Cost Accounting Updated Version

Index
NO CHAPTERS PAGE #
1 Introduction to cost accounting 2-4
2 Accounting concept relating to manufacturing activities 5 – 20
3 Job order costing 21 – 35
4 Process costing 36 – 46
5 Joint product and by product 47 – 51
6 Costing and control of material 52 – 58
7 Costing and control of labour 59 – 62
8 Factory Overhead 63 – 71
9 Budgeting 72 – 90
10 Direct and absorption costing 91 – 115
11 Cost, volume and profit analysis 116 – 129
1
CHAPTER # 1
COST ACCOUNTING: AN INTRODUCTION
Cost :
Cost can be defined as the expenditure incurred on a given thing. It can also be
described as the resources that have been sacrificed or must be sacrificed to attain a
particular objective. In other words, cost is the amount of resources used for
something which must be measured in terms of money.
For example –
Cost of preparing 1 cup of tea is the amount incurred on the elements like material,
labour and other expenses; similarly cost offering any services like banking is the
amount of expenditure for offering that services. Thus cost of production or cost of
services can be calculated by ascertaining the resources used for the production or
services.
Definition of Cost accounting
Cost accounting is concerned with recording, classify and summarizing costs for
determination of cost of products or services, planning, controlling and
reducing such costs and furnishing of information to management for decisions
Objective of Cost Accounting
 To ascertain the cost of production on per unit basis, For example, cost per
kg, cost per meter, cost per litre, cost per ton etc.
 Cost accounting helps in the determination of selling prices.
 Cost accounting helps in cost control and cost reduction
 Helps in make or buy decision
 Cost accounting also helps in locating wastages, inefficiencies and other
loopholes in the production processes/services offered.
 Cost accounting also helps in estimation of costs for the future.
TYPES OF COST
 Fixed Cost
Definition of Fixed Cost:

The cost which does not varies with level of output in a relevant time.
For Example: Rent, Salaries etc
 Variable Cost
Definition of Variable Cost

The cost which varies with level of output in a relevant time.
2
For Example: Material, Commision, Wages etc
 Semi-variable Cost
Definition of Semi-variable Cost

A cost composed of a mixture of fixed and variable components. Costs are fixed for
a set level of production or consumption, becoming variable after the level is
exceeded.
For Example: Electricity, Telephone bill etc
ELEMENTS OF COST:
Element of cost
Material Labour Other

expenses
Direct Indirect Direct Indirect Direct Indirect
Material: The substance from which the finished product is made is known as
material.
Direct Material: is one which can be directly or easily identified in the product Eg:
Timber in furniture, Cloth in dress, etc
Indirect Material: one which cannot be easily identified in the product Eg; lubricants,
oil, consumables, Stationery etc
Labour: The human effort required to convert the materials into finished product is
called labour.
Direct Labour: is one which can be conveniently identified or attributed wholly to a

particular job, product or process. Eg: wages paid to carpenter, fees
paid to tailor etc
Indirect Labour: is one which cannot be conveniently identified or attributed wholly to
3
a particular job, product or process. Eg: works manager’s salary,
gate keeper’s salary, Accountant’s salary, Logistics manager salary
etc
Other Expenses: are those expenses other than materials and labour.
Direct Expenses: are those expenses which can be directly allocated to particular
job, process or product. Eg : Excise duty, royalty, special hire
charges, etc.
Indirect Expenses: are those expenses which cannot be directly allocated to

particular job, process or product. Eg: factory rent, office rent,
advertising, office lighting etc
Example: Identify Cost

Units 6000 8000 11000
Material 30,000 40,000 ?
Commission 60,000 80,000 ?
Rent 20,000 20,000 ?
Salaries 50,000 50,000 ?
Electricity 28,000 34,000 ?
Telephone 50,000 62,000 ?
Total 238,000 286,000 ?
4
CHAPTER # 2
Accounting concept relating to manufacturing activities
Manufacturing cost is the sum of costs of all resources consumed in the process of
making a product. The manufacturing cost is classified into
three categories:

 Direct materials cost
 Direct labour cost and
 Manufacturing overhead.
Direct materials cost: Direct materials are the raw materials that become a part of
the finished product. Manufacturing adds value to raw
materials by applying a chain of operations to maintain a
deliverable product. There are many operations that can be
applied to raw materials such as welding, cutting
and painting. It is important to differentiate between the direct
materials and indirect materials.
Direct labour cost: The direct labour cost is the cost of workers who can be easily
identified with the unit of production. Types of labour who are
considered to be part of the direct labour cost are the assembly
workers on an assembly line.
Manufacturing overhead: Manufacturing overhead is any manufacturing cost that is

neither direct materials cost or direct labour cost.
Manufacturing overhead includes all charges that provide

support to manufacturing.
Manufacturing overhead includes
 Indirect labour cost: The indirect labour cost is the cost associated with
workers, such as supervisors and material handling team, who are not directly
involved in the production.
 Indirect materials cost: Indirect materials cost is the cost of associated with
consumables, such as lubricants, grease, and water, that are not used as raw
materials.
 Other indirect manufacturing cost: includes machine depreciation, land

rent, property insurance, electricity, freight and transportation, or any
expenses that keep the factory operating.
5
Format of manufacturing account
ABC Company
Manufacturing Account
For the month of xxxxxx
Opening stock of raw materials Xxxxx

Add purchase of raw materials Xxxxx
Add carriage inwards ( if any ) Xxxxx
Xxxxx
Less Returns outwards (of raw materials) Xxxxx
Xxxxx
Less Goods drawings ( if any ) Xxxxx
Xxxxx
Less Closing stock of raw materials Xxxxx
Cost of Direct Materials xxxxxxx
Add Direct labour xxxxxxx
Add Direct expenses (Eg: royalties) xxxxxxx
Prime Cost xxxxxxx
Add Factory overhead expenses
Factory lighting Xxxxxx
Factory heating Xxxxxx
Factory insurance Xxxxxx
Factory rent Xxxxxx
Factory maintenance Xxxxxx
Factory indirect wages Xxxxxx
Factory supervisor’s wages Xxxxxx (+)
Depreciation on plant & machinery Xxxxxx
Depreciation on factory building Xxxxxx
Depreciation on factory furniture Xxxxxx
Depreciation on factory motor van Xxxxxx
Depreciation on other factory fixed assets Xxxxxx xxxxxx
xxxxxx
Add Opening stock of work in progress xxxxxx
xxxxxx
Less Closing stock of work in progress xxxxxx
Cost of production xxxxxx
QUESTION # 1
6
Ali & Co. is a manufacturing business. The following information relates to the year
ended 30 April 2005.
Rs.
Direct material 146,300
Direct labour 175,400
Factory overheads 83,800
Work in progress, 1 May 2004 10,000
Work in progress, 30 April 2005 10,000
REQUIRED: Calculate
1. Prime cost
2 Factory cost of production
Solution # 1
Ali Co.
Prime Cost
For the Ended 30 April 2005
Ali Co.
Factory cost of production
For the Ended 30 April 2005
QUESTION # 2
7
ABC is a manufacturer. The following balances were extracted from his books on 1
December 2010.
Rs.
Inventories (stocks) 1 January 2010:
Raw materials 14,700
Work in progress 23,570
Purchases of raw material 75,600
Direct factory wages 62,140
Factory Rent 28,000
Factory management salaries 31,500
Office salaries 41,600
Sundry office expenses 9,870
Carriage inwards 2,000
Purchase return 1,000
Factory heat and light 2,500
Additional information:
Inventories (stock) 31 December 2010:
Rs.
Raw material 16,250
Required:
Prepare the manufacturing account of ABC for the year ended 31 December 2010.
Show clearly the cost of raw materials consumed, prime cost and cost of production.
Solution # 2
ABC
Manufacturing account
for the year ended 31 December 2010
QUESTION # 3
8
Maqbool & company is a manufacturer. The following balances were extracted from
the books on 31 December 2011.
Rs.
Inventory at 1 January 2011
Purchases of raw materials 147,200
Royalties paid 10,000
Direct factory wages 85,960
Factory indirect expenses 23,450
Rent 30,000
Factory management salaries 36,000
Distribution costs 18,650
Carriage inward 15,000
Purchase return 9,000
General factory expenses 11,300
Plant and machinery (cost) 75,000
Office equipment (cost) 24,000
Provisions for depreciation: Plant and machinery 25,000
Provisions for depreciation: Office equipment 9,000
1. Inventory at 31 December 2011
Rs.
2. Rent is to be apportioned four fifths (4/5) to the factory and one fifth (1/5) to
the administration.
3. Depreciation is to be charged as follows:
i. Factory plant and machinery at 20% per annum using the diminishing
(reducing) balance method.
ii. Office equipment at 10% on cost using the straight-line method.
REQUIRED:
Prepare the manufacturing account of Maqbool & company for the year ended 31
December 2011. Show clearly the prime cost and cost of production.
Solution # 3
9
Maqbool & company
For the year ended 31 December 2011
QUESTION # 4
Following information relates to the Karachi Steel Manufacturing Company:
10
Rs.
Direct materials 25,000
Indirect materials 5,000
Direct labour 30,000
Indirect labour 4,500
Factory overhead (excluding indirect materials and indirect labour) 15,000
Plant cost 500,000
Required: Compute the
i. Prime costs
ii. Conversion costs
iii. Cost of production
Solution # 4
Karachi Steel
Prime Cost
Karachi Steel
Conversion Cost
Karachi Steel
Cost of production
QUESTION # 5
11
Sugar Mills Limited. submits the following data on October 31, 2010, material put into
process Rs.42,300; direct labour is paid at the rate of Rs.7.8 and Rs.8.4 in
department A and B respectively. Department A worked 6125 hours and Department
B reported 9875 hours. Factory overhead is applied on the basis of direct labour
hours at the rate of Rs.5 per hour in Department A and Rs.4.2 per hour in
Department B.
Oct.1 Oct.31
Finished goods 11,300 9400
Work in process 17,300 19,425
Materials 15,000 19,200
Required: Determine
i. Total manufacturing cost
ii. Cost of goods manufactured
iii. Cost of goods sold
Solution # 5
Sugar Mills Limited.
Total Manufacturing account
for the year ended October 31, 2010

Cost of Good Manufacture
For the year ended October 31, 2010

Cost of Goods Sold
12
For the year ended October 31, 2010
QUESTION # 6
From the following information prepare the manufacturing, trading and profit and loss
accounts for the year ending 31 December 19X6 and the balance sheet as at 31
December 2012 for the firm of M. Ali.
Rs. Rs.
Purchase of raw materials 258,000
Fuel and light 21,000
Administration salaries 17,000
Factory wages 59,000
Carriage outwards 4,000
Rent and rates 21,000
Sales 482,000
Returns inward 7,000
General office expenses 9,000
Repairs to plant and machinery 9,000
Stock at 1 January 2012
Finished goods 23,000
Sundry creditors 37,000
Capital account 457,000
Freehold premises 410,000
Plant and machinery 80,000
Debtors 20,000
Provision for depreciation on plant and
Machinery at 1 January 2012 8,000
Cash in hand 11,000
984,000 984,000
Make provision for the following:
1. Stock in hand at 31 December 2012
2. Depreciation of 10% on plant and machinery – straight line method
3. 80% of fuel and light and 75% of rent and rates to be charged to
manufacturing
4. Doubtful debts provision – 5% of sundry debtors
5. ￡4,000 outstanding for fuel and light
6. Rent and rates paid in advance - Rs.5,000
7. Market value of finished goods - Rs.382,000
Solution # 6
13
M. Ali
For the year ending 31 December 2012
M. Ali
Trading profit and loss account
14
For the year ending 31 December 2012
QUESTION # 7
Hassan Textile Mills Limited. started in business on 1st January 2013 as a
manufacturer of gaming machines. The following figures are extracted from his
records on 31st December 2013.
15
Rs.
Sales (30,000 machines at Rs.30 each) 900,000
Plant and machinery (bought 1st January 2013) 80,000
Motor vans (bought 1st January 2013) 10,000
Administrative wages 18,000
Loose tools bought 6,400
Light and power 40,000
Building repairs 20,000
Raw materials bought 273,400
Salesmen’s salaries 29,000
Driver’s wages 24,000
Motor van expenses 5,000
Direct wages 302,000
General administration expenses 6,000
Indirect wages 54,000
Repairs to machinery 11,000
Rates and insurance 10,000
The following information is also made available to you:

1. The work in progress on 31st December 2013, valued at production cost was
￡55,000.
2. The closing stocks on 31st December 2013 were: Raw materials ￡13,400,
Loose tools ￡2,400.
3. Depreciate motor vans 20%, plant and machinery 10%.
4. Allocate expenses as follows:
Factory Administration
Light and power 9/10 1/10
Building repairs 3/5 2/5
Rates and insurance 4/5 1/5
5. A manufacturing profit of 25% on production cost was added for the purpose
of transferring finished goods to the trading account.
6. During the year 40,000 machines were completed. Value the 10,000
machines in stock at the average cost of production (subject to provision for
unrealized profit).
Required: Draw up the manufacturing, trading and profit and loss account for the
year ended 31st December 2013. Show clearly the figures of prime cost
and production cost of goods completed.
Solution # 7
Hassan Textile Mills Limited.
For the year ended 31st December 2013
16
Hassan Textile Mills Limited.
Trading profit and loss account
For the year ended 31st December 2013
17
PRACTISE QUESTION
Question 1
18
Raw material (1-1-03) 12,500 Raw material (31-12-03) 32,000
Work-in-Process(1-1-03) 6,300 Work-in-Process(31-12-03) 16,500
Finished Goods (1-1-03) 12,500 Finished Goods(31-12-03) 25,000
Sales 678,600 Direct labour
Sales return 15,000 25,000
Purchases of raw material 245,000 Other factory overhead 17,600
Administrative expense 70,000 Repair and maintenance 10,000
Marketing expense 55,000 Insurance-factory 12,000
Indirect material 8,000 Depreciation-factory 22,000
Indirect labour
4,500
Required:
i. Statement of cost of goods manufactured
ii. Income Statement
QUESTION # 2
The Delta Company manufactures small stuffed gorillas. The total revenue is
Rs.59,000
The Company incurred the following costs:

Rs.
Materials 5,200 (10% is indirect materials)
Labour 7,000 (12% is indirect labour)
Factory overhead 25,000 (including indirect materials and indirect labour)
General expenses 14,700
Equipment purchased 5,300
Total 62,000
There were no units still in process at the end of the year, and 92% of the goods
produced during the year were sold.
Required: Prepare Income Statement showing net income or loss.
QUESTION # 3
During the month of August, Binder Electronics applied overhead to jobs using an
overhead rate of 150% direct labour cost. Direct labour in August was Rs.65,000.
Actual overhead in August was Rs.140,000. Assume that actual overhead was
composed of the following items.
Rs.
Indirect material 20,000
Utilities 5,000
Depreciation 50,000
Repair expense 20,000
REQUIRED:
a. Calculate over/under applied overhead
19
b. What would impact of be over/under applied overhead on cost of product?
QUESTION # 4
Babar Manufacturing expects the following overhead costs in 2004:
Rs.
Indirect material 25,000
Indirect labour
40,000
Depreciation 100,000
Repair of machinery 125,000
Utilities 35,000
They expect to use 15,000 direct labour hours at a cost of Rs.330,000 and 10,000
machine hours during the year.
Required:
a. Justify the selection of an appropriate allocation base
b. calculate the predetermined overhead allocation rate.
QUESTION # 5
Auto Industries Limited. Is a manufacturing company that uses a predetermined
overhead rate based on direct labour hours to apply overhead. For 2008 estimated
direct labour hours are 95,000 and estimated factory overhead is Rs.579,500.
Following information extracted from their record.
Sep 1, 2008 inventories Rs.

Material inventory 7,500
Work in process 31,200
Material purchases during the month of Sep 104,000

Direct material requisitioned
Department-A 45,000
Department-B 33,500
Direct labour hours:
Department –A 4200
Department-B 3500
Direct labour (Rs.5.5 per hour) 42,350

Supervisory salaries 6,000
Factory rental cost 7,000
Factory depreciation 7,500
Indirect material used 12,000
Required:
i. What is total cost of product?
ii. What is the total factory overhead applied during September 2008?
iii. What is the over-applied or under-applied overhead for September?
CHAPTER # 3
20
JOB ORDER COSTING
Cost Accounting System:
 A cost accounting system (also called product costing system or costing
system) is a framework used by firms to estimate the cost of their products for
profitability analysis, inventory valuation and cost control
 Estimating the accurate cost of products is critical for profitable operations. A

firm must know which products are profitable and which ones are not, and this
can be ascertained only when it has estimated the correct cost of the product.
o There are two main cost accounting systems: the job order costing and the
process costing.
i. Job order costing
ii. Process costing
Job Order Costing:

Job order costing is a cost accounting system that accumulates manufacturing costs
separately for each job. It is appropriate for firms that are engaged in production of
unique products , special orders and customer specification. For example, it is the
costing accounting system most appropriate Software house.
Job Order Costing Characteristics:

 Related to a customer specific order.
 Assigning a unique job code.
 Cost accumulated and preparing job order cost sheet
Basic features of Job Costing

 Each job is treated as a cost unit.
 All costs are accumulated and ascertained for each job.
 Each job is unique.
 Each job is executed as per customer’s specifications.
 A separate job cost sheet or job card is used for each job and is assigned a
certain number by which the job is identified.
In which industries job costing is applied

Job Costing is applied in those industries where the goods are manufactured or
services are rendered against specific orders as per customer’s specifications. It is
generally applied in –
 Engineering industries
 Construction industries
 Ship – Building industries
 Furniture – making industries
 Automobiles service industries
 Repair Shops industries
Advantages of Job order Costing
21
Job costing enables the management –
 To know a detailed analysis of costs of material, labour and overhead charged
to each job.
 To ascertain profit or loss made on each job.
 To estimate the costs and profitability of similar jobs to be taken up in future.
 To control operational inefficiency by comparing the actual costs with the
estimated cost.
 To identify jobs where waste, scrap, spoilage and defective occurred and take
corrective action against the responsible person or department.
Process Costing:
Process costing is a cost accounting system that accumulates manufacturing costs
separately for each process. It is appropriate for products whose production is a
process involving different departments and costs flow from one department to
another. For example, it is the cost accounting system used by Textile Unit.
Example of Job and Process Costing

Software House Job Order Costing
Textile Unit Process Costing
Job Order Cost Sheet
22
Cost Job Job Job
111-W 666-S 555-F
Direct Material Cost
Direct Labour Cost
FOH applied
Total Production Cost
Selling & Admin Overhead
Total Cost Charge to job
Selling Price
Profit / Loss
ILLUSTRATE:
A furniture Mart received an order to manufacture furniture for a school the order
was assigned a job code FS-6.
FS-6 Job was priced at Rs. 400,000 and selling & Admin cost allocated to the FS-6
Job was 10% of Selling price.
Direct Material Cost:

Date Requisition No. Cost
March 05 978 25,000
March 15 1060 50,000
March 25 1100 40,000
Direct Labour Cost:

Date Hours Rate Amount
March 05 400 50 20,000
March 15 400 50 20,000
March 25 200 50 10,000
50,000
F.O.H Applied:
F.O.H cost is applied at Rs. 180 per Direct Labour hour.
Direct Labour Hours = 400 + 400 + 200
= 1000
Direct Labour hours x O.A.R(Overhead absorption rate)
1000 x 180 = 180,000
Job Order Cost Sheet:
Amount
23
Direct Material 115,000
Direct Labour 50,000
F.O.H applied 180,000
Total Production Cost 345,000
Selling & admin overhead 40,000
Total cost charge to job 385,000
Selling price 400,000
Profit 15,000
General Entries:
Date Particulars Debit Credit
March W.I.P (FS-6) 117,000
05 Material 25,000
Labour 20,000
FOH Applied (400 x 180) 72,000
March W.I.P (FS-6) 142,000

15 Material 50,000
Labour 20,000
FOH Applied (400 x 180) 72,000
March W.I.P (FS-6) 86,000

25 Material 40,000
Labour 10,000
FOH Applied (200 x 180) 36,000
March Finished Goods(FS-6) 345,000

31 W.I.P 345,000
March COGS 385,000

31 Finished Goods 385,000
March Account Receivable 400,000

31 Sales 400,000
Ledger Account:
W.I.P T-Account
24
March March
05 Material 25,000 31 Finished Goods 345,000
Payroll 20,000
FOH 72,000
15 Material 50,000
Payroll 20,000
FOH 72,000
25 Material 40,000
Labour 10,000
FOH 36000
345,000 345,000
Finished Goods T- Account
W.I.P 345,000 c/d 385,000
Selling & Admin 40,000
385,000 385,000
Question # 1
Following information has been extracted from costing record of Abdul Engineering
works in respect of Job No. 101.
Material Rs.5,800
Wages:
Department A 100 hours @ Rs. 5 per hour
25
Department B 200 hours @ Rs. 3 per hour
Overhead for the two department are estimated as follows:

Variable Overhead
Department A Rs.10,000 for 5,000 direct labour hours
Department B Rs.30,000 for 10,000 direct labour hours
Fixed Overheads: Estimated at Rs.50,000 for 50,000 normal working hours.
Required:
Calculate the cost of Job No. 101 and calculate the price to be charged so as to
given a profit of 20% on selling price.
Solution # 1
Abdul Engineering works
Question # 2
Classify these industries with respect to the type of cost accumulation procedure
generally used--job order costing or process costing.
a. Meat k. Pianos
b. Sugar l. Linoleum
c. Steel m. Leather
d. Breakfast cereal n. Nylon
e. Paper boxes o. Baby foods
f. Wooden furniture p. Locomotives
g. Toys and novelties q. Office machines equipment
h. Coke r. Luggage
i. Cooking utensils s. Paint
j. Caskets t. Tires and tubes
Question # 3
26
Forge Machine Works collects its cost data by the job order cost accumulation
procedure. For Job 642, the following data are available:
Date Direct material Date Direct labour

Sept 14 Rs. 1,200 Sept 20 180 hrs
@Rs.6.20/hr
Sept 20 Rs. 662 Sept 26 140 hrs @ Rs.
7.30/hr
Sept 22 Rs. 480
Factory overhead applied at the rate of Rs.3.50 per direct labour hour
Required:
a) The appropriate information on a job cost sheet.
b) The sales price of the job, assuming that it was contracted w ith a markup of
40% of cost.
Solution # 3
Forge Machine Works
Question # 4
The Karachi Company uses job order costing. At the beginning of the May, two jobs
were in process:
Job 369 Job372
Materials Rs. 2,000 Rs. 700
Direct labour Rs. 1,000 Rs. 300
27
Applied factory overhead Rs. 1,500 Rs. 450
There was no inventory of finished goods on May1. During the month, Jobs 373,
374, 375, 376, 378, and 379 were started.
Materials requisitions for May totaled Rs.13,000,

Direct labour cost, Rs.10,000
Actual factory overhead, Rs.16,000.
Factory overhead is applied at a rate of 150% of direct labour cost.
The only job still in process at the end of May is No. 379, with costs of Rs.1,400 for
materials and Rs.900 for direct labour. Job 376,
The only finished job on hand at the end of May, has a total cost of Rs.2,000.
Required:
a) T accounts for work in process, finished goods, cost of goods sold, factory
overhead control, and applied factory overhead.
b) General journal entries to record:
a. Cost of goods manufactured
b. Cost of goods sold
c. Closing of over or under applied factory overhead to cost of goods sold.
Solution # 4
Karachi Company
Ledger Account
For the month of May
28
Karachi Company
General Entries
For the month of May
Date Particular P.R Debit (Dr) Credit (Cr)
Question # 5
Iqra inc. provided the following data for January, 19B:
Materials and supplies:

Inventory, January 1, 19B Rs.10,000
29
Purchases on account 30,000
Labour:
Accrued, January 1, 19B 3,000
Paid during January (ignore payroll taxes) 25,000
Factory overhead costs:

Supplies (issued from materials) 1,500
Depreciation 1,000
Other factory overhead costs (all from outside suppliers on account) 14,500
Work in process:
Job1 Job2 Job3 Total
Rs.
Work in process January 1, 19B -- -- Rs. 1,000
1,000
Job costs during January, 19B:
Rs.6,00
Direct materials 4,000 Rs.5,000 15,000
0
Direct labour 5,000 8,000 7,000 20,000
Applied factory overhead 5,000 8,000 7,000 20,000
Job 1 started in December, 19A, finished during January, and sold to a customer for
Rs.21,000 cash
Job 2 started in January, not yet finished.
Job 3 started in January, finished during January, and now in the finished goods
inventory awaiting customer's disposition
Finished goods inventory January 1, 19B.
Required:
Journal entries, with detail for the respective job orders and factory overhead
subsidiary records, to to record the following transactions for the January:
1. Purchase of materials on account.
2. Labour paid.
3. Labour cost distribution.
4. Materials issued.
5. Depreciation for the month.
6. Acquisition of other overhead costs on credit.
7. Overhead applied to production.
8. Jobs completed and transferred to finished goods.
9. Sales revenue.
10. Cost of goods sold.
Solution # 5
30
Question # 6
Hogle Company is a manufacturing firm that uses job order costing system. On
January 1, the beginning of its fiscal year, the company's inventory balances were as
follows:
31
Raw materials Rs.20,000
Work in process Rs.15,000
Finished Goods Rs.30,000
The company applies overhead cost to jobs on the basis of machine-hours worked.
For the current year, the company estimated that it would work 75,000 machine-
hours and incur Rs.450,000 in manufacturing overhead cost. The following
transactions were recorded for the year
1. Raw materials were purchased on account, Rs.410,000.

2. Raw materials were requisitioned for use in production, Rs.380,000
(Rs.360,000 direct materials and Rs.20,000 indirect materials).
3. The following costs were incurred for employee services: direct labour,
Rs.75,000; indirect labour, Rs.110,000; sales commission, Rs.90,000; and
administrative salaries, Rs.20,000.
4. Sales travel costs were Rs.17,000.
5. Utility costs in the factory were Rs.43,000.
6. Advertising costs were Rs.180,000.
7. Depreciation was recorded for the year, 350,000 (80% relates to factory
operations, and 20% relates to selling and administrative activities).
8. Insurance expired during the year, Rs.10,000 (70% relates to factory
operations, and 30% relates to selling and administrative activities).
9. Manufacturing overhead was applied to production. Due to greater than
expected demand for its products, the company worked 80,000 machine-
hours during the year.
10. Goods costing Rs.9,00,000 to manufacture according to their job cost sheets
were completed during the year.
11. Goods were sold on account to customers during the year at a total selling
price of Rs.1,500,000. The goods cost Rs.870,000 to manufacture according
to their job cost sheets.
Required:
a) Prepare journal entries to record the preceding transactions.

b) Post the entries in (1) above to T-accounts (don't forget to enter the beginning
balances in the inventory accounts).
c) Is manufacturing overhead under applied or over applied for the year?
Prepare journal entry to close any balance in the manufacturing overhead
account to cost of goods sold (COGS). Do not allocate the balance between
ending inventories and cost of goods sold (COGS).
d) Prepare an income statement for the year.
Solution # 6
32
Accounts Receivable Raw Materials Work in Process

Finished Goods
Prepaid Insurance

Accumulated Depreciation

Salaries and Wages Payable

Accounts Payable Manufacturing Overhead

Cost of goods sold

33
Sales Administrative Salary Expense

Insurance Expense
Depreciation Expenses
Sales Commissions Expenses

Sales Travel Expense
Advertising expense

HOGLE COMPANY
Income Statement
For the Year Ended December 31
34
CHAPTER # 4
PROCESS COSTING
Process costing is an accounting methodology that traces and accumulates direct
costs, and allocates indirect costs of a manufacturing process. Costs are assigned to
products, usually in a large batch, which might include an entire month's production.
Eventually, costs have to be allocated to individual units of product. It assigns
average costs to each unit, and is the opposite extreme of Job costing which
attempts to measure individual costs of production of each unit. Process costing is
usually a significant chapter. it is a method of assigning costs to units of production
in companies producing large quantities of homogeneous products.
The importance of process costing:
Costing is an important process that many companies engage in to keep track of

where their money is being spent in the production and distribution processes.
Understanding these costs is the first step in being able to control them. It is very
important that a company chooses the appropriate type of costing system for their
product type and industry. One type of costing system that is used in certain
industries is process costing that varies from other types of costing (such as job
costing) in some ways. In process costing unit costs are more like averages, the
35
process-costing system requires less bookkeeping than does a job-order costing
system. Thus, some companies often prefer to use the process-costing system.
When process costing is applied?
Process costing is appropriate for companies that produce a continuous mass of like
units through series of operations or process. Also, when one order does not affect
the production process and a standardization of the process and product exists.
However, if there are significant differences among the costs of various products, a
process costing system would not provide adequate product-cost information.
Costing is generally used in such industries such as petroleum, coal mining,
chemicals, textiles, paper, plastic, glass, food, banks, courier, cement, and soap.
Reasons for use:

Companies need to allocate total product costs to units of product for the following
reasons:
 A company may manufacture thousands or millions of units of product in a

given period of time.
 Products are manufactured in large quantities, but products may be sold in

small quantities, sometimes one at a time (automobiles, loaves of bread), a
dozen or two at a time (eggs, cookies), etc.
 Product costs must be transferred from Finished Goods to Cost of Goods

Sold as sales are made. This requires a correct and accurate accounting of
product costs per unit, to have a proper matching of product costs against
related sales revenue.
 Managers need to maintain cost control over the manufacturing process.
Process costing provides managers with feedback that can be used to
compare similar product costs from one month to the next, keeping costs in
line with projected manufacturing budgets.
 A fraction-of-a-cent cost change can represent a large dollar change in

overall profitability, when selling millions of units of product a month.
Managers must carefully watch per unit costs on a daily basis through the
production process, while at the same time dealing with materials and output
in huge quantities.
 Materials part way through a process (e.g. chemicals) might need to be given
a value, process costing allows for this. By determining what cost the part
processed material has incurred such as labour or overhead an "equivalent
unit" relative to the value of a finished process can be calculated.
Figure 4.1
36
Steps for Process Costing:
1. Prepare Quantity Schedule

2. Prepare Equivalent Per Unit (EPU)
3. Prepare Cost Charged to the Department
4. Prepare Cost Accounted for as Follows
Format of Cost of Production Report
Cost of Production Report

For the month of xxxxxx
Quantity Schedule:
Units received from preceding department XXXXXX
======
Units transferred to finished goods XXXXX

Units still in process XXXXX
Units lost in process (Normal Spoilage XXXX × X %) XXXXX
Units lost in process (Abnormal Spoilage XXXX - XXX) XXXXX XXXXX
------- ======
37
Cost Charged to the Department: Total Cost Unit Cost
Cost from preceding department:
Transferred in during the month (XXXXX units) Rs.XXXXX Rs.X.XX
-------- ------
Cost added by the department:
Materials Rs. XXXXX Rs. X.XX
Labour and factory 0verhead Rs. XXXXX Rs. X.XX
-------- ------
Total cost added Rs. XXXXX Rs. X.XX
-------- ------
Total cost to be accounted for Rs. XXXXX Rs. X.XX
======= =====
Cost Accounted for as Follows:
Transferred to finished goods [(XXXX× Rs.XX) + (XXX* ×
Rs. XXXXX
Rs.XX)]
Transferred to Factory Overhead (XXX** × Rs.XX) XXXXX
Work in process - ending inventory:
Cost from preceding department (XXXX × Rs.X.XX) Rs. XXXXX
Labour and factory overhead (XXXX × XX% × Rs.X) XXXXX XXXXX
-------- -------
Total cost accounted for Rs. XXXXX
======
* Normal spoilage
**Abnormal spoilage
Question # 1
Zain manufacturer uses process costing to determine total cost of production and
unit cost of production. During January, 2006, it started 15,000 units in production
department – A. 1,000 units were loss during the process – normal. 10,000 units
were transferred to department – B and 4,000 units remained in the work in process
inventory at the end of the month, which were 100% complete as to materials and
50% complete as to labour and factory overhead. The costs charged to department –
A in January, 2006 were as follows:

Material Rs.42,000
Labour Rs.15,000
Factory overhead Rs.24,000
Required:
Prepare cost of production report for Department – A for the month of January, 2006
38
Solution # 1
Question # 2
A company's Department 2 costs for June were:
Cost from Department 1 Rs.16320

Cost added in Department 2:
Materials 43,415
Labour 56,100
Factory overhead (FOH) 58,575
The quantity schedule shows 12,000 units were received during the month from
Department 1; 7,000 units were transferred to finished goods; and 5,000 units in
process at the end of June were 50% complete as to materials cost and 25%
complete as to conversion cost.
Required: Prepare Cost of production report.
Solution # 2
39
Question # 3
For December, the Production Control Department of Carola Chemical, Inc.,
reported the following production data for Department 2:
Transferred in from Department 1 55,000 litres
Transferred out to Department 3 39,500 litres
In process at the end of December (with 1/2 labour and factory
10,500 litres
overhead)
All materials were put into process in Department 1. The cost department collected
following figures for department 2:
Unit cost for units transferred in from department 1 Rs.1.80
Labour cost in department 2 Rs.27,520
Applied factory overhead Rs.15480
Required: A cost of production report for department 2 for December.
Solution # 3
40
Question # 4
The following data originates from three different situations occurring in a

manufacturing organization using process costing:
Started in process during the month 18,000 units

Completed during the month and transferred 12,000 units
In process at the end of the month
(Completed as to material and 1/2 as to conversion) 6,000 units
In process inventory at the beginning of the month
(1/4 completed as to material and 1/8 as to conversion) 12,000 units
Completed and transferred during the month 15,000 units
Loss during the month 1,000 units
Still in process at the end of the month
(1/8 complete as to materials and ¼ as to conversion) 6,000 units
Required:
a) Compute the equivalent production in each situation, using
i. FIFO method of costing
ii. Average costing
41
Solution # 4
Question # 5
Baba Farid Sugar Mills Limited. uses process costing. The costs for Department 2
for April were:
Cost from preceding department Rs.20,000
Cost added by department:
Materials Rs.21,816
Labour 7,776
Factory overhead (FOH) 4,104 33,696
The following information was obtained from the department's quantity schedule:
Units received 5,000
Units transferred out 4,000
Units still in process 1,000
The degree of completion of the work in process as to costs originating in

department 2 was: 50% of units were 40% complete; 20% were 30% complete; and
the balances were 20% complete.
Required: The cost of production report for Department 2 for April.
42
Solution #5
Practice Question
Question # 1
During April, 20,000 units were transferred in from department A at a cost of

Rs.39,000. Materials cost of Rs.6,500 and conversion cost of Rs.9,000 were added
in department B. On April 30, department B had 5,000 units of work in process 60%
complete as to conversion as costs. Materials are added in the beginning of the
process in department B.
Required:
43
1. Equivalent units of production calculation.
2. The cost per equivalent unit for conversion costs.
Question # 2
During February, the Assembly department received 60,000 units from Cutting
department at a unit cost of Rs.3.54.
Costs added in the Assembly department were:

Materials Rs.41,650
Labour Rs.101,700
Factory overhead Rs.56,500.
There was no beginning inventory.

Of the 60,000 units received,
50,000 were transferred out;
9,000 units were in process at the end of the month (all materials, 2/3 converted);
1,000 lost units were 1/2 complete as to materials and conversion costs.
The entire loss is considered abnormal and is to be charged to factory overhead.
Required: Cost of production report.
Question # 3
The Sterling Company uses process costing. In department B, conversion costs are
incurred uniformly throughout the process. Materials are added at the end of the
process, following inspection. Normal spoilage is expected to be 5% of good output.
The following information related to department B for January:
Units Dollars
Received from department A 12,000 Rs.84,000
Transferred to finished goods 9,000
Ending inventory (70% complete) 2,000
Cost incurred:
Materials 18,000
Labour and factory overhead 45,600
Required: Cost of Production report for department B.
Question # 4
Pepsi Inc., uses process costing system in its two producing departments. In
department 2, inspection takes place at the 96% stage of completion, after which
materials are added to good units. A spoilage rate of 3% of good output is
considered normal.
44
Department 2 records for April shows:
Received from department 1 30,000 units

Cost Rs.135,000
Materials Rs.12,500
Conversion cost (labour + factory overhead) Rs.139,340
Transferred to finished goods 25,000 units
Ending work in process inventory (50% complete) 4,200 units
Required: Cost of production report.
Question # 5
Pietra - Gonatas, Inc. uses process costing to account for the costs of its only
product, product D. Production takes place in three departments; Fabrication,
Assembly, and Packaging.
At the end of the fiscal year, June 30, the following inventory of product D is on hand:
 No unused raw materials or packaging materials.

 Fabrication department: 300 units, 1/3 complete as to raw materials and 1/2
complete as to direct labour
 Assembly department: 1,000 units, 2/5 complete as to direct labour.
 Packaging department: 100 units, 3/4 complete as to packaging materials and
1/4 complete as to direct labour.
 Shipping for finished goods are: 400 units.
Required:
1. The number of equivalent units of raw materials in all inventories at June 30.
2. The number of equivalent units of the fabrication department's direct labour in
all inventories at June 30
3. The number of equivalent units of packaging materials in all inventories at
June 30.
45
CHAPTER # 5
JOINT AND BY PRODUCT
Joint products and by products arise in situations where the production of one
product makes inevitable the production of other products. When a group of
individual products is simultaneously produced, and each product has a significant
relative sales value, the outputs are usually called joint products. Those that are
part of the simultaneous production process and have a minor sales value when
compared with the joint products are called by-products.
Question # 1
A Company operates a process which produces three joint products – K, P and Z.

The costs of operating this process during September amounted to Rs.117,000.
During the month the output of the three products was:
K 2,000 litres
P 4,500 litres
Z 3,250 litres
P is further processes at a cost of Rs.9.00 per litre.

The actual loss of the second process was 10% of the input which was normal.
46
Products K and Z are sold without further processing.
The final selling prices of each of the products are:

K Rs.20.00 per litre
P Rs.25.00 per litre
Z Rs.18.00 per litre
Joint costs are attributed to products on the basis of output volume.
Required:
Allocate the joint cost and profit of each product.
Solution # 1
Question # 2
Shabbir Associates manufactures 3 joint products - Exe, Wye and Zee. A by-product
Baye is also produced. During the month of November 2000 the joint cost for direct
materials and direct labour were Rs 80,000 and 120,000 respectively. Shabbir
Associates have an established practice of absorbing overhead at 50% of direct
cost. Production and sales related data for the month of November 2000 is as
follows:
Products Production Sales Sales Value per unit
Kgs Kgs Rupees per Unit
Exe 7,800 7,000 10.00
Wye 11,700 11,000 10.00
Zee 10,000 9,000 6.50
Baye 10,000 10,000 2.60
The sales value of by-product is deducted from the process cost before apportioning
cost to each joint product. Costs of common processing are apportioned between
joint products on the basis of production cost. Assume that there is no opening
inventory.
Required:
Calculate profit for the month of November and analyze the profit product-wise.
Solution # 2
47
Question # 3
Victory Ltd manufactures three products A, B and C from a joint process. The joint
cost amount to Rs.600,000. Additional information is as follows:
Additional cost and market

Value if processed further
Product Units produced Market value at Additional Market
Split of point (Rs.) cost (Rs.) value (Rs.)
A 6,000 400,000 90,000 550,000
B 4,000 350,000 70,000 450,000
C 2,000 250,000 50,000 300,000
Required:
Total cost of each product using average unit cost method
Total cost of each product using market value method.
Solution # 3
48
Question # 4
The yield of a certain process is 80% as to the main product and 15% as to the by-
product. Remaining 5%is the process loss. The material put in process (10,000
units) costs Rs.21 per unit and all other charges amounted to Rs.30,000 of which
power cost accounted for 33 1/3%. It is ascertained that power is chargeable to the
main product and by product in the ratio of 10:9.
Required:
Draw up a statement showing the cost of the by- product.
Solution # 4
49
Question # 5
Broad-way Manufacturing Limited produces two products DL-1 & DL-2. The
production involves two processes, I and II. The following data is available in respect
of production during the month of August 2006.
Process I Process II
Rs. Rs.
Material issued 375,000 100,000
Direct wages paid 150,000 200,000
Direct expenses incurred 100,000 100,000
During the month of August, materials issued to Process I and Process II were 1,250
tons and 230 tons respectively. The cost of output of Process – I is charged to
Process – II. Incidental to production, two by-products i.e. PT-1 and PT-2 are
generated in the first process and treated as a credit to Process-I.
Following additional information is also available:
Product Sales Packing

Tones Rs. Cost
DL-1 100 600,700 20,070
DL-2 900 1,203,500 100,350
PT-1 200 10,000 -
PT-2 50 2,500 -
A shortfall occurs in Process II due to evaporation which is considered as normal

loss. There was no opening or closing stocks.
Required:
a) Calculate joint processing costs and apportion them between DL-1 and DL-2
on the basis of sales value.
b) Prepare summary trading account for the month showing net profit of each
product
Solution # 5
50
CHAPTER # 6
Costing and control of material
Any material required would not be taken from existing stock but would be
purchased at a later date, and so the estimated purchase price would be the relevant
material cost. Where material are taken from existing stock do remember that the
original purchase price represent a past or sunk cost and is therefore irrelevant for
decision making. If the materials are to be replacing then using the materials from a
particular activity will necessitate their replacement. Thus, the decision to use the
material on an activity will result in additional acquisition costs compared with the
situation if the material were not used on that particular activity. Therefore, the future
replacement cost represents the relevant cost for the material.
Question # 1
Your company regularly uses material X and currently has in stock 600 kg for which
it paid Rs.1,500 two weeks ago. If these were to be sold as raw material it could be
sold today for Rs.2 per kg. You are aware that the material can be on the open
market for Rs.3.25 per kg, but it must be purchases in quantities for 1,000 kg.
You have been asked to determine the relevant cost of 600 kg of material X to be
used in a job for a customer.
Required:
51
Determine the relevant cost for material.
Solution # 1
Question # 2
O Reilly has been approach by a customer who would like a special job to be done
for him, and who is willing to pay 22,000 for it. The job would required the following
material.
MATERIAL TOTAL UNITS REALASABL REPLACEMNET
QUANTITY ALREADY IN E PER UNIT COST
REQUIRED STOCK (Rs.)
A 1,000 ---- ---- 6.00
B 1,000 600 2.50 5.00
C 1,000 700 2.50 4.00
D 2,000 200 6.00 9.00
Material B is used regularly by O Reilly and it unit of B are required for this job, they
would need to be replace to meet other production demand. Material C and D are in
inventory as the result of previous over-buying, and they have a restricted use. No
other use could be found for material C, but the unit of material D could be used in
another job as substitute of 300 unit of material E, which is currently cost Rs.5 per
unit.
52
Required:
Calculate the relevant cost of material for deciding whether or not accept the
contract.
Solution # 2
Question # 3
Shaheen Ltd is a manufacturing working below capacity. Its marketing manager

would like to fill up capacity by taking extra work at low price. A potential customer
has offer to buy 1,000 unit of EF. Each unit of EF required 2 units of material C and 5
units of material D. Stock position of materials is as follows.
DESCRITPION UNITS IN ORIGINAL CURRENT SCRAP
STOCK PURCHASE REPLACEMENT VALUE
PRICE PER PRICE PER
UNIT (RS.) UNIT (RS.)
C 1,500 30 35 24
D 4,000 20 25 18
Material C is in continuous use by company while D is no longer used by the
company and the existing stock is now surplus to requirement.
Required:
Calculate relevant cost for material.
53
Solution # 3
Question # 4
A one year contract has been offer to Malaika Industries which will utilize an existing
machine that is only suitable for such contract works. Four type of material would be
required for the contract as follows:
MATERIAL AVAIALBLE REQUIRED PURCHASE CURRENT CURRENT
STOCK FOR PRICE OF BUYING RESALE
(UNIT) CONTRAC STOCK PRICE PRICE
T (UNITS) (RS.) (RS.)
071 1,200 450 23.00 17.00 14.50
076 200 1,250 32.00 42.00 40.50
079 3,000 800 47.00 53.50 42.00
085 1,800 1,200 33.00 13.25 12.00
Material 071 and 085 are in regularly use wit in the firm. Material 076 could be sold if
not used for the contact and there are no other uses for 079, which have been
deemed to be obsolete.
Required:
Calculate the relevant cost of material.
54
Solution # 4
Question # 5
A company is evaluating a project that required two types of material T & v. Date
relating to the material requirement are as follows:
MATERIAL QUANTI QUANTITY ORIGINAL CURRENT CURRENT
TY CURRENTL COST OF PURCHAS RESALEBL
NEEDE Y IN QUANTITY E PRICE E PRICE
D FOR INVENTORY IN (KG) (Rs.)
PROJE (KG) INVENTOR
CT (KG) Y (KG)
T 500 100 40 45 44
V 400 200 55 52 40
Material T is regularly used by company in normal production. Material V is no longer
in use by the company and has no alternative use with the business.
Required:
What is the total relevant cost of material for the project.
Solution # 5
55
Practice Question
Question # 1
Armstrong Corporation manufactures bicycle parts. The company currently has a

Rs.21,000 inventory of parts that have obsolete due in change inn design
specification. The parts could be sold for Rs.9,000, or modified for Rs. 12,000 and
sold for Rs. 22,300.
Required:
Which of the data above relevant to the decision about the obsolete parts?
Question # 2
Intercontinental chemical company, located in Buenos airs, Argentina, recently

received an order for a product it does not normally produce. Since the company has
excess capacity, management is considering accepting the order .In analyzing the
decision; the assistant controller is compiling the relevant cost of producing the
order. Production of the special order would require 8,000 kilograms of theolite.
International does not use theolite for its regular product, but the firm has 8,000
kilograms of the chemical on hand from the days when it used theolote regularly.
The theoloite could be sold to a chemical wholesaler for 14,500p. The book value of
the theolite is 2.00p per kilogram. Intercontinental could buy theolite for 2.40 p.
Required:
What is the relevant cost of the theolite for the purpose of analyzing the special order
decision?
56
Question # 3
Intercontinental’s special order requires 1,000 kilograms of genatope, a solid

chemical regularly used in the company’s product. The current stock of genatope is
8,000 kilograms at a book value of 8.10 p per kilogram. If the special order is
accepted, the firm will be forced to restock genatope earlier than expected, at the
predicted cost of 8.70 p per kilogram. Without the special order, the purchasing
manager predicts that the price will be 8.30p when normal restocking takes place.
Any order of genatope must be in the amount of 5,000 kilogram.
Required:
What is the relevant cost of genatope?
Question # 4
A company is evaluating a project that required the following types of material.
MATERIAL IN STOCK NEEDED PURCHASE CURRENT CURRENT

FOR PRICE OF PURCHAS RESALABLE
CONTRACT STOCK E PRICE PRICE (RS.)
(RS.) (RS.)
A 100 1,000 1.10 3.00 2.00
B 1,100 1,000 2.00 0.90 1.00
C --- 100 --- 6.00 ---
D 100 200 4.00 3.00 2.00
E 50,000 5,000 0.18 0.20 0.25
F 1,000 3,000 0.90 2.00 1.00
Material B and E are used regularly in the company. Material A could be sold to a
local sculptor, if not used for the contract. Material A and E can be used for other
purpose, such as property maintenance. Company has no use for material D and F,
the stocks of which are obsolete.
Required:
Calculate the relevant cost of each material.
Question # 5
57
A company has an inventory of 1,000 assorted parts for a line of missiles that has
been discontinued. The inventory cost is Rs.80,000. the part can be either
remachined at total additional costs of Rs.30,000 and then sold for Rs.35,000 or sold
as scrap for Rs.2,000.
Required:
What action is more profitable? Show your calculations.
CHAPTER # 7
Costing and control of labour
Determining the direct labour cost that is relevant to short term decision making
depends on the circumstances. Where a company has temporary spare capacity
and the labour force is to be maintained in short term, the direct labour cost
incurred will remains the same for all alternative decision. The direct labour cost
will therefore be irrelevant for short term decision making purpose. Consider now
a situation where casual labour is sued and where workers can be hired on daily
basis, a company may then adjust the employment of labour to exactly the
amount to meet the production requirement. The labour cost will increase if the
company accepts additional work, and will decrease if production is reduced. In
this situation the labour cost will be relevant cost for decision making purpose.
Question # 1
L.W is currently deciding whether to undertake a new contract. 15 hour of labour will
be required for the contract. L.W currently produces product L, the standard cost of
detail of which are shown below.
Rs.
Direct material (10 kg @ Rs.2) 20
Direct labour (5 hour @ Rs.6) 30
50
Sales price per unit 72
Contribution 22
58
Required:
1. What is the relevant cost of labour if the labour must be hired from outside the
organization.
2. What is the relevant cost of labour if L.W expects to have 5 hour spare
capacity.
3. What is the relevant cost of labour if labour is short supply?
Solution # 1
Question # 2
A division of Rhine auto has received an enquiry from one of its major customers for
a special order for a component that will required 1,000 skilled labour hours. Skill
labour is currently in short supply and if the company accept the order then it will be
necessary to reduced production of component P. Detail cost per unit and selling
price per unit of component P are as follows:
Rs.
Sales price 88
Direct labour (4 hours @ Rs.10) 40
Other variable cost 12
Contribution margin 36
Required:
59
Calculate the relevant cost.
Solution # 2
Question # 3
A contract is under consideration that requires 600 labour hours to complete. There
are 350 hours to spare capacity.
The remaining hours for the contract can be found either by weekend overtime
working paid at double the normal rate of pay or by diverting labour from the
manufacturing the product QZ. If the contract is undertaken and labour is diverted,
then sales of product QZ will be lost. Product QZ takes three labour hours per unit to
manufacture and makes a contribution of Rs.12 per unit. The normal rate of pay of
labour is Rs.9 per hour.
Required:
What is the total relevant cost of labour for the project?
Solution # 3
60
Question # 4
A contract is under consideration that required 800 labour hours to complete. There
are 450 hours of spare labour capacity for which the worker are still being paid the
normal rate of pay. The remaining hours required for the contract can be found either
by overtime working paid at 50% above the normal rate of pay or by diverting labour
from the manufacturing of product OT. If the contract is undertaken and labour is
diverted, then sales of product OT will be lost. Product OT takes seven labour hours
per unit to manufacture and makes a contribution of Rs.14 per unit. The normal rate
of pay for labour is Rs.8 per hour.
Required:
Calculate the relevant cost of labour to the contract.
Solution # 4
61
CHAPTER # 8
Factory Overhead
FACTORY OVERHEAD COST (FOH)
Factory overhead costs are those costs incurred which cannot be identified directly
to cost unit. These are incurred in many different parts of organization.
These include:
1. Indirect materials
2. Indirect labor
3. Indirect costs
Attributable to production and the service activities associated with manufacturing.
Marketing, general administration, research and development costs that are not
associated with manufacturing are not usually treated as overheads for this purpose.
Factory overhead costs are incurred in three main centers:
 Production centers: costs arising in production departments such as the

costs of fuel, protective clothing, depreciation and supervision.
 Service centers: the cost of operating support departments or sections
within the factory, for example, the costs of materials handling, production
control, and canteen.
 General costs centers: general production overhead such as factory
rent/taxes, heating and lighting and production management salaries.
62
FOH Cost Allocation & Apportionment
The total cost of factory overhead needs to be distributed among specific cost
centers. Some items can be allocated immediately, e.g. the salary of a cost centre
supervisor or indirect materials issued to a cost centre. Other items need to be
apportioned between a number of centers, e.g. factory rent and taxes or the factory
manager’s salary.
Cost Allocation
It refers to the costs that can be identified with specific cost centers.
Apportionment
It refers to the costs that cannot be identified with specific cost centre but must be
divided among the concerned department/cost centers.
Steps of Allocation & Apportionment

1. Item wise collection of FOH cost.
2. Identifying cost centre (Production & Services).
3. Allocating and apportioning general F.O.H cost to the cost centers.
4. Apportioning FOH cost of service cost centers to the production cost centers.
5. Calculation of total FOH cost for each production cost centers.
6. Determining FOH rate for each production cost center.
FOH Absorption Rate
Finally FOH absorption rate is calculated at which the cost is absorbed in the cost
unit. This is also known as overhead absorption rate (OAR) this can be calculated as
under:
Bases for FOH Absorption Rate

Following can be used as base to calculate overhead absorption rate:
1. Direct Labor hours
2. Machine hours
3. No. of unit produced
4. Direct labor cost
5. Prime cost
In selecting a basis for apportioning an overhead item, the cost of obtaining a high
degree of accuracy must be considered. For example, the charge for heat and light
could be shared on the basis of a complex formula incorporating power points, light
bulbs and wattage but you should be aware that the end result will still be open to
question. When answering examination questions, you may have to use your own
judgment in relation to the information given as it is impracticable to provide a
comprehensive list of bases to cover every situation.
63
Question 1
Data relating to Department B for August:

Rs.
Total budgeted factory overhead 6000
Total direct labor hours 800
Direct labor 1600
Direct material used 3000
Machine hour 1200
Required:
Calculate FOH rate based on above data using:
1. labor hour
2. labor cost
3. prime cost
4. machine hour
5. material cost
Solution 1
64
Question 2
(a) Calculate five different overhead rate for cost center AM on the following
budgeted data:
Labor hours 1400 Hour

Total direct labor Rs.3600
Direct material cost Rs.7500
Machine hour 2850 Hour
Units produced 535 units
Total budgeted factory overhead Rs.12900
(b) A cost unit has been produced in Cost center AM and following details
recorded:
Direct material used Rs.16.5

Direct labor Rs.17.5
Direct labor hours 5.5 hour
Machine hour 8.5 hour
Required
Calculate the cost of the above unit using each of the absorption bases
calculated in (a)
Solution 2
65
Question 3
A factory has two production departments and two service departments. Overhead
are given as under
Production deptt Service deptt
A B C D
Overhead 6000 4000 1170 1500
Department C is allocated to A: 40%, B: 50% and D: 10%
Department D is allocated to A: 50%, B: 30% and C: 20%
Show how the expenses of the two service departments are to be charged to the two
production departments.
Solution 3
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Question 4.
A company has two service department and two producing departments. The
relationship between the four department can be expressed as follows:
Percentage of service cost allocation

Service Producing Service
Department department department
A B M N
M 55% 35% 10%
N 40% 45% 15%
Service department cost to be allocated:

M--------------------Rs.60,000
N--------------------Rs. 85,000
Required:
The amount of service costs applicable to each department.
The total factory overhead in each producing department if producing department
overhead is A Rs.135,000 and B Rs.145,000.
Solution 4
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Question 5.
The Martin Company has four producing departments and three service
departments. The following information for October is available:
Department Actual Square Employees Investment

Expense feet in equipment
Grinding 10,000 3000 30 20,000

Forming 14,000 1500 20 10,000
Machining 4000 2500 30 12,000
Finishing 8000 1000 10 4000
Building Service 6000 500 15 600
Health and Recreation 5000 2000 5 1600
Repair and Maint. 3000 2000 10 2400
The order and bases for distributing expenses of the service departments are:
Building service, area, Health and Recreation, number of employees: Repairs and
Maintenance, investment in equipment. The company assigns service department
expenses to other service departments, however after a department’s expenses
have been allocated, no expenses are assigned back to it.
Required:
Distribution of service department expenses based on the data given.
Solution 5
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Practice Question:
Question 1
ABC ltd. has three production departments (P, Q and R) and two service
departments (X and Y). The total overheads for the departments are given below:
Departmen
Overheads
t
P $35,000
Q $64,000
R $19,000
X $22,000
Y $38,000
The reallocation percentages of the service departments' costs are given below:
Departmen
P Q R X Y
t
X 20% 25% 25% — 10%
Y 25% 30% 30% 15% —
Reallocate the service department costs in the specified percentages using repeated
distribution method.
Question 2
West Folrida Company uses the direct method in allocating service department cost
to producing departments. Costs of Department S1 are allocated on the basis of
number of employees, while cost of Department S2 is allocated on the basis of
machine hours. The allocation bases use in calculating predetermined overhead rate
are machine hours in Department P1 and direct labor hours in Department P2.
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Producing Department Service Department
P1 P2 S1 S2
Budgeted FOH $410,000 $304,000 $100,000 $50,000
Number of employees 90 210 20 28
Machine hours 64,000 16,000
Direct labor hours 35,000 100,000
The following data pertain to Job 437:

Department P1 Department P2
Material cost $90 $40
Direct labor hours 1 2
Machine hours 3 1
Required:
1. Calculate total overhead of producing department after apportioning service
department cost.
2. Calculate predetermined factory overhead rates for the producing
departments.
3. Compute the resulting overhead cost of Job 437.
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CHAPTER # 9
BUDGETING
A budget is a quantified plan of action for a forthcoming accounting period. A budget
can be set from the top down (imposed budget) or from the bottom up (participatory
budget).
A budget is a quantitative expression of a plan for a defined period of time. It may

include planned sales volumes and revenues, resource quantities, costs and
expenses, assets, liabilities and cash flows. It expresses strategic plans of business
units, organizations, activities or events in measurable terms
A budget (derived from old French word bougette, purse) is a quantified financial

plan for a forthcoming accounting period.[2]
A budget is an important concept in microeconomics, which uses a budget line to

illustrate the trade-offs between two or more goods. In other terms, a budget is an
organizational plan stated in monetary terms.
Purpose
Budget helps to aid the planning of actual operations by forcing managers to

consider how the conditions might change and what steps should be taken now and
by encouraging managers to consider problems before they arise. It also helps co-
ordinate the activities of the organization by compelling managers to examine
relationships between their own operation and those of other departments. Other
essentials of budget include:
To control resources
To communicate plans to various responsibility center managers.
To motivate managers to strive to achieve budget goals.
To evaluate the performance of managers
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To provide visibility into the company's performance
For accountability
Budget Preparation
Long-term plan The starting point, this will show what the budget has to achieve
(the introduction of new production, the required return, and so
on) and outline how it is to be done. It will also contain general
guidelines on allowable price increase like wage rates. The long-
term policy needs to be communicated to all managers
responsible for preparing budgets so that they are aware of the
context within which they are budgeting and how their area of
responsibility is expected to contribute.
Limiting factor The factory that limits the scale of operations, this is usually sales
demand, but it may be production capacity where demand is
high. Budgeting cannot proceed until the budget for the limiting
factor has been prepared, since this affects all the other budgets.
Budget manual Prepare to assist functional managers, this will show how figures
and forecasts are to be arrived at and give any other information
that is to apply across the organization. It is likely to include
proformas showing how the information is to be presented. If
budgeting is done with spreadsheets, layouts and computations
may be pre programmed, requiring only the entry of the figures. It
may include a flow diagram showing how individual budgets are
interlinked and specify deadlines by which first drafts must be
prepared.
Sales budget This contains information on the expected volume of sales

(based on estimates or market research), the sales mix, and
selling prices. The total revenues indicated will be used to
compile the cash budget, although this information needs to be
adjusted to allow for the expected timing of receipts. The volume
of sales indicates the level of production required and the extent
of spending on distribution and administration.
Production The level of sales anticipated in match against opening inventory

capacity and desired closing inventory to establish the level of production.
From this can be calculated the need for materials (again
allowing for opening and closing inventory), labour and machine
hours. In other words production budgeting is done in terms of
physical resources initially and costed afterwards. At this stage,
too, it is likely that needs for new capital expenditure will be
72
identified, this information will be used in preparing the capital
budget.
Functional Budgets for other areas of the organization like distribution and
budget administration take the anticipated sales level as their point of
reference. Vehicle costs, carriage costs, stationery and
communication costs, and above all staff costs feature in these
budgets.
Discretionary Training and R & D are known as discretionary costs and have
costs special features.
Consolidation This can begin once all parts of the organization have submitted
and their individual budgets. It is most unlikely that all of the budgets
coordination will be in line with each other at the first attempt. Areas of
incompatibility must be identified and the budgets modified in
consultation with individual managers. Spreadsheets are
invaluable at this stage, both for the consolidation itself and to
allow changes to be made quickly and accurately.
Cash budget This can only be prepared at this stage because it needs to take
account of all of the plans of the organization and translate them
into expected cash flows. Cash must be available when it is
needed to enable the plans to be carried out. Overdraft facilities
may need to be negotiated in advance, or some activities may
need to be deferred until cash has been collected.
Master budget The final stage, once all of the necessary modifications have
been made, is to prepare a summary of all of the budgets in the
form of a master budget, which generally comprises a budgeted
income statement, a budgeted balance sheet and a budgeted
cash flow statement.
Type of budget
1. Sales budget
2. Production budget
3. Purchase budget
4. Expense budget
5. Cash budget
6. Zero base budget
7. Flexed budget
8. Flexible budget
9. Master budget
10. Incremental budget
11. Activity based budgeting
12. Rolling budgets
1) Sales Budget
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A sales budget is a financial plan depicting how resources should best be allocated
to achieve the forecasted sales. The purpose of sales budgeting is to plan for and
control the expenditure of resources (money, material, people and facilities)
necessary to achieve the desired sales objectives
2) Production Budget
A production budget is a financial plan that lists the number of units to be

manufactured during a period. In other words, this is a report that estimates the
number of units that a plant will produce from period to period.
Managers use the production budget to estimate how many units they will need to
produce in future periods based on the future estimated sales numbers. They also
use this report as a planning tool for future production processes, machine times,
and scheduling. Production managers have to estimate the future demands and plan
out the workflow to make sure everything is produced timely and there aren’t long
periods of wait time or down time.
3) Purchase Budget
A merchandise purchases budget is a financial plan that reports the total estimates

costs or units of merchandise inventory that are expected to be purchased by a
retailer in an accounting period. In other words, this is the budget that managers use
to plan inventory purchases for the upcoming periods
4) Expenses Budget
An expense budget is part of the bread-and-butter basics of good management. Set

your budget as a goal, then review and revise often to stay on track. Being right
on budget is usually good, but good management takes the regular review to check
on the timing, efficiency, and results of what your business spends.
5) Cash Budget
Cash budget is an estimation of the cash inflows and outflows for a business or

individual for a specific period of time. Cash budgets are often used to assess
whether the entity has sufficient cash to fulfill regular operations and/or whether too
much cash is being left in unproductive capacities.
6) Zero-based budget (ZBB)
Zero-based budgeting (ZBB) is a method of budgeting in which all expenses must be

justified for each new period. Zero-based budgeting starts from a "zero base" and
every function within an organization is analyzed for its needs and costs.
7) Flexed Budget
A flexible budget is a budget that adjusts or flexes for changes in the volume of

activity. The flexible budget is more sophisticated and useful than a static budget,
which remains at one amount regardless of the volume of activity.
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8) Flexible budget
A flexible budget is a budget that adjusts or flexes for changes in the volume of

activity. The flexible budget is more sophisticated and useful than a static budget,
which remains at one amount regardless of the volume of activity.
9) Master Budget
The master budget is the aggregation of all lower-level budgets produced by a

company's various functional areas, and also includes budgeted financial
statements, a cash forecast, and a financing plan.
10) Incremental Budget
An incremental budget is a budget prepared using a previous period's budget or

actual performance as a basis with incremental amounts added for the new budget
period. • The allocation of resources is based upon allocations from the previous
period.
11) Activity based budgeting
Activity based budgeting involves defining the activities that underlie the financial figures
in each function and using the level of activity to decide how much resource should be
allocated, how well it is being managed and to explain variances from budget.
12) Rolling Budget
Rolling budget (continuous budgets) are budgets which are continuously updated by
adding a further period (say a month or a quarter) and deducting the earliest period.
Question # 1
A company is preparing the budget for the next year, ending December 31 st 2004.
Forecasts for the year and standard data are given below:
Finished products U V W
Sales value at standard price (Rs.) 800,000 1,280,000 2,400,000
Inventory (units) January 1st 2004 3,000 7,000 9,000
Inventory (units) December 31st 2004 8,000 17,000 19,000
Direct material inventory
January 1st 2004 (Units) December 31st 2004 (Units)
A 150,000 240,000
B 60,000 96,000
C 70,000 112,000
D 90,000 144,000
To meet the expected increase in sales, inventories are to be increased.

Standard cost data per unit of product included the following:
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Direct Material Standard price Product U Product V Product W
(Rs./unit) (units) (units) (units)
A 0.20 - 9 12
B 0.30 2 7 -
C 0.50 6 5 3
D 0.10 4 - 9
Direct labour Standard rate Product U Product V Product W
(Rs./hr) (hours) (hours) (hours)
Deprt 1 8.00 0.50 0.30 0.60
Deprt 2 6.00 0.50 0.30 0.60
Other data:
 Direct labour hours overhead Rs.1,143,000 absorbed on direct labour hour rate
basis.
 Fixed production 127,000.
 Administrative expenses are absorbed at the rate of 50% of production cost.
 Marketing expenses are absorbed at the rate of 25% of production cost.
 Profit is calculated at a rate of 12.50% of selling price.
Required:
1. Production budget .
2. Direct material cost budget.
3. Material purchases budget.
4. Direct labour cost budget.
Solution # 1
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Question # 2
Khas Manufacturing limited manufactures three products namely X, Y and Z. Sales data
for preparation of budget for November, 2004 is given below.
Product Quantity (Units) Price per unit

(Rs.)
X 1,000 500
Y 2,000 600
X 1,500 700
i. Raw material used in the company’s product are:
Raw material M1 M2 M3
Cost per unit (Rs.) 20 30 45
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Quantities (units) used in:
Product X 4 2 -
Product Y 3 3 1
Product Z 2 1 1
ii. Finished Stock: Product

X Y Z
st
Quantities 1 November, 2004 1,000 1,500 500
30th November, 2004 1,100 1,650 550
iii. Raw materials stock: M1 M2 M3

Quantities (units)
1st November, 2004 26,000 20,000 12,000
30th November, 2004 31,200 24,000 14,400
Required:
Prepare budget for November, 2004 for:
a) Sales quantity and value, including total value.
b) Quantities of production for product X, Y & Z.
c) Material usage in units, and
d) Material purchases in quantities and value including total value.
Solution # 2
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Question # 3
Gala Ltd manufactures one product, the Durrell. Its sales for a six month period are
expected to be:
2011 Durrells
July 800
August 1050
September 1400
October 1100
November 950
December 850
On 1 July Gala Ltd expects to have 100 Durrells in inventory. It intends to hold
inventory levels of 250 Durrells at the end of July and August, 200 at the end of
September and October, and 100 thereafter.
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REQUIRED
(a) Prepare a monthly production budget for Gala Ltd for the six months July to
December.
Each Durrell requires 2 kilos of raw material. Until 31 August this is expected to cost
Rs.4 per kilo and Rs.4.50 from 1 September to 30 November and Rs.5 per kilo
thereafter.
REQUIRED
(b) Prepare a monthly raw materials purchasing budget for the six months July to
December.
Solution # 3
80
Question # 4
Zeresh Limited provides the following information from its sales budget for 2014.
Sales
price
Units per unit
Rs.
January 10 000 20
February 11 000 20
March 11 000 21
April 12 000 21
May 12 000 21
June 14 000 24
Additional information
Inventory of finished goods at each month end is maintained at 20% of the units
expected to be sold in the following month.
Each unit requires 0.5 kilos of raw materials, which costs Rs.3 a kilo.
Half a month’s inventory of raw materials is maintained, based on the expected

usage in the following month.
The total production cost of each unit is Rs.11 and this is the value used for
inventory valuation.
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REQUIRED
(i) Prepare the production budget for each of the five months January to
May 2014.
(ii) Prepare the purchases budget for raw materials for each of the four
months January to April 2014. Show purchases of raw materials in both
kilos and dollars.
Solution # 4
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Question # 5
MW Limited manufactures a single product, a Tu. The finance director prepares

monthly budgets. The following budgeted information is available for the first three
months of 2015.
1 The selling price will be fixed at Rs.60 per unit. In January 2015 sales are
expected to be 24 000 units. It is anticipated that there will be a 5% increase
in sales volume in every subsequent month up to April 2015.
2 The finished goods inventory level at the end of each month will be
maintained at one-third of the expected sales volume in the following month.
The inventory of finished goods at 31 December 2014 is expected to be 7500
units with a value of Rs.242000. The finished goods inventory value at 31
March 2015 is expected to be Rs.298000.
3 Each unit of Tu requires 10 kilos of raw material. The closing inventory of raw
materials each month is expected to meet 20% of the production requirement
of the following month. The inventory of raw materials at 31 December 2014 is
expected to be 48000 kilos. The purchase price will remain at Rs.1.50 per
kilo.
4 Direct labour for the first three months of 2015 is expected to be Rs.850000.
Manufacturing overhead is expected to be 50% of direct labour.
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REQUIRED
(a) Prepare the sales budget for the period January to March 2015. State the
units and revenue for each month.
(b) Prepare the production budget for the period January to March 2015. State
the units for each month.
(c) Prepare the purchases budgets for the period January to March 2015. State
the units and cost for each month.
Solution # 5
84
Question # 6
VTV Company has a cash balance of Rs.54,000 at the beginning of September and
the following information is available:
 Creditors give one month credit
 Salaries are paid in the current month
 Fixed costs are paid in one month arrears and include a charge for
depreciation Rs.10,000 per month
 Credit sales are settled as follows: 40% in the month of sales, 45% in the next
month and 12% in the following month. The balance represents bad debts.
Month Cash Credit Purchases Salaries Fixed

Sales Sales Overheads
July 148,000 110,000 18,000 60,000
August 164,000 122,400 18,000 60,000
September 40,000 160,000 120,000 19,000 60,000
October 44,000 180,000 138,000 19,000 64,000
November 50,000 200,000 150,000 20,000 64,000
Required:
Prepare cash budget for September, October and November
Solution # 6
85
86
Practice Questions
. Question # 1
New Vision Trading Company Ltd. is planning to arrange for a six monthly overdraft
facility with a bank. However, before finalization of any arrangement it wants to know
the estimated requirements of cash. For this purpose it has hired you as consultant
to make an estimate of the foreseeable cash requirements.
The following is the basic data regarding various business cycles of the company:
1. Sales forecast for the six months are as under:

Months Rs.
January 800,000
February 950,000
March 600,000
April 900,000
May 1,100,000
June 600,000
2. Purchases are made as and when required
3. No closing stock is maintained as the supplier has capability to supply any
quantities at any time.
4. Gross profit ratio is maintained @ 20% of the sales price.
5. Various expenses for the six months are as under:
Rs.
Salaries and wages 390,000
Repair and maintenance 120,000
Insurance 6,000
Stores and spares 270,000
Duties 360,000
Legal Charges 24,000
6. Recoveries from the debtors are made as follows:
50% in the month of sale
30% in the month following the month of sale
20% in the second month after sales
7. Trade creditors are paid as under:
40% in the month of purchase
40% in the month following the month of purchase
87
20% in the second month after purchase
8. All other business expenses are paid in the month of expense. Expenses
are evenly spread throughout the year.
9. The company commenced its business on 1.1.2000 with a cash balance
of Rs.50,000.
Required:
Prepare cash budget for the next six months
Question # 2
A manufacturing company submits the following figures for the first quarter of the
year 2000.
Product
A B C
Sales in units:
January 25,000 30,000 10,000
February 20,000 25,000 10,000
March 30,000 35,000 10,000
Selling price per unit:

Target for first quarter 2001 Rs.10 Rs.20 Rs.40
Sales quantity increase 20% 10% 10%
Sales price increase Nil 10% 25%
Stock position of 1 Jan 2001 as % of Jan 2001 sales 50%
st
50% 50%
Stock position as on 31st March 2001 (Units) 20,000 25,000 5,000
Stock position end Jan & Feb % of subsequent
month sales 50% 50% 50%
Required:
Prepare Sales budget for the first quarter of 2001 Show working.
Prepare Production budget for the first quarter of 2001. Show working.
Question # 3
The directors require a cash budget for the four months October 2004 to January
2005 to be prepared from the following information.
1. Sales in September 2004 were Rs.40 000.

2. Forecast sales are as follows:
2004 October Rs.48000
November Rs.60000
December Rs.54000
2005 January Rs.36000
February Rs.36000
3. 25% of all sales are cash transactions. One month’s credit is allowed on the
remainder.
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4. A gross profit of 33 1/3% is made on all sales.
5 Goods are purchased one month before sale and paid for two months after
purchase.
6. Wages of Rs.28 000 and overheads of Rs.10 000 are paid each month.
7. The ordinary dividend for the year ended 30 September 2004 will be paid on 1
January 2005.
8. A machine costing Rs.30 000 will be purchased and paid for in November 2004.
9. Bank overdraft at 30th September 2004 was Rs.5000.
REQUIREDPrepare a cash budget in columnar form for each of the four months October
2004 to January 2005. (All calculations should be made to the nearest Rs.000.)
Question # 4
The directors of Sperrabuck Ltd were concerned about the company’s cash flow.
They requested the accountant to prepare a cash budget for the four months ending
31 October 2005.
The following information was available:

(i) Actual sales
2005 Rs.
May 88 000
June 110 000
Budgeted sales
July 82 800
August 87 400
September 89 700
October 101 250
November 120 000
December 108 000
(ii) Sales are made as follows:
40% of total sales are for cash
50% of total sales are on credit and are paid for in the month after sale
10% of total sales are on credit and are paid for two months after sale
(iii) Customers purchasing on credit are allowed a discount of 2% if they pay
within one month of purchase.
(iv) Supplies are purchased two months before sale and paid for one month
after purchase.
(iv) The selling price is fixed by adding a mark-up of 40% to the cost of goods
sold.
(v) Wages of Rs.8000 per month are paid in the month in which they are
earned. It is expected that wages will be increased by a pay award of 5%
from 1 September 2005.
(vi) Staff are paid a bonus of 4% on all sales in excess of Rs.80 000 each
month. The bonus is paid in the following month.
89
(vii) Other expenses currently amount to Rs.7000 per month and are paid in
the month in which they are incurred. These expenses are expected to
increase by 8% from 1 September 2005.
(ix) The company will pay a final dividend of Rs.30 000 in August 2005.
(x) Sperrabuck Ltd will purchase fixed assets for Rs.20 000 in September
2005.
(xi) The balance at bank on 30 June 2005 is Rs.12 000.
REQUIRED:
Prepare a cash budget for Sperrabuck Ltd for each of the four months July, August,
September and October 2005. Prepare the budget in columnar form and make all
calculations to the nearest Rs..
CHAPTER # 9
MARGINAL AND ABSORTION COSTING
Product cost
Product costing is the accounting process of determining all business expenses
pertaining the creation of company products. These costs can include raw material
purchases, worker wages, production transportation costs and retail stocking fees.
There are 2 type of Product cost
Product cost
Marginal cost Absorption cost
MARGINAL COSTING
 Marginal Cost (Variable Cost / Direct Cost) is the variable cost of one unit of
product or service.
 In Marginal Costing, only variable costs are charged to cost of sale and a
contribution is calculated (sale revenue minus variable cost of sale).
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 Closing inventories of work in progress or finished goods are valued at
marginal (variable) production cost.
 Fixed Costs are treated as period cost, and are charged in full to the profit and
loss account of the accounting period in which they are incurred.
The Marginal production cost per unit of an item usually consists of the following.
 Direct Material
 Direct Labour
 Variable Factory Overhead
ABSORPTION COSTING
 Absorption Costing (full costing) is the total cost (variable cost + fixed cost) of
one unit of product or service.
 In Absorption Costing, total costs (variable cost + fixed cost) are charged to
cost of sale and a gross profit is calculated (sales revenue minus cost of
sales).
 Closing inventories of work in progress or finished goods are valued at total

production cost.
 Fixed cost are treated as a product cost, and included in the cost per unit of
product. Absorption costing is recommended in the financial reporting
by IAS 2 Inventories.
The Absorption Costing cost per unit of an item usually consists of the following.
 Direct Material
 Direct Labour
 Variable Factory Overhead
 Fixed Factory Overhead
No change in Inventory:
If there is no change in inventory over the year that is beginning and ending
inventory are same or nil, because actual production and sales are the same. In
marginal costing all fixed overhead are charged to the income statement as
expense, however in absorption costing, fixed manufacturing overhead are applied
to production at the predetermined rate. Since all unit of produced are sold, all the
fixed manufacturing overhead cost are charged to income statement as expense.
Therefore profit under marginal and absorption are same if no change in inventory.
Increase in inventory: If ending inventory level is higher than opening inventory

level, profit under absorption costing is higher than marginal costing. In marginal
costing, none of the portion of fixed manufacturing cost becomes the part of
inventory while in absorption cost some fixed manufacturing cost becomes part of
inventory.
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Decrease in inventory: If ending inventory level is lower than opening inventory
level, profit under marginal costing is higher than absorption costing.
DIFFERENCE B/W MARGINAL AND ABSORTION COSTING
Marginal Costing Absorption Costing

Fixed costs are treated as period cost. Fixed costs are treated as product cost.
It is useful for decision making. It is useful for reporting purpose.
Its cost per unit consists of Direct Material, Its cost per unit consists of Direct Material,
Direct Labour and Variable Factory Direct Labour, Variable Factory Overhead
Overhead. and Fixed Factory overhead.
FORMAT
ABC Limited
Income statement under Marginal costing
For the period ended on ………..
Rs. Rs.
Sales XXX
Less: Cost of Goods Sold:
Raw material XX
Direct Labour XX
Variable Manufacturing cost XX
Total Manufacturing cost XXX
Add: Work in progress opening XX
Less: Work in progress closing (XX)
Cost of goods manufactured XXX
Add: Finished Goods opening XX
Goods available for sale XXX
Less: Finished Goods closing (XX)
Cost of goods sold (XXX)
Gross Contribution Margin XXX
Less: Variable selling XX
Variable marketing expense XX
Variable administrative expense XX
Total Variable expense (XXX)
Contribution Margin XXX
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Less: Fixed Cost
Fixed Manufacturing cost XXX
Fixed marketing expense XXX
Fixed selling expense XXX
Fixed administrative expense XXX
Total Fixed cost (XXX)
Net Profit / Net Loss XXX / (XXX)
ABC Limited
Income statement under Absorption costing
Fot the period ended on ………..
Rs. Rs.
Sales XXX
Less: Cost of Goods Sold:
Raw material XX
Direct Labour XX
Variable Manufacturing cost XX
Fixed Manufacturing cost XX
Total Manufacturing cost XXX
Add: Work in progress opening XX
Less: Work in progress closing (XX)
Cost of goods manufactured XXX
Add: Finished Goods opening XX
Goods available for sale XXX
Less: Finished Goods closing (XX)
Unadjusted Cost of goods sold XXX
Under / (Over) applied Fixed FOH XXX / (XXX)
Adjusted Cost of goods sold (XXX)
Gross Profit XXX
Less: Fixed Cost
Variable selling XXX
Variable marketing expense XXX
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Variable administrative expense XXX
Fixed marketing expense XXX
Fixed selling expense XXX
Fixed administrative expense XXX
Total Expenses (XXX)
Net Profit / Net Loss XXX / (XXX)
Question # 1
ABC Ltd is considering using direct costing method for decision making instead of
absorption costing method. Following data has been summarized for that purpose:
Annual Normal Plant capacity Units 40,000

Fixed Factory overhead for the year Rs. 500,000
Fixed Marketing Expenses for the year Rs. 100,000
Fixed Administrative expenses for the year Rs. 150,000
Sales price per unit Rs. 1,000
Standard variable manufacturing cost per unit Rs. 400
Variable marketing expenses per unit sold Rs. 100
Actual production for the year Unit 30,000
Sales for the year Unit 28,000
Opening finished goods inventory Unit 1,000
Required:
a) Income statement for the year under direct method.
b) Operating income for the year if absorption costing had been used.
Solution # 1
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95
Question # 2
Following data relates to Shehla Sister Ltd engaged in production and marketing a
computer component:
July 1998 August 1998
Units Produced 10,500 5,000
Units Sold 5,000 10,000
Rupees Rupees
Fixed manufacturing cost 500,000 500,000
Unit selling price 500 500
Variable cost per unit 250 250
Per unit fixed factory overhead rate 50 50
Marketing overheads fixed 120,000 120,000
Administrative overheads 130,000 130,000
Required:
a) Comparative income statement for each month on absorption Costing basis.
b) Comparative income statement for each month on marginal Costing basis.
Solution # 2
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97
Question # 3
Following data relates to Shahnoor Industries Ltd:
Number of units produced 55,000

Number of units sold 50,000
Selling price per unit Rs.200
Production cost per unit:
Raw Material Rs.75
Direct Labour Rs.50
Variable Factory Overhead 50% of direct labour cost
Fixed Factory Overhead Rs.500,000
Administrative and Selling Overhead Rs.1,000,000
Required:
a) Prepare Operating statements using Absorption and Marginal Costing
method.
b) Calculate closing stock value under the above two method.
Solution # 3
98
99
Question # 4
Shaheen Ltd. manufactures around 10,000 machines in a month. The break-up of

unit cost is as under:
Rs.
Direct Material 750
Direct Labour 300
Variable Overhead 150
Fixed Overhead 600
1,800
Selling Price of machine is Rs.2,400. Production and sales for periods 1,2 and 3
were as under:
Period 1 Period 2 Period 3
Production 10,000 8,000 11,000
100
Sales 8,000 9,000 12,000
Production can be increase to 11,000 units without a corresponding increase in fixed

overhead.
Required:
a) Prepare Operating statements for the three periods assuming the company
uses:
1. Absorption Costing; and
2. Marginal Costing
Solution # 4
101
102
Question # 5
Following information pertains to Dilber Associates:
Normal Capacity of plant is 20,000 units per month or 240,000 units a year.
Variable costs per unit are:

Rs.
Direct Material 3.00
Direct Labour 2.25
Variable Factory Overhead 0.75
Total 6.00
Fixed overheads are Rs.300,000 per year or Rs.1.25 per unit at normal capacity.
Company is using ‘units of product’ as basis for applying overheads. Fixed marketing
and administrative expenses are Rs.60,000 per year and variable marketing
expenses are Rs.3,400, Rs.3,600, Rs.4,000 and Rs.3,000 for the first, second, third
and fourth month respectively.
Actual and applied variable overheads are the same. Likewise no material or labour
variance exists. There is no work in process. Standard costs and finished goods
inventories in units are:
MONTH
First Second Third Fourth
Units in beginning inventory ----- ----- 3,000 1,000
Units produced 17,500 21,000 19,000 20,000
Units sold 17,500 18,000 21,000 16,500
Units in ending inventory ----- 3,000 1,000 4,500
Required:
a) Prepare income statement through Absorption
b) Prepare income statement through Direct Costing methods.
Solution # 5
103
104
Question # 6
Khan Company is a small business which has the following budgeted marginal
costing profit and loss account for the month ended 30.6.2004:
Rs. Rs.
Sales 96,000
Cost of sales:
Opening stock 6,000
Production 72,000
Closing Stock (14,000) 64,000
32,000
Other variable cost-Selling expense 6,400
Contribution 25,600
Fixed cost:
Production Overhead 8,000
Administration 7,200
Selling 2,400 17,600
Net profit 8,000
Standard cost per unit is:
Rs.
Direct material (1kg) 16
Direct labour (3 hours) 18
Variable cost (3 hours) 6
105
Budgeted selling price per unit is Rs.60
The company’s normal level of activity is 4,000 units per month. It has budgeted
fixed production costs at Rs.8,000 per month and absorbed them on the normal level
of the activity of units produced.
Required:
Prepare budgeted profit and loss under absorption costing for the month ended
30.6.2004.
Solution # 6
106
107
Question # 7
Ali Ltd makes and sells one product, the standard production cost of which is as
follows for one unit:
Rs.
Direct labour (3 hours at Rs.6 per hour) 18
Direct material (4 kgs at Rs.7 per kg) 28
Variable factory Overhead 3
Fixed factory overhead 20
Standard production cost 69
Normal output is 16,000 units per annum and this figure is used for the fixed factory
overhead calculation.
Costs relating to selling, distribution and administrative are:
Variable 20% of sales value
Fixed Rs.180,000 per annum
The only variance is a fixed factory overhead volume variance. There are no units in
finished goods stock at 1.10.2003. The fixed overhead expenditure is spread evenly
throughout the year. The selling price per unit is Rs.140.
For each of six monthly periods, the numbers of units to be produced and sold are
budgeted as:
Six month ending Six month ending
31.3.2004 30.9.2004
Production units 8,500 7,000

Sales units 7,000 8,000
Required:
a) Prepare statements for the management showing sales, costs and profits for
each of the six monthly periods, using:
1. Marginal Costing
2. Absorption Costing
b) Prepare an explanatory statement reconciling for each six monthly period the
profit using marginal costing with the profit using absorption costing.
Solution # 7
108
109
Practice Question
Question # 1
110
Modem Metal Works details in German Silver Sets; the standard production cost of
which is as under:
Rs.
Direct material 4kg @ Rs.35 140
Direct labour 3 Hrs @ Rs.30 90
F.O.H- Variable 15
Fixed 100
Total cost 345
Normal output is 16,000 units per annum, costs relating to selling, distribution and
administration are:
Variable 20% of sales value
Fixed Rs.900,000 per annum
The only variance is fixed (production) OH volume variance.
There are no sets in finished goods stock as on 1st April 2002. The fixed overheads
expenditure is spread throughout the year. The selling price per set is Rs.700. The
numbers of sets to be produced and sold are budgeted are:
Six month ending Six month ending
th
30 September 2002 31st March 2003
Production 8,500 7,000
Sales 7,000 8,000
Required:
a) Prepare statements showing sales, costs of sales and profit for each six
month period, using:
1. Marginal costing
2. Absorption costing
b) Prepare an explanatory statement reconciling each six months period profit
using marginal costing with that of absorption costing.
Question # 2
The management of Moon Company uses the following unit costs for the single
product it manufactures
Project cost
Rs. Per unit
Direct materials (all variances) 300
Direct labour (all variances) 190
Factory overhead:
Variable cost 60
Fixed cost (based on 1,000 units/month) 50
Marketing, general and administrative cost:
Variable cost (per unit sold) 40
Fixed cost (based on 1,000 units/month) 28
The projected sales price is Rs.800 per unit. The fixed costs remain fixed within the
relevant range of 400 to 1,600 units of production and sales.
Management has projected the following unit data for June:
Units
Beginning inventory 200
111
Production 900
Available 1,100
Sales 750
Ending inventory 350
Required:
a) An income statement for June, using absorption costing method, with all
adjustment in Cost of Goods Sold.
b) An income statement for June, using direct costing method.
c) Reconciliation of the difference in operating income as computed in (i) and (ii)
above.
Question # 3
A manufacturer produces and sells single product. Summarized data of operations
for two years are given below.
Rs.
Selling price per unit 4,000
Manufacturing costs:
Variable cost per unit:
Direct materials 880
Direct labour 480
Variable overhead 240
Fixed cost per year 9,600,000
Selling and administrative costs:
Variable (per unit sold) 400
Fixed cost per year 5,600,000
Year 1 Year 2
Beginning inventory – units -------- 2,000
Units produced 10,000 6,000
Units sold 8,000 8,000
Ending inventory – units 2,000 --------
Required:
a) Prepare income statement for each year using absorption costing.(Marks 8)
b) Prepare income statement for each year using direct costing.(Marks 8)
Question # 4
Flexible budget for a product as prepare by Anchor Ltd, is given below:
Sales - unit 10,000 15,000 20,000

Rs. Rs. Rs.
112
Sales 800,000 1,200,000 1,600,000
Manufacturing cost:
Variable 300,000 450,000 600,000
Fixed 200,000 200,000 200,000
Total manufacturing cost 500,000 650,000 800,000
Marketing and other expenses:
Variable 200,000 300,000 400,000
Fixed 160,000 160,000 160,000
Total Marketing and other expense 360,000 460,000 560,000
Operating income / (loss) (60,000) 90,000 240,000
 The budget of 20,000 units will be used for allocating the fixed manufacturing
cost to units of product.
 At the end of first six months, 12,000 units have been completed and 6,000
units have been sold @ Rs.80 per unit.
 All fixed costs are budgeted and incurred uniformly throughout the year and
all costs incurred, coincide with budget.
 The over or under applied fixed manufacturing cost is deferred unit the end of
the year.
Required:
a) Calculate the amount of fixed manufacturing cost applied to production during
the first six months under absorption costing.
b) Prepare income statements for the first six months under:
1. Absorption Costing
2. Marginal Costing
c) Reconcile the difference in operating income under absorption costing and
marginal costing.
Question # 5
Basic standard cost data of Zahoor & Co. is as under:
Normal Capacity (monthly) 50,000 units
Production, October, 2007 45,000 units
Sales October, 2007 47,500 units
113
Standard variable costs per unit: Rupee(s)
Material and labour 8.00
Factory overhead 2.00
Distribution expenses 1.00
Operating variances:
Representing excessive incurrence of variable costs Rs.4,500
Selling price per unit Rs.20
Fixed cost for October, 2007:

Manufacturing expenses (Rs.4/- per unit on normal capacity) Rs.200,000
Distribution expenses 75,000
Administration expenses 50,000
Others 25,000
Required:
a) Prepare income statement for the month of October, 2007 under:
1. Absorption Costing, and
2. Marginal Costing
b) Prepare a reconciliation of incomes under absorption costing and marginal
costing for October, 2007.
CHAPTER # 10
Cost, volume and profit analysis
114
Cost-volume-profit (CVP) / Breakeven analysis are the study of interrelation
ship between cost, volume and profit at various level of activity.
The management of an organization usually wishes to know the profit likely to be

made if the aimed-for production and sales for the year are achieved. Management
may also be interest to know the following.
 The breakeven point which is the activity level at which there is neither profit
nor loss.
 The amount by which actual sales can below anticipated sales, without a loss
being incurred.
Contribution Margin OR Contribution to sales

Contribution margin is a measure to how much contribution is earned. It can be
calculated as follows.
Contribution margin = Sales – Variable cost
Variable cost includes direct material, direct labour, variable overhead, variable
selling and variable administrative overhead.
Contribution Margin Ratio (CM %) OR Contribution to sales ratio (C/S %)

Contribution margin is a measure of how much contribution is earned from each Rs.1
of sales. It can be calculated as follows.
Contribution margin ratio (CM%) = Contribution margin x 100
Sales
OR
Contribution margin ratio (CM%) = Sales – variable cost x 100
Sales
Breakeven Sales in Amount (Rs.)

At the breakeven point, sales revenue = total cost and there is no profit. At the
breakeven point total contribution = fixed cost.
Breakeven Sales in amount = Fixed Cost
CM%
Breakeven sales in units

Breakeven points in units mean show many units to be sold to require to neither
profit nor loss.
Breakeven Sales in unit = Fixed cost
CM per unit
CM per unit = Sales per unit – Variable cost per unit
Sales are required to earned profit if amount of profit is given

How many sales are required to sales to earned profit.
Sales are required to earn profit (Rs.) = Fixed Cost + Profit
CM%
115
OR
Sales are required to earned profit in units = Fixed Cost + Profit
CM per unit
Sales are required to earned profit if % of profit on sales is given

How many sales are required to sell to earned profit if % of profit on sales is given.
Sales are required to earned profit (Rs.) = Fixed Cost
CM% - TP%
Sales are required to earned profit after tax if amount of profit is given
How many sales are required to sales to earned profit after tax if amount of profit is
given.
Sales are required to earned profit after tax (Rs.) = Fixed Cost + Target profit
1-tax rate
CM%
Sales are required to earned profit after tax if % of profit on sales is given
How many sales are required to sales to earned profit after tax if amount of profit is
given
Sales are required to earned profit after tax (Rs.) = Fixed cost
CM% - Target profit %
1 – tax rate
Margin of safety (MOS)

The margin of safety is the difference in units between the budgeted sales volume
and the breakeven sales volume. It is some time as percentage of budgeted sales
volume. The margin of safety may also be express as the difference between the
budgeted sales revenue and breakeven sales revenue express as a percentage of
the budgeted sales revenue.
Margin of safety = Budgeted sales revenue – Breakeven sales revenue

OR
Margin of safety ratio (%) = Budgeted sales revenue – Breakeven sales revenue x 100
Budgeted sales revenue
Question # 1
The fixed cost of an enterprise for the year is Rs.400,000. The variable cost per unit
for a single product being made is Rs.20. Each units sells at Rs.100.
116
Required
a) Breakeven point.
b) If the turnover for the next year is Rs.800,000, calculate the estimated
contribution and profit, assuming that the cost and selling price remain the
same.
c) A profit target of Rs.400,000 has been desired for the next year. Calculate the
turnover required to achieve the desired result.
Solution # 1
117
Question # 2
The Parrot Company sold 150,000 units @ Rs. 30 each, Variable cost is Rs. 20
(Manufacturing Rs. 15 & Marketing Rs. 5), Fixed Cost is Rs. 1,200,000 annually
which occurs evenly throughout the year (Manufacturing Rs. 800,000 & Marketing
Rs. 400,000).
Required
I. Breakeven point in units
II. Breakeven point in Rupees
III. Number of units to be sold to earn profit before tax of Rs. 200,000
IV. Number of units to be sold to earn after tax profit of Rs. 100,000 if tax rate is
25%
V. The breakeven point in units if selling price is increased by Rs. 3 and variable
cost by Rs. 2 per unit.
Solution # 2
118
Question # 3
Gala Promotions Limited is planning a concert in Karachi. The following are the
estimated costs of the proposed concert:
Rs. (000)
Rent of premises 1,300
Advertising 1,000
Printing of tickets 250
Ticket sellers, security 400
Wages of Gala Promotions Limited Personnel employed at the concert 600
Fee of artist 1,000
There are no variable costs of staging the concert. The company is considering a
selling price for tickets at either Rs.4,000/- or Rs.5,000/- each.
Required:
i. Calculate the number of tickets which must be sold at each price in order to
break-even.
ii. Recalculate the number of tickets which must be sold at each price in order to
break-even, if the artist agrees to change from fixed fee of Rs. 1 million to a
fee equal to 25% of the gross sales proceeds.
iii. Calculate the level of ticket sales for each price, at which the company would
be indifferent as between the fixed and percentage fee alternative.
iv. Comment on the factors, which you think, the company might consider in
choosing between the fixed fee and percentage fee alternative.
Solution # 3
119
Question # 4
120
The Sindh Engineering Company produces a bicycle which sells at Rs.1,000 per
unit. At 80% capacity utilization which is the normal level of activity, the sales are
Rs.180 million. Costs are as under:
Prime cost per unit Rs.400

Factory indirect cost Rs.30 million (including variable cost Rs.10million)
Selling costs Rs.25 million (including variable cost Rs.15million)
Distribution costs Rs.20 million (including variable cost Rs.11million)
Administration costs Rs.6 million
Commission and discounts are 5% of sales value.
Required:
i. Calculate the break-even sales value.
ii. Prepare statements showing sales, costs, profit and contribution margin at
each of the following levels:
a. at the normal level of activity;
b. if unit selling price is reduced by 5% thereby increasing sales and
production volume by 10% of the normal activity level;
c. if unit selling price is reduced by 10% thereby increasing sales and
production volume by 20% of the normal activity level.
Solution # 4
121
Question # 5
A company produces mineral water. Based on the projected annual sales of 40,000
bottles of mineral water, cost studies have produced the following estimates:
Total annual costs
(in rupees) Variable cost percentage
Material 193,600 100
Labour 90,000 70
Overhead 80,000 64
Administration 30,000 30
The production will be sold through dealers who would receive a commission of 8%
of sale price.
Required:
(i) Compute the sale price per bottle which will enable management to realize a
profit of 10 percent of sales.
(ii) Calculate the break-even point in rupees if sale price is fixed at Rs. 11 per
bottle.
Solution # 5
122
Question # 6
Dream world Resorts maintains a water park and has experienced a steady growth
in its sales for the past five years. Increased competition, however, has led the
owners to believe that an aggressive advertising campaign will be necessary next
year to maintain the present growth. In order to launch advertising campaign the next
year, following data has been compiled for the year 2005.
Variable cost Rs.137.50 per ticket
123
Total fixed cost for the year Rs.1,350,000
Sales price Rs.250.00 per ticket
Expected sales 2005 – 20,000 ticket Rs.5,000,000
Income tax rate 35%
The resort has set sales target for 2006 at a level of Rs.5,500,000 or 22,000 tickets.
Required:
i. The project after tax net income for the year 2005.
ii. Number of tickets at breakeven point during the year 2005.
iii. After tax net income for the year 2006 if an additional fixed marketing expense
of Rs.112,500 is spent on advertising in the year 2006 (with all other costs
remaining constant) to attain the sales target for the year 2006.
iv. The breakeven point in value for the year 2006 if additional Rs.112,500 is
spend on advertising.
v. The required sale (value) to equal after tax net income for the year 2005 if
additional Rs.112,500 is spent on advertising in the year 2006.
vi. The maximum amount that can be spent on additional advertising at a sales
level of 22,000 tickets, if an after tax net income of Rs.600,000 is desired.
Solution # 6
124
Question # 7
Gullever Engineering Ltd, manufactures lathe machines. Its budget data for next
year is as under:
Rs.
Sales (2,000 units) 8,000,000
Variable cost 3,000,000
Contribution margin 5,000,000
Fixed cost 2,000,000
Operating income 3,000,000
Required:
i. Calculate breakeven point in units and amount.
ii. Calculate margin of safety in units and amount
Solution # 7
125
Practice Question
Question # 1
Normal annual capacity of Karachi Company is 200,000 units and the sales price is
Rs.32 per unit. Unit cost of components is as under:
Variable cost per unit (Rs.) Fixed Cost(Rs.)
Direct material 9.00 --
Direct labour 10.0 --
Factory overhead 2.00 400,000
Non-manufacturing cost 3.00 100,000
Total cost 24.0 500,000
126
Required:
i. Calculate the breakeven point in rupees and in units. Prove your answer.
ii. Compute amount of sales required to earn a profit of Rs.420,000. Prove
Question # 2
R Company has prepare the following projections for the coming year 2008:
Rs.
Sales 150,000
Variable cost 112,500
Contribution margin 37,500
Fixed cost 20,000
Net income 17,500
Required:
i. Compute the following:
a. Breakeven sales in rupees.
b. Margin of safety in rupee and in percentage.
ii. A minimum unit to be sold to breakeven, if the sale price is Rs.15/unit.

iii.
Question # 3
The following data has been taken out from the record of Osman Bros., based on the
financial result for the year ending 30th June 2008:
Breakeven sales Rs.2,000,000
Contribution margin ratio 40%
Profit for the year ending 30th June 2008 Rs.320,000
Required:
i. Calculate the following:
a) Fixed expenses for the year.
b) Sales for the year
c) Variable expenses for the year
d) Margin of safety ratio.
Question # 4
Variable cost Rs.10 per unit

Fixed cost Rs.42,000
Sales price Rs.16 per unit
Breakeven point 7,000 units
By matching Revenue & Expenses prove that 7,000 units are breakeven point.
127
Question # 5
Calculate the breakeven point in units when:
Sales price Rs.1 each
Sales Rs.60,000
Variable cost (0.5 per unit) Rs.30,000
Fixed cost Rs.20,000
128

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Index

1 Introduction to cost accounting 2-4

2 Accounting concept relating to manufacturing activities 5 – 20

3 Job order costing 21 – 35

5 Joint product and by product 47 – 51

6 Costing and control of material 52 – 58

7 Costing and control of labour 59 – 62

10 Direct and absorption costing 91 – 115

11 Cost, volume and profit analysis 116 – 129

Definition of Cost accounting

Objective of Cost Accounting

Definition of Fixed Cost:

Definition of Variable Cost

Definition of Semi-variable Cost

Material Labour Other

Direct Indirect Direct Indirect Direct Indirect

Direct Labour: is one which can be conveniently identified or attributed wholly to a

Indirect Labour: is one which cannot be conveniently identified or attributed wholly to

Indirect Expenses: are those expenses which cannot be directly allocated to

Example: Identify Cost

Manufacturing overhead: Manufacturing overhead is any manufacturing cost that is

Manufacturing overhead includes all charges that provide

Manufacturing overhead includes

 Other indirect manufacturing cost: includes machine depreciation, land

Opening stock of raw materials Xxxxx

Sugar Mills Limited.

Sugar Mills Limited.

The following information is also made available to you:

The Company incurred the following costs:

Required: Prepare Income Statement showing net income or loss.

Sep 1, 2008 inventories Rs.

Material purchases during the month of Sep 104,000

Direct labour (Rs.5.5 per hour) 42,350

 Estimating the accurate cost of products is critical for profitable operations. A

Job Order Costing:

Job Order Costing Characteristics:

Basic features of Job Costing

In which industries job costing is applied

Advantages of Job order Costing

Example of Job and Process Costing

Job Order Cost Sheet

Direct Material Cost:

Direct Labour Cost:

March W.I.P (FS-6) 142,000

March W.I.P (FS-6) 86,000

March Finished Goods(FS-6) 345,000

March COGS 385,000

March Account Receivable 400,000

Overhead for the two department are estimated as follows:

Fixed Overheads: Estimated at Rs.50,000 for 50,000 normal working hours.

Date Direct material Date Direct labour

Materials requisitions for May totaled Rs.13,000,

Date Particular P.R Debit (Dr) Credit (Cr)

Iqra inc. provided the following data for January, 19B:

Materials and supplies:

Factory overhead costs:

Job 2 started in January, not yet finished.

Finished goods inventory January 1, 19B.

1. Raw materials were purchased on account, Rs.410,000.

a) Prepare journal entries to record the preceding transactions.

The importance of process costing:

Costing is an important process that many companies engage in to keep track of

When process costing is applied?