ACCOUNTING FOR BUSINESS II

CHAPTER 1
COST SHEET
Meaning And Scope of Cost Accountanc
The term cost accountancy is wider than the term cost accounting. According to the Terminology
of Management and Financial Accountancy Published by the Chartered Institute of Management
Accountants, London, cost accountancy means, the alication of costing and cost accounting
rinciles, methods and techni!ues to the science, art and ractice of cost control. It includes the
resentation of information deri"ed there from for the urose of managerial decision ma#ing.
Cost Accounting
Cost accounting is the rocess of accounting for costs. It embraces the accounting rocedures
relating to recording of all income and e$enditure and the rearation of eriodical statements
and reorts with the ob%ect of ascertaining and controlling costs. It is thus the formal mechanism
by means of which costs of roducts or ser"ices are ascertained and controlled.
Costing
Costing is the techni!ue and rocess of ascertaining costs.& Cost accounting is different from
costing in the sense that the former ro"ides only the basis and information for ascertainment of
cost. 'nce the information is made a"ailable the costing can be carried out arithmetically by
means of memorandum statements or by method of integral accounting.
(owe"er, the two terms costing and cost accounting are often used interchangeably. )o such
distinction has also been obser"ed for the urose of this boo#. *heldon has gi"en an e$hausti"e
definition of costing after e$anding the ideas contained in the definitions of the terms +costing
and cost accounting,. According to him costing is, the classifying recording and aroriate
allocation of e$enditure for the determination of the costs of roducts or ser"ices- the relation of
these costs to sales "alues- and the ascertainment of rofitability&.
Cost Cont!o"
According to the Institute of Cost and *or#s Accountants of India, cost control means The act of
ower of controlling or regulating or dominating or commanding costs through the alication of
management tools and techni!ues to the erformance of any oeration to most redetermined
ob%ecti"es of !uality, !uantity, "alue and time oat an otimum outlay&.
O#$ecti%es of Cost Accounting
T&e 'ain o#$ecti%es of cost accounting can #e su''a!i(ed as fo""o)s*+
.. Asce!taining Costs* / The first and foremost ob%ecti"e of cost accounting is to find out
cost of a roduct, rocess or ser"ice. The other ob%ecti"es which ha"e been mentioned
hereafter scan be achie"ed only when the costs ha"e been ascertained.
0. ,ete!'ining Se""ing P!ice1 / 2usiness enterrises are run on a rofit 3 ma#ing basis. It
is thus necessary that the re"enue should be greater than the costs incurred in roducing
goods and ser"ices from which the re"enue is to be deri"ed. Cost accounting ro"ides
information regarding the cost to ma#e and sell such roducts or ser"ices.
4. Measu!ing and Inc!easing Efficienc1 / Cost accounting in"ol"ers a study of the
"arious oerations used in manufacturing a roduct or ro"iding a ser"ices. The study
facilitates measuring of the efficiency of the organisation as a whole as well as of the
deartments besides de"ising means of increasing the efficiency.
5. Cost Cont!o" and Cost Reduction1 / Cost accounting assists in cost control it uses
techni!ues such as budgetary control, standard costing etc. for controlling costs. 2udgets
are reared will in ad"ance. The standards for each item of cost are determined, the
actual costs are comared with the standard costs and "ariances are found out as to their
causes. This greatly increases the oerating efficiency of the enterrise. 2esides it, cost is
re!uired to be reduced also constant research and de"eloment acti"ities hel in reduction
of costs without comromising with the !uality of goods or ser"ices.
6. Cost Manage'ent1 / The term +Cost Management, includes the acti"ities of managers in
short/run and long/run lanning and control of costs. Cost management has a broad focus. It
includes both cost control and lost reduction. As a matter of fact cost management is often
in"ariably lin#ed with re"enue and rofit lanning. For instance, to enhance re"enue and
rofits, the management often deliberately incurs additional costs for ad"ertising and
roduct modifications.
7. Asce!taining P!ofits* / Cost accounting also aims at ascertaining the rofits of each and
e"ery acti"ity. It roduces statements at such inter"als as the management may re!uire.
The financial statements reared under financial accounting, generally once a year or half
3 year, are saced too far aart in time to meet the needs of the management. In order to
oerate the business at a high le"el of efficiency, it is essential for the management to ha"e
a fre!uent re"iew of roduction, sales and oerating results. Cost accounting ro"ides daily,
wee#ly or monthly "olumes of units roduced, accumulated costs together with aroriate
analysis so that !uantum of rofit and rofitability is #nown.
8. P!o%iding Basis fo! Manage!ia" ,ecision - Ma.ing1 / Costs accounting hels the
management in formulation oerati"e olicies. These olicies may relate to any of the
following matters1/
9i: ;etermination of cost 3 "olume 3 rofit relationshi.
9ii: <hutting down or oerating at a loss.
9iii: Ma#ing or buying from outside sulies.
9i": Continuing with the e$isting lant and machinery or relacing them by imro"ed
and economical means.
Cost Accounting /e!sus Financia" Accounting
Accounting may broadly be classified into two categories1/
9a: Financial Accounting and
9b: Management Accounting
Financial Accounting is concerned with recording, classifying and summari=ing financial
transactions and rearing statements relating to the business in accordance with generally
acceted accounting concets and con"entions. It is mainly meant to ser"e all arties e$ternal to
the oerating resonsibility of the firm such as shareholders and creditors of the firm besides
ro"iding information about the o"erall oerational results of the business while management
accounting is concerned with accounting information which is useful for the management it is the
resentation of accounting information in such as way as to assist the management in the creation
of olicy and day to day oeration of the underta#ing.
IMPORTANCE OF COST ACCOUNTING
10 Costing &e"ps in pe!iods of t!ade dep!ession and t!ade co'petition*+
In eriods of trade deression the business cannot afford to ha"e lea#ages which ass
unchec#ed. The management should #now where economies may be sought, waste eliminated
and efficiency increased. The business has to wage a wa$ for its sur"i"al. The management
should #now the actual cost of their roducts before embar#ing on any scheme of reducing the
rices on gi"ing tenders. Ade!uate costing facilitates this.
1. Aids in p!ice fi2ation*+
Though economic law > suly and demand and acti"ities of the cometitors, to a great e$tent,
determine the rice of the article, cost to the roducer does lay an imortant art. The
roducer can ta#e necessary guidance from his costing records.
30 He"ps in esti'ate*+
Ade!uate costing records ro"ide a reliable basis uon which tenders and estimates may be
reared. The chances of losing a contract on account of o"er 3 rating or losing in the
e$ecution of a contract due to under 3 rating can be minimi=ed. Thus, ascertained costs
ro"ide a measure for estimates, a guide to olicy, and a control o"er current roduction&.
40 He"ps in c&anne"ing p!oduction on !ig&t "ines*+
Costing ma#es ossible for the management to distinguish between rofitable and non/
rofitable acti"ities rofit can be ma$imi=ed by concentrating on rofitable oerations and
eliminating non/rofitable ones.
5. 6astages a!e e"i'inated*+
As it is ossible to #now the cost of the article at e"ery stage, it becomes ossible to choc#
"arious forms of waste, such as time, e$enses etc. or in the use of machine, e!uiment and
tools.
7. Costing 'a.es co'pa!ison possi#"e*+
If the costing records are regularly #et, comarati"e cost data for different eriods and "arious
"olumes of roduction will be a"ailable. It will hel the management in forming future lines of
action.
8. P!o%ides data fo! pe!iodica" p!ofit and "oss accounts*+
Ade!uate costing records suly to the management such data as may be necessary for
rearation of rofit and loss account and balance sheet, at such inter"als as may be desired by
the management.
It also e$lains in detail the sources of rofit or loss re"ealed by the financial accounts thus
hels in resentation of better information before the management.
9. Aids in dete!'ining and en&ancing efficienc1/
Losses due to wastage of material, idle time of wor#ers, oor suer"ision etc., will be disclosed
if the "arious oerations in"ol"ed in manufacturing a roduct are studied by a cost accountant.
The efficiency can be measured and costs controlled and through it "arious de"ices can be
framed to increase the efficiency.
:. He"ps in in%ento! cont!o"*+
Costing furnishes control which management re!uires in resect of stoc# of materials, wor#/in/
rogress and finished goods. 9This has been e$lained in detail under the chater Materials&:
1;. He"ps in cost !eduction*+
Costs can be reduced in the long run when alternati"es are tried. This is articularly imortant
ion the resent day conte$t of global cometition cost accounting has assumed secial
significance beyond cost control this way.
11. Assists in inc!easing p!oducti%it
Producti"ity of material and labour is re!uired to be increased to ha"e growth and more
rofitability in the organisation costing renders great assistance in measuring roducti"ity and
suggesting ways to imro"e it.
E<EMENTS OF COST
There are three broad elements of cost1/
9a: Material
9b: Labour
9c: ?$enses
=a> Mate!ia"* + The substance from which the roduct is made is #nown as material. It may
be in a raw or a manufactured state. It can be direct as well as indirect.
,i!ect Mate!ia"1 / All material which becomes an integral art of the finished roduct and
which can be con"eniently assigned to secific hysical units is termed as ;irect
Material&.
Following are some of the e$amles of direct material1/
9i: All material or comonents secifically urchased roduced or re!uisitioned from
stores.
9ii: Primary ac#ing material 9e.g. 3 cartoon, wraing, cardboard, bo$es etc.:
9iii: Purchased or artly roduced comonents.
;irect material is also described as raw/material, rocess material, rime material,
roduction material, stores material, constructional material etc.
Indi!ect Mate!ia"1 / All material which is used for uroses ancillary to the business and
which cannot be con"eniently assigned to secific hysical units is termed as Indirect
Material&.
Consumable stores, oil and waste, rinting and stationery etc. are a few e$amles of
indirect material
Indirect material may be used in the factory the office or the selling and distribution
di"ision.
=#> <a#ou!* / For con"ersion of materials into finished goods, human effort is needed such
human effort is called labour. Labour can be direct as well as indirect.
,i!ect "a#ou!1 / Labour which ta#es an acti"e and direct art in the roduction of a
articular commodity is called labour. ;irect labour costs are, therefore secially and
con"eniently traceable to secific roducts.
;irect labour is also described as rocess labour, roducti"e labour, oerating labour,
manufacturing labour, direct wages etc.
Indi!ect "a#ou!*+ labour emloyed for the urose of carrying out tas#s incidental to goods
or ser"ices ro"ided, is indirect labour such labour does not alter the construction,
comosition or condition of the roduct. It cannot be ractically traced to secific units of
outut wages of store 3 #eeers, foreman, time 3 #eeers, directors, fees, salaries of
salesmen, etc. are all e$amles of indirect labour costs.
Indirect labour may relate to the factory the office or the selling and distribution di"ision.
=c> E2penses* / ?$enses may be direct or indirect.
,i!ect e2penses* + These are e$enses which can be directly, con"eniently and wholly
allocated to secific cost centers or cost units. ?$amles of such e$enses are1 hire of some
secial machinery re!uired for a articular contract, cost of defecti"e wor# incurred in
connection with a articular %ob or contract etc.
;irect e$enses are sometimes also described as chargeable e$enses&.
Indi!ect e2penses1/ these are e$enses which cannot be directly, con"eniently and wholly
allocated to cost centers or cost units.
O/ERHEA,S*/ It is to be noted that the term o"erheads has a wider meaning than the term
indirect e$enses o"erheads include the cost of indirect material, indirect labour besides
indirect e$enses.
Indirect e$enses may be classified under the following three categories1/
=a> Manufactu!ing =)o!.s? facto! o! p!oduction> e2penses*+
<uch indirect e$enses which are incurred in the factory and concerned with the running of
the factory or lant are #nown as manufacturing e$enses. ?$enses relating to roduction
management and administration are included there in. Following are a few items of such
e$enses1
@ent, rates and insurance of factory remises, ower used in factory building, lant and
machinery etc.
=#> Office and Ad'inist!ati%e e2penses
These e$enses are not related to factory but they ertain to the management and
administration of business such e$enses are incurred on the direction and control of an
underta#ing e$amle are 1/ office rent, lighting and heating, ostage and telegrams,
telehones and other charges- dereciation of office building, furniture and e!uiment,
ban# charges, legal charges, audit fee etc.
=c> Se""ing and ,ist!i#ution E2penses*+
?$enses incurred for mar#eting of a commodity, for securing orders for the articles,
disatching goods sold, and for ma#ing efforts to find and retain customers are called selling
and distribution e$enses e$amles are1/
Ad"ertisement e$enses cost of rearing tenders, tra"eling e$enses, bad debts, collection
charges etc.
*arehouse charges ac#ing and loading charges, carriage outwards, etc.
The abo"e classification of different elements of cost can be resented in the form of the
following chart1
?L?M?)T< 'F C'<T
?L?M?)T< 'F C'<T
MAT?@IAL
MAT?@IAL
LA2'A@
LA2'A@
?BP?)<?<
?BP?)<?<
;I@?CT
;I@?CT
I);I@?CT
I);I@?CT
;I@?CT
;I@?CT
I);I@?CT
I);I@?CT ;I@?CT
;I@?CT
I);I@?CT
I);I@?CT
FACT'@C
FACT'@C
'FFIC?
'FFIC?
<?LLI)D
;I<T@I2ATI')
<?LLI)D
;I<T@I2ATI')
FACT'@C
FACT'@C
'FFIC?
'FFIC?
<?LLI)D ;I<T@I2ATI')
<?LLI)D ;I<T@I2ATI')
FACT'@C
FACT'@C
'FFIC?
'FFIC?
<?LLI)D
;I<T@I2ATI')
<?LLI)D
;I<T@I2ATI')
OR
?lements
of cost
?lements
of cost
;I@?CT MAT?@IAL
;I@?CT MAT?@IAL
;I@?CT LA2'A@
;I@?CT LA2'A@
;I@?CT ?BP?)<?<
;I@?CT ?BP?)<?<
'E?@(?A;<
'E?@(?A;<
FACT'@C 'E?@(?A;<
FACT'@C 'E?@(?A;<
'FFIC? 'E?@(?A;<
'FFIC? 'E?@(?A;<
<?LLI)D > ;I<T@I2ATI')
'E?@(?A;<
<?LLI)D > ;I<T@I2ATI')
'E?@(?A;<
I);I@?CT MAT?@IAL
I);I@?CT MAT?@IAL
I);I@?CT
LA2'A@
I);I@?CT
LA2'A@
I);I@?CT
?BP?)<?<
I);I@?CT
?BP?)<?<
I);I@?CT MAT?@IAL
I);I@?CT MAT?@IAL
I);I@?CT
LA2'A@
I);I@?CT
LA2'A@
I);I@?CT
?BP?)<?<
I);I@?CT
?BP?)<?<
I);I@?CT
MAT?@IAL
I);I@?CT
MAT?@IAL
I);I@?CT
LA2'A@
I);I@?CT
LA2'A@
I);I@?CT
?BP?)<?<
I);I@?CT
?BP?)<?<
Ite's e2c"uded f!o' cost accounts
There are certain items which are included in financial accounts but not in cost accounts. These
items fall into three categories1/
App!op!iation of p!ofits
9i: Aroriation to sin#ing funds.
9ii: ;i"idends aid
9iii: Ta$es on income and rofits
9i": Transfers to general reser"es
9": ?$cess ro"ision for dereciation of buildings, lant etc. and for bad debts
9"i: Amount written off 3 goodwill, reliminary e$enses, underwriting commission,
discount on debentures issued- e$enses of caital issue etc.
9"ii: Caital e$enditures secifically charged to re"enue
9"iii: Charitable donation
Matte!s of pu!e finance
=a> Pu!e" financia" c&a!ges1/
9i: Losses on sale of in"estments, buildings, etc.
9ii: ?$enses on transfer of comany,s office
9iii: Interest on ban# loan, debentures, mortgages, etc.
9i": ;amages ayable
9": Penalties and fines
9"i: Losses due to scraing of machinery
9"ii: @emuneration aid to the rorietor in e$cess of a fair reward for ser"ices rendered.
=#> Pu!e" financia" inco'es1/
9i: Interest recei"ed on ban# deosits
9ii: Profits made on the sale of in"estments, fi$ed assets, etc.
9iii: Transfer fees recei"ed
9i": @ent recei"able
9": Interest, di"idends, etc. recei"ed on in"estments.
9"i: 2ro#erage recei"ed
9"ii: ;iscount, commission recei"ed
A#no!'a" gains and "osses*+
9i: Losses or gains on sale of fi$ed assets.
9ii: Loss to business roerty on account of theft, fire or other natural calamities.
In addition to abo"e abnormal items 9gain and losses: may also be e$cluded from cost
accounts. Alternati"ely, these may be ta#en to costing rofit and loss account.
Co'ponents of tota" cost
P!i'e cost* / It consists of costs of direct material, direct labour and direct e$enses. It is also
#nown as basic, first or flat cost.
Facto! cost*+ It comrises of rime cost and in addition wor#s of factory o"erheads which
includes costs of indirect material, indirect labour and indirect e$enses of the factory. The cost is
also #nown as wor#s cost, roduction or manufacturing cost.
Office cost* + If office and administrati"e o"erheads are added to factory cost office cost is
arri"ed at this is also termed as administrati"e cost or the total cost of roduction.
Tota" cost*+ 'ffice cost or total cost of roduction selling and distribution o"erheads are added to
the total cost of roduction to get the total cost or the cost of sales.
Cost of sales or total cost. The "arious comonents of total cost can be deicted through the hel
of the following chart1/
Co'ponents of Tota" cost
;irect material lus
;irect labour lus Prime cost or ;irect cost or First cost
;irect e$enses
Prime cost lus wor#s cost or factory or roduction cost or manufacturing *or#s
o"erheads cost
*or# cost lus office and
Administrati"e o"erheads
'ffice cost lus selling
And distribution o"erheads
Ad$ust'ents fo! in%ento!ies
The following ad%ustments may ha"e to be made for in"entories of raw materials, wor# 3 in 3
rogress and finished goods while comuting the different comonents of cost1
9i: ;irect 'ening stoc# Purchases of Closing stoc#
Material F of ;irect G ;irect / of ;irect
Consumed material material material
9ii: *or#s Dross wor#s 'ening wor# / Closing wor# 3 in
F G HH
Cost cost in 3 rogress rogress
9iii: Cost of roduction F cost of roduction G 'ening stoc# Closing stoc#
of goods sold of finished H of finished good
I""ust!ation 10 Calculate rime cost from the following information1/
;irect material / @s. 5I,III, ;irect labour / @s. 4I,III ;irect e$enses / @s. 06.III
<olution1 Prime cost F ;irect Material G ;irect labour G ;irect e$enses
F @s. 5I,III G @s.4I, III G @s. 06,III
F @s. J6,III
I""ust!ation 1.Calculate rime cost from the following information1/
'ening stoc# of raw material F @s. .0,6II
Purchased raw material F @s. 86,III
?$enses incurred on raw material F @s. 6,III
Closing stoc# of raw material F @s. 00,6II
*ages @s. 58,7II ;irect e$enses @s. 04,5II
So"ution* + Calculation of raw material consumed1/
@aw material consumed F 'ening stoc# of material G urchases of @aw material
G e$enses incurred on raw material / closing stoc# of raw material
F @s .0,6II G @s 86,III G @s 6,III 3 @s 00,6II
F @s. J0,6II 3 @s 00,6II
F @s. 8I,III
P!i'e cost F @aw material consumed G ;irect labour G ;irect e$enses
F @s 8I,III G @s 58,7II G @s 04,5II
F @s ., 5.,III
OR
It can be shown in "ertical form such as cost sheet
Pa!ticu"a! ,etai"s =Rs> A'ount =Rs>
'ening stoc# of raw material .0,6II
Add1/ Purchase 8,6II
Add1/ ?$enses incurred on urchases 6,III
///////////////
@aw material a"ailable J0,6II
<ess 1/ closing stoc# of raw material 00,6II
///////////////
@aw material consumed 8I,III
Add1/ ;irect wages or labour 58,7II
Add*/ ;irect e$enses 04,5II
//////////////
P!i'e cost .,5.,III

I""ust!ation 3. Calculate wor#s cost or factory cost from the following details1/
@aw material consumed F @s 6I,III
;irect wages F @s0I, III
;irect e$enses F @s .I,III
Factory e$enses KIL of direct wages
'ening stoc# of wor# in rogress F @s .6,III
Closing stoc# of wor# in rogress F @s 0.,III
So"ution* / Calculation of factory cost
Pa!ticu"a! A'ount =Rs> A'ount =Rs>
;irect material consumed 6I,III
Add1/ ;irect wages 0I,III
Add*/ ;irect ?$enses .I,III
/////////////
P!i'e cost KI,III
Add*/ Factory e$enses .7,III
//////////////
Current manufacturing cost J7,III
Add*/ 'ening stoc# of wor# in rogress .6,III
//////////////
Total goods rocessed during the eriod .,..,III
<ess1/ Closing soc# of wor# in rogress 0.,III
//////////////
Facto! cost o! )o!. cost JI,III
I""ust!ation 40 Calculate cost of roduction from the following information1/
@aw material urchased F @s 50,6II
Freight aid F @s 6,III
Labour charges F @s .0,6II
;irect e$enses F @s .I,III
Factory o"erhead KIL of ;irect labour charges
Administrati"e o"erhead F .IL of wor# cost
'ening stoc# Closing stoc#
@aw material K,III .I,III
*or# in rogress 8,6II J,III
So"ution* + Calculation of cost of roduction1/
Pa!ticu"a! A'ount =Rs> A'ount =Rs>
Material urchased 50,6II
Add*/ freight 6,III
/////////////
Total cost of material urchased 58,6II
Add1/ 'ening stoc# of @aw material K,III
////////////
Material a"ailable for consumtion 66,6II
<ess1/ Closing stoc# of @aw material .I,III
////////////
@aw material consumed 56,6II
Add1/ ;irect labour charges .0,6II
Add1/ ;irect e$enses .I,III
P!i'e cost 7K,III
Add*/ Factory o"erhead .I,III
////////////
Current manufacturing cost 8K,III
Add1/ 'ening stoc# of wor# in rogress 8,6II
////////////
Total goods rocessed during the eriod K6,6II
<ess*/ Closing stoc# of wor# in rogress J,III
////////////
Factory cost 87,6II
Add*/ Administrati"e o"erhead 8,76I
////////////
Cost of p!oduction K5,.6I

I""ust!ation 5. Preare cost sheet from the following articular in the boo# of 2. M. @ehman
@aw material urchased F @s. ., 0I,III
Paid freight charges F @s .I,III
*ages aid to laborers F @s 46,III
;irectly chargeable e$enses F @s 06,III
Factory on cost F 0IL of rime cost
Deneral and administrati"e e$enses F 5L of factory cost
<elling and distribution e$enses F 6L of roduction cost
Profit 0IL on sales
'ening stoc# Closing stoc#
@aw material .6,III 0I,III
*or# in rogress .8,6II 05,III
Finished goods 0I,III 08,6II
So"ution*+
Boo. of B0 M0 Re&'an
Cost s&eet
@aw material urchased .,0I,III
Add1/ freight charges .I,III
///////////////
Total cost of raw material urchased .,4I,III
Add*/ oening stoc# of raw material .6,III
///////////////
Cash of raw material a"ailable .,56,III
<ess*/ closing stoc# of raw material 0I,III
//////////////
Ra) 'ate!ia" consu'ed .,06,III
Add1/ wages aid to labours 46,III
Add1/ ;irectly chargeable e$enses 06,III
//////////////
P!i'e cost .,K6,III
Add*/ Factory o"erhead 0IL of rime cost 48,III
///////////////
Current manufacturing cost 0,00,III
Add*/ 'ening stoc# of wor# in rogress .8,6II
///////////////
Total goods rocessed during the eriod 0,4J,6II
<ess*/ closing stoc# of wor# in rogress 05,III
///////////////
Facto! on )o!. cost 0,.6,6II
Add1/ Deneral > administrati"e e$enses 5L of factory cost K,70I
///////////////
Cost of p!oduction 0,05,.0I
Add*+ oening stoc# of finished goods 0I,III
//////////////
Doods a"ailable for sales 0,55,.0I
<ess*/ closing stoc# of finished goods 08,6II
//////////////
Cost of goods so"d 0,.7,70I
Add1/ selling and distribution e$enses 6L of roduction
cost
..,0I7
//////////////
Cost of sa"es 0,08,K07
Add1/ Profit 67,J67.6I
///////////////
Sa"es 0,K5,8K0.6I
I""ust!ation 70 Preare cost sheet in the boo# of M. 2. @ehman from the following articulars.
'ening stoc#1 / @aw material F @s 6,III
Finished goods F @s 5,III
Closing stoc#1 / @aw material F @s 5,III
Finished goods F @s 6,III
@aw material urchased F @s 6I,III
*ages aid to laboures F @s 0I,III
Chargeable e$enses F @s 0,III
@ent and Ta$es F @s 8,5II
Power F @s 4,III
?$erimental e$enses F @s 7II
<ale of wastage of material F @s 0II
'ffice management salary F @s 5,III
'ffice rinting > stationery F @s 0II
<alaries to salesman F @s 0,III
Commission to tra"eling agents F @s .,III
<ales F @s ., II,III
So"ution*+
Boo. of B0 M0 Re&'an
Cost s&eet
Pa!ticu"a! ,etai"s =Rs> A'ount =Rs>
@aw material urchased 6I,III
Add1/ 'ening stoc# of raw material 6,III
///////////////
@aw material for consumtion 66,III
<ess1/ closing stoc# of raw material 5,III
///////////////
@aw material consumed 6.,III
<ess1/ <ale of wastage of materials 0II
///////////// 6I,KII
Add*+ ;irect labour 0I,III
Add1/ ;irect chargeable e$enses 0,III
//////////////
P!i'e cost 80,KII
Add1/ Factory o"erhead
@ent > Ta$es 8,5II
Power 4,III
?$erimental charges 7II
////////////// ..,III
Facto! cost K4,KII
Add*/ Administrati"e o"erhead1/
'ffice management salary 5,III
'ffice rinting > stationery 0II
/////////////// 5,0II
Cost of p!oduction KK,III
Add*/ 'ening stoc# of finished goods 5,III
/////////////
Doods a"ailable for sales J0,III
<ess1/ closing stoc# of finished goods 6,III
/////////////
Cost of goods so"d K8,III
Add*/ selling and distribution o"erhead1/
<alaries of salesman 0,III
Commission to tra"eling agent .,III
////////////// 4,III
Cost of sales JI,III
Profit .I,III
//////////////
Sa"es .,II,III
I""ust!ation 80 The cost of sale of roduction +A, is made u as follows1/
Material used in manufacturing @s 6,6II
Material used in ac#ing material @s .,III
Material used in selling the roduct @s .6I
Material used in the factory @s .86
Material used in the office @s .06
Labour re!uired in roduction @s .,III
Labour re!uired for suer"ision in factory @s 0II
?$enses direct factory @s 6II
?$enses indirect factory @s .II
?$enses office @s .06
;ereciation of office building @s 86
;ereciation on factory lant @s .86
<elling e$enses @s 46I
Freight on material @s 6II
Ad"ertising @s .06
Assuming that all roducts manufactured and sold, what should be the selling rice be fi$ed to
obtain a rofit of 0IL on selling rice.
So"ution
Cost S&eet
Pa!ticu"a! A'ount =Rs> A'ount =Rs> A'ount =Rs>
,i!ect 'ate!ia"*+
Material used in manufacturing 6,6II
Material used in Pac#ing material .,III
Freight on material 6II
///////////// 8,III
,i!ect )ages*+
labour re!uire in roduction .,III
;irect e$enses1/ ;irect factory 6II
////////////
P!i'e cost K,6II
Add1/ Factory o"erhead
Indirect material used in factory 86
Indirect labour re!uired for suer"ision 0II
Indirect factory e$enses .II
;ereciation factory .86
///////////// 086
///////////// 66I
Facto! on )o!.s cost JI6I
Add1/ office > administrati"e e$enses
Indirect material .06
Indirect e$enses office .06
Indirect dereciation 86
//////////// 0II
///////////// 406
Tota" cost of p!oduction J486
Add*/ selling and distribution o"erhead1/
Indirect material .6I
Indirect e$enses 46I
Ad"ertisement .06
//////////// 586
///////////// 706
Cost of sales .I,III
Profit 0,6II
///////////
Sa"es .0,6II
I""ust!ation 90
P!epa!e a state'ent of cost f!o' t&e fo""o)ing t!ading and P@< account fo! t&e ea! ending
Ma!c& 31? 1;;9
Pa!ticu"a! A'ount =Rs> Pa!ticu"a! A'ount =Rs>
To oening stoc# material .0,III 2y sales 0,II,III
Finished goods 5I,III 2y closing stoc#
material
0I,III
To urchases .,0I,III Finished goods 6I,III
To cost of moulds 4,III
To salary of factory manger .,III
To dereciation of machine KII
To gross rofit 74,0II
////////////// ///////////////
0,8I,III
//////////////
0,8I,III
/////////////
To office salary J,III 2y Dross rofit 74,0II
To salesman salary 7,III 2y interest from
ban#
KII
To insurance of office building .,III 2y di"idend recei"ed 0II
To godown e$enses KII 2y rent recei"ed JII
To directors fees 0,III
To telehone charges 8II
To showroom e$enses .,0II
To deli"ery "an e$enses .,6II
To reliminary e$enses 0,III
To interest on deb. 8II
To mar#et research e$. 7II
To net rofit 4J,III
////////////// //////////////
76,.II
//////////////
76,.II
//////////////
So"ution
State'ent of cost
=Fo! t&e ea! ending 31
st
Ma!c& 1;;9>
Pa!ticu"a! ,etai"s =Rs> A'ount =Rs>
;irect material1/
@aw material urchased .,0I,III
Add*+ oening stoc# of raw materials .0,III
///////////////
@aw material for consumtion .,40,III
<ess1/ Closing soc# of raw materials 0I,III
///////////////
@aw material consumed .,.0,III
Add*/ ;irect labour 4I,III
///////////////
P!i'e cost .,50,III
Add1/ Factory o"erhead1/
Cost of moulds 4,III
Factory manager salary .,III
;ereciation on machinery KII
/////////////// 5,KII
///////////////
Facto! cost .,57,KII
Add*/ office and administrate o"erhead
<alary J,III
Insurance .,III
;irectors fees 0,III
Telehone charges 8II
/////////////// .0,8II
/////////////
Cost of p!oduction .,6J,6II
Add*/ 'ening stoc# of finished goods 5I,III
//////////////
Doods a"ailable for sales .,JJ,6II
<ess1/ Closing stoc# of finished goods 6I,III
//////////////
Cost of goods so"d .,5J,6II
Add1/ selling > distribution e$t1/
<alesman,s salary 7,III
Insurance 9godown: KII
<howroom e$enses .,0II
?$enses of deli"ery "an .,6II
Mar#et research e$enses 7II
///////////// .I,.II
////////////////
Cost of sales .,6J,7II
Profit 5I,5II
////////////////
Sa"es 0,II,III
I""ust!ation :0
The following in"entory data relate to )a=ia Ltd.
In"entories
'ening Closing
Finish goods @s .,.II @s J6I
*or# in rogress @s 8II @s KII
@aw materials @s JII @s J6I
Additiona" info!'ation*+
Cost of goods a"ailable for sales F @s 7K5I
Total goods rocessed during the eriod F @s 765I
Factory on cost F @s .78I
;irect material used F @s .J4I
@e!uirements1/
9i: determine raw material urchase
9ii: determine the direct labour and cost incurred
9iii: determine the cost of goods sold
So"ution
9i: @aw material urchased1/
@aw material consumed F oening stoc# G urchases 3 closing stoc#
OR @s .,J4I F @s JII G Purchases 3 @s J6I
OR @s .,J4I G @s 6I F urchases
@s .,JKI F @aw material urchased
9ii: ;irect labour cost1/
Cost of goods rocessed during the year F @s 7,65I
Less1 / 'ening wor# in rogress F @s 8II
///////////////
@s 6,K5I
Less1 / Factory o"erheads F @s .,78I
///////////////
Prime cost F @s 5,.8I
Less1 / @aw material consumed F @s .J4I
//////////////
;irect labour cost F @s 0,05I
9iii: Cost of goods sold1/
F cost of goods a"ailable for sales 3 closing stoc# finished goods
F 7K5I 3 J6I F @s 6KJI
I""ust!ation 1;0
Mr. Mia furnishes the following data related to the manufacture of a standard roduct during the
month of August 0IIK
@aw material consumed / @s .6,III
;irect labour / @s 6,III
Machine hours wor#ed / @s JII
Machine hour rate / @s 6
Administration o"erheads F 0IL of wor#s cost
<elling o"erheads / @s I.6I er unit
Anit roduced / @s .8,.II
Anit sold / .7,III N @s 5 er unit
Cou are re!uired to reare a cost sheet from the abo"e showing1/
9a: The cost er unit
9b: Cost er unit sold and rofit for the eriod
So"ution
Boo. of Aia
Cost s&eet
=Fo! t&e 'ont& of August 31? 1;;9>
Pa!ticu"a! A'ount =Rs> A'ount =Rs>
;irect material consumed .6,III I.K8K
;irect labour 6,III I.0J0
;irect e$enses 5,III
//////////////
I.044
//////////////
P!i'e cost 05,III ..5I4
Factory o"erheads
9JII hours N @s 6 er hour: 5,6II
//////////////
I.074
///////////////
6o!. cost 0K,6II ..777
Administrati"e o"erheads
N 0IL of wor#s cost 6,8II
//////////////
I.444
///////////////
Cost of roduction 45,0II 0,III
Less1/ closing stoc# on August 4., 0IIK
9..II units N @s 0 er unit: 0,0II
///////////
/////
//////////////
Cost of goods sold 40,III 0.III
<elling o"erheads N @s I.6I er unit for .7III K,III
///////////
I.6I
/////////////
Cost of sales 5I,III 0.6I
Profit 05,III
////////////
..6I
////////////
Sa"es =17;; unit> 75,III 5.II
O Closing stoc# F unit roduced / units sold
F .8.II/.7III
F ..II units
E2e!cise Buestions0
T&eo!etica" Buestions*+
.: ?$lain the meaning of cost accountancy
0: ;efine
a: ;irect materials
b: ;irect wages
c: ;irect e$enses
4: *hat is cost accountingP ;iscuss briefly its imortant functions in a business firm
5: ?$lain the imortant ob%ecti"es of cost accountingP
6: ;istinguish between1/
a: ;irect e$enses and indirect e$ensesP
b: ;irect labour and indirect labourP
c: ;irect materials and indirect materialsP
7: ;istinguish between +costing, and +cost accounting,
8: *hat is financial accountingP (ow it is different from cost/accountingP
K: Mention the elements of cost
J: ?$lain the classification of direct labour
.I:(ow the o"erheads are different from the e$ensesP
..:<tate at least fi"e each tye of o"erheads
a: Factory o"erheads
b: Administrati"e o"erheads
c: <elling and distribution o"erheads
.0:*hat are the comonents of direct costP
.4: *rite the formula of calculating the raw material consumed
.5:?$lain the meaning of cost of goods sold and cost of sales
.6:?$lain the meaning of
a: First cost
b: *or#s cost and wor#s on cost
c: Cost of roduction and goods a"ailable for sales
P!actica" p!o#"e's =S&o!t Ans)e!s>
.. 'ening stoc# of raw material / @s .6,III
Closing stoc# of raw material / @s 0I,III
Material urchased / @s ., 0I,III
Find raw material consumed
9Ans. ., .6,III:
0. @aw material consumed / @s ., I0,III
@aw material for consumtion / @s ., .I,III
@aw material urchased / @s ., II,III
Find oening > closing stoc# of raw material 9Ans. @s .I,III and @s K,III:
4. Prime cost / @s ., K6,III
Current manufacturing cost / @s 0, 00,III
Total goods rocessed during the eriod / @s 0, 4J,6II
*or#s cost / @s 0, .6,III
Find factory o"erheads, oening and closing stoc# of wor# in rogress
9Ans. @s 48,III, @s .8,6II and @s 05,III:
5. Cost of roduction / @s ..,0I7
Doods a"ailable for sales / @s .0,0I7
Cost of goods sold / @s .I,K4.
Cost of <ales / @s .., 4J.
<ales / @s .0,III
Find oening and closing stoc# of finished goods, selling e$enses and rofit or loss 9Ans. @s
.,III, @s .,486, @s 67I and @s 7IJ rofit:
6. ;irect material consumed / @s 7I,III
;irect labour 6IL of material consumed
;irect e$enses / 44QRSL of direct labour
Factory o"erheads / 5IL of direct labour
'ffice o"erheads / on cost 77TRSL of wor#s
Find office cost 9Ans. @s ., 0I,III:
PRACTICA< PROB<EMS ="ong ans)e!s>
.. From the following articulars reare a cost sheet showing the total cost er tone for the
eriod ended 4.
st
;ecember .JJK
Rs Rs
@aw material 44,III ;irector,s fees 9office: 0,III
Producti"e wages 46,III Factory cleaning 6II
;irect e$enses 4,III <undry office e$enses 0II
Anroducti"e wages .I,6II ?stimating KII
Factory rent and terms 8,6II Factory stationery 86I
Factory lighting 0,0II 'ffice stationery JII
Factory heating .,6II Factory insurance .,.II
Moti"e ower 5,5II 'ffice insurance 6II
(aulage 4,III Legal e$enses 5II
;irector,s fees 9wor#s: .,III @ent of warehouse 4II
;ereciation of An#eeing of deli"ery "ans 8II
/ lant and machinery 0,III 2an# charges 6I
/ office building .,III Commission on sales .,6II
/ deli"ery "ans 0II Loose tools written off 7II
2ad debts .II @ent and ta$es 9office: 6II
Ad"ertising 4II *ater suly .,0II
<ales deartment .,6II
salaries
The total outut for the eriod has been .I,III tones.
9Ans. Prime cost @s 8.,III wor#s cost @s .,IK,I6I office cost @s .,.4,7II total cost @s .,.K,0II
cost er tone @s ...K0:
0. Preare a cost sheet to show the total cost of roduction and cost er unit of goods
manufactured by a comany for the month of Uuly .JJ5. Also find out the cost of sales.
Rs Rs
<toc# of raw materials
./8/.JJ5
4,III Factory rent > rates 4,III
@aw materials urchased 0K,III 'ffice rent 6II
<toc# of raw materials
4./8/.JJ5
5,6II Deneral e$enses 5II
Manufacturing wages 8,III ;iscount on sales 4II
;ereciation on lant .,6II Ad"ertisement 7II
Loss on sale of a art of
lant
4II ?$enses to be charged fully
income ta$ aid
0,III
The number of units roduced during Uuly .JJ5 was 4,III
The stoc# of finished goods was 0II and 5II units on ./8/.JJ5 and 4./8/.JJ5 resecti"ely. The
total cost of units on hand on ./8/.JJ5 was @s 0,KII. All these had been sold during the month.
9Ans. Prime cost @s 44,6II factory cost @s 4K,III cost of roduction @s 4K,JII cost of sales @s
485.7:
4. The following articulars relating to the year .JJ5 ha"e been ta#en from the boo#s of a
chemical wor#s manufacturing and selling a chemical mi$ture1
Rs Rs
Stoc. on 1
st
Can0 1::4
@aw materials 0,III 0,III
Finished mi$ture 6II .,86I
Factory stores ////// 8,06I
Pu!c&ases
@aw materials .,7I,III .,KI,III
Factory stores ////// 05,06I
Sa"es
Finished mi$ture .,64,I6I J,.K,III
Factory scra ////// K,.8I
Factory wages ////// .,8K,76I
Power ////// 4I,5II
;ereciation of machinery ////// .K,III
Sa"a!ies
Factory ////// 80,00I
'ffice ////// 48,00I
<elling ////// 5.,6II
E2penses
;irect ////// .K,6II
'ffice ////// .K,0II
<elling ////// .K,III
Stoc. on 31
st
,ece'#e! 1::4
@aw material .,0II
Finished mi$ture 56I
Factory stores ////// 6,66I
The stoc# of finished mi$ture at the end of .JJ5 is to be "alued at the factory cost of the mi$ture
for that year. The urchase rice of raw3materials uncharged throughout .JJ5.
Preare a statement gi"ing the ma$imum ossible information about cost and its brea# u for the
year .JJ5.
9Ans. Prime cost @s 4,88,KII factory cost @s 6,.7,0II cost of roduction of finished mi$ture sold @s
6,8.,K60 cost of sales @s 7,4.,460:
5. Calculate
a: Ealue of raw/materials consumed
b: Total cost of roduction
c: Cost of goods sold and
d: The amount of rofit from the following articulars1
Rs Rs
Opening stoc. Power 0,III
@aw 3 materials 6,III Factory heating and lighting 0,III
Finished goods 5,III Factory insurance .,III
C"osing stoc. ?$erimental ?$enses 6II
@aw 3 materials 5,III <ales of wastage of materials 0II
Finished goods 6,III 'ffice management salaries 5,III
@aw 3 materials urchased 6I,III 'ffice rinting and stationery 0II
*ages aid to labourers 0I,III <alaries of salesmen
commission of tra"eling
agent
0,III
Chargeable e$enses 0,III
<ales .,II,III Factory rent, rates > ta$es 6,III
9Ans. 9a: @s 6I,KII, 9b: @s K8,6II, 9c: @s KJ,6II, 9d: @s .I,6II:
V(int sales of raw/materials wastage of @s 0II has been deducted from the cost of raw/materialsW
6. The cost of the sale of roduct +B, is made u as follows1
Rs
Materials used in manufacturing .I,0I
Materials used in ac#ing materials 0,6II
Materials used in selling the roduct 46I
Materials used in office 86
Materials used in factory .06
Labour re!uired in roducing 0,6II
<alary aid to wor#s manager and other rincial officers of the factory 56I
?$enses 3 indirect office 06I
?$enses 3 direct factory .,III
2ad debts 4II
Pac#ing e$enses .6I
Lighting and heating charges of the factory 0II
?$enses 3 indirect factory .06
Assuming that all the roducts manufactured are sold, what should be the selling rice to obtain a
rofit of 0IL on cost riceP
Illustrate in a chart for# for resentation to your mange, the di"ision of costs of roduct +B,
VAns. Prime cost @s .7,0II, wor#s cost @s .8,.II cost of sales @s .K,006 sales @s 0.,K8IW
7. Calculate the rime cost, factory cost, total cost of roduction and cost of sales from the
following articulars1
Rs0
@aw materials consumed .0,III
;irectly chargeable e$enses 6II
*ages aid to labourers 0,6II
Drease, oil, cotton waste etc. 06
<alary manager and cler#s .,86I
Insurance of stoc# of raw materials 4II
Consumable stores 5II
P!inting and statione!*
Factory 6I
'ffice 0II
<ales dett. .II
/////////// 46I
@ent of office building .6I
,ep!eciation 1
Factory remises 0II
'ffice furniture 6I
;eli"ery "ans 86
///////// 406
Power and fuel 6II
Contribution to ro"ident fund of factory emloyees .,III
<alaries of administrati"e directors .II
2an# charges 86
Cost of samles 06I
<alaries of sales manger 4II
Ad"ertising 6II
Pac#ing material 46I
<torage in stoc#s of finished goods 0I
VAns. Prime cost @s .6,III, factory cost @s .J006 total cost of roduction @s .J,KII cost of sales @s
0.,4J6W
8. Calculate
a: Ealue of raw/materials consumed
b: Total cost of roduction
c: Cost of goods sold and
d: The amount of rofit from the following articulars1
Rs
Opening stoc.*
@aw materials .,46I
Finished goods 0,6II
C"osing stoc.*
@aw/materials 86I
Finished goods .,6II
@aw materials urchased 0I,III
*ages aid to labourers K,III
;irect e$enses .,06I
?$erimental e$enses 56I
Factory rinting and stationery 46I
Rent *
Factory 06I
'ffice .0I
//////// 48I
*ages of fireman .,III
Lighting 3 office .06
Audit fees .6I
Telehone e$enses 6II
Ad"ertising .,06I
Mar#et research e$enses 66I
<alary of godown 3 #eeers .86
Tra"eling e$enses 86I
Commission of tra"eling agent 6II
<ales 6I,III
VAns. 9a: "alue of raw 3 materials consumed @s. 0I,7II 9b: Total cost of roduction @s 40,8J6, 9c:
cost of goods sold @s 44,8J6, 9d: rofit @s .0,JKIW
K. Preare a statement of cost from the following trading and rofit and loss account for the
year ending 4.
st
March, .JJ6.
Pa!ticu"a!s Rs Pa!ticu"a!s Rs
Opening stoc.1 <ales .,II,III
Materials K,III C"osing stoc.*
Finished goods 06,III Materials .6,III
Purchase of materials 8I,III Finished goods 4I,III
;irect labour .I,III
Drease, oil etc. 6II
<alary of store#eeer 8II
Power > fuel KII
Dross rofit cRd 4I,III
///////////// /////////////
.,56,III .,56,III
///////////// /////////////
Lighting1 Dross rofit bRd 4I,III
'ffice 6II ;i"idends recei"ed 0,III
<ales dett. 76I Interest on loan 7II
,ep!eciation* Transfer fees .,56I
'ffice remises .,III @ecei"ed
;eli"ery "ans 86I
Fees of office manager 0,III
2an# charges .,6II
<elling e$enses .,6II
<ales commission 6II
Preliminary e$enses 4,III
Pac#ing e$enses .,.II
;i"idends aid on .,III
<hare caital of comany
;iscount on debentures 6II
)et rofit 0I,III
//////////// ///////////
45,III 45,III
VAns. Prime cost @s 84,III, wor#s cost @s 86,III, total cost of roduction @s KI,III cost of goods
sold @s 86III cost of sales @s 8J,III rofit @s 0.,IIIW
J. The following data relate to the manufacture of standard roduct during the four wee#
ending on 0K
th
'ct. .JJ5.
@aw materials consumed @s 0I,III
;irect wages @s .0,III
Machine hr wor#ed J6I 9hrs:
Machine hour rate @s 0.II
'ffice o"erhead .6L on wor#s cost
<elling o"erhead @s I.48 er unit
Anits roduced 0I,III
Anits sold N @s 0.6I each .K,III
Preare a statement from the abo"e showing1
9a: The cost of roduction er unit, and
9b: The rofit for the eriod
VAns. 9a: @s .,J5J 9b: @s 4,06K
.I. A firm has urchased a lant to manufacture a new roduct, the cost data for which is gi"en
below1
?stimated annual sales 05,III units
Esti'ated costs*
Material @s 5.II er unit
;irect labour @s I.7I er unit
'"erheads @s 05,III er year
Administrati"e e$enses @s 0K,KII er year
<elling e$enses .6L of sales
Calculate the selling rice if rofit er unit is @s ..I0
VAns. @s J.0IW
... Preare a cost sheet from the following data to find out rofit and cost er unit1
@aw materials consumed @s .,7I,III
;irect wages @s KI,III
Factory o"erheads 0IL of direct wages
'ffice o"erheads .IL of factory cost
<elling o"erheads .0,III
Anit roduced 5,III
Anits sold 4,7II
<elling rice @s .II er unit
VAns. Prime cost @s 0,5I,III, factory cost @s 0,67,III, cost of roduction @s 0,K.,7II, cost of sales
@s 0,76,55I, rofit @s J5,67IW