Cost Accounting

BSPATIL
1
Syllabus
Paper 3.3 Cost Accounting
Cost Accounting Elements of Cost + Cost Concepts
Accounting and Control of Material Cost.
Labour Wage payment and incentive Labour Cost Control Labour Turnover.
Overead Classification Allocation! Appointment and Absorption of overead
"rocess Costing "rocess losses inter#process profits.
$tandard costing %ariance analysis
Cost Ledgers# &econciliation of cost and financial profits 'ntegral Accounting
BSPATIL
2
Contents
Lesson( ) 'ntroduction of Cost Accounting
*efinition Cost Concepts Element of Cost 'nstallation of Costing $ystem
Lesson( + Material Cost
,ature "urcasing -unctions $tores Control $toc. Levels EO/ "ricing or Material 'ssues
A0C#Analysis Material ouses.
Lesson( 1 Labour Cost
,ature Wage "olicy Wage "ayment metods 'ncentive scemes! Leson turnmen.
Lesson( 2 Overead Cost
,ature # Classification Allocation Apportionment of overead cost Absorption of overead(
metods! Macine 3om &ate metod.
Lesson( 4 5ob Costing and 0atc Costing
,ature features Cost $eet preparation 6tilities Limitations.
Lesson( 7 Contract Costing
-eatures Types or Contract
Lesson( 8 "rocess Costing
$imple "rocess Costing "rocess 9it ,ormal and abnormal causes 'nter process profit
Lesson( : $tandard Costing and %ariance Analysis
*efinition 6ses and Limitations Material Cost %ariance Labour Cost %ariance Overead Cost
%ariance and $ales %ariance
Lesson( ; Cost Ledger Accounting
,ature Control Accounts and its 6ses "reparation of Cost Ledger Account
Lesson( )< 'ntegral Accounting
,ature 6ses "reparation of 'ntegral Accounts
Lesson( )) &econciliation of Cost and -inancial Accounts ,eed for &econciliation $teps in reconciliation
"reparation of &econciliation $tatement.
BSPATIL
3
Lesson: 1
INTRODUCTION OF COST ACCOUNTING
Cost Accountancy
='t is te application of costing and cost accounting principle! metod and tecni>ues to te
science! art and practice of cost control and te ascertainment of profitability. 't includes te
presentation of information derived tere from for te purpose of managerial decision ma.ing?.
Te term @Cost AccountancyA includes Costing and Cost accounting. 'ts purposes are Cost#
control and "rofitability ascertainment. 't serves as an essential tool of te management for decision
ma.ing.
Cost Accounting
=Te process of accounting for cost from te point at 9ic eBpenditure is incurred or
committed to te establisment of its ultimate relationsip 9it cost centres and cost units. 'n its 9idest
usage it embraces te preparation of statistical data! te application of cost control metods and te
ascertainment of te profitability of activities carried out or planned? Cost accounting means suc
as analysis of accounting and oter information as to enable management to .no9 te cost involved in
eac activity togeter 9it its significant constituent elements in order to arrive at proper decisions.Cost
accounting provides management 9it cost data relating to products! processes! Cobs and different
operations in order to control te costs and maBimiDe te earnings. 't play a vital role in all te business
activities.
Definition of Cost Accounting
Te application of costing and cost accounting principles! metods and tecni>ues to te
science! art and practice of cost control and te ascertainment of profitability. 't includes te
presentation of information derived tese from for te purpose of managerial decision ma.ing.
Objects of Cost Accounting
). To serve as a guide to price fiBing of products.
+. To disclose sources to 9astage in various operations of manufacture.
1. To reveal sources of economy in production process.
2. To provide for an effective system of stores and material.
4. To measure te degree of efficiency of te various departments or units of production.
7. To provide suitable means and information to te top management to control and guide te
operations of te business organisation.
8. To eBercise effective control on te costs! time and efforts of labour! macines and oter
factors of production.
:. To compare actual costs 9it te standard costs and analyse te causes of variation.
;. To provide necessary information to develop cost standards and to introduce te system of
budgetary control.
)<. 't enables te management to .no9 9ere to economiDe on costs! o9 to fiB prices! o9 to
maBimiDe profit and so on.
BSPATIL
4
TECNI!UES AND "ETOD OF COSTING
Te types and tecni>ues of costing are as follo9s(
1. Historial Costing:
@Te ascertainment of costs after tey ave been incurredA 3istorical costs are! terefore! @postmortemA
costs as under tis metod all te eBpenses incurred on te production are first incurred and tem te costs are
ascertained.
2. Standard Costing:
@Te preparation and use of standard costs! teir comparison 9it actual costs and te analysis of
variance to teir causes and points of incidenceA.
3ere te standards are first set and ten tey are compared 9it actual performances. Te difference
bet9een te standard and te actual is .no9n as te variance. Te variances are analyDed to find out teir causes
and also te points or locations at 9ic tey occur.
3. Marginal Costing:
@Te ascertainment of marginal costs and of te effects on profit of canges in volumes or type of
output by differentiating bet9een fiBed costs and variable costsA.
Te fiBed costs are tose 9ic do not cange but remain te same! 9it te increase or decrease in te
>uantum of production. Te variables costs are tose 9ic do cange proportionately 9it te cange in
>uantum of production.
Te marginal costing ta.es into account only te variable costs to find out @marginal costsA. Te
difference bet9een $ales and Marginal costs is .no9n as @ContributionA and contribution is an aggregate of
-iBed costs and "rofitELoss. $o te fiBed costs are deducted from te contribution to find out te profits.
Marginal costing is a tecni>ue to ascertain te effect on profits. Marginal costing is a tecni>ue to ascertain te
effect on profit by te cange in te volume of output or by te cange in te type of output.
4. Direct Costing:
Te practice of carging all direct cost to operations! process or products! leaving all te indirect costs to be
9ritten off against profits in te period in 9ic tey arise
5. Absorption Costing
@Te practice of carging all costs! bot variables and fiBed! to operations! processes or products.
Tis is te traditional tecni>ue as opposed to Marginal or *irect costing tecni>ues. 3ere bot te fiBed
and variables cost are carged in te same manner.
"et#o$s of Costing
Te metods of costing can be divided into tree main groups(
). 5ob CostingF
+. "rocess CostingF and
1. -arm Costing.
). %ob Costing: Te Cob costing metods are applicable 9ere te unit of manufacture is one and
BSPATIL
5
complete in itself. Tey include printers! Cob foundries! tool manufactures! contractors! etc. te
follo9ing metods are included in 5ob Costing(
&i' Contract Costing: Tis metod if applied in underta.ings erecting buildings or carrying out
constructional 9or.s! e.g.! 3ouse buildings! sip building! Civil Engineering contracts. 3ere te cost
unit is one and completed in itself. Te cost unit is a contract 9ic may continue for over more tan a
year. 't is also .no9n as te Terminal Costing! since te 9or.s are to be completed 9itin a specified
period as per terms of contract or agreement eBecuted by te contractor and contractee.
Contracts can be differentiated from fobs in as muc as te contracts Cobs are carried out outside
te factory and generally are of a long#term 9ile Cobs are carried out inside te factory and are
of a sort duration. 'f an order complete in itself and meant only for te person 9o as placed
te order! tis Cob#order is eBecuted inside te press and te completion of te order ta.es a
sort time as against te contract 9ic may ta.e years.
&ii' (atc# Costing: 'n tis metod! a batc of similar or identical products is treated as a Cob. 3ere
te unit of cost is a batc of group of products! costs are collected and analyDed according to
batc numbers and te costs are ascertained batc 9ise. Tis metod is applied in
parmaceutical industries 9ere medicines or inCections are manufactures batc 9ise or in
general engineering factories producing components in convenient batces.
). )*ocess Costing: "rocess costing metod is applicable to tose industries manufacturing an number of
units of output re>uiring processing. 3ere an article as to undergo t9o or more processes for reacing
te stage of finised goods and succeeding process till completion.
C+assification of Cost
Te cost#classification is te process of grouping costs according to teir caracteristics. Te cost can
be classified into te follo9ing(
). According to elementsF
+. According to -unctions or OperationsF
1. According to ,ature or 0eaviour!
2. Accounting to Controllability!
4. According to ,ormality!
7. According to &elevance to decision#ma.ing and Control.
According to Elements( Te cost is classified into iG *irect Cost! and iiG 'ndirect Cost according to
elements! viD.! Materials! Labour and EBpenses! te description of 9ic occurs in te earlier pages of
tis capter.
According to -unctions( te cost is classified into te follo9ing(
iG "roduction Cost or Manufacturing Cost!
iiG Administration Cost!
iiiG $elling Cost! and
ivG *istribution Cost!
A brief description of eac tese items are given belo9(
BSPATIL
6
iG "roduction Cost is @Te cost of se>uence of operation 9ic begins 9it supplying materials!
labour and services and ends 9it primary pac.ing of te productA.
't is also .no9n as Manufacturing of -actory Cost.
iiG Administration Cost is =Te Cost of formulating te policy! directing te organisation and
controlling te operations of an underta.ing! 9ic is not related directly to a production! selling!
distribution! researc or development activity or function.? Administration Cost comprise office and
Administration eBpenses.
iiiG $elling Cost is =Te cost of see.ing to create and stimulate demand Hsometimes termed @mar.etingAG
and of securing order.?
't is also .no9n as $elling eBpenses or $elling overeads 9ic include all te eBpenses of $elling
*epartment.
ivG *istribution Cost is =Te cost of se>uence of operations 9ic begins 9it ma.ing te pac.ed
product available for dispatc and ends 9it ma.ing te re#conditioned returned empty pac.age! if
any! available for re#use?.
't is .no9n as *istribution eBpenses or overeads 9ic include eBpenses li.e pac.ing! 9areouse
eBpenses! cost of freigt! sipping carges and also te eBpenses of re#conditioning te returning
empty pac.ages for using tem again.
According to ,ature or 0eaviour( Cost can be classified into
iG -iBed Cost iiG %ariable Cost! and iiiG $emi#-iBed for $emi#variable Cost.
iG -iBed Cost is =A cost 9ic tends to be unaffected by variations in volume of output. -iBed costs
depend mainly on te effluBion of time and do not vary directly 9it volume of rate of output.
-iBed Costs are sometimes referred to as period costs in systems of direct costing.? -iBed costs or
-iBed eBpenses are tose eBpenses 9ic do not cange 9it te increase or decrease in te
>uantum of production but remain stable. Tey are period costs! e.g.! &ent of 0uilding! $alaries etc.
iiG %ariable Cost is =A cost 9ic tends to vary directly 9it volume of output! %ariable costs are
sometimes referred to as direct costs in systems of direct costing.? %ariable costs or eBpenses are
tose 9ic increase in direct proportion 9it te increase in production or 9ic decrease in direct
proportion 9it te decrease in production! e.g.! *irect Materials! *irect Labour! "o9er! -uel etc.
iiiG $emi#fiBed or $emi#variable cost is =A cost 9ic is partly variable.? Tis is a cost 9it canges
but not in direct proportion to te increase or decrease in te production#output! e.g.! &epairs and
Maintenance! $alary of supervisors etc.
According to controllability( Te cost can be divided into(
iG Controllable Cost! iiG 6ncontrollable Cost.
iG Controllable Cost( Tis is a cost 9ic can be influenced by te action of a specified member of an
underta.ing. Te organisation is divided into departments or responsibility centres eac managed by
a 3ead. Te costs of a particular department or centre re guided by te person#in#carge of te
department. Te costs 9ic can be controlled by a @specified memberA 9o is generally an
important lin. in te management are te controllable costs. tey 3ead of a cost#centre or a
department as control over variable costs only 9ic include "rime cost and oter variable
overeads. $o te controllable costs are te variable costs.
vG 6ncontrollable Costs( it is a cost 9ic cannot be influenced by te action of a specified
member of an underta.ing. 6ncontrollable costs are generally te -iBed costs! te control of
9ic does nto lie 9itin te province of a member of te underta.ing. Te cange in -iBed
BSPATIL
7
costs is a mater to be decided at te top level of te management depending upon te policy of
te underta.ing. Anoter eBample of e uncomtrollable cost is 9ere te cost of one department
is sared by te oter department for reason tat te oter department is ta.ing te benefit of
services of te department. $uppose! te cost of "o9er departments is sared by te Macine
*epartment! te cost of tis sare is uncontrollable as it as no control over te cost of te oter
department! viD.! te "o9er *epartment.
Acco*$ing to No*,a+ity:
Te cost is classified into iG ,ormal cost! and iiG Abnormal cost
iG ,ormal Cost( 't is te cost at a given level of output in te condition at 9ic tat level of output is
normally attained.
iiG Abnormal cost( it is a cost 9ic is beyond normal cost.
Acco*$ing to *e+e-ance to $ecision.,a/ing an$ Cont*o+:
Te costs classified on tis basis are te follo9ing
iG $ut#do9n Cost( A cost 9ic 9ill still be re>uired to be incurred even toug a plant is closed or
sut#do9n for a temporary period! e.g.! te cost of rent! rates! depreciation! maintenance etc.! is
.no9n as sut#do9n cost.
iiG $un Cost( A cost 9ic as been incurred in te past or sun. in te past and is not relevant to te
particular decision#ma.ing is a sun. cost. 'f it is decided to replace te eBisting plantF te 9ritten
do9n boo. value of te plant less te sale value of te eBisting plant! is a $un. a 'rrevocable cost.
iiiG Opportunity Cost( =Te net selling price! rental value or transfer value 9ic could be obtained at a
point in time if a particular asset or group of assets 9ere to be sold! ired! or put to some alternative
use available to te o9ner at tat time? is te opportunity cost. Te cost 9ic are related to te
sacrifice made or te benefits foregone are opportunity costs. to ta.e an eBample! if a part of te
factory building as been let out on rent and no9 9e 9ant to use tat portion for installing a plant!
9e 9ould naturally lose te rent tat 9e used to get. $o te loss of rent is te opportunity 9ic
9ould arise due to putting te part of tat factory building to an alternative use available to te
o9ner! and tis cost sould be .ept in vie9 9ile installing te plant.
ivG 'mputed cost( it is ypotetical cost re>uired to be considered to ma.e costs comparable. 'f te
o9ner of te factory carges rent of te factory to te cost of production to ma.e cost comparable
9it tat of tose underta.ings 9ic run production in rented factories! it is an 'mputed cost as te
rent as actually not been paid. $ome is te case 9it carging 'nterest on oneAs o9n capital.
COST.CENTRE AND COST.UNIT
Cost are ascertained according to Cost Centres or Cost 6nits.
Cost-centre
A Cost#Centre is a very 9ide term and includes te "roductions. *epartment "rocesses! Wor. orders! $ervice
*epartment! Operations! Macine Centers! Area or regions of sales! Wareouses! "ersons! etc.! of 9ic te
cost is to be ascertained. A Cost#Centre can be classified into te follo9ing four types(
). 'mpersonal! +. "ersonal! 1. Operation! 2. "rocess.
-or manufacturing operations! te cost centres may be "roduction cost centers! i.e.! te "roduction *epartments
engaged in producing! or te $ervice cost#centres! i.e.! te $ervice *epartments 9ic elp te production 9or.
e.g.! $tore! "o9er *ept. 'nternal Transport *ept.! &epairs and Maintenance *ept.! etc.!
BSPATIL
8
-or sales operations! te cost#centres! all te macine or te persons operating tose macines are brougt
togeter under one cost#centre for determination and control of costs. 9ere te 9or. is carried on troug
processes! eac process is a cost centre. A macine or a group of macines can also be cost#centre. Te Cost
Centres are very useful for analysis! ascertainment and control of costs.
Cost Unit
A Cost 6nit is a unit of >uality of product! service! or time Hor a combination of teseG in relation to 9ic costs
may be ascertained or eBpressed.
5ob is a cost unit 9ic consists of a single order Hor contractG.
0atc is a cost unit 9ic consists of a group of identical items 9ic maintains its identity trougout one or
more stages of production.
"roduct Iroup is a cost unit 9ic consists of a group of similar products.
Tus! cost unit is a sub#division into proper nomenclatures attributable to a unit of measurements of cost. Cost
6nits are of t9o types( )G $ingle. +G Composite. Te eBamples of $ingle Cost unit are#per tone! per meter! per
.ilogram etc.! and te eBamples of composite units are#per passenger#.ilometer! per tone#.ilometer etc.
INSTALLATION OF COSTING S0STE"
Te need and importance of te installation and te organisation of a good system of cost accounting are being
increasingly realiDed presently all over te business versatility. Te common eBperience of entusiastic youts
climbing te business tree and falling mid#9ay 9itout even collecting te leaves o9es to te ignorance of e
use installation and organisatoin of accosting system! and to te infatuation tat te profits could be earned
9itout it. A good system is te .ey#point governing! te mecanism of an enterprise in te field of cost
control! ascertainment of profitability! and managerial decision#ma.ing.
'nstallation of a cost system is not an eBpense but an investment as te re9ards are muc greater tan te
eBpenses incurred. Te cost system is for te business and not te business for a system of cost. Terefore! te
system as to be so designed as to meet te specific needs of te enterprise.
A) eneral Consideration !or installing Costing S"ste#
Te general considerations to be observed in installing a costing system are as follo9s(
Te ObCective( Weter te obCective of installing te costing system is limited to a specific area! e.g.
material management! or fiBing selling price. Or to arrive at a certain managerial decisionF or te obCect
is to install te system for covering all te aspects of cost affecting te business. Te approac to install
te system 9ill be dependent on its obCectives.
Te Area of Operation( 3aving decided te obCective! te areas of operation of te system are to be
studied! by 9ic te management can be best benefited. 'f production is slac.! attention 9ill ave to be
paid to increase itF if production is good but te sales are receding! study 9ill be made to increase te
sales and action ta.en according to te results of study and analysis. $uc areas 9ic re>uire
immediate attention are to be carved out on priority basis to be andled by te cost system!
Te Organisation of te 0usiness( ,o system of cost installation 9ould succeed until te organisation
structure of te business is ta.en into account. Te organiDational part 9ould elp to determine te
scope of 9or.ing and improvement. 'f te interests of management call for certain minor canges in te
organiDational structure! to its advantage! te same may ave to be done.
Te Conception J &eception of te 'dea( Te idea of te installation of te cost system is to be placed
before te staff and te 9or.ers in a manner tat it is 9ell received and not obCected to on flimsy
grounds. Te success of te system 9ould depend on te cooperation of e persons engaged in te
BSPATIL
9
enterprise! and te cooperation 9ill be fort coming only if te idea and plans are 9ell conceived and
received. Te benefits of introducing te system to all te sections sould be 9ell eBplained.
Collection of *ata J "rompt 'nformation( Te cost data 9or.s as a base for decision#ma.ing. Tere
sould be evolved a proper system for te collection of te re>uired cost data and information promptly.
$econdly! tere sould be a system to verify te correctness of te data supplied! oter9ise te
conclusions dra9n 9ould be 9rong and time spent in its 9or.ing 9ould go 9aste.
Cost &ecords J Cost 0oo.s( Te maintenance of cost records and cost boo.s depends on te siDe and
nature of te business! but te basic re>uirements. Te manner in 9ic te financial accounts could be
interloc.ed into an integral accounting system as to be studied and 9or.ed out. *ecision as to be
ta.en if t9o separate set of boo.s#one for financial accounts and oter for cost accounts#ave to be
maintained and tereafter te results are to be reconcile. "roper boo.s and records are to be .ept and
maintained to meet te re>uirements of eiter of te t9o situations mentioned above.
Control system for te Elements of Cost( $ystem 9ould ave to be devised for recording and controlling
costs of materials! labour and overeads! in accordance 9it costing principles and procedures.
Type and Metod of Costing( Te coice of metod of costing 9ould depend on te nature of
production! e.g.! 5ob Cost metod or te "rocess Cost metod. -or cost control! standard costing along
9it 0udgetary control may ave to be selected and applied. $imilarly! for decision ma.ing! Marginal
and *ifferential costing tecni>ues may be found useful. "reparations for te application of te
particular metod and tecni>ueEtype sould be made initially.
&esponsibility Accounting( &esponsibility accounting is a tecni>ue of cost control by delegating! etc.!
.no9n as responsibility centres. 'ts as to be Cudged 9eter a particular official 9o ad been assigned
a particular function! as implemented te same or not 9itin te timeA allotted to im! or not! and tus
te responsibility as got to be fiBed for failure#action on individual persons! for te sa.e of control of
cost. -or tis purpose! a system of responsibility accounting sould be evolved.
(' S1ecific consi$e*ations fo* insta++ing costing syste,
Te specific considerations as distinct from general considerations to be .ept in vie9 9ile installing a cost
system are as follo9s(
$iDe and ,ature of 0usiness( 'n a business of big siDe! a detailed cost system is necessary 9ile in a
small business! te system sould be 9itin te re>uirements so tat te eBpenses on te installation and
its 9or.ing may not out#9eig te utility.
Te cost system is good for business engaged in manufacturing or in service#rendering concerns but for
oters. Even in production enterprise li.e colliery 9ere te production costs are all direct costs! te
financial 9ere te production costs are all direct costs! te financial accounts may be so designed as to
obviate te need of any cost system! unless oter9ise called for.
"roducts( te nature of product determines te metod of costing to be applied. 'f te material content of
te product is more valuable! te material cost records need be .ept in comparatively more elaborate
manner so as to ma.e material cost control effective. $ame is te position 9it regard to labour and
overead.
Organisatoin( Te organiDational set up for a costing system sould be modeled tat te control part is
eBercised by te Cost Accountant! as suc! te present organiDational set up of te costing department
need close study to suggest necessary canges.
-unctional study( Te functional divisions of an underta.ing based on cost are aG Manufacturing! bG
Administration! and cG $elling J *istribution. A study of te present 9or.ing of te different
departments in necessary to suggest improvements.
BSPATIL
10
C) $rinciples !or S#oot% &or'ing
Te follo9ing principles sould be .ept in mind 9ile introducing te cost system(
Te system sould be simple and easy to operate.
Te system sould be fleBible! so tat it may be eBpanded or contracted per needs of te business.
Te eBisting pattern sould be disturbed only as little as may be considered desirable.
Te desired canges be introduced gradually and not in aste.
Confidence be created by te Cost accountant in te minds of management and
EBecutives regarding te utility of te system! so as to avoid unnecessary criticism
And to obviate obstacles.
D) (ine o! Action
Te follo9ing line of action is recommended for te installation of cost system.
*etermination of te type of costing and te metod of costing! as may be suitable for te underta.ing.
To prepare forms! card! report#performs! boo.s etc.! for .eeping records of all te elements of cost! viD.!
material! labour and overeads.
To decide issues regarding material cost control! i.e.! purcase! storing! issue and valuation.
To decide matters regarding labor cost control! i.e.! Cob evaluation! merit rating! appointment! time
recording! division of 9or.! remuneration of labour and oter allied problems li.e idle time! overtime!
labour turnover! casual 9or.ings! etc.
Were te 9or. is carried on more by macines! proper records be .ept for te macines.
To suggest a suitable system for te collection! classification and analysis of all.
Types of evereads! i.e.! manufacturing! administrative! and selling J distributive.
To decide te metods of allocation and apportionment of overeads among te production departments
and $ervice departments 9ic sould be earlier clearly demarcated! and to decide te metod of
absorption of overeads.
To decide normal capacity of production and prepare budgets and standards.
To maintain boo.s of cost control based on double#entry principle.
To devise information system by 9ic te costing department may communicate to oter departments
and receive reports and oter necessary informations promptly .
Merit o! Cost Acco)nting
e+1fu+ in )+anning an$ Decision "a/ing: Cost information brings to ligt te profitable activities of te
BSPATIL
11
organisation. 't provided te sound and rational basis for planning! te canges in products! plants! processes
and tecni>ues of production. Te information provided by cost accounting is also useful in evaluating te
various alternatives involved in a situation before ta.ing any final decision.
In-ento*y Cont*o+: As an efficient stores accounting system is essential to an ade>uate system of cost accounts!
in effective cec. is provided on all materials and stores.
Asce*tain,ent of Costs: Cost accounting is very elpful in calculating te cost of an article being produced by
te enterprise. 't elps in fiBing te selling price of te product.
Stan$a*$ Costs: 't elps te production manger not only to find 9at various Cobs and processes ave cost but
also 9at tey sould ave cost. Te pre#planned standard costs are used for comparison of te cost of te
products.
Assistance in "anufactu*ing: Cost accounting pinpoints lapses in purcases of ra9 materials and oter
articles! teir utiliDation. 't indicates 9ere 9astages are occurring long before te production is finised. 't
elps to ta.e immediate steps to avoid suc losses and 9astes.
)*o,otion of Sa+es: Cost accounting is also very elpful in te promotion of sales by adopting an appropriate
price policy. Te tecni>ue of brea. even analysis serves as constant remember to increase te sales to te brea.
even point. 't also see.s to control te selling and distribution coasts.
E-a+uation of )*ofitabi+ity: 't elps in elimination unprofitable activities and operations.
)*ofit can be "a2i,ise$: Cost accounting elps te management in maBimiDing profits by eliminating all
9astes and uneconomical processes. Tis cost accounts elp in increasing points and minimiDing loses.
COST SEET
Cost $eets are statements setting out te costs of a product giving details of all te costs. "resentation of
costing information depends upon te metod of costing. A cost seet can be prepared 9ee.ly! montly!
>uarterly or annually.
'n a cost seet besides total eBpenditure incurred! cost per unit of output in case of eac element of cost can be
so9n in a separate column. Te cost seet sould give cost per unit in te previous period for te purposes of
comparison.
Ad*antages o! Cost S%eet
). 't is a simple and useful medium of communication 9ic gives information about costs to all levels of
management in a simple and lucid form.
+. 't elps in comparative study of te various elements of costs 9it te past results and standard cost.
Tus it elps te management in control process.
1. 't elps te management in fiBing up te selling price more accurately.
2. 'f acts as a guide to te manufacturer and elps im in formulating a definite and profitable production
policy.
4. 't enables a producer .eep a close 9atc and control over te cost of production.
7. 't so9s te total cost and te per unit of te units produced during te given period.
)*ob+e, 1
Te follo9ing particulars ave been eBtracted from te costing records of a manufacturing co.! for te year
BSPATIL
12
ended 1<
t
5une! );;).
Rs3
&a9 material purcase )!<<!<<<
4ages
*irect 7<!<<<
'ndirect )<!<<<
Office $alaries ++!<<<
-inised Ioods stoc. )<!<<<
Advertising 7!<<<
AgentAs Commission )<!<<<
&ent! rates J taBes etc H;E)< for 9or.s ! )E)< for
officeG
+!<<<
Wor.s 2!<<<
0uilding#repairs +!<<<
$alaries#plant 2!<<<
De1*eciation Rs3
"lant Macinery 2!<<<
0uilding +!<<<
Carriage in9ard +!<<<
Carriage Out9ard 7!<<<
Sa+es 2!<<!<<<
O1ening Stoc/.
&a9 material 2<!<<<
Travelling eBpenses +!<<<
"o9er +!<<<
"lant Maintenance :!<<<
"isce++aneous e21enses
"lant +!<<<
BSPATIL
13
Office +!<<<
C+osing Stoc/
&a9 Materials 2<!<<<
-inised goods 7!<<<
0uilding is occupied ;E)< by factory and )E)< by office. "roduction +<!<<< H6nitsG
Kou are re>uired to prepare a detailed cost statement so9ing
iG Materials consumed
iiG "rime cost
iiiG Wor.s on cost.
ivG Cost of production
vG Cost of sales and
viG "rofit earned
So+ution
Cost state,ent of t#e yea* en$e$ 56
t#
%une7 18813
)a*ticu+a* Tota+ Cost Cost 1e* unit
Opening $toc. of ra9
material
2<!<<<
Add "urcases )!<<!<<<
Add Carriage in9ard +!<<<
)!2+!<<<
Less Closing stoc. or ra9
materials
2<!<<<
i' "ate*ia+s consu,e$ )!<+!<<< 4.)<
*irect labour 7<!<<< 1!<<
ii' )*i,e Cost )!7+!<<< :.)<
Add: Facto*y o-e*#ea$s
'ndirect Wages )<!<<< <.4<
"o9er +!<<< <.)<
"lant Maintenance :!<<< <.2<
&ent! rates and taBes H;E)<G )!:<< <.<;
Misc. EBpenses +!<<< <.)<
&epairs 0uilding H;E)<G<.+< )!:<< <.+<
$alaries "lant 2<<< <.+<
*epreciation "lant 2!<<< <.<;
#0uilding H;E)<G )!:<< 12!<<< ).88
iii' 4o*/s cost )!;8!2<< ;.:8
Add: Office Overeads
BSPATIL
14
Office $alaries ++!<<< ).)<
&ents! &ates and TaBes H)E)<G +<< <.<)
Misc. eBpenses 2!<<< <.+<
&epairs 0uilding H)E)<G +<< <.<)
*epreciation# 0uilding H)E)<G +<< +7!7<< <.<) ).11
i-' Cost of )*o$uction +!+2!<<< )).+<
Add: Opening $toc. of
finised product
)<!<<<
+!12!<<<
Less: Closing stoc. of
finised goods
7!<<<
Cost of goo$s so+$ +!+:!<<<
Add: $elling and distribution
overeads
Carriage out9ards 7!<<<
Travelling eBpenses +!<<<
Advertising 7!<<<
AgentAs Commission )<!<<< +2!<<<
Cost of Sa+es 97:97666
A$$ )*ofit ,a*gin )!2:!<<<
-' Sa+es -a+ue 2!<<!<<<
)*ob+e, 9
Te cost of $ale of "roduct A is made up as follo9s(
Materials used in
Manufacturing
44<<< *irect EBpenses 4<<<
Materials used in "rimary
pac.ing
)<<<< 'ndirect EBpenses HfactoryG )<<<
Materials used in selling
product
)4<< Administration eBpenses )+4<
Materials used in -actory 84< *epreciation of office building
J e>uipments
84<
Materials used in office )+4< *ep. On factory buildings )84<
Labour re>uired in "roducting )<<<< $elling eBpenses 14<<
Labour re>uired for factory
supervision
+<<< -reigt on material purcased 4<<<
Advertising )+4<
Assuming tat all products are manufactured are sold! 9at sould be te selling price to be obtained as a profit
of +<L on selling priceM
Sol)tion
COST SEET
STATE"ENT OF COST AND )ROFIT
BSPATIL
15
Di*ect ,ate*ia+ Rs3 Rs3
Materials used in manufacturing 44<<< )<<<<<
Materials used in primary pac.ing )<<<<
-reigt on material purcased 4<<< 8<<<<
*irect labour )<<<<
*irect eBpenses#factory 4<<<
*irect eBpenses#factory :4<<<
"&'ME CO$T
-actory overeads 84<
Labour re>uired for factory supervision +<<<
'ndirect eBpenses factory )<<<
*ept. on factory building )84< 44<<
WO&N$ CO$T ;<4<<
Administration O#3
Materials used in O3)< )+4<
Administration eBpenses )+4<
*ept. on office building e>uipment 84< 1+4<
CO$T O- "&O*6CT'O, ;184<
$ellings *istribution O#3
Materials used in selling te product )4<<
$elling eBpenses 14<<
Advertising )+4< 7+4<
CO$T O- $ALE$ )<<<<<
"rofit H+<L on selling price or +4L on costG +4<<<
$ELL',I "&'CE )+4<<<
"roblem 1
-rom te follo9ing data prepare a cost J profit statement of %iCay stoves manufacturing company for te year );;<.
$toc. of materials as on
).).);;<
14<<< Establisment eBpense )<<<<
$toc. of materials as on
1).)+.);;<
2;<<< Completed stoc. in and
).).;<
#
"urcase of materials 4+4<< Completed stoc. in and
1).)+.;<
14<<<
*irect 9ages ;4<<<
-actory eBpenses )84<< $ales ):;<<<
Te number of stoves manufacturing during te year );;< 9as )<<<. Te company 9ants to >uote for te contract for
te stoves to be >uoted are of uniform >uality and ma.e similar to tose manufacturing in te previous year. 0ut cost of
materials as increased )4L and cost of factory labour by )<L. "repare a statement of net profit to be >uoted to give te
same percentage of net profit of turnover as 9as realiDed during te year );;< assuming tat te cost per unit of O.3.
carges 9ill be te same as te previous year.
BSPATIL
16
Sol)tion
COST AND )ROFIT STATE"ENT OF STO;ES 1886
Amount &s. Amount &s.
Opening $toc. of Materials 14<<<
"urcase of Materials 4+4<<
:84<<
Closing stoc. of Materials 2;<<
%OL6ME O- MATE&'AL CO,$6ME* :+7<< +<.74
*irect 9ages ;4<<< +1.84
"&'ME CO$T )887<< 22.2<
-actory eBpenses )84<< 2.18
WO&N CO$T );4)<< 2:.88
Establisment eBpenses )<<<< +.4<
CO$T O- "&O*6CT'O, +<4)<< 4).+8
Opening completed stoc. #
Cost of production during te prd +<4)<<
Closing completed stoc. 14<<<
CO$T O- $ALE$ )8<)<<
"&O-'T ):;<<
$ELL',I "&'CE ):;<<<
STATE"ENT SO4ING !UOTATION )RICE FOR 1666 STO;ES
Materials consumed +<74<
)4L increase 1<;:
+182:
-actory 9ages +184<
)<La increase +184
"&'ME CO$T +7)+4
-actory eBpenses 2;:81
218<
WO&N CO$T 42+21
Establisment eBpenses +4<<
TOTAL CO$T 47821
Hprofit )<L of selling price of )E; of costG 71<4
$ELL',I "&'CE 71<4:
BSPATIL
17
Lesson 9
"ate*ia+ Cost
Te term @materialsA refers to suc commodities 9ic are supplied to te manufacturing industry in teir crude
or original forms. Tey are ra9 in nature of ave to be processed furter. 0roadly! tese may be classified in te
follo9ing groups( &a9 materials! components! consumable stores! Maintenance Materials! Tools etc.
$ince te underlying purpose of cost accounting is to minimiDe te cost of production! it is important tat an
effective control is eBercised over tem. Te storage space and storage costs re reduce tereby. Control over materials is
also necessary to prevent eBtra#eBpenses on teir unnecessary purcase and improper use. A regular supply of materials
greatly elps te production scedule. 't is necessary! terefore! tat statements are prepared to accurately record te
value of materials consumed by eac department of Cob.
Material Cost Control envisages a proper organisatoin for te efficient purcasing and storing of te materials!
and for ma.ing tem issued to te departments or te cost#centres in appropriate >uantities. At te proper times and
valued at te rigt prices.
Te materials cost control aims at .eeping te material cost 9itin reasonable limits! budgets or standards.
Tis control is eBercised beginnings from te point te orders are prepared for being placed 9it te suppliers!
and ending at te point te materials are effectively utiliDed in production or are disposed off oter9ise.
Te follo9ing factors contribute to purcase control(
iG *etermination of /uantity to be purcased
/uantities purcased in eBcessive number or 9eigt bloc. te 9or.ing capital and te >uantities purcased belo9
te reasonable limit endanger te continuous 9or.ing of te factory.
iiG *etermination of te Ordering "oint
Te ordering point of te ordering level is one at 9ic te order for purcase of materials is to be placed 9it te
suppliers 9en te stoc. of tat material is reduced to tat point by consumption or oter9ise.
iiiG *etermination of "rice at 9ic to be purcased
Te selection of rigt suppliers and te best terms available out of te >uotations received elps tis factor.
+%e $)rc%ase c"cle constit)tes t%e !ollo,ing:
). 'nitiating te purcaseF
+. &eceiving of te "urcase &e>uisitionsF
1. *eciding important factors relating to purcaseF
2. $electing te suppliersF
4. "lacing purcase#orders and follo9#up
7. &eceiving te supply and returning un9arranted suppliersF
8. 'nspecting te material receivedF and
:. "assing invoices for payment.
+%e i#portant !actors to be decided are:
aG Wat to purcaseF
bG Wen to purcaseF and
cG 3o9 muc to purcase.
After receiving te "urcase &e>uisitions! te neBt step is to select te suppliers to 9om te orders may be sent for
te supply. Tis is done by inviting tenders or >uotations from different suppliers.
Wile inviting te tenders! te supplying firms sould be re>uested to state teir terms and conditions of supply!
delivery time! mode of payment! etc.! clearly and to send te tenders in sealed covers.
3aving accepted te tenders! te orders are place by te "urcase *epartment 9it te firms selected fro te
purcase of re>uisitioned materials.
Te purcaser order sould be prepared on te printed form and sould contain all te necessary details! so as to
BSPATIL
18
leave no room for any ambiguity or doubt and so as to avoid legal complications.
-ollo9#up of te "urcase order if essential to .eep te scedule of supply by te specified date so tat
production 9or. may not suffer.
Te &eceiving *epartment cec.s te supply from te copy of te "urcaser order and prepares is report of te
goods received.
Te 'nspection *epartment ma.es an inspection of te goods received regarding te >uality and specifications.
Sto*es Reco*$s
13 (in Ca*$
A 0in card! also .no9n as 0in Tag or $toc. card! is a card so9ing >uantitative record of te receipts! issues and
closing balances of te material .ept in te corresponding bin. Te 0in card is placed in te bin or self or is ung
over te almira or te rac. oter9ise .no9n as @0inA. $eparate 0in cards are prepared for eac item of stores and if
t9o different materials are .ept in one almira! t9o 0in cards! one for eac! are prepared! treating te almira as t9o
bins.
93 Sto*es Le$ge*
$tores Ledger is a record of stores! bot in >uantity and value and is maintained by te stores Accountant. 't is
similar to 0in card but 9it te main difference tat value of material is so9n in te $tores ledger. $tores Ledger is
an important boo. and te account of eac item of stores is maintained separately. Wile 0in cards are maintained
by store#.eeper in te store! $tore Ledger is maintained in te accounting department by te $tores Accountant.
"ate*ia+ Cont*o+ an$ its Re<ui*e,ents
= @Material ControlA may be defined as te regulation of te procedures for re>uisitioning! buying! receiving!
storing! andling and usage of materials?.
Te main re>uirements of a system of material control are(
"lanning and fiBation of definite responsibility for eac function of material.
Co#ordination bet9een departments responsible for re>uisitioning! purcasing! receiving! inspecting! storing
and utiliDing te materials!
CentraliDation on purcases.
6se of material purcase budget and material re>uirement budget.
6se of standard and uniform forms! and
"roper system of stoc. control.
-or proper application of te material control te follo9ing steps are necessary.
). "urcasing of materials
+. &eceiving and inspecting of materials
1. $toring of materials
2. "ricing material 'ssues
4. Accounting materials losses.
7. Neeping pysical and perpetual inventory
)u*c#asing of "ate*ia+s
'n a large manufacturing concern! a separate purcase department is set up 9it te obCect of effecting all purcases.
Te top management lays do9n te purcase department. 't is te function of te purcaser department to decide( iG
Wat to purcaserF iiG Wen to purcaseF iiiG form 9ere to purcaseF ivG o9 muc to purcase! and vG finally at
9at price te material sould be purcased.
BSPATIL
19
"aintenance of Stoc/ Le-e+s
Te neBt important point after determination of EO/ is to decide as to 9en te order for purcase sould be
placed. Te ans9er is simple. Te order for purcase sould be placed 9en te stoc. is reduced by usage to te Order
"oint. Te Order "oint is one 9ere te order sould be placed for te economic order >uantity. -or deciding Order
"oint! t9o tings! viD.! H)G Lead time and H+G 6sage during Lead time! are te determining factors. Lead time is te
supply time! or to be more specific! Lead Time is =te time interval bet9een placing an order and aving materials on
te factory floor ready for productionO?
6sage means te sue of materials by consumptions for productions! or te stoc. of finised goods sold.
$ometimes purcase are made in large bul. in a season if te goods are seasonal! i.e.! available in one season
only! or at a time 9en it is feared tat te goods may not be found available in te near future due to some reason.
$pecial items for 9ic no limit or order#points are fiBed may be purcased as and 9en needed.
To avoid over#stoc.ing and under stoc.ing eac items of te inventory as te MaBimum Level. Minimum
Level and an Order point.
O*$e* )oint
't is also .no9nF @Ordering LevelAF or @ &ecorder "ointA! or @&eordering Level or @Ordering LimitA! it as been
stated earlier tat Order "oint is at 9ic order for supply of materials or goods is placed. To decide te Order
"oint! tree factors are considered! viD.! H)G Lead time H+G 6sage during Lead time! and H1G Minimum Limit! or
te $afety stoc..
'n order to ensure tat te optimum >uantity of material is purcased and stoc.ed! neiter less nor more! te
store.eeper applies scientific tecni>ues of materials management. -iBing of certain levels for eac items of
materials is one of suc tecni>ues.
Te follo9ing levels are generally fiBed.
). MaBimum level
+. Minimum level
1. Order level
2. *anger level
13 "a2i,u, +e-e+
Te maBimum stoc. level indicates te maBimum >uantity of an item of material 9ic can be eld in stoc. at any
time.
Te maBimum stoc. can be calculated by applying te follo9ing formula.
MaBimum level &e#order level + re#order >uantity Hminimum consumption P minimum re#order periodG
93 "ini,u, +e-e+
Minimum level represents te >uantity belo9 9ic te inventory of any items sould not allo9ed to fallF in oter
9ords! an enterprise must maintain minimum >uantity of stoc. so tat te production is not ampered due to non#
availability of materials. 'f some buffer inventory is acting as a cusion against reasonable eBpected maBimum
usage.
-or#)la:
Minimum level Q &e#order level H,ormal consumption B normal re#order periodG
53 Re.o*$e*ing Le-e+ )oint
&e#ordering stoc. level in relation to an items of stoc. is te point at 9ic it becomes essential to initiate purcase
orders for its fres supplies. ,ormally! re#ordering level is a point bet9een te maBimum and te minimum levels.
-res orders must be placed before te actual stoc.s touc te minimum level.
&eorder level Q maBimum re#order period B maBimum usage.
=3 Dange* +e-e+
Te danger level is belo9 te minimum level and represents a stage 9ere immediate steps are ta.en for getting
BSPATIL
20
stoc. replenised. Wen te stoc. reaces danger level it is indicative tat if no emergency steps are ta.en to
restoc. te material! te stores 9ill be completely eBausted and normal production stopped. Ienerally te danger
level of stoc. is fiBed above te minimum level but belo9 te re#ordering level.
Econo,ic O*$e* !uantity Ana+ysis
.cono#ic /rder 0)antit"
Tis represents te normal >uantity to be placed on order 9en te stoc. as reaced its re#order level. &e#
ordering >uantity is to be fiBed ta.ing into account te maBimum and minimum stoc. levels. Te >uantity ordered must
be tat 9ic! 9en added to te minimum stoc.! 9ill not eBceed te maBimum stoc. to be carried at any point of time.
Te follo9ing factors govern te re#ordering >uantity.
). Average consumption
+. Cost of pacing order
1. Cost of storage
2. 'nterest on capital etc.!
Carrying cost of inventory consists of
iG Te costs of pysical storage! suc as cost of space! andling and up.eep eBpenses! insurance! cost of
obsolescence etc.
iiG 'nterest on capital invested Hte opportunity cost of te capital bloc.ed upG and
iiiG Cost of placing te order eac time.
Economic order >uantity or economic lot siDe Hif it relates to productionG refers to te number ordered in a single
purcase or number of units sould be manufactured in a single run so tat te total costs#ordering or set up costs and
inventory carrying costs are at te minimum level. 'n oter 9ords! it is te >uantity tat sould be ordered at one time so
as to minimiDe te total of
iG Cost of placing orders and receiving te goods! and
iiG Cost of storing te goods as 9ell as interest on te capital invested. Te economic order >uantity can be
determined by te follo9ing simple formula.
EO/ Q Economic order >uantity or number of units in one lot.
A Q Annual usage in units
$ Q Ordering costs for one order Hor set#up costs for one set#upG
' Q 'nventory carrying costs per unit per year.
This formula is based in three assumptions:
iG "rice 9ill remain constant trougout te year and >uantity discount is not involved.
iiG "attern of consumption! variable ordering costs per order and variable inventory carrying carge per unit per
annum 9ill remain te same trougout! and
iiiG EO/ 9ill be delivered eac time te stoc. balance! eBcluding safety stoc.! is Cust reduced to nil.
)*ob+e, 1
$uppose te annual consumption is 784 units! )<L is te interest and cost of storing an article costing &s. 1< per
unit! cost of placing and order is &s. ):. Calculate te E.O./.
Sol)tion:
BSPATIL
21
Were A Q Annual usage
$ Q Ordering cost for one order
' Q 'nventory carrying costs per unit per year.
)*ob+e, 9
T9o components A and 0 are used as follo9s(
,ormal usage 4< units per 9ee. eac
Minimum usage+4 units per 9ee. eac
MaBimum usage 84 units per 9ee. eac
&e#order >uantity A(1<< units 0(4<< units
&e#order period A(2 to 7 9ee.s 0(+ to 2 9ee.s
Calc)late !or eac% co#ponent:
aG &e#order level bG Minimum level
cG MaBimum level dG Average stoc. level
Sol)tion
&e#order level Q MaBimum consumption R maBimum re#order period
Component A Q 84R7 Q 24< units
Component 0 Q 84R2 Q 1<< units
Minimum level Q &e#order level H,ormal consumption R ,ormal re#order periodG
Component A Q 24<#H4<R4G Q +<< units
Component 0 Q 1<<#H4<R1G Q )4< units
MaBimum level Q &e#order level + &eorder /uantity
HMinimum consumption R Minimum re#order periodG
Component A Q 24< + 1<< H+4R2G Q 74< units
Component 0 Q 1<< + 4<< H+7R+G Q 84< units
Average $toc. level Q S HMinimum level + MaBimum levelG
Component A QSH+<<+74<G Q 2+4 units
Component 0 Q SH)4<+84<G Q 24< units
Nee$ fo* In-ento*y Cont*o+
BSPATIL
22
Te term @'nventoryA is used to denote HiG goods a9aiting sale Hte stoc. items of a trading concern and te
finised stoc.s of a manufacturerGF HiiG te goods in course of manufacture! .no9n as 9or.#in#progress! and HiiiG goods
to be used directly or indirectly in production! i.e.! ra9 materials and supplies.
'n a manufacturing company! normally te cost of materials constitutes fifty percent of te production cost and
te cost of inventory Hi.e.! ra9 materials W.'.".! and finised goodG represents about one#tird of te total assets. As te
costs of materials and inventory are >uite formidable but at te same time controllable! tere is a great need felt for
proper planning! purcasing! andling and accounting for te same! and also to organiDe te system of inventory control
in a manner tat it may provide te maBimum profitably to te management.
Objecti-es of In-ento*y Cont*o+
Te obCectives of inventory control as listed belo9(
). To eBercise proper control on te purcases and issues of inventoriesF proper storingF elimination of 9astageF
and regulating te proper supplies to 9or.s and to customersF
+. "ricing of te inventories on suitable basisF
1. "roper recording! and scientific inventory management
2. To ave proper assessment of income troug te process of matcing appropriate costs against revenues.
4. To maintain inventory of sufficient siDe for te operations to go on uninterruptedly but te siDe sould matc
9it te optimum financial involvement.
Tec#ni<ues of In-ento*y Cont*o+
Te tecni>ues or te tools generally used to effect control over te inventory are te follo9ing(
). 0udgetary tecni>ues for inventory planningF
+. A#0#C. $ystem of inventory controlF
1. Economic Order /uantity HE.O./.G i.e.! o9 muc to purcase at one time economicallyF
2. Maintenance of $toc. levels to decide 9en to purcaseF
4. "erpetual inventory system and te system of store verificationF
7. &eduction of surplus stoc.s and revie9 of slo9#moving or stagnant items.
8. Control &atios.
(u$geta*y Tec#ni<ues
-or te purcase of ra9 materials and stoc.s! 9at 9e re>uired is a purcase 0udged to be prepared in terms of
>uantities and values involved. Te sales stipulated as per sales 0udget of te corresponding period generally 9or.s out
to be te .ey factor to decide te production >uantum during te budget period! 9ic ultimately decides te purcases
to be made and te inventories to be planned.
A.(.C Ana+ysis
To eBercise proper control on stores! it is essential tat te store items sould be classified according to values
so tat te most valuable items may be paid greater and due a attention regarding teir safety and care! as compared to
oters. Te stores are divided into tree categories generally! viD.! A! 0! and C.
'n te A0C system! greatest care and control is to be eBercised on te items of @AA list as any loss or brea.age or
9astage of any items of tis list may prove to be very costlyF proper care need be eBercised on @0A list items and
comparatively less control is needed for @CA list items. Te rules relating to receipt maintenance issue and 9riting off
stores items sould be formed in accordance 9it te utility and value of te items based on te above categoriDation.
Manufacturing organiDations find it useful to divide materials into tree categories for te purpose of eBercising
selecting control on materials. An analysis of te material cost 9ill so9 tat a smaller percentage of items may
represent a smaller percentage of te value of items te percentage number of 9ic is more or less e>ual to teir value
of consumption. 'tems falling in te first category are treated as @AA items! of te second category and @0A items and
items of te tird category are ta.en as @CA items. $uc an analysis of materials is .no9n as A0C analysis. Tis
tecni>ue of stoc. control is also .no9n as stoc. control according to value metod or al9ays 0etter Control metod or
"roportional parts value. Analysis metod. Tus! under tis tecni>ue of material control! materials are listed in @AA! @0A
and @CA categories in descending order based on money value of consumption.
A0C analysis measures te cost significance of eac item of materials. 't concentrated on important items! so it is also
.no9n as @Control by importance and EBceptionA.
BSPATIL
23
Ad*antages:
)G A $trict Control is eBercised on te items 9ic represent a ig percentage of te material costs.
+G 'nvestment in inventory is reduced to te minimum possible level.
1G $torage cost is reduced as a reasonable >uantity of materials! 9ic account for ig percentage of value of
consumption 9ill be maintained in te stores.
1.D Anal"sis:
%E* %ital! Essential! *esirable analysis is used primarily for control of spare parts. Te spare! parts can be
divided into tree categories vital! essential or desirable .eeping in vie9 te critically to production.
)e*1ectua+ In-ento*y Syste,
"erpectual 'nventory is a system of records maintained by te controlling department! 9ic reflects te
pysical movement of stoc.s and teir current balance. 't aims at devising te system of records by 9ic te receipts
and issues of stores may be recorded immediately at te time of eac transaction and te balance may be brougt out so
as to so9 te up#to#date position.
Te records used for perpectual inventory are(
H)G 0in CardsF
H+G $tore Ledger Accounts or $tores &ecord cardsF
H1G Te forms and documents used for receipt! issue and transfer of materials.
Ad*antages o! $erpect)al 2n*entor" s"ste#
). 't .eeps te record of stoc.s upto date.
+. Te materials are .ept 9itin te Minimum and MaBimum Limits. ,on#observance of te limits fiBed is
detected.
1. Te materials going out of stoc. are easily detected and purcased at te appropriate time to avoid te ris. of
closing do9n.
2. 't acts as a moral cec. on te staff of te stores *epartment and so te possibilities of loss or teft of materials
are minimiDed.
4. Te recording of stoc.s in 0in cards as 9ell as $tore &ecord cards minimiDes te error in entering te receipts
and issues of stoc.s.
7. Te discrepancies noted after pysical counting are detected and corrective action is ta.en promptly to avoid
future occurrence.
8. Te materials getting state or being 9asted are detected and placed in rigt atmospere.
:. Te prompt balancing of closing stoc.s enables >uic. preparation of final accounts.
;. Te slo9 moving inventories! obsolete or dormant stoc.s are brougt to te notice of te "urcase *epartment
so tat suc stoc.s may purcased future in lesser >uantities as re>uired.
)<. Te availability of correct figures of stoc.s elps in te insurance of te stoc.s.
Cont*o+ Ratios
Te control ratios are mainly t9o
H)G 'nventory Turnover &atio 9ic 9e ave studied and
H+G 'nput#output &atio.
31) 2n*entor" +)rno*er
'nventory Turnover is a ratio of te value of te materials consumed during a period to te average value of
inventory eld during tat period.
Certain materials are slo9 moving. 't means teir consumption rate >uite so9 and so capital remains loc.ed up and
storing costs continue to be incurred in suc materials if tese materials are stored in eBcess of te re>uirement te
rate of consumptions in terms of value or in terms of days is indicated by 'nventory Turnover ratio. Te number of
days in 9ic te average inventory is consumed can be ascertained by dividing te period by te 'nventory
turnover ratio.
'f te inventory turnover rate in terms of value of materials is ig! or if te lengt of te inventory turnover
period is sort! te material is said to be fast moving. $o if te rate of consumption is fast! or if te inventory
BSPATIL
24
turnover rate is good! it is a ealty measure of efficiency of materials control! as te capital employed is properly
utiliDed.
2. 2np)t-o)tp)t 4atio
Te 'nput#output &atio is te ratio of te ra9 material put into manufacture and te standard ra9 materials content
of te actual output.
Tis ratio enables one to find out 9eter te usage of te materials is favourable or not. A standard ratio of
input of materials and output of material sould be determined and te actual ratio sould be compared 9it te
standard ratio.
)*icing of "ate*ia+ Issues
Te pricing of issue of materials is not as simple as te pricing of receipts. As te issue are made out of te various
lots purcased at different prices! te >uestions arises as o9 to price te issues! tere are several metods used for
pricing te issues and te selection of a proper metod depends upon te follo9ing factors(
). Te type of 9or.#Cob or processF
+. &ange of price fluctuations and mar.et trendsF
1. Te 'nventory turnover period and te carrying or te non#carrying cost i.e.! te fre>uency of purcases and
E.O./.
2. Te need for maintenance of uniformity is costs of te products 9itin te industry.
4. Te nature and durability of te material 9eter it evaporates or srin.s! or absorbs moisture! etc.
"et#o$ of )*icing
Te various metods used for pricing of te materials are(
Cost $rice Met%ods:
). -irst in -irst out H-'-OG
+. Last in -irst out HL'-OG
1. 3igest in -irst out H3'-OG
2. 0ase stoc. price
A*erage price Met%ods:
). $imple Average
+. Weigted $imple Average
1. "eriodic Weigted Average
2. Moving $imple Average
4. Moving $imple Average
7. Moving Weigted Average
Fi*st in Fi*st out "et#o$ &FIFO':
6nder tis metod materials received first are issued first. After te first lot of te material purcased is over!
te neBt lot is ta.en up for issue. As suc! te materials are issued in te order in 9ic tey are received in te stores.
Te pricing of te issue of te first lot is done at te rate of purcase of te first lot. $imilarly! te pricing pattern follo9s
for te subse>uent lots. Te closing stoc. in tis metod is valued at te latest purcase price and tus it represents te
current conditions as far as possible.
Merits
). 't is simple to operate
+. Te materials are carged at costs only. $o te purcase price is recovered in full 9itout so9ing any
profit or loss on issue.
1. Tis metod is good 9ere
a. Te prices are fallingF
b. Te consumption rates of te materials is slo9
2. Te Closing stoc. is so9n at current rates.
De#erits
). 't is not suitable in te situation 9en te prices so9 a rising trend! as it 9ill carge te material at te
BSPATIL
25
lo9er rate tan te replacement rate.
+. Te same type of materials issued to t9o Cobs at t9o different prices 9ill so9 different costs.
1. 'f te prices fluctuate to muc! te clerical errors may be many.
Last in Fi*st Out &LIFO':
6nder tis metod! te material received last is issued first L'-O metod and as suc! pricing of issues is done
in te reverse order of purcases. 'n times of rising prices! tis metod is considered best for application! as te current
cost of materials contributes to te cost of production.
Merits
). Te material cost represents current prices eBcept 9en te purcases 9ere made long ago!
+. 't is simple to operate and te pricing is done on cost basis
1. 't relates current cost to current sale price! and enables te management to ma.e correct decisions.
2. 't is more useful 9en purcases are not too many and te prices are eiter steady or are rising. 't is more
suitable for bul.y materials 9it ig unit prices.
De#erits
). Wit ig fluctuations in rates! te calculations become more complicated! and give 9ay to more clerical
errors.
+. Te 9or. of pricing is eld up if te latest receipt rate is not readily available.
1. As in -'-O! costs of different batces of production are distorted and more tan one price is adopted! in
some cases! for pricing a single re>uisition.
2. Closing stoc. is valued at a cost 9ic does not represent current conditions.
ig#est in Fi*st Out &IFO':
6nder tis metod te material received at te igest price in te stoc. is issued first. Tis metod is good
9en it is desired to .eep te inventory value of te materials at te lo9est possible price.
(ase Stoc/ )*ice "et#o$
'n tis metod a minimum >uantity of stoc. is al9ays eld at a fiBed price as reserve in te stoc.. Tis
minimum stoc. is .no9n as base stoc. or te safety stoc. and is not used unless an emergency arises. Tis stoc. is
valued at long#run @normalA price! 9ile te stoc. in eBcess of tis stoc. is priced on some oter basis! usually are -'-O
or te L'-O basis. 't is not an independent metod in itself a it is conCoined 9it eiter -'-O or te L'-O metod.
Si,1+e A-e*age "et#o$
Te issue is prices at an average price and not at te eBact cost price as in te earlier metods. Te simple
average is calculated by dividing te total of te rates of te materials in te stoc. from 9ic te materials to be priced
could ave been dra9n! by te number of te rates of prices.
Tis metod can be used 9it advantage if
HaG Te purcase prices to not fluctuate considerably! and
HbG 't is difficult to identify te different issues of te materials.
4eig#te$ A-e*age "et#o$
Merits
). Tis metod irons out te 9ide fluctuations in te prices.
+. Wit every ne9 issue! a ne9 rate is not calculated.
1. Te total value of te material issued does not beave up and do9n to te total value of te material received! as
is te case 9it $imple Average Metod.
De#erits
). Calculations are tedious. "rices are 9or.ed out in decimals to get correct results.
+. A lot of materials purcased at a very ig price at one time continues to reflect its effect in te average! for a
considerable time after it is eBausted.
)e*io$ic Si,1+e A-e*age "et#o$
BSPATIL
26
Tis metod is similar to $imple Average Metod eBcept tat te average rate is calculated periodically! say
montly or >uarterly or once in te accounting period. 'f calculated montly! te average of te unit prices of all te
receipts during te mont is adopted as te rate for pricing issues during te subse>uent mont.
)e*io$ic 4eig#te$ A-e*age "et#o$
Tis metod is similar to Weigted Average Metod eBcept tat te calculation is made periodically! say at an
interval or one mont. Te rate so arrived is used for te issues made in te neBt mont.
"o-ing Si,1+e A-e*age "et#o$
Tis represents a price 9ic is obtained by dividing te total of te periodic simple average prices or a given
number of periods! te last of te periods being tat for 9ic te materials are to be issued! by te number of periods.
"o-ing 4eig#te$ A-e*age "et#o$
Tis is Cust similar to te Moving $imple Average Metod eBcept tat te periodic average price! in tis
system! is based on te 9eigted average.
)*ob+e, 5
)G $o9 te $tore Ledger entries as tey 9ould appear 9en using
iG -'-O
iiG L'-O
iiiG Weigted average metod
ivG $imple average metod
April ). 0alance 1<< units &s. 7<<E#
+. "urcase +<< units &s. 22<E#
2. 'ssued )4< units
7. "urcase +<< units &s. 27<E#
)). 'ssued )4< units
);. 'ssued +<< units
++. "urcase +<< units &s. 2:<E#
+8. 'ssued +4< units
Sol)tion
1' Sto*es Le$ge* Account as 1e* FIFO "ETOD
*ate *etails &eceipt 'ssued 0alance
/ty &ate Amt /ty &ate Amt /ty &ate Amt
April
)
0alance 1<< +E# 7<< # # # 1<< +E# 7<<
+ "urcase +<< +.+< 22< # # # 1<< +.<< 7<<
+<< +.+< 22<
2 'ssue )4< +.<< 1<< )4< +.<< 1<<
+<< +.+< 22<
7 "urcase +<< +.1< 27< )4< +.<< 1<<
+<< +.+< 22<
+<< +.1< 27<
)) 'ssue )4< +.<< 1<< +<< +.+< 22<
+<< +.1< 27<
); 'ssue +<< +.+< 22< +<< +.1< 27<
++ "urcase +<< +.2< 2:< +<< +.1< 27<
+<< +.2< 2:<
+8 'ssue +<< +.1< 27< )4< +.2< 17<
BSPATIL
27
4< +.2< )+<
Value of Closing Stock : 150 units at the rate of Rs !"0 #alue Rs $%0&'
9' LIFO "ETOD
*ate *etails &eceipt 'ssued 0alance
6nit &ate Amt 6nit &ate Amt 6nit &ate Amt
April
)
0alance 1<< +.<< 7<< # # # 1<< +.<< 7<<
+ "urcase +<< +.+< 22< # # # 1<< +.<< 7<<
+<< +.+< 22<
2 'ssue )4< +.+< 11< 1<< +.<< 7<<
4< +.+< ))<
7 "urcase +<< +.1< 27< 1<< +.<< 7<<
4< +.+< ))<
+<< +.1< 27<
)) 'ssue )4< +.1< 124 1<< +.<< 7<<
4< +.+< 7<<
4< +.1< ))4
); 'ssue 4< +.1< ))4 +<< +.<< 2<<
4< +.+< ))<
)<< +.<< +<<
++ "urcase +<< +.2< 2:< # # # +<< +.<< 2<<
+<< +.2< 2:<
+8 'ssue +<< +.2< 2:< )4< +.<< 1<<
4< +.<< )<<
Value of Closing Stock : 150 units ( Rs !00 #alue is Rs $00&'
5' 4EIGTED A;ERAGE "ETOD
*ate *etails &eceipt 'ssued 0alance
6nit &ate Amt 6nit &ate Amt 6nit &ate Amt
April
)
0alance 1<< +.<< 7<< # # # 1<< +.<< 7<<
+ "urcase +<< +.+< 22< # # # 4<< +.<: )<2<
2 'ssue # # # )4< +.<: 1)+ 14< +.<: 8+:
7 "urcase +<< +.1< 27< # # 44< +.)7 ))):
)) 'ssue # # # )4< +.)7 1+2 2<< +.)7 :72
); 'ssue # # # +<< +.)7 21+ +<< +.)7 21+
++ "urcase +<< +.2< 2:< # # # 2<< +.+: ;)+
+8 'ssue # # # +4< +.+: 48< )4< +.+: 12+
Value of Closing Stock : 150 units at the rate of Rs !!) #alue Rs $"!00&
=' SI")LE A;ERAGE "ETOD
*ate *etails &eceipt 'ssued 0alance
6nit &ate Amt 6nit &ate Amt 6nit &ate Amt
April 0alance 1<< +.<< 7<< # # # 1<< +.<< 7<<
BSPATIL
28
)
+ "urcase +<< +.+< 22< # # # 4<< +.)< )<4<
2 'ssue # # # )4< +.)< 1)4 14< +.)< 14
7 "urcase +<< +.1< 27< # # 44< +.)8 ));1..4<
)) 'ssue # # # )4< +.)8 1+4.4< 2<< +.)8 :7:
); 'ssue # # # +<< +.)8 212 +<< +.)8 212
++ "urcase +<< +.2< 2:< # # # 2<< +.+1 :;+
+8 'ssue # # # +4< +.+1 448.4< )4< +.+1 112.4<
Value of Closing Stock : 150 units at the rate of Rs !!$ #alue Rs $$"50
)*ob+e, =
Te follo9ing is te record of receipts and issues a certain material in te factory during a 9ee..
April );;8
). Opening 0alance 4< tonnes T &s. )< per tone.
'ssued 1< tonnes T &s. )< per tones
+. &eceived 7< tonnes T &s. )<.+< per tone.
1. 'ssued +4 tonnes T &s. )<.+< per tone Hstoc. verification reveals loss of toneG
2. &eceived bac. from orders )< tonnes T &s. )<.+< per tone
Hpreviously issued at &s. ;.)4 per toneG
4. 'ssued 2< tonnes T &s. )<.+< per tone.
7. &eceived ++ tonnes T &s. )<.1< per tone.
8. 'ssued 1: tonnes T &s. )<.1< per tone.
Sol)tion
Sto*es Le$ge* Account Un$e* LIFO
*ate &eceipts 'ssues 0alance
/ty &ate Amt /ty &ate Amt /ty &ate Amt
) 1< 4< )< 4<<
) 1< )< 1<< +< )< +<<
+ 7< )<.+< 7)+ # # # +< )< +<<
7< )<.+< 7)+
1 # # # +4 )<.+< +44 +< )< +<<
) )<.+< )<.+< 14 )<.+< 148
+< )< +<<
2 )< ;.)4 ;).4 12 )<.+< 127.:<
# # # +< )< +<<
12 )<.+< 127.:<
)< ;.)4 ;).4<
4 # # # )< ;.)4 1).4< +< )< +<<
1 )<.+< 1<7.< 2 )<.+< 2<.:<
7 ++ )<.1< ++7.7 +< )< +<<
2 )<.+< 2<.:<
8 # # # ++ )<.1< ++7.7
2 )<.+< 2<.:< : )<.<< :<.<<
)+ )<.<< )+<.<
BSPATIL
29
Closing $toc. : tonnes T &s. )< Q &s. :<E#
Sto*es Le$ge* Un$e* FIFO
*ate &eceipts 'ssues 0alance
/ty &ate Amt /ty &ate Amt /ty &ate Amt
) 1< 4< )< 4<<
) 1< )< 1<< +< )< +<<
+ 7< )<.+< 7)+ # # # +< )< +<<
7< )<.+< 7)+
1 # # # +< )< +<<
4 )<.+< 4) 44 )<.+< 47)
)Hloss
G
)<.+< )<.+< 42 )<.+< 44<.:<
2 )< ;.)4 ;).4 # 42 )<.+< 44<.:<
# # )< ;.)4 ;).4<
4 # # # 2< )<.+< 2<: )2 )<.+< )2+.:<
)< ;.)4 ;).4<
7 ++ )<.1< ++7.7 # )2 )<.+< )2+.:<
)< ;.)4 1).4<
++ )<.1< ++7.7<
8 # # # )2 )<.+< )2+.:<
)< ;.)4 ;).4< : )<.1 :+.2<
++ )<.1< ++7.7<
Closing stoc. : tonnes T &s. )<.1< Q :+.2<
BSPATIL
30
C#a1te* > 5
Labou* Cost
=Labour Cost! representing te uman contribution to production! is an important cost factor 9ic re>uires constant
control! measurement and analysis.?
A rational approac to te problems of labour! fair maintenance of 9age records for 9age ascertainment! fair
9age policy! and te incentives for earning more 9ages go a long 9ay in providing a sense of security and stability to
te 9or.men! in minimiDing te labour turnover! and in eBercising effective labour cost control.
Labour cost control aims at te control of te labour cost per unit of production and not at te reduction of te
9age rates of te 9or.men.
Efficiency of labour Ha concept meaningless to materialG as an important impact on te successful 9or.ing of a
business.
Labour cost is second maCor element of cost. "roper control and accounting for labour cost is one of te most important
problems of a business enterprise. 0ut control of labour cost presents certain practical difficulties unli.e te control of
material cost.
Labour costs represent te various items of eBpenditure $uc as(
Monetar" 5ene!its:
iG 0asic WagesF
iiG *earness Allo9anceF
iiiG EmployerAs Contribution to "rovident -undF
ivG EmployerAs Contribution to EmployeeAs $tate 'nsurance HE$'G $cemeF
vG "roduction 0onusF
viG "rofit 0onusF
viiG Old age "ensionF
viiiG &etirement IratuityF
-ringe 5ene!its:
iG $ubsidised -oodF
iiG $ubsidised 3ousingF
iiiG $ubsidised Education to te cildren of te 9or.ersF
ivG Medical facilitiesF
vG 3olidays payF
viG &ecreational facilities.
Economic utiliDation of labour is a need of te present day industry to reduce te cost of production of te products
manufactured or service rendered.
Control of labour costs is an important obCective of management and te realiDation of tis obCectives depends upon te
cooperation of every member of te supervisory force from te top eBecutive to foreman. -rom functional point of vie9!
control of labour cost is effected in large industrial concern by te coordinated efforts of te follo9ing siB departments#
)G "ersonnel *epartment!
+G Engineering *epartment!
1G &ate or time and Motion $tudy department
2G Time#Neeper *epartment
4G Cost Accounting *epartment
7G "ay#roll *epartment
-actors o*erning a Satis!actor" s"ste# o! &age $a"#ent
BSPATIL
31
Te follo9ing factors sould be considered 9ile evolving a suitable and a successful system of 9age payment.
aG Te system sould depend upon te nature of te 9or.ed and te efforts involved.
bG 't sould guarantee a minimum living 9age to ensure a satisfactory standard of living.
cG 't sould be based upon a scientific time and motion study.
dG 't sould be capable of being understood by al te employees.
eG 't sould be fleBible and capable of being adapted to canged circumstances.
fG 'ts incidence on te cost per unit sould be suc tat it does not form a considerable proportion of te total cost
per unit to deprive te employer of a fair margin of profit! given te mar.et price of te commodity produced by
concern.
gG 't sould reduce te labour turnover.
G Te cost of 9or.ing te system sould be te least.
iG 't sould boost employee morale.
CG 't sould be acceptable to trade unions.
.G 't sould be correlated to te capacity of te concern to pay.
-or labour#cost#control! te follo9ing factors sould also be .ept in vie9 9ile devising te system(
1. $rod)ction $lanning:
"roduction sould be so planned as to ave te maBimum and rational utiliDation of labour. Te product and
process engineering! programming! routing! and direction constitute te production#planning.
2. Setting )p o! standards
Wit te elp of 9or. study! time study and motion study are set up for production operations. Te standard
cost of labour so set is compared to te actual labour cost and te reasons for variations! if any! are loo.ed into.
$ Use o! labo)r b)dgets:
Labour budget is prepared on te basis of production budget. Te number and type of 9or.ers needed for te
production are provided for along 9it te cost of labour in te Labour budget. Tis budget is a plan for labour
cost and is based on te past data considered in future perspective.
4. St)d" o! t%e e!!ecti*eness o! &age-polic":
3o9 far te remuneration paid on te basis of incentive plan fro te departments elp te managerial control on
labour and eBercise labour cost control.
C#a*acte*istics of Goo$ 4age Syste,
1. -air to bot% t%e $arties:
Te system sould be suc as may be acceptable gladly to te employer and te employees. for tis purpose!
te employer sould decide te system in consultation 9it te 9or.ers.
2. .as" to Calc)late
Te 9or.ers sould be in a position to calculate teir 9ages correctly and feel sure tat tey ave been
correctly paid. Easy calculation 9ill elp te employer also in maintaining simple records.
3. 4elated to .!!icienc"
@-air remunerations for fair outputA! sould be te idea and remuneration sould be related to te individual
efficiency of te 9or.ers.
4. Mini#)# ,age g)aranteed
Tere sould be a guarantee of minimum 9ages to te 9or.ers to enable tem to maintain teir basic
BSPATIL
32
standards of life! and to do a9ay 9it uncertainty#concept.
5. 2ncenti*e-oriented
Te 9age system sould be suc tat te 9or.ers may feel encouraged to product more and earn more
9ages.
6. 0)alit" 2#pro*e#ent-oriented
'n te race to earn more 9ages 9it an increase in production! te cances are tat te >uality of te output
may deteriorate. Te system sould! terefore! ensure @better 9ages for better >ualityA.
De!inite ,age-base
Te basis or te metod of 9age payment sould be clearly defined and announced in advanced to te 9or.ers!
and it sould not be canged fre>uently to suit te interest of te employer! oter9ise a sense of distrust may develop in
te 9or.ers to9ards te sceme. A cange in te system sould be effected only after ta.ing te 9or.ers into
confidence.
(abo)r +)rno*er
Labour turnover is an indeB denoting cange in te labour force for an organisatoin during a specified period. 'n
every industry! 9or.s leave teir Cob a ne9 9or.ers ave to be appointed to replace tem. Te ratio of te replaced
9or.ers to te number of 9or.s is te Labour Turnover &atio. 'f more 9or.ers leave te factory! te turnover 9ould be
ig! and vice versa. A ig turnover is a costly affair and must be avoided.
Ca)ses o! (abo)r +)rno*er
Te 9or.ers leave te factory eiter by
iG &esignation! or by
iiG *iscarge by te employer! or
iiiG *ue to a cause not 9itin oneAs control.
Ca)se !or resignation
Te causes may be(
). Lo9 9ages paid as compared to te 9ages paid in oter factory 9ic e is induced to Coin.
+. 'll ealt and bad 9or.ing conditionsF
1. Lac. of safety measuresF
2. *issatisfactions due to various causes suc as
a. 3ours of 9or.
b. 'mproper placement
c. 6nfair metod of promotion!
d. 0ad relationsip 9it $upervisor! or 9it fello9#9or.ers in some cases.
Ca)ses !or Disc%arge
). 'ncompetenceF
+. 'nsubordination! disobedience! and disregard of te rules asn regulationsF
1. 6npunctuality or lac. of attention to dutyF
2. Accidents or suffering from infectious diseaseF
4. 'mmoral caracter.
Ca)ses not ,it%in control
). $easonal caracter of te industry 9ere 9or. is carried on during some part of te year onlyF
+. *eat of te 9or.erF
"easu*e,ent of Labou* Tu*no-e*
Labour Turnover is measured by applying any one of te follo9ing tree Metods(
1 Separation *ethod
BSPATIL
33
Multiplication of te formula by )<< indicated &atio of te turnover in percentage.
! Replacement *ethod
'n tis metod! only te actual replacement are counted irrespective of te number of 9or.ers left. 'f ne9 9or.ers are
appointed for eBpansion programme! tey are eBcluded from te number or replacements.
$ +lu, *ethod
Tis metod is te combination of Metod ) and Metod +.
Effect of Labou* Tu*no-e* on Cost
Te Labour Turnover in eBcess of normal rate is ig turnover! and te turnover belo9 te normal rate is lo9
turnover. 't is al9ays better to .eep te turnover lo9! but it sould nto be construed tat te factories 9it lo9 turnover
are al9ays more productive. Tere may be lo9 turnover in a factory for te reason tat te 9or.ers engaged terein are
belo9 standard and so tey cannot find better place in oter factories. $econdly! lo9 turnover in te senior scales may
not provide promotion factories. $econdly! lo9 turnover in te senior scales may not provide promotion opportunities to
te young and promising employees and so tey may li.e to sift to oter factories for better prospects.
A ig turnover as an adverse effect on te cost of production due to te follo9ing reasons(
). Cange in 9or.ers interrupts production and te production goes do9n.
+. ,e9 comers ta.e time in learning te factory procedure and te 9or. procedure.
1. Te tools and macines cannot be andled as efficiently by te ne9 9or.ers as iter to done by te old staff.
Tere are cances of more brea.#do9ns and of greater cost of repairs of macines.
2. Wat is true of macines is also true of material andling and usage by te ne9 9or.ers.
4. Te rate of accidents may increase! te rate of defectives in te finised output may increase! and tere may be
increased 9astage of time.
7. Te cost of ma.ing selections and cost of imparting training to te ne9 entrants 9ould furter increase te cost
and reduce te profits.
Cost of Labou* Tu*no-e*
Tere are t9o types of costs
iG "reventive cost and
iiG &eplacement costs
And amenities to te 9or.ers tat tey may be tempted to continue at teir Cob in te factory and not to leave it for
eBample(
iG "ersonnel Administration( Only tat portion of te cost of tis department 9ic is related to te
maintenance of good relationsip bet9een labour and management.
iiG Medical $ervices#"reventive as 9ell as curative.
BSPATIL
34
iiiG Welfare activities and services.
ivG Miscellaneous scemes and benefits! e.g.! "rovident fund sceme! "ension sceme! 0onus incentives
scemes! etc.
Te replacement costs are tose incurred to recruit ne9 9or.ers and also te costs conse>uent or incidental to
replacement! for eBample(
HiG Cost in selection and appointment
HiiG Training cost
HiiiG Loss of output due to delay in recruitment 9or.ers
HivG Cost of inefficiency of ne9 9or.ers
HvG Cost of brea.age of tools and macinery
HviG Cost of increased spoilage and defectives
HviiG Cost of fre>uent accidents
Te treatment of "revention and &eplacement costs is to carge tem as overead and apportion to te different
departments in te ratio of oter 9or.ers.
IDLE TI"E
Te time 9en te 9or.er does no 9or. and remains idle! is te idle time. $o te idle time cost represents te
9ages paid for te time lost. Te follo9ing are its causes(
1. (ac' o! proper planning:
Tat te production 9or. sould go on smootly! depends upon proper planning. 'f te 9or.ers do not ave material at
te rigt time! or te macines are not .ept fir for 9or.ing! te time goes 9aste. $ometimes! delay in te proceeding
process delays te operations of te succeeding progress. 3ere also te 9or.ers ave to 9ait due to faulty planning or
bad management.
2. Careless in S)per*ision:
'f te foreman of a department does not ta.e is duty seriously! te labour 9or.ing under im also becomes careless and
spoils time in te idle 9ay.
3. Con!rontation bet,een labo)r #anage#ent:
Te confrontation bet9een labour and management arising form any cause! does 9aste time in discussions! dialogues!
stri.es etc.! and te 9ages paid! if any! for tis period form te idle time cost.
4. .cono#ic -actors:
Trade depression! or serve competition lo9ers te production! and so labour remains effectively unutiliDed.
:3 Ot#e*s *easons:
Te electricity may fail or te macine may brea. do9n for some or more time. Tey ma.e labour to remain idle for te
time being.
'dle time does not limit itself in its effect to te 9ages paid for te time but is 9ider implications. Te plant! macines!
e>uipments! and oter accessories also become idle during tat period! and te fiBed cost continues to be incurred. As
suc! idle time need be reduced as far as possible.
'dle#time cost can be divided into t9o types(
HiG ,ormal! and
HiiG Abnormal
,ormal idle#time can be furter divided into
aG Controllable! and
bG 6ncontrollable.
,ormal idle#time is one 9ic is incidental to production. Te cost of normal and controllable idle time sould be
BSPATIL
35
carged as an overead eBpense to te production. 'f te responsibility for tis type of idle#time can be fiBed upon a
particular department! te cost sould be carged to te overeads of tat department and absorbed in te production
cost of tat department.
O;ER.TI"E
Te time 9or.ed over and above te normal ours is overtime. Te remuneration usually paid for te overtime 9or. is
at double te normal rate. Te need for over time 9or. arises due to(
). 'ncrease in demand for te products 9ere te production during te normal ours falls sort to meet itF
+. $ortage of 9or.ers due to absence or non#availability and so it is decided to give overtime 9or. to te eBisting
staffF
1. 6tiliDation of perisable ra9 materials by 9or.ing overtimeF
2. EBecution of urgent orders! or to complete te 9or. o;n te same dayF
4. $ortage of e>uipments! macines! or space for te completion of CobsF
7. Lac. of administrative control on 9or.ers! on account of 9ic te production during normal ours remains less
te standard output and overtime 9or. as to be done by te 9or.ers.
Disad*antages o! o*erti#e ,or'ing
Te follo9ing are te disadvantages(
). Wor.erAs ealt is adversely affectedF
+. Te >uality of te output is at a discountF and
1. Te cost of production rises due to increased labour cost.
S"ste# o! &age $a"#ent
$trictly spea.ing! tere are only t9o basic metods of 9age payment! viD.! 9ages based on te time spent in te
factory! and 9ages based on te >uantum of 9or. turned out. Tese are tus .no9n respectively as te @time 9ageA and
te @piece 9ageA metods of remuneration. $ince eac of tese as its o9n advantages and disadvantages! attempts are
made to combine te t9o! mainly 9it a vie9 to overcoming teir disadvantages. We ave terefore! te premium bonus
or te incentive scemes 9ic may eiter be considered to be merely variations of te t9o! or as anoter of 9age
payment. Tese tree metods may also be re#classified into only t9o groups! viD.! te time 9age system and te
payment by results.
"et#o$s of Re,une*ation
Te metods of remuneration can be classified into(
). Time &ate $ystem
+. "ieced &ate $ystem
1. 'ncentive $cemes
+i#e 4ate S"ste#
'n tis system! a 9or.er is paid on te basis of attendance for te day or according to te ours of te day!
regardless of te output. Tis system is also .no9n as time 9or.! day 9or.! day age rate or day rate. Te 9age rate of
te day 9or.er may be fiBed on ourly! daily! 9ee.ly! fortnigtly! or montly basis depending on te practice follo9ed
in te concern.
Te basic feature of tis system is tat te 9or.er is paid so muc per unit of time regardless of te output e
produces. Te unit of time may be an our! a day! a 9ee. or a mont. 6nder tis metod! 9ages depend entirely upon
te time cloc.ed! but not on te efficiency of te 9or.er. Tere are tree variants of tis system! eac differing only in
so far as te fiBation of te time rate is concerned. Tey are(
aG -lat Time or Time &ate at Ordinary levelF
bG 3ig *ay &ate or Time &ate at ig levelF
cG Measured *ay 9or. or Iraduated Time &ate.
BSPATIL
36
rad)ated +i#e 4ate
6nder tis metod 9ages are paid at time rates 9ic vary according to
a. Merit#rating of te 9or.ers! or
b. Canges in te cost of living indeB.
't te cost of living goes up! te 9ages also go up proportionately! and vice versa. Tus te 9or.s get te real 9ages.
$imilarly! te 9or.ers aving iger merit rating get iger 9ages! and te 9or.ers 9it lo9er rating get lo9er 9ages.
Di!!erential +i#e 4ate
Wor.ers are paid rate accounting to teir individual efficiency. Tey are paid normal rate upto a certain
percentage of efficiency and te rate increases in steps for efficiency slabs beyond te standard. As te efficiency is
measured in terms of output! tis metod does not fall strictly under te area of time rate system.
)ay,ent by Resu+ts.)iece.?o*/ Rate
Te payment of 9ages under tis system is based upon te out turn of te 9or.er. Te rate is fiBed per piece of
9or. and te 9or.er is paid according to te pieces of 9or. completed or te volume of 9or. done by im! irrespective
of te time ta.en by im in completing tat 9or.. A 9or.man is free to earn as muc as is ability! energy! or s.ill
9ould allo9 to im to produce.
Te various scemes falling under @"ayment by resultsA ma.e speed as te basis of payment! instead of time.
Accordingly! tese scemes are Cust te opposite of te time 9age system. Tey are so called because of te fact tat
9ages are lin.ed to te volume of 9or. done regardless of te time ta.en by 9or.ers. Efficiency is recogniDed in all
tese scemes and 9or.ers get 9ages according to teir avility! efficiency! and speed. Te follo9ing scemes fall under
te payment by results metod of 9age payment.
a. $traigt "iece &ate.
b. *ifferential "iece &ate.
Stabilit" o! t%e S"ste#
Tis system is suitable in te follo9ing cases(
). Were te production can be measured in standard units.
+. Were strict supervision is not possible.
1. Were >uality and precision are not of primary importance.
Ad*antages
). 't provide initiative and incentive to te 9or.ers to product more.
+. Te productivity increases and cost of production per unit goes do9n.
1. As tere is little 9astage of time on te part of te 9or.ers! te fiBed overeads and resources li.e plant!
macinery and space are 9ell utiliDed.
2. Wor.ers feel free to 9or.! complete 9it fello9 9or.ers! eBibit teir efficiency! and earn more of 9ages.
4. Less supervision is re>uired over te 9or.ers! and appy relations are maintained 9it tem.
7. 't is easy to calculate te labor of products.
Disad*antages
). 'n te race to earn more 9ages by producing more! te >uality of products is li.ely to deteriorate. $o it re>uires
strict inspection and >uality control.
+. Continuous and increased 9or.ing for some days may cause fatigue and ill ealt to te 9or.ers.
1. To speed up production! te macines! tools! and e>uipments are sometimes not andled 9it te care tat tey
re>uire! and so te 9or.ers eBpose temselves to accidents! besides causing loss of brea.do9n to te macines!
e>uipments etc.!
BSPATIL
37
2. Te inefficient 9or.ers earning less of 9ages start feeling Cealous of oter 9or.ers 9o earn more. Tis creates
unealty atmospere.
4. Te 9or.ers feel insecure of earning during te days of ill ealt! olidays! etc.
7. Tis system is not useful for >uality products.
Te piece rate $ystem can be classified into(
Straig%t $iece 4ates
't is a simple metod of ma.ing payment at a fiBed rate per unit for te units manufactured.
Earnings Q ,umber of units P &ate per unit
Te rate is fiBed ta.ing into consideration
a. Time rate for te same class of 9or.ers! and
b. $tandard output during a given time.
Di!!erential $iece 4ates
6nder tis system! efficient 9or.ers are paid 9ages at a lo9er rate. A definite standard of efficiency is set for
eac Cob and for efficiency belo9 or above te standard different piece rates are paid according to different levels of
efficiency. Te follo9ing t9o metods of 9age payment are studied under tis system(
a. Taylor *ifferential "iece#rate Metod! and
b. Merric. *ifferential "iece rate Metod
+a"lor Di!!erential $iece-4ate
-.W. Taylor tougt to improve te efficiency of 9or.ers by suggesting t9o rates of payment of 9ages(
H'G A iger rate to te 9or.ers 9o product e>ual to or more tan te standard fiBed for production during
te day! and
H''G A lo9er rate to te 9or.ers 9o do not acieve te standard.
Merric' Di!!erential $iece-rate
'n te Taylor Metod! te effect on te 9ages is >uite sarp in te marginal cases. To remove tis defect
Merric. suggested tree piece rates for a Cob as follo9s(
"ercentage of $tandard Output "ayment under Merric. Metod
6pto :1L ,ormal piece rate
Above :1L and upto )<<L ))<L of normal piece rate
Above )<<L )+<L of normal piece rate
Incenti-e Sc#e,es
-actors !or Selecting 2ncenti*e Sc%e#e
Te follo9ing factors sould be considered for selecting an incentive sceme(
1. $rod)cti*it"
Te obCect of te incentive sceme is to increase productivity. Terefore! tis factor is very important. Te increased
BSPATIL
38
productivity lo9ers te cost to te benefit of te employers.
2. Si#plicit"
Te sceme sould be simple in operations and 9ell understood by te 9or.ers. Te sceme sould be amenable to
te setting up of standards and te comparison of te results 9it te actual.
3. Cost 4ed)ction
Te sceme! 9en introduced! is bound to increase te pay#bill of te 9or.ers! and tus increase te cost. 0ut te
simultaneous increase in production 9ould reduce te cost per unit or production. Te fiBed overeads remain
constant up to a certain limit of plant capacity. As suc! te increased productivity reduces te cost of fiBed
overeads per unit.
4. 5etter (abo)r $s"c%olog"
Te sceme sould not affect 9or.erAs ealt adversely! sould reduce labour turnover and elp to improve te
standard of living of te 9or.ers.
6nder tis eading! 9e study te follo9ing metods(
H'G 3alsey "remium $cemeF
H''G 3alsey Weir $cemeF
H'''G &o9an "remium $cemeF
Halse" $re#i)# Sc%e#e
6nder tis plan!
HiG Time rate is guaranteedF
HiiG $tandard time is fiBed for te Cob or operationF
HiiiG Te 9or.ers producing more tan te standard! or te 9or.ers completing te 9or. in less tan te
standard time fiBed! get bonus in addition to te ordinary time 9ageF
HivG Te bonus of te premium! by 9atever name called! is 1< to 8< percent of te 9ages of time saved! te
usual percentage being 4<L!
HvG Te remaining of te bonus percentage is sared by te employer.
Merits o! Halse" $lan
HiG *ay 9age or te time rate is guaranteed. Even if output is less tan te standard! one gets te time 9ageF
HiiG Wor.ers get premium for te output above te standard. 't provides incentive to te 9or.ers to produce
moreF
HiiiG As te premium is not )<<L but only 4<L or so! te employers feel appy about it is a tey sare te
remaining 4<LF
HivG Te sceme is very simple and understood easily by te 9or.ers.
De#erits
HiG A significant sare of te bonus goes to te employers. $o te 9or.ers obCect to itF
HiiG 'ncentive is not so attractive as it is 9it te piece 9or.F
HiiiG Were te 9or.ers start saving more tan 4<L of te time! tey earn premium in uge amounts! 9ic
te employers do not relis.
Halse" 7 &eir Sc%e#e
Tis scedule is similar to 3alsey sceme eBcept tat in tis sceme te 9or.ers and employers sare te
BSPATIL
39
premium in )(+ ratio.
4o,an $re#i)# Sc%e#e 3*ariable s%aring plan)
Mr. 5ames &o9an introduced tis sceme in Ilasgo9 in ):;:. 't is similar to 3alsey sceme but te premium
concept ere is different. 3ere te premium is in te ratio of Time saved to $tandard time! calculated on te ordinary
9ages.
"remium Q Wages of time 9or.ed B Time saved E $tandard Time
OrF HAT x &G T$ E $T
Tis sceme also guarantees day 9age as is done by 3alsey "lan.
)*ob+e, 1
Calculate te earnings of a 9or.er from te follo9ing information as under.
aG Time &ate Metod( $tandard time 1< ours Time ta.en +< ours. 3ourly rate of 9ages of &e. ) per our plus a
dearness allo9ance 4< paise per our 9or.ed.
Sol)tion
+i#e 4ate Met%od:-
Time "ut in by 9or.ers x &ate per our Q 1< x ) Q &s. 1<
)*ob+e, 9
On te basis of te follo9ing information calculate te earnings of A and 0 on te straigt price &ate basis and TaylorAs
differential piece rate system.
$tandard "roduction : units per our
,ormal time rate &s. <.2< per our
Di!!erential to be applied:-
:<L of piece rate belo9 standard
)+<L of piece rate at or above standard. 'n a ; our day! A produces 42 units and 0 products 84 units.
Sol)tion
$tandard production per our : units
,ormal time rate per our &s. <.2<
"iece &ate &s. <.2<E: Q &s. <.<4
Earnings under te straigt piece rate system(#
A( 42 units T &s. <.<4 Q &s. +.8<
0( 84 units T &s. <.<4 Q &s. 1.84
Di!!erential $iece 4ate:-
Lo9 "iece rate( :<L of piece rate H<.<4 x :< E )<<G Q &s. <.<2
3ig "iece rate( )+<L of piece rate Q H<.<4 x )+< E )<<G Q &s. <.<7
BSPATIL
40
$tandard output per our is : units! $o $tandard Output for a ; our day is 8+ units. A produces only 42 units 9ic is
less tan te standard output of 8+ units. $o e is entitled to get a lo9er price rate of &s. <.<2 per unit. On te oter
and! 0As output of 84 units is more tan te standard output of 8+ units. $o $A is to get iger piece rate of &e. <.<7
per unit.
AAs earning( 42 units T &e. <.<2 Q &s. +.)7
0As earning( 84 units T &e. <.<7 Q &s. 2.4<
)*ob+e, 5
Calculate te earning of 9or.ers A!0 and C under Merric.As multiple piece system from te follo9ing particulars.
,ormal rate per 3our &s. ).:<
$tandard time per unit ) minute
-utput per da. as follo/s:'
Wor.er A( 1:2 units
Wor.er 0( 24< units
Wor.er C( 44+ units
Wor.ing ro9s per day are :
Sol)tion
$tandard output per minute Q ) units
$tandard "roduction per our Q 7< units
$tandard "roduction per day of : our Q 2:< units
i.e. H7< x :G
,ormal rate per our Q &s. ).:<
,ormal output per our Q 7< units
Terefore ,ormal piece rate Q H)<:<E7<G x 4 paise
Calculation of le#el of 0erformance:'
$tandard output per day Q 2:< units
Wor.er AAs Output per day Q 1:2 units
Wor.er AAs level of performance Q H1:2E2:<G x )<< Q :<L
Wor.er 0As Output per day Q 24< units
Wor.er 0As level of performance Q H24<E2:<G x )<< Q 21L
Wor.er CAs Output per day Q 44< units
Wor.er AAs level of performance Q H44<E2:<G x )<< Q ))4<L
1arnings of /orkers A:'
Merric.As multiple piece rate system(#
-or 1:2 units T 1 paise per unit Q H1:2 B 1G E)<< Q )).4<
,ormal piece rate as been applied because 9or.er AAs level of performance is :<8. Wic is belo9 :1L.
1arning of 2orker 3:'
-or 24< units T 1.1 "aise per unit Q 24< B 1.1E)<< Q &s. )2.:4
Wor.er 0As level of "erformance is ;1.84L 9ic is bet9een :1L and )<<L. $o e is entitled to get ))<L of
BSPATIL
41
normal piece rate.
1arning of 2orker C:'
-or 44+ units T 1.7 paise per unit Q H44+ B 1.7GE)<<
&s. );.:8
Wor.er CAs level of performance is ))4L 9ic is more tan )<<L of standard output. $o it is entitled to get )+<L of
normal "iece rate.
)*ob+e, =
Calculate te earnings of 9or.ers A and 0 under straigt piece rate system and TaylorAs differential piece rate system
from te follo9ing particulars.
,ormal &ate per our &s. +.2<
$tandard time per unit 1< seconds
4ifferentials to be applied:'
:<L of piece rate belo9 standard
)+<L of piece rate at above standard
Wor.er A produces :<< units per day and
Wor.er 0 produces )<<< units per day.
Sol)tion
3ourly "roduction Q Q )+< units
"iece rate Q Q <.<<4
Lo/ piece rate:'
L"& Q :<L of normal piece rate
Q :<L x <.<<4
Q <.<<2
5igh piece rate:
3"& Q )+< of <.<<4
Q <.<<7
$tandard "roduction per day Q )+< units x :
Q ;7< units
Computation of earnings of A and 3:'
A 0
,ormal "iece &ate <.<<4 <.<<4
"roduction per day :<< )<<<
$tandard "roduction
"er day ;7< units ;7< units
a. $traigt piece &ate $ystem :<< x <.<<4 )<<< x <.<<4
Earning &s. 2.:< &s. 4
BSPATIL
42
17<<
)<<<
)+<
+.+)<
b. TaylorAs *ifferential piece
&ate <.<<2 x :<< <.<<7 x )<<<
&s. 1.+ &s. 7.<<
)*ob+e, :
-rom te follo9ing data! total montly remuneration of tree 9or.ers A! 0 and C under te
6ant7s Task and 3onus Scheme:'
iG $tandard "roduction per mont per 9or.er is )<<< units.
iiG Actual "roduction during te mont A Q :4< units!
0 Q )<<< units
C Q ))<< units
iiiG "iece 9or.s rate 4< paise per unit
Sol)tion
$tandard "roduction per mont is )<<< units and piece rate is 4< paise per unit so guaranteed montly payment
is &s. 4<< Hi.e. )<<< units T 4< paiseG
Le#el of 0erformance:'
$tandard output per mont )<<< units
Wor.er AAs Output :4< units
Wor.er AAs level of "erformance Q B )<< Q :4L
2orkers 37s -utput:'
Wor.er 0As level of "erformance B )<< Q )<<L
2orkers C7s -utput:'
Wor.er CAs level of "erformance B )<< Q ))<L
1arning of 2orker A:'
Wor.er AAs level of "erformance is :4L 9ic is belo9 te standard performance so it 9ill get &s. 4<< te
guaranteed montly payment.
1arning of 2orker 3:'
Wor.er 0As level of performance is )<<L so e 9ill get piece 9ages for )<<< units plus +<L bonus
"iece Wages for )<<< units T 4< paise per unit &s. 4<<
Add( +<L bonus i.e. H4<< B +< GE)<< &s. )<<
Total earning &s. 7<<
1arning or 2orker C:'
Wor.er CAs level of "erformance is ))<L 9ic is more tan te standard "erformance so e 9ill get piece
9age prices +<L bonus.
BSPATIL
43
:4<
)<<<
)<<<
)<<<
))<<
)<<<
Thus dis earnings are as follo/s:'
"rice 9ages for )!)<< units T 4< paise per unit &s. 44<
Add( +<L bonus H44< B +<GE)<< &s. ))<
Total earning &s. 77<
)*ob+e, @
Te eBisting incentives system of a certain factory is
,ormal 9or.ing 9ee. 4 days of ; ours plus 1 rate sifts of 1 rs eac.
&ate "ayment # *ay9or. Q &e. ) per our
# Late sift Q &s. ).4< per our
Additional bonus payable &s. +.4< per day sift
&s. ).4< per Late sift
Average output per operative for 42 our 9ee. )+< articles i.e. including 1 Late sifts
'n order to increase output and eliminated overtime it 9as decided to 9it on to a system of payment by results te
follo9ing information is obtained.
Time rate &e. ) per our
0asic time allo9ed for )4 articles 4 ours
"iece 9or. rate Add +<L to piece
"remium Add 4<L to time
Kou are re>uired to so9
iG 3ours 9or.ed
iiG Wee.ly earnings
iiiG ,umber of articles produce and
ivG Labor cost per article for one operative under te follo9ing sysem
aG EBisting time rte
bG $traigt piece 9or.
cG &o9an system
dG 3alsay 9eir system
Assume tat )14 articles produces in a 24 ours 9or. under HbG HcG and HdG and tat te 9or.er earns alf time saved
under te 3alsay system. Te additional bonus under te eBisting system 9ill be discontinued on te proposed incentive
sceme.
Sol)tion
aG EBisting time &ate(# &s.
Wee.ly 9ages 24 rs. T &e. ) per our 24<<
; rs T &e. ).4< per our )1.4<
*ay sift bonus 4 B +.4< )+.4<
Late sift bonus 1 B ).4< 2.4<
Total Earning 84.4<
b8 0iece rate s.stem:'
BSPATIL
44
0asic time ( 4 ours for )4 articles
Terefore cost of )4 articles 4.<<
Add( +<L ).<<
Total Earning 7.<<
Terefore &are per article &s. 7.<< E )4 Q &s. <.2<
Articles products in a 9ee. Q 24 B )4E4 Q )14
3ence Earning Q )14 B <.2< Q &s. 42.<<
c8 Ro/an 0remium S.stem:'
0asic time Q 4 rs for )4 articles
Adding 4<L Q 8S as for )4 articles
Terefore time for producing one articles
Q 8S rs E )4 Q 1< minutes
Terefore time allo9ed for )14 articles Q 78 S rs
Actual time ta.en for )14 articles 24 rs
Terefore time saved Q ++S rs
Earning Q Time 9ages B HL of time saved E $tandard TimeG B Time 9age
Q 24 B ) + H++S E 78SG B 24 Q 24 + )4 Q 7<
d8 5alsa.'2eir 0remium S.stem:'
Earning Q Time 9age + 4<L HTime saved B Time rateG
Q 24 B ) + 4<L H78S # 24G B )
Q 24 + )).+4 Q &s. 47.+4
Te oter re>uirements of te problems ave been so9n in te follo9ing table(#
*ethods:'
a b c d
iG 3ours 9or.ed 24 42 24 24
iiG Wee.ly earning &s. 84.4< 42.<< 7<.<< 47.+4
iiiG Articles produces )+< )14 )14 )14
ivG Labour cost per article <.7+; <.2<< <.222 <.2)8
)*ob+e, A
Te Wor.er earns &s. + as bonus T 4<L. $o total bonus at )<<L sould be &s. 2. Te ourly rate of 9ages being &e.
). Te time saves sould be 2 ours.
$tandard time allo9ed # )< ours
Less( time saved # 2 ours
Time ta.en # 7 ours
A 9or.er completes a Cob in a certain number of ours. Te standard time allo9ed for te Cob is )< rs! and te ourly
rate of 9ages Hi.e. &e. ) te 9or.er earns at te 4<L rate of bonus &s. 6nder 3alsay plan.
Ascertain dis total /ages under the Ro/an premium plan:'
Sol)tion
BSPATIL
45
Te 9or.er earns &s. + as bonus at 4<L so total bonus at )<<L sould be &s. 2. Te ourly rate of 9ages being
&e. ) te time saved sould be 2 rs.
$tandard time allo9ed )< ours
Less( Time saved 2 ours
Time ta.en 7 ours
1arning under the roman 0remium 0lan:'
Earning Q T B & + H$ T E $G B T B &
Were T Q Time ta.en i.e.! 7 ours
$ Q $tandard time i.e. )< ours
& Q &ate per our i.e. &e. )
Terefore Earning Q 7 B ) + H)<#7E)<G B 7 B )
Q &s. 7 + &s. +.2<
Q &s. :.2<
)*ob+e, B
-or a certain 9or. order te $tandard time is +< ours! 9ages &s. 4 per our te actual time ta.en is )1 ours and
factory overead carges are :<L of standard time.
$o out a comparative statement so9ing te effect on paying 9ages 3alsay plan.
Sol)tion
Earning Q A.T B T.& + 4<L HT.$. B T.&G
Q )1 B 4 + 4<L H8 B 4G
Q 74 + )8.4
Q &s. :+.4<
)*ob+e, 8
A Wor.man 9ose basic rate of pay is &e. ) per our of 9or.ing under te @&o9anA system of premium bonus. 'n
addition e gets dearness allo9ance of &s. +< per 9ee. of 2: ours. *uring one 9ee. e does te follo9ing Cobs.
iG 5ob )<) for 9ic +4 ours are allo9ed. 3e ta.es +< ours.
iiG 5ob )<+ for 9ic 1< ours are allo9ed e ta.es +2 ours.
*uring te 9ee.! is 9aiting time amounts to 2 ours. -ind te 9or.erAs earning and te amounts to be carged to eac
Cob and to overead.
Sol)tion
Wor.ers earning form 5ob )<) (#
$tandard time +4 ours
Time ta.en +< ours
&ate per our &e. )
Wages for actual time Q +< rs T ) &e.
"remium according to &oman $ystem
BSPATIL
46
Q Time ta.en B &ate per r. + HTime saved E $tandard timeG B Actual time B &ate per r
Q +< B ) + H4E+4G B +<
Q &s. +2 &s. +2.<<
0roportion of dearness allo/ances:'
Q +< B H+4E44G
Earning from Cob )<) &s. ;.<;
Total &s. 11.<;
The /orkers earning from 9ob 10!:'
$tandard time Q 1< ours
Time ta.en Q +2 ours
&ate per our Q ) &e.
Earning Q T B & + HT.$ E$tdG B A.T B &
Q +2 B ) + H7E1<G B +2
Q +2 + 2.:
Q &s. +:.:<
0roportion of 4earness allo/ance:'
Q +< B H1< E 44G
Q &s. )<.;)
Earning from Cob )<+ &s. 1;.8)
Total earning of the /orker:'
5ob )<) Q &s. 11.<;
5ob )<+ Q &s. 1;.8)
&ead Q &s. 2.<<
Total Q &s. 87.:<
)*ob+e, 16
Te guaranteed time table is &e. ) per o9 ig piece rate is &e. <.+< per unit and standard output is )< units per our.
'n a day of : ours! A produces 8< units and 0 produces :< units and C produces ;< units. Calculate te earning of A!0
and C under Iantt tas. plan.
Sol)tion
$tandard Output at )< units per our is :< units.
AAs output is belo9 te $tandard
0As output is at te standard and CAs output is above te standard.
Accordingly A gets time 9ages! 0 gets a bonus of +<L of te time rate and C gets ig piece rate.
Earnings( A Q : ours B &e. ) Q &s. :
0 Q : ours B &e. ).+< Q &s. ;.7<
C Q ;< ours B &e. <.+< Q &s. ):
BSPATIL
47
)*ob+e, 11
$tandard output is )< units per our and basic 9age rate is &e. ).4< per our. 'n a day of : ours. A produces 2< units. 0
84 units and C produces ;< units. Calculate te 9ages of A!0 and C under Merric.As differential piece rate.
Sol)tion
$tandard output Q )< units per our
0asic 9age &ate Q &s. ).4< per our
"iece rate Q ).4< E )< Q &s. <.)4
$ercentage e!!icienc":-
Q HActual output E $tandard outputG B )<<
-or A Q H2< B )<<E:<G Q 4<L
-or 0 Q H84 B H)<<E:<G Q ;1.84L
-or C Q H;< B )<<E;<G Q ))+.4L
AAs efficiency being less tan :1L e is paid te ordinary piece rate. 0As efficiency being :1L to )<<L. 3e is paid at
))<L of ordinary piece rate. CAs efficiency being more tan )<<L e is paid at )+<L.
Tus( A gets 2< B &e. <.)4 Q &s. 7.<<
0 gets 84 B <.)74 Q &s. )+.18
C gets ;< B &e. <.): Q &s. )7.+<
BSPATIL
48
Lesson > =
O;EREAD COST
Overead is =te aggregate of indirect material cost! indirect 9agers Hindirect labor costG and indirect eBpenses?.
Classi!ication o! /*er%eads
Te Overeads can be classified according to(
iG ElementsF
iiG -unctionsF
iiiG 0eaviourF
ivG ControllabilityF
.le#ent-,ise classi!ication
Overead Materials Cos is te 9ic cannot be allocated but 9ic can be apportioned to! or absorbed by! cost
centres or cost units. Consumable stores! lubricating oil! loose tools! cotton 9aste! etc. are te eBamples.
'ndirect Labour Cost is te cost of 9ages 9ic cannot be allocated but 9ic can be apportioned to! or
absorbed by! cost centres or cost units. $alary of foremen! supervisors! 9or.s manager! store.eepers! etc. Wages of
maintenance dept. employerAs contribution to provident -und! overtime 9ages! etc.! are te eBamples.
'ndirect EBpenses are te eBpenses 9ic cannot be allocated but 9ic can be apportioned to! or absorbed by!
cost centres or cost units. -actory rent! ligting! eating! depreciation! insurance! oter factory eBpenses! all
administrations! selling! and distribution eBpenses fall under tis group.
O-e*#ea$ is $i-i$e$ acco*$ing to functions into:
iG "roduction or Manufacturing OvereadF
iiG Administration OvereadF
iiiG $elling OvereadF
ivG *istribution Overead
$rod)ction /*er%ead
't includes all overeads incurred from te stage of procurements of materials till te completion of te
manufacture and te primary pac.ing of te product.
). &ent! municipal taBes! depreciation! insurance! etc.! of te factory land and building.
+. *epreciation insurance etc. of te factory plant! macines and e>uipments.
1. -actory ligting! eating and air conditioningF
2. -uel and po9erF
4. Consumable stores! small tools! etc!F
7. 'ndirect materials! suc as cotton 9aste! lubricating oil! bruses etc.F
8. &epairs of factory building! plant! macines and e>uipments.
:. $tore#.eeping eBpensesF
;. Cost of idle time! overtime! oliday pay etc.
)<. $alary of foremen! time.eepers! 9or.s manager etc.F
)). &epairs and maintenance of "o9er ouseF
)+. Oter eBpenses! e.g.! Wor.erAs training and 9elfare! 'nspection! &esearc and *evelopment! -actory telepone
and $tationary etc.
C+assification Acco*$ing to (e#a-iou*
BSPATIL
49
-i8ed /*er%eads
-iBed overeads is one 9ic tends to be unaffected by variation in volume of output. Tis overead remains
constant! i.e.! does not cange 9it te increase or decrease in production! 9itin a certain range. Te fiBed overeads
are related to te periods! and so te fiBed costs are also .no9n as "eriod Costs! e.g.! te rent of te building or te
salaries of te office staff.
1ariable /*er%eads
Te variable overead is one 9ic tends to vary directly 9it volume of output. Te variable cost increases in
direct proportion 9it te increase in production! and decrease in production. 't is .no9n as *irect cost.
$alesmanAs CommissionF *iscounts to customersF 0ad debtsF 0ranc eBpensesF "ostageF $tationeryF TravellingF
$alesmanAs eBpensesF "ac.ing cargesF Carriage out9ardF %ariable eBpenses on delivery vansF etc.
't means tat a part of te eBpenses does not cange 9ile te oter part of te same eBpense carges 9it
volume of output. Ienerally! on costs are truly fiBed or truly variable.
Classi!ication According to Controllabilit"
Te overeads can be classified on te basis of controllability into aG Controllable! and bG 6n#controllable.
Te controllable cost is one 9ic can be controlled! i.e.! maintained or reduced. Te variable costs fall under
tis category. Te un#controllable cost is one 9ic cannot be influenced by te action of a specified member of te
underta.ing.
Allocation o! cost
Allocation of cost means carging te full amount a cost to a cost centre! i.e. to te Cob! process! or to te
product etc. Te nature of te eBpense is suc tat it can easily be identified and allocated to te cost centre or to te cost
unit of production.
Apportion#ent o! cost
Were te eBpense is a common one and it is to be allotted to different cost centres proportionately on an
appropriate basis! it is .no9n as @apportionmentA. -or eBample! rent of te factory is an eBpense 9ic cannot be
allocated to any one department! but is to be sared by all te production departments and service department! on
suitable basis! e.g.! floor area basis.
Absorption o! /*er%ead
Wit te elp of allocation and apportionment! te different production departments get teir due sare of te
total production overeads. After tat! te process of absorption starts. Te overeads of a particular department are to
be allotted to te production units of te department. Tis allotment to te unity is absorption.
Abilit" to $a" $rinciple9 .!!icienc" or 2ncenti*e principle:
Overeads is to recover or absorb te overeads in te cost of products! individual Cobs! processes! batces! or
oter convenient units. Te overeads falling to te sare of a department troug te process of allocation or
apportionment! is to be absorbed by te cost units of tat department. Tis is .no9n as @Absorption of overeadsA.
)*ob+e, 1
BSPATIL
50
Te ,e9 Enterprises Ltd.! as tree "roduction *epartments A!0!C and t9o $ervice *epartments * and E. Te
follo9ing figures are eBtracted from te records of te company(
&s.
&ent and rates 4!<<<
Ieneral ligting 7<<
'ndirect Wages )!4<<
"o9er )!4<<
*epreciation of Macinery )<!<<<
$undries )<!<<<
Te follo9ing furter details are available(
Total A 0 C * E
-loor $pace
H$>. ftG
)<!<<< +!<<< +!4<< 1!<<< +!<<< 4<<
Ligt points 7< )< )4 +< )< 4
*irect
Wages H&s.G
)<!<<< 1!<<< +!<<< 1!<<< )!4<< 4<<
3.". of
Macines
)4< 7< 1< 4< )< #
%alue of
Macinery
H&s.G
+!4<!<<< 7<!<<< :<!<<< )!<<!<<< 4!<<< 4!<<<
Wor.ing
3ours
# 7!++7 2!<+: 2!<77 # #
Te eBpenses of * and E are allocated as follo9s(
A 0 C * E
* +<L 1<L 2<L # )<L
E 2<L +<L 1<L )<L #
Wat is te total cost of an article if its ra9 material cost is &s. 4<! labour cost &s. 1< and its passes troug
*epartments A!0 and C for 2!4 and 1 ours respectivelyM
Sol)tion
Statement of Allocation and Apportionment of -#erhead:
Total "roduction $ervice &ate of Appointment
&s. A 0 C * E
*irect Wages +<<< # # # )4<< 4<< Actual
&ent J &ates 4<<< )<<< )+4< )4<< )<<< +4< &e. <.4 per
s>.ft.
Ieneral
Ligting
7<< )<< )4< +<< )<< 4< &s. )< per
"oint
'ndirect Wages )4<< 24< 1<< 24< ++4 84 &s. <.)4 per
&e. of
*irect
9ages
"o9er )4<< 7<< 1<< 4<< )<< # &s. "er 3.".
*epreciation )<<<< +2<< 1+<< 2<<< +<< +<< 2L of value
of
macinery
BSPATIL
51
$undries )<<<< 1<<< +<<< 1<<< )4<< 4<< )<<L of
*irect
Wages
1<7<< 844< 8+<< ;74< 27+4 )484
$ervice *ept.
*
# ;77 )22; );11 #2:1) 2:1
1<7<< :4)7 :72; ))4:1 #+<7 +<4:
$ervice *ept.
*
# :+1 2)+ 7)8 +<7 #+<4:
1<7<< ;11; ;<7) )++< # #
Wor.ing ours # 7++7 2<+: 2<77 # #
&ate per ours # )4< ++4 1<< # #
Ascertainment of cost of an article &s.
Material 4<.<<
Labour Cost 1<.<<
:<.<<
Overead cost
*ept. A! 2 rs T ).4< Q 7.<<
*ept. 0! 4 rs T +.+4 Q )).+4
*ept. C! 1 rs T 1.<< Q ;.<< +7.4<
&s. )<7.+4
,ote( $undry eBpenses are apportioned on te basis of direct 9ages.
)*ob+e, 9
Kou are supplied 9it te follo9ing information and re>uired to 9or. out te production our rate of recovery of
overead in *epartment A!0! and C.
"roduction *epartments $ervice
*epartments
Total A 0 C " /
"articulars( &s. &s. &s. &s. &s. &s.
&ent )+<<< +2<< 2:<< +<<< +<<< :<<
Electricity 2<<< :<< +<<< 4<< 2<< 1<<
'ndirect
Labour
7<<< )+<< +<<< )<<< :<< )<<<
*epreciation
of Macinery
4<<< +4<< )7<< +<< 4<< +<<
$undries 24<< ;)< +)21 :28 1<< 1<<
Estimated
9or.ing rs.
)<<< +4<< )2<<
EBpenses of $ervice *epartments " and / are apportioned as under(
A 0 C " /
" 1<L 2<L +<L # )<L
/ )<L +<L 4<L +<L #
BSPATIL
52
Sol)tion
a' Re1eat Dist*ibution "et#o$
O-e*#ea$ Dist*ibution Su,,a*y fo* t#e 1e*io$CCCCC
Total A 0 C " /
"articulars( &s. &s. &s. &s. &s. &s.
&ent )+<<< +2<< 2:<< +<<< +<<< :<<
Electricity 2<<< :<< +<<< 4<< 2<< 1<<
'ndirect Labour 7<<< )+<< +<<< )<<< :<< )<<<
*epreciation of
Macinery
4<<< +4<< )7<< +<< 4<< +<<
$undries 24<< ;)< +)21 :28 1<< 1<<
Total &s. 1)4<< 8:)< )+421 2428 2<<< +7<<
*epartment " )+<< )7<< :<< #2<<< 2<<
;<)< )2)21 4128 # 1<<<
*epartment / 1<< 7<< )4<< 7<< #1<<<
;1)< )2821 7:28 7<< #
*epartment " ):< +2< )+< #7<< 7<
;2;< )2;:1 7;78 # 7<
*epartment / 7 )+ 1< )+ #7<
;2;7 )2;;4 7;;8 )+ #
*epartment " 2 4 1 #)+ #
Total &s. 1)4<< ;4<< )4<<< 8<<< # #
Wor.ing 3ours )<<< +4<< )2<<
&ate per 3our ;.4< 7.<< 4.<<
bG E>uation Metod Halternative metodG
Let B be te eBpenses of $ervice *epartment "F and
y be te eBpenses of $ervice *epartment /.
Ten B Q 2<<< + )E4y Hsince +<L of y 9ell be apportioned to *epartment "G F and
y Q +7<< + )E)<B
Q +7<< + )E)< H2<<< + )E4yG! substituting te value
of B(
Q +7<< + 2<< + )E4<y
Q 1<<< + )E4<y
4<y Q )4<<<< + y
2;y Q )4<<<<
y Q 1<7)
B Q 2<<< + )E4 B 1<7) Q 2!7)+
O-e*#ea$s Dist*ibution Su,,a*y
"roduction *epartments $ervice *epartments
A 0 C " /
&s. &s. &s. &s. &s.
Total as given above 8!:)< )+!421 2!428 2!<<< +!7<<
EBpenses of *ept. "
H&s. 2!7)+G
)!1:2 )!:24 ;++ #2!7)+ 27)
EBpenses of *ept /
H&s. 1!<7)G
1<7 7)+ )!41) 7)+ #1.<7)
BSPATIL
53
&s. ;!4<< )4!<<< 8!<<< # #
,o. of 9or.ing ours )!<<< +!4<< )!2<<
&ate per our ;.4< 7.<< 4.<<
)*ob+e, 5
Te follo9ing information are available for "roduction departments A!0! J C te $ervice te *ept * J E.
"articular "roduction *ept $ervice *ept
Total A 0 C * E
&ent )<<< +<< 2<< )4< )4< )<<
E.0 +<< 4< :< 1< +< +<
-ire 'ns 2<< :< )7< 7< 7< 2<
"lant *ept 2<<< )<<< )4<< )<<< 1<< +<<
Transport 2<< 4< 4< 4< )<< )4<
Te eBpenses of services dept * J E are apportioned as under
A 0 C * E
* 1<L 2<L +<L # )<L
E )<L +<L 4<L +<L #
Apportion te eBpenses of service dept to production dept by
)G &epeated *istribution Metod
+G $imultaneous E>uation Metod
Sol)tion
RE)EATED DISTRI(UTION "ETOD
O-e* ea$ Ana+ysis S#eet
"roduction *epartments $ervice *epartments
A 0 C " /
&s. &s. &s. &s. &s.
&ent +<< 2<< )4< )4< )<<
E.0. 4< :< 1< +< +<
-ire! 'nsur :< )7< 7< 7< 2<
"lant *ept. )<<< )4<< )<<< 1<< +<<
Transport 4< 4< 4< )4< )<<
Total EBp. )1:< +);< )+;< 71< 4)<
$ervice *ept. *L ):; +4+ )+7 71< 71
)47; +22+ )2)7 # 481
$ervice *ept EL 48 ))4 +:7 ))4 481
$ervice *ept EL 14 27 +1 ))4 ))
$ervice *ept *L ) + 7 + ))
$ervice *ept *L ) ) # + #
Total )771 +7<7 )81) #
BSPATIL
54
(0 SI"ULTANEOUS E!UATION "ETOD
Total A 0 C * E
Total )1:< +);< )+;< 71< 4)<
*L 1<L 2<L +<L # )<L
EL )<L +<L 4<L +<L #
Let B be te total eBp of * to be apportioned
Let y be te total eBp of E to be apportioned
B Q <.+y + 71< H)G
y Q <.)B + 4)< H+G
$ubstituting te value of B in H+G
y Q <.) H<.+y 71<G + 4)
Q <.<+y 71 + 4)<
<.;: y Q 481
Terefore y Q 4:4
Terefore B Q 828
A 0 C
)1:< +)1< )+;<
$ervice *ept * 1<L (
2<L ( +<LHof 828G
++2 +;; )2;
$ervice *ept E H)(+(4 of
4:4G
4: ))8 +;1
Total )77+ +7<7 )81+
)*ob+e, =
$uperfine Ltd. as furnised te follo9ing particulars for te alf year ended Marc 1)! );:+. Compute te
deprs OE3 rates. -or te eac of te productions department assuming tat te OE3 carges are recovered as a L of
direct 9ages.
"articular "roduction *ept. $ervice *ept.
A 0 C * E
*irect Wages 2<<< 7<<< :<<< +<<< 2<<<
*irect Material +<<< 2<<< 2<<< 1<<< 1<<<
,o. of Employee )<< )4< )4< 4< 4<
E0 NW3 :<<< 7<<< 2<<< +<<< +<<<
Ligt point )< )7 2 7 2
Assert value )+<<<< :<<<< 7<<<< +<<<< +<<<<
Area occupied :s;
meters8
)4< +4< )<< 4< 4<
Over 3ead eBpenses for te above period
BSPATIL
55
Motive "o9er 11<<
Ligting 2<<
$tores eBp :<<
$taff 9elfare 2:<<
*eprecation 1<<<<
&epair )4<<<
&ent J &ates )+<<
Ieneral eBp )+<<<
Apportion te eBpenses of service dept * in proportion to te direct 9ages J tat of E in te ratio 4(1(+ to
production dept A!0!C
Sol)tion
O;ER EAD DISTRI(UTION SU""AR0
"articular A 0 C * E
*irect Material # # # 1<<< 1<<<
Wages +<<< 2<<<
"o9er 2(1(+()() )+<< ;<< 7<< 1<< 1<<
Ligting 4(:(+(1(+ )<< )7< 2< 7< 2<
$tores eBp.
+(2(2(1(1 HMaterialG
)<< +<< +<< )4< )4<
$taff +(1(1()() 17< )22< )22< 2:< 2:<
*eprec. 7(2(1()() )+<<< :<<< 7<<< +<<< +<<<
&ent J rates
1(4(+()()
1<< 4<< +<< )<< )<<
&epairs Hassert
ratioG
7<<< 2<<< 1<<< )<<< )<<<
Ieneral eBp. Hstaff
ratioG
+2<< 17<< 17<< )+<< )+<<
Total +1<7< )::<< )4<:< )<+;< ++8<
Abortionment of
$er. dept * in te
ratio of 9ages
++:8 121< 2481 # #
Abortion of E in te
ratio 4(1(+
7114 17:) +242 # #
Total 1)8<+ +4:)) +);<8 # #
Over 3ead &ecovery Has per te rate 9agesG
*ept A Q H1)8<.+E2<<<G B )<< Q 8;+.44L
*ept 0 Q H+4:).)E7<<<G B )<< Q 21<.+L
*ept C Q H+);<.8E:<<<G B )<< Q +8+.:L
BSPATIL
56
Abso*1tion of o-e*#ea$ cost
Absorption means allotment of overead cost of Cobs i.e.! 9it a vie9 to carging te same amount of overeads
in respect of te departments of cost centre 9ere it is spent.
"et#o$s of Abso*1tions
Tere are various metods of absorptions! some of 9ic generally used are given belo9(
aG *irect Labour Cost Metod.
bG *irect Labour 3ours Metod
cG Macine 3our &ate
dG "rime Cost Metod
eG Conversion Cost Metod
Mac%ine Ho)r 4ate Met%od
Tis Metod is applicable 9ere 9or. is carried on mostly by te macines because te overeads in suc a case are
more related to te macines. Te factory overeads of te factory are ppportioned to te different macines or group of
macines. An individual macine is treated to be a cost centre! and sometimes a group of macines 9ic 9or. togeter
in Co#operation is treated to be a cost centre fro te purpose of apportionment. Te 9or.ing ours of a macine are
calculated for te period for 9ic te macine is to run. Macine our rate is scientific! practical and accurate. 't elps
in finding out idle macines cost and also in decision ma.ing.
)*ob+e, :
Wor.out te macine our rate for te follo9ing macine! 9ose scrap value is nil(
). Cost of Macine &s. ;<!<<<
+. Oter carges e.g. freigt and installation &s. )<!<<<
1. Wor.ing life )< years
2. Wor.ing ours +!<<< per year
4. &epair carges 4<L of *epreciation
7. "o9er )< units per our! T )< paise per unit
8. Lubricating oil T &s. + per day of : ours.
:. Consumable stores T &s. )< per day of : ours
;. Wages of operator T &s. 2 per day.
BSPATIL
57
Sol)tion
Computation of *achine 5our Rate
Macine ,oOO..
$tanding Carges 0er da.
&s.
0er hour
&s.
Lubricating Oil +
Wages 2
Consumable $tores )<
)7
3ourly rate H)7+:G +.<<
"ac#ine E21enses
*epreciation cost &s. )!<<!<<<
Kearly depreciation )<!<<<
3ourly depreciation )<<<< + +<<< 4.<<
&epairs 4<L of depreciation +.4<
"o9er )< units T )< paise per unit ).<<
Macine our rate HCompreensiveG )<.4<
)*ob+e, @
Compute from te follo9ing information relating to macine ,o. ):! macine our rate
&s.
Cost of macine ))!<<<
$crap value 7:<
&epairs for te effective 9or.ing life )!4<<
$tanding carges for 2 9ee.ly period )!7<<
Effective 9or.ing life )<!<<< ours
"o9er used 7 units T 4 paise per unit
3ours 9or.ed in 2 9ee.ly period )+< ours.
,o. of macines in te 9or.sop is 2<! of 9ic eac bears e>ual carges.
Sol)tion Computation of Macine 3our &ate
Macine ,o. ):
"er our
&s.
$tanding carges )7<< EH2<B)+<G 11
Macine EBpenses
*epreciation cost ))!<<<
Less#scrap value # 7:<
%alue to be 9ritten off &s. )<!1+<
3ourly rate Q )<!1+< + )<!<<< ).<1
&epairs &s. )!4<< for entire life
3ourly rate )4<< + )<!<<< )4
"o9er consumed 7 units T 4 paise per unit 1<
Macine 3our &ate ).:)
BSPATIL
58
)*ob+e, A
Calculate te macine our rate from te follo9ing(
&s.
Cost of Macine :!<<<
Cost of 'nstallation +!<<<
$crap value after )< years +!<<<
&ates and rent for a >uarter for te sop 1<<
Ieneral ligting +< p.m.
$op supervisorAs salary 7<< p.a. >uarter
'nsurance premium for a macine 7< p.a.
Estimate repair )<< p.a.
"o9er + units per our T &s. 4 per )<< units
Estimated 9or.ing our p.a. +!<<<
Te macine occupier )E2
t
of te total area of te sop. Te supervisor is eBpected to devote ).7
t
of is time for
supervising te macine! Ieneral ligting eBpenses are to be apportioned on te basis of floor area.
Sol)tion
Computation of *achine 5our Rate
*achine <o:
"er year "er our
Standing C%arges: &s. &e.
&ent and &ates )E2
t
1<<
Ieneral ligting as per floor area 7<
$upervisorAs $alary )E7
t
2<<
'nsurance premium 7<
Total yearly $tanding carges :+<
3ourly rate :+< + +!<<< <.2<
Mac%ine e8penses
*epreciation Cost :!<<<
'nstallation +!<<<
Total )<!<<<
Less $crap value +!<<<
Amount to be 9ritten off &s. :!<<< <.2<
&epairs etc. <.<4
"o9er + units T 4 paise per unit <.)<
Macine 3our &ate <.;7
BSPATIL
59
)*ob+e, B
Calculate te macine our rate! for te macine ,o. 24 from te follo9ing particulars(
&s.
Cost of Macine )<!<<<
Estimated scrap value +4<
Estimated 9or.ing life )4!<<< ours
3ours re>uired for maintenance +<< ours
"roductive 9or.ing ours p.a. +!<<< ours
$etting up time 4L
"o9er +< units T 8 paise per unit
Cost of repairs p.a. )!4<<
,o. of operators loo.ing after 2 macines +
Wages of operator p.m. )4<
Cemical re>uired p.m. )<<
Overeads cargeable to tis macine +<< p.m.
'nsurance premium )L p.a.
Sol)tion
Calculation of Macine 3our &ate
Macine ,o. 24 "er our
&s. &s.
Kearly $tanding Carges
Overeads &s. +<< B )+ Q +!2<<
'nsurance )L of )<!<<< Q )<<
Wages H+ B )4< B )+G E 2 Q ;<<
Total 1!2<<
Effective 9or.ing ours in a year )!;<<
Terefore 1!2<< ).8;
)!;<<
Macine EBpenses
*epreciation &s. H)<!<<< +4<G E )4!<<< <.74
&epairs &s. )!4<< + )!;<<<.8;
Cemicals &s. H)<< B )+G E );<< <.71
"o9er 8 paise B +< units ).2< ).2<
Macine our rate 4.+7
,ote( 't as been presumed tat te ours re>uired for maintenance ave already been adCusted in te total yearly ours.
$econdly 4L time needed in setting up! as been considered as productive! and ence as been adCusted accordingly i.e.
as normal loss in terms of ours for it as already caused in increase in macine our rate. Also it is presumed tat no
po9er is used in setting up operations.
)*ob+e, 8
Compute compreensive macine our rate from te follo9ing data(
HaG Total of macine to be depreciated &s. +!1<!<<<
Life )< yearsF *epreciation on straigt line.
HbG *epartmental overeads HannualG(
&ent 4<!<<<F 3eat and ligt +<!<<< F supervision )!1<!<<<.
HcG *epartmental Area 8<!<<< s>. metres.
Macine Area +!4<< s>. metres.
HdG +7 macines in te department.
HeG Annual cost of reserve e>uipment for te macine &s. )!4<<.
BSPATIL
60
HfG 3ours run on production ):<<
HgG 3ours for setting and adCusting +<<
HG "o9er cost &s. <.4< per our of running time.
HiG Labour H)G 9en setting and adCusting! full time attention
H+G 9en macine is producing! one man can loo. after 1 macine
HCG Labour rate &s. 7 per our.
6sing te macine our rate as calculated value 9or. out te amount of factory overead to be absorbed on te
follo9ing(
Total ours "roduction time $etting up time
rs
5ob ,o. 7<4 )<< :< +<
5ob. ,o. 4;4 )<< :< 1<
Sol)tion
Computation of compreensive macine our rate
$tanding carges
&ent! eat and ligt H8<!<<< B +!4<<G E 8<!<<< +4<<
$upervision H)!1<!<<< G E +7 4!<<<
*epreciation )<L of &s. +!1<!<<< +1!<<<
&eserve e>uipment cost H)4<<E+7G 4:
Labour cost during setting and adCustment +<< rs T &s. 7 Q
H)!+<< E 1)!84:G
3ourly &ate for standing carges 1)!84: E ):<< )8.72
Macine carges
"o9er <.4<
Labour H)E1 of &s. 7G +.<<
Compreensive macine our rate +<.)2
'f te macine our rate over te various Cobs 9ill be(
5ob ,o. 7<4 Q +<.)2 B :< Q )!7)).+<
5ob ,o. 4;4 Q +<.)2 B 8< Q )!2<;.:<
Use* an$ o-e* abso*1tion of o-e*#ea$
Te amount of overead absorbed in costs is sum total of overead cost allotted to individual cost units by
application of overead rates under te actual rate metod! overead cost are fully carged to production so tat
overead absorbed in e>ual to overead incurred.
"re#determined overead rate is calculated on te basis of budgeted overeads and tis is applied to actual base. Te
amount absorbed may not be identical 9it te amount of overeads incurred it is called under absorption and in reverse
condition it is called over absorption. Tis may appen due to error in esteeming eBpenses! error in estimating te base!
maCor canges in metods of production and seasonal fluctuation of overead.
BSPATIL
61
Lesson > :
%O( COSTING D (ATC COSTING
5ob Costing is te metod of costing used to determine te cost of non#standard Cobs carried out according to
customersA specifications. 'n tis metod is also .no9n are separately indentified and are coasted individually. 5ob
costing is applicable to Cob printers! engineers! furniture ma.ers! builders! contractors! ard9are and macine
manufacturing industries! repairing sops! etc.
Te Costing *epartment prepares Cob cost seet H-ig. +G for eac Cob! containing te production order ,o.! and
oter details relating to te Cob. Were a Cob re>uires several maCor operations or components! sub#cost seet. Te Cob
cost seet is te document detailing te cost of te Cob under *irect material. *irect labour! Wor.s overeads etc.! 't is
not prepared for a specific period but for a specific Cob.
Te cost of all te Cob in process are debited to te Wor.#in#"rogress Control Account. On te completion of a
Cob! tis account is credited and -inised Ioods Control Account is debited 9it its cost. Te difference bet9een te
cost and te price carged is te profit or te loss on te Cob.
On te completion of a Cob Completion &eport is submitted by te production sop to te planning *epartment
9it a copy to Costing *epartment. Tis report is an indication tat furter eBpenses on te Cob sould cease and te Cob
cost seet be closed.
)*ob+e, 1
-ind out in te suitable cost seets form te selling rater per tone of special paper manufacturing by a paper mill
for a private firm a 5anuary );;8 under te follo9ing divisions of cost(
a. "rime Cost
b. Wor.s cost!
c. Total cost!
d. $elling price
Te cost seet is to be prepared 9it reference to te data given belo9(
*irect Materials
"aper plup )!<<< tonnes T &s. 4< per tone.
Oter Miscellaneous Materials! +<< tonnes at &s. 1< per tone.
*irect Labour
)<< s.illed men T &s. 4 per day for +< days.
4< uns.illed men T &s. 1 per day for +< days.
*irect EBpenses
$pecial e>uipment &s. 4!<<<
$pecial dies &s. +!<<<
Wor.s Overead
%ariable )<L on direct 9ages.
-iBed 7<L on direct 9ages
Administrative overead at )<L of 9or.s cost.
$elling and distributive overead at )4L of 9or.s cost.
"rofit )<L in total cost
BSPATIL
62
-inised paper manufactured :<< tonnes
$ale of 9aste paper &s. )!<<<
Tere 9as not 9or. in progress in te beginning or at te end of te mont. Te scarp value of special e>uipment is nil
after use. Wor. 9as done only for +< days in te mont. $elling price is to be 9or.ed to te nearest rupee.
Sol)tion:
Cost#$eet for $pecial "aper
Rs3 Rs3
Di*ect ,ate*ia+
"aper pulp )!<<< tonnes T &s. 4< per tone 4<!<<<
Oter materials +<< tonnes T &s. 1< per tone 7!<<< 47!<<<
*irect Labour
)<< s.illed men at &s. 4 for +< days )<!<<<
4< uns.illed man at &s. 1 for +< days 1!<<< )1!<<<
*irect EBpenses
$pecial E>uipment 4!<<<
$pecial dies +!<<< 8!<<<
)*i,e Cost A@7666
Wor.s overead
%ariable )<<L of direct labour )1!<<<
-iBed 7<L of direct labour 8!:<< +<!:<<
8@7B66
Less ( sale of 9aste )!<<<
4o*/s cost 8:7B66
Office Overead
Administrative )<L of 9or.s cost ;!4:<
$elling and distributive )4L of 9or.s cost )2!18< +1!;4<
Tota+ Cost 17187A:6
"rofit )<L ))!;84
$elling "rice T &s. )72.74 or &s. )74 for :<<
Tonnes
)!1)!8+4
)*ob+e, 9
Te information give belo9 as been ta.en from te costing record of an Engineering Wor.s in respect of 5ob
,o. 1<1.
Materials &s. 2!<)<
Wages(
*ept. A 7< ours T &s. 1 per our
0 2< ours T &s. + per our
C +< ours T &s. 4 per our
Overead eBpenses for tese tree departments 9ere estimated as follo9s(
%ariable overeads(
*ept. A &s. 4!<<< for 4!<<< labour ours
0 &s. 1!<<< for )!4<< labour ours
C # &s. +!<<< for 4<< labour ours
BSPATIL
63
-iBed overeads(
Estimated at &s. +<!<<< for )<!<<< normal 9or.ing ours. Kou are re>uired to calculate te cost of Cob 1<1 and
calculate te price to give profit of +4L on selling price.
Sol)tion
Amount Amount
&s. &s.
*irect Materials 2!<)<
Wages *ept. A 7< rs. B &s. 1 ):<
0 2< rs. B &s. + :<
C +< rs. B &s. 4 )<< 17<
Overeads variable
*ept. A 7< B H&s. 4<<< E 4<<< rs.G 7<
0 2< B H&s. 1<<< E )4<< rs.G :<
C +< B H&s. +!<<< E 4<< rs.G :< ++<
-iBed overeads(
)+< ours T H&s. +<!<<< E )<<<< rsG +2<
Total cost 2!:1<
"rofit +4L on selling price or )E1 on Cost
"rice
)7)<
$elling "rice 722<
Ad*antages o! :ob Costing
5ob Costing offers te follo9ing specific advantages(#
Te cost material! labour! and overead for every Cob or product in a department is available daily! 9ee.ly or as
often as re>uired 9ile te Cob is still in progress. Tis enable te management to .no9 te trend of te costs
and tis by te efficiency of operations.
On completion of a Cob! te cost under eac element is immediately ascertained. Cost may be compared 9it te
selling prices of e products in order to determine teir profitability and to decide 9ic product lines sould be
pused or discontinued or 9eter prices or price >uotation could be revised. Te application of marginal
costing tecni>ues may be useful in suc situations.
3istorical costs for past periods for eac product! compiled by orders! departments! or macines! provide useful
statistics for future production planning and for estimating te costs of similar Cobs to be ta.en up in future. Tis
assists in te prompt furnising of price >uotations for specific Cobs.
Te adoption of predetermined overead rates in Cob costing necessitates te application of a system of
budgetary control of overead 9it all its advantages.
Te actual overead costs are compared 9it te overead applied at predetermined ratesF tus at te end of an
accounting period! overead variances can be analyDed.
$poilage and defective 9or. can be easily identified 9it specific Cobs or products so tat responsibility may be
fiBed on determents or individuals.
5ob costing is particularly suitable for cost#plus and suc oter contracts 9ere selling price is determined
directly on te basis of costs.
BSPATIL
64
Li,itations of job costing:
5ob costing is comparatively more eBpensive as more clerical 9or. is involved in identifying eac element of
cost 9it specific departments and Cobs.
Wit te increase in te clerical processes! cances of errors are enanced.
Te cost as ascertained! even 9ere tey are complied very promptly! are istorical as tey are compiled after
incidence.
Te cost compiled under Cob costing system represents te cost incurred under actual conditions of operation.
Te system does not ave any scientific basis to indicate 9at te cost sould be or sould ave been! unless
standards of performance efficiency are establised. Estimated cost! prepared by some concerns in respect of Cob
orders! also do not serve te purpose.
'f maCor economic canges ta.e place! comparison of cost of a Cob for one period 9it tat of anoter becomes
meaningless. *istortion of cost also occurs 9en te batc >uantities are different.
(ATC COSTING
0atc costing a modified from of Cob costing. Wile Cob costing is concerned 9it producing articles according
to customerAs re>uirements and specifications! batc costing is used 9ere te articles are manufactured in a good
number in definite batces. Component parts of 9atces! radio sets! television sets etc.! are eBtensively produced under
batc costing! for being assembled in te product. 'f one component of a special design is ordered by a customer for
manufacture! it is 0atc costing! 0atc costing! terefore! is also .no9n a =Lot Costing?.
A batc of 9or.ers is assigned to perform te tas. of producing a certain number of articles in a particular
period. Tus te cost of production can be compared batc 9ise! and efficiency ascertained. Li.e Cob order system! one
number is allotted to eac batc. Te material re>uisitions are prepared batc 9ise! labour is engaged batc 9ise! and
te overeads are also carged batc 9ise. Tis it is a modified form of Cob costing.
Te cost control in batc costing depends upon ascertainment of te optimum number of batc production. Te
Economic 0atc /uantity can be decided on te same principle and same formula as applied to Economic Order
/uantity is case of materials.
Cost comparison bet9een te t9o batces is possible if bot batces are allo9ed te same facilities! time to
produce! and te same number of articles. Te comparison can be fruitfully done 9it te elp of cost seets of te t9o
batces.
)*ob+e, 1
A Coining factory as underta.en to supply +<< pieces of a component per mont for te ensuing siB monts.
Every mont a batc order is opened against 9it material and labour ours are boo.ed at actual. Overeads are levied
at a rate per labour our. Te selling price contracted for is &s. : per piece. -orm te follo9ing data present te cost and
profit per piece of eac batc order and overall position of te order for )+<< pieces.
Monts 0atc output Material cost *irect 9ages *irect labour
ours
&s. &s.
5anuary +)< 74< )+< +2<
-ebruary +<< 72< )2< +:<
Marc ++< 7:< )4< +:<
April ):< 71< )2< +8<
May +<< 8<< )4< 1<<
5une ++< 8+< )7< 1+<
BSPATIL
65
Te oter *etails are(
Monts Cargeable eBpenses *irect labour ours
&s. &s.
5anuary )+!<<< 2!:<<
-ebruary )<!47< 2!2<<
Marc )+!<<< 4!<<<
April )<!4:< 2!7<<
May )1!<<< 4!<<<
5une )+!<<< 2!:<<
Sol)tion:
COST SEET
5an -eb. Mar. April May 5une Total
0atc output +)< +<< ++< ):< +<< ++< )+1<
$ales %alue
&s.
)7:< )7<< )87< )22< )7<< )87< ;:2<
Material Cost
&s.
74< 72 7:< 71< 8<< 8+< 2<+<
*irect Wages
&s.
)+< )2< )4< )2< )4< )7< :7<
Cargeable
eBpenses &s.
7<< 78+ 78+ 7+) 8:< :<< 2)24
Total Cost
&s.
)18< )24+ )4<+ )1;) )+1< )7:< ;<+4
"rofit per
0atc &s.
1)< )2: +4: 2; #1< :< :)4
Total Cost
per unit &s.
7.4+ 8.+7 7.:1 8.81 :.)4 8.72 8.12
"rofit per
unit &s.
).2: <.82 ).)8 <.+8 #<.)4 <.17 <.77
Over all position of te order for )!+<< units.
$ales value of )!+<< units T :E# per units. &s. ;!7<<
Total cost of )!+<< units T 8.12 per unit &s. :!:<:
UUUUUUUUUUUUUUU
)*ofit Rs3 A89
BSPATIL
66
Lesson > @
CONTRACT COSTING
Contract is an agreement enforceable by la9. 't is an agreement bet9een t9o parties Contractor and te
Contractee. Te contractor agrees to underta.e and complete te 9or.! as per terms of contract! 9itin a specific period
and for a particular monetary consideration. Te terms of contract regarding 9or. to be underta.en! period in 9ic to
be completed! value of te contract advances to be made by te Contractee to te contractor on te certificate of
arcitect! compensation payable by te contractor for te breac of contract! etc.! are decided upon bet9een te t9o
parties before te 9or. is started. Tese contracts related to te 9or.s of construction of roads! buildings! bridges! dams
and ban.s! ports! etc!
Contract costing is te tecni>ue of ascertaining cost of a contract. 3ere te unit of cost is one only! e.g.! a
building! or a bridge etc. it is similar to Cob in principle! and so te metod of recording cost is te same. A Contract
Ledger boo. is .ept in 9ic a separate account for eac contract is opened.
Te follo9ing items appear on te debit side of te Contract AEc(
). *irect Materials
+. *irect Labour
1. *irect EBpenses
2. Overeads
4. "lant and Macinery
7. $ub#Contract Cost
8. EBtra Wor. done
Te follo9ing items appear on te credit side of te Contract AEc(
). Materials &eturned
+. Materials Transferred
1. Materials at te end
2. "lant and Tools at te end
4. Wor. Certified
7. Wor. done but 6ncertified
8. Contract "rice
&or' Certi!ied
As per terms of te contract! te contractee advances some :< or ;< percent of e 9or. done to te contractor on
te basis of te 9or. certified by te contracteeAs arcitect or engineer periodically. Te balance of +< or )< percent
amount is retained by te contractee! so tat te contractor may continue to 9or. and not leave te contract if te
contract is not proving to be profitable one to im. Te amount retained is .no9n as @&etention of MoneyA.
&or' done b)t not "et Certi!ied
A 9or. done by te contractor but 9ic remains to be certified by te arcitect on te date of accounting is
.no9n as 9or. done but not yet certified.
Contract $rice
Te contract price is te value of contract agreed to be paid to te contractor by te contractee on te
satisfactory completion of te contract. $o on te completion of te Contract te Contract AEc is credited 9it te
contract price and @ContracteeAs AEcA is debited.
Cost 7 pl)s 7 contract
Were a contractor feels esitant to >uote for a 9or. of contract 9ic is absolutely ne9 to im! and ne9 to
oter contractors as 9ell! and e is unable to estimate te cost of te 9or.s offered to im for eBecution. 't is decided
9it te contract or tat e 9ould be paid te total cost of 9or. 9atever it be! plus is profit as a rate percent on te
total cost. $uc s contract is .no9n as @Cost plus ContractA.
Ascertain#ent o! $ro!it;(oss on Contract
BSPATIL
67
Te "rofitELoss on contract is ascertained as follo9s(
aG On completion of Contract(
Te eBcesses of credit over te debit items of te contract aEc is te profit! and te 9ole of it can be ta.en into
account. Te eBcess of debit over te credit items is loss.
bG On incomplete Contract(
Were a contract ta.es more one financial year for in to complete! it is usual to ta.e into account a part of te
profit only to te "rofit and Loss Account. 'f tere is a loss! te 9ole of te loss is transferred to te " J L AEc.
Wat part of te notional profit sould be credited to te profit and loss account eac year! depends on te practice and
circumstances of te case. Te general rules are(
aG 'f te value of certified 9or. is less tan )E2
t
of te contract price! no profit is ta.en into account! and te
balance of te contract aEc is transferred to te Wor.#in#"rogress AEc.
bG 'f te certified 9or. is )E2
t
or more tan )E2
t
! but less ten S of te contract price! only )E1 of te computed
profit as reduced to te cas basis Hcas received on 9or. certifiedG! sould be credited to te "rofit and Loss
Account. Te formula is(
"rofit Q Computed profit! i.e. Cr. 0alance of contract aEc B )E1 B Hcas received E 9or. certifiedG
Te balance of te computed profit is a reserve and is transferred to Wor.#in#"rogress AEc.
cG 'f te value of certified 9or. is S or more tan S of te contract value! +E1 of te computed profit as reduced to
te cas basis is credited to " J L AEc.
)*ob+e, 1
HWere more tan S contract is completeG
0uilding Contractors Ltd.! underta.e contracts. On 1)
st
October! );;1 9en te actual accounts 9ere prepared! te
positions of Contract ,o. )<) 9ic 9as commenced on )
st
5anuary! );;1! 9as as under(
&s.
Material purcased 18!4<<
Material in and )!4<<
Wage "aid 21!84<
Wage outstanding 7+4
"roportionate sare of indirect eBpenses )!:84
Cost of plant 7!+4<
Te value of 9or. certified 9as &s. ;<!<<< of 9ic &s. 78!4<< ad been received! 9or. completed but uncertified 9as
valued at &s. +!4<<.
Te Contract price 9as &s. )!4<!<<<.
Te plant on te site 9as valued at &s. 4!<<< on 1)
st
October! );;1.
"repare Contract ,o. )<) account after ta.ing credit for "rofit 9ic you tin. reasonable.
BSPATIL
68
Sol)tion:
Cont*act 161 Account
Rs3 Rs3
To Materials "urcased 18!4<< 0y 9or.#in#"rogress
Account(
To Wages 21!84< Wor. certified ;<!<<<
To "lant 7!84< Wor. done but 6ncertified
+!4<<
;+!4<<
To "roportionate sare of
indirect eBpenses
)!:84
To Outstanding Wages 7+4 0y Material at site )!4<<
To 0alance cEd ;!<<< 0y "lant at site Hdep. %alueG 4!<<<
+otal <<9=== +otal <<9===
To "rofit and Loss AEc 2!4<< 0y 0alance cEd ;!<<<
To Wor.#in#"rogress
Account
2!4<<
Tota+ 87666 Tota+ 87666
R "rofit as been ascertained as follo9s(
&s. ;!<<< B +E1 B 78!4<< E ;<!<<< &s. 2!4<<.
#i8 if the contract /ork has sufficientl. ad#anced= or the contract is almost complete= the profit is ascertained as follo/s:
Te eBpenses of te part of te contract remaining to be eBecuted are estimated! and added to te eBpenses
already incurred! to give an idea of te total cost of te full contract. On deducting te estimated total cost from te
contract price! 9e get te notional or te computed profit. Of tis computed profit only tat part is credited to " J L AEc
as is reduced by te proportion of.
HiG @Wor. creditedA to @Contract "riceA or more conservatively.
HiiG @Cas receivedA to @Contract "riceA so(
i. "rofit Q Estimated "rofit on completed contract B Wor. certified E Contract "rice
ii. "rofit Q Estimated "rofit on completed contract B Cas &eceived E Contract "rice.
An Estimated Contract AEc or Estimated Contract $tatement is re>uired to be prepared to find out te estimated cost of
te full contract and to find out te national profit for te purpose of calculating te "rofit to be credited to te "rofit and
Loss Account in te main Contract AEc.
4o*/.in.1*og*ess an$ (a+ance S#eet
Te Wor.#in#progress AEc is debited 9it te sums
HiG Wor. certified Hvalued at contract priceG! and
HiiG Wor. done but not yet certified Hvalued at costG.
Tis account is credited 9it te balance of te notional profit not ta.en to te "rofit and Loss Account.
Tis account so9s debit balance 9ic is ta.en to te 0alance $eet on te Asset side. Te ContracteeAs AEc 9ic
so9s credit balance on account of cas received in advance! is not so9n on te Liability side of te 0alance $eet but
is so9n as a deduction from te Wor.#in#"rogress AEc on te Asset side of te 0alance $eet.
BSPATIL
69
)*ob+e, 9
Te follo9ing information relate to Contract ,o. )+1. Kou are re>uired to prepare te Contract Account and te
ContracteeAs Account assuming tat te amount due from te contractee 9as duly received.
&s.
*irect Material +<!+4<
*irect Wages )4!4<<
$tores 'ssued )<!4<<
Loose Tools +!2<<
Tractor EBpenses(
&unning Material +!1<<
Wages of *rivers 1!<<< 4!1<<
Oter *irect Carges +!74<
Te contract price 9as &s. ;<!<<< and te contract too. )1 9ee.s in its completion. Te values of Loose Tools and
$tores returned at te end of te period 9ere &s. +<< and 1!<<< respectively. Te plant 9as also returned at a value of
&s. )7!<<< after carging depreciation at +<L. Te value of tractor 9as &s. +<!<<< and depreciation 9as to be carged
to te contract T )4L per annum. Te Administration and office eBpenses are to be provided at )<L on 9or.s cost.
So+ution:
Cont*act 195 Account
)a*ticu+a*s A,ount )a*ticu+a* A,ount
&s. &s.
To *irect Materials +<!+4< 0y $tores &eturned 1!<<<
To *irect Wages )4!4<< 0y Loose tolls returned +<<
To $tores 'ssued )<!4<< 0y "lant &eturned )7!<<<
To "lant Horiginal costG +<!<<< 0y 0alance being 4:!)4<
To Loose Tools +!2<< Wor. Cost AEc
To tractor eBpenses(
&unning Materials +!1<<
Wages of drivers 1!<<< 4!1<<
To *epreciation on Tractor
T )4L on &s. +<!<<< for
)1 9ee.s
84<
To oter *irect Carges +!74<
+otal 88!14< +otal 88!14<
To 0alance being 9or. cost
bEd
4:!)4< 0y ContracteeAs AEc ;<!<<<
To Administration and
office eBpenses T )<L on
9or.s cost
To profit J Loss AEc +7!<14
Tota+ 867666 Tota+ 867666
Cont*acteeEs Account
Rs3 Rs3
To Contract AEc ;<!<<< 0y 0an. ;<!<<<
Tota+ ;<!<<< Tota+ ;<!<<<
Te plant 9as depreciated T +<L Hnot T +<L annumG. Te depreciated value is &s. )7!<<<. $o te original cost of te
plant comes to &s. +<!<<<.
BSPATIL
70
)ROFIT ON INCO")LETE CONTRACTS
)*ob+e,s 5
A firm of building contractors began to trade on )
st
April! );;<. Te follo9ing 9as te eBpenditure on te contract for
&s. 1<!<<!<<<(
Rs3
Materials issued to contract 4)!<<<
"lant used for contract )4!<<<
Wages incurred :)!<<<
Oter EBpenses incurred 4!<<<
Cas received on account to 1)
st
Marc! );;) amounted to &s. )!+:!<<< being :<L of te 9or. certified. Of te plant
and materials 9ic cost &s. +!4<< 9ere lost. On 1)
st
Marc! );;) plant 9ic cost &s. 1!<<< and materials 9ic cost
&s. +!<<< 9as returned to stores! te cost of 9or. done but uncertified 9as &s. )!<<< and materials costing &s. +!1<<
9ere in and on site. Carge )4L depreciation on plant! reserve S profit received and prepare a Contract Account from
te above particulars.
Sol)tion: Cont*act Account
*r. Cr.
"articulars Amount "articulars Amount
&s. &s.
To materials 4)!<<< 0y "rofit J Loss aEc
To Wages :)!<<< "lant Lost 1!<<<
To "lant )4!<<< Material +!4<< 4!4<<
To Oter eBpenses 4!<<<
0y "lant returned
to store
+!<<<
To "rofit to date +8!<<< Less( *ep 1<< )8!<<
0y plant at site )<!<<<
Less( *ep )!4<< :!4<<
0y Material at site +!1<<
0y Wor.#in#"rogress AEc(
Wor. certified )!7<!<<<
Wor. done but
uncertified
)!<<< )!7)!<<<
Total )!8;!<<< Total )!8;!<<<
To "rofit J Loss AEc HS of
profit recd.G
)<!:<< 0y "rofit to date bEd +8!<<<
To Wor. in "rogress(
&eserve HS of
profit recd.G
)<!:<<
0alance H+<L of
&s. +8!<<<G
4!2<< )7!+<<
Total +8!<<< Total +8!<<<
BSPATIL
71
Notes:
). Ascertainment of "rofit(
"rofit to date +8!<<<
"rofit received 2E4 Hin te ratio of cas received to 9or. certifiedG +)!7<<
&eserved S of profit received )<!:<<
Transferred S of profit received to "rofit J Loss Account )<!:<<
0alance H +8!<<< +)!<<<G i.e. +<L of +8!<<< 4!2<<
+. Te value of te plant on 1)
st
Marc! );;) as been ascertained as follo9s(
O*igina+ ;a+ue De13 Net ;a+ue
&s. &s. &s.
"lant Lost 1!<<< # #
"lant returned to
store
+!<<< 1<< )!8<<
"lant at site )<!<<< )!4<< :!4<<
1:7666 17B66 167966
BSPATIL
72
Lesson > A
)ROCESS COSTING
"rocess costing is te type of costing applied in industries 9ere tere is continuous or mass production. Te
necessity for compilation of te costs of a process or a department for a given period! as distinct from te cost of a 9ole
Cob or a specific batc of production units! as given rise to te concept of process cost accounting. Tere are many
industries engaged in continuous processing in 9ic te end products are te results of a number of operations
performed in se>uence. 'n suc industries! it is necessary to apply process costing.
"rocess costing is suitable for a large number of mining! manufacturing and public utility industries li.e mines
and >uarries! cotton! 9ool and Cute teBtiles! cemicals! soap ma.ing! paper! plastics! distillation processes! e.g. alcool!
tanning! oil refining! scre9s! bolts and rivets! canning! food products! dairy! and electricity and gas underta.ings.
Featu*es of )*ocess Costing:.
). Te production is continuous and te end product is te result of a se>uence of processes.
+. Te product is omogeneous and te units product are identical and standardiDed.
1. Te se>uence of operations for processing te product is specific and predetermined.
2. Te finised products of one process 9or.s as ra9 material for te neBt or process until completion.
)*ocess Costing an$ %ob Costing:.
A comparison of te basic principles of process costing 9it tose of Cob costing! given belo9! 9ill assist in
appreciating process costing procedures.
5ob Costing "rocess Costing
). "roduction is by specify orders ). "roduction is in continuous flo9! te
products being omogeneous.
+. Costs are determined by Cobs or
batces of products
+. Cost are compiled on time basis! i.e.
for production for a given accounting
period! for eac process or
departments.
1. Te various Cobs are separate and
independent of eac oter.
1. 0eing manufactured in a continuous
flo9! products lose teir individual
entity.
2. 6nit cost of a Cob is calculated by
dividing te total cost incurred into te
units produced in te lot or batc.
2. Te unit cost of a process! 9ic is
computed by dividing te total cost for
te period Hafter adCustment of te
opening and closing 9or.#in#processG!
is an average cost for te period.
4. Costs are calculated 9en a Cob is
completed.
4. Costs are calculated at te end of te
cost period.
7. Tere may or may not be any 9or.#
in#progress at te beginning or end of
an accounting period.
7. "roduction being continuous tere is
usually some 9or.#in#process at te
beginning as 9ell as at te end of te
accounting period.
8. Tere are usually no transfers from
one Cob to anoter unless it is necessary
8. As a product moves from one
process to anoter! transfers of cost
BSPATIL
73
to transfer surplus 9or. or eBcess
production.
from process to process are made.
:. As suc product unit is different and
production is not continuous! more
managerial attention is needed if
proper control is to be eBercised.
:. "rocess production is standardiDed
and is more stable. 3ence! control of
process activities is comparatively
easy.
A$-antages an$ Li,itations of )*ocess Costing:.
"rocess costing as te follo9ing advantages(
HiG "rocess cost may be determined periodically at sort intervals. Wen predetermined overead rates are
in use! it may be possible to complete unit cost 9ee.ly or even daily. Tis not al9ays so under te Cob
costing system! particularly 9en Cobs run for long periods and tere are no significant units of
completed production during te various accounting periods! falling bet9een te total period of run of
te Cobs.
HiiG 't involves less efforts and less clerical eBpenses as te accounting metod is simpler tan tat in Cob
costing.
HiiiG *etailed cost! budgeted as 9ell as actual! are made available for eac possible by evaluating te
performance of eac process etc.
HivG Allocation of overead to departments and processes can be made fairly accurately on definite bases.
HvG $ince te material consumption ass te various operations are more or less standardiDed! more accurate
cost estimates are available for price >uotations.
HviG 't is easier to set effective and fairly stable standards in case of mass production or continuous repetitive
production. "rocess costing situations are! terefore! more adaptable for installing standard costing
procedures.
Te limitations and 9ea.nesses of process costing systems are as follo9s(#
HiG 0eing only average costs for te accounting period! process cost cannot be considered to be very
accurate for te purpose of detailed analysis! evaluation! and control of individual performance
efficiency on a day#to#day basis.
HiiG Costs obtained at te end of te accounting period are only istorical and are not of muc use for
effective control unless standard process cost are used. Tis is! no doubt! true in respect of all oter
istorical systems but te nature of process accounting 9it its departmental divisions ma.es tis
disadvantage more prominent.
HiiiG Wen different products come out of one and te same process! te common costs are prorated to te
various products. $uc cost of individual products are not reliable as tey may! at best! be ta.en to be
only approBimations.
HivG -or te purpose of calculation of unit costs of continuous processes! 9or.#in#process is re>uired to be
determined at te end of an accounting period. Tis is done mostly on estimated basis 9ic introduces
furter inaccuracies in costs.
)*ocess Costing )*oce$u*es:.
Te procedure for costing applicable to processes or departments 9ill very in details according to te re>uirements of
production metods. Te various situations and problems envisaged and te metods of calculation of costs in respect of
eac of te situations ave been discussed under te follo9ing eads(
). $ingle process production
+. More tan one process involvedF output of one process transferred in full to te subse>uent process.
1. Output of a process partly transferred to te neBt process and partly retained in stoc..
2. "rocess consisting of opening and closing stoc.! fully completed.
4. ,ormal and abnormal losses occurring in process but tere is no closing stoc. or te closing stoc. is fully
BSPATIL
74
complete.
7. "rocess consisting of partially completed closing stoc..
8. ,ormal loss or abnormal loss involved#closing stoc. partially complete.
:. "rocess consisting of partially completed opening stoc..
;. ,ormal andEor abnormal losses and bot opening and closing 9or.#in#processes.
)*ob+e, 1: 3$rocess acco)nts ,it% Cost s%eets)
Am article as to undergo tree different processes before it becomes ready for sale. -rom te follo9ing
information find out cost of production per unit of tat article! if +<< units of article 9ere manufactured upto 1)
st
*ecember! );;).
Manufacturing
"rocess
&efining "rocess -inising "rocess
&s. &s. &s.
Material +<<< )<<< 8<<
Labour )4<< +4<< )<<<
*irect EBpenses 2<< +<< 1<<
Te indirect eBpenses for te period amount to &s. 7!<<< in te factory out of 9ic &s. +<<< is attributable to
tis product. Tere 9as no stoc. at te end in any process. Te indirect eBpenses sould be allocated to eac process on
te basis of labour.
Sol)tion:
"anufactu*ing )*ocess AFc ?it# Cost S#eet
&Out1ut : 966 units of a*tic+e'
0articulars Cost
per
unit
Amount 0articulars Cost
per
unit
Amount
Rs3 Rs3 Rs3 Rs3
To Material )<.<< +.<< 0y Transfer to
&efining "rocess
AEc
++.4< 24<<
To Labour 8.4< )4<<
To *irect EBpenses +.<< 2<<
To 'ndirect
EBpenses
1.<< 7<<
Tota+ 993:6 =7:66 Tota+ 993:6 =:66
BSPATIL
75
Refining )*ocess Account
&Out1ut : 966 units of a*tic+es'
0articulars Cost
per
unit
Amount 0articulars Cost
per
unit
Amount
Rs3 Rs3 Rs3 Rs3
To Transfer from
Manufacturing
"rocess AEc
++.4< 24<< 0y Transfer of
-inising "rocess
AEc
Te cost per unit is
&s. 27.<<
27.<< ;+<<
To Material 4.<< )<<<
To Labour )+.4< +4<<
To *irect EBpenses ).<< +<<
To 'ndirect
EBpenses
4.<< )<<<
Tota+ =@366 8966 Tota+ =@366 8966
Refining )*ocess Account
&Out1ut : 966 units of a*tic+es'
0articulars Cost
per
unit
Amount 0articulars Cost
per
unit
Amount
Rs3 Rs3 Rs3 Rs3
To Transfer from
&efining "rocess
AEc
27.<< ;+<< 0y -inised $toc.
AEc
4:.+4 ))74<
To Material 27.<< ;+<<
To Labour 1.84 84<
To *irect EBpenses 4.<< )<<<
To 'ndirect
EBpenses
).4< 1<<
Tota+ :B39: 117@:6 Tota+ :B39: 11@:6
<ote: The indirect 1,penses of Rs !000 ha#e been allocated to the three processes in the proportion of direct
labour Rs $ : 5: ! :Rs 1500 : !500 : 10008
)*ob+e, 9: 3+reat#ent o! 5"e-prod)ct and Scrap)
A particular brand of penyl passed troug tree important processes. *uring te 9ee. ended )4
t
5anuary! );4+! 7<<
gross of bottles are produced. Te cost boo. so9 te follo9ing information(
"rocess ) "rocess + "rocess 1
&s. &s. &s.
Material 2<<< +<<< )4<<
Labour 1<<< +4<< +1<<
*irect EBpenses 7<< +<< 4<<
Cost of bottles ,il +<1< ,il
Cost of cor.s ,il ,il ,il
BSPATIL
76
Te indirect eBpenses for te period 9ere &s. )7<<. Te bye#products 9ere sold for &s. +2< H"rocess +G. Te residue
sold for &s. )+4.4< H"rocess 1G.
"repare te account in respect of eac process so9ing its cost and cost of production of te finised product per gross
of bottles.
Sol)tion:
)*ocess 1 HOutput 7<< gross of bottlesG
&s. &s.
To Materials 2<<<.<< 0y Transfer to "rocess ,o.
+ Hcost per gross of bottles
&s. )1.7; approBimatelyG
:+)4.1:
To Labour 1<<<.<<
To *irect EBpenses 7<<.<<
To 'ndirect EBpenses 7)4.1:
Total :+)4.1: Total :+)4.1:
)*ocess 9
To Transfer from "rocess
)
:+)4.1: 0y $ale of 0ye#"roduct +2<.<<
To Materials +<<<.<< 0y Transfer to "rocess of
bottles Hcost per gross of
bottles &s. +4.17
approBimatelyG
)4+):.+<
To Labour +4<<.<<
To *irect EBpenses +<<.<<
To 'ndirect EBpenses 4)+.:+
+<1<.<<
Total )424:.+< Total )424:.+<
)*ocess 5
To Transfer from "rocess
+
)424:.+< 0y $ale of residue )+4.4<
To Materials )4<<.<< 0u -inised products
account HCost per gross of
bottles &s. 11.74G
+<):;.4<
To Labour +1<<.<<
To *irect EBpenses 4<<.<<
To 'ndirect EBpenses 28).:<
To Cost of roc.s 1+4.<<
Total +<1)4.<< Total +<1)4.<<
<ote: >ndirect 1,penses ha#e been charged to three processes in the labour ratio of $0 : !5 : !$
Abno*,a+ Loss an$ Abno*,a+ Gain:.
Abnormal spoilage or defective 9or. may arise in a process due to unforeseen factors. Te cost of suc
abnormal loss is not included in te cost of te process but te average cost of te lost units is carged to an Abnormal
Loss Account 9ic is credited 9it te scrap and closed to te "rofit and Loss Account. Tus! in computing te
abnormal loss! scrap value of te abnormal lost units 9ill be ignored but in 9or.ing out te loss for carging to "rofit
BSPATIL
77
and Loss Account! tis 9ill be ta.en into consideration.
$ometimes! 9en te actual loss in a process is less tan te anticipated loss! te difference bet9een te t9o is
considered to be abnormal gain. Te value of te abnormal gain is calculated in te same 9ay as described above for
abnormal loss and is credited to an Abnormal Iain Account 9ic is ultimately closed. "rofit and Loss Account. Te
scrap value of te normal anticipated loss in te process 9ere abnormal gain occurs is credited to te process account
9it te result tat te net debit to te process is te cost of abnormal gain less te value of scrap for te normal loss.
)*ob+e, 5:
3>or#al ,astage 7 (oss in ,eig%t and sale o! scrap)
Te 0engal Cemical Co. Ltd.! produced tree cemicals during te monts of 5uly );;4 by tree consecutive
processes. 'n eac process + per cent of te total 9eigt put in is lost and )< percent is scrap 9ic from process H)G and
H+G realiDes &s. )<< a ton and form process H1G &s. +< a ton.
Te product of tree processes is dealt 9it as follo9s(
"rocess ' "rocess '' "rocess '''
"assed to neBt
process
84L 4<L #
$toc. .ept for
sale
+4L 4<L )<<L
"rocess ' "rocess '' "rocess '''
&s. Tons &s. Tons &s. Tons
&a9 materials )+<<<< )<<< +:<<< )2< )<8:2< )12:
Manufacturing Wages +<4<< # ):4+< # )4<<< #
Ieneral EBpenses )<1<< # 8+2< # 1)<< #
"repare "rocess Cost Account! so9ing te cost per ton of eac product.
Sol)tion: )*ocess I
Tons Rs3 Tons Rs3
To &a9 Materials )!<<< )!+<!<<< 0y Loss of 9eigt
H+L of )<<< tonsG
+< #
To Manufacturing
Wages
+<!4<< 0y $ales of scrap
H)<L of )<<<
tonsG
)<< )<!<<<
To Ieneral
EBpenses
)<!1<< 0y Transfer to
Wareouse
++< 14!+<<
0y Transfer to
"rocess '' Hcost
per ton &s. )7<G
77< )!<4!7<
Total )!<<< )!4<!:<< )!<<< )!4<!:<<
BSPATIL
78
)*ocess II
Tons Rs3 Tons Rs3
To Transfer from
"rocess '
77< )!<4!7<<
To &a9 Materials )2< +:!<<< 0y Loss of 9eigt
H+L of :<< tonsG
)7 #
To Manufacturing
Wages
# ):!4+< 0y $ales of scrap
H)<L of :<< tonsG
:< :!<<<
To Ieneral
EBpenses
# 8+2< 0y Transfer to
Wareouse
14+ 84!7:<
0y Transfer to
"rocess ''' Hcost
per ton &s. +)4G
14+ 84!7:<
Total :<< )!4;!17< :<< )4;17<
)*ocess III
Tons Rs3 Tons Rs3
To Transfer from
"rocess ''
14+ 84!7:<
To &a9 Materials )!12: )!<8!:2< 0y Loss of 9eigt
H+L of )8<< tonsG
12 #
To Manufacturing
Wages
# )4!<<< 0y $ales of scrap
H)<L of )8<<
tonsG
)8< 1!2<<
To Ieneral
EBpenses
# 1!)<< 0y Transfer to
Wareouse
)!2;7 );:++<
0y Transfer to
"rocess ''' Hcost
per ton &s. +)4G
14+ 84!7:<
Total )8<< +!<)!7+< Total )8<< +<)7+<
)*ob+e, =:
3S%o,ing $rocess A;cs and Abnor#al &astage A;cs)
Te 'mperial Manufacturing CompanyAs product passes troug t9o distinct processes A and 0 and ten to -inised
$toc.. 't is .no9n from past eBperience tat 9astage occurring in te process is as under(
'n process A 4L of te units entering te process.
'n process 0 )<L of te units entering te process.
Te $crap %alue of te 9astage in "rocess A is &s. : per )<< units and "rocess 0 is &s. )<< units.
Te "rocess figures are(
"rocess A "rocess 0
&s. &s.
Materials consumed 1<<< )4<<
Wages 14<< +<<<
Manufacturing eBpenses )<<< )<<<
4!<<< units 9ere brougt into "rocess A costing &s. +4<<.
Te outputs 9ere(
"rocess A 2!8<< 6nits
"rocess 0 2!)4< 6nits
BSPATIL
79
"repare "rocess Cost Accounts so9ing te cost of te output. Also so9 abnormal Wastage Account.
Sol)tion:
"rocess A Account
6nits &s. 6nits &s
To 6nits introduced 4!<<< +!4<< 0y ,ormal 9astage +4< +<
To Material 1!<<< 0y Abnormal
9astage
4< )<4R
To Wages 1!4<< 0y "rocess 0 2!8<< ;!:84
To Mfg. EBpense )!<<<
4!<<< )<!<<< 4!<<< )<!<<<
R Te %alue of abnormal 9astage in "rocess A is calculated as follo9s(
,ormal output is 4!<<< +4< Q 2!84< units
,ormal cost is )<!<<< +< Q &s. ;!;:<
Terefore! ,ormal cost of one unit is ;!;:< E 2!84< Q &s. +.)<
Terefore! Cost of 4< units of Abnormal 9astage is +.)< B 4< Q &s. )<4.
As te Abnormal 9astage is sold for &s. 2! terefore! te amount of loss to be transferred to "rofit and Loss Account
sall be &s. )<4 2 Q &s. )<).
Abno*,a+ 4astage AFc &)*ocess A'
6nits &s. 6nits &s
To "rocess A 4< )<4 0y sale of $crap T
&s. : per )<<
4< 2
0y " J L AEc Loss
transferred
)<)
4< )<4 4< )<4
)*ocess ( Account
6nits &s. 6nits &s
To "rocess A 28<< ;:84 0y ,ormal Wastage
AEc
28< 28
To Materials )4<< 0y Abnormal
9astage AEc
:< R+8)
To Wage +<<< 0y -inised $toc.
AEc
2)4< )2<48
2!8<< )8!184 2!8<< )2!184
R Te value of abnormal 9astage in "rocess 0 is calculated as follo9s(
Te normal cost of 2+1< units is &s. )21+:
Terefore! ,ormal Cost of one unit Q )2!1+:E2!+1< Q &s. 1.1;
Terefore! te Cost of :< units Q &s. 1.1; B :< Q &s. +8)
Te abnormal 9astage 9ill realiDe &s. :! terefore te loss transferable sall be &s. +8) : Q &s. +71.
Abno*,a+ 4astage AFc &)*ocess ('
BSPATIL
80
6nits &s. 6nits &s
To "rocess 0 :< +8) 0y sale of $crap T
&s. )< per )<<
:< :
0y " J L AEc Loss
transferred
+71
:< +8) :< +8)
)*ob+e, ::
-rom te follo9ing details eBtracted form te costing records of an oil mill for a year ended 1)
st
Marc! you are re>uired
to prepare te process cost account of
HaG Iroundnut Crusing "rocessF
HbG &efining "rocessF and
HcG -inising "rocess including cas.ing! and determine te cost per tone of eac process and te total cost per tone
of finised oil.
"urcase of 4!<<< tonnes of groundnut &s. 2:!<<!<<<
Crusing "lant
&s.
&efining "lant &s. -inising "lant
&s.
Wages +4!<<< )<!<<< )4!<<<
"o9er 7!<<< 1!7<< +!2<<
$undry Materials )!2<< +<!<<< #
&epairs to "lant J
Macinery
+!:<< 1!14< )!2<<
$team 7!<<< 4!+<< 2!4<<
-actory
Overeads
)1!+<< 7!7<< +!)<<
Cost o Cas.s # # 4;!7<<
1<<< tonnes of crude oil 9ere producedF +!4<< tonnes of oil 9ere produced by te refining processF and +!2:<
tonnes of refined oil 9ere finised for delivery.
Iroundnut sells sold &s. 2<<F )!84< tonnes of groundnut residue sold &s. ))!<<<F loss in 9eigt in crusing
+4< tonnesF 24< tonnes of by#products obtained from &efining "rocess &s. )7!84<.
Sol)tion:
Iroundnut Crusing "rocess
Tonnes &s. Tonne &s.
Iroundnut 4<<< 2:<<<<< Crude oil HCEoG 1<<< 2:21<<<
Wages +4<<< Iroundnut
residue
)84< ))<<<
"o9er 7<<< Iroundnut
sells
2<<
$undry materials )2<< "rocess loss +4< #
&epairs to "lant
J Macinery
+:<<
$team 7<<<
-actory
overeads
)1+<<
4<<< 2:422<< 4<<< 2:422<<
Cost per tone of crude oil Q &s. )7)2.11
BSPATIL
81
&efining "rocess
Tonnes &s. Tonne &s.
Crude oil HbEfG 1<<< 2:21<<< &efined oil HcEoG +4<< 2:84<<<
Wages )<<<< 0y#products 24< )784<
"o9er 17<< "rocess loss 4< #
$undry material +<<<<
&epairs to "lant
J Macinery
114<
$team 4+<<
-actory
overeads
77<<
1<<< 2:;)84< 1<<< 2:;)84<
Cost per tone of refined oil Q &s. );4<
-inising "rocess
Tonnes &s. Tonne &s.
&efined oil HbEfG +4<< 2:84<<< -inised oil +2:< 2;7<<<<
Wages )4<<<
"o9er +2<< "rocess loss +< #
&epairs to "lant
J Macinery
)2<<
$team 24<<
-actory
overeads
+)<<
Cost of cas.s 4;7<<
+4<< 2;7<<<< +4<< 2;7<<<<
)*ob+e, @
Te product of a company passes troug tree distinct processes to completion. Tese processes are .no9n as A!0 and
C. -rom past eBperience it is ascertained tat 9astage is incurred in eac process as under(
"rocess A +L of input
"rocess 0 1L of input
"rocess C )<L of input
Te normal process loss occurring in te tree processes is regularly sold at te rates of 4< paise H"rocess AG!
&e. ) H"rocess 0G and &s. + H"rocess CG per unit respectively te output of eac process passes immediately to te neBt
process and te finised units are transferred from "rocess C to finised stoc.. Te follo9ing eBpenses 9ere incurred.
A 0 C
Materials consumed 2<<<< +<<<< )4<<<
*irect labour 2+<<< 2+7<< 14<<<
Manufacturing eBpenses )27<< :1:< )1;+<
&epairs to "lant J Macinery +!:<< 1!14< )!2<<
+<!<<< units ave been issued to "rocess A at cost of &s. :<!<<<. Te output from eac process as been as under(
"rocess A );!4<<
"rocess 0 ):!:<<
"rocess C )7!7<<
Tere 9as not stoc. of 9or.#in#process in any process.
BSPATIL
82
"repare te process accounts and abnormal 9astage account! assuming tat te abnormal 9astage collected togeter for
all te tree processes 9as sold in one lump and fetced a price of &s. )<<<<.
Sol)tion:
+or 0rocess A:
). Actual 9astage Q +<<<< );4<< Q 4<< units
+. ,ormal 9astage Q +L of +<<<< Q 2<< units
1. $crap sale value Q 2<< B &e. <.4< Q &s. +<<
2. Abnormal 9astage Q Actual 9astage less normal 9astage
Q )<< units
4. "rorata cost Q &s. )87<<< E H+<!<<< 2<<G Q &s.
);!7<<
7. Cost of abnormal 9astage &s. )877<<E);7<< B )<<
Q &s. ;<< Hrounded offG
)*ocess A
6nits &s. 6nits &s.
6nits +<<<< :<<<< Transfer to
"rocess 0
);4<< )844<<
Material 2<<<< ,ormal 9astage 2<< +<<
Labour 2+<<< Abnormal
9astage
)<< ;<<
Overead )27<<
+<<<< )877<< +<<<< )877<<
Calculations in respect of "rocess 0 and C are made in a similar manner. )*ocess (
6nits &s. 6nits &s.
Transfer from
"rocess A
);4<< )844<< Transfer to
"rocess C
)::<< +222<<
Material +<<<< ,ormal 9astage 2:4 4:4
Labour 2+7<< Abnormal
9astage
))4 )2;4
Overead :1:<
);4<< +272:< );4<< +272:<
)*ocess C
6nits &s. 6nits &s.
Transfer from
"rocess 0
)::<< +222<< Transfer to
-inised stoc.
)7<<< +::<<<
Material )4<<< ,ormal 9astage )::< 187<
Labour 14<<< Abnormal
9astage
;+< )747<
Overead )1;+<
)::<< 1<:1+< )::<< 1:1+<
Abnormal Wastage Account
"rocess A ;<< $ale )<<<<
BSPATIL
83
"rocess 0 )2;4 Loss H"rofit and
loss accountG
:;44
"rocess C )747<
Total ):;44 Total ):;44
Accounting of Inte*.)*ocess )*ofits:.
'nclusion of inter#process profit creates complications in te accounts. As te internal profits remain merged in
process stoc.! 9or.#in#progress! and finised stoc. suitable adCustment is re>uired to be made in te 0alance $eet in
order to eBclude suc unrealiDed profit.
Wen inter#process profit is included in te accounts! it is advisable to ave tree columns in te ledger to
indicate te cost! profit! and te total. Tis facilitates te calculation of te profit to be provided for inclusion in closing
stoc. in eac process and in te final finised stoc..
)*ob+e, A:
A product passes troug tree processes before it is completed and transferred to finised stoc.. Te follo9ing
data are available for a mont.
"rocess
,o.
) &s.
"rocess
,o.
+ &s.
"rocess
,o.
1 &s
Opening stoc. Hat prime costG +<<< )+<<< )<<<<
*irect material )1<<< +<<<< 2<<<<
*irect Labour )<<<< )<4<< 4<<<<
-actory overead )<<<< +4<<< +4<<<
Closing stoc. Hat prime costG 4<<< 7<<< 1+<<<
'nter#process transfers of output included profits at te follo9ing rates(
"rocess ) to "rocess + # +<L on transfer price
"rocess + to "rocess 1 # +4L on transfer price
"rocess 1 to -inised $toc. # )<L on transfer price
'nter#process profit included in te opening stoc. 9ere(#
'n "rocess + # &s. +!<<<
'n "rocess 1 # &s. +!:<<
'n -inised $toc. # &s. )<!<<<
-inised $toc.(#
Opening balance # &s. +4!<<<
Closing balance # &s. 11!<<<
$ales during te mont # &s. 1!<<!<<<
Complete te process accounts! determine te gross profit for te mont and indicate te value at 9ic te closing
stoc. 9ill appear in te 0alance $eet on te last day of te mont.
Sol)tion:
Total
&s.
Cost &s. "ft
&s.
Total
&s.
Cost &s. "ft
&s.
$toc. HbEfG +<<< +<<< # Transfer 184<< 1<<<< 84<<
BSPATIL
84
to "rocess
,o.+
*irect material )1<<< )1<<< #
*irect Labour )<<<< )<<<< #
Less stoc. HcEfG 4<<< 4<<< #
"rime cost +<<<< +<<<< #
-.K. Overead )<<<< )<<<< #
"rocess cost 1<<<< 1<<<< #
"rofit T +<L
on transfer
price H+4L on
costG
84<< 84<<
18!4<< 1<!<<< 84<< 18!4<< 1<!<<< 84<<
)*ocess No3 9 Account
Total
&s.
Cost
&s.
"ft.
&s.
Total
&s.
Cost
&s.
"ft.
&s.
$toc. HbEfG )+!<<< )<!<<< +<<< Transfer
to
"rocess
,o.1
)1+<<< ;<+)+ 2)8::
Transfer
from
process
,o. )
18!4<< 1<!<<< 8!4<<
*irect
material
+<!<<< +<!<<< #
*irect
labour
)<!4<< )<!4<< #
Total :<!<<< 8<!4<< ;!4<<
Less stoc.
HcEfG
7!<<< 4!+:: R8)+
"rime cost 82!<<< 74!+)+ :!8::
-.y.
Overead
+4!<<< +4!<<< #
"rocess
cost
;;!<<< ;<+)+ :8::
"rofit at
+4L on
transfer
price H)E1G
of cost
11!<<< 11!<<<
Total )1+<<< ;<+)+ 2)!8:: )1+<<< ;<+)+ 2)!8::
$toc. HcEfG 7!<<< 4!+:: 8)+
R Te proportionate profits on closing in tis and oter processes are 9or.ed out in te follo9ing manner(#
"rofit Q &s. 7!<<< B &s. 8<!4<< E &s. :<!<<< B &s. 7!<<< &s. 4!+:: Q &s. Q 8)+
)*ocess No3 5 Account
BSPATIL
85
Total
&s.
Cost
&s.
"ft.
&s.
Total
&s.
Cost
&s.
"ft.
&s.
$toc. HbEfG )<!<<< 8!+<< +!:<< Transfer
to
finised
stoc.
+4<<<< ):747+ 7121:
Transfer
from
process
,o. +
)1+<<< ;<!+)+ 2)!8::
*irect
material
2<!<<< 2<!<<< #
*irect
labour
4<!<<< 4<!<<< #
Total +1+<<< ):82)+ 224::
Less stoc.
HcEfG
1+!<<< +4!:4< 7!)4<
"rime cost +<<<<< )7)47+ 1:21:
-.y.
Overead
+4!<<< +4!<<< #
"rocess
cost
++4<<< ):747+ 1:21:
"rofit at
)<L on
transfer
price of
cost
+4<<< +4<<<
Total +4<<<< ):747+ 7121: +4<<<< ):747+ 7121:
$toc. HcEfG 1+<<< +4:4< 7)4<
BSPATIL
86
Finis#e$ Stoc/ Account
Total
&s.
Cost
&s.
"ft.
&s.
Total
&s.
Cost
&s.
"ft.
&s.
$toc.
HbEfG
+4!<<< )4!<<< )<!<<< $ales 1<<<<< )88182 )++7+7
Transfer
from
process
,o. 1
+4<<<< ):747+ 7121:
Total +84<<< +<)47+ 81!21:
Less
stoc.
HcEfG
11!<<< +2!):: :!:)+
Iross
"rofit
4:<<< 4:<<<
1<<<<< )88182 )++7+7 1<<<<< )88182 )++7+7
$toc.
HcEfG
11<<< +2):: ::)+
)*o-ision fo* )*ofit Account
&s. &s. &s. &s.
"rofit and
Loss
Account
0alance
HbEfG
"rocess + +<<<
"rocess 1 +:<<
"roportion
of "rovision
not re>uired
for "rocess
+
)+:: $toc. )<<<<
-inised
$toc.
)):: )2:<<
0alance
HcEfG
"rofit J
Loss AEc
"rocess + 8)+ Loss AEc
"rocess 1 7)4< Additional
provision
re>uired for
"rocess 1
114<
-inised
$toc.
::)+
)4782
):)4< ):)4<
0alance
HbEfG
"rocess + 8)+
BSPATIL
87
"rocess 1 7)4<
-inised
$toc.
::)+
)4!782
Ana+ysis of g*oss 1*ofit fo* t#e ,ont#:
&s. &s. &s.
"rocess ) 84<<
"rocess + 11<<<
"lus "rovision not
made
)+:: 12+::
"rocess 1 +4<<<
Less "rovision 114< +)74<
-inised $toc. 4:<<<
"lus "rovision )):: 4;)::
R)++7+7
R Tis agrees 9it te profit in te -inised $toc. Account
0alance $eet
"rocess $toc. 4!<<<
"rocess ) 7<<<
"rocess +
Less "rofit 8)+ 4!+::
1+<<<
"rocess 1
7)4<
+4:4<
-inised $toc. 11<<<
Less "rofit ::)+
+2)::
)*ob+e,: B
A product passes troug tree processes to completion. Tese processes are .no9n at A! 0! C. Te output of
eac process is carged to te neBt process at a price calculated to give a profit of +<L on te transfer price. Te output
of process C is carged to -inised $toc. on a similar basis.
Tere 9as no partly#finised 9or. in any process on *ecember 1)! on 9ic date te follo9ing information
9as obtained.
"rocess A "rocess 0 "rocess C
Materials
consumed
2<<< 7<<< +<<<
Labour 7<<< 2<<< :<<<
$toc. on *e. 1) +<<< 2<<< 7<<<
$toc. in eac process 9ere valued at "rime Cost to te process
Tere 9as no stoc. into finised stoc.! &s. 2<<< remained in and on *ecember 1)! and te balance as been sold for
&s. 17!<<<. $o9 "rocess Accounts.
BSPATIL
88
Sol)tion:
$rocess ?A@ Acco)nt
Total
&s.
Cost
&s.
"rofit
&s.
Total
&s.
Cost
&s.
"rofit
&s.
To
Material
2<<< 2<<< # 0y
"rocess
0 AEc
transfer
)<<<< :<<< +<<<
To
Labour
7<<< 7<<< #
Total )<<<< )<<<< #
Less (
Closing
$toc. cEd
+<<< +<<< #
"rime
cost
:<<< :<<< #
To Iross
profit
+4L on
cost
+<<< +<<<
)<<<< :<<< +<<< )<<<< :<<< +<<<
To stoc.
bEd
+<<< +<<< #
$rocess ?5@ Acco)nt
Total
&s.
Cost
&s.
"rofit
&s.
Total
&s.
Cost
&s.
"rofit
&s.
To
"rocess
A #
transfer
)<<<< :<<< +<<< 0y
process
AEc
+<<<< )22<< 4:<<
To
Material
7<<< 7<<< # +<<<
To
Labour
2<<< 2<<< #
Total +<<<< ):<<< +<<<
Less (
Closing
$toc. cEd
"rime
cost
)7<<< )22<< )7<<
To Iross
profit
+4L on
cost
2<<< # 2<<<
BSPATIL
89
+<<<< )22<< 47<<
To stoc.
bEd
$rocess ?C@ Acco)nt
Total
&s.
Cost
&s.
"rofit
&s.
Total
&s.
Cost
&s.
"rofit
&s.
To
"rocess
0 #
transfer
+<<<< )22<< 47<< 0y
finised
To
Material
+<<< +<<< # $toc.
AEc
1<<<< );4+< )<2:<
To
Labour
:<<< :<<< #
Total 1<<<< +22<< 47<<
Less (
Closing
$toc. cEd
7<<< 2::< ))+<
"rime
cost
+2<<< );4+< 22:<
To Iross
profit
+4L on
cost
7<<< # 7<<<
1<<<< );4+< )<2:< 1<<<< );4+< )<2:<
To stoc.
bEd
7<<< 2::< ))+<
BSPATIL
90
-inis%ed Stoc' A;c
Total
&s.
Cost
&s.
"rofit
&s.
Total
&s.
Cost
&s.
"rofit
&s.
To
"rocess
C #
transfer
1<<<< );4+< )<2: 0y
$ales
17<<< )7;)8 );<:1
Less (
Closing
$toc. cEd
2<<< +7<1 )1;8
+7<<< )7;)8 ;<:1
To Iross
profit
)<<<< # )<<<<
17<<< )7;)8 );<:1 17<<< )7;)8 );<:1
To stoc.
bEd
2<<< +7<1 )1;8
31) Calc)lation o! $ro!it on Closing Stoc'
-ormulae(
<ote: The amount of cost column and Total Column are those /hich appear abo#e the Closing stock line
"rocess @AA ( ,o profit included
2<<< 17<< Q 2<<
7<<< 2::< Q ))+<
2<<< +7<1 Q )1;8
&9' Actua+ )*ofit Rea+ise$
"rocess 6nrealised "rofit Actual "rofit
BSPATIL
91
"rofit
&s.
in Closing $toc.
&s.
&s.
"rocess @AA +<<< # +<<<
"rocess @0A 2<<< 2<< 17<<
"rocess @CA 7<<< ))+< 2:::<
-inised $toc. AEc )<<<< )1;8 :7<1
Total ++<<< +;)8 RR);<:1
RR %arify tis figure 9it tat so9n in te credit profit column of -inised $toc. Account. 't tallies.
33) 1al)ation o! Closing Stoc' !or 5alance S%eet
Te amount of Cost Columns of -inised $toc. Account 9ill be ta.en to te 0alance $eet. 't is comprised of(
Cost of closing stoc.
&s.
"rocess @AA +<<<
"rocess @0A 17<<
"rocess @CA 2::<
-inised $toc. +7<1
Total )1<:1
34) +est C%ec'
'ndividual cost of "rocess
Q &s. 1<<<<
@AA @0A @CA
Q i.e. H)<<<< + )<<<< + )<<<<G
Less ( Cost of $ales H$ee -inised $toc. AEcG
Q &s. )7;)8
#################
Closing $toc. Q &s. )1<:1
#################
BSPATIL
92
LESSON > B
STANDARD COSTING D ;ARIANCE ANAL0SIS
STANDARD COST D STANDARD COSTING
$tandard cost is a =predetermined cost 9ic is calculated from management standard of efficient operation and te
relevant necessary eBpenditure.? # '.C.M.A E,ILA,*
$tandard costing is =te preparation of standard costs teir comparison of actual costs and te analysis of variances to
teir causes and points of incidence? # '.C.M.A E,ILA,*
Tus! it is clear from tese definitions tat standard costs represent te scientifically planned or predetermined costs
based on tecnical estimate! labour and overead for selected period of time and for a prescribed set of 9or.ing
conditions. Te 9ord @standardA connotes a ting serving as a basic for comparison. $tandards can be establised in
respect of >uantitative and >ualitative li.e material and labor.
O(%ECTI;E OF STANDARD COSTING
Te main obCectives of standard costing are(
#To control te factors 9ic affect production.
# to supply reports promptly to te management so9ing te progress of production and o9 eBpenditure to date
compares 9it estimates so tat corrective actions may be ta.en in time! and
# To disclose te effect of temporary increase or decrease in te volume of output and sales or revenues.
TECNI!UES OF STANDARD COSTING
Te tecni>ue of standard costing involves(
# Te ascertainment of standard costs.
# Te use of standard costs.
# Teir comparison 9it te actual cost and te measurements of variances.
# te location of responsibility for te variances and te corrective action to be ta.en.
# te analysis of variances for ascertainment te reasons for te same.
ESTA(LIS"ENT OF A STANDARD COSTING S0STE"
Te installation of standard costing system in a manufacturing concern involves te follo9ing steps(
aG $tandardiDation of functions i.e. all activities sould be standardiDed and te tecnical processes of operations
sould also be susceptible to planning.
bG Establisment of cost centres.
cG Classification of Accounts i.e.! te different accounts can be codified and different symbols may be used to
facilitate speedy collection! analysis reporting.
dG $etting up of standards( $tandards may be basic Hlong periodG and current Hsort periodG! -rom te point of vie9
of efficiency level tey 9ill fall into te tree broad categories.
BSPATIL
93
iG $trict ideal
iiG Attainable or eBpected E actual and
iiiG Loose
Te standard sould be realistic and attainable. 6nrealistic standards provo.e resentment and depress performance.
Loose standard leads te management to indulge in self congratulation. ,ormally a period of one year is more realistic
as it coincides 9it te budget period and te normal accounting period.
eG $etting of standard costs(
$tandard costs sould be determined for eac element of cost separately and accurately. Li.e te budget committee or
standards division 9ic 9ill be versed 9it te 9or. of te standard costs. te standard committee generally consists of
all functional eads li.e production manager! personal manager! etc. 'n determining te output regard must be ad to te
limiting factors affecting sales! production etc. setting up of standard cost involves te determination of cost standards.
A cost standard is a usage! price or oter standard upon 9ic a standard cost is based.
AD;ANTAGES OF TE STANDARD COSTING
Te utility of standard elp te management in fiBation of prices and in laying do9n production policies.
). $tandards costs elp te management in fiBation of prices and in laying do9n production policies.
+. Te elp in readily so9ing up and ten elimination of avoidable 9astages and losses.
1. Tey provide constant and uniform bases for management on te operational efficiency of 9or.ers and oter
members of te staff.
2. Management! troug te study of variances! needs to concentrate only areas and problems 9ic call for its
attention i.e.! te system management by eBceptionA can be practiced.
4. *elegation of autority becomes effective te concerned men .no9 9at tey ave to acieve and by 9at
standard tey 9ill be Cudged.
7. Te 9ole concern in stimulated 9it a dynamic for9ard loo.ing mentality.
8. "erformance of employees at all levels can be Cudged obCectively! tis enables te concern to promote and
regard te rigt person.
:. $tandards act as a @yardstic.A to measure te actual performance and te efficiency of labour and oter factors.
;. %aluation of closing stoc. is facilitated by te standard cost of production.
)<. As standards are set for every element of cost! te costing procedures are simplified.
LI"ITATIONS OF STANDARDS COSTING
$tandard costing tecni>ue as te follo9ing sort comings.
). $etting of standards is a difficult tas. as it involves tecnical s.ill.
+. Te fiBation of inaccurate standards especially tose tat are incapable of acievement adversely affects te
morale of te employees and act as indrances to increased efficiency.
1. Te system is not suitable for te Cobbing type of industries producing articles according to customers
specifications even if it is installed! te fiBation of standards for type of Cob becomes difficult and eBpensive.
2. 't is necessary to distinguis bet9een controllable and uncontrollable variances in order to localiDe deviations
and fiBing responsibilities.
4. Te system may not be suitable even in te case of industries tat are liable to fre>uent tecnological canges
BSPATIL
94
affecting te conditions of production even if it is installed! a constant revision of standards become necessary.
7. $mall concern cannot afford tis system due to iger cost associated 9it standard costing.
8. Tere is no unanimity regarding te circumstances to be ta.en as te basis for setting standard costs. even if
tere is unanimity a revision of standard is essential to suit to te canging circumstances. Te revision of
standards becomes eBpensive. 'f tey are not revised! tey become outmoded.
DETER"INATION OF STANDARDS
-or any given product or unit te follo9ing standards must be determined.
). $tandard material costs.
+. $tandard labour costs.
1. $tandard direct costs.
2. $tandard variable overead costs
4. $tandard -iBed over ead costs.
7. $tandard selling prices and profit.
Te standard direct material cost is found by multiplying te >uantity of materials to be purcased 9it te rate of price
at 9ic tey are available.
*etermination of standard labour cost involves fiBations of
HaG $tandard labour grades
HbG $tandards labour times i.e.! standard ours troug time! motion and fatigue study 9it te elp of 9or. study
engineers and
HcG $tandard 9age rates based on te time rate! piece rate and premium plans.
$tandard direct cost is any eBpenditure 9ic is directly to be incurred on a specific cost unit. 't is carged directly to
te particular cost standard concerned.
$tandard overead costs are classified as manufacturing! administration! selling! and distribution over eads. Tey are
also classified as fiBed! variable and semi variable so tat current estimate for eac class may be prepared for te budget
period. $tandard overead rate is determined on te basis of past records and future trend of prices.
;ARIANCE ANAL0SIS
Te main aim of te standard costing is te control of te cost. $o te management is provided 9it te information
about situations 9ere in te actual results are not as tey 9ere planned to be. 3ence management is informed of only
te deviations or variances from te original plans! teir favourable or unfavorable nature and te causes of suc
deviations. 'n tis conteBt standard costing subscribes to te principles of =management by eBception?.
%ariance is te difference bet9een standard cost and actual cost. 't is eBpressed by a simple formula as follo9s(
variance Q actual cost standard cost.
%ariance analysis is terefore te process of analysis variance by dividing te total variance in suc a 9ay tat
management can assign responsibility for off standard performance. 'f variance is to increase te profit it is said to be
favourable so9n as H-G. 't 9ould result 9en te actual cost are lo9er tan te standard costs. 't is also .no9n as
positive or credit variance and vie9ed only as savings. 'f variance is not to increase te profit it is adverse or
unfavorable so9n as HAG it 9ould result 9en actual costs eBceed te standard costs. 't is also .no9n as negative or
debit variance and vie9ed as additional costs or losses.
13 "ATERIAL NOT ;ARIANCE &"C;'
Tis is te difference bet9een te standard cost of materials specified for te output acieved and te standard cost of
te materials used
BSPATIL
95
Material Cost %ariance Q Total std. Total Actual Cost.
MCW Q H$/R$"G HA/ R A"G
Were (
$/ Q $tandard /uantity
$" Q $tandard "rice
A/ Q Actual /uantity
A" Q Actual "rice
a' "ATERIAL )RICE ;ARIANCE &");'
Tis is te difference bet9een te standard price specified and te standard price paid.
M"% Q A/ H$" A"G
CAUSES
). Cange in basic purcase price of material.
+. Cange in >uantity of purcase or uneconomical siDe of purcase order.
1. &us order to meet sortage of supply or purcase in less or more favourable mar.et.
2. -ailure to ta.e advantage of off season price! te failure to purcase 9en price is ceaper.
4. -ailure to obtain cas and trade discounts or cange in te discount rates.
7. Wea. purcase organisation.
8. "ayment of eBcess or less freigt
:. Transit losses and discrepancies if purcase price is inflated to include te loss.
;. Cange in >uality or specification or materials purcased.
)<. 6se of substitute material aving a iger or lo9er unit price.
)). Cange in materials purcase! un.eep and store .eeping cost Htis is applicable only 9en suc carges are
allocated to direct material costs on a predetermined or standard cost basis.G
)+. Cange in te pattern or amount of taBes and duties.
b' "ATERIAL USAGE ;ARIANCE &"U;'
Tis is te difference bet9een te standard >uantity specified and actual >uantity used.
M6% Q $" H$/ A/G
Material usage variance is subdivided into
iG Material miB variance
iiG Material yield variance or scrap variance
i' "ATERIAL "IG ;ARIANCE &"";'
Tis is te portion of te direct material usage variance 9ic is due to te difference bet9een te standard and te
actual composition of a miBture.
BSPATIL
96
aG Wen te ratio of miB is different but te total >uantities of standard miB and te total >uantities of actual miB
are te same.
MM% Q $" H$/ A/G
bG Wen te total actual >uantity and total standard >uantity and te ratio of miB are different! ten te standard
>uantity of te eac material 9ill be revised.
MM% Q H&/ A/G R $"
Were &/ denotes &evised standard >uantity! 9ic is e>ual to
Total 9eigt of actual miB
################################# R $tandard /uantity
Total 9eigt of standard miB
ii' "ATERIAL 0IELD OR SCAR) ;ARIANCE
Tis is te portion of te direct material usage variance 9ic is due to te difference bet9een standard yield specified
and actual yield obtained.
MK% Q $" R Abnormal Loss E Iain
Or
MK% Q $" H$K AKG
Te difference bet9een standard yield and actual yield is called abnormal loss or gain. 'f te standard yield is less tan
te actual yield! te difference is called abnormal gain! and if te standard yield is iger tan te actual yield te
difference is called abnormal loss.
CAUSES FOR "ATERIAL USAGE ;ARIANCE
Te causes of material usage variance are(
). %ariation is usage of materials due to inefficient or careless use or economic use of materials.
+. Cange in specification or design of product.
1. 'nefficient and inade>uate inspection of ra9 materials.
2. "urcase of inferior material or cange in >uality of materials.
4. &igid tecnical specification and strict inspection leading to more reCections 9ic re>uire more materials for
rectifications.
7. 'nefficiency in production resulting in 9astages.
8. 6se of substitute materials.
:. Teft or pilferage of materials.
;. 'nefficient labour force leading to eBcessive utiliDation of materials.
)<. *efective macines! tools! and e>uipments! and bad or improper maintenance leading to brea.do9n and more
usage of materials.
)). Kield from materials in eBcess of or less tan tat provided as te standard yield.
)+. -aulty materials processing. Timber for eBample! if not properly seasoned may be 9asted 9ile being used in
subse>uent processes.
)1. Accounting errors! e.g. 9en materials returned from sop or transferred form one Cob to anoter are not
properly accounted for .
BSPATIL
97
)2. 'naccurate standards
)4. Cange in composition of a miBture of materials for a specified output.
II LA(OUR COST ;ARIANCE &LC;'
't is te difference bet9een standard direct specified for te activity acieved and te actual direct 9ages paid.
LC% $LC ALC H$tandard Labour Cost Actual Labour CostG
Labour cost variance is sub#divided into
)G &ate of pay variance and
+G Efficiency variance! 9ic is furter sub divided into
a. 'dle time
b. Calendar variance
c. MiB variance
d. Kield variance
13 LA(OUR RATE OF )A0 ;ARIANCE &LR;'
Tis is tat portion of labour cost variance 9ic is due to te difference bet9een te standard rate of pay specified and
te actual rate paid.
L&% Q AT H$& # A&G
Q Actual time Hstandard rate actual rateG
CAUSES FOR LA(OUR COST ;ARIANCE
*irect labour rate variance occur due to te follo9ing(
). Cange in basic 9age structure or cange in piece 9or. rate. Tis 9ill give rise to te variance till suc time
te standards are not revised.
+. Employment of 9or.ers of grades and rates of pay different from tose specified due to sortage of labour
of te proper category! or troug mista.e! or due to te retention of surplus labour.
1. "ayment of guaranteed 9ages to 9or.ers 9o are unable to earn teir normal 9ages if suc guaranteed
9ages form part of direct labour cost.
2. 6se of a different metod of payment e.g. payment of day rates 9ile standards are based on piece 9or.
metod of remuneration.
4. 3iger to lo9er rates paid to casual and temporary 9or.ers employed to meet seasonal demands or urgent
or special 9or..
7. ,e9 9or.ers not being allo9ed full normal 9age rates.
8. Over time and nigt sift 9or. in eBcess of or less tan te standard! or 9ere no provision as been made
in teir standard. Tis 9ill be applicable only if overtime and sift differential payments form tat laid do9n
in te standard.
9' LA(OUR EFFICIENC0 ;ARIANCE &LE;'
Tis is also tat portion of labour cost variance 9ic is due to te difference bet9een te standard labour ours
specified for te outputs acieved and te actual labour ours eBpended. Tis is oter9ise .no9n as labor time variance.
Labour spending variance! labour usage variance! labour >uantity variance.
BSPATIL
98
LE% Q $& H$T ATG
CAUSES FOR LA(OUR EFFICIENC0 ;ARIANCE
Te causes giving rise to direct labour efficiency variance as follo9s(
). Lac. of proper supervision or stricter supervision tat specified.
+. "oor 9or.ing conditions
1. *elay due to! 9aiting for materials tools! instructions etc. if not treated as idle time.
2. *efective macine tools! and oter e>uipments.
4. Macine brea. do9n if not boo.ed to idle time.
7. Wor. on ne9 macines re>uiring less ti.e ten provided for as long as te standard is not revised.
8. 0asic inefficiency of 9or.ers due to lo9 morale! insufficient training! faulty instructions! incorrect
sceduling of Cobs etc.
:. 6se of non standard material re>uiring more or less operation 9ages.
;. Carrying our operations not provided for and boo.ing tem as direct 9ages.
)<. 'n correct standards
)). Wrong selection of 9or.ers! e.g. no employing te rigt type of man for doing te Cob.
)+. 'ncrease in labour turnover.
)1. 'ncorrect recording of performances! i.e. time and output.
LA(OUR IDLE TI"E ;ARIANCE &LIT;'
Tis is tat te portion of labour cost variance 9ic is due to te abnormal idle time of 9or.ers on account of
failure of po9er supply! macine brea. do9n! sortage of materials etc.
L'T% Q '3 R $& H'dle ours R standard rate per ourG
LA(OUR CALENDAR ;ARIANCE &LC;'
Tis arises only 9en 9or.ers are paid for te days for 9ic tey ave not 9or.ed and for 9ic no provision
9as made 9ile determining standards. Tis 9ill appen only 9en some special public olidays be declared.
LC% Q $& R 3olidays
LA(OUR "IG ;ARIANCE &L";'
't is due to te difference in te standard output specified and actual output obtained.
LK% Q $tandard labor cost per unit Hactual output standard outputG
)RO(LE" 1
Te standard cost of te cemical miBture @"/A is as follo9s(
2<L of material "T &s. 2<< "er ..g.
7<L of material /T &s. 7<< per .g.
BSPATIL
99
A standard loss of )<L is normally anticipated in production. Te follo9ing particulars are available for te mont of
$eptember );:2.
A standard loss of )<L is normally anticipated in production. Te follo9ing particulars are available for te mont of
$eptember );:2.
):< .gs. of material " ave been used T &s. 17< per .g.
++< .gs. of material / ave been used T &s. 7:< per .g.
Te actual production of @"/A 9as &s. 17; .gs.
Calculate te follo9ing variance(
a. Materials price variance
b. Materials usage variance
c. Materials miB variance
d. Materials yield variance
Also so9 te reconciliation of standard cost 9it actual cost 9it actual cost 9it elp of te above variance.
Sol)tion
$tandard loss is )<L
3ence for productions of ;< .gs re>uire input of )<< .gs.
Terefore production of 17; .gs re>uires input ofM
17; E ;< R 2)< .gs.
MC% Q H$tandard cost of input of H2)< .gs of productionG Hactual cost of production of 17; .gsG
"2<L of 2)< Q )72 .gs at 2<< Q 747<< " ):<R17< Q 72!:<<
/7<L of 2)< Q +27 .gs at 7<< Q )287<< / ++<R7:< Q )2;!7<<
##### ############## ####### ##########
'nput 2)< .gs +)1+<< 2<< +)22<<
Loss 2) 1) ####
##### ############## ####### ##########
"roduction 17; .gs +)1+<< 17; +)2<<<
). Material Cost %ariance HMC%G Q $C AC
Q +)1+<< +)22<<
Q &s. )+<< HAG
+. Materials "rice %ariance HM"%G Q A/ H$"#A"G
" Q ):< H2<< 17<G Q 8+<< H-G
/ Q ++< H7<< 7:<G Q )87<< HAG
#####################
)<2<< HAG
#####################
BSPATIL
100
1. Material 6sage %ariance HM6%G Q $" H$/#A/G
" Q 2<< H)72 ):<G Q 72<< HAG
/ Q 7<< H+27#++<G Q )47<< H-G
######################
;+<< H-G
######################
Material 6sage %ariance is to be analysed into MiB %ariance and yield variance as follo9s(
HiG Material MiB %ariance HMM%G Q $" H&$/ A/G
" Q 2<< H)72 R 2<< E 2)< ):<G
Q 2<< H)7<#):<G :<<< HAG
/ Q 7<< H+27R2<<E2)< ++<G
Q 7<< H+27#++<G )+<<< H-G
###############
2<<<< H-G
###############
Material yield variance HMKG Q $K& H$K#AKG
$tandard Cost per unit at output Q +)1+<<E17;
Q &s. 488.)88: per .g.
-or an input of 2)< Ngs. $tandard yield is 17; .g
-or an input of 2<< Ngs. $tandard yield is M
2<< E 2)< R 17; Q 17< .gs. $tandard yield for actual input
MK Q &s. 488.)88: H17<#17:G Q&s. 4+<<H-G
HiiG Labour Efficiency %ariance HLE%G
Q $& H$3#A3"G
Q 1.<< H8<<<#:<<<G
Q 1<<< HAG
HiiiG Labour Cost %ariance HLC%G
Q $CA" AC
Q +)!<<< +2)7<
Q 1)7< HAG
,ote(# Wen tere is difference bet9een actual ours paid HA3"G and Actual 3ours Wor.ed HA3WG tere 9ill be
Labour Efficiency $ub#variance and 'dle time %ariance 9ic are calculated as follo9s(
Labour Efficiency $ub %ariance Q $& H$3#A3WG
Q 1.<< H8<<<#:<<<G
Q &s. +2<< HAG
Labour 'dle Time %ariance Q $& R ,o. of 3ours lost
Q 1.<< R +<<
Q &s. 7<< HAG
##############
&s. 1<<< HAG
##############
BSPATIL
101
Tis is reconciled 9it Labour Efficiency %ariance as calculated above.
Reconci+iation:
M6% Q MM% + MK%
;+<<H-GQ 2<< H-G + 4+<< H-G
Fina+ Reconci+iation:
MC% Q M"% + MM% + MK%
)+<< HAG Q )<2<< HAG + 2<<<H-G + 4+<<H-G
)RO(LE" 9
Te follo9ing details are available form te records of A0C Ltd. engaged in manufacturing Article @AA for te
9ee. ended +:
t
$eptember.
Te $tandard Labour ours for te 9ee. )<<< rs and rates of payment per article @AA 9ere as follo9s(
3ours &ate per our Total
&s. &s.
$.illed Labour )< 1.<< 1<
$emis.illed Labour : ).4< )+
6ns.illed Labour )7 ).<< )7
4:
Te actual labour ours and rates of pay per our 9ere given belo9(
3ours &ate per our Total
&s. &s.
$.illed Labour ;<<< 2.<< 17<<<
$emis.illed Labour :2<< ).4< )+7<<
6ns.illed Labour +<<<< <.;< ):<<<
77!7<<
-rom te above set of data you are as.ed to calculate(
a. Labour Cost %ariance
b. Labour &ate %ariance
c. Labour Efficiency %ariance
d. Labour MiB %ariance
Sol)tion
$C$M $CAM
$M 3ours &ate Amount
&s.
AM 3ours &ate Amount
&s.
$.illed )<<< B
)< Q
)<<<<
1!<< 1<<<< $.illed ;<<< 1.<< +8!<<<
BSPATIL
102
$emi#s.illed )<<< B
: Q
:<<<
).4< )+<<< $emi#s.illed :2<< ).4< )+!7<<
6n#s.illed )<<< B
)7 Q
)7!<<<
).<< )7<<< 6n#s.illed +<<<< ).<< +<!<<<
12!<<< 4:<<< 182<< 4;!7<<
H$C$MG
a. Labour Cost %ariance HLC%G Q $C#AC
Q 4:<<<#777<<
Q :7<<HAG
b. Labour rate %ariance HL&%G Q A3" H$&#A&G
$.illed Q ;<<< H1#2G Q ;<<<HAG
$emi#$.illed Q :2<< H).4< ).4<G Q ,il
6n#$.illed Q +<!<<< H) # .;<G Q 8<<< HAG
c. Labour Efficiency %ariance HLE%G
Q $& H$3#A3"G
Q 1.<< H)<<<< ;<<<G Q 1<<<H-G
Q ).4< H:<<< :2<<G Q 7<<HAG
Q ).<< H)7<<< +<<<<G Q 2<<<HAG
################
)7<<HAG
d. Labour MiB %ariance HLM%G Q $C$M $CAM
Q 4:<<< 4;7<<
Q )7<<HAG
)*ob+e, 5
'n te production of -inised product 4< employees 9ere engaged at a $tandard rate of &s. 1 per our. Te standard
performance 9as set at +<< numbers per our. A 2< our per 9ee. 9as in operation. 'n a particular period of 2 9ee.s 14
employees 9ere paid at te standard period of 2 9ee.s 14 employees 9ere paid at te standard rate! but )< employees
9ere paid at &s. 1.+< per our and 4 employees at &s. +.:< per our. Te factory stopped production for 2 ours due to
e>uipment failure. Actual production 9as +:<<< 6nits. Calculate te labour HiG rate and HiiG efficiency %ariances.
Sol)tion
4< employees B &s. 1 per our Q &s. )4<
Output product Q +<<
$tandard cost of actual production H$CA"G Q +:<<< B <.84
Q &s. +)!<<<
Actual Cost HACG
Employees Wee.s 3ours &ate
&s.
Amount
BSPATIL
103
14 B 2 B 2< Q 47<< B 1.<< Q )7!:<<
)< B 2 B 2< Q )7<< B 1.+< Q 4!)+<
4 B 2 B 2< Q :<< B +.:< Q +!+2<
4< :<<< +2!)7<
A3" Q :<<<
A3W Q :<<< 'dle time of 2 ours :<<< +<< Q 8+<<
in respect of all 4< employees
HiG Labour &ate %ariance HL&%G Q A3" H$& A&G
Q 47<< H1.<< 1.<<G Q ,il.
Q )7<< H1.<< 1.+<G Q 1+< HAG
Q :<< H1.<< +.:<G Q )7< H-G
#############
)7< HAG
#############
O;EREAD ;ARIANCE
Overead %ariance can be classified into HAG %ariable Overead %ariance and H0G -iBed Overead %ariance.
O%E&3EA* CO$T %A&'A,CE
-iBed Overead %ariance %ariable Overead %ariance
EBpenditure
%ariance
%olume
%ariance
EBpenditure
%ariance
Efficiency
%ariance
Efficiency Capacity Calendar $easonal
). %ariable Overead %ariance( Tey are caused by difference bet9een te actual variable overead eBpenditure
incurred and te standard allo9ed(
%O3C Q $O3C AO3C
%ariable Overead Q $tandard %ariable Overead Cost on Cost %ariance Actual Output Actual %ariable
Overead Cost
Q HActual output $tandard Overead &ate Actual Overead
Alternatively! te follo9ing variable overead variance may be computed to ma.e te position more clear(
HiG %ariable Overead EBpenditure %ariance H%C3E B %G Cost
Tis is te difference bet9een standard variable Overead allo9ance of actual output! and te standard variable
overead of actual time.
%O3E efficiency %ariance Q $tandard Overead &ate HActual Time $tandard time for actual productionG
BSPATIL
104
Total %ariable Overead Q EBpenditure %ariance + Efficiency %ariance
-iBed Overead Cost %ariance H-O3C%G ( 't is tat portion of overead variance 9ic is due to te difference bet9een
fiBed overead recovered and te actual fiBed overead cost incurred.
-O3C% Q HActual output R $tandard fiBed overead &ateG Actual Overead
Tis variance is divided into HiG fiBed Overead EBpenditure %ariance and HiiG -iBed Overead %olume %ariance
HiG -iBed Overead EBpenditure H-O3E%G ( 't is te difference bet9een actual overead eBpenditure and te
budgeted eBpenditure.
-O3E% Q 0udgeted fiBed Overead Actual -iBed Overead
Q H$tandard &ecovery &ate R 0udgeted "roductionG
Actual -iBed Overeads
'f te actual output is more tan te budgeted output! it leads to over#recovery of overeads costs and a favourable
variance results an vice versa. Tis variance is also .no9n as 0udget %ariance or Cost %ariance or $pending %ariance.
HiiG -iBed Overead %olume %ariance H-O3%%G ( 't is te difference bet9een te standard cost of overead
absorbed in actual output and te standard allo9ance allo9ed for te output. Tis variance is caused due to te
difference bet9een te budgeted output and te actual output.
-O3%% Q $tandard -iBed Overead &ate HActual /uantity 0udgeted /uantityG
Or
Q Actual output R $tandard &ate 0udgeted -iBed Overead
'f te actual output is more tan te budgeted output! it leads to over#recovery of overead costs and a favourable
variables results and vice versa.
Te %olume %ariance can furter be analysed as under
HaG -'PE* O%E&3EA* E--'C'E,CK %A&'A,CE H-O3Eff.%G
't is tat portion of volume variance 9ic is due to te difference bet9een te budgeted efficiency Hin standard unitG
and te actual efficiency acieved. Tis variance is li.e labour efficiency variance.
-O3Eff.% Q $tandard Overead &ate per unit HActual /uantity $tandard /uantityG
Wen te actual output is more tan te standard >uantity of output.
Overead Cost %ariance( Causes Controllability
A. Overead
EBpenditure %ariance
). &ise in prices! 9ages 6ncontrollable
+. Lac. of control over
EBpenditure
*ept. Manager
1. Cange in production "roduction Manmager
2. Cange in nature of
service eg. 6se gas in
lieu of electricity
##do##
0. %olume %ariance ). *eclining $ales HLac.
of ordersG or Customer
$ales Manager
BSPATIL
105
demands
+. Lac. of proper
supervision
-oreman
1. *efect in Macinery
H0rea.do9nG
Maintenance Engineer
2. Lo9 efficiency of
9or.er
-oreman E "ersonnel
Manager
4. "oor >uality material "urcase Manager
7. Abnormal idle time Hif
not boo.ed as part of
time spent on CobsG
-oreman E
6ncontrollable
8. More or less 9or.ing
days E Calendar
6ncontrollable
:. $tri.es! absenteeism
including lateness
"ersonnel Manager
)RO(LE" =
Te follo9ing figures ave been eBtracted from te cost records for te mont of Marc );;8.
$tandard Actual
,umber of units
produced
84<< :<<<
Capacity )<<L )<4L
,umber of days 9or.ed +4 +7
-iBed overeads &s. ++4<< &s. +14<<
%ariable overeads &s. )4<<< &s. )484<
Analyse te total overead variance into
HiG -iBed overead variance!
HiiG %ariable overead variance! and
HiiiG $ub#variances under eac ead
Sol)tion
Overead Cost %ariance Q $td. cost for Actual production Actual cost
Q 2<!<<< # 1:!;<<
Q &s. )!)<< H-G
Overead Cost %ariance Q -O3C% + %O3C%
&s. ))<< H-G Q &s. :4< H-G + +4< H-G
HaG -O3C% Q HA" R $O3&G A"O3
Q :<<< B 1 +1)4<
Q &s. :4< H-G
HbG EBpenditure %ariance Q 0udgeted -iBed Overeads Actual -iBed Overeads
Q &s. ++4<< &s. +1)4<
Q &s. 74< HAG
HcG -O3%% Q 0O3& A" R $O3&
BSPATIL
106
Q :<<< B 1 &s. ++4<<
Q &s. )4<< H-G
Or
$O3& H0udgeted output Actual outputG
Q 1 B H84<< :<<<G
Q &s. )4<<H-G
HdG Capacity variance -iBed Overead $tandard &ate per unit
H$tandard /uality for actual oursG
-or actual ours E days
Q &s. 1
$tandard production for actual ours
Q
Q 8:84 units
HeG Calendar %ariance Q per unit $tandard -iBed Cost
HActual /uantity $tandard
/uantity for actual capacityG
Q &s. 1 H:<<<#8:84G
Q &s. 184 H-G
Q
Q 8:84
-O3C% Q -O3E% + -O3%%
Q &s. 74<HAG + &s. )4<< H-G
Q &s. :4< H-G
)*oof
-O3 %.%. Q Cal. %. + Cap. %. + Eff. %.
&s. )4<<H-G Q &s. ;<<H-G + &s! ++4 H-G + &s. 184H-G
HiG %ariable overead
%ariance Q $C AC
Were
Q &s. )7<<< &s. )484<
Q &s. +4<H-G
BSPATIL
107
HiiG %ariable overead
EBpenditure variance Q 0C AC
Q +7 B 7<<
Q )47<< )484<
Q &s. )4<HAG
HiiiG %ariable overead efficiency variance
Were standard overead rate per our E day is given
%ariable overead
Efficiency variance Q $& HAT $TG
Q 7<< H+7 +7.78G
Q &s. 2<< H-G
Were standard overead rate per unit is given(
%ariable overead
efficiency variance Q $& HA" $"G
Q + H:!<<< 8!:<<G
Q &s. 2<<H-G
Cec. (
%O3C% Q %O3 EP. %. + %O3 Eff. %.
&s. +4<H-G Q &s. )4<HAG + &s. 2<<H-G
)*ob+e, :
Te standard cost per unit for product @AA is as under (
$tandard Cost ( # Te cost of operations to produce )<<< units during 5anuary );8) is as under(
Rs3 Rs3
Material ) 6nit &s. )< )< Material ;4< at &s. )) )<!24<
Labour 4 ours at &s. + )< Labour 2!4<< ours at &s.
+.+<
;!;<<
Overeads( Overeads(
%ariable 4 ours at &s. + %ariable ))!<<<
-iBed 4 ours at &s. ) 4 -iBed 74<<
Total cost per unit 14 Total cost of )<<< units of
product A
18!:4<
Te fleBible budget for tis department for normally montly activity 9as called for 7!7<< direct labor ours of
operations. At tis level te fiBed indirect cost 9as budgeted at &s. 7!<<<.
Kou are re>uired to compute te various variance from te above solution.
Sol)tion
iG Material cost variance Q $tandard cost of actual output Actual cost of actual material used
Q &s. )<!<<< &s. )<24<
Q &s. 24< HAG
BSPATIL
108
iiG Material price variance Q A/ H$"#A"
Q ;4< H)<#))G
Q 14< HAG
iiiG Material usage variance Q $tandard unit price H$/#A/G
Q &s. )< H)!<<< ;4<G
Q &s. 4<< H-G
%erification (
Material cost variance Q Materials price variance + material usage variance
&s. 24<HAG Q &s. ;4<HAG + &s. 4<< H-G
ivG Labour cost variance Q $LC ALC
Q 4!<<< R &s. + 2!4<< R &s. +.+<
Q &s. )<!<<< &s. ;!;<<
Q &s. )<< H-G
vG Labour rate of pay variance Q Actual time H$tandard rate Actual rateG
Q 2!4<< H+ +.+<G
Q &s. ;<< H-G
viG Labour Efficiency variance
Q $tandard rate H$tandard time actual timeG
Q &s. +H4!<<< 2!4<<G
Q &s. )<<< H-G
Cec. ( LC% Q L&% + LE%
&s. )<<H-G Q &s. ;<< HAG + &s. )<<< H-G
viiG %ariable over ead
%ariance Q HActual output R standard rated of fiBed overeadsG Actual fiBed over ead incurred
Q H)!<<< B 4G # 7!4<<
Q &s. )!4<< HAG
)*oof
Overead Cost %ariance Q %ariable overead variance + fiBed over
ead variance
&s. +!4<< HAG Q &s. )!<<< HAG + &s. )!4<< HAG
SALES ;ARIANCE
Te cost variance so for eBplained ultimately affects profit favourably or adversely. 0udgeted profit may be
affected due to increase or decrease iG in te selling price and iiG te >uantum of sales.
Te are t9o distinct metod of computing and presenting sales variance.
iG $ales value or turnover metod and
iiG $ales margin profit metod.
Te first metod so9s te effect of variance in terms of turnover. Te second so9s te effect in terms of profit.
BSPATIL
109
Sa+es ;a+ue "et#o$
HiG $ales %alue %ariance(
't is difference bet9een standard
Or
0udgeted sales and te actual sales
$ales %alue %ariance Q $tandard sales Actual sales
,ote( $tandard $ales Q $tandard sales R Actual >uantities of sales
'f actual sales are more tan te budgeted or standard sales! a favourable variance 9ould result and vice versa.
iiG $ales "rice %ariance(
'f is tat portion of te sales value variance 9ic is due to te difference bet9een standard price specified and
te actual price carged.
$ales "rice %ariance Q Actual >uantity $old H$tandard "rice Actual "riceG
iiiG $ales %olume %ariance
Tis is te difference bet9een te budgeted sales and te standard value of te actual miB of sales.
$ales %olume %ariance Q $tandard "rice HActual /uantity $tandard /uantityG
Or
Q 0udgeted $ales $tandard $ales
'f actual sales at standard price eBceed te budgeted sales! tere is a favourable variance and vice versa.
Tus! $ales %alue %ariance Q "rice %ariance + %olume %ariance
Te volume variance can furter be analyDed into
HaG MiB %ariance and
HbG /uantity %ariance
HaG MiB %ariance(
't is tat portion of te sales value variance 9ic is due to te difference bet9een te standard and te actual
interrelationsip of te >uantities of eac product or product group of 9ic sales are composed! 9ere products are
BSPATIL
110
omogeneous.
# $tandard Cost of Actual MiB
$ales Margin /uantity %ariance(
Tis is te difference bet9een sales margin volume variance and sales margin miB variance.
Margin /uantity %ariance Q $tandard Margin &ate H$tandard /uantity Actual /uantityG
$ales Margin *ue to $ales Allo9ance(
't is tat portion of total margin variance 9ic is due to te difference bet9een te budgeted rebates! discounts!
etc.! allo9ance on tose sales(
"rofit Hor LossG %ariance(
't is te difference bet9een te budgeted profit Hor LossG and te actual profit Hor lossG.
Types Causes Controllability
A. $ales "rice
%ariance
). 6neBpected Competition
+. &ise in general price level
1. "oor >uality of material
6ncontrollable
# *o
# *o #
0. $ales %olume
%ariance
). 6neBpected Competition
+. 'neffective $ales "roportion
1. 'neffective $upervision and
control of salesman
6ncontrollable
"ublicity Manager
$ales Manager
DIS)OSAL OF ;ARIANCES
Tere is difference of opinion among accountants as regards disposal of cost variance. 3o9ever! te follo9ing
metods are usually used to close te $tandard Cost %ariances(
iG Transfer to profit and loss account.
iiG Allocation of finised stoc.! 9or. in progress! and cost of salesF
iiiG Transfer to &eserve Account i.e.! to carry for9ard to te neBt financial year and to be set off in te
subse>uent year of years
Te standard cost are also incorporated in te accounting system so as to increase its statistical utility. Te follo9ing are
te metods for accounting based on standard costing.
iG "artial plan metod!
iiG $ingle plan metod and
iiiG *ual plan metod.
)RO(LE" A
-rom te follo9ing particulars of $ri *anala.smi mills Ltd.! calculate(
iG Total sales margin variance
BSPATIL
111
iiG $ales margin variance due to selling price.
iiiG $ales margin variance due to volume.
$tandard Actual in H&s.G
/ty Cost p.u. "rice p.u. 6nits Cost "rice
"rod P 1!<<< )< )+ +!+<< )<.4< )1
"rod K +!<<< )4 ): )!7<< )2.<< )8
Sol)tion
iG Total $ales Margin
%ariance Q Actual >uantity of sales B Actual profit per unit
# budgeted >uantity of sales B 0udgeted profit
per unit
Hi.e. Actual profit 0udgeted profitG
"rod. P ( 1!+<< R &s. +.4< 1<<< R &s. +.<< Q &s. +!<<< H-G
"rod. K ( +!7<< R &s. 1.<< +<<< R &s. 1.<< Q &s. )!+<< HAG
###################
Total $ales Margin %ariance &s. :<< H-G
iiG $ales Margin %ariance due to
$elling price Q A/ HA" $"G
"rod. P ( 1!+<< H&s. )1 &s. )+G Q &s. 1!+<< H-G
"rod. K ( )!7<< H&s. )8 &s. ):G Q &s. )!7<< HAG
#########################
Total sales margin due
selling price &s. )7< H-G
iiiG $ales margin due to volume Q $" HA/ $/G
"rod P( &s. + H1!+<< 1<<<G Q &s. 2<< H-G
"rod K( &s. 1 H)!7<< +<<<G Q &s. )!+<< HAG
##########################
Total sales margin variance
due to volume Q &s. :<< HAG
BSPATIL
112
)RO(LE" B
-or a mont! te budgeted and actual figure for sales in a company 9ere as under(
"roduct /ty "rice
&s.
0udget
%alue
&s.
/ty Actual
"rice
&s.
Actual
value
&s.
' +< + 2< )4 + 1<
'' )< ) )< )4 ).4< ++.4<
''' 4 1 )4 )< +.4< +4
'% )< 1.4< 14 )< 1 1<
24 )<< 4< )<8.4<
Te budgeted costs 9ere te different products 9ere(
' &s. ).4<
'' &s. <.:<
''' &s. +.<<
'% &s. 1.<<
Calculate te sales variance based on (
aG Turnover and bG "rofits verify your calculation.
Sol)tion
aG $ales variance based on turnover(
$tandard $ales H$$G
Actual 0udget
&evised $tandard $ales $$
"roduct /ty "rice 0alue $tandard price per 6nit of $tandard
' )4 + 1<.<< MiB Q )<< E 24 Q +.++++
'' )4 ) )4.<< &$$ Q 4< R +.++++ Q &s. ))).))
''' )< 1 1<.<<
'% )< 1.4< 14.<<
4< ))<.<<
Total sales value %ariance Q 0$ A$
Q )<< )<8.4<
Q &s. 8.4< H-G
$ales &ate %ariance H$&%G Q A/ H$& A&G
' Q )4 H+ +G Q ,il
'' Q )4 H) ).4<G Q 8.4< H-G
''' Q )< H1 +.4<G Q 4.<< HAG
'% Q )< H1.4< 1G Q 4.<< HAG
+.4< HAG
$ales %olume %ariance H$%%G( Q H$& H0/ A/G
BSPATIL
113
' Q + H+< )4G Q )<.<< HAG
'' Q ) H)< )4G Q 4.<< H-G
''' Q 1 H4#)<G Q )4.<< H-G
'% Q 1.4< H)< )<G Q ,il
)<.<< H-G
&econciliation '(
Total sales value %ariance Q $&% + $%%
8.4< H-G Q +.4< HAG + )<.<< H-G
$ales /uantity %ariance H$/%G Q 0$ &$$
Q )<< ))).))
Q )).)) H-G
$ales MiB %ariance H$M%G Q &$$ $$
Q ))).)) ))<.<<
Q ).)) HAG
,ote ( if &$$ is more tan $$! it is adverse variance and vice versa.
Fina+ Reconci+iation:
Total $ales %alue %ariance Q $&% + $/% + $M%
8.4< H-G Q +.4< HAG + )).)) H-G + ).)) HAG
bG $ales %arious based on "rofit(
(u$get )*ofit
"roduct /ty. &ate of "rofits Total &s.
' +< +.<< ).4< Q <.4< )<.<<
'' )< ).<< <.:< Q <.+< +.<<
''' 4 1.<< +.<< Q ).<< 4.<<
'% )< 1.4< 1.<< Q <.4< 4.<<
24 ++.<<
ACTUAL )ROFITS A)
"roduct /ty. &ate of "rofits Total &s.
' )4 +.<< ).4< Q <.4< 8.4<
'' )4 ).4< <.:< Q <.8< )<.4<
''' )< +.4< +.<< Q <.4< 4.<<
'% )< 1.<< 1.<< Q ,il. ,il
4< +1.<<
$tandard "rofit H$$G
Actual 0udget
&evised $tandard "rofit
"roduct /ty &ate %alue $tandard Margin per 6nit of
BSPATIL
114
of
"rofit
$tandard MiB
' )4 <.4< 8.4< Q ++ E 24
'' )4 <.+< 1.<< Q &s. <.2::;
''' )< ).<< )<.<< &$" Q 4< B <.2::;
'% )< <.4< 4.<< Q +2.22
4< +4.4<
Total sales "rofit %ariance Q 0" A"
Q ++.<< # +1.<<
Q &s. ).<< H-G
$ales &ate of "rofit
%ariance H$&"%G Q A/ H$&" A&"G
' Q )4 H<.4< <.4<G Q ,il
'' Q )4 H<.+< <.8<G Q 8.4< H-G
''' Q )< H).<< <.4<G Q 4.<< HAG
'% Q )< H<.4< ,ilG Q 4.<< HAG
+.4< HAG
$ales %olume %ariance H$%%G ( Q H$&" H0/ A/G
' Q <.4< H+< )4G Q +.4< HAG
'' Q <.+< H)< )4G Q 4.<< H-G
''' Q ).<< H4 )<G Q 4.<< H-G
'% Q <.4< H)< )<G ,il
1.4< H-G
&econciliation )(
Total sales "rofit %ariance Q $&"% + $%%
Q +.4< HAG + 1.4< H-G
Q &s. ).<< H-G
$ales /uantity %ariance H$/%G Q 0" &$"
Q ++.<< +2.22
Q &s. 2.22 H-G
$ales MiB %ariance H$M%G Q &$" $"
Q +2.22 +4.4<
Q ).<7 H-G
&econciliation ''(
$%% Q $/% + $M%
1.4< H-GQ +.22 H-G + ).<7 H-G
Q ).<< H-G
CONTROL RATIOS
Te management 9ants to .no9 9eter performance of its business is going as per estimated scedule or not.
BSPATIL
115
Tis can be identified 9it te elp of control ratios. 'f te ratio are more tan )<<L ten te performance 9ill be
favourable but if tese ratios are less tan )<<L ten te performance 9ill be unfavourable or unsatisfactory. Te
formula for computing certain control ratios are given belo9.
Te ratio indicates o9 muc budgeted ours ave been actually utiliDed. 'f te ratio if :<L ten it means tat :<L
budgeted ours ave been utiliDed and te remaining +<L capacity remain idle.
Tis ratio so9s te level of activity attained during te period.
Tis ratio so9s te level of efficiency attained during a particular period. 'f tis ratio is )1<L ten it so9s tat te
efficiency is more by 1<L or it as gone up by 1<L.
Tis ratio so9s 9eter actual 9or.ing days available are more or less tan te budgeted 9or.ing days. 'f te ratio is
more tan )<<L ten actual 9or.ing days are more tan te budgeted number of 9or.ing days and vice versa if te
ratio is less tan )<<L.
E2a,1+e
"roduct P ta.es 4 ours to ma.e and K re>uires )< ours. 'n a mont of +4 effective days of : ours a day! )<<<
units of P and 7<< units of K 9ere produced. Te company employees 4< 9or.ers in te production department. Te
budgeted ours are )!<+!<<< for te year. Calculate capacity ratio! activity ratio and efficiency ratio.
Sol)tion
$tandard 3ours for Actual "roduction(
"roduct P ( )<<< B 4 Q 4<<< 3ours
"roduct K ( 7<< B )< Q 7<<< 3ours
###############
))<<< 3ours
###############
0udgeted 3ours HMontly Q )!<+!<<< E )+
Q :4<< 3ours
Actual 3ours Wor.ed Q 4< B +4 B :
Q )<!<<< 3ours
BSPATIL
116

Q ))8.74L

Q )+;.2)L

Q ))<.2)L
$ince al te tere control ratios are more tan )<<L organisation is performing 9ell in producing te products P and K.
BSPATIL
117
LESSON 8
COST LEDGER ACCOUNTING
Cost accounting system can be introduced in an organiDation in t9o 9ays. Tey are(
). Cost Leger Accounting
+. 'ntegral Accounting.
Cost (eger Acco)nting: 6nder tis metod separate set of cost accounts ave to be maintained so as to derive cost
details. 't 9ill differ from general financial accounting system adopted in te organisation. 3ence! it re>uires t9o
9eparate set of accounts. 't can be called inter#loc.ing system. 6nder cost Ledger Accounting te boo.s are .ept only
for te impersonal accounts. To ma.e tis system self#balancing certain set of control accounts ave to be prepared.
As in te case of general accounting system! transactions relating to factory operations 9ic are ultimately
reflected in te cost accounts are recorded in te boo.s of original entry. $ummaries from tese boo.s are CournaliDed
and posted in te general ledger 9ic contain control accounts and subsidiary boo.s. Te follo9ing ledger accounts in
tis system.
Stores (edger:
'n consists of accounts of individual items of ra9 materials! components and consumable stores. &eceipts are posted into
te stores ledger on te basis of stores received notes and issues are recorded on te basis of re>uisition slip. Te balance
of tis account so9s te stoc. in and.
&or' in $rogress (edger:
't consists of accounts of eac Cob pending on te floor. Eac Cob accounts is debited 9it all direct costs
carged to te Cob and a sare of overeads. 't is credited 9it te values transferred to finised stoc. ledger and 9en
Cob is completed.
Stoc' ledger:
't contains item 9ise accounts in respect of finised stoc. intended for sale. A separate account is opened is for
eac finised product or Cob.
Cost (edger:
't is te main ledger of te costing department. 't contains control accounts in respect of eac ledger li.e store
ledger! stoc. ledger and 9or. in progress ledger. 'n addition! it contains general ledger control accounts! 9ages control
accounts and overead control accounts.
Control acco)nts:
A control account is maintained in te cost ledger so tat double entry in te cost ledger may be completed and
ma.e it self balancing. Tese control accounts are noting but total accounts or adCustment accounts! summariDing
mass of information contained in te subsidiary ledgers. Tese control accounts are posted 9it te totals of items 9ic
ave been debited or credited in detail to te accounts in te ledgers to 9ic tey relate. Te balance in control
accounts represents te total of balances in a number of accounts of similar nature maintained in tat subsidiary ledger to
9ic te control relates.
Ad*antages o! Control acco)nts:
Control accounts elps
# to provide a cec. for ensuring tat all eBpenditure are recorded.
# provides a basis for reconciliation 9it financial accounts.
# provided ready means of preparing montly or periodical financial statements.
BSPATIL
118
+"pes o! Control Acco)nts:
A brief description about different control accounts are given belo9(
Stores (edger Control Acco)nts:
Tis accounts reveals te value of stores received! issued and balances in and. &eceipts are posted from goods
received posted on te basis of material re>uisition in te credit side of te account. Te balance of tis account
represents te total balance of stoc. 9ic sould agree 9it aggregate of te balance of individual accounts in te
stores ledger.
&age Control Acco)nt:
Tis accounts records labour transactions in aggregate. 't is debited 9it gross 9ages so9n in 9ages analysis
seet. 't is closed by transfer of direct labour to 9or. in progress and indirect labour to overead.
&or'-in-progress Control Acco)nt:
't represents te total W'" at any time. 't is debited 9it te totals of materials! 9ages and overeads as
transferred from te respective control accounts. Te completed Cob 9ill be credited in tis account. Tus! tis account
so9s te so9s te total value of unfinised Cobs.
&or's /*er%ead Control Acco)nt:
't deals 9it factory overead eBpenses in aggregate. 't is debited 9it te amount of indirect material! indirect
material analysis and 9age analysis seets. 't is credited 9it te amount of overeads! recovered! as obtained from te
applied overead analysis seets. Te balance represents under or over absorption 9ic is transferred to overead
adCustment account.
Ad#inistrati*e /*er%ead Control Acco)nt:
't is debited 9it te administration overead incurred and credited 9it te amount of administrative overead
absorbed by finised goods. Te balance represents under or over absorption of administrative overead 9ic is
transferred to overead adCustment account.
Setting and Distrib)tion /*er%ead Control Acco)nt:
't is debited 9it te amount of selling and distribution overead incurred and credited 9it overead aabsorbed
by cost of sales. 0alance represents under E over absorption.
Cost o! Sales acco)nt:
't is debited 9it te cost of goods sold by transfer from finised goods ledger control and also by te selling
distribution overead absorbed. 't is closed by transferring its balance to costing profit and loss account.
Costing $ro!it and (oss Acco)nt:
't is debited 9it te cost of sales! abnormal losses and under absorbed overead and credited 9it sales value!
abnormal gain and over#absorbed overead. 0alance represents profit or loss 9ic is transferred to cost ledger control
account.
Cost ledger control acco)nt or eneral ledger Ad:)st#ents A;c:
BSPATIL
119
't is maintained to ma.e te cost ledger self#balancing. Te main obCect of tis account is to complete double
entry in cost accounting. All te financial transactions on account of material purcases! 9ages! salaries and
miscellaneous eBpenses are credited to cost ledger control account by contra debit to various control accounts. All
financial receipts are debited to tis account. Te balance is tis represents te total of te balance of all personal
accounts in te financial ledger.
)*ob+e, 13
-rom te follo9ing data 9rite up te various accounts as you envisage in te cost ledger and prepare a trial
balance as on 1)
st
Marc );:2.
aG 0alance as on ).2.:1( &s. HtousandsG
Material control )+2<
Wor. in progress 7+4
-inised goods )+2<
"roduction overead :2
Administration overead )+< HcreditG
$elling J *istribution overead 74
Ieneral ledger control 1)12
bG Transactions for te year ended 1).1.:2 ( &s. HtousandsG
Materials (
"urcases 2!:<)
'ssued to(
5obs 2!882
Maintenance 9or.s 2)+
Administration office 12
$elling departments 8+
*irect 9ages )!2;1
'ndirect 9ages 74<
Carriage in9ard :2
"roduction overead (
'ncurred +!2+1
Absorbed 1!4;)
Administration overead(
'ncurred 82<
Absorbed 4+;
Allocated to sales )2:
$ales overead(
'ncurred 72+
Absorbed :+<
-inised goods produced ;!4:2
-inised goods sold ;!881
$ales realiDation )+!21<
Sol)tion:
BSPATIL
120
Cost Ledger
Ieneral Ledger AdCustment Account
*r. Cr
&s. &s.
To costing "EL
Account HsalesG )+!21< 0y balance 1!)12
0y material control aEc 2!:<)
To balance cEd 1!++7 0y 9ages control aEc +!)21
0y production overead
control aEc HcarriageG
:2
0y production overead
control aEc
+!2+1
Admini. Overead control
aEc
82<
0y selling J dis. Overead
control aEc.
72+
0y closing "EL aEc )!7:;
)4!747 )4!747
"ate*ia+ Cont*o+ Account
To 0alance bEd )+2< 0y W'" control AEc 2882
To Ieneral Ledger
AdCustment aEc
2:<) 0y "roduction Overead
Control AEc
2)+
0y Administration overead
control aEc
12
0y selling J dis overead
control aEc
8+
0y balance cEd 82;
7<2) 7<2)
4ages Cont*o+ Account
To Ieneral Ledger
AdCustment aEc
+)21 0y W'" Control AEc )2;1
0y production overead
Control aEc
74<
+)21 +)21
)*o$uction O-e*#ea$ Cont*o+ Account
To balance bEd :2 0y W'" Control aEc 14;)
To Material Control aEc 2)+ 0y 0alance cEd 7+
To Ieneral Ledger
AdCustment account
:2
To Wages Control aEc 74<
To Ieneral Ledger
AdCustment aEc
+2+1
1741 1741
4o*/ > in > )*og*ess Cont*o+ Account
BSPATIL
121
To 0alance bEd 7+4 0y -inised Ioods Control
AEc
;4:2
To Material Control aEc 2882 0y 0alance cEd :;;
To 9age Control aEc )2;1
To "roduction Overead
Control AEc
14;)
)<2:1 )<2:1
A$,inist*ation O-e*#ea$ Cont*o+ Account
To Material Control aEc 12 0y 0alance bEd )+<
To Ieneral Ledger
AdCustment aEc
84< 0y -inised Ioods Control
aEc
4+;
To 0alance cEd +1 0y Cost $ales aEc )2:
);8 );8
Finis#e$ Goo$s Cont*o+ Account
To 0alance bEd )+2< 0y Cost of sales aEc ;881
To Administration Overead
Control aEc
4+; 0y 0alance cEd )4:<
To W'" Control aEc ;4:2
))141 ))141
Se++ing an$ Dist*ibutions O-e*#ea$ Cont*o+ Account
To 0alance bEd 74 0y cost of sales :+<
To Material control aEc 8+
To Ieneral Ledger
AdCustments aEc
72+
To 0alance cEd 2)
:+< :+<
Cost of Sa+es Account
To -inised goods Control
aEc
;881 0y Costing "EL aEc )<82)
To $elling J *is. Overead
Control aEc
:+<
To admin. Overead Control
aEc
)2:
)<82) )<82)
Costing )*ofit an$ Loss Account
To Cost of $ales aEc )<82) 0y Ieneral ledger
AdCustment aEc H$alesG
)+21<
To Ieneral Ledger
AdCustments aEc
)7:;
)+21< )+21<
BSPATIL
122
T*ia+ (a+ance as on 5135318B=
*r. Cr.
&s. &s.
Material Control Account 82;
W'" Control Account :;;
-inised goods ledger control account )4:<
"roduction overead control account 7+
Administration overead control account +1
$ales J *istribution overead control aEc 2)
Ieneral Ledger AdCustment account 1++7
)*ob+e, : 9
-rom te follo9ing balances and transactions eBtracted from te Cost. 0oo.s of Iupta Engineering Co.!
Cournalise and 9rite up te accounts in te Cost Ledger and prepare a Trial 0alance as at 1)
st
*ec. );O Also so9 te
profit or loss for te mont.
0alance as at )#)+#);O
*r. Cr.
&s. &s.
Worn#in#"rogress Account 4+<<
-inised Ioods Account +1<<
-actory Overead $uspense Account 4<
Office Overead $uspense Account 1<
$tore Ledger Control Account ))4<
Ieneral Ledger AdCustment Account :81<
:81< :81<
Transactions for te monts 9ereF &s.
*irect Wages 84<<
'ndirect Wages 4<<
Wor.s Overead absorbed in production ++<<
Office Overead absorbed in production )+<<
$tores issued to production 2;<<
Ioods finised during te monts ):<<<
-inised Ioods $old +)<<<
$tores "urcased 4<<<
$tores issued to factory repair orders +<<
Carriage in9ards on stores issued for "roduction :<
-actory EBpenses )24<
Office EBpenses ))8<
BSPATIL
123
Sol)tion: 5ournal
*ate *r. Cr.
);O &s. &s.
*ec.) Wor.#in#"rogress Ledger Control AEc *r. 4+<<
-inised Ioods Ledger Control AEc *r. +1<<
-actory Overead $uspense AEc *r. 4<
Office Overead $uspense AEc *r. 1<
$tores Overead $uspense AEc *r. ))4<
To Ieneral Ledger AdCustment AEc :81<
);O
*ec. ) $tores Ledger Control aEc
To Ieneral Ledger AdCustment A.c
H0eing stores purcasedG
*r. 4<<<
4<<<
W.'.". Ledger Control AEc
To stores Ledger Control AEc
H0eing te stores issued to production &s.
2;<< and carriage in9ard on stores issued
&s. :<G
*r. 2;:<
2;:<
-actory Overead Control AEc
To stores Ledger Control AEc
H0eing stores issued to factory repairsG
*r. +<<
+<<
W.'.". Ledger Control AEc
To Wages Control AEc
H0eing indirect Wages carged to factory
overeadG
*r. 84<<
84<<
-actory Overead Control AEc
To Wages control AEc
H0eing te total 9ages brougt into Costing
0oo.s from financial boo.sG
*r. 4<<
4<<
Wages control AEc
To Ieneral Ledger AdCustment AEc
H0eing te total 9ages brougt into Costing
0oo.s from financial boo.sG
*r. :<<<
:<<<
-actory Overead Control AEc
To -actory Overead suspense AEc
H0eing te latter transferred to former AEc
reversing te entry
*r. 4<
4<
-actory Overead Control AEc
To Ieneral Ledger adCustment AEc
H0eing te actual factory eBpenses brougt
into costing boo.sG
*r. )24<
)24<
W.'.". Ledger Control AEc
To -actory Overead Control AEc
H0eing te overeads carged to productionG
*r. ++<<
++<<
BSPATIL
124
Office Overead Control AEc
To office Overead $uspense aEc
H0eing $uspense AEc transferred to former
reversing te entryG
*r. 1<
1<
Office Overead Control AEc
To Ieneral Ledger AdCustment AEc
H0eing te actual office overeads brougt
into costing boo.sG
*r. ))8<
))8<
W.'.". Ledger Control AEc
To Office Overead Control AEc
H0eing te office overeads carged to
productionG
*r. )+<<
)+<<
-inised Ioods Control AEc
To W.'.". Ledger Control AEc
H0eing te finised goods transferred to
former accountG
*r. ):<<<
):<<<
Cost of $ales AEc
To -inised Ioods Control AEc
H0eing te -inised $toc. transferred to
former accountG
*r. +<1<<
+<1<<
Ieneral Ledger AdCustment AEc
To Costing "rofit J Loss AEc
H0eing te amount of sales brougt into
costing "JL AEcG
*r. +)<<<
+)<<<
Costing "rofit J Loss
To Ieneral Ledger AdCustment AEc
H0eing te amount of "rofitG
*r. 8<<
8<<
COST LEDGER
Gene*a+ Le$ge* A$just,ent Account
&s. &s.
To Costing " J L AEc
H$alesG
+)<<< 0y 0alance bEd :81<
To 0alance cEd 2<4< 0y $tores Ledger Control
AEc
4<<<
0y Wages Control AEc :<<<
0y -actory Overead
Control AEc
)24<
0y Office Overead Control
AEc
))8<
0y Costing " J L AEc 8<<
+4<4< +4<4<
Sto*es Le$ge* Cont*o+ Account
&s. &s.
BSPATIL
125
To 0alance bEd ))4< 0y W.'." Ledger Control AEc 2;:<
To Ieneral Ledger
AdCustment AEc
4<<< 0y -actory Overead
Control AEc
+<<
0y 0alance cEd ;8<
7)4< 7)4<
To 0alance bEd ;8<
4ages Cont*o+ Account
To Ieneral Ledger
AdCustment AEc
:<<< 0y W.'.". Ledger Control
AEc
84<<
0y -actory Overead
Control AEc
4<<
:<<< :<<<
Facto*y O-e*#ea$ Cont*o+ Account
&s. &s.
To $tores Ledger Control
AEc
+<< 0y W.'.". Ledger Control
AEc
++<<
To Wages Control AEc 4<<
To -actory Overead
Control AEc
4<
To Ieneral Ledger
AdCustment AEc
)24<
++<< ++<<
Office O-e*#ea$ Cont*o+ Account
&s. &s.
To Office Overead
$uspense AEc
1< 0y W.'.". Ledger Control
AEc
)+<<
To Ieneral Ledger
AdCustment AEc
))8<
)+<< )+<<
4o*/.in.)*og*ess Le$ge* Cont*o+ Account
&s. &s.
To 0alance bEd 4+<< 0y -inised Ioods Control
AEc
):<<<
To $tores Ledger Control
AEc
2;:< 0y 0alance cEd 1<:<
To Wages Control AEc 84<<
To -actory Overead
Control AEc
++<<
To Office Overead Control
AEc
)+<<
+)<:< +)<:<
To 0alance bEd 1<:<
BSPATIL
126
Finis#e$ Goo$s Cont*o+ Account
&s. &s.
To 0alance bEd +1<< 0y Cost of sales AEc +<1<<
To W.'.". Ledger Control ):<<<
+<1<< +<1<<
Cost of Sa+es Account
&s. &s.
To -inised Ioods control
AEc
+<1<< 0y Costing " J L AEc +<1<<
+<1<< +<1<<
Costing )*ofit an$ Loss Account
&s. &s.
To Cost of $ale AEc +<1<< 0y Ieneral Ledger
AdCustment AEc HsalesG
+)<<<
To Ieneral Ledger
AdCustment AEc HprofitG
8<<
+)<<< +)<<<
Trial 0alance HAs at 1)
st
*ecember OOO..
&s. &s.
To $tores Ledger Control
AEc
;8< Ieneral Ledger Control AEc 2<4<
Wor.#in#"rogress Ledger
Control
1<:<
2<4< 2<4<
)*ob+e, : 5
Te follo9ing balances are eBtracted from te costs boo.s of ACit Traders Ltd.! for te year ended 1)
st
*ec. );;4
*r. Cr.
&s. &s.
$tores in 3and )7<<< +24<<
$toc. of -inised Ioods +27<< +7)<<
Wor.#in#"rogress 1+<<< 114<<
"urcases # 87<<<
Carriage 'n9ards # 4<<
$tores 'ssued # 7:<<<
Wages *irect # 78+<<
Wages # # 'ndirect # ++<<<
Wor. EBpenses 7;+<<
Cost of -inised Ioods +2<<<<
Cost of -inised Ioods sold +1:4<<
$elling EBpenses 7)<<
Office J Administration EBpenses )2<<<
BSPATIL
127
Te Cost 5ournal so9s tat &s. ;+8<< and &s. )1;<< 9ere allocated to Wor.#in#"rogress for 9or.s overeads and
office overeads respectively. "repare Cost Ledger Account and a Trial 0alance from te above information as at 1)
st
*ec. );;4.
Sol)tion:
&s. &s.
To 0alance cEd 1+87<< 0y 0alance bEd 8+7<<
0y $tores Ledger Control
AEc
87<<<
0y $tores Ledger control AEc
HCarriageG
4<<
0y Wages Control AEc +<<
0y "roduction Overead
Control AEc
7;+<<
0y Administration Overead
Control AEc
)2<<<
0y $elling and *istribution
Overead Control AEc
7)<<
1+87<< 1+87<<
0y 0alance bEd 1+87<<
Sto*e Le$ge* Cont*o+ Account
&s. &s.
To 0alance bEd )7<<< 0y Wor.#in#"rogress Ledger
Control AEc
7:<<<
To Ieneral Ledger
AdCustment AEc H"urcasesG
87<<< 0y 0alance cEd +24<<
To Ieneral Ledger
AdCustment AEc HCarroageG
4<<
;+4<< ;+4<<
To 0alance bEd +24<<
4ages Cont*o+ Account
&s. &s.
To Ieneral Ledger
AdCustment AEc
:;+<< Wor.#in#"rogress Ledger
Control AEc
78+<<
"roduction Overead Control
AEc
++<<<
:;+<< :;+<<
)*o$uction O-e*#ea$ Cont*o+ Account
&s. &s.
To Wages Control AEc ++<<< 0y W.'.". Leger Control AEc ;+8<<
To Ieneral Ledger
AdCustment AEc
7;+<<
To Overead AdCustment
AEc
)4<<
;+8<< ;+8<<
BSPATIL
128
A$,inist*ation O-e*#ea$ Cont*o+ Account
&s. &s.
To Ieneral Ledger
AdCustment AEc
)2<<< 0y W.'.". Ledger Control
AEc
)1;<<
0y Overead AdCustment
AEc
)<<
)2<<< )2<<<
Se++ing an$ Dist*ibution O-e*#ea$ Cont*o+ Account
&s. &s.
To Ieneral Ledger
AdCustment AEc
7)<< 0y Cost of $ales AEc 7)<<
7)<< 7)<<
4o*/.in.)*og*ess Le$ge* Cont*o+ Account
&s. &s.
To 0alance bEd 1+<<< 0y -inised Ioods Control
AEc
+2<<<<
To $tores Ledger Control
AEc
7:<<< 0y Loss in "roduction AEc 1<<
To Wages Control AEc 78+<< 0y 0alance cEd 114<<
To "roduction Overead
Control AEc
;+8<< To Administration Overead
Control AEc
)1;<<
+81:<< +81:<<
To 0alance bEd 114<<
Finis#e$ Goo$s Cont*o+ Account
&s. &s.
To 0alance bEd +27<< 0y Cost of $ales AEc +1:4<<
To W.'.". Ledger Control
AEc
+2<<<< 0alance cEd +7)<<
+727<< +727<<
Cost of Sa+es Account
&s. &s.
To -inised Ioods Control
AEc
+1:4<< 0y 0alance cEd +227<<
To $elling J *istribution
Overead Control AEc
7)<<
+227<< +227<<
To 0alance bEd +227<<
BSPATIL
129
O-e*#ea$ A$just,ent Account
&s. &s.
To Administrative Overead
Control AEc
)<< 0y "roduction Overead
Control AEc
)4<<
To 0alance cEd )2<<
)4<< )4<<
0y 0alance bEd )2<<
Loss in )*o$uction Account
&s. &s.
To W.'.". Ledger Control
AEc
1<< 0y 0alance cEd 1<<
1<< 1<<
Trial 0alance
HAs at 1)
st
*ecember );;4G
*r. Cr.
&s. &s.
Ieneral Ledger AdCustment AEc 1+87<<
$tores Ledger Control AEc +24<<
Wor.#in#"rogress Ledger Control AEc 114<<
-inised Ioods Control AEc +7)<<
Cost of $ales AEc +227<<
Overead AdCustment AEc )2<<
Loss in "roduction AEc 1<<
1+;<<< 1+;<<<
&s. &s.
To Cost of $ales AEc +<1<< 0y Ieneral Ledger
AdCustment AEc H$alesG
+)<<<
To Ieneral Ledger
AdCustment AEc HprofitG
8<<
+)<<< +)<<<
Trial 0alance
HAs at 1)
st
*ecember OOOO.G
*r. Cr.
Ieneral Ledger Control AEc 2<4<
$tores Ledger Control AEC ;8<
Wor.#in#"rogress
Ledger Control AEc 1<:<
2<4< 2<4<
"roblem ( 1
Te follo9ing balances are eBtracted from te coasts boo.s of ACit Traders Ltd.! for te year ended 1)
st
*ec.!
);;4.
BSPATIL
130
)#)#);84 1)#)+#);84
&s. &s.
$tores in 3and )7<<< +24<<
$toc. of -inised Ioods
Wor.#in#"rogress
"urcases
Carriage 'n9ard
$tores# *irect
Wages#*irect
Wages#'ndirect
Wor.s EBpenses
Cost of -inised Ioods
Cost of -inised Iods sold
$elling EBpenses
Office J Administration EBpenses
Te Cost 5ournal so9s tat &s. ;+8<< and &s. )1;<< 9ere allocated to Wor.#in#"rogress for 9or.s overeads and
office overeads respectively. "repare Cost Ledger Account and a Trial 0alance from te above information as at 1)
st
*ec. );;4.
Sol)tion:Gene*a+ Le$ge* A$just,ent Account
&s. &s.
To 0alance cEd 1+87<< 0y 0alance bEd 8+7<<
0y $tores Ledger Control
AEc
87<<<
0y $tores Ledger Control
AEc HCarriageG
4<<
0y Wages Control AEc :;+<<
0y "roduction Overead
Control AEc
7;+<<
0y Administration Overead
Control AEc
)2<<<
Overead Control AEc 7)<<
1+87<< 1+87<<
0y balance bEd 1+87<<
Sto*es Le$ge* Cont*o+ Account
&s. &s.
To 0alance bEd )7<<< 0y Wor.#in#"rogress Ledger
Control AEc
7:<<<
To Ieneral Ledger
AdCustment AEc H"urcasesG
87<<< 0y 0alance cEd +24<<
To Ieneral Ledger
AdCustment AEc HCarroageG
4<<
;+4<< ;+4<<
To 0alance bEd +24<<
BSPATIL
131
4ages Cont*o+ Account
&s. &s.
To Ieneral Ledger
AdCustment AEc
:;+<< 0y Wor.#in#"rogress Ledger
Control AEc
78+<<
0y "roduction Overead
Control AEc
++<<<
:;+<< :;+<<
)*o$uction O-e*#ea$ Cont*o+ Account
&s. &s.
To Wages Control AEc ++!<<< 0y W.'.". Ledger Control
aEc
;+8<<
To Ieneral Ledger
AdCustment AEc
7;+<<
To Overead AdCustment
AEc
)4<<
;+8<< ;+8<<
A$,inist*ation O-e*#ea$ Cont*o+ Account
&s. &s.
To Ieneral Ledger
AdCustment AEc
)2<<< 0K W.'." Ledger Control
AEc
)1;<<
0y Overead AdCustment
AEc
)<<
)2<<< )2<<<
Se++ing an$ Dist*ibution O-e*#ea$ Cont*o+ Account
&s. &s.
To Ieneral Ledger
AdCustment AEc
7)<< 0y Cost of $ales AEc 7)<<
7)<< 7)<<
Wor.#in#"rogress Ledger Control Account
&s. &s.
To 0alance bEd 1+<<< 0y -inised Ioods Control
AEc
+2<<<<
To $tore Ledger Control
AEc
7:<<< 0y Loss in "roduction AEc 1<<
To Wages Control AEc 78+<< 0y 0alance cEd 114<<
To "roduction Overead
Control AEc
;+8<< To Administration Overead
Control aEc
)1;<<
+81:<< +81:<<
To 0alance bEd 114<<
BSPATIL
132
Finis#e$ Goo$s Cont*o+ Account
&s. &s.
To 0alance bEd +27<< 0y Cost of $ales AEc +1:4<<
To W.'.". Ledger Control
AEc
+2<<<< 0alance cEd +7)<<
+727<< +727<<
Cost of Sa+es Account
&s. &s.
To -inised Ioods Control
AEc
+1:4<< 0y 0alance cEd +227<<
To $elling J *istribution
Overead Control AEc
7)<<
+227<< +227<<
To 0alance bEd +227<<
O-e*#ea$ A$just,ent Account
&s. &s.
To Administrative Control
AEc
)<< 0y "roduction Overead
Control AEc
)4<<
To 0alance cEd )2<<
)4<< )4<<
Loss in )*o$uction Account
&s. &s.
To W.'.". Ledger Control
AEc
1<< 0y 0alance cEd 1<<
1<< 1<<
T*ia+ (a+ance
:As at $1
st
4ecember= 1??58
*r. Cr.
&s. &s.
Ieneral Ledger AdCustment AEc 1+87<<
$tores Ledger Control AEc +24<<
Wor.#in#"rogress Ledger Control aEc 114<<
-inised Iood Control aEc +7)<<
Cost of $ales AEc +227<<
Overead AdCustment AEc )2<<
Loss in "roduction AEc 1<<
1+;<<< 1+;<<<
BSPATIL
133
Lesson 16
Integ*a+ Accounting
'ntegral accounting system is defined as a single set of accounts 9ic provides bot financial and cost accounting
information. Cost and financial accounts are .ept in one self contained ledger 9ic is .no9n as integrated ledger. Tis
system does not recogniDe te need for separate set of accounts. 3ence! tere is no need for reconciliation of cost and
financial accounts.
A$-antages is Integ*a+ syste,s:
An integrated accounting system as te follo9ing advantages.
). Tere is not problem of reconciliation as tere 9ill be only profit amount.
+. Tis system is economical and easy to understand.
1. *uplication of 9or. and labor is avoided.
2. Cost data can present promptly and regularly.
4. All cost data and accounts are automatically cec.ed and tus cost figures are accurate.
7. 'n broaden te outloo. of accountant and is staff.
)*ob+e, 13 5ournaliDe follo9ing transactions assuming cost and financial accounts are integrated.
&a9 materials purcases 2<<<<
*irect materials issued to production 1<<<<
Wages and H1<L indirectG +2<<<
*irect 9ages carged to production )7<<<
Manufacturing eBpenses incurred );<<<
Manufacturing overead carged to
production
):2<<
$elling and distribution costs 2<<<
-inised products at cost 2<<<<
$ales 4:<<<
Closing stoc. ###
&eceipts from debtors )1:<<
"ayments to creditors ++<<<
So+ution:
). $tores ledger control aEc
To 0ougt ledger control aEc
2<<<
2<<<
+. Wor.#in#progress control aEc
To stores ledger control aEc
1<<<<
1<<<<
1. Wage control aEc
To ban. aEc
+2<<<
+2<<<
2. -actory overead aEc
To 9ages control aEc
*r. 8+<<
8+<<
4. Wor.#in#progress ledger control aEc
To 9ages control
*r. )7:<<
)7:<<
7. -actory overead aEc
To ban. aEc
*r. );<<<
);<<<
8. Wor.#in#progress ledger control aEc
To -actory overead aEc
*r. ):2<<
):2<<
:. $elling J distribution overead aEc
To 0an. aEc
*r. 2<<<
2<<<
;. -inised stoc. ledger control aEc
To Wor.#in#progress control aEc
*r. 2<<<<
2<<<<
)<. Cost of sales aEc *r 22<<<
BSPATIL
134
To finised stoc. ledger control aEc
To selling J distribution control aEc
2<<<<
2<<<
)). $ales ledger control account
To cost of sales AEc
*r. 4:<<<
4:<<<
)+. 0an. AEc
To $ales ledger control aEc
*r. )1:<<
)1:<<
)1. 0ougt ledger control aEc
To 0an. aEc
*r. ++<<
++<<
,ote( 't as been assumed tat all manufactured units ave been sold and selling and distribution overead ave been
carged to cost of sales.
)*ob+e, 9:
Te follo9ing are te balances of A co. Ltd. in its integrated ledger on )
st
5anuary(
*r. Cr.
$tores Control Account 17<<<
Wor.#in#progress Account +2<<<
-inised Ioods Account +7<<<
Cas at ban. +<<<<
Creditors Control Account )7<<<
-iBed Assets Account ))<<<<
*ebtors Control Account +2<<<
$are capital Account )7<<<<
*epreciation "rovision Account )<<<<
"rofit J Loss Account 72<<<
+4<<<< +4<<<<
Transactions for te t9elve monts ended 1)
st
*ecember 9ere(
*r. Cr.
Wages#direct )82<<<
Wages#'ndirect )<<<<
$tores purcased on credit +<<<<<
$tores issued to repair order 2<<<
$tores issued to production ++<<<<
Ioods finised during te period at cost 21<<<<
Ioods sold at cost 22<<<<
"roduction overead recovered ;7<<<
"roduction overead :<<<<
Administration overead +2<<<
$elling and *istribution overead +:<<<
*epreciation H9or.sG +7<<
"ayments to suppliers +<+<<<
"ayments from customers 4:<<<<
&ates prepaid included in production overead
incurred
7<<
"urcases of fiBed assets in cas 2<<<
Caritable *onations +<<<
-ines paid )<<<
'nterest on ban. loan +<<
'ncome#taB 2<<<<
Kou are re>uired to 9rite upto te account in te integral ledger and ta.e out a trial balance. Te administration
BSPATIL
135
overead is 9ritten off to profit and loss account.
Sol)tion:
'n te 'ntegral Ledger of A Co. Ltd.
$tores Control Account
*r. Cr.
*ate "articular Amt. *ate "articular Amount
5an ) To 0alance bEd 17<<< *ec1) 0y Wor.#in#"rogress
aEc
++<<<<
*ec.
1)
To Creditors Control
AEc
+<<<<< *ec1) 0y "roduction
overead ac
2<<<
*ec.1) 0y 0alance cEd )+<<<
+17<<< +17<<<
5an) To 0alance bEd )+<<<
4o*/ cont*o+ Account
*ec.
1)
To 0an. ):2<<< *ec. 1) 0y Wor.#in#"rogress
AEc
)82<<<
*ec.1) 0y "roduction
overead aEc
)<<<<
):2<<< ):2<<<
)*o$uction O-e*#ea$ Account
&s. &s.
*ec.1) To Wages Control )<<<< *ec.
1)
0y "re#paid eBpenses
AEc H&entG
7<<
*ec.1) To $tores Control
AEc
2<<< *ec.
1)
0y Wor.#in#progress
AEc
;7<<<
*ec. 1) To *epreciation
"rovisions AEc
+7<<
;77<<< ;77<<
A$,inist*ation O-e*#ea$ Account
&s. &s.
*ec.1) To 0an. +2<<< *ec.
1)
0y Cost of $ales
AEc
+2<<<
+2<<< +2<<<
Se++ing an$ Dist*ibution O-e*#ea$ Account
&s. &s.
*ec.
1)
To 0an. +:<<< *ec.1) 0y Cost of $ales
AEc
+:<<<
+:<<< +:<<<
BSPATIL
136
4o*/.in.)*og*ess Account
&s. &s.
5an) To 0alance bEd 12<<< *ec. 1) 0y -inised Iood
AEc
21<<<<
*ec. 1) Wages Control aEc )82<<< *ec.1) 0y 0alance cEd ;2<<<
*ec. 1) To $tores Control aEc ++<<<<
*ec.1) To "roduction
Overead AEc
;7<<<
4+2<<< 4+2<<<
5an ) To 0alance bEd ;2<<<
Finis#e$ Goo$s Account
&s. &s.
5an) To 0alance bEd +7<<< *ec. 1) 0y Cost of $ales 22<<<<V
5an.) To Wor.#in#progress
AEc
21<<<< *ec.1) 0y 0alance cEd )7<<<
247<<< 247<<<
5an ) To 0alance cEd )7<<<
Cost of Sa+es Account
&s. &s.
*e. 1) To -inised Ioods
AEc
22<<< *ec.
1)
0y *ebtors
Control AEc
7<<<<<
*ec.1) To $ J * Overead
aEc
+:<<<
*ec.1) To Costing " J L
AEc
)1+<<<
5an ) To 0alance bEd 7!<<!<<< 7!<<!<<<
Costing ) D L Account fo* t#e yea* en$ing 51
st
Dece,be*
&s. &s.
*e. 1) Administration
Overead AEc
+2<<< *ec.
1)
0y Cost of $ales )1+<<<
*ec. 1) To " J L )<:<<<
)1+<<< )1+<<<

) D L fo* t#e yea* en$ing 51
st
Dece,be*
&s. &s.
*ec. 1) To Caritable
*onations
+<<< 5an ) 0y 0alance bEd 72<<<
To -ines )<<< 5an) 0y Costing " J L
AEc
)<:<<<
To interest on 0an.
Loan
+<<<
To 'ncome#taB 2<<<<
To ,et "rofit )+:<<<
BSPATIL
137
)8+<<< )8+<<<
)*e.1ai$ e21enses account
&s. &s.
*ec.1) To "roduction AEc 7<< *ec.
1)
0y 0alance cEd 7<<
7<< 7<<
5an ) To 0alance bEd 7<<
De1*eciation )*o-ision Account
&s. &s.
*ec. 1) To 0alance cEd )+7<< 5an.) 0y 0alance bEd )<<<<
*ec.
1)
0y "roduction
Overead AEc
+7<<
)+7<< )+7<<
5an. ) 0y balance bEd )+7<<
Debto*s Cont*o+ Account
&s. &s.
*ec. 1) To 0alance bEd +2<<< *ec.1) 0y 0an. 4:<<<<
*ec.1) To cost of sales
aEc
7<<<<< *ec.1) 0y 0alance cEd 22<<<
5an ) To 0alance bEd 7+2<<< 7+2<<<
5an) To 0alance bEd 22<<<
C*ea$ito*s Cont*o+ Account
&s. &s.
*ec. 1) To 0an. +<+<<< 5an) 0y 0alance bEd )7<<<
*ec.1) To 0alance cEd )2<<< *ec.1) 0y $tores
Control AEc
+<<<<<
+)7<<< +)7<<<
5an) 0y 0alance cEd )2<<<
BSPATIL
138
S#a*e Account
&s. &s.
5an.) To 0alance bEd +<<<< *ec. 1) 0y Wages
Control
):2<<<
*ec.1) To *ebtors
Control AEc
4:<<<< *ec.1) 0y -iBed
Assets AEc
*ec.1) 0y "roduction
overead aEc
:<<<<
*ec1) 0y admin.
Overead
+2<<<
*ec.1) $J* overead +:<<<
*ec.1) 0y creditors
control aEc
+<+<<<
*ec.1) 0y -ines AEc )<<<
*ec.1) 0y Caritable
*onations
+<<<
*ec.1) 0y interest on
0an. Loan
+<<
*e.1) 0y 'ncome#taB 2<<<<
*ec.1) 0y balance cEd 12:<<
7<<<<< 7<<<<<
5an.) To 0alance bEd 12:<<
To T*ia+ (a+ance as on 51
st
Dece,be*
3ead of Account *r. 0al Cr. 0al
&s. &s.
$tores Control AEc )+<<<
Wor.#in#progress AEc ;2<<<
-inised goods AEc )7<<<
"repaid eBpenses AEc 7<<
*epreciation "rovision AEc )+7<<
*ebtors Control AEc 22<<<
Creditors Control AEc )2<<<
-iBed Assets AEc ))2<<<
0an. AEc 12:<<
$are Capital AEc )7<<<<
"rofit J Loss AEc )+::<<
Total 1)42<< 1)42<<
BSPATIL
139
Lesson 11
Reconci+iation of Cost an$ Financia+ Accounts
Wen te Cos Ledger Accounting system is adopted in an organiDations te results so9n by te accounting records i.e.
financial accounting and cost ledger accounting differ from eac oter. 3ence! it becomes necessary to reconcile te
profit or loss so9n by te t9o sets of records.
,eed for &econciliation(
). 't is necessary to find out te reasons for te differences in te profitability of bot te records.
+. &econciliation enables to test te reliability of cost accounts. Costing figures in total sould agree 9it te
financial records.
Reasons fo* $isag*ee,ent:
Te difference in te profitability of cost and financial records may be due to te follo9ing reasons.
). 'tems included in te financial accounts but not in cost accounts.
a. "urely financial income# suc as interest received on ban. deposits! interest and dividend on
investments! rent receivables! transfer fee received! profit on te sale of assets etc.
b. "urely financial carges suc as losses due to scraping of macinery! losses on te sale of investments
and assets! interest paid on te ban. loans! mortgages! debentures etc.! eBpenses of companyAs transfer
office! damages payable at la9 etc.
c. Appropriation of profit te appropriation of profit is again a matter 9ic concerns only financial
accounts. 'tems li.e payment of income taB and dividends! transfer to reserve! eavy donations! 9riting
off of preliminary eBpenses! good9ill and patents appear only in profit and loss appropriation account
and te costing profit and loss aEc is not affected.
+. 'tems included in cost accounts only(
Tere are certain items 9ic are included in cost accounts but not in financial accounts. Tey are( Carges in
lieu of rent 9ere premises are o9ned! interest on capital employed in production but upon 9ic no interest is actually
paid.
1. 6nderEOver absorption of overead eBpenses(
'n cost accounts! overeads are absorbed at predetermined rates 9ic are based on past data. 'n te financial accounts
te actual amount incurred is ta.en into account. Tere arise a difference bet9een te actual eBpenses and te
predetermined overeads carged to product or Cob.
'f overeads are not fully recovered! 9ic means tat te amount of overeads absorbed in cost accounts is less tan
te actual amount! te sortfall is called as under recovery or under absorption. 'f overead eBpenses recovered in cost
accounts is more tan tat of te actually incurred! it is called over absorption. Tus! bot te over and under recovery
may cause te difference in te profits of bot te records.
2. *ifferent basis of stoc. valuation(
'n cost accounts! te stoc. of finised goods are valued at cost by -'-O! L'-O! average rate! etc. 0ut! in financial
accounts stoc.s are valued eiter at cost or mar.et price! 9icever is less.
Te valuation of 9or.#in#progress may also lead to variation. 'n financial boo.s only prime cost may be ta.en into
account for tis purpose 9ereas in cost accounts! it may be valued at prime cost plus factory overead.
4. *ifferent basis of depreciation adopted(
Te rates and metods of carging depreciation may be different in t9o sets of accounts.
"et#o$ of *econci+iation of 1*ofits:
BSPATIL
140
Te are t9o alternative forms of presentation of reconciliation of profits revealed by cost and financial accounts! namely
$tatement form
Account form
'n te statement form it is .no9n as &econciliation $tatement and in te accounts form it is .no9n as Memorandum
&econciliation Account.
'n bot forms! te profits as per one set is ta.en to start 9it and addition E adCustments are made to arrive at te profit of
anoter set of boo.s.
"e,o*an$u, Reconci+iation Accounts:
't is an account form of reconciling te profitability of t9o records. Te amount of profit as per cost records is credited
to te Memorandum account. Te items to be deducted are debited and tose to be added are credited to tis amount.
Te balancing figure is profitEloss of financial accounts.
Te process of preparing reconciliation statement is 9or.ed out ere in te form of problems.
A proforma Memorandum &econciliation Account is give belo9(
"e,o*an$u, Reconci+iation Account
HAs on OOOOOO.G
&s. &s.
To Loss as per Cost 0oo. 0y "rofit as per Cost 0oo.sO
To 'tems of eBpenses so9n in
-inance boo.s but not in Cost
boo.s
0y 'tems of eBpenses so9n in cost
but not in -in. 0oo.sO
To 'tems of eBpenses
undercarged in Cost 0oo.s or
overcarged in -in. 0oo.s.
0y items of over carges in Cost
0oo.sO
To items of income over#
carged in Cost 0oo.s or not
included in -in. 0oo.sO
0y Over valuations of opening
stoc. in Cost 0oo.sO
To Over#valuation of opening
stoc. in -in. 0oo.s
0y 6nder#valuation of closing stoc.
in Cost 0oo.s
To 6nder#valuation of closing
stoc. in -in. 0oo.s..!.
To *epreciation under#carged
in Cost 0oo.s or over carged
in -in. 0oo.sO
0y *epreciation over#carged in
Cost 0oo.sO
To "rofit as per -inancial
0oo.sO
)*ob+e, : 1
Te profit as per cost accounts is &s. )4<<<<. Te follo9ing details are ascertained on comparison of cost and financial
accounts.
&s. &s.
a. Opening $toc.(
Materials
-inised goods
)<<<<
):<<<
)4<<<
)7<<<
b. Closing $toc.(
Materials
-inised goods
)+<<<
+<<<<
)1<<<
)8<<<
c. 'nterest carged but not paid &s. )<<<<
d. Write of preliminary eBpenses &s. 4<<F Iood9ill &s. )4<<
BSPATIL
141
e. *ividend on 6T' received &s. )<<<
f. 'ndirect eBpenses carged in financial accounts &s. :<<<< but &s. 844<<
recovered in Cost Accounts.
-ind out te profit as per financial accounts by dra9ing up a &econciliation
statement.
Sol)tion: Reconci+iation State,ent
&s. &s.
"rofit as per Cost accounts )4<<<<
Add ( Opening stoc. of finised goods over
valued in cost accounts
+<<<
Closing stoc. of materials under recovered in
cost accounts
)<<<
'nterest carged only on cost accounts )<<<<
*ividend on 6T' not included in cost accounts )<<< )2<<<
)72<<<
Less ( Opening stoc. of material under valued in
cost accounts
4<<<
Closing stoc. of finised goods over valued in
cost accounts
1<<<
"reliminary eBpenses 9ritten off in financial
accounts
4<<
Iood9ill 9ritten off in -inal accounts )4<<
'ndirect eBpenses under recovered in cost
accounts
24<< )24<<
"rofit as per financial accounts )2;4<<
Alternatively! te above information may also be presented in te form of an account .no9n as Memorandum
&econciliation Account.
"e,o*an$u, Reconci+iation Account
&s. &s.
To Opening stoc. of material
under valued in cost AEc
4<<< 0y profit as per Cost Account )4<<<<
To Closing stoc. of finised
good over valued in cost
account
1<<< 0y Opening stoc. of finised
goods over valued in cost aEc
+<<<
To "reliminary eBpenses
9ritten off
4<< 0y closing stoc. of material
under valued in cost accounts
)<<<
To Iood9ill 9ritten off )4<< 0y interest carged only in
cost AEc
)<<<<
Overeads under recovered 24<< 0y dividend received )<<<
To "rofit as per financial
Accounts Hbalancing figG
)2;4<<
)72<<< )72<<<
)*ob+e,: 9
BSPATIL
142
-ollo9ing are te figures available in financial accounts of te year ended 1).1.87.
*irect Material consumption +4<<<<
*irect Wages )<<<<<
-actory overeads 1:<<<<
Admini. Overead +4<<<<
$elling and *is. Overead 2:<<<<
0ad debts +<<<<
"reliminery eBpenses )<<<<
Legal carges 4<<<
*ividend received 4<<<<
$ales H)+<<<< unitsG 8<<<<<
'nterest on deposit received )<<<<
Closing $toc.(
-inised stoc. 2<<<< units )!+<!<<<. Wor.#
in#progress
:<<<<
Te cost account reveal direct material consumption
as
+:<<<<
-actory overead recovered at +<L on price cost.
Administration overead at &s. + per unit or production. $elling and distribution
overeads at &s. 2 per unit sold! prepare
). Costing profit and loss account
+. $tatement reconciling te profits disclosed by te costing profit and loss account and financial profit and
loss account.
Sol)tion
C+osing )*ofit an$ Loss account fo* t#e yea* en$ing 513538@
&s. &s.
To direct materials +:<<<< 0y $ales 8<<<<<
To direct 9ages )<<<<< Closing stoc.( -inised goods )+<<<<
To factory overead 87<<< Wor.#in#progress :<<<<
To administration overead 2:<<<< 0y net loss 4)7<<<
To selling J *is. Overead 2:<<<<
)2)7<<< )2)7<<<
)*ofit D Loss Account as 1e* Financia+ (oo/s
&s. &s.
To direct materials +4<<<< 0y sales 8<<<<<
To direct 9ages )<<<<< 0y dividend received 4<<<<
To -actory overead 1:<<<< 0y 'nterest received )<<<<
To Administration overead +4<<<< 0y Closing stoc.(
To $elling J *is. 2:<<<< -inised goods )+<<<<
To 0ad debts +<<<< Wor.#in#progress :<<<<
To "reliminary eBpenses )<<<< ,et loss 414<<<
To legal carges 4<<<
)2;4<<< )2;4<<<
Reconci+iation State,ent
Loss as per cost account 4)7<<<
BSPATIL
143
Less:
a. Over carging of materials in Cost accounts 1<<<<
b. Over absorption of administration overead in cost
account
+1<<<< +7<<<<
+47<<<
A$$:
a. 6nder absorption of factory overead 1<2<<<
b. 0ad debts not included in cost accounts +<<<< 1+2<<<
4:<<<<
Less :
AdCustment of income items not included in cost
accounts
4<<<<
'nterest on deposit received )<<<< 7<<<<
4+<<<<
A$$:
AdCustments not so9n in cost accounts
"reliminary eBpenses )<<<<
Legal Carges 4<<< )4<<<
,et loss as per financial boo.s 414<<<
,otes(
). 'n te costing profit and loss account factory overeads ave been calculated as +<L of &s. H+:<<<< + )<<<<<
87<<<G
+. Administration overead at &s. 1 per unit of production. ,umber of units produced Q sales )+<<<< + closing
stoc. of 2<<<< unitsG
)*ob+e, : 5
-rom te follo9ing particulars! prepare
HaG A statement of cost of manufacture for te year.
HbG A statement of profit as per cost accounts and
HcG "rofit and loss account in te financial boo.s and a reconciliation of te difference in te profits as so9n by HbG
and HcG above(
&s.
Opening stoc. of ra9 materials )<<<<<
Closing stoc. of ra9 materials )4<<<<
Opening stoc. of finised product +<<<<<
Closing stoc. of finised product 4<<<<
"urcase of ra9 materials 7<<<<<
Wages +4<<<<
Calculate factory overead at +4 percent on prime cost. Office overead 9ill be levied at 84 percent on factory
overead. Actual 9or.s eBpenditure amounted to &s. );184< and actual office eBpenses amounted to &s. )4+4<<. Te
selling price 9as fiBed at +4L above cost price.
BSPATIL
144
COST LEDGER ACCOUNTING
Cost of manufacture &s. &s.
aG &a9 materials
Opening stoc.
Add purcases
Less closing stoc.
)<<<<<
7<<<<<
)4<<<< 44<<<<
Wages +4<<<<
-actory overead H+4L on "rime costG +<<<<<
Office overead H84L on -y. OvereadG )4<<<<
Cost of manufacture ))4<<<
State#ent o! $ro!it 3Cost Acco)nts)
&s.
bG Opening $toc. of -inised goods +<<<<<
Cost of manufacture ))4<<<<
Less Closing $toc. of -inised goods 4<<<<
Cost of sales )1<<<<<
"rofit H+4L of costG 1+4<<<
$ales )7+4<<<
$ro!it and (oss Acco)nt
&s. &s.
To opening $toc. +<<<<< 0y sales )7+4<<<
To &a9 materials( 0y Closing $toc. 4<<<<
To Opening $toc. )<<<<<
To "urcase 7<<<<<
Less Closing $toc. )4<<<< 44<<<<
To Wages +4<<<<
To -actory overead );184<
To office overead )4+4<<
To "rofit 1+:84<
1@A:666 1@A:666
4econciliation State#ent
"rofit as per Cost Accounts 1+4<<<
Add Over#absorption of -.K. overead +<<<<<
#);184< 7+4<
Less under#absorption of office overead )4+4<<
#)4<<<< +4<<
"rofit as per -inancial Accounts 1+:84<
)*ob+e, =:
A companyAs net profit as per te cost boo.s 9as &$. +1<71 9ereas te audited final accounts so9ed a profit
of &s. )77+2. Wit te elp of te follo9ing data! you are re>uired to prepare a reconciliation statement! and eBplain te
reason for te difference bet9een te t9o figures.
BSPATIL
145
$ro!it and (oss Acco)nt
Kear ended 1)
st
Marc! );O.
&s. &s.
Opening $toc. +28)8; $ales 1274<<
"urcase :+)42
1+;111
Closing $toc. 84)+) +42+)+
*irect Wages +1)11
-actory Overead +<:+7
Iross profit cEd 2:1+;
Total 1274<< 1274<<
Administration
eBpenses
;:24 Iross profit bEd 2:1+;
$elling eBpenses ++)87 Miscellaneous
income
1)7
,et "rofit )77+2
Total 2:!724 2:724
Te costing records so9(
HaG $toc. balance of &s. 8:)8;
HbG *irect 9ages absorbed during te year &s. +2:87
HcG -actory overead absorbed &s. );8)2
HdG Administration eBpenses carged T 1 per cent of selling prices.
HeG $elling eBpenses carged T 4 per cent of value of sales
HfG ,o mention of miscellaneous income
Sol)tion
&s. &s.
"rofit as per Cost Accounts +1<71
Less ( *ifference in valuation of closing
stoc.
8:);8
84)+) H#G
1<87
-actory overead under absorbed +<:+7
);8)2 H#G
)))+
$elling eBpenses under#absorbed ++)87
)81+4 H#G
2:4)
Add( Wages over#absorbed +2:78
+1)11 )812
Administration overead over#absorbed )<1;4
;:24 44<
$undry income not so9n in Costing
"rofit
1)7
0rofit as per financial accounts 1%%!"
"ODEL !UESTION )A)ER
(3Co,37
Cost Accounting
BSPATIL
146
MaBimum()<< mar.s )ART > A
Ans9er any FI;E >uestions
). Wat are te obCectives of cost accountingM
+. Wat do you mean A0C analysisM EBplain it 9it an illustration.
1. Wat do you mean by labour turnoverM Wat are its causesM
2. Wat are te different metods of allocation of Coint costs to Coint products.
4. Wat are te advantages and limitations of standard costingM
7. -rom te follo9ing particulars! calculate te economic order >uantity and find out te number of orders to be
placed in a year(
Annual re>uirements ( )7<< units
Cost of material per unit ( &s. 2<
Cost of placing and receiving on order ( &s. 4<
Annual carrying cost of inventory values ( )<L in inventory
8. A furniture manufacturer uses sunmica tops of tables. -rom te follo9ing information! find out price variance!
usage variance and cost %ariance(
$tandard >uantity of sunmica per table ( 2 s>. metre
$tandard price per s>. metre of sunmica ( &s. 4
Actual production of tables ( )<<<
$unmica actually used ( 21<< s>. meter
Actual purcase price of sunmica ( &s. 4.4< per s>.
meter
"A&T 0 H 2 B )4 G Q 7<
Ans9er any FOUR >uestions
:. Wat are te obCectives and advantages of cost auditM 3o9 is it different form management auditM
;. Wat do you mean by non#integrated accountingM Wat are te causes for reconciliation of cost and financial
profitsM
)<. An engineering 9or.s! te standard time for a Cob is )7 ours and te basic 9age is &s. ) per our.
A bonus sceme is instituted so tat 9or.er is to receive is normal rate for ours actually 9or.ed and 4<L for
te ours saved.
Materials for te Cob cost &s. +< and overeads are carged on a basis of &s. + per labour our.
Calculate te 9ages and effective rate of earning per our if te Cob is completed HiG in )+ ours and HiiG in )2
ours. Also ascertain factory cost of te Cob on te same basis.
)). Te follo9ing information relates to te activities of a production departments for a certain periods in a factory(
Materials use ( &s. 8+<<<
*irect 9ages ( 7<<<<
3ours of macine operations ( +<<<<
Labour ours 9or.ed ( +2<<<
Overeads vareable to te department ( 2:<<<
On one order carried out in te departments during te period! te relevant data 9ere(
3ours &s.
Materials used 2<<<
*irect 9ages 11<<
BSPATIL
147
Labour ours )74<
Macine ours )+<<
"repare a comparative statement of cost of tis order by using te follo9ing tree metods of recovery of overeads(
aG *irect labour our rate metod
bG *irect labour cost metod
cG Macine our rate metod
)+. A product is obtained after passing it troug tree processes. Te follo9ing information is collected for
5anuary );:;.
)*ocess
' '' '''
*irect materials H&s.G 4+<< 1:8; 21+;
*irect 9ages H&s.G 2<<< 4;:; +;:8
6nits produced :8; 247 +12
,ormal loss 4L )<L )4L
%alues of scrap per units H&s.G 2 : )<
)<<< 6nits at &s. 7 Eac 9as introduced in process. Te indirect eBpenses for te mont &s. ):<<<. "repare process
accounts.
)1. -rom te information given belo9! prepare HaG a statement so9ing profit or loss and HbG anoter statement
reconciling te costing profit 9it tose so9n by financial accounts
Trading and "rofit and Loss Account for te year );:;
Rs3 Rs3
Material
consumed
)4<<<< $ales H)4<<<<
unitsG
1+<<<<
*irect 9ages 84<<<
-actory eBpenses 24<<<
Office eBpenses )1<<<
$elling eBpenses ;<<<
,et "rofit +84<<
1+<<<< 1+<<<<
Te normal output of te factory is )+4<<< units. -actory eBpenses of a fiBed nature re &s. +4<<<. Tese eBpenses are
for all practical purposes constant. $elling eBpenses are constant to te eBtent of &s. 1<<< and te balance varied 9it
sales.
)2. Calculate overead variance form te follo9ing data(
$tandard
H&sG
Actual
H&s.G
-iBed overeads :<<< :4<<
%ariable overeads )+<<< ))<<<
Output in units 2<<< 1:<<
BSPATIL
148