CAG 201
ADVANCED COST ACCOUNTING - III
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)
:
September 2015
First Publication
:
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Type Setting
:
Cover Print
:
Printed by
:
Dr. Prakash Atkare, Registrar, Y.C.M.Open University, Nashik - 422 222.
Publisher
CONTENTS
Topic 1
Unit 1
Methods of Costing
Introduction and Job Costing
1-30
1.0 Introduction 1.1 Unit objectives 1.2 Introduction of methods of Costing 1.2.1 Installation of Costing
system 1.2.2 Overview of costing methods 1.3 Job Costing - Meaning and Definition 1.4 Features of Job
Costing 1.5 Advantages of Job Costing 1.6 Limitations of Job Costing 1.7 Procedure followed in Job
Costing 1.8 Preparation of Job Cost Sheet 1.9 Forms used in Job Costing 1.10 Industries which use Job
Costing 1.11 Illustrations 1.12 Summary 1.13 Key Terms 1.14 Questions and Exercises 1.15 Further
Reading
Unit 2
Batch Costing (Theory)
31-38
2.0 Introduction 2.1 Unit objectives 2.2 Meaning of batch costing 2.3 Features of batch costing 2.4
Advantages of batch costing 2.5 Disadvantages of batch costing 2.6 Industries which use batch costing 2.7
Accounting recording for batch costing 2.8 Economic Batch Quantity (EBQ) 2.9 Summary 2.10 Key
Terms 2.11 Questions 2.12 Further Reading
Unit 3
Batch Costing (Practical Problems)
39-50
3.0 Introduction 3.1 Unit objectives 3.2 Illustrations 3.3 Summary 3.4 Exercises 3.5 Further Reading
Unit 4
Contract Costing (Theory)
51-66
4.0 Introduction 4.1 Units objectives 4.2 Meaning of Contract Costing 4.3 Difference between Job
Costing and Contract Costing 4.4 Features of Contract Costing 4.5 Industries which use Contract Costing
4.6 Accounting recording in Contract Costing 4.7 Calculation of profit to be transferred to Profit & Loss.
Account in respect of contracts in different stages of completion 4.8 Summary 4.9 Key Terms 4.10
Theory Questions 4.11 Further Reading
Unit 5
Contract Costing (Practical Problems)
67-80
5.0 Introduction 5.1 Unit objectives 5.2 Illustrations on Contract Costing 5.3 Summary 5.4 Exercises
Unit 6
Process Costing (Theory)
81-96
6.0 Introduction 6.1 Units objectives 6.2 Meaning of Process Costing 6.3 Features of Process Costing
6.4 Difference between Job Costing and Process Costing 6.5 Advantages of Process Costing 6.6
Disadvantages of Process Costing 6.7 Collection of costs and procedure followed 6.8 Normal and Abnormal
Loss or gain 6.9 Inter- process profit 6.10 Summary 6.11 Key Terms 6.12 Questions 6.13 Further
Reading
Unit 7
Process Costing (Practical Problems)
97-118
7.0 Introduction 7.1 Unit Objectives 7.2 Illustrations on process costing 7.3 Summary 7.4 Exercises 7.5
Further Reading
Topic 2
Unit 8
Methods of Costing
Operating or Service Costing
119-134
8.0 Introduction 8.1 Unit Objectives 8.2 Meaning of Operating Costing 8.3 Features of Operating Costing
8.4 Industries which use Operating Costing 8.5 Operating Cost Units 8.6 Formats of Operating Cost
Sheets 8.7 Summary 8.8 Key Terms 8.9 Questions 8.10 Further Reading
Unit 9
Operating Costing (Practical)
135-162
9.0 Introduction 9.1 Unit Objectives 9.2 Preparation of Operating Cost Sheets 9.2.1 Operating Cost Sheet
in Transport Organisations (Illustrations 1 To 7) 9.2.2 Operating Cost Sheet in Power Generating Organisations
(Illustrations 8 To 9) 9.2.3 Operating Cost Sheet in Canteens (Illustration 10) 9.3 Summary 9.4 Exercises
Topic 3
Unit 10
Cost Books
Cost Journal and Ledger
163-181
10.0 Introduction 10.1 Unit Objectives 10.2 Cost Accounting Record and Processes 10.3 Cost Accounting
Records Rules 10.4 Companies ( Cost Accounting Records) Rules, 2011 10.5 Cost Ledger and Control of
Cost 10.5.1 Cost Ledgers 10.2.2 Control Accounts 10.5.3 Accounting Treatment of Journal Entries 10.6
Summary 10.7 Key Terms 10.8 Questions 10.9 Further Reading
Unit 11
Integral and Non-integral Accounting System
182-236
11.0 Introduction 11.1 Unit Objectives 11.2 Integral and Non-integral accounting systems 11.2.1 Integral
System 11.2.2 Non-integral system 11.2.3 Accounting Treatment of Journal Entries 11.3 Reconciliation
and integration between Financial Account and Cost Account 11.3.1 Reasons for differences 11.3.2
Reconciliation of Cost and Financial Accounts 11.3.3 Methods of Reconciliation of Cost and Financial
Accounts : (I) Preparation of Reconciliation Statement (II) Preparation of Memorandum Reconciliation
Account 11.3.4 Illustrations 11.4 Key Terms 11.5 Questions and Exercises 11.6 Further Reading
INTRODUCTION
This book of self - instructional material is based on the syllabus for the
subject Advanced Cost Accounting (M.Com : CAG 201). It is written by taking
into consideration the revised syllabus prescribed for the M.Com students of
Yashwantrao Chavan Maharashtra Open University, Nashik from June, 2015.
This book contents 11 Units and these Units deal with mainly methods of
costing and also cost books and Integral and Non-integral Accounting system.
The authors have provided theoratical information related to the particular method
of costing which is followed by illustrations providing practical knowledge in the
subsequent Unit. It is hoped that this arrangement will help the students in
understanding the theory as well as the practical related to each method of costing
in an easy way. The students who register for the M.Com course are distant education students and are able to contact the teachers only few times and keeping
this point in mind, the authors have included a large number of practical illustrations
and sufficient exercises in each Unit.
Any valuable suggestions made by the teachers as well as the students will
definitely be welcomed by the authors.
The authors and editors are sincerely thank the authorities of YCMOU for
the guidance and co-operation given by them.
Editor
Authors
Topic 1
Methods of Costing
Unit 1
Introduction and Job Costing
Unit 2
Batch Costing (Theory)
Unit 3
Batch Costing (Practical
Problems)
Unit 4
Contract Costing
Unit 5
Contract Costing
(Theory)
(Practical Problems)
Unit 6
Process Costing (Theory)
Unit 7
Process Costing (Practical
Problems)
Unit 1 Introduction and Job Costing
Introduction & Job Costing
Structure
1.0
Introduction
1.1
Unit objectives
1.2
Introduction of methods of Costing
1.2.1
Installation of Costing system
1.2.2
Overview of costing methods
1.3
Job Costing - Meaning and Definition
1.4
Features of Job Costing
1.5
Advantages of Job Costing
1.6
Limitations of Job Costing
1.7
Procedure followed in Job Costing
1.8
Preparation of Job Cost Sheet
1.9
Forms used in Job Costing
NOTES
1.10 Industries which use Job Costing
1.11 Illustrations
1.12 Summary
1.13 Key Terms
1.14 Questions and Exercises
1.15 Further Reading
1.0
Introduction :
The method of cost accumulation and identifying them to products and
services depends upon the nature of operations in an enterprise. Therefore, cost
accounting procedure varies from one enterprise to another. For example, a non manufacturing enterprise may not follow the procedure of accumulating costs
which may be followed by a specific customer orders enterprise. Similarly, a hospital
may prefer to accumulate costs in a manner as to provide cost of outpatient treatment
or a specific medical treatment; a concern organising exhibitions and fairs may be
interested in knowing the cost of an exhibition to be organised in a particular
season. On the contrary, a contractor accumulates costs for each separate contract.
Although the procedure of accumulating costs may differ for different types of
Advanced Cost Accounting - III
1
Introduction & Job Costing
NOTES
organisations, the basic principles underlying cost accumulating procedures are
applicable to all types of organisations. Each cost accounting procedure or system
aims to provide information that is needed by the management of an enterprise.
1.1
Unit Objectives
After studying the information provided in this Unit you should be able to
understand :•
Methods of costing ;
•
Meaning of job costing ;
•
Features of job costing ;
•
Advantages and limitations of job costing; and,
•
Documents which are prepared and used in job costing.
1.2
Introduction of methods of costing
According to the type of work preformed and the manner in which it is
preformed, for different types of industries different arrangements become
necessary for accumulation of cost data and accordingly different methods of
costing have come into existence. A brief information about the costing methods
is provided in this Unit.
1.2.1 Installation of Costing System
Cost Accounting is the process of accounting for cost, from the point at
which expenditure is incurred or to be incurred to the point of charging to the cost
centres and cost units. It has many uses which includes the preparation of statistical
data, the application of cost control methods and the ascertainment of the
profitability of activities carried out or planned. It is the means which consists of
concepts, methods and procedures used to measure, analyse or estimate the cost,
profitability and performance of individual products, departments and other sectors
of a company’s operations. It has internal and external use or both and it answers
to all the questions to the concerned parties. Thus, Cost Accounting is the process
and technique of determination of a product costs. It is a system of cost accumulation,
ascertainment and classification for product costing and managerial planning,
control and decision-making process. In short, Cost Accounting is a dynamic and
diverse field of activity.
Need of Costing Methods :
2
Advanced Cost Accounting - III
Methods of costing indicates a systematic procedure established for
ascertaining cost of a product, job, process or services by using the principles of
costing. A cost Accounting method is merely the process of ‘collecting and
presenting costs’. The nature of industries differs. Some are very simple and
produce only one product e.g. brick-making. Some industries may produce only
one product but it may really be an assembly of numerous components e.g. bicycle,
motor car etc. Again there may be a homogeneous product but involving many
distinct stages and processes such as vegetable oil. In some case there may be
important by-products or joint products. e.g. petroleum products, sugar etc. It is
therefore, natural that the exact method employed to ascertain cost per unit should
depend on the nature of the industry. The general principle of ascertaining cost of
production per unit is the same, but the methods of ascertaining and presenting
the costs vary with the type of production. Hence, various methods are required
for ascertaining the costs because every business is different in its nature, in its
type of products, in methods of production etc.
Introduction & Job Costing
NOTES
1.2.2 Overview of Costing Methods
In manufacturing organisations, the principles of cost accumulation and
their identification with products are more clear and visible and therefore the
principles used by a manufacturing enterprise is often used by other organisations
also for accumulating costs. In manufacturing concerns, costs are accumulated
and assigned to products on the basis of the following cost accounting methods :
(A)
Specific Order Costing and
(B)
Operation Costing.
But according to Mr. Batty, “ Many costing systems do not fall neatly into
the category of either job or process costing. Often, systems use some features
of both the main costing systems”. It is, for this reason, that he uses the term’’
hybrid costing systems’’ for all those methods that combine the features of the
basic costing methods.
(A)
Specific Order Costing :
The terminology of ICMA defines Specific Order Costing as
“the category of basic costing methods applicable where the work
consists of separate contracts, jobs or batches each of which is authorised
by a special order or contract.’’ This method is adopted in made-to-order type
of products which depends entirely on the specification of customers. As such
there is no standardization in the production process for want of uniformity. This
method may take any of the following :
1)
Job Costing :
The terminology of ICMA defines Job Costing as “that form of specific
order costing which applies where work is undertaken to customers’
special requirements’’. Under this method, costs are collected and
accumulated for each job work order or project separately. Each job can
be separately identified, so it becomes essential to analyse the cost according
to each job. A Job Card is prepared for each job for cost accumulation.
This method is applicable to printers, machine tool manufacturers, foundries
Advanced Cost Accounting - III
3
Introduction & Job Costing
and general engineering workshops, interior decorator, painters, repair shops
etc.
2)
Batch Costing :
The terminology of ICMA defines Batch Costing as “that form of specific
order costing which applies where similar articles are manufactured
in batches either for sale or use within the undertaking”. This method
is a variation of Job Costing. In this method, the cost of a batch or group of
identical products is ascertained and, therefore, each batch of products is a
unit of cost for which costs are accumulated. This method is used in biscuit
factories, bakeries, ready-made garments, hardwares like nuts, bolts, screws,
shoes, toys, drugs and pharmaceuticals etc.
NOTES
Methods of costing
The following figure indicates different methods of Cost Ascertainment
Methods of Costing
A
B
Specific Order Costing
i.e. Job Costing
Job Costing
1.
Batch
Costing
2.
1.
Process
Costing
Operation Costing
i.e. Process Costing
Contract
Costing
3.
2.
Operating
or
Service
Costing
Multiple Or
Composite
Costing
4.
3.
Unit or
Single or
output
Costing
Fig. 1.1 Methods of Costing
4
Advanced Cost Accounting - III
Class Cost
Method
5.
4.
Departmental
Costing
5.
Operation
Costing
3)
Introduction & Job Costing
Contract Costing :
The terminology of ICMA defines Contract Costing as “ that form of
specific order costing which applies where work is undertaken to
customers’ special requirements and each order is of long duration”.
The cost unit here is a contract which is of a long duration and may continue
over more than one financial year. A separate account is kept for each
contract. This method is used by builders, civil engineering contractors,
constructional and mechanical engineering firms etc.
4)
Multiple or Composite Costing :
It is an application of more than one method of cost ascertainment in respect
of the same product. This method is used in industries where a number of
components are separately manufactured and then assembled into a final
product. In such industries each component differs from the others as to
price, material used and process of manufacture undergone. So it will be
necessary to ascertain the cost of each component for this purpose, process
costing may be applied. To ascertain the cost of the final product, batch
costing may be applied. This method is used in factories manufacturing
cycles, automobiles, engines, radios, TVs, typewriters, aeroplanes, etc. This
method has been completely dropped from the latest ICMA Terminology.
5)
NOTES
Class Cost Method :
Check Your Progress
i)
Why different costing
methods are required in
different industries
ii) What is meant by
‘specific order costing’ ?
Which methods are
included under Specific
Order Costing?
iii) What is meant by
‘process costing’ ? Which
costing methods are
included under process
costing ?
It is the method of Job Costing where the costing of goods is done by
classes instead of the unit or piece. Instead of the cost being separately
accumulated for each article or piece, the cost will cover a group of orders
of the same class of product.
B) Operation Costing :
The terminology of ICMA defines Operation Costing as
“The category of basic costing methods applicable where standardised goods
or services result from a sequence of repetitive and more or less continuous
operations or process to which costs are charged before being averaged
over the units produced during the period”. The following are the different
method of costing which fall under this category.
1)
Process Costing :
The terminology of IMCA defines Process Costing as “that form of
operation costing which applies where the standardised good are produced”.
It is a method of costing where cost is ascertained at the stage of every
process and also after completing the finished production. It is used in
concerns where production follows a series or sequential process. Process
type of industries do not manufacture individual item to the specific
requirements of customers. As such, production is not intermittent but
continuous. Each process represents a distinct stage of manufacture and
the output of one process becomes the input of the following process. The
unit cost is arrived at by averaging the cost over the units produced, and
Advanced Cost Accounting - III
5
Introduction & Job Costing
NOTES
cost per unit of each process is ascertained. Process Costing is used in a
variety of industries such as chemicals, oil refining, paper making, flour
milling, cement manufacturing, sugar, rubber, textiles, soap, glass, food
processing etc.
2)
Operating or Service Costing :
The terminology of ICMA defines Service Costing as “that form of
Operation Costing which applies where - standardised services are
provided either by an undertaking or by a service cost centre within
an undertaking”. This method of costing is used by those undertakings
which render service as against manufacturing and supply of tangible
products. It is an essential method of costing where only the services are
rendered. It ascertains the cost of one unit of service rendered. This method
is applicable to transport undertakings, electricity supply undertakings,
hospitals, hotels, canteen, water works, gas companies, educational
institutions, etc. The cost unit depends upon the service provided. Usually,
a composite cost unit is used. For example tonne km. passenger km, patient
day or bed day, KWH, meal served, student hours etc.
3)
Unit or Single or Output Costing :
It is a method of costing by the unit of production where manufacturing is
continuous and the units are identical. In some cases the units may differ in
terms of size, shape, quality, etc. This method is also called as Single Costing
because only one type of product alone is manufactured. Examples of
industries where this method is applicable are : Collieries, quarries, flourmills, paper mills, textile mills, brick-making, radio, cameras, pencils, slates,
dairy products etc. No separate set of books is generally required and
costing information is presented in the form of a statement known as Cost
Sheet.
4)
Departmental Costing :
A factory may be divided into a number of departments and sometimes
good results are obtained by allocating expenditure first to different
departments and then to different products manufactured in that department.
Under this method, the cost incurred in maintaining a particular department
is ascertained. There are two objectives for using this method viz. to control
the cost of department and to charge the cost of a department to the finished
product.
5)
Operation Costing :
It is a special type of Process Costing. It refers to the determination of cost
of operations, the cost unit is the ‘operation’ instead of the process. The
per unit cost is arrived at by dividing the cost of an operation by the number
of units completed in the operation centre. For large undertakings it is
frequently necessary to ascertain the cost of various operations. Cost control
can be exercised more effectively with operation costing.
6
Advanced Cost Accounting - III
1.3
Job Costing
Introduction & Job Costing
Meaning and definition :
The industries which manufacture articles or products or render services
against specific orders, use the Job Costing method for ascertaining the cost per
job or service. e.g. specific requirement of a customer, fabrication, repairs etc.
Each job has a separate identity. Under this method, individual jobs are identifiable
and each job become a separate cost centre. ICMA London defines Job Costing
as, “It is that category of basic costing method which is applicable where is
the work consists of separate contract, job or batches each of which is
authourised by specific order or contract.’’ Examples of Job order industries
are printing press, construction of buildings, bridges, ship-building, furniture making,
machine tool manufacturing, repair shops, painting works etc.
1.4
Features of Job Costing
i)
Production is made or services are rendered against specific orders.
ii)
A Job is clearly identifiable throughout the production process.
iii)
Each job has its own characteristics and requires special attention.
iv)
A distinguishing number is allotted to each Job order undertaken.
v)
Each of the job becomes a separate cost centre.
vi)
Costs are charged directly to individual job orders.
vii)
The manufacturing cost of a Job order can be found out only after the Job
order is completed irrespective of the time taken for the same.
viii)
Production is not made in anticipation of demand and for storing purpose.
1.5
NOTES
Advantages
i)
Cost of each job as per order is ascertained separately. This helps in finding
out the profit or loss on each individual job.
ii)
It enables management to detect those jobs which are more profitable and
those which are not profitable.
iii)
It provides a basis for determining the cost of similar jobs undertaken in
future. It thus helps in future production planning.
iv)
It enables the management to know the trends in costs.
v)
Profitability ratio of different jobs can be found out.
vi)
It helps the managements to fix selling price of specific job on the basis of
Advanced Cost Accounting - III
7
Introduction & Job Costing
costs.
vii)
It enables the management to provide quotations for similar type of jobs.
viii)
Spoilage and defective work can be easily identified with specified jobs or
products.
ix)
It enables the management to take corrective steps for improving the
efficiency in future.
x)
It is essential for cost plus contracts.
NOTES
1.6
Limitations
i)
Calculations are more and hence there is possibility of errors which may
cause a serious loss.
ii)
A system of budgetary control may not be used effectively.
iii)
The system does not indicate any standard of performance efficiency.
iv)
Comparison of cost of a job over any period of time cannot be made if
certain economic changes takes place in between.
v)
It is expensive to operate as there is increase in clerial works.
vi)
Job costing is a historical costing which ascertains the cost of job or product
after it has been manufactured.
1.7
Procedure followed in Job Costing
Job Costing is designed to show in detail their cost components of the total
cost executing a job. A Job Cost sheet is prepared for every job which is undertaken.
Material cost is accounted for in the job cost sheet on the basis of material requisition
concerned. Labour cost on the basis of time clocked in respect of the job with the
help of time tickets and factory overheads are added to those cost components
according to some reasonable methods of overhead absorption. Thus, the total
cost of the job consists of partly of direct costs and partly of costs arrived at by
assignments, allocation, apportionment and finally by absorption. Thus, the
procedure for Job Order Cost System may be summarised as follows:
1)
Receiving an Enquiry :
Before placing an order with the manufacturer, usually the customer will
enquire about the price, quality to be maintained, the duration within which the
order is to be executed and other specifications of the job.
2)
8
Advanced Cost Accounting - III
Estimation of the price of the job :
The cost accountant estimates the cost of Job after considering the various
elements of cost and keeping in mind the specification of customers. This is based
on the cost of execution of similar Job in the previous year and considering the
possible changes in the various element of cost. The estimated cost of the job is
then communicated to the prospective customer.
3)
Receiving of Order :
If the prospective customer accepts the quotation, the intention of
acceptance is forwarded to the respective departments so that preparation work
may begin even before the issue of the formal Production Order. The production
control department receives the order.
4)
Introduction & Job Costing
NOTES
Job Number :
When an order has been accepted, an individual work order number must
be assigned to each such Job so that separate orders are capable of being identified
at all stages of production. Assignment of Job numbers also facilitates reference
for costing purposes in the ledger and convenient for use in various forms and
documents.
5)
Production Order :
Once the job is accepted the Planning department prepares Production
Order. The Production Order is nothing but a form of instructions issued to the
foreman to proceed with the manufacture of the articles. Several copies of
Production Order are prepared and passed on to the following:
i)
All departmental foremen connected with the job.
ii) Store-keeper for issuance of materials.
iii) Tool room - an advance notification of tools required.
A Production Order contains all the information that is relevant to the job
or products or service. It gives information about the following :
i)
Particulars of job, product or service.
ii)
Quantity to be produced.
iii)
Date of starting and required date of completion of the job.
iv)
Particulars of materials required.
v)
Particulars of various operations involved in the perfomance and execution
of the job.
A specimen form of Production Order for a job is as follows :
Advanced Cost Accounting - III
9
Introduction & Job Costing
PRODUCTION ORDER
NOTES
Name of Customer
.........
Job No.
.......
Date of Commencement
.........
Date
........
Date of Completion
........
Bill of Material No.
........
Special instructions
........
Drawing attached - Yes/No ........
Quantity (Units)
Description
Machines to be used
Tools required
sd/.............
Production Authorised by :
Head of Production Control Dept.
Fig. 1.2 Production Order for a job
The columns provided in the Production Order differ widely, depending
largely upon the nature of production. Some such orders are accompanied by the
blue prints and contain a bill of materials and detailed instructions as to which tools
and machineries are to be used.
6)
Recording of Costs :
There are various costs required for the job. The raw material, the labour
costs, overhead charges etc. are directly chargeable to that particular production
order number. General Job Cost Sheet is prepared for each job.
The basis of collection of costs are :
10 Advanced Cost Accounting - III
i)
Materials : Materials Requisition, Bills of Materials or Material Issue
Analysis Sheet.
ii)
Wages : Operation Schedule, Job Card or Wages Analysis Sheet.
iii)
Direct Expenses : Direct Expenses Vouchers.
iv)
Overheads: Standing Order Number or Cost Account Number.
v)
Completion of Job : On completion of a Job report is sent to Costing
Department. The expenditure under each element of cost is totalled and
the total job cost ascertained.
7) Profit or Loss on Job : It is determined by comparing the actual expenditure
of cost with the price obtained.
Introduction & Job Costing
The Figure below is a diagram showing Job Order Execution Procedure. :
Enquiry by a Customer
NOTES
Preparation of Estimate by
the Estimating Department
Submission of Tender or
Quotation to the customer
Receipt of Order by the Sales
Department if Quotation is
accepted by the customer
Preparation of Work
Order by the Production
Control Department on
information from the
Sales Department
Flow of information to
Cost Office regarding
material usage, labour
and machine time
Copies of Work Order to
shop foreman, storekeeper, cost office and
Production Control department
Execution of the Job and
Inspection
Completion of the Job
and Despatch
Preparation of Invoice by
the Sales Department
Completion Report
to Cost Office
Copies of Invoice to
Customner, Cost Office
and Financial Accounting Department
Fig 1.3 Diagram showing Job Order execution procedure
1.8
Preparation of Job Cost Sheet
A Job Cost Sheet is a cost statement prepared to analyse and ascertain the
actual cost incurred with respect to the individual jobs. Thus, a card for each Job
is maintained where in the total cost of the job is accumulated. A separate Job
Advanced Cost Accounting - III
11
Introduction & Job Costing
NOTES
Cost Sheet is prepared to find out profit or loss on each job. It records with the
actual costs incurred on direct material, direct labour, direct expenses and overheads
on the Job as it passes through the factory. The total constitutes the cost of the
Job Order or operation. Cost of Material Consumed is collected from invoices
and material requisition note. The Direct Labour Cost is found out by operating
each workmen’s wages according to the time he spends on each job, as recorded
on job sheets. Overheads may be allocated as a simple percentage of material
cost or by some such other method as is appropriate and practicable for the
organisation concerned. On completion of a job the various elements of costs are
summed together and the total cost is ascertained. The total cost is then divided
by the number of jobs completed or units produced to ascertain the cost per job or
unit.
A specimen of Job Cost Sheet is as follows :
JOB COST SHEET
Customer ........
Job No. ............
Date of Commencement .......
Date of Completion .......
Material Cost
Labour Cost
Factory Overheads
(Absorbed)
Date Material Amount Date Hour Rate Amount Date Hours
Req. No.
`
`
`
Total
Total
Profit or Loss
Rate Amount
`
`
Total
Cost Summary
`
`
Price Quoted
........
Material
Less: Cost
.........
Add : Labour
(+)
.........
Add : Factory Overhead
(+)
Add : Administration Overhead
(+)
Add : Selling Overhead
(+)
Profit or Loss ........
.........
Total Cost
12 Advanced Cost Accounting - III
Fig. 1.4 : Job Cost Sheet
1.9
Introduction & Job Costing
Forms used in Job Costing (Documents
prepared for recording job costing)
Following are the various forms used in Job Costing method :
i)
Production Order : It is a written authority to factory foreman to proceed
with a job.
ii)
Bill of Materials : It is a complete schedule of materials, parts etc. required
for a particular Job or Production order.
iii)
Operation Schedule : There are various operations of a job, e.g. turning,
drilling, milling, assembling, etc. It contains name of Job, Name of operation,
Description of operation, starting time and Completion time, etc.
iv)
Tool List : It is a list of all types of tools required for a particular job. It is
given alongwith schedule and instruction cards.
v)
Planning Board : It is nothing but a time-table of a particular job to be
done. It sets the time for processing the various jobs.
i)
Move Tickets : There are various steps in completion of the job. There is
a progress of each job which is checked off on the operations schedule.
The move tickets are sent alongwith each lot at the time of transfer to the
next department.
ii) What are the features of
Job Costing ? Mention
advantages
and
limitations
of
Job
Costing.
vi)
1.10 Industries which use job costing
NOTES
Check Your Progress
Explain the meaning of
‘Job Costing’ and give
definition of Job Costing.
iii) Briefly mention the
procedure followed under
Job Costing.
Job costing method is generally applied in following industries :-
iv) Which documents are
prepared and used in Job
Costing ? Give the
formats of ‘Production
Order’ and ‘Job Cost
Sheet’.
i)
Construction Industries.
v ) In which industries use of
‘job costing’ is made ?
ii)
Engineering Industries.
iii)
Ship Building Industries.
iv)
Fertilizer Making Industries.
v)
Automobile Service industries.
vi)
Repair shops Industries.
vii)
Machine Manufacturing Industries
viii)
Tool Manufacturing Industries.
Advanced Cost Accounting - III
13
Introduction & Job Costing
1.11
Illustrations
ILLUSTRATION 1
NOTES
Denso India Ltd. Dombivali provides the following information in respect
of Job No. 346, you are required to prepare a Job Cost Sheet for the period ended
31st March, 2012 showing the cost of job and selling price to give a profit of 20%
on sales.
`
Productive Wages
90,000
Materials used directly for job
90,000
Sundry Work Expenses
3,400
Selling Commission
1,200
Machinery Repairs
5,700
Advertising
2,500
Coal and Coke
3,000
Consumable stores
Directors Fees
3,000
Factory Insurance
1,400
Carriage Outward
9,200-
Unproductive Wages
24,200
Chargeable Expense
4,500
Depreciation on Office Furniture
3,700
Selling on Cost
10,000
Motive Power
10,100
Packing Charges
7,500
Technical Directors Fees
1,700
Salary to works Manager
5,400
Heating and Lighting
Office Rent
Direct Expenses Payable
14 Advanced Cost Accounting - III
12,800
700
9,500
500
Introduction & Job Costing
SOLUTION
Working Notes :
1.

Calculation of Profit i.e.20% on Sales
SP
=
CP + P
100
=
80 + 20
If 80 CP
=
20P
` 3,00,000
=
?
NOTES
` 3,00,000 x 20
=
80
=
` 75,000
In the books of Denso India Ltd., Dombivali
Job Cost Sheet for Job No. 346 for the period ended 31st March, 2012
Particulars
Amount
`
Materials used directly
90,000
Add :
Productive Wages
90,000
Add :
Direct Expenses :
(i)
Chargeable expenses
(ii)
Direct expenses payable
4,500
(+)
PRIME COST
Add :
500
1,85,000
1,85,000
Factory Overheads :
(i)
Sundry Works Expenses
3,400
(ii)
Machine Repairs
5,700
(iii)
Coal and Coke
3,000
(iv)
Consumable Stores
12,800
(v)
Factory Insurance
1,400
(vi)
Unproductive Wages
24,200
(vii)
Motive power
10,100
(viii)
Technical Directors Fees
1,700
(ix)
Salary to works Manager
5,400
(x)
Heating and Lighting
(+)
WORKS COST
Add :
Amount
`
700
2,53,400
2,53,400
Administration Overheads :
(i)
Directors Fees
3,000
(ii)
Depreciation on office Furniture
3,700
(iii)
Office Rent
COST OF PRODUCTION
(+)
9,500
2,69,600
2,69,600
Advanced Cost Accounting - III
15
Introduction & Job Costing
Add :
NOTES
Selling and Distribution Overheads :
(i)
Selling Commission
1,200
(ii)
Advertising
2,500
(iii)
Carriage Outward
9,200
(iv)
Selling on Cost
(v)
Packing charges
10,000
COST OF JOB
Add :
Profit (20% Sales) +
SELLING PRICE
(+)
7,500
(1)
3,00,000
(+)
75,000
(2)
3,75,000
3,00,000
3,75,000
ILLUSTRATION 2
Following information relates to two different jobs of a manufacturing
concern Hikal Engineering Co. Ltd., Himmatpur for the month of March 2012 :
Job. No. 367
Chargeable Expenses Payable
Job No. 376
250
400
6,200
7,500
700
650
Direct Labour
4,800
1,700
Other Direct Expenses
2,050
3,950
Operating Labour
1,300
5,200
Prime Cost Materials
3,800
10,500
900
100
Process Materials
Cost of Special Designs
Productive Wages Outstanding
Additional Information :
(i)
Distribution on Cost - 3% on Office Cost
(ii)
Management Expenses - 20% on Works Cost
(iii)
Works Overheads - 50% on Basic Cost
(iv)
Selling Expenses - 7% on Cost of Production
Find out the Cost of Sales and Value of Sales to get a profit of 25% on
Value of turnover.
16 Advanced Cost Accounting - III
Introduction & Job Costing
SOLUTION
Working Notes :
1.
Calculation of Profits i.e. 25% on Value of turnover
SP
=
CP + P
NOTES
(i.e. value of turnover)
(a)

100
=
75 + 25
If 75 CP
=
25P
` 39, 600 C.P.
=
?
Job No. 367 :
` 39,600 x 25
= ` 13,200
=
75
(b)

Job No. 376 :
If 75 CP
=
25P
` 59,400 CP
=
?
` 59,400 x 25
= ` 19,800
=
75
Advanced Cost Accounting - III
17
Introduction & Job Costing
In the books of Hikal Engineering Co., Ltd. Himmatpur
Job Cost Sheet for the month of 31st March, 2012.
Job No. 367
Amount Amount
`
`
Particulars
NOTES
Direct Materials :
10,000
(i) Process Materials
(ii) Prime Cost Materials
Job No. 376
Amount Amount
`
`
6,200
(+)
3,800
18,000
7,500
(+)
10,500
7,000
Add :Direct Wages
(ii) Operating Labour
7,000
4,800
1,700
1,300
5,200
(iii) Productive Wages
Outstanding
(+)
900
Add :Direct Expenses :
(+)
100
3,000
5,000
(i) Chargeable Expenses Payable
250
400
(ii) Cost of Special Designs
700
650
(iii) Other Direct Expenses
(+)
2,050
PRIME COST / BASIC COST
(+)
3,950
20,000
30,000
Add :Works Overheads
(50% on Basic Cost)
(+)
WORKS COST/FACTORY COST
10,000
(+)
30,000
15,000
45,000
Add :Management Expenses
(20% on Works Cost)
(+)
6,000
(+)
9,000
COST OF PRODUCTION/
OFFICE COST
36,000
54,000
Add :Selling Expenses
(7% on Cost of production)
(+)
2,520
(+)
3,780
(+)
1,080
(+)
1,620
Add :Distribution on Cost
(3% on Office Cost)
COST OF SALES
(1)
39,600
59,400
Add :Profits
(25% on value of turnover)
VALUE OF SALES
18 Advanced Cost Accounting - III
(+)
(2)
13,200
52,800
(+)
19,800
79,200
Introduction & Job Costing
ILLUSTRATION 3
Globle Paper Mills Ltd., Gulbarga provides the following information relating
to a special job undertaken in the month of March 2012 from which you are
required to prepare a Job Cost Sheet showing separately the cost of the job and
value of the job. Also calculate the selling price per ton of the special paper
manufactured.
NOTES
Direct Materials -
• Paper pulp
-
500 tons @ ` 50 per ton.
• Other materials
-
100 tons @ ` 30. per ton
• Raw paper
-
75 tons @ ` 20 per ton
Direct Wages -
• Skilled workers- 100 workers @ ` 10 per day - worked for 5 days.
• Semi-skilled workers
-
75 workers @ ` 8 per day - worked for 6 days
• Unskilled workers
-
50 workers @ ` 5 per day - worked for 4 days.
• Administrative Overheads - 40% on Factory Cost.
Works on Cost -
• Fixed
-
30% on Prime Cost Wages
• Variable
-
15% on Basic Wages
• Semi - variable
-
5% on Operating Wages
Selling on the Cost - 7% on Works Cost
Distribution Overheads - 3% on Manufacturing Cost
Operating Wages due but not paid
Defective Materials Returned - Direct Materials
Chargeable Expenses Payable
Special Paper Manufactured
Prime Cost Expenses
` 400
` 1,500
` 300
Tone 1,250
` 6,700
Profits - 25% on value of sales
Advanced Cost Accounting - III
19
Introduction & Job Costing
SOLUTION
Working Notes :
1.
Calculation of profits i.e. 25% on value of sales
SP
=
CP + P
100
=
75 + 25
If 75 CP
=
25 P
` 75,000 CP
=
?
NOTES
(i.e. value of sales)
` 75,000 x 25
=
75
=
` 25.000
2. Calculation of Selling price per ton of special paper manufactured If 1,250 Tons
=
` 1,00,000
1 Ton
=
?
1 x ` 1,00,000
=
1,250
=
` 80 per ton
In the books of Global paper Mills Ltd., Gulbarga
Job Cost-Sheet for the month of March 2012
Units Produced - 1,250 Tons
Units Sold - 1,250 Tons
Particulars
Amount
`
28,000
Direct Materials :
(a) Paper Pulp
- 500 x `50
25,000
(b) Other Materials - 100 tons x ` 30
(c) Raw Paper
- 75 tons x ` 20
3,000
(+)
1,500
29,500
Less: Defective materials returned Direct Materials
20 Advanced Cost Accounting - III
Amount
`
(-)
1,500
Amount
`
Add : Direct Wages :
Introduction & Job Costing
(a) Skilled workers -
10,000
100 workers x ` 10 x 5 days
5,000
(b) Semi - skilled workers 75 workers x ` 8 x 6 days
3,600
NOTES
(c) Unskilled workers 50 workers x ` 5 x 4 days
Add : Operating wages due but not paid
1,000
(+)
400
Add : Direct Expenses :
7,000
(i) Prime Cost Expenses
(ii) chargeable Expenses payable
6,700
(+)
300
PRIME COST
45,000
Add : Works on Cost
45,000
5,000
(a) Fixed - 30% on Prime Cost
Wages i.e. ` 10,000
3,000
(b) Variable - 15% on Basic Wages
i.e. ` 10,000
1,500
(c) Semi-variable 5% on Operating wages
i.e. ` 10,000
(+)
500
(+)
FACTORY COST
50,000
50,000
Add : Administrative Overheads
(40% of Factory Cost i.e. ` 50,000)
(+)
20,000
COST OF PRODUCTION
70,000
70,000
Add : Selling on Cost
(7% of Works Cost i.e. ` 50,000)
3,500
Add : Distribution Overheads
(3% of Manufacturing Cost
i.e. ` 50,000)
TOTAL JOB COST
(+)
(1)
Add : Profit (25% on value of Sales)
(+)
1,500
75,000
75,000
25,000
25,000
1,00,000
1,00,000
VALUE OF JOB
(@ Rs.80 per ton)
(2)
Advanced Cost Accounting - III
21
Introduction & Job Costing
NOTES
ILLUSTRATION 4
Ceekay Engineering Ltd., Churuchgate undertake jobs as per customer’s
requirements. In March. 2012 they have received an order from Kunal Enterprises,
Kandivali for a job order No. 243. The management expects 30% profit on value
of sales. The cost estimates for the Job No. 243 shows the following information.
`
Direct Materials
1,35,000
Direct Wages
35,000
Chargeable Expenses
10,000
Factory Overheads : 50% of Direct Cost
Administration oncost : 50% of Works Oncost
Selling and Distribution Expenses : 10% of cost of sales
Prepare a Cost Sheet for Job No. 243 showing clearly the cost built - up at
each stage and advise the management about the price to be quoted for the job.
SOLUTION
Working Notes :
1. Calculation of Selling and Distribution Expenses i.e. 10% of cost of
Sales.
Cost of production + Selling and Distribution Expenses = Cost of sales.
90 + 10
=
100
If 90 C. of P.
=
10 S & D. E.
 ` 3,15,000 C. of P.
= ?
` 3,15,000 x 10
=
90
=
` 35,000
2. Calculation of Profit i.e. 30% on Value of Sales
SP
=
(i.e. value of sales)
22 Advanced Cost Accounting - III
CP + P
(i.e. cost of sales)
100
=
70 + 30
If 70 CP
=
30 P
` 3,50,000 C.P.
=
=
` 3,50,000 x 30
70
` 1,50,000
In the books of Ceekey Engineering Ltd., Churchgate
Introduction & Job Costing
Estimated Job Cost-Sheet for Job No. 243 for the month of
March 2012
Particulars
Amount
`
Direct Materials
1,35,000
Add : Direct Wages
Add : Chargeable Expenses
35,000
(+)
DIRECT COST/PRIME COST
Add : Factory Overheads (50% of D.C. i.e. ` 1,80,000)
WORKS COST
NOTES
10,000
1,80,000
(+)
90,000
(+)
2,70,000
(+)
45,000
Add : Administration Oncost
(50% of Works Oncost i.e. ` 90,000)
COST OF PRODUCTION
3,15,000
Add : Selling and Distribution Expenses
(10% of Cost of sales)
(+)
COST OF SALES
Add : Profit (30% of value of sales)
PRICE TO BE QUOTED FOR THE JOB
35,000
3,50,000
(+)
1,50,000
(1)
5,00,000
1.12 Summary
The nature of work to be performed differs from industry to industry and so
it becomes necessary to follow separate methods of costing for accumulation of
costs and for presenting the information as needed by the management. The methods
of costing are divided in two groups - specific order costing and operating costing.
In the group of Specific Order Costing the methods included are job costing, batch
costing, contract costing, multiple or composite costing and class cost method. In
the second group of operation costing the methods included are process costing,
operating or service costing, unit or single or output costing, departmental costing
and operation costing.
Job costing is that form of specific order costing which applies where work
is undertaken to customers’ special requirements. Job costing method is adopted
where the job, order or a project is undertaken and completed as per the
requirements of the customer and so cost data is accumulated and recorded for
each job, order or a project separately. Since costs are recorded for each job
separately it becomes possible to ascertain profit or loss for each job. A customer
makes enquiry with the concern to find out whether a certain work will be
undertaken by the concern as per the specifications mentioned by the customer
and how much price the concern will charge for doing that work. When the price
quoted by the concern is acceptable to the customer, he places an order for the
job. The work is completed by the concern as per the specification and is handed
over to the customer on receiving the quoted price. For each job a separate Job
Advanced Cost Accounting - III
23
Introduction & Job Costing
Cost Sheet is prepared in which costs incurred on account of materials used,
labour employed and overheads of the job are recorded separately and by comparing
total cost of the job with the price quoted for the job profit earned or loss suffered
is calculated.
NOTES
1.13 Key Terms
i)
Production Order : It is a document prepared by Planning Department
after receiving order from the customer and contains instructions and orders
to the foremen of sections to start production of articles for which order is
received from the customer.
ii)
Job Cost Sheet : It is a sheet or card prepared for each job separately to
accumulate and analyse actual costs incurred for the specific job.
1.14 Questions and Exercises
I - Theory Questions
(1)
What is meant by ‘job costing’ ? Explain the features of job costing.
(2)
What is ‘job costing’ ? Explain its advantages and limitations.
(3)
What are the main features of job costing. Describe briefly the procedure
of recording costs under job costing.
(4)
What is a job cost sheet ? What data is generally recorded in a job cost
sheet?
(5)
Explain the documents which are prepared in job costing.
II - Multiple Choice Questions
(1)
Which of the following is not ‘Process Costing’ (a) Service Costing
(b) Departmental Costing
(c) Operating Costing
(d) Contract Costing
(2)
Special Order Costing is not related to (a) Job Costing
(b) Batch Costing
24 Advanced Cost Accounting - III
Introduction & Job Costing
(c) Service Costing
(d) Composite Costing
(3)
In biscuit factories bakeries -------- method is used.
(a) Job Costing
NOTES
(b) Batch Costing
(c) Multiple Costing
(d) Contract Costing
(4)
Match the pairs.
Group I
Group II
(i) Process Costing
(a)
quarries
(ii) Service Costing
(b)
automobiles
(iii) Batch Costing
(c)
bakeries
(iv) Composite Costing
(d)
hospitals
(e)
paper making
Ans. : (i) - (e), (ii) - (d), (iii) - (c), (iv) - (b).
Ans. : (1 - d), (2 - c), (3 - b).
III - Exercises :
(1) Shreyas Engineering Works has received an enquiry for performing an
engineering job. The costing department has estimated that materials cost of the
job will amount to ` 6,000 and direct wages for the job will be ` 7,500. Factory
overheads are absorbed at 60% of direct wages and office and administration
overheads are absorbed at 20% of the prime cost. Assuming that the basis for
absorption of factory overheads and office and administration overheads remain
unchanged calculate the price to be quoted the job if a profit of 30% is to earned
on the cost of production of the proposed job.
(2) A factory uses job costing. The following data are available from the book
for the year ended 31st Dec. 2014.
`
Direct Materials
9,00,000
Direct wages
7,50,000
Profit
6,09,000
Advanced Cost Accounting - III
25
Introduction & Job Costing
NOTES
Selling and Distribution Overheads
5,25,000
Administration Overheads
4,20,000
Factory Overheads
4,50,000
Prepare a cost sheet showing Prime Cost, Factory Cost, Cost of Production,
Cost of Sales and Sales Value for the year ended 31st December, 2014.
The factory has received an order for a job to be completed in January,
2015. It is estimated that direct materials costing ` 1,20,000 and direct wages of
` 75,000 would be required for the job. The factory absorbs factory overheads as
a percentage of direct wages and administration overheads and selling and
distribution overheads as a percentage of factory cost and the same basis will be
used in the year 2015-2016. In the year 2015-2016, selling and distribution overheads
are expected to go up by 15% Assuming that the factory desires to earn profit at
the same rate on sales, how much price the factory should quote for the job to be
performed in January, 2015.
(3) X Ltd. has to quote a price for Job No. 338. The costing department has
provided following information about estimated costs for Job No. 338.
Direct Materials
:
34 units at ` 15 per unit.
Direct Labour
:
Department A - 12 hours at ` 15 per hour
Department B - 10 hours at ` 8 per hour
The following additional information is available from the books of X Ltd.
Department A - Variable Overheads
Hours worked
Department B - Variable overheads
Hours worked
Fixed overheads for the company
Total Hours worked
` 1,80,000
36,000
Rs.80,000
20,000
` 4,20,000
70,000
Profit desired from Job No. 338 is at 25% on the price quoted.
You are required to calculated price to be quoted for Job No. 338.
(4) From the following particular prepare Cost-Sheet for Job No. 55 and find
out the selling price of the job.
`
Materials directly issued for the job
26 Advanced Cost Accounting - III
21,400
Direct Expenses
5,000
Productive Wages
8,000
Provide 70% on Productive wages for works overheads,10% on Works
Cost for office Oncost and 5% on Cost of Production and Selling and Distribution
overheads, Profits shall be 25% on Selling price.
(5) From the following information in respect on Job No. 6379, you are required
to prepare a Job Cost Sheet showing the cost of the job and also calculate the
selling price to give a profit of 20% on Selling price.
Introduction & Job Costing
NOTES
`
Wages to different jobs
90,000
Materials used on jobs
95,000
General works overheads
6,400
Selling Commission
1,200
Machinery Repairs
5,700
Advertising
2,500
Consumable Stores
12,800
Directors Fees
3,000
Factory Insurance
1,400
Carriage Outwards
9,200
Wages to Indirect Labourers
24,200
Depreciation on Office Furniture
3,700
Selling on Cost
10,000
Motive Power
10,100
Packing Charges
7,500
Technical Directors Fees
1,700
Salary of work Manager
5,400
Heating and Lighting
700
Office Rent
9,500
(6) The following information relates to two different jobs of a manufacturing
business, Jamy Engineeing Works, Jamner for the month of May, 2012
Particulars
Job No. 786
Job No. 687
`
`
Cost of materials consumed
5,000
8,500
Direct expenses
3,500
5,000
Chargeable expenses
1,500
1,500
Advanced Cost Accounting - III
27
Introduction & Job Costing
Works overheads are 40% of Prime cost and Administrative on costs are
20% of Works cost.
You are required to prepare a Job Cost Sheet showing the cost of the job
and also calculate the selling price to give a profit of 20% on the selling price.
NOTES
(7) The Production department of a manufacturing company provides the
following information for the month of October, 2012 :
Particulars
Direct Materials
`
54,000
Direct Labour
`
45,000
Labour hours worked
Hrs.
36,000
Machine Operation
Hrs.
30,000
Factory overheads
`
36,000
For a job order executed by the concern department during the period the
relevant information was as under :
Particulars
Direct Materials
`
12,000
Direct wages
`
6,400
Labour hours worked
Hrs.
6,400
Machine Operation
Hrs.
4,800
Prepare Job Cost Sheet, calculating the overhead charges chargeable to
the job by the following methods:
1.
Direct Material Percentage rate. 2. Direct Wages Percentage rate.
3.
Labour Hour rate.
4. Machine Hour rate.
(8) The following information relates to the activities of a production department
of a factory for the month of March, 2012 :Materials consumed
` 36,000
Productive wages
` 30,000
Direct labour hours worked
Hrs. 25,000
Hours of machine operation
Hrs. 20,000
Overheads chargeable to the department
` 25,000
If the cost of materials consumed on Job No. 123 is ` 2,000 and labour
charges amounted to ` 1,650 ascertain the Total Job Cost by the following methods
of allocating overheads.
28 Advanced Cost Accounting - III
1.
Percentage on direct wages
2.
Machine hour rate
3.
Direct labour hour rate
Labour hours worked for the job were 1,650 and hours of machine operated
for the job were 1,200.
Introduction & Job Costing
NOTES
1.15 Further Reading
1.
‘Advanced Cost Accounting’ - Nigam and Sharma
2.
‘Cost Accounting - Priciples and Practice’ - N. K. Prasad
3.
‘Cost Accounting’ - Jawahar Lal
4.
‘Theory and Practice of Cost Accounting’ - M. L. Agrawal
5.
‘Cost Accounting’ - B. K. Bhar
Advanced Cost Accounting - III
29
UNIT 2
Batch Costing (Theory)
Batch Costing (Theory)
Structure
2.0
Introduction
2.1
Unit objectives
2.2
Meaning of batch costing
2.3
Features of batch costing
2.4
Advantages of batch costing
2.5
Disadvantages of batch costing
2.6
Industries which use batch costing
2.7
Accounting recording for batch costing
2.8
Economic Batch Quantity (EBQ)
2.9
Summary
NOTES
2.10 Key Terms
2.11 Questions
2.12 Further Reading
2.0
Introduction
A batch is a cost unit consisting of a group of identical items which maintain
their identity through out one or more stages of production. When production is
done in batches accumulation of costs is done by following ‘batch costing method’.
Like job costing method, batch costing method is also a specific order costing.
Quantity produced in a batch is known as a lot and costs incurred for producing
the quantity in a lot are accumulated and recorded as cost of a batch. Theoritical
information related to the batch costing method is provided in this Unit.
2.1
Unit Objectives
After studying the information provided in this Unit you should be able to :
•
Know the meaning of batch costing;
•
Understand features, advantages and disadvantages of batch costing;
•
Know the industries which use batch costing;
•
Know how costs are recorded in batch costing;
Advanced Cost Accounting - III
31
Batch Costing (Theory)
•
2.2
Understand meaning and formula used for calculation of Economic Batch
Quantity.
Meaning of Batch Costing
NOTES
Batch costing is that form of specific order costing under which each batch
is treated as a cost unit and costs are accumulated and ascertained separately for
each batch. Each batch consists of a number of like units.
Batch costing is a method of costing used by the concerns which produce
an identical product or a component in a very large number at a time. All units
produced at one time are collectively known as a batch and the cost of production
is calculated for a batch because a batch is regarded as a unit. When the batch
production becomes complete, production of the next batch is started. On the
basis of batch cost calculated, the cost of single unit of the product is decided and
selling price of that single unit of product is fixed by adding expected margin of
profit to the cost of production of the single unit of the product. In order to distinguish
a unit produced in one batch from the units produced in other batches, each batch
is given a separate number and that batch number is recorded on all the units of
the product belonging to that batch.
2.3
Features of Batch Costing
Batch costing which is also known as ‘lot costing’ has following important
features :
32 Advanced Cost Accounting - III
1.
Batch costing is a variation of job costing. In job costing work of production
is carried out according to the specifications and instructions given by a
customer whereas in batch costing a large number of units of an identical
product are produced as ordered by a customer or for storage and sale in
the market.
2.
Batch is a unit for cost calculation. In a batch the units of identical product
may be in hundreds or in thousands but each batch is regarded as an
independent unit and its total cost is equally divided by the number of units
produced in that batch in order to decide the cost of production of a single
unit of the product.
3.
Each batch is given a separate number and the output of a batch is identified
by the number of the batch recorded on each unit of output of the batch.
Therefore a unit of the product is output of which batch can be easily found
out by referring to the batch number recorded on the unit, e.g. the number
of the batch in which bottle of medicine has been produced is recorded on
the bottle of medicine. If the contents of bottles of a batch are found harmful
to the patients, all bottles of that batch can be taken out of market for
investigation and if necessary for destruction, on the basis of the batch
number recorded on the bottles.
4.
Unit cost of a product varies with the size of the batch. If quantity produced
in a batch is small, the unit cost of the product is more and if the quantity
produced in a batch is large, the unit cost of the product of that batch is
less. Therefore, it is necessary to find out the economic batch quantity by
producing which the cost of production of a unit of the product can be kept
to the minimum.
Batch Costing (Theory)
NOTES
2.4
Advantages of Batch Costing
Use of batch costing provides following advantages :
i)
The accounting work is considerably reduced as a group of homogeneous
jobs constitute a batch.
ii)
The variations in the costs arising under job costing is smoothened by means
of averaging such costs and spreading over the batch of articles. This
gives a consistent cost of production of every article in the batch.
iii)
It takes the benefit of reduced cost of production arising out of EBQ.
iv)
Supervision becomes very easy and effective. So idle time is eliminated.
v)
The loss of time due to inter job transfer of materials, labourers and tools is
minimised under batch costing.
2.5
Disadvantages of Batch Costing
i)
Determination of a batch from various jobs often poses problem. It is difficult
to come across absolute homogenity of jobs.
ii)
When quantity of goods to be manufactured differs from customer to
customer, it becomes difficult to determine the batch.
iii)
If the production of a batch is wrongly undertaken due to sub-standard of
materials or defective operation, the whole batch of articles are required to
be discarded which causes a great loss to the manufacturing concern.
2.6
Industries which use Batch Costing
All those industries which are engaged in the production of identical type
of product or component a large quanity at one time use a method of batch costing.
Such industries are pharmaceutical industry, industries engaged in production of
components used in radio sets, television sets, watches, manufacture of bicycles,
two-wheelers, automobiles, industries producing nuts, bolts, screws, etc.
Advanced Cost Accounting - III
33
Batch Costing (Theory)
NOTES
2.7
Accounting recording for Batch Costing
A batch consists of a number of units of a product which are of identical
nature. When a batch production is to be stared, the machines and equipment to
be used for the production are required to be set. The time required for setting up is recorded and the operator’s wages for such time are calculated. Overheads
to be charged according to the overhead absorption rate used are calculated for
the set-up time. The operator’s wages and the overhead charges for set-up time
are added to calculate the setting-up cost. (The setting -up cost is of fixed nature
and it remains same irrespective of the actual quantity to be produced in a batch.)
For batch production material is issued from the stores and all materials
issued for a batch is recorded against the particular number issued to the batch.
Direct workers working on a batch prepare time sheets showing the number
of batch and the starting time and finishing time for the work performed by them
for the batch production. As per the rate of remuneration applicable to the workers
the labour cost is calculated by the costing department and the total amount of the
labour cost is charged to the particular batch as direct labour cost.
Any expenses specially incurred for the batch are charged to the batch
cost as direct or chargeable expenses. Overheads are charged to the batch
according to the method seleted for aborption of overheads.
The setting-up cost, the direct material cost, direct labour cost, direct
exspenses and the amount of overheads charged are added together to find out
the total cost of production of a batch. This cost is divided by the quantity produced
in that batch to find out the cost per unit of the product. When a unit of the
product is sold to a customer at a certain selling price, the difference between the
selling price and total cost of the unit of product indicates the amount of profit
earned per unit.
2.8
Economic Batch Quantity (EBQ)
In order to control batch cost it is important to decide the quantity to be
produced in each batch which enables to keep the batch cost at optimum level.
Economic batch quantity is that quantity of a batch which enables the management
to keep the batch cost at minimum level. If the quantity of a batch is either
increased or decreased from the economic batch quantity determind the batch
cost will increase and become more than the batch cost incurred when economic
batch quantity is produced.
It has already been mentioned that the batch cost consists of two types of
costs as under :
i) Setting-up cost : This is the cost incurred before the batch production is
started. In order to do the production machines are used and it is necessary to
check the machines and do necessary adjustments in them so that they are ready
for operations. Oiling and supplying the required consumables must be taken care
34 Advanced Cost Accounting - III
Batch Costing (Theory)
of. This work is generally done by the operator of the machine or the direct
worker who is appointed to do the work of production or to complete the expected
activity with the help of the machine.
The time taken by the worker and the rate at which he is paid wages decide
setting - up cost. The amount of the setting - up cost remains same and does not
change according to the quantity to be produced in each batch. Setting - up cost is
a fixed cost and therefore if the quantitty of the batch is small the per unit of
product cost increases and when the quantity to be produced in a batch increases,
the setting - up cost per unit of product becomes less.
ii) Carrying Cost : Carrying cost means the cost to be incurred for carrying one
unit of the product in inventory per annum. For deciding this cost, the cost of
production per unit of the product and the interest amount blocked up in the value
of the product when it is being stored for the year are taken into consideration . If
the cost of production of one unit of the product is large and the rate of intersest
is also high, it is obvious that the cost of carrying will become more.
When both these costs are added the batch cost becomes available. In
economic batch cost the setting-up cost and the carrying cost are approximately
equal and the total batch cost is the minimum. If batch quantity is increased or
decreased compared to the economic batch quantity the batch cost will be more
as compared to the batch cost calculated by using the economic batch quantity for
batch production.
Economic batch quantity can be calculated by following formula which is
similar to the formula used for calculating the economic order quantity (EOQ) in
respect of materials. Depending upon the details provided for calculating the
economic batch quantity two different formulas are required to be used. These
formulas are given below :-
NOTES
Check Your Progress
i)
Define ‘Batch Costing’
and explain the meaning
of batch costing.
ii) What are the features of
‘Batch Costing’ ?
iii) State the advantages and
disadvantages of ‘Batch
Costing’.
iv) In which industries ‘Batch
Costing’ is used ?
v ) What do you understand
by the terms ‘setting-up
costs’ and ‘carrying
costs’?
vi) What is meant by
‘Economic
Batch
Quantity’ ? Give and
explain the formula used
for calculating Economic
Batch Quantity.
vii) Briefly explain how
accounting recording is
done
under
‘batch
costing’.
1)
When annual requirement of the product, the setting-up cost per batch and
the cost of carrying one unit of the product for the year is the information provided.
2 R.S
Economic Batch Quantity =

C
where R = Annual requirement of the product
S = Setting-up costs per batch
C = Carrying cost per unit of product for a year expressed in rupees.
2)
When information about annual requirement of the product, setting-up costs
per batch, rate of interest p.a. on capital blocked in the product during storage and
the cost of production per unit of the product is provided :2 R.S
EBQ =

IC
Advanced Cost Accounting - III
35
Batch Costing (Theory)
where EBQ
NOTES
R
= Annual requirement of the product
S
= Setting-up costs per batch
I
= Rate of interest on capital
C
2.9
= Economic Batch Quantity
= Cost of production per unit of product
Summary
Batch costing is a method of costing used for accumulation and ascertainment
of costs when a number of identical units of a product are produced by completing
one or more stages of production. The units produced are homogeneous and are
produced at the same time. The quantity which is produced constitutes batch
quantity. Each batch is separete and after completion of production of one batch
the production of the next batch is undertaken. Each batch is given a separate
batch number and the batch number is recorded on each unit of the product
manufactured in that batch. This helps in identification of a unit of product as
belonging to a particular batch. A batch cost sheet is prepared for each batch and
it records the batch number, date of commencement of the batch production, the
date of completion of the batch production and the quantity produced in the batch.
Materials cost, labour cost, direct expenses and proportionate amount of overheads
to be charged to the batch are recorded in the Batch Cost Sheet and total cost of
the batch production is calculated by adding the amounts of costs incurred for the
batch. As per small or large quantity produced in a batch, the unit cost of the
product increases or decreases. To minimise such variations in the unit cost
Economic Batch Quantity is calculated and actual production quantity is kept near
the EBQ.
2.10 Key Terms
i)
Batch Costing : It is that form of specific order costing under which each
batch is treated as a cost unit. Each batch consists of a number of identical
units of the product and accumulation and recording of costs is done for
each batch separately.
ii)
Economic Batch Quantity (EBQ) : Economic Batch Quantity is that quantity
of a batch at which the ‘setting up costs’ and ‘carrying costs’ are almost
equal and cost of the batch becomes minimum. Formula used for EBQ is :
2 R.S
EBQ=

C
where R = Annual Requirement of the product
S = Setting-up cost per batch
36 Advanced Cost Accounting - III
C = carrying cost unit of product for a year expreesed in rupees.
2.11 Questions
Batch Costing (Theory)
I - Theory Questions
(1)
What is ‘Batch Costing’? Explain the features of batch costing.
(2)
What do you understand by ‘batch costing’? Explain the procedure followed
for cost calcuation in batch costing.
(3)
What is meant by Economic Batch Quantity? Explain the formula used for
calculating EBQ.
(4)
Explain the meaning of batch costing. In which industries batch costing
method is used ?
(5)
Explain the features, advantages and disadvaneages of batch costing.
(6)
Write notes on.
NOTES
(a) Setting - up costs.
(b) Production costs.
(c) Calculation of unit cost of a product in batch costing.
(d) Documents prepared in batch costing.
II - Multiple Choice Questions
(1)
Batch Costing is a ------- of job costing.
(a) variable
(b) valuation
(c) verification
(d) opposite
(2)
Batch is a ------------- of cost calculation.
(a) price
(b) cost
(c) unit
(d) value
(3)
Which of the following statement is ‘wrong’ ?
(a)
‘Setting-up cost’ is the cost incurred before the batch production is
started.
(b)
‘Setting-up cost’ is a fixed cost.
Advanced Cost Accounting - III
37
Batch Costing (Theory)
NOTES
(4)
(c)
‘Setting-up cost’ is divided by the quantity produced in the batch to
find out the cost per unit of the product.
(d)
‘Setting-up Cost’ is the variable nature and it fluctuates as per actual
quantity to be produced in a batch.
‘Carrying cost’ means the cost to be incurred for carrying ------ of the
product in inventory per annum.
(a) all units
(b) two units
(c) one unit
(d) 100 units
(5)
Any expenses specially incurred for the batch are charged to the batch
cost as ---------(a) indirect expenses
(b) unchargeable expenses
(c) direct expenses
(d) emergency expenses
(6)
Match the pairs.
Group I
Group II
(a) Batch Costing
(i) Example of Process Costing
(b) Setting up Cost
(ii) Control batch cost.
(c) Carrying Cost
(iii) Cost for carrying one unit of the
production.
(d) Economic Batch Quantity
(iv)‘incurred before batch production’.
(v) ‘Variation of job costing’.
Ans. : (a) = (v); (b) = (iv); (c) = (iii); (d) = (ii).
Ans. : (1 - a), (2 - c), (3 - d), (4 - c), (5 - c).
2.12 Further Reading
38 Advanced Cost Accounting - III
1.
‘Cost Accounting’ - Jawahar Lal
2.
‘Advanced Cost Accounting’ - Nigam and Sharma
Unit 3
Batch Costing (Practical Problems)
Batch Costing
(Practical Problems)
Structure
3.0
Introduction
3.1
Unit objectives
3.2
Illustrations
3.3
Summary
3.4
Exercises
3.5
Further Reading
3.0
NOTES
Introduction
In the previous Unit we have considered theoretical information related to
Economic Batch Quantity and preparation of Batch Cost Sheet for calculation of
batch cost and cost per unit of the product produced in a batch. In this Unit, a few
Illustrations are provided to understand how Economic Batch Quantity is calculated
and how Batch Cost Sheet is prepared to ascertain costs incurred for a batch
production.
3.1
Unit Objectives
After completing study of the various illustrations provided in this Unit you
should be able to :•
Use the formula for calculating the Economic Batch Quantity; and
•
Prepare Batch Cost Sheet showing total cost of a batch production and
calculate per unit cost of the product from the batch.
3.2
Illustrations
ILLUSTRATION 1
A firm engaged in the production of Y product uses batch costing. It has
given you following information :
Annual requirement of Y product is 9600 units. Setting-up costs per batch
amounts to `300. Annual cost of carrying one unit of Y product in the inventory
is ` 25.
You are required to calculate economic batch quantity for production of Y
product.
Advanced Cost Accounting - III
39
Batch Costing
(Practical Problems)
SOLUTION
Since rate of interest on capital and cost of production of one unit of Y
product is not provided in the problem following formula is used for calculating the
economic batch quantity for Y product :
NOTES
2 R.S
EBQ =

Where EBQ =
C
R =
Economic Batch Quantity
Annual requirement of the product
S = Setting - up cost per batch
C = Cost of carrying one unit of the
product in the inventory for a year
2 x 9600 x `300
EBQ =
 ` 25
=
 230400
=
480 units
 480 units of Y product should be produced in each batch.
ILLUSTRATION 2
A manufacturer has accepted from a customer an order to supply him 600
components during one year. The setting - up cost per batch is estimated as `400
irrespective of the quantity of components produced in a batch. Production cost
of one component amounts to `120 and the interest rate is 10% p.a.
Calculate the economic batch quantity.
SOLUTION
EBQ =

2 R.S
Where EBQ = Economic Batch Quantity
IC
R = Annual requirement of the component
S = Setting - up cost per batch
I = Rate of interest p. a.
C = Cost of production of one
component.
2 x 600 x 400
EBQ =

=

=
=
40 Advanced Cost Accounting - III

.10 x 120
480000
12
40000
200 units
 200 components should be produced in each batch.
Batch Costing
(Practical Problems)
ILLUSTRATION 3
A factory which uses batch costing has entered into a contract with a
manufacturing concern to supply to it 1000 units of a component per month for
next three month. Costing department of the factory opens a batch cost sheet to
which the actual cost of materials issued for the batch production is charged. The
actual amount of direct wages incurred for the batch production is also charged
to the batch sheet. Factory overheads are incurred for the entire factory and are
charged to the batch production on the basis of direct labour hours. The component
is supplied to the manufacturing concern at a price of ` 48 per component.
NOTES
Following details are provided to you for three months period.
Month
Batch Output
(Units)
Material Cost
`
Direct Wages
`
Direct Labour Hours
1st
1040
21,800
6,800
1360
nd
1030
22,000
6,600
1340
3rd
1070
22,400
7,200
1420
2
The factory overheads and total direct labour hours for the same three
months were :
Month
Factory Overheads
`
Total Direct Labour Hours
1st
65,000
13,000
nd
72,000
14,500
3rd
70,000
14,000
2
You are required to show the total cost and total amount of profit per batch
as well as total cost per unit of the component and profit per unit of the component.
Also show the position of cost and profit for the order of 3000 units of the
component.
SOLUTION
Factory Overheads are charged to the batch production on the basis of
direct labour hour. The calculation of factory overheads to be charged to each
batch are calculated as under :Factory Overheads
Total direct labour hours
For 1st month : 65,000
x Direct labour hours of the batch
x 1360 = ` 6,800
13,000
For 2nd month : 72,000
x 1340 = ` 6653.80
14,500
For 3rd month : 70,000
x 1420 = ` 7,100
14,000
Advanced Cost Accounting - III
41
Batch Costing
(Practical Problems)
Batch Cost Sheets for three months
Month
Batch output (Units)
NOTES
1st
2nd
3rd
Total
1040
1030
1070
3140
Sales value @ Rs.48 per unit
`
49,920
49,440
51,360
1,50,720
Materials Cost
`
21,800
22,000
22,400
66,200
Direct Wages
`
6,800
6,600
7,200
20,600
Factory overheads
`
6,800
6653.80
7,100
20553.80
Total Cost
`
35,400
35,253.80
36,700
107353.80
Profit per batch
`
14,520
14,186.20
14,660
43366.20
Total Cost per unit
`
34.04
34.23
34.30
34.19
Profit per unit
`
13.96
13.77
13.70
13.81
Overall position of the order for 3000 units of components :
Sales value of 3000 units at ` 48 per unit
`
1,44,000
Total cost of 3000 units at ` 34.19
`
1,02,570
Profit from the order
`
41,430
(Note : Total units produced in three batches are 3140 units out of which 3000
units are supplied to the manufacturing concern. There remain 140 units
of the components in stock which can be sold by the factory and earn
profit from the sale.)
ILLUSTRATION 4
B Company manufactures component P-109 in one of its department fully.
The company uses batch costing method for calculation of cost for the component.
Materials used for manufacturing one unit of p-109 cost `45 and the operator
takes 30 minutes for producing one unit and he is paid wages at the rate of `20
per hour. Overheads are charged to the batch production at the rate of `10 per
machine hour. The operator spends 2 hours 30 minutes time for setting - up of the
machine irrespective of the actual number of units included in a batch.
Using the above information prepare batch cost sheets showing setting up cost, production cost and total cost of the batch assuming that the batch size is
(i) 10 units, (ii) 50 units and (iii) 100 units. Also calculate per unit setting-up cost,
production cost and total cost for each of the batch size mentioned above.
42 Advanced Cost Accounting - III
Batch Costing
(Practical Problems)
SOLUTION
i) Cost sheet for a batch of 10 units of P- 109 component
Cost of Cost per
the batch
unit
`
`
`
NOTES
Setting - up cost :
Wages of operator for 2 hours 30 minutes
at ` 20 per hour
50
Overheads for 2 hours 30 minutes at
` 10 per machine hour
25
Production cost :
`
75
7.50
Materials cost 10 units at ` 45 per unit
450
45.00
Direct wages 5 hours at ` 20 per hour
100
10.00
Overheads for 5 machine hours at Rs 10 per hour
50
5.00
600
Total Cost (Setting - up cost + production cost)
675
67.50
ii) Cost Sheet for a batch of 50 units of P-109 Component
Cost of Cost per
the batch
unit
`
`
`
75
1.50
Setting - up Cost :
Wages of operator for 2 hours 30 minutes
at ` 20 per hour
50
Overheads for 2 hours 30 minutes at
` 10 per machine hour
25
Production Cost :
`
Materials cost 50 units at ` 45 per unit
2250
45.00
Direct wages 25 hours at ` 20 per hour
500
10.00
Overheads for 25 machine hours at Rs 10 per hour
250
5.00
3000
Total cost (setting - up cost + production cost)
3075
61.50
Advanced Cost Accounting - III
43
Batch Costing
(Practical Problems)
iii) Cost Sheet for a batch of 100 units of component P-109
Cost of Cost per
the batch
unit
`
NOTES
`
`
75
0.75
Setting - up cost :
Wages of operator for 2 hours 30 minutes
at ` 20 per hour
50
Overheads for 2 hours 30 minutes at
` 10 per machine hour
25
Production Cost :
Materials Cost 100 units at ` 45 per unit
4500
45.00
Wages of operator for 50 hours at ` 20 per hour
1000
10.00
Overheads for 50 hours at Rs 10 per machine hour
500
5.00
6000
Total Cost (Setting-up Cost + Production Cost)
6075
60.75
(Note that the Setting-up Cost of the batch reduces as the number of units included
in the batch increase while the Production Cost per unit remains same at different
quantities in the batches.)
ILLUSTRATION 5
From the following information relating to Camlin India Ltd., find out
Economic Batch Quantity :i)
Total number of units to be produced in a year 9000 units.
ii)
Set-up Cost per batch `200
iii)
Carrying Cost per unit of production `0.10
SOLUTION
2 US
EBQ =

Where, EBQ = Economic Batch Quantity
C
U = Units to be produced in a year
S = Set-up Cost per batch
C = Carrying Cost per unit of production.
2 x 9000 units x ` 200
EBQ =

` 0.10
=
100

10
=
 36000000 units
360000 units x
=
44 Advanced Cost Accounting - III
6000 units
Batch Costing
(Practical Problems)
ILLUSTRATION 6
Balaji Industries has to supply 1000 paper cones per day to a textile Industry.
They find that when they start a production run they can produce 2500 paper
cones per day. The cost of building a paper cone in stock for a year of 360
working days is ` 0.80 and the set-up cost of production run is ` 10 How frequently
should production run be made ?
NOTES
SOLUTION
2 US
EBQ =

Where, EBQ = Economic Batch Quantity
C
U = Units to be produced in a year, i.e.
360 days x 1000 paper cones
= 3,60,000 paper cones
S = Set-up Cost per batch, i.e. ` 10
C = Carrying Cost per unit of production
i.e. ` 0.80
2 x 360000 paper cones x ` 10
EBQ =

` 0.80
100
7200000 paper cones x

=
 90,00,000 paper cones
=
=
80
3000 paper cones
Production run in terms of days :
EBQ
=
Production per day
3000 paper cones
=
1000 paper cones
= 3 days
ILLUSTRATION 7
In Aarti Drugs Manufacturing Co. Ltd., a component Z oxan - 100 is made
entirely in a cost centre FDC. Materials cost ` 0.50 per component and each
component takes 10 minutes to produce. The machine operator is paid at ` 3 per
hour and the machine hour rate is ` 6 per hour. The setting-up of the machine to
produce Zoxan - 100 takes 140 minutes.
You are required to prepare a Cost Sheet showing the Production Cost,
Setting-up Cost and Total Cost assuming that a batch of
(i) 10 components, (ii) 100 components and (iii) 1000 components is produced
separately.
Advanced Cost Accounting - III
45
Batch Costing
(Practical Problems)
NOTES
SOLUTION
In the Books of Aarti Drugs Manufacturing Co. Ltd.,
Cost Sheet
For the period ended -----------Component : Zoxan - 100
Batch : 10 components
Particulars
Amount
`
Production Cost
(A)
Materials cost
Total cost of
the Batch
`
Cost per
unit
`
20.00
2.00
21.00
2.10
41.00
4.10
5.00
(` 0.50 x 10 components)
Add Wages to machine operator
5.00
(` 3 x 1 hour 40 minutes
Add Machine Expenses
10.00
(` 6 x 1 hour 40 minutes)
Setting-up Cost
(B)
Wages to Machine Operator
7.00
(` 3 x 2 hours 20 minutes)
Add Machine Expenses
14.00
(` 6 x 2 hours 20 minutes)
Total Cost (A + B)
(C)
In the Books of Aarti Drugs Manufacturing Co. Ltd.
Cost Sheet
For the period ended ---------Component : Zoxan - 100
Batch : 100 components
Particulars
Amount
`
Production Cost
(A)
Materials Cost
Total cost of
the Batch
`
Cost per
unit
`
200.00
2.00
21.00
0.21
221.00
2.21
50.00
(` 0.50 x 100 components)
Add Wages to Machine Operator
50.00
(` 3 x 16 hour 40 minutes
Add Machine Expenses
100.00
(` 6 x 16 hour 40 minutes)
Setting-up Cost -----
(B)
Wages to Machine Operator
7.00
(` 3 x 2 hours 20 minutes)
Add Machine Expenses
(` 6 x 2 hours 20 minutes)
46 Advanced Cost Accounting - III
Total Cost (A + B)
14.00
(C)
Batch Costing
(Practical Problems)
In the Books of Aarti Drugs Manufacturing Co. Ltd.
Cost Sheet
For the period ended ---------Component : Zoxan - 100
Batch : 1000 components
Particulars
Production Cost
Amount
Total Cost of
the Batch
Cost per
unit
`
`
`
(A)
2,000.00
Materials Cost
NOTES
2.00
500.00
(` 0.50 x 1000 components)
Add Wages to machine operator
500.00
(` 3 x 166 hour 40 minutes
Add Machine Expenses
1000.00
(` 6 x 166 hour 40 minutes)
Setting-up Costs
(B)
21.00
Wages to Machine Operator
0.021
7.00
(` 3 x 2 hours 20 minutes)
Add Machine Expenses
14.00
(` 6 x 2 hours 20 minutes)
Total Cost (A + B)
3.3
(C)
2021.00
2.021
Summary
In this Units we have considered only Illustrations on the batch costing.
Two types of practical problems Viz. Calculation of Economic Batch Quantity
and preparation of Cost Sheet for finding out the Total Cost of batch and Unit
Cost of a product from the batch, we have considered. The formula used for
calculation of EBG is one of the following depending upon the information
provided :
2 R.S
EBQ =

C
Where EBQ =
Economic Batch Quantity
R = Annual requirement of the product
S = Setting-up Cost per batch
C = Cost of carrying one unit of
the product in the inventory
for a year.
OR
Advanced Cost Accounting - III
47
Batch Costing
(Practical Problems)
2 R.S
EBQ =

Where EBQ = Economic Batch Quantity
IC
R = Annual requirement of the product
S = Setting-up cost per batch
I = Rate of interest per annum
NOTES
C = Cost of production of one unit
of the product.
[Some times in the formula, instead of R, U is used which stands for Units to be
produced in a year.]
While preparing Cost Sheet for batch production, details of element-wise
costs incurred for the batch production are shown under Production Cost and
Setting-up Cost and by adding these Production Cost and Setting-up Costs, Total
Cost for each unit of the product are shown in columnar form.
3.4
(i)
Exercises
Henley Co. Hazaribag intends to produce 40000 units during a year in batches.
The Setting-up Cost for each batch is ` 160. The carrying cost per unit has
been estimated at ` 20 p.a.
Calculate Economic Batch Quantity.
(ii)
Vasant Auto, Bangaluru are producing various parts of a passenger car in
batches. Annual demand of the part is 72000 units. The cost of setting-up
of tools for each new batch is ` 450. The cost of each batch is ` 30.
Company borrows for financing stocks @ 10% p.a. other carrying costs
are ` 2 per part p.a.
Calculate Economic Batch Quantity.
(iii)
48 Advanced Cost Accounting - III
A jobbing factory has undertaken to supply 200 pieces of a component per
month for the ensuing six months. Every month a batch order is opened
against which material and labour hours are booked at actual. Overheads
are levied at a rate per labour hour. The selling price contracted for is `8
per piece. From the following data present the profit per piece of each
batch order and overall position of the order for 1200 pieces.
Month
Batch output
Units
Material cost
`
Direct wages
`
Direct labour
Hours
January
210
650
120
240
February
200
640
140
280
March
220
680
150
280
April
180
630
140
270
May
200
700
150
300
June
220
720
160
320
Batch Costing
(Practical Problems)
The other details are
3.5
Month
Overheads
`
Direct labour
hours
January
12,000
4800
February
10,560
4400
March
12,000
5000
April
10,580
4600
May
13,000
5000
June
12,000
4800
NOTES
Further Reading
1.
‘Advanced Cost Accounting’ - Nigam and Sharma
2.
‘Cost Accounting - Priciples and Practice’ - N. K. Prasad
3.
‘Cost Accounting’ - Jawahar Lal
4.
‘Theory and Practice of Cost Accounting’ - M. L. Agrawal
5.
‘Cost Accounting’ - B. K. Bhar
Advanced Cost Accounting - III
49
Unit 4 Contract Costing (Theory)
Contract Costing (Theory)
Structure
4.0
Introduction
4.1
Unit objectives
4.2
Meaning of Contract Costing
4.3
Difference between Job Costing and Contract Costing
4.4
Features of Contract Costing
4.5
Industries which use Contract Costing
4.6
Accounting recording in Contract Costing
4.7
Calculation of profit to be transferred to Profit & Loss. Account in respect
of contracts in different stages of completion.
4.8
Summary
4.9
Key Terms
NOTES
4.10 Theory Questions
4.11 Further Reading
4.0
Introduction
Contract Costing is a method of costing which is included under the group
of specific order costing. It is a method of costing used in construction work or
mining work where the volume of work involved is very large and the period
required to carry on and complete the work is very long and the work may be
carried on over a number of years. The person or organisation which wants to get
the work done generally invites tenders from the interested parties requesting
them to mention the price at which they are ready to do the work as per the terms
and conditions mentioned in the advertisement or the tender form. A tender found
proper and acceptable is accepted and a contract is entered into with the party.
The person or organisation for whom the work is to be done is called ‘contractee’
and the person of organisation which is given the contract is called a ‘contractor’
Cost accumulation, recording of costs and ascertainment of profit of loss is done
separately for each contract and the method of costing used for this is called
‘contract costing’. Theoratical information about various aspects of contract costing
is provided in this Unit.
Advanced Cost Accounting - III
51
Contract Costing (Theory)
4.1
Unit Objectives
After studying the information provided in this Unit you should be able to :
NOTES
•
Understand meaning of contract costing ;
•
Understand how contract costing differs from job costing ;
•
Know features of contract costing;
•
Understand exactly the meaning of different terms used in contract costing;
•
Understand the accounting recording done in contract costing; and
•
Understand how profit from contract is decided to be transferred to Profit
and Loss Account in respect of contracts which are in different stages of
completion.
4.2
Meaning of Contract Costing
The terminology of ICMA defines Contract Costing as “ that form of specific
order costing which applies where work is undertaken to customers’ special
requirements and each order is of long duration”. The cost unit in contract
costing is a contract which is of a long duration and may continue over more than
one financial year. In contract costing as the contract of each customer may be
different from the other contracts, it becomes necessary to open a separate contract
account for each contract.
Contract costing is a type of job costing. A contract is accepted by a contractor
to do a certain work for the contractee ( i.e. customer ) during an agreed time for
a certain price mentioned in the contract. A contract is regarded as a unit and the
costs incurred for a contract are recorded to an account opened for that contract
and profit or loss is calculated by comparing the total cost of the contract with the
contract price agreed upon at the time of signing the contract. Method used for
recording of costs related to the contract work and for ascertainment of profit /
loss on the contract is known as ‘contract costing’ which is also known as ‘terminal
costing’, Contract costing is, thus, a method of costing.
4.3
Difference between Job Costing and Contract
Costing
Though contract costing is regarded as a type of job costing, there are
some important points of differences between contract costing and job costing.
These differences are as under :
1)
52 Advanced Cost Accounting - III
Contract is a large work of construction or building undertaken by a contractor
and so at a time only a very few contracts are started by the contractor. In
case of job the work to be done is on small scale and so in job costing a
number of jobs are accepted and work related to them is carried out by the
owner.
2)
Contract work is generally performed at the site of the contractee since it is
mostly construction work to be performed at a certain place owned by the
contractee. In job work it is performed in the factory or workshop of the
concern which has accepted the job order.
3)
A contract takes a considerable time for completion and may go on over a
period of one year or more. A job on the other hand becomes complete in
few hours, days, weeks or months.
4)
In case of contract majority of items of expenses are directly debited to the
contract account since they are incurred exclusively for the particular
contract. Only office and administration overheads of the head office are
required to be apportioned to the contract on some suitable basis. In case of
job work as the work is done in the factory premises only few expenses are
charged directly and exclusively to the job account and all other expenses
are required to be apportioned among a number of jobs which are carried
on and completed at the same time.
5)
In case of contract as the work continues over a long period of time and
may not become complete in One financial year, amount of profit on a
contract cannot be easily calculated and transferred to the Profit and Loss
Account. Special rules and formulas are required to be used for this purpose.
In job costing since the accepted work/order can be finished in a short
period of time, profit / loss from each job completed can be easily calculated
and transferred to the Profit and Loss Account.
6)
In case of a contract the contractor gives some part of the contract work to
sub-contractors who are specialists in these fields; e.g. in case of construction
of a building the contractor may give sub-contracts for work like plumbing,
electric-fittings, colouring etc. In job costing, generally, the need for giving
sub-contracts does not arise.
Contract Costing (Theory)
NOTES
Even though there exist the above mentioned differences between contract
costing and job costing there is similarity between job costing and contract costing
and therefore it is said that ‘a contract is a big job and a job is a small contract’.
4.4
Features of Contract Costing
(1)
In contract costing each contract is a separate unit of cost and the cost data
related to each contract is recorded as cost of that unit.
(2)
Each contract is given a separate number for identification and the contract
account opened in the cost ledger bears that number.
(3)
Contract is entered between contractor (who undertakes to do a certain
work) and contractee (who is the customer for whom the contract work is
to be performed ). The contract includes all the details such as name of the
Advanced Cost Accounting - III
53
Contract Costing (Theory)
NOTES
Check Your Progress
i)
What is meant by
‘contract costing’ ? Give
definition of ‘contract
costing’.
ii) What is the difference
between ‘job costing’ and
‘contract costing’ ?
iii) Briefly mention the
features of ‘contract
costing’.
In
which
industries
contract
costing is used ?
contractor, name of the contractee, nature of work to be done with
specifications, period in which the contract is to be completed by the
contractor, contract price and the manner in which it is to be paid by the
contractee, penalties for non-completion and defective work, etc.
(4)
Contract work is normally done at the site of the contractee and not in the
factory or premises of the contractor.
(5)
Contract work is a huge work and so a contractor undertakes only a few
contracts at the same time. In some cases a new contract is undertaken
only after completion of the present contract.
(6)
A contract being a large work needs a long period for its completion. Some
contracts are continued for a number of years before they become complete.
(7)
As the contract work is performed at the site of the contractee most of the
items of cost such as material cost, labour cost and expenses for electricity,
telephone, insurance, etc. are incurred for each contract separately. All
these cost can be directly allocated to the contract. Only expenses incurred
by the head office/central office on office and administration work need
appointment among the different contracts which are being carried on
simultaneously by the contractor.
(8)
In case of some contracts the contractor may give sub-contracts to specialists
in performing certain works. Thus sub-contracts may be given for electrical
fittings, plumbing work, glass fitting work, lift fitting work, etc.
(9)
Since a contract may not become complete at the end of the financial year,
calculation of profit on incomplete contract and transferring it to Profit and
Loss Account at the end of the financial year needs careful consideration.
Special rules and formulas are required to be used for this.
iv) Explain how accounting
recording is done in
contact costing.
v ) Explain the following
terms :a) Contractee
b) Contract Price
c) Retention Money
d) Escalation Clause
(10) Contractee makes payment to contractor as the work of contract progresses.
The basis of the payment is the certificate issued by the architect of the
contractee for the work completed by the contractor upto the date of issue
of such certificate. A certain percentage of the value of work certified by
the architect is deducted as ‘retention money’ by the contractee and balance
amount is paid to the contractor.
4.5
Industries Which Use Contract Costing
The method of contract costing is used in construction industry where the
construction of roads, construction of dams, construction of bridge, multi storey
building, etc. is accepted as contract work. Contract costing is also used in shipbuilding industry where the contract of building a cargo ship or a passenger ship is
accepted by the ship building company. Contract costing is also adopted when a
government agency gives contracts for completion of certain projects on costplus basis because estimating contract price is not possible either for the contractors
or for the government agency giving such contract.
54 Advanced Cost Accounting - III
4.6
Accounting recording in Contract Costing
When a contract is accepted by contractor a separate contract account
bearing a distinct number is opened in the Cost Ledger of the contractor. As
explained in the features of contract costing majority items of cost incurred for
the contract are treated as the direct expenses and are allocated to the contract.
They include materials cost, wages and direct expenses like electricity expenses,
telephone bill, insurance, etc. because they are incurred specifically for the contract.
Office and administration overheads of the head office are apportioned to the
contract by using percentage of materials cost or percentage of labour cost or
percentage of prime cost. If sub-contracts are given for some specialised work
the amount paid to the sub-contractors is also charged to the contract. If the
contract is completed in the financial year, the contract price received from the
contractee is credited to the contract account. Any material remaining unused at
the end of contract work is valued and recorded on the credit side of the contract
account. Similarly any material transferred to other contract or returned back to
the stores is also credited to the contract account. Contract account is closed to
find out amount of profit / loss on the contract which is transferred to profit and
loss account of the year. In case of incomplete contract the costing procedure is
different and it is explained at a later stage. The recording for the various costs is
explained in detail as under :
Contract Costing (Theory)
NOTES
Material Cost :
As per the nature of contract work materials of different types are required
to be used. These can be provided from one or more of the following sources :a) Materials purchased from market and directly delivered at the site :
Materials required on large scale and which are to be used for a specific contract
may be purchased from the market and the supplier is instructed to give delivery
of such materials directly at the contract site. This helps in avoiding unnecessary
transport expenses in moving the materials to the store house and from there to
the contract site and also delay in providing the materials for contract work. The
invoices received from the suppliers are used for recording the materials cost.
b) Materials suppiled from store room : If materials required for contract
work are available in the store room of the contractor they are made available
form the store room against the materials requisition notes and the costing of such
materials is done in the usual way.
c) Materials transferred from other contracts : Sometimes a material at the
site of a contract is found in excess of the requirement of that contract. If such
excess material can be used on some other contact it is transferred to the site of
the other contract. A Material transfer note is prepared showing the details such
as nature, quality, quantity of materials transferred, the contract number of the
contract transferring it and contract number of the contract receiving it and other
relevant information. Costing department debits the value of the materials received
to the contract account receiving the materials and credits the contract account of
the contract which has transferred it. Sometimes material urgently required by a
contract and not immediately available in the market or store room may be
Advanced Cost Accounting - III
55
Contract Costing (Theory)
NOTES
transferred from some other contract which possesses that material.
d) Materials supplied by contractee : If the contractee is in possession of
some materials which he wishes to be utilised for his contract, he may supply such
materials to the contractor by sending them to the contract site. Cost of such
materials is not debited to the contract account but is shown in a separate
memorandum record. The cost of materials received for contract from any one
or more sources mentioned above is debited to the contract account. Contract
account is credited with the cost of materials returned to the store room, materials
transferred to other contracts, materials unused lying at the contract site and cost
of materials sold. Cost of materials destroyed in accident at the contact site is also
credited to the contract account as abnormal loss.
Labour cost :
Wages of workers employed at site of the contract are recorded as direct
wages and charged to the contract account. Salaries of supervisors, engineers
and managerial personnel working at the site of the contract are also charged to
the contract account as direct wages. Pay roll is prepared for each contract
separately so that it becomes easy to calculate and charge the wages to the
contract account. If two or more contracts are started by the contractor at the
same time the payroll may be sectionalised, each section recording the names,
time spent on work and wages payable to the workers working on one contract.
When some workers work on two or more contracts, they are provided with time
sheets for recording the time spent by each worker on each job and on the analysis
of the time sheets of such workers the proportionate amount of wage to be charged
to each contract account is worked out and debited to the contract account. Along
with the wages paid any wages which are outstanding at the time of closing the
contract account should also be debited to the contract account.
Direct Expenses :
Direct expenses incurred for a contract are directly debited to the contract
account on the basis of voucher for payments made. These direct expenses are
telephone bills paid, electricity bill, item of stationery purchased for the contract,
cost of construction maps and plans, expenses of blue-prints, hire charges of plant
and special equipment used for the contract, etc.
Plant and Machinery :
For contract work a plant and machinery may be used. Depreciation on
such plant and machinery used for a contract can be recorded in one of the
following ways :a) Full value of the plant and machinery is debited to the contract account. When
the contract is complete or when the contract account is to be closed at the end of
the financial year the plant and machinery is revalued and this amount is credited
to the contract account. This recording result in contract account being debited
with the amount of depreciation on the plant and machinery.
56 Advanced Cost Accounting - III
If the plant and machinery is no longer required for the contract work it may be
sold at site and the sales proceeds are credited to the contract account. Instead of
selling the used plant and machinery if it is sent to some other contract site or
returned to the stores, it is recorded accordingly on the credit side of the contract
account with the revalued amount of the plant and machinery.
b) According to the second way of recording, only the amount of depreciation
calculated on the value of the plant and the machinery at a certain rate for the
period for which it has been used is debited to the contract amount.
Contract Costing (Theory)
NOTES
Instead of purchasing the plant and machinery for a contract if it is obtained
and used on hire basis, only the hire charges are debited to the contract account.
Sub-contracts :
When the contractor give some specialised work of the contract on subcontract basis, the amount paid to the sub-contractor is directly debited to the
contract account.
Contact Price :
Contract price is an amount to be paid by contractee to contractor on
satisfactory completion of contract work. Contract price is decided at the time of
entering into a contract and agreed upon by both, contractor and contractee. If it
is a small contract which can be completed in a short period, say few months, the
contract price is paid to the contractor after deducting a certain agreed percentage
of it as retention money on completion of the contract. However, in case of a
large contract which may take a few years time for completion the full amount of
contract price cannot be paid on completion of the contract as it will create a
financial strain on the contractor. Therefore the contractee agrees to pay part of
the contract price as per the progress of the contract work.This results in creation
of ‘work’ certified and ‘cost of uncertified work’ in contract costing.
Work Certified :
When a contract takes more than one year for completion, the contractee
has to pay part amount of the contract price on completion of part of the contract
work. For this purpose the contractee appoints an architect (or a surveyor) to
decide how much of the contract work has been completed by the contractor.
The architect or surveyor does the inspection of work completed by the contractor
in respect of quantity as well as quality and issues a certificate stating the value of
work completed upto a particular date. This value includes some portion of profit
and so it is not the cost amount but a proportionate amount of the contract price.
This amount is called value of work certified.
Cost of uncertified work :
As stated above the architect issues a certificate for value of work completed
in respect of the contract upto a certain date. The contractor does not stop his
work on that date but continues his work after that date date upto the close of the
period. However, as this work is not inspected by the architect he does not certify
it. The cost incurred for this work is called ‘cost of uncertified work’. This amount
does not include any amount of profit but it is calculated at the actual cost incurred
Advanced Cost Accounting - III
57
Contract Costing (Theory)
NOTES
by the contractor for the work done after the date of certificate issued by the
artchitect upto the date on which the contract account is being closed. The
contractee does not pay any amount to the contractor for the amount of cost of
uncertified work since this work will be considered and included in the next
certificate issued by the architect.
The amount of work certified and the cost of uncertified work are credited
to the contract account when contract account is closed at end of the year.
Retection Money :
A contractee does not make payment to the contractor for full amount of
work certified by the architect but deducts a certain percentage of this amount as
agreed and pays the net amount to the contractor. This amount deducted and not
paid to the contractor is called ‘retention money’. Retention money is usually 20
to 25 percent of the work certified. The contractee keeps this amount with him as
a reserve to compel the contractor to do rectification work in case some contract
work is found defective later on or to see that the contractor dose not leave the
contract work incomplete. The retention money can also be used by the contractee
to recover any penalty or fine levied against the contractor for delay in completing
the contract work or for unsatisfactory work performed by the contractor. The
retention money is paid to the contractor after completion of a specific period
mentioned in the terms of contract after the completed contract work is handed
over by the contractor to the contractee; e.g. in case of contract for construction
of a building the contractee keeps the retention money with himself for one rainy
season after the possession of the completed building is given to him.
Work-in-progress :
Instead of crediting contract account with the items of value of work
certified, cost of uncertified work, plant at site at the time of closing of contract
account and materials unused remaining at the site separately, it is possible to
record all these items to Work-in-progress account and show work-in-progress as
one item on credit side of the contract account. Work-in-progress account is debited
and contract Account is credited with the full amount of the work-in-progress. At
the begining of the next year the entry is reversed so that the amount of work-inprogress is shown on the debit side of the contract account and costs incurred
during the next year appear below this item of work-in-progress account.
Work-in-progress also appears on assets side of the Balance Sheet. The
recording appears as under :
58 Advanced Cost Accounting - III
Contract Costing (Theory)
Balance Sheet as on -----Assets
Work-in-progress :
Value of work certified
----------
Cost of uncertified work
----------
Plant at site
----------
Materials at site
----------
NOTES
---------Less : Amount received from the contractee
-------------------
Less : Reserve for unrealised profit
4.7
----------
----------
Calculation of profit to be transferred to Profit
and Loss Account in respect of contracts in
different stages of completion
In case of small contracts which are started and also completed in the
same financial year, there is no difficulty in calculation and transfer of profit to
Profit and Loss Account. If the credit side of a contract account is heavier than its
debit side, the difference is the amount of profit and the entire amount of profit is
transferred to Profit and Loss Account. In case a contract account shows a debit
balance it is the amount of loss on the contract account and is transferred to
Profit and Loss Account.
When a contract takes more than one financial year to complete
complications are created in calculation of profit on contract and in transferring a
certain part of it to Profit and Loss Account of the year. If a contract is expected
to be completed in 2 or more financial years, a ‘notional profit’ is first calculated at
the end of each financial year. Amount of notional profit is decided as under :
Value of work certified
-----------
Add : cost of uncertified work
---------------------
Less : cost of work done to date
-----------
Notional Profit
-----------
Out of notional profit a certain amount is kept aside as a reserve to meet
any unexpected costs or losses and the balance of notional profit is transferred to
Profit and Loss Account.
Advanced Cost Accounting - III
59
Contract Costing (Theory)
If majority of work has been completed, insted of calculating notional profit
‘estimated profit’ is calculated as under :Contract Price
----------
Less : Total cost of contract incurred upto date
----------
NOTES
---------Less : Estimated cost for completion of remaining work
----------
Estimated Profit on contract
----------
Out of estimated profit amount a certain portion is transferred as a reserve
to meet any contingencies which may arise in respect of the contract and balance
of estimated profit is transferred to Profit and Loss Account.
On the basis of stage of completion of contract how much amount of notional
profit should be transferred to Profit and Loss Account is decided. Stage of
completion of a contract is decided by comparing the amount of work certified
with the contract price, e.g. if work certified in respect of a contract is 24,00,000
and its contract price is 36,00,000 stage of completion of the contract is
24,00,000
2
=
36,00,000
3
Rules that are generally followed while calculating amount of notional profit
to be transferred to Profit and Loss Account are as under :1)
If stage of completion of a contract is less than one-fourth of the contract,
no profit should be transferred to Profit and Loss Account.
2)
If stage of completion of a contract is more than one-fourth of the contract,
amount to be transferred to Profit and Loss Account is calculated as under:
1
Notional Profit x
3
If more conservative view is taken by the contractor following formula is
adopted :
1 Cash received
Notional Profit x x
3 Work certified
3)
If stage of completion of a contract is one-half or more of the contract,
amount to be transferred to Profit and Loss Account is calcualated as under :
Notional Profit x
2 x Cash received
3 Work certified
4)
If contract work is almost complete and estmated profit is calculated, the
amount of profit to be transferred to Profit and Loss Account can be decided in
any of the follwoing ways :
Work Certified
60 Advanced Cost Accounting - III
i) Estimated Profit x
Contract price
Work Certified
ii) Estimated Profit x
Contract price
Contract Costing (Theory)
Cash received
x
Work certified
Cost of work to date
iii) Estimated Profit x
Estimated total cost of contract
Cost of work to date
iv) Estimated Profit x
Estimated total cost of contract
Cash received
x
NOTES
Work certified
5)
If a contract account shows loss, the entire amount of loss should be
transferred to Profit and Loss Account irrespective of the stage of completion of
the contract.
Escalation Clause :
This clause is sometimes included in contracts to protect interests of
contractors. Contract price is estimated and inclued in terms and conditions of a
contract at the time of entering into contract. However sometimes situation in the
economy is such that price of materials and wage rates applicable to labour are
likely to rise in near future and accurate estimation of such increase is not possible.
While fixing the contract price contractor tries to estimate the prices of materials
and wages rates as accurately as possible but if the prices increase beyond this
estimated limit, the cost of contract work is likely to exceed the contract price and
instead of earning profit from the contract he may be required to suffer loss. To
take care of this risk, escalation clause is inculed in the contract and this clause
makes provision for increasing the contract prices if the price of materials and/or
wage rates increase beyond a certain limit agreed upon by the comtractor and the
contractee. The escalation clause thus provides an upward revision in the contract
price and the contractor and the contractee agree to such revision under a certain
situation and upto a specific limit.
Check Your Progress
i)
How profit is calculation
in contract costing ?
ii) Explain, with the help of
formulas, how amount of
profit to be transferred to
Profit and Loss Account
is calculated in case of
contracts in different
stages of completion.
iii) What is meant by ‘costplus contracts’ ? Under
which circumstances
these contracts are
entered into ?
Along with the escalation clause, there may be a de-escalation clause included
in the contract to protect interests of the contractee. De-escalation clause provides
for a downward revision of conrtract price. When The prices of materials and
wage rates of labour decrease beyand an agreed limit, the contract price of the
contract is reduced by an agreed amount and the contractee is required to pay this
new (reduced) contract price to the contractor instead of the original contract
price which was decided before begining of the contract work.
Cost-plus Contracts :
Sometimes because of new nature of work or because of fluctuations in
market prices of materials or beacuse of difficully in deciding the exact period in
which the contract work can be completed, it becomes difficult for contractors to
estimate cost of contract work accuartely and quote a definite contract price.
Contractors may not be willing to take risk of doing the contract work under such
uncertain condition. Therefore to induce them to accept the contract and complete
the work, contract is offered to them on ‘cost-plus contract’ basis. Beginning of
cost-plus contracts can be traced to the second world war period when such
contracts were offered by the defence ministry and other Government
departments.
Advanced Cost Accounting - III
61
Contract Costing (Theory)
NOTES
In cost-plus contract, contract price is not agreed upon between contractor
and contractee. The contarctor is allowed to incur whatever costs are necessray
for completion of contract work and re-imburesement of such total costs together
with a certain fixed amount of profit or profit calculated at an agreed percentage
of total cost is made to the contractor by the contractee. In such contracts the
contractee is allowed to audit the books of accounts of the contractor to satisfy
himself that the costs incurred by the contractor are proper and the contractee is
not making payment for unnecessary and excessive expenses incurred by the
contractor. The contractor is also benefitted because he receives payment for all
costs incurred by him for the contract work and receives a definite profit as
agreed in the beginning.
Cost-plus contracts are generally given by the Central Government and
departments of State Governments when contract work is likely to take several
years for completion and in which the requirement of quantity of materials and
number of direct and indirect workers to be employed cannot be accurately decided.
Over such a long period prices of materials and wage rates for labour are also
likely to change serval times and estimation of cotract prices becomes very difficult.
So for works like construction of high-ways, construction of dams and canals,
building-up thermal power stations, laying down rails and constructions of railway
stations, etc. cost-plus contructs are given by the Government departments.
4.8
Summary
Contract costing is a method of costing followed by organisations which
accept Contracts from customers. A contract is accepted for construction of a
building, construction of road, construction of a bridge and construction of a dam.
A contract is a big job and an organisation accepts a few contracts at a time.
According to the nature of the contract work a long time-more than one year and
upto 5 or 6 years - is required to complete a contract. The contract is entered into
between the contractee (cutomber for whom the work is to be performed) and
the contractor (who agrees to do the work for the contractee) and it is in writing
containing information such as names of the contractor and contractee, the nature
of work, the site where the work is to be performed, specifications about the
work, time limit for completion of the contract, the contract price and manner in
which it will be paid by the contractee to the contractor, guarantee period, penalties
for delay in completion of the contract and for defective work, etc.
For every contract a separate contract account is opened in the Ledger. As
contract work is done at the site of the contractee, majority items of costs incurred
for the contract can be easily identified with the comtract and they are debited to
the contract account. Material cost, labour cost, direct expenses are debited to
the contract account. Office and administration overheads are apportioned to the
contract account by using the method of absorption of overheads followed by the
organisation.
62 Advanced Cost Accounting - III
Plant installed at the site is debited to the contract account with full value of
the plant and at the end of the financial year the value calculated for the used
plant is credited to the contract account. Alternatively, depreciation on plant is
calculated at decided rate for the period for which the plant has been used for
contract work and the amount of depreciation is debited to the contract account.
If there are any outstanding wages or expenses, they are debited to the contract
account. If the contract is completed in the financial year, the contract price is
credited to the contract account. Items of material returned to stores or sent to
the site of other contract, material remaining unused at the end of the year are
credited to the contract account and the diffrence between debit and credit side
total of the contract account indicates profit earned or loss suffered on the contract
and is transfered to the Profit and Loss Account.
Contract Costing (Theory)
NOTES
In case of contracts which are incomplete at the end of the financial year,
the full contract price can not be credited to the contract account but the amount
of work-in-progress (total of work certified by the architect of the contractee and
work uncertified at cost price) is calculated and credited to the contract account.
If the contract account shows notional loss, the entire amount of the notional loss
is transferred to the Profit and Loss Account of the year. If contract account
shows notional profit, depending upon the stage of completion of the contract a
certain protion of the notional profit, calculated by using appropriate formula, is
tranferred to Profit and Loss Account of the year and remaining balance of the
notional profit is transferred to the Work-in-Progress Account.
When prices of materials and wage rates are rising but exact amount cannot
be determined, to protect the interests of the contractor, a clause called ‘escalation
clause’ is included in the terms and conditions of the contract. This clause gives
the right to the contractor to increase the contract price upto a certain limit, if the
price of materials and wage rates increase beyond a certain amount. De-escalation
clause included in the contract terms is opposite of the escalation clause which
protects the interest of the contractee by allowing him to reduce the contract
price upto a certain limit if the material prices and wage-rates fall up to a certain
amount as compared to the rates mentioned in the original contract.
When the exact cost of a contract can not be ascertained properly because
of new type of contract work or due to unpredictable changes in the economy, the
contractor and the contractee agree to a contract on ‘cost plus contract’ basis. In
such case the actual cost incurred by the contractor for the contract is ascertained
and an agreed margin of profit is added to the contract cost to decide the contract
price of the contract.
4.9
Key Terms
i) Contractor :
Contractor is a person or group of persons who undertakes to
complete a certain work as per the requirements of a customer
within a particular time limit.
ii) Contractee : Contractee is the customer for whom the contract work is to
be completed.
iii) Contract Price : It is the amount agreed to be paid by the contractee to the
Advanced Cost Accounting - III
63
Contract Costing (Theory)
NOTES
contractor on completion of the contract. [Part amount of
contract price is generally paid as per the progress of the
contact work.]
iv) Work Certified : It is the value of work completed by the contractor upto a
certain date. It is certified by the Architect of the Contractee.
v) Work Uncertified : It is the cost of work done by the Contractor from the
date of work certified upto the date on which contract account
is closed for calculation of profit/loss in respect of the contract.
vi) Retention Money : It is a certain percentage of the amount of Work Certified
which is not paid to the contractor but retained by the
contractee to cover any defective work or as a reserve for
delay in completion of the contract by the contractor.
The amount of the retention money is completely paid to the
contractor on expiry of an agreed period after entire contract
is completed.
4.10 Questions
I - Theory Questions
1)
What is ‘contract costing’ ? Explain the features of contract costing.
2)
“A job is a small contract and the contract is a big job”. Explain.
3)
Explain how accounting recording is done in contract costing.
4)
Who are sub contractors ? What work they perform ? How will you treat
payments made to sub-contractors in contract costing ?
5)
With the help of formulas explain how notional profit or loss shown by
contract accounts in different stages of completion is treated in contract
costing ?
6)
What is meant by ‘escalation clause’ and ‘de-escalation clause’ ? Why
these clauses are included in terms and conditions of contract ?
7)
Write notes on :
a) Work certified
b) Work completed but not certified
c) Escalation and de-escalation clauses
d) Cost-plus contracts
64 Advanced Cost Accounting - III
8)
Explain the treatment given to materials and plant in contract costing.
9)
Explain the following in context of contract costing :-
a) Work-in-progress
Contract Costing (Theory)
b) Retention money
II - Multiple Choice Questions
(1)
NOTES
The cost unit in contract costing is -------- which is of a long duration and
may be continued over more than one financial year.
(a) a customer
(b) the contractee
(c) a contractor
(d) a contract
(2)
In case of contract majority of expenses are directly -------(a) debited to the contrat account.
(b) credited to the contract account.
(c) debited to the contractor account.
(d) debited to the contractee’s account.
(3)
Contract work is normally done at the site of the ---------(a) contractor
(b) contractee
(c) factor of the contractor
(d) premises of the contractor
(4)
The amount paid to the sub-contractor is debited to the ----------(a) Contractor Account
(b) Contractee Account
(c) Contract Account
(d) Customer Account
(5)
Contract work takes a considerable time for completion and may -------(a) be completed in one financial year
(b) go on over a period of one year or more
(c) be completed in a period of 90 days
(d) be completed in a one calender year
Advanced Cost Accounting - III
65
Contract Costing (Theory)
(6)
Which of the following statement is ‘Wrong’ ?
(a) In case of some contracts the contractor may give sub-contracts
(b) The contract work is performed at the site of the contractee
(c) Contractee makes payment to contractor as the work of contract
progress
NOTES
(d) Contractor makes payment to contractee as ‘retention money’
(7)
Match the pairs.
Group I
Group II
(a) Contract Costing
(i) part amount paid by the contractor
(b) Contract work
(ii) amount paid by contractee to contractor
(c) Retention money
(iii) amount with contractee as a reserve
(d) Contract Price
(iv) at the site of contractee
(v) type of job costing
Ans. (a) - (v), (b) - (iv), (c) - (iii), (d) - (ii).
(8)
A de-escalation clause is included in the contrat to ---------(a) protect interests of the contractree
(b) protect interests of the contractor
(c) protect interests of the society
(d) control fluctuations in market price
Ans. : (1 - d), (2 - a), (3 - b), (4 - c), (5 - b), (6 - d), (8 - a).
4.11 Further Reading
66 Advanced Cost Accounting - III
1.
‘Advanced Cost Accounting’ - Nigam and Sharma
2.
‘Theory and Practice of Cost Accounting’ - M. L. Agrawal
3.
‘Cost Accounting - Principles and Practice’ - N. K. Prasad
4.
‘Cost Accounting’ - B. K. Bhar
Unit 5 Contract Costing (Practical)
Contract Costing (Practical)
Structure
5.0
Introduction
5.1
Unit objectives
5.2
Illustrations on Contract Costing
5.3
Summary
5.4
Exercises
5.0
NOTES
Introduction
In Unit 4, we have considered theoratical information about various aspects
of Contract Costing such as meaning, features, industries which use Contract
Costing, Accounting Recording in Contract Costing and explanation of terms used
in Contract Costing. Also in respect of contracts in different stages of completion
how much of notional profit should be transferred to Profit and Loss Account was
also mentioned with the help of formulas. Now, in this Unit, we shall study a few
illustrations to understand how the contract accounts are actually prepared.
5.1
Unit Objectives
After understanding the recording shown in the Illustrations you should be
able to :
•
Understand how different items are recorded in the Contract Account;
•
Understand how the stage of completion of a contract is determined ; and
•
Know how the amount of profit to be transferred to Profit and Loss Account
is calculated and recorded in case of contracts in different stages of
completion at the end of the financial year.
Advanced Cost Accounting - III
67
Contract Costing (Practical)
5.2
Illustrations on Contract Costing
1)
Buildwell Company has undertaken a contract to construct a 12 storey
building for a contract price of `15 crores. Construction work started on 1st April,
2008 and following data is available for the year ending on 31st March, 2009 :
NOTES
`
Materials sent to site
80,00,000
Materials supplied from the store
9,50,000
Wages paid
1,17,00,000
Direct expenses
4,50,000
Plant installed at site
20,00,000
Overheads charge to the contract
3,00,000
Plant at site on 31-03-2009
16,00,000
Materials unused at site on 31-03-2009
52,000
Wages accrued on 31-03-2009
4,00,000
Work certified
3,60,00,000
Cost of work uncertified
17,20,000
Cash received from the contractee is 75% of work certified. Prepare
Contract Account for the year ending 31st March, 2009.
SOLUTION
In the Books of Buildwell Company
Dr.
Contract Account for the year ended 31st March, 2009
`
To Materials sent to site
To Wages paid
`
80,00,000 By Work-in- progress
To Materials supplied from
the store
Work certified 3,60,00,000
9,50,000 Cost of uncertified
1,17,00,000 work
17,20,000
To Direct expenses
4,50,000 By Plant at site on
To Overheads charged
3,00,000
To Plant installed at site
31-3-2009
3,77,20,000
16,00,000
20,00,000 By Materials unused
To Wages accrued on
31-3-2009
Cr.
at site on 31-3-2009
52,000
4,00,000
To Reserve A/c transferred
(Profit in reserve)
1,55,72,000
3,93,72,000
68 Advanced Cost Accounting - III
3,93,72,000
Note : Contract price is ` 15 crores and work certified is ` 3,60,00,000 which
means it is less than one-fourth of the contract price and so no profit is transferred
to Profit and Loss Account and the entire amount of profit is transferred to Reserve
Account.
2)
A building contractor has accepted a contract for construction of a small
bunglow at a contract price of ` 1,20,00,000. The work started on 1-1-2001 and
upto 31-12-2001 the books of the contractor showed the following position :-
Contract Costing (Practical)
`
Materials sent to site
22,00,000
Wages paid
35,00,000
Plant installed at site an 1-1-2001
6,00,000
Direct expenses
2,25,000
Overheads charged to the contract
NOTES
65,000
Cash received from the contractee
64,00,000
(being 80% of work certified
Cost of uncertified work on 31-12-2001
3,10,000
Materials at site on 31-12-2001
1,82,000
Plant has been used throughout the year and is to be depreciated at 15%
per annum.
Prepare Contract Account showing the amount of profit to be transferred
to Profit and Loss Account for the year 2001.
SOLUTION
Dr.
Contract Account for the year ended 31st March, 2001
`
To Materials sent to site
22,00,000
To Wages paid
35,00,000
To Direct expenses
To Overheads charged
To Plant installed at site
To Notional Profit c/d
2,25,000
65,000
`
By work-in- progress
Work certified 80,00,000
Cost of uncertified
Work on 31-12-2001
6,00,000
24,12,000
Cr.
3,10,000
By Plant at site on
83,10,000
5,10,000
31-12 2001 (6,00,000 Depreciation 90,000)
By Materials at site
on 31-12-2001
90,02,000
To Profit transferred to
Profit and Loss A/c
1,82,000
90,02,,000
By Notional Profit b/d
24,12,000
12,86,400
To Reserve A/c transferred
(Profit in Reserve)
11,25,600
24,12,000
24,12,000
Notes:- (1) Cash received from the contractee is 80% of work certified since
cash received is ` 64,00,000 amount of work certified is
Advanced Cost Accounting - III
69
Contract Costing (Practical)
100
= ` 80,00,000
64,00,000 x
80
NOTES
(2) Work certified is ` 80,00,000 and the contract price is ` 1,20,00,000 which
means more than half work has been completed. So the profit to be transferred to
Profit and Loss A/C is taken as 2/3 rd of notional profit as reduced by percentage
of cash received to work certified.
2
24,12,000 x
80
= ` 12,86,400
x
3
100
3)
The following information relates to a building contract which was accepted
by B Ltd. for a contract price of `20,00,000 :
Year 2004
Year 2005
`
`
Materials sent to site
2,00,000
5,68,000
Wages paid
1,70,000
5,00,000
24,000
40,000
4,000
10,800
6,00,000
20,00,000
Cost of uncertified work
16,000
-
Materials at site
12,000
14,000
Plant sent to site
28,000
4,000
Direct expenses
Overheads charged
Work certified
Contractee paid cash equal to 80% of work certified at the end of 2004 and
balance amount of the contract price in 2005 when the completed building was
handed over to him.
The value of plant at site at the end of 2004 was `14,000 and at the end of
2005 was `10,000
Prepare Contract A/c and Contractee’s A/c for the years 2004 and 2005
showing the amount of profit transferred to Profit and Loss A/c.
70 Advanced Cost Accounting - III
Contract Costing (Practical)
SOLUTION
Dr.
Cr.
Contract Account for the year ended 2004
`
To Materials sent to site
2,00,000
To Wages paid
1,70,000
To Direct expenses
24,000
To Overheads charged
4,000
To Depreciation on Plant
14,000
`
By Work-in progress :
Work certified 6,00,000
NOTES
Cost of
uncertified work 16,000
By Materials at site
6,16,000
12,000
(` 28,000 - `14,000)
To Notional Profit c/d
2,16,000
6,28,000
To Profit transferred to
6,28,000
By Notional Profit b/d
Profit and Loss A/c
2,16,000
57,600
To Reserve A/c transferred
(Profit in Reserve)
1,58,400
2,16,000
Dr.
2,16,000
Cr.
Contract Account for the year ended 2005
`
To Work-in-Progress :
Work certified
`
By Contractee’s Account
6,00,000
By Materials at site
20,00,000
14,000
Cost of uncertified
work
16,000
6,16,000
Less Profit in Reserve
1,58,400
To Materials at site b/d
4,57,600
12,000
To Materials sent to site
5,68,000
To Wages paid
5,00,000
To Direct expenses
40,000
To Overheads charged
10,800
To Depreciation on Plant
8,000
(` 14,000 + 4,000 - ` 10,000)
To Profit transferred to
Profit and Loss A/c
4,17,600
20,14,000
20,14,000
Advanced Cost Accounting - III
71
Contract Costing (Practical)
Dr.
Year
Year
2004
To Balance c/d
4,80,000
2004
By Bank A/C
4,80,000
NOTES
Cr.
Contractee’s Account
Year
4,80,000
4,80,000
Year
2005
To Contract A/c
2005
transferred
20,00,000
By Balance b/d
By Bank A/c
20,00,000
Notes :
(i)
15,20,000
20,00,000
Profit transferred to Profit and Loss A/c in the year 2004.
1
Notional Profit x
1
2,16,000 x
4,80,000
3
3
Cash Received
x
Work certified
80
x
100
= ` 57,600
1/3rd portion of notional profit is taken since the work certified is more than 1/4th
but less than 1/2 of the contract price.
(ii) In the year 2005 the contract has been fully completed and so the entire
amount of profit `4,17,600 is transferred to Profit and Loss A/c.
(iii) In the year 2004 value of Plant sent to site is `28,000 and at the end of year
2004 value of Plant at site is mentioned as `14,000. So Plant depreciation is
`28,000 - `14,000 = `14,000.
(iv) For the year 2005, Plant at site brought down on debit side of the Contract
A/c is Rs.14,000 and in 2005 Plant of ` 4000 is sent to the site which makes the
value of Plant `18,000. At the end of the year value of Plant is given as `10,000.
So the amount of depreciation on Plant is `18000 - `10,000 = `8,000.
4)
From the following particulars taken from Contract Ledger of a contractor
on 30-6-2012 prepare Contract Account and show the relevent recording as it
would appear in the Balance Sheet as on 30-6-2012 :
Materials sent to site by suppliers
`
82,000
Materials sent to site from the store
25,000
Wages paid
94,000
Direct expenses paid
11,500
Proportionate establishment expenses charged to contract
Plant installed at site
Wages accrued on 30-6-2012
Work certified
Cost of uncertified work
Materials at site on 30-6-2012
72 Advanced Cost Accounting - III
Plant at site on 30-6-2012
6,300
40,000
5,200
1,90,000
18,000
3,000
38,000
Out of materials sent to site, materials costing `6000 were found unsuitable
for the contract work and were sold for `4500.
Contract Costing (Practical)
Contractee pays cash equal to 90% of work certified.
Contract price is `8,00,000.
SOLUTION
Dr.
NOTES
Contract Account for the year ended 30th June, 2012
`
`
To Materials from suppliers
82,000
To Materials from the store
25,000
To Wages paid
94,000
Add accured
5,200
To Direct expenses
Cr.
By Work-in-progress :
Work certified 1,90,000
Cost of uncertified
99,200
11,500
To Establishment expenses
charged
6,300
To Plant installed
40,000
work
18,000
By Plant at site
2,08,000
38,000
By Materials at site
3,000
By Materials sold
4,500
By Profit and Loss A/c
1,500
(Loss on sale of materials)
By Loss transferred to
Profit and Loss A/c
9,000
2,64,000
2,64,000
Balance Sheet as on 30th June, 2012.
Capital & Liabilities
`
`
Assets & properties
Work-in- progress:
Wages occurred
5,200
Work certified
1,90,000
Work uncertified
18,000
2,08,000
Less Cash received
from contractee 1,71,000
Plant at site
37,000
38,000
Materials at site
3,000
Profit & Loss A/c
Loss from contract 9,000
Loss on sale of
materials
1,500
10,500
5)
Illustration on contract almost complete and estimated profit from the
contract on completion is calculated :
A firm of contractors obtained a contract for construction of a portion of a
road, the contract price being ` 6,00,000. Work started on 1-1-2005 and cost
incurred during the year ended 31-12-2005 was as under :Advanced Cost Accounting - III
73
`
Contract Costing (Practical)
NOTES
Stores and materials issued
1,88,000
Wages paid
1,52,000
Sundry expenses
14,000
Establishment expenses charged
22,550
Plant installed
55,000
Out of materials issued, materials costing ` 18,000 were found unsuitable
for the contract work and were sold for ` 21,750.
A part of the plant costing ` 4000 was damaged and sold for ` 2,300.
On 31-12-2005, materials at the site were of ` 5,250 and value of plant at
site was ` 37,000.
Value of work certified was Rs.4,00,000 and cost of uncertified work was
` 38,000.
80% of work certified was paid by the contractee in cash.
The firm decided to estimate further expenditure to be incurred for completing
the contract work on 31-5-2006, to estimate the profit that will be available on
completion of the contract and transfer to Profit and Loss Account for the year
ending on 31-12-2005 a portion of estimated profit such amount which the work
certified on 31-12-2005 bears to the contract price.
The estimated costs for completion of the contract work were as under :1)
In addition to stores and materials at site on 31-12-2005, stores and materials
of ` 52,000 will be required,.
2)
Additional wage cost will amount to ` 45,000.
3)
Sundry expenses to be incurred will be ` 3000 and establishment expenses
of ` 5,450 will have to be charged to the contract.
4)
In addition to the Plant at site on 31-12-2005, Plant costing `12000 will
have to be installed at the site. On completion of the contract the residual
value of the Plant is estimated to be ` 4,500.
5)
A provision of `25,000 will have to be made to take care of any
contingencies.
You are required to prepare Contract Account for the year ending 31st
December, 2005 and an estimated contract account on completion of the contract.
74 Advanced Cost Accounting - III
Contract Costing (Practical)
SOLUTION
Dr.
Contract Account for the year ending 31st Dec., 2005
`
Cr.
`
To Stores and materials issued
1,88,000
By Materials sold
To Wages paid
1,52,000
By Plant sold
2,300
By Profit and Loss A/c
1,700
To Sunday expenses
14,000
To Establishment expenses
22,550
To Plant installed
55,000
To Profit and Loss A/c
3,750
(Profit on materials sold)
To Balance c/d
NOTES
(Loss on Plant sold)
By Work -in-progress
Work certified 4,00,000
Work uncertified 38,000
70,700
21,750
4,38,000
By Plant at site on
31-21-2005
37,000
By Materials at site
on 31-12-2005
5,06,000
To Profit transferred to
5,06,000
By Balance b/d
Profit & Loss A/c
35,000
To Reserve A/c transferred
35,700
5,250
70,700
(Profit in Reserve)
70,700
Dr.
70,700
Cr.
Estimated Contract A/c on Completion
`
To stores and Material
2,40,000
(188000 + 52000)
To Wages
1,97,000
(1,52,000 + 45,000)
To Sundry expenses
`
By Materials sold (Cost)
18,000
By Plant sold (cost)
4,000
By Plant at site
4,500
(residual value )
17,000
By Cost of contract c/d
5,47,500
(14,000 + 3,000)
To Establishment expenses
28,000
(22,550 + 5,450)
To Plant installed
67,000
(55,000 + 12,000)
To Reserve for contingencies
25,000
5,74,000
To Cost of Contract b/d
To Estimated profit on Contract
5,47,500
52,500
6,00,000
5,74,000
By Contractee’s A/c
6,00,000
( Contract price)
6.00,000
Note : Amount of profit transferred to Profit and Loss Account for the year
ending 31st December, 2005 is calculated by using the following formula as stated
in the problem :-
Advanced Cost Accounting - III
75
Contract Costing (Practical)
Work Certified
Estimated Profit x
Contract Price
400000
= 52,500 x
6,00,000
NOTES
= Rs 35,000
In absence of specific instruction, any of the following formulas can be
used :Work Certified
1)
Estimated Profit x
Cash received
x
Contract Price
Work Certified
Cost of Work to date
2)
Estimated Profit x
Estimated Total Cost of Contract
Cost of work to date
3)
Estimated Profit x
Estimated Total Cost of Contract
5.3
Cash received
x
Work certified
Summary
For each contract a separate Contract Account is prepared. On the debit
side of the Contract Account materials purchased for the contract, materials supplied
from stores of the contractor, wages paid and payable, direct expenses, overhead
amount charged to the contract, plant installed at the site of the contract (or
depreciation on plant used for the contract) are items of costs related to the contract
are recorded. On the credit side of the Contract Account amount of work-inprogress (consisting of amount of work certified and cost of uncertified work),
Value of plant at the site at the end of the period and Value of materials unused at
the site are the usual items recorded. If some material is returned to the store or
sold out or transferred to some other contract, recording for these items is also
shown on credit side of the Contract A/c. If there is any profit earned or loss
suffered on sale of material which was supplied for contract work, it should be
calculated and recorded separately to the Contract Account. By closing Contract
Account’s first part notional profit or loss is calculated. Notional profit amount is
brought down on credit side of Contract Account and depending upon the stage of
completion of the contract an appropriate portion of the notional profit is transferred
to Profit and Loss Account of the current year and remaining portion of the notional
profit is transferred to Reserve Account as profit in reserve. In case the Contract
Account shows a loss at the end of the financial year, the entire amount of loss is
transferred to Profit and Loss Account of the current year.
76 Advanced Cost Accounting - III
5.5
Contract Costing (Practical)
Exercises
(1) The Swadeshi Construction Company has undertaken a Contract No. 185
and has provided following data related to the contract :`
Work certified by the architect
1,43,000
Cost of work completed but not certified
3,400
Plant installed at the site
11,300
Value of plant on 31-12-2013
8,200
Cost of materials sent to the site
64,500
Direct wages paid
54,800
Establishment overheads charged to the contract
3,250
Wages occurred on 31-12-2013
1,800
Direct expenses incurred for the contract
2,400
Materials unused at site on 31-12-2013
1,400
Materials returned to the store
400
Direst expenses accrued on 31-12-2013
200
Contract price
2,00,000
Cash received from the contractee
1,30,000
NOTES
Prepare Contract No. 185 Account for the year ending 31st Dec., 2013 and
show how much profit you will transfer to Profit and Loss Account for the year
ending 31st December, 2013.
(2) Modern Contractors have undertaken two contracts A and B on 1-1-2006,
Following information has been supplied for the year ending 31-12-2006 in respect
of the two contracts :Contract A
`
Contract B
`
Materials sent to sites
85,349
73,267
Direct wages paid
74,375
68,523
Plants installed at sites at cost
15,000
12,500
Direct Expenditure
3,167
2,859
Establishment charges
4,126
3,852
549
632
Materials returned to store
Advanced Cost Accounting - III
77
Contract Costing (Practical)
NOTES
Value of work certified
1,95,000
1,45,000
Cost of uncertified work
4,500
3,000
Materials at site on 31-12-2006
1,883
1,736
Wages accrued on 31-12-2006
2400
2100
240
180
11,000
9,500
Direct expenditure accrued on 31-12-2006
Value of plants on 31-12-2006
The Contract prices are agreed at ` 2,50,000 for Contract A and ` 2,00,000
for contract B. Cash received from the contractee is ` 1,80,000 and ` 1,40,000
respectively for Contract A and Contract B.
Prepare :
a) Contract Accounts for Contract A and Contract B,
b) Contractee’s’ Accounts, and
c) Show how work-in-progress shall appear in the Balance Sheet of the Contractor.
(3) Reliable Construction Company has undertaken contract no. 42 an 1st July,
2012. The contract price was ` 27,00,000 and the data related to the contract
upto 30th June, 2013 is as under :`
Direct Materials
5,80,000
Wages Paid
9,24,000
Other expenses
Plant installed at site
28,000
1,60,000
Materials unused at site on 30-06-2013
55,000
Wages accrued on 30-06-2013
22,000
Other expenses accrued on 30-06-2013
3,000
Work certified by the architect
16,00,000
Cash received from the contractee
12,80,000
Cost of uncertified work
70,000
The Plant of site is to be depreciated at 10%.
Prepare Contract No. 42 Account for the year ended 30th June, 2013 showing
clearly the working for profit transferred to Profit and Loss A/c for the year
ending 30th June, 2013.
78 Advanced Cost Accounting - III
(4) A firm of contractors has undertaken a contract for construction of a building
on 1st October, 2014. The contract price is ` 2,50,00,000 and the contractee has
agreed to pay cash to the extent of 60% of work certified by the architect. Upto
31st March, 2015, the end of the financial year of the firm following information
about the contract is available:`
Materials sent to the site
15,00,000
Wages paid
18,00,000
Direct expenses
Contract Costing (Practical)
NOTES
2,40,000
Plant installed at site
20,00,000
Materials returned to store
90,000
Wages accrued on 31-3-2015
80,000
Establishment overheads charged to the contract
1,30,000
Value of work certified
60,00,000
Cost of uncertified work
2,10,000
Plant is to be depreciated at 10% p.a..
Prepare Contract Account for the year ended 31st March, 2015
(5) A contractor commenced a building contract on October 1, 1997. The
contract price is ` 4,40,000. The following data pertaining to the contract for the
year 1998-99 has been compiled from his books and is as under :`
April 1, 1998
work - in- progress not certified
April 1, 1998
Materials at site
1998 - 99
Expenses incurred :
55,000
2,000
Materials issued
1,12,000
Wages paid
1,08,000
Hire of plant
20,000
Other expenses
34,000
March 31, 1999 Materials at site
4,000
Work - in- progress : Not certified
Work - in progress : Certified
8,000
4,05,000
The cash received represents 80% of the work certified. It has been
estimated that further costs to complete the contract will be ` 23,000 including
Advanced Cost Accounting - III
79
Contract Costing (Practical)
the materials at site as on March 31, 1999.
Required :
Determine the profit on the contract for the year 1998-99 on prudent basis,
which has to be credited to Profit % Loss A/c. (C.A. Inter, Nov. 1999)
NOTES
80 Advanced Cost Accounting - III
Unit 6 Process Costing (Theory)
Process Costing (Theory)
Structure
6.0
Introduction
6.1
Unit objectives
6.2
Meaning of Process Costing
6.3
Features of Process Costing
6.4
Difference between Job Costing and Process Costing
6.5
Advantages of Process Costing
6.6
Disadvantages of Process Costing.
6.7
Collection of costs and procedure followed
6.8
Normal and Abnormal Loss or Gain
6.9
Inter- process profit.
NOTES
6.10 Summary
6.11 Key Terms
6.12 Questions
6.13 Further Reading
6.0
Introduction
In this Unit we will consider a method of costing which is followed by those
concerns which manufacture a product or products on a continuous basis through
stages or processes in a certain sequence and the finished product becomes ready
after completion of the last stage or process. Accumulation and recording of costs
is done by these concerns processwise and for a certain period. The units of first
process are transferred to second process as input and further costs incurred for
completion of work of the second process are added in the second process and
this procedure goes on till the last process becomes complete and the finished
product becomes available. For this purpose a method of costing known as ‘process
costing’ is followed. In this Unit only theoratical information about process costing
is provided and practical illustrations will be provided in the next Unit.
Advanced Cost Accounting - III
81
Process Costing (Theory)
6.1 Unit Objectives
After studying the information given in this Unit, you should be able to
understand :
NOTES
•
Meaning of process costing;
•
Features of process costing;
•
How process costing differs from job costing;
•
Advantages and disadvantages of process costing; and
•
Procedure followed in process costing for recording costs.
6.2
Meaning of process costing
Process Costing refers to a method of accumulating cost of production by
process. It represents a method of cost procedure applicable to continuous or
mass production industries producing standard products. Costs are compiled for
each process or department by preparing a separate account for each process.
According of ICMA, Process Costing is “that form of operating costing
which applies where standardised goods are produced”. Kohler defines
Process Costing as “a method of cost accounting whereby costs are charged
to processes or operations and averaged over units produced.” Like unit
costing, Process costing is also a form of Operation costing as distinguished from
specific order costing. In case of Unit costing, production of a single product is
brought about by setting up a separate plant. In the case of Process costing,
however, production follows a series of sequential processes for either a single
product or a limited range of product. The aim of process costing is to determine
the total cost of each operation and to apply this cost to the product at each state
of process. It will then be possible to ascertain cost per unit for each operation or
process and in total.
Applicability
Process costing is suitable for a large number of industries like mines and
quarries, cotton, wool and jute textiles, chemicals, soap-making, paper plastics,
distilleries, oil refining, screws, bolts and revets, food products, dairy, breweries,
suger works, confectionaries, cement, flour mill/gas etc.
In short, Process Costing is easily applicable in those industries where
manufacture of product is of uniform standards and there is continuous production.
82 Advanced Cost Accounting - III
6.3
Features of Process Costing
Process Costing (Theory)
Process costing has the following important features :
i)
Each plant is divided into number of process cost centres or departments
and each such division is a stage of production or a process.
ii)
The finished products are uniform in all respects such as shape, size, weight,
quality, colour, chemical content etc. so unit cost is calculated by dividing
the total cost by the number of units produced.
iii)
Output of one process is the input of the next process.
iv)
It is not possible to distinguish finished products while they are in the stage
of processing.
v)
Costs follow the flow of production i.e. costs incurred in the earlier process
are transferred to the later process alongwith the output.
vi)
Total cost of the finished product in the last process is cumulative i.e. it
comprises of costs of all processes.
vii)
The cost of any particular unit is the average cost of manufacture over a
period.
viii)
Production of one article may give rise to two or more by-products.
ix)
Occurrence of process losses e.g. evaporation, shrinkage, chemical reaction
etc.
x)
The semi-finished products are expressed in terms of complete products.
This is technically termed as equivalent production.
xi)
Production accumulated and reported by process.
xii)
Production process is predetermined and a definite sequence of production
is followed.
xiii)
The unit of cost is the “process” under this mehtod of costing.
xiv)
The production is continuous and on large scale basis in anticipation of
demand.
NOTES
Advanced Cost Accounting - III
83
Process Costing (Theory)
6.4
Difference between Job Costing and Process
Costing
Difference between Job costing and Process Costing can be stated as follows:
NOTES
Job Costing
Process Costing
i)
Production is against spectific i)
orders and instructions from the
customers.
Production is in continuous flow
and is for stocks.
ii)
Cost are determined separately ii)
for each unit or job.
Costs are compiled for each
process or department and unit
cost is the average cost.
iii)
Jobs are independent of each iii)
other.
Products lose their individual
identity beacuse of continuous
flow.
iv)
Unit cost of a job is calculated iv)
by dividing the total costs
incurred into the units produced
in the lot or batch.
The unit of cost of a process is
computed by dividing the total
cost for the period into the output
of the process during that period.
v)
Costs are ascertained when a job v)
is complete.
Costs are calculated at the end
of the cost period.
vi)
Cost of a job is not transferred to vi)
another.
The cost of process is transferred
to the next process.
vii)
There may or may not be work- vii)
in-progress at the beginning or at
the end of the accounting period.
Due to continuous production,
work-in-progress is a regular
feature.
viii) Cost control is comparatively viii) Production is standardised
making it comparatively easier to
difficult and needs more attention.
exercise cost control.
84 Advanced Cost Accounting - III
ix)
It requires more forms and ix)
documents.
It requires less paper work.
x)
Diversification is possiable in Job x)
Costing.
Diversification is not possible
under process costing unless
altogether a new set of
machineries are installed.
xi)
In Job Costing, Reporting is after xi)
completion of job.
In Process Costing, Reporting is
progresswise and in respect of
time.
xii)
Investment of capital is less.
xii)
Investment of capital is more.
6.5
Process Costing (Theory)
Advantages
The advantages of Process Costing are as follows :
i)
It helps in computation of costs of the process as well as of the end product
at short intervals.
ii)
Average costs of homogeneneous products can easily be computed.
iii)
Allocation of expenses can be easily made and this results into a more
accurate costing.
iv)
It involves less clerical labour because of the simplicity of cost records.
v)
Quotation can be submitted more promptly with standardisation of processes.
vi)
Managerial control is possible by evaluating the performance of each process
and by ascertaining the abnormal losses.
vii)
It is easier to establish the standards in case of continuous production, Hence,
Standard costing system can be followed easily in process costing.
viii)
As cost of production is ascertained periodically, management is in a position
to receive various reports periodicallly and review the progress and efficiency
of the production process.
6.6
NOTES
Check Your Progress
i)
Explain the meaning of
‘Process Costing’ and
define the term ‘Process
Costing.
ii) Briefly mention features,
advantages
and
disadvantages of process
costing.
iii) What is the difference
between ‘job costing’ and
‘process costing’ ?
Disadvantages
The disadvantages of Process Costing are as follows
i)
The average cost ascertained under this method is not true cost per unit. As
such, it conceals weaknesses and inefficiencies in processing.
ii)
Since, it is based on historical costs, it has all the weaknesses of historical
costing.
iii)
The valuation of work-in- progress on the basis of the degree of completion
may sometimes, be a more guess work.
iv)
The emergence of joint products may present the problem of apportionment
of joint cost and if apportionment is not properly done cost results may not
be accurate.
v)
It may not always be possible to indicate the suitable units for showing
quantity figuress in process cost statements.
vii)
The method does not permit evaluation of efforts of individual workers or
supervisors.
viii)
It involves difficulty in ascertaining closing stock value when output of one
process is transferred to another process at transfer price or market price.
Advanced Cost Accounting - III
85
Process Costing (Theory)
6.7
Collection of Costs and procedure followed
The whole industrial unit is divided into distinct processes to which all amounts
of direct material, direct labour, direct expenses and overheads are debited.
NOTES
i)
Direct Materials : With the help of material requisition, costs of raw
materials are debited to the process concerned.
ii)
Direct Labour : Wages paid to the labourers and other staff engaged in
particular process are charged to the concerned process. Sometimes, many
workers are engaged in more than one process, the gross wages paid
concerned are to be allocated on the basis of time spent.
iii)
Direct Expenses : There are certain expenses chargeable to the process
concerned e.g. electricity bill, depreciation etc.
iv)
Overheads : There are many expenses which are incurred for more than
two processes the total of such expenses may be apportioned either on
suitable basis or at predetermined rate based on direct labour charges or
prime cost etc.
Procedure :
i)
For the purpose of cost accounting, process industries are divided into
departments, each department representing a particular process. A process
may consist of a separate operation or series of operations. A foreman or
supervisor is appointed for each department. He is responsible for efficient
functioning of his department.
ii)
A separate account is maintained for each process and it is debited with
the value of raw material, labour and overheads relating to the process.
iii)
Output is recorded in terms of units (e.g. tons, litres, kg., etc.) on daily,
weekly or suitable periodical basis depending upon processing time.
iv)
Average cost per unit is found out by dividing the total cost of each process
by total production of that process. In arriving at average unit costs/costs
normal loss in production and incomplete units in the beginning and at the
end of the period, are taken into consideration.
v)
Cost of previous process is transferred to the subsequent process so that
the total cost and unit cost of products are accumulated.
vi)
Products remaining unfinished in the process at the close of the period are
to be assessed in terms of equivalent completed units on the basis of
percentage/degree of completion.
In making process accounts, columns are generally provided on both debit
side and credit side for total cost, per unit cost and for material quantities.
The figure below indicates the diagram showing Process Cost Flow.
86 Advanced Cost Accounting - III
Process Costing (Theory)
Process Cost Flow
Input
e ss
Pr oc
ain
loss/g
Input
Input
Process 1
By-product
NOTES
e ss
Pr oc
ain
loss/g
Process 2
Work-in process
e ss
Pr oc
ain
loss/g
Process 3
By-product
Finished Output
Work-in process
Fig. 6.1 : Process Cost Flow
6.8
Normal and Abnormal Loss or gain
In many of the industries which employ Process Costing, a certain amount
of loss or wastage occurs at various stages of production. This loss may be due to
evaporation, chemical change, change in moisture content,, carelessness, accident
or any other reason. It is therefore, necessary to keep accurate records for both
input and output of each process. Where loss occurs at a last stage of manufacture
it is apparent that financial loss is greater than the mere cost of raw materials.
This is becasue more and more labour and overhead are expanded in process as
the products move towards completion stage.
The term “Process Loss” may be defined as the difference between the
input quantity of raw material and the output quantity.
The I.C.M.A. defines ‘waste’ and ‘scarp’ from the recovery value point of
view as follows :
Waste : “Discarded substances having no value”.
Scrap : “Discarded material having some recovery value which is usually
disposed of without further treatment or re-introduced into the production process
in the place of raw material”.
Process losses and wastages are of two types viz. Normal Process Loss
and Abnormal Process Loss.
a)
Normal Loss
Normal Process Loss represents the loss which is expected under normal
conditions. This type of loss is unavoidable and is inherent in the process of
manufacture. It is often caused by such factors as evaporation, chemical change,
withdrawals for test or sampling, unavoidable spoilage quantities or other physical
Advanced Cost Accounting - III
87
Process Costing (Theory)
NOTES
reasons. It often includes scrap and waste. These types of losses can be estimated
from the nature of materials, nature of operation, previous experience or technical
data. Normal Loss is generally calculated at a certain percentage of the input of
units introduced in the respactive process.
Accounting Treatment :
The normal process loss is borne by the good units produced.
Total Process Cost - Value of Normal Wastage
Unit Cost
=
Good Units Produced
The units of normal wastage are recorded on the credit side of a process
account in quantity column only. The value of normal wastage, if any, should be
included in the amount column on the credit side as saleable value. This reduces
the cost of normal output. Process loss is shared by saleable units.
The accounting entries in respect of Normal Loss may be passed as follows:
For arising normal loss :
Normal Loss A/c
... Dr.
To Process A/c
For adjustment of the deficiency in the sale of normal loss :
Abnormal Gain A/c
... Dr.
To Normal Loss A/c
For sale of scrap, if any :
Cash A/c
... Dr.
To Normal Loss A/c
b)
Abnormal Loss :
Where the loss is caused by unexpected or abnormal conditions and if it is
beyond limit, it is called “Abnormal Loss”. In other words, any wastage arising
in excess of the normal wastage is known as “Abnormal Wastage”. It arises
due to abnormal causes or unforseen factors. Use of defective materials,
carelessness, fire, machine breakdown, power failure, strike etc. may give rise to
abnormal process losses.
Abnormal Loss is avoidable. It can be controlled by the management by
taking proper care. Units of Abnormal Loss is calculated as follows :
Units Introduced (entered)
Less :
Normal Loss in units
-----(-)
 Normal Output
Less :
Actual Output
 Units of Abnormal Loss
88 Advanced Cost Accounting - III
-----------
(-)
-----------
Thus, in short, the difference between the normal output and the actual
output is the abnormal loss.
Process Costing (Theory)
Normal Output = Units entered - Normal Loss in units.
Accounting Treatment :
Accounting procedure for abnormal loss is different. Abnormal loss
(wastage) is valued at the end at which the good units would be valued if there
were only normal loss (wastage). The amount of abnormal loss is credited to a
process concerned. A separate Abnormal Loss A/c is opened and the scrap value,
if any is credited to Abnormal Loss A/c and the balance on it ultimately transferred
to Costing Profit and Loss Account. The value of abnormal wastage is calculated
as follows :
NOTES
Value of Abnormal Loss (Wastage)
=
Normal Cost of Normal Output
x Units of Abnormal Loss
Normal Output
[ where, Normal Cost
=
Normal Output =
Total Process Cost - Value of normal loss, if any
Units entered - Normal loss in units]
The Accounting entries may be passed as follows :
For the value of Abnormal Loss :
Abnormal Loss A/c
... Dr.
To Concerned Process A/c
If any amount is received from sale of scrap :
Cash / Bank A/c
... Dr.
To Abnormal Loss A/c
For Closing Abnormal Loss A/c
Costing Profit and Loss A/c
... Dr.
To Abnormal Loss A/c
c)
Abnormal Gain :
The Normal Loss is an estimated figure. The actual loss may be more or
less than the normal loss. If the actual loss is more than the normal loss, it is
treated as abnormal loss. But if the actual loss is less than the normal loss,
it is known as abnormal gain or abnormal effectives. The abnormal gain is
calculated in a similar manner as an abnormal loss.
Units of Abnormal Gain is to be calculated as under :
Actual Output
Less :
Normal Output
 Units of Abnormal Gain
-----(-)
-----------
Advanced Cost Accounting - III
89
Process Costing (Theory)
Normal Output = Units entered (Introduced) - Normal loss in units
Accounting Treatment :
NOTES
Like Abnormal loss, Abnormal gain also does not affect the cost of normal
output as this is also valued in the same manner as abnormal loss. The process
account is debited with the quantity and value of Abnormal Gain and Abnormal
Gain A/c is credited. Finally, it is seen that the Process account is credited with
the quantity and value of normal scrap. But the actual quantity is less. Hence, the
difference is credited to Normal Loss Account by debiting the Abnormal Gain
Account. Then, the balance to the credit of Abnormal Gain A/c is transferred to
Costing Profit and Loss Account as Abnormal Gain.
The value of Abnormal Gain is calculated as follows :
Value of Abnormal Gain =
Total Process Cost - Value of Normal Wastage
x Units of Abnormal Gain
Normal Units Produced
The Accounting entries may be passed as follows :
For value of Abnormal gain :
Concerned Process A/c
... Dr.
To Abnormal Gain
For adjustment of scrap value of Abnormal gain :
Abnormal Gain A/c
... Dr.
To Normal Loss A/c
For Closing Abnormal Gain Account :
Abnormal Gain A/c
... Dr.
To Costing Profit and Loss A/c
Usually the form of Process Account, Normal Loss Account, Abnormal
Loss Account and Abnormal Gain Account is as follows :
90 Advanced Cost Accounting - III
Process Costing (Theory)
Dr.
Process Account
Particulars
Cr.
Quantity Cost per Amount Particulars
units
Quantity Cost per Amount
`
unit
units
`
To Earlier Process A/c
.........
`
`
.........
.........
(In the case of later Process A/c)
To Raw Materials
unit
By Normal Loss A/c
.........
.........
.........
(% of input)
.........
.........
.........
By Loss in Weight
To Direct Labour (Wages)
.........
.........
By Scrap Value
To Direct Expenses
.........
.........
By Sale of by-product
.........
.........
.........
.........
.........
.........
.........
To Indirect Exp. (Overheads)
.........
.........
By Abnormal Loss A/c
To Abnormal Gain
.........
.........
By Next Process A/c or
.........
.........
.........
Finished Stock A/c (in the
case of last process)
.........
.........
Dr.
Particulars
To Process A/c
.........
Normal Loss Account
Quantity
Amount
Units
`
.........
.........
Particulars
By Abnormal Gain A/c
Cr.
Quantity
Amount
Units
`
.........
.........
By Cash (Sale)
.........
.........
Dr.
Particulars
To Process A/c
.........
.........
Abnormal Loss Account
Quantity
Amount
Units
`
.........
.........
Particulars
By Cash (Sale)
Cr.
Quantity
Amount
Units
`
.........
.........
By Costing P & L A/c
.........
Dr.
Particulars
To Normal Loss A/c
.........
.........
.........
.........
.........
Abnormal Gain Account
Quantity
Amount
Units
`
.........
.........
To Costing Profit and Loss A/c
Particulars
By Process A/c
Cr.
Quantity
Amount
Units
`
.........
.........
.........
.........
.........
.........
.........
Advanced Cost Accounting - III
91
Process Costing (Theory)
NOTES
Check Your Progress
What do you mean by ‘inter
process profit ? What are the
advantages and disadvantages
in using inter process profit
recording ?
6.9
Inter Process Profit
Sometimes, the output from one process is transferred to the next process
at market value or cost plus certain percentage of profit. It is considered desirable
by a manufacturing concern to value output of each process at a price corresponding
to a market price of comparable goods . Thus, profit or loss made by each process
is revealed. The market price of the output processed being generally higher than
that the cost to the process, each process will show some profit. The profit is
termed as ‘Inter Process Profit’. In other words, inter process profits can be
defined as profits made by the transfer of process from transfer of output to the
subsequent process. The advantages and disadvantages of inter process profit
are as follows :
Advantages :
i)
To show whether the cost of production competes with the market price.
ii)
On the basis of this conclusion a management can decide whether a product
should be processed internally or to be brought in the market. In short, it
assists the management in make or buy decision.
iii)
To make each process self-efficient because the transfer processes are
not given the benifits of economies effected in the earlier process.
iv)
The true profit or loss of each process can be ascertained and appropriate
action can be taken if profit of any process is insufficient.
Disadvantages :
i)
It becomes necessary to adjust closing stock value to its cost price because
closing stock is valued in the balance sheet at cost price.
ii)
If the adjustment is not effected in the closing stock, such valuation is not
accepted by auditor and tax authorities.
iii)
The method involves additional clerical work by way of calculating transfer
price and then ascertaining the value of closing stock at its cost price.
But it creates complexity in accounts inter-process profits so introduced
remain included in the price of process stocks, finished stocks and work-in-progress.
For the Balance Sheet purpose, inter process profit cannot be included in stock, as
a firm cannot make a profit by trading itself. To avoid these complications a provision
must be created to reduce the stock to actual cost price. This problem arises only
in respect of closing stock because goods sold will have realised the internal profits.
Alternative Treatment :
In order to compute the profit element in closing stock and to obtain net
realised profit for a period, three columns (total column, cost column and profit
column) are shown on each side of process accounts and closing stock has been
deducted from the debit side of the process accounts instead of showing it on
credit side. Cost of closing stock can be easily obtained if we compare the
92 Advanced Cost Accounting - III
Process Costing (Theory)
accumulated cost column and total column in any process. The cost of stock can
be obtained by the formula :
Cost
x Closing Stock
=
Total
The profit on closing stock can be obtained by deducting the cost of stock
thus arrived from the value of stock.
Sometimes opening stock and production overheads are given. We should
add the Opening stock at the beginning with transfer cost, materials and wages.
From the total of these Closing stock should be deducted to calculate Prime Cost.
Then Production overheads are added. This becomes the cost of the process to
which is added the desired percentages of profit.
6.10 Summary
Process Costing is a method of costing which is used by those industries
which are engaged in manufacture of a product or products on a continuous basis.
The product becomes ready after it goes through the operations carried on in
stages or processes. The processes are carried out in a particular sequence.
Materials are put in the first process and the necessary operations or work is
performed by the workers employed in the first process. Direct expenses,indirect
labour cost is also incurred in the first process and when the work of first process
becomes complete, the processed material which is the output of the first process
is transferred to the second process as input of the second process. If necessary
materials required to do the work of the second process is added and workers
employed to work in the second process do the work. Wages paid to these workers
and also direct expenses and overheads incurred in the second process are recorded
to the second process account and output of second process is transferred to the
next process. When the last process work becomes complete, the output of that
process is transferred to the store as finished goods. Unit cost of output of each
process is calculated on average basis by dividing the total cost of the process by
the number of units in the output of that process. Normal loss units are considered
on the basis of past experience and they are deducted from the input units to
calculate normal units of output. If actual output units are less than the normal
output units, the shortage units is regarded as abnormal loss units and if the actual
output units are more than the normal units of output, the excess units of output
are known as abnormal gain units. Value of abnormal loss units is debited to
costing Profit and Loss Account and value of abnormal gain units is credited to
costing Profit and Loss Account. Normal loss units are recorded on credit side of
the process account in ‘units column’ but no value for the normal loss units is
recorded in the amount column of the process account.
NOTES
Check Your Progress
i)
How costs are collected
and recorded in process
costing ?
ii) What procedure is
followed for recording of
costs in process costing ?
iii) How
normal
and
abnormal gain or loss is
determined ? What is the
accounting treatment
given to these items ?
Advanced Cost Accounting - III
93
Process Costing (Theory)
NOTES
6.11 Key Terms
(i)
Normal Loss in Process Costing : Normal Loss is the expected loss in
normal conditions. It is unavoidable.
(ii)
Abnormal Loss in Process Costing : It is a loss caused by abnormal
conditions and it is calculated by deducting actual output of the process
from the normal output.
(iii)
Abnormal Gain : When the actual output of a process is more than the
normal output of the process, the excess of units is called abnormal gain
units and the saleable value of such excess units is the amount of abnormal
gain.
6.12 Questions
I - Theory Questions
94 Advanced Cost Accounting - III
(1)
What is meant by ‘process costing’ ? How process costing differs form job
costing ?
(2)
What is ‘Process Costing’ ? Explain the features of process costing.
(3)
In which industries process costing is followed ? What are the advantages
and disadvantages of process costing ?
(4)
How costs are collected in process costing ? Explain the procedure used in
the process costing for recording the costs.
(5)
What do you understand by ‘normal loss’ in process costing ? What are the
usual causes of such normal loss ? How normal loss is accounted for in
process costing ?
(6)
What is meant by ‘abnormal loss’ and ‘abnormal gain’ in process costing ?
Taking an imaginery example explain how abnormal loss and abnormal gain
units are calculated. How accounting treatment is given for abnormal loss
and abnormal gain ?
(7)
Give a specimen of a Process Account. Which are the items recorded on
debit side and credit side of Process Account ?
(8)
What do you mean by inter-process profit ? State the advantages and
disadvantages of inter-process profit.
II - Multiple Choice Questions
(1)
Process Costing (Theory)
Process Costing is a form of ----------------(a) Job Costing.
(b) Special Order Costing.
(c) Class Cost Method.
NOTES
(d) Operation Costing.
(2)
Process Costing is easily applicable in industries like ----------(a) mines and quarries.
(b) construction.
(c) machine tools manufacturing.
(d) bakeries.
(3)
In Process Costing costs are calculated --------(a) when a job is started.
(b) when a job is completed.
(c) at the beginning of cost period.
(d) at the end of the cost period.
(4)
In Process Costing “work in progress” is ----------(a) not possible.
(b) a regular feature.
(c) at the beginning of the accounting period.
(d) at the end of the accounting period.
(5)
Which of the following statement is ‘wrong’.
(a) In process costing allocation of expenses can be easily made.
(b) In process costing average costs of homogeneous products can be easily
computed.
(c) It is easier to establish the standards in case of continuous production in
process costing.
(d) Standard costing system cannot be followed easily in process costing.
(6)
Any wastage arising in excess of the normal wastage is known as -----(a) Abnormal wastage.
(b) Normal loss.
Advanced Cost Accounting - III
95
Process Costing (Theory)
(c) Actual loss.
(d) Normal wastage.
(7)
For adjustment of the deficiency in the sale of normal loss, the following
account is credited.
NOTES
(a) Process Account
(b) Abnormal gain Account
(c) Concerned process Account
(d) Normal Loss Account
(8)
Match the pairs.
Group I
Group II
(a) Process Costing
(i) Profit on Closing Stock.
(b) Normal Loss
(ii) transfer of process frm transfer of output.
(c) Abnormal Loss
(iii) unforseen factors.
(d) Inter process profit
(iv) evaporation.
(v) Distinguished from specific order costing.
Ans. (a) - (v), (b) - (iv), (c) - (iii), (d) - (ii).
Ans. : (1 - d), (2 - a), (3 - d), (4 - b), (5 - d), (6 - a), (7 - d).
6.13 Further Reading
96 Advanced Cost Accounting - III
1.
‘Advanced Cost Accounting’ - Nigam and Sharma
2.
‘Cost Accounting - Priciples and Practice’ - N. K. Prasad
3.
‘Cost Accounting’ - Jawahar Lal
4.
‘Theory and Practice of Cost Accounting’ - M. L. Agrawal
5.
‘Cost Accounting’ - B. K. Bhar
Unit 7 Process Costing (Practical Problems)
Process Costing
(Practical Problems)
Structure
7.0
Introduction
7.1
Unit Objectives
7.2
Illustrations on process costing
7.3
Summary
7.4
Exercises
7.5
Further Reading
7.0
NOTES
Introduction
In this Unit illustrations on process costing are provided. Theoratical
information about various items related to the process costing, we have considered
in Unit 6. Preparation of Process Accounts, calculation of normal loss in the process,
calculation of abnormal loss and abnormal gain quantity and accounting treatment
to be given to these items was explained in theory in unit 6. In this Unit actual
recording to be made to the process accounts and calculation at total cost of a
process and also cost per unit of the process is explained with the help of a few
illustrations.
7.1
Unit objectives
After considering the illustrations provided in this Unit you should be able
to :
•
Prepare process accounts;
•
Calculate the quantity of normal loss in processes;
•
Calculate the quantity of abnormal loss and abnormal gain involved in the
processes;
•
Calculate the amount of abnormal loss and abnormal gain; and
•
Find out the total cost and per unit cost of each process.
Advanced Cost Accounting - III
97
Process Costing
(Practical Problems)
7.2
Illustrations on Process Costing
ILLUSTRATION 1 (Preparation of a process account of simple type.)
Information given below is related to Process X for the month of September,
NOTES
2014 :
`
Materials consumed
7,500
Wages
12,800
Direct expenses
3,600
Overheads are to be charged at 40% of wages. Output of Process X is 1000 units.
You are required to prepare Process X Account for the month of September,
2014 showing total cost of the process. Also calculate per unit cost of the output.
SOLUTION
Dr.
Process X Account
( For Sept. 2014) Cr.
Output 1000 units
Amount
`
To Materials consumed
To Wages
7,500
12,800
To Direct expenses
3,600
To Overheads
5,120
Amount
`
By Output transferred to
next process
29,020
( 40% of wages)
29,020
29,020
Calculation of cost per unit :
Total Cost of the process
Per unit cost
=
Output of the process
` 29,020
=
1000 units
= ` 29.020
ILLUSTRATION 2 (Processes having normal loss)
98 Advanced Cost Accounting - III
A manufacturing concern produces finished product P after carrying out
Process A and Process B. Direct material is introduced at the beginning of Process
A and after completing Process A, its output is transferred to Process B for
further work. Output of Process B is transferred to the store as the finished
product P. There is normal loss at 2% of input in Process A and at 5% of input in
Process B. Scrap arising due to the normal loss in both the processes has no
saleble value.
Process Costing
(Practical Problems)
Following information about costs is provided to you :
Process A
Porcess B
`
`
26,000
22,000
Indirect Materials
-
4,500
Direct Expenses
6,800
6,095
Wages
NOTES
Overheads incurred by the concern amounted to ` 11,200 and they are to
be changed to the processes as a percentage of wages.
At the beginning 2000 units of material were put in the Process A at ` 3 per
unit.
You are required to prepare Process A Account and Process B Account
showing the cost per unit of output.
SOLUTION
Dr.
Particulars
Process A Account
Units Amount Particulars
Cr.
Units
`
To Direct Materials
20000
To Wages
`
60000 By Normal Loss
6800 By Output transferred
To Overheads
5200 to Process B A/C
20000
19600
98000
98000
20000
98000
Process B Account
Units Amount Particulars
Cr.
Units
`
To Process A A/c
-
at cost of ` 5 per unit
(20% of wages)
Particulars
400
26000 (2% of input of 20,000 units)
To Direct Expenses
Dr.
Amount
19600
`
98000 By Normal Loss
Output transferred
Amount
980
-
(5% of 19600 units)
To Indirect Materials
4,500 By Transfer to the
To wages
22000
store as Finished
To Direct Expenses
6095
Product P at cost
To Overheads
4400
of ` 7.25 per unit
18620
134995
19600
134995
(20% of wages)
19600
134995
Advanced Cost Accounting - III
99
Process Costing
(Practical Problems)
Notes :
(i) Calculation of per unit cost of output of process A
Normal Cost
=
Total Cost - Scrap Value
Normal Output
NOTES

` 98000
19600 units
` 98000 - Nil
=
Input - Normal Loss
20000 units - 400 units
= ` 5 per unit
(ii) Calculation of per unit cost of the finished product P
Normal Cost
=
Normal Output
Total Cost - Scrap Value realised
Input units of the process - Normal Loss units
=
` 134995 - Nil
19600 units - 980 units
=
` 134995
18620 units
=
` 7.25 Per unit
(iii) Overhead absorption percentage
Overheads are to be absorbed as percentage of wages.
Total wages
= ` 26,000 of Process A + ` 30,000 of Process B
= ` 56,000
Total Overheads incurred are ` 11,200.
Therefore percentage is calculated as 11,200
x 100
56,000
= 20% of wages
ILLUSTRATION 3
A product passes through two distinct processes A and B. From the following
information you are required to prepare Process ‘A’ Account, Process ‘B’ Account,
Abnormal Loss Account and Abnormal Gain Account.
Particulars
Process
‘B’
Materials (introduced 20,000 units in Process ‘A’)
`
30,000
3,000
Labour
`
10,000
12,000
Overheads
`
7,000
9,850
Normal Loss
`
10%
4%
Scrap value of Normal Loss
` 1 per unit
Output
100 Advanced Cost Accounting - III
Process
‘A’
Units
There is no stock or work in progress in any process :
17,500
2 per unit
17,000
Process Costing
(Practical Problems)
SOLUTION
In the books of a Factory
Dr.
Particulars
Process ‘A’ Account
Quantity
Amount Particulars
Units
To Materials
20,000
To Labour
Cr.
Quantity
Amount
NOTES
Units
30,000 By Normal Loss
2,000
2,000
500
1,250
17,500
43,750
20,000
47,000
10,000 (10% of 20,000 units)
7,000 (2,000 units x 1)
To Overheads
By Abnormal Loss
(Balancing Figure
By Process ‘B’ A/c
20,000
Dr.
Particulars
47,000
Process ‘B’ Account
Quantity Amount
Particulars
Units
To Process ‘A’ A/c
17,500
To Materials
Units
43,750 By Normal Loss
700
1,400
17,000
68,000
17,700
69,400
9,850 (700 units x ` 2)
200
17,700
Dr.
800 By Finished Stock A/c
69,400
Abnormal Loss Account
Quantity Amount Particulars
Units
By Bank
500
Cr.
Quantity Amount
Units
To Process ‘A’
A/c
Amount
12,000
To Overheads
Particulars
Quantity
3,000 (4% of 17,500 units)
To Labour
To Abnormal Gain*
(Balancing Figure)
Cr.
1,250
500
500
-
750
500
1,250
(500 units x `1)
By Costing Profit
and Loss A/c*
Balancing Figure)
500
1,250
Advanced Cost Accounting - III
101
Process Costing
(Practical Problems)
Dr.
Abnormal Gain Account
Particulars
Quantity Amount Particulars
Units
To Normal Loss
NOTES
Cr.
Quantity Amount
Units
200
400
-
400
200
800
By process ‘B’ A/c
200
800
200
800
(200 units x ` 2)
To Costing Profit
and Loss A/c *
(Balancing Figure)
Working Notes :
1) Calculation of cost of Abnormal Loss in Process ‘A’ Account :
Dr. - Cr.
=
Balance
Quantity :
Units 20,000 - 2,000 Units
=
18,000 Units : Normal Output
Amount :
` 47,000 - ` 2,000
=
` 45,000
If 18,000 Units
=
500 Units
=

: Normal Cost
` 45,000
?
5000 units x ` 45,000
=
=
18,000 units
` 1,250
2) Calculation of cost of Abnormal Gain in Process ‘B’ Account :
Dr. - Cr.
=
Balance
Quantity :
17,500 Units - 700 Units
=
16,800 units : Normal Output
Amount :
` 68,600 - ` 1,400
=
` 67,200

If 16,800 Units
=
` 67,200
200 Units
=
?
: Normal Cost
200 units x ` 67,200
=
=
16,800 units
` 800
ILLUSTRATION 4
The product of a manufacturing concern passes through two processes A
and B and then to finished stock. It is ascertained that in each process normally
5% of the total weight is lost and 10% is scrap which from process A and B
realises ` 80 per ton and ` 200 per ton respectively.
102 Advanced Cost Accounting - III
Process Costing
(Practical Problems)
The following are the figures relating to both the process.
Particulars
Process
Process
‘A’
‘B’
Tons
1,000
70
Cost of materials per ton
`
125
Wages
`
28,000
10,000
Manufacturing Expenses
`
8,000
5,250
Tons
830
780
Materials
Output
200
NOTES
Prepare process Cost Account showing cost per ton of each process. There
was no stock or work-in- progress in any process.
SOLUTION
In the books of a Manufacturing Concern
Dr.
Particulars
Process ‘A’ Account
Quantity Amount Particulars
Tons
To Cost of Materials
1,000
Cr.
Quantity Amount
Tons
1,25,000 By Loss in weight
(1,000 Tons x ` 125)
50
-
100
8,000
20
3,600
830
1,49,400
1,000
1,61,000
(5% of 1,000 Tons.)
To Wages
28,000 By Normal Scarp
To Manufacturing
(10% of 1,000 Tons.)
8,000 (100 Tons x ` 80)
Expenses
By Abnormal Loss*
(Balancing Figure)
By process ‘B’ A/c
1,000
Dr.
Particulars
1,61,000
Process ‘B’ Account
Quantity Amount Particulars
Tons
To Process’ A’ A/c
830
Quantity Amount
Tons
1,49,400 By Loss in weight
To Cost of
Materials
Cr.
45
-
90
18,000
780
1,63,800
915
1,81,800
(5% of 900 Tons.)
70
14,000 By Normal Scrap
(70 Tons x ` 200)
(10% of 900 Tons.)
10,000 (90 Tons x ` 200)
To wages
To Manufacturing
Expenses
To Abnormal Gain *
5,250 By Finished stock A/c
15
3,150
915
1,81,800
(Balancing Figure)
Advanced Cost Accounting - III
103
Process Costing
(Practical Problems)
Dr.
Abnormal Loss Account
Particulars
Quantity Amount Particulars
Tons
To Process ‘A’ A/c
Cr.
Quantity Amount
Tons
20
3,600 By Bank
20
1,600
-
2,000
20
3,600
(20 Tons x `80)
NOTES
By Costing Profit
and Loss A/c *
(Balancing Figure)
20
Dr.
3,600
Abnormal Gain Account
Particulars
Quantity Amount Particulars
Tons
To Normal Loss
Cr.
Quantity Amount
Tons
15
3,000 By Process ‘B’ A/c
15
3,150
15
3,150
(15 Tons x ` 200)
To Costing Profit
and Loss A/c *
(Balancing Figure)
-
150
15
3,150
Working Notes :
1) Calculation of cost of Abnormal Loss in Process ‘A’ Account:
Dr. - Cr.
=
Balance
Quantity :
1,000 Tons - 150 Tons.
=
850 Tons
Amount :
` 1,61,000 - ` 8,000
=
` 1,53,000 : Normal Cost

If 850 Tons
=
` 1,53,000
20 Tons
=
?
: Normal Output
20 Tons x ` 1,53,000
=
=
850 Tons.
` 3,600
2) Calculation of cost of Abnormal Gain in Process ‘B’ Account :
Dr. - Cr.
=
Balance
Quantity :
900 Tons - 135 Tons.
=
765 Tons : Normal Output
Amount :
` 1,78,650 - ` 18,000
=
` 1,60,650 : Normal Cost

104 Advanced Cost Accounting - III
If 765 Tons
=
` 1,60,650
15 Tons
=
?
Process Costing
(Practical Problems)
15 Tons x ` 1,60,650
=
=
765 Tons.
` 3,150
3) Calculation of cost per ton in Process ‘A’ Account :
If 830 Tons
=
` 1,49,400
1 Tonne
=
?

NOTES
1 Tons x ` 1,49,400
=
=
830 tons.
` 180 per ton
4) Calculation of cost per ton in Process ‘B’ Account :
If 780 Tons
=
` 1,63,800
1 Ton
=
?

1 Ton. x 1,63,800
=
=
780 tons.
` 210 per ton
ILLUSTRATION 5
A product ‘Bee’ passes through three processes A, B and C. 10,000 units
were issued to Process ‘A’ in the beginning at cost of ` 10 per unit. Prepare
Process Account assuming that there was no opening or closing stock. The
following information is made available :Particulars
Process ‘A’
Process ‘B’
Process ‘C’
Sundry Materials
`
10,000
15,000
5,000
Wages
`
50,000
80,000
65,000
Direct Expences
`
15,300
18,100
30,828
Normal Scrap
%
3
5
8
Value of Scrap per unit
`
2.50
5.00
8.50
Units
9,500
9,100
8,100
Actual Output
Advanced Cost Accounting - III
105
Process Costing
(Practical Problems)
SOLUTION
In the books of a Factory
Dr.
NOTES
Particulars
Process ‘A’ Account
Quantity
Amount Particulars
Units
By Normal Scrap
10,000
10,000 By Abnormal Loss *
To Wages
50,000 (Balancing Figure)
To Direct Expenses
15,300 By Process ‘B’ A/c
10,000
Dr.
1,75,300
200
3,599
9,500
1,70,951
10,000
1,75,300
Process ‘B’ Account
Quantity
Amount Particulars
Units
Cr.
Quantity Amount
Units
9,500
1,70,951 By Normal Scrap
To Sundry Materials
15,000 (5% of 9,500 units)
To Wages
80,000 (475 units x ` 5)
To Direct Expenses
18,100 By Process ‘C’ A/c
To Abnormal Gain*
750
(300 units x ` 2.50)
To Sundry Materials
To Process ‘A’ A/c
300
1,00,000 (3% of 10,000 units)
(10,000 units x `10)
Particulars
Quantity Amount
Units
To Cost of Units
Issued
Cr.
75
475
2,375
9,100
2,84,017
9,575
2,86,392
2,341
(Balancing Figure)
9,575
Dr.
Particulars
2,86,392
Process ‘C’ Account
Quantity
Amount Particulars
Units
To Process ‘B’ A/c
9,100
To Sundry Materials
Cr.
Quantity Amount
Units
2,84,017 By Normal Scrap
728
6,188
272
12,302
5,000 (8% of 9,100 units)
To Wages
65,000 (728 units x ` 8.50)
To Direct Expenses
30,828 By Abnormal Loss *
(Balancing Figure)
By Finished Stock A/c
9,100
106 Advanced Cost Accounting - III
3,84,845
8,100
3,66,355
9,100
3,84,845
Dr.
Abnormal Loss Account
Particulars
To Process ‘A’ A/c
Quantity
Units
Amount Particulars
200
3,599 By Bank
Cr.
Process Costing
(Practical Problems)
Quantity Amount
Units
200
500
(200 Units x ` 2.50)
NOTES
By Costing Profit
and Loss A/c *
-
3,099
200
3,599
(Balancing figure)
200
Dr.
3,599
Abnormal Gain Account
Particulars
Quantity
Units
To Normal Loss
75
Amount Particulars
375
By Process ‘B’ A/c
Cr.
Quantity Amount
Units
75
2,341
(75 units x ` 5)
To Costing Profit
and Loss A/c *
-
1,966
(Balancing Figure
75
Dr.
2,341
75
Abnormal Loss Account
Particulars
Quantity
Units
To Process ‘C’ A/c
272
Amount Particulars
12,302
By Bank
2,341
Cr.
Quantity Amount
Units
272
2,312
(272 units x ` 8.50)
By Costing Profit
and Loss A/c *
-
9,990
272
12,302
(Balancing Figure)
272
12,302
Working Notes :
1) Calculation of cost of Abnormal Loss in Process ‘A’ Account:
Dr. - Cr.
=
Balance
Quantity :
10,000 Units - 300 Units.
=
9,700 Units : Normal Output
Amount :
` 1,75,300 - ` 750
=
` 1,74,550 : Normal Cost

If 9,700 Units
=
` 1,74,000
200 Units
=
?
Advanced Cost Accounting - III
107
Process Costing
(Practical Problems)
200 Units x ` 1,74,550
=
` 3,599
=
NOTES
9,700 units
2) Calculation of cost of Abnormal Gain in Process ‘B’ Account:
Dr. - Cr.
=
Balance
Quantity :
9,500 Units - 475 Units.
=
9,025 Units : Normal Output
Amount :
` 2,84,051 - ` 2,375
=
` 2,81,676 : Normal Cost
If 9,025 Units
=
` 2,81,676
200 Units
=
?

75 Units x ` 2,81,676
=
=
9,025 units
` 2,341
3) Calculation of cost of Abnormal Loss in Process ‘C’ Account:
Dr. - Cr.
=
Balance
Quantity :
9,100 Units - 728 Units.
=
8,372 Units : Normal Output
Amount :
` 3,84,845 - ` 6,188
=
Rs.3,78,657 : Normal Cost
If 8,372 Units
=
272 Units
=

` 3,78,657
?
272 Units x ` 3,78,657
=
8,372 units
= ` 12,302
ILLUSTRATION 6
The finished product of a factory has to pass through process 1, 2 and 3.
During August 2006 data relating to this product was as shown below :
Particulars
Process
Process
Process
1
2
3
Total
Basic Raw Materials
(10,000 Units)
`
6,000
-
-
6,000
Direct Materials added
`
8,500
9,500
5,500
23,500
Direct Wages
`
4,000
6,000
12,000
22,000
Direct Expenses
`
1,200
930
1,340
3,470
Production Overheads
`
-
-
-
16,500
(absorbed as a percentage of
108 Advanced Cost Accounting - III
direct wages)
Output
Normal Loss
Units
9,200
8,700
7,900
-
%
10
5
10
-
`
0.20
0.50
1.00
-
Process Costing
(Practical Problems)
Scrap Value of Normal
Loss per unit
There was no stock at the beginning or at the end of any process. You are
required to prepare -
NOTES
i) Process ‘1’ Account, ii) Process ‘2’ Account iii) Process ‘3’ Account iv)
Abnormal Loss Account and v) Abnormal Gain Account.
SOLUTION
In the books of a Factory
Process ‘1’ Account
Dr.
Particulars
Quantity Amount Particulars
Units
`
To Cost of basic
Raw Materials
By Normal Loss
10,000
Cr.
Quantity Amount
Units
`
1,000
200
9,200
23,000
10,200
23,200
6,000 (10% of 10,000 units)
To Direct Materials
8,500 (1,000 units x ` 0.20)
To Direct Wages
4,000
To Direct Expenses
1,200
To Production
3,000
Overheads
(` 16,500 x 2 /11)
To Abnormal Gain *
200
500
(Balancing Figure)
By Process ‘2’ A/c
10,200
Dr.
Particulars
To Process ‘A’ A/c
23,200
Process ‘2’ Account
Quantity Amount Particulars
Units
`
9,200
23,000 By Normal Loss
To Direct Materials
9,500 (5% of 9,200 units)
To Direct Wages
6,000 (460 units x 0.50)
To Direct Expenses
930 By Abnormal Loss*
To Production
4,500 (Balancing Figure)
Overheads
By Process ‘3’ A/c
Cr.
Quantity Amount
Units
`
460
230
40
200
8,700
43,500
9,200
43,930
(` 16,500 x 3 /11)
9,200
43,930
Advanced Cost Accounting - III
109
Process Costing
(Practical Problems)
Dr.
Particulars
To Process ‘2’ A/c
NOTES
Process ‘3’ Account
Quantity Amount Particulars
Units
`
8,700
To Direct Materials
43,500 By Normal Loss
Cr.
Quantity Amount
Units
`
870
870
5,500 (10% of 8,700 units)
12,000 (870 units x `1)
To Direct Wages
To Direct Expenses
1,340
To Production
9,000
Overheads
(`16,500 x 6 /11)
To Abnormal Gain*
70
630
(Balancing Figure)
By Finished stock A/c
8,770
Dr.
Particulars
To Normal Loss
71,970
7,900
71,100
8,770
71,970
Abnormal Gain Account
Quantity Amount Particulars
Units
`
200
40 By Process ‘1’ A/c
Cr.
Quantity Amount
Units
`
200
500
200
500
(200 Units x `0.20)
To Costing Profit
and Loss A/c
-
460
200
500
(Balancing Figure)
Dr.
Particulars
To Process ‘2’ A/c
Abnormal Loss Account
Quantity Amount Particulars
Units
`
40
200
By Bank
Cr.
Quantity Amount
Units
`
40
20
-
180
40
200
(40 Units x `0.50)
By Costing Profit and
Loss A/c *
(Balancing Figure)
40
110 Advanced Cost Accounting - III
200
Dr.
Abnormal Gain Account
Particulars
Quantity Amount Particulars
Units
`
To Normal Loss
70
70
By Process ‘3’A/c
Cr.
Process Costing
(Practical Problems)
Quantity Amount
Units
`
70
630
(70 Units x `1)
NOTES
To Costing Profit
and Loss A/c *
-
560
70
630
(Balancing Figure)
70
630
Working Notes :
1) Calculation of cost of Abnormal Gain in Process ‘1’ A/c:
Dr. - Cr.
=
Balance
Quantity :
10,000 Units - 1,000 Units.
=
9,000 Units : Normal Output
Amount :
` 22,700 - ` 200
=
` 22,500 : Normal Cost
If 9,000 Units
=
` 22,500
200 Units
=
?

200 Units x ` 22,500
=
9,000 units
` 500
=
2) Calculation of cost of Abnormal Loss in Process ‘2’ A/c:
Dr. - Cr.
=
Balance
Quantity :
9,200 Units - 460 Units.
=
8,740 Units : Normal Output
Amount :
` 43,930 - ` 230
=
` 43,700 : Normal Cost
If 8,740 Units
=
` 43,700
40 Units
=
?

40 Units x ` 43,700
=
8,740 units
= ` 200
3) Calculation of cost of Abnormal Gain in Process ‘3’ A/c:
Dr. - Cr.
=
Balance
Quantity :
8,700 Units - 870 Units.
=
7,830 Units : Normal Output
Amount :
` 71,340 - ` 870
=
` 70,470 : Normal Cost
Advanced Cost Accounting - III
111
Process Costing
(Practical Problems)
If 7,830 Units
=
` 70,470
70 Units
=
?

70 Units x ` 70,470
=
7,830 units
NOTES
= ` 630
ILLUSTRATION 7
Product X is obtained after it passes through three distinct processes. You
are required to prepare Process Account from the following information.
Particulars
Total
Process
`
I
II
III
`
`
`
Materials
15,084
5,200
3,960
5,924
Direct Wages
18,000
4,000
6,000
8,000
Production Overheads
18,000
-
-
-
Units
950
840
750
Normal Loss
%
5
10
15
Value of scrap per unit
`
4
8
10
Actual Output
1,000 units @ ` 6 per unit were introduced in Process ‘I’ Account.
Production Overheads to be distributed as 100 % of Direct Wages.
SOLUTION
In the books of a Factory
Dr.
Particulars
Process ‘I’ Account
Quantity Amount Particulars
Units
To Cost of Units
1,000
`
Quantity Amount
Units
6,000 By Normal Loss
Introduced
Cr.
50
`
200
(5% of 1,000 units)
(1,000 Units x ` 6)
To Materials
5,200 (50 units x ` 4)
To Direct Wages
4,000 By Process ‘II’ A/c
950
19,000
1,000
19,200
To Production
Overheads
4,000
(` 4,000 x 100%)
1,000
112 Advanced Cost Accounting - III
19,200
Dr.
Particulars
To Process ‘I’ A/c
Process ‘II’ Account
Quantity Amount Particulars
Units
`
950
19,000 By Normal Loss
3,960 (10% of 950 units)
To Direct Wages
6,000 (95 units x ` 8)
To Production
6,000 By Abnormal Loss *
Overheads
(Balancing Figure)
(` 6,000 x 100%)
By Process ‘III’ A/c
Dr.
Particulars
To Process ‘II’ A/c
34,960
95
840
33,600 By Normal Loss
To Materials
5,924 (15% of 840 units)
To Direct Wages
8,000 (126 units x `10)
`
760
NOTES
15
600
840
33,600
950
34,960
Process ‘III’ Account
Quantity Amount Particulars
Units
`
Process Costing
(Practical Problems)
Quantity Amount
Units
To Materials
950
Cr.
Cr.
Quantity Amount
Units
`
126
1,260
750
57,000
876
58,260
To Production
Overheads
To Abnormal Gain*
8,000
36
2,736
(Balancing Figure)
By Finished stock A/c
876
Dr.
Particulars
To Process ‘II’ A/c
58,260
Abnormal Loss Account
Quantity Amount Particulars
Units
`
15
600 By Bank
Cr.
Quantity Amount
Units
`
15
120
-
480
15
600
(15 Units x ` 8)
By Costing Profit
and Loss A/c *
(Balancing Figure)
15
Dr.
Particulars
To Normal Loss
(36 Units x `10)
To Costing Profit
and Loss A/c *
(Balancing Figure)
600
Abnormal Gain Account
Quantity Amount Particulars
Units
`
36
360 By Process ‘III’ A/c
-
2,376
36
2,736
Cr.
Quantity Amount
Units
`
36
2,736
36
2,736
Advanced Cost Accounting - III
113
Process Costing
(Practical Problems)
Working Notes :
1) Calculation of cost of Abnormal Loss in Process ‘II’ Account :
NOTES
Dr. - Cr.
=
Balance
Quantity :
950 Units - 95 Units.
=
855 Units
Amount :
` 34,960 - ` 760
=
` 34,200 : Normal Cost
If 855 Units
=
` 34,200
15 Units
=
?

: Normal Output
15 Units x ` 34,200
=
=
855 units
` 600
2) Calculation of cost of Abnormal Gain in Process ‘III’ Account:
Dr. - Cr.
=
Balance
Quantity :
840 Units - 126 Units.
=
714 Units
Amount :
` 55,524 - ` 1,260
=
` 54,264 : Normal Cost

If 714 Units
=
` 54,264
36 Units
=
?
: Normal Output
36 Units x ` 54,264
=
=
7.3
114 Advanced Cost Accounting - III
714 units
` 2,736
Summary
In this Unit, illustrations on Process Costing have been provided. In process
costing there is continuous flow of production and there may be two or three or
more processes through which the material introduced in the first process goes till
the last process becomes complete and the finished product becomes available as
the output of the last process. Production in process industries is for stock. The
quantity as well as the amount is to be accounted for in each process and so on
Debit side and credit side of each process account quantity column and amount
column is prepared. On Debit side of the process account material cost, wages,
direct expenses and overheads charged to the process account as per the method
of absorption followed by the concern are recorded. If there is normal loss in the
process, its quantity and if the normal loss (scrap) has any saleble value such
value is recorded on credit side of the process account. Output of the process is
recorded on the credit side of the process account as transferred to the next
process. If the output quantity is less then the normal quantity (i.e. Input quantity
- normal loss quantity) the difference which is shortage is recorded on credit side
of the process account as quantity of abnormal loss. On the other hand if actual
quantity of the output of the process is more than the normal output quantity of the
process, there is excess quantity of output obtained and it is recorded on debit side
of the process account as ‘abnormal gain’. Per unit cost of the process is calculated
as under :- Normal / Net Cost
Normal Output
Process Costing
(Practical Problems)
NOTES
Normal or Net Cost means Total Cost of the process minus saleble value of
normal loss quantity, if any and Normal Output means input quantity minus normal
loss quantity. Valuation of output quantity and abnormal loss or abnormal gain,
quantity is done at the per unit cost calculated for the process as explained above.
7.4
Exercises
1)
A product passes through three processes A, B and C. Normal wastege in
each process is as follows :
Process A
3% of input
Process B
5% of input
Process C
8% of input
Wastage of Process A was sold at ` 2.50 per unit, that of Process B at `
5 per unit and that of Process C at ` 10 per unit.
10000 units were issued to Process A at ` 10 per unit in the beginning of
April, 2012. The other expenses were as under :
Process A
Process B
Process C
Sundry Materials
` 10,000
Rs.15,000
` 5,000
Labour
` 50,000
` 80,000
` 65,000
Direct Expenses
` 10,500
` 11,880
` 20,090
9500 units
9100 units
8100 units
Actual Output was
Prepare the Process Accounts assumming that there were no opening or
closing stocks. Also prepare Abnormal Wastage and Abnormal Gain Accounts.
2)
A manufacturing firm produces its finished product Q - 20 after carrying
out two processes X and Y. Past experience shows that normal loss occurs at 5%
of input units in process X and at 10 % of units entering into process Y. Wastage
due to normal loss is sold at ` 16 per 100 units and at ` 20 per 100 units in
Process X and Process Y respectively. The other data related to the two processes
is as under :
Process X
`
Process Y
`
Sundry Materials consumed
6,000
3,000
Wages
7,000
4,000
Manufacturing Expenses
2,000
2,000
Advanced Cost Accounting - III
115
Process Costing
(Practical Problems)
5000 units were brought into Process X costing ` 5,000. The output of
Process X was 4700 units and output of Process Y was 4150 units.
Prepare Process X A/c, Process Y A/c showing cost per unit of the output
in each process.
NOTES
3)
Finished product A-03 becomes ready after completion of two processes
Process I and Process II. Basic material is put in Process I and output of
Process I is transferred to Process II as input and output of Process II is transferred
to the store as the finished product A -03.
At the beginning of May, 2014, 6,000 kg. of basic material was put into
Process I at the cost of ` 150 per kg. Normal loss in Process I is 4% of input and
normal loss in process II is 10% of input of process II Normal Loss of both
processes has no sale value.
Other information about the two processes is as under.
Wages
Process I
Process II
`
`
4,80,000
3,20,000
54,000
13,200
Direct Expenses
Manufacturing overheads incurred amount to ` 2,50,000 and are to be
charged to the processes on the basis of percentage of wages.
Actual output of process I was 5700 kgs. and that of process II 5200 kgs.
You are required to prepare process I A/c, process II A/c and abnormal
Loss / Gain Accounts showing the cost per kg of output in both the processes.
4)
An article passed through three processes. From the figures shown the
cost of each of the three processes during the month of January 2010. Prepare
Process Account.
Particulars
Process I
Process II
Process III
Materials Used
`
1,500
5,000
2,000
Labour
`
8,000
20,000
6,000
Direct Expenses
`
2,600
7,200
2,500
The indirect expenses amounting to ` 1,500 may be apportioned on the
basis of wages.
The number of articals produced during the month are 240.
5)
A product passes through two distinct processes A and B and then to finished
stock. The output of A passes direct to B and that of B to finished stock. From the
following information you are required to prepare the process accounts.
116 Advanced Cost Accounting - III
Particulars
Process A
Process B
Materials Consumed
`
12,000
6,000
Direct Labour
`
14,000
8,000
Manufacturing Expenses
`
4,000
4,000
Output
Units
9,400
8,300
Input in Process A
Units
10,000
-
Input in Process A
Value in `
10,000
-
(%of input)
5%
10%
(Per 100 units)
`8
Rs.10
Normal Wastage
Value of Normal Wastage
Process Costing
(Practical Problems)
NOTES
No opening or closing stock is held in process.
6)
A product passes through three processes X, Y and Z before its completion.
From past experience it is realised that wastage is incurred in each process as
under :
X - 2%, Y - 5% and Z - 10% of the units introduced in the process.
Scarp value :
X ` 10 for 100 units
Y ` 15 for 150 units
Z ` 40 for 100 units
Other details are :
Particulars
X
Y
Z
Materials
`
6,000
3,000
1,500
Direct Wages
`
9,000
6,000
4,500
Manufacturing Expenses
`
1,500
1,500
2,200
30,000 units are issued to Process ‘X’ at a cost of `15,000. The output of
Process ‘X’ - 29,200 units, ‘Y’ - 28,200 units and ‘Z’ - 24,000 units.
Show the Process Accounts.
7)
A product passes through three processes to completion in January 1999,
the cost of production were given as below :
Particulars
Process I
Process II
Process III
Direct Materials
`
2,000
3,020
2,462
Wages
`
3,500
4,226
5,000
Production Overheads
`
1,500
2,000
2,500
1000 units were issued to Process I at ` 5 each
Particulars
I
II
III
%
10%
5%
10%
Wastage Realised
per unit
`3
`5
`6
Actual production
units
920
870
800
Normal Loss
Prepare the necessary process accounts.
Advanced Cost Accounting - III
117
Process Costing
(Practical Problems)
8)
The product ‘X’ is obtained after it is produced through three distinct
processes. The following cost information is available for the operation:
Particulars
NOTES
Total
Process I
Process II
Process III
Materials
`
5,625
2,600
2,000
1,025
Direct Wages
`
7,330
3,500
4,226
5,000
Production Overheads
`
7,330
-
-
-
500 units at ` 4 per unit were introduced in Process I. Production overheads
are absorbed at 100% of direct wages. The actual output and normal loss of the
respective processes are:
Particulars
Output
Normal Loss
Value of Scrap
Units
on Input
per unit
%
`
Process I
450
10%
2
Process II
340
20%
4
Process III
270
25%
5
There is no stock of work-in-progress in any process.
Show the three process accounts and abnormal loss and abnormal gain
account.
9)
In a manufacturing concern the output of ‘A’ process is transferred to ‘B’
process. It has been the experience that normal wastage in process A is 5% and
in case of B 10% of the units entering the process. The scrap value of normal
wastage ` 50 per hundred units in Process A and ` 80 per hundred units in
Process B.
Particulars
Process A
Process B
Materials
10,000
6,000
Wages
8,000
4,000
Manufacturing Expenses
2,000
2,000
In process A one thousand units were entered at a cost of ` 5,000. The
output of Process A is 900 units and Process B 750 units.
Prepare Process ‘A’ Account and Process ‘B’ Account.
7.5
118 Advanced Cost Accounting - III
Further Reading
1.
‘Advanced Cost Accounting’ - Nigam and Sharma
2.
‘Cost Accounting - Priciples and Practice’ - N. K. Prasad
3.
‘Cost Accounting’ - Jawahar Lal
4.
‘Theory and Practice of Cost Accounting’ - M. L. Agrawal
5.
‘Cost Accounting’ - B. K. Bhar
Topic 2
Methods of Costing
Unit 8
Operating or Service Costing
Unit 9
Operating Costing (Practical)
Unit 8 Operating or Service Costing
Operating Or Service Costing
(Theory)
Structure
8.0
Introduction
8.1
Unit Objectives
8.2
Meaning of Operating Costing
8.3
Features of Operating Costing
8.4
Industries which use Operating Costing
8.5
Operating Cost Units
8.6
Formats of Operating Cost Sheets
8.7
Summary
8.8
Key Terms
8.9
Questions
NOTES
8.10 Further Reading
8.0
Introduction
There are some organisations which are established with an objective of
providing some service to the customers. These organisations do not manufacture
and sell any product but they render service to the people who want to make use
of such service and they charge a price for the service provided to the customers.
These organisations have to calculate cost incurred by them for creating and
providing the service and on the basis of cost calculated, they have to decide how
much charge should be made to the customers. For such organisations a separate
method of costing has been created and it is called ‘Operating’ or ‘Service’ Costing.
In this Unit information about the operating costing is provided.
8.1
Unit Objectives
After studying the information given in this Unit, you should be bale to :-
•
Understand meaning and nature of operating costing,
•
Know in which industries use of operating costing is made,
•
Understand different cost units used in operating costing, and
•
Calculate cost for the units used in operating costing.
Advanced Cost Accounting - III
119
Operating Or Service Costing
(Theory)
NOTES
8.2
Meaning of Operating Costing
In simple words it can be stated that operating costing is a method of costing
which is used for calculating cost per unit in those industries which do not produce
an article or product but which create and provide a service which is needed by
people in the society.
According to the Institute of Cost and Management Accountants (U.K.)
operating costing is “that form of operation costing which applies where
standardised services are provided either by an undertaking or by a service
cost centre within an undertaking.” Thus operating costing method can be used
by an undertaking in two types of situations; when an undertaking provides a
standardised service to outside customers at a certain price per unit of such service
and secondly when there exists a service cost centre which creates a service and
provides it to the other departments of the same undertaking. Example of the first
situation is a public transport organisation which provides service to those who
want to travel or send goods from one place to other place; the example of the
second situation is of a boiler house which is a service cost centre creating steam
and providing it to the production departments of the same undertaking for running
their plants and machines. Since in both these situations the output is not a product
but a service the operating costing is also known as ‘service costing’.
8.3
Features of Operating Costing
Operating Costing is similar to single or output costing with one major
difference that while in single or output costing cost of a unit of product
manufactured is calculated, in operating costing cost is calculated for a unit of
service rendered. Due to this difference there are some special features of
operating costing which are mentioned below :-
120 Advanced Cost Accounting - III
i)
Operating Costing is a method of costing which is used for calculating cost
of a unit of service provided by an undertaking. The undertakings do not
produce any articles but create and provide a standardised service to
customers by charging a certain price per unit.
ii)
Selection of Unit in operating costing is difficult and is required to be done
carefully. Units are to be selected for measuring service created and provided
to customers and as there are various types of services, for each type of
service a different unit is required to be used. The unit may be a simple unit
or it may be a complex or compound unit made up of two different factors.
As cost per unit of service is calculated in operating costing, selection of
unit must be done in a careful manner. In case of a transport organisation
which provides transport service to passengers, a simple unit can be cost
per passenger but when all passengers do not travel the same distance it
becomes necessary to use a compound unit such as per passenger per
kilometer so that fixation of fares for different distances can be done in a
proper way.
iii)
In operating costing costs are accumulated under suitable headings and
then they are spread over the cost units and total cost of per unit service is
calculated. The headings under which costs are accumulated may be fixed
costs, semi-fixed costs and variable costs or standing costs, maintenance
costs and operating or running costs or some other headings depending
upon the nature of service provided by the undertaking.
iv)
Operating Costs are mostly period costs. These costs are incurred for a
specific period and they are recorded as costs incurred for a specific period
and they are accumulated under suitable headings for that period. On the
basis of number of cost service units that are calculated for the period, the
costs are divided among the cost service units and cost per service unit is
ascertained. In case of a transport organisation costs such as insurance,
rent of garage, salaries of drivers, conductors, managers, licence fee, road
taxes, depreciation of vehicles, etc. are periodic costs. Similarly in other
service rendering undertakings also most of the costs are period costs.
v)
In those undertakings which use operating costing a lot of statistical data is
required to be collected and used for presentation as well as calculation of
cost per service unit. For example, in case of a transport organisation statistical
data such as number of passangers carried, distance travelled, number of
days in a month or quarter year for which the vehicle was operated, number
of trips made by the vehicle, life of the vehicle in years, time lost due to
accidents and maintenance, number of drivers and other personnel working
for the vehicle, period for which road taxes and taxes are paid, quantity of
petrol/diesel consumed, etc. is required to be collected and analysed for
finding out the cost per service unit.
Operating Or Service Costing
(Theory)
NOTES
8.4
Industries which use Operating Costing
Opertating Costing is used by those industries which are engaged in the
activity of rendering service to customers. Undertakings which function in the
following fields make use of operating costing :Transport - motor, rail, water and air. They may be providing service to passangers
who wish to travel from one place to other placer or they may provide
service for transporting goods.
Public Utility Services - supply of water, gas, electricity, communication etc.
Education - establishing and running schools, colleges, universities, technical
institutes etc.
Entertainment - sports clubs, theatres, dramas, liabraries, orchestras, Restuarants,
hotels, lodges, boardings, cafeteria, canteens.
Health - Hospitals, nursing-homes, diagnostic centres etc.
Some undertakings may be doing the work of creating the service and
providing the service to customers while some undertakings may buy the service
Advanced Cost Accounting - III
121
Operating Or Service Costing
(Theory)
NOTES
Check Your Progress
i)
What is meant by
‘operating’ or ‘service
costing’ ? Give definition
of ‘operating costing’.
ii) What are the features of
operating costing ?
iii) In which industries use of
operating costing is done?
iv) What is ‘an operating
cost unit’ ? Give examples
of different industrie and
operating cost units used
in them.
from outside and merely provide it to customers. For example an electricity company
may itself generate electricity and provide it to its customers while some other
company may buy electricity from electricity generating company or power-station
and distribute it among its customers. Undertakings which create/produce the
service and then sell it to the customers will have to follow more elaborate costing
system than the undertaking which buys the service from outside and merely sells
it to its customers.
8.5
Operating Cost Units
Undertakings which use operating costing are interested in finding out cost
per service unit incurred by them so that they can take proper decisions about rate
or price to be charged to customers whom the service is provided. Information
about cost per service unit also enables them to compare such cost with their own
costs incurred in the past and to judge their efficiency in creating and providing
the service to the customers. If there are options available regarding the method
to be used or equipments to be used, cost per service unit in each option enables
them to decide which option is more profitable since use of it results in bringing
the cost per service unit to the minimum.
As the type of service created is different in different organisations which
use operating costing, it is obvious that the cost service unit cannot be same in
different organisations. For some of the organisations the cost units used are
given below :Type of organisation/undertaking
Cost Unit
Transport organisations - i) Passangers
Per Passanger Kilometre
Per Passanger Mile
ii) Goods
Hospitals
Per Ton Kilometre
Per Patient - day / Per bed /
Per Operation
Electricity Supply
Per Kilowatt Hour (KWH)
Canteens
Per Tea-cup, Per Meal
Cinema
Per Man show
Hotels (Rent)
Per Room / Per person bed
Gas works
1000 cubic feet produced
Boiler house (department)
1000 Kilo
8.6
122 Advanced Cost Accounting - III
Formats of Operating Cost Sheets
Operating cost sheet is prepared to show the costs incurred for providing
service to customers. It is prepared for a specific period (a month or a quarter of
year) and the costs are recorded under suitable headings such as fixed or standing
costs, maintenance costs, variable or operating costs. Total amount incurred for
each item of cost under each heading during the specific period is shown and by
adding the total cost of each heading total cost for the specific period is worked
out. Cost per unit is calculated by dividing total cost of the specific period by total
number of service units during the specific period.
Below are given two specimen of operating cost sheet used in transport
organisations :
Operating Or Service Costing
(Theory)
NOTES
Specimen 1 :
Operating Cost Sheet
Vehicle No : ----------
Period : ------------------
Cost Unit : ------------
No of Cost Units : -----
Capacity
: ------------
Item of Cost
Total
`
Per Unit
`
A
--------
--------
B
--------
--------
C
--------
--------
--------
--------
Fixed / Standing Costs :
Insurance
Taxes
Licence Fee
Interest
Depreciation of the vehicle
General Administration charges
Maintenance Costs :
Garage Rent
Garage Staff Salaries
Garage Other Expenses
Repairs and Maintenance
Cleaning Expenses
Overhaul Expenses
Spare-parts Cost
Operating / Running Costs :
Cost of Petrol/ Diesel, Oil, etc.
Salaries of Drivers, Cleaners, Mechanic
Depreciation of Tyres, Tubes, Battery
Toll Charges
Total (A+B+C)
Advanced Cost Accounting - III
123
Operating Or Service Costing
(Theory)
Note :- Depreciation of the vehicle is assumed on time basis and so included
under Fixed / Standing Costs.
Specimen 2 :
Operating Cost Sheet
NOTES
Vehicle No : ----------
Period : ------------------
Cost Unit : -----------Capacity
: -----------Item of Cost
Budget
Actual
Total Per Unit Total Per Unit
`
`
`
`
A
------
------
------
------
B
------
------
------
------
------
------
------
------
------
------
------
Standing / Fixed Costs :
Insurance
Interest
Taxes
Licence Fee
General Administration Charges
Maintenance Costs :
Garage Rent
Garage Expenses
Garage Staff Salaries
Repairs and Maintenance
Clearing Charges
Overhaul Expenses
Lubrication Oil Expenses
Spare Parts Cost
Operating / Running Costs :
Depreciation of the Vehicle
Depreciation of Tyres, Tubes, Battery
Salary of Driver, Cleaner, Mechanic
Cost of Petrol / Diesel, Oil, etc.
Toll Charges
C
(1) Total Operating Cost (A+B+C)
(2) Total Units : ------ Passanger k.m./
------ Ton k.m.
124 Advanced Cost Accounting - III
(3) Per Unit Cost : (1 divided by 2) .....
------
Notes : i) Depriciation of the vehicle is included under the heading of Operating /
Running Costs assuming that the vehicle is depreciated on the basis of
life of the vehicle in terms of running hours of the vehicle.
ii) Budgeted Costs are compared with the actual costs and variation is
recorded. Causes of variation are found out and necessary steps are
taken to control costs.
Operating Or Service Costing
(Theory)
NOTES
Log Book :
A transport organisation maintains a log book for each vehicle owned and
operated by it. A log book provides complete information about the history of the
vehicle right from date of purchase, price at which the vehicle has been purchased,
its registration number, capacity in terms of number of passangers or goods in
tons, insurance, taxes paid, life of the vehicle, estemated scrap value at the end of
its life, etc and on the basis of these particulars calculation of some of the standing
charges to be recorded in the operating cost sheet can be done.
In the second part of the log book information about the vehicle staff such
as driver, cleaner, mechanic, etc. their names, addresses, remuneration payable to
them, garage rent/depreciation, garage staff and their salaries, repairs and renewals
cost, cleaning charges, overhauling cost and other maintenance expenses is
provided. On the basis of this information repairs and maintenance cost to be
recorded in the operating cost sheet can be calculated. [If remuneration is paid to
the driver and cleaner on monthly basis it will be recorded under standing charges
and not under repairs and maintenance heading.]
Third part of the log book provides information about the running expenses
of the vehicle such as petrol or diesel consumption, kilometers run per litre of
petrol / diesel, lubricant, grease and oil expenses, depreciation of tyres, tubes and
battery, insurance of goods carried and salary of driver, cleaner and mechanic if
the salary is paid on the basis of running hours of the vehicle. Depreciation of
vehicle will also come under this heading if such depreciation is provided on the
basis of life of the vehicle in terms of running hours of the vehicle.
Daily Log Sheet :
A transport organisation gives a daily log sheet to the driver of each vehicle
every day and the driver is required to complete the details in the daily log sheet
and return it to the office at the end of the day. The daily time sheet mainly covers
information about the trips made by the vehicle in the day, route of the trips,
number of passangers or number of tons of goods carried, timings of each trip,
consumption of petrol / diesel, expenses of lubricants, grease, etc., distance cover
in each trip, delays caused and causes of delays, etc. On the basis of these details
some items of costs recorded under running costs can be calculated and recorded
in the operating cost sheet. Calculation of the service cost units such as km travelled,
passanger km / ton km can be completed by using the details provided in the daily
log sheet. A proforma of daily log sheet is given below :
Advanced Cost Accounting - III
125
Operating Or Service Costing
(Theory)
NOTES
Daily Log Sheet
Vehicle No : ----------------------
Date :------------
Driver’s name : ------------------
Out time : ----------
Licence No. : ------------------
In time : ----------Trip Particulars
Trip No.
Starting
Arriving
Goods/Passangers Distance Remarks
Place Time Place Time
Carried
Out
travelled
Collected
enroute
Km.
Supplies :
Worker’s Time :
Time Lost :
Petrol / Diesel --------
Driver
Loading
--------
Oil
--------
Conductor --------
Unloading
--------
Grease
--------
Cleaner
Traffic delays --------
--------
--------
Mechanic --------
Accident
--------
Any other
--------
Operating Cost Sheets are also prepared by other service rendering
organisations such as boiler house, power generating organisations, hotels and
canteens, educational institutions, hospitals, etc. Of course, depending upon the
nature of service provided by the organisation the types of costs incurred and the
grouping of them under the headings differs in the operating cost sheet. Specimen
of some of these operating cost sheets are given below :
126 Advanced Cost Accounting - III
Operating Or Service Costing
(Theory)
Operating Cost Sheet of a Power Station
Month ------
Units of Electricity Generated ---------
Cost Item
Total Cost for
the month
Cost per
KWH
NOTES
Steam Production Cost :
Coal and coke
--------
Water purchased
--------
Water softners
--------
Wages of coal handling
--------
Wages of stockers
--------
Repairs and Maintenance
--------
Lubricant oil
---------------
Less Credit on account of :
i) Sale of Ash
--------
ii) Cost of steam supplied to
--------
manufacturing shops
Total Cost of Steam Production (A)
---------------
--------
Electricity Generation Cost :
Cost of Steam Production (A)
--------
Operaters’ Wages
--------
Stores
--------
Repairs and Maintenance
--------
Depreciation of electricity generating
Equipments
--------
Supervision Charges
--------
Proportionate Overheads Charged
--------
Interest on Capital
--------
Total Cost of Generating Electricity
--------
--------
Advanced Cost Accounting - III
127
Operating Or Service Costing
(Theory)
Operating Cost Sheet of a Canteen
For the month -------------Items of Cost
NOTES
`
A] Provisions :
Bread
Butter
Buiscuits
Cakes
Tea
Coffee
Eggs
Chicken
Fish
Vegetable
Rice
Atta
Dal
Sugar
Ghee
Milk
Fruits
Others
B] Labour and Supervision :
Salary of Cooks
Salary of Waiters
Salary if Canteen Manager
Helpers
Salary of Cleaners
Salary if Sweepers
C] Consumable Stores :
Cost of Table Linens
Cost of Cutlery
Cost of Crockery
128 Advanced Cost Accounting - III
Total Cost Cost Per Unit
Cost of Paper Napkins
`
Operating Or Service Costing
(Theory)
D] Maintenance :
Rent, Taxes
Light Charges
Insurance
Gas
NOTES
Cost of Power, Steam, etc
Depreciation of Furniture
Check Your Progress
Depreciation of Canteen Building
i)
Water Charges
Electricity charges
Total
--------
--------
Receipts from :
Sale of meals
--------
--------
Sale of snacks, tea, coffee, etc
--------
--------
--------
--------
--------
--------
Total Receipts
Subsidi from the Organisation
Give
formats
of
Operating Cost Sheets
used
in
transport
organisation.
ii) What is a Log Book ?
Which
details
are
recorded in it ?
iii) How will you prepare
Operating Cost Sheet to
be used for a canteen ?
iv) Under which heads the
costs are recorded in an
Operating Cost Sheet of
a power station ?
( Total Cost - Total Receipts )
8.7
Summary
Operating costing which is also known as service costing is a method of
costing which is used in those organisations which do not produce and sell any
product but which provide some service to customers needed by them. Therefore,
transport organisations which carry passangers or goods form one place to another
by running bus service, truck service, air service, railway service, water transport
service, organisations creating and supplying electricity, hotel, lodging and canteen
service, educational institutions, hospitals and nursing homes, public utility services
like water, gas, communications, etc., organisations providing entertainment like
cinema, sports clubs, orchestras, drama theatres use operating costing system.
In operating costing calculation of cost is done per unit of service rendered.
The service provided to customers is a standardised service and the unit for
calculation of cost differs from service industry to service industry. The unit may
be a simple unit or it may be a compound unit made up by two different factors;
e.g. cost per k.m. of running is a simple unit whereas cost per passanger k.m. is
compound unit.
In operating costing for calculation of per unit cost an operating cost sheet
is prepared for a specific period in which costs are recorded under certain headings
and the unit cost is calculated for each heading and by adding the unit cost under
the different headings, the total unit cost is calculated.
Advanced Cost Accounting - III
129
Operating Or Service Costing
(Theory)
For accurate calculation and presentation of operating cost a lot of statistical
information is required to be recorded and analysed by the organisation. When
total cost per unit is calculated, expected profit margine is added to it for determining
the rate to be charged to the customers for per unit service provided to them.
NOTES
8.8
Key Terms
i)
Operating Costing : It is a method of costing used by industries and
organisations which do not produce any product but create standardsed
service and provide it on a unit basis at a certain price to those who need
the service.
ii)
Operating Cost Unit : Industrial/organisations which create and provide
service are required to decide cost per unit of service are so that they can
take decision about the rate to be charged to customers per unit of service
provided, such unit is known as ‘operating cost unit’. It may be a simple unit
or a compound or complex unit.
iii)
Operating Cost Sheet : It is a document prepared by industrial units/
organisations which follow operating costing method, in which the various
costs are recorded under certain heads showing total costs and per service
unit cost for a specific period.
8.9
Questions
I - Theory Questions
A]
Short answer questions
(1)
What is meant by ‘Operating Costing’ ?
(2)
Mention the industires which use operating costing.
(3)
Give 3 examples of simple unit and 2 examples of compound unit used in
Operating Costing.
(4)
Mention the headings under which costs are grouped in operating cost sheet
of a transport organisation.
(5)
Mention the Cost Units used in following organisations for Cost Calculation:i) Passanger Transport
ii) Electricity Generating Industry
iii) Hospital
iv) Goods Transport Organisation
130 Advanced Cost Accounting - III
Operating Or Service Costing
(Theory)
B]
Long answer questions
1)
What is ‘Operating Costing’ ? In which industries/organisations operating
costing is used ?
2)
Define ‘Operating Costing’. Explaine the features of Operating Costing.
3)
Draw a specimen of operating cost sheet for a passanger transport
organisation.
4)
What do you mean by a Log Sheet ? What is the information recorded in it?
5)
What are the various items of cost of operation of an electricity generating
undetaking ? Draw an operating cost sheet for such undertaking.
6)
Briefly explain the procedure to be followed for recording of various items
to cost incurred by a canteen.
NOTES
II - Multiple Choice Questions
(1)
Operating Costs are mostly ---------- costs.
(a) Fixed Costs.
(b) Semi-fixed Costs.
(c) Standing Costs.
(d) Period Costs.
(2)
In those undertakings which use Operating Costing a lot of ----- data is
required to calculate.
(a) individual.
(b) primary.
(c) secondary.
(d) statistical.
(3)
Match the pairs.
Group I
Group II
(a) Transport
(i)
hotels.
(b) Public Utility Service
(ii) diagnostic centres.
(c) Education
(iii) technical institutions.
(d) Health
(iv) Communication.
(v) water and air.
Ans. : (a) - (v), (b) - (v), (c) - (iii), (d) - (ii).
Advanced Cost Accounting - III
131
Operating Or Service Costing
(Theory)
(4)
Operating costing is that form of operation costing which applied where --------- services are provided by an undertaking.
(a) minimum
(b) maximum
NOTES
(c) optimum
(d) standarised.
(5)
Operating Costing is a method of costing which is used for calculating ------ by undertaking.
(a) cost of unit of service provided.
(b) cost of unit produced.
(c) costof a article produced.
(d) cost of an item assembled.
(6)
Selection of unit in operating costing is ---------(a) an easy task.
(b) done authomatically.
(c) difficult task.
(d) routine work.
(7)
Undertakings which use operating costing take proper decisions about --------(a) rate to be charged to customers.
(b) the production of units.
(c) running their plants & machinery.
(d) unsold stock of goods.
(8)
Which of the following statement is ‘wrong’.
(a) Operating Costing is similar to single or output costing with some major
differences.
(b) Selection of unit in operating costing is difficult and is required to be
done carefully.
(c) Operating Costs mostly period costs.
(d) Operating cost is ultimately related to specific order costing.
Ans. : (1 - d), (2 - d), (4 - d), (5 - a), (6 - c), (7 - a), (8 - d).
132 Advanced Cost Accounting - III
8.10 Further Reading
1.
‘Advanced Cost Accounting’ - Nigam and Sharma
2.
‘Cost Accounting - Priciples and Practice’ - N. K. Prasad
3.
‘Cost Accounting’ - Jawahar Lal
4.
‘Theory and Practice of Cost Accounting’ - M. L. Agrawal
5.
‘Cost Accounting’ - B. K. Bhar
Operating Or Service Costing
(Theory)
NOTES
Advanced Cost Accounting - III
133
Unit 9
Operating Costing (Practical)
Operating Costing (Practical)
Structure
9.0
Introduction
9.1
Unit Objectives
9.2
Preparation of Operating Cost Sheets
9.2.1
NOTES
Operating Cost Sheet in Transport Organisations
(Illustrations 1 To 7)
9.2.2
Operating Cost Sheet in Power Generating Organisations
(Illustrations 8 To 9)
9.2.3
Operating Cost Sheet in Canteens
(Illustration 10)
9.3
Summary
9.4
Exercises
9.0
Introduction
In Unit 8, theoretical information about Operating Costing Method has been
provided. It was pointed out that to find out the Unit Cost of an organisation which
uses operating costing method, it is necessary to prepare operating cost sheet and
specimen of the operating cost sheet were provided. In this Unit we will consider
how the Operating Cost Sheets are prepared for different organisations by studying
a few illustrations.
9.1
Unit Objectives
After studying the illustrations given in this Unit, you should be able to :
•
Prepare Operating Cost Sheets for different types of organisations which
use Operating Costing Method; and
•
Understand how per unit cost is calculated in these organisations.
Advanced Cost Accounting - III
135
Operating Costing (Practical)
9.2
Preparation of Operating Cost Sheets
9.2.1 Operating Cost Sheet in Transport Organisations
ILLUSTRATION 1
NOTES
Reliable Transport Company has provided following information about a
truck owned by it :
Capacity of the truck
3 ton.
Cost of the truck
` 8,00,000
Life of the truck
10 years
Scrap value of the truck at the end of its life ` 60,000.
Cost of diesel
` 50 per litre.
Average cost of repairs and maintenance ` 4,000 per month.
Driver’s wages
` 12,000 per month.
Cleaner’s wages
` 4,000 per month.
Annual Insurance Premium for the track ` 6,000.
Annual Tax ` 2040.
Supervision and other overheads allocated to the truck ` 1,000 per annum.
Average estimated cost of battery, types, tubes, etc. ` 69,000 p.a.
Rent of garage apportioned to the truck ` 1,500 p.m.
Overhaul expenses of the truck ` 1,500 per month.
Lubricants, oil, etc. ` 1,000 per month.
Interest payable on loan taken for purchase of the truck is ` 4,080 per month.
The truck runs between two cities A and B which are 100 k.m. apart.
When the truck starts from A city on its outward trip, it is loaded to its full capacity
and on its inward trip from B city, it is loaded to 60% of its capacity on an average.
The truck runs for 25 days in a month and completes one round trip each
day.
The truck gives an average of 8 km per litre of diesel.
You are required to calculate :
136 Advanced Cost Accounting - III
a)
Operating Cost of the truck per ton km, and
b)
Decide the freight rate per ton km if a profit of 40% on the freight is desired
by the company.
Operating Costing (Practical)
SOLUTION
Reliable Transport Company
Operating Cost Sheet of the Truck
Cost Unit : per ton km
Item of Cost
Per Month Per ton Km
`
NOTES
`
Standing Charges :
` 6,000
Insurance premium
12 months
Taxes
500.00
` 2040
170.00
12
` 1,000
Supervision and overheads
allocated
12 months
83.33
Depreciation of the truck
6,166.67
Driver’s Wages
12,000.00
Cleaner’s Wages
4,000.00
Interest on Loan
4,080.00
Total Standing Charges (A)
27,000.00
2.25
Maintenance Costs :
Repairs and maintenance
4,000.00
Rent of the garage allocated
1,500.00
Lubricant, oil, etc.
1,000.00
Overhaul expenses
1,500.00
Total Maintenance Cost (B)
8,000.00
0.67
Running / Variable Costs :
Cost of diesel
Average cost of battery, tyres,
tubes, etc.
` 69,000
31,250.00
5750.00
12 months
Total Running Costs (C)
Total Operating Cost (A+B+C)
37,000.00
3.08
72,000.00
6.00
Add Expected Profit @ 40% on Freight Rate
4.00
Freight Rate per ton km
10.00
Notes and Calculations :
(1) Calculation of ton km per month :
Ton km = (Distance from A city to B city x Weight in tons) +
(Distance from B city to A city x Weight in tons) x 25 days
= (100 km x 3 tons) + (100 km x 1.8 tons) x 25 days
Advanced Cost Accounting - III
137
Operating Costing (Practical)
= (300 km x tons + 180 km tons) x 25 days
= 480 ton km x 25 days
= 12,000 ton km
NOTES
(2) Calculation of Depreciation of the truck per month :
Cost of truck - Scrap Value
Depreciation Amount
=
Life in years x 12 months
` 8,00,000 - ` 60,000
=
10 years x 12 months
` 7,40,000
=
120 months
= ` 6166.67
(3) Cost of the diesel consumed per month :
Distance travelled x cost per litre x No. of days travelled
=
km travelled per litre
200 km x ` 50 x 25 days
=
8 km per litre
=
` 31,250.
(4) Calculation of freight rate per ton km :
Profit desired is 40% on freight rate. Therefore, if freight rate is 100, profit included
in it is 40 and total cost is 60
If cost is 60 - Freight rate is 100
 If Operating Cost per ton km is ` 6, Freight Rate is ` 10.
ILLUSTRATION 2
PQR Transport Company runs a bus service between two cities which are
75 km apart. The company has provided following data related to the bus for the
month of May, 2013 :
Cost of the bus ` 9,50,000
Estimated scrap value of the bus at the end of 10 years of its life is ` 50,000
There is one driver, one conductor and one mechanic for the bus and their monthly
salaries are ` 12,000, ` 10,000 and ` 6,000 respectively.
Road Tax and other taxes for the bus amount to ` 9,000 per annum.
138 Advanced Cost Accounting - III
The Company has appointed one traffic manager who is paid ` 20,000 salary per
month and one-fifth of this salary is allocated to the bus.
Operating Costing (Practical)
Supervision and other clerical expenses apportioned to the bus amount to ` 2,500
per month.
2% p.a. is the insurance premium payable on the value of the bus.
The bus runs 12 km per litre of petrol and the cost of the petrol is ` 78 per litre.
NOTES
Expected Repairs and Maintenance Charges for the bus are ` 24,000 per annum.
Cleaning charges of the bus are ` 500 per month.
Cost of tyres, tubes, batteries etc. is estimated at ` 150 per 100 km of running.
The bus completes one round trip between the two cities every day and operates
on an average for 25 days in a month.
Prepare Operating Cost Sheet for the bus for the month of May, 2013 and
calculate the cost per km of running the bus.
SOLUTION
Notes & Calculations :
(1) Calculation of Depreciation per month :
Cost of the bus - Scrap Value
Life of the bus in months
` 9,50,000 - ` 50,000
=
10 years x 12 months
` 9,00,000
=
120 months
=
` 7,500
(2) Kilo meters run by the bus in May, 2013 :
Kilometers run per day x No. of days operated
=
75 km x 2 x 25 days
=
150 km x 25 days
=
3,750 km
(3) Cost of petrol per km :
The bus runs 12 km per litre of petrol and the cost of petrol is `78 per litre.
` 78

Cost of petrol per k.m. of running
=
12 km
=
` 6.50
Advanced Cost Accounting - III
139
Operating Costing (Practical)
NOTES
Cost of petrol consumed in May, 2013
=
Cost per k.m. x Total k.m. run
=
` 6.50 x 3,750 km
=
` 24,375
(4) Cost of tyres, tubes, batteries, etc. for May, 2013 :
Cost of tyres, tubes, batteries etc. is estimated at ` 150 for 100 k.m. run by the
bus.
` 150

Cost for May, 2013
x 3,750 km
=
100 km
=
` 5,625
` 5,625

Per km cost
=
3,750 km
=
` 1.50 per km
(5) Allocation of traffic manager’s salary :
Traffic manager’s monthly salary is ` 20,000 and one-fifth of it is to be
allocated to the bus.

Amount allocated to the bus
=
` 20,000 x 1/5
=
` 4,000
=
` 1583.33
(6) Insurance premium per month :
` 9,50,000 x 2/100 x 1/12
140 Advanced Cost Accounting - III
Operating Costing (Practical)
P Q R Transport Company
Operating Cost Sheet of the bus for May, 2013
Total units : 3,750 km
Item of Cost
Per Month
`
Per km
`
NOTES
Standing / Fixed Costs :
Salary of driver
12,000
Salary of conductor
10,000
Salary of mechanic
6,000
` 9,000
12
Road Tax and other taxes
750
Traffic Manager’s salary
4,000
Supervision and clerical charges
2,500
Insurance premium
1,583.33
Total Standing Cost (A)
36,833.33
9.82
2,500.00
0.67
Total Running Cost (C)
37,500.00
10.00
Total Operating Cost (A+B+C)
76,833.33
20.49
Maintenance Cost :
Repairs and Maintenance
` 24,000
= ` 2,000
12
Cleaning charges
` 500
Total Maintenance Cost (B)
Running / Variable Costs :
Cost of petrol consumed
` 24,375
Cost of tyres, tubes, batteries etc.
` 5,625
Depreciation of the bus
` 7,500
Notes :
(1) Depreciation on the bus is included under the heading of ‘running costs’. It
can be included under the heading of ‘standing / fixed costs’ also.
(2) Operating cost per km is calculated as instructed in the problem. If information
about the seating capacity of the bus and actual number of passengers carried in
each trip was provided in the problem, calculation of cost per passenger k.m.
could have been done.
Advanced Cost Accounting - III
141
Operating Costing (Practical)
ILLUSTRATION 3
From the following data relating to the vehicle, of Ghatge Patil Transport
Co. Kolhapur calculate the cost per running Kilometer .
`
NOTES
Cost of Vehicle
1,00,000
Road Licences Fees (annual)
5,100
Garage Rent (annual)
4,800
Insurance Charges (annual)
2,100
Supervision and Salary (annual)
12,000
Drivers Wages per hour
2.00
Cost of Diesel per litre
4.00
Repairs and Maintenance per km
2.20
Tyres and Batteries per km
1.80
Kilometers run per litre 20 km
Kilometers run annual 20,000 km
Estimated Life of the vehicle 1,00,000 km
You are required to charge Interest on Cost of vehicle @ 10% p.a., the
vehicle runs 20 km per hour on an average :
SOLUTION
In the books of Ghatge Patil Transport Co., Kolhapur
Statement showing Cost per km.
(Cost unit - per km.)
Particulars
A)
Per Year
`
Per km
`
1.70
Standing Charges :
(Fixed Charges)
i) Road Licence Fees
5,100
ii) Insurance Charges
2,100
iii) Supervision and Salary
12,000
iv) Interest on Cost of Vehicle
10,000
v) Garage Rent

B)
Total Standing Charges
(+)
4,800
34,000
Maintenance Charges :
(Semi-Variable charges)
142 Advanced Cost Accounting - III
i) Repairs and Maintenance
2.20
ii) Tyres and Batteries
1.80
C)
Operating Costing (Practical)
Running Charges :
(Variable charges)
i) Depreciation
1.00
ii) Drivers Wages
0.10
iii) Cost of Diesel

(+)
0.20
Cost per km
7.00
NOTES
Working Notes :
=
` 1,00,000
Cost of Vehicle
i)
Depreciation :
ii)
Drivers Wages :
iii)
Cost of Diesel :
iv)
Interest on Cost of vehicle :
=
Estimated Life
=
`2
= `1
= 10 Ps.
20 km
=
`4
= 20 Ps.
km 20
=
v)
km 1,00,000
Standing charges :
=
= 10% of ` 1,00,000
` 10,000
` 34,000
= ` 1.70
km 20,000
ILLUSTRATION 4
From the following data calculate the cost per running mile of Road Lines
Transport Co., Raipur.
Particulars
Vehicle I
Vehicle II
Miles
15,000
6,000
Cost of Vehicle
`
2,50,000
1,50,000
Road Licence (annual)
`
7,500
7,500
Annual Insurance
`
7,000
4,000
Annual Garage Rent
`
7,250
5,420
Supervision and Salaries (annual)
`
24,000
24,000
Driver’s Wages per hour
`
30
30
Cost of fuel per litre
`
20
20
Miles
20
15
Repairs and Maintenance per mile
`
1.65
2
Tyre Allocation per mile
`
.80
.60
Miles
1,00,000
75,000
Mileage run (annual)
Miles run per litre
Estimated Life of vehicles
Charges interest @ 15% p.a. on the cost of vehicles. The vehicles run 20
miles per hour on an average.
Advanced Cost Accounting - III
143
Operating Costing (Practical)
SOLUTION
In the books of Road Lines Transport Co., Raipur
Statement showing Cost per mile
(Cost unit - per mile)
NOTES
Particulars
Vehicle - I
Vehicle - II
Per Year Per Mile Per Year Per Mile
A)
5.55
Standing Charges :
10.57
(Fixed Charges)
i)
Road licence
7,500
7,500
ii)
Insurance
7,000
4,000
iii)
Supervision and Salaries
24,000
24,000
iv)
Interest on Cost of Vehicles
37,500
22,500
v)
Garage Rent
7,250

B)
(+)
Total Standing Charges
(+)
83,250
5,420
63,420
Maintenance Charges
(Semi- variable charges)
C)
i)
Repairs and Maintenance
1.65
2.00
ii)
Tyre Allocation
0.80
0.60
Running Charges :
(Variable Charges)

i)
Depreciation
2.50
2.00
ii)
Drivers wages
1.50
1.50
iii)
Cost of fuel
(+)
Cost per mile
1.00
(+)
13.00
18.00
Working Notes :
I
II
` 2,50,000
i)
Depreciation :
=
` 1,50,000
=
M 1,00,000
=
ii)
Driver’s Wages
` 2.50
M 75,000
=
I
` 30
=
M 20
=
144 Advanced Cost Accounting - III
`2
II
` 30
=
` 1.50
M 20
=
1.33
` 1.50
iii)
Cost of Fuel :
I
` 20
=
` 20
=
M 20
=
iv)
v)
Operating Costing (Practical)
II
`1
M 15
=
` 1.33
NOTES
Interest on Cost of vehicle :
I - 15% - ` 2,50,000
=
` 37,500
II- 15% - ` 1,50,000
=
` 22,500
Standing Charges :
I
II
` 83,250
=
` 63,420
=
M 15,000
=
` 5.55
M 6,000
=
` 10.57
ILLUSTRATION 5
From the following information relating to Royal Transport Co., Raigad
calculate the cost per running km.
Wages to Drivers per month
`
500
Cost of Diesel per litre
`
1.50
Cost of Mobile Oil per litre
`
10.00
Annual Cleaning and Servicing
`
2,460
Insurance Charges per year
`
4,000
Yearly Road Tax
`
6,400
Repairs and Maintenance for twelve months
`
1,200
Cost of Tyre, Tubes etc. per year
`
1,800
Diesel km. per litre
km.
4
Mobile km. per litre
km.
50
Cost of Vehicle
`
Estimate Life
Years
Residual Value of Vehicle
`
30,000
Interest on Cost of Vehicle p.a.
%
7
Estimated annual run
km.
1,30,000
5
36,000
Advanced Cost Accounting - III
145
Operating Costing (Practical)
SOLUTION
Working Notes :
i)
Driver’s Wages :
` 500 x 12 months
NOTES
=
= ` 0.17
km. 36,000
ii)
Cost of Diesel :
` 1.50
= ` 0.38
=
km. 4
iii)
Cost Mobile Oil :
` 10
= ` 0.20
=
km. 50
iv)
Repairs and Maintenance :
` 1,200
= ` 0.03
=
km. 36,000
v)
Cost of Tyre, Tubes etc. :
` 1,800
= ` 0.05
=
km. 36,000
vi)
Interest on Cost of Vehicle :
=
vii)
7% of ` 1,30,000 = ` 9,100
Depreciation :
Cost of Vehicle - Residual value of Vehicle
=
Estimated life of Vehicle
` 1,30,000 - ` 30,000
= ` 20,000
=
5 years
` 20,000
=
km. 36,000
=
` 0.56
viii) Standing charges :
` 21,960
= ` 0.61
=
km. 36,000
146 Advanced Cost Accounting - III
Operating Costing (Practical)
In the books of Royal Transport Co., Raigad
Statement Showing Cost per running km.
Particulars
A)
Per Year
`
Per km
`
0.61
Standing Charges :
NOTES
(Fixed Charges)
i)
Cleaning and Servicing
2,460
ii)
Insurance Charges
4,000
iii) Road Tax
iv) Interest on Cost of Vehicle

B)
6,400
(+)
Total Standing Charges
9,100
21,960
Maintenance Charges :
(Semi-Variable charges)
C)
i)
Repairs and Maintenance
0.03
ii)
Cost of Tyre, Tubes etc.
0.05
Running Charges :
(Variable Charges)
i)
Driver’s Wages
0.17
ii)
Cost of Diesel
0.38
iii) Cost of Mobile Oil
0.20
iv) Depreciation

(+)
Cost per km
0.56
2.00
ILLUSTRATION 6
Varun Transport Co., Pune owns a fleet of taxis and the following information
is available from their records.
Number of Taxis
Number 10
` 20,000
Cost of each Taxi
Monthly Salary to the Staff •
Manager
- ` 3,000
•
Accountant
- ` 2,500
•
Cleaner
- ` 2,000
•
Mechanic
- ` 1,500
Garage Rent per month
Monthly Insurance Premium
Yearly Taxes
Monthly Salary to Driver per taxi
Annual Repairs per taxi
` 1,000
` 84
` 600 per taxi
` 200
` 1,000
Advanced Cost Accounting - III
147
Operating Costing (Practical)
Total life of a taxi is about 2,00,000 km. A taxi runs in all 3,000 km. in a
month of which 30% it runs empty. Petrol consumption is one litre for 10 km. @
21.80 per litre. Oil and other sundries are `5 per 100 km.
Calculate the cost of running a taxi per km.
NOTES
SOLUTION
Working Notes :
i) Calculation of effective kms run per month :
The taxi runs 30% empty which means its effective run is only 70% and
hence, all costs must be calculated taking into consideration its effective run i.e.
70% of 3,000 km i.e. 2,100 km.
Kms.
Monthly running of a taxi-km
Less : 30% empty i.e. 30% of 3,000 km

ii)
Actual monthly run-km
Depreciation :
Cost of Taxi
=
Estimated Life of a Taxi
=
` 20,000
= ` .10
km. 2,00,000
` .10 x 3,000 km
=
2,100 km.
=
` 0.14
iii) Salary of Manager :
` 3,000
=
10 Taxis
=
148 Advanced Cost Accounting - III
` 300
3,000
(-)
900
2,100
Operating Costing (Practical)
In the boks of Varun Transport Co., Pune
Statement showing Cost of running a taxi per km.
(Cost Unit - per Km.)
Particulars
A)
Per Year
`
Standing Charges :
Per km
`
0.54
NOTES
( Fixed Charges )
i)
Manager’s Salary
300
ii)
Accountant’s Salary
250
iii) Cleaner’s Salary
200
iv) Mechanic’s Salary
150
v)
84
Insurance Premium
vi) Taxes
50
vii) Garage Rent
100

B)
Total Standing Charges
1134
Maintenance Charges :
( Semi - Variable Charges )
i)
C)
Repairs
0.04
Running Charges :
( Variable Charges )
i)
Depreciation
0.14
ii)
Driver’s Salary
0.10
iii) Petrol Consumption
3.11
iv) Oil and Other Sundries

iv)
Cost per km
(+) 0.07
4.00
Salary of Accountant :
` 2,500
=
=
v)
10 Taxies
` 250
Salary of Cleaner :
` 2,000
=
=
vi)
10 Taxies
` 200
Salary of Mechanic :
` 1,500
=
10 Taxis
=
` 150
Advanced Cost Accounting - III
149
Operating Costing (Practical)
vii)
Garage Rent :
` 1,000
=
10 Taxis
=
NOTES
` 100
viii) Taxes :
` 600
= ` 50
=
12 months
ix)
Driver’s Salary :
` 200
= ` 0.10
=
2,100 km.
x)
Repairs :
` 1,000
= ` 83.33
=
12 months
` 83.33
=
2,100 km.
=
xi)
` 0.04
Petrol Consumption :
` 21.80
= ` 2.18
=
10 km.
` 2.18 x 3,000 km
=
2,100 km.
=
xii)
` 3.11
Oil and Other Sundries :
`5
= ` .05
=
100 km.
` .05 x 3,000 km
= ` 0.07
=
2,100 km.
xiii) Standing Charges :
` 1,134
=
2,100 km
150 Advanced Cost Accounting - III
= ` 0.54
Operating Costing (Practical)
ILLUSTRATION 7
From the following data relating to two passengers vehicles named Ganga
and Yamuna, of Saibaba Transport Co., Sangali you are required to calculate the
cost per running km.
Particulars
Ganga
Yamuna
Cost of Vehicle
`
1,00,000
60,000
Annual Road Licence
`
3,000
3,000
Insurance Per Annum
`
2,800
1,600
Yearly Garage Rent
`
2,400
2,000
Supervision and Salaries for twelve months
`
5,200
2,325
Driver’s Wages per running hour
`
6
6
Cost of Petrol per litre
`
3.50
3.50
Repairs and Maintenance per km.
`
3.30
3.30
Cost of Tyre and Tubes per km.
`
3.59
4.10
Estimate Life
kms
1,60,000
1,20,000
km. per litre of petrol
kms
10
12
Annual kms run
kms
24,000
9,000
NOTES
Charge interest @ 10% p.a. on cost of vehicles and vehicle runs 40 km. per
hour on an average.
SOLUTION
Working Notes :
Ganga
i)
Depreciation :
=
Cost of Vehicle
=
Estimated Life of Vehicle
` 1,00,000
Driver’s Wages :
=
km. 1,60,000
= ` 0.63
ii)
Yamuna
=
`6
km. 1,20,000
=
=
40 km.
= Re. 0.15
iii)
Cost of Petrol :
=
` 3.50
iv)
Interest on Cost of Vehicle : = 10% of
=
=
v)
Standing Charges :
=
` 23,400
` 0.15
` 3.50
=
` 0.29
=
10% of
` 60,000
=
=
km. 24,000
= ` 0.98
`6
km. 12
` 1,00,000
= ` 10,000
Re. 0.50
40 km.
km. 10
= ` 0.35
` 60,000
` 6,000
` 14,925
km. 9,000
=
` 1.66
Advanced Cost Accounting - III
151
Operating Costing (Practical)
In the books of Saibaba Transport Co. Sangali
Statement showing Cost per running km.
(Cost unit - per km)
Particulars
Ganga
Yamuna
Per year Per Mile Per year Per Mile
`
`
`
`
NOTES
A)
0.98
Standing Charges :
1.66
(Fixed Charges)
i)
Road Licence
3,000
3,000
ii)
Insurance
2,800
1,600
iii)
Supervision and Salaries
5,200
2,325
iv)
Interest on Cost of Vehicle
10,000
6,000
v)
Garage Rent

B)
Total Standing Charges
(+)
2,400
(+)
23,400
2,000
14,925
Maintenance Charges :
(Semi-Variable Charges)
C)
i)
Repairs and Maintenance
3.30
3.30
ii)
Cost of Tyre and Tubes
3.59
4.10
Running Charges :
(Variable Charges)
i)
Depreciation
0.63
0.50
ii)
Driver’s Wages
0.15
0.15
iii)
Cost of Petrol

Cost per km
(+)
0.35
(+)
9.00
0.29
10.00
9.2.2 Operating Cost Sheet in Power Generating Industry
ILLUSTRATION 8
From the following information provided by Zed Thermal Power Station for
the year 2012-13. Prepare a Cost Sheet showing the cost of electricity generated
per unit of kwh :
Total Units generated
10,00,000 kwh
Operating labour
` 75,000
Repairs & Maintenance
` 60,000
Lubricants, Spares and Supplies
` 50,000
Plant Supervision
` 45,000
Administration Overheads
` 25,000
Coal consumed per kwh for the year is 3 kg @ ` 0.20 per kg.
Depreciation to be charged on capital cost of ` 5,00,000 @ 5% p.a.
152 Advanced Cost Accounting - III
Operating Costing (Practical)
SOLUTION
Operating Cost Sheet of Zed Thermal Power Station
For the year 2012-13
Total Cost Cost per kwh
`
`
A)
Fixed Costs :
Plant Supervision
45,000
Administration Overheads
25,000
NOTES
Depreciation on Capital cost of `
B)
5,00,000 @ 5% p.a.
25,000
Total Fixed Cost
95,000
0.095
Running / Variable Costs :
Cost of Coal Consumed
(3 kg x ` 0.20 x 10,00,000 kwh)
6,00,000
Operating labour
75,000
Repairs & Maintenance
60,000
Lubricants, Spares and Supplies
50,000
Total Running Cost
Total Cost (A + B)
7,85,000
0.785
8,80,000
0.88
ILLUSTRATION 9
The Jabalpur Thermal Power Generating Station has given following data
for a period of one month about the electricity generated by it. You are required to
prepare an Operating Cost Sheet for the month showing the cost per unit of
electricity generated.
i)
Fuel :
Coal stock at the beginning of the month
Supply of coal during the month
Coal stock at the end of the month
300 tons
1400 tons
500 tons
As per the contract, coal is supplied at the colliery F.O.R. at ` 40 per ton.
Add 10% to cover freight and handling expenses.
ii)
Oil : 8 tons at ` 450 per ton.
iii)
Water : 30,000 liters. Pumping Charges at `4.5 per 100 liters.
iv)
Depreciation of Steam Boiler : Capital value of the steam Boiler `
80,000 and rate of depreciation 12 1/2 % p.a.
v)
Salaries and wages of the staff at the Boiler House :
12 workers at ` 2000 p.m.
30 coolies at ` 800 p.m.
Advanced Cost Accounting - III
153
Operating Costing (Practical)
vi)
Sale of Ash : 100 tons @ ` 5 per ton.
vii)
Salaries and Wages of staff of the Generating Station :
50 workers at a wage rate of ` 3,000 p.m.
20 unskilled workers at a wage rate of `1000 p.m.
NOTES
viii) Repairs & Maintenance of the Generating Equipment ` 5200 p.m.
ix)
Capital Value of the Generating Equipment is ` 3,60,000 on which
depreciation at 10% p.a. is to be provided.
x)
Administration overheads apportioned ` 4000 p.m.
xi)
Number of Units generated in the month are 82,000 Units out of which
2,000 Units are lost in the process of generation.
SOLUTION
Total Units generated in the month
82,000
Less Units lost in the process
2,000
Net Units generated in the month
80,000
Operating Cost Sheet of The Jabalpur Thermal
Power Station for the month -----Net Units generated : 80,000
A)
Total Cost
Cost per unit
`
`
Cost of materials consumed :
Coal : Opening stock
300 tons
Add Supplied during the
month
1400 tons
1700 tons
Less Closing Stock
Coal consumed
500 tons
1200 tons
Cost of coal at ` 40 per ton
for 1200 tons
` 48,000
Add Freight & Handling
Expenses @ 10%
Oil : 8 tons @ ` 450 per ton
` 4,800
52,800.00
3,600.00
Water : 30,000 litres pumped
at ` 4.50 per 100 litres
1,350.00
57,750.00
154 Advanced Cost Accounting - III
0.722
B)
Operating Costing (Practical)
Salaries & Wages :
i)
ii)
For Boiler House :
12 workers at ` 2,000 p.m.
24,000.00
30 coolies at ` 800 p.m.
24,000.00
For Generating Station :
50 workers at ` 3,000 p.m.
NOTES
1,50,000.00
20 unskilled workers at ` 1,000 p.m.
20,000.00
2,18,000.00
C)
Depreciation :
i)
On Steam Boiler : ` 80,000 at
12 1/2% p.a.
ii)
833.33
On Generating Equipment : ` 3,60,000
at 10% p.a.
D)
2.725
3,000.00
3,833.33
0.048
5,200.00
0.065
2,84,783.33
3.560
500.00
0.006
2,84,283.33
3.554
4,000.00
0.050
2,88,283.33
3.604
Repairs & Maintenance of Generating
Equipment
Total (A + B + C + D)
Less Sale of Ash
100 tons at ` 5 per ton
Works Cost
Add Administration overheads
Total Cost
9.2.3 Operating Cost Sheet in Canteen
ILLUSTRATION 10
PQR Co. Ltd. runs a canteen for its employees and provides subsidy, if
required. Following details of costs incurred for the canteen in the month of March,
2014 are provided to you :
Purchase of provisions during March, 2014 :
Quantity
(kgs/litres)
Rate
(per kg/litre)
Milk
250
30
Sugar
200
32
Tea
10
250
Atta
500
28
Vegetable Oil
60
65
Rice
300
40
Advanced Cost Accounting - III
155
Operating Costing (Practical)
NOTES
Dal
75
60
Beson
15
40
Vegetables
100
30
Potato
50
18
Onion
70
15
Spices
5
200
Other expenses for March, 2014 :
Transport Charges
` 250
Salary to Cook
` 4,000
Salary to Waiters (5 waiters)
` 1,000 each
Salary to Helpers (2 helpers)
` 600 each
Salary of Canteen Manger
` 8,000
Fuel, Gas, etc.
` 2,200
Miscellaneous Expenses :
Crockery, Glassware
` 400
Depreciation of Utensils
` 300
Depreciation of Furniture
` 500
Depreciation of Canteen Hall
` 200
Sale of Coupons :
For Tea 8,000 coupons of ` 1 each
For Meals 12,000 coupons of ` 5 each
Opening and closing stock of provisions :
Sugar
Atta
Rice
Tea
On 1st March, 2014
25 kg
40 kg
15 kg
2 kg
On 31st March, 2014
30 kg
30 kg
20 kg
1 kg
Prepare an Operating Cost Statement and show how much subsidy should
the company give for March, 2014.
156 Advanced Cost Accounting - III
Operating Costing (Practical)
SOLUTION
In the Books of PQR Co. Ltd.
Statement showing the amount of subsidy to be given
to the Canteen for the month of March, 2014
Particulars
Amount
Amount
`
`
NOTES
Opening Stock of Provisions :
Sugar
25 kgs x ` 32
800
Atta
40 kgs x ` 28
1,120
Rice
15 kgs x ` 40
600
Tea
2 kgs x ` 250
500
Milk
250 litres x ` 30
7,500
Sugar
200 kgs x ` 32
6,400
Tea
10 kgs x ` 250
2,500
Atta
500 kgs x ` 28
14,000
Vegetable Oil
60 litres x ` 65
3,900
Rice
300 kgs x ` 40
12,000
Dal
75 kgs x ` 60
4,500
Beson
15 kgs x ` 40
600
Vegetables
100 kgs x ` 30
3,000
Potato
50 kgs x ` 18
900
Onion
70 kgs x ` 15
1,050
Spices
5 kgs x ` 200
1,000
3,020
Add Purchases :
57,350
60,370
Less Closing Stock :
Sugar
30 kgs x ` 32
960
Atta
30 kgs x ` 28
840
Rice
20 kgs x ` 40
800
Tea
1 kg x ` 250
250
2,850
57,520
Labour Charges :
Salary to Cook
1 x ` 4,000
4,000
Salary to Waiters
5 x ` 1,000
5,000
Salary to Helpers
2 x ` 600
1,200
1 x ` 8,000
8,000
18,200
2,200
2,200
Salary to Canteen Manager
Fuel, Gas, etc.
Advanced Cost Accounting - III
157
Operating Costing (Practical)
Consumable Stores :
Crockery and Glassware
400
400
250
250
Miscellaneous Charges :
Transport Charges
Depreciation
NOTES
On Utensils
300
On Furniture
500
On Canteen Hall
200
1,000
79,570
Total Operating Cost
Less Sale of Coupons :
For Tea
(8,000 x ` 1)
8,000
For Meals
(12,000 x ` 5)
60,000
Amount of Subsidy to be given
68,000
11,570
[Note : Valuation of opening stock and closing stock of items is done at the purchase
price as the valuation rates for them is not provided in the problem.]
9.3
Summary
For the organisations which render service to the customers, operating
costing or service costing method of costing is used. In order to record costs and
to calculate unit cost (which may be simple unit or compound unit) Operating Cost
Sheet is prepared. Generally, in Operating Cost Sheet costs are grouped under
three heads - standing charges, maintenance charges and running charges.
However, depending upon the type of service and the activity carried on by the
organisations, the operating cost sheet may be prepared by grouping the costs
under some other groups. Total cost shown by the Operating Cost Sheet is divided
by total units of the service and per unit cost of the service is calculated.
9.4
1.
Exercises
From the following data, calculate the cost per mile of a vehicle of Charminar
Transport Co., New Delhi.
Cost of vehicle
Garage Rent per year
` 4,800
Insurance charges per year
` 1,600
Road tax per year
` 2,000
Driver’s wages per month
` 805
Cost of petrol per litre
` 5.60
Tyre maintenance per mile
` 0.80
Estimated life of vehicle
Miles per litre of Petrol
158 Advanced Cost Accounting - III
` 1,00,000
Estimated annual mileage
miles 1,50,000
miles 5
miles 10,000
2.
From the following data, you are required to ascertain the cost of running
the lorry per tonne-mile of Durga Transport Co., Dombivali. Total tonnage
carried in a week 30 tonnes and total mileage carried in a week was 600
miles. Details of above are as follows :
Days
Miles
Tonnes
Monday
120
6
Tuesday
125
5
Wednesday
110
4
Thursday
100
5.5
Friday
80
4.5
Saturday
65
5.0
600
30.00
Total
Operating Costing (Practical)
NOTES
The expenses for the week were as follows :
Driver’s salary ` 200 per month, Cleaner’s salary `100 per month, Petrol,
Oil etc. 30 paise per mile, Repairs and Maintenance `300 per month,
Depreciation `4,800 per annum and Other expenses `200 per month.
(There are four weeks in a month).
3.
M/s Eagle Transport Ltd., Edalabad charges `60 per tonne for a 5 tonne
lorry from Edalabad to Jalgaon. The charge for return trip is `56 per tonne.
In the month of July MH-12-4889, made ten outward Journey’s with full
load out of which 3 tonnes were unloaded at Pachora twice in the month. It
returned once without any load from Burdwan.
The details of expenses are as follows :
Annual fixed charges
Annual maintenance charges
Monthly operating charges
` 19,000
` 9,600
` 12.2
Additional data available are :
Distance from Edalabad to Pachora
kms 30
Distance from Pachora to Jalgaon
kms 45
MH-12-4889 carried a load of 8 tonnes 5 times in the month while returning
from Jalgaon but was once caught by police and fined `1,000.
You are required to calculate the cost per ton km. and also the profit in the
month of July 2010 assuming that no concession is made for delivery at the
intermediate stages.
4.
Harekrishna owns a luxury bus which runs from Bangalore to Chittor and
back for 10 days in a month. The distance from Banglore to Chittor is 200
kms. The bus completes the trip from Bengaluru to Chittor and back on the
same day. The bus goes another 10 days in a month towards Mysore. The
distance from Bengaluru to Mysore is 130 kms. The trip is also completed
in the same day. For the rest 4 days its operation in a month it runs in the
Advanced Cost Accounting - III
159
Operating Costing (Practical)
local city. The daily distance covered in the local city is 70 kms. Calculate
the rate that Harekrishna should charge per passenger when he wants to
earn a profit of 25% of his takings. The other information is given below :
`
Cost of the Bus
Depreciation rate p.a.
NOTES
1,50,000
15%
Salary of Driver p.a.
`
500
Salary of Conductor p.a.
`
500
Salary to Part Time Accountant p.a.
`
250
Insurance p.a.
`
1,800
Diesel Consumption 6 km per litre
`
1.50 per litre
Token Tax p.a.
`
800
Lubricant Oil
`
20 per 100 km.
Repairs and Maintenance per month
`
1,000
Permit Fee per month
`
560
Normal Capacity
Persons 50
The bus uses generally 90% of the capacity when it goes to Chittor and
80% when it goes to Mysore. It is always full when it runs within the city.
The passenger is 25% of the next takings.
5.
Mr. Milkha Singh has started transport business with a fleet of 10 taxis.
The various expenses incurred by him are given below :
Cost of each taxi
`
75,000
Salary of office staff per month
`
1,500
Salary of general staff per month
`
2,000
Rent of garage per month
`
1,000
Driver’s salary (per taxi) per month
`
400
Road tax and Repairs (per taxi) p.a.
`
2,160
Insurance premium p.a.
4% of cost
The life of a taxi is `3,00,000 km. and at the end of which it is estimated to
be sold at ` 15,000. A taxi runs on an average 4,000 km. per month of
which 20% is runs empty. Petrol consumption is 9 km. per litre of petrol
costing ` 6.30 per litre. Oil and other sundry expenses amount of ` 10 per
100 km.
Calculate the effective cost of running a taxi per km. If the hire charge rate
is `1.80 per kilometer, find out the profit. Mr. Milkha Singh may expect to
make in the first year of operation.
6.
160 Advanced Cost Accounting - III
From the following data, calculate the cost per mile of vehicle :
Value of vehicle
`
25,000
Garage rent per year
`
1,200
Insurance charges per year
`
400
Road tax per year
`
500
7.
Driver’s wages per month
`
400
Cost of petrol per litre
`
1.40
Tyre maintenance per mile
`
0.20
Estimated life
Miles
1,50,000
Miles per litre of Petrol
miles
5
Estimated annual mileage
miles
10,000
Operating Costing (Practical)
NOTES
Modern Transport Co., Mumbai is running two buses between two places 100 kms. part. Seating Capacity of each bus is 50 passengers. The following
particulars are taken from their books for a month of July, 2010.
Wages of drivers, conductors and cleaners
`
3,000
Salary of supervisory and office staff
`
1,500
Diesel, oil etc.
`
6,000
Repairs and maintenance
`
1,500
Taxation and insurance
`
2,000
Depreciation
`
3,000
Interest and other charges
`
2,500
Actual passengers travelled were 80% of the capacity. The buses ran on
all the days. Each bus made a to and fro trip.
Find out the cost per passenger kilometer.
8.
Surya Transport Co., Sangli owns a fleet of 10 trucks each costing 60,000.
The company has employed one manager to whom it pays Rs. 450 p.m., an
account who gets 250 p.m., and a peon who gets 100 p.m. The company
has got it’s trucks insured @ 2% per annum. The annual total tax is 1,200
per truck. The other expenses were as follows :
Driver’s salary per month
200
Cleaner’s salary per month
80
Machanic’s salary per month
300
Repairs and maintenance per year
Diesel consumption
1,200 for one truck
3 kms. per litre at 0.90 per litre
The estimated life of the truck is 5 years.
Other information :
Distance travelled by each truck per day 200 kms.
Normal loading capacity 100 quintals.
Wastage in loading capacity 10%
Percentage of truck laid up for repair 5%
Effective days in a month 25
Calculate : a) Cost per quintal km. and b) Cost per km. of running a truck.
Advanced Cost Accounting - III
161
Topic 3
Cost Books
Unit 10
Cost Journal and Ledger
Unit 11
Integral and Non-integral
Accounting System
Unit 10
Cost Journal and Cost Ledger
Cost Journal & Cost Ledger
Structure
10.0 Introduction
NOTES
10.1 Unit Objectives
10.2 Cost Accounting Record and Processes
10.3 Cost Accounting Records Rules
10.4 Companies ( Cost Accounting Records) Rules, 2011
10.5 Cost Ledger and Control of Cost
10.5.1 Cost Ledgers
10.2.2 Control Accounts
10.5.3 Accounting Treatment of Journal Entries
10.6 Summary
10.7 Key Terms
10.8 Questions
10.9 Further Reading
10.0 Introduction
Cost Accounting is an internal part of a firm’s formal accounting system.
There are three methods for recording costs which can be used by a firm :
i)
Memorandum cost records : Under this method cost records are not
tied with the General Ledger accounts.
ii)
Incorporation of manufacturing costs in General Ledger : Under this
method due to incorporation of manufacturing cost in general ledger, it reflects
current inventory balances, cost of sales, variations from standards and
other details of cost, and
iii)
Maintenance of separate General Ledger and Cost Ledger : In this
method the cost ledger is tied in with the general ledger for purchases and
manufacturing expenses. However, current inventory balances, cost of sales,
etc. are carried out in the cost ledger.
There are definite advantages for separate cost recording. Cost accounts
are essentially maintained on principles of double entry book-keeping. The cost
accounts are integrated with the financial accounts, being kept in the same ledger
with additional accounts being opened to provide the necessary functional analysis.
Advanced Cost Accounting - III
163
Cost Journal & Cost Ledger
In order to prove that cost and financial accounts are in agreement, Reconciliation
of Cost and Financial Account Statement becomes essential. Integral accounting
is a method of accounting in which both cost and financial accounts are kept in the
same ledger.
NOTES
10.1 Unit Objectives
After studying this Unit you should be able to :
•
Understand cost accounting records rules and processes; and
•
Know the meaning, operating and advantages of cost ledger,
10.2 Cost Accounting Record and Processes
Cost Accounting provides tremendous help to a business in its routine and
non-routine decisions. It is equally important to weigh the cost of the system
against it’s advantages. There are certain external requirements imposed on an
organisation that necessiate the establishment of minimum cost requirements .
For example, maintenance cost accounting records as required under Companies
Act 1956. The primary advantages of cost accounting of course, is that it shows
precisely where costs are incurred, giving a realistic basis for cost cutting. Actually,
it helps to determine, the profitability of products being made and sold.
The Government of India had issued “Cost Accounting Record Rules” in
respect of number of products / industries ( as listed under section 209 (1) (d) of
companies Act )
10.3 Cost Accounting Records Rules
According to these rules, all companies engaged in activities of production
or manufacturing, etc. (for which cost accounts records have been prescribed)
should maintain accounting records relating to the utilization of materials, labour
and other items of cost. Such books of account should facilitate the calculation
and disclosure of cost of production and cost of sales of the products at a periodical
intervals. All books of account and the proforma prescribed by the rules should be
completed within the prescribed time limit after the end of the relevant financial
year of the company.
a)
Requirement of Records as per rules.
The following are the main requirement of Cost Accounting (Records) Rules
generally applicable for various industries in India.
164 Advanced Cost Accounting - III
i)
Records for Raw Materials.
ii)
Records for Labour.
iii)
Records for Overheads.
iv)
Records for Utilities / services.
v)
Records for Fixed Assets.
vi)
Records for Packing.
vii)
Records for Research and Development Expenses.
viii)
Records for Conversion Cost.
ix)
Records for By-products.
x)
Records for Work-in-Progress and Finished Goods.
xi)
Records for Cost of Productions and Marketing.
xii)
Reconciliation of Cost Records with Financial Books.
xiii)
Computation of Variances.
xiv)
Physical Verification.
xv)
Statistical Data.
Cost Journal & Cost Ledger
NOTES
Check Your Progress
What are the main areas of
maintenance
of
Cost
Accounting Records.
b) Areas of maintenance of Cost Accounting Records.
i)
Raw materials, components, stores and spare parts etc.
ii)
Wages and Salaries.
iii)
Overheads.
iv)
Utilities.
v)
Service department expenses including workshop repair and
maintenance.
vi)
Depreciation.
vii)
Royalty / Technical knowhow fee.
viii)
Research and development expenses.
In addition to above eight areas, the cost accounting records may also be
maintained for the following :
i)
Packing expenses, ii) Interest, iii) Expenses / incentive on export;
iv)
Conversion Cost; v) Captive consumption; vi) Credit for by products
vii)
Work-in-progress and finished goods stock;
viii)
Production records
ix)
Cost statements;
x)
Reconciliation with financial accounts and adjustment of cost variances;
Advanced Cost Accounting - III
165
Cost Journal & Cost Ledger
xi)
Stock verification records;
xii)
Inter-company transactions
xiii)
Statistical Statements and other records.
NOTES
10.4 Companies (Cost Accounting Records) Rules,
2011
i)
Legal Authority of the Companies (Cost Accounting Records) Rules,
2011.
Central Government, in exercise of the powers conferred by clause (b) of
sub-section (1) of section 642 read with clause (d) of section 209 of the
Companies Act, 1956 (1 of 1956), has notified Companies (Cost Accounting
Records) Rules 2011.
ii)
Date from which Rules come into force.
The Companies (Cost Accounting Records) Rules 2011 have been published
vide G.S.R. 429(E) dated 3rd June, 2011. As per sub-rule (2) of Rule 1,
these rules have come into force on the date of publication in the Official
Gazette.
iii)
Applicability.
The Companies (Cost Accounting Records) Rules, 2011 has superseded 36
cost accounting record rules
The said Rules are applicable to all companies engaged in production,
processing, manufacturing and mining activities as defined under Rules 2(j),
2(k), 2(l) or 2(o) respectively and where:
i) the aggregate value of net worth as on the last date of the immediately
preceding financial year exceeds five crores of rupees; or
ii) the aggregate value of net turnover made by the company from sale or
supply of all products or activities during the immediately preceding financial
year exceeds twenty crores of rupees; or
iii) the company’s equity or debt securities are listed or are in the process of
listing on any stock exchange, whether in India or outside India.
Any company meeting the above criteria would be required to maintain
cost accounting records and file a Compliance Report in the prescribed
format from financial year commencing on and from 1st April, 2011.
These Rules are not applicable to a company which is a body corporate
governed by a Special Act.
166 Advanced Cost Accounting - III
Further, the Companies (Cost Accounting Records) Rules 2011 is not
applicable to activities or products covered in any of the following rules :
(a)
Cost Accounting Records (Bulk Drugs) Rules, 1974
(b)
Cost Accounting Records (Formulations) Rules, 1988
(c)
Cost Accounting Records (Fertilizers) Rules, 1993
(d)
Cost Accounting Records (Sugar) Rules, 1997
(e)
Cost Accounting Records (Industrial Alcohol) Rules,1997
(f)
Cost Accounting Records (Electricity Industry) Rules,2001
(g)
Cost Accounting Records (Petroleum Industry) Rules, 2002
(h)
Cost Accounting Records (Telecommunications) Rules, 2002
Cost Journal & Cost Ledger
NOTES
In case a company is engaged in activities, in addition to the activities covered
by the above 8 Rules, such activities shall be covered under the Companies
(Cost Accounting Records) Rules 2011.
iv)
Maintenance of cost records.
As per sub rule (2) of Rule 4, the companies are required to maintain cost
records on regular basis in such manner so as to make it possible to calculate
per unit cost of production or cost of operations, cost of sales and margin
for each of its products and activities for every financial year on monthly /
quarterly / half-yearly / annual basis. The cost statements are to be prepared
for every unit and every product produced, processed, manufactured or
mined.
As per sub rule (3), the cost records are to be maintained in accordance
with the generally accepted cost accounting principles and cost accounting
standards issued by the institute; to the extent these are found to be relevant
and applicable.
These Rules have not prescribed any specific formats for the cost statement.
A guidance note on the subject is under preparation by ICWAI, inter alia,
containing model formats for cost records, statements, schedules etc.
v)
Meaning of ‘Turnover’ under these Rules.
As per Rule 2(p), “Turnover” means gross turnover made by the company
from the sale or supply of all products or services during the financial year.
It includes any turnover from job work or loan license operations but does
not include any non-operational income.
Check Your Progress
Define the term “Turnover”
under the Rule 2 (p).
From a reading of the Rules, it appears that the word “Gross” denotes
“total”. Hence, the “Turnover” under these Rules would exclude duties and
taxes.
Note :
In view of the Master Circular No. 2/2011 dated 11th November 2011,
General Circular Nos. 67/2011 and 68/2011 dated 30th November
2011 the above clarification is superseded and the correct position is
Advanced Cost Accounting - III
167
Cost Journal & Cost Ledger
given in “ Applicability” as mentioned above)
vi)
Authentication of Compliance Report as per Rules.
As per Rule 5, the compliance Reports and annexure thereto is required to
be certified by a “Cost Accountant” as defined under Rule 2(c).
NOTES
As per Rule 7, the annexure to the Compliance Report is to be duly approved
by the Board of Directors.
A “Cost Accountant” within the definition of these Rules does not include :
a) A member holding a part-time certificate of practice; or
b) A member who is in full time employment whose membership fees
are in arrears;
c) A member of ICWAI who has been admitted as a member through
reciprocal arrangement of membership by virtue of being a member
of Institute of Management Accountants USA.
Companies engaged in activities or products to which the cost accounting
records rules listed under Rule 3(a) to 3(h) apply will not be required to file
a Compliance Report until these Rules are amended.
However, if the concerned company is also engaged in other activities
covered under the Companies (Cost Accounting Records) Rules 2011, in
that case the company would be required to file a Compliance Report.
There is no ceiling on the number of compliance Reports that can be
authenticated by a Cost Accountant in whole-time practice. A Cost
Accountant working as permanent employee can authenticate the
compliance Report of the company where he is employed provided his
membership dues are not in arrears. He cannot authenticate compliance
Reports of any other company even under the same group.
vii)
“Abridge Cost Statement”.
Books of account and other records relating to utilization of materials, labour
and other items of cost that provides data/information to compute the cost
of production, cost of sales and margin of each of the products/activities of
the company on monthly/quarterly/half-yearly/annual basis are considered
part of the cost records. It includes statistical, quantitative and other records
which enable the company to exercise, as far as possible, control over the
various operations and costs with a view to achieve optimum economies in
utilization of resources. Cost records are required to be maintained on
continuous basis from the basic stage of inputs to the final output.
There cannot be any exhaustive list of cost records. This would depend on
the materiality of cost components in the cost of the product/activity.
168 Advanced Cost Accounting - III
The abridged cost statement can be used as as sample cost statement. This
may be modified according to the need of the company.
viii) Treatment for manufacturing without the use of power :
Cost Journal & Cost Ledger
The definition of product in Rule 2(m) includes manual operation as well.
Therefore, any production, processing, manufacturing or mining activitywhether by use of power or not - are included for the purposes of these
Rules.
The test of inclusion under the Rules is whether it is a production, processing,
manufacturing or mining activity resulting in a product [for definition of
“product” refer to Rule 2(m)] intended for use, consumption, sale, transport,
store, delivery or disposal and whether the company carrying out the activity
falls within the criteria mentioned under Rule 3(1). If the company meets
requirement of Rule 3(1), the activity - whether or not for capitive/selfconsumption - will come under the ambit of these Rules.
NOTES
Every company covered under Companies (Cost Accounting Records) Rules
2011 is required to file a Companies Report irrespective of whether all or
any of its products are covered under cost audit. Thus, the Compliance
Report shall include product groups covered under cost audit as well as
product groups not covered under cost audit.
ix)
Report is to be prepared for the “Company as a whole”.
The compliance Report is to be prepared for the ‘company as a whole’
under different product groups.
The status of the company so far as applicability of cost audit is concerned
will remain unchanged until cost audit orders are issued for its other products/
activities now covered under Companies (Cost Accounting Records) Rules
2011. The company would now be required to maintain cost records for all
the products/activities irrespective of whether these are under cost audit or
not and also file a compliance Report.
It is mandatory to prepare unit-wise and product/activity-wise cost
statements as per the companies (Cost Accounting Records) Rules 2011.
For Compliance Certificate purposes, no cost statement is required to be
submitted.
However, if any or all the products / activities of the company is also covered
under Cost Audit, then for the purposes of submission of Cost Audit Report
under the Companies (Cost Audit Report) Rules 2011, a consolidated cost
statement for the product group (s) under cost audit is required to be
prepared.
Advanced Cost Accounting - III
169
Cost Journal & Cost Ledger
10.5 Cost Ledger and Control of Cost
There are two basic methods of maintaining cost accounts : (i) Independent
cost accounts or non-integrated accounting and (ii) Integral or integrated cost
accounting.
NOTES
Methods
or
Systems of
Maintaining
Cost
Accounts
Check Your Progress
What is maintaining Cost
Accounts ? Which Systems
you know ?
Independent Cost
Accounts or Nonintegrated accounting
(Inter-locking)
Integral or Integrated
Cost Accounting
i) Independent Cost Accounting System :
Under the traditional or non-integrated system a separate set of costing
books is maintained along with the financial books of accounts. Under this method,
the cost accounting department is responsible for maintenance of cost accounts
cost reports and statements. The cost ledger is quite independent of the financial
ledger. The accounts department is interested in all types of accounts i.e. personal,
real and nominal though the cost department in also basically concerned with the
income and expenditure of the firm.
ii) Integral or Integrated Cost Accounting System :
Integral accounts, signify a system in which both cost and financial ledgers
are merged into a composite system. This system relates to a single accounting
function which contain both financial and cost accounts.
10.5.1 Cost Ledgers
The ‘Cost Ledger’ is the principal ledger of costing department and various
control accounts are maintained therein. In large business, in addition to “Cost
Ledger” other relevent ledgers viz. Store Ledger, Work in Progress ledger, Finished
Goods Ledger etc. are maintained alongwith Cost Ledger.
170 Advanced Cost Accounting - III
‘Cost Ledger’ contains all impersonal accounts including overheads accounts
such as, factory, administrative selling and distribution overheads etc. All the other
ledgers which are supportive to “Cost Ledger” are serve as subsidiary ledgers.
When in large business organisation such subsidiary ledgers are maintained, it is
essential that the “Cost Ledger” should be made self-balancing by opening various
control accounts. In order to make ‘Cost Ledger’ self balancing ‘Corresponding
Entries’ related to above mentioned subsidiary ledgers, where a debit or credit,
are posted in a control accounts for each of the other ledgers maintained therein.
i) Store Ledger : It contains all accounts of individual items of raw materials,
components and consumable stores. In cost ledger a Stores Ledger Control
Account is opened to represent the stores ledger in total.
ii) Work-in-Progress Ledger : In this ledger, accounts of all jobs pending
on the floor are maintained. Each job is allotted a code number and a separate
account is opened for each job. Work-in-Progress Control Account is
maintained in the cost ledger which represents the Work-in-Progress Ledger
Account in total.
Cost Journal & Cost Ledger
NOTES
Check Your Progress
How cost ledger is the
principal ledger of costing
department ?
iii) Finished Goods Ledger : It contains item-wise accounts in respect
of finished goods intended for sale. Finished Stock Ledger Control Account
is maintained in cost ledger, to represent finished stock ledger in total.
In addition to the above mentioned three control accounts the Cost Ledger
contains i) General Ledger Control Account, ii) Wages Control Accounts and iii)
Overhead Control Accounts - Such as production overhead account, Administrative
overhead account, selling and distribution overhead accounts, cost of sales account
etc.
10.5.2 Control Accounts
In order to provide a ready means of preparing Profit and Loss Accounts
and Balance Sheet and other cost statements, control accounts are maintained in
accounting system. As discussed earlier, number of subsidiary ledgers are kept
for recording numerous transactions instead of posting them into general ledger.
The total of all these subsidiary ledger accounts are posted in total at the end of
the period to control accounts in the cost ledger. These accounts facilitate
compilation of financial accounts and reconciliation with financial accounts. These
cost control accounts also minimise and detect accounting errors like - nonposting,
wrong posting and other mistakes.
Following are the important Control Accounts which are opened in ‘Cost
Ledger’ as shown in figure 10.1
1)
General Ledger Adjustment Account;
2)
Store Ledger Control Account;
3)
Work-in-Progress Ledger Control Account;
4)
Finished Goods Ledger Control Account;
5)
Wages Control Account;
6)
Production Overhead Account;
7)
Administration Overhead Account;
Check Your Progress
How many Control accounts
you know ?
Advanced Cost Accounting - III
171
8)
Selling and Distribution Overhead Account;
9)
Cost of Sales Account;
10)
Cos
t
n
butio
Distri nts
u
g and
Sellin head Acco
Over
o
f
S
ales
A
c
c
oun
t
Ov Adm
erh ini
ea stra
d A tiv
cc e
ou
nt
Costing Profit and Loss Account;
8
9
7
Produ
ction
O
Acco verhead
unt
10
Cost
Contol
6
it
rof unt
P
g
co
tin Ac
s
Co Loss
d
an
1
General Ledger
adjustment or
Control Account
Accounts
2
5
4
s
res
og unt
Pr
in cco
rk l A
Wo ontro
C
Fi
Ledg nished Go
er Co
ods
n
t
r
o
l Acc
ount
ol
ntr
o
C t
ges coun
a
W Ac
St
Con ore Le
trol dge
Acc r
oun
t
3
Fig. 10.1 : Cost Control Accounts
172 Advanced Cost Accounting - III
1) General Ledger Adjustment (or Control) Account :
This account is essential to make the cost ledger “self-balancing”. All
transactions of income and expenditure which originate in the financial accounts
must be entered in this ledger for eventual transfer to cost control accounts. The
balance on this account represents the total of all balances of the impersonal
accounts. It is a total account which links Cost and Financial Accounts.
Cost Journal & Cost Ledger
NOTES
2) Stores Ledger Control Account :
In this account receipts and issues of materials are recorded from goods
received notes and stores requisitions respectively. The balance of this account
represents the total balance of stores which should agree with the aggregate
balances of individual accounts in the stores ledger.
3) Work-in-Progress Ledger Control Account :
This account indicates the total amount of work-in-progress, if any, direct
materials, direct labour costs, direct expenses, production overhead recovered
and is credited with the actual or predetermined cost of finished products transferred
to finished goods stores. Materials returns, transfer and abnormal time costs are
also credited to the respective jobs. The balance of this account will show total
balance of jobs which are in progress as per individual job accounts.
4) Wages Control Account :
This account relates to all types of wages and labour costs incurred. In
fact, this account acts as a clearing house for wages incurred and absorbed.
Direct wages are transferred to Work-in-Progress Account and indirect to
respective Overhead Control Accounts.
5) Production or Manufacturing Overhead Account :
This account contains the factory expenses. It is debited with indirect material
cost, indirect wages and indirect expenses and credited with the amount of
overhead recovered. Overheads allocable to Work-in-Progress are carried over
to the next period. The balance in the Control Accounts represents under or over
absorption and is transferred to Costing Profit and Loss Account.
6) Administration Overhead Account :
This account is debited with the administration cost and credited with the
overhead recovered. Any balance, in this account, is transferred to Costing Profit
and Loss Account.
7) Selling and Distribution Overhead Account :
Selling and distribution costs are debited to this account and credited with
the amount of overhead recovered. Balance, if any, is transferred to Costing Profit
and Loss Account.
8) Finished Goods Ledger Control Account :
This is also known as Stock Ledger Control Account. The total value of
Advanced Cost Accounting - III
173
Cost Journal & Cost Ledger
NOTES
finished goods in stock is represented in this account. This account is debited with
opening balance of finished goods and the cost of finished goods transferred from
Work-in-Progress Control Account. It is credited with the cost of sales and the
balance represents the amount of unsold stock in business.
9) Cost of Sales Account :
This account records the actual sales made and profit thereon. This account
is debited with the cost of goods sold, selling and distribution overhead, recovered
and is closed by transfer to Costing Profit and Loss Account.
10) Costing Profit and Loss Account :
This account records the transfer of the amount in respect of under-or
over-recovered overheads, the sale value of goods sold and balance from cost of
sale account. The account is also credited or debited with the abnormal losses or
gains. The closing balance represents profit or loss and is reconciled with the
profit or loss as per financial profit and loss account.
In short, all these control accounts are maintained as per the fundamental
principles of double entry book-keeping system. The working of all above mentioned
control accounts is explained with the help of following journal entries.
10.5.3 Accounting Treatment of Journal Entries
Following journal entries are to be passed in various control accounts.
Transactions
Journal Entry
1) Materials Purchased :
a) For Stock
• Debit Stores Ledger Control A/c
Credit General Ledger Adjustment A/c
b) For special jobs
• Debit Work-in-Progress Control A/c
Credit General Ledger Adjustment A/c
2) Materials Issued :
a) Direct Materials
• Debit Work-in-Progress Control A/c
Credit Stores Ledger Control A/c
b) Indirect Materials
• Debit Work-in-Progress Control A/c
Credit Store Ledger Control A/c
c) Return to Supplies
• Debit General Ledger Adjustment A/c
Credit Store Ledger Control A/c
3) Materials Returned from
174 Advanced Cost Accounting - III
shop floor :
• Debit Stores Ledger Control A/c
Credit Work-in-Progress Control A/c
4) Materials transferred from
job to job :
• No entry in Control Account. In Work-
Cost Journal & Cost Ledger
in-Progress Ledger
• Debit Transferee Job A/c
Credit Transferor Job A/c
5) Labour :
NOTES
a) Total Salary and Wages paid • Debit Wages Control A/c
Credit General Ledger Adjustment A/c
b) Allocation :
For Direct Labour
• Debit Work-in-Progress A/c
Credit Wages Control A/c
For Indirect Labour
• Debit Respective Overhead Control A/c
Credit Wages Control A/c
6) Direct Expenses :
• Debit Work-in-Progress Control A/c
Credit General Ledger Adjustment A/c
7) Overheads :
a) Incurred and accrued
b) Recovered
Credit General Ledger Adjustment A/c
• Debit Work-in-Progress A/c (For works
overhead).
• Debit Finished Goods Ledger Control
A/c (For administration overheads).
• Debit Cost of Sales
(For selling and distribution overheads)
Credit Respective Overhead Control A/c
c) Work-in-Progress
• Debit Work-in-Progress A/c
Credit Respective Overhead Control A/c
8) Finished Stock :
a) Produced
• Debit Finished Goods Ledger Control A/c
b) Sold (at cost)
Credit Work-in-Progress A/c
(i) Debit Cost of Sales A/c
Credit Finished Goods Ledger Control A/c
c) Sales Return
(ii) Debit General Ledger Adjustment A/c
Debit Cost of Sales A/c Credit General
Ledger Adjustment A/c
Advanced Cost Accounting - III
175
Cost Journal & Cost Ledger
9) Capital Work (On completion) • Debit General Ledger Adjustment A/c
Credit Capital Order A/c
10) Repairs Work (on completion) • Debit Respective Overhead Control A/c
Credit Repair Order A/c
NOTES
11) Special Orders Completion
and sold immediately at
factory cost. (at total cost)
• (i) Debit Cost of Sales A/c Credit Workin-Progress Control A/c
(ii) Debit General Ledger Adjustment A/c
Credit Cost of Sales A/c
12) Total cost to make and sell
(profit)
• Debit Cost of Sales A/c
Credit Costing Profit and Loss A/c
13) Under absorption of overhead • Debit Costing Profit and Loss A/c
(if unadjusted)
Credit Respective Overhead Control A/c
14) Over-absorption of Overhead • Debit Respective Overhead Control A/c
if unadjusted
15) Transfer of Net Profit
Credit Costing Profit and Loss A/c
• Debit Costing Profit and Loss A/c
Credit General Ledger Adjustment A/c
ILLUSTRATION
Enter the following transactions relating to Escorts Ltd. Mumbai in the
Financial Books and Cost Books for the year ended 31st March, 2012.
Materials purchased :
176 Advanced Cost Accounting - III
`
a)
On Credit
15,000
b)
Material purchased for special job on credit
1,200
c)
Cash purchases
3,000
Material returned to supplier
1050
Material issue to jobs
9,300
Indirect Materials issued to jobs
750
Material returned from shop floor
600
Material transferred from (Job No. 911 to 901)
300
SOLUTION
Cost Journal & Cost Ledger
In the books of Escorts Ltd., Mumbai
Financial Books
Date
Particulars
1) a)
Purchases A/c
L.F.
Dr.
Debit Credit
`
`
-
To Creditors A/c
NOTES
15,000
-
15,000
(Being the amount of Credit purchases)
b)
Purchases A/c
Dr.
-
To Creditors A/c
1,200
-
1,200
(Being credit purchases for special Job)
c)
Purchases A/c
Dr.
-
To Cash A/c
3,000
-
3,000
(Being the amount of cash purchases)
2)
Creditors A/c
Dr.
-
To Purchases A/c
1050
-
1050
(Being material returned to suppliers)
( Note : No entries are required in the financial books for item Nos. 3, 4, 5, and 6
as they affect only the Cost Ledgers.)
Cost Books
Date
Particulars
1) a) Store Ledger Control A/c
L.F. Debit Credit
`
`
Dr.
-
To General Ledger Control Adjustment A/c
15,000
-
15,000
(Being the amount of Credit purchases)
b) Work-in-Progress Ledger Control A/c
Dr.
To General Ledger Control A/c
-
1,200
-
1,200
(Being Materials purchases for special Job)
c) Stores Ledger Control A/c
Dr.
-
To General Ledger Control Adjustment A/c
-
3,000
3,000
(Being cash purchases made)
Advanced Cost Accounting - III
177
Cost Journal & Cost Ledger
2)
General Ledger Control A/c
Dr.
To Store Ledger Control A/c
-
1050
-
1050
(Being material returned to suppliers)
NOTES
3)
Work-in-Progress Ledger Control A/c
Dr.
To Store Ledger Control A/c
-
9,300
-
9,300
(Being material issued to jobs)
4)
Factory Overhead Control A/c
Dr.
To Stores Ledger Control A/c
-
750
-
750
(Being indirect material issued to jobs)
5)
Stores Ledger Control A/c
Dr.
-
600
To Work-in-Progress Ledger Control A/c -
600
(Being material returned to stores)
6)
Job No. 911 A/c
To Job No. 901 A/c
Dr.
-
300
300
(Being material returned from Job No. 911
No. 901)
( Note : Item No. 6 affects two accounts of the same Work-in-Progress Ledger,
so the entry will be passed directly as above and not through Work-inProgress Ledger Control A/c)
10.6 Summary
Cost books are maintained for recording cost accounting records and a
firm may maintain these books by following any of the three methods available to
it. Under the first method Memorandum cost records are kept while under the
second method incorporation of manufacturing cost is done in the General Ledger
and under the third method separate General Ledger and Cost Ledger are
maintained. Cost Accounting Record Rules and Companies (Cost Accounting
Records) Rules, 2011 provide the rules which are required to be followed by the
firms to whom they become applicable while keeping the cost accounting records
and cost books. A Cost Ledger contains control accounts which help in controlling
costs. A Journal is also prepared in which journal entries are recorded related to
various costs and the journal is maintained on double entry principles of accounting.
178 Advanced Cost Accounting - III
10.7 Key Terms
Cost Journal & Cost Ledger
“Turnover” - As per rule 2 (p) “Turnover” means gross turnover made by
company from the sale or supply of all products or services during the
financial year.
“Cost Ledger” - Cost ledger is the main ledger of costing department and
various control accounts are maintains therein. In large business, in addition
to “cost ledger” other relative ledgers viz. Store ledger, Work in progress
ledger, Finished Goods Ledger etc. are maintained alongwith Cost Ledger.
NOTES
10.8 Questions
I - Theory Questions
1)
What are control accounts ? Describe their advantages.
2)
What is a cost ledger ? What advantages are available from maintaining a
cost ledger ?
3)
Discuss the important control accounts maintained in costing .
4)
You want to introduce control accounts in your company. What accounts
would you institute and from what sources would the entries be derived ?
II - Multiple Choice Questions
(1)
Cost Accounting provides tremendous help to business in its ------- decisions.
(a) planning & non planning.
(b) financial & non financial.
(c) routine & non-routine.
(d) policy & non-policy.
(2)
Which of the following statement is ‘wrong’.
(a) The companies (Cost Accounting Records) Rules are applicable to all
companies not engaged in production, processing, manufacturing &
mining activity.
(b) The Companies (Cost Accounting Records) Rules is not applicable to
activities or products covered ‘Cost Accounting Records (Bulk Drugs)
Rules, 1974.
(c) The Companies (Cost Accounting Records) Rules is not applicable to
activities or products covered ‘Cost Accounting Records (Formulations)
Rules 1988.
(d) The Companies (Cost Accounting Records) Rules is not applicable to
activities or products covered “Cost Accounting Records (Electricity
Advanced Cost Accounting - III
179
Cost Journal & Cost Ledger
industry) Rules 2001.
(3)
As per Rule 2 (1) “Turnover” means -------- made by the company from
the sale or supply of all products or services during the financial year.
(a) net turnover
NOTES
(b) actual turnover
(c) net sales
(d) gross turnover
(4)
Cost Ledger contains all ----------- accounts including overheads accounts.
(a) impersonal
(b) personal
(c) individual
(d) personnel
(5)
Match the pairs.
Group I
Group II
(a) General Ledger Adjustment Account(i) factory expenses
(b) Store Ledger Control Account
(ii) labour cost
(c) Work in progress Ledger Control
(iii) total balance of jobs which
Account
(d) Wages Control Account
are in progress
(iv) Receipts & issues of material
(v) self balancing.
Ans. (a) - (v), (b) - (iv), (c) - (iii), (d) - (ii)
(6)
A Cost Ledger contains ----------- which helps in controlling costs.
(a) nominal accounts
(b) control accounts
(c) real accounts
(d) personal accounts
(7)
A ---------- is a system of accounting under which only one set of accounts
books is maintained to record both the cost and financial transactions.
(a) Double Entry Book-keeping.
(b) Single entry system.
(c) Conventional accounting system.
(d) Integral System.
188 Advanced Cost Accounting - III
(8)
Cost Accounts are concerned with -----------
Cost Journal & Cost Ledger
(a) impersonal accounts.
(b) Bank accounts.
(c) industries accounts
(d) creditors accounts
(9)
NOTES
In Integral System “Return of direct materials” is credited to ---------(a) Store Control Account
(b) Work in progress Account
(c) Sundry Creditors Account
(d) Cost Ledger Account.
Ans. : (1 - c), (2 - a), (3 - d), (4 - a), (6 - b), (7 - d), (8 - a), (9 - b).
10.9 Further Reading
1.
‘Advanced Cost Accounting’ - Nigam and Sharma
2.
‘Cost Accounting - Priciples and Practice’ - N. K. Prasad
3.
‘Cost Accounting’ - Jawahar Lal
4.
‘Theory and Practice of Cost Accounting’ - M. L. Agrawal
5.
‘Cost Accounting’ - B. K. Bhar
Advanced Cost Accounting - III
180
Unit 11
Integral and Non-Integral
Accounting Systems
Integral & Non-integral
Accounting Systems
Structure
NOTES
11.0 Introduction
11.1 Unit Objectives
11.2 Integral and Non-integral accounting systems
11.2.1 Integral System
11.2.2 Non-integral system
11.2.3 Accounting Treatment of Journal Entries
11.3 Reconciliation and integration between Financial Account and Cost Account
11.3.1 Reasons for differences
11.3.2 Reconciliation of Cost and Financial Accounts
11.3.3 Methods of Reconciliation of Cost and Financial Accounts :
(I) Preparation of Reconciliation Statement
(II) Preparation of Memorandum Reconciliation Account
11.3.4 Illustrations
11.4 Key Terms
11.5 Questions and Exercises
11.6 Further Reading
11.0
Introduction
There are two systems of maintaining cost records. The first system is
known as integral system or integrated system under which only one set of
accounting books is kept to record financial as well as cost records. Cost accounts
and financial accounts are maintained in the same General Ledger. The second
system is known as non-integral or non-integrated system and under this system
separate General Ledgers are maintained - one for cost accounts and the other
for financial accounts. Under integral system of accounting the result shown by
cost accounts and financial accounts are same. However, when non-intergral
system is followed there may arise difference between results shown by cost
accounts and results shown by financial accounts and it becomes necessary to
reconcile the results shown by both General Ledgers.
Advanced Cost Accounting - III
182
Integral & Non-integral
Accounting Systems
11.1
Unit Objectives
After studying the information given in this Unit, you should be able to :-
•
Understand meaning, features and advantages of integral accounting
system;
•
Pass journal entries under integral system of accounting.
Check Your Progress
•
Prepare Reconciliation statement, a statement of cost of manufacture
and a statement of profit as per cost accounts; and
Which subsidiary ledgers are
maintained in Integral
System ?
•
Prepare cost ledger.
NOTES
11.2
Integral and Non-integral Accounting System
There are two systems of maintaining cost accounts : viz. Integral system
or Integrated system and Non-integral Non integrated or Interlocking system.
11.2.1
Integral System
Integral system is a system of accounting under which only one set of
account books is maintained to record both the cost and financial transactions. It
is known as integrated system.
Basic feature of Integral system are as follows :
i)
•
Store Ledger
•
Work in Progress Ledger
•
Finished Goods Ledger
•
Sales Ledger
•
Purchase Ledger
•
Overhead Ledger
ii)
183 Advanced Cost Accounting - III
Under this system various subsidiary ledgers are maintained as follows -
A control account for each subsidiary ledger is maintained in general ledger.
The main control accounts are as follows -
•
Stores Ledger Control Account
•
Work in Progress Control Account
•
Finished Stock Control Account
•
Sale Control Account
•
Purchase Control Account
•
Production Overhead Control Account
•
Administrative Overhead Control Account
•
Selling and Distribution Overheads Control Account
•
Wages Control Account
iii)
No need for Cost Ledger : There is no need for cost ledger because all
control accounts are prepared in the financial ledger.
iv)
No need for Cost Ledger Control Account : There is no need for cost
ledger control account because both the aspects of all transactions are
recorded in the respective accounts.
v)
The balances of Overheads Control Accounts which represent under / over
absorption of overheads are transferred to Profit and Loss Account.
vi)
The result of Profit and Loss Account i. e. profit or loss is transferred to
Profit and Loss Appropriation Account.
11.2.2
Integral & Non-integral
Accounting Systems
NOTES
Non-Integral System
Meaning :
Non-integral system is a system of accounting under which two separate
sets of account books are maintained - one to record cost transactions and the
other to record financial transactions. It is also known as non-integrated system
or Inter-locking system or Cost Ledger Accounting system.
Definition :
CMIA London defines Non-Integral System as “a system in which the
cost accounts are distinct from financial accounts, the two sets of accounts
being kept continuously in agreement by the use of control accounts or made
readily reconcilable by other means.”
Basic Features of Non-integral System :
The basic features of Non-integral System are as follows :
i) Impersonal Accounts Cost accounts are concerned with impersonal accounts i.e. real and nominal
accounts.
ii) Various Ledgers Under this system one main ledger (i.e., cost ledger) and various subsidiary
ledgers are maintained. Following ledgers are maintained in cost books under
non-integral system :
•
Cost Ledger
•
Stores Ledger / Job Ledger
•
Work in the Progress Ledger
•
Finished Goods Ledger
Advanced Cost Accounting - III
184
Integral & Non-integral
Accounting Systems
NOTES
iii) Control Accounts Various Control Accounts are maintained under this system. Control
Accounts are the total/summary accounts which are maintained for the subsidiary
ledgers in the Cost Ledger under non-integral system, prepared on the basis of
periodic total of transactions in the respective subsidiary ledgers.
iv) Format of Important Control Accounts :
Check Your Progress
Which its are credited in
Store Ledger Control A/c ?
1) Store Ledger Control Account
Dr.
Stores Ledger Control Account
Particulars
To Balance B/D
Cr.
`
Particulars
`
......
By WIP Control A/c
......
To Cost Ledger Control A/c ......
(Stores Purchased)
(Issued to Production)
By Production Overheads
Control A/c
......
(Issued for Factory Repairs)
By Administration Overheads
Control A/c
......
(Issued to Administration
Office)
By Selling & Distribution
Overheads Control A/c
......
(Issued to Selling &
Distribution Office)
By Capital WIP Control A/c
......
(Issued for Capital Order)
By Cost Ledger Control A/c
......
(Insurance Claim)
By Costing Profit and Loss A/c
......
(Irrecovered Abnormal Loss)
By Balance C/D
......
185 Advanced Cost Accounting - III
......
......
Integral & Non-integral
Accounting Systems
2) Wages Control Account
Dr.
Wages Control Account
Particulars
To Cost Ledger Control A/c
`
Particulars
...... By WIP Control A/c
(Total wages paid)
Cr.
`
......
NOTES
(Direct wages)
By Production Overheads
Control A/c
......
(Indirect wages)
By Capital WIP Control A/c
......
(Wages for Capital Order)
......
......
3) Production Overheads Control Account
Dr.
Production Overheads Control Account
Particulars
To Stores Ledger Control A/c
`
...... By WIP Control A/c
(Indirect Material)
To Wages Control A/c
`
......
(Overheads absorbed/
......
(Indirect wages)
To Cost Ledger Control A/c
Particulars
Cr.
charged)
By Costing Profit & Loss A/c
......
(Production Overheads
(Overheads under-absorbed
due to abnormal reasons)
incurred)
To Costing Profit & Loss A/c
......
(Overheads over-absorbed
due to abnormal reasons)
......
......
Advanced Cost Accounting - III
186
Integral & Non-integral
Accounting Systems
4) Work-in-Progress Control Account
Dr.
Work-in-Progress Control Account
Particulars
NOTES
`
Particulars
To Balance B/D
...... By Finished Stock Ledger
To Stores Ledger Control A/c
......
Control A/c
To Wages Control A/c
......
(Cost of Finised goods
To Production Overheads
Control A/c
Cr.
`
......
produced & transferred to
......
warehouse)
By Balance C/D
......
......
......
5) Finished Stock Ledger Control Account
Dr.
Finished Stock Ledger Control Account
Particulars
`
To Balance B/D
...... By Cost of Sales A/c
To WIP Control A/c
......
To Administration Overheads
Control A/c
187 Advanced Cost Accounting - III
Particulars
Cr.
`
......
(Cost of Goods Sold
transferred)
...... By Balance C/D
......
......
......
Integral & Non-integral
Accounting Systems
6) Administration Overheads Control Account
Dr.
Administration Overheads Control Account
`
Particulars
To Cost Ledger Control A/c
Particulars
Cr.
`
...... By Finished Stock Ledger
(Administration Overheads
Control A/c
incurred)
(Overheads absorbed
......
NOTES
/charged)
To Stores Ledger Control A/c
......
To Costing Profit & Loss A/c
...... By Costing Profit & Loss A/c
(Overheads over-absorbed
(Overheads under-absorbed
due to abnormal reasons)
due to abnormal reasons)
......
......
......
7) Cost of Sales Account
Dr.
Cost of Sales Account
Particulars
`
To Finished Stock Ledger
Control A/c
Particulars
By Costing Profit and Loss A/c
......
Cr.
`
......
(Cost of Sales transferred)
To Selling & Distribution
Overheads Control A/c
......
......
......
Advanced Cost Accounting - III
188
Integral & Non-integral
Accounting Systems
8) Selling & Distribution Overhead Control Account
Dr.
Selling & Distribution Overhead Control Account
`
Particulars
NOTES
Cr.
Particulars
`
......
To Cost Ledger Control A/c.
......
By Cost of Sales A/c.
To Stores Ledger Control A/c.
......
(Overheads absorbed/
charged)
To Costing Profit & Loss A/c.
......
By Costing Profit & Loss
(Overheads over-absorbed)
(Overheads under-absorbed)
due to abnormal reasons)
due to abnormal reasons)
......
......
9) Overhead Adjustment Account
Dr.
Overhead Adjustment Account
Particulars
`
To Production Overheads
Control A/c
......
To Administration Overheads
(Over-absorbed)
......
By Administration Overheads
Control A/c. (Under-absorbed) ......
To Selling & Distribution
Overheads Control A/c
`
By Production Overheads
Control A/c (Underabsorbed)
Particulars
Cr.
Control A/c (Over-absorbed)
By selling & Distribution
......
(Under-absorbed)
Overheads Control A/c
......
(Over-absorbed)
To Costing Profit and Loss A/c ...... By Costing Profit and Loss A/c ......
(Balancing figure)
(Balancing figure)
......
......
Alternavtively the under/over absorbed overheads may be carried forward
to the next accounting period by means of respective Overheads Suspense (or
Reserve) Accounts.
189 Advanced Cost Accounting - III
Integral & Non-integral
Accounting Systems
10) Costing Profit and Loss Account
Dr.
Costing Profit and Loss Account
`
Cr.
Particulars
`
To Cost of Sales A/c.
...... By Cost Ledger Control A/c.
......
To Stores Ledger Control A/c.
...... (Sales)
Particulars
NOTES
To Production Overheads
Control A/c.
......
To Administration Overheads
Control A/c.
......
To Selling & Distribution
Overheads Control A/c.
......
To Cost Ledger Control A/c.
(Profit)
......
......
......
11) Cost Ledger Control Account
Dr.
Cost Ledger Control Account
Particulars
To Costing Profit & Loss
`
Particulars
......
By Balance B/D
A/c (Sales)
To Balance C/D
Cr.
`
......
By Stores Ledger Control
......
A/c (Purchases)
......
By Wages Control A/c.
......
(Wages incurred)
By Production Overheads
Control A/c
......
By Administration Overheads
Control A/c
......
By Selling & Distribution
Overheads Control A/c
......
By Costing Profit & Loss
......
A/c (Profit)
......
......
Advanced Cost Accounting - III
190
191 Advanced Cost Accounting - III
4)
3)
2)
Dr. Purchases
Cr. Sundry Creditors or Cash
immediate repair work
Cr. Sundry Creditors or Cash
jobs
Purchase of materials for
Dr. Purchases
Cr. Cash
stock
Materials purchased for special
Dr. Purchases
Cash purchases of materials for
Cr. Cost Ledger Control
Materials-in-Progress
Dr. Work-in-Progress or
Cr. Cost Ledger control A/c.
WIP Ledger control A/c.
General Ledger Adjustment
Cr. Cost Ledger Control or
Dr. Store Ledger Control A/c
Cr. cost ledger control A/c.
Payable)
Cr. Creditors or Cash
Dr. Factory Overhead Control
Cr. Creditors or Cash
Dr. Work-in-Progress
Cr. Cash
Dr. Stores Control
Cr. Creditors
or Stores Ledger control
Cr. Sundry Creditors (or Account
stock
3
Integral System Entry
Dr. Stores (or materials) Control Dr. Stores (or materials) Control
2
Cost Books-Entry (Inter-locking)
Materials purchased on credit for Dr. Purchases (or stores)
1
Financial Books-Entry
Non-Integral System
NOTES
1)
Sr. No. Transactions
Integral & Non-integral
Accounting Systems
11.2.3 Accounting Treatment of Journal Entries
Under the integral & Non-Integral accounts system following entries are to
passed for some regular nature transactions.
11)
Return of indirect materials to
10)
transfer entries in capital assets and overhead accounts will be required to be made.
jobs accounts are debited and credited. In cases where capital and overhead are involved, necessary
Cr. Factory Overhead Control
job to another
Cr. Factiry Overhead Control
Dr. Stores Control
Cr. Work-in-Progress
Cr. Work-in-Progress
Dr. Stores Control
Dr. Stores Control
Cr. Stores Control
Dr. Factory Overhead Control
Dr. Stores Control
Cr. Stores Control
Dr. Factory Overhead Control
Cr. Stores Control
Dr. Work-in-Progress
Cr. Cash
Dr. Creditors
Cr. Stores Control
Dr. Sundry Creditors
No entry is required in the Control Accounts. However, in the work-in-progress Ledger, the respective
No entry
No entry
No entry
Cr. Stores Control
Materials-in-Progress
Dr. Work-in-Progress or
Cr. Stores Control
Dr. Cost Ledger
Cr. Cost Ledger
Dr. Factory Overhead Control
Materials transferred from one
store
Return of direct materials
shops
Issues of indirect materials to
production to shops
No entry
Cr. Cash
purchases made
Issues of direct materials for
Dr. Sundry Creditors
Cr. Purchases
from stock
Payment to creditors for
Dr. Sundry Creditors
Materials returned to suppliers
9)
8)
7)
6)
5)
Integral & Non-integral
Accounting Systems
NOTES
Advanced Cost Accounting - III
192
193 Advanced Cost Accounting - III
14)
Payment of wages
Cr. Provident Fund
Cr. Wages payable (for
unpaid wages)
Cr. Cash
Cr. Provident Fund
Cr. Wages payable (for unpaid
wages)
Cr. Cash
Cr. Insurance
Cr. Tax
Cr. Cost Ledger control
Cr. Insurance
Dr. Wages/Pay Roll Control
(or Inventory adjustment)
Cr. Factory Overhead Control
Dr. Stores Control
Cr. Stores Control
(Inventory adjustment)
Dr. Factory overhead control
Cr. Tax
Dr. Wages/Pay Roll Control
Dr. Wages/Pay Roll
(or Inventory adjustment)
stock-taking)
Dr. Stores Control
Cr. Factory Overhead Control
No entry
in material (or physical
Adjustment of normal supplies
taking)
Cr. Stores Control
stock (or physical stock-
Dr. Factory Overhead Control
(or Inventory Investment)
No entry
deficiencies in material
Adjustment of normal
NOTES
13)
12)
Integral & Non-integral
Accounting Systems
16)
15)
Dr. Expenses
Cr. Sundry creditors
Cr. Cash
Payment for expenses and
services, e.g., rent, power,
repairs, etc.
Cr. Wages Control
Control (for office salary)
Cr. Creditors
Cr. Cash
Dr. Selling and distribution
Overhead Control
Cr. Cost Ledger Control
Distribution)
Administration or selling and
Control
Dr. Administration Overhead
Dr. Factory Overhead Control
Cr. Wages Control
salaries)
Overhead Control (for sales staff
Dr. Overhead Control (Factory,
Overhead Control
Dr. Administration Overhead
Dr. Selling & Distribution
Dr. Selling & Distribution
indirect labour)
Dr. Factory Overhead Control (for Dr. Administration Control
Dr. Factory Overhead Control
Dr. Work-in-Progress
pay roll account)
Dr. Work-in-Progress or Labour
in-Progress (for direct labour)
No entry
wage and salary (closing of
Analysis and distribution of
Integral & Non-integral
Accounting Systems
NOTES
Advanced Cost Accounting - III
194
195 Advanced Cost Accounting - III
Dr. Selling and Distribution
Overhead Control
Cr. Capital Assets.
Dr. Selling and Distribution
Overhead Control
Cr. Cost Ledger control
Cr. Factory Overhead Control
(ii) Dr. Applied Factory Overhead
(Department-wise)
Cr. Factory Overhead Control
Dr. Applied Factory Overhead
Cr. Applied Factory Overhead and
(i) Dr. Work-in-Progress
Cr. Applied Factory Overhead
Dr. Work-in-Progress
department wise) or
rates.
Cr. Factory Overhead Control or
Cr. Factory Overhead Control
Dr. Work-in-Progress
Control
Control
Dr. Work-in-Progress
Dr. Administration Overhead
Dr. Factory Overhead Control
Dr. Administration Overhead
Dr. Factory Overhead Control
overhead applied at departmental
No entry
Cr. Capital assets
charges for the period
Recording of manufacturing
Dr. Depreciation
Recording of depreciation
NOTES
18)
17)
Integral & Non-integral
Accounting Systems
Recording cost of goods sold
Recording of sales
22)
Dr. Profit and Loss
Cr. Cost and Sales
Cr. Finished Goods (at cost)
Dr. Costing Profit and Loss (at cost)
Cr. Sales (Sales price)
Cr. Costing Profit and Loss
Sales, or Accounts Receivalbe)
Cr. Sales
(Sales price)
Dr. Cost Ledger Control
Cr. Sales (Sales price)
Dr. Debtors or Cash (Sales price)
Cr. Finished Goods (at cost)
Goods sold)
Cr. Cost of Sales (at cost)
Dr. Cost of Sales - Goods
Cr. Work-in-Progress
Dr. Finished Goods control
Cr. Work-in-Progress
Dr. Stores Control
Cr. Work-in-Progress
Dr. Profit and Loss
Dr. Cost of Sales (or cost of
Dr. Debtors (or Cash for Cash
No entry
Cr. Work-in-Progress
completed from production to
finished goods)
Fin. Goods Ledger Control
Dr. Finished Goods Control or
Cr. Work-in-Progress
Dr. Stores Control
Cr. Work-in-Progress
Dr. Costing Profit and Loss
completed (Transfer of goods
Recording cost of job/goods
(ii) Scrap taken on stock charges
No entry
No entry
(i) Taken out of job/process cost
(Abnormal spoilage or waste)
No entry
Spoiled & defective work
21)
20)
19)
Integral & Non-integral
Accounting Systems
NOTES
Advanced Cost Accounting - III
196
197 Advanced Cost Accounting - III
25)
Distribution Overhead Control
Cr. Factory Overhead Control,
Overhead Control
Selling and Distribution
Administration Overhead Control,
Overhead Control, Selling and
of sales or Overhead Suspense.
Distribution overhead
Cr. Factory Overhead Control, Admn.
Work-in-Progress and Cost
overhead, Selling and
Suspense
Dr. Profit and Loss or Overhead
Overhead Control
Overhead Control
Dr. Costing Profit & Loss or
Cr. Selling and Distribution
Cr. Selling and Distribution
Dr. Cost of Sales
Control
Control
Dr. Cost of sales
Cr. Administration Overhead
Dr. Finished Goods Control
Cr. Administration Overhead
Dr. Finished Goods Control
Finished Goods,
No entry
No entry
No entry
Overhead, Administration
Under-absorbed Factory
distribution overhead
Absorption of selling and
overhead
Absorption of administration
NOTES
24)
23)
Integral & Non-integral
Accounting Systems
26)
Cr. Profit and Loss or Overhead
Suspense.
Cr. Costing Profit and Loss or
Finished Goods, Work-in-Progress
Overhead Suspense.
and Cost of Sales or
Control
Overhead Control
Distribution Overhead
Selling & Distribution Overhead
Control, Selling and Distribution
Administration overhead control,
Dr. Factory Overhead Control,
overhead, Selling and
Dr. Factory Overhead Control,
Administration Overhead
No entry
Overhead, Administration
Over-absorbed Factory
Integral & Non-integral
Accounting Systems
NOTES
Advanced Cost Accounting - III
198
Integral & Non-integral
Accounting Systems
Example
Journalise the following transactions relating to Boxin Ltd., Badalapur in
the Cost Books, Financial Books and also in the integrated system of accounts.
1)
Purchase of materials ` 11,500
2)
Wages paid ` 40,000
3)
Wages charged to production ` 21,000
4)
Indirect wages ` 19,000
5)
Sales made during the year ` 3,00,000
6)
Plant and Machinery bought ` 1,75,000
NOTES
199 Advanced Cost Accounting - III
3)
2)
1)
Date
To Sundry Creditors A/c.
Purchase A/c........... Dr.
Particulars
Financial Books
No Entry
(Being the wages paid in cash)
To Cash A/c.
Wages A/c.............. Dr.
(Being the material purchased)
Answer
40,000
11,500
40,000
11,500
production)
(Being the wages charged to
To Wages Control A/c.
A/c. ....................... Dr.
Work-in-Progress Control
(Being the direct wages paid)
Control A/c.
To Cost Ledger
Wages Control A/c. ....... Dr.
material taken into stores)
(Being the purchase of
Control A/c.
To Cost Ledger
Stores Ledger Control A/c.
Debit Credit Particulars
Cost Books
21,000
40,000
11,500
Debit
Integrated Books
A/c. ......................... Dr.
Work in Progress Control
To Cash A/c.
Wages Control A/c. .... Dr.
21,000 To Wage Control A/c.
40,000
11,500
To Sundry Creditors A/c.
Stores Ledger Control A/c. Dr.
Credit Particulars
In the books of Boxin Ltd. Badalapur
21,000
40,000
11,500
Debit
21,000
40,000
11,500
Credit
Integral & Non-integral
Accounting Systems
NOTES
Advanced Cost Accounting - III
200
201 Advanced Cost Accounting - III
6)
Cash or Sundry Debtors
5)
3,00,000
To Sales A/c
Control A/c. .......... Dr.
3,00,000
and machinery)
(Being the purchase of plant
To Cash A/c.
3,00,000
Cash or Sundry Debtors
19,000 To Wage Control A/c.
19,000
Debit
To Cash A/c.
No Entry
To Costing Profit & Loss
Cost Ledger Control A/c. Dr.
paid)
(Being the indirect wages
To Wages Control A/c.
A/c. ............................... Dr.
19,000
A/c. ............................ Dr.
Credit Particulars
Production Overhead Control
Debit
Production Overhead Control
Particulars
Plant and Machinery A/c...Dr. 1,75,000
1,75,000
3,00,000
Credit
Integrated Books
Plant and Machinery A/c. Dr. 1,75,000
during the year)
(Being the Sales effected
To Sales A/c.
3,00,000
Debit
Cost Books
NOTES
............ Dr.
No Entry
Particulars
Financial Books
4)
Date
Answer
1,75,000
3,00,000
19,000
Credit
Integral & Non-integral
Accounting Systems
Integral & Non-integral
Accounting Systems
Illustrations
ILLUSTRATION 1
Bokaro Ltd., Bilaspur keeps books on Integrated Accounting System. The
following balances appear in their ledger books as on 1st April, 2011.
Particulars
Debit
Credit
`
`
Issued and Paid-up Share Capital
3,85,000
General Reserves
2,00,000
Sundry Creditors
5,00,000
Furniture and Fixtures
1,85,000
Plant and Machinery
4,00,000
Sundry Debtors
3,00,000
Bank
1,05,000
Stores
NOTES
95,000
Total
10,85,000
10,85,000
Transactions transacted during the year were as follows :
`
Credit Purchases of Material
10,00,000
Materials issued for production to shop
10,50,500
Stores-in-hand
40,000
Payment of wages
6,50,000
Direct wages charged to production
6,00,000
Indirect wages charged to factory overheads
50,000
Factory Expenses paid
3,00,000
Factory Expenses charged to production
2,75,000
Selling and Distribution Expenses paid
1,00,000
Cash of finished stock
18,00,000
Total Turnover on credit
25,00,000
Closing stock of Finished Goods
40,000
Payment to Sundry Creditors
11,00,000
Collection from Sundry Debtors
21,00,000
You are required to prepare
i)
Necessary ledger accounts, ii) Income statement for the year ended 31st
March 2012, iii) Trial Balance as on 31st March, 2012 and iiv) a Balance sheet
as on 31st March, 2012.
Advanced Cost Accounting - III
202
Integral & Non-integral
Accounting Systems
SOLUTION
In the books of Bokaro Ltd., Bilaspur
i) General Ledger under Integrated Accounting System
NOTES
Dr.
To Balance C/D
Share Capital Account
3,85,000
(Closing Balance)
By Balance B/D
3,85,000
By Balance B/D.
To Balance C/D
General Reserve Account
2,00,000
(Closing Balance)
By Balance B/D
Cr.
2,00,000
2,00,000
By Balance B/D
To Bank
3,85,000
(Opening Balance)
2,00,000
Dr.
3,85,000
(Opening Balance)
3,85,000
Dr.
Cr.
Sundry Creditors Account
11,00,000
(Payment to Sundry
By Balance B/D
2,00,000
Cr.
5,00,000
(Opening Balance)
Creditors)
To Balance C/D
4,00,000
(Closing Balance)
By Stores Control
(Purchases of Materials)
15,00,000
15,00,000
By Balance B/D
Dr.
To Balance B/D
Furniture and Fixtures Account
1,85,000
(Opening Balance)
By Balance B/D
Dr.
To Balance B/D
1,85,000
1,85,000
Plant and Machinery Account
4,00,000
By Balance C/D
Cr.
4,00,000
(Closing Balance)
4,00,000
203 Advanced Cost Accounting - III
Cr.
1,85,000
(Opening Balance)
To Balance B/D
4,00,000
(Closing Balance)
1,85,000
To Balance B/D
10,00,000
4,00,000
4,00,000
Dr.
To Balance B/D
Sundry Debtors Account
3,00,000
(Opening Balance)
To Sales
By Bank
Cr.
21,00,000
(Collection from Sundry
25,00,000
(Credit Sales)
Debtors)
By Balance C/D
7,00,000
NOTES
(Closing Balance)
28,00,000
To Balance B/D.
Dr.
To Balance B/D
28,00,000
7,00,000
Bank Account
1,05,000
(Opening Balance)
To Sundry Debtors
Integral & Non-integral
Accounting Systems
By Wages Control
Cr.
6,50,000
(Payment of wages)
21,00,000
By Factory Overhead
(Collection from
Control
Sundry Debtors)
(Factory Expenses Paid)
By Selling and Distribution
13,00,000
1,00,000
Overhead Control
(Selling and Distribution
Expenses paid)
By Sundry Creditors
11,00,000
(Payment to Sundry
Creditors)
By Balance C/D
55,000
(Closing Balance)
22,05,000
To Balance B/D
Dr.
To Balance B/D
22,05,000
55,000
Stores Control Account
95,000
(Opening Balance)
By Work-in-Progress
Cr.
10,50,000
(Materials issued for
Production)
To Sundry Creditors
10,00,000
(Purchases of Materials)
By Costing Profit & Loss *
5,000
(Balancing figure i.e.
Abnormal Loss)
By Balance C/D
40,000
(stores-in-hand)
10,95,000
To Balance B/D
10,95,000
40,000
Advanced Cost Accounting - III
204
Integral & Non-integral
Accounting Systems
Dr.
Work in-Progress Account
To Stores Control
NOTES
10,50,000
By Finished Stock Control
(Materials issued for
(Finished Production at
Production)
cost)
To Wages Control
Cr.
18,00,000
6,00,000
(Direct wages charged
to Production)
To Factory Overhead
2,75,000
Control
By Balance C/D
1,25,000
(Closing Balance)
(Factory Expenses
charged to Production)
19,25,000
To Balance B/D
19,25,000
1,25,000
Dr.
Wages Control Account
To Bank
6,50,000
(Payment of wages)
By Work-in-Progress
Cr.
6,00,000
(Direct wages charged
to Production)
By Factory Overhead
50,000
Control
(indirect wages charged to
Factory Overheads)
6,50,000
Dr.
6,50,000
Factory Overhead Control Account
To Wages Control
50,000
By Work-in-Progress
(Indirect Wages Charged
(Factory Expenses
to Factory Overhead)
Charged to Production)
To Bank
3,00,000
(Factory Expenses Paid)
By Costing Profit & Loss *
75,000
3,50,000
Selling and Distribution Overhead Control Account
To Bank
2,75,000
(Under - absorption)
3,50,000
Dr.
Cr.
1,00,000
(Selling and Distribution
By Cost of Sales
Cr.
1,00,000
(Transfer to cost of sales)
Expenses paid)
1,00,000
205 Advanced Cost Accounting - III
1,00,000
Dr.
Finished Stock Control Account
To Work-in-Progress
18,00,000
By Cost of Sales *
(Finished Production at
(Balancing figure transfer
cost)
to cost of sales)
By Balance C/D
Cr.
17,60,000
40,000
NOTES
(Closing stock of FG)
18,00,000
Dr.
18,00,000
Sales Account
To Costing Profit &
25,00,000
Loss *
Integral & Non-integral
Accounting Systems
By Sundry Debtors
Cr.
25,00,000
(Credit Sales)
(Balancing figure
transfer to costing
Profit & Loss)
25,00,000
Dr.
25,00,000
Cost of Sales Account
To selling and Distribution
1,00,000
By Costing Profit & Loss *
Overhead Control
(Balancing figure transfer
(Transfer from selling
to costing Profit & Loss)
Cr.
18,60,000
and Distribution
Overhead Control)
To Finished Stock Control
17,60,000
(Transfer from Finished
stock control)
18,60,000
Dr.
18,60,000
Costing Profit & Loss Account
To Stores Control
5,000
(Abnormal Loss)
To Factory Overhead
By Sales
Cr.
25,00,000
(Total Sales)
75,000
Control (Under absorption)
To Cost of Sales
18,60,000
(Net Cost of Sales)
To Net Profit C/D
5,60,000
25,00,000
25,00,000
Advanced Cost Accounting - III
206
Integral & Non-integral
Accounting Systems
ii)
Trial Balance as on 31st March, 2012
Particulars
NOTES
Debit
Credit
`
`
Share Capital
3,85,000
General Reserve
2,00,000
Sundry Creditors
4,00,000
Furniture and Fixture
1,85,000
Plant and Machinery
4,00,000
Sundry Debtors
7,00,000
Bank
55,000
Stores
40,000
Work-in-Progress
1,25,000
Finished Stock
40,000
Profit & Loss A/c.
5,60,000
Total
15,45,000
15,45,000
iii) Balance-Sheet as on 31st March, 2012
Liabilities
`
1) Share Capital :
A) Issued and Paid
`
Assets
1) Fixed Assets :
3,85,000 Plant and Machinery
4,00,000
up Capital
Furniture and Fixtures
2) Reserves and Surplus
2) Investments :
General Reserve
2,00,000
Profit and Loss
5,60,000
3) Securred Loans
1,85,000
-
- 3) Current Assets Loans
and Advances :
Sundry Debtors
7,00,000
Bank
55,000
Closing Stock
i) Stores
4) Unsecured Loans
-
5) Current Liabilities and
Provisions
Sundry Creditors
40,000
ii) Work-in-Progress
1,25,000
iii) Finished stock
40,000
4) Miscellaneous Expenses
-
5) Profit and Loss Account
-
(Deficit)
4,00,000
15,45,000
207 Advanced Cost Accounting - III
2,05,000
15,45,000
Integral & Non-integral
Accounting Systems
ILLUSTRATION 2
Atlas Co. Ahemedabad operates on Non - integrated system of Accounting.
You are required to pass necessary journal entries in the cost books for the following
transactions for the year ended 31st March, 2012 with suitable narrations.
1. Materials Purchased on credit for stock
` 87,000
2. Carriage paid on purchases of Materials
` 3,000
3. Materials issued for production to shop
` 29,200
NOTES
` 6,200
4. Materials returned to stores from job
5. Payments made for direct wages
` 17,900
6. Payments made for indirect wages
` 12,100
7. Direct wages charged to production
` 7,900
8. Indirect ways charged to factory overheads
` 2,100
9. Salaries to administrative staff amounted to
` 4,600
10. Remuneration to employees from sales dept.
` 1,900
SOLUTION
In the books of Atlas Co. Amadabad
Cost Journal under Non-integrated system of Accounting.
Date
2012
1.
Particulars
Stores Ledger Control A/c.
Dr.
To Cost Ledger Control A/c.
L.
F.
Debit
`
-
87,000
-
Credit
`
87,000
(Being materials purchased on credit
for stock)
2.
Stores Ledger Control A/c.
Dr.
To Cost Ledger Control A/c.
-
3,000
-
3,000
(Being carriage paid on purchases of
materials)
3.
Work-in-Progress Ledger control A/c.Dr.
To Stores Ledger control A/c.
-
29,200
29,200
(Being materials issued for production
to shop)
Advanced Cost Accounting - III
208
Integral & Non-integral
Accounting Systems
4.
Stores Ledger Control A/c.
Dr.
-
6,200
To Work-in-Progress Ledger
Control A/c
-
6,200
(Being materials returned to stores from
NOTES
job)
5.
Wages control A/c.
Dr.
-
17,900
To Cost Ledger Control A/c
17,900
(Being direct wages paid)
6.
Wages Control A/c.
Dr.
-
12,100
To Cost Ledger Control A/c.
12,100
(Being indirect wages paid)
7.
Work-in-Progress Ledger
Control A/c.
Dr.
-
7,900
To Wages Control A/c
7,900
(Being direct wages charged to
production)
8.
Factory Overhead Control A/c.
Dr.
To Wages Control A/c.
-
2,100
-
2,100
(Being indirect wages charged to
factory overheads)
9.
Administration Overhead
Dr.
-
4,600
control A/c.
To Wages Control A/c.
4,600
(Being administrative staff salaries
allocated to Administration overhead
control Account)
10.
Selling and Distribution Overhead
Control A/c.
Dr.
To Wages Control A/c.
(Being remuneration to employees of
sales dept. allocated to Selling and
209 Advanced Cost Accounting - III
Distribution Overhead Control Account)
-
1,900
1,900
11.3 Reconcilation and Integration between financial
Accounts and Cost Account
In business, where cost and financial accounts are maintained separately,
the cost accountants are responsible for recording of costing transactions, where
as financial accountants are in charge of financial records. Under cost and financial
accounting system the profit (or loss) shown by one system will not agree with
that of other because these two sets of books may follow different accounting
principles and policies. In order to prove that the cost and financial accounts are in
agreement, a Memorandum Reconcilation or Reconsilation Statement becomes
essential.
Hence, (i) to identify the reasons for difference between the results shown
by the cost Accounting system and financial accounting system and (ii) To check
the arithmetical accuracy and reliability of both the sets of books, the need for
reconsilation of cost and financial accounts arises.
Integral & Non-integral
Accounting Systems
NOTES
Check Your Progress
Give three reasons for
differences between the
results shown by cost accounts
and financial accounts.
11.3.1 Reasons for the difference
The various reasons for difference between the results shown by cost
Accounts and Financial Accounts are given below :i)
Different Bases for Valuation of Inventory/Stocks
In Financial Accounting work-in-progress are generally valued at prime
cost but in cost accounts it is usually valued at Factory Cost. In Financial Accounting
stock of finished goods is valued at cost or market price whichever is lower but in
cost accounts it is valued at cost. This does cause a difference.
ii)
Different methods of Depreciation
Financial accounts treat depreciation as a period cost which varies with the
lapse of time. In cost ledger depreciation is regarded as variable cost. In Financial
Accounts, the fixed percentage of original cost method or written down value
method may be used but in cost accounts Machine Hour Rate method of
depreciation may be used. Thus using different methods of depreciation in cost
accounts and financial accounts may lead to difference in profit figures.
iii) Under or over absorption of overheads and abnormal losses and
savings
In financial accounts, the abnormal items are merged with their normal
headings. Abnormal losses of material or time will be added to the debits of material
and wages. In cost accounts, on the other hand abnormal wastages, losses are
kept outside the manufacturing costs. The overheads absorbed at a pre-determined
rate in cost accounts may be different from the actual overheads recorded in
financial accounts. Both over and under absorption leads to difference in profit
figures occur between the cost accounts and financial accounts.
Advanced Cost Accounting - III
210
Integral & Non-integral
Accounting Systems
iv)
Items appearing only in the financial Accounts
There are some items which appear only in the financial accounts and not
at all in the cost ledger.
a)
Purely Financial Charges -
NOTES
The examples of purely financial charges are as follows :-
•
Interest on loans and mortgage.
•
Losses on disposal of fixed assets, e.g. plant, equipment, building, investment,
etc.
•
Damages payable at law.
•
Penalties and fines payable for the late completion of contracts.
•
Discount and bad debts/debenture issues.
•
Share issue expenses.
•
Preliminary Expense written off.
•
Good will written off.
•
Underwriting commission written off.
•
Losses on sale of fixed assets and investments.
•
Stamp duty and expenses on transfer of capital, stock, shares bond, etc.
b)
Purely Financial Incomes :
The examples of purely financial incomes are as follows :-
Check Your Progress
Which are purely financial
incomes ?
211 Advanced Cost Accounting - III
•
Interest received on bank deposits.
•
Interest, dividends, etc., received on investments.
•
Rents receivable from letting out a portion of the premises.
•
Profits made on the sale of fixed assets and capital expenditures, charged
specifically to revenue.
•
Transfer fees received.
c)
Appropriation of Profit :
These represent the appropriation or distribution of net operating profits.
Being charges against net profit, items like the following appear only in the financial
profit and loss account :
•
Income-tax, Dividend Distribution Tax.
•
Dividends paid on equity or preference share capital.
•
Debenture redemption fund, appropriation or sinking fund for repayment of
other liabilities.
•
Transfer to general reserve or any other fund to strengthen the financial
structure i. e. Dividend Equalisation Reserve etc.
•
Amounts written off goodwill, preliminary expenses, under writing
commission, debenture capital and expenses of capital issues.
•
Charitable donations.
d)
Items of Notional Expenses Included Only in Cost Accounts :
Integral & Non-integral
Accounting Systems
NOTES
There are some items which are included in cost accounts but not in financial
accounts. e.g.
•
Notional interest on capital
•
Notional rent on premises owned
•
Notional salary of the proprietor/partner
11.3.2 Reconcilation of Cost and financial Accounts
Meaning :
Reconcilation Statement is a statement which reconciles the profit/loss as
per Cost Accounts with the profit/loss as per Financial Accounts by showing all
causes of differences between the two.
Integration between cost and financial accounts
Integration means that the same set of the accounts fulfils the requirements
of both i.e. cost and financial accounts. When the cost and Financial Accounts
are integrated i.e. when only one set of books is maintained for recording both
cost and financial transactions, there is no need to have separate reconsilation
statement between these two accounts.
11.3.3 Methods of Reconciliation of cost and Financial
Account
The reconciliation of costing and financial profits can be attempted either.
I)
by preparing a Reconciliation Statement.
II)
by preparing a Memorandum Reconciliation Account.
Whichever method is followed, the end result remains the same.
Advanced Cost Accounting - III
212
Integral & Non-integral
Accounting Systems
NOTES
I Preparation of
Reconcilation
Statement
Methods of
Reconcilation of
Cost and Financial
Accounts
Preparation of II
A momorandum
Reconcilation
Account
Check Your Progress
Give
the
format
of
Reconsiliation Statement.
(I)
Preparation of Reconcilation Statement
When reconcilation is attempted by preparing a reconcilation statement,
profit shown by one set of accounts is taken as base profit and items of difference
are either added to it or deducted from it to arrive at the figure of profit shown by
other set of accounts.
Format of Reconciliation Statement is as follows :
213 Advanced Cost Accounting - III
Integral & Non-integral
Accounting Systems
RECONCILATION STATEMENT - I
(When Profit as per Cost Accounts is taken as a starting point)
`
Particulars
A.
Profit as per Cost Accounts
B.
Add : Items having the effect of higher profit in
----
NOTES
financial accounts :
i)
Over-absorption of Factory Overheads/Office &
Administration Overheads/Selling & Distribution
Overhead in Cost Accounts.
ii)
Over-valuation of Opening Stock or Raw Material/
Work-in-progress/Finished Goods in Cost Accounts
iii)
C.
----
Under-valuation of Closing Stock of Raw Material/
Work-in-progress/Finished Goods in Cost Accounts
iv)
----
----
Incomes excluded from Cost Accounts : (e.g.)
Interest & Dividend on Investments, Rent received,
----
Transfer Fees received etc.
(+)
(----)
Less : Items having the effect of lower profit in
financial accounts :
i)
Under-absorption of Factory Overheads/Office
Overheads/Selling & Distribution Overheads in
Cost Accounts.
ii)
Under-valuation of Opening Stock of Raw Material/
Work-in-progress/Finished Goods in Cost Accounts
iii)
----
Expenses excluded from Cost Accounts : (e.g.)
Bad Debts written off, Preliminary Expenses/
Discount on Issue written off, Legal Charges etc.
D.
----
Over-valuation of Closing Stock of Raw Material/
Work-in-progress/Finished Goods in Cost Accounts
iv)
----
---(-)
(----)
Profit as per Financial Accounts (A + B - C)
----
Note : In case of ‘Loss’, the amount shall appear as a minus item.
Advanced Cost Accounting - III
214
Integral & Non-integral
Accounting Systems
RECONCILATION STATEMENT-II
(When Profit as per Financial Accounts is taken as a starting point)
`
Particulars
A.
Profit as per Financial Accounts
B.
Less : Items having the effect of lower profit in Cost
----
NOTES
Accounts :
i)
Over-absorption of Factory Overheads/Office &
----
Administration Overheads/Selling & Distribution
Overheads in Cost Accounts.
ii)
Over-valuation of Opening Stock of Raw Material/
----
Work-in-progress/Finished Goods in Cost Accounts
iii)
Under-valuation of Closing Stock of Raw Material/
----
Work-in-progress/Finished Goods in Cost Accounts :
iv)
Incomes excluded from Cost Accounts : (e.g.)
----
Interest & Dividend on Investments, Rent received,
Transfer Fees received etc.
C.
(+)
(----)
Add : Items having the effect of higher profit in
Cost Accounts :
i)
Under-absorption of Factory Overheads/Office &
----
Overheads/Selling & Distribution Overhead in
Cost Accounts.
ii)
Under-valuation of Opening Stock of Raw Material/
----
Work-in-progress/Finished Goods in Cost Accounts
iii)
Over valuation of Closing Stock of Raw Material/
----
Work-in-progress/Finished Goods in Cost Accounts
iv)
Expenses excluded from Cost Accounts : (e.g.)
----
Bad Debts written off, Preliminary Expenses/
Discount on Issue written off, Legal Charges etc.
D.
(+)
Profit as per Cost Accounts (A - B + C)
Note : In case of ‘Loss’, the amount shall appear as a minus item.
215 Advanced Cost Accounting - III
(----)
----
II)
Integral & Non-integral
Accounting Systems
Preparation of Memorandom Reconciliation Account
When reconciliation is attempted through Memorandum Reconciliation
Account, profit to be taken as “base profit” is shown like the opening balance of
this account. All items of difference required to be deducted are debited and those
to be added are credited to this account. The balancing figure of this account is
the profit shown by other set of accounts. A speciman form of Memorandum
Reconciliation Account is given below :
NOTES
Format of Memorandum Reconciliation Account is as follows :Dr.
Memorandum Reconciliation Account
Particulars
` Particulars
Cr.
`
To Loss as per Cost Accounts
---- By Profit as per Cost Accounts
----
To Financial Expenses
---- By Financial Incomes
----
To Underabsorption of
Overheads in Cost Accounts
By Overabsorption of
----
To Undervaluation of
Opening Stock in Cost
----
To Overvaluation of Closing
Stock in Cost Accounts
To Profit as per Financial
----
By Overvaluation of
Opening Stock in Cost
Accounts
Overheads in Cost Accounts
Accounts
----
By Undervaluation of
----
Closing Stock in Cost
Accounts.
----
---- By Loss as per Financial
----
Accounts (if Dr < Cr)
Accounts (if Dr > Cr)
----
----
Example
Following information is derived from the records of Atlas Co. Ajmer for
the year ended 31st March, 2012. You are required to prepare.
i)
A statement showing the profit as per Cost Accounts; and
ii) A statement of reconciliation.
Following information is taken from the financial records :
Advanced Cost Accounting - III
216
Integral & Non-integral
Accounting Systems
Dr. Profit and Loss Account for the year ended 31st March, 2012 Cr.
`
Particulars
To Opening Stock finished
goods (400 units)
NOTES
`
Particulars
By Sales (10,200 units)
7,14,000
16,000 By Closing Stock of
To Materials
2,50,000 finished goods (200 units)
To Wages
1,00,000
To Factory Overhead
9,000
94,000
To Administration
1,05,000
To Selling Expenses
50,000
To Bad debts
10,000
To Preliminary expenses
To Net Profit C/D.
4,000
34,000
7,23,000
7,23,000
Following are found out in costing books :
Materials ` 25 per units. Labour cost `16 per units. The factory overheads
are absorbed at 60 % of labour cost and administration overheads at 20% of
factory cost. Selling expenses are charged at ` 6 per unit sold. In cost accounts,
the opening stock is valued at ` 45 per unit and the closing stock at ` 60 per unit.
There is no opening or closing stock of materials or works-in-progress except that
of finished goods.
Answer
In the books of Atlas Co. Ajmer
Cost Sheet for the year ended 31st March 2012
Units Produced : 10,000 Units
Units Sold : 10,200 Units
`
Particulars
10,200 Units
Materials
(10,000 Units @ ` 25 per unit)
Add :
2,50,000
Wages
(10,000 Units @ ` 16 per unit)
(+)
 Prime Cost
Factory
4,10,000
Overheads
(60% of Labour)
(+)
 Works cost
Add :
217 Advanced Cost Accounting - III
96,000
5,06,000
Office Overheads
(20% of works cost)
Less :
1,60,000
Closing Stock of Finished Goods :
(+)
1,01,200
6,07,200
(200 units @ cost i.e. ` 6,07,200 Units ÷
Integral & Non-integral
Accounting Systems
10,000 Units, ` 60.72 but valued @
` 60 only (as per the problem)
(-)
 200 Units x ` 60
Add :
12,000
5,95,200
Opening Stock of finished goods
(Units 400 @ ` 45)
(+)
 Cost of goods sold
18,000
NOTES
6,13,200
Add : Selling expenses
(Units 10,200 x ` 6)
(+)
61,200
 Cost of sales
6,74,400
Profit
39,600
Sales
7,14,000
Working Notes :
1)
Computation of Units Produced during the year :
Sales
=
Closing Stock
+
10,200 Units
Opening Stock
-
200 Units
400 Units
= 10,000 Units
Reconciliation Statement for the year ended 31st March, 2012
`
Particulars
Profit as per Cost Books
`
39,600
Add :
i)
Factory overhead over-absorbed
2,000
ii)
Selling overhead over-absorbed
11,200
iii)
Over-valuation of opening stock of finished
goods in cost books
(+)
2,000
15,200
54,800
Less :
i)
Administrative overheads under absorbed
3,800
ii)
Closing stock of finished goods over-valued
3,000
in cost books
iii)
Bad debts and preliminary expenses not taken into (+)
14,000 (-) 20,800
account in cost books
 Profit as per Financial Books
34,000
Advanced Cost Accounting - III
218
Integral & Non-integral
Accounting Systems
11.3.4 Illustrations
ILLUSTRATION 1
NOTES
From the following Profit and Loss Account of Atlas Co. Ltd., Aurangabad
for the year ended 31st March, 2012, draw a Memorandum Reconciliation Account
showing the profits as per Cost Accounts.
Dr.
Profit and Loss Account for the year ended 31-03-2012 Cr.
Particulars
To Rent and Taxes
`
11,200
`
Particulars
By Gross Profit B/D
54,600
To Administrative Salaries
6,500
By Rent Received
400
To Advertisement
4,900
By Commission Received
100
To Sales Promotion
9,300
To Carriage Outward
2,900
To Loss on Sales of Furniture
1,900
To Interest on Deposits
200
To Penalties
100
To Net Profit C/D
18,100
55,100
To General Reserve
8,000
To Proposed Dividend
4,000
To Income Tax
1,000
To Surplus C/D
5,100
55,100
By Net Profit B/D
18,100
18,100
18,100
The Cost Accountant has ascertained the profit of `19,800 as per his books
of accounts.
SOLUTION
Working Notes :
1)
Statement showing reasons for disagreement :
Particulars
219 Advanced Cost Accounting - III
CA
FA
Difference
`
`
`
i)
Rent Received
-
400
400
ii)
Commission Received
-
100
100
iii)
Loss on Sale of Furniture
-
1,900
1,900
iv)
Interest on Deposits
-
200
200
v)
Penalties
-
100
100
vi)
General Reserve
-
8,000
8,000
vii)
Proposed Dividend
-
4,000
4,000
viii)
Income Tax
-
1,000
1,000
In the books of Atlas Co. Ltd., Aurangabad
Memorandum Reconciliation Account
for the year ended 31st March, 2012
Dr.
`
Particulars
`
Particulars
To Financial Expenses and
By Profits as per Cost
Appropriations debited only in
Accounts
Financial Accounts
By Financial Incomes credited
i) Loss on Sale of Furniture
Cr.
Integral & Non-integral
Accounting Systems
19,800
NOTES
1,900 only in Financial Accounts
ii) Interest on Deposits
200 i) Rent Received
400
iii) Penalties
100 ii) Commission Recieved
100
iv) General Reserve
8,000
v) Proposed Dividend
4,000
vi) Income Tax
1,000
To Profits as per Financial
5,000
Accounts
20,300
20,300
ILLUSTRATION 2
Bajaj Electrical Co. Ltd., Bijleenagar shows profit as per cost accounting
system `46,126 whereas the audited financial accounts shows a profit of `33,248.
You are required to prepare a Reconciliation Statement from the financial record
given below.
Dr.
Profit and Loss Account for the year ended 31-03-2012
`
`
Opening Stock
4,94,358
5,08,424
Add : Purchases (+)
1,64,308
Particulars
Particulars
Sales
`
Cr.
`
6,93,000
6,58,666
Less :
Closing Stock (-)
1,50,242
Productive Wages
46,266
Works Overheads
41,652
Gross Profit C/D.
96,658
6,93,000
Office Overheads
19,690
Selling and Distribution
6,93,000
Gross Profit B/D
Dividend Received
Overheads
44,352
Net Profit C/D
33,248
97,290
96,658
632
97,290
Advanced Cost Accounting - III
220
Integral & Non-integral
Accounting Systems
NOTES
The accounting record maintained by the cost accountant shows that,
i)
Stock as on 31st March, 2006 amounted to ` 1,56,394.
ii)
Productive wages absorbed were ` 49,734.
iii)
Works Overheads absorbed were ` 39,428.
iv)
Office Overheads were charged @ 3% on value of turnover.
v)
Dividend received were not recorded at all.
SOLUTION
Working Notes :
1) Statement showing Reasons for Disagreement :
Particulars
i)
Closing Stock
ii)
iii)
CA
`
FA
`
Difference
`
1,56,394
1,50,242
6,152
Productive Wages
49,734
46,266
3,468
Works Overheads
39,428
41,652
2,224
iv) Office Overheads
20,790
19,690
1,100
v)
34,650
44,352
9,700
-
632
632
Selling and Distribution Overheads
vi) Dividend Received
In the Books of Bajaj Electrical Co. Ltd., Bijaleenagar
Reconcilation Statement for the year ended 31st March, 2006
Particulars
Amount
Amount
`
`
Profits as per Cost Accounts
46,126
Add :
i) Financial Incomes credited only in
Financial Accounts
a) Divident Received
632
ii) Overabsorption of Overheads/Expenses
in Cost Accounts
a) Productive Wages
b) Office Overheads
3,468
(+)
1,100
Less :(+)
5,200
51326
i) Overvaluation of Closing Stock in
6,152
Cost Accounts
ii) Underabsorption of Overheads/Expenses
in Cost Accounts
a) Works Overheads
b) Selling and Distribution Overheads
2,224
(+)
9,704
(-)
221 Advanced Cost Accounting - III
 Profit as per Financial Accounts
18,078
33,248
Integral & Non-integral
Accounting Systems
ILLUSTRATION 3
Colgate Chemicals Co. Ltd., Cochin prepared their Profit and Loss Account
for the year ended 31st March, 2012 which is as follows :
`
Particulars
To Opening Stock
To Purchases
`
Particulars
NIL By Sales
2,52,100
7,50,000
2,52,100 Less : Returns Inward
7,50,000
(-) NIL
NOTES
(50,000 units x ` 15)
Less : Returns outwards (-) NIL
To Manufacturing Wages
1,05,000 By Closing Stock
40,800
To Factory Overheads
1,21,300 By Share Transfer Fees
2,600
Received
To Establishment Overheads
53,400 By Profit on Sale of Plant
23,400
To Selling and Distribution
Overheads
71,000
To Depreciation on Plant
11,000
To Net Profit C/D
2,03,000
8,16,800
8,16,800
The cost accounting records ascertained the profits of ` 1,97,700. Prepare
a Reconciliation Statement after considering the following details.
i)
Stock on 31st March 2006 valued by the Cost Accountant amounted to `
42,800.
ii)
The Factory Overheads were taken as 100% of Productive Wages in Cost
Accounts.
iii)
The Selling and Distribution Overheads were charged at 10% on Invoice
Price in Cost Accounts.
iv)
The Establishment Overheads were charged at Re. 1 per unit sold in Cost
Accounts.
v)
The Cost Accountants charged depreciation on Plant at ` 8,000.
SOLUTION
Working Notes :
1)
Statement showing Reasons for Disagreement :
Particulars
CA
FA
Difference
`
`
`
42,800
40,800
2,000
i)
Closing Stock
ii)
Share Transfer Fees
-
2,600
2,600
iii)
Profit on Sale of Plant
-
23,400
23,400
iv)
Factory Overheads
1,05,000
1,21,300
16,300
v)
Selling and Distribution Overheads
75,000
71,000
4,000
vi)
Establishment Overheads
50,000
53,400
3,400
vii)
Depreciation on Plant
8,000
11,000
3,000
Advanced Cost Accounting - III
222
Integral & Non-integral
Accounting Systems
In the books of Colgate Chemicals Co. Ltd., Cochin
Reconciliation Statement for the year ended 31st March, 2012
Particulars
NOTES
Amount
`
Profits as per cost Accounts
Amount
`
1,97,700
Add :
i) Financial Incomes credited only in Financial Accounts
a) Share Transfer Fees Received
2,600
b) Profit on Sale of Plant
23,400
ii) Overabsorption of Overheads/Expenses in Cost Accounts
a) Selling and Distribution Overheads (+)
4,000
(+)
30,000
2,27,700
Less :
i) Overvaluation of Closing Stock in Cost Accounts
2,000
ii) Underabsorption of Overheads/Expenses in Cost Accounts
a) Factory Overheads
16,300
b) Establishment Overheads
3,400
c) Depreciation on Plant (+)
3,000
(-)
Profit as per Financial Accounts
24,700
2,03,000
ILLUSTRATION 4
Following is the summarised Profit and Loss Account of Finolex Oil Co.
Ltd., Faizpur for the year ended 31st March, 2012.
Particulars
To Raw Materials
`
`
Particulars
95,000 By Sales
1,92,000
Purchases
(4,800 units x ` 40)
To Carriage and Freight on
By Stock as on 31-03-2012
Purchase of Raw Materials
To Productive Wages
To Chargeable Expenses
To Production Overheads
1,000 i) Work-in-progress
12,000
70,000 a) Materials
6,000
2,000 b) Labour
3,600
48,000 c) Production Overheads
(+) 2400
To Gross Profit C/D
24,000 ii) Finished Goods
2,40,000
To Office Overheads
12,000 By Gross Profit B/D.
To Net Profit C/D.
13,000 By Interest on Govt. Securities
25,000
223 Advanced Cost Accounting - III
36,000
2,40,000
24,000
1,000
25,000
During the year 6,000 units were produced and 4,800 units were sold. The
Integral & Non-integral
Accounting Systems
cost accounting records shows that i)
Production Overheads allocated to production were ` 6 per unit
manufactured.
ii)
Office Overheads allocated to production were ` 3 per unit produced.
iii)
The cost profits amounted to ` 24,000
NOTES
You are required to prepare a statement of Reconciliation between Cost
Accounts and Financial Accounts.
SOLUTION
In the books of Finolex Oil Co. Ltd., Faizpur
Statement showing Cost and Profit for the year ended 31st March 2012
Units Produced : 6,000
Units Sold : 4,800
Particulars
Amount
`
95,000
Raw Materials Purchases
Add :
Carriage and Freight on Purchases Raw Materials (+)
1,000
i)
96,000
Cost of Raw Materials Purchased
Add :
Productive Wages
Add :
Chargeable Expenses
96,000
70,000
Prime Cost
Add :
Amount
`
(+)
2,000
ii)
1,68,000
(+)
36,000
1,68,000
Production Overheads
(`6 x Units Manufactured - 6,000)
2,04,000
Add :
Stock of Work-in-progress as on 01-04-2011 Nil
Less :
Stock of Work-in-progress as on 31-03-2012
(-)
12,000
iii)
1,92,000
(`3 x Units Produced - 6,000)
(+)
18,000
Cost of Production
iv)
2,10,000
Works Cost
Add :
Office Overheads
Add :
Stock of Finished Goods as on 01-04-2011
Nil
Less :
Stock of Finished Goods as on 31-03-2012
42,000
If 6,000 units
= ` 2,10,000
 1,200 units
= ?
=
2,10,000
1,200 units x ` 2,10,000
6,000 units
= ` 42,000
Total Cost
Add :
1,92,000
Profits
Sales
(4,800 units x ` 40)
(-)
v)
1,68,000
1,68,000
vi) (+)
24,000
24,000
1,92,000
Advanced Cost Accounting - III
224
Integral & Non-integral
Accounting Systems
Working Notes
1) Statement showing Reasons for Disagreement :
Particulars
NOTES
CA
FA
Difference
`
`
`
i) Production Overheads
36,000
48,000
12,000
ii) Office Overheads
18,000
12,000
6,000
iii) Closing Stock of Finished Goods
42,000
36,000
6,000
-
1,000
1,000
iv) Interest on Government Securities
In the books of Finolex Oil Co. Ltd., Faizpur
Reconciliation Statement for the year ended 31st March, 2012
Particulars
Amount
`
Profits as per Cost Accounts
Amount
`
24,000
Add :
i)
Financial Incomes credited only in Financial Accounts
a) Interest on Government Securities
ii)
1,000
Overabsorption of Overheads/Expenses in
Cost Accounts
a) Office Overheads
(+)
6,000
(+)
7,000
31,000
Less :
1)
Underabsorption of Overheads/Expenses in
Cost Accounts
i) Production Overheads
12,000
ii) Overvaluation of Closing Stock in
Cost Accounts
(+)
6,000
(-)
 Profit as per Financial Account
225 Advanced Cost Accounting - III
18,000
13,000
Integral & Non-integral
Accounting Systems
ILLUSTRATION 5
David White Co. Ltd., Delhi has prepared a Profit and Loss Account for
the year ended 31st March, 2012 which is shown below.
`
Particulars
To Raw Materials Expenses
`
Particulars
1,39,600 By Sales
4,80,000
To Productive Wages
76,200 (1,200 units x ` 40)
To Works Overheads
42,600 By Stock as on 31-03-2012
To Office Overheads
39,100 i) Finished Goods
To Selling and Distribution
Overheads
8,000
(200 units)
42,700 ii) Work-in-progress
47,995
To Underwriting Commission
2,200 a) Material
28,200
To Discount on Issue of Shares
2,501 b) Wages
11,796
To Interest on Bank Loan
3,000 c) Works Overheads
To Provision for Income-Tax
4,100
To Net Profit C/D
NOTES
(+) 7,999
1,89,994 By Interest on Deposits
5,41,995
6,000
5,41,995
The accounting record maintained by the cost accountant for the similar
period disclosed the following facts :
i)
Works Overheads allocated to the production were one-fifth of direct cost.
ii)
Office Overheads were charged to the production at `3 per unit produced
during the period.
iii)
Selling and Distribution Overheads were charged at `4 per unit sold during
that period.
You are required to prepare -
1)
Statement showing Cost and Profit as per Cost Accounts.
2)
Statement showing reasons for disagreement and
3)
Reconciliation Statement as on that date.
Advanced Cost Accounting - III
226
Integral & Non-integral
Accounting Systems
SOLUTION
In the books of David White Co. Ltd., Delhi
Statement showing Cost and Profit
for the year ended 31st March, 2012
Units Produced - 12,200
Units Sold
Closing Stock
+
12,000
200
Units Sold - 12,000
NOTES
Particulars
Amount
`
Raw Materials Expenses
1,39,600
Add : Productive Wages
Prime Cost
(+)
76,200
i)
2,15,800
(+)
43,160
Amount
`
2,15,800
Add : Works Overheads
(1/5 of Direct Cost i.e. ` 2,15,800
2,58,960
Add : Opening Stock of Work-in-progress
Less : Closing Stock of Work-in-progress
Nil
(-)
47,995
ii)
2,10,965
(` 3 x Units produced i.e. 12,200)
(+)
36,600
Cost of Production
iii)
2,47,565
(+)
48,000
Works Cost
2,10,965
Add : Office Overheads
2,47,565
Add : Selling and Distribution Overheads
(` 4 x Units sold i.e. 12,000)
2,95,565
Add : Opening Stock of Finished Goods
Nil
Less : Closing Stock of Finished Goods
4,058
If 12,200 units = ` 2,47,565
 200 units = ?
200 units x ` 2,47,565
=
12,200 units
= ` 4,058
(-)
Total Cost
iv)
2,91,507
2,91,507
v) (+)
1,88,493
1,88,493
Add : Profits
Sales
(12,000 units x ` 40)
227 Advanced Cost Accounting - III
4,80,000
Integral & Non-integral
Accounting Systems
Working Notes 1) Statement showing Reasons for Disagreement
Particulars
CA
`
FA
`
i) Works Overheads
43,160
42,600
560
ii) Office Overheads
36,600
39,100
2,500
iii) Selling and Distribution Overheads
48,000
42,700
5,300
iv) Underwriting Commission
-
2,200
2,200
v) Discount on Issue of Shares
-
2,501
2,501
vi) Interest on Bank Loan
-
3,000
3,000
vii) Provision for Income-Tax
-
4,100
4,100
4,058
8,000
3,942
-
6,000
6,000
viii) Closing Stock of Finished Goods
ix)
Interest on Deposits
Difference
`
NOTES
In the books of David White Co. Ltd., Delhi
Reconciliation Statement for the year ended 31st March, 2012
Particulars
Amount
`
Profit as per cost Accounts
Amount
`
1,88,493
Add :
i) Financial Incomes credited only in Financial
Accounts
a) Interest on Deposits
6,000
ii) Overabsorption of Overheads/Expenses in
Cost Accounts
a) Works Overheads
560
b) Selling and Distribution Overheads
5,300
iii) Undervaluation of Closing Stock in Cost Accounts
3,942
(+)
15,802
2,04,295
Less :
i) Financial Expenses and Appropriations debited only
in Financial Accounts
a) Underwriting Commission
2,200
b) Discount on Issue of Shares
2,501
c) Interest on Bank Loan
3,000
d) Provision for Income Tax
4,100
ii) Underabsorption of Overheads/Expenses in
Cost Accounts
a) Office Overheads
(+)
2,500
(-)
 Profit as per Financial Accounts
14,301
1,89,994
Advanced Cost Accounting - III
228
Integral & Non-integral
Accounting Systems
ILLUSTRATION 6
Elpro National Co. Ltd., Edalabad prepared their final accounts as follows :
Dr.
NOTES
Manufacturing, Trading and Profit and Loss Account
for the year ended 31st March, 2012
`
Particulars
To Stock of Raw Materials
Cr.
`
Particulars
By Stock as on 31-03-2012
as on 01-04-2011
29,500 i) Raw Materials
To Raw Materials Purchases
32,000
1,85,000 ii) Work-in-progress
To Carriage Inward
1,500 a) Materials
12,800
4,000
To Direct Wages
2,98,000 b) Wages
5,500
To Factory Overheads
1,90,750 c) Factory Overheads (+) 3,300
By Manufacturing Cost C/D
7,04,750
7,04,750
To Manufacturing Cost B/D
6,59,950 By Sales of Finished Goods
To Management Overheads
1,22,500 (7,600 units x ` 120)
To Selling and Distribution
By Finished Goods
Overheads
6,59,950
9,12,000
1,17,600
1,64,000 (1,400 units)
To Bad Debts written off
17,500 By Dividend Received
To Net Profit C/D
72,450
10,36,400
6,800
10,36,400
The following additional information is also available.
i)
Direct Wages includes wages due but not paid amounting to `17,000.
ii) Factory Overheads allocated to production were 60% of Prime Cost Wages.
iii) Management Overheads allocated to production were at `12 per unit
manufactured.
iv) Selling and Distribution Overheads were 20% of loaded price.
You are required to prepare,
a) Statement of Cost and Profit as per cost accounting system.
b) Statement showing reasons for disagreement and
c) Reconciliation Statement for the year ended 31st March, 2012
229 Advanced Cost Accounting - III
Integral & Non-integral
Accounting Systems
SOLUTION
In the books of Elpro National Co. Ltd., Edalabad
Statement of Cost and Profit for the year ended 31st March, 2012
Units Produced - 9,000
Units Sold
7,600
Closing Stock
+
1400
NOTES
Units Sold - 7,600
Particulars
Amount
`
Stock of Raw Materials as on 01-04-2011
Amount
`
29,500
Add :
Raw Materials Purchases
(+)
1,85,000
Add :
Carriage Inward
(+)
1,500
2,16,000
Less : Stock of Raw Materials as on 31-03-2012
(-)
32,000
Cost of Raw Materials Consumed
i)
1,84,000
Add :
Direct Wages
2,98,000
i) Actual Direct Wages paid
ii) Wages due but not paid
1,84,000
2,81,000
(+) 17,000
Prime Cost
ii) (+)
4,82,000
(+)
1,78,000
4,82,000
Add : Factory Overheads
(60 % of Prime Cost Wages i.e. ` 2,98,000)
6,60,800
Add : Stock of Work-in-Progress as on 01-04-2011(+)
Nil
Less: Stock of Work-in-Progress as on 31-03-2012 (-)
12,800
i) Materials
4,000
ii) Wages
5,500
iii) Factory Overheads
(+) 3,300
iii)
6,48,000
(` 12 x Units Manufactured - 9,000)
(+)
1,08,000
Cost of Production
iv)
7,56,000
(+)
1,82,400
Works Cost
6,48,000
Add : Management Overheads
7,56,000
Add : Selling and Distribution Overheads
(20 % of Loaded Price - ` 9,12,000)
9,38,400
Add : Stock of Finished Goods as on 01-04-2011
Nil
Less : Stock of Finished Goods as on 31-03-2012
1,17,600
If 9,000 units = ` 7,56,000
 1,400 units = ?
=
1,400 units x ` 7,56,000
9,000 units
= ` 1,17,600
Total Cost
Add : Profits
Sales
(7,600 units x ` 120)
v) (-)
8,20,800
vi) (+)
91,200
8,20,800
9,12,000
Advanced Cost Accounting - III
230
Integral & Non-integral
Accounting Systems
Working Notes 1) Statements showing Reasons for Disagreement
Particulars
NOTES
CA
FA
Difference
`
`
`
i) Factory Overheads
1,78,800
1,90,750
11,950
ii) Management Overheads
1,08,000
1,22,500
14,500
iii) Selling and Distribution Overheads
1,82,400
1,64,000
18,400
iv) Bad Debts written off
-
17,500
17,500
v) Dividend Received
-
6,800
6,800
In the books of Elpro National Co. Ltd. Edalabad
Reconciliation Statement for the year ended 31st March, 2012
Particulars
Amount
`
Profits as per Cost Accounts
Amount
`
91,200
Add :
i) Financial Incomes credited only in Financial Accounts
6,800
ii) Overabsorption of Overheads/Expenses in Cost Accounts
a) Selling and Distribution Overheads
(+)
18,400
(+)
25,200
1,16,400
Less :
i) Financial Expenses and Appropriations
debited only in Financial Accounts
a) Bad Debts written off
17,500
ii) Underabsorption of Overheads/Expenses in CostAccounts
a) Factory Overheads
b) Management Overheads
11,950
(+)
14,500
(-)
 Profit as per Financial Accounts
43,950
72,450
11.4 Key Terms
231 Advanced Cost Accounting - III
a)
Cost Ledger : This is the principal ledger of cost department. It contains
all impersonal accounts including overhead accounts such as Factory
overheads. Administrative overheads, Selling and distribution overheads,
etc. and classified by the various production and service departments or
other cost centres.
b)
Stores Ledger : Contains all stores accounts, separate accounts being
kept for each item of store.
c)
Work-in-Progress Ledger : Records each type of job undertaken : t h e
cost of all materials, wages and overheads of each job is posted to respective
job account in this ledger.
d)
Finished Goods Ledger : This ledger contains accounts of completely
finished jobs or products, separate accounts are opened for each type of
finished job, product, etc.
e)
Memorandum Reconciliation Account : Memorandum Reconciliation
Account is basically presentation of Reconciliation statement in ‘T’ Account
Form.
Integral & Non-integral
Accounting Systems
NOTES
It is not part of double entry system because all items posted in this
account do not have their corresponding debits/credits in the books of
accounts.
f)
Integrated Accounts : Integrated or integral accounting is a method of
accounting in which both cost and financial accounts are kept in the same
ledger. The two sets of books maintained under non-integrated system one
for cost accounting and another for financial accounting are merged into a
composite ledger.
11.5 Questions and Exercises
I - Objective Questions
A)
State with reasons whether the following statements are True or False.
1.
Cost Ledger Account in financial book is a Memorandum Account.
2.
Cost Ledgers are maintained on self-balancing principle.
3.
Selling and distribution overheads recovered are credited to cost of sales
account.
4.
Materials purchased for specific jobs are debited to work-in-progress control
account.
5.
Integral accounting is also called as interlocking accounting system.
6.
Cost ledger control account servers as a link between financial accounts
and cost accounts.
7.
There is no need for reconciliation under Integrated Accounting System.
8.
Internal transactions are treated in the same manner under integrated system
as well as under non-integrated system of accounting.
9.
A systematic method of recording both financial and costing entries in one
self-contained ledger is known as non-integrated ledger.
10.
Correct and more reliable cost data is made available to the management
under non-integral system of accounting.
Advanced Cost Accounting - III
232
Integral & Non-integral
Accounting Systems
Answers :
True: 1, 2, 4, 7, 8.
False: 3. debited, 5. non-integral, 9. integrated ledger, 10. integral system of
accounting.
NOTES
B)
Fill in the blanks.
1.
The Government of India has issued Cost Accounting Record Rules in
respect of certain manufacturing industries under section ---------- of
Companies Act.
2.
Data for wage control account is derived from ----------.
3.
Only those entries appear in General Ledger Control Account which influence
both ---------
4.
Items of pure financial nature generally do not appear in -------- books.
5.
Higher value of -------- stock in financial books leads to higher financial
profit.
6.
The need to reconcile cost and financial profit arises if cost account and
financial accounts are --------- of each other.
7.
Transfers to reserve are generally ----------- from cost books.
8.
Income tax is recorded in ----------- books only.
9.
There is no general ledger adjustment account under --------- accounting
system.
10.
Integral accounting system avoids ---------- prevalent in case of nonintegrated accounting system.
Answers :
1. 209 (1) (d), 2. Wage analysis sheets, 3. financial and cost books, 4. cost,
5. closing, 6. independent, 7. excluded, 8. financial, 9. integrated, 10. duplication.
233 Advanced Cost Accounting - III
II.
Theory Questions -
1.
What is ‘Cost Ledger’ ? State the various types of control accounts opened
in cost ledger.
2.
What is ‘Cost Control Accounts’ ? State the advantages of maintaining a
Cost Ledger.
3.
‘Non-Integrated Accounting’ is one of the system of cost control accounting
to keep cost books. Discuss.
4.
What is ‘Reconciliation Statement’ ? State the reasons for the differences
between cost accounts and financial accounts that needs to be reconciled.
5.
What is ‘Memorandum Reconciliation Accounts’ ? Under what
circumstances reconciliation of cost and financial accounts be avoided ?
6.
What is ‘Reconciliation’ ? Why should cost accounts and financial accounts
be reconciled ?
7.
“There is generally a divergence between’ financial profits and ‘cost profits’
comment.
8.
What is ‘Reconciliation Statement’ ? State in brief the method of preparing
‘Reconciliation Statement’.
9.
Reconciliation of cost and financial accounts in the modern computer age is
redundant” comment.
10.
What is ‘Integral Accounting’? State the features and need for integral
accounting system.
11.
‘Integral Accounting System’ has number of advantages but it has some
limitations also ‘Discuss’.
12.
Define ‘Integral Accounting System’. State the nature and advantages of
Integral Accounting System.
III.
Practical Problems :
1.
Amco Ltd., Aurangabad Provides you the following data, from which you
are required to pass necessary journal entries under integral accounting
system and non-integral accounting system.
Integral & Non-integral
Accounting Systems
NOTES
`
Purchases of Raw Materials
37,500
Wages Paid
24,700
Productive Wages
17,200
Unproductive Wages
7,500
Materials issued to production
29,100
Factory Overheads incurred
14,300
Works Overheads charged to production
15,400
Office Overheads paid
7,900
Administration overhead charged to
7,600
production
Cash Sales
98,900
Finished Goods of Cost
58,800
Advanced Cost Accounting - III
234
Integral & Non-integral
Accounting Systems
2)
The following ledger balances were extracted from Burma Ltd., Baroda as
on 31st March, 2012.
Particulars
NOTES
Debit
`
Raw Materials Control A/c.
48,200
Work-in Progress Control A/c.
14,700
Finished Stock Control A/c.
21,100
Nominal Ledger Control A/c.
Credit
`
84,000
84,000
84,000
Following transactions took place during the month March, 2012
`
Purchases of Raw Materials
23,100
Raw Materials returned to suppliers
900
Raw Materials losses
1,100
Raw Materials issued to Production
17,400
Factory Overheads allocated to Work-in-Progress
11,700
Work-in-progress rejected
1,100
Finished Goods at cost
32,300
Direct Wages allocated to Work-in-Progress
16,500
Loss of goods sold
39,100
Returns of finished goods by customers
2,700
You are required to prepare necessary ledger control accounts in cost ledger.
3)
Colin Ltd. Chennai Operates an Integrated Accounting System. Following
details are given for the year ended 31st March, 2012
Tiral Balance as on 31st March, 2012.
Particulars
Debit
`
Issued and subscribed share capital
Credit
`
20,00,000
Reserve Fund
2,00,000
Sundry Creditors
1,50,000
Expense Creditors
Land and Building
Plant and Machinery
20,000
5,00,000
13,00,000
Provision for Depreciation on plant
and Machinery
235 Advanced Cost Accounting - III
Stock of Raw Materials
1,00,000
2,20,000
Stock of Work-in-Progress
40,000
Stock of Finished Goods
60,000
Sundry Debtors
2,00,000
Bank
1,50,000
24,70,000
The following data for April, 2012 are given
Raw materials purchases on credit
Raw materials returned to suppliers
Materials issued to production
Materials returned from shop floor
Payment of Productive wages-factory
Unproductive wages paid-factory
Administrative salaries paid
Integral & Non-integral
Accounting Systems
24,70,000
`
9,90,000
40,000
8,50,000
20,000
2,50,000
50,000
1,00,000
Selling and Distribution Salaries paid
75,000
Depreciation on Plant and Machinery for April
50,000
Production Overheads Payable
Office Overheads due
Selling and Distribution Overheads incurred but not paid
NOTES
3,00,000
50,000
1,00,000
Credit Turnover
20,00,000
Collection from Sundry Debtors
19,50,000
Paid to creditors for purchases by cheque
10,00,000
Production overhead charged to production
3,90,000
Administration overhead applied to Fnished Goods
1,45,000
Selling and Distribution overhead applied to cost of sales
1,80,000
Stock on 30th April, 2012
i) Work-in-progress
2,10,000
ii) Finished Goods
2,15,000
You are required to prepare necessary ledger accounts, income statement
for April, 2012 and a Balance Sheet as on 30th April, 2012.
Advanced Cost Accounting - III
236