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Cost Accounting


Paper 3.3 Cost Accounting

Cost Accounting Elements of Cost + Cost Concepts

Accounting and Control of Material Cost.

Labour Wage payment and incentive Labour Cost Control Labour Turnover.

Overhead Classification Allocation, Appointment and Absorption of overhead

Process Costing Process losses inter-process profits.

Standard costing Variance analysis

Cost Ledgers- Reconciliation of cost and financial profits Integral Accounting


Lesson: 1 Introduction of Cost Accounting

Definition Cost Concepts Element of Cost Installation of Costing System
Lesson: 2 Material Cost
Nature Purchasing Functions Stores Control Stock Levels EOQ Pricing or Material Issues
ABC-Analysis Material houses.
Lesson: 3 Labour Cost
Nature Wage Policy Wage Payment methods Incentive schemes, Leson turnmen.
Lesson: 4 Overhead Cost
Nature - Classification Allocation Apportionment of overhead cost Absorption of overhead:
methods, Machine Hom Rate method.
Lesson: 5 Job Costing and Batch Costing
Nature features Cost Sheet preparation Utilities Limitations.
Lesson: 6 Contract Costing
Features Types or Contract
Lesson: 7 Process Costing
Simple Process Costing Process with Normal and abnormal causes Inter process profit
Lesson: 8 Standard Costing and Variance Analysis
Definition Uses and Limitations Material Cost Variance Labour Cost Variance Overhead Cost
Variance and Sales Variance
Lesson: 9 Cost Ledger Accounting
Nature Control Accounts and its Uses Preparation of Cost Ledger Account
Lesson: 10 Integral Accounting
Nature Uses Preparation of Integral Accounts
Lesson: 11 Reconciliation of Cost and Financial Accounts Need for Reconciliation Steps in reconciliation
Preparation of Reconciliation Statement.

Lesson: 1


Cost Accountancy

It is the application of costing and cost accounting principle, method and techniques to the
science, art and practice of cost control and the ascertainment of profitability. It includes the
presentation of information derived there from for the purpose of managerial decision making.

The term Cost Accountancy includes Costing and Cost accounting. Its purposes are Cost-
control and Profitability ascertainment. It serves as an essential tool of the management for decision

Cost Accounting

The process of accounting for cost from the point at which expenditure is incurred or
committed to the establishment of its ultimate relationship with cost centres and cost units. In its widest
usage it embraces the preparation of statistical data, the application of cost control methods and the
ascertainment of the profitability of activities carried out or planned Cost accounting means such
as analysis of accounting and other information as to enable management to know the cost involved in
each activity together with its significant constituent elements in order to arrive at proper decisions.Cost
accounting provides management with cost data relating to products, processes, jobs and different
operations in order to control the costs and maximize the earnings. It play a vital role in all the business

Definition of Cost Accounting

The application of costing and cost accounting principles, methods and techniques to the
science, art and practice of cost control and the ascertainment of profitability. It includes the
presentation of information derived these from for the purpose of managerial decision making.

Objects of Cost Accounting

1. To serve as a guide to price fixing of products.

2. To disclose sources to wastage in various operations of manufacture.

3. To reveal sources of economy in production process.

4. To provide for an effective system of stores and material.

5. To measure the degree of efficiency of the various departments or units of production.

6. To provide suitable means and information to the top management to control and guide the
operations of the business organisation.

7. To exercise effective control on the costs, time and efforts of labour, machines and other
factors of production.

8. To compare actual costs with the standard costs and analyse the causes of variation.

9. To provide necessary information to develop cost standards and to introduce the system of
budgetary control.

10. It enables the management to know where to economize on costs, how to fix prices, how to
maximize profit and so on.


The types and techniques of costing are as follows:

1. Historial Costing:

The ascertainment of costs after they have been incurred Historical costs are, therefore, postmortem
costs as under this method all the expenses incurred on the production are first incurred and them the costs are

2. Standard Costing:

The preparation and use of standard costs, their comparison with actual costs and the analysis of
variance to their causes and points of incidence.

Here the standards are first set and then they are compared with actual performances. The difference
between the standard and the actual is known as the variance. The variances are analyzed to find out their causes
and also the points or locations at which they occur.

3. Marginal Costing:

The ascertainment of marginal costs and of the effects on profit of changes in volumes or type of output
by differentiating between fixed costs and variable costs.

The fixed costs are those which do not change but remain the same, with the increase or decrease in the
quantum of production. The variables costs are those which do change proportionately with the change in
quantum of production.

The marginal costing takes into account only the variable costs to find out marginal costs. The
difference between Sales and Marginal costs is known as Contribution and contribution is an aggregate of
Fixed costs and Profit/Loss. So the fixed costs are deducted from the contribution to find out the profits.
Marginal costing is a technique to ascertain the effect on profits. Marginal costing is a technique to ascertain the
effect on profit by the change in the volume of output or by the change in the type of output.

4. Direct Costing:

The practice of charging all direct cost to operations, process or products, leaving all the indirect costs to be
written off against profits in the period in which they arise

5. Absorption Costing

The practice of charging all costs, both variables and fixed, to operations, processes or products.

This is the traditional technique as opposed to Marginal or Direct costing techniques. Here both the fixed
and variables cost are charged in the same manner.

Methods of Costing

The methods of costing can be divided into three main groups:

1. Job Costing;

2. Process Costing; and

3. Farm Costing.

1. Job Costing: The job costing methods are applicable where the unit of manufacture is one and
complete in itself. They include printers, job foundries, tool manufactures, contractors, etc. the
following methods are included in Job Costing:

(i) Contract Costing: This method if applied in undertakings erecting buildings or carrying out
constructional works, e.g., House buildings, ship building, Civil Engineering contracts. Here the cost
unit is one and completed in itself. The cost unit is a contract which may continue for over more than a
year. It is also known as the Terminal Costing, since the works are to be completed within a specified
period as per terms of contract or agreement executed by the contractor and contractee.

Contracts can be differentiated from fobs in as much as the contracts jobs are carried out outside
the factory and generally are of a long-term while jobs are carried out inside the factory and are
of a short duration. If an order complete in itself and meant only for the person who has placed
the order, this job-order is executed inside the press and the completion of the order takes a
short time as against the contract which may take years.

(ii) Batch Costing: In this method, a batch of similar or identical products is treated as a job. Here
the unit of cost is a batch of group of products, costs are collected and analyzed according to
batch numbers and the costs are ascertained batch wise. This method is applied in
pharmaceutical industries where medicines or injections are manufactures batch wise or in
general engineering factories producing components in convenient batches.

1. Process Costing: Process costing method is applicable to those industries manufacturing an number of
units of output requiring processing. Here an article has to undergo two or more processes for reaching
the stage of finished goods and succeeding process till completion.

Classification of Cost

The cost-classification is the process of grouping costs according to their characteristics. The cost can be
classified into the following:

1. According to elements;

2. According to Functions or Operations;

3. According to Nature or Behaviour,

4. Accounting to Controllability,

5. According to Normality,

6. According to Relevance to decision-making and Control.

According to Elements: The cost is classified into i) Direct Cost, and ii) Indirect Cost according to
elements, viz., Materials, Labour and Expenses, the description of which occurs in the earlier pages of
this chapter.

According to Functions: the cost is classified into the following:

i) Production Cost or Manufacturing Cost,

ii) Administration Cost,

iii) Selling Cost, and

iv) Distribution Cost,

A brief description of each these items are given below:

i) Production Cost is The cost of sequence of operation which begins with supplying materials,
labour and services and ends with primary packing of the product.

It is also known as Manufacturing of Factory Cost.

ii) Administration Cost is The Cost of formulating the policy, directing the organisation and
controlling the operations of an undertaking, which is not related directly to a production, selling,
distribution, research or development activity or function. Administration Cost comprise office and
Administration expenses.

iii) Selling Cost is The cost of seeking to create and stimulate demand (sometimes termed marketing)
and of securing order.

It is also known as Selling expenses or Selling overheads which include all the expenses of Selling

iv) Distribution Cost is The cost of sequence of operations which begins with making the packed
product available for dispatch and ends with making the re-conditioned returned empty package, if
any, available for re-use.

It is known as Distribution expenses or overheads which include expenses like packing, warehouse
expenses, cost of freight, shipping charges and also the expenses of re-conditioning the returning
empty packages for using them again.

According to Nature or Behaviour: Cost can be classified into

i) Fixed Cost ii) Variable Cost, and iii) Semi-Fixed for Semi-variable Cost.

i) Fixed Cost is A cost which tends to be unaffected by variations in volume of output. Fixed costs
depend mainly on the effluxion of time and do not vary directly with volume of rate of output. Fixed
Costs are sometimes referred to as period costs in systems of direct costing. Fixed costs or Fixed
expenses are those expenses which do not change with the increase or decrease in the quantum of
production but remain stable. They are period costs, e.g., Rent of Building, Salaries etc.

ii) Variable Cost is A cost which tends to vary directly with volume of output, Variable costs are
sometimes referred to as direct costs in systems of direct costing. Variable costs or expenses are
those which increase in direct proportion with the increase in production or which decrease in direct
proportion with the decrease in production, e.g., Direct Materials, Direct Labour, Power, Fuel etc.

iii) Semi-fixed or Semi-variable cost is A cost which is partly variable. This is a cost with changes
but not in direct proportion to the increase or decrease in the production-output, e.g., Repairs and
Maintenance, Salary of supervisors etc.

According to controllability: The cost can be divided into:

i) Controllable Cost, ii) Uncontrollable Cost.

i) Controllable Cost: This is a cost which can be influenced by the action of a specified member of an
undertaking. The organisation is divided into departments or responsibility centres each managed by
a Head. The costs of a particular department or centre re guided by the person-in-charge of the
department. The costs which can be controlled by a specified member who is generally an
important link in the management are the controllable costs. they Head of a cost-centre or a
department ahs control over variable costs only which include Prime cost and other variable
overheads. So the controllable costs are the variable costs.

v) Uncontrollable Costs: it is a cost which cannot be influenced by the action of a specified
member of an undertaking. Uncontrollable costs are generally the Fixed costs, the control of
which does nto lie within the province of a member of the undertaking. The change in Fixed
costs is a mater to be decided at the top level of the management depending upon the policy of
the undertaking. Another example of he uncomtrollable cost is where the cost of one department
is shared by the other department for reason that the other department is taking the benefit of
services of the department. Suppose, the cost of Power departments is shared by the Machine
Department, the cost of this share is uncontrollable as it has no control over the cost of the other
department, viz., the Power Department.

According to Normality:

The cost is classified into i) Normal cost, and ii) Abnormal cost

i) Normal Cost: It is the cost at a given level of output in the condition at which that level of output is
normally attained.

ii) Abnormal cost: it is a cost which is beyond normal cost.

According to relevance to decision-making and Control:

The costs classified on this basis are the following

i) Shut-down Cost: A cost which will still be required to be incurred even though a plant is closed or
shut-down for a temporary period, e.g., the cost of rent, rates, depreciation, maintenance etc., is
known as shut-down cost.

ii) Shun Cost: A cost which has been incurred in the past or sunk in the past and is not relevant to the
particular decision-making is a sunk cost. If it is decided to replace the existing plant; the written
down book value of the plant less the sale value of the existing plant, is a Sunk a Irrevocable cost.

iii) Opportunity Cost: The net selling price, rental value or transfer value which could be obtained at a
point in time if a particular asset or group of assets were to be sold, hired, or put to some alternative
use available to the owner at that time is the opportunity cost. The cost which are related to the
sacrifice made or the benefits foregone are opportunity costs. to take an example, if a part of the
factory building has been let out on rent and now we want to use that portion for installing a plant,
we would naturally lose the rent that we used to get. So the loss of rent is the opportunity which
would arise due to putting the part of that factory building to an alternative use available to the
owner, and this cost should be kept in view while installing the plant.

iv) Imputed cost: it is hypothetical cost required to be considered to make costs comparable. If the
owner of the factory charges rent of the factory to the cost of production to make cost comparable
with that of those undertakings which run production in rented factories, it is an Imputed cost as the
rent has actually not been paid. Some is the case with charging Interest on ones own capital.


Cost are ascertained according to Cost Centres or Cost Units.


A Cost-Centre is a very wide term and includes the Productions. Department Processes, Work orders, Service
Department, Operations, Machine Centers, Area or regions of sales, Warehouses, Persons, etc., of which the cost
is to be ascertained. A Cost-Centre can be classified into the following four types:

1. Impersonal, 2. Personal, 3. Operation, 4. Process.

For manufacturing operations, the cost centres may be Production cost centers, i.e., the Production Departments
engaged in producing, or the Service cost-centres, i.e., the Service Departments which help the production work
e.g., Store, Power Dept. Internal Transport Dept., Repairs and Maintenance Dept., etc.,

For sales operations, the cost-centres, all the machine or the persons operating those machines are brought
together under one cost-centre for determination and control of costs. where the work is carried on through
processes, each process is a cost centre. A machine or a group of machines can also be cost-centre. The Cost
Centres are very useful for analysis, ascertainment and control of costs.

Cost Unit

A Cost Unit is a unit of quality of product, service, or time (or a combination of these) in relation to which costs
may be ascertained or expressed.

Job is a cost unit which consists of a single order (or contract).

Batch is a cost unit which consists of a group of identical items which maintains its identity throughout one or
more stages of production.

Product Group is a cost unit which consists of a group of similar products.

Thus, cost unit is a sub-division into proper nomenclatures attributable to a unit of measurements of cost. Cost
Units are of two types: 1) Single. 2) Composite. The examples of Single Cost unit are-per tone, per meter, per
kilogram etc., and the examples of composite units are-per passenger-kilometer, per tone-kilometer etc.


The need and importance of the installation and the organisation of a good system of cost accounting are being
increasingly realized presently all over the business versatility. The common experience of enthusiastic youths
climbing the business tree and falling mid-way without even collecting the leaves owes to the ignorance of he
use installation and organisatoin of accosting system, and to the infatuation that the profits could be earned
without it. A good system is the key-point governing, the mechanism of an enterprise in the field of cost control,
ascertainment of profitability, and managerial decision-making.

Installation of a cost system is not an expense but an investment as the rewards are much greater than the
expenses incurred. The cost system is for the business and not the business for a system of cost. Therefore, the
system has to be so designed as to meet the specific needs of the enterprise.

A) General Consideration for installing Costing System

The general considerations to be observed in installing a costing system are as follows:

The Objective: Whether the objective of installing the costing system is limited to a specific area, e.g.
material management, or fixing selling price. Or to arrive at a certain managerial decision; or the object
is to install the system for covering all the aspects of cost affecting the business. The approach to install
the system will be dependent on its objectives.

The Area of Operation: Having decided the objective, the areas of operation of the system are to be
studied, by which the management can be best benefited. If production is slack, attention will have to be
paid to increase it; if production is good but the sales are receding, study will be made to increase the
sales and action taken according to the results of study and analysis. Such areas which require
immediate attention are to be carved out on priority basis to be handled by the cost system,

The Organisation of the Business: No system of cost installation would succeed until the organisation
structure of the business is taken into account. The organizational part would help to determine the
scope of working and improvement. If the interests of management call for certain minor changes in the
organizational structure, to its advantage, the same may have to be done.

The Conception & Reception of the Idea: The idea of the installation of the cost system is to be placed
before the staff and the workers in a manner that it is well received and not objected to on flimsy
grounds. The success of the system would depend on the cooperation of he persons engaged in the
enterprise, and the cooperation will be forth coming only if the idea and plans are well conceived and
received. The benefits of introducing the system to all the sections should be well explained.

Collection of Data & Prompt Information: The cost data works as a base for decision-making. There
should be evolved a proper system for the collection of the required cost data and information promptly.
Secondly, there should be a system to verify the correctness of the data supplied, otherwise the
conclusions drawn would be wrong and time spent in its working would go waste.

Cost Records & Cost Books: The maintenance of cost records and cost books depends on the size and
nature of the business, but the basic requirements. The manner in which the financial accounts could be
interlocked into an integral accounting system has to be studied and worked out. Decision has to be
taken if two separate set of books-one for financial accounts and other for cost accounts-have to be
maintained and thereafter the results are to be reconcile. Proper books and records are to be kept and
maintained to meet the requirements of either of the two situations mentioned above.

Control system for the Elements of Cost: System would have to be devised for recording and controlling
costs of materials, labour and overheads, in accordance with costing principles and procedures.

Type and Method of Costing: The choice of method of costing would depend on the nature of
production, e.g., Job Cost method or the Process Cost method. For cost control, standard costing along
with Budgetary control may have to be selected and applied. Similarly, for decision making, Marginal
and Differential costing techniques may be found useful. Preparations for the application of the
particular method and technique/type should be made initially.

Responsibility Accounting: Responsibility accounting is a technique of cost control by delegating, etc.,

known as responsibility centres. Its has to be judged whether a particular official who had been assigned
a particular function, has implemented the same or not within the time allotted to him, or not, and thus
the responsibility has got to be fixed for failure-action on individual persons, for the sake of control of
cost. For this purpose, a system of responsibility accounting should be evolved.

B) Specific considerations for installing costing system

The specific considerations as distinct from general considerations to be kept in view while installing a cost
system are as follows:

Size and Nature of Business: In a business of big size, a detailed cost system is necessary while in a
small business, the system should be within the requirements so that the expenses on the installation and
its working may not out-weigh the utility.

The cost system is good for business engaged in manufacturing or in service-rendering concerns but for
others. Even in production enterprise like colliery where the production costs are all direct costs, the
financial where the production costs are all direct costs, the financial accounts may be so designed as to
obviate the need of any cost system, unless otherwise called for.

Products: the nature of product determines the method of costing to be applied. If the material content of
the product is more valuable, the material cost records need be kept in comparatively more elaborate
manner so as to make material cost control effective. Same is the position with regard to labour and

Organisatoin: The organizational set up for a costing system should be modeled that the control part is
exercised by the Cost Accountant, as such, the present organizational set up of the costing department
need close study to suggest necessary changes.

Functional study: The functional divisions of an undertaking based on cost are a) Manufacturing, b)
Administration, and c) Selling & Distribution. A study of the present working of the different
departments in necessary to suggest improvements.

C) Principles for Smooth Working

The following principles should be kept in mind while introducing the cost system:

The system should be simple and easy to operate.

The system should be flexible, so that it may be expanded or contracted per needs of the business.

The existing pattern should be disturbed only as little as may be considered desirable.

The desired changes be introduced gradually and not in haste.

Confidence be created by the Cost accountant in the minds of management and

Executives regarding the utility of the system, so as to avoid unnecessary criticism

And to obviate obstacles.

D) Line of Action

The following line of action is recommended for the installation of cost system.

Determination of the type of costing and the method of costing, as may be suitable for the undertaking.

To prepare forms, card, report-performs, books etc., for keeping records of all the elements of cost, viz.,
material, labour and overheads.

To decide issues regarding material cost control, i.e., purchase, storing, issue and valuation.

To decide matters regarding labor cost control, i.e., job evaluation, merit rating, appointment, time
recording, division of work, remuneration of labour and other allied problems like idle time, overtime,
labour turnover, casual workings, etc.

Where the work is carried on more by machines, proper records be kept for the machines.

To suggest a suitable system for the collection, classification and analysis of all.

Types of everheads, i.e., manufacturing, administrative, and selling & distributive.

To decide the methods of allocation and apportionment of overheads among the production departments
and Service departments which should be earlier clearly demarcated, and to decide the method of
absorption of overheads.

To decide normal capacity of production and prepare budgets and standards.

To maintain books of cost control based on double-entry principle.

To devise information system by which the costing department may communicate to other departments
and receive reports and other necessary informations promptly .

Merit of Cost Accounting

Helpful in Planning and Decision Making: Cost information brings to light the profitable activities of the
organisation. It provided the sound and rational basis for planning, the changes in products, plants, processes
and techniques of production. The information provided by cost accounting is also useful in evaluating the
various alternatives involved in a situation before taking any final decision.

Inventory Control: As an efficient stores accounting system is essential to an adequate system of cost accounts,
in effective check is provided on all materials and stores.

Ascertainment of Costs: Cost accounting is very helpful in calculating the cost of an article being produced by
the enterprise. It helps in fixing the selling price of the product.

Standard Costs: It helps the production manger not only to find what various jobs and processes have cost but
also what they should have cost. The pre-planned standard costs are used for comparison of the cost of the

Assistance in Manufacturing: Cost accounting pinpoints lapses in purchases of raw materials and other
articles, their utilization. It indicates where wastages are occurring long before the production is finished. It
helps to take immediate steps to avoid such losses and wastes.

Promotion of Sales: Cost accounting is also very helpful in the promotion of sales by adopting an appropriate
price policy. The technique of break even analysis serves as constant remember to increase the sales to the break
even point. It also seeks to control the selling and distribution coasts.

Evaluation of Profitability: It helps in elimination unprofitable activities and operations.

Profit can be Maximised: Cost accounting helps the management in maximizing profits by eliminating all
wastes and uneconomical processes. This cost accounts help in increasing points and minimizing loses.


Cost Sheets are statements setting out the costs of a product giving details of all the costs. Presentation of
costing information depends upon the method of costing. A cost sheet can be prepared weekly, monthly,
quarterly or annually.

In a cost sheet besides total expenditure incurred, cost per unit of output in case of each element of cost can be
shown in a separate column. The cost sheet should give cost per unit in the previous period for the purposes of

Advantages of Cost Sheet

1. It is a simple and useful medium of communication which gives information about costs to all levels of
management in a simple and lucid form.

2. It helps in comparative study of the various elements of costs with the past results and standard cost.
Thus it helps the management in control process.

3. It helps the management in fixing up the selling price more accurately.

4. If acts as a guide to the manufacturer and helps him in formulating a definite and profitable production

5. It enables a producer keep a close watch and control over the cost of production.

6. It shows the total cost and the per unit of the units produced during the given period.

Problem 1

The following particulars have been extracted from the costing records of a manufacturing co., for the year
ended 30th June, 1991.


Raw material purchase 1,00,000


Direct 60,000

Indirect 10,000

Office Salaries 22,000

Finished Goods stock 10,000

Advertising 6,000

Agents Commission 10,000

Rent, rates & taxes etc (9/10 for works , 1/10 for 2,000

Works 4,000

Building-repairs 2,000

Salaries-plant 4,000

Depreciation Rs.

Plant Machinery 4,000

Building 2,000

Carriage inward 2,000

Carriage Outward 6,000

Sales 4,00,000

Opening Stock-

Raw material 40,000

Travelling expenses 2,000

Power 2,000

Plant Maintenance 8,000

Miscellaneous expenses

Plant 2,000

Office 2,000

Closing Stock

Raw Materials 40,000

Finished goods 6,000

Building is occupied 9/10 by factory and 1/10 by office. Production 20,000 (Units)

You are required to prepare a detailed cost statement showing

i) Materials consumed

ii) Prime cost

iii) Works on cost.

iv) Cost of production

v) Cost of sales and

vi) Profit earned


Cost statement of the year ended 30th June, 1991.

Particular Total Cost Cost per unit

Opening Stock of raw 40,000

Add Purchases 1,00,000
Add Carriage inward 2,000
Less Closing stock or raw 40,000
i) Materials consumed 1,02,000 5.10

Direct labour 60,000 3,00

ii) Prime Cost 1,62,000 8.10

Add: Factory overheads

Indirect Wages 10,000 0.50
Power 2,000 0.10
Plant Maintenance 8,000 0.40
Rent, rates and taxes (9/10) 1,800 0.09
Misc. Expenses 2,000 0.10
Repairs Building (9/10)0.20 1,800 0.20
Salaries Plant 4000 0.20
Depreciation Plant 4,000 0.09
-Building (9/10) 1,800 34,000 1.77

iii) Works cost 1,97,400 9.87

Add: Office Overheads

Office Salaries 22,000 1.10

Rents, Rates and Taxes (1/10) 200 0.01
Misc. expenses 4,000 0.20
Repairs Building (1/10) 200 0.01
Depreciation- Building (1/10) 200 26,600 0.01 1.33

iv) Cost of Production 2,24,000 11.20

Add: Opening Stock of 10,000
finished product

Less: Closing stock of 6,000
finished goods

Cost of goods sold 2,28,000

Add: Selling and distribution

Carriage outwards 6,000
Travelling expenses 2,000
Advertising 6,000
Agents Commission 10,000 24,000

Cost of Sales 2,52,000

Add Profit margin 1,48,000

v) Sales value 4,00,000

Problem 2

The cost of Sale of Product A is made up as follows:

Materials used in 55000 Direct Expenses 5000

Materials used in Primary 10000 Indirect Expenses (factory) 1000
Materials used in selling 1500 Administration expenses 1250
Materials used in Factory 750 Depreciation of office building 750
& equipments
Materials used in office 1250 Dep. On factory buildings 1750
Labour required in Producting 10000 Selling expenses 3500
Labour required for factory 2000 Freight on material purchased 5000
Advertising 1250

Assuming that all products are manufactured are sold, what should be the selling price to be obtained as a profit
of 20% on selling price?
Direct material Rs. Rs.
Materials used in manufacturing 55000 100000
Materials used in primary packing 10000
Freight on material purchased 5000 70000
Direct labour 10000
Direct expenses-factory 5000
Direct expenses-factory 85000
Factory overheads 750
Labour required for factory supervision 2000
Indirect expenses factory 1000
Dept. on factory building 1750 5500
Administration O-H
Materials used in OH10 1250
Administration expenses 1250
Dept. on office building equipment 750 3250
Sellings Distribution O-H
Materials used in selling the product 1500
Selling expenses 3500
Advertising 1250 6250
Profit (20% on selling price or 25% on cost) 25000

Problem 3
From the following data prepare a cost & profit statement of Vijay stoves manufacturing company for the year 1990.

Stock of materials as on 35000 Establishment expense 10000

Stock of materials as on 49000 Completed stock in hand -
31.12.1990 1.1.90
Purchase of materials 52500 Completed stock in hand 35000
Direct wages 95000
Factory expenses 17500 Sales 189000

The number of stoves manufacturing during the year 1990 was 1000. The company wants to quote for the contract for
the stoves to be quoted are of uniform quality and make similar to those manufacturing in the previous year. But cost of
materials has increased 15% and cost of factory labour by 10%. Prepare a statement of net profit to be quoted to give the
same percentage of net profit of turnover as was realized during the year 1990 assuming that the cost per unit of O.H.
charges will be the same as the previous year.



Amount Rs. Amount Rs.
Opening Stock of Materials 35000
Purchase of Materials 52500
Closing stock of Materials 4900
Direct wages 95000 23.75
PRIME COST 177600 44.40
Factory expenses 17500 4.37
WORK COST 195100 48.77
Establishment expenses 10000 2.50
Opening completed stock -
Cost of production during the prd 205100
Closing completed stock 35000
PROFIT 18900
Materials consumed 20650
15% increase 3098
Factory wages 23750
10%a increase 2375
Factory expenses 49873
Establishment expenses 2500
(profit 10% of selling price of 1/9 of cost) 6305

Lesson 2
Material Cost
The term materials refers to such commodities which are supplied to the manufacturing industry in their crude
or original forms. They are raw in nature of have to be processed further. Broadly, these may be classified in the
following groups: Raw materials, components, consumable stores, Maintenance Materials, Tools etc.
Since the underlying purpose of cost accounting is to minimize the cost of production, it is important that an
effective control is exercised over them. The storage space and storage costs re reduce thereby. Control over materials is
also necessary to prevent extra-expenses on their unnecessary purchase and improper use. A regular supply of materials
greatly helps the production schedule. It is necessary, therefore, that statements are prepared to accurately record the
value of materials consumed by each department of job.
Material Cost Control envisages a proper organisatoin for the efficient purchasing and storing of the materials,
and for making them issued to the departments or the cost-centres in appropriate quantities. At the proper times and
valued at the right prices.
The materials cost control aims at keeping the material cost within reasonable limits, budgets or standards.
This control is exercised beginnings from the point the orders are prepared for being placed with the suppliers,
and ending at the point the materials are effectively utilized in production or are disposed off otherwise.
The following factors contribute to purchase control:

i) Determination of Quantity to be purchased

Quantities purchased in excessive number or weight block the working capital and the quantities purchased below
the reasonable limit endanger the continuous working of the factory.

ii) Determination of the Ordering Point

The ordering point of the ordering level is one at which the order for purchase of materials is to be placed with the
suppliers when the stock of that material is reduced to that point by consumption or otherwise.

iii) Determination of Price at which to be purchased

The selection of right suppliers and the best terms available out of the quotations received helps this factor.

The Purchase cycle constitutes the following:

1. Initiating the purchase;
2. Receiving of the Purchase Requisitions;
3. Deciding important factors relating to purchase;
4. Selecting the suppliers;
5. Placing purchase-orders and follow-up
6. Receiving the supply and returning unwarranted suppliers;
7. Inspecting the material received; and
8. Passing invoices for payment.

The important factors to be decided are:

a) What to purchase;
b) When to purchase; and
c) How much to purchase.

After receiving the Purchase Requisitions, the next step is to select the suppliers to whom the orders may be sent for
the supply. This is done by inviting tenders or quotations from different suppliers.

While inviting the tenders, the supplying firms should be requested to state their terms and conditions of supply,
delivery time, mode of payment, etc., clearly and to send the tenders in sealed covers.

Having accepted the tenders, the orders are place by the Purchase Department with the firms selected fro the
purchase of requisitioned materials.

The purchaser order should be prepared on the printed form and should contain all the necessary details, so as to
leave no room for any ambiguity or doubt and so as to avoid legal complications.

Follow-up of the Purchase order if essential to keep the schedule of supply by the specified date so that
production work may not suffer.

The Receiving Department checks the supply from the copy of the Purchaser order and prepares his report of the
goods received.

The Inspection Department makes an inspection of the goods received regarding the quality and specifications.

Stores Records

1. Bin Card

A Bin card, also known as Bin Tag or Stock card, is a card showing quantitative record of the receipts, issues and
closing balances of the material kept in the corresponding bin. The Bin card is placed in the bin or shelf or is hung
over the almirah or the rack otherwise known as Bin. Separate Bin cards are prepared for each item of stores and if
two different materials are kept in one almirah, two Bin cards, one for each, are prepared, treating the almirah as two

2. Stores Ledger

Stores Ledger is a record of stores, both in quantity and value and is maintained by the stores Accountant. It is
similar to Bin card but with the main difference that value of material is shown in the Stores ledger. Stores Ledger is
an important book and the account of each item of stores is maintained separately. While Bin cards are maintained
by store-keeper in the store, Store Ledger is maintained in the accounting department by the Stores Accountant.

Material Control and its Requirements

Material Control may be defined as the regulation of the procedures for requisitioning, buying, receiving,
storing, handling and usage of materials.

The main requirements of a system of material control are:

Planning and fixation of definite responsibility for each function of material.
Co-ordination between departments responsible for requisitioning, purchasing, receiving, inspecting, storing
and utilizing the materials,
Centralization on purchases.
Use of material purchase budget and material requirement budget.
Use of standard and uniform forms, and
Proper system of stock control.

For proper application of the material control the following steps are necessary.
1. Purchasing of materials
2. Receiving and inspecting of materials
3. Storing of materials
4. Pricing material Issues
5. Accounting materials losses.
6. Keeping physical and perpetual inventory

Purchasing of Materials
In a large manufacturing concern, a separate purchase department is set up with the object of effecting all purchases.
The top management lays down the purchase department. It is the function of the purchaser department to decide: i)
What to purchaser; ii) When to purchase; iii) form where to purchase; iv) how much to purchase, and v) finally at
what price the material should be purchased.
Maintenance of Stock Levels
The next important point after determination of EOQ is to decide as to when the order for purchase should be
placed. The answer is simple. The order for purchase should be placed when the stock is reduced by usage to the Order
Point. The Order Point is one where the order should be placed for the economic order quantity. For deciding Order
Point, two things, viz., (1) Lead time and (2) Usage during Lead time, are the determining factors. Lead time is the
supply time, or to be more specific, Lead Time is the time interval between placing an order and having materials on
the factory floor ready for production
Usage means the sue of materials by consumptions for productions, or the stock of finished goods sold.
Sometimes purchase are made in large bulk in a season if the goods are seasonal, i.e., available in one season
only, or at a time when it is feared that the goods may not be found available in the near future due to some reason.
Special items for which no limit or order-points are fixed may be purchased as and when needed.
To avoid over-stocking and under stocking each items of the inventory has the Maximum Level. Minimum
Level and an Order point.

Order Point
It is also known; Ordering Level; or Recorder Point, or Reordering Level or Ordering Limit, it has been
stated earlier that Order Point is at which order for supply of materials or goods is placed. To decide the Order
Point, three factors are considered, viz., (1) Lead time (2) Usage during Lead time, and (3) Minimum Limit, or
the Safety stock.

In order to ensure that the optimum quantity of material is purchased and stocked, neither less nor more, the
storekeeper applies scientific techniques of materials management. Fixing of certain levels for each items of
materials is one of such techniques.

The following levels are generally fixed.

1. Maximum level
2. Minimum level
3. Order level
4. Danger level

1. Maximum level
The maximum stock level indicates the maximum quantity of an item of material which can be held in stock at any
The maximum stock can be calculated by applying the following formula.
Maximum level Re-order level + re-order quantity (minimum consumption X minimum re-order period)

2. Minimum level

Minimum level represents the quantity below which the inventory of any items should not allowed to fall; in other
words, an enterprise must maintain minimum quantity of stock so that the production is not hampered due to non-
availability of materials. If some buffer inventory is acting as a cushion against reasonable expected maximum

Minimum level = Re-order level (Normal consumption x normal re-order period)

3. Re-ordering Level Point

Re-ordering stock level in relation to an items of stock is the point at which it becomes essential to initiate purchase
orders for its fresh supplies. Normally, re-ordering level is a point between the maximum and the minimum levels.
Fresh orders must be placed before the actual stocks touch the minimum level.

Reorder level = maximum re-order period x maximum usage.

4. Danger level
The danger level is below the minimum level and represents a stage where immediate steps are taken for getting
stock replenished. When the stock reaches danger level it is indicative that if no emergency steps are taken to
restock the material, the stores will be completely exhausted and normal production stopped. Generally the danger
level of stock is fixed above the minimum level but below the re-ordering level.

Economic Order Quantity Analysis

Economic Order Quantity

This represents the normal quantity to be placed on order when the stock has reached its re-order level. Re-
ordering quantity is to be fixed taking into account the maximum and minimum stock levels. The quantity ordered must
be that which, when added to the minimum stock, will not exceed the maximum stock to be carried at any point of time.
The following factors govern the re-ordering quantity.
1. Average consumption
2. Cost of pacing order
3. Cost of storage
4. Interest on capital etc.,

Carrying cost of inventory consists of

i) The costs of physical storage, such as cost of space, handling and upkeep expenses, insurance, cost of
obsolescence etc.
ii) Interest on capital invested (the opportunity cost of the capital blocked up) and
iii) Cost of placing the order each time.

Economic order quantity or economic lot size (if it relates to production) refers to the number ordered in a single
purchase or number of units should be manufactured in a single run so that the total costs-ordering or set up costs and
inventory carrying costs are at the minimum level. In other words, it is the quantity that should be ordered at one time so
as to minimize the total of

i) Cost of placing orders and receiving the goods, and

ii) Cost of storing the goods as well as interest on the capital invested. The economic order quantity can be
determined by the following simple formula.

EOQ = Economic order quantity or number of units in one lot.

A = Annual usage in units

S = Ordering costs for one order (or set-up costs for one set-up)
I = Inventory carrying costs per unit per year.

This formula is based in three assumptions:

i) Price will remain constant throughout the year and quantity discount is not involved.
ii) Pattern of consumption, variable ordering costs per order and variable inventory carrying charge per unit per
annum will remain the same throughout, and
iii) EOQ will be delivered each time the stock balance, excluding safety stock, is just reduced to nil.

Problem 1
Suppose the annual consumption is 675 units, 10% is the interest and cost of storing an article costing Rs. 30 per
unit, cost of placing and order is Rs. 18. Calculate the E.O.Q.


Where A = Annual usage
S = Ordering cost for one order
I = Inventory carrying costs per unit per year.

Problem 2

Two components A and B are used as follows:

Normal usage 50 units per week each
Minimum usage25 units per week each
Maximum usage 75 units per week each
Re-order quantity A:300 units B:500 units
Re-order period A:4 to 6 weeks B:2 to 4 weeks

Calculate for each component:

a) Re-order level b) Minimum level

c) Maximum level d) Average stock level


Re-order level = Maximum consumption * maximum re-order period

Component A = 75*6 = 450 units

Component B = 75*4 = 300 units

Minimum level = Re-order level (Normal consumption * Normal re-order period)

Component A = 450-(50*5) = 200 units

Component B = 300-(50*3) = 150 units

Maximum level = Re-order level + Reorder Quantity

(Minimum consumption * Minimum re-order period)

Component A = 450 + 300 (25*4) = 650 units

Component B = 300 + 500 (26*2) = 750 units

Average Stock level = (Minimum level + Maximum level)

Component A = (200+650) = 425 units

Component B = (150+750) = 450 units

Need for Inventory Control

The term Inventory is used to denote (i) goods awaiting sale (the stock items of a trading concern and the
finished stocks of a manufacturer); (ii) the goods in course of manufacture, known as work-in-progress, and (iii) goods
to be used directly or indirectly in production, i.e., raw materials and supplies.

In a manufacturing company, normally the cost of materials constitutes fifty percent of the production cost and
the cost of inventory (i.e., raw materials W.I.P., and finished good) represents about one-third of the total assets. As the
costs of materials and inventory are quite formidable but at the same time controllable, there is a great need felt for
proper planning, purchasing, handling and accounting for the same, and also to organize the system of inventory control
in a manner that it may provide the maximum profitably to the management.

Objectives of Inventory Control

The objectives of inventory control as listed below:
1. To exercise proper control on the purchases and issues of inventories; proper storing; elimination of wastage;
and regulating the proper supplies to works and to customers;
2. Pricing of the inventories on suitable basis;
3. Proper recording, and scientific inventory management
4. To have proper assessment of income through the process of matching appropriate costs against revenues.
5. To maintain inventory of sufficient size for the operations to go on uninterruptedly but the size should match
with the optimum financial involvement.

Techniques of Inventory Control

The techniques or the tools generally used to effect control over the inventory are the following:
1. Budgetary techniques for inventory planning;
2. A-B-C. System of inventory control;
3. Economic Order Quantity (E.O.Q.) i.e., how much to purchase at one time economically;
4. Maintenance of Stock levels to decide when to purchase;
5. Perpetual inventory system and the system of store verification;
6. Reduction of surplus stocks and review of slow-moving or stagnant items.
7. Control Ratios.

Budgetary Techniques
For the purchase of raw materials and stocks, what we required is a purchase Budged to be prepared in terms of
quantities and values involved. The sales stipulated as per sales Budget of the corresponding period generally works out
to be the key factor to decide the production quantum during the budget period, which ultimately decides the purchases
to be made and the inventories to be planned.

A-B-C Analysis
To exercise proper control on stores, it is essential that the store items should be classified according to values
so that the most valuable items may be paid greater and due a attention regarding their safety and care, as compared to
others. The stores are divided into three categories generally, viz., A, B, and C.
In the ABC system, greatest care and control is to be exercised on the items of A list as any loss or breakage or
wastage of any items of this list may prove to be very costly; proper care need be exercised on B list items and
comparatively less control is needed for C list items. The rules relating to receipt maintenance issue and writing off
stores items should be formed in accordance with the utility and value of the items based on the above categorization.
Manufacturing organizations find it useful to divide materials into three categories for the purpose of exercising
selecting control on materials. An analysis of the material cost will show that a smaller percentage of items may
represent a smaller percentage of the value of items the percentage number of which is more or less equal to their value
of consumption. Items falling in the first category are treated as A items, of the second category and B items and
items of the third category are taken as C items. Such an analysis of materials is known as ABC analysis. This
technique of stock control is also known as stock control according to value method or always Better Control method or
Proportional parts value. Analysis method. Thus, under this technique of material control, materials are listed in A, B
and C categories in descending order based on money value of consumption.

ABC analysis measures the cost significance of each item of materials. It concentrated on important items, so it is also
known as Control by importance and Exception.
1) A Strict Control is exercised on the items which represent a high percentage of the material costs.
2) Investment in inventory is reduced to the minimum possible level.
3) Storage cost is reduced as a reasonable quantity of materials, which account for high percentage of value of
consumption will be maintained in the stores.

VED Analysis:
VED Vital, Essential, Desirable analysis is used primarily for control of spare parts. The spare, parts can be
divided into three categories vital, essential or desirable keeping in view the critically to production.

Perpectual Inventory System

Perpectual Inventory is a system of records maintained by the controlling department, which reflects the
physical movement of stocks and their current balance. It aims at devising the system of records by which the receipts
and issues of stores may be recorded immediately at the time of each transaction and the balance may be brought out so
as to show the up-to-date position.

The records used for perpectual inventory are:

(1) Bin Cards;
(2) Store Ledger Accounts or Stores Record cards;
(3) The forms and documents used for receipt, issue and transfer of materials.

Advantages of Perpectual Inventory system

1. It keeps the record of stocks upto date.
2. The materials are kept within the Minimum and Maximum Limits. Non-observance of the limits fixed is
3. The materials going out of stock are easily detected and purchased at the appropriate time to avoid the risk of
closing down.
4. It acts as a moral check on the staff of the stores Department and so the possibilities of loss or theft of materials
are minimized.
5. The recording of stocks in Bin cards as well as Store Record cards minimizes the error in entering the receipts
and issues of stocks.
6. The discrepancies noted after physical counting are detected and corrective action is taken promptly to avoid
future occurrence.
7. The materials getting state or being wasted are detected and placed in right atmosphere.
8. The prompt balancing of closing stocks enables quick preparation of final accounts.
9. The slow moving inventories, obsolete or dormant stocks are brought to the notice of the Purchase Department
so that such stocks may purchased future in lesser quantities as required.
10. The availability of correct figures of stocks helps in the insurance of the stocks.

Control Ratios
The control ratios are mainly two
(1) Inventory Turnover Ratio which we have studied and
(2) Input-output Ratio.

(1) Inventory Turnover

Inventory Turnover is a ratio of the value of the materials consumed during a period to the average value of
inventory held during that period.
Certain materials are slow moving. It means their consumption rate quite show and so capital remains locked up and
storing costs continue to be incurred in such materials if these materials are stored in excess of the requirement the
rate of consumptions in terms of value or in terms of days is indicated by Inventory Turnover ratio. The number of
days in which the average inventory is consumed can be ascertained by dividing the period by the Inventory
turnover ratio.
If the inventory turnover rate in terms of value of materials is high, or if the length of the inventory turnover
period is short, the material is said to be fast moving. So if the rate of consumption is fast, or if the inventory
turnover rate is good, it is a healthy measure of efficiency of materials control, as the capital employed is properly

2. Input-output Ratio
The Input-output Ratio is the ratio of the raw material put into manufacture and the standard raw materials content
of the actual output.
This ratio enables one to find out whether the usage of the materials is favourable or not. A standard ratio of
input of materials and output of material should be determined and the actual ratio should be compared with the
standard ratio.

Pricing of Material Issues

The pricing of issue of materials is not as simple as the pricing of receipts. As the issue are made out of the various
lots purchased at different prices, the questions arises as how to price the issues, there are several methods used for
pricing the issues and the selection of a proper method depends upon the following factors:
1. The type of work-job or process;
2. Range of price fluctuations and market trends;
3. The Inventory turnover period and the carrying or the non-carrying cost i.e., the frequency of purchases and
4. The need for maintenance of uniformity is costs of the products within the industry.
5. The nature and durability of the material whether it evaporates or shrinks, or absorbs moisture, etc.

Method of Pricing
The various methods used for pricing of the materials are:

Cost Price Methods:

1. First in First out (FIFO)
2. Last in First out (LIFO)
3. Highest in First out (HIFO)
4. Base stock price

Average price Methods:

1. Simple Average
2. Weighted Simple Average
3. Periodic Weighted Average
4. Moving Simple Average
5. Moving Simple Average
6. Moving Weighted Average

First in First out Method (FIFO):

Under this method materials received first are issued first. After the first lot of the material purchased is over,
the next lot is taken up for issue. As such, the materials are issued in the order in which they are received in the stores.
The pricing of the issue of the first lot is done at the rate of purchase of the first lot. Similarly, the pricing pattern follows
for the subsequent lots. The closing stock in this method is valued at the latest purchase price and thus it represents the
current conditions as far as possible.
1. It is simple to operate
2. The materials are charged at costs only. So the purchase price is recovered in full without showing any profit
or loss on issue.
3. This method is good where
a. The prices are falling;
b. The consumption rates of the materials is slow
4. The Closing stock is shown at current rates.


1. It is not suitable in the situation when the prices show a rising trend, as it will charge the material at the
lower rate than the replacement rate.
2. The same type of materials issued to two jobs at two different prices will show different costs.
3. If the prices fluctuate to much, the clerical errors may be many.

Last in First Out (LIFO):

Under this method, the material received last is issued first LIFO method and as such, pricing of issues is done
in the reverse order of purchases. In times of rising prices, this method is considered best for application, as the current
cost of materials contributes to the cost of production.

1. The material cost represents current prices except when the purchases were made long ago,
2. It is simple to operate and the pricing is done on cost basis
3. It relates current cost to current sale price, and enables the management to make correct decisions.
4. It is more useful when purchases are not too many and the prices are either steady or are rising. It is more
suitable for bulky materials with high unit prices.

1. With high fluctuations in rates, the calculations become more complicated, and give way to more clerical
2. The work of pricing is held up if the latest receipt rate is not readily available.
3. As in FIFO, costs of different batches of production are distorted and more than one price is adopted, in
some cases, for pricing a single requisition.
4. Closing stock is valued at a cost which does not represent current conditions.

Highest in First Out (HIFO):

Under this method the material received at the highest price in the stock is issued first. This method is good
when it is desired to keep the inventory value of the materials at the lowest possible price.

Base Stock Price Method

In this method a minimum quantity of stock is always held at a fixed price as reserve in the stock. This
minimum stock is known as base stock or the safety stock and is not used unless an emergency arises. This stock is
valued at long-run normal price, while the stock in excess of this stock is priced on some other basis, usually are FIFO
or the LIFO basis. It is not an independent method in itself a it is conjoined with either FIFO or the LIFO method.

Simple Average Method

The issue is prices at an average price and not at the exact cost price as in the earlier methods. The simple
average is calculated by dividing the total of the rates of the materials in the stock from which the materials to be priced
could have been drawn, by the number of the rates of prices.
This method can be used with advantage if
(a) The purchase prices to not fluctuate considerably, and
(b) It is difficult to identify the different issues of the materials.

Weighted Average Method

1. This method irons out the wide fluctuations in the prices.
2. With every new issue, a new rate is not calculated.
3. The total value of the material issued does not behave up and down to the total value of the material received, as
is the case with Simple Average Method.

1. Calculations are tedious. Prices are worked out in decimals to get correct results.
2. A lot of materials purchased at a very high price at one time continues to reflect its effect in the average, for a
considerable time after it is exhausted.

Periodic Simple Average Method
This method is similar to Simple Average Method except that the average rate is calculated periodically, say
monthly or quarterly or once in the accounting period. If calculated monthly, the average of the unit prices of all the
receipts during the month is adopted as the rate for pricing issues during the subsequent month.

Periodic Weighted Average Method

This method is similar to Weighted Average Method except that the calculation is made periodically, say at an
interval or one month. The rate so arrived is used for the issues made in the next month.

Moving Simple Average Method

This represents a price which is obtained by dividing the total of the periodic simple average prices or a given
number of periods, the last of the periods being that for which the materials are to be issued, by the number of periods.

Moving Weighted Average Method

This is just similar to the Moving Simple Average Method except that the periodic average price, in this
system, is based on the weighted average.

Problem 3
1) Show the Store Ledger entries as they would appear when using
ii) LIFO
iii) Weighted average method
iv) Simple average method

April 1. Balance 300 units Rs. 600/-

2. Purchase 200 units Rs. 440/-
4. Issued 150 units
6. Purchase 200 units Rs. 460/-
11. Issued 150 units
19. Issued 200 units
22. Purchase 200 units Rs. 480/-
27. Issued 250 units
1) Stores Ledger Account as per FIFO METHOD

Date Details Receipt Issued Balance

Qty Rate Amt Qty Rate Amt Qty Rate Amt
April Balance 300 2/- 600 - - - 300 2/- 600
2 Purchase 200 2.20 440 - - - 300 2.00 600
200 2.20 440
4 Issue 150 2.00 300 150 2.00 300
200 2.20 440
6 Purchase 200 2.30 460 150 2.00 300
200 2.20 440
200 2.30 460
11 Issue 150 2.00 300 200 2.20 440
200 2.30 460
19 Issue 200 2.20 440 200 2.30 460
22 Purchase 200 2.40 480 200 2.30 460
200 2.40 480

27 Issue 200 2.30 460 150 2.40 360
50 2.40 120

Value of Closing Stock : 150 units at the rate of Rs. 2.40 value Rs. 360/-

Date Details Receipt Issued Balance
Unit Rate Amt Unit Rate Amt Unit Rate Amt
April Balance 300 2.00 600 - - - 300 2.00 600
2 Purchase 200 2.20 440 - - - 300 2.00 600
200 2.20 440
4 Issue 150 2.20 330 300 2.00 600
50 2.20 110
6 Purchase 200 2.30 460 300 2.00 600
50 2.20 110
200 2.30 460
11 Issue 150 2.30 345 300 2.00 600
50 2.20 600
50 2.30 115
19 Issue 50 2.30 115 200 2.00 400
50 2.20 110
100 2.00 200
22 Purchase 200 2.40 480 - - - 200 2.00 400
200 2.40 480
27 Issue 200 2.40 480 150 2.00 300
50 2.00 100
Value of Closing Stock : 150 units @ Rs. 2.00 value is Rs. 300/-


Date Details Receipt Issued Balance
Unit Rate Amt Unit Rate Amt Unit Rate Amt
April Balance 300 2.00 600 - - - 300 2.00 600
2 Purchase 200 2.20 440 - - - 500 2.08 1040
4 Issue - - - 150 2.08 312 350 2.08 728
6 Purchase 200 2.30 460 - - 550 2.16 1118
11 Issue - - - 150 2.16 324 400 2.16 864
19 Issue - - - 200 2.16 432 200 2.16 432
22 Purchase 200 2.40 480 - - - 400 2.28 912
27 Issue - - - 250 2.28 570 150 2.28 342
Value of Closing Stock : 150 units at the rate of Rs. 2.28 value Rs. 342.00/


Date Details Receipt Issued Balance

Unit Rate Amt Unit Rate Amt Unit Rate Amt

April Balance 300 2.00 600 - - - 300 2.00 600
2 Purchase 200 2.20 440 - - - 500 2.10 1050
4 Issue - - - 150 2.10 315 350 2.10 35
6 Purchase 200 2.30 460 - - 550 2.17 1193..50
11 Issue - - - 150 2.17 325.50 400 2.17 868
19 Issue - - - 200 2.17 434 200 2.17 434
22 Purchase 200 2.40 480 - - - 400 2.23 892
27 Issue - - - 250 2.23 557.50 150 2.23 334.50

Value of Closing Stock : 150 units at the rate of Rs. 2.23 value Rs. 334.50

Problem 4
The following is the record of receipts and issues a certain material in the factory during a week.
April 1997
1. Opening Balance 50 tonnes @ Rs. 10 per tone.
Issued 30 tonnes @ Rs. 10 per tones
2. Received 60 tonnes @ Rs. 10.20 per tone.
3. Issued 25 tonnes @ Rs. 10.20 per tone (stock verification reveals loss of tone)
4. Received back from orders 10 tonnes @ Rs. 10.20 per tone
(previously issued at Rs. 9.15 per tone)
5. Issued 40 tonnes @ Rs. 10.20 per tone.
6. Received 22 tonnes @ Rs. 10.30 per tone.
7. Issued 38 tonnes @ Rs. 10.30 per tone.
Stores Ledger Account Under LIFO
Date Receipts Issues Balance
Qty Rate Amt Qty Rate Amt Qty Rate Amt
1 30 50 10 500
1 30 10 300 20 10 200
2 60 10.20 612 - - - 20 10 200
60 10.20 612
3 - - - 25 10.20 255 20 10 200
1 10.20 10.20 35 10.20 357
20 10 200
4 10 9.15 91.5 34 10.20 346.80
- - - 20 10 200
34 10.20 346.80
10 9.15 91.50
5 - - - 10 9.15 31.50 20 10 200
3 10.20 306.0 4 10.20 40.80
6 22 10.30 226.6 20 10 200
4 10.20 40.80
7 - - - 22 10.30 226.6
4 10.20 40.80 8 10.00 80.00
12 10.00 120.0

Closing Stock 8 tonnes @ Rs. 10 = Rs. 80/-

Stores Ledger Under FIFO

Date Receipts Issues Balance

Qty Rate Amt Qty Rate Amt Qty Rate Amt
1 30 50 10 500
1 30 10 300 20 10 200
2 60 10.20 612 - - - 20 10 200
60 10.20 612
3 - - - 20 10 200
5 10.20 51 55 10.20 561
1(loss 10.20 10.20 54 10.20 550.80
4 10 9.15 91.5 - 54 10.20 550.80
- - 10 9.15 91.50
5 - - - 40 10.20 408 14 10.20 142.80
10 9.15 91.50
6 22 10.30 226.6 - 14 10.20 142.80
10 9.15 31.50
22 10.30 226.60
7 - - - 14 10.20 142.80
10 9.15 91.50 8 10.3 82.40
22 10.30 226.60
Closing stock 8 tonnes @ Rs. 10.30 = 82.40

Chapter 3

Labour Cost
Labour Cost, representing the human contribution to production, is an important cost factor which requires constant
control, measurement and analysis.

A rational approach to the problems of labour, fair maintenance of wage records for wage ascertainment, fair
wage policy, and the incentives for earning more wages go a long way in providing a sense of security and stability to
the workmen, in minimizing the labour turnover, and in exercising effective labour cost control.

Labour cost control aims at the control of the labour cost per unit of production and not at the reduction of the
wage rates of the workmen.

Efficiency of labour (a concept meaningless to material) has an important impact on the successful working of a

Labour cost is second major element of cost. Proper control and accounting for labour cost is one of the most important
problems of a business enterprise. But control of labour cost presents certain practical difficulties unlike the control of
material cost.

Labour costs represent the various items of expenditure Such as:

Monetary Benefits:
i) Basic Wages;
ii) Dearness Allowance;
iii) Employers Contribution to Provident Fund;
iv) Employers Contribution to Employees State Insurance (ESI) Scheme;
v) Production Bonus;
vi) Profit Bonus;
vii) Old age Pension;
viii) Retirement Gratuity;

Fringe Benefits:
i) Subsidised Food;
ii) Subsidised Housing;
iii) Subsidised Education to the children of the workers;
iv) Medical facilities;
v) Holidays pay;
vi) Recreational facilities.

Economic utilization of labour is a need of the present day industry to reduce the cost of production of the products
manufactured or service rendered.

Control of labour costs is an important objective of management and the realization of this objectives depends upon the
cooperation of every member of the supervisory force from the top executive to foreman. From functional point of view,
control of labour cost is effected in large industrial concern by the coordinated efforts of the following six departments-
1) Personnel Department,
2) Engineering Department,
3) Rate or time and Motion Study department
4) Time-Keeper Department
5) Cost Accounting Department
6) Pay-roll Department

Factors Governing a Satisfactory system of Wage Payment

The following factors should be considered while evolving a suitable and a successful system of wage payment.

a) The system should depend upon the nature of the worked and the efforts involved.
b) It should guarantee a minimum living wage to ensure a satisfactory standard of living.
c) It should be based upon a scientific time and motion study.
d) It should be capable of being understood by al the employees.
e) It should be flexible and capable of being adapted to changed circumstances.
f) Its incidence on the cost per unit should be such that it does not form a considerable proportion of the total cost
per unit to deprive the employer of a fair margin of profit, given the market price of the commodity produced by
g) It should reduce the labour turnover.
h) The cost of working the system should be the least.
i) It should boost employee morale.
j) It should be acceptable to trade unions.
k) It should be correlated to the capacity of the concern to pay.

For labour-cost-control, the following factors should also be kept in view while devising the system:

1. Production Planning:

Production should be so planned as to have the maximum and rational utilization of labour. The product and
process engineering, programming, routing, and direction constitute the production-planning.

2. Setting up of standards

With the help of work study, time study and motion study are set up for production operations. The standard cost
of labour so set is compared to the actual labour cost and the reasons for variations, if any, are looked into.

3. Use of labour budgets:

Labour budget is prepared on the basis of production budget. The number and type of workers needed for the
production are provided for along with the cost of labour in the Labour budget. This budget is a plan for labour
cost and is based on the past data considered in future perspective.

4. Study of the effectiveness of Wage-policy:

How far the remuneration paid on the basis of incentive plan fro the departments help the managerial control on
labour and exercise labour cost control.

Characteristics of Good Wage System

1. Fair to both the Parties:

The system should be such as may be acceptable gladly to the employer and the employees. for this purpose,
the employer should decide the system in consultation with the workers.

2. Easy to Calculate
The workers should be in a position to calculate their wages correctly and feel sure that they have been
correctly paid. Easy calculation will help the employer also in maintaining simple records.

3. Related to Efficiency
Fair remunerations for fair output, should be the idea and remuneration should be related to the individual
efficiency of the workers.

4. Minimum wage guaranteed

There should be a guarantee of minimum wages to the workers to enable them to maintain their basic
standards of life, and to do away with uncertainty-concept.

5. Incentive-oriented
The wage system should be such that the workers may feel encouraged to product more and earn more

6. Quality Improvement-oriented
In the race to earn more wages with an increase in production, the chances are that the quality of the output
may deteriorate. The system should, therefore, ensure better wages for better quality.

Definite wage-base
The basis or the method of wage payment should be clearly defined and announced in advanced to the workers,
and it should not be changed frequently to suit the interest of the employer, otherwise a sense of distrust may develop in
the workers towards the scheme. A change in the system should be effected only after taking the workers into

Labour Turnover
Labour turnover is an index denoting change in the labour force for an organisatoin during a specified period. In
every industry, works leave their job a new workers have to be appointed to replace them. The ratio of the replaced
workers to the number of works is the Labour Turnover Ratio. If more workers leave the factory, the turnover would be
high, and vice versa. A high turnover is a costly affair and must be avoided.

Causes of Labour Turnover

The workers leave the factory either by
i) Resignation, or by
ii) Discharge by the employer, or
iii) Due to a cause not within ones control.

Cause for resignation

The causes may be:
1. Low wages paid as compared to the wages paid in other factory which he is induced to join.
2. Ill health and bad working conditions;
3. Lack of safety measures;
4. Dissatisfactions due to various causes such as
a. Hours of work
b. Improper placement
c. Unfair method of promotion,
d. Bad relationship with Supervisor, or with fellow-workers in some cases.

Causes for Discharge

1. Incompetence;
2. Insubordination, disobedience, and disregard of the rules asn regulations;
3. Unpunctuality or lack of attention to duty;
4. Accidents or suffering from infectious disease;
5. Immoral character.

Causes not within control

1. Seasonal character of the industry where work is carried on during some part of the year only;
2. Death of the worker;

Measurement of Labour Turnover

Labour Turnover is measured by applying any one of the following three Methods:
1. Separation Method

Multiplication of the formula by 100 indicated Ratio of the turnover in percentage.

2. Replacement Method

In this method, only the actual replacement are counted irrespective of the number of workers left. If new workers are
appointed for expansion programme, they are excluded from the number or replacements.

3. Flux Method

This method is the combination of Method 1 and Method 2.

Effect of Labour Turnover on Cost

The Labour Turnover in excess of normal rate is high turnover, and the turnover below the normal rate is low
turnover. It is always better to keep the turnover low, but it should nto be construed that the factories with low turnover
are always more productive. There may be low turnover in a factory for the reason that the workers engaged therein are
below standard and so they cannot find better place in other factories. Secondly, low turnover in the senior scales may
not provide promotion factories. Secondly, low turnover in the senior scales may not provide promotion opportunities to
the young and promising employees and so they may like to shift to other factories for better prospects.

A high turnover has an adverse effect on the cost of production due to the following reasons:
1. Change in workers interrupts production and the production goes down.
2. New comers take time in learning the factory procedure and the work procedure.
3. The tools and machines cannot be handled as efficiently by the new workers as hither to done by the old staff.
There are chances of more break-downs and of greater cost of repairs of machines.
4. What is true of machines is also true of material handling and usage by the new workers.
5. The rate of accidents may increase, the rate of defectives in the finished output may increase, and there may be
increased wastage of time.
6. The cost of making selections and cost of imparting training to the new entrants would further increase the cost
and reduce the profits.

Cost of Labour Turnover

There are two types of costs
i) Preventive cost and
ii) Replacement costs
And amenities to the workers that they may be tempted to continue at their job in the factory and not to leave it for

i) Personnel Administration: Only that portion of the cost of this department which is related to the
maintenance of good relationship between labour and management.
ii) Medical Services-Preventive as well as curative.
iii) Welfare activities and services.
iv) Miscellaneous schemes and benefits, e.g., Provident fund scheme, Pension scheme, Bonus incentives
schemes, etc.

The replacement costs are those incurred to recruit new workers and also the costs consequent or incidental to
replacement, for example:
(i) Cost in selection and appointment
(ii) Training cost
(iii) Loss of output due to delay in recruitment workers
(iv) Cost of inefficiency of new workers
(v) Cost of breakage of tools and machinery
(vi) Cost of increased spoilage and defectives
(vii) Cost of frequent accidents

The treatment of Prevention and Replacement costs is to charge them as overhead and apportion to the different
departments in the ratio of other workers.

The time when the worker does no work and remains idle, is the idle time. So the idle time cost represents the
wages paid for the time lost. The following are its causes:

1. Lack of proper planning:

That the production work should go on smoothly, depends upon proper planning. If the workers do not have material at
the right time, or the machines are not kept fir for working, the time goes waste. Sometimes, delay in the proceeding
process delays the operations of the succeeding progress. Here also the workers have to wait due to faulty planning or
bad management.

2. Careless in Supervision:
If the foreman of a department does not take his duty seriously, the labour working under him also becomes careless and
spoils time in the idle way.

3. Confrontation between labour management:

The confrontation between labour and management arising form any cause, does waste time in discussions, dialogues,
strikes etc., and the wages paid, if any, for this period form the idle time cost.

4. Economic Factors:
Trade depression, or serve competition lowers the production, and so labour remains effectively unutilized.

5. Others reasons:
The electricity may fail or the machine may break down for some or more time. They make labour to remain idle for the
time being.

Idle time does not limit itself in its effect to the wages paid for the time but his wider implications. The plant, machines,
equipments, and other accessories also become idle during that period, and the fixed cost continues to be incurred. As
such, idle time need be reduced as far as possible.

Idle-time cost can be divided into two types:

(i) Normal, and
(ii) Abnormal

Normal idle-time can be further divided into

a) Controllable, and
b) Uncontrollable.

Normal idle-time is one which is incidental to production. The cost of normal and controllable idle time should be
charged as an overhead expense to the production. If the responsibility for this type of idle-time can be fixed upon a
particular department, the cost should be charged to the overheads of that department and absorbed in the production
cost of that department.

The time worked over and above the normal hours is overtime. The remuneration usually paid for the overtime work is
at double the normal rate. The need for over time work arises due to:

1. Increase in demand for the products where the production during the normal hours falls short to meet it;
2. Shortage of workers due to absence or non-availability and so it is decided to give overtime work to the existing
3. Utilization of perishable raw materials by working overtime;
4. Execution of urgent orders, or to complete the work o9n the same day;
5. Shortage of equipments, machines, or space for the completion of jobs;
6. Lack of administrative control on workers, on account of which the production during normal hours remains less
the standard output and overtime work has to be done by the workers.

Disadvantages of overtime working

The following are the disadvantages:

1. Workers health is adversely affected;
2. The quality of the output is at a discount; and
3. The cost of production rises due to increased labour cost.

System of Wage Payment

Strictly speaking, there are only two basic methods of wage payment, viz., wages based on the time spent in the
factory, and wages based on the quantum of work turned out. These are thus known respectively as the time wage and
the piece wage methods of remuneration. Since each of these has its own advantages and disadvantages, attempts are
made to combine the two, mainly with a view to overcoming their disadvantages. We have therefore, the premium bonus
or the incentive schemes which may either be considered to be merely variations of the two, or as another of wage
payment. These three methods may also be re-classified into only two groups, viz., the time wage system and the
payment by results.

Methods of Remuneration
The methods of remuneration can be classified into:
1. Time Rate System
2. Pieced Rate System
3. Incentive Schemes

Time Rate System

In this system, a worker is paid on the basis of attendance for the day or according to the hours of the day,
regardless of the output. This system is also known as time work, day work, day age rate or day rate. The wage rate of
the day worker may be fixed on hourly, daily, weekly, fortnightly, or monthly basis depending on the practice followed
in the concern.
The basic feature of this system is that the worker is paid so much per unit of time regardless of the output he
produces. The unit of time may be an hour, a day, a week or a month. Under this method, wages depend entirely upon
the time clocked, but not on the efficiency of the worker. There are three variants of this system, each differing only in
so far as the fixation of the time rate is concerned. They are:

a) Flat Time or Time Rate at Ordinary level;

b) High Day Rate or Time Rate at high level;
c) Measured Day work or Graduated Time Rate.
Graduated Time Rate

Under this method wages are paid at time rates which vary according to

a. Merit-rating of the workers, or

b. Changes in the cost of living index.
It the cost of living goes up, the wages also go up proportionately, and vice versa. Thus the works get the real wages.
Similarly, the workers having higher merit rating get higher wages, and the workers with lower rating get lower wages.

Differential Time Rate

Workers are paid rate accounting to their individual efficiency. They are paid normal rate upto a certain
percentage of efficiency and the rate increases in steps for efficiency slabs beyond the standard. As the efficiency is
measured in terms of output, this method does not fall strictly under the area of time rate system.

Payment by Results-Piece-work Rate

The payment of wages under this system is based upon the out turn of the worker. The rate is fixed per piece of
work and the worker is paid according to the pieces of work completed or the volume of work done by him, irrespective
of the time taken by him in completing that work. A workman is free to earn as much as his ability, energy, or skill
would allow to him to produce.

The various schemes falling under Payment by results make speed as the basis of payment, instead of time.
Accordingly, these schemes are just the opposite of the time wage system. They are so called because of the fact that
wages are linked to the volume of work done regardless of the time taken by workers. Efficiency is recognized in all
these schemes and workers get wages according to their avility, efficiency, and speed. The following schemes fall under
the payment by results method of wage payment.

a. Straight Piece Rate.

b. Differential Piece Rate.

Stability of the System

This system is suitable in the following cases:

1. Where the production can be measured in standard units.

2. Where strict supervision is not possible.
3. Where quality and precision are not of primary importance.

1. It provide initiative and incentive to the workers to product more.
2. The productivity increases and cost of production per unit goes down.
3. As there is little wastage of time on the part of the workers, the fixed overheads and resources like plant,
machinery and space are well utilized.
4. Workers feel free to work, complete with fellow workers, exhibit their efficiency, and earn more of wages.
5. Less supervision is required over the workers, and happy relations are maintained with them.
6. It is easy to calculate the labor of products.

1. In the race to earn more wages by producing more, the quality of products is likely to deteriorate. So it requires
strict inspection and quality control.
2. Continuous and increased working for some days may cause fatigue and ill health to the workers.

3. To speed up production, the machines, tools, and equipments are sometimes not handled with the care that they
require, and so the workers expose themselves to accidents, besides causing loss of breakdown to the machines,
equipments etc.,
4. The inefficient workers earning less of wages start feeling jealous of other workers who earn more. This creates
unhealthy atmosphere.
5. The workers feel insecure of earning during the days of ill health, holidays, etc.
6. This system is not useful for quality products.

The piece rate System can be classified into:

Straight Piece Rates

It is a simple method of making payment at a fixed rate per unit for the units manufactured.
Earnings = Number of units X Rate per unit

The rate is fixed taking into consideration

a. Time rate for the same class of workers, and
b. Standard output during a given time.

Differential Piece Rates

Under this system, efficient workers are paid wages at a lower rate. A definite standard of efficiency is set for
each job and for efficiency below or above the standard different piece rates are paid according to different levels of
efficiency. The following two methods of wage payment are studied under this system:

a. Taylor Differential Piece-rate Method, and

b. Merrick Differential Piece rate Method

Taylor Differential Piece-Rate

F.W. Taylor thought to improve the efficiency of workers by suggesting two rates of payment of wages:

(I) A higher rate to the workers who product equal to or more than the standard fixed for production during
the day, and
(II) A lower rate to the workers who do not achieve the standard.

Merrick Differential Piece-rate

In the Taylor Method, the effect on the wages is quite sharp in the marginal cases. To remove this defect Merrick
suggested three piece rates for a job as follows:

Percentage of Standard Output Payment under Merrick Method

Upto 83% Normal piece rate
Above 83% and upto 100% 110% of normal piece rate
Above 100% 120% of normal piece rate

Incentive Schemes

Factors for Selecting Incentive Scheme

The following factors should be considered for selecting an incentive scheme:

1. Productivity

The object of the incentive scheme is to increase productivity. Therefore, this factor is very important. The increased
productivity lowers the cost to the benefit of the employers.

2. Simplicity

The scheme should be simple in operations and well understood by the workers. The scheme should be amenable to
the setting up of standards and the comparison of the results with the actual.

3. Cost Reduction

The scheme, when introduced, is bound to increase the pay-bill of the workers, and thus increase the cost. But the
simultaneous increase in production would reduce the cost per unit or production. The fixed overheads remain
constant up to a certain limit of plant capacity. As such, the increased productivity reduces the cost of fixed
overheads per unit.

4. Better Labour Psychology

The scheme should not affect workers health adversely, should reduce labour turnover and help to improve the
standard of living of the workers.

Under this heading, we study the following methods:

(I) Halsey Premium Scheme;

(II) Halsey Weir Scheme;
(III) Rowan Premium Scheme;

Halsey Premium Scheme

Under this plan,

(i) Time rate is guaranteed;
(ii) Standard time is fixed for the job or operation;
(iii) The workers producing more than the standard, or the workers completing the work in less than the
standard time fixed, get bonus in addition to the ordinary time wage;
(iv) The bonus of the premium, by whatever name called, is 30 to 70 percent of the wages of time saved, the
usual percentage being 50%,
(v) The remaining of the bonus percentage is shared by the employer.

Merits of Halsey Plan

(i) Day wage or the time rate is guaranteed. Even if output is less than the standard, one gets the time wage;
(ii) Workers get premium for the output above the standard. It provides incentive to the workers to produce
(iii) As the premium is not 100% but only 50% or so, the employers feel happy about it is a they share the
remaining 50%;
(iv) The scheme is very simple and understood easily by the workers.


(i) A significant share of the bonus goes to the employers. So the workers object to it;
(ii) Incentive is not so attractive as it is with the piece work;
(iii) Where the workers start saving more than 50% of the time, they earn premium in huge amounts, which
the employers do not relish.
Halsey Weir Scheme
This schedule is similar to Halsey scheme except that in this scheme the workers and employers share the
premium in 1:2 ratio.

Rowan Premium Scheme (variable sharing plan)

Mr. James Rowan introduced this scheme in Glasgow in 1898. It is similar to Halsey scheme but the premium
concept here is different. Here the premium is in the ratio of Time saved to Standard time, calculated on the ordinary

Premium = Wages of time worked x Time saved / Standard Time

Or; (AT x R) TS / ST

This scheme also guarantees day wage as is done by Halsey Plan.

Problem 1

Calculate the earnings of a worker from the following information as under.

a) Time Rate Method: Standard time 30 hours Time taken 20 hours. Hourly rate of wages of Re. 1 per hour plus a
dearness allowance 50 paise per hour worked.


Time Rate Method:-

Time Put in by workers x Rate per hour = 30 x 1 = Rs. 30

Problem 2
On the basis of the following information calculate the earnings of A and B on the straight price Rate basis and Taylors
differential piece rate system.

Standard Production 8 units per hour

Normal time rate Rs. 0.40 per hour

Differential to be applied:-

80% of piece rate below standard

120% of piece rate at or above standard. In a 9 hour day, A produces 54 units and B products 75 units.


Standard production per hour 8 units

Normal time rate per hour Rs. 0.40
Piece Rate Rs. 0.40/8 = Rs. 0.05

Earnings under the straight piece rate system:-

A: 54 units @ Rs. 0.05 = Rs. 2.70

B: 75 units @ Rs. 0.05 = Rs. 3.75

Differential Piece Rate:-

Low Piece rate: 80% of piece rate (0.05 x 80 / 100) = Rs. 0.04
High Piece rate: 120% of piece rate = (0.05 x 120 / 100) = Rs. 0.06

Standard output per hour is 8 units, So Standard Output for a 9 hour day is 72 units. A produces only 54 units which is
less than the standard output of 72 units. So he is entitled to get a lower price rate of Rs. 0.04 per unit. On the other
hand, Bs output of 75 units is more than the standard output of 72 units. So SA is to get higher piece rate of Re. 0.06 per

As earning: 54 units @ Re. 0.04 = Rs. 2.16

Bs earning: 75 units @ Re. 0.06 = Rs. 4.50

Problem 3

Calculate the earning of workers A,B and C under Merricks multiple piece system from the following particulars.

Normal rate per Hour Rs. 1.80

Standard time per unit 1 minute

Output per day as follows:-

Worker A: 384 units
Worker B: 450 units
Worker C: 552 units
Working rows per day are 8

Standard output per minute = 1 units
Standard Production per hour = 60 units
Standard Production per day of 8 hour = 480 units
i.e. (60 x 8)
Normal rate per hour = Rs. 1.80
Normal output per hour = 60 units
Therefore Normal piece rate = (1080/60) x 5 paise

Calculation of level of Performance:-

Standard output per day = 480 units

Worker As Output per day = 384 units
Worker As level of performance = (384/480) x 100 = 80%

Worker Bs Output per day = 450 units

Worker Bs level of performance = (450/480) x 100 = 43%

Worker Cs Output per day = 550 units

Worker As level of performance = (550/480) x 100 = 1150%

Earnings of workers A:-

Merricks multiple piece rate system:-

For 384 units @ 3 paise per unit = (384 x 3) /100 = 11.50

Normal piece rate has been applied because worker As level of performance is 807. Which is below 83%.

Earning of Worker B:-

For 450 units @ 3.3 Paise per unit = 450 x 3.3/100 = Rs. 14.85

Worker Bs level of Performance is 93.75% which is between 83% and 100%. So he is entitled to get 110% of
normal piece rate.

Earning of Worker C:-

For 552 units @ 3.6 paise per unit = (552 x 3.6)/100

Rs. 19.87

Worker Cs level of performance is 115% which is more than 100% of standard output. So it is entitled to get 120% of
normal Piece rate.

Problem 4

Calculate the earnings of workers A and B under straight piece rate system and Taylors differential piece rate system
from the following particulars.
Normal Rate per hour Rs. 2.40
Standard time per unit 30 seconds

Differentials to be applied:-

80% of piece rate below standard

120% of piece rate at above standard
Worker A produces 800 units per day and
Worker B produces 1000 units per day.

Hourly Production = = 120 units
Piece rate = = 0.005
Low piece rate:-
LPR = 80% of normal piece rate
= 80% x 0.005
= 0.004

High piece rate:

HPR = 120 of 0.005
= 0.006

Standard Production per day = 120 units x 8

= 960 units

Computation of earnings of A and B:-

Normal Piece Rate 0.005 0.005
Production per day 800 1000
Standard Production
Per day 960 units 960 units

a. Straight piece Rate System 800 x 0.005 1000 x 0.005
Earning Rs. 4.80 Rs. 5

b. Taylors Differential piece

Rate 0.004 x 800 0.006 x 1000
Rs. 3.2 Rs. 6.00

Problem 5

From the following data, total monthly remuneration of three workers A, B and C under the

Gants Task and Bonus Scheme:-

i) Standard Production per month per worker is 1000 units.

ii) Actual Production during the month A = 850 units,
B = 1000 units
C = 1100 units
iii) Piece works rate 50 paise per unit


Standard Production per month is 1000 units and piece rate is 50 paise per unit so guaranteed monthly payment
is Rs. 500 (i.e. 1000 units @ 50 paise)

Level of Performance:-

Standard output per month 1000 units

Worker As Output 850 units
Worker As level of Performance = x 100 = 85%

Workers Bs Output:-

Worker Bs level of Performance x 100 = 100%

Workers Cs Output:- 1000
Worker Cs level of Performance x 100 = 110%

Earning of Worker A:- 1100

Worker As level of Performance is 85% which is below the standard performance so it will get Rs. 500 the
guaranteed monthly payment.

Earning of Worker B:-

Worker Bs level of performance is 100% so he will get piece wages for 1000 units plus 20% bonus

Piece Wages for 1000 units @ 50 paise per unit Rs. 500
Add: 20% bonus i.e. (500 x 20 )/100 Rs. 100

Total earning Rs. 600

Earning or Worker C:-

Worker Cs level of Performance is 110% which is more than the standard Performance so he will get piece
wage prices 20% bonus.

Thus dis earnings are as follows:-

Price wages for 1,100 units @ 50 paise per unit Rs. 550
Add: 20% bonus (550 x 20)/100 Rs. 110

Total earning Rs. 660

Problem 6

The existing incentives system of a certain factory is

Normal working week 5 days of 9 hours plus 3 rate shifts of 3 hrs each.

Rate Payment - Daywork = Re. 1 per hour

- Late shift = Rs. 1.50 per hour

Additional bonus payable Rs. 2.50 per day shift

Rs. 1.50 per Late shift

Average output per operative for 54 hour week 120 articles i.e. including 3 Late shifts

In order to increase output and eliminated overtime it was decided to with on to a system of payment by results the
following information is obtained.

Time rate Re. 1 per hour

Basic time allowed for 15 articles 5 hours
Piece work rate Add 20% to piece
Premium Add 50% to time

You are required to show

i) Hours worked
ii) Weekly earnings
iii) Number of articles produce and
iv) Labor cost per article for one operative under the following sysem

a) Existing time rte

b) Straight piece work
c) Rowan system
d) Halsay weir system

Assume that 135 articles produces in a 45 hours work under (b) (c) and (d) and that the worker earns half time saved
under the Halsay system. The additional bonus under the existing system will be discontinued on the proposed incentive

a) Existing time Rate:- Rs.
Weekly wages 45 hrs. @ Re. 1 per hour 4500
9 hrs @ Re. 1.50 per hour 13.50
Day shift bonus 5 x 2.50 12.50
Late shift bonus 3 x 1.50 4.50

Total Earning 75.50

b) Piece rate system:-

Basic time : 5 hours for 15 articles

Therefore cost of 15 articles 5.00
Add: 20% 1.00

Total Earning 6.00

Therefore Rare per article Rs. 6.00 / 15 = Rs. 0.40

Articles products in a week = 45 x 15/5 = 135

Hence Earning = 135 x 0.40 = Rs. 54.00

c) Rowan Premium System:-

Basic time = 5 hrs for 15 articles

Adding 50% = 7 has for 15 articles
Therefore time for producing one articles
= 7 hrs / 15 = 30 minutes
Therefore time allowed for 135 articles = 67 hrs
Actual time taken for 135 articles 45 hrs
Therefore time saved = 22 hrs
Earning = Time wages x (% of time saved / Standard Time) x Time wage
= 45 x 1 + (22 / 67) x 45 = 45 + 15 = 60

d) Halsay-Weir Premium System:-

Earning = Time wage + 50% (Time saved x Time rate)
= 45 x 1 + 50% (67 - 45) x 1
= 45 + 11.25 = Rs. 56.25

The other requirements of the problems have been shown in the following table:-
a b c d
i) Hours worked 45 54 45 45
ii) Weekly earning Rs. 75.50 54.00 60.00 56.25
iii) Articles produces 120 135 135 135
iv) Labour cost per article 0.629 0.400 0.444 0.417

Problem 7

The Worker earns Rs. 2 as bonus @ 50%. So total bonus at 100% should be Rs. 4. The hourly rate of wages being Re. 1.
The time saves should be 4 hours.

Standard time allowed - 10 hours

Less: time saved - 4 hours
Time taken - 6 hours

A worker completes a job in a certain number of hours. The standard time allowed for the job is 10 hrs, and the hourly
rate of wages (i.e. Re. 1 the worker earns at the 50% rate of bonus Rs. Under Halsay plan.

Ascertain dis total wages under the Rowan premium plan:-

The worker earns Rs. 2 as bonus at 50% so total bonus at 100% should be Rs. 4. The hourly rate of wages being
Re. 1 the time saved should be 4 hrs.

Standard time allowed 10 hours

Less: Time saved 4 hours
Time taken 6 hours

Earning under the roman Premium Plan:-

Earning = T x R + (S T / S) x T x R

Where T = Time taken i.e., 6 hours

S = Standard time i.e. 10 hours
R = Rate per hour i.e. Re. 1
Therefore Earning = 6 x 1 + (10-6/10) x 6 x 1
= Rs. 6 + Rs. 2.40
= Rs. 8.40

Problem 8

For a certain work order the Standard time is 20 hours, wages Rs. 5 per hour the actual time taken is 13 hours and
factory overhead charges are 80% of standard time.

So out a comparative statement showing the effect on paying wages Halsay plan.


Earning = A.T x T.R + 50% (T.S. x T.R)

= 13 x 5 + 50% (7 x 5)
= 65 + 17.5
= Rs. 82.50

Problem 9

A Workman whose basic rate of pay is Re. 1 per hour of working under the Rowan system of premium bonus. In
addition he gets dearness allowance of Rs. 20 per week of 48 hours. During one week he does the following jobs.

i) Job 101 for which 25 hours are allowed. He takes 20 hours.

ii) Job 102 for which 30 hours are allowed he takes 24 hours.

During the week, his waiting time amounts to 4 hours. Find the workers earning and the amounts to be charged to each
job and to overhead.


Workers earning form Job 101 :-

Standard time 25 hours
Time taken 20 hours
Rate per hour Re. 1

Wages for actual time = 20 hrs @ 1 Re.

Premium according to Roman System

= Time taken x Rate per hr. + (Time saved / Standard time) x Actual time x Rate per hr

= 20 x 1 + (5/25) x 20

= Rs. 24 Rs. 24.00

Proportion of dearness allowances:-

= 20 x (25/55)
Earning from job 101 Rs. 9.09

Total Rs. 33.09

The workers earning from job 102:-

Standard time = 30 hours

Time taken = 24 hours
Rate per hour = 1 Re.
Earning = T x R + (T.S /Std) x A.T x R
= 24 x 1 + (6/30) x 24
= 24 + 4.8
= Rs. 28.80

Proportion of Dearness allowance:-

= 20 x (30 / 55)
= Rs. 10.91

Earning from job 102 Rs. 39.71

Total earning of the worker:-

Job 101 = Rs. 33.09

Job 102 = Rs. 39.71
Read = Rs. 4.00
Total = Rs. 76.80

Problem 10

The guaranteed time table is Re. 1 per how high piece rate is Re. 0.20 per unit and standard output is 10 units per hour.
In a day of 8 hours, A produces 70 units and B produces 80 units and C produces 90 units. Calculate the earning of A,B
and C under Gantt task plan.


Standard Output at 10 units per hour is 80 units.

As output is below the Standard
Bs output is at the standard and Cs output is above the standard.

Accordingly A gets time wages, B gets a bonus of 20% of the time rate and C gets high piece rate.

Earnings: A = 8 hours x Re. 1 = Rs. 8
B = 8 hours x Re. 1.20 = Rs. 9.60
C = 90 hours x Re. 0.20 = Rs. 18

Problem 11

Standard output is 10 units per hour and basic wage rate is Re. 1.50 per hour. In a day of 8 hours. A produces 40 units. B
75 units and C produces 90 units. Calculate the wages of A,B and C under Merricks differential piece rate.


Standard output = 10 units per hour

Basic wage Rate = Rs. 1.50 per hour
Piece rate = 1.50 / 10 = Rs. 0.15

Percentage efficiency:-

= (Actual output / Standard output) x 100

For A = (40 x 100/80) = 50%

For B = (75 x (100/80) = 93.75%
For C = (90 x 100/90) = 112.5%

As efficiency being less than 83% he is paid the ordinary piece rate. Bs efficiency being 83% to 100%. He is paid at
110% of ordinary piece rate. Cs efficiency being more than 100% he is paid at 120%.

Thus: A gets 40 x Re. 0.15 = Rs. 6.00

B gets 75 x 0.165 = Rs. 12.37
C gets 90 x Re. 0.18 = Rs. 16.20

Lesson 4


Overhead is the aggregate of indirect material cost, indirect wagers (indirect labor cost) and indirect expenses.

Classification of Overheads

The Overheads can be classified according to:

i) Elements;
ii) Functions;
iii) Behaviour;
iv) Controllability;

Element-wise classification

Overhead Materials Cos is the which cannot be allocated but which can be apportioned to, or absorbed by, cost
centres or cost units. Consumable stores, lubricating oil, loose tools, cotton waste, etc. are the examples.

Indirect Labour Cost is the cost of wages which cannot be allocated but which can be apportioned to, or
absorbed by, cost centres or cost units. Salary of foremen, supervisors, works manager, storekeepers, etc. Wages of
maintenance dept. employers contribution to provident Fund, overtime wages, etc., are the examples.

Indirect Expenses are the expenses which cannot be allocated but which can be apportioned to, or absorbed by,
cost centres or cost units. Factory rent, lighting, heating, depreciation, insurance, other factory expenses, all
administrations, selling, and distribution expenses fall under this group.

Overhead is divided according to functions into:

i) Production or Manufacturing Overhead;

ii) Administration Overhead;
iii) Selling Overhead;
iv) Distribution Overhead

Production Overhead

It includes all overheads incurred from the stage of procurements of materials till the completion of the
manufacture and the primary packing of the product.

1. Rent, municipal taxes, depreciation, insurance, etc., of the factory land and building.
2. Depreciation insurance etc. of the factory plant, machines and equipments.
3. Factory lighting, heating and air conditioning;
4. Fuel and power;
5. Consumable stores, small tools, etc,;
6. Indirect materials, such as cotton waste, lubricating oil, brushes etc.;
7. Repairs of factory building, plant, machines and equipments.
8. Store-keeping expenses;
9. Cost of idle time, overtime, holiday pay etc.
10. Salary of foremen, timekeepers, works manager etc.;
11. Repairs and maintenance of Power house;
12. Other expenses, e.g., Workers training and welfare, Inspection, Research and Development, Factory telephone
and Stationary etc.

Classification According to Behaviour

Fixed Overheads

Fixed overheads is one which tends to be unaffected by variation in volume of output. This overhead remains
constant, i.e., does not change with the increase or decrease in production, within a certain range. The fixed overheads
are related to the periods, and so the fixed costs are also known as Period Costs, e.g., the rent of the building or the
salaries of the office staff.

Variable Overheads
The variable overhead is one which tends to vary directly with volume of output. The variable cost increases in
direct proportion with the increase in production, and decrease in production. It is known as Direct cost.

Salesmans Commission; Discounts to customers; Bad debts; Branch expenses; Postage; Stationery; Travelling;
Salesmans expenses; Packing charges; Carriage outward; Variable expenses on delivery vans; etc.

It means that a part of the expenses does not change while the other part of the same expense charges with
volume of output. Generally, on costs are truly fixed or truly variable.

Classification According to Controllability

The overheads can be classified on the basis of controllability into a) Controllable, and b) Un-controllable.

The controllable cost is one which can be controlled, i.e., maintained or reduced. The variable costs fall under
this category. The un-controllable cost is one which cannot be influenced by the action of a specified member of the

Allocation of cost

Allocation of cost means charging the full amount a cost to a cost centre, i.e. to the job, process, or to the
product etc. The nature of the expense is such that it can easily be identified and allocated to the cost centre or to the cost
unit of production.

Apportionment of cost

Where the expense is a common one and it is to be allotted to different cost centres proportionately on an
appropriate basis, it is known as apportionment. For example, rent of the factory is an expense which cannot be
allocated to any one department, but is to be shared by all the production departments and service department, on
suitable basis, e.g., floor area basis.

Absorption of Overhead

With the help of allocation and apportionment, the different production departments get their due share of the
total production overheads. After that, the process of absorption starts. The overheads of a particular department are to
be allotted to the production units of the department. This allotment to the unity is absorption.

Ability to Pay Principle, Efficiency or Incentive principle:

Overheads is to recover or absorb the overheads in the cost of products, individual jobs, processes, batches, or
other convenient units. The overheads falling to the share of a department through the process of allocation or
apportionment, is to be absorbed by the cost units of that department. This is known as Absorption of overheads.

Problem 1

The New Enterprises Ltd., has three Production Departments A,B,C and two Service Departments D and E. The
following figures are extracted from the records of the company:

Rent and rates 5,000
General lighting 600
Indirect Wages 1,500
Power 1,500
Depreciation of Machinery 10,000
Sundries 10,000

The following further details are available:

Total A B C D E
Floor Space 10,000 2,000 2,500 3,000 2,000 500
(Sq. ft)
Light points 60 10 15 20 10 5
Direct 10,000 3,000 2,000 3,000 1,500 500
Wages (Rs.)
H.P. of 150 60 30 50 10 -
Value of 2,50,000 60,000 80,000 1,00,000 5,000 5,000
Working - 6,226 4,028 4,066 - -

The expenses of D and E are allocated as follows:

D 20% 30% 40% - 10%
E 40% 20% 30% 10% -

What is the total cost of an article if its raw material cost is Rs. 50, labour cost Rs. 30 and its passes through
Departments A,B and C for 4,5 and 3 hours respectively?

Statement of Allocation and Apportionment of Overhead:
Total Production Service Rate of Appointment
Rs. A B C D E
Direct Wages 2000 - - - 1500 500 Actual
Rent & Rates 5000 1000 1250 1500 1000 250 Re. 0.5 per
General 600 100 150 200 100 50 Rs. 10 per
Lighting Point
Indirect Wages 1500 450 300 450 225 75 Rs. 0.15 per
Re. of
Power 1500 600 300 500 100 - Rs. Per H.P.
Depreciation 10000 2400 3200 4000 200 200 4% of value

Sundries 10000 3000 2000 3000 1500 500 100% of
30600 7550 7200 9650 4625 1575
Service Dept. - 966 1449 1933 -4831 483
30600 8516 8649 11583 -206 2058
Service Dept. - 823 412 617 206 -2058
30600 9339 9061 1220 - -
Working hours - 6226 4028 4066 - -
Rate per hours - 150 225 300 - -

Ascertainment of cost of an article Rs.

Material 50.00
Labour Cost 30.00
Overhead cost
Dept. A, 4 hrs @ 1.50 = 6.00
Dept. B, 5 hrs @ 2.25 = 11.25
Dept. C, 3 hrs @ 3.00 = 9.00 26.50
Rs. 106.25
Note: Sundry expenses are apportioned on the basis of direct wages.

Problem 2
You are supplied with the following information and required to work out the production hour rate of recovery of
overhead in Department A,B, and C.
Production Departments Service
Total A B C P Q
Particulars: Rs. Rs. Rs. Rs. Rs. Rs.
Rent 12000 2400 4800 2000 2000 800
Electricity 4000 800 2000 500 400 300
Indirect 6000 1200 2000 1000 800 1000
Depreciation 5000 2500 1600 200 500 200
of Machinery
Sundries 4500 910 2143 847 300 300
Estimated 1000 2500 1400
working hrs.
Expenses of Service Departments P and Q are apportioned as under:
P 30% 40% 20% - 10%
Q 10% 20% 50% 20% -

a) Repeat Distribution Method
Overhead Distribution Summary for the period

Total A B C P Q
Particulars: Rs. Rs. Rs. Rs. Rs. Rs.
Rent 12000 2400 4800 2000 2000 800
Electricity 4000 800 2000 500 400 300
Indirect Labour 6000 1200 2000 1000 800 1000
Depreciation of 5000 2500 1600 200 500 200
Sundries 4500 910 2143 847 300 300
Total Rs. 31500 7810 12543 4547 4000 2600
Department P 1200 1600 800 -4000 400
9010 14143 5347 - 3000
Department Q 300 600 1500 600 -3000
9310 14743 6847 600 -
Department P 180 240 120 -600 60
9490 14983 6967 - 60
Department Q 6 12 30 12 -60
9496 14995 6997 12 -
Department P 4 5 3 -12 -
Total Rs. 31500 9500 15000 7000 - -
Working Hours 1000 2500 1400
Rate per Hour 9.50 6.00 5.00

b) Equation Method (alternative method)

Let x be the expenses of Service Department P; and

y be the expenses of Service Department Q.

Then x = 4000 + 1/5y (since 20% of y well be apportioned to Department P) ; and

y = 2600 + 1/10x
= 2600 + 1/10 (4000 + 1/5y), substituting the value
of x:
= 2600 + 400 + 1/50y
= 3000 + 1/50y
50y = 150000 + y
49y = 150000
y = 3061
x = 4000 + 1/5 x 3061 = 4,612

Overheads Distribution Summary

Production Departments Service Departments

Rs. Rs. Rs. Rs. Rs.
Total as given above 7,810 12,543 4,547 4,000 2,600
Expenses of Dept. P 1,384 1,845 922 -4,612 461
(Rs. 4,612)
Expenses of Dept Q 306 612 1,531 612 -3.061
(Rs. 3,061)
Rs. 9,500 15,000 7,000 - -
No. of working hours 1,000 2,500 1,400
Rate per hour 9.50 6.00 5.00

Problem 3

The following information are available for Production departments A,B, & C the Service the Dept D & E.

Particular Production Dept Service Dept

Total A B C D E
Rent 1000 200 400 150 150 100
E.B 200 50 80 30 20 20
Fire Ins 400 80 160 60 60 40
Plant Dept 4000 1000 1500 1000 300 200
Transport 400 50 50 50 100 150

The expenses of services dept D & E are apportioned as under

D 30% 40% 20% - 10%
E 10% 20% 50% 20% -

Apportion the expenses of service dept to production dept by

1) Repeated Distribution Method

2) Simultaneous Equation Method



Over Head Analysis Sheet

Production Departments Service Departments

Rs. Rs. Rs. Rs. Rs.
Rent 200 400 150 150 100
E.B. 50 80 30 20 20
Fire, Insur 80 160 60 60 40
Plant Dept. 1000 1500 1000 300 200
Transport 50 50 50 150 100
Total Exp. 1380 2190 1290 630 510
Service Dept. D% 189 252 126 630 63
1569 2442 1416 - 573
Service Dept E% 57 115 286 115 573
Service Dept E% 35 46 23 115 11
Service Dept D% 1 2 6 2 11
Service Dept D% 1 1 - 2 -
Total 1663 2606 1731 -


Total A B C D E
Total 1380 2190 1290 630 510
D% 30% 40% 20% - 10%
E% 10% 20% 50% 20% -

Let x be the total exp of D to be apportioned

Let y be the total exp of E to be apportioned

x = 0.2y + 630 (1)

y = 0.1x + 510 (2)

Substituting the value of x in (2)

y = 0.1 (0.2y 630) + 51
= 0.02y 63 + 510
0.98 y = 573

Therefore y = 585
Therefore x = 747

1380 2130 1290

Service Dept D 30% : 224 299 149

40% : 20%(of 747)

Service Dept E (1:2:5 of 58 117 293


Total 1662 2606 1732

Problem 4

Superfine Ltd. has furnished the following particulars for the half year ended March 31, 1982. Compute the
deprs O/H rates. For the each of the productions department assuming that the O/H charges are recovered as a % of
direct wages.

Particular Production Dept. Service Dept.

Direct Wages 4000 6000 8000 2000 4000
Direct Material 2000 4000 4000 3000 3000
No. of Employee 100 150 150 50 50
EB KWH 8000 6000 4000 2000 2000
Light point 10 16 4 6 4
Assert value 120000 80000 60000 20000 20000
Area occupied (sq. 150 250 100 50 50

Over Head expenses for the above period

Motive Power 3300
Lighting 400
Stores exp 800
Staff welfare 4800
Deprecation 30000
Repair 15000
Rent & Rates 1200
General exp 12000

Apportion the expenses of service dept D in proportion to the direct wages & that of E in the ratio 5:3:2 to
production dept A,B,C



Particular A B C D E

Direct Material - - - 3000 3000

Wages 2000 4000
Power 4:3:2:1:1 1200 900 600 300 300
Lighting 5:8:2:3:2 100 160 40 60 40
Stores exp. 100 200 200 150 150
2:4:4:3:3 (Material)
Staff 2:3:3:1:1 360 1440 1440 480 480
Deprec. 6:4:3:1:1 12000 8000 6000 2000 2000
Rent & rates 300 500 200 100 100
Repairs (assert 6000 4000 3000 1000 1000
General exp. (staff 2400 3600 3600 1200 1200

Total 23060 18800 15080 10290 2270

Abortionment of 2287 3430 4573 - -

Ser. dept D in the
ratio of wages

Abortion of E in the 6335 3681 2454 - -

ratio 5:3:2

Total 31702 25811 21907 - -

Over Head Recovery (as per the rate wages)

Dept A = (3170.2/4000) x 100 = 792.55%

Dept B = (2581.1/6000) x 100 = 430.2%
Dept C = (2190.7/8000) x 100 = 272.8%

Absorption of overhead cost

Absorption means allotment of overhead cost of jobs i.e., with a view to charging the same amount of overheads
in respect of the departments of cost centre where it is spent.

Methods of Absorptions

There are various methods of absorptions, some of which generally used are given below:

a) Direct Labour Cost Method.

b) Direct Labour Hours Method
c) Machine Hour Rate
d) Prime Cost Method
e) Conversion Cost Method

Machine Hour Rate Method

This Method is applicable where work is carried on mostly by the machines because the overheads in such a case are
more related to the machines. The factory overheads of the factory are ppportioned to the different machines or group of
machines. An individual machine is treated to be a cost centre, and sometimes a group of machines which work together
in Co-operation is treated to be a cost centre fro the purpose of apportionment. The working hours of a machine are
calculated for the period for which the machine is to run. Machine hour rate is scientific, practical and accurate. It helps
in finding out idle machines cost and also in decision making.

Problem 5

Workout the machine hour rate for the following machine, whose scrap value is nil:

1. Cost of Machine Rs. 90,000

2. Other charges e.g. freight and installation Rs. 10,000
3. Working life 10 years
4. Working hours 2,000 per year
5. Repair charges 50% of Depreciation
6. Power 10 units per hour, @ 10 paise per unit
7. Lubricating oil @ Rs. 2 per day of 8 hours.
8. Consumable stores @ Rs. 10 per day of 8 hours
9. Wages of operator @ Rs. 4 per day.


Computation of Machine Hour Rate

Machine No..
Standing Charges Per day Per hour
Rs. Rs.
Lubricating Oil 2
Wages 4
Consumable Stores 10
Hourly rate (16+8) 2.00

Machine Expenses

Depreciation cost Rs. 1,00,000

Yearly depreciation 10,000
Hourly depreciation 10000 + 2000 5.00
Repairs 50% of depreciation 2.50
Power 10 units @ 10 paise per unit 1.00
Machine hour rate (Comprehensive) 10.50

Problem 6

Compute from the following information relating to machine No. 18, machine hour rate
Cost of machine 11,000
Scrap value 680
Repairs for the effective working life 1,500
Standing charges for 4 weekly period 1,600
Effective working life 10,000 hours
Power used 6 units @ 5 paise per unit
Hours worked in 4 weekly period 120 hours.
No. of machines in the workshop is 40, of which each bears equal charges.

Solution Computation of Machine Hour Rate

Machine No. 18
Per hour
Standing charges 1600 /(40x120) 33
Machine Expenses
Depreciation cost 11,000
Less-scrap value - 680
Value to be written off Rs. 10,320
Hourly rate = 10,320 + 10,000 1.03
Repairs Rs. 1,500 for entire life
Hourly rate 1500 + 10,000 15
Power consumed 6 units @ 5 paise per unit 30

Machine Hour Rate 1.81

Problem 7

Calculate the machine hour rate from the following:

Cost of Machine 8,000
Cost of Installation 2,000
Scrap value after 10 years 2,000
Rates and rent for a quarter for the shop 300
General lighting 20 p.m.
Shop supervisors salary 600 p.a. quarter
Insurance premium for a machine 60 p.a.
Estimate repair 100 p.a.

Power 2 units per hour @ Rs. 5 per 100 units

Estimated working hour p.a. 2,000

The machine occupier 1/4th of the total area of the shop. The supervisor is expected to devote 1.6 th of his time for
supervising the machine, General lighting expenses are to be apportioned on the basis of floor area.


Computation of Machine Hour Rate

Machine No:

Per year Per hour

Standing Charges: Rs. Re.
Rent and Rates 1/4th 300
General lighting as per floor area 60
Supervisors Salary 1/6th 400
Insurance premium 60
Total yearly Standing charges 820
Hourly rate 820 + 2,000 0.40

Machine expenses

Depreciation Cost 8,000

Installation 2,000
Total 10,000
Less Scrap value 2,000
Amount to be written off Rs. 8,000 0.40
Repairs etc. 0.05
Power 2 units @ 5 paise per unit 0.10
Machine Hour Rate 0.96

Problem 8
Calculate the machine hour rate, for the machine No. 45 from the following particulars:
Cost of Machine 10,000
Estimated scrap value 250
Estimated working life 15,000 hours
Hours required for maintenance 200 hours
Productive working hours p.a. 2,000 hours
Setting up time 5%
Power 20 units @ 7 paise per unit
Cost of repairs p.a. 1,500
No. of operators looking after 4 machines 2
Wages of operator p.m. 150
Chemical required p.m. 100
Overheads chargeable to this machine 200 p.m.
Insurance premium 1% p.a.

Calculation of Machine Hour Rate
Machine No. 45 Per hour
Rs. Rs.
Yearly Standing Charges
Overheads Rs. 200 x 12 = 2,400
Insurance 1% of 10,000 = 100
Wages (2 x 150 x 12) / 4 = 900

Total 3,400
Effective working hours in a year 1,900
Therefore 3,400 1.79

Machine Expenses
Depreciation Rs. (10,000 250) / 15,000 0.65
Repairs Rs. 1,500 + 1,9000.79
Chemicals Rs. (100 x 12) / 1900 0.63
Power 7 paise x 20 units 1.40 1.40
Machine hour rate 5.26
Note: It has been presumed that the hours required for maintenance have already been adjusted in the total yearly hours.
Secondly 5% time needed in setting up, has been considered as productive, and hence has been adjusted accordingly i.e.
as normal loss in terms of hours for it has already caused in increase in machine hour rate. Also it is presumed that no
power is used in setting up operations.

Problem 9

Compute comprehensive machine hour rate from the following data:

(a) Total of machine to be depreciated Rs. 2,30,000

Life 10 years; Depreciation on straight line.
(b) Departmental overheads (annual):
Rent 50,000; Heat and light 20,000 ; supervision 1,30,000.
(c) Departmental Area 70,000 sq. metres.
Machine Area 2,500 sq. metres.
(d) 26 machines in the department.
(e) Annual cost of reserve equipment for the machine Rs. 1,500.

(f) Hours run on production 1800
(g) Hours for setting and adjusting 200
(h) Power cost Rs. 0.50 per hour of running time.
(i) Labour (1) when setting and adjusting, full time attention
(2) when machine is producing, one man can look after 3 machine
(j) Labour rate Rs. 6 per hour.

Using the machine hour rate as calculated value work out the amount of factory overhead to be absorbed on the

Total hours Production time Setting up time

Job No. 605 100 80 20
Job. No. 595 100 80 30

Computation of comprehensive machine hour rate
Standing charges
Rent, heat and light (70,000 x 2,500) / 70,000 2500
Supervision (1,30,000 ) / 26 5,000
Depreciation 10% of Rs. 2,30,000 23,000
Reserve equipment cost (1500/26) 58
Labour cost during setting and adjustment 200 hrs @ Rs. 6 =
(1,200 / 31,758)
Hourly Rate for standing charges 31,758 / 1800 17.64
Machine charges
Power 0.50
Labour (1/3 of Rs. 6) 2.00
Comprehensive machine hour rate 20.14
If the machine hour rate over the various jobs will be:

Job No. 605 = 20.14 x 80 = 1,611.20

Job No. 595 = 20.14 x 70 = 1,409.80

User and over absorption of overhead

The amount of overhead absorbed in costs is sum total of overhead cost allotted to individual cost units by
application of overhead rates under the actual rate method, overhead cost are fully charged to production so that
overhead absorbed in equal to overhead incurred.

Pre-determined overhead rate is calculated on the basis of budgeted overheads and this is applied to actual base. The
amount absorbed may not be identical with the amount of overheads incurred it is called under absorption and in reverse
condition it is called over absorption. This may happen due to error in esteeming expenses, error in estimating the base,
major changes in methods of production and seasonal fluctuation of overhead.

Lesson 5

Job Costing is the method of costing used to determine the cost of non-standard jobs carried out according to
customers specifications. In this method is also known are separately indentified and are coasted individually. Job
costing is applicable to job printers, engineers, furniture makers, builders, contractors, hardware and machine
manufacturing industries, repairing shops, etc.

The Costing Department prepares job cost sheet (Fig. 2) for each job, containing the production order No., and
other details relating to the job. Where a job requires several major operations or components, sub-cost sheet. The job
cost sheet is the document detailing the cost of the job under Direct material. Direct labour, Works overheads etc., It is
not prepared for a specific period but for a specific job.

The cost of all the job in process are debited to the Work-in-Progress Control Account. On the completion of a
job, this account is credited and Finished Goods Control Account is debited with its cost. The difference between the
cost and the price charged is the profit or the loss on the job.

On the completion of a job Completion Report is submitted by the production shop to the planning Department
with a copy to Costing Department. This report is an indication that further expenses on the job should cease and the job
cost sheet be closed.

Problem 1

Find out in the suitable cost sheets form the selling rater per tone of special paper manufacturing by a paper mill
for a private firm a January 1997 under the following divisions of cost:

a. Prime Cost
b. Works cost,
c. Total cost,
d. Selling price
The cost sheet is to be prepared with reference to the data given below:

Direct Materials

Paper plup 1,000 tonnes @ Rs. 50 per tone.

Other Miscellaneous Materials, 200 tonnes at Rs. 30 per tone.

Direct Labour

100 skilled men @ Rs. 5 per day for 20 days.

50 unskilled men @ Rs. 3 per day for 20 days.

Direct Expenses

Special equipment Rs. 5,000

Special dies Rs. 2,000

Works Overhead

Variable 10% on direct wages.

Fixed 60% on direct wages

Administrative overhead at 10% of works cost.

Selling and distributive overhead at 15% of works cost.
Profit 10% in total cost
Finished paper manufactured 800 tonnes
Sale of waste paper Rs. 1,000

There was not work in progress in the beginning or at the end of the month. The scarp value of special equipment is nil
after use. Work was done only for 20 days in the month. Selling price is to be worked to the nearest rupee.


Cost-Sheet for Special Paper

Rs. Rs.
Direct material
Paper pulp 1,000 tonnes @ Rs. 50 per tone 50,000
Other materials 200 tonnes @ Rs. 30 per tone 6,000 56,000
Direct Labour
100 skilled men at Rs. 5 for 20 days 10,000
50 unskilled man at Rs. 3 for 20 days 3,000 13,000
Direct Expenses
Special Equipment 5,000
Special dies 2,000 7,000
Prime Cost 76,000
Works overhead
Variable 100% of direct labour 13,000
Fixed 60% of direct labour 7,800 20,800
Less : sale of waste 1,000
Works cost 95,800
Office Overhead
Administrative 10% of works cost 9,580
Selling and distributive 15% of works cost 14,370 23,950
Total Cost 1,19,750
Profit 10% 11,975
Selling Price @ Rs. 164.65 or Rs. 165 for 800 1,31,725

Problem 2

The information give below has been taken from the costing record of an Engineering Works in respect of Job
No. 303.

Materials Rs. 4,010

Dept. A 60 hours @ Rs. 3 per hour
B 40 hours @ Rs. 2 per hour
C 20 hours @ Rs. 5 per hour

Overhead expenses for these three departments were estimated as follows:

Variable overheads:
Dept. A Rs. 5,000 for 5,000 labour hours
B Rs. 3,000 for 1,500 labour hours
C - Rs. 2,000 for 500 labour hours

Fixed overheads:
Estimated at Rs. 20,000 for 10,000 normal working hours. You are required to calculate the cost of job 303 and
calculate the price to give profit of 25% on selling price.

Amount Amount
Rs. Rs.
Direct Materials 4,010
Wages Dept. A 60 hrs. x Rs. 3 180
B 40 hrs. x Rs. 2 80
C 20 hrs. x Rs. 5 100 360
Overheads variable
Dept. A 60 x (Rs. 5000 / 5000 hrs.) 60
B 40 x (Rs. 3000 / 1500 hrs.) 80
C 20 x (Rs. 2,000 / 500 hrs.) 80 220

Fixed overheads:
120 hours @ (Rs. 20,000 / 10000 hrs) 240
Total cost 4,830
Profit 25% on selling price or 1/3 on Cost 1610
Selling Price 6440

Advantages of job Costing

Job Costing offers the following specific advantages:-

The cost material, labour, and overhead for every job or product in a department is available daily, weekly or as
often as required while the job is still in progress. This enable the management to know the trend of the costs
and this by the efficiency of operations.
On completion of a job, the cost under each element is immediately ascertained. Cost may be compared with the
selling prices of he products in order to determine their profitability and to decide which product lines should be
pushed or discontinued or whether prices or price quotation could be revised. The application of marginal
costing techniques may be useful in such situations.
Historical costs for past periods for each product, compiled by orders, departments, or machines, provide useful
statistics for future production planning and for estimating the costs of similar jobs to be taken up in future. This
assists in the prompt furnishing of price quotations for specific jobs.
The adoption of predetermined overhead rates in job costing necessitates the application of a system of
budgetary control of overhead with all its advantages.
The actual overhead costs are compared with the overhead applied at predetermined rates; thus at the end of an
accounting period, overhead variances can be analyzed.
Spoilage and defective work can be easily identified with specific jobs or products so that responsibility may be
fixed on determents or individuals.
Job costing is particularly suitable for cost-plus and such other contracts where selling price is determined
directly on the basis of costs.

Limitations of job costing:
Job costing is comparatively more expensive as more clerical work is involved in identifying each element of
cost with specific departments and jobs.
With the increase in the clerical processes, chances of errors are enhanced.
The cost as ascertained, even where they are complied very promptly, are historical as they are compiled after
The cost compiled under job costing system represents the cost incurred under actual conditions of operation.
The system does not have any scientific basis to indicate what the cost should be or should have been, unless
standards of performance efficiency are established. Estimated cost, prepared by some concerns in respect of job
orders, also do not serve the purpose.
If major economic changes take place, comparison of cost of a job for one period with that of another becomes
meaningless. Distortion of cost also occurs when the batch quantities are different.


Batch costing a modified from of job costing. While job costing is concerned with producing articles according
to customers requirements and specifications, batch costing is used where the articles are manufactured in a good
number in definite batches. Component parts of watches, radio sets, television sets etc., are extensively produced under
batch costing, for being assembled in the product. If one component of a special design is ordered by a customer for
manufacture, it is Batch costing, Batch costing, therefore, is also known a Lot Costing.

A batch of workers is assigned to perform the task of producing a certain number of articles in a particular
period. Thus the cost of production can be compared batch wise, and efficiency ascertained. Like job order system, one
number is allotted to each batch. The material requisitions are prepared batch wise, labour is engaged batch wise, and the
overheads are also charged batch wise. This it is a modified form of job costing.

The cost control in batch costing depends upon ascertainment of the optimum number of batch production. The
Economic Batch Quantity can be decided on the same principle and same formula as applied to Economic Order
Quantity is case of materials.

Cost comparison between the two batches is possible if both batches are allowed the same facilities, time to
produce, and the same number of articles. The comparison can be fruitfully done with the help of cost sheets of the two

Problem 1
A joining 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 with material and labour hours are booked at actual. Overheads are levied
at a rate per labour hour. The selling price contracted for is Rs. 8 per piece. Form the following data present the cost and
profit per piece of each batch order and overall position of the order for 1200 pieces.

Months Batch output Material cost Direct wages Direct labour

Rs. Rs.
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

The other Details are:

Months Chargeable expenses Direct labour hours

Rs. Rs.
January 12,000 4,800
February 10,560 4,400
March 12,000 5,000
April 10,580 4,600
May 13,000 5,000
June 12,000 4,800


Jan Feb. Mar. April May June Total
Batch output 210 200 220 180 200 220 1230
Sales Value 1680 1600 1760 1440 1600 1760 9840
Material Cost 650 64 680 630 700 720 4020
Direct Wages 120 140 150 140 150 160 860
Chargeable 600 672 672 621 780 800 4145
expenses Rs.
Total Cost 1370 1452 1502 1391 1230 1680 9025
Profit per 310 148 258 49 -30 80 815
Batch Rs.
Total Cost 6.52 7.26 6.83 7.73 8.15 7.64 7.34
per unit Rs.
Profit per 1.48 0.74 1.17 0.27 -0.15 0.36 0.66
unit Rs.

Over all position of the order for 1,200 units.

Sales value of 1,200 units @ 8/- per units. Rs. 9,600
Total cost of 1,200 units @ 7.34 per unit Rs. 8,808
Profit Rs. 792

Lesson 6
Contract is an agreement enforceable by law. It is an agreement between two parties Contractor and the
Contractee. The contractor agrees to undertake and complete the work, as per terms of contract, within a specific period
and for a particular monetary consideration. The terms of contract regarding work to be undertaken, period in which to
be completed, value of the contract advances to be made by the Contractee to the contractor on the certificate of
architect, compensation payable by the contractor for the breach of contract, etc., are decided upon between the two
parties before the work is started. These contracts related to the works of construction of roads, buildings, bridges, dams
and banks, ports, etc,

Contract costing is the technique of ascertaining cost of a contract. Here the unit of cost is one only, e.g., a
building, or a bridge etc. it is similar to job in principle, and so the method of recording cost is the same. A Contract
Ledger book is kept in which a separate account for each contract is opened.

The following items appear on the debit side of the Contract A/c:
1. Direct Materials
2. Direct Labour
3. Direct Expenses
4. Overheads
5. Plant and Machinery
6. Sub-Contract Cost
7. Extra Work done

The following items appear on the credit side of the Contract A/c:
1. Materials Returned
2. Materials Transferred
3. Materials at the end
4. Plant and Tools at the end
5. Work Certified
6. Work done but Uncertified
7. Contract Price

Work Certified
As per terms of the contract, the contractee advances some 80 or 90 percent of he work done to the contractor on
the basis of the work certified by the contractees architect or engineer periodically. The balance of 20 or 10 percent
amount is retained by the contractee, so that the contractor may continue to work and not leave the contract if the
contract is not proving to be profitable one to him. The amount retained is known as Retention of Money.

Work done but not yet Certified

A work done by the contractor but which remains to be certified by the architect on the date of accounting is
known as work done but not yet certified.

Contract Price
The contract price is the value of contract agreed to be paid to the contractor by the contractee on the
satisfactory completion of the contract. So on the completion of the Contract the Contract A/c is credited with the
contract price and Contractees A/c is debited.

Cost plus contract

Where a contractor feels hesitant to quote for a work of contract which is absolutely new to him, and new to
other contractors as well, and he is unable to estimate the cost of the works offered to him for execution. It is decided
with the contract or that he would be paid the total cost of work whatever it be, plus his profit as a rate percent on the
total cost. Such s contract is known as Cost plus Contract.

Ascertainment of Profit/Loss on Contract

The Profit/Loss on contract is ascertained as follows:
a) On completion of Contract:
The excesses of credit over the debit items of the contract a/c is the profit, and the whole of it can be taken into
account. The excess of debit over the credit items is loss.

b) On incomplete Contract:
Where a contract takes more one financial year for in to complete, it is usual to take into account a part of the
profit only to the Profit and Loss Account. If there is a loss, the whole of the loss is transferred to the P & L A/c.

What part of the notional profit should be credited to the profit and loss account each year, depends on the practice and
circumstances of the case. The general rules are:

a) If the value of certified work is less than 1/4 th of the contract price, no profit is taken into account, and the
balance of the contract a/c is transferred to the Work-in-Progress A/c.
b) If the certified work is 1/4th or more than 1/4th, but less then of the contract price, only 1/3 of the computed
profit as reduced to the cash basis (cash received on work certified), should be credited to the Profit and Loss
Account. The formula is:

Profit = Computed profit, i.e. Cr. Balance of contract a/c x 1/3 x (cash received / work certified)

The balance of the computed profit is a reserve and is transferred to Work-in-Progress A/c.

c) If the value of certified work is or more than of the contract value, 2/3 of the computed profit as reduced to
the cash basis is credited to P & L A/c.

Problem 1
(Where more than contract is complete)

Building Contractors Ltd., undertake contracts. On 31 st October, 1993 when the actual accounts were prepared, the
positions of Contract No. 101 which was commenced on 1st January, 1993, was as under:

Material purchased 37,500
Material in hand 1,500
Wage Paid 43,750
Wage outstanding 625
Proportionate share of indirect expenses 1,875
Cost of plant 6,250

The value of work certified was Rs. 90,000 of which Rs. 67,500 had been received, work completed but uncertified was
valued at Rs. 2,500.

The Contract price was Rs. 1,50,000.

The plant on the site was valued at Rs. 5,000 on 31st October, 1993.

Prepare Contract No. 101 account after taking credit for Profit which you think reasonable.


Contract 101 Account

Rs. Rs.
To Materials Purchased 37,500 By work-in-Progress
To Wages 43,750 Work certified 90,000
To Plant 6,750 Work done but Uncertified 92,500
To Proportionate share of 1,875
indirect expenses
To Outstanding Wages 625 By Material at site 1,500
To Balance c/d 9,000 By Plant at site (dep. Value) 5,000
Total 99,000 Total 99,000
To Profit and Loss A/c 4,500 By Balance c/d 9,000
To Work-in-Progress 4,500
Total 9,000 Total 9,000

* Profit has been ascertained as follows:

Rs. 9,000 x 2/3 x 67,500 / 90,000 Rs. 4,500.

vi) if the contract work has sufficiently advanced, or the contract is almost complete, the profit is ascertained as follows:

The expenses of the part of the contract remaining to be executed are estimated, and added to the expenses
already incurred, to give an idea of the total cost of the full contract. On deducting the estimated total cost from the
contract price, we get the notional or the computed profit. Of this computed profit only that part is credited to P & L A/c
as is reduced by the proportion of.

(i) Work credited to Contract Price or more conservatively.

(ii) Cash received to Contract Price so:

i. Profit = Estimated Profit on completed contract x Work certified / Contract Price

ii. Profit = Estimated Profit on completed contract x Cash Received / Contract Price.

An Estimated Contract A/c or Estimated Contract Statement is required to be prepared to find out the estimated cost of
the full contract and to find out the national profit for the purpose of calculating the Profit to be credited to the Profit and
Loss Account in the main Contract A/c.

Work-in-progress and Balance Sheet

The Work-in-progress A/c is debited with the sums

(i) Work certified (valued at contract price), and

(ii) Work done but not yet certified (valued at cost).

This account is credited with the balance of the notional profit not taken to the Profit and Loss Account.

This account shows debit balance which is taken to the Balance Sheet on the Asset side. The Contractees A/c which
shows credit balance on account of cash received in advance, is not shown on the Liability side of the Balance Sheet but
is shown as a deduction from the Work-in-Progress A/c on the Asset side of the Balance Sheet.

Problem 2

The following information relate to Contract No. 123. You are required to prepare the Contract Account and the
Contractees Account assuming that the amount due from the contractee was duly received.

Direct Material 20,250
Direct Wages 15,500
Stores Issued 10,500
Loose Tools 2,400
Tractor Expenses:
Running Material 2,300
Wages of Drivers 3,000 5,300
Other Direct Charges 2,650

The contract price was Rs. 90,000 and the contract took 13 weeks in its completion. The values of Loose Tools and
Stores returned at the end of the period were Rs. 200 and 3,000 respectively. The plant was also returned at a value of
Rs. 16,000 after charging depreciation at 20%. The value of tractor was Rs. 20,000 and depreciation was to be charged
to the contract @ 15% per annum. The Administration and office expenses are to be provided at 10% on works cost.

Contract 123 Account

Particulars Amount Particular Amount
Rs. Rs.
To Direct Materials 20,250 By Stores Returned 3,000
To Direct Wages 15,500 By Loose tolls returned 200
To Stores Issued 10,500 By Plant Returned 16,000
To Plant (original cost) 20,000 By Balance being 58,150
To Loose Tools 2,400 Work Cost A/c
To tractor expenses:
Running Materials 2,300
Wages of drivers 3,000 5,300
To Depreciation on Tractor 750
@ 15% on Rs. 20,000 for
13 weeks
To other Direct Charges 2,650
Total 77,350 Total 77,350

To Balance being work cost 58,150 By Contractees A/c 90,000

To Administration and
office expenses @ 10% on
works cost
To profit & Loss A/c 26,035
Total 90,000 Total 90,000

Contractees Account
Rs. Rs.
To Contract A/c 90,000 By Bank 90,000
Total 90,000 Total 90,000

The plant was depreciated @ 20% (not @ 20% annum). The depreciated value is Rs. 16,000. So the original cost of the
plant comes to Rs. 20,000.


Problems 3

A firm of building contractors began to trade on 1 st April, 1990. The following was the expenditure on the contract for
Rs. 30,00,000:

Materials issued to contract 51,000
Plant used for contract 15,000
Wages incurred 81,000
Other Expenses incurred 5,000

Cash received on account to 31 st March, 1991 amounted to Rs. 1,28,000 being 80% of the work certified. Of the plant
and materials which cost Rs. 2,500 were lost. On 31 st March, 1991 plant which cost Rs. 3,000 and materials which cost
Rs. 2,000 was returned to stores, the cost of work done but uncertified was Rs. 1,000 and materials costing Rs. 2,300
were in hand on site. Charge 15% depreciation on plant, reserve profit received and prepare a Contract Account from
the above particulars.

Solution: Contract Account

Dr. Cr.
Particulars Amount Particulars Amount
Rs. Rs.
To materials 51,000 By Profit & Loss a/c
To Wages 81,000 Plant Lost 3,000
To Plant 15,000 Material 2,500 5,500

To Other expenses 5,000

By Plant returned 2,000
to store
To Profit to date 27,000 Less: Dep 300 17,00

By plant at site 10,000

Less: Dep 1,500 8,500

By Material at site 2,300

By Work-in-Progress A/c:
Work certified 1,60,000
Work done but 1,000 1,61,000
Total 1,79,000 Total 1,79,000
To Profit & Loss A/c ( of 10,800 By Profit to date b/d 27,000
profit recd.)
To Work in Progress:
Reserve ( of 10,800
profit recd.)
Balance (20% of 5,400 16,200
Rs. 27,000)

Total 27,000 Total 27,000


1. Ascertainment of Profit:
Profit to date 27,000
Profit received 4/5 (in the ratio of cash received to work certified) 21,600
Reserved of profit received 10,800
Transferred of profit received to Profit & Loss Account 10,800
Balance ( 27,000 21,000) i.e. 20% of 27,000 5,400

2. The value of the plant on 31st March, 1991 has been ascertained as follows:

Original Value Dep. Net Value

Rs. Rs. Rs.
Plant Lost 3,000 - -
Plant returned to 2,000 300 1,700
Plant at site 10,000 1,500 8,500
15,000 1,800 10,200

Lesson 7


Process costing is the type of costing applied in industries where there is continuous or mass production. The
necessity for compilation of the costs of a process or a department for a given period, as distinct from the cost of a whole
job or a specific batch of production units, has given rise to the concept of process cost accounting. There are many
industries engaged in continuous processing in which the end products are the results of a number of operations
performed in sequence. In such industries, it is necessary to apply process costing.

Process costing is suitable for a large number of mining, manufacturing and public utility industries like mines
and quarries, cotton, wool and jute textiles, chemicals, soap making, paper, plastics, distillation processes, e.g. alcohol,
tanning, oil refining, screws, bolts and rivets, canning, food products, dairy, and electricity and gas undertakings.

Features of Process Costing:-

1. The production is continuous and the end product is the result of a sequence of processes.
2. The product is homogeneous and the units product are identical and standardized.
3. The sequence of operations for processing the product is specific and predetermined.
4. The finished products of one process works as raw material for the next or process until completion.

Process Costing and Job Costing:-

A comparison of the basic principles of process costing with those of job costing, given below, will assist in
appreciating process costing procedures.

Job Costing Process Costing

1. Production is by specify orders 1. Production is in continuous flow, the
products being homogeneous.

2. Costs are determined by jobs or 2. Cost are compiled on time basis, i.e.
batches of products for production for a given accounting
period, for each process or

3. The various jobs are separate and 3. Being manufactured in a continuous

independent of each other. flow, products lose their individual

4. Unit cost of a job is calculated by 4. The unit cost of a process, which is

dividing the total cost incurred into the computed by dividing the total cost for
units produced in the lot or batch. the period (after adjustment of the
opening and closing work-in-process),
is an average cost for the period.

5. Costs are calculated when a job is 5. Costs are calculated at the end of the
completed. cost period.

6. There may or may not be any work- 6. Production being continuous there is
in-progress at the beginning or end of usually some work-in-process at the
an accounting period. beginning as well as at the end of the
accounting period.

7. There are usually no transfers from 7. As a product moves from one

one job to another unless it is necessary process to another, transfers of cost

to transfer surplus work or excess from process to process are made.

8. As such product unit is different and 8. Process production is standardized

production is not continuous, more and is more stable. Hence, control of
managerial attention is needed if process activities is comparatively
proper control is to be exercised. easy.

Advantages and Limitations of Process Costing:-

Process costing has the following advantages:

(i) Process cost may be determined periodically at short intervals. When predetermined overhead rates are
in use, it may be possible to complete unit cost weekly or even daily. This not always so under the job
costing system, particularly when jobs run for long periods and there are no significant units of
completed production during the various accounting periods, falling between the total period of run of
the jobs.
(ii) It involves less efforts and less clerical expenses as the accounting method is simpler than that in job
(iii) Detailed cost, budgeted as well as actual, are made available for each possible by evaluating the
performance of each process etc.
(iv) Allocation of overhead to departments and processes can be made fairly accurately on definite bases.
(v) Since the material consumption ass the various operations are more or less standardized, more accurate
cost estimates are available for price quotations.
(vi) It is easier to set effective and fairly stable standards in case of mass production or continuous repetitive
production. Process costing situations are, therefore, more adaptable for installing standard costing

The limitations and weaknesses of process costing systems are as follows:-

(i) Being only average costs for the accounting period, process cost cannot be considered to be very
accurate for the purpose of detailed analysis, evaluation, and control of individual performance
efficiency on a day-to-day basis.
(ii) Costs obtained at the end of the accounting period are only historical and are not of much use for
effective control unless standard process cost are used. This is, no doubt, true in respect of all other
historical systems but the nature of process accounting with its departmental divisions makes this
disadvantage more prominent.
(iii) When different products come out of one and the same process, the common costs are prorated to the
various products. Such cost of individual products are not reliable as they may, at best, be taken to be
only approximations.
(iv) For the purpose of calculation of unit costs of continuous processes, work-in-process is required to be
determined at the end of an accounting period. This is done mostly on estimated basis which introduces
further inaccuracies in costs.

Process Costing Procedures:-

The procedure for costing applicable to processes or departments will very in details according to the requirements of
production methods. The various situations and problems envisaged and the methods of calculation of costs in respect of
each of the situations have been discussed under the following heads:

1. Single process production

2. More than one process involved; output of one process transferred in full to the subsequent process.
3. Output of a process partly transferred to the next process and partly retained in stock.
4. Process consisting of opening and closing stock, fully completed.

5. Normal and abnormal losses occurring in process but there is no closing stock or the closing stock is fully
6. Process consisting of partially completed closing stock.
7. Normal loss or abnormal loss involved-closing stock partially complete.
8. Process consisting of partially completed opening stock.
9. Normal and/or abnormal losses and both opening and closing work-in-processes.

Problem 1: (Process accounts with Cost sheets)

Am article has to undergo three different processes before it becomes ready for sale. From the following
information find out cost of production per unit of that article, if 200 units of article were manufactured upto 31 st
December, 1991.

Manufacturing Refining Process Finishing Process

Rs. Rs. Rs.
Material 2000 1000 700
Labour 1500 2500 1000
Direct Expenses 400 200 300

The indirect expenses for the period amount to Rs. 6,000 in the factory out of which Rs. 2000 is attributable to
this product. There was no stock at the end in any process. The indirect expenses should be allocated to each process on
the basis of labour.


Manufacturing Process A/c with Cost Sheet

(Output : 200 units of article)
Particulars Cost Amount Particulars Cost Amount
per per
unit unit
Rs. Rs. Rs. Rs.
To Material 10.00 2.00 By Transfer to 22.50 4500
Refining Process
To Labour 7.50 1500
To Direct Expenses 2.00 400
To Indirect 3.00 600

Total 22.50 4,500 Total 22.50 4500

Refining Process Account
(Output : 200 units of articles)
Particulars Cost Amount Particulars Cost Amount
per per
unit unit
Rs. Rs. Rs. Rs.
To Transfer from 22.50 4500 By Transfer of 46.00 9200
Manufacturing Finishing Process
Process A/c A/c
The cost per unit is
Rs. 46.00
To Material 5.00 1000
To Labour 12.50 2500
To Direct Expenses 1.00 200
To Indirect 5.00 1000

Total 46.00 9200 Total 46.00 9200

Refining Process Account

(Output : 200 units of articles)
Particulars Cost Amount Particulars Cost Amount
per per
unit unit
Rs. Rs. Rs. Rs.
To Transfer from 46.00 9200 By Finished Stock 58.25 11650
Refining Process A/c
To Material 46.00 9200
To Labour 3.75 750
To Direct Expenses 5.00 1000
To Indirect 1.50 300

Total 58.25 11,650 Total 58.25 11650

Note: The indirect Expenses of Rs. 2000 have been allocated to the three processes in the proportion of direct
labour Rs. 3 : 5: 2 (Rs. 1500 : 2500 : 1000)

Problem 2: (Treatment of Bye-product and Scrap)

A particular brand of phenyl passed through three important processes. During the week ended 15 th January, 1952, 600
gross of bottles are produced. The cost book show the following information:

Process 1 Process 2 Process 3

Rs. Rs. Rs.
Material 4000 2000 1500
Labour 3000 2500 2300
Direct Expenses 600 200 500
Cost of bottles Nil 2030 Nil
Cost of corks Nil Nil Nil

The indirect expenses for the period were Rs. 1600. The bye-products were sold for Rs. 240 (Process 2). The residue
sold for Rs. 125.50 (Process 3).

Prepare the account in respect of each process showing its cost and cost of production of the finished product per gross
of bottles.
Process 1 (Output 600 gross of bottles)
Rs. Rs.
To Materials 4000.00 By Transfer to Process No. 8215.38
2 (cost per gross of bottles
Rs. 13.69 approximately)
To Labour 3000.00
To Direct Expenses 600.00
To Indirect Expenses 615.38

Total 8215.38 Total 8215.38

Process 2
To Transfer from Process 8215.38 By Sale of Bye-Product 240.00
To Materials 2000.00 By Transfer to Process of 15218.20
bottles (cost per gross of
bottles Rs. 25.36
To Labour 2500.00
To Direct Expenses 200.00
To Indirect Expenses 512.82

Total 15458.20 Total 15458.20

Process 3

To Transfer from Process 15458.20 By Sale of residue 125.50

To Materials 1500.00 Bu Finished products 20189.50
account (Cost per gross of
bottles Rs. 33.65)
To Labour 2300.00
To Direct Expenses 500.00
To Indirect Expenses 471.80
To Cost of rocks 325.00

Total 20315.00 Total 20315.00

Note: Indirect Expenses have been charged to three processes in the labour ratio of 30 : 25 : 23

Abnormal Loss and Abnormal Gain:-

Abnormal spoilage or defective work may arise in a process due to unforeseen factors. The cost of such
abnormal loss is not included in the cost of the process but the average cost of the lost units is charged to an Abnormal
Loss Account which is credited with the scrap and closed to the Profit and Loss Account. Thus, in computing the

abnormal loss, scrap value of the abnormal lost units will be ignored but in working out the loss for charging to Profit
and Loss Account, this will be taken into consideration.

Sometimes, when the actual loss in a process is less than the anticipated loss, the difference between the two is
considered to be abnormal gain. The value of the abnormal gain is calculated in the same way as described above for
abnormal loss and is credited to an Abnormal Gain Account which is ultimately closed. Profit and Loss Account. The
scrap value of the normal anticipated loss in the process where abnormal gain occurs is credited to the process account
with the result that the net debit to the process is the cost of abnormal gain less the value of scrap for the normal loss.

Problem 3:
(Normal wastage Loss in weight and sale of scrap)

The Bengal Chemical Co. Ltd., produced three chemicals during the months of July 1995 by three consecutive
processes. In each process 2 per cent of the total weight put in is lost and 10 percent is scrap which from process (1) and
(2) realizes Rs. 100 a ton and form process (3) Rs. 20 a ton.

The product of three processes is dealt with as follows:

Process I Process II Process III

Passed to next 75% 50% -
Stock kept for 25% 50% 100%

Process I Process II Process III

Rs. Tons Rs. Tons Rs. Tons
Raw materials 120000 1000 28000 140 107840 1348
Manufacturing Wages 20500 - 18520 - 15000 -
General Expenses 10300 - 7240 - 3100 -

Prepare Process Cost Account, showing the cost per ton of each product.

Solution: Process I
Tons Rs. Tons Rs.
To Raw Materials 1,000 1,20,000 By Loss of weight 20 -
(2% of 1000 tons)
To Manufacturing 20,500 By Sales of scrap 100 10,000
Wages (10% of 1000
To General 10,300 By Transfer to 220 35,200
Expenses Warehouse
By Transfer to 660 1,05,60
Process II (cost
per ton Rs. 160)
Total 1,000 1,50,800 1,000 1,50,800

Process II
Tons Rs. Tons Rs.
To Transfer from 660 1,05,600
Process I
To Raw Materials 140 28,000 By Loss of weight 16 -
(2% of 800 tons)
To Manufacturing - 18,520 By Sales of scrap 80 8,000
Wages (10% of 800 tons)
To General - 7240 By Transfer to 352 75,680
Expenses Warehouse
By Transfer to 352 75,680
Process III (cost
per ton Rs. 215)
Total 800 1,59,360 800 159360

Process III
Tons Rs. Tons Rs.
To Transfer from 352 75,680
Process II
To Raw Materials 1,348 1,07,840 By Loss of weight 34 -
(2% of 1700 tons)
To Manufacturing - 15,000 By Sales of scrap 170 3,400
Wages (10% of 1700
To General - 3,100 By Transfer to 1,496 198220
Expenses Warehouse
By Transfer to 352 75,680
Process III (cost
per ton Rs. 215)
Total 1700 2,01,620 Total 1700 201620

Problem 4:
(Showing Process A/cs and Abnormal Wastage A/cs)

The Imperial Manufacturing Companys product passes through two distinct processes A and B and then to Finished
Stock. It is known from past experience that wastage occurring in the process is as under:

In process A 5% of the units entering the process.

In process B 10% of the units entering the process.
The Scrap Value of the wastage in Process A is Rs. 8 per 100 units and Process B is Rs. 100 units.

The Process figures are:

Process A Process B
Rs. Rs.
Materials consumed 3000 1500
Wages 3500 2000
Manufacturing expenses 1000 1000

5,000 units were brought into Process A costing Rs. 2500.

The outputs were:

Process A 4,700 Units
Process B 4,150 Units
Prepare Process Cost Accounts showing the cost of the output. Also show abnormal Wastage Account.

Process A Account
Units Rs. Units Rs
To Units introduced 5,000 2,500 By Normal wastage 250 20
To Material 3,000 By Abnormal 50 105*
To Wages 3,500 By Process B 4,700 9,875
To Mfg. Expense 1,000
5,000 10,000 5,000 10,000
* The Value of abnormal wastage in Process A is calculated as follows:

Normal output is 5,000 250 = 4,750 units

Normal cost is 10,000 20 = Rs. 9,980

Therefore, Normal cost of one unit is 9,980 / 4,750 = Rs. 2.10

Therefore, Cost of 50 units of Abnormal wastage is 2.10 x 50 = Rs. 105.

As the Abnormal wastage is sold for Rs. 4, therefore, the amount of loss to be transferred to Profit and Loss Account
shall be Rs. 105 4 = Rs. 101.

Abnormal Wastage A/c (Process A)

Units Rs. Units Rs
To Process A 50 105 By sale of Scrap @ 50 4
Rs. 8 per 100
By P & L A/c Loss 101
50 105 50 105

Process B Account

Units Rs. Units Rs

To Process A 4700 9875 By Normal Wastage 470 47
To Materials 1500 By Abnormal 80 *271
wastage A/c
To Wage 2000 By Finished Stock 4150 14057
4,700 17,375 4,700 14,375

* The value of abnormal wastage in Process B is calculated as follows:

The normal cost of 4230 units is Rs. 14328

Therefore, Normal Cost of one unit = 14,328/4,230 = Rs. 3.39

Therefore, the Cost of 80 units = Rs. 3.39 x 80 = Rs. 271

The abnormal wastage will realize Rs. 8, therefore the loss transferable shall be Rs. 271 8 = Rs. 263.

Abnormal Wastage A/c (Process B)

Units Rs. Units Rs
To Process B 80 271 By sale of Scrap @ 80 8
Rs. 10 per 100
By P & L A/c Loss 263
80 271 80 271

Problem 5:

From the following details extracted form the costing records of an oil mill for a year ended 31 st March, you are required
to prepare the process cost account of

(a) Groundnut Crushing Process;

(b) Refining Process; and
(c) Finishing Process including casking, and determine the cost per tone of each process and the total cost per tone
of finished oil.

Purchase of 5,000 tonnes of groundnut Rs. 48,00,000

Crushing Plant Refining Plant Rs. Finishing Plant

Rs. Rs.
Wages 25,000 10,000 15,000
Power 6,000 3,600 2,400
Sundry Materials 1,400 20,000 -
Repairs to Plant & 2,800 3,350 1,400
Steam 6,000 5,200 4,500
Factory 13,200 6,600 2,100
Cost o Casks - - 59,600

3000 tonnes of crude oil were produced; 2,500 tonnes of oil were produced by the refining process; and 2,480
tonnes of refined oil were finished for delivery.

Groundnut shells sold Rs. 400; 1,750 tonnes of groundnut residue sold Rs. 11,000; loss in weight in crushing
250 tonnes; 450 tonnes of by-products obtained from Refining Process Rs. 16,750.
Groundnut Crushing Process
Tonnes Rs. Tonne Rs.
Groundnut 5000 4800000 Crude oil (C/o) 3000 4843000
Wages 25000 Groundnut 1750 11000
Power 6000 Groundnut 400
Sundry materials 1400 Process loss 250 -
Repairs to Plant 2800
& Machinery
Steam 6000
Factory 13200
5000 4854400 5000 4854400

Cost per tone of crude oil = Rs. 1614.33

Refining Process
Tonnes Rs. Tonne Rs.
Crude oil (b/f) 3000 4843000 Refined oil (c/o) 2500 4875000
Wages 10000 By-products 450 16750
Power 3600 Process loss 50 -
Sundry material 20000
Repairs to Plant 3350
& Machinery
Steam 5200
Factory 6600
3000 4891750 3000 4891750

Cost per tone of refined oil = Rs. 1950

Finishing Process
Tonnes Rs. Tonne Rs.
Refined oil (b/f) 2500 4875000 Finished oil 2480 4960000
Wages 15000
Power 2400 Process loss 20 -

Repairs to Plant 1400

& Machinery
Steam 4500
Factory 2100
Cost of casks 59600
2500 4960000 2500 4960000

Problem 6

The product of a company passes through three distinct processes to completion. These processes are known as A,B and
C. From past experience it is ascertained that wastage is incurred in each process as under:

Process A 2% of input
Process B 3% of input
Process C 10% of input

The normal process loss occurring in the three processes is regularly sold at the rates of 50 paise (Process A),
Re. 1 (Process B) and Rs. 2 (Process C) per unit respectively the output of each process passes immediately to the next
process and the finished units are transferred from Process C to finished stock. The following expenses were incurred.

Materials consumed 40000 20000 15000
Direct labour 42000 42600 35000
Manufacturing expenses 14600 8380 13920
Repairs to Plant & Machinery 2,800 3,350 1,400

20,000 units have been issued to Process A at cost of Rs. 80,000. The output from each process has been as under:

Process A 19,500
Process B 18,800
Process C 16,600

There was not stock of work-in-process in any process.

Prepare the process accounts and abnormal wastage account, assuming that the abnormal wastage collected together for
all the three processes was sold in one lump and fetched a price of Rs. 10000.


For Process A:

1. Actual wastage = 20000 19500 = 500 units

2. Normal wastage = 2% of 20000 = 400 units
3. Scrap sale value = 400 x Re. 0.50 = Rs. 200
4. Abnormal wastage = Actual wastage less normal wastage
= 100 units
5. Prorata cost = Rs. 176000 / (20,000 400) = Rs.
6. Cost of abnormal wastage Rs. 176600/19600 x 100
= Rs. 900 (rounded off)

Process A
Units Rs. Units Rs.
Units 20000 80000 Transfer to 19500 175500
Process B
Material 40000 Normal wastage 400 200
Labour 42000 Abnormal 100 900
Overhead 14600

20000 176600 20000 176600

Calculations in respect of Process B and C are made in a similar manner. Process B

Units Rs. Units Rs.
Transfer from 19500 175500 Transfer to 18800 244400
Process A Process C
Material 20000 Normal wastage 485 585
Labour 42600 Abnormal 115 1495
Overhead 8380

19500 246480 19500 246480

Process C
Units Rs. Units Rs.
Transfer from 18800 244400 Transfer to 16000 288000
Process B Finished stock
Material 15000 Normal wastage 1880 3760
Labour 35000 Abnormal 920 16560
Overhead 13920

18800 308320 18800 38320

Abnormal Wastage Account

Process A 900 Sale 10000

Process B 1495 Loss (Profit and 8955
loss account)
Process C 16560

Total 18955 Total 18955

Accounting of Inter-Process Profits:-

Inclusion of inter-process profit creates complications in the accounts. As the internal profits remain merged in
process stock, work-in-progress, and finished stock suitable adjustment is required to be made in the Balance Sheet in
order to exclude such unrealized profit.

When inter-process profit is included in the accounts, it is advisable to have three columns in the ledger to
indicate the cost, profit, and the total. This facilitates the calculation of the profit to be provided for inclusion in closing
stock in each process and in the final finished stock.

Problem 7:

A product passes through three processes before it is completed and transferred to finished stock. The following
data are available for a month.

Process Process Process

No. No. No.
1 Rs. 2 Rs. 3 Rs
Opening stock (at prime cost) 2000 12000 10000
Direct material 13000 20000 40000
Direct Labour 10000 10500 50000
Factory overhead 10000 25000 25000
Closing stock (at prime cost) 5000 6000 32000

Inter-process transfers of output included profits at the following rates:

Process 1 to Process 2 - 20% on transfer price

Process 2 to Process 3 - 25% on transfer price
Process 3 to Finished Stock - 10% on transfer price

Inter-process profit included in the opening stock were:-

In Process 2 - Rs. 2,000

In Process 3 - Rs. 2,800
In Finished Stock - Rs. 10,000

Finished Stock:-
Opening balance - Rs. 25,000
Closing balance - Rs. 33,000
Sales during the month - Rs. 3,00,000

Complete the process accounts, determine the gross profit for the month and indicate the value at which the closing
stock will appear in the Balance Sheet on the last day of the month.

Total Cost Rs. Pft Total Cost Rs. Pft
Rs. Rs. Rs. Rs.
Stock (b/f) 2000 2000 - Transfer 37500 30000 7500

to Process
Direct material 13000 13000 -
Direct Labour 10000 10000 -
Less stock (c/f) 5000 5000 -
Prime cost 20000 20000 -
F.Y. Overhead 10000 10000 -
Process cost 30000 30000 -
Profit @ 20% 7500 7500
on transfer
price (25% on
37,500 30,000 7500 37,500 30,000 7500

Process No. 2 Account

Total Cost Pft. Total Cost Pft.
Rs. Rs. Rs. Rs. Rs. Rs.

Stock (b/f) 12,000 10,000 2000 Transfer 132000 90212 41788

Transfer 37,500 30,000 7,500
No. 1
Direct 20,000 20,000 -
Direct 10,500 10,500 -

Total 80,000 70,500 9,500

Less stock 6,000 5,288 *712

Prime cost 74,000 65,212 8,788
F.y. 25,000 25,000 -
Process 99,000 90212 8788
Profit at 33,000 33,000
25% on
price (1/3)
of cost

Total 132000 90212 41,788 132000 90212 41,788

Stock (c/f) 6,000 5,288 712

* The proportionate profits on closing in this and other processes are worked out in the following manner:-

Profit = Rs. 6,000 x Rs. 70,500 / Rs. 80,000 x Rs. 6,000 Rs. 5,288 = Rs. = 712
Process No. 3 Account
Total Cost Pft. Total Cost Pft.
Rs. Rs. Rs. Rs. Rs. Rs.

Stock (b/f) 10,000 7,200 2,800 Transfer 250000 186562 63438

Transfer 132000 90,212 41,788
No. 2
Direct 40,000 40,000 -
Direct 50,000 50,000 -

Total 232000 187412 44588

Less stock 32,000 25,850 6,150

Prime cost 200000 161562 38438
F.y. 25,000 25,000 -
Process 225000 186562 38438
Profit at 25000 25000
10% on
price of

Total 250000 186562 63438 250000 186562 63438

Stock (c/f) 32000 25850 6150

Finished Stock Account
Total Cost Pft. Total Cost Pft.
Rs. Rs. Rs. Rs. Rs. Rs.

Stock 25,000 15,000 10,000 Sales 300000 177374 122626

Transfer 250000 186562 63438
No. 3

Total 275000 201562 73,438

Less 33,000 24,188 8,812

Gross 58000 58000

300000 177374 122626 300000 177374 122626

Stock 33000 24188 8812


Provision for Profit Account

Rs. Rs. Rs. Rs.

Profit and Balance
Loss (b/f)
Process 2 2000
Process 3 2800
Proportion 1288 Stock 10000
of Provision
not required
for Process
Finished 1188 14800
Balance Profit &
(c/f) Loss A/c
Process 2 712 Loss A/c
Process 3 6150 Additional 3350
required for
Process 3
Finished 8812
18150 18150


Process 2 712
Process 3 6150
Finished 8812

Analysis of gross profit for the month:

Rs. Rs. Rs.

Process 1 7500
Process 2 33000
Plus Provision not 1288 34288
Process 3 25000
Less Provision 3350 21650

Finished Stock 58000

Plus Provision 1188 59188

* This agrees with the profit in the Finished Stock Account

Balance Sheet
Process Stock 5,000
Process 1 6000
Process 2
Less Profit 712 5,288
Process 3
Finished Stock 33000
Less Profit 8812

Problem: 8

A product passes through three processes to completion. These processes are known at A, B, C. The output of
each process is charged to the next process at a price calculated to give a profit of 20% on the transfer price. The output
of process C is charged to Finished Stock on a similar basis.

There was no partly-finished work in any process on December 31, on which date the following information
was obtained.

Process A Process B Process C

Materials 4000 6000 2000
Labour 6000 4000 8000
Stock on De. 31 2000 4000 6000

Stock in each process were valued at Prime Cost to the process

There was no stock into finished stock, Rs. 4000 remained in hand on December 31, and the balance has been sold for
Rs. 36,000. Show Process Accounts.

Process A Account
Total Cost Profit Total Cost Profit
Rs. Rs. Rs. Rs. Rs. Rs.

To 4000 4000 - By 10000 8000 2000

Material Process
B A/c
To 6000 6000 -

Total 10000 10000 -

Less : 2000 2000 -

Stock c/d
Prime 8000 8000 -
To Gross 2000 2000
25% on

10000 8000 2000 10000 8000 2000

To stock 2000 2000 -


Process B Account
Total Cost Profit Total Cost Profit
Rs. Rs. Rs. Rs. Rs. Rs.

To 10000 8000 2000 By 20000 14400 5800

Process process
A - A/c
To 6000 6000 - 2000
To 4000 4000 -

Total 20000 18000 2000

Less :
Stock c/d
Prime 16000 14400 1600
To Gross 4000 - 4000
25% on

20000 14400 5600

To stock

Process C Account
Total Cost Profit Total Cost Profit
Rs. Rs. Rs. Rs. Rs. Rs.

To 20000 14400 5600 By

Process finished
B -
To 2000 2000 - Stock 30000 19520 10480
Material A/c
To 8000 8000 -

Total 30000 24400 5600

Less : 6000 4880 1120

Stock c/d
Prime 24000 19520 4480
To Gross 6000 - 6000
25% on

30000 19520 10480 30000 19520 10480

To stock 6000 4880 1120


Finished Stock A/c
Total Cost Profit Total Cost Profit
Rs. Rs. Rs. Rs. Rs. Rs.

To 30000 19520 1048 By 36000 16917 19083

Process Sales
C -

Less : 4000 2603 1397

Stock c/d
26000 16917 9083
To Gross 10000 - 10000

36000 16917 19083 36000 16917 19083

To stock 4000 2603 1397


(1) Calculation of Profit on Closing Stock


Note: The amount of cost column and Total Column are those which appear above the Closing stock line.

Process A : No profit included

4000 3600 = 400

6000 4880 = 1120

4000 2603 = 1397

(2) Actual Profit Realised

Process Unrealised Profit Actual Profit

Profit in Closing Stock
Rs. Rs.
Process A 2000 - 2000
Process B 4000 400 3600
Process C 6000 1120 48880
Finished Stock A/c 10000 1397 8603
Total 22000 2917 **19083

** Varify this figure with that shown in the credit profit column of Finished Stock Account. It tallies.

(3) Valuation of Closing Stock for Balance Sheet

The amount of Cost Columns of Finished Stock Account will be taken to the Balance Sheet. It is comprised of:

Cost of closing stock

Process A 2000
Process B 3600
Process C 4880
Finished Stock 2603
Total 13083

(4) Test Check

Individual cost of Process

= Rs. 30000
= i.e. (10000 + 10000 + 10000)

Less : Cost of Sales (See Finished Stock A/c)

= Rs. 16917
Closing Stock = Rs. 13083




Standard cost is a predetermined cost which is calculated from management standard of efficient operation and the
relevant necessary expenditure. - I.C.M.A ENGLAND

Standard costing is the preparation of standard costs their comparison of actual costs and the analysis of variances to
their causes and points of incidence - I.C.M.A ENGLAND

Thus, it is clear from these definitions that standard costs represent the scientifically planned or predetermined costs
based on technical estimate, labour and overhead for selected period of time and for a prescribed set of working
conditions. The word standard connotes a thing serving as a basic for comparison. Standards can be established in
respect of quantitative and qualitative like material and labor.


The main objectives of standard costing are:

-To control the factors which affect production.

- to supply reports promptly to the management showing the progress of production and how expenditure to date
compares with estimates so that corrective actions may be taken in time, and

- To disclose the effect of temporary increase or decrease in the volume of output and sales or revenues.


The technique of standard costing involves:

- The ascertainment of standard costs.

- The use of standard costs.

- Their comparison with the actual cost and the measurements of variances.

- the location of responsibility for the variances and the corrective action to be taken.

- the analysis of variances for ascertainment the reasons for the same.


The installation of standard costing system in a manufacturing concern involves the following steps:

a) Standardization of functions i.e. all activities should be standardized and the technical processes of operations
should also be susceptible to planning.
b) Establishment of cost centres.
c) Classification of Accounts i.e., the different accounts can be codified and different symbols may be used to
facilitate speedy collection, analysis reporting.
d) Setting up of standards: Standards may be basic (long period) and current (short period), From the point of view
of efficiency level they will fall into the three broad categories.

i) Strict ideal
ii) Attainable or expected / actual and
iii) Loose

The standard should be realistic and attainable. Unrealistic standards provoke resentment and depress performance.
Loose standard leads the management to indulge in self congratulation. Normally a period of one year is more realistic
as it coincides with the budget period and the normal accounting period.

e) Setting of standard costs:

Standard costs should be determined for each element of cost separately and accurately. Like the budget committee or
standards division which will be versed with the work of the standard costs. the standard committee generally consists of
all functional heads like production manager, personal manager, etc. In determining the output regard must be had to the
limiting factors affecting sales, production etc. setting up of standard cost involves the determination of cost standards. A
cost standard is a usage, price or other standard upon which a standard cost is based.


The utility of standard help the management in fixation of prices and in laying down production policies.

1. Standards costs help the management in fixation of prices and in laying down production policies.
2. The help in readily showing up and then elimination of avoidable wastages and losses.
3. They provide constant and uniform bases for management on the operational efficiency of workers and other
members of the staff.
4. Management, through the study of variances, needs to concentrate only areas and problems which call for its
attention i.e., the system management by exception can be practiced.
5. Delegation of authority becomes effective the concerned men know what they have to achieve and by what
standard they will be judged.
6. The whole concern in stimulated with a dynamic forward looking mentality.
7. Performance of employees at all levels can be judged objectively, this enables the concern to promote and
regard the right person.
8. Standards act as a yardstick to measure the actual performance and the efficiency of labour and other factors.
9. Valuation of closing stock is facilitated by the standard cost of production.
10. As standards are set for every element of cost, the costing procedures are simplified.


Standard costing technique has the following short comings.

1. Setting of standards is a difficult task as it involves technical skill.

2. The fixation of inaccurate standards especially those that are incapable of achievement adversely affects the
morale of the employees and act as hindrances to increased efficiency.
3. The system is not suitable for the jobbing type of industries producing articles according to customers
specifications even if it is installed, the fixation of standards for type of job becomes difficult and expensive.
4. It is necessary to distinguish between controllable and uncontrollable variances in order to localize deviations
and fixing responsibilities.

5. The system may not be suitable even in the case of industries that are liable to frequent technological changes
affecting the conditions of production even if it is installed, a constant revision of standards become necessary.
6. Small concern cannot afford this system due to higher cost associated with standard costing.
7. There is no unanimity regarding the circumstances to be taken as the basis for setting standard costs. even if
there is unanimity a revision of standard is essential to suit to the changing circumstances. The revision of
standards becomes expensive. If they are not revised, they become outmoded.
For any given product or unit the following standards must be determined.
1. Standard material costs.
2. Standard labour costs.
3. Standard direct costs.
4. Standard variable overhead costs
5. Standard Fixed over head costs.
6. Standard selling prices and profit.
The standard direct material cost is found by multiplying the quantity of materials to be purchased with the rate of price
at which they are available.
Determination of standard labour cost involves fixations of
(a) Standard labour grades
(b) Standards labour times i.e., standard hours through time, motion and fatigue study with the help of work study
engineers and
(c) Standard wage rates based on the time rate, piece rate and premium plans.
Standard direct cost is any expenditure which is directly to be incurred on a specific cost unit. It is charged directly to
the particular cost standard concerned.
Standard overhead costs are classified as manufacturing, administration, selling, and distribution over heads. They are
also classified as fixed, variable and semi variable so that current estimate for each class may be prepared for the budget
period. Standard overhead rate is determined on the basis of past records and future trend of prices.
The main aim of the standard costing is the control of the cost. So the management is provided with the information
about situations where in the actual results are not as they were planned to be. Hence management is informed of only
the deviations or variances from the original plans, their favourable or unfavorable nature and the causes of such
deviations. In this context standard costing subscribes to the principles of management by exception.
Variance is the difference between standard cost and actual cost. It is expressed by a simple formula as follows:
variance = actual cost standard cost.
Variance analysis is therefore the process of analysis variance by dividing the total variance in such a way that
management can assign responsibility for off standard performance. If variance is to increase the profit it is said to be
favourable shown as (F). It would result when the actual cost are lower than the standard costs. It is also known as
positive or credit variance and viewed only as savings. If variance is not to increase the profit it is adverse or
unfavorable shown as (A) it would result when actual costs exceed the standard costs. It is also known as negative or
debit variance and viewed as additional costs or losses.


This is the difference between the standard cost of materials specified for the output achieved and the standard cost of
the materials used
Material Cost Variance = Total std. Total Actual Cost.
MCW = (SQ*SP) (AQ * AP)
Where :
SQ = Standard Quantity
SP = Standard Price
AQ = Actual Quantity
AP = Actual Price
This is the difference between the standard price specified and the standard price paid.

1. Change in basic purchase price of material.
2. Change in quantity of purchase or uneconomical size of purchase order.
3. Rush order to meet shortage of supply or purchase in less or more favourable market.
4. Failure to take advantage of off season price, the failure to purchase when price is cheaper.
5. Failure to obtain cash and trade discounts or change in the discount rates.
6. Weak purchase organisation.
7. Payment of excess or less freight
8. Transit losses and discrepancies if purchase price is inflated to include the loss.
9. Change in quality or specification or materials purchased.
10. Use of substitute material having a higher or lower unit price.
11. Change in materials purchase, unkeep and store keeping cost (this is applicable only when such charges are
allocated to direct material costs on a predetermined or standard cost basis.)
12. Change in the pattern or amount of taxes and duties.


This is the difference between the standard quantity specified and actual quantity used.
Material usage variance is subdivided into
i) Material mix variance
ii) Material yield variance or scrap variance


This is the portion of the direct material usage variance which is due to the difference between the standard and the
actual composition of a mixture.

a) When the ratio of mix is different but the total quantities of standard mix and the total quantities of actual mix
are the same.

b) When the total actual quantity and total standard quantity and the ratio of mix are different, then the standard
quantity of the each material will be revised.
MMV = (RQ AQ) * SP
Where RQ denotes Revised standard quantity, which is equal to

Total weight of actual mix

--------------------------------- * Standard Quantity
Total weight of standard mix


This is the portion of the direct material usage variance which is due to the difference between standard yield specified
and actual yield obtained.
MYV = SP * Abnormal Loss / Gain
The difference between standard yield and actual yield is called abnormal loss or gain. If the standard yield is less than
the actual yield, the difference is called abnormal gain, and if the standard yield is higher than the actual yield the
difference is called abnormal loss.


The causes of material usage variance are:
1. Variation is usage of materials due to inefficient or careless use or economic use of materials.
2. Change in specification or design of product.
3. Inefficient and inadequate inspection of raw materials.
4. Purchase of inferior material or change in quality of materials.
5. Rigid technical specification and strict inspection leading to more rejections which require more materials for
6. Inefficiency in production resulting in wastages.
7. Use of substitute materials.
8. Theft or pilferage of materials.
9. Inefficient labour force leading to excessive utilization of materials.
10. Defective machines, tools, and equipments, and bad or improper maintenance leading to breakdown and more
usage of materials.
11. Yield from materials in excess of or less than that provided as the standard yield.
12. Faulty materials processing. Timber for example, if not properly seasoned may be wasted while being used in
subsequent processes.
13. Accounting errors, e.g. when materials returned from shop or transferred form one job to another are not
properly accounted for .
14. Inaccurate standards
15. Change in composition of a mixture of materials for a specified output.
It is the difference between standard direct specified for the activity achieved and the actual direct wages paid.
LCV SLC ALC (Standard Labour Cost Actual Labour Cost)
Labour cost variance is sub-divided into
1) Rate of pay variance and
2) Efficiency variance, which is further sub divided into
a. Idle time
b. Calendar variance
c. Mix variance
d. Yield variance


This is that portion of labour cost variance which is due to the difference between the standard rate of pay specified and
the actual rate paid.
LRV = AT (SR - AR)
= Actual time (standard rate actual rate)


Direct labour rate variance occur due to the following:
1. Change in basic wage structure or change in piece work rate. This will give rise to the variance till such time
the standards are not revised.
2. Employment of workers of grades and rates of pay different from those specified due to shortage of labour
of the proper category, or through mistake, or due to the retention of surplus labour.
3. Payment of guaranteed wages to workers who are unable to earn their normal wages if such guaranteed
wages form part of direct labour cost.
4. Use of a different method of payment e.g. payment of day rates while standards are based on piece work
method of remuneration.
5. Higher to lower rates paid to casual and temporary workers employed to meet seasonal demands or urgent
or special work.
6. New workers not being allowed full normal wage rates.
7. Over time and night shift work in excess of or less than the standard, or where no provision has been made
in their standard. This will be applicable only if overtime and shift differential payments form that laid down
in the standard.


This is also that portion of labour cost variance which is due to the difference between the standard labour hours
specified for the outputs achieved and the actual labour hours expended. This is otherwise known as labor time variance.
Labour spending variance, labour usage variance, labour quantity variance.



The causes giving rise to direct labour efficiency variance as follows:
1. Lack of proper supervision or stricter supervision that specified.
2. Poor working conditions
3. Delay due to, waiting for materials tools, instructions etc. if not treated as idle time.
4. Defective machine tools, and other equipments.
5. Machine break down if not booked to idle time.
6. Work on new machines requiring less tike then provided for as long as the standard is not revised.
7. Basic inefficiency of workers due to low morale, insufficient training, faulty instructions, incorrect
scheduling of jobs etc.
8. Use of non standard material requiring more or less operation wages.
9. Carrying our operations not provided for and booking them as direct wages.
10. In correct standards
11. Wrong selection of workers, e.g. no employing the right type of man for doing the job.
12. Increase in labour turnover.
13. Incorrect recording of performances, i.e. time and output.


This is that the portion of labour cost variance which is due to the abnormal idle time of workers on account of
failure of power supply, machine break down, shortage of materials etc.
LITV = IH * SR (Idle hours * standard rate per hour)


This arises only when workers are paid for the days for which they have not worked and for which no provision
was made while determining standards. This will happen only when some special public holidays be declared.
LCV = SR * Holidays


It is due to the difference in the standard output specified and actual output obtained.
LYV = Standard labor cost per unit (actual output standard output)

The standard cost of the chemical mixture PQ is as follows:
40% of material P@ Rs. 400 Per k.g.
60% of material Q@ Rs. 600 per kg.

A standard loss of 10% is normally anticipated in production. The following particulars are available for the month of
September 1984.
A standard loss of 10% is normally anticipated in production. The following particulars are available for the month of
September 1984.
180 kgs. of material P have been used @ Rs. 360 per kg.
220 kgs. of material Q have been used @ Rs. 680 per kg.
The actual production of PQ was Rs. 369 kgs.
Calculate the following variance:
a. Materials price variance
b. Materials usage variance
c. Materials mix variance
d. Materials yield variance

Also show the reconciliation of standard cost with actual cost with actual cost with help of the above variance.

Standard loss is 10%
Hence for productions of 90 kgs require input of 100 kgs.
Therefore production of 369 kgs requires input of?
369 / 90 * 410 kgs.

MCV = (Standard cost of input of (410 kgs of production) (actual cost of production of 369 kgs)

P40% of 410 = 164 kgs at 400 = 65600 P 180*360 = 64,800

Q60% of 410 = 246 kgs at 600 = 147600 Q 220*680 = 149,600
----- -------------- ------- ----------
Input 410 kgs 213200 400 214400
Loss 41 31 ----
----- -------------- ------- ----------
Production 369 kgs 213200 369 214000

1. Material Cost Variance (MCV) = SC AC

= 213200 214400
= Rs. 1200 (A)

2. Materials Price Variance (MPV) = AQ (SP-AP)

P = 180 (400 360) = 7200 (F)
Q = 220 (600 680) = 17600 (A)
10400 (A)

3. Material Usage Variance (MUV) = SP (SQ-AQ)
P = 400 (164 180) = 6400 (A)
Q = 600 (246-220) = 15600 (F)
9200 (F)

Material Usage Variance is to be analysed into Mix Variance and yield variance as follows:

(i) Material Mix Variance (MMV) = SP (RSQ AQ)

P = 400 (164 * 400 / 410 180)

= 400 (160-180) 8000 (A)
Q = 600 (246*400/410 220)
= 600 (246-220) 12000 (F)
40000 (F)

Material yield variance (MY) = SYR (SY-AY)

Standard Cost per unit at output = 213200/369
= Rs. 577.1778 per kg.

For an input of 410 Kgs. Standard yield is 369 kg

For an input of 400 Kgs. Standard yield is ?

400 / 410 * 369 = 360 kgs. Standard yield for actual input
MY = Rs. 577.1778 (360-368) =Rs. 5200(F)

(ii) Labour Efficiency Variance (LEV)

= 3.00 (7000-8000)
= 3000 (A)

(iii) Labour Cost Variance (LCV)

= 21,000 24160
= 3160 (A)

Note:- When there is difference between actual hours paid (AHP) and Actual Hours Worked (AHW) there will be
Labour Efficiency Sub-variance and Idle time Variance which are calculated as follows:

Labour Efficiency Sub Variance = SR (SH-AHW)

= 3.00 (7000-8000)
= Rs. 2400 (A)

Labour Idle Time Variance = SR * No. of Hours lost

= 3.00 * 200
= Rs. 600 (A)
Rs. 3000 (A)

This is reconciled with Labour Efficiency Variance as calculated above.



9200(F)= 400 (F) + 5200 (F)

Final Reconciliation:
1200 (A) = 10400 (A) + 4000(F) + 5200(F)

The following details are available form the records of ABC Ltd. engaged in manufacturing Article A for the
week ended 28th September.

The Standard Labour hours for the week 1000 hrs and rates of payment per article A were as follows:

Hours Rate per hour Total

Rs. Rs.
Skilled Labour 10 3.00 30
Semiskilled Labour 8 1.50 12
Unskilled Labour 16 1.00 16

The actual labour hours and rates of pay per hour were given below:

Hours Rate per hour Total

Rs. Rs.
Skilled Labour 9000 4.00 36000
Semiskilled Labour 8400 1.50 12600
Unskilled Labour 20000 0.90 18000

From the above set of data you are asked to calculate:

a. Labour Cost Variance

b. Labour Rate Variance
c. Labour Efficiency Variance
d. Labour Mix Variance


SM Hours Rate
Amount AM Hours Rate Amount
Rs. Rs.
Skilled 1000 x 3,00 30000 Skilled 9000 3.00 27,000
10 =

Semi-skilled 1000 x 1.50 12000 Semi-skilled 8400 1.50 12,600
8 =
Un-skilled 1000 x 1.00 16000 Un-skilled 20000 1.00 20,000
16 =

34,000 58000 37400 59,600

a. Labour Cost Variance (LCV) = SC-AC
= 58000-66600
= 8600(A)

b. Labour rate Variance (LRV) = AHP (SR-AR)

Skilled = 9000 (3-4) = 9000(A)
Semi-Skilled = 8400 (1.50 1.50) = Nil
Un-Skilled = 20,000 (1 - .90) = 7000 (A)

c. Labour Efficiency Variance (LEV)

= 3.00 (10000 9000) = 3000(F)
= 1.50 (8000 8400) = 600(A)
= 1.00 (16000 20000) = 4000(A)

d. Labour Mix Variance (LMV) = SCSM SCAM

= 58000 59600
= 1600(A)

Problem 3
In the production of Finished product 50 employees were engaged at a Standard rate of Rs. 3 per hour. The standard
performance was set at 200 numbers per hour. A 40 hour per week was in operation. In a particular period of 4 weeks 35
employees were paid at the standard period of 4 weeks 35 employees were paid at the standard rate, but 10 employees
were paid at Rs. 3.20 per hour and 5 employees at Rs. 2.80 per hour. The factory stopped production for 4 hours due to
equipment failure. Actual production was 28000 Units. Calculate the labour (i) rate and (ii) efficiency Variances.


50 employees x Rs. 3 per hour = Rs. 150

Output product = 200

Standard cost of actual production (SCAP) = 28000 x 0.75

= Rs. 21,000

Actual Cost (AC)

Employees Weeks Hours Rate Amount
35 x 4 x 40 = 5600 x 3.00 = 16,800
10 x 4 x 40 = 1600 x 3.20 = 5,120
5 x 4 x 40 = 800 x 2.80 = 2,240

50 8000 24,160

AHP = 8000

AHW = 8000 Idle time of 4 hours 8000 200 = 7200

in respect of all 50 employees

(i) Labour Rate Variance (LRV) = AHP (SR AR)

= 5600 (3.00 3.00) = Nil.
= 1600 (3.00 3.20) = 320 (A)
= 800 (3.00 2.80) = 160 (F)
160 (A)

Overhead Variance can be classified into (A) Variable Overhead Variance and (B) Fixed Overhead Variance.


Fixed Overhead Variance Variable Overhead Variance
Expenditure Volume Expenditure Efficiency
Variance Variance Variance Variance

Efficiency Capacity Calendar Seasonal

1. Variable Overhead Variance: They are caused by difference between the actual variable overhead expenditure
incurred and the standard allowed:


Variable Overhead = Standard Variable Overhead Cost on Cost Variance Actual Output Actual Variable
Overhead Cost

= (Actual output Standard Overhead Rate Actual Overhead

Alternatively, the following variable overhead variance may be computed to make the position more clear:

(i) Variable Overhead Expenditure Variance (VCHE x V) Cost

This is the difference between standard variable Overhead allowance of actual output, and the standard variable
overhead of actual time.

VOHE efficiency Variance = Standard Overhead Rate (Actual Time Standard time for actual production)

Total Variable Overhead = Expenditure Variance + Efficiency Variance

Fixed Overhead Cost Variance (FOHCV) : It is that portion of overhead variance which is due to the difference between
fixed overhead recovered and the actual fixed overhead cost incurred.

FOHCV = (Actual output * Standard fixed overhead Rate) Actual Overhead

This variance is divided into (i) fixed Overhead Expenditure Variance and (ii) Fixed Overhead Volume Variance

(i) Fixed Overhead Expenditure (FOHEV) : It is the difference between actual overhead expenditure and the
budgeted expenditure.
FOHEV = Budgeted fixed Overhead Actual Fixed Overhead
= (Standard Recovery Rate * Budgeted Production)
Actual Fixed Overheads

If the actual output is more than the budgeted output, it leads to over-recovery of overheads costs and a favourable
variance results an vice versa. This variance is also known as Budget Variance or Cost Variance or Spending Variance.

(ii) Fixed Overhead Volume Variance (FOHVV) : It is the difference between the standard cost of overhead
absorbed in actual output and the standard allowance allowed for the output. This variance is caused due to the
difference between the budgeted output and the actual output.

FOHVV = Standard Fixed Overhead Rate (Actual Quantity Budgeted Quantity)

= Actual output * Standard Rate Budgeted Fixed Overhead

If the actual output is more than the budgeted output, it leads to over-recovery of overhead costs and a favourable
variables results and vice versa.

The Volume Variance can further be analysed as under


It is that portion of volume variance which is due to the difference between the budgeted efficiency (in standard unit)
and the actual efficiency achieved. This variance is like labour efficiency variance.

FOHEff.V = Standard Overhead Rate per unit (Actual Quantity Standard Quantity)

When the actual output is more than the standard quantity of output.
Overhead Cost Variance: Causes Controllability

A. Overhead 1. Rise in prices, wages Uncontrollable

Expenditure Variance
2. Lack of control over Dept. Manager
3. Change in production Production Manmager
4. Change in nature of --do--
service eg. Use gas in
lieu of electricity
B. Volume Variance 1. Declining Sales (Lack Sales Manager
of orders) or Customer

2. Lack of proper Foreman
3. Defect in Machinery Maintenance Engineer
4. Low efficiency of Foreman / Personnel
worker Manager
5. Poor quality material Purchase Manager
6. Abnormal idle time (if Foreman /
not booked as part of Uncontrollable
time spent on jobs)
7. More or less working Uncontrollable
days / Calendar
8. Strikes, absenteeism Personnel Manager
including lateness


The following figures have been extracted from the cost records for the month of March 1997.

Standard Actual
Number of units 7500 8000
Capacity 100% 105%
Number of days worked 25 26
Fixed overheads Rs. 22500 Rs. 23500
Variable overheads Rs. 15000 Rs. 15750

Analyse the total overhead variance into

(i) Fixed overhead variance,
(ii) Variable overhead variance, and
(iii) Sub-variances under each head


Overhead Cost Variance = Std. cost for Actual production Actual cost
= 40,000 - 38,900
= Rs. 1,100 (F)

Overhead Cost Variance = FOHCV + VOHCV

Rs. 1100 (F) = Rs. 850 (F) + 250 (F)


= 8000 x 3 23150
= Rs. 850 (F)

(b) Expenditure Variance = Budgeted Fixed Overheads Actual Fixed Overheads

= Rs. 22500 Rs. 23150
= Rs. 650 (A)


= 8000 x 3 Rs. 22500
= Rs. 1500 (F)
SOHR (Budgeted output Actual output)
= 3 x (7500 8000)
= Rs. 1500(F)

(d) Capacity variance Fixed Overhead Standard Rate per unit

(Standard Quality for actual hours)
For actual hours / days

= Rs. 3

Standard production for actual hours


= 7875 units

(e) Calendar Variance = per unit Standard Fixed Cost

(Actual Quantity Standard
Quantity for actual capacity)

= Rs. 3 (8000-7875)
= Rs. 375 (F)

= 7875


= Rs. 650(A) + Rs. 1500 (F)
= Rs. 850 (F)


FOH V.V. = Cal. V. + Cap. V. + Eff. V.

Rs. 1500(F) = Rs. 900(F) + Rs, 225 (F) + Rs. 375(F)

(i) Variable overhead

Variance = SC AC


= Rs. 16000 Rs. 15750

= Rs. 250(F)
(ii) Variable overhead
Expenditure variance = BC AC
= 26 x 600
= 15600 15750
= Rs. 150(A)

(iii) Variable overhead efficiency variance

Where standard overhead rate per hour / day is given

Variable overhead
Efficiency variance = SR (AT ST)
= 600 (26 26.67)
= Rs. 400 (F)

Where standard overhead rate per unit is given:

Variable overhead
efficiency variance = SR (AP SP)
= 2 (8,000 7,800)
= Rs. 400(F)

Check :
VOHCV = VOH EX. V. + VOH Eff. V.
Rs. 250(F) = Rs. 150(A) + Rs. 400(F)

Problem 5
The standard cost per unit for product A is as under :

Standard Cost : - The cost of operations to produce 1000 units during January 1971 is as under:

Rs. Rs.
Material 1 Unit Rs. 10 10 Material 950 at Rs. 11 10,450

Labour 5 hours at Rs. 2 10 Labour 4,500 hours at Rs. 9,900


Overheads: Overheads:
Variable 5 hours at Rs. 2 Variable 11,000
Fixed 5 hours at Rs. 1 5 Fixed 6500
Total cost per unit 35 Total cost of 1000 units of 37,850
product A

The flexible budget for this department for normally monthly activity was called for 6,600 direct labor hours of
operations. At this level the fixed indirect cost was budgeted at Rs. 6,000.

You are required to compute the various variance from the above solution.


i) Material cost variance = Standard cost of actual output Actual cost of actual material used
= Rs. 10,000 Rs. 10450
= Rs. 450 (A)

ii) Material price variance = AQ (SP-AP
= 950 (10-11)
= 350 (A)

iii) Material usage variance = Standard unit price (SQ-AQ)

= Rs. 10 (1,000 950)
= Rs. 500 (F)

Verification :

Material cost variance = Materials price variance + material usage variance

Rs. 450(A) = Rs. 950(A) + Rs. 500 (F)

iv) Labour cost variance = SLC ALC

= 5,000 * Rs. 2 4,500 * Rs. 2.20
= Rs. 10,000 Rs. 9,900
= Rs. 100 (F)

v) Labour rate of pay variance = Actual time (Standard rate Actual rate)
= 4,500 (2 2.20)
= Rs. 900 (F)

vi) Labour Efficiency variance

= Standard rate (Standard time actual time)
= Rs. 2(5,000 4,500)
= Rs. 1000 (F)

Check : LCV = LRV + LEV

Rs. 100(F) = Rs. 900 (A) + Rs. 1000 (F)

vii) Variable over head

Variance = (Actual output * standard rated of fixed overheads) Actual fixed over head incurred
= (1,000 x 5) - 6,500
= Rs. 1,500 (A)


Overhead Cost Variance = Variable overhead variance + fixed over head


Rs. 2,500 (A) = Rs. 1,000 (A) + Rs. 1,500 (A)


The cost variance so for explained ultimately affects profit favourably or adversely. Budgeted profit may be
affected due to increase or decrease i) in the selling price and ii) the quantum of sales.

The are two distinct method of computing and presenting sales variance.

i) Sales value or turnover method and

ii) Sales margin profit method.

The first method shows the effect of variance in terms of turnover. The second shows the effect in terms of profit.

Sales Value Method

(i) Sales Value Variance:

It is difference between standard


Budgeted sales and the actual sales

Sales Value Variance = Standard sales Actual sales

Note: Standard Sales = Standard sales * Actual quantities of sales

If actual sales are more than the budgeted or standard sales, a favourable variance would result and vice versa.

ii) Sales Price Variance:

If is that portion of the sales value variance which is due to the difference between standard price specified and
the actual price charged.

Sales Price Variance = Actual quantity Sold (Standard Price Actual Price)

iii) Sales Volume Variance

This is the difference between the budgeted sales and the standard value of the actual mix of sales.

Sales Volume Variance = Standard Price (Actual Quantity Standard Quantity)

= Budgeted Sales Standard Sales

If actual sales at standard price exceed the budgeted sales, there is a favourable variance and vice versa.

Thus, Sales Value Variance = Price Variance + Volume Variance

The volume variance can further be analyzed into

(a) Mix Variance and
(b) Quantity Variance

(a) Mix Variance:

It is that portion of the sales value variance which is due to the difference between the standard and the actual
interrelationship of the quantities of each product or product group of which sales are composed, where products are

- Standard Cost of Actual Mix

Sales Margin Quantity Variance:

This is the difference between sales margin volume variance and sales margin mix variance.

Margin Quantity Variance = Standard Margin Rate (Standard Quantity Actual Quantity)

Sales Margin Due to Sales Allowance:

It is that portion of total margin variance which is due to the difference between the budgeted rebates, discounts,
etc., allowance on those sales:

Profit (or Loss) Variance:

It is the difference between the budgeted profit (or Loss) and the actual profit (or loss).

Types Causes Controllability

A. Sales Price 1. Unexpected Competition Uncontrollable
Variance 2. Rise in general price level - Do
3. Poor quality of material
- Do -
B. Sales Volume 1. Unexpected Competition Uncontrollable
Variance 2. Ineffective Sales Proportion Publicity Manager
3. Ineffective Supervision and
control of salesman Sales Manager


There is difference of opinion among accountants as regards disposal of cost variance. However, the following
methods are usually used to close the Standard Cost Variances:

i) Transfer to profit and loss account.

ii) Allocation of finished stock, work in progress, and cost of sales;
iii) Transfer to Reserve Account i.e., to carry forward to the next financial year and to be set off in the
subsequent year of years

The standard cost are also incorporated in the accounting system so as to increase its statistical utility. The following are
the methods for accounting based on standard costing.

i) Partial plan method,

ii) Single plan method and
iii) Dual plan method.


From the following particulars of Sri Dhanalakshmi mills Ltd., calculate:

i) Total sales margin variance
ii) Sales margin variance due to selling price.
iii) Sales margin variance due to volume.

Standard Actual in (Rs.)

Qty Cost p.u. Price p.u. Units Cost Price
Prod X 3,000 10 12 2,200 10.50 13
Prod Y 2,000 15 18 1,600 14.00 17


i) Total Sales Margin

Variance = Actual quantity of sales x Actual profit per unit
- budgeted quantity of sales x Budgeted profit
per unit

(i.e. Actual profit Budgeted profit)

Prod. X : 3,200 * Rs. 2.50 3000 * Rs. 2.00 = Rs. 2,000 (F)
Prod. Y : 2,600 * Rs. 3.00 2000 * Rs. 3.00 = Rs. 1,200 (A)
Total Sales Margin Variance Rs. 800 (F)

ii) Sales Margin Variance due to

Selling price = AQ (AP SP)

Prod. X : 3,200 (Rs. 13 Rs. 12) = Rs. 3,200 (F)

Prod. Y : 1,600 (Rs. 17 Rs. 18) = Rs. 1,600 (A)
Total sales margin due
selling price Rs. 160 (F)

iii) Sales margin due to volume = SP (AQ SQ)

Prod X: Rs. 2 (3,200 3000) = Rs. 400 (F)

Prod Y: Rs. 3 (1,600 2000) = Rs. 1,200 (A)
Total sales margin variance
due to volume = Rs. 800 (A)


For a month, the budgeted and actual figure for sales in a company were as under:

Product Qty Price Budget Qty Actual Actual

Value Price value
Rs. Rs. Rs. Rs.
I 20 2 40 15 2 30
II 10 1 10 15 1.50 22.50
III 5 3 15 10 2.50 25
IV 10 3.50 35 10 3 30

45 100 50 107.50

The budgeted costs were the different products were:

I Rs. 1.50
II Rs. 0.80
III Rs. 2.00
IV Rs. 3.00

Calculate the sales variance based on :

a) Turnover and b) Profits verify your calculation.


a) Sales variance based on turnover:

Standard Sales (SS) Revised Standard Sales SS
Actual Budget
Product Qty Price Balue Standard price per Unit of Standard
I 15 2 30.00 Mix = 100 / 45 = 2.2222
II 15 1 15.00 RSS = 50 * 2.2222 = Rs. 111.11
III 10 3 30.00
IV 10 3.50 35.00

50 110.00

Total sales value Variance = BS AS

= 100 107.50
= Rs. 7.50 (F)

Sales Rate Variance (SRV) = AQ (SR AR)

I = 15 (2 2) = Nil
II = 15 (1 1.50) = 7.50 (F)
III = 10 (3 2.50) = 5.00 (A)
IV = 10 (3.50 3) = 5.00 (A)

2.50 (A)

Sales Volume Variance (SVV): = (SR (BQ AQ)

I = 2 (20 15) = 10.00 (A)
II = 1 (10 15) = 5.00 (F)
III = 3 (5-10) = 15.00 (F)
IV = 3.50 (10 10) = Nil

10.00 (F)
Reconciliation I:
Total sales value Variance = SRV + SVV
7.50 (F) = 2.50 (A) + 10.00 (F)

Sales Quantity Variance (SQV) = BS RSS

= 100 111.11
= 11.11 (F)

Sales Mix Variance (SMV) = RSS SS

= 111.11 110.00
= 1.11 (A)

Note : if RSS is more than SS, it is adverse variance and vice versa.

Final Reconciliation:

Total Sales Value Variance = SRV + SQV + SMV

7.50 (F) = 2.50 (A) + 11.11 (F) + 1.11 (A)

b) Sales Various based on Profit:

Budget Profit
Product Qty. Rate of Profits Total Rs.

I 20 2.00 1.50 = 0.50 10.00

II 10 1.00 0.80 = 0.20 2.00
III 5 3.00 2.00 = 1.00 5.00
IV 10 3.50 3.00 = 0.50 5.00

45 22.00


Product Qty. Rate of Profits Total Rs.

I 15 2.00 1.50 = 0.50 7.50

II 15 1.50 0.80 = 0.70 10.50
III 10 2.50 2.00 = 0.50 5.00
IV 10 3.00 3.00 = Nil. Nil

50 23.00

Standard Profit (SS) Revised Standard Profit

Actual Budget
Product Qty Rate Value Standard Margin per Unit of
of Standard Mix
I 15 0.50 7.50 = 22 / 45
II 15 0.20 3.00 = Rs. 0.4889
III 10 1.00 10.00 RSP = 50 x 0.4889
IV 10 0.50 5.00 = 24.44

50 25.50

Total sales Profit Variance = BP AP

= 22.00 - 23.00
= Rs. 1.00 (F)

Sales Rate of Profit

Variance (SRPV) = AQ (SRP ARP)

I = 15 (0.50 0.50) = Nil
II = 15 (0.20 0.70) = 7.50 (F)
III = 10 (1.00 0.50) = 5.00 (A)
IV = 10 (0.50 Nil) = 5.00 (A)

2.50 (A)

Sales Volume Variance (SVV) : = (SRP (BQ AQ)

I = 0.50 (20 15) = 2.50 (A)

II = 0.20 (10 15) = 5.00 (F)
III = 1.00 (5 10) = 5.00 (F)
IV = 0.50 (10 10) Nil

3.50 (F)

Reconciliation 1:
Total sales Profit Variance = SRPV + SVV
= 2.50 (A) + 3.50 (F)
= Rs. 1.00 (F)

Sales Quantity Variance (SQV) = BP RSP

= 22.00 24.44
= Rs. 4.44 (F)

Sales Mix Variance (SMV) = RSP SP

= 24.44 25.50
= 1.06 (F)

Reconciliation II:


3.50 (F)= 2.44 (F) + 1.06 (F)
= 1.00 (F)


The management wants to know whether performance of its business is going as per estimated schedule or not.
This can be identified with the help of control ratios. If the ratio are more than 100% then the performance will be
favourable but if these ratios are less than 100% then the performance will be unfavourable or unsatisfactory. The
formula for computing certain control ratios are given below.

The ratio indicates how much budgeted hours have been actually utilized. If the ratio if 80% then it means that 80%
budgeted hours have been utilized and the remaining 20% capacity remain idle.

This ratio shows the level of activity attained during the period.

This ratio shows the level of efficiency attained during a particular period. If this ratio is 130% then it shows that the
efficiency is more by 30% or it has gone up by 30%.

This ratio shows whether actual working days available are more or less than the budgeted working days. If the ratio is
more than 100% then actual working days are more than the budgeted number of working days and vice versa if the
ratio is less than 100%.


Product X takes 5 hours to make and Y requires 10 hours. In a month of 25 effective days of 8 hours a day, 1000
units of X and 600 units of Y were produced. The company employees 50 workers in the production department. The
budgeted hours are 1,02,000 for the year. Calculate capacity ratio, activity ratio and efficiency ratio.


Standard Hours for Actual Production:

Product X : 1000 x 5 = 5000 Hours

Product Y : 600 x 10 = 6000 Hours
11000 Hours

Budgeted Hours (Monthly = 1,02,000 / 12

= 8500 Hours

Actual Hours Worked = 50 x 25 x 8

= 10,000 Hours

= 117.65%

= 129.41%

= 110.41%

Since al the there control ratios are more than 100% organisation is performing well in producing the products X and Y.



Cost accounting system can be introduced in an organization in two ways. They are:

1. Cost Leger Accounting

2. Integral Accounting.

Cost Leger Accounting: Under this method separate set of cost accounts have to be maintained so as to derive cost
details. It will differ from general financial accounting system adopted in the organisation. Hence, it requires two
weparate set of accounts. It can be called inter-locking system. Under cost Ledger Accounting the books are kept only
for the impersonal accounts. To make this system self-balancing certain set of control accounts have to be prepared.

As in the case of general accounting system, transactions relating to factory operations which are ultimately
reflected in the cost accounts are recorded in the books of original entry. Summaries from these books are journalized
and posted in the general ledger which contain control accounts and subsidiary books. The following ledger accounts in
this system.

Stores Ledger:
In consists of accounts of individual items of raw materials, components and consumable stores. Receipts are posted into
the stores ledger on the basis of stores received notes and issues are recorded on the basis of requisition slip. The balance
of this account shows the stock in hand.

Work in Progress Ledger:

It consists of accounts of each job pending on the floor. Each job accounts is debited with all direct costs
charged to the job and a share of overheads. It is credited with the values transferred to finished stock ledger and when
job is completed.

Stock ledger:
It contains item wise accounts in respect of finished stock intended for sale. A separate account is opened is for
each finished product or job.

Cost Ledger:

It is the main ledger of the costing department. It contains control accounts in respect of each ledger like store
ledger, stock ledger and work in progress ledger. In addition, it contains general ledger control accounts, wages control
accounts and overhead control accounts.

Control accounts:

A control account is maintained in the cost ledger so that double entry in the cost ledger may be completed and
make it self balancing. These control accounts are nothing but total accounts or adjustment accounts, summarizing
mass of information contained in the subsidiary ledgers. These control accounts are posted with the totals of items which
have been debited or credited in detail to the accounts in the ledgers to which they relate. The balance in control
accounts represents the total of balances in a number of accounts of similar nature maintained in that subsidiary ledger to
which the control relates.

Advantages of Control accounts:

Control accounts helps
- to provide a check for ensuring that all expenditure are recorded.
- provides a basis for reconciliation with financial accounts.
- provided ready means of preparing monthly or periodical financial statements.

Types of Control Accounts:
A brief description about different control accounts are given below:

Stores Ledger Control Accounts:

This accounts reveals the value of stores received, issued and balances in hand. Receipts are posted from goods
received posted on the basis of material requisition in the credit side of the account. The balance of this account
represents the total balance of stock which should agree with aggregate of the balance of individual accounts in the
stores ledger.

Wage Control Account:

This accounts records labour transactions in aggregate. It is debited with gross wages shown in wages analysis
sheet. It is closed by transfer of direct labour to work in progress and indirect labour to overhead.

Work-in-progress Control Account:

It represents the total WIP at any time. It is debited with the totals of materials, wages and overheads as
transferred from the respective control accounts. The completed job will be credited in this account. Thus, this account
shows the shows the total value of unfinished jobs.

Works Overhead Control Account:

It deals with factory overhead expenses in aggregate. It is debited with the amount of indirect material, indirect
material analysis and wage analysis sheets. It is credited with the amount of overheads, recovered, as obtained from the
applied overhead analysis sheets. The balance represents under or over absorption which is transferred to overhead
adjustment account.

Administrative Overhead Control Account:

It is debited with the administration overhead incurred and credited with the amount of administrative overhead
absorbed by finished goods. The balance represents under or over absorption of administrative overhead which is
transferred to overhead adjustment account.

Setting and Distribution Overhead Control Account:

It is debited with the amount of selling and distribution overhead incurred and credited with overhead aabsorbed
by cost of sales. Balance represents under / over absorption.

Cost of Sales account:

It is debited with the cost of goods sold by transfer from finished goods ledger control and also by the selling
distribution overhead absorbed. It is closed by transferring its balance to costing profit and loss account.

Costing Profit and Loss Account:

It is debited with the cost of sales, abnormal losses and under absorbed overhead and credited with sales value,
abnormal gain and over-absorbed overhead. Balance represents profit or loss which is transferred to cost ledger control

Cost ledger control account or General ledger Adjustments A/c:

It is maintained to make the cost ledger self-balancing. The main object of this account is to complete double
entry in cost accounting. All the financial transactions on account of material purchases, wages, salaries and
miscellaneous expenses are credited to cost ledger control account by contra debit to various control accounts. All
financial receipts are debited to this account. The balance is this represents the total of the balance of all personal
accounts in the financial ledger.

Problem 1.

From the following data write up the various accounts as you envisage in the cost ledger and prepare a trial
balance as on 31st March 1984.

a) Balance as on 1.4.83: Rs. (thousands)

Material control 1240
Work in progress 625
Finished goods 1240
Production overhead 84
Administration overhead 120 (credit)
Selling & Distribution overhead 65
General ledger control 3134

b) Transactions for the year ended 31.3.84 : Rs. (thousands)

Materials :
Purchases 4,801
Issued to:
Jobs 4,774
Maintenance works 412
Administration office 34
Selling departments 72
Direct wages 1,493
Indirect wages 650
Carriage inward 84
Production overhead :
Incurred 2,423
Absorbed 3,591
Administration overhead:
Incurred 740
Absorbed 529
Allocated to sales 148
Sales overhead:
Incurred 642
Absorbed 820
Finished goods produced 9,584
Finished goods sold 9,773
Sales realization 12,430


Cost Ledger
General Ledger Adjustment Account
Dr. Cr
Rs. Rs.
To costing P/L
Account (sales) 12,430 By balance 3,134
By material control a/c 4,801
To balance c/d 3,226 By wages control a/c 2,143
By production overhead 84
control a/c (carriage)
By production overhead 2,423
control a/c
Admini. Overhead control 740
By selling & dis. Overhead 642
control a/c.
By closing P/L a/c 1,689

15,656 15,656

Material Control Account

To Balance b/d 1240 By WIP control A/c 4774
To General Ledger 4801 By Production Overhead 412
Adjustment a/c Control A/c
By Administration overhead 34
control a/c
By selling & dis overhead 72
control a/c
By balance c/d 749

6041 6041

Wages Control Account

To General Ledger 2143 By WIP Control A/c 1493
Adjustment a/c
By production overhead 650
Control a/c

2143 2143

Production Overhead Control Account

To balance b/d 84 By WIP Control a/c 3591

To Material Control a/c 412 By Balance c/d 62
To General Ledger 84
Adjustment account
To Wages Control a/c 650
To General Ledger 2423
Adjustment a/c

3653 3653

Work in Progress Control Account

To Balance b/d 625 By Finished Goods Control 9584
To Material Control a/c 4774 By Balance c/d 899
To wage Control a/c 1493
To Production Overhead 3591
Control A/c

10483 10483

Administration Overhead Control Account

To Material Control a/c 34 By Balance b/d 120
To General Ledger 750 By Finished Goods Control 529
Adjustment a/c a/c
To Balance c/d 23 By Cost Sales a/c 148

197 197
Finished Goods Control Account
To Balance b/d 1240 By Cost of sales a/c 9773
To Administration Overhead 529 By Balance c/d 1580
Control a/c
To WIP Control a/c 9584

11353 11353

Selling and Distributions Overhead Control Account

To Balance b/d 65 By cost of sales 820
To Material control a/c 72
To General Ledger 642
Adjustments a/c
To Balance c/d 41

820 820

Cost of Sales Account

To Finished goods Control 9773 By Costing P/L a/c 10741
To Selling & Dis. Overhead 820
Control a/c
To admin. Overhead Control 148

10741 10741

Costing Profit and Loss Account

To Cost of Sales a/c 10741 By General ledger 12430
Adjustment a/c (Sales)
To General Ledger 1689
Adjustments a/c

12430 12430

Trial Balance as on 31.3.1984
Dr. Cr.
Rs. Rs.
Material Control Account 749
WIP Control Account 899
Finished goods ledger control account 1580
Production overhead control account 62
Administration overhead control account 23
Sales & Distribution overhead control a/c 41
General Ledger Adjustment account 3226

Problem : 2

From the following balances and transactions extracted from the Cost. Books of Gupta Engineering Co.,
journalise and write up the accounts in the Cost Ledger and prepare a Trial Balance as at 31 st Dec. 19 Also show the
profit or loss for the month.

Balance as at 1-12-19
Dr. Cr.
Rs. Rs.
Worn-in-Progress Account 5200
Finished Goods Account 2300
Factory Overhead Suspense Account 50
Office Overhead Suspense Account 30
Store Ledger Control Account 1150
General Ledger Adjustment Account 8730

8730 8730

Transactions for the months were; Rs.

Direct Wages 7500
Indirect Wages 500
Works Overhead absorbed in production 2200
Office Overhead absorbed in production 1200
Stores issued to production 4900
Goods finished during the months 18000
Finished Goods Sold 21000
Stores Purchased 5000
Stores issued to factory repair orders 200
Carriage inwards on stores issued for Production 80
Factory Expenses 1450
Office Expenses 1170

Solution: Journal
Date Dr. Cr.
19 Rs. Rs.
Dec.1 Work-in-Progress Ledger Control A/c Dr. 5200
Finished Goods Ledger Control A/c Dr. 2300
Factory Overhead Suspense A/c Dr. 50
Office Overhead Suspense A/c Dr. 30
Stores Overhead Suspense A/c Dr. 1150
To General Ledger Adjustment A/c 8730

Dec. 1 Stores Ledger Control a/c Dr. 5000
To General Ledger Adjustment A.c 5000
(Being stores purchased)

W.I.P. Ledger Control A/c Dr. 4980

To stores Ledger Control A/c 4980
(Being the stores issued to production Rs.
4900 and carriage inward on stores issued
Rs. 80)

Factory Overhead Control A/c Dr. 200

To stores Ledger Control A/c 200
(Being stores issued to factory repairs)

W.I.P. Ledger Control A/c Dr. 7500

To Wages Control A/c 7500
(Being indirect Wages charged to factory

Factory Overhead Control A/c Dr. 500

To Wages control A/c 500
(Being the total wages brought into Costing
Books from financial books)

Wages control A/c Dr. 8000

To General Ledger Adjustment A/c 8000
(Being the total wages brought into Costing
Books from financial books)

Factory Overhead Control A/c Dr. 50

To Factory Overhead suspense A/c 50
(Being the latter transferred to former A/c
reversing the entry

Factory Overhead Control A/c Dr. 1450

To General Ledger adjustment A/c 1450
(Being the actual factory expenses brought
into costing books)

W.I.P. Ledger Control A/c Dr. 2200

To Factory Overhead Control A/c 2200
(Being the overheads charged to production)
Office Overhead Control A/c Dr. 30
To office Overhead Suspense a/c 30
(Being Suspense A/c transferred to former
reversing the entry)

Office Overhead Control A/c Dr. 1170

To General Ledger Adjustment A/c 1170
(Being the actual office overheads brought
into costing books)

W.I.P. Ledger Control A/c Dr. 1200

To Office Overhead Control A/c 1200
(Being the office overheads charged to

Finished Goods Control A/c Dr. 18000

To W.I.P. Ledger Control A/c 18000
(Being the finished goods transferred to
former account)

Cost of Sales A/c Dr. 20300

To Finished Goods Control A/c 20300
(Being the Finished Stock transferred to
former account)

General Ledger Adjustment A/c Dr. 21000

To Costing Profit & Loss A/c 21000
(Being the amount of sales brought into
costing P&L A/c)

Costing Profit & Loss Dr. 700

To General Ledger Adjustment A/c 700
(Being the amount of Profit)

General Ledger Adjustment Account

Rs. Rs.
To Costing P & L A/c (Sales) 21000 By Balance b/d 8730
To Balance c/d 4050 By Stores Ledger Control 5000
By Wages Control A/c 8000
By Factory Overhead 1450
Control A/c
By Office Overhead Control 1170
By Costing P & L A/c 700

25050 25050

Stores Ledger Control Account

Rs. Rs.
To Balance b/d 1150 By W.I.P Ledger Control A/c 4980
To General Ledger 5000 By Factory Overhead 200
Adjustment A/c Control A/c
By Balance c/d 970

6150 6150

To Balance b/d 970

Wages Control Account

To General Ledger 8000 By W.I.P. Ledger Control A/c 7500
Adjustment A/c
By Factory Overhead 500
Control A/c

8000 8000

Factory Overhead Control Account

Rs. Rs.
To Stores Ledger Control 200 By W.I.P. Ledger Control A/c 2200
To Wages Control A/c 500
To Factory Overhead 50
Control A/c
To General Ledger 1450
Adjustment A/c

2200 2200
Office Overhead Control Account
Rs. Rs.
To Office Overhead 30 By W.I.P. Ledger Control A/c 1200
Suspense A/c
To General Ledger 1170
Adjustment A/c

1200 1200

Work-in-Progress Ledger Control Account

Rs. Rs.
To Balance b/d 5200 By Finished Goods Control 18000
To Stores Ledger Control 4980 By Balance c/d 3080
To Wages Control A/c 7500
To Factory Overhead 2200
Control A/c
To Office Overhead Control 1200
21080 21080
To Balance b/d 3080

Finished Goods Control Account
Rs. Rs.
To Balance b/d 2300 By Cost of sales A/c 20300
To W.I.P. Ledger Control 18000

20300 20300

Cost of Sales Account

Rs. Rs.
To Finished Goods control 20300 By Costing P & L A/c 20300

20300 20300

Costing Profit and Loss Account

Rs. Rs.
To Cost of Sale A/c 20300 By General Ledger 21000
Adjustment A/c (sales)
To General Ledger 700
Adjustment A/c (profit)

21000 21000

Trial Balance (As at 31st December ..

Rs. Rs.
To Stores Ledger Control 970 General Ledger Control A/c 4050
Work-in-Progress Ledger 3080

4050 4050

Problem : 3
The following balances are extracted from the costs books of Ajith Traders Ltd., for the year ended 31 st Dec. 1995

Dr. Cr.
Rs. Rs.
Stores in Hand 16000 24500
Stock of Finished Goods 24600 26100
Work-in-Progress 32000 33500
Purchases - 76000
Carriage Inwards - 500
Stores Issued - 68000
Wages Direct - 67200
Wages - - Indirect - 22000
Work Expenses 69200
Cost of Finished Goods 240000
Cost of Finished Goods sold 238500
Selling Expenses 6100
Office & Administration Expenses 14000

The Cost Journal shows that Rs. 92700 and Rs. 13900 were allocated to Work-in-Progress for works overheads and
office overheads respectively. Prepare Cost Ledger Account and a Trial Balance from the above information as at 31 st
Dec. 1995.
Rs. Rs.
To Balance c/d 327600 By Balance b/d 72600
By Stores Ledger Control 76000
By Stores Ledger control A/c 500
By Wages Control A/c 200
By Production Overhead 69200
Control A/c
By Administration Overhead 14000
Control A/c
By Selling and Distribution 6100
Overhead Control A/c

327600 327600
By Balance b/d 327600

Store Ledger Control Account

Rs. Rs.
To Balance b/d 16000 By Work-in-Progress Ledger 68000
Control A/c
To General Ledger 76000 By Balance c/d 24500
Adjustment A/c (Purchases)
To General Ledger 500
Adjustment A/c (Carroage)

92500 92500

To Balance b/d 24500

Wages Control Account

Rs. Rs.
To General Ledger 89200 Work-in-Progress Ledger 67200
Adjustment A/c Control A/c
Production Overhead Control 22000

89200 89200

Production Overhead Control Account

Rs. Rs.
To Wages Control A/c 22000 By W.I.P. Leger Control A/c 92700
To General Ledger 69200
Adjustment A/c
To Overhead Adjustment A/c 1500

92700 92700

Administration Overhead Control Account

Rs. Rs.
To General Ledger 14000 By W.I.P. Ledger Control A/c 13900
Adjustment A/c
By Overhead Adjustment A/c 100

14000 14000

Selling and Distribution Overhead Control Account

Rs. Rs.
To General Ledger 6100 By Cost of Sales A/c 6100
Adjustment A/c

6100 6100

Work-in-Progress Ledger Control Account

Rs. Rs.
To Balance b/d 32000 By Finished Goods Control 240000
To Stores Ledger Control 68000 By Loss in Production A/c 300
To Wages Control A/c 67200 By Balance c/d 33500
To Production Overhead 92700 To Administration Overhead 13900
Control A/c Control A/c

273800 273800
To Balance b/d 33500

Finished Goods Control Account

Rs. Rs.
To Balance b/d 24600 By Cost of Sales A/c 238500
To W.I.P. Ledger Control A/c 240000 Balance c/d 26100

264600 264600

Cost of Sales Account

Rs. Rs.
To Finished Goods Control 238500 By Balance c/d 244600
To Selling & Distribution 6100
Overhead Control A/c

244600 244600
To Balance b/d 244600

Overhead Adjustment Account

Rs. Rs.

To Administrative Overhead 100 By Production Overhead 1500
Control A/c Control A/c
To Balance c/d 1400

1500 1500
By Balance b/d 1400

Loss in Production Account

Rs. Rs.
To W.I.P. Ledger Control A/c 300 By Balance c/d 300

300 300

Trial Balance
(As at 31st December 1995)
Dr. Cr.
Rs. Rs.
General Ledger Adjustment A/c 327600
Stores Ledger Control A/c 24500
Work-in-Progress Ledger Control A/c 33500
Finished Goods Control A/c 26100
Cost of Sales A/c 244600
Overhead Adjustment A/c 1400
Loss in Production A/c 300

329000 329000

Rs. Rs.
To Cost of Sales A/c 20300 By General Ledger 21000
Adjustment A/c (Sales)
To General Ledger 700
Adjustment A/c (profit)

21000 21000

Trial Balance
(As at 31st December .)
Dr. Cr.
General Ledger Control A/c 4050
Stores Ledger Control A/C 970
Ledger Control A/c 3080

4050 4050

Problem : 3
The following balances are extracted from the coasts books of Ajith Traders Ltd., for the year ended 31 st Dec.,
1-1-1975 31-12-1975
Rs. Rs.
Stores in Hand 16000 24500
Stock of Finished Goods

Carriage Inward
Stores- Direct
Works Expenses
Cost of Finished Goods
Cost of Finished Gods sold
Selling Expenses
Office & Administration Expenses

The Cost Journal shows that Rs. 92700 and Rs. 13900 were allocated to Work-in-Progress for works overheads and
office overheads respectively. Prepare Cost Ledger Account and a Trial Balance from the above information as at 31 st
Dec. 1995.

Solution:General Ledger Adjustment Account

Rs. Rs.
To Balance c/d 327600 By Balance b/d 72600
By Stores Ledger Control 76000
By Stores Ledger Control 500
A/c (Carriage)
By Wages Control A/c 89200
By Production Overhead 69200
Control A/c
By Administration Overhead 14000
Control A/c
Overhead Control A/c 6100

327600 327600

By balance b/d 327600

Stores Ledger Control Account

Rs. Rs.
To Balance b/d 16000 By Work-in-Progress Ledger 68000
Control A/c
To General Ledger 76000 By Balance c/d 24500
Adjustment A/c (Purchases)
To General Ledger 500
Adjustment A/c (Carroage)

92500 92500

To Balance b/d 24500

Wages Control Account

Rs. Rs.
To General Ledger 89200 By Work-in-Progress Ledger 67200
Adjustment A/c Control A/c

By Production Overhead 22000
Control A/c

89200 89200

Production Overhead Control Account

Rs. Rs.
To Wages Control A/c 22,000 By W.I.P. Ledger Control a/c 92700
To General Ledger 69200
Adjustment A/c
To Overhead Adjustment 1500

92700 92700

Administration Overhead Control Account

Rs. Rs.
To General Ledger 14000 BY W.I.P Ledger Control 13900
Adjustment A/c A/c
By Overhead Adjustment 100

14000 14000

Selling and Distribution Overhead Control Account

Rs. Rs.
To General Ledger 6100 By Cost of Sales A/c 6100
Adjustment A/c

6100 6100

Work-in-Progress Ledger Control Account

Rs. Rs.
To Balance b/d 32000 By Finished Goods Control 240000
To Store Ledger Control A/c 68000 By Loss in Production A/c 300
To Wages Control A/c 67200 By Balance c/d 33500
To Production Overhead 92700 To Administration Overhead 13900
Control A/c Control a/c

273800 273800

To Balance b/d 33500

Finished Goods Control Account
Rs. Rs.
To Balance b/d 24600 By Cost of Sales A/c 238500
To W.I.P. Ledger Control 240000 Balance c/d 26100

264600 264600

Cost of Sales Account

Rs. Rs.
To Finished Goods Control 238500 By Balance c/d 244600
To Selling & Distribution 6100
Overhead Control A/c

244600 244600
To Balance b/d 244600

Overhead Adjustment Account

Rs. Rs.
To Administrative Control 100 By Production Overhead 1500
A/c Control A/c
To Balance c/d 1400

1500 1500

Loss in Production Account

Rs. Rs.
To W.I.P. Ledger Control 300 By Balance c/d 300

300 300

Trial Balance
(As at 31st December, 1995)
Dr. Cr.
Rs. Rs.
General Ledger Adjustment A/c 327600
Stores Ledger Control A/c 24500
Work-in-Progress Ledger Control a/c 33500
Finished Good Control a/c 26100
Cost of Sales A/c 244600
Overhead Adjustment A/c 1400
Loss in Production A/c 300

329000 329000

Lesson 10

Integral Accounting
Integral accounting system is defined as a single set of accounts which provides both financial and cost accounting
information. Cost and financial accounts are kept in one self contained ledger which is known as integrated ledger. This
system does not recognize the need for separate set of accounts. Hence, there is no need for reconciliation of cost and
financial accounts.

Advantages is Integral systems:

An integrated accounting system has the following advantages.

1. There is not problem of reconciliation as there will be only profit amount.
2. This system is economical and easy to understand.
3. Duplication of work and labor is avoided.
4. Cost data can present promptly and regularly.
5. All cost data and accounts are automatically checked and thus cost figures are accurate.
6. In broaden the outlook of accountant and his staff.

Problem 1. Journalize following transactions assuming cost and financial accounts are integrated.

Raw materials purchases 40000

Direct materials issued to production 30000
Wages and (30% indirect) 24000
Direct wages charged to production 16000
Manufacturing expenses incurred 19000
Manufacturing overhead charged to 18400
Selling and distribution costs 4000
Finished products at cost 40000
Sales 58000
Closing stock ---
Receipts from debtors 13800
Payments to creditors 22000

1. Stores ledger control a/c 4000
To Bought ledger control a/c 4000
2. Work-in-progress control a/c 30000
To stores ledger control a/c 30000
3. Wage control a/c 24000
To bank a/c 24000
4. Factory overhead a/c Dr. 7200
To wages control a/c 7200
5. Work-in-progress ledger control a/c Dr. 16800
To wages control 16800
6. Factory overhead a/c Dr. 19000
To bank a/c 19000
7. Work-in-progress ledger control a/c Dr. 18400
To Factory overhead a/c 18400
8. Selling & distribution overhead a/c Dr. 4000
To Bank a/c 4000
9. Finished stock ledger control a/c Dr. 40000
To Work-in-progress control a/c 40000
10. Cost of sales a/c Dr 44000
To finished stock ledger control a/c 40000
To selling & distribution control a/c 4000
11. Sales ledger control account Dr. 58000
To cost of sales A/c 58000
12. Bank A/c Dr. 13800
To Sales ledger control a/c 13800
13. Bought ledger control a/c Dr. 2200
To Bank a/c 2200

Note: It has been assumed that all manufactured units have been sold and selling and distribution overhead have been
charged to cost of sales.

Problem 2:

The following are the balances of A co. Ltd. in its integrated ledger on 1 st January:
Dr. Cr.
Stores Control Account 36000
Work-in-progress Account 24000
Finished Goods Account 26000
Cash at bank 20000
Creditors Control Account 16000
Fixed Assets Account 110000
Debtors Control Account 24000
Share capital Account 160000
Depreciation Provision Account 10000
Profit & Loss Account 64000
250000 250000

Transactions for the twelve months ended 31st December were:

Dr. Cr.
Wages-direct 174000
Wages-Indirect 10000
Stores purchased on credit 200000
Stores issued to repair order 4000
Stores issued to production 220000
Goods finished during the period at cost 430000
Goods sold at cost 440000
Production overhead recovered 96000
Production overhead 80000
Administration overhead 24000
Selling and Distribution overhead 28000
Depreciation (works) 2600
Payments to suppliers 202000
Payments from customers 580000
Rates prepaid included in production overhead 600
Purchases of fixed assets in cash 4000
Charitable Donations 2000
Fines paid 1000
Interest on bank loan 200
Income-tax 40000

You are required to write upto the account in the integral ledger and take out a trial balance. The administration overhead
is written off to profit and loss account.


In the Integral Ledger of A Co. Ltd.

Stores Control Account
Dr. Cr.
Date Particular Amt. Date Particular Amount
Jan 1 To Balance b/d 36000 Dec31 By Work-in-Progress 220000
Dec. To Creditors Control 200000 Dec31 By Production 4000
31 A/c overhead ac
Dec.31 By Balance c/d 12000

236000 236000
Jan1 To Balance b/d 12000

Work control Account

Dec. To Bank 184000 Dec. 31 By Work-in-Progress 174000
31 A/c
Dec.31 By Production 10000
overhead a/c

184000 184000

Production Overhead Account

Rs. Rs.
Dec.31 To Wages Control 10000 Dec. By Pre-paid expenses 600
31 A/c (Rent)
Dec.31 To Stores Control 4000 Dec. By Work-in-progress 96000
A/c 31 A/c
Dec. 31 To Depreciation 2600
Provisions A/c

966000 96600

Administration Overhead Account

Rs. Rs.
Dec.31 To Bank 24000 Dec. By Cost of Sales 24000
31 A/c

24000 24000

Selling and Distribution Overhead Account

Rs. Rs.
Dec. To Bank 28000 Dec.31 By Cost of Sales 28000
31 A/c

28000 28000

Work-in-Progress Account
Rs. Rs.
Jan1 To Balance b/d 34000 Dec. 31 By Finished Good 430000
Dec. 31 Wages Control a/c 174000 Dec.31 By Balance c/d 94000
Dec. 31 To Stores Control a/c 220000
Dec.31 To Production 96000
Overhead A/c

524000 524000
Jan 1 To Balance b/d 94000

Finished Goods Account

Rs. Rs.
Jan1 To Balance b/d 26000 Dec. 31 By Cost of Sales 440000`
Jan.1 To Work-in-progress 430000 Dec.31 By Balance c/d 16000

456000 456000
Jan 1 To Balance c/d 16000

Cost of Sales Account

Rs. Rs.
De. 31 To Finished Goods 44000 Dec. By Debtors 600000
A/c 31 Control A/c
Dec.31 To S & D Overhead 28000
Dec.31 To Costing P & L 132000

Jan 1 To Balance b/d 6,00,000 6,00,000

Costing P & L Account for the year ending 31 December
Rs. Rs.
De. 31 Administration 24000 Dec. By Cost of Sales 132000
Overhead A/c 31
Dec. 31 To P & L 108000
132000 132000

P & L for the year ending 31st December

Rs. Rs.
Dec. 31 To Charitable 2000 Jan 1 By Balance b/d 64000
To Fines 1000 Jan1 By Costing P & L 108000
To interest on Bank 2000
To Income-tax 40000
To Net Profit 128000

172000 172000

Pre-paid expenses account

Rs. Rs.
Dec.31 To Production A/c 600 Dec. By Balance c/d 600

600 600
Jan 1 To Balance b/d 600

Depreciation Provision Account

Rs. Rs.
Dec. 31 To Balance c/d 12600 Jan.1 By Balance b/d 10000
Dec. By Production 2600
31 Overhead A/c

12600 12600
Jan. 1 By balance b/d 12600

Debtors Control Account

Rs. Rs.
Dec. 31 To Balance b/d 24000 Dec.31 By Bank 580000
Dec.31 To cost of sales 600000 Dec.31 By Balance c/d 44000

Jan 1 To Balance b/d 624000 624000

Jan1 To Balance b/d 44000

Creaditors Control Account

Rs. Rs.
Dec. 31 To Bank 202000 Jan1 By Balance b/d 16000
Dec.31 To Balance c/d 14000 Dec.31 By Stores 200000
Control A/c

216000 216000
Jan1 By Balance c/d 14000

Share Account
Rs. Rs.
Jan.1 To Balance b/d 20000 Dec. 31 By Wages 184000
Dec.31 To Debtors 580000 Dec.31 By Fixed Assets
Control A/c A/c
Dec.31 By Production 80000
overhead a/c
Dec31 By admin. 24000
Dec.31 S&D overhead 28000
Dec.31 By creditors 202000
control a/c
Dec.31 By Fines A/c 1000
Dec.31 By Charitable 2000
Dec.31 By interest on 200
Bank Loan
De.31 By Income-tax 40000
Dec.31 By balance c/d 34800

600000 600000
Jan.1 To Balance b/d 34800

To Trial Balance as on 31st December

Head of Account Dr. Bal Cr. Bal

Rs. Rs.
Stores Control A/c 12000
Work-in-progress A/c 94000
Finished goods A/c 16000
Prepaid expenses A/c 600
Depreciation Provision A/c 12600
Debtors Control A/c 44000
Creditors Control A/c 14000
Fixed Assets A/c 114000
Bank A/c 34800
Share Capital A/c 160000
Profit & Loss A/c 128800

Total 315400 315400

Lesson 11

Reconciliation of Cost and Financial Accounts

When the Cos Ledger Accounting system is adopted in an organizations the results shown by the accounting records i.e.
financial accounting and cost ledger accounting differ from each other. Hence, it becomes necessary to reconcile the
profit or loss shown by the two sets of records.

Need for Reconciliation:

1. It is necessary to find out the reasons for the differences in the profitability of both the records.
2. Reconciliation enables to test the reliability of cost accounts. Costing figures in total should agree with the
financial records.

Reasons for disagreement:

The difference in the profitability of cost and financial records may be due to the following reasons.
1. Items included in the financial accounts but not in cost accounts.
a. Purely financial income- such as interest received on bank deposits, interest and dividend on
investments, rent receivables, transfer fee received, profit on the sale of assets etc.
b. Purely financial charges such as losses due to scraping of machinery, losses on the sale of investments
and assets, interest paid on the bank loans, mortgages, debentures etc., expenses of companys transfer
office, damages payable at law etc.
c. Appropriation of profit the appropriation of profit is again a matter which concerns only financial
accounts. Items like payment of income tax and dividends, transfer to reserve, heavy donations, writing
off of preliminary expenses, goodwill and patents appear only in profit and loss appropriation account
and the costing profit and loss a/c is not affected.

2. Items included in cost accounts only:

There are certain items which are included in cost accounts but not in financial accounts. They are: Charges in
lieu of rent where premises are owned, interest on capital employed in production but upon which no interest is actually

3. Under/Over absorption of overhead expenses:

In cost accounts, overheads are absorbed at predetermined rates which are based on past data. In the financial accounts
the actual amount incurred is taken into account. There arise a difference between the actual expenses and the
predetermined overheads charged to product or job.

If overheads are not fully recovered, which means that the amount of overheads absorbed in cost accounts is less than
the actual amount, the shortfall is called as under recovery or under absorption. If overhead expenses recovered in cost
accounts is more than that of the actually incurred, it is called over absorption. Thus, both the over and under recovery
may cause the difference in the profits of both the records.

4. Different basis of stock valuation:

In cost accounts, the stock of finished goods are valued at cost by FIFO, LIFO, average rate, etc. But, in financial
accounts stocks are valued either at cost or market price, whichever is less.

The valuation of work-in-progress may also lead to variation. In financial books only prime cost may be taken into
account for this purpose whereas in cost accounts, it may be valued at prime cost plus factory overhead.

5. Different basis of depreciation adopted:

The rates and methods of charging depreciation may be different in two sets of accounts.
Method of reconciliation of profits:
The are two alternative forms of presentation of reconciliation of profits revealed by cost and financial accounts, namely

Statement form
Account form
In the statement form it is known as Reconciliation Statement and in the accounts form it is known as Memorandum
Reconciliation Account.
In both forms, the profits as per one set is taken to start with and addition / adjustments are made to arrive at the profit of
another set of books.

Memorandum Reconciliation Accounts:

It is an account form of reconciling the profitability of two records. The amount of profit as per cost records is credited
to the Memorandum account. The items to be deducted are debited and those to be added are credited to this amount.
The balancing figure is profit/loss of financial accounts.
The process of preparing reconciliation statement is worked out here in the form of problems.
A proforma Memorandum Reconciliation Account is give below:

Memorandum Reconciliation Account

(As on .)
Rs. Rs.
To Loss as per Cost Book By Profit as per Cost Books
To Items of expenses shown in By Items of expenses shown in cost
Finance books but not in Cost but not in Fin. Books
To Items of expenses By items of over charges in Cost
undercharged in Cost Books or Books
overcharged in Fin. Books.
To items of income over- By Over valuations of opening
charged in Cost Books or not stock in Cost Books
included in Fin. Books
To Over-valuation of opening By Under-valuation of closing stock
stock in Fin. Books in Cost Books
To Under-valuation of closing
stock in Fin. Books..,.
To Depreciation under-charged By Depreciation over-charged in
in Cost Books or over charged Cost Books
in Fin. Books
To Profit as per Financial

Problem : 1

The profit as per cost accounts is Rs. 150000. The following details are ascertained on comparison of cost and financial

Rs. Rs.
a. Opening Stock:
Materials 10000 15000
Finished goods 18000 16000
b. Closing Stock:
Materials 12000 13000
Finished goods 20000 17000
c. Interest charged but not paid Rs. 10000
d. Write of preliminary expenses Rs. 500; Goodwill Rs. 1500

e. Dividend on UTI received Rs. 1000
f. Indirect expenses charged in financial accounts Rs. 80000 but Rs. 75500
recovered in Cost Accounts.
Find out the profit as per financial accounts by drawing up a Reconciliation

Solution: Reconciliation Statement

Rs. Rs.
Profit as per Cost accounts 150000
Add : Opening stock of finished goods over 2000
valued in cost accounts
Closing stock of materials under recovered in 1000
cost accounts
Interest charged only on cost accounts 10000
Dividend on UTI not included in cost accounts 1000 14000

Less : Opening stock of material under valued in 5000

cost accounts
Closing stock of finished goods over valued in 3000
cost accounts
Preliminary expenses written off in financial 500
Goodwill written off in Final accounts 1500
Indirect expenses under recovered in cost 4500 14500

Profit as per financial accounts 149500

Alternatively, the above information may also be presented in the form of an account known as Memorandum
Reconciliation Account.

Memorandum Reconciliation Account

Rs. Rs.
To Opening stock of material 5000 By profit as per Cost Account 150000
under valued in cost A/c
To Closing stock of finished 3000 By Opening stock of finished 2000
good over valued in cost goods over valued in cost a/c
To Preliminary expenses 500 By closing stock of material 1000
written off under valued in cost accounts
To Goodwill written off 1500 By interest charged only in 10000
cost A/c
Overheads under recovered 4500 By dividend received 1000
To Profit as per financial 149500
Accounts (balancing fig)
164000 164000

Problem: 2

Following are the figures available in financial accounts of the year ended 31.3.76.
Direct Material consumption 250000
Direct Wages 100000
Factory overheads 380000
Admini. Overhead 250000
Selling and Dis. Overhead 480000
Bad debts 20000
Preliminery expenses 10000
Legal charges 5000
Dividend received 50000
Sales (120000 units) 700000
Interest on deposit received 10000
Closing Stock:
Finished stock 40000 units 1,20,000. Work- 80000
The cost account reveal direct material consumption 280000
Factory overhead recovered at 20% on price cost.
Administration overhead at Rs. 2 per unit or production. Selling and distribution
overheads at Rs. 4 per unit sold, prepare

1. Costing profit and loss account

2. Statement reconciling the profits disclosed by the costing profit and loss account and financial profit and
loss account.


Closing Profit and Loss account for the year ending 31.3.96

Rs. Rs.
To direct materials 280000 By Sales 700000
To direct wages 100000 Closing stock: Finished goods 120000
To factory overhead 76000 Work-in-progress 80000
To administration overhead 480000 By net loss 516000
To selling & Dis. Overhead 480000

1416000 1416000

Profit & Loss Account as per Financial Books

Rs. Rs.
To direct materials 250000 By sales 700000
To direct wages 100000 By dividend received 50000
To Factory overhead 380000 By Interest received 10000
To Administration overhead 250000 By Closing stock:
To Selling & Dis. 480000 Finished goods 120000
To Bad debts 20000 Work-in-progress 80000
To Preliminary expenses 10000 Net loss 535000
To legal charges 5000

1495000 1495000

Reconciliation Statement
Loss as per cost account 516000

a. Over charging of materials in Cost accounts 30000
b. Over absorption of administration overhead in cost 230000 260000
a. Under absorption of factory overhead 304000
b. Bad debts not included in cost accounts 20000 324000

Less :
Adjustment of income items not included in cost 50000
Interest on deposit received 10000 60000


Adjustments not shown in cost accounts
Preliminary expenses 10000
Legal Charges 5000 15000

Net loss as per financial books 535000

1. In the costing profit and loss account factory overheads have been calculated as 20% of Rs. (280000 + 100000
2. Administration overhead at Rs. 3 per unit of production. Number of units produced = sales 120000 + closing
stock of 40000 units)

Problem : 3

From the following particulars, prepare

(a) A statement of cost of manufacture for the year.
(b) A statement of profit as per cost accounts and
(c) Profit and loss account in the financial books and a reconciliation of the difference in the profits as shown by (b)
and (c) above:

Opening stock of raw materials 100000
Closing stock of raw materials 150000
Opening stock of finished product 200000
Closing stock of finished product 50000
Purchase of raw materials 600000
Wages 250000

Calculate factory overhead at 25 percent on prime cost. Office overhead will be levied at 75 percent on factory
overhead. Actual works expenditure amounted to Rs. 193750 and actual office expenses amounted to Rs. 152500. The
selling price was fixed at 25% above cost price.


Cost of manufacture Rs. Rs.

a) Raw materials
Opening stock 100000
Add purchases 600000
Less closing stock 150000 550000
Wages 250000
Factory overhead (25% on Prime cost) 200000
Office overhead (75% on Fy. Overhead) 150000

Cost of manufacture 115000

Statement of Profit (Cost Accounts)

b) Opening Stock of Finished goods 200000
Cost of manufacture 1150000
Less Closing Stock of Finished goods 50000

Cost of sales 1300000

Profit (25% of cost) 325000

Sales 1625000

Profit and Loss Account

Rs. Rs.
To opening Stock 200000 By sales 1625000
To Raw materials: By Closing Stock 50000
To Opening Stock 100000
To Purchase 600000
Less Closing Stock 150000 550000
To Wages 250000
To Factory overhead 193750
To office overhead 152500
To Profit 328750
1675000 1675000
Reconciliation Statement
Profit as per Cost Accounts 325000
Add Over-absorption of F.Y. overhead 200000
-193750 6250
Less under-absorption of office overhead 152500
-150000 2500

Profit as per Financial Accounts 328750

Problem 4:

A companys net profit as per the cost books was RS. 23063 whereas the audited final accounts showed a profit
of Rs. 16624. With the help of the following data, you are required to prepare a reconciliation statement, and explain the
reason for the difference between the two figures.

Profit and Loss Account
Year ended 31st March, 19.
Rs. Rs.
Opening Stock 247179 Sales 346500
Purchase 82154

Closing Stock 75121 254212
Direct Wages 23133
Factory Overhead 20826
Gross profit c/d 48329

Total 346500 346500

Administration 9845 Gross profit b/d 48329

Selling expenses 22176 Miscellaneous 316
Net Profit 16624

Total 48,645 48645

The costing records show:

(a) Stock balance of Rs. 78179
(b) Direct wages absorbed during the year Rs. 24876
(c) Factory overhead absorbed Rs. 19714
(d) Administration expenses charged @ 3 per cent of selling prices.
(e) Selling expenses charged @ 5 per cent of value of sales
(f) No mention of miscellaneous income


Rs. Rs.
Profit as per Cost Accounts 23063
Less : Difference in valuation of closing 78197
stock 75121 (-)
Factory overhead under absorbed 20826
19714 (-) 1112
Selling expenses under-absorbed 22176
17325 (-)
Add: Wages over-absorbed 24867
23133 1734
Administration overhead over-absorbed 10395
9845 550
Sundry income not shown in Costing 316

Profit as per financial accounts 16624.

Cost Accounting

Maximum:100 marks PART A

Answer any FIVE questions

1. What are the objectives of cost accounting?

2. What do you mean ABC analysis? Explain it with an illustration.
3. What do you mean by labour turnover? What are its causes?
4. What are the different methods of allocation of joint costs to joint products.
5. What are the advantages and limitations of standard costing?
6. From the following particulars, calculate the economic order quantity and find out the number of orders to be
placed in a year:

Annual requirements : 1600 units

Cost of material per unit : Rs. 40
Cost of placing and receiving on order : Rs. 50
Annual carrying cost of inventory values : 10% in inventory

7. A furniture manufacturer uses sunmica tops of tables. From the following information, find out price variance,
usage variance and cost Variance:
Standard quantity of sunmica per table : 4 sq. metre
Standard price per sq. metre of sunmica : Rs. 5
Actual production of tables : 1000
Sunmica actually used : 4300 sq. meter
Actual purchase price of sunmica : Rs. 5.50 per sq.

PART B ( 4 x 15 ) = 60

Answer any FOUR questions

8. What are the objectives and advantages of cost audit? How is it different form management audit?
9. What do you mean by non-integrated accounting? What are the causes for reconciliation of cost and financial
10. An engineering works, the standard time for a job is 16 hours and the basic wage is Rs. 1 per hour.
A bonus scheme is instituted so that worker is to receive his normal rate for hours actually worked and 50% for
the hours saved.
Materials for the job cost Rs. 20 and overheads are charged on a basis of Rs. 2 per labour hour.
Calculate the wages and effective rate of earning per hour if the job is completed (i) in 12 hours and (ii) in 14
hours. Also ascertain factory cost of the job on the same basis.

11. The following information relates to the activities of a production departments for a certain periods in a factory:

Materials use : Rs. 72000

Direct wages : 60000
Hours of machine operations : 20000
Labour hours worked : 24000
Overheads vhareable to the department : 48000

On one order carried out in the departments during the period, the relevant data were:

Hours Rs.
Materials used 4000
Direct wages 3300
Labour hours 1650
Machine hours 1200

Prepare a comparative statement of cost of this order by using the following three methods of recovery of overheads:

a) Direct labour hour rate method

b) Direct labour cost method
c) Machine hour rate method

12. A product is obtained after passing it through three processes. The following information is collected for January

Direct materials (Rs.) 5200 3879 4329
Direct wages (Rs.) 4000 5989 2987
Units produced 879 456 234
Normal loss 5% 10% 15%
Values of scrap per units (Rs.) 4 8 10

1000 Units at Rs. 6 Each was introduced in process. The indirect expenses for the month Rs. 18000. Prepare process

13. From the information given below, prepare (a) a statement showing profit or loss and (b) another statement
reconciling the costing profit with those shown by financial accounts
Trading and Profit and Loss Account for the year 1989
Rs. Rs.
Material 150000 Sales (150000 320000
consumed units)
Direct wages 75000
Factory expenses 45000
Office expenses 13000
Selling expenses 9000
Net Profit 27500
320000 320000

The normal output of the factory is 125000 units. Factory expenses of a fixed nature re Rs. 25000. These expenses are
for all practical purposes constant. Selling expenses are constant to the extent of Rs. 3000 and the balance varied with

14. Calculate overhead variance form the following data:

Standard Actual
(Rs) (Rs.)
Fixed overheads 8000 8500
Variable overheads 12000 11000
Output in units 4000 3800