Cost and Management Accounting: An Introduction, 7 th edition
Colin Drury
ISBN 978-1-40803-213-
9 © 2011 Cengage Learning EMEA

5.1a
Accounting entries for an integrated accounting system
Example
The following are the transactions of AB Ltd for the month of April.
1.
Raw materials of £182 000 were purchased on credit.
2.
Raw materials of £2 000 were returned to the supplier because of defects.
3.
The total of stores requisitions for direct materials issued for the period was £165 000.
4.
The total issues for indirect materials during the period was £10 000.
Cost and Management Accounting: An Introduction, 7 th edition
Colin Drury
ISBN 978-1-40803-213-
9 © 2011 Cengage Learning EMEA

5.1b
5.
Gross wages of £185 000 were incurred during the period consisting of:
Wages paid to employees £105 000
PAYE due to Inland Revenue
National insurance contributions due
£60 000
£20 000
6.
All the amounts due in transaction 5 were settled by cash during the period.
7.
The allocation of the gross wages for the period was as follows:
Direct wages £145 000
Indirect wages £40 000
8.
The employer’s contribution for national insurance deductions was
£25 000.
Cost and Management Accounting: An Introduction, 7 th edition
Colin Drury
ISBN 978-1-40803-213-
9 © 2011 Cengage Learning EMEA

5.1c
9.
Indirect factory expenses of £41 000 were incurred during the period.
10.
1Depreciation of factory machinery was £30 000.
11. Overhead expenses charged to jobs by means of factory overhead absorption rates was £140 000 for the period.
12. Nonmanufacturing overhead incurred during the period was £40 000.
13. The cost of jobs completed and transferred to finished goods stock was
£300 000.
9.
The sales value of goods withdrawn from stock and delivered to customers was £400 000 for the period.
10. The cost of goods withdrawn from stock and delivered to customers was
£240 000 for the period.
Cost and Management Accounting: An Introduction, 7 th edition
Colin Drury
ISBN 978-1-40803-213-
9 © 2011 Cengage Learning EMEA

5.2a
Example
1. Purchase of raw materials
Dr Stores ledger control account
Cr Creditors control account
2. Return of raw materials
Dr Creditors control account
Cr Stores ledger control account
3. Issue of direct materials
Dr Work in progress control account
Cr Stores ledger control account
4. Issue of indirect materials
Dr Factory overhead control account
Cr Stores ledger control account
182 000
2 000
165 000
10 000
182 000
2 000
165 000
10 000
Cost and Management Accounting: An Introduction, 7 th edition
Colin Drury
ISBN 978-1-40803-213-
9 © 2011 Cengage Learning EMEA

5.2b
1.
Stores ledger control account
Creditors a/c 182 000
Balance b/d
182 000
5 000
2.Creditors a/c 2 000
3.Work in progress a/c 165 000
4.Factory overhead a/c 10 000
Balance c/d 5 000
182 000
Cost and Management Accounting: An Introduction, 7 th edition
Colin Drury
ISBN 978-1-40803-213-
9 © 2011 Cengage Learning EMEA

5.3a
1. Recording labour costs payable
Dr Wages control account 185 000
Cr Inland Revenue account
Cr National insurance contribution account
20 000
Cr Wages accrued account
60 000
105 000
Note the above accounts will be cleared by crediting cash and debiting each of the accounts.
2. Recording the allocation of labour costs
Dr Work in progress account
Dr Factory overhead control account
Cr Wages control account
185 000
145 000
40 000
Cost and Management Accounting: An Introduction, 7 th edition
Colin Drury
ISBN 978-1-40803-213-
9 © 2011 Cengage Learning EMEA

5.3b
3.
Recording the employer ’s national insurance contribution
Dr Factory overhead control account
Cr cash/bank
25 000
25 000
Wages control account
5. Wages accrued a/c
5. PAYE tax a/c
5. National Insurance a/c
105 000 7. Work in progress a/c 145 000
60 000 7. Factory overhead a/c 40 000
20 000
185 000
______
185 000
Cost and Management Accounting: An Introduction, 7 th edition
Colin Drury
ISBN 978-1-40803-213-
9 © 2011 Cengage Learning EMEA

5.4a
1.
Recording the overheads incurred
Dr Factory overhead control account
Cr Expense creditors control account
Cr Provision for depreciation
2.
Recording the allocation of overheads to production
Dr Work in progress control account
Cr Factory overhead control account
71 000
41 000
30 000
140 000
140 000
Note that the balance of the factory overhead account represents the under or over-recovery of overhead that is transferred to the Costing Profit and Loss account.
Cost and Management Accounting: An Introduction, 7 th edition
Colin Drury
ISBN 978-1-40803-213-
9 © 2011 Cengage Learning EMEA

Cost and Management Accounting: An Introduction, 7 th edition
Colin Drury
ISBN 978-1-40803-213-
9 © 2011 Cengage Learning EMEA

5.5
1. Recording non-manufacturing overheads incurred
Dr Non-manufacturing overheads account 50 000
Cr Expense creditors
Dr Profit and loss account
Cr Non-manufacturing overheads account
40 000
40 000
40 000
2. Production completed during the period
Dr Finished goods stock account
Cr Work in progress control account
300 000
300 000
3. Recording sales and cost of goods sold
Dr Debtors control account
Cr Sales account
Dr Cost of sales account
Cr Finished goods stock account
Cost and Management Accounting: An Introduction, 7 th edition
Colin Drury
ISBN 978-1-40803-213-
9 © 2011 Cengage Learning EMEA
400 000
400 000
240 000
240 000

5.6a
1.
Contract costing is applied to relatively large cost units which take a long time to complete (e.g. civil engineering projects).
2.
A separate account is maintained for each contract.
• The first section is used to determine cost of sales.
• In the second section cost of sales is compared with sales to derive the profit to date.
• The third section records future expenses and accrued expenses.
Cost and Management Accounting: An Introduction, 7 th edition
Colin Drury
ISBN 978-1-40803-213-
9 © 2011 Cengage Learning EMEA

5.6b
3. Guidelines for determining profit to date on contracts.
• No profit is taken if the contract is at an early stage.
• Prudence concept applied and losses recorded as
• incurred or anticipated.
• If the contract is near completion a proportion of the profit should be recognized based on the following formula:
Cash received to date
Contract Price
× Estimated profit
Cost and Management Accounting: An Introduction, 7 th edition
Colin Drury
ISBN 978-1-40803-213-
9 © 2011 Cengage Learning EMEA

5.6c
• Within the 35–85%stage of completion, the following formula is recommended to determine profit to date:
*Notional profit = Value of work certified – Cost of work certified
Cost and Management Accounting: An Introduction, 7 th edition
Colin Drury
ISBN 978-1-40803-213-
9 © 2011 Cengage Learning EMEA

5.7
Cost and Management Accounting: An Introduction, 7 th edition
Colin Drury
ISBN 978-1-40803-213-
9 © 2011 Cengage Learning EMEA

5.7
Contract costing example
• The agreed retention rate is 10% of the value of work certified by the contractees ’ architects.
• Contract C is scheduled for handing over to the contractee in the near future, and the site engineer estimates that the extra costs required to complete the contract, in addition to those tabulated above, will total £305 000.
• This amount includes an allowance for plant depreciation, construction services, and for contingencies.
• You are required to prepare a cost account for each of the three contracts and recommend how much profit or loss should be taken up for the year.
Cost and Management Accounting: An Introduction, 7 th edition
Colin Drury
ISBN 978-1-40803-213-
9 © 2011 Cengage Learning EMEA

5.8
Cost and Management Accounting: An Introduction, 7 th edition
Colin Drury
ISBN 978-1-40803-213-
9 © 2011 Cengage Learning EMEA

5.9a
Cost and Management Accounting: An Introduction, 7 th edition
Colin Drury
ISBN 978-1-40803-213-
9 © 2011 Cengage Learning EMEA

5.9b
Cost and Management Accounting: An Introduction, 7 th edition
Colin Drury
ISBN 978-1-40803-213-
9 © 2011 Cengage Learning EMEA