ACCOUNTING FOR BUSINESS II CHAPTER 1

COST SHEET
Meaning And Scope of Cost Accountanc
The term cost accountancy is wider than the term cost accounting. According to the Terminology of Management and Financial Accountancy Published by the Chartered Institute of Management Accountants, London, cost accountancy means, the a lication of costing and cost accounting rinci les, methods and techni!ues to the science, art and ractice of cost control. It includes the resentation of information deri"ed there from for the ur ose of managerial decision ma#ing.

Cost Accounting
Cost accounting is the rocess of accounting for costs. It embraces the accounting rocedures relating to recording of all income and e$ enditure and the re aration of eriodical statements and re orts with the ob%ect of ascertaining and controlling costs. It is thus the formal mechanism by means of which costs of roducts or ser"ices are ascertained and controlled.

Costing
Costing is the techni!ue and rocess of ascertaining costs.& Cost accounting is different from costing in the sense that the former ro"ides only the basis and information for ascertainment of cost. 'nce the information is made a"ailable the costing can be carried out arithmetically by means of memorandum statements or by method of integral accounting. (owe"er, the two terms costing and cost accounting are often used interchangeably. )o such distinction has also been obser"ed for the ur ose of this boo#. *heldon has gi"en an e$hausti"e definition of costing after e$ anding the ideas contained in the definitions of the terms +costing and cost accounting,. According to him costing is, the classifying recording and a ro riate allocation of e$ enditure for the determination of the costs of roducts or ser"ices- the relation of these costs to sales "alues- and the ascertainment of rofitability&.

Cost Cont!o"
According to the Institute of Cost and *or#s Accountants of India, cost control means The act of ower of controlling or regulating or dominating or commanding costs through the a lication of management tools and techni!ues to the erformance of any o eration to most redetermined ob%ecti"es of !uality, !uantity, "alue and time oat an o timum outlay&.

O#$ecti%es of Cost Accounting

T&e 'ain o#$ecti%es of cost accounting can #e su''a!i(ed as fo""o)s*+

.. Asce!taining Costs* / The first and foremost ob%ecti"e of cost accounting is to find out cost of a roduct, rocess or ser"ice. The other ob%ecti"es which ha"e been mentioned hereafter scan be achie"ed only when the costs ha"e been ascertained. 0. ,ete!'ining Se""ing P!ice1 / 2usiness enter rises are run on a rofit 3 ma#ing basis. It is thus necessary that the re"enue should be greater than the costs incurred in roducing goods and ser"ices from which the re"enue is to be deri"ed. Cost accounting ro"ides information regarding the cost to ma#e and sell such roducts or ser"ices. 4. Measu!ing and Inc!easing Efficienc 1 / Cost accounting in"ol"ers a study of the "arious o erations used in manufacturing a roduct or ro"iding a ser"ices. The study facilitates measuring of the efficiency of the organisation as a whole as well as of the de artments besides de"ising means of increasing the efficiency. 5. Cost Cont!o" and Cost Reduction 1 / Cost accounting assists in cost control it uses techni!ues such as budgetary control, standard costing etc. for controlling costs. 2udgets are re ared will in ad"ance. The standards for each item of cost are determined, the actual costs are com ared with the standard costs and "ariances are found out as to their causes. This greatly increases the o erating efficiency of the enter rise. 2esides it, cost is re!uired to be reduced also constant research and de"elo ment acti"ities hel in reduction of costs without com romising with the !uality of goods or ser"ices. 6. Cost Manage'ent1 / The term +Cost Management, includes the acti"ities of managers in short/run and long/run lanning and control of costs. Cost management has a broad focus. It includes both cost control and lost reduction. As a matter of fact cost management is often in"ariably lin#ed with re"enue and rofit lanning. For instance, to enhance re"enue and rofits, the management often deliberately incurs additional costs for ad"ertising and roduct modifications. 7. Asce!taining P!ofits* / Cost accounting also aims at ascertaining the rofits of each and e"ery acti"ity. It roduces statements at such inter"als as the management may re!uire. The financial statements re ared under financial accounting, generally once a year or half 3 year, are s aced too far a art in time to meet the needs of the management. In order to o erate the business at a high le"el of efficiency, it is essential for the management to ha"e a fre!uent re"iew of roduction, sales and o erating results. Cost accounting ro"ides daily, wee#ly or monthly "olumes of units roduced, accumulated costs together with a ro riate analysis so that !uantum of rofit and rofitability is #nown. 8. P!o%iding Basis fo! Manage!ia" ,ecision - Ma.ing 1 / Costs accounting hel s the management in formulation o erati"e olicies. These olicies may relate to any of the following matters1/ 9i: ;etermination of cost 3 "olume 3 rofit relationshi . 9ii: <hutting down or o erating at a loss. 9iii: Ma#ing or buying from outside su lies. 9i": Continuing with the e$isting lant and machinery or re lacing them by im ro"ed and economical means.

Cost Accounting /e!sus Financia" Accounting

Accounting may broadly be classified into two categories1/ 9a: Financial Accounting and 9b: Management Accounting Financial Accounting is concerned with recording, classifying and summari=ing financial transactions and re aring statements relating to the business in accordance with generally

acce ted accounting conce ts and con"entions. It is mainly meant to ser"e all arties e$ternal to the o erating res onsibility of the firm such as shareholders and creditors of the firm besides ro"iding information about the o"erall o erational results of the business while management accounting is concerned with accounting information which is useful for the management it is the resentation of accounting information in such as way as to assist the management in the creation of olicy and day to day o eration of the underta#ing.

IMPORTANCE OF COST ACCOUNTING

10 Costing &e"ps in pe!iods of t!ade dep!ession and t!ade co'petition *+ In eriods of trade de ression the business cannot afford to ha"e lea#ages which ass unchec#ed. The management should #now where economies may be sought, waste eliminated and efficiency increased. The business has to wage a wa$ for its sur"i"al. The management should #now the actual cost of their roducts before embar#ing on any scheme of reducing the rices on gi"ing tenders. Ade!uate costing facilitates this. 1. Aids in p!ice fi2ation*+ Though economic law > su ly and demand and acti"ities of the com etitors, to a great e$tent, determine the rice of the article, cost to the roducer does lay an im ortant art. The roducer can ta#e necessary guidance from his costing records. 30 He"ps in esti'ate*+ Ade!uate costing records ro"ide a reliable basis u on which tenders and estimates may be re ared. The chances of losing a contract on account of o"er 3 rating or losing in the e$ecution of a contract due to under 3 rating can be minimi=ed. Thus, ascertained costs ro"ide a measure for estimates, a guide to olicy, and a control o"er current roduction&. 40 He"ps in c&anne"ing p!oduction on !ig&t "ines*+ Costing ma#es ossible for the management to distinguish between rofitable and non/ rofitable acti"ities rofit can be ma$imi=ed by concentrating on rofitable o erations and eliminating non/ rofitable ones. 5. 6astages a!e e"i'inated*+ As it is ossible to #now the cost of the article at e"ery stage, it becomes ossible to choc# "arious forms of waste, such as time, e$ enses etc. or in the use of machine, e!ui ment and tools. 7. Costing 'a.es co'pa!ison possi#"e*+ If the costing records are regularly #e t, com arati"e cost data for different eriods and "arious "olumes of roduction will be a"ailable. It will hel the management in forming future lines of action. 8. P!o%ides data fo! pe!iodica" p!ofit and "oss accounts*+ Ade!uate costing records su ly to the management such data as may be necessary for re aration of rofit and loss account and balance sheet, at such inter"als as may be desired by the management. It also e$ lains in detail the sources of rofit or loss re"ealed by the financial accounts thus hel s in resentation of better information before the management.

9. Aids in dete!'ining and en&ancing efficienc 1/ Losses due to wastage of material, idle time of wor#ers, oor su er"ision etc., will be disclosed if the "arious o erations in"ol"ed in manufacturing a roduct are studied by a cost accountant. The efficiency can be measured and costs controlled and through it "arious de"ices can be framed to increase the efficiency. :. He"ps in in%ento! cont!o"*+ Costing furnishes control which management re!uires in res ect of stoc# of materials, wor#/in/ rogress and finished goods. 9This has been e$ lained in detail under the cha ter Materials&: 1;. He"ps in cost !eduction*+ Costs can be reduced in the long run when alternati"es are tried. This is articularly im ortant ion the resent day conte$t of global com etition cost accounting has assumed s ecial significance beyond cost control this way. 11. Assists in inc!easing p!oducti%it Producti"ity of material and labour is re!uired to be increased to ha"e growth and more rofitability in the organisation costing renders great assistance in measuring roducti"ity and suggesting ways to im ro"e it.

E<EMENTS OF COST
There are three broad elements of cost1/ 9a: Material 9b: Labour 9c: ?$ enses =a> Mate!ia"* + The substance from which the roduct is made is #nown as material. It may be in a raw or a manufactured state. It can be direct as well as indirect. ,i!ect Mate!ia"1 / All material which becomes an integral art of the finished roduct and which can be con"eniently assigned to s ecific hysical units is termed as ;irect Material&. Following are some of the e$am les of direct material1/ 9i: All material or com onents s ecifically urchased roduced or re!uisitioned from stores. 9ii: Primary ac#ing material 9e.g. 3 cartoon, wra ing, cardboard, bo$es etc.: 9iii: Purchased or artly roduced com onents. ;irect material is also described as raw/material, rocess material, roduction material, stores material, constructional material etc. rime material,

Indi!ect Mate!ia"1 / All material which is used for ur oses ancillary to the business and which cannot be con"eniently assigned to s ecific hysical units is termed as Indirect Material&. Consumable stores, oil and waste, rinting and stationery etc. are a few e$am les of indirect material Indirect material may be used in the factory the office or the selling and distribution di"ision.

=#>

<a#ou!* / For con"ersion of materials into finished goods, human effort is needed such
human effort is called labour. Labour can be direct as well as indirect. ,i!ect "a#ou!1 / Labour which ta#es an acti"e and direct art in the roduction of a articular commodity is called labour. ;irect labour costs are, therefore s ecially and con"eniently traceable to s ecific roducts. ;irect labour is also described as rocess labour, roducti"e labour, o erating labour, manufacturing labour, direct wages etc. Indi!ect "a#ou!*+ labour em loyed for the ur ose of carrying out tas#s incidental to goods or ser"ices ro"ided, is indirect labour such labour does not alter the construction, com osition or condition of the roduct. It cannot be ractically traced to s ecific units of out ut wages of store 3 #ee ers, foreman, time 3 #ee ers, directors, fees, salaries of salesmen, etc. are all e$am les of indirect labour costs. Indirect labour may relate to the factory the office or the selling and distribution di"ision.

=c> E2penses* / ?$ enses may be direct or indirect. ,i!ect e2penses* + These are e$ enses which can be directly, con"eniently and wholly allocated to s ecific cost centers or cost units. ?$am les of such e$ enses are1 hire of some s ecial machinery re!uired for a articular contract, cost of defecti"e wor# incurred in connection with a articular %ob or contract etc. ;irect e$ enses are sometimes also described as chargeable e$ enses&. Indi!ect e2penses1/ these are e$ enses which cannot be directly, con"eniently and wholly allocated to cost centers or cost units.

O/ERHEA,S*/ It is to be noted that the term o"erheads has a wider meaning than the term
indirect e$ enses o"erheads include the cost of indirect material, indirect labour besides indirect e$ enses. Indirect e$ enses may be classified under the following three categories1/ =a> Manufactu!ing =)o!.s? facto! o! p!oduction> e2penses*+ <uch indirect e$ enses which are incurred in the factory and concerned with the running of the factory or lant are #nown as manufacturing e$ enses. ?$ enses relating to roduction management and administration are included there in. Following are a few items of such e$ enses1 @ent, rates and insurance of factory remises, ower used in factory building, lant and machinery etc. =#> Office and Ad'inist!ati%e e2penses These e$ enses are not related to factory but they ertain to the management and administration of business such e$ enses are incurred on the direction and control of an underta#ing e$am le are 1/ office rent, lighting and heating, ostage and telegrams, tele hones and other charges- de reciation of office building, furniture and e!ui ment, ban# charges, legal charges, audit fee etc. =c> Se""ing and ,ist!i#ution E2penses*+

?$ enses incurred for mar#eting of a commodity, for securing orders for the articles, dis atching goods sold, and for ma#ing efforts to find and retain customers are called selling and distribution e$ enses e$am les are1/ Ad"ertisement e$ enses cost of re aring tenders, tra"eling e$ enses, bad debts, collection charges etc. *arehouse charges ac#ing and loading charges, carriage outwards, etc. The abo"e classification of different elements of cost can be resented in the form of the following chart1

?L?M?)T<'F 'FC'<T C'<T ?L?M?)T<

MAT?@IAL MAT?@IAL
;I@?CT ;I@?CT I);I@?CT I);I@?CT ;I@?CT ;I@?CT

LA2'A@ LA2'A@
I);I@?CT I);I@?CT

?BP?)<?< ?BP?)<?< ;I@?CT ;I@?CT

FACT'@C FACT'@C

I);I@?CT I);I@?CT
FACT'@C FACT'@C 'FFIC? 'FFIC?

FACT'@C FACT'@C 'FFIC? 'FFIC? <?LLI)D <?LLI)D ;I<T@I2ATI') ;I<T@I2ATI')

'FFIC? 'FFIC? <?LLI)D;I<T@I2ATI') ;I<T@I2ATI') <?LLI)D

<?LLI)D <?LLI)D ;I<T@I2ATI') ;I<T@I2ATI')

OR

?lements ?lements ofcost cost of

;I@?CT MAT?@IAL ;I@?CT MAT?@IAL

;I@?CT LA2'A@ ;I@?CT LA2'A@

;I@?CT ?BP?)<?< ;I@?CT ?BP?)<?<

'E?@(?A;< 'E?@(?A;<

FACT'@C 'E?@(?A;< FACT'@C 'E?@(?A;<

'FFIC?'E?@(?A;< 'E?@(?A;< 'FFIC?

<?LLI)D >;I<T@I2ATI') ;I<T@I2ATI') <?LLI)D > 'E?@(?A;< 'E?@(?A;<

I);I@?CTMAT?@IAL MAT?@IAL I);I@?CT

I);I@?CT I);I@?CT MAT?@IAL MAT?@IAL

I);I@?CT I);I@?CT MAT?@IAL MAT?@IAL

I);I@?CT I);I@?CT LA2'A@ LA2'A@

I);I@?CT I);I@?CT LA2'A@ LA2'A@

I);I@?CT I);I@?CT LA2'A@ LA2'A@

I);I@?CT I);I@?CT ?BP?)<?< ?BP?)<?<

I);I@?CT I);I@?CT ?BP?)<?< ?BP?)<?<

I);I@?CT I);I@?CT ?BP?)<?< ?BP?)<?<

Ite's e2c"uded f!o' cost accounts

There are certain items which are included in financial accounts but not in cost accounts. These items fall into three categories1/

App!op!iation of p!ofits
9i: 9ii: 9iii: 9i": 9": 9"i: A ro riation to sin#ing funds. ;i"idends aid Ta$es on income and rofits Transfers to general reser"es ?$cess ro"ision for de reciation of buildings, lant etc. and for bad debts Amount written off 3 goodwill, reliminary e$ enses, underwriting commission, discount on debentures issued- e$ enses of ca ital issue etc. 9"ii: Ca ital e$ enditures s ecifically charged to re"enue 9"iii: Charitable donation

Matte!s of pu!e finance

=a> Pu!e" 9i: 9ii: 9iii: 9i": 9": 9"i: 9"ii: financia" c&a!ges1/ Losses on sale of in"estments, buildings, etc. ?$ enses on transfer of com any,s office Interest on ban# loan, debentures, mortgages, etc. ;amages ayable Penalties and fines Losses due to scra ing of machinery @emuneration aid to the ro rietor in e$cess of a fair reward for ser"ices rendered.

=#> Pu!e" financia" inco'es1/ 9i: Interest recei"ed on ban# de osits 9ii: Profits made on the sale of in"estments, fi$ed assets, etc. 9iii: Transfer fees recei"ed 9i": @ent recei"able 9": Interest, di"idends, etc. recei"ed on in"estments. 9"i: 2ro#erage recei"ed 9"ii: ;iscount, commission recei"ed A#no!'a" gains and "osses*+ 9i: Losses or gains on sale of fi$ed assets. 9ii: Loss to business ro erty on account of theft, fire or other natural calamities. In addition to abo"e abnormal items 9gain and losses: may also be e$cluded from cost accounts. Alternati"ely, these may be ta#en to costing rofit and loss account.

Co'ponents of tota" cost

P!i'e cost* / It consists of costs of direct material, direct labour and direct e$ enses. It is also
#nown as basic, first or flat cost.

Facto! cost*+ It com rises of rime cost and in addition wor#s of factory o"erheads which

includes costs of indirect material, indirect labour and indirect e$ enses of the factory. The cost is also #nown as wor#s cost, roduction or manufacturing cost.

Office cost* + If office and administrati"e o"erheads are added to factory cost office cost is
arri"ed at this is also termed as administrati"e cost or the total cost of roduction.

Tota" cost*+ 'ffice cost or total cost of roduction selling and distribution o"erheads are added to
the total cost of roduction to get the total cost or the cost of sales. Cost of sales or total cost. The "arious com onents of total cost can be de icted through the hel of the following chart1/

Co'ponents of Tota" cost

;irect material lus ;irect labour lus ;irect e$ enses Prime cost o"erheads lus cost Prime cost or ;irect cost or First cost wor#s cost or factory or roduction cost or manufacturing *or#s

*or# cost lus office and Administrati"e o"erheads 'ffice cost lus selling And distribution o"erheads

Ad$ust'ents fo! in%ento!ies

The following ad%ustments may ha"e to be made for in"entories of raw materials, wor# 3 in 3 rogress and finished goods while com uting the different com onents of cost1 9i: ;irect Material Consumed 9ii: *or#s Cost ' ening stoc# Purchases of of ;irect G ;irect material material Dross wor#s ' ening wor# / F G cost in 3 rogress F / Closing stoc# of ;irect material Closing wor# 3 in HH rogress

9iii: Cost of roduction of goods sold

F cost of roduction G ' ening stoc# Closing stoc# of finished H of finished good

I""ust!ation 10

Calculate rime cost from the following information1/

;irect material / @s. 5I,III, ;irect labour / @s. 4I,III ;irect e$ enses / @s. 06.III <olution1 Prime cost F ;irect Material G ;irect labour G ;irect e$ enses

F F

@s. 5I,III @s. J6,III

@s.4I, III G @s. 06,III

I""ust!ation 1.Calculate

rime cost from the following information1/ ' ening stoc# of raw material F @s. .0,6II Purchased raw material F @s. 86,III ?$ enses incurred on raw material F @s. 6,III Closing stoc# of raw material F @s. 00,6II *ages @s. 58,7II ;irect e$ enses @s. 04,5II Calculation of raw material consumed1/ @aw material consumed F ' ening stoc# of material G urchases of @aw material G e$ enses incurred on raw material / closing stoc# of raw material F @s .0,6II G @s 86,III G @s 6,III 3 @s 00,6II F @s. J0,6II 3 @s 00,6II F @s. 8I,III

So"ution* +

P!i'e cost

F @aw material consumed G ;irect labour G ;irect e$ enses F @s 8I,III G @s 58,7II G @s 04,5II F @s ., 5.,III

OR

It can be shown in "ertical form such as cost sheet Pa!ticu"a! ' ening stoc# of raw material Add1/ Purchase Add1/ ?$ enses incurred on urchases @aw material a"ailable <ess 1/ closing stoc# of raw material @aw material consumed Add1/ ;irect wages or labour Add*/ ;irect e$ enses P!i'e cost ,etai"s =Rs> .0,6II 8,6II 6,III /////////////// J0,6II 00,6II /////////////// A'ount =Rs>

8I,III 58,7II 04,5II ////////////// .,5.,III

I""ust!ation 3.

Calculate wor#s cost or factory cost from the following details1/

@aw material consumed F @s 6I,III ;irect wages F @s0I, III ;irect e$ enses F @s .I,III Factory e$ enses KIL of direct wages

' ening stoc# of wor# in rogress Closing stoc# of wor# in rogress

F @s .6,III F @s 0.,III

So"ution* /

Calculation of factory cost Pa!ticu"a! A'ount =Rs> 6I,III 0I,III .I,III ///////////// A'ount =Rs>

;irect material consumed Add1/ ;irect wages Add*/ ;irect ?$ enses P!i'e cost Add*/ Factory e$ enses Current manufacturing cost Add*/ ' ening stoc# of wor# in rogress Total goods rocessed during the eriod <ess1/ Closing soc# of wor# in rogress Facto! cost o! )o!. cost

KI,III .7,III ////////////// J7,III .6,III ////////////// .,..,III 0.,III ////////////// JI,III

I""ust!ation 40

Calculate cost of roduction from the following information1/ @aw material urchased F @s 50,6II Freight aid F @s 6,III Labour charges F @s .0,6II ;irect e$ enses F @s .I,III Factory o"erhead KIL of ;irect labour charges Administrati"e o"erhead F .IL of wor# cost @aw material *or# in rogress ' ening stoc# K,III 8,6II Closing stoc# .I,III J,III

So"ution* +

Calculation of cost of roduction1/ Pa!ticu"a! A'ount =Rs> 50,6II 6,III ///////////// 58,6II K,III //////////// 66,6II .I,III //////////// 56,6II .0,6II A'ount =Rs>

Material urchased Add*/ freight Total cost of material urchased Add1/ ' ening stoc# of @aw material Material a"ailable for consum tion <ess1/ Closing stoc# of @aw material @aw material consumed Add1/ ;irect labour charges

Add1/ ;irect e$ enses P!i'e cost Add*/ Factory o"erhead Current manufacturing cost Add1/ ' ening stoc# of wor# in rogress Total goods rocessed during the eriod <ess*/ Closing stoc# of wor# in rogress Factory cost Add*/ Administrati"e o"erhead Cost of p!oduction

.I,III

7K,III .I,III //////////// 8K,III 8,6II //////////// K6,6II J,III //////////// 87,6II 8,76I //////////// K5,.6I

I""ust!ation 5. Pre

are cost sheet from the following articular in the boo# of 2. M. @ehman @aw material urchased F @s. ., 0I,III Paid freight charges F @s .I,III *ages aid to laborers F @s 46,III ;irectly chargeable e$ enses F @s 06,III Factory on cost F 0IL of rime cost Deneral and administrati"e e$ enses F 5L of factory cost <elling and distribution e$ enses F 6L of roduction cost Profit 0IL on sales ' ening stoc# Closing stoc# @aw material .6,III 0I,III *or# in rogress .8,6II 05,III Finished goods 0I,III 08,6II

So"ution*+

Boo. of B0 M0 Re&'an
Cost s&eet
.,0I,III .I,III /////////////// .,4I,III .6,III /////////////// .,56,III 0I,III ////////////// .,06,III 46,III 06,III ////////////// .,K6,III 48,III /////////////// 0,00,III .8,6II /////////////// 0,4J,6II 05,III /////////////// 0,.6,6II K,70I /////////////// 0,05,.0I 0I,III ////////////// 0,55,.0I 08,6II ////////////// 0,.7,70I ..,0I7 ////////////// 0,08,K07 67,J67.6I /////////////// 0,K5,8K0.6I

@aw material urchased Add1/ freight charges Total cost of raw material urchased Add*/ o ening stoc# of raw material Cash of raw material a"ailable <ess*/ closing stoc# of raw material Ra) 'ate!ia" consu'ed Add1/ wages aid to labours Add1/ ;irectly chargeable e$ enses P!i'e cost Add*/ Factory o"erhead 0IL of rime cost Current manufacturing cost Add*/ ' ening stoc# of wor# in rogress Total goods rocessed during the eriod <ess*/ closing stoc# of wor# in rogress Facto! on )o!. cost Add1/ Deneral > administrati"e e$ enses 5L of factory cost Cost of p!oduction Add*+ o ening stoc# of finished goods Doods a"ailable for sales <ess*/ closing stoc# of finished goods Cost of goods so"d Add1/ selling and distribution e$ enses 6L of cost Cost of sa"es Add1/ Profit Sa"es roduction

I""ust!ation 70
' ening stoc#1 / Closing stoc#1 /

Pre are cost sheet in the boo# of M. 2. @ehman from the following articulars. @aw material Finished goods @aw material Finished goods F F F F @s @s @s @s 6,III 5,III 5,III 6,III

@aw material urchased *ages aid to laboures Chargeable e$ enses @ent and Ta$es Power ?$ erimental e$ enses <ale of wastage of material 'ffice management salary 'ffice rinting > stationery <alaries to salesman Commission to tra"eling agents <ales

F F F F F F F F F F F F

@s @s @s @s @s @s @s @s @s @s @s @s

6I,III 0I,III 0,III 8,5II 4,III 7II 0II 5,III 0II 0,III .,III ., II,III

So"ution*+

Boo. of B0 M0 Re&'an
Cost s&eet
Pa!ticu"a! ,etai"s =Rs> 6I,III 6,III /////////////// 66,III 5,III /////////////// 6.,III 0II ///////////// A'ount =Rs>

@aw material urchased Add1/ ' ening stoc# of raw material @aw material for consum tion <ess1/ closing stoc# of raw material @aw material consumed <ess1/ <ale of wastage of materials Add*+ ;irect labour Add1/ ;irect chargeable e$ enses P!i'e cost Add1/ Factory o"erhead @ent > Ta$es Power ?$ erimental charges Facto! cost Add*/ Administrati"e o"erhead1/ 'ffice management salary 'ffice rinting > stationery Cost of p!oduction Add*/ ' ening stoc# of finished goods Doods a"ailable for sales <ess1/ closing stoc# of finished goods Cost of goods so"d

6I,KII 0I,III 0,III ////////////// 80,KII

8,5II 4,III 7II ////////////// 5,III 0II ///////////////

..,III K4,KII

5,0II KK,III 5,III ///////////// J0,III 6,III ///////////// K8,III

Add*/ selling and distribution o"erhead1/ <alaries of salesman Commission to tra"eling agent Cost of sales Profit Sa"es

0,III .,III //////////////

4,III JI,III .I,III ////////////// .,II,III

I""ust!ation 80

The cost of sale of roduction +A, is made u as follows1/ Material used in manufacturing Material used in ac#ing material Material used in selling the roduct Material used in the factory Material used in the office Labour re!uired in roduction Labour re!uired for su er"ision in factory ?$ enses direct factory ?$ enses indirect factory ?$ enses office ;e reciation of office building ;e reciation on factory lant <elling e$ enses Freight on material Ad"ertising @s @s @s @s @s @s @s @s @s @s @s @s @s @s @s 6,6II .,III .6I .86 .06 .,III 0II 6II .II .06 86 .86 46I 6II .06 rice be fi$ed to

Assuming that all roducts manufactured and sold, what should be the selling obtain a rofit of 0IL on selling rice.

So"ution
Pa!ticu"a! ,i!ect 'ate!ia"*+ Material used in manufacturing Material used in Pac#ing material Freight on material ,i!ect )ages*+ labour re!uire in roduction ;irect e$ enses1/ ;irect factory P!i'e cost Add1/ Factory o"erhead Indirect material used in factory Indirect labour re!uired for su er"ision Indirect factory e$ enses ;e reciation factory

Cost S&eet
A'ount =Rs> A'ount =Rs> 6,6II .,III 6II ///////////// A'ount =Rs>

8,III .,III 6II //////////// K,6II

86 0II .II .86

///////////// Facto! on )o!.s cost Add1/ office > administrati"e e$ enses Indirect material Indirect e$ enses office Indirect de reciation Tota" cost of p!oduction Add*/ selling and distribution o"erhead1/ Indirect material Indirect e$ enses Ad"ertisement Cost of sales Profit Sa"es

086 ///////////// .06 0II ///////////// .6I

66I JI6I

.06 86 ////////////

406 J486

46I .06 ////////////

586 /////////////

706 .I,III 0,6II /////////// .0,6II

I""ust!ation 90
P!epa!e a state'ent of cost f!o' t&e fo""o)ing t!ading and P@< account fo! t&e ea! ending Ma!c& 31? 1;;9 Pa!ticu"a! To o ening stoc# material Finished goods To urchases To cost of moulds To salary of factory manger To de reciation of machine To gross rofit A'ount =Rs> Pa!ticu"a! .0,III 2y sales 5I,III 2y closing stoc# material .,0I,III Finished goods 4,III .,III KII 74,0II ////////////// 0,8I,III ////////////// J,III 2y Dross rofit 7,III 2y interest from ban# .,III 2y di"idend recei"ed KII 2y rent recei"ed 0,III 8II .,0II .,6II 0,III A'ount =Rs> 0,II,III 0I,III 6I,III

To office salary To salesman salary To insurance of office building To godown e$ enses To directors fees To tele hone charges To showroom e$ enses To deli"ery "an e$ enses To reliminary e$ enses

/////////////// 0,8I,III ///////////// 74,0II KII 0II JII

To interest on deb. To mar#et research e$ . To net rofit

8II 7II 4J,III ////////////// 76,.II //////////////

////////////// 76,.II //////////////

So"ution
Pa!ticu"a!

State'ent of cost =Fo! t&e ea! ending 31st Ma!c& 1;;9>

,etai"s =Rs> .,0I,III .0,III /////////////// .,40,III 0I,III /////////////// .,.0,III 4I,III /////////////// 4,III .,III KII /////////////// A'ount =Rs>

;irect material1/ @aw material urchased Add*+ o ening stoc# of raw materials @aw material for consum tion <ess1/ Closing soc# of raw materials @aw material consumed Add*/ ;irect labour P!i'e cost Add1/ Factory o"erhead1/ Cost of moulds Factory manager salary ;e reciation on machinery Facto! cost Add*/ office and administrate o"erhead <alary Insurance ;irectors fees Tele hone charges Cost of p!oduction Add*/ ' ening stoc# of finished goods Doods a"ailable for sales <ess1/ Closing stoc# of finished goods Cost of goods so"d Add1/ selling > distribution e$t1/ <alesman,s salary Insurance 9godown: <howroom e$ enses ?$ enses of deli"ery "an Mar#et research e$ enses Cost of sales Profit

.,50,III

5,KII /////////////// .,57,KII

J,III .,III 0,III 8II ///////////////

.0,8II ///////////// .,6J,6II 5I,III ////////////// .,JJ,6II 6I,III ////////////// .,5J,6II

7,III KII .,0II .,6II 7II /////////////

.I,.II //////////////// .,6J,7II 5I,5II

Sa"es

//////////////// 0,II,III

I""ust!ation :0
The following in"entory data relate to )a=ia Ltd. In"entories Finish goods *or# in rogress @aw materials ' ening @s .,.II @s 8II @s JII Closing @s J6I @s KII @s J6I

Additiona" info!'ation*+ Cost of goods a"ailable for sales F @s 7K5I Total goods rocessed during the eriod F @s 765I Factory on cost F @s .78I ;irect material used F @s .J4I @e!uirements1/ 9i: determine raw material urchase 9ii: determine the direct labour and cost incurred 9iii: determine the cost of goods sold

So"ution
9i: OR OR 9ii: @aw material urchased1/ @aw material consumed @s .,J4I @s .,J4I G @s 6I @s .,JKI F F F F o ening stoc# G urchases 3 closing stoc# @s JII G Purchases 3 @s J6I urchases @aw material urchased F @s 7,65I F @s 8II /////////////// @s 6,K5I F @s .,78I /////////////// F @s 5,.8I F @s .J4I ////////////// F @s 0,05I

;irect labour cost1/ Cost of goods rocessed during the year Less1 / ' ening wor# in rogress Less1 / Factory o"erheads Prime cost Less1 / @aw material consumed ;irect labour cost

9iii:

Cost of goods sold1/ F cost of goods a"ailable for sales 3 closing stoc# finished goods F 7K5I 3 J6I F @s 6KJI

I""ust!ation 1;0

Mr. Mia furnishes the following data related to the manufacture of a standard roduct during the month of August 0IIK @aw material consumed ;irect labour Machine hours wor#ed Machine hour rate Administration o"erheads <elling o"erheads Anit roduced Anit sold / / / / F / / / @s .6,III @s 6,III @s JII @s 6 0IL of wor#s cost @s I.6I er unit @s .8,.II .7,III N @s 5 er unit

Cou are re!uired to re are a cost sheet from the abo"e showing1/ 9a: The cost er unit 9b: Cost er unit sold and rofit for the eriod

So"ution Boo. of Aia Cost s&eet =Fo! t&e 'ont& of August 31? 1;;9>
Pa!ticu"a! ;irect material consumed ;irect labour ;irect e$ enses P!i'e cost Factory o"erheads 9JII hours N @s 6 er hour: 6o!. cost Administrati"e o"erheads N 0IL of wor#s cost Cost of roduction Less1/ closing stoc# on August 4., 0IIK 9..II units N @s 0 er unit: Cost of goods sold <elling o"erheads N @s I.6I er unit for .7III Cost of sales Profit Sa"es =17;; unit> O Closing stoc# F unit roduced / units sold F .8.II/.7III F ..II units A'ount =Rs> .6,III 6,III 5,III ////////////// 05,III 5,6II ////////////// 0K,6II 6,8II ////////////// 45,0II 0,0II /////////// 40,III K,III /////////// 5I,III 05,III //////////// 75,III A'ount =Rs> I.K8K I.0J0 I.044 ////////////// ..5I4 I.074 /////////////// ..777 I.444 /////////////// 0,III ///// ////////////// 0.III I.6I ///////////// 0.6I ..6I //////////// 5.II

E2e!cise Buestions0
T&eo!etica" Buestions*+ .: ?$ lain the meaning of cost accountancy 0: ;efine a: ;irect materials b: ;irect wages c: ;irect e$ enses 4: *hat is cost accountingP ;iscuss briefly its im ortant functions in a business firm 5: ?$ lain the im ortant ob%ecti"es of cost accountingP 6: ;istinguish between1/ a: ;irect e$ enses and indirect e$ ensesP b: ;irect labour and indirect labourP c: ;irect materials and indirect materialsP 7: ;istinguish between +costing, and +cost accounting, 8: *hat is financial accountingP (ow it is different from cost/accountingP K: Mention the elements of cost J: ?$ lain the classification of direct labour .I:(ow the o"erheads are different from the e$ ensesP ..:<tate at least fi"e each ty e of o"erheads a: Factory o"erheads b: Administrati"e o"erheads c: <elling and distribution o"erheads .0:*hat are the com onents of direct costP .4: *rite the formula of calculating the raw material consumed .5:?$ lain the meaning of cost of goods sold and cost of sales .6:?$ lain the meaning of a: First cost b: *or#s cost and wor#s on cost c: Cost of roduction and goods a"ailable for sales

P!actica" p!o#"e's =S&o!t Ans)e!s>

.. ' ening stoc# of raw material Closing stoc# of raw material Material urchased Find raw material consumed / @s .6,III / @s 0I,III / @s ., 0I,III 9Ans. ., .6,III:

0.

4.

@aw material consumed / @s ., I0,III @aw material for consum tion / @s ., .I,III @aw material urchased / @s ., II,III Find o ening > closing stoc# of raw material 9Ans. @s .I,III and @s K,III: Prime cost / @s ., K6,III Current manufacturing cost / @s 0, 00,III Total goods rocessed during the eriod / @s 0, 4J,6II *or#s cost / @s 0, .6,III Find factory o"erheads, o ening and closing stoc# of wor# in rogress 9Ans. @s 48,III, @s .8,6II and @s 05,III:

5.

Cost of roduction / @s ..,0I7 Doods a"ailable for sales / @s .0,0I7 Cost of goods sold / @s .I,K4. Cost of <ales / @s .., 4J. <ales / @s .0,III Find o ening and closing stoc# of finished goods, selling e$ enses and rofit or loss 9Ans. @s .,III, @s .,486, @s 67I and @s 7IJ rofit: ;irect material consumed ;irect labour 6IL of material consumed ;irect e$ enses / Factory o"erheads / 'ffice o"erheads / Find office cost / @s 7I,III 44QRSL of direct labour 5IL of direct labour on cost 77TRSL of wor#s 9Ans. @s ., 0I,III:

6.

PRACTICA< PROB<EMS ="ong ans)e!s> .. From the following articulars re are a cost sheet showing the total cost er tone for the eriod ended 4.st ;ecember .JJK Rs @aw material Producti"e wages ;irect e$ enses An roducti"e wages Factory rent and terms Factory lighting Factory heating Moti"e ower (aulage ;irector,s fees 9wor#s: ;e reciation of / lant and machinery / office building / deli"ery "ans 2ad debts Ad"ertising <ales de artment salaries 44,III 46,III 4,III .I,6II 8,6II 0,0II .,6II 5,5II 4,III .,III 0,III .,III 0II .II 4II .,6II ;irector,s fees 9office: Factory cleaning <undry office e$ enses ?stimating Factory stationery 'ffice stationery Factory insurance 'ffice insurance Legal e$ enses @ent of warehouse An#ee ing of deli"ery "ans 2an# charges Commission on sales Loose tools written off @ent and ta$es 9office: *ater su ly Rs 0,III 6II 0II KII 86I JII .,.II 6II 5II 4II 8II 6I .,6II 7II 6II .,0II

The total out ut for the eriod has been .I,III tones. 9Ans. Prime cost @s 8.,III wor#s cost @s .,IK,I6I office cost @s .,.4,7II total cost @s .,.K,0II cost er tone @s ...K0: 0. Pre are a cost sheet to show the total cost of roduction and cost er unit of goods manufactured by a com any for the month of Uuly .JJ5. Also find out the cost of sales. Rs Rs

<toc# of raw materials ./8/.JJ5 @aw materials urchased <toc# of raw materials 4./8/.JJ5 Manufacturing wages ;e reciation on lant Loss on sale of a art of lant

4,III Factory rent > rates 0K,III 'ffice rent 5,6II Deneral e$ enses 8,III ;iscount on sales .,6II Ad"ertisement 4II ?$ enses to be charged fully income ta$ aid

4,III 6II 5II 4II 7II 0,III

The number of units roduced during Uuly .JJ5 was 4,III The stoc# of finished goods was 0II and 5II units on ./8/.JJ5 and 4./8/.JJ5 res ecti"ely. The total cost of units on hand on ./8/.JJ5 was @s 0,KII. All these had been sold during the month. 9Ans. Prime cost @s 44,6II factory cost @s 4K,III cost of 485.7: 4. roduction @s 4K,JII cost of sales @s

The following articulars relating to the year .JJ5 ha"e been ta#en from the boo#s of a chemical wor#s manufacturing and selling a chemical mi$ture1 Rs Stoc. on 1st Can0 1::4 Rs 0,III .,86I 8,06I .,KI,III 05,06I J,.K,III K,.8I .,8K,76I 4I,5II .K,III 80,00I 48,00I 5.,6II .K,6II .K,0II .K,III

@aw materials Finished mi$ture Factory stores Pu!c&ases @aw materials Factory stores Sa"es Finished mi$ture Factory scra Factory wages Power ;e reciation of machinery Sa"a!ies Factory 'ffice <elling E2penses ;irect 'ffice <elling Stoc. on 31st ,ece'#e! 1::4 @aw material Finished mi$ture Factory stores

0,III 6II ////// .,7I,III ////// .,64,I6I ////// ////// ////// ////// ////// ////// ////// ////// ////// ////// .,0II 56I //////

6,66I

The stoc# of finished mi$ture at the end of .JJ5 is to be "alued at the factory cost of the mi$ture for that year. The urchase rice of raw3materials uncharged throughout .JJ5. Pre are a statement gi"ing the ma$imum ossible information about cost and its brea# u for the year .JJ5. 9Ans. Prime cost @s 4,88,KII factory cost @s 6,.7,0II cost of roduction of finished mi$ture sold @s 6,8.,K60 cost of sales @s 7,4.,460: 5. Calculate a: Ealue of raw/materials consumed b: Total cost of roduction c: Cost of goods sold and d: The amount of rofit from the following articulars1 Rs Opening stoc. @aw 3 materials Finished goods C"osing stoc. @aw 3 materials Finished goods @aw 3 materials urchased *ages aid to labourers Chargeable e$ enses Factory rent, rates > ta$es Power 6,III Factory heating and lighting 5,III Factory insurance ?$ erimental ?$ enses 5,III <ales of wastage of materials 6,III 'ffice management salaries 6I,III 'ffice rinting and stationery 0I,III <alaries of salesmen commission of tra"eling agent 0,III 6,III <ales Rs 0,III 0,III .,III 6II 0II 5,III 0II 0,III

.,II,III

9Ans. 9a: @s 6I,KII, 9b: @s K8,6II, 9c: @s KJ,6II, 9d: @s .I,6II: V(int sales of raw/materials wastage of @s 0II has been deducted from the cost of raw/materialsW

6.

The cost of the sale of roduct +B, is made u as follows1 Rs

Materials used in manufacturing Materials used in ac#ing materials Materials used in selling the roduct Materials used in office Materials used in factory Labour re!uired in roducing <alary aid to wor#s manager and other rinci al officers of the factory ?$ enses 3 indirect office ?$ enses 3 direct factory 2ad debts

.I,0I 0,6II 46I 86 .06 0,6II 56I 06I .,III 4II

Pac#ing e$ enses Lighting and heating charges of the factory ?$ enses 3 indirect factory

.6I 0II .06

Assuming that all the roducts manufactured are sold, what should be the selling rice to obtain a rofit of 0IL on cost riceP Illustrate in a chart for# for resentation to your mange, the di"ision of costs of roduct +B, VAns. Prime cost @s .7,0II, wor#s cost @s .8,.II cost of sales @s .K,006 sales @s 0.,K8IW 7. Calculate the rime cost, factory cost, total cost of roduction and cost of following articulars1 sales from the Rs0 @aw materials consumed ;irectly chargeable e$ enses *ages aid to labourers Drease, oil, cotton waste etc. <alary manager and cler#s Insurance of stoc# of raw materials Consumable stores P!inting and statione! * Factory 'ffice <ales de tt. @ent of office building ,ep!eciation 1 Factory remises 'ffice furniture ;eli"ery "ans Power and fuel Contribution to ro"ident fund of factory em loyees <alaries of administrati"e directors 2an# charges Cost of sam les <alaries of sales manger Ad"ertising Pac#ing material <torage in stoc#s of finished goods .0,III 6II 0,6II 06 .,86I 4II 5II 6I 0II .II ///////////

46I .6I

0II 6I 86 /////////

406 6II .,III .II 86 06I 4II 6II 46I 0I

VAns. Prime cost @s .6,III, factory cost @s .J006 total cost of roduction @s .J,KII cost of sales @s 0.,4J6W 8. Calculate a: Ealue of raw/materials consumed b: Total cost of roduction

c: Cost of goods sold and d: The amount of rofit from the following articulars1 Rs Opening stoc.* @aw materials Finished goods C"osing stoc.* @aw/materials Finished goods @aw materials urchased *ages aid to labourers ;irect e$ enses ?$ erimental e$ enses Factory rinting and stationery Rent * Factory 'ffice *ages of fireman Lighting 3 office Audit fees Tele hone e$ enses Ad"ertising Mar#et research e$ enses <alary of godown 3 #ee ers Tra"eling e$ enses Commission of tra"eling agent <ales .,46I 0,6II 86I .,6II 0I,III K,III .,06I 56I 46I 06I .0I ////////

48I .,III .06 .6I 6II .,06I 66I .86 86I 6II 6I,III

VAns. 9a: "alue of raw 3 materials consumed @s. 0I,7II 9b: Total cost of roduction @s 40,8J6, 9c: cost of goods sold @s 44,8J6, 9d: rofit @s .0,JKIW K. Pre are a statement of cost from the following trading and rofit and loss account for the year ending 4.st March, .JJ6. Pa!ticu"a!s Opening stoc.1 Materials Finished goods Purchase of materials ;irect labour Drease, oil etc. <alary of store#ee er Power > fuel Dross rofit cRd Rs Pa!ticu"a!s Rs .,II,III .6,III 4I,III

<ales K,III C"osing stoc.* 06,III Materials 8I,III Finished goods .I,III 6II 8II KII 4I,III ///////////// .,56,III

///////////// .,56,III

Lighting1 'ffice <ales de tt. ,ep!eciation* 'ffice remises ;eli"ery "ans Fees of office manager 2an# charges <elling e$ enses <ales commission Preliminary e$ enses Pac#ing e$ enses ;i"idends aid on <hare ca ital of com any ;iscount on debentures )et rofit

/////////////

Dross rofit bRd 6II ;i"idends recei"ed 76I Interest on loan Transfer fees .,III @ecei"ed 86I 0,III .,6II .,6II 6II 4,III .,.II .,III

///////////// 4I,III 0,III 7II .,56I

6II 0I,III //////////// 45,III

/////////// 45,III

VAns. Prime cost @s 84,III, wor#s cost @s 86,III, total cost of roduction @s KI,III cost of goods sold @s 86III cost of sales @s 8J,III rofit @s 0.,IIIW J. The following data relate to the manufacture of standard ending on 0Kth 'ct. .JJ5. roduct during the four wee# @s 0I,III @s .0,III J6I 9hrs: @s 0.II @s I.48 er unit 0I,III .K,III

@aw materials consumed ;irect wages Machine hr wor#ed Machine hour rate 'ffice o"erhead .6L on wor#s cost <elling o"erhead Anits roduced Anits sold N @s 0.6I each Pre are a statement from the abo"e showing1 9a: The cost of roduction er unit, and 9b: The rofit for the eriod VAns. 9a: @s .,J5J 9b: @s 4,06K .I.

A firm has urchased a lant to manufacture a new roduct, the cost data for which is gi"en below1 05,III units @s 5.II @s I.7I @s 05,III @s 0K,KII .6L er unit er unit er year er year of sales

?stimated annual sales Esti'ated costs* Material ;irect labour '"erheads Administrati"e e$ enses <elling e$ enses

Calculate the selling rice if rofit er unit is @s ..I0 VAns. @s J.0IW ... Pre are a cost sheet from the following data to find out rofit and cost er unit1

@aw materials consumed ;irect wages Factory o"erheads 0IL of direct wages 'ffice o"erheads .IL of factory cost <elling o"erheads Anit roduced Anits sold <elling rice

@s .,7I,III @s KI,III .0,III 5,III 4,7II @s .II er unit

VAns. Prime cost @s 0,5I,III, factory cost @s 0,67,III, cost of roduction @s 0,K.,7II, cost of sales @s 0,76,55I, rofit @s J5,67IW