CERTIFICATE LEVEL

Subject Fundamentals of Management Accounting (BA2)

K.Sivagar
Lecturer B.Sc (Hons), ACMA, CGMA

Module Tute 06 – Integrated Accounting Systems

Code BA2/KS/06
 Integrated Accounting Systems
The CIMA Terminology defines integrated accounts as a “set of accounting records that integrates both
financial and cost accounts using a common input of data for all accounting purposes”.

Accounts required for an integrated accounting system:

• Raw materials control account
• Wages control account
• Production overhead control account
• Administration overhead control account
• Selling and distribution overhead control account
• Work in progress control account
• Finished goods control account
• Cost of sales control account
• Sales account
• Under/over absorption account
• Statement of profit or loss

Accounting for the cost of labour

The cost of labour is made up of a number of components. It is important to recognize how these
components are accounted for. Some will be treated as direct labour costs and some will be treated as
indirect labour costs.

✓ Deductions from employees’ wages:

The total amount of pay for each employee is known as gross wage. But this is not the amount
received by the employees as a number of deductions are made (pension contributions, taxes etc.)
Net wage = Gross wage – Deductions
The employer may also make additional benefit contributions on behalf of employees. Some
organisations treat this as an indirect cost and others treat this as part of direct wages cost by
adding it to the gross wages value.

BA2 Nov. 2020 – Tute 06 – K. Sivagar 1

✓ Overtime premium:
Normally overtime premium paid to an employee will be treated as an indirect cost. But if the
overtime has been worked because of a specific customer request to complete a job, it will be
treated as a direct cost.

✓ Bonus earnings:
Bonuses calculated based on an individual task basis will be treated as direct labour cost. However,
if it is for the total hours worked for a particular pay period, it will be treated as an indirect cost.

✓ Idle time:
Idle time payments are treated as indirect costs in the analysis of wages.

BA2 Nov. 2020 – Tute 06 – K. Sivagar 2

 The main accounting entries in an integrated accounting system

1. The purchase of raw materials on credit terms

Debit Raw materials control
Credit Payables control

2. The issue of direct materials to production

Debit Work in progress control
Credit Raw materials control

3. The issue of indirect materials to production overheads

Debit Production overhead control
Credit Raw materials control

4. A cash payment of net wages

Debit Wages control
Credit Cash/Bank

5. Employee deductions to be made from employee wages and paid to tax authorities and pension
funds
Debit Wages control
Credit Employee deductions payable

6. The direct wages are charged to work in progress

Debit Work in progress control
Credit Wages control

7. The indirect wage costs are collected in the production overhead control account
Debit Production overhead control
Credit Wages control

BA2 Nov. 2020 – Tute 06 – K. Sivagar 3

8. Electricity for production purposes obtained on credit
Debit Production overhead control
Credit Payables control

9. Depreciation of machinery used for production

Debit Production overhead control
Credit Provision for depreciation

10. Cash paid for office expenses

Debit Administrative overhead control
Credit Cash account

11. Absorption of production overhead using a predetermined rate

Debit Work in progress control
Credit Production overhead control

• Under absorption
Debit Statement of profit or loss
Credit Production overhead control

• Over absorption
Debit Production overhead control
Credit Statement of profit or loss

12. The transfer of completed goods to the finished goods account

Debit Finished goods control
Credit Work in progress control

13. The transfer of finished goods from the inventory account to cost of sales
Debit Cost of sales account
Credit Finished goods control

BA2 Nov. 2020 – Tute 06 – K. Sivagar 4

14. Transfer the costs of goods sold from the cost of sales to the statement of profit or loss
Debit Statement of profit or loss
Credit Cost of sales account

15. Transfer the administration costs from the administration overhead control account to the
statement of profit or loss
Debit Statement of profit or loss
Credit Administration overhead control

16. The sale of goods produced on credit

Debit Receivables control
Credit Sales account

17. The transfer of sales revenue to the statement of profit or loss

Debit Sales control
Credit Statement of profit or loss

Practice Question – 01 $
Capital introduced 500,000
Machine purchased (for production) 300,000
Machine depreciation per year 30,000

Raw material purchased for credit 600,000

Raw material purchased for cash 200,000

Paid to raw material creditors 400,000

Raw material issued – direct 500,000

Raw material issued – indirect 150,000

Salaries & wages – paid 500,000

Salaries & wages – payable 80,000

BA2 Nov. 2020 – Tute 06 – K. Sivagar 5

(Direct wage 70% , indirect wage 20% , administration 10%)

Production overhead paid 200,000

Production overhead absorbed 400,000

Finished goods – produced 1,150,000

Finished goods – sold 1,000,000

Administration & selling expenses paid 180,000

Credit sales 1,600,000

Money collected from debtors 1,500,000

Requirement:

Record the transactions using the integrated accounting system.

Recording variances in the ledger accounts

• Ledger account is kept for each variance.

• Any adverse variance is shown as a debit entry in the variance account.
• Any favourable variance is shown as a credit entry in the variance account.
• Other corresponding entries;
✓ Material price variance is recorded in the raw materials control account.
✓ Labour rate variance is recorded in the wages control account.
✓ Quantity variances (material usage, labour efficiency and variable overhead efficiency) are
recorded in the work in progress control account.
✓ Variable overhead expenditure, fixed overhead expenditure and fixed overhead volume
variances are usually recorded in production overhead control account.
✓ Sales are usually recorded at actual amounts in the ledger accounts, so sales variances are not
applicable.
✓ At the end of the accounting period the variances accounts are totaled and transferred to the
statement of profit or loss (adverse variances are debited to the statement of profit or loss and
favourable variances are credited).

BA2 Nov. 2020 – Tute 06 – K. Sivagar 6

Practice Question – 02
Standard cost
Direct material 2 kg @ $10 = 20
Direct labour 3 hrs @ $6 = 18
Variable production overhead 3 hrs @ $3 = 9
Fixed production overhead = 13
Standard cost 60
Standard profit 40
Standard price 100

Budgeted production & sales are 10,000 units

Actual details
Actual sales 11,000 units @ $110
Actual production 12,000 units
Raw material 26,000 kg purchased @ $9 per kg (used 25,000kg). Stocks are valued at the
standard.
Labour 35,000 hours paid @ $7 per hrs (Idle hours are 500)
Variable production overhead $ 138,000
Fixed production overhead $ 152,000
Overhead cost accounting system used by the organization is absorption costing.

Requirement:
1. Calculate all the variances
2. Prepare ledger accounts

BA2 Nov. 2020 – Tute 06 – K. Sivagar 7

 Objective Test Questions

1. A firm operates an integrated cost and financial accounting system. The accounting entries for
indirect wages incurred would be:
Debit Credit
A. Wages control account Overhead control account
B. Work in progress account Wages control account
C. Overhead control account Wages control account
D. Wages control account Work in progress account

2. X Co has recorded the following wages costs for direct production workers for November.
$
Basic pay 70,800
Overtime premium 2,000
Holiday pay 500
Gross wages incurred 73,300
The overtime was not worked for any specific job.

The accounting entries for these wages costs would be:

Debit Credit
$ $
A.. Work in progress account 72,800
Overhead control account 500
Wages control account 73,300
B. Work in progress account 70,800
Overhead control account 2,500
Wages control account 73,300
C. Wages control account 73,300
Work in progress account 70,800
Overhead control account 2,500
D. Wages control account 73,300
Work in progress account 72,800
Overhead control account 500

BA2 Nov. 2020 – Tute 06 – K. Sivagar 8

3. The wages control account for A Co for February is shown below.
Wages control account
$ $
Bank 128,400 Work in progress control 79,400
Balance c/d 12,000 Production overhead control 61,000
140,400 140,400
Balance b/d 12,000
Which of the following statements about wages for February is not correct?
A. Wages paid during February amounted to $128,400
B. Wages for February were prepaid by $12,000
C. Direct wages cost incurred during February amounted to $79,400
D. Indirect wages cost incurred during February amounted to $61,000

4. When a standard costing bookkeeping system is used and the actual price paid for raw materials
exceeds the standard price, the double entry to record this is:
Debit Credit
A. Raw material control account Raw material price variance account
B. Work in progress control account Raw material price variance account
C. Raw material price variance account Raw material control account
D. Raw material price variance account Work in progress control account

5. A firm uses an integrated standard cost bookkeeping system. The double entry for a favourable
labour efficiency variance is:
Debit Credit
A. Labour efficiency variance account Wages control account
B. Work in progress control account Labour efficiency variance account
C. Wages control account Labour efficiency variance account
D. Labour efficiency variance account Work in progress control account

BA2 Nov. 2020 – Tute 06 – K. Sivagar 9

6. A firm uses standard costing and an integrated accounting system. The double entry for a favourable
material usage variance is:
Debit Credit
A. Suppliers control account Material usage variance account
B. Material usage variance account Stores control account
C. Work in progress control account Material usage variance account
D. Material usage variance account Work in progress control account

7. A firm uses an integrated cost bookkeeping system. The double entry for a favourable labour rate
variance is:
Debit Credit
A. Labour rate variance account Wages control account
B. Work in progress control account Labour rate variance account
C. Labour rate variance account Work in progress control account
D. Wages control account Labour rate variance account

8. A firm uses an integrated cost bookkeeping system. The double entry for an adverse material usage
variance is:
Debit Credit
A. Material usage variance account Work in progress control account
B. Material usage variance account Stores ledger control account
C. Work in progress control account Material usage variance account
D. Stores ledger control account Material usage variance account

9. A firm uses an integrated cost bookkeeping system. The accounting entries for the factory cost of
finished production would be:
Debit Credit
A. Work in progress control account Finished goods control account
B. Costing statement of profit or loss Finished goods control account
C. Finished goods control account Work in progress control account
D. Cost of sales account Finished goods control account

BA2 Nov. 2020 – Tute 06 – K. Sivagar 10

10. A firm operates an integrated cost and financial accounting system. The accounting entries for an
issue of direct materials to production would be:
Debit Credit
A. Work in progress control account Stores control account
B. Finished goods account Stores control account
C. Stores control account Work in progress control account
D. Cost of sales account Work in progress control account

11. The book keeping entries in a standard cost system when the actual price for raw materials
purchased is less than the standard price are:
Debit Credit No entry in
this account
Raw materials control account
WIP control account
Raw material price variance account

12. In an integrated cost and financial accounting system, the accounting entries at the end of the
period for factory overhead over-absorbed would be:
Debit Credit No entry in
this account
Overhead control account
Work in progress account
Statement of profit or loss

The following information relates to questions 13, 14 and 15.

A manufacturing company uses an integrated accounting system. The production overhead absorption
rate is $3 per direct labour hour. Production overhead incurred last period was $85,000 and 27,000
direct labour hours were worked. Other information was as follows.

BA2 Nov. 2020 – Tute 06 – K. Sivagar 11

 $
Opening inventory 18,500
Closing inventory 16,100
Deliveries from suppliers 142,000
Returns to suppliers 2,300
Cost of indirect materials issued 25,200

13. The accounting entries to record the absorption of production overhead for the period would be:
Debit Credit
A. Work in progress account $85,000 Overhead control account $85,000
B. Finished goods account $81,000 Overhead control account $81,000
C. Work in progress account $81,000 Overhead control account $81,000
D. Overhead control account $81,000 Overhead control account $81,000

14. The accounting entries to record the under or over absorption of production overhead for the
period would be:
Debit Credit
A. Statement of profit or loss $4,000 Overhead control account $4,000
B. Overhead control account $4,000 Statement of profit or loss $4,000
C. Work in progress account $4,000 Overhead control account $4,000
D. Overhead control account $4,000 Work in progress account $4,000

15. How is the issue of direct materials recorded in the cost accounts?
Debit Credit
A. Stores ledger control account $119,200 Work in progress control account $119,200
B. Work in progress control account $119,200 Stores ledger control account $119,200
C. Stores ledger control account $116,900 Work in progress control account $116,900
D. Work in progress control account $116,900 Stores ledger control account $116,900

BA2 Nov. 2020 – Tute 06 – K. Sivagar 12

 Questions 16 & 17 are based on following information.

The following analysis of labour costs for a department has been produced. Direct employees are
directly involved in production while indirect employees are involved indirectly with production, or in
support functions.
Direct Employees Indirect Employees
Basic pay 55,000 22,750
Overtime – basic rate 2,400
Overtime premium 600
Bonuses 1,000 1,500
59,000 27,750

16. Use the costs from the above table to complete the analysis of direct and indirect labour costs.
Direct labour costs Indirect labour costs
Basic pay – direct employees
Basic pay – indirect employees
Overtime – basic rate
Overtime premium
Bonusses – direct employees
Bonusses – indirect employees

17. Complete the following sentences by selecting the correct word.

• If the overtime worked by direct employees was to complete a specific job for a customer,
overtime premium would be treated as direct/indirect costs.
• If the bonuses were paid for completion of a particular task, the bonuses would be treated as
direct/indirect costs.

BA2 Nov. 2020 – Tute 06 – K. Sivagar 13

18. At the end of a period a company using an integrated accounting system calculated that they had an
adverse labour rate variance.
Which TWO of the following entries would be required to record this?
A. CR Work in progress account
B. DR Work in progress account
C. DR Labour rate variance account
D. CR Labour rate variance account
E. CR Wages control account
F. DR Wages control account

19. Which TWO of the following statements relating to integrated accounting are true?
A. If a company operates an integrated accounting system, they need to undertake a periodic
reconciliation to ensure financial ledgers agree
B. Control accounts are used as summary accounts to record the total entries for each ledger
C. Integrated accounting systems may not provide the quality of information required for
management accounting purposes
D. Maintaining integrated accounting systems can result in duplication of work
E. With an integrated accounting system different profit figures can be calculated for financial and
management accounting purposes

20. Consider the following entries taken from the WIP control account.
Wages $30,000
Production overhead $40,000
Transfer of finished goods $350,000
Balance carried forward $75,000

Calculate the value of raw materials brought into production $......................................

BA2 Nov. 2020 – Tute 06 – K. Sivagar 14