integrated and non integrated system of accounting

INTEGRATED AND NON INTERATED SYSTEM OF ACCOUNTS

CHAPTER 1 - COST ACCOUNTING SYSTEM

1.1 INTRODUCTION

Cost accounting is a process of collecting, analyzing, summarizing and evaluating

various alternative courses of action. Its goal is to advise the management on the most

appropriate course of action based on the cost efficiency and capability. Cost accounting

provides the detailed cost information that management needs to control current

operations and plan for the future.[1]

Since managers are making decisions only for their own organization, there is no need for

the information to be comparable to similar information from other organizations.

Instead, information must be relevant for a particular environment. Cost accounting

information is commonly used in financial accounting information, but its primary

function is for use by managers to facilitate making decisions.

Unlike the accounting systems that help in the preparation of financial reports

periodically, the cost accounting systems and reports are not subject to rules and

standards like the Generally Accepted Accounting Principles. As a result, there is wide

variety in the cost accounting systems of the different companies and sometimes even in

different parts of the same company or organization. A cost accounting system is a

system designed for managers to help them make decisions and includes; input

measurement basis, inventory valuation method, cost accumulation method and cost flow

assumption. The type of costs that come into an inventory may be pure historical costing

or standard costing.

1

http://en.wikipedia.org/wiki/Generally_Accepted_Accounting_Principles

http://en.wikipedia.org/wiki/Financial_statement

http://en.wikipedia.org/wiki/Financial_accounting

http://en.wikipedia.org/wiki/Cost_accounting#cite_note-google1-1

DIFINITION OF COST ACCOUTING SYSTEM

Meaning & Definition Cost- “the amount of expenditure (actual or notional) incurred on,

or attributable to a specified thing or activity”-CIMA, London Costing-”the techniques

and processes of ascertaining cost”-CIMA, London

Cost Accounting “Cost Accounting is the application of accounting and costing

principles, methods and techniques in the ascertainment of costs and the analysis of

savings and/or excesses as compared with previous experience or with standards”-CIMA,

London

1.2IMPORTANCE OF COST ACCOUNTING

The limitation of financial accounting has made the management to realize the

importance of cost accounting. The importance of cost accounting is as follows:

1. Importance to Management

Cost accounting provides invaluable help to management. It is difficult to indicate

where the work of cost accountant ends and managerial control begins. The

advantages are as follows:

Helps in ascertainment of cost

Cost accounting helps the management in the ascertainment of cost of

process, product, Job, contract, activity, etc., by using different techniques

such as Job costing and Process costing.

Aids in Price fixation

By using demand and supply, activities of competitors, market condition to

a great extent, also determine the price of product and cost to the producer

2

does play an important role. The producer can take necessary help from his

costing records.

Helps in Cost reduction

Cost can be reduced in the long-run when cost reduction program me and

improved methods are tried to reduce costs.

Elimination of wastage

As it is possible to know the cost of product at every stage, it becomes

possible to check the forms of waste, such as time and expenses etc., are in

the use of machine equipment and material.

Helps in identifying unprofitable activities

With the help of cost accounting the unprofitable activities are identified, so

that the necessary correct action may be taken.

Helps in checking the accuracy of financial account

Cost accounting helps in checking the accuracy of financial account with

the help of reconciliation of the profit as per financial accounts with the

profit as per cost account.

Helps in fixing selling Prices

It helps the management in fixing selling prices of product by providing

detailed cost information.

2. Importance to Employees

3

Worker and employees have an interest in which they are employed. An efficient

costing system benefits employees through incentives plan in their enterprise, etc.

As a result both the productivity and earning capacity increases.

3. Cost accounting and creditors

Suppliers, investor’s financial institution and other moneylenders have a stake in

the success of the business concern and therefore are benefited by installation of

an efficient costing system. They can base their judgment about the profitability

and prospects of the enterprise upon the studies and reports submitted by the cost

accountant.

4. Importance to National Economy

An efficient costing system benefits national economy by stepping up the

government revenue by achieving higher production. The overall economic

developments of a country take place due to efficiency of production.

5. Data Base for operating policy

Cost Accounting offers a thoroughly analyzed cost data which forms the basis of

formulating policy regarding day to day business.

1.3ADVANTAGES OF COST ACCOUNTING

The science of cost accounting has developed primarily to serve the needs of the

management. The techniques of cost accounting are the best tools by which management

may conduct a business towards profitable operations. It is so much allied to management

that it is difficult to indicate where the cost accounting ends and managerial control

begins.

4

Cost Accounting has many advantages. The following are the most important advantages

of a good cost accounting system:

1. Profitable and unprofitable Activities:

In Cost Accounting profitable and unprofitable activities are disclosed. Management can

take steps to eliminate or to reduce those activities from which little or no profit is

earned. It can change the method of production in order to render such activities more

profitable.

2. Classification and Subdivision of costs:

Costs are accumulated and classified by every possible division of business. In a good

costing system data regarding costs by functions, departments, processes, jobs or orders,

contracts and services can be easily computed. Thus it helps management to ascertain the

profitability of each product, sales area, division etc. in order to improve profit.

3. Cost Finding and Price-Fixing:

It provides accurate cost data which help in the fixation of selling price and for

submitting quotations. In periods of depression it enables the management to determine

the extent to which prices can be reduced.

4. Control of Materials and supplies:

Since in all types of cost accounting, materials and supplies must be accounted for in

terms of departments, processes, and units of production or services; a system of

receiving, handling, and issuing materials and supplies is an essential part of cost control.

5

This will eliminate or reduce misappropriation, embezzlement, obsolescence, and losses

from scrap, defective, and spoiled materials and supplies.

5. Control of Wages and Salaries:

Cost Accounting activities encourage accounting for labour by jobs and by operations. In

many manufacturing concerns daily summary reports are prepared to show the number of

hours and minutes worked and the wage rate for each worker per job or operation.

Cost Accounting is a benefit to the employer by establishing standards to measure the

efficiency of labour to assist in assignment of work to employees best fitted for it, and to

determine the unit cost of labour arising from each activity.

6. Overhead costs:

The Cost accountant first separates costs into direct and indirect items. Direct costs

consists of materials and labour that can be definitely

7. Helps in adverse periods:

Cost accounting helps in the periods of economic recession, trade depression and trade

competition. In such periods, the management should concentrate on measures to be

taken to minimize loss. While taking decision during such periods, cost accounting

extends a helping hand to the management to resolve crisis.

8. Price fixation, Floating tenders, Quotations etc.:

Cost records play a vital role in fixing the price of a product, service or process. Cost

accounting facilitates such task.

9. Eliminates wastages:

6

Cost of the article or process at each and every stage can be determined with the help of

cost records, thereby minimizing wastages that occur.

10. Maximizes profit:

Cost accounting helps in maximizing profit, choosing apt approach for its production.

Non-profitable lines may be avoided.

11. Facilitates comparison:

Cost records provide data to compare different periods, which in turn helps the

management to take future course of action promptly.

12. Preparation of final accounts:

Cost records provide the necessary accounting information for the preparation of profit

and loss account and balance sheet at specified periods promptly.

13. Inventory control:

Costing helps to a great extent with respect to control of stock of raw materials, work-in-

progress and finished goods.

14. Increasing productivity:

Productivity of material and lab our is inevitable for any organization to attain growth

and expansion. Costing helps in these areas to increase productivity.

15. Enhancing efficiency:

As costs are determined at each stage, wastages can be detected and remedial measures

can be taken without delay; efficiency of an organization is enhanced, which in turn

maximizes the profitability.

7

16. Boon to creditors:

Costing records serve as a reliable and authentic document by which creditors (investors,

banks and money-lending institutions etc.) can repose faith on business organizations and

extend advances without any hesitation and with confidence.

17. Beneficial to employees:

Costing records are easily accessible and transparent to employees because of which

they are benefitted monetarily by way of incentive, bonus etc. This strengthens the

cordial relationship between the employer and employee, and industrial peace

environment prevails.

18. Boost to national economy:

Prosperity in industrial sector will reflect in the general economy of any nation by way of

increased revenue to the government. Better system of cost accounting paves the way to

achieve higher GDP growth of the nation.

1.4 OBJECTIVES OF COST ACCOUNTING

The main objectives of cost accounting are:

1. To determine the cost of a product, process or service

2. To analyze, classify and record all expenditures with respect to the cost of product,

process or service in order to determine its cost

3. To provide necessary information to the management in time

4. To provide data needed for periodical preparation of profit and loss account and

balance sheets

5. To serve as a guide by providing actual data for comparison

6. To facilitate price fixation and offering quotations

7. To assist budgetary control

8

8. To assist cost control and cost reduction

9. To record the relative production results in each unit of plant to examine efficiency

10. To provide the basis for production planning and for avoiding wastages of

materials and stores

11. To provide data for different periods and various volumes of output for effective

planning and future expansion of business

12. To provide the basis for making decisions such as:

1. To shut down or operate

2. To make or buy

3. To continue with existing plant/machinery or to replace it

4. To determine cost–volume–profit relationship

13. To assist the management in devising suitable policy decisions in other key areas

1.5 BASIC DOCUMENT USED IN COST ACCOUNTING

The following documents are used for collecting and classifying various costs:

(1)Material requisition note:

A document which authorizes and records the issue of materials for use.

(2)Material returns note:

A document which records the returns of unused materials.

(3) Material transfer note:

A document which records the transfer of materials from one store to another,

from one cost centre to another, or from one unit to another.

(4) Material issue analysis sheet:

9

A document which is a classified record of materials issues, returns and transfers.

(5) Lab our Time Record:

A document which records the amount of time spent by an employee, showing the

analysis between a numbers of activities during a payment period.

(6) Wages analysis Sheet:

A document which is a classified record of time and / or wages complied from lab

our time records.

(7) Expenses analysis Sheet:

A document which classified record of expenses.

(8) Cost journal voucher:

A document which provides the details necessary to support an entry in the cost

A/C.

(9) Machine Time Record:

A document which records the amount of time an items of equipment is operated

or remain idle, and the work done by the machine, and which may record the cost

of the time so recorded.

CHAPTER 2 – INTEGRATED SYSTEM OF ACCOUNTS

2.1 INTRODUCTION

10

Integrated accounting system involves the combination of cost accounting and financial

accounting records. In this system, only one set of books of accounts are maintained. This

set of books fulfils the principles of cost accounting and financial accounting. In this

system, nominal accounts follow the principles of cost accounting. Real accounts and

personal accounts are kept in accordance with financial accounting principles.

Integrated accounting system may be defined as “the inter-locking of financial and cost

accounting systems to ensure that all relevant expenditure is absorbed into the cost

accounts. Under this system, transactions are classified according to both their function

and nature”. Under this system, double-entry system of book keeping is followed for

recording transactions.

DEFINTION OF INTEGRATED SYSTEM

CIMA has defined integrated system as “ a system in which the financial and cost

accounts are inter-locked to ensure that all relevant expenditure is absorbed into the cost

accounts.” Under this accounting system transactions are classified both according to

their function and natures.

2.2 FEATURES OF INTEGRATED ACCOUNTING:

Account budget setup capability

Check printing in batch or on demand

Electronic check request feature automatically creates an Accounts Payable record

Recurring journal entries tool

Payroll import functionality

Search and view accounts by date range, accounting period or any other aspect

Print or export grid results to Excel

Trial balance, income statement, balance sheet and statement of cash flows

capabilities

11

Trust balances by matter

Ability to transfer monies between trust accounts

Support for multiple checking accounts with different check formats per account

Bank statements can be downloaded for reconciliation

Track and manage vendor and payee relationships

Process 1099 information

Account-split capabilities to automatically distribute a check or adjustment among

multiple accounts

Compensation formulas automate the splitting of fee income postings

Support for matter level, client level or partial payments

Management of unapplied cash

Support for write-offs

Group, sort or filter search results

Period-based analysis

2.3 ADVANTAGES OF INTEGRAL SYSTEM OF ACCOUNTING

1. Duplication of work avoided:

Keeping unnecessary accounting records is avoided, by which duplication of

accounting work is eliminated to a great extent.

2. Saves time and money:

Instead of cost ledger, control account, general ledger adjustment account,

purchases account and stores ledger account, only one set of books are maintained

and thus save time and money.

3. Reconciliation problem:

12

As there will be only one figure for profit or loss, the problem of reconciliation of

profits, as shown by cost and financial books, will not arise.

4. Accuracy:

Correct and reliable data can be obtained under this system and as such the results

will be more accurate.

5. Control on cost:

In this system, all expenses are included in cost accounts. It leads to an automatic

check on costs and ensures better control over it.

2.4 DISADVANTAGES OF INTEGRATED SYSTEM :

1. This system has to fulfill the requirements of both the cost and the financial

accounts. Because of this, it is a complicated procedure.

2. In any case, perfect integration cannot be possible.

3. This system may not be suitable for large-scale manufacturing factories.

2.5 PREREQUISITES FOR SUCCESSFUL INTEGRATED SYSTEM OF

ACCOUNTING

1. Role of management:

The role of management is important in the implementation of integrated

accounting system. The management has to plan the level of integration and issue

guidelines for effective implementation of this system.

2. Classification of accounts:

Account heads should be duly identified and classified. The accounting data have

to be maintained in separate subsidiary ledgers as follows (i) sales ledger (ii)

13

purchases ledger (iii) stores ledger is job ledger (iv) stock ledger (v) overheads

ledger and the like.

3. Coding of accounts:

To facilitate the task of relevant and speedy information, proper coding of

accounts must be done.

4. Accounts personnel:

Proper training should be provided to accounts department personnel to acquaint

with this accounting system.

5. Agreed routine

An agreed routine, with regard to the treatment of provision for accruals, prepaid

expenses and other adjustments necessary for preparation of interim accounts must

be specified.

2.6 ACCOUNTING TREATMENT

14

Journal entries: The journal entries that have to be passed under both integral and non-

integral accounting systems are shown in the tabular form as follows:

Accounting entries in non-integrated accounting system (financial books and cost books)

and integrated accounting system.

15

16

17

18

2.7 SOLVED PROBLEM

INTEGRATED SYSTEM

Bangalore petro-chemicals co. keep books on integral accounting system. The following

balances appear in the books company as on 1st January 2004.

Particular Dr. Rs. Cr. Rs.

Stores control A/C 18000

Work in progress A/C 17000

Finished goods A/C 13000

Bank A/C 10000

Creditor A/C 8000

Fixed assets A/C 55000

Debtors A/C 12000

Share capital A/C 80000

Depreciation provision A/C 5000

Profit and loss A/C 32000

TOTAL 125000 125000

Transactions for the year ended 31st December, 2004 were as under:

Particular Rs. Rs.

Wages – direct 87000

Indirect 5000 92000

Purchase of materials (on credit) 100000

Materials issues to production 110000

Materials for repairs 2000

Goods finished during the year (at cost) 215000

Sales (on credit) 300000

19

Cost of goods sold 220000

Production overheads absorbed 48000

Production overheads incurred 40000

Administration overheads incurred 12000

Selling overhead incurred 14000

Payments to creditors 101000

Payments from debtors 290000

Depreciation of machinery 1300

Prepaid rent (included in factory overheads) 300

Write up accounts in the integrated ledger and prepare a trial balance.

Solution:

Dr. Stores control A/C Cr.

Particular Rs. particular Rs.

To balance b/d 18000 By WIP A/C 110000

To creditors A/C 100000 By production overheads 2000

By balance c/d 6000

118000 118000

Dr. wages control A/C Cr.

Particular Rs. Particular Rs.

To bank A/C 92000 By WIP A/C 87000

By production overhead A/C 5000

92000 92000

Dr. Work in progress A/C Cr.

20


To balance b/d 17000 By finished goods A/C 216000

To stores control A/C 110000 By balance c/d 47000

To wages control A/C 87000

To production A/C 48000

262000 262000

Dr. Production overhead A/C Cr.


To wages control A/C 5000 By WIP A/C 48000

To stores control A/C 2000 By prepaid rent 300

To Bank A/C 40000

To deprecation provision 1300

48300 48300

Dr. finished goods A/C Cr.


To balance b/d 13000 By cost of sales A/C 220000

To WIP A/C 215000 By balance c/d 20000

To administration overhead 12000

240000 240000

Dr. Administrative overhead A/C Cr.

21


To bank A/C 12000 By finished goods A/C 12000

12000 12000

Dr. cost of sales A/C Cr.


To finished goods A/C 220000 By sales A/C 234000

To selling & distribution A/C 14000

234000 234000

Dr. Selling and distribution A/C Cr.


To bank A/C 14000 By cost of sale A/C 14000

14000 14000

Dr. Sales A/C Cr.


To cost of sales A/C 234000 By debtors A/C 300000

To P/L A/C (profit) 66000

300000 300000

Dr. prepaid A/C Cr.

22


To production overhead A/C 300 By balance c/d 300

300 300

Dr. Depreciation provision A/C Cr.


To balance c/d 6300 By balance b/d 5000

By production overhead A/C 1300

6300 6300

Dr. Profit and loss A/C Cr.


To balance c/d 98000 By sales A/C 66000

By profit b/d 32000

98000 98000

Dr. Debtors A/C Cr.


To balance b/d 12000 By bank A/C 290000

To sales 300000 By balance c/d 22000

312000 312000

Dr. creditors A/C Cr.


23

To bank 101000 By balance b/d 8000

To balancec/d 7000 By stores control A/C 100000

108000 108000

Dr. bank A/C Cr.


To balance b/d 10000 By creditors 101000

To debtors 290000 By wages control A/C 92000

By production OH A/C 40000

By adiministration OH A/C 12000

By selling and distribution OH A/C 14000

By balance c/d 41000

300000 300000

Dr. fixed assets A/C Cr.


To balance b/d 55000 By balance c/d 55000

55000 55000

Dr. share capital A/C Cr.


To balance c/d 80000 By balance b/d 80000

80000 80000

Trial balance as on 31-12-2004

24


stores control A/C 6000

WIP A/C 47000

Finished goods A/C 20000

Bank A/C 41000

Creditors A/C 7000

Fixed assets A/C 55000

Debtors A/C 22000

Share capital A/C 80000

Deprection provision A/C 6300

P and L A/C 98000

Prepaid rent A/C 3000

191300 191300

Problem no 2.

From the following information you are requested to pass journal entries and prepare

necessary accounts and trial balance under system of integrated account in the books of

XYZ Co. Ltd.

Particular Rs.

Matrial purchase on credit 29600

Wages paid 33600

Wages productive 29600

Wages unproductive 4000

Matrial issues to prodction 25600

Works expenses incurred 13000

Finished goods at cost 60000

Works expenses chareged to production 17200

25

Adiministrion expenses 8800

Selling overhead paid & charged to sales 9000

Cash sales 78000

Adiministraion expenses charges to production 8700

Solution: IN THE BOOKS CO. LTD

JOURNAL

No. Particular Dr. Rs. Cr. Rs.

1. Stores control A/C Dr.

To creditors A/C

(Being material purchased on credit)

29600

29600

2. Wages control A/C Dr.

To bank A/C

(Being wages paid)

33600

33600

1. WIP legder control A/C Dr.

To wages control A/C

(Being the wages charged to factory overhead))

29600

29600

1. Factory overhead control A/C Dr.


(Being indirect wages charged to factory overhead))

4000

4000


To stores control A/C

(Being material issued to jobs)

25600

25600

1. Factory overhead control A/C Dr.

To bank A/C

(Being factory expenses incurred)

13000

13000

26


To factory overhead control A/C

(Being factroy overhead chareged to production)

17200

17200

8. Adiministration Overhead control A/C Dr.

To Bank A/C


8800

8800

9. WIP control A/C Dr.

To Adiministration overhead control A/C

(Being adiministration overhead charged to production)

8700

8700

10. Selling and distribution overhead control A/C Dr.

To bank A/C

(Being selling expenses incurred)

9000

9000

11. Finished stock control A/C Dr.

To WIP control A/C

(Being Finished stock transferred at cost)

60000

60000

12. Cost of sales A/C Dr.

To finished stock control A/C

To stores control A/C

(Being the cost of production oof goods sold)

69000

60000

9000

13. Bank A/C Dr.

To sales A/C


78000

78000

LEDGER

Dr. Stores control A/C Cr.

27


To creditors A/C 29600 By WIP Ledger control A/C 25600

4000

29600 29600



To bank A/C 33600 By WIP ledger control A/C 29600

By factory overhead control A/C 4000

33600 33600

Dr. WIP Ledger control A/C Cr.


To wages A/C 29600 By finished stock control

A/C

60000

To stores control A/C 25600 By balance c/d 4000

To factory overhead control

A/C

17200

To adiministration Overhead

controlA/C

8700

81100 81100

Dr. factory overhead control A/C Cr.

28


To wages control A/C 4000 By WIP Ledger control A/C 17200

To bank A/C 13000

To overhead suspenes A/C 200

17200 17200

Dr. adiministration overhead control A/C Cr.


To bank A/C 8800 By WIP ledger control A/C 8000

By overhead suspenses A/C 100

8800 8800

Dr. selling & distribution overhead control A/C Cr.


To bank A/C 9000 By cost of sales A/C 9000

9000 9000

Dr. finished stock ledger control A/C Cr.


To WIP ledger control A/C 60000 By cost of sales A/C 60000

60000 60000


29


To finished stock ledger

control A/C

60000 By sales A/C 78000

To selling and distribution

overhead control A/C

9000

To profit and loss A/C 9000

78000 78000

Dr. bank A/C Cr.

Particular Rs. particualar Rs.

To sales A/C 78000 By wages control A/C 33000

By factory overhead control

A/C

13000

By adiministraion overhead

control A/C

8800

By selling & distribution

overhead control A/C

9000


78000 78000

Dr. creditors A/C Cr.

Particulars Rs. Particular Rs.

To balance c/d 29600 By stores control A/C 29600

29600 29600

Dr. overhead suspenese A/C Cr.

30


To Adiministration overhead

Control A/C

100 By factory overhead control

A/C

200

To balance c/d 100

200 200

Dr. sales A/C Cr.


To cost of sales A/C 78000 By bank A/C 78000

78000 78000

Dr. profit and loss A/C Cr.


By cost of sales A/C 9000

Trial balance as at …..


Stores control A/C 4000

WIP Ledger control A/C 21100

Bank A/C 13600

Creditors A/C 29600

Overhead suspenses A/C 100

Profit And loss A/C 9000

38700 38700

CHAPTER 3- NON INTEGRATED SYSTEM OF ACCOUNTS

31

3.1 INTRODUCTION

Meaning of Non-Integrated Accounts CIMA, London defines it as,” a system in which

the cost accounts are distinct from the financial accounts, the two sets of accounts being

kept continuously in agreement or readily recognizable ”Also known as independent

system, separate books system, cost ledger system, interlocking accounting system or

traditional system”

3.2 FEATURES OF NON- INTEGRATED SYSTEM

Features of Non-Integrated System Separate set of books for costing and for financial

accounting for cost accounting, source of information is the same as financial accounting

Cost accounts records only coasts, which are a part of Nominal Accounts For other

accounts, cost control accounts or adjustment accounts are maintained

Books of Accounts Main Ledger: Cost Ledger: contains control accounts and nominal

accounts other than Stores Ledger, WIP Ledger and Finished Goods Ledger Subsidiary

Ledgers: Stores Ledger, WIP Leger and Finished Goods Ledger

Role of general Ledger Adjustment Account Also known as Cost Ledger Control

Account or Finance Ledger Control Account It is the counterbalancing account for the

stocks of material, work-in-progress, and finished goods

1. Separate books

In a non-integrated cost accounting system there are separate cost accounting cost

journals and cost ledgers.

2. Principal of double- entry

However, it too follows the fundamental principles of double entry book-keeping for this

purpose.

3. Cost manual

32

As the number and types of transactions involved in accounting are numerous, a number

of individuals are employed in their recording and analysis. A cost manual is prepared for

guidance of the staff.

4. Voucher

As in the case of financial accounting system, transactions are recorded in the cost

journal voucher, which provides the details necessary to support an entry in the cost

accounts.

5. Account/code

Each entry is debited/credited to a cost accounts. CIMA has defined a cost accounts as

‘an account in the cost ledger. Each account may be given a cost code.

6. Journal

These vouchers are first entered into cost journals. There may be one general journal to

summaries all original entries or separate journals may be kept to record lab our, material

and overhead transactions.

7. Ledger

From the cost journals, entries are posted in the cost ledger. CIMA has defined a ‘cost

ledger’ as a ledger whose accounts record those transactions which are included in costs.

In financial accounting, ledger may be divided into general and subsidiary ledgers like

debtors ledger, creditors ledger etc.

Similarly, cost ledger may be divided into main and subsidiary ledger. There may be a

main ledger known as cost ledger and other subsidiary ledgers like stores ledger, work in

progress ledger and finished stock ledger.

3.3 CONTROL ACCOUNTS

The cost ledger contains two of accounts to complete the double entry :

33

(a) Cost ledger control A/C

(b) Three cost control A/C

(A)Cost ledger control A/C :

CIMA has defined a cost ledger control account’ as ‘an account which is

maintained in the principal ledger which records the totals of the transactions

recorded in detail in the cost legder and provides a check on the accurancy of

the latter. Cost ladger control A/C helps to record all

Items of income and expenditure.

The function of this account which is also referred to as General ledger

Adjustment Account or nominal legder control A/C, is quite important in a

cost accounting system.

(b)cost control accounts :

The three cost control account – stores ledger control accounts, work-in-

progress control account and finished goods control A/C – help to exercise

control over the concerned subsidiary ledger. Transactions kept in details in

one or more A/C of the subsidiary ledger are posted in totals, at the end of a

period, to the control.

(1)stores ledger control A/C

(1)records material cost : The account records materials transactions.

(2)debit and credit : Receipts are posted from goods received notes from

materials requistions or materials issue analysis sheet. The account also

record issues of materials to outside parties, returns through return notes, and

stores adjustment through material transfer notes.

34

(3)Balance : The balance of this account represents the total balance of stock

which should agree with the aggregate of the balance of indiviuals foilos in the

stores ledger.

(2)wages control A/C

(1)Records labour cost : this account records labour transaction.

(2)debits & credits : entries are made from wages analysis sheet. The account

is debited with the gross wages and is cleared by the transfer of direct labour

labour to WIP and indirect labour to factory, administration and selling and

distribution overhead control A/C or research and development A/C or capital

A/C as the case may be.

(3)factory overhead control A/C

(1)Records overhead costs : this account deals with manufacturing overhead

expenses.

(2)Debits & credits : To this account is debited the amount of indirect material,

indirect labour, and indirect expenses incurred. The figures are obtained from

materials issue analysis sheet. Where separate overhead applied account is

opened, credit is given to this account.

(4)work-in-progress control A/C

(1)Debits : This account is debited with the opening balance of work-in-

progress, and material, labour and factory overhead costs.

(2)credit : This account is credited with the cost of finished goods.

(3)balance : The balance of this account represents unfinished closing stock in

process carried over.

35

(5)finished goods control A/C

(1)Debits : This A/C is debited with the opening balance of finished goods; the

cost of finished goods for the period transfred from the work in progress control A/C

And the amount of administration overhead recovered, if administration overhead is not

treated as period cost.

(2)Credits : It is credited with the cost of sales (by transfer to cost of sales

accounts)

(3)balance : The balance of the A/C after writing back the unrecovered

administration overheads, represents unsold stock carried over.

(6)Administration overhead A/C :

(1)Debits : administration overhead cost is debited to this A/C.

(2)Credit : the amount of overhead recovered in the finished goods sold is

credited. Another methods is to close the administration overhead A/C by transfer to

costing profit And loss A/C. In this case, no amount of administration cost is charged to

the finished goods A/C.

(7)Cost of sales A/C

(1)Debit : This A/C is debited with the cost of goods sold and selling and

distribution overhead recovered.

(2)Credit : It is closed by transfer to costing Profit And loss A/C.

(8)Selling and distribution overhead A/C :

(1)Debit : selling and distibution costs are debited to the selling and distribution

overhead A/C.

36

(2)Credit : As the end of the period, the account is closed by transfer to cost of sales

A/C.

(9)Overhead adjustment A/C :

(1)Debits & Credits : The amount of under absorbed or over absorbed factroy,

administration, selling and distribution overhead may be debited or credited to this A/C.

(2)Balance : The balance at the end of a period, may be either

(i) carried over to the next accounting period,

(ii) or transferred to costing profit and loss A/C,

(iii) or prorated to cost of sales A/C, WIP A/C And finished stock A/C

(10)costing profit and loss A/C

(1)Debits and credits : The A/C records the transfer of the amounts of under-

absorbed and over-absorbed overhead, the sale value of goods sold, and the balance from

the cost of sales A/C. abnormal losses or gains to be kept out of costs are also debited or

credited to the A/C.

(2)Balance : The closing balance of this A/C represents the closing profit

and loss which should be reconciled with the financial profit and loss.

3.4 SOLVED PROBLEM

NON INTEGRATED SYSTEM

Problem no 1.

37

Cost man Ltd. Maintain separate set of books for financial accounts and cost accounts.

The following information is furnished for the year 2003.

Particulars Rs.

Material control A/C 60000

W-I-P control A/C 90000

Finished good control A/C 140000

Cost ledger control A/C 290000

Transaction for the year are:

Materials purchased 660000

Materials issued as:

Direct materials 450000

Indirect materials 120000

Wages paid allocated as:

Direct materials 270000

Indirect materials 90000

Production expenses 240000

Value of finished goods produced 1080000

Closing stock of finished goods 120000

Administration expenses 240000

Selling expenses 180000

sales 1800000

Prepare the necessary control accounts in books of costing records.

Solution:Dr. Cost Ledger Control A/C Cr.

Particular Rs particular Rs

To costing P/L A/C (Sales) 1800000 By balance b/d 290000

To balance c/d 450000 By material control A/C 660000

38

By wages control A/C

(Direct + indirect wages)

360000

By selling and admin expenses 420000

By costing P/L A/C 280000

By factory overheads control

A/C

240000

22.50000 22,50000

By balance b/d 450000

Dr. material control A/C Cr.


To balance b/d 60000 By WIP control A/C

Direct material 450000

To cost ledger control A/C 660000 Indirect material 120000 570000


720000 720000

Dr. WIP control A/C Cr.

particular Rs. particular Rs.

To balance b/d 90000 By finished goods A/c 1080000

To material control A/C 570000 By balance c/d 180000


To factory overhead control

A/C

330000

1260000 1260000

Dr. Finished goods control A/C Cr.

39

Particular Rs particular Rs.

To balance b/d 140000 By cost of sales (bal . fig.) 1100000

To WIP 1080000 By balance c/d 120000

1220000 1220000

Dr. Factory overhead control A/C Cr.

particular Rs particular Rs.


(Indirect cost)

90000 By WIP 330000

To cost ledger control A/C 240000

330000 330000

Dr. Cost P/L A/C Cr.


To cost of sales (bal. fig.) 1100000 By cost ledger control A/C 1800000

To admin and selling exp. 420000

To cost ledger control A/C

(Costing profit)

280000

1800000 1800000

Dr. Trial balance

particular Dr. Cr.

Cost ledger control A/C 450000

Material control A/C 150000

WIP control A/C 180000

Finished goods control A/C 120000

40

450000 450000

ILLUSTRATION 2

A COMPANY operates separate cost accounting and financial accounting system. The

following is the list of opening balances as on 1-4-2003 in the cost ledger:


Stores ledger control A/C 53375



General ledger control A/C 188750

Transactions for the quarter ended 30-06-2003 are as under:

particular Rs.

Materials purchased 26700

Materials issued to production 40000

Materials issued for factory repairs 900

Factory wages paid (including indirect wages Rs. 23000) 77500

Production overheads incurred 95200

Production overhead under- absorbed and written-off 3200

sales 256000

The company’s gross profit is 25% on factory cost. At the end of the quarter, WIP stock

increased by Rs. 7500.

Prepare the relevant control A/C, Costing profit and loss A/C and general ledger

adjustment account to record the above transactions for the quarter ended 30-06-2003.

Solution:

Dr. General (cost) ledger adjustment A/C Cr.


41

To sales 256000 By balance b/d 188750

To balance c/d 180000 By stores ledger control A/C 26700

By wages control A/C 77500

By overhead control A/C 95200

By costing P/L A/C 48000

436150 436150

Dr. Stores ledger control A/C Cr.


To balance b/d 53375 By WIP control A/C 40000

To general ledger adjustment

A/C


A/C

900


80075 80075

Dr. WIP Control A/C Cr.


To balance b/d 104595 By finished goods control A/C 202900

To stores ledger control A/C 40000 By balance c/d 112095


To factory O/H A/C 115900

314995 314995

Dr. finished goods control A/C Cr.


To balance b/d 30780 By cost of sale A/C 204800

To WIP control A/C 202900 By balance c/d 28880

233680 233680

42

Gross profit is 25% on factory cost or 20% on sales.

Hence cost of sales = 256000- 20% of Rs. 256000 =Rs. 204800.



To general ledger control

A/C


A/C

23000

By WIP control A/C 54500

77500 77500

Dr. Factory overhead control A/C Cr.


To stores ledger control A/C 900 By costing P/L A/C 3200

To wages control A/C 23000 By WIP control A/C 115900

To general ledger control

A/C

95200

119100 119100

Dr. costing P/L A/C Cr.

Particular Rs Particular Rs

To factory overhead control A/C 3200 By sales A/C 256000

To cost sales A/C 204800

To general ledger control A/C 48000

256000 256000

Dr sales A/C Cr.


To costing P/L A/C 256000 To general ledger adjustment A/C 256000

43

256000 256000



To finished goods control

A/C

204800 By costing P/L A/C 204800

204800 204800

Trial balance (as on 30-6-2003)


Stores ledger control A/C 39175



General ledger adjustment A/C 180150

180150 180150

CHAPTER 4 - CONCLUSION

CONCLUSION

Integrating existing databases is a very difficult task. Still, it is something that enterprises

face today and cannot avoid if they want to launch new applications or to reorganize the

existing information system for better profitability. We have discussed basic issues and

solutions. We focused on the fundamental concepts and techniques, insisting on the

alternatives and on Criteria for choice. More Details are easily found in an over-abundant

literature. To the best of our knowledge, no integration tool has yet been developed as a

commercial product. Some research

44

Most enterprises’ worldview of globalization is mismatched with the reality of

globalization today; they bring a proliferation of localized standards when, more than

ever, governance, transparency and information integrity need to be maintained

consistently throughout the enterprise. By mandating common standards, implementing a

standard Chart of Accounts, building common data definitions and deploying common

processes across the Finance function, enterprises can transform into IFOs. This will

position them to be more responsive, more flexible, and to outperform their peers. To get

there, CFOs should take ownership of their Finance processes enterprise wide, simplify

their technology and delivery models, and provide a new, single version of the truth to

their enterprises. They must formally define their risk programs and take an active role in

risk management. For the enterprise to live up to this vision, change and integration will

need to come from all areas of the business, not just Finance. With this in mind, the CFO

can be a leader in this charge, armed with the facts and trusted with the reins of the

enterprise in confident hands.

APPENDICES

BIBLIOGRAPHY

www.wikipedia.com

www.google.com

REFERENCS

45

http://www.wikipedia.com/

1. crownyou.hubpages.com › ... › Homework Help

2. www.letslearnfinance.com › Accounting

3. www.stamfordonline.com.my/ ..

4. www.cpaireland.ie/UserFiles/

5. www.tutorsonnet.com › Accounting › Cost Accounting

6. crownyou.hubpages.com › ... › Homework Help

46

http://hubpages.com/topics/education-and-science/elementary-middle-school-and-high-school/homework-help/3573

http://www.tutorsonnet.com/homework_help/accounting_assignment_help.htm

http://www.cpaireland.ie/UserFiles/

http://www.stamfordonline.com.my/

http://www.letslearnfinance.com/category/accounting

http://hubpages.com/topics/education-and-science/elementary-middle-school-and-high-school/homework-help/3573

Documents

integrated and non integrated system of accounting