BBS College of Engineering & Technology

Department of Business Administration

MBA 2nd SEMESTER
Subject: Cost and Managment Accounting
Code: BMB 207
Name of Faculty: Dr. Shubham Kushwaha
UNIT:- 1
Meaning, nature and scope of Management Accounting: Difference
between managernent accounting and financial accounting. Cost
concepts:, Cost Unit, Cost Control and Cost Reduction; Components of
total Cost, Cost Sheet, Classification of costs, Types and methods of
costing. Inventory Management, Labour Cost, Overheads, Activity based
costing
________________________________________________________________________
Evolution of Management Accounting:
Managerial accounting has its roots in the industrial revolution of the 19th century.
During this early period, most firms were tightly controlled by a few owner-managers
who borrowed based on personal relationships and their personal assets. Since there
were no external shareholders and little unsecured debt, there was little need for
elaborate financial reports. In contrast, managerial accounting was relatively
sophisticated and provided the essential information needed to manage the early large
scale production of textile, steel, and other products. After the turn of the century,
financial accounting requirements grow rapidly because of new pressures placed on
companies by capital markets, creditors, regulatory bodies, and federal taxation of
income. Many firms needed to raise funds from increasingly widespread and detached
suppliers of capital To tap these vast reservoirs of outside capital, firms' managers had
to supply audited financial reports. Because outside suppliers of capital relied on
audited financial statements, independent accountants had a keen interest in
establishing well defined procedures for corporate financial reporting. As a
consequence, for many decades, management accountants increasingly focused their
efforts on ensuring that financial accounting requirements were met and financial
reports were released on time. The practice of management accounting stagnated, in
the early part of the century, as product line expanded operations became more
complex, forward looking companies saw a renewed need for management-oriented
reports that was separate from financial reports. But in most companies, management
accounting practices up through themid-1980s were largely indistinguishable from
practices that were common prior to World War I. In recent years, however, new
economic forces have led to many important innovations in management accounting.

Meaning, nature and scope of Management Accounting:

Management accounting collects and provides accounting, cost accounting, economic

and statistical information to the men at various managerial levels to assist them in the
performance of managerial functions and their evaluations. It is the development and
application of various techniques of recording, analysis, interpretation and presentation,
making the financial, costing, and other data active and effective in the performance of
managerial functions, viz., planning, decision-making and control. It should be noted
that management accounting makes use of not only accounting techniques but also of
statistical and mathematical techniques. Management accounting is forward looking
and should, therefore, be able to treat economic information and data to make it
suitable for use by the management.

Definition of Management Accounting

The management accounting team of Anglo-American Council on Productivity defined

management accounting as:

"The presentation of accounting information in such a way as to assist management in

the creation of policy and in day to day operation of an understanding".

American Accounting Association defines management accounting as under: "The

application of appropriate techniques and concepts in processing historical and
projected economic data of an entity to assist management in establishing plans for
reasonable economic objectives and in the making of rational decisions with a view
towards these objectives".

J Batty defines: "Management accounting is the term used to describe accounting

methods, systems and techniques which coupled with special knowledge and ability,
assists management in its task of maximising profits or minimising losses."

Brown and Howard define: "Management accounting is that aspect of accounting

which is concerned with the efficient management of a business through the
presentation of management of such information as will facilitate efficient and
opportune planning and control."
Robert Anthony has defined management accounting thus: "Management accounting is
concerned with accounting information which is useful to management.

OBJECTIVE OF MANAGEMENT ACCOUNTING

The fundamental objective of management accounting is to assist the management in

carrying out its duties efficiently so that maximize profits or minimize losses of
management. It includes computation of plans and budgets covering all aspects of the
business. Example: production, selling, distribution, research and finance. Management
accounting systematic allocate responsibilities for implementation of plans and
budgets. It analysis of all transactions, financial and physical, to enable effective
comparison to be made between the forecasts and actual performance.

The main objectives of management accounting are as follows:

1. To formulate Planning and policy: Planning involves forecasting on the basis of

available information, setting goals, framing polices determining the altemative courses
of action and deciding on the program of activities. It facilitate the preparation of
statements in the light of past results and gives estimation for the future.

2. To interpretation of financial documents: Management accounting is to present

financial information to the management. Financial information must be presented in
such away that it is easily understood. It presents accounting information with the help
of statistical devices like charts, diagrams, graphs, etc.

3. To assist in Decision-making process: Management accounting makes decision-

making process more scientific with the help of various modern techniques.
Information/ligure relating to cost, price, profit and savings for each of the available
alternatives are collected and analyzed accordingly which will provide a base for taking
sound decisions.

4. To help in control: Management accounting is a helpful for managerial control.

Management accounting tools e.g. standard costing and budgetary control are helpful
in controlling performance. Cost control is affected through the use of standard costing
and departmental control is made possible through the use of budgets. Performance of
each and every individual is controlled with the help of management accounting.

5. To provide report: Management accounting keeps the management fully informed

about the latest position of the concern through reporting. It helps management to take
proper and quick decisions. It informs the performance of various departments
regularly to the top management.
6. To Facilitate Coordination of Operations:Management accounting provides tools for
overall control and coordination of business operations. Budgets are important means
of coordination.

NATURE OF MANAGEMENT ACCOUNTING

The following aspects are considered as the nature of management accounting:

(1) Management accounting is a decision making system: Management accounting

provides accounting information in such a way as to assist management in the creation
of policy and in the day-to-day operations. Though management accountant is not
taking any decision but provides data which is helpful to management in decision
making. It communicates a great variety of facts in a systematic and meaningful
manner.

(il) Management accounting is futuristic: Management accounting unlike the financial

accounting, deais with the future. It helps in planning the future-because decisions are
always taken for the future course of action. In the decision making process
mariagement accounting provides selective and fruitful information out of the data
collected

(iii) Management accounting is a technique of selective nature: Management

accountant takes into account only those data from the financial statement and
communicates to the management which is useful for taking decisions.

(iv) Management accounting analyses different variables: Management accounting

helps in analysing the reasons for variations in profit as compared to the past period. It
analyses the effects of different variables on the profits and profitability of the concern..

(v) Management accounting does not set particular formats for information: It provides
necessary information to the management in the form which may be more useful to the
management in taking various decisions on different aspects of the business..

SCOPE OF MANAGEMENT ACCOUNTING

Management accounting includes financial accounting and extends to the operation of

a system of cost accountancy, budgetary control and statistical data. While meeting the
legal and conventional requirements regarding the presentation of financial statements,
(profit and loss account, balance sheet and cash flow statements) it stresses emphasis
upon the establishment and operation of internal controls. The scope of management
accounting, inter alia includes:
1. Formation, installation and operation of accounting, cost accounting, tax accounting
and information systems. Management accountant has to construct and reconstruct
these systems to meet the changing needs of management functions.

2. The complation and preservation of vital data for management planning. The
accounts and the document files are repository of vast quantities of details about the
past progress of the enterprise, without which forecasts of the future is very hazardous
for the enterprise. The management accountant presents the past data in such a way as
to reflect the trends of events to the management. He is supposed to give his
assessment of anticipated changes in relevant areas. Such information provides
effective assistance in the planning process. At times the management accountant may
be called upon to associate with and even supervise the actual planning process
alongwith other members of the management team..

3. Providing means of communicating management plans to the various levels of

organisation. This, on the one hand ensures the coordination of various segments of the
enterprise plans and on the other defines the role of individual segments in the whole
plan and assists the management in. directing their activities.

4. Providing and installing an effective system of feed-back reports. This would enable
the management in its controlling function. By pin-pointing the significant deviations
between actual and expected activities, and by adhering to the principles of selectivity
and relevance, such reports help in the installation and operation of the system of
management by exceptions. The management accountant is expected to analyse the
deviation by reasons and responsibility and to suggest appropriate corrective measures
in deserving cases.

5. Analysing and interpreting accounting and other data to make it understandable and
usable to the management. It is only through such analysis and clarification that the
management is enabled to place the various data and figures in proper perspective in
the performance of its functions. Such analysis assists management in the location of
responsibilities and to effect necessary changes in the organisational set up to achieve
the objectives of the enterprise in a more efficient manner.

6. Assisting management in decision-making by (a) providing relevant accounting, other

data and (b) analysing the effect of alternative proposals on the profits and position of
the enterprise. Management accountant helps the management in a proper
understanding and analysis of the problem in hand and presentation of factual
information obviously in financial terms.

7. Providing methods and techniques for evaluating the performance of the

management in the light of the objectives of the enterprises, thus assisting in the
implementation of the principle of management by objectives.

8. Improving, modifying and sharpening the effectiveness of co existing techniques of

analysis. The management accountant should always think of increasing the
practicability of existing techniques. He should be on the lookout for the development of
new techniques as well.

Thus, management accounting serves not only as a tool in the hands of management,
but also provides for a technique of evaluating the performance of the management
itself. It operates as a double-edged sword assisting the management in proper
performance of its functions of planning, decision-making and control, and at the same
time, enabling the owners and other interested parties to evaluate and appraise the
management of the enterprise.

DIFFERENCE BETWEEN FINANCIAL ACCOUNTING AND MANAGEMENT ACCOUNTING

Financial accounting and management accounting both appear to be similar in as much

as both study the impact of business transactions and events of the enterprise and
report and interpret the resuits thereof. Both provide information for intemal as well as
external use. But management accounting, although having Its roots in financial
accounting differs from the latter in the following respects.

1. Financial accounting deals with the business transactions and events for the
enterprise as a whole. Management accounting, in addition to the study of events in
relation to the enterprise as a whole takes organisation in its various units and
segments and attempts to trace the impact and effect of the business transactions and
events through its various divisions and sub-divisions. Thus, while the financial
statement profit and loss account, balance sheet and cash flow statements reveal the
overall performance and position of the enterprise. Management accounting reports
emphasise on the details of operational costs, inventories, products, process and jobs.
It traces the effect and impact of the business transactions and events on costs,
inventories, processes, jobs and products.

2. Financial accounting is attached more with reporting the results and position of the
business to persons and authorities other than management Government, creditors,
investors, owners, etc. At times, financial accounting follows window-dressing tactics in
order to project a better than actual image of the enterprise. Management accounting is
concerned more with generating information for the use of internal management and
hence the information reflects the real or realy expected position.
3. Financial accounting is necessarily historical. It records and analyses business
events long after they have taken place. Management accounting analyses the events
as they take place and also anticipates such events for the future. Thus, it uses data
which generally has relevance to the future.

4. Since financial accounting data is historical in nature, it is more precise than the
management. accounting data, which generally reflects the expected future, and hence
could only be an estimation. This provides the necessary rapidity to management
accounting information.

5. The periodicity in reporting financial accounts is much wider than in case of

management accounting. In financial accounting, generally, results are reported on year
to year basis. In management accounting, weekly, fortnightly and even monthly
reporting is used.

6. Financial accounting has to be governed by the 'generally accepted principles". This is

so because, it has to cater for the informational needs of the outsiders. It has to stick to
the generally accepted methods of presentation of such information. Regarding the
contents and form of information. financial accounting has to abide by the legal
provisions also. Management accounting has not to worry about such legal and/or
conventional constraints and the "generally accepted principles". It is tree to formulate
its own rules, procedures and forms, because the information it generates is solely for
internal consumption. In management accounting fixed assets may be stated at
appraisal values, overhead costs may be omitted from inventories or revenues may be
recorded before realisation. Generally accepted principles of financial accounting do not
permit such accounts. What is important in management accounting is the usefulness
of the information for managerial functions rather than its general acceptability. The
form and content of management accounting information. differs according to the
needs and purpose.

7. Financial accounting is a must in case of joint stock companies to meet the statutory
provisions of company law and tax laws. Even in case of sole proprietorship and
partnership firms financial accounting becomes a necessity for tax purposes.
Management accounting, on the other hand, is entirely optional and its forms and
contents depend upon the outlook of the management.

8. Financial statements prepared under financial accounting consists of monetary

information anly. Management accounting statements in addition to monetary
information also consist non-monetary information, viz., quantities of materials
consumed, number of workers, quantities produced and sold and so on.
9. Financial statements are required to be published and audited by statutory auditors.
Management accounting statements are for internal use and thus neither published nor
audited.

LIMITATIONS OF MANAGEMENT ACCOUNTING

The management accountant has the responsibility of producing and providing

dependable accounting and other relevant data for the use of management. The data
provided, if it has to be really effective in the management process, must be: (1)
relevant and precise, (2) consistent and comparable, (3) presented in an appropriate
and understandable form, (4) provided at appropriate time intervals, and (5) provided to
meet the needs of various levels of management. The management accountant is
expected to keep in mind the above points while producing his product. However, the
information and reports presented by management accountant still suffers from the
following limitations:

(1) Different meaning of the same term: in accounting different terms carry different
meanings under different set of circumstances and conditions. Such meanings and
figures may superficially resemble one another and a person who is not, familiar with
them may easily become confused or frustrated. The most common source of
confusion is the word 'cost'. There are historical costs, ful costs, direct costs, variable
costs, standard costs, original costs, residual costs, net costs. differential costs,
opportunity costs, estimated cost and incremental costs. Some of these terms are
synonymous, others are not exactly synonymous through resembling each other, still
others. although not synonymous at all, may be used as if they were synonymous. In
order to avoid such confusion and misunderstanding, the management accountant
should in approaching a specific. problem, define, as carefully and clearly as possible,
the meaning in which such words are being used. He should as far as possible be
consistent in prescribing the meanings to such terms.

(2) Approximations: Management accounting data cannot be completely accurate in all

respects. A good deal of approximation is involved in the compilation and preparation of
such data. The smaller the time gap between the happening and reporting of an event,
the greater wil be the approximation. In addition, in the working out of the estimates and
future costs, approximation has to be resorted to. Even case of historical data, the cost
and time required for accuracy may be prohibitive and compel the management
accountant to do some approximations. Therefore, while using the information provided
by the management accountant, the management must be aware of the degree of
approximation. The management accountant should folow a consistent practice in
matters of approximations.
(3) Incompleteness of the data: Management accountant can provide only the
quantitative data as far as avalable, to the management, Business problems and their
decisions often require additional quantitative as well as qualitative data which may be
outside the purview of the management accountant. For example, the management
accounting data will not disclose the extent to which the quality and utility of a product
is affected by the changes in materials or methods of production. The management
should guard itself against the belief that problems could be completely solved by
numerical analysis. The management accountant should point out as far as possible,
the qualitative factors relevant for decision-making in each case.

(4) Importance of proper management action: A management accountant may provide

information and figures in most appropriate form to the management. But figures
themselves are nothing more than marks on pieces of paper, and by themselves they
accomplish nothing. Anything that the business accomplishes is the result of action of
the people. Figures can only assist people in the organisation in various ways. It is the
management and the people in the organisation who are to use the figure by
understanding their language and act accordingly. The same set of figures, if not acted
upon by the management, becomes useless or if misunderstood by the management,
may lead to unwise actions.

 Cost Concepts: The term 'cost' means the amount of expenses [actual or
notional) incurred on or attributable to specified thing or activity.

As per Institute of cost and work accounts (ICWA) India, Cost is 'measurement in
monetary terms of the amount of resources used for the purpose of production of
goods or rendering services.

To get the results make efforts. Efforts constitute cost of getting the results. It can be
expressed in terms of money; it means the amount of expenses incurred on or
attributable to some specific thing or activity. The term cost is used in this very form. In
reference to production/manufacturing of goods and services cost refers to sum total
of the value of resources used like raw material and labour and expenses incurred in
producing or manufacturing of given quantity.

Cost Unit- Cost Unit is a device for the purpose of breaking up or separating costs into
smaller sub divisions attributable to products or services. It is the unit of quantity of
product, service of time (or combination of these) in relation to which costs may be
ascertained or expressed. A few examples of cost units are given below:

Industry/Product Automobile
Cable Number of vehicles

Cement Metres/kilometres

Chemicals/Fertilizers Tonne

Litre/Kliogram/tonne

Cost Unit

Cost Control - Cost control, also known as cost management or cost containment, is a
broad set of cost accounting methods and management techniques with the common
goal of improving business cost-efficiency by reducing costs, or at least restricting their
rate of growth. Businesses use cost control methods to monitor, evaluate, and
ultimately enhance the efficiency of specific areas, such as departments, divisions, or
product lines, within their operations. Cost Control refers to the process of managing
and regulating expenses to ensure that they do not exceed the budgeted or expected
amounts. This involves continuously monitoring costs and taking corrective actions
when necessary. For instance, if production costs exceed expectations, a manager may
look into improving efficiency or renegotiating supplier contracts.

Cost Reduction: Cost reduction may be defined as the real and permanent reduction in
the unit costs of goods manufactured or services rendered without impairing their
suitability for the use intended. Cost Reduction, on the other hand, aims at achieving a
permanent decrease in the cost of producing goods or services without affecting quality.
This can be achieved through measures such as improving operational efficiency,
investing in technology, outsourcing non-core activities, and optimizing supply chain
management. While cost control is about preventing unnecessary cost overruns, cost
reduction focuses on long-term savings.

 Components or Elements of cost

Cost of production/manufacturing consists of various expenses incurred on

production/manufacturing of goods or services. These are the elements of cost which
can be divided into three groups Material, Labour and Expenses.

Elements of cost

Material Labour Expenses

  Material: To produce or manufacture material is required. For example to
manufacture shirts cloth is required and to produce flour wheat is required. All
material which becomes an integral part of finished product and which can be
conveniently assigned to specific physical unit is termed as "Direct Material". It is
also described raw material, process material, prime material, production
material, stores material, etc. The substance from which the product is made is
known as material. It may be in a raw or manufactured state. Material is
classified into two categories:

 Direct Material

 Indirect Material

Direct material: Direct Material is that material which can be easily identified and related
with specific product, job, and process. Timber is a raw material for making furniture,
cloth for making garments, sugarcane for making sugar, and Gold/silver for making
jewellery, etc are some examples of direct material.

Indirect material: Indirect Material is that material which cannot be easily and
conveniently identified and related with a particular product, job, process, and activity,
Consumable stores, oil and waste, printing and stationery etc, are some examples of
indirect material. Indirect materials are used in the factory, the office, or the selling and
distribution department.

 Labour: Labour is the main factor of production. For conversion of raw material
into finished goods, human resource is needed, and such human resource is
termed as labour. Labour cost is the main element of cost in a product or service.
Labour can be classified into two categories:

Direct labour: Labour which takes active and direct part in the production of a
commodity. Direct labour is that labour which can be easily identified and related with
specific product, job, process, and activity. Direct labour cost is easily traceable to
specific products. Direct labour costs are specially and conveniently traceable to
specific products. Direct labour varies directly with the volume of output. Direct labour
is also known as process labour, productive labour, operating labour, direct wages,
manufacturing wages, etc. Cost of wages paid to carpenter for making furniture, cost of
a tailor in producing readymade garments, cost of washer in dry cleaning unit are some
examples of direct labour.
Indirect labour: Indirect labour is that labour which can not be easily identified and
related with specific product, job, process, and activity. It includes all labour not directly
engaged in converting raw material into finished product. It may or may not vary directly
with the volume of output. Labour employed for the purpose of carrying out tasks
incidental to goods or services provided is indirect labour. Indirect labour is used in the
factory, the office, or the selling and distribution department. Wages of store-keepers,
time-keepers, salary of works manager, salary of salesmen, etc, are all examples of
indirect labour cost.

 Expenses :All cost incurred in the production of finished goods other than
material cost and labour cost are termed as expenses. Expenses are classified
into two categories:

 Direct expenses, and

 Indirect expenses (An item of overheads)

Direct expenses

These are expenses which are directly, easily, and wholly allocated to specific cost
center or cost units. All direct cost other than direct material and direct labour are
termed as direct expenses.

Direct expenses are also termed as chargeable expenses. Some examples of the direct
expenses are hire of special machinery, cost of special designs, moulds or patterns,
feed paid to architects, surveyors and other consultants, inward carriage and freight
charges on special material, Cost of patents and royalties.

1. Cost center means a location, person, or item of equipment or group of these for
which costs may be ascertained and used for the purpose of cost control.

2. Cost object is anything for which a separate measurement of cost is desired. It may
be a product, service, project, or a customer.

Indirect expenses

These expenses cannot be directly, easily, and wholly allocated to specific cost center
or cost units. All indirect costs other than indirect material and indirect labour are
termed as indirect expenses. Thus, Indirect expenses are treated as part of overheads.
Rent, rates and taxes of building, repair, insurance and depreciation on fixed assets, etc,
are some examples of indirect expenses.

 OVERHEADS: MEANING

The term overhead has a wider meaning than the term indirect expenses. Overheads
include the cost of indirect material, indirect labour and indirect expenses. This is the
aggregate sum of indirect material, indirect labour and indirect expenses.

Overheads are classified into following three categories:

 Factory/works/ production overheads

 Office and administrative overheads

 Selling and distribution overheads

Factory/works overheads

All indirect costs incurred in the factory for production of goods is termed as
factory/works overheads. Such costs are concerned with the running of the factory or
plant. These include indirect material, indirect labour and indirect expenses incurred in
the factory. Some examples are as follows:

Indirect materials:

(1) Grease, oil, lubricants, cotton waste (iii) Cost of threads, gum, nails, etc.
etc.
(iv) Consumable stores
(ii) Small tools, brushes for sweeping,
sundry supplies etc. (v) Factory printing and stationery

Indirect wages

(1) Salary of factory manager, foremen, supervisors, clerks etc.

(ii) Salary of storekeeper

(iii) Salary and fee of factory directors and technical directors

(iv) Contribution to ESI, PF, Leave pay etc. of factory employee.

Indirect expenses

(1) Rent of factory buildings and land (iv) Depreciation of factory building,
plant and machinery, and their repairs
(ii) Insurance of factory building, plant, and maintenance charges.
and machinery
(v) Power and fuel used in factory
(iii) Municipal taxes of factory building
(vi) Factory telephone expenses.
  Office and administrative overheads

These expenses are related to the management and administration of the business.
They are incurred for the direction and control of an undertaking. These represent the
aggregate of the cost of indirect material, indirect labour, and indirect expenses incurred
by the office and administration department of an organisation. Some examples are as
follows:

Office printing and stationery, Cost of brushes, dusters etc. for cleaning office building
and equipments, Postage and stamps. Salary of office manager, clerks, and other
employees, Salary of administrative directors, Salaries of legal adviser, Salaries of cost
accountants and financial accountants, Salary of computer operator. Rent, insurance,
rates and taxes of office building, Office lighting, heating and cleaning, Depreciation and
repair of office building, furniture, and Equipment etc., Legal charges, Bank charges,
Trade subscriptions, Telephone charges, Audit fee etc.

 Selling and distribution overheads

Selling and distribution overheads are incurred for the marketing of a commodity, for
securing order for the articles, dispatching goods sold or for making efforts to find and
retain customers. These expenses represent the aggregate of indirect material, indirect
labour, and indirect expenses incurred by the selling and distribution department of the
organisation. These overheads have two aspects (i) procuring orders (ii) executing the
order. Based upon this concept the selling and distributions are studied separately.

I. Selling overheads: Indirect costs incurred in relation to the procurement of sale orders
are termed as selling overheads. Some of the examples of selling overheads are as
follows

Indirect material

(1) Catalogues, price list (iii) Postage and stamps.

(ii) Printing and stationery (iv) cost of sample

Indirect wages

(1) Salaries of sales managers, clerks and other employees.

(ii) Salaries and commission of salesmen and technical representatives

(iii) Fees of sales directors.

Indirect expenses

(1) Advertising (iv) Legal charges incurred for recovery

of debts
(iii) Rent and insurance of showroom
(v) Travelling and entertainment (vi) Expenses of sending samples
expenses
(vii) Market research expenses.
II. Distribution overheads

Indirect costs incurred in relation to the execution of the sales order is termed as
distribution overheads. Some of the examples of distribution overheads are as follows:

Indirect material

(1) Cost of packing material

(ii) oil, grease, spare parts etc. for maintaining delivery vans

Indirect wages

(1) Salaries of godown employees

(ii) Wages of drivers of delivery vans

(iii) Wages of packers and dispatch staff.

Indirect expenses

(1) Packing expenses

(ii) Godown rent, insurance, depreciation, and repair etc.

(iii) Freight carriage outwards and other transport charges.

(iv) Running expenses of delivery vans, repair, and depreciation.

(v) Insurance in transit etc.

 Classification of Costs

Costs in management accounting can be classified in various ways based on their

nature, behavior, function, controllability, normality, and the time at which they are
incurred.

1. By Nature (Element-wise Classification)

Costs by nature are classified into direct and indirect costs. Direct costs are those that
can be directly traced to a specific product or service, such as raw materials used in
production or wages paid to workers assembling the product. Indirect costs, however,
cannot be directly linked to a particular product. These include costs like factory rent,
salaries of supervisors, and other general manufacturing supplies. This classification
helps in determining the total cost of a product and is essential for accurate pricing.
2. By Behavior (Cost Variability)

Cost behavior classification considers how costs change with changes in the level of
output. Fixed costs remain constant irrespective of the level of production—examples
include building rent and manager salaries. Variable costs change in direct proportion to
production volume, such as raw material costs or piece-rate wages. Semi-variable costs
(or mixed costs) have elements of both fixed and variable costs, like electricity bills that
include a fixed service charge and a variable charge based on usage. Understanding
cost behavior is critical for budgeting and break-even analysis.

3. By Function (Purpose-based Classification)

Costs can also be classified by their function in the business. Production costs are
those directly associated with manufacturing, including raw materials and factory labor.
Administrative costs relate to general management and office functions, such as office
rent or administrative staff salaries. Selling costs are incurred in marketing and
promoting products, like advertising and sales commissions. Distribution costs are
linked to delivering the finished product to customers, including packaging and
transportation expenses. This classification is useful for departmental cost control and
performance evaluation.

4. By Controllability

In terms of controllability, costs are classified into controllable and uncontrollable costs.
Controllable costs are those which a manager has the authority to influence or regulate,
such as overtime wages or utility usage. Uncontrollable costs are beyond the influence
of a specific manager, like costs allocated by head office or depreciation. This
distinction helps assign responsibility within the organization and is important for
performance appraisal and cost management.

5. By Normality (Occurrence Frequency)

Cost classification by normality differentiates between normal and abnormal costs.

Normal costs are expected and incurred during regular business operations, such as
periodic maintenance or standard utility bills. Abnormal costs arise from unusual or non
-recurring situations, such as losses from a natural disaster, fire, or theft. These are
typically reported separately as they do not reflect the usual cost of production and may
need special managerial attention.

6. By Time (Time of Incurrence)

Lastly, costs can be classified based on when they are incurred. Historical costs are
actual costs already incurred in the past and are important for financial accounting and
evaluating past performance. Predetermined costs are estimated before the actual cost
is incurred and are used for planning and control. These include standard costs
(scientifically calculated expected costs under efficient conditions) and estimated costs
(based on trends and managerial judgment). This classification helps in variance
analysis and cost control.

 Types and Method of Costing

 Job Costing is used when production is carried out according to specific

customer orders. Each job or order is treated as a separate unit, and the costs
related to labor, materials, and overheads are recorded individually. This method
is suitable for industries like printing, furniture making, and construction.

 Batch Costing is similar to job costing, but instead of individual jobs, it

accumulates costs for a group or batch of identical items. The total cost of the
batch is then divided by the number of units to calculate the per-unit cost. It is
commonly used in industries like pharmaceuticals, toys, and garments.

 Process Costing applies to industries where production is continuous and the

product passes through multiple processes or stages. Each process is treated as
a cost center, and the costs incurred are averaged over the units produced. This
method is suitable for industries like oil refining, chemicals, and textiles.

 Unit Costing, also known as Output Costing or Single Costing, is used where
identical units are produced in large volumes. The total cost is divided by the
number of units to find the cost per unit. Industries like brick manufacturing,
cement, and steel production use this method.

 Operation Costing is a detailed version of process costing where the costs are
recorded for each operation within a process. It is used in industries that require
precise control over every step of production, such as automobile manufacturing
and shoe production.

 Contract Costing is applied in industries where the work is carried out under a
specific contract over a long period. Each contract is treated as a cost unit, and
all costs related to that contract are recorded separately. This method is
common in construction projects like roads, buildings, and bridges.

 Multiple Costing or Composite Costing is used in industries where different types

of costing methods are required to compute the cost of a single product. This
 happens in complex manufacturing systems like those producing airplanes or
electronic devices, which require a mix of job, batch, and process costing.

 Historical Costing involves recording the actual costs incurred during production.
This method is mainly used for preparing financial statements and analyzing
past performance, but it does not support planning or control since it records
costs after they have been incurred.

 Standard Costing involves setting predetermined costs for products and services
based on efficient operations and technical analysis. These standard costs are
compared with actual costs to find out variances, which help in cost control and
performance evaluation. It is widely used for budgetary control.

 Marginal Costing considers only the variable costs in the cost of production,
treating fixed costs as period costs. This method is helpful in managerial
decision-making, especially in cases like pricing under competition, make-or-buy
decisions, and profit planning.

 Absorption Costing, also known as full costing, includes both fixed and variable
costs in calculating the total cost of a product. This method is used in external
financial reporting as it reflects the complete cost of production.

 Uniform Costing is a system where a common method of costing is applied

across multiple organizations within the same industry. It facilitates
standardization, benchmarking, and performance comparison among different
firms in the industry.

 Inventory Management

Inventory management refers to the process of ordering, storing, tracking, and

controlling inventory, which includes raw materials, work-in-progress (WIP), and finished
goods,vused in production or for sale. The primary objective of inventory management
is to ensure that a business maintains an optimal level of stock to meet customer
demands without incurring unnecessary holding costs. Efficient inventory management
helps in avoiding both stock-outs (which can result in lost sales) and excess inventory
(which ties up capital and increases storage costs).

Key functions of inventory management include inventory control, demand forecasting,

stock replenishment, and valuation of inventory. Popular techniques used are Economic
Order Quantity (EOQ), which determines the ideal order quantity to minimize total
inventory costs; ABC analysis, which categorizes inventory based on importance and
value; and Just-In-Time (JIT), which aims to minimize inventory levels by aligning orders
with production schedules. Modern inventory management often involves automated
systems and software tools that help businesses maintain real-time inventory records,
reduce human error, and improve decision-making. Effective inventory management not
only improves cash flow and profitability but also enhances overall operational
efficiency and customer satisfaction.

1. Economic Order Quantity (EOQ)

The Economic Order Quantity (EOQ) is a classic inventory management technique used
to determine the ideal order quantity that minimizes the total cost of inventory, including
ordering costs and holding costs. The goal of EOQ is to strike a balance between
ordering too frequently (which increases ordering costs) and ordering in large quantities
(which increases storage and carrying costs). By calculating EOQ, businesses can
optimize their inventory purchase decisions, reduce waste, and improve efficiency.

2. ABC Analysis

ABC Analysis is a technique that categorizes inventory into three groups based on their
value and importance. ‘A’ items are high-value products with low frequency of sales, ‘B’
items are of moderate value and frequency, and ‘C’ items are low-value but high-
frequency products. This method helps prioritize management efforts, ensuring that
more attention is given to critical ‘A’ items while automating or simplifying the control of
‘B’ and ‘C’ items. ABC Analysis supports better resource allocation and control over
valuable inventory.

3. Just-In-Time (JIT)

Just-In-Time (JIT) is an inventory strategy where materials and products are ordered
and received only as they are needed in the production process. The main objective of
JIT is to reduce inventory holding costs and minimize waste. It requires precise demand
forecasting, strong supplier relationships, and efficient production scheduling. Although
JIT helps in maintaining lean inventory and reducing overhead costs, it can be risky if
there are supply chain disruptions or sudden demand changes.

4. FIFO and LIFO

FIFO (First-In, First-Out) and LIFO (Last-In, First-Out) are methods used for inventory
valuation and cost flow assumptions. Under FIFO, the oldest inventory is sold first,
which is useful in businesses where products have a shelf life. It also reflects current
market prices in ending inventory during inflation. On the other hand, LIFO assumes that
the most recently acquired inventory is sold first. It may result in lower taxable income
during inflation but is not permitted under some international accounting standards.

5. Safety Stock and Reorder Point

Safety stock refers to the extra inventory kept as a buffer to avoid stock-outs due to
unexpected demand or delays in supply. The reorder point is the inventory level at which
a new order should be placed to replenish stock before it runs out. These techniques
ensure smooth production and sales by maintaining continuity in operations. Both are
critical for risk management in inventory control and help businesses maintain service
levels without overstocking.

 Activity-Based Costing (ABC)

Activity-Based Costing (ABC) is a modern costing technique that identifies and assigns
costs to activities based on their consumption of resources, and then assigns those
costs to products or services based on their actual usage of those activities. Unlike
traditional costing methods that allocate overheads based simply on volume metrics
(like machine hours or labor hours), ABC provides a more accurate picture by focusing
on the actual activities that drive costs.

For example, activities such as setting up machines, processing orders, quality

inspections, and packaging are all cost-generating tasks. In ABC, these activities are
identified as cost drivers, and their costs are traced to the products based on how much
they use each activity. This helps in assigning indirect costs more precisely to different
products or services, especially in companies that have a wide variety of products with
different levels of complexity.

ABC is particularly useful in identifying non-value-adding activities, analyzing profitability,

improving product pricing strategies, and supporting better decision-making. It is widely
used in complex manufacturing environments and service industries where overhead
costs form a significant portion of total costs. Though it requires more effort and data
to implement, ABC provides better insight into cost behavior and helps managers make
informed strategic decisions.

Key Concepts of ABC:

 Activities: ABC identifies the activities that contribute to overhead costs, such as
machine setups, testing, or quality control.

 Cost Pools: Activities are grouped into cost pools, where costs are accumulated
for each activity.
  Cost Drivers: Cost drivers are the factors that cause the costs in a cost pool to
increase or decrease. Examples include machine hours, number of setups, or
number of inspections.

 Cost Allocation: Costs are allocated to products or services based on how much
they use the cost drivers for each activity.

Benefits of ABC:

 More Accurate Costing: ABC provides a more accurate picture of the true cost of
products or services by assigning overhead costs to the activities that drive them.

 Improved Pricing Decisions:With a clearer understanding of costs, companies

can make better pricing decisions.

 Better Cost Management:ABC can help identify areas where costs can be
reduced by focusing on activities that drive those costs.

 Enhanced Decision Making:ABC can improve decision-making regarding product

profitability, process improvements, and strategic planning.

Process of ABC:

1. Identify Activities: Identify all activities involved in the production or delivery of

products or services.

2. Assign Costs to Activities: Assign costs to each activity, either by directly observing
the costs or by using surveys or interviews.

3. Identify Cost Drivers: Determine the cost drivers for each activity.

4. Calculate Cost Driver Rates: Calculate the cost per unit of each cost driver.

5. Allocate Costs: Allocate costs to products or services based on the amount of each
cost driver they use.

 Cost Sheet

Cost Sheet A Cost Sheet is a statement that presents the total cost of production and
cost per unit in a structured format. It is prepared periodically and helps the
management in cost control, price fixation, and decision-making.

Objectives of Preparing a Cost Sheet

 To ascertain total cost and cost per unit.

 To analyze the components of cost.

 To determine the selling price.

 To compare current and previous period costs.

 To assist in cost control and cost reduction.

 5 Cost Sheet

PREPARATION OF COST SHEET

Cost sheet is a statement designed to show the output of a particular accounting period along with
break up of costs. It is often considered good to prepare cost sheet with cost data of previous periods.
This facilitates comparison and promotes cost control.
Cost Sheet
(I) Proforma of Cost Sheet
Particulars Total Cost Cost Per Unit
` `
Opening Stock of Raw Materials xxx xxx
Add: Purchases xxx xxx
Add: Carriage Inward xxx xxx
Add: Octroi and Customs Duty xxx xxx
Less: Closing Stock of Raw Materials
Cost of Direct Materials Consumed xxx xxx
Direct Wages xxx xxx
Direct or Chargeable Expenses xxx xxx
Prime Cost xxx xxx
Add: Works or Factory Overheads:
Indirect Materials xxx xxx
Indirect Wages xxx xxx
Leave Wages xxx xxx
Bonus to Workers xxx xxx
Overtime Wages xxx
Fuel and Power xxx
142 Cost Accounting

Rent and Taxes xxx

Insurance xxx
Factory Lightings xxx
Supervision xxx
Works Stationery xxx
Canteen and Welfare Expenses xxx
Repairs xxx
Works Salaries xxx
Depreciation of Plant and Machinery xxx
Works Expenses xxx
Gas and Water xxx
Technical Director’s Fees xxx
Laboratory Expenses xxx
Works Transport Expenses xxx
Works Telephone Expenses xxx
Add: Opening Stock of Work-in-Progress xxx xxx
Less: Closing Stock of Work-in-Progress xxx xxx
Less: Sale of Waste scrap xxx xxx
Works Costs xxx xxx
Add: Office and Administration Overheads:
Office Salaries xxx
Directors Fees xxx
Office Rent and Rates xxx
Office Stationery and Printing xxx
Sundry Office Expenses xxx
Depreciation on Office Furniture xxx
Subscription to Trade Journals xxx
Office Lightings xxx
Establishment Charges xxx
Directors Travelling Expenses xxx
Consultants’ Fees xxx
Contribution to Provident Fund xxx
Postage xxx
Legal Charges xxx
Audit Charges xxx
Bank Charges xxx
Depreciation and Repairs of Office Equipment xxx
Bonus to Staff xxx
Cost Sheet 143

Cost of Production xxx xxx

Add: Opening Stock of Finished Goods xxx xxx
Less: Closing Stock of Finished Goods xxx xxx
Cost of Goods Sold xxx xxx
Add: Selling and Distribution Overheads:
Advertising xxx
Showroom Expenses xxx
Salesmen’s Salaries and Expenses xxx
Packing Expenses xxx
Carriage Outward xxx
Commssion of Sales Agents xxx
Cost of Catalogues xxx
Expenses of Delivery Vans xxx
Collection Charges xxx
Travelling Expenses xxx
Cost Tenders xxx
Warehouse Expenses xxx
Cost of Mailing Literature xxx
Sales Managers’ Salaries xxx
Insurance of Showroom xxx
Sales Directors’ Fees xxx
Sales Office Expenses xxx
Rent of Sales Office xxx
Depreciation of Delivery Vans xxx
Expenses of Sales Branch xxx
Establishments xxx
Branch Office Expenses xxx
Total Cost/Total of Sales xxx xxx
Profit or Loss xxx xxx
Sales xxx xxx

Following items are to to be ignored in the cost sheet:

(a) Advance tax paid
(b) Cash discount allowed on sales
(c) Divedend paid
(d) Dividend received
(e) Debenture interest
(f) Donation paid
 144 Cost Accounting

(g) Interest received

(h) Interest paid on loan
(i) Income tax paid
(j) Interest paid on bank overdraft
(k) Income tax refund
(l) Interest on capital
(m) Bad debts
(n) Loss on sale of machinery
(o) Purchase of computer for office
(p) Purchase delivery van
(q) Profit on sale of investment
(r) Sale of machinery
The following expenses are excluded from cost sheet:
(1) Finance Overheads:
(a) Interest on Capital
(b) Bad Debts.
(c) Discount allowed on Sales.
(2) Income Tax, Advance Tax and Income Tax Provision.
The following incomes are excluded from cost sheet:
(1) Non-operating income such as discount received.
Note:
The following four items are independent variables and they remain constant unless any change is
given in them:
1. Units produced and sold.
2. Selling price per unit.
3. Variable cost per unit
4. Total Fixed Cost
Cost Sheet 145

Profit
Sales
Selling and Loss
Distribution
Value
Overheads Total Cost
of Sales
Office and Cost of
Administration Production/
Overheads Cost of
Works/Factory Goods Sold
Works/
Overheads
Factory Cost
Direct Material Prime Cost
Direct Labour
Direct Expenses

Fig. Composition of Selling Price

Table: Profit Table

Percentage on Cost Price Percentage on Sale Price

1 1
(1) 100%   50%  
1  2

1 1 %1
3
(2) 50%   33  
 2 3

1 %1 1
(3) 33
3
  25 %  
3 4

% 1 1
(4) 25   20 %  
4
   5

2 %
% 1  3
1
(5) 20   16  
 5 6
 

1  1 
(6) 11.11%   10%  
9  10 

Steps in Preparation of Cost Sheet:

(1) All the cost are classified into Direct Costs or Indirect Costs.
(2) Items of costs are arranged in the order of first, Material then Labour and in the last expenses.
(3) All Direct Costs are also termed as Prime Costs. In a Cost Sheet all the items of Prime Cost are
recorded first strictly in the order of Material, Labour and Expenses.
146 Cost Accounting

(4) Then all indirect costs also termed as overheads are recorded.
(5) In case of indirect costs the items are broadly categorised into three main groups:
(a) Works/Factory Cost: In this case all factory overheads are recorded such as indirect
works material, indirect factory labour and indirect factory expenses. All indirect costs
related to factory is recorded here.
(b) Office and Administration Cost: In this case all administration overheads are recorded
such as indirect administration material, indirect administration labour and indirect
administration expenses. All indirect costs related to administration is recorded here.
(c) Selling and Distribution Cost: In this case all selling and distribution overheads are
recorded such as indirect selling and distribution material, indirect selling and distribution
labour and indirect selling and distribution expenses. Both selling expenses as well as
Distribution expenses are considered together in this case.
(6) Finance expenses are not to be considered in the costs sheet. E.g., Interest paid, Bad debts, etc.
(7) Non-operating incomes and non-operating expenses are not to be considered in the cost sheet.
E.g., Profit or Loss on Sale of Fixed Assets, Fictitious Assets written-off, etc.
Method of Preparing Cost Sheet:
In case of a cost sheet all the costs are classified into three main elements, i.e.,
(a) Materials
(b) Labour
(c) Expenses
Further each of the above items are classified into direct and indirect costs.
(1) Direct Materials: It includes the cost of direct (main) raw material plus all expenses relating to
purchases of such direct material such as carriage inward, octroi duty, custom duty on imported
materials, etc.
(2) Direct Labour/Wages: It is also known as productive wages. It is the wages paid for the staff
(employees) who are engaged directly in productive activities. Employees who take in the raw
materials and introduce it in the machine for production purpose is termed as direct labour.
E.g., Wages paid to carpenter who converts wood into a fine piece of furniture.
(3) Direct (or chargeable) Expenses: Direct expenses are such expenses which are incurred
directly with the production activities. According to CIMA, United Kingdom, "Direct expenses
are those expenses which can be identified with and allocated to cost centres or units". E.g.,
Carriage Inwards incurred for purchase of raw materials, Hire charges of special equipment
required for a job, etc.
(4) Overheads: Overheads is an aggregate of all indirect expenses. It comprises of:
(a) Factory overheads.
(b) Office overheads.
(c) Selling and Distribution overheads.
Cost Sheet 147

Further each of the above item is classified into:

(i) Material i.e., Indirect Materials.
(ii) Labour i.e., Indirect Labour.
(iii) Expenses i.e., Indirect Expenses.

CLASSIFICATION OF COSTS
The term 'cost' is defined in a variety of ways. Its simple meaning is ‘total expense’.
Cost can be classified in a number of ways:
(a) Direct Costs.
(b) Indirect Cost
(c) Fixed Cost
(d) Variable Cost.
(e) Semi-variable Cost.
Direct Cost:
Direct cost are those costs which can be conveniently associated wholly with a particular unit of
a final product. Direct costs can be directly identified with and allocated to cost centres or cost units.
E.g.:
(i) Materials which form part of the finished product — cost of wood in a firm manufacturing
furniture.
(ii) Wages payable to worker who is directly involved in production — carpenter's wages in a firm
manufacturing furniture.
(iii) Carriage expenses on raw materials.
(iv) Workers' wages.
(v) Raw material charges
Indirect Cost:
The Institute of Cost and Management Accountants (UK) defines indirect cost as the, "Cost which
cannot be allocated but which can be apportioned to or absorbed by cost centers or cost units." They are
incurred for the benefit of more than one product, activity or job and must be apportioned by some
appropriate bases to the various functions. Costs which cannot be associated or connected with a
particular unit of the final product is termed as indirect costs. Indirect costs cannot be identified and
allocated with cost centers or cost units and therefore they are apportioned on some equitable basis to
cost centers or cost units.
E.g.:
(i) Advertisement expenses
(ii) Office rent
 148 Cost Accounting

(iii) Packing expenses [Note: Primary Packing Materials - Direct Cost Secondary Packing Materials
- Indirect Cost]
(iv) Depreciation on Furniture
(v) Legal expenses
(vi) Cost of consumable stores.
(vii) Salaries of foreman, supervisor, factory manager
(viii) Rent and rates,
(ix) Printing and stationery,
(x) Telephone expenses,
(xi) Heat and light,
(xii) Maintenance, etc.
Overheads:
Overheads means indirect cost. Overheads are also termed as "On costs". Overheads is an aggregate
of indirect materials, indirect labour and indirect expenses.
(a) Factory overheads,
(b) Administrative overheads, and
(c) Selling and Distribution overheads

SOLVED PROBLEMS

Illustration 1
[M.U., T.Y.B.Com., Modified]
The accounts of Z Ltd for the year ended 31st December, 2010, shows the following:
Particulars (`)
Work Office Salaries 6,500
Administrative Office Salaries 12,600
Cash Discounts allowed 2,900
Carriage Outward 4,300
Carriage Inward 7,150
Bad debts written off 6,500
Repairs to Plant and Machinery 4,450
Rent, rates,taxes, Insurance etc
Factory 8,500
Office 2,000
Cost Sheet 149

Sales 4,61,000
Stock of Raw materials:
1st Jan., 2010 48,000
31st Dec., 2010 62,800
Materials Purchased 1.85,00
Travelling Expenses 2,100
Travellers Salaries and Commission 7,700
Productive Wages 1,26,000
Depreciation on Plant and Machinery 6,500
Depreciation on Office Furniture 300
Director’s Fees 6,000
Gas and Water (Factory) 1,200
Gas and Water (Office) 400
Manager’s Salary (1/4 Office and 3/4 Factory) 10,000
General Expenses 3,400

You are required to prepare a cost statement for the year ended 31st December, 2010.
Solution
Z Ltd.
Cost Statement for the year ended 31st December, 2010
Particulars ` `
Raw Materials Consumed:
Stock of Raw Materials as on 1st Jan., 2010 48,000
Add: Materials Purchased 1,85,000
Add: Carnage Inward 7,150
Less: Stock of Raw Materials as on 31st Dec., 20010 62,800
Raw Materials Consumed 1,77,350
Productive Wages 1,26,000
PRIME COST 3,03,350
Add: Works/Factory Overheads:
Work Office Salaries 6,500
Repairs to Plant and Machinery 4,450
Rent, Rates, Taxes, Insurance etc. – Factory 8,500
Depreciation on Plant and Machinery 6,500
Gas and Water (Factory) 1,200
Manager’s Salary (3/4) 7,500
Works or Factory Overheads 34,650
 150 Cost Accounting

WORKS/FACTORY COST 34,38,000

Add: Office and Administration Overheads:
Administrative Office Salaries 12,600
Rent, Rates, Taxes, Insurance etc. – Office 2,000
Depreciation on Office Furniture 300
Director’s Fees 6,000
Gas and Water (Office) 400
Manager’s Salary (1/4) 2,500
General Expenses 3,400
Office and Administration Overheads 27,200
COST OF PRODUCTION/COST OF GOODS SOLD 3,65,200
Add: Selling and Distribution Overheads:
Carriage Outward 4,300
Travelling Expenses 2,100
Travellers Salanes and Commission 7,700
Selling and Distribution Overheads 14,100
TOTAL COST OF SALES 3,79,300
Add: Profit (Balancing Figure) 81,700
SALES 4,61,000
Illustration 2
[M.U., T.Y.B.Com., Modified]
From the following date, prepare a Cost Sheet for the year 2010. Number of Units produced:
10,000 Units.
Particulars `
Opening Stock of Raw Materials 3,00,000
Purchase of Raw Materials 8,00,000
Closing Stock of Raw Materials 1,00,000
Carriage Outward 8,000
Wages Indirect 20,000
Salary:
Office 50,000
Sales Office 40,000
Other Factory Expenses 50,000
Trade Fair Expenses 20,000
Depreciation:
Factory 30,000
Office 20,000
Selling 20,000
Direct Salary 50,000
Cost Sheet 151

Advance Interest Received 40,000

Custom Duty Paid for Purchase of Raw Material 5,00,000
Debenture Interest Paid 50,000
Freight Inward 20,000
Custom Duty Paid for Purchase of Plant 50,000
Direct Wages 2,00,000
Other Direct Charges 50,000
Goodwill Written-off 5,000
Number of Units sold 8,000 units at cost plus 18% Profit
Direct Salary is to be allocated to factory. Office and Selling in the ratio of 2:1:2.
Solution:

Cost Statement for the year ended 2010

Particulars Units Total Total Cost Per
` ` Unit `
Raw Materials Consumed:
Opening Stock of Raw Materials 3,00,000 30.0
Add: Purchase of Raw Materials 8,00,000 80.0
Add: Custom Duty Paid for Purchase of Raw Materials 5,00,000 50.0
Add: Freight Inward 20,000 2.0
Less: Closing Stock of Raw Materials 1,00,000 10.0
Raw Materials Consumed 15,20,000 152.0
Direct Wages 2,00,000 20.0
Other Direct Charges 50,000 5.0
PRIME COST 10,000 17,70,000 177.0
Add: Works/Factory Overheads:
Wages Indirect 20,000 2.0
Other Factory Expenses 50,000 5.0
Depreciation - Factory 30,000 3.0
Direct Salary - Factory (2/5) 20,000 2.0
Works or Factory Overheads 10,000 1,20,000 12.0
WORKS/FACTORY COST 10,000 18,90,000 189.0
Add: Office and Administration Overheads:
Office Salary 50,000 5.0
Depreciation – Office 20,000 2.0
Direct Salary – Office (1/5) 10,000 1.0

Office and Administration Overheads 10,000 80,000 8.0

 152 Cost Accounting

COST OF PRODUCTION 10,000 19,70,000 197.0

Less: Closing Stock of Finished Goods
(Valued as per As -2) 2,000 3,78,000 189.0
Cost of Goods Sold 8,000 15,92,000 199.0
Add: Selling and Distribution Overheads:
Carriage Outward 8,000 1.0
Salary – Sales Office 40,000 5.0
Trade Fair Expenses 20,000 2.5
Depreciation – Selling 20,000 2.5
Direct Salary – Sales(2/5) 20,000 2.5
Selling and Distribution Overheads 8,000 1,08,000 13.5
TOTAL COST OF SALES 8,000 17,00,000 212.5
Add: Profit @ 18% 3,06,000 38.25
Sales Value 8,000 20,06,000 250.75
20,06,000
Illustration 3
[M.U., T.Y. B.Com., April 1996, Adapted]
Swadeshi Electronics Ltd. furnishes you the following information for the year ended 31st March,
2012
Production and Sales Units 15,000
Sales ` 12,75,000
Direct Wages ` 2,70,000
Direct Materials ` 3,30,000
Factory Overheads ` 2,25,000
Administrative Overheads ` 1,05,000
Sales Overheads ` 90,000
On account of intense competition following changes are estimated in the subsequent year:
(a) Production and sales activity will be increased by one third.
(b) Material rate will be lower by 25%. However, there will be increase in consumption by 20% due
to quality difference.
(c) Direct wages cost would be reduced by 20% due to automation.
(d) Out of the above factory overheads, ` 45,000 are of fixed nature. The remaining factory
expenses are variable in proportion to the number of units produced.
(e) Total administrative overheads will be lower by 40%.
(f) Sales overheads per unit would remain the same.
(g) Sale price per unit would be lower by 20%.
Prepare a statement of cost for both the years ending 31st March, 2012 and 31st March, 2013
showing maximum possible details of cost.
Cost Sheet 153

Solution
Swadeshi Electronics Ltd.
Cost Sheet for the year ended 31st March, 2012
[Output: 15,000 Units]

Particulars Total Cost per

` ` Unit `
Direct Materials 3,30,000 22
Direct Wages 2,70,000 18
Prime Cost 6,00,000 40
Add: Works/Factory Overheads:
Fixed Overheads 45,000 3
Variable Overheads 1,80,000 12
Factory Overheads 2,25,000 15
Works/Factory Cost 8,25,000 55
Add: Office and Administration Overheads:
Administrative Overheads 1,05,000 7
Cost of Production/Cost of Goods Sold 9,30,000 62
Add: Selling and Distribution Overheads
Sales Overheads 90,000 6
Total Cost of Sales 10,20,000 68
Add: Profit 2,55,000 17
Sales Value 12,75,000 85

Estimated Cost Sheet for the year ending 31st March, 2013
[Output: 20,000 Units]
Particulars Total Cost per Unit
` ` `
Direct Materials 3,96,000 19.80
Direct Wages 2,16,000 10.80
Prime Cost 6,12,000 30.60
Add: Works/Factory Overheads:
Fixed Overheads 45,000 22.50
Variable Overheads 2,40,000 12.00
Factory Overheads 2,85,000 14.25
Works/Factory Cost 8,97,000 44.85
Add: Office and Administration Overheads:
Administrative Overheads 63,000 3.15
Cost of Production/Cost of Goods Sold 9,60,000 48.00
 154 Cost Accounting

Add: Selling and Distribution Overheads

Sales Overheads 1,20,000 6.00
Total Cost of Sales 10,80,000 54.00
Add: Profit 2,80,000 14.00
Sales Value 13,60,000 68.00
Illustration 4
[M.U., T.Y.B.Com., Modified]
From the following data, prepare a cost sheet for the year 2010.
Particulars `
Opening Stock of Raw Materials 3,00,000
Purchases 8,00,000
Closing Stock of Raw Materials 4,00,000
Carriage Outward 50,000
Wages Direct 7,00,000
Wages Indirect 1,00,000
Chargeable Expenses 2,00,000
Rent and Rates: Factory 40,000
Office 5,000
Indirect Materials 15,000
Drawing Office Salaries 10,000
Depreciation: Plant 5,000
Office Furniture 1,000
Salary: Office 25,000
Salesmen 20,000
W.I.P.: 1-1-2010 20,000
31-12-2010 10,000
Sale of by Product 10,000
Other Factory Expenses 57,000
Other Office Expenses 9,000
Managing Director's Remuneration 1,20,000
Other Selling Expenses 10,000
Art Work Charges 40,000
Stock of Finished goods: 1-1-2010 10,000
31-12-2010 50,000
Traveling Expenses of Salesmen 11,000
Carriage Inward 10,000
Sales 30,00,000
Advance Income Tax paid 1,50,000
Advertisement 20,000
M.D.’s remuneration to be allocated as ` 40,000 to factory, ` 20,000 to office and ` 60,000 to
sales.
Cost Sheet 155

Solution
Cost Statement for the year ended 2010
Particulars ` `
Rew Materials Consumed:
Opening Stock of Raw Materials 3,00,000
Add: Purchases 8,00,000
Add: Carnage Inward 10,000
Less: Closing Stock of Raw Materials 4,00,000
Raw Materials Consumed 7,10,000
Wages Direct 7,00,000
Chargeable Expenses 2,00,000
PRIME COST 16,10,000
Add: Works/Factory Overheads:
Wages Indirect 1,00,000
Rent and Rates - Factory 40,000
Indirect Materials 15,000
Drawing Office Salaries 10,000
Depreciation - Plant 5,000
Other Factory Expenses 57,000
Managing Director’s Remuneration 40,000
Add: W.I.P. as on 1-9-2010 20,000
Less: W.I.P. as on 31-12-2010 10,000
Less: Sale of By-product 10,000
Works or Factory Overheads 2,67,000
WORKS/FACTORY COST 18,77,000
Add: Office and Administration Overheads:
Rent and Rates - Office 5,000
Depreciation - Office Furniture 1,000
Salary-Office 25,000
Other Office Expenses 9,000
Managing Director’s Remuneration 20,000
Office and Administration Overheads 60,000
COST OF PRODUCTION 19,37,000
Add: Stockof Finished Goodsason1.1-2010 10,000
19,47,000
Less: Stock of Finished Goods as on 31-12-2010 50,000
 156 Cost Accounting

COST OF GOODS SOLD 18,97,000

Add: Selling and Distribution Overheads:
Carriage Outward 50,000
Salary-Salesmen 20,000
Other Selling Expenses 10,000
Art Work Charges 40,000
Travelling Expenses of Salesmen 11,000
Advertisement 20,000
Managing Dieectir’s Remuneration 60,000
Selling and Distribution Overheads 2,11,000
TOTAL COST OF SALES 21,08,000
Add: Profit 8,92,000
Sales 30,00,000
Illustration 5
[M.U., T.Y.B.Com., Modified]
Hindustan Machine Tools Ltd. furnishes for March, 2012 the following information for a department:
Deluxe wrist watches manufactured 1,000 pieces.
Cost and other data `
Opening stock
Raw materials 4,50,000
Finished goods 3,30,000
(200 pieces)
Closing stock
Raw materials 5,00,000
Finished goods (300 pieces) ?
Purchases of raw material 7,00,000
Direct labour 4,00,000
Indirect labour factory 1,00,000
Consumption of stores and spares 90,000
Sales 21,60,000

Other overheads Factory Office Sales depot

` ` `
Salary 1,00,000 2,00,000 1,50,000
Electricity 25,000 2,000 10,000
Stationery and Printing 10,000 25,000 20,000
Travelling expenses 3,000 10,000 50,000
Rent 5,000 5,000 5,000
Showroom and Exhibition expenses - - 10,000
Miscellaneous expenses 15,000 25,000 20,000
Cost Sheet 157

The stock of finished goods is valued at current month's cost of production.

(a) You are required to prepare a cost sheet for the month of March, 2012 and ascertain the
amount of profit.
(b) What should be the selling price in order to earn additional profit on sales?
Solution
Cost Statement for the month of March, 2012
Particulars Units Total Total Cost Per
` ` Unit `
Raw Materials Consumed:
Opening Stock of Raw Materials 4,50,000 450.00
Add: Purchase of Raw Materials 7,00,000 700.00
Less: Closing Stock of Raw Materials 5,00,000 500.00
Raw Materials Consumed 6,50,000 650.00
Direct Labour 4,00,000 400.00
PRIME COST 1,000 10,50,000 1,050.00
Add: Works/Factory Overheads:
Indirect Labour Factory 1,00,000 100.00
Consumption of Stores and Spares 90,000 90.00
Salary 1,00,000 100.00
Electricity 25.000 25.00
Stationery and Printing 10,000 10.00
Travelling Expenses 3,000 3.00
Rent 5,000 5.00
Miscellaneous expenses 15,000 15.00
Works or Factory Overheads 1,000 3,48,000 348.00
WORKS/FACTORY COST 1,000 13,98,000 1,398.00
Add: Office and Administration Overheads:
Salary 2,00,000 200.00
Electricity 2,000 2.00
Stationery and Printing 25.000 25.00
Travelling Expenses 10.000 10.00
Rent 5,000 5.00
Miscellaneous expenses 25,000 25.00
Office and Administration Overheads 1,000 2,67,000 267.00
COST OF PRODUCTION 1,000 16,65,000 1,665.00
Add: Opening Stock of Finished Goods 200 3,30,000 1,650.00
1,200 19,95,000 1,662.50
Less: Closing Stock of Finished Goods
(Valued at Cost of Production) 300 4,99,500 1,665.00
COST OF GOODS SOLD 900 14,95,500 1661.66
 158 Cost Accounting

Add: Selling and Distribution Overheads:

Salary 1,50,000 166.66
Electricity 10,000 11.11
Stationery and Printing 20,000 22.22
Travelling expenses 50,000 55.55
Rent 5,000 5.55
Show room and Exhibition expenses 10,000 11.11
Miscellaneous expenses 20,000 22.22
Selling and Distribution Overheads 900 2,65,000 294.44
TOTAL-COST OF SALES 900 17,60,500 1,956.11
Add: Profit 900 3,99,500 443.89
Sales 900 21,60,000 2400.00
Illustration 6
[M.U., B.Com., October 1995, Adapted]
Following is the Profit and Loss Account for the year ended 31st March, 2012 of M/s. Cool and
Comforts Ltd., manufacturers of Table Fans. They manufactured and sold during the year 2000 fans.
Profit and Loss Account for the year ended 31st March, 2005
Dr. Cr.
Particulars ` Particulars `
To Materials Consumed 1,20,000 By Sales 6,00,000
To Wages 1,80,000
To Manufacturing Expenses 75,000
To Gross Profit c/d 2,25,000
` 6,00,000 ` 6,00,000
To Rent, Rates and Taxes 15,000 By Gross Profit b/d 2,25,000
To General Expenses 30,000
To Management Expenses 90,000
To Sales and Distribution Expenses 45,000
To Net Profit 45,000
` 2,25,000 ` 2,25,000
Their estimates for the next year ending 31st March 2013 are as under:
(a) The production and sales would increase to 3000 fans.
(b) The prices of materials per fan would increase by 20%
(c) The labour cost per fan would go up by 10%
(d) The manufacturing expenses would remain in the same proportion to materials consumed and
wages as in the previous year.
(e) The selling and distribution expenses per fan would remain unchanged.
(f) The other expenses would remain unaffected on account of increase in the production.
Cost Sheet 159

Prepare a statement for the two years, 2011 -2012 and 2012-2013 showing cost and profit per fan
and total cost and total profit, giving maximum possible break-up of cost.
Solution
M/s. Cool and Comforts Ltd.
Cost Sheet for the year ended 31st March. 2012
[Output: 2,000 Fans]
Particulars Total Cost per
` ` Unit (`)
Materials Consumed 1,20,000 60.0
Wages 1.80.000 90.0
Prime Cost 3,00,000 150.0
Add: Works/Factory Overheads:
Manufacturing Expenses 75,000 37.5
Works/Factory Cost 3,75,000 187.5
Add: Office and Administration Overheads:
Rent, Rates and Taxes 15,000 7.5
General Expenses 30,000 15.0
Management Expenses 90,000 45.0
Total Office and Administration Overheads 1,35,000 67.5
Cost of Production/Cost of Goods Sold 5,10,000 255.0
Add: Selling and Distribution Overheads
Selling and Distribution Expenses 45,000 22.5
Total Cost of Sales 5,55,000 277.5
Add: Profit 45,000 22.5
Sales Value 6,00,000 300.0

Estimated Cost Sheet for the year ending 31st March, 2006
[Output: 3,000 Fans]
Particulars Total Cost per
` ` Unit (`)
Materials Consumed 2,16,000 72.00
Wages 2.97,000 99.00
Prime Cost 5,13,000 171.00
Add: Works/Factory Overheads:
Manufacturing Expenses 1,28,250 42.75
Works/Factory Cost 6,41,250 213.75
Add: Office and Administration Overheads:
Rent, Rates and Taxes 15,000 5.00
General Expenses 30,000 10.00
Management Expenses 90,000 30.00
 160 Cost Accounting

Total Office and Administration Overheads 1,35,000 45.00

Cost of Production/Cost of Goods Sold 7,76,250 258.75
Add: Selling and Distribution Overheads
Selling and Distrbution Expenses 67,500 22.50
Total Cost of Sales 8,43,750 281.25
Add: Profit 56,250 18.75
Sales Value 9,00,000 300.00
Illustration 7
[CA Modified]
Dunkel Ltd. Started a factory in Navi Mumbai on 1st April, 2011. Following details are furnished
about its activity during the year ended 31st March, 2012.
Raw Material consumed - 40,000 units @ ` 7 per unit.
Direct Wages:
(a) Skilled worker ` 9 per unit.
(b) Unskilled worker ` 6 per unit.
Royalty (On raw material consumed) @ ` 3 per unit.
Works overheads @ ` 8 per machine hour.
Machine Hours Worked 25,000.
Office Overheads at 1/3rd of works cost
Sales Commission @ ` 4 per unit.
Units produced 40,000
Stock of units at the end 4,000 units to be valued at cost of production per unit.
Sale price is ` 60 per unit.
Prepare Cost sheet showing the various elements of cost, bothin total and per unit.
Solution
Dunkel Ltd.
Cost Sheet for the year ended 31st March, 2012
Particulars Units Total Cost per
` ` Unit (`)
Raw Materials Consumed 40,000 2,80,000 7
Direct Wages:
Skilled Workers Wages 3,60,000 9
Unskilled Workers Wages 2,40,000 6
Total Direct Wages 6,00,000 15
Cost Sheet 161

Direct Expenses:
Royalty on Raw Material Consumed 1,20,000 3
Prime Cost 10,00,000 25
Add: Works/Factory Overheads:
Works Overheads 8 × 25,000 2,00,000 5
Works/Factory Cost 12,00,000 30
Add: Office and Administration Overheads:
Office Overheads 4,00,000 10
Cost of Production 40,000 16,00,000 40
Less: Closing Stock 4,000 1,60,000 40
Cost of Goods Sold 36,000 14,40,000 40
Add: Selling and Distribution Overheads
Sales Commission 36,000 1,44,000 4
Total Cost of Sales 36,000 15,84,000 44
Add: Profit 36,000 5,76,000 16
Sales Value 36,000 21,60,000 60
Illustration 8
[CS Modified]
Prepare a cost sheet showing the total and per tonne cost of paper manufactured by Times Paper
Mills Ltd. For the month of March, 2012. There were 26 working days in the month. Also find the profit
earned by the company. The details are as under:
Direct Raw materials:
Paper pulp 6,000 tons @ ` 900 per tonne.
Direct labour:
280 Skilled workmen ` 250 per day
300 Semiskilled workmen ` 150 per day
470 Unskilled workmen ` 100 per day
Direct expenses:
Special equipment hire charges ` 12,000 per day
Special dyes ` 250 per tonne of total raw material input
Work overheads: Variable @ 50% of direct wages
Fixed ` 2,70,000 p.m.
Administration overheads @ 12% of works cost
Selling and distribution overheads ` 80 per tonne sold.
Opening stock of paper 500 tonnes valued @ ` 2,501.60 per ton
Closing stock of paper 300 tonnes valued at cost of production.

The paper is sold @ ` 3,000 per tonne.

162 Cost Accounting

Solution
Times Paper Mills Ltd.
[Working Days: 26]
Cost Sheet for the month of March, 2012
Particulars Tons Total Cost per
` ` Unit (`)
Direct Raw Materials:
Paper Pulp 6,000 54,00,000 900.00
Direct Labour:
Skilled Workmen 280 × 250 × 26 18,20,000 303.33
Semiskilled Workmen 300 × 150 × 26 11,70,000 195.00
Unskilled Workmen 470 × 100 × 26 12,22,000 203.66
Direct Labour 42,12,000 702.00
Dieect Expenses:
Special Equipments Hire Charges 12,000 × 26 3,12,000 52.00
Special Dyes 6,000 15,00,000 250.00
Direct Expenses 18,12,000 302.00
PRIME COST 6,000 1,14,24,000 1,904.00
Add: Works/Factory Overheads:
Variable 21,06,000 351.00
Fixed 2,70,000 45.00
Works/Factory Overheads 23,76,000 396.00
Works or Factory Cost 6,000 1,38,00,000 2,300.00
Add: Office and Administration Overheads:
Administration Overheads 16,56,000 276.00
Cost of Production 6,000 1,54,56,000 2,576.00
Add: Opening Stock of Paper 500 12,50,800 2,501.60
6,500 1,67,06,800 2,570.27
Less: Closing Stock of Paper 300 7,72,800 2,576.00
Cost of Goods Sold 6,200 1,59,34,000 2,655.66
Add: Selling and Distribution Overheads 6,200 4,96,000 80.00
Total Cost of Sales 6,200 1,64,30,000 2,650.00
Add: Profit 6,200 21,70,000 350.00
Sales Value 6,200 1,86,00,000 3,000.00
Cost Sheet 163

Illustration 9
The following particulars are extracted from the books of a company relating to commodity Aplha
for the half year ending 30th June, 2012.
`
Purchase of raw materials 1,30,000
Direct wages 1,00,000
Rent, rates, insurance and works on cost 45,000
Carriage inward 1,500
Stock on 1-1-2012
Raw materials 20,000
Finished products (1,600 tonnes) 17,600
Stock on 30-6-2012
Raw materials 25,000
Finished products (3,200 tonnes) 37,600
Work-in-progress on 1-1-2012 4,500
Work-in-progress on 30-6-2012 16,000
Factory supervision 10,000
Sales – Finished product 3,00,000
Advertising discount allowed and selling cost at Re.0.50 per tonne sold. 25,000 tonnes of commodity
was sold during the period.
You are required to ascertain:
1. Prime Cost
2. Factory Cost
3. Cost of Sales
4. Profit
5. No. of tonnes of the commodity sold.
Solution
Cost Sheet of Commodity Alpha for the period ending 30-6-2009
Particular ` `
Raw materials
Opening stock 20,000
Add: Purchases 1,30,000
1,50,000
Less: Closing stock 25,000
1,25,000
Add: Carriage inwards Materials Consumed 1,500
1,26,500
164 Cost Accounting

Direct wages 1,00,000

Prime cost 2,26,500
Rent, rates, insurance and works 45,000
On cost Cost of factory supervision 10,000
55,000
Add: Opening Work-in-progress 4,500
Less: Closing Work-in-progress 16,000
Factory Cost
Add: Opening stock of finished goods (1,600 tonnes) 17,600
Less: Closing stock of finished goods (3,200 tonnes) 37,600
Cost of goods sold 2,50,000
Add: Advertising and selling cost @
Re. 0.50 per tones on 25,000 tonnes 12,500
Cost of sales 2,62,500
Profit 37,500
Sales 3,00,000

QUESTIONS FOR SELF-PRACTICE

(I) Practical Questions

(1) The following is an extract of the costing information for the year ended 31 March 2012:
`
Sales 1,96,000
Purchase-raw material 60,000
Direct wages 60,000
Rent, Rates, insurance, & other works on cost 21,000
Carriages inwards 1,000
Opening stock –
Raw material 10,000
Finished goods (200 tons) 12,000
Closing stock: Raw materials 11,000
Supervision 3,000
Advertising 4,000
Office overheads 30,000
Selling expenses 8,000
3,000 tons of the commodities were produced. The closing stock of finished goods is 400 tons.
The same has to be valued at work cost. Prepare a detailed cost statement showing:
Cost Sheet 165

(1) Cost of the output-total as well as per unit

(2) Net profit for the year.
[Ans.: (1) Total Cost ` 1,78,800 Cost Per Unit 63.86
(2) Net profit ` 17,200 Cost Per Unit 6.14]
(2) From the following data, relating to the manufacturing of a standard product during September
2012 prepares a statement showing cost & profit per unit:
`
Raw material used 1,20,000
Direct wages 72,000
Man hours worked 10,000 hours
Man hours rate for recovering works overheads ` 10 per hour
Office overheads 25% on work cost
Selling overheads ` 1.50 per unit
Unit produced 42,000; units sold 40,000 @ ` 25 per unit.
[Ans.:(1) Total Cost ` 4,07620 Cost Per Unit 10.19
(2) Net profit ` 5,92,380 Cost Per Unit 14.81]
(3) X Y & Z carry on business as engineers in partnership, sharing profits & losses equally,
Z devotes to the business only so much time as he thinks fit. Y acts as works manager & X as
office manager. The following figures for the month of march, 2010 are available:
[MU, T.Y.B.Com., Modified]
`
Purchases of materials
74,250
Works wages Direct 48,000
Indirect 6,000
Office salaries 14,085
Carriages inward 450
Carriages outward 42,000
Sales 2,40,000
Opening stock of Materials 26,250
Finished goods (600 units) 6,750
Work-in-progress 9,750
Travelling expenses (25% administrative: 75% sales) 1,800
Interest on capital (equally to X,Y,& Z) 4,500
Advertising 4,500
Power 1,575
Income tax 14,250
166 Cost Accounting

Agents commission 6,750

Plant maintenance 5,490
Lighting (90% for factory, 10% for sale) 1,500
Discount received 450
Bad debts 750
Sundry expenses (Factory) 2,100
(Office) 3,900
Factory Buildings repairs 750
Partners salaries X 1,500
Y 1,800
Depreciation Plant 2,850
Factory 1,200
Building 600
Sale of Scrap

On 31st March 2010 Materials on hand totaled ` 24,000 where as the work-in-progress was
estimated as ` 8,500. 1800 units were produced out of which 650 remained unsold. Prepare cost sheet
& show the profit earned.
(4) In 2009 selling price was ` 10 per article & total sales were ` 1,00,000. In 2010, selling price
was increased by 10%. Total sales realized ` 1,26,500.
In 2009, materials cost was 40% of sales value. In 2010, Prices of raw material rose by 10%.
In 2009, wages were ` 30,000. In 2010, the wages cost was ` 33,000. In 2009, other expenses
were 10% of sales value. These expenses rose in 2010 by ` 1,500.
Prepare cost statement for the years 2009 & 2010. Find out the net profit for 2009, & 2010.
[Ans.:(1) Total Cost- 2009-` 80,000 Cost Per Unit 8.00 & 2010- ` 95,100 Cost Per Unit 8.27
(2) Net profit - 2009-` 20,000 Cost Per Unit 2.00 & 2010- ` 31,400 Cost Per Unit 2.73]
(5) From the following information prepare a cost statement showing maximum possible break up
of cost & total profit:
[MU T.Y.B.Com., Modified]
`
Sales for January 2010 30,00,000
Cost of goods sold 24,80,000
Administration expenses 1,80,000
Selling expenses 40,000
1.1.10 31.1.10
` `
Raw material stock 3,20,000 4,00,000
Work-in-progress 3,20,000 4,80,000
Finished goods 4,20,000 3,40,000
Cost Sheet 167

Direct wages were 30% of prime cost

Raw materials consumed were 50% of prime cost
Direct expenses were 20% of prime cost
Factory overheads were 20% of prime cost.
[Ans.: (1) Total Cost ` 25,20,000
(2) Net profit ` 4,80,000]
(6) The following particulars relating to the year 2008 are taken from the book & records of a
chemical works manufacturing & selling a standardized mixture:
[CA Modified]
Kgs. Kgs.
Stock in 1-1-2009 opening Raw Materials 2,000 2,000
Finished Mixtures 500 1,750
Factory Stores 7,250
Raw Materials 1,60,000 1,80,000
Purchase
Factory Stores 24,250
Finished Mixtures 1,53,050 9,18,000
Sale Factory Scrap 8,170
Factory wages 1,78,650
Mixtures
Power 30,400
Machinery depreciation 18,200
Salaries Factory 72,220
Office 37,220
Selling 41,500
Expenses Direct 18,500
Office 18,200
Selling 18,000
Interest on capital Factory 7,000
General 3,000
Advertising 1,40,000
Cash discount on sales 14,500
Bank Interest paid 1,250
Stock on 31-12-2009 Raw Materials 1,200 ?
Finished Mixtures 450 ?
Factory Stores 5,550
 168 Cost Accounting

The wastage in raw material is normal. The purchase price of raw materials remained unchanged
through 2009. The stock of finished mixture at the end of the year is to be valued at factory cost. Raw
materials are consumed on FIFO basis. From the above information you are required to prepare a cost
statement shoeing the prime cost, works cost & total cost of the mixture produced during the year.
[Ans.: Prime Cost- ` 3,77,800 Works Cost- ` 5,16,200 Total Cost- ` 16,89,797]
(7) The following figures are extracted from the Trial Balance of Gogetter Co. on 30th September,
2012.
[MU T.Y.B.Com Modified]
Particulars `
Inventories
Finished goods 80,000
Raw Materials 1,40,000
Work-in-progress 2,00,000
Office Appliances 17,400
Plant & Machinery 4,60,500
Buildings 2,00,000
Sales 7,68,000
Sales Return & Rebates 14,000
Materials Purchased 3,20,000
Freight incurred on Materials 16,000
Purchase Returns 4,800
Direct Labour 1,60,000
Indirect Labour 18,000
Factory Supervision 10,000
Repairs & Unkeep – factory 14,000
Heat, Light, & Power 65,000
Rates & Taxes 6,300
Miscellaneous Factory Expenses 18,700
Sales Commission 33,600
Sales Travelling 11,000
Sales Promotion 22,500
Distribution Dept. Salaries & Expense 18,000
Office Expenses 8,600
Interest on Borrowed Funds 2,000
Further details are available as follows:
(i) Closing Inventories:
Finished Goods 1,15,000
Raw Materials 1,80,000
Work in progress 1,92,000
Cost Sheet 169

(ii) Accrued Expenses On:

Direct Labor 8,200
Indirect Labor 1,200
Interest on Borrowed Funds 2,000
(iii) Depreciation to be provided on: office Appliances 5%, plant &
Machinery 10% Building 4%
(iv) Distribution of the following costs:
Heat, Light & power to Factory, Office & Distribution in the ratio 8:1:1.
Rates & Taxes two-third to factory & one-third to office
Depreciation on Building Factory, office & selling in the ratio 8:1:1
With the help of the above information you are required to prepare cost sheet for Gogetter Co. for
the year ended 30th September, 2012.
[Ans.: (1) Total Cost- ` 7,14,220
(2) Net profit - ` 39,780]
(8) The accounts of a small manufacturer showed the following particulars for the year ending
31st March, 2010:
`
Materials Used 75,000
Productivity wages 60,000
Factory Overheads 13,500
Office overheads 7,425
For the quarter to end on 30th June, 2010 it is estimated that the materials would cost ` 25,000 &
wages ` 7,500. The factory overheads will bear the same production to the prime cost & the office
overheads will bear the same production to the prime cost as in the previous year. Prepare an estimated
cost sheet. Also ascertain what cost as in the previous year. Prepare an estimated cost sheet. Also
ascertain what price should be charged if the manufacturer wants to earn 25% profit on selling price.
[Ans.: Total Cost- March 2010 -` 1,55,925 & June 2010- ` 37,538 Profit- ` 12,512]
(9) The following information is available from the books of a company producing luxury ceiling
fans for the year ended 31-3-2010 Production & sales 1000 units.
[MU T.Y.B.Com Modified]
` `
Direct materials 2,00,000 Administration expenses 60,000
Direct wages 1,50,000 Selling expenses 45,000
Factory expenses 1,37,500 Sales 7,30,000
The following estimates have been made for 2010-2011:
(i) Production & sales will be 1,500 units.
(ii) Materials prices per unit will increase by 25% but due to economy in consumption there will be
saving of 12% with reference to the revised price.
 170 Cost Accounting

(iii) The wage rates per unit will increase by 20%

(iv) Factory expenses ` 50, 000 are fixed. The remaining factory expenses will be in the same
proportion to materials consumed & wages as in the previous year.
(v) The total administration expenses will increase by 66-2/3%
(vi) Selling expenses will be ` 90,000.
(vii) The profit desires is 20% on sales.
Prepare a cost statement maximum possible break-up of cost per unit & total cost, profit per unit
& total profit for 2009-2010 & 2010-2011.
[Ans.: (1) Total Cost- 2010- ` 5,92,500 Cost Per Unit 592.50 &
2011- ` 9,90,000 Cost Per Unit 660.00
(2) Net Profit - 2010- ` 1,37,500 Cost Per Unit 137.50
& 2011- ` 2,47,500 Cost Per Unit 165.00]
(10) The following is the trading & profit & loss account of a manufacturing company for the
quarter ended 30th June, 2009:
` `
To opening stock By Sale of finished goods 2,75,000
Raw materials 5,000 By Sale of factory scrap 5,000
Work-in-progress 10,000 By Income from Investments 10,000
Finished goods 25,000 40,000 By Closing stock
To Purchase of raw Raw material 15,000
Materials 1,00,000 Work-in-progress 20,000
To Wages (75% direct & Finished goods 10,000 45,000
25% indirect) 60,000
To Factory expenses 20,000
To Administrative expense 15,000
To Selling & distribution exps. 30,000
To Interest 20,000
To Income tax 25,000
To Net Profit 25,000
3,35,000 3,35,000
Finished goods costing ` 5,000 were used for free samples and those costing ` 10,000 were
donated to a charitable institution, however, no accounting entries have been passed for the same.
Further no accounting entry has been passed for the material costing ` 5, 000 destroyed by fire while it
was being worked in the factory. You are required to prepare a cost sheet.
[Ans.: Total Cost- Rs.2,25,000 & Profit- Rs.50,000]
Cost Sheet 171

(11) A company produced two knids of electric pumps XA and XB details of which are
XA XB
Pumps manufactured 25,000 12,000
Direct cost: ` 3,140 ` 2,650
Materials 9,400 5,700
Wages 2,100 1,410
Power, etc. 14,640 9,760
Total
Other costs
Factory supervision, etc. ` 3,600
Packing wages and expenses 400
Management and selling expenses 4,400
You are required to prepare a statement showing the cost of each kind of pump when ready for
dispatch, taking the following into considerations.
(i) Factory supervision to be charged in proportion to direct costs.
(ii) Packing expenses to be apportioned in the ratio that direct costs plus factory supervision costs
of XA bear to similar costs of XB.
(iii) Management and selling expenses to be charged in production to the pups manufactured.
[Ans.: Total Cost- XA- 20,013 XB- ` 12,788]
(12) A manufacturer commenced production on 1st January, 2012 of a standard article in two
grades A and B. Both are produced form the same raw material and are sold to wholesalers at
a uniform price – Grade A at ` 150 per dozen and Grade B at ` 240 per dozen. Sale price are
based on the following estimated figures:
[CIMA London Modified]
Cost per Article
Grade A Grade B
Direct material cost 1.50 3.00
Direct wages 5.00 7.00
Production overhead 2.50 3.50
Works cost 9.00 13.50
Selling and Distribution overhead 0.90 1.35
Total Cost 9.90 14.85
On making up accounts for year ended 31st December 2012, the following faits were ascertained:
Cost of Material Used Grade A Grade B
Direct wages 15,000 20,000
Product wages 38,250 76,500
Product overheads (Total) ` 68,125
Selling & Distribution overhead (Total) ` 32,700
 172 Cost Accounting

During the year sales amounted to ` 1,05,000 in respect of Grades A articles and ` 1,80,000 in
respect of Grade B articles, and stock on hand at 31st Dec, 2009, valued at work cost as per his costing
were ` 5,400 of Grade A and ` 13,500 of Grade B.
From the information given above, you are required to prepare a statement of revised costing
showing the cost per article sold during 2012.
[Ans.: Total Cost- A- 83,160 B- ` 1,33,650]
(13) The managing director of a small manufacturing concern consults you as to the minimum price
at which he can sell the output of one of the departments of the company which is intended for
mass production in future. The company’s records show the following particulate for this
department for the past year:
Production & Sales (100 Units) Works overheads 7,000
Materials 13,000 Office overheads 2,800
Direct labor 7,000 Selling overheads 3,200
Direct charges 1,000 Profit 5,000
You ascertain that 40% of the works overheads fluctuate directly with production and 70% of the
selling overheads fluctuate with sales. It is anticipated that the department would produce 500 units per
annum and that direct labour charges per unit will be reduced by 20%. While fixed selling overheads
charges are expected to show an increase of 25% but otherwise no changes are anticipated.
[Ans.: Actual Total Cost -` 39,000 Cost Per Unit 390.00 & Estimated
` 1,35,100 Cost Per Unit 270.00]
(14) The cost of manufacturing 5,000 units of a commodity comprises –
Materials 20,000 Fixed factory overhead 16,000
Direct labour 25,000 Variable factory overhead 4,000
Chargeable expenses 400

For manufacturing every 1,000 extra units of the commodity the cost of production increases as
follows:
Materials: Proportionately. Fixed factory overheads: ` 200 extra. Wages: 10% less than
proportionately. Variable factory overheads 25% less than proportionately.
Chargeable Expenses: No extra cost whatsoever.
Calculate the estimate cost of producing 8,000 units of the commodity and show by how it would
differ if a flat rate of factory overhead based on wages were charged.
[Ans.: Actual Works Cost - ` 65,400 Cost Per Unit 13.08 &
Estimated ` 89,800 Cost Per Unit 11.23]
(15) Electronics Ltd., furnish the following information for 10,000 TV valves manufactured during
the year 2009.
[ICWA Modified]
Cost Sheet 173

Materials 90,000 Clerical salaries and 33,500

Management expenses
Direct Wages 60,000 Selling expenses 5,500
Power and consumable stores 12,000 Sale proceeds of scrap 2,000
Factory indirect wages 15,000 Plant repairs, maintenance 11,500
and depreciation
Lighting of factory 5,500
Defective work (cost of rectification) 3,000
The net selling price was ` 31.60 per unit sold and all units were sold.
As from 1st Jan 2010, the selling price was reduced to ` 31 per unit. It was estimated that
production could be increased in 2010 by 50% due to spare capacity.
Rates for materials and direct wages will increase by 10%.
You are required to prepare:
(a) Cost sheet for the year 2009 showing various elements of cost unit and
(b) Estimated cost and profit statement for 2010.
Assuming that 15,000 units will be produced and sold during the year and factory overheads will
be recovered as a percentage of direct wages and office and selling expenses as percentage of works
cost.
[Ans.:(1) Total Cost- 2009- ` 2,34,000 Cost Per Unit 23.40 & 2010-
` 3,51,000 Cost Per Unit 23.40
(2) Net profit - 2009- ` 82,000 Cost Per Unit 8.20 & 2010-
` 1,14,000 Cost Per Unit 7.69]
(16) American Sprayers Ltd., manufactured and sold 1,000 sprayers during the year ended 31st
March, 2010. The summarized accounts are set out below:
[CS Modified]
Manufacturing, Trading and Profit and Loss Account for the year ended 31-3-10.
` `
To cost of materials 80,000 By Sales 4,00,000
To Direct wages 1,20,000
To manufacturing cost 50,000
To Gross profit 1,50,000
` 4,00,000 ` 4,00,000
To management and staff Salaries 60,000 By Gross Profit 1,50,000
To Rent rates & Insurance 10,000
To Selling expenses 30,000
To General expenses 20,000
To Net Profit 30,000
1,50,000 1,50,000
174 Cost Accounting

For the year ending 31st March 2011, it is estimated that:

(a) Output and sales will be 1,200 sprayers
(b) Price of materials will rise by 20% on the previous year’s level
(c) Wages per unit will rise by 5%.
(d) Manufacturing cost will rise in proportion to the combined cost of materials and wages
(e) Other expenses will remain unaffected by the rise in output.
(f) Selling expenses per unit will remain unchanged
(i) Prepare a cost sheet for the year ending 31st March, 2010
(ii) Prepare an estimated cost sheet showing the price at which the sprayer should be sold so
as to show a profit of 10% on the selling price.
[Ans.:(1) Total Cost- 2010- ` 3,70,000 Cost Per Unit 370.00 & 2011-
` 4,46,400 Cost Per Unit 327.00
(2) Net profit - 2010- ` 30,000 Cost Per Unit 30.00 & 2011-
` 36,000 Cost Per Unit 30.00]
(17) Tidy Home Limited manufactures domestic vacuum cleaners. For the year ending 30th Sep.
2009, expenses incurred are as follows for an output of 1,000 units.
[CA Modified]
Raw material consumed 1,00,000
Direct wages 50,000
Factory overheads 80,000
Administrative overheads 23,000
Selling overheads (which are 10% of sales value) 35,000
Distribution overheads (for sale of 900 unit) 18,000
For the year 2009-10 following changes are expected:
(i) Raw material prices are expected to rise by 10% but per unit consumption is expected to fall
by 5%
(ii) Direct wages may rise by 15% but productivity of labour may bring down the cost of wages
per unit by 10%.
(iii) Of the factory overheads, ` 30,000 are fixed cost and are expected to remain at the same level,
but variable component thereof is likely to have the same relationship to wages, as it had for the
year 2008-09.
(iv) Administration overheads may rise by 20%.
(v) Selling overheads as a percentage of sale value may remain at the same level, as for 2008-09.
(vi) Distribution overheads per unit may remain the same.
(vii) Output for the year 2009-10 is expected to be 1,500 units.
Cost Sheet 175

You are required to work out the total cost per vacuum cleaner for 2009-10 and the selling price at
which it should be marketed in order to make of profit of 20% on sale value.
[Ans.:(1) Total Cost- 2009- ` 2,80,700 Cost Per Unit 311.88 & 2010-
` 4,56,686 Cost Per Unit 304.45
(2) Net profit - 2009- ` 69,300 Cost Per Unit 77.00 & 2010-
` 1,14,171 Cost Per Unit 76.11]
(18) M/s Bata Shoe Co. manufacturers two types of shoes A and B. Production costs for the year
ended 31st March, 2010 were:
[MU T.Y.B.Com., Modified]
Direct materials ` 15,00,000
Direct wages 8,40,000
Production overheads 3,60,000
` 27,00,000
There was no work-in-progress at the beginning or at the end of the year. It is ascertained that:
(a) Direct Materials in type A shoes consists twice as much as that in type B shoes.
(b) The direct wages for type B shoes were 60% of those for type A shoes.
(c) Production overhead was the same per pair of A and B type.
(d) Administrative overheads for each type were 150% of direct wages.
(e) Production during the year were: Type A 40,000 pairs of which 36,000 were sold. Type B
1,20,000 pairs of which 1,00,000 were sold.
(f) Selling cost was ` 1.50 per pair.
(g) Selling price was ` 44 for type A and ` 28 per pair for type B.
[Ans.: Total Cost- A- 13,50,000 B- ` 22,50,000 Profit- A- 2,34,000 B- ` 5,50,000]
(19) X and Y shoe polish company Ltd. manufactures black and brown polish in one standard size
of tin retailing at ` 1.08 and ` 1.20 respectively. The following data is supplied to you.
[CA Modified]
Direct Materials: Polish 7,38,000
Tins 2,88,000
Direct Wages 2,44,800
Production overheads 3,67,200
Administrative & selling overheads 1,22,400
Sales for the year were: Black 14,000,000 tins & Brown 6,00,000 tins. The opening & closing
stock were:
Black Brown
Opening stock (Tins) 48,000 1,60,000
Closing stock (Tins) 1,08,000 60,000
 176 Cost Accounting

The opening stock of the black & brown polish was valued at its production cost of paise 30.4 per
tin & paise 86.4 per tin respectively. The cost of raw material for brown polish is 10% higher than that
for black there is no difference in the cost of tins. Direct wages for brown are 8% higher than those for
black polish & production overheads are considered to vary with direct wages. Administrative & selling
overheads are absorbed at a uniform rate per tin of polish sold. Prepare a statement to show the cost &
profit per tin of polish
[Ans.: Total Cost- Black- 12,44,160 Brown- ` 5,54,400
Profit- Black- 3,11,040 Brown- ` 1,65,600]
(20) A Company manufactures a mixer which is sold for ` 1,200/-
[ICWA Modified]
(a) Materials constituted at 45% of cost sales.
(b) Labour constituted 40% of cost sales
(c) Overhead expenses constituted 15% of cost of sales.
(d) An increase of 15% in material cost & 10% in labour cost is expected.
(e) The anticipated increased costs in relation to the present sales price would cause 35%
decrease in the amount of the present gross profit.
If the only figure available are those given above, what must be the selling price to given the same
percentage of gross profit as before?
[Ans.: Actual Total Cost -` 900 Profit ` 300 & Estimated ` 996.75 Profit ` 195.00]
(21) The cost structure of an article the selling price of which is ` 45,000 is as follows:
[CA Modified]
Direct Materials 50% Direct Labour………… 20%
Overheads 30%
An increase of 15% in the cost of material & of 25% in the cost of labour is anticipated. These
increased costs in relation to the present selling would cause a 25% decrease in the amount of present
profit per article.
You are required:
(1) To prepare a statement of profit per article at present &
(2) The revised selling price to produce the same percentage of profit to sales as before.
[Ans.: Actual Total Cost -` 33,750 Profit ` 11,250 & Estimated
` 37,968.75 Profit ` 12,656.25]
(22) A factory produces uniform type of articles & has a capacity of 8,000 units per week. The
following information shows the different elements of cost for 3 consecutive weeks when the
output has changed from week to week.
[CA Modified]
Cost Sheet 177

Units Produced Direct materials ` Direct Labour Factory overheads

(partly Variable & partly fixed)
800 3,200 1,200 5,600
1,000 6,400 1,500 6,400
1,600 5,600 2,400 8,800
The factory has received an order for 2,400 units upon the selling price of which it wants a profit
of 25%. Finds out what price per unit it should quote.
[Ans.: Total Cost- Week 1- ` 39,600 2- ` 38,160 3-` 36,000
Profit- 1- ` 9,900 2- ` 9,540 3- ` 9,000]
(23) A factory can manufacture 10,000 units every month. The following data is furnished to you
for the quarter ended 31st December, 2009:
[CS Modified]
Materials cost ` 5 per unit
Labour cost ` 4 per unit
Variable factory expenses ` 2 per unit
October November December
Production (unit) 6,000 8,000 7,000
Factory overheads ` 8,000 9,000 8,500
A commission agent introduced a prospective customer who wants to place an order for 10,000
units every month. You are asked to quote your price after considering the following:-
(1) Administration overheads is 10% of works cost.
(2) Sales & distribution overheads is 12.5% of cost of production.
(3) The commission agent is to be paid Re. 1 per unit.
(4) The factory wants a profit of 20% on sales price.
(24) A factory can produced 60,000 units p.a at 100% capacity. The estimated cost of production is
as follows:
[CA Modified]
Direct materials ` 3 per unit.
Direct wages ` 2 per units
Fixed cost p.a ` 1,50,000
Variable expenses per unit ` 5
Semi-variable expenses per annum.
(a) Upto 50% of capacity ` 50,000
(b) ` 10,000 for every increase of 25% in capacity or part thereof.
The factory produces only against orders. If the production programme of the factory is as indicated
below, what should be the selling price if it wants to earn a profit of ` 1,00,000 for the year? The
production programme is :
 178 Cost Accounting

(a) For the first 3 months at 50% capacity.

(b) For the next 9 months at 80% capacity.
[Ans. Total Cost- ` 6,50,000 & Profit- ` 1,00,000]
(25) In respect of factory, the following figure have been obtained for the year 2009.
Cost of materials ` 6,00,000
Wages of Labour 5,00,000
Factory Overheads 3,00,000
Administration charges 3,36,000
Selling charges 2,24,000
Distribution charges 1,40,000
Profit 4,20,000
A work has been executed in 2010 & the following expenses have been incurred.
Materials 8,000
Wages 5,000
At what price should the product be sold? Factory overheads is based on direct labour &
administration, selling & distribution overhead on factory cost. The same rate of profit on the selling
price as in 2009 is required.
[Ans.: (1) Total Cost- 2009- ` 21,00,000 & 2010- ` 13,110
(2) Net profit - 2009- ` 4,20,000]
(26) The present sales turnover of a factory is 1000 articles at ` 550 each. By reason of a price
reduction of 9%, the size of order is expected to increase by 50%. The present cost structure
of the factory is as follows:
Materials 40%
Variable wages & expenses 30%
Fixed overheads 15%
Profit 15%
Present the present & estimated cost sheet. Is it advisable for the company to go for a price
reduction ?
[Ans.: Actual Sales - ` 5,50,000 Profit ` 82,500 & Estimated
` 7,50,750 Profit ` 1,12,612.50]
(27) The State Government granted license to Sweet Sugar Ltd., to manufacture & sell sugar with
a stipulation that 40% of the output should be sold to the State Government at a controlled price
of ` 3,000/- per ton & the balance output can be sold in the open market at any price. Following
are the details of Sweet Sugar Ltd., for the year ended 31st March, 2010. During the year 3,600
tons of sugarcan was consumed @ 350 per ton.
Cost Sheet 179

`
Direct Expenses 4,20,000
Telephone Charges 3,52,695
Office computer purchased 2,75,350
Factory Rent & Insurance 3,54,760
Machinery purchased 4,25,560
Machinery Repairs 98,847
Commission on Sales 3,37,650
Factory Salaries 2,19,588
Carriages Outward 1,54,090
Packing Expenses 1,94,450
Bank Interest 1,65,895
Factory Electricity 2,61,880
Delivery Van Expenses 1,06,850
Coal Consumed 3,80,125
Depreciation on Machinery 2,49,600
Depreciation on Computer 2,04,180
Depreciation on Delivery Van 1,57,360
Office Salaries 1,89,325
Printing & Stationery 1,13,000
During the year 2,400 tons of sugar was produced. The Company’s profit target for the year, for
fixing the open market selling price on the basis of cost sheet, is 10% of its average paid-up capital of
` 1,42,56,000. Prepare cost sheet & find various components of total cost & per unit cost & suggest the
selling price for open market.
[Ans.: Total Cost- ` 50,54,400 & Profit- ` 14,25,600
Open Market Price ` 2,500 per tone]
(28) Vaijanth Polymers manufactures & sells a typical brand of tiffin boxes under its own brand
name the installed capacity of the plant is 1,20,000 units per year, distribution evenly over each
month of calendar year. The Cost Accountants of the company has informed you about the
cost structure of the product, which is as follows:
[ICWA Modified]
Raw Materials ` 20 per unit
Direct Labour `12 per unit
Direct Expenses ` 2 per unit
Variable Overheads ` 16 per unit
Fixed Overheads ` 16 per unit.
Fixed overheads for the year ` 3,00,000
 180 Cost Accounting

Semi-variable Overheads are as follows:

(a) ` 7,500 per month upto 50% capacity &
(b) Additional ` 2,500 per month for every additional 25% capacity utilization or part thereof.
The plant was operating at 50% capacity during the first seven months of the calendar year 2009
& at 100% capacity in the remaining months of the year. The selling price for the period from 1st
January 2009 to 31st July, 2009 was fixed at ` 69/- per unit. The firm has been monitoring the profitability
& revising the selling price to meet its annual profit target of Rs.8 lacs. You are required to suggest the
selling price per unit for the cost & also profit for the period:-
(a) From 1st January 2009 to 31st July 2009
(b) From 1st August 2009 to 31st December 2009.
(29) A manufacturer produces 8,000 units per month, split up cost & sales value of which is given
below:
[ICWA London Modified]
` (per Unit)
Direct Material 30
Direct Labour 20
Factory Expenses
Fixed Overheads (` 2,00,000) 25
Variable Overheads 40
Selling & distribution Expenses 115
Fixed (` 80,000) 10
Variable 15
140
General Administration (Fixed ` 2,40,000) 30
Margin of Profit 5
Selling price 175
Due to increase in demand & consequent extension of delivery dates & dissatisfaction among
customers, the management decided to provide for an output of 12,000 units per month in the next year.
Prepare a comparative cost statement showing anticipated margin of profit for the present output (of
8,000 units) & the proposed output (of 12,000 units). Assume that in the coming year there will be an
all-round increase of 5% in the different items of expenses expect fixed expense. Selling price can be
increased by 2% in the coming year. Due to the proposed increase in output (if the proposal is adopted)
there will be an increase of 25% in the Fixed Factory overheads 20% in Fixed selling & Distribution
expenses & 10% in General administration.
[Ans.: Actual Sales - ` 14,00,000 Profit ` 40,000 & Estimated
` 21,42,000 Profit ` 63,000]
Cost Sheet 181

(30) The present sales turnover of a factory is 2000 articles at ` 500 each. By reason of a price
reduction of 10% the size of order is expected to increase by 50%. The present cost structure
of the factory is as follows.
[CIMA London Modified]
Materials 40%
Variable wages & expenses 30%
Fixed overheads 15%
Profit 15%
100%
Present the present & estimated cost sheet. Is it advisable for the company to go for a price
reduction?
[Ans.: Actual Sales - ` 10,00,000 Profit ` 1,50,000 & Estimated
` 13,50,000 Profit ` 2,02,500]
(II) Theory Questions
(1) What is a cost sheet? What are the purposes of a cost sheet?
(2) Give composition of a selling price.
(3) Write short notes on
(a) Works Cost.
(b) Elements of Cost
(4) “Fixed costs are variable per unit while variable costs are fixed per unit” Comment.
(5) Define the term cost. What are the different elements of cost?
(III) Objective Questions
(I) State whether the following statements are True or False.
(1) Cost of a product is decided as per cost attach concept.
(2) Interest on captital is a non-cost item
(3) Cost sheet shows total cost and cost per unit.
(4) Prime cost includes factory overheads.
(5) Cost of production includes selling overheads.
(6) Carriage on material increases cost of materials.
(7) Waste having realisable value is called as scrap.
(8) Fixed cost remains constant irrespective of output.
(9) Variable cost is also called as product cost.
[Ans. True: (1,2, 3, 6, 7, 8, 9). False: (4, 5)]
182 Cost Accounting

(II) Match the Following

Group A Group B
(1) Interest on loan (i) Direct Cost
(2) Prime Cost (ii) Factory Cost plus Office Overheads
(3) Cost of Production (iii) Prime Cost plus Factory Overheads
(4) Factory Cost (iv) Sales less Total Cost
(5) Profit (v) Cost plus Profit
(vi) Non-Cost Item
[Ans. (1 - vi), (2 - i), (3 - ii), (4 - iii), (5 - iv)]
(III) Multiple Choice Questions. Select the Right Answer
(1) Total cost includes
(i) Cost of production plus selling overheads
(ii) Direct cost
(iii) Indirect cost
(2) Prime cost includes
(i) Direct material plus direct labour plus direct expenses
(ii) Direct material plus direct expenses
(iii) Direct cost plus indirect cost
(3) Factory overheads includes
(i) Factory salary, depreciation of machine, fuel
(ii) Factory salary, rent of offce, selling commssion
(iii) Office overheads only
(4) Stock is valued at
(i) Cost of production
(ii) Direct cost
(iii) Indirect cost
(5) Selling price is equal to
(i) Total cost plus profit
(ii) Direct cost plus profit
(iii) Indirect cost plus profit
[Ans. (1 - i), (2 - i), (3 - i), (4 - i), (5 - i) ]

C C C