Course: Cost Accounting (462)

Semester: Autumn, 2020

ASSIGNMENT No. 1
Q.1 What is cost accounting? What are its objectives? In what respect, does cost accounting differ from
financial accounting?
Cost Accounting refers to that branch of accounting which deals with costs incurred in the production of units
of an organization. On the other hand, financial accounting refers to the accounting concerned with recording
financial data of an organization, in order to exhibit exact position of the business.
Cost accounting generates information so as to keep a check on operations, with an aim of maximizing profit
and efficiency of the concern. Conversely, Financial accounting ascertains the financial results, for the
accounting period and the position of the assets and liabilities on the last day of the period. There is no
comparison between these two because they are equally important for the users. This article presents you the
difference between cost accounting and financial accounting in tabular form.
Comparison Chart

BASIS FOR
COST ACCOUNTING FINANCIAL ACCOUNTING
COMPARISON

Meaning Cost Accounting is an accounting Financial Accounting is an accounting

system, through which an system that captures the records of
organization keeps the track of financial information about the
various costs incurred in the business to show the correct financial
business in production activities. position of the company at a particular
date.

Information type Records the information related to Records the information which are in
material, labor and overhead, which monetary terms.
are used in the production process.

Which type of cost Both historical and pre-determined Only historical cost.
is used for cost
recording?

Users Information provided by the cost Users of information provided by the

accounting is used only by the financial accounting are internal and
internal management of the external parties like creditors,
organization like employees, shareholders, customers etc.
directors, managers, supervisors etc.

Valuation of Stock At cost Cost or Net Realizable Value,

whichever is less.
 BASIS FOR
COST ACCOUNTING FINANCIAL ACCOUNTING
COMPARISON

Mandatory No, except for manufacturing firms Yes for all firms.
it is mandatory.

Time of Reporting Details provided by cost accounting Financial statements are reported at the
are frequently prepared and reported end of the accounting period, which is
to the management. normally 1 year.

Profit Analysis Generally, the profit is analyzed for Income, expenditure and profit are
a particular product, job, batch or analyzed together for a particular
process. period of the whole entity.

Purpose Reducing and controlling costs. Keeping complete record of the

financial transactions.

Forecasting Forecasting is possible through Forecasting is not at all possible.

budgeting techniques.
Definition of Cost Accounting
Cost Accounting is the field of accounting that is used to record, summarise and report the cost information on a
periodical basis. Its primary function is to ascertain and control costs. It helps the users of cost data to make
decisions regarding the determination of selling price, controlling costs, projecting plans and actions, efficiency
measurement of the labour, etc.
Cost Accounting adds to the effectiveness of the financial accounting by providing relevant information which
ultimately results in the good decision-making process of the organisation. It traces the cost incurred at each
level of production, i.e. right from the input of the material till the output produced, each and every cost is
recorded. There are two types of Cost Accounting systems, they are:
 Non – Integrated Accounting System: The accounting system in which separate set of books is
maintained for cost information.
 Integrated Accounting System: The accounting system in which cost and financial data are maintained
in a single set of books.
Definition of Financial Accounting
Financial Accounting is the branch of accounting, which keeps the complete record of all monetary transactions
of the entity and reports them at the end of the financial period in proper formats that increases readability of the
financial statements among its users. The users of financial information are many i.e. from internal management
to outside parties.

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Preparation of financial statement is the major objective of financial accounting in a specified manner for a
particular accounting period of an entity. It includes Income Statement, Balance Sheet, and Cash Flow
Statement which helps in, tracing out the performance, profitability and financial status of an organisation
during a period.
The information provided by the financial accounting is useful in making comparisons between different
organisations and analysing the results thereof, on various parameters. In addition to this, performance and
profitability of various financial periods can also be compared easily.
Key Differences Between Cost Accounting and Financial Accounting
The following are the major differences between cost accounting and financial accounting:
1. Cost Accounting aims at maintaining cost records of an organisation. Financial Accounting aims at
maintaining all the financial data of an organisation.
2. Cost Accounting Records both historical and per-determined costs. Conversely, Financial Accounting
records only historical costs.
3. Users of Cost Accounting is limited to internal management of the entity, whereas users of Financial
Accounting are internal as well as external parties.
4. In cost, accounting stock is valued at cost while in financial accounting, the stock is valued at the lower
of the two i.e. cost or net realisable value.
5. Cost Accounting is mandatory only for the organisation which is engaged in manufacturing and
production activities. On the other hand, Financial Accounting is mandatory for all the organisations, as
well as compliance with the provisions of Companies Act and Income Tax Act is also a must.
6. Cost Accounting information is reported periodically at frequent intervals, but financial accounting
information is reported after the completion of the financial year i.e. generally one year.
7. Cost Accounting information determines profit related to a particular product, job or process. As
opposed to Financial Accounting, which determines the profit for the whole organisation made during a
particular period.
8. The purpose of Cost Accounting is to control costs, but the purpose of financial accounting is to keep
complete records of the financial information, on the basis of which reporting can be done at the end of
the accounting period.
So, above are the most important differences between the Cost Accounting and Financial Accounting. The
information provided by the Cost Accounting is helpful in the decision making of the managers to control costs,
but it lacks comparability. The information provided by the financial accounting is capable of making
comparisons, but future forecasting cannot be done through this information. That is why they both go side by
side, in fact, cost accounting data is helpful for financial accounting.
Q.2 Khan Fabrics Limited had a fire that completely destroyed the factory premises. Only few
accounting records could be saved which revealed following information.

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 Sales Rs. 650,000 Purchase of direct Rs.
materials 320,000
Direct Rs. 90,000 Cost of goods available for Rs.
Labour sale 530,000
Balance sheet of the company prepared at the end of previous accounting year contains following
inventory balances:
Direct Material Amount Amount
Opening 50000
Add:Purchase 320000
Material 370000
Less: Closing (55000)
Direct Material 315000
Labor Cost 90000
Prime Cost 405000
Factory overhead 45000
Cost 450000
Add: work 60000
Goods 510000
Less: work (45000)
Good Manufacture 465000
Add: finish 65000
Sold 530000
Closing (42500)
Cost of goods 487500
Direct materials inventory Rs. 50,000
Work in Process Rs. 60,000
Finished goods inventory Rs. 65,000
Company’s experience over past ten year showed following percentage relationship:
Direct labour equals 20% of total current manufacturing cost
Factory overhead is 33.33% of total conversion cost
Gross Profit is 25% of sales
The loss was covered by a insurance policy. The insurance company wants to know approximate
value of inventories for settlement of claim.
You are required to estimate cost of closing inventories of:
Sales = 650000
Purchase = 320000
Direct Labor = 90000
Cost of Good for Sale = 530000

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Direct materials inventory = Rs. 50,000
Work in Process = Rs. 60,000
Finished goods inventory = Rs. 65,000
Direct Labor = 20%
Factory Overhead = 33.33%
Gross Profit = 25%
(i) Materials
Direct labor equal 20% of CMC
Labor = 90000 * 100/20
CMC = 450000
(ii) Work in Process
FOH 33% of conversion cost
CC = FOH + labor
D.C = 90000 * 33.33/66.67
FOH = 44993.25034 = 45000
(iii) Finished goods inventories destroyed by fire.
Gross profit 25% of sale
Sale = GP + Cost
100 = 25 + 75
Cost 650000 * 75/100 = 487500
Q.3 Smart Electronics firm engaged in producing multiple electronics items. On 1 st January 2015, firm
received an order for the supply of solar system and solar fans from Bahoo College. Work started in
two jobs numbered 230 and 410 on 4th January and completed on 16th January. Firm charged mark
up of 20% on this order. The cost incurred on this order was as follows.
Cost items Job 230 Job 410
Material cost incurred Rs. 33,000 Rs. 23,000
Labour cost paid Rs. 10,000 Rs. 9,000
FOH cost Rs. 2000 Rs. 2000
Both jobs were completed and were sold on cash basis.
Requirement: 1. Enter the appropriate cost data on job cost sheet.
2. Prepare journal entries to reflect the cost cycle for both jobs.

Job Direct Material Direct Labor FOH Cost Total

230 33000 10000 2000 45000
410 23000 9000 2000 34000

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 Total 20% 56000 19000 4000 79000
11200 3800 800 15800
67200 22800 4800 94800

Date Detail Amount Amount

Jod 230 Work 45000
33000
10000
2000
Work 34000
23000
9000
2000
Complete 79000 79000
Cash 94800 94800
cost 79000 79000
Q.4 Process costing system is used in some manufacturing organizations. Explain the nature of such
organizations.
Process costing is used when there is mass production of similar products, where the costs associated with
individual units of output cannot be differentiated from each other. In other words, the cost of each
product produced is assumed to be the same as the cost of every other product. Under this concept, costs
are accumulated over a fixed period of time, summarized, and then allocated to all of the units produced
during that period of time on a consistent basis. When products are instead being manufactured on an
individual basis, job costing is used to accumulate costs and assign the costs to products. When a
production process contains some mass manufacturing and some customized elements, then a hybrid
costing system is used.
Examples of the industries where this type of production occurs include oil refining, food production, and
chemical processing. For example, how would you determine the precise cost required to create one gallon
of aviation fuel, when thousands of gallons of the same fuel are gushing out of a refinery every hour? The
cost accounting methodology used for this scenario is process costing.
Process costing is the only reasonable approach to determining product costs in many industries.   It uses
most of the same journal entries found in a job costing environment, so there is no need to restructure the
chart of accounts to any significant degree.  This makes it easy to switch over to a job costing system from
a process costing one if the need arises, or to adopt a hybrid approach that uses portions of both systems.
Example of Process Cost Accounting
As a process costing example, ABC International produces purple widgets, which require processing
through multiple production departments. The first department in the process is the casting department,

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where the widgets are initially created. During the month of March, the casting department incurs $50,000
of direct material costs and $120,000 of conversion costs (comprised of direct labor and factory overhead).
The department processes 10,000 widgets during March, so this means that the per unit cost of the widgets
passing through the casting department during that time period is $5.00 for direct materials and $12.00 for
conversion costs. The widgets then move to the trimming department for further work, and these per-unit
costs will be carried along with the widgets into that department, where additional costs will be added.
Types of Process Costing
There are three types of process costing, which are:
1. Weighted average costs . This version assumes that all costs, whether from a preceding period or the
current one, are lumped together and assigned to produced units. It is the simplest version to calculate.
2. Standard costs . This version is based on standard costs. Its calculation is similar to weighted average
costing, but standard costs are assigned to production units, rather than actual costs; after total costs
are accumulated based on standard costs, these totals are compared to actual accumulated costs, and
the difference is charged to a variance account.
3. First-in first-out costing (FIFO) . FIFO is a more complex calculation that creates layers of costs, one
for any units of production that were started in the previous production period but not completed, and
another layer for any production that is started in the current period.
There is no last in, first out (LIFO) costing method used in process costing, since the underlying
assumption of process costing is that the first unit produced is, in fact, the first unit used, which is the
FIFO concept.
Why have three different cost calculation methods for process costing, and why use one version instead of
another?  The different calculations are required for different cost accounting needs.  The weighted
average method is used in situations where there is no standard costing system, or where the fluctuations
in costs from period to period are so slight that the management team has no need for the slight
improvement in costing accuracy that can be obtained with the FIFO costing method.  Alternatively,
process costing that is based on standard costs is required for costing systems that use standard costs.  It is
also useful in situations where companies manufacture such a broad mix of products that they have
difficulty accurately assigning actual costs to each type of product; under the other process costing
methodologies, which both use actual costs, there is a strong chance that costs for different products will
become mixed together.  Finally, FIFO costing is used when there are ongoing and significant changes in
product costs from period to period – to such an extent that the management team needs to know the new
costing levels so that it can re-price products appropriately, determine if there are internal costing
problems requiring resolution, or perhaps to change manager performance-based compensation.  In
general, the simplest costing approach is the weighted average method, with FIFO costing being the most
difficult.

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Cost Flow in Process Costing
The typical manner in which costs flow in process costing is that direct material costs are added at the
beginning of the process, while all other costs (both direct labor and overhead) are gradually added over
the  course of the production process. For example, in a food processing operation, the direct material
(such as a cow) is added at the beginning of the operation, and then various rendering operations gradually
convert the direct material into finished products (such as steaks).
Features of Process Costing
1. The production is continuous
2. The product is homogeneous
3. The process is standardized
4. The output of one process becomes the raw material of another process
5. The output of the last process is transferred to finished stock
6. Costs are collected process-wise
7. Both direct and indirect costs are accumulated in each process
8. If there is a stock of semi-finished goods, it is expressed in terms of equivalent units
9. The total cost of each process is divided by the normal output of that process to find out the cost per unit of
that process.
Advantages of Process Costing
Advantages of process costing are;
1. Costs are be computed periodically at the end of a particular period
2. It is simple and involves less clerical work that job costing
3. It is easy to allocate the expenses to processes to have accurate costs.
4. Use of standard costing systems in very effective in process costing situations.
5. Process costing helps in the preparation of tender quotations.
6. Since cost data is available for each process, operation and department, good managerial control is possible.
Distinguish between job costing and process costing
Job order costing and process costing are two different systems. Both the systems are used for cost calculation
and attachment of cost to each unit completed, but both the systems are suitable in different situations.
The basic difference between job costing and process costing are;

Basis of
Job order costing Process costing
Distinction

Specific order Performed against specific orders Production is contentious

Nature Each job may be different. The product is homogeneous and

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 Standardized.

Costs are complied with for each process

Cost Cost is determined for each job
for the department on a time basis, i.e.,
determination separately.
for a given accounting period.

Cost Cost is calculated at the end of the cost

Cost complies when a job is completed.
calculations period.

Proper control is comparatively difficult Proper control is comparatively easier as

Control as each product unit is different, and the the production is standardized and is
production is not continuous. more suitable.

There is usually not transfer from one

The output of one process is transferred
Transfer job to another unless there is some
to another process as input.
surplus work.

Work-in- There may or may not be work-in- There is always some work-in-progress
progress progress. because of continuous production.

Suitable to industries where production

Suitable where goods are made for stock
Suitability is intermittent, and customer orders can
and production is continuous.
be identified in the value of production.

Normal Loss
The cost of the units representing normal loss is borne by the good units produced. If the normal loss has any
realizable scrap value, such value is credited to the process accounting.
Thus normal loss is treated by neglect. Suppose there is neither any scrap value nor any abnormal gain. If,
however, there is abnormal gain, a separate account for normal loss has to be opened.
Abnormal Loss
The cost of the process is to be apportioned between the units lost abnormally and good units in the ratio of
such units. The cost of units representing abnormal loss is debited to abnormal loss account and credited to
process account.
Q.5 The Friends Company uses process costing system. The department B received 14,000 units at the
cost of Rs. 280,000. The department B costs were Rs. 24,000 for direct labour and Rs. 89,250 for
factory overheads. Normal spoilage is 5% of good output, inspection and identification of spoilage
takes place at the 90% stage of completion. A total of 8,000 units were completed and transferred to

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 Department C for further processing. At the end of the month 5,000 units were still in process,
estimated to be 60% complete as to the conversion cost.
Required: Prepare a cost of production report for department B.

1. Equivalent Production
Conversion = 8000 + (5000 * 60%) + (600 * 90%) = 11540
2. Unit Cost:
Labor = 24000 / 11540 = 2.079722
FOH = 89250 / 11540 = 7.733968
3. Adjustment
= 280000 / 14000 – 400 – 20.58823529
= 0.58823529
4. Abnormal Loss = 17652.33454

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