COURSE MANUAL FOR UNDE

UNDERGRADUATE COURSES
(For Internall Circu
Circulation only)

COST ACCO
CCOUNTING
IV SEMESTE
ESTER BBA
(As per Bangalore Univers
niversity CBCS Syllabus)

SUMA
MA B G
Assistant Professor,Depar
Department of Commerce
Seshadripuram Institute of Com
Commerce and Management

AKHILA
ILA D
DEVI S
Lecturer, Departmen
rtment of Commerce
Seshadripuram Institute of Com
Commerce and Management

PRIYANK
YANKA B
Lecturer, Departmen
rtment of Commerce
Seshadripuram Institute of Com
Commerce and Management

SESHADRIPURAM EDU
EDUCATIONAL TRUST
BENGALURU, MANDYA,
DYA, MYSORE,TUMKUR

i
Published : 2019

Printed :
KRIYA PRAKASHANA
# 40/5, 2nd 'B' Main, 16th Cross,
SR Nagar, Bengaluru - 27
Ph.:080 22234369
e-mail : kriyaprakashana@gmail.com

ii
 ACKNOWLEDGEMENT

It has given us great pleasure to prepare the Course Manual for the subject Cost
Accounting as per the syllabus prescribed for IV semester B.Com by Bangalore
Central University under the CBCS scheme. There is no claim of originality
and the manual is a compilation of material from different sources including
the internet. It is solely for internal circulation among students of degree
colleges belonging to the Seshadripuram Group of Institutions. We have
attempted to present the material in a manner which will help our students to
understand concepts clearly. We would like to emphasize that this manual
attempts to lay the foundation for understanding and learning the subject and
cannot be taken as a substitute for a standard textbook or reference book.We
have attempted to present the material in a manner which will help students to
understand concepts clearly.
We are grateful to the Management for giving us the unique opportunity to
prepare the course manual which we hope will be of great use for our students.
We would like to thank our Principal Prof. Vidya S Shivannavar, the HOD of
Commerce and Management Prof. Punitha G and all faculty of the department for
their support and guidance in preparing the manual. We are extremely grateful to the
subject reviewer of our manual Prof. Vidya S Shivannavar. We also extend our
heartfelt thanks to Bharath P N, English Department for undertaking the task of
language review. We would also like to thank our students who have been our constant
motivation in preparing this manual. We look forward to their feedback which will
help us to improve the material in subsequentyears.

SUMA B G
AKHILA DEVI S
PRIYANKA B

iii
 PREFACE

This manual has been prepared to serve the requirement of 4th Semester
B.Com students as per Bangalore Central University Syllabi. Studying and
understanding Cost Accounting in depth is very necessary in the
contemporary world.

The principles and techniques of the subject have been discussed in a simple
language and special emphasis. Each unit ends with a set of theoretical and
practical (Worked-out Problems) exercises so that the readers can reinforce
their understanding of the chapters.

We owe our gratitude to our management, Seshadripuram Educational Trust

for giving us this opportunity; we also thank our Principal Prof.
Vidya.S.Shivannavar for guiding us all through the preparation of course
manual and special thanks to our parents for supporting us.

Finally our acknowledgement is due to the almighty who has blessed us with
the knowledge required for writing this manual.

iv
 Syllabus

OBJECTIVE
The objective of this subject is to familiarize students with the various concepts
and elements of cost.

UNIT 1: INTRODUCTION TO COST ACCOUNTING 10 Hrs

Introduction – Meaning& Definition of Cost, Costing and Cost Accounting –
Objectives of Costing - Comparison between Financial Accounting and Cost
Accounting –Designing and Installing a Cost Accounting System – Cost
Concepts - Classification of Costs – Cost Unit – Cost Center – Elements of Cost
– Preparation of Cost Sheet – Tenders and Quotations.

UNIT 2: MATERIAL COST CONTROL 14Hrs

Meaning – Types – Direct Material – Indirect Material - Material Control –

Purchasing Procedure – Store Keeping – Techniques of Inventory Control –
Setting of Stock Levels – EOQ – ABC Analysis – VEDAnalysis – Just In-Time
– Perpetual Inventory System – Documents used in Material Accounting –
Methodsof Pricing Material Issues – FIFO – LIFO – Weighted Average Price
Method and Simple Average PriceMethod.

UNIT 3: LABOUR COST CONTROL 10Hrs

Meaning – Types: Direct Labour, Indirect Labour - Timekeeping – Time
booking – Idle Time – Overtime – Labour Turn Over. Methods of Labour
Remuneration: Time Rate System, Piece Rate System, Incentive Systems
Halsey plan, Rowan Plan &Taylor‟s differential Piece Rate SystemMerrick‟s
Differential Piece Rate System – Problems.

UNIT 4: OVERHEAD COST CONTROL 14Hrs

Meaning and Definition – Classification of Overheads – Procedure for

Accounting and Control ofOverheads – Allocation of Overheads –
Apportionment of Overheads – Primary Overhead DistributionSummary –
Secondary Overhead Distribution Summary – Repeated Distribution Method
and SimultaneousEquations Method – Absorption of Factory Overheads –
Methods of Absorption – Machine Hour Rate –Problems.

v
UNIT 5: RECONCILIATION OF COST AND FINANCIAL ACCOUNTS
08Hrs

Need for Reconciliation – Reasons for differences in Profit or Loss shown by

Cost Accounts and Profit or Loss shown by Financial Accounts – Preparation of
Reconciliation Statement and Memorandum Reconciliation Account.

SKILL DEVELOPMENT:

• Classification of costs incurred in the making of a product.

• Identification of elements of cost in services sector.
• Cost estimation for the making of a proposed product.
• Documentation relating to materials handling in a company.
• Collection and Classification of overheads in an organization.
• Discuss the reasons for LTO in organizations.

vi
 CONTENTS

Sl.
Units Page No.
No.

INTRODUCTION TO COST
1 1 - 44
ACCOUNTING

2 MATERIAL COST CONTROL 45 - 78

3 LABOUR COST CONTROL 79 - 110

4 OVERHEAD COST CONTROL 111 - 142

RECONCILIATION OF COST AND 143 - 164

5
FINANCIAL ACCOUNTS

6 BOOKS FOR REFERENCE 165

7 MODEL QUESTION PAPER 166 - 169

8 NOTE 170-172

vii
viii
 UNIT – 1

INTRODUCTION TO COST ACCOUNTING

INTRODUCTION

Cost accounting is branch of accounting. It has been developed because of the

limitations of financial accounting. Financial accounting is mainly concerned
with keeping of records to show the financial information about the profit or
loss of business for a year and the financial position of the business at the end
of the year. It fails to provide cost related information to the management to
take effective decisions regarding production and sales aspects. It plays crucial
role in the success of every enterprise.
In these days every management needs detail information about the cost such as
elements of cost (Material, Labour and Overhead cost) and needs know about
the losses and wastes in the line of activity taken place in the production
process. The management try to take the advantage in the fixation, control and
ascertaining the cost. The information provided by the financial accounting is
not help to the management decisions regarding the cost related aspects. Hence,
cost accounting has been developed as a separate special branch of accounting
to serve the various purposes of management.

Cost
Definitions
According to ICMA, London – “The amount of expenditure (actual or notional)
incurred on or attributable to a specified thing or activity”
According to ICWA, India – “Cost is a measurement, in monetary terms, of the
amount used for the purpose of production of goods or rendering services”

COST ACCOUNTING IV SEMESTER B.B.A | 1

Meaning
Cost means the total amount of expenditure, actual or notional, paid or
outstanding, incurred on a particular thing or service or on the completion of
some work. In other words, Cost is the sum all the expenditure incurred in
producing and selling a product or in rendering a service or in performing a job.

Features of Cost
• Cost is an amount of expenditure
• Cost include both Actual or Notional expenditure
• Cost may be in the form of Expired (Paid) or Unexpired (Outstanding)
• Cost can measure in terms of Money

Costing
According to ICMA, London – “The technique and process of ascertaining
costs”
Costing is the technique and process for determining the cost of a product,
service or job. Under this techniques of cost refers the body of principles and
rules and process refers routine procedure followed in the organizations.
In short, costing is the systematic procedure of ascertaining the cost of a
product, service or job.

Cost Accounting
According to ICMA, London – “The process of accounting for cost form the
point at which expenditure is incurred or committed to the establishment of its
ultimate relationship with cost centres and cost units.”
Cost accounting is the formal system of accounting for costs by means of which
costs of products or services are ascertained and controlled. It begins with the
recording of costs and ends with the preparation of cost report for managerial
decisions.

Objectives of Cost Accounting

• Ascertainment of Cost
• Control of Cost
• Guide to Business Policy
• Determination of Selling Price
2 | COST ACCOUNTING IVSEMESTER B.B.A
 • Measuring and Improving performance of Production Process
• Helps to preparation of Financial Statements
• Establishes Standard Cost
• Prevents the Fraud and misuse of funds
• Helps to plan the Tax Liabilities

Advantage of Cost Accounting

• To serve as a guide to price fixing of products
• To disclose sources of wastage in process of production
• To revel sources of economy in production process
• To provide for an effective system of stores, materials, etc.
• To exercise effective control on factors of production
• To ascertain the profitability of each product
• To suggest management on future expansion policies
• To organize cost reduction programmes.
• To provide timely information
• To organize the internal audit systems.

Comparison between Cost Accounting and Financial Accounting

Sl. Financial
Point of Difference Cost Accounting
No Accounting
External Purpose Internal Purpose
1 Purpose (Information for the (Information for the
Interested parties) Management)
Statutory Obligatory as per Voluntary expect
2
Requirements Companies Act 1956 certain Industries
Ascertainment of
Determination of the
Profit or Loss and the
3 Objective cost of products or
financial position of
services
the business
Periodical
4 On the Annual basis Continuous process
Reporting
Pre-Determined
5 Not covered Covered
cost

COST ACCOUNTING IV SEMESTER B.B.A | 3

 Classification of In Detail ( In terms of
6 Not in Detail
Cost various heads)

Format of Uniform as per Not in Uniform as per

7 presenting the Companies Act of the requirement of
information 1956 Management

It records both
It records only
8 Transactions monetary and non-
monetary transactions
monetary transactions
It needs reconciliation
of its profits with
Reconciliation of It does not need any
9 profit as per Financial
Profit such reconciliation
records

It deals not only with

It deals only with
10 Dealings with facts actual facts and also
actual facts
future estimations
Price at whichever
Recording of Stock
11 lower between It is valued at Cost
price
Market and Cost price

Independent from Dependent on the

12 Entity
Cost Accounting Financial Accounting

Designing and Installing the Cost Accounting System

A costing system should not be an attempt to introduce a ready-made costing
system. It should be specifically designed or devised system to meet the special
needs of the enterprise. Under this a costing system give proper importance for
consideration, steps to be taken for installing the costing system, practical
difficulties, steps to be taken for resolve the practical difficulties etc.

Essentials of a Good Costing System

• Simplicity
• Flexibility and Adaptability
• Economy
• Comparability
• Suitability to the firms
4 | COST ACCOUNTING IVSEMESTER B.B.A
 • Uniformity of Forms
• Less clerical work
• Efficient Material Control and Wages System
• Reconciliations
• Overall Efficiency of Cost Accountant

Steps to be taken for Installing the Cost Accounting System

• Ascertainment of the necessity and the profitability of a Costing System
• Determination of the Objectives
• Design the separate the Costing System
• Determining the Technical Details of Costing System
• Determining the Operational Details
• Fix the Managerial, supervisory responsibility for the staff
• Training for the Staff
• Introducing the System
• Organizing the Cost Office
• Proper supervision over the working of the Costing System

Practical Difficulties in organizing a Costing System

• Lack of support from the departmental heads
• Resistance from the existing financial accounting staff
• Non co-operation from the foremen, supervisors and workers
• Shortage of trained Staff
• Heavy operating cost

Cost Concept
• Cost Classification
• Cost Unit
• Cost Center
• Elements of Cost

I. Cost Classification
Bases or Methods of Classification of Costs
• On the basis of the Nature or Elements of Costs
• On the basis of the Functions or Operations of Costs
COST ACCOUNTING IV SEMESTER B.B.A | 5
 • On the basis of the Allocation or Identity of Costs
• On the basis of the Variability or Behaviour Costs
• On the basis of the Controllability of Costs
• On the basis of the Normality of Costs
• On the basis of the Time of Ascertaining the Costs

1. On the basis of the Nature or Elements of Costs

Under this available cost classified into three categories

a) Material Costs– Refers the costs of various items of materials used by

an undertaking. Ex: Cost of Raw Material, Components, Consumable
stores, Packing etc.
b) Labour Costs– Refers to the various items of remuneration, such as
wages, salaries, commission, bonus, etc paid to the employees.
c) Expenses– Refers to the cost of services enjoyed by an undertaking. In
other words, expenses refer to all costs except the material cost and
labour cost. Ex: Factory rent, lighting, power, depreciation of plant,
printing and stationery, postage, advertisement etc.
2. On the basis of the Functions or Operations of Costs
Under this available cost classified into three categories
a) Production Costs (Manufacturing or Factory Cost) – Refers to the
costs of sequence of operations which begins with the acquisition of raw
material and ends with the completion of the finished goods. Ex:
Material Costs and Labour Costs
b) Administration Costs – Refers to the costs incurred in formulating the
policy, directing, the organist ion and controlling the operations of an
undertaking. Ex: Office rent, Depreciation of office building, GM
Salary, Office staff salaries, office lighting and heating, Printing and
stationery etc.
c) Selling and Distribution Costs– Refers those costs which are incurred
after the goods are converted into saleable condition until they are sold
and delivered to the consumers. These cost again divided into two heads
such as Selling costs and Distribution costs. Selling costs referred as

6 | COST ACCOUNTING IVSEMESTER B.B.A

 marketing cost and Distribution cost referred as transportation and
storage cost of product.
3. On the basis of the Allocation or Identity of Costs
Under this available cost classified into two categories

a) Direct Costs– Refers to costs which can be identified with the cost
centre or cost unit
b) Indirect Costs– Refers to cost which cannot be identified and allocated
to any particular cost centre or cost unit.
4. On the basis of the Variability or Behaviour Costs
Under this available cost classified into three categories

a) Fixed Cost – The cost which do not vary with the change in the level of
activity or output and remain fixed for all volume of production for a
given period of time
b) Variable Cost- The cost which vary with the change in the level of
activity or output. Under this costs increases in total when the output
increases and vice-versa
c) Semi-Variable Cost- Refers to those costs which remain fixed upto a
certain level of production, and tend to vary beyond that level. In short,
these costs which are party fixed and partly variable
5. On the basis of the Controllability of Costs
Under this available cost classified into two categories
a) Controllable Costs– Refers to those costs which can be controllable by
the specified executive in charge of the concerned cost centre.
b) Non-Controllable Costs- Refers to those costs which cannot be
controllable by the specified executive in charge of the concerned cost
centre.
6. On the basis of the Normality of Costs
Under this available cost classified into two categories
a) Normal Costs – Refers to those costs which are normally incurred at a
given level of output in the normal conditions. Ex: Costs of Production.
COST ACCOUNTING IV SEMESTER B.B.A | 7
 b) Abnormal Costs– Refers to those costs which are incurred under
exceptional circumstances at a given level of output and not change
against cost of production.

7. On the basis of the Time of Ascertaining the Costs

Under this available cost classified into two categories

a) Historical Costs or Post Costs – Refers those costs which are

ascertained after they have been incurred. The costs are available only
after the completion of production
b) Pre-determined Costs– Refers those costs which are determined in
advance of production. These costs may be either estimated or standard
costs.
Other types of Cost

• Actual Cost or Expenditure: The expenses in the form of cash and the
same are shown in accounting records. For Ex: cost of material
purchased, wages paid to workers, any expenses in cash etc.
• Notional Cost or Expenditure: The expenses not in the form of cash
and not consider for the purpose of comparison and managerial
decisions. For Ex: cost of land and building, labour, capital owned by
the proprietor and supplied to the business at free of change.
• Expired Cost: The cost which incurred or paid by the organization to
generate the revenue and recorded in the profit and loss account in the
debit side. For Ex: Depreciation, Salary, Interest and tax,
• Unexpired Cost: The cost which unconsumed or yet incurs by the
organization and should be shown as an asset in the balance sheet. For
Ex: Prepaid Expenses (Insurance, Advances) etc.
• Expense – “An expired or unexpired cost resulting from a productive
usage of an asset” and it should be compensating the value in terms of
revenue for an organization
• Loss – “An expired cost resulting from the decline in the service
potential of an asset that generated no benefit to the firm. It should not
be compensating the value. For Ex: Destruction of stock by fire

8 | COST ACCOUNTING IVSEMESTER B.B.A

II. Cost Unit

A cost unit is a unit of product, service or time in relation to which cost may be
ascertained or expressed. Under this the unit of measurement must clearly
defined and selected before the process of cost-finding. In short, cost unit is a
unit of measurement of cost. The forms of measurement, generally, used as cost
units are number, length, area, volume, weight, time and value.

Table showing the Cost Units used by the Industries

Method of Costing Name of Industry Cost Units Used

Furniture Per Unit
Ship Building Per Ship
Job Costing
Books Per Book/1,000
Engineering Per Job

Chemicals Per Liter

Cement Per Tonne
Paint Per Liter
Process Costing
Oil Per Liter
Brewery Per Kg/Liter
Pharmaceuticals Per 1000 tablets
Readymade Garments Per Dozen /100
Batch Costing
Medicines Per Dozen /100/1000
Transport
Passenger Km
Power House and Per Tonne Km
Electricity KWH
Operating Costing
Hospitals Per Patient Day
Hotels and Canteens Per Meal/Per Cup
Cinema Per Man Show

Buildings Per Building

Contract Costing
Road Construction Per Km
Collieries Per Tonne of Coal
Single Costing
Brick Works Per 1,000
Bicycle Per Cycle
Scooter Per Scooter
Multiple Costing
Automobile Number
Radio Number

COST ACCOUNTING IV SEMESTER B.B.A | 9

III. Cost Centre
A cost centre is a location, person or item of equipment (or group of these) for
which cost may be ascertained and used for the purpose of cost control. In
simple words, cost centre is a part of an undertaking in relation to which costs
are changed and ascertained. Each cost centre is given charge under a personal
for controlling the cost, accumulation of cost and its allocation. The sub
divisions of cost centres are:
a) The personal Cost Centre: It consist a person or group persons. For Ex:
Works Managers, Store Keepers, and Sales Managers Etc.
b) Impersonal Cost Centre: It consists of a location or items of equipment
c) Operational Cost Centre: It consists of machines and/or person carrying
out similar operations. For Ex: Machines and People engaged in
welding, turning, machinery etc.
d) Process Cost Centre: It consists of specific process or a continuous
sequence of operations.
Profit Centre: It is a segment of a business that is responsible for all activities
involved in the production and sales of products, systems and services. It is
created by the top management for evaluating performance of a division. It
enjoys autonomy in decisions making.

IV. Elements of Cost

Means an essential components or parts of the total cost of product, service or
job. The various components or elements of cost are grouped into three
categories. Such as Material cost, Labour cost and Expenses.

10 | COST ACCOUNTING IVSEMESTER B.B.A

Cost Sheet

A cost sheet is a statement of cost showing the various elements of cost of a

product produced, or service rendered or job done during the period in total as
well as per unit of output. It is prepared at regular intervals. For Ex: Weekly,
Monthly, Quarterly, Yearly etc.

A cost sheet is prepared by classifying costs according to elements such as

Materials, Labour and Overheads.

COST ACCOUNTING IV SEMESTER B.B.A | 11

Specimen of Cost Sheet

Cost Sheet of XYZ Co. Ltd

For the period ending…….

Units Produced: ……

Particular Amount Amount Per Per

Unit Unit
Opening Stock of Raw Material xxxxx
Add: Purchases xxxxx
Add: Carriage Inwards xxxxx
Add: Other Expenses related to xxxxx
Purchases xxxxx
Less: Returns xxxxx
Less: Closing Stock of Raw Material xxxxx xxxxx
Direct Material xxxxx
Direct Wages/Labour xxxxx
Direct Expenses
Prime Cost xxxxx
Add: Work or Factory Overheads xxxxx xxxxx
Less: Sale of Scrap xxxxx
Add: Opening Stock of Work in xxxxx
Progress xxxxx
Less: Closing Stock of Work in
Progress
Works Cost or Factory Cost xxxxx
Add: Office and Administrative xxxxx xxxxx
Overheads
Cost of Production xxxxx
Add: Opening Stock of Finished xxxxx
Goods xxxxx
Less: Closing Stock of Finished Goods
Cost of goods Sold xxxxx
Add: Selling and Distribution xxxxx xxxxx
Overheads
Cost of Sales (Total cost) xxxxx
Add: Profit xxxxx
Sales xxxxx

12 | COST ACCOUNTING IVSEMESTER B.B.A

List of Overheads

Factory Overheads Office and Selling and

Administrative Distribution
Overheads Overheads

o Indirect Materials o Office Salaries o Advertising

o Indirect Wages o Director’s Fees o Showroom Expenses
o Fuel and Power o Office Rent and o Bad Debts
o Coal Rates o Salesmen’s Salaries
o Factory Rent and o Office Stationery o Packing Expenses
Taxes and Printing o Carriage Outwards
o Insurance o Sundry Office o Commission
o Factory Lighting Expenses o Cost of Catalogues
o Supervision o Depreciation on o Expenses of
o Works Stationery Office Furniture Delivery Vans
o Canteen and o Subscription to o Collection charges
welfare Expenses Trade Journals o Cost of Tenders
o Repairs o Office Lighting o Warehouse
o Works Salaries o Establishment Expenses
o Depreciation of Charges o Cost of Mailing
Plant and o Director’s Travel Literature
Machinery Expenses o Sales Manager’s
o Works Expenses o Postage Salaries
o Gas and Water o Legal Charges o Sales Director’s
o Haulage o Audit Fees Fees
(Transporting o Expenses of Sales
goods by Railway Branches
or Road)
o Laboratory Depreciation and
Expenses Repairs of Delivery
Vans

Items Excluded from Cost/Cost Sheet

The following items are of financial in nature and not included while preparing
a cost sheet.

• Cash Discount
• Interest Paid
• Preliminary Expenses
COST ACCOUNTING IV SEMESTER B.B.A | 13
 • Goodwill written off
• Provision for Taxation
• Provision for Bad Debts
• Transfer Service
• Donations
• Income Tax
• Dividend Paid
• Profit/Loss on sale of Fixed Assets
• Damages payable at Law, etc

PROBLEMS ON COST SHEET

1. The following cost data is obtained from the books of a manufacturing
concern for the year ended 31.12.2016.

Direct materials 180000

Direct wages 150000
Profit 121800
Selling and
distribution 105000
expenses
Office and
administrative 84000
expenses
Factory overhead 90000

Prepare a cost sheet indicating prime cost, works cost, cost of production, cost
of sales and sales value.

14 | COST ACCOUNTING IVSEMESTER B.B.A

Solution:

COST SHEET FOR THE YEAR ENDED 31.12.2016

Particulars Amount Amount

Direct material 180000
Direct wages 150000
PRIME COST 33000
ADD: factory overheads 90000
WORKS COST 420000
ADD: office and administrative
84000
overhead
COST OF PRODUCTION 504000
ADD: selling and distribution
105000
overhead
TOTAL COST 609000
ADD: profit 121800
SALES 730800

2. Prepare a Cost Sheet for A Co., from the following information provided
for the year ending 31.3.2017

Direct material 200000

Chargeable expenses 100000

Factory overhead 240000

Office and administrative overhead 80000

Selling and distribution overhead 59000

Sales 900000

COST ACCOUNTING IV SEMESTER B.B.A | 15

Solution

Cost Sheet forthe Year Ended 31.12.2017

Particulars Amount Amount

Direct Material cost 200000
Direct wages 120000
Other expenses 60000
PRIME COST 380000
ADD: Factory Overheads 240000
WORKS COST 540000
ADD: Office and administrative Overheads 80000
COST OF PRODUCTION 620000
ADD: selling and Distribution Overheads 59000
TOTAL COST 679000
PROFIT 221000
SALES 900000

3. From the data given below, ascertain prime cost, works cost, cost of
production, total cost and profit for the year ended 2018 March 31st

Direct material cost 200000

Direct wages 120000

Other direct expenses 60000

Factory overhead 50000

Administration overhead 40000

Selling and distribution overhead 20000

Sales 600000

16 | COST ACCOUNTING IVSEMESTER B.B.A

Solution:
Cost Sheet forthe Year Ended 31st March 2018
Particulars Amount Amount
Direct material cost 200000
Direct wages 120000
Other direct expense 60000
PRIME COST 380000
ADD: Factory Overheads 50000
WORKS COST 430000
ADD: Administrative Overheads 40000
COST OF PRODUCTION 470000
ADD: Sales and distribution overheads 20000
TOTAL COST 490000
PROFIT 110000
SALES 600000

4. Prepare a statement of cost to ascertain the profit and loss for the year
ended on 31.3.2016. The following is extracted from AB ltd.
Direct material 280000
Factory rent, rate, taxes 20000
Chargeable expenses 80000
Depreciation on machinery 6000
Travelers salary 8000
Office cleaning and lighting 16000
Office factory expenses 10000
Travelling expenses of salesman 4400
Carriage and freight inwards 18000
Advertisement 8000
Wages for indirect labor 40000
Productive wages 300000
Office rent, rates, taxes 2000
Office salary 10000
Printing and stationery 2000
Factory repairs 12800

COST ACCOUNTING IV SEMESTER B.B.A | 17

 Management expenses 4800
Showroom expenses 4000
Carriage and freight outwards 4000
Sales 920000

Solution:
COST SHEET FOR THE YEAR ENDED 31.3.2016
PARTICULARS AMOUNT AMOUNT
Direct material 280000
Productive wages 300000
Chargeable expenses 80000
Carriage and freight inward 18000
PRIME COST 678000
Add: Factory overhead
Wages for indirect labour 40000
Factory rent, rate, taxes 20000
Depreciation on machinery 6000
Factory repairs 12800
Management expenses(2400X2/6) 1600 80400
WORKS COST 758400
ADD: Office and administrative overhead
Office rent, rate, taxes 2000
Office salary 10000
Printing and stationery 2000
Office cleaning and lighting 1600
Office factory expenses 10000
Management expenses(2400X1/6) 800 26400
COST OF PRODUCTION 784800
Add: selling and distribution overhead
Traveler’s Salary 8000
Management expenses(2400X3/6) 2400
Showroom expenses 4000
Carriage and freight outwards 4000
Advertisement 8000
Travelling expenses of salesman 4400 30800
TOTAL COST 815600
PROFIT 104400
SALES 920000

18 | COST ACCOUNTING IVSEMESTER B.B.A

 Working Note:
Profit = Total Sales – Total Cost
= 920000 – 815600
= 104400

5. Following details about a manufacturing company is provided with various

expenses incurred by it.

Raw material consumed 140000

Carriage inward 4000
Factory rent 4800
Bad debts 880
Power 9200
Postage expenses 930
Salesman expenses 6800
Direct wages 170000
Factory manager salary 160000
Audit fee 700
Printing & stationery 1240
Legal expenses 700
Carriage outwards 3080
Indirect material 1120
Depreciation of furniture 300
Repairs on plant & machinery 2400
Advertisement 1000
General manager salary 72000
Depreciation of plant & machinery 2480

Classify the above expenses under various elements of cost showing separately
the total expenditure under each element.
PARTICULARS AMOUNT AMOUNT
Raw materials 140000
Carriage inward 4000
Direct wages 170000
COST ACCOUNTING IV SEMESTER B.B.A | 19
 PRIME COST 314000
Add: Factory overhead
Factory rent 4800
Power 9200
Factory manager salary 160000
Indirect materials 1120
Repair on plant and machinery 2400
Depreciation on plant & machinery 2480 180000
WORKS COST 494000
Add: Office & administrative overhead
Postage expenses 930
Auditor fees 700
Printing and stationery 1240
Legal expenses 700
Depreciation on furniture 300
General manager salary 72000 75870
COST OF PRODUCTION 569870
Add: Selling & distribution overhead
Bad debts 880
Sales man expenses 6800
Carriage outward 3080
Advertising 1000 11760
TOTAL COST 581630

6. Prepare the statement of cost showing total cost per unit from the following
information provided by XYZ Ltd

Raw material 66000

Productive wages 76000
Factory rent 15000
Motive power 8800
DIRECTORS FEES:
Works 2000
Office 4000
20 | COST ACCOUNTING IVSEMESTER B.B.A
 Factory cleaning 1000
Sundry office expenses 400
Estimating expenses 1600
Factory stationery 1500
Delivery rent 400
Bad debts 200
Advertising 600
Up keeping of delivery rent 1400
Sales departmental salary 3000
Unproductive wages 21000
Factory lighting 4400
Factory heating 3000
Haulage 6000
Loose tools written off 1200
Office rent 1000
Water supply: works 2400
Factory insurance 2200
Office insurance 1000
Legal expenses 800
Rent of warehouse 600
DEPRECIATION:
Plant & machinery 4000
Office building 2000
Bank charges 100
Commission of sales 3000
Total operations for the period 29550 units.

Solution:
Cost Sheet of XYZ Ltd
PARTICULARS AMOUNT AMOUNT PER
UNIT
Raw materials 66000
Productive wages 76000
PRIME COST 142000 9.6
Add: Factory Overhead

COST ACCOUNTING IV SEMESTER B.B.A | 21

 Factory rent 15000
Motive power 8800
Directors fees 2000
Factory stationery 1500
Factory cleaning 1000
Factory heating 3000
Haulage 6000
Loose tools written off 1200
Water supply 2400
Depreciation on plant & machinery 4000
Factory insurance 2200
Estimating expenses 1600
Un-productive wages 21000
Factory lighting 4400 74100 5.00
WORKS COST 216100 14.6
Add: Office & administration
overhead
Directors fees 4000
Sundry office expenses 400
Office stationery 1800
Office rent 1000
Office insurance 1000
Legal expenses 800
Depreciation on office building 2000
Depreciation on Bank charges 100 11100 0.76
COST OF PRODUCTION 227200 15.37
Selling & distribution overhead
Delivery rent 400
Bad debts 200
Advertising 600
Up keeping of delivery rent 1400
Sales department salary 3000
22 | COST ACCOUNTING IVSEMESTER B.B.A
 Rent of ware house 600
Commission on sales 3000 9200 0.62
TOTAL COST 236400 16.00

7. Prepare a Cost Sheet from the following details of a Manufacturing Co.,

for the month of September 2015.

Stock of raw materials on 01.09.15 150000

stock of raw materials on 30.09.15 183000
Direct wages 105000
Indirect wages 5500
Factory rent & power 30000
expense on purchase 3000
Advertising 7000
Traveller’s wages 13000
Sales 400000
Work in progress on 01.09 56000
Work in progress on 30.09 70000
purchase of raw materials 132000
Depreciation on plant & machinery 7000
Carriage outwards 5000
Office rent & tax 5000
Stock of finished goods on 01.09.2015 108000
Stock of finished goods on 30.09.2015 62000

Solution:
Cost Sheet of a Manufacturing Co., as on 30th September 2015.
PARTICULARS AMOUNT AMOUNT
Opening stock of raw materials on 01.09.2011 150000
Add: purchases 132000
Add: expenses on purchase 3000
285000

COST ACCOUNTING IV SEMESTER B.B.A | 23

 Less: Closing stock of raw materials on
183000
30.09.2011
COST OF MATERIALS CONSUMED 102000
Add: Direct wages
105000

PRIME COST 207000

Add: Factory overheads:
Indirect wages 5500
Factory rent & power 30000
Depreciation on plant & machinery 7000
42500
Add: opening stock of work in progress 56000
98500
Less: closing stock of work in progress 70000 28500
WORKS COST 235500
Add: Office & administration overheads:
Office rent & tax 5000
COST OF PRODUCTION 240500
Add: Opening stock of finished goods 108000
348500
Less: closing stock of finished goods 62000
COST OF GOODS SOLD 286500
Add: Selling and distribution overhead:
Advertising 7000
Traveller’s wages 13000
Carriage outwards 5000 25000
TOTAL COST 311500
PROFIT 88500
SALES 400000

8. A manufacturing company requires a statement of cost showing results of it

production operation for jan-2011. The cost records give the following
information.

24 | COST ACCOUNTING IVSEMESTER B.B.A

 Particulars 01.01.2011 31.1.2011
Raw materials 200000 265000
Finished goods 143000 84000
Work in progress 62500 69000

The transactions during the month of jan-2011 as follows:

purchase of raw materials 176000

Productive wages 34000
Work expenses 79000
Sales 568000
Administration expenses 26000
sale of factory scrap 4000
Selling & distribution expenses 30000

Solution:

COST SHEET FOR THE YEAR ENDED JAN-2011

PARTICULARS AMOUNT AMOUNT

Opening stock of raw materials 200000
Add: Purchases 176000
376000
Less: Closing stock of raw materials 265000
COST OF MATERIALS CONSUMED 110000
Direct wages 34000
PRIME COST 145000
Add: Factory overheads
Work expenses 79000
224000
Less: sale of scrap 4000
220000
Add: Opening stock of work in progress 62000
282000
COST ACCOUNTING IV SEMESTER B.B.A | 25
Less: closing stock of work in progress 69000
WORKS COST 213000
Add: Office and administrative overhead
Administrative expenses 26000

COST OF PRODUCTION 239000

Add: Opening stock of finished goods 143000
382000
Less: Closing stock of finished goods 84000
298000
Add: Selling and distribution overheads 30000
TOTAL COST 328000
PROFIT 240000
SALES 568000

9. Following information is obtained from the records of a manufacturing

company for the year ending 31.12.2017

Particulars Opening Closing

Stock of raw materials 80000 100000
Stock of finished goods 200000 300000
Work in progress 20000 28000

Indirect labour 100000

Carriage outwards 40000
Lubricants 20000
Power 60000
Insurance of plant 6000
Direct labour 600000
Purchase of raw materials 800000
Depreciation on machinery 100000
Sales commission 120000
Factory rent 120000
Salary of salesman 200000

26 | COST ACCOUNTING IVSEMESTER B.B.A

 Property tax of factory building 22000
Administration expenses 200000
Sales 2400000

Prepare Cost Sheet showing profit and different costs.

Solution:

COST SHEET FOR THE YEAR ENDED 31.12.2017

PARTICULARS AMOUNT AMOUNT

Opening stock of raw materials 80000
Add: Purchases 800000
880000
Less: Closing stock of raw materials 100000
COST OF MATERIALS CONSUMED 780000
Add: Direct labour 600000
PRIME COST 1380000
Add: Factory overheads
Indirect labour 100000
Lubricants 20000
Power 60000
Insurance of plant 6000
Depreciation on machinery 100000
Factory rent 120000
Property tax of factory building 22000 428000
1808000
Add: Work in progress (opening) 20000
1828000
Less: Work in progress (closing) 28000
WORK COST 1800000
Add: Office and administrative overhead
Administration expenses 200000
COST OF PRODUCTION 2000000
Add: Opening stock of finished goods 200000
2200000
Less: Closing stock of finished goods 300000
COST OF GOODS SOLD 1900000
Add: Selling and distribution overheads
Carriage outwards 40000
Sales commission 120000
COST ACCOUNTING IV SEMESTER B.B.A | 27
Salary of salesman 200000
TOTAL COST 2260000
PROFIT 140000
SALES 2400000

10. Following information are provided by a Manufacturing Company

producing Product ‘B’ for the period 1.4.2016 to 31.3.2017

Material cost - 180000

cost of labour 150% of material cost
Factory on cost is charged at 30% of prime cost
office on cost is calculated at 20% on total cost
profit is to be calculated at 10% of sales
As certain profit by preparing cost sheet
Solution:

COST SHEET FOR THE YEAR ENDED 31.3.2017

PARTICULARS AMOUNT AMOUNT

Material Cost 180000
Labour Cost (90000 X 150 %) 270000
PRIME COST 450000
ADD: factory overhead (225000 X
135000
30%)
WORKS COST 80% 585000
ADD: office and administration
20% 146250
overheads
TOTAL COST 100% 731250
PROFIT 10% 81250
SALES 100% 812500

28 | COST ACCOUNTING IVSEMESTER B.B.A

Quotations or Tenders and Estimated Cost Sheet

A tender or quotation is the price at which a producer is prepared to supply a

particular product. An estimate is the predetermination of the cost of a product
in advance of production.
Steps to be followed for the preparation of Quotations or Tenders and
Estimated Cost Sheet
I Preparation of the cost sheet for the past period
II Calculation of the % of overheads, and the % of profit on sales of the
past period.
III Preparation of the statement of Tender
Note: In the problem, information specifically given concerned overheads for
the tender are to be taken at the same percentages as in the past period.
However, if such specific instruction is not given, need not to calculate the
percentages. It should be taken on the basis of the overheads per unit in the past
period.

If required, the percentages of factory, office and selling overheads calculated

as follows:

Percentages of factory overheads on Direct wages:

Percentages of Office and Selling overhead on Work cost

O
×

COST ACCOUNTING IV SEMESTER B.B.A | 29

 PROBLEMS ON TENDERS AND QUOTATIONS

1. A Machine manufacturing company discloses the following information

for the year 2015.

Materials 700000

Labour 540000

Factory over head 162000

Administration overhead 112160

What Price should the Company quote for a Machine?

It is estimated that Rs. 2000/- in material and Rs. 1400/- in labour will
be required for a refrigerator. Observe Factory off on the basis of direct
labour and administration over head on the basis of works cost, profit of
25% on selling price is required.

Solution:

COST SHEET FOR THE YEAR 2015

PARTICULARS AMOUNT AMOUNT

Materials 350000
Labour 270000

PRIME COST 620000

Add: Factory overhead 81000

WORKS COST 701000

Add: office and administration overhead 56080

COST OF PRODUCTION/ TOTAL
757080
COST
PROFIT 108154
SALES 865234

30 | COST ACCOUNTING IVSEMESTER B.B.A

 STATEMENT OF TENDER
PARTICULARS AMOUNT AMOUNT
Material 2000
Labour 1400
PRIME COST 3400
Add: factory overhead 420
WORKS COST 3820
Add: office and administration overhead 306
COST OF PRODUCTION/TOTAL COST 4126
PROFIT 590
SALES 4716

2. A company manufacturing AC disclose the following information for

six months ending on 30.09.2016.

Material used 300000

Factory over head 48000
Direct wages 240000
Office Expenses 35292

Prepare Cost Sheet of AC and calculate the price which the company could
quote for manufacturing a machine that requires.

Direct materials 2500

Expenditure in productive wages 1500
So, the price may yield a profit of 20% on the selling price for the
purpose of price quotation charged over head as % on direct wages and
office overhead and a % on works cost.
Solution:

COST SHEET FOR THE YEAR ENDED 30-09-2016

PARTICULARS AMOUNT AMOUNT
Material Used 300000
Direct Wages 240000
PRIME COST 540000
COST ACCOUNTING IV SEMESTER B.B.A | 31
 Add: Factory over head 48000
Works Cost 588000
Add: Office and Administration Over head 35292
COST OF PRODUCTION/TOTAL COST 623292

Calculation of Percentages:

=20%

O
×

! "
×
!
= 6%

TENDERS AND QUOTATION

PARTICULARS AMOUNT AMOUNT

Material used 2500
Direct Wages/Productive Wages 1500
PRIME COST 4000
Add : Factory Overhead(1500 x 20/100) 300
WORKS COST 4300
Add: Office and Administration Over head
258
(4300x6/100)
TOTAL COST 4558
PROFIT (4558X20/100) 1140
SALES 5698

32 | COST ACCOUNTING IVSEMESTER B.B.A

 3. From the following particulars prepare a cost statement.

Stock on 1.01.2016: Raw materials 61000

Stock on 1.01.2016: Finished goods 40800
Stock on 31.01.2016: Raw materials 97000
Stock on 31.01.2016: Finished goods 20000
Purchases of raw materials 50000
Work in progress on 1.01.2016 16000
Work in progress on 31.01.2016 18000
Sales 190000
Direct wages 40800
Factory expenses 21000
Office expenses 10800
selling expenses 7600
Distribution expenses 5000

Also calculate the percentages of works expenses to direct wages & the
percentages of office expenses to works cost.

Solution:

COST SHEET FOR THE PERIOD JAN 2016

PARTICULARS AMOUNT AMOUNT

Opening stock of raw materials 61000
Add: Purchases 50000
111000
Less: Closing stock of raw materials 97000
COST OF CONSUMED 14000
Direct wages 40800
PRIME COST 54800
Add: Factory Overhead 21000
Add: Opening Stock of work in progress 16000
37000
Less: closing stock of work in progress 18000 19000
WORKS COST 73800

COST ACCOUNTING IV SEMESTER B.B.A | 33

Add: Office and administrative overhead 10800
Add: Opening stock of finished goods 40800
51600
Less: Closing stock of finished goods 20000 31600
COST OF GOODS SOLD 105400
Add: Selling and distribution overhead
Selling 7600
Distribution 5000 12600
TOTAL COST 118000
PROFIT 72000
SALES 190000

CALCULATION OF PERCENTAGE

(1) WORKS EXPENSES * 100

DIRECT WAGES
= 21000/40800*100=51.47%

(2) OFFICE EXPENSES *100

WORKS COST
= 10800/ 73800 * 100=14.63%

4. The following particulars have been extracted for the year 2016, of a
factory.
cost of materials 120000
wages 1000000
Factory overhead 600000
Administrative charges 672000
Selling charges 448000
Distributive charges 280000
Profit 840000

34 | COST ACCOUNTING IVSEMESTER B.B.A

 A work order has to be executed in 2017 and the estimated expenses
are:
Materials 16000 Wages 10000
Assuming that, in 2017, the rate of factory overhead has gone up by
20%, distribution charges have gone down by 10%,selling and
administrative charges have gone each up by 15%,
At what price should the product be sold so as to earn the same rate of
profit on the selling price as 2016?
Factory overhead are based on wages and administration and selling and
distribution overheads on factory cost sheet.
Solution:
COST SHEET FOR THE YEAR ENDED 2016
Particulars Amount(Rs) Amount(Rs)
Cost of materials 1200000
Wages 1000000
PRIME COST 2200000
Add: Factory overhead 600000
WORKS COST 700000
Add: Office and administrative
672000
overhead
COST OF PRODUCTION 3472000
Add: Selling and Distribution overhead
Selling charges 448000
Distribution charges 280000 728000
TOTAL COST 4200000
PROFIT 840000
SALES 5040000

CALCULATION OF PERCENTAGE:

1) Factory overhead/direct wages*100

COST ACCOUNTING IV SEMESTER B.B.A | 35

 = 600000/1000000*100 = 60 %
Add: increased % (60*20/100) =12 %
TOTAL =72%

2) Office and administration overhead/works cost*100

=672000/2800000*100 =24%
Add: Increased % (24*15/100) =3.6%
TOTAL =27.6%

3) Selling charges/factory cost*100

=448000/2800000*100 =16%
Add: Increased % (16*15/100) =2.4%
TOTAL =18.4%

4) Distribution charges/works cost*100

=280000/2800000*100 =10%
Less: decreased % (10*10/100) =1%
TOTAL =9%

5) Profit/Total cost*100
=840000/4200000*100 =20%

Estimated Cost Sheet for the year 2017

Particulars Amount Amount

Cost of materials 16000
Wages 10000
PRIME COST 26000
Add: Factory overhead (10000*72%) 7200
WORKS COST 33200
Add: Office and administration overhead 9164
(33200*27.6%)
COST OF PRODUCTION 42364
Add: Selling and distribution overhead
Selling charges (33200*18.4%) 6108
Distribution charges 2988 9096
TOTAL COST 51460
PROFIT 10292
SALES 61752
36 | COST ACCOUNTING IVSEMESTER B.B.A
 5. From the following particulars, you are required to prepare a statement
showing
a. The Cost of materials used
b. The Works Cost
c. Total Cost
d. The percentage of works on cost to productive wages
e. The percentage of General on cost to Works Cost

Stock of Finished Goods on 31st December 2013 8000

st
Stock of Raw Materials on 31 December 2013 95000
Purchase of Raw Materials 65000
Wages (Productive) 475000
Sale of Finished Goods 1040000
Stock of Finished Goods 31. 12. 2014 674000
Stock of Raw Materials on 31. 12.2014 75000
Works overhead Charges 95000
Office and General Expenses 186000

The company is about to send a tender for a large plant. The costing
department estimates that the materials required would cost ` 84500/- and
Wages to workmen for making the plant would cost `68400/-. The tender is to
be made at a net profit of 20% on the selling price.

Show what the amount of tender would be, if based on the above percentage?

Solution:

Cost Sheet for the year ended 31st December 2014

Particulars Amount Amount

Raw materials consumed
Opening Stock of Raw Materials 95000
Add: Purchases of Raw Materials 650000
745000
Less: Closing Stock of Raw Materials 75000
COST OF MATERIALS USED 670000
Add: Productive Wages 475000

COST ACCOUNTING IV SEMESTER B.B.A | 37

 PRIME COST 1145000
Add: Works Overhead Charges 95000
WORKS COST 1240000
Add: Office and general expenses 186000
TOTAL COST 1426000

Calculation of Required percentages:

1. Percentages of Works on cost on Productive Wages:

#$%&' $( )$'*
× 100
+%$,-)*./0 #120'

95000
× 100
475000
= 20%

90(0%1: $( )$'*
2. Percentage of General on cost on Works Cost:

× 100
#$%&' ;$'*

186000
× 100
1240000
= 15%

Statement of Tender
Particulars Amount Amount
Materials required 84500
Wages 68400
PRIME COST 152900
Add: Works on cost (68400*20%) 13680
WORKS COST 166580
Add: General on cost ( 166580* 15%) 24987
TOTAL COST 191567
Profit ( 20% on Selling Price or 25% Cost
47892
Price i.e 191567 *25%)
SELLING PRICE/ AMOUNT OF TENDER 239459
38 | COST ACCOUNTING IVSEMESTER B.B.A
 REVIEW QUESTIONS

SECTION - A (2 marks)

1. Define cost accounting.

2. What are the objectives of costing?
3. State any three limitations of financial accounting.
4. What are the limitations of cost accounting?
5. Define cost.
6. What is semi fixed cost?
7. What is a cost centre?
8. What is a cost unit?
9. Differentiate between direct and indirect cost.
10. What is fixed cost? Give examples.
11. Define overhead.
12. What is works cost?
13. What is cost sheet?
14. What are the three elements of cost?
15. Give examples of selling overhead.

SECTION - B (6 Marks)

1. “Cost accounting is an aid to management” substantiate.

2. Explain the difference between financial and cost accounting.
3. What are the essential principles of a good costing system? Explain.
4. Explain the objectives of cost accounting.
5. Explain the characteristics of fixed and variable costs.
6. What are elements of cost? Explain with examples.

COST ACCOUNTING IV SEMESTER B.B.A | 39

 PRACTICAL QUESTIONS

1. From the following information for the month of January prepare a Cost
Sheet to show the following Components: Prime Cost, Factory Cost, Cost of
Production, Total Cost and Profit.

Direct materials 57000

Direct Wages 28500
Factory Rent and Rates 2500
Office rent and Rates 500
Plant repairs and maintenance 1000
Plant Depreciation 1250
Factory Heating and Lightings 400
Factory manager’s salary 2000
Office Salaries 1600
Director’s Remuneration 1500
Telephone and Postage 200
Printing and Stationery 100
Legal Charges 150
Advertisement 1500
Salesmen Salaries 2500
Showroom Rent 500
Sales 116000

2. The directors of XYZ & Co. require a statement showing the production
results of the business for the month of March 2016. The cost accounts
reveal the following information:
Stock on hand on 01.03.2013
Raw Material 50000
Finished Goods 34720
Stock on hand on 31.03.2016
Raw Material 52500
Finished Goods 31500
Purchase of raw materials 43800

40 | COST ACCOUNTING IVSEMESTER B.B.A

 Work-in-Progress
On .01.03.2016 16440
On 31.03.2016 18200
Sale of finished goods 146620
Direct wages 34300
Non-productive wages 1660
Works Expenses 16680
Office and administrative expenses 6320

You are required to prepare a statement so as show a) the value of materials

consumed, b) the total cost of production, c) the cost of goods sold, d) the net
profit for the month.

3. Mr. Ramesh furnishes the following data relating to the manufacture of a

standard product during the month of April 2012.
Raw materials consumed 12000
Direct Labour charges 9000
Direct Wages 5000
Factory overheads 20% of prime Cost
Administration overheads 25% of works cost
Selling overheads 0.50 per unit
Units produced and Sold 16500
Units Sold 2.50 per unit

You are required to prepare a Cost Sheet from the above and ascertain the
following:

a. The Cost per Unit

b. Profit/ Loss for the period

4. The following extract of costing information relates to commodity for the

half-year ended 31.06.2016:

Purchase of raw materials 264000

Direct wages 220000
Rent, rates, insurance and works on cost 88000
COST ACCOUNTING IV SEMESTER B.B.A | 41
 Carriage inward 3168
Stock on 01.01.2016
Raw materials 44000
Finished Products 35200
Stock on 31.06.2016
Raw Materials 48928
Finished Products (1,600 tons) 70400
Work-in-Progress
on 01.01.2016 10560
on 31.06.2016 352000
Cost of Factory Supervision 17600
Sales of finished production 660000

5. Mr. X furnishes the following data relating to the manufacture of a

Standard product during the month of April 2012.

Raw materials consumed 20000

Direct labour charges 10000
Direct Wages 8000
Machine Hours Worked 850 hrs
Machine Hours Rate ` 5/-
Administration overheads 25% of Works Cost
Selling Overheads 0.50 per unit
Units Produced 15000 units
Profit on Sales 20%

You are required to prepare a cost sheet from the above and ascertain the
following
The Cost per Units
Sales for the period

42 | COST ACCOUNTING IVSEMESTER B.B.A

6. The accounts of machine manufacturing company disclose the following
information for the 6 months ending 31st December 2012.

Material Used 150000

Direct Wages 120000
Factory Overheads 24000
Office Expenses 18000
Selling and Distribution overheads 10000
Profit on cost sales 20%

Prepare a cost sheet of the machine for the period ending 2012 and calculate at
the price which the company should quote for the manufacture of a machine
requiring materials valued at ` 1250/- wages ` 750/-. Profit 20% on selling
price.

7. The following particulars have been extracted for the year 2012.

Cost of materials 600000

Wages 500000
Factory Overheads 300000
Administration Charges 336000
Selling Charges 224000
Distribution Charges 140000
Profits 420000

A work order has to be executed in 2013 and the estimated expenses are as
follows:

Materials 8000/-

Wages 5000/-

Assuming that in 2013 the rate of factory overheads has gone up 20%,
distribution charges gone up by 10% and selling and administration charges
have gone each up by 15%. At what price should the product be sold so as to
earn the same rate of profit on the selling price as in 2012?

COST ACCOUNTING IV SEMESTER B.B.A | 43

8. Honda Ltd furnishes the following information for 10000 units of a product
manufactured during the year 2012.
Materials 90000
Direct wages 60000
Power and Consumable Stores 12000
Indirect Wages 15000
Factory Lightings 5500
Cost of rectification of defective work 3000
Clerical Salaries and Management expenses 33500
Selling Expenses 5500
Sales Proceeds of Scrap 2000
Repairs maintenance and depreciation of plant 11500

The net selling price was ` 31.60/- per unit sold and all units were sold.
As from 2013, the selling price reduced to ` 31/- per unit. It was estimated
that production could be increased in 2013 by 50% due to spare capacity.
Rates for materials and direct wages will increase by 10%.
Assume that all goods produced are sold during the year.
You are required to prepare
Cost sheet for the year 2012
Estimated Cot and Profit for 2013.

44 | COST ACCOUNTING IVSEMESTER B.B.A

 UNIT
IT 2

MATERIAL COS
OST CONTROL

INTRODUCTION

Material is a very important factorctor oof production. It includes physical

commodities used to manufacturee the final end product. It is the starting
point from which the first operations
ns star
start. It is inventor able and does not get
waste and exhaust (unless it is deterio
eteriorated) with the passage of time as
labour is wasted with the passage off time whether in use or not.

Direct and indirect materials are both

oth tre
treated as stores items, whereas stocks
of finished goods are not treatedd as a stores item. Direct and indirect
materials purchased for stock purposes
poses to be issued to different jobs, work
orders or departments as and when requir
required are known as stores. On the other
hand, finished goods are treated as stock. We may also refer to the commonly
used term ‘inventory’ which includesdes the stock not only of raw materials but
also stores and spares, work-in-progress
ogress and finished goods. Thus, stock of
materials is only a part of the inventory
tory hheld by a manufacturing unit.

Classifica
ification
of Mater
aterials

Direct Indirect
materials Materials

• Direct materials - Materials which form part of a finished product

are known as direct materials. s. In oother words, direct materials can
be conveniently and accurately ly allo
allocated to a particular unit of cost.
Eg: leather in shoes, steel usedd in m
making machine etc.,
COST ACCOUNTING IV SEMESTER B.B.A | 45
 • Indirect materials –Materials which cannot be treated as part of the
finished product because it cannot be conveniently and accurately
allocated to a particular unit of product. Eg: screws, nuts and bolts,
lubricating oil and grease etc.,

Definition of Material Cost:

According to CIMA of UK, material cost is “the cost of commodities

supplied to an undertaking.”
Material Control:
Material control is a systematic control over the purchasing, storing and
using of materials so as to have the minimum possible cost of materials.
Material cost control involves the following activities:
1. Purchase and procurement
2. Receipt and inspection
3. Storage issue and consumption
4. Valuation and consumption
5. Stock control

Purchasing forms and documents:

a. Purchase requisition – purchases of materials are initiated through
purchase requisition. A document known as purchase requisition is
commonly used as a formal request to the purchasing department to
order certain materials.
The purchase requisition is usually prepared in duplicate, the
original will be Sent to purchasing department and the duplicate
will be kept as a record by the store keeper.
b. Issue of tender to suppliers – the purchasing department will invite
tenders or quotations on receipt of purchase requisition. The suppliers
will quote their terms and conditions. After receiving the quotations
on the last date tenders are opened and a comparative statement is
prepared. The financial stability and the capacity to deliver goods on
time will also be verified.
c. Purchase Order – A purchase order is an order to a supplier for
specified materials. It may be defined as a written authorization to
46 | COST ACCOUNTING IVSEMESTER B.B.A
 the suppliers to supply a specified quantity and quality of materials at
a stipulated time and in accordance with the terms and conditions
mentioned there in.

Purchase Procedure:
The purchase procedure starts with the receipt of purchase
requisition from the indenting department and ends with the payment
and if necessary with the replacement of rejected materials.

The important steps in purchase procedure are:

Receiving purchase Inviting quotation

Receipt of quotation
requisition and enquiries

Receipt of materials
Placing purchase
Returns to supplier and inspection of
order
materials

Approval of invoices
and payments

1. Receiving purchase requisition: A purchase requisition is a

specification giving the quality and quantity of materials required by
the other departments within a specifiedtime. It is prepared in
triplicate, one to purchasing department, one to production control
department and one to the order placing department.
2. Inviting quotation and enquiries: on receipt of the approved
purchase requisition the purchase department shall invite price
quotations from the approved suppliers. After consideration of the
vendor performance the list is periodically updated
3. Receipt of quotation: after the receipt of quotations, the source of
supply will be selected. The purchasing department keeps a list of
suppliers and invites quotations for materials.
COST ACCOUNTING IV SEMESTER B.B.A | 47
 4. Placing purchase order: after finalizing quotations the order for
purchase is made. It contains the description of material, rate quantity
and the value of materials.
5. Receipt of materials and inspection of materials: the purchase orders
are followed up by the purchase department till the materials are
received in stores, accepted after quality inspection and replacement
received for rejected materials.
6. Returns to supplier: where goods received are not of the type ordered
or are damaged or are not satisfactory, these may be returned to the
supplier immediately. It is usual to forward a Debit Note to the
supplier. If the supplier accepts the claim, he signifies his acceptance
by the issue of a Credit note.
7. Approval of invoices and payments: When the invoice is being
vouched, various documents like copies of purchase requisition,
purchase order, goods received note, and inspection report should be
checked against each other to ensure that the quantity, price, carriage,
packing and discounts have been charged correctly. Mathematical
accuracy should be checked, if everything is found correct payment
should be made accordingly.

Store Keeping:
According to Alford & Beatty, “Store keeping is that aspect of material
control which is concerned, with the physical storage of goods”.

Objectives of good storekeeping:

1. Economical use of storage space.
2. Protection of materials against fire and theft.
3. Protection of materials against deterioration.
4. Immediate location of materials required.
5. Up-to-date sores records.
6. Facilitating perpetual inventory
7. Speedy receipts and issues of materials.
8. Avoiding over-stocking and under-stocking.

48 | COST ACCOUNTING IVSEMESTER B.B.A

Techniques of Inventory Control

1. ABCtechnique
2. VEDanalysis
3. Stocklevels
4. Economic order quantity (Re-orderquantity)
5. JIT
6. FSNanalysis
7. Perpetual inventorysystem
8. Proper purchaseprocedure

ABC Technique
All items of materials are classified according to their value, i.e
high, medium and low values, which are known as A, B and C
items respectively.

Material Cost Type of control

A High Strict
B Lesser than A material Moderate
C Lesser than A & B materials Loose

VED ANALYSIS
“V” stands for vital material items in the sense that when these are out of
stock or when not readily available, the production activity comes to a
complete halt or is drastically affected.

“E” stands for essential items without which temporary losses of

production or dislocation of production work occurs, their stock-out cost is
very high.

“D” denotes desirable items i.e. all other items of materials which are
necessary but do not cause any immediate effect on production.

STOCK LEVELS
Maximum level – is the level above which stocks should not normally be
allowed to rise. It is the maximum quantity of a material that may be held in
store.
COST ACCOUNTING IV SEMESTER B.B.A | 49
Formula:
Maximum level= Reorder level + reorder quantity – (minimum consumption
xminimumreorderperiod)
Minimum level – is that level below which stock should not normally be
allowed to fall. In case any item of material falls below this level, there is a
danger of stoppage in production and top priority should be given to the
purchase of new materials.

Formula:
Minimum level = re-order level – (normal consumption x normal re-order
period)
Re-order level – is that level of material at which a new order for material is
placed. It is this level that purchase requisition is made out. This level is above
minimum level but below maximum level.

Formula:
Re-order level = (maximum consumption x maximum re-order period)
a) Danger level – is a level which normal issues of materials are stopped
and urgent action is taken for purchase of materials so that production is
not interrupted dueto shortage ofmaterials.
Formula:
Danger level = average or normal consumption x maximum reorder period for
emergencyPurchase

b) Average stocklevel
Formula:
Average stock level = minimum level + maximum level
2
Or
Average stock level = minimum level + ½ (reorderquantity)

50 | COST ACCOUNTING IVSEMESTER B.B.A

Illustration 2.1

Akshaya manufacturing company provides the information of material used:

Maximum - 24,000 units per week Minimum – 8,000 units per week
Normal consumption – 8,000 units per week Re-order quantity – 48,000
units
Time required for delivery – minimum 4 weeks, Maximum 4 weeks
Maximum re-order period for emergency purchases 2 weeks
Calculate: a) Re-order level b) Maximum stock level c)
Minimum stock level d) Danger level e) Average stock level
Solution:

Re-order level = Maximum Consumption x Maximum Re-Order Period

= 24,000 x 4 = 96,000 units
Minimum level = Re-Order Level – (Normal Consumption X Normal Re-
Order Period)
= 96000 - (8,000 x 5) = 56,000 units
Maximum level = Reorder level + reorder quantity – (minimum
consumption x minimum reorder period)
= 96,000 + 48,000 – (8,000 x 4) = 112,000 units
Danger level = Average or Normal consumption x Maximum re-
order period foremergency purchase
= 8,000 x 2 weeks = 16,000 units
Average stock level = minimum level + ½ (reorder quantity)
= 56,000 + ½ (48,000) = 32,000 units

Illustration 2.2

Sunfeast Co., furnishes the following information. Calculate re-order level,

maximum level, minimum level and average stock level. Normal consumption
is 240 units, minimum consumption is 200 units, maximum consumption is
300 units, re-order quantity is 1500 units, re-order period is 10 to 15 days,
normal re-order period is 12 days.

COST ACCOUNTING IV SEMESTER B.B.A | 51

Solution:

Re-order level = Maximum Consumption x Maximum Re-Order

Period
= 300 units x 15days = 4500 units
Minimum level = Re-Order Level – (Normal Consumption X Normal
Re-Order Period)
= 4500 - (240 x 12) = 1620 units
Maximum level = Reorder level + reorder quantity – (minimum
consumption xminimumreorderperiod)

= 4500 + 1,500 – (200 x 10) = 4000 units

Average stock level = minimum level + maximum level
2
+ A
=
= 2810 units

Economic Order Quantity

EOQ is the size of the order which gives maximum economy in purchasing any
material and ultimately contributes towards maintaining the material at the
optimum level and at the minimum cost. It equates the cost of ordering with the
cost of storage of materials.

Formula

2FG
BCD = E
;H

Where:
EOQ = Economic order quantity A = Annual consumption
B = Buying cost per order
C = Cost per unit of material
S = Storage and carrying cost % of cost
52 | COST ACCOUNTING IVSEMESTER B.B.A
Alternatively,

LM
IJK = E

Where S = Storage cost per unit per annum

Illustration 2.3
The following information relates to material from which an economic order
quantity has to be calculated

Annual consumption – Rs. 12,000, placing an order requires Rs. 2, Storage cost
10 paise per kg.

2FG
BCD = E
H

∗ ∗
IJK = E

BCD = √480000

BCD = 693 &2'

Illustration 2.4
Calculate EOQ for material A. The following details are furnished. Annual
usage – 1, 80,000 units

Buying cost per order - Rs. 10

Cost of carrying inventory - 10% of cost, Cost per unit – Rs. 50

2FG
BCD = E
;H

COST ACCOUNTING IV SEMESTER B.B.A | 53

 2 × 180000 × 10
BCD = E
50 × 10%

BCD = √720000

BCD = 849 R(.*'

Or

2FG
BCD = E
H

2 ∗ 180000 ∗ 10
BCD = E
5

BCD = 849 R(.*'

Just in time inventory or JIT

Just-In-Time purchasing is a Japanese technique. Here, the business enterprises
do not purchase inventories in bulk and store them. But the business enterprises
purchase only according to their requirements. After the materials are utilised
for that particular order, fresh stock is purchased according to further
requirements.

FSN Analysis
According to this analysis the items are classified into Fast moving (F), slow
moving (S), and non-moving (N) on the basis of their rate of consumption. Fast
moving goods are good indication for profitability. The reasons for the slow
moving goods are to be analysed and steps should be taken to dispose them at
the earliest. Non-moving goods increase the materials handling cost.

Perpetual Inventory System

Perpetual inventory system is defined by Weldon as “the method of recording
stores balances after each receipt and issue to facilitate regular checking and
obviate closing down for stock taking

54 | COST ACCOUNTING IVSEMESTER B.B.A

Methods of Pricing Material Issues
The First-in First-out(FIFO)
different
methods Last in First Out (LIFO)
used for
pricing the Simple Average Method
material
issues are: Weighted Average Method

Illustration2.6
Following transactions occur in the purchase and issue of a material:
Jan 1 Opening balance 500 units @ Rs. 8
Jan 5 Purchased 200 units @ Rs. 4
Jan12 Purchased 150 units @ Rs.4.10
Jan20 Purchased 300 units @ Rs.4.50
Jan25 Purchased 400 units @ Rs. 5
Jan 4 Issued 200 units
Jan10 Issued 400 units
Jan15 Issued 100 units
Jan19 Issued 100 units
Jan26 Issued 200units
Jan30 Issued 250 units

Issues are to be priced on the principle of “First in First out”. Prepare

stores ledger account in respect of the materials for the month of January.

Solution:

Stores Ledger Account (FIFO)

Receipts Issues Balance
Date Particulars Rate Rate Rate
Qty AmtRs. Qty AmtRs. Qty AmtRs.
Rs. Rs. Rs.
Jan-
Opening bal. - - - - - - 500 8 4000
01
Jan-
Issued - - - 200 8 1600 300 8 2400
04
Jan- 300 8 2400
Purchased 200 4 800 - - -
05
200 4 800

Jan- Issued - - - 300 8 2400

100 4 400
10 100 4 400

COST ACCOUNTING IV SEMESTER B.B.A | 55

Jan- 100 4 400
Purchased 150 4.1 615 - - -
12
150 4.1 615

Jan-
Issued - - - 100 4 400 150 4.1 615
15
Jan-
Issued - - - 100 4.1 410 50 4.1 205
19
Jan- 50 4.1 205
Purchased 300 4.5 1350 - - -
20
300 4.5 1350

Jan- 50 4.1 205

Purchased 400 5 2000 - - -
25 300 4.5 1350
400 5 2000
Jan- 50 4.1 205 150 4.5 675
Issued - - -
26
150 4.5 675 400 5 2000

Jan- 150 4.5 675

Issued - - -
30 300 5 1500
100 5 500

Last in first out method (LIFO)

This method is based on the assumption that the last items purchased are first to
be used. Here, issues are valued at current prices, which stock remains at
historical cost. The method has advantage under inflationary condition of the
market. LIFO method is useful where materials are used less frequently and
under inflationary condition.

Illustration2.7

ABC Company uses a raw material ‘X’ for its production purpose. The details
of purchases and issues are given below:

2017 July
1 Opening Balance 300 kg at ` 30/- per Kg
3 Purchased 500 kgs at ` 26.6/- per kg
4 Issued 220 kgs
10 Issued 400 kgs
20 purchased 490 kgs at 23 per Kg
56 | COST ACCOUNTING IVSEMESTER B.B.A
 25 Issued 400 kgs
26 Surplus 50 kgs returned to stores out of issues on 4th July
Prepare a Stores Ledger under LIFO Method

Solution:
Stores Ledger Account (FIFO)

Date Particulars Receipts Issues Balance

Qty Rate Amt Qty Rate Amt Qty Rate Amt

July Opening - - - - - - 300 30 9000

2017 Balance
1

July Purchased 500 26.60 13300 - - - 300 30 9000

3
500 26.60 13300

July Issued - - - 220 26.60 5852 300 30 9000

4
280 26.60 7448

July Issued - - - 280 26.60 7448 180 30 5400

10
120 30 3600

July Purchased 490 23 11270 - - - 180 30 5400

20
490 23 11270

July Issued - - - 400 23 6900 180 30 5400

25
90 23 2070

July Surplus(Material 50 26.60 1330 - - - 180 30 5400

26 returned)
90 23 2070
50 26.60 1330

Simple Average Price Method

Simple average price is the average of the prices without any regard to
quantities. The calculation of simple average price involves adding of different
prices and dividing by the number of different prices.

COST ACCOUNTING IV SEMESTER B.B.A | 57

Illustration 2.8
From the following information prepare Stores Ledger Account under Simple
Average Price Method

2016

Jan 1 Received 600 units at ` 20/- per unit

Jan 10 Received 300 units at 24/- per unit
Jan 15 Issued 700 units
Jan 20 Received 300 units at 28/- per unit
Jan 25 Issued 400 units
Jan 28 Received 500 units at 22/- per unit
Jan 31 Issued 500 Units

Solution:
Stores Ledger under SAM
Receipts Issues Balance
Date Particulars
Qty Rate Amt Qty Rate Amt Qty Rate Amt
Jan 1 Received 600 20 12000 - - - 600 20 12000
Jan
Received 300 24 7200 - - - 900 19200
10
Jan
Issued - - - 700 22 15400 200 3800
15
Jan
Received 300 28 8400 - - - 500 12200
20
Jan
Issued - - - 400 26 10400 100 1800
25
Jan
Received 500 22 11000 - - - 600 12800
28
Jan
Issued - - - 500 25 12500 100 300
31

Calculation of simple average price:

• 20+24 =22
2

Weighted Average Price Method

58 | COST ACCOUNTING IVSEMESTER B.B.A

This method gives due importance on quantities received. Weighted average
rate is calculated each time a fresh lot is received. Average price remains the
same till the next issue is received. Thus issue prices are derived at the time of
receipt not at the time ofissues.

T$*1: ;$'* $U V1*0%.1:' .( H*$)&

#0.2ℎ*0, F/0%120 +%.)0 =
T$*1: D-1(*.*W $U V1*0%.1:' .( H*$)&

Illustration 2.9
The following transactions took place in respect of a material item.

Date Receipts Qty Rates per unit Issued Qty

2016 400 2.00 -
March 2
March 10 300 2 -
March 15 - - 200
March 18 250 2.60 -
March 20 - - 200
Prepare a Stores Ledger Account under Weighted Average Method

Solution:
Receipts Issues Balance
Date Particulars
Qty Rate Amt Qty Rate Amt Qty Rate Amt
2016
-
March 2 Purchased 400 2.00 800 - - - 400 800
-
March 10 Purchased 300 2 600 - - - 700 1400
-
March 15 Issue - - - 200 2 400 500 1000
-
March 18 Purchase 250 2.60 650 - - - 750 1650
-
March 20 Issue - - - 200 2.20 440 550 1210

Problems and Solutions:

1. Calculate the EOQ for material ‘M -12’ the following details are
furnished:
Annual usage 60,000units
Buying cost per order Rs.15
Cost of carrying inventory 10% of cost
Cost per unit Rs.60.
COST ACCOUNTING IV SEMESTER B.B.A | 59
Solution:

LM
IJK = E

×A × !
IJK = E
A

IJK = √300000

547.7 units

2. Calculate EOQ from the following:

Monthly consumption 3000 units
Ordering cost Rs. 25 per order
Inventory carrying cost per month per unit 60 paise.

Solution:

LM
IJK = E

× × !×
IJK = E
0. A ×

IJK = √250000

500 units

60 | COST ACCOUNTING IVSEMESTER B.B.A

3. The following information is available in respect of material J. You are
required to calculate EOQ and also ascertain the number of orders to be
placed during the year and time gap between one order and other.
Annual consumption – Rs. 5050, cost of placing an order 50 paise,
maintenance cost per unit 0.10.

Solution:

LM
IJK = E

× ! ! × .!
IJK = E
.

IJK = √50500

224.7

F((-1: )$('-Vc*.$( 5050

Number of orders = = = 22 $%,0%'
BCD 224.7

365
Time gap between 2 orders = = 17 days
22

4. The following information relating to a type of raw materials for which

you are supposed to ascertain EOQ.
Number of orders to be placed and time gap.
Annual usage 4800 units
Unit price Rs. 2
Ordering cost per unit Rs. 4
Storage cost 2% per annum.

COST ACCOUNTING IV SEMESTER B.B.A | 61

Solution:

LM
IJK = E
;

× ×
IJK = E
× %

IJK = √960000

= 980 Units

Number of orders = Annual Consumption / EOQ = 4800/ 980 = 5 orders

Time Gap between 2 orders = 365/5 = 73 days

5. ABYAK Co. requires 3000 units of a material per month costing Rs 25

each. Cost per order is Rs. 100 and carrying charges 20% of the average
inventory. Find out EOQ, number of orders per year and time gap

Solution:

LM
IJK = E

× × ×
IJK = E
!× %

IJK = √1440000

= 1200 Units

Number of Orders = Annual Consumption / EOQ = 36000/1200 =30 orders

Time gap between 2 orders = 365/ 30 = 12 days

62 | COST ACCOUNTING IVSEMESTER B.B.A

6. In respect of material B the following data is available:

Budgeted consumption:
a) Maximum 1000 units perweek
b) Minimum 200 units perweek
c) Average 600 units perweek
d) Re-order quantity 3,500units
e) Re-order period 3 to 5weeks
Calculate: re-order level, maximum stock level, and minimum stock
level.

Solution :

Re-order level = Maximum Consumption x Maximum Re-Order Period

= 1000 x 5 = 5000 units
Minimum level = Re-Order Level – (Normal Consumption X Normal Re-
Order Period)
= 5000 - (600 x 4) = 2,600 units
Maximum level = Reorder level + reorder quantity – (minimum
consumption x minimum reorder period)
= 5000 + 3,500 – (200 x 3) = 7,900 units

7. The following information is available in respect of a particular material

Re-order quantity 1500units
Re-order period 4-6 weeks
Maximum consumption 400 units per week
Normal consumption 300 units per week
Minimum consumption 250 units per week
Calculate Re-order level, maximum level, minimum level, and
average stock level.
COST ACCOUNTING IV SEMESTER B.B.A | 63
 Re-order level = Maximum Consumption x Maximum Re-Order Period
= 400 x 6 = 2,400 units
Minimum level = Re-Order Level – (Normal Consumption X Normal Re-
Order Period)
= 2,400 - (300 x 5) = 900 units
Maximum level = Reorder level + reorder quantity – (minimum
consumption xminimum reorderperiod)
= 2,400 + 1,500 – (250 x 4) = 2,900 units
Average stock level = minimum level + maximum level
2
= 2900+900 = 1900units
2
8. In respect of material N the following data is available for
budgeted consumption:
Maximum stock 400units
Minimum stock 50 units
Average stock 200 units
Annual usage 1800 units
Lead time 2 – 4 months
Storage costs are 25% per annum of the average stock value
Ordering cost Rs. 2 per order
Price per unit of material Rs. 0.32 per unit

Calculate EOQ, Re-order level, maximum level, minimum level, and

average stock level.

Solution:
m n
= o p qrq rq × q p qrq m −

m n = × A=A t

64 | COST ACCOUNTING IVSEMESTER B.B.A

 o qrq n
=m − − (v q rq
×v q m − )

o qrq n =A −( × )= t

o p qrq
=m +m Kr
− (o qrq rq
× o qrq m x )

o p qrq =A + − (! × )=A r

z.(.V-V y0/0: + z1{.V-V y0/0:

F/0%120 H*$)& y0/0: =
2
4000 + 6300
F/0%120 H*$)& y0/0: =
2
= 5150 Units

9. The following details are available with reference for material A

during the month of January 2017.
Jan 1 Opening Stock 200 Units at ` 6/- per unit
Jan 2 Received 300 units at ` 4/- per unit
Jan 4 issued 250units
Jan 6 received 100 units at ` 4 per unit
Jan 7 issued 50 units
Jan 8 received 300 units at ` 2 per unit
Jan 10 Issued 200 units

Ascertain the stock value on 10Jan by preparing Stores Ledger account under
FIFO method.

COST ACCOUNTING IV SEMESTER B.B.A | 65

 Solution:
Stores ledger Account FIFO
Date Particulars Receipts Issues Balance
Qty Rate Rs Qty Rate Rs Qty Rate Rs
Jan 1 Opening - - - - - - 200 6 1200
Balance
Jan 2 Received 300 4 1200 - - - 200 6 1200
300 4 1200
Jan 4 Issued - - - 200 6 1200 250 4 1000
50 4 200
Jan 6 Received 100 4 400 - - - 250 4 1000
100 4 400
Jan 7 Issued - - - 50 4 200 200 4 800
100 4 400
Jan 8 Received 300 2 600 - - - 200 4 800
100 4 400
300 2 600
Jan Issued - - - 200 4 800 100 4 400
10 300 2 600

10. From the following information prepare stores ledger account under
LIFOmethod.

Feb 1 Opening Stock 200 units @ ` 4/- per unit

Feb 5 Purchased 100 units @ 2/- per unit
Feb 10 Purchased 150 units @ 2/- per unit
Feb 20 Purchased 180 units @ 2.50/- per unit
Feb 2 Issued 150 units
Feb 7 Issued 100 units
Feb 14 Issued 100 units
Feb 29 Issued 230 units

66 | COST ACCOUNTING IVSEMESTER B.B.A

 Solution:

Stores Ledger Account LIFO

Receipts Issues Balance

Date Particulars
Qty Rate Rs Qty Rate Rs Qty Rate Rs
Opening
Feb 1 - - - - - - 200 4 800
Balance
Feb 2 Issued - - - 150 4 600 50 4 200
50 4 200
Feb 5 Purchased 100 2 200 - - -
100 2 200
Feb 7 Issued - - - 100 2 200 50 4 200
Feb 50 4 200
Purchased 150 2.40 360 - - -
10 150 2.40 360
50
Feb 4 200
Issued - - - 100 2.40 240 50
14 2.40 120

50 4 200
Feb
Purchased 180 2.50 450 - - - 50 2.40 120
20
180 2.50 450
Feb 180 2.50 450
Issued - - - 50 4 200
29 50 2.40 120

11. The following are the details of materials used in a factory during January
2018.
1 Opening Balance 500 kg @ 25/- per kg
3 Issue 70 kgs
4 Issue 100 kgs
8 Issue 80 Kgs
13 Received from the Supplier 200 kgs @ 24.50/-
14 Refund of Surplus from a Work order 15 kgs @ 24/-
16 Issue 180 Kgs
20 Received from suppliers 240 kgs @ 24.40/- per kg
24 Issue 305 Kgs
25 Received from the suppliers 320 kgs @ 24.30/-
26 Issue 112 kgs
27 Refund of Surplus from a work order 12 kgs @ 24.50/-
28 Received from the Supplier 100 Kgs @ 25/-
28 Paid Freight on the purchase of 28th Jan 200/-

COST ACCOUNTING IV SEMESTER B.B.A | 67

Issues are to be priced on the principle of FIFO method. The stock verifier of
thefactory noticed that on 15th there was a shortage of 5 kgs and on
27thanother shortage of 8 kgs.

Solution:

Stores Ledger Account (FIFO)

Date Receipts Issues Balance
Particulars
Jan Qty Rate Amt. Qty Rate Amt. Qty Rate Amt.
Opening
1 - - - - - - 500 25 12500
Balance
3 Issued - - - 70 25 1750 430 25 10750
4 Issued - - - 100 25 2500 330 25 8250
8 Issued - - - 80 25 2000 250 25 6250
250 25 6250
13 Received 200 24.5 4900 - - -
200 24.5 4900
250 25 6250
Received
14 15 24 360 - - - 200 24.5 4900
(Refund)
15 24 360
245 25 6125
Issued
15 - - - 5 25 125 200 24.5 4900
(Shortage)
15 24 360
65 25 1625
Issued
- - - 180 25 4500 200 24.5 4900
(Shortage)
16 15 24 360
65 25 1625
200 24.5 4900
20 Received 240 24.4 5856 - - -
15 24 360
240 24.4 5856
65 25 6125
200 24.5 4900
24 Issued - - - 215 24.4 5246
15 24 360
25 24.4 610
215 24.4 5246
25 Received 320 24.3 7776 - - -
320 24.3 7776
103 24.4 2513.2
26 Issue - - - 112 24.4 2732.8
320 24.3 7776
27 Received 12 24.5 2940 - - - 103 24.4 2513.2

68 | COST ACCOUNTING IVSEMESTER B.B.A

 (Refund) 320 24.3 7776
12 24.5 294
Issued 95 24.4 2318
(Shortage)
27 - - - 8 24.4 195 320 24.3 7776
12 24.5 294
95 24.4 2318
320 24.3 7776
28 Received 100 27 2700 - - - 12 24.5 294
100 27 2700
527 13088

Note 1: Refund of surplus from a work order on Feb 14thand 27thhave to be

treated as receipts and entered in the Receipts.
Note 2: The shortage noticed on Feb 15thand 27thhave to be entered in the
issue section.
Note 3: The purchase price for 100 kgs received on Feb 28th, Rs. 27 per kg,
has been calculated by adding the freight rate Rs. 200/ 100 kgs, i.e Rs.2 per kg
along with the price of Rs. 25 per kg.

12. From the following prepare stores ledger account under simple average
method.

Feb 1st Purchased 300 units at Rs 1.50 per unit

Feb 10th Purchased 900 units at Rs 1.75 per unit

Feb 11th Purchased 200 units at Rs 1.85 per unit

Feb 12th Issued 150units

Feb14th Issued 200units

Feb25th Purchased 1200 units at Rs. 1.80 per unit

Feb29th Issued 350 units.

COST ACCOUNTING IV SEMESTER B.B.A | 69

 Solution:

Stores Ledger Account (SAM)

Receipts Issues Balance
Date Particulars Rate Amt Rate Amt Rate Amt
Qty Qty Qty
Rs. Rs. Rs. Rs. Rs. Rs.
1 Purchased 300 1.5 450 - - - 300 1.5 450
10 Purchased 900 1.75 1575 - - - 1200 - 2050
11 Purchased 200 1.85 370 - - - 1400 - 2420
12 Issued - - - 150 1.7 255 1250 - 2165
14 Issued - - - 200 1.7 340 1050 - 1825
25 Purchased 1200 1.8 2160 - - - 2250 - 3985
29 Issued - - - 350 1.8 630 1900 - 3350
1900 - 3350

13. Prepare the stores ledger account using simple average method of pricing
issues using from the following details.

Date
RATE
(JAN PARTICULARS UNITS
(Rs.)
2016)
1 Opening balance 300 2
2 Purchased 200 2.2
4 Issued 150
6 Purchased 200 2.3
11 Issued 150
19 Issued 200
22 Purchased 200 2.4
27 Issued 250
th
The stock verification record reveals shortage on Jan 10thand Jan 30 to the
tune of 10 and 20 units respectively. There was a refund of surplus from a work
order on 25th, 20 units earlier issued on 4thJan 2016.

70 | COST ACCOUNTING IVSEMESTER B.B.A

 Solution:

Stores Ledger Account (SAM)

Receipts Issues Balance

Date Particulars Rate Amt Rate Amt Rate
Qty Qty Qty Amt Rs.
Rs. Rs. Rs. Rs. Rs.
Opening
1 - - - 300 2 600
Balance
2 Received 200 2.2 440 - - - 500 - 1040
4 Issued - - - 150 2.1 315 350 - 725
6 Received 200 2.3 460 - - - 550 - 1185
Issued
10 - - - 10 2.16 21.6 540 - 1163
(shortage)
11 Issued - - - 150 2.16 324 390 - 839
19 Issued - - - 200 2.25 450 190 - 389
22 Received 200 2.4 480 - - - 390 - 869
Received
25 20 2.1 42 - - - 410 - 911
(Surplus)
27 Issued - - - 250 2.27 568 160 - 344
28 Received 200 2.5 500 - - - 360 - 844
Issued
30 - - - 20 2.3 46 340 - 797
(shortage)
340 797

14. The following transactions are related to material ‘Z’. Prepare stores ledger
account usingWAM.

Date(March2015) Receipt (kgs) Rate Issue

2 200 2 -
10 300 2.4 -
15 - - 250
18 250 2.6 -
20 - - 200

COST ACCOUNTING IV SEMESTER B.B.A | 71

 Solution:
Stores Ledger Account (WAM)

Receipts Issues Balance

Date Particulars Rate Amt Rate Amt Rate Amt
Qty Qty Qty
Rs. Rs. Rs. Rs. Rs. Rs.
March
2 Purchased 200 2 400 - - - 200 2 400

10 Purchased 300 2.4 720 - - - 500 - 1120

15 Issued - - - 250 2.24 560 250 - 560
18 Purchased 250 2.6 650 - - - 500 - 1210
20 Issued - - - 200 2.42 484 300 - 726

15. Following data is extracted with reference to material ‘S’. Prepare

Stores Ledger account under Weighted Average Method using the
information of February 2018.
st
1 Opening stock 200 units at Rs. 3.50
rd
3 Purchased 300 units at Rs. 4 per unit
13thPurchased 900 units at Rs. 4.30 per unit
23rdPurchased 600 units at Rs. 3.80 per unit
th
5 Issued 400units
th
14 Issued 600 units
th
15 Issued 600 units

72 | COST ACCOUNTING IVSEMESTER B.B.A

 Solution:

Stores Ledger Account (WAM)

Receipts Issues Balance

Date Particulars Rate Amt Rate Amt Rate
Qty Qty Qty Amt Rs.
Rs. Rs. Rs. Rs. Rs.
1 Opening bal - - - - - - 200 3.5 700

3 Purchased 300 4 1200 - - - 500 3.8 1900

5 Issued - - - 400 3.8 1520 100 - 380

13 Purchased 900 4.3 3870 - - - 1000 4.25 4250

14 Issued - - - 600 4.25 2550 400 - 1700

23 Purchased 600 3.8 2280 - - - 1000 3.98 3980

25 Issued - - - 600 3.98 2388 400 - 1592

COST ACCOUNTING IV SEMESTER B.B.A | 73

 REVIEW QUESTIONS

SECTION-A (2 Marks)

1. What do you mean bymaterials?

2. State the classification ofmaterials.
3. What are direct materials? Giveexamples
4. What are indirectmaterials?
5. What do you mean by materialcontrol?
6. What do you mean by storekeeping?
7. State the objectives of storekeeping
8. State the techniques of materialcontrol.
9. What do you mean byEOQ?
10. What do you mean byFIFO?
11. State any two advantages of FIFOmethod.
12. What do you mean byLIFO?
13. State any two advantages of LIFOmethod.
14. State any two disadvantages of LIFOmethod.

SECTION - B & C (6 and 14 Marks)

1. Explain the techniques or methods of inventorycontrol.

2. Explain various levels ofstock
3. Distinguish between:
a) FIFO andLIFO
b) Simple average method and Weighted average method
4. Explain in brief the purchaseprocedure.

74 | COST ACCOUNTING IVSEMESTER B.B.A

 PRACTICAL PROBLEMS

1. The details of material usage of X and Y are given below from

which you are supposed to calculate Re-order level, maximum
level, minimum level, and average stock level.
Normal consumption 150 units perweek
Minimum consumption 75 units per week
Maximum consumption 225 per week
Re-order quantity X – 1500 units, Y – 2500 units
Re-order period X – 4 to 6 weeks, Y – 2 to 4 weeks.

2. The components M1 and M2 are used in the manufacture of an

article. The following data relates to the components.
Minimum usage 25 units per week each
Maximum usage 75 units per week each
Re-order period M1 – 4 to 6 weeks
M2 – 2 to 4 weeks

Maximum level M1 – 650 units

M2 – 720 units

Calculate ROQ, Re-order level, maximum level, minimum level, and

average stock level.

3. From the following particulars of material A show how the values of

issue should be ascertained under FIFO method. The information is
of January2015.
1 Opening stock 1000 units at Rs. 5 perunit
3 Purchased 900 units at Rs.6 perunit
10 Issued 1200units
12 Purchased 800 units at Rs.6 perunit
16 Purchased 300 units at Rs.6 perunit
18 Issued 400units
20 Issued 600units
21 Purchased 200 units at Rs.6 perunit
25 Issued 600units.
COST ACCOUNTING IV SEMESTER B.B.A | 75
 4. Prepare a stores ledger account from the following transactions of
March 2016, adopting the FIFO method of pricing ofissue.
st
1 Opening balance 200 units at Rs.2 per unit
nd
2 Purchased 600 units at Rs. 3 perunit
th
6 Issued to production department 600 units
th
12 Purchased 400 units at Rs.3.40
nd
22 Issued 300units
th
26 Purchased 500 units at Rs.3.50 per unit
th
30 Issued 200units.

5. From the following transactions. Prepare store ledger account

using FIFO and LIFOmethod.
Jan2 Purchased 4000 units at Rs. 4 perunit
Jan 20 Purchased 500 units at Rs. 5 per unit
Feb 5 Issued 2000 units
Feb 10 Purchased 6000 units at Rs. 6 per unit
Feb 12 Issued 4000 units
March 2 Issued 1000units
March 5 Issued 2000units
March 15 Purchased 4500 units at Rs. 5.50 per unit
March 22 Issued 3000 units.

6. ABC Company uses a raw material for its production purpose.

The details of purchases and issues are givenbelow:
2 Opening balance 300 ltrs at Rs. 25 perltr
5 Purchased 500 ltrs @ Rs 26.60 perltr
6 issued 220ltrs
10 issued 400 ltrs
20purchased 490 ltrs @ 23 per ltr
25 Issued 300ltrs

76 | COST ACCOUNTING IVSEMESTER B.B.A

 26 Surplus 20 ltrs returned to stores out of issues on 4thJan
Prepare a stores ledger under FIFO method.

7. The following transactions occurred in purchases and issue of

material in an organisation during October2016.
Receipts Quantity Rate (Rs.)
4thOctober 200 24

10thOctober 150 23

18thOctober 100 24

22ndOctober 100 23.50

Issues Quantity
5thOctober 250

12thOctober 200

25thOctober 250

The stock on 1stOctober was 200 units at Rs. 25 per unit. Prepare the Stock
Ledger account first by adopting FIFO method of charging material issued and
secondly by LIFO method.

8. From the following details of receipts and issues of material

ascertain the value of closing stock by using Simple average
method and weighted averagemethod.
Jan 1st Purchased 500 units at Rs. 2 per unit
Jan 10thPurchased 300 units at Rs. 2.10 per unit
Jan 15thIssued 600units
Jan 20thPurchased 400 units at Rs. 2.20 per unit
Jan 25thIssued 300units
Jan 27thPurchased 500 units at Rs. 2.10 per unit
Jan 31stIssued 200units.

COST ACCOUNTING IV SEMESTER B.B.A | 77

 9. The following transactions took place in respect of material P,
ascertain the value of closing stock by using Simple average method
and weighted average method.
Date Receipts Rate per unit Units Issued

1-3-2016 20 units 25 -

9-3-2016 30units 30 -

20-3-2016 - - 5 units

24-3-2016 40 units 32 -

26-3-2016 - - 30 units

Prepare the stores ledger account on the basis of Weighted Average

Price Method.

78 | COST ACCOUNTING IVSEMESTER B.B.A

 UNIT 3

LABOR COST CONTROL

INTRODUCTION

Labour cost is the second important element of cost of production. Wages,

salaries and other forms of remunerations represent a major portion of the total
cost of a product or services. The growth and profitability of the concern
depends upon proper utilization of human resources or labour force which in
turn needs proper accounting and control of cost. Thus, control of labour cost is
a very significant issue from the view point of management.
Labour constitutes an important element of the total cost of production. Human
contribution is represented by labour. From the sensitivity point of view of the
various cost elements, the most sensitive element is the labour cost, because
human behavior is related to it. Therefore, approach required to control labour
cost is completely different from the approach required for the control of other
cost elements. For the control of labour cost, the study of labour behavior,
performance measurement, results analysis, time and motion study, control on
the attendance and departure, in all matters human approach are essential.
Labour cost control means labour cost control per unit. Unit cost can be reduced
by obtaining more output against the same rate of remuneration. Thus labour
cost reduction means for the same wage obtaining more output or for the higher
wage obtaining more output but does not at all means wage-cut.
DIRECT AND INDIRECT LABOUR COST
The labour cost can be classified into two types:
1. Direct Labour Cost,
2. Indirect Labour Cost.

COST ACCOUNTING IV SEMESTER B.B.A | 79

1. Direct Labour Cost
Any labour cost that is specially incurred for or can be readily charged to or
identified with a specific job, contract, work order or any other unit of cost is
termed as direct labour cost.
Wages for supervision, wages for foremen, wages for labours who are actually
engaged in operation or process are the examples of direct labour cost.

2. Indirect Labour Cost

Indirect labour is for work in general. The importance of the distinction lies in
the fact that whereas direct labour can be identified with and charged to the job,
indirect labour cannot be so charged and has, therefore to be treated as part of
the factory overheads to be included in the cost of production. For example,
salaries and wages of supervisors, storekeepers, and maintenance labour, etc.

TIME KEEPING
Timekeeping is the process of tracking and reporting work and leave time. It
refers to recording of each worker’s time of coming in and going out of the
factory during engagement of the factory. It is essential for the purpose of
attendance and determination of wage payable to each worker.
Objectives of Timekeeping: The following are the important objectives of
timekeeping:
• Preparation of payrolls.
• Ensuring discipline in attendance.
• Apportionment of overhead on the basis of labour hours.
• Effective utilization of human resources. Minimization of labour costs
• Ascertaining ideal labour time and ideal machine time.
Methods of Timekeeping: The following are the two important methods
of timekeeping:

1. Manual Method:
• Attendance Register Method
• Token or Disc Method.

80 | COST ACCOUNTING IVSEMESTER B.B.A

 2. Mechanical Method:
• Time Recording clocks
• Dial Time Records
• Key Recorder System.
Manual Method: The choice of the manual method adopted by the factory
depends upon its size, number of workers employed, and nature of the business
and policy of a firm. Under manual methods, there are two important methods
which are in use:
• Attendance Register Method: Under this method, an attendance register is
maintained by the Timekeeper in the time office. This register may be
filled in by the Timekeeper when the worker gets inside the factory and
the time of departure.
This method is very simple and most suitable to small-scale industries. It is very
difficult to operate when the number of workers is large.
• Token or Metal Disc Method: In this method, each worker is given a
metal disc or a token bearing his identification number. All the tokens or
discs are hung on a board serially at the entrance of the gate in the
factory. As the worker enters the gates of the factory, he removes his disc
from the board and drops it into a box.
This process is continued until the scheduled time expires. Latecomers may
drop their tokens in a separate box or handover personally to the timekeeper. In
the case of absentees the tokens are not removed from the board. Based on the
above process, the timekeeper records the attendance in the register known as
Muster Roll for the purpose of pay rolls.
This method is simple and economical. But it suffers from certain
disadvantages given below:
There is chance to remove the disc of fellow worker’s token from the board to
ensure his presence.
Mechanical Method: In order to achieve the accuracy and reliability of
recording of time of workers, the following different mechanical devices are
used:

COST ACCOUNTING IV SEMESTER B.B.A | 81

Time Recording Clocks: Under this system, each worker is given a time card
for a week orfortnight. These time or clock cards are serially arranged in a tray
at the entrance to the factory. When the worker enters the factory, he takes his
allotted card from the tray and puts it in the time recording clock that records
the exact arrival time at the space provided on the card against the particular
day.
This process is repeated for recording time of departure for lunch, return from
lunch, leaving the factory after his day’s work. Late arrivals, early leavings and
overtime are printed in red so as to distinguish these from normal period spent
in the factory. This method is very popular for correct recording of attendance.
Dial Time Records: This is a machine which is used for recording correct
attendance time of arrival and departure of worker automatically. This recorder
has a number of holes about the circumference. Each hole represents worker’s
number which corresponds to identification of allotted clock numbers. At the
time of arrival and departure of worker, by operating this machine, the dial arm
into a hole and the time is automatically recorded on an attendance sheet placed
inside. This machine is most suitable in small scale industries.
Key Recorder System: In this machine there are a number of keys, each key
denotes worker’s number. When the time of arrival and departure the worker
inserts his allotted key in the key hole and gives aturn, the ticket time and clock
time are recorded on a sheet of paper. This method is economical and easy to
operate.
Time Booking: It refers recording the time of each worker for each department,
operation, process or job during engagement of the factory. It is useful for the
purpose of cost analysis and effective cost control.

Objectives of Time Booking: The following are the main objectives of time
booking:

o To ascertain the cost of each job, operation or process.

o To ascertain the cost of ideal time.
o Apportionment of overhead based on the suitable basis.
o To establish the fair and suitable wage system.
o To ensure the proper utilization of attendance time.
o To ensure the effective cost control and cost reduction.

82 | COST ACCOUNTING IVSEMESTER B.B.A

Methods of Time Booking: In order to achieve the effective utilization of
manpower resources, recording the correct time of workers and labour cost
control is essential to adopt various methods of time booking.

The following are the important methods used for time booking :

1. Daily Time Sheet

2. Weekly Time Sheet
3. Job Cards or Job Tickets:
• Job Card For Each Worker
• Job Card For Each Job
• Combined Time and Job Card
• Piece Work Card
1. Daily Time Sheet: This is one of the important methods which is used
for a daily record of the work done by each worker. This record
indicates that the nature of work, actual time spent by the worker on
each job or operation. The daily time sheet is allotted to each worker on
which the record is made by the worker himself or by the official in-
charge. This method is suitable only for small-scale industries.
2. Weekly Time Sheet: This system may be done as in the case of daily
time sheet. Under this method, instead of recording time on daily time
sheets, worker is given a weekly time sheet on which recording by the
worker on each job for a week. This method is useful for those concerns
where the workers usually carryon a few jobs in a week.
3. Job Card or Job Tickets: This method is adopted for recording of time
booking for a worker’s time spent on a job. A job card is prepared for
each job giving detailed particulars of the work to be carried out by the
worker. Job cards are classified into four types7:
4. Job Card for Each Worker: Under this system, job card is issued to each
worker at the beginning of each day or week. The job card is used to
record the time of starting and finishing the each job or work. It
indicates the nature of work, time spent by the worker for each job or
operation, idle time, total hours, rates and remuneration of different jobs
during a scheduled time.
5. Job Card for Each Job: In this system, separate card is prepared and
COST ACCOUNTING IV SEMESTER B.B.A | 83
 allotted to each job. The job card is used to each job passes along with
the job from worker to worker. As soon as the worker receives the job
card he records the time of starting and finishing the job or operation.
This system is useful not only for correct calculation of wages for each
job but also it shows the details of the work to be done by the worker.
6. Combined Time and Job Card: Under this system, job card is prepared
on the basis of attendance time and actual time spent by the worker.
This system is useful to ascertain idle time, time taken and time booking
on account of pay rolls.
7. Piece Work Card: This system is adopted where the piece wage payment
is applicable.
Idle Time

Idle Time is that time during which the workers spend their time without giving
any production or benefit to the employer and concern. The idle time may arise
due to non-availability of raw materials, shortage of power, machine breakdown
etc.

The normal idle time arises due to the following reasons :

o Time taken for personal affairs.

o Time taken for lunch and tea break.
o Time taken for obtaining work.
o Time taken for changing from one job to another.
o Waiting time for getting instructions, tools and or raw materials,
spare parts etc.
o Time taken by the workers to walk between factory gate and place of
work.

Abnormal Idle Time

Abnormal idle time refers to any loss of time which may occur due to some
abnormal reasons.
Abnormal idle time can be prevented through effective planning and control.
The abnormal idle time may arise due to the following avoidable reasons :
o Faulty planning.
84 | COST ACCOUNTING IVSEMESTER B.B.A
 o Lack of co-operation and co-ordination.
o Power failure.
o Time lost due to delayed instructions.
o Time lost due to inefficiency of workers.
o Time lost due to non-availability of raw materials, spare parts, tools
etc.
o Time lost due to strikes, lock outs and lay-off.

Accounting Treatment of Normal Idle Time and Abnormal Ideal Time

Normal Idle Time: Normal idle time wages is treated as a part of cost of
production. Thus, in case of direct workers an allowance for normal idle time is
built into labour cost rates. In the case of indirect workers, normal idle time
wage is spread over, all the products or jobs through the process of absorption
of factory overheads.
Abnormal Idle Time: Abnormal idle time cost is not included as a part of
production cost and is shown as a separate item in the Costing Profit and Loss
Account so that normal cost is not distributed.
Over Time: The term “over time” refers to when a worker works beyond the
normal working hours or scheduled time is known as ‘overtime.’ According to
Factories Act, the wage rate of overtime work is to be paid at double the normal
rate of wages. The extra amount of remuneration is paid to the worker in
addition to normal rate of wages is said to be overtime premium.
Effect of Over Time Payment on Productivity: The following are the effects
of over time payment on productivity:
o Overtime premium is an extra payment over normal wages and hence
will increasethe production cost.
o The efficiency of workers during overtime work may fall and hence
output may be reduced.
o To earn more, workers may not concentrate on work during normal
hours, and thus the output during normal hours may fall.
o Reduced output and increased premium will increase the cost of
production.

COST ACCOUNTING IV SEMESTER B.B.A | 85

 Accounting Treatment of Overtime Wages: The following are the ways of
charging of overtime premium:

o If overtime is resorted to at the desire of the customer then overtime

premium is charged to concerned job directly.
o If overtime is required to cope with genera h works overtime.
o If overtime is worked on account of abnormal conditions such as
flood, earthquake etc. that should be charged to production schedule
or for meeting urgent orders, the overtime premium should be
treated as overhead cost of particular department or cost center.
Control of Overtime: Control of overtime is essential to minimize the cost of
production and increase the overall performance of the efficiency. Effective
control of overtime can be possible through the following ways:

o Effective sound planning of production

o Adequate supervision
o Ensuring availability of raw materials, spare parts
o Encouraging productivity
o Reducing labour turnover
o Ensuring effective system of repairs and maintenance, material handling
and smooth flow of production.

Labour Turnover

Labour Turnover may be defined as “the rate of changes in labour force, i.e.,
the percentage of changes in the labour force of an organization during a
specific period. Higher rate of labour turnover indicates that labour is not stable
and there are frequent changes in the labour force in the organization.
Methods of Measurement of Labour Turnover : The following are the important
methods of measuring labour turnover: (a) Separation Method (b) Replacement
Method (c) Flux Method.
Separation Method : Under this method, labour turnover is calculated by
dividing the total number of separation (number of employees left or
discharged) during the period by the average number of workers on the pay roll.

86 | COST ACCOUNTING IVSEMESTER B.B.A

 v . r
Thus, the formula is:
|}~•€• ‚€•ƒ•„…• =
L . † r

Replacement Method : In this method, labour turnover is measured by

dividing the number of replacement of workers during the period by average
number of workers during the period.

Thus formula may be expressed as :

No. of Workers Replaced during the period

Labour Turnover = × 100
F/0%120 ($. $U •$%&0%' ,-%.(2 *ℎ0 W01%

Flux Method: Under this method, labour turnover is measured by dividing the
total number of separation and replacement of workers by the average number
of workers during the period. Thus the formula is:

•$. $U H0c1%1*.$( + •$. $U ‘0c:1)0V0(*

Labour Turnover = × 100
F/0%120 ($. $U •$%&0%' ,-%.(2 *ℎ0 W01%

Causes for Labour Turnover: The causes for labour turnover can be classified
into two categories (a) Avoidable Causes, (b) Unavoidable Causes.

Avoidable Causes:

o Lack of job involvement

o Lack of co-operation among the employees
o Lack of smooth relationship between employer and
employees
o Dissatisfaction with wages and incentives
o Bias attitude of Management
o Poor working conditions
o Dissatisfaction with promotion, recognition, transfer etc.
o Lack of Co-ordination
o Non-availability of adequate protection, proper instructions,
accommodation etc.

COST ACCOUNTING IV SEMESTER B.B.A | 87

Unavoidable Causes:
o Retirement or Death of employer
o Marriage in the case of female workers
o Permanent disability due to accident or illness
o Dismissal or discharged due to inefficiency or disciplinary ground.
o Dissatisfaction with job
o Shortage of power, raw materials etc.
o Personal responsibilities
o Personal betterment with regard to new job
o Change in nature of business and plant location.

Effect of Labour Turnover:

o Increased cost of recruitment, training and placement
o Increased cost of production
o Decrease in output due to inefficient or newly recruited workers
o Higher accident rate due to negligence or mishandling of machines
o Low team spirit due to lack of co-operation and co-ordination between
the workers and employers.
The chief aim of the preventive costs which are incurred in order to keep the
workers satisfied and reduce the labour turnover rate as much as possible.
These preventive costs which include the following:

o Cost of providing medical facilities, canteen and other welfare facilities

o Cost of administration.
o Cost of providing better working conditions
o Cost of pension, gratuity, provident fund and other retirement benefits.
Replacement Costs: These costs include the following :
o Cost of recruitment, training and placement
o Increase wastages and scrap
o Cost of repairs and maintenance including machine
breakdowns
o Cost of compensation on account of accidents
o Loss of output due to inefficiency or newly recruited workers.
88 | COST ACCOUNTING IVSEMESTER B.B.A
Method of Remuneration

There are two basic methods of wages payment10:

• Time Wages System and
• Piece Wage System.
Under time wage system, wages are paid on the basis of time spent on the job
irrespective of the amount of work done. This is known as Time Rate or Day
Wage System. The unit of time may be a day, a week, a fortnight or a month.
Under piece wage system, remuneration is based on the amount of work done
or output of a worker. This is known as “Piece Rate System” or “Payment by
Result.” Thus, a workman is paid in direct proportion to his output.

1. TIME RATE SYSTEM

This is also termed as “Day Wage System” or “Flat Rate System”. Under this
system, wages are paid to the workers on the basis of time spent on the job
irrespective of the quantity of work produced by the workers. Payment can be
made at a rate per day or a week, a fortnight or a month. The formula for
calculation of payment of time rate of ordinary levels is as follows :

Remuneration or Earnings or wages = Time Rate × Time worked

This system is suitable under the following conditions:

• Where the units of output are difficult to measure, e.g. watchman.

• Where the quality of work is more important e.g., artistic furniture, fine
jewellery, carving etc.
• Where machinery and materials used are very sophisticated and
expensive.
• Where supervision is effective and close supervision is possible.
• Where the workers are new and learning the job.
• Where the work is of a highly varied nature and standard of performance
cannot be established.

COST ACCOUNTING IV SEMESTER B.B.A | 89

Advantages

• It is simple and easy to calculate.

• Earning of workers are regular and fixed.
• Time rate system is accepted by trade unions.
• Quality of the work is not affected.
• This method also avoids inefficient handling of materials and tools.

Disadvantages

• No distinction between efficient and inefficient worker is made and

hence they get the same remuneration.
• Cost of supervision is high due to strict supervision used for high
productivity of labour.
• Labour cost is difficult to control due to more payment may be made for
the lesser amount of work.
• No incentive is given to efficient workers. It will depress the efficient
workers.
• There are no specific standards for evaluating the merit of different
employees for promotions.

Illustration 3.1:

Worker A, on a given day works 7 hours and his wage rate is Rs. 100 per
hour. Calculate his wages for the day.
Solution:
Wages = Time Rate × Time worked
Wages = 100 Rs× 7 Hrs.
Wages = 700 Rs.

90 | COST ACCOUNTING IVSEMESTER B.B.A

Illustration 3.2:

Mr. Vilas works in a factory where the wages paid are on time basis.
Calculate his wages for the week for which the following details are
available.

Day No. of hours

worked
Monday 6
Tuesday 7
Wednesday 8
Thursday 8
Friday 7
Saturday 4
The wage rate is Rs. 200 per hour.

Solution:
Wages = Time Rate × Time worked
Wages = Rs. 200 × (6+7+8+8+7+4)
Wages= Rs. 200 × 40 hours
Wages = Rs. 8000.

2. PIECE RATE SYSTEM

Under this system, wages of a worker are calculated on the basis of
amount of work done or output of a worker. Accordingly, a worker is paid
in direct proportion to his output. Formula to calculate piece rate is as
follows:

Piece Work Earnings = Piece Rate ×Units Produced

Advantages
o It facilitates direct relation between efforts and reward.
o This system encourages the efficient workers to increase
production.
o Under this system efficient workers are recognized and rewarded:
o It helps to reduce the cost of supervision and idle time.
o Tenders or quotations can be prepared confidently and accurately.
COST ACCOUNTING IV SEMESTER B.B.A | 91
Disadvantages
o Where a concern is producing large quantities, it is difficult to fix a
piece rate.
o In order to maximize their earnings, workers working with high speed
may affect their health.
o The quality of output cannot be maintained.
o This system is not encouraging to the inefficient workers.
o Temporary delays or difficulties may affect the earnings of the workers.

Piece Rate System is suitable where

o Quality and workmanship are not important.
o Work can be measured accurately.
o Quantity of output directly depends upon the efforts of the worker.
o Production of standardized goods in a factory.
o Job is of a repetitive nature.

Illustration 3.3:
Aditya, an employee of a factory produces 435 units in a day. He paid a piece
rate wage of 9 Rs. Per unit. Calculate his daily wages for the day.
Solution:
Piece Work Earnings = Piece Rate ×Units Produced
Wages = Rs. 9 × 435 units
Wages = Rs. 3915

BONUS OR INCENTIVES SCHEMES

Incentive Scheme of wage payment is also known as Premium Bonus Plans.
Introduced in order to increase production with ensuring proper industrial
climate. Various types of incentive schemes are combinations of time and piece
rate systems. The following are the important individual incentive plans
discussed below:

1. Halsey Plan: This Plan was developed by F.A. Halsey. This system also
termed as Split Bonus Plan or Fifty-Fifty Plan. Under this plan, Standard
92 | COST ACCOUNTING IVSEMESTER B.B.A
 time is fixed for each job or operation on the basis of past performance. If
a worker completes his job within or more than the standard time then the
worker is paid a guaranteed time wage. If a worker completes his job
within or less than the standard time, then he gets a bonus of 50% of the
time saved plus normal earnings. Under this method, the total earnings is
calculated as follows:
Total Earning = T × R + % (S - T) R

Where, T = Time Taken; R = Hourly Rate; S = Standard Time.

Note: If the percentage is not mentioned in the problem it is taken as 50%. And
if the percentage is mentioned such percentage must be taken. It may vary from
33.1/3% to 66.2/3%

Advantages:

o It is simple to understand.
o Total earnings of each worker can be easy to calculate.
o Both employer and employee get equal benefit of time saved.
o This system not only benefits efficient worker but also provides average
worker to get guaranteed minimum wages.
o This system is based on time saved and it can reduce the labour cost.

Disadvantages
o Lackofco-operationamongtheemployees.
o Under this system establishment of standard is verydifficult.
o Earning are reduced at high level of efficiency.

Illustration 3.4
The time allowed for a certain job is 9 hours and the worker X completes it in 7
hours. The time rate is Rs. 100. Calculate the total wages of X under Halsey
plan. The rate of incentive is 50%.

Solution:
Time saved = Standard time allowed – Time taken
Total wages= T × R + 50% (S - T) R

COST ACCOUNTING IV SEMESTER B.B.A | 93

T = Time Taken; R = Hourly Rate; S = Standard Time.
= 7 × 100 + 50% (9 − 7)100
= 700 + 50% of 200
= 700 + 100
= Rs. 800
Wages of X is Rs. 800.

Illustration 3.5:
An industry allows 50 hours of time for the completion of a certain quantity of
production. It pays a time rate of Rs. 120 per hour. The actual wages are to be
calculated according to Halsey plan.
Worker A completes the production in 47 hours, B in 50 hours but C is able to
complete the work in 53 hours.
Calculate the total wages of A,B and C and also comment on their wages.

Solution:
Since the percentage is not mentioned, it is assumed to be 50%
Calculation of wages:
Total wages= T × R + 50% (S - T) R
T = Time Taken; R = Hourly Rate; S = Standard Time.

Worker A= 47 × 120 + 50% (50 − 47)100

Wages = 5640 + 50% of 360
Wages = 5640 + 180
Wages of worker A = Rs. 5820.

Wages of Worker B and C:

Wages of Worker B: 50 hrs. × Rs. 120 = Rs. 6000
Wages of Worker C: 53 hrs. × Rs. 120 = Rs. 6360
Worker B and C are not able to save any time and therefore they are not entitled
for any incentive. They will be paid only in time rate wages as per the actual
hours worked.
94 | COST ACCOUNTING IVSEMESTER B.B.A
The effective earning of Mr. A is higher than that of Mr. B and Me. C.
therefore, Mr. A’s wages will be the highest.

Illustration 3.6:

The standard time oallowed for a job is 15 hours, which has been determind
based on a time and motion study. Ram completes the job in 16 hours and
Shyam in 12 hours. The time rate is Rs. 125 per hour.

Calculate the wages under Halsey plan taking the bonus at 60%.

Solution:

Since Ram takes more than the standard time, he is not entitled for any bonus.
He will only receive time wages.
Wages of Ram: 16 Hrs. × Rs. 125
Wages = Rs. 2000
Wages of Shyam:
Total wages= T × R + 60% (S - T) R
Wages= 1,500 × 60% (15 − 12)125
Wages = 1,500 + 60% (375)
Wages = 1,500 + 225
Wages of Shyam= Rs.1725.

Illustration 3.7
Standard time allowed for a job is 20 hours at the rate of Rs. 2 per hour plus DA
at .60 paise per hour worked. Actual time taken by the worker is 15 hours.
Calculate his earnings under Halsey Plan.

Solution: The bonus is assumed to be at 50%.

Total wages= T × R + 50% (S - T) R

Wages = 15 × 2.60 + 50%(20 − 15)2
Wages = 39+50% (5)2
Wages = 39 + 50% (10)
Wages = 39+5
Wages = Rs. 44.
COST ACCOUNTING IV SEMESTER B.B.A | 95
2. ROWAN PLAN:
This plan was introduced by David Rowan of England. It is similar to the
Halsey Plan in many respects except that it differs in calculation of bonus.
Under this system, bonus is determined as the proportion of the time taken
which the time saved bears to the standard time allowed. Here, the standard
time for the completion of a job and the rate per hour is fixed. If the time taken
by the worker is more than the standard time, then he is paid according to the
time rate, i.e. time taken multiplied by the rate per hour. Total wages of the
worker under Rowan Plan is calculated as under:
’“”
Wages= T × ‘ + ×Tב
’

T = Time Taken; R = Hourly Rate; S = Standard Time.

Rowan plan is also called as Rowan Premium Plan.

Advantags:

o This method provides minimum wages to workers.

o The worker is not induced to rush through the work because bonus
increases at a decreasing rate at higher levels of efficiency. Thus the
quality of goods, under this system will not suffer.
o Labour cost per unit is reduced because time saved is shared by the
worker and management both.
o The increase in production will reduce overhead cost per unit produced.

Disadvantages:

o The calculation of bonus under this system is complicated. In Halsey

plan workers know that he will get additional wages for half of the time
saved. In this method a certain proportion of time saved is paid as
incentive. The calculation involved is difficult for workers to
understand.
o This method is unjust for efficient workers since bonus is paid at
decreasing rate.
o Labour cost is generally higher in this method.

96 | COST ACCOUNTING IVSEMESTER B.B.A

Difference between Halsey and Rowan Plan

Basis Halsey Plan Rowan Plan

Bonus Amount Amount of bonus is lesser Amount of bonus is
than Rowan. higher than Halsey.
Earning per hour Earning per hour increases Earning per hour
in an accelerating rate. increases in steadily.
Cost Less expensive More expensive.
Reward Highly skilled workers are Highly skilled
rewarded properly. workers are not
rewarded properly.
Method of Simple and easy to Not simple and not
computation calculate. easily understood by
the workers.

Illustration 3.8:

Time Rate Rs. 120 per hour, standard time allowed to workers- 40 hours, actual
time taken by the workers-36 hours. Calculate the total wages according to
Rowan Plan.

Solution:

H−T
Total Wages = T × ‘ + ×Tב
H
40 − 36
= 36 × 120 + × 36 × 120
40
4
= 4320 + × 4320 + 432
40
Total wages= Rs. 4752

COST ACCOUNTING IV SEMESTER B.B.A | 97

Illustration 3.9:

Calculate the earnings of a worker under Rowans plan from the following
particulars.

Standard time for producing one dozen of units = 3 hours, actual time taken by
the worker to produce 20 dozens = 48 hours, hourly rate of wages guaranteed =
Rs. 5 per hour.

Solution:

The standard time allowed for producing 1 dozen of articles is 3 hours,

therefore, standard time for producing 20 dozen will be 20 × 3 = 60 hours.

H−T
Total Wages = T × ‘ + ×Tב
H
60 − 48
= 48 × 5 + × 48 × 5
60
12
= 240 × 240
60
= 240 + 48

Total wages= Rs. 288.

Illustration 3. 10:
1. A worker takes 9 hours to complete a job on a daily wages and 6 hours on a
scheme of payment by results. His daily rate is Rs. 0.75 paise an hour, the
material cost of the product is Rs. 4 and the overheads are as recorded at
150% of the total direct wages. Calculate the factory cost of the product
under: a. Piece Rate System b. Rowan Plan C. Halsey Plan.

Solution:
Calculation of Direct labour Cost
a. Piece Rate System = 6 hours at 75 paise an hour = Rs. 4.50.
b. Halsey plan
Total wages= T × R + 50% (S - T) R
= 4.50 + 50% (9-6) 0.75
98 | COST ACCOUNTING IVSEMESTER B.B.A
 = 4.50 + 50% (3) 0.75
= 4.50 + 50% (2.25)
=4.50 × 1.13
Wages = Rs. 5.63.

c. Rowan plan:

H−T
Total Wages = T × ‘ + ×Tב
H
9−6
= 6 × 0.75 + × 6 × 0.75
9
3
= 4.50 × 4.50
9
= 4.50 + 1.50
Total wages= Rs. 6
Factory cost under the plans:

Particulars Piece Halsey(Rs.) Rowan(Rs.)

work(Rs.)
Materials 4.00 4.00 4.00
Direct Labour 4.50 5.62 6.00
Prime cost
8.50 9.63 10.00
Factory Overheads(150% of
8.43 9.00
Direct Labour)
6.75
Factory cost 15.25 18.05 19.00

Illustration 3.11:

The standard output of a product has been fixed at 6 units per day of 8 hours in
a factory. The normal wages per day is Rs. 12. Determine the total wages of the
three workers under a. Halsey Plan, b. Rowan Plan, where the output of Mr. M=
8 units, Mr. K= 12 units and Mr. B= 15 units.

COST ACCOUNTING IV SEMESTER B.B.A | 99

Solution: Since the standard time for the actual production of the three workers
is not mentioned, they must be calculated on the basis of the given standard
time for 6 hours.

Calculation of standard time:

8
Mr. M: × 8 = 10.67 Hrs.
6
12
Mr. K: × 8 = 16 Hrs.
6
15
Mr. B: × 8 = 20 Hrs.
6

Calculation of wages:

a. Halsey Plan:
I. Mr. M
Total wages= T × R + 50% (S - T) R
= 8× 1.50 + 50% (10.67 − 8)1.50
= 12+ 50% (2.67) 1.50
= 12+ 50% (4)
=12+ 2
Wages of Mr. M = Rs. 14.

II. Mr. K
Total wages= T × R + 50% (S - T) R
= 8× 1.50 + 50% (16 − 8)1.50
= 12+ 50% (8) 1.50
= 12+ 50% (12)
=12+6
Wages of Mr. K = Rs. 18.

100 | COST ACCOUNTING IVSEMESTER B.B.A

 III. Mr. B
Total wages= T × R + 50% (S - T) R
= 8× 1.50 + 50% (20 − 8)1.50
= 12+ 50% (12) 1.50
= 12+ 50% (18)
=12+9
Wages of Mr. K = Rs. 21.

b. Rowan Plan
I. Mr. M
H−T
Total Wages = T × ‘ + ×Tב
H
10.66 − 6
= 8 × 1.50 + × 8 × 1.50
10.67
2.67
= 12 × 12
10.67
= 12+3
Total wages= Rs.15

H−T
II. Mr. K
Total Wages = T × ‘ + ×Tב
H
16.8
= 8 × 1.50 + × 8 × 1.50
16
8
= 12 × 12
16
= 12+6

Total wages= Rs.18

COST ACCOUNTING IV SEMESTER B.B.A | 101

 H−T
III. Mr. B
Total Wages = T × ‘ + ×Tב
H
20.8
= 8 × 1.50 + × 8 × 1.50
206
12
= 12 × 12
20
= 12+7.20

Total wages= Rs.19.20

Illustration 3.12

The following particulars are given to you:

Standard time : 10 hrs
Time Rate :Rs. 3 per hour.
Prepare a comparative table under Halsey Plan and rowan plan if time
taken is 9 hrs., 8 hrs., 6 hrs., 4 hrs., and 3 hrs. the table must contain the
bonus payable, amount of total wages and labour cost per hour under two
methods. State at least one point of distinction between Halsey and Rowan
Plan in the calculations.
Solution:

Halsey Rowan
Rate Per Per
Time Time Time
Per Total Hour Total Hour
allowed Taken Saved Bonus Bonus
Hour Wages Labour Wages Labour
(Hrs.) (Hrs.) (Hrs.) Rs. Rs.
Rs. Rs. Cost Rs. Cost
Rs. Rs.
10 9 3.17 2.70
1 3 1.50 28.50 29.70 3.00
10 8 3.38 4.80
2 3 3.00 27.00 28.50 3.60
10 6 4.00 7.20
4 3 6.00 24.00 25.20 4.30
10 4 5.25 7.20
6 3 9.00 21.00 19.20 4.80
10 3 6.50 6.30
7 3 10.50 19.50 15.30 5.10

102 | COST ACCOUNTING IVSEMESTER B.B.A

Conclusion: the above table shows that when the time saved is less than 50% of
the time allowed Rowan Plan pays a higher amount of bonus than Halsey Plan.
After 50% of time saved, Halsey plan plays the higher amount of bonus.

3. TAYLOR’S DIFFERENTIAL PIECE-RATE SYSTEM

It was introduced by F.W. Taylor, who believed that the workers should be paid
on the basis of their degree of efficiencies. Under this method, with the help of
Time and Motion Study, the standard time for the completion of a job is fixed
on the basis of which the performance of the workers is evaluated. Taylor’s
differential piece-rate system posits that the worker who exceeds the standard
output within the stipulated time must be paid a high rate for high production.
On the other hand, the worker is paid a low rate if he fails to reach the level of
output within the standard time.

The following is the formula to calculate the wage of a worker under this
system:

Wages = Output in units× Piece rate (higher rate for the efficient and
lower rate for the inefficient)

The main features of this system are:

o Minimum wages are not guaranteed in this plan.

o A standard time fixed for taking completing the task.
o Different rates are fixed for taking standard time or more.
o Higher rate is given if work is completed in standard or less time and
lower rate is offered if more than standard time is taken.
Advantages:

o This method is simple to understand and wages to be paid to a worker

can easily be calculated.
o It offers good incentives to efficient workers.
o This method is preferred by employees because it reduces overhead
expenses per unit by raising output.

COST ACCOUNTING IV SEMESTER B.B.A | 103

Limitations:

o This method punishes slow workers very severely by giving them lower
rates hence less wages.
o A seed of disunity is sown among workers. Those producing them will
feel jealous of others.
o Workers are not guaranteed minimum wages and they feel insecure
about their earnings.
o It adversely affects the health of workers because they try to over exert
for reaching the standard output.

Illustration 3.13:
Three workers A, B and C produce 15,25 and 16 units in 8 hours a day in a
factory. The standard time allowed per unit is 30 minutes and the wages is Rs.
20 per hour. The differentials applied is 75% for the inefficient and 125% for
the efficient.

Calculate the wages under Taylor’s Differential Piece-Rate System.

Solution:

Calculation of standard production:

The time allowed per unit is 30 minutes or 1š2 hour. Therefore, standard
production for an 8 hour day is 8 hours or 480 minutes divided by 30
›œ• žŸ ¡¢£¤
= 16 hours.
¥• žŸ ¡¢£¤
minutesi.e.,

The wage rate is given on time basis and then converted into piece basis as
follows:
¦§¨© ª©« ¬-®« ³•
=
’¨§¯°§«° ®¯±¨² ª©« ¬-®« ³
= = Rs. 10 per unit.the basic piece rate is

Rs. 10 per unit. Therefore, the differentials are:

Inefficient: 75% of Rs. 10 = Rs. 7.50 per unit.
Efficient: 125% of 10% = Rs. 12.50 per unit.

104 | COST ACCOUNTING IVSEMESTER B.B.A

 Calculation of wages A=15 units (Inefficient) = 15 × 7.50 = ‘'. 112.50
Calculation of wages B=25 units (Efficient) = 25 × 12.50 = ‘'. 312.50
Calculation of wages C=16 units (at standard) = 16 × 12.50 = ‘'. 200

Illustration 3.14

The following were the outputs reported by the four workers-Asha, Disha, Isha
and Nisha, during a 40 hour week in their factory: 135, 340, 400 and 450.
The normal rate per hour is Rs. 100 and the standard time allowed per unit is 6
minutes. Calculate the wages under a. piece rate system and b. Taylor’s
Differential Piece-Rate System.

Solution:

a. Production under straight piece rate system:

Workers Production Rate per Earnings Effective rate
in units unit (Rs.) (Rs.) per unit
(total earnings
÷No. of
units)(Rs.)
Asha 135 10 1350 10
Disha 340 10 3400 10
Isha 400 10 4000 10
Nisha 450 10 4500 10

Taylor’s Differential Piece-Rate System.

Workers Production Status of Differential Wages Effective

in units production piece rate production piece rate
in Rs × µ¶··…•…ƒ¸¶}¹
º¶…»… •}¸… (¼½. )
Asha 135 Below std. 8 1080 8
Disha 340 Below Std. 8 2720 8
Isha 400 At Std. 12 4800 12
Nisha 450 Above Std. 12 5400 12

COST ACCOUNTING IV SEMESTER B.B.A | 105

Note:

o The actual production of each worker is compared with the standard

production to find out the status of production.
o Since the differentials are not given, they are to be assumed as 20%
below i.e., 80% and 20% above i.e., 120% the standard piece rate for
below standard and above standard productions.
o

Illustration 3.15

Using Tylors differential piece rate system, find the earnings of Amar, Akbar
and Ali from the following particulars.
Standard time: 20 minutes
Normal rate per hour: Rs. 9.00
In an 8 hour day
Amar produced: 23 units
Akbar produced: 24 units
Ali produced: 30 units
The differential rates are 83% for the inefficient and 125% for the efficient
worker.

Solution:

Calculation of standard units

Working hours=8 hours or 480 minutes.

Standard time per unit = 20 minutes.
›œ• ¾•
³•
= 24 units ; Standard production per hour =
³•
Standard units per day = =3
units

106 | COST ACCOUNTING IVSEMESTER B.B.A

 Earnings under Taylor’s Differential Piece Rate System

Workers Amar Akbar Ali

Standard output per day (units) 24 24 24

Actual output per day(units) 23 24 30

³¥ ¡ Ÿ¢¤ ³› ¡ Ÿ¢¤ ¥• ¡ Ÿ¢¤
× 100 × 100 × 100 × 100
¿À¨®§Á -®¨ª®¨
Efficiency (%) = ’¨§¯°§«° -®¨ª®¨ ³› ¡ Ÿ¢¤ ³› ¡ Ÿ¢¤ ³› ¡ Ÿ¢¤

Earning rate per unit 83% of the 125% of the 125% of the
piece rate piece rate piece rate

2.49 (83% of 3.75 (125% of 3.75 (125% of

Earning rate per unit(Rs.)*
Rs.3*) Rs.3*) Rs.3*)
(Working note 1)

57.27(23 units 90 (24 units 112.50(30

× 2.49 ‘'. ) × 2.49 ‘'. ) units ×
2.49 ‘'. )

Earnings(Rs.)

Working note 1:

Normal rate per hour = Rs. 9

¤ Ã
’¨§¯°§«° -Ä ¥ ®¯±¨² ª©« ¬-®«
Normal rate per unit: = Rs. 3

COST ACCOUNTING IV SEMESTER B.B.A | 107

 REVIEW QUESTIONS

Short Answer Questions: (Theory type)

1. Define direct labour. Give two examples.

2. What is indirect labour? Give example.
3. What is time keeping?
4. Differentiate between time keeping and time booking.
5. State the methods of time keeping.
6. State the methods of time booking.
7. What is idle time?
8. State the causes of idle time.
9. Mention the difference between idle time and idle capacity.
10. How is normal idle time treated in costing?
11. How is abnormal idle time treated in costing?
12. State three avoidable causes that give rise to idle time?
13. What is the meaning of overtime?
14. What is a biometric time recording clock?
15. How is labour turnover measured?
16. How is overtime premium treated in cost accounting?
17. Distinguish between time rate and piece rate.
18. State the factors to be considered while selecting a method of labour
remuneration.
19. What is Halsey Plan?
20. What are the merits and demerits of Halsey Plan?
21. What is Rowan Plan?
22. What are the merits and demerits of Rowan Plan?
23. What is merit rating?
24. What is the formula of calculating bonus under Halsey premium plan?

108 | COST ACCOUNTING IVSEMESTER B.B.A

 PRACTICAL QUESTIONS

1. A worker complete a job in 15 hours for which time allowed 20 Hrs, hourly
rate Rs 20. Calculate the wages of the workers under a) Piece Rate System,
b) Halsey Bonus Plan , c) Rowan’s Bonus Plan

2. Calculate the wages of the workers under a) Piece Rate System, b) Halsey
Bonus Plan , c) Rowan’s Bonus Plan

Std Time= 60 Hrs

Actual time taken = 40 hours
Hourly Rate=Rs18
3. Calculate the earnings of a worker under different methods from the
following information ST=50 Hrs, AH=40 Hrs, hourly Rate Rs 3 and also
calculate effective earnings per hour.
4. Calculate the wages of the workers under a) Piece Rate System, b) Halsey
Bonus Plan , c) Rowan’s Bonus Plan
Std Time= 80 Hrs
Actual time taken = 60 hours
Hourly Rate=Rs25
5. From the following information calculate wages under different schemes

Particulars A B C D E F
Standard Hours 3 4 5 6 7 8
Actual Hours 5 3 4 5 3 3
Time Saved 0 1 1 1 4 5
Hourly Rate 2 2 2 2 2 2

6. From the following details calculate labour cost per day of 8 hrs.
Basic pay 7500 per month
DA=50% of basic pay
Leave salary 10% of basic pay and DA
Contribution to RPF 8% of basic pay & DA
COST ACCOUNTING IV SEMESTER B.B.A | 109
 Contribution to ESI 4% of basic pay &DA
Prorate canteen expenses RS 775 P.M per worker. Total working hours
per month 200.

7. Calculate the earnings of the worker in term of expenditure to the

management for a month & also calculate labour cost per day of 8 hrs.
Basic salary including DA 300 PM. Leave salary 6% of basic pay.
Employee contribution to RPF 6% of basic pay plus leave salary.
Chargeable Rs25 for worker for welfare facilities per month. The no of
working Hrs Per Month 200 Hrs.

8. A worker men wages for a guaranteed 44 Hrs per week is Rs 10 per hour.
The estimated time to produce an article is 30 minutes and under incentive
schemes the time allowed increased by 20% during a week a workmen
produces 100 articles. Calculate his wages under Halsey system.

9. A worker men wages for a guaranteed 44 Hrs per week is Rs 0.75 per hour.
The estimated time to produce an article is 30 minutes and under incentive
schemes the time allowed increased by 20% during a week a workmen
produces 100 articles. Calculate his wages under Halsey system and
Rowan’s Bonus Plan.

10. A worker men wages for a guaranteed 48Hrs per week is Rs 25per hour.
The estimated time to produce an article is 20minutes and under incentive
schemes the time allowed increased by 20% during a week a workmen
produces 100 articles. Calculate his wages under a) Piece Rate System, b)
Halsey Bonus Plan , c) Rowan’s Bonus Plan.

11. Calculate the wages due to a worker under Halsey Bonus Plan , c) Rowan’s
Bonus Plan from the following details Standard Time=9hrs, Time
Taken=6hrs, Normal rate=0.75 per hr., material cost Rs.4, Over
Heads=150% of Direct Wages also calculate total cost.

12. Compute earnings of the worker under a) Piece Rate System, b) Halsey
Bonus Plan , c) Rowan’s Bonus Plan: Information given : wage rate Rs 2
per hr., DA Rs 1 per hr., Standard Hours- 80 and Actual Hours -50.

110 | COST ACCOUNTING IVSEMESTER B.B.A

 UNIT 4

OVERHEAD COST CONTROL

INTRODUCTION:

Meaning of Overheads
Overheads are those costs required to run a business, but which cannot be
directly attributed to any specific business activity, product, or service. Thus,
overhead costs do not directly lead to the generation of profits.
It is the aggregate of indirect materials cost, indirect Labour cost and indirect
expenses which cannot be conveniently identified with and directly allotted to a
particular cost centre or cost object in an economically feasible way.

Definition:
The CIMA of UK has defined overhead as “the aggregate of indirect materials
cost, indirect wages and indirect expenses.”
According to Bloker and Weltmer, “Overhead costs are the operating costs of a
business enterprise which cannot be traced directly to a particular unit of
output.”
Classification of Overheads:
Function wise classification of overheads.
1. Production Overhead
2. Administration Overhead
3. Selling Overhead
4. Distribution Overhead

COST ACCOUNTING IV SEMESTER B.B.A | 111

Behavior wise classification of overheads
1. Fixed Overhead
2. Variable Overhead
3. Semi-Variable Overhead

Elements wise classification of overheads

1. Indirect Materials
2. Indirect Labor
3. Indirect Expenses

Accounting and Control of Overheads:

Distribution of overhead cost to cost units is one of the most complex problems
of cost accounting. This is because overhead cost cannot be identified with
individual cost units and there are no accounting means of exact distribution.
Therefore, such costs are analysed and distributed to various cost centres and
cost units on arbitrary basis.
Steps in Distribution of Overheads
The following procedure is followed in finding out the overhead cost of
individual cost units of production:
1. Collection of overhead under separate headings.
2. Allocation and absorption to production departments and service
departments.
3. Re-appropriation of total overheads of each service department to
production departments.
4. Absorption of Overhead.

Collection of overhead:

Collection of overhead means collection of various items of overhead under

suitable accounts. The main sources from which overhead expenses are
collected in cost accounts are given below:

a) Stores requisition notes. For indirect material issued from stores.

112 | COST ACCOUNTING IVSEMESTER B.B.A

 b) Invoices. For payments made to outside parties for stores as well as
other services.
c) Wages analysis book. For wages paid to indirect workers
d) Journal entries. For those overhead items which do not involve cash
payment and need some adjustment or those relating to outstanding
expenses, e.g., depreciation, outstanding rent, etc.
Allocation and Apportionment (Primary Distribution)

Allocation of Overheads:
The term ‘allocation of overheads’ refers to identifying an item of overhead and
the allotment of the whole amount to one department or cost centre. In other
words, charging the entire amount of overhead to a particular department or
cost centre, is called allocation of overhead. A point to be clearly understood is
that allocation can be made only when exact amount of overhead incurred in a
cost centre is definitely known.
For example – rent cannot normally be allocated, since rent is payable for the
factory as a whole and the exact amount of rent for each department cannot be
known. Some examples of allocation are – salary of a foreman, wages of a
machine operator, power expenses if separate meter is installed for each
production department.
Apportionment of Overheads:
Those overheads which cannot be allocated to a specific department or cost
centre need to be apportioned to various departments or cost centers the process
of charging proportionate amount of overheads to various departments is known
as apportionment of overheads. As overheads are to be charged proportionately
to various departments it has to be done on some equitable basis. For example,
salary of general manager is to be apportioned to various departments on the
basis of time devoted by him on different departments.
Difference between Allocation and Apportionment of Overheads:
Under allocation of overheads the entire amount of expenses is charged to a
particular department, but under apportionment of overhead only a
proportionate amount is charged to a department. Allocation is the first step in
the departmentalization of overheads, whereas apportionment comes next.
Allocation is a simple process, whereas apportionment is a complicated process.
COST ACCOUNTING IV SEMESTER B.B.A | 113
In case of allocation, overheads can be conveniently identified with a
department, whereas it is not possible to identify overheads to a department
under apportionment process.
Basis of apportionment of Overheads:
Table showing the basis of Apportionment of some common of Production
overheads:

Common items of Production overheads Basis of Apportionment

1. a) Factory rent, Rates &Taxes Floor area occupied
b) Repairs & maintenance of factory building
c) insurance of factory building
d) Depreciation of factory building (if owned)
2.a) Repairs &maintenance of plant and Capital cost of plant and
machinery machinery
b) insurance of plant and machinery
c) depreciation of plant and machinery
3.Iinsurance of stock insured value of stock
4. a) Supervision No. of workers
b) canteen , staff welfare expenses
c) Time keeping & personnel office expenses
5. a) Compensation to workers Wages
b) Employees' state insurance contribution
c) Provident Fund Contribution
6. Stores overhead/stores keeping expenses value of direct material
7. Material handling charges weight of direct material
No. of light points or floor
8. lighting and Heating
area occupied
Horse power of machines or
9. Power/ steam consumption
machine hours

114 | COST ACCOUNTING IVSEMESTER B.B.A

 Format of Statement Showing the apportionment of Overheads:

Production Service
Basis of
Items of Overheads Apportioned Department Department
Apportionment
P1 P2 S1 S2
Fixed power
Normal
Generation cost Capacity
Actual power
consumption
Variable power (kwh)
Actual power
consumption
Generation cost (kwh)
No. of Light
Lighting points
Depreciation Asset value
Insurance asset value
Rent, rates & Taxes Floor space
Repairs Floor space
Stores Overheads Direct material
Employee's insurance charges Direct wges
Staff welfare expenses No.of workers
Supervision expenses No.of workers

Apportionment of Service Department Costs: (Secondary Distribution)

Meaning of Secondary distribution of overheads

Secondary distribution of overheads means the apportionment of overheads of

service departments among the production department on some suitable basis.

COST ACCOUNTING IV SEMESTER B.B.A | 115

Methods of Secondary Distribution:

Apportionment to Production Department only:

Here the total amount of each service department is distributed to only

production de116partment

Table showing basis of apportionment of some common items of

Overheads of Service department:

Service Department Basis of Apportionment

No. of purchase orders or No. of
1. Purchase department purchase requisitions or value of
materials purchased
No. of material requisition or
2. Store department
value of materials issued
3. Time- keeping department, Pay-roll no. of employees or total labour
department hours or machine hours
4. Personnel department, canteen,
No. of employees or total wages
welfare, medical, recreation dept.
5. Repairs and maintenance No.of hours worked in each dept.
Meter reading reading or H.P.
Hour for powers. Meter reading or
6. Power house
floor space for lighting, heat
consumed.
Inspection hours or value of items
7. Insepction
inspected
No. of drawings made or man-
8.Drawing office
hours worked
No. of workers in each
9. Accounts department
department or time devoted
Direct labour hours or Machine
10. Tool room
hours or wages

Apportionment to Production as well as Service Departments.

Non-Reciprocal Method (Step-Ladder Method):
Under this method, expenses of one service department (generally the one
which received the least service and gives the maximum service from and to
other service departments) are apportioned to all other departments in the
proportion of benefit derived by them; then expenses of the next service

116 | COST ACCOUNTING IVSEMESTER B.B.A

department are apportioned to the remaining departments and so on till
expenses of all service departments are dealt with.

ILLUSTRATION 1
L & T Ltd., has two production departments P1& P2 and three service departments S1,
S2 and S3. The overheads of various departments for a period are given below :
P1 Rs. 26500 P2 Rs.3500 S1 Rs. 8500 S2Rs. 15000 S3 Rs.6500
The costs of service departments are to be apportioned as follows :

P1 P2 S1 S2 S3

S1 50% 30% - - 20%

S2 30% 50% 10% - 10%

S3 40% 60% - - -

Prepare Overhead Distribution Statement according to Step Ladder Method.

Solution :

Overheads Distribution Statement

P1 P2 S1 S2 S3
Particulars
Rs. Rs. Rs. Rs. Rs.
Overheads as given 26500 3500 8500 15000 6500
Apportionment of S2’s
Costs to P1, P2, S1&
4500 7500 1500 -15000 1500
S3 in the ratio of 3 : 5 :
1:1
Apportionment of S1’s
Costs to P1, P2, & S3 5000 3000 -10000 - 2000
in the ratio of 5 : 3 : 2
Apportionment of S3’s
Costs to P1, P2, in the 4000 6000 - - -10000
ratio of 2 : 3
40,000 20,000 - - -

COST ACCOUNTING IV SEMESTER B.B.A | 117

Reciprocal Method:

This method recognizes the fact that where two or more service department
render services to each other, each department receiving such services should
be charged for the cost of services rendered by the other. The following
methods may be followed for inter-service distribution:
I. Simultaneous Equation Method
II. Repeated Distribution Method

Simultaneous Equation Method:

This method involves the following steps:
1. Calculate the total costs of each service department by forming and
solving simultaneous equations.
2. Re-apportion the total costs of each service department only to
Production Department on the basis of given percentages.

ILLUSTRATION 2
Sunrise Ltd., has two production departments P1& P2 and two service departments S1
and S2. Expenses of these departments are as follows:
P1 - Rs.51, 837; P2 - Rs.12,163 ; S1 - Rs.40,000; S2 - Rs.16,000
The costs of service departments are to be apportioned as follows:

P1 P2 S1 S2 S3

S1 50% 40% - - 10%

S2 30% 50% 20% - -

Apportion the cost of service departments by using Simultaneous Equation Method

Solution :
Step 1 Formation of simultaneous equations
Let X = Total expenses of S1, Let Y = Total expenses of S2
X = Rs.40,000 + 20% of Y -I
Y = 16,000 + 10% of X - II
118 | COST ACCOUNTING IVSEMESTER B.B.A
Step 2 Solving simultaneous equations
X = Rs.40,000 + .20 Y -I
Y = 16,000 + .10 X - II
Putting the value of X I equation II
Y = 16000 + .10(40,000 + .20Y)
= 16000 + 4000 + 0.02Y
Y-.01Y = 20000
Y = 20000/.98 = Rs.20,408
Putting value of Y is equation I
X = 40,000 + .20 x 20,408
X = 44,082

Repeated Distribution Method:

The overhead expenses, according to primary distribution summary are written
against the respective departments, one after another. Then the expenses of
service departments are redistributed to the production department as well as
services department on the basis of agreed percentage. This process is repeated
until the figures of the service departments are exhausted or become too small
to matter.

ILLUSTRATION 3

TT Ltd., has two production departments P1& P2 and two service departments S1 and
S2. Expenses of these departments are as follows :

P1 - Rs.51,837 P2 - Rs.12,163 S1 - Rs.40,000 S2 - Rs.16,000

The costs of service departments are to be apportioned as follows :

P1 P2 S1 S2 S3
S1 50% 40% - - 10%
S2 30% 50% 20% - -
Apportion the expenses of service departments using Repeated Distribution Method.

COST ACCOUNTING IV SEMESTER B.B.A | 119

Solution :

Overheads Distribution Statement

P1 P2 S1 S2
Particulars
Rs. Rs. Rs. Rs.
Overheads as per primary
51,837 12,163 40,000 16,000
Distribution
Cycle 1 Cost of S1,
apportioned in the ratio 20,000 16,000 -40,000 4,000
(5:4:1)
Cost of S2, apportioned in
6,000 10,000 4,000 -20,000
the ratio (3:5:2)
Cycle 2 Cost of S1,
apportioned in the ratio 2,000 1,600 -4,000 400
(5:4:1)

Cost of S2, apportioned in

120 200 80 -400
the ratio (3:5:2)

Cycle 3 Cost of S1,

apportioned in the ratio 40 32 -80 8
(5:4:1)

Cost of S2, apportioned in

3 5 - -8
the ratio (3:5)

Total Overheads 80,000 40,000 - -

Absorption of Overheads:
The next step in the process of overhead control is to recover it while
ascertaining the cost of production. Charging overheads to individual products
or jobs is known as overhead absorption. The overhead expenses pertaining to a
cost centre are ultimately to be charged to the products, jobs etc, which pass
through that cost centre. The method apportionment of overheads of an
individual cost centre is known as absorption. The terms overhead absorption,
recovery change, application of overhead are used interchangeably.

120 | COST ACCOUNTING IVSEMESTER B.B.A

Basis of Absorption
For the purpose of absorption of overhead to individual jobs, processes or
products overheads absorption rates are applied. The overhead rates of expenses
for apportioning them to production may be estimated on the following three
bases.
On the basis of the figure of the previous year or period overhead rate may be
ascertained and applied to production in the current year.
2. The overhead rate for the year may be determined on the basis if the
estimated expenses and anticipated volume of production or activity.
3. The overhead rate for the year is determined on the basis of the normal
volume of output or capacity of the business.
These are several methods in use for determining overhead rates. The overhead
rate is calculated as under:
C/0%ℎ01, B{c0('0'
C/0%ℎ01, ‘1*0 =
G1'0
Overhead absorbed in a product or job
= Overhead rate X No. of units produced
Methods of Absorption of Factory Overheads
The methods generally applied for the absorption of factory overheads are:
1. Percentage on Direct Material: The actual or predetermined rate of
overhead absorption is calculated by dividing the manufacturing overheads by
the material cost incurred or expected to be incurred and expressing the result
as a percentage. The formula is given below:
Percentage of Works Overhead to Direct material
Factory Overheads
× 100
Direct MaterialCost
2. Percentage on Direct Wages: An actual or predetermined rate of
overhead absorption is calculated by dividing the cost to be apportioned
absorption by the wages paid or expected to be paid and expressing the
result as a percentage. The formula for computing the percentage rate for
a period is given below:

COST ACCOUNTING IV SEMESTER B.B.A | 121

Percentage of works overheads to direct wages
È}»¸••É Ê„…•Ë…}µ½
×
̶•…»¸ Í}Î…½
3. Percentage in Prime Cost: An actual or predetermined rate of
overhead absorption is calculated by dividing the overheads to be
absorbed by the prime cost in incurred or expected to be incurred and
expressing the result as a percentage. The formula for computing the
percentage rate for a period is given below:
Percentage of Work Overheads of Prime Cost
È}»¸••É Ê„…•Ë…}µ½
×
Ï•¶Ð… Ñ•½¸
4. Direct Labour Hour Rate: An actual or predetermined rate of overhead
absorption which is calculated by dividing the cost to be absorbed by the labour
hours worked or expected to be worked. The labour hour rate for a period is
given below:
Direct Labour Hour Rate
È}»¸••É Ê„…•Ë…}µ½
×
̶•…»¸ |}~•€• Ò•€•½
The effective working hours for which the factory works during a particular
period is ascertained as shown below:
Effective Working Hours = [Number of average workers employed during a
given period for which the factory works] * [No. of hours for which the factory
works during each day]
4. Machine Hour Method: This is a method of allocating factory
overheads to different job or products by first calculating the amount
spent to run a machine for one hour and then calculating the amount
chargeable to a job or products by first calculating the amount spent to
run a machine for one hour and then calculating the amount chargeable
to a job or product by multiplying the rate and the number of hours, the
machine is used on that job.
È}»¸••É Ê„…•Ë…}µ½
o Ó r m =
v o Ó r

122 | COST ACCOUNTING IVSEMESTER B.B.A

ILLUSTRATION 4

From the following particulars compute the Machine Hour Rate

Particulars Rs.
Cost of machine 22,000
Scrap value 1360
Repairs for the effective working life 3,000
Standing charges for 4 weekly period 3,200
Effective working life 20000 hours
Power used 6 units per hour 5 paise per unit.
Hours worked in 4 weekly period 120 hours

Solution:
Computation of Machine Hour Rate
Cost Per
Particulars
Hour
Standing Charges ( ` 3200 ÷ 120 hrs) 26.67
Õ-²¨“’À«§ª Ö§Á®©
1. Ô0c%0).1*.$( = ×ÄÄ©À¨±Ø© Ù-«Ú±¯Û ܱĩ
22000 − 1360
=
20000 ℎ%'
1.03

2. Repairs (` 3000 ÷ 20000) 0.15

3. Power 6 units @ 5 paise 0.30
4. Machine Hour Rate 28.15

ILLUSTRATION 5
Work out the machine hour rate for the following machine for the month of January:

Cost of machine Rs.90,000

Other charges, e.g., freight and
Rs.10,000
installation
Working life 10 years

Working hours 2,000 per year

Repair charges 50% of depreciation

COST ACCOUNTING IV SEMESTER B.B.A | 123

 Power— 10 units per hour @ 10 paise
per unit
Lubricating oil @ Rs. 2 per day of 8
hours
Consumable stores @ Rs. 10 per day of
8 hours
Wages of operator @ Rs.4 per day.

Solution:
Computation of Machine hour rate
Standing Charges Per Day Per Hour
Lubricating Oil 2 -
Consumable Stores 10 -
Wages of Operator 4 -
Standing Charges per Hour
(16 ÷ 8 hrs)
16 -

Variable Charges - 2.00

Ô0c%0).1*.$(
‘' 90000 + 10000
=
- 5.00
20000 ℎ%'
Repairs (50% of
- 2.50
depreciation)
Power 10 units @ 10 paise
- 1.00
per unit
Machine hour Rate - 10.50

ILLUSTRATION 6

S & N Co., provides the following information which has three production
department's A, B and C and two service departments X and Y .

Departments
Particulars
A B C X Y
Total departmental overhead as
12,600 14,800 5,600 9,000 4,000
per primary distribution (in Rs.)

124 | COST ACCOUNTING IVSEMESTER B.B.A

The company decided to charge the service department post on the basis of the
following percentage :

Service
Service Production Departments
Departments
Depts.
A B C X Y
X 20% 15% 10% 10%
Y 20% 20% 10% 10%

Find the total overheads of production departments charging service departmental costs
to production on the repeated distribution method.

Solution:

Service
Production Departments
Service Departments
Depts. A B C X Y
Rs. Rs. Rs. Rs. Rs.
Total as give 12,600 14,800 5,600 9,000 4,000
X 3,273 2,455 1636 -9,000 1636
Y 788 788 394 394 -2,364
X 143 107 72 -394 72
Y 24 24 12 12 -72
X 4 3 2.5 -12 2.5
-2.5
6,830 18,177 7,717

Ratios
X = 4:3:2:2 =11
Y = 2:2:1:1 = 6

ILLUSTRATION 7

The following data were obtained from the books of Light Engineering Company for
the half year ended 30th September. Calculate the departmental overhead rates for each
of the production departments, assuming that the overheads are recovered as a
percentage of direct wages :

COST ACCOUNTING IV SEMESTER B.B.A | 125

 Production Service
Particulars of Basis
Departments Departments
Overheads
A B C X Y
Direct Wages Rs. 7,000 6,000 5,000 1,000 1,000
Direct Materials Rs. 3,000 2,500 2,500 1,500 1,000
Employees Nos. 200 150 150 50 50
Electricity Kwh. 8,000 6,000 6,000 3,000 3,000
Light Points Nos. 10 15 15 5 5
Assets value ('000) Rs. 50 30 20 10 10
Area Occupied (Sq.yd.) 800 600 600 200 100

The expenses for 6 months were:

Stores overhead 400 Depreciation 6,000

Repairs &
Motor Power 1,200
1000 maintenance
Electric lighting 200 General overheads 10,000
Labour welfare 3,000 Rent and Taxes 600

Apportion the expenses of department X in ratio of 4 : 4 : 3 and that of department Y

in proportion to direct wages, to department A, B and C respectively. (C.A. Inter)

Solution:

Light Engineering Company overhead Distribution Summary

Period: Half year ended 30th Sept.
Production Service
Departments Departments
Particulars of Overheads Basis
Total A B C X Y

Rs. Rs. Rs. Rs. Rs. Rs.

Direct (as
Wages 2,000 1,000 1,000
given)
Direct (as
Materials 2,500 1,500 1,000
given)
Materials
Stores Overhead 400 120 100 80 60 40
consumed
Motive Power K.W.H. 1,500 480 360 360 120 180
Lighting No. of 200 40 60 60 20 20
126 | COST ACCOUNTING IVSEMESTER B.B.A
 points
No. of
Labour Welfare 3,000 1,000 750 750 250 250
employee
Assets
Depreciation 6,000 2,500 1,500 1,000 500 500
value
Assets
Repairs & Maintenance 1,200 500 300 200 100 100
value
Wages
General Overhead 10,000 3,500 3,000 2,500 500 500
paid
Area
Rent & Taxes 600 200 150 150 50 50
occupied
Total 27,400 8,340 6,220 5,100 4,100 3,640
Apportionment of Service Depts.
Department X 4 : 3 : 3 (as given) 1,640 1,230 1,230 4,100
Department Y Direct Wages 7 : 6 : 5 1,416 1,213 1,011 - 3640
Total 27,400 11,396 8,663 7,341

Direct Wages 7,000 6,000 5,000

Percentage of Overheads to Direct Wages

11,396 x 100
A= = 162.8%
7,000
8,663 x 100
B= = 144.4%
6,000

7,341 x 100
C= = 146.8%
5,000

ILLUSTRATION 8

A company has three production departments P,Q and R and two service departments
X and Y. The expenses incurred by them during the month are :
P Rs. 40,000 X Rs. 11700
Q Rs. 35,000 Y Rs. 15,000
R Rs. 25,000
The expenses of service departments are apportioned to the production departments on
the following basis :
P Q R X Y
Expenses of X 20% 40% 30% - 10%
Expenses of Y 40% 20% 20% 20%
COST ACCOUNTING IV SEMESTER B.B.A | 127
Show clearly as to how the expenses of X and Y departments would be apportioned to
the A, B, and C departments:

Solution :
Secondary Distribution Summary
Service
Production Departments
Department

A B C X Y

Rs. Rs. Rs. Rs. Rs.

Total expenses 40,000 35,000 25,000 11,700 15,000

Service Department X 2,340 4,680 3,510 11,700 1,170

Service Department Y 6,468 3,234 3,234 3,234 -16,170

Service Department X 647 1293.5 970 -3,234 323.5

Service Department Y 129.5 64.5 64.5 64.5 -323.5

Service Department X 13 26 19.5 -64.5 6.5

Service Department Y 2.5 1.5 1 1.5 -6.5

Service Department X -1.5

TOTAL 49,600 44,300 32,799 - -

ILLUSTRATION 9

In an engineering factory, the following particulars have been extracted for the year
ended 31.12.2013.

Service
Production Departments
Particulars Departments
A B C X Y
Direct wages (Rs.) 30,000 45,000 60,000 15,000 30,000
Direct materials (Rs.) 15,000 30,000 30,000 22,500 22,500
Staff number 1,500 2,250 2,250 750 750
Electricity (kwh) 6,000 4,500 3,000 1,500 1,500
Asset value (Rs.) 60,000 40,000 30,000 10,000 10,000
128 | COST ACCOUNTING IVSEMESTER B.B.A
 Light points 10 16 4 6 4
Area (square meters) 150 250 50 50 50

The expenses for the period were as follows:

Rs. Rs.
Power 1,100 Depreciation 30,000
Lighting 200 Repairs 6,000
Stores overhead 800 General overheads 12,000
Welfare to staff 3,000 Rent and taxes 550

Apportion the expenses of service department Y according to direct wages and those of
service department X in the ratio 5 : 3 : 2 to the production departments.

You are required to prepare an Overhead Distribution Summary. (BBM Bangalore,

Adapted)

Solution:
Overhead Distribution Summary

Item Total Production Service

Departments Departments
Particulars A B C X Y
Rs. Rs. Rs. Rs. Rs.
Direct wages Actual 45,000 15,000 30,000
Direct materials Actual 45,000 22,500 22,500
Electricity 1,100
Power
(kwh) 400 300 200 100 100
Lighting Light points 200 50 80 20 30 20
Value of 800
Stores
direct
overheads
materials 100 200 200 150 150
Welfare to Staff Staff number 3,000 600 900 900 300 300
Depreciation Asset value 30,000 12000 8000 6000 2000 2000
Repairs Asset value 6,000 2400 1600 1200 400 400
General 12,000
Direct wages
overheads 2000 3000 4000 1000 2000
Rent and taxes Area 550 150 250 50 50 50
Total 17700 14330 12570 41530 57520

COST ACCOUNTING IV SEMESTER B.B.A | 129

 -
Department X 5:3:2
20765 12459 8306 41530
-
Department Y 2:3:4
12782 19173 25565 57520
Total 51247 45962 46441

ILLUSTRATION 10

A factory has three Production Departments and two Service Departments. The
overhead departmental distribution summary shows the following:
Departments Rs.
A 6,50,000
B 6,00,000
C 5,00,000
P 1,20,000
Q 1,00,000

The Service Department expenses are allotted on a percentage basis as follows :

Service
Production Departments Departments
A B C X Y
Service Departments P 30 40 15 - 15
Service Departments Q 40 30 25 5 -

Show how the expenses of the two Service Departments are to be charged to
Production Departments under "repeated distribution” method and ‘simultaneous
equations’ method.

Solution :
(a) Repeated Distribution Method
Secondary Overhead Distribution Summary
Production Departments Service Departments
Particulars
A B C X Y
Totals as per
6,50,000 6,00,000 5,00,000 1,20,000 1,00,000
Primary Summary
Service
36,000 48,000 18,000 (-) 1,20,000 18,000
Departments P

130 | COST ACCOUNTING IVSEMESTER B.B.A

 Service
47,200 35,400 29,500 5,900 (-) 1,18,000
Departments Q
Service
1,770 2,360 885 (-)5,900 885
Departments P
Service
354 266 221 44 (-) 885
Departments Q
Service
13 18 7 (-) 44 6
Departments P
Service
3 2 1 (-) 6
Departments Q
Total 7,35,340 6,86,046 5,48,614

Notes. 1. Fractions have been avoided as this method itself gives only approximate
results.
2. Students are advised to solve this problem by ‘Simultaneous Equations’ methods
and check this answer.
(b) Simultaneous Equations Method
Let X = Overhead of Service Deptt. P
Y = Overhead of Service Deptt. Q
X = 1,20,000 + 5% of Y …(i)
Y = 1,00,000 + 15% of X …(ii)
X = 1,20,000 + 0.05 Y …(i)
Y = 1,00,000 + 0.15 X …(ii)
X — 0.05 Y = 1,20,000 …(i)
- 0.15X + Y = 1,00,000 …(ii)
Multipliying equation (ii) by 0.05 and add
X - 0.05 Y = 1,20,000
—0.0075 X + 0.05 Y = 5,000
0.9925 X = 1,25,000
X = 125,944.58
Substituting the value of X in equation (i)
125,944.58 — 0.05 Y = 1,20,000 -
Y = l,18,891.60

COST ACCOUNTING IV SEMESTER B.B.A | 131

Thus Overhead of Deptt. P = Rs. 125,944.58 or Rs. 1,25,945 (approx.)
Overhead of Deptt. Q = Rs. 1,18,891.60 or Rs. 1,18,892 (approx.)

Secondary Overhead Distribution Summary

Production Departments
A B C
Total as per Primary
6,50,000 6,00,000 5,00,000
Distribution
Overheads of Deptt. P 37,783 50,378 18,892
(30%, 40% and 15% of
1,25,945)
Overheads of Deptt. Q 47,557 35,668 29,723
(40%, 30% and 25% 0f
1,18,892)
Total 7,35,340 6,86,046 5,48,615

ILLUSTRATION 11

A company has three production cost centres A, B and C and two service cost
centres X and Y Costs allocated to service centres are required to be apportioned to the
production centres to find out) cost of production of different products.

It is found that benefit of service cost centres is also received by each other
along with the production cost centres. Overhead costs as allocated to the five cost
centres and estimates of benefit of service cost centres received by each of them are as
under:

Cost Overhead costs as Estimates of benefits received from Service centres %

centres allocated (Rupees)
X Y
A 60,000 40 50
B 30,000 20 20
C 15,000 30 25
X 15,000 10
Y 7,500 5

132 | COST ACCOUNTING IVSEMESTER B.B.A

Work out final overhead costs of each of the production departments including re-
apportioned cost of service centres using (a) Continuous distribution method and (b)
Simultaneous equation method. (I.C.WA.. Inter)

Solution :
(a) Secondary Overhead Distribution Summary (Repealed or Continuous
Distribution Method)

Service
Production Departments
Departments
Particulars
A B C X Y
Rs. Rs. Rs. Rs. Rs.
Overhead costs 60,000 30,000 15,000 15,000 7,500
Overheads of X 6316 3158 4737 -15000 789
Overheads of Y 3947 1579 1974 789 -8289
Overheads of X 332 166 249 -789 42
Overheads of Y 20 8 10 4 -42
Overheads of X 2 1 1 -4 -
Final overhead
cost of Prod. 70617 34912 21971 - -
Dept.

(b) Simultaneous Equation Method : Suppose overhead of X service centre is x and of

Y is y.
Overhead of X = 15,000 + 10% y …(i)
Overhead of Y = 7500 + 5% x …(ii)
x = 15,000 + 0.10y …(i)
y =7500 + 0.05x …(ii)
x= 15000+ 0.10y
x= 15000 + 0.10 (7500+0.05x)
x= 15000+750+0.005x
x-0.005x = 15750
0.995x = 15750

COST ACCOUNTING IV SEMESTER B.B.A | 133

X = 15750/ 0.995
X= 15829
Y = 7500+ 0.05x
Y= 7500+0.05 (15829)
Y= 7500+791.45
Y= 8291
Thus overhead of X is ` 15829 (approx…)
Overhead of Y id ` 8291 (approx….)

Secondary Overhead Distribution Summary

(Simultaneous Equation Method)
Production Departments
Particulars A B C
Overhead costs 60,000 30,000 15,000
Overheads of X ( 40%,20% & 30% ) 6,332 3,166 4,748
Overheads of Y ( 50%, 20% & 25% 4,146 1,658 2,073
Overhead cost of Prod. Dept. 70478 34824 21821

Ratios:
X = 8:4::6:1
Y = 5:2::2.5:1

ILLUSTRATION 12

A company has three production cost centres, A, B, and C and two service cost
centres X and Y. Costs allocated to service centres are required to be apportioned to
the production centres to find out cost of production of different products.
It is found that benefit service cost centres is also received by each other along
with the production cost centres.
Overhead costs as allocated to the five cost centres and estimates of benefits of
service cost centres received by each of them are as under:

134 | COST ACCOUNTING IVSEMESTER B.B.A

 Estimates of benefits
Overhead costs as allocated received from service
Cost centers
Rs. centers :%
X Y
A 40,000 20 20
B 20,000 30 25
C 10,000 40 50
X 10,000 - 5
Y 5,000 10 -

Work out final overhead costs of each of the production departments including
reapportioned cost of service centres using (a) Continuous method and (b)
Simultaneous Equation method.

Solution:
(a) STATEMENT SHOWING APPORTIONMENT
(Continuous Distribution method)
Production Department Service department
Particulars
A B C X Y
Overheads 40,000 20,000 10,000 10,000 5,000
Overhead cost of X 20,000 3,000 4,000 -10,000 1,000
Overhead cost of Y 1200 1,500 3,000 300 - 6,000
Overhead cost of X 60 90 120 -300 30
Overhead cost of Y 6 7.5 15 1.5 -30
Overhead cost of X 0.3 0.45 0.6 -1.5 -
Total 43266.3 24,598 17,136

(b) Simultaneous Equation Method

X= 10000+ 0.05 y

Y= 5000+0.10x

X = 10000+ 0.05 y

= 1000+0.05 /9 5000+0.10 x)

X= 10000+250+0.005x

x-0.005x = 10250
COST ACCOUNTING IV SEMESTER B.B.A | 135
 0.995x = 10250

X= 10250/0.995

X= 10301.5

Y= 5000+0.10x

Y = 5000+0.10 ( 10301.5)

Y= 5000+1030.15

Y= 6030.15

STATEMENT OF APPORTIONMENT OF OVERHEAD COST

(SimultaneousEquation Method)

Production Departments Service Departments

Particulars
X Y Z P Q
Overhead costs ( Given) 40,000 20,000 10,000 10,000 5,000
Overhead cost of X
2,060 3,090 4,121 -10301.5 1,030
(% given)
Overhead cost of Y
1206 1,507 3,015 302 -6030
(% given)
Total 43266 24,597 17,136
Ratios X= 20:25:50:5 , Y = 4:5:10:1

ILLUSTRATION 13.

SRS Ltd gives the following information in respect of overheads in a factory:

Production Departments Service Departments

A :Rs. 480000 X : Rs. 1,40,000

B :Rs. 420000 Y : Rs. 180,000

C :Rs. 3,00,000

136 | COST ACCOUNTING IVSEMESTER B.B.A

 The expenses of X and Y service departments are apportioned as under :

Production Department Service Department

Particulars
A B C X Y
Overhead cost of X 20% 40% 30% 10%
Overhead cost of Y 40% 20% 20% 20%

Solution:
Statement Showing Apportionment of Overheads
(Repeated Distribution method)

Production Departments Service Departments

Particulars Basis A B C X Y
Rs. Rs. Rs. Rs. Rs.
Expenses 4,80,000 4,20,000 3,00,000 1,40,000 1,80,000
Expenses of X 28,000 56,000 42,000 -140000 14,000
Expenses of Y 77600 38,800 38,800 38,800 -194000
Expenses of X 7760 15,520 11,640 -38800 3,880
Expenses of Y 1552 776 776 776 -3880
Expenses of X 155 310 233 -776 78
Expenses of Y 31 16 16 16 -78
Expenses of X 3 6 5 -16 -
Total 5,67,101 5,31,428 3,93,470 - -

COST ACCOUNTING IV SEMESTER B.B.A | 137

 REVIEW QUESTIONS

SECTION- A (2 Marks)

1. Define overhead.
2. What is difference between overhead and prime cost?
3. What is difference between works on cost and works cost?
4. Give examples of Factory overheads
5. Give two examples each of selling overheads and distribution
overheads
6. List the steps in distribution of overheads
7. What is the difference between allocation and apportionment of
overheads
8. Give two examples each of production departments and service
departments
9. Give two bases of apportionment of factory overheads.
10. What is step ladder method of apportionment of service department
overheads
11. State four methods of absorption of overheads.
12. What is Machine hour rate?
13. What is the difference between labour cost method and labour hour
rate method of absorption?
14. Give two advantages of machine hour rate method
15. State two advantages of percentage of direct labour cost method of
absorption.
16. How are administration overheads treated in cost accounts?
17. State two methods for the absorption of selling and distribution
overheads.
18. How is setting up time treated in calculating Machine hour rate?

138 | COST ACCOUNTING IVSEMESTER B.B.A

SECTION B (6 marks)

1. Explain the different methods of classification of overheads.

2. Distinguish between allocation and appropriation of overheads. Mention
also the basis of apportionment of expenses.
3. What is Machine hour rate? How is it calculated?
4. Calculate machine hour rate from the following data:
Cost of machine Rs. 1,16,000
Estimated scrap value Rs.16,000
Estimated working life 20,000hrs.
Estimated maintenance cost during working life of machine Rs.2,400
Power used per machineRe.1 per hour
Rent rates per month (10% to be charged to machine) Rs.3,000
Normal machine running hours during a month 180
Standing charges other than rent, rates etc. Per month Rs.400

SECTION -C (14 marks)

1. The following information is supplied from the costing records of a

company. Rent 2000, Maintenance 1200, depreciation 900, lighting
200, insurance 1000, Employer’s contribution to P.F 300, Energy 1800,
and Supervision 3000.
Particulars Departments
A B C D
Floor space (sq.ft) 150 110 90 50
Number of workers 24 16 12 8
Total direct wages 8000 6000 4000 2000
(Rs)
Cost of machinery 24000 18000 12000 6000
Stock of goods 15000 9000 6000 -
Prepare a statement showing apportionment of costs to various
departments.

COST ACCOUNTING IV SEMESTER B.B.A | 139

2. The following data were obtained from the books of Glaxo company for the
year ended 2004. Prepare an overhead distribution summary.
Particulars Prod. Dept Service Dept
A B C X Y
Direct wages 7000 6000 5000 1000 1000
Direct materials 3000 2500 2000 1500 1000
Employees 200 150 150 50 50
(No’s)
Electricity 8000 6000 6000 2000 3000
(000wh)
Light points 10 15 15 5 5
(No’s)
Asset values 50000 30000 20000 10000 10000
Area occupied 800 600 600 200 200
(Sq.ft)

The expenses for 6 months were;

Stores overhead 400, depreciation 6000, motive power 1500, repairs &
maintenance 1200, electric lighting 200, General overheads
10000, labour welfare 3000, Rent & taxes 600.
Apportion the expenses of Dept X in the ratio of 4:3:3 and that of Dept
Y in the proportion to direct wages, to Dept A, B & C
respectively.

3. The following particulars relate to a manufacturing company which

has 3 Production departments, A, B and C and 2 Service departments
X & Y.
Total departmental overheads as per primary distribution
Production department Service department
A B C X Y
6300 7400 2800 4500 2000
The company decided to charge the service department cost on the basis
of the following %.
A B C X Y
X 40% 30% 20% - 10%
Y 30% 30% 20% 20% -
140 | COST ACCOUNTING IVSEMESTER B.B.A
Find out the total overhead of production depts. Charging service dept.
costs to production depts. by Simultaneous Equation Method.
(B.Com May 2006)

4. The following are the overhead allocation of 3 production

departments and 2 service departments X, Y, Z and S1 and S2
respectively.
X Y Z S1 S2
15000 14400 19300 9250 3150

Distribute the overhead of service department S1 and S2 to production

department and service departments as follows;
X Y Z S1 S2
S1 20% 30% 40% - 10%
S2 40% 20% 30% 10% -
(B.Com May 2007)

5. Ranjani ltd. Has 3 Production dept. and 2 Service depts... from the
following figures prepare the overhead distribution summary using
Repeated distribution method for secondary distribution and calculate
the overhead rate per labour hour. (B.Com May 2008)
Particulars A B C P Q
Direct materials 45000 30000 15000 12000 9000
(Rs)
Direct wages 30000 22.5000 15000 6000 4.5000
Value of 60000 45000 30000 - -
machine
Floor area (sq.ft) 30000 20000 15000 10000 5000
HP of machines 240 200 160 - -
No. of light 120 90 60 30 20
points
No. of labour 5000 5000 5000
hours
Other information;
Indirect materials 22200, indirect wages 15600, depreciation on
machinery 27000, depreciation on building 12000, rent, rates and
COST ACCOUNTING IV SEMESTER B.B.A | 141
 taxes 9000, electric power 33750, lighting 2400, general expenses
7800. The service rendered by each service department to other
departments is as under
A B C P Q
P 30% 40% 20% - 10%
Q 10% 20% 50% 20% -

6. The modern company is having four departments. A, B and C are

producing departments and D is the servicing departments. The
actual cost for the period was as follows.
Rent 2000,
Repairs 1200,
Depreciation 900,
Light 200,
Supervision 3000,
Insurance 1000,
Employees Insurance 300,
Power 1800.

The following data are also available in respect of the four departments.

Particulars A B C D
Area in sq.ft 150 110 90 50
No. of wor000ers 24 16 12 8
Total wages 8000 6000 4000 2000
Value of plant 24000 18000 12000 6000
Value of stoc000 15000 9000 6000 -

Apportion the costs of various departments in most equitable way and

apportion service department cost to Production department in the ratio
of 2:2:1 ( June B.Com 2009)

142 | COST ACCOUNTING IVSEMESTER B.B.A

 UNIT - 5

RECONCILIATION OF COST AND

FINANCIAL ACCOUNTING

INTRODUCTION:

In big business concerns where both financial accounts and cost accounts are
maintained separately, the profit shown by one may not agree with profit shown
by the other, In fact they are expected to show the same profits as both sets of
boo000s are written up from same records and same data. But in practice,
profits of both accounting systems may not be same due to several reasons.
Therefore, there is necessity of reconciliation of both profits to confirm
accuracy of boo000s of accounts on one hand and to find out the reasons for
variation in profits on the other. For reconciling profits of both sets of boo000s,
a statement is prepared called ‘reconciliation statement’.
Reasons for disagreement in profits
Following are the main reasons for disagreement in profits or losses of both sets
of boo000s:
1) Items shown only in financial accounts:-There are several items
which appear in financial accounts only. These items are classified into
three groups as follows:-
• Purely financial charges:-
o Loss on sale of fixed assets and investments
o Discount on debentures and bonds
o Interest on ban000 loans and mortgages etc
o Fines and penalties
o Damages payable under court decree
o Stamp duty and expenses on issue and transfer of shares

COST ACCOUNTING IV SEMESTER B.B.A | 143

 • Purely financial items:-
o Profit on sale of fixed assets
o Rent receivable
o Dividend and interest received on investments
o Interest received on ban000 deposits
o Transfer fees received
o Bro000erage received

• Appropriation of profits:-
o Dividend paid
o Transfer to reserves and sin000ing funds
o Donations and charities
o Income tax
o Goodwill, preliminary expenses written off
o Excess provision for depreciation and for bad debts

• Items shown only in cost accounts:-There are few items which are
included in cost accounts only. These items are usually notional charges
which are as follows:-

o Interest on own capital

o Rent on own building
o Salary of proprietor if not charged to P&L account
o Over absorption and under absorption of overheads:-

In cost accounts overheads are recovered on the basis of predetermined rates

whereas in financial accounts these are recorded at actual cost. If the overhead
recovered is more than actual overhead incurred, it is called as over absorption
of overheads. Similarly, if the overhead recovered is less than actual overhead,
it is 000nown as under absorption of overhead. In such cases there is necessity
of ma000ing proper adjustment to profits for reconciliation.

Different methods of stoc000 valuation

144 | COST ACCOUNTING IVSEMESTER B.B.A

In financial accounts stoc000 is valued at cost or mar000et price whichever is
less, whereas in cost accounts stoc000 is valued at actual cost. This will result
into variation in profits of both systems. Therefore, adjustment in this respect is
necessary for reconciliation.

Different methods of charging depreciation

In financial accounts usually depreciation is charged under straight line or
diminishing balance method whereas in cost accounts it is charged at machine
hour rate or production unit rate, this may also cause a difference in the profits.

Abnormal gains and losses:-

Abnormal loss of material due to theft, fire etc., abnormal idle time, exceptional
bad debts and abnormal gains may be shown in financial accounts, but are
excluded from the cost accounts. This also causes difference in profits of both
set of boo000s.

Significance of Reconciliation of Profits

Reconciliation of profits has assumed greater significance where both financial
accounts and cost accounts are maintained independent of each other. The
significance of reconciliation of profits may be enumerated as follows:
• It reveals the reasons for difference in profits or loss of both sets of
boo000s.
• It facilitates analysis of reasons for difference in profits to ta000e
necessary steps for adjustment.
• It helps to confirm the mathematical accuracy and reliability of both sets
of boo000s.
• It contributes to the standardization of policies regarding stoc000
valuation, depreciation and overheads.
• It promotes co-ordination between the activities of financial and cost
accounts
• It enables the management to secure effective internal control by
disclosing reasons for difference in profits.

Procedure for Reconciliation

COST ACCOUNTING IV SEMESTER B.B.A | 145

The profit of financial and cost accounts are reconciled by preparing a
Reconciliation Statement or a Memorandum Reconciliation Account. The
following steps shall be ta000en for preparing a reconciliation statement:-

Find out various reasons for variation in profits of both sets of boo000s.
Ta000e any profit as base, If profit as per cost accounts is ta000en as base,
following items are added-
• Items of Incomes included in financial accounts only.
• Items of expenses (Notional costs) included in cost accounts only.
• Items of overheads over recovered in cost accounts
• The amount of higher valuation of opening stoc000 in cost accounts
• The amount of lower valuation of closing stoc000 in cost accounts.
• Over charging of depreciation in cost accounts.

Then the following items are deducted:-

• Items of expenses included in financial accounts only.

• Items of incomes included in cost accounts only.
• Items of overheads under recovered in cost accounts
• The amount of lower valuation of opening stoc000 in cost accounts
• The amount of higher valuation of closing stoc000 in cost accounts
• Under charging of depreciation in cost accounts.

146 | COST ACCOUNTING IVSEMESTER B.B.A

 PROBLEMS AND SOLUTIONS

Problem 5.1
From the following figures, prepare a Reconciliation Statement and determine
financial profit:

Net profit as per costing boo000s 66,760

Factory overhead under-recovered in costing 5,700
Administration overhead recovered in excess 4,250
Depreciation charged in financial boo000s 3,660
Depreciation recovered in costing 3,950
Interest received but not included in costing 450
Income-tax provided in financial boo000s 600
Ban000 interest credited in financial boo000s 230
Stores adjustment (credited in financial boo000s) 420
Depreciation of stoc000 charged in financial accounts 860
Dividends appropriated in financial accounts 1,200
Loss due to then and pilferage provided only in financial boo000s 260

Solution

Reconciliation Statement

Rs Rs
Profit as per costing boo000s 66,760
Add: 1. Adm. overhead recovered in excess 4,250
2. Depredation overcharged m cost boo000s 290
(3950 - 3660)
3. Interest received but not included in costing 450
4. Ban000 interest credited in financial boo000s 230
5. Stores adjustment credited in financial 420 5,640
boo000s 72,400
Less: 1. Factory overhead under-recovered 5,700
2. Income tax provided in financial boo000s 600
3. Dividends appropriated 1,200
4. Depreciation of stoc000 in financial boo000s 860
5. Loss due to theft and pilferage not shown in 260 8,620
cost boo000s
COST ACCOUNTING IV SEMESTER B.B.A | 147
 Profit as per financial boo000s 63,780

Problem 5.2
The net profits erf a manufacturing company appeared at 74,500 as per
financial records for the year ended 31st March, 2013 The cost boo000s,
however, showed a net profit of 88,460 for the same period. A careful scrutiny
of the figures from both the sets of accounts revealed the following facts :

Income tax provided in financial boo000s 10,000

Ban000 interest credited in financial boo000s 250
Wor000s overhead under-recovered in cost boo000s 1,550
Depreciation charged in financial boo000s 5,600
Depreciation recovered in costing boo000s 6,000
Administrative overheads over-recovered 850
Loss due to obsolescence charged in financial accounts 2,800
Interest on investments not included in cost accounts 4,000
Stores adjustments (Credited in financial boo000s) 240
Loss due to depreciation in stoc000
values charged in financial boo000s 3,350

You are required to prepare

(a) the Reconciliation Statement
(b) a Memorandum Reconciliation Account.

Solution:
(a) Reconciliation Statement

Profit as per Cost Accounts 88,460

Add: (i) Ban000 interest credited in financial 250
boo000s
(ii) Excess depreciation recovered in cost 400
accounts
{iii) Administrative overheads over-recovered in 850
cost accountson investment 'not included in cost
(iv) Interest 2,000
accounts
(v) Stores adjustments credited in financial 240 3.740
148 | COST ACCOUNTING IVSEMESTER B.B.A
 boo000s 92,200
Less: 10,00
(i) Income tax provided in financial boo000s 0
(n) Wor000s overhead under-recovered in cost 1,5S0
boo000s
(iii) loss due to obsolescence charged in. 2,800
financial accounts
(iv) Loss due to depreciation in stoc000 values 17,700
3,350
charged in financial boo000s
Profit as per Financial Accounts 74,500

Problem 5.3
A manufacturing company disclosed a net loss of ? 3,47,000 as per their
cost accounts for the year ended March 31, 2013. The financial accounts
however disclosed a net loss of T 5,10,000 for the same period. The following
information was revealed as a result of scrutiny of the figures of both the sets of
accounts:

Factory overheads under-absorbed 40,000

Administration overheads over-absorbed 60,000
Depreciation charged in financial accounts 3,25,000
Depreciation recovered in cost accounts 2,75,000
Interest on investments not included in cost accounts 96,000
Income-tax provided 54,000
Interest on loan funds in financial accounts 2,45,000
Transfer fee (credit in financial boo000s) 24,000
Stores adjustment (credit in financial boo000s) 14,000
Dividend received 32,000

Prepare a statement showing reconciliation between the figure of net loss as per
cost accounts and the figure of net loss shown in the financial boo000s.

COST ACCOUNTING IV SEMESTER B.B.A | 149

Problem 5.4
From the following/figures prepare a Reconciliation Statement :
Net loss as per financial records 208045
Net loss per costing records 172400
Wor000s overhead under recovered in costing 3120
Administrative overhead recovered in excess 1700
Depreciation charged in financial records 11200

Solution:
Reconciliation Statement
Loss as per Cost Accounts 3.47.000
Add: 1. Factory overheads under-absorbed 40,000
2. Depreciation (3,25,000 - 2,75,000) 50,000
3. Income tax S4,000
4. Interest on loan funds 2,45,000 3,89,000
7,36,000
Less: 1. Administrative overheads over-absorbed 60,000
2. Interest on investments 96,000
3, Transfer fee (Cr. in financial boo000s) 24,000
4. Stores adjustment (Cr. in financial 14,000
boo000s)
5. Dividend received 32,000 2,26,000
Loss as per Financial Accounts 5,10,000

Depreciation recovered in costing 12500

Interest received not included in costing 8000
Obsolescence (loss) charged in financial records 5700
Income-tax provided in financial boo000s 40300
Ban000 interest credited in financial boo000s 750
Stores adjustment (credit) in financial boo000s 475
Value of opening stoc000 in: Cost accounts 52,600
Financial accounts 54,000

150 | COST ACCOUNTING IVSEMESTER B.B.A

Value of closing stoc000 in:
Cost accounts 52,000
Financial accounts 49,600
Interest charged in cost accounts
but not in financial accounts 6,000
Preliminary expenses written off in financial accounts 800
Provision for doubtful debts in financial accounts 150

Reconciliation Statement

Loss as per costing records 1,72,400

Add :1. Words overhead under recovered 3,120

2. Obsolescence loss in financial records 5,700

3. Income tax 40,300

4. Difference in value of op. stoc000
1,400
(54,000 - 52,600)
5. Difference cl. stoc000 value (52,000 - 2,400
49,600)
6. Preliminary expenses 800
7. Provision for doubtful debts 150 53,870
2,26,270
Less : Adm. overhead over-recovered 1,700
Depredation over-recovered in cost
1,300
(12,500 - 11,200)
Interest received 8,000
Ban000 interest 750
Stores adjustment 475
Interest charged only in cost accounts 6,000 18,225

Loss as per financial records 2,08,045

COST ACCOUNTING IV SEMESTER B.B.A | 151

Problem 5.5

A factory manufactures two types of television sets一Supreme and Majestic,

From the following particulars prepare, a statement showing cost and profit per
television set sold. There is no opening or closing stoc000

Supreme Majestic
Materials 81,900 3,26,040
Labour 46,800 2,09,760
Selling price per television set 3,000 3,000

Wor000s expenses are charged at 80% on labour and office expenses at 15% on
wor000s cost
78 Supreme and 286 Majestic television sets were sold.
Find out profit as per financial accounts assuming that actual wor000s expenses
amounted to 1,92,060 and office expenses totalled 1,40,400. Reconcile the
profit shown by cost and financial records.

Solution :
Statement of Cost and Profit (as per Cost Accounts)
Supreme Majestic
Total
(78 Sets) (286 Sets)
Materials 81,900 3,26,040 4,07,940

Labour 46,800 2,09,760 2,56,560

Prime Cost 1,28,700 5,35,800 6,64,500

Wor000s overhead (80% on 37,440 1,67,808 2,05,248
labour)
Wor000s Cost 1,66,140 7,03,608 8,69,748
Office overhead (IS% on wor000s 24.921 1.05.541 1.30.462
cost) 10,00,21
Total Cost 1,91,061 8,09,149
0
Profit 42,939 48,851 91,790
10,92,00
Sales 2,34,000 8,58,000
0

152 | COST ACCOUNTING IVSEMESTER B.B.A

 Profit and Loss Account (As per Financial Accounts)

Particulars Rs. Rs Particulars Rs. Rs

To Materials: By Sales :
Supreme 81,900 Supreme 2,34,000
Majestic 3,26,040 4,07,940 Majestic 8,58,000 10,92,000
To Labour:
Supreme 46,800
Majestic 2,09,760 2,56,560
To Wor000s
1,92,060
expenses
To Office
1,40,400
expenses
To Net Profit 95,040
10,92,000 10,92,000

Reconciliation Statement

Profit as per Cost Accounts (Total)

91,790
Add: Over-absorption of wor000s overhead
13,188
(2,05,248 - 1,92,060)

Under-absorption of office overheads 1,04,978

Less:
(1,40,400 - 1,30,462) 9,938

Profit as per Financial Accounts 95,040

Problem 5.6
During the year ending 31st Oct. 2013 the profit of P000 Ltd. as per Financial P
& L A/c was 33,248 as shown below. Prepare a Reconciliation Statement and
arrive at the profit as per Cost Accounts using the additional information given.

COST ACCOUNTING IV SEMESTER B.B.A | 153

 Profit and Loss Account {for the year ending 31st Oct 2013)
To Opening stoc000 4,94,358 By Sales 6,93,000
To Purchases 1,64,308 By Sundry 632
income
6,58,666
Less: Closing stoc000 1,50,242
5,08,424
To Direct wages 46,266
To Factory overhead 41,652
To Adm. overhead 19,690
To Selling expenses 44,352
To Net profit 33,248
6,93,632 6,93,632

Costing records show :

i. Closing stoc000 - 1,54,892
ii. Direct wage absorbed - 48,382
iii. Factory overhead absorbed - 38,138
iv. Administrative expenses calculated at 3% of sales
v. Selling expenses absorbed @5% of sales.

Solution:
Reconciliation Statement

Profit as per financial accounts 33,248

Add :1. Difference in stoc000 valuation (1,54,892 -

4,558
1,50,242)

2. Under-absorbed factory overhead (41,652 -

3,514
38,138)

3. Under-absorbed selling expenses (44,352 -

9,702 17,774
34,650)

154 | COST ACCOUNTING IVSEMESTER B.B.A

 51,022

Less :1. Over-absorbed direct wages (48,382 - 46,266) 2,116

2. Over-absorbed adm. expenses (20,790 -

1,100
19,690)

3. Sundry income excluded from cost accounts 632 3,848

Profit as per cost accounts 47,174

Problem 5.7

From the following figures, prepare a reconciliation statement:

Financial
Particulars Cost Accounts
Accounts
Profit 50,000 ?
Mar000eting overheads 8,000 8,000
Provision for bad debts —— 5,000
Factory overheads 8,500 7,000
Director's fees --- 2,000
Income tax paid ---- 15,000
Rent of owned premises 6,000 ---
Depreciation 11,250 12000
Share transfer fee (Cr.) --- 1000
Administrative overheads 5000 8000

Solution:
Reconciliation Statement

Rs Rs
Profit as per cost accounts 50,000
Add :1. Factory overhead over absorbed (8,500-
1,500
7,000)
COST ACCOUNTING IV SEMESTER B.B.A | 155
 2. Rent on owned premises charged only in cost
6,000
accounts
8,500
3. Share transfer fee 1,000
58,500
Less :1. Provision for bad debts 5,000
2. Director's fees 2,000
3. Income tax paid 15,000
4. Depreciation (12,000 -11,250) 750
5. Adm. overhead under-absorbed (8,000 - 5,000) 3,000 25,750

Profit as per financial accounts

32,750

Problem 5.8
The profit is per cost accounts is 1,50,000. The following-details are
ascertained on comparison of cost and financial accounts.
Cost Financial
accounts accounts
(a) Opening Stoc000s
Materials 10,000 15,000
Finished goods 18,000 16,000
(b) Closing stoc000s :
Materials 12,000 13,000
Finished goods 20,000 17,000
Materials 10,000 15,000

Interest charged but not paid 10,000

Write off : Preliminary expenses 500
Goodwill 1,500
Dividend on Unit Trust of India received 1,000.
Indirect expenses charged in financial accounts 80,000 but 75,500 recovered
in cost accounts.
156 | COST ACCOUNTING IVSEMESTER B.B.A
Find out the financial profit by preparing a Memorandum Reconciliation
Account.

Solution:

Memorandum Reconciliation Account

To Opening stoc000 of 5000 By Profit as per costs 150000

materials accounts
(under-valued in cost
accounts)

To Closing stoc000 of 3000 By Opening stoc000 of 2000

finished goods finished goods
(over-valued in cost (over-valued in cost
accounts) accounts)

To Preliminary expenses 500 By Closing stoc000 of 1000

written of materials
(under-valued in cost
accounts)

To Goodwill written off 1500 By Interest charged 10000

only in cost accounts
To Overheads under- 4500 By Dividend received 1000
recovered
To Profit as per financial 149500
accounts
164000 164000

Problem 5.9
The cost accountant of a company has arrived at a profit of 73,24,150 based
on cost accounting records for the year ending 31-3-2013. As cost auditor,
you find the following differences between financial accounts and cost
accounts.
a) Value of WIP and Finished goods as per Financial Accounts
`12821995
COST ACCOUNTING IV SEMESTER B.B.A | 157
 b) Value of WIP and Finished goods As per cost accounts
`13104220
c) Profit on sale of fixed assets ` 61500
d) Loss on sale of investments ` 11200
e) Voluntary retirement compensation included in salaries and wages in
Financial Accounts ` 1675000
f) Donation paid ` 25000
g) Major repairs and maintenance written-off in Financial Accounts
` 1326000
h) Major repairs and maintenance written-off Amount in cost accounts
` 608420
i) Insurance claim relating to previous year received during the year
`1429000
j) Profit from retail trading activity ` 712300

You are required to prepare a reconciliation statement between the profit

figures as per costing and financial accounts. Calculate the profit as per
financial boo000s.

Solution :
Reconciliation Statement

Profit as per Cost Accounts 73,24,160

Add: Difference is stoc000 values

2,82,225
(1,31,04,220 - 1,28,21,995)

Profit on sale of fixed assets 61,500

Insurance claim received 14,29,000

Profit from retail trading 7,12,300 24,85,025

98,09,175
158 | COST ACCOUNTING IVSEMESTER B.B.A
 Less :Loss on sale of investments 11,200

Voluntary retirement compensation 16,75,000

Donation paid 25,000

Repairs and maintenance (13,26,000 -

7,17,580 24,28,780
6,08,420)

Profit as per Financial Accounts 73,80,395

WIPRO Co. manufactures two sizes of machine components. Size A and B. The
following data refer to the year ended 31 December 2013

Size A Size B
Production 125 units 400 units
Sales 120 units 360 units
Wages per unit 40 30
Material cost per unit 15 12
Sale price per unit 125 90

Problem 5.10
All expenses other than wages and materials are analyzed under 'wor000s
overheads' which during the year amounted to 9,000 and 'office overheads'
which amounted to 10,000.
In fixing the selling price it was estimated that wor000s overheads be ta000en
at 50% on wages and office overhead expenses at 33 1/3% (or) 33.333% on
wor000s cost.
You are required to compute :
1. The total cost of each unit on the basis of the above overhead
percentages;
2. The net profit for the year shown by financial accounts, valuing unsold
stoc000s at actual material and wages cost plus wor000s overheads at
50% on wages; and
COST ACCOUNTING IV SEMESTER B.B.A | 159
 3. The reconciliation of net profit in above (2) with estimated total net
profit based on cost figures.

Solution:
Statement of Cost and Profit for the year ending 31 Dec. 2013
Size A Size B
Total
(125 units) (400 units)
Per Total Per
Particulars Total A +B
unit unit

Materials 15 1,875 12 4,800 6,675

Wages 40 5,000 30 12,000 17,000

Prime Cost 55 6,875 42 16,800 23,675

Wor000s overhead
20 2,500 15 6,000 8,500
(50% on wages)

Wor000s Cost
75 9,375 57 22,800 32,175
Office overhead
(33.333 % on wor000s
25 3,125 19 7,600 10,725
cost
Cost of
100 12,500 76 30,400 42,900
Production

Less : Closing stoc000 —— 500 — 3,040 3,540

Cost of Goods
100 12,000 76 27,360 39,360
Sold
Profit 25 3,000 14 5,040 8,040

Sales 125 15,000 90 32,400 47,400

Profit as per cost boo000s = Rs 8,040.

Note- In cost accounts, closing stoc000 has been valued at cost of production as
under :
A - 5 units @ Rs 100 = Rs 500
B - 40 units @ Rs 76 = Rs 3,040
160 | COST ACCOUNTING IVSEMESTER B.B.A
 Financial Profit and Loss Account for year ending 31 Dec. 2013

Particulars Rs Rs Particulars Rs Rs
To Materials By Sales
A 1,875 A 15,000
B 4,800 6,675 B 32,400 47,400
To Wages By Closing stoc000

A 5,000 A (5 units @ 75) 375

B 12,000 17,000 B (40 units @ 57) 2,280 2,655

To Wor000s
9,000
expenses
To Office
10,000
expenses
To Net profit 7,380
50,055 50,055

Reconciliation Statement

Profit as per cost accounts 8,040

Add : Over-absorbed office overhead (10,725 - 10,000) 725

Less : Under-absorbed wor000s overheads (9,000 - 8,500) 500 8,765

Over valuation of closing stoc000 in costing (3,540 - 2,655) 885 1,385

Profit as per financial accounts 7,380

COST ACCOUNTING IV SEMESTER B.B.A | 161

 EXERCISE
SECTION - C
1. The net profit of Shubham Ltd., appeared at Rs. 51,600 as per financial
records for the year ended 31st December, 2008. The cost boo000s
however, showed a net profit of Rs. 69,120 for the same period, A careful
scrutiny of the figures from both the sets of accounts revealed the
following facts:-

Income tax provided in financial boo000s - 16000

Ban000 interest (Cr) in financial boo000s - 200
Wor000s overheads under absorbed - 1240
Depreciation charged in financial boo000s- 4480
Depreciation absorbed in cost boo000s - 4800
Administrative overheads over absorbed- 680
Loss charged only in financial boo000s - 2240
Interest on investment not included in cost boo000s- 3200
Stores adjustments (credit) in financial boo000s - 190
Loss of stoc000 charged in financial boo000s - 2630
Prepare a reconciliation statement.

2. From the following figures of M/S Paras Ltd, prepare reconciliation

statement as well as memorandum reconciliation account.
Net profit as per financial boo000s 31,890
Net profit as per costing boo000s 33,380
Factory on cost under recovered in costing 2,850
Administrative on cost recovered in excess 2,125
Depreciation charged in financial boo000s 1,830
Depreciation recovered in costing 1,975
Interest received but not included in costing 225
Income tax provided in financial boo000s 300
Ban000 interest credited in financial boo000s 115

162 | COST ACCOUNTING IVSEMESTER B.B.A

 Stores adjustment (credited in financial boo000s) 430
Dividends apportioned in financial boo000s 600
Loss due to theft and pilferage provided only in financial boo000s130

3. The cost boo000s of Neel 000amal Ltd., revealed a profit of Rs. 57320
whereas profit as per financial boo000s was Rs. 37,100 on comparison of
both records the reasons for difference were traced as under:

Depreciation charged only in financial boo000s 1,600

Ban000 interest credited in financial boo000s 60
Reserve for doubtful debts 1140
Directors fees charged only in financial boo000s 1,300
Income tax 16600
Over recovery of overheads in cost accounts 360

Prepare a reconciliation statement.

4. Prepare reconciliation statement from the following:-

Profit as per cost accounts 17300

Over absorption of overheads in cost accounts 8800
Interest charged only in financial accounts 800
Preliminary expenses written off 1200
Over valuation of closing stoc000 in cost accounts 2400
Under valuation of opening stoc000 in cost accounts 1400

5. Prepare a statement of reconciliation from the following data:

Net profit as per cost accounts 3,00,000

Wor000s overheads charged in cost accounts 51,000
Wor000s overheads in financial accounts 42,000
Income tax provided in financial accounts 90,000
Value of closing stoc000 in cost accounts 28,125

COST ACCOUNTING IV SEMESTER B.B.A | 163

 Value of closing stoc000 in financial accounts 31,125
Provision for doubtful debts 30,000
Dividend on investments not included in cost accounts 6,000
Preliminary expenses written off in financial accounts 13,500
Stores adjustments ( credited in financial accounts) 1,500
Share transfer fees credited in financial accounts 6,000
Depreciation as per cost accounts 10,000
Depreciation charged in financial accounts 17,500
Loss on sale of assets shown in financial accounts 12,000

164 | COST ACCOUNTING IVSEMESTER B.B.A

 BOO000S FOR REFERENCE

1. J. Made Gowda – Cost and Management Accounting , HPH

2. M.V. S000u000la – Cost and Management Accounting

3. N.000. Prasad: Cost Accounting, Boo000s Syndicate Pvt.

Ltd.

4. Nigam & Sharma: Cost Accounting , HPH

5. 000hanna Pandey & Ahuja – Practical Costing, S Chand

6. Soundarajan A & 000. Ven000ataramana, Cost Accounting,

SHBP.

COST ACCOUNTING IV SEMESTER B.B.A | 165

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 NOTE

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NOTE

COST ACCOUNTING IV SEMESTER B.B.A | 171

 NOTE

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