OM SAI RAM

COST & MANAGEMENT ACCOUNTING

[EXECUTIVE PROGRAMME]
VOLUME - 2

get ready to LearN with fUN…..

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 INDEX
S. NO. TOPIC PAGE NO.
8. INTRODUCTION 3

9. COST SHEET 25

10. CASH FLOW STATEMENT 44

11. FUND FLOW STATEMENT 79

12. RECONCILIATION 91

13. CONTRACT COSTING 99

14. JOINT PRODUCT & BY PRODUCTS 116

15. PROCESS COSTING 126

16. BUDGETARY CONTROL 140

17. OPERATING COSTING 160

18. INTEGRAL & NON INTEGRAL SYSTEMS 170

19. COST ACCOUNTING RECORDS & COST AUDIT 185

PAST TRENDS 192

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 CHAPTER

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Accounting is a very old science which is considered to be essential for keeping records of all
receipts and payments as well as that of the income and expenditures. Accounting can be broadly
divided into 3 categories.

Categories of Accounting

Financial Accounting Cost Accounting Management accounting

1. Financial Accounting aims at finding out profit or losses of an accounting year as well as the
assets and liabilities position, by recording various transactions in a systematic manner.

2. Cost Accounting helps the business to ascertain the cost of production/services offered by
the organization and also provides valuable information for taking various decisions and also
for cost control and cost reduction.

3. Management Accounting helps the management to conduct the business in a more efficient
manner. It helps in decision making

COST

Cost can be defined as the expenditure (actual or notional) incurred on or attributable to a given
thing. ICWA, India defines Cost as "measurement, in monetary terms, of the amount of resources
used for the purpose of production of goods or rendering services".

It can also be described as the resources that have been sacrificed or must be sacrificed to attain a
particular objective. For example - Cost of preparing one cup of tea is the amount incurred on the
elements like material, labour and other expenses.

COSTING

Costing may be defined as 'The technique and process of ascertaining costs'. Thus costing means
determining the cost by any technique or process like memorandum records or formal records
based on double entry system.

According to Weldon, 'Costing is classifying, recording, allocation and appropriation of expenses

for the determination of cost of products or services and for the presentation of suitably arranged
data for the purpose of control and guidance of management. If we analyze the above definitions, it
will be understood that costing is basically the procedure of ascertaining the costs.

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It consists of principles and rules which are used for determining:
(a) The cost of producing a product, e.g. projector, laptop, car.
(b) The cost of providing a service, e.g. educational institute, hospital, transport.
(c) The cost of performing an activity, e.g. placing purchase orders, receiving deliveries of
materials.

COST ACCOUNTING

Cost accounting may be defined as “A specialized branch of accounting which involves

classification, accumulation, assignment and control over cost”. Cost Accounting primarily deals
with collection, analysis of relevant of cost data for interpretation and presentation for
various problems of management. CIMA defined it as, 'the establishment of budgets, standard
costs and actual costs of operations, processes, activities or products and the analysis of variances,
profitability or the social use of funds'.
Thus, Cost Accounting embraces –
(a) Collecting, classifying, recording, allocating and analyzing the costs.
(b) Preparation of periodical statements and reports for ascertaining and controlling costs.
(c) Ascertainment of profitability of activities carried out or planned.

COST ACCOUNTANCY

Cost Accountancy is a broader term and is defined as, the application of costing and cost
accounting principles, methods and techniques to the science and art and practice of cost control
and the ascertainment of profitability as well as presentation of information for the purpose of
managerial decision making.

If we analyze the above definition, the following points will emerge,

a) Cost accountancy is basically application of the costing and cost accounting principles.
b) This application is with specific purpose and that is for the purpose of cost control,
ascertainment of profitability and also for presentation of information to facilitate decision
making.

Cost accountancy is a combination of art and science, it is a science as it has well defined rules and
regulations, it is an art as application of any science requires art and it is a practice as it has to be
applied on continuous basis and is not a onetime exercise.

CLASSIFICATION OF COSTS

Classification according to

Elements Behaviors Time

Nature Function For Decision

making

An important step in computation and analysis of cost is the classification of costs into different
types. Classification helps in better control of the costs and also helps considerably in decision
making. Classification of costs can be made according to the following basis.

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(A) Classification according to elements:- Costs can be classified according to the elements.
There are three elements of costing, viz. material, labor and expenses. Total cost of
production/services can be divided into the three elements to find out the contribution of
each element in the total costs.

(B) Classification according to nature:- As per this classification, costs can be classified into
Direct and Indirect. Direct costs are the costs which are identifiable with the product
unit or cost center while indirect costs are not identifiable with the product unit or cost
center and hence they are to be allocated, apportioned and then absorb in the production
units. All elements of costs like material, labor and expenses can be classified into direct and
indirect. They are mentioned below.

1. Direct and Indirect Material:- Direct material is the material which is identifiable with
the product. For example, in a cup of tea, quantity of milk consumed can be identified,
quantity of glass in a glass bottle can be identified and so these will be direct materials for
these products. Indirect material cannot be identified with the product, for example
lubricants, fuel, oil, cotton wastes etc cannot be identified with a given unit of product and
hence these are the examples of indirect materials.

2. Direct and Indirect Labour:- Direct labour can be identified with a given unit of product,
for example, when wages are paid according to the piece rate, wages per unit can be
identified. Similarly wages paid to workers who are directly engaged in the production
can also be identified and hence they are direct wages. On the other hand, wages paid to
workers like sweepers, gardeners, maintenance workers etc are indirect wages as they
cannot be identified with the given unit of production.

3. Direct and Indirect Expenses:- Direct expenses refers to expenses that are specifically
incurred and charged for specific or particular job, process, service, cost center or cost
unit. These expenses are also called as chargeable expenses. Examples of these
expenses are cost of drawing, design and layout, royalties payable on use of patents,
copyrights etc, consultation fees paid to architects, surveyors etc. Indirect expenses on the
other hand cannot be traced to specific product, job, process, service or cost center or cost
unit. Several examples of indirect expenses can be given like insurance, electricity, rent,
salaries, advertising etc.

It should be noted that the total of direct expenses is known as 'Prime Cost' while the
total of all indirect expenses is known as 'Overheads'.

(C) Classification according to behavior:- Costs can also be classified according to their
behavior. This classification is explained below.

1. Fixed Costs:- Out of the total costs, some costs remain fixed irrespective of changes in the
production volume. These costs are called as fixed costs. The feature of these costs is that
the total costs remain same while per unit fixed cost is always variable. Examples of these
costs are salaries, insurance, rent, etc.

2. Variable Costs:- These costs are variable in nature, i.e. they change according to the
volume of production. Their variability is in the same proportion to the production, i.e. the
increase is exactly in the same proportion of the production. Another feature of the
variable cost is that per unit variable cost remains same while the total variable costs will
vary. Examples of variable costs are direct materials, direct labour etc.

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 3. Semi-variable Costs:- Certain costs are partly fixed and partly variable. In other words,
they contain the features of both types of costs. These costs are neither totally fixed nor
totally variable. Maintenance costs, supervisory costs etc are examples of semi-variable
costs. These costs are also called as 'stepped costs'.

(D) Classification according to functions:- Costs can also be classified according to the
functions / activities. This classification can be done as mentioned below.

1. Production Costs: - All costs incurred for production of goods are known as production
costs.

2. Administrative Costs:- Costs incurred for administration are known as administrative

costs. Examples of these costs are office salaries, printing and stationery, office
telephone, office rent, office insurance etc.

3. Selling and Distribution Costs:- All costs incurred for procuring an order are called as
selling costs while all costs incurred for execution of order are distribution costs. Market
research expenses, advertising, sales staff salary, sales promotion expenses are some of
the examples of selling costs. Transportation expenses incurred on sales, warehouse rent
etc are examples of distribution costs.

4. Research and Development Costs:- In the modern days, research and development has
become one of the important functions of a business organization. Expenditure incurred
for this function can be classified as Research and Development Costs.

(E) Classification according to time: - Costs can also be classified according to time. This
classification is explained below.
1. Historical Costs: - These are the costs which are incurred in the past, i.e. in the past
year, past month or even in the last week or yesterday. The historical costs are
ascertained after the period is over. In other words it becomes a post-mortem analysis of
what has happened in the past. They can be effectively used for predicting the future
costs.

2. Predetermined Cost: - These costs relating to the product are computed in advance of
production, on the basis of a specification of all the factors affecting cost and cost data. Pre
determined costs may be either standard or estimated. Standard Cost is a
predetermined calculation of how much cost should be under specific working conditions.
It is based on technical studies regarding material, labour and expenses. On the other
hand, estimated costs are predetermined costs based on past performance and adjusted
to the anticipated changes. It can be used in any business situation or decision making
which does not require accurate cost.

(F) Classification of costs for Management decision making: - One of the important functions
of cost accounting is to present information to the Management for the purpose of decision
making. For decision making certain types of costs are relevant. Classification of costs based
on the criteria of decision making can be done in the following manner

1. Marginal Cost: - Marginal cost is the change in the aggregate costs due to change in the
volume of output by one unit. For example, suppose a manufacturing company produces
10,000 units and the aggregate costs are ` 25,000, if 10,001 units are produced the
aggregate costs may be ` 25,020 which means that the marginal cost is ` 20 Marginal cost is
also termed as variable cost and hence per unit marginal cost is always same.

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 2. Differential Costs: - Differential costs are also known as incremental cost. This cost is the
difference in total cost that will arise from the selection of one alternative to the other. In
other words, it is an added cost of a change in the level of activity. This type of analysis is
useful for taking various decisions like change in the level of activity, adding or dropping a
product, change in product mix, make or buy decisions, accepting an export offer and so on.
3. Opportunity Costs: - It is the value of benefit sacrificed in favor of an alternative course of
action. It is the maximum amount that could be obtained at any given point of time if a
resource was sold or put to the most valuable alternative use that would be practicable.
Opportunity cost of goods or services is measured in terms of revenue which could have
been earned by employing that goods or services in some other alternative uses.
4. Relevant Cost: - The relevant cost is a cost which is relevant in various decisions of
management. Decision making involves consideration of several alternative courses of
action. In this process whatever costs are relevant, are to be taken into consideration. In
other words, costs which are going to be affected matter the most and these costs are called
as relevant costs. Relevant cost is a future cost which is different for different alternatives.
It can also be defined as any cost which is affected by the decision on hand, Thus in decision
making relevant costs play a vital role.
5. Replacement Cost: - This cost is the cost at which existing items of material or fixed assets
can be replaced. Thus this is the cost of replacing existing assets at present or at a future
date.
6. Abnormal Costs: - It is an unusual or a typical cost whose occurrence is usually not regular
and is unexpected. This cost arises due to some abnormal situation of production Abnormal
cost arises due to idle time, may be due to some unexpected heavy breakdown of
machinery. They are not taken into consideration while computing cost of production or for
decision making.
7. Controllable Costs: - In cost accounting, cost control and cost reduction are extremely
important. Controllable costs are those which can be controlled or influenced by a
conscious management action. For example, costs like telephone, printing stationery etc can
be controlled while costs like salaries etc cannot be controlled at least in the short run.
Generally, direct costs are controllable while uncontrollable costs are beyond the control of
an individual in a given period of time.
8. Shutdown Cost: - These costs are the costs which are incurred if the operations are shut
down and they will disappear if the operations are continued. Examples of these costs are
costs of sheltering the plant and machinery and construction of sheds for storing exposed
property. Computation of shutdown costs is extremely important for taking a decision of
continuing or shutting down operations.
9. Urgent Costs: - These costs are those which must be incurred in order to continue
operations of the firm. For example, cost of material and labor must be incurred if
production is to take place.

DISTINCTION BETWEEN FINANCIAL ACCOUNTING AND COST ACCOUNTING

Financial Accounting differs from Cost Accounting in the following respects:
Basis of Distinction Financial Accounting Cost Accounting
Objectives Its objectives is to provide Its objectives is to ascertain cost, to
information about overall control cost and to provide
financial performance and information for decision- making
financial position of the business
Analysis of costs and It shows the overall profit/loss of It shows the detailed cost and profits

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profit the entire organisation. for each product, process, job,
contract, etc.
Focus on Its focus is on historical data. Its focus is on present, past and
Present/Future future data.
Legal requirements Financial accounts of companies Preparation of cost records is
have to meet requirements of the voluntary, except in a few cases
Companies Act and the Income where the law makes it mandatory.
Tax Act.
Monetary / Non- Only monetary information is Both kinds of information (monetary
monetary information recorded in financial records. and physical) are recorded in cost
records.
Persons interested Virtually the whole world is Usually internal management at
interested in financial different levels is interested in
information the top costing information
management, workers, the
shareholders, lenders,
prospective investors the
government.
Access Anybody can have access to Outsiders generally have no access to
financial statements of cost records.
companies
Decision – making Financial accounts are of limited Cost accounts are basically designed
use in decision making to facilitate decision making in the
areas of production, purchase, sales,
etc.
Emphasis- Its emphasis is on reporting and Its emphasis is on control-control on
Control/Reporting not on control materials cost, labour cost and
overheads.
General vs Special It generates general purpose It generates special purpose reports
reports reports like Income Statement, like Report on Defectives, Report on
balance Sheet, Cash Flow Spoilage, Idle Time Report.
Statement.

MAJOR LIMITATIONS OF FINANCIAL ACCOUNTING AND HOW THESE ARE OVERCOME BY

COST ACCOUNTING

Major Limitations of Financial Accounting How these are overcome by Cost

Accounting
Financial Accounting does not provide the The technique of budgeting enables the
information required the information required by management to perform the function of
management for forecasting and planning forecasting and planning.
Financial Accounting does not provide the The technique of marginal costing enables
information required by management for decision the management to perform the function of
– making in various areas such as make or buy, shut decision – making.
down or continue, retain or replace etc.
Financial Accounting does not provide the The techniques of budgeting and standard
information required by the management for costing enable the management to perform
control and assessment of the performance of the function of control and assessment.
various costs and responsibility centers.

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OBJECTIVES OF COST ACCOUNTING
Objectives of Cost Accounting can be summarized as under
1. To ascertain the cost of production on per unit basis, for example, cost per kg, cost per meter,
cost per liter, cost per ton etc.
2. Cost accounting helps in the determination of selling price. Cost accounting enables to
determine the cost of production on a scientific basis and it helps to fix the selling price.
3. Cost accounting helps in cost control and cost reduction.
4. Cost accounting also helps in locating wastages, inefficiencies and other loopholes in the
production processes / services offered.
5. Cost accounting helps in presentation of relevant data to the management which helps in
decision making.
6. Cost accounting also helps in estimation of costs for the future.
7. To provide Information for decision-making = Cost Accounting aims at providing information
for various managerial decisions like –
(a) Whether to make or buy a component
(b) Whether to retain or replace an existing machine
(c) Whether to process further or not
(d) Whether to shut down or continue operations.

ESSENTIALS OF A GOOD COSTING SYSTEM

For availing of maximum benefits, a good costing system should possess the following
characteristics.
1. Suitability: The cost accounting system should be suitable to the nature of business.
2. Tailor made system: It should be tailor made to meet the requirements of the business
3. Simplicity: It should be easy to understand and simple to operate
4. Economical: It should be economical to install and operate. Its cost should be justified by the
benefits derived
5. Flexibility: It should be flexible to adopt the changing requirements of the business
6. Accuracy: It should provide the accurate information
7. Promptness: It should provide prompt information at regular intervals.
8. Support of staff: It should receive the necessary cooperation and participation of the staff.
9. Cost control: It should ensure cost control over the various fields.
10. Clearly defined Cost Centers: There should be clearly defined cost centers and responsibility
centers.

IMPORTANCE / ADVANTAGES OF COST ACCOUNTING

ADVANTAGES TO MANAGEMENT

Helps in Ascertainment of Cost: It helps in the ascertainment of cost of each product, process,
job, contract, activity etc. by using different methods of costing such as Job Costing and Process
Costing.

Helps in Control of Cost: It helps in the control of material costs, labour costs and overheads by
using different techniques of control such as Standard Costing and Budgetary Control.

Helps in Decisions-Making: It helps the management in making various decisions such as -

Whether to make or buy a component
Whether to retain or replace an existing machine
Whether to process further or not
Whether to shut down or continue operations
Whether to expand or not

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Helps in fixing Selling Prices: It helps the management in fixing selling prices of products or
services by providing detailed cost information.

Helps in Inventory Control: It helps in inventory control by using various techniques such as ABC
analysis, Economic Order Quantity, Stock levels, Perpetual Inventory system and Continuous Stock
Taking, Inventory Turnover Ratio etc.

Helps in Cost reduction: It helps in the introduction of cost reduction programme and finding out
new and improved methods to reduce costs.

Helps in preparation of Budgets: It helps in the preparation of various budgets such as Sales
Budget/Production Budget, Purchase Budget, Man-Power Budget, and Overheads Budget.

Helps in Identifying Unprofitable Activities: It helps in identifying unprofitable activities so that

the necessary corrective action may be taken.

Helps in Identifying Material Losses: It helps in identifying material losses such as wastage,
scrap, spoilage and defective through report on material losses so that the necessary corrective
action may be taken.

Helps in Identifying Idle Time and Labour Turnover: It helps in identifying idle time and
labour turnover through the report on idle time and labour turnover so that the necessary
corrective action may be taken.

Helps in Cost Comparison: It helps in Cost Comparisons such as –

Comparison with Standard Figures: Comparison of actual figures with standard or budgeted
figures for the same period and the same firm;

Intra-firm Comparison: Comparison of actual figures of one period with those of another period
for the same firm;
Inter-firm Comparison: Comparison of actual figures of one firm with those of another standard
firm belonging to the same industry; and

ADVANTAGES TO EMPLOYEES
An efficient costing system benefits employees by introducing incentive plans. As a result both the
productivity and earnings increase.

ADVANTAGES TO SOCIETY
An efficient costing system benefits the society by providing products and services at lower prices
due to lower cost of production.

ADVANTAGES TO NATIONAL ECONOMY

An efficient costing system benefits national economy by achieving higher production, higher
productivity because progress of enterprises leads to the progress of the industry which lead to
progress of the national economy.

ADVANTAGES TO GOVERNMENT, ITS AGENCIES AND OTHERS

An efficient costing system helps government, its agencies (like Wage Tribunals) and others (like
Chamber 'of Commerce and Industry) by providing required cost information. Such cost
information is useful for price fixation, wage level fixation, settlement of industrial disputes,
framing various policies etc.

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 CERTAIN IMPORTANT TERMS
COST UNIT

Meaning of Cost Unit

A cost unit is a unit of product, service or time in terms of which costs are ascertained or
expressed. It is basically a unit of, measurement like number (per 1000 bricks), weight (per tonne
of coal), length (per meter of cloth), volume (per litre of petrol), time (per kilowatt hours of
power), area (per square foot of construction). Its selection depends on the nature and type of
industry.

Purpose of Cost Unit

The main purpose of selecting a cost unit is to, express cost per such unit.

Types of Cost Unit

Cost units are of two types as follows:
Types Meaning Examples
Units of production These are used in manufacturing A tonne of coal, steel, per 10 gram
industries. of gold.
Units of service These are used in service Passenger km., tonne km., per
industries bed per day

Examples of Cost Unit

Some examples of cost unit for different products and services are given below:
Product/Activity Cost Unit
GOODS
Bricks Per 1000 bricks
Cars Per car
Television Per set
Gold Per 10 grams/per gram
Iron steel/coal Per tone
Paper Per ream/ Per Kilogram
Cement Bag / per tone
Petrol Per litre
Wire Per meter

SERVICES
Power Per kilowatt hour
Computers Service Per hour
Passenger Transport Per Passenger per kilometer
Goods Transport Per Kilogram / tonne per kilometer
Nursing Home Per bed per day
Hotel Per room per day

COST OBJECT
Meaning of Cost Object
Cost may be defined as “anything for which a separate measurement of cost is required. It
may be product, service, activity or process etc.

Examples of Cost Object

Some examples of cost objected are as follows:
Cost Object Examples

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Product Computer, Mobile Phone, TV, Car
Service Hotel service, Hospital service, Transport service
Process Spinning Process, Weaving Process in a Textile Mill
Activity Placing purchases order, Receiving deliveries of materials Inspecting materials,
Storing materials in the store.

RESPONSIBILTY CENTRE

Meaning of Responsibility Centre

Responsibility center is unit or function of an organization under the control of a manager who has
direct responsibility for its performance.

Types of Responsibility Centre

For management control purposes, responsibility centers are classified into the following five
categories:

Responsibility Centers

Cost Centre Revenue Centre Profit Contribution Investment

Centre Centre Centre

Cost Centre
Meaning Cost centre is a responsibility centre for which costs are accumulated
CIMA, London defines cost centre as “a production or service location,
function, activity or item of equipment whose costs may be attributed to cost
units.” For example, a production department, stores department etc.
Objective The main objective of cost centre is to minimize the centre’s costs and to fix
the responsibility of the person in charge of a cost centre for the control of
cost of that centre.
Revenue Centre
Meaning Revenue Centre is a responsibility centre for which only revenues are
accumulated.
CIMA, London defines revenue centre as “a centre devoted to raising
revenue with no responsibility for production e.g. a sales centre”
Objective The main objective of revenue centre’s is to maximize the centre’s revenue
Profit Centre
Meaning Profit Centre is a responsibility centre for which both costs and revenues are
accumulated. Thus the profit center concept is used for evaluation of
performance.
CIMA, London defines profit centre as “a part of business accountable for
costs and revenues.” It may be called a Business Centre, Business Unit or
Strategic Business Unit.
Objective The main objectives of profit centre is to maximize the centre’s profit (i.e.,
difference between revenues and expenses)
Contribution Centre
Meaning Contribution Centre is a responsibility centre for which variable costs and
revenues are accumulated.
CIMA, London defines contribution centre “as a profit centre whose
expenditure is reported on marginal or direct cost basis”
Objective The main objectives of contribution centre are to maximize the centre’s

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 contribution (i.e., difference between revenues and variable cost of sales).
Investment centre
Meaning Investment Centre is a responsibility centre for which costs, revenues and
investments in assets are accumulated.
CIMA, London defines investments centre as “a profit centre whose
performance is measured by its return on capital employed.”
Objective The main objectives of investment centre is to maximize the centre’s Return
on investment (ROI) or return on Capital Employed (ROCE)

Types of Cost Centre

Basically Cost centers are of two types as following:
Types Meaning Examples
Personal Cost Centre It Consists of person or a group of Machine operator, Driver of a
persons delivery van, Salesman, Foreman
Impersonal Cost It Consists of a location or an item of Location: Factory, sales area
Centre equipment or group of these Equipment: Machine, Delivery van

From the functional point view, cost centers may be classified into following two types:
Type Meaning Examples
Productions Cost It is cost centre where the actual In a Textile Mill, Spinning
Centre production work takes place. Department, Weaving Department,
Calendaring Department, Dying
Department.
Service Cost Centre It is a cost centre which renders Power hours, Stores Department
services to production cost centers Repairs and maintenance
and other cost centers Department, Cost Accounting
Department, Purchases Department
,Personnel Department.

COSTING SYSTEMS
There are different costing systems used in practice. These are described below.

(A) Historical Costing:- In this system, costs are ascertained only after they are incurred and
that is why it is called as historical costing system. For example, costs incurred in the month
of April, 2007 may be ascertained and collected in the month of May. Such type of costing
system is extremely useful for conducting post-mortem examination of costs, i.e. analysis of
the costs incurred in the past. Historical costing system may not be useful from cost control
point of view but it certainly indicates a trend in the behavior of costs and is useful for
estimation of costs in future.

(B) Absorption Costing:- In this type of costing system, costs are absorbed in the product units
irrespective of their nature. In other words, all fixed and variable costs are absorbed in the
products. It is based on the principle that costs should be charged or absorbed to whatever is
being costed, whether it is a cost unit, cost center.

(C) Marginal Costing:- In Marginal Costing, only variable costs are charged to the products and
fixed costs are written off to the Costing Profit and Loss A/c. The principle followed in this
case is that since fixed costs are largely period costs, they should not enter into the
production units. Naturally, the fixed costs will not enter into the inventories and they will be
valued at marginal costs only.

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 (D) Uniform Costing:- This is not a distinct method of costing but is the adoption of identical
costing principles and procedures by several units of the same industry or by several
undertakings by mutual agreement. Uniform costing facilitates valid comparisons between
organizations and helps in eliminating inefficiencies.

COSTING METHODS AND TECHNIQUES

Introduction:- It is necessary to understand the difference between the costing methods and
techniques. Costing methods are those which help a firm to compute the cost of production or
services offered by it. On the other hand, costing techniques are those which help a firm to present
the data in a particular manner so as to facilitate the decision making as well as cost control and
cost reduction. Costing methods and techniques are explained below.

METHOD OF COSTING

Job Costing Process costing Contract Costing

Batch Costing Operating Costing

Methods of Costing:- The following are the methods of costing.

(i). Job Costing:- This costing method is used in firms which work on the basis of job work. There
are some manufacturing units which undertake job work and are called as job order units. The
main feature of these organizations is that they produce according to the requirements and
specifications of the consumers. Each job may be different from the other one. Production is
only on specific order and there is no pre demand production. Because of this situation, it is
necessary to compute the cost of each job and hence job costing system is used. In this system,
each job is treated separately and a job cost sheet is prepared to find out the cost of the job.
The job cost sheet helps to compute the cost of the job in a phased manner and finally arrives
the total cost of production.

(ii). Batch Costing:- This method of costing is used in those firms where production is made on
continuous basis. Each unit coming out is uniform in all respects and production is made
prior to the demand, i.e. in anticipation of demand. One batch of production consists of the
units produced from the time machinery is set to the time when it will be shut down for
maintenance. For example, if production commences on 1st January 2007 and the machine is
shut down for maintenance on 1st April 2007, the number of units produced in this period will
be the size of one batch. The total cost incurred during this period will be divided by the
number of units produced and unit cost will be worked out. Firms producing consumer goods
like television, air-conditioners, washing machines etc use batch costing.

(iii). Process Costing:- Some of the products like sugar, chemicals etc involve continuous
production process and hence process costing method is used to work out the cost of
production. The meaning of continuous process is that the input introduced in the process I
travels through continuous process before finished product is produced. The output of process
I becomes input of process II and the output of process II becomes input of the process III. If
there is no additional process, the output of process III will be the finished product. In process
costing, cost per process is worked out and per unit cost is worked out by dividing the total

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 cost by the number of units. Industries like sugar, edible oil, chemicals are examples of
continuous production process and use process costing.

(iv). Operating Costing:- This type of costing method is used in service sector to work out the cost
of services offered to the consumers. For example, operating costing method is used in
hospitals, power generating units, transportation sector etc. A cost sheet is prepared to
compute the total cost and it is divided by cost units for working out the per unit cost.

(v). Contract Costing:- This method of costing is used in construction industry to work out the cost
of contract undertaken. For example, cost of constructing a bridge, commercial complex,
residential complex, highways etc is worked out by use of this method of costing. Contract
costing is actually similar to job costing, the only difference being that in contract costing, one
construction job may take several months or even years before they are complete while in job
costing, each job may be of a short duration. In contract costing, as each contract may take a
long period for completion, the question of computing of profit is to be solved with the help of a
well defined and accepted method.

Technique of Costing
As mentioned above, costing methods are for computation of the total cost of production/ services
offered by a firm. On the other hand, costing technique help to present the data in a particular
format so that decision making becomes easy. Costing techniques also help for controlling and
reducing the costs. The following are the techniques of costing.

TECHNIQUES OF COSTING

Marginal Costing Standard Costing Budgetary Costing

1. Marginal Costing:- This technique is based on the assumption that the total cost of production
can be divided into fixed and variable. Fixed costs remain same irrespective of the changes in the
volume of production while the variable costs vary with the level of production, i.e. they will
increase if the production increases and decrease if the production decreases. Variable cost per
unit always remains the same. In this technique, only variable costs are taken into account while
calculating production cost. Fixed costs are not absorbed in the production units. They are
written off to the Costing Profit and Loss Account. The reason behind this is that the fixed costs
are period costs and hence should not be absorbed in the production. Secondly they are variable
on per unit basis and hence there is no equitable basis for charging them to the products. These
techniques is effectively used for decision making in the areas like make or buy decisions,
optimizing of product mix, key factor analysis, fixation of selling price, accepting or rejecting an
export offer, and several other areas.

2. Standard Costing:- Standard costs are predetermined costs relating to material, labor and
overheads. Though they are predetermined, they are worked out on scientific basis by
conducting technical analysis. They are computed for all elements of costs such as material, labor
and overheads.

The main objective of fixation of standard cost is to have benchmark against which the actual
performance can be compared. This means that the actual costs are compared with the
standards. The difference is called as 'variance'.

If actual costs are more than the standard, the variance is 'adverse' while if actual costs are less
than the standard, the variance is 'favorable'. The adverse variances are analyzed and reasons for

15
 the same are found out. Favorable variances may also be analyzed to find out the reasons behind
the same. Standard costing, thus is an important technique for cost control and reduction.

3. Budgets and Budgetary Control:- Budget is defined as, 'a quantitative and/or a monetary
statement prepared to prior to a defined period of time for the policies during that period for
the purpose of achieving a given objective.'

If we analyze this definition, it will be clear that a budget is a statement, which may be either in
monetary form or quantitative form or both. For example, a production budget can be prepared in
quantitative form showing the target production, it can also be prepared in monetary terms
showing the expected cost of production.

Some budgets can be prepared only in monetary terms, e.g. cash budget showing the estimated
receipts and payments in a particular period can be prepared in monetary terms only. Another
feature of budget is that it is always prepared prior to a defined period of time which means that
budget is always prepared for future and that to a defined future.

For example, a budget may be prepared for next 12 months or 6 months or even for 1 month, but
the time period must be certain and not vague. One of the important aspects of budgeting is that it
lays down the objective to be achieved during the defined period of time and for achieving the
objectives, whatever policies are to be pursued are reflected in the budget.

16
 PAST EXAMINATION QUESTIONS

MULTIPLE CHOICE QUESTIONS

1. Period costs are-

(a) Variable costs
(b) Fixed costs
(c) Prime costs
(d) Overhead costs
Ans. (b) Fixed costs

2. The management accounting is an extension of -

(a) Financial accounting
(b) Responsibility accounting
(c) Cost accounting
(d) All of the above
Ans. (d) All of the above

3. Cost is determined before hand under-

(a) Standard costing
(b) Historical costing
(c) Marginal costing
(d) None of the above
Ans. (a) Standard Costing

4. Opportunity cost helps in –

(a) Ascertainment of cost
(b) Controlling cost
(c) Making managerial decisions
(d) None of the above.
Ans. (c) Making managerial decisions

5. The costing method in which fixed factory overheads are added to inventory is-
(a) Direct costing
(b) Marginal costing
(c) Absorption costing
(d) Activity based costing.
Ans. (c) Absorption costing

Fill in the Blanks

1. The technique and process of ascertaining cost is termed as costing.
2. The method of costing used in a refinery is Process costing.
3. Costs which are pertinent for decision-making are termed as Relevant Costs.
4. Costs which are ascertained after they have been incurred are known as Historical costs.
5. Operating costing is also known as service costing and it is used where services are
rendered but articles are not produced.
6. Cost is a fact whereas price is a Policy.
7. Imputed costs are relevant for Decision Making.
8. A Sunk cost is the cost that has already been incurred and cannot be avoided by decisions
taken in the future.
9. A profit centre is a division or organizational unit concerned with controlling both
Sales/Revenue and costs.
10. Indirect expenses are excluded from cost.

17
11. Historical costs are not useful for decision making as all past costs are irrelevant.
12. A responsibility centre in which a manager is accountable for costs only is called Cost centre.

True and False/Correct and Incorrect

Qus 1.
Notional costs and imputed costs mean the same thing
Ans. Correct. Notional cost or imputed costs appear in the cost account only and do not involve
any cash outlay. E.g. Interest on capital, the payment for which is not actually made. These costs
are similar to opportunity costs and need to be considered when evaluating alternative proposals.

Qus 2.
Fringe benefits are charged to Costing Profit and Loss Account.
Ans. Incorrect. Expenditure Incurred for factory worker is treated as factory over- head and
should be apportioned to all the departments on the basis of the number of workers. Expenses
related to office and selling and distribution workers should be treated as office overhead and
selling and distribution overhead respectively. Hence, Fringe Benefits are treated in cost
accounting in following ways:-
a) Directly charged to production by using supplementary rate.
b) Charge to particular department overhead.
c) Charged as general overhead.

Qus 3.
Cost Accounting is a branch of financial accounting.
Ans. False, Cost Accounting is a branch of accounting for cost which begins with the recording of
income and expenditure or the bases on which they are calculated. Cost accounting system is used
to record, summarize and report cost information.

Qus 4.
Cost reduction is cost control.
Ans. False, Cost reduction and cost control are two different approaches. Cost control may be
temporary affair and at the cost of quality. Cost reduction implies the retention of the quality.

Qus 5.
Rent on owned building is included in cost accounts.
Ans. True, Rent on owned building is included in cost accounts to calculate the real cost after
taking into account the notional rent which would have been paid, if the building had been taken
on rent.

Qus 6.
Rent on own building is not included in cost accounts.
Ans. False, Rent on owned building is included in cost accounts to calculate the real cost after
taking into account the notional rent which would have been paid, if the building had been taken
on rent.

Qus 7.
Administration overheads are incurred due to management policy and they are easily
controllable.
Ans. Incorrect, A major part of administrative overhead costs is fixed in nature and are incurred
due to management policy. Administration overheads are usually non-controllable cost but still
they cannot be allowed to increase beyond limits. Administration overhead can be controlled by
adopting the methods i.e. control through budgets, control through standards, etc.

18
Qus 8.
A profit centre whose performance is measured by its Return on Investment (ROI) is known
as Investment centre.
Ans. Correct, The performance of an Investment Centre is measured on the basis of income
earned by proper asset utilisation, i.e. Return on Investment.

Qus 9.
The method of costing used in a refinery is operating costing.
Ans. False, The method of costing used in a refinery is process costing.

Qus 10.
Opportunity cost is recorded in the books of account.
Ans. False, Opportunity cost are not recorded in the books of accounts. It is important in decision
making and comparing alternatives.

Qus 11.
Direct cost and variable costs are not necessarily the same.
Ans. False, Direct costs are costs that are directly related to a cost centre or cost unit. It is a part of
total variable costs, hence, Direct costs and Variable Costs are the same.

Qus 12.
Sunk cost are not relevant for decision-making.
Ans. True, Sunk cost is a cost on equipment or productive resources which has no economic
relevance to the present decision making process.

Qus 13.
'Costing' and 'cost accounting' are the same.
Ans. False, Cost accounting is different from costing in the sense that the former provides only the
basis and information for ascertainment of costs. Once the information is made available, costing
can be carried out arithmetically by means of memorandum statements or by method of integral
accounting.

Qus 14.
"Opportunity cost is measure of the benefit of opportunity foregone." Comment.
Ans. Opportunity Costs refers to the value of sacrifice made or benefit of opportunity foregone in
accepting an alternative course of action. The opportunity forgone or sacrifice made is usually the
net-profit that might have been earned from the rejected alternative. E.g.- a firm financing its
expansion plan by withdrawing money from its bank deposits. In such a case the loss of interest on
the bank deposit is the opportunity cost for carrying out the expansion plan.

Qus 15.
Distinguish between 'Job costing' and 'contract costing'.
Ans. Job Costing - Under job costing, products are manufactured according to specific
requirements of the customer. This method involves the ascertainment of the cost of each job
separately. It is ideal where products are dissimilar and non repetitive in nature. It is suitable for
printing, interior decoration, ship building, automobile repairing shops and advertising industries.

Contract Costing - It is a type of specific order costing in which the cost of each contract is
ascertained separately. It is suitable for firms engaged in the civil engineering works, construction
of bridges, roads, buildings etc.

The main difference between these two Costing are:-

19
The Job Costing, Job refers to any specific work order or assignment where work is performed as
per customer specifications and requirements, and duration of a production cycle is usually short,
but might extend over a year also. Contract is of long duration, generally extending for more than
one accounting year. Each contract is treated as a single cost unit. In job costing, an order, a unit,
lot or batch of product may be taken as cost unit. Contract is generally not carried out at the
contractor's premises. It is done on the site but job work is generally carried out in the premises.

Qus 16.
Distinguish between 'Explicit costs' and 'Implicit costs'.
Ans. Explicit Costs - These costs involve immediate cash payment. Since, these costs are actually
incurred and are recorded in the books of accounts, they are easy to measure. E.g. - salaries, wages,
advertisement, etc

Implicit Costs - These costs do not involve immediate cash outflow and are otherwise known as
economic or notional or imputed costs. They are not recorded in the books of accounts and since
they are not actually incurred, they cannot be easily estimated. E.g. - Interest on own capital, salary
of proprietor, rent of own premises used or office purposes etc.

The major difference between Explicit Costs and Implicit Costs are that explicit costs involves
immediate cash outlay whereas, Implicit costs do not involve immediate cash outflow. Explicit
costs are recorded in the books of accounts but, implicit costs are not recorded in the books of
account.

Qus 17.
Distinguish between 'imputed costs' and 'common costs'.
Ans. Imputed Costs - These costs appears in cost accounts only and do not involve any cash
outlay. These costs are used only for the purposes of decision making and performance evaluation.
Imputed costs are not recorded in financial accounts. These costs are also known as notional costs.
These costs are notional in nature and do not involve any cash outlay. Interest on own capital is an
example of imputed cost. In actual, Interest payment is not made but the basic concept is that if the
fund had been invested elsewhere they would have earned interest.

Thus, Imputed costs are similar to opportunity costs and needs to be considered when evaluating
alternative proposals.

Common costs - Common costs are incurred collectively for a number of cost centre. These costs
are indirect costs which are incurred for more than one product, Job or any other specific costing
object. These costs are incurred for the general benefit of a number of departments or for the
entire enterprise and which is necessary for present and future operations. Common costs are
apportioned,
on a suitable basis, for determining the cost of the individual cost centre. Common costs are just
the opposite of traceable costs. For e.g., rent of the factory is a common cost to all departments
located in a factory.

20
 TRAIN UR BRAIN
1. ______ is the process of accounting for cost c) Replacement costing
which begins with the recoding of income d) Differential Costing
and expenditure or the basis on which 10. One of the most important tool in cost
they are calculated. accounting is –
a) Financial Accounting a) Expenses b) Budget
b) Process Accounting c) Planning
c) Cost Accounting d) None of the above
d) Management Accounting 11. _________ is a technique of cost
2. Cost accounting system is used to record, ascertainment and cost control.
summarise and report – a) Capital Costing b) Job Costing
a) Income information c) Batch Costing
b) Cost Information d) Standard Costing
c) Loss Information 12. The cost of a group of products is
d) Capital Information ascertained by –
3. One of the function of cost accounting is a) Batch Costing
proper matching of – b) Marginal Costing
a) Profits b) Losses c) Process Costing
c) Overheads d) Costs d) Material Costing
4. The main purpose of cost accounting is to 13. _________ costs are hypothetical notional
provide information to management for - costs.
a) Decision making b) Policy making a) Opportunity b) Shut down
c) Planning c) Imputed d) Absolute
d) None of the above 14. The method of costing used in job order
5. One the basis of behaviour of cost, industries is known as -
overheads are classified into – a) Batch costing b) Job costing
a) Controllable and Uncontrollable c) Direct costing d) Uniform costing
b) Capital and Revenue 15. Which costs are charged against current
c) Fixed and Variable income?
d) Normal and Abnormal a) Common cost b) Joint Cost
6. Total cost of direct material, direct labour, c) Period Cost d) Future Cost
direct expenses and manufacturing 16. _________ cost follows the item into
expenses are included in – inventory.
a) Selling Costs a) Total b) Period
b) Production costs c) Production d) Relevant
c) Development Costs 17. Increase in variable cost is due to increase
d) Distribution Costs in –
7. ________ costs are directly related to cost a) Sales b) Production
centre or cost unit. c) Purchase
a) Fixed b) Selling d) None of the above
c) Direct d) Indirect 18. A cost which requires payment to outside
8. The cost which cannot be influenced by parties is known as –
the action of a specified member of an a) Opportunity cost
undertaking is – b) Shut-down cost
a) Contrallable Cost c) Absolute cost
b) Opportunity Cost d) Out of pocket cost
c) Uncontrollable Cost 19. Salary of sweeper is an example of –
d) None of the above a) Sunk cost b) Avoidable Cost
9. The ascertainment of cost after they had c) Unavoidable cost
been incurred is known as - d) None of the above
a) Historical costing 20. Research and development cost is an
b) Pre-determined costing example of –

21
 a) Discretionary cost b) Joint Cost c) Cost cetnre
c) Relevant Cost d) Common cost d) Profit Centre
21. Which costs are established through 31. A unit of product, service or time for which
analysis of past data? costs are incurred and ascertainment is
a) Policy costs b) Relevant costs known as –
c) Programmed Costs a) Cost centre b) Service unit
d) Engineered costs c) Service centre d) Cost unit
22. ________ is the smallest segment of activity 32. A process of distributing an item of cost
or area for which costs are accumulated. over several cost centres is known as –
a) Service Costs b) Cost centre a) Cost apportionment
c) Profit centre b) Cost Allocation
d) Responsibility centre c) Cost absorption
23. The cost centre which consists of a person d) None of the above
or a group of persons is known as – 33. Direct costs are _______ costs plus all fixed
a) Process cost centre costs which are directly traceable for a
b) Operation cost centre product.
c) Personal cost centre a) Joint Cost b) Future cost
d) Service cost centre c) Controllable cost d) Marginal cost
24. _________ have the responsibility of 34. A cost centre where all machine are
generating and maximizing profit. performing the scheme activity is known
a) Profit centre as -
b) Investment centre a) Process cost centre
c) Cost centre b) Service cost centre
d) None of the above c) Operation cost centre
25. Cycle manufacturing organization uses d) Production cost centre
_______ method. 35. Cost accounting is a branch of –
a) Job costing b) Process costing a) Management accounting
c) Unit costing d) Multiple costing b) Tax accounting
26. Cost accounting system provides legal c) Financial Accounting
department with useful data like budgets, d) None of the above
targets, cash flow statement etc. 36. _________ is useful in case of “cost plus
a) True b) False contracts” where price is to be determined
c) Partly True d) Partly False finally on the basis of actual cost.
27. Good relationship between the company a) Continuous Costing Method
and the outsider and its employees are b) Post Costing Method
maintained by – c) Direct Costing Method
a) Public Relations Department d) None of the above
b) Legal Department 37. Interest on capital, payment for which is
c) Marketing Department not actually made is an example of –
d) Research and Design Department a) Sunk Cost
28. The payment mode to the outsider for b) Replacement Cost
some specialized services are called - c) Opportunity Cost
a) Specific charges b) Service charges d) Imputed Cost
c) Sub-contracting charges 38. The method of costing used in oil
d) None of the above refineries is –
29. The scope of cost accounting is _______ than a) Job Costing b) Batch Costing
financial accounting. c) Process Costing
a) Limited b) Broad d) Operation costing
c) Wider d) Narrow 39. A combination of two or more method of
30. A gas production shop which produces and costing is known as -
supplies gas is called – a) Operating Costing b) Output costing
a) Production cost centre c) Contract Costing d) Multiple costing
b) Service cost centre

22
40. Interior decoration firm follows _______ 49. _________ is known as the technique and
method of costing. process of ascertaining the costs of
a) Process Costing activities processes, products or services.
b) Contract Costing a) Costing b) Cost Accounting
c) Multiple costing c) Cost centre d) Cost method
d) Operation costing 50. An information system developed for
41. City bus transport follows the _______ management is –
costing method of costing. a) Shareholders b) Government
a) Operating b) Contract c) Cost Accounting
c) Multiple d) Batch d) Financial Institutions
42. Cost unit is applicable to hotels providing 51. Car manufacturing organization uses the
lodging facility is – _______ method.
a) Per bed per day a) Unit Costing b) Multiple Costing
b) Per Passenger per day c) Batch costing d) Job Costing
c) Per room per day 52. ________ is a form of continuous operation
d) None of the above costing.
43. The cost incurred in order to maintain the a) Service Costing b) Direct costing
earning capacity of the business is known c) Batch Costing
as - d) Absorption costing
a) Normal cost b) Capital Cost 53. A power house which generates and
c) Historical Cost d) Revenue Cost supplies power is called _________ centre.
44. ________ is the total of all variable costs i.e., a) Profit b) Cost
prime costs and variable overheads. c) Production Cost d) Service Cost
a) Opportunity cost b) Marginal Cost 54. _________ is the application of accounting
b) Pre-determined cost and costing principles, methods and
c) Replacement cost techniques in the ascertainment of costs
45. Overhead costs of a machine shop may be and the analysis of variance.
absorbed by using. a) Management Accounting
a) Rate per machine hour b) Costing
b) Rate per machine minute c) Financial Accounting
c) Rate per machine second d) Cost Accounting
d) None of the above 55. A unit of a product or unit of service to
46. The main purpose of _________ is to prepare which are ascertained by means of
Profit and loss account and balance sheet allocation, apportionment and absorption
for reporting to owners and outside is called -
parties. a) Cost Object b) Service unit
a) Cost Accounting c) Cost unit d) Cost centre
b) Management Accounting 56. _______ is an example of specific order
c) Financial Accounting costing.
d) Computerized Accounting a) Job b) Batch
47. The technique and process of ascertaining c) Contract d) Historical
the cost of activities, processes, products 57. A good system of ________ serves as a
or services is known as – means of control expenditure and helps to
a) Cost Accountancy secure economy in manufacture.
b) Costing a) Cost Accounting b) Costing
c) Cost Accounting c) Management Accounting
d) None of the above d) None of the above
48. Any activity for which a separate 58. Cost accounting is an essential tool of –
measurements of cost is desired, is known a) Art b) Science
as - c) Management d) Both (a) and (b)
a) Cost Object b) Cost unit 59. ________ costing is the ascertainment of
c) Cost System costs after they are incurred.
d) None of the above a) Historical b) Job

23
 c) Process d) Batch
60. The aim of financial accounting is to
provide information for fixing prices.
a) True b) False
c) Partly True d) Partly False
61. ________ accounts provide information for
income determination.
a) Cost b) Financial
c) Management
d) None of the above
62. Cost accounting is a post-mortem
examination
a) True b) False
c) Partly True d) Partly False
63. The most suitable system, for shoe
manufacturer is –
a) Job Costing b) Batch costing
c) Contract costing
d) None of the above
64. A cost centre which is ancillary to and
render service to other production cost
centre is called -
a) Process cost centre
b) Production cost centre
c) Service cost centre
d) None of the above

ANSWERS

1. c 2. b 3. d
4. a 5. c 6. b
7. c 8. c 9. a
10. b 11. d 12. a
13. c 14. b 15. c
16. c 17. b 18. d
19. b 20. a 21. d
22. b 23. d 24. a
25. d 26. b 27. a
28. c 29. d 30. b
31. d 32. a 33. d
34. c 35. c 36. b
37. d 38. c 39. d
40. b 41. a 42. c
43. d 44. b 45. a
46. c 47. b 48. a
49. a 50. c 51. b
52. a 53. c 54. d
55. c 56. c 57. b
58. c 59. a 60. a
61. b 62. b 63. b
64. c

24
 CHAPTER

9
Prime cost
It consists of costs of direct material, direct labour and direct expenses. It is also known as basic,
first or flat cost.

Factory cost
It comprises of prime cost and, in addition, works of factory an overhead which includes costs of
indirect material, indirect labour, and indirect expenses of the factory. The cost is also known as
works cost, production or manufacturing cost.

Office cost
If office and administrative overheads are added to factory cost, office cost is arrived at. This is
also termed as administrative cost or the total cost of production.

Total cost
Selling and distribution overheads are added to the total cost of production to get the total cost or
the cost of sales.

The various components of total cost can be depicted through the help of the following chart:

Components of Total Cost

Direct Material plus
Direct Labour plus Prime Cost or Direct Cost or Final Cost.
Direct Expenses
Prime Cost plus Works Cost or Factory Cost or Production cost or
Works Overheads Manufacturing Cost.
Work Cost plus Office and Office Cost or total cost of Production
Administrative Overheads
Office Cost plus Selling and Distribution Cost of Sales or Total Cost.
Overheads
Adjustments for inventories
The following adjustments may have to be made for inventories of Raw-Materials, Work-in-
progress and Finished Goods while computing the different components of cost:
Direct Material Opening Stock of Purchases of Closing Stock
= + - -
Consumed Direct Materials Direct Materials of Direct
Materials
Works Cost = + Opening Work- - Closing Work-
Gross Works in-Progress in-Progress
Cost

Cost of Cost of Opening Stock Closing Stock

production of = Production + of - of Finished
Goods sold FinishedGoods Goods

25
 COST SHEET

MEANING OF COST SHEET

Cost sheet is a document which provides for the assembly of the detailed cost of a cost centre or
cost unit. It is a periodical statement of cost designed to show in detail the various elements of cost
of goods produced, like prime cost, factory cost, and cost of production and total cost. Preparation
of a cost sheet can be understood with the following illustration:

Specimen of Cost Sheet

Cost Sheet for the period -------------Production -------------Units
` Total Cost (`)
Direct Material Consumed:
Opening Stock of raw material xxx
Add: Purchases of raw material xxx
Add: freight inward xxx
Less: Closing Stock of material xxx
Less: Sale of scrap Xxx Xxx
Direct wages Xxx
Direct Expenses/Chargeable expense Xxx

PRIME COST
Add: Works/Factory overheads XXX
Indirect Materials Xxx
Indirect Wages Xxx
Indirect expense Xxx

GROSS FACTORY COST XXX

Add: opening stock of WIP Xxx
Less: closing stock of WIP (xxx)
NET FACTORY COST XXX

Add: Office and Administration

Indirect Materials Xxx
Indirect Wages Xxx
Indirect expense Xxx

COST OF PRODUCTION XXX

Add: opening stock of finished goods Xxx
Less: closing stock of finished goods Xxx

COST OF GOOD SOLD XXX

Add: selling and distribution overheads
Indirect Materials Xxx
Indirect Wages Xxx
Indirect expense Xxx

COST OF SALES XXX

Add: profit Xxx
SALES XXX

26
 ITEMS EXCLUDED FROM COST ACCOUNTS

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

Appropriation of profits
1. Appropriation to sinking funds.
2. Dividends paid.
3. Taxes on income and profits.
4. Transfers to general reserves.
5. Amount written off-goodwill, preliminary expenses, underwriting commission, discount on
debentures issued; expenses of capital issue, etc.
6. Charitable donations.

Matters of pure finance

(a) Purely financial charges:
(i) Losses on sale of investments, buildings, etc.
(ii) Expenses on transfer of company's office.
(iii) Interest on bank loan, debentures, mortgages, etc.
(iv) Damages payable.
(v) Penalties and fines.

(b) Purely financial incomes :

(i) Interest received on bank deposits.
(ii) Profits made on the sale of investments, fixed assets, etc.
(iii) Rent receivable.
(iv) Interest, dividends, etc. received on investments.
(v) Brokerage received
(vi) Discount, commission received.

Abnormal gains and losses

(i) Losses or gains on sale of fixed assets.
(ii) Loss to business property on account of theft, fire or other natural calamities.

In addition to above abnormal items (gains and losses) may also be excluded from cost accounts.
Alternatively, these may be taken to Costing Profit and Loss Account.

Cost Sheet and Production Account

The following are the points of distinction between cost sheet and production account:

Cost sheet Production Account

It is prepared as a statement
Expenses are classified to ascertain prime cost,
factory cost, total cost, etc.
To enable comparison, figures of previous
period are provided.
It is based on actual and estimated figures of
expenses.
It is prepared for each job and sometimes for
the whole factory.
It is prepared as an account.
Expenses are not classified.
No figures of previous period are provided.
Hence no comparison is possible.
It is based on actual figures.
It is prepared for each production department.

27
 CLASSROOM PRACTICE – LETS PLAY TOGETHER

NUMBER OF UNITS PRODUCED

= Number of units Sold – Closing Stock of Finished Goods (in Units) – Opening Stock of
Finished Goods (in units)

Qus 1
Calculate the number of units produced in each of the following alternative cases:
Case (a) Sales 7,500 units, Opening Stock 3000 units and Closing Stock 2,400 units

Case (b) Sales ` 2,40,000, Opening Stock 200 units, and Closing Stock 2,200 units, Selling Price ` 30
per unit.

Case (c) Sales ` 15,00,000, Opening Stock valued at ` 3,60,000 @ ` 120 per unit, Closing Stock 20%
less than the Opening Stock, Selling Price `200 per unit.

Ans:
Case (a) Production = Sales + Closing Stock - Opening Stock
= 7,500 + 2,400 - 3,000 = 6,900 units

Case (b) Production = Sales + Closing Stock - Opening Stock

= (` 2,40,000/` 30) + 2,200 - 200 = 10,000 units

Case (c) Opening Stock (in units) = ` 3,60,000/` 120 = 3,000 units
Closing Stock (in units = 3,000 - 20% of 3,000 = 2,400 units
Sales (in units) = ` 15,00,00/` 200 = 7,500 units
Production = Sales + Closing Stock - Opening Stock
= 7,500 + 2,400 - 3,000 = 6,900 units

COST OF DIRECT MATERIALS CONSUMED

= Opening Stock of Raw materials + Purchase of Raw Materials + Expenses on Purchases
(e.g. Carriage/Freight Inward) – Purchase Returns of Raw materials – Closing Stock of Raw
materials – Net Value of Normal Scrap of Raw – Materials
Or
= prime Cost (or Direct Cost) – Direct Labour Cost – Direct Expenses
Or
= No. of units produced x Direct Material Cost per unit
Calculate the Cost of Raw-materials consumed in each of the following alternative cases:

Qus 2
Case (a) Opening Stock of Raw-Materials ` 29,500, Closing Stock of Raw-materials ` 36,000,
Purchases of Raw-materials ` 1, 90,000, Carriage on Purchases ` 1,500, Sale of Normal Scrap of
Raw-materials ` 5,000.
Case (b) Prime Cost ` 4, 77,000, Direct Labour Cost ` 2, 90,000, Direct Expenses ` 7,000
Case (c) Direct Labour Cost ` 1, 60,000. Direct Material Cost 250% of Direct Labour Cost

28
Case (d) Direct Material required per unit: Material I-@ ` 2 per unit: 5 units, Material II - @ ` 1 per
unit: 5 units, Numbers of units produced - 6,900 units

Ans:
Case (a) Opening Stock of Raw-Materials ` 29,500
Add: Purchases of Raw-Materials ` 1,90,000
Add: Carriage on purchases ` 1,500
Less: Closing Stock of Raw-materials ` 36,000
Less: Sale of Scrap of Raw-Materials ` 5,000
Cost of Raw-Materials consumed ` 1,80,000

Case (b) Prime Cost ` 4,77,000

Less: Direct Labour Cost ` 2,90,000
Less. Direct Expenses ` 7,000
Cost of Raw-Materials consumed `1,80,000

Case (c) Direct Material Cost = 250% of ` 1,60,000 = ` 4,00,000

Case (d) Direct Material Cost

Material I (6,900 × 5 × ` 2) = ` 69,000
Material II (6,900 × 5 × ` 1) = ` 34,000
= ` 1,03,000

DIRECT LABOUR COST

= No. of produced × Direct Labour Cost per unit
Or
= Prime Cost (or direct Cost) – Direct Material Cost – Direct Expenses

Qus 3
Calculate the Direct Labour Cost in each of the following alternative cases:
Case (a) Direct Material Cost ` 45,000, Direct Labour 33-1/3% of Direct Material Cost
Case (b) Prime Cost ` 72,000, Direct Material Cost ` 45,000; direct Expenses ` 12,000
Case (c) Direct Labour Hours required per unit:
Deptt. I @ ` 5.00 per hour 2 hours
Deptt. II @ ` 2.00 per hour 6 hours
Deptt. III @ ` 1.50 per hour 2 hours
No. of Units produced 6,900 units

Ans:
Case (a) Direct Labour Cost =33-1/3% of ` 45,000 = ` 15,000
Case (b) Direct Labour Cost = Prime Cost - Direct Material Cost - Direct Expenses
= ` 72,000 - ` 45,000 - ` 12,000 = ` 15,000.

29
Case (c) Direct Labour Cost
Deptt. I [6,900 × 2 × ` 5] = ` 69,000
Deptt. II [6,900 × 6 × ` 2] = ` 82,800
Deptt. III [6,900 × 2 × ` 1.50] = ` 20,700
= ` 1,72,500

PRIME COST OR DIRECT COST

= Direct Material Cost + Direct Labour Cost + Direct Expenses
Or
= Factory Cost – Factory Overheads – Opening Stock of Work-in-progress + Closing Stock of
Work-in-progress
Qus 4
Calculate Prime Cost in each of the following alternative cases:

Case (a) Direct Material Cost ` 1,00,000, Direct Labour Cost ` 50,000. Direct Expenses ` 25,000.

Case (b) Work Cost ` 80,000, Factory Overheads ` 8,000

Case (c) Factory Cost ` 1, 00,000, Works Overheads 25% of Prime Cost

Case (d) Direct Material Cost ` 45,000, Direct Labour Cost 33-1/3% of Direct Material Cost, Direct
Expenses 20% of Direct Material Cost and Direct Labour Cost.

Ans:
Case (a) Prime Cost = Direct Material Cost + Direct Labour Cost + Direct Expenses
= ` 1, 00,000 + ` 50,000 + ` 25,000 = ` 1,75,000

Case (b) Prime Cost = Works Cost - Factory Overheads

= ` 80,000 - ` 8,000 = ` 72,000

Case (c) Prime Cost = Factory Cost - Works Overheads

= ` 1,00,000 - 20% of ` 1,00,000 = ` 80,000

Case (d) Direct Material Cost ` 45,000

Direct Labour Cost [33-1/3% of ` 45,000] ` 15,000
Total Direct Material Cost & Labour Cost ` 60,000
Direct Expenses [20% of ` 60,000] ` 12,000
Prime Cost ` 72,000

FACTORY OVERHEADS OR WORKS OVERHEADS/ PRODUCTION OVERHEADS

= No. of Units produced × Factory overheads per unit
Or
= Prime Cost × % of Works overheads on prime Cost
Or
= Works Cost × % of Works Overheads on Work Cost

30
 Or
= Works Cost + Closing Work-in-progress – opening Work-pin-progress – Prime Cost

Qus 5
Calculate Factory Overheads in each of the following alternative cases:

Case (a) Factory Overheads 1/9th of the Prime Cost, Prime Cost ` 72,000

Case (b) Works Overheads 10% of Work Cost, Prime Cost ` 28,80,000

Case (c) Machine Hours Worked 900 Hours, Machine Hour Rate ` 5

Case (d) Direct Labour Cost ` 17,500 being 175% of works overheads

Solution:
Case (a) Factory Overheads = 1/9 of ` 72,000 = ` 8,000

Case (b) Let Works Overheads be X

Thus, X = 10% of [X + ` 28, 80,000]
X = .1 X + ` 2, 88,000
.9X = ` 2,88,000
X = ` 2,88,000/.9
= ` 3,20,000

Case (c) Factory Overheads = 900 × ` 5 = ` 4,500

Case (d) Factory Overheads = ` 17,500 × 100/175 =` 10,000

FACTORY COST
= Prime Cost + Factory overheads + opening Work-in-progress – Closing Work-in-progress
Or
= Cost of goods produced – office & Adm. Overheads

Qus 6
Calculate Factory Cost in each of the following alternative cases:

Case (a) Prime Cost ` 9,00,000, Works Overheads @ 60% of Direct Labour Cost, Direct Labour Cost
` 5,00,000, Opening WIP ` 1,00,000, Closing WIP ` 3,00,000.

Case (b) Prime Cost ` 1, 00,000, Factory Overheads 25% of Prime Cost

Case (c) Prime Cost ` 2, 00,000, Factory Overheads 20% of Factory Cost

Case (d) Cost of Goods produced ` 4, 00,000, Office & Administrative Overheads 20% of Cost of
Production

31
Case (e) Cost of Goods produced ` 2, 00,000, Office & Administrative Overheads 25% of Works
Cost

Ans:
Case (a)
A. Prime Cost ` 9,00,000
B. Add: Works Overheads [60% of ` 5,00,000] ` 3,00,000
C. Add: Opening WIP ` 1,00,000
D. Less: Closing WIP ` 3,00,000
E. Works Cost [A + B + C- D] ` 10,00,00

Case (b) Factory Cost = Prime Cost + Factory Overheads

= `1,00,000 + 25% of ` 1,00,000 = ` 1,25,000

Case (c) Factory Cost = Prime Cost + Factory Overheads

= ` 2,00,000 + 25% of ` 2,00;000 = ` 2,50,000

Case (d) Factory Cost = Cost of Goods Produced - Office & Administration Overheads `
4,00,000 -20% of ` 4,00,000 = ` 3;20,000

Case (e) Factory Cost = Cost of Goods produced - Office & Administration Overheads
= ` 2,00,000 - 20% ` 2,00,000 = ` 1,60,000

CONVERSION COST
= Direct Labour Cost + Direct Expenses + Factory overheads
Or
= Factory Cost – Direct Materials Cost
Qus 7
Calculate Conversion Cost in each of the following alternative cases:

Case (a) Direct Labour Cost ` 3,00,000, Direct Expenses ` 2,00,000 and Factory Overheads `
1,00,000

Case (b) Factory Cost `10, 00,000 and Direct Material Cost ` 4,00,000
Ans:
Case (a) Conversion Cost = Direct Labour Cost + Direct Expenses + Factory Overheads
= ` 3,00,000 + ` 2,00,000 + ` 1,00,000
= ` 6,00,000

Case (b) Conversion Cost = Factory Cost - Direct Material Cost

= ` 10,00,000- ` 4,00,000
= ` 6,00,000

OFFICE & ADMINISTRATION OVERHEADS

= No. of units produced × Office & Adm. Overheads per unit produced

32
 Or
= Works Cost × % of office & Adm. Overheads on Work cost
Or
= Cost of Goods produced × % of Office & Adm. Overheads on Cost of Goods Produced
Or
= Cost of goods Produced – Factory Cost

Qus 8
Calculate Office & Administration Overheads in each of the following alternative cases.

Case (a) Office & Adm. Overheads 25% of Works Cost, Works Cost ` 80,000

Case (b) Office & Adm. Overheads 20% of Cost of Goods produced, Cost of Goods produced
` 1, 00,000

Case (c) Office & Adm. Overheads are recovered @ ` 150 per 10 units produced, numbers of
Units produced 16,000.

Ans:
Case (a) Office & Adm. Overheads = 25% of` 80,000 = ` 20,000
Case (b) Office & Adm. Overheads = 20% of` 1, 00,000 = ` 20,000
Case (c) Office & Adm. Overheads = 16,000 × 150/10 = ` 2, 40,000

COST OF GOODS PRODUCED

= Works Cost + office & Administration Overheads
Or
= Cost of Goods Sold + Cost of Closing Stock of Finished Goods – Cost of Opening Stock of Finished
Goods

Qus 9
Calculate the Cost of Goods Produced in each of the following alternative cases:
Case (a) Works Cost ` 1, 00,000, Office & Adm. Overheads 25% of Work Cost

Case (b) Office & Adm. Overheads ` 1, 00,000 being 25% of Work Cost

Case (c) Office & Adm. Overheads ` 1, 00,000 being 20% of Cost of Goods produced.

Ans
Case (a) Cost of Goods Produced = Works Cost + Office & Adm. Overheads
= `1 ,00,000 + 25% of ` 1,00,000 = ` 1,25,000

Case (b) Works Cost = ` 1,00,000/.25 = ` 4,00,000

Cost of Goods produced
= ` 4,00,000 + ` 1,00,000 = ` 5,00,000

Case (c) Cost of Goods produced = ` 1,00,000/.20 = ` 5,00,000

33
 COST OF GOODS SOLD
= Cost of Goods produced + Opening Stock of Finished Goods – Closing Stock of Finished Goods
Or
= Cost of Goods available for sale – Closing Stock of Finished Goods
Or
= Cost of Sales – Selling & Distribution Overheads

SELLING & DISTRIBUTION OVERHEADS

= No. of units Sold x Selling & Dist. Overheads per unit sold
Or
= Cost of Goods Sold x % of Selling & Dist. Overheads on Cost of Goods Sold
Or
= Cost of Sales x % of Selling & Dist. Overheads on Cost of Sales
Or
= Cost of Sales – Cost of Goods Sold

Qus 10
Calculate Selling & Distribution Expenses in each of the following alternative cases:

Case (a) Cost of Goods Sold ` 1, 00,000, Selling & Distribution Expenses 20% of Cost of Goods Sold

Case (b) Sales 10,000 units, Selling & Distribution Expenses are charged @ ` 250 per 100 units
sold

Case (c) Cost of Sales ` 1, 00,000, Selling & Distribution Expenses 25% of Cost of Goods Sold

Ans:
Case (a) Selling & Distribution Expenses = 20% of `1,00,000 = ` 20,000

Case (b) Selling & Distribution Expenses = 10,000 units × 250/100 = ` 25,000

Case (c) Let the Cost of Goods Sold be 'X

Cost of Goods Sold = Cost of Sales - Selling & Distribution Expenses
X = ` 1, 00,000 - 25% of X
1.25X = ` 1, 00,000
X = ` 1, 00,000/1.25 = ` 80,000
Selling & Distribution Expenses = 25% of ` 80,000 = ` 20,000

COST OF SALES
= Cost of Goods Sold + Selling & Distribution overheads
Or
= Sales – profit
Qus 11
Calculate the Cost of Sales in each of the following alternative cases:

Case (a) Cost of Goods Sold ` 1, 20,000, Selling & Distribution Expenses 20% of Cost of Goods Sold

34
Case (b) Cost of Goods Sold ` 1, 20,000, Selling & Distribution Expenses 20% of Cost of Sales.

Case (c) Sales ` 1, 20,000, Profit 20% on Sales.

Case (d) Sales ` 1, 20,000, Profit 20% on cost of Sales

Ans:
Case (a) Cost of Sales = Cost of Goods Sold + Selling & Distribution Expenses
= ` 1, 20,000 + 20% of ` 1,20,000 = ` 1,44,000 Case

Case (b) Cost of Sales = X

X = Cost of Goods Sold + Selling & Distribution Expenses
X = ` 1, 20,000 + 20% of X
X - .2X = ` 1, 20,000
X = ` 1, 20,000/.8 = ` 1, 50,000

Case (c) Cost of Sales = Sales - Profit

= ` 1, 20,000 - 20% of ` 1, 20,000
= ` 96,000
Case (d) Let Cost of Sales be 'X
X = Sales - Profit
X = ` 1,20,000 - 20% of X
1.2X = ` 1, 20,000
X = ` 1, 20,000/1.2 = ` 1, 00,000

PROFIT
= Sales – Cost of Sales
Or
= Cost of Sales × % of profit on Cost
Or
= Sales × % of profit on Sales
Or
= Sales Units × profit per unit sold

Qus 12
Calculate Profit in each of the following alternative cases:
Case (a) Cost of Sales ` 1, 20,000, Profit 20% on Cost
Case (b) Cost of Sales `1, 20,000, Profit 20% on Sales
Case (c) Sales ` 1, 20,000, Profit 20% on Sales
Case (d) Sales ` 1, 20,000, Profit 20% on Cost
Case (e) Sales 10,000 units, Profit ` 20 per unit

Ans:
Case (a) Profit = 20% of ` 1, 20, 000 = ` 24,000

35
Case (b) Let Sales be X, Profit = 20% X
Sales = Cost of Sales + Profit
x = ` 1, 20,000 + .20X
.8X = ` 1, 20,000
X = ` 1, 20,000/8 = ` 1, 50,000
Profit = ` 1, 50,000 × 20% = ` 30,000

Case (c) Profit = 20% of ` 1, 20,000 = ` 24,000

Case (d) Let Cost of Sales be ‘X’

Sales = Cost of Sales + Profit
` 1, 20,000 = X + 20% of X·
1.20X = ` 1, 20,000
X = ` 1, 20,000/1.20 = ` 1, 00,000
Profit = 20% of ` 1, 00,000 = ` 20,000
Case (e) Profit = 10,000 × ` 20 = ` 2, 00,000

SALES
= Cost of Sales + profit
Or
= Sales Units × Selling price per unit

Qus 13
Calculate Sales in each in the following alternative cases:
Case (a) Cost of Sales ` 1, 20,000, Profit 20% on Cost

Case (b) Cost of Sales ` 1, 20,000, Profit 20% on Sales,

Case (c) Profit @ 20% on Cost amounted to ` 20,000

Case (d) Profit @ 20% on Sales amounted to ` 24,000

Case (e) Sales 10,000 units, Selling Price ` 20 per unit

Case (f) Production 15,000 units, Closing Stock of finished Goods 8,000 units.Opening Stock 3,000
units, Cost of Sales @ ` 15 per unit, Profit @ 25% on sales.

Ans:
case (a) Sales = Cost of Sales + Profit
= ` 1,20,000 + 20% of `1,20,000 = ` 1,44,000

Case (b) Let Sales be 'X

Sales = Cost of Sales + Profit
X = ` 1, 20,000 + 20% of X

36
 .8X = `1, 20,000
X = `1, 20,000/8 = ` 1,50,000

Case (c) Cost of Sales = ` 20,000/.20 = ` 1, 00,000

Sales = ` 1, 00,000 + ` 20,000 = ` 1, 20,000

Case (d) Sales = ` 24,000/.20 = ` 1,20,000

Case (e) Sales = 10,000 × ` 20 = ` 2,00,000

Case (f) Sales (units) = Opening Stock + Production - Closing Stock

= 3,000 + 15,000 - 8,000 = 10,000 units
Let Selling Price be X
Profit = 25% of X = .25X
Selling Price = Cost + Profit
X= ` 15 + .25X
.75X = ` 15
X = ` 15/.75 = ` 20
Thus, Sales =10,000 × ` 20 = ` 2,00,000

Qus 14
Calculate (a) Cost of raw materials consumed; (b) Total cost of production; (c) Cost of goods sold
and (d) The amount of profit from the following particulars:

Particular `
Opening Stock: Raw materials 5,000
Finished goods 4,000
Closing Stock: Raw materials 4,000
Finished goods 5,000
Raw materials purchased 50,000
Wages paid to laborers 20,000
Chargeable expenses 2,000
Rent rates and taxes 5,000
Power 2,400
Factory heating and lighting 2,000
Factory insurance 1,000
Experimental expenses 500
Sale of wastage of material 200
Office management salaries 4,000
Office printing and stationery 200
Salaries of salesman 2,000
Commission of travelling agents 1,000
Sales 1,00,000

Ans: COST SHEET

` `

37
Raw materials purchased 50,000
Add: Opening stock 5,000
55,000
Less: Closing stock 4,000
Less: Sale of wastage of materials 200

COST OF RAW MATERIALS CONSUMED 50,800

Labour--direct 20,000
Chargeable expenses 2,000

PRIME COST 72,800

Add: Production overheads:

Rent, rates and taxes 5,000
Power 2,400
Heating & lighting 2,000
Insurance 1,000
Experimental expenses 500
10,900

FACTORY COST 83,700

Add: Administrative overheads:

Office management salary 4,000
Office printing & stationery 200 4,200
87,900
TOTAL COST OF PRODUCTION
Opening stock of finished goods 4,000
91,900
Less: Closing stock of finished goods 5,000

COST OF PRODUCTION OF GOODS SOLD 86,900

Add: Selling and distribution overheads:

Salaries of salesmen 2,000
Commission to travelling agents 1,000 3,000

89,900
COST OF SALES

PROFIT 10,100
SALES 1,00,000

Note: The amount of profit has been calculated by deducting the cost of goods sold from the
amount of sales.
Qus 15
ABC Limited manufactures ring binders which are embossed with the customers’ own logo. A
customer has ordered a batch of 600 binders. The following illustrate the cost for a typical batch of
100 binders.
`
Direct materials 60

38
 Direct labour 20
Machine set up 6
Design and art work 30
Prime cost 116
Direct employees are paid on a piecework basis.
ABC Limited absorbs production overheads at a rate of 20% of direct wages cost. 5 % is added to
the total production cost of each batch to allow for selling, distribution and administration
overheads.
ABC Limited requires a profit margin of 25% of sales value.

The selling price for 600 binders (to the nearest penny) will be:
A. `756
B. `772.8
C. `806.4
D. `1008
Ans:
`
Prime cost (`116 × 6) 696

Overheads (`20 × 6 × 20%) 24

720
Selling, distribution and admin overheads (180 × 5%) 36
Total cost 756
Selling price (756/75×100) 1008
(8 marks)
PAST EXAMINATION PROBLEMS

1. Administration overheads are recovered as a percentage of -

(a) Direct materials
(b) Direct wages
(c) Prime cost
(d) Works cost
Ans. (d) Works cost

2. For shoe manufacturers, the most suitable cost system is -

(a) Job costing
(b) Batch costing
(c) Contract costing
(d) None of the above.
Ans. (b) Batch costing

3. The most suitable cost system where the products differ in type of materials and work
performed is –
(a) Job costing
(b) Process costing
(c) Operating costing
(d) None of the above
Ans. (a) Job costing

Fill in the Blanks

39
 (1) Cost of sales is ascertained after adding selling and distribution expenses in cost of
production.
(2) Amount realized from the sale of scrap which is relevant with manufacturing process be
reduced from production cost.
(3) Abnormal wastage is not part of cost of production.
(4) Direct material + direct labour + factory overheads = Factory Cost/Works Cost.
(5) An account giving details of cost of production cost of sales and profit made during a
particular period is called Cost Sheet.
(6) A system that keeps a running and continuous record that tracks inventories and cost of
goods sold on day-to-day basis is called Perpetual Inventory System.

True and False / Correct and Incorrect

1. Conversion costs and overheads are interchangeable terms.

Ans. Incorrect, Conversion costs includes cost incurred in converting the raw material into the
finished product. It is the sum of direct wages, direct expenses and manufacturing overheads.
Conversion cost includes prime cost. Whereas, overheads do not include prime costs, it is only
indirect costs. Conversion cost is referred to as the production cost excluding the cost of direct
materials.

2. Production cost of goods sold and cost of goods .sold are synonyms.
Ans. False, Production cost of goods sold includes cost upto works cost or factory cost while
cost of goods sold includes cost upto office and administrative overheads.

3. Job costing can be used in industries using standard costing.

Ans. True, Standard costing is a technique which can be used with any costing method. Hence,
job costing can be used in industries using standard costing.

Distinguish between

Qus 16 'Cost Sheet' and 'Production Account'.

Ans. The Distinction between Cost Sheet and Production Account are:

Cost Sheet Production Account

1. It is simply a statement and does not follow the It is prepared on the basis of double entry
double entry system. system of accounting.
2. It is comprised of many parts like Prime cost, It comprises of two parts - one indicates the
Works cost, Cost of production, Cost of goods cost of manufacture and the other reflects the
sold, Cost of sales and Profit. sales and gross profit.
3. The main objective is cost ascertainment and The main purpose of the account is that of
decision making. reporting.
4. It is very useful in submitting tenders and It is not useful for preparation of tenders and
preparation of budgets. quotations.
5. The total cost is segregated into various The costs are shown in totality and product-
categories depending upon their nature and wise or location-wise analysis is not given.
location of occurrence.
6. It is also know as a Statement of Cost. It is also Known as a Manufacturing Account

Qus 17 Why is cost sheet necessary when production account is prepared?

Ans. Cost Sheet is a statement which is prepared by a manufacturing concern to know the
total cost of the product manufactured. To arrive at the total cost, the various elements of cost

40
are set out in form of statement i.e. Cost Sheet. Cost Sheet contain the subdivision of cost arranged
in a logical order under the different heads, i.e. Prime Cost, Work Cost, Cost of Production, etc. To
enable comparison, figures of previous period are provided. Cost Sheet is prepared on the basis of
actual and estimated figures of expenses. Cost Sheet is prepared for each Job and sometime for the
whole factory. It is prepared to ascertain the total cost, total sales, and total profit and thereby cost
per unit, selling price per unit and profit per unit, etc. Cost Sheet provides 'the total cost figure as
well as cost per unit of production. It assists in cost control by disclosing operational inefficiency;
it is also helps in inter-firm and intra firm comparison. It assists in product wise and location wise
cost analysis.

Whereas, production account is prepared as an account on the basis of double entry system
of accounting. In a production account expenses are not classified and previous years figures are
also not given. Hence, comparison is not possible. Production account comprises of two parts - one
indicates the cost of manufacture and the other reflects the sales and gross profit. Production
account is pre- pared for each production department.

Hence, cost sheet is necessary even when production account is prepared.

41
 TRAIN UR BRAIN
1. For ascertainment of cost of production c) Costing Profit & Loss Account
and profit, cost sheet are prepared on …… d) Balance Sheet
basis. 9. In cost sheet, net realizable value of
a) Quarterly b) Weekly normal scrap of direct materials is
b) Periodical d) Yearly deducted from –
2. Works cost mean – a) Factory overheads
a) Prime cost less work expenses b) Cost of materials
b) Prime cost plus work expenses c) prime Cost
c) Only works expenses or works d) Work Cost
overhead 10. Cost of production is also known as –
d) All of the above a) Prime Cost b) Office Cost
3. Cost unit is measured in – b) Period Cost d) Fixed Cost
a) Per litre b) Per kg 11. If a profit 20% of sales, then it will be
b) Per tonne d) All of the ……. of cost.
above a) 10% b) 30%
4. A statement showing various c) 20% d) 25%
components of total cost of output of a 12. Cost sheet is also known as –
particular product or service produced a) Bank Requisition Statement
during a particular period is known as - b) Statement of Cost
a) Cost Sheet b) Cost centre c) Statement of income and Expenditure
c) Cost Category d) Balance Sheet d) None of the above
5. Cost Sheet may be prepared – 13. When factory expenses are added to
a) Weekly b) Fortnightly prime cost, it is known as -
c) Monthly d) All of the a) Total Cost b) Factory Cost
above c) Period Cost
6. Number of units produced is calculated d) None of the above
by – 14. Calculate work overheads given work
a) Number of units sold - Closing stock overheads 10% of work cost, prime cost `
of finished goods - opening stock of
28,80,000.
finished goods
b) Number of units sold + Closing stock a) ` 3,20,000 b) ` 3,00,000
of finished goods - opening stock of c) ` 3,10,000 d) ` 3,30,000
finished goods
c) Number of units sold + Closing stock 15. Calculate profit, given Cost of sales `
of finished goods + opening stock of 1,20,000 Profit 20% on sales.
finished goods a) ` 30,000 b) ` 24,000
d) Number of units sold - Closing stock
of finished goods + opening stock of c) ` 1,50,000 d) ` 2,00,000
finished goods 16. Calculate the prime cost from the
7. Cost of direct materials consumed = following information:
a) Prime cost + Direct Labour cost – Direct material purchased: ` 1,00,000
Direct expenses
b) Prime cost - Direct Labour cost + Direct material consumed: ` 90,000
Direct expenses Direct Labour: ` 60,000
c) Prime cost + Direct Labour cost +
Direct expenses: ` 20,000
Direct expenses
d) Prime cost - Direct Labour cost – Manufacturing overheads: ` 30,000
Direct expenses
a) ` 1,80,000 b) ` 2,00,000
8. Abnormal loss of material is transferred
to – c) ` 1,70,000 d) ` 2,10,000
a) Material Cost b) Prime Cost

42
17. Total Cost of a product: ` 10,000 Profit: a) 198000 b) 224000
b) 300000 d) 400000
25% on selling Price Profit is:
21. Determine the direct labour cost
a) ` 2,500 b) ` 3,000 incurred.
c) ` 3,333 d) ` 2,000 a) 198000 b) 224000
c) 300000 d) 400000
18. Calculate cost of sales from the following:
22. Determine the cost of goods sold.
Net Works cost: ` 2,00,000 a) 198000 b) 224000
Office & Administration ` 1,00,00 c) 300000 d) 589000
Overheads 23. Calculate conversion cost from the
Opening Stock of WIP ` 10,000 following
Closing Stock of WIP ` 20,000 Direct labour: ` 300000
Closing Stock of finished ` 30,000 Direct expenses: ` 200000
goods: Manufacturing overheads: ` 100000
There was no opening stock of finished
a) 600000 b) 500000
goods
c) 400000 d) 700000
Selling overheads ` 10,000
a) ` 2,70,000 b) ` 2,80,000 From the following information:
c) ` 3,00,000 d) ` 3,20,000 Cost of materials @ ` 13 per unit
19. Calculate value of closing stock from the Labour Cost @ ` 7.50 per unit
following: Factory Overheads are absorbed @ 60%
Opening stock of finished goods (500 of labour cost
units): ` 2,000 Administration Overheads are absorbed
@ 20% of factory cost
Cost of production 10000 units: ` 50,000
Selling Overheads are charged @ ` 2.50
Closing Stock (1000 units)?
per unit sold
a) ` 4,000 b) ` 4,500 Opening stock of finished goods - 500
c) ` 5,000 d) ` 6,000 units @ 19.75
Closing Stock of finished goods - 250
The following inventory data relate to XYZ units
ltd. Sales – 10250 units at profit of 20% on
Inventories Ending sales
Beginning
Finished goods 95,000 24. Calculate prime cost
` 1,10,000 a) 205000 b) 250000
Work-in- ` 70,000 80,000 c) 300000 d) 302375
progress 25. Calculate factory cost
Raw materials ` 90,000 95,000 a) 205000 b) 250000
c) 300000 d) 302375
Additional Information:
26. Calculate cost of goods purchased
Cost of goods available for ` 6,84,000 a) 205000 b) 250000
sale
c) 300000 d) 302375
Total goods processed during ` 6,54,000
27. Calculate cost of goods sold
the period
a) 302375 b) 205000
Factory overheads ` 1,67,000 c) 250000 d) 300000
Direct materials used ` 1,93,000 28. Calculate cost of sales
a) 205000 b) 250000
Calculate. c) 328000 d) 302375
29. Calculate Sales
20.Determine raw material purchases a) 205000 b) 250000

43
 c) 300000 d) 410000 The following data are available from
30. Calculate profit books at the year ending 31st March, 1999:
a) 205000 b) 82000 Direct Material ` 9,00,000
c) 300000 d) 302375
Direct Wages ` 7,50,000
From the following information Factories Overhead ` 4,50,000
Opening Closing
Raw Materials 29,500 36,000 38. Calculate works cost
Work in progress a) 900000 b) 1650000
Materials 13,600 12,000 c) 450000 d) 2100000
Wages 11,000 16,500 39. Calculate factory overheads, given
Works overheads 6,600 9,900 machine hour worked 900 hours,
Finished goods 200 units 1600
machine hour rate is ` 5
@ ` 84 units
a) ` 4,000 b) ` 4,500
Purchase of raw material ` 1,90,000,
c) ` 5,000 d) ` 6,000
Carriage on purchases ` 1,500, Sale of
Scrap of Raw Material ` 5,000. From the following particulars:
Wages ` 2,97,000 `
Works overheads are absorbed @ 60% of Opening Stock: Raw materials 5,000
direct labour cost. Finished goods 4,000
Administration overheads are absorbed @ Closing Stock: Raw materials 4,000
Finished Goods 5,000
` 12 per unit produced. Raw materials purchased 50,000
Selling and Distribution overheads are Sale of wastage of material 200
absorbed @ 20% of sales
Sales – 7600 units at a profit of 10% on 40. Calculate Cost of raw-materials
sales consumed.
a) 59000 b) 50800
31. Calculate prime cost c) 51000 d) 60000
a) 205000 b) 250000 41. ______________ provides information for
c) 477000 d) 648000 income determination.
32. Calculate factory cost a) Financial Accounting
a) 20500 b) 250000 b) Cost Accounting
c) 30000 d) 648000 c) Management accounting
33.Calculate cost of goods purchased d) None of these
a) 205000 b) 250000 42. ______________ helps in ascertaining costs
c) 300000 d) 756000 beforehand.
34. Calculate cost of goods sold a) Financial Accounting
a) 638400 b) 205000 b) Cost Accounting
c) 250000 d) 300000 c) Management accounting
35.Calculate cost of sales d) None of these
a) 205000 b) 820000 43. The scope of cost accounting include
c) 328000 d) 302375 _____________, _______________ and ____________.
36.Calculate Sales a) Cost Ascertainment, Cost
a) 912000 b) 250000 presentation and Control
c) 300000 d) 410000 b) Tax planning, Tax Accounting and
37.Calculate profit Financial accounting
a) 205000 b) 82000 c) Presentation of accounting
c) 91200 d) 302375 information, creation of policy, day-
to-day operation.
d) None of the above

44
44. Cost accounting disclose ______________ b) To provide information to enable
a) The Financial position management to make short-term
b) Profit/Loss of a product, job or service decisions.
c) Effect and impact of cost on business c) To present true and fair view of
d) None of these overall results of the transactions,
45. ______________ is a post-mortem of past and events.
costs. d) None of the above
a) Financial Accounting 53. A company presently does not utilize its
b) Cost Accounting available capacity. In case of full capacity
c) Both a and b utilization, the cost per unit shall _______.
d) None of these a) Increase b) Decrease
46. Cost Accounting ___________________ c) Remain constant
a) Deals with historic data d) None of the above
b) Has futuristic approach 54. One of the most important technique in
c) Both (a) & (b) cost planning is _______________
d) None of these a) Direct cost b) Budget
47. Which of the following is feature of job c) Marginal costing
costing? d) None of the above
a) Single Order 55. ________________ aids in price fixation.
b) Single Contract a) Financial Accounting
c) Every job is cost unit itself b) None of these
d) All of the above c) Management Accounting
48. ___________ may be defined as the d) Cost Accounting
technique of presenting cost data when 56. ________________ is the oldest branch of
variable costs and fixed costs are shown accounting.
separately for managerial decision a) Financial Accounting
making. b) Cost Accounting
a) Standard costing c) Management Accounting
b) Variance costing d) None of these
c) Absorption costing 57. _______________ includes financial and cost
d) Marginal costing accounting tax planning and tax
49. In which of the following cost accounting accounting.
do not have any role? a) Financial Accounting
a) Inventory control b) Cost Accounting
b) Price Fixation c) Management Accounting
c) Price earning d) None of these
d) Service provider 58. In automobile ___________ costing is used.
50. Indirect costs are also known as ________ a) Process b) Batch
a) Opportunity cost c) Multiple d) Job
b) Common costs 59. Service costing is used in industries
c) Traceable costs producing ____________________
d) Sunk costs a) Products b) Service
51. ____________ represents the resources that c) Both a and b d) None of these
have been sacrificed to attain a particular 60. _______________ costing is applicable to
objective. partners.
a) Cost b) Expenses a) Process b) Batch
c) Assets d) Liability c) Multiple d) Job
52. Which of the following is not objective of
cost accounting? ANSWERS
a) To arrive at the cost of production of
every unit, job, operation, process. 1. c 2. b 3. d
4. a 5. d 6. b
7. d 8. c 9. b

45
10. b 11. d 12. b
13. b 14. a 15. a
16. c 17. c 18. b
19. c 20. a 21. b
23. d 24. a 25. a
26. b 27. c 28. a
29. c 30. d 31. b
32. c 33. d 34. a
35. b 36. a 37. c
38. d 39. b 40. b
41. a 42. b 43. a
44. b 45. a 46. c
47. d 48. d 49. c
50. b 51. a 52. c
53. b 54. c 55. d
56. a 57. c 58. b
59. b 60. d

46
 CHAPTER

10

MEANING OF CASH FLOW STATEMENT

The Cash Flow Statement means the statement of changes in Cash and Cash equivalents.

It shows the following for the period covered by it:-

Net Cash flows from Operating Activities;
Net Cash flows from Investing Activities;
Net Cash flows from Financing Activities;
Net change in Cash and Cash Equivalents

WHAT IS MEANT BY TERM “CASH FLOWS”?

Cash flows are inflows and outflows of cash and cash equivalents
Cash flows exclude movements between items that constitute cash or cash equivalents because
these components are part of the cash management of an enterprise rather than part of its
operating, investing and financing activities.
Cash management includes the investment of excess cash equivalents
Some of the transactions which represent movements between items of cash or equivalent, are
given below:

(1) Cash deposited into Bank;

(2) Cash withdrawn from Bank;
(3) Purchase/Sale of Short-term Marketable Securities (neither held as Current Assets nor held
as Investments). These transactions do not form part of cash flows.

WHEN DOES THE FLOW OF CASH ARISE?

The cash flow arises when the net effect of transaction is either to increase or to the amount of
cash or cash equivalents.
The transaction which affects either:
(a) Any Current Account (other than cash & cash equivalent account) and Cash/Cash Equivalent
Account; or
(b) Any Non-Current Account and Cash/Cash Equivalent Account, causes a change in cash
position.
FOR WHAT PERIOD SHOULD THE CASH FLOW STATEMENT PREPARED?

Cash Flow Statement should be prepared and presented for each period for which financial
statements are presented.

OBJECTIVIES OF CASH FLOW STATEMENT

47
Basically the purpose of Cash Flow Statement is to ascertain the reasons for the net flow (i.e., the
difference between the opening and closing balance of cash & cash equivalents), and not simply
the net flow which is already known.

The objectives of Cash Flow Statement are as follows:

(1) To ascertain the specific sources (i.e., Operating/Investing/Financing Activities) from which
Cash & Cash Equivalents were generated by an enterprise;
(2) To ascertain the specific uses (i.e., Operating/Investing/Financing Activities) for which Cash
& Cash Equivalents were used by an enterprise;
(3) To ascertain the net change in Cash & Cash Equivalents indicating the difference between
total sources and total uses between the dates of two Balance Sheets.

What is meant by the term 'Cash'?

Cash comprises cash on hand and demand deposits with banks.

What is meant by the term 'Cash equivalents'?

(a) Cash equivalents are short term, highly liquid investments that are readily convertible into
known amounts of cash and which are subject to an insignificant risk of changes in value.

(b) Cash equivalents are held for the purpose of meeting short-term cash commitments rather
than for investment or other purposes.

(c) For an investment to qualify as a cash equivalent, it must be readily convertible to a known
amount of cash and be subject to an insignificant risk of changes in value. Therefore, an
investment normally qualifies as a cash equivalent only when it has a short maturity of, say,
three months or less from the date of acquisition.

(d) Investments in shares are excluded from cash equivalents unless they are, in substance, cash
equivalents; for example, preference shares of a company acquired shortly before their
specified redemption date (provided there is only an insignificant risk of failure of the
company to repay the amount at maturity).

48
 CLASSROOM PRACTICE – LETS PLAY TOGETHER
Qus 1.
Classify the following activities as (i) Operating Activities; (ii) Investing Activities: (iii)
Financing Activities
1. Purchase of Machinery
2. Sale of Land
3. Payment of Income Tax
4. Refund of Income Tax
5. Payment of Dividend
6. Receipt of Dividend
7. Payment of Interest
8. Receipt of Interest
9. Issue of Debentures
10. Buy-back of Equity Shares
Solution:
Purchase of Machinery Investing Activity,
Sale of Land Investing Activity
Payment of Income Tax Operating Activity,
Refund of Income Tax Operating Activity,
Payment of Dividend Financing Activity,
Receipt of Dividend Investing Activity,
Payment of Interest Financing Activity,
Receipt of Interest Investing Activity,
Issue of Debentures Financial Activity,
Buy-back of Equity Shares Financing Activity

Qus 2.
Classify the following activities as (a) Operating Activities, (b) Investing Activities, (c)
Financing Activities, (d) Cash or Cash Equivalents.

(1) Purchase of Machinery

(2) Proceeds from issuance of equity share capital
(3) Cash Sales
(4) Proceeds from long-term borrowings
(5) Proceeds from Sale of Machinery
(6) Cash receipts from Debtors
(7) Trading Commission received
(8) Purchase of Investments
(9) Redemption of Preference shares
(10) Cash Purchases of Goods
(11) Proceeds from sale of Investments
(12) Purchase of Goodwill
(13) Cash paid to suppliers of Goods
(14) Interim Dividend paid on Equity Shares
(15) Wages & Salaries paid
(16) Proceeds from sale of Patents
(17) Interest Received on Debentures held as Investments
(18) Interest paid on Lon -term borrowings
(19) Office and Administration Expenses paid
(20) Manufacturing Overheads paid
(21) Dividend Received on shares held as investments

49
 (22) Rent Received on property held as investment
(23) Selling and Distribution Expenses paid
(24) Income Tax paid
(25) Dividend paid on Preference Shares
(26) Underwriting Commission paid
(27) Rent paid
(28) Brokerage paid on issue of shares
(29) Brokerage paid on purchase of investments
(30) Bank Overdraft
(31) Cash Credit
(32) Short-term Deposits
(33) Marketable Securities
(34) Refund of Income Tax received
(35) Discount allowed to customers
(36) Discount received from Suppliers
Solution :-
(a) Operating Activities 3,6,7,10,13,15,19,20,23,24,27,34,35,36
(b) Investing Activities 1,5,8,11,12,16,17,21,22,29
(c) Financing Activities 2,4,9,14,18,25,26,28
(d) Cash or Cash Equivalents 30,31,32,33

Qus 3.
Classify the following activities as (i) Operating Activities; (ii) Investing Activities; (iii)
Financing Activities in case of (a) a manufacturing enterprise; (b) a financial enterprise.

(1) Purchase of Investments.

(2) Proceeds from Sale of Investments.
(3) Brokerage paid on purchase & sale of Investments.
(4) Interest received on Debentures held as Investments.
(5) Dividend received on shares held as Investments.
(6) Loans & Advances made to third parties.
(7) Receipts from the repayments of loans & advances made to third parties.
(8) Receipt of Interest on loans & advances made to third parties.

Solution:-
(a) In case of a Manufacturing Enterprise, all the given activities are Investing Activities since
they relate to acquisition and disposal of long-term assets.
(b) In case of a Financial Enterprise, all the given activities are Operating Activities since they
relate to the main revenue-producing activity of the enterprise.

Qus 4.
Classify the following activities as (i) Operating Activities; (ii) Investing Activities; (iii)
Financing Activities in case of (a) manufacturing enterprise; (b) a Real Estate enterprise.
(1) Purchase of Land.
(2) Purchase of Building.
(3) Sale of Land.
(4) Sale of Building.
(5) Brokerage paid on purchase and sale of Land & Building.
(6) Rent received from a Building.
(7) Payment of Construction Cost of a Building.

Solution:-

50
 (a) In case of a Manufacturing Enterprise, all the given activities are Investing Activities since
they relate to acquisition and disposal of long-term assets.

(b) In case of a Real Estate Enterprise, all the given activities are Operating Activities since they
relate to the main revenue-producing activity of the enterprise.

Qus 5.
State which of the following would result in inflow/outflow of Cash or Cash Equivalents:
1. Purchase of Stock-in-trade for cash;
2. Purchase of a fixed asset on long-term deferred payment basis;
3. Sale of Stock-in-trade at profit for cash;
4. Sale of a fixed asset (book value ` 5,000) at a loss of ` 3,000.
5. Bills Receivable endorsed to creditors;
6. Issue of shares against a purchase of fixed asset;
7. Issue of fully paid Bonus Shares;
8. Declaration of Final Dividend;
9. Redemption of Debentures by converting them into equity shares; and
10. Writing-off of Bad Debts against a provision for Doubtful Debts; and
11. Cash deposited into Bank.
12. Cash withdrawn from Bank.
13. Purchase of Marketable Securities for Cash.
14. Sale of Marketable Securities for Cash at par.
OPERATING ACTIVITIES

What are the Operating activities?

1. Operating activities are the principal revenue-producing activities of the enterprise and other
activities that are not investing or financing activities.

2. Cash flows from operating activities are primarily derived from the principal revenue
producing activities of the enterprise. Therefore, they generally result from the transactions
and other events that enter into the determination of net profit or loss.

Meaning of Cash from Operating Activities

1. Cash from operations refers to the cash generated in the business as a result of operating
activities carried out during the normal course of the business.

2. Cash from operations is computed by taking out the difference between the operating receipts
that involved an inflow of cash and the operating payments that involved an outflow of cash
during the accounting period.

Examples of Cash Flows from Operating Activities

(1) Cash receipts from the sale of goods and the rendering of services;
(2) Cash receipts from royalties, fees, commissions and other revenue;
(3) Cash payments to suppliers for goods and services;
(4) Cash payments to and on behalf of employees;
(5) Cash receipts and cash payments of an insurance enterprise for premiums and claims,
annuities and other policy benefits;
(6) Cash payments or refunds of income taxes unless they can be specifically identified with
financing and investing activities; and
(7) Cash receipts and payments relating to future contracts, forward contracts, option contracts
and swap contracts when the contracts are held for dealing or trading purposes.

51
An enterprise may hold securities and loans for dealing or trading purposes, in which case they are
similar to inventory acquired specifically for resale. Therefore, cash flows arising from the
purchase and sale of dealing or trading securities are classified as operating activities. Similarly,
cash advances and loans made by financial enterprises are usually classified as operating activities
since they relate to the main revenue-producing activity of that enterprise.

Distinction between Net Profit and Cash from operations

Cash from operations can be distinguished from Net Profit as follows:-

Basis of Net profit Cash from Operating Activities
Distinction
(1) Meaning It indicates the net result of Operating It indicates the cash flow as a
& Non-operating activities carried out result of operating activities
during an accounting year.
(2) Non-Cash It is calculated after taking into account It is calculated excluding the effect
operating item the effect of non-cash operating items. of non-cash operating items since
(Depreciation) Represent merely the book entries. these items
(3) Non-operating It is calculated after taking into account It is calculated excluding the effect
items the effect of non-operating items of non-operating items since these
items do not relate to operating
activities

How to Compute Cash from Operating Activities

The amount of cash from operating activities may be computed by following either the Direct
Method or the Indirect Method:-

I. DIRECT METHOD

Under direct method, the Cash from Operating Activities is computed as follows:

Statement showing the Computation of Cash from

Operating Activities (under Direct Method)

Particulars ` `
(A). Operating Receipts in Cash (e.g.)
Cash Sales XXX
Cash receipts from Debtors XXX
Trading Commission received XXX XXX
(B). Operating Payments in Cash (e.g.)
Cash Purchases XXX
Cash paid to suppliers XXX
Wages & Salaries paid XXX
Office and Administration Expenses paid XXX
Manufacturing Overheads paid XXX
Selling and Distribution Expenses paid XXX XXX
(C). Cash generated from Operations before taxes (A - B) XXX
(D). Income Tax paid (Net of Refund of Tax) XXX
(E). Cash flow before extraordinary item (C - D) XXX
(F). Extraordinary item XXX
(G). Net Cash from (used in) Operating Activities XXX

52
 Qus 6.
[Calculation of Cash from Operating Activities by Direct Method]

From the following particulars, Calculate Cash Flows from Operating Activities:
` `
Cash Sales 2,00,000 Manufacturing Overheads paid 30,000
Cash Purchases 50,000 Office & Administration Expenses 20,000
paid
Cash receipts from customers 4,00,000 Selling & Distribution Expenses paid 10,000
Cash paid to suppliers 1,00,000 Income Taxes paid 1,18,000
Trading Commission received 1,00,000 Insurance proceeds from earthquake 1,00,000
disaster settlement
Trading Commission Paid 25,000 Income Tax Refund received 3,000
Wages & Salaries paid 40,000
Rent paid 10,000

Solution: - Cash Flow from Operating Activities

Particulars `
(A). Operating Receipts In Cash:
Cash Sales 2,00,000
Cash receipts from customers 4,00,000
Trading Commission received 1,00,000
7,00,000
(B). Operating Payments in Cash:
Cash Purchases 50,000
Cash paid to suppliers 1,00,000
Trading Commission paid 25,000
Wages & Salaries paid 40,000
Rent paid 10,000
Manufacturing Overheads paid 30,000
Office & Administrative Expenses paid 20,000
Selling & Distribution Expenses paid 10,000
2,85,000
(C). Cash generated from Operations before taxes [A - B] 4,15,000
(D). Income Tax paid (Net of refund) [` 1,18,000 - ` 3,000] 1,15,000
(E). Cash flow before extraordinary items 3,00,000
(F). Insurance proceeds from earthquake disaster settlement 1,00,000
(G). Net Cash from Operating Activities 4,00,000

53
 II. INDIRECT METHOD
Under indirect method, the Cash from Operating Activities is computed as follows:
Statement showing the computation of Cash Flows from
Operating Activities (Under Indirect Method)
Particulars ` `
(A). Net Profit as per Profit & Loss A/c or Difference· between Closing Balance and
Opening Balance of P&L A/c
Add: Proposed dividend for the current year xxx
Add: Interim dividend paid during the current year xxx
Add: Transfer to reserve xxx
Add: Provision for Tax made during the Current Year xxx
Less: Refund of Tax credited to P&L A/c (xxx)
Less: Extraordinary item, if any, credited to P&L A/c (e.g., Insurance proceeds from
(xxx)
earthquake disaster settlement)
(B). Net Profit before taxation and extraordinary item xxx
(C). Add: Items to be added: (For example)
Depreciation xxx
Interest on Debentures or borrowings xxx
Preliminary Expenses/Underwriting Commission/Discount on xxx
Issue of Debentures/Shares written off xxx
Goodwill/Patents/Trade Marks/Copyright amortised xxx
Loss on sale of Machinery/Land & Building/Investments etc. xxx
Premium payable on redemption of Preference shares/Debentures xxx xxx
(D). Less: Items to be deducted: (For example)
Interest Income xxx
Dividend Income xxx
Rental Income xxx
Profit on sale of Machinery/Land & Building etc. investments etc. xxx (xxx)
(E). Operating Profit before Working Capital Changes [B + C - D] xxx
(F). Add : Decrease in Current Assets & Increase in Current Liabilities:
Decrease in Stock xxx
Decrease in Debtors/B/R xxx
Decrease in Prepaid expenses xxx
Decrease in Accrued Commission xxx
Increase in Creditors for goods xxx
Increase in Outstanding expenses xxx
Increase in Commission received in advance xxx
Increase in Provision for Doubtful Debts or Discount on Debtors xxx xxx
(G). Less: Increase in Current Assets & Decrease in Current Liabilities:
Increase in Stock xxx
Increase in Debtors B/R xxx
Increase in Prepaid Expenses xxx
Increase in Accrued Commission xxx
Decrease in Creditors for goods xxx
Decrease in Outstanding expenses xxx
Decrease in Commission received in advance xxx
Decrease in Provision for Doubtful Debts/Discount on Debtors xxx (xxx)
(H). Cash generated from operations [E + F - G) xxx
(I). Less: Income taxes paid (Net of Refund) (xxx)
(J). Cash flow before extraordinary item [H - I] xxx
(K). Extraordinary items xxx
(L). Net Cash from (used in) operating activities xxx
Note: Negative items which are to be deducted have been shown in brackets.

54
 Tutorial Notes
(i). Increase/Decrease in Unpaid Interest on Debentures/Loans affects the Cash Flow from
Financing Activities and not Operating Activities.
(ii). Increase/Decrease in Unclaimed Dividend affects the Cash Flow from Financing Activities and
not Operating Activities
(iii). Increase/Decrease in Accrued Interest on Investments affects the Cash Flow from Investing
Activities and not Operating Activities.

CALCULATION OF CASH FLOW FROM OPERATING ACTIVITIES FROM BALANCE SHEETS ONLY
Qus 7.
From the following particulars. Calculate Cash from Operating Activities
Liabilities 2013 2012 Assets 2013 2012
` ` ` `
Equity Share Capital 80,000 55,000 Fixed Assets 80,000 80,000
12% Pref. Share Capital 20,000 25,000 Less: Accumulated
Depreciation 30,000 20,000
Profit & Loss A/c 6,400 6,000 50,000 60,000
15% Debentures 34,000 22,000 15% Investments 20,000 10,000
Creditors & B/P 22,000 24,000 Debtors & B/R 49,000 20,600
Provision for Taxation 8,400 6,000 Stock 70,000 80,000
Proposed Dividend 11,600 10,000 Marketable Securities 5,000 2,000
Bank Overdraft 13,600 25,000 Cash 2,000 400
1,96,000 1,73,000 1,96,000 1,73,000
Solution:- Cash Flow from Operating Activities
Particulars ` `
A. Closing Balance as per Profit & Loss A/c 6,400
Less: Opening Balance as per Profit & Loss A/c (6,000)
Add: Proposed dividend (on Equity & Preference) 11,600
Add: Provision for Tax 8,400
B. Net Profit before taxation, and extraordinary item 20,400
C. Add: Items to be added
Depreciation 10,000
Interest on Debentures 3,300 13,300
D. Less: Items to be deducted: Interest on Investments (1,500)
E. Operating Profit before Working Capital Changes 32,200
F. Less: Changes in Current Assets & in Current Liabilities:
Decrease in Stock 10,000
Increase in Debtors & B/R (28,400)
Decrease in Creditors & B/P (2,000) (20,400)
G. Cash generated from operations 11,800
H. Less: Income taxes paid (Net of Refund) (6000)
I. Net Cash from Operating Activities 5,800
Working Notes:
(i). It has been assumed that new debentures have been issued at the end of current accounting
year.
(ii). It has been assumed that new Investments have been purchased at the end of current
accounting year.

55
 INVESTING ACTIVITIES
What are investing activities?
(a) Investing activities are the acquisition· and disposal of long-term assets and other
investments not included in cash equivalents.

(b) Cash flow from investing activities is ascertained by analysing the changes in Fixed Assets and
Long-term Investments in the beginning and at the end of the year.

Examples of Cash Flows arising from Investing Activities

(1) Cash payments to acquire fixed assets (including intangibles). These payments include those
relating to capitalised research and development costs and self-constructed fixed assets;

(2) Cash receipts from disposal of fixed assets (including intangibles);

(3) Cash payments to acquire shares, warrants or debt instruments of other enterprises and
interests in joint ventures (other than payments for those instruments considered to be cash
equivalents and those held for dealing or trading purposes);

(4) Cash receipts from disposal of shares, warrants or debt instruments of other enterprises and
interests in joint ventures (other than receipts from those instruments considered to be cash
equivalents and those held for dealing or trading purposes);

(5) Cash advances and loans made to third parties (other than advances and loans made by a
financial enterprise);
(6) Cash receipts from the repayment of advances and loans made to third parties (other than
advances and loans of a financial enterprise);

(7) Cash payments for futures contracts, forward contracts, option contracts and swap contracts
except when the contracts are held for dealing or trading purposes, or the payments are
classified as financing activities; and

(8) Cash receipts from futures contracts, forward contracts, option contracts and swap contracts
except when the contracts are held for dealing or trading purposes, or the receipts are
classified as financing activities.

Why is the separate disclosure of cash flows arising from investing activities important?
The separate disclosure of cash flows arising from investing activities is important because the
cash flows represent the extent to which expenditures have been made for resources intended to
generate future income and cash flows.

How to Compute Cash Flow from Investing Activities

Cash flow from Investing Activities is computed as follows:

A. Proceeds from disposal of non-current assets `

(whether tangible or intangible or depreciable or non-depreciable) (for example)
Proceeds from sale of machinery XXX
Proceeds from sale of Land & building XXX
Proceeds from sale of Furniture & Fixtures XXX
Proceeds from Investments XXX
Proceeds from sale of Goodwill/Patents/Trademark/Copyright XXX
XXX

56
B. Add: Non-operating Incomes from Investments (For examples)
Dividend received on shares held as investments XXX
Interest received on Debentures held as Investments XXX
Rent received from property held as Investments XXX
XXX
C. Less: Purchase of Non-Current assets (whether tangible or intangible or
depreciable or non-depreciable) (for example)
Purchase of Machinery XXX
Purchase of land & Building XXX
Purchase of Furniture & Fixtures XXX
Purchase of Investments XXX
Purchase of Goodwill/patents/Trademark/Copyright XXX
XXX
D. Net Cash Flow investing Activities [if (A + B)>C] XXX
Or
Net Cash used in investing Activities [if (A+B)<C] XXX

Qus 8.
From the following particulars, Calculate Cash from Investing Activities:
Liabilities 2012 2013 Assets 2012 2013
` ` ` `
Provision for Depreciation 11,000 21,000 Goodwill 1,15,000 90,000
on Furniture
Patents 90,000 1,15,000
Land 1,00,000 90,000
Plant & Machinery (Net) 1,80,000 1,60,000
Furniture (Gross) 21,000 2,46,000
10% Investments 2,00,000 1,80,000
Accrued Interest on 10% - 6,000
Investments
Preliminary Expenses 5,000 3,000
Underwriting Comm. 3,000 8,000
Discount on Issue of
Debentures 10,000 20,000

Solution:
Cash Flow from Investing Activities
Particulars `
Purchase of Patents [` 1,15,000 - ` 90,000] (25,000)

Proceeds from Sale of Land [` 1,00,000 - ` 90,000] 10,000

Purchase of Furniture [` 2,46,000 - ` 21,000] (2,25,000)

Proceeds from Sale of Investments [` 2,00,000 - Rs 1,80,000] 20,000

Interest on 10% Investments [` 20,000 - ` 6,000] 14,000

Net Cash used in investing Activities (2,06,000)

Notes:
(i). It has been assumed that the sale of investments was at book value and as a result there is
neither profit nor loss on sale.

57
(ii). It has been assumed that Investments have been sold at the end of current accounting year.

FINANCING ACTIVITIES

What are the financing activities?

(a) Financing activities are activities that result in changes in the size and composition of the
owners' capital (including preference share capital in the case of a company) and borrowings
of the enterprise.

(b) Cash flow from financing activities is ascertained by analysing the changes in Equity Share
Capital, Pref. Share Capital, Debentures and others borrowings.

Examples of Cash Flows arising from financing Activities

(1) Cash proceeds from issuing shares or other similar instruments;
(2) Cash proceeds from issuing debentures, notes and bonds.
(3) Cash proceeds from short or long-term borrowings.
(4) Cash payments for Buy back of Equity Shares.
(5) Cash payments for Redemption of Pref. Shares.
(6) Cash payments of amounts borrowed.
(7) Cash payments for equity dividend & Pref. Dividend.
(8) Cash payments for Interest on Debentures and Loans

Why is the separate disclosure of cash flows arising from financing activities important?
The separate disclosure of cash flows arising from financing activities is important because it is
useful in predicting claims on future cash flows by providers of funds (both capital and
borrowings) to the enterprise.

How to Compute Cash Flow from Financing Activities

Cash Flow from Financing Activities is computed as follows:
A. Proceeds from issuance of Share Capital & Borrowings [including Premium but
excluding Discount & expenses relating to issue such as underwriting
commission or brokerage] (for examples)
Proceeds from issuance of Equity Share Capital XXX
Proceeds from issuance of Preference Share Capital XXX
Proceeds from long-term borrowings (e.g. Debentures, Loans) XXX
XXX
B. Less: Redemption/Repayment/Buy Back [including premium](for example)
Buy back of Equity Shares XXX
Redemption of preference Shares XXX
Repayment of Long-term borrowings XXX
XXX
C. Less: Dividend (whether Interim/Final) Paid/Interest paid (for example)
Interim Dividend paid on Equity Shares XXX
Final Dividend paid on Equity Shares XXX
Final Dividend paid on Preference Shares XXX
Interest paid on Long-term borrowings XXX
XXX
D. Net Cash Flow Financing Activities [If A > (B + C] XXX
Net Cash used in Financing Activities [if A > (B+C] XXX

58
Qus 9.
From the following particulars of Shikha Ltd., Calculate Cash Flows from Financial
Activities:
2012 2013 2012 2013
Liabilities Assets
` ` ` `
Discount on Issue of
Equity Share Capital 6,00,000 8,00,000 5,000 6,000
Debentures
18% Pref. Share Capital 4,00,000 2,00,000
Underwriting Comm. on
Securities Premium 1,00,000 1,30,000 - 10,000
Issue of Shares
14% Debentures 2,00,000 3,00,000
Additional Information:
(1) Preference Dividend on preference shares and an Interim Dividend @ 15% were paid on
equity shares on 31.12.2013.
(2) Preference shares were redeemed on 31.12.2013 at a premium of 5%. Such premium has,
been provided out of profits.
(3) New shares and debentures were issued on 31.12.2013.
Solution:
Cash Flow from Financing Activities
Particulars `
Proceeds from issuance of equity share capital [` 2,00,000 + ` 30,000 - ` 10,000] 2,20,000

Proceeds from long-term borrowings [` 1,00,000 - ` 1,000] 99,000

Redemption of Preference shares [` 2,00,000 + ` 10,000] (2,10,000)

Interest paid on Long term borrowings [14% on ` 2,00,000] (28,000)

Interim Dividend paid on Equity Shares [15% on ` 6,00,000] (90,000)

Dividend paid on Pref. Shares [18% on ` 4,00,000] (72,000)

Net Cash used in financing activities (81,000)

ANALYSIS OF THE CHANGES IN NON-CURRENT ITEMS

To identify whether there is an inflow or outflow of cash on account of non-current items, the
accounts of all non-current items (like Fixed Assets, Investments (Long-term), Goodwill, Patents,
Trademarks, Preliminary Expenses, Underwriting Commission, Discount on issue of Shares
/Debentures, Equity Share Capital, Preference Share Capital, Debentures, Long term Loans) should
be prepared after taking into consideration the following:
(a) Opening Balance (given in Opening Balance Sheet)
(b) Closing Balance (given in Closing Balance Sheet)
(c) Relevant Additional Information (if any given)
TREATMENT OF CHANGES IN INTANGIBLE NON-CURRENT ASSETS (E.G. GOODWILL,
PATENT, TRADEMARKS, COPYRIGHTS
Step 1 – prepare the Account of intangible Non-current Asset as follows:
Dr. Patents/Trade \Marks/Copyright Account Cr.
Particulars ` Particulars `
To Balance b/d ............... By Bank A/c (Sale Proceeds) ...............
To Bank A/c (Purchases) ............... By Profit & Loss A/c (Loss) ...............

59
To Profit & Loss A/c (Profit) ............... By Profit & Loss A/c (Amortised) ...............
By Balance c/d ...............
............... ...............

Step 2- Show the Treatment of changes in Intangible Non-Current Assets as follows:

Item Treatment Reason

(a) The amount of Add back to Current year's profit in order to find out It merely
amortization cash from operating activities if such amount of represents a book
amortization has already been debited to Profit & Loss entry and does not
Account. Unless otherwise stated, any decrease in the involve any inflow
amount of intangible assets represents the amount of of cash
amortization.
(b) The amount of Show as Cash used In Investing activities In Cash Flow It represents an
purchases statement. Unless otherwise stated, any increase in the outflow of cash.
amount of intangible assets represents the amount of
purchases.
(c) The amount of Show as Cash Inflow from investing activities in Cash It represents an
sale proceeds Flow Statement. inflow of cash.

TREATMENT OF CHANGES IN TANGIBLE NON-DEPRECIABLE NON-CURRENT ASSETS

(E.G. INVESTMENTS, LAND)

Step 1 – prepare the Account of tangible Non-depreciable non-current asset as follows:

Dr. Land/Investment Account Cr.
Particulars ` Particulars `
To Balance b/d .............. By Bank A/c (Sale Proceeds) ..............
To Bank A/c (Purchases) .............. By P&L A/c (Loss on Sale)
To P&L (Profit) .............. By Balance c/d ..............
.............. . ............

Step 2 - Show the treatment of changes in tangible non-depreciable non-current assets as follows:
Item Treatment Reason
(a) The amount of sale Shows as cash inflow from It represent the inflow of cash
proceeds investing activities
(b) The amount of purchase Shows as cash used in It represent the outflow of cash
investing activities
(c) The amount on loss of sale Add back to the current year It does not represent an
if debited to P&L A/c profit in order to find out cash outflow of cash
from operating activities
(d) The amount of profit on Subtract from the current year It does not represent an
sale credited to P&L A/c profit in order to find out cash operating income
from operating activities

TREATMENT OF CHANGES IN TANGIBLE DEPRECIATION NON-CURRENT ASSETS (E.G. PLANT

& MACHINERY, FURNITURE & FICTURE)

Step 1 – Prepare the Account of Depreciable Asset as follows:

Dr. Plant & Machinery/Furniture & Fixtures Account Cr.

60
Particulars ` Particulars `
To Balance b/d ………… By Depreciation A/c ………
To Bank A/c (Purchases) ………… By Bank A/c (sale) ………
To Profit & Loss A/c (Profit) ………… By P&L A/c (loss) ………
By Balance c/d ………

WHEN ACCUMULATED DEPRECIATION IS GIVEN

First prepare the following three accounts:

Dr. (i) Plant and Machinery Account (at cost) Cr.
Particulars ` Particulars `
To Balance b/d ……………. By Asset Disposal A/c …………..
To Bank A/c (Purchases) ……………. By Balance c/d …………….
…………… …………….

Dr. (ii) Provision for Depreciation Account Cr.

Particulars ` Particulars `
To Asset Disposal A/c ………….. By Balance b/d ……………
To Balance c/d ………….. By P&L A/c (b.f.) (Dep. Provided ……………
during the current year)
………….. …………..

Dr. (iii) Asset Disposal Account Cr.

Particulars ` Particulars `
To Plant & Machinery A/c (Cost) ………….. By Provision for depreciation A/c ……………
To Profit & Loss A/c (Profit) ………….. By Bank A/c (Sale proceeds) ……………
By Profit & Loss A/c (Loss on …………….
sale)

TREATMENT OF PROPOSED DIVIDEND

Legally speaking, the item 'Proposed Dividend' is not a liability at all because the liability to pay
dividend does not arise merely on the recommendation of the Board of Directors, rather it arises
on the declaration of dividend at the Annual General Meeting which is to be held after the end of
the relevant accounting year.

The Treatment of “Proposed Dividend” in Cash Flow Statement is suggested below:

Proposed Meaning Treatment

Dividend
Previous It represent the amount of final
year dividend declared for the
previous year but paid during the
current year
Current It represent the amount of
year’s dividend proposed by the board
of director for the current year
Show the net dividend paid (i.e previous years
proposed dividend minus dividend still
payable) as cash used in financing activities in
cash flow statement
Add back to the current year profit to find out
cash from operating activities.

Tutorial Notes:

61
(i). The term 'Proposed Dividend' should not be confused with the term 'Dividend Payable' or
'Unpaid Dividend' or 'Unclaimed Dividend' which is deducted from previous year's proposed
dividend to compute Net Dividend Paid.

(ii). Unless otherwise stated it is presumed that the 'Proposed Dividend' appearing in the previous
years Balance Sheet has been declared subsequently at the Annual General Meeting and has
been paid during the current accounting period.

TREATMENT OF INTERIM DIVIDEND

An 'Interim Dividend is that dividend which is declared between two annual general meetings. An
interim dividend may be declared by the Board of Directors, provided the articles authorise the
Board in the behalf.

The treatment of interim dividend paid in Cash Flow Statement is suggested below:
(a) Add back to current year's profits in order to find out cash from operating activities.
(b) Show as Cash used in Financing Activities in the Cash Flow Statement.

TREATMENT OF PROVOSION FOR TAX

Step 1 – Prepare Provision for Tax Account as follows:

Dr. Provision for Tax Account Cr.

Particulars ` Particulars `
To Bank A/c (Tax paid) ............... By Balance b/d ...............
By Profit & Loss A/c (Provision
To Balance c/d ............... . ..............
made)
............... ...............

Step 2 - Show the treatment of Provision made and Tax paid (net of refund, if any) as
follows:
Item Meaning Treatment Reason
Current year’s It represent the Add back to the current year’s It is merely a book
provision amount of tax profit to calculate cash from entry and does not
provided for the operating activities involve any outflow of
current year cash
Previous year’s It represent the Subtract the net tax paid (after It involves the outflow
tax paid amount of tax paid deducting refund of tax) from of cash
cash before tax from operating
activities

Tutorial Note
Unless otherwise stated, it presumed that the Provision for Tax appearing in the previous year's
Balance Sheet has been paid subsequently during the current year.

Qus 10.
Following are the extracts from the Balance Sheets of “X” Ltd.
31.3.2012 31.3.2013 31.3.2012 31.3.2013
Liabilities Assets
` ` ` `
Profit & Loss A/c 50,000 90,000
Provision for Tax 30,000 36,000

62
 Required:
Show how the related items will appear in Cash Flow Statement in each of the following
alternative cases:
Case (a) If no other information is given.
Case (b) If Tax paid during the year is ` 28,000.
Case (c) If Tax provided during the year is ` 38,000.

Solution:
(a) An Extract of Cash Flow Statement for the year ending 31.3.2013.
I. CASH FLOWS FROM OPERATING ACTIVITIES: `
Closing balance as per Profit & Loss A/c 90,000
Less: Opening balance as per Profit & Loss A/c -50,000
Add: Provision for Tax 36,000
Less: Income taxes paid (Net of Refund) -30,000
Net Cash from Operating Activities 46,000
(b) An Extract of Cash Flow Statement for the year ending 31.3.2013.
CASH FLOWS FROM OPERATING ACTIVITIES:
Closing balance as per Profit & Loss A/c 90,000
Less: Opening balance as per Profit & Loss A/c -50,000
Add: Provision for Tax 34,000
Less: Income taxes paid (Net of Refund) -28,000
Net Cash from Operating Activities 46,000
Working note:
Dr. Provision for Tax Account Cr.
Particulars ` Particulars `
To Bank A/c (Paid) 28,000 By Balance b/d 30,000
To Balance c/d 36,000 By P&L A/c (Tax Provided) (b/f) 34,000
64,000 64,000
(c) An Extract of Cash Flow Statement for the year ending 31.3.2013.
CASH FLOWS FROM OPERATING ACTIVITIES:
Closing balance as per Profit & Loss A/c 90,000
Less: Opening balance as per Profit & Loss A/c -50,000
Add: Provision for Tax 38,000
Less: Income taxes paid (Net of Refund) -32,000
Net Cash from Operating Activities 46,000
Working note:
Dr. Provision for Tax Account Cr.
Particulars ` Particulars `
To Bank A/c (Tax Paid) (b/f) 32,000 By Balance b/d 30,000
To balance c/d 36,000 By Profit & Loss A/c (Tax Provided) 38,000
68,000 68,000

What is benefit of classification of activities?

An enterprise presents its cash flows from operating, investing and financing activities in a
manner which is most appropriate to its business. Classification by activity provides information
that allows users to assess the impact of those activities on the financial position of the enterprise

63
and the amount of its cash and cash equivalents. This information may also be used to evaluate the
relationships among those activities.
A single transaction may include cash flows that are classified differently. For example, when the
instalment paid in respect of a fixed asset acquired on deferred payment basis includes both
interest and loan, the interest element is classified under financing activities and the loan element
is classified under investing activities.

64
Format of Cash Flow Statement
A Format of Cash Flow Statement is given below:

Cash Flow Statement of M/s

For the year ended 31st March, 2013
Particulars ` `
I. Cash Flows from Operating Activities:
A. Net Profit as per Profit & Loss A/c or Difference between Closing Balance and
Opening Balance of P&L A/c
Add: Proposed dividend for the current year XXX
Add: Interim dividend paid during the current year XXX
Add: Transfer to reserve XXX
Add: Provision for Tax made during the Current Year XXX
Less: Refund of Tax credited to P&L A/c (XXX)
Less: Extraordinary item (if any) credited to P&L A/c (e.g., Insurance proceeds
(XXX)
from earthquake disaster settlement)
B. Net Profit before taxation, and extraordinary item XXX
C. Add: Items to be added: (For example)
Depreciation XXX
Interest on borrowings XXX
Preliminary Expenses/Underwriting Commission/Discount on XXX
Issue of Debentures/Shares written of XXX
Goodwill/Patents/Trade Marks/Copyright amortised XXX
Loss on sale of Machinery/Land & Building/Investments etc. XXX
Premium payable on redemption of Preference shares/Debentures XXX XXX
D. Less: Items to be deducted: (For example)
Interest Income XXX
Dividend Income XXX
Rental Income XXX
Profit on sale of Machinery/Land & Building Investments etc. XXX (XXX)
E. Operating Profit before Working Capital Changes [B + C – D] XXX
F. Add: Decrease in Current Assets & Increase in Current Liabilities:
Decrease in Stock XXX
Decrease in Debtors/B/R XXX
Decrease in Prepaid expenses XXX
Decrease in Accrued Commission XXX
Increase in Creditors for goods XXX
Increase in Outstanding expenses XXX
Increase in Commission received in advance XXX
Increase in Provision for Doubtful Debts or Discount on Debtors XXX XXX
G. Less: Increase in Current Assets & Decrease in Current Liabilities:
Increase in Stock XXX
Increase in Debtors B/R XXX
Increase in Prepaid Expenses XXX
Increase in Accrued Commission XXX
Decrease in Creditors for goods XXX
Decrease in Outstanding expenses XXX
Decrease in Commission received in advance XXX
Decrease in Provision for Doubtful Debts/Discount on Debtors XXX (XXX)
H. Cash generated from operations [E + F - G] XXX
I. Less: Income taxes paid (Net of Refund) (XXX)

65
 J. Cash flow before extraordinary item [H - I] XXX
K. Extraordinary items XXX
L. Net Cash from (used in) Operating Activities XXX
II. Cash Flows from Investing Activities:
Proceeds from sale of Machinery/Land & Building XXX
Proceeds from sale of Investments XXX
Proceeds from sale of Patents/Trademarks/Copyrights XXX
Rent/Dividend/Interest Received XXX
Purchase of Machinery/Land & Building (XXX)
Purchase of Investments (XXX)
Purchase of Patents/Trademarks/Copyrights/Goodwill (XXX)
Net Cash from (used in) Investing Activities XXX
III. Cash Flows from Financing Activities:
Proceeds from issuance of share capital XXX
Proceeds from long-term borrowings XXX
Redemption of Preference shares/Buy - back of Equity shares (XXX)
Repayment of borrowings (XXX)
Interest paid on borrowings (XXX)
Interim Dividend paid (XXX)
Final Dividend paid (XXX)
Net Cash from (used in) Financing Activities XXX
IV. Net Increase (Decrease) in Cash and Cash Equivalents [ I + II + III ] XXX
V. Cash and Cash Equivalents at the Beginning of Period
Cash in hand XXX
Cash at Bank XXX
Marketable Securities/Short-term Deposits XXX
Less: Bank Overdraft/Cash Credit (XXX) XXX
VI. Cash and Cash Equivalents at End of Period [ IV + V ]
Cash in hand XXX
Cash at bank XXX
Marketable Securities/Short-term Deposits XXX
Less: Bank Overdraft/Cash Credit (XXX) XXX

Notes:
(i). Negative items which are to be deducted have been shown in brackets.
(ii). Issue of Shares/Debentures for consideration other than cash and purchase of a Non-current
Asset against the issue of Shares/Debentures do not appear in the Cash Flow Statement
because these transactions do not involve any inflow/outflow of cash.

66
 PRACTICAL QUESTIONS

Que 1.
The following are the summary of cash transactions extracted from the books of Zigzag Ltd.:
Balance as on 1st July, 2012 70
Receipts from customers 5,566
Issue of shares 600
Sale of fixed assets 256
Sub-Total 6,492
Payments to suppliers 4,094
Payments for fixed assets 460
Payments for overheads 230
Wages and salaries 138
Taxation 486
Dividends 160
Repayment of bank loans 500
Sub-Total 6,068

Balance as on 30th June, 2013 424

You are required to prepare a cash flow statement of the period ended 30th June, 2002 in
accordance with Accounting Standard-3 (revised).

Solution:
In the books of Zig Zag Limited
Cash Flow statement for the period ending 30th June, 2013
Particulars ` `
Cash Flow from Operating Activities:
- Receipts from Customers 5,566
- Payment to Suppliers (4,094)
- Payment of Wages and Salaries (138)
- Payment of Overheads (230)
- Payment of Taxes (486)
Net Cash from Operating Activities (A) 618
Cash Flow from Investing Activities:
- Proceeds on Sale of Fixed Assets 256
- Acquisition(payment) of fixed assets (460)
Net Cash from Investing Activities (B) (204)
Cash Flow from Financing Activities:
- Proceeds on issue of shares 600
- Payment of dividends (160)
- Repayment of bank loans (500)
Net Cash from Investing Activities (C) (60)
Net increase in cash and cash equivalents (A) + (B) + (C) 354
Cash and Cash equivalents at the beginning of the period 70
Cash and Cash equivalents at the end of the period 424

Que 2.
The following information is available from the books of Exclusive Ltd. for the year ended
31st March 2013:
1. Cash sales for the year were ` 10,00,000 and sales on account ` 12,00,000.

67
2. Payments on accounts payable for inventory totaled ` 7, 80,000.
3. Collection against accounts receivable were ` 7, 60,000.
4. Rent paid in cash ` 2, 20,000, outstanding rent being ` 20,000.
5. 4, 00,000 Equity shares of ` 10 par value were issued for ` 48,00,000.
6. Equipment was purchased for cash ` 16, 80,000.
7. Dividend amounting to ` 10, 00,000 was declared, but yet to be paid.
8. ` 4, 00,000 of dividends declared in the previous year were paid.
9. An equipment having a book value of ` 1,60,000 was sold for ` 2,40,000.
10. The cash account was increased by ` 37,20,000.
Prepare a cash flow statement using direct method.
Solution:
Exclusive Ltd.
Cash Flow Statement for the year ended 31st March 2013 (Direct Method)
Particulars ` `
Cash Flow from Operating Activities
Cash receipts from customers
(` 10,00,000 + 7,60,000) 17,60,000
Cash paid to suppliers and for rent (10,00,000)
Net Cash from Operating Activities (A) 7,60,000
Cash Flow from Investing Activities
Sale of equipment 2,40,000
Purchase of equipment (16,80,000)
Net Cash from Investing Activities (B) (14,40,000)
Cash Flow from Financing Activities
Issue of equity shares (including premium) 48,00,000
Dividends paid (4,00,000)
Net Cash from Financing Activities (C) 44,00,000
Net Increase in Cash and Cash Equivalents (A + B + C) 37,20,000

Que 3.

From the following Balance Sheets of X Ltd., prepare Cash Flow Statement
31.3.2012 31.3.2013 31.3.2012 31.3.2013
Liabilities Assets
` ` ` `
Equity Share Capital 3,00,000 4,00,000 Goodwill 1,15,000 90,000
15% Redeemable Pref.
1,50,000 1,00,000 Land & Building 2,00,000 1,70,000
Share Capital
General Reserve 40,000 70,000 Plant 80,000 2,00,000
Profit & Loss A/c 30,000 48,000 Debtors & B/R 1,60,000 2,52,000
Creditors & B/P 55,000 83,000 Stock 97,000 87,000
Outstanding Expenses 20,000 16,000 Marketable Securities 15,000 10,000
Provision for Taxation 40,000 50,000 Cash and Bank 10,000 8,000
Proposed Dividend 42,000 50,000
6,77,000 8,17,000 6,77,000 8,17,000
Additional Information:

68
(a) Depreciation of ` 10,000 and ` 20,000 has been charged on plant and land and buildings
respectively,
(b) An interim dividend of ` 20,000 has been paid, and
(c) Income-tax ` 35,000 has been paid.

Solution:
Cash Flow Statement
For the year ended 31st March, 2013
Particulars ` `
I. Cash Flows from Operating Activities:
A. Closing Balance as per Profit & Loss A/c 48,000
Less: Opening balance as per Profit & Loss A/c (30,000)
Add: Proposed dividend during the year (on equity & Preference 50,000
shares)
Add: Interim dividend paid during the year 20,000
Add: Transfer to reserve 30,000
Add: Provision for Tax 45,000
B. Net Profit before taxation, and extraordinary item 1,63,000
C. Add: Items to be added
Depreciation 30,000
Goodwill written off 25,000 55,000
D. Operating Profit before working capital changes [B + C] 2,18,000
E. Add: Decrease in Current Assets & Increase in Current Liabilities:
Increase in Creditors & B/P 28,000
Decrease in Stock 10,000 38,000
F. Less: Increase in Current Assets & Decrease in Current Liabilities:
Increase in Debtors & B/R 92,000
Decrease in Outstanding Expenses 4,000 (96,000)
G. Cash generated from operations [D + E - F] 1,60,000
H. Less: Income taxes paid (Net of Refund) (35,000)
I. Net Cash from Operating Activities 1,25,000
II. Cash Flows from Investing Activities:
Purchase of Plant (1,30,000)
Proceeds from sale of Building 10,000
Net Cash used in investing activities (1,20,000)
III. Cash Flows from Financing Activities:
Proceeds from issuance of share capital 1,00,000
Redemption of Preference shares (50,000)
Interim Dividend paid (20,000)
Final Dividend paid (on equity & preference shares) (42,000)
Net Cash used in financing activities (12,000)
IV. Net Decrease in Cash and Cash Equivalents [ I +II + III ] (7,000)
V. Cash and Cash Equivalents at Beginning of Period
Marketable Securities 15,000
Cash and bank 10 000 25,000
VI. Cash and Cash Equivalents at end of Period [ IV + V ]
Marketable Securities 10,000
Cash and bank 8,000 18,000

Working Notes:

69
 Dr. (i) Provision for Tax Account Cr.
Particulars ` Particulars `
To Bank A/c 35,000 By Balance c/d 40,000
To Balance c/d 50,000 By P & L A/c (balancing figure) 45,000
85,000 85,000

Dr. (ii) Plant Account Cr.

Particulars ` Particulars `
To Balance b/d 80,000 By Depreciation A/c 10,000
To Bank A/c (Purchases) (Balancing
1,30,000 By Balance c/d 2,00,000
figure)
2,10,000 2,10,000

Dr. (iii) Land & Building Account Cr.

Particulars ` Particulars `
To Balance b/d 2,00,000 By Depreciation A/c 20,000
By Bank A/c (Sale) (Balancing 10,000
figure)
By Balance c/d 1,70,000
2,00,000 2,00,000

Que 4.
Calculate the cash flow from operating activities on the basis of the following information using
indirect method:
(` in lakhs)
Sales 487.23
Interest earned 58,45
Total income 545.68
Material consumed 246.45
Other expenses 133.18
Loss on sale of asset 33.45
Depreciation 93.34
Interest and finance charges 82.11
Profit before tax (-) 42.85
Provision for income tax 0.00
Profit after tax (-) 42.85
Balance sheet extracts as on:

31st December, 2012 31st December, 2011

( ` in lakhs) ( ` in lakhs)
Inventories 45.30 67.33
Trade receivables 112.65 96.56
Trade payables 94.33 84.78
Provision for tax 4.80 0.00
Dec 2013 (4 Mark)

70
 TRAIN UR BRAIN 9. __________ means the movements of cash
1. A statement of cash flows reports the into the organization and movement of
inflows (receipts) and outflow (payments) cash out of the organization.
of cash and its equivalents of an a) Cash
organization during a particular period. b) Cash Equivalents
a) True b) False c) Cash flow
c) Partly True d) Partly False d) All of the above
2. Accounting to the Accounting Standard – 4, 10. The difference between the cash inflows
an organization should prepare a cash flow and outflows are known as –
statement and should prevent it for each a) Net Cash Flow
period. b) Cash Equivalent
a) True b) False c) Working Capital
c) Partly d) Partly False d) Cash Management
3. Cash Comprise – 11. ________ includes the investment of excess
a) Cash in hand cash in each equivalent
b) Demand deposits with banks a) Net Cash Flow
c) Both (a) and (b) b) Cash Equivalent
d) None of the above c) Working Capital
4. ___________ means those deposits which are d) Cash Management
repayable by bank on demand by the 12. The cash flow statement during a period is
depositor. classified into ________ main categories of
a) Cash in hand cash inflows and cash outflows.
b) Demand Deposits a) Two b) Three
c) Fixed Deposits c) Four d) Five
d) None of the above 13. __________ are the principal revenue –
5. _________ are short term, highly liquid producing activities of the enterprise and
investments that are readily convertible other activities that are not investing and
known amounts of cash and which are financing activities.
subject to an insignificant risk of change a) Operating Activities
in value. b) Investing Activities
a) Cash c) Financing Activities
b) Cash Equivalents d) None of the above
c) Cash Flow 14. Operating activities does not include cash
d) All of the above effects of those transactions and events
6. Cash are held for the purpose of meeting that enter into the determination of net
short term cash commitments rather than profit or loss.
for investments or other purposes. a) True b) False
a) True b) False c) Partly True d) Partly False
c) Partly True d) Partly False 15. Out of the following examples of cash flow
7. Out of the following, examples of cash from operating activities are –
equivalents are: i) Cash receipts from the sale of goods and
i) Treasury bills rendering of services.
ii) Commercial Papers ii) Cash receipts from royalties, fees,
iii) Commercial Bills commission and other revenues.
iv) Secured premium notes iii) Cash Payments to suppliers for goods
a) (i), (ii) b) (ii), (iii) and services.
c) (ii), (iii) d) All of the above iv) Cash payment to and on behalf
8. ________ are inflows and outflows of cash
and cash equivalents.
a) Cash
b) Cash equivalents
c) Cash Flows
d) All of the above

71
 vi) Cash payments or refund of income
taxes unless they can be specifically
identified with financing and investing
activities.
a) (i), (ii), (iii), (iv)
b) (ii), (iii), (iv), (v)
c) (iii), (iv), (v), (vi)
d) All of the above
16. _______ are the acquisitions and disposal of
long-term assets and other investments
not included in cash equivalents.
a) Net Cash Flow
b) Cash Equivalents
c) Working Capital
d) Cash Management
17. Investing activities include transactions
and events that involve the purchase and
sale of short term productive assets (e.g.
land, building, plant and machinery etc.)
not held for resale and other investment.
a) True b) False
c) Partly True d) Partly False
18. Out of the following, example of cash flows
arising from investing activities are:
i) Cash payments to acquire fixed assets
(including intangibles), those payments
include those relating to capitalized
research and development costs and
self-constructed fixed costs.
ii) Cash receipts from disposal of fixed
assets (including intangibles)
iii)Cash payments to acquire shares,
warrants, or debt instruments of other
enterprises and interests in joint
ventures (other than payment for those
instruments considered to be cash
equivalents and those held for dealing
or trading purposes)
iv) Cash receipts from disposal of shares,
warrants, or debt instruments of other
enterprises and interest in joint
ventures (other than receipts from
those instruments considered to be
cash equivalents and those held for
dealing and trading purposes)
v) Cash advances and loans made to third
parties (other than advances and loans
made by a financial enterprise)
vi) Cash receipts from the repayment of
advances and loans made to third
parties (other than advances and loans
of a financial enterprise)
vii) Cash receipts and payments relating to
future contracts, forward contracts,
option contracts and swap contracts
except when the contracts are held for
dealing or trading purposes or the
transactions are classified as financing
activities.
a) All of the above
b) (i), (ii), (iii), (iv)
c) (iii), (iv), (v), (vi)
d) (iii), (v), (vi), (vii)
19. ____________ are the activities that results in
changes in size and composition of the
owner’s capital (including preference
share capital in the case of a company) and
borrowings of the enterprise.
a) Operating Activities
b) Investing Activities
c) Financing Activities
d) None of the above
20. Out of the following, examples of cash flow
from financing activities are –
i) Cash proceeds from issuing shares or
other similar instruments.
ii) Cash proceeds from issuing debentures,
loans notes, bonds and other short term
borrowing.
iii) Cash repayments of amounts borrowed
i.e. redemption of debentures, bonds
etc.
iv) Cash payments to redeem preference
shares
v) Payment of dividend
a) (i), (ii), (iii) b) (ii), (iii), (iv)
c) (ii), (iv), (v) d) All of the above
21. According to Accounting Standard 3
(revised), the treatment of interest and
dividends, received and paid, depends
upon the _________ of the enterprise.
a) Size b) Nature
c) Space
d) None of the above
22. In the case of financial enterprises, cash
flow arising from interest paid and
interest and dividends received, should be
classified as –
a) Cash flows from operating activities
b) Cash flows from investing activities
c) Cash flows from financing activities
d) All of the above
23. The aggregate cash flow arising from
acquisition and from disposals of
72
 subsidiaries or other business units should
be presented separately and classified as –
a) Operating Activities
b) Investing Activities
c) Financial Activities
d) None of the above
24. Out of the following, examples of non-cash
transactions are –
i) The acquisition of assets by assuming
directly related liabilities.
ii) The acquisition of enterprise by means
of issue of shares.
iii)conversion of debt into equity.
a) (i), (ii) b) (ii), (iii)
c) (i), (iii) d) All of the above
25. The basic information required for the
preparation of a cash flow statement is –
a) Comparative balance sheets
b) Statement of profit and loss
c) Additional Data
d) All of the above
26. The procedure may be used for the
preparation of a cash flow statement are –
i) Calculation of net increase (decrease) in
cash and cash equivalents accounts. The
difference between cash and cash
equivalents for the period may be
computed by comparing these accounts
given in the comparative balance
sheets. The results will be cash receipts
and payments during the period
responsible for the increase or decrease
in cash and cash equivalent items.
ii) Calculation of the net cash provided
(used) by operating activities. It is by
the analysis of statement of profit and
loss, comparative balance sheet and
selected additional information.
iii) Calculation of net cash provided (used)
by investing and financing activities. All
other changes in the balance sheet item
must be analysed taking account the
additional information and effect on
cash may be grouped under the
investing and financing activities.
iv) Preparation of cash flow statement. It
may be prepared by classifying all cash
inflows and outflows in terms of
operating, investing and financing
activities. The net cash flow provided
by (used) in each of three activities may
be highlighted.
v) Ensure that the aggregate of net cash
flows from operating, investing and
financing activities is equal to net
increase (decrease) in cash and cash
equivalents.
vi) Report any significant
investing/financing transactions that
did not involve cash or cash equivalents
in a separate schedule to the cash flow
statement.
a) (i), (ii), (iii), (iv), (v), (vi)
b) (ii), (iii), (i), (iv), (v), (vi)
c) (i), (iii), (ii), (iv), (v), (vi)
d) (vi), (v), (iv), (iii), (ii), (i)
27. The method of converting net profit into
net cash flows from operating activity is –
a) Direct Method b) Indirect Method
c) Both (a) and (b)
d) None of the above
28. Under ________ cash receipts from operating
revenues and cash payment from
operating expenses are arranged and
presented in the cash flow statement.
a) Direct Method b) Indirect Method
c) Both (a) and (b)
d) None of the above
29. Cash Receipts – Cash Payments =
a) Net cash from operating activities
b) Net cash from investing activities
c) Net cash from financing activities
d) None of the above
30. Out of the following, examples of usual
cash receipts and cash payment resulting
from operating activities are –
i) Cash sales of goods and services
ii) Cash collected from debtors
(customers)
iii)Cash receipts of interest or dividends
iv)Cash receipts of royalities, fees,
commission and other revenues.
v) Cash payments to suppliers (creditors)
vi) Cash payments for wages and salaries
to employees
a) (i), (ii), (iii), (iv)
b) (ii), (iii), (iv), (v)
c) (iii), (iv), (v), (vi)
d) All of the above
31. Cash collected from debtors –
a) Credit sales + Decrease in accounts
receivables or – increase in account
receivables
73
 b) Credit sales + Decrease in accounts c) Medium Range d) Very long range
receivables or + increase in account 37. Issue of shares against the purchase of
receivables fixed assets is considered under financing
c) Credit sales - Decrease in accounts activities in cash flow statement.
receivables or + increase in account a) True b) False
receivables c) Partly True d) Partly False
d) Credit sales - Decrease in accounts 38. Cash flow statement ignores the accrual
receivables or – increase in account accounting concept.
receivables a) True b) False
32. Purchases – c) Partly True d) Partly False
a) Cost of goods sold + Closing stock + 39. The following information’s are given:
Opening stock 1) Cash sales of goods in trade
b) Cost of goods sold + Closing stock - 2) Cash paid to suppliers of finished goods
Opening stock 3) Sale of machinery by HEC Ltd.
c) Cost of goods sold - Closing stock + 4) Purchase of Investment
Opening stock 5) Interim Dividend paid on equity shares.
d) Cost of goods sold - Closing stock - 6) Bank overdraft
Opening stock 7) Marketable Securities
33. In _________ the net profit (loss) is used as 8) Income tax Paid
the base to calculate net cash provided by 9) Rent Received on property held as
or used in operating activities. investment
a) Direct Method b) Indirect Method 10)Redemption of Preference shares
c) Both (a) and (b) 11)Short term Deposits
d) None of the above 12)Brokerage paid on issue of shares
34. The purpose of cash flow statement in to 13)Proceeds from sale of patents
provide information about the cash flows 14)Interest paid on Debentures
associated with the periods of operations 15)Interest Received on Debentures
and also about the entity’s investing and 16) Cash Credit
financial activities. Classify
a) True b) False (i) Operating Activities
c) Partly True d) Partly False a) 1, 2, 3, 8 b) 4, 9, 13, 15
35. Out of the following, the usefulness of cash c) 5, 10, 12, 14 d) 6, 7, 11, 16
flow statement are – (ii) Investing Activities
i) Predict future cash flows a) 1, 2, 3, 8 b) 4, 9, 13, 15
ii) Determine the ability to pay dividends c) 5, 10, 12, 14 d) 6, 7, 11, 16
and other commitments. (iii) Financing Activities
iii)Efficiency in cash management a) 1, 2, 3, 8 b) 4, 9, 13, 15
iv)Discloses success or failure of cash c) 5, 10, 12, 14 d) 6, 7, 11, 16
planning (iv) Cash and cash Equivalents
vi) Evaluate management decisions a) 1, 2, 3, 8 b) 4, 9, 13, 15
36. Cash flow statement is required for the c) 5, 10, 12, 14 d) 6, 7, 11, 16
financial planning of –
a) Short range b) Long Range

40. From the following calculate cash from operations:

Profit and loss account for the year ended 31st March, 2014
Particulars (`)(‘000) Particulars ` (‘000)
Particulars (`)(‘000) Particulars ` (‘000)
To Salaries 5,000 By Gross Profit 25,000
To Rent 1,000 By Profit on sale of land 5,000
To Depreciation 2,000 By Income-tax refund 3,000
To Loss on sales of plant 1,000

74
 To Goodwill written off 4,000
To Proposed dividend 5,000
To Provision for tax 5,000
To Net Profit 10,000
33,000 33,000
a) 1,90,000 b) 2,10,00,000 c) 1,70,00,000 d) 2,30,00,000

41. Following information is available from the books of Standard Company Ltd.
Particulars 2014 (`) 2013 (`)
Profit made during the year 2,50,000
Income received in advance 500 600
Prepaid expenses 1,600 1,400
Debtors 80,000 95,000
Bills receivables 25,000 20,000
Creditors 45,000 40,000
Bills payable 13,000 15,000
Outstanding expenses 2,500 2,000
Accrued income 1,500 1,200
Calculate cash flow from operations.
a) 2,72,000 b) 2,62,000 c) 2,82,000 d) 2,92,000

42. From the following details compute the amount of receipts from customers:
As on 31.03.2013 As on 31.03.2014
Debtors 1,87,000 1,84,200
Bills receivable 30,000 50,000
Bills Payable 60,000 20,000
Sales during 2013-2014 were ` 46,37,200.
a) ` 44,20,300 b) ` 45,20,300 c) ` 46,20,300 d) ` 47,20,300

43. X ltd. has made a net profit of ` 200 lakhs during the financial year 2013-14 and sold a plt of
land in Ranchi for ` 50 lacs. The capital gain from sale of land was ` 20 lakhs. Income tax rate is
30.9% and tax on long term capital gain is 20.6%.
i) Calculate the amount shown in cash flow from operating activities.
a) ` 61.8 lakhs b) 62.8 lakhs c) ` 61.7 lakhs d) ` 61.5 lakhs
ii) Calculate the amount shown in cash flow from investing activities.
a) ` 4.8 lakhs b) ` 4.21 lakhsc) ` 4.2 lakhs d) ` 4.12 lakhs

44. Calculate ‘cash from operating activities’ from the following information’s:
Income statement
(for the year ended 31st March, 2014)
Particulars (`) (`)
Sales 33,40,000
Less: Cost of Goods sold 26,60,000
Gross Profit 6,80,000
Less: Administrative Expenses 1,80,000
Selling Expenses 1,26,000
Depreciation 64,000
Preliminary Expenses written off 20,000
Income tax 30,000 4,20,000

75
 Net profit after Income Tax 2,60,000

Current Assets and Current Liabilities 31.03.2013 31.3.2014

(`) (`)
Debtors 1,20,000 1,12,000
Bill Receivables 10,000 14,000
Creditors 80,000 96,000
Bills Payable 20,000 22,000
Outstanding Expenses 4,000 3,200
Prepaid Expenses 1,800 2,400
Stock 1,40,000 1,16,000
a) 3,88,600 b) 3,86,600 c) 3,68,600 d) 3,88,800

45. Calculate ‘Cash from operating activities’ from the following balances:
Particulars 31.03.2013 31.03.2014
(`) (`)
Current Assets and Current Liabilities:
Debtors 70,000 40,000
Bills Receivables 4,000 7,000
Creditors 30,000 45,000
Bills Payable 10,000 8,000
Outstanding Expenses 2,000 3,000
Prepaid Expenses 1,800 1,600
Accrued Income 500 1,000
Income received in Advance 700
Cash from operation before working capital changes was ` 2,50,000.
a) 2,80,000 b) 2,90,000 c) 2,70,000 d) 2,85,000

46. K Ltd. made a profit of ` 7,00,000 after considering the following items:
`
Preliminary Expenses written off 10,000
Depreciation on Fixed Assets 70,000
Loss on sale of Machinery 10,000
Provision for Doubtful Debts 15,000
Gain on Sale of Land 9,000
The following is the position of current assets and current liabilities:
31.03.2013 31.3.2014
(`) (`)
Debtors 55,000 80,000
Bill Receivables 18,000 15,000
Prepaid Expenses 4,000 5,000
Creditors 35,000 45,000
Bills Payable 20,000 11,000
Expenses Payable 36,000 21,000
Calculate cash from Operating Activities:
a) 7,49,000 b) 7,69,000 c) 7,59,000 d) 7,79,000

47. From the following Balance Sheets of B Ltd. , Calculate cash from Operating Activities:
Liabilities 31.12.2012 31.12.2013 31.12.2012 31.12.2013

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 (`) (`) (`) (`)
Equity Share Capital 6,00,000 8,00,000 Goodwill 2,30,000 1,80,000
15% redeemable Land and Building 4,00,000 3,40,000
preference share capital 3,00,000 2,00,000 Plant 1,60,000 4,00,000
Genera Reserve 80,000 1,40,000 Debtors 3,20,000 5,04,000
Profit & Loss Account 60,000 96,000 Stock 1,94,000 1,74,000
Creditors 1,10,000 1,66,000 Marketable Securities 30,000 20,000
Outstanding Expenses 40,000 32,000 Cash and Bank 20,000 16,000
Provision for Taxation 80,000 1,00,000
Proposed Dividend 84,000 1,00,000
13,54,000 16,34,000 13,54,000 16,34,000
a) 2,15,000 b) 2,01,000 c) 2,05,000 d) 2,10,000

48. From the following particulars calculate cash from investing Activities:
Liabilities 2013 (`) 2014 (`) 2013 (`) 2014 (`)
Provision for Goodwill 30,000 20,000
depreciation on Plant 3,00,000 4,80,000
furniture 11,000 21,000 Land and Building 70,000 2,00,000
Furniture (gross) 42,000 92,000
8% investments 2,50,000 1,90,000
Accrued interest on
8% Investment -- 8,000
Preliminary Expenses 10,000 20,000
a) (2,88,000) b) 2,88,000 c) (2,88,800) d) 2,88,800

49. Zed Ltd. provides the following information, calculate net cash flows from financing activities:
Particulars 2013 (`) 2014 (`)
Equity share capital 6,00,000 11,00,000
11% Debentures 1,50,000 --
14% Debentures -- 3,00,000
Additional Information:
i) Interest paid on debentures ` 16,500.
ii) Dividends paid ` 60,000
iii) During the year 2014, Zed Ltd. issued 2 bonus shares for every 3 shares held by capitalizing
reserve.
a) 1,75,000 b) 1,73,500 c) 1,73,300 d) 1,73,330

50. Calculate the cash inflows/outflows in the following situation.

31.03.2014 31.3.2013
(`) (`)
Provision for taxation 1,00,000 70,000
Income Tax Liability for current year was estimated to ` 1,20,000.
a) ` 70,000 b) ` 80,000 c) ` 90,000 d) ` 60,000

51. Vayu Ltd. had the following balances:

Investment at the end of 2008 ` 40,000
Investment at the end of 2009 ` 33,000
During the year the company had sold 30% of its original investments at a profit of ` 10,000.
Calculate sources and uses of cash.
a) ` 2,000 b) ` 3,000 c) ` 4,000 d) ` 5,000

77
52. Calculate the cash inflow/outflows in the following situation:
Closing Opening
(`) (`)
Plant 4,00,000 3,20,000
Less: Depreciation 1,44,000 64,000
2,56,000 2,56,000
It discarded plant costing ` 2 Lakhs, accumulated depreciation ` 40,000 at ` 20,000 only.
a) (2,60,000) b) 2,60,000 c) (2,80,000) d) 2,80,000

53. From the following details relating to the accounts of Nidhi Ltd. Calculate net profit before tax.

Particulars 31.03.2013 31.3.2014

(`) (`)
Share Capital 20,00,000 16,00,000
Reserves 4,00,000 3,00,000
Profit & Loss Account 2,00,000 1,20,000
Debentures 4,00,000 --
Provision for Taxation 2,00,000 1,40,000
Proposed Dividend 4,00,000 2,00,000
Creditors 14,00,000 16,40,000
50,00,000 40,00,000
a) 8,70,000 b) 7,80,000 c) 7,88,000 d) 7,00,000

54. The following information is available from the books of exclusive ltd. for the year ended 31 st
March, 2014:
i) Cash sales for the year were ` 10,00,000 and sales on account ` 12,00,000.
ii) Payments on accounts payable for inventory totaled ` 7,80,000.
iii) Collection against accounts receivable were ` 7,60,000.
iv) Rent paid in cash ` 2,20,000, outstanding rent being ` 20,000.
v) 4,00,000 Equity shares of ` 10 per value were issued for ` 48,00,000.
vi) Equipment was purchased for cash ` 16,80,000.
vii) Dividend amounting to ` 10,00,000 was declared, but yet to be paid.
viii) ` 4,00,000 of dividends declared in the previous year were paid.
ix) An equipment having a book value of ` 1,60,000 was sold for ` 2,40,000.
x) The cash account was increased by ` 37,20,000.
Calculate:
(i) Cash flow from Operating Activity
a) 7,60,000 b) (14,40,000) c) 44,00,000 d) 37,20,000
(ii) Cash flow from Investing Activity
a) 7,60,000 b) (14,40,000) c) 44,00,000 d) 37,20,000
(iii) Cash flow from financing Activity
a) 7,60,000 b) (14,40,000) c) 44,00,000 d) 37,20,000
(iv) Cash flow from Cash Equivalents
a) 7,60,000 b) (14,40,000) c) 44,00,000 d) 37,20,000

78
55. From the following particulars, calculate cash flow from Operating activities
Cash Sales ` 65,86,000
Cash collected from debtors during the year amounted to ` 33,23,400
Cash paid to suppliers was ` 79,36,810
` 9,87,500 was paid to and for employees.
a) 9,85,000 b) 9,85,000 c) 9,86,090 d) 9,80,090

56. From the following particulars, calculate cash flow from investing activities.
Furniture of the book value of ` 18,500 was sold for ` 11,000 and a new furniture costing `
83,160 was purchased.
a) 72160 b) (72,160) c) 72,000 d) Nil

57. From the following particulars, calculate cash flow from Financing activities
Debentures of the face value of ` 3,00,000 were redeemed at a premium of 2% interest on
debentures. Interest on debentures ` 84,000 was also paid.
a) (3,90,000) b) 3,90,000 c) 3,00,000 d) 4,00,000

58. From the following information, calculate the Cash Outflow on purchase of machinery

Particulars Opening Closing

Machinery (At cost) 4,00,000 4,20,000
Accumulated Depreciation 1,00,000 1,10,000
Additional Information:
During the year, a machine costing ` 40,000 with the accumulated depreciation of ` 24,000 was
sold for ` 20,000.
a) 60,000 b) 1,60,000 c) 1,00,000 d) 2,00,000

59. From the following information, calculate the Cash inflow from sale of Patents.
Particulars Opening Closing
Patents 2,80,000 1,60,000
Patents were written off to the extent of ` 40,000 and some patents were sold at a profit of `
20,000.
a) 1,50,000 b) 1,00,000 c) 2,00,000 d) 3,00,000

60. From the following information, calculate the Cash Outflow on purchase of machinery
Particulars 31.03.2008 31.03.2009
Fixed Assets 8,75,000 11,90,00
Additional Information:
Depreciation on fixed Assets was ` 100,000
a) 5,00,000 b) 4,15,000 c) 3,00,000 d) 4,00,000

61. From the following information calculate Cash Outflow on purchase of investments.
Particulars 31.3.2008 31.03.2009
Investments @ 10% 2,50,000 5,00,000
Additional Information:
Half of the investment held in the beginning of the year were sold at 10% profit.
a) 175000 b) 137500 c) 200000 d) 375000

79
62. From the following information
Particulars As on As on
31.3.2006 31.03.2007
Provision for Taxation 9,000 10,000
Additional Information:
Provision for taxation made during the year was ` 75,000
Calculate tax paid during the year.
a) 74,000 b) 60,000 c) 84,000 d) 1,00,000

63. From the following Information

Particulars As on As on
31.3.2006 31.03.2007
Provision for Taxation 19,000 20,000
Provision for taxation made during the year was ` 75,000
Calculate tax paid during the year.
a) 74,000 b) 60,000 c) 84,000 d) 1,00,000

From the following particulars of XYZ Ltd.

Particulars As on As on
31.3.2013 31.03.2014
Fixed Assets (Net) 5,10,000 6,20,000
Additional Information:
A machine with a book value of ` 40,000 was sold for ` 25,000.
Depreciation charged during the year was ` 70,000.
64. Calculate loss on sale of fixed assets
a) 15,000 b) 25,000 c) 30,000 d) 40,000

65. Calculate Cash Outflow on purchase of fixed assets

a) 3,00,000 b) 2,20,000 c) 3,20,000 d) 4,00,000

66. From the following particulars XYZ Ltd.

Assets 31.3.2007 31.03.2008
(`) (`)
Fixed Assets 60,00,000 65,00,000
Less: Provision for depreciation 20,00,000 24,50,000
Accumulated depreciation of ` 4,50,000 is charged to P/L A/c during the year.
Calculate Cash Outflow on purchase of fixed assets
a) 4,00,000 b) 3,00,000 c) 4,50,000 d) 5,00,000

67. From the following information

Particulars As on As on
31.3.2008 31.03.2009
Provision for Taxation 40,000 60,000
Provision for taxation made during the year was ` 30,000
Calculate tax paid during the year.
a) 14000 b) 60000 c) 24000 d) 10000

68. From the following Information

80
 Particulars As on As on
31.3.2008 31.03.2009
Provision for Taxation 40,000 60,000
Additional Information
Tax paid during the year is ` 30,000
Calculate provision for taxation made during the year.
a) 14000 b) 60000 c) 50000 d) 10000

69. From the following information

Trading Profit and Loss Account
(for the year ended 31st March, 2009)
Particulars ` Particulars `
To Bad Debts 4000 By Sales
To Discount Allowed 2000 Cash 75000
To Sales Return 2000 Credit 125000 200000
Additional Information
31st March, 2008 31st March, 2009
Debtors 15000 18000
Calculate Cash Received from Debtors
a) 2,00,000 b) 1,14,000 c) 2,14,000 d) 3,00,000

70. Cash flow statement provides information
that:
a) Supplements the P & L account and
balance sheet
b) Is independent of financial statements
c) Provides basis for financial planning
d) Relates to cash budget
71. Which one of the following is not treated
as Cash Equivalent?
a) Certificate of deposit
b) Treasury bill
c) Commercial paper
d) Public deposit
72. Cash flows arising from transactions in a
foreign currency should be converted by
applying the exchange rate prevailing:
a) At the reporting date of cash flow
statement
b) At the average rate of exchange
c) At the rate prevailing on the date of
transaction
d) At the lowest exchange rate in the year
73. Cash Receipt from disposal of fixed assets
is treated as:
a) Cash inflows from operating activities
b) Cash inflows from investing activities
c) Cash inflows from financing activities
d) Cash inflows from extra-ordinary
activities
74. Unrealized gains and losses arising in
foreign exchange are:
a) Cash inflows from operating activities
b) Cash inflows from investing activities
c) Cash inflows from financing activities
d) Not treated as cash flows
75. AS-3 (Revised) is mandatory for:
a) Listed companies
b) Companies having a turnover of more
than 50 crores
c) Both (a) and (b)
d) None of the above
76. One of the following is considered as cash
transaction:
a) Conversion of debt into equity
b) Adjustment of bonus towards call
money
c) Acquisition of an enterprise by issue of
shares
d) Purchase of plant and machinery by
issue of unsecured debentures payable
after one year.
77. Securities premium collected, amounts to
cash flow from:
a) Operating activities
b) Investing activities
c) Financing Activities
d) Not treated as cash flows
78. _________________ at the beginning and at the
end of the accounting period indicate the
changes that have taken place in sheet,
liabilities and capital.
a) Balance Sheet

81
 b) P & L Account a) Operating activities
c) Cash Flow statement b) Investing activities
d) Fund Flow Statement c) Financing Activities
79. Dividend received should be classified as d) Not treated as cash flows
cash inflow from _______________ activities. 85. Necessary adjustments are made for
a) Operating activities increase or decrease in current assets and
b) Investing activities current liabilities to attain net cash from
c) Financing Activities operating activities in ______________
d) Not treated as cash flows method.
80. Cash advances and loans made to a third a) Direct b) Indirect
party is treated as cash flows from c) Investing
______________________ d) Not treated as cash flows
a) Operating activities 86. Increase in current assets will cash from
b) Investing activities operations.
c) Financing Activities a) Increase b) Decrease
d) Not treated as cash flows c) Not change
81. The normal business cash payments or d) None of the above
refunds of income-tax are taken as cash 87. Decrease in current liability will
flows from _________________. ____________ cash from operations.
a) Operating activities a) Increase b) Decrease
b) Investing activities c) Not change
c) Financing Activities d) None of the above
d) Not treated as cash flows 88. The _______________ is prepared for the
82. Under ______________ method the difference forthcoming period as a planning exercise
between cash receipt and cash payment is for cash activities.
taken to arrive at the net cash flow from a) Cash Budget
operating activities. b) Cash Flow Statement
a) Direct b) Indirect c) Funds Flow Statement
c) Investing d) None of the above
d) Not treated as cash flows 89. The ________________ prescribes the format of
83. Cash outflows arising from interest paid cash flow statement and the procedure to
on working capital loan should be be adopted in preparation of it.
classified as cash flows from a) AS-4 b) AS-11
a) Operating activities c) AS-3 d) AS-5
b) Investing activities 90. The term cash includes ………………………
c) Financing Activities a) Cash and Bank Balances
d) Not treated as cash flows b) All the Current Assets
84. The payment of dividend to the preference c) None of the above
shareholder is considered as cash flow
from _________________ activities.

ANSWERS

1 a 2 b 3 d 4 b 5 b
6 b 7 a 8 c 9 c 10 a
11 d 12 b 13 a 14 b 15 d
16 b 17 b 18 a 19 c 20 d
21 b 22 a 23 b 24 d 25 d
26 a 27 c 28 a 29 a 30 d
31 a 32 b 33 b 34 a 35 d
36 a 37 b 38 a 39 (i) a (ii) b
(iii) c (iv) d 40 a 41 b 42 c

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43 (i) a (ii) d 44 a 45 b 46 c
47 d 48 a 49 b 50 c 51 d
52 a 53 b 54(i) a (ii) b (iii) c
(iv) d 55 b 56 b 57 a 58 a
59 b 60 b 61 d 62 a 63 a
64 a 65 b 66 d 67 d 68 c
69 b 70. a 71. d 72. a 73. b
74. d 75. c 76. b 77. c 78. a
79. b 80. b 81. a 82. a 83. a
84. c 85. b 86. b 87. b 88. a
89. c 90 a

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 CHAPTER

11
Fund flow statement also referred to as statement of “source and application of funds” presents
the movement of funds and helps to understand the changes in the structure of assets, liabilities
and equity capital.

The usefulness of information provided by Income statement and Balance Sheet functions
effectively and efficiently, but in the true sense they do not disclose the nature of all transactions.
Management, Creditors and Investors etc. want to determine or evaluate the sources and
application of funds employed by the firm for the future course of action. Therefore, it is essential
to analyse the movement of assets, liabilities, funds from operations and capital between the
components of two year financial statements.

The information required for the preparation of funds flow statement is drawn from the basic
financial statements such as the Balance Sheet and statement of profit and loss .The most
commonly accepted form of fund flow is the one prepared on working capital basis.

Meaning of Fund
Fund means working capital. If current assets of company is more than current liability of
business, it is called working capital and working capital’s other name is Fund.

Fund = Working capital = Current assets – Current liability

Meaning of Flow of Funds

Flow of funds include both “inflow” and “outflow”. The term “ flow of funds” means “Transfer of
economic values from one assets to another and one liability to another.” Flow of fund takes
place whenever there is change in working capital. This change may be either inflow or outflow of
funds.
If fixed assets are converted into current asset or fixed liability is converted into current liabilities,
these are the flow of fund. But if current assets are changed with other current assets or current
Liabilities are changed into other current liabilities, then, there is no flow of fund because there is
no change working capital.Suppose, we get the money from debtor, this is not flow of fund
because, working capital is not changed. Both items of current assets and when current assets
change into current assets, there will not be change in working capital.

Flow of Fund =
Fixed asset changes into current asset or current asset changes into fixed assets
Or
Fixed liability changes into current liability or current liability changes into fixed liability.
Or
Any transaction which attract one current account and one non-current account then it is only
flow of fund.

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For example:
Machinery a/c Dr. (Non-current)
To share capital a/c (Non-current)
(Machinery purchase in consideration of share)

In the above transaction both accounts are non current accounts which do not affect working
capital and same will remain unaffected i.e. there will be no flow of fund.

Machinery a/c Dr. (Non-current)

To Bank a/c (Current)
(Machinery purchase in cash)

In the above transaction one account is non-current and other is current which effect working
capital i.e. there will be flow of fund.
There are a few examples of inflow and outflow of funds:

Inflow of Funds

Issue of Equity Share Capital

Issue of Preference Share Capital
Issue of Debentures/Long term Loans
Premium on issue of shares/debentures
Sale of Investments
Sale of Fixed Assets

Outflow of Funds

Redemption of Preference Share Capital

Redemption of Debentures
Repayment of Long term Loans
Premium on redemption of preference shares/debentures
Purchase of Investments/Fixed Assets
Dividend Paid
Taxes Paid
Drawings by proprietor/partner

Flow of Funds?

NO

Current Assets Current Liabilities

YES

YES YES YES

YES
Non –current Assets Non – Current
NO Liabilities
STEPS FOR PREPARATION OF FUND FLOW STATEMENT

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STEP FOR PREPARATION OF FUND FLOW STATEMENT
FIRST STEP

To prepare statement of Changes in Working Capital

It is very necessary to make statement of changes of working capital. Because net increase in
working capital is use of fund and net decrease in working capital is source of fund.

We take two balance sheets, one is current year balance sheet and other is previous year balance
sheet. Then we separate current assets and current liabilities.

If current assets are more than previous year current assets, it means increase in working capital.
If current assets are less than previous year current assets, it means decrease in working capital.
Because relationship between current assets and working capital is positive and if any changes in
current assets, working capital will change in same direction.

If current liabilities are more than previous year current liabilities, it means decrease in working
capital. If current liabilities are less than previous year current liabilities, it means increase in
working capital. Relationship between working capital and current liabilities are inverse.

We can summarise the above as under:

Working Capital increase/decrease when Change in current assets or current liabilities

• Increase working capital • Increase in current assets
• Decrease in current liabilities
• Decrease in working capital • Decrease in current assets
• Increase in current liabilities
• No change in working capital • Realisation from debtors/Bills Receivable
• Payment to creditors/Bills Payable
• Goods sold on credit
• Goods purchased on credit
Net working capital increase or decrease when a transaction involves a current account and non-
current account.
Statement or schedule of changes in working capital
Particulars Previous Current Effect on working capital
Year (`) Year

Increase` Decrease`
(a) CURRENT ASSETS
Cash in hand
Debtor
Inventory
Bills Receivable
Total Current Assets (A)
(b) CURRENT LIABILITIES
Trade Creditors
Bills Payable
(c) Total Current Liabilities (B)
Total Working Capital (A-B)
(d) Change in Working Capital

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SECOND STEP
Ascertain the funds from operation
Funds from the operation may be ascertained from following two methods as under:
(i) In statement form
(ii) In account form
Fund from operation is required for preparation of fund flow statement for source of fund side. It
can be shown on application of fund side when there is negative fund from operation. Operation
means business activity and fund from operation means profit from business activity.

Statement of fund from operations

The fund flow statement is prepared as per the following Performa:

Statement of Funds from operations for the _______________

Particulars ` `
Net Profit after tax for the year XXX
Add: Non-Current/Non-Operating Expenses (E.G.)
Depreciation XX
Loss on Sale of Fixed Assets XX
Interest on Debentures XX
Goodwill Written Off XX
Provision for Tax XX
Proposed Dividend XX
Interim Dividend XX
Transfer from Statement of Profit & Loss (Profit & Loss Account) XX
Other Non-Current & Non-Operating items debited XX XXX
Less: Non-Current &Non Operating Incomes (e.g.)
Interest on Investment XX
Dividend Received XX
Profit on Sale of Fixed Assets XX
Interest on Bank Deposit XX
Refund of Tax XX
Other Non-Current & Non-Operating items credited XX XXX
Net Fund Flow From Operation XXX.
Fund Flow Statement in Account Form
Adjusted Profit & Loss Account for the period_____________

Particulars Amount ` Particulars Amount`

To Non-Current & Non-Operating
By Balance b/d XX
Items Charged:
By Non-Current &Non Operating
Transfer to General Reserve XX
Items credited
XX Profit on Sale of Fixed Assets XX
Goodwill Written Off XX Income from Investment XX
Preliminary Expenses XX Other Non-Current &Non. XX
Operating Items
Depreciation XX By Net Fund Flow from Operation XX
(Balancing Figure)
Provision for Taxation XX
Other Non-Current & Non XX
Operating Items

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 To Balance c/d XX

CLASSROOM PRACTICE – LETS PLAY TOGETHER

Qus 1.
From the following details prepare a statement showing changes in working capital during 2012:
Balance sheet of Surya as on 31st December

Liabilities 2011 2012 Assets 2011 2012

` ` ` `
Share capital 5,00,000 6,00,000 Fixed assets 10,00,000 11,20,000
Reserves 1,50,000 1,80,000 Less: Depreciation 3,70,000 4,60,000
Profit and Loss A/c 40,000 65,000 6,30,000 6,60,000
Debentures 3,00,000 2,50,000 Stock 2,40,000 3,70,000
Creditors for goods 1,70,000 1,60,000 Book Debts 2,50,000 2,30,000
Provision for tax 60,000 80,000 Cash in hand 80,000 60,000
Preliminary expenses 20,000 15,000
12,20,000 13,35,000 12,20,000 13,35,000

Solution
The first step is to prepare the schedule of changes in working capital.
Schedule of changes in working capital
2011 2012 Increase in Decrease in
working working
capital capital
` ` ` `
Current Asset:
Stock 2,40,000 3,70,000 1,30,000
Book debts 2,50,000 2,30,000 - 20,000
Cash in hand 80,000 60,000 - 20,000
(A) 5,70,000 6,60,000 1,30,000 40,000
Current Liability:
Creditors for goods (B) 1,70,000 1 ,60,000 10,,000
Working capital (A- B) 4,00,000 5,00,000 1,40,000 40,000
Increase in working capital 1,00,000 - - 1,00,000
5,00,000 5,00,000 1,40,000 1,40,000

Qus 2.
From the following two balance sheet of M/s Ram Traders as at December 31, 2011 and 2012.
Prepare the statement of sources and uses of funds
2011 2012 2011 2012
` ` ` `
Liabilities
Share capital 80,000 90,000
Trade creditors 20,000 46,000
Profit & Loss a/c 4,60,000 5,00,000
Assets
Cash 60,000 94,000
Debtors 2,40,000 2,30,000
Stock in trade 1,60,000 1,80,000

88
Land 1,00,000 1,32,000
5,60,000 6,36,000 5,60,000 6,36,000

Solution:
The first step is to prepare the schedule of changes in working capital.
Schedule of changes in working capital
2011 2012 Increase in Decrease in
working working
capital capital
` ` ` `
Current Asset:
Cash 60,000 94,000 34,000 --
Debtors 2,40,000 2,30,000 -- 10,000
Stock in trade 1,60,000 1,80,000 20,000 --
(A) 4,60,000 5,04,000 -- --
Current Liability:
Trade creditors (B) 20,000 46,000 -- 26,000
Working capital (A - B) 4,40,000 4,58,000 54,000 36,000
Increase in working capital 18,000 -- -- 18,000
4,58,000 4,58,000 54,000 54,000
The next step is to prepare the non current accounts of the firm.

Land ACCOUNT
Dr. Cr.
` `
To Balance b/d 1,00,000 By Balance c/d 1,32,000
To Cash(Purchase) balancing figure 32,000
1,32,000 1,32,000

Share capital Account

Dr. Cr.
` `
To Balance c/d 90,000 By Cash (Issue of shares) 10,000
Balancing figure
By Balance b/d 80,000
90,000 90,000
Adjusted Profit & Loss Account
Dr. Cr.
` `
To Balance c/d 500,000 ByBalance b/d 4,60,000
Funds from operation
By Funds From Operation (Bal fig) 40,000
500,000 500,000

Fund flow statement

Sources ` Application `
Issue of Shares 10,000 Purchase of Land 32,000
Funds from operation 40,000 Increase in working capital 18,000

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 50,000 50,000

Qus 3.
From the following balance sheets of A on 31st December 2011 and 2012, you are required to
prepare Fund flow statement.
The followings are additional information has also been given:
 Depreciation charged on plant was ` 4,000 and on building `4,000
 Provision for taxation of `.19,000 was made during the year 2012
 Interim Dividend of `8,000 was paid during the year 2012

Balance sheet
Liabilities 2011 2012 Assets 2011 2012
` ` ` `
Share capital 1,00,000 1,00,000 Goodwill 12,000 12,000
General Reserve 14,000 18,000 Building 40,000 36,000
Profit & Loss A/c 16,000 13,000 Plant 37,000 36,000
Sundry creditors 8,000 5,400 Investments 10,000 11,000
Bills payable 1,200 800 Stock 30,000 23,400
Provision for taxation 16,000 18,000 Bills receivable 2,000 3,200
Provision for doubtful debts 400 600 Debtors 18,000 19,000
Cash 6,600 15,200
1,55,600 1,55,800 1,55,600 1,55,800
Solution:
Statement of changes in working capital
2011 2012 Increase in Decrease in
working working
capital capital
` ` ` `
Current Asset:
Stock 30,000 23,400 --- 6,600
Bills receivable 2,000 3,200 1,200 ---
Debtors 18,000 19,000 1,000 ---
Cash 6,600 15,200 8,600
(A) 56,600 60,800
Current liability
Sundry creditors 8,000 5,400 2,600
Bills payable 1,200 800 400
Provision for doubtful debts 400 600 --- 200
(B) 9,600 6,800
Working capital (A- B) 47,000 54,000 13,800 6,800
Increase in working capital 7,000 7,000
54,000 54,000 13,800 13,800

Building Account
Dr. Cr.
` `
To Balance b/d 40,000 By(Depreciation) Adjusted
Profit & Loss A/c 4,000
By Balance c/d 36,000

90
 40,000 40,000
Plant Account
Dr. Cr.
` `
To Balance b/d 37,000 By(Depreciation) Adjusted
To Cash (Purchase) Profit & Loss A/c 4,000
balancing figure 3,000 By Balance c/d 36,000
40,000 40,000
Investments Account
Dr. Cr.
` `
To Balance b/d 10,000 By Balance c/d 11,000
To Cash (Purchase) Balancing figure 1,000
11,000 11,000

General Reserve Account

Dr. Cr.
` `
To Balance b/d 18,000 By Balance b/d 14,000
By Adjusted Profit and Loss A/c 4,000
(Profit transferred during the
current year)
18,000 18,000
Provision for Taxation Account
Dr. Cr.
` `
To Cash (Tax paid previous year taxation) By Balance b/d 16,000
Balancing figure 17,000 By Adjusted Profit & Loss A/c 19,000
To Balance bid 18,000 (provision for taxation made
during the year)
35,000 35,000

Adjusted Profit & Loss Account

` `
To Depreciation on Building 4,000 By Balance bid 16,000
To Depreciation on Plant 4,000 By Funds from operations 36,000
To Transfer to General Reserve 4,000
To Provision for taxation 19,000
To Interim dividend 8,000
T a Balance c/d 13,000
52,000 52,000
The next step is to prepare the fund flow statement.

Fund Flow Statement

Sources ` Applications `
Funds from operations 36,000 Purchase of the plant 3,000
Purchase of the Investment 1,000
Increase working capital 7,000
Tax paid 17,000

91
 Interim dividend 8,000
36,000 36,000

92
 TRAIN UR BRAIN
1. ________ also referred to as statement of vi) Redemption of Debentures
“source application of funds” presents the vii) Repayment of long term loans
movement of funds and helps to viii) Premium on Redemption of
understand the changes in the structure of Preference Shares/ Debentures
assets, liabilities and equity capital. a) (i), (ii), (iii), (iv)
a) Ratio Analysis b) (ii), (iii), (iv), (v)
b)Cash Flow Statement c) (v), (vi), (vii), (viii)
c) Fund Flow Statement d) (iv), (v), (vi), (vii)
d) None of the above 9. Out of the following, examples of outflow
2. Funds means – of funds are –
a) Current Assets b) Working capital i) Issue of Equity Share Capital
c) Current Liabilities d) All of the above ii) Issue of Preference Share Capital
3. Fund from operation means iii) Issue of Debentures/Long Term
a) Business Activity Loans
b) Profit from Business activity iv) Premium on Issue of
c) Both (a) and (b) Share/Debentures
d) None of the above v) Redemption of Preference Share
4. Funds = working capital Capital
a) Current Assets – Current Liabilities vi) Redemption of Debentures
b) Current Assets + Current Liabilities vii) Repayment of Long Term Loans
c) Current Assets × Current Liabilities viii) Premium on Redemption of
d) Current Assets ÷ Current Liabilities Preference Shares/Debentures
5. Flow of funds include – a) (i), (ii), (iii), (iv)
a) Inflow b) Outflow b) (ii), (iii), (iv), (v)
c) Both (a) and (b) c) (v), (vi), (vii), (viii)
d) None of the above d) (iv), (v), (vi), (vii)
6. The term “Flow of funds” means “Transfer 10. Fund flow statement is a statement
of economic value from one assets to showing sources and uses of funds for a
another and one liability to another”. period of time
a) True b) False a) True b) False
c) Partly True d) Partly False c) Partly True d) Partly False
7. Flow of fund – 11. “A statement of sources and application of
a) Fixed assets changes into current asset funds is a technical device designed to
or currents assets changes into assets analysis the changes in the financial
b) Fixed liability changes into current condition of a business enterprises
liability or current liability changes between two dates.” The definition is given
into fixed liability by –
c) Any transactions which attract one a) Foulke b) Anthony
current account and one non current c) P.F. Drucker d) Henri Fayol
account then it is only flow of fund. 12. “The funds flow statement describes the
d) (a) or (b) or (c) sources from which additional funds were
8. Out of the following, example of inflow of derived and the use to which these sources
funds are - were put”. The definition is given by –
i) Issue of Equity Share Capital a) Foulke b) Anthony
ii) Issue of Preference Share Capital c) P.F. Drucker d) Henri Fayol
iii) Issue of Debentures/Long Term 13. The features of fund flow statement is –
Loans a) Shows sources of funds during a
iv) Premium on Issue of Share/ specified period
Debentures b) Shows uses of funds during a specified
v) Redemption of Preference Share period
Capital

93
 c) Funds used here means working 19. If current liabilities are ________ previous
capital i.e., the excess of current assets year current liabilities , it means increase
over current liabilities in working capital.
d) All of the above a) More than b) Less than
14. Funds flows statement are also known as – b) Equal to d) Not equal to
i) Sources and application of funds 20. Relationship between working capital and
ii) Statement of changes in financial current liabilities are inverse.
position a) True b) False
iii) Sources and uses of funds b) Partly True d) Partly False
iv) Summary of financial operations 21. Fund from operation is required for
v) Where got, where gone statement preparation of cash flow statement for
a) (i), (ii), (iii), (iv) source of fund side.
b) (ii), (iii), (iv), (v) a) True b) False
c) (i), (ii), (iv), (v) b) Partly True d) Partly False
d) All of the above 22. Operation means –
15. _________ in this book “Management a) Business activity
Accounting – Text and Cases” has b) Profit from business activity
explained the funds flow by way of “where c) Both (a) and (b)
got, where gone statement”. d) None of the above
a) Foulke b) Prof. Anthony 23. If the amount of reserves and surplus of a
c) P. F. Drucker d) Henri Fayol company increases by ` 50 lakhs and the
16. If current assets are more than previous
year current asset, it means ________ in fixed assets increase by ` 10 lakhs over a
working capital. period of time, then how much amount of
a) Increase b) Decrease funds is available for other uses?
c) Both (a) and (b) a) ` 50 lakhs b) ` 10 lakhs
d) None of the above
17. If current assets are ________ previous year c) ` 40 lakhs d) ` 30 lakhs
current assets, it means decrease in 24. If the accrued interest expense increases
working capital. by ` 40 lakhs and the provision for taxes
a) More than b) Less than
c) Equal to d) Not equal to reduces by ` 50 lakhs over a period of time,
18. If current liabilities are ________ previous then what is the amount of the excess
current liabilities, it means decrease in funds used?
working capital. a) ` 50 lakhs b) ` 10 lakhs
a) More than b) Less than
c) Equal to d) Not equal to c) ` 40 lakhs d) ` 30 lakhs

25. Balance Sheet of M/s A & B

Liabilities 1.4.13 31.3.14 Assets 1.4.13 31.3.14
Capital 1,48,000 1,49,000 Machinery 80,000 86,000
Loan from Bank 30,000 25,000 Buildings 50,000 55,000
Mrs. A’s Loan -- 20,000 Land 20,000 30,000
Current Liabilities 36,000 41,000 Stock 25,000 22,000
Debtors 35,000 38,400
Cash 4,000 3,600

During the year, the partners withdrew ` 26,000 for domestic expenditure. The provision for
depreciation against Machinery as on 01.04.2013 was ` 27,000 and on 31.03.2014 was `
36,000. Calculate the amount of change in working capital.
a) 28,000 b) 23,000

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 c) 5,000 increase d) 5,000 decrease

26. One of the following is not an objective of a) Inflow b) Outflow

funds flow analysis: c) No effect
a) Working capital utilization d) None of the above
b) Statutory Requirements 34 Sale of stock in trade at profit for cash will
c) In raising new funds result in _________________ of funds.
d) As an instrument of planning and a) Inflow b) Outflow
control c) No effect
27. The relationship between sources and d) None of the above
application of funds and its impact on 35. Sale of fixed assets (book value J 7,000) at
___________________ is explained in statement a loss of J 6,000 will result in ______________
of sources and application of funds. of funds.
a) working Capital b) Cash Flow a) Inflow b) Outflow
c) Profit and Loss c) No effect
d) None of the above d) None of the above
28. The funds flow statement is prepared in 36. Cash collected from debtors will result in
between ________________ balance sheet _______________ of funds.
dates. a) Inflow b) Outflow
a) One b) Two c) No effect
c) Three d) None of the above
d) None of the above 37. Cash paid to creditors will result in
29. Any transaction which _______________ _____________________ of funds.
amount of working capital, is a source of a) Inflow b) Outflow
working capital. c) No effect
a) Increase b) Decrease d) None of the above
c) Either of the above 38. Bill receivables endorsed to creditors will
d) None of the above result in __________________ of funds.
30. Any transaction which _______________ a) Inflow b) Outflow
amount of working capital, is a application c) No effect
or use of working capital. d) None of the above
a) Increase b) Decrease 39. Bills receivables endorsed to creditors,
c) Either of the above dishnoured will result in _______________ of
d) None of the above funds.
31. Purchase of stock-in-trade on credit will a) Inflow b) Outflow
result in _________________ of funds. c) No effect
a) Inflow b) Outflow d) None of the above
c) No effect 40. Issue of shares against a purchase of fixed
d) None of the above assets.
32. Purchase of a fixed asset on a credit of two a) Inflow b) Outflow
months. c) No effect
a) Inflow b) Outflow d) None of the above
c) No effect
d) None of the above ANSWERS
33. Purchase of a fixed asset on long term
deferred payment basis will result in
_____________ of funds.
1. c 2. b 3. b
4. a 5. c 6. a
7. d 8. a 9. c
10. a 11. a 12. b
13. d 14. d 15. b

95
16. a 17. b 18. a
19. b 20. a 21. b
22. a 23. c 24. b
25. d 26. b 27. a
28. b 29. a 30. b
31. c 32. b 33. c
34. a 35. a 36. c
37. c 38. c 39. c
40. c

96
 CHAPTER

12
Need for reconciliation

There is need for reconciliation because of maintenance of two sets of accounts. It finds out
reasons for the difference between the profit or loss in cost accounts and the profit or loss in
financial accounts. It ensures the mathematical accuracy and reliability of cost accounts in order to
have cost ascertainment, cost control and cost reduction.
Because of maintenance of two sets of accounts and different approach in cost accounts, profit or
loss revealed in financial accounts may not agree with the profit or loss as per cost accounts. Every
month or at least every six months, the two sets of records-cost and financial accounts must be
reconciled.

Reasons for difference between Profits shown in Cost accounts and those shown in financial
accounts

ITEMS INCLUDED IN FINANCIAL ACCOUNTS ONLY

(a) Purely financial expenses:
(i). Interest on loans, bank mortgages.
(ii). Expenses and discounts on issue of shares, debentures etc.
(iii). Losses on sale of fixed assets and investments.
(iv). Other capital losses i.e., loss by fire not covered by insurance etc.
(v). Fines and penalties.
(vi). Stamp duty and expenses on transfer of shares.
(vii). Goodwill written off.
(viii). Preliminary expenses written off.
(ix). Donations and Subscriptions etc.
(x). Income tax.
(xi). Underwriting Commission written off

(b) Purely financial Income:

(i). Interest received on bank deposits, loans and investments.
(ii). Dividends received.
(iii). Profit on sale of fixed assets and investments.
(iv). Rents receivable.
(v). Fees received on issue and transfer of shares.
(vi). Profit on sale of stores.

(c) Appropriations of Profits:

(i). Dividends.
(ii). Transfer to reserves.

ITEMS INCLUDED IN COST ACCOUNTS ONLY

These are usually notional charges called as imputed costs/opportunity costs.

97
 (a) Interest on capital at notional figure though not incurred.
(b) Salary of owner manager at notional figure though not incurred.
(c) Notional rent of own building.
(d) Notional Depreciation on the asset fully depreciated for which book value is nil.

1. Under or over-absorption of overheads, if transferred to next year's accounts

If the under-or over-absorption of overheads is transferred to next year's accounts. Profit or
losses in both sets of accounts may vary as there will be difference between the overhead-
actually incurred in financial accounts and overhead absorbed in cost accounts of a particular
period. In other cases i.e., if it is transferred to same year's costing P &L account and if it is
adjusted by application of supplementary overhead rate, profit or losses of both sets of
accounts may not differ to this extent.

2. Different bases of stock valuation

In financial accounts, stock is valued at the cost or NRV whichever is lower whereas in cost
accounts, the value of stock on hand may differ to a certain extent depending on the method
followed for pricing of material issues i.e., FIFO, LIFO, Weighted Average etc.
Valuation of work-in-progress may be at prime cost or at prime cost + Factory overhead.
Similarly finished goods may be valued at prime cost + Factory overhead + Administration
overhead i.e., Cost of Production.

3. Different methods of charging depreciation

In financial accounts, depreciation is calculated on the basis of straight line method or written
down value method etc., where as in cost accounts, depreciation is calculated on the basis of
machine hours or production units.

Procedure for reconciliation

There are 3 steps involved in the procedure for reconciliation.
1. Ascertainment of profit as per financial accounts.
2. Ascertainment of profit as per cost accounts.
3. Reconciliation of both the profits. It is similar to Bank reconciliation statement.
4. One may start with profit as per cost accounts and arrive at the financial profit and vice-versa
by adding and subtracting the items of variation between both sets of accounts as shown in
the following Performa.

PROFIT AS PER COST ACCOUNTS:

Add:
1. Income and profits taken in financial accounts and not in cost accounts.
2. Notional expenses taken in cost accounts and not in financial accounts.
3. Over-absorption of overheads in cost accounts.
4. Excess valuation of opening inventory in cost accounts as compared to valuation in financial
accounts.
5. Lower valuation of closing inventory in cost accounts as compared to valuation in financial
accounts.
6. Excess depreciation accounted for in cost accounts.

Less:
7. Expenses and Losses accounted for in financial accounts and not in cost accounts.
8. Appropriations in financial accounts only.
9. Notional income taken in cost accounts and not in financial accounts.
10. Under-absorption of overheads in cost accounts.
11. Lower valuation of opening inventory in cost accounts as compared to valuation in financial
accounts.

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 12. Higher valuation of closing inventory in cost accounts as compared to valuation in financial
accounts.
13. Lower depreciation accounted for in cost accounts.

Profit or loss as per financial accounts

Note-Inventory includes raw materials, stores, spares, work-in-progress, stock of finished goods
etc.

PROFIT AS PER FINANCIAL ACCOUNTS

Add- Items 7 to 13 as mentioned above
Less- Items 1 to 6 as mentioned above
Profit or loss as per cost accounts

Memorandum Reconciliation account

Alternatively, reconciliation may be effected by memorandum reconciliation account also. The
profit as per cost accounts is credited to this account. Items 1 to 6 which are to be added are
entered on the credit side and items 7 to 13 which are to be deducted are debited to this account.

THEORETICAL PROBLEMS

Qus 1. List the Financial expenses which are not included in cost.

Qus 2. What are the reasons for disagreement of Profits as per financial accounts and cost
Accounts? Discuss.

Qus 3. Why is it necessary to reconcile the Profits between the Cost Accounts and Financial
Accounts?

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 CLASSROOM PRACTICE – LETS PLAY TOGETHER

Qus 1.
From the following figures prepare a reconciliation statement: `
Net loss as per costing records 1,72,400
Works overhead under recovered in costing 3,120
Administrative overhead recovered in excess 1,700
Depreciation charged in financial records 11,200
Depreciation recovered in costing 12,500
Interest received not included in costing 8,000
Obsolescence charged (loss) in financial records 5,700
Income-tax provided in financial books 40,300
Bank Interest credited in financial books 750
Stores adjustment (credit) in financial books 475
Value of opening stock in: Cost accounts 52,600
Financial accounts 54,000
Value of closing stock in: Cost accounts 52,000
Financial accounts 49,600
Interest charged in cost accounts but not in financial accounts 6,000
Preliminary expenses written off in financial accounts 800
Provision for doubtful debts in financial accounts 150

Solution:
Reconciliation Statement
Net Loss as per Cost A/c's (172400)
Less: Under recovered works O/H (3120)
Add: Over recovered administrative O/H 1700
Add: Overcharged Depreciation in Cost A/c 1300
Add: Interest received 8000
Less: Loss due to obsolescence (5700)
Less: Income-tax (40300)
Add: Bank Interest 750
Add: Stores adjustment 475
Less: Under valued opening stock (1400)
Less: Over valued closing stock (2400)
Add: Interest Charged in Cost A/c 6000
Less: Preliminary Expenses (800)
Less: Provision for doubtful debts (150)
Net (Loss) / Net Profit as per Financial A/c (208045)

Qus 2.
A manufacturing company disclosed a net loss of ` 3,47,000 as per their cost accounts for
the year ended March 31, 2013. The financial accounts however disclosed a net loss of ` 5, 10,000
for the same period. The following information was revealed as a result of scrutiny of the figures of
both the sets of accounts:
`
i. Factory overheads under-absorbed 40,000
ii. Administration overheads over-absorbed 60,000
iii. Depreciation charged in Financial Accounts 3,25,000
iv. Depreciation charged in Cost Accounts 2,75,000

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 v. Interest on investments not included in Cost Accounts 96,000
vi. Income-tax provided 54,000
vii. Interest on loan funds in Financial Accounts (Dr) 2.45,000
viii. Transfer fees (Credit in financial books) 24,000
ix. Stores adjustment (Credit in financial books) 14,000
x. Dividend received 32,000

Solution:
Dr. MEMORANDUM RECONCILIATION ACCOUNT Cr.
Amount Amount
Particulars Particulars
` `
To Net loss as per cost Accounts 3,47,000 By Administration overhead
To Depreciation under-charged over-absorbed 60,000
in cost accounts 50,000 By Interest on Investment in
To Factory overheads under-absorbed 40,000 Financial A/c only 96,000
To Income-tax not provided in costing 54,000 By Dividends received 32,000
To Interest on loan funds not charged By Stores Adjustment 14,000
in costing 2,45,000 By Transfer fees 24,000
By Net loss as per financial accounts 5,10,000
7,36,000 7,36,000

Qus 3.
In the reconciliation between Cost and Financial Accounts, one of the areas of differences is for
different methods of stock valuation. State with reasons in each of the following circumstances
whether Costing Profit will be higher or lower than the financial Profit
Cost Financial
Items of Stock Valuation Valuation
` `
Raw Material (Opening) 50,000 60,000
Work-in-progress (Closing) 60,000 50,000
Finished Stock (Closing) 50,000 60,000
Finished Stock (Opening) 60,000 50,000
Solution:
In the reconciliation it does not matter in which form the stock is kept. i.e .. Raw Material, Work-in-
progress or Finished Stocks. The basic principle is that if the opening Stock is higher, Profit is
lower whereas if the Closing Stock is higher, Profit is higher, and vice versa. On the basis of this
principle the following conclusions on the four propositions can be drawn:
1. Raw Material (Opening) is lower in Cost Accounts, the Costing Profit will be higher by ` 10,000.
2. Work-in-progress (Closing) is higher in Cost Accounts, Costing Profit will be higher by `10.000.
3. Finished Stock (Closing) is lower in Cost Accounts. Costing Profit will be lower by `10,000.
4. Finished Stock (Opening) is higher by `10,000 in Cost Accounts, Costing Profit will, therefore.
be lower by ` 10.000.

Qus 4. (Dec-2013)
Prepare a reconciliation statement from the following figures and ascertain the profits as per
financial books :
`
Loss as per cost accounts 50,000

101
Under-valuation of closing stock in cost accounts 25,000
Preliminary expenses written-off in financial books 10,000
Profit on sale of furniture recorded in financial books only 6,000
Interest on bank loan 6,075
Factory overheads over-absorbed 11,075
( 4 Marks)

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 TRAIN UR BRAIN
1. Cost accounting deal with – 9. If overheads are not fully absorbed i.e., the
a) The ascertainment of cost of product amount of cost accounts is less than the
b) Absorption of overheads into product actual amount, the short fall is called
cost …………
c) Ascertainment of division wise or a) Over Absorption
product were profitability b) Under Absorption
d) All of the above c) Both (a) and (b)
2. ________ accounting deals with the d) None of the above
classification and recording and 10. Interest received on bank deposits is
summarization of transactions of the purely financial item.
concern and ends up with the preparation e) True b) False
of financial statements viz. profit and loss c) Partly True d) Partly False
account and balance sheet for accounting 11. Selling overhead under absorbed results
period. …….. profit in financial accounts.
a) Activity based b) Cost Based a) No b) Lower
c) Cost d) Financial c) Higher
3. The reasons for difference in profit or loss d) None of the above
in cost and financial accounts is analyzed 12. Transfer to general reserve is an item of
and highlighted through – financial accounts
a) Statement of Profit & Loss Account a) True b) False
b) Memorandum Profit & Loss Account c) Partly True d) Partly False
c) Reconciliation Statement 13. Absorption of overheads causes less profit
d) Analysis Statement in cost accounts.
4. The actual overheads incurred will be a) True b) False
recorded under – c) Partly True d) Partly False
a) Cost Accounts 14. Reconciliation of cost and financial
b) Financial Accounts accounts ensures the accuracy of _______
c) Integrated Accounts sets of accounts
d) Inter-Located Accounts a) Two b) Three
5. The absorption of overheads in _____ c) Four d) Five
accounts may be under or over recovered 15. When financial profit in ` 7,000 the
than the actual overheads incurred.
administrative overhead over recovered in
a) Cost b) Financial
c) Integrated d) Interlocked Cost Accounts ` 600, then the costing profit
6. Notional interest in capital is shown in – is –
a) Financial Accounts a) ` 7,600 b) ` 6,400
b) Cost Accounts
c) Integrated Accounts c) ` 8,200 d) ` 5,800
d) Non-Integrated Accounts 16. Depreciation charged in costing books is `
7. Absorption of overheads ______ profit in
costing books 11,500 and in financial books is ` 10,200.
a) Increases b) Decreases What will be the financial profit when
c) Both (a) and (b) costing profit is ` , 000?
d) None of the above
8. Loss on sale of fixed assets is an item of a) ` 5,300 b) ` 2,700
only ______ and it is excluded in _______. c) ` 4,000 d) ` 5,000
a) Cost Accounts, Cost Books
17. Depreciation charged accounts is ` 10,500
b) Financial Accounts, Cost Books
c) Cost Accounts, Financial Books and in financial books is ` 9,200. What will
d) Financial Accounts, Financial Books

103
 be the financial profit/loss, when profit as c) To facilitate internal audit work
per cost accounts is ` 3,000? d) To comply with provision of the
statute and accounting standard
a) Profit ` 1,700 b) Loss ` 1,700 25. The reasons for difference of profit
c) Profit ` 4,300 d) Loss ` 4,300 between cost and financial accounts can be
grouped under _________________
18. If the opening and closing balances of
a) Purely labour items
plant and machinery are ` 2,00,000 and ` b) Purely direct items
2,76,000 respectively, depreciation during c) Purely material items
the year being ` 20,000 the additions made d) None of the above
during the year are – 26. In cost accounts, appropriation of profit is
_____________________
a) ` 76,000 b) ` 96,000 a) Included b) Not included
c) ` 56,000 c) Considered
d) None of the above d) Separately shown
19. Reconciliation statement is required to be 27. Purely financial items are _______________ in
prepared in case of ________________ system. financial accounts.
a) Integrated b) Non-integrated a) Not included b) Considered
c) Either of the above c) Not considered
d) None of the above d) None of the above
20. Which of the following items are shown in 28. Which of the following statement is
Profit and loss account only? correct in relation to treatment of
a) Dividend paid abnormal losses?
b) Commission received a) Abnormal losses are considered in
c) Income tax paid financial accounts
d) All of the above b) Abnormal losses are separately
21. Which of the following items are shown in shown in cost accounts
cost accounts only? c) Neither (a) nor (b)
a) Rent of own premises d) both (a) and (b)
b) Notional cost of own capital 29. The reconciliation of profit between cost
c) Salary of own manager at notional and financial accounts can be done by
figure preparing?
d) All of the above a) Trial Balance b) Balance Sheet
22. Goodwill written off is such item which is c) Memorandum Reconciliation
included in _________________ accounts but Statement
not ______________________ in accounts. d) Profit & Loss Accounts
a) Financial; Cost 30. Notional charges in cost accounts __________
b) Cost ; Financial a) Increase Financial profit
c) Main ; Supplementary b) Decrease financial profit
d) Supplementary; Main c) Decrease costing profit
23. Sundry incomes included in financial d) Increase costing profit
accounts are __________________ in 31. If profit as per both set of books i.e.
Reconciliation Statement, while preparing financial and cost accounts is same and
it from cost accounts profit or loss. equal there is no need to make
a) Added b) Subtracted reconciliation statement.
c) Not Treated a) True b) False
d) None of the above c) Partly True
24. The need for reconciliation of profit as cost d) None of the above
and financial accounts arises: __________ 32. The results of Cost and Financial Accounts
a) For checking arithmetical accuracy of are always equal.
financial accounts a) True b) False
b) For ensuring reliability of cost c) Either of (a) or (b)
accounts d) None of the above

104
33. The profit of financial accounts is always
written in the beginning in Reconciliation
Statement.
a) True b) False
c) Either of (a) or (b)
d) None of the above
34. The preparation of Cost Reconciliation
Statement is necessary for a
manufacturing concern.
a) True b) False
c) Either of (a) or (b)
d) None of the above
35. Reconciliation Statement can be prepared
in account form.
a) True b) False
c) Either of (a) or (b)
d) None of the above
36. Write-off of fictitious assets is deducted in
Reconcilliation Statement, while preparing
it from cost accounts profit or loss.
a) True b) False
c) Either of (a) or (b)
d) None of the above

ANSWERS

1. d 2. d 3. c
4. b 5. a 6. b
7. a 8. b 9. b
10. a 11. c 12. a
13. b 14. a 15. b
16. a 17. c 18. b
19. b 20. d 21. d
22. a 23. a 24. b
25. d 26. b 27. b
28. d 29. c 30. c
31. b 32. b 33. b
34. b 35. a 36. a

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 CHAPTER

13

Meaning of Contract Costing

Contract Costing is that form of specific order costing under which each contract is treated as cost
unit and costs are accumulated and ascertained separately for each contract.

Basic Features of Contract Costing

(a) Each contract is treated as cost unit
(b) All costs are accumulated and ascertained for each contract.
(c) A separate Contract Account is prepared for each contract and is assigned a certain number by
which the contract is identified.
(d) Work on contracts is usually executed at the site of the contract.
(e) Direct costs usually constitute a major portion of the total cost of the contract.
(f) Indirect costs usually constitute a small portion of the total cost of the contract.
(g) The numbers of contracts undertaken by a contractor at a time is not usually very large.

In which Industries Contract Costing is applied

Contract Costing is applied in-
(a) Industries engaged in the construction of building, roads, bridges or other construction work
(b) Industries undertaking engineering projects.

Number of Parties involved in a Contract

There are two parties involved in a contract viz.
(a) The contractor-the person who undertakes the contract, and
(b) The Contracteethe person who assigns the contract.

DISTINCTION BETWEEN JOB COSTING AND CONTRACT COSTING

Job costing differs from Contract costing in the following respects:

Basis of Distinction Job Costing Contract Costing

1) Cost Unit Each job is treated as a cost unit. Each contract is treated as a cost
unit.
2) Execution of Job work is executed in factory Contract work is executed at the
work premises. site of contract.
3) Indirect Costs Indirect costs are higher that those Indirect costs are lower than
under contract costing. those under job costing.
4) Pricing Pricing is influenced by individual Pricing is influenced by the
condition and general policy of the specific clauses of the contract.
organization.
5) Size Size of a job is smaller than that of a Size of a contract is larger than
contract. that of a job.
6) number The numbers of jobs are usually The numbers of contracts
large. undertaken are usually small.

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PROCEDURE FOR CONTRACT COSTING
Separate Contract Account
A separate account is maintained for each contract to ascertain the cost and profit on each contract
and is assigned a separate contract number.

Accounting for Material Costs

Material Costs are accounted for as follows:

a) For materials purchased for a contract

Contract A/c is debited and Stores supplier’s A/c
Cash/bank A/c is credited.
b) For materials issued from stores Contract A/c is debited and Stores Control A/c is
credited.
c) For materials returned to stores Stores Control A/c is debited and Contract A/c is
credited.
d) For material transferred to other Transferee Contract A/c is debited and Transferor
contracts Contract A/c is credited on the basic of Materials
Transfer Note.
e) For sale of materials Cash/Bank A/c is debited and Contract A/c is
credited.
f) For abnormal loss of materials Costing Profit & Loss A/c is debited and Contract A/c
is credited.
g) For materials supplied by the Such materials should not be charged to Contract A/c.
Contractee without affecting the
contract price

Accounting for Labour Costs

Labour costs are accounted for as follows:

Wages paid to workers Such wages are charged directly to respective Contract A/c
engaged on a particular
contract
Wages paid to workers who Such wages are distributed over the contracts on the basic
move from one contract to of time spent by workers on each contract
another

Accounting for Direct Expenses

The Charge for the use of Plant and Machinery may be accounted for as follows:
Where a plant is specifically The Contract A/c is debited with the cost of the plant at the time
purchased for the contract of purchase and is credited with the depreciated value of the
plant at the end of accounting period.
Where a plant is issued from The Contract a/c is debited with the amount of depreciation for
stores for a short period the period of use.

Where a plant is taken on The Contract A/c is debited with the amount of hire charges.
time.
Accounting for indirect Expenses or Overheads
Indirect expenses or Overheads (such as expenses of Engineers, Surveyors, Supervisors, Stock-
keepers, and Administration) are distributed over different contract on some suitable basis like
percentage of material cost, percentage of labour cost, percentage of prime cost, per labour hour
etc.

107
Accounting for Sub-Contract Costs
Sub-contract costs are also debited to respective Contract Account.

Accounting for Extra Work

The cost of extra work should be debited to Contract Account and the amount payable for the extra
work by the Contractee should be address to the contract price. If extra work is substantial, it is
better to treat it as a separate contract.

WORK CERTIFIED

Meaning of Work Certified

Work Certified is that portion of the work completed which has been certified approved by the
contractee’s architect or surveyor. It is valued is terms of contract price.

Accounting Treatment of Work Certified

The Value of work certified is debited to Contractee’s Account or Work-in-progress Account and is
credited to the Contract Account.
Its value is transferred to the debit of Contract Account at the beginning of the next accounting
period.

Computation of Value of Work Certified

The value of work certified is calculated as follows:
Value of Work Certified = Contract Price × Work Certified as % of Contract Price
OR

Cash Received
=
Cash received as % of Work Certified

CLASSROOM PRACTICE – LETS PLAY TOGETHER

Que 1.
[Calculation of Value of Work Certified]
Calculate the value of Work Certified in each of the following cases:
(a) Contract Price ` 10,00,000, Work Certified 60%
(b) Cash received ` 4, 80,000 being 80% of Work Certified.

Solution:
(a) Value of Work Certified = Contract price × Work Certified as % of Contract Price
= ` 10, 00,000 × 60% = ` 6, 00,000
Cash received Rs .4,80,000
(b) Value of Work Certified = = = ` 6,00,000
Cash as % of Work Certified 80%

RETENTION MONEY

Meaning of Retention Money

Retention Money is that portion of value of work certified which is retained by the Contractee as
security for any defective work which may be discovered later with in the guarantee period.

Purpose of Retention Money

Its purpose is to provide a safeguard against the risk

108
When is Retention Monet Paid

Retention Money is paid when it is ensured that there is no fault in the work carried out by the
contractor.

Computation of Retention Money

It is calculated as follows:
Retention Money = Value of Work Certified – Cash Received

CASH RECEIVED

Meaning of Cash Received

Cash received is that portion of the value of work certified which is paid by the Contractee. It is
usually expressed as percentage of Work Certified.

Computation of Cash Received.

Cash received is calculated as follows:
Cash received = Value of Work Certified – Retention money
OR
= Value of Work Certified× Cash Received as % of Work Certified
OR
= Contract Price × % of Work Certified × % of Cash Received

Que 2.
Calculate the amount of payment received from Contractee in each of the following cases.
(a) Work certified ` 3, 00,000, Payment received from Contractee 80%.
(b) Contact price ` 5, 00,000; work certified 60%, payment received from Contractee 80%.

Solution:
(a) Payment received from Contractee
= Work certified × % of cash received
= ` 3, 00,000 × 80% = ` 2, 40,000

(b) Payment received from Contractee

= ` 5, 00,000 × 60% × 80% = ` 2, 40,000

WORK UNCERTIFIED

Meaning of Work Uncertified

Work uncertified is that portion of the work completed which has not been certified approved by
the contractee’s architect or survey or it is valued at cost.

Accounting Treatment of Work Uncertified

The cost of work uncertified is debited to work-in-progress Account and its credited to Contract
Account. Its cost is transferred to the debit of Contract Account at the beginning of the next
accounting period.

Computation of Work Uncertified

The cost of Work Uncertified is calculated as follows:
Cost of Work Uncertified
= Total Cost incurred till date – Cost of Work Certified

109
 OR
% of Work Uncertified
= Total Cost incurred till date× % of Total Work done till date

Que 3.
[Calculation of Cost of Work Uncertified]
Calculate the Cost of Work Uncertified in each of the following alternative cases.
(a) Total Costs incurred to date ` 1, 20,000, Cost of Work Certified ` 1, 00,000.
(b) Total Costs incurred to date `1, 20,000 to complete 60% of the contract work. However,
architect gave certificate only for 50% of the contract price.

Solution:
(a) Cost of Work Uncertified
= Total Costs incurred to date - Cost of Work Certified
= ` 1, 20,000 - ` 1, 00,000 = ` 20,000

(b) Cost of Work Uncertified

% of Work Uncertified
= × Total Costs incurred till date
% of Total Work done till date

60% − 50%
= ×` 1, 20,000 = ` 20,000
60%

NOTIONAL PROFIT

Meaning of Notional Profit

Notional Profit is the difference between the value of work- in – progress certified and the cost of
work-in-progress certified.

Computation of Notional Profit

Notional Profit is computed as follows:

Notional Profit =ValueofWorkCertified – CostofWorkCertified

OR
=ValueofWorkCertified – (TotalCostincurredtilldate – CostofWorkUncertified)

Que 4.
Calculate Notional Profit in each of the following alternative cases:
(a) Value of Work Certified ` 2,50,000; Cost of Work Certified `1,00,000
(b) Value of Work Certified ` 2, 50,000; Cost of Work Uncertified ` 20,000; Total Cost incurred
till date ` 1, 20,000.

Solution:-
(a) Notional Profit

= Value of Work Certified - Cost of Work Certified

= ` 2, 50,000 - ` 1, 00,000 = ` 1, 50,000

(b) Notional Profit

110
= Value of Work Certified - (Total Cost incurred till date - Cost of Work Uncertified)
= `2, 50,000 - (`1, 20,000 - `20,000) = ` 1, 50,000

111
HOW TO ACCOUNT FOR PROFIT ON INCOMPLETE CONTRACTS?

Argument in favour of ignoring profit in incomplete Contracts

Those who favour ignoring the profits on incomplete contracts till completion argue that true
profits cannot be ascertained till completion because some unforeseen losses may arise due to risk
and uncertainty during the remaining period of execution of contract, and may reduce or event or
even wipe of the expected profits.

Argument against ignoring profit on Incomplete Contracts

Those who do not favour ignoring the profits on incomplete contracts till completion argue that
there shall be wide fluctuations of profits from year as the accounts may show abnormally low
profits in the year in which larger number of contracts remain incomplete and may show
abnormally high profits in the year in which large number of contracts is completed.

Consensus
Now, the consensus is to take credit for profit on incomplete contracts on the basic of stage of
completion of the contract activity and after making adequate provision for unknown
contingencies.

Principles to be followed while taking credit for Profit on Incomplete Contract

There are no hard and fast rules as to how much portion of profit on incompletion contract should
be credited to Profit & Loss Account. However, the following principles may be followed:

Principles to be followed while taking credit for profit on Incomplete Contract

1. The costs incurred upto date should be clearly identified.
2. The stage of contract performance completed should be reasonably estimated.
3. The costs to complete the contract should be reasonably estimated.
4. The total contract revenues to be received should be reliably estimated.
5. The work certified should be valued in terms of contract price and its value should be treated
as contract revenue for the accounting period.
6. The uncertified work should be valued at the cost and should be treated like closing inventory
at the end of accounting period.
7. The national profit on incomplete contract should be estimated as under:
National Profit = Value of Work Certified + Cost of Uncertified Work
8. The amount of profit to be credited to Profit and Loss Account can be calculated as under:

Statement showing the amount of Profit to be credited to Profit & Loss Account

Value of Work Certified……… Amount of Profit to be credited to Profit and Loss

If less than 25% of the Contract
Price
If equal to or more than 25% but
less than 50% of the Contract
Price
If equal to or more than 50% but
less than 90% of the Contract
Price
Account
No profit is taken into account. The entire amount is treated
as reserve.
𝟏 Cash Received
× Notional Profit ×
𝟑 Work Certified
𝟐 Cash Received
× Notional Profit ×
𝟑 Work Certified

112
If equal to or more than 90% of The amount of profit to be credited to Profit & Loss A/c
the Contract Price may be ascertained by adopting any of the following
formula:
Cash Received
(i) Estimated Total Profit ×
Contract Pric e
Cost of Work to date
(ii) Estimated Total Profit ×
Estimated Total cost
Cash Received
×
Work Certified

9. Provision for Foreseeable Losses – When current estimates of total contract costs and revenues
indicate a loss, provision should be made for the entire loss on the contract irrespective of the
amount of work done and the method of accounting followed.

COST PLUS CONTRACT

Meaning of Cost plus Contract

Cost plus contract refers to that contract under which the contract price is ascertained by adding a
fixed percentage of profit to the cost of the contract.

Cases where Cost plus Contracts are entered

This type of contract is entered in those cases where it is not possible to estimate the contract cost
in advance with a reasonable degree of accuracy due to unstable conditions of materials, labour
etc.
Governments and Semi-Governments usually prefer to assign contracts on cost plus basis.

Advantages Disadvantages
1. He is assured of a fixed percentage of 1. He is deprived of market advantages which
profit. could have occurred due to favourable market
2. He is protected against the rise in the costs conditions.
of materials, labour etc. 2. Contractee may object to cost ascertainment.
3. He does not get any benefit by reducing costs.

Advantages and Disadvantages from the point of view of Contractee.

Advantages Disadvantages
1. He can ensure himself about the cost of the 1. The contractor may not have any in
contract as he is empowered to examine document to reduce costs.
the books and documents of the contractor 2. He cannot ascertain the final price to be paid.
to ascertain the accuracy of the cost of 3. He has to bear the cost of inefficiencies on
contract. part of contractor.
2. He gets the benefits of a decline in the 4. He cannot prepare purchase budget.
prices of materials, labour etc. 5. He has to pay not only the resultant high cost
3. He is ensured that the price to be paid will but also the resultant high profit.
depend on cost rather than on arbitrary
commitment.

ESCALATION CLAUSE AND DE-ESCALATION CLAUSE

Meaning of Escalation Clause

Escalation clause in a contract provides that if during the period of execution of a contract, the
prices of materials, rates of labour etc. rise beyond a specified limit, the contract price will be
increased by specified rate or amount.

113
How to calculate Escalation Claim
Escalation claim so far as rates are concerned may be calculated as follows:
For Material = Standard Quantity × (Actual Price - Standard Price)
For Labour = Standard Labour × (Actual Rate - Standard Rate)

What type of Increase in costs is not covered by Escalation Clause

Escalation clause does not cover that part of increase in costs which is caused due to inefficiency
or wrong estimation.

Meaning of De-escalation Clause

Conversely, de-escalation clause may also be provided for the downward adjustment of the
contract price in case the prices of materials, rates of labour etc. fall beyond a specified limit.

Que 5.
Mr. Bharat undertook a contract No. 501 for `. 5, 00,000 on 1st July 2014. On 31st March 2015.
When the accounts were closed, the following information was available.

Materials issued to site `55,000 Wages paid ` 18,000

Direct expenses paid `6,000 General Overheads 25% of
Wages
Site office costs `10,000 Costs of Sub-contracts ` 15,000
Plant `2,00,000 Wages accrued at the end ` 2,000
Direct expenses prepaid at the `1 ,000 Materials at site at the end ` 5,000
end
Cost of work uncertified `20,000

Cash received ` 2, 00,000 being 80% of work certified

The plant was installed on the respective date of the contract and depreciation is to be provided at
10% p.a.

Required: Prepare Contract Account, Contractee's Account and show the relevant items relating
to Contract in the Contractor's Balance Sheet.

Solution: -
Contract No. 501 Account
Dr. for the year ended 31st March 2015 Cr.
Particulars ` Particulars `
To Materials 55,000 By Materials at site 5,000
To Wages: By Cost of contract till date c/d 1,20,000
Paid 18,000
Add: Outstanding 2,000 20,000
To Direct Expenses
Paid 6,000
Less: Prepaid 1,000 5,000
To General Overheads
[25% of ` 20,000] 5,000
To Site Office costs 10,000
To Costs of sub-contracts 15,000

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To Depreciation on plant
10 9 15,000
[`2,00,000 × × ]
100 12
1,25,000 1,25,000
To Cost of Contract b/d 1,20,000 By Work-in-progress:
To Notional Profit c/d 1,50,000 Value of work certified 2,50,000
Cost of Work uncertified 20,000
2,70,000 2,70,000
To Profit & Loss A/c [Refer to W. 80,000 By Notional profit b/d 1,50,000
Note]
To work-in-progress A/c 70,000
[Reserve]
1,50,000 1,50,000

Working Note: Calculation of Profit to be credited to P & L A/c

Cash received Rs 2,00,000

(i). Work certified = = = `2,50,000
% of work certified 80%

Work certified Rs 2,50,000

(ii). Degree of completion of contract = × 100 = × 100 = 50%
Contract Price Rs .5,00,000

2 Cash Received
(iii). Profit to be Cr. To P & L A/c = × notional profit ×
3 Work certified
2 Rs 2,00,000
= ×`1, 50,000× = ` 80,000
3 Rs .2,50,000

Dr. Contractee’s Account Cr.

Particulars ` Particulars `
To Balance c/d 2,00,000 By Bank A/c 2,00,000

An Extract of Balance Sheet as at 31st March 2006

Liabilities ` Assets `
Plant at site [`2,00,000 -
Wages accrued 2,000 1,85,000
`15,000]
Profit & Loss A/c 80,000 Materials at site 5,000
Prepaid Direct Expenses 1,000
Work-in-Progress:
Value of work certified 2,50,000
Cost of work uncertified 20,000 2,70,000
Less: Reserve 70,000

2,00,000
Less: Payment received from
2,00,000
Contractee

Que 6.

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A contract is estimated to be 80% complete in its first year of construction as certified. The
Contractee pays 75% of value of work certified, as and when certified and makes the final payment
on the completion of contract. Following information is available for the first year:

`
Cost of work-in-progress uncertified 8,000
Profit transferred to Profit & Loss A/c at the end of year 1 on incomplete contract 60,000
Cost of work to date 88,000

Calculate the value of work- in-progress certified and amount of contract price.

Solution:
As the contract is 80% complete, so 2/3rd of the notional profit on cash basis has been
transferred to Profit & Loss A/c in the first year of contract.
2
∴ Amount transferred to Profit & Loss A/c = × Notional Profit × % of cost received
3

2 75
= ×Notional Profit ×
3 100

60,000 ×3 ×100
Or, Notional Profit =
2×75
=` 1, 20,000
Computation of Value of Work Certified
Cost of work to date = ` 88, 000
Rs .1,20,000
Add: Notional Profit =
Rs .2,08,000

Less: Cost of Work Uncertified = (8,000)

Value of Work Certified = ` 2, 00,000
Since the Value of Work Certified is 8%0 of the Contract Price, therefore

Value of Work Certified

Contract Price =
80%
Rs .2,00,000
= = `2, 50,000
80%

Que 7.
Deluxe Limited undertook a contract for `5, 00,000 on 1st July, 2011. On 30th June, 2012, when the
accounts were closed, the following details about the contract were gathered:
Materials Purchased `1,00,000, Wages Paid ` 45,000, General Expenses `10,000, Plant Purchased
`50,000, Materials on Hand 30.06.2012 `25,000, Wages Accrued 30.06.2012 Rs 5,000, Work
Certified `2,00,000, Cash Received `1, 50,000, Work Uncertified ` 5,000, Depreciation of Plant
`5,000.

The above contract contained an escalator clause which read as follows: "In the event of prices of
materials and rates of wages increase by more than 5%, the contract price would be increased
accordingly by 25% of the rise in the cost of materials and wages beyond 5% in each case."

116
It was found that since the date of signing, the agreement the prices of materials and wages rates
increased by 25%. The value of the work certified does not take into account the effect of the
above clause.
Required: Prepare the Contract Account

Solution:-
Dr. Contract Account for the year ending on 30th June 2012 Cr.
Particulars ` Particulars `
To Materials Consumed: By Cost of Contract c/d 1,40,000
Purchased 1,00,000
Less: Closing Stock 25,000 75,000
To Wages Paid 45,000
Add: Acurred5,000 50,000
To General Expenses 10,000
To Depreciation on paid 5,000
1,40,000 1,40,000
To Cost of Contract b/d 1,40,000 By Work-in-progress
To Notional Profit c/d 80,000 Value of Work Certified 2,00,000
Cost of Work uncertified 15,000
Contract Escalation 5,000
2,20,000 2,20,000
To Profit & Loss A/c 20,000 By Notional profit b/d 80,000
80,000 80,000

Working Notes:

(i). Statement showing the Calculation of Escalation Claim

Before Increase @ 25% Increase @ 20% Escalation Claim
Materials 100 20 25
` 75,000× = ` 60,000 60,000 × = ` 12,000 12,000 × = ` 3,000
125 100 1000
Wages 100 20 25
` 50,000 × = ` 40,000 40,000 × = `8,000 8,000 × = ` 2,000
125 100 100
` 5,000

(ii). Calculation of Profit to be credited to Profit & Loss Account

1 Cash Received
=3× Notional Profit ×
Work certified

1 1,50,000
= 3×` 80,000 × = ` 20,000
Rs 2,00,000

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 PAST EXAMINATION QUESTION

Multiple Choice Questions

1. For contracts which are very near to completion, the profit is ascertained by the formula

Work certified
(a) Estimated profit ×
Contract price

Work certified Cash received

(b) Estimated profit × ×
Contract price work certified

Work certified Cost of work

(c) Estimated profit × ×
conteacr price Total Cost to date

(d) Any of the above in the absence of specific instruction.

Ans. (d) Any of the above in the absence of specific instruction.

2. When a contract is not complete at the end of the year, profit on in-complete contract -
(a) Is not considered
(b) Is considered for inclusion in the profit for the year.
(c) Is considered for the inclusion of a part of the year
(d) None of the above.

Ans. (b) is considered for inclusion in the profit for the year.

Fill in the Blanks

1. No profit on in completed contracts is taken to profit and loss account, if the value of work-in
progress is less than 1/4th of contract price.
2. Escalation Clause in a contract provides that contract price would be suitably enhanced on
the happening of a specified contingency.
3. Contract in which reimbursement is based on actual allowable cost plus a fixed fee is called
Costs plus Contracts.
4. In contract costing, the cost unit is a contract.

True and False/Correct and Incorrect

In cost plus contracts, the contractor runs a risk of incurring a loss.
Ans. Incorrect. Cost plus contracts are the contracts in which the contractor is reimbursed not only
the costs incurred by him in executing the contract, but is also, remunerated a stipulated project
profit for sending his services. This stipulated profit may either be fixed amount decided in
advance or determined subsequently with reference to a percentage of costs to be incurred by
him.

Que 8.
Cost plus contracts
Ans. Cost plus contracts are the contracts in which the contractor is reimbursed not only the costs
incurred by him in executing the contract, but is also, remunerated a stipulated profit for
rendering his services. This stipulated profit may either be fixed amount decided in advance or
determined subsequently with reference to a percentage of costs to be incurred by him. Such types
of contracts are entered into when it is not possible to estimate the Contract Cost with reasonable
accuracy due to unstable condition of material, labour services, etc.

118
Cost plus contracts are useful for both the contractor and Contractee. The former is assured of
recovering all his costs and the latter is satisfied with the quality of work since, the contractor does
not need to economize, especially in terms of the costs incurred.

Que 9.
State the merits of 'costs plus contract'.
Ans. Cost plus contracts are the contracts in which the contractor is reimbursed not only the costs
incurred by him in executing the contract, but is also, remunerated a stipulated profit for
rendering his services. This stipulated profit may either be fixed amount decided in advance or
determined subsequently with reference to a percentage of costs to be incurred by him. Such types
of contracts are entered into when it is not possible to estimate the Contract Cost with reasonable
accuracy due to unstable condition of material, labour services, etc.
Cost plus contracts are useful for both the contractor and Contractee. The former is assured of
recovering all his costs and the latter is satisfied with the quality of work since the contractor does
not need to economize, especially in terms of the costs incurred.

The merits of Cost plus Contracts are:-

(i). The contractor is assured of a fixed percentage of profit and has no risk of incurring any loss
on the contract.
(ii). It is useful when the work to be done is not definitely fixed at the time of entering into the
contract and making an estimate.
(iii). Contractee has the right to examine the books of the contractor to ascertain the correctness
of the cost of the contract.
(iv). Contractee is assured of the quality of the work.

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 TRAIN UR BRAIN
1. Contract costing is also known as – b)
1 Cash Received
× Notional Profit × Work
3 Certified
a) Terminal Costing b) Job Costing 2 Cash Received
c) Procession costing d) Batch costing c) × Notional Profit × Work
3 Certified
2. A separate account is maintained by the 1 Cash Received
d) 3 × Notional Profit × Work Certified
contractor for each –
10. When work certified is 50% or more, but
a) Sales b) Purchase
less than 90% of the total contract price,
c) Production d) Contract
the amount to be transferred to the costing
3. There are _________ parties to ac contract.
Profit and Loss Account is –
a) One b) Two 1 Cash Received
c) Three d) Many a) 3 × Notional Profit × Work Certified
4. In contract costing all direct costs are b)
1 Cash Received
× Notional Profit × Work
3 Certified
debited to – 2 Cash Received
a) Contract Account c) × Notional Profit × Work
3 Certified
2 Cash Received
b) Trading Account d) 3 × Notional Profit × Work Certified
c) Profit and Loss Account 11. In contract costing unit of cost is –
d) None of the above a) Contract b) Labour
5. A certificate specifying the value of work
c) Material d) Overhead
completed is issued by a …… in contract 12. When cash ratio is 85%, then the retention
costing. money is –
a) Surveyor b) Inspector a) 15% b) 5%
c) Manager d) Auditor c) 10% d) 20%
6. The formula for calculating National Profit 13.When 45% of the contract price in certified
is –
as work in progress, the profit to be
a) Notional Profit = (Value of work credited to Profit and Loss Account will be
certified + Cost of work uncertified) – equal to –
Cost of work till 1 2
b) Notional Profit = (Value of work a) 3 b) 3
4
certified – Cost of work uncertified) + c) 3
cost of work till date d) None of the above
c) Notional Profit = (Value of work 14.Cost plus Contract is usually entered into
certified + cost of work uncertified) + those cases where –
cost of work till date a) The contractor wants to earn higher
d) Notional Profit = (Value of work amount of profit
certified – cost of work uncertified) – b) The cost can be easily estimated
cost of work till c) It is not possible to compute the cost in
7. ……. aims at safeguarding the interest of advance with a reasonable degree of
contractor against, unforeseen rise in cost. accuracy
a) Escalation Clause d) None of the above
b) De-escalation clause 15.Out of the following, contract costing is
c) Reserve Clause applicable for –
d) All of the above a) Hospitals b) Telephones
8. When work certified is ……. nothing is c) Road Construction d) Automobiles
credited to Costing Profit and Loss Account. 16.If the amount of work certified is less than
a) More than 25% b) Less than 35% 30% of the contract, profit should be taken
c) Less than 25% d) More than 35% to Profit and Loss Account.
9. When work certified is 25% or more, but a) True b) False
less than 50% of the total contract price, c) Partly True d) Partly False
the amount to be transferred to the costing 17.Contract costing is a specialized system of
Profit and Loss Account is – job costing applied to –
2 Cash Received
a) 3 × Notional Profit × Work Certified a) Long-term contracts

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 b) Job contracts
c) Short-term contracts 26. Total costs incurred to date ` 1,20,000, Cost
d) Medium – term contracts
18.Contract costing is not applicable for – of work Certified ` 1,00,000
a) Ship buildings a) ` 20,000 b) ` 30,000
b) Civil construction
c) Automobiles c) ` 40,000 d) ` 10,000
d) Construction of Bridges 27.Total Costs incurred to date ` 1,20,000 to
19. The ………. of value of work certified and complete 60% of the contract work.
uncertified appearing in the Contract However, architect gave certified only for
account is called work in progress. 50% of the contract price.
a) Difference b) Sum
c) Ratio a) ` 10,000 b) ` 40,000
d) None of the above c) ` 30,000 d) ` 20,000
20.The amount of work in progress include –
a) The value of work certified Following amounts have been spent on a
b) The value of work uncertified contract still unfinished on 31st December,
c) Both (a) and (b) 1994:
d) None of the above
21.……… is appointed to periodically visit the Materials ` 80,000
site for inspection of the work completed. Wages ` 70,000
a) Auditor b) Cost accountant
Direct Charges ` 50,000
c) Contractor d) Surveyor
22.In fixed price contract with …… the ` 2,00,000 have been received from the
contractor can claim for increase can claim contractee being 80% of the work certified.
for increase in prices of inputs to the
Uncertified work in progress being `
agreed extent.
a) Cash Received b) Cost plus 10,000. Total value of the Contract is `
c) Escalation clause d) Government 4,00,000.
23.The price for executing a contract is known
as the – 28.Calculate Notional profit
a) Cash Price b) Contract Price a) 70000 b) 60000
c) Revenue price d) All of the above c) 50000 d) 80000
29.Calculate profit to be transfer to Profit and
Calculate the amount of payment received Loss Account
from contractee in each of the following a) 32000 b) 40000
cases. c) 42000 d) 50000
30.Calculate profit to be transfer to Profit and
24. Work certified ` 3,00,000, Payment Loss Account
received from contractee 80%. a) 32000 b) 40000
c) 28000 d) 50000
a) ` 1,40,000 b) ` 2,40,000
c) ` 3,40,000 d) ` 1,20,000 Vijay Construction Limited took a contract
in 199 for road construction. The contract
25.Contract price ` 5,00,000, work certified
price was ` 10,00,000 and its estimated cost
60%, payment received from contractee
80%. of completion would be ` 9,20,000. At the
a) ` 2,60,000 b) ` 1,40,000 end of 1994, the company had received `
c) ` 2,40,000 d) ` 3,50,000 3,60,000 representing 90 percent of work
certified. Work not yet certified was `
Calculate the Cost of Work Uncertified in 10,000.
each of the following alternative cases.

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 Expenditure incurred on the contract 34.Calculate the amount to be credited due to
during 1994 was as follows: escalation clause
 Materials ` 50,000; Labour ` 3,00,000, a) 6000 b) 5000
c) 4000 d) 8000
Plant ` 20,000. 35.Calculate Notional profit
 Materials costing ` 5,000 were damaged a) 70000 b) 60000
c) 50000 d) 80000
and had to be disposed of for ` 1,000. 36.Calculate profit to be transfer to Profit and
 Plant is considered; having depreciated Loss Account
by 25 per cent. a) 20000 b) 40000
c) 18000 d) 50000
31.Calculate Notional profit 37.Calculate profit to be transfer to Reserve
a) 70000 b) 60000 a) 32000 b) 42000
c) 50000 d) 80000 c) 60000 d) 50000
32.Calculate profit to be transfer to profit and
Loss Account Contract Price ` 10,00,000, work certified
a) 32000 b) 40000
0%, payment received from contractee
c) 18000 d) 50000
80%.
33.Calculate profit to be transfer to Reserve
38.Calculate work certified
a) 32000 b) 42000
c) 28000 d) 50000 a) ` 6,00,000 b) ` 1,40,000
b) ` 2,40,000 d) ` 3,50,000
ABC Limited undertook a contract for ` 39.Calculate cash received
5,00,000 on 1st July, 1994 . On 30th June a) ` 6,00,000 b) ` 1,40,000
1995 when the accounts were closed, the
following details about the contract were b) ` 4,80,000 d) ` 3,50,000
gathered: 40.` 2,00,000 have been received from the
` contractee being 80% of the work certified:
Materials purchased 1,00,000 a) ` 6,00,000 b) ` 1,40,000
Wages paid 45,000
General Expenses 10,000 b) ` 4,80,000 d) ` 2,50,000
Plant Purchased 50,000
Materials on hand 30.6.95 25,000 Contract price ` 20,00,000, work certified
Wages Accrued 30.6.95 5,000 60%, payment received from contractee
Work Certified 2,00,000 80%.
Cash Received 1,50,000
Work Uncertified 15,000 41.Calculate work certified
Depreciation oin Plant 5,000
a) ` 6,00,000 b) ` 1,40,000
The above contract contained an escalation c) ` 12,00,000 d) ` 3,50,000
clause which read as follows: 42.Calculate cash received
“In the event of price of materials and rates
of wages increase by more than 5% the a) ` 9,60,000 b) ` 1,40,000
contract price will be increased accordingly c) ` 4,80,000 d) ` 3,50,000
by 25% of the rise in the cost of materials 43.Calculate retention money
and wages beyond 5% in each case.” It was
found that since the date of signing the a) ` 6,00,000 b) ` 1,40,000
agreement the prices of materials and wage c) ` 2,40,000 d) ` 3,50,000
rates increased by 25%. The value of work
certified does not take into account the The Contractors own a plant which
effect of the above clause.
originally cost ` 20 lakhs has been

122
continuously in use in this contract c) Cost of work uncompleted
throughout the year. The residual value of d) cost of work certified
the plant after 5 years of life is expected to 52. Contract account is prepared by:
be ` 5 lakhs. Straight-line method of a) Contractor b) Contractee
c) Both (a) & (b) d) None of these
depreciation is in use.
53. If cash received by contractor is ` 1,20,000
44.Calculate the amount of depreciation after and as per the contract, the contractee pays
one year 80% of the work certified then what is the
a) ` 6,00,000 b) ` 1,40,000 amount of work certified?
a) ` 1,20,000 b) J 96,000
c) ` 2,40,000 d) ` 3,00,000
45.Calculate the amount of plant at site after c) ` 1,50,000 d) ` 85,000
one year 54. _______________ costing is applied for
a) ` 16,00,000 b) ` 14,00,000 engineering projects.
a) Job Costing b) Batch costing
b) ` 17,00,000 d) ` 23,00,000 c) Contract costing
d) Operating costing
The value of the work certified was ` 55. Contract costing is a specialized system of
_____________ costing.
14,40,000 of which ` 10,80,000 had been a) Job b) Batch
received work finished but uncertified was c) Process d) Operating
valued at ` 40,000. The plant on the site on 56. Any materials returned to stores or lying of
the unused or material transfers to another
31st December, 1994 was valued at ` 80,000. contract site are __________________ to the
The contract price was ` 24,00,000. contract Account.
a) Debited b) Credited
46.Calculate Notional Profit c) Either of the above d) No treatment
a) 70000 b) 144000 57. Contract price is not found:
c) 50000 d) 80000 a) In case of cost plus contracts
47.Calculate profit to be transfer to Profit and b) In case of escalation clause
Loss Account c) In case of fixed price contracts
a) 72000 b) 40000 d) None of the above
c) 18000 d) 50000 58. Contract costing is not used in one of the
48.Calculate profit to be transfer to Reserve following industries:
a) 32000 b) 72000 a) Ship Buildings b) Automobiles
c) 60000 d) 50000 c) Civil construction
49. The loss incurred on an incomplete d) Construction of bridges
contract is transferred to _______________ 59. Contract costing is a specialized system of
account. the Costing and is applied to ______________
a) Costing profit and loss account contracts.
b) Profit and loss account a) Short Term b) Medium Term
c) Trading Account c) Long Term
d) Deferred to next year d) Continuous Process
50. Contract costing is used in ______________ 60. Cost plus contracts are based on ____________
a) Airplane industry costing technique in which total allocation
b) Automobile Industry of costs will be taken into consideration.
c) Building Construction a) Contract b) Marginal
d) None of these c) Absorption d) Specific order
51. The amount of work-in-progress consist of:
a) Cost of work certified and uncertified ANSWERS
b) Value of work certified and cost of work
uncertified 1. a 2. d 3. b
4. a 5. a 6. a

123
7. a 8. c 9. b
10. c 11. a 12. a
13. a 14. c 15. c
16. b 17. a 18. c
19. b 20. c 21. d
22. c 23. b 24. b
25. c 26. a 27. d
28. b 29. a 30. c
31. b 32. c 33. b
34. b 35. d 36. a
37. c 38. a 39. c
40. d 41. c 42. a
43. c 44. d 45. c
46. b 47. a 48. b
49. b 50. c 51. b
52. a 53. c 54. c
55. a 56. b 57. a
58. b 59. c 60. c

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 CHAPTER

14

Meaning of certain important terms

1. Joint Products
Joint Products are:
(a) Two or more products
(b) Produced from the same process or operation
(c) Considered to be of relatively equal importance

Example: In refining Crude Petroleum, gasoline, fuel oil. Lubricants, paraffin, coal tar, asphalt and
kerosene are all produced. These are known as joint products.
2. Co-Products
Co-products are:
(a) Two or more products
(b) Considered to be of relatively equal importance
(c) Belonging to the same line of activity, but arising from different processes or operations.

Example: Rice and wheat are agricultural produce, but they arise from different cultivation
processes.
3. By-Products
By-products are defined as "products recovered from material discarded in a main process, or
from the production of some major products, where the material value is to be considered at the
time of severance from the main product."

By-product refers to incidental waste, arising during the course of manufacture, which has a
commercial name and value. It refers to secondary or subsidiary product incidentally arising
during the manufacturing process.

Examples: Molasses arising in the manufacture of sugar, Tar, Ammonia and Benzole obtained on
carbonization of coal and Glycerin obtained in the manufacture of soap.

Treatment of By-product cost in Costing Accounting

1. When they are of small total value: If the amount realised from the sale of by-product is
small, it may be dealt in anyone of the following two ways:
(a) The sales value of the by-product may be credited to the Profit and Loss Account and no
credit be given in the cost accounts. The credit to the Profit and Loss Account here is
treated either as miscellaneous income or as additional sales revenue.

125
 (b) The sale proceeds of the by-product may be treated as deductions from the total costs.
The sale proceeds in fact should be deducted either from the production cost or from the
cost of sales.

2. When they are of considerable total value: In this case by-products may be regarded as joint
products. To determine exact cost of by-products the costs incurred upto the point of
separation, should be apportioned over by-products and joint products by using a logical basis.
In this case, the joint costs may be divided over joint products and byproducts by using
physical unit method (at the point of split off) or ultimate selling price (if sold).

3. When they require further processing: In this case, the net realisable value of the by-
product at the split-off point may be arrived at by subtracting the further processing cost from
the realisable value of by-products.
If the total sales value of by-products at split-off point is small, it may be treated as per the
provisions discussed under (1) above. If the amount realised from the sale of by- products is
considerable, it may be treated as discussed under (2) above.

Distinguish between Joint Products and By-Products.

Particulars Joint Products By-Products

Two or more products, separated in
the course of the same processing Products recovered from
1. Meaning
operation, considered as relatively materialdiscarded in a main process.
equally important.
2. Nature Intentionally manufactured. Incidentally arises during process.
3. Importance Comparatively higher Sale Value. Comparatively lower Sale Value.

Distinguish between Joint Products and Co-Products.

Particulars Joint Products Co-Products

Joint Products are produced Co-Products arise from different processes or
1. Process from the same process or operations, but belong to the same line of
operation. activity.
Co-Products may arise from - (a) common
Joint Products are produced
raw material (e.g. Chairs, Tables made from
2. Materials from common Raw Material
same wood), or (b) different raw material
only.
(e.g. Rice and Wheat).

4. Split Off Point

It refers to the stage or point of production, wherein common raw material gets split or identified
into two or more finished products. The split off point is significant in Joint Product Costing since
costs are classified and ascertained by reference to the Split off Point as:
(a) Common Costs - Pre-split off point and
(b) Specific Costs - post split off point.

Methods of Apportionment of Joint Costs

The usual methods of apportioning joint costs are as follows:

1. Average Unit Cost Method: Under this method, total process cost (upto the point of
separation) is divided by total units of joint products produced. On division average cost per

126
 unit of production is obtained. The effect of application of this method is that all joint products
will have uniform cost per unit.

2. Contribution Margin Method: Under this method joint costs are segregated into two parts -
variable and fixed. The variable costs are apportioned over the joint products on the basis of
units produced (average method) or physical quantities. If the products are further processed,
then all variable cost incurred be added to the variable cost determined earlier. Then
contribution is calculated by deducting variable cost from their respective sales values. The
fixed costs are then apportioned over the joint products on the basis of contribution ratios.

3. Reverse Cost Method: According to this method the joint cost are apportioned in the
proportion computed as follows for each joint product:
Estimated.final sales value of output - Estimated net operating profit - Estimating selling and
distribution expenses - Estimated office and administration expenses - Estimated further
processing costs.

4. Constant Gross Margin Percentage NRV Method: This method assumes that all the joint
products will earn the same rate of gross margin percentage. This percentage is computed by
computing the overall gross margin on all joint products as follows:

Estimated final sales value of output of all Joint products together - Estimated total joint
cost - Estimated total further processing cost

The share in joint cost is computed as follows:

Estimated final sales value of output of each joint product- Estimated gross profit on each joint
product- Estimated further processing cost of each joint product

This method however has a peculiar problem that a joint product having a high burden of
further processing cost may have a negative share in joint cost which implies that the other
joint products will bear the entire joint cost and also some of the further processing cost of this
joint product.

5. Market Value of output at split off point/ Market value of output at point of separation:
This method is used for apportioning joint costs to joint products upto the split off point. It is
difficult to apply if the market values of the products at the point of separation are not
available. The joint cost may be apportioned in the ratio of sales values of different joint
products.

6. Market Value after further Processing/ Final sales value of output method: Here the basis
of apportionment of joint costs is the total sales value of finished products at the further
processing. If some product is not further processed, its final sales value of output is the market
value at point of separation. However, the use of this method is unfair where further
processing costs after the point of separation are disproportionate or when all the joint
products are not subjected to further processing.

7. Net Realisable Value Method (NRV): Here joint costs is apportioned on the basis of net
realisable value of the joint products,
Net Realisable Value = Estimated final sales value of output
(-) Selling & distribution expenses, if any
(-) Further processing cost

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 CLASSROOM PRACTICE – LETS PLAY TOGETHER

Qus 1.
Naresh Manufacturing Co. produces the following products using 5,000 tons of Coal at a cost of `
15 per ton, into a common process: Coke - 3500 Tons, Tar -1200 Tons, Sulphate of Ammonia - 52
Tons, Benzol - 48 Tons. 200 tons of the material is lost in process as waste and air evaporation.
Labour and Overheads for the process are ` 15,000 and ` 6,000 respectively. Apportion joint costs
using physical units method among the products.

Solution: Total Joint Costs = Materials + Labour + OH = (5,000 tons × ` 15) + ` 15,000 + ` 6,000 = `
96,000

Sulphate of
Product Coke Tar Benzol Total
Ammonia
Quantity 3,500 tons 1,200 tons 52 tons 48 tons 4,800 tons
3,500 1,200 52 48
Joint Cost 4,800 ×`96 000 × 96 000 × `96,000 ×` 96,000
4,800 4,800 4,800
apportioned in `96,000
above ratio = ` 70,000 = ` 24,000 = ` 1,040 = ` 960

Qus 2.
In Mahesh Ltd, the cost of refining operations to the split off point during a period amounted to `
72,000 with the following production of products - First Grade: 300 units, Second Grade: 600 units,
Third Grade: 300 units.

You are required to apportion the Joint Cost - (1) On Average Unit Cost Method, (2) On Technical
Evaluation method with points 4, 3 and 2 for the three grades respectively. Also highlight the
anomaly, if any, in using the Average Unit Cost method.

Solution
First Second Third
Product Total
Grade Grade Grade
1. Number of units produced 300 units 600 units 300 units 1,200 units
2. Joint Cost apportioned in Average Unit
` 18,000 ` 36,000 ` 18,000 ` 72,000
Cost Method (Ratio 3 : 6 : 3)
3. Importance (given) 4 3 2
4. Importance × No. of units (1 × 3) 1,200 1,800 600 3,600
5. Joint Cost apportioned in Technical
` 24,000 ` 36,000 ` 12,000 `72,000
Evaluation Method (Ratio 12 : 18 : 6)

Note: The anomaly in Average Unit Cost Method of apportionment is that First and Third Grade
Product have the same cost assigned to them, just because output quantity is the same. This is
removed under Technical Evaluation Method.

Qus 3.
Apportion the Joint Cost using contribution margin method and obtain Profit and Loss for each of
the Joint Products, from the following data -
 Sales: Product A -100 kg at ` 60 per kg, and Product B -120 kg at ` 30 per kg.

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 Total Costs: Marginal Cost ` 4,400 and Fixed Cost ` 3,900

Solution: Note: Under the Contribution Margin Method, Variable Costs are apportioned using
physical quantities (since average unit cost or points are not given in the question). Fixed Costs are
apportioned on the ratio of Contribution, i.e. Sales Value Less Variable Costs.

Statement of Apportionment and Profits

Particulars Product A Product B Total

Sales 100 × 60 = 6,000 120 × 30 = 3,600 9,600
Less: Variable Costs in the ratio 100: 120 (2,000) (2,400) 4,400
Contribution = Sales Less Variable Costs 4,000 1,200 5,200
Fixed Costs in ratio of Contribution 40:
Less: (3,000) (900) 3,900
12
Profit = Contribution Less Fixed Costs 1,000 300 1,300

Qus 4.
Find out the cost of joint products A and B using contribution margin method from following data:
Sales
A : 100 Kg @ ` 60 per Kg
B : 120 Kg @ ` 30 per Kg
Joint costs
Marginal cost ` 4,400
Fixed cost ` 3,900

Solution: The marginal cost (variable cost) of ` 4,400 is apportioned over the joint products A and
B in the ratio of their physical quantity i.e 100 ; 120
Marginal cost for Product A :` 4,400 × 100/220 = ` 2,000
Marginal cost for Product B :` 4,400 × 120/220 = ` 2,400
The fixed cost of `3,900 is apportioned over the joint products A and B in the ratio of their
contribution margin i.e. 40 : 12 (Refer to working note)
Product A :` 3,900 × 40/52 = ` 3,000
Product B :` 3,900 × 12/52 = ` 900
Working Note: Computation of contribution margin ratio
Products Sales revenue (`) Marginal cost (`) Contribution (`)
A 6,000 2,000 4,000
B 3,600 2,400 1,200
Contribution ratio is 40:12

Qus 5.
ABC Ltd produces 7,250 kg of a main product X from one of its chemical processes, together with
350 kg by product Y and 270 Kg of by product Z. The total costs of the process are ` 1,46,375, and
the by products are sold for ` 2 and ` 2.50 respectively. The management wish to consider the
effect on unit costs of product X of two alternative methods of treating by product income.

Required:

129
Show the effect on the cost of main product X of each of two possible methods of treatment of by-
product income.
Solution:
Method I: Credit the by product income to process A/c
146375 − (350 × 2) − (270 × 2.5)
Cost Per Unit (kg).of main product X = = `20 per kg.
7250
Method II: Credit the by Product income to costing P & L A/c as Miscellaneous Income.
146375
Cost Per Kg. of main product = = ` 20.19 per kg.
7250
TRAIN UR BRAIN
1. Sugar Industry applies the …….method of 8. ________ does not take the quality of the
costing. product into consideration.
a) Joint Products and By Products a) Standard Cost Method
b) Job and Batch b) Normal Profit Method
c) Marginal c) Market Value Method
d) Operating d) Physical Quantity Method
2. Two or more products may be produced 9. Share of joint cost of each product under
simultaneously from a common set of Average Unit cost Method is calculated by
inputs through a single manufacturing –
process known as – a) Number of unit produced + Average
a) Main process b) Joint Process cost per unit
c) Standard Process b) Number of unit produced – Average
d) None of the above cost per unit
3. In the Oil industry, gasoline, fuel, oil, c) Number of unit produced × Average
lubricant, coal tar, asphalt, paraffin and cost per unit
kerosene are all produces from crude d) Number of unit produced ÷ Average
petroleum are known as – cost per unit
a) Main Products b) By Products 10. Each Joint Product has the same cost per
c) Joint Products d) All of the above unit till the split off point under –
4. The term co-product is also used in a) Survey Method
respect of – b) Average unit cost method
a) Main product b) Joint Product c) Market value method
c) By-Product d) Normal Profit Method
d) None of the above 11. A technical survey of production process
5. Joint products are the result of some and its associated costs is conducted under
common items of cost, these costs are –
known as - a) Survey Method
a) Prime cost b) Preventive cost b) Average Unit Cost Method
c) Direct costs d) Joint costs c) Market Value Method
6. The costs which incurred after the split off d) Normal Profit Method
point are known as – 12. _______ Method is also known as Points
a) Prime costs b) Preventive cost Value or Technical Evaluation or Weighted
c) Separable costs d) Joint Costs Output Method.
7. When joint products are capable of being a) Average Unit cost b) Normal Profit
measured in physical quantities, the c) Survey
method used for allocation of joint costs a) Direct Allocation
are known as – 13. _______ method is formulated on the lines of
a) Physical Quantities Method the concept of marginal or variable
b) Survey Method costing, where the costs are first allocated
c) Market Value method into fixed and variable costs.
d) Average Unit Cost Method a) Survey
b) Contribution margin

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 c) Average Unit Cost 20. _______ is a secondary or subsidiary product
d) Physical Quantities incidentally arising during the common
14. _______ method is used when the joint manufacturing process.
products are marketable at the split off a) Main Product b) Joint Product
point out their further processing costs are c) By Product d) All of the above
disproportionate. 21. Costs over by products can be apportioned
a) At the point of separation Method by ______ methods.
b) After future processing a) Two b) Three
c) Net realizable value c) Four d) Five
d) Normal Profit 22. ______ is adopted when the value of the by -
15. _______ is used when the final sales value of products is very small as compared to the
the joint products after further processing sales value of the main product and is sold
is used as the basis for apportionment. off without further processing.
a) At the point of Separation Method a) Miscellaneous Income Method
b) Standard Cost Method b) Total Sales less Total Cost Method
c) Net Realizable Value c) Total Cost less Sales Value of by-
d) After Further Processing product Method
16. The formula for calculating Net Realizable d) Reserve Cost Method
Value is – 23. Sales value of the by-product is created to
a) Net Realizable Value = Sales Value after the Costing Profit and Loss account as
further processing – further processing ______ in Miscellaneous Income Method
costs a) Gross Income b) Net Income
b) Net Realizable Value = Sales Value after c) Miscellaneous Income
further processing + further processing d) None of the above
costs 24. Sales value of by-product is credited to the
c) Net Realizable Value = Sales Value after main product account instead of being
further processing × further processing transferred to the costing Profit and Loss
costs Account under –
d) Net Realizable Value = Sales Value after a) Miscellaneous Income Method
further processing ÷ further b) Total Sales less Total Cost Method
processing costs c) Total Cost less Sales Value of by-
17. _______ is also known as constant gross product method
margin percentage method. d) Reserve Cost Method
a) Standard Cost Method 25. “Any change in the market value of the by-
b) Normal Profit Method product will cause a change in the value of
c) Survey Method the main product”, is the major
d) Direct Allocation Method disadvantage of –
18. Under ________ the joint costs are a) Miscellaneous Income Method
apportioned on the basis of the standard b) Total Sales less Total Cost Method
cost set for the respective joint products. c) Total Cost less Sales Value of by-
a) Normal Profit method product method
b) Survey Method d) Reserve Cost Method
c) Standard Cost Method 26. Some profit is recognized on the sale of the
19. ________ is used when the joint costs are by-product, under –
specifically identifiable or capable of being a) Miscellaneous Income Method
estimated to the allocable to each joint b) Total Sales Less Total Cost method
product. c) Total Cost less Sales Value of by-
a) Market Value Method product method
b) Normal Profit method d) Reserve Cost Method
c) Survey Method 27. _______ Method is adopted when the sales
d) Direct Allocation Method value of the by-product in significant.
a) Joint Cost b) Opportunity
c) Standing Cost d) Market Value

131
28. ______ Method is used when the by-product a) Post separation point
is used within the factory. b) Further processing stage
a) Joint Cost b) Opportunity c) Split-off point
c) Standing Cost d) Market Value d) Point of separation
29. ________ is determined on the basis of 35. In accounting of joint products under
technical calculation or by calculating the market value method, _______ will be
average of the past 4 to 5 years. apportioned to the products in the ratio of
a) Prime Cost b) Primitive Cost sales price respective individual products.
c) Marginal Cost d) Standard Cost a) Joint Costs b) By Products
30. Incremental revenue is calculated by – c) Post Separation costs
a) Incremental Value = Sales value after d) Standard Costs
further processing + Sales value at the 36. A furniture manufacturing company is an
split off point example of –
b) Incremental Value = Sales value after a) Joint Products b) Common Costs
further processing - Sales value at the c) Pre-separation costs
split off point d) Joint costs
c) Incremental Value = Sales value after 37. ______ are the costs which are common to
further processing × Sales value at the the processing of joint products or by-
split off point products upto the point of separation.
d) Incremental Value = Sales value after a) Joint Process costs
further processing ÷ Sales value at the b) Common costs
split off point c) Pre-separation costs
31. The formula for calculating increment cost d) Joint costs
is – 38. _______ are assigned to two or more
a) Incremental Cost = Cost of further products produced in a single department.
processing + Selling and Distribution a) Joint Costs b) Common costs
expenses if any c) Common process costs
b) Incremental Cost = Cost of further d) Pre-separation costs
processing - Selling and Distribution 39. production of molasses used for industrial
expenses if any alcohol is an example of ______.
c) Incremental Cost = Cost of further a) By-products b) Co-products
processing × Selling and Distribution c) Scrap d) Waste
expenses if any 40. Ash produced in thermal power plant is an
d) Incremental Cost = Cost of further example of _______.
processing ÷ Selling and Distribution a) By-products b) Co-products
expenses if any c) Scrap d) Waste
32. It is worthwhile to process the product 41. A product which arises incidentally in the
further if – production of the main products and
a) Incremental revenue > Incremental which has a relatively small sales value as
costs compared with the main products is
b) Incremental revenue < Incremental known as ______.
costs a) Waste b) Scrap
c) Incremental revenue = Incremental c) By-products d) Defectives
costs 42. The Joint products will arise from the
d) None of the above common process and common input, and
33. _______ is the product where two or more can be identified only at split off point
products separated in processing each stage and linear relation exists between
having a sufficiently high sale value to them as to the quantities of production.
merit recognition as main products. a) True b) False
a) Joint Product b) Co-Product c) Partly True d) Partly False
c) Main Product d) By-Product 43. the material that has no value or even
34. The point at which joint products become negative value if it has to be disposed of at
separately identifiable is called – some cost is _________

132
 a) Scrap b) Spoilage 52. When a particular type of product (Joint
c) Defectives d) Waste Product) is manufactured in different
44. Joint costs are useful for – varieties and grades, they are called –
a) Setting the selling price of a product a) Joint products b) Joint costs
b) Determining whether to continue c) By products d) Co-products
producing an item 53. The by-products arise incidentally in the
c) Both (a) and (b) production of the _______ products and has
d) Determining inventory cost for a relatively small value in comparison to
accounting purposes the _______ products.
45. ______ is a product which is recovered a) Main, Main b) Joint, Main
incidentally from the materials used in the c) Main, Joint d) Co, Joint
manufacturing or recognized main 54. Furnace slag is a ________ in iron and steel
products. industry.
a) Joint Product b) By Product a) Joint Products b) Joint Cost
c) Main Product c) By Products d) Co-products
d) None of the above 55. Under market value method, joint costs
46. In a diary industry, milk is the main will be apportioned to the products in the
product, and butter and cheese are the by- ratio of market value of individual joint
products. products using –
a) True b) False a) Market value at separation point
c) Partly True d) Partly False b) Market value at finished stage
47. ______ is the incidental residue from the c) Net realizable value
materials used in manufacturing d) All of the above
operations which is recoverable and 56. Costs incurred after split off stage are
measurable without further processing. called -
a) Waste b) Scrap a) Further processing costs
c) Spoilage d) Defective b) Post separation costs
48. The basic reason for accounting of joint c) (a) or (b)
products and by-products is – d) None of the above
a) To share out joint costs 57. Apportionment of joint cost to joint and
b) To judge the profitability of each by-products affects the overall profit or
product loss.
c) Both (a) and (b) a) True b) False
d) None of the above c) Partly True d) Partly False
49. ________ is the point at which the joint 58. The principal product is known as -
products are identifiable separately a) Main Product b) By-Product
a) Separation Point c) Joint Product d) All of the above
b) Breakeven point 59. An incidental products of lesser value are
c) Equilibrium point usually called:
d) None of the above a) Joint Product b) By Product
50. The production cost incurred prior to the c) Main Product
split off point are called – d) None of the above
a) Joint Products b) Joint Costs 60. Products of nearly equal value are called:
c) By products d) Co-products a) By-product b) Joint Product
51. ______ are those when two or more c) Main Product d) All of the above
products arise simultaneously in the 61. A company produces two joint products, S
course of processing and each product has and M. In a year, further processing costs
a significant sales value in relation to each beyond split off point spent were ` 8,000
other.
a) Joint Products b) Joint Cost and ` 12,000 for 800 units of S and 400
c) By products d) Co-products units of M respectively. S sells at ` 25 and
M sells at ` 50 per unit. A sum of ` 9,000 of

133
 joint costs were allocated to products on
the net realization method.
What were the total joint costs in the year?
a) ` 15,000 b) ` 11,250
c) ` 13,500 d) ` 13,500
62. In case of Joint products, the main
objective of accounting of the cost is to
apportion the joint costs incurred upto the
split off point. For cost apportionment one
company has chosen physical quantity
method. Three joint products X, Y and Z
are produced in the same process, up to
the point of split off the total production of
X, Y and Z is 30,000 kg. out of which x
produces 15,000 kg, and joint costs are `
1,80,000. Joint costs allocated to product X
is –
a) ` 60,000 b) ` 90,000
c) ` 30,000 d) None of the above

ANSWERS

1. a 2. b 3. c
4. b 5. d 6. c
7. a 8. d 9. c
10. b 11. a 12. c
13. b 14. a 15. d
16. a 17. b 18. c
19. d 20. c 21. a
22. a 23. c 24. b
25. c 26. d 27. a
28. b 29. d 30. b
31. a 32. a 33. a
34. c 35. a 36. c
37. b 38. a 39. a
40. a 41. c 42. a
43. d 44. d 45. b
46. a 47. b 48. c
49. a 50. b 51. a
52. d 53. a 54. c
55. d 56. c 57. b
58. a 59. b 60. b
61. a 62. b

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 CHAPTER

15
MEANING OF CERTAIN IMPORTANT TERMS

1. PROCESS
A process refers to a distinct stage in manufacturing or production activity wherein raw material is
converted from one form into another, before it is finally converted into the saleable final product.

2. PROCESS COSTING
It is a method of costing used in industries where the raw material passes through two or more
processes before converted into a final product. This method is useful in the manufacturing of
products like steel, textile, sugar, soap, chemicals, etc. For these products, the production process
is continuous and the output of one process becomes the input of the following process till
completion.

3. PROCESS LOSS
Process Loss may be defined as the loss of material arising during the course of a processing
operation.
Equationally it may be summarized as
Process Loss = Input Quantity Less Output Quantity.

4. NORMAL WASTAGE
It is defined as the loss of material which is inherent in the nature of work. Such wastage can be
estimated in advance on the basis of past experience or technical specifications. If the wastage is
within the specified limit, it is considered as normal. Suppose a company states that the normal
wastage in process A will be 10% of input. In such a case wastage upto 10% of input will be
considered as normal wastage of the process.

5. ABNORMAL WASTAGE
It is defined as the wastage which is not inherent to manufacturing operations. In simple words
wastage over and above normal wastage is known as abnormal wastage. This type of wastage may
occur due to the carelessness of workers, a bad planning, misuse of material, lack of designing etc.
Such wastage cannot be estimated in advance.

The units representing abnormal wastage are valued like good units produced and debited to
the separate account which is known as abnormal wastage account. If the abnormal wastage
fetches some value, the same is credited to abnormal wastage account i.e. difference between
value of units representing abnormal wastage minus realization value is transferred to Costing
profit and loss account for the year.

6. ABNORMAL GAIN
It is defined as unexpected gain in production under normal conditions. In other words, if the
actual process waste is less than the estimated normal waste, the difference is considered as
abnormal gain. Suppose, a Company states that 10% of its input will be normal loss of process A. If

135
input of this company is 100 units then its normal output should be 90 units. If actual output is 95
units, then 5 units will represent its abnormal gain.

These units which represent abnormal gain are valued like normal output of the process. The
concerned process account is debited with the quantity and value of abnormal gain. The
abnormal gain account is credited with the figure of abnormal gain amount. Abnormal gain is the
result of actual wastage or loss being less than the normal. The scrap realization shown against
normal wastage gets reduced by the scrap value of abnormal gain. Consequently, there is an
apparent loss by way of reduction in the scrap realisation attributable to abnormal effectives. This
loss is set off against abnormal effectives by debiting the account. The balance of this account
becomes abnormal gain and is transferred to costing profit and loss account.

7. EQUIVALENT PRODUCTION
Equivalent Production means converting the incomplete production units into their equivalent
completed units.
Equivalent units are determined as under:
1. Compute the number of physical units of closing work in progress
2. Estimate the percentage of completion of work in progress for various elements of cost viz.
Materials, Labour and Overheads.
3. Compute equivalent completed units = Physical units × Percentage of Completion

8. INTER-PROCESS PROFITS
Generally Processes are regarded as Cost Centres i.e., the focus is only on ascertainment of cost.
Sometimes, they can also be treated as Profit Centres i.e., responsibility for earning profits.
However, since output of intermediate processes is not directly saleable, the output of one process
is transferred to the next process not at cost but at market value or cost plus a percentage of profit.
This is called as Transfer Price. The difference between cost incurred and the transfer price is
known as inter-process profits.

Advantages
1. It is possible to compare cost of output and market value at each stage of completion.
2. It is easier to fix responsibility of Process Managers for Cost Control through indirect means of
achieving higher profits.

Disadvantages
1. It is a complicated method involving transfer-pricing considerations.
2. The determination of appropriate transfer price is not a simple affair.
3. It might promote conflicts and misunderstandings among managers as regards comparative
profitability.
4. It requires reconciliation between profits booked at each stage and actual realized profit since
it shows profits locked up in unsold stock.

Need for valuation of WIP: If all units introduced into a process during a period are fully
completed and transferred to the next process, it is simple to compute the average cost per unit as
total Costs incurred during the period divided by Output during the period. However, generally
manufacturing processes are continuous activities. Hence all units introduced into a process may
not be fully completed. There might be units lying as Closing Work in Progress. Hence, costs
incurred during a period represent the cost of work carried on opening work in progress closing
work-in-progress and completed units. Thus to ascertain the cost of each completed unit it is
necessary to ascertain the cost of work- in-progress in the beginning and at the end of the process.

136
Basis of Valuation
1. Based on Actual: WIP can be valued on actual basis, i.e., materials used on the unfinished units
and the actual amount of labour expenses involved. However, this method does not ensure
accuracy.
2. Based on Equivalent Production: In order to provide a higher measure of accuracy, an
alternative -method of WIP valuation is based on converting partly finished units into
equivalent finished units.

DIFFERENCE BETWEEN JOB COSTING AND PROCESS COSTING

Job costing and process costing are the two methods of cost accounting. Job costing is applied
where production is carried out under specific orders, depending upon customer’s requirement.
Here each job is considered as a cost unit and to some extent the cost centre also. Process costing
is applied in cases where the identity of individual orders is lost in the general flow of production.
Industries to which process costing is applied produce uniform products without reference to the
specific requirements of customers. The main points of comparison between job costing and
process costing are as follows:

1. Job costing is applicable to goods produced/manufactured to customer’s specifications.

However, process costing is applicable to production consisting of succession of continuous
operations or processes.
2. Costs are accumulated by a job or work order irrespective of its time of completion under job
costing. When a job is finished all costs associated with it are charged to it in full. Whereas
under process costing costs are accumulated by processes for a particular period regardless of
the number of units produced.
3. Each job will be different from the other under job costing whereas in the case of process
costing units of product are homogenous and indistinguishable, because goods are produced
on a mass scale.
4. Job is normally a single unit, the whole unit is taken as one for costing purposes. Even if job
consists of number of parts, cost of job is calculated only after all the parts are complete. As
such there is no question of work-in-progress merely because some parts are not yet
completed. In the case of process costing, the unit of production may remain incomplete at
various stages of production. it is therefore necessary to compute at the end of the period not
only the cost of the finished units but of work in progress also.
5. Job costing does not involve transfer of costs from one job to another. Where as In the case of
process costing transfer of output from one process to another involves the transfer of its costs
as well.
6. Job costs are ascertained only after the completion of job and not at the end of particular
period. Whereas in the case of process costing costs are ascertained at the end of the
accounting period and not when the process is complete, since production does a continuous
flow constitute itself into cycle.
7. Since each job may be different from other therefore they 'will not involve the use of Identical
material and labour, cost of jobs cannot be ascertained by averaging. In the case of process
costing since units of production are uniform and are at the same stage of production
therefore, costs are computed by averaging the total cost of each stage of production.
8. Control becomes difficult in the case of job costing because each job is different from the other.
Whereas control over production and costs is easier in the case of process costing since
production is a standardized one.

137
 CLASSROOM PRACTICE – LETS PLAY TOGETHER

Qus 1.
A product passes from Process l and Process II. Materials issued to Process I amounted to ` 40,000,
Labour ` 30,000 and Manufacturing OH were ` 27,000. Normal Loss was 3% of input as estimated.
But 500 more units of output of Process I were lost due to carelessness of workers. Only 4,350
units of output were transferred to Process II. There were no Opening Stocks. Input Raw Material
issued to Process I were 5,000 units. Show Process I Account.

Solution: Process I Account

Particulars Qty ` Particulars Qty `
By Process II (Transfer) at ` 20
To Direct Materials 5,000 40,000 4,350 87,000
p.u.
To Direct Labour 30,000 By Normal Loss (3% of 5,000) 150 -
To Manufacturing OH 27,000 By Abnormal Loss at ` 20 p.u. 500 10,000
Total. 5,000 97,000 Total 5,000 97,000

Rs .97,000
Note: Effective Cost per unit = = ` 20 per unit.
(5,000 −150)units
Qus 2.
The product of a manufacturing concern passes through two processes A and B and then to
finished stock. It is ascertained that in each process normally 5% of the total weight is lost and
10% is scrap which from Processes A and B realizes ` 80 per ton and ` 200 per ton respectively.
The following are the figures relating to both the processes:
Process A Process B
Materials in tons 1,000 70
Cost of materials per ton in rupees 125 200
Wages in rupees 28,000 10,000
Manufacturing expenses in rupees 8,000 5,250
Output in tons 830 780
Prepare Process Cost Accounts showing cost per ton of each process. There was no stock or work-
in-progress in any process.

Solution: Process A Account

Tons ` Tons `
To Material 1,000 1,25,000 By Normal Loss - Weight loss 50 --
To Wages 28,000 - Sale of Scrap 100 8,000
To Expenses 8,000 By Abnormal Loss 20 3,600
By Process B (Rs. l80 per ton) 830 1,49,400
1,000 1,61,000 1,000 1,61,000

Process B Account
Tons ` Tons `
To Process A 830 1,49,400 By Normal Loss -Weight loss 45 --
To Material 70 14,000 - Sale of Scrap 90 18,000
To Wages 10,000 By Finished Stock 780 1,63,800
(`210 per ton)
To Expenses 5,250

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To Abnormal Gain 15 3,150
915 1,81,800 915 1,81,800
Note: Calculation of Abnormal Loss:

Process A
1,61,000 − 8,000 × 20
Value of Abnormal Loss = = 180 × 20 = 3,600
850

Process B
1,78,650 − 18,000 × 15
Value of Abnormal gain = = `210 × 15 = ` 3,150
765

Qus 3.
50 units are introduced into a process at a cost of ` 50. The total additional expenditure incurred
by the process is ` 32. Of the units introduced 10 per cent are normally spoiled in the course of
manufacture; these possess a scrap value of Re. 0.20 each. Owing to an accident only 40 units are
produced.

You are required to-(i) prepare a process account and (ii) give journal entries to show how the loss
arising out of spoiled units should be treated.

Solution: Process Account

Units Amount Units Amount
To Materials 50 50.00 By Normal Loss 5 1.00
To Additional
-- 32.00 By Abnormal Loss 5 9.00
Expenditure
By Transfer to next Process 40 72.00
50 82.00 50 82.00

Journal entries
Normal Loss A/c Dr. 1.00
To Process A/c 1.00
(Realisation of normal loss)
Abnormal Loss A/c Dr. 9.00
To Process A/c 9.00
(Abnormal loss valued)
Cash/Debtors A/c Dr. 1.00
To Normal Loss A/c 1.00
(Normal spoilt units disposed of at the rate of 20 paise per unit)
Cash/Debtors A/c Dr. 1.00
To Abnormal Loss A/c 1.00
(Abnormal spoilt units disposed of at the rate of 20 paise per unit)
Costing Profit and Loss A/c Dr. 8.00
To Abnormal Loss A/c 8.00
(Balance of abnormal loss account transferred to Costing Profit and Loss A/c)

Qus 4.
JK Ltd produces a product AZE, which passes through two processes, viz, Process I and Process II.
The output of each process is treated as the Raw Material of the next process to which it is
transferred and output of the Process II is transferred to finished stock. The following data related
to December
Particulars Process I Process II

139
 25,000 units introduced at a cost of ` 2,00,000 -
Material Consumed ` 1,92,000 96,020
Direct Labour ` 2,24,000 1,28,000
Manufacturing Expenses ` 1,40,000 60,000
Normal Wastage of Input 10% 10%
Scrap Value of Normal Wastage (per unit) ` 9.90 8.60
Output in Units 22,000 20,000

Prepare - (a) Process I and Process II A/c, and (b) Abnormal Loss / Gain Account as the case may
be, for each process.

Solution: 1. Process I A/c

Particulars Qty ` Particulars Qty `
By Process II -
To Basic Raw Materials 25,000 2,00,000 (at ` 32.50 pu) 22,000 7,15,000
transfer
To Direct Materials - 1,92,000 By Normal Loss (at ` 9.90 pu) 2,500 24,750
To Direct Labour - 2,24,000 By Abnormal Loss . (at ` 32.50 pu) 500 16,250
To Manufacturing
- 1,40,000 (See WN for Rate Computation)
Expenses
Total 25,000 7,56,000 Total 25,000 7,56,000

1. Process II A/c
Particulars Qty ` Particulars Qty `
By Fin.Goods Control (at `49.5
To Process I 22,000 7,15,000 20,000 9,90,000
pu)
To Direct Materials - 96,020 (See WN for Rate Computation)
To Direct Labour - 1,28,000 By Normal Loss (at ` 8.6 pu) 2,200 18,920
To Manufacturing
- 60,000
Expenses
To Abnormal Gain(at
200 9,900
`49.5pu)
Total 22,200 10,08,920 Total 22,200 10,08,920
2. Normal Loss A/c
Particulars Qtty ` Particulars Qtty `
To Process I 2,500 24,750 By Bank (Scrap Realisation) 2,500 24,750
Sub-Total 2,500 24,750 Total 2,500 24,750
To Process II 2,200 18,920 By Bank (Scrap Realisation) 2,000 17,200
By Abnormal Gain - adjt. transfer 200 1,720
Sub -Total 2,200 18,920 Total 2,200 18,920

Note:
 Normal Loss is separately sub-totaled in respect of each Process.
 In respect of Process II, only Process Loss of 2,000 units will be scrapped. The balance 200
units constitute Abnormal Gain, i.e. unexpected good production, which is not scrapped. Hence,
this amount is transferred to Abnormal Gain Account.

3. Abnormal Loss A/c

140
 Particulars Qty Particulars Qty `
To Process I 500 16,250 By Bank (at ` 9.90 per unit) 500 4,950
By Costing Profit & Loss A/c
- 11,300
(b/f)
Total 500 16,250 Total 500 16,250

4. Abnormal Gain A/c

Particulars Qty ` Particulars Qty `
To Normal Loss a/c (at ` 8.60 pu) 200 1,720 By Process II 200 9,900
To Costing Profit and Loss A/c
8,180
(bal.fig)
Total 200 9,900 Total 200 9,900

Working Notes
Process I Process II
1. LOSS ANALYSIS 1. LOSS ANALYSIS
Process Loss = Input Quantity - Output Quantity Process Loss = Input Quantity - Output Quantity
= 25,000 - 22,000 = 3,000 = 22,000 - 20,000 = 2,000

Normal Loss Abnormal Loss Normal Loss Abnormal Gain

10% of 25,000 = (bal. fig) 500 10% of 22,000 = (Bal. fig) 200
2,500 2,200
2. COST ANALYSIS 2. COST ANALYSIS
Particulars Cost Quantity Particulars Cost Quantity
Gross 7,56,000 25,000 Gross 9,99,020 22,000
(-) Normal 24,750 2,500 (-) Normal 18,920 2,200
Loss Loss
Net 7,31,250 22,500 Net 9,80,100 19,800
Rs .7,31,250 Rs .9,80,100
Effective Cost per unit = = ` 32.50 p.u. Effective Cost per unit = = ` 49.50 p.u.
22,500 19,800

Qus 23(Dec 2013)

In a factory, a product is produced through two distinct processes; Process-A and Process-B. On
completion, the product is transferred to finished stock account. During the month of June, 2013,
the following information was obtained
Particulars Process-A Process-B
Units –introduced 3,000 ---
Units transferred to next process 2,800 ---
Units transferred to finished stock --- 2,750
Cost of units introduced (`) 21,000 ---

Materials (`) --- 3,000

Labour cost (`) 10,600 5,500

Overheads (`) 3,350 3,820

The normal loss in each process was 5% which was sold at `5 per unit. There was no stock of raw
material or work-in-progress in the beginning or at the end of the month.
You are required to prepare the process accounts and finished stock account. (8 marks)

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 TRAIN UR BRAIN
1. ………… is an accidental loss and cannot be c) Waste
predicted in advance. d) None of the above
a) Seasonal Loss b) Abnormal loss 11. When anticipated process loss is less
c) Normal loss d) Standard loss than actual process loss, the
2. Process costing system is also known as – difference is known as -
a) Continuous Operation Costing a) Abnormal Gain b) Abnormal loss
b) Job Costing c) Profit d) Normal gain
c) Batch Costing 12. The stage where separate products are
d) Marginal Costing identified is called -
3. Cost per unit, in the process costing a) Split off point b) Starting point
increases because of – c) Net realizable value
a) Abnormal gain b) Abnormal loss d) None of the above
c) Normal loss d) Normal gain 13. Equivalent Production of work-in-
4. For computation of costs, …….. are opened progress (WIP) is calculated by –
for each different process. a) Actual number of units in WIP +
a) Trading Account Percentage of work completed
b) Profit & Loss Account b) Actual number of units in WIP –
c) Process Account Percentage of work completed
d) Manufacturing Account c) Actual Number of units in WIP ÷
5. ………. costing used in mass production Percentage of work completed
industries d) Actual number of units in WIP ×
a) Job b) Process Percentage of work completed
c) Contract d) Batch 14. …….. material is not distinguished in
6. …………. is used where the production process costing.
moves from one process or department to a) Direct and Indirect b) waste
the next until its final completion. c) Scrap d) Defective
a) Job Costing b) Batch Costing 15. Which of the following appear on the
c) Process Costing credit side of process costing?
d) Marginal Costing a) Normal Loss b) Abnormal Loss
7. Abnormal process losses is transferred to c) Both (a) and (b)
…… d) None of the above
a) Normal Loss Account 16. Normal process loss may rise due to –
b) Costing Profit & Loss Account a) Evaporation
c) Profit & Loss Account b) Chemical Reaction
d) None of the above c) Vaporization
8. In process account, total column indicates d) Both (a) and (b)
– 17. The value of abnormal loss is credited to
a) Cost Column – Profit Column Costing Profit and Loss Account.
b) Cost Column + Profit Column a) True b) False
c) Cost Column × Profit Column c) Partly True d) Partly False
d) Cost Column ÷ Profit Column 18. Abnormal gain rises when the actual ……….
9. In process costing, to arrive at the cost per is then the normal predetermined process
unit, total process cost is divided by – ………….
a) Cost of units produced a) Process loss, process gain
b) Number of units produced b) Process loss, process loss
c) Both (a) and (b) c) Abnormal gain, process loss
d) None of the above d) Abnormal loss, process loss
10. The portion of a basic raw material lost in 19. ……….. implies production of a process in
processing having no recovery value is complete units.
known as – a) work certified
a) Scrap b) Spoilage b) work in progress

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 c) Equivalent production
d) None of the above From the following data
20. Abnormal loss is charged to – Input introduced in process I 2,000 units
a) Trading Account Output 1700 units
b) Costing Profit and Loss Account Normal Loss (% of input) 10%
c) Balance Sheet Value of Scrap per unit `1
d) All of the above
Cost of materials, labour and
21. Abnormal gains will be ………. to the
process account and ……….. to abnormal overheads ` 18,200
gain account. Calculate the cost of Abnormal Loss and
a) Debited, debited prepare abnormal Loss A/c
b) Debited, credited
c) Credited, Credited 28. Calculate the units of normal loss
d) Credited, debited a) 50 b) 59
22. The work-in-progress at the end is 800 c) 200 d) 100
units which are complete upto 70%. Its 29. Calculate the scrap value of normal loss
equivalent units are – a) 100 b) 200
a) 560 b) 600 c) 300 d) 400
c) 520 d) 640 30. Calculate cost per good unit
23. An input of 1,250 kgs. of material a) 50 b) 10
introduced into the process and expected c) 60 d) 100
normal loss in 4% and if the actual output 31. Calculate the units of abnormal loss
from the process is 1,075 kgs., the a) 50 b) 10
abnormal loss is ……… kgs. c) 60 d) 100
a) 125 b) 150 32. Calculate the cost of abnormal loss
c) 200 d) 100 a) 1000 b) 1800
c) 1900 d) 3000
From the following information, prepare
Process Account and Normal Loss Account. From the following information
Input of raw materials 1,000 units @ ` 6 Input of raw material 840 units @ ` 40
per unit per unit
Direct material ` 5,200 Direct material ` 5,924
Direct wages ` 4,000 Direct wages ` 8,000
Production overheads ` 4,000 Overheads ` 8,000
Actual Output t/f to Process II 950 units Actual Output t/f to process II 750 units
Normal loss 5% Normal Loss 15%
Value of Scrap Per unit ` 4 per unit Value of Scrap per unit ` 10 per unit

24. Calculate the units of normal loss 33. Calculate the units of abnormal gain
a) 50 b) 59 a) 50 b) 10
c) 60 d) 100 c) 60 d) 36
25. Calculate the amount of normal loss 34. Calculate the cost of abnormal gain
a) 100 b) 200 a) 1000 b) 1800
c) 300 d) 400 c) 2000 d) 2736
26. Calculate cost per good unit
a) 50 b) 20 35. A factory transferred out 4,400 completed
c) 60 d) 100 units during June 2014 Opening stock was
27. Calculate the amount transfer to next 200 units 75% completed, closing stock
process was 400 units 50% completed. Assuming
a) 20000 b) 18000 FIFO method, the equivalent production in
c) 19000 d) 30000 June, 2014 to which these data relate was

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 a) 4,450 units b) 4,400 units c) Subtracted from the new costs
c) 5,000 units d) Nil d) Averaged with other costs to arrive at
36. Process B had no opening inventor. 13,500 total costs
units of raw material were transferred in 42. When FIFO method is used in Process
at ` 4.50 per unit. Additional material at ` costing, the opening stocks are
a) Kept separate from the costs of the
1.25 per unit was added in process. Labour
new period
and overheads were ` 6.25 per completed b) Added to new costs
unit and ` 2.50 per unit incomplete. If c) Subtracted from the new costs
d) Averaged with other costs to arrive at
11,750 completed units were transferred
total costs
out, what was the closing inventory in
43. When compared with normal spoilage,
Process B?
abnormal spoilage
a) ` 6562.50 b) ` 12,250,00 a) Arises more frequently from factors
c) ` 14,437,50 d) ` 25,375,00 that are inherent in the manufacturing
37. A process costing system for J Co used an process
b) Is generally thought to be more
input of 3,500 kg of materials at ` 20 per kg controallable by production
and labour hours of 2,750 at ` 25 per hour. management than normal
Normal loss is 20% and losses can be sold c) is given the same accounting
treatment as normal spoilage
at a scrap value of ` 5 per kg. Output was d) Is not typically influenced by the
2,950 kg. What is the value of the output? “tightness” of production standards
a) ` 142,485 b) ` 146,183 44. Normal loss is a loss, which is
a) Unavoidable in any process
c) ` 149,746 d) ` 152,986
b) Avoidable in any process
38. In process costing, if an abnormal loss c) Both
arises, the process account is generally d) None
a) Debited with the scrap value of the 45. If the actual output is less than the normal
abnormal loss units output the difference between the two is
b) Debited with the full production cost known as
of the abnormal loss units a) Abnormal Loss b) Abnormal gain
c) Credited with the scrap value of the c) Either a or b d) None
abnormal loss units 46. If the actual output is more than the
d) Credited with the full production cost normal output, the difference between the
of the abnormal loss units two is known as
39. A factory transferred out 8,800 completed a) Abnormal Loss b) Abnormal Gain
units during July 2014. Opening stock was c) Either a or b d) None
400 units 75% completed, closing stock 47. A chemical process has normal wastage of
was 800 units 50% completed. Assuming 10% of input. In a period 2500 units of
FIFO method, the equivalent production in input is introduced and there is an
June, 2014 to which these data relate was abnormal loss of 75 units. Find quantity of
a) 8,900 units b) 9,400 units good units produced.
c) 9,500 units d) Nil a) 2200 b) 2175
40. Popular methods for calculating c) 2300 d) 2400
equivalent production are
a) FIFO b) Average Cost From the following information:
c) Both 1 and 2 d) Neither 1 nor 2 Input of materials: 1000 units
41. When average method is used in process Closing WIP: 900 units
costing, the opening inventory costs are Transfer to next process: 9,100 units
a) Kept separate from the costs of the Degree of completion:
new period Closing stock (%)
b) Added to new costs Material 100

144
 Labour 70 Method of Valuation: FIFO
Overheads 30
Method of Valuation: FIFO 54. Equivalent Production units for Material
a) 9,200 b) 9,170
48. Equivalent Production units for Material c) 10,000 d) 11,000
a) 9,370 b) 9,170 55. Equivalent Production units for Labour
c) 10,000 d) 11,000 a) 9,730 b) 8,930
49. Equivalent production units for Labour c) 10,000 d) 11,000
a) 9,730 b) 9,170 56. Equivalent Production units for Overheads
c) 10,000 d) 11,000 a) 9,370 b) 9,170
50. Equivalent Production units for Overheads c) 11,000 d) 8,570
a) 9,370 b) 9,170 AB Ltd. is engaged in the process
c) 10,000 d) 11,000 engineering industry. During the month,
October 2007, 2000 units were introduced
From the following information in process ‘X’. The normal loss is estimated
Input of materials 10,000 units at 5% of input. At the end of the month,
Normal Loss: 8% of total input [i.e., opening 1400 units had been produced and
WIP + units put in] transferred to process ‘Y’, 460 were
Scrap realized @ ` 40 per 100 units incomplete units, and 140 units had to be
scrapped at the end of the process.
Closing WIP 900 units
The incomplete units reached the following
Transfer to next process: 7,900 units
degree of completion:
Degree of completion:
Material: 75%, Labour: 50%, Overheads:
Closing
50%
Scraped
Stock (%) units The scrapped units fetched ` 10 each.
Material 100 100
Labour 70 30 57. Equivalent Production units for Material
Overheads 30 20 a) 9200 b) 9170
Method of Valuation: FIFO c) 1785 d) 1100
58. Equivalent Production units for Labour
51. Equivalent Production units for Material a) 973 b) 893
a) 9,200 b) 9,170 c) 1785 d) 1670
c) 10,000 d) 11,000 59. Equivalent Production units for Overheads
52. Equivalent Production units for Labour a) 973 b) 893
a) 9,730 b) 8,850 c) 1785 d) 1670
c) 10,000 d) 11,000
53. Equivalent Production units for Overheads From the following particulars using First
a) 9,370 b) 9,170 In First Out Method
c) 11,000 d) 8,250 A) Opening work in progress – 900 units
degree of completion, material – 100%,
From the following information labour and overheads – 60%.
Input of materials 10,000 units B) Input of materials: 9100 units
Normal Loss: 8% of total input [i.e., opening C) Finished units transferred to next
WIP + units put in] process – 7,800
Scrap realized @ ` 40 per 100 units D) Normal Scrap – 10% of input
E) Units scrapped – 1,200 units, degree of
Closing WIP 900 units
completion: material 100%, labour and
Transfer to next process: 7,900 units
overheads: 70%
Degree of completion:
F) Closing work in progress – 1000 units,
Closing Stock (%)
degree of completion: material 100%,
Material 100
labour and overheads 80%.
Labour 70
Overheads 30

145
60. Equivalent Production units for Material quantity
a) 9,200 b) 9,170 introduced
c) 8200 d) 8100
61. Equivalent Production units for Labour 66. The Scrap realizes ` 80 per ton.
a) 973 b) 893
c) 8100 d) 8200 a) ` 149400 b) ` 300000
62. Equivalent Production units for Overheads c) ` 100000 d) ` 195000
a) 9730 b) 8930 67. The method of costing used in a refinery is
c) 8100 d) 8200 ___________________.
a) Process b) Batch
50 units are introduced in Process A at a c) Multiple d) Contract
cost of ` 100. Direct wages and overheads 68. The method of costing applied in biscuit
amount to ` 37.50 of the units introduced industries is _______________ costing and in
steel industry _______________ costing.
10% are normally spoilt. Due to an
a) Job, Contract b) Job, Process
accident, the number of units transferred to
c) Process, Operation d) Job, Batch
the next process is 40. Assuming scrap units
69. Where raw material is to pass certain
realize 0.50 paise per unit.
stages, before it is converted into finished
goods, the method of costing used is
63. Calculate cost per unit
______________
a) ` 4 b) ` 3 a) Contract costing b) Job Costing
c) ` 2 d) ` 5 c) Process Costing
d) Operation Costing
64. Calculate cost of good units
70. When the actual loss is more than the
a) ` 140 b) ` 300 estimated loss, the difference between the
c) ` 120 d) ` 500 two is considered to be _______________.
a) Abnormal loss b) Normal loss
c) Loss d) None of them
2,000 units costing ` 4 per unit were 71. When actual loss is less than the estimated
introduced to process I. Labour costs and loss, the difference between the two is
other expenses were ` 1,080 and ` 120 considered to be _______________.
respectively. Its output was 1,900 units. a) Abnormal Gain b) Normal loss
The normal scrap was 10% of the input and c) Abnormal Loss d) Income
72. When actual loss is _______________ than the
had a realizable value of ` 1 per unit. estimated loss, the difference between the
two is considered to be abnormal gain.
65. Calculate cost of good units a) More b) Less
a) ` 1400 b) ` 3000 c) Higher d) None of them
73. When actual loss is _______________ than the
c) ` 10000 d) ` 9500 estimated loss, the difference between the
two is considered to be abnormal loss.
From the information given below a) Abnormal b) Normal
1,000 tonnes @ ` 125 per ton were initially c) Both a and b d) None of them
introduced in the process. 74. ________________ process loss should be
transferred to costing profit and loss
Wages ` 28,000
account.
Factory overheads ` 8,000 a) Abnormal b) Normal
Normal Wastage 5% of total weight c) Both a and b d) None of them
of material initially 75. The cost of _________________ process loss is
introduced absorbed in the cost of production of good
Output 830 tonnes units.
Normal Scrap 10% of the initial a) Market price, Actual Cost

146
 b) Actual cost, Market price
c) Both a and b
d) None of them
76. In inter process profits, the output of one
process is transferred from one process to
another not at _____________ but at ___________.
a) Market price, Actual cost
b) Actual cost, Market price
c) Both a and b
d) None of them
77. Which one out of the following is not an
equivalent production valuation method?
a) FIFO b) WAC
c) EOQ
d) All of the above
78. Process costing is an appropriate method
costing when producing ………………
a) For Homogeneous products like textiles,
oil or financial institutions
b) For heterogeneous products like food
processing and metals.
c) Unique products such as sail boats of
custom furniture
d) None of the above
79. Differences between FIFO and weighted
average methods of process costing occur
when ………………..
a) There is opening WIP
b) Costs change from the prior period
c) Answers (a) and (b) above
d) None of the above
80. Using the weighted average method, the
physical units in opening work-in-
progress stock, started and completed and
transferred out will:
a) There is no way to know without
knowing the costs of each purchase
b) Be more than the units computed under
the FIFO method and less than the units
computed using the standard costing
method.
c) Differ from the units computed under
the FIFO and standard costing methods
d) Be the same as the FIFO method and
standard costing methods.
81. Which of the following statement is true?
a) Process costing is ordinarily applied
where all the operations are performed
in one department.
b) The cost of abnormal process loss is not
included in the cost of the process.
c) Job costing and process costing cannot
be simultaneously used in the same
industry?
d) Equivalent unit or equivalent
production comprises the units
completed during the period together
with equivalent completed units,
represented in the beginning and
ending WIP inventories.
82. Which of the following statement is true?
a) In process costing, ordinarily no
distinction is made between direct and
indirect materials.
b) There is no difference between the
terms ‘co-products’ and ‘Joint Products’.
Operating costing is the same as operation
costing.
d) Neither (a) nor (b) nor (c)
83. If there is no opening or closing stock of
work-in-progress, and the production
process started and completed 2000 units,
the equivalent units would be: ………..
a) This cannot be determined without
knowing the percentage of conversion
costs needed to complete the products.
b) Equal to 2000 units
c) More than 2000 units
d) Less than 2000 units
84. If there is no opening stock of work-in-
progress, 1000 units in closing stock are
40% complete and 3000 are units started
and completed for ` 5,00,000 …………
a) Then the weighted-average method would
assign more costs than the FIFO method
b) Then the weighted –average method
would assign less cost than the FIFO
method
c) Then the weighted-average method would
assign all the costs and the FIFO method
would assign none.
d) Then the weighted-average method would
assign the same costs as the FIFO method.
85. The main difference between the weighted-
average and FIFO cost flow assumptions
under a process costing system is
a) The FIFO method mixes the opening WIP
with current units started, while the
weighted average method keeps these
costs in distinct and separate layers.
b) The weighted-average method mixes the
opening WIP with current units started,
while the FIFO method keeps these units
and costs and distinct and separate layers.
147
 c) The FIFO method mixes the opening WIP 34. d 35. a 36. c
with current units started, while the 37. a 38. d 39. a
weighted-average method mixes the 40. c 41. c 42. a
closing WIP with current units started. 43. b 44. a 45. a
d) The weighted-average method mixes the 46. b 47. b 48. c
opening WIP with current units started, 49. a 50. a 51. a
while the FIFO method mixes the closing 52. b 53. d 54. a
current units started.
55. b 56. d 57. c
86. The weighted-average process costing
58. d 59. d 60. d
method calculates the equivalent units by
61. d 62. d 63. d
…….
a) Considering only the work done during the 64. c 65. d 66. a
current period. 67. a 68. b 69. c
b) The units started during the current period 70. a 71. a 72. b
minus the units in the ending inventory 73. a 74. a 75. b
c) The units started during the current period 76. b 77. c 78. a
plus the units in ending inventory 79. a 80. d 81. d
d) The equivalent units completed during the 82. a 83. b 84. d
current period plus the equivalent units in 85. b 86. d 87. c
ending inventory 88. d 89. c 90. c
87. Where actual loss in a process is less than the
anticipated loss, the difference between the
two is considered to be _____________
a) Abnormal loss b) Normal loss
c) Abnormal gain d) Normal gain
88. In process costing, the abnormal loss is
treated as ______________ cost and written off
to profit and loss account.
a) Unit b) Future
c) Process d) Period
89. The process costing is not used in one of
the following:
a) Chemical b) Textile
c) Cement d) Oil Refining
90. _______________ arises where the actual
process loss is less than the normal
predetermined process loss.
a) Abnormal loss b) Normal loss
c) Abnormal gain d) Normal gain

ANSWERS

1. b 2. a 3. c
4. c 5. b 6. c
7. b 8. b 9. b
10. c 11. b 12. a
13. c 14. a 15. d
16. d 17. b 18. b
19. c 20. b 21. b
22. a 23. a 24. a
25. b 26. b 27. c
28. c 29. b 30. b
31. d 32. a 33. d

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 CHAPTER

16

MEANING OF BUDGET

A budget is a detailed plan of operations for some specific future period. It is an estimate
prepared in advance of the period to which it applies. It acts as a business barometer as it is a
complete programme of activities of the business for the period covered. A budget is defined as a
"comprehensive and coordinated plan of action, expressed in monetary terms, for the operations
and utilisation of resources of an organisation for some specified period in the future.

The Chartered Institute of Management Accountants, London defines a budget as "a financial
and/or quantitative statement, prepared prior to a defined period of time, of the policy to be
pursued during that period for the purpose of attaining a given objective.'"

Characteristics - The main characteristics of a budget are:

1. Prepared In Advance - It is prepared in advance and is derived from the long-term strategy of
the organisation.
2. Relates to Future - It is related to future period for which objectives or goals have already
been laid down
3. Expressed in Quantitative/Financial Terms - It is expressed in quantitative form, physical or
monetary units, or both.

MEANING OF FORECAST
Forecast means an estimate about the probable events at a given period of time. It differs from
a budget. Budget is an operating and financial plan of a business enterprise. It is a sort of
commitment or a target which the management seeks to attain on the basis of the forecasts made.
Forecasts are made regarding sales, production and financial requirements of the business.
Physical quantities as well as monetary values are estimated separately.

DIFFERENCE BETWEEN A FORECAST AND A BUDGET

Forecasts and budgets both refer to the anticipated actions and events in a specified future period
but there is a wide difference between the two. The points of difference have been explained
hereunder:

FORECAST
1. Mere estimate. Forecast is a mere estimate of
what is likely to happen. It is a statement of
probable events which are likely to happen
under anticipated conditions during a
specified period of time.
2. No sense of control. Forecasts, being
BUDGET
Planned event. Budget shows the policy and
programme to be followed in a future period
under planned conditions.
Tool of control. A budget is a tool of control

149
 statements of future events, do not connote
any sense of control.
3. Preliminary step. Forecasting is a preliminary
step for budgeting. It ends with the forecast of
likely events.
4. Wider Scope. Forecasts can be made in those
spheres also where budgets can't interfere.
since it represents actions which can be
shaped according to will so that it can be
suited to the conditions which may or may
not happen.
Later step. It begins when forecasting ends.
Forecasts are converted into budgets.
Limited scope. Budgets can be made of only
those phenomenon which are capable of
being expressed quantitatively.

BUDGETING
Budgeting is the art of building budgets. Budgeting is the process of
1. Making budgets and
2. Making use of budgets for further planning, co-coordinating and control purposes.

BUDGETARY CONTROL
Budgetary control is the technique of control with the use of budget. The Chartered Institute of
Management Accountants, London, defines budgetary control as "the establishment of budgets
relating to the responsibilities of executives to the requirements of a policy, and the continuous
comparison of actual with budgeted results, either to secure by individual action the objective of
that policy or to provide a basis for its revision.

Budgetary control involves:

(a) Establishment of budgets;
(b) Continuous comparison of actual with budgets for achievement of targets and placing the
responsibility for failure to achieve the budget figures;
(c) Revision of budgets in the light of changed circumstances.

The difference between budget, budgeting and budgetary control has been stated thus:
"Budgets are the individual objectives of a department, etc., whereas Budgeting may be said
to be the act of building budgets. Budgetary Control embraces all this and in addition includes
the science of planning the budgets themselves and the utilisation of such budgets to effect an
overall management tool for the business planning and control.

STEPS IN BUDGETARY CONTROL

STEPS INVOLVED IN THE PREPARATION OF BUDGETS

The following practical steps are involved in the preparation of budgets:

Step 1: Appointment of Budget Controller

Although the Chief Executive is finally responsible for the budget programme, it is better if a large
part of the supervisory responsibility is delegated to a special official designated as Budget
Controller or Budget Director. Such a person should have knowledge of the technical details of the
business and should report directly to the President or the Chief Executive of the organisation.

Step 2: Formulation of Budget Committee

The Budget Controller is assisted in his work by the Budget Committee. The Committee consists of
all the Heads of various departments, viz., Production, Sales, Finance, Personnel, Purchase, etc.
with the Managing Director as its Chairman. It is generally the responsibility of the Budget
Committee to submit, discuss and finally approve the budget figures.

150
Step 3: Fixation of Budget period
The period covered by a budget is known as budget period. There is no general rule governing the
selection of the budget period. The length of the budget period depends upon the nature of the
plan and circumstances of the business. For example, industries which are subject to fashion
change use short budget period whereas industries involving long-term expenditure with
relatively little change in product design use long budget periods.

Step 4: Identification of Budget factor (or Key factor or limiting Factor)

The factor which sets a limit to the total activity is known as budget factor, key factor or limiting
factor. For example, if production cannot be increased Inspite of heavy demand, due to non-
availability of raw-material/power, raw-material/power is called here key factor. The key factors
should be correctly identified and their extent of influence must first be carefully assessed.

Step 5: Identification of Budget Centers

It is a well known saying that costs are the best controlled at the point of incurrence." Thus, for
example, in the case of production cost the point of control will be at the supervisor or operator
level. In this way, suitable areas of control have to be selected. These areas should not be too large
because the span of control should be limited. Normally, the areas chosen should conform to the
natural responsibilities of executives. Such areas are known as budget centres. A budget which
refers to a budget centre is a department budget. A budget centre may again consist of a number of
cost centres representing different groups of machines.

Step 6: Preparation of Budget Manual

The budget manual is a schedule, document or booklet which shows, in written forms budgeting
organisation and procedures. The manual should be well written and indexed, a copy thereof may
be given to each departmental head for guidance.

Step 7: Preparation of Various Budgets

TYPES OF BUDGETS
Budgets may be classified on various bases as follows:

Budget

Capacity Coverage Period Conditions

Fixed Flexible Functiona Master Long- Short- Basic Current

Budget Budgets l Budgets Budget term term Budgets Budgets
Budget Budget
Certain important budgets

(1) Functional Budgets

Budgets for a period are really classified according to the various activities in the organization. All
activities are interrelated. The forecasts for individual activities are prepared and co-ordinate with
those of other activities and then consolidated to show the total effect of all the activities as a
whole. Approved targets for individual functions are known as “functional budgets”. The
consolidation of all functional budgets is known as the “Master Budget”. This is nothing but the
targeted profit and loss statement and balance sheet of the organization.

151
Principal functional budgets are:
a) Sales Budget
b) Production Budget
c) Materials Budget
d) Direct Labour Budget
e) Manufacturing Overhead Budget
f) Administration Cost Budget:
g) Selling Expenses Budget:
h) Research and Development Budget:
i) Cash Budget:

(2) MASTER BUDGETS

The Master Budget is "a summary of the budget schedules in capsule form made for the purpose of
presenting in one report the highlights of the budget forecast.") The Chartered Institute of
Management Accountants. London defines it as "the summary budget, incorporating its
component functional budgets, which is finally approved adopted and employed." Thus it is a
summary budget which incorporates all other budgets. It sets out the plan of operations for all
departments in considerable detail for the budget period. The budget may take the form of a Profit
and Loss Account and a Balance Sheet as at the end of the budget period.

The Master Budget requires the approval of the Budget Committee before it is put into operation.
It may happen sometimes that a number of master budgets have to be prepared before the final
one is agreed upon. The budget generally contains details regarding sales (net), production costs,
cash position and key account balances (e.g. debtors, stock, fixed assets, bills payable etc.). It also
shows the gross and the net profit and the important accounting ratios.

(3) FIXED BUDGETS

A budget may be established either as a fixed budget or a flexible budget. A fixed budget is a
budget designed to remain unchanged irrespective of the level of activity actually attained. A
fixed budget is one which is designed for a specific planned output level and is not adjusted to the
level of activity attained at the time of comparison between the budgeted and actual costs.
Obviously, fixed budgets can be established only for a small period of time when the actual output
is not anticipated to differ much from the budgeted output. However, a fixed budget is liable to
revision if due to business conditions undergoing a basic change or due to other reasons, actual
operations differ widely from those planned in the fixed budget. These budgets are most suited for
fixed expenses but they have only a limited application and is ineffective as a tool for cost control.

(4) FLEXIBLE BUDGETS

The Chartered Institute of Management Accountants, London defines flexible budget as a budget
which by recognising different cost behaviour patterns, is designed to change as volume of output
changes. It is a budget prepared in a manner so as to give the budgeted cost for any level of
activity. It is a budget which by recognising the difference between fixed, semi-fixed and variable
cost is designed to change in relation to the activity attained. It is designed to furnish budgeted
cost at any level of activity attained.

Distinction between Fixed Budget and Flexible Budget

Fixed Budget differs from Flexible Budget in the following respects:
Basis of Distinction Fixed Budget
1. Change with Activity It does not change with actual
volume of activity achieved. Thus,
it is known as rigid or inflexible
budget.
Flexible Budget
It can be recasted on the
basis of activity level to be
achieved. Thus, it is not rigid.

152
2. One level or different
levels of activity
3. Utility of variance
analysis
4. Decision Making
5. Basis of Comparison
It operates on one level of activity
and less than one set of
conditions. It assumes that there
will be no change in the prevailing
conditions, which is unrealistic.
Since all costs like-fixed, variable
and semi-variable are related to
only one level of activity, variance
analysis does not give useful
information.
If the budgeted and actual activity
levels differ significantly then the
aspects like cost ascertainment
and price fixation do not give a
correct picture.
Comparison of actual performance
with budgeted targets will be
meaningless specially when there
is a difference between the two
activity levels.
It consists of various budgets
for different levels of activity.
Here analysis of variance
provides useful information
as each cost is analysed
according to its behaviour.
Flexible budgeting at
different levels of activity
facilitates the ascertainment
of cost, fixation of selling
price and tendering of
quotations.
It provides a meaningful
basis of comparison of the
actual performance with the
budgeted targets.

(5) PERFORMANCE BUDGETS

The concept of performance budgeting relates to greater management efficiency especially
in government work. The purpose of performance budgeting is to focus attention upon the work
to be done, services to be rendered rather than things to be spent for or acquired. In performance
budgeting, emphasis is shifted from control of inputs to efficient and economic management of
functions and objectives.

(6) LONG-TERM BUDGETS

The budgets which are prepared for periods longer than a year are called long-term budgets. Such
budgets are helpful in business forecasting and forward planning. Capital expenditure budget and
Research and Development budget are examples of long-term budgets.

(7) SHORT-TERM BUDGETS –

Budgets which are prepared for period upto a year are known as short-term budgets. Cash budget
is an example of short-term budget. Such type of budgets are prepared in cases where a specific
action has to be immediately taken to bring any variation under control, as in cash budgets.

(8) BASIC BUDGETS –

A budget which remains unaltered over a long period of time is called basic budget.

(9) CURRENT BUDGETS –

A budget which is established for use over a short period of time and is related to the current
conditions is called current budget.

PROGRAMME BUDGET

A budget set for a plan or a programme of action of the organisation is known as a programme
budget. Such budgets can be prepared for each plan or programme separately. It helps
management in assessing the economies of various programmes. The estimated revenues and
costs of the programmes are given in the budget. The budgets are not suitable to exercise control

153
over individuals since so many persons may be assigned with the task of completing the
programme and no one individual may be responsible for the entire operation.

Performance Budgeting involves evaluation of the performance of every executive in an

organisation in the context of both specific as well as overall objectives of the organisation. This
requires complete clarity about both the short-term and long term organisational objectives. The
responsibility of the various levels of management should be predetermined in terms of results
expected from them and the authority vested in them. In other words performance budgeting
requires fixing of the responsibility of each executive in the organisation and a continuous
appraisal of his performance. It is, therefore considered to be synonymous with responsibility
accounting.

ZERO BASE BUDGETING

Zero-base budgeting is "De nova budgeting" or budgeting from beginning, or as the name suggests,
beginning from zero base, assuming nothing happened in the past. Certified Institute of
Management Accountants, London defines zero-base budgeting as a method of budgeting whereby
all activities are re-evaluated each time a budget is set. Discrete levels of each activity are valued
and a combination chosen to match funds available." The premise is that every rupee of
expenditure requires justification. Right from a home budget to the national budget, the concept
can be applied. The expenditure to be incurred by a housewife next month can be budgeted after
ignoring the current and past expenditures altogether and on the basis of need of incurring the
expenditure on every single item. Similarly, the country can also draft, e.g., Income-tax law or any
other law or prepare annual budget without in any way, considering what already existed.

154
 CLASSROOM PRACTICE – LETS PLAY TOGETHER

Que 1.
Prepare a Production Budget for 3 months ending March 31, 2015, for a factory producing four
products on the basis of the following information:

Type of Estimated Stock on Estimated Sales during Desired Closing Stock on

Product Jan. 1, 2015 (units) Jan-March, 2015 March 31, 2015 (units)
A 2,000 10,000 3,000
B 3,000 15,000 5,000
C 4,000 13,000 3,000
D 3,000 12,000 2,000

Solution:
Particulars Units
Product A: Estimated Sales 10,000
Add: Desired Closing Stock 3,000
13,000
Less : Estimated Opening Stock (2,000) 11,000
Product B: Estimated Sales 15,000
Add: Desired Closing Stock 5,000
20,000
Less : Estimated Opening Stock (3,000) 17,000
Product C: Estimated Sales 13,000
Less: Desired Closing Stock 3,000
16,000
Less: Estimated Opening Stock (4,000) 12,000
Product : Estimated Sales 12,000
Add: Desired Closing Stock 2,000
14,000
Less : Estimated Opening Stock (3,000) 11,000
Total units to be produced 51,000

The Sales and the Production Budgets are interdependent and must be prepared in co-operation
with both the Sales and Production Departments.

Que 2.(Before the exam)

Product A Product B
Sales (in units) as per Sales Budget:
1st Quarter 2014 1,000 2,000
2nd Quarter 2014 2,360 1,000
3rd Quarter 2014 2,160 1,250
4th Quarter 2014 2,480 750
Product A Product B
Stock position as on 1.1.20114 20% 100%
Percentage of 1stQuarter 2014 sales
Stock position ending 1st , 2nd and 3rd Quarter 50% 50%
Percentage of Next Quarter's sales
Stock position on 31.12.2014 2,200 1,000

Required: Prepare Production Budget for the year 2014.

155
 Solution:-
Production Budget for the year 2014

Particulars/ Product ‘A’ Product ‘B’

Product & period 1st Q. 2nd Q. 3rd Q. 4thQ. 1st
Q. 2nd Q. 3rd Q. 4th Q.
A. Budgeted Sales 1,000 2,360 2,160 2,480 2,000 1,000 1,250 750
B. Add : Closing Stock 1,180 1,080 1,240 2,200 500 625 375 1,000
C. Less: Opening Stock 200 1,180 1,080 1,240 2,000 500 625 375
D. Units to be produced (A + B -
1,980 2,260 2,320 3,440 500 1,125 1,000 1,375
C)

Que 3.
The budget manager of Alankar Cosmetics Limited is preparing a budget for the accounting year
starting from 1st July, 2015.
As part of the budget operations, some items of factory overhead costs have been estimated by
him under specified conditions of volume as follows:

Volume or Production (in units) 1, 20,000 1, 50,000

` `
Expenses:
Indirect Materials 2,64,000 3,30,000
Indirect Labour 1,50,000 1,87,500
Maintenance 84,000 1,02,000
Supervision 1,98,000 2,34,000
Engineering Services 94,000 94,000
Calculate the cost of factory overhead items given above at 1,40,000 units of production.

Solution:
FACTORY OVERHEADS BUDGET
`
Indirect Material (Variable @ ` 2.20 per unit) 3,08,000

Indirect Labour (Variable @ ` 1.25 per unit) 1,75,000

Maintenance: Fixed 12,000
Variable @ ` 0.60 per unit 84,000
Supervision: Fixed 54,000
Variable @ ` 1.20 per unit 1,68,000
Engineering Services (Fixed) 94,000
Total Factory Overheads 8,95,000

Working Notes:
The fixed and variable element included in each item of factory overhead has been' ascertained as
follows:

(i). Indirect material

Change in Expense
Variable cost per unit =
Change in Output

66,000
= = ` 2.20
30,000

156
 Variable Indirect Material = 1, 20,000 × 2.20 = ` 2, 64,000 for 1,20,000 units.
Hence, there is no fixed clement involved.

(ii). Indirect Labour:

Change in Expense
Variable cost per unit =
Change in output

37,500
= = ` 1.25
30,000

Indirect Labour for 1, 20,000 units = 1, 20,000×` 1.25 = ` 150.000

Hence, there is no fixed clement involved.

(iii). Maintenance:
Change in Expense
Variable cost per unit = Change in output

18,000
= 30,000 = ` .60
Maintenance tor 1.20.000 units = 120,000 ×.60 = ` 72,000
Fixed Maintenance cost for 1.20,000 units = ` 84,000 - ` 72,000 = ` 12,000

(iv). Supervision:
Change in Expense
Variable cost per unit = Change in output

36,000
=30,000 = ` 1.20
Fixed Supervision cost = ` 1, 98,000 - (1, 20,000 × 1.20) = `54.000.

Que 4.
You are requested to prepare a Sales Overhead Budget from the estimates given below:
`
Advertisement 2,500
Salaries of the Sales department 5,000
Expenses of Sales department 1,500
Counter Salesmen's salaries and dearness allowance 6,000
Commission to counter salesmen at 1 % on their sales.
Travelling salesmen's commission at 10% on their sales and expenses at 5% on their sales.

The sales during the period were estimated as follows:

Counter Sales Travelling Salesmen's Sales
80,000 10,000
1,10,000 15,000
1,40,000 20,000

Solution:
SALES OVERHEAD BUDGET
(For the period ending .. .)

Estimated Sales
` 90,000 ` 1,25,000 ` 1,60,000

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 Fixed Overheads:
Advertisement 2,500 2.500 2.500
Salaries of Sales Department 5,000 5,000 5.000
Expenses of Sales Department 1,500 1.500 1.500
Counter Salesmen' s Salaries and D.A. 6,000 6,000 6,000
15,000 15,000 15,000
Variable Overheads:
Counter Salesmen' s Commission @ 1% on sales 800 11,00 1,400
Travelling Salesmen's Commission @ 10% 1,000 1,500 2,000
Expenses 5% 500 750 1,000
2,300 3,450 4,400
Total Sales Overheads 17,300 18,450 19,400

Que 5.
Prepare a cash budget for the months of May, June and July 2009 on the basis of the following
information:

(1) Income and Expenditure Forecasts

Credit Credit Manufacturing Office Selling
Month Wages
Sales Purchases Expenses Expenses Expenses
` ` ` ` ` `
March 60,000 36,000 9,000 4,000 2,000 4,000
April 62,000 38,000 8,000 3,000 1,500 5,000
May 64,000 33,000 10,000 4,500 2,500 4,500
June 58,000 15,000 8,500 3,500 2,000 3,500
July 50,000 39,000 9,500 4,000 1,000 4,500
August 60,000 34,000 8,000 3,000 1,500 4,500

(2) Cash balances on 1st May, 2009 ` 8,000

(3) Plant costing ` 16,000 is due for delivery in July payable 10% on delivery and the balance after
3 months.
(4) Advance Tax of ` 8,000 each is payable in March and June.
(5) Period of credit allowed (i) by suppliers-two months and (ii) to customers- one month.
(6) Lag in payment of manufacturing-1/2 months
(7) Lag in payment of office and selling expenses--one month.

Solution:
CASH BUDGET

Particulars May 2009 June 2009 July 2009

` ` `
Opening Balance 8,000 13,750 12,250
Estimated Cash Receipts:
Debtors (Credit Sales) 62,000 64,000 58,000
70,000 77,750 70,250
Estimated Cash Payments: ` ` `
Creditors (Credit purchases) 36,000 38,000 33,000
Wages 10,000 8,500 9,500
Manufacturing expenses 3,750 4,000 3,750

158
Office expenses 1,500 2,500 3,500
Selling expenses 5,000 4,500 3,500
Plant-payment on delivery - - 1,600
Advance Tax - 8,000 -
Total 56,250 65,500 53,350
Closing Balance 13,750 12,250 16,900

Notes:
(i). Opening balance for June has been written after finding closing balance for May and for July
after finding the closing balance for June.
(ii). Since the period of credit allowed to customers is one month, the amount of credit sales in
April shall be collected in May and so on.
(iii). Since the period of credit allowed by suppliers is two months the payment for credit
purchases in March shall be made in May and so on.
(iv). One-half of the manufacturing expenses of April and one-half of those of May shall be paid in
May i.e. (1/2 of ` 3.000) + (1/2 of ` 4,500) i.e. ` 3,750 and so on.
(v). Office and selling expenses of April shall be paid in May and so on.

Que 6.
The following are the budget estimates of plant servicing department in a manufacturing
company:
Items of Cost Planned at 6,000 service hours Planned at 9000 service hours
(`) (`)
Salaries 28,000 28,000
Indirect materials 42,000 63,000
Miscellaneous costs 16,000 20,500
Required: Prepare a flexible budget for the department for 7,000, 8,000 and 9,500 service hour.

Solution:
FLEXIBLE BUDGET
For 7,000 For 8,000 For 9,500
Items of Cost Comments
Service Hours ` Service Hours ` Service Hours `
Salaries 28,000 28,000 28,000 Fixed Cost
` 7 per hour
Indirect Materials 49,000 56,000 66,500
(Variable Cost)
Miscellaneous `1.50 per hour
10,500 12,000 14,250
Cost (Variable Cost)
87,500 96,000 1,08,750

CONTROL RATIOS

Three important ratios are commonly used by the management to find out whether the deviations
of actual from budgeted results are favorable or otherwise. These ratios are expressed in terms of
percentages. If the ratio is 100% or more, the trend is taken as favorable. The indication is taken as
unfavorable if the ratio is less than 100%. These ratios are:

159
Activity Ratio It is a measure on the level of activity attained over a period. It is obtained when the
number of standard hour’s equivalent to the work produced is expressed at a percentage of the
budgeted hours.

Standard hours for actual production

Activity Ratio = × 100
Budget hours

Capacity Ratio This ratio indicates whether and to what extent budgeted hours of activity are
actually utilised. It is the relationship between the actual number of working hours and the
maximum possible number of working hours in a budget period.

Actu al hours worked

Capacity Ratio = Budget hours

Efficiency Ratio This ratio indicates the degree of efficiency attained in production. It is obtained
when the standard hour’s equivalent to the work produced are expressed as a percentage of the
actual hours spent in producing that work:

Standard hours for actual production

Efficiency Ratio = × 100
Actual hours worked

Calendar Ratio Sometimes Calendar Ratio is also calculated. It is calculated on the basis of
budgeted working days in a year on a month. It tells about the shortfall or otherwise on account of
lesser or more number of effective working days (because of holidays). It is a part of Capacity
Ratio. It can be computed thus:
Budgeted Days
Calendar Ratio = Actual Days × 100

Que 7.
A factory produces 2 units of commodity in one standard hour. Actual production during a
particular year is 17,000 units and the budgeted production for the year is fixed at 20,000 units.
Actual hours operated are 8,000. Calculate the efficiency and activity ratios.

Solution:
2 units an: produced in one standard hour 17,000
17,000
:. 17,000 units = 2 i.e... 8,500 standard hours for actual production

20,000
And 20,000 units = i.e... 10,000 budgeted hours
2
actual production
Efficiency = Standard hours for Actual × 100
hours worked
8500
= 8000 × 100 = 106.25%

Standard hours for actual production

Activity Ratio = ×100
Budgeted hours
8500
= 10000 × 100 = 85%

Que 8.
A factory produces two products P and Q. P takes 10 hours to produce and Q requires 16 hours as
per the budget. A month has 25 budgeted days of 8 hours each. During the month 500 units of P
and 400 units of Q were produced. The factory employs 50 workers. They actually worked for 9
hours daily for 24 days.

Calculate:
(i) Efficiency ratio; (ii) Capacity ratio; (iii) Calendar Ratio.

160
 Solution:
Budgeted hours = 50 × 8 × 25 = 10,000
Actual hours = 50 × 9 × 24 = 10,800
Standard hours for actual production
P = 10 × 500 = 5,000
Q = 10 × 400 = 6,400
Total =11,400

Standard Hours for Actual Output

(i) Efficiency ratio = × 100
Actual Hours

11,400
= 10,800 = 105.55%

Actual hours
(ii) Capacity ratio = Budgeted hours × 100

10,800
= 10,000 = 108%

Actual days
(iii) Calendar ratio = Budgeted days × 100

24
= 26

= 96%
Que 9.
Activity ratio of a company is 80% and is capacity ratio is 120%. Find out its efficiency ratio.

Solution:
Activity Ratio = Capacity Ratio × Efficiency Ratio
80 = 120 × X
120X = 80
80 2
X = 120 = 3 = or 66.67%

Que 10.
A factory manufactures two types of articles- X and Y. Article X takes 10 hours to make and article
Y requires 20 hours. In a month (25 days of 8 hours each) 500 units of X and 300 units of Y are
produced. The budgeted hours are 8,500 per month. The factory employs 60 men in the
department concerned. Compute Activity Ratio. Capacity Ratio and Efficiency Ratio.
Solution:
Standard hours for actual production Hrs.
X 500 units × 10 5,000
Y 500 units × 20 6,000
11,000
Budgeted Hours 8,500
Actual Hours Worked 60 × 8 × 25 = 12,000

Standardhoursforactualproduction
Activity Ratio = × 100
Budgeted hours
11,000
= × 100 = 129%
8,500

161
 Actual hours worked
Capacity Ratio = × 100
Budgeted hours

12,000
= × 100 = 141%
8,500

Standard hours for actual production

Efficiency Ratio = × 100
Actual hours worked

11,000
= 12,000× 100 = 92%

Que 11.
Computeronix Ltd. produces two products, viz., Product - A and Product B, in one of its
departments. Each unit takes 5 hours and 10 hours respectively as production time. 1,000 units of
Product - A and 600 units of Product - B were produced during March, 2001. Actual man-hours
spent in the-production were 10,000. Monthly budgeted hours are 8,000. Compute the various
control ratios.

Solution:
Budgeted hours per month = 8,000
Actual hours worked = 10,000

Actualhoursworked 10,000
Capacity Ratio = × 10 = × 100 =125%
Budgeted hours 8,000

Standard Hours for Actual Production

Efficiency Ratio = × 100
Actual Hours Worked

10,000 × 5 − 600 × 10 11,000

= = 10,000 ×100 = 110%
10,000

Standard Hours for Actual Production

Activity Ratio = × 100
Budgeted Hours

11,000
= × 100 = 137.5%
8,000

162
 PAST EXAMINATION QUESTIONS

Multiple Choice Questions

1. A budget that gives a summary of all the functional budgets and projected profit and loss
account is known as-
(a) Capital budget
(b) Flexible budget
(c) Master budget
(d) Discretionary budget.
Ans. (c) Master budget

2. A budget designed to remain unchanged irrespective of the level activity actually

attained is called-
(a) Master budget
(b) Fixed budget
(c) Current budget
(d) Flexible budget
Ans. (b) Fixed Budget

Fill in the Blanks

1. The system of standard costing and budgetary control has the common objectives, but both are
two different techniques (independent).
2. Functions determine the priorities of functional budgets.
3. Master budget is a summary budget incorporating the component functional budgets and
which is finally approved, adopted and employed.
4. Fixed budget is a budget designed to furnish budgeted costs for any level of activity actually
attained.

True and False/Correct and Incorrect

1. A fixed budget is concerned with budgeting of fixed assets.

Ans. False, A fixed budget is a budget which is designed to remain unchanged irrespective of
the level of activity actually attained.

2. Budgeting and forecasting are used inter-changeably, as such there is no difference

between the two.
Ans. False, Though the objectives of Budgeting and Forecasting are same but they cannot be
used interchangeably. Forecast is a preliminary step for budgeting and budget begins when
forecasting ends. Budgets are based upon the forecasts of anticipated events.

3. A budget manual is a summary of all the financial budgets.

Ans. False, A budget manual is document schedule or booklet which sets out the responsibility
of the person engaged in the routine of and the forms and records for budgetary control.

4. Fixed budgets are budgets of fixed assets.

Ans. False, Fixed budgets are most suited for fixed expenses but, they have only a limited
application and are ineffective as a tool for cost control.

5. Distinguish between the 'Budget period' and 'control period'.

Ans: Budget Period and Control Period: A budget period should be distinguished from control
period.

163
The budget period will depend upon the following two factors:
(a) The type of business; and
(b) The control aspect.

For example, in case of seasonal industries (that is food or clothing), the budget period should be a
short one and should cover one season. But in case of industries with heavy capital expenditure
such as heavy engineering works, the budget period should be long enough to meet the
requirements of the business. From .control point of view, the budget period should be a short one
so that the actual results may be compared with the budget each week end or month end and
discussed with the Budget Committee.

A budget period should be distinguished from 'control period; The latter indicates the periodicity
with which reports are sent to the various levels of management. It need not be the same as the
budget period. Reports are sent usually at shorter intervals so that corrective action may be taken
within budget period.

164
 TRAIN UR BRAIN
1. Budgetary Control is a system of c) Middle term budget
controlling – d) All of the above
a) Costs b) Production 10. Budget is prepared –
c) Sales d) Loss a) Before a specified period
2. ________ spells out duties and b) After a specified period
responsibilities of various executives c) During a specified period
concerned with budgets. d) None of the above
a) Wage Sheet b) Budget 11. In flexible budgeting –
manual a) Budget standards may be adjusted at
c) Cost Sheet d) Sales record will
3. A factor which influences all other b) Planned activity level is adjusted to
budgets is called - the actual activity, level before the
a) Direct Factor b) Indirect Factor budget comparison report is
c) Key Factor d) None of these prepared
4. Master Budget is – c) Statement included in the budget
a) Total of all Budgets report vary from period to period
b) Expansion of all Budgets d) None of the above
c) Average of all Budgets 12. ________ is set first and all other budgets
d) Summary of all Budgets are subordinate to it.
5. Zero-Base Budgeting was first used by – a) Long term Budget
a) Jimmy Carter b) De Paula b) Capital expenditure budget
c) CIMA, England c) Budget for the key factor
d) None of the above d) Master Budget
6. The basic difference between a fixed 13. Budget is the most important tool of –
budget and flexible budget is that – a) Cost Planning b) Sales Planning
a) A fixed budget cannot be changed c) Production Planning
whereas flexible budget can be easily d) All the above
changed. 14. A budget which lays more stress on
b) A fixed budget is budget for simple control aspect is an -
measure of activity whereas flexible a) Flexible budget b) Master Budget
budget in an different activity levels. c) Responsibility budget
c) A fixed budget is concerned with d) Operating budget
fixed expenses whereas flexible 15. A budget which represents fixed assets
budgets deals with variable expenses expenditure during the budget period is
d) All of the above known as -
7. In flexible budget, careful study and a) Fixed Budget
classification of can be – b) Long term cash budget
a) Direct and indirect expenses c) Mid-term budget
b) Administrative, selling and factory d) Capital expenditure budget
expense 16. A short term cash budget does not
c) Fixed, semi-variable and variable exhibit –
expenses a) Cash Payment
d) Past and current expenses b) Issuing of bonus shares
8. Production Budget is governed by – c) Investment activities
a) Cost Budget b) Material d) None of the above
Budget 17. Cash budget is concerned with –
c) Fixed Budget d) Sales Budget a) Past Value b) Present Value
9. Budgetary control is useful for the c) Future Value
control of costs relating to – d) Forecasting figures
a) Short term Budget 18. ________ financial forecasting is primarily
b) Long term Budget done to support.

165
 a) Managing b) Planning Standard hours for actual production
÷ 100
c) Staffing d) Organizing budgeted hours

19. _________ is a section of an organization for c) Activity Ratio =

budgeted hours
which separate budgets can be prepared × 100
Standard hours for actual production
and control exercised. d) Activity Ratio =
a) Budget Centre b) Planning budgeted hours
× 100
cetnre Standard hours for actual production
c) Management centre 27. The formula for calculating Capacity
d) Production centre Ratio in budgetary control is -
Acutal Hours Worked
20. A _________ is required to be set up to a) Capacity Ratio = Budgeted hours ÷
provide an effective medium for co-
100
ordinating and review of the budget Acutal Hours Worked
programme. b) Capacity Ratio = ×
Budgeted hours
a) Planning Committee 100
b) Management Committee c) Capacity Ratio =
Acutal Hours Worked
+
c) Budget Committee Budgeted hours

d) All the above 100

Acutal Hours Worked
21. _________ is a method of budgeting d) Capacity Ratio = -
Budgeted hours
whereby all activities are re-evaluated 100
each time a budget is formulated. 28. The formula for calculating Efficiency
a) Tradition Budgeting Ratio in Budgetary control is –
b) Zero base budgeting a) Efficiency Ratio =
c) Flexible Budgeting Standard hours for acutal production
+ 100
d) All the above Actual hours worked
22. A responsibility centre that has control b) Efficiency Ratio =
Standard hours for acutal production
over both cost and revenue is known as – - 100
Actual hours worked
a) Profit centre b) Cost centre c) Efficiency Ratio =
c) Investment centre Standard hours for acutal production
×100
d) None of the above Actual hours worked
23. A responsibility centre that has control d) Efficiency Ratio =
Standard hours for acutal production
over cost, revenue and investment of ÷100
Actual hours worked
funds is known as – 29. _________ is a financial and/or quantitative
a) Cost centre b) Profit Centre statement, prepared and approved prior
c) Investment Centre d) All of the to a defined period of time.
above a) Budget b) Manual
24. Budget which gives an estimate of the c) Forecast d) Program
anticipated receipts and payments 30. ____________ is an estimate of what is likely
during budget period is known as - to happen.
a) Fixed Budget b) Flexible a) Budget b) Manual
Budget c) Forecast d) Program
c) Long term budget d) Cash Budget 31. ___________ is the top management’s
25. The budget which is designed to remain involvement in budget process is
unchanged irrespective of the level of essential for successful implementation
activity actually attained is known as – of the budgets.
a) Fixed Budget b) Flexible a) True b) False
Budget b) Partly True d) Partly False
c) Short term Budget d) Cash Budget 32. Production =
26. The formula for calculating Activity Ratio a) Sales + closing stock + Opening stock
in Budgetary Control is - b) Sales + closing stock – opening stock
a) Activity Ratio = c) Sales – closing stock + opening stock
Standard hours for actual production
× 100 d) Sales – closing stock - opening stock
budgeted hours
b) Activity Ratio = 33. __________ is a period for which the budget
is prepared.

166
 a) Budget period d) None of the above
b) Accounting period 43. profit planning and control is not a part
c) Time period of budgetary control mechanism.
d) None of the above a) True b) False
34. A budget can be a - c) Partly True d) Partly False
a) Long term budget 44. Strategic implementation is often
b) Short term budget described as the action phase of the
c) Both (a) and (b) strategic management process, covers –
d) None of the above i) Strategy activation
35. A __________ is generally prepared for one ii) Performance management
year or lesser period. iii) Evaluation
a) Long term budget iv) Control
b) Short term boudget a) i, ii, iii b) ii, iii, iv
c) Both (a) and (b) c) i, iii, iv d) All of the
d) None of the above above
36. The ___________ budget is a foundation 45. _________ is a blue print indicating the
upon which the other functional budgets course of action to achieve the desired
are built. objectives.
a) Cash b) Master a) Budget b) Period
c) Sales or Revenue d) Production c) Strategy d) Centre
37. A system of budgetary control may be 46. Proper performance measurement
used in an organization even when system is a must for achieiving desired
_________ costing is being used. results.
a) Standard b) Marginal a) True b) False
c) Job d) Batch c) Partly True d) Partly False
38. ____________ budget is a summary budget 47. ____________ is also known as key sector or
incorporating all functional budgets. limiting factor, whose influence must
a) Cash b) Master first be assessed in order to ensure that
c) Sales or Revenue d) Production the functional budgets are reasonably
39. Budget is a/an – capable of fulfillment.
a) Financial and/ or quantative a) Principal budget factor
statement prepared and approved b) Zero base budgeting
prior to a defined period of time c) Master budget
b) Operating profit and financial plan to d) None of the above
a business enterprise 48. The useful purpose that budget seeks to
c) Sort of commitment or a target which serve include coordinating the activities
the management seems to attain on of the various parts of the organization
the basis of forecasts made and ensuring that the parts are in
d) All of the above harmony with each other.
40. A budget is prepared for different a) True b) False
segments of a business. c) Partly True d) Partly False
a) True b) False 49. __________ is known as the process of
c) Partly True d) Partly False designing, implementing and operating
41. The ________ budget is the starting point of budgets.
most master budgets. a) Budgetary Control b) Budget
a) Cash b) Master variance
c) Sales or Revenue d) Production c) Budgeting d) Budget
42. ___________ is based on the premise that Manual
every rupee of expenditure requires 50. In a flexible budget format, the
justification. depreciation at the output level of 9,000
a) Zero Base Budgeting (ZBB) units is ` 24,000, the depreciation per
b) Economic Order quantity
unit at 10,000 unit level would be –
c) Economic Batch Quantity

167
 a) ` 1.7 b) ` 2.67
c) ` 2.40 d) ` 2.50

ANSWERS

1. a 2. b 3. c
4. d 5. a 6. b
7. c 8. d 9. a
10. a 11. b 12. c
13. a 14. c 15. d
16. b 17. d 18. b
19. a 20. c 21. b
22. a 23. c 24. d
25. a 26. a 27. b
28. c 29. a 30. c
31. a 32. b 33. a
34. c 35. b 36. c
37. a 38. b 39. d
40. a 41. c 42. a
43. b 44. d 45. c
46. a 47. a 48. a
49. c 50. c

168
 CHAPTER

17

Meaning of Operating Costing

Operating costing method is applied by undertakings providing services, not tangible products. It
is also called service costing. Operating costing is defined by the CIMA Terminology as "that form
of operation costing which applies where standardised services are provided either by an
undertaking or by a service cost centre within an undertaking." The costs incurred in providing a
service are called' operating costs' and the method used for computing such costs is called
'operating costing'.

Internal and External Services

Operating costing is used for ascertaining cost of all services produced within an undertaking,
whether for use by products and departments within the organisation, called internal services, or
for sale to outsiders at a price to yield profit, called external service. Service produced may be used
both internally as well as externally. Power may be generated by a captive power generation plant
to be used by various production departments within the organisation and part of it may be for
sale to outsiders. Same can be said about transport services, gas supply or canteen services, etc.
Method of computing cost is same for both internal and external services and they come under
operating costing.

Broad Areas of Operating Costing

This method of costing is used wherever any type of service is to be costed involving costs
measurable in terms of money. These services may broadly be categorised as:
(i). Transport services, e.g., Taxi, Bus, Truck, Railway, Tramway, Airline,
(ii). Supply services, e.g., Electricity/Power supply, Gas supply, Steam supply, Water supply,
(iii). Welfare services, e.g., Education, Healthcare, Canteen, Hotel, Libraries.
(iv). Municipal services, e.g., Sanitation services, Road repairs Street lighting etc.

Characteristics of Operating Costing

1. It deals with determination of cost of repetitive services, not tangible products.
2. It resembles unit costing such that the total cost incurred during a period on a service divided
by the total number of cost units of the service gives cost per unit of service.
3. The proportion of fixed costs is generally higher.
4. Requirement of working capital is generally less in case of service enterprises.
5. Similar services provided by different organisations may be qualitatively different. Hence
their cost may be different.
6. Various costs in providing services may be categorised as: Fixed charges and Variable
charges.

Cost Unit
There are large varieties of services and therefore, there are different cost units for different
services. Selection of a suitable cost unit for each service sometimes proves difficult. For some

169
services cost units are simple involving only one characteristic, whereas in other cases, it may be
composite reflecting two or more characteristics.

Simple Cost Unit: Composite Cost Unit:

Examples of simple cost unit are: Examples of composite cost unit are:
Nature of service Cost Unit Nature of service Cost Unit
Taxi Per kilometer Bus or Train journey Per passenger-
km
Hire of a complete bus Per kilometer Goods carriage in a train,. Per ton-km
Truck, etc
Hire of a complete Per kilometer Hospitalisation Per bed per day
truck
Course in a college Per student Hotel room Per room per
day
Buffet Lunch/Dinner Per guest Per guest per
day
Tea in a canteen Per cup of tea Electricity/Power Per kilowatt-
hour
Supply of gas/steam Per cubic feet Cinema/Circus Per seat per
show

Importance/Benefits of Operating Costing

1. Ensuring that fixed costs incurred on provision of services are fully utilised.
2. Ascertaining that the maintenance of facilities is neither neglected nor excess cost is incurred
on maintenance.
3. Keeping operating cost at the optimum level.
4. Comparing cost of providing a service during a period with the cost incurred in the same
organisation during the previous period, or by other organisations in the same period. This
enables cost control.
5. Ascertaining the most economic input for providing a particular service, i.e., ge'1eratlon of
power with petrol, diesel or gas, etc.
6. Evaluating alternatives, e.g. carry freight by tempo, truck or railway.
7. Determining whether to produce a service or buy it from outside, e.q..whether to generate
power through a captive power plant or buy it from outside, or buy trucks or hire trucks, etc.
8. In case of production of service for use internally by different departments within the
organisation, the cost per unit of service needs to be calculated for determining the charge to
departments/products for the use of the service.
9. In case of production of service for sale to outsiders, the cost per unit of service needs to be
ascertained for determining selling price and profitability of services.

Transport Costing
Transport costing relates to determining cost per service unit for Air, Water, and Road traffic for
both goods and passengers, e.g., cost of plying a passenger for 100 km; cost of air-lifting one ton of
goods for 100 km., cost of shipping 100 tons per 100 km., cost per km for a taxi, cost per
passenger- km in case of a bus or a train or cost per ton-km, for a truck or goods train, etc.

"The more kilometers you travel with your own vehicle, the cheaper it becomes". Comment
The cost per kilometer, (if one travels in his own vehicle) will decline when he travels more
kilometers. This is because the majority of costs for running and maintaining vehicles are of fixed
nature and the component of fixed cost per kilometer goes on decreasing with an increase in
kilometer travel. Hence, the given statement is true.

170
Cost Classification in Transport Costing
Costs involved in transportation business can be classified in two ways:

(a) Fixed Costs: These costs are-constant over a period of time irrespective of mileage, freight or
fare collected. All examples given under the head standing charges come under the category
of fixed costs. In addition the maintenance cost which are of fixed nature, e.g., servicing,
periodic maintenance should also come under this head. In case depreciation is calculated on
the basis of life of vehicle given in terms of number of years, it also becomes a fixed cost
because depreciation charge on a month/year basis is not affected by actual running in this
case. Salaries of drivers, conductors, helpers, cleaners, etc. are also fixed costs.

(b) Variable costs: These costs vary in proportion to the number of kilometers a vehicle runs, so
that variable cost per kilometer remains constant. Examples are: petrol, diesel, mobil oil,
salaries and commissions paid to driver, conductor, helper etc. on the basis of actual mileage.
Repairs and spares may be included in this category if these are considered variable on the
basis of mode of their incurrence. In case life of the asset is given in kilometers and the
depreciation is calculated on the basis of number of kilometers the vehicle runs, then it is also
a variable cost. Salaries of drivers, conductors, helpers, cleaners, etc. if paid on daily basis is a
variable cost.
Alternative classification can be Standing charges & running charges.

Normal and Abnormal Losses

As in every other case, .in transport costing also, all normal costs/losses must be taken into
account while calculating cost per unit. But, cost per unit must not be influenced by abnormal
gains and losses. For example, if in taxi business, a taxi has generally 20% running without fare,
then this cost of 20% idle running should be recovered from 80% normal running with fare.

In the same way if a 50 seater bus has generally 90% occupancy, i.e., 45 seats are generally
occupied, all fixed and variable costs relating to the operation of the bus should be divided by
passenger - kms based on 45 seats so as to arrive at cost per passenger-km.

Again, if in a to and fro trip a truck gets freight only on one way running, the cost of two way
running should be recovered from normal ton-kms based on one way freight.
In the above three cases, 20% idle running or 10% idle capacity or one way running without fare,
respectively are normal losses.

However, if there are abnormal losses, such as, loss on account of accident, it should be excluded
from operating cost sheet. Also if in the above cases idle running or idle capacity, etc., is more-than
the normal, excess idle running or idle capacity represents abnormal loss, and cost per unit must
not be affected by this.

Absolute and Commercial Ton-kms

Absolute ton-kms are calculated on the basis of actual haulage from one destination to another
when the same truck or station-wagon carries freight for different destinations in one trip while
commercial ton-kms are calculated with reference to average haulage. In case such type of
operation in trucking business is normal, the freight rate is determined on the basis of commercial
ton-kms (if market permits) while the actual collection is based an absolute ton-kilometers

171
 CLASSROOM PRACTICE – LETS PLAY TOGETHER

Qus 1.
From the following information, calculate the (a) Effective kilometres p.a.; (b) Effective passenger
kilometres p.a.; (c) Total fuel consumption; and (d) Total cost of fuel; (e) Cost of fuel per kilometre

Distance of one way route 40 kilometres

Round trips per day 3
Days operated in a month 25
Seating capacity 50 passengers
Seating capacity occupied 80%
Fuel consumption 1 litre per 6 kms
Rate of fuel ` 15 per litre

Solution
(a) Effective kilometres = Distance covered one way × No. of trips per day
×No. of days operated × No4. of months operated
= 40 × (3 × 2) × 25 × 12 = 72,000

(b) Effective passenger kilometres =Effective kilometres × Seating capacity × Seating

capacity occupied
= 72,000 × 50 × 80% = 28,80,000

Distance Covered 72,000

(c) Fuel Consumption = = = 12 000 Litres
Mileage per Litre 6

(d) Cost of Fuel = Fuel Consumption × Rate of Fuel

= 12,000 ×` 15 = `1,80,000

Total Cost of Fuel 1,80,000

(e) Cost of Fuel per Kilometre = = = ` 2.50 per Km.
Total Distance Covered 72,000

Qus 2.
A truck starts with a load of 10 tonnes of goods from station P. It unloads 4 tonnes at station Q and
rest of the goods at station R. It reaches at back directly to station P after getting reloaded with 8
tonnes of goods at station R. The distances between P to Q, Q to R and then from R to Pare 40 kms,
60 kms and 80 kms respectively.

Required: Compute 'Absolute Tonne-km' and 'Commercial Tonne-km'.

Solution
Absolute tonnes-kms = 10 tonnes×40 kms + 6 tonnes×60 kms + 8 tonnes × 80 kms
= 1,400 tonnes-kms
Commercial tonnes-kms = Average load × Total kilometres travelled
(10+6+8)
= tonnes× 180 kms = 8 tonnes× 180 kms
3
= 1,440 tonnes-kms

Note: It may be noted that while calculating the Absolute tonnes-kms, the travel between any two
stations is considered individually, while in the case of commercial tonne-kms, the trip is
considered - as a whole.

172
Qus 3.
From the following information, calculate the bus fare to be charged from each passenger:
(a) Delhi to Agra; (b) Delhi to Bhiwani; (c) Delhi to Chandigarh :

(a) Deihl to Agra 200 km

Delhi to Bhiwani 120 km
Delhi to Chandigarh 250 km
(b) Effective passenger km 3,72,000
(c) Total Cost (excluding Conductor's commission @ 15% and Passenger Tax @ 5% of total
takings) `1,48,800
(d) Desired Profit - 30 % on total takings.

Solution Statement showing Fare to be Charged

Particulars `
Total Cost (excluding Commission & Passenger Tax) 1,48,800
Add: passenger tax @ 5% of ` 2,97,600 14,880

Add: Conductor's Commission @ 15% of `2,97,600 44,640

Total Cost (including Commission & Passenger Tax (A + B + C) 2,08,320
Add: Profit @ 30% of `2,97,600 89,280
Total Takings (D + E) 2,97,600
Effective Passenger km 3,72,000
Taking per passenger km (` 2×97,600/3,72,000) Re .80
Fare to be charged
Delhi to Agra per passenger = 200 km Re. 0.80 = ` 160
Delhi to Bhiwani per passenger = 120 km × Re 0.80 = ` 96
Delhi to Chandigarh per passenger = 250 km × Re 0.80 = ` 200

Working Note: Calculation of total takings

Let the total takings be X
X = Total Cost + Profit
X = (` 1,48,800 + 0.05 X + .15X) + .30 X
X - 50X =` 1,48,800
X = ` 1,48,800/.5 = ` 2,97,600

Qus 4.
Calculate total passenger kilometers from the following information:
Number of buses 6, number of days operating in a month 25 round trips made by each bus per day
8, distance covered 20 kilometres (one side), capacity of bus 40 passengers, normally 80% of
capacity utilization.

Solution:
Passenger Kms. = (6 Buses × 25 days × 8 trips × 2 round × 20 kms × 40 passengers × 80%
capacity utilization) = 15,36,000

Qus 5.

173
A lorry starts with a load of 24 tonnes of goods from station A. It unloads 10 tonnes at station B
and rest of goods at station C. It reaches back directly to station A after getting reloaded with 18
tonnes of goods at station C. The distance between A to B, B to C and then from C to A are 270 kms,
150 kms and 325 kms respectively. Compute 'Absolute tonneskms' and 'Commercial tones-kms.

Solution:
Absolute tones kms
= tonnes (unit of weight) × Km (Unit of distance)
= 24 tonnes × 270 kms + 14 tonnes × 150 kms + 18 tonnes × 325 kms
= 6480 + 2100 + 5850
= 14430 tonnes kms

Commercial Tonneskms
= Average load × total kms traveled
24 + 14 + 18
=[ ] tonnes × 745 kms
3
= 13906.67 Tonnes km

Qus 6.
A truck starts with a load of 20 tonnes of goods from station A. It unloads 6 tonnes at station B and
rest of the goods at station C. It reaches back directly to station A after getting reloaded with 16
tonnes of goods at station C. The distance from A to 13 and B to C stations are 100 Kms. and 130
Kms. respectively.
Compute the absolute tonne-kms for the truck service. Dec 2013.

174
 TRAIN UR BRAIN
1. “Cost Accounting for services or 9. ________ Method is similar to process
functions (e.g. Canteens, maintenance, costing
and personnel) These may be referred to a) Operation is similar to process
as service centers, departments or costing
functions.” This is known as – b) Operating costing
a) Operating Costing b) Batch Costing c) steam generation costing
a) Job Costing d) Hotel costing
b) Standard Costing 10. An operation is a stage of manufacturing
2. Operating Costing is also known as – where the output is converted from one
a) Standard Costing b) Service form to another. Cost of each operation is
Costing known as -
c) Batch Costing d) Process a) Operating Costing
Costing b) Operation Costing
3. Operating costing is usually applicable in c) Hotel Costing
- d) Steam generation costing
a) Transport Companies 11. Boiler house costing is an example of –
b) Supply Agencies a) Process Costing b) Service
c) Hotels Costing
d) All of the above c) Standard Costing d) Output costing
4. Out of the following, features of service 12. Room day is a cost unit used in –
organizations are – a) Goods Transport b) Canteens
a) They use operating costing method c) Hotels d) Electricity
for determination of costs 13. Operating costing does not used in –
b) They are changed in providing or a) Transport b) Hospitals
operating a service c) Electricity d) Electronics
c) They are labour intensive 14. Cost per unit can be calculated by –
d) The major outputs and inputs cannot Total Costs for the period
a) Number of services units in the period
be stored. Number of services units in the period
5. Composite units used for transport b) Total Costs for the period
costing are of ……. types. c) Average × Total km. travelled
a) Four b) One d) None of the above
c) Two d) Three 15. In case of ________ the cost is determined
6. …….. units are calculated by the total of per man meal.
tone – kms (or quintal-km, tone-mile etc.) a) Power house b) Canteens
arrived by multiplying the distance with c) Transport d) Boiler house
the respective weight carried. 16. A log sheet is a record which is
a) Commercial absolute maintained for each vehicle to record the
b) Absolute details of trips, running time, capacity,
c) Simple Average distance covered, cost of petrol diesel,
d) None of the above lubricants loading and unloading time
7. ________ units are calculated by arrived by etc. on daily basis is known as –
multiplying the average weight carried a) Daily log sheet
with the total distance travelled. b) Monthly log sheet
a) Commercial b) Absolute c) Quarterly log sheet
c) Simple Average d) None of the above
d) None of the above 17. An electricity supply company used
8. The load which is computed as a cost unit ………… as cost unit.
by multiplying the respective weight and a) Ton-Kilometer b) Patient Day
the quantity is – c) Kilowatt-hours
a) Standard load b) Over Load d) Full time student
c) Labour Load
d) None of the above

175
18. ………. Method is useful for a transport 28. Hospitals use ________ a cost per unit.
company. a) No. of hours pumped
a) Operations Costing b) Per 1000 gallons
b) Operating costing c) Patient day
c) Process Costing d) No. of beds
d) Single Costing 29. A captive power generation unit in a
19. _________ costing is also known as manufacturing company is a _________
operating costing. a) Production department
a) Output b) Operation b) Service department
c) Service c) Account Department
d) Continuous Process d) Marketing Department
20. Under transport costing, out of the 30. In transport undertaking, out of the
following which one is not used as following which one is considered as
composite unit ________ fixed cost?
a) Number of miles run a) Driver’s salaries
b) Passenger mile b) Cleaner’s salaries
c) Passenger mile c) Garage mechanic’s salaries
d) Ton Kilometer d) All of the above
21. Out of the following boiler house costing 31. ______ is maintained for each vehicle
is an example of – which gives performance statistics of
a) Process costing each vehicle.
b) In-house costing a) Cash book b) Log Book
c) Service Costing c) Work book d) Scrap Book
d) Output Costing 32. Log book is also known as –
22. Service costing is not used in - a) Cash book b) Work book
a) Electricity b) Hospitals c) Daily log sheet d) Cost sheet
c) Transport d) Electronics 33. Service costing is also called _______ used
23. Under _______ Company, Kilowatt hour is for establishing cost of services rendered
used as a composite cost unit. or services offered for sale and no items
a) Boiler House b) Transport are produced.
c) Electricity supply d) Coal a) Operating costing
extraction b) Operation costing
24. Maintenance charges like tyres and c) Process costing
tubes, repairs, and paintings, over halls, d) Job costing
etc. are in the nature of semi variable 34. _______ is a method of process costing in
expenses. which each process or stage of
a) True b) False production is costed separately.
c) Partly True d) Partly False a) Operating costing
25. In ______ costing, standing expenses will b) Operating costing
not in direct proportion to kilometers c) Process costing
run. d) Job costing
a) Service b) Transport 35. Repairs and maintenance is an example
c) Operating d) Operation of –
26. The rental of a car is include – a) Operating Cost b) Operation cost
a) Fixed Costs b) Running Costs c) Running cost d) Fixed cost
c) Both (a) and (b) 36. Accumulation and control of costs in
d) None of the above transport costing are achieved through a
27. Water supply companies use _____ as cost –
per unit. a) Daily log sheet
a) No. of hours pumped b) Operating cost sheet
b) Per 1000 gallons c) Both (a) and (b)
c) Patient day d) None of the above
d) No. of beds

176
37. Cost of car ` 50,000
Residual value of the end
of the 5th year ` 10,000
Calculate monthly depreciation?
a) ` 667 b) ` 8.667
c) ` 8,000
d) None of the above
38. A transport service company is running 4
buses between two towns the distance of
which as 50 kms. Seating capacity of each
bus is 40 passengers. The seating
capacity utilized was 75%. All the four
buses run on all days of the month. Each
bus had made one round trip daily. The
number of passenger-kms, are –
a) 3,60,000 b) 1,20,000
c) 2,40,000 d) 3,20,000
39. If the present cost of the car is ` 25,000,
residual value at the end of the 4th year is
` 5,000, the monthly depreciation is
………..
a) ` 4,000 b) ` 416.67
c) ` 4,417
d) None of the above
40. A bus carries 25 passengers daily for 25
days and its mileage per month is 2,000
kms. Its passenger miles are …………
a) 60,000 b) 25,000
c) 40,000 d) 50,000
41. The distance covered by a tourist bud
between Delhi to Punjab and back on the
same day is 150 kms. One way. The bus
will make 8 trips in a month with
occupancy of 90%. The seating capacity
of the bus is 50. The total passenger kms.
In a month are ________.
a) 1,00,000 b) 1,08,000
c) 1,20,000 d) 90,000
42. A hotel has a capacity of 100 single
rooms and 20 double rooms. The average
occupancy of both single and double
rooms is expected to be 80% throughout
the year of 365 days. The total amount
single rooms/day are _______. The rent of
double room has been fixed at 125% of
the rent of a single room.
a) 36,500 b) 35,040
c) 29,200 d) 5,840
43. The hospital is opened for 365 days, but
bed occupancy is 25 patients per day in
60 days; and 20 beds occupied in another
40 days. Extras beds occupied during the
year are 200 The patient-days of the
hospital are _________.
a) 4,000 b) 2,200
c) 3,200 d) 4,600
44. The seating capacity of a school bus is 60
students one way. The seating capacity is
fully occupied during the whole year. The
school follows differential bus fees based
on distance travelled as under:
From Bus Fee Student availing
School the facility
4 kms 25% of full 15%
8 kms 50% of full 30%
16 kms Full 55%
The total students’ equivalent to 25%
fare students it:
a) 264 b) 336
c) 396 d) 354
45. Transport Company is running five
buses between two towns, which are 50
kms. Apart, seating capacity of each bus
is 50 passengers. Actually passengers
carried by each bus were 75% of seating
capacity. All buses ran on all days of the
month. Each bus made one round trip per
day. Passenger kms. Are –
a) 2,81,250 b) 5,62,500
c) 3,30,000
d) None of the above
46. A truck capable of carrying 5 tonnes of
goods normally carries 80% of the load
on the outward journey and 40% of the
load on inward journey. The journey is
300 kms. For one side. It takes two days
to complete the return trip. In a year of
300 days compute the tones- km.
a) 2,70,000 b) 3,00,000
c) 3,30,000 d) 3,50,000
47. A lorry starts with a load of 40 tonnes of
goods from Section A. It unloads 16
tonnes at Station B and the rest of the
goods at Section C. It reaches back
directly to Station A after getting
unloaded with 32 tonnes of goods at
Station C. The distance between A to B, B
to C and then from A to C are 16 kms, 240
and 320 kms respectively.
(i) Calculate absolute tone km.
a) 22,000 b) 22,400
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 c) 22,432 d) 22,412 a) Running b) Petrol
(ii) Calculate commercial tone km. c) Driver Salary d) Tax
a) 23,040 b) 23,004 55. Service costing is called as _______________
c) 23,042 d) 23,043 a) Operation Costing
48. A truck carries goods covering a distance b) Operating Costing
of 60 km. each way. On upward journal, c) Multiple costing
freight is available for its full capacity, d) None of these
but , on downward journey, only 25% of 56. Electricity supply company uses
its capacity is filled up. The truck runs on _____________ as cost unit.
a average 20 days a month. a) Kilo watt hour b) Per household
(i) Compute absolute tone-km per c) Voltage d) None of these
month for the truck if the capacity of 57. In transportation costing a composite
the truck is 10 tons. unit such as ________________ is used.
a) 15,000 b) 20,000 a) Passenger Km b) Per km
c) 15,450 d) 15,540 c) Per passenger ton d) Per Passenger
(ii) Compute commercial tone-km per 58. Boiler house costing is an example of
month for the truck if the capacity of ____________.
the truck is 10 tons. a) Operation b) Service
a) 20,000 b) 15,000 c) Process d) Job
c) 15,400 d) 15,540 59. In service costing fixed charges are also
49. State which of the following are the called as:
characteristics of service costing: a) Standing Charges
1. High levels of indirect costs as a b) Variable charges
proportion of total costs c) Fixed charges
2. Use of composite cost units d) None of these
3. Use of equivalent units? 60. Service costing is not used in one of the
a) (1) only b) (1) & (2) only following:
c) (2) only d) (2) & (3) only a) Electricity b) Hospitals
50. Which of the following organizations c) Transport d) Electronics
should not be advised to use service 61. Operating costing is used in concerns:
costing? a) Manufacturing b) Trading
a) Distribution service c) Service Providing
b) Hospital d) All of the above
c) Maintenance Department of a
manufacturing company ANSWERS
d) A light engineering company
51. _______________ is the most suitable method 1. a 2. B 3. d
in a transport industry. 4. d 5. C 6. b
a) Operation Costing 7. a 8. A 9. a
b) Service Costing 10. b 11. B 12. c
c) Process costing 13. d 14. A 15. b
d) Job Costing 16. a 17. C 18. b
52. Room/day is the cost unit used in 19. c 20. A 21. c
__________ 22. d 23. C 24. a
a) Hotels b) Hospitals 25. b 26. C 27. b
c) Schools d) None of these 28. c 29. B 30. d
53. Maintenance charges are in the nature of 31. b 32. C 33. a
_____________ expenses 34. b 35. C 36. c
a) Fixed b) Variable
37. a 38. A 39. b
c) Semi-Variable d) None of these
40. d 41. B 42. a
54. In transport costing ______________ charges
43. b 44. D 45. b
are more or less in direct proportion to
46. a 47. (i) B (ii) a
kilometers run.

178
48. (i) a (ii) B 49. c
50. c 51. B 52. a
53. c 54. A 55. b
56. a 57. A 58. b
59. a 60. D 61. c

179
 CHAPTER

18

INTRODUCTION
To operate business operations efficiently and successfully, it is necessary to make use of an
appropriate accounting system. Such a system should state in clear terms whether cost and
financial transactions should be integrated or kept separately. Where cost and financial accounting
records are integrated, the system so evolved is known as integrated or integral accounting. In
case cost and financial transactions are kept separately, the system is called Non-Integrated
Accounting system.

NON-INTEGRAL SYSTEM
Meaning of Non-integral system

Non-integral system is a system of accounting under which two separate sets of account books are
maintained- one to record cost transactions and the other to record financial transactions. It is also
known as non-integrated system or Inter-locking system or Cost ledger Accounting system.
CIMA, London defines Non-integral system as, “a system in which the cost accounts are distinct
from financial accounts, the two sets of accounts being kept continuously in agreement by the use
of control accounts or made readily reconcilable by other means.”

Basic features of Non-Integral system

The basic features of Non-Integral system are as follows:

a) Impersonl accounts - cost accounts are concerned with impersonal accounts i.e., real and
nominal accounts.
b) Various Ledgers - Under this system one main ledger (i.e. cost ledger) and various subsidiary
ledgers are maintained.

Ledgers in Cost Books

The following four important ledgers are maintained in cost books under non-integral system:
Ledger Meaning
1. Cost Ledger It is the main/principal ledger in cost books which contains –
a) Control A/c for each of the subsidiary ledgers like Stores Ledger
Control Account. Work-in-Progress Ledger Control Account, Finished
Goods Ledger Control Account etc.
b) A cost Ledger Control Account/ General Ledger Adjustment Account
to make the Cost Ledger self-balancing.
2. Stores Ledger/ It deals with material transactions. It contains a separate account for each
Job Ledger item of store (i.e., raw materials, components, consumable stores etc.) each
such account is debited with stores received and is credited with stores
issued/ returned to vendor. The balance of this account represents the
cost of unconsumed stores.

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 3. Work-in- It deals with work-in-progress. It contains a separate account for each
progress job/work-in-progress. Each such account is debited with materials cost,
Ledger wages and production overheads chargeable to the work and is credited
with the cost of work completed/finished goods produced. The balance of
this account represents the cost of unfinished work.
4. Finished It deals with finished goods. It contains a separate account for each item of
goods ledger finished product. Each such account is debited with cost of finished goods
and the amount of administration overheads absorbed and is credited
with cost of goods sold. The balance of this account represents the cost of
unsold finished goods.

CONTROL ACCOUNTS

i) Meaning of Control accounts

Control accounts are the total/summary accounts which are –
i) Maintained for the subsidiary ledgers in the Cost ledger under non-integral system.
ii) Prepared on the basis of periodic table of transactions in the respective subsidiary
ledgers.
ii) Content of control ledgers
A control account is debited with the total of items which have been debited in various
individual accounts in the respective subsidiary ledger and is credited with the total of items
which have been credited in various individual accounts in the respective subsidiary ledger.
iii) Balance of Control Account
The Balance of a control account represents the total of balances in various individual
accounts in the respective subsidiary ledger.
iv) Cost ledger Control Account
In addition to Control Accounts for each of the subsidiary ledgers, a Cost ledger Control
Account is also maintained in cost ledger to complete the double entry and to make the cost
ledger Self Balancing.
v) Objective of control Accounts
Control accounts are maintained in the Cost ledger to complete the double entry.
vi) Advantages of Control Accounts
i) Control A/c provides a summary of transactions recorded in various subsidiary ledgers.
ii) These facilitate the prompt preparation of financial statements at the end of each
accounting period.
iii) These provide a basis for reconciliation of cost and financial accounts.
vii) Important control accounts
1. Stores Ledger Control Account
2. Wages Control Account
3. Production Overheads Control Account
4. Work-in-Progress Control Account
5. Finished stock ledger Control Account
6. Administration Overheads Control Account
7. Cost of sales Account
8. Selling & Distribution overheads Control Account
9. Overhead Adjustment Account
10. Costing Profit & Loss Account
11. Cost Ledger Adjustment Account

Meaning, Contents, Balance and format of Important Control Accounts

1. Stores Ledger Control Account
Meaning It is a total /summary account which summarises all the materials
transactions in aggregate.

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 Contents It is debited with the stores received on the basis of Goods received
Notes, Materials Returned Notes and is credited with the stores issued
in the basis of Material requisition slips/Materials Abstract, Abnormal
losses or gains (if any) are transferred to Costing Profit and Loss A/c.
Balance Its balance represents the total cost of unconsumed stores which must
agree with the aggregate of the balances of individual accounts in the
stores ledger.
Format Its general format is shown below:

Stores Ledger Control Account

Particulars ` Particulars `
To Balance b/d …... By WIP Control A/c ……
To Cost ledger Control A/c (issued to Production)
(Stores purchased) …… By Production overheads control A/c
(Issued for Factory Repairs) ……
By Administration Overheads Control
A/c
(Issued to Adm. Office)
By selling & Dist. Overheads Control A/c
(Issued to selling & Dist. Office) ……
By Capital WIP Control A/c
(Issued for Capital Order)
By Cost ledger Control A/c ……
(Insurance Claim)
By Costing P & L A/c
……
(Irrecovered Abnormal Loss)
By Balanced c/d
……

……

……
…… ……

2. Wages Control Account

Meaning It is a total /summary account which summarises all wage transactions
in aggregate.
Contents It is debited with gross wage (paid and accrued) (direct and Indirect)
on the basis of Wages Analysis Sheet.
Closure It is closed by transferring direct wages to Work-in-Progress Ledger
Control A/c (if relate to production) or Administration Overheads
Control Account (if relate to Administration) or Selling & Distribution
Overheads Control A/c (if relate to Selling & Distribution) or Capital
WIP control A/c (if relate to Capital Order). Wages paid for abnormal
Idle time are transferred to costing Profit & Loss A/c.
Format Its general format is shown below:

Wage Control Account

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 Particulars ` Particulars `
To Cost Ledger Control A/c …... By WIP Control A/c ……
(Total Wages paid) (Direct Wages)
By Production overheads control A/c
(Indirect Wages) ……
By Capital WIP Control A/c
(Wages for Capital Order)

……
…… ……

3. Production Overheads Control A/c

Meaning It is a total /summary account which summarises all production
overheads transactions in aggregate.
Contents It is debited with the indirect material cost, indirect labour cost and
indirect expenses incurred in production department on the basis of
Material Analysis Sheet, Wages Analysis Sheet and Expenses Analysis
Sheet respectively. It is credited with the overheads absorbed by work-
in-progress on the basis of Applied Overheads Analysis Sheet.
Closure The difference between the overheads incurred and overheads
absorbed represents under or over absorbed overheads which are
transferred to Overheads Adjustment/Suspense Account or Closing
Profit and Loss A/c.
Format Its general format is shown below:

Production Overheads Control Account

Particulars ` Particulars `
To Store ledger Control A/c …... By WIP Control A/c ……
(Indirect material) (Overheads absorbed/charged)
To Wages Control A/c By Costing P & L A/c
(Indirect Wages) …... (Overheads under-absorbed due to ……
To Cost Ledger Control A/c abnormal reasons)
(Production overheads
incurred) …...
To Costing P & L A/c
(Overheads over-absorbed
due to abnormal reasons)
…...

…… ……

4. Work-in-Progress Ledger Control Account

Meaning It is a total /summary account which summarises all the work-in-
progress transactions is aggregate.
Contents It is debited with total direct maerials cost, direct wages and
production overheads absorbed as transferred from the respective
control accounts. It is credited with the total cost of finished goods
produced which is transferred to Finished Stock Ledger Control

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 Account.
Closure Its Balance represents the cost of unfinished work.
Format Its general format is shown below:

Work-in-Progress Control Account

Particulars ` Particulars `
To Balance b/d …... By Finished stock Ledger Control A/c ……
To Stores ledger Control a/c (Cost of Finished Goods produced &
To Wages Control A/c …... transferred to warehouse)
To Production Overheads …... By Balance c/d
Control A/c
……
…..
…… ……

5. Finished Stock Ledger Control A/c

Meaning It is a total /summary account which summarises all finished goods
transactions in aggregate.
Contents It is debited with the cost of finished goods produced transferred from
work-in-progress ledger Control Account and the amount of
administration overheads absorbed transferred from Administration
Overheads Control Account. It is credited with total cost of goods sold
which is transferred to the Cost of Sales Account.
Closure Its Balance represents the cost of unsold finished work.
Format Its general format is shown below:

Finished Stock Ledger Control Account

Particulars ` Particulars `
To Balance b/d …... By Cost of Sales A/c ……
To WIP Control A/c (Cost of Goods Sold transferred)
To Administration Overheads …... By Balance c/d
Control A/c …... ……

…… ……

6. Administration Overheads Control Account

Meaning It is a total /summary account which summarises all Administration
Overheads transactions in aggregate.
Contents It is debited with administration overheads incurred and is credited
with the overheads absorbed by finished goods produced which are
transferred to Finished Stock Ledger Control Account.
Closure The difference between the overheads incurred and overheads
absorbed represents under or over-absorbed overheads which are
transferred to Overheads Adjustment/Suspense Account or Costing
Profit and Loss A/c
Format Its general format is shown below:

Administration Overheads Control Account

184
 Particulars ` Particulars `
To Stores Ledger Control a/c …... By Finished Stock Ledger Control A/c ……
To Cost Ledger Control A/c (overheads absorbed/charged)
(administration overheads …... By Costing P & L A/c
incurred) (Overheads under-absorbed due to ……
To Costing P & L A/c abnormal reasons)
(Overheads over-absorbed
due to abnormal reasons) …...

…… ……

7. Cost of Sales Account

Meaning It is a total /summary account which summarises all finished goods
transactions in aggregate.
Contents It is debited with cost of goods sold transferred from finished Stock
Ledger Control account and the amount of selling & distribution
overheads absorbed transferred from Selling & Distribution overheads
Control Account. It is credited with the cost of sales Account which is
transferred to the costing Profit & Loss Account.
Closure Its Balance represents the total cost of sales which is transferred to
Costing P & L Account.
Format Its general format is shown below:

Cost of Sales Control Account

Particulars ` Particulars `
To Finished Stock Ledger By Closing P & L A/c ……
Control A/c (Cost of Sales transferred)
To Selling & Distribution …...
Overheads Control A/c
……
…… ……

8. Selling & Distribution Overheads Control Account

Meaning It is a total /summary account which summarises all the Selling &
Distribution Overheads transactions in aggregate.
Contents It is debited with Selling & Distribution Overheads incurred and is
credited with overheads absorbed by finished goods sold.
Closure The difference between overheads incurred and overheads absorbed
represents under or over-absorbed overheads which are transferred to
Overheads Adjustment/Suspense Account or Costing Profit and Loss
A/c.
Format Its general format is shown below:

Selling & Distribution Control Account

Particulars ` Particulars `

185
 To Cost Ledger Control A/c …... By Cost of Sales A/c ……
To Stores Ledger Control A/c (Overheads absorbed/charged)
To Costing Profit & Loss A/c …… By Costing P & L A/c
(Overheads over-absorbed …… (Overheads under-absorbed due to ……
due to abnormal reasons) abnormal reasons)

…… ……

9. Overhead Adjustment Account

Meaning It is a total /summary account which summarises all the under or over-
absorbed Overheads.
Contents It is debited with under-absorbed production, administration and
selling & distribution overheads and is credited with over-absorbed
overheads.
Closure Its balance represents the total cost of sales which is transferred to
costing P & L Account.
Format Its general format is shown below:

Overhead Adjustment Account

Particulars ` Particulars `
To Production Overheads By Production Overheads Control A/c ……
Control A/c (Over-absorbed)
(Under-absorbed) …... By Administration overheads Control
To Administration Overheads A/c
Control A/c (Over-absorbed)
(Under-absorbed) By Selling & Distribution Overheads ……
To Selling & Distribution …… Control A/c
Overheads Control A/c (Over-absorbed)
(Under-Absorbed) By Costing P & L A/c*
To Costing P & L A/c* (balancing figure) ……
(balancing figure)
……
……
……
…… ……
10. Costing Profit and Loss Account
Meaning It shows the overall performance of operating activities of the
enterprise during a particular accounting period as per Cost books.
Contents It is debited with cost of sales, abnormal losses and under-absorbed
overheads and is credited with the value of sales, abnormal gains and
over-absorbed overheads.
Closure The difference between the total of credit side and total of debit side
represents costing profit/loss which is transferred to cost Ledger
Control Account.
Format Its general format is shown below:

Overhead Adjustment Account

Particulars ` Particulars `
To Cost of Sales A/c …... By Cost Ledger Control A/c ……

186
 To Stores Ledger Control A/c …... (Sales
To Production Overheads
Control A/c
To Administration Overheads …...
Control A/c
To Selling & Distribution
Overheads Control A/c ……
To Cost Ledger Control A/c
(Profit)
……

……
…… ……

11. Costing Ledger Control Account

Meaning It is a total/summary account which summarises all the financial
receipts and payments transactions and all the transfer transactions
from cost books to financial books.
Contents Its objective is to complete the double entry and make the cost ledger
self-balancing.
Closure It is debited with second aspects of all those transactions of which only
credit aspects could be recorded in other control accounts. For
example, in case of sales, credit aspect is recorded in Costing Profit &
Loss Account but debit aspect is recorded in Cost Ledger Control
Account. It is credited with second aspects of all those transactions of
which only debit aspects could be recorded in other control accounts.
For example, in case of payment of wages, debit aspect is recorded in
Wages Control Account but credit aspect is recorded in Cost Ledger
Control Account.
Balance Its Balance represents the total of all balances of impersonal accounts.
Format Its general format is shown below:

Overhead Adjustment Account

Particulars ` Particulars `
To Costing P & L A/c (sales) …... By Balance b/d ……
To balance c/d By Stores Ledger Control A/c
…... (Purchase) ……
By Wage Control A/c
(Wage incurred)
By Production Overheads Control A/c ……
By Administration overheads Control
A/c
By Selling & Distribution Overheads ……
Control A/c
By Costing P & L A/c (Profit)
……

……
……

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 …… ……

ACCOUNTING ENTRIES UNDER NON-INTEGRAL SYSTEM

Transaction Journal Entry

I. Relating to Materials
1. On purchase & Incurrence of
Carriage Inward expenses
a) For Stock Stores Ledger Control A/c Dr.
To Cost ledger Control A/c

b) For specific Jobs WIP Ledger Control A/c Dr.

To Cost Ledger Control A/c
2. On Issue
a) As Direct Material WIP Leger Control A/c Dr.
To Stores Ledger Control A/c

b) As Indirect Material Production Overhead Control A/c Dr.

Administration Overhead Control A/c Dr.
Selling & Dist. Overhead Control A/c Dr.
To Stores Ledger Control A/c

c) For Capital Order Capital WIP Control A/c Dr.

To Stores Ledger Control A/c
3. On Return
a) From Store to Supplier Cost Ledger Control A/c Dr.
To Stores Ledger Control A/c

b) Of Direct Materials from Stores ledger Control A/c Dr.

Production to Store To WIP Ledger Control A/c

c) Of Indirect Materials to Store Stores Ledger Control A/c Dr.

To Respective Overhead Control A/c

d) From Capital Order Stores Ledger Control A/c Dr.

To Capital WIP Control A/c
4. On transfer from one job to No entry in control A/c but following entry
another only in WIP Ledger Control Ledger:
Transferee Job A/c Dr.
To Transferor Job A/c

5. (a) Loss of Material

i) Abnormal Costing P & L A/c Dr.
To Stores Ledger Control A/c

ii) Normal Production Overheads Control A/c Dr.

(b) Stores Gain To Stores Ledger Control A/c

6. Payment to creditors for materials

Reverse of above entry will be passed No
entry.
II. Relating to Labour

188
 a) On Payment Wages Control A/c Dr.
To Cost Ledger Control A/c
b) On Allocation
i) Of Direct Wages WIP Ledger Control A/c Dr.
To Wages Control A/c

ii) Of Indirect Wages Production Overheads Control A/c Dr.

Administration Overhead Control A/c Dr.
Selling & Dist. Overhead Control A/c Dr.
To Wages Control A/c
III. Relating to Direct Expenses Incurred Wages Control A/c Dr.
To Cost Ledger Control A/c
IV. Relating to Overheads Production Overheads Control A/c Dr.
a) On Payment Administration Overhead Control A/c Dr.
Selling & Dist. Overhead Control A/c Dr.
To Wages Control A/c
b) On Absorption/ Recovery
i) Of Production Overheads WIP Ledger Control A/c Dr.
To Production Overhead Control A/c

ii) Of Administration Overheads Finished Stock Ledger Control A/c Dr.

To Adm. Overheads Control A/c

iii) Of selling & Dsit. Overheads Cost of sales A/c Dr.

To Selling & Dist. Overhead Control A/c
c) Over-Absorption of Overheads Respective Overhead Control A/c Dr.
To Overhead Adjustment A/c
Costing Profit & Loss A/c

d) Under-Absorption of Overheads Overhead Adjustment A/c Dr.

Costing P & L A/c
To Respective Overheads Control A/c
V. Relating to Transfer of finished goods Finished stock Ledger Control A/c Dr.
produced To WIP Ledger Control A/c
VI. Relating to transfer of finished goods Cost of Sales A/c Dr.
sold To Finished stock ledger control A/c
VII. Relating to transfer of Cost of Sales Costing Profit & Loss A/c Dr.
To Cost of sales A/c
VIII. Relating to Sales Cost Ledger Control A/c Dr.
To Costing Profit & Loss A/c
IX. (a) Abnormal Loss
a) WIP Costing Profit & Loss A/c Dr.
To Cost of sales A/c

b) Finished Stock Costing Profit & Loss A/c Dr.

To Finished stock Ledger Control A/c
(b) Abnormal Gain Reverse of above entry will be passed
X. Relating to Transfer of Net Profit/Loss
a) Net Profit Costing Profit & Loss A/c Dr.
To Cost Ledger Control A/c

b) Net Loss Cost Ledger Control A/c Dr.

189
 To Costing Profit & Loss A/c

INTEGRAL SYSTEM

Meaning of integral system

Integral system is a system of accounting under which only one set of account books is
maintained to record both the cost and financial transactions. It is also known as integrated
system.

Basic Features of Integral System

a) No need for cost ledger – There is no need for cost ledger because all control accounts
are maintained in the financial ledger.
b) No need for Cost ledger Control Account – There is no need for cost ledger control
Account because both the aspects (i.e. debit and credit) of all transactions are recorded in
the respective accounts.
c) Subsidiary Ledgers – Under this system, various subsidiary ledgers are maintained as
follows:
1. Stores It contains separate accounts for each item of store.
Ledgers
2. Work-in- It contains separate accounts for each job, work/product in
progress progress.
ledger
3. Finished It contains separate accounts for each job/work/product finished.
Goods
4. Sales Ledger It contains separate personal accounts for each customer.

5. Purchases It contains separate personal accounts for each supplier.

Ledger
6. Overhead It contains separate accounts for factory, administration and
Ledger selling and distribution overheads.

d) Controls Account – A control accounts for each subsidiary ledger is maintained in the
general ledger. The important control accounts are as follows:
Control Accounts
1. Stores Ledger Control Account
2. Work-in-Progress Control Account
3. Finished Stock Control Account
4. Sales Control Account
5. Purchases Control Account
6. Production Overheads Control Account
7. Administration Overheads Control Account
8. Selling and Distribution Overheads Control Account
9. Wages Control Account

e) Balances of Overheads Control Accounts - The balances of Overheads Control

Accounts which represents under/over absorption of overheads are transferred to
Profit and Loss A/c.
f) Profit as Per P & L A/c - The Profit as per P & L A/c is transferred to Profit & Loss
Appropriation Account.

Advantages of Integral System

a) Economical – It is economical because it avoids the duplication of recording of the
transactions in two separate set of books.

190
b) No need for reconciliation – There is no need for reconciliation because there will be only
one figure of Profit/Loss as there is only one set of books.
c) No delay in the availability of information – There is no delay in availability of information
because it is provided directly from the books of original entry.
d) Suitable for mechanized Accounting - it is suitable for mechanized accounting.
e) Better Coordination – It tends to coordinate the functions of different sections of the
accounting.

Essential Pre-Requisites for Integral/ Integrated System

The essential pre-requisites for integral/Integrated system include the following:
a) Decision as to extent of Integration – The management must decide about the extent of
integration of the two sets of books. Some concerns find it useful to integrate upto the stage of
prime cost or factory cost while other prefer full integration of the entire accounting records.
b) Suitable Coding System - A suitable coding system must be made available so as to serve the
accounting purposes of financial and cost accounts.
c) Accounting Policy – An Accounting Policy with regard to the treatment of provision for
accruals, prepaid expenses, other adjustment necessary for preparation of interim accounts,
must be laid down in advance.
d) Co-ordination - Perfect Coordination should exist between the staff responsible for the
financial and cost aspects of the accounts and an efficient processing of accounting documents
should be ensured.

ACCOUNTING ENTRIES UNDER NON-INTEGRAL SYSTEM

Transaction Journal Entry

I. Relating to Materials
1. On purchase & Incurrence of
Carriage Inward expenses
a) For Stock Stores Ledger Control A/c Dr.
To Cash A/c/ Creditor’s A/c

b) For specific Jobs WIP Ledger Control A/c Dr.

To Cost Ledger Control A/c
2. On Issue
a) As Direct Material WIP Leger Control A/c Dr.
To Stores Ledger Control A/c

b) As Indirect Material Production Overhead Control A/c Dr.

Administration Overhead Control A/c Dr.
Selling & Dist. Overhead Control A/c Dr.
To Stores Ledger Control A/c

c) For Capital Order Capital WIP Control A/c Dr.

To Stores Ledger Control A/c
3. On Return
a) From Store to Supplier Creditor’s A/c Dr.
To Stores Ledger Control A/c

b) Of Direct Materials from Stores ledger Control A/c Dr.

Production to Store To WIP Ledger Control A/c

c) Of Indirect Materials to Store Stores Ledger Control A/c Dr.

To Respective Overhead Control A/c

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 d) From Capital Order Stores Ledger Control A/c Dr.
To Capital WIP Control A/c
4. On transfer from one job to
another
No entry in control A/c but following entry
only in WIP Ledger Control Ledger:
Transferee Job A/c Dr.
To Transferor Job A/c
5. (a) Loss of Material
i) Abnormal
P & L A/c Dr.
To Stores Ledger Control A/c
ii) Normal
(b) Stores Gain Production Overheads Control A/c Dr.
To Stores Ledger Control A/c
6. Payment to creditors for materials
Reverse of above entry will be passed
Creditor’s A/c Dr.
II. Relating to Labour
a) On Payment Wages Control A/c Dr.
To Cash A/c /Bank A/c
b) On Allocation
i) Of Direct Wages WIP Ledger Control A/c Dr.
To Wages Control A/c

ii) Of Indirect Wages Production Overheads Control A/c Dr.

III. Relating to Direct Expenses Incurred
IV. Relating to Overheads
a) On Payment
b) On Absorption/ Recovery
i) Of Production Overheads
Administration Overhead Control A/c Dr.
Selling & Dist. Overhead Control A/c Dr.
To Wages Control A/c
WIP Ledger Control A/c Dr.
To Cash A/c /Creditor’s A/c
Production Overheads Control A/c Dr.
Administration Overhead Control A/c Dr.
Selling & Dist. Overhead Control A/c Dr.
To Cash A/c /Creditor’s A/c
WIP Ledger Control A/c Dr.
To Production Overhead Control A/c

ii) Of Administration Overheads Finished Stock Ledger Control A/c Dr.

To Adm. Overheads Control A/c

iii) Of selling & Dsit. Overheads Cost of sales A/c Dr.

To Selling & Dist. Overhead Control A/c
c) Over-Absorption of Overheads Respective Overhead Control A/c Dr.
To Overhead Adjustment A/c
Profit & Loss A/c

d) Under-Absorption of Overheads Overhead Adjustment A/c Dr.

P & L A/c
To Respective Overheads Control A/c
V. Relating to Transfer of finished goods Finished stock Ledger Control A/c Dr.
produced To WIP Ledger Control A/c

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 VI. Relating to transfer of finished goods Cost of Sales A/c Dr.
sold To Finished stock ledger control A/c
VII. Relating to transfer of Cost of Sales Profit & Loss A/c Dr.
To Cost of sales A/c
VIII. Relating to Sales Cash A/c, Bank A/c, Debtor’s A/c Dr.
To Profit & Loss A/c
IX. (a) Abnormal Loss
a) WIP Profit & Loss A/c Dr.
To WIP Ledger Control A/c

b) Finished Stock Profit & Loss A/c Dr.

To Finished stock Ledger Control A/c
(b) Abnormal Gain Reverse of above entry will be passed
X. Relating to Transfer of Net Profit/Loss
a) Net Profit Profit & Loss A/c Dr.
To Profit & Loss Appropriation A/c

b) Net Loss No entry

DIFFERENCE BETWEEN NON-INTEGRAL SYSTEM AND INTEGRAL SYSTEM

Non-Integral system differs from integral system in the following respects:

Basis of distinction Non-Integral System Integral System

1. No. of sets of books Two separate set of books are
maintained – one to record cost
transactions and the other to
record financial transactions.
2. Cost Ledger Cost ledger is maintained.
3. Control accounts Control Accounts are opened in
the cost ledger.
4. Figure of There are two figures of
Profit/Loss Profit/Loss – one as per cost
books and another as per
financial books.
5. Need for There is need for reconciliation of
Reconciliation cost accounts and financial
accounts because there are two
figures of profit/loss as there are
two sets of books.
6. Balances of Balances of overhead control
Overheads Control Accounts which represent
A/cs under/over absorption of
overheads are transferred to
Costing Profit & Loss A/c.
7. Economical It is expensive because of
duplication of recording the
transactions in two sets of books.
Only one set of books is
maintained to record both the cost
transaction and financial
transactions.
Cost ledger is not maintained.
Control Accounts are opened in
the general ledger.
There is only one figure of
Profit/Loss because only one set of
books is maintained.
There is no need for reconciliation
because there is only one figure of
profit/loss as there is only one sets
of books.
Balances of overhead control
Accounts which represent
under/over absorption of
overheads are transferred to
Profit & Loss A/c.
It is economical because it avoids
duplication of recording the
transactions in two sets of books.

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 TRAIN UR BRAIN a) Financial and Cost Account
b) Management and Financial Accounts
1. Under __________ separate ledgers for cost c) Management and cost Accounts
accounting and financial accounting are d) None of the above
contained. 9. General ledger Adjustment Account is
a) Integrated Accounting also known as……………… accounts.
b) Non-Integrated Accounting a) Work-in-progress Ledger Control A/c
c) Inter locking of Accounts b) Cost Ledger Control A/c
d) Cost Ledger Accounting c) Stores Ledger Control A/c
2. The maintenance of both cost accounts d) Finished Goods Ledger Control A/c
and Financial Account can be avoided 10. In non-integrated accounting ____________
and only one set of accounts can be account is debited for purchase of
maintained under non integrated materials.
accounting system. a) Work-in-progress Ledger Control A/c
a) True b) False b) Cost Ledger Control A/c
c) Partly True d) Partly False c) Stores Ledger Control A/c
3. Non-integral accounting system is also d) Finished Goods Ledger Control A/c
known as –
a) Financial Accounting ANSWERS
b) Cost Accounting
c) Hybrid Accounting 1. c 2. b 3. d
d) Cost ledger Accounting 4. b 5. c 6. b
4. Under _______ both Financial and cost 7. c 8. a 9. b
accounting records are maintained in 10. c
one set of books to meet the
requirements of financial accounting and
cost accounting purposes.
a) Cost ledger Accounting
b) Integral Accounting
c) Inter Locking of accounts
d) Financial Accounting
5. Maintenance of _______ accounts avoids
duplication of efforts, and reconciliation
of cost and financial accounts is not
required.
a) Financial b) Cost
c) Integrated d) Interlocking
6. The principal ledgers maintained in _____
systems are cost ledger, WIP ledger,
finished goods ledger.
a) Integrated Accounting
b) Non-Integrated Accounting
c) Interlocking of accounts
d) Cost ledger Accounting
7. Under _______ accounts no personal
accounts are kept but the transactions
affecting the nominal accounts are
recorded.
a) Financial b) Integrated
c) Cost d) Non-
Integrated
8. Integral Accounts merge ______ is one set
of accounts.

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 CHAPTER

19

COST AUDIT
Cost audit is an independent examination of cost records and other related information of an
entity including a non-profit entity with a view to expressing an opinion thereon. The cost
auditors’ approach should be to ensure that the cost accounting plan is an consonance with the
objectives set by the organization and also establish the correctness or otherwise of the figures by
the processes of vouching verification, reconciliation etc. of the cost accounts.
Cost audit comprises of the following:
(a) Verification of the cost accounting records for the accuracy of the cost accounts, cost
reports, cost statements and cost data and
(b) Examination of these records to ensure that they adhere to the cost accounting principles,
plans, procedures and objectives.

PROVISIONS PRETAINING TO COST ACCOUNTING RECORDS

(a) According to section 2(13) on the Companies Act, 2013 “books of account” includes records
maintained in respect of:
1) All sums of money received and expended by a company and matters in relation to
which the receipts and expenditure take place;
2) All sales and purchases of goods and services by the company;
3) The assets and liabilities of the company; and
4) The items of cost as may be prescribed under section 148 in the case of a company
which belongs to any class of companies specified under that section;
(b) Section 128 on the Companies Act, 2013 provides that every company shall prepare and keep
at its registered office books of account and other relevant books and papers and financial
statement for every financial year which give a true and fair view of the state of the affairs of
the company, including that of its branch office or offices, if any.
(c) Further all or any of the books of account aforesaid and other relevant papers may be kept t
such other place in India as the Board of Directors may decide and where such a decision is
taken, the company shall, within seven days thereof, file with the Registrar a notice in writing
giving the full address of that other place.
(d) In exercise of powers conferred by section 469(1) and (2) read with section 2(13)(iv),
section 128 and section 148 of the Companies Act, 2013, the Central Government prescribes
the Companies (Cost Records and Cost Audit) Rules, 2013* for the maintenance of cost
records relating to the utilization of materials, labour and other items of cost, in the manner
as prescribed by specified class of companies, including foreign companies defined in section
2(42) of the Companies Act, 2013, engaged in the production of such goods or providing
such services as may be prescribed.

PROVISIONS PERTAINING TO COST AUDIT

Section 148 of the Companies Act, 2013 deals with the audit of Cost Accounting records. The
Section provides as follows:

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(a) Notwithstanding anything contained in Chapter X of Companies Act, 2013, the Central
Government may, by order, in respect of such class of companies engaged in the production
of such goods or providing such services as may be prescribed, direct that particulars relating
to the utilization of material or labour or to other items of cost as may be prescribed shall
also be included in the books of account kept by that class of companies.
(b) If the Central Government is of the opinion, that it is necessary to do so, it may, by order,
direct that the audit of cost records of class of companies, which are covered under sub-
section(1) and which have a net worth of such amount as may be prescribed or a turnover of
such amount as may be prescribed, shall be conducted in the manner specified in the order.
(c) The audit under sub-section (2) shall be conducted by a Cost Accountant in practice who
shall be appointed by the Board on such remuneration as may be determined by the
members in such manner as may be prescribed.
(d) Provided that no person appointed under section 139 as an auditor of the company shall be
appointed for conducting the audit of cost records.
(e) Provided further that the auditor conducting the cost audit shall comply with the cost
auditing standards.
(f) As audit conducted under this section shall be in addition to the audit conducted under
section 143.

PROVISIONS PRETAINING TO APPLICABILITY OF COST AUDIT

(a) Every company covered under Rule 3 of the Companies (Cost Records and Audit)
Amendment Rules, 2014 shall within 180 days of the commencement of every financial
year appoint a cost auditor at a remuneration to be determined in accordance with
provisions of section 148(3) of the Companies Act, 2013 and rules made there under.
(b) The provisions of section 143 (12) of the Companies Act, 2013 and the relevant rules made
there under shall apply mutatis mutandis to a cost auditor during performance of his
functions under section 148 of the Companies Act, 2013 and these rules.
(c) Rules not to apply in certain cases: The requirement of Cost Audit is not applicable for
Companies :
- whose revenue from exports, in foreign exchange, exceeds 75 percent of its Total
Revenue or
- which is operating from a special Economic Zone.

APPOINTMENT AND REMUENRATION OF COST AUDITOR

(a) Every Company covered under the Companies (Cost Records and Cost Audit) Rules, 2013*
shall within 180 days of the commencement of every financial year appoint a cost
auditor at remuneration to be determined in accordance with provisions of section 148(3)
and rules made thereunder.
(b) Provided that before such appointment is made, written consent of the cost auditor to such
appointment, and a certificate that the appointment, if made, shall be in accordance with the
provisions of section 139, section 141 and section 148 of the Companies Act, 2013 and the
rules made thereunder, as applicable shall be obtained from the cost auditor.
(c) The company shall inform the cost auditor concerned of his or its appointment as such and
file a notice of such appointment with CG with in a period of 30 days of Board meeting in
which such appointment is made or within a period of 180 days of commencement of
financial year, whichever is earlier {Form CRA-2, Electronic Mode}.

Rights and Responsibilities of Cost Auditor

Section 148 of the Companies Act, 2013 gives the cost auditor same powers as the financial auditor
has under section 143 of the Companies Act, 2013, which requires that the company and every
officer thereof, shall make available to the cost auditor, such information and explanation as he
may consider necessary for the performance of his duties as cost auditor and submit his report
within the prescribed time limit.

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COST AUDIT REPORT
(a) Cost Audit report means the report audited and signed by the Cost Auditor.
(b) Every cost auditor, who conducts an audit of the cost records of the company shall, within
180 days from the close of the company’s financial year to which of the report relates,
submit the cost audit report along with his reservations or qualifications or observations or
suggestions in the Form CRA-3 to the Board of Directors of the Company.
(c) A company shall within thirty days the date of receipt of a copy of the cost audit report,
furnish the Central Government with such report along with full information and explanation
on every reservation or qualification contained therein, Form CRA-4.

PUNISHMENT FOR CONTRAVENTION

(a) For Cost Auditor - According to section 147 (2) of the Companies Act, 2013, the auditor shall
be punishable with fine which shall not be less than twenty-five thousand rupees but which
may extend to five lakh rupees.
Provided that if an auditor has contravened such provisions knowingly or willfully with the
intention to deceive the company or its shareholders or creditors or tax authorities, he shall
be punishable with imprisonment for a term which may extend to one year and with fine
which shall not be less than one lakh rupees but which may extend to twenty-five lakh
rupees.
The provision of section 143 of the Companies Act, 2013 applies mutatis-mutandis to Cost
Accountants in practice conducting Cost Audit under section 148 of the Companies Act, 2013.
If any cost accountant in practice fails to comply with the provisions of section 143(12) of the
Companies Act, 2013, for reporting of an offence involving fraud, they will be punished with
a fine of minimum J 1 lakh and upto J 25 lakhs.
(b) For Company - The company and every officer thereof who is in default shall be punishable in
the manner as provided in sub-section (1) of section 147 of the Companies Act, 2013,
wherein the company shall be punishable with fine which shall not be less than twenty-five
thousand rupees but which may extend to five lakh rupees.
Every officer of the company who is in default shall be punishable with imprisonment for
term which may extend to one year or with fine which shall not be less than ten thousand
rupees but which may extend to one lakh rupees, or with both.

PURPOSE OF COST AUDIT

The primary purpose of Cost Audit is to express an opinion on the cost accounts of the company
whether these have been properly maintained and compiled according to the cost accounting
system followed by the enterprise or not. The general objectives can be described to include the
following:
(a) Verification of cost accounts with a view to ascertaining that these have been properly
maintained and complied according to the cost accounting system followed by the enterprise.
(b) Ensuring that the prescribed procedure of cost accounting records rules are duly adhered to
(c) Detection of errors and fraud
(d) Verification of the cost of each “cost unit” and “cost centre” to ensure that these have been
properly ascertained.
(e) Determination of inventory valuation.
(f) Facilitating the fixation of prices of goods and services.
(g) Periodical reconciliation between cost accounts and financial accounts.
(h) Ensuring optimum utilization of human, physical and financial resources of the enterprise.
(i) Detection and correction of abnormal loss
(j) Inculcation of cost consciousness
(k) Advising management, on the basis of inter-firm comparison of cost records, as regards the
areas where performance calls for improvement.
(l) Promoting corporate governance through various operational disclosures.

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Special purpose of cost audit are as follows:
(a) Facilitate in fixation of reasonable prices of goods and services produced by the enterprise.
(b) Improvement in productivity of human, physical and financial resources of the enterprise.
(c) Channelise enterprise resources to most optimum, productive and profitable areas.
(d) Availability of audited cost data as regards contracts containing escalation clauses.
(e) Facilitate in settlement of bills in the case of cost plus contracts entered into by the
Government.
(f) Pinpointing areas of inefficiency and mismanagement, if any for the benefit of shareholders,
consumers etc., such that necessary corrective action could be taken in time.

Advantages of Cost Audit

Cost audit provide numerous benefits to the management, society, shareholders and the
government. The advantages are as under:
(a) Advantages to Management
(1) Management gets reliable data for its day-to-day operations like price fixing, control,
decision-making etc.
(2) A close and continuous check on all wastages will be kept through a proper system of
reporting to management.
(3) Inefficiencies in the working of the company will be brought to light to facilitate
corrective action.
(4) Management by exception becomes possible through allocation of responsibilities to
individual managers.
(5) The system of budgetary control and standard costing will be greatly facilitated.
(6) A reliable check on the valuation of closing stock and work-in-progress can be
established.
(7) It helps in the detection of errors and fraud.
(b) Advantages to Society
(1) Cost audit is often introduced for the purpose of fixation of prices. The prices so fixed
are based on the Audit Cost data and so the consumers are saved from exploitation.
(2) Since price increase by some industries is not allowed without proper justification like
increase in cost of production, inflation through price hikes can be controlled and
consumers can maintain their standard of living.
(c) Advantages to Shareholders
Cost audit ensures that proper records are kept as to purchases and utilization of materials
and expenses incurred on wages, etc. It also makes sure that the valuation of closing stocks
and work-in-progress is on a fair basis. Thus the shareholders are assured of a fair return on
their investment.
(d) Advantages to Government
(1) Where the Government enters into a cost-plus contract, cost audit helps government to
fix the price of the contract at a reasonable level.
(2) Cost audit helps in the fixation to ceiling prices of essential commodities and thus undue
profiteering is checked.
(3) Cost audit enables the government to focus its attention on inefficient units.
(4) Cost audit enables the government to decide in favour of giving protection to certain
industries.
(5) Cost audit facilitates settlement of trade disputes brought to the government.
(6) Cost audit and consequent management action can create a healthy competition among
the various units in an industry. This impose an automatic check on inflation.

COST AUDIT TECHNIQUES

There are no specific techniques being used by cost auditor in carrying out the cost audit
assignments. Techniques employed by a Cost auditor in effectively carrying out his audit are –

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(a) Accounting or economic Techniques - It includes techniques like, vouching physical
verification, comparison of data with peer, break-even analysis, discounted cash flow and net
present value method, cost benefit analysis, standard costing and marginal costing, quality
analysis of company transactions and activity based costing to test the relevance of cost to
activities.
(b) Scientific techniques – These technique include use of computer models, network analysis,
mathematical programme solving etc.
(c) Statistical techniques – It includes techniques like activity sampling, monte carlo
simulation, exponential smoothing, inter-firm comparison etc.
(d) Personnel techniques – It includes techniques like attitude survey, ergonomics (man-
machine relationship), training methods, profitability and productivity measurement etc.
(e) General techniques – It includes techniques like brain storming, transfer pricing,
management by objective, management by exception, corporate planning, information theory
etc.

COST AUDIT PROGRAMME

Cost audit programme is an essential prerequisite for conducting an audit. It is a plan of action
drawn in advance before taking up the audit, and to help the auditor to cover the entire area of his
function thoroughly.
The audit programme should include all the usual broad steps that a financial auditor include in
his audit programme. However, the significant things that should not be missed are: proper
vouching of expenses, capital and revenue character determination, allocation of expenses,
apportionment of overheads, arithmetical accuracy, etc. The exact content of cost audit largely
depends on the size of the organization, range of products, production process, the existence of a
well organized costing department and of a well designed costing system, and the existence of a
capable internal auditing system.

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 TRAIN UR BRAIN
1. The verification of correctness of cost b) Determination of inventory value
accounts and adherence to the Cost c) Facilitating the fixation of prices of
Accounting plan is done under: goods and services.
a) Management audit d) None of the above
b) Cost audit 9. The cost auditor shall forward his report
c) Internal audit to the Board within __________ days from
d) Performance Audit the close of the financial year to which
2. Section _______________ of the Companies the report relates.
Act, 2013 deals with the books of a) 7 b) 30
accounts to be kept by company. c) 90 d) 180
a) 148 b) 149 10. According to Section 147(2) of the
c) 149 d) 129 Companies Act, 2013, the auditor shall
3. If company keeps its book of accounts be punishable with a minimum fine of
other than at registered office then it has ______.
to give a notice in writing to the a) ` 10,000 b) ` 20,000
Registrar giving the full address of that
other place within ____________ days. c) ` 25,000 d) ` 2,50,000
a) 6 b) 7 11. According to section 147 of the
c) 8 d) 9 Companies Act, 2013, in case of default
4. Section ____________ of the Companies Act, by the company, It shall be punishable
2013 deals with the audit of Cost with a minimum fine of __________.
Accounting records. a) ` 10,000 b) ` 20,000
a) 158 b) 149
c) 128 d) 129 c) ` 25,000 d) ` 2,50,000
5. An auditor appointed under section 139 12. According to Section 147 of the
of the Companies Act, 2013 can be Companies Act, 2013, in case of default
appointed for conducting the audit for by the company, every office of the
cost records. company who is in default shall be
a) True b) False punishable with a minimum fine of
c) Either of (a) or (b) _______.
d) None of the above a) ` 10,000 b) ` 20,000
6. A company shall within _______ days from
the date of receipt of a copy of the cost c) ` 25,000 d) ` 2,50,000
audit report prepared in pursuance of 13. Which of the following is not a
section 148(2) of the Companies Act, accounting or economic technique of
2013, shall furnish it to the Central cost audit?
Government. a) Vouching
a) 7 b) 10 b) Physical Verification
c) 25 d) 30 c) Cost benefit analysis
7. If any audit is made in complying with d) Activity sampling
the provisions of section 148 of the 14. Which of the following is not a scientific
Companies Act, 2013 then the company technique of cost audit?
or the cost auditor shall be punishable in a) Use of computer models
the manner as provided in Section b) Quality analysis of company
________ of the Companies Act, 2013. transactions
a) 128 b) 135 c) Use of network analysis
c) 147 d) 149 d) Use of mathematical programme
8. Which of the following is not a purpose 15. Statutory cost audit are applicable only
of cost audit? to:
a) Detection of errors and fraud a) Firm b) Company

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 c) Individual d) Society
16. _________ is the systematic and
dispassionate examination, analysis and
appraisal of managements overall
performance.
a) Management audit
b) Cost audit
c) Internal audit
d) Performance audit
17. Who may order direct cost audit of a
company, if in its opinion it is necessary
to do so?
a) The ministry of Corporate Affairs
b) The Parliament
c) The Central Government
d) All of the above
18. The cost audit order can be given by the
Central Government only in respect of
Class of Companies which is required to
maintain books of accounts under the
provisions of _________ of the Companies
Act, 2013.
a) Section – 148 b) Section – 138
c) Section – 128
d) Section – 209(1)(d)

ANSWERS

1. b 2. c 3. b
4. a 5. b 6. d
7. c 8. d 9. d
10. c 11. c 12. a
13. d 14. b 15. b
16. a 17. c 18. a

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PAST TRENDS

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 GLIMPSE OF PAST TRENDS 5. Identify the cost which is not relevant or
useful for decision making –
1. A company producing three products, a) Shut down cost
viz. X, Y and Z has sales mix in the ratio of b) Marginal cost
2 : 1 : 3. The profit volume ratio of the c) Imputed cost and replacement cost
products X, Y and Z are 15%, 30% and d) Sunk cost
20% respectively. The total fixed cost of 6. EOQ is 200 units, ordering cost ` 20 per
the company is ` 3,00,000. order and total purchases 4,000 units.
The break-even point of the company The carrying cost per unit will be –
will be – a) ` 2 b) ` 6
a) ` 16,15,390 b) ` 17,50,000 c) ` 4
c) ` 23,33,333 d) ` 11,66,667 d) None of the above
2. Which one of the following is non- 7. From the following particulars, calculate
current item – the selling price per unit, if the break-
a) Securities premium even point is brought down to 10,000
b) Outstanding Wages units:
c) Trade payables Selling price per unit : ` 20
d) Bank Balance Variable cost per unit : ` 16
3. Match the following –
Overheads Basis of Fixed expenses : ` 60,000
apportionment Choose the correct option –
i) Insurance of stock a) Floor area a) ` 25 b) ` 20
ii)Rent and other b)number of
building expenses workers c) ` 22 d) ` 32
iii) Fringe benefits c)Direct wages 8. Standard time allowed for a job is 20
iv) Holiday pay d)Capital Value hours @ ` 2 per hour. Actual time taken
Select the correct answer using the codes by a worker is 15 hours. The earning and
given below – effective wage rate under Halsey Plan
(i) (ii) (iii) (iv) (50% sharing) will be –
a) (a) (c) (d) (b)
b) (d) (a) (b) (c) a) ` 35 and ` 2.33b) ` 35 and ` 1.75
c) (d) (b) (a) (c) c) ` 40 and ` 2.67d) ` 40 and ` 2.00
d) (c) (a) (b) (c) 9. Operating and accounting figures for the
4. Match the following statements with month of January, 2015 with respect to
prescribed forms: overheads were as under:
Statements Forms
Actual overheads ` 8,600
i) Cost audit Report to Central a) CRA 3
Government by the company Actual direct labour hours ` 6,000
ii)Cost Auditor to submit c) CRA 2 Standard labour hours ` 5,000
report to the Board of
Directors Budget equation = ` 3,000 + (90 paise ×
iii)Intimation of appointment d) CRA 4 Actual direct hours)
of Cost Auditor to MCA by the Absorption equation = ` 1.50 × Standard
company
direct labour hours
Select the correct answer using the codes
given below – The budgeted overheads amounted to `
(i) (ii) (iii) 8,400 and absorbed overheads to ` 8,250.
a) (a) (b) (c) The overheads volume variance is –
b) (c) (a) (b)
c) (b) (a) (c) a) ` 150 (A) b) ` 158 (F)
d) (c) (b) (a)

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 c) ` 142 (A) d) ` 140 (F) per financial records. The following
details are given:
10. Assertion (A):
Opening stock overstated in ` 8,500
A current ratio of 2 : 1 is considered
cost accounts
satisfactory as a rule of thumb but it
should not be followed blindly. Closing stock understand in ` 7,600
Reason(R): cost accounts
The greatest weakness of current ratio is Factory overheads under ` 4,500
the possibility of window dressing and recovered in cost accounts
manipulation. The profit as per cost accounts will be –
Select the correct answer from the a) ` 69,950 b) ` 65,950
options given below – c) ` 51.850 d) ` 56,950
a) Both A and R are true and R is the
correct explanation of A. 14. Cost Accounting Standard _______ is
b) Both A and R are true, but R is not the related to bringing uniformly and
correct explanation of A. consistency in the principles and method
c) A is true, but R is false of determining the selling and
d) A is false, but R is true distribution overheads with reasonable
11. What is the proper sequence of events in accuracy.
an ‘activity based costing’ system – a) 10 b) 12
(i) Calculation of overheads application c) 15 d) 4
rates 15. Which of the following statements is
(ii) Identification of cost drivers wrong with reference to contract costing
(iii)Identification of cost pools –
(iv) Assignment of overheads cost to a) Cost plus contract is suitable where it
products is not possible to compute the cost in
Select the correct answer from the advance.
options given below – b) Upward and downward revision may
a) (i), (iii), (iv), (ii) be possible in contract price by
b) (ii), (iii), (i), (iv) inserting escalation/de-escalation
c) (iii), (ii), (i), (iv) clause
d) (ii), (iii), (iv), (i) c) If certified work-in-progress is ¼ or
12. Calculate machine hour rate from the more but less than ½ of the contract
following: price, no profit is to be transferred to
Cost of machine profit and loss account.
` 19,200 d) Loss on incomplete contracts should
Estimated scrap value ` 1,200 be transferred to profit and loss
account.
Average repair and ` 150 16. Which one of the following statements is
maintenance charges per
true in ABC classification of materials –
month
a) ‘C’ items of material have moderate %
Effective working life of ` 50 of cost and high % of quantity
machine
b) ‘A’ items of material have high % of
Running time per month 10,000
cost and low % of quantity
hours
c) ‘A’ items of material have high % of
Power used by machine 5 19 paise
cost and high % of quantity
units per hour @ per unit
d) ‘B’ items of material have moderate %
Choose the correct option – of cost and low % of quantity
a) ` 4 b) ` 3.95 17. Aman Ltd. sells its products at ` 16 per
c) ` 5.95 d) ` 3.50 unit. In a period, if it produces and sells
13. During the year ended 31st March, 2015, 20,000 units, it incurs a loss of ` 2 per
the profit of the company is ` 63,450 as unit. If the volume is doubled, it earns a

204
 profit of ` 2.20 per unit. The amount of b) 49,000 Kgs. and 72,000 Kgs.
respectively
fixed cost and break-even point (in unit)
c) 40,000 kgs. and 60,000 Kgs.
will be –
respectively
a) ` 1,68,000 and 26,250 units d) 43,000 Kgs. and 63,000 Kgs.
b) ` 8,000 and 53,333 units respectively
23. Which one of the following would not
c) ` 1,60,000 and 25,000 units form part of master budget –
d) ` 1,70,000 and 42,500 units a) Cash Budget
18. In a situation of raising prices, profit and b) Statement of profit and loss
tax liability would be lower under _______ c) Statement of financial position
method than under _______ method of d) None of the above
material issue pricing. 24. Standard time for a job is 40 hours @ ` 2
a) FIFO; LIFO b) LIFO; FIFO per hour. Actual time taken by a worker
c) LIFO; Average d) FIFO; Average is 30 hours. His total earnings under
19. The purchase of machinery by issuing Rowan plan and Halsey plan will be –
long-term notes payable should be a) ` 75 and ` 70 respectively
reported as a -
a) Non-cash investing and financing b) ` 70 and ` 75 respectively
activity c) ` 60 and ` 70 respectively
b) Cash Outflow in the operating activity
c) Cash Outflow in the investing activity d) ` 75 and ` 60 respectively
d) Cash Outflow in the financing activity 25. Section ______ of the Companies Act, 2013
20. A standard that represents the most gives the cost auditor same power as the
likely scenario can be referred to as - financial auditor has under section _______
a) Attainable standard of the Companies Act, 2013.
b) Basic standard a) 148, 143 b) 143, 148
c) Ideal standard c) 147, 148 d) 143, 144
d) Normal standard 26. Balance of investment account is ` 20,000
21. Stock turnover : 6 times
on 31st March, 2014 and ` 30,000 on 31st
Total sales : ` 3,00,000
March, 2015. As per additional
Gross Profit ratio: 20%
information, dividend received ` 3,000
Closing Stock : ` 4,000 more than
opening stock includes ` 1,000 from pre-acquisition
The opening stock is - profit which is credited to investment
a) ` 36,000 b) ` 38,000 account. The amount of investment
purchased/sold during the year 2014-15
c) ` 40,000 d) ` 42,000 is –
22. The produce one unit of ‘A’, two a) ` 12,000 purchased
ingredients, i.e., 2 kgs, of X and 3 kgs, of Y
are required: b) ` 11,000 purchased
Stock Opening Closing c) ` 9,000 purchased
levels
A (Units) 5,000 8,000 d) ` 9,000 sold
X (Kgs.) 11,000 14,000 27. Which one of the following statements is
Y (Kgs. 18,000 21,000 correct -
What will be the quantity of consumption a) Lower debt equity ratio means lower
of ingredients X and Y, if 20,000 units of financial risk
A are sold – b) Increase in net profit ratio means
a) 46,000 Kgs. and 69,000 Kgs. increase in sales
respectively c) A higher receivable turnover is not
desirable

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 d) Indirect coverage ratio depends upon a) Maximization of profit through
tax rate. effective planning
28. Direct labour cost will include – b) Planned approach for expenditure
a) All Labour cost attributable to a c) Create necessary conditions for
production department setting-up of standard costs
b) labour cost of production and d) Based on quantitative data and
production support services represent only an impersonal
c) Cost of direct labour engaged in appraisal to the conduct of business
converting raw materials into activity.
manufactured articles 34. Job analysis is the analysis of each Job to
d) Cost of labour recruited directly by the determine a list of ______ needed by
management and through contractors workers to perform the work
29. Following information is provided in satisfactory.
respect of a contract: a) Qualifications
Contract price : ` b) Manual methods
c) Mechanical methods
10,00,000
d) Various Jobs
Cost incurred : ` 5,60,000 35. The technique of economic order
Cash received : ` 5,40,000 quantity is losing significance since the
development of -
Work no certified : ` 60,000 a) Perpetual inventory
Deduction by way of b) Just-in-time
retention money : 10% c) First-in-First-out
The amount of notional profit is - d) ABC analysis
a) ` 40,000 b) ` 1,00,000 36. A firm plans to produce 1,980 units of a
product per 8 hour shift. The standard
c) ` 4,40,000 productivity is 2 units per man hour.
d) None of the above Average labour efficiency is 91% idle
30. Those fixed costs which continue to be time is 15% of attendance time and
incurred even when there is no absenteeism is 20%. How many workers
production are called – should be recruited to produce planned
a) Period costs output –
b) Discretionary Costs a) 200 b) 124
c) Committed costs c) 136 d) 151
d) Output costs 37. Two articles A and B are produced in a
31. Which one of the following is not a part factory. Their specifications show that 4
of reciprocal method for re-distribution units of A or 2 units of B can be produced
of service department’ overheads to in one hour. The budgeted production for
production departments – January, 2015 is 800 units of A and 200
a) Simultaneous equation method units of B. The actual production for the
b) Step method month was 900 units of A and 180 units
c) Repeated distribution method of B. Actual labour hours spent were 350.
d) Trial and error method The efficiency ratio for January 2015 is -
32. Profit : ` 50,000 a) 80% b) 85%
c) 90% d) 95%
Contribution : ` 70,000 38. A direct cost is a cost which can be
Sales : ` 7,00,000 classified on the basis of -
The amount of margin of safety will be – a) Behaviour b) Traceability
c) Controllability d) Relevance
a) ` 4,00,000 b) ` 5,00,000
39. Following information is given:
c) ` 2,50,000 d) ` 1,45,000 Input raw material 2,000 units @ ` 20 per
33. Which one of the following is not an unit
advantage of budgetary control –

206
 Direct Material : ` 8,400 the capacity sales when fixed cost is `
Direct wages : ` 13,000 1,20,000. The 100% capacity sales will be
–
Production overheads : ` 12,350
a) ` 4,80,000 b) ` 2,50,000
Output transferred to
Process II : 1,800 c) ` 7,50,000
times d) None of the above
Normal loss of input : 5% 44. Which of the following statements is/are
Scrap value per unit : `6 true:
(i) Common sixe balance sheet is vertical
Value of abnormal loss will be
financial analysis
a) ` 3,657.50 b) ` 3,881,60 (ii) Financial analysis performed on
c) ` 3,850.00 d) ` 3,687.50 behalf of shareholders is called
internal analysis
40. The original standard rate of pay in a
(iii)Trend percentage may be used for
factory was ` 4 per hour. Due to both balance sheet and profit and loss
settlement with Trade Unions, this rate of account.
pay per hour was increased by 15%. Select the correct answer from the
During a particular period, 5,000 actual options given below –
hours were worked whereas work done a) (i) and (ii) b) (ii) and (iii)
was equivalent to 4,400 hours. Actual c) (i) and (iii) d) (ii) only
labour cost was ` 24,000. Labour cost 45. Following information is given:
variance will be – Standard fixed overheads
a) ` 6,400 (A) b) ` 6,000 (A) rate per hour :`5
Budgeted hours : 12,500
c) ` 6,400 (F) d) ` 6,000 (F) Standard number of working
41. Following information relates to a travel days : 25
agency: Actual hours : 11,500
Distance of one way route : 40 kms. Actual number of working
Round trips per day :3 days : 22
Days operated in a month : 25 Calender variance will be –
Seating capacity a) 2,840 (A) b) 5,000 (A)
(80% occupied) : 50 c) 2,500 (A) d) 7,500 (A)
46. Management accounting does not include
passengers the function of –
The effective passenger-km per annum a) Planning and control
will be – b) Product costing
a) 2,40,000 b) 28,80,000 c) Preparation of financial statements
c) 14,40,000 d) 24,00,000 d) Decision-making
42. Which method of joint cost 47. Kirti Ltd. has provided following
apportionment is suitable where further information for the quarter January to
processing costs after separation point March:
are not incurred proportionately or all Jan. Feb. March
the joint products are not subject to Sales @ ` 20 per 1,000 2,000 3,000
further processing – unit (units)
a) Physical unit method Closing Debtors 16,000 40,000 64,000
b) Contribution margin method
(`)
c) Relative market value method
d) Market value after further processing 20% of the sales are on cash basis and
method balance on credit basis. The amount to be
43. The ratio variable cost to sales is 75%. collected from debtors in the month
The break-even point occurs at 64% of February and March will be –

207
 a) Zero and ` 8,000 respectively d) 400 Kgs. and 6 orders
52. Which of the following account will be
b) ` 8,000 and ` 16,000 respectively debited under the integrated accounting
c) ` 8,000 and ` 24,000 respectively system when materials are purchased on
credit –
d) ` 16,000 and ` 36,000 respectively a) Purchases account
48. Following information is given for b) Stores ledger control account
Component ‘A’: c) Cost ledger control account
Normal usage 50 units per week, d) None of the above
maximum usage 75 units per week, 53. Cost of production for
reorder period 4 to 6 weeks. The 10,000 units : `
minimum level of stock will be –
1,60,000
a) 250 units b) 150 units
c) 450 units d) 200 units Opening stock of finished
49. From the following financial data, goods (1,000 units) : ` 18,000
compute stock turnover ratio and stock Closing stock of finished
velocity (assume 360 days in a year) goods (FIFO) :2,000
Opening stock : ` 58,000 units
Selling and distribution
Purchases : ` 5,02,000
overheads : ` 2 per
Return Outwards : ` 18,000 unit sold
Sales : ` 6,53,000 Profit mark-up on selling price: 20%
The amount of profit will be –
Return Inwards : ` 13,0000
a) ` 39,800 b) ` 40,500
Gross Profit : 25% on sales
Choose the correct option – c) ` 41,000 d) ` 40,800
a) 8 times; 45.62 days 54. 8% Preference share capital : `
b) 8 times; 45 days
3,00,000
c) 10.67 times; 33.75 days
d) 7.74 times; 46.51 days Equity share capital (` 10 per
50. Which statement contains opening as share) : `
well as closing balances of cash and cash
8,00,000
equivalents and prepared on actual basis
– Profit after 30% tax : `
a) Cash flow statement 2,80,000
b) Fund Flow statement Market price of equity share : ` 40
c) Both (a) and (b) above
The earnings per share and the price
d) Statement of income and expenditure
earnings ratio will be –
51. Quarterly consumption
of materials : 2,000 a) ` 3.50 and 11.43
Kgs. b) ` 5 and 8
Cost of placing an order : ` 50 c) ` 4.70 and 8.51
Cost per unit : ` 40 d) ` 3.20 and 12.50
Storage and other carrying 55. Re-order quantity : 300 Kgs.
costs : 8% of average Minimum usage : 20 Kgs. per day
inventory Minimum lead time : 5 days
The economic order quantity and Maximum stock level : 400 Kgs.
number of orders to be placed per Re-order level will be –
quarter of the year will be – a) 350 Kgs. b) 200 Kgs.
a) 400 Kgs. and 5 orders c) 375 Kgs. d) 150 Kgs.
b) 500 Kgs. and 4 orders
c) 500 Kgs. and 12 orders

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56. Cost of maintenance of an equipment for 60. Which one of the following is the correct
12,000 hours of running is ` 1,70,000 and sequence of the purchase procedure of
inventory –
for 18,500 hour or running, it is ` a) Indenting for material, issuing
2,09,000. The cost of maintenance for tenders, receiving quotations, and
14,000 hours will be – placing order
a) ` 1,81,500 b) ` 1,80,000 b) Issuing tenders and receiving
quotations, indenting for material, and
c) ` 1,82,000 d) ` 1,90,000 placing order.
57. For a department, the standard c) Placing order, issuing tenders and
overheads rate is ` 2.50 per hour and the receiving quotations, and indenting
overheads allowances are as follows: for material
Activity level Budget d) Indenting for material and placing
Overheads order.
61. PQR Ltd has prepared the budget for the
(Hours) Allowance (`) protection of one lakh units of the only
3,000 10,000 commodity manufactured by them for a
7,000 18,000 costing period as follows:
11,000 26,000 Cost elements ` (in
Calculate the normal capacity level on the
basis of which the standard overheads lakhs)
rate has been worked out – Raw material
a) 8,000 hours b) 7,000 hours 252
c) 6,000 hours d) 9,000 hours Direct Labour 75
58. Acute Ltd. is committed to supply 24,000 Direct expenses 10
bearings per annum to Mighty ltd. on a Works overheads (60% fixed)
steady basis. it is estimated that it costs 225
10 paise as inventory holding cost per Administrative overheads (80% fixed) 40
bearing per month and that the set-up Selling Overheads (50% fixed) 20
If the actual production during the period
cost per run of bearing manufacture is ` was 60,000 units, the revised budget cost
324. per unit will be –
The Optimum run size for bearing a) ` 740 b) ` 800
manufacture would be –
a) 3,800 units b) 4,000 units c) ` 700 d) ` 840
b) 3,600 units d) 3,400 units 62. Match the following overtime reasons to
59. Following information is supplied charge in cost accounting:
regarding a contract in progress: Reason Charged to
Details Amount Stage of i) Overtime due to a) Job directly
circumstances beyond
(`) Completion control
(%) ii) Overtime due to negligence b)General
Erection cost or delay of workers Overheads
iii)Overtime resorted due to c)Costing profit
to date 7,500 25
desire of customer and loss
Fabrication cost to date: account
Material 60,000 60 iv)Overtime due to general d) Particular
Wages and other pressure of work department
expenses 47,500 50 Select the correct answer using the codes
Contract value 2,00,000 given below: -
The estimated profit or loss at the (i) (ii) (iii) (iv)
completion of the contract will be – a) (c) (a) (d) (b)
a) ` 25,000 (Profit) b) ` 25,000 (Loss) b) (c) (d) (a) (b)
c) (d) (a) (b) (c)
c) ` 26,000 (Profit) d) ` 26,000 (Loss) d) (b) (c) (a) (d)

209
63. There are two similar plants under the activity
same management. The management ii)Designing the b)Facility level
desires to merge these two plants. The product activity
following particulars are available: v) Production c)Unit level activity
Details Plant – I Plant – II manager salary
Capacity 100% 60% vi) Use of d)Batch level
operation ` (in lakhs) ` (in lakhs) consumables activity
Sales 600 240 Select the correct answer using the codes
given below –
Variable 440 180
(i) (ii) (iii) (iv)
costs
a) (d) (c) (b) (a)
Fixed costs 80 40
b) (d) (c) (a) (b)
The capacity of the merged plant to be
c) (a) (d) (b) (c)
operated for the purpose of break-even
d) (d) (a) (b) (c)
will be –
67. From the following particulars relating to
a) 45.14% b) 48.12%
Job No. 555, ascertain the total cost:
c) 50.76% d) 46.16%
64. Following information is given for an `
order: Direct materials 16,000
Materials (Direct) : ` 25,000 Direct labour 8,000
Direct expenses 1,600
Wages (Direct) : ` 20,000 Works overheads are recovered on the
factory overheads : 75% of wages basis of 50% on prime cost and
(direct) administrative overheads at 10% of
Sales : ` 85,800 works cost.
Choose the correct option –
Profit : 10% on cost of
production a) ` 45,000 b) ` 45,240
Office overheads are charged as a c) ` 42,240 d) ` 43,000
percentage of factory cost. The amount of
68. In financial analysis, ‘time series analysis’
office overheads and its percentage to
refers to –
factory cost will be –
a) Making a time series of various ratios
a) ` 78,000 and 30% to assess a firm’s profitability
b) ` 18,000 and 30% b) A graphical comparison of a firm’s
sources of finance
c) ` 25,800 and 43% c) The comparison of financial ratios
d) ` 33,000 and 55% over a period of time to assess the
65. Total number of workers : 100 direction of change and the financial
Idle time : 5% performance of a firm
Working days per week : 300 d) A comparison of time values for
various ratios of a firm
Factory overheads : ` 11,400 69. Input material : 10,000 units
No. of hours worked per day : 8 Normal loss of total input : 8%
Directly labour hour rate will be – closing work-in-progress : 900 units
a) 6 paise per hour Degree of completion for closing stock of
b) 4 paise per hour work-in-progress and abnormal loss:
c) 8 paise per hour Material – 100%
d) 5 paise per hour Labour – 70%
66. Match the following events with type of Output transferred to next process 7,900
activity – units
Overheads Basis of From the above information, equivalents
apportionment production units for material and labour
i) Material ordering a) Product level are:

210
 a) 9,200 and 8,930 respectively a) A – 10,000 units, B- 5,500 units
b) 9,200 and 8,810 respectively b) B – 10,000 units, A – 5,500 units
c) 8,800 and 8,930 respectively c) B – 10,000 units, A – 6,400 units
d) 8,800 and 8,810 respectively d) 10,000 units of each A and B
70. The standard material required to 74. The formula for computing overheads
manufacture one unit of Product – A is 5 efficiency variance is -
Kgs. and the standard price per Kg. of a) Absorbed overheads – Standard
material is ` 3. The cost accountant’s overheads
b) Standard overheads – Revised
records, however, reveal that 16,000 Kgs.
budgeted overheads
of material costing ` 52,000 were used for c) Absorbed overheads – Budgeted
producing 3,000 units of Product – A. overheads
Material price variance will be - d) Absorbed Overheads – Actual
a) ` 4,000 (A) b) ` 4,000 (F) overheads
75. If average collection period is 15 days
c) ` 4,300 (A) d) ` 4,300 (F)
and average account receivable is `
71. Which of the following statements is/are
45,000 the total amount of credit sales
false:
will be (assume 360 days in a year)
(i) Product can be sold below marginal
cost in certain special circumstances a) ` 10,80,000 b) ` 16,20,000
(ii) Cost per unit of key factor is the basis c) ` 6,75,000 d) ` 1,87,500
of ranking products on profitability.
76. A process in which management is
(iii)When there are no inventories, profit
looking outward to examine how others
figures under marginal and
achieve their performance levels and to
absorption costing are identical.
understand the process they use, is called
Select the correct answer from the
-
options given below –
a) Balanced score card
a) (ii) only b) (i) and (ii)
b) Target costing
c) (i) and (iii) d) (ii) and (iii)
c) Bench marking process
72. Which of the following is/are the
d) Performance analysis
characteristics of service costing:
(i) Use of composite cost units 77. Cost of goods sold : `
(ii) Documents like daily log sheet, cost 4,00,000
sheet, etc. are used for collection of Administration and officer
cost data expenses : ` 35,000
(iii)Expenses are divided on functional
Selling and distribution
basis as in unit costing.
Select the correct answer from the expenses : ` 45,000
options given below – Net Credit sales : `
a) (i) Only b) (i) and (ii) 4,75,000
c) (ii) and (iii) d) (i) and (iii)
73. Following data are given: Cash Sales : `
Product- A Product - 1,25,000
B Operating profit ratio will be –
Contribution per 30 28 a) 30% b) 35%
unit (`) c) 20% d) 25%
Direct labour (hours 5 4 78. Which one of the following is not a
per unit)
statistical technique of cost audit –
Maximum possible 10,000 10,000
production (units) a) Monte-Carlo Simulation
Direct labour hours available 72,000 b) Inter-firm comparison
hours. What should be the number of c) Network analysis
units of A and B to be produced to d) Exponential smoothing
maximize profit of the company –

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79. If provision for taxation is treated as a (iv)Rent on owned building is included in
current liability, then payment of tax is - cost accounts.
a) An application of funds a) (i) and (ii) b) (iii) and (iv)
b) A source of funds c) (ii) and (iv) d) All of the
c) No flow of funds above
d) None of the above 85. XYZ Ltd. had 4,000 units of inventory in
80. Margin of safety is ` 8,000 which hand on 1st March, 2016, costing ` 4 per
represents 40% of sales, P/V ratio is unit. purchases and issues and material
50%. Fixed cost will be – during the month were as follows:
Date Purchase Issue
a) ` 6,000 b) ` 5,500
March 8 500 units @ ` 5 per unit --
c) ` 6,500 d) ` 7,000 March -- 2,000 units
81. What is the proper sequence in standard 15
costing to control cost and measure March 6,000 units @ ` 6 per --
20
efficiency – unit
a) Try to achieve targets, compare actual March -- 4,000 units
costs with targets, set targets. 28
b) Set targets, compare actual costs with The cost of inventory as on 31st March,
targets, try to achieve targets 2016 under FIFO and weighted average
c) Set targets, compare actual costs with cost method will be -
targets, report to management, revise a) ` 27,000 and ` 24,498
the targets.
b) ` 27,000 and ` 23,625
d) Set targets, try to achieve targets,
compare actual with targets, report to c) ` 22,000 and ` 23,625
management d) ` 22,000 and ` 24,498
82. Direct cost ` 45,000 86. What Journal entry is to be passed in
Direct labour cost is 40% of direct non-integrated accounting system when
material cost finished goods are sold at cost –
Royalties on production ` 4,000 a) Debit General ledger adjustment
Other direct expenses are 20% of prime account and credit costing profit and
cost loss account
Prime cost will be – b) Debit General ledger adjustment
account and Credit finished goods
a) ` 78,750 b) ` 83,750 stock ledger account
c) ` 80,400 c) Debit Cost of sales account and Credit
d) None of the above Costing profit and loss account
83. A budget in which is a responsibility d) Debit cost of sales account and Credit
centre manager must justify each finished goods stock ledger control
planned activity and its budgeted total account
cost is called - 87. Match the following industry/product
a) Traditional budget with appropriate cost unit:
b) Zero based budget Industry/Product Cost unit
c) Master budget i) Toy Industry a) Per batch
d) Functional budget ii)Steel Industry b)Tone-Kilometre
84. Which of the following statements are iii)Chemical c)Tone
true – iv) Transport d)Gallon
(i) Conversion costs and overheads are Select the correct answer using the codes
interchangeable terms given below-
(ii) Notional cost and imputed cost means (i) (ii) (iii) (iv)
the same thing a) (a) (c) (d) (b)
(iii)Cost accounting is not needed by a b) (a) (b) (d) (c)
non-profit organization c) (a) (d) (c) (b)

212
 d) (b) (a) (c) (d) a) (i) and (ii) b) (ii) and (iii)
88. Which one of the following statements is c) (i) and (iii) d) (ii) only
false – 93. Pride Ltd. has profit after tax ` 90,000,
a) Management accountant uses cost
accounting tools and techniques for depreciation ` 17,000, and decrease of
planning and decision making debtors ` 20,000. The cash generated
b) Management accounting is mostly from operating activities will be –
historical in its approach and it
projects the past a) ` 87,000 b) ` 93,000
c) Cost accounting system can be c) ` 1,27,000 d) ` 53,000
installed without management 94. Classify the following expenses as direct
accounting (D) and indirect (I) –
d) Management accounting focuses on (i) Royalties charged as a rate per unit
wealth maximization (ii) Cost of making a design, pattern for a
89. 4,000 Kgs. of material is purchased @ ` 2 specific job
per kg, Normal wastage is estimated at (iii)Salesman’ Commission
the rate of 10%. The wastage has (iv)Power, fuel, lighting, of factory and
recovery value of ` 1.10 kg. Calculate cost office
Select the correct answer using the codes
of material of work order of 600 units. If given below –
each unit requires 1.5 kg of material –
(i) (ii) (iii) (iv)
a) ` 1,260 b) ` 1,800 a) (D) (D) (I) (I)
c) ` 1,620 d) ` 1,890 b) (D) (D) (I) (D)
c) (D) (D) (D) (D)
90. What is the treatment of unrealized
d) (D) (D) (D) (I)
profit in process costing –
95. Under Merrick’s multiple piece rate
a) Transferred to profit and loss account
system, 110% of the ordinary piece rate
b) Closing stock valued at transfer price
is given to workers whose level of
c) Eliminated by creating stock reserve
performance lies between _______ of the
d) Treated as abnormal gain
standard output.
91. Cost-Volume-Profit analysis is based on
a) 83% and 100% b) 73% and
several assumptions. Which one of the
100%
following is not one of these assumptions
c) 83% and 90% d) 80% and 90%
–
a) Sales mix of the products is constant 96. Current liabilities of a firm are `
b) The behaviour of both sales and 1,50,000., Its current ratio is 3 : 1 and
variable cost is linear throughout the liquid ratio is 1 : 1. The value of stock will
relevant range be –
b) Variable cost per unit will remain a) ` 3,00,000 b) ` 4,50,000
constant
d) Productivity and operational c) ` 2,50,000 d) ` 1,50,000
efficiency will change according to 97. The state of production at which separate
output products are identified is known as -
92. Which of the following is/are not a a) Split-off point
purpose of time keeping – b) Break-even point
(i) Ascertaining labour cost of a c) Re-order point
job/product/activity. d) Cost indifference point
(ii) Evaluating labour performance by 98. Under material costing, unit product cost
comparing actual and budgeted time would most likely be increased by –
(iii)Providing internal check against a) A decrease in the number of units
workers. produced
Select the correct answer from the b) An increase in the number of units
options given below – produced

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 c) An increase in the commission paid to
salesman for each unit sold
d) A decrease in the commission paid to
salesman for each unit sold.
99. A company reported current year profit
as ` 70,000 after the following
adjustment:
Loss on sale of equipment : ` 9,000
Premium on debenture
redemption : ` 1,500
Tax provision : ` 22,000
Dividend income : ` 4,000
Profit on revaluation of fixed
cost : ` 2,500
The amount of fund from operations will
be
a) ` 96,000 b) ` 93,000
c) ` 78,000 d) ` 61,000
100. In process costing, abnormal effectives
would arise if –
a) Actual units lost during the process
were more than the normal loss
b) Closing stock at end of the period
was higher than opening stock
c) Actual units lost during the process
were less than the normal loss
d) Estimate of cost per unit was below
the actual cost per unit of output.

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