CAG 101
ADVANCED COST ACCOUNTING - I
YASHWANTRAO CHAVAN MAHARASHTRA OPEN UNIVERSITY
Dnyangangotri, Near Gangapur Dam, Nashik 422 222, Msharashtra
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University, Nashik.
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YASHWANTRAO CHAVAN MAHARASHTRA OPEN UNIVERSITY
Vice-Chancellor : Dr. M. M. Salunkhe
Director (I/C), School of Commerce & Management : Dr. Prakash Deshmukh
State Level Advisory Committee
Dr. Pandit Palande
Hon. Vice Chancellor
Dr. B. R. Ambedkar University
Muaaffarpur, Bihar
Dr. Suhas Mahajan
Ex-Professor
Ness Wadia College of Commerce
Pune
Dr. V. V. Morajkar
Ex-Professor
B.Y.K. College, Nashik
Dr. Mahesh Kulkarni
Ex-Professor
B.Y.K. College, Nashik
Dr. J. F. Patil
Economist Kolhapur
Dr. Ashutosh Raravikar
Director, EDMU,
Ministry of Finance
New Delhi
Dr. A. G. Gosavi
Professor
Modern College, Shivaji Nagar, Pune
Dr. Madhuri Sunil Deshpande
Professor
Swami Ramanand Teerth Marathwada
University, Nanded
Dr. Prakash Deshmukh
Director (I/C)
School of Commerce & Management
Y.C.M.O.U., Nashik
Dr. Parag Saraf
Chartered Accountant Sangamner
Dist. AhmedNagar
Dr. S. V. Kuvalekar
Associate Professor and
Associate Dean (Training)(Finance )
Dr. Surendra Patole
Assistant Professor
School of Commerce & Management
National Institute of Bank Management ,
Y.C.M.O.U., Nashik
Pune
Dr. Latika Ajitkumar Ajbani
Assistant Professor
School 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
10, Vidya Society, Shikhare Wadi, Research Guide,
Nashik Road - 422 101.
BYK College of Commerce,
2) Dr. Suhas Mahajan
Nashik - 422 005.
Research Guide,
Ness Wadia College of Commerce,
Pune - 411 001.
Dr. Latika Ajitkumar Ajbani
Assistant Professor
School of Commerce & Management
Y.C.M.O.U., Nashik
Production
Shri. Anand Yadav
Manager, Print Production Centre
Y.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
:
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Cover Print
:
Printed by
:
Publisher
:
Dr. Prakash Atkare, Registrar, Y.C.M.Open University, Nashik - 422 222.
CONTENTS
TOPIC 1
UNIT 1
Introduction to Cost Accounting
Cost Concepts
1-26
1.0 Introduction 1.1 Unit Objectives 1.2 Cost Concepts 1.2.1 Cost 1.2.2 Costing 1.2.3 Cost Accounting
1.2.4 Cost Accountancy 1.3 Limitations of Financial Accounting 1.4 Nature of Cost Accounting 1.5
Objectives of Cost Accounting 1.6 Advantages of Cost Accounting 1.7 Limitations of Cost Accounting 1.8
Difference between Financial Accounting and Cost Accounting 1.9 Cost Unit and Cost Centres 1.10
Summary 1.11 Key Terms 1.12 Questions & Exercises 1.13 Further Reading
UNIT 2
Elements of Cost
27-50
2.0 Introduction 2.1 Unit Objectives 2.2 Elements of cost 2.2.1 Material, Labour and Expenses 2.2.2
Material - direct and indirect 2.2.3 Labour - direct and indirect 2.2.4 Expenses - direct and indirect 2.3
Overheads and types of overheads 2.4 Items excluded form cost 2.5 Division of costs 2.6 Classification
of costs 2.7 Methods of cost classification 2.8 Summary 2.9 Key Terms 2.10 Questions 2.11 Further
Reading
UNIT 3
Cost Sheets and Quotations
51-102
3.0 Introduction 3.1 Unit Objectives 3.2 Cost Sheet 3.2.1 Purpose of Cost sheet 3.2.2 Proforma of
simple cost sheet 3.2.3 Proforma of complex cost sheet 3.3 Summary list 3.4 Illustrations 3.5 Quotations
and its preparation 3.6 Illustrations on preparation of quotation 3.7 Summary 3.8 Key Terms 3.9
Questions and Exercises 3.10 Further Reading
TOPIC 2
UNIT 4
Material Costing
Meaning of Material and Purchasing
103-112
4.0 Introduction 4.1 Unit Objective 4.2 Meaning of materials 4.3 Types of materials 4.4 Purchase of
materials 4.4.1 Decision of purchasing 4.4.2 Centralised and de-centralised purchasing 4.5 Purchase
Requisition 4.6 Selection of supplier 4.7 Placing order with the supplier 4.8 Summary 4.9 Key Terms 4.10
Questions 4.11 Further Reading
UNIT 5
Receipt and Storage of Materials
113-126
5.0 Introduction 5.1 Unit objective 5.2 Receipt of materials 5.2.1 Checking quantity and quality of
materials received 5.2.2 Documents connected with receipt and Verification of materials received
5.3
Storage of Materials 5.3.1 Location of store 5.3.2 Organisation of stores 5.3.3 Classification and codification
of materials 5.3.4 Bins and Bin Cards 5.3.5 Recording of materials in stores 5.4 Summary 5.5 Key
Terms 5.6 Questions 5.7 Further Reading
UNIT 6
Control Over Materials in stores
127-158
6.0 Introduction 6.1 Unit Objective 6.2 Control over materials in stores 6.3 Fixation of stock levels 6.4
Economic Order Quantity (EOQ) 6.5 Stock taking 6.5.1 Methods of stock taking 6.6 Discrepancies and
treatment of discrepancies 6.7 Summary 6.8 Key Terms 6.9 Questions and exercises 6.10 Further
Reading
UNIT 7
Issue of Materials
159-166
7.0 Introduction 7.1 Unit Objectives 7.2 Issue of materials 7.3 Procedure for issue of materials 7.4
Documents related to issue of materials 7.5 Care to be taken while issuing materials 7.6 Summary 7.7 Key
Terms 7.8 Questions 7.9 Further Reading
UNIT 8
Pricing of Material Issued
167-220
8.0 Introduction 8.1 Unit objectives 8.2 Pricing of materials issued 8.3 Methods used for pricing of issues
8.3.1 Cost price Methods 8.3.2 Average Price Methods 8.3.3 Notional Price Methods 8.4 Important
points related to materials costing control 8.5 Summary 8.6 Key Terms 8.7 Questions and exercises 8.8
Further Reading
TOPIC 3 Labour Costing
UNIT 9 Meaning and Types of Labour
221-242
9.0 Introduction 9.1 Unit Objectives 9.2 Meaning and Importance of labour 9.3 Types of labour 9.3.1
Direct Labour 9.3.2 Indirect Labour 9.3.3 Casual Labourers 9.3.4 Out Workers 9.3.5 Types of workers
on the basis of skill 9.4 Sections / departments dealing with labour activities 9.5 Labour turnover 9.5.1
Measurement of labour turnover 9.5.2 Causes of labour turnover 9.5.3 Cost of Labour turnover 9.5.4
Illustrations on labour turnover 9.6 Summary 9.7 Key Terms 9.8 Questions and Exercises 9.9 Further
Reading
UNIT 10 Time Keeping
243-252
10.0 Introduction 10.1 Unit objectives 10.2 Time keeping 10.2.1 Meaning and importance 10.2.2 Methods
of time keeping 10.3 Summary 10.4 Key Terms 10.5 Questions 10.6 Further Reading
UNIT 11 Time Booking
253-262
11.0 Introduction 11.1 Unit Objectives 11.2 Time Booking 11.2.1 Meaning and Necessity 11.2.2 Methods
of time booking 11.3 Summary 11.4 Key Terms 11.5 Questions 11.6 Further Reading
UNIT 12 Reconciliation of Time Kept and Time Booked
263-269
12.0 Introduction 12.1 Unit Objectives 12.2 Reconciliation of time kept and time booked 12.3 Idle time and its
types 12.4 Causes of idle time 12.5 Cost and treatment of idle time cost 12.6 Summary 12.7 Key Terms 12.8
Questions 12.9 Further Reading
INTRODUCTION
This book of self - instructional material is based on the syllabus for the
subject Advanced Cost Accounting (M.Com : ACG 101). This book is written
after taking into consideration the revised syllabus prescribed for the M.Com
students of Yashwantrao Chavan Maharashtra Open University, Nashik from June,
2015. We hope that the book will help the students in understanding the theory as
well as the practical part related to the topics included in the syllabus for the
subject.
The information provided in this book is given in easy language to enable
the students to understand the theorotical as well as practical problems related to
the various topics. We have kept in mind the fact that the students are not able to
have constant interaction with the subject teachers and sufficient illustrations have
been provided for the benefit of these students. While giving the theoratical
information at appropriate stages, we have provided charts and figures to enable
the students to understand and remember the information easily.
The authors welcome any valuable suggestions made by the students and
teachers.
The authors and editors are greatful to the authorities of YCMOU guidence
and co-operation provided by them.
Editor
Authors
TOPIC 1
Introduction to Cost Accounting
UNIT 1
Cost Concepts
UNIT 2
Elements of Cost
UNIT 3
Cost Sheets and Quotations
UNIT 1
Cost Concepts
Cost Concepts
Structure
1.0
Introduction
1.1
Unit Objectives
1.2
Cost Concepts
1.2.1
Cost
1.2.2
Costing
1.2.3
Cost Accounting
1.2.4
Cost Accountancy
1.3
Limitations of Financial Accounting
1.4
Nature of Cost Accounting
1.5
Objectives of Cost Accounting
1.6
Advantages of Cost Accounting
1.7
Limitations of Cost Accounting
1.8
Difference between Financial Accounting and Cost Accounting
1.9
Cost Unit and Cost Centres
NOTES
1.10 Summary
1.11 Key Terms
1.12 Questions & Exercises
1.13 Further Reading
1.0 Introduction
Business enterprises all over the world are functioning in a highly competitive
environment with high degree of risk. They are required to function more efficiently
and more effectively to offer their products at comparatively lower prices. This is
necessary for achieving the objective of maximisation of profit. Amount of profit
earned depends upon the price of the product and the cost incurred for
manufacturing and selling of the product. Financial Accounting was not able to
help the management in obtaining information and using it for decision-making,
efficient management and for controlling cost. Therefore, a new branch of
accounting, viz. cost accounting come into existence. In this unit, information is
provided about some basic terms used in costing and necessity for cost Accounting.
Advanced Cost Accounting - I
1
Cost Concepts
1.1
Unit Objectives
After studying the information given in this unit, you should be able to
understand :
NOTES
•
Concepts of cost, costing, cost Accounting and cost Accountancy;
•
Limitations of Financial Accounting;
•
Nature and objectives of Cost Accounting;
•
Advantages and limitations of Cost Accounting; and
•
Meaning of cost unit and cost centre.
1.2
COST Concept
It is necessary to understand some of the important Cost Concepts used
very often in the business world which are shown in Figure 1.1
Fig. 1.1 : Cost Concepts
1.2.1 Cost :
The concept ‘Cost’ is defined, in different ways by various authorities as
follows :
(i)
ICMA London defines the term ‘Cost’ as, “the amount of expenditure
(actual or notional) incurred on or attributable to a specified thing or activity”.
(ii) According to Crowningshield ‘Cost’ represents, “an expenditure made
to secure an economic benefit, generally resources that promise to produce revenue.
The resources may have tangible substance (material or machinery) or they may
take the form of services (wages, rent, power)”.
2
Advanced Cost Accounting - I
(iii) In the words of Shillinglaw, “Cost represents the resources that must be
sacrificed to attain a particular objective”.
Cost Concepts
(iv) The Committee on Cost Concepts and Standards of the American
Accounting Association defines ‘Cost’ as, “the foregoing, in monetary terms
incurred or potentially to be incurred to achieve a specific objective”.
(v) Anthony and Welsoh defines, “Cost is a measurement in monetary terms,
of the amount of resources used for some purposes”.
NOTES
(vi) A.I.C.P.A. Committee on terminology defines Cost as, “the amount
measured in money or cash expended or other property transferred, capital stock
issued, services performed, or a liability incurred in consideration of goods or
services received or to be received”.
(vii) W.M. Harper defines ‘Cost’ as, “the value of economic resources used
as a result of producing or doing the thing costed”.
(viii) According to Oxford Dictionary, “Cost is the price paid for something”.
Again the general concept of Cost which is most widely used is the money
cost of production. Another concept of Cost is the real cost according to Marshall.
Again Opportunity Cost concept is there. Opportunity Cost means the sacrifice
made for not utilising the other alternatives.
From the above definitions we can conclude that Cost is the total of all
expenses incurred, whether paid or outstanding, in the manufacturing and sale of
product or those incurred in giving a service. Costs are calculated from the point
of view of management which expects costs to perform three functions i.e. cost
computation, cost control and cost analysis. Thus, concept of Costs depends upon
the purpose for which it is used, the conditions under which it is employed and the
people who intend to use this concept. From the management point of view the
Cost may be direct, indirect, prime, conversion, joint, product, period, controllable,
out of pocket, imputed, differential, marginal, standard etc. In short, Cost is a
sacrifice made to achieve something and measured in terms of money and has
always been used with some specific objective. It depends upon many factors
and it changes with the changes in factors.
1.2.2 Costing :
Costing is simply cost finding. It is the process, technique and procedure of
ascertaining the costs. It includes all the principles, rules and regulations of
calculating the costs. The concept ‘Costing’ is defined in different ways by various
authorities as follows :
i)
ICMA, London defines Costing as, “the techniques and process of
ascertaining costs.”
ii)
Wheldon defines Costing as follows;
“Costing is the classifying, recording and appropriate allocation of expenditure
for the determination of the costs of products or services and for the presentation
Advanced Cost Accounting - I
3
Cost Concepts
NOTES
of suitably arranged data for the purposes of control and guidance of the
management. It includes the ascertainment of the cost of every order, job, contract,
process, service or unit as may be appropriate. It deals with the cost of production,
selling and distribution”.
iii)
Harold James defines, “Costing is the proper allocation of expenditure
whereby reliable cost may be ascertained and suitably presented to afford
guidance to the producers in control of their business”.
Hence, the primary functions of costing is the ascertainment of cost of
products and services. In order to ascertain costs, certain well established
techniques and procedures are to be followed. Costing, as a technique, is a body
of principles and rules which govern the procedure of ascertaining the costs. As
opined by Dobson, the technique of costing is never static nor are its
rules fixed for all time. It means, they are flexible in nature. These principles
and rules can be modified and improved in the light of the developments and
changes in the business environment.
From the above definitions we can summaries that, Costing is a technique
of ascertaining the cost. This technique is however, dynamic and changes with
the changes of time. Costing can be carried out by the process of arithmetic,
memorandum, statements, etc. The costs may be either ascertained from the
historical records i.e. after they have been incurred or by the predetermined
standards and analysis of variances between the standard and the actual or by
using the marginal costing method i.e. by differentiating the fixed and variable
costs.
1.2.3 Cost Accounting :
Cost Accounting is the process of accounting for costs. It begins with the
recording of income and expenditure and ends with the preparation of periodical
statements. The concept cost Accounting is defined in different ways by various
authorities as follows :
i)
Kohler defines Cost Accounting as, “that branch of accounting dealing
with the classification, recording, allocation, summarisation and reporting of current
and prospective costs”.
ii)
Wheldon defines Cost Accounting as, “the classifying, recording and
appropriate allocation of expenditure for the determination of the costs of products
or services, the relation of these costs to sales values and the ascertainment of
profitability”.
iii)
Van Sickle defines, “Cost Accounting is the science of recording and
presenting business transactions pertaining to the production of goods and services,
whereby these records become a method of measurement and means of control.”
4
Advanced Cost Accounting - I
iv) Shillinglow defines, “ Cost Accounting as a body of concepts, methods
and procedures used to measure, analyse or estimate the costs, profitability and
performance of individual products, departments and other sequences of a
company’s operations, for either internal or external use or both and to report on
these questions to the interested parties”.
v)
I.C.M.A. London defines Cost Accounting as, “the process of accounting
for cost from the point at which expenditure is incurred or committed to the
establishment of its ultimate relationship with cost centres and cost units”. In its
widest usage , it embraces the preparation of statistical data, the application of
the cost control methods and the ascertainment of the profitability of activities
carried out or planned.
Cost Concepts
NOTES
An analysis of the above comprehensive definition reveals some of the
important functions of Cost Accounting. Cost Accounting refers to the formal
mechanism or a systematic procedure by means of which costs of products and
services are computed. This is one of the important aspects which distinguishes
cost accounting from costing.
From the above definitions we can conclude that cost accounting is
concerned with :i)
Cost ascertainment, ii) Cost presentation, and iii) Cost control.
i)
For Cost Ascertainment purpose, costing has developed various methods
and systems like Job Costing and process Costing,
ii)
For Cost Presentation different forms and statements are prepared for
efficient reporting.
For Cost control purpose, setting up of standard and comparing them with
actual to find out variation, analysing the variances and taking up corrective actions
etc.
Because, cost accounting aims at two more functions viz. application of
cost control methods, and ascertainment of profitability of company’s products,
activities, functions, etc. For the purpose of the cost control, budgetary control,
standard costing, responsibility accounting etc. may be applied. Profitability denotes
the capability, and potentiality of the company to make profit. To ascertain the
profitability various tools such as P/V Ratio, Contribution, etc. can be used.
Ascertainment of cost ( Which is the sole objective of costing), is, therefore, only
one of the objectives ( but not the only objective ) of the cost accounting. Therefore,
Cost Accounting = Costing by Formal Mechanism (+) Application of Cost Control
Methods (+) Ascertainment of Profitability.
1.2.4 Cost Accountancy :
It is the application of costing and cost accounting principles. methods and
techniques. It is also the science, art, and practice of controlling the costs and
ascertainment of profitability. Cost accountancy is mainly concerned with the
presentation of costing data to the management in a precise form so that vital
decisions can be taken by the management. The concept of cost Accountancy is
defined in different ways by various authorities as follows :
Advanced Cost Accounting - I
5
Cost Concepts
NOTES
i)
ICMA, England has defined Cost Accountancy as,
“the application of costing and cost accounting principles, methods
and techniques to the science, art, and practice of cost control and the
ascertainment of profitability. It includes the presentation of information
derived there from for the purpose of managerial decision-making.”
A careful observation of this definition shows that Cost Accountancy is a
comprehensive term and it includes costing and cost accounting as it aims at both
the cost ascertainment and control and ascertainment of profitability. Further, and
most importantly, it aims at serving managerial personnel in their decision-making
process by furnishing relevant cost information obtained from the cost books of
accounts. Cost Accountancy has, therefore, been viewed as the science, art
and practice of a cost accountant. It is a science in the sense that it is a body
of systematised knowledge with principles (of the nature of fundamental truths)
which a cost accountant should follow for the purpose of discharging his duties
and responsibilities properly and satisfactorily.
i)
It is a science because there are certain definite principles which are
followed in cost accountancy.
ii)
It is an art because it is the ability and skill of the cost accountant to apply
the principles of cost accountancy to solve the intricate and complex
problems of the management.
iii)
It is the practice because cost accountant has to keep his knowledge upto-date to the latest developments. He has to present the data to the
management in a most up-to-date manner with latest techniques and methods
for taking various decisions.
However, by aiming at cost ascertainment, cost Accountancy serves the
purpose of costing. By aiming at controlling cost and at ascertaining profitability,
it ( i.e. cost accountancy ) serves other purposes of cost accounting. By adding a
new dimension to its function viz. providing information for managerial decisionmaking. Cost Accountancy becomes broader than both costing and cost
accounting. Therefore Cost Accountancy = Costing (+) Application of Cost Control
Methods and Ascertainment of Profitability (+) Presentation of relevant
information for Managerial Decision-making.
Cost Accountancy is a comprehensive term and includes the various
aspects such as costing, cost accounting, cost control, cost audit and budgetary
control.
6
Advanced Cost Accounting - I
Difference between Costing, Cost Accounting and Cost Accountancy :
Points of
Distinction
Costing
Cost Accounting
Scope
It is broader in its
It is narrow in its
scope
Function
Cost Accountancy
It is broadest in its scope
scope
It is concerned
It is concerned with
It is concerned with
with
recording of cost
formulation of costing
ascertainment
principles, methods and
of cost
and techniques to be
adopted by a business
Periodicity
It begins where
It begins where
of
cost accountancy
costing ends
functioning
ends
Persons
The person
The persons
The persons involved are
involved
involved is cost
involved are cost
experts in the field of
accountant
clerks
cost accountancy such as
NOTES
It is a starting point
management accountant
1.3
Cost Concepts
Check Your Progress
i) What are Cost Concepts ?
ii) Differentiate
between
Costing, Cost Accounting
and Cost Accountancy.
Limitations of Financial Accounting
Broadly speaking, there are three main branches of accounting viz. Financial
Accounting, Cost Accounting and Management Accounting. All these are
concerned with presentation of business data to the users.
Financial Accounting is mainly concerned with recording business
transactions in the books of accounts for the purpose of presenting final accounts
to Board of Directors, Shareholders and Tax Authorities etc. The objective of
financial accounting is to present a true and fair view of company income, financial
position and funds at regular intervals.
In the modern business world, business concerns need some methods and
ways by which they can measure their performance. Financial Accounting cannot
serve this purpose at all. The indications given by Profit and Loss Account and
Balance Sheet are generally inadequate. It is just like thermometer which only
indicates the temperature of human body. Judgements can be made only on the
basis of such thermometer and a good doctor will have number of other checks
made in order to see what the patient is suffering from. The profit shown by
Profit and Loss Account should not be taken as a sign of success because there
may be a loss on certain items which might have been compensated by the profit
of certain other items. Information regarding wastages and losses is very difficult
to get from Financial Accounting and therefore it is only Cost Accounting which
makes such information available to the management . Hence, Cost Accounting
has emerged mainly because of certain limitations of Accounting which are shown
in figure 1.2
Advanced Cost Accounting - I
7
Cost Concepts
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NOTES
2
14
13
Fig. 1.2 : Limitations of Financial Accounting
1)
It shows only overall performance :
Financial Accounting provides information about profit, loss cost, etc. of
the collective activities of the business as a whole. It does not provide data
for each and every product, process, department or operation separately.
2)
It provides only historical data :
Financial Accounting is historical in nature and it provides data of past
activities. It does not provide current data which management requires for
making effective plans for future. so it is rightly said that financial accounts
provide only a post-mortem analysis of past activities.
3)
It is static in nature :
Modern business is dynamic and not static. Financial Accounts do not
incorporate the changes that take place within the business.
4)
It fails to provide information for price fixation :
In Financial Accounting, cost are not available by division, products, process
etc. So price fixation becomes difficult and estimates cannot be prepared.
5)
8
Advanced Cost Accounting - I
It fails to control cost :
Financial Accounts fail to exercise control over material, labour and other
expenses incurred in a business enterprise. As a result avoidable wastages
and losses remains as it is under this system.
6)
No proper classification of costs :
In Financial Accounting, expenses are not classified into direct and indirect,
fixed and variable and controllable and uncontrollable. These classifications
have utility of their own.
7)
Cost Concepts
NOTES
It does not provide proper system for performance appraisal :
In Financial Accounting there is no system of developing norms and
standards to appraise the efficiency in the use of materials, labour and
other costs by comparing the actual performance with what should have
been accomplished during a given period of time.
8)
It fails to analyse losses :
Financial Accounting does not fully analyse the loss due to idle time, idle
plant capacities, inefficient labour , sub-standard material, etc.
9)
It does not provide a basis of cost comparison :
Financial Accounting does not provide cost data regarding operations of
the enterprise for the purpose of comparing such data with other periods of
operations or other concerns in the industry.
10)
It fails to provide adequate information for reports :
It does not provide adequate information for reports to outside agencies
like banks, government, insurance companies and trade associations.
11)
It fails to provide adequate data to management :
Financial Accounting fails to supply useful data to management for taking
various decisions like replacement of labour by machines, introduction of
new products, make or buy decision, selection of the most profitable product
mix etc.
12)
Possibility of manipulation of financial accounts :
Very often Financial Accounts are manipulated at the whim and fancies of
the management so as to project better image in the minds of prospective
investors. Financial Accounts may be manipulated by making under or
overvaluation of machinery, excessive or inadequate provisions for
depreciation, creation of secret reserves etc.
13)
It does not make use of control techniques :
Financial Accounts fail to make use of certain important cost control
techniques, such as Budgetary Control, Standard Costing, etc. Thus, financial
accounts do not facilitate measuring the efficiency of the business with the
help of control techniques.
14)
If fails to ascertain break-even point :
Financial Accounting does not help in ascertaining the break-even point.
Advanced Cost Accounting - I
9
Cost Concepts
NOTES
i.e. the sale or output where the revenue equals the cost. Hence, the point
of no profit-no loss cannot be found out under financial accounts.
However, the importance and utility of Financial Accounting system cannot
be under rated, because, it provides voluminous data for cost books of accounts.
Further though Financial Accounting primarily aims at serving external parties
and meeting legal requirements, it does not mean that financial reports are not
useful to management. Management also utilises the financial reports for taking
decisions but to a limited extent, because, the approach and objective of financial
accounting are different.
1.4
Nature of Cost Accounting
The industrial revolution in England presented a challenge to the development
of accounting as a tool of industrial management. Costing techniques were
developed as guides to management actions. The increasing awareness on the
part of the entrepreneurs and industrial managers for using scientific principles of
management in the wake of scientific management movement led to the
development of Cost Accounting . To take the decisions, management needs
information. Hence, the need for an accounting system. Which serves the
management. Cost Accounting is designed to serve the management by undertaking
the responsibility of a comprehensive evaluation of each and every cost related
activity and by furnishing the relevant data to take timely and appropriate action.
10 Advanced Cost Accounting - I
Of course, Financial Accounting also takes care of the business transactions.
Because, it deals with the systematic recording of transactions that have taken
place during a period and finding out the result of the company as a whole and
also assets-liabilities position at the and of the accounting period. But, this is mainly
concerned with the reporting to the external parties in accordance with the
provisions of the Companies Act, 1956 and other Statutes. It is mainly concerned
with the keeping and maintenance of financial books of accounts, communicating
the result and the financial position to the external parties and meeting the legal
requirements. It does not undertake a comprehensive evaluation of i) cost
effectiveness and economies, ii) performance of departments, functions, products,
etc. iii) factors which influence and which have a bearing on the managerial decisions
etc. As opined by Blocker and Weltmer, inspite of new accounting devices,
improved techniques and elaborate subsidiary records, Financial
Accounting is so limited and inaccurate in regard the information which
can be supplied to management that, during the past 30 years businessmen
have been eager to adopt supplementary accounting methods known as
Cost Accounting. The scope of financial accounting does not extent to cover
cost ascertainment and analysis of cost control and providing cost information for
managerial decisions. However, it provides abundant data to the Cost Accounting
which uses them for cost ascertainment , cost control for cost analysis for
managerial decisions. L. W. Hawkins has therefore, aptly said the ordinary
trading account is a locked store-house of most valuable information to
which cost system is the key. The approach of cost accounting is different
from that of financial accounting. cost Accounting analyses them from the view
point of whether they are relating to the operating activities and also the view
point of thier relevancy to the decisions under the consideration of the management.
Thus, compared with Financial Accounting, Cost Accounting, is relatively a
recent development. In fact, Cost Accounting started as a branch of Financial
Accounting. But now, it may well be regarded as a profession in its own right. The
vital importance that Cost Accounting has acquired in the modern age is because
of the growth of complexities in modern industry.
Cost Concepts
NOTES
Cost Accounting in Indian Context :
The application of Cost Accounting methods in Indian industries was felt
from the beginning of the 20th century. The following factors have accelerated
the system of Cost Accounting in our country :
i)
Increased awareness of cost consciousness by Indian industries with a
view to ascertain costs more accurately for each product or job.
ii)
Growing competition among manufacturers led to fixation of prices at a
lower level so as to attract more customer.
iii)
Government economic policy emphasizing on planned economy.
iv)
Increased Government control over pricing led to Indian manufacturers to
give more importance to the installation of the cost accounting.
v)
The establishment of National Productivity Council in 1958 and a statutory
body viz. Institute of the Cost and Works Accounting of India.
By realizing importance of Cost Accounting technique and benefits available
to the industries, Government of India has made compulsory the maintenance of
cost accounts to most of the industries in the corporate sector For development of
Cost Accounting profession in India, Government passed an Act viz. “Cost and
Works Accountants Act, 1959 and established a statutory institute named as,
“Institute of Cost and Works Accountants of India “. The Companies Act, 1956
has been amended and provision has been made to make it obligatory to industries
to maintain the cost accounting records. Besides this Government made ‘Cost
Audit’ compulsory to these industries.
During last 50 years, cost accounting emerged as important tool to the
management for improving efficiency and the profitability of the organisation,
with increasing complexities in business for efficient management, costing data
became important and hence the importance of Cost Accounting is increasing
day-by-day.
Advanced Cost Accounting - I
11
1.5
Cost Concepts
Objectives of Cost Accounting
The important objectives of Cost Accounting are indicated in Figure 1.3
Standards
for
Measuring
Efficiency
Ascertainment
of
Cost
Objectives of Cost Accounting
To
pr
bas ovide
is f
Ope
o
ra r
Pol ting
icy
t
uention
q
e
Fr para unt
pre Accother
of n d o r ts
a epo
R
To
da pr ov
ta id
Re Co for e
du st
c ti
on
Pr epa
r
ation
of Co
st
Estim
ate
trol
Con st
Co
of
De
te
of rmi
Se nat
Pr llin ion
ice g
Fig. 1.3 : Objectives of C ost Accounting
i)
Ascertainment of cost :
This is the primary objective of Cost accounting. For the purpose of
ascertaining the cost of a product, process or operation, it is necessary to
record the expenses incurred, classify them properly and them allocate or
apportion it amongst the respective products, processes or departments for
calculating total cost of each of these. If there is only one product, cost per
unit can be found out by dividing the total expenditure by the total number
of units produced. But if there are number of products manufactured, then
the cost is to be split up between the various products. For this purpose
various techniques may be used.
ii)
12 Advanced Cost Accounting - I
Control of Cost :
Cost control aims at improving efficiency by controlling and reducing cost.
Cost control is exercised at different stages in a factory, viz. acquisition of
materials, recruiting and deployment of labour force during production
process and so on. As such, we have material cost control, labour cost
control, production control, quality control and so on. Control over cost is
exercised through the techniques of budgetary control and standard costing.
In these techniques, cost is controlled by comparing actual cost with predetermined cost. Cost control is becoming more and more important tool
because of growing competition.
iii)
Determination of Selling Price :
Cost accounting provides information on the basis of which selling prices
of products or services may be fixed. Total cost of production constitutes
the basis on which selling price is fixed by adding a margin of profit. Cost
accounting furnishes both the total cost of production as well as cost incurred
at each and every stage of production. In fixation of selling price other
factors are also important such as market condition, the area of distribution,
volume of sales etc. But no doubt, cost plays the dominating role in price
fixation.
iv)
Cost Concepts
NOTES
To provide a basis for Operating Policy :
Cost data to a great extent helps the management in formulating the policies
of a business and in decision-making. Hence, availability of cost data is a
must for all levels of management. Some of the decisions which are based
on cost data are; make or buy decision, manufacturing by mechanization or
automation, whether to close or continue operations inspite of losses, selling
below cost decision, introduction of new products etc.
v)
Frequent preparation of Accounts and Other Reports :
Every concern relies upon the reports on cost data to know the level of
efficiency regarding purchase , production, sales and operation results.
Financial accounts provide information only at the end of the year because
value of closing stock is available at the end of the year. But cost accounts
provide the value of closing stock at frequent intervals by adopting,
“continuous stock verification “ system. Using the value of closing stock it
is possible to prepare final accounts and to know the operating results of
the business.
vi)
To provide data for Cost Reduction :
For survival in the world of competition, it is necessary to keep the prices
of products or services as low as possible. It is only possible when cost of
production is less. So, the management has to make continuous efforts to
reduce the cost. To provide data for cost reduction is one of the important
objectives of the cost accounting. It helps the management in finding out
improved methods to reduce costs.
vii)
Preparation of Cost Estimates :
Many times, it is required to take new jobs by the manufacturing concern
or introduce new product as per customer ’s requirement. Before
manufacturing. cost estimates are to be made. Under cost accounting
system, preparation of cost estimates is possible. So preparation of cost
estimates is also one of the important objective of Cost Accounting.
viii) Standards for Measuring Efficiency :
For measuring the performance of various business activities, management
requires some base for evaluating the performance. Standard Cost is one
Advanced Cost Accounting - I
13
Cost Concepts
of the means for evaluating the performance. So development of Standard
Cost is also important objective of Cost Accounting.
1.6
NOTES
Advantages of Cost Accounting
As seen earlier, Cost Accounting is a tool available with the management
for making decisions as regards sales, purchases, production, finance, inventory
control etc. If the costing system is sound, it provides the following benefits to the
management :
i)
Helps in Decision-Making :
Decision-making is concerned with choosing between alternative courses
of action. An important factor involved in the choice is the financial
implication of the available alternatives. Cost accounting is a decisionmaking tool. It provides suitable cost data and other related information to
enable management to evaluate alternative courses of action.
The important decisions which are influenced by, to a greater extent, the
cost reports, are :
a)
Whether to diversify or not the company’s product lines;
b)
Fixation and/or revision of selling price;
c)
To decide about whether a part is to be manufactured internally or to be
purchased from outsiders;
d)
Whether the joint and/or by-products are to be sold at split-off point or after
further processing;
e)
About the profitable sales mix;
f)
About the optimal level of activity;
g)
To decide about the discontinuation of activities of a sales branch, temporarily,
or to drop a product, purely on temporary basis, till the demand rises for the
product;
h)
To decide about scarce resource allocation, etc.
ii)
Supplies detailed Cost Information :
Cost accounting classifies cost and revenue by every possible division of
the business and supplies management with detailed and regular cost
information. Such information is useful for ascertaining the cost of product,
process, department, division or unit of service.
iii)
14 Advanced Cost Accounting - I
Guides in Price Fixation :
Cost is one of the most important factor to be considered while fixing prices.
It assists management in fixation of selling price both in normal conditions
and for the period of depression. With the help of costing only, it is possible
to prepare estimates, tenders and quotations.
iv)
It reveals Operating Efficiency :
Cost Concepts
Cost information reveals, profitable and unprofitable activities, so that steps
may be taken to reduce or eliminate wastages and inefficiencies occurring
in any form such as idle time, under utilisation of plant capacity, spoilage of
materials etc.
v)
It facilitates Planning :
NOTES
It enables the management to know future costs so that appropriate plans
and decisions can be made.
vi)
It reveals Idle Capacity :
A concern may not be working to full capacity due to reasons such as
shortage of demand, machine breakdown or other bottlenecks in production.
A cost accounting system can easily find out the cost of idle capacity so
that the management may take immediate steps to improve the position.
vii)
Helps in Inventory Control :
Perpetual inventory system which is an integral part cost accounting, helps
in the preparation of interim profit and loss account. Other inventory control
techniques like ABC Analysis, Level setting etc. are also used in cost
accounting.
viii) Helps in Cost Control :
Cost accounting helps in controlling costs with special techniques like
standard costing and budgetary control.
ix)
Helps in Cost Reduction :
It helps in the introduction of a cost reduction program and finding out new
and improved ways to reduce costs.
x)
Checks the Accuracy of Financial Accounts :
Cost accounting provides a reliable check on the accuracy of financial
accounts with the help of reconciliation between the two at the end of the
accounting period.
xi)
It facilitates Cost Comparison :
Cost accounting enables management to make cost comparison of jobs,
products, departments, sales territories etc. within the same concern. It
provides inter-firm cost comparison also.
xii)
It prevents Frauds and Manipulation :
It helps in preventing manipulation and frauds through cost audit system.
Thus, reliable cost data can be furnished to management and others.
This way, Cost Accounting serves the company, Further, it may be noted
here that Cost Accounting serves, directly or indirectly, all the parties in one way
Advanced Cost Accounting - I
15
Cost Concepts
or the other. Cost Accounting is primarily designed to serve the management in its
decision-making task which in turn will benefit the company and others. Indirectly,
workers, creditors, investors, customers, society and government are benefitted
by a god costing system.
NOTES
1.7
Limitations of Cost Accounting
Besides the various advantages of Cost Accounting system, it suffers from
certain limitations which are as follows :
i)
Expensive :
Highly paid cost accountants and the organisation of costing system involves
additional expenditure. However, before installing it, care must be taken to
enure that the benefits derived are more than the investment made on this
system of accounting.
ii)
More Complex :
Cost Accounting system involves number of steps in ascertaining cost such
as collection and classification of expenses, allocation and apportionment
of expenses etc. These steps are considered as complicated. Again a
system requires several forms and documents in preparing the reports. This
will tend to delay in the preparation of accounts.
iii)
Limited Applicability :
All business enterprises cannot make use of a single method and technique
of costing. It all depends upon the nature of the business and type of
product manufactured by it. If a wrong technique and method is used, it
misleads the result of the business.
iv)
Not applicable to Small Concerns :
A Cost Accounting system is applicable only to a large sized business and
not suitable for small sized business because it is more expensive.
v)
Lack of Uniformity :
This is the greatest limitation of Cost Accounting system. It fails to conform
any uniform procedure. It is possible that two equally competent cost
accountants may arrive at different results from the same information. So
it is said that all cost accounting results are mere estimates. Hence, it is not
reliable.
vi)
Lack of Accuracy :
Accuracy in Cost Accounting is relative. Certain assumptions are always
made while ascertaining cost to suit a particular situation.
vii)
16 Advanced Cost Accounting - I
Confusion regarding Non-Cost Items :
There may be confusion regarding non-cost items e.g interest on capital,
cash discount etc. should be included or to be excluded from cost accounts.
viii) Not useful for handling futuristic situations :
Cost Concepts
The contribution of Cost Accounting for handling futuristic situations has
not been much. For example, cost accounting has not evolved any tool so far for
handling inflationary situation.
ix)
Failure in many cases :
It is argued that the adoption of costing system failed to produce the desired
results in many cases and so it is defective.
x)
NOTES
It fails in considering social obligations :
Cost Accounting fails to take into account the social obligations of the
business. In other words, social accounting is outside the purview of the cost
accounts.
Cost Accounting is not an exact science. Because, though the Cost
Accounting system aims at ascertaining cost, it is impossible to ascertain the actual
cost of the goods and services. Because, in order to ascertain the cost of goods
and services, it is necessary to use a number of estimates, bases for apportionment,
etc. However, these limitations i) are, to some extent, unavoidable. ii) do not affect
much the realisation of the objectives for which cost accounting is introduced; and
iii) are, to some extend, essential for the purpose of operation of the system.
Keeping these points in mind, it is necessary to have a look at the limitations of the
system.
1.8
Difference Between Financial Accounting and
Cost Accounting
Financial Accounting refers to recording of all money transactions on double
entry principles in a set of books with an object to prepare final accounts of the
business. Cost Accounting refers to accumulation, classification, analysis and
presentation of costs for managerial control. Both the systems of accounting make
use of same items of expenditure but in different ways to serve their own purposes.
Due to complexities of large scale production in the modern business activities,
the Financial Accounting falls short of meeting these challenges. Hence, Cost
Accounting has come into existence to solve all the managerial problems. The
following are the differences between Financial Accounting and Cost Accounting:
Advanced Cost Accounting - I
17
Cost Concepts
Points of Distinction Financial Accounting
i) Coverage
It covers accounts of
whole business relating to
all
commercial
transactions.
It covers the transactions
relating to certain specific
activities only e.g.
production,
sales,
services etc.
ii) Purpose
The purpose of Financial
Accounting is external
reporting mainly to
owners, creditors, tax
authorities, Government
and
prospective
investors.
The purpose of Cost
Accounting is the internal
reporting i.e. to the
management of every
business.
iii) Statutory Requirement These accounts have to
be prepared according to
the legal requirements of
Companies Act and
Income-Tax Act.
These accounts are
generally prepared to
meet the requirements of
the management. But
now it has been made
obligatory to keep cost
records under the
Companies Act.
NOTES
18 Advanced Cost Accounting - I
Cost Accounting
iv) Recording of
transacions
It records, classifies and
analyses the transactions
in a subjective manner
i.e. according to the
nature of expenditure.
It
records
expenditure in
objective manner
according
to
purposes for which
are incurred.
the
an
i.e.
the
cost
v) Nature of costs
Financial Accounts Cost Accounts record
record only historical both historical and
costs.
estimated costs.
vi) Nature of expenses
incurred
In Financial Accounts In Cost Accounts, cost
expenses are recorded in are expressed by proper
totals.
analysis and classification
in order to find out cost
per unit.
vii) Analysis of cost and
profit
Financial Accounts
disclose profit for the
entire business as a
whole. It does not show
the figures of cost and
profit for individual
products, departments
and processes etc.
Cost Accounts show the
profitability, or otherwise
of each product, process
or operation so as to
reveal the areas of
profitability.
Cost Concepts
viii) Duration of Reporting Financial reports are
prepared periodically,
usually on an annual
basis.
Cost Accounting is a
continuous process and
reporting may be daily,
weekly, monthly etc.
ix) Contorl aspect
It does not make use of
any control techniques. It
does not control material
and labour cost.
It makes use of some
important
control
techniques such as
Standard
costing,
Marginal
costing,
Budgetary Control etc.It
exercises control over
material cost by ABC
Analysis, level setting,
EOQ etc. and over
labour cost by minimizing
idle time, overtime etc.
x) Types of statements
prepared
Financial Accounting
prepares general purpose
statements like Profit
and Loss A/c and
Balance Sheet.
Cost
Accounting
generates
special
purpose statements and
reports like Reports of
Loss of Materials, Idle
Time Reports, variance
Report etc.
xi) Pricing
It fails to guide the It provides adequate data
formulation of pricing for formulating pricing
policy.
policy.
xii) Valuation of Stock
Stock is valued at cost Stock is always valued at
price or market price, cost price.
whichever is less.
xiii) Evaluation of Efficiency
The information provided The cost data helps in
by Financial Accounts is evaluating the efficiency
not sufficient to evaluate of the business.
the efficiency of the
business.
xiv) Break-up of costs
Costs are not broken up The costs are analysed
according to thier nature according to thier nature
and functions for further
and fuctions.
analysis and control.
xv) Inter/Intra Firm
comparison
Under
Financial
Accounting Inter-firm or
Intra-firm comparison
cannot be made.
Under Cost Accounting
it is possible to make
Inter-firm and Intra-firm
comparison.
NOTES
Advanced Cost Accounting - I
19
Cost Concepts
xvi) Classification of Costs There is no system of
classification of costs into
fixed and variable or
controllable
and
uncontrollable.
Since
there
is
classification of costs into
controllable
and
uncontrollable costs, the
management can reduce
the controllable costs.
The distinction between
fixed costs and variable
costs also helps the
management to take vital
decisions.
xvii) Reference
In Financial Accounting
reference can be made
in case of difficulty to the
company law, case
decisions and to business
ethics.
In Cost Accounting no
such reference is
possible. Guidance can
be had only from a body
of conventions followed
by cost accountants.
xviii) Dealing of
Transactions.
Financial Accounts deal
with only monetary
transactions and it deals
only with actual facts
and figures.
Cost Accounts deal with
monetary as well as nonmonetary transactions
and it deals partly with
the facts and figures and
partly with estimates.
NOTES
Check Your Progress
i)
What is the nature of Cost
Accounting ?
ii) What are the objectives
of Cost Accounting ?
iii) How Cost Accounting has
emerged ?
iv) What are advantages and
limitations
of
Cost
Accounting ?
1.9
A)
Cost Unit and Cost Centres
Cost Unit :
Cost Unit is a quantitative unit of product or service or time in relation to
which costs are ascertained or expressed. Cost Units differ from industry to
industry. The unit selected should be the most natural to the business and accepted
by all concerned. Therefore, utmost care should be taken while selecting cost
units. It should be neither too small nor too large.
If unit is too large, significant cost trends may pass unnoticed, due to
averaging of cost. If the unit is too small, it may necessitate detailed and expensive
clerical work.
Costing means measuring the costs in relation to a unit. Hence, the unit of
measurement must be clearly defined and selected. This should be done before
ascertainment of costs. For Example, in a cement factory, the cost per tonne of
cement is found out, in a cloth mill, the cost per meter is ascertained in case of
machine, the cost per machine hour is found out etc. Thus, here tonne, meter and
machine hour become the cost units. Hence, we can say that a cost unit is nothing
but a unit of measurement of cost.
20 Advanced Cost Accounting - I
In case of a service unit, it is difficult to find out and decide a suitable cost
unit. For example, in case of transport undertaking, the costs may be either related
to the distance travelled in kilometer, or the weight carried i.e. tones. While
selecting proper cost unit for the transport both factors i.e distance and weight
should be considered. Hence, tonne kilometer or passenger kilometer will be a
proper unit.
Cost Concepts
A Cost Unit may be Classified into,
i)
NOTES
Single Cost Unit
in which only one characteristics is used in measurement of cost e.g. per
kilometer, per litre, per passenger, etc.
ii)
Composite Cost unit
in which two characteristics are used simultaneously in measurement of
cost e.g per tonne-kilometer, per passenger-kilometer, per kilowatt-hour,
per patient-bed, etc.
Each industry has a different cost units, some of which are given below:
Industry / Product
Cost Unit
i)
Automobile
Number
ii)
Bricks
Thousand
iii)
Cotton/Jute
Bale
iv)
Chemicals
Litre, Gallen, K.G., Tonne
v)
Electricity
KWH
vi)
Furniture
Number
vii)
Gas
Cubic meter
viii) Hostel or Hospital
Room per day or per bed
ix)
Mines
Tonne
x)
Steel
Tonne
xi)
Shoes
Pair
xii)
Transport
Tonne km/Passenger km
xiii) Utensils
KG/Tonne
xiv) Cement
Tonne
xv)
Meter or km
Cable
xvi) Fertilizer
Tonne
xvii) TV/Radio/VCR
Set
xviii) Building
sq.ft. or sq. mtr.
xix) Nuts and Bolts
Gross
xx)
Quintal
Sugar and Flour Mills
xxi) Timber
Cubic foot
xxii) Water Supply
Thousand Litres/ Gallon
Advanced Cost Accounting - I
21
Cost Concepts
NOTES
B)
Cost Centre:
For the purposes of administrative control, the entire organisation is divided
into a number of sub-units which may be in the form of departments, branches,
processes for ascertaining and controlling costs. Because, the costs incurred will
be charged initially to these sub-units which are known as Cost Centres. A Cost
Centre is therefore, a sub-unit of the organisation for which costs may be collected
separately and used for cost ascertainment and control. CIMA, England has
therefore defined cost centre as “a location, person or item of equipment (or
group of these) for which costs may be ascertained and used for the
purposes of control”. An analysis of this definition reveals that a cost centre
may be in the form of i) a location, (such as a department, division, section or
process) or ii) an item of equipments (like machine) or iii) a person (e.g. salesman)
or a group of these. However, costs incurred are identified with the cost centres
initially (for distribution later amongst cost units). It helps to ascertain the cost
centers initially (for distribution later amongst cost units). It helps to ascertain the
cost centre-wise costs. Divisionalisation of organisation into a number of cost
centres, therefore, assumes importance. The number and size of cost centres
differ from one organisation to another depending upon the nature of production
activities, size of the organisation, managements’s informational needs, etc.
The Figure 1.4 Shows the various Types of Cost Centres.
Process
cost
centre
Production
Cost
Centres
Service
cost
centre
Types
of cost
Centres
Impersonal
cost
centre
Operating
cost
centre
Personal
cost
centre
Fig. 1.4 : Types of Cost Centres
Types of Cost Centres :
i)
Production Cost Centre :
It is a cost centre connected with production i.e. machine shop, welding
shop, assembly shop etc. The manufacturing and non-manufacturing costs
are charged to product cost centres.
22 Advanced Cost Accounting - I
ii)
Cost Concepts
Service Cost Centre :
A Service Cost Centre is one which provides services to the other cost
centers. Only non-manufacturing costs are charged to service cost centre.
Examples of service cost centre are canteen, machinery maintenance, office
service etc.
iii)
iv)
Personal Cost Centre consists of a person or group of persons. Personal
Cost Centre follows the organisational structure of a factory. Under this
type of cost centre, costs are analysed and accumulated by works manager,
sales Manager, Store-keeper, Foreman etc.
i)
Impersonal Cost Centre :
ii) How Cost
determined ?
It consists of a location or item of equipment. A Cost centre relating to
location may represent a region of sales, a warehouse or storeroom. Cost
centre relating to an item of equipment could be a machine or group of
machines.
v)
NOTES
Personal Cost Central :
Check Your Progress
What is ‘Cost Unit’ ?
Unit
is
iii) What do you understand
by ‘Cost Cenres’ ?
Operations Cost Centre :
It is a cost centre which consists of machines/ persons carrying out similar
operations i.e machines and operations engaged in welding, turning or
matching.
vii)
Process Cost Centre :
It is a cost centre which consists of a specific process or continuous
sequence of operations.
Whatever may be the type of cost centre, it is determined by taking into
consideration the factors like, the volume of work to be performed, the extent of
cost control that can be exercised, responsibilities to be identified and the use of
cost centres to the cost accounting department.
1.10 Summary
In order to understand the subject of Cost Accounting it is necessary to first
know the meaning and definitions of some basic terms used in the subject of Cost
Accounting. These terms include cost, costing, cost accounting and cost
accountancy, Cost means the amount of expenditure (actual or notional) incurred
on or attributable to a specified, thing or activity. Costing means finding the cost.
The techniques and processes used for calculation or ascertainment of cost related
to a product, order, job, contract, process or a service means costing. Cost
Accounting is the process of accounting for costs. It is a branch of accounting
and it is used for ascertainment, presentation and control of costs. Cost accounting
is the application of costing and cost accounting principles, methods and techniques
to the science, art and practice of cost control and the ascertainment of profitability.
It is presentation of cost information to the management in such a way that it
Advanced Cost Accounting - I
23
Cost Concepts
NOTES
helps the managements in decision taking.
The need for Cost Accounting was realised due to the limitations of financial
accounting. Cost accounting possesses certain advantages and it also has certain
limitations. Ascertainment of cost, control of cost, determination of selling price,
to provide a basis for operating policy, help in cost reduction, create standards for
measurement of efficiency and preparation of cost estimates are the main
objectives of cost accounting. According to the nature of industry, the type of
product and the volume of production every, enterprise has to decide the cost unit
which is nothing but the quantity for which cost is to be calculated. Cost unit may
be number, weight, square feet or square meter, etc. Cost Centres are the subunits of the entire organisation and the sub-units may be sections, departments, a
machine or group of machines, a person or group of persons for which cost is
collected separately so that cost ascertainment and cost control become possible.
1.11 Key Terms
i)
Cost : Cost means amount of expenditure (actual or notional) incurred.
ii)
Costing : Costing means finding out the cost incurred for a product, service,
job, process, contract or an operation.
iii)
Cost Accounting : Cost Accounting is the process of accounting for costs.
It includes classifying, recording and appropriate allocation of expenditure
for determing the cost of a product, process, service, etc and to relate the
costs to sales revenue and finding out the profitability.
iv)
Cost Accountancy : It is the application of costing and cost accounting
principles, methods and techniques to the science, art and practice of cost
control and ascertainment of profitability. It includes the presentation of
information derived there from for the purpose of managerial decision
making.
v)
Cost Unit : Cost Unit is a quantitative Unit of product or service or time in
relation to which costs are ascertained.
vi)
Cost Centre : Cost Centre is a location, person or item of equipment (or
group of these) for which costs may be ascertained and used for the purposes
of control.
1.12 Questions
I) Select the most appropriate answer for the multiple choice questions
given below :
(i)
24 Advanced Cost Accounting - I
The profession of the cost Accounting has gained importance when the
Government of India framed cost Accounting Record Rules, ----(a) 1956, (b) 1959, (c) 1965, (d) 1968
(ii)
The cost journals and cost ledgers are recorded and maintained on the
basis of -------
Cost Concepts
(a) single entry principle, (b) Cost Accounting Record Rules, (c) Cost
accounting standards, (d) double entry principle
(iii)
Cost Accounting provides a basis for formulating ----policies.
NOTES
(a) administrative, (b) financial , (c) operating, (d) environmental
(iv)
Financial Accounting is meant for-----reporting, whereas Cost Accounting
is meant for ----- reporting.
(a) external - internal, (b) managerial - administrative, (c) administrative managerial (d) internal -external
(v)
A cost which will still be incurred although a plant is closed down temporarily,
is termed as----cost,
(a) engineered , (b) shut-down, (c) common, (d) joint-product
(vi)
The cost per unit which remains constant is -----cost,
(a) fixed, (b) semi-fixed, (c) variable, (d) semi- variable
[Answers : (i) - (d), (ii) - (d), (iii) - (c), (iv) - (a), (v) - (b), (vi) - (c).
II)
Theory Questions :
1)
Define the term ‘cost’. Differentiate between costing, Cost Accounting
and Cost Accountancy.
2)
“Cost Accounting has been developed out of the limitations of financial
Accounting”, Discuss.
3)
Define ‘Cost Accounting’. State the nature and objectives of cost
Accounting.
4)
“Cost Accounting begins where Financial Accounting ends”. Comment.
5)
What is ‘Cost Accounting’? State the advantages and limitations of Cost
Accounting.
6)
“Costing system has become an essential tool in the hands of management”.
Discuss.
7)
Explain the concept ‘Cost Accounting’ and differentiate Cost Accounting
from Financial Accounting.
8)
What is ‘Cost Unit’? State the unit of cost used at least in five manufacturing
companies.
9)
What is ‘Cost Centre’? Explain various types of Cost Centres.
Advanced Cost Accounting - I
25
Cost Concepts
III) Multiple Choice Questions :
(1)
Cost Accounting has been developed out of the limitations of --------Accounting.
(a) management
NOTES
(b) personal
(c) financial
(d) assets
(2)
Milk used in dairy products is the example of ----------- material.
(a) direct
(b) indirect
(c) essential
(d) secondary
(3)
A cost ----------- is a sub unit of organisation for which costs may be collected
separately for cost ascertainment and control.
(a) accounting
(b) centre
(c) department
(d) section
(4)
Which statement is “wrong”.
(a) Costing is concerned with ascertainment of cost
(b) Cost Accounting is concerned with recording of cost
(c) Cost Accountancy is concerned with formulation of costing principles,
methods and techniques.
(d) Costing is concerned with preparation final accounts.
Ans. : (1 - c), (2 - a), (3 - b), (4 - d)
1.13 Further Reading
26 Advanced Cost Accounting - I
1)
‘Advanced Cost Accounting’ - Nigam and Sharma Published by Himalaya
Publishing House.
2)
‘Theory and Practice of Cost Accounting’ - M. L. Agrawal. Published by
Sahitya Bhavan, Agra.
3)
‘Cost Accounting’ - Principles and Practice - N. K. Prasad.
UNIT 2
Elements of Cost
Elements of Cost
Structure
2.0
Introduction
2.1
Unit Objectives
2.2
Elements of cost
2.2.1
Material, Labour and Expenses
2.2.2
Material - direct and indirect
2.2.3
Labour - direct and indirect
2.2.4
Expenses - direct and indirect
2.3
Overheads and types of overheads
2.4
Items excluded form cost
2.5
Division of costs
2.6
Classification of costs
2.7
Methods of cost classification
2.8
Summary
2.9
Key Terms
NOTES
2.10 Questions
2.11 Further Reading
2.0
Introduction
After studying the information about cost concepts in the unit 1, in this unit
you will be studying information about elements of cost. There are three elements
of cost - material cost, labour cost and expenses. Each element of cost is divided
into direct and indirect and how these direct and indirect elements of cost are
decided and how classification of costs according to the different methods is
done is also explained in this Unit. Clear and proper understanding of costs
classification is important since cost collection and presentation of cost-data is
possible only when costs classification is fully understood.
2.1
Unit Objectives
After studying the information provided in this Unit, you should be able to :
•
Understand three main elements of cost;
Advanced Cost Accounting - I
27
Elements of Cost
•
Decide how each element is divided into direct and indirect;
•
Know why classification of costs is necessary; and
•
Understand classification of costs according to different methods.
NOTES
2.2
Elements of Cost
The costituent elements which build up the cost of a unit are materials,
labour, energy and equipments. These elements are broadly divided into three
major groups of materials, labour, and expenses. These three elements of cost or
cost factors could then be further classified in to direct and indirect categories.
The term ‘materials’ refer to all commodities supplied to an undertaking. Labour
is an essential factor of production. It is a human resource and participates in the
process of production. labour cost is a significant element of cost of a product or
service. All costs other than material costs other than material costs and labour
costs are termed as expenses. Direct expenditure is one which is identifiable as
belonging exclusively to a particular process .product, unitary service. Indirect
expenditure is one which , while still being part of the production ,is not incurred
exclusively for a particular part of the job and must , therefore, be spread over the
whole.
2.2.1 Material, Labour And Expenses
On the basis of the nature or elements of costs, costs may be classified into
three broad categories as material cost, labour cost and other expenses. Material
cost denotes the cost of raw materials consumed in the process of manufacturing
and marketing a commodity. Labour cost represents the wages, salaries, etc.
payable to the employees of a corporate entity. Expenses refer to the costs other
than material and labour costs ( but including notional costs of the use of owned
assets) of other services. provided and used in manufacturing and marketing the
goods and services of the company. Elementwise classification is important for
the purpose of ascertaining the costs of different elements of total cost of a product
manufactured or services generated. Further, it also helps to ascertain the relative
share and importance of each of the elements of total cost of goods and services.
For the management it is not sufficient to have knowledge of total cost
control only, but for effective control and decision-making the management must
know further analysis and classification of costs. Hence, the total cost is analysed
according to the elements of cost. There are basically three elements of cost viz.
material, labour and other expenses. Again they are further analysed into different
elements i.e. direct and indirect material, direct and indirect labour and direct and
indirect expenses. Indirect expenses are termed as overheads or on cost. The
overheads are factory overheads, office and administrative overheads and selling
and distribution overheads.
28 Advanced Cost Accounting - I
Elements of Cost
The Figure 2.1 indicates the different Elements of Cost.
Total Cost
Identifiability
Elements
NOTES
Material
Direct
Indirect
Labour
Direct
Indirect
Direct
Indirect
Overhead
Functional
Prime Cost
Expenses
Production
Administration
Selling and
Distribution
Fig. 2.1 : Elements of Cost
Thus, elements of cost are the different items or components of cost which
are added to get the total cost of any product or service. According to ICMA,
London, Elements of Cost means, “the primary classification of costs according
to the factors upon which expenditure is incurred viz. material cost, labour cost
and expenses”.
Analysis and classification of costs facilitates cost ascertainment, render it
possible to make valid comparisons of the operating efficiency of various
departments and assist in locating the responsibility for off-standard performance.
The total cost of a product consists of various elements of cost. These
elements are as under.
2.2.2 Material - Direct and Indirect
According to ICMA London - Material Cost is, “the cost of commodities
supplied to an undertaking”. Material Cost is divided into the following :
(A) Direct Material :
Direct Materials are those which can be identified in the product and can
be measured. They can also be charged to the product directly. Thus, direct
materials enter the product and form a part of finished product. For example
cotton used in a textile mill, timber used in furniture making, pig-iron in foundry
Advanced Cost Accounting - I
29
Elements of Cost
NOTES
are treated as direct materials. The cost of direct material is termed as the direct
material cost.
But sometimes, even if some materials go directly into the production, they
are not treated as direct materials, for example, thread in dress making, nails in
shoe making, glue in binding etc. The reason for this is that the value of these
materials is very less and the quantity used is also negligible. Hence, attempt is
not made to analyse their costs which will otherwise be time consuming and will
add to extra cost because of spending more time on them, while their value being
negligible. Thus, such materials should conveniently be treated as indirect materials.
B) Indirect Materials :
Indirect material are those which do not form part of the finished products.
It is defined as, “ materials which cannot be allocated, but which can be apportioned
to or absorbed by cost centres or cost units . For example lubricants, oils, cotton
wastes, small tools etc. Thus , materials which cannot be conveniently identified
with individual cost units are termed as indirect materials. These are minor in
importance. But sometimes, the cost of small items which have less value like the
nails in furniture , thread in the dress manufacturing, paper used in polishing, etc.
are treated as indirect materials though they go directly into production. The cost
of these indirect materials is termed as indirect material cost.
Generally, the materials are purchased from market or directly from
manufacturers. The materials purchased have to be brought to the factory for
converting them into finished product. So all the expenses which will be incurred
for bringing the materials to the place of production will have to be considered for
ascertaining the cost of materials. Materials purchased are stored in godowns
therefrom they are issued for production. The valuation of material issued for
consumption is done by Costing Department. This value of materials consumed is
charged as ‘Material cost’.
Following are the points of differences between Direct Material
and Indirect Materials :
Direct Materials
30 Advanced Cost Accounting - I
Indirect Materials
i)
It is that which can be
conveniently identified with and
allocated to cost units.
i)
These are those materials which
cannot be conveniently identified
with individual cost units.
ii)
It generally becomes a part of
the finished product. e.g. cotton
used in a textile mill. Clay in
bricks, leather in shoes, timber
in furniture, etc.
ii)
These are minor in importance,
such as (i) small and relatively,
inexpensive items which may
become a part of finished product
e.g. pins, screws, nuts, and bolts,
thread, etc. (ii) those items
which do not physically become
a part of the finished products
e.g. coal, lubrication oil and
greece, sand paper ,etc.
iii) It directly enters the product and
they form part of the finished
product.
iii) The costs which relate to the
factory form part of the factory
overhead.
Elements of Cost
2.2.3. Labour :
According to ICMA London, Labour Cost is defined as, “the cost of
remuneration (wages, salaries, commissions, bonus etc. ) of the employees of an
undertaking “. Generally worker’s efforts are necessary for producing any particular
thing or giving any service. In spite of computerisation and automation, the
importance of labour force in manufacturing product or giving service is increasing
day-by-day. The expenses incurred for obtaining the services of human being are
labour cost of a job. Labour Cost is divided into the following:
(A)
NOTES
Direct Labour :
All the workers who are directly engaged in manufacturing activity such
as operating machines, doing assembly work etc. are direct workers and wages
paid to them are known as direct labour cost. These wages can be conveniently
identified with a particular product, job or process. For ascertaining direct labour
cost, it is necessary to know how much and what work has been done by individual
worker. For this purpose various records should be maintained by the management.
Wages of skilled and unskilled Labour may be included in this item. Examples of
direct labour are : Baker, Shoemaker, Carpenter, Weaver, Tailor, Bus Drivers and
Conductors etc.
(B)
Indirect Labour :
It is of a general character and cannot be conveniently identified with a
particular cost unit. In other words, indirect labour is not directly engaged in the
production operations but only to assist or help in production operations. Thus, the
wages which cannot be allocated but which can be apportioned or absorbed by
cost centres or cost unit is known as indirect labour. Examples of indirect labour
are : salaries and wages paid to foreman, supervisors, chargeman, inspectors,
clerical staff etc., working in production department, overtime and night shift
allowance paid and any other benefits paid to them.
Following are the points of differences between Direct Labour and
Indirect Labour :
Direct Labour
i) It controls of wages paid to
Indirect Labour
i) It is not directly engaged in the
workers directly engaged in
production operations but only to
converting raw materials into
assist or help in production
finished products.
operations.
ii) These wages can be conveniently ii) It is of general character and canidentified with particular product,
not be conveniently identified with
job or process.
a particular cost unit.
iii) Wages paid to Baker, Shoe-maker, iii) Wages paid to Supervisor,
Carpenter, Weaver and Tailor are
Inspector, Cleaner, Clerk, Peon,
the examples of Direct Labour.
Watchman are the examples of
Indirect Labour.
Advanced Cost Accounting - I
31
Elements of Cost
iv) All labour expended in altering
NOTES
iv) The wages which cannot be
the construction,
allocated but which can be
composition, confirmation or
apportioned to or absorbed by
condition of the product is
cost centres or cost units is known
known as Direct Labour.
as Indirect Labour.
2.2.4 Expenses
All costs other than material and labour are termed as other expenses.
According to ICMA, London, Expenses is defined as, “the cost of services provided
to an undertaking and the notional cost of the use of owned assets”. Expenses
are divided into the following :
(A)
Direct Expenses :
Direct Expenses include all types of expenses other than direct materials
and direct labour which are incurred specifically for a particular product or process.
It is defined as “expenses which can be identified with and allocated to cost
centres and cost units”. Direct expenses are also known as chargeable expenses.
Direct expenses form a part of the Prime Cost, e.g. chargeable expenses, Hire of
special plant, Royalties, Cost of patents and patterns, Engineer’s Fees, Cost of
special drawings, Designs and layouts, Architect’s fees, Direct expenses payable,
Surveyor’s fees, Productive expenses outstanding, Consultant’s fees, Process
expenses due but not paid, Prime cost expenses etc.
Check Your Progress
i) Which are the ‘elements
of cost’ ?
ii) How each element of
cost is further divided ?
iii) Explain the differences
between :
a) Direct Materials and
Indirect Materials
b) Direct Labour and
Indirect Labour
c) Direct Expensess
and Indirect Expenses.
(B)
Indirect Expenses :
All indirect costs other than indirect material and indirect labour costs are
termed as Indirect Expenses. These expenses are not charged directly to production.
Indirect expenses cannot be allocated but they can be apportioned to or absorbed
by cost centres or cost units. Examples of indirect expenses are : rent, rates and
taxes, salary of general manager, staff welfare expenses, canteen expenses,
telephone expenses, lighting, power, fuel, depreciation, insurance, bank charges
and interest paid, etc.
The aggregate of direct material cost, direct labour cost and direct expenses
is termed as “Prime Cost” while the aggregate of indirect material cost, indirect
labour cost and indirect expenses is termed as “Overheads”.
Following are the points of differences between Direct Expenses
and Indirect Expenses :
Direct Expenses
i) “Expenses which can be identi-
32 Advanced Cost Accounting - I
Indirect Expenses
i) “All indirect costs other than ind-
fied with and allocated to cost
direct materials and indirect labour
centres and cost unit” are known
costs, are termed as Indirect
as Direct Expenses.
Expenses.
ii) These are those expenses which ii) These cannot be directly identified
are specifically incurred in con-
with a particular job, process
nection with a particular job or
or work order and are common
cost unit.
to cost units and cost centres.
iii) These are also known as “chargeable” expenses.
iv) These form a part of the Prime
Elements of Cost
iii) These are also known as nonChargeable expenses or oncosts.
NOTES
iv) It forms a part of the overheads.
Cost.
v) Cost of Drawings and Patterns
v) Rent and Rates, Depreciation,
Carriage Inward, Royalty paid,
Light and Power, Advertising,
Excise Duty, Architect Fees are
Insurance, Carriage Outward are
the examples of Direct Expenses.
the examples of Indirect Expenses.
2.3
Overheads and Types of Overheads
Overhead costs are the operating costs of a business enterprise which
cannot be identified with particular units of output. Overheads consists of all
expenses incurred for in connection with the general organisation of the entire
concern or a part of it, i.e. cost of operating supplies and services used by the
undertaking. It also include maintenance of capital assets. There are four main
types of overheads as below :
i) Factory or Production or Works or Manufacturing Overheads :
These are the overheads which are concerned with the production function.
It includes indirect materials, indirect wages and indirect expenses in producing
goods or services. Thus, overhead covers all types of indirect expenses incurred
by a concern right from the receipt of an order to the final delivery of goods to the
customer or for storing the finished goods in the godowns. Examples of factory
overheads are : depreciation of plant and machinery, depreciation of factory
buildings, insurance charges and repairs on plant and machinery and factory building,
power consumption, coal and other fuel charges, wages of indirect workers,
welfare services etc.
ii) Office or Administration or Management or Establishment Overheads:
These are the indirect expenditures incurred in general administrative
function i.e. in formulating policies, planning and controlling the function, directing
and motivating the personnel of an organisation in the attainment of its objectives.
Examples of office and administration overheads are : Office rent, rates and
taxes, salaries of office staff, postage, telegrams and telephone, printing and
stationery, office lighting, repairs and depreciation of office building and equipments,
legal expenses, audit fees director’s fees, bank charges and interest paid, etc.
iii) Selling Overheads :
Selling overhead is the cost of promoting sales and retaining customers. It
Advanced Cost Accounting - I
33
Elements of Cost
NOTES
is the skill of any business to attract new customers by offering extra facilities
and services by giving them free samples etc. so that they get attracted to the
company. Similarly, the existing customer should be retained by providing the best
services for which certain expenses are necessary. Thus, if a concern wants to
expand its business it must incur selling expenses which cannot be avoided.
Examples of selling overheads are : salaries of the sales manager and sales staff,
commission paid to salesman and selling agents, advertising charges, packing
charges, free catalogues, pamphlets and price lists, mail order house expenses,
showroom expenses, bad debts, after sales service expenses, travelling expenses
etc.
iv) Distribution Overheads :
Distribution overheads are the expenses incurred in moving the goods from
the company’s godowns to the customers premises. It means that distribution
overhead starts with all indirect material, indirect wages and indirect expenses
incurred upto the point of packing the product for making available for despatch
and ends with making the re-conditioned returned empty packages and tins available
for reuse. The actual definition of distribution expenses is “the cost of the sequence
of operations, which begins with making the packed product available for despatch
and ends with making the re-conditioned returned empty package, if any available
for reuse”. Examples of distribution overheads are : warehouse rent and insurance,
salary of warehouse keeper and other cost of transportation of goods, insurance
of goods in transit, cost of maintenance of vehicles, loading expenses, carriage
outward, special packing expenses, cost of repairing and re-conditioned of empty
packages etc.
2.4
Items Excluded From Cost
The following is the list of items which are to be excluded from the
computation of total cost or Non cost Items.
i)
Financial Incomes :
Capital Profits, Dividend Received, Brokerage and Commission Received,
Share Transfer Fees Received, Interest on Investments, Interest on Bank
Deposits, Rent Received, Bad Debts Recovery, Interest on Loan given.
ii)
Financial Charges :
Capital Losses, Cash Discount, Trade Discount, Penalties and Fines, Share
Transfer Fees Paid, Interest on Bank Loan, Interest on Debentures,
Preliminary Expenses, Underwriting Commission, Discount on Issue of
Shares and Debentures, Loss on Investments, Capital Expenses, Interest
on Capitals, Salary or Commission paid to Partners. Income Tax, Wealth
Tax, Interest on Debentures, Reconstruction Expenses, Development
Expenses.
34 Advanced Cost Accounting - I
iii)
Appropriations :
Elements of Cost
Bad Debts Reserve, Dividends Paid, Charitable Donations, Transfer to
Reserves, Sinking Fund, Debenture Redemption Fund, Machinery
Replacement Fund, Investment Fluctuation Fund, etc.
iv)
Abnormals :
NOTES
Abnormal Wastage, Abnormal Idle Time, Loss by fire, Loss by Theft, Loss
of Stock, Insurance Premium, etc.
2.5
Division of Costs
The division of costs are obtained with the help of Elements of Cost. The
following are the various divisions of costs of an article or a product.
i) Prime Cost :
This is the total of Direct material, Direct labour and Direct Expenses.
Prime Cost = Direct Material + Direct Wages + Direct Expenses.
ii) Works Cost :
This consist of Prime cost plus Works Expenses.
Works Cost = Prime Cost + Works Overheads
iii) Cost of Production :
This is made up of Works Cost plus Office and Administrative Overheads.
Cost of production is termed as “Gross Cost”.
Cost of Production = Works Cost + Office and Administration Overheads.
iv) Total Cost / Cost of Sales :
This is Cost of production plus selling and distribution overheads. In other
words, it is the total expenditure incidental to production, administration,
selling and distribution of commodities manufactured.
Total Cost / Cost of Sales = Cost of Production + Selling and Distribution
Overheads.
v) Selling Price =
Total Cost / Cost of Sales + Profit (or - Loss).
Advanced Cost Accounting - I
35
Elements of Cost
The Division of Costs may be shown in the following chart indicated in Figure 2.2
Division of Costs
NOTES
(+)
(+)
Direct Material
Direct Labour
Direct Expenses
Add
(+)
Works on Cost
or
Factory Overheads
or
Manufacturing Expenses
Prime Cost / Direct Cost / Basic Cost / Operating Cost /
First Cost / Flat Cost / Original Cost
Add
(+)
Factory Cost / Works Cost / Manufacturing Cost
Add
(+)
Office Overheads or Administration on Cost or Management Expenses
Cost of Production / Gross Cost / Office Cost
Add
(+)
Selling and Distribution Overheads
Cost Price / Total Cost / Cost of Sales / Cost of Turnover /
Sales Cost / Net Cost / Turnove Cost
Add / Less
(+)
(-)
Profit / Loss
Inflated Price/Invoice Price/Selling Price/Sales/
Market Price/Value of Sales/Value of Turnover/Loaded Price
Fig. 2.2 : Division of Costs
36 Advanced Cost Accounting - I
2.6
Elements of Cost
Classification of Costs
Meaning and Definition :
Cost Classification means grouping of costs according to their common
characteristics. It is the process of grouping the items together which are alike.
According to Dickey, “Classification is the process of grouping like facts
under a common designation on the basis of similarities of nature, attributes
or relations”.
NOTES
The Committee on National Association of Accounts defines
Classification as, “The identification of each item and the systematic placement
of like items together according to their common features”. Items grouped
together under common heads are further defined according to their fundamental
differences. Suitable classification of costs is of utmost important, so that these
costs can be identified with the cost centres or cost units.
Need for Cost Classification :
The need for cost classification arises having to use cost data for a variety
of purposes. For different purposes different kinds of cost informations are required.
Therefore, costs must be arranged and classified in such a manner that they can
be combined in different ways to serve different purposes. Generally, Cost
Classification is required for the attainment of the following purpose shown in
Figure 2.3
In Budgeting
and
Planning
Process
(ii)
Controlling
of Costs
(iii)
Pricing
Policies
(iv)
Current
Application of
Plans and
Policies
(v)
Ascertainment
of Profits
Periodically
(i)
Need for cost
Classification
Fig. 2.3 : Need for Cost Classification
Advanced Cost Accounting - I
37
Methods of Cost Classification
38 Advanced Cost Accounting - I
Variable
Semi-variable
Product
Capital
Period
Revenue
Administration
Factory
Labour
Fixed
Controllable
Research and
developments
Selling and
distribution
Indirect
Direct
Expenses
Material
Uncontrollable
Pre-determined
Historical
Abnormal
Normal
Normality
(6)
Controllability
(5)
Behaviour
(4)
Functions
(2)
Elements
(1)
Identifiability
(3)
Cost classification
Fig. 2.4 : Classification of Costs
Time
(7)
Association
(8)
Investment
(9)
Irrelevant
Costs are classified in different ways according to their elements i.e. material,
labour and expenses. Other basis of cost classification are function, variability,
controllability, normality, period, investment etc. The costs may be the same, but
the classification of costs are made in different ways depending upon the specific
requirement and the purpose to be achieved in a particular organisation. The
Figure 2.4 shows the graphical presentation of Classification of Costs.
Relevancy
(10)
NOTES
2.7
Relevant
Elements of Cost
1) Elements :
Elements of Cost
The cost elements of a product are, Material, Labour and Expenses.
a) Materials :
The ICMA, London defines material cost as, “the cost of commodities,
other than fixed assets, introduced into products or consumed in the operation of
an organisation. Material cost may be either direct material cost or indirect material
cost.
NOTES
Direct Material Cost is defined as “the cost of materials entering into and
becoming constituent element of a product or saleable service”. Thus, materials
which can be identified with the production of a product or which can be traced to
the finished product are known as direct materials. Examples of direct materials
are cotton in cotton textile, timber in furniture making industries, leather in shoe
making industries etc.
Indirect Material Cost has been defined as, “material cost other than
direct materials cost”. In other words, material cost which cannot be identified
with a product, job or process or traceable to the same, is known as indirect
material cost. Examples of indirect materials are consumable stores such as oil,
cotton waste, small tools, works stationery etc.
But in some cases, even direct materials which can be traced to the
product concerned may be treated as indirect materials because of time and
labour involved in ascertaining their cost for the purposes of a direct charges. For
example, thread, buttons, nails, gum, metal strips etc. which are used in production
are treated as indirect although they are direct in nature.
b) Labour :
Labour is the physical or mental efforts expended in production. The
remuneration for such efforts is known as wages . Labour cost may be either
direct labour cost or indirect labour cost.
Direct Labour Cost is defined as, “the cost of remuneration for employee’s
efforts and skills applied directly to a product or saleable service”.
Indirect Labour Cost is defined as, “labour cost other than direct labour
cost”. Thus, indirect labour is not directly engaged in the production operations,
but only to assist or help in production operations. Examples of indirect labour are
: salaries and wages paid to foreman, supervisors, chargeman, inspectors,
maintenance workers, clerical staff etc. working in production department, overtime
and night shift allowance paid and any other benefit paid.
c) Expenses :
The term ‘Expenses’ denotes the cost of services provided to an
undertaking. Expenses may be direct or indirect.
ICMA, defines Direct Expenses as “ Costs other than materials or wages
which are incurred for a specific product or a saleable service”. Direct expenses
Advanced Cost Accounting - I
39
Elements of Cost
NOTES
form a part of Prime Cost. Example of direct expenses are : Cost of drawings
and patterns, Repairs and maintenance of plant and equipment taken on hire,
Architect’s fees, Research expenditure, Excise duty, Royalty etc.
Indirect Expenses are “expenses other than direct expenses”. These
expenses are not charged directly to production. Examples of indirect expenses :
Rent and rates, Salary of General Manager, Staff welfare expenses, Canteen
expenses, Lighting, Telephone expenses etc.
2) Functions :
Costs may be classified on the basis of business functions like manufacturing,
administration, selling and distribution, research and development etc.
Ascertainment of costs for all these functions is necessary and hence they are
classified as follows :
a) Factory Cost :
This is the cost which is incurred for the series of operations i.e. right from
the supply of materials, labour and expenses incurred till the completion of
production. Thus, materials, labour and expenses, both direct and indirect, constitute
production cost. Examples of manufacturing cost are : material, labour, factory
rent rates and taxes, depreciation on factory building and plant and machinery,
factory lighting and power , store keeping expenses, insurance of factory building
etc.
b) Administration Cost :
This is the cost running a concern i.e. for framing the policies, directing and
controlling all the activities of the organisation other than manufacturing and selling
distribution expenses. According to ICMA it defines as, “the sum of these costs
of general and management and of secretarial, accounting and administrative
services which cannot be directly related to production, marketing, research and
development function of the enterprise”. Examples of administration cost are :
Director’s fees and allowances, Salaries of office staff, Audit fees, Legal expenses,
Office rent and taxes, Office lighting , Expenses of secretarial and accounting
department, Postage and telegram, Printing and stationery etc.
c) Selling and Distribution Cost :
Selling costs are those costs which are incurred for attracting the potential
customers and retaining the existing customers. Thus, demand is created in the
market through advertisement and publicity so that new orders can be secured.
Selling Costs include : Advertisement, Hoarding / Neon signs etc. Salaries
and commission to salesman and sales staff, Costs of free sample / brochures
etc. Showroom expenses, Travelling expenses of salesman etc.
40 Advanced Cost Accounting - I
Distribution Expenses are incurred for despatching the products which
are ready after packing. These expenses include : Carriage outward, Warehouse
expenses , Packing costs, Running and maintenance cost of delivery van, Salary
of the godown staff etc.
d) Research and Development Cost :
Research cost is defined as, “the cost of seeking new or improved products,
applications of material or methods”. Development cost is defined as, “the cost of
process which begins with the implementation of the decision to produce or new
or improved methods and ends with the commencement of formal production of
that product or by that method.
Elements of Cost
NOTES
3) Identifiability :
According to the identifiability with the cost units, jobs or processes the
costs are classified into direct and indirect. In costing, Direct and Indirect costs
have much significance.
a) Direct Cost :
All the costs which can be conveniently allocated to cost unit or cost centre
is known as direct cost. For example the cost of cotton in case of textile industries,
the cost of timber in furniture industries etc.
b) Indirect Cost :
It is a cost which is of general character and which cannot be identified
with a particular unit of cost. These cost cannot be allocated but can be apportioned
to cost unit or cost centre. The terms ‘direct’ and ‘indirect’ relate to the methods
of allocating them because it depends upon whether the same cost should be
treated as direct or indirect. Thus, same item may be treated as a direct cost in
one case and indirect cost in another case. This bifurcation depends upon the
nature of business and also cost unit decided by the management. For example,
we can treat depreciation as a direct cost, if there is only one machine or cost
centre but if there are many cost units it becomes difficult to allocate the cost
accurately. In this case, it is treated as an indirect cost, e.g. in cost of construction
sites, the depreciation of machinery etc. is taken as direct cost while in case of a
factory where there are many departments which use the same machine it is
treated as an indirect cost.
This type of classification is important because of the following reasons,
i)
it facilitates accurate ascertainment of cost.
ii)
it facilitates controlling of costs.
iii)
it enables in fixing the responsibility to the executives.
Difference between Direct and Indirect Costs :
Direct costs are those costs which are incurred for and may easily and
conveniently be identified with a particular cost unit or cost centre. Direct costs
include direct material cost, direct labour cost and other direct expenses. Indirect
costs, on the other hand, represent the costs which are of general nature and
which cannot easily and conveniently be identified with a particular cost unit or
cost centre.They include indirect material cost, indirect labour cost and other
indirect expenses. The indirect costs are therefore called Overhead expenses.
Advanced Cost Accounting - I
41
Elements of Cost
These indirect or overhead expenses can further be divided into three sub-categories
as factory overhead expenses, administration overhead expenses, and selling and
distribution overhead expenses (on the basis of the functions). The Classification
of Costs on the basis of Traceability Elements and Functions is shown in figure
2.5.
NOTES
Direct cost
or
Prime cost
Elementwise
classification
Direct material cost
Direct labour cost
Direct expenses
Classification
of
costs
On the
basis of
traceability
Indirect costs
or
Elementwise
Overhead
classification
Expenses
Indirect
material
cost
Indirect
labour
cost
Production
overhead
expenses
Functional
classification
Indirect
expenses
Administrative
overhead
expenses
Selling &
distribution
overhead
expenses
Fig. 2.5 : Classification of Costs on the basis of Traceability,
Elements and Functions
4) Behavior :
On the basis of this characteristic, costs are classified according to their
nature/behavior in relation to changes in the level of activities or volume of
production. On the basis of variability, costs are classified as under :
a) Fixed Cost :
42 Advanced Cost Accounting - I
According to ICMA London-Fixed cost is defined as, “ a cost which accrues
in relation to the passage of time and which within certain output or turnover
limits tends to be unaffected by fluctuations in volume of output or turnover”. In
other words, fixed costs remain fixed in total amount and do not increase or decrease
with volume of production. But the fixed cost per unit increase when volume of
production decreases, and decreases when the volume of production increases.
Thus, fixed costs are constant in total amount but fluctuate per unit as production
changes. The characteristics of fixed cost are :
Elements of Cost
i)
fixed total amount within a relevant output range.
ii)
increase or decrease in per unit fixed cost when volume of production
changes.
iii)
fixed costs can are apportioned to departments on some equitable basis.
iv)
fixed cost can be controlled mostly by the top level management.
NOTES
Examples of fixed cost are, Rent, Rates, Taxes, Insurance of factory building,
Manager’s salary, Office staff salaries, Municipal taxes etc.
Cost ( `)
The following is the graph indicating the Behavior of fixed cost in figure 2.6.
Y
Total Fixed Cost
Fixed Cost per unit
0
Volume of Production
(Units)
Fig. 2.6 : Behavior of Fixed Cost
X
b) Variable Costs :
ICMA, London-defines variable Cost as, “a cost which in aggregate tends
to vary in direct proportions to changes in the volume of output or turnover”. In
other words, when volume of output increases, total variable cost also increases
and vice-versa, when volume of output decreases, total variable cost also decreases.
But the variable cost per unit remains fixed.
The following is the graph indicating the Behavior of Variable Cost in Figure
Y
Cost ( `)
2.7
ria
Va
l
ta
To
st
Co
e
bl
Variable Cost per unit
0
Volume of Production (Units)
X
Fig. 2.7 : Behavior of Variable Cost
Thus, Variable Costs, in general , indicate the following characteristics.
Advanced Cost Accounting - I
43
Elements of Cost
NOTES
i)
They vary in direct proportion to volume of output or turnover.
ii)
The variable cost per unit of product remains constant.
iii)
It is easy for allocation and apportionment to departments.
iv)
Such costs can be controlled by departmental heads.
Example of variable costs are : direct material cost , direct labour cost, direct
expenses, power, repairs, royalties, commission of salesman, normal spoilage etc.
c) Semi-variable or Semi-fixed Costs :
ICMA, London-defines Semi-Variable Cost as, “a cost containing both fixed
and variable elements, which is therefore partly affected by fluctuations in the
volume of output or turnover”. Thus, these costs are partly fixed and partly variable.
A semi-variable cost has often a fixed element below which it will not fall in any
level of output. The variable element in semi-variable costs changes either at a
constant rate or in lump-sum. For example, if there is additional shift in the factory,
it will require additional supervisors and certain costs will increase in lump-sum.
In case of telephone charges, there is a minimum rent and after a specified
number of calls, the charges are according to the number of calls made. Thus,
there is no fixed pattern of behavior of semi-variable costs. The following is the
graph indicating the Behavior of Semi-Variable Cost in Figure 2.8
Y
Y
Semi-variable Cost
Cost ( `)
Cost ( `)
Semi-variable Cost
0
Volume of Production (Units)
X
0
Volume of Production (Units)
Fig. 2.8 : Behaviors of Semi-Variable Cost
Cost ( `)
Following is the graph indicating the Behavior of Fixed, Variable and SemiVariable Costs in Figure 2.9
Y
C
B
A
A = Fixed Cost
B = Semi-variable cost
C= = Variable cost
X
Volume of Production (Units)
Fig. 2.9 : Behaviour of Fixed, Variable and Semi-Variable Costs
0
44 Advanced Cost Accounting - I
Examples of semi-variable costs are : Telephone charges, depreciation,
X
repairs and maintenance of plant and machinery, building, supervision, compensation
for accidents, light and power etc.
Elements of Cost
5) Controllability :
On this basis costs are classified into two types viz. Controllable Costs and
Uncontrollable Costs.
NOTES
a) Controllable Costs :
ICMA, London defines-Controllable Costs as, “ a cost chargeable to a cost
centre, which can be influenced by the actions of the person in whom control of
the centre is vested”. In other words, these are the costs which may be directly
regulated at a given level of management authority. Variable costs are generally
controllable by department heads. Practically, all variable costs are controllable
cost.
b) Uncontrollable costs :
ICMA, London-defines Uncontrollable Cost as, “a cost chargeable to a
cost centre, which cannot be influenced by the actions of the person in whom
control of the centre is vested”. In other words, these are those costs which
cannot be influenced by the action of the specified member of an enterprise. It
means these costs are not within the control of management. Practically all fixed
costs are uncontrollable.
6) Normality :
Under this method, costs are classified according to whether these costs
are normally incurred at a given level of output in the condition in which that level
of activity is normally attained. On the basis costs are classified into Normal Cost
and Abnormal Cost.
a) Normal Cost :
Normal Cost is defined as, “a cost which is normally incurred to a given
level of output in the condition in which that level of output is normally attained”.
It is a part of cost of production.
b) Abnormal Cost :
It is defined as, “cost which is not normally incurred at a given level of
output in the condition in which that level of output is normally attained”. It is not
a part of cost of production and charged to Costing Profit and Loss Account.
7) Time :
On this basis costs are classified into Historical Cost and Predetermined
Cost.
a) Historical Cost :
It is defined as, “the costs which are ascertained after these have been
incurred”. Thus, such costs are available only when the production of a particular
Advanced Cost Accounting - I
45
Elements of Cost
thing has already been done. Such costs are only of historical value and not useful
for cost control purposes. The characteristics of such costs are :
i)
they are based on recorded facts,
ii)
these costs may be verified with the help of supported documents,
iii)
these are objectives in nature because they relate to the past events.
NOTES
b) Pre-determined Cost :
It is defined as, “the costs which are ascertained in advance of production
on the basis of a specification of all factors affecting cost”. These costs are set up
from analysis and forecast made before the event and thus, represent not what
has happened, but what is expected to happen. Pre-determined cost determined
on scientific basis becomes standard cost. Such costs when compared with actual
costs we can know the reasons of variance. Thus, by these costs, management
can fix the responsibility and can take remedial action to avoid its recurrence in
future. Predetermined costs may be in various forms like budgeted cost, estimated
cost, standard cost and so on.
8) Association :
On this basis costs are classified into Product Cost and Period Cost.
a) Product Costs :
It is described as the costs which are directly associated with the product.
Thus, unit product is sold, these costs provide no benefit. When the products are
sold, the total product costs are recovered as an expense. This expense is called
the cost goods sold. Examples of product costs are : Direct material, Direct labour
and Factory overheads.
b) Period Costs :
It is described as the costs which are associated with a particular accounting
period. These are not related with the products delivered to the customers. Such
costs are charged to Profit and Loss Account of the period. Examples of period
costs are : Rent, salaries of office staff, travelling expenses etc. These costs are
inventoried i.e. these are not included in the value of closing stocks.
This classification is important for ascertainment of profit. Product cost
can be carried forward to the next accounting period as a part of unsold finished
stock whereas period cost is written off in the accounting period in which it is
incurred.
9) Basis of Investment :
On this basis costs are classified into Capital Cost and Revenue Cost.
a) Capital Costs :
46 Advanced Cost Accounting - I
It is defined as, “a cost which is intended to benefit in future period”. Capital
cost is treated as purchase of an asset. Examples of capital cost are purchase of
Elements of Cost
premises, plant and machinery, furniture etc.
b) Revenue Costs :
It is defined as, “a cost which is incurred to benefit the current period”.
Revenue cost is treated as an expense. Examples of revenue costs are : salaries,
postage, printing and stationery, rent, rates and taxes, insurance etc.
NOTES
10) Basis of Relevancy :
On the basis of whether the cost items are relevant or irrelevant to the
decisions under the consideration of the management, costs may broadly be
classified into two categories as relevant costs and irrelevant costs.
a) Relevant Costs :
These are those costs which have a bearing, or which have an effort on the
decisions under the consideration of the management. That means, they are the
most pertinent costs and therefore their efforts are to be reckoned before taking
a decision.
b) Irrelevant Costs :
It represent the costs which have no effect on the decisions under the
consideration of the management. For instance, marginal cost is an example to
relevant costs. It may be noted here that the marginal costs represents the extra
cost for an additional unit. On the other hand, sunk cost is a good example to
irrelevant costs. Because, sunk cost represents the costs incurred in the past.
They are therefore called past costs. Since they represent the costs which have
already been incurred, no present or future decision is able to alter them. Hence,
they are irrelevant.
2.8
Check Your Progress
i)
Show division of Costs
from Prime Cost to Sales
or Selling Price.
ii) What
is
meant
by
classification of costs ?
iii) Mention the methods of
classification of costs
iv) State how costs are
classified under:
a) Functional
Classification
b) Behavioural
Classification
c) Normality
Classification
Summary
There are three elements of cost - material, labour and expenses. Element
of material consists of all raw materials, components, semi-finished, and finished
parts which are used in manufacturing of products or for providing services required
by the customers. The second element of cost is labour cost and it is the amount
of wages, fees and remuneration paid to the employees working in the enterprise.
Labour is provided by the employees in the form of physical labour, intelligence,
and skills required to convert the materials into a finished product by heating,
mixing, cutting, moulding, and other processes used for production. The third
element of cost is expenses and it includes all expenditure incurred - actual or
notional - excluding material cost and labour cost.
Each element of cost is divided in two parts - direct and indirect. So there is
direct material cost and indirect material cost, direct labour cost and indirect labour
cost and direct expenses and indirect expenses. When material, labour and
expenses can be easily related to the product manufactured and they form a
major or substantial part of the total cost of a product, they are recorded as ‘direct’,
Advanced Cost Accounting - I
47
Elements of Cost
NOTES
while when they form an insignificant portion of the total cost of a product and
relationship between them and the finished product cannot be easily established,
they are regarded as the ‘indirect’ materials, labour and expenses.
Classification of costs is the process of locating costs with similar features
and putting them in a particular group. This makes possible reporting cost
information in a certain format as well as in controlling costs. There are various
methods of classifying the costs; e.g. they may be classified on the basis of elements,
functions, behavior, nature, controllability, etc.
2.9
Key Terms
i)
Costs Classification : Identification of each item of cost and systematic
placement of like items together according to their common features.
ii)
Prime Cost : Aggregate of Direct Material Cost, Direct Labour Cost and
Direct Expensess.
iii) Factory Cost / Works Cost : Prime Cost plus Manufacturing / Factory /
Works Overheads.
iv) Cost of Production / Office Cost / Gross Cost : Factory Cost plus
Office overheads / Administration overheads / General Overheads.
v)
Cost of Sales / Total Cost / Cost of Turnover : Cost of Production plus
Selling and Distribution Overheads.
vi)
Selling Price / Sales : Cost of Sales plus Profit / minus Loss.
2.10 Questions
(I)
Select the most appropriate answer for the following multiple choice
questions
(i)
Lubricants used in factory workshop is the example of ----- material
(a) Direct
(b) Indirect
(c) Prime
(d) Essential
(ii)
Wages paid to factory supervision is the example of ----- labour.
(a) direct
(b) fixed
(c) variable
48 Advanced Cost Accounting - I
(d) indirect
(iii)
Carriage on purchases is a part of direct ----cost.
Elements of Cost
(a) labour
(b) material
(c) overhead
NOTES
(d) normal
Ans : (1 - b), (2 - d), (3 - b),
(iv)
Match the pairs.
Group I
(a) Direct-Material Cost
Group II
(i) Supply of material
(b) Research & Development Cost (ii) Skills applies to a product
(c) Administration Cost
(iii) Framing the policies
(d) Direct Labour Cost
(iv) Improved products
(v) Constituent element of a product
Ans : (a) - (v) ; (b) - (iv) ; (c) - (iii) ; (d) - (ii).
(II) Theory Questions
1)
What is ‘cost’? State the various elements of cost with suitable examples.
2)
What is ‘cost classification’? Explain the need for cost classification.
3)
State the various methods of cost classification with suitable examples.
4)
“Fixed costs are variable per units while variable costs are fixed per unit”.
Comment.
5)
Distinguish between direct labour costs and indirect labour costs.
2.11 Further Reading
i)
‘Advanced Cost Accounting’ - Nigam and Sharma published by Himalaya
Publishing House.
ii)
‘Cost Accounting’ - Jawahar Lal - Publisher : Total Mc Graw Hill Publishing
Co. Ltd., New Delhi.
iii)
‘Cost Accounting’ - Principles and Practicee’ - N. K. Prasad.
Advanced Cost Accounting - I
49
UNIT 3 Cost Sheet and Quotations
Cost Sheet & Quotations
Structure
3.0
Introduction
3.1
Unit Objectives
3.2
NOTES
Cost Sheet
3.2.1
Purpose of Cost sheet
3.2.2
Proforma of simple cost sheet
3.2.3
Proforma of complex cost sheet
3.3
Summary list
3.4
Illustrations
3.5
Quotations and its preparation
3.6
Illustrations on preparation of quotation
3.7
Summary
3.8
Key Terms
3.9
Questions and Exercises
3.10 Further Reading
3.0
Introduction
Cost information becomes useful only when it is arranged and presented to
the management in a systematic manner which can be grasped by the management
easily and in a very short time. Then only persons doing the management can use
it for cost controlling and for taking decisions. Cost sheet is the first such statement
which is prepared to give step-by-step information about costs incurred by the
enterprise for a certain period. In this Unit information is provided related to
preparation of a cost sheet and based on its information, how a quotation is
prepared.
3.1
Unit Objectives
After studying the information provided in this unit, you should be able to :
•
Understand format of a simple cost sheet;
•
Understand format to be used for preparing a complex cost sheet; and
•
Prepare quotation for a job or service to be provided to a customer.
Advanced Cost Accounting - I
51
Cost Sheet & Quotations
NOTES
3.2
Cost Sheet
A cost sheet is a statement prepared for a certain period such as a quarter
of a year, for half-year or a year giving information about costs incurred for different
elements of cost by an enterprise. In cost sheet costs are recorded in a step-bystep way in order to provide ‘total cost’, sales effected in that period and profit
earned or loss suffered in that period. Cost sheet has columns for recording ‘total
costs’ as well as ‘per unit costs’ and sometimes it also has additional columns for
recording total costs as well as per unit cost for the previous period. Such additional
columns help instant comparison of present period costs with costs of the pervious
period.
3.2.1 Purpose of Cost Sheet
A cost sheet not only shows the total cost but also the various components
of total cost. Total cost is the total cost incurred on various elements for
manufacturing and selling a product or total cost incurred for production and sale
of a certain quantity of a product or for completion of a job, order or process. A
cost sheet serves the following purposes :
i)
It discloses the cost per unit as well as the total cost of output.
ii)
It discloses the various elements of cost.
iii)
It is useful for preparation of tender price or submission of quotations for
job to be accepted or an order to be fulfilled.
iv)
It helps management to find out the causes of variations and take steps to
eliminate or control the factors which are responsible for increasing total
cost. It becomes possible by making comparative study of the current costs
with the past results and standard costs.
v)
It enables manufacturer to keep a close watch and control over the cost of
production.
vi)
It helps the management in formulating a definite and useful production
policy.
A cost sheet, including sale and profit is also known as Production Account.
Like expanded form of cost sheet, the Production Account consists of two parts.
The first part shows the cost of production in total and break-up costs and the
second part known as the ‘Statement of Profit’ shows sales and profit.
52 Advanced Cost Accounting - I
Cost Sheet & Quotations
3.2.2 Proforma of Simple Cost Sheet
In the books of a Company
Cost Sheet for the period ended ............
Name of the Product ..........
Units Produced .........
Particulars
Direct Materials
Units Sold .........
Total Cost
`
-
Unit Cost
`
-
Add :
Direct Labour
(+)
-
-
Add :
Direct Expenses
(+)
-
-

Prime Cost
(1)
-
-
Add :
Factory Overheads
(+)
-
-

Factory Cost
(2)
-
-
Add :
Office Overheads
(+)
-
-

Cost of Production
(3)
-
-
Add :
Selling and Distribution Overheads
(+)
-
-

Total Cost
(4)
-
-
Add :
Profit /
(5) (+)
-
-
(-)
-
-
-
-
-
-
Less Loss
Sales
NOTES
3.3.3 Proforma of Complex Cost Sheet
(Cost Sheet with Stock Adjustments)
In the books of a Company
Cost Sheet for the period ended ............
Name of the Product ..........
Units Produced ........
Particulars
Opening Stock of Raw Materials
Units Sold .........
Total Cost
`
-
Unit Cost
`
-
Add : Purchases of Raw Materials
(+)
-
-
Add : Expenses on Purchases of Raw Materials
(+)
-
-
-
-
Less : Closing Stock of Raw Materials
(-)
-
-
Less : Purchases Returns
(-)
-
-
Materials
(-)
-
-
Cost of Materials Consumed
(1)
-
-
Less : Sale of Scrap or Defectives of Raw

Advanced Cost Accounting - I
53
Cost Sheet & Quotations
NOTES
Add :
Direct Labour
(+)
-
-
Add :
Direct Expenses
(+)
-
-

Prime Cost
(2)
-
-
Add :
Factory Overheads
(+)
-
-
Add :
Opening Stock of Work-in-Progress
(+)
-
-
-
-
(-)
-
-
Less : Sale of scrap or Defectives of Work-in-progress (-)
-
-

Factory Cost
(3)
-
-
Add :
Office Overheads
(+)
-
-

Cost of Production
(4)
-
-
Add :
Opening Stock of Finished Goods
(+)
-
-
-
-
Less : Closing Stock of Work-in-Progress
Less : Closing Stock of Finished Goods
(-)
-
-

Cost of Goods Sold
(5)
-
-
Add :
Selling and Distribution Overheads
(+)
-
-

Total Cost
(6)
-
-

Add Profit /
(7) (+)
-
-
(-)
-
-
-
-
-
-
Less Loss
Sales
3.3
Summary List
Following is the summary list of various items of cost included in the major
group of cost and the synonymous terms used for the same in the simplified
preparation of a Cost Sheet Tender, Quotation and Estimates.
(DM)
Direct Materials :
Viz. Direct Materials Cost , Prime Cost Materials, Cost of Materials
Consumed, Process Materials, Cost of Materials, Purchased, Operating
Materials, Value of Raw Materials Used, Basic Materials, Productive
Materials Cost.
e.g.
Opening Stock of Raw Materials
54 Advanced Cost Accounting - I
Add :
Purchases of Materials
Add :
Primary Packing Charges
Add :
Expenses for Purchases of Raw Materials, e.g. Carriage Inward,
Freight Inward, Carriage and Cartage, Octroi, Duty and Customs, Excise
Duty, Dock Charges, Clearing charges, Forwarding Charges, Loading
and Unloading, Transaction Charges, etc.
Less :
Closing Stock of Raw Materials
Less :
Sale of Scrap or Defectives of Raw Materials
Less :
Returns Outward or Purchases Returns or Returns to Suppliers or
Defective Materials Returned to Creditors.
(DL)
Cost Sheet & Quotations
NOTES
Direct Labour :
Viz. Direct Labour Cost, Prime Cost Labour, Direct Wages, Process
Labour, Operating Labour, Basic Labour, Productive Labour
e.g. Productive Wages, Wages paid to direct workers, Outstanding
Wages, etc.
(DE)
Direct Expenses :
Viz. Chargeable expesses, Prime Cost Expenses, Productive Expenses,
Basic Expenses.
e.g. Royalty, Hire of Special Plant, Cost of Patterns, Layout, designs or
Drawings, Architects Fees, Engineers Fees, Surveyors Fees, Licence
Fees, Outstanding Direct Expenses, etc.
(PC)
Prime Cost :
viz. Direct Cost, Basic Cost, Operating Cost, First Cost, Productive
Cost, Flat Cost.
(F)
Factory Overheads :
Viz. Works on Cost, Manufacturing Expenses, Factory Burden.
e.g. Indirect Materials, Factory Lighting, Expenses, Materials, Motive
Power, On Cost Materials, Factory Rent, Rates, Taxes and Insurance,
Indirect Labour, Property Tax on Factory Premises, On cost Wages,
Electric Power, Indirect Expenses, Rent of Raw Materials Stores, On
Cost Expenses, Workshop Rent, Heating and Lighting, Coal and Coke,
Steam, Gas and Water, Power and Fuel, Wages to Indirect Labours i.e.
Shop Floor Helpers, Supervisors, Cleaners, Oilers, etc. Remuneration
to Watch and Ward Staff, Instructors, Factory Clerical Staff, Works
Manager, Production Engineer, etc Technical Directors Fees, Labour
Welfare and Amenities to Production Staff, Expenses on Workers
Canteen, Entertainment Room, Creches etc. Consumable Stores, Cotton,
Oil and Wastes, Haulage, Lubricants, Expenses of Testing Labs.,
Laboratory Expenses, Drawing Office Salaries, Repairs,
Maintenance,Renewals and Depreciation on Plant and Machinery, Tools
and Equipments, Fixtures and Patterns, Factory Building etc. Cost of
Factory Supervision, General Works Overheads, Sundry Factory
expenses, Other Manufacturing on Cost, Factory Cleaning Charges,
Storekeeping Expenses, Upkeep of Raw Materials Stores, Time-keeping
Expenses, Time Office Expenses, Normal Wastage and Spoilage,
Miscellaneous Production Expenses, Works Stationary, Idle Time
Advanced Cost Accounting - I
55
Cost Sheet & Quotations
Wages, Subscirption of Technical Journals and Magazines, Works Office
Expenses, Internal Transport, Materials Handling Charges, Unproductive
Wages, Wages and Salaries, Power and lighting, etc.
(FC)
NOTES
Factory Cost :
Viz. Works Cost, Manufacturing Cost, Production Cost.
(O)
Office Overheads :
Viz. Administration Expenses, Management on Cost, Establishment
Overheads.
e.g. Indirect Materials, Indirect Labour and Indirect Expenses of
Administrative Office, Office Rent, Rates, Taxes, Insurance, Lighting,
etc. Property Tax on Office Premises, Office Salaries, Salaries and
Wages, Directors Fees, General Managers, Salaries and Allowances,
Counting House Salaries, Directors Travelling Expenses, General Office
Overheads, Electric Lighting, Electricity and Lighting Charges, General
on Cost, Sundry Expenses, Other Administrative Charges, Miscellaneous
Office Expenses, Expenses of Management, Branch office Expenses,
Office Cleaning Charges, Repairs, Maintenance, Renewals and
Depreciation on Office Furniture, Office Building, Office Equipments,
Office Appliances, etc. Renovation of Administrative Office, Lighting
and Power, Salaries and Wages, Printing and Stationery, Postage and
Telegrams, Telephone Charges, Legal Fees, Audit Fees, Accountancy
Charges, Office Conveyance, General Fees, Air-conditioning to
Administrative Office, Office Supplies and Expenses, Bank Charges,
General Establishment Charges, Office Lighting, Subscription of Trade
Journals, Public Relation Expenses, etc.
(COP)
Cost of Production :
viz. Gross Cost, Office Cost.
(S)
56 Advanced Cost Accounting - I
Selling and Distribution Overheads :
viz. Selling Expenses, Distribution on Cost, Marketing Overheads.
e.g. Indirect Materials, Indirect Labour and Indirect Expenses of Sales
Office, Salaries and Allowances to Sales Manager, Marketing Executive,
Publicity Officer, Travelling Salesmen, Sales Office Staff, etc. ; Travelling
Salesmen Salaries and Commission, Selling Agents Salaries and
Commission, Carriage on Sales, Commission on Sales, Travelling
Expenses, Carriage and Cartage Outward, Freight Outward, Loading
and Unloading of Finished Goods, Recurring Expenses of Delivery Vans,
Show-room Expenses, Sales Branches and Sales Depot Expenses,
Packing Charges, Secondary Packing Charges, Advertisement, Publicity
Charges, Cost of Special Advertisement, After Sales Service Expenses,
Distribution of free Samples and Gifts, Diaries and Calenders, Gift
Articles and Folders, etc. Bad Debts, Debts Collection Charges, Cash
Discount Allowed, Catalogue Expenses, Tendering Expenses, Repairs,
Maintenance, Renewals and Depreciation on Delivery Vans, Sales
Cost Sheet & Quotations
Depots, Show-rooms, Sales Premises, etc. Delivery Van Running
Expenses, Upkeep of Delivery Vans, Warehouse Expenses, Sales
Promotion Expenses, Rent, Rates, Taxes, Insurance and Lighting of
Sales Office, Selling on Cost, Warehouse Labour Charges, Other
Expensess for handling of Finished Goods in Stores, Sales Printing and
Stationery, Market Research Expenses, Estimating Expenses,
Demonstration Expenses, Loading and Unloading of Finished Goods,
Price List, Catalogue, Banners, Hand Bills, Posters, etc. Export Duty,
Drivers, Conductors, Cleaners Salaries and Wages, Cost of Mailing
Literature, Sales Promotion Expenses, etc.
(TC)
(P)
NOTES
Total Cost :
Check Your Progress
Viz. Cost of Sales, Cost Price, Cost of Turnover, Sales Cost, Turnover
Cost, Net Cost.
i)
Profit :
ii) Mention the major cost
heads shown in Cost Sheet.
Viz. Net Margin
iii) Enumerate the items of
costs included in :
How Prime Cost is
Calculated while preparing
Cost Sheet ?
(L)
Loss :
a) Factory Overheads
(S)
Sales :
c) Selling and Distribution
Overheads.
b) Office Overheads, and
Viz. Selling Price, Value of Sales, Market Price, Value of Turnover,
Invoice Price, Inflated Price, Loaded Price.
3.4 Illustrations
ILLUSTRATION 1
The expenditure incurred in the manufacturing and selling of product X’
for the three months ended 31-3-2012 is as given below :
`
Direct Material Cost
Engineers Fees
Power and Fuel
Wages Payable
Office Salary
Trade Discount
Chargeable Expenses
Haulage
General Expenses on Cost
Catalogue Expenses
Process and Operating Wages
Time-keeping Expenses
Electricity Charges
Donations for Educational Fund
Tendering Expenses
30,000
1,000
7,000
2,000
5,000
500
4,000
3,000
1,000
1,500
13,000
2,000
2,000
1,000
1,000
Advanced Cost Accounting - I
57
Commission on Sales
Cost Sheet & Quotations
2,500
Tonnes manufactured and sold -1000
NOTES
Prepare a Cost-Sheet of Benzene Manufacturers, Malad, showing the cost
of each element, the total cost per ton and the profits if the sales are made at `
100 per ton.
SOLUTION
In the books of Benzene manufacturers, Malad
Cost-Sheet for Product X’ for the three months ended 31-3-2012
Units Produced -1,000 Tons
Units Sold
-1,000 Tons
Particulars
Total Cost
`
Add :
(1)
(2)
Add :
(1)
(2)
Direct Material Cost
Direct Labour :
Process and Operating Wages
Wages Payable
Direct Expenses :
Engineers Fees
Chargeable Expenses

Prime Cost
Factory Overheads :
Power and Fuel
Haulage
Time-keeping Expenses
(1)
Add :
(1)
(2)
(3)
(2)
Add :
(1)
(2)
(3)

Factory Cost
Office Overheads :
Office Salary
General on Cost
Electricity Charges
Add :
(1)
(2)
(3)

Cost of Production
(3)
Selling and Distribution Overheads :
Catalogue Expenses
Tendering Expenses
Commission on Sales
(+)
Add :

Total Cost
Profits for the Period
Sales :
(1,000 tons x `100)
(+)
(+)
(+)
(+)
(4)
(5)
13,000
2,000
1,000
4,000
(+)
UnitCost
`
30,000
30
15,000
15
5,000
5
50,000
12,000
50
12
62,000
8,000
62
8
70,000
5,000
70
5
7,000
3,000
2,000
(+)
5,000
1,000
2,000
(+)
1,500
1,000
2,500
(+)
(+)
75,000
25,000
75
25
1,00,000
100
Working Notes :
(i)
58 Advanced Cost Accounting - I
Trade Discount and Donations for Educational Fund are the items to be
excluded from cost.
Cost Sheet & Quotations
ILLUSTRATION 2
From the following particulars relating to M/s Rajchand Rayon manufacturers
Chinchwad, prepare a Simple Cost-Sheet showing.
(a) Prime Cost, (b) Works Cost, (c) Cost of Production, (d) Cost of Sales,
(e) Profit or Loss for the period, for six months ended 31-3-2012
NOTES
`
Cost of Materials Consumed
Oil and Waste
Operating Labour
Wages of Foreman
Direct Expenses
Store keepers Wages
Sales - Cash and Credit
Commission paid to the partner, Mr.Chandmal
Electric Power
Salary paid to the partner, Mr. Rajmal
Consumable Stores
Direct Wages Payable
Lighting :
(i)
Factory Plant
(ii) Office Establishment
Carriage Outward
Rent :
(i)
Administrative Office
(ii) Workshop
Warehouse Charges
Repairs and Renewals :
(i)
Factory Plant
(ii) Machinery
(iii) Office Premises
(iv) Warehouse
Interest on Bank Overdraft
Advertising
Depreciation :
(i)
Office Buildings
(ii) Machinery
Travelling Expenses
Office Manager’s Salary
Salesmen’s Commission and Salaries
Director’s Fees
Printing and Stationery
Telephone Charges
Postage
Bad Debts
40,000
100
9,000
1,000
2,000
500
1,00,000
350
200
650
1,000
1,000
500
200
150
1,000
2,000
200
500
1,000
200
100
340
400
500
200
200
2,250
500
500
200
50
100
450
Advanced Cost Accounting - I
59
Cost Sheet & Quotations
SOLUTION
In the books of M/s Rajchand manufacturers, Chinchwad
Cost-Sheet for the six months ended 31-3-2012
Particulars
Amount
`
NOTES
Add :
Cost of Materials Consumed
40,000
Direct Labour :
10,000
(1) Operating Labour
(2) Direct Wages Payable
Add :
`
9,000
(+)
1,000
Direct Expenses
(+)
2,000

(a)
52,000
Prime Cost
Add : Factory Overheads :
52,000
7,000
(1) Oil and Waste
100
(2) Wages of Foreman
1,000
(3) Store keepers wages
500
(4) Electric power
200
(5) Consumable Stores
1,000
(6) Lighting - Factory plant
500
(7) Rent- Workshop
2,000
(8) Repairs and Renewals- Factory Plant
(9) Repairs and Renewals- Machinery
(10) Depreciation-Machinery
Amount
500
1,000
(+)
200
(+)

Add :
Works Cost
(b)
Office Overheads :
59,000
5,000
(1) Lighting-Office Establishment
200
(2) Rent-Administrative Office
1,000
(3) Repairs and Renewals-Office Premises
200
(4) Depreciation-Office Building
500
(5) Office Manager’s Salary
2,250
(6) Director’s Fees
500
(7) Printing and Stationery
200
(8) Telephone Charges
(9) Postage
59,000
50
(+)
100
(+)

Add :
60 Advanced Cost Accounting - I
Cost of Production
(C)
Selling and Distribution Overheads :
(1) Carriage Outward
150
(2) Warehouse Charges
200
64,000
64,000
2,000
2,000
(3) Repairs and Renewals-Warehouse
100
(4) Advertising
400
(5) Travelling Expenses
200
(6) Salesmen’s Commission and Salaries
500
(7) Bad Debts
450
(+)
Cost Sheet & Quotations
NOTES
(+)

Add :
Cost of Sales
Profit for the Period
(e)
Sales-Cash and Credit
(d)
66,000
66,000
(+)
34,000
34,000
1,00,000
1,00,000
Working Notes :
(1)
Commission paid to the partner Mr. Chandmal, salary paid to the partner
Mr. Rajmal and Interest on Bank Overdraft are the items to be excluded
from cost.
ILLUSTRATION 3
The Cost of sale of product ‘Butanol’ is made up as follows ;
`
Royalties
Materials used in Production -Direct
1,000
12,000
Carriage on Sales
1,250
Materials used in Primary Packing
9,000
Carriage on Purchases
5,000
Materials used in Secondary Packing
1,500
Bad Debts
3,250
Materials used in Factory Workshop
750
Coal and Coke
1,750
Materials used in Administrative Office
1,250
Administration on Cost
750
Labour required in Manufacturing-Direct
9,500
General Overheads
1,000
Purchases of Raw Materials
44,000
Labour required for Works Supervision
2,500
Motive Power
1,000
Productive Wages Payable
Chargeable Expenses
500
4,000
Assuming that all products manufactured in Peterson Chemicals Ltd. Bhosari
are sold, what should be the Invoice Price to obtain a profit of 20% on Selling
Price?
Advanced Cost Accounting - I
61
Cost Sheet & Quotations
SOLUTION
In the books of Peterson Chemicals Ltd., Bhosari
Cost Sheet for the period ended......
Name of the Product : Butanol
NOTES
Particulars
Amount
`
Direct Materials :
(i)
70,000
Materials used in Production- Direct
(ii) Materials used in Primary Packing
(iv) Carriage on Purchases
12,000
9,000
(iii) Purchases of Raw Materials
44,000
(+)
5,000
Add : Direct Labour :
(i) Labour required inManufacturing-Direct
(+)
9,500
(ii)
Productive Wages Payable
(+)
Add : Direct Expenses :
(i)
(ii)
Royalties
Chargeable Expenses

Amount
`
500
(+)
(+)
Prime Cost
Materials used in Factory Workshop
(ii)
Coal and Coke
5,000
1,000
4,000
(1)
Add : Factory Overheads :
(i)
10,000
85,000
85,000
6,000
750
1,750
(iii) Labour required for Works Supervision
2,500
(iv) Motive Power
1,000
(+)
(+)

Factory Cost
(2)
91,000
91,000
Add : Office Overheads :
(i)
Materials used in Administrative Office
(ii)
Administration on Cost
(iii) General Overheads
1,250
750
(+)
1,000
(+)

Cost of Production
(3)
Add : Selling and Distribution Overheads
6,000
(i)
Carriage on Sales
1,250
(ii)
Materials used in Secondary Packing
1,500
(iii) Bad Debts
94,000
(+)
3,250
(+)
Total Cost
Add : Profit
(20% on Selling Price)
62 Advanced Cost Accounting - I

Invoice Price
(4)
1,00,000
1,00,000
(5)
25,000
25,000
1,25,000
1,25,000
(+)
Cost Sheet & Quotations
Working Notes :
(1)
Calculation of Profit i.e. 20% on Selling Price
Selling Price = Total Cost + Profit
100
If 80 TC

` 1,00,000 TC
80
20
= 20 P
NOTES
= ?
` 1,00,000 X 20
=
80
= ` 25,000
ILLUSTRATION 4
Prepare a Statement of Cost from the following information relating to
Cotton Textiles Ltd. Mumbai, for the year ended 31-3-2012
`
Cost of Direct Materials
2,00,000
Sales
4,00,000
Direct Wages
1,00,000
Office Indirect Materials
5,000
Cost of Special Patterns
40,000
Postage and Telegram
Bad Debts and Recovered
2,000
250
Factory Rent and Insurance
5,000
Outstanding Chargeable Expenses
2,000
Carriage Outward
2,500
Interest on Loan
2,150
Printing and Stationery
500
Factory Indirect Wages
3,000
Selling on Cost
4,000
Travelling Salesman’s Salary
4,000
Works Indirect Materials
1,000
Royalties
8,000
Genral Works Overheads
2,000
Bad Debts written-off
1,000
Also calculate the percentage of profits earned to sales.
Advanced Cost Accounting - I
63
Cost Sheet & Quotations
SOLUTION
In the books of Cotton Textiles Ltd., Mumbai
Statement of Cost for the year ended 31-3-2012
Particulars
Amount
NOTES
`
Cost of Direct Materials
Amount
`
2,00,000
Add : Direct Wages
(+)
Add : Direct Expenses :
1,00,000
50,000
(i)
Cost of Special Patterns
(ii)
Outstanding Chargeable Expenses
(iii)
Royalties
40,000
2,000
(+)
8,000
(+)

Prime Cost
(1)
Add : Factory Overheads :
3,50,000
3,50,000
11,000
(i)
Factory Rent and Insurance
5,000
(ii)
Factory Indirect Wages
3,000
(iii)
Works Indirect Material
1,000
(iv) Genral Works Overheads
(+)
2,000
(+)

Factory Cost
(2)
Add : Office Overheads :
3,61,000
3,61,000
7,500
(i)
Office Indirect Materials
5,000
(ii)
Postage and Telegram
2,000
(iii)
printing and Stationery
(+)
500
(+)

Cost of Production
(3)
Add : Selling and Distribution Overheads :
3,68,500
11,500
(i)
Carriage Outward
2,500
(ii)
Selling on Cost
4,000
(iii)
Travelling Salesman’s Salary
4,000
(iv) Bad Debts written-off
3,68,500
(+)
1,000
(+)

Total Cost
Add : Profits for the years
(4)
3,80,000
3,80,000
(5) (+)
20,000
20,000
4,00,000
4,00,000
Sales
Working Notes :
(1) Calculation of percentages of profits earned to sales
If ` 4,00,000 Sales
64 Advanced Cost Accounting - I

100
= ` 20,000 profit
= ?
Cost Sheet & Quotations
100 X `20,000
=
`4,00,000
= 5%
(2)
Bad Debts recovered and Interest on Loan are the items to be excluded
from cost.
NOTES
ILLUSTRATION 5
Majestic Furnitures Ltd. Manmad, manufactures Cots, Tables, Chairs and
Cupboards. The following are the cost details available for the year ended 31st
March, 2012.
Particulars
Prime Cost
Process Labour
Materials
Productive
Value of
Expenses
Turnover
`
`
`
Cots
50,000
30,000
16,000
1,50,000
Tables
45,000
20,000
19,000
1,20,000
Chairs
70,000
40,000
18,000
2,00,000
Cupboards
28,000
50,000
2,000
1,30,000
1,93,000
1,40,000
55,000
6,00,000
Total
`
Additional Information :
• Works on Cost.....80% of Direct Wages
• Bad Debts Provision
...
`
600
• Administrative Overheads
...
`
15,000
• Bad Debts Recovery
...
`
250
• Selling and Distribution Expenses
• Book Debts
...
...
`
`
12,000
41,000
Allocate Management on Cost on the basis of Works Cost and Selling and
Distribution Overheads on the basis of Actual Sales.
You are required to prepare a Simple Cost Statement showing the following
in case of each of the product in the columnar form.
(a) Direct Cost,
(b) Factory Cost,
(c) Cost of Production,
(d) Cost of Sales,
(e) Profit or Loss for the year.
Advanced Cost Accounting - I
65
Cost Sheet & Quotations
SOLUTION
In the books of Majestic Furniture Ltd., Manmad
Cost Statement for the year ended 31st March, 2012
Particulars
Cots
`
NOTES
Tables
`
Chairs Cupboards
`
`
Total
`
Prime Cost Materials
50,000
45,000
70,000
28,000
1,93,000
Add : Process Labour
30,000
20,000
40,000
50,000
1,40,000
Add : Productive Expenses (+)
16,000
19,000
18,000
2,000
55,000
(a)
96,000
84,000
1,28,000
80,000
3,88,000
i.e. Process Labour)
(+)
24,000
16,000
32,000
40,000
1,12,000
 Factory Cost
(b)
1,20,000
1,00,000
1,60,000
1,20,000
5,00,000
Overheads
(+)
3,600
3,000
4,800
3,600
15,000
 Cost of Production
(c)
1,23,600
1,03,000
1,64,800
1,23,600
5,15,000
(+)
3,000
2,400
4,000
2,600
12,000
(d)
1,26,600
1,05,400
1,68,800
1,26,200
5,27,000
(e) (+)
23,400
14,600
31,200
3,800
73,000
1,50,000 1,20,000 2,00,000
1,30,000
6,00,000

Direct Cost
Add : Works on Cost
(80% of Direct Wages
Add : Administrative
Add : Selling and
Distribution Expenses
 Cost of Sales
Add : Profits for the
year
Value of Turnover
Working Notes :
(1)
Allocation of Management on Cost (i.e. Administrative Overheads) on the
basis of Works Cost (i.e. Factory Cost).
Particulars
Factory Cost
`
 Ratio
Cots
Tables
Chairs
Cupboards
1,20,000
1,00,000
1,60,000
1,20,000
6
5
8
6
3,600
3,000
4,800
3,600
Allocation of Administrative
Overheads
`
(` 15,000 X 6 : 5 : 8 : 6)
(2)
Allocation of Selling and Distribution Overheads (i.e. Selling and Distribution
Expenses) on the basis of Actual Sales (i.e. Value of Turnover).
Particulars
Value of Turnover
`
 Ratio
Allocation of Selling and
Distribution Expenses
66 Advanced Cost Accounting - I
(` 12,000 X 15 : 12 : 20 : 13)
`
Cots
Tables
Chairs
Cupboards
1,50,000
1,20,000
2,00,000
1,30,000
15
12
20
13
3,000
2,400
4,000
2,600
(3)
Bad Debts Provision, Bad Debts Recovery and Book Debts are the items
to be excluded from cost.
Cost Sheet & Quotations
ILLUSTRATION 6
Sudarshan Chemicals ltd., Satana, produces a standard product, the cost
data relating to the same for April, 2012 is given below. You are required to prepare
a Cost Sheet showing separately
NOTES
(a) Cost of Materials Consumed, (b) Prime Cost, (c) Works Cost,
(d) Cost of Production (e) Total Cost, (f) Net Profit and (g) Market Price.
`
Purchases of Materials-Cash
4,000
Establishment Overheads : 20% of Factory Cost
Wages Payable
Purchases of Materials-Credit
800
12,000
Works Overheads : 80% of Direct Wages
Cost of Special Designs
850
Clearing charges on Purchases
1,200
Productive Wages
3,200
Selling on Cost : ` 4 per unit sold
Chargeable Expenses Payable
150
Defective Materials Retuned
400
Distribution Overheads : ` 1 per unit dispatched
Trade Discount
785
During the month of April, 2012 units sold and dispatched were 1,300 units
only. Also find out the market price per unit on the basis that profit mark-up is
uniformly made to yield a profit of 4% on Cost of Sales.
Advanced Cost Accounting - I
67
Cost Sheet & Quotations
SOLUTION
In the books of Sudershan Chemicals Ltd. Satana
Cost Sheet for the month ended 30th April, 2012
Units Produced
Units Sold
NOTES
Particulars
Cash
(ii)
Credit
1,300
1,300
Amount
Purchases of Materials
(i)
-
Amount
`
`
(a)
16,800
16,800
(+)
4,000
16,000
4,000
(+) 12,000
Add : Clearing Charges on Purchases
(+)
1,200
17,200
Less : Defective Materials Returned
(-)
 Cost of Materials Consumed
Add : Direct Labour :
(i)
Wages Payable
(ii)
Productive Wages
400
800
(+)
3,200
Add : Direct Expenses :
(i)
Cost of Special Designs
(ii)
Chargeable Expenses Payable
1,000
850
(+)
150
(+)

Prime Cost
(b)
21,800
(80% of Direct Wages i.e. ` 4,000)
(+)
3,200

(c)
25,000
(+)
5,000
21,800
Add : Works Overheads :
Works Cost
25,000
Add : Establishment Overheads :
(20% of Factory Cost i.e. ` 25,000)

Cost of Production
(d((99)(((d(9 30,000
30,000
Add : Selling and Distribution Overheads :
(i)
Selling on Cost
(+)
5,200
(+)
1,300
(e)
36,500
36,500
(+)
1,460
1,460
(g)
37,960
37,960
(` 4 x Units Sold -1,300 i.e. ` 5,200)
(ii)
Distribution Overheads ( ` 1 x Units Dispatched- 1,300 i.e.
` 1,300)
 Total Cost
Add : Net Profit
(f)
(4% on Cost of Sales i.e. ` 36,500)

68 Advanced Cost Accounting - I
Market Price
Cost Sheet & Quotations
Working Notes :
(1)
(2)
Calculation of Net Profit i.e. 4% on Cost of Sales.
=
4% of ` 36,500 i.e. Cost of Sales
=
` 1,460
Calculation of Market Price per unit.
NOTES
Market Price
=
Number of Units Sold
=
` 37,960
Units 1,300
=
` 29.20 per unit.
ILLUSTRATION 7
The following data have been extracted from the books of M/s Sunshine
Industries Ltd., Sholapur, for the calender year 2011-2012
`
Opening Stock of Process Materials
25,000
Wages - Direct
70,000
Rent and Taxes
(Factory -10/11, Office - 1/11)
5,500
Freight on purchases of Raw Materials
5,000
Indirect Materials
Sales Promotion
Purchases of Raw Materials
Interest on Debentures
500
2,000
85,000
5,200
Depreciation :
(i) Plant and Machinery
1,500
(ii) Office Equipments
1,000
Closing Stock of Process Materials
35,000
Wages - Indirect
10,000
Cost of Designs and Drawings
12,000
Salaries :
(i) Office Staff
2,500
(ii) Travelling Salesmen
2,000
Productive Expenses
3,000
Defective materials returned -Process Material
5,000
Other Works on Cost
5,700
Office Overheads
4,900
Manager’s Remuneration :
(i) Works
2,300
Advanced Cost Accounting - I
69
Cost Sheet & Quotations
(ii) Office
6,100
Productive Wages due but not paid
5,000
Irrecoverable Debts
1,000
Sales
NOTES
2,50,000
Debt Collection Charges
1,100
Advance payment of Income Tax
2,000
Selling on Cost
3,900
Prepare a Statement of Cost showing profits earned during the year 2011-2012.
SOLUTION
In the books of M/s Sunshine Industries Ltd. Sholapur
Statement of Cost for the calender year 2011-2012
Particulars
Opening Stock of Process Materials
Amount
Amount
`
`
(1)
75,000
75,000
(+)
75,000
25,000
Add : Purchases of Raw Materials
85,000
Add : Freight on Purchases of Raw Materials (+)
5,000
1,15,000
Less: Closing Stock of Process Materials
(-)
35,000
(-)
5,000
Less: Defective Materials returned Process Materials
 Cost of Materials Consumed
Add : Direct Labour :
(1)
Wages-Direct
(2)
Productive Wages due but not paid
70,000
(+)
Add : Direct Expenses :
(1)
Cost of Designs and Drawings
(2)
Productive Expenses
(+)
(+)
Add : Factory Overheads :
Rent and Taxes - Factory
(10/11 x ` 5,500)
(2)
Indirect Materials
(3)
Depreciation on Plant and Machinery
(4)
Wages -Indirect
(5)
Other Works on Cost
(6)
Manager’s Remuneration-Works
 Works Cost
70 Advanced Cost Accounting - I
15,000
12,000
 Prime Cost
(1)
5,000
3,000
(2)
1,65,000
(+)
25,000
1,65,000
5,000
500
1,500
10,000
5,700
(+)
2,300
(3)
1,90,000
1,90,000
Add : Office Overheads :
(1)
(+)
Rent and Taxes - Office
(1/11 x ` 5,500)
Cost Sheet & Quotations
15,000
500
(2)
Depreciation on Office Equipments
1,000
(3)
Salaries-Office staff
2,500
(4)
Office Overheads
4,900
(5)
Manager’s Remuneration-Office
(+)
 Cost of Production
NOTES
6,100
(4)
2,05,000
2,05,000
Add : Selling and Distribution
Overheads :
10,000
(1)
Sales Promotion
2,000
(2)
Salaries-Travelling Salesmen
2,000
(3)
Irrecoverable Debts
1,000
(4)
Debts Collection Charges
1,100
(5)
Selling on Cost

Total Cost
Add : Profits Earned
(+)
3,900
(5)
2,15,000
2,15,000
(6)
35,000
35,000
2,50,000
2,50,000
(+)
Sales
Working Notes :
(1)
Interest on Debentures, Advance payment of Income-Tax etc. are the items
to be excluded from cost.
ILLUSTRATION 8
The accounts of Dorabjee Manufacturers, Deolali for the year ended 31-32012 show the following.
`
Stock of Raw Materials as on 1-4-2011
Bad Debts written-off
Raw Materials Purchased
Motive Power
Traveller’s Commission
67,200
9,100
2,59,000
320
10,780
Depreciation on Office Equipments
420
Carriage Inwards
720
Interest on Bank Loan
380
Factory Taxes
Productive Wages
Directors Travelling Expenses
Coal and Coke
General Overheads
11,900
1,76,400
8,400
560
4,760
Advanced Cost Accounting - I
71
Gas and Water - Factory
1,680
Packing Charges
940
Sales of Finished Goods
6,00,000
Manager’s Salary
15,000
(Factory - 2/3, Office - 1/3)
Delivery Van Expenses
4,060
Depreciation on Factory Building
18,200
Publicity Charges
2,000
Repairs to Plant
6,340
Carriage Outward
7,120
Hire Charges of Special Machinery
9,010
Office Rent
2,800
Surveyor’s Fees
590
Legal Charges
620
Stock of Raw Materials as on 31-3-2012
87,920
Prepare a Cost-Statement giving the following details for the year ended
31-3-2012
(1)
Cost of Materials Consumed
(2)
Prime Cost
(3)
Works Cost
(4)
Cost of Production
(5)
Total Cost
(6)
Net Profit for the year.
SOLUTION
In the books of Dorabjee Manufacturers, Deolali
Cost-Statement for the year ended 31-3-2012
Particulars
Stock of Raw Materials as on 1-4-2011
Add : Raw materials purchased
Add : Carriage inward
72 Advanced Cost Accounting - I
(+)
Less: Stock of Raw Materials as on 31-3-2012 (-)
 Cost of Materials Consumed
Add : Productive Wages
Add : Direct Expenses :
(1)
Hire Charges of Special Machinery
(2)
Surveyor’s Fees
(+)
 Prime Cost
Add : Factory Overheads :
67,200
2,59,000
720
3,26,920
87,920
(1)
(+)
9,010
590
(2)
Amount
`
Amount
`
2,39,000
1,76,400
9,600
2,39,000
4,25,000
49,000
4,25,000
(1)
(2)
(3)
(4)
(5)
Motive Power
Factory Taxes
Coal and Coke
Gas and Water -Factory
Manager’s Salary- Factory
(2/3 X ` 15,000)
(6)
Depreciation on Factory Buildings
(7)
Repairs to Plant
 Works Cost
Add : Office Overheads :
(1)
Depreciation on Office Equipments
(2)
Director’s Travelling Expenses
(3)
Genral Overheads
(4)
Manager’s Salary- Office
(1/3 X ` 15,000)
(5)
Office Rent
(6) Legal Charges
 Cost of Production
Add : Selling and Distribution Overheads
(1)
Bad Debts written-off
(2)
Traveller’s Commission
(3)
Packing Charges
(4)
Delivery Van Expenses
(5)
Publicity Charges
(6)
Carriage Outward
 Total Cost
Add : Net Profit for the year
Sales of Finished Goods
320
11,900
560
1,680
(+)
10,000
18,200
6,340
(3)
Cost Sheet & Quotations
NOTES
4,74,000
22,000
4,74,000
4,96,000
34,000
4,96,000
5,30,000
70,000
5,30,000
70,000
6,00,000
6,00,000
420
8,400
4,760
(+)
(+)
5,000
2,800
620
(4)
9,100
10,780
940
4,060
2,000
7,120
(5)
(6) (+)
Working Notes :
(1)
Interest on Bank Loan is an item to be excluded from Cost.
ILLUSTRATION 9
Following details have been obtained from the cost records of Colgate Ltd.,
Kolkata for the year ended 31-3-2012
Stock of Operating Materials as on 1-4-2011
Wages paid to Direct Workers
Interim Dividend paid
Purchases of Raw Materials
Heating and Lighting
Counting House Salaries
Carriage and Cartage on Purchases of Raw
Materials
Commission on Sales
Wages Payable
Technical Director’s Fees
Stock of Operating Material as on 31-3-2012
`
30,000
55,000
12,000
87,000
6,000
20,000
3,000
5,000
5,000
10,000
40,000
Advanced Cost Accounting - I
73
Show-Room Expenses
Establishment on Cost
Share Transfer Fees
Expenses of Testing Labs.
Branch Office Expenses
After-Sales Service Expenses
Cost Sheet & Quotations
NOTES
7,000
12,000
2,000
4,000
8,000
8,000
Selling Price
2,50,000
Prepare a Cost-Sheet showing :
(1)
Cost of Raw Materials Consumed
(2)
Prime Cost
(3)
Works Cost
(4)
Cost of Production
(5)
Total Cost
(6)
Profit or Loss
Also calculate the percentage of
(1)
Factory Overheads to Direct Wages
(2)
Office on Cost to Works Cost
(3)
Selling and Distribution Expenses to Cost of Production.
SOLUTION
In the books of Colgate Ltd. Kolkata
Cost-Sheet for the year ended 31-3-2012
Particulars
Stock of Operating Material as on 1- 4 -2011
Add : Purchases of Raw Materials
Add : Carriage and Cartage on Purchases
of Raw Materials
Amount
`
80,000
60,000
80,000
1,40,000
20,000
1,40,000
1,60,000
1,60,000
30,000
87,000
3,000
1,20,000
Less :Stock of Operating Materialsas on 31-3-2012(-) 40,000
 Cost of Materials Consumed
(1)
Add : Direct Labour :
(1) Wages paid to Direct Workers
55,000
(2) Wages Payable
(+)
5,000
(+)
 Prime Cost
(2)
Add : Factory Overheads :
(1) Heating and Lighting
6,000
(2) Technical Director’s Fees
10,000
(3) Expenses of Testing Labs
(+)
4,000
(+)
 Works Cost
(3)
74 Advanced Cost Accounting - I
Amount
`
(+)
Add :
(1)
(2)
(3)
Office Overheads :
Counting House Salaries
Establishment on Cost
Branch Office Expenses
40,000
(+)
 Cost of Production
Add : Selling and Distribution Overheads :
(1) Commission on Sales
(2) Show Room Expenses
(3) After Sales-Service Expenses
(+)
 Total Cost
Add : Profit
Selling Price
20,000
12,000
8,000
(+)
(4)
5,000
7,000
8,000
(+)
(5)
(6)(+)
Cost Sheet & Quotations
2,00,000
20,000
2,00,000
2,20,000
30,000
2,50,000
2,20,000
30,000
2,50,000
NOTES
Working Notes :
(1)

Calculation of Percentage of Factory Overheads to Direct Wages.
If ` 60,000 D.W.
=
` 20,000 F.O.
100
=
?
100 X ` 20,000
=
=
(2)

` 60,000
33.33%
Calculation of percentage of Office on Cost to Works Cost.
If ` 1,60,000 W.C.
=
` 40,000 O.O.C.
100
=
?
100 X `. 40,000
=
=
(3)

` 1,60,000
25%
Calculation of percentage of Selling and Distribution Expenses to
Cost of Production.
If ` 2,00,000 C.O.P.
=
` 20,000 S. & D.E.
100
=
?
100 X ` 20,000
=
=
(4)
` 2,00,000
10%
Interim Dividend and Share Transfer Fees etc. are the items to be excluded
from Cost.
Advanced Cost Accounting - I
75
Cost Sheet & Quotations
ILLUSTRATION 10
The Following is the Trading and Profit and Loss Account of Sarabhai
Chemicals Ltd. Surat, for the year ended 31-3-2012
Dr.
Trading and Profit and Loss Account
Cr.
st
for the year ended 31 March, 2012
NOTES
Particulars
To Stock of Raw Materials 1-4-2011
To Purchases of
2,52,000
Raw Materials
Less: Returns Outward (-)
2,000
To Productive Wages
To Carriage on Purchases
To Royalty
To Gas and Water
To Custom and Duty
To Chargeable Expenses
due but not paid
To Wages Outstanding
To Heating and Lighting
To Gross Profit C/D
To Carriage on Sales
To Underwritting Commission
To Commission on Sales
To Sales Depot Expenses
To Salaries
To Bad Debts Provision
To PropertyTax on Office Premises
To Depreciation on Office
Equipments
To Net Profit C/D *
`
Particulars
`
18,000 By Sales
5,10,000
2,50,000 Less :Returns Inward(-) 10,000
5,00,000
1,02,000 By Stock of Raw Materials
25,000 on 31-3-2012
7,200 By Sale of Scrap Materials
19,000
8,000
2,800
8,000
11,000
60,000
5,11,000
5,000 By Gross Profit B/D
4,500 By Interest on Investment
7,600
2,400
16,000
1,500
2,000
2,000
20,000
61,000
10,000
1,000
5,11,000
60,000
1,000
61,000
You are required to prepare a Cost Statement for the year ended 31-3-2012
showing
(1) Cost of Materials Consumed, (2) Flat Cost, (3) Manufacturing Cost,
(4) Gross Cost, (5) Cost of Turnover, (6) Profits for the year.
Also calculate the percentage of profit on sales.
76 Advanced Cost Accounting - I
Cost Sheet & Quotations
SOLUTION
In the books of Sarabhai Chemicals Ltd., Surat
Cost Statement for the year ended 31st March, 2012
Particulars
Stock of Raw Materials on 1-4-2011
Add :Purchases of Raw Materials
Amount
Amount
`
`
NOTES
18,000
(+)
2,52,000
Add :Expenses on Purchases of Raw Materials :
(i)
Carriage on Purchases
(+)
25,000
(ii)
Custom and Duty
(+)
8,000
3,03,000
Less: Stock of Raw Materials on 31-3-2012
(-)
10,000
Less: Returns Outward
(-)
2,000
Less: Sale of Scrap Materials
(-)
1,000
 Cost of Materials Consumed
(1)
Add :Direct Labour :
Productive Wages
(+)
1,02,000
(ii)
Wages Outstanding
(+)
8,000
Add :Direct Expenses :
Royalty
(ii)
Chargeable Expenses due but not paid
10,000
7,200
(+)
 Flat Cost
2,800
(2)
Add : Factory Overheads :
(i)
Gas and Water
(ii)
Heating and Lighting
(ii)
Property Tax on Office Premises
(iii)
Depreciation on Office Furniture

(+)
11,000
(3)
2,000
(+)
2,000
(4)
4,60,000
4,60,000
15,000
(i)
Carriage on Sales
5,000
(ii)
Commission on Sales
7,600
(iii)
Sales Depot Expenses
Sales
4,40,000
16,000
Add : Selling and Distribution Overheads :
Add : Profits for the year
4,40,000
20,000
Gross Cost
 Cost of Turnover
4,10,000
19,000
Add : Office Overheads :
Salaries
4,10,000
30,000
 Manufacturing Cost
(i)
2,90,000
1,10,000
(i)
(i)
2,90,000
(+)
2,400
(5)
4,75,000
4,75,000
(6) (+)
25,000
25,000
5,00,000
5,00,000
Advanced Cost Accounting - I
77
Cost Sheet & Quotations
Working Notes :
(1)
Calculation of percentages of Profit on Sales.
If ` 5,00,000 Sales
NOTES

100
= ` 25,000 Profit
= ?
100 X ` 25,000
` 5,00,000
(2)
= 5%
Underwriting Commission, Bad Debts Provision, and Interest on Investment
are the items to be excluded from cost.
ILLUSTRATION 11
The cost accounts of Eagle Ltd. Allahbad, for the year ended 31-3-2012
showed the following information.
Types of Stock
As on 1-4-2011
As on 31-3-2012
`
`
Raw Materials
65,000
50,000
Work-in-Progress
10,000
7,500
Finished Stock
15,000
5,000
`
Underwriting Commission
Purchases of Raw Materials
Selling Overheads
Drawing Office Salaries
Productive Labour
10,000
2,60,000
8,000
12,000
1,65,000
Audit Fees
7,000
Establishment on Cost
2,000
Steam, Gas and Water
1,500
Sales
5,50,000
Rent
15,000
(Factory -66 2/3 %, Office - 33 1/3%)
Architect’s Fees
10,000
Wages Outstanding
5,000
Octroi and Duty
5,000
Distribution on Cost
2,000
Prepare a Cost-Sheet showing
(a) Cost of Materials Consumed, (b) Basic Cost, (c) Works Cost,
(d) Cost of Production, (e) Cost of Turnover, (f) Profit.
78 Advanced Cost Accounting - I
Cost Sheet & Quotations
SOLUTION
In the books of Eagle Ltd., Allahabad
Cost-Sheet for the year ended 31-3-2012
Particulars
Add :
Add :
Less:
Add :
(1)
(2)
Add :
(1)
Add :
(1)
(2)
(3)
Add :
Less:
Add :
(1)
(2)
(3)
Add:
(1)
(2)
Add :
Less:
Add :
Stock as on 1-4-2011 Raw Materials
Purchases of Raw Materials
Octroi and Duty
(+)
(+)
Stock as on 31-3-2012
Raw Materials
(-)
 Cost of Materials Consumed
Direct Labour
Productive Labour
Wages Outstanding
(+)
Direct Expenses :
Architect’s Fees
 Basic Cost
Factory Overheads :
Drawing Office Salaries
Steam, Gas and Water
Rent-Factory (66 2/3 % i.e. 2/3 of ` 15,000)(+)
Stock as on 1-4-2011 Works-in-Progress(+)
Stock as on 31-3-2012 Works-in-Progress(-)
 Works Cost
Office Overheads :
Audit Fees
Establishment on Cost
Rent-Office (33 1/3 % i.e. 1/3 of ` 15,000) (+)
 Cost of Production
Selling and Distribution Overheads :
Selling Overheads
Distribution on Cost
(+)
Stock as on 1-4-2011 - Finished Stock
Stock as on 31-3-2012 - Finished Stock
 Cost of Turnover
Profits
Sales
Amount
`
Amount
`
2,80,000
1,70,000
2,80,000
65,000
2,60,000
5,000
3,30,000
50,000
(a)
NOTES
1,65,000
5,000
(+)
(b)
10,000
4,60,000
23,500
4,60,000
12,000
1,500
10,000
(c)
7,000
2,000
5,000
(d)
8,000
2,000
(+)
(-)
(e)
(f) (+)
10,000
4,93,500
7,500
4,86,000
14,000
5,00,000
10,000
15,000
5,25,000
5,000
5,20,000
30,000
4,86,000
5,00,000
5,20,000
30,000
5,50,000 5,50,000
Working Notes :
(1)
Underwriting Commission is an item to be excluded from cost.
Advanced Cost Accounting - I
79
Cost Sheet & Quotations
ILLUSTRATION 12
Following information of Finolex Ltd. Faizpur, relates to a commodity for
the year ending 31-3-2012
`
NOTES
Opening Stock as on 1-4-2011
(i)
Raw Materials
5,000
(ii)
Work-in-Progress
1,200
(iii) Finished Goods (1,000 Tons)
4,000
Closing Stock as on 31-3- 2012
(i)
Raw Materials
3,000
(ii)
Work-in-Progress
3,200
(iii) Finished Goods (2,000 Tons)
9,000
Purchases of Raw Materials
35,000
Prime Cost Labour
25,000
Excise Duty on purchases of Raw Materials
2,000
Administration Overheads
8,000
Cost of Factory Supervision
12,000
Income Tax
5,000
Carriage and Cartage
1,000
Management Expenses
1,000
Accountancy Charges
1,000
Preliminary Expenses
3,200
Sales of Finished Goods
1,17,500
Advertising, Bad Debts and Selling on Cost amounted to 50 paise per ton
sold. 16,000 tons of commodities were produced during the year 2011-2012.
Prepare a Cost-Sheet showing
(1) Cost of Materials Consumed, (2) Prime Cost, (3) Works Cost, (4) Cost
of Production, (5) Cost of Goods Sold, (6) Cost of Sales, (7) Profits for the period,
(8) Profits per ton of commodity sold.
80 Advanced Cost Accounting - I
Cost Sheet & Quotations
SOLUTION
In the books of Finolex Ltd. Faizpur
Cost-Sheet for the year ended 31-3-2012
Units Produced -16,000 Tons
Units Sold
- 15,000 Tons
NOTES
Particulars
Amount
`
Amount
`
Opening Stock as on 1-4-2011
Raw Materials
Add :
Purchases of Raw Materials :
Add:
Expenses for Purchases of Raw Materials :
(1)
Excise Duty on Purchases of
5,000
35,000
Raw Materials
(2)
Carriage and Cartage
2,000
(+)
1,000
43,000
Less:
Add :
Closing Stock as on 31-3-2012 Raw Materials (-)
3,000
 Cost of Materials Consumed
(1)
40,000
Prime Cost Labour
(+)
25,000
 Prime Cost
(2)
65,000
Add :
Cost of Factory Supervision
Add:
Opening Stock as on 1-4-2011 Work-in-Progress(+)
40,000
65,000
12,000
1,200
78,200
Less:
Closing Stock as on 31-3-2012 Work-in-Progress (-)
 Works Cost
3,200
3,200
(3)
75,000
Add :Office Overheads :
10,000
(1)
Administration Overheads
8,000
(2)
Management Expenses
1,000
(3)
Accountancy Charges
(+)
 Cost of Production
Add:
75,000
1,000
(4)
Opening Stock as on 1-4-2011 Finished Goods(+)
85,000
85,000
4,000
89,000
Less:
Closing Stock as on 31-3-2012 Finished Goods(-)
 Cost of Goods Sold
Add :
(5)
80,000
80,000
(+)
7,500
(6)
87,500
87,500
(7) (+)
30,000
30,000
1,17,500
1,17,500
Advertising, Bad Debts and Sellingon Cost
(50 Ps. x 15,000 Tons )
 Cost of Sales
Add :
9,000
Profits for the period
Sales of Finished Goods
Advanced Cost Accounting - I
81
Cost Sheet & Quotations
Working Notes :
(1)
Calculation of Units Sold during the year 2011-2012
Tons
Opening Stock of Finished Goods as on 1-4-2011
NOTES
1,000
Add : Production during the year
(+) 16,000
17,000
Less : Closing Stock of Finished Goods as on 31-3-2012

(2)
(-)
Units Sold
2,000
15,000
Calculation of Profits per ton of commodity sold If 15,000 Tons = Profit ` 30,000

1 Ton = ?
1 ton x ` 30,000
=
15,000 Tons
= ` 2 per ton
(3)
Income Tax, Preliminary Expenses etc. are the items to be excluded from
Cost.
ILLUSTRATION 13
The following information has been obtained from the records of Quality
Manufacturing co. Ltd., Bharatpur, for the year ended 31-3-2012
Summary of Stock Position
Types of Stock
As on 1-4-2011
`
Finished Goods-Stock
Raw Materials
Stock of Work-in-Progress
50,000
20,000
5,000
Additional Information
82 Advanced Cost Accounting - I
Purchases of Raw Materials
Wages Outstanding
Indirect Materials
Discount on issue of Debentures
Freight Inward
Property Tax on Factory Building
Director’s Travelling Expenses
Carriage on Sales
Defective Raw Materials Returned
Direct Chargeable Expenses
Workshop Rent
Expenses for participating in Industrial Exhibition
Value of Sales
Office Cleaning Charges
As on 31-3-2012
`
75,000
25,000
7,000
`
1,30,000
3,000
12,000
8,000
15,000
8,000
8,000
5,000
5,000
2,000
7,000
3,000
3,00,000
2,000
Sales Promotion Charges
Miscellaneous Overheads
Upkeep of Delivery Vans
Motive Power
Productive Wages
Postage and Telegrams
6,000
7,000
1,000
5,000
60,000
3,000
Cost Sheet & Quotations
NOTES
Prepare a Statement of Cost showing :
(1) Value of Raw Materials Consumed, (2) Direct Cost, (3) Manufacturing Cost,
(4) Cost of Production, (5) Cost of Goods Sold, (6) Cost of Turnover, (7) Profit.
Also calculate the percentage of Profit on Cost Price and on Selling Price
separately.
SOLUTION
In the books of Quality Manufacturers Ltd., Bharatpur
Statement of Cost for the year ended 31-3-2012
Particulars
Add :
Add :
Raw materials as on 1-4-2011
Purchases of Raw Materials
Freight Inward
Less : Raw Materials as on 31-3-2012
Less : Defective Raw Materials returned
Add :
(1)
(2)
Add :
 ValueofRawMaterialsConsumed
Direct Labour :
Productive Wages
Wages Outstanding
Direct Chargeable Expenses
Add :
(1)
(2)
(3)
(4)
Add :
 Direct Cost
Factory Overheads
Indirect Material
Property Tax on Factory Building
Workshop Rent
Motive Power
Work-in-Progress as on 1-4-2011
(+)
(-)
(-)
Add :
(1)
(2)
(3)
(4)
 Cost of Production
`
`
1,35,000
63,000
1,35,000
2,000
2,00,000
32,000
2,00,000
12,000
8,000
7,000
5,000
(+)
5,000
2,37,000
(-)
7,000
Less : Work-in-Progress as on 31-3-2012
 Manufacturing Cost
Office Overheads :
Director’s Travelling Expenses
Postage and Telegrams
Miscellaneous Overheads
Office Cleansing Charges
60,000
3,000
(+)
(2)
(+)
Amount
20,000
1,30,000
15,000
1,65,000
25,000
5,000
(1)
(+)
Amount
(3)
(+)
2,30,000
20,000
2,30,000
2,50,000
2,50,000
8,000
3,000
7,000
2,000
(4)
Advanced Cost Accounting - I
83
Cost Sheet & Quotations
NOTES
Add : Finished Goods- Stock as on 1-4-2011 (+)
Less : Finished Goods- Stock as on 31-3-2012
 Cost of Goods Sold
Selling and Distribution Overheads :
Carriage on Sales
Expenses for participating in Industrial Exhibition
Upkeep of Delivery Vans
Sales Promotion Charges
(+)
Add :
(1)
(2)
(3)
(4)
 Cost of Turnover
Profits
Value of Sales
Add :
(-)
(5)
50,000
75,000
2,25,000
15,000
2,25,000
2,40,000
60,000
3,00,000
2,40,000
60,000
3,00,000
5,000
3,000
1,000
6,000
(6)
(7) (+)
Working Notes :
(1)
Calculation of percentage of Profit on Cost Price.
If `. 2,40,000 CP = `60,000 P

100 = ?
100 X `60,000
=
`2,40,000
= 25%
(2)
Calculation of percentage of Profit on Sales.
If `. 3,00,000 SP = ` 60,000 P

100 = ?
100 X `60,000
=
`3,00,000
= 20%
(3)
Discount on issue of Debentures is an item to be excluded from cost.
ILLUSTRATION 14
Jindal Cables and Conductors Ltd. Jalgaon, provides the following cost data
relating to the manufacture of a standard product during the month of May, 2012
`
Carriage and Cartage
Units Sold -900 units @ ` 40 per unit
Raw Materials Stock as on 31st May, 2012
200
2,850
Monthly Production- 1,000 units
Sale of Raw Materials scrap
150
Selling and Distribution on Cost : ` 3.60 per unit
Operating Wages Payable
Operation of Machine Hours - 1,600
Stock of Raw Materials as on 1st May, 2012
84 Advanced Cost Accounting - I
Administration Overheads: 10% of Works Cost
600
1,200
Hire of Special Machinery
1,500
Machine Hour Rate
Cost Sheet & Quotations
2.50
Raw Materials Purchases
14,600
Productive Wages
4,400
Cost of Layout
500
You are required to prepare a Cost-Sheet showing Total Cost Unit and
Cost for the month ended 31st May, 2012. Also calculate Profit earned for the
month and Profit per unit sold.
NOTES
SOLUTION
In the books of Jindal Cables and Conductors Ltd. Jalgaon
Cost-Sheet for the month ended 31st May, 2012
Units Produced - 1,000 units
Units Sold - 900 units
Particulars
Total Cost
Stock of Raw materials as on 1-5-2012
`
`
13,000
13.00
5,000
5.00
2,000
2.00
(2)
20,000
20.00
(+)
4,000
4.00
(3)
24,000
24.00
(+)
2,400
2.40
(4)
26,400
26.40
(+)
-
(-)
2,640
(5)
23,760
(+)
3,240
3.60
(6)
27,000
30.00
(7) (+)
9,000
10.00
36,000
40.00
1,200
Add : Raw Materials Purchases
Add : Carriage and Cartage
Unit Cost
14,600
(+)
200
16,000
Less : Raw Materials-Stock as on 31-5-2012
(-)
2,850
Less : Sale of Raw Materials Scrap
(-)
150
 Cost of Materials Consumed
(1)
Add : Direct Labour :
(i)
Operating Wages Payable
(ii)
Productive Wages
600
(+)
4,400
Add : Direct Expenses :
(i)
Hire of Special Machinery
(ii)
Cost of Layout
1,500
(+)
500
(+)
 Prime Cost
Add : Factory Overheads :
 Works Cost
Add : Administration Overheads :
 Cost of Production
Add:
Stock of Finished Goods on 1-5-2012
Less : Stock of Finished Goods on 31-5-2012
 Cost of Goods sold
-
Add : Selling and Distribution on Cost
(900 Units x ` 3.60)
 Total Cost
Add : Profits for the month
Sales (900 Units x ` 40)
Advanced Cost Accounting - I
85
Cost Sheet & Quotations
Working Notes :
(1)
Calculation of Factory Overheads :
Operation of
Machine Hour
Machine Hours
NOTES
` 2.50
1,600 Hrs.
(2)
(3)
Rate
X
Factory
=
Overheads
` 4,000
Calculation of Administration Overheads i.e. 10% of Works Cost :
=
10% of ` 24,000
=
` 2,400
Valuation of Closing Stock of Finished Goods on the basis of Cost of
Production :
Units
Monthly Production
1,000
Less : Units Sold
(-)
 Closing Stock
If 1,000 Units

100 Units
=
900
100
= ` 26,400 Cost of Production
= ?
100 Units x ` 26,400
1,000 Units
=
` 2,640
ILLUSTRATION 15
Mafatlal Cotton Textiles Ltd. Bhandup, submits the following information
for the year ended 31st March, 2012.
`
st
86 Advanced Cost Accounting - I
Inventories as on 31 March, 2011 :
•
Raw Materials
•
Work-in-Progress
•
Finished Goods
Inventories as on 31st March, 2012 :
•
Raw Materials
•
Work-in-Progress
•
Finished Goods
Additional Information :
Special Trade Discount
Annual Turnover :
(i) Cash
(ii) Credit
Excise Duty on Purchases
Defective Materials Returned
Materials Inventory Purchases
Prime Cost Labour
Raw Materials Scrap Sold
12,500
16,400
17,300
9,300
6,400
5,300
275
45,000
1,55,000
3,200
1,400
62,700
29,400
200
Hire of Cutting Machinery
Dock Charges
Carriage Inward
Productive Wages Payable
Preliminary Expenses
Cost of Patterns
Productive Expenses
Cost Sheet & Quotations
10,600
1,400
1,100
10,600
1,300
5,200
4,000
NOTES
Factory Overheads - 50% of Basic Wages
Management on Cost - 5% of Sales Value
Selling Expenses - 3% of Invoice Price
Distribution Overheads- 1% of Loaded Price
You are required to prepare a Statement of Cost showing(a) Cost of Raw Materials Consumed,
(b) Prime Cost,
(c) Works Cost,
(d) Cost of Production,
(e) Cost of Goods Sold,
(f) Cost of Sales and (g) Profits for the year.
SOLUTION
In the books of Mafatlal Cotton Textiles Ltd., Bhandup
Statement of Cost for the year ended 31st March, 2012
Particulars
Amount
`
Inventories of Raw Materials as on 1-4-2011
Add : Materials Inventories Purchases
Add: Expenses for Purchases of Raw Materials
(i) Excise Duty on Purchases
(ii) Dock Charges
(iii) Carriage Inward
Amount
`
12,500
62,700
(+)
Less : Inventories of Raw Materials as on 31-3-2012
Less : Defective Materials Returned
Less : Raw Materials Scrap Sold
(-)
Cost of Raw Materials Consumed
Add : Direct Labour :
(i) Prime Cost Labour
(ii) Productive Wages Payable
(+)
Add : Direct Expenses :
(i) Hire of Cutting Machinery
10,800
(ii) Cost of Patterns
5,200
(iii) Productive Expenses
(+) 4,000
3,200
1,400
1,100
80,900
9,300
1,400
200
(a)
(+)
29,400
10,600
(+)
70,000
40,000
70,000
20,000
(+)
 Prime Cost
Add : Factory Overheads
(50% Basic Wages i.e. Direct Labour ` 40,000)
Add: Inventories of Work-in-Progress as on 1-4-2011
(b)
(+)
1,30,000
20,000
(+)
16,400
1,30,000
Advanced Cost Accounting - I
87
Cost Sheet & Quotations
(-)
1,66,400
6,400
 Works Cost
Add : Management on Cost
(5% of Sales Value i.e. Annual Turnover ` 2,00,000)
(c)
(+)
1,60,000
10,000
1,60,000
 Cost of Production
Add: Inventories of Finished Goods as on 1-4-2011
Less : Inventories of Finished Goods as on 31-3-2012
(d)
(+)
1,70,000
(-)
1,70,000
17,300
1,87,300
5,300
(e)
1,82,000
1,82,000
6,000
8,000
Less :
NOTES
Inventories of Work-in-Progress as on 31-3-2012
 Cost of Goods sold
Add : Seeling and Distribution Overheads :
(i) Selling Expenses
(3% ofInvoice Pricei.e.Annual Turnover` 2,00,000)
(ii) Distribution Overheads
(1% ofLoaded Price i.e.Annual Turnover `2,00,000)
 Cost of Sales
Add : Profits for the year
Annual Turnover
(+)2,000
(f)
(g)(+)
1,90,000
10,000
2,00,000
1,90,000
2,00,000
( Cash ` 45,000 + Credit ` 1,55,000)
Working Notes :
(1)
Special Trade Discount, Preliminary Expenses etc. are the items to be
excluded from cost.
3.5 Quotation and it’s preparation
When a customer or a concern wishes to get a certain job done or wish to
purchase a certain type of product in a certain quantity at a competitive price an
advertisement is published in the newspaper inviting offers from interested parties.
Such offer may be in the form of a quotation or a tender. In each quotation a price
is mentioned at which the party submitting the quotation is willing to perform the
expected work. By Comparing the prices mentioned in all the quotations received
and other terms and conditions mentioned in them the party selects a particular
quotation beneficial to it and places order with the particular manufacturer or
manufacturing concern.
88 Advanced Cost Accounting - I
In order to obtain the order, the manufacturing concern has to prepare the
quotation in a proper way and the price mentioned in it should be a competitive
price. While preparing a quotation, the concern has to take into consideration
many factors such as the nature of work involved, the volume of work to be
completed and the type, quality and quantity of materials which will have to be
used and also the type of labour, number of workers whose services will have to
be used and labour cost to be incurred according to the rates of wages applicable
to the workers. For calculation of amount of overheads, the concern relies upon
the information about overheads available from cost sheet prepared for the previous
period. The overheads to be incurred are calculated by considering thier relations
with certain item appearing in the cost sheet. Once the total cost or cost of
production is estimated for the work to be performed, the concern adds to it the
Cost Sheet & Quotations
profit amount desired by it and the price to be quoted is finalized.
For preparation of quotation for a specific job direct materials cost, direct
labour cost and direct expenses, if any, are first determined and total of these
amounts is taken as a prime cost of the job for which the quotation is being
prepared. To the prime cost amount of Factory Overheads is added. Factory
Overheads are estimated as a certain percentage of direct labour cost and this
percentage is decided on the basis of direct labour cost and factory overheads
from the cost sheet of the previous cost sheet. When the estimated amount of the
factory overheads is added to the prime cost, the estimated amount of ‘Factory
Cost’ of the proposed job becomes available. To the factory cost amount the
estimated office and administration overheads is added. Estimation of the office
and administration overheads is generally done as a percentage of office and
administration overheads to the factory cost of the previous period cost sheet.
After adding the estimated amount of office and administration overheads to the
factory cost the amount of cost of production of the proposed job becomes known.
Amount of desired profit (which may be a certain percentage of the estimated
cost of production or a certain percentage of the quotation price of the job) is
added to the estimated cost of production and the total so obtained is shown as the
price to be quoted to the customer who has invited the quotations for the job.
NOTES
Check Your Progress
i)
What
is
meant
by
Quotation ? Why it is
prepared ?
ii) Enumerate the process of
preparation of quotation.
A specimen of quotation for a job is given below :
------------------& company
Quotation for Job No.------`
Direct Materials Cost
-----
Add : Direct Labour Cost
-----
Add : Direct Expenses
-----
Prime Cost
-----
Add : Factory Overheads
(at --% on Direct Labour cost)
-----
Factory Cost/Works Cost
-----
Add : Office and Administration Overheads
(at--% on Factory Cost)
-----
Cost of Production
-----
Add : Profit (at --% on cost of Production
or -- % on Price Quoted)
-----
Price to be quoted for the job
-----
Advanced Cost Accounting - I
89
Cost Sheet & Quotations
3.6 Illustrations on Preparation of Quotation
(1)
NOTES
From the following information provided by Modern manufacturing Company
for a period of 3 months ending on 31st March, 2014, prepare a cost sheet
for that period showing a) Prime Cost, b) Factory Cost, c) Cost of
Production, d) Total Cost, and e) Profit or Loss for the period :
`
Direct Materials Consumed
4,80,000
Direct Wages
6,00,000
Direct Expenses
20,000
Office & Administration Overheads
50,000
Factory Overheads
1,50,000
Selling Overheads
1,45,000
Sales
17,80,000
The company intends to submit a quotation for supplying a machinery in the
month of May, 2014. The Costing Department of the Company has estimated that
materials costing ` 35,000, direct wages of `50,000 and direct expenses amounting
to `5,000 will be needed for the machinery. Factory Overheads as a percentage
of direct wages and Office Overheads as a percentage of Factory cost is to be
charged using the costs as a basis as appearing in the cost sheet for the period
ending on 31st March, 2014. The company desires to earn a profit of 25% on the
cost of production from the Quotation.
Calculate price to be quoted for the machinery.
SOLUTION
Modern Manufacturing Company
Cost Sheet
For 3 months ending 31st March, 2014
`
Direct Materials Consumed
Add: Direct Wages
Add: Direct Expenses
Prime Cost
Add: Factory Overheads
Factory Cost
Add: Office & Administration Overheads
Cost of Production
Add: Selling Overheads
Total Cost
Add: Profit for the period
Sales
90 Advanced Cost Accounting - I
4,80,000
6,00,000
20,000
11,00,000
1,50,000
12,50,000
50,000
13,00,000
1,45,000
14,45,000
3,35,000
17,80,000
Cost Sheet & Quotations
Preparation of Quotation for the Machinery
`
Direct Materials Cost
Add: Direct Wages
Add: Direct Expenses
Prime Cost
Add: Factory Overheads
(at 25% on Direct Wages)
Factory Cost
Add: Office & Administration Overheads
(at 4% on Factory Cost)
Cost of Production
Add: Profit
(at 25% on Cost of Production)
Price to be quoted for the machinery
35,000
50, 000
5,000
90,000
12,500
NOTES
1,02,500
4,100
1,06,600
26,650
1,33,250
Working Notes :
i)
Calculation of % of Factory Overheads to Direct Wages :
Direct Wages ` 6,00,000 = Factory O.H. ` 1,50,000

Direct Wages 100 = Factory O.H.
=
1,50,000 X 100
6,00,000
= 25%
In the Quotation Direct Wages are estimated as ` 50,000

Factory Overheads are :
50,000 x 25
= `12,500
100
ii)
Calculation of % of Office & Adm. O.H. to Factory Cost :
Factory Cost ` 12,50,000 and Office & Adm. O.H. ` 50,000
50,000 x 100
= 4%
12,50,000
Estimated Factory Cost is ` 1,02,500 in the Quotation
 In the Quotation 4% of ` 1,02,500 =
1,02,500 x 4
100
` 4,100 is the amount of Office & Adm. Overheads
iii)
Calculation of Profit in the Quotation :
The company desires a profit of 25% of cost of production of the machinery.
As cost of machinery is estimated as `. 1,06,600, the profit calculated is
` 1,06,600 x 25
100
= ` 26,650
Advanced Cost Accounting - I
91
Cost Sheet & Quotations
NOTES
2)
From the following particulars you are required to prepare a cost sheet
showing i) Cost of materials consumed, ii) Prime Cost, iii) Works Cost, iv) Cost of
Production, v) Cost of goods sold, vi) Profit or Loss for the period, vii) Percentage
of works overheads to direct wages and viii) Percentage of office overheads to
works cost :
Stock on 1-1-2013 :
Raw Materials ` 32,000, Finished Goods ` 34,500
Stock on 30-6-2013 :
Raw Materials ` 30,000, Finished Goods ` 48,000
Purchases of Raw Materials ` 2,08,000
Direct Wages ` 1,50,000
Works Overheads ` 45,000
Office Overheads ` 40,500
Selling Overheads ` 55,000
Sales ` 5,82,000
The concern is to submit a tender for supply of a large plant in the month of
July, 2013. It is estimated that direct materials of `20,500 and direct wages of
`15,000 will have to be incurred for the plant. Assuming that the percentages of
works cost to direct wages and office overheads to works cost calculates in the
cost sheet for the period ended 30th June, 2013 will remain unchanged and the
profit desired by the concern is 20% of the tender price, calculate the price to be
quoted in the tender.
SOLUTION
Cost sheet of ------------For the period of six months ending 30-6-2013
`
Stock of Materials on 1-1-2013
Add: Purchase of Materials
Less: Stock of Materials on 30-6-2013
Cost of Materials Consumed
Add: Direct Wages
Prime Cost
Add: Works Overheads
Works Cost
Add: Office Overheads
Cost of Production
Add: Stock of Finished Good on 1-1-2013
Less: Stock of Finished Goods on 30-6-2013
92
Advanced Cost Accounting - I
`
32,000
2,08,000
2,40,000
30,000
2,10,000
1,50,000
3,60,000
45,000
4,05,000
40,500
4,45,500
34,500
4,80,000
48,000
4,32,000
Add: Selling Overheads
Total Cost
Add: Profit
Sales
55,000
4,87,000
95,000
5,82,000
Cost Sheet & Quotations
Calculation of Percentages :
NOTES
i)
% of works overheads to Direct Wages :
Direct Wages ` 1,50,000 - Works Overheads ` 45,000
 Direct Wages ` 100
- Works Overheads ` ?
45,000 x 100
= 30%
1,50,000
ii)
% of office overheads to Works Cost :
Works Cost `4,05,000
-
Office Overheads `40,500
Works Cost ` 100
-
?
40,500 x 100
= 10%
4,05,000
Preparation of Tender for the plant
`
Direct Materials Cost
Add: Direct Wages
Prime Cost (estimated)
Add: Works Overheads
(30% of Direct Wages)
Works Cost
Add: Office Overheads
(10% of works cost)
Cost of Production
Add: Profit (at 20% on Tender Price)
Tender Price for the plant
20,500
15,000
35,500
4,500
40,000
4,000
44,000
11,000
55,000
Working Note :
The concern desires profit at 20% on Tender Price
 Tender Price is taken as 100. Profit is 20% on Tender Price. So, Tender Price
`100 - Profit ` 20 = ` 80 which is Cost of Production.

If Cost of Production is ` 80 - Profit is ` 20
If Cost of Production is ` 44,000 - Profit is ?
44,000 x 20
80
= 11,000
Adding the profit of `11,000 to Cost of Production of `44,000 we get the
Tender Price as `55,000. The profit is 20% of `55,000.
Advanced Cost Accounting - I
93
Cost Sheet & Quotations
NOTES
3.7
Summary
In this Unit, we have studied information about Cost Sheets and Quotations.
While preparing a cost sheet Costs are required to be shown under specific heads
such as Prime Cost, Factory Cost, Cost of Production, Cost of Sales and by
comparing the Cost of Sales / Total Cost with Sales Value profit or loss for the
Cost Sheet period is required to be calculated. While preparing a Cost Sheet a
specific format is required to be used and various items of costs are required to be
grouped under specific heads. Certain items of costs are not included in Cost
Sheet and such items should be carefully remembered.
While preparing a Quotation for supplying a product or service or performing
a job, process or operation for a prospective customer, it is necessary to calculate
the direct materials cost, direct labour cost and direct expenses as accurately as
possible. Once the prime cost is so calculated, additions for factory overheads,
office overheads and other overheads are estimated on the basis of present
experience and total estimated cost is decided. Expected margin of profit is added
to the total cost and price to be quoted to the prospective customer is found out.
Price quoted should be competitive as the prospective customer invites quotations
from different suppliers / manufacturers and after comparing the prices quoted by
them, takes decision about placing of order.
3.8
Key Terms
i)
Cost Sheet : A statement of costs prepared for a certain duration (a week,
fortnight, month, quarter of a year, half year or a year) showing costs under
certain headings and for ascertainment of profit/loss for that period by
comparing total costs with sales.
ii)
Prime Cost : Direct Material Cost + Direct Labour Cost + Direct
Expenses.
iii)
Works / Factory Cost : Prime Cost + Works / Factory Overheads
iv)
Cost of Production : Works / Factory Cost + Office and Administration
Overheads
v)
Cost of Sales / Total Cost : Cost of Production + Selling and Distribution
Overheads.
vi)
Profit : Sales - Cost of Sales
vii)) Loss : Cost of Sales - Sales.
94 Advanced Cost Accounting - I
3.9
Cost Sheet & Quotations
Questions & Exercises
I. Theory Questions :
1.
What is a Cost Sheet ? Give a proforma of a Cost Sheet.
2.
What is Cost Sheet ? Explain the uses of Cost Sheet.
3.
Give the meaning of the term “Tender”. What are the different types of
tenders? What points would you consider for submitting a Tender ?
4.
What do you mean by Cost Sheet ?
Sheet ?
5.
Differentiate between Tender and Quotations.
6.
Write short notes:
NOTES
What are the purposes of a Cost
(i) Cost Sheet, (ii) Tender, (iii) Purposes of Cost Sheet,
(iv) Uses of Cost Sheet.
II. Practical Problems :
1.
From the following information supplied by Bajaj Ltd., Jamnager prepare a
statement showing the cost of production and the goods sold for the period
from 1-1-2015 to 31-1-2015.
`
Stock of raw materials as on 1-1-2015
Raw materials purchased during the month
5,00,000
Wages paid
2,50,000
Factory Overheads
80,000
Work-in-Progress (1-1-2015)
10,000
Work-in-Progress (31-1-2015)
20,000
Closing stock of raw materials as on 31-1-2015
30,000
Opening stock of finished goods (1-1-2015)
80,000
Closing stock of finished goods (31-1-2015)
70,000
Selling and Distribution Overheads
10,000
Administrative Overheads
25,000
Sales
2.
40,000
10,00,000
M/s Strong and Weak Co., Matunga manufacture plastic buckets and
furnishes you the following particulars. You are required to prepare a Cost
Sheet for the year ended 31-12-2014, showing therein the Prime Cost, Works
Cost, Cost of Production and Cost of Sales alongwith Cost per unit and
percentage of each element of cost to total cost.
Advanced Cost Accounting - I
95
`
Cost Sheet & Quotations
Unit Produced -10,000
Materials consumed
Wages paid to workers
Power and Fuel (Factory)
Repairs to machines
Depreciation-Machinery
Depreciation- Office Furniture
Supervision expenses (Factory)
Hire charges for machines of special purposes
Wages paid to maintenance workers
Audit fees
Director’s fees
Bad Debts
Office expenses
Salaries
Rent, rates and taxes (Factory)
Sales
Salesman salary
Advertising expenses
Delivery van expenses
Warehouse rent
Printing and Stationery
Direct expenses
NOTES
3.
1,00,000
40,000
20,000
8,000
6,000
1,000
2,000
4,000
20,000
1,500
7,500
2,500
3,500
2,000
5,000
3,00,000
8,000
2,000
8,000
6,000
1,000
8,000
From the following particulars of FOX and Co. Faizpur prepare a Cost
Sheet showing :
(i) Prime Cost, (ii) Factory Cost, (iii) Total Cost of Production and (iv) Cost
of Sales for the period ended 30.6.2014.
`
Raw materials
Wages paid to workers
Direct expenses incurred for production
Consumable stores
Supervisor’s wages
Wages paid to floor helper
Electric power (Factory)
Electric power (Office)
Rent (Factory)
Rent (Office)
Repairs and Renewals on :
Plant and Machinery
Renovation of Office Building
Depreciation on Plant and Machinery
Depreciation on Office Building
Manager’s salary
Telephone charges
96 Advanced Cost Accounting - I
50,000
20,000
2,500
500
2,000
600
800
500
5,000
2,000
5,000
1,000
500
200
3,000
200
4.
Printing and Stationery
Postage and Telegrams
Director’s Fees
Advertisement
Travelling expenses
Salesmen’s salary and commission
Warehouse rent
400
150
800
800
300
1,000
900
Delivery van expenses
1,000
Cost Sheet & Quotations
NOTES
M/s Favourite Industries Ltd. Faizabad produce auto parts. From the following
particulars prepare Cost Sheet for the period ended 31st December, 2014.
`
Opening Stock of raw materials
Raw materials purchased
Closing stock of raw materials
Direct Labour Cost (20% of Factory on Cost)
Factory on Cost
Administrative Overheads (10% of Works Cost)
Selling and Distribution Expenses
Details of the finished goods are as follows :
Opening stock of finished goods 2,000 units
Finished goods produced during the period
Closing stock of finished goods
20,000
70,000
15,000
30,000
10,000
25,000
20,000 units
4,000 units
You are required to find out the profit made during the year @ 10% on the
Selling Price.
Note : (i) There was no balance of opening or closing stock of work-in-progress.
(ii) Show the working of profit ascertained.
5.
The accounts of Via Manufacturing Co., Nashik for the year ended 31st
December, 2014 shows the following :
`
Drawing Office Salaries
Counting-House Salaries
Cash-Discount Allowed
Carriage and Cartage Outwards
Carriage and Cartage Inwards
Bad debts written off
Repairs of Plant, Machinery and Tools
Rent, Rates, Taxes and Insurance-Factory
Rent, Rates, Taxes and Insurance- Office
Sales
Stock of Materials - 31st December 2014
Stock of Materials - 31st December 2013
Materials Purchased
Travelling Expenses
Traveller’s Salaries and Commission
Productive Wages
Depreciation - Plant, Machinery and Tools
6,500
12,600
2,900
4,300
7,150
6,500
4,450
8,500
2,000
4,61,100
62,800
48,000
1,85,000
2,100
7,700
1,26,000
6,500
Advanced Cost Accounting - I
97
Depreciation-Furniture
Director’s Fees
Gas, and Water-Factory
Gas, and Water-Office
Manager’s Salary (3/4 Factory and 1/4 Office)
General Expenses
Income-Tax
Dividend
Cost Sheet & Quotations
NOTES
300
6,000
1,200
400
10,000
3,400
1,000
2,000
Prepare a statement giving the following information :
(i) Materials consumed; (ii) Prime cost; (iii) Factory on cost and the
percentage on wages; (iv) Factory cost; (v) Genral on cost and percentage
on Factory cost; (vi) Total Cost; (vii) Net profit.
6.
Tata Ltd. Tatangar produces a standard product. The following information
is given to you from which you are required to prepare “Cost Sheet” for the
period ended 31st July 2014.
`
Opening Stock of Raw Materials
Purchases of Raw Materials
Closing stock of Raw Materials
Direct wages
Other Direct Expenses
Factory Overheads
Office Overheads
Selling and Distribution Expenses
10,000
85,000
4,000
20,000
10,000
100% of Direct Labour
10% of Works Cost
` 2 per unit sold
Finished Products :
In hand at the beginning of the period
Produced during the period
In hand at the end of the period
1000 (value `16,000)
10,000
2,000
Also find our the selling price per unit on the basis that profit mark up is
uniformly made to yield a profit of 20% of the selling price.There were no
work-in-progress either at the beginning or at the end of the period.
7.
The following details have been obtained from the cost records of
Cement India Ltd., Chennai for one month.
Stock of raw materials on 1st April 2014
th
98 Advanced Cost Accounting - I
Stock of raw materials on 30 April 2014
Direct wages
Indirect wages
Sales 2,11,000
st
Work-in-progress 1 April, 2014
Work-in-progress 30th April, 2014
Purchases of raw material
Factory rent, rate, power
Depreciation on Plant and Machinery
75,000
91,500
52,500
2,750
28,000
35,000
66,000
15,000
3,500
Expenses on Purchase
Carriage outward
Advertising
Office rent and taxes
Travellers wages and commission
Stock of finished goods 1st April 2014
Stock of finished goods 30th April 2014
1,500
2,500
3,500
2,500
6,500
54,000
31,000
Cost Sheet & Quotations
NOTES
th
prepare Cost-Sheet for the month ended 30 April 2014.
8.
Following information has been obtained from the records of Quality
Manufacturing Co., Bandra.
1-1-2014 31-12-2014
`
Stock of Raw Materials
Stock of Finished Goods
Stock of Work-in-progress
`
40,000
50,000
1,00,000
1,50,000
10,000
14,000
Other Particulars :
Indirect Labour
50,000
Lubricants
10,000
Insurance on plant
3,000
Purchase of raw materials
4,00,000
Sales Commission
60,000
Salaries of Salesmen
1,00,000
Administrative Expenses
1,00,000
Carriage Outward
20,000
Power
30,000
Direct Labour
3,00,000
Depreciation on Machinery
50,000
Factory Rent
60,000
Property Tax on Factory Buildings
11,000
Sales
12,00,000
Prepare a statement of cost and profit showing :
(i) Value of Raw Materials Consumed
(iii) Factory Cost
(v) Cost of Sales
9.
(ii) Prime Cost
(iv) Cost of Production
(vi) Profit
The following information are received from the books of ABC Co. Ltd.,
Allahabad for the quarter ending 31-3-2014.
`
Stock of Materials 31-3-2009
Purchases of Material
Stock of Materials on 1-1-2009
Travelling Expenses
75,000
7,95,000
1,05,000
5,100
Advanced Cost Accounting - I
99
Cost Sheet & Quotations
NOTES
\
Carriage Inward
Carriage Outward
Labour Welfare Expenses
Depreciation on Plant
Factory Rent
Office Rent
Bad Debts
Productive wages
Traveller’s Salary and Commission
Expenses regarding purchase of materials
Director’s Fees
Fuel, Gas and Water
Manager’s Salary
(He devotes 2/3 of his time to factory)
Air conditioning charges of Office
Outstanding productive wages
Sales
8,290
9,150
14,200
18,000
11,200
29,100
9,000
2,27,000
9,000
4,500
8,700
17,900
18,000
9,000
33,000
14,29,500
Prepare Cost-Sheet giving :
(i) Prime Cost, (ii) Works Cost, (iii) Cost of Production, (iv) Total Cost
10.
The following data have been extracted from the books of Sunshine Industries
Ltd., Surat for the year 2014.
`
100 Advanced Cost Accounting - I
Opening stock of raw materials
Purchases of raw materials
Closing stock of raw materials
Carriage Inward
Wages-Direct
Wages-Indirect
Other direct charges
Rent and Rates Factory
Office
Indirect consumption of material
Depreciation Plant and Machinery
Office Furniture
Salary Office
Salesmen
Other Factory Expenses
Other Office Expenses
Manager’s Remuneration
Bad debts written off
Advertisement expenses
Travelling expenses of Salesmen
Carriage and Freight outward
25,000
85,000
40,000
5,000
75,000
10,000
15,000
5,000
500
500
1,500
100
2,500
2,000
5,700
900
12,000
1,000
2,000
1,100
1,000
Sales2,50,000
Advance income tax paid
Cost Sheet & Quotations
15,000
Cash discount
5,000
The manager has the overall charge of the company and his remuneration
is to be allocated at `4,000 to factory, ` 2,000 to office and ` 6,000 to the
selling expenses.
NOTES
From the above particulars prepare a statement showing :
(i) Prime Cost, (ii) Factory Cost, (iii) Cost of Production, (iv) Cost of Sales,
and (v) Net Profit.
11.
The accounts of Machine Manufacturing Co., Mahim disclose the following
information for the six weeks ending 31st December 2014.
`
Materials used
1,50,000
Productive Wages
1,20,000
Factory Overheads Expenses
24,000
Establishment and Genral Expenses.
17,640
Prepare the Cost Sheet of the machines. The Company is about to
send a tender for a machinery. The costing department estimates that the
materials required would cost `1,250 and expenditure in productive wages
` 750 and Direct expenses ` 500. The tender is to be made at a profit of
20% on selling price.
Show what the amount of tender would be if based on above percentages.
12.
Prav. Electricals Ltd., Pune provides the following information for 10,000
T.V. valves manufactured during the year 2014-2015.
`
Materials
Direct Wages
Power and Consumable stores
Factory and Indirect Wages
Light of a Factory
Defective Work (Cost of rectification)
Clerical Salaries and Management expenses
Selling expenses
Sales Proceeds of Scrap
90,000
60,000
12,000
15,000
5,500
3,000
33,500
5,500
2,000
Plant Repairs, Maintenance and Depreciation
11,500
The net selling price was `31.60 per unit and all units were sold.
As from 1st April, 2014, the selling price was reduced to `31 per unit
and it was estimated that production could be increased in 2014-2015 by
50% due to spare capacity. Rates of Material and Direct Wages will increase
by 10%.
Using the above data prepare Cost Sheet for the year 2013-14 and also
for the year 2014-15.
Advanced Cost Accounting - I
101
Cost Sheet & Quotations
III. Multiple choice questions :
(1)
A document which provides for the assembly of the estimated details cost
in respect of cost centre or cost unit is known as ----(a) Cost ledger
NOTES
(b) Cost statement
(c) Cost sheet
(d) balance sheet
(2)
Match the pairs
Group I
Group II
(a) Factory Overheads
(i) Opening Stock
(b) Office Overheads
(ii) Operating Labour
(c) Selling and Distribution Overheads (iii) Bad Debts
(d) Direct Labour
(iv) Establishment Overheads
(v) Electric Power
Ans : (a) - (vi) ; (b) - (iv) ; (c) - (iii) ; (d) - (ii).
(3)
Cost sheet discloses the ---- as well as the total cost of output.
(a) cost per unit
(b) gross cost
(c) net cost
(d) direct cost
(4)
A cost sheet, including sale and profit is also known as ‘-----Account’
(a) Trading
(b) Profit and loss
(c) Production
(d) Realisation
Ans. : (1 - c), (3 - a), (4 - c)
3.10 Further Reading
102 Advanced Cost Accounting - I
i)
‘Cost Accounting’ - Jawahar Lal.
ii)
‘Cost Accounting’ - Principles and Practice - N. K. Prasad.
iii)
‘Cost Accounting’ - B. K. Bhar.
iv)
‘Advanced Cost Accounting’ - Nigam and Sharma.
Topic 2
Material Costing
Unit 4
Meaning of Material and
Purchasing
Unit 5
Receipt and Storage of
Materials
Unit 6
Control Over Materials in
Stores
Unit 7
Issue of Materials
Unit 8
Pricing of Material
Issued
Unit 4 Meaning of Material and Purchasing
Meaning & Purchasing
Structure
4.0
Introduction
4.1
Unit Objective
4.2
Meaning of materials
4.3
Types of materials
4.4
Purchase of materials
4.4.1
Decision of purchasing
4.4.2
Centralised and de-centralised purchasing
4.5
Purchase Requisition
4.6
Selection of supplier
4.7
Placing order with the supplier
4.8
Summary
4.9
Key Terms
NOTES
4.10 Questions
4.11 Further Reading
4.0
Introduction
In Unit 2, you have studied the elements of costs and have become familiar
with the three elements of costs, viz. materials, labour and expenses. In this Unit
you shall study some basic information about the first element of cost, viz. material.
Information about the meaning of material, types of material and purchasing of
material is provided in this Unit. Since material cost forms a major portion of total
cost of a product, it must be controlled effectively and every step right from
purchasing of material needs proper understanding and attention.
4.1
Unit Objectives
After completing study of information provided in this Unit, you should be
able to understand :
•
Meaning of material;
•
Types of material;
•
How material is purchased.
Advanced Cost Accounting - I
103
Meaning & Purchasing
NOTES
4.2
Meaning of Materials
The term materials refers to all commodities consumed in the process of
manufacturing. For manufacturing any product material or materials of some
specific type are needed. By processing, mixing, heating, cutting or by giving a
certain shape to the materials the workers create the products needs by customers.
For different industries different materials are required, e.g. steel industry needs
iron-ore, textile industry requires raw cotton, chemicals and artificial fibers,
automobile industry uses steel, rubber, wires and other components.
Material is the first element of cost and materials cost is regarded as an
important cost in the cost structure of almost all the manufacturing concerns
because materials cost constitutes 30% to 75% of the total cost of production
incurred by the manufacturing concerns.
Sometimes the words ‘materials’ and ‘stores’ are used as interchangeable
words. However, there is difference in the meaning of these two words. As stated
above materials mean commodities which are used in the process of manufacturing
whereas stores mean materials, tools, equipments, items used for repairs and
maintenance work, stock of work-in-progress and finished goods. Thus scope of
stores is much wider than the scope of materials.
4.3
Types of Materials
A manufacturing concern purchases and uses various types of materials.
These types are as under :
104 Advanced Cost Accounting - I
1)
Raw materials : These materials are used by the production department
for creating different parts by conducting specific process like cutting,
melting, grinding, mixing, heating, etc. and the parts are fitted in a specific
manner to create the final product as required by the customers. Raw cotton,
leather, timber, minerals like iron-ore, silver, gold, manganise, copper are
some examples of raw materials.
2)
Supplies : These include items like pins, paper of wooden boxes, polish
papers, cotton waste, small tools, jigs, etc. Which are used by workers for
carrying on the production processes or for storage of the parts produced
till further operation are completed on them to convert them into finished
products.
3)
Indirect Materials : These are the Materials which cannot be conveniently
traced or identified with the finished products. Normally the cost of these
materials is very low and so even if they are included in the finished products
they are not regarded as raw-materials or direct materials, Nails, pins, screws,
nut and bolts, thread are examples of such materials. Some items which are
not included in the final product are also treated as indirect materials; e.g..
lubricating oil, grease, coal, soap, sand-paper used for polishing the parts or
the final product.
4)
5)
4.4
Components / Finished parts : A manufacturing concern may not itself
produce each and every part used in the final product. It may purchase
some parts from outside and use them in the final product; e.g. tubes and
tires used in an automobile car may be purchased by an automobile company
from outside suppliers. In a similar way companies manufacturing T.V.
sets, refrigerators, washing machines, ratio/transistor sets purchase a few
items which are fitted in the appliances manufactured by them.
Meaning & Purchasing
NOTES
Consumable : These are items like coal, gas, diesel, petrol, etc. Which are
needed to keep the machine and other apperatus running for carrying on
the manufacturing processes, soaps, towels, cotton-waste etc. Which are
supplied to the workers are also consumable items.
Purchase of Materials
In the control of materiels cost the first stage at which care is required to be
taken is purchase of materials. Efficient and effective purchasing helps in reducing
the materials cost by avoiding unnecessary purchasing, by avoiding purchase of
materials at improper prices, by doing the purchasing of the right quantity and
quality of materials, by doing the purchasing at the right time and by doing the
purchasing from the right source. Purchase of materials should be given due
attention by the management of every concern engaged in the manufacturing
filed.
4.4.1 Decision of Purchasing :
A manufacturing concern is able to carry on the activity of production when
the materials required for production are supplied to it in the required quantity and
at the required time. On the basis of quantity of materials available in the stores
department and the quantity to be supplied to the production department as per
the schedule of production, decision is taken by the storekeeper to make purchasing
of materials. Decision about purchase of materials is also taken by the in-charge
of the Research and Development Department when some special items of
materials are needed for the work of research or development of some new
products. In both these cases there is centralised purchasing followed by the
manufacturing concern. If there is decentralised purchasing followed by the concern,
the managers of functional department take decisions about purchasing as and
when they need the materials and other items needed by their departments.
4.4.2 Centralised and Decentralised Purchasing :
In centralised purchasing there is a separate purchase department created
in organisational structure of the concern. Purchase manager also sometimes
designated as ‘buyer’ is the head of the purchase department. He, along with the
persons working in the purchase department, performs the work if purchasing
materials and other items required by all the departments in the concern. When
production or any other department needs materials, parts, equipments, tools,
Advanced Cost Accounting - I
105
Meaning & Purchasing
NOTES
consumable items, stationery, etc. it requests the purchase department by sending
a duly filled ‘purchases requisition’. The purchase department makes the
arrangement for obtaining the required materials and other items by selecting a
proper supplier. Since requirement of all department are pulled together and one
order is placed with the supplier, it become possible to bargain for low prices,
more discount, free delivery and the better credit facilities. Centralised purchasing
enables purchasing of materials of standardised nature, appointment of skilled
purchasers in purchase department and better control over the materials cost.
However, when the manufacturing concerns is of small size or when the
branches of the concerns are located at different and far away places the policy
of centralised purchasing may not become possible and the branches are allowed
to make their separate purchases as per their requirements. Such decentralised
purchasing enables each branch or department to make its own purchases.
Decentralised purchasing provides the benefit of purchase of materials of the
exact type, avoides the delay in obtaining the materials and saving of administration
costs which are required to be incurred for a separate purchase department under
centralised purchasing.
4.5. Purchase Requisition
Purchase requisition is a document used for making a written request to the
purchasing authority to arrange for purchase of certain materials as mentioned in
the purchase requisition. As mentioned above most of the purchase requisitions
are received from the stores department and a few such requisitions may be
received from the Research and Development department and the Repairs and
Maintenance department. A purchase requisition provides information about name
of the department which has prepared it, the date on which it is prepared, description
and specifications of the material or materials to be purchased, quantity to be
purchased, date up to which the materials should be made available, signatures of
persons who have prepared, checked and approved the purchase requisition. Each
purchase requisition is numbered and the purchase departments records the
purchase order number when it orders the materials by placing the order with the
selected supplier. A format of purchase requisition used by many concerns is
given below :
106 Advanced Cost Accounting - I
Meaning & Purchasing
............. Co. Ltd.
PURCHASE REQUISITION
No :-------
Date :-----
Date upto which
materials are required-----
Department-----
Serial No.
NOTES
Particulars
(Name & specification)
Quantity
required
Remarks
Prepared by
checked by
Approved by
--------------
-------------
---------------
For use of purchase Department :
Order No.------Name of supplier-------
4.6
Selection of Supplier
After receiving the purchase requisition the purchase department studies it
to find out the type and specification of materials to be purchased, the period in
which the materials are to be provided, the quantity in which the materials are to
be purchased and on the basis of this information decides whether they should be
purchased from local market or central market or national market. When quantity
of material is small and they are to be obtained in a very short period, purchasing
is made from the local market; otherwise they are purchased from district level,
state level or national markets. For purchasing the materials a suitable supplier is
selected by the purchase department and such selection is done by comparing the
information in respect of terms of purchase such as price, terms of payment, date
of delivery, reliability of the supplier about quality of materials and ability to supply
the materials. For materials which are purchased on regular basis the purchase
department usually collects all this information from the various suppliers and
maintains it in its files. When some new type of materials are to be purchased, the
purchase departments invites tenders and quotations from suppliers and prepares
a comparative statement for selecting the supplier with whom the order is to be
placed. While selecting the supplier objective of purchasing the materials at lowest
price, obtaining the materials of the right quality and quantity within the stipulated
time limit and obtaining favourable terms of delivery and payment terms are given
careful attention.
Advanced Cost Accounting - I
107
Meaning & Purchasing
NOTES
Check Your Progress
i)
Explain the meaning of
following :
1) Materials
2) Purchase Requisition
3) Purchase Order
ii) Which
Factors
are
considered while selecting
a supplier ?
iii) What is the difference
between
Centralised
Purchasing
and
Decentralised Purchasing?
4.7
Placing Order with the Supplier
After deciding the suppliers with whom order for purchase of materials is
to be placed, the purchase department prepares ‘purchase order’. Printed forms
are used for placing the order. There is provision for recording the information
such as order number, date of placing the order, name and address of the supplier
to whom order is given, date upto which delivery is to be given by the supplier,
reference of tender number or quotation number of the supplier. Columns are
provided for writing important information like serial number, particulars of
materials along with specifications, size, grade or quality, quantity being purchased,
price per unit, total amount, remarks, etc. Purchase order is signed by the purchase
manager or purchase officer who is authorised to sign the purchase order. Terms
and conditions of purchasing are included in the purchase order. They include
delivery schedule to be followed by the supplier, size and type of packing, mode of
transportation, place at which delivery is to be given, mode and time of payment,
jurisdiction and method of dispute settlement.
A Specimen of Purchase Order is given below :
............. Co. Ltd.
Purchase Order
Date :-------------
Purchase Order No. : ----Requisition No. : ----Date Required : -----
Name & Address
of the supplier
Your Tender/Quotation No.------ Dated.------- has been accepted.
Please supply the following items on the terms and condition mentioned
overleaf.
Sr. No. Description and specifications
of items
Qty. Rate Amt. Remarks
---------------------Purchase Manager / Officer
Terms & Conditions overleaf.
108 Advanced Cost Accounting - I
A purchase order when accepted by the suppliers creates a legal contract
between the concern placing the order and the supplier. Therefore it must be
prepared very carefully and the supplier should be asked to acknowledge
acceptance of the order by signing and returning the second copy of the purchase
order to the concern placing the order. Five or more copies of the purchase order
are prepared in different colors. The first and second copy is send to the supplierthe second copy is returned by the supplier as acknowledgments and acceptance
of the order. The third copy is sent to the stores department, fourth copy is sent to
the costing/accounting department and fifth copy is sent to the department from
which the purchase requisition was received. The second copy received back
from the supplier is retained by the purchase department and used for taking
follow-up action, if necessary.
4.8
Summary
Meaning & Purchasing
NOTES
In all manufacturing concern products are created by using some materials.
Material is the first element of cost. Depending upon the product to be created
different industries use different materials such as wood, iron-ore, leather, cotton,
minerals like silver, manganise, copper, gold, etc. and by conducting necessary
processes and operations the materials are a given required shapes and the final
products as required by the customers are made. Materials which are included in
the finished product and which form a major part of the material cost of the
product are known as ‘direct materials’ and materials which do not form a part of
the finished product and whose cost is insignificant as compared to the cost of the
direct materials are known as ‘indirect materials’. Raw materials, supplies, indirect
materials, components/finished parts and consumables are the types of materials.
When material is required for manufacturing and it is not available in the
required quantity in the stores, a purchase requisition is prepared and sent to the
purchase requisition is prepared and sent to the purchase department. Purchasing
may be done centrally or in a decentralised way depending upon the policy of the
concern. When a decision for purchasing is taken, tenders are invited from supplies
dealing in that type of material. Tenders or quotations received from the suppliers,
they are studied and compared with other tenders/quotations in respect of price of
material quoted and other terms and conditions mentioned in them and selection
of a supplier is done and purchase order is sent to him. The work of selecting a
proper supplier is important as it affects the cost of material and also the proper
functioning of the production departments.
4.9
Key Terms
i)
Centralised Purchasing : A separate purchase department is created in
the organisation which makes purchases for all departments which need materials
and other items for their use.
ii)
Decentralised Purchasing : Authority is given to each section and
department to make the purchases of materials, tools, stationery and other items
as and when they are needed.
iii) Purchase Requisition : It is a document used for making a written request
to the purchasing authority to make arrangement for purchase of items in quantity
and as per quanlity and specifications mentioned in the document.
Advanced Cost Accounting - I
109
Meaning & Purchasing
4.10 Questions
I. Multiple Choice Questions :
(1)
NOTES
A request for purchase of material is terms as ----(a) Purchase requisition
(b) Purchase order
(c) Purchase receipt
(d) bill.
(2)
A ----- is a contractual document which authorises the supplier to supply
the material
(a) purchase requisition
(b) purchase receipt
(c) purchase order
(d) store ledger
(3)
Decentralised purchasing is more convenient for ----- items which are
specific to departmental.
(a) useful
(b) common
(c) uncommon
(d) day-to-day
(4)
Centralised purchasing ensures ----- over purchases.
(a) less control
(b) better control
(c) no control
(d) indirect control.
Ans. : (1 - a), (2 - c), (3 - c), (4 - b)
II - Theory Quesitons :
110 Advanced Cost Accounting - I
(1)
What do you understand from `Material’? State the meaning of ‘direct
materials’ and ‘indirect materials’ and give list of five items of direct and
indirect materials.
(2)
What is meant by `material cost’? Explain types of materials giving example
of each type of material.
(3)
How and when materials are purchased in an industrial undertaking?
(4)
What is the difference between ‘Centralised Purchasing’ and ‘Decentralised
Purchasing’ ? State briefly merits and demerits of both types of purchasing.
(5)
Explain major stages in the purchase procedure followed in a large-size
industrial concern.
(6)
What is the importance of ‘Purchase Order’? To which point careful
attention should be given while preparing a purchase order ?
Meaning & Purchasing
NOTES
4.11 Further Reading
i)
‘Cost Accounting’ - Jawahar Lal
ii)
‘Cost Accounting’ - Principles and Practice’ - N. K. Prasad.
iii)
‘Cost Account’ - B. K. Bhar
iv)
‘Advanced Cost Accounting’ - Nigam and Sharma.
Advanced Cost Accounting - I
111
Unit 5
Receipt and Storage of Materials
Receipt & Storage of
Materials
Structure
5.0
Introduction
5.1
Unit objective
5.2
Receipt of materials
5.3
5.2.1
Checking quantity and quality of materials received
5.2.2
Documents connected with receipt and Verification of materials
received.
Storage of Materials
5.3.1
Location of store
5.3.2
Organisation of stores
5.3.3
Classification and codification of materials
5.3.4
Bins and Bin Cards
5.3.5
Recording of materials in stores
5.4
Summary
5.5
Key Terms
5.6
Questions
5.7
Further Reading
5.0
NOTES
Introduction
In the previous unit, we have studied information about meaning, types and
purchase of materials. When as per the order given to the supplier he delivers the
materials it is to be received and its quantity and quality is required to be checked
and arrangement for proper storage of the various items of material is done by the
manufacturing concern. In this unit we shall study the work of receipt and storage
of materials and how it helps in controlling the material cost.
5.1
Unit Objectives
After completing study of this Units you should be able to understand :
•
Arrangement made for receipt of materials;
•
How checking of quantity and quality of materials received is done;
Advanced Cost Accounting - I
113
Receipt & Storage of
Materials
•
Preparation and use of documents used in connection with receipts and of
materials;
•
Organisation of stores; and
•
Classification and codification of materials.
NOTES
5.2
Receipt of Materials
Materials are supplied by the supplier as per the purchase order received
by him. The materials and other items are packed by him as per the instructions
provided in the purchase order and they are dispatched by train or road-carriers.
In a large-scale manufacturing concern materials are received from many suppliers
and on a large-scale and so in such concerns there is a separate ‘Goods Receiving
Department’ created for taking delivery of materials and other goods. In a small
size concern stores department does the work of receiving materials. The goods
receiving department is located near the entrance gate of the premises where the
work of unloading of the vehicle can be done without causing any hindrance to
other departments of the concern.
5.2.1 Checking Quantity and Quality of Materials Received
The goods receiving department is required to weigh, count or measure the
quantity of materials received from the supplier. The necessary equipment and
facilities are provided to the goods receiving department for checking the quantity
received. The quantity is checked with the Delivery Note sent by the supplier
along with the materials and with the quantity mentioned in the purchase order, if
such a copy is provided by purchase department to it.
It also checks the condition of the materials and if there are damaged or
broken goods, they are kept separate and after consulting the purchase department
they may be returned to the supplier with a request for replacement of them or if
the damage is negligible the goods may be accepted. Any difference between the
quantity received, quantity ordered and quantity mentioned in the delivery note of
the supplier is immediately reported to the purchase department so that it can
take-up the matter with supplier.
Verification of the quality or grade of the material is done by the Inspection
Section. According to the nature of materials quality of materials is checked by
the persons working in the Inspection Section by conducting the appropriate tests
in its laboratory. If the quality is found to be within the acceptable range, the
materials are accepted and with the inspection report they are sent to the stores
or to the department which had submitted the purchase requisition. However, if
the quality is not acceptable, such materials are kept in a separate place known as
‘quarantine area’ and the suppliers is instructed to take back such materials and
supply the proper quality materials as per the order.
114 Advanced Cost Accounting - I
5.2.2 Documents Connected with Receipt and Verification
of Materials Received
As mentioned above, when the materials and other goods are delivered by
the suppliers they are received and checked in respect of the quantity and the
quality by the Goods Receiving Department/ Section. It is not sufficient to merely
take possession of the materials, check their quantity and quality but a record of it
must be duly maintained by the Goods Receiving Department. Information about
the supplier who has sent the materials, purchase order number, description of
materials received, quantity of materials and condition of the materials, inspection
report giving information about quality of materials received are some of the
important points covered by the information. Printed forms are used as the goods
received note and inspection report. Some concerns use a single form with provision
to record the quantity as well as the quality inspection report, whereas some
concerns use two separate forms one for recording quantity and other for inspection
report.
Receipt & Storage of
Materials
NOTES
Generally three copies are prepared of the Goods Received Note. First
copy is sent to the Purchase Department to verify with the purchase order given
to the supplier and to take necessary steps for damaged sub-standard or shortage
of material supplied and for payment to be made to the supplier for the materials
accepted. Second copy is sent to the stores department or the which has requested
for purchase of the material along with the materials. Third copy is retained as the
office copy by the goods receiving department as a record.
Specimen form of goods received note is shown below :
------------------Co. Ltd.
Goods Received Note
Supplier------------------------------------------------------Carriage/Vehicle No.--Sr. No.
Description
Qty.
No.-------Date received----Purchase order no.---Delivery Note No.-----
No. of
Packages
Remarks
Qty. checked by------
There are some materials whose quality/grade must be properly tested before
they are allowed to be used for manufacturing purpose. According to the nature
of the material the manner in which its quality should be tested and to what extent
testing should be done is decided. Quality may be tested on the basis of hardness,
strength, chemicals to examine reaction of the materials, etc. and persons verifying
the quality of materials should be qualified and experienced and they should be
Advanced Cost Accounting - I
115
Receipt & Storage of
Materials
qualified and experienced and they should be given the necessary facilities for
conducting the tests. If a separate report about inspection of quality of materials is
prepared its format may be as under : --------------------Co. Ltd.
Quality Inspection Report
NOTES
No. : ----Date : ----Check Your Progress
i)
Name of Material inspected
Type of test conducted
Which are the documents
connected with receipt
and
verification
of
materials received ?
ii) Give format
following :
of
Quantity tested
% of testing
Result of testing
the
a) Goods Received Note
Report about quality
of the material
b) Quality Inspection
Report
Tests conducted by
----------------------
Reference No. of G R Note-----
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Inspected by
---------------
Some concerns do not prepare and use a separate Quality Inspection Report
but include it in Good Received Note by making necessary space provision for it.
5.3
Storage of Materials
Storage of materials means keeping the materials received from the suppliers
in a systematic and scientific manner at a place known as the stores. Materials
purchased and received from the suppliers are generally not required in the total
quantity by the production department or its different sections and so the materials
are required to be kept in the stores department in a safe way till they are
requisitioned for by the section where they are consumed or processed. Since
materials are costly they cannot be kept at any place in the open without keeping
proper records and without taking precautions. A large portion of money is invested
by the manufacturing concerns in the stock of materials and so materials are
regarded as equivalent to cash and for keeping the materials and to protect them
from natural factors like heat, humidity and damage caused by insects, rate, etc.
and also from fire, theft and factors causing adverse effects on quality of materials,
a proper arrangement at a place called store is essential.
116 Advanced Cost Accounting - I
5.3.1 Location of store
The location of the store or stores department is required to be decided
after considering a number of factors since the efficiency of the stores is very
much dependent upon the correct location of the stores is very much dependent
upon the correct location of the stores. Factors to be considered for deciding
location of the stores include mainly the nature of nature of manufacturing activityprocessing of materials to create the final product or assembly of various parts for
producing the finished product-, nature of materials used such as heavy, light-inweight, solid, liquid, inflammable, unit in which the materials are issued, the
frequency of issue of materials, convenience with which receipt and issue of
materials can be done, security arrangement for materials, distance between place
of stores and the place where the materials are consumed by the manufacturing
centers and total space available to the concern and how much space out of it can
be allocated to the stores department.
Receipt & Storage of
Materials
NOTES
It is also necessary to decide whether the concern should follow centralised
storage or decentralised storage system. In centralised storage, there is one central
stores for all the departments as well as the head office and all the branches.
Centralised store does the work of storing all the materials and other items required
by the production, repairs and maintenance, research and development, office
and other departments of the concern and supplies the materials to them as and
when they demand them. Centralised storage is beneficial because large orders
for materials can be placed by combining the requirements of all the departments
and advantages of large orders can be obtained, available space can be efficiently
utilised for storage of different items, limited and expert staff can be appointed in
the stores department, time and money can be saved in maintaining the stores
records, security arrangements can be made more efficiently and better and
effective control on inventory becomes possible.
The draw-backs of the centralised storage are delay in placing orders and
obtaining the materials from the suppliers, delay in movement of materials from
the store to the production of other departments especially when they are located
at a long distance from each other, purchase of materials of inexact specifications
due to not understanding the exact requirements of a particular department and
greater risk due to storage of all materials at a central place.
Due to the above limitations some concerns follow the system of decentralised
storage in which the production and other departments are provided a separate
space in their own department for storage of materials which they need in their
day-to-day working. Centralised storage is followed by majority of the concerns
due to more advantages provided by it.
5.3.2 Organisation of stores
In a centralised store a separate stores department is created in the
organisation of the concern. Storekeeper or stores manager is in charge of the
stores department and under him necessary number of assistants and store clerks
are appointed as required by the volume of the work to be done by the stores
Advanced Cost Accounting - I
117
Receipt & Storage of
Materials
NOTES
department. The work of receiving the accepted materials, storage and production
of the materials and issue of materials in the required quantity as requisitioned by
the production and other departments from time to time is the main work to be
performed by the stores personnel. Only authorised persons are given entry in
the stores department. According to the number of materials and other items to
be stored, the nature of the materials and the volume of materials to be handled
decision is taken as to where each type of material should be stored and what
arrangement should be storage of each material. Heavy materials are generally
kept on the floor, light materials may be kept on racks and scares and valuable
materials may be kept in cupboards under lock and key. Instruments required for
lifting, measuring, transporting and handling of materials are required to be provided
at appropriate places in the stores department. Once the material is received in
the store safeguarding the quantity and quality of it the and issuing it when
requisitioned by the consuming department is the responsibility of the stores
department. Proper lighting and air-conditioning arrangements, provision of wooden
or steel containers, drums, paper-boxes, glass containers for storage of different
types of materials, provision of fire-fighting equipment and keeping them in usable
condition and keeping the floors clean, dry and clear for movement of materials
without causing any accident are also the matters to which due attention is required
to be given by the stores personnel. The stores personnel is also required to maintain
records for each material to show the material received, material issued and the
quantity of material in stock and verify such stock by doing physical checking and
comparing it with the quantity shown in stock as per the documents. Information
about some of the above mentioned points is provided in following sub-points.
5.3.3 Classification and Codification of Materials
Prior to allotment of space for storage of materials it is necessary to classify
and codify the materials. A manufacturing concern uses various types of materials
and the number of such materials may run into hundreds and thousands. These
materials are, therefore, sorted into different classes or groups and this process is
termed as classification of materials. Classification enables the storekeeper to
know how many different materials are to be stored in the store and accordingly
he can allot required space for each material. In classification, materials of similar
nature are placed in the same class; e.g. Material which form part of the finished
product and which are processed by workers for creating the finished product are
the direct materials and they are included in the class of direct materials. Materials
which may form part of the finished product but whose proportion-quantity wise
as well as value wise is very small and materials which are consumed in the
manufacturing process and are not included in the finished product are regarded
as indirect materials and placed in that group. Similarly there can be classes for
fuel (coal, diesel, gas, etc.), parts of machinery and components, packaging
materials, items of stationery and stock of work-in-process and stock of finished
goods. Materials included in one class are, generally, kept in one space allotted to
that class and items included in that class are separately kept in the space allotted
to each; e.g. screws, nails, nuts, bolts, wire are included in the class of indirect
materials and for each item a separate space is alloted. In the space a alloted for
118 Advanced Cost Accounting - I
screws, screws of different sizes, of different metal-steel, copper, brass- ,of round
and square heads, of different strengths are kept separately from each other. This
helps in locating the exact material when it is to be issued as per material requisition
note.
Receipt & Storage of
Materials
Codification of materials :
Code means a symbol assigned to any item by which that item is identified.
In the store as there are hundreds of items which are stored, it becomes difficult
to identify them by their names. Names of materials may be lengthy and there
may be materials which have only slight variation of names. Such materials are
likely to create ambiguity in the minds of store people and may lead to wrong
material being issued. Names of materials are lengthy and difficult to remember.
Therefore instead of using names of materials they are identified by the symbols.
Use of symbol avoids confusion in identifying the material since one code represents
only once specific material. Symbols are short and easy to remember and save
the time and labour spent in writing the lengthy names of materials. Use of codes
helps in maintaining secrecy about the materials being used in manufacturing and
use of code is essential when mechanised accounting is followed in a concern.
NOTES
Methods of Codification :
There are three methods which can be used for codification of materials.
These methods are :i)
Numerical Method : In this method a number is allotted to each item of
material. For example iron are is given symbol ‘1’, Brass is given number 2,
Petrol number 3 and so on. Further grade or type of the material can be
assigned a number after a decimal point; e.g. Iron are grade A denoted by
1.1, grade B 1.2 etc.
ii)
Alphabetical Method : In this method each item of material is given a
particular alphabet as a symbol. Since the total alphabets are limited, they
are not sufficient for all the items of materials and so combination of alphabets
are used to overcome this difficulty; e.g A is used as a symbol for Acid, AS
is a symbol for Sulphuric Acid,
iii)
Combination of Numerical and Alphabetic Methods : As suggested
by the name of the method this is a mixture of method i) and ii). As any
number of combinations can be made, this method can cover any number
of material items. In this method symbols can be allotted as A1, A2, BS1,
BS2 etc. for different items of materials.
Mnemonic codes can be used as symbols for the items at first materials.
Mnemonic code is dependent upon the first sound when the name of the
material is pronounced; e.g For wood the symbol used is W, for steel the
symbol is S, for oil symbol is O.
5.3.4 Bins and Bin Cards :
The area where the materials are stored is divided in such a way that for
Advanced Cost Accounting - I
119
Receipt & Storage of
Materials
NOTES
storage of each item of materials there is a certain area provided as per the
requirements. Each such area used for storage of material is called a ‘bin’. So bin
can be any container, a box, a rack, a shelf, an area in a cupboard or any other
arrangement made for storage of a certain material. Depending upon the nature
of the material, size of the material, volume in which the material is to be stored
and the value and risk attached to the material where and how it should be stored
is carefully decided. Each bin is numbered and a record of bin numbers and
materials stored in them is kept on the desk of the storekeeper for easy reference.
For every bin a document called ‘bin card’ is prepared which provides
information about bin number, description of material stored in the bin, stores
ledger number or folio, minimum level of quantity to be maintained of the material
etc. A bin card has columns for recording receipt of material, issue of material and
balance of material. Reference number of Goods Received Note No. and Material
Requisition Note No is recorded for each transaction of receipt and issue of material
from the bin and quantity in balance is shown in the balance column of the Bin
Card after every receipt and issue transaction of the material from the bin. When
the physical verification of actual quantity in bin is done and it is compared with
the quantity shown in balance column of bin card, the date of such verification and
signature of the person doing such verification is recorded in the bin card along
with remarks.
Format of Bin Card is given below :------------Co. Ltd.
BIN CARD
Bin No -------Description ------Code No. -----Store Ledger No. ----Date
Receipts
Ref. No. Quantity
Minimum Level ----Re-Order Level ----Re-Order Qty -----
Issues
Ref. No. Quantity
Balance
Stock Verification
Quantity Date Remarks Initials
Reference No column under Receipts records the number of Material
Received Note and Ref. No. Column under issues records the number of Material
Requisition Note received in the stores department.
5.3.5 Recording of Materials in Stores
120 Advanced Cost Accounting - I
A proper and systematic recording of materials which are received in the
stores and which are issued from the stores is required to be maintained by the
stores department. When material is received form the Goods Receiving
Department/Section, it is accompanied by Goods/Material received Note and
Inspection Report. A stores clerk who receives the material checks the quantity
of material physically and compares and it with the quantity of material recorded
in the Material Received Note and the Inspection Report. If the quantity received
is correct he signs acknowledgment for it and takes the material to the particular
bin allotted for storage of the material. Freshly received material is kept in back
and previous stock of material is kept in the front part of the bin so that old
material is used for issue of material and freshly received material is used for
issue after exhausting the old stock.
Receipt & Storage of
Materials
NOTES
Material is issued from the store on the basis of Material Requisition Note
received from the production department or other departments which need the
material. Regular type of materials required for day-to-day production are
requisitioned by the supervisor by preparing and signing the Material Requisition
Note but for special, scares and valuable materials along with the supervisor`s
signature the signature of the Assistant production Manager or production Manager
is required as approval for issue of such materials. The store clerk checks all the
details given in the Material Requisition Note and if satisfied, takes out the quantity
of material from the bin and gives it to the person who has brought the Material
Requisition Note to him.
Sometimes it happens that the quantity of materials supplied from the store
to a production department for a particular job is found in excess of the quantity
used for consumption. This may happen due to over estimation of quantity of
material for doing a job or due to reduction in the quantity of the finished product
for the job due to change in order. Thus the production department possesses
some quantity of material not used for the job. Such excess material is required to
be returned back to the store for safeguarding it and while returning the excess
material the department returning it has to prepare a document called ‘Material
Return Note’ in duplicate filling all the necessary information in it. The colour of
Material Return Note is different from the colour of Material Received Note so
that the store clerk can distinguish it from the Material Received Note. When the
store clerk receives the returned material, he signes both copies and keeps one
copy in the store and gives the other copy to the person who has brought the
material from the production department to be kept by it as evidence of return of
excess material.
The cost office is required to make the recording for the cost of material
returned to the store. On the basis of quantity of material returned and the rate of
the material, the value of the returned material is calculated and credited to the
returned material is calculated and credited to the cost of the job from which it has
been returned. Recording in the Bin Card and store ledger Account is also made
to increase the quantity and value of material in stock.
In some manufacturing concerns where two or more production
departments/sections use the same material in manufacturing process, the excess
material available with one department/section is directly transferred to another
department/section which needs that material. This is done with the objective of
Advanced Cost Accounting - I
121
Receipt & Storage of
Materials
How location for storage is
decided ?
avoiding delay in returning excess material by one production department to the
store and the other production department obtaining it from the store. For such
transfer of materials from one department to another Material Transfer Note is
prepared giving details such as name of the department transferring the material,
nature and description of materials transferred, quantity of such of material, the
Job No from which it is transferred and Job No. for which the transferred material
is used, signatures of persons transferring it and receiving it, etc. The cost office
debits the cost of transferred material to the Job No for which it is used and
credits it to the Job No from which the excess material has been transferred. Use
of Material Transfer Note should be allowed only in exceptional case and in normal
situation excess material should always be returned to the store with duly prepared
Material Return Note.
ii) What
is
meant
by
Classification
and
Codification of materials ?
Specimen of Material Return Note and Material Transfer Note are
given below :-
NOTES
Check Your Progress
i)
iii) State the methods used for
codification of materials.
iv) Which documents are used
in stores department in
connection with storage of
materials ?
v ) Give the formta of :
a)
Bin Card
b)
Material Returned
Note
c)
Material Transfer
Note
------------------Co. Ltd.
Material Return Note
Department -------Credit Job No-----Quantity
Unit
No.----------Date --------Description
Bin No ------Stores Ledger No ----Authorised by --------
Code
For cost office
Rate Amount
Received by -------Storekeeper --------
---------------Co. Ltd
Material Transfer Note
From Job No ------To Job No ---------From Department -----Quantity
122 Advanced Cost Accounting - I
Authorised
-----------
Description
Delivered
----------
No. --------Date -------To Department ---Code
Received
----------
For cost office
Rate
Amount
Priced
-------
5.4
Summary
Materials Ordered with the supplier is received from him and Goods
Received Department makes the necessary arrangements for receiving the
materials, for checking the quantity and condition of the materials. Quality of the
materials received is checked by the Inspection Section. If quantity and quality is
as per the purchase order it is accepted and Goods Received Note is prepared
and along with the materials it is sent to the stores department. Stores should be
located at a proper place which is suitable to all departments which use the
materials. A concern may use centralised stores method or de-centralised stores
method. When centralised store method is followed a separate stores-department
is created. A store-keeper or a stores manager is head of the stores department
and under him some assistants and stores clerks work in this department doing the
work of receiving , storing, issuing and protecting the various materials as per
requirement. Bin Card for each separate material is prepared in which quantity of
material received, issued and balance of quantity in the bin is recorded date wise.
Material received in the store is checked with the quantity mentioned in the Goods
Received Note and issue of material is done only against an authorised Material
Requisition Note. Recording is also made in the Bin Card when Material Return
Note and Material Transfer Note is received from the concerned departments.
5.5
Receipt & Storage of
Materials
NOTES
Key Terms
i)
Bin : A Space stores allotted for storage of a specific item of material. Bin
may be shelf, a cupboard, a specific floor area, a rack, a box, etc.
ii)
Bin Card : It is Document prepared for each bin and is kept attached to
each bin. Columns provided in Bin Card are used for recording date wise
the quantity received in bin and issued from the bin and quantity in balance
column is adjusted after each receipt and issue transaction.
iii)
Material Return Note : It is a document prepared for material returned
by a production section to Stores Department. Return of material may be
due to defective material or excess material not required for immediate
production.
iv)
Material Transfer note : A document prepared to record transfer of
material from one section to another section. A section which has excess
material may be give it to another section which is in need of such material.
To save time, the transfer of material is allowed and to record such transfer
Material Transfer Note is prepared.
Advanced Cost Accounting - I
123
Receipt & Storage of
Materials
5.6
Questions
I. - Multiple Choice Questions :
1.
NOTES
Purchase control is an element of ----------- control.
(a) labour
(b) expenditure
(c) material
(d) indirect
2.
Bin Card is maintained by the ---------------(a) planning department
(b) Store Keeper
(c) cost accountant
(d) production department
3.
A --------------- of materials relates to grouping of materials.
(a) classification
(b) codification
(c) centralisation
(d) decentralisation
Ans. : (1 - c), (2 - b), (3 - a)
4.
Match the pairs.
Group I
Group II
(a) Bin Card
i)
Centralised purchases
(b) Store Ledger
ii)
grouping of material
(c) Codification
iii)
assigning symbols
(d) classification
iv)
Materials & value of material
v)
-----
II. - Theory Questions :
124 Advanced Cost Accounting - I
(1)
Explain the procedure followed in store from receipt of materials to issue of
materials.
(2)
What care should be taken by a store clerk while receiving materials in
store ?
(3)
What do you understand by ‘classification’ and ‘codification’ of materials ?
State the methods used for codification of materials.
(4)
Why a store is necessary ? Which documents are used for recording receipt
and storage of materials ?
(5)
Explain the organisation of store. Where the store should be located ?
(6)
What is meant by ‘bin’ ? Give format of ‘Bin Card’ explaining how the
information is recorded in the columns of bin card.
(7)
Give specimens of ‘Material Return Note’ and ‘Material Transfer Note’.
When these Notes are used and how recording is made in these two
notes ?
5.7
Receipt & Storage of
Materials
NOTES
Further Reading
i)
‘Cost Accounting’ - Jawahar Lal
ii)
‘Cost Accounting’ - Principles and Practice’ - N. K. Prasad.
iii)
‘Cost Accounting’ - B. K. Bhar
iv)
‘Advanced Cost Accounting’ - Nigam and Sharma.
Advanced Cost Accounting - I
125
Unit 6 Control over Materials in Stores
Control Over Materials
In Stores
Structure
6.0
Introduction
6.1
Unit Objective
6.2
Control over materials in stores
6.3
Fixation of stock levels
6.4
Economic Order Quantity (EOQ)
6.5
Stock taking
6.5.1
NOTES
Methods of stock taking
6.6
Discrepancies and treatment of discrepancies
6.7
Summary
6.8
Key Terms
6.9
Questions and exercises
6.10 Further Reading
6.0
Introduction
Material cost forms 30% to 70% of the total cost of a product and so
efforts are required to be made to control material cost right from purchase of
materials to consumption of materials. When materials are being stored precaution
are required to be taken in handling of material, for protection of materials from
climate and theft and also in storing materials in particular quantities. In this unit
information is provided to you about the manner in which control over materials is
exercised when they are in the store.
6.1
Unit Objectives
Study of information provided in this Unit should enable you to understand :
•
Different factors to which attention should be given for exercising control
over materials while they are in the store;
•
How Economic Order Quantity should be calculated ;
•
Which stock level are fixed and how they are fixed;
•
Why stock taking is necessary and which methods can be used for fixing
stock levels;
Advanced Cost Accounting - I
127
Control Over Materials
In Stores
NOTES
•
Discrepancies in quantity of material and reasons for such discrepancies;
and
•
How discrepancies are treated.
6.2 Control over Materials in Stores
For any business concern and especially for a manufacturing concern
material is almost equivalent to cash. A large amount of money is invested in the
stock of materials kept in the store. Material is affected by many factors such as
climate, sunshine, dust, insects and theft and its quality as will as quantity is adversely
affected and the concern is required to suffer the loss caused by this. So it is
necessary that proper control on the materials should be kept to eliminate or
minimise the loss when the materials are in the stores department. By giving
attention to the following points proper control on materials can be kept :-
128 Advanced Cost Accounting - I
1.
While receiving the materials from the Goods Receiving section at the
entrance of the stores it should be physically counted, measured or weighed
and the quantity should be verified with the quantity mentioned in the Materials
Received Note. Attention should also be given to the condition of the
materials received.
2.
Materials received should be immediately taken to the bins allotted for storage
of materials. It should not be allowed to lie near the entrance of the stores
department or in the passage.
3.
While keeping the material in its proper bin it should be kept in such a way
that old stock in the bin is kept ahead and newly received material is kept in
the back. This enables issue of old material first and newly received material
later on. This is necessary when quality of material is adversely affected
due to passage of time.
4.
Arrangement should be made for proper inspection of materials at regular
intervals. Such inspection is helpful in noticing deterioration of quality,
shortage in quantity, slow-moving items of materials and material which
has become obsolete. The storekeeper takes appropriate action in each
case.
5.
Issue of materials to production department or sections should be done by
the stores department only against Materials Requisition Note duly filled in.
The person issuing the material should issue exact quantity of materials
mentioned in the Material Requisition Note. For some special or scarce and
very valuable materials the Materials Requisition Note should be signed by
the production manager and issue of such materials should be done by the
store clerk after informing the storekeeper about such issue.
6.
Persons working in the stores department should be given necessary training
so that they can take proper care while handling the materials and while
using the weighing, measuring equipment and fire-fighting equipment.
7.
For each material maximum, minimum, re-ordering levels should be
determined and the store personnel should be given instructions to observe
these levels. This will ensure avoiding the situation of over-stocking as well
as non availability of material.
6.3 Fixation of Stock Levels
Control Over Materials
In Stores
NOTES
For each material the stores department has to fix certain levels. They
include Maximum Level, Minimum Level, Re-Ordering Level and Danger Level.
It is also necessary to determine how much quantity should be ordered when for
a material fresh order is to be placed. Quantity to be ordered depends upon the
maximum and minimum consumption of the material, maximum and minimum
period required for receiving the material from the supplier after an order is placed
with him, the price per unit of material, changes expected in the price and availability
of material in the near future, the discount and other facilities offered by the
supplier for different size orders and the capital available with the concern for
investment in the stock of materials. Once the order quantity is fixed generally it
remains unchanged unless some major changes in the price of material or in the
availability of the material in the market are expected to take place. When a
material is available only in a certain season and it is consumed throughout the
year quantity to be ordered will naturally be a large quantity.
6.4
Economic Order Quantity (EOQ)
Economic order quantity is that quantity of a material by ordering which the
total cost of purchasing and carrying the stock of material is kept at optimum
level. In other words at economic order quantity the cost of purchasing and the
cost of carrying the inventory are almost equal. If the quantity to be ordered is
either increased or decreased from the economic order quantity, the total cost of
purchasing and carrying the inventory will increase.
Cost of purchasing also called cost of ordering includes the cost of stationary,
cost of salary of the purchase clerk who prepares the order, postage cost of
sending the order to the supplier, proportionate cost of establishment expenses of
the purchase and goods receiving department, and cost of advertisement if tenders
are invited from suppliers by publishing an advertisement in the newspapers or
periodicals. Cost of purchasing is less if only a single order is given for purchasing
the annual requirement of the material and cost of purchasing increases when
number of orders given is more than one.
Cost of carrying inventory which is also known as cost of storage includes
cost of warehousing, rent, salaries, printing and stationary expenses of the store
department, insurance premium, interest on amount of capital locked in the stock
of material, loss caused by spoilage, wastage or loss of material while it is kept in
the store and cost of handling the material. When quantity order is less the cost of
carrying the inventory is less and when quantity per order is more the cost of
carrying inventory is more.
Advanced Cost Accounting - I
129
Control Over Materials
In Stores
NOTES
Cost of ordering and cost of carrying inventory move in opposite directions.
If order quantity is low there will be more number of orders to be placed for
obtaining the total quantity of annual requirement and so cost of ordering will be
more. But as the ordered quantity is less the cost of carrying small inventory will
become less. On the other hand if quantity per order is more the cost of ordering
will become less and the cost of carrying inventory will be more due to large
inventory to be carried by the store.
Economic order quantity is, therefore, such quantity per order which balances
the cost of ordering with the cost of carrying inventory. At economic order quantity
the total cost made up of cost of ordering and cost of carrying inventory is lowest.
For calculating economic order quantity the formula used is as follow :-
EOQ =
 2AB
Ci
Where EOQ
= Economic Order Quantity,
A
= Annual Usage or Consumption
of the material
B
= Buying cost per order or
cost of placing an order
C
= Cost per unit of the material
i
= Cost of carrying inventory
expressed as 0% p.a.
There is another formula for calculating EOQ which is as under :EOQ =
 2AB
S
Where EOQ
= Economic Order Quantity
A
= Annual usage of material
B
= Buying cost per order
S
= Storage cost per unit per annum
Economic order quantity can also be decided by using the Tabulation Method
according to which the number of orders for the annual consumption are started
from a single order and increased by one every time. Cost of buying and cost of
carrying average inventory are calculated separately and by adding these two
costs the total cost is calculated. When a single order is placed to obtain the
quantity of annual consumption, the buying cost is the minimum and since the
average inventory is more the cost of carrying the inventory is maximum. The
total cost is also maximum at this stage. With increase in the number of orders, the
buying cost increases while the carrying cost of the inventory decreases. Total
cost column shows that upto a certain stage it decreases and after that stage it
again starts increasing. The stage at which the total cost is lowest is the stage
which indicates the economic order quantity.
130 Advanced Cost Accounting - I
In order to understand calculation of EOQ by formula method and tabulation
method let us consider the following illustration :
Control Over Materials
In Stores
ILLUSTRATION
Arun Co. Pvt. Ltd. manufactures a certain product and uses a particular
material in the manufacturing process. Annual consumption of this material is
20000 units. The cost price per unit is ` 2.50 and buying cost per order amounts
to ` 100. The cost of carrying the inventory is 10 % per annum.
NOTES
Calculate EOQ for the material using :
i)
Formula method, and
ii)
Tabulation method.
SOLUTION
i) Formula method :
EOQ =
 2AB
Ci
Where A
B
= ` 100 per order
C
= ` 2.50 per unit
i
Therefore EOQ =
= 20,000 unit
= 10% p.a.
2 X 20000 X 100
 2.50 10 %
=
4000000
.25
=
16000000

=
4000 units
X
ii) Tabulation Method :
Annual No. of Units
Usage Orders per
(units)
p.a. order
20000
*
Average
inventory
(units)
1
2
3
4
5
6
7
8
9
20000
10000
6666
5000
4000
3333
2857
2500
2222
10000
5000
3333
2500
2000
1667
1429
1250
1111
10
2000
1000
Value of
average
inventory
@ ` 2.50
per unit
(`)
25000
12500
8333.50
6250
5000
4167.50
3572.50
3125
2777.50
2500
Buying cost Carrying Total
at ` 100 Cost p.a. Cost
per order
@ 10%
(`)
100
200
300
400
500
600
700
800
900
1000
(`)
2500
1250
833.35
625
500
416.75
357.25
312.50
277.75
250
(`)
2600
1450
1133.35
1025
1000
1016.75
1057.25
1112.50
1177.75
1250
Advanced Cost Accounting - I
131
Control Over Materials
In Stores
NOTES
* indicates EOQ as 4000 units and to obtain the quantity needed for annual
consumption 5 orders will have to be placed during the year.
At EOQ units the total cost is ` 1000 made up of ` 500 as buying cost
and ` 500 as the carrying cost. Figures in the total column show that ` 1000 is
the lowest cost and at this economic order quantity level the buying cost and the
carrying cost are equal. When quantity per order is more than 4000 units or less
than 4000 units the total cost is more than ` 1000.
[Additional Illustrations are given on EOQ at the end of this Unit]
Fixation of Stock Levels :
For controlling the quantity of materials stored in the storeroom the
storekeeper fixes stock levels for each material. Stock levels to be fixed include
maximum stock levels, minimum stock level, re-ordering stock level and danger
level. While fixing the stock levels for each material factors such as normal
consumption, maximum consumption and minimum consumption, minimum, normal
and maximum period taken by the supplier for delivering the material after accepting
the order and emergency period required for obtaining the material in emergency.
Situation and the economic order quantity fixed for the material are taken into
consideration.
First stock level to be fixed is the re-order level because for fixing maximum
and minimum stock level information of re-order level is needed.
Re-Order Level = Maximum Consumption x Maximum delivery period.
When stock of material in hand reaches the re-order level fixed for the
material an order is placed with the supplier. It is fixed at that level which enables
the stores department to supply the material to the production department even if
maximum consumption takes place and maximum period is taken by the supplier
to deliver the material for the order placed with him. Stoppage of production due
to non availability of material in stock is, thus, avoided by fixation of re-order
level.
Maximum level = Re-Order Level + Re-Order Quantity - (minimum
consumption x Minimum delivery period.)
Actual quantity of material in stores can be less than or equal to the maximum
level but cannot exceed the quantity fixed as the maximum level.
Minimum Level = Re-Order Level - (Normal consumption x Normal delivery
period)
Minimum level, as the name suggests, is that actual quantity in stores which
will not be below the minimum stock level. If the actual quantity of the material
falls below the minimum level fixed, there is risk of stoppage of production and to
avoid it, the storekeeper should give priority to obtain the material from the supplier.
Danger level = Average or Normal Consumption x Maximum delivery period for
emergency purchases.
132 Advanced Cost Accounting - I
Average Consumption =
Maximum Consumption + Minimum Consumption
Control Over Materials
In Stores
2
When quantity of a material in store reaches the danger level fixed for that
material there is danger of stoppage of production due to non availability of the
material in the stores. When a material reaches the danger level normally all
regular issues of the material are stopped and the available material is issued only
for urgent jobs after obtaining permission from the storekeeper. The storekeeper
makes emergency arrangements for obtaining the material. The emergency
arrangement may be in the form of obtaining the material from local supplier
instead of the usual practice of obtaining it from the district /state /national level
supplier or permitting transportation of material by passenger train, air transport
or special courier service instead of the usual transportation by truck or goods
train. Since emergency purchasing results in increasing the cost of material,
maximum care should be taken to see that a material does not reach its danger
level.
NOTES
Average stock level indicates the average quantity carried for a material
and such level is calculated by the following formula :Average stock level =
Maximum level + Minimum level
2
It is also calculated by using the alternative formula as given below :Average stock level = Minimum level + 1/2 (Re-Order Quantity)
ILLUSTRATION 1
Manohar & Co. uses a certain material in the manufacturing of its product.
It has asked you to fix maximum level, minimum level, re-order level and danger
level for this material and has provided following data related to the material :Consumption of the material per week :
Normal 500 units
Maximum 800 units
Minimum 200 units
Re- Order Quantity 3500 units
Period for obtaining delivery from supplier :
Minimum
2 Weeks
Normal
3 Weeks
Maximum
5 Weeks
Period needed to obtain emergency delivery 1 week.
Advanced Cost Accounting - I
133
Control Over Materials
In Stores
SOLUTION
Re-Order level = Maximum Consumption x Maximum delivery period
= 800 x 5
= 4000 units
NOTES
Maximum level = Re-order level + Re-Order quantity - (Minimum consumption x
Minimum delivery period )
= 4000 + 3500 - (200 x 2)
= 7500 - 400
= 7100 units
Minimum level = Re-order level - (Normal consumption x Normal delivery
period)
= 4000 - (500 x 3)
= 4000 - 1500
= 2500 units
Danger level = Average consumption x Period for emergency delivery
= 500 x 1
= 500 units
[Note : Average consumption Period as follows :
Maximum consumption + Minimum consumption
2

800 + 200
=
2
1000
= 500 units]
2
ILLUSTRATION 2
From the following information calculate (a) Reordering Level, (b) Maximum
Level, (c) Minimum Level, (d) Average stock Level, (e) Danger Level.
Lead Times
:
Average 10 days
Maximum 15 days
Minimum 6 days
Maximum for emergency purchases 4 days
Rate of consumption
:
Average 15 units per day
Maximum 20 units per day
Minimum 10 units per day
ordering Quantity
134 Advanced Cost Accounting - I
:
200 units
Control Over Materials
In Stores
SOLUTION
(a) Reordering level
(b) Maximum Level
=
MX.C x MX.RP
=
Maximum rate of consumption per day x Maxi
mum lead times in days
=
20 units x 15 days = 300 units.
NOTES
= RL + RQ - (MN.RP)
= Reordering Level + Ordering Quantity - (Minimum
rate of consumption per day x Minimum lead time in days)
= 300 units + 200 units - (10 units x 6 days)
= 500 units - 60 units = 440 units.
(c) Minimum level
= RL - (A.C x A.RP)
= Reordering Level - (Average rate of consumption per
day x Average lead time in days)
= 300 units -(15 units units x10 days) = 300 units - 150 units
= 150 units.
(d) Average Stock Level = MN.L+ 1/2 RQ
= Minimum Level + 1/2 of Ordering Quantity
= 150 units + 1/2 x 200 units = 150 units + 100 units
= 250 units.
(e) Danger Level
= A.C x MX . RP for EP
= Average rate of consumption per day x Maximum
lead time for emergency purchases in days
= 15 units x 4 days = 60 units.
ILLUSTRATION 3
Two components ‘A’ and ‘B’ are used in Swastic Industries, Pune as follows :
Normal Usage
:
150 units per week each
Minimum Usage
:
75 units per week each
Maximum usage
:
225 units per week each
Re-order Quantity
:
A - 900 units
B - 1,500 units
Re-order Period
:
A- 4 to 6 weeks
:
B- 2 to 4 weeks
Calculate for each component.
(a) Reorder Level, (b) Maximum Level, (c) Minimum Level, (d) Average stock
Level.
Advanced Cost Accounting - I
135
Control Over Materials
In Stores
SOLUTION
(a) Reorder Level
= MX . C x MX . RP
= Maximum usage per week x Maximum re-order
period in weeks
NOTES
(b)
Component A’
= 225 units x 6 weeks = 1,350 units
Component B’
= 225 units x 4 weeks = 900 units
Maximum Level
= RL + RQ - (MN . C x MN . RP)
= Reorder Level + Reorder Quantity - (Minimum
Usage per week x Minimum reorder period in
weeks)
Component A’
= 1,350 units + 900 units - (75 units x 4 weeks)
= 2,250 units - 300 units = 1,950 units
Component B’
= 900 units + 1,500 units - (75 units x 2 weeks)
= 2,400 units - 150 units = 2,250 units.
(c) Minimum Level
= RL - (A.C X A.RP)
= Reorder Level - (Normal usage per week x
Normal reorder period in weeks)
Component A’
= 1,350 units - (150 units x 5 weeks)
= 1,350 units - 750 units = 600 units
Component B’
= 900 units - (150 units x 3 weeks)
= 900 units - 450 units = 450 units
(d) Average Stock Level
= MN.L+1/2 of Reorder Quantity
= Minimum Level + 1/2 of Reorder Quantity
Component A’
= 600 units +1/2 x 900
= 600 units + 450 units = 1,050 units
Component B’
= 450 units + 1/2 x 1,500 units
= 450 units + 750 units = 1,200 units
ILLUSTRATION 4
The following particulars are furnished by Casio Ltd., Cochin for 12 months
ended 31-03-2014.
Month in 2013-2014
136 Advanced Cost Accounting - I
Budget consumption in units
April
300
May
400
June
500
July
600
August
800
September
1,000
October
1,000
November
900
December
800
January
700
February
600
March
800
Total Yearly Consumption
Control Over Materials
In Stores
NOTES
8,400
Delivery period : 2 to 4 months
Reorder Quantity : 1,000 units
Calculate : (1) Reorder Level, (2) Maximum Level, (4) Average Stock
Level using reorder quantity.
SOLUTION
(1) Reorder Level = MX.C x MX.RP
= Maximum rate of consumption per month x Maximum
Delivery period in months
= 1,000 units x 4 months
= 4,000 units.
(2) Maximum Level = RL + RQ - (MN.C x MN.RP)
= Recorder Level + Reorder Quantity - (Minimum rate of
consumption per month x Minimum delivery period in
months)
= 4,000 units + 1,000 units - (300 units x 2 months)
= 5,000 units + 600 units
= 4,400 units
(3) Minimum Level = RL- (A.C x A.RP)
= Reorder Level - (Average rate of consumption per month x
Average delivery period in months)
= 4,000 units - (700 units x 3 months)
= 4,000 units - 2,100 units
= 1,900 units.
(4) Average Stock Level = MN.L + 1/2 RQ
= Minimum Level + 1/2 of Reorder Quantity
= 1,900 units + 1/2 x 1,000 units
Advanced Cost Accounting - I
137
Control Over Materials
In Stores
= 1,900 units + 500 units
= 2,400 units.
Working Notes :
NOTES
1. Calculation of rate of consumption per month
(a) Maximum = 1,000 units (i.e. September and October)
(b) Minimum = 300 units (i.e April)
(c) Average = 700 units (i.e. 8,400 units / 12 months)
ILLUSTRATION 5
The following information is available in respect of a material.
Economic Order Quantity :
900 units
Rate of consumption per week :
1) Normal
25 units
2) Maximum
35 units
3) Minimum
15 units
Delivery Period :
1) Minimum
20 weeks
2) Normal
25 weeks
3) Maximum
30 weeks
Calculate : (i) Reorder Level, (ii) Maximum Level, (iii) Minimum level, (iv)
Average Stock Level.
SOLUTION
(1) Reorder Level
= MX.C x MX.RP
= Maximum rate of consumption per week x
Maximum delivery period in weeks
= 35 units x 30 weeks = 1,050 units
(2) Maximum Level
= RL + RQ - (MN.C x MN.RP)
= Reorder Level + Economic Order Quantity - (minimum
rate of consumption per week x Minimum delivery
period in week)
= 1,050 units + 900 units - (15 units x 20 weeks)
= 1,950 units - 300 units = 1,650 units.
(3) Minimum Level
138 Advanced Cost Accounting - I
= RL - (A.C x A.RP)
= Reorder Level - (Normal rate of consumption per
week x Normal delivery period in weeks)
= 1,050 units - (25 units x 25 weeks ) = 1,050 units 625 units
Control Over Materials
In Stores
= 425 units
(4) Average Stock Level= MN.L +1/2 RQ
= Minium Level + 1/2 of Economic Ordering Quantity
= 425 units + 1/2 x 900 units = 425 units + 450 units
NOTES
= 875 units.
ILLUSTRATION 6
Find out Reorder Level, Maximum Level, Minimum Level and Average
Stock Level from the following particulars :
Normal Consumption
:
300 units per day
Maximum consumption :
420 units
Minimum consumption :
240 units per day
Reorder Quantity
3,600 units.
:
Minimum period for receiving the goods - 10 days
Maximum period for receiving the goods - 15 days
Normal period for receiving the goods - 12 days.
SOLUTION
(a) Recorder Level
= MX . C x MX . RP
= Maximum rate of consumption per day x Maximum
period for receiving the goods in days
= 420 units x 15 days = 6,300 units
(b) Maximum Level
= RL + RQ - (MN . C x MN .RP)
= Reorder level + Reorder Quantity - (Minimum
consumption per day x Minimum period for
receiving the goods in days)
= 6,300 units + 3,600 units - (240 units x 10 days)
= 9,900 units - 2,400 units = 7,500 units
(c) Minimum Level
= RL - (A . C x A . RP)
= Reorder level - (Normal consumption per day x
Normal period for receiving the goods in days)
= 6,300 units - (300 units x 12 days)
= 6,300 units - 3,600 units
= 2,700 units
(d) Average Stock Level= MN . L + 1/2 RQ
= Minimum Level + 1/2 of Reorder Quantity
= 2,700 units + 1/2 x 3,600 units = 2,700 units + 1,800 units
= 4,500 units
Advanced Cost Accounting - I
139
Control Over Materials
In Stores
NOTES
ILLUSTRATION 7
(a)
The availability of an imported machinery component is irregular and
consequently the consumption pattern also varies during the year. Show
how should the ‘Reorder level’ be ascertained for this component.
(b)
From the following annual data, compute the ‘Average Stock Level’ for the
said component.
Particulars
Consumption
(i) Maximum usage in a month
300 Nos.
(ii) Minimum usage in a month
200 Nos.
(iii) Average usage in a month
225 Nos.
Time lag for procurement of material :
(i) Maximum - 6 months
(ii) Minimum - 2 months
Reordering quantity - 750 Nos.
SOLUTION
(a) Reorder Level
= MX . C x MX . RP
= Maximum usage per month x Maximum
time lag for procurement of material in
months.
= 300 Nos. x 6 months
= 1,800 Nos.
(b) Average Stock Level = MN . L + 1/2 RQ
Here, Minimum Level of Stock is not given in the problem, hence,
Minimum Level
= RL - (A . C x A . RP)
= Reorder Level - (Average usage per month
x Average time lag for procurement of
materials in months)
= 1,800 Nos. - 225 Nos. x
6+2
i.e. 4 months
2
= 1,800 Nos. - 900 Nos.
= 900 Nos.
Now Average Stock Level = Minimum Level + 1/2 of Reordering Quantity
= 900 Nos. + 1/2 x 750 Nos.
= 900 Nos. + 375 Nos.
= 1,275 Nos.
140 Advanced Cost Accounting - I
Control Over Materials
In Stores
ILLUSTRATION 8
A Company uses certain raw material for a particular product for which
the following information is a available.
Usage per unit of product
: 10 kgs
Reorder Quantity
: 10,000 kgs.
Delivery period in weeks
:
• Minimum
-1
• Average
-2
• Maximum
-3
NOTES
The weekly production varies from 175 to 225 units averaging 200 units of
the said product. You are required to calculate, (i) Reorder Level, (ii) Maximum
Level, (iii) Minimum Level, (iv) Average Stock Level.
SOLUTION
(i) Reorder Level
= MX . C x MX . RP
= Maximum usage of production per week x
Maximum delivery period in weeks
= (225 units x 10 kgs) x 3 weeks = 2,250 kgs. x 3
weeks
= 6,750 kgs.
(ii) Maximum Level
= RL + RQ - (MN . C x MN .RP)
= Reorder Level + Reorder Quantity - (Minimum
usage of production per week x Minimum delivery
period in weeks)
= 6,750 kgs + 10,000 kgs - (175 units x 10 kgs) x 1 week
= 16,750 kgs. - (1,750 kgs x 1 week) = 16,750 kgs - 1,750 kgs.
= 15,000 kgs.
(iii) Minimum Level
= RL - (A . C x A . RP)
= Reorder Level - (Average usage of production
per week x Average delivery period in weeks)
= 6,750 kgs - (200 units x 10 kgs. x 2 weeks)
= 6,750 kgs. - (2,000 kgs x 2 weeks) = 6,750 kgs. - 4,000 kgs.
= 2,750 kgs.
(iv) Average Stock Level = MN . L + MX . L / 2
= Minimum Level + Maximum Level /2
=
2,750 kgs. + 15,000 kgs. 17,750 kgs.
=
= 8,875 kgs.
2
2
Advanced Cost Accounting - I
141
Control Over Materials
In Stores
NOTES
6.5
Stock Taking
Stock taking means verification of stock of all items of materials which are
kept in the store of a concern. Such verification can be done by verification of the
recording done in the bin card and stores ledger and tallying the quantity in balance
shown by these two documents. For every transaction of receipt of material and
issue of material recording is done in the bin card and store ledger account prepared
for that material and therefore the quantity in balance shown in both these
documents on a particular date is expected to be same. If there is difference in
the balance of the quantity, the reasons for such difference are found out by
comparing the recording for each transaction of receipt and issue of material.
The causes of difference may be any one or more the following :
1)
Clerical errors made by the persons who have done recording in these
documents. Errors may have been committed while adding or substracting
the quantity received or issued respectively due to which quantity of material
in balance is recorded wrong.
2)
A transaction recorded in one document may not be recorded in the other
document.
3)
Quantity recorded as received or issued is wrong in one of the documents.
4)
Recording of the quantity received or issued may have been done in wrong
column in one of the documents due to which quantity shown in balance
column of that document becomes wrong.
By finding out the reason / reasons due to which the difference in the stock
of the two documents is caused and by rectifying these errors the stock shown in
the bin card and the stores ledger account is tallied.
The stock taking mentioned above is known as perpetual inventory control
and in this only checking of the recording is done, there is no arrangement for
doing physical stock taking of the materials. For exercising proper control on
material physical verification of stock is also necessary so that quantity as well as
condition of the materials kept in store can be checked. Such arrangement is
called ‘physical stock taking’.
6.5.1 Methods of Stock Taking
For physical stock taking two methods are available as under :
1.
Periodic stock taking
2.
Continuous stock taking
According to the size of the concern, number of items kept in the store,
volume or quantity of each item of material, nature of the materials and the number
of transactions of receipt and issue of the materials one of the above mentioned
methods is selected and used for physical stock taking.
142 Advanced Cost Accounting - I
1. Periodic stock taking :- As the name suggests under this method all items of
material in the stores are physically checked after a certain period. Normally such
checking is done once in a year at the end of the financial year followed by the
concern and so this method is also known as ‘annual stock taking’. There is no
separate staff for the stock taking work and the work is carried on with the help
of employees from production and other departments. Generally the working of
production department is suspended for the period required for physical stock
taking of all the items of material, loose tools, spare-parts, stock of work-in-process
and stock of finished goods. By adding the quantities actually found in the stock
taking and by valuation of them, the values of assets at the end of the financial
year are found out and this information is used in the preparation of Profit and
Loss Account and Balance Sheet of the concern. Taking into consideration the
total items to be checked and the number of persons available for doing the work
of stock taking teams of the employees are created and each team is entrusted
with the items of materials to be checked by it. Workers are assigned the work of
removal of stock from the bin, counting/measuring/weighing of material and keeping
the material in its appropriate bin. The clerks from office and other departments
are given the work of writing the information about name of material, its code, bin
number, date of checking the stock, name of persons who done the work of
checking, quantity of the material actually found on stock taking, remarks about
the condition of the material, etc. in the documents used for physical stock taking.
Supervisors, foremen and similar staff is given the responsibility of supervising the
work of certain number of teams assigned to them. During the period of stock
taking no issue of material is allowed and no receipt of material is allowed to be
kept in the bin so that whatever quantity of material was in the store at the
commencement of the stock taking remains unchanged during the period of stock
taking.
Control Over Materials
In Stores
NOTES
Advantages of periodic stock taking
1.
Stock of all items of material, equipment, tools, etc. is verified physically at
one time and value of stock of various items can be calculated and used for
preparation of the financial statements of the concern.
2.
Since no separate staff is employed for stock taking there is saving of
expenditure on remuneration and other facilities to be provided to such
staff.
3.
For small organisations having a limited number of items of material, physical
stock taking done once in a year is sufficient.
4.
If production activity is not to be totally stopped during the period of stock
taking, the production department can be informed to plan production activity
for urgent jobs during this period and retain the concerned workers and
supervisors required for such jobs and to obtain quantity of material needed
for such jobs in advance from the stores department.
Disadvantages of periodic stock taking
1.
When periodic stock taking method is followed the working of plant and
Advanced Cost Accounting - I
143
Control Over Materials
In Stores
production department is required to be stopped during the period of stock
taking because physical verification of stock and issue of materials to
production department is not possible at the same time. Stoppage of
production activity even for one day causes huge loss to the concern and in
a large size concern where stock taking may take a few days time and
during this period the loss caused is tremendous.
NOTES
2.
As the work of stock taking is done by workers and other employees the
result of physical stock taking may not be satisfactory and reliable.
3.
As physical stock taking is done once in a year, the discrepanies in actual
quantity of stock and stock shown by bin card and store ledger account
cannot be explained easily because of long gap between the dates of
transactions and physical stock taking.
4.
Slow-moving items of material and obsolete items of material are brought
to the notice of the storekeeper promptly since checking of stock is done
only once in a year. This may result in suffering loss as decisions about
these items cannot be taken by the management on timely basis.
5.
Theft, misappropriation of material and adverse effects on quality of the
material stored are noticed only when the physical checking of the materials
is done at the of the year. Proper control on quantity and quality of materials
does not become possible under such situation.
6.
Employees working in the stores department know that stock taking is done
only at the end of the financial year so they may become lethargic and may
not record the transactions of receipts and issues immediately after they
have taken place. The recording in bin cards and store ledger accounts
may be kept pending and may be completed a few days before the physical
stock taking begins.
Because of the above mentioned disadvantages the periodic stock taking is
not followed except in the small concerns and concerns where a limited number
of items are used and stored.
2. Continuous stock taking
144 Advanced Cost Accounting - I
In continuous stock taking method physical stock taking is done throughout
the year by a separate staff appointed and trained for the work of stock taking.
Under this method physical stock taking is done every day and a few items of
materials are verified every day. The staff is informed about the items of materials
to be checked by them when they report for the work in the morning. This helps
in maintaining an element of surprise as the staff as well as the stores personnel
do not know in advance which materials will be taken up for stock taking on that
day. Depending upon the number of items of material and the quantity in stock of
each item of material, some materials may be checked once or more number of
times during one year. The actual quantity found in stock taking is verified with
the quantity in balance in the bin card and the store ledger account. If there is
difference in these three quantities it is recorded in the document used for stock
taking work and reasons for the difference are found out and necessary adjustment
is made to eliminate the discrepancy.
Control Over Materials
In Stores
Advantages of continuous stock taking
1.
Physical stock taking is done by staff specifically employed and trained for
that work and so the work is efficiently done and information about stock
available is reliable.
2.
Since physical verification of various item is done throughout the year any
discrepancy in recorded stock and the actual stock is brought to the notice
quickly and appropriate action can be taken immediately. Also attention of
the storekeeper is drawn to the slow moving or non-moving items of material
as well as the materials not being protected properly. Such items of materials
can be disposed off quickly and possible loss due to their deteroration can
be avoided or reduced.
3.
When continuous stock taking method is used the working of plant and
production department is not required to be stopped for stock taking. Loss
of production due to stoppage of production work is thus avoided in this
method.
4.
Person working in the stores department have to do the recording for
transactions of receipt and issue of materials immediately after the transaction
is completed and keep the recording in bin card and stores ledger account
up-to-date. Any item of material may be physically verified on any day by
the staff doing the stock taking and comparison of the stock quantity actually
found for a material is done with quantity shown in balance in the bin card
and the store ledger account. If the quantities do not agree, the store clerk
is required to give explanation for the same and this makes the store clerks
more efficient in their work.
5.
Information about the total quantity in stock for all the items can be quickly
found out by adding the quantities reported by the stock takers. Only the
quantity received and quantity issued since the last date of stock taking will
have to be added and substracted respectively to the last quantity reported
and this enables the management to know the quantity and value of materials
and other items on any day the information is needed by it.
NOTES
Disadvantages of continuous stock taking
1.
This method is expensive because separate staff is employed for stock
taking. Remuneration of this staff and cost of facilities to be provided to it
can be incurred only by large size concerns and so small concerns find it
difficult to use this method of stock taking.
2.
Stock taking work and receipts and issues of materials take place
simultaneously and so the work of stock taking is disturbed and quantity of
material in stock cannot be exactly found out.
Whichever method is used for physical stock taking it should be remembered
that the actual quantity of material found in stock should be compared with
the quantity recorded in the bin card and the store ledger account as quantity
Advanced Cost Accounting - I
145
Control Over Materials
In Stores
NOTES
in balance and any difference should be accounted for by finding out the
difference.
When physical stock taking is done of a material, the information found is
recorded on a document called ‘Inventory Tag’. There are two parts of the inventory
tag with perforation in between. The inventory tag duly completed is tied outside
the bin in which that material is stored. The lower part of the inventory tag is torn
off and all these parts are sent to the costing or accounting department for valuation
of the stock. Specimen of an inventory tag is shown below :
Inventory Tag
No. -----
Store code --------
Name of material -----
Store ledger account No. -----
Bin No. ---------
Quantity
Stock verified by ------
--------
Date
---------
(cut it here)
Store code -------
Name of material -----
Quantity
Stock verified
-------
-----
Store ledger account ----Inventory Tag No. -----
Bin No. -----
6.6 Discrepancies and Treatment of Discrepancies
When physical stock taking of materials is done and the actual quantity of
the materials is found out it is compared with the quantity in balance in the bin
cards and the store ledger accounts of the particular material. If actual quantity of
material in store is not same as the quantity shown in the balance column of the
bin card and the store ledger account, the difference in the quantity is noted down
as a case of discrepancy. The cause of discrepancy is then found out and according
to the nature of it, the treatment to be given for the quantity and value of the
difference in material is decided. Discrepancy can be of two types-actual quantity
in store is less than the quantity appearing in the bin card and store ledger account.
The first type of discrepancy is known as shortage which implies loss and the
second type of the discrepancy is known as excess or overage and it is a surplus
or gain.
The causes of discrepancy may be natural (normal) or unnatural (abnormal).
They are also known as unavoidable causes and avoidable causes.
Under unavoidable causes the following causes are included :-
146 Advanced Cost Accounting - I
1.
Evaporation of liquid materials reducing their quantity
2.
Absorption of moisture which increases the weight of the materials
3.
Shrinkage which reduces size or weight during the storage period.
4.
Loss of material when breakage or cutting of material purchased in bulk is
done for issuing it in small quantity to production or other departments.
Control Over Materials
In Stores
Avoidable causes of discrepancy are as under :
1.
Careless handling of materials by the stores personnel resulting in damage
or breakage of material and making it unusable.
2.
Theft, misappropriation or pilferage of material which results in actual
quantity being less than the quantity recorded in bin card and store ledger
account.
3.
Insufficient protection provided to materials while they are stored ; e.g. iron
items not properly protected may become rusty, items affected by changes
in climate not kept in air conditioned rooms.
4.
Carelessness in issue of materials resulting in issue of more or less quantity
than the quantity shown in Material Issue Note.
5.
Calculation errors done by the store clerk while arriving at the quantity in
balance.
6.
Recording of receipt or issue of material in the wrong column of the bin
card/ store ledger account which results in the quantity in the balance column
of the document being shown different than the actual quantity in the bin.
NOTES
Treatment of discrepancies :
Discrepancies found in the actual quantity in store and the quantity appearing
in the bin card and store ledger account should be treated as per the cause due to
which the discrepancy has taken place. The treatment given may be as under :1.
Difference caused due to wrong recording or omission of recording should
be adjusted by rectifying the record.
2.
Difference caused by unavoidable causes is regarded as a loss and it is not
charged to material cost but it is charged to profit and loss account of the
concern.
3.
Difference caused due to the fault of the stores department is transferred
to stores overhead.
4.
When the stock recorded as per bin card and store ledger account is more
than the actual stock as per physical stock taking, the following entry is
passed:
Inventory adjustment A/c
To Materials and supplies
Dr.
............
..........
If the shortage of stock can be divided as caused by normal reasons and
caused by abnormal reasons such as theft, misappropriation, fire, etc., the Inventory
adjustment account is debited with the loss due to normal causes, Costing Profit
and Loss Account is debited with the loss/shortage caused by abnormal reasons
and total credit is given to Material and Supplies Account.
Advanced Cost Accounting - I
147
Control Over Materials
In Stores
For the quantity and value of the shortages a recording is made in the issue
column of the store ledger account and quantity and value is reduced in the balance
column of the store ledger account. In the bin card also recording for shortage
quantity is made in issue column and quantity in balance column is reduced
accordingly.
NOTES
If discrepancy is of a negligible quantity and value no entries are passed for
its treatment and the recording appearing in the bin card and store ledger account
is taken as correct.
At the end of year, the balance standing to the Inventory Adjustment Account
is calculated and the Account is closed by transferring such balance to overhead
control Account or Profit and Loss Account as per the policy followed by the
management of the concern.
Some additional Illustrations on EOQ :ILLUSTRATION 1
A manufacturer buys certain equipments from outside suppliers at `30 per
unit. Total annual needs are 1,600 units. The following further data are available
Annual return on investment:
10%
Rent, Insurance, Tax per unit per year :
`1
Cost of placing an order :
` 50
Calculate the Economic Order Quantity
SOLUTION
EOQ
where, EOQ
=
2 AO
C
= Economic Order Quantity
A
= Annual need in unit i.e. 1,600 units
O
= Cost of placing an order i.e. ` 50
C
= Inventory carrying cost including Rent, Insurance,
Tax per unit per year i.e. 10% of ` 30
= `3+`1=`4
= 2 X 1,600 units X ` 50
 10% of ` 30 + ` 1
`3+`1
= 1,60,000 units
units
 1,60,000
`4
=
40,000 units

= 200 units
=
148 Advanced Cost Accounting - I
ILLUSTRATION 2
Control Over Materials
In Stores
A Company uses 10,000 units per year of an item costing `25 each. The
cost of processing a purchase order is `10 and the stock holding cost amount to
20% per year of the money value of inventory. How much should the company
buy at a time in a single order, in order to minimise the inventory cost ?
NOTES
SOLUTION
EOQ
where, EOQ
=
 2 AO
C
= Economic Order Quantity
A
= Annual usage in terms of units i.e. 10,000 units
O
= Cost of processing a purchase order i.e. `10
C
= Stock holding cost i.e. 20% of ` 25 = ` 5
=
=
=
2
X 10,000
units X ` 10
`5
units
 2,00,000
`5
40,000 units
= 200 units
Conclusion : The Company should buy 200 units in a single order at a time,
to minimise the inventory cost.
ILLUSTRATION 3
Given the annual consumption of material is 1,800 units, ordering cost are
` 2 per order, price per unit of material is 32 ps. and storage cost are 25% p.a. of
stock value, find the Economic Order Quantity.
SOLUTION
EOQ
where, EOQ
=
 2CAO
= Economic Order Quantity
A
= Annual consumption of material in units i.e. 1,800 units
O
= Ordering cost per order i.e. ` 2
C
= Storage cost per unit i.e. 25% of 32 ps. = ` 0.08
=
2
X 1,800 units X
`2
25% of 32 ps.
 7,200 units
=
` 0.08
Advanced Cost Accounting - I
149
Control Over Materials
In Stores
=
=
7,200 units
X 100
8
90,000 units
= 300 units
NOTES
ILLUSTRATION 4
Calculate Economic Order Quantity from the following particulars by using
Simpson’s Mathematical formula :
Annual requirement :
1,600 units
Cost of material per unit :
` 40
Cost of placing and receiving one order :
` 200
Annual carrying cost of inventory : 10% of inventory value
SOLUTION
Calculation of EOQ by Simpson’s Mathematical formula
EOQ
where, EOQ
=
 2CAO
= Economic Order Quantity
A
= Annual requirements in units i.e. 1,600 units
O
= Cost of placing and receiving one order i.e. ` 200
C
= Inventory carrying cost i.e. 10% of ` 40 = ` 4
=
2
X 1,600 units X ` 200
10% of `40
=
units
6,40,000
`4
=
1,60,000 units
= 400 units
ILLUSTRATION 5
From the following particulars calculate Economic Order Quantity
150 Advanced Cost Accounting - I
Annual Demand
:
4,000 units
Rate of Interest
:
6% p.a.
Unit price
:
`2
Ordering Cost per order
:
`5
Storage cost
:
2% p.a.
Control Over Materials
In Stores
SOLUTION
EOQ
where, EOQ
=
2CAO
= Economic Order Quantity
A
= Annual demand in units i.e. 4,000 units
O
= Ordering cost per order i.e. ` 5
C
= Inventory carrying cost i.e. 8% of ` 2 = ` 0.16
X 4,000 units X ` 5
=
2
=
units
40,000
` 0.16
8% of ` 2

= 40,000 units X
=
NOTES
100
16
2,50,000 units
= 500 units
ILLUSTRATION 6
The annual requirement of an item is 12,000 units, each costing ` 6, every
order costs ` 200 to release and inventory carrying charges are 20% of the
average inventory per annum.
Find out Economic Order Quantity.
SOLUTION
EOQ
=
 2CAO
where,
EOQ
= Economic Order Quantity
A
= Annual requirements in units i.e. 12,000 units
O
= Order cost i.e. `200
C
= Inventory carrying charges i.e. 20% of ` 6 = ` 1.20
X 12,000 units X ` 200
=
2
=
units
 48,00,000
` 1.20
20% of ` 6
 40,00,000 units
=
= 2,000 units
Advanced Cost Accounting - I
151
Control Over Materials
In Stores
ILLUSTRATION 7
You are required to calculate Economic Order Quantity from the following
information.
NOTES
Annual consumption :
15,000 kg.
Cost of placing an order :
` 48
Cost of Raw materials : `2 per kg.
Storage cost : 8% of average inventory
SOLUTION
EOQ
=
 2CAO
where, EOQ = Economic Order Quantity
A
= Annual consumption in kg. i.e. 15,000 kg.
O
= Cost of placing an order i.e. ` 48
C
= Storage cost i.e. 8% of ` 2 = ` 0.16
=
=
=
2
X 15,000 kg. X
` 48
8% of ` 2
kg. = 14,40,000 kg. 100

14,40,000
` 0.16
16
X
90,00,000 kg.
= 3,000 kg.
ILLUSTRATION 8
A Company uses annually 50,000 units of an item each costing ` 1.20.
Each order costs ` 45 and carrying cost 15% of the annual average inventory
value. Calculate Economic Order Quantity.
SOLUTION
EOQ
 2 AO
=
C
where, EOQ
= Economic Order Quantity
A
= Annual usage in units i.e. 50,000 units
O
= Order placing cost i.e. ` 45
C
= Inventory carrying cost i.e. 15% of `1.20 = ` 0.18
=
2
X 50,000 units X
15% of `1.20
45,00,000 units
=
152 Advanced Cost Accounting - I
` 45
` 0.18

= 45,00,000 units X 100
=
Control Over Materials
In Stores
18
2,50,00,000 units
= 5,000 units
NOTES
6.7
Summary
Material is received at the entrance of the stores department and the person
receiving it should check the quantity of material with the quantity mentioned in
the Materials Received Note. Material is taken to the bin allotted for that material.
Material already in the bin is kept in the front side of the bin and new material
received in the back side of the bin so that old material is issued first and new
material remains in the bin. Personnel working in the stores department should be
given proper training for handling of the material and use of different weighing
machines correctly. For each material Maximum Level, Re-ordering Level,
Minimum Level and Danger Level are fixed by considering the use of material,
time required for obtaining material and quantity of material purchased at one
time. Economic Order Quantity is calculated for each material. To verify the
quantity and quality of material in bin stock taking arrangement is made. Periodic
stock taking and Perpetual or Continuous stock taking are the methods which can
be used for stock taking. Stock taking helps in locating discrepancy between
physical stock in the bin and quantity shown in the Balance column of the Bin
Card. Reasons for discrepanies are found out and suitable treatment is given for
the discrepancy.
6.8
Key Terms
EOQ : Economic Order Quantity is that quantity of a material by ordering
which the total of purchasing and carrying the the stock of material is kept at
optimum level.
6.9
Questions and Exercises
I. - Multiple Choice Questions
1.
Under ------------- level of stock materials are issued to important jobs only.
(a) minimum
(b) maximum
(c) ordering
(d) danger
2.
EOQ model is based on assumption of ----------
Advanced Cost Accounting - I
153
Control Over Materials
In Stores
(a) linearity
(b) safety
(c) abnormity
(d) security
NOTES
3.
Recorder point is lower than the ---------- levels to avoid excess stock.
(a) minimum
(b) maximum
(c) danger
(d) stock
4.
The storekeeper should initiate a purchase requisition when stock reaches
--------- level.
(a) re-order
(b) danger
(c) maximum
(d) minimum
Ans. : (1 - d), (2 - a), (3 - b), (4 - a).
II. - Theory Questions
154 Advanced Cost Accounting - I
(1)
Why Control over materials is needed when the materials are being stored
in the stores? Which factors should be given attention while exercising
such control ?
(2)
Which stock- levels are fixed for materials ? What purpose is served by the
stock-levels fixed ?
(3)
Explain the concept of ‘EOQ’ .
(4)
State the stock-levels which are fixed for the materials. Give formulas used
for calculating the various stock-levels.
(5)
What do you understand by the term ‘stock-taking’ ? Which methods are
used for stock-taking ?
(6)
Explain procedure, advantages and disadvantages of ‘periodic stock-taking
method’.
(7)
Explain procedure followed, advantages and disadvantages of ‘perpetual /
continuous stock-taking method’.
(8)
What you understand by the term ‘discrepancy in stock’ ? What are causes
of such discrepancies ?Explain treatment given to discrepancies in stocks.
Control Over Materials
In Stores
III. - Exercises
1.
From the following particulars calculate :
a) Re-order Level, b) Minimum Level and c) Maximum Level
2.
Normal usage
100 units per day
Minimum usage
60 units per day
Maximum usage
130 units per day
E.O.Q.
4,000 units
Re-order period
25 to 30 days
NOTES
The components A and B are used as follows :
Re-ordering Quantity
A : 3,000 units
B : 4,000 units
Re-ordering period
A : 4 to 6 weeks
B : 2 to 4 weeks
Normal usage
3,000 units per week each
Minimum usage
1,500 units per week each
Maximum usage
4,500 units per week each
You are required to calculate for each of the components :
a) Maximum Level, b) Minimum Level, c) Average stock level,
d) Re-ordering Level.
3.
4.
From the following particulars, calculate the minimum stock level, maximum
stock level and reorder level :
a) Maximum consumption
150 units per day
b) Minimum consumption
100 units per day
c) Normal consumption
120 units per day
d) Re-order quantity
1,500 units
e) Re-order period
10 - 15 days
f) Normal re-order period
12 days
Two components A and B are used as follows :
Normal usage
50 per week each
Minimum usage
25 per week each
Maximum usage
75 per week each
Re-order quantity
A : 300 ; B : 500
Advanced Cost Accounting - I
155
Control Over Materials
In Stores
Re-order period
A : 4 to 6 weeks; B : 2 to 4 weeks
Calculate for each component
a) Re-order Level
b) Minimum Level
NOTES
c) Maximum Level
d) Average stock level
5.
From the following data, Calculate,
a) Re-order Level,
b) Minimum stock level
c) Maximum stock level
6.
Re-order quantity
1,500 units
Re-order period
4 to 6 weeks
Maximum consumption
400 units per week
Normal consumption
30 units per week
Minimum consumption
250 units per week
From the following particulars, Calculate,
a) Re-order Level
b) Minimum Level
c) Maximum Level and
d) Average Level
7.
Normal usage
100 units per day
Minimum usage
60 units per day
Maximum usage
130 units per day
E.O.Q.
5,000 units
Re-order period
25 to 30 days
You have been asked to calculate the following levels for Part No. ‘T’ from
the following information.
a) Re-ordering level, b) Maximum level, c) Minimum level, d) Danger stock
level, e) Average stock level
The re-ordering quantity is to be calculated from the following data :
Total costs of purchasing relating to the order are `20.
156 Advanced Cost Accounting - I
No. of units to be purchased during the year is 5000.
Control Over Materials
In Stores
Purchase price per unit including transportation costs is ` 50.
Annual cost of storage of one unit is `5.
Lead Times
Rate of Consumption
Average
10 days
Average
15 units per day
Maximum
15 days
Maximum
20 units per day
Minimum
6 days
Minimum
10 units per day
NOTES
Maximum for emergency 4 days
purchases
8.
9.
Calculate the stock levels for an item of material from the following
information
Normal usage
200 units per day
Maximum usage
250 units per day
Minimum usage
120 units per day
Re-order period
5 to 15 days
Economic Order Quantity
4,000 units
From the following particulars, calculate the economic order quantity.
Annual requirements
:
1,600 units
Cost of materials per units
:
` 40
Cost of placing and receiving one order :
` 50
Annual carrying cost of inventory
10% of inventory value.
:
10.
A unit of article A costs ` 50 and the annual consumption is 2,000 units.
The cost of placing an order is ` 40 and the interest is 10% per annum.
find the economic order quantity.
11.
From the following figures, you are required to calculate Economic Order
Quantity and No. of orders to be placed per year.
Total consumption of material per year 1,000 kg.
Procurement cost per order
`5
Unit price of material
`2
Storage and carrying cost
8%
12.
If the annual usage of a component is 4,000 pieces, set up and order
processing cost ` 50, annual rate is 10% and cost of manufacturing a unit
is ` 100. Calculate the Economic Order Quantity.
13.
Find out the economic order quantity from the following particulars:
Annual usage
:
6,000 units
Advanced Cost Accounting - I
157
Control Over Materials
In Stores
:
` 20
Cost of placing and receiving one order:
` 60
Annual carrying cost of one unit
10% of inventory value
Cost of materials per unit
14.
:
From the following information determine E.O.Q.
NOTES
Annual usage
:
90,000 units
Cost per unit
:
` 50
Buying cost per order
:
` 10
Cost of carrying Inventory
:
10% of cost
15.
Given : Annual usage of a material 600 units, ordering costs are ` 12 per
one order, price of material is ` 20 per unit, and cost of storage is 20% of
inventory value, find out EOQ.
16.
Suppose the annual consumption is 675 units, 10% is the interest and cost
of storing an article ` 30 per unit, cost of placing an order is ` 18. Calculate
the Economic Order Quantity.
17.
A factory requires 15,000 units of a certain material for the year. Cost of
carrying one unit of material is calculated to be `20 per annum, and it is
estimated that the expenses of placing an order and receiving would amount
to ` 375. Calculate Economic Order Quantity.
18.
From the following particulars determine the E.O.Q.
Cost of materials per unit
`5
Demand per month
500 units
Cost of placing each order
`15
Inventory carrying cost
20%
6.10 Further Reading
158 Advanced Cost Accounting - I
i)
‘Cost Accounting’ - Jawahar Lal
ii)
‘Cost Accounting’ - Principles and Practice’ - N. K. Prasad
iii)
‘Cost Accounting’ - B. K. Bhar
iv)
‘Advance Cost Accounting’ - Nigam and Sharma
Unit 7 Issue of Materials
Issue of Materials
Structure
7.0
Introduction
7.1
Unit Objectives
7.2
Issue of materials
7.3
Procedure for issue of materials
7.4
Documents related to issue of materials
7.5
Care to be taken while issuing materials
7.6
Summary
7.7
Key Terms
7.8
Questions
7.9
Further Reading
7.0
NOTES
Introduction
Materials are purchased and kept in stores because they are needed by
production departments for processing and for completing operations necessary
for manufacturing finished products. Materials demanded by production and other
departments must be issued to them by stores department so that their work is not
held up. In this Unit information related to issue of materials and care to be taken
while performing this work is provided.
7.1
Unit Objectives
After completing study of the information provided in this Unit you should
be able to understand :
•
Importance of issue of materials;
•
Procedure followed while issuing materials;
•
Documents related to issue of materials; and
•
Care to be taken while issuing materials.
Advanced Cost Accounting - I
159
Issue of Materials
NOTES
7.2
Materials of various types, qualities and specifications are stored in the
stores. These materials are used by different production departments for creation
of finished products by carrying on processes such as heating, mixing, cutting,
moulding, welding, etc. Some other departments and sections also use materials
for performing their work, e.g. repairing and maintenance department needs
materials, spare-parts and other such materials for performing repairing and
maintenance work. As materials are stored in stores department, they must be
made available to the concerned department in required quantity, of proper quality
and specifications and at the proper time. This work of providing materials is
known as the work of issuing materials. The work of issue of materials is important
because the functioning of the entire enterprise depends on it. If material needed
by production department is not issued to it at the proper time, in the required
quantity and of proper quality, the work of production is withheld and it may not be
possible for the enterprise to fulfill the order received from customer. It will affect
profit expected to be earned from the particular order and it will also adversely
affect the market reputation of the enterprise. Due to all these factors the persons
performing work of issue of materials have to be very alert.
7.3
Check Your Progress
i)
What is meant by issue
of materials ? What is the
importance of issue of
materials ?
ii) Give, in brief, the
procedure followed for
issue of materials
160 Advanced Cost Accounting - I
Issue of Materials
Procedure for Issue of Materials
In order to do the work of issue of materials, every enterprise lays down a
procedure which is required to be followed by departments demanding the materials
and by the persons working in the stores department. For obtaining the required
materials from the stores, the department which needs the materials has to make
a written request to the storekeeper stating the items of materials, the quantity in
which materials are required and the job number, order number or process for
which the materials are to be used. A document called ‘Materials Requisition
Note’ is provided in the printed form to all the departments and section which
need the materials for production or some other purposes. The Materials Requisition
Note duly filled in is signed by the foreman/supervisor and also by the production
manager or the executive of the concerned department if the material demanded
is scares and valuable. The material requisition note is generally prepared in triplicate
and all three copied are sent to the stores department. The storekeeper or his
assistant checks the details given in the material requisition note and if the materials
are available for issue, signs all three copies giving permission to the stores clerk
to issue the materials. The stores clerk takes out the materials to be issued in the
required quantity from the appropriate bins and brings it to the stores entrance.
The worker who has brought the M R Note checks the quantity of the materials
being issued and if it is correct signs all the three copies as a proof of collection of
materials. The first copy is given to the worker who takes it to his department
where it is filed as a record of materials demanded and received. The second
copy is retained by the stores clerk and filed as a proof of materials issued and on
the basis of it recording in the bin card is made in issue column and quantity in
balance column is recorded. The third copy is sent by the stores department to
the accounting/costing department for recording the quantity issued, quantity in
Issue of Materials
balance and value of material issued and value of stock in the stores ledger account
maintained for the material. The accounting/costing department retains this copy
with itself for calculating materials cost to be charged to the job, order or process
for which the materials are used.
The rule of issuing any material from the stores only against valid material
requisition note should be strictly followed by the persons working in the stores
department and after issue of material recording of it in the bin card and recording
of the new balance in the balance column of the bin card should be completed
immediately by the concerned stores clerk. Similarly recording of the issue
transaction (quantity and value) in the appropriate columns of the stores ledger
account and recording of changed quantity and value of stock in the balance
column of the stores ledger account should be completed by the accounts/costing
department to avoid the possibility of omission of recording of the transaction in
the stores ledger account.
7.4
NOTES
Documents Related to Issue of Materials
There are three documents which are related to issue of materials. They
are :
1. Materials Requisition Note,
2. Bin Card, and
Check Your Progress
i)
Give Specimen of :
a) Materials Requisition
Note
b) Stores Ledger Account
3. Stores Ledger Account.
Out of these three documents the ruling of the Bin Card has already been
provided in the previous Unit. The specimen of Material Requisition Note and
Stores Ledger Account are given below :
ii) What care should be taken
while issuing materials
from the stores ?
Advanced Cost Accounting - I
161
Issue of Materials
-----------------------& Co.
Materials Requisition Note
NOTES
Materials required for Job/Order No.-----
No. ------
Department -----------------------
Date -----
Sr. No. Description
Code
Qty.
For Cost Office use
Rate
Amount
`
`
Prepared by------
Bin No.-----
Issued by-------
Sanctioned by-----
Stores Ledger A/c No.----
Received by----
Storekeeper ------
Priced by------
----------------------& Co.
Stores Ledger Account
Description -----
Unit
Code No. ------
Location -----
Minimum level
-----
Bin No.
Re-order Qty.----
Re-order level
-----
Date
------
Receipts
-----
Issues
Maximum level -----
Balance
Stock verification
Ref Qty Rate Amt Ref. Qty Rate Amt Qty Rate Amt Date Remarks
No.
162 Advanced Cost Accounting - I
No.
& Initials
Reference No. under Receipt is the Goods Received Note No. and
Reference No. under Issues is the Material Requisition Note No. After recording
the receipt of material the quantity in the balance column is increased and after
recording the issue of material the quantity in balance column is reduced by
deducting the quantity issued from the preceding quantity appearing in the balance
column.
Issue of Materials
NOTES
In the stock verification column the date on which the physical stock taking
is done and any difference (shortage or surplus) found in comparison to the stock
recorded in the balance column on that date is recorded with the initials of the
person who has done the physical stock taking. Information in ‘rate’ and ‘Amount’
columns is recorded by Costing Dept.
7.5
Care to be taken while Issuing Materials
In order to ensure that issue of materials is properly done attention should
be given to following points :
i)
Materials should be issued only at the entrance of the stores department.
ii)
Materials should be issued only against an authorised Materials Requisition
Note. All columns should be properly filled in the Materials Requisition
Note and it should be signed by the foreman of the section which needs the
materials and it should also be signed by the in charge of the department. In
case of materials which are very costly and use of them is required to be
made in limited quantity, Material Requisition Note Should be counter-signed
by the factory or production manager. This enables controlled use of very
valuable and scarce material.
iii)
Store clerk who does the work of materials issue should understand the
nature of material to be issued, code number of the material to be issued
and quantity in which material is to be issued. This enables him to issue the
exact material to be issued and issue of wrong material does not take place.
iv)
While taking out the material from the bin, the store clerk should take the
material from the old lot, keeping recently received material in the bin. This
results in issue and use of the old material and helps in avoiding deterioration
in quality of old material.
v)
The store clerk should check that the weighing machine or other instruments
used for measuring quantity of material are in proper condition and would
enable him in issuing the correct quantity as mentioned in the Material
Requisition Note.
vi)
Proper and careful handling of material as per its nature is another point to
which the store clerk should pay attention. This helps in avoiding breakage
and loss of material when it is being removed from the bin and when it is
being carried to the stores entrance for issue.
vii)
While handing over materials to the person who has brought the Materials
Advanced Cost Accounting - I
163
Issue of Materials
Requisition Note the store clerk should instruct him to check the quantity
and condition of the materials and to sign the Note for the materials received
by him. It acts as a proof of issue of materials.
viii)
NOTES
7.6
On the basis of M. R. Note, the store clerk should do the recording in the
Bin Card for quantity of material issued and record the quantity in the
balance column of the Bin Card by deducting the quantity issued from the
previous quantity recorded in the balance column.
Summary
Issue of materials is done by store clerks working in the stores department
to production departments and other departments which need materials for
performing their activities. For obtaining materials a written request in the form of
Material Requisition Note is required to be prepared by the section or department
which needs the material. Details such as name/number of the section or department
which is requesting issue of materials, M.R. Note number, date, job/process/
operation for which materials are required, description and code of material required,
quantity, quality/specification, etc. are required to be filled in and signatures of
person who has prepared the M.R. Note, who has sanctioned it and if necessary
of the production or factory manager are required to be obtained before the copies
of the M.R. Note are presented at the entrance of the stores department. For
issue of materials a procedure is laid down in each concern and it is strictly followed
by the persons involved in the activity of issue of materials. Attention is given to
various factors connected with issue of materials. Materials Requisition Note,
Bin Card and stores Ledger Account are the documents in which information is
recorded regarding issue of materials. Issue of materials is as important as the
activities of purchase of materials and storage of materials.
7.7
Key Terms
Materials Requisition Note : It is a document prepared by a section or a
department which needs materials for a work, stating description of materials,
quantity and quality as well as specifications of the materials, requesting the
storekeeper for issue of the materials.
7.8
Questions
I - Multiple Choice Questions.
1.
Material Requisition Note is the document related to ------- materials.
(a) accounting of
(b) issue of
164 Advanced Cost Accounting - I
(c) inspection of
(d) verification of
2.
Issue of Materials
The duty of a ---------- is to issue correct materials against the authorised
store requisition.
(a) supervisor
(b) material manager
NOTES
(c) works manager
(d) storekeeper
3.
In store ledger account information of rates and amount columns is recorded
by ---------(a) accounts department
(b) store department
(c) costing department
(d) cash department
4.
The material requisition note is generally prepared in -------(a) duplicate
(b) a single copy
(c) triplicate
(d) four copies
Ans. : (1 - b), (2 - d), (3 - c), (4 - c).
II - Theory Questiions
1)
Give specimen of ‘Material Requisition Note’. Who are authorised to prepare
and sign Material Requisition Notes ?
2)
Explain the procedure followed in an industrial concern for issue of materials.
3)
What care should be taken while issuing materials from store ? Why such
care is necessary ?
7.9
Further Reading
i)
‘Cost Accounting’ - Jawahar Lal
ii)
‘Cost Accounting’ - Principles and Practice’ - N. K. Prasad.
iii)
‘Cost Accounting’ - B. K. Bhar
iv)
‘Advanced Cost Accounting’ - Nigam and Sharma
Advanced Cost Accounting - I
165
Unit 8 Pricing of Material Issued
Pricing of Material Issued
Structure
8.0
Introduction
8.1
Unit objectives
8.2
Pricing of materials issued
8.3
Methods used for pricing of issues
NOTES
8.3.1 Cost price Methods
8.3.2
Average Price Methods
8.3.3
Notional Price Methods
8.4
Important points related to materials costing control
8.5
Summary
8.6
Key Terms
8.7
Questions and exercises
8.8
Further Reading
8.0
Introduction
In Unit 7, we have studied information about issue of materials + stores to
various departments which use the materials. In order to calculate cost of the
materials used for jobs, operations, processes and other purposes it becomes
necessary to calculate the cost of materials used for them. Information about
work of pricing of materials issued, methods used for pricing the issue of materials
is provided in this Unit.
8.1
Unit Objectives
After study of information provided in this Unit, you should be able to :
•
Understand who does the work of pricing of materials issued ;
•
Understand methods which can be used for pricing the issue of materials ;
and
•
Know the effect on material cost when a particular method of pricing the
issue is used by an enterprise.
Advanced Cost Accounting - I
167
Pricing of Material Issued
8.2
The accounting or costing department does the work of pricing of materials
issued by using the method of pricing followed by the concern. By adding the
amounts calculated for different materials issued for a particular job, order or
process, the material cost to be charged to it can be calculated.
NOTES
8.3
Check Your Progress
i)
Which are the major
methods used for pricing
of materials ?
ii) State the types of
methods available under
the following methods of
pricing the issues :a) Cost Price Methods
b) Average Price Methods
c)
Notional
Methods
Price
iii) What is the difference
between FIFO and LIFO
Methods of pricing the
issues ?
iv) Briefly
explain
following :-
Pricing of Materials Issued
Methods Used for Pricing of Issues
Materials issued by the stores department as per the materials requisition
notes is required to be priced by the accounting or costing department in order to
calculate and charge to the jobs or orders or processes as the materials cost.
Problem arises in pricing the issue of material because the material may not be
purchased in a single lot and at one price. Same material may have been purchased
on different dates, in different quantities and at different prices as per the
fluctuations taking place in the market conditions. In such situation it becomes
difficult to decide at which price the material issues should be priced. There are
following methods out of which a method is required to be selected and used for
pricing the issues of material
8.3.1 A) Cost Price Methods
i) First In First Out ( FIFO )
the
a) Highest In First out,
b) Base Stock Method,
c) Simple Average and
Weighted Average
d) Standard Price Method
and
Inflated
Price
Method.
ii) Last In First Out ( LIFO )
iii) Highest In First Out ( HIFO )
iv) Base Stock Method
8.3.2 B) Average Price Methods (based on cost price)
i) Simple Average
ii) Weighted Average
iii) Periodic Simple Average
iv) Periodic Weighted Average
8.3.3 C) Notional Price Method
i) Standard Price
ii) Inflated Price
168 Advanced Cost Accounting - I
According to the method selected for pricing of issues the amount charged
for the issues and the amount of quantity in balance ( closing stock value ) will be
different. Out of the above mentioned methods only FIFO, LIFO, Simple Average,
Weighted Average and Base Stock Method are the methods on which the practical
problems are given below. For other methods only theoretical information is given.
A. Cost Price Methods
Pricing of Material Issued
1. First In First Out (FIFO) Method :
Under this method it is assumed that material purchased first is issued first
and material purchased last remains in stock. If the stores ledger account shows
opening stock at a certain rate, the first issue will be priced at the opening stock
rate and only when the opening stock is fully exhausted, the subsequent issue will
be priced at the rate at which the first purchases of the period is made.
NOTES
Advantages
1)
Under FIFO method the pricing of issue is done at the cost price and so
there is no unrealised profit or loss.
2)
Issues are priced at the old purchase price and so this method follows the
rule of old materials to be issued first and latest purchases should be kept in
stock.
3)
This method is suitable when the market shows falling price trend for the
material since high prices of the earlier purchases are charged to the
production and closing stock is valued at the current price which is low.
4)
FIFO method is simple to understand and easy to follow.
Disadvantages
1)
FIFO method is not suitable when the material price shows a rising trend.
Material cost charged to the production is less and closing stock of material
is valued at current high price.
2)
Material cost of two same jobs using the same quantity of material may be
different merely because material issued to them is from different lots
purchased at different prices. Proper comparison of the cost of two same
jobs does not become possible.
3)
When purchasing is done in small quantities at different prices and a number
of times and issues are made in large quantities, for pricing of the issues a
number of prices are required to be used and this increases the calculation
work and possibility of errors increases.
ILLUSTRATION
Following information is provided by SR co. in respect of a material used by
it its manufacturing process :2013
July 1 Opening stock of 800 units @ ` 8 each.
4 Issue of 500 units.
7 Receipt of 600 units @ ` 9 each.
12 Issue of 400 units.
Advanced Cost Accounting - I
169
Pricing of Material Issued
15 Issue of 200 units.
19 Receipt of 700 units @ `9.50 each
24 Receipt of 400 units @ `10 each
NOTES
28 Issue of 800 units.
Prepare Stores Ledger Account Pricing the issues using First In First
FIFO method
S R Company
Stores Ledger Account
Description -----
Unit
Code No. ------
Location -----
Minimum level
-----
Bin No.
Re-order Qty.----
Re-order level
-----
Date
------
Receipts
Maximum level -----
Issues
Ref Qty Rate Amt. Ref.
No.
-----
`
`
Balance
Qty Rate Amt.
`
No.
Stock verification
Qty RateAmt. Date Remarks
`
`
`
2013
July1
4
MRN 500
8
4000
800
8 6400
300
8 2400
300
8 2400
600
9 5400
500
9 4500
300
9 2700
300
9 2700
No.
7 GRN 600
9
5400
No.
12
MRN 300
8
2400
100
9
900
MRN 200
9
1800
N0.
15
19 GRN 700 9.50 6650
No.
24 GRN 400 10
700 9.50 6650
4000
300
No.
9 2700
700 9.50 6650
400 10 4000
28
MRN 300
No.
170 Advanced Cost Accounting - I
9
2700
200 9.50 1900
500 9.50 4750
400 10 4000
& Initials
Explanation :
Issue on July 4 of 500 units is priced at ` 8 per unit because this issue is
made out of the opening stock of 800 units, rate being `8 each. Issue of 400 units
made on July 12 is from the first last of 300 units @ ` 8 each and 100 units are
issued from the next lot @ ` 9 each. Total cost of material issued is, therefore,
`3300.
Pricing of Material Issued
NOTES
Issue of 200 units on 15 July is made out of stock which is valued @ `9 per
unit. Issue of 800 units on July 28 is made from 300 units @ ` 9 and remaining
500 units are issued out of the lot of 700 units which was purchased @ ` 9.50 per
unit.
Closing stock of material is of 600 units consisting of 200 units @ `9.50
each and 400 units purchased on July 24 @ `10 each. The closing stock value is
` 1900 + ` 4000 = ` 5900.
[In this illustration all columns of Stores Ledger Account are shown. In the
subsequent illustrations. Only columns related to quantity, rate and amount will be
shown to save the space.]
2. Last In First Out (LIFO) Method :
LIFO method of pricing the issues is exactly opposite to FIFO method.
When LIFO method is used it is assumed that material purchased last is used for
making issues and so the price charged for the first issue is the price at which
latest purchasing has been made. Naturally the stock is valued at the oldest price
rate of the period. For which the stores ledger account is prepared. It should be
remembered that actual quantity issued is from the oldest lot and the quantity
purchased recently remains in stock; only for pricing of issues it is assumed that
recently purchased quantity is issued first.
Advantages :
1)
LIFO method is simple to understand and easy to follow.
2)
Pricing of issues is done at actual cost of materials and so there is no
unrealised profit or loss caused by this method.
3)
In the increasing price trend shown by the market this method is suitable
since issues are priced at the current prices which are high and high price
of material is immediately recovered by charging it to the production.
4)
In the situation of rising prices the quantity in stock is valued at the old low
prices and so the closing stock value is shown less. This agrees with the
principle of valuation of closing stock to be done at cost or market price
whichever is less.
Disadvantages :
1)
When there are large number of transactions of receipts and issues the
recording and calculations increase and the possibility of errors increases.
2)
During the period of falling prices, the material cost of production will be
Advanced Cost Accounting - I
171
Pricing of Material Issued
shown less whereas that production has been done by using the material
purchased earlier at high prices.
3)
Comparison of costs of two similar jobs using same material in same quantity
may give misleading results merely because material issued to them is from
two different lots purchased at different prices.
NOTES
ILLUSTRATION
Stores Ledger Account is prepared by using the information given in the
previous illustration but using LIFO Method.
SR Company
Stores Ledger Account
Date
Receipts
Qty
Rate
`
Issues
Amt
`
Qty
Rate
`
Balance
Amt
`
Qty
Rate
`
Amt
`
800
8
6400
300
600
8
9
2400
5400
300
200
300
300
700
8
9
8
8
9.50
2400
1800
2400
2400
6650
300
700
8
9.50
2400
6650
400
10
4000
2013
July, 1
4
7
500
600
9
8
4000
5400
12
400
9
3600
15
19
200
9
1800
700
9.50
6650
24
400
10
4000
28
400
10
4000
300
8
2400
400
9.50
3800
300
9.50
2850
Closing stock of material at the end of July, 2013 is 600 units consisting of
300 units @ ` 8 and 300 units @ `9.50. The value of closing stock is ` 2400 +
`2850 = `5250. Under the FIFO method of pricing the issues the value of
closing stock was `5900.
Under LIFO method closing stock consists of 300 units @ `8 each, which
are from the opening stock of 800 units.
172 Advanced Cost Accounting - I
Pricing of material received back from the production department :
Under FIFO method of pricing the issues material returned to stores by a
production department is recorded in the receipt section of the stores ledger account
and to differentiate it from normal receipt transactions such recording is normally
done in red ink. The recording done for pricing of material to the job to which it
was issued is considered and if such issue was done from a single lot, the price
charged for the issue is recorded as the rate at which material returned is valued
and in the balance column the quantity received back, the rate and the value of
material received back calculated at that rate is recorded as the last lot separately.
If the pricing of issue to the job is done from two or more lots at their lot prices, the
returned material is valued at the rate of the last lot which was issued to that job
and such returned material is recorded in the balance column as explained above.
Pricing of Material Issued
NOTES
In the illustration for FIFO method which we have already considered if we
presume that on July 22 the stores department has received 20 units from the job
to which material was issued on July 12, the recording in the Receipt and Balance
sections will appear as under :Date
Receipts
Qty Rate
`
2013
July 22
20
9
Issues
Amt Qty Rate
`
`
180
Balance
Amt
`
Qty Rate
`
Amt
`
300
9
2700
700
9.50
6650
20
9
180
Under LIFO method of pricing the recording for the above transaction will
be done on July 22 by valuing the returned material at ` 9 each because on July
12 the material was issued to the job from a single lot which was priced at `9
each. The recording for the transaction of return of material will, therefore, remain
same as shown for FIFO method above.
Recording for shortage of material under FIFO method is done in Issue
section of the Stores Ledger Account in red ink. The quantity of shortage is shown
in a Quantity column, the rate of the first lot of material in balance is used for
calculating the amount of loss and it is shown in the amount column of the issue
column. In the Balance section the quantity of shortage is reduced from the first
lot and remaining quantity is shown in the quantity column and valued at the rate
of the first lot.
Assuming that in the illustration, it is mentioned that on July 31 a shortage of
10 units is found in physical stock taking of the material, 10 units will be recorded
in quantity column of the issue section and since the stock on July 28 consists of
two lots (200 units @ ` 9.50 and 400 units @ ` 10 each) the shortage will be
charged at `9.50 each and balance column will be adjusted accordingly. The
recording on 31st July will appear in Stores Ledger Account as per FIFO method
Advanced Cost Accounting - I
173
Pricing of Material Issued
Date
Receipts
Qty Rate
`
Issues
Amt Qty Rate
`
`
Balance
Amt
`
Qty Rate
`
Amt
`
190
9.50
1805
400
10
4000
2013
NOTES
July 31
10
9.50
95
Under LIFO method of pricing the issues, the recording for shortage of 10
units will be done as under :Date
Receipts
Qty Rate
`
Issues
Amt Qty Rate
`
`
Balance
Amt
`
Qty Rate
`
Amt
`
300
8
2400
290
9.50
2755
2013
July 31
10
9.50
95
According to LIFO method, shortage of 10 units is charged from the last lot
in stock for which the rate is ` 9.50 each and the quantity in balance for the last
lot is reduced and so stock in balance on July 31 is shown as 300 units @ ` 8 and
290 units @ ` 9.50 each. The loss of ` 95 will be charged to costing profit &
Loss Account as abnormal loss.
3) Highest In First Out (HIFO) Method :
In this method the pricing of issue is done at the highest purchase price
shown in balance column upto the date of issue. When the lot having the highest
price is fully exhausted by the issues, the next highest price is used for pricing the
subsequent issue. In this method production/ jobs are charged with the highest
price of purchase of material and recovery of the material purchased at highest
price is done first and valuation of material in stock is done at low prices. The
value of closing stock is shown less than its real value and thus by reducing the
profit amount for the period a secret reserve is created by the concern.
HIFO method of pricing the issues is not popular and a few concerns may
be using this method.
4) Base Stock Method :
174 Advanced Cost Accounting - I
In this method a fixed quantity out of stock is always held at a fixed price
and this stock is known as the base stock and it is to be held as reserve stock for
a very long period of time. Base stock is not used for making any issues unless an
emergency situation arises. This method is not an independent method and for
pricing of issues it is to be coupled with FIFO or LIFO method. This method is
generally used by those industries which have to carry on the manufacturing process
for a very long period of time.
ILLUSTRATION
Pricing of Material Issued
A manufacturing company uses a material in its manufacturing process
and has provided following information about the transactions that have taken
place in respect of the material :2013
NOTES
May 1 Opening stock 600 kgs at `50 per kg.
3 Material issued 200 kgs.
2013
May 7 Receipt of 400 kgs @ `54 per kg.
12 Issue of 300 kgs.
18 Receipt of 500 kgs @ `55 per kg.
22 Issue of 150 kgs.
25 Issue of 400 kgs.
30 Receipt of 200 kgs @ `56 per kg.
The company follows Base Stock Method for pricing the issues and keeps
base stock of 200 kgs at a fixed price of `50 per kg. It uses FIFO method along
with the Base Stock Method.
Show the recording in the Stores Ledger Account.
SOLUTION
Stores Ledger Account (Base Stock with FIFO)
Date
Receipts
Qty
Rate
`
Issues
Amt
`
Qty
Rate
`
Balance
Amt
`
Qty
Rate
`
Amt
`
600
50
30000
400
50
20000
400
50
20000
2013
July,1
3
7
200
400
54
500
55
200
50
10000
400
200
54
50
21600
10000
100
54
5400
300
54
16200
200
50
10000
300
500
54
55
16200
27500
200
50
10000
150
500
55
55
8100
27500
27500
22
150
25
30
200
56
10000
21600
12
18
50
11200
54
8100
150
54
8100
200
50
10000
250
55
13750
250
55
13750
200
50
10000
250
56
13750
200
56
11200
Advanced Cost Accounting - I
175
Pricing of Material Issued
Base stock of 200 kgs @ ` 50 per kg is maintained in the Balance column
throughout the month.
B. Average Cost Methods :
i) Simple Average :-
NOTES
In this method the pricing of issues is not done at the actual cost price but at
simple average of the prices at which materials are purchased prior to the issue
date. If the quantity of the previous purchases is exhausted, then the simple average
of prices of subsequent purchases is calculated and at that average price issue of
materials is priced. For calculation of simple average following formula is used :
Total of Prices
No of prices
If purchases have been made at ` 10. ` 12 and ` 11 per unit prior to issue
of material, the simple average of the prices will be
`10 + `12 + `11
3
`33
=
3
=
`11 and
at `11 per unit the quantity issued will be charged. In simple average method only
purchase prices are added and the quantity purchased is not taken into consideration.
The justification given for using simple average method is the materials purchased
in different lots and at different prices gets mixed up when it is kept in the bin and
issue of material, therefore, may not be from a particular lot. So simple average of
prices should be used for pricing the issues.
The only advantage of this method is it is simple to understand and easy to
follow.
The disadvantage of this method is that issue of material is not priced not at
the cost price but at a price which is totally different from cost price. Along with
this since quantity purchased at each price is not considered the price charged
may give an absurd result. From the following example this points should become
clear :
Feb 4
Purchase of 600 units at `10 each.
Feb 9
Purchase of 20 units at `18 each.
Feb 11 Issue of 300 units.
The simple average price =
176 Advanced Cost Accounting - I
`10 + `18
2
= `14
300 units issued will be priced at the simple average price of `14 each and
the total material cost of issue will be 300 units x `14 = ` 4200. The pricing of
issue under FIFO method would have been 300 units x `10 = `3000 and under
LIFO method it would be (20 units x `14) + (280 units x `10) = `280 + `2800
= `3080. By using simple average method, there is excessive charge for material
made to the production / job. Therefore when there is too much difference in the
quantity purchased at different prices and the fluctuation in material prices is very
wide, simple average method does not become a suitable method. Unrealised
profit or loss is likely to take place when simple average method is used for pricing
the issues.
Pricing of Material Issued
ILLUSTRATION
B Ltd. uses a certain component in its finished product and purchase it
from the supplier. It follows Simple Average Method for pricing the issues. From
the following particulars prepare Stores Ledger Account :
NOTES
2013, March
1
Opening stock of 250 units @ `20 each.
3
Receipt of 400 units @ ` 19 each.
7
Issue of 500 units.
10 Receipt of 700 units @ `18 each.
12 Receipt of 300 units @ ` 20 each.
23 Issue of 200 units
27 Issue of 450 units
SOLUTION
B Ltd.
Stores Ledger Account
(Simple Average Method)
Date
Receipts
Qty
Rate
`
Issues
Amt
`
Qty
Rate
`
Balance
Amt
`
Qty
Rate
`
Amt
`
250
20
5000
250
20
5000
400
19
7600
2013
Mar,1
3
400
19
7600
7
500
19.50
9750
150
2850
10
700
18
12600
850
15450
12
300
20
6000
1150
21450
23
200
19
3800
950
17650
27
450
19
8550
500
9100
Calculation of simple average price for issue transactions is done as under
On March 7 :
On March 23 :
`20 + `19
= ` 19.50
2
`19 + `18 + `20
`57
=
3
3
= ` 19
Advanced Cost Accounting - I
177
Pricing of Material Issued
NOTES
Since the opening stock quantity of 250 units is exhausted in the issue of
500 units on March 7 the price of `20 for opening stock is not considered and
purchase prices on March 3, March 10 and March 12 are considered for calculation
of simple average.
On March 27 : `18 + `20
=
2
`38
2
= ` 19
When 200 units are issued on March 23, the balance quantity of 150 units
out of 400 units purchased on March 3 are issued and so the purchase price of
` 19 for purchases made on March 3 has not been considered for calculation of
simple average price and purchase price of ` 18 and `20 are added and the
simple average of `19 is calculated and used for issue made on March 27.
It should be remembered that once the quantity in stock and quantity
purchased are used for issues made, their prices should be dropped and should not
be used in calculating of the simple average. The price of quantity in balance and
all subsequent purchase prices prior to the issue transaction are to be considered
while calculating the simple average price and the issued quantity should be priced
at this simple average price.
Value of quantity in balance column is calculated by adding to the previous
stock value the value of purchases made and by deducting from the previous
stock value the value of material issued. Rate column under Balance section does
not show any rate except the rate given for the opening stock.
ii) Weighted Average Method :
To overcome the defect of quantity purchased being ignored in the simple
average method, the Weighted Average Method has been introduced. In this
method the Weighted average is calculated as under :Value of material in the balance
Total quantity of material in balance
At the weighted average price the pricing of material issued is done. The
new weighted average is required to be calculated after each purchase transaction
but on issue of material new weighted average is not to be calculated.
Advantages :
178 Advanced Cost Accounting - I
1)
In this method as quantity purchased at a certain price is considered for
calculating and pricing the issues and so the weighted average price is
appropriate compared to the simple average method.
2)
In this method weighted average changes only with the fresh purchases
and new weighted average is not calculated for the issue transaction. This
reduces the calculation work considerably.
3)
As along with purchased price the quantity purchased at that price is also
considered the fluctuations in prices and in quantities purchased are ruled
out and the weighted average price gives a better result.
4)
Valuation of stock is more realistic in this method because the extreme
differences in purchase prices are evened out and quantity in balance is
valued at the weighted average price.
5)
In this method unrealised profit or loss is not likely to arise.
Disadvantages :
1)
For accuracy purpose, the weighted average price is required to be calculated
upto 4 or 5 decimal points and calculation at such weighted average for
pricing the issues creates difficulty.
2)
If purchase transactions are frequent, the calculation of weighted average
is required to be done after every purchase transaction even though there is
no issue transaction during this period. This increases clerical work and
possibility of calculation error.
Pricing of Material Issued
NOTES
ILLUSTRATION
Texmo co. has provided following information to you.
2012 Aug.
1
Opening stock of 800 units @ ` 5 each.
4
Receipt of 700 units @ ` 4.90 each.
8
Issue of 500 units.
11 Issue of 400 units.
16 Receipt of 600 units @ ` 5.20 each.
19 Receipt of 300 units @ ` 5.30 each.
22 Issue of 800 units.
26 Issue of 300 units.
28 Receipt of 500 units @ `5.10 each.
Assuming that the company follows Weighted Average Method for pricing
the issues, prepare Store Ledger Account.
Advanced Cost Accounting - I
179
Pricing of Material Issued
SOLUTION
Weighted Average Method
Texmo Company
Stores Ledger Account
NOTES
Date
Receipts
Qty
Rate
`
Issues
Amt
`
Qty
Rate
`
Balance
Amt
`
Qty
Rate
`
Amt
`
800
5
4000
1500
4.9533
7430
4.9533 49533.35
2013
Aug, 1
4
700
4.90
3430
8
500
4.9533
2476.65
1000
11
400
4.9533
1981.32
600
4.9533
2972.03
16
600
5.20
3120
1200
5.0767
6092.03
19
300
5.30
1590
1500
5.1213
7682.03
22
800
5.1213
4097.04
700
5.1213
3584.99
25
300
5.1213
1536.39
400
5.1213
2048.60
900
5.1096
4598.60
28
500
5.10
2550
Note that weighted average is calculated after each transaction of receipt
of material and pricing of issues which take place on Aug, 8 and 11 are priced at
the same weighted average price. Also issues that have taken place on Aug, 22
and Aug, 26 are priced at the same weighted average price of `5.1213 per unit
since they have taken place consequatively without any new receipt in between
these transactions.
iii) Periodic Simple Average Method :
In this method simple average of the purchase prices is calculated for all
the prices for all the prices for a fixed period which may be one month or 4
months or 6 months and the periodic simple average so calculated for pricing the
issues made in the subsequent period. If the period fixed is one month, the simple
average of all receipt prices is calculated and the periodic simple average so
calculated for pricing the issues made in the next month. If period fixed is six
months, the receipt prices in the six months period are used for calculating the
periodic simple average and it is used for pricing the issues made in the subsequent
period. In this method quantity of material purchased at different prices is totally
ignored and so the disadvantages of simple average method also become applicable
to the periodic simple average method. As periodic simple average calculated is
used for pricing the issues of next period the method does not charge the issues at
the current prices.
iv) Periodic Weighted Average Method :
180 Advanced Cost Accounting - I
This method is similar to the periodic simple average method but in this
method, the periodic weighted average is calculated by considering the quantity
purchased at each price. In this method also the periodic weighted average
calculated for a fixed period is used for pricing the issues made in the subsequent
period.
Pricing of Material Issued
The periodic simple average method and the periodic weighted average
method are used for pricing the issues in a very few concerns.
C. Notional Price Methods :
NOTES
In notional price method the cost price or average of cost prices are not
considered for pricing the issues but a different price which may be a standard
price or an inflated price is used for pricing the issues of material.
i) Standard Price Method :
In this method pricing of issues is not done at the cost price or average
price. For a period a standard price or a pre-estimated price is fixed and the issues
are priced at this standard price of pre-estimated price. While fixing the standard
price various factors like current price, fluctuations in price expected in near future,
quantities normally purchased, discount available with a quantity purchased,
transport and other costs related to the material, etc. are considered and accordingly
a price is fixed as a standard price. All issues made during the period are priced at
the standard price. In the balance section quantity in balance after receipt of
material and issue of material is shown and its value is shown by adding the value
of receipt and by deducting the value of issued material to the previous stock
value. The value of closing stock is more or less as compared to the actual cost
and such variance is either favourable price variance or unfavorable price variance
and treated separately.
Advantages :
1)
Since pricing of issues is done at the standard price the material cost of jobs
can be compared and difference in material cost of two similar jobs shows
efficiency or inefficiency in the use of material for them.
2)
Calculation of material price variance shows efficiency or otherwise of the
purchase department in making the purchases.
Disadvantages :
1)
When there are wide fluctuations in the market price of material, it becomes
difficult to fix the standard price for pricing the issues.
2)
Actual cost of material used for a job or production order is not shown in
the standard price method. So this method becomes suitable only when
standard costing is followed in the entire concern.
ii) Inflated Price Method :
Inflated price method is not an independent method of pricing the issues but
it is to be used in conjunction with some other method such as FIFO, LIFO, etc.
When the nature of material is such that its quantity is reduced while it is being
stored in the stores department due to some natural reason like evaporation or
climatic changes this method of pricing the issues is found suitable. The loss in
Advanced Cost Accounting - I
181
Pricing of Material Issued
NOTES
quantity or weight is recovered by inflating the purchase price and the value of
purchased material is divided by the net quantity ( i.e. purchased quantity expected
loss in quantity) The inflated price so calculated for pricing the material issued
from that purchase lot. Since purchase price as well as the quantity purchase at
that price may change during the period, a new inflated price is required to be
calculated on purchase of every new lot. Supposing that there is 10 % loss in
weight for a material and 400 liters of material is purchased at a price of `90 per
litre, the inflated price for this lot can be calculated as under :Net Weight
= Gross quantity purchased - 10% loss in quantity
= 400 - 40
= 360 liters
Value of purchased material = 400 x 90 = `36,000
Value of material purchased
Inflated price =
Net Weight
` 36,000
=
360 Liters
= ` 100 per litre
When 360 liters of material from this lot is issued the price will be charged
at `100 per litre and thus the full value of material purchased is recovered from
issue of the material and loss due to reduced quantity is fully recovered.
[ Additional Illustrations given after 8.6 Summary ]
8.4
Important Points Related to Materials Costing
Control
With the objective of exercising proper control on materials cost attention
should be given to the following important points :i)
182 Advanced Cost Accounting - I
Material cost depends upon the quantity, quality and price of the materials
and on proper utilisation of the materials by workers engaged in the
manufacturing process. It is, therefore, necessary to establish and maintain
close co-ordination among the purchasing, stores and production departments.
When production department gives correct information about type of
materials, their quality and specifications, the quantity in which they are
needed and the date upto which they should be made available the stores
department con find out whether the required materials are available in
stores and can be supplied at the right time to the production departments.
If they are not available, the stores department, by preparing materials
requisition note can request the purchase department to place the order and
obtain the materials at reasonable prices within the specific time limit. Excess
material is to be properly preserved in the stores department so that loss of
materials can be minimised. The workers in the production department
should use the materials carefully and scrap, spoilage and wastage is kept
to the minimum. Thus proper co-ordination helps to a great extent in
controlling materials control.
ii)
Purchasing of materials should, as far as possible, be centralised and
purchasing of right material, in right quantity and at proper prices from right
suppliers should be ensured. Through this cost of materials is controlled to
the maximum extent.
iii)
Proper procedures should be laid down for each activity connected with
the materials. Except in emergency situation the procedures should be strictly
followed.
iv)
For movements of materials standardised documents such as purchase order,
goods received note, materials requisition note, material returned note,
materials transfer note, bin card, stores ledger account, etc. should be made
available to record the relevant information. Movement and issue of materials
without proper authorisation should be strictly prohibited.
v)
Sufficient space and facilities should be provided to the stores department
for storage of various materials. Arrangement should be made to protect
the material and insurance coverage should be provided to eliminate or
minimise loss of materials during the storage period.
vi)
Method to be used for pricing of issues of materials should be carefully
selected so that the cost incurred for the materials can be recovered from
materials cost charged to production.
vii)
By making stock-taking arrangement the quantity as per records and the
actual quantity should be compared and proper re-conciliation between these
two quantities should be made. If possible, internal audit system should be
followed for verification of materials and for detecting and reporting any
loss, damage, theft and slow-moving, obsolete and adversely affected
materials.
viii)
Fixation of stock levels and deciding the economic order quantity for each
item of material also helps in controlling materials cost.
8.5
Pricing of Material Issued
NOTES
Summary
Materials issued from the stores to a particular job, order, process or operation
are required to be priced and this work is done by accounts or costing department
of the enterprise. This is necessary in order to calculate total material cost of a
job, order, process or operation. There are various methods available for pricing
the materials issued such as ‘cost price methods’, ‘average price methods’ and
‘notional price methods’. These methods provide further certain methods out of
which a particular method is selected by the enterprise for pricing for materials.
For example, under cost price methods there are First In First Out (FIFO), Last In
First Out (LIFO), Highest In First Out (HIFO) and Base Stock Method. Each
method possesses certain advantages as well as certain disadvantages. According
to the type of material quantity in which materials are used, and variation in the
price of material over a period a particular method of pricing the issue of materials
is selected by an enterprise. In the Stores Ledger Account the value of material
Advanced Cost Accounting - I
183
Pricing of Material Issued
issue is recorded and by adding the value of different materials issued for a job,
order, process or operation the total materials cost is calculated and charged to
the job, order, process or operation.
NOTES
ADDITIONAL ILLUSTRATIONS
ILLUSTRATION 1
The following particulars have been extracted in respect of Material-Bee
of Domnick Co., Durgapur for the month of March, 2014. Prepare Stores Ledger
Account pricing the material issues on the basis of Last In First Out Method.
1st
Opening stock - 100 units @ `1.75
5th
Purchases - 150 units @ `1.50
8th
Issues - 200 units
12th Purchases - 300 units @ `1.60
18th Issues - 250 units
22th Purchases - 400 units @ `1.70
29th Issues - 400 units
30th Spoilage - 10 units.
Ascertain the value of closing stock.
184 Advanced Cost Accounting - I
Opening Stock
Purchases
Issues
Purchases
Issues
Purchases
Issues
Spoilage
8th
12th
18th
22nd
29th
30th
-
-
-
400
300
150
GRN Qty.
No. units
Receipts
1.70
1.60
1.50
Rate
`
680
480
225
Amt.
`
-
-
-
-
MRN
No.
In the books of Domnick Co.; Durgapur
Stores Ledger Account of Materials-Bee
For the month ended 31-03-2014
1st
5th
Date Particulars
2014
March
SOLUTION
10
400
250
150
50
Qty.
Units
Issues
1.60
1.70
1.60
1.50
1.75
Rate
`
16
680
400
225
87.50
Amt.
`
50
300
50
50
50
50
400
50
50
50
40
100
100
150
50
Qty.
units
1.75
1.60
1.75
1.60
1.75
1.60
1.70
1.75
1.60
1.75
1.60
1.75
1.75
1.50
1.75
Rate
`
-------------
Balance
Maximum Level
Minimum Level
Reorder Level
Reorder Quantity
87.50
480
87.50
80.00
87.50
80.00
680
87.50
80.00
87.50
64.00
175
175
225
87.50
Amt
`
Spoilage
*
Remarks
Pricing of Material Issued
NOTES
Advanced Cost Accounting - I
185
Pricing of Material Issued
Working Notes :
(i)
Valuation of Closing Stock :
Closing stock is 90 units consists of two lots viz.
NOTES
i) 50 units - @ `1.75 - ` 87.50
ii) 40 units - @ `1.60 - ` 64
Hence, 90 units are valued at `151.50
ILLUSTRATION 2
The following are the receipts and issues of material in Akbar-Ali Co. Ltd.
Ajmer, during the month of March 2012
1
Opening stock 2,000 units @ `46 per unit
4
Issued 1,400 units
6
Purchased 3,500 units @ `45 per unit
8
Condemned due to deterioration in quantity and hence transferred to
scrap 300 units
9
Issued 800 units
14 Issued 2,100 units
17 Purchased 2,000 units @ `48 per unit
20 Issued 1,200 units
25 Purchased 1,800 units @ `47 per unit
28 Issued 2,800 units
31 Excess found in stock 430 units due to wrong weighing during the month.
The maximum level fixed is 4,000 units, the minimum 750 units and the
reorder level is 1,000 units.
Show the Stores Ledger Account under Last In First Out Method.
186 Advanced Cost Accounting - I
Issues
Purchases
Issues
Purchases
Issues
Excess in Stock
14th
17th
20th
25th
28th
31st
9th
Condemned due
to deterioration
Issues
Opening Stock
Issues
Purchases
Particulars
-
-
-
-
430
1,800
2,000
3,500
47
47
48
45
Receipts
GRN Qty.
Rate
No. units
`
20,210
84,600
96,000
1,57,500
Amt.
`
-
-
-
-
-
-
MRN
No.
In the books of Akbar-Ali Co.,Ltd.Ajmer
Stores Ledger Account of Material
For the month ended 31-03-2012
8th
Date
2012
March
1st
4th
6th
SOLUTION
LIFO
1,800
800
200
1,200
2,100
800
300
1,400
Issues
Qty.
Units
47
48
45
48
45
45
45
46
Rate
`
84,600
38,400
9,000
57,600
94,500
36,000
13,500
64,400
Amt.
`
600
100
430
46
45
47
Balance
Qty.
Rate
units
`
2,000
46
600
46
600
46
3,500
45
600
46
3,200
45
600
46
2,400
45
600
46
300
45
600
46
300
45
2,000
48
600
46
300
45
800
48
600
46
300
45
800
48
1,800
47
600
46
100
45
27,600
4,500
20,210
Amt
`
92,000
27,600
27,600
1,57,500
27,600
1,44,000
27,600
1,08,000
27,600
13,500
27,600
13,500
96,000
27,600
13,500
38,400
27,600
13,500
38,400
84,600
27,600
4,500
Maximum Level
- 4,000 units
Minimum Level
- 750 units
Reorder Level
- 1,000 units
Reorder Quantity -
Excess in
Stock *
Scrap
*
Remarks
Pricing of Material Issued
NOTES
Advanced Cost Accounting - I
187
Pricing of Material Issued
Working Notes :
(i) Excess found in stock on 31st March due to wrong weighing during the
month, is valued at `47 per unit as the latest purchase price.
ILLUSTRATION 3
NOTES
The stock on hand of material as on 01-01-2014 was 500 units @ ` 1 per
unit. The following purchases and issues were subsequently made. Prepare Stores
Ledger Account of Material in Ballarpur Ltd., Baroda for the three months ended
31-03-2014 under Last In First Out Method.
Purchases :
6-1-2014
20-1-2014
27-1-2014
13-2-2014
20-2-2014
17-3-2014
:
:
:
:
:
:
100 units @ ` 1.10
700 units @ ` 1.20
400 units @ ` 1.30
1,000 units @ ` 1.40
500 units @ ` 1.50
400 units @ ` 1.60
:
:
:
:
:
:
500 units
500 units
500 units
500 units
500 units
500 units
Issues :
9-1-2014
22-1-2014
30-1-2014
15-2-2014
22-2-2014
11-3-2014
On 29-03-2014 the stock verifier reported that there was a breakage of 15
units.
188 Advanced Cost Accounting - I
Particulars
Stock on hand
Purchases
Issues
Purchases
Issues
Purchases
Issues
Purchases
1-1
6-1
9-1
20-1
22-1
27-1
30-1
13-2
-
-
-
1,000
400
700
1.40
1.30
1.20
Receipts
GRN Qty.
Rate
No.
units
`
100
1.10
1,400
520
840
110
Amt.
`
In the books of Ballapur Ltd.; Baroda
Stores Ledger Account
For the three month ended 31-03-2014
Date
2014
SOLUTION
LIFO
-
-
-
MRN
No.
400
100
500
100
400
Issues
Qty.
Units
1.30
1.20
1.20
1.10
1.
Rate
`
520
120
600
110
400
Amt.
`
-------------
1.
1.20
1.
1.20
1.
1.20
1.30
1.
1.20
1.
1.20
1.40
100
700
100
200
100
200
400
100
100
100
100
1,000
Balance
Qty.
Rate
units
`
500
1.
500
1.
100
1.10
100
1.
Maximum Level
Minimum Level
Reorder Level
Reorder Quantity
840
100
240
100
240
520
100
120
100
120
1,400
100
Amt
`
500
500
110
100
Remarks
Pricing of Material Issued
NOTES
Advanced Cost Accounting - I
189
Issues
Purchases
Issues
Issues
Purchases
Breakage
20-2
22-2
11-3
17-3
29.3*
190 Advanced Cost Accounting - I
15-1
-
-
430
500
1.60
1.50
640
750
-
-
-
-
15
500
500
500
1.60
1.40
1.50
1.40
24.
700
750
700
100
100
500
100
100
500
500
100
100
500
100
100
100
100
400
100
100
385
1.
1.20
1.40
1.
1.20
1.40
1.50
1.
1.20
1.40
1.
1.20
1.
1.20
1.60
1.
1.20
1.60
100
120
700
100
120
700
750
100
120
700
100
120
100
120
640
100
120
616
Breakage
*
Pricing of Material Issued
NOTES
ILLUSTRATION 4
Pricing of Material Issued
The following transactions relate to purchase and issue of material, CM105 in Colgate Ltd. Cochin during March, 2009. Prepare a Stores Ledger Account
under Last In First Out Method of charging materials.
1st
Opening balance - 500 units @ `25
3rd
Issues 70 units
4th
Issued 100 units
8th
Issued 80 units
NOTES
13th Received from vendor 200 units @ `24
14th Refund of surplus from a work order 15 units @ `24
16th Issued 180 units
20th Received from vendor 240 units @ `23
24th Issued 304 units
25th Received from vendor 320 units @ `23.50
26th Issued 112 units
27th Refund of surplus from a work order 12 units @ `25
29th Received from vendor 100 units @ `24.
A stock verifier noted that on 15th he had found a shortage of 5 units and on
28 a damage of 8 units.
th
Advanced Cost Accounting - I
191
192 Advanced Cost Accounting - I
Opening Balance
Issues
Issues
Issues
Purchases
Refund of surplus -
Shortage
Issues
Purchases
2009
March
1st
3rd
4th
8th
13th
14th *
15th *
16th
20th
Receipts
-
-
240
15
200
23
24
24
Rate
`
5,520
360
4,800
Amt.
`
-
-
-
MRN
No.
180
5
70
100
80
Qty.
Units
Issues
24
24
25
25
25
Rate
`
4,320
120
1,750
2,500
2,000
Amt.
`
Qty.
units
500
430
330
250
250
200
250
215
250
210
250
30
250
30
240
Rate
`
25
25
25
25
25
24
25
24
25
24
25
24
25
24
23
-----------------------
Balance
Maximum Level
Minimum Level
Reorder Level
Reorder Quantity
Amt
`
12,500
10,750
8,250
6,250
6,250
4,800
6,250
5,160
6,250
5,040
6,250
720
6,250
720
5,520
Shortage*
Refund *
Remarks
NOTES
GRN Qty.
No. units
Particulars
In the books of Colgate Ltd., Cochin
Stores Ledger Account of Material CM-105
For the month ended 31-03-2009
Date
SOLUTION
LIFO
Pricing of Material Issued
Issues
Refund of surplus -
Damage
Purchases
26th
27th
28th
29th
-
Purchases
25th
-
Issues
24th
100
12
320
24
25
23.50
2,400
300
7,520
-
-
-
8
112
240
30
34
25
23.50
23
24
25
200
2,632
5,520
720
850
216
208
12
216
208
4
216
208
4
100
216
320
216
208
216
25
23.50
25
25
23.50
25
25
23.50
25
24
25
23.50
25
23.50
25
5,400
4,888
300
5,400
4,888
100
5,400
4,888
100
2,400
5,400
7,520
5,400
4,888
5,400
Damage*
Refund*
Pricing of Material Issued
NOTES
Advanced Cost Accounting - I
193
Pricing of Material Issued
ILLUSTRATION 5
On 1st March, 2013 the stock of a component in the stores was 500 units
@ `300 per hundred. During the three months the receipts and issues were as
follows:
NOTES
Purchased :
March :
April :
May :
400 units @ ` 400 per hundred
500 units @ ` 500 per hundred
600 units @ ` 600 per hundred
March :
April :
May :
300 units
400 units
500 units
Issued :
When stock was taken on 31st May 2013, a discrepancy of 50 units was
revealed.
Prepare a Stores Ledger Card under First In First Out Method in the
books of Hamam Ltd., Himmatpur.
194 Advanced Cost Accounting - I
Particulars
Opening Stock
Purchases
Issues
Purchases
Issues
Purchases
Issues
Discrepancy
1-3
1-3
31-3
1-4
30-4
1-5
31-5
31-5*
-
-
-
600
500
400
6.00
5.00
4.00
Receipts
GRN Qty.
Rate
No. units
`
3,600
2,500
1,600
Amt.
`
-
-
-
-
MRN
No.
In the books of Humam Ltd., Himmatpur
Stores Ledger Card of a Component
For three months ended 31-05-2013
Date
2013
SOLUTION
FIFO
200
300
50
200
200
300
Issues
Qty.
Units
4.
5.
5
3.
4.
3.
Rate
`
800
1,500
250
600
800
900
Amt.
`
-----------------------
Balance
Qty.
Rate
units
`
500
3.
500
3.
400
4.
200
3.
400
4.
200
3.
400
4.
500
5.
200
4.
500
5.
200
4.
500
5.
600
6.
200
5.
600
6.
150
5
600
6.
Maximum Level
Minimum Level
Reorder Level
Reorder Quantity
Amt
`
1,500
1,500
1,600
600
1,600
600
1,600
2,500
800
2,500
800
2,500
3,600
1,000
3,600
750
3,600
Discrepancy*
Remarks
Pricing of Material Issued
NOTES
Advanced Cost Accounting - I
195
Pricing of Material Issued
ILLUSTRATION 6
Prepare a Stores Ledger Account on the basis of First In First Out Method
of pricing the issue of stores using the following information about material G-7 of
Galaxy Co., Gauhatti for March, 2009.
NOTES
Date
Particulars
2009, march
196 Advanced Cost Accounting - I
Quantity
Rate per unit
units
`
1st
Materials on hand
300
9.70
3rd
Purchases
250
9.80
11th
Issues
390
-
14th
Shortage
10
-
15th
Purchases
300
10.05
18th
Purchases
150
9.60
20th
Issues
210
-
24th
Purchases
110
9.90
25th
Issues
300
-
28th
Purchases
150
10.30
29th
Issues
210
-
Issues
Shortage
Purchases
Purchases
Issues
11th
14th
15th
18th
20th
-
-
150
300
9.60
10.05
1,440
3,015
2,450
Amt.
`
In the books of Galaxy Co., Gauhatti
Stores Ledger Account of Material G.7
For the month ended 31-03-2009
Date Particulars
Receipts
2009
GRN Qty.
Rate
March
No. units
`
st
1
Materials on hand
rd
3
Purchases
250
9.80
SOLUTION
FIFO
-
-
MRN
No.
150
60
300
90
10
Issues
Qty.
Units
9.80
10.05
9.70
9.80
9.80
Rate
`
1,470
603
2,910
882
98
Amt.
`
-------------------------------------
150
150
300
150
300
150
240
150
9.80
9.80
10.05
9.80
10.05
9.60
10.05
9.60
Balance
Qty.
Rate
units
`
300
9.70
300
9.70
250
9.80
160
9.80
Maximum Level
Minimum Level
Reorder Level
Reorder Quantity
1,470
1,470
3,015
1,470
3,015
1,440
2,412
1,440
Amt
`
2,910
2,910
2,450
1,568
Shortage*
Remarks
Pricing of Material Issued
NOTES
Advanced Cost Accounting - I
197
Purchases
Issues
Purchases
Issues
25th
28th
29th
198 Advanced Cost Accounting - I
24th
-
-
150
110
10.30
9.90
1,545
1,089
-
-
90
110
10
240
60
9.60
9.90
10.30
10.05
9.60
864
1,089
103
2,412
576
240
150
110
90
110
90
110
150
140
10.05
9.60
9.90
9.60
9.90
9.60
9.90
10.30
10.30
2,412
1,440
1,039
864
1,089
864
1,089
1,545
1,442
Pricing of Material Issued
NOTES
Pricing of Material Issued
ILLUSTRATION 7
The stock in hand of a Material Fox as on 1st January 2009 was 500 units @
`10 per unit. From the following transactions of purchases and issues of Finolex
Co. Ltd., Faizabad, prepare a Stores Ledger Account under First In First Out
Method.
NOTES
Purchases :
6th
20th
27th
13th
20th
17th
Jan.
Jan.
Jan.
Feb.
Feb.
Mar.
100 units @
700 units @
400 units @
1,000 units @
500 units @
400 units @
Jan.
Jan.
Jan.
Feb.
Feb.
Mar.
Mar.
500 units
500 units
500 units
500 units
500 units
500 units
Missing units 20.
` 11
` 12
` 13
` 14
` 15
` 16
Issues :
9th
22nd
30th
15th
22nd
11th
30th
Advanced Cost Accounting - I
199
200 Advanced Cost Accounting - I
Particulars
Stock on hand
Purchases
Issues
Purchases
Issues
Purchases
Issues
1-1
6-1
9-1
20-1
22-1
27-1
30-1
-
-
-
400
700
100
13
12.
11.
Receipts
GRN Qty.
Rate
No. units
`
5,200
8,400
1,100
Amt.
`
-
-
-
MRN
No.
In the books of Finolex Co. Ltd., Faizabad
Stores Ledger Account of Material Fox
For the three month ended 31-03-2009
Date
2009
SOLUTION
FIFO
300
200
100
400
500
Issues
Qty.
Units
12.
13.
11.
12.
10.
Rate
`
3,600
2,600
1,100
4,800
5,000
Amt.
`
-------------------------------------
300
400
200
12.
13.
13.
Balance
Qty.
Rate
units
`
500
10.
500
10.
100
11.
100
11.
100
11.
700
12.
300
12.
Maximum Level
Minimum Level
Reorder Level
Reorder Quantity
3,600
5,200
2,600
Amt
`
5,000
5,000
1,100
1,100
1,100
8,400
3,600
Remarks
Pricing of Material Issued
NOTES
Purchases
Issues
Purchases
Issues
Issues
Purchases
Missing
13-2
15-2
20-2
22-2
11-3
17-3
30-3
-
-
-
400
500
1,000
16
15
14
6,400
7,500
14,000
-
-
-
-
20
200
300
500
200
300
15
14.
15.
14
13
14
300
2,800
4,500
7,000
2,600
4,200
200
400
180
400
700
500
200
500
200
200
1,000
700
15.
16.
15
16
14
15
14.
15.
15.
13.
14.
14.
3,000
6,400
2,700
6,400
9,800
7,500
2,800
7,500
3,000
2,600
14,000
9,800
Missing*
Pricing of Material Issued
NOTES
Advanced Cost Accounting - I
201
Pricing of Material Issued
ILLUSTRATION 8
Prepare a Stores Ledger Account of material E-DOM from the following
particulars adopting First-In-First-Out Method of pricing of material issues in
the books of E-light Co. Ltd. Elora for March,2009.
NOTES
1st Opening Stock - 200 pieces @ ` 2
Purchases :
5
th
10
th
100 Pieces @ ` 2.20 - Goods Received Note -7
150 Pieces @ ` 2.40 - Goods Received Note -12
20th
180 Pieces @ ` 2.50 - Goods Received Note - 15
th
120 Pieces @ ` 2.30 - Goods Received Note - 24
29
Issues :
2
7
nd
th
12
202 Advanced Cost Accounting - I
th
150 Pieces - Material Requisition Note - 6
100 Pieces - Material Requisition Note - 10
100 Pieces - Material Requisition Note - 17
28th
200 Pieces - Material Requisition Note - 23
31st
Defectives - 15 Pieces
Opening Stock
Issues
Purchases
Issues
Purchases
Issues
Purchases
Issues
Purchases
Defectives
7th
10th
12th
20th
28th
29th
31st *
Particulars
24
15
12
7
120
180
150
100
2.30
2.50
2.40
2.20
Receipts
GRN Qty.
Rate
No.
pieces
`
276
450
360
220
Amt.
`
-
23
17
10
6
MRN
No.
In the books of E-light Co. Ltd. Elora
Stores Ledger Account of Material E-DOM
For the month ended 31-03-2009
Date
2009
March
1st
2nd
5th
SOLUTION
FIFO
15
100
100
50
50
50
50
150
Issues
Qty.
pieces
2.50
2.40
2.50
2.20
2.40
2
2.20
2.00
Rate
`
37.50
240
250
110
120
100
110
300
Amt.
`
-------------
80
120
65
120
100
180
80
50
150
100
2.50
2.30
2.50
2.30
2.40
2.50
2.50
2.20
2.40
2.40
Balance
Qty.
Rate
pieces `
200
2.
50
2.
50
2.
100
2.20
50
2.20
Maximum Level
Minimum Level
Reorder Level
Reorder Quantity
200
276
162.50
276
240
450
200
110
360
2.40
Amt
`
400
100
100
220
110
Defectives*
Remarks
Pricing of Material Issued
NOTES
Advanced Cost Accounting - I
203
Pricing of Material Issued
ILLUSTRATION 9
Prepare a Stores Ledger Account from the following receipts and issues of
Material Lee-45 of Liril Co. Ltd. for March, 2012 pricing it on Weighted Average
Rate Method.
NOTES
Receipts :
Date
st
1
15th
30th
Quantity
(Units)
1,000
1,500
500
P.O.No.
Quantity
(Units)
500
250
1,250
500
M.R.N.
No.
6
8
13
19
`
8
12
20
Issues :
Date
3rd
9th
20th
31th
204 Advanced Cost Accounting - I
Rate Per Unit
10
9
8
Date
2012
March
1st
3rd
9th
15th
20th
30th
31st
Purchases
Issues
Issues
Purchases
Issues
Purchases
Issues
Particulars
SOLUTION
Weighted Average
Rate Method
1,500
500
12
20
8
9
Receipts
GRN Qty.
Rate
No. units
`
8 1,000
10.
4,000
13,500
Amt.
`
10,000
19
13
6
8
MRN
No.
500
250
Issues
Qty.
Units
500
1,250
In the books of Liril Co. Ltd.
Stores Ledger Account of Material Lee-45
For the month ended 31-03-2012
8,571
9.143
10
10
Rate
`
4,285.50
11,429
5,000
2,500
Amt.
`
-----------------------
Balance
Qty.
Rate
Amt
units
`
`
1,000
10
10,000
500
10
5,000
250
10
2,500
1,750 9.143
16,000
500 9.143
4.571
1,000 8.571
8,571
500 8,571
4,285.50
Maximum Level
Minimum Level
Reorder Level
Reorder Quantity
Remarks
Pricing of Material Issued
NOTES
Advanced Cost Accounting - I
205
Pricing of Material Issued
Working Notes :
i)
Calculation of Weighted Average Rate :
1st
=
(1,000 units x ` 10)
1,000 units
NOTES
=
15th =
=
=
=
30th =
=
=
=
` 10,000
= ` 10
1,000 units
(250 units x ` 10) + (1,500 units x ` 9)
250 units + 1,500 units
` 2,500 + ` 13,500
1,750 units
` 16,000
1,750 units
` 9.143
(500 units x ` 9.143) + (500 unites x ` 8)
500 units + 500 units
` 4,571 + ` 4.000
1,000 units
` 8,571
1,000 units
` 8.571
ILLUSTRATION 10
From the following information relating to Material- Kobra of Kalyani
Manufactures, Kanpur, Prepare a Stores Ledger Account for the month of March
2014 on the basis of Weighted Average Rate Method.
206 Advanced Cost Accounting - I
1st
Purchases - 100 units @ ` 10 GRN No. 32
2nd
Purchases - 200 units @ ` 10.20 - GRN No. 35
5th
Issues - 250 units M.R.N. - No. 17
7th
Purchases - 300 units @ ` 10.50 - G.R.N. No. 38
10th
Purchases - 200 units @ ` 10.80 - G.R.N. No. 39
13th
Issues - 200 units - M.R.N. No. 19
18th
Issues - 200 units - M.R.N. No. 21
20th
Purchases - 100 units @ ` 11 - G.R.N. No. 42
28th
Issues - 150 units - M.R.N. No. - 27
Date
2014
March
1st
2nd
5th
7th
10th
13th
18th
20th
28th
Purchases
Purchases
Issues
Purchases
Purchases
Issues
Issues
Purchases
Issues
Particulars
SOLUTION
Weighted Average
Rate Method
100
42
11.
1,100
3,150
2,160
300
200
38
39
10.50
10.80
Amt.
`
1,000
2,040
Receipts
GRN Qty.
Rate
No. units
`
32
100
10
35
200
10.20
27
19
21
17
MRN
No.
150
200
200
250
Issues
Qty.
Units
In the books of Kalyani Manufacturers, Kanpur
Stores Ledger Account of Material-Kobra
For the month ended 31-03-2014
10.745
10.576
10.576
10.133
Rate
`
1,611.84
2,115.20
2,115.20
2,553.25
Amt.
`
-----------------------
Balance
Qty.
Rate
units
`
100
10
300
10.133
50
10.133
350
10.448
550
10.576
350
10.576
150
10.576
250
10.745
100
10.745
Maximum Level
Minimum Level
Reorder Level
Reorder Quantity
Amt
`
1,000
3,040
506.75
3,656.75
5,816.75
3,701.60
1,586.40
2,686.39
1,074.55
Remarks
Pricing of Material Issued
NOTES
Advanced Cost Accounting - I
207
Pricing of Material Issued
Working Notes :
i)
Calculation of Weighted Average Rate :
1st
=
(100 units x `10)
100 units
NOTES
` 1,000
=
100 units
=
2nd
=
` 10
(100 units x ` 10) + (200 units x ` 10.20)
100 units + 200 units
=
` 1,000 + ` 2,040
300 units
=
` 3,040
300 units
=
` 10.133
(50 units x ` 10.133) + (300 units x 10.50)
7th
=
50 units + 300 units
` 506.75 + ` 3,150
=
350 units
` 3,656.75
=
350 units
=
` 10.448
(350 units x `10.448) + (200 units x `10.80)
10th
=
=
350 units + 200 units
` 3656.75 + ` 2,160
550 units
=
` 5,816.75
550 units
=
` 10.576
(150 units x `10.576) + (100 units x ` 11)
20th
=
150 units + 100 units
208 Advanced Cost Accounting - I
Pricing of Material Issued
` 1,586.40 + ` 1,100
=
250 units
` 2,686.40
=
250 units
=
NOTES
` 10.745
ILLUSTRATION 11
The following transactions took place in respect of Material - Jebra of Jain
Bros. Jaipur for the month March, 2014
Date
2014
March
2nd
10th
15th
18th
20th
24th
30th
Quantity
(Units)
200
300
Receipts
Rate
`
2.
2.40
G.R.N.
No.
87
89
250
2.60
94
200
2.50
Issues
Quantity
M.R.N.
Units
No.
250
67
200
69
300
70
96
Record the above transitions in the Stores Ledger Account on the basis of
Weighted Average Rate Method.
Advanced Cost Accounting - I
209
210 Advanced Cost Accounting - I
Date
2014
March
2nd
10th
15th
18th
20th
24th
30th
Purchases
Purchases
Issues
Purchases
Issues
Purchases
Issues
Particulars
SOLUTION
Weighted Average
Rate Method
250
200
94
96
2.50
2.60
Receipts
Qty.
Rate
units
`
200
2.
300
2.40
GRN
No.
87
89
500
650
Amt.
`
400
720
70
69
67
MRN
No.
300
200
250
Issues
Qty.
Units
In the books of Jain Bros., Jaipur
Stores Ledger Account of Material Jebra
For the month ended 31-03-2014
2.452
2.42
2.24
Rate
`
735.60
484
560
Amt.
`
Qty.
units
200
500
250
500
300
500
200
Maximum Level
Minimum Level
Reorder Level
Reorder Quantity
Balance
Rate
`
2.
2.24
2.24
2.42
2.42
2.452
2.452
-----------------------
Amt
`
400
1,120
560
1,210
726
1,226
490.40
Remarks
Pricing of Material Issued
NOTES
Pricing of Material Issued
Working Notes :
(i)
Calculated of weighted Average Rate :
2nd
=
=
=
10th
=
=
=
=
18th
=
=
=
=
24th
=
=
=
=
(200 units x `2)
200 units
` 400
200 units
`2
(200 units x ` 2) + (300 units x ` 2.40)
200 units + 300 units
` 400 + ` 720
500 units
` 1,120
500 units
` 2.24
(250 units x ` 2.24) + (250 units x 2.60)
250 units + 250 units
` 560 + ` 650
500 units
` 1,210
500 units
`2.42
(300 units x ` 2.42) + (200 units x ` 2.50)
300 units + ` 200 units
`726 + ` 500
500 units
` 1,226
500 units
` 2.452
NOTES
Advanced Cost Accounting - I
211
Pricing of Material Issued
8.6
Key Terms
i)
FIFO : It is a method of pricing the issues in which Material received first
is treated as material issued first and pricing of issues is done accordingly.
(First In First Out.)
ii)
LIFO : Last In First Out method of pricing the issues and for the issues
the price of the last material received is charged.
NOTES
8.7
Questions & Exercises
I - Theory Questions
1)
Explain the various methods of pricing of material issues from stores.
2)
Explain briefly the various factors which are considered before adopting a
particular method of pricing of issues from stores.
3)
Explain the advantages and disadvantages of First In First Out Method of
pricing of material issues.
4)
Discuss the effects of rising prices and falling prices on Last In First Out
method of pricing of materials issues.
5)
Explain the differences between FIFO and LIFO method of pricing of
material issues.
6)
Explain in detail the Weighted Average Price Method of pricing of material
issues.
II - Exercises
1.
From the following, prepare Stores Ledger Account under : (i) FIFO and
(ii) LIFO methods for the month ended 31st January, 2012
Purchases :
1st Jan.
Opening Stock
200 pieces @ ` 2 each
5th Jan.
Purchases
100 pieces @ ` 2.20 each
10th Jan. Purchases
150 pieces @ ` 2.40 each
20th Jan.| Purchases
180 pieces @ ` 2.50 each
Issues :
212 Advanced Cost Accounting - I
2nd Jan.
Issues
150 pieces
7th Jan.
Issues
100 pieces
12th Jan.
Issues
100 pieces
28th Jan.
Issues
200 pieces
2.
The following is the record of receipts and issues of certain material in the
factory during a week :
Pricing of Material Issued
April 2010
1st April
Opening Stock
50 tonnes @ `10 per tonne
1th April
Issued
30 tonnes
2ndApril
Received
60 tonnes @ `10.20 per tonne
3rd April
Issued
25 tonnes (stock verification reveals
loss of one tonne)
4th April
Received from
orders
10 tonnes (previously issued at ` 9.15 per
tonne)
5th April
Issued
40 tonnes
6th April
Received
22 tonnes @ `10.30 per tonne
7th April
Issues
38 tonnes
NOTES
At what prices will you issue the materials ? Use FIFO and LIFO methods
and show the comparative results.
3.
A manufacturer used cost price as the basis for charging out the materials
to jobs. The receipt side of the stores ledger accounts shows the following
particulars :
500
articles
bought
at
` 3 each
700
articles
bought
at
` 3.10 each
400
articles
bought
at
` 3.20 each
800
articles
bought
at
` 3.10 each
Successive issues were made of 300, 1000 and 200 articles. At what price
per article should each of these issues be charged under FIFO method ?
4.
Show the following in Stores Ledger Account on FIFO basis.
Date
Particulars
Unit
Rate
(`)
1-1-2009
Opening Balance
100
3.80
4-1-2009
Purchases
800
4.00
15-1-2009
Purchases
500
4.20
16-1-2009
Issues
600
-
21-1-2009
Purchases
800
4.60
22-1-2009
Issues
1,200
Advanced Cost Accounting - I
213
Pricing of Material Issued
24-1-2009
Purchases
1,400
4.40
25-1-2009
Received back from
(Issued on 16-1-2009)
50
-
27-1-2009
Issues
900
-
30-1-2009
Issues
450
-
completed job
NOTES
On 20th January stock verification revealed a shortage of 20 units.
5.
The following are the receipts and issues of coal in a factory during March,
2011.
March
1
4
6
8
9
14
17
20
25
28
31
Opening stock 200 tons at `460 per ton
Issues 140 tons
Purchased 350 tons at `450 per ton
Condemned due to deterioration in quantity and transferred to
scrap 30 tons
Issues 80 tons
Issues 210 tons
Purchased 200 tons at `480 per ton
Issued 210 tons
Purchased 180 tons at `470 per ton
Issues 280 tons
Excess found in stock - 43 tons due to wrong weighing during the
month
The maximum level fixed is 400 tons, the minimum 75 tons and the re-order
level is 100 tons. Show the Stores Ledger Account under LIFO system.
6.
214 Advanced Cost Accounting - I
From the following records of receipts and issues of materials, write up
Stores Ledger Account for the month of January, 2013 by LIFO method.
1.
Opening Balance 500 quintals @ `25
3.
Issued 70 quintals
4.
Issued 100 quintals
8.
Issued 80 quintals
13.
Received from vendor 200 quintals @ ` 24
14.
Refund or surplus from a work order 15 quintals @ ` 24
16.
Issued 180 quintals
20.
Received from vendor 240 quintals @ ` 23
24.
Issued 304 quintals
25.
Received from vendor 320 quintals @ ` 25
Pricing of Material Issued
26.
Issued 112 quintals
27.
Refund of surplus from a work order 12 quintals @ ` 25
29.
Received from vendor 100 quintals @ ` 24
A stock verifier of the factor noted that on 15th January he had found a
shortage of 5 quintals and on 28th January another shortage of 8 quintals.
7.
NOTES
The following particulars have been extracted in respect of “Material A’.
Prepare Stores Ledger Account pricing the material issue on the basis of
First In First Out (FIFO) method and Last In First Out (LIFO) method :
Receipts :
1-3-2012
Opening Stock
100 units at ` 1.80
5-3-2012
Purchases
150 units at ` 1.50
12-3-2012
Purchases
300 units at ` 1.60
22-3-2012
Purchases
400 units at ` 1.70
8-3-2012
Issued
200 units
18-3-2012
Issued
250 units
29-3-2012
Issued
400 units
Issues :
8.
The following transactions took place in respect of material item.
Date
Receipt Quantity
Rate
Issues Quantity
`
2-3-2013
400
2.00
-
10-3-2013
300
2.20
-
15-3-2013
-
-
250
18-3-2013
250
2.40
-
20-3-2013
-
-
200
Prepare Stores Ledger Account on the basis of Weighted Average Price
Method
9.
During January 2009, The Jagat Engineering Co. Ltd. effected the purchase
of a certain item of stores as under :
Advanced Cost Accounting - I
215
Pricing of Material Issued
Purchases :
Date
Units
Total Amount in
`
NOTES
2-1-2009
100
190
15-1-2009
150
333
During the same period the details of the issues of the item were under :
Issues :
Date
Units
8-1-2009
50
20-1-2009
100
Besides on 1-1-2009 there was an Opening Balance of 160 units valued for
` 200.
Enter the above transactions in the Stores Ledger under the Weighted
Average price Method.
10.
11.
The following figure relate, to Material ‘X’. Prepare Stores Ledger Account
showing receipt and issue, pricing the issue on the basis of Weighted Average.
1-1-2009
Opening Stock 200 units @ ` 3.50 per unit
3-10-2009
Purchases 300 units @ ` 4 per unit
5-10-2009
Issued 400 units
13-10-2009
Purchases 900 units @ ` 4.30 per unit
15-10-2009
Issue 600 units
23-10-2009
Purchases 600 units @ ` 3.80 per unit
25-10-2009
Issue 500 units
From the following information prepare Stores ledger account under Weighted
Average Price Method for the months of March 2014.
:
Opening Stock 300 pieces at ` 2 each
5th March
:
400 pieces at ` 2.20 each
10th March
:
150 pieces at ` 2.40 each
20th March
:
180 pieces at ` 2.60 each
1st March
Purchases :
216 Advanced Cost Accounting - I
Pricing of Material Issued
Issues :
6th March
:
250 pieces
11th March
:
100 pieces
21st March
:
200 pieces
On 31st March, 2014 the stock verifier reported that there was shortage of
10 pieces.
12.
NOTES
The following are details supplied by Modern Company Ltd., in respect of
its raw materials for the month of March 2012
Date 2012
March
Receipts
Units kg.
Price per kg.
1.
2,000
5.
7.
1,000
6.
10.
15.
(Issues)
Units kg.
`
2,500
2,000
7.
31.
2,200
Show the Stores Ledger Account under FIFO and LIFO system.
13.
The stock in hand of a material as on 1-1-2014 was 500 units at ` 1 per
unit. The following purchases and issues were subsequently made. Prepare
the Stores Ledger Account under FIFO method.
Purchases
Issued
6th Jan. 100 units @ ` 1.10
9th Jan. 500 units
20th Jan. 700 units @ ` 1.20
22nd Jan. 500 units
27th Jan. 400 units @ ` 1.30
30th Jan. 500 units
13th Feb. 1,000 units @ ` 1.40
14th Feb. 500 units
20th Feb. 500 units @ ` 1.50
22nd Feb. 500 units
17th March 400 units @ ` 1.60
11th March 500 units.
III - Multiple Choice Questions
1.
Under -------- method simplicity and convenience are lost when there is too
much change in the price of materials.
(a) LIFO
(b) FIFO
Advanced Cost Accounting - I
217
Pricing of Material Issued
(c) Weighted average price
(d) Notional price
2.
The objective of matching current costs with current revenues is not achieved
under the ---------- method of pricing material issue.
NOTES
(a) LIFO
(b) FIFO
(c) Weighted average price
(d) Notional price
3.
Value of closing stock under ------- method can be well accepted for the
purpose of preparation of balance sheet.
(a) weighted average price
(b) LIFO
(c) FIFO
(d) Actual price
Ans. : (1 - c), (2 - a), (3 - a).
4.
Match the pairs.
Group I
Group II
(a) FIFO method
i)
Simple average of the price
(b) LIFO method
ii)
not popular method
(c) Base stock method
iii) manufacturing process for long period
(d) HIFO method
iv) material purchased last is used for
issues.
v) material purchased last remaining in
stock.
Ans. : (a) - (v); (b) - (iv); (c) - (iii); (d) - (i).
8.7
218 Advanced Cost Accounting - I
Further Reading
1.
‘Advanced Cost Accounting’ - Nigam and Sharma Published by Himalaya
Publishing House.
2.
‘Cost Accounting’ - Jawahar Lal - Published by Tata Mc Graw Hill
Publishing Co. Ltd.
3.
‘Theory and Practice of Cost Accounting’ - M. L. Agrawal - Published by
Sahitya Bhawan, Agra.
4.
‘Cost and Management Accounting’ - M. N. Arora - Published by Himalaya
Publishing House.
5.
‘Cost Accounting - Principles and Practice’ - N. K. Prasad
Pricing of Material Issued
NOTES
Advanced Cost Accounting - I
219
Topic 3
Labour Costing
Unit 9
Meaning and Types of Labour
Unit 10
Time Keeping
Unit 11
Time Booking
Unit 12
Reconciliation of Time Kept and Time
Booking
Unit 9 Meaning and Types of Labour
Meaning & Types of Labour
Structure
9.0
Introduction
9.1
Unit Objectives
9.2
Meaning and Importance of labour
9.3
Types of labour
9.3.1
Direct Labour
9.3.2
Indirect Labour
9.3.3
Casual Labourers
9.3.4
Out Workers
9.3.5
Types of workers on the basis of skill
9.4
Sections / departments dealing with labour activities
9.5
Labour turnover
9.5.1
Measurement of labour turnover
9.5.2
Causes of labour turnover
9.5.3
Cost of Labour turnover
9.5.4
Illustrations on labour turnover
9.6
Summary
9.7
Key Terms
9.8
Questions and Exercises
9.9
Further Reading
9.0
NOTES
Introduction
After studying information related to the first element of cost, viz. material
cost, we have to study information about the second element of cost, viz. labour
cost. In every manufacturing as well as service providing concern, labour is required
to be used for creating finished product from the materials or for providing service
to customers. Physical labour, skill and intelligence required for this work is provided
by human beings who are employed by the concerns. In this unit, information
about meaning and importance of labour and about types of labour is provided.
Advanced Cost Accounting - I
221
Meaning & Types of Labour
9.1
Unit Objectives
After studying the information given in this unit, you should understand.
NOTES
•
nature and importance of labour as the second element of cost,
•
different types of labour,
•
organisation which deals with labour, and
•
concept of labour turnover, different methods of calculating labour turnover,
causes and cost of labour turnover and treatment of labour turnover costs.
9.2
Check Your Progress
i)
What is labour and why it
is regarded as an
important factor of costs
?
ii) Distinguish
between
‘Direct Labour’ and
‘Indirect Labour’.
Meaning & Importance of Labour
Labour is the contribution made by persons (workers) in creation of a
product or completion of a process or performance of an activity due to which a
work is completed. Labour is provided by human beings who are engaged by the
owners or management of a concern. Labour is the energy, knowledge and skill
provided by a worker which is required to treat, process and give the required
shape to the material so that the material is mixed, heated, cut moulded in the
required way so that the product as desired by the consumer becomes ready.
Labour cannot be separated from a labourer and it is required to be used
immediately because it cannot be stored like material. Labourer being a living
thing possesses mind, thinking power and feelings and so he should be treated
properly. Labour is the second element of cost and the remuneration paid to
labourers is known as ‘labour cost’. Labour cost forms a substantial portion of
the total cost of a job production order and in some industries which are known
as labour intensive industries the proportionate amount of labour cost incurred is
more than the amount of materials cost incurred. Therefore, by treating the labour
force property and by obtaining their willing co-operation the owners try to increase
the output so that per unit labour cost is reduced.
iii) What are the types of
labour ?
iv) What
sections
or
departments deal with
labour activities ?
9.3
Types of Labour
All workers working in a concern provide labour but according to the nature
of their work they are classified among different types as under 1.
Direct Labourers
2.
Indirect Labourers
3.
Casual Labourers, and
4.
Out Workers
9.3.1 Direct Labourers
222 Advanced Cost Accounting - I
Direct labourers are those labourers who are engaged in the process of
manufacturing by doing the work of mixing of materials. heating the materials,
operating on machines for giving a certain shape to the processed material by
cutting, moulding and shaping and thus creating a finished product. All the workers
who are performing one or more of the above mentioned activities is regarded as
direct labour and the amount paid to them is termed as the direct labour cost. The
labour of these workers can be easily and conveniently related to the finished
product or a component created by them.
Meaning & Types of Labour
NOTES
Thus labour which can be identified with its output is regarded as direct
labour and the cost incurred for such labour is direct labour and the cost incurred
for such labour is recorded as direct labour cost. A machinist operating a machine,
a coal miner digging out the coal, a carpenter cutting and fitting the pieces of
wood for creating chairs, tables or other wooden furniture, a worker working on
a weaving machine for producing cloth, an electrician doing the work of fitting
wires and cables in a motor car are all examples of direct labour.
9.3.2 Indirect Labourers
Those workers/employees who provide service to the direct labourers to
complete their work are known as indirect labourers. The labour provided by the
indirect labourers cannot be easily related to or identified with a particular product,
job or production order is the indirect labour and the cost incurred for the indirect
labourers is treated as indirect labour cost. Indirect labour cost is of insignificant
amount and it is incurred not for a particular job, order or product but it is incurred
as a common cost. A proportionate amount of total indirect costs in charged to
the production cost of each product, job or order. The cost incurred on pay,
allowances and for providing some statutory or voluntary facilities is included in
the total indirect labour cost. Security personnel, employees working in purchase
and stores department, workers engaged in loading and unloading of materials
and finished goods, canteen employees, drivers and cleaners of vehicles, employees
and foremen working in the factory and other departments doing clerical type of
work, etc. are some of the indirect labourers. The cost of indirect labour is treated
as factory overheads and it is charged to the product, job order, process or an
activity by using some appropriate method.
9.3.3 Casual Labourers
Casual labourers are not regular or permanent labourers of a concern.
They are unemployed workers in search of jobs. Before commencement of the
regular work in the factory they assembled at the gate of the factory with the
hope of getting some work for a day or two. The need for casual workers arises
when some regular and permanent workers remain absent and to replace them
for a day or more casual workers are given their work. Casual workers also
become necessary when there is sudden and temporary increase in the volume
of work. Normally, a foreman comes at the gate, makes enquiry with the persons
waiting there and selects the required number of workers who posses knowledge
of doing that work and takes them in the factory as casual workers. The casual
workers are paid remuneration on daily basis and they do not get any facilities
Advanced Cost Accounting - I
223
Meaning & Types of Labour
NOTES
which are provided to the permanent workers. Generally casual workers are taken
up for doing jobs of unskilled nature and their work is supervised by a foreman or
a senior worker. The casual worker is given a job card to record the nature and
amount of work done by him and payment of wages is made to him on that basis.
To avoid the risk of payment to casual or badaly workers, the person who has
selected him should not be allowed to make payment of wages to him. This helps
in controlling loss caused by payment made to dummy or bogus workers.
9.3.4 Out Workers
In some time of production activities it is not necessary for the workers to
come to factory for carrying on production activities and the products are completed
by the workers at their homes. The owner gives them the required quantity of raw
materials and tools needed for creating the products. These workers are known
as ‘out workers’. They do the production work at home and bring the products at
the place of the concern and hand over the quantity produced to the foreman or
some authorised person and after checking those products, payment of wages is
made to them on piece-rate basis. As there is no factory place the owner is not
required to incur expenditure on rent, other establishment charges and on facilities
to be provided to the workers. However, while receiving the products care should
be taken to check the quality of the products, to see that the materials provided to
them are carefully used by them. Services of out-workers are used in bidi industry,
making products by assembling and fitting components, preparation of potatowafers, papads and other eatables, etc. because they can be produced without
using sophisticated machinery.
9.3.5 Types of Workers on the Basis of Skill
Types of labour can also be stated on the basis of amount of skill possessed
by them. Accordingly, there are highly skilled workers, skilled workers, semiskilled workers and unskilled workers. According to the nature of work and the
amount of skill required for the work appropriate type of workers are appointed in
the factory. Highly skilled workers get more remuneration and as the degree of
skill decreases, the remuneration rate also reduces.
9.4
Sections / Departments Dealing with Labour
Activities
In medium and large size concerns to deal with the various activities related
to the labour following sections or departments are established :
224 Advanced Cost Accounting - I
1.
Personnel Department,
2.
Engineering Department,
3.
Time-keeping Section.
4.
Remuneration and Payroll Department, and
5.
Cost Accounting Department.
1.
Personnel Department : This department is responsible for making
available the right type of workers and other employees including managers and
executives in the right number, at the right time to the concern. It is also responsible
for preparation the volume of the work, the possibility of changes in this volume
and the category of the personnel needed. The vacancies arising due to retirement
of present employees, resignation, death and termination of services of employees
by the management. Taking into consideration when these employees will be
required, the personnel department is required to publish advertisements in
appropriate newspapers and journals inviting applications from suitably qualified
and experienced persons, arrange for their tests and interviews. The personnel
department issues appointment letters to the selected candidates. It has to arrange
for training of the fresh employees and has to maintain record for each employee
right from his appointment upto his retirement. Matters related to promotion,
demotion, disciplinary action and facilities to be provided to the employees are
also required to be conducted by the personnel department. In present times
helping to maintain good industrial relations is also regarded as the work of the
personnel department.
Meaning & Types of Labour
NOTES
2.
Engineering Department : Planning and scheduling of the jobs to be
performed by the workers, doing job analysis, conducting time and motion studies
and paying attention to the efficiency and safety of the workers is the main
responsibility of the engineering department.
3.
Time-keeping Section : Time-keeping is the work of recording the incoming time and out-going time of each worker. By using suitable methods the
reporting time and the departure-time of each employee is recorded by the persons
working in the time-keeping section so that attenandance time, the time spent by
workers on different jobs, the normal time and over-time work done by the workers
and total time for which remuneration is to be paid to them can be properly worked
out. Basic data required by remuneration and payroll department for calculating
the remuneration payable to the workers is provided by the time-keeping section.
4.
Remuneration and Payroll Department : According to the time worked
or quantity produced by each worker and by taking into consideration the rate
applicable to each worker, the work of calculation of remuneration of workers is
the work performed by the remuneration and payroll department. Gross amount
of remuneration made up of basic pay, dearness and other allowances, incentive
payment, if any, is shown in the wage sheet and deductions on account of provident
fund contribution of the worker, employee’s state insurance contribution and any
recovery of loan or advance taken by the employee, amount of fine charged to
the employee and any contribution the employees’ co-operative society are also
recorded against the name of the employee/worker. Net amount of remuneration
payable to the worker is recorded and on actual disbursement made to the worker
his signature is taken on the wage sheet as a proof of payment made to the
worker. Preparation and maintenance of the wage-sheets and payrolls is a statutory
requirement of every concern.
Advanced Cost Accounting - I
225
Meaning & Types of Labour
NOTES
5.
Cost Accounting Department : Cost accounting data related to labour is
collected by this department along with cost data of materials, overheads to
calculate the cost of various jobs, production orders, processes, etc. Analysis of
labour cost as direct and indirect labour cost and preparing and submitting the
labour cost reports to the management for information and control of cost is also
the responsibility of the cost accounting department.
9.5
Labour Turnover
Labour Turnover is the loss of employment in an organisation. It is a national
problem of every nation and leads to high costs and low productivity The extent of
Labour Turnover various according to industry, structure of employment in the
country; ratio of male and female in labour force, and infrastructure of a particular
organisation. Although the cost of labour turnover is high in these days, very little
effort has been made to collect, classify and compare the cost of labour turnover.
A detailed study of the causes of labour turnover, analysis and comparison of cost
of such turnover may help in controlling the situation.
In all business organisations, it is a common feature that some workers
leave the employment and new workers join in place of those leaving. This change
in work force is known as Labour Turnover. Labour Turnover is thus defined as
the rate of change in the composition of the labour force in the organisation.
Labour turnover varies greatly between different trades and industries. For example,
where part time and seasonal labour is employed, the rate will be higher.
9.5.1 Measurement of Labour Turnover
To facilitate the comparisons between different periods and different
undertakings, labour turnover may be expressed in a rate. There are three alternative
methods by which this rate is computed. Once a particular method is used, it
should be consistently followed for comparative analysis. The methods are :
1) Separation Method
This method takes into account only those workers who have left during a
particular period. The formula is :
Number of workers left during a period
Labour Turnover Rate =
x 100
Average Number of workers during the period
Average Number =
Number of workers
in the beginning
+
Number of workers at
end of the period
x 100
2
Multiplication by 100 in the above formula indicates rate in percentage.
2) Replacement Method
226 Advanced Cost Accounting - I
This method takes into account only those new workers who have joined in
Meaning & Types of Labour
place of those who have left. Its formula is :
Labour Turnover Rate =
Number of workers replaced during the period
x 100
Average Number of workers during the period
If new workers are engaged for expansion programme or any other such
purpose they are not considered for this computation.
NOTES
3) Flux Method
This shows the total change in the composition of labour force due to
separations and additions of workers. The formula is :
Number of
workers left
Labour Turnover Rate =
+
Number of
workers replaced
x 100
Average Number of workers during the period
EXAMPLE
Bharat Foods Product Ltd., supplies you the following information.
Number of workers on 1 April 2009
80
Number of workers on 30 April 2009
100
Number of workers resigned
07
Number of workers discharged
02
Number of replacements
08
Calculate labour turnover rate.
SOLUTION
Average number of workers =
80 + 100
= 90
2
Number of workers left
= 7+2 = 9
1) Separation Rate
=
Number of workers left
x 100
Average Number of workers
=
9
x 100 = 10 %
90
2) Replacement Rate
=
Number of workers replaced
x 100
Average Number of workers
=
8
90
x 100 = 8.8 %
Advanced Cost Accounting - I
227
Meaning & Types of Labour
3) Flux Rate
=
Number of workers left +
Number of workers replaced
x 100
Average Number of workers
=
NOTES
9+8
x 100 = 18.8 %
90
9.5.2 Causes of Labour Turnover
Labour turnover reports should be prepared regularly to be placed before
the management, giving a breakdown of the causes as why the workers left. The
causes may be classified in three broad categories :
i)
Avoidable causes
ii)
Unavoidable causes
iii)
Personal causes
1)
Avoidable Causes :
These include :
a) Redundancy due to seasonal fluctuations, shortage of raw materials,
contraction in market demand, Government and technological
unemployment etc.
b) Dissatisfaction with
i) low remuneration, ii) job, iii) long hours of work, iv) bad working
conditions, v) locality or environment.
c) Discrimination between one worker and another.
d) Bad relation with subordinates, fellow workers, supervisions and
management.
e) Lack of :
i) transport, ii) accommodation, iii) proper recreational facilities, iv)
proper welfare measures, v) proper training facilities, and vi) proper
promotional avenues.
f) Inadequate protection from accidents
g) Disputes between rival trade unions
2)
Unavoidable Causes :
These are due to :
a) Personnel betterment,
b) Retirement,
228 Advanced Cost Accounting - I
c) Sickness,
Meaning & Types of Labour
d) Accidents,
e) Death,
f) Domestic responsibilities,
g) Pregnancy or marriage,
NOTES
h) Move from locality,
i) National service,
j) Dismissal or discharge due to insubordination, negligence, inefficiency
unauthorised long absence, criminal prosecution etc.
3)
Personnal Causes :
Workers may leave employment purely on personal grounds e.g.
a) Dislike for the job, locality or environments,
b) Domestic troubles and family responsibilities,
c) Personal betterment,
d) Retirement due to old age and illness,
d) Marriage of girls.
Effect of Labour Turnover :
A certain amount of labour turnover will always take place. To a limited
extent this may be welcome particularly at the lower management level in that it
creates vacancies for internal promotions and maintains the morals high for the
young and the ambitious. Moreover, new workers bring new ideas and methods
of doing work from other concerns.
Labour turnover is expensive and generally it should be minimised because
it results in increased cost of production for reasons stated below.
Labour Turnover due to avoidable causes is not only a loss to the individual
but also a loss to the organisation, industry and the nation as a whole.
High Labour Turnover
High Labour Turnover results in increased cost of production due to the
following reasons. :
i)
Increased cost of selection, training of new workers.
ii)
Costs connected with new entrants such as accidents, breakage of tools,
spoilage of finished products etc.
iii)
Delay in production.
Advanced Cost Accounting - I
229
Meaning & Types of Labour
NOTES
iv)
Efficiency of new workers becomes very low and hence productivity will
also be low.
v)
Increase in cost of scrap, defective work and additional supervision etc.
vi)
Decrease in overall production due to lack of desired efficiency of new
workers and due to lack of desired efficiency of new workers and due to
time lost between the leaving of staff and recruitment of new workers. In
addition, there will be reduction in sales and loss of goodwill with customers.
Check Your Progress
Low Labour Turnover
i)
What is the meaning of
‘Labour Turnover’ ?
ii) What are the causes of
labour turnover ?
iii) How learn turnover can
be
measured
under
different methods ?
iv) Explain how labour
turnover
cost
is
measured.
In the senior grades of factory, employment may not be a good thing because
there will be few possibilities of promotion for the young workers who will be
forced to leave the organisation for future advancement. This also results in
increased labour cost per unit of production because of high wages of existing
senior workmen.
9.5.3 Cost of Labour Turnover
The cost of labour turnover may be broadly classified into two broad
categories viz. Preventive costs, and Replacement costs.
i) Preventive Costs
These costs are those which are incurred to keep the work force satisfied
and to prevent or discourage them from leaving the organisation. These include :
a) Cost of Personnel Management : Only that portion of this cost
which can be attributed to the efforts of the personnel department in
maintaining good relations between management and workers.
b) Cost of welfare activities and services, e.g. canteen, meals, co-operative
stores, educational and transport facilities, housing schemes etc.
c) Cost of medical services.
d) Pension schemes to provide security and retirement benefits.
e) Extra bonus and other perquisities (in excess of those given by other
similar concerns) to discourage their defecting to other undertakings.
ii) Replacement Costs
These costs include all such losses and wastages arising because of the
inexperienced new labour force replacing the existing one as well as the cost of
recruitment and training of the new workers. These include :
a) Cost of recruitment and selection of new employees.
b) Cost of training of new workers.
c) Loss of output due to some time gap in obtaining new workers.
230 Advanced Cost Accounting - I
d) Loss due to inefficiency of new workers.
Meaning & Types of Labour
e) Cost of accidents due to lack of experience of new workers.
f) Cost of scrap and defective work of new workers.
g) Cost of tools and machine breakdown due to faulty handling by new
workers.
NOTES
Reduction and Control of Labour Turnover
Labour turnover may be reduced by taking action on the basis of avoidable
causes given earlier. The following steps may be taken in this regard :
a) Divising a suitable and satisfactory wage policy.
b) Providing working conditions conductive to health and efficiency.
c) Impartial and sympathetic attitude of personnel management.
d) Introducing financial and non-financial incentive plans.
e) Providing promotional opportunities.
f) Encouraging labour participation in management.
g) Introducing an effective grievance procedure.
h) Strengthening the welfare measures.
9.5.4 Treatment of Cost Labour Turnover
The Preventive cost of labour turnover should be apportioned to various
departments on the basis of number of workers in each department.
Regarding the replacement costs, if the replacement is due to the fault of a
particular department, it should be directly charged to that department. If labour
turnover is due to the defective management policy, the replacement cost should
be apportioned to various departments on the basis of number of workers in each
department.
Working of Cost of Labour Turnover :
i)
The cost of labour turnover may be worked out as a percentage of sales or
per worker employed as follows :
Total cost of labour turnover
x 100
Sales
or
Total cost of labour turnover
Average number of workers employed
Advanced Cost Accounting - I
231
Meaning & Types of Labour
ii)
Preventive costs should be apportioned to the different departments in
proportion to the number of employees in each department.
iii)
Replacement costs are to be allocated to the concerned departments on
the basis of the number of persons engaged in that department.
NOTES
FORMULAE
Meaurement of Labour Turnover :
1) Separation Method : NS
x 100
AW
Labour Turnover Rate =
Number of workers left in a period
x 100
Average Number of workers on the payroll in the period
2) Replacement Method : NR
x 100
AW
Labour Turnover Rate =
Number of workers replaced in a period
x 100
Average number of workers on the payroll in the period
3) Flux Method : NS + NR
x 100
A W
Number of workers
Number of workers
+
left in a period
replaced in a period
Labour Turnover Rate =
x 100
Average Number of workers on the payroll in the period
9.5.5 Labour Turnover
ILLUSTRATION 1
The extracts from the payroll of Air Cooler Co., Ltd., Ahmedabad is as follows :
Number of workers on 1-3-2012
150
Number of workers on 31-3-2012
200
Number of workers resigned
Number of workers discharged
Number of workers replaced due to resignations and discharges
20
8
21
Calculate the labour turnover rate during the month under different methods.
232 Advanced Cost Accounting - I
Meaning & Types of Labour
SOLUTION
Calculation of average number of workers on the payroll in the month of March,
2012.
Number of workers on 1-3-2012 + Number of workers on 31-3-2012
=
2
NOTES
150 + 200
=
2
350
=
2
= 175 workers
Calculation of Labour Turnover Rate :
1) Separation Method :
Number of workers left in a period
x 100
Average number of workers on the payroll in the period
28
=
x 100
175
Labour Turnover Rate =
= 16 %
2) Replacement Method :
Labour Turnover Rate =
=
Number of workers replaced in a period
x 100
Average number of workers on the payroll in the period
21
x 100
175
= 12 %
3) Flux Method :
Number of workers
+
left in a period
Number of workers
replaced in a period
Labour Turnover Rate =
x 100
Average number of workers on the payroll in the period
=
28 + 21
x 100
175
= 28 %
Advanced Cost Accounting - I
233
Meaning & Types of Labour
ILLUSTRATION 2
From the following particulars supplied by the personnel department of Balaji Co.,
Badalpur calculate the labour turnover.
NOTES
Total number of employees on 1-6-2012
2,007
Number of employees left and discharged during the month
Number of employees recruited during the month
Total number of employees on 30-06-2012
120
60
1,993
SOLUTION
Calculation of average number of workers on the payroll in the month of June,
2012.
Total number of
+
employees on 01-06-2012
=
Total number of
employees on 30-06-2012
2
2,007 + 1,993
=
2
4,000
=
2
= 2,000 employees
Calculation of Labour Turnover Rate :
1) Separation Method :
Number of workers left in a period
x 100
Average Number of workers on the payroll in the period
120
=
x 100
2,000
Labour Turnover Rate =
= 6%
2) Replacement Method :
Labour Turnover Rate =
=
Number of workers replaced in a period
x 100
Average Number of workers on the payroll in the period
60
2,000
= 3%
234 Advanced Cost Accounting - I
x 100
Meaning & Types of Labour
3) Flux Method :
Number of workers
Number of workers
+
left in a period
replaced in a period
Labour Turnover Rate =
x 100
Average Number of workers on the payroll in the period
=
120 + 60
NOTES
x 100
2,000
=
180
x 100
2,000
= 9%
ILLUSTRATION 3
The personnel department of Duplex Co. Ltd., Dombiwali has supplied the
following information relating to its work force during the month of January 2012.
Number of workers on 1.1.2012
900
Number of workers on 31.01.2012
1,100
During the month 15 persons quit and 25 persons are discharged. 150
workers were engaged out of them 20 persons were appointed in the vacancy
caused. Calculate labour turnover rate during the period under different methods.
SOLUTION
Calculation of average number of workers on the payroll in the month of January,
2012.
Number of workers on 1.1.2012 + Number of workers on 31.1.2012
=
2
900 + 1,100
=
2
2,000
=
2
= 1,000 workers
Calculation of Labour Turnover Rate :
1) Separation Method :
Number of workers left in a period
x 100
Average Number of workers on the payroll in the period
40
=
x 100
1,000
Labour Turnover Rate =
=
4%
Advanced Cost Accounting - I
235
Meaning & Types of Labour
2) Replacement Method :
Labour Turnover Rate =
NOTES
=
Number of workers replaced in a period
x 100
Average number of workers on the payroll in the period
20
x 100
1,000
= 2%
3) Flux Method :
Number of workers
Number of workers
+
left in a period
replaced in a period
Labour Turnover Rate =
x 100
Average number of workers on the payroll in the period
=
40 + 20
x 100
1,000
60
=
x 100
1,000
= 6%
ILLUSTRATION 4
From the following data given by personnel department of Duckback Co.
Ltd., Delhi, calculate the monthly and annual labour turnover rate by applying
different methods.
Number of workers on payroll i) At the beginning of the month
ii) At the end of the month
853
1,147
During the month 10 workers left, 40 workers were discharged and 150
workers were newly recruited of these 25 workers were recruited in the vacancies
of those leaving, while the rest were for an expansion scheme.
SOLUTION
Calculation of average number of workers on the payroll in the month
Number of workers at the beginning of the month +
Number of workers at the end of the month
=
2
853 + 1,147
=
2
2,000
=
236 Advanced Cost Accounting - I
2
= 1,000 workers
Meaning & Types of Labour
Calculation of Labour Turnover Rate :
1) Separation Method :
Number of workers left in a period
x 100
Average number of workers on the payroll in the period
50
=
x 100
1,000
Labour Turnover Rate =
NOTES
= 5%
Monthly Labour Turnover Rate
=
5%
5 x 365
Annual Labour Turnover Rate =
= 60.83%
30
2) Replacement Method :
Labour Turnover Rate =
=
Number of workers replaced in a period
x 100
Average number of workers on the payroll in the period
25
x 100
1,000
= 2.5 %
Monthly Labour Turnover Rate
=
2.5 %
2.5 x 365
Annual Labour Turnover Rate =
= 30.42%
30
3) Flux Method :
Number of workers
Number of workers
+
left in a period
replaced in a period
Labour Turnover Rate =
x 100
Average number of workers on the payroll in the period
=
50 + 25
x 100
1,000
75
x 100
=
1,000
= 7.5 %
Monthly Labour Turnover Rate
Annual Labour Turnover Rate =
=
7.5 %
7.5 x 365
30
= 91.25%
Advanced Cost Accounting - I
237
Meaning & Types of Labour
NOTES
ILLUSTRATION 5
During February 2012, the following information was obtained from the
personnel department of Moderate Co., Malegaon. Labour force at the beginning
of the month, 1,767 and 2,233 at the end of the month. During the month 60
persons were discharged and 20 left the company, During the month 200 workers
were engaged out of which only 40 workers were appointed against the vacancy
caused by the number of workers separated and the remaining on account of
extension programme of the company. Calculate the labour turnover rate and
equivalent annual rate under :
i)
Separation method
ii)
Replacement method and
iii)
Flux method
SOLUTION
Calculation of average number of workers on the payroll in the month of February,
2012.
Number of workers on 1.2.2012 + Number of workers on 29.2.2012
=
2
1,767 + 2,233
=
2
4,000
=
2
= 2,000 workers
Calculation of Labour Turnover Rate :
1) Seperation Method :
Number of workers left in a period
x 100
Average Number of workers on the payroll in the period
80
=
x 100
2,000
Labour Turnover Rate =
= 4%
Monthly Labour Turnover Rate
Annual Labour Turnover Rate =
=
4%
366* x 4
= 50.48%
29
2) Replacement Method :
Labour Turnover Rate =
238 Advanced Cost Accounting - I
Number of workers replaced in a period
x 100
Average Number of workers on the payroll in the period
Meaning & Types of Labour
40
=
x 100
2,000
= 2%
Monthly Labour Turnover Rate
=
2%
NOTES
366* x 2
Annual Labour Turnover Rate =
= 25.24%
29
3) Flux Method :
Number of workers
Number of workers
+
left in a period
replaced in a period
Labour Turnover Rate =
x 100
Average Number of workers on the payroll in the period
=
80 + 40
x 100
2,000
120
=
x 100
2,000
= 6%
Monthly Labour Turnover Rate
Annual Labour Turnover Rate =
=
6%
366* x 6
= 75.72%
29
*
9.6
2012 being a leap year.
Summary
Labour cost is the second element of cost. It is an important element of
cost since it forms a substantial portion of the total cost of a product. Labour is
provided by human beings who provide physical, intelligence power, skills which
are required for creating a final product from the materials. There are various
types of labour such as direct labour, indirect labour, casual labourers, out workers
and depending upon level of skill possessed by labourers skilled, semi-skilled labour
and unskilled labour. An organisation is established consisting of personnel
department, engineering department, time-keeping section, remuneration and payroll
departments and cost accounting department. Such organisation looks after various
activities related to labour. Labour turnover is a problem faced by all industries
and by all nations. Measurement of labour turnover is done by using separation
method, replacement method and flux method. It is important to find out causes of
labour turnover, cost of labour turnover and efforts are required to be made to
minimise labour turnover and its cost.
Advanced Cost Accounting - I
239
Meaning & Types of Labour
9.7
Key Terms
i)
Labour : It is the contribution made by workers in creation of a product, or
completion of a process or performance of an activity due to which a work
is completed.
ii)
Direct Labour : Labour which can be identified with its output easily.
iii)
Direct Labour Cost : Cost incurred for the direct labour.
iv)
Indirect Labour : Labour provided by workers to direct labourers and
which cannot be easily identified with the output. Indirect labour is mostly
in the form of services provided by indirect workers to the direct workers.
v)
Indirect Labour Cost : Cost incurred for the indirect labourers. It is also
known as factory overheads.
vi)
Casual Workers / Labourers : Workers who are not permanent workers
of an enterprise. According to the need of a concern, they are temporarily
taken up for doing the work, from unemployed labourers assembling outside
the gate of the concern.
vii)
Out Workers : Out workers do not work in the factory premises but
perform the work assigned to them of their homes or perform it at the
customers’ homes or offices if it is a service to be provided.
viii)
Labour Turnover : It is the changes in the work-force of an enterprise
during a certain period due to some workers leaving their jobs and new
workers joining the enterprise in that period.
NOTES
9.8
Questions and Exercises
I - Multiple Choice Questions
(1)
Disbursement of wages is the labour function of ----------- department.
(a) time keeping
(b) time booking
(c) payroll
(d) store
(2)
Indirect labour costs are not ----------- with the production of specific goods
or services.
(a) identifiable
(b) negotiate
(c) recorded
240 Advanced Cost Accounting - I
(d) allocated
(3)
High remuneration attracts ----------- labour force.
Meaning & Types of Labour
(a) highest
(b) efficient
(c) casual
NOTES
(d) temporary
Ans. : (1 - c), (2 - a), (3 - b).
(4)
Match the pairs.
Group I
Group II
(a) Direct labourers
(i)
‘No remuneration’
(b) Indirect labourers
(ii) ‘do production work at home’.
(c) Casual labourers
(iii) ‘unemployed workers’
(d) Out workers
(iv) ‘provide services to direct
labourers.’
(v) ‘doing the work of mixing of
materials.’
Ans. : (a) - (v); (b) - (iv), (c) - (iii); (d) - (ii)
II - Theory Questions
1.
Explain meaning and importance of labour cost.
2.
Explain types of labour and give examples of each type of labour.
3.
Distinguish between ‘direct labour’ and ‘indirect labour’.
4.
What do you understand by the term ‘labour turnover’? state methods
used for calculating labour turnover ?
5.
What are causes of labour turnover? What care should be taken to keep
labour turnover to minimum ?
6.
Explain the cost of labour turnover. ‘Zero labour turnover should be the
target of a good industrial concern’. Do you agree with the statement ?
9.9
Further Reading
i)
‘Cost Accounting’ - Jawahar Lal
ii)
‘Cost Accounting’ - Principles and Practice’ - N. K. Prasad.
iii)
‘Cost Accounting - B. K. Bhar
Advanced Cost Accounting - I
241
Meaning & Types of Labour
NOTES
242 Advanced Cost Accounting - I
iv)
‘Advanced Cost Accounting
- Nigam and Sharma
v)
‘Theory and Practice of Cost Accounting’ - M. L. Agrawal.
Unit 10 Time Keeping
Time Keeping
Structure
10.0 Introduction
NOTES
10.1 Unit objectives
10.2 Time keeping
10.2.1 Meaning and importance
10.2.2 Methods of time keeping
10.3 Summary
10.4 Key Terms
10.5 Questions
10.6 Further Reading
10.0 Introduction
In every manufacturing as well as service providing enterprise a number
of workers and other employees are appointed to perform certain work assigned
to them. They work in different sections and department for co-ordinating their
work and for smooth functioning of the enterprise there is a particular time at
which they are they should report for work and a certain time upto which they
should remain present. When the number of workers and employees is a large
number a separate arrangement for recording the ‘in’ time and ‘out’ time has to
be made which is known as ‘time-keeping’ arrangement. In this Unit we shall
study information related to this arrangement in detail.
10.1 Unit objectives
After completing study of information given in this unit, you should be able
to understand :
•
Time keeping and its importance;
•
Different methods - manual and mechanical of time keeping; and
•
Now a particular method is selected for time keeping by an enterprise.
Advanced Cost Accounting - I
243
Time Keeping
10.2 Time Keeping
In every factory there is an arrangement made for recording the attendance
and in as well as out time of the workers working in the factory. The section or
department doing this work is called ‘time-keeping section or department.’
NOTES
10.2.1 Meaning and Importance :
Time keeping means recording in and out time of the workers. Working of a
factory is an organized activity and to carry on this activity efficiently and smoothly,
it is necessary that the workers appointed for doing different types of work should
be available in the factory. Every factory decides the time at which the work
should begin and the time upto which the work should be carried on. According to
the volume of work, the number of workers and the space of the factory the
management decides whether the factory should operate in one, two or three
shifts and fixes the working hours for each shift. While deciding the working
hours the management should follow the provisions given in the Factories Act.
Provision is also made for lunch-break and tea-break for the workers. Hours
fixed for each shift are known as ‘normal hours’ and if workers work over and
above the normal hours, the additional time worked by them is the ‘over-time’
work done by them and for over-time wages are paid at higher rate which may be
one and half times or at double of the normal rate of wages.
Time-keeping is, thus, a systematic arrangement made by the management
to record attendance and in-coming and out-going time of the workers. Time
Keeping is important due to the following reasons:
1.
It is a statutory requirement.
2.
It is a basis for preparation of wage-sheets and payrolls.
3.
It shows the attendance of the workers and helps in maintaining regularity
and discipline among workers.
4.
Calculation of normal wages and over-time wage becomes possible on the
basis of information available from time-keeping records.
5.
Certain benefits like pension and gratuity, leave with pay, provident fund
are provided by considering the continuity of service of the employees.
Also decisions regarding promotion, disciplinary action to be taken against
the employee are taken by considering regularity and punctuality of the
employees which becomes available from the time-keeping records.
6.
When overheads are to be apportioned by using the method of labour hours
or labour cost, time-keeping becomes essential. [More information is provided
about this in the unit of overheads.]
10.2.2 Methods of time-keeping :
Methods used for time-keeping can be divided into two categories as under:
244 Advanced Cost Accounting - I
A] Manual Methods, and
Time Keeping
B] Mechanical Methods.
A) Manual Methods :
In these methods the work of recording attendance as well as recording intime and out-time is done either by the workers themselves or by the time-keeper/
time clerk appointed to do that work and no mechanical device is used for doing it.
Under manual methods there are two methods available as under:-
NOTES
i) Attendance Register or Muster Methods :
Under this methods a register is maintained for time-keeping. In this register
names of the workers are written as per their seniority or department wise, columns
are provided against name of each worker for recording identity number and for
recoding in-time and out-time with signature or initials of the worker for a period
of one month. The attendance register is kept on a desk near the gate of the
factory premises. When a worker reports for work, he goes to the desk and puts
his initials with the time he is reporting and then goes to his department . When the
worker is going out the same procedure is repeated by him and thus his out-time
is recorded in the register. When the workers are allowed to leave the factory
premises for lunch-break, the out-time and in-time is required to be recorded by
them. Some time recoding of in and out-time is done by the time-clerk or timekeeper.
If the number of workers is large, instead of a single register separate
registers for each department may be kept to avoid delay in recording the in and
out time.
For a small size factory employing limited number of workers the registers
method is very suitable. Once the procedure is explained to the workers they can
easily follow it. It also does not require investment of large amount to operate it.
The recorded and completed registers can be bound together and preserved for
any time.
The method suffers from two defects. First defect is that the timings
recorded by the workers may not be accurate because the worker may write the
timings to show that he is very punctual.
The second defect of the method is that a workers may record the attendance
of on absent or late-coming worker who is his friend by imitating his initials and
detection of this is very difficult.
ii) Token or disc method :
In this method metal tokens or round metal discs are prepared. Each worker
is given an identity number and it is either painted or engraved on a token or disc.
The token or disc has a hole in it so that it can be hung from a hook or nail. A
board is prepared having sufficient nails or hooks attached to it. The tokens or
discs are hung in serial order and it is kept just inside the factory gate. A similar
Advanced Cost Accounting - I
245
Time Keeping
NOTES
broad is kept near the time-keepers cabin. When a worker arrives for joining his
duty, he goes to the board, removes the token or disc bearing his number from the
board and hangs it on the board kept near the cabin of the time-keeper. When the
time allowed for reporting to the work is over, the time-keeper removes the second
board and keeps a box having a slot at its top in the place of the board. A workers
reporting late has to put his token or disc in the box or he may be required to hand
over the token or disc personally to the time-keeper who notes down the time of
reporting in the register. The tokens still hanging from the first board indicate the
workers who are absent on that day and the time-keeper does the absence
recording in the register. The tokens hanging from the second board show the
workers who have reported for the work within the time allowed and their presence
is recorded by the time-keeper. Similarly the tokens put in the box by late-comers
are removed from the box and the late-timing is recorder in the register against
the names of the workers bearing those token numbers. The same procedure is
repeated when workers go-out from the factory. Only tokens of workers who
are present for work are hung on the second board and when the worker goes
out he takes his token and hangs it on the board kept near the gate. After the
regular working hours are over, the tokens still hanging from the second board
indicate the workers who are working over-time.
Token or disc method can be used for any number of workers by preparing
required number of tokens and by using separate boards bearing a fixed number
for each board.
This method suffers from the defect that a worker may remove his own token
and also token bearing his friend’s number and hang them on the other board thus
recording his own as well as his absent or late-coming friend’s presentee. Strict
supervision at the board will become necessary to see that each worker takes
only one token from the board.
B) Mechanical Methods :
Mechanical methods make use of some mechanical device for recording
the time of arrival and time of departure of each worker. The mechanical methods
are used by concerns of medium and large size who employ large number of
workers and who can afford to make initial investment in the mechanical devices.
The mechanical devices require a shorts time for recording in-coming and outgoing time of workers, the time is recorded automatically and is not required to be
handwritten, and this eliminates disputes between workers and time-keeper about
correctness of the time recorded by the time-keeper and the paper or cards on
which the time is printed can be used for preparation of wage-sheets and payrolls
and coping the timings does not becomes necessary.
Mechanical methods are of following types :-
246 Advanced Cost Accounting - I
i)
Time-recording Clock Method,
ii)
Dial Recording Method, and
iii)
Key Recording Method.
Time Keeping
i) Time-recording Clock Method
In this method each worker is given a card bearing name of the worker, his
number, name of the department in which he works. There are columns provided
for recording ‘in’, ‘out’, ‘in’, ‘out’ timings for each day. A card covers the period
of one week after which a fresh card is prepared for the worker. These cards are
serially arranged on a tray and the tray is kept on a table inside the factory gate.
When a worker enters into the gate, he picks up his card from the ‘out tray’,
inserts it inside the clock at proper place so that the clock records his in-time for
the day. The worker takes out his card, checks the time recorded and places the
card in another tray known as ‘in-tray’. Same procedure is repeated by the worker
when he wants to record his ‘out-time’ only difference being that he takes the
card from ‘in-tray’ and after the clock has recorded the out time he places it in the
‘out-tray’. The clock has an additional feature of recording late-timings and overtimes in red ink so that these entries of timings are immediately noticed by the
time-keeper. It is necessary to keep the recordings under the observation of the
time-keeper so that every worker will take only his card for doing the time recording
and possibility of recordings of time for a ‘dummy’ or ‘ghost’ worker is eliminated.
A specimen of a time-card or clock card is shown below.
NOTES
------------ Co Ltd.
Time card
Name of the worker ----------
Department --------
No. -------
Week ending -------
Day
Morning
In
Out
Afternoon
In
Out
Normal
Hours
Over-time
Hours
Monday
Tuesday
Wednesday
Thursday
Friday
Saturday
Total
Rate per hour
Amount ( `)
Normal
Hours
Overtime
---
---
--------
---
---
---------------
Advanced Cost Accounting - I
247
Time Keeping
NOTES
ii) Dial Recording Method
In this method a dial recorder is used for recording in and out time of the
workers. The recorder has a dial and on the dial there are about 160 holes. Each
hole bears a number and each worker is given his identity or token number, these
numbers corresponding to the numbers given to holes on the dial. The dial recorder
also has a dial arm at the center of the dial. The dial recorder also has a dial arm
at the centre of the dial. When a worker enters the gate of the factory he goes to
the dial recorder, moves the dial arm to the hole bearing his identity number and
presses the dial arm into that hole. When this is done, on the roll of the paper kept
inside the dial recorder the number of the worker and the time the dial arm was
pressed by the worker are automatically printed. Same procedure is followed by
the worker to record his out-time. At the end of the month the paper roll is taken
out from the dial recorder and a new paper roll is fitted in the clock recorder. The
paper roll on which the number and the in-coming and out-going time of the workers
are printed can be used for calculating the hours-normal and overtime-of each
worker and for preparation of payrolls.
Advantages :
Check Your Progress
i)
What is meant by ‘Time
Keeping’ ? Why it is
regarded as important ?
ii) Which methods are used
for time-Keeping ?
1)
It is suitable for a medium or large-scale unit employing a large number of
workers. For a group of 150 to 160 workers one dial recorder can be
provided and providing separate dial recorders, any number of workers can
be covered.
2)
The method is simple to understand and easy to follow.
3)
Since the timings are, automatically printed, they are accurate and workers
complaints about wrong time recorded by the time-keeper do not take place.
4)
Information about hours worked by the workers makes the work of payroll
department easy.
Disadvantages :
1)
For using this method a lot of investment is needed and so small-size units
do not use it.
2)
Printing of timing is done on paperroll kept inside the dial recorder. So
workers cannot see the recording to verify the correctness of the time
recorded.
3)
If proper supervision at the dial recorded is not provided, a worker can
easily record timing for his worker-friend who is absent or is reporting late
for the work.
iii) Explain briefly following
methods of time keeping:
a)
Muster / Attendance
Register Method
b) Token or
c) Time-Recording Clock
Method
iii) Key Recording Method
d) Dial Recording Method
e) Key Recording Method
248 Advanced Cost Accounting - I
It is a method similar to the dial recording method. A key recorder has
many holes on the dial of the recorder. There are many keys and each key has a
number which is same as the identity number given to a worker. When a worker
reports for work he picks up the key bearing his identity number and inserts it in
the proper hole on the dial and gives it a turn. This result in recording the number
and the time at which the key was given a turn by the worker. This information is
printed on the paper roll kept inside the recorder. The worker takes out the key
and puts it in the tray kept near the recorder. Then the worker goes to the department
in which he has been appointed. When the worker leaves the factory at lunchbreak and or in the evening the out-time is recorded by following the same
procedure. On the basic of his in-time and out-time total time for which he was
present in the factory premises can be calculated. Division of the total time in
normal hours and over-time hours is shown and using the normal rate and overtime rate applicable to the worker the pay roll department calculates his normal
wages, over-time wages and total wages payable to the worker. Deductions to be
made are shown separately and the net amount of wages to be paid to the worker
are shown.
Time Keeping
NOTES
This method has advantages and disadvantages which are similar to dial
recorder method.
10.3 Summary
Time keeping is an arrangement made by the enterprise to record ‘in time’
and ‘out time’ for each worker and employee. In time means the time at which a
worker enters through the gate of the enterprise and out time means the time he
goes out of the gate. In other words, the total time for which a worker was
present in the premises of the enterprise becomes available through the time
keeping record. Similarly whether a worker was present or absent on all working
days of the enterprise can also be found out by using the time keeping record. If
the enterprise operates in two or three shifts, the time keeping for workers of
each shift is required to be made. Time keeping is a statutory requirement of the
management of an enterprise.
Time keeping may be done by a time keeper or by the worker. According
to the number of workers employed in an enterprise either manual method of time
keeping or mechanical method of time keeping may be selected. Under manual
method ‘attendance register/muster method’ and ‘token or disc method’ are the
two methods available while under mechanical method ‘time recording clock
method’, ‘dial recording method’ and ‘key recording method’ are the three methods
available. Each method has certain advantages and disadvantages which should
be carefully considered before selecting a particular time keeping method by an
enterprise.
10.4 Key Terms
i)
Time Keeping : Reducing of ‘in’ and ‘out’ time of each worker present in
the factory.
ii)
Time Keeping Section / Department : The Section or the Department
which is assigned the work of time-keeping.
Advanced Cost Accounting - I
249
Time Keeping
NOTES
iii)
Token or Disc : Made from some metal a token or disc bears the number
alloted to a worker. The number is either painted or engraved on the token
or disc.
10.5 Questions
I - Multiple Choice Questions
1.
‘Time keeping’ is the recording of the ----------- of a worker.
(a) performance
(b) attendance
(c) efficiency
(d) job satisfaction
2.
To maintain discipline and regularity in attendance is the main objective of
---------- department.
(a) Time-keeping
(b) Time-booking
(c) Payroll
(d) Production
Ans. : (1 - b), (2 - a).
3.
Match the pairs.
Group I
Group II
(a) Muster Method
(i) ‘Key Recording Method’
(b) Token or Disc Method
(ii) ‘In-tray’ and ‘out-tray’
(c) Dial Recording Method
(iii) ‘The roll of the paper’
(d) Time Recording Clock Method
(iv) ‘Sufficient nails or hooks
attached’
(v) ‘Attendance Register’
Ans. : (a) - (v), (b) - (iv), (c) - (iii), (d) - (ii).
II - Theory Questions
250 Advanced Cost Accounting - I
1)
What is ‘Time-keeping’? State manual and mechanical methods of timekeeping.
2)
Explain manual method of time-keeping stating merits and demerits of them.
3)
Explain mechanical method of ‘Time-keeping’. Briefly mention advantages
and limitations of these method.
Time Keeping
10.6 Further Reading
i)
‘Cost Accounting’ - Jawahar Lal
ii)
‘Cost Accounting’ - Principles and Practice’ - N. K. Prasad.
iii)
‘Cost Accouning’ - B. K. Bhar
iv)
‘Advanced Cost Accounting - Nigam And Sharma.
NOTES
Advanced Cost Accounting - I
251
Unit 11
Time Booking
Time Booking
Structure
11.0 Introduction
NOTES
11.1 Unit Objectives
11.2 Time Booking
11.2.1 Meaning and Necessity
11.2.2 Methods of time booking
11.3 Summary
11.4 Key Terms
11.5 Questions
11.6 Further Reading
11.0 Introduction
In the previous Unit we have studied time keeping and methods used for
time keeping. Time keeping gives in time and out time or arrival time and departure
time of every worker. However, this information is not sufficient for calculations
for labour cost. A worker is paid remuneration of the basis of time spent by him in
doing the work assigned to him. A worker may do only one job or he may do
different jobs on one day. For calculating the labour cost of a job the actual time
spent by a worker on that job is taken into consideration. Arrangement made for
recording ‘on-time’ (starting time) and ‘off-time’ (stop time) is called time booking
arrangement. By considering actual working time of all workers who have
performed work of that job and the wage rate applicable to each such worker,
the labour cost of the job or process or operation can be calculated.
11.1 Unit Objectives
After studying information given in this unit you should be able to :-
•
Understand meaning and need for time booking;
•
Know the various methods available for doing time booking; and
•
Prepare the documents used under different methods of time booking.
Advanced Cost Accounting - I
253
Time Booking
NOTES
11.2 Time Booking
Time-Booking means recording of time spent by workers on job, product or
process. It is not sufficient to do time-keeping, i.e. recording of in-coming and outgoing or arrival time and departure time. How much of the attendance time of a
worker is used by him for doing the work assigned to him is required to be found
out by the management of the concern. Workers are paid remuneration for doing
the work and not for merely remaining present in the factory premises.
11.2.1 Meaning and Necessity :
Time- Booking is a systematic arrangement to find out how much time the
workers have used for performance of a job, activity, process or production work.
When a worker reports for work in a section or department, the supervise or
foreman of the section/department informs him which work is to be done by the
worker. It may be a particular job, process or a certain stage in the manufacturing
activity. When the worker actually starts the work, time when the worker has
started the work is recorded by him or by the foreman under whom he is working.
This time is called as ‘on-time’ or ‘starting-time’. When the worker stops the
work he was doing, that time is also recorded and is known as ‘off-time’ or ‘finishtime’. From the on-time upto the off-time the time is calculated and recorded as
the working time or productive time. If the productive time falls within the normal
working hours it is recoreded as normal hours and if the worker has worked even
after the normal working hours were over such additional time is recorded as the
over-time.
Time-Booking becomes necessary due to the following reasons :-
254 Advanced Cost Accounting - I
1.
Maximum of the attendance time of workers should be utilized for doing
the work assigned to him. When wages are paid on the basis of time worked,
It is necessary on the part of management to utilise the time of the workers
to maximum extent for production work, otherwise the workers get
remuneration for wasted time also.
2.
Direct labour cost of a job, a process or product manufactured can be
found out by multiplying the total hours spent by the workers who have
worked on it by the wage rates applicable to them. By doing time-booking
information about total hours spent by the direct workers on the job, process
or production of a certain quantity becomes available.
3.
Measurement of efficiency of the workers can be done by the management
by comparing the actual time taken by the workers with the estimated or
budgeted time fixed for that work. Time booking provides data about actual
time taken by the workers for completing the work.
4.
For calculation and control of idle time the time booked for workers is
compared with the hours for which the workers were present in the factory
premises. Through time booking the labour hours actually put in for doing
the work can be determined.
5.
In those concerns where incentive or bonus payment is made on the basis
of time saved by the workers out of time allowed for doing a certain work,
accurate information about actual time taken by the workers is needed.
Time booking fulfills this need.
6.
For absorption or charging of overheads to a job or production order direct
labour hours or direct labour cost method is used. For calculation of direct
labour hours or direct labour cost, time-booking is essential.
Time Booking
NOTES
11.2.2 Methods of Time-Booking :
Time Booking is done by using any one of the following methods :1. Daily Time Sheet :
In this method a daily time sheet is prepared for each worker, when the
worker reports for the work, the foreman gives him a daily time sheet. The
information asked for in the sheet is to be filled-in by the worker himself and
when he stops the work in the evening, he is required to hand over the completed
sheet duly signed by him to the foreman. The foreman checks the recording in the
sheet and if they correct he sings the sheet and sends it to the cost department.
The cost clerk completes the recording in respect of normal hours, over-time
hours and the rates applicable and shows the total labour cost for the worker for
the day. He is also required to sign the sheet taking responsibility for the calculations
shown in it. Total number of daily time sheets will be equal to the actual number of
workers who were present for doing the work on that day. These sheets are
preserved and used for the further cost analysis.
A specimen of daily time sheet is given below :-
————————————— Company
Daily Time Sheet
Worker’s Name :—————————————
Date :———————Token No.:——————————————
Department :—-————
Work
Order
Description of
work done
No.
Time
Total Hours
Started Finish Normal Over
ed
time
Rate
Amount
` Normal Overtime
`
`
Total Hrs i) Normal
ii) Over-time
Worker
Foreman
Cost clerk
Advanced Cost Accounting - I
255
Time Booking
NOTES
In the daily time sheet information is recorded by the worker on the same
day the work is performed by him and it is also verified by the foreman immediately
and so the information is more accurate.
The drawback of this method is the lot of paper work involved since for
every worker one daily time sheet has to be prepared and so this method is not
suitable where the number of workers employed is very large.
2. Weekly Time Sheet :
This method is similar to the method of daily time sheet except the time
booking is done for the days of the week. Worker is given a weekly time sheet at
the commencement of the work on the first day of the week. He records the
details such as job or production order number, the starting and finishing time of
the work, details of the work performed by him and normal and overtime hours
spent by him on the job each day. At the end of the week he signs the sheet and
gives it to the foreman who checks the entries and if found correct, certifies it so
by singing the sheet and sends it to the cost department for calculations of normal
and overtime wages and any incentive bonus if applicable to the worker.
—————————— Company
Weekly Time Sheet
Name Of Worker :-----------------------------------------------------Token No. :----------------------------------- Week ending on:----------------Department :---------------------------------Day
Job/ Order Work done On Off HoursWorked Rate Amount
No.
Normal Over Rs. Normal Over
-time
time
Mon
Tues
Wed
Thurs
Fri
Sat
Total
Signature of worker
256 Advanced Cost Accounting - I
Signature of Foreman
Cost Clerk
Weekly time sheet reduces the paper work considerably. When workers
are engaged on a job for a long time, weekly time sheet method proves suitable.
However, as the sheet remains with worker for a week it may get spoiled, stained
or torn. Also the time booked may not be accurate as the worker may record the
details not every day but for 3-4 days at one time relying on his memory for filling
on (starting) and off (finishing) times. This inaccuracy will cause the calculations
of labour cost to become wrong.
Time Booking
3. Job Card / Job Ticket :
This is another method used for time booking. Under it job card or job
ticket can be prepared in the following ways :
a)
Job card for each job,
b)
Job card for each worker,
c)
Combined time and job card, and
d)
Piece-work card.
NOTES
Brief information about each of the above four methods are given below:
a) Job card for each job :
For each job a separate job card is prepared to record the time worked on
the job by each worker and the labour cost of each stage of the job and total
labour cost of a job. Job No., Job description, the sequence in which the stages of
the job are to be completed are recorded in the job-card by the production
engineering department. The job card is given to the worker or the group of
workers who have to perform the first stage of the job. The worker/workers
record their names, the starting time and the finishing time of that stage and total
hours worked on the first stage of the job and hand over the work together with
the job-card to the foreman and the foreman give the the work to the worker/
workers who have to do the next stage of the job work. In this way the job card
moves with the job and when the recording of the last stage of job work is done,
the total time taken for completion of the job is calculated. The cost department
calculates the direct labour cost of the job by considering the time spent by each
worker and the normal, overtime rate and any incentive bonus amount payable to
the workers.
Job card for each job provides information about the various stages through
which it has been completed, the departments and which workers from these
departments have performed these stages, the time taken by them to complete all
the stages, how many normal hours and overtime hours were required to do the
job and the labour cost incurred for the job. All this information becomes available
on a single job card or job ticket and it provides guidance while planning a similar
type of job.
A specimen of Job Card for each job is shown below :
Advanced Cost Accounting - I
257
—————————— Company
Job Card for Each Job
Job/ Order No. ---------------------------Job Description -------------------------Started on --------------- at -------------
Completed on --------- at ---------
Standard Hrs. allowed --------------
Actual Hrs. taken -----------------
Day
Date
Tokan
No. of
Name of
Worker
Dept.
Work done
Time
On
Off
Worker
Hours
Normal
Over
Rate
`
Amount
`
time
Total
Foreman
Cost Clerk
b) Job Card For Each Worker :
In this method for each worker a separate job card is prepared for a specific
period, say a week or a fortnight. The job card is given to the worker at the
commencement of the period and the job number and the work he is required to
do in respect of the job is told to him. When the worker starts his work, he
records the time as ‘on time’ and when he finishes his work he records the time as
‘off-time’. After showing the recording to the foreman who had assigned the
work to him, the worker receives instructions about another job either in the same
department or a different departments. He begins the work on the new job and
again does the recording for it in the job card with him. At the end of the specific
period he signs it and gives it to the foreman or drops it in the box provided for it.
Thus the time booked by the worker on one or more jobs during the specific
period are recorded on the job card of the worker and the remuneration payable
to him for the period can be calculated by the cost clerk.
In this method as the job is completed by a number of workers by doing the
particular work allocated to them and as the time booked is recorded by each of
them on his job card, it becomes necessary to collect all such job cards together,
find out time spent by each such worker on the particular job, and add the direct
labour cost from the job cards to find out the total direct labour cost of the completed
job.
258 Advanced Cost Accounting - I
Comparing the time booked with attendance time of the worker, becomes
easy in this method.
Time Booking
c) Combined Time and Job Card :
In this method, instead of making separate arrangements for time-keeping
and time-booking they are combined in one card. For every worker a combined
time and job card is prepared for a period of one week. The name of worker, his
token number, name of the department, job number, in and out time of the worker
every day and his starting/ on time and finishing/off time for the jobs performed
by him on that day, his normal hours of work, his overtime hours, idle time, rate of
remuneration and his normal and overtime amount of remuneration is recorded in
the columns prepared in the card.
NOTES
This method is useful for a small concern which employees a few workers
and on whom proper supervision can be kept to see that they report for the work
punctually and do the jobs assigned to them. Since recording of in and out time
(time-keeping) and on and off time (time-booking) of a worker is recorded on the
same card, it becomes easy to reconcile time of attendance and working time and
find out the idle time.
A format of combined time and job card is given below :—————————— & Company
Combined Time and Job Card
Day
Name of Worker -------------------------
Department ------------------
Token No. -------------------------
Week ending on ----------------
Job No
Attendance Time
In
Out
Job Time
On
Off
Normal
Hrs.
Overtime
Hrs.
Idle
Time
Mon
Tues
Wed.
Thurs.
Fri.
Sat.
Wages : Normal
Total
Overtime
Total
Signature of Worker
Signature of Foreman
Signature of Cost Clerk
Advanced Cost Accounting - I
259
Time Booking
d) Piece - Work Card
Check Your Progress
i)
What is the meaning of
‘Time-Booking’ ? Why
Time
Booking
is
Important ?
ii) Give the formats of :a) Daily Time Sheet
b) Weekely Time Sheet
c) Job Card / Job Ticket
for each worker
d) Combined Time and
Job Card
A piece-work card is prepared when the workers are paid remuneration
not on the basis of time worked by them but on the basis of the quantity produced
and accepted by concern. Such remuneration is known as piece-rate remuneration
and it is stated as per unit or `_________ per K.g. _______, per dozen etc.
A piece-work card is prepared for each worker or for a group of workers
if the work is done by the group. Even though wages are paid on the basis of
quantity produced and accepted, the recording of time taken of the production is
also recorded in the card. This is necessary for charging of overheads when the
overheads are divided on the basis of labour hours and for calculating the amount
of bonus payable to the worker on the basis of his efficiency.
e) Price- Work Card
Format of a piece-work card may be as under :—————————— Company
Piece - Work Card
Name of Worker -------------------------
Department ------------------
Token No. -------------------------
Week ending on ----------------
Day
Job Description
Time Production Rejections
No.
Taken
of Work
(Units)
(Units)
Accepted
(Units)
Initials
Passed by Rate
Worker (Inspector)
`
Amount
`
Mon.
Tue.
Wed.
Thurs.
Fri.
Sat.
Total
Worker
Foreman
Cost Clerk
11.3 Summary
260 Advanced Cost Accounting - I
Time booking means recording ‘on-time’ and ‘off-time’ of workers
performing a job, process, activity or operation assigned to them. On-time is also
known as ‘starting-time’ and ‘off-time’ is also known as ‘stop or finishing time’.
Time booking enables the management to find out how much of attendance
time is spent by a worker for doing the work assigned to him. For calculating
wages when wages are paid on time-rate basis, for judging efficiency of worker
by comparing the actual time taken by him for doing the work with the time
allowed by management for doing the work and for calculating amount of incentive
payable to a worker for the time saved by him information becomes available
from time-booking records. Total labour cost of a job, process, activity and operation
can be calculated by finding out actual time spent by workers who have done the
work and the amount of wages payable to them for such work. Preparation of
‘daily time sheet’, ‘weekly time sheet’. ‘Job card/job ticket’ for each worker or
each job’, ‘combined time and job card’ and ‘piece-work card’ are the methods of
time- booking and depending upon nature of work and number of workers employed
a suitable method of time booking is selected and used for time booking.
Time Booking
NOTES
11.4 Key Terms
i)
Time Booking : Time Booking means recording the time actually spent by
a worker for production work. By recording ‘On’ or ‘Starting’ time and
‘Off’ or ‘Stop’ time for each worker his time is booked.
ii)
Daily Time Sheet : It is a sheet to given to each worker when he reports
for work every day. Details are filled in the columns by the worker and the
sheet is given to supervisor / foreman when the day’s work is over. The
supervisor checks the details recorded by the worker and signs the sheet
and sends it to wages section for further analysis.
iii)
Weekly Time Sheet : It is similar to the Daily Time Sheet with the
difference that it is used for a week by a worker.
iv)
Job Card for Each Job : It is a card used for time-booking of all the
workers who have worked on the job.
v)
Job card for each worker : It is a card provided to each worker in which
he records his time booked for all the jobs which he has worked during a
specific period of time.
11.5 Questions
I - Multiple Choice Questions
1)
Time-booking means recording of time spent by ---------(a) workers on job
(b) workers in premises
(c) workers for arrival
(d) workers for departure
2)
Efficient time booking helps to minimise ---------(a) working time
(b) total time
Advanced Cost Accounting - I
261
(c) idle time
Time Booking
(d) time given
3)
NOTES
When the workers are paid remuneration not on the basis of time worked
but on the basis of quality produced is known as ------- remuneration.
(a) time rate
(b) daily rate
(c) quality rate
(d) piece-rate
4)
Which of the following statement is ‘wrong’.
(a) Daily time sheet method is not suitable where number of workers
employed is very large.
(b) Weekly time sheet reduced the proper work considerably.
(c) A piece-work card is prepared when the workers are paid remuneration
not on the basis of the worked by them.
(d) Weekly time sheet increased the paper work considerably.
Ans. : (1 - a), (2 - c), (3 - d), (4 - d).
II - Theory Questions
1.
What is meant by ‘Time- Booking ‘? Mention various methods which can
be used for time- booking ?
2.
Give the specimen of ‘Daily Time Sheet’. ‘Weekly Time Sheet’ and ‘Job
Card For Each Job’. Also mention how recording is done in these documents.
3.
What is difference between ‘Time-keeping’ and ‘Time-booking’ ? Is
arrangement necessary for time-keeping as well as time-booking ?
11.6 Further Reading
262 Advanced Cost Accounting - I
i)
‘Cost Accounting’ - Jawahar Lal
ii)
‘Cost Accounting’ - Principles and Practice’ - N. K. Prasad
ii)
‘Cost Accounting’ - B. K. Bhar
iv)
‘Advanced Cost Accounting’ - Nigam and Sharma
Unit 12
Reconciliation of Time Kept and Time
Booked
Reconciliation of Time Kept
& Time Booked
Structure
12.0 Introduction
NOTES
12.1 Unit Objectives
12.2 Reconciliation of time kept and time booked
12.3 Idle time and its types
12.4 Causes of idle time
12.5 Cost and treatment of idle time cost
12.6 Summary
12.7 Key Terms
12.8 Questions
12.9 Further Reading
12.0 Introduction
In Unit 10 and 11, information is provided about time keeping and time
booking respectively. Attendance time is the time calculated from ‘in time’ to ‘out
time’ of a worker whereas actual work-time is calculated by considering ‘ontime’ and ‘off-time’ of a worker spent by him on one or more jobs performed by
him on the same day. Time kept by a worker (attendance time) is always more
than time booked (actual working time) by him on any day. It is important to
reconcile the time kept with time booked for every worker employed by the
enterprise and minimise the difference in order to control the labour cost.
Information about the reconciliation is provided in this unit.
12.1 Unit Objectives
Information given in this unit should enable you to understand :
•
Necessity of reconciliation between time kept and time booked;
•
Meaning of idle time and its types;
•
Causes of idle time; and
•
Cost of idle time and how idle time is treated.
Advanced Cost Accounting - I
263
Reconciliation of Time Kept
& Time Booked
NOTES
12.2 Reconciliation of Time Kept with Time Booked
Time kept is the attendance time of a worker. It is calculated from the ‘in
time’ recorded by the worker or the time keeper when the worker enters through
the gate of the factory at the beginning of the shift timings upto the ‘out time’ at the
end of the shift timings. When the remuneration is paid on time basis, it is the
attendance time for which the worker was present that his wages are calculated.
Time booked for the worker is calculated by considering the ‘starting time’ or ‘on
time’ and the ‘finishing time’ or ‘off time’ of the worker recorded for one or more
jobs performed by him on that day. The total of time booked for a worker with his
attendance time on.
12.3 Idle Time and its Types
Idle time is the difference between time kept and time booked for a worker
on a day. In other words, time for which a worker is present in the factory but not
used for any job, order, process, operation or any other activity related to production
is the idle time. It is the time for which the worker remains idle and does not
perform any production activity.
Idle time is of two types : normal idle time and abnormal idle time. Normal
idle time is caused by reasons which are of unavoidable nature, e.g. time taken by
a worker for walking from the entrance to the section or department where he
performs the work assigned to him. Similarly waiting to receive instructions from
the foreman or supervisor also results in idle time which cannot be avoided and so
it is treated as normal idle time.
When idle time is caused by avoidable reasons it is treated as abnormal idle
time. For example, when idle time is caused due to non availability of material or
tools or because of machinery is not available as it is being used by another worker
for completing his job, the idle time is regarded as abnormal idle time. Similarly
idle time caused by an accident or strike of workers is abnormal idle time because
proper planning of work and efficient administration can eliminate these causes of
the same day is compared. The attendance time is usually more than the time
booked for the worker. The difference is the time for which the worker gets his
wages but no production is obtained form him, this time is called ‘idle time’. Thus
reconciliation of time kept with time booked shows the idle time and since the
worker is paid for the idle time also the management is interested in minimising
the idle time.
264 Advanced Cost Accounting - I
12.4 Causes of Idle Time
Reconciliation of Time Kept
& Time Booked
According to the causes due to which the idle time arises they can be
grouped under three groups as shown below :
a)
Production Causes,
b)
Administration Causes, and
c)
Economic Causes.
NOTES
a) Production Causes :
These causes take place due to production process or production difficulties.
They can mentioned as under :
1.
Idle time caused by machine breakdown.
2.
Idle time caused due to power failure.
3.
Idle time caused due to gap required between completion of one job and
starting of the next job.
4.
Worker waiting for the instructions from the foreman.
5.
Non availability of the materials and/or tools required to do the job.
6.
Time taken to overcome the effects of an accident and to continue the
production process.
7.
When the production work is carried on in a certain sequence, noncompletion of previous stage causes idle time in the next stages.
b) Administration Causes :
These causes are due to the administrative decisions, they include:1)
Non acceptance of certain demands of the workers or their trade union
leading to strike or lock-out.
2)
Surplus plant capacity not decided to be used by the administration.
3)
Inefficient planning and lack of co-ordination among different sections or
departments.
4)
Administrative decision to go slow since the situation in the market is widely
fluctuating.
c) Economic Causes :
These are the causes due to the economic situations. They include :1)
Condition of recession or depression existing in the economy due to which
there is fall in demand and production is reduced without termination of
any workers.
Advanced Cost Accounting - I
265
Reconciliation of Time Kept
& Time Booked
2)
Seasonal nature of the product being manufactured by the concern. During
off-season period production is reduced.
3)
Severe competition created by a new concern or a foreign competitor and
present production is required to be reduced. The labour is not used to the
full capacity and so idle time is increased.
NOTES
Apart from the causes mentioned above in three groups. There are some
unavoidable causes which result in creation of idle time. Mention may be made
of some causes as under :1)
Time taken by a worker to reach his department or place of work form the
gate of the factory.
2)
Time taken by the workers to take care of personal needs.
3)
Rest needed by workers after doing physically heavy work.
4)
Time required for re-setting of machine after completing a certain amount
of production.
5)
When a job is to be performed by 4 workers working in a team, absence or
late-coming of any one of then causes the other three workers to hold-up
the starting of the job.
12.5 Cost and Treatment of Idle Time
Check Your Progress
i)
Why reconcilation of
‘time kept’ with ‘time
booked’ is necessary ?
ii) What is ‘ idle time’ ? Why
efforts should be done to
minimise idle time ?
iii) What are causes of idle
time ? How these causes
can be grouped ?
iv) How cost of idle time is
treated ?
v ) What is the difference
between ‘normal idle
time’ and ‘abnormal idle
time’ ?
266 Advanced Cost Accounting - I
Employer pays wages to the worker even for the idle time. In this way the
amount of wages paid to the workers for the idle time cab be regarded as the cost
of idle time. Total idle time and the cost of such idle time should be found out by
preparing a separate. Idle Time card and showing in it the reasons due to which
the idle time has taken place. The idle time cost should be divided between normal
idle time cost and abnormal idle time cost. Normal idle time cost should be further
sub-divided between normal idle time cost caused by controllable causes and
caused by uncontrollable causes. The cost of normal idle time caused by
controllable reasons is treated as overheads and charged to production. If it is
possible to trace the normal idle time cost caused by controllable reasons to a
particular production department, it should be added to the factory overheads of
that department so that the production cost of other departments is not
unnecessarily increased. Idle time of normal type caused by uncontrollable reasons
such as time taken by the workers to reach their place of work from the entrance
gate of the factory, or machine-setting time or time lost between completion of
one job and commencement of the next job etc. should be charged to the particular
job as production overheads of that job or by making use of inflated wage rate for
charging direct labour cost to the job. Efforts should be made by the management
to minimise the normal idle time cost and thereby the production cost of the
department or of the job is reduced.
Abnormal idle time cost is caused by reasons which cannot be controlled.
Idle time caused by fire, flood, strikes, machinery break-down or major power
failure or accident can be regarded as abnormal idle time. The cost of such
abnormal idle time is not treated as cost but it is regarded as abnormal loss and is
directly debited to costing profit and loss account.
Reconciliation of Time Kept
& Time Booked
12.6 Summary
NOTES
There is a difference between time kept (attendance time) and time booked
(time used for performance of work) for a worker. It is necessary to find out how
much is the difference between these two and why the difference has taken
place. This activity is known as reconciliation of time kept and time booked. This
difference is known as ‘idle-time’. As a worker gets remuneration for the idle
time also, it is important for the management to minimise the idle time and thereby
control the labour cost. Complete elimination of idle time is not possible because
there are certain causes which are bound to create idle time, e.g. a worker needs
some time to reach his section or department where he works and also needs time
to prepare for the job by changing his clothes, receiving instructions from his
foreman about the job assigned to him, setting-up of the machine and receiving
materials with which the job is to be done. Similarly some time is lost between
completion of a job and starting of another job. Idle time caused by such normal
causes is called ‘normal idle time’. When idle time is caused by reasons which are
controllable, such idle time is called as ‘abnormal idle time’, causes of idle time
can be grouped under production causes, administration causes and economic
causes. By preparing a separate idle time card, total idle time, cost of the idle time
and causes of idle time, the cost of normal idle time and of abnormal idle time is
calculated. Normal idle time cost is treated as production/factory overheads and
if such cost can be traced to particular production departments, it is added to the
production overheads of that production department. Cost of abnormal idle time is
treated as abnormal loss and it is charged as abnormal loss to Costing Profit and
Loss Account of the enterprise.
12.7 Key Terms
i)
Idle Time : It is the time difference between ‘time kept’ and ‘time booked’
by a worker. Idle time is the time not used for production work.
ii)
Normal Idle Time : It is the idle time caused by reasons which cannot be
avoided.
iii)
Abnormal Idle Time : It is idle time which takes place due to abnormal
reasons and available causes.
Advanced Cost Accounting - I
267
Reconciliation of Time Kept
& Time Booked
12.8 Questions
I - Multiple choice Questions
1.
NOTES
Normal idle time is caused by reasons which are of ------- nature.
(a) available
(b) unavailable
(c) suitable
(d) considerable
2.
When idle time is caused by -------- reasons it is treated as abnormal idle
time.
(a) available
(b) unavailable
(c) suitable
(d) considerable
3.
Idle time caused by accident of workers is -------- idle time.
(a) abnormal
(b) normal
(c) available
(d) unavailable
Ans. (1 - b), (2 - a), (3 - a).
4.
Match the pairs.
Group I
Group II
(a) Production causes
(i)
Payment for idle time
(b) Administrative causes
(ii) Resetting of machine after
completing production
(c) Economic causes
(iii) Off-season period production
(d) Unavoidable causes
(iv) Inefficient planning
(v) Machine Breakdown.
Ans. : (a) - (v), (b) - (iv), (c) - (iii), (d) - (ii)
268 Advanced Cost Accounting - I
II - Theory Questions
1)
What is meant by ‘idle time’ ? What are its types ?
2)
Give causes of ‘normal idle time’ ? How is cost of normal idle time treated
?
3)
What are causes of ‘abnormal idle time’ ? How is cost of abnormal idle time
treated ?
4)
What are causes of ‘abnormal idle time’ ? How is cost of abnormal idle time
treated ?
5)
Why reconciliation of time- kept with time – booked is necessary ?
Reconciliation of Time Kept
& Time Booked
NOTES
12.9 Further Reading
i)
‘Cost Accounting’ - Jawahar Lal
ii)
‘Cost Accounting’ - Principles and Practice’ - N. K. Prasad
ii)
‘Cost Accounting’ - B. K. Bhar
iv)
‘Advanced Cost Accounting’ - Nigam and Sharma
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