost of each heading total cost for the specific period is worked

out. Cost per unit is calculated by dividing total cost of the specific period by total

number of service units during the specific period.

Below are given two specimen of operating cost sheet used in transport

organisations :

Specimen 1 :

Operating Cost Sheet

Vehicle No : ---------- Period : ------------------

Cost Unit : ------------ No of Cost Units : -----

Capacity : ------------

Item of Cost Total Per Unit

` `

Fixed / Standing Costs :

Insurance

Taxes

Licence Fee

Interest

Depreciation of the vehicle

General Administration charges

A -------- --------

Maintenance Costs :

Garage Rent

Garage Staff Salaries

Garage Other Expenses

Repairs and Maintenance

Cleaning Expenses

Overhaul Expenses

Spare-parts Cost

B -------- --------

Operating / Running Costs :

Cost of Petrol/ Diesel, Oil, etc.

Salaries of Drivers, Cleaners, Mechanic

Depreciation of Tyres, Tubes, Battery

Toll Charges

C -------- --------

Total (A+B+C) -------- --------


NOTES

123


Note :- Depreciation of the vehicle is assumed on time basis and so included

under Fixed / Standing Costs.

Specimen 2 :

Operating Cost Sheet

Vehicle No : ---------- Period : ------------------

Cost Unit : ------------

Capacity : ------------

Item of Cost Budget Actual

Total Per Unit Total Per Unit

` ` ` `

Standing / Fixed Costs :

Insurance

Interest

Taxes

Licence Fee

General Administration Charges

A ------ ------ ------ ------

Maintenance Costs :

Garage Rent

Garage Expenses

Garage Staff Salaries

Repairs and Maintenance

Clearing Charges

Overhaul Expenses

Lubrication Oil Expenses

Spare Parts Cost

B ------ ------ ------ ------

Operating / Running Costs :

Depreciation of the Vehicle

Depreciation of Tyres, Tubes, Battery

Salary of Driver, Cleaner, Mechanic

Cost of Petrol / Diesel, Oil, etc.

Toll Charges

C ------ ------ ------ ------

(1) Total Operating Cost (A+B+C) ------ ------ ------ ------

(2) Total Units : ------ Passanger k.m./

------ Ton k.m.

(3) Per Unit Cost : (1 divided by 2) .....Advanced Cost Accounting - III

NOTES

124


Notes : i) Depriciation of the vehicle is included under the heading of Operating /

Running Costs assuming that the vehicle is depreciated on the basis of

life of the vehicle in terms of running hours of the vehicle.

ii) Budgeted Costs are compared with the actual costs and variation is

recorded. Causes of variation are found out and necessary steps are

taken to control costs.

Log Book :

A transport organisation maintains a log book for each vehicle owned and

operated by it. A log book provides complete information about the history of the

vehicle right from date of purchase, price at which the vehicle has been purchased,

its registration number, capacity in terms of number of passangers or goods in

tons, insurance, taxes paid, life of the vehicle, estemated scrap value at the end of

its life, etc and on the basis of these particulars calculation of some of the standing

charges to be recorded in the operating cost sheet can be done.

In the second part of the log book information about the vehicle staff such

as driver, cleaner, mechanic, etc. their names, addresses, remuneration payable to

them, garage rent/depreciation, garage staff and their salaries, repairs and renewals

cost, cleaning charges, overhauling cost and other maintenance expenses is

provided. On the basis of this information repairs and maintenance cost to be

recorded in the operating cost sheet can be calculated. [If remuneration is paid to

the driver and cleaner on monthly basis it will be recorded under standing charges

and not under repairs and maintenance heading.]

Third part of the log book provides information about the running expenses

of the vehicle such as petrol or diesel consumption, kilometers run per litre of

petrol / diesel, lubricant, grease and oil expenses, depreciation of tyres, tubes and

battery, insurance of goods carried and salary of driver, cleaner and mechanic if

the salary is paid on the basis of running hours of the vehicle. Depreciation of

vehicle will also come under this heading if such depreciation is provided on the

basis of life of the vehicle in terms of running hours of the vehicle.

Daily Log Sheet :

A transport organisation gives a daily log sheet to the driver of each vehicle

every day and the driver is required to complete the details in the daily log sheet

and return it to the office at the end of the day. The daily time sheet mainly covers

information about the trips made by the vehicle in the day, route of the trips,

number of passangers or number of tons of goods carried, timings of each trip,

consumption of petrol / diesel, expenses of lubricants, grease, etc., distance cover

in each trip, delays caused and causes of delays, etc. On the basis of these details

some items of costs recorded under running costs can be calculated and recorded

in the operating cost sheet. Calculation of the service cost units such as km travelled,

passanger km / ton km can be completed by using the details provided in the daily

log sheet. A proforma of daily log sheet is given below :


NOTES

125


Daily Log Sheet

Vehicle No : ---------------------- Date :------------

Driver’s name : ------------------ Out time : ----------

Licence No. : ------------------ In time : -----------

Trip Particulars

Trip No. Starting Arriving Goods/Passangers Distance Remarks

Place Time Place Time Carried travelled

Out Collected Km.

enroute

Supplies : Worker’s Time : Time Lost :

Petrol / Diesel -------- Driver -------- Loading --------

Oil -------- Conductor -------- Unloading --------

Grease -------- Cleaner -------- Traffic delays --------

Mechanic -------- Accident --------

Any other --------

Operating Cost Sheets are also prepared by other service rendering

organisations such as boiler house, power generating organisations, hotels and

canteens, educational institutions, hospitals, etc. Of course, depending upon the

nature of service provided by the organisation the types of costs incurred and the

grouping of them under the headings differs in the operating cost sheet. Specimen

of some of these operating cost sheets are given below :


NOTES

126


Operating Cost Sheet of a Power Station

Month ------ Units of Electricity Generated ---------

Cost Item Total Cost for Cost per

the month KWH

Steam Production Cost :

Coal and coke --------

Water purchased --------

Water softners --------

Wages of coal handling --------

Wages of stockers --------

Repairs and Maintenance --------

Lubricant oil --------

--------

Less Credit on account of :

i) Sale of Ash --------

ii) Cost of steam supplied to --------

manufacturing shops --------

Total Cost of Steam Production (A) -------- --------

Electricity Generation Cost :

Cost of Steam Production (A) --------

Operaters’ Wages --------

Stores --------

Repairs and Maintenance --------

Depreciation of electricity generating

Equipments --------

Supervision Charges --------

Proportionate Overheads Charged --------

Interest on Capital --------

Total Cost of Generating Electricity -------- --------


NOTES

127


Operating Cost Sheet of a Canteen

For the month --------------

Items of Cost Total Cost Cost Per Unit

` `

A] Provisions :

Bread

Butter

Buiscuits

Cakes

Tea

Coffee

Eggs

Chicken

Fish

Vegetable

Rice

Atta

Dal

Sugar

Ghee

Milk

Fruits

Others

B] Labour and Supervision :

Salary of Cooks

Salary of Waiters

Salary if Canteen Manager

Helpers

Salary of Cleaners

Salary if Sweepers

C] Consumable Stores :

Cost of Table Linens

Cost of Cutlery

Cost of Crockery

Cost of Paper NapkinsAdvanced Cost Accounting - III

NOTES

128


D] Maintenance :

Rent, Taxes

Light Charges

Insurance

Gas

Cost of Power, Steam, etc

Depreciation of Furniture

Depreciation of Canteen Building

Water Charges

Electricity charges

Total -------- --------

Receipts from :

Sale of meals -------- --------

Sale of snacks, tea, coffee, etc -------- --------

Total Receipts -------- --------

Subsidi from the Organisation -------- --------

( Total Cost - Total Receipts )

8.7 Summary

Operating costing which is also known as service costing is a method of

costing which is used in those organisations which do not produce and sell any

product but which provide some service to customers needed by them. Therefore,

transport organisations which carry passangers or goods form one place to another

by running bus service, truck service, air service, railway service, water transport

service, organisations creating and supplying electricity, hotel, lodging and canteen

service, educational institutions, hospitals and nursing homes, public utility services

like water, gas, communications, etc., organisations providing entertainment like

cinema, sports clubs, orchestras, drama theatres use operating costing system.

In operating costing calculation of cost is done per unit of service rendered.

The service provided to customers is a standardised service and the unit for

calculation of cost differs from service industry to service industry. The unit may

be a simple unit or it may be a compound unit made up by two different factors;

e.g. cost per k.m. of running is a simple unit whereas cost per passanger k.m. is

compound unit.

In operating costing for calculation of per unit cost an operating cost sheet

is prepared for a specific period in which costs are recorded under certain headings

and the unit cost is calculated for each heading and by adding the unit cost under

the different headings, the total unit cost is calculated.Advanced Cost Accounting - III

NOTES

129


Check Your Progress

i) Give formats ofOperating Cost Sheetsused in transportorganisation.

ii) What is a Log Book ?Which details arerecorded in it ?

iii) How will you prepareOperating Cost Sheet tobe used for a canteen ?

iv) Under which heads thecosts are recorded in anOperating Cost Sheet ofa power station ?

For accurate calculation and presentation of operating cost a lot of statistical

information is required to be recorded and analysed by the organisation. When

total cost per unit is calculated, expected profit margine is added to it for determining

the rate to be charged to the customers for per unit service provided to them.

8.8 Key Terms

i) Operating Costing : It is a method of costing used by industries and

organisations which do not produce any product but create standardsed

service and provide it on a unit basis at a certain price to those who need

the service.

ii) Operating Cost Unit : Industrial/organisations which create and provide

service are required to decide cost per unit of service are so that they can

take decision about the rate to be charged to customers per unit of service

provided, such unit is known as ‘operating cost unit’. It may be a simple unit

or a compound or complex unit.

iii) Operating Cost Sheet : It is a document prepared by industrial units/

organisations which follow operating costing method, in which the various

costs are recorded under certain heads showing total costs and per service

unit cost for a specific period.

8.9 Questions


A] Short answer questions

(1) What is meant by ‘Operating Costing’ ?

(2) Mention the industires which use operating costing.

(3) Give 3 examples of simple unit and 2 examples of compound unit used in

Operating Costing.

(4) Mention the headings under which costs are grouped in operating cost sheet

of a transport organisation.

(5) Mention the Cost Units used in following organisations for Cost Calculation:-

i) Passanger Transport

ii) Electricity Generating Industry

iii) Hospital

iv) Goods Transport Organisation


NOTES

130


B] Long answer questions

1) What is ‘Operating Costing’ ? In which industries/organisations operating

costing is used ?

2) Define ‘Operating Costing’. Explaine the features of Operating Costing.

3) Draw a specimen of operating cost sheet for a passanger transport

organisation.

4) What do you mean by a Log Sheet ? What is the information recorded in it?

5) What are the various items of cost of operation of an electricity generating

undetaking ? Draw an operating cost sheet for such undertaking.

6) Briefly explain the procedure to be followed for recording of various items

to cost incurred by a canteen.


(1) Operating Costs are mostly ---------- costs.

(a) Fixed Costs.

(b) Semi-fixed Costs.

(c) Standing Costs.

(d) Period Costs.

(2) In those undertakings which use Operating Costing a lot of ----- data is

required to calculate.

(a) individual.

(b) primary.

(c) secondary.

(d) statistical.


Group I Group II

(a) Transport (i) hotels.

(b) Public Utility Service (ii) diagnostic centres.

(c) Education (iii) technical institutions.

(d) Health (iv) Communication.

(v) water and air.

Ans. : (a) - (v), (b) - (v), (c) - (iii), (d) - (ii).Advanced Cost Accounting - III

NOTES

131


(4) Operating costing is that form of operation costing which applied where --

-------- services are provided by an undertaking.

(a) minimum

(b) maximum

(c) optimum

(d) standarised.

(5) Operating Costing is a method of costing which is used for calculating ----

--- by undertaking.

(a) cost of unit of service provided.

(b) cost of unit produced.

(c) costof a article produced.

(d) cost of an item assembled.

(6) Selection of unit in operating costing is ----------

(a) an easy task.

(b) done authomatically.

(c) difficult task.

(d) routine work.

(7) Undertakings which use operating costing take proper decisions about ----

------

(a) rate to be charged to customers.

(b) the production of units.

(c) running their plants & machinery.

(d) unsold stock of goods.


(a) Operating Costing is similar to single or output costing with some major

differences.

(b) Selection of unit in operating costing is difficult and is required to be

done carefully.

(c) Operating Costs mostly period costs.

(d) Operating cost is ultimately related to specific order costing.

Ans. : (1 - d), (2 - d), (4 - d), (5 - a), (6 - c), (7 - a), (8 - d).


NOTES

132



NOTES

133








Unit 9 Operating Costing (Practical)

Structure

9.0 Introduction

9.1 Unit Objectives

9.2 Preparation of Operating Cost Sheets

9.2.1 Operating Cost Sheet in Transport Organisations

(Illustrations 1 To 7)

9.2.2 Operating Cost Sheet in Power Generating Organisations

(Illustrations 8 To 9)

9.2.3 Operating Cost Sheet in Canteens

(Illustration 10)

9.3 Summary

9.4 Exercises

9.0 Introduction

In Unit 8, theoretical information about Operating Costing Method has been

provided. It was pointed out that to find out the Unit Cost of an organisation which

uses operating costing method, it is necessary to prepare operating cost sheet and

specimen of the operating cost sheet were provided. In this Unit we will consider

how the Operating Cost Sheets are prepared for different organisations by studying

a few illustrations.

9.1 Unit Objectives

After studying the illustrations given in this Unit, you should be able to :

• Prepare Operating Cost Sheets for different types of organisations which

use Operating Costing Method; and

• Understand how per unit cost is calculated in these organisations.


NOTES

135

Operating Costing (Practical)

9.2 Preparation of Operating Cost Sheets

9.2.1 Operating Cost Sheet in Transport Organisations

ILLUSTRATION 1

Reliable Transport Company has provided following information about a

truck owned by it :

Capacity of the truck 3 ton.

Cost of the truck ` 8,00,000

Life of the truck 10 years

Scrap value of the truck at the end of its life ` 60,000.

Cost of diesel ` 50 per litre.

Average cost of repairs and maintenance ` 4,000 per month.

Driver’s wages ` 12,000 per month.

Cleaner’s wages ` 4,000 per month.

Annual Insurance Premium for the track ` 6,000.

Annual Tax ` 2040.

Supervision and other overheads allocated to the truck ` 1,000 per annum.

Average estimated cost of battery, types, tubes, etc. ` 69,000 p.a.

Rent of garage apportioned to the truck ` 1,500 p.m.

Overhaul expenses of the truck ` 1,500 per month.

Lubricants, oil, etc. 1,000 per month.

Interest payable on loan taken for purchase of the truck is ` 4,080 per month.

The truck runs between two cities A and B which are 100 k.m. apart.

When the truck starts from A city on its outward trip, it is loaded to its full capacity

and on its inward trip from B city, it is loaded to 60% of its capacity on an average.

The truck runs for 25 days in a month and completes one round trip each

day.

The truck gives an average of 8 km per litre of diesel.

You are required to calculate :

a) Operating Cost of the truck per ton km, and

b) Decide the freight rate per ton km if a profit of 40% on the freight is desired

by the company.


NOTES

136


SOLUTION

Reliable Transport Company

Operating Cost Sheet of the Truck

Cost Unit : per ton km

Item of Cost Per Month Per ton Km

` `

Standing Charges :

Insurance premium 6,000

500.00 12 months

Taxes ` 2040

170.00 12

Supervision and overheads ` 1,00083.33allocated 12 months

Depreciation of the truck 6,166.67

Driver’s Wages 12,000.00

Cleaner’s Wages 4,000.00

Interest on Loan 4,080.00

Total Standing Charges (A) 27,000.00 2.25

Maintenance Costs :

Repairs and maintenance 4,000.00

Rent of the garage allocated 1,500.00

Lubricant, oil, etc. 1,000.00

Overhaul expenses 1,500.00

Total Maintenance Cost (B) 8,000.00 0.67

Running / Variable Costs :

Cost of diesel 31,250.00

Average cost of battery, tyres, ` 69,000

5750.00 tubes, etc.

12 months

Total Running Costs (C) 37,000.00 3.08

Total Operating Cost (A+B+C) 72,000.00 6.00

Add Expected Profit @ 40% on Freight Rate 4.00

Freight Rate per ton km 10.00

Notes and Calculations :

(1) Calculation of ton km per month :

Ton km = (Distance from A city to B city x Weight in tons) +

(Distance from B city to A city x Weight in tons) x 25 days

= (100 km x 3 tons) + (100 km x 1.8 tons) x 25 days


NOTES

137


= (300 km x tons + 180 km tons) x 25 days

= 480 ton km x 25 days

= 12,000 ton km

(2) Calculation of Depreciation of the truck per month :

Depreciation Amount =Cost of truck - Scrap Value

Life in years x 12 months

=` 8,00,000 - 60,000

10 years x 12 months

=` 7,40,000

120 months

= ` 6166.67

(3) Cost of the diesel consumed per month :

=

Distance travelled x cost per litre x No. of days travelled

km travelled per litre

=200 km x ` 50 x 25 days

8 km per litre

= ` 31,250.

(4) Calculation of freight rate per ton km :

Profit desired is 40% on freight rate. Therefore, if freight rate is 100, profit included

in it is 40 and total cost is 60

If cost is 60 - Freight rate is 100

If Operating Cost per ton km is ` 6, Freight Rate is ` 10.

ILLUSTRATION 2

PQR Transport Company runs a bus service between two cities which are

75 km apart. The company has provided following data related to the bus for the

month of May, 2013 :

Cost of the bus ` 9,50,000

Estimated scrap value of the bus at the end of 10 years of its life is ` 50,000

There is one driver, one conductor and one mechanic for the bus and their monthly

salaries are ` 12,000, ` 10,000 and ` 6,000 respectively.

Road Tax and other taxes for the bus amount to ` 9,000 per annum.

The Company has appointed one traffic manager who is paid 20,000 salary perAdvanced Cost Accounting - III

NOTES

138


month and one-fifth of this salary is allocated to the bus.

Supervision and other clerical expenses apportioned to the bus amount to 2,500

per month.

2% p.a. is the insurance premium payable on the value of the bus.

The bus runs 12 km per litre of petrol and the cost of the petrol is ` 78 per litre.

Expected Repairs and Maintenance Charges for the bus are 24,000 per annum.

Cleaning charges of the bus are ` 500 per month.

Cost of tyres, tubes, batteries etc. is estimated at ` 150 per 100 km of running.

The bus completes one round trip between the two cities every day and operates

on an average for 25 days in a month.

Prepare Operating Cost Sheet for the bus for the month of May, 2013 and

calculate the cost per km of running the bus.

SOLUTION

Notes & Calculations :

(1) Calculation of Depreciation per month :

Cost of the bus - Scrap Value

Life of the bus in months

=

` 9,50,000 - 50,000

10 years x 12 months

=

` 9,00,000

120 months

= ` 7,500

(2) Kilo meters run by the bus in May, 2013 :

Kilometers run per day x No. of days operated

= 75 km x 2 x 25 days

= 150 km x 25 days

= 3,750 km

(3) Cost of petrol per km :

The bus runs 12 km per litre of petrol and the cost of petrol is `78 per litre.

Cost of petrol per k.m. of running = ` 78

12 km

= ` 6.50 Advanced Cost Accounting - III

NOTES

139


Cost of petrol consumed in May, 2013 = Cost per k.m. x Total k.m. run

= ` 6.50 x 3,750 km

= ` 24,375

(4) Cost of tyres, tubes, batteries, etc. for May, 2013 :

Cost of tyres, tubes, batteries etc. is estimated at ` 150 for 100 k.m. run by the

bus.

Cost for May, 2013 =` 150

x 3,750 km100 km

= ` 5,625

Per km cost =` 5,625

3,750 km

= ` 1.50 per km

(5) Allocation of traffic manager’s salary :

Traffic manager’s monthly salary is ` 20,000 and one-fifth of it is to be

allocated to the bus.

Amount allocated to the bus = ` 20,000 x 1/5

= ` 4,000

(6) Insurance premium per month :

` 9,50,000 x 2/100 x 1/12 = ` 1583.33


NOTES

140


P Q R Transport Company

Operating Cost Sheet of the bus for May, 2013

Total units : 3,750 km

Item of Cost Per Month Per km

` `

Standing / Fixed Costs :

Salary of driver 12,000

Salary of conductor 10,000

Salary of mechanic 6,000

Road Tax and other taxes ` 9,000 750

12

Traffic Manager’s salary 4,000

Supervision and clerical charges 2,500

Insurance premium 1,583.33

Total Standing Cost (A) 36,833.33 9.82

Maintenance Cost :

Repairs and Maintenance` 24,000

= 2,000

12

Cleaning charges ` 500

Total Maintenance Cost (B) 2,500.00 0.67

Running / Variable Costs :

Cost of petrol consumed 24,375

Cost of tyres, tubes, batteries etc. ` 5,625

Depreciation of the bus ` 7,500

Total Running Cost (C) 37,500.00 10.00

Total Operating Cost (A+B+C) 76,833.33 20.49

Notes :

(1) Depreciation on the bus is included under the heading of ‘running costs’. It

can be included under the heading of ‘standing / fixed costs’ also.

(2) Operating cost per km is calculated as instructed in the problem. If information

about the seating capacity of the bus and actual number of passengers carried in

each trip was provided in the problem, calculation of cost per passenger k.m.

could have been done.


NOTES

141


ILLUSTRATION 3

From the following data relating to the vehicle, of Ghatge Patil Transport

Co. Kolhapur calculate the cost per running Kilometer .

`

Cost of Vehicle 1,00,000

Road Licences Fees (annual) 5,100

Garage Rent (annual) 4,800

Insurance Charges (annual) 2,100

Supervision and Salary (annual) 12,000

Drivers Wages per hour 2.00

Cost of Diesel per litre 4.00

Repairs and Maintenance per km 2.20

Tyres and Batteries per km 1.80

Kilometers run per litre 20 km

Kilometers run annual 20,000 km

Estimated Life of the vehicle 1,00,000 km

You are required to charge Interest on Cost of vehicle @ 10% p.a., the

vehicle runs 20 km per hour on an average :

SOLUTION

In the books of Ghatge Patil Transport Co., Kolhapur

Statement showing Cost per km.

(Cost unit - per km.)

Particulars Per Year Per km

` `

A) Standing Charges : 1.70

(Fixed Charges)

i) Road Licence Fees 5,100

ii) Insurance Charges 2,100

iii) Supervision and Salary 12,000

iv) Interest on Cost of Vehicle 10,000

v) Garage Rent (+) 4,800

Total Standing Charges 34,000

B) Maintenance Charges :

(Semi-Variable charges)

i) Repairs and Maintenance 2.20

ii) Tyres and Batteries 1.80


NOTES

142


C) Running Charges :

(Variable charges)

i) Depreciation 1.00

ii) Drivers Wages 0.10

iii) Cost of Diesel (+) 0.20

Cost per km 7.00

Working Notes :

i) Depreciation : =Cost of Vehicle

= ` 1,00,000

= ` 1Estimated Life km 1,00,000

ii) Drivers Wages : = `2

= 10 Ps.20 km

iii) Cost of Diesel : =` 4

= 20 Ps.km 20

iv) Interest on Cost of vehicle : = 10% of ` 1,00,000

= ` 10,000

v) Standing charges : =` 34,000

= ` 1.70km 20,000

ILLUSTRATION 4

From the following data calculate the cost per running mile of Road Lines

Transport Co., Raipur.

Particulars Vehicle I Vehicle II

Mileage run (annual) Miles 15,000 6,000

Cost of Vehicle ` 2,50,000 1,50,000

Road Licence (annual) ` 7,500 7,500

Annual Insurance ` 7,000 4,000

Annual Garage Rent ` 7,250 5,420

Supervision and Salaries (annual) ` 24,000 24,000

Driver’s Wages per hour ` 30 30

Cost of fuel per litre ` 20 20

Miles run per litre Miles 20 15

Repairs and Maintenance per mile ` 1.65 2

Tyre Allocation per mile ` .80 .60

Estimated Life of vehicles Miles 1,00,000 75,000

Charges interest @ 15% p.a. on the cost of vehicles. The vehicles run 20

miles per hour on an average.Advanced Cost Accounting - III

NOTES

143


SOLUTION

In the books of Road Lines Transport Co., Raipur

Statement showing Cost per mile

(Cost unit - per mile)

Particulars Vehicle - I Vehicle - II

Per Year Per Mile Per Year Per Mile

A) Standing Charges : 5.55 10.57

(Fixed Charges)

i) Road licence 7,500 7,500

ii) Insurance 7,000 4,000

iii) Supervision and Salaries 24,000 24,000

iv) Interest on Cost of Vehicles 37,500 22,500

v) Garage Rent (+) 7,250 (+) 5,420

Total Standing Charges 83,250 63,420

B) Maintenance Charges

(Semi- variable charges)

i) Repairs and Maintenance 1.65 2.00

ii) Tyre Allocation 0.80 0.60


(Variable Charges)

i) Depreciation 2.50 2.00

ii) Drivers wages 1.50 1.50

iii) Cost of fuel (+) 1.00 (+) 1.33

Cost per mile 13.00 18.00

Working Notes :

I II

i) Depreciation : =` 2,50,000

=` 1,50,000

M 1,00,000 M 75,000

= ` 2.50 = ` 2

ii) Driver’s Wages I II

=` 30

=` 30

M 20 M 20

= ` 1.50 = ` 1.50


NOTES

144


iii) Cost of Fuel : I II

=` 20

=` 20

M 20 M 15

= ` 1 = ` 1.33

iv) Interest on Cost of vehicle :

I - 15% - ` 2,50,000 = ` 37,500

II- 15% - ` 1,50,000 = ` 22,500

v) Standing Charges : I II

=` 83,250

=` 63,420

M 15,000 M 6,000

= ` 5.55 = ` 10.57

ILLUSTRATION 5

From the following information relating to Royal Transport Co., Raigad

calculate the cost per running km.

Wages to Drivers per month ` 500

Cost of Diesel per litre ` 1.50

Cost of Mobile Oil per litre ` 10.00

Annual Cleaning and Servicing ` 2,460

Insurance Charges per year ` 4,000

Yearly Road Tax ` 6,400

Repairs and Maintenance for twelve months ` 1,200

Cost of Tyre, Tubes etc. per year ` 1,800

Diesel km. per litre km. 4

Mobile km. per litre km. 50

Cost of Vehicle ` 1,30,000

Estimate Life Years 5

Residual Value of Vehicle ` 30,000

Interest on Cost of Vehicle p.a. % 7

Estimated annual run km. 36,000


NOTES

145


SOLUTION

Working Notes :

i) Driver’s Wages :

=` 500 x 12 months

= ` 0.17

km. 36,000

ii) Cost of Diesel :

=` 1.50

= ` 0.38

km. 4

iii) Cost Mobile Oil :

=` 10

= ` 0.20

km. 50

iv) Repairs and Maintenance :

=` 1,200

= ` 0.03

km. 36,000

v) Cost of Tyre, Tubes etc. :

=` 1,800

= ` 0.05

km. 36,000

vi) Interest on Cost of Vehicle :

= 7% of ` 1,30,000 = ` 9,100

vii) Depreciation :

=Cost of Vehicle - Residual value of Vehicle

Estimated life of Vehicle

=` 1,30,000 - ` 30,000

= ` 20,0005 years

=` 20,000

km. 36,000

= ` 0.56

viii) Standing charges :

=` 21,960

= ` 0.61km. 36,000


NOTES

146


In the books of Royal Transport Co., Raigad

Statement Showing Cost per running km.

Particulars Per Year Per km` `


(Fixed Charges)

i) Cleaning and Servicing 2,460

ii) Insurance Charges 4,000

iii) Road Tax 6,400

iv) Interest on Cost of Vehicle (+) 9,100

Total Standing Charges 21,960


(Semi-Variable charges)

i) Repairs and Maintenance 0.03

ii) Cost of Tyre, Tubes etc. 0.05


(Variable Charges)

i) Driver’s Wages 0.17

ii) Cost of Diesel 0.38

iii) Cost of Mobile Oil 0.20

iv) Depreciation (+) 0.56

Cost per km 2.00

ILLUSTRATION 6

Varun Transport Co., Pune owns a fleet of taxis and the following information

is available from their records.

Number of Taxis Number 10

Cost of each Taxi 20,000

Monthly Salary to the Staff -

• Manager - 3,000

• Accountant - 2,500

• Cleaner - 2,000

• Mechanic - 1,500

Garage Rent per month ` 1,000

Monthly Insurance Premium ` 84

Yearly Taxes ` 600 per taxi

Monthly Salary to Driver per taxi ` 200

Annual Repairs per taxi ` 1,000


NOTES

147


Total life of a taxi is about 2,00,000 km. A taxi runs in all 3,000 km. in a

month of which 30% it runs empty. Petrol consumption is one litre for 10 km. @

21.80 per litre. Oil and other sundries are `5 per 100 km.

Calculate the cost of running a taxi per km.

SOLUTION

Working Notes :

i) Calculation of effective kms run per month :

The taxi runs 30% empty which means its effective run is only 70% and

hence, all costs must be calculated taking into consideration its effective run i.e.

70% of 3,000 km i.e. 2,100 km.

Kms.

Monthly running of a taxi-km 3,000

Less : 30% empty i.e. 30% of 3,000 km (-) 900

Actual monthly run-km 2,100

ii) Depreciation :

= Cost of Taxi

Estimated Life of a Taxi

= ` 20,000

= ` .10km. 2,00,000

=` .10 x 3,000 km

2,100 km.

= ` 0.14

iii) Salary of Manager :

=` 3,000

10 Taxis

= ` 300


NOTES

148


In the boks of Varun Transport Co., Pune

Statement showing Cost of running a taxi per km.

(Cost Unit - per Km.)

Particulars Per Year Per km

` `


( Fixed Charges )

i) Manager’s Salary 300

ii) Accountant’s Salary 250

iii) Cleaner’s Salary 200

iv) Mechanic’s Salary 150

v) Insurance Premium 84

vi) Taxes 50

vii) Garage Rent 100

Total Standing Charges 1134


( Semi - Variable Charges )

i) Repairs 0.04


( Variable Charges )

i) Depreciation 0.14

ii) Driver’s Salary 0.10

iii) Petrol Consumption 3.11

iv) Oil and Other Sundries (+) 0.07

Cost per km 4.00

iv) Salary of Accountant :

=` 2,500

10 Taxies

= ` 250

v) Salary of Cleaner :

=` 2,000

10 Taxies

= ` 200

vi) Salary of Mechanic :

=` 1,500

10 Taxis

= ` 150


NOTES

149


vii) Garage Rent :

=` 1,000

10 Taxis

= ` 100

viii) Taxes :

= ` 600

= ` 5012 months

ix) Driver’s Salary :

=` 200

= ` 0.102,100 km.

x) Repairs :

=` 1,000

= ` 83.3312 months

=` 83.33

2,100 km.

= ` 0.04

xi) Petrol Consumption :

=` 21.80

= ` 2.1810 km.

=` 2.18 x 3,000 km

2,100 km.

= ` 3.11

xii) Oil and Other Sundries :

= ` 5

= `

.05100 km.

=` .05 x 3,000 km

= ` 0.07 2,100 km.

xiii) Standing Charges :

=` 1,134

= ` 0.54

2,100 km


NOTES

150


ILLUSTRATION 7

From the following data relating to two passengers vehicles named Ganga

and Yamuna, of Saibaba Transport Co., Sangali you are required to calculate the

cost per running km.

Particulars Ganga Yamuna

Cost of Vehicle ` 1,00,000 60,000

Annual Road Licence ` 3,000 3,000

Insurance Per Annum ` 2,800 1,600

Yearly Garage Rent ` 2,400 2,000

Supervision and Salaries for twelve months ` 5,200 2,325

Driver’s Wages per running hour ` 6 6

Cost of Petrol per litre ` 3.50 3.50

Repairs and Maintenance per km. ` 3.30 3.30

Cost of Tyre and Tubes per km. ` 3.59 4.10

Estimate Life kms 1,60,000 1,20,000

km. per litre of petrol kms 10 12

Annual kms run kms 24,000 9,000

Charge interest @ 10% p.a. on cost of vehicles and vehicle runs 40 km. per

hour on an average.

SOLUTION

Working Notes :

Ganga Yamuna

i) Depreciation :

= Cost of Vehicle

=` 1,00,000

=` 60,000

Estimated Life of Vehicle km. 1,60,000 km. 1,20,000

= ` 0.63 = Re. 0.50

ii) Driver’s Wages :=

` 6=

` 6

40 km. 40 km.

= Re. 0.15 = ` 0.15

iii) Cost of Petrol :=

` 3.50=

` 3.50

km. 10 km. 12

= ` 0.35 = ` 0.29

iv) Interest on Cost of Vehicle : = 10% of = 10% of

` 1,00,000 ` 60,000

= ` 10,000 = ` 6,000

v) Standing Charges :=

23,400=

` 14,925

km. 24,000 km. 9,000

= ` 0.98 = ` 1.66Advanced Cost Accounting - III

NOTES

151


In the books of Saibaba Transport Co. Sangali

Statement showing Cost per running km.

(Cost unit - per km)

Particulars Ganga Yamuna

Per year Per Mile Per year Per Mile` ` ` `

A) Standing Charges : 0.98 1.66

(Fixed Charges)

i) Road Licence 3,000 3,000

ii) Insurance 2,800 1,600

iii) Supervision and Salaries 5,200 2,325

iv) Interest on Cost of Vehicle 10,000 6,000

v) Garage Rent (+) 2,400 (+) 2,000

Total Standing Charges 23,400 14,925


(Semi-Variable Charges)

i) Repairs and Maintenance 3.30 3.30

ii) Cost of Tyre and Tubes 3.59 4.10


(Variable Charges)

i) Depreciation 0.63 0.50

ii) Driver’s Wages 0.15 0.15

iii) Cost of Petrol (+) 0.35 (+) 0.29

Cost per km 9.00 10.00

9.2.2 Operating Cost Sheet in Power Generating Industry

ILLUSTRATION 8

From the following information provided by Zed Thermal Power Station for

the year 2012-13. Prepare a Cost Sheet showing the cost of electricity generated

per unit of kwh :

Total Units generated 10,00,000 kwh

Operating labour 75,000

Repairs & Maintenance 60,000

Lubricants, Spares and Supplies 50,000

Plant Supervision 45,000

Administration Overheads 25,000

Coal consumed per kwh for the year is 3 kg @ ` 0.20 per kg.

Depreciation to be charged on capital cost of ` 5,00,000 @ 5% p.a.


NOTES

152


SOLUTION

Operating Cost Sheet of Zed Thermal Power Station

For the year 2012-13

Total Cost Cost per kwh

` `

A) Fixed Costs :

Plant Supervision 45,000

Administration Overheads 25,000

Depreciation on Capital cost of

5,00,000 @ 5% p.a. 25,000

Total Fixed Cost 95,000 0.095

B) Running / Variable Costs :

Cost of Coal Consumed

(3 kg x 0.20 x 10,00,000 kwh) 6,00,000

Operating labour 75,000

Repairs & Maintenance 60,000

Lubricants, Spares and Supplies 50,000

Total Running Cost 7,85,000 0.785

Total Cost (A + B) 8,80,000 0.88

ILLUSTRATION 9

The Jabalpur Thermal Power Generating Station has given following data

for a period of one month about the electricity generated by it. You are required to

prepare an Operating Cost Sheet for the month showing the cost per unit of

electricity generated.

i) Fuel :

Coal stock at the beginning of the month 300 tons

Supply of coal during the month 1400 tons

Coal stock at the end of the month 500 tons

As per the contract, coal is supplied at the colliery F.O.R. at ` 40 per ton.

Add 10% to cover freight and handling expenses.

ii) Oil : 8 tons at ` 450 per ton.

iii) Water : 30,000 liters. Pumping Charges at `4.5 per 100 liters.

iv) Depreciation of Steam Boiler : Capital value of the steam Boiler `

80,000 and rate of depreciation 12 1/2 % p.a.

v) Salaries and wages of the staff at the Boiler House :

12 workers at ` 2000 p.m.

30 coolies at ` 800 p.m. Advanced Cost Accounting - III

NOTES

153


vi) Sale of Ash : 100 tons @ ` 5 per ton.

vii) Salaries and Wages of staff of the Generating Station :

50 workers at a wage rate of ` 3,000 p.m.

20 unskilled workers at a wage rate of `1000 p.m.

viii) Repairs & Maintenance of the Generating Equipment ` 5200 p.m.

ix) Capital Value of the Generating Equipment is ` 3,60,000 on which

depreciation at 10% p.a. is to be provided.

x) Administration overheads apportioned 4000 p.m.

xi) Number of Units generated in the month are 82,000 Units out of which

2,000 Units are lost in the process of generation.

SOLUTION

Total Units generated in the month 82,000

Less Units lost in the process 2,000

Net Units generated in the month 80,000

Operating Cost Sheet of The Jabalpur Thermal

Power Station for the month ------

Net Units generated : 80,000

Total Cost Cost per unit

` `

A) Cost of materials consumed :

Coal : Opening stock 300 tons

Add Supplied during the

month 1400 tons

1700 tons

Less Closing Stock 500 tons

Coal consumed 1200 tons

Cost of coal at ` 40 per ton

for 1200 tons 48,000

Add Freight & Handling

Expenses @ 10% ` 4,800 52,800.00

Oil : 8 tons @ ` 450 per ton 3,600.00

Water : 30,000 litres pumped

at 4.50 per 100 litres 1,350.00

57,750.00 0.722


NOTES

154


B) Salaries & Wages :

i) For Boiler House :

12 workers at 2,000 p.m. 24,000.00

30 coolies at 800 p.m. 24,000.00

ii) For Generating Station :

50 workers at 3,000 p.m. 1,50,000.00

20 unskilled workers at 1,000 p.m. 20,000.00

2,18,000.00 2.725

C) Depreciation :

i) On Steam Boiler : 80,000 at

12 1/2% p.a. 833.33

ii) On Generating Equipment : 3,60,000

at 10% p.a. 3,000.00

3,833.33 0.048

D) Repairs & Maintenance of Generating

Equipment 5,200.00 0.065

Total (A + B + C + D) 2,84,783.33 3.560

Less Sale of Ash

100 tons at ` 5 per ton 500.00 0.006

Works Cost 2,84,283.33 3.554

Add Administration overheads 4,000.00 0.050

Total Cost 2,88,283.33 3.604

9.2.3 Operating Cost Sheet in Canteen

ILLUSTRATION 10

PQR Co. Ltd. runs a canteen for its employees and provides subsidy, if

required. Following details of costs incurred for the canteen in the month of March,

2014 are provided to you :

Purchase of provisions during March, 2014 :

Quantity Rate

(kgs/litres) (per kg/litre)

Milk 250 30

Sugar 200 32

Tea 10 250

Atta 500 28

Vegetable Oil 60 65

Rice 300 40Advanced Cost Accounting - III

NOTES

155


Dal 75 60

Beson 15 40

Vegetables 100 30

Potato 50 18

Onion 70 15

Spices 5 200

Other expenses for March, 2014 :

Transport Charges ` 250

Salary to Cook ` 4,000

Salary to Waiters (5 waiters) ` 1,000 each

Salary to Helpers (2 helpers) ` 600 each

Salary of Canteen Manger ` 8,000

Fuel, Gas, etc. ` 2,200

Miscellaneous Expenses :

Crockery, Glassware ` 400

Depreciation of Utensils ` 300

Depreciation of Furniture ` 500

Depreciation of Canteen Hall ` 200

Sale of Coupons : For Tea 8,000 coupons of ` 1 each

For Meals 12,000 coupons of ` 5 each

Opening and closing stock of provisions :

Sugar Atta Rice Tea

On 1st March, 2014 25 kg 40 kg 15 kg 2 kg

On 31st March, 2014 30 kg 30 kg 20 kg 1 kg

Prepare an Operating Cost Statement and show how much subsidy should

the company give for March, 2014.


NOTES

156


SOLUTION

In the Books of PQR Co. Ltd.

Statement showing the amount of subsidy to be given

to the Canteen for the month of March, 2014


` `

Opening Stock of Provisions :

Sugar 25 kgs x 32 800

Atta 40 kgs x 28 1,120

Rice 15 kgs x 40 600

Tea 2 kgs x 250 500 3,020

Add Purchases :

Milk 250 litres x 30 7,500

Sugar 200 kgs x 32 6,400

Tea 10 kgs x 250 2,500

Atta 500 kgs x 28 14,000

Vegetable Oil 60 litres x 65 3,900

Rice 300 kgs x 40 12,000

Dal 75 kgs x 60 4,500

Beson 15 kgs x 40 600

Vegetables 100 kgs x 30 3,000

Potato 50 kgs x 18 900

Onion 70 kgs x 15 1,050

Spices 5 kgs x 200 1,000 57,350

60,370

Less Closing Stock :

Sugar 30 kgs x 32 960

Atta 30 kgs x 28 840

Rice 20 kgs x 40 800

Tea 1 kg x 250 250 2,850

57,520

Labour Charges :

Salary to Cook 1 x 4,000 4,000

Salary to Waiters 5 x 1,000 5,000

Salary to Helpers 2 x 600 1,200

Salary to Canteen Manager 1 x 8,000 8,000 18,200

Fuel, Gas, etc. 2,200 2,200


NOTES

157


Consumable Stores :

Crockery and Glassware 400 400

Miscellaneous Charges :

Transport Charges 250 250

Depreciation

On Utensils 300

On Furniture 500

On Canteen Hall 200 1,000

Total Operating Cost 79,570

Less Sale of Coupons :

For Tea (8,000 x 1) 8,000

For Meals (12,000 x 5) 60,000 68,000

Amount of Subsidy to be given 11,570

[Note : Valuation of opening stock and closing stock of items is done at the purchase

price as the valuation rates for them is not provided in the problem.]

9.3 Summary

For the organisations which render service to the customers, operating

costing or service costing method of costing is used. In order to record costs and

to calculate unit cost (which may be simple unit or compound unit) Operating Cost

Sheet is prepared. Generally, in Operating Cost Sheet costs are grouped under

three heads - standing charges, maintenance charges and running charges.

However, depending upon the type of service and the activity carried on by the

organisations, the operating cost sheet may be prepared by grouping the costs

under some other groups. Total cost shown by the Operating Cost Sheet is divided

by total units of the service and per unit cost of the service is calculated.

9.4 Exercises

1. From the following data, calculate the cost per mile of a vehicle of Charminar

Transport Co., New Delhi.

Cost of vehicle 1,00,000

Garage Rent per year ` 4,800

Insurance charges per year ` 1,600

Road tax per year ` 2,000

Driver’s wages per month ` 805

Cost of petrol per litre ` 5.60

Tyre maintenance per mile ` 0.80

Estimated life of vehicle miles 1,50,000

Miles per litre of Petrol miles 5

Estimated annual mileage miles 10,000Advanced Cost Accounting - III

NOTES

158


2. From the following data, you are required to ascertain the cost of running

the lorry per tonne-mile of Durga Transport Co., Dombivali. Total tonnage

carried in a week 30 tonnes and total mileage carried in a week was 600

miles. Details of above are as follows :

Days Miles Tonnes

Monday 120 6

Tuesday 125 5

Wednesday 110 4

Thursday 100 5.5

Friday 80 4.5

Saturday 65 5.0

Total 600 30.00

The expenses for the week were as follows :

Driver’s salary 200 per month, Cleaner’s salary 100 per month, Petrol,

Oil etc. 30 paise per mile, Repairs and Maintenance `300 per month,

Depreciation `4,800 per annum and Other expenses `200 per month.

(There are four weeks in a month).

3. M/s Eagle Transport Ltd., Edalabad charges `60 per tonne for a 5 tonne

lorry from Edalabad to Jalgaon. The charge for return trip is 56 per tonne.

In the month of July MH-12-4889, made ten outward Journey’s with full

load out of which 3 tonnes were unloaded at Pachora twice in the month. It

returned once without any load from Burdwan.

The details of expenses are as follows :

Annual fixed charges 19,000

Annual maintenance charges ` 9,600

Monthly operating charges ` 12.2

Additional data available are :

Distance from Edalabad to Pachora kms 30

Distance from Pachora to Jalgaon kms 45

MH-12-4889 carried a load of 8 tonnes 5 times in the month while returning

from Jalgaon but was once caught by police and fined `1,000.

You are required to calculate the cost per ton km. and also the profit in the

month of July 2010 assuming that no concession is made for delivery at the

intermediate stages.

4. Harekrishna owns a luxury bus which runs from Bangalore to Chittor and

back for 10 days in a month. The distance from Banglore to Chittor is 200

kms. The bus completes the trip from Bengaluru to Chittor and back on the

same day. The bus goes another 10 days in a month towards Mysore. The

distance from Bengaluru to Mysore is 130 kms. The trip is also completed

in the same day. For the rest 4 days its operation in a month it runs in the Advanced Cost Accounting - III

NOTES

159


local city. The daily distance covered in the local city is 70 kms. Calculate

the rate that Harekrishna should charge per passenger when he wants to

earn a profit of 25% of his takings. The other information is given below :

Cost of the Bus ` 1,50,000

Depreciation rate p.a. 15%

Salary of Driver p.a. ` 500

Salary of Conductor p.a. ` 500

Salary to Part Time Accountant p.a. ` 250

Insurance p.a. ` 1,800

Diesel Consumption 6 km per litre ` 1.50 per litre

Token Tax p.a. ` 800

Lubricant Oil ` 20 per 100 km.

Repairs and Maintenance per month ` 1,000

Permit Fee per month ` 560

Normal Capacity Persons 50

The bus uses generally 90% of the capacity when it goes to Chittor and

80% when it goes to Mysore. It is always full when it runs within the city.

The passenger is 25% of the next takings.

5. Mr. Milkha Singh has started transport business with a fleet of 10 taxis.

The various expenses incurred by him are given below :

Cost of each taxi ` 75,000

Salary of office staff per month ` 1,500

Salary of general staff per month ` 2,000

Rent of garage per month ` 1,000

Driver’s salary (per taxi) per month ` 400

Road tax and Repairs (per taxi) p.a. ` 2,160

Insurance premium p.a. 4% of cost

The life of a taxi is 3,00,000 km. and at the end of which it is estimated to

be sold at ` 15,000. A taxi runs on an average 4,000 km. per month of

which 20% is runs empty. Petrol consumption is 9 km. per litre of petrol

costing 6.30 per litre. Oil and other sundry expenses amount of 10 per

100 km.

Calculate the effective cost of running a taxi per km. If the hire charge rate

is 1.80 per kilometer, find out the profit. Mr. Milkha Singh may expect to

make in the first year of operation.

6. From the following data, calculate the cost per mile of vehicle :

Value of vehicle ` 25,000

Garage rent per year ` 1,200

Insurance charges per year ` 400

Road tax per year ` 500Advanced Cost Accounting - III

NOTES

160


Driver’s wages per month ` 400

Cost of petrol per litre ` 1.40

Tyre maintenance per mile ` 0.20

Estimated life Miles 1,50,000

Miles per litre of Petrol miles 5

Estimated annual mileage miles 10,000

7. Modern Transport Co., Mumbai is running two buses between two places -

100 kms. part. Seating Capacity of each bus is 50 passengers. The following

particulars are taken from their books for a month of July, 2010.

Wages of drivers, conductors and cleaners ` 3,000

Salary of supervisory and office staff ` 1,500

Diesel, oil etc. ` 6,000

Repairs and maintenance ` 1,500

Taxation and insurance ` 2,000

Depreciation ` 3,000

Interest and other charges ` 2,500

Actual passengers travelled were 80% of the capacity. The buses ran on

all the days. Each bus made a to and fro trip.

Find out the cost per passenger kilometer.

8. Surya Transport Co., Sangli owns a fleet of 10 trucks each costing 60,000.

The company has employed one manager to whom it pays Rs. 450 p.m., an

account who gets 250 p.m., and a peon who gets 100 p.m. The company

has got it’s trucks insured @ 2% per annum. The annual total tax is 1,200

per truck. The other expenses were as follows :

Driver’s salary per month 200

Cleaner’s salary per month 80

Machanic’s salary per month 300

Repairs and maintenance per year 1,200 for one truck

Diesel consumption 3 kms. per litre at 0.90 per litre

The estimated life of the truck is 5 years.

Other information :

Distance travelled by each truck per day 200 kms.

Normal loading capacity 100 quintals.

Wastage in loading capacity 10%

Percentage of truck laid up for repair 5%

Effective days in a month 25

Calculate : a) Cost per quintal km. and b) Cost per km. of running a truck.


NOTES

161


Topic 3 Cost Books

Unit 10 Cost Journal and Ledger

Unit 11 Integral and Non-integral

Accounting System

Unit 10 Cost Journal and Cost Ledger

Structure

10.0 Introduction

10.1 Unit Objectives

10.2 Cost Accounting Record and Processes

10.3 Cost Accounting Records Rules

10.4 Companies ( Cost Accounting Records) Rules, 2011

10.5 Cost Ledger and Control of Cost

10.5.1 Cost Ledgers

10.2.2 Control Accounts

10.5.3 Accounting Treatment of Journal Entries

10.6 Summary

10.7 Key Terms

10.8 Questions


10.0 Introduction

Cost Accounting is an internal part of a firm’s formal accounting system.

There are three methods for recording costs which can be used by a firm :

i) Memorandum cost records : Under this method cost records are not

tied with the General Ledger accounts.

ii) Incorporation of manufacturing costs in General Ledger : Under this

method due to incorporation of manufacturing cost in general ledger, it reflects

current inventory balances, cost of sales, variations from standards and

other details of cost, and

iii) Maintenance of separate General Ledger and Cost Ledger : In this

method the cost ledger is tied in with the general ledger for purchases and

manufacturing expenses. However, current inventory balances, cost of sales,

etc. are carried out in the cost ledger.

There are definite advantages for separate cost recording. Cost accounts

are essentially maintained on principles of double entry book-keeping. The cost

accounts are integrated with the financial accounts, being kept in the same ledger

with additional accounts being opened to provide the necessary functional analysis.Advanced Cost Accounting - III

NOTES

163

Cost Journal & Cost Ledger

In order to prove that cost and financial accounts are in agreement, Reconciliation

of Cost and Financial Account Statement becomes essential. Integral accounting

is a method of accounting in which both cost and financial accounts are kept in the

same ledger.


After studying this Unit you should be able to :

• Understand cost accounting records rules and processes; and

• Know the meaning, operating and advantages of cost ledger,

10.2 Cost Accounting Record and Processes

Cost Accounting provides tremendous help to a business in its routine and

non-routine decisions. It is equally important to weigh the cost of the system

against it’s advantages. There are certain external requirements imposed on an

organisation that necessiate the establishment of minimum cost requirements .

For example, maintenance cost accounting records as required under Companies

Act 1956. The primary advantages of cost accounting of course, is that it shows

precisely where costs are incurred, giving a realistic basis for cost cutting. Actually,

it helps to determine, the profitability of products being made and sold.

The Government of India had issued “Cost Accounting Record Rules” in

respect of number of products / industries ( as listed under section 209 (1) (d) of

companies Act )

10.3 Cost Accounting Records Rules

According to these rules, all companies engaged in activities of production

or manufacturing, etc. (for which cost accounts records have been prescribed)

should maintain accounting records relating to the utilization of materials, labour

and other items of cost. Such books of account should facilitate the calculation

and disclosure of cost of production and cost of sales of the products at a periodical

intervals. All books of account and the proforma prescribed by the rules should be

completed within the prescribed time limit after the end of the relevant financial

year of the company.

a) Requirement of Records as per rules.

The following are the main requirement of Cost Accounting (Records) Rules

generally applicable for various industries in India.

i) Records for Raw Materials.

ii) Records for Labour.


NOTES

164


iii) Records for Overheads.

iv) Records for Utilities / services.

v) Records for Fixed Assets.

vi) Records for Packing.

vii) Records for Research and Development Expenses.

viii) Records for Conversion Cost.

ix) Records for By-products.

x) Records for Work-in-Progress and Finished Goods.

xi) Records for Cost of Productions and Marketing.

xii) Reconciliation of Cost Records with Financial Books.

xiii) Computation of Variances.

xiv) Physical Verification.

xv) Statistical Data.

b) Areas of maintenance of Cost Accounting Records.

i) Raw materials, components, stores and spare parts etc.

ii) Wages and Salaries.

iii) Overheads.

iv) Utilities.

v) Service department expenses including workshop repair and

maintenance.

vi) Depreciation.

vii) Royalty / Technical knowhow fee.

viii) Research and development expenses.

In addition to above eight areas, the cost accounting records may also be

maintained for the following :

i) Packing expenses, ii) Interest, iii) Expenses / incentive on export;

iv) Conversion Cost; v) Captive consumption; vi) Credit for by products

vii) Work-in-progress and finished goods stock;

viii) Production records

ix) Cost statements;

x) Reconciliation with financial accounts and adjustment of cost variances;Advanced Cost Accounting - III

NOTES

165


Check Your Progress

What are the main areas ofmaintenance of CostAccounting Records.

xi) Stock verification records;

xii) Inter-company transactions

xiii) Statistical Statements and other records.

10.4 Companies (Cost Accounting Records) Rules,2011

i) Legal Authority of the Companies (Cost Accounting Records) Rules,

2011.

Central Government, in exercise of the powers conferred by clause (b) of

sub-section (1) of section 642 read with clause (d) of section 209 of the

Companies Act, 1956 (1 of 1956), has notified Companies (Cost Accounting

Records) Rules 2011.

ii) Date from which Rules come into force.

The Companies (Cost Accounting Records) Rules 2011 have been published

vide G.S.R. 429(E) dated 3rd June, 2011. As per sub-rule (2) of Rule 1,

these rules have come into force on the date of publication in the Official

Gazette.

iii) Applicability.

The Companies (Cost Accounting Records) Rules, 2011 has superseded 36

cost accounting record rules

The said Rules are applicable to all companies engaged in production,

processing, manufacturing and mining activities as defined under Rules 2(j),

2(k), 2(l) or 2(o) respectively and where:

i) the aggregate value of net worth as on the last date of the immediately

preceding financial year exceeds five crores of rupees; or

ii) the aggregate value of net turnover made by the company from sale or

supply of all products or activities during the immediately preceding financial

year exceeds twenty crores of rupees; or

iii) the company’s equity or debt securities are listed or are in the process of

listing on any stock exchange, whether in India or outside India.

Any company meeting the above criteria would be required to maintain

cost accounting records and file a Compliance Report in the prescribed

format from financial year commencing on and from 1st April, 2011.

These Rules are not applicable to a company which is a body corporate

governed by a Special Act.

Further, the Companies (Cost Accounting Records) Rules 2011 is not

applicable to activities or products covered in any of the following rules :Advanced Cost Accounting - III

NOTES

166


(a) Cost Accounting Records (Bulk Drugs) Rules, 1974

(b) Cost Accounting Records (Formulations) Rules, 1988

(c) Cost Accounting Records (Fertilizers) Rules, 1993

(d) Cost Accounting Records (Sugar) Rules, 1997

(e) Cost Accounting Records (Industrial Alcohol) Rules,1997

(f) Cost Accounting Records (Electricity Industry) Rules,2001

(g) Cost Accounting Records (Petroleum Industry) Rules, 2002

(h) Cost Accounting Records (Telecommunications) Rules, 2002

In case a company is engaged in activities, in addition to the activities covered

by the above 8 Rules, such activities shall be covered under the Companies

(Cost Accounting Records) Rules 2011.

iv) Maintenance of cost records.

As per sub rule (2) of Rule 4, the companies are required to maintain cost

records on regular basis in such manner so as to make it possible to calculate

per unit cost of production or cost of operations, cost of sales and margin

for each of its products and activities for every financial year on monthly /

quarterly / half-yearly / annual basis. The cost statements are to be prepared

for every unit and every product produced, processed, manufactured or

mined.

As per sub rule (3), the cost records are to be maintained in accordance

with the generally accepted cost accounting principles and cost accounting

standards issued by the institute; to the extent these are found to be relevant

and applicable.

These Rules have not prescribed any specific formats for the cost statement.

A guidance note on the subject is under preparation by ICWAI, inter alia,

containing model formats for cost records, statements, schedules etc.

v) Meaning of ‘Turnover’ under these Rules.

As per Rule 2(p), “Turnover” means gross turnover made by the company

from the sale or supply of all products or services during the financial year.

It includes any turnover from job work or loan license operations but does

not include any non-operational income.

From a reading of the Rules, it appears that the word “Gross” denotes

“total”. Hence, the “Turnover” under these Rules would exclude duties and

taxes.

Note :

In view of the Master Circular No. 2/2011 dated 11th November 2011,

General Circular Nos. 67/2011 and 68/2011 dated 30th November

2011 the above clarification is superseded and the correct position is Advanced Cost Accounting - III

NOTES

167


Check Your Progress

Define the term “Turnover”under the Rule 2 (p).

given in “ Applicability” as mentioned above)

vi) Authentication of Compliance Report as per Rules.

As per Rule 5, the compliance Reports and annexure thereto is required to

be certified by a “Cost Accountant” as defined under Rule 2(c).

As per Rule 7, the annexure to the Compliance Report is to be duly approved

by the Board of Directors.

A “Cost Accountant” within the definition of these Rules does not include :

a) A member holding a part-time certificate of practice; or

b) A member who is in full time employment whose membership fees

are in arrears;

c) A member of ICWAI who has been admitted as a member through

reciprocal arrangement of membership by virtue of being a member

of Institute of Management Accountants USA.

Companies engaged in activities or products to which the cost accounting

records rules listed under Rule 3(a) to 3(h) apply will not be required to file

a Compliance Report until these Rules are amended.

However, if the concerned company is also engaged in other activities

covered under the Companies (Cost Accounting Records) Rules 2011, in

that case the company would be required to file a Compliance Report.

There is no ceiling on the number of compliance Reports that can be

authenticated by a Cost Accountant in whole-time practice. A Cost

Accountant working as permanent employee can authenticate the

compliance Report of the company where he is employed provided his

membership dues are not in arrears. He cannot authenticate compliance

Reports of any other company even under the same group.

vii) “Abridge Cost Statement”.

Books of account and other records relating to utilization of materials, labour

and other items of cost that provides data/information to compute the cost

of production, cost of sales and margin of each of the products/activities of

the company on monthly/quarterly/half-yearly/annual basis are considered

part of the cost records. It includes statistical, quantitative and other records

which enable the company to exercise, as far as possible, control over the

various operations and costs with a view to achieve optimum economies in

utilization of resources. Cost records are required to be maintained on

continuous basis from the basic stage of inputs to the final output.

There cannot be any exhaustive list of cost records. This would depend on

the materiality of cost components in the cost of the product/activity.

The abridged cost statement can be used as as sample cost statement. This

may be modified according to the need of the company.Advanced Cost Accounting - III

NOTES

168


viii) Treatment for manufacturing without the use of power :

The definition of product in Rule 2(m) includes manual operation as well.

Therefore, any production, processing, manufacturing or mining activity-

whether by use of power or not - are included for the purposes of these

Rules.

The test of inclusion under the Rules is whether it is a production, processing,

manufacturing or mining activity resulting in a product [for definition of

“product” refer to Rule 2(m)] intended for use, consumption, sale, transport,

store, delivery or disposal and whether the company carrying out the activity

falls within the criteria mentioned under Rule 3(1). If the company meets

requirement of Rule 3(1), the activity - whether or not for capitive/self-

consumption - will come under the ambit of these Rules.

Every company covered under Companies (Cost Accounting Records) Rules

2011 is required to file a Companies Report irrespective of whether all or

any of its products are covered under cost audit. Thus, the Compliance

Report shall include product groups covered under cost audit as well as

product groups not covered under cost audit.

ix) Report is to be prepared for the “Company as a whole”.

The compliance Report is to be prepared for the ‘company as a whole’

under different product groups.

The status of the company so far as applicability of cost audit is concerned

will remain unchanged until cost audit orders are issued for its other products/

activities now covered under Companies (Cost Accounting Records) Rules

2011. The company would now be required to maintain cost records for all

the products/activities irrespective of whether these are under cost audit or

not and also file a compliance Report.

It is mandatory to prepare unit-wise and product/activity-wise cost

statements as per the companies (Cost Accounting Records) Rules 2011.

For Compliance Certificate purposes, no cost statement is required to be

submitted.

However, if any or all the products / activities of the company is also covered

under Cost Audit, then for the purposes of submission of Cost Audit Report

under the Companies (Cost Audit Report) Rules 2011, a consolidated cost

statement for the product group (s) under cost audit is required to be

prepared.


NOTES

169


10.5 Cost Ledger and Control of Cost

There are two basic methods of maintaining cost accounts : (i) Independent

cost accounts or non-integrated accounting and (ii) Integral or integrated cost

accounting.

i) Independent Cost Accounting System :

Under the traditional or non-integrated system a separate set of costing

books is maintained along with the financial books of accounts. Under this method,

the cost accounting department is responsible for maintenance of cost accounts

cost reports and statements. The cost ledger is quite independent of the financial

ledger. The accounts department is interested in all types of accounts i.e. personal,

real and nominal though the cost department in also basically concerned with the

income and expenditure of the firm.

ii) Integral or Integrated Cost Accounting System :

Integral accounts, signify a system in which both cost and financial ledgers

are merged into a composite system. This system relates to a single accounting

function which contain both financial and cost accounts.

10.5.1 Cost Ledgers

The ‘Cost Ledger’ is the principal ledger of costing department and various

control accounts are maintained therein. In large business, in addition to “Cost

Ledger” other relevent ledgers viz. Store Ledger, Work in Progress ledger, Finished

Goods Ledger etc. are maintained alongwith Cost Ledger.

‘Cost Ledger’ contains all impersonal accounts including overheads accounts

such as, factory, administrative selling and distribution overheads etc. All the other

ledgers which are supportive to “Cost Ledger” are serve as subsidiary ledgers.

When in large business organisation such subsidiary ledgers are maintained, it is

essential that the “Cost Ledger” should be made self-balancing by opening various

Methodsor

Systems ofMaintaining

CostAccounts

Independent CostAccounts or Non-

integrated accounting(Inter-locking)

Integral or IntegratedCost Accounting


NOTES

170


Check Your Progress

What is maintaining CostAccounts ? Which Systemsyou know ?

control accounts. In order to make ‘Cost Ledger’ self balancing ‘Corresponding

Entries’ related to above mentioned subsidiary ledgers, where a debit or credit,

are posted in a control accounts for each of the other ledgers maintained therein.

i) Store Ledger : It contains all accounts of individual items of raw materials,

components and consumable stores. In cost ledger a Stores Ledger Control

Account is opened to represent the stores ledger in total.

ii) Work-in-Progress Ledger : In this ledger, accounts of all jobs pending

on the floor are maintained. Each job is allotted a code number and a separate

account is opened for each job. Work-in-Progress Control Account is

maintained in the cost ledger which represents the Work-in-Progress Ledger

Account in total.

iii) Finished Goods Ledger : It contains item-wise accounts in respect

of finished goods intended for sale. Finished Stock Ledger Control Account

is maintained in cost ledger, to represent finished stock ledger in total.

In addition to the above mentioned three control accounts the Cost Ledger

contains i) General Ledger Control Account, ii) Wages Control Accounts and iii)

Overhead Control Accounts - Such as production overhead account, Administrative

overhead account, selling and distribution overhead accounts, cost of sales account

etc.

10.5.2 Control Accounts

In order to provide a ready means of preparing Profit and Loss Accounts

and Balance Sheet and other cost statements, control accounts are maintained in

accounting system. As discussed earlier, number of subsidiary ledgers are kept

for recording numerous transactions instead of posting them into general ledger.

The total of all these subsidiary ledger accounts are posted in total at the end of

the period to control accounts in the cost ledger. These accounts facilitate

compilation of financial accounts and reconciliation with financial accounts. These

cost control accounts also minimise and detect accounting errors like - nonposting,

wrong posting and other mistakes.

Following are the important Control Accounts which are opened in ‘Cost

Ledger’ as shown in figure 10.1

1) General Ledger Adjustment Account;

2) Store Ledger Control Account;

3) Work-in-Progress Ledger Control Account;

4) Finished Goods Ledger Control Account;

5) Wages Control Account;

6) Production Overhead Account;

7) Administration Overhead Account;


NOTES

171


Check Your Progress

How cost ledger is theprincipal ledger of costingdepartment ?

Check Your Progress

How many Control accountsyou know ?

Cost

Contol

Accounts

General Ledgeradjustment or

Control Account

Store Ledger

Control Account

Work in Progress

Control A

ccount

Finished G

oodsL

edger Control A

ccount

Wages Contro

l

Account

Production OverheadAccount

Administrative

Overhead Account

Selling and D

istribution

Overhead A

ccounts

Cost of Sales A

ccount

Costing Profit

and Loss

Account

1

2

34

5

6

7

8 9

10

Fig. 10.1 : Cost Control Accounts

8) Selling and Distribution Overhead Account;

9) Cost of Sales Account;

10) Costing Profit and Loss Account;

Advanced Cost Accounting - III172

1) General Ledger Adjustment (or Control) Account :

This account is essential to make the cost ledger “self-balancing”. All

transactions of income and expenditure which originate in the financial accounts

must be entered in this ledger for eventual transfer to cost control accounts. The

balance on this account represents the total of all balances of the impersonal

accounts. It is a total account which links Cost and Financial Accounts.

2) Stores Ledger Control Account :

In this account receipts and issues of materials are recorded from goods

received notes and stores requisitions respectively. The balance of this account

represents the total balance of stores which should agree with the aggregate

balances of individual accounts in the stores ledger.

3) Work-in-Progress Ledger Control Account :

This account indicates the total amount of work-in-progress, if any, direct

materials, direct labour costs, direct expenses, production overhead recovered

and is credited with the actual or predetermined cost of finished products transferred

to finished goods stores. Materials returns, transfer and abnormal time costs are

also credited to the respective jobs. The balance of this account will show total

balance of jobs which are in progress as per individual job accounts.

4) Wages Control Account :

This account relates to all types of wages and labour costs incurred. In

fact, this account acts as a clearing house for wages incurred and absorbed.

Direct wages are transferred to Work-in-Progress Account and indirect to

respective Overhead Control Accounts.

5) Production or Manufacturing Overhead Account :

This account contains the factory expenses. It is debited with indirect material

cost, indirect wages and indirect expenses and credited with the amount of

overhead recovered. Overheads allocable to Work-in-Progress are carried over

to the next period. The balance in the Control Accounts represents under or over

absorption and is transferred to Costing Profit and Loss Account.

6) Administration Overhead Account :

This account is debited with the administration cost and credited with the

overhead recovered. Any balance, in this account, is transferred to Costing Profit

and Loss Account.

7) Selling and Distribution Overhead Account :

Selling and distribution costs are debited to this account and credited with

the amount of overhead recovered. Balance, if any, is transferred to Costing Profit

and Loss Account.

8) Finished Goods Ledger Control Account :

This is also known as Stock Ledger Control Account. The total value of Advanced Cost Accounting - III

NOTES

173


finished goods in stock is represented in this account. This account is debited with

opening balance of finished goods and the cost of finished goods transferred from

Work-in-Progress Control Account. It is credited with the cost of sales and the

balance represents the amount of unsold stock in business.

9) Cost of Sales Account :

This account records the actual sales made and profit thereon. This account

is debited with the cost of goods sold, selling and distribution overhead, recovered

and is closed by transfer to Costing Profit and Loss Account.

10) Costing Profit and Loss Account :

This account records the transfer of the amount in respect of under-or

over-recovered overheads, the sale value of goods sold and balance from cost of

sale account. The account is also credited or debited with the abnormal losses or

gains. The closing balance represents profit or loss and is reconciled with the

profit or loss as per financial profit and loss account.

In short, all these control accounts are maintained as per the fundamental

principles of double entry book-keeping system. The working of all above mentioned

control accounts is explained with the help of following journal entries.


Following journal entries are to be passed in various control accounts.

Transactions Journal Entry

1) Materials Purchased :

a) For Stock • Debit Stores Ledger Control A/c

Credit General Ledger Adjustment A/c

b) For special jobs • Debit Work-in-Progress Control A/c


2) Materials Issued :

a) Direct Materials • Debit Work-in-Progress Control A/c

Credit Stores Ledger Control A/c

b) Indirect Materials • Debit Work-in-Progress Control A/c

Credit Store Ledger Control A/c

c) Return to Supplies • Debit General Ledger Adjustment A/c

Credit Store Ledger Control A/c

3) Materials Returned from • Debit Stores Ledger Control A/c

shop floor : Credit Work-in-Progress Control A/cAdvanced Cost Accounting - III

NOTES

174


4) Materials transferred from • No entry in Control Account. In Work-

job to job : in-Progress Ledger

• Debit Transferee Job A/c

Credit Transferor Job A/c

5) Labour :

a) Total Salary and Wages paid • Debit Wages Control A/c


b) Allocation :

For Direct Labour • Debit Work-in-Progress A/c

Credit Wages Control A/c

For Indirect Labour • Debit Respective Overhead Control A/c

Credit Wages Control A/c

6) Direct Expenses : • Debit Work-in-Progress Control A/c


7) Overheads :

a) Incurred and accrued Credit General Ledger Adjustment A/c

b) Recovered • Debit Work-in-Progress A/c (For works

overhead).

• Debit Finished Goods Ledger Control

A/c (For administration overheads).

• Debit Cost of Sales

(For selling and distribution overheads)

Credit Respective Overhead Control A/c

c) Work-in-Progress • Debit Work-in-Progress A/c

Credit Respective Overhead Control A/c

8) Finished Stock :

a) Produced • Debit Finished Goods Ledger Control A/c

b) Sold (at cost) Credit Work-in-Progress A/c

(i) Debit Cost of Sales A/c

Credit Finished Goods Ledger Control A/c

c) Sales Return (ii) Debit General Ledger Adjustment A/c

Debit Cost of Sales A/c Credit General

Ledger Adjustment A/c


NOTES

175


9) Capital Work (On completion) • Debit General Ledger Adjustment A/c

Credit Capital Order A/c

10) Repairs Work (on completion) • Debit Respective Overhead Control A/c

Credit Repair Order A/c

• (i) Debit Cost of Sales A/c Credit Work-

in-Progress Control A/c

(ii) Debit General Ledger Adjustment A/c

Credit Cost of Sales A/c

12) Total cost to make and sell • Debit Cost of Sales A/c

(profit) Credit Costing Profit and Loss A/c

13) Under absorption of overhead • Debit Costing Profit and Loss A/c

(if unadjusted) Credit Respective Overhead Control A/c

14) Over-absorption of Overhead • Debit Respective Overhead Control A/c

if unadjusted Credit Costing Profit and Loss A/c

15) Transfer of Net Profit • Debit Costing Profit and Loss A/c


ILLUSTRATION

Enter the following transactions relating to Escorts Ltd. Mumbai in the

Financial Books and Cost Books for the year ended 31st March, 2012.

Materials purchased : `

a) On Credit 15,000

b) Material purchased for special job on credit 1,200

c) Cash purchases 3,000

Material returned to supplier 1050

Material issue to jobs 9,300

Indirect Materials issued to jobs 750

Material returned from shop floor 600

Material transferred from (Job No. 911 to 901) 300


NOTES

176


11) Special Orders Completion

and sold immediately at

factory cost. (at total cost)

SOLUTION

In the books of Escorts Ltd., Mumbai

Financial Books

Date Particulars L.F. Debit Credit

` `

1) a) Purchases A/c Dr. - 15,000

To Creditors A/c - 15,000

(Being the amount of Credit purchases)

b) Purchases A/c Dr. - 1,200

To Creditors A/c - 1,200

(Being credit purchases for special Job)

c) Purchases A/c Dr. - 3,000

To Cash A/c - 3,000

(Being the amount of cash purchases)

2) Creditors A/c Dr. - 1050

To Purchases A/c - 1050

(Being material returned to suppliers)

( Note : No entries are required in the financial books for item Nos. 3, 4, 5, and 6

as they affect only the Cost Ledgers.)

Cost Books

Date Particulars L.F. Debit Credit

` `

1) a) Store Ledger Control A/c Dr. - 15,000

To General Ledger Control Adjustment A/c - 15,000

(Being the amount of Credit purchases)

b) Work-in-Progress Ledger Control A/c Dr. - 1,200

To General Ledger Control A/c - 1,200

(Being Materials purchases for special Job)

c) Stores Ledger Control A/c Dr. - 3,000

To General Ledger Control Adjustment A/c - 3,000

(Being cash purchases made)


NOTES

177


2) General Ledger Control A/c Dr. - 1050

To Store Ledger Control A/c - 1050

(Being material returned to suppliers)

3) Work-in-Progress Ledger Control A/c Dr. - 9,300

To Store Ledger Control A/c - 9,300

(Being material issued to jobs)

4) Factory Overhead Control A/c Dr. - 750

To Stores Ledger Control A/c - 750

(Being indirect material issued to jobs)

5) Stores Ledger Control A/c Dr. - 600

To Work-in-Progress Ledger Control A/c - 600

(Being material returned to stores)

6) Job No. 911 A/c Dr. - 300

To Job No. 901 A/c - 300

(Being material returned from Job No. 911

No. 901)

( Note : Item No. 6 affects two accounts of the same Work-in-Progress Ledger,

so the entry will be passed directly as above and not through Work-in-

Progress Ledger Control A/c)

10.6 Summary

Cost books are maintained for recording cost accounting records and a

firm may maintain these books by following any of the three methods available to

it. Under the first method Memorandum cost records are kept while under the

second method incorporation of manufacturing cost is done in the General Ledger

and under the third method separate General Ledger and Cost Ledger are

maintained. Cost Accounting Record Rules and Companies (Cost Accounting

Records) Rules, 2011 provide the rules which are required to be followed by the

firms to whom they become applicable while keeping the cost accounting records

and cost books. A Cost Ledger contains control accounts which help in controlling

costs. A Journal is also prepared in which journal entries are recorded related to

various costs and the journal is maintained on double entry principles of accounting.


NOTES

178


10.7 Key Terms

“Turnover” - As per rule 2 (p) “Turnover” means gross turnover made by

company from the sale or supply of all products or services during the

financial year.

“Cost Ledger” - Cost ledger is the main ledger of costing department and

various control accounts are maintains therein. In large business, in addition

to “cost ledger” other relative ledgers viz. Store ledger, Work in progress

ledger, Finished Goods Ledger etc. are maintained alongwith Cost Ledger.

10.8 Questions


1) What are control accounts ? Describe their advantages.

2) What is a cost ledger ? What advantages are available from maintaining a

cost ledger ?

3) Discuss the important control accounts maintained in costing .

4) You want to introduce control accounts in your company. What accounts

would you institute and from what sources would the entries be derived ?


(1) Cost Accounting provides tremendous help to business in its ------- decisions.

(a) planning & non planning.

(b) financial & non financial.

(c) routine & non-routine.

(d) policy & non-policy.


(a) The companies (Cost Accounting Records) Rules are applicable to all

companies not engaged in production, processing, manufacturing &

mining activity.

(b) The Companies (Cost Accounting Records) Rules is not applicable to

activities or products covered ‘Cost Accounting Records (Bulk Drugs)

Rules, 1974.

(c) The Companies (Cost Accounting Records) Rules is not applicable to

activities or products covered ‘Cost Accounting Records (Formulations)

Rules 1988.

(d) The Companies (Cost Accounting Records) Rules is not applicable to

activities or products covered “Cost Accounting Records (Electricity Advanced Cost Accounting - III

NOTES

179


industry) Rules 2001.

(3) As per Rule 2 (1) “Turnover” means -------- made by the company from

the sale or supply of all products or services during the financial year.

(a) net turnover

(b) actual turnover

(c) net sales

(d) gross turnover

(4) Cost Ledger contains all ----------- accounts including overheads accounts.

(a) impersonal

(b) personal

(c) individual

(d) personnel


Group I Group II

(a) General Ledger Adjustment Account(i) factory expenses

(b) Store Ledger Control Account (ii) labour cost

(c) Work in progress Ledger Control (iii) total balance of jobs which

Account are in progress

(d) Wages Control Account (iv) Receipts & issues of material

(v) self balancing.

Ans. (a) - (v), (b) - (iv), (c) - (iii), (d) - (ii)

(6) A Cost Ledger contains ----------- which helps in controlling costs.

(a) nominal accounts

(b) control accounts

(c) real accounts

(d) personal accounts

(7) A ---------- is a system of accounting under which only one set of accounts

books is maintained to record both the cost and financial transactions.

(a) Double Entry Book-keeping.

(b) Single entry system.

(c) Conventional accounting system.

(d) Integral System.


NOTES

188


(8) Cost Accounts are concerned with -----------

(a) impersonal accounts.

(b) Bank accounts.

(c) industries accounts

(d) creditors accounts

(9) In Integral System “Return of direct materials” is credited to ----------

(a) Store Control Account

(b) Work in progress Account

(c) Sundry Creditors Account

(d) Cost Ledger Account.

Ans. : (1 - c), (2 - a), (3 - d), (4 - a), (6 - b), (7 - d), (8 - a), (9 - b).








NOTES

180


Unit 11 Integral and Non-IntegralAccounting Systems

Structure

11.0 Introduction


11.2 Integral and Non-integral accounting systems

11.2.1 Integral System

11.2.2 Non-integral system


11.3 Reconciliation and integration between Financial Account and Cost Account

11.3.1 Reasons for differences

11.3.2 Reconciliation of Cost and Financial Accounts

11.3.3 Methods of Reconciliation of Cost and Financial Accounts :

(I) Preparation of Reconciliation Statement

(II) Preparation of Memorandum Reconciliation Account

11.3.4 Illustrations

11.4 Key Terms



11.0 Introduction

There are two systems of maintaining cost records. The first system is

known as integral system or integrated system under which only one set of

accounting books is kept to record financial as well as cost records. Cost accounts

and financial accounts are maintained in the same General Ledger. The second

system is known as non-integral or non-integrated system and under this system

separate General Ledgers are maintained - one for cost accounts and the other

for financial accounts. Under integral system of accounting the result shown by

cost accounts and financial accounts are same. However, when non-intergral

system is followed there may arise difference between results shown by cost

accounts and results shown by financial accounts and it becomes necessary to

reconcile the results shown by both General Ledgers.


NOTES

182

Integral & Non-integralAccounting Systems


After studying the information given in this Unit, you should be able to :-

• Understand meaning, features and advantages of integral accounting

system;

• Pass journal entries under integral system of accounting.

• Prepare Reconciliation statement, a statement of cost of manufacture

and a statement of profit as per cost accounts; and

• Prepare cost ledger.

11.2 Integral and Non-integral Accounting System

There are two systems of maintaining cost accounts : viz. Integral system

or Integrated system and Non-integral Non integrated or Interlocking system.

11.2.1 Integral System

Integral system is a system of accounting under which only one set of

account books is maintained to record both the cost and financial transactions. It

is known as integrated system.

Basic feature of Integral system are as follows :

i) Under this system various subsidiary ledgers are maintained as follows -

• Store Ledger

• Work in Progress Ledger

• Finished Goods Ledger

• Sales Ledger

• Purchase Ledger

• Overhead Ledger

ii) A control account for each subsidiary ledger is maintained in general ledger.

The main control accounts are as follows -

• Stores Ledger Control Account

• Work in Progress Control Account

• Finished Stock Control Account

• Sale Control Account

• Purchase Control Account

• Production Overhead Control Account

• Administrative Overhead Control AccountAdvanced Cost Accounting - III

NOTES

183


Check Your Progress

Which subsidiary ledgers aremaintained in IntegralSystem ?

• Selling and Distribution Overheads Control Account

• Wages Control Account

iii) No need for Cost Ledger : There is no need for cost ledger because all

control accounts are prepared in the financial ledger.

iv) No need for Cost Ledger Control Account : There is no need for cost

ledger control account because both the aspects of all transactions are

recorded in the respective accounts.

v) The balances of Overheads Control Accounts which represent under / over

absorption of overheads are transferred to Profit and Loss Account.

vi) The result of Profit and Loss Account i. e. profit or loss is transferred to

Profit and Loss Appropriation Account.

11.2.2 Non-Integral System

Meaning :

Non-integral system is a system of accounting under which two separate

sets of account books are maintained - one to record cost transactions and the

other to record financial transactions. It is also known as non-integrated system

or Inter-locking system or Cost Ledger Accounting system.

Definition :

CMIA London defines Non-Integral System as “a system in which the

cost accounts are distinct from financial accounts, the two sets of accounts

being kept continuously in agreement by the use of control accounts or made

readily reconcilable by other means.”

Basic Features of Non-integral System :

The basic features of Non-integral System are as follows :

i) Impersonal Accounts -

Cost accounts are concerned with impersonal accounts i.e. real and nominal

accounts.

ii) Various Ledgers -

Under this system one main ledger (i.e., cost ledger) and various subsidiary

ledgers are maintained. Following ledgers are maintained in cost books under

non-integral system :

• Cost Ledger

• Stores Ledger / Job Ledger

• Work in the Progress Ledger

• Finished Goods Ledger


NOTES

184


iii) Control Accounts -

Various Control Accounts are maintained under this system. Control

Accounts are the total/summary accounts which are maintained for the subsidiary

ledgers in the Cost Ledger under non-integral system, prepared on the basis of

periodic total of transactions in the respective subsidiary ledgers.

iv) Format of Important Control Accounts :

1) Store Ledger Control Account

Dr. Stores Ledger Control Account Cr.

Particulars ` Particulars `

To Balance B/D ...... By WIP Control A/c ......

To Cost Ledger Control A/c ...... (Issued to Production)

(Stores Purchased) By Production Overheads

Control A/c ......

(Issued for Factory Repairs)

By Administration Overheads

Control A/c ......

(Issued to Administration

Office)

By Selling & Distribution

Overheads Control A/c ......

(Issued to Selling &

Distribution Office)

By Capital WIP Control A/c ......

(Issued for Capital Order)

By Cost Ledger Control A/c ......

(Insurance Claim)

By Costing Profit and Loss A/c ......

(Irrecovered Abnormal Loss)

By Balance C/D ......

...... ......


NOTES

185


Check Your Progress

Which its are credited inStore Ledger Control A/c ?

2) Wages Control Account

Dr. Wages Control Account Cr.


To Cost Ledger Control A/c ...... By WIP Control A/c ......

(Total wages paid) (Direct wages)

By Production Overheads

Control A/c ......

(Indirect wages)

By Capital WIP Control A/c ......

(Wages for Capital Order)

...... ......

3) Production Overheads Control Account

Dr. Production Overheads Control Account Cr.


To Stores Ledger Control A/c ...... By WIP Control A/c ......

(Indirect Material) (Overheads absorbed/

To Wages Control A/c ...... charged)

(Indirect wages) By Costing Profit & Loss A/c

To Cost Ledger Control A/c ...... (Overheads under-absorbed

(Production Overheads due to abnormal reasons)

incurred)

To Costing Profit & Loss A/c ......

(Overheads over-absorbed

due to abnormal reasons)

...... ......


NOTES

186


4) Work-in-Progress Control Account

Dr. Work-in-Progress Control Account Cr.


To Balance B/D ...... By Finished Stock Ledger

To Stores Ledger Control A/c ...... Control A/c ......

To Wages Control A/c ...... (Cost of Finised goods

To Production Overheads produced & transferred to

Control A/c ...... warehouse)

By Balance C/D ......

...... ......

5) Finished Stock Ledger Control Account

Dr. Finished Stock Ledger Control Account Cr.


To Balance B/D ...... By Cost of Sales A/c ......

To WIP Control A/c ...... (Cost of Goods Sold

To Administration Overheads transferred)

Control A/c ...... By Balance C/D ......

...... ......


NOTES

187


6) Administration Overheads Control Account

Dr. Administration Overheads Control Account Cr.


To Cost Ledger Control A/c ...... By Finished Stock Ledger

(Administration Overheads Control A/c ......

incurred) (Overheads absorbed

/charged)

To Stores Ledger Control A/c ......

To Costing Profit & Loss A/c ...... By Costing Profit & Loss A/c ......

(Overheads over-absorbed (Overheads under-absorbed

due to abnormal reasons) due to abnormal reasons)

...... ......

7) Cost of Sales Account

Dr. Cost of Sales Account Cr.


To Finished Stock Ledger By Costing Profit and Loss A/c ......

Control A/c ...... (Cost of Sales transferred)

To Selling & Distribution


...... ......


NOTES

188


8) Selling & Distribution Overhead Control Account

Dr. Selling & Distribution Overhead Control Account Cr.


To Cost Ledger Control A/c. ...... By Cost of Sales A/c. ......

To Stores Ledger Control A/c. ...... (Overheads absorbed/

charged)

To Costing Profit & Loss A/c. ...... By Costing Profit & Loss

(Overheads over-absorbed) (Overheads under-absorbed)

due to abnormal reasons) due to abnormal reasons)

...... ......

9) Overhead Adjustment Account

Dr. Overhead Adjustment Account Cr.


To Production Overheads By Production Overheads

Control A/c (Under- Control A/c

absorbed) ...... (Over-absorbed) ......

To Administration Overheads By Administration Overheads

Control A/c. (Under-absorbed) ...... Control A/c (Over-absorbed)

To Selling & Distribution By selling & Distribution

Overheads Control A/c ...... Overheads Control A/c ......

(Under-absorbed) (Over-absorbed)

To Costing Profit and Loss A/c ...... By Costing Profit and Loss A/c ......

(Balancing figure) (Balancing figure)

...... ......

Alternavtively the under/over absorbed overheads may be carried forward

to the next accounting period by means of respective Overheads Suspense (or

Reserve) Accounts.


NOTES

189


10) Costing Profit and Loss Account

Dr. Costing Profit and Loss Account Cr.


To Cost of Sales A/c. ...... By Cost Ledger Control A/c. ......

To Stores Ledger Control A/c. ...... (Sales)

To Production Overheads

Control A/c. ......

To Administration Overheads

Control A/c. ......

To Selling & Distribution

Overheads Control A/c. ......

To Cost Ledger Control A/c.

(Profit) ......

...... ......

11) Cost Ledger Control Account

Dr. Cost Ledger Control Account Cr.


To Costing Profit & Loss ...... By Balance B/D ......

A/c (Sales) By Stores Ledger Control

To Balance C/D ...... A/c (Purchases) ......

By Wages Control A/c. ......

(Wages incurred)

By Production Overheads

Control A/c ......

By Administration Overheads

Control A/c ......

By Selling & Distribution


By Costing Profit & Loss ......

A/c (Profit)

...... ......


NOTES

190



Under the integral & Non-Integral accounts system following entries are to

passed for some regular nature transactions.


NOTES

191


Sr.

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tem

En

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12

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ater

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pur

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r. c

ost

ledg

er c

ontr

ol A

/c.

2)C

ash

purc

hase

s of

mat

eria

ls f

orD

r. P

urc

hase

sD

r. S

tore

Led

ger

Con

trol

A/c

Dr.

Sto

res

Con

trol

stoc

kC

r. C

ash

Cr.

Cos

t L

edge

r C

ontr

ol o

rC

r. C

ash

Gen

eral

Led

ger A

djus

tmen

t

3)M

ater

ials

pur

chas

ed f

or s

peci

alD

r. P

urc

hase

sW

IP L

edge

r co

ntro

l A

/c.

Dr.

Wor

k-in

-Pro

gres

s

jobs

Cr.

Sun

dry

Cre

dito

rs o

r C

ash

Cr.

Cos

t L

edge

r co

ntro

l A

/c.

Cr.

Cre

dito

rs o

r C

ash

4)P

urch

ase

of m

ater

ials

for

Dr.

Pu

rcha

ses

Dr.

Wor

k-in

-Pro

gres

s or

Dr.

Fac

tory

Ove

rhea

d C

ontr

ol

imm

edia

te r

epai

r w

ork

Cr.

Sun

dry

Cre

dito

rs o

r C

ash

Mat

eria

ls-i

n-P

rogr

ess

Cr.

Cre

dito

rs o

r C

ash

Cr.

Cos

t L

edge

r C

ontr

ol


NOTES

192


5)M

ater

ials

ret

urne

d to

sup

plie

rsD

r. S

undr

y C

redi

tors

Dr.

Fac

tory

Ove

rhea

d C

ontr

olD

r. S

undr

y C

redi

tors

from

sto

ckC

r. P

urch

ases

Cr.

Cos

t L

edge

rC

r. S

tore

s C

ontr

ol

6)P

aym

ent

to c

redi

tors

for

Dr.

Sun

dry

Cre

dito

rsD

r. C

ost

Led

ger

Dr.

Cre

dito

rs

purc

hase

s m

ade

Cr.

Cas

hC

r. S

tore

s C

ontr

olC

r. C

ash

7)Is

sues

of

dire

ct m

ater

ials

for

No

entr

yD

r. W

ork-

in-P

rogr

ess

orD

r. W

ork-

in-P

rogr

ess

prod

ucti

on to

sho

psM

ater

ials

-in-

Pro

gres

sC

r. S

tore

s C

ontr

ol

Cr.

Sto

res

Con

trol

8)Is

sues

of

indi

rect

mat

eria

ls to

No

entr

yD

r. F

acto

ry O

verh

ead

Con

trol

Dr.

Fac

tory

Ove

rhea

d C

ontr

ol

shop

sC

r. S

tore

s C

ontr

olC

r. S

tore

s C

ontr

ol

9)R

etur

n of

dir

ect

mat

eria

lsN

o en

try

Dr.

Sto

res

Con

trol

Dr.

Sto

res

Con

trol

Cr.

Wor

k-in

-Pro

gres

sC

r. W

ork-

in-P

rogr

ess

10)

Ret

urn

of in

dire

ct m

ater

ials

toN

o en

try

Dr.

Sto

res

Con

trol

Dr.

Sto

res

Con

trol

sto

reC

r. F

acti

ry O

verh

ead

Con

trol

Cr.

Fac

tory

Ove

rhea

d C

ontr

ol

11)

Mat

eria

ls t

rans

ferr

ed f

rom

one

No

entr

y is

req

uire

d in

the

Con

trol

Acc

ount

s. H

owev

er, i

n th

e w

ork-

in-p

rogr

ess

Led

ger,

the

res

pect

ive

job

to a

noth

erjo

bs a

ccou

nts

are

debi

ted

and

cred

ited

. In

cas

es w

here

cap

ital

and

ove

rhea

d ar

e in

volv

ed,

nece

ssar

y

tran

sfer

ent

ries

in

capi

tal

asse

ts a

nd o

verh

ead

acco

unts

wil

l be

req

uire

d to

be

mad

e.


NOTES

193


12)

Adj

ustm

ent o

f no

rmal

No

entr

yD

r. F

acto

ry O

verh

ead

Con

trol

Dr.

Fac

tory

ove

rhea

d co

ntro

l

defi

cien

cies

in m

ater

ial

(or

Inve

ntor

y In

vest

men

t)(I

nven

tory

adj

ustm

ent)

stoc

k (o

r ph

ysic

al s

tock

-C

r. S

tore

s C

ontr

olC

r. S

tore

s C

ontr

ol

taki

ng)

13)

Adj

ustm

ent o

f no

rmal

sup

plie

sN

o en

try

Dr.

Sto

res

Con

trol

Dr.

Sto

res

Con

trol

in m

ater

ial (

or p

hysi

cal

Cr.

Fac

tory

Ove

rhea

d C

ontr

olC

r. F

acto

ry O

verh

ead

Con

trol

stoc

k-ta

king

)(o

r In

vent

ory

adju

stm

ent)

(or

Inve

ntor

y ad

just

men

t)

14)

Pay

men

t of

wag

esD

r. W

ages

/Pay

Rol

lD

r. W

ages

/Pay

Rol

l C

ontr

olD

r. W

ages

/Pay

Rol

l C

ontr

ol

Cr.

Ins

uran

ceC

r. C

ost

Led

ger

cont

rol

Cr.

Ins

uran

ce

Cr.

Tax

Cr.

Tax

Cr.

Pro

vide

nt F

und

Cr.

Pro

vide

nt F

und

Cr.

Wag

es p

ayab

le (

for

unpa

idC

r. W

ages

pay

able

(fo

r

wag

es)

unpa

id w

ages

)

Cr.

Cas

hC

r. C

ash


NOTES

194


15)

Ana

lysi

s an

d di

stri

buti

on o

fN

o en

try

Dr.

Wor

k-in

-Pro

gres

s or

Lab

our

Dr.

Wor

k-in

-Pro

gres

s

wag

e an

d sa

lary

(cl

osin

g of

in-P

rogr

ess

(for

dir

ect

labo

ur)

Dr.

Fac

tory

Ove

rhea

d C

ontr

ol

pay

roll

acc

ount

)D

r. F

acto

ry O

verh

ead

Con

trol

(fo

rD

r. A

dmin

istr

atio

n C

ontr

ol

indi

rect

labo

ur)

Dr.

Sel

ling

& D

istr

ibut

ion

Dr.

Adm

inis

trat

ion

Ove

rhea

dO

verh

ead

Con

trol

Con

trol

(fo

r of

fice

sal

ary)

Cr.

Wag

es C

ontr

ol

Dr.

Sel

ling

& D

istr

ibut

ion

Ove

rhea

d C

ontr

ol (

for

sale

s st

aff

sala

ries

)

Cr.

Wag

es C

ontr

ol

16)

Pay

men

t fo

r ex

pens

es a

ndD

r. E

xpen

ses

Dr.

Fac

tory

Ove

rhea

d C

ontr

olD

r. O

verh

ead

Con

trol

(F

acto

ry,

serv

ices

, e.g

., re

nt, p

ower

,C

r. S

undr

y cr

edit

ors

Dr.

Adm

inis

trat

ion

Ove

rhea

dA

dmin

istr

atio

n or

sel

ling

and

repa

irs,

etc

.C

r. C

ash

Con

trol

Dis

trib

utio

n)

Dr.

Sel

ling

and

dis

trib

utio

nC

r. C

redi

tors

Ove

rhea

d C

ontr

olC

r. C

ash

Cr.

Cos

t L

edge

r C

ontr

ol


NOTES

195


17)

Rec

ordi

ng o

f de

prec

iati

onD

r. D

epre

ciat

ion

Dr.

Fac

tory

Ove

rhea

d C

ontr

olD

r. F

acto

ry O

verh

ead

Con

trol

char

ges

for

the

peri

odC

r. C

apit

al a

sset

sD

r. A

dmin

istr

atio

n O

verh

ead

Dr.

Adm

inis

trat

ion

Ove

rhea

d

Con

trol

Con

trol

Dr.

Sel

ling

and

Dis

trib

utio

nD

r. S

elli

ng a

nd D

istr

ibut

ion

Ove

rhea

d C

ontr

olO

verh

ead

Con

trol

Cr.

Cos

t L

edge

r co

ntro

lC

r. C

apit

al A

sset

s.

18)

Rec

ordi

ng o

f m

anuf

actu

ring

No

entr

yD

r. W

ork-

in-P

rogr

ess

Dr.

Wor

k-in

-Pro

gres

s

over

head

app

lied

at d

epar

tmen

tal

Cr.

Fac

tory

Ove

rhea

d C

ontr

olC

r. F

acto

ry O

verh

ead

Con

trol

or

rate

s.de

part

men

t w

ise)

or

Dr.

Wor

k-in

-Pro

gres

s

(i)

Dr.

Wor

k-in

-Pro

gres

sC

r. A

ppli

ed F

acto

ry O

verh

ead

and

Cr.

App

lied

Fac

tory

Ove

rhea

dD

r. A

ppli

ed F

acto

ry O

verh

ead

(Dep

artm

ent-

wis

e)C

r. F

acto

ry O

verh

ead

Con

trol

(ii)

Dr.

App

lied

Fac

tory

Ove

rhea

d

C

r. F

acto

ry O

verh

ead

Con

trol


NOTES

196


19)

Spo

iled

& d

efec

tive

wor

kN

o en

try

Dr.

Cos

ting

Pro

fit

and

Los

sD

r. P

rofi

t an

d L

oss

(i)

Tak

en o

ut o

f jo

b/pr

oces

s co

stN

o en

try

Cr.

Wor

k-in

-Pro

gres

sC

r. W

ork-

in-P

rogr

ess

(

Abn

orm

al s

poil

age

or w

aste

)D

r. S

tore

s C

ontr

olD

r. S

tore

s C

ontr

ol

(ii)

Scr

ap t

aken

on

stoc

k ch

arge

sC

r. W

ork-

in-P

rogr

ess

Cr.

Wor

k-in

-Pro

gres

s

20)

Rec

ordi

ng c

ost o

f jo

b/go

ods

No

entr

yD

r. F

inis

hed

Goo

ds C

ontr

ol o

rD

r. F

inis

hed

Goo

ds c

ontr

ol

com

plet

ed (

Tra

nsfe

r of

goo

dsF

in. G

oods

Led

ger

Con

trol

Cr.

Wor

k-in

-Pro

gres

s

com

plet

ed f

rom

pro

duct

ion

toC

r. W

ork-

in-P

rogr

ess

fini

shed

goo

ds)

21)

Rec

ordi

ng c

ost o

f go

ods

sold

No

entr

yD

r. C

ost

of S

ales

(or

cos

t of

Dr.

Cos

t of

Sal

es -

Goo

ds

Goo

ds s

old)

Cr.

Fin

ishe

d G

oods

(at

cos

t)

Cr.

Fin

ishe

d G

oods

(at

cos

t)D

r. P

rofi

t an

d L

oss

Dr.

Cos

ting

Pro

fit

and

Los

s (a

t cos

t)C

r. C

ost

and

Sal

es

Cr.

Cos

t of

Sal

es (

at c

ost)

22)

Rec

ordi

ng o

f sa

les

Dr.

Deb

tors

(or

Cas

h fo

r C

ash

Dr.

Cos

t L

edge

r C

ontr

olD

r. D

ebto

rs o

r C

ash

(Sal

es p

rice

)

Sal

es, o

r A

ccou

nts

Rec

eiva

lbe)

Cr.

Sal

es (

Sal

es p

rice

)C

r. S

ales

(S

ales

pri

ce)

Cr.

Sal

esC

r. C

osti

ng P

rofi

t an

d L

oss

(Sal

es p

rice

)


NOTES

197


23)

Abs

orpt

ion

of a

dmin

istr

atio

nN

o en

try

Dr.

Fin

ishe

d G

oods

Con

trol

Dr.

Fin

ishe

d G

oods

Con

trol

over

head

Cr.

Adm

inis

trat

ion

Ove

rhea

dC

r. A

dmin

istr

atio

n O

verh

ead

Con

trol

Con

trol

24)

Abs

orpt

ion

of s

elli

ng a

ndN

o en

try

Dr.

Cos

t of

sal

esD

r. C

ost

of S

ales

dist

ribu

tion

ove

rhea

dC

r. S

elli

ng a

nd D

istr

ibut

ion

Cr.

Sel

ling

and

Dis

trib

utio

n

Ove

rhea

d C

ontr

olO

verh

ead

Con

trol

25)

Und

er-a

bsor

bed

Fac

tory

No

entr

yD

r. C

osti

ng P

rofi

t &

Los

s or

Dr.

Pro

fit

and

Los

s or

Ove

rhea

d

Ove

rhea

d, A

dmin

istr

atio

nF

inis

hed

Goo

ds,

Sus

pen

se

over

head

, Sel

ling

and

Wor

k-in

-Pro

gres

s an

d C

ost

Cr.

Fac

tory

Ove

rhea

d C

ontr

ol, A

dmn.

Dis

trib

utio

n ov

erhe

adof

sal

es o

r O

verh

ead

Sus

pens

e.O

verh

ead

Con

trol

, Sel

ling

and

Cr.

Fac

tory

Ove

rhea

d C

ontr

ol,

Dis

trib

utio

n O

verh

ead

Con

trol

Adm

inis

trat

ion

Ove

rhea

d C

ontr

ol,

Sel

ling

and

Dis

trib

utio

n

Ove

rhea

d C

ontr

ol


NOTES

198


26)

Ove

r-ab

sorb

ed F

acto

ryN

o en

try

Dr.

Fac

tory

Ove

rhea

d C

ontr

ol,

Dr.

Fac

tory

Ove

rhea

d C

ontr

ol,

Ove

rhea

d, A

dmin

istr

atio

nA

dmin

istr

atio

n O

verh

ead

Adm

inis

trat

ion

over

head

con

trol

,

over

head

, Sel

ling

and

Con

trol

, Sel

ling

and

Dis

trib

utio

nS

elli

ng &

Dis

trib

utio

n O

verh

ead

Dis

trib

utio

n O

verh

ead

Ove

rhea

d C

ontr

olC

ontr

ol

Cr.

Cos

ting

Pro

fit

and

Los

s or

Cr.

Pro

fit

and

Los

s or

Ove

rhea

d

Fin

ishe

d G

oods

, Wor

k-in

-Pro

gres

sS

usp

ense

.

and

Cos

t of

Sal

es o

r

Ove

rhea

d S

uspe

nse.


NOTES

199


Example

Journalise the following transactions relating to Boxin Ltd., Badalapur in

the Cost Books, Financial Books and also in the integrated system of accounts.

1) Purchase of materials ` 11,500

2) Wages paid ` 40,000

3) Wages charged to production ` 21,000

4) Indirect wages ` 19,000

5) Sales made during the year ` 3,00,000

6) Plant and Machinery bought 1,75,000


NOTES

200


An

swer

In

th

e b

ook

s of

Box

in L

td.

Bad

alap

ur

Fin

an

cia

l B

ook

sC

ost

Bo

ok

sIn

teg

rate

d B

oo

ks

Dat

eP

arti

cula

rsD

ebit

Cre

dit

Par

ticu

lars

Deb

itC

redi

tP

arti

cula

rsD

ebit

Cre

dit

1)P

urc

has

e A

/c..

....

....

. D

r.11

,500

Sto

res

Led

ger

Con

trol

A/c

.11

,500

Sto

res

Led

ger

Con

trol

A/c

. D

r.11

,500

To

Sun

dry

Cre

dito

rs A

/c.

11,5

00T

o C

ost

Led

ger

To

Sun

dry

Cre

dito

rs A

/c.

11,5

00

Con

trol

A/c

.11

,500

(Bei

ng th

e m

ater

ial p

urch

ased

)(B

eing

the

pur

chas

e of

mat

eria

l tak

en in

to s

tore

s)

2)W

ages

A/c

....

....

....

.. D

r.40

,000

Wag

es C

ontr

ol A

/c.

......

. D

r.40

,000

Wag

es C

ontr

ol A

/c.

....

Dr.

40,0

00

To

Cas

h A

/c.

40,0

00T

o C

ost

Led

ger

40,0

00T

o C

ash

A/c

.40

,000

Con

trol

A/c

.

(Bei

ng t

he w

ages

pai

d in

cas

h)(B

eing

the

dir

ect

wag

es p

aid)

3)N

o E

ntry

Wor

k-in

-Pro

gres

s C

ontr

ol21

,000

Wor

k in

Pro

gres

s C

ontr

ol21

,000

A/c

. ..

....

....

....

....

....

. D

r.A

/c.

....

....

....

....

....

....

. D

r.

To

Wag

es C

ontr

ol A

/c.

21,0

00T

o W

age

Con

trol

A/c

.21

,000

(Bei

ng t

he w

ages

cha

rged

to

prod

ucti

on)


NOTES

201


Fin

an

cia

l B

ook

sC

ost

Bo

ok

sIn

teg

rate

d B

oo

ks

Dat

eP

arti

cula

rsD

ebit

Cre

dit

Par

ticu

lars

Deb

itC

redi

tP

arti

cula

rsD

ebit

Cre

dit

4)N

o E

ntry

Pro

duct

ion

Ove

rhea

d C

ontr

olP

rodu

ctio

n O

verh

ead

Con

trol

A/c

. ..

....

....

....

....

....

....

.. D

r.19

,000

A/c

. ..

....

....

....

....

....

....

....

. D

r.19

,000

To

Wag

es C

ontr

ol A

/c.

19,0

00T

o W

age

Con

trol

A/c

.19

,000

(Bei

ng t

he i

ndir

ect

wag

es

paid

)

5)C

ash

or S

undr

y D

ebto

rsC

ost

Led

ger

Con

trol

A/c

. D

r.C

ash

or S

undr

y D

ebto

rs

....

....

....

Dr.

3,00

,000

3,00

,000

Con

trol

A/c

. ...

......

. D

r.3,

00,0

00

To

Sal

es A

/c.

3,00

,000

To

Cos

ting

Pro

fit

& L

oss

3,00

,000

To

Sal

es A

/c3,

00,0

00

(Bei

ng t

he S

ales

eff

ecte

d

duri

ng th

e ye

ar)

6)P

lant

and

Mac

hine

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NOTES

202


Illustrations

ILLUSTRATION 1

Bokaro Ltd., Bilaspur keeps books on Integrated Accounting System. The

following balances appear in their ledger books as on 1st April, 2011.

Particulars Debit Credit

` `

Issued and Paid-up Share Capital 3,85,000

General Reserves 2,00,000

Sundry Creditors 5,00,000

Furniture and Fixtures 1,85,000

Plant and Machinery 4,00,000

Sundry Debtors 3,00,000

Bank 1,05,000

Stores 95,000

Total 10,85,000 10,85,000

Transactions transacted during the year were as follows :

`

Credit Purchases of Material 10,00,000

Materials issued for production to shop 10,50,500

Stores-in-hand 40,000

Payment of wages 6,50,000

Direct wages charged to production 6,00,000

Indirect wages charged to factory overheads 50,000

Factory Expenses paid 3,00,000

Factory Expenses charged to production 2,75,000

Selling and Distribution Expenses paid 1,00,000

Cash of finished stock 18,00,000

Total Turnover on credit 25,00,000

Closing stock of Finished Goods 40,000

Payment to Sundry Creditors 11,00,000

Collection from Sundry Debtors 21,00,000

You are required to prepare

i) Necessary ledger accounts, ii) Income statement for the year ended 31st

March 2012, iii) Trial Balance as on 31st March, 2012 and iiv) a Balance sheet

as on 31st March, 2012.


NOTES

203


SOLUTION

In the books of Bokaro Ltd., Bilaspur

i) General Ledger under Integrated Accounting System

Dr. Share Capital Account Cr.

To Balance C/D 3,85,000 By Balance B/D 3,85,000

(Closing Balance) (Opening Balance)

3,85,000 3,85,000

By Balance B/D. 3,85,000

Dr. General Reserve Account Cr.

To Balance C/D 2,00,000 By Balance B/D 2,00,000

(Closing Balance) (Opening Balance)

2,00,000 2,00,000

By Balance B/D 2,00,000

Dr. Sundry Creditors Account Cr.

To Bank 11,00,000 By Balance B/D 5,00,000

(Payment to Sundry (Opening Balance)

Creditors)

To Balance C/D 4,00,000 By Stores Control 10,00,000

(Closing Balance) (Purchases of Materials)

15,00,000 15,00,000

By Balance B/D 4,00,000

Dr. Furniture and Fixtures Account Cr.

To Balance B/D 1,85,000 By Balance B/D 1,85,000

(Opening Balance) (Closing Balance)

1,85,000 1,85,000

To Balance B/D 1,85,000

Dr. Plant and Machinery Account Cr.

To Balance B/D 4,00,000 By Balance C/D 4,00,000

(Opening Balance) (Closing Balance)

4,00,000 4,00,000


Dr. Sundry Debtors Account Cr.

To Balance B/D 3,00,000 By Bank 21,00,000

(Opening Balance) (Collection from Sundry

To Sales 25,00,000 Debtors)

(Credit Sales) By Balance C/D 7,00,000

(Closing Balance)

28,00,000 28,00,000

To Balance B/D. 7,00,000

Dr. Bank Account Cr.

To Balance B/D 1,05,000 By Wages Control 6,50,000

(Opening Balance) (Payment of wages)

To Sundry Debtors 21,00,000 By Factory Overhead 13,00,000

(Collection from Control

Sundry Debtors) (Factory Expenses Paid)

By Selling and Distribution 1,00,000

Overhead Control

(Selling and Distribution

Expenses paid)

By Sundry Creditors 11,00,000

(Payment to Sundry

Creditors)

By Balance C/D 55,000

(Closing Balance)

22,05,000 22,05,000

To Balance B/D 55,000

Dr. Stores Control Account Cr.

To Balance B/D 95,000 By Work-in-Progress 10,50,000

(Opening Balance) (Materials issued for

Production)

To Sundry Creditors 10,00,000 By Costing Profit & Loss * 5,000

(Purchases of Materials) (Balancing figure i.e.

Abnormal Loss)


(stores-in-hand)

10,95,000 10,95,000

To Balance B/D 40,000


NOTES

204


Dr. Work in-Progress Account Cr.

To Stores Control 10,50,000 By Finished Stock Control 18,00,000

(Materials issued for (Finished Production at

Production) cost)

To Wages Control 6,00,000

(Direct wages charged

to Production)

To Factory Overhead 2,75,000 By Balance C/D 1,25,000

Control (Closing Balance)

(Factory Expenses

charged to Production)

19,25,000 19,25,000


Dr. Wages Control Account Cr.

To Bank 6,50,000 By Work-in-Progress 6,00,000

(Payment of wages) (Direct wages charged

to Production)

By Factory Overhead 50,000

Control

(indirect wages charged to

Factory Overheads)

6,50,000 6,50,000

Dr. Factory Overhead Control Account Cr.

To Wages Control 50,000 By Work-in-Progress 2,75,000

(Indirect Wages Charged (Factory Expenses

to Factory Overhead) Charged to Production)

To Bank 3,00,000 By Costing Profit & Loss * 75,000

(Factory Expenses Paid) (Under - absorption)

3,50,000 3,50,000

Dr. Selling and Distribution Overhead Control Account Cr.

To Bank 1,00,000 By Cost of Sales 1,00,000

(Selling and Distribution (Transfer to cost of sales)

Expenses paid)

1,00,000 1,00,000


NOTES

205


Dr. Finished Stock Control Account Cr.

To Work-in-Progress 18,00,000 By Cost of Sales * 17,60,000

(Finished Production at (Balancing figure transfer

cost) to cost of sales)


(Closing stock of FG)

18,00,000 18,00,000

Dr. Sales Account Cr.

To Costing Profit & 25,00,000 By Sundry Debtors 25,00,000

Loss * (Credit Sales)

(Balancing figure

transfer to costing

Profit & Loss)

25,00,000 25,00,000

Dr. Cost of Sales Account Cr.

To selling and Distribution 1,00,000 By Costing Profit & Loss * 18,60,000

Overhead Control (Balancing figure transfer

(Transfer from selling to costing Profit & Loss)

and Distribution

Overhead Control)

To Finished Stock Control 17,60,000

(Transfer from Finished

stock control)

18,60,000 18,60,000

Dr. Costing Profit & Loss Account Cr.

To Stores Control 5,000 By Sales 25,00,000

(Abnormal Loss) (Total Sales)

To Factory Overhead 75,000

Control (Under absorption)

To Cost of Sales 18,60,000

(Net Cost of Sales)

To Net Profit C/D 5,60,000

25,00,000 25,00,000


NOTES

206


ii) Trial Balance as on 31st March, 2012

Particulars Debit Credit

` `

Share Capital 3,85,000

General Reserve 2,00,000


Furniture and Fixture 1,85,000



Bank 55,000

Stores 40,000

Work-in-Progress 1,25,000

Finished Stock 40,000

Profit & Loss A/c. 5,60,000

Total 15,45,000 15,45,000

iii) Balance-Sheet as on 31st March, 2012

Liabilities ` Assets `

1) Share Capital : 1) Fixed Assets :

A) Issued and Paid 3,85,000 Plant and Machinery 4,00,000

up Capital Furniture and Fixtures 1,85,000

2) Reserves and Surplus 2) Investments : -

General Reserve 2,00,000

Profit and Loss 5,60,000

3) Securred Loans - 3) Current Assets Loans

and Advances :


Bank 55,000

Closing Stock 2,05,000

i) Stores 40,000

ii) Work-in-Progress 1,25,000

iii) Finished stock 40,000

4) Unsecured Loans - 4) Miscellaneous Expenses -

5) Current Liabilities and 5) Profit and Loss Account -

Provisions (Deficit)


15,45,000 15,45,000


NOTES

207


ILLUSTRATION 2

Atlas Co. Ahemedabad operates on Non - integrated system of Accounting.

You are required to pass necessary journal entries in the cost books for the following

transactions for the year ended 31st March, 2012 with suitable narrations.

1. Materials Purchased on credit for stock 87,000

2. Carriage paid on purchases of Materials ` 3,000

3. Materials issued for production to shop 29,200

4. Materials returned to stores from job ` 6,200

5. Payments made for direct wages 17,900

6. Payments made for indirect wages 12,100

7. Direct wages charged to production ` 7,900

8. Indirect ways charged to factory overheads ` 2,100

9. Salaries to administrative staff amounted to ` 4,600

10. Remuneration to employees from sales dept. ` 1,900

SOLUTION

In the books of Atlas Co. Amadabad

Cost Journal under Non-integrated system of Accounting.

Date Particulars L. Debit Credit

2012 F. ` `

1. Stores Ledger Control A/c. Dr. - 87,000

To Cost Ledger Control A/c. - 87,000

(Being materials purchased on credit

for stock)


To Cost Ledger Control A/c. - 3,000

(Being carriage paid on purchases of

materials)

3. Work-in-Progress Ledger control A/c.Dr. - 29,200

To Stores Ledger control A/c. - 29,200

(Being materials issued for production

to shop)


NOTES

208



To Work-in-Progress Ledger

Control A/c - 6,200

(Being materials returned to stores from

job)

5. Wages control A/c. Dr. - 17,900

To Cost Ledger Control A/c 17,900

(Being direct wages paid)

6. Wages Control A/c. Dr. - 12,100

To Cost Ledger Control A/c. 12,100

(Being indirect wages paid)

7. Work-in-Progress Ledger

Control A/c. Dr. - 7,900

To Wages Control A/c 7,900

(Being direct wages charged to

production)

8. Factory Overhead Control A/c. Dr. - 2,100

To Wages Control A/c. - 2,100

(Being indirect wages charged to

factory overheads)

9. Administration Overhead Dr. - 4,600

control A/c.

To Wages Control A/c. 4,600

(Being administrative staff salaries

allocated to Administration overhead

control Account)

10. Selling and Distribution Overhead

Control A/c. Dr. - 1,900

To Wages Control A/c. 1,900

(Being remuneration to employees of

sales dept. allocated to Selling and

Distribution Overhead Control Account)Advanced Cost Accounting - III

NOTES

209


11.3 Reconcilation and Integration between financialAccounts and Cost Account

In business, where cost and financial accounts are maintained separately,

the cost accountants are responsible for recording of costing transactions, where

as financial accountants are in charge of financial records. Under cost and financial

accounting system the profit (or loss) shown by one system will not agree with

that of other because these two sets of books may follow different accounting

principles and policies. In order to prove that the cost and financial accounts are in

agreement, a Memorandum Reconcilation or Reconsilation Statement becomes

essential.

Hence, (i) to identify the reasons for difference between the results shown

by the cost Accounting system and financial accounting system and (ii) To check

the arithmetical accuracy and reliability of both the sets of books, the need for

reconsilation of cost and financial accounts arises.

11.3.1 Reasons for the difference

The various reasons for difference between the results shown by cost

Accounts and Financial Accounts are given below :-

i) Different Bases for Valuation of Inventory/Stocks

In Financial Accounting work-in-progress are generally valued at prime

cost but in cost accounts it is usually valued at Factory Cost. In Financial Accounting

stock of finished goods is valued at cost or market price whichever is lower but in

cost accounts it is valued at cost. This does cause a difference.

ii) Different methods of Depreciation

Financial accounts treat depreciation as a period cost which varies with the

lapse of time. In cost ledger depreciation is regarded as variable cost. In Financial

Accounts, the fixed percentage of original cost method or written down value

method may be used but in cost accounts Machine Hour Rate method of

depreciation may be used. Thus using different methods of depreciation in cost

accounts and financial accounts may lead to difference in profit figures.

iii) Under or over absorption of overheads and abnormal losses and

savings

In financial accounts, the abnormal items are merged with their normal

headings. Abnormal losses of material or time will be added to the debits of material

and wages. In cost accounts, on the other hand abnormal wastages, losses are

kept outside the manufacturing costs. The overheads absorbed at a pre-determined

rate in cost accounts may be different from the actual overheads recorded in

financial accounts. Both over and under absorption leads to difference in profit

figures occur between the cost accounts and financial accounts.


NOTES

210


Check Your Progress

Give three reasons fordifferences between theresults shown by cost accountsand financial accounts.

iv) Items appearing only in the financial Accounts

There are some items which appear only in the financial accounts and not

at all in the cost ledger.

a) Purely Financial Charges -

The examples of purely financial charges are as follows :-

• Interest on loans and mortgage.

• Losses on disposal of fixed assets, e.g. plant, equipment, building, investment,

etc.

• Damages payable at law.

• Penalties and fines payable for the late completion of contracts.

• Discount and bad debts/debenture issues.

• Share issue expenses.

• Preliminary Expense written off.

• Good will written off.

• Underwriting commission written off.

• Losses on sale of fixed assets and investments.

• Stamp duty and expenses on transfer of capital, stock, shares bond, etc.

b) Purely Financial Incomes :

The examples of purely financial incomes are as follows :-

• Interest received on bank deposits.

• Interest, dividends, etc., received on investments.

• Rents receivable from letting out a portion of the premises.

• Profits made on the sale of fixed assets and capital expenditures, charged

specifically to revenue.

• Transfer fees received.

c) Appropriation of Profit :

These represent the appropriation or distribution of net operating profits.

Being charges against net profit, items like the following appear only in the financial

profit and loss account :

• Income-tax, Dividend Distribution Tax.

• Dividends paid on equity or preference share capital.

• Debenture redemption fund, appropriation or sinking fund for repayment of

other liabilities.Advanced Cost Accounting - III

NOTES

211


Check Your Progress

Which are purely financialincomes ?

• Transfer to general reserve or any other fund to strengthen the financial

structure i. e. Dividend Equalisation Reserve etc.

• Amounts written off goodwill, preliminary expenses, under writing

commission, debenture capital and expenses of capital issues.

• Charitable donations.

d) Items of Notional Expenses Included Only in Cost Accounts :

There are some items which are included in cost accounts but not in financial

accounts. e.g.

• Notional interest on capital

• Notional rent on premises owned

• Notional salary of the proprietor/partner

11.3.2 Reconcilation of Cost and financial Accounts

Meaning :

Reconcilation Statement is a statement which reconciles the profit/loss as

per Cost Accounts with the profit/loss as per Financial Accounts by showing all

causes of differences between the two.

Integration between cost and financial accounts

Integration means that the same set of the accounts fulfils the requirements

of both i.e. cost and financial accounts. When the cost and Financial Accounts

are integrated i.e. when only one set of books is maintained for recording both

cost and financial transactions, there is no need to have separate reconsilation

statement between these two accounts.

11.3.3 Methods of Reconciliation of cost and Financial Account

The reconciliation of costing and financial profits can be attempted either.

I) by preparing a Reconciliation Statement.

II) by preparing a Memorandum Reconciliation Account.

Whichever method is followed, the end result remains the same.


NOTES

212


(I) Preparation of Reconcilation Statement

When reconcilation is attempted by preparing a reconcilation statement,

profit shown by one set of accounts is taken as base profit and items of difference

are either added to it or deducted from it to arrive at the figure of profit shown by

other set of accounts.

Format of Reconciliation Statement is as follows :


NOTES

213


Preparation of

Reconcilation

Statement

Methods of

Reconcilation of

Cost and Financial

Accounts

Preparation ofA momorandum

ReconcilationAccount

III

Check Your Progress

Give the format ofReconsiliation Statement.

RECONCILATION STATEMENT - I

(When Profit as per Cost Accounts is taken as a starting point)

Particulars `

A. Profit as per Cost Accounts ----

B. Add : Items having the effect of higher profit in

financial accounts :

i) Over-absorption of Factory Overheads/Office &

Administration Overheads/Selling & Distribution

Overhead in Cost Accounts. ----

ii) Over-valuation of Opening Stock or Raw Material/

Work-in-progress/Finished Goods in Cost Accounts ----

iii) Under-valuation of Closing Stock of Raw Material/


iv) Incomes excluded from Cost Accounts : (e.g.)

Interest & Dividend on Investments, Rent received, ----

Transfer Fees received etc. (+) (----)

C. Less : Items having the effect of lower profit in

financial accounts :

i) Under-absorption of Factory Overheads/Office

Overheads/Selling & Distribution Overheads in

Cost Accounts. ----

ii) Under-valuation of Opening Stock of Raw Material/


iii) Over-valuation of Closing Stock of Raw Material/


iv) Expenses excluded from Cost Accounts : (e.g.)

Bad Debts written off, Preliminary Expenses/ ----

Discount on Issue written off, Legal Charges etc. (-) (----)

D. Profit as per Financial Accounts (A + B - C) ----

Note : In case of ‘Loss’, the amount shall appear as a minus item.Advanced Cost Accounting - III

NOTES

214


RECONCILATION STATEMENT-II

(When Profit as per Financial Accounts is taken as a starting point)

Particulars `

A. Profit as per Financial Accounts ----

B. Less : Items having the effect of lower profit in Cost

Accounts :

i) Over-absorption of Factory Overheads/Office & ----

Administration Overheads/Selling & Distribution

Overheads in Cost Accounts.

ii) Over-valuation of Opening Stock of Raw Material/ ----

Work-in-progress/Finished Goods in Cost Accounts

iii) Under-valuation of Closing Stock of Raw Material/ ----

Work-in-progress/Finished Goods in Cost Accounts :

iv) Incomes excluded from Cost Accounts : (e.g.) ----

Interest & Dividend on Investments, Rent received,

Transfer Fees received etc. (+) (----)

C. Add : Items having the effect of higher profit in

Cost Accounts :

i) Under-absorption of Factory Overheads/Office & ----

Overheads/Selling & Distribution Overhead in

Cost Accounts.

ii) Under-valuation of Opening Stock of Raw Material/ ----


iii) Over valuation of Closing Stock of Raw Material/ ----


iv) Expenses excluded from Cost Accounts : (e.g.) ----

Bad Debts written off, Preliminary Expenses/

Discount on Issue written off, Legal Charges etc. (+) (----)

D. Profit as per Cost Accounts (A - B + C) ----

Note : In case of ‘Loss’, the amount shall appear as a minus item.


NOTES

215


II) Preparation of Memorandom Reconciliation Account

When reconciliation is attempted through Memorandum Reconciliation

Account, profit to be taken as “base profit” is shown like the opening balance of

this account. All items of difference required to be deducted are debited and those

to be added are credited to this account. The balancing figure of this account is

the profit shown by other set of accounts. A speciman form of Memorandum

Reconciliation Account is given below :

Format of Memorandum Reconciliation Account is as follows :-

Dr. Memorandum Reconciliation Account Cr.


To Loss as per Cost Accounts ---- By Profit as per Cost Accounts ----

To Financial Expenses ---- By Financial Incomes ----

To Underabsorption of By Overabsorption of

Overheads in Cost Accounts ---- Overheads in Cost Accounts ----

To Undervaluation of By Overvaluation of

Opening Stock in Cost Opening Stock in Cost

Accounts ---- Accounts ----

To Overvaluation of Closing By Undervaluation of

Stock in Cost Accounts ---- Closing Stock in Cost

Accounts. ----

To Profit as per Financial ---- By Loss as per Financial ----

Accounts (if Dr < Cr) Accounts (if Dr > Cr)

---- ----

Example

Following information is derived from the records of Atlas Co. Ajmer for

the year ended 31st March, 2012. You are required to prepare.

i) A statement showing the profit as per Cost Accounts; and

ii) A statement of reconciliation.

Following information is taken from the financial records :


NOTES

216


Dr. Profit and Loss Account for the year ended 31st March, 2012 Cr.


To Opening Stock finished By Sales (10,200 units) 7,14,000

goods (400 units) 16,000 By Closing Stock of

To Materials 2,50,000 finished goods (200 units) 9,000

To Wages 1,00,000

To Factory Overhead 94,000

To Administration 1,05,000

To Selling Expenses 50,000

To Bad debts 10,000

To Preliminary expenses 4,000

To Net Profit C/D. 34,000

7,23,000 7,23,000

Following are found out in costing books :

Materials 25 per units. Labour cost 16 per units. The factory overheads

are absorbed at 60 % of labour cost and administration overheads at 20% of

factory cost. Selling expenses are charged at ` 6 per unit sold. In cost accounts,

the opening stock is valued at 45 per unit and the closing stock at 60 per unit.

There is no opening or closing stock of materials or works-in-progress except that

of finished goods.

Answer

In the books of Atlas Co. Ajmer

Cost Sheet for the year ended 31st March 2012

Units Produced : 10,000 Units

Units Sold : 10,200 Units

Particulars `

10,200 Units

Materials

(10,000 Units @ 25 per unit) 2,50,000

Add : Wages

(10,000 Units @ 16 per unit) (+) 1,60,000

Prime Cost 4,10,000

Factory Overheads

(60% of Labour) (+) 96,000

Works cost 5,06,000

Add : Office Overheads

(20% of works cost) (+) 1,01,200

Less : Closing Stock of Finished Goods : 6,07,200


NOTES

217


(200 units @ cost i.e. 6,07,200 Units ÷

10,000 Units, 60.72 but valued @

` 60 only (as per the problem) (-) 12,000

200 Units x 60 5,95,200

Add : Opening Stock of finished goods

(Units 400 @ 45) (+) 18,000

Cost of goods sold 6,13,200

Add : Selling expenses

(Units 10,200 x 6) (+) 61,200

Cost of sales 6,74,400

Profit 39,600

Sales 7,14,000

Working Notes :

1) Computation of Units Produced during the year :

= Sales

+ Closing Stock

- Opening Stock

10,200 Units 200 Units 400 Units

= 10,000 Units

Reconciliation Statement for the year ended 31st March, 2012

Particulars ` `

Profit as per Cost Books 39,600

Add :

i) Factory overhead over-absorbed 2,000

ii) Selling overhead over-absorbed 11,200

iii) Over-valuation of opening stock of finished

goods in cost books (+) 2,000 15,200

Less : 54,800

i) Administrative overheads under absorbed 3,800

ii) Closing stock of finished goods over-valued 3,000

in cost books

iii) Bad debts and preliminary expenses not taken into (+) 14,000 (-) 20,800

account in cost books

Profit as per Financial Books 34,000


NOTES

218


11.3.4 Illustrations

ILLUSTRATION 1

From the following Profit and Loss Account of Atlas Co. Ltd., Aurangabad

for the year ended 31st March, 2012, draw a Memorandum Reconciliation Account

showing the profits as per Cost Accounts.

Dr. Profit and Loss Account for the year ended 31-03-2012 Cr.


To Rent and Taxes 11,200 By Gross Profit B/D 54,600

To Administrative Salaries 6,500 By Rent Received 400

To Advertisement 4,900 By Commission Received 100

To Sales Promotion 9,300

To Carriage Outward 2,900

To Loss on Sales of Furniture 1,900

To Interest on Deposits 200

To Penalties 100

To Net Profit C/D 18,100

55,100 55,100

To General Reserve 8,000 By Net Profit B/D 18,100

To Proposed Dividend 4,000

To Income Tax 1,000

To Surplus C/D 5,100

18,100 18,100

The Cost Accountant has ascertained the profit of 19,800 as per his books

of accounts.

SOLUTION

Working Notes :

1) Statement showing reasons for disagreement :

Particulars CA FA Difference

` ` `

i) Rent Received - 400 400

ii) Commission Received - 100 100

iii) Loss on Sale of Furniture - 1,900 1,900

iv) Interest on Deposits - 200 200

v) Penalties - 100 100

vi) General Reserve - 8,000 8,000

vii) Proposed Dividend - 4,000 4,000

viii) Income Tax - 1,000 1,000


NOTES

219


In the books of Atlas Co. Ltd., Aurangabad

Dr. Memorandum Reconciliation Account Cr.

for the year ended 31st March, 2012


To Financial Expenses and By Profits as per Cost 19,800

Appropriations debited only in Accounts

Financial Accounts By Financial Incomes credited

i) Loss on Sale of Furniture 1,900 only in Financial Accounts

ii) Interest on Deposits 200 i) Rent Received 400

iii) Penalties 100 ii) Commission Recieved 100

iv) General Reserve 8,000

v) Proposed Dividend 4,000

vi) Income Tax 1,000

To Profits as per Financial 5,000

Accounts

20,300 20,300

ILLUSTRATION 2

Bajaj Electrical Co. Ltd., Bijleenagar shows profit as per cost accounting

system 46,126 whereas the audited financial accounts shows a profit of 33,248.

You are required to prepare a Reconciliation Statement from the financial record

given below.

Dr. Profit and Loss Account for the year ended 31-03-2012 Cr.

Particulars ` ` Particulars ` `

Opening Stock 4,94,358 5,08,424 Sales 6,93,000

Add : Purchases (+) 1,64,308

6,58,666

Less :

Closing Stock (-) 1,50,242


Works Overheads 41,652

Gross Profit C/D. 96,658

6,93,000 6,93,000

Office Overheads 19,690 Gross Profit B/D 96,658

Selling and Distribution Dividend Received 632

Overheads 44,352

Net Profit C/D 33,248

97,290 97,290


NOTES

220


The accounting record maintained by the cost accountant shows that,

i) Stock as on 31st March, 2006 amounted to ` 1,56,394.

ii) Productive wages absorbed were ` 49,734.

iii) Works Overheads absorbed were ` 39,428.

iv) Office Overheads were charged @ 3% on value of turnover.

v) Dividend received were not recorded at all.

SOLUTION

Working Notes :

1) Statement showing Reasons for Disagreement :


` ` `

i) Closing Stock 1,56,394 1,50,242 6,152

ii) Productive Wages 49,734 46,266 3,468

iii) Works Overheads 39,428 41,652 2,224

iv) Office Overheads 20,790 19,690 1,100

v) Selling and Distribution Overheads 34,650 44,352 9,700

vi) Dividend Received - 632 632

In the Books of Bajaj Electrical Co. Ltd., Bijaleenagar

Reconcilation Statement for the year ended 31st March, 2006


` `

Profits as per Cost Accounts 46,126

Add :

i) Financial Incomes credited only in

Financial Accounts

a) Divident Received 632

ii) Overabsorption of Overheads/Expenses

in Cost Accounts

a) Productive Wages 3,468

b) Office Overheads (+) 1,100 5,200

Less :(+) 51326

i) Overvaluation of Closing Stock in 6,152

Cost Accounts

ii) Underabsorption of Overheads/Expenses

in Cost Accounts

a) Works Overheads 2,224

b) Selling and Distribution Overheads (+) 9,704

(-) 18,078

Profit as per Financial Accounts 33,248Advanced Cost Accounting - III

NOTES

221


ILLUSTRATION 3

Colgate Chemicals Co. Ltd., Cochin prepared their Profit and Loss Account

for the year ended 31st March, 2012 which is as follows :


To Opening Stock NIL By Sales 7,50,000 7,50,000

To Purchases 2,52,100 2,52,100 Less : Returns Inward (-) NIL

Less : Returns outwards (-) NIL (50,000 units x 15)

To Manufacturing Wages 1,05,000 By Closing Stock 40,800

To Factory Overheads 1,21,300 By Share Transfer Fees 2,600

Received

To Establishment Overheads 53,400 By Profit on Sale of Plant 23,400

To Selling and Distribution

Overheads 71,000

To Depreciation on Plant 11,000

To Net Profit C/D 2,03,000

8,16,800 8,16,800

The cost accounting records ascertained the profits of 1,97,700. Prepare

a Reconciliation Statement after considering the following details.

i) Stock on 31st March 2006 valued by the Cost Accountant amounted to `

42,800.

ii) The Factory Overheads were taken as 100% of Productive Wages in Cost

Accounts.

iii) The Selling and Distribution Overheads were charged at 10% on Invoice

Price in Cost Accounts.

iv) The Establishment Overheads were charged at Re. 1 per unit sold in Cost

Accounts.

v) The Cost Accountants charged depreciation on Plant at ` 8,000.

SOLUTION

Working Notes :



` ` `

i) Closing Stock 42,800 40,800 2,000

ii) Share Transfer Fees - 2,600 2,600

iii) Profit on Sale of Plant - 23,400 23,400

iv) Factory Overheads 1,05,000 1,21,300 16,300

v) Selling and Distribution Overheads 75,000 71,000 4,000

vi) Establishment Overheads 50,000 53,400 3,400

vii) Depreciation on Plant 8,000 11,000 3,000Advanced Cost Accounting - III

NOTES

222


In the books of Colgate Chemicals Co. Ltd., Cochin



` `

Profits as per cost Accounts 1,97,700

Add :

i) Financial Incomes credited only in Financial Accounts

a) Share Transfer Fees Received 2,600

b) Profit on Sale of Plant 23,400

ii) Overabsorption of Overheads/Expenses in Cost Accounts

a) Selling and Distribution Overheads (+) 4,000

(+) 30,000

2,27,700

Less :

i) Overvaluation of Closing Stock in Cost Accounts 2,000

ii) Underabsorption of Overheads/Expenses in Cost Accounts

a) Factory Overheads 16,300

b) Establishment Overheads 3,400

c) Depreciation on Plant (+) 3,000

(-) 24,700

Profit as per Financial Accounts 2,03,000

ILLUSTRATION 4

Following is the summarised Profit and Loss Account of Finolex Oil Co.

Ltd., Faizpur for the year ended 31st March, 2012.


To Raw Materials 95,000 By Sales 1,92,000

Purchases (4,800 units x 40)

To Carriage and Freight on By Stock as on 31-03-2012

Purchase of Raw Materials 1,000 i) Work-in-progress 12,000

To Productive Wages 70,000 a) Materials 6,000

To Chargeable Expenses 2,000 b) Labour 3,600

To Production Overheads 48,000 c) Production Overheads

(+) 2400

To Gross Profit C/D 24,000 ii) Finished Goods 36,000

2,40,000 2,40,000

To Office Overheads 12,000 By Gross Profit B/D. 24,000

To Net Profit C/D. 13,000 By Interest on Govt. Securities 1,000

25,000 25,000

During the year 6,000 units were produced and 4,800 units were sold. TheAdvanced Cost Accounting - III

NOTES

223


cost accounting records shows that -

i) Production Overheads allocated to production were ` 6 per unit

manufactured.

ii) Office Overheads allocated to production were ` 3 per unit produced.

iii) The cost profits amounted to ` 24,000

You are required to prepare a statement of Reconciliation between Cost

Accounts and Financial Accounts.

SOLUTION

In the books of Finolex Oil Co. Ltd., Faizpur

Statement showing Cost and Profit for the year ended 31st March 2012

Units Produced : 6,000

Units Sold : 4,800

Particulars Amount Amount` `

Raw Materials Purchases 95,000

Add : Carriage and Freight on Purchases Raw Materials (+) 1,000

Cost of Raw Materials Purchased i) 96,000 96,000

Add : Productive Wages 70,000

Add : Chargeable Expenses (+) 2,000

Prime Cost ii) 1,68,000 1,68,000

Add : Production Overheads

(`6 x Units Manufactured - 6,000) (+) 36,000

2,04,000

Add : Stock of Work-in-progress as on 01-04-2011 Nil

Less : Stock of Work-in-progress as on 31-03-2012

(-) 12,000

Works Cost iii) 1,92,000 1,92,000


(`3 x Units Produced - 6,000) (+) 18,000

Cost of Production iv) 2,10,000 2,10,000

Add : Stock of Finished Goods as on 01-04-2011 Nil

Less : Stock of Finished Goods as on 31-03-2012 42,000

If 6,000 units = 2,10,000

1,200 units = ?

=1,200 units x 2,10,000

6,000 units

= 42,000 (-)

Total Cost v) 1,68,000 1,68,000

Add : Profits vi) (+) 24,000 24,000

Sales 1,92,000

(4,800 units x 40) Advanced Cost Accounting - III

NOTES

224


Working Notes



` ` `

i) Production Overheads 36,000 48,000 12,000

ii) Office Overheads 18,000 12,000 6,000

iii) Closing Stock of Finished Goods 42,000 36,000 6,000

iv) Interest on Government Securities - 1,000 1,000

In the books of Finolex Oil Co. Ltd., Faizpur



` `


Add :

i) Financial Incomes credited only in Financial Accounts

a) Interest on Government Securities 1,000

ii) Overabsorption of Overheads/Expenses in

Cost Accounts

a) Office Overheads (+) 6,000

(+) 7,000

31,000

Less :

1) Underabsorption of Overheads/Expenses in

Cost Accounts

i) Production Overheads 12,000

ii) Overvaluation of Closing Stock in

Cost Accounts (+) 6,000

(-) 18,000

Profit as per Financial Account 13,000


NOTES

225


ILLUSTRATION 5

David White Co. Ltd., Delhi has prepared a Profit and Loss Account for

the year ended 31st March, 2012 which is shown below.


To Raw Materials Expenses 1,39,600 By Sales 4,80,000

To Productive Wages 76,200 (1,200 units x 40)

To Works Overheads 42,600 By Stock as on 31-03-2012

To Office Overheads 39,100 i) Finished Goods 8,000

To Selling and Distribution (200 units)

Overheads 42,700 ii) Work-in-progress 47,995

To Underwriting Commission 2,200 a) Material 28,200

To Discount on Issue of Shares 2,501 b) Wages 11,796

To Interest on Bank Loan 3,000 c) Works Overheads

To Provision for Income-Tax 4,100 (+) 7,999

To Net Profit C/D 1,89,994 By Interest on Deposits 6,000

5,41,995 5,41,995

The accounting record maintained by the cost accountant for the similar

period disclosed the following facts :

i) Works Overheads allocated to the production were one-fifth of direct cost.

ii) Office Overheads were charged to the production at `3 per unit produced

during the period.

iii) Selling and Distribution Overheads were charged at 4 per unit sold during

that period.

You are required to prepare -

1) Statement showing Cost and Profit as per Cost Accounts.

2) Statement showing reasons for disagreement and

3) Reconciliation Statement as on that date.


NOTES

226


SOLUTION

In the books of David White Co. Ltd., Delhi

Statement showing Cost and Profit


Units Produced - 12,200Units Sold

+ Closing Stock

12,000 200

Units Sold - 12,000


Raw Materials Expenses 1,39,600

Add : Productive Wages (+) 76,200

Prime Cost i) 2,15,800 2,15,800

Add : Works Overheads

(1/5 of Direct Cost i.e. 2,15,800 (+) 43,160

2,58,960

Add : Opening Stock of Work-in-progress Nil

Less : Closing Stock of Work-in-progress (-) 47,995

Works Cost ii) 2,10,965 2,10,965


(` 3 x Units produced i.e. 12,200) (+) 36,600

Cost of Production iii) 2,47,565 2,47,565

Add : Selling and Distribution Overheads

(` 4 x Units sold i.e. 12,000) (+) 48,000

2,95,565

Add : Opening Stock of Finished Goods Nil

Less : Closing Stock of Finished Goods 4,058

If 12,200 units = 2,47,565

200 units = ?

= 200 units x 2,47,565

12,200 units

= 4,058 (-)

Total Cost iv) 2,91,507 2,91,507

Add : Profits v) (+) 1,88,493 1,88,493

Sales 4,80,000

(12,000 units x 40)


NOTES

227


Working Notes -

1) Statement showing Reasons for Disagreement

Particulars CA FA Difference` ` `

i) Works Overheads 43,160 42,600 560

ii) Office Overheads 36,600 39,100 2,500

iii) Selling and Distribution Overheads 48,000 42,700 5,300

iv) Underwriting Commission - 2,200 2,200

v) Discount on Issue of Shares - 2,501 2,501

vi) Interest on Bank Loan - 3,000 3,000

vii) Provision for Income-Tax - 4,100 4,100

viii) Closing Stock of Finished Goods 4,058 8,000 3,942

ix) Interest on Deposits - 6,000 6,000

In the books of David White Co. Ltd., Delhi



Profit as per cost Accounts 1,88,493

Add :

i) Financial Incomes credited only in Financial

Accounts

a) Interest on Deposits 6,000

ii) Overabsorption of Overheads/Expenses in

Cost Accounts

a) Works Overheads 560

b) Selling and Distribution Overheads 5,300

iii) Undervaluation of Closing Stock in Cost Accounts 3,942

(+) 15,802

2,04,295

Less :

i) Financial Expenses and Appropriations debited only

in Financial Accounts

a) Underwriting Commission 2,200

b) Discount on Issue of Shares 2,501

c) Interest on Bank Loan 3,000

d) Provision for Income Tax 4,100

ii) Underabsorption of Overheads/Expenses in

Cost Accounts

a) Office Overheads (+) 2,500

(-) 14,301

Profit as per Financial Accounts 1,89,994Advanced Cost Accounting - III

NOTES

228


ILLUSTRATION 6

Elpro National Co. Ltd., Edalabad prepared their final accounts as follows :

Dr. Manufacturing, Trading and Profit and Loss Account Cr.



To Stock of Raw Materials By Stock as on 31-03-2012

as on 01-04-2011 29,500 i) Raw Materials 32,000

To Raw Materials Purchases 1,85,000 ii) Work-in-progress 12,800

To Carriage Inward 1,500 a) Materials 4,000

To Direct Wages 2,98,000 b) Wages 5,500

To Factory Overheads 1,90,750 c) Factory Overheads (+) 3,300

By Manufacturing Cost C/D 6,59,950

7,04,750 7,04,750

To Manufacturing Cost B/D 6,59,950 By Sales of Finished Goods 9,12,000

To Management Overheads 1,22,500 (7,600 units x 120)

To Selling and Distribution By Finished Goods 1,17,600

Overheads 1,64,000 (1,400 units)

To Bad Debts written off 17,500 By Dividend Received 6,800

To Net Profit C/D 72,450

10,36,400 10,36,400

The following additional information is also available.

i) Direct Wages includes wages due but not paid amounting to `17,000.

ii) Factory Overheads allocated to production were 60% of Prime Cost Wages.

iii) Management Overheads allocated to production were at `12 per unit

manufactured.

iv) Selling and Distribution Overheads were 20% of loaded price.

You are required to prepare,

a) Statement of Cost and Profit as per cost accounting system.

b) Statement showing reasons for disagreement and

c) Reconciliation Statement for the year ended 31st March, 2012


NOTES

229


SOLUTION

In the books of Elpro National Co. Ltd., Edalabad

Statement of Cost and Profit for the year ended 31st March, 2012

Units Produced - 9,000

Units Sold +

Closing Stock

7,600 1400

Units Sold - 7,600


Stock of Raw Materials as on 01-04-2011 29,500

Add : Raw Materials Purchases (+) 1,85,000

Add : Carriage Inward (+) 1,500

2,16,000

Less : Stock of Raw Materials as on 31-03-2012 (-) 32,000

Cost of Raw Materials Consumed i) 1,84,000 1,84,000

Add : Direct Wages 2,98,000

i) Actual Direct Wages paid 2,81,000

ii) Wages due but not paid (+) 17,000

Prime Cost ii) (+) 4,82,000 4,82,000

Add : Factory Overheads

(60 % of Prime Cost Wages i.e. 2,98,000) (+) 1,78,000

6,60,800

Add : Stock of Work-in-Progress as on 01-04-2011(+) Nil

Less: Stock of Work-in-Progress as on 31-03-2012 (-) 12,800

i) Materials 4,000

ii) Wages 5,500

iii) Factory Overheads (+) 3,300

Works Cost iii) 6,48,000 6,48,000

Add : Management Overheads

(` 12 x Units Manufactured - 9,000) (+) 1,08,000

Cost of Production iv) 7,56,000 7,56,000

Add : Selling and Distribution Overheads

(20 % of Loaded Price - 9,12,000) (+) 1,82,400

9,38,400

Add : Stock of Finished Goods as on 01-04-2011 Nil

Less : Stock of Finished Goods as on 31-03-2012 1,17,600

If 9,000 units = 7,56,000

1,400 units = ?

= 1,400 units x 7,56,000

9,000 units

= 1,17,600

Total Cost v) (-) 8,20,800 8,20,800

Add : Profits vi) (+) 91,200

Sales 9,12,000

(7,600 units x 120)Advanced Cost Accounting - III

NOTES

230


Working Notes -

1) Statements showing Reasons for Disagreement


` ` `

i) Factory Overheads 1,78,800 1,90,750 11,950

ii) Management Overheads 1,08,000 1,22,500 14,500

iii) Selling and Distribution Overheads 1,82,400 1,64,000 18,400

iv) Bad Debts written off - 17,500 17,500

v) Dividend Received - 6,800 6,800

In the books of Elpro National Co. Ltd. Edalabad




Add :

i) Financial Incomes credited only in Financial Accounts 6,800

ii) Overabsorption of Overheads/Expenses in Cost Accounts

a) Selling and Distribution Overheads (+) 18,400

(+) 25,200

1,16,400

Less :

i) Financial Expenses and Appropriations

debited only in Financial Accounts

a) Bad Debts written off 17,500

ii) Underabsorption of Overheads/Expenses in Cost Accounts

a) Factory Overheads 11,950

b) Management Overheads (+) 14,500

(-) 43,950

Profit as per Financial Accounts 72,450

11.4 Key Terms

a) Cost Ledger : This is the principal ledger of cost department. It contains

all impersonal accounts including overhead accounts such as Factory

overheads. Administrative overheads, Selling and distribution overheads,

etc. and classified by the various production and service departments or

other cost centres.

b) Stores Ledger : Contains all stores accounts, separate accounts being

kept for each item of store.


NOTES

231


c) Work-in-Progress Ledger : Records each type of job undertaken : the

cost of all materials, wages and overheads of each job is posted to respective

job account in this ledger.

d) Finished Goods Ledger : This ledger contains accounts of completely

finished jobs or products, separate accounts are opened for each type of

finished job, product, etc.

e) Memorandum Reconciliation Account : Memorandum Reconciliation

Account is basically presentation of Reconciliation statement in ‘T’ Account

Form.

It is not part of double entry system because all items posted in this

account do not have their corresponding debits/credits in the books of

accounts.

f) Integrated Accounts : Integrated or integral accounting is a method of

accounting in which both cost and financial accounts are kept in the same

ledger. The two sets of books maintained under non-integrated system one

for cost accounting and another for financial accounting are merged into a

composite ledger.


I - Objective Questions

A) State with reasons whether the following statements are True or False.

1. Cost Ledger Account in financial book is a Memorandum Account.

2. Cost Ledgers are maintained on self-balancing principle.

3. Selling and distribution overheads recovered are credited to cost of sales

account.

4. Materials purchased for specific jobs are debited to work-in-progress control

account.

5. Integral accounting is also called as interlocking accounting system.

6. Cost ledger control account servers as a link between financial accounts

and cost accounts.

7. There is no need for reconciliation under Integrated Accounting System.

8. Internal transactions are treated in the same manner under integrated system

as well as under non-integrated system of accounting.

9. A systematic method of recording both financial and costing entries in one

self-contained ledger is known as non-integrated ledger.

10. Correct and more reliable cost data is made available to the management

under non-integral system of accounting.Advanced Cost Accounting - III

NOTES

232


Answers :

True: 1, 2, 4, 7, 8.

False: 3. debited, 5. non-integral, 9. integrated ledger, 10. integral system of

accounting.

B) Fill in the blanks.

1. The Government of India has issued Cost Accounting Record Rules in

respect of certain manufacturing industries under section ---------- of

Companies Act.

2. Data for wage control account is derived from ----------.

3. Only those entries appear in General Ledger Control Account which influence

both ---------

4. Items of pure financial nature generally do not appear in -------- books.

5. Higher value of -------- stock in financial books leads to higher financial

profit.

6. The need to reconcile cost and financial profit arises if cost account and

financial accounts are --------- of each other.

7. Transfers to reserve are generally ----------- from cost books.

8. Income tax is recorded in ----------- books only.

9. There is no general ledger adjustment account under --------- accounting

system.

10. Integral accounting system avoids ---------- prevalent in case of non-

integrated accounting system.

Answers :

1. 209 (1) (d), 2. Wage analysis sheets, 3. financial and cost books, 4. cost,

5. closing, 6. independent, 7. excluded, 8. financial, 9. integrated, 10. duplication.

II. Theory Questions -

1. What is ‘Cost Ledger’ ? State the various types of control accounts opened

in cost ledger.

2. What is ‘Cost Control Accounts’ ? State the advantages of maintaining a

Cost Ledger.

3. ‘Non-Integrated Accounting’ is one of the system of cost control accounting

to keep cost books. Discuss.

4. What is ‘Reconciliation Statement’ ? State the reasons for the differences

between cost accounts and financial accounts that needs to be reconciled.Advanced Cost Accounting - III

NOTES

233


5. What is ‘Memorandum Reconciliation Accounts’ ? Under what

circumstances reconciliation of cost and financial accounts be avoided ?

6. What is ‘Reconciliation’ ? Why should cost accounts and financial accounts

be reconciled ?

7. “There is generally a divergence between’ financial profits and ‘cost profits’

comment.

8. What is ‘Reconciliation Statement’ ? State in brief the method of preparing

‘Reconciliation Statement’.

9. Reconciliation of cost and financial accounts in the modern computer age is

redundant” comment.

10. What is ‘Integral Accounting’? State the features and need for integral

accounting system.

11. ‘Integral Accounting System’ has number of advantages but it has some

limitations also ‘Discuss’.

12. Define ‘Integral Accounting System’. State the nature and advantages of

Integral Accounting System.

III. Practical Problems :

1. Amco Ltd., Aurangabad Provides you the following data, from which you

are required to pass necessary journal entries under integral accounting

system and non-integral accounting system.

`

Purchases of Raw Materials 37,500

Wages Paid 24,700


Unproductive Wages 7,500

Materials issued to production 29,100

Factory Overheads incurred 14,300

Works Overheads charged to production 15,400

Office Overheads paid 7,900

Administration overhead charged to 7,600

production

Cash Sales 98,900

Finished Goods of Cost 58,800Advanced Cost Accounting - III

NOTES

234


2) The following ledger balances were extracted from Burma Ltd., Baroda as

on 31st March, 2012.

Particulars Debit Credit` `

Raw Materials Control A/c. 48,200

Work-in Progress Control A/c. 14,700

Finished Stock Control A/c. 21,100

Nominal Ledger Control A/c. 84,000

84,000 84,000

Following transactions took place during the month March, 2012

`

Purchases of Raw Materials 23,100

Raw Materials returned to suppliers 900

Raw Materials losses 1,100

Raw Materials issued to Production 17,400

Factory Overheads allocated to Work-in-Progress 11,700

Work-in-progress rejected 1,100

Finished Goods at cost 32,300

Direct Wages allocated to Work-in-Progress 16,500

Loss of goods sold 39,100

Returns of finished goods by customers 2,700

You are required to prepare necessary ledger control accounts in cost ledger.

3) Colin Ltd. Chennai Operates an Integrated Accounting System. Following

details are given for the year ended 31st March, 2012

Tiral Balance as on 31st March, 2012.

Particulars Debit Credit` `

Issued and subscribed share capital 20,00,000

Reserve Fund 2,00,000


Expense Creditors 20,000

Land and Building 5,00,000


Provision for Depreciation on plant

and Machinery 1,00,000

Stock of Raw Materials 2,20,000Advanced Cost Accounting - III

NOTES

235


Stock of Work-in-Progress 40,000

Stock of Finished Goods 60,000


Bank 1,50,000

24,70,000 24,70,000

The following data for April, 2012 are given `

Raw materials purchases on credit 9,90,000

Raw materials returned to suppliers 40,000

Materials issued to production 8,50,000

Materials returned from shop floor 20,000

Payment of Productive wages-factory 2,50,000

Unproductive wages paid-factory 50,000

Administrative salaries paid 1,00,000

Selling and Distribution Salaries paid 75,000

Depreciation on Plant and Machinery for April 50,000

Production Overheads Payable 3,00,000

Office Overheads due 50,000

Selling and Distribution Overheads incurred but not paid 1,00,000

Credit Turnover 20,00,000

Collection from Sundry Debtors 19,50,000

Paid to creditors for purchases by cheque 10,00,000

Production overhead charged to production 3,90,000

Administration overhead applied to Fnished Goods 1,45,000

Selling and Distribution overhead applied to cost of sales 1,80,000

Stock on 30th April, 2012

i) Work-in-progress 2,10,000

ii) Finished Goods 2,15,000

You are required to prepare necessary ledger accounts, income statement

for April, 2012 and a Balance Sheet as on 30th April, 2012.


NOTES

236
