MANAGEMENT ACCOUNTING (NOTES)

TYPES OF ACCOUNTS

1) Personal Accounts:
The account of individuals, firms, shops and establishments, institutions, companies are called
personal accounts. Like every natural person, the non-natural individuals are also treated as `persons’. It
is because such `persons’ have the artificial or legal existence. Although, you cannot shake hands with
such persons, for all accounting purposes, these are called persons.
The examples of personal accounts may be given as follows.
*Suresh’s Account
*Joshi’s Account
*M/S Ghatge-patil and Sons Account
*Alurkar Brothers Account
*N M V High School Account
*Pune University Account
2. Real Account:
The accounts of properties and assets are Real Accounts. These accounts Indicate the
values of various assets held by the business. The examples of Real Accounts can be given as follows.
*Cash Account
*Stock of Goods Account
*Land Account
*Building Account
*Plant and Machinery Account
*Furniture and Fixture Account
3. Nominal Accounts:
The accounts of expenses & losses and Incomes & gains are called Nominal Accounts. The
titles of Nominal Accounts indicate the various heads of expense and income items, which have to be
incurred or received during the course of the business. Therefore, the account-heads are neither
individuals nor assets of the business. The examples of nominal accounts can be given as follows:
*Wages Account
*Carriage Inwards Account
*Salaries Account
*Printing and Stationery Account
*Travelling expenses Account
*Conveyance Account
*Interest paid/received Account
*Discount allowed/received Account

RULES OF ACCOUNTS
(A) Rules for personal accounts:
Whether a person is to be debited or credited is to be determined by understanding the
following rule :
DEBIT the receiver, CREDIT the giver.
The rule says that if the person happens to be receiver of a benefit,Debit his account.
It the person happens to be giver of a benefit, Credit his account.

(B) Rules for Real Accounts –

Real accounts show the assets. Whether an asset account is to be debited Or credited is
determined by applying the following rule:
 DEBIT what comes in;CREDIT what goes out.
In a transaction relating to asset, there are two possibilities; an asset may come into the
business or it may go out of the business. If an asset comes in, debit the Asset Account; if it goes
out, credit the Asset Account.

III Rules for Nominal Account –

Expenses, losses, incomes and gains grouped under Nominal Accounts are debited or credited
by applying the following rule:
DEBIT expenses and losses; CREDIT incomes and gains.

Meaning of Journal

A businessman records the transactions daily in his books of accounts.

He has to record the transaction in proper books of accounts in the scientific

way. In this sense, `Journal ‘ is an important books which is called a book of

``Original entry ‘’ ``Prime entry’’ i.e. the book of first entry.

From the above information, the following features of journal can be

Noticed.

1. It is a preliminary or original record of the business transactions.

2. It records all the transactions in order of dates (chronologically)
i.e. the transactions are recorded in the same order in which they
take place.
3. Transactions recorded in the form of journal entries are briefly
explained in narration. Every journal entry is followed by a
narration.
4. It facilitates the recording of business transactions by passing the
Journal entries. This work is the foundation for maintaining the
ledger.

Need and Importance of Journal

1. It is needed to carry out further functions of accounting

2. Journal is a book of original entry, therefore, it is important from
the point of view of book-keeping.
3. It records both the aspects of a transaction together at one place.
It helps understand the transactions easily.
4. It helps cross check the transaction.
5. The recording of a business transaction in the journal is viewed
as the primary source of knowing the exact nature of a transaction.
As such is reliability is found much more in the event of searching
the facts of the transaction at a future date.
1. Journalize the following transactions in the books of Vishnu
April 2005.

1 Vishnu started business with cash Rs. 50,000.

4 Paid into bank Rs. 5000.
7 Cash purchases Rs. 12000.
10 Goods sold on cash Rs. 4800.
15 Bought furniture Rs. 7000.
20 Purchased goods Rs. 2000 from Bhagwan on cash.
23 Withdrawn from bank Rs. 3500 for office use.
27 Paid to Laxmi Rs. 1200.
29 Goods worth Rs. 2400 withdrawn by Vishnu for personal use.
30 Paid salary Rs. 8000.

2. Pass the Journal entries in the books of Narayan for the month of
June 2005.

1 Commenced business with cash Rs. 40,000 and goods worth Rs. 30,000.
3 Bought goods from Gajanan Rs. 3000.
4 Cash sales Rs. 2500.
7 Paid to Gajanan by cheque Rs. 2900 in full settlement.
10 Purchased goods from Narad and Co. worth Rs. 5000
13 Goods worth Rs. 1000 distributed as free samples.
17 Deposited into bank Rs. 1700.
20 Borrowed from Shankar Rs. 9000.
22 Paid rent to Varun by cheque Rs. 7800.
27 Paid salary by cheque Rs. 4900 and by cash Rs. 1500.

3. Record the following transactions in the books of Dharmendra.

1 Purchased goods for cash Rs. 3000 and paid carriage on the same Rs. 170.
2 Purchased machinery Rs. 7000.
3 Sold goods to Manohar on cash Rs. 6400.
4 Sold goods on credit to M/s Nandkishor Rs. 1800.
5 Paid telephone charges Rs. 2800.
6 Cash received from Saxena Rs. 2950 and allowed discount Rs. 50.
7 Rcceived commission Rs. 720.
8 Paid electricity bill Rs. 1540.

4. Enter the following transactions in the books of Shridevi a cloth merchant

March 2005.

1 Commenced business with a capital Rs. 80,000.

2 Opened the account with Bhagini Nivedita Sahakari Bank by depositing Rs. 25000.
7 Bought 100 cotton sarees from Yashoda Mills of Rs. 800 each at 10% T.D Supplied dress materials
of Rs. 4500 by Jam Mills.
15 Purchased furniture of Rs. 7000.
20 Sold sarees to Shilpa Rs. 3000.
24 Paid cash to Nirmala on account Rs. 7500.
27 Paid for Advertisement by cheque Rs. 1800.

5. Journalise the following

2 Subhash started business by investing cash Rs. 45000 and loan from ICICI Rs. 60000.
5 Purchased stationery for office use Rs. 2000.
6 Bought goods from Golden star Co. Rs. 10000 and paid half the amount Immediately.
7 Sold private vehicle and invested into business Rs. 9000.
8 Purchased goods from Blue star Co. Rs. 5000 at 10% T.D.
10 Returned goods to Blue Star Co. Rs. 500( gross).
14 Paid for carriage on machinery Rs. 400.
15 Withdrawn from bank Rs. 2300 for office use and Rs. 3000 for household
Purpose.

6. Show how the following transactions will appear in the Journal of Shri Bapat
for the month of April 2005.

3 Commenced business with cash Rs. 30000, goods Rs. 20000 and furniture Rs. 40000
4 Cash purchases Rs. 2800.
6 Sold goods to Sathe Rs. 6000.
7 Paid travellg exp. Rs. 1200.
9 Received a cross cheque of Rs. 5800 from Sathe in full settlement of his A/c Goods burnt by fire
Rs. 7000 and insurance company admitted a claim of Rs. 5000.
10 Paid interest Rs. 900.
13 Supplied goods by Khare Rs. 2200.

7. Give Journal entries for the following transactions.

1 Bought goods for cash Rs. 8900
2 Deposited into bank Rs. 4700
3 Received an order from Shri Bapu for Rs. 2000
4 Invoiced-goods to Sonu Rs. 1200
5 Cash stolen from cash box Rs. 7000
6 Paid for building repairs Rs. 12000
7 Natu purchased goods from us Rs. 2500
8 P ages Rs. 15000 by cheque

8. Journalise the following transactions of Shaharukh for the month of May 2005
1 Shaharukh brought in cash Rs. 20000, furniture Rs. 20000 and Building
Rs. 80000 to start the business.
2 Opened current account with Bank of India by depositing Rs. 12000.
3 Purchased goods from Salman for Rs. 3000 less 2 %trade discount.
4 Returned goods to Salman worth Rs. 700 on account of bad quality.
9 Paid to Salman Rs. 2200 in full and final settlement. Purchased goods of Rs. 3500 for cash on
5% cash discount.

20 Amzad received cash from us Rs. 15000.

30 Withdrawn goods costing Rs. 2800 and cash Rs. 8200 from business for personal
Use.
9. Journalise the following
1 Bought goods worth Rs. 8000 from Ninad at 10% trade Discount and paid cash
Less 2% cash discount.
2 Goods supplied by Sharad worth Rs. 10000 off 10% T.D and 5% C.D. paid
Half amount in cash.
3 Purchased goods from Appa Rs. 6000 and supplied the same to Bappa at 20%
Profit.
4 Goods worth Rs. 3000 were damaged in transit a claim was disallowed by
transport authorities.
5 Amount due from Mr. Faithful Rs. 2500. He is declared insolvent and received
only 40% from his property.
6 Received a cheque from Krishna Rs. 5600, it is sent to the bank immediately.
7 Commission due from Radha Rs. 800.
8
10. Enter the following transactions in the book of Rupeshkumar for the month of
January 2005.

3 Rupeshkumar borrowed Rs. 60,000 from his wife Rupamati and commence Business.
4 Deposited into bank Rs. 20,000.
6 Purchased Machinery of Rs. 24,000 from Modern company for cash and paid for its
transportation Rs. 4000 and installation charges Rs. 6000,
12 Paid for household expenses Rs. 1400.
Purchased shares of Sun fertilizers Ltd. Rs. 2500 and paid for it by cheque,
20 Supplied goods to Riteshkumar worth Rs. 3200 and received half the amount in
Cash.
25 Received an order from Niteshkumar for goods worth Rs. 5400.
28 Executed the order received on 25 th Jan.

11. From the following transactions, prepare Journal.

1 Started business with cash Rs. 10000,
2 Bought furniture Rs. 2000,
3 Sold goods to Vinod Rs. 1000.
4 Received from Vinod Rs. 970 and allowed discount Rs. 30.
5 Amount of Rs. 700 written off as bad debit previously, is received.
6 Paid rent Rs. 1200 by cheque and salary Rs. 4000.
7 Received dividend Rs. 250.
8 Sold machinery for cash Rs. 8000.
12. Transactions for Motilal for the month of February 2005 are given below
Journalise them.

1 Cash purchases Rs. 1700.

4 Purchased goods from Kantilal worth Rs. 6000 less 10% trade discount.
7 Paid freight on goods purchased Rs. 400
10 Received interest on investments Rs. 1100.
11 Paid sundry expenses Rs. 500.
12 Invoiced goods to Manilal worth Rs. 5000 on 10% T.D. and 5% cash discount. Half the amount
received immediately.
 14 Paid for stationery Rs. 800
22 Paid Rs. 4500 as rent of residential flat.

13. Journalise the following

1 Sold goods for cash Rs. 2900.
2 Purchased goods Rs. 1500 and payment made by cheque.
3 Gave charity Rs. 950.
4 Took loan from Dena Bank Rs. 15000.
5 Commission due from Vivek Rs. 240.
6 Purchased securities worth Rs. 7000.
7 Goods damaged in transit Rs. 3000.
8 Paid carriage for Vinayak Rs. 800.

14. Record the following transactions in the books of Reema

March 2005
1 Commenced business with cash Rs. 18000 and goods worth Rs. 7,000.
2 Purchased goods from Super Bazar Rs. 2800 on cash.
5 Goods insured with New India Assurance Co. Ltd. For Rs. 15000 and paid
Premium by cheque Rs. 1000.
6 Purchased 10 calculators for office use at Rs. 600 cash.
9 Goods of Rs. 750 were distributed as free samples.Received a gift Rs. 3000 and invested in free
samples.
10 Purchased goods from Seema worth Rs. 20.000 at 10% trade discount.

28 Settled the account of Seema at 1.5% cash discount.

15. Journalise the following transactions

1 Opened current account with Bank of Maharashtra by depositing Rs. 10,000.
2 Bought goods worth Rs. 4000 at 10% T.D. and 2% C.D.
3 Placed an order with Teena and Co. for goods worth Rs. 8000.
4 Returned the goods from Teena and Co. and paid half the amount in cash at 5%
cash discount.
5 Paid Diwali advance to workers Rs. 7000.
6 Returned loan of IDBI of Rs. 15,000 together with interest Rs. 2000.
7 Purchased machinery for business in exchange of goods Rs. 9000.
8 Withdraw for daughter’s marriage Rs. 10,000.
9 Paid to economic times Rs. 250 for insertion.
10 Paid Audit fee Rs. 1200.

QUESTIONS:

IIIustration 1 : Journalise the following transactions in the book of Mr. Shriram of Akola for the month of
March 2005.
1 Shriram started business with cash Rs. 75,000.
4 Purchased goods for cash Rs. 10,000.
7 Sold goods for cash Rs. 7,000.
9 Purchased machinery from M/s Hiralal Bros. on cash Rs. 9,500.
10 Sold goods to Madhuri Rs. 4,200.
15 Paid Rent Rs. 5,500.
17 Received cash from Madhuri Rs. 4,200.
Bought goods from Sudhakar Rs. 3,000 on credit.
25 Paid for salary Rs. 2,000.
30 Purchased furniture Rs. 6,000 for cash.

IIIustration 2 : Record the following transactions in the Journal of Azar.

April 2005
1 Azar commenced business with cash Rs. 80,000 and goods of
Rs. 20,000
4 Opened current Account in Canara Bank by depositing Rs. 10,000.
6 Bought merchandise from Mangesh Rs. 4,000 on cash.
7 Returned goods to Mangesh Rs. 500.
Withdrawn from bank Rs. 5,000.
9 Sold goods to Radha Rs. 6,000 on credit.
15 Purchased stationery Rs. 950 and payment made by cheque.
17 Radha returned us goods woth Rs. 500.
Received cash from Radha Rs. 5,500.
25 Goods withdrawn for personal use by proprietor Rs. 2,800.
30 Paid to Times of India for advertisement Rs. 600.

IIIustration 3 : Enter the following transactions in the Journal of Abhijit for the month of May 2005.

4 Abhijit commenced business with cash Rs. 25,000, Goods worth Rs 7000
9 Cash Purchases Rs. 7,500.
10 Cash Sales Rs. 4,000.
11 Purchased goods from Akshay worth Rs. 9,000 less 10% trade discount.
17 Sold goods worth Rs. 12,000 less 5% trade discount to Abhay.
19 Purchased goods from Sujay of Rs. 7,000.
20 Returned goods to Sujay of Rs. 800.
24 Issued a cheque to Sujay of Rs. 6,000 in full settlement.
28 Paid telephone charges Rs. 2,200.
30 Paid local conveyance to manager Rs. 250.

IIIustration 4 : Das is a dealer in Electrical goods. Journalise the following transactions in his books for
the month of June 2005

2 Das started business with cash Rs. 5,00,000 of which Rs. 3,60,000 was taken as a loan from Murti
4 Purchased 50 T.V. sets from Onida Company at Rs. 6,000 eachon cash
5 Paid carriage Rs. 2,500 on the above goods.
7 Bought 70 mixers from Rico Company at Rs. 2,000 each
10 Paid electricity deposit Rs. 10,000 to M.S.E.B.
12 Sold 20 T.V. sets to Karnawat brothers for Rs. 1,40,000 on cash
13 Paid for Sales literature Rs. 8,000.
17 Recold company supplied us 30 geysers at Rs. 2,800 each and
 payment made in cash.
20 Paid Life Insurance premium of Mr. Das to Kotak Mahindra
Rs. 4,500.
28 Paid salary Rs. 7,000.

IIIustration 5 : Journalise the following transactions during the month of July 2005 in the books of
Pallavi.

2 Pallavi received Rs. 25,000 from her uncle as a gift and deposited the same into the account of
business.
3 Purchased goods of Rs. 6,500 from Mrunmayi.
5 Sold goods on credit to Shridevi for Rs. 4,000.
7 Goods of Rs. 250 being defective returned by Shridevi.
8 Remitted cash to Mrunmayi Rs. 6,300 and received discount
10 Goods burnt by fire Rs. 2,400
18 Bought machinery from Kranti Rs. 14,000 and half the amount
paid immediately.
24 Paid for repairs to machinery Rs. 150
28 Withdrawn from bank Rs. 5,000 for personal use.
30 Paid salary to staff by cheque Rs. 13,000.

IIIustration 6 : Journalise the following transactions in the books of a trader.

June 2005
1 Monica Commenced business with cash Rs. 24,000, Goods worth Rs. 8,000, Machinery worth Rs.
15,000 and borrowed money Rs. 20,000 from her friend Mallika at 10% p.a.
4 Bought goods worth Rs. 6,000 from Sukanta at 10% trade discount.
7 Returned goods worth Rs.600 to Sukanta as being of Inferior quality.
10 Purchased goods worth Rs. 5,000 from Kanta at 10% trade discount and paid cash Less 2% cash
discount.
14 Sold goods worth Rs. 10,000 to Shanta at 5% trade discount and Paid for office cleaning Rs. 100.
16 Purchased a new plant and machinery worth 80,000 from Techno Ltd., and an old machinery
worth Rs. 10,000 was exchanged in Part payment.
18 Paid Insurance premium Rs. 1,000 to New India Assurance Company Ltd.
20 Goods brunt by fire Rs. 9,000 and Insurance Company admitted a Claim of Rs. 7,500.
26 Purchased for office 4 computer tables at Rs. 1,700 each and 4 Chairs at Rs. 4,000.
28 Purchased 30 shares of Satyam Software Company. Ltd. By paying Rs. 1,000 per share.
30 Paid carriage on behalf of Babita Rs. 1,200.

IIIustration 7 : Record the following transactions in the books of Sachin for the month of June 2005.

3 Bought goods of Rs. 8,000 from Shastri at 3% trade discount

6 Sold half the goods purchased from Shastri to Kirmani at 20%profit on cost.
8 Purchased machinery for cash Rs. 10,000 and paid Rs. 500 wages For the installation of machinery.
10 Uninsured goods damaged in transit Rs. 3,500.
11 Sachin paid Rs. 18,000 to Poddar college for his son’s fees.
14 Placed an order for goods Rs. 2,500 with Vishwanath
18 For the assistance of the watch and ward department, purchased a hound dog for Rs. 6,500
24 Vishwanath executed the order which was placed on 14 June.
27 Paid to Gangauli Rs. 9,000 on account.
30 Paid quarterly rent for the residential accommodation of the
proprietor at Rs. 20,000 p.a
IIIustration 8 : Journalise the following transactions of Shri. Pannalal for the month of June 2005.

5 Pannalal commenced business with Cash Rs. 60,000 and machinery Rs. 20,000.
6 Purchased Splender bike from Hero-Honda Company for cash Rs. 25,000.
8 Paid Insurance premium of above vehicle Rs. 2,000 to New India Assurance Company Ltd.
10 Paid Municipal taxes Rs. 6,800.
11 Deposited into bank Rs. 3,000.
14 Bought goods from Hiralal Rs. 10,000 and paid him half the amount in cash immediately.
16 Paid deposit to V.S.N.L. for the Internet connection Rs. 5,000.
19 Cash sales Rs. 7,000.
Received commission on sale Rs. 700.
21 Remmitted remaining cash to Hiralal.
25 Paid for postage and telegram Rs. 900.

IIIustration 9 : Journalise the following transactions.

1 Paid for repairs to Motor car Rs. 2,800.

3 Goods distributed as free sample Rs. 950
6 Purchased goods from Kishor Rs. 1,500.
10 Paid to Kishor by cheque Rs. 1,450 in full settlement.
11 Received interest on investment Rs. 1,200.
12 Nanda received goods from us Rs. 1,800.
14 Goods send back by Nanda of Rs. 800 as they were not as per sample.
19 Rita paid us an account Rs. 2,460 aftar deducting cash discount Rs. 40
20 Invoiced goods to Smita Rs. 2,200 on cash.
24 Geeta bought goods from us Rs. 4,000.
29 Shweta received cash from us Rs. 2,000

IIIustration 10 : Record the following transactions in the books of Mirza for the month of January 2005.

1 Cash purchases Rs. 4,200.

3 Sold goods Rs. 3,000 to Sayyed.
8 Mirza purchased goods from Galib Rs. 8,500 on cash.
10 Javed supplied goods to Mirza Rs. 2,700.
12 Deposited Rs. 6,000 in Bank of Maharashtra.
18 Received dividend Rs. 480 from KSB pumps.
18 Sayyed is declared insolvent and Rs. 2,000 is received from his estate in full settment of Rs. 3,000.
20 Invested in National Savings Certificate Rs. 5,000.
25 Paid Income – tax Rs. 4,700.
28 Paid rent to Iandlord in advance Rs. 3,700.
 LEDGER
`` A ledger account may be defined as a summary, statement of all the transactions relating to persons,
assets, expenses or incomes which have taken place during a given period to time and shows their net
effect “.
`` A group of accounts in known as a Ledger. The General Ledger is the main book of accounts, it
contains an account for each assets, liability, proprietorship, revenue and expense account. The Ledger
contains the same information as the Journal. However, in the Journal each transaction is
completely recorded as unit. The entire effect of a transaction is completely recorded in one place in the
Journal. Periodically, the same information is posted to the Ledger where it is accumulated according to
individual items. The Ledger where it is accumulated includes all the basic accounts needed for the
preparation of the financial statements.”

Need and Importance of Ledger

Ledger provides the information in summarized and classified from which helps in obtaining the details
of various accounts such as assets, liabilities, expenses, income etc.iIt gives a complete picture of a
particular account at a glance. The preparation of a Trial Balance is possible on the basis of all
the balances of individual accounts from the Ledger From the Trial Balance, financial statements i.e.
Profit and Loss Account and Balance Sheet can be prepared at the end of financial
Year. Financial statements further help us in making the interpretation
of various balances extracted from the Ledger.
Ledger is useful to a trader in understanding the account wise Information of the business transactions.
Ruling of the ledger account

Dr. Title of the Account Cr.

Date Particulars J.F. Amount Date Particulars J.F. Amount

IIIustration 1 : Record the following transactions in the Journal of Shri. Ramakant and post them
into proper Ledger Accounts.
March 2005
3 Started business with cash Rs. 20,000 as his Capital.
8 Bought merchandise from Shrikant Rs. 4500.
10 Sold goods Rs. 3000.
12 Returned goods to Shrikant Rs. 500
14 Withdrew for household expenses Rs. 700
19 Paid for salaries Rs. 1000
30 Paid rent Rs. 850

IIIustration 2 : Journalize the transactions and post them to ledgers

March 2005

2 Cash balance Rs. 8000

4 Bought goods Rs. 1500
6 Cash sales Rs. 5000.
10 Receivd from A Rs. 2000
11 Paid to veeru Rs. 2000
20 Paid salary Rs. 1400
 IIIustration 3 : Record the following transactions in the Journal of Karan and post them into Ledger and
balance it.
2005 May
2 Commenced business with cash Rs. 15000 and machinery Rs. 20,000.
4 Purchased goods of Rs. 10000 at 20% Trade discount from Pavan and paid half of the amount at 10%
cash discount.
6 Sold half of the above goods to Shravan less 5% cash discount Sharvan settled his account at 5% cash
discount.
20 Salary paid to Bhuvan Rs. 800.
23 Goods wroth Rs. 250 withdrawn by the proprietor for his personal Use
28 Goods Rs. 300 returned to Pravan
30 Rent paid Rs. 400

IIIustration 3 : Journalise the following transactions in the books of Namrata and Post them into
Ledger.

April 2005

3 Started business with Cash Rs. 22000

5 Deposited into Dena Bank Rs. 7000
7 Purchased goods from Neeta worth Rs. 20,000 by paying her 25% amount in cash
17 50% of the goods purchased from Neeta were sold to Nishita at 20% profit on sales
20 Paid for travelling by cheque Rs. 1000
23 Paid legal expenses Rs. 700
30 Paid Insurance premium of office building Rs. 2000

Practical Problems
1. Journalise the following transactionas and Post them into Ledger A/cs and balance the
Ledger accounts.
Jan. 2005
4 Munnabhai started business with cash Rs. 15000.
8 cash sales Rs. 1200
10 Bought goods for cash from Shantibhai Rs. 750
15 Deposited into bank Rs. 10,000
17 Supplied goods to Pravinbhai Rs. 750
20 Withdrawn from bank Rs. 500 for office use
25 Goods purchased on credit from Sureshbhai Rs. 340
27 Received from Pravinbhai Rs. 735 and allowed him discount Rs. 15
28 Paid salary Rs. 150
30 Paid to Sureshbhai Rs. 325 and received discount Rs. 15
Paid carriage Rs. 75
2 Enter the following transactions in the Journal of Rekha and prepare necessary accounts and balance it
for the month of Feb 2005.
5 Commenced business with cash Rs. 20,000 and goods worth Rs. 4000
8 Purchased office furniture Rs. 1200
9 Bought stationary from Asha Rs. 300 on credit
10 Sold goods to Surekha for cash Rs. 500
17 Paid to M.S.E.B for electricity deposit Rs. 2000
20 Paid life insurance premium Rs. 750

3 Record the following transactions in the Journal of Rahim for the month of March 2005 and post them
into Ledger and Balance it :
1 Started business with cash Rs. 10,000 and goods Rs. 12,000
3 Rs. 5000 deposited into bank
7 Sold goods to Salim Rs. 5000
8 Received Rs. 2000 from Salim and allowed discount Rs. 500
10 Goods worth Rs. 1000 distributed as free samples
12 Purchased goods worth Rs. 6000 at 10% cash discount, half amount paid in cash and balance paid by
cheque
17 Paid Insurance Premium Rs. 500
18 Salim was declared insolvent and a 30% amount could be recovered in full and
final settlemet
27 Exchanged the personal motor car worth Rs. 15000 for goods worth Rs. 12000
29 Rs. 500 and Rs. 600 withdrawn for bank from office use and for personal use respectively
30 Paid salaries Rs. 1000 by cheque, Rs. 800 in cash and Rs. 1200 in goods.

4 Enter the following transactions in the Journal of Vivck for the month of May 2005, post them into
Ledger and Balance it
3 Rs. 10,000 borrowed from Vilas at 12% P.A.
5 Bought goods from Vilas worth Rs. 3000 at 10% T.D.
8 Returned goods to Vilas as defective Rs. 500
10 Paid Rs. 2000 to Vilas less 5% cash discount
12 Vivek paid to his domestic servant salary Rs. 1000
13 Paid for advertisement Rs. 400
17 Sent goods to Vishwas worth Rs. 500
20 Sold goods to Vishwas Rs. 1200 and paid transport charges Rs. 50 on his behalf.
30 Paid interest on loan Rs. 100
TRIAL BALANCE
Meaning of a Trial Balance

A Trial Balance is a statement of all ledger accounta taken together

with their respective debit or credit balances on a particular date.

 Purpose of a Trial Balance

A Trial Balance is prepared with the following purposes :
(a) A Trial Balance is prepared to check the arithmetical accuracy of
recording the transactions under the Double Entry system.
(b) It is prepared to find out the errors, if any, while writing the books

of accounts.

(c) It helps prepare Final Accounts of a business.

 Characteristics of a Trial Balance
(a) A Trial Balance records the names of all ledger accounts :
(b) In a Trial Balance, the closing balance of every ledger account is
taken. It may be a debit balances or a credit balance.
(c) After recording all the ledger balances in a columner from, a total
of all debit and all credit balances is taken.
(d) If both the totals agree with each other, the trial balance is said to
be tallied.
(e) When a trial balance is tallied, it indicates an arithmetical accuracy
of writing the accounts under the Double Entry system.

IIIustration 2 : Following is the list of balance of different ledger accounts.

You are required to prepare a Trial Balance as on 31 – 3 – 2001.

Name of Account Balances Rs.

(a) Capital 85,000

(b) Sales 71,000
(c) Purchases 30,565
(d) Drawings 5,800
(e) Machinery 40,000
(f) Building 40,000
(g) Sundry Debtors 12,600
(h) Discount Received 1590
(i) Purchases Returns 233
(j) Cartage 1,438
(k) Salaries 1,335
(l) Insurance 1,420
(m) Wages 1,335
(n) Office Expenses 1,790
 (o) Cash 4,820
(p) Sundry Creditors 13,225
(q) Loan from Central Bank 6,700
(r) Commission Received 2,745
(s) Bills Payable 6,260
(t) Opening Stock 13,600
(u) Furniture 12,500
(v) Travelling Expenses 1550
(w) Bank balance as per Pass Book 10,000
(x) Bank balance as per cash Book 18,000

IIIustration 5 : Given below is a Trial Balance prepared by the accountant of Mr. Y. This Trial Balance
is not tallied due to some mistakes made by an accountant. You are required to prepare a correct trial
balance.
 Trial Balance as on 31 – 3 - 2000

Name of the Account Debit Balance Credit Balance

Rs. Rs.
Machinery 32,000 -
Debtors - 22,000
Creditors - 40,700
Goodwill 30,600 -
Discount Received 1,800 -
Discount Allowed - 2,700
Furniture 14,300 -
Sales - 2,30,000
Purchases 1,17,000 -
Purchases Returns 1,800 -
Sales Returns - 3,100
Wages 22,400 -
Salaries - 10,200
Carriage Inward 1,400 -
Carriage Outward - 2,300
Loan to Mr. X - 20,000
Printing and Stationery 3,500 -
Advertising - 4,800
Cash in hand 970 -
Cash at Bank - 1,230
Bank Overdraft 11,500 -
Capital - 1,00,000
Land and Building 97,300 -
Total 3,34,570 4,37,030

It is also informed by Mr. Y that the accountant forgot to include the balances of three ledger
accounts viz. Audit fees A/c Rs. 1,500; Interest Received A/c Rs. 2,000 and sundry Expenses A/c
Rs. 500.
1. From the following particulars prepare a Trial Balance of Mr. Patil
As on 31-03-2000.

Name of the Account Balance (Rs.)

Opening Stock 20,400
Freehold Premises 89,000
Bank Overdraft 13,700
Capital of Mr. Patil 2,32,000
Drawing 48,000
Purchases 95,000
Sales 1,85,200
Carriage 4,700
Power Charges 8,900
Printing and Stationery 3,600
Telephone Charges 1,900
Advertisement 4,300
Return Inward 6,200
Return Outward 2,100
Debtors 38,400
Creditors 31,700
Goodwill 1,00,000
Vehicles 40,000
Vehicle Expenses 4,300
2. Following are the ledger balance taken from the books of Mr. Sanket. Prepare
his Trial Balance as on 31 - 3 - 2001

Name of the Account Balance (Rs.)

Reserve for Doubtful Debts 1,300
Mr. Sanket’s Capital 85,200
Mr. Sanket’s Drawings 12,000
General Reserve 20,500
Furniture and Fixtures 12,400
Purchases 40,000
Bad Debts 1,400
Debtors 33,200
Computer 14,300
Sales 75,200
Creditors 28,200
Wages 10,800
Salaries 12,200
Opening Stock 24,300
Cash at Bank 600
Loan from the Bank 20,000
Advertising 4,700
Cash at Bank 7,400
Administration Expenses 8,800
Interest paid 3,000
Motor Car 45,300
3. Prepare a Trial Balance from the following ledger balances as on 31-3-2002.

Name of the Account Balance (Rs.)

Goodwill 18,000
Building 76,000
Capital 46,000
Cash in hand 2,100
Sales Returns 2,400
Drawings 10,000
Purchases Returns 1,300
Furniture 23,000
Sales 85,600
Purchases 29,200
Debtors 19,100
Plant and Machinery 34,500
Bank Overdraft 14,900
Creditors 42,200
Opening Stock 15,800
Salaries 18,700
Bills Receivable 10,400

4. From the following information of Mr. Z, prepare a Net Trial Balance of his
business as on 31 – 3 – 2003.

Name of the Account Debit Balance Rs. Credit Balance Rs.

1. Capital A/c - 9,200
2. Cash A/c 13,130 6,550
3. Goods A/c 8,300 4,500
4. Merchant’s A/c 12,000 4,800
5. Kane’s A/c 3,200 9,600
6. Furniture A/c 2,000 -
7. Advertisement A/c 100 -
8. Commission A/c 350 -
9. Creditors A/c - 4,430
39,080 39,080
5. Following is the information extracted from the ledger book of Mr. Aniket as on
31 - 3 – 2004. Prepare a Net Trial Balance.

Name of the Account Debit Balance Rs. Credit Balance Rs.

1. Sales Return A/c 1,000 -
2. S. Debtors A/c 9,000 1,000
3. Purchases Return A/c - 1,000
4. Drawings A/c 1,000 -
5. Taxes A/c 1.100 -
6. Sales A/c - 89,000
7. Rent A/c 1.500 -
8. S. Creditors A/c 8,000 29,500
9. Purchases A/c 38,000 -
10. Cash A/c 69,000 4,100
11. Bank A/c 68,000 60,000
12. Furniture A/c 8,000 -
 13. Capital A/c - 72,000
14. Machinery A/c 52,000 -
Total 2,56,600 2,56,600

FINAL ACCOUNTS

In the books of xxx

Trading Account

[ For the year ending on 31 March.... ]

Dr. Cr.

Particulars Amount Particulars Amount Rs.

Rs.
To Opening stock ……………… By Sales ………….. …………...
To Purchases ………… Less : Return ………….. ……………
Less : Return ………… ……………… Inwards
Outwards By Closing stock ……………
To Wages ……………..
To Carriage Inward ……………..
To Power and Fuel ……………..
To Coal, Gas, Water ……………..
To Factory/Works Expenses ……………..
To Freight and Duty ……………..
To Royalty ……………..
To Gross Profit ……………..
[transferred to Profit & ……………..
Loss A/c]
Total …………….. Total …………..

Profit and Loss Account

[ For the year ending on 31 March…]

Dr. Cr.

Particulars Amount Particulars Amount

To Office Salaries ………….. By Gross Profit B/d …………..
To Rent, Rates and Taxes ………….. By Discount Received …………..
To Printing and Stationery ………….. By Interest Received …………..
To Postage and Telegrams ………….. By Commission Received …………..
To Telephone Charges ………….. By Rent Received …………..
To Office Expenses ………….. By Interest on Drawings …………..
To Insurance ………….. By Profit on Sale of …………..
To Audit Fees ………….. Old Asset
To Sundry Expense ………….. By Sundry Incomes …………..
To Electricity Charges …………..
To Conveyance …………..
To Bad Debts …………..
To Advertising …………..
To Travelling …………..
To Commission Paid …………..
To Discount Allowed …………..
To Export Duty …………..
To Carriage Outward …………..
To Unproductive Wages …………..
To Bank Charges …………..
To Interest On Loans …………..
To Interest On Capital …………..
To Loss by Fire …………..
To Depreciation On Assets …………..
To Loss by Theft …………..
To Loss On Sale of Assets …………..
To Net Profit …………..
[Transferred to Capital A/c] …………..
Total ………….. Total …………..

Balance Sheet of Mr. X

as on 31 March …..

Liabilities Amount Rs. Assets Amount Rs.

Capital ………… Fixed Assets ………….
Add – Net Profit ………… Goodwill ………….
Less – Net Loss ……….. Land and Building ………….
Less – Drawings ………… ………….. Plant and Machinery ………….
Sundry Creditors ………….. Vehicles ………….
Loans …………. Furniture ………….
Bank Overdraft …………. Fixtures and Fittings ………….
Bills Payable …………. Patterns and Moulds ………….
Outstanding Expenses …………. Patents ………….
Income Received in Advance …………. Loose Tools ………….
Live Stock ………….
Current Assets ………….
Closing Stock ………….
Sundry Debtors ………….
Bills Receivable ………….
Prepaid Expenses ………….
Sundry Debtors ………….
Bills Receivable ………….
Prepaid Expenses ………….
Cash at Bank ………….
Cash in hand ………….
Income Outstanding ………….
Investments ………….
Total …………. Total ………….

Name of the Adjusting Entry Double effect in the

adjustment Final Accounts.
Closing Stock Stock (at end) A/c Dr. 1.Balance sheet Asset side
To Trading A/c 2.Trading A/c credit side

Depreciation Depreciation A/c Dr. 1.P & L Account Debit side

To Asset A/c 2.Deduct from an asset which
is shown on the Asset side of
the Balance sheet.

Bad Debts Bad Debts A/c Dr. 1.P & L A/c Debit side
To Sundry Debtors A/c 2.Deduct from sundry
Debtors which are shown on
the Asset side of the Balance
sheet.

Provision for bad P & L A/c Dr. 1.P & L A/c Debit side
& doubtful debts To R.D.D. A/c 2.Provision for doubtful debts
(R.D.D.) is subtracted from Debtors.

Provision for P & L A/c Dr. 1.P & L A/c Debit side
discount on Drs. To Provision for 2.Provision for Discount on
Discount on Drs. Is subtracted from
Debtors A/c Debtors.

Name of the Adjusting Entry Double effect in the

 adjustment Final Accounts.
Provision for Provision for discount 1.P & L A/c credit side
discount on Crs. on Crs. A/c Dr. 2.Provision for Discount on
To P & L A/c Crs. Is subtracted from
Creditors which are shown on
the liability side of the
Balance sheet.

Outstanding Expense A/c Dr. 1.Add to the respective

Expense To Outstanding Expense shown on the debit
Expense A/c Side of either Trading A/c or
P & L A/c
2.Liability side of the
Balance sheet

Prepaid expense Prepaid Expense A/c Dr. 1.Balance sheet Asset side 2.
To Expense A/c Subtract from the respective
Item of expense which is
shown on the debit sibe of
either Trading or
P & L A /c.

Accrued income Outstanding Income 1.Add to respective income

A/c Dr. on the credit side of P& L A/
To Income A/c c.
2.Balance sheet asset side.

Income Received Income A/c Dr. 1.Deduct from the respective

in advance To Income Received income which is shown on the
In advance A/c credit side of P & L A/c.
2.Balance sheet, liability side.

IIIustration 1 : Following is a Trial Balance of M/s Swaroop and Swanand Co. for the year ending on 31 –
3 – 2001.

Dr. Trial Balance as on 31 – 3 – 2001 Cr.

Name of Account Rs. Name of Account Rs.

Salaries 11,000 Sales 1,40,000
Taxes and Insurance 6,100 Bank Over draft 18,000
Stok on 1-4-2000 41,000 Commission Received 2,000
Purchases 82,600 Capital 1,30,000
Wages 4,800 Creditors 39,000
Furniture 10,000 R.B.D.D. 2,100
Advertisement 7,900 10% Loans
Interest on loans 2,800 [take on 1 – 4 – 2000] 53,000
Debtors 40,000 Bills payable 4,000
Building 86,000
Vehicles 62,000
Bad Debts 1,800
Cash in hand 12,100
Investments 20,000
3,88,100 3,88,100
Prepare Trading and Profit and Loss Account for the year ending on

31-3-01 and a Balance sheet as on that date, after taking into account the

Following adjustments.

Adjustments :

1. Closing stock of goods on 31-3-2001 is valued at cost price

Rs. 35,600 and Market Price Rs. 38,000.
2. Depreciate Building at 5%; Furniture at 10% and vehicles at 5%
3. Insurance is prepaid at Rs.1,100.
4. Of the commission received Rs. 1000 are received for the next
year.
5. R.B.D.D. is to be provided at 5% on Debtors.
6. Outstanding expenses were wages Rs. 200 and Advertisement
Rs. 1,100.

IIIustration 2 : Given below is a Trial balance of Mr. Ashok, as on 31 March, 2005

Trial Balance as on 31 March, 2005

Debit Balances Rs. Credit Balances Rs.

Cash in hand 6,800 Loan from Bank 20,000
Sundry Debtors 22,500 Sundry Creditors 15,000
Bills Receivable 10,000 Sales 65,800
Stock (on 1 – 4 – 2004) 16,700 Purchases Returns 2,200
Purchases 37,200 Bills Payable 8,200
Sales Returns 800 Discount 2,300
Salaries 11,000 Capital 56,500
Wages 2,000
Printing and stationery 3,200
Commission 1,000
Machinery 41,000
Carriage 1,500
Insurance 1,800
Drawings 2,500

Octroi duty 800

Furniture 8,000
Office Rent 3,200

Total 1,70,000 Total 1,70,000

Prepare Trading and Profit and Loss A/c for the year ended 31

March, 2005 and Balance Sheet as on that date aftar considering the following
Adjustments.

1. Stock of goods on 31 March, 2005 valued at Rs. 21,000.

2. Outstanding expenses were : Salaries Rs. 1000, Printing Bills
Rs. 800.
3. Prepaid Insurance Rs. 600
4. R.B.D.D. is to be provided at Rs. 500 on Sundry Debtors.
5. Furniture is to be depreciated at 5%.

IIIustration 3 :

From the following Trial Balance of Mrs. Shrivastava, prepare Trading and Profit and loss A/c for
the year ended 31 March, 2005 and Balance sheet as a that date, after taking into account the
adjustments.

Trial Balance as on 31 March, 2005

Particulars Debit Balance Credit Balance

Stock on 1 – 4 – 2004 7518
Machinery 30,000
Furniture 6,500
Depreciation on Furniture 450
Purchases and sales 1,01,012 1,41,613
Returns 4663 3,062
Manufacturing wages 6,317
Discount 1,015 518
Bad debts 1,635
Bad debts recovered 382
R.B.D.D. 500
Reserve for discount on sundry creditors 200
Office Salaries 7,165
Rent and Insurance 6,715
Travelling Expenses 1285
Cash 400
Sundry Debtors and creditors 23,493 10,000
Drawings 2500
Capital 47,925
Shares in Reliance Ltd. 1,800
Duty and Taxes 1,332
Total 2,04,000 2,04,000

Adjustments :

1. Stock on 31 March, 2005 values at cost price Rs. 17,050, Market

Price Rs. 17,550
2. Depreciate Machinery by 7 % P.a
3. Rent due but not paid Rs. 585 and unpaid manufacturing wages
Rs. 883.
4. Carry forward insurance Rs. 500.
5. Reserve for bad and doubtful debts is to be increased to Rs. 1000.
 6. Maintain Reserve for discount on sundry creditors at 4%.

IIustration 4 : From the following Trial Balance of Shri Ambadas, prepare Trading and Profit and Loss A/c
for the year ending 31 March,2005 and Balance sheet as on that date. Consider the adjustments given
below the Trial Balance.

Trial Balance as on 31 March, 2005

Particulrs Debit Balance Credit Balance

Opening stock 30,000
Ambabas,s Capital 40,000
Ambadas,s Drawings 10,000
Purchases 70,000
Sales 1,25,000
Sales Returns 1,000
Purchases Returns 2,000
Salaries and Commission 6,000
Rent and Taxes 1,000
Insurance 900
Wages 3,100
Building 10,000

Bills Payable 5,730

Gas, coke and water 1,900
Machinery 12,000
Loose Tools 5,000
Loan to Amar 9,000
Sundry Debtors 25,000
Cash in hand 3,330
Rent Received 1,000
Bad Debts 400
R.B.D.D. 1,200
Discount 700
Sundry Creditors 14,000
Reserve for Discount on debtors 400
Total 1,89,330 1,89,330
Adjustments:

1. Provide for RBDD in the year Rs 1000

2. Closing Stock Rs 25000
3. Rent receivable Rs 500

IIIustration 5 : From the following information, prepare Final Accounts

of Shri Raj for the year ended 31 March, 2004.

Trial Balance as on 31 March, 2004

Debit Balances Amt Rs. Credit Balances Amt Rs.

Drawings 10,000 Capital 1,00,000
Bills Receivable 9,000 Bills payable 10,600
Purchases 1,20,000 Sales 1,72,000
Sales Returns] 5,600 Purchases Returns 7,500
Wages 17,000 10% Bank Loan
Motive Power 21,400 (Taken on 1 – 7 – 2003) 25,000
Salaries 12,000 R.B.D.D. 2,500
Bad debts 2,500 Sundry Creditors 67,000
Sundry debtors 62,000 Commission Received 4,500
Opening Stock 20,000 Outstanding Printing 400
Insurance 1,500
Machinery 90,000
Furniture 12,500
Rapair 2,500
Discount 400
Interest on Bank Loan 1,250
Cash 500
Printing and Stationery 1,400
Total 3,89,550 Total 3,89,550

IIIustration 6 : You are given below balances extracted from the books of Shri Prasad, as at 31
March, 2005. Prepare Trading and Profit and Loss A/c for the year ended 31 March, 2005 and
Balance Sheet as on that date after taking into consideration the following adjustments :

1. Stock as 31 March, 2005 valued at Rs. 19,200.

2. Rent received but not earned Rs. 100.
3. Provide depreciation on Building at 10%p.a.
4. Write off bad debts Rs. 300 and create bad debts reserve on S.
debtors at 4%.
5. Unexpired insurance Rs. 200.
6. Unpaid bill for purchase of stationery Rs. 300.
7. Accrued interest on Investments Rs. 300.

Trial Balance as at 31 March, 2005

Particulars Debit Balance Rs. Credit Balance Rs.

Stock on 1 - 4 - 2004 18,000
Prasad’s Capital 40,000
Prasad’s Drawings 10,000
Purchases 70,000
Sales 1,25,000
Sales Returns 1,000
Purchase Returns 2,000
Sundry Debtors 25,300
Sundry Creditors 15,000
Salaries (paid for 10 Months) 6,000
Rent and Taxes 1,000
 Insurance 900
Wages 5,100
Carriage on Purchases 1,200
Carriage on Sales 800
Building 20,000
Investments 10,700
R. B. D. D. 1,000
Plant and Machinery 12,000
Cash in hand 3,000
Cash at Bank 5,700
Printing and Stationery 1,000
Rent Received 1,100
Bad debts 400
Provident fund 8,000

Total 1,92,100 1,92,100

IIIustration 7 : From the following Trial Balance and adjustments, your are required to prepare
Trading and Profit and loss A/c for the year ended 31 March, 2005 capital A/c and Balance Sheet as on
31 March, 2005 in the books of Mr. Rajaram.

Trial Balance as on 31 March, 2005

Debit Balance Rs. Credit Balance Rs.

Drawings 5,000 Capital 50,000
Goodwill 1,600 Creditors 28,000
Building 32,000 Bills payable 1,250
Debtors 25,600 Loan from Rajesh 10,000
Bills Receivable 2,000 Commission Received 1,000
Cash 2,025 R.B.D.D. 600
Sales Returns 2,000 Sales 46,400
Opening Stock 12,000
Purchases 35,000
Wages 7,500
Royalties 2,600
Office Rent 1,800
General expenses 1,900
Printing and stationery 800
Salaries 4,000
Postage and Telegram 725
Bad Debts 300
Insurance 400
Total 1,37,250 Total 1,37,250

IIIustration 8 : Following is the Trial Balance of Mr. Satish as on 31 st March, 2005. Prepare Trading and
Profit and Loss A/c for the year ended 31 st March, 2005 and Balance Sheet as on that date after taking
into Consideration the adjustments.
 Trial Balance as on 31 st March, 2005

Particulars Debit Particulars Credit

Balance Rs. Balance Rs.
Plant and Machinery 75,000 Capital 90,000
Stock on 1-4-2004 15,000 Sales 15,000
Sundry Debtors 15,000 Sundry Creditors 13,800
Purchases 15,000 Deposits 2,700
Advertisement 750 Bills Payable 2,800
Insurance 450 Unpaid Manufacturing 200
Trade expenses 300 Wages
Manufacturing wages 375 Commission Received 300
Audit fees 750 R.B.D.D 1,200
Drawings 375
Carriage 150
Octroi duty 150
Factory Expenses 375
Office Expenses 225
Furniture 1,350
Salary 375

Total 1,26,000 Total 1,26,000

IIIustration 9 : Shri Pandit submitted to you the following Trial Balance, which he has not been
able to agree. Rewrite the Trial Balance and Prepare Trading and Profit and Loss A/c for the year anded
31 March, 2005 and Balance Sheet as on that date

Trial Balance as on 31 March, 2005

Particulars Debit Balance Credit Balance

Rs. Rs.
Capital 16,000
Opening Stock 17,500
Closing Stock 18,790
Drawings 3,305
Returns Inward 550
Carriage Inward 1,240
Deposit with x 1,400
Returns Outward 840
Carriage Outward 725
Rent paid 800
Rent Outstanding 150
Purchases 13,000

Particulars Debit Balance Credit Balance

Rs. Rs.
Sundry Debtors 5,000
Sundry Creditors 4,000
Furniture 1,500
Sales 47,790
Wages 850
Cash 1,370
Goodwill 1,800
Advertisement 950
Total 48,305 89,255
 Standard Costing
5.2 DEFINITION OF STANDARD COST

Standard cost is defined ``as a pre-determined cost which is calculated from management’s

standards of efficient operation and the relevant necessary expenditure. It may be used as

a basis for price fixing and for cost control through variance analysis.’’

Standard cost is a pre-determined operating cost. It reflects quantities of material and

labour expected to be used, prices expected to be paid for materials and labour during the

coming year and factory expense applicable to production based on good performance and

practical capacity operation of the factory.

5.2.1 Need for Standard costs : Since standard costs are pre-determined cpsts computed

before the production takes place, they are preferable to actual costs. Moreover, certain

conditions resulting from mass production make standard costs necessary and strongly

advisable. Some of such conditions are:

(a) Historical costs may be too expensive to compute. For example, in a manufacturing
concern producing about 1,00,000 parts, divided into various lots, imagine the time
and clerical labour involved in arriving at the actual cost lot by lot and then averaging
it to determine the cost per unit.
(b) The unit costs computed on historical data may vary from day to day and they are of
no use to the sales department in setting selling prices. For example, if the historical
costs per unit of product in a week are Rs. 1.05, 0.99, 1.27, 1.18, 1.42, 1.56, the
selling price cannot be varied from day to match the costs.
(c) Historical costs are not known until after the completion of a month or even a longer
period. But in many cases, to take a decision, the cost of a product has to be calculated
even before the production begins.
(d) Historical costs may not be adequate for the measurement of efficiency. Standard
costs are well suited for measuring operating efficiency because they represent what
the costs should be. The management, consequently, knows immediately whether the
performance is satisfactory.
5.2.2 Uses of Standard Costs :
1. Use of standard costs is an effective way for planning and controlling costs.
2. Pricing decisions and decisions involving submission of quotations, answering tenders
etc., are also facilitated by the use of standard costs.
3. Identification and measurement of variances from standards has been made possible
 with the use of standard cost, with a view to improve performance or to correct loose
standards, if any.
4. Facilitates management by exception.
5.9 CONTROL THROUGH VARIANCE ANALYSIS

Cost variance has been defined ``as the difference between a standard cost and the

comparable actual cost incurred during a period’’. Variance analysis has been defined ``as

the analysis of the cost variances into its component parts and the explanation of variances’’.

Thus variance analysis is part of the process of control and involves the calculation of

variance and interpretation of results so as to localize the different factors that are

responsible for the variance. It leads us to ascertain the magnitude of each of the variances

and the causes thereof so that corrective action may be taken.

5.9.1 Types of Variances :

Variances may be broadly classified under the following heads according to the main type

of cost.

(a) Material
(b) Labour
(c) Overheads:

There are three distinct group of variances that arise in standard costing. They are:

(1) Variances of efficiency : These include variances because of efficiency or inefficiency

in the use of materials or labour, ascertained by comparing actual quantities with pre-

determined quantities of material and labour hours and from special allowances for surplus

material and labour cost.

(2) Variances of price rates : These include variances resulting from changes `in unit

material prices, standard labour hour rates and standard allowances for indirect costs.

(3) Variances due to volume : These represent, the effect of difference between actual

activity and the level of activity assumed when the standard was set.

5.9.2 Reasons for variances : The purpose of the standard costing reports is to investigate

the reasons for significant variances so as to identify the problems and take corrective

action. Variances are broadly of two types, namely, controllable and uncontrollable.

Controllable variances are those which can be controlled by the departmental heads whereas
uncontrollable variances are those which are beyond their control. For example, price

variance is normally regarded as uncontrollable if the price increase is due to fluctuations

of prices in the market. It becomes controllable if the production controller has failed to

place orders in time and urgent purchase was made at extra cost. In the former case, no

responsibility is attached to any one whereas the departmental head has responsibility for

the loss in the latter case.

As already explained, not all price variances are uncontrollable. If the uncontrollable

variances are of significant nature and are persistent, the standard may need revision.

5.10.1 Direct – material variances : The total direct material cost variance for actual

output can basically be divided into two types, namely (a) price variance and (b) usage

variance. The method of calculating these variances is as under:

Total material cost variance = Standard cost – Actual cost

Price variance = Actual qty. (Std. price – Actual price)

Usage variance = Std. qty – Actual qty.)

IIIustration 1

The standard and actual figures of product`Z’ are as under:

Standard Actual

Material quantity 50 units 45 units

Material price per unit Re. 1.00 Re. 0.80

Calculate material cost variances.

Mix variance : If two or more materials are mixed in a process, an optimum or standard

mixture is decided upon by the production planning department. If the actual mix is different

from the standard mix, a variance arises. This part of the usage variance attributable to the

change in mix is called the mix variance. The procedure and formula for calculating the

mix variance is as under:

(a) Calculate the standard cost per unit of the standard mix.
(b) Calculate the standard cost per unit of the actual mix.
(c) Multiply the difference between (a) and (b) with the total actual quantity.
Thus, Mix variance = Total Actual qty. (Std. cost per unit of std. mix – Std. cost per

unit of actual mix).

Yield Variance : In some industries the finished product can be related to the raw

material input in terms of units, weight, volume, etc. and consequently the standard loss of

material can be readily computed. This relationship is known as the yield. When the standard

yield is given and the actual consumption deviates from standard consumption, the

difference is known as yield variance. Yield variance is just another way to look at the

sub-usage variance.

IIIustration 2

The standard quantity of material required is 4 kgs. Per unit of actual output. The relevant

Figures are as under :

Material A B C D

Standard mix % 30% 40% 20% 10%

Price per kg. (Rs.) 1.25 1.50 3.50 3.00

Actual qty. used (kg.) 1.180 1.580 830 440

Actual price per kg. (Rs.) 1.30 1.80 3.40 3.00

Actual output: 1,000 units

Calculate price variance, mix variance, sub-usage variance and total material cost variance.

IIIustration 3

The standard set for a chemical mixture of a firm is as under:

Standard Standard price

Material mix % per kg (Rs.)

A 40 20

B 60 30

The standard loss in production is 10 %. During a period, the actual consumption and price

paid for a good output of 182 kg. are as under:

Material Quantity Actual price

in kg. per kg (Rs.)

 A 90 18

B 110 34

Calculate the variances.

5.10.2 Direct labour variances: The two basic variances that can be calculated in respeet

of direct labour are (a) rate variance and (b) efficiency variency variance.

The formula’s for calculating labour variances are as under:

Total labour cost variance = Std. labour cost – Actual labour cost

Rate variance = Actual time (Std. rate – Actual rate)

Efficiency variance = Std. rate (Std. time – Actual time)

IIIustration 4

The standard and actual figures of a firm are as under

Standard time for the job 1,000 hours

Standard rate per hour Rs. 0.50

Actual time taken 900 hours

Actual wages paid Rs. 360

Compute the variances

IIIustration 5

Given the following data, compute the variances.

Skilled Semi-Skilled Unskilled

Number of workers in standard gang 16 6 3

Standard rate per hour 3 2 1

Actual number of workers in the gang 14 9 2

Actual rate of pay per hour (Rs.) 4 3 2

In a 40- hour week, the gang as a whole produced 900 standard hours.

Labour idle time variance : This variance arises due to the difference between

actual labour hours worked and the actual labour hours paid (idle time hours). This is computed

by multiplying the difference between hours worked and paid by the standard labour rate.

It may be written as follows:

 Standard labour rate (Actual hours worked – Actual labour hour paid)

OR

Standard labour hour rate x ldle time hours.

IIIustration 6

A firm gives you the following data:

Standard time per unit 2.5 hours

Actual hours worked 2,000 hours

Standard rate of pay Rs. 2 per hour

25 % of the actual hours has been lost as idle time.

Actual output 1,000 units

Actual wages Rs. 4,500

Calculate the idle time variance.

9.Compute the material variances from the following data.

Actual quantity consumed 100Kgs.

Actual price per kg. Rs. 19

Standard price per kg. Rs. 20

Production in standard units is 45 units; one standard unit requires 2 kg. of material.

10.The standard time per unit is 2 hours at Re. 1/-per hour. During a period, 500 units are
made and the records showed the actual payment of wages of Rs. 1,800 for 1200 hours
worked. Compute the labour cost variances.
1.2 MAIN CHARACTERISTICS OF SERVICE SECTOR

( i) Activities are labour intensive : The activities of service sector generally are labour

intensive. The direct material cost is either small or non-existent. For example, cost of

stationery used by a professional consultant in case he gives verbal opinion. In the preced-

for a client will be small or even non existent in case he gives verbal opinion. In the preced-

ing example direct labour cost content of a service is significant.

(ii) Cost-unit is usually difficult to define : The selection of cost unit usually, for service

sector is difficult to ascertain as compared to the selection of cost unit for manufacturing

sector. The following table provides some examples of the cost units for service sector.
 (A) To External Customers Cost Unit
( i) Hotel Bed nights available, Bed night occupied
(ii) School Student hours, Full time students
(iii) Hospital Patient per day, Room per day
(iv) Accounting firm Charged out client hours
(v) Transport Passenger km., quintal km.

(B) Internal services Cost Unit

( i) Staff canteen Meals provided, No. of staff

(ii) Machine maintenance Maintenance hours provided to user department

(iii) Computer department Computer time provided to user department

(iii) Product costs in service sector : Costs are classified as product or period costs in

Manufacturing sector for various reasons. These are :

( i) To determine the unit manufacturing costs so that inventories can be valued and selling

prices created and verified.

(ii) To report production costs on income statement.

(iii) To analyse costs for control purposes.

The only difference between manufacturing and service sector is that in service sector there is

no physical product that can be stored, assembled and valued. Services are rendered and cannot

be stored up or placed in a vault. In service sector the cost of material is insignificant. Render-

ing a loan service, representing someone in court of law or selling an insurance policy are typical

services performed by professionals. For computing unit cost of these services the most impor-

tant cost would be professional’s labour cost. The direct labour cost is traceable to service

rendered. In addition to labour cost the service sector like manufacturing sector incurs various

overhead cost. In service sector those overhead costs which are incurred for offering a service

are classified as service overhead (like factory overhead in manufacturing sector).