5 - Cost Accounting (T.Y.B.com Sem-V)

We are happy to present the First Edition of "Cost Accounting" to the students of
T.Y.B.Com.: Semester - V of lvlumbai University tailqred as per the new syllabus and
the revised paper pattern under the Choice Based Credit, Grading and Semester
System effective from the current academic year 2018-19.
We have solved a lafge number of lllustrations and added many Practical problems in
the Exercises in view of the full 100 marks university examination under the new
paper pattern.
The theory is presented in simple language. Numerous Exhibits and Worksheets with
ready-to-fill-in formats for step-by-step solution explain what is to be done, why and
how.
The numerous illustrations are logically classified into different categories in ascending
order of difficulty. These contain full solutions to questions asked in various
examinations (Mumbai University as well as Professional Examinations), along with
detailed working notes. This will 9efinitely give you a firm grip on the practical aspects
of the subject.
The Exercises Section is designed as a complete Do-it-Youfself (DlY) Home Study

Kit. Exercises contain Theory Questions- Descriptive and Shorl Notes - with precise
para-reference in the text where you can find the model answer. The massive collection
of MCQs (Conceptuat and Numerical), True or False Questions etc. will be very
usefulfor tackling this tricky exam question. The practical questions follow, as far as
possible, the same serial order as the illustrations. The detailed step-by-step answers
can be used as a master-key to cross-check your answers.
A separate section 'Answer in Brief' containing numerical MCQs / short practical

problems / gase studies is included in Exercises in all the Chapters with detailed
answers.
Another separate section 'Test Bank'contains Objective Questions set in the lvlumbai
University Examinations from October 20141o November 20'17.
We welcome constructive suggestions for improvement. Kindly e-mail your suggestions

and queries to mananprakashan@ gmail.com.
- Authors
Syllabus
1. lntroduction to Cost Accounting

(a) Objectives and Scope of Cost Accounting
(b) Cost Centres and Cost Units
(c) Cost Classification for Stock Valuation, Profit Measurement, Decision Making and
Control
(d) Coding Systems
(e) Elements of Cost
(f) Cost Behaviour Pattern, Separating the Components of semi-variable Costs
2. Material Cost
(i) Procurement Procedures - Store Procedures and Documentation in respect of
Receipts and lssue of Stock, Stock Verification
(ii) lnventory Control-Techniques of Fixing of Minimum, Maximum and Reorder Levels,
Economic Order Quantity, ABC Classification; Stocktaking and Perpetual lnventory
(iii) lnventoryAccounting
Note : Simple practical problems based on
Calculation of EOQ
Raw Material Turnover Ratio
Preparation of stock ledger and valuation of inventories, based on FIFO and
Weighted average cost
3. Labour Cost
(i) Attendance and Payroll Procedures, Overview of Statutory Requirements, Overtime,
ldle Time and lncentives
(ii) Labour Turnover
(iii) Utilisation of Labour, Direct and lndirect Labour, Charging of Labour Cost, ldentifying
Labour Hours with Work Orders or Batches or Capital Jobs
(iv) Efficiency Rating Procedures
(v) Remuneration Systems and lncentive Schemes
Note : Simple practical problems based on :
Preparation of labour cost statement
Remuneration and incentive systems based on Piece work plan, Halsey Premium Plan,
Rowan system, Gantt's Task
4. Overheads
Functional Analysis - Factory, Administration, Selling and Distribution
Behavioural Analysis - Fixed, Variable, Semi Variable Cost
Note : Simple practical problems on
Departmentalization and apportionment of primary overheads,
Computation oI overhead rates including Machine overhead rates
'Basic concepts of treatment of over/under absorption of overheads - Direct Labour method
and Prime Cost method
5. Classification of Costs and Cost Sheet
Classification of Costs, Cost of Sales, Cost Centre, Cost Unit, Profit Centre and lnvestment
Centre
Cost Sheet, Total Costs and Unit Costs, Different Costs for different purposes
Note : Simple practical problems on preparation of cost sheet
6. Reconciliation of Cost and Financial Accounts
Practical problems based on Reconciliation of Cost and Financial Accounts
IV
Question
Maximum Marks: 100

Questions to be Set : 06
Duration:3 Hrs.
AllQuestions are Compulsory Carrying 15 Marks each
Q. No Pafticulars Marks
Q.1 Objective Questions* 20 ,}
(A) Sub questions to be asked 12 and to be answered any 10

(B) Sub questions to be asked 12 and to be answered any 10
(. Multiple Choice lTrue or False / Match the Columns /
Fill in the Blanks)
o.2 Full Length Practical Question 15
OR
Q.3 Full Length Practical Question 15

OR

OR
Q.s Full Length Practical Question 15

OR
o.5 Full Length Practical Question
o.6 (A) Theory Questions 10
(B) Theory Questions 10
OR
Q.6 Short Notes 20
To be asked 06, to be answered 04
Note : Full length question of 15 marks may be divided into two sub questions of 7/8
and 10/5 marks.
v
To,
Prin. Vasant Govind Natu

and
ilrs. Sudha Vasant Natu
(i4y ln-Laws)
I was a stranger, and you took me in.

(New Tbstament)
tUukund
Page Nos.
Theory & Exercises
lllustrations
1. lntroduction to Cost Accounting ....... 1 23
2. MaterialCost........... 36 97
3. Labour Cost .......... 126 181
4. Overheads 205 254

5. Classification of Costs and Cost 9heet......... 276 331
6. Reconciliation of Cost and Financial Accounts 355 394
* Testdank............. 412
VI
1
INTRODUCTI ON TO
COST ACCOUNTING
THEORY AND ILLUSTRATIONS
OUTLINE
No. Topic Page
1. Definitions 3
1.3 Cost
1.4 Cost Accounting
2. Objectives and Scope 3
2.1 Basic Objectives
2.2 Other Objectives
3. lmportance and Advantages 5
3.1 l\tlanagement and Owners
3.2' Workers
3.3 Government / Consumers / Public
4. Objections / Criticisms 6
E Need for Cost Accounting 6
5.1 Ascertainingltem-wiseCost/Profitability .
5.2 Cost Control

5.3 QuantitativeReconciliation
5.4 Decision Making and Planning
Financial Accounting Vs. Cost Accounting 7
7. Essentials of Good Costing System 8
7.1 Features
7.2 Aspects
Classification/Purposes of Costs I
8.1 Classification
8.2 Different Costs for Different Purposes
Classification on Basis of Behaviour
9.1 Fixed Costs
9.2 Variable Costs
9.3 Semi-VariableCosts
, CostAccounting (TYB.Com. : SEM-V)
10. Classification on Basis of Time 11

'10.1 Historical Costs
10.2 Pre-determined Costs
11. Classification For Management Decisions 12
11.1 Marginal Cost
11.2 Opportunity Cost
11.3 Replacement Cost
11.4 lrnputed Cost
11.5 Sun( Cost
11.6 Controllable Cost
. 11.7 Relevant Cost
11.8 Normal Cost
11.9 Abnormal Cost
11.10 Avoidable Costs
11.11 Unavoidable Costs
1 1 .1 2 Diff erential Cost
4,. Classification on Basis of Elements 14

13. Classification on Basis of Cost CentrelUn it 14
13.1 Meaning
13.2 Cost Centre
13.3 Cost Unit
13.4 Prime/DirectCosts
13.5 Overheads/lndirect Costs
13.6 TotalCost
14. Classification on Basis of Functions (Cost Structure) .16
15. Coding Systems 18
15.1 Codes
15.2 Composite Codes
15.3 Advantages of a Coding System
15.4 odi ng System
16. 18
Equations
16.2 Method
16.3
21
Introduction to C o st A c co unting 3
'1.1 cosr
CA$l (Cost Accounting Standard I on 'Classification of Cost', issued by the ICWA, India), defines
Cost as : Cost is a measuternent, in monetary terms, of the amount of resources used for the
purpose of productian of goods or rendering services. Manufacturing ofgoods or rendering services
involves consumption of resources. Cost is measured by the sacrifice made in terms of resources or
price paid to acquire goods and services. For example, material cost is the price of materials acquired
for manufacturing a product.
1.2 COSTING
Costing means the technique and process of ascertainment of cosrs (ICMA). Costing involves the
following steps : (i) Ascertaining or collecting costs (ii) Analysing or classifoing costs into basic
elements such as Material, Labour, Expenses etc. and (iii) Allocating total costs to a 'particular
thing'i.e. a product, a contract or a process. Thus cost can now be defined as the total expenditure,
duly classified into Materials, Labour, Expenses etc., allocated to a particular product or contract or
process.
1.3 COSTACCOUNTING
(f) ICMA: The Institute of Cost and ManagementAccountant, England (ICMA) has defined Cost
Accounting as - "lhe process of accouniing for the costs from tie point at whiich expenditure is
incurred, to the establishment of its ultirhate relationship with cost centres qnd cost units. In its
widest sense, it embraces the preparation of statistical data, the application of cost contrul
methods and the ascertainment of the prcfitability of activities carried oul or planned".
(2) Wheldon : Wheldon has defined Cost Accounting as "classifuing, recording and appropriate
qllocation of expenditurefor determination of costs ofproducts or services andfor the prcsentation
of suilably arranged data for the purpose of contrcl and guidance of management." [H. J.
Weldon, Cost Accounting and Costing Methods, Macdonold and Evans, 1948.1
Cost Accounting is a term broader than Costing. It covers Costing plus the Reporting and Control of
Costs. Thus, Cost Accounting: Costing + Cost Reporting + Cost Control. Cost Accounting can be
defined asthe process ofRecording, ClassiJication,Allocation, Reporting and Control of Costs.
1,4 COST REPORTINGAND CONTROL

CostAccountancy or Cost Reporting includes the presentation of information derived from Cost
Accounting for the purpose of management decision-making (ICMA). The cost figures may be
presented to the management in the form ofAccountS (Cost Sheet, ContractA"/c, ProcessA/c, Costing
Profit and Loss Account etc.) or Statistics. The management can then use the cost figures for various
purposes e.g. to fix the selling price, to make comparison with other competing concerns, to reduce
avoidable costs, to control wastages and losses in production and so on. The cost data can be used by
the management in controlling the costs ofproduction or operation, for taking decisions, and planning
for the future. Cost Control is the guidance and regulation by executive action of costs of operating
an undertaking (ICMA).
2. OBJECTIVES AND SCOPE
2.1 BASIC OBJECTIVES

Cost Accounting has the following basic objectives : (1) Costing (2) Cost Reporting and (3) Cost
Control. These are explained in detail below :
4 Cost Accounting (TY B. Com. : SEM-V)
2.1.1 Costing
Costing has the following basic objectives (or 5 'A's) :Ascertain, Analyse, Allocate, Apportion and
Absorb.
(1) Ascertain Costs : Ascertain or collect all the expdnses relating to a particular period.
(2) Analyse Costs : Anallse or classiffthe expenses under different heads ofaccount such as Material,
Labour, Expenses etc;
(3) Allocate Costs : Allocate or charge in fuIl the Direct Expenses or the specific costs such as Raw
Materials, Labour to relevant product, contract or process.
(4) Apportion Costs : Apportion or distribute Common Expenses to each product, contract or process
on a suitable basis.
(5) Absorb Costs : Absorb the total expenses of a department over its products. So, in this final step,
the individual cost ofeach product is determined. This product cost is then reported to management.
2.1.2 CostReporting
Cost Reporting or Presentation has the following objectives :
(l) What to Report : What is the nature of information to be presented ? The information should be
relevant and precise.
(2) Whom to Report : Whom is the report to be presented ? This will determine the scope ofreport.
The report to be submitted to the Top Management will be short, while the report to the Cost
Accountant will be detailed.
(3) When to Report : When is the report to be presented - whether Daily, Weekly, Monthly, Quarterly
or Yearly etc. The scope and format of the report will depend upon the frequency of reporting.
(4) How to Report : How or in what format is the report to be predented ? The format will depend
upon the factors mentioned above- Once the cost report is received, management can take action
to control the costs.
2.1.3 Cost Control
Cost Control has been defined by ICMA London as - "the guidance and regulation by executive
action of the costs of operating an undertaking". Thus, Cost Control means the control of costs by
management. Following are the aspects or stages of Cost Control:
(1) Set Targets : Set up targets for Cost, Production, Profits etc. for each period.
(2)MeasureActual Performance: Measure the actual figures of performance relating to cost,
production, profits etc. for the period concerned.
(3) Compare Targets with Actuals : The figures of actual performance are to be compared with the
figures oftargets to find out the variations.
(4) Analyse Variations : The causes for variations whether favourable or adverse are to be
investigated. While adverse variations denote wastages and losses, favourable variations may
indicate that the targets fixed are very low. ln both the cases it is important to know the exact
reason for the variations.
(5) Take Action : Once the causes are known, irnmediate action has to be taken to eliminate avoidable
losses etc.
2.2 OTHER OBJECTIVES

The other objectives of Cost Accounting are as follows :
(l) Provide required data for fixing Sales Price, for submitting Tenders. Quotations etc.
(2) Assist the management in controlling inventory of ra'*. materials, goods in process, finished
goods, spares and consumables etc.
(3) Advise management on future policies regarding expansion, growth, capital investment etc.
(4) Install Labour Incentive System for getting maximum productivity from Labour at optimum
cost.
Introduc tion to C o st Ac co unting 5
(5) Advise management in deciding optimum product-mix, merits and demerits ofaltSrnative courses
of actions (make or buy etc.), introduction of automation, mechanisation, rationalisation of
system of production etc.
(6) Maintain Cost Accounting Records as per law. e.g. the Companies Act.
3. IMPORTANCE AND ADVANTAGES
CostAccounting is important not onlyto the management and owners.but also to many others like
the workers, the Government, the consumers, the public at large and so on. The advantages from a
well organised Cost Accounting System to all these sections of public are explained in detail below:
3.1 MANAGEMENTANDOWNERS
(1) Ascertaining Cost/Profitability of Each Product : Cost Accounting enables the management
ofthe concern to ascertain the cost and profitabilityofeach individual product/servicelcontractl
process/division/branch separately. The cost ofproduction ofeach product so determined is also
used for valuation ofclosing stock ofgoods at the end ofthe year.
(2) Cost Control : CostAccounting helps the management ofthe concern in controlling costs, reducing
avoidable expenditure, and minimising wastages and losses. Comparison with Industry Standards
or past data helps the management in judging and improving its performance.
(3) Quantitative Reconciliation : Cost Accounting ensures the reconciliation of quantity of input
with the quantities of output, wastages and scrap. The management is thus able to regulate and
monitor the movement of materials right from the Raw Materials Store to the Finished Goods
Warehouse. This prevents theft and loss ofmaterial during processing and handling.
(4) Decision Making and Budgetary Control : CostAccounting is a great help to the management
in taking serval decisions such as :
- which products to produce more.
- how much to produge,
- whether to make or buy a component,
- what price to charge, or quote in a Quotation or Tender, and so on. Thus Cost Accounting is
an invaluable aid to decision making. Further, Cost Accounting facilitates preparation of
Budgets and implementation of Budgetary Control in the organisation.
(5) Maximisation of Profits and Net Worth : The end result of all the above advantages of Cost
Accounting is the maximisation ofprofits ofthe concern. This benefits the owners by increase in
the Net Worth or the Share prices, higher dividends and so on.
@
Cost Accounting has an elaborate system of assessing the performance of workers and rewarding
them suitably through incentives and bonus. The increase in profits due to a Cost Accounting System
also leads to higher remuneration and bonus to the workers.
3.3 GOVERNMENT / CONSUMERS / PUBLIC

(l) Fixing Fair Prices : In case the products e.g. drugs or fertilisers are under price control, Cost
Accounting furnishes the data required by the Government for fixing fair prices. Consumers
benefit since the prices fixed on the basis ofcost data arejust and reasonable and cannot be too
high.
(2) Efficiency and Prosperity : CostAccounting leads to eliciencyand productivity in the lndustrial
sector. Cost Accounting ensures optimum utilisation of the scarce economic resources of the
country. This leads to overall prosperity and economic growth of the nation and the people at
large.
(3) Taxes and Welfare : Cost Accounting leads to maximum profits for an organisation. Naturally
the Government also gains by way of more taxes on production (Excise), income (lncome Tax)
6 Cost Accounting (TlY B. Com. : SEM-V)
and sales (Sales Tax, Custom Duties) etc. The higher revenue is used by the Government for
public welfare and economic development.
4, OBJECTIONS / CRITICISMS
Generally, tlie following objeitlons or criticisms are levelled against Cost Accounting :
(1) Duplication : It is argued that CostAccounting is a duplication when a good Financial Accounting
System is already in operation. Cost Accounting takes its basic data from books ofaccounts and
just rearranges it in a different way.
(2) Inapplicable : In a concern producing a single product involving no complex processes, Cost
Accounting is inapplicable. It is also of no use in non-profitable organisations or in agriculture
etc.
(3)Not Useful for Decision Making : In manycases, the decisions of the management are not
based on Cost Accounting data. Thus the decision regarding which item to produce and how
.much to produce depends upon the licence given by the Government and the market forces of
(4) Expensive and Routine : A Cost Accounting SyStems is quite expensive to install and operate.
At times the CostAccounting systems becomes a mere routine of filling in forms and submitting
standard reports. Non-cooperation from staffalso may lead to fdilure of the system in many
concerns.
However, these objections are not valid in view of the objectives, importance and advantages of
CostAccounting explainedabove. Properplanning and implementation will overcomethesecriticism.
FOR CO$T ACCOUNTING
Financial Accounting records financial transactions ofSales, Purchases, Cash etc. through Journals
and Ledgers and reports their summary through Final Accounts. The aims of Financial Accounting
are to - (i) present the working results ofthe concern for a particular peiriod through the Profit and
Loss Account i.e. to show the amount ofprofit or loss earned by the concern (ii) present the financial
position ofthe concern as bn a particular date through the Balance Sheet, i.e. show the amount of
Assets and Liabilities at the end ofthe year. However, Financial Accounting has its own limitations.
The limitations of Financial Accounting have led to the origin and evolution of Cost Accounting, as
explained below.
5.1 ASCERTAINING ITEM.WISECOST/PROFITABILITY

Ifaconcernismanufacturinganumberofproducts, itsProfitandLossAccountshowsthe lumpsum
amount ofnet profit or loss from all products taken together. The profits from some products are set
offagainst losses, if any, from other products and only the net result is shown in the Profit and Loss
Account. Financial Accounts thus fail to give a product-wise break-up ofprofit or loss.
In case ofa construction company, the Profit and LossAccount shows the net profit or loss from all
contracts taken together. The Financial Accounts do not indicate the profit or loss made on each
contract separately.
Similarly, if a concern has a number of processes, divisions or branches, the Profit and LossAccount
shows the net profit or loss from all processes, divisions or branches taken together. Financial Accounts
do not show the profit or loss made by each process, division or b,ranch separately.
Financial Accounts fail to ascertqin the individual cost/profitabilit.v of each product or contract or
process etc., separately. Cost Accounting grew out ofthis serious limitation of Financial Accounting.
The management of any concern is interested in identifoing products which are profitable so that it can
concentrate upon the profitable activities and discontinue the loss-making products. Each product,
contract, process, division or branch is known as a'cost centre'. Cost Accountingfuffils this objective
by ascertaining the individual costs of each product, contract, prccess or division.
Introduction to C o st Ac co unting 7
5.2 COST CONTROL

Financial Accounts merely record the expenses incuned. The management, however, is more interested
in guiding and regulating the expenses themselves, i.e. in Cost Control. Thus Financial Accounts show
the expanses paid for purchase of Raw Material and stop at that. Financial Accounts fail to show
whether the raw materials have been used efficiently; whether the output is normal or whether there is
any abnormal waste during the process of production and so on. Cost Accorurting has evolved effective
techniques to assist management in Cost Control at every step. Thus, Cost Acccjunting helps the
manqgement to control the cost of Materials, Lobour and Expensesby means ofan elaborate system of
recording, classification and reporting of costs to the management. CostAccounting techniques such
as Standard Costing compare the operating results ofthe concern with Industry Standards or with past
datato judge the eficiency or prcductivity of the concern.
5.3 QUANTITATIVERECONCILIATION
Financial Accounts report data in terms of Rupees only. They ignore the Quantitative aspects of
Input and Output. Efficiency or productivity of a concern depends upon obtaining the maximum
quantity of output from a given quantity of input. Cost Accounting provides useful data regarding
Quantity of Input, Quantity of Wastage or Scrap and Quantity of Output. Cost Accounting helps in
Quantitative Reconciliation and controlling the movement, leakage and wastage of materials.
5.4 DECISION MAKING AND PLANNING

Financial Accounting is based on past records. Further, the Final Accounts (Profit and Loss Account
and Balance Sheet) are available generally well after the accounting year is over. The information in
the Financial Accounts is thus historical as well as stale which is not at all useful for the management
for taking decisions in time, or for planning the future activities ofthe organisation. Cost Accounting
Techniques such as Forecasting, Marginal Costing, Budgets etc. were developed to help the
management in making decisions or planning for future such as -
(I) fixing the price of a product or submitting tenders or quotations.
(2) taking decisions about how much to produce, whether to make a component or buy it from
outside, and
(3) preparing Budgets for future and monitoring variance of the actual figures from the budgeted
figures of Cost, Profit etc.
r u.r6,*,r, : FINANCIAL ACCOUNTING VS. COST ACCOUNTING

Feature Financial Accounting (FA) Cost Accounting (CA)
(1) Nature FA records, reports and CA records, reports and
a@ions analysesEosts'ol-eac-h-cost
of a concern. centre of a concernfp?o-tluct,
contract, process etc.).
(21 Use FA is used even by o-u!g.dg CA is used only by the
entities e.g. investors, creditors, menagement of the concern.
bEnksGtc.
(3) System FA uses the double-entry CA dqgq_no!_U9-. the double-
system for recording financial entry system for collecting
data. cost data.
(4) Scope FA covers all items of income CA covers only income and
and expenses whether relgled expenses related to cost
to the cost centres or not.. .centres.
(5) Period FA is for spepllig_pefllg e.g. a CA concentrates or1 so.st
financialyear. centreq and not on period
6 Cost Accounting (T Y.B. Com. : SEM-V)
(6) Rcports FA results are shown in P & L CA results are shown in

A/c and Balance Sheet. Cost Sheets / Costing Profit
& Loss A/c/ Reports /
Contract A,/c / Process A/c.
(71 t nit FA is expressed in Rupees only. CA record receipts, issues and
stock of materials, in terms of
quantities.
(8) Dala FA discloses past data. lt is a CA discloses current data or
post-mortem. future estimates.
(9) tlecisions FA cannot be used for GA is used for making
managerial decisions. decisions - pricing, product
mix, how much to produce etc.
OF GOOD
There cannot be a single ready made costing system applicable to all industries and organisations, A
Costing System has to be specially designed for each industry and every organisation keeping in
view the facts ofeach case. The essentials or pre-requisites ofa good costing system are as follows:
7.1 FEATURES
The essential features, which a good Cost Accounting System should possess, are as follows :
l. Informative and Simple: Cost Accounting System should be tailor-made, practical, simple and
capable of meeting the requirements ofa business concern.
2. Accurrcy: The data to be used by the cost accounting system should be accurate;.otherwise it
may result in wrong reports.
3. Supportfrom Management: Necessaryco-operation andparticipation ofexecutives fromvarious
departrnents ofthe concern is essential for developing a good systern ofcost accounting.
4. Cost Benelit: The cost of installing and operating the system should juslify the results.
5. Precise Information: The system of costing should not require meticulous and unnecessary details.
6. Procedure: A carefully planned programme should be prepared by using network analysis for
the introduction ofthe system.
7. Tiust Management should have faith in the costing system and should also provide a helping
hand for its development and success.
7.2 ASPECTS
l. Technical Aspects
The Costing System should be designed after studying the technical aspects ofthe industry and the
organisation. Thus, a thorough studyhas to be made ofthe nature ofproduct, the process ofproduction,
the complexityofmethods ofproduction, the degree ofcontrol required at each stage ofproduction
and so on. Which element of cost - material, labour or overheads - is more important, depends on the
nature ofthe product.
2. Physical Aspects
The phlsical lay out of the factory, the movements of material on the shop floor and between the
warehouses are to be studied before installing the Cost System.
3. Procedural Aspects
The procedures followed by the organisation for purchase, receipt, storage and issue of Materials;
for recruitment, training and remuneration of Labour, and fu paynent of Expenses etc. are to be
studied before designing the costing system.
4. OperationalAspects
(f ) Simple : The systems should be simple to operate and run. The Forms and Reports should be so
designed as to be simple to fill in and maintain.
Introduction to Cost Accounling 9
(2) Integrated with Financial Accounts : The final reports from the costing systems should be
capable of being reconciled with the financial accounts. As far as possible, there should be no
duplication of work. An integrated system of maintaining both Cost Accounts and Financial
Accounts should be developed to save time and costs and to avoid duplication and errors.
(3) Timely and Accurate Reports : The system should generate timely and accurate reports so that
corrective actions can be taken by the management in time.
(4) Co'operation from staff : The system should gain ready cooperation from the staff. If the
system is simple to operate and well-designed, there will be no resistance from the staffto the
installation of the costing system.
5. Financial Aspects
The cost ofdesigning, installing and operating the costing system has to be reasonable. The benefits
from the costing system should be, in the long run, more than its cost. Management should consider
the cost of a good costing system as a long term investment rather than a write-off and provide
enough funds therefor.
8. CLASSIFICATION / PURPOSES OF GOSTS
8.1 CLASSIFICATION
According to CAS-I by ICWA, classification of costs is the,arrangement of items of costs in logical
groups having regard to their nature (subjective classification) or purpose (objective classification.)
Cost classification according to the nature ofproduction process into Job Cost, Process Cost etc. is
discussed in Chapter 5. The scheme ofclassification should be such that every item ofcost can be
classified. The following are the major classifications of costs - (i) Nature of Expense (Elements)
(ii) Relation to Object - traceability (Direct/Indirect) (iii) Functions / Activities (Production,
Administration, Selling, Distribution and R & D).
EXHIBIT 2 : COST CLASSIFICATION
COST CLASSIFICATION
BEHAVIOUR TIME FOR MANAGEMENT ELEMENTS
1. Fixed Cost. 1. Historical Cost 1. Marginal Cost Nature-wise

2. Variable Cost 2. Pre-determined Cost 2. Opportunity Cost
3. Semi-variable (a) Standard Cost 3. Replacement Cost 1. Material Cost
Cost , (b) Estimated Cost 4. lmputed Cosl. 2. Labour Cost
5. Sunk Cost 3. Expenses
6. Controllable Cost.
7. Relevant Cost Cosl Centrey'
8. NormalCost Cost Unit Wise
S
9. Abnormal Cost 1. Prime/Direct Cost
10. Avoidable Cost
1. Production Cost Direct MaterialCost
11. Unavoidable Cost
2. Administration Cost Direct Labour Cost
12. DifferentialCost
3. Selling Cost Direct Expenses
4. Distribution Cost 2. Overheads/
5. Research & Dev. Cost lndirect Cost
Factory Overheads
Off ice/Ad m ni strative
i
Overheads
sale/Distribution
Overheads
10 Co st Ac co unting (7. Y, B. C om. : SEM -V)
8.2 DIFFERENT COSTS FOR DIFFERENT PURPOSES

CostAccounting can supplyrelevant cost information for decision-making. In reality, different costs
are required for different purposes. The requirement changes depending upon the nature ofdecision
to be taken. Thus, some items of costs may become relevant for such decisions while others may be
irrelevant. Consider the following examples :
Purpose Relevant Cost lnformation

Profit Determination Fullor Total Costs
Pricing
- ln a Competitive Market Variable Costs
- ln a near Monopoly Position TotalCosts
Producing a New Product Variable Costs
Dropping a Product Line Variable Costs plus ldentifiable Fixed Costs
In short, managers must studythe situation, decide which costs are most appropriate for that decision
and then take thb-dqcision and implement it.
9. CLASSIFICATION ON BASIS OF BEHAVIOUR

1. Meaning : Cost behavi our means the way in which costs are affected by changes in the volume
ofoutput. Knowledge of cost behaviour is important for budgeting, decision making and control
accounting. There are many factors which may influence costs, The major factor is volume of
output, or the level of activity. The level of activity may refer to one of the following - (l)
Number of units produced (2) Number of invoices issued (3) Value of items sold (4) Number of
items sold. The basic principle of cost behaviour is that as the level of activity rises, costs will
usually rise. It will cost more to produce 2,000 units of.output thhn it will cost to produce 1,000
units.
2. Classification : According to CAS-I by ICWA, costs are classified, on the basis of behaviour,
into Fixed Cost, Variable Cost and Semi-fixed or Semi-variable cost, depending upon the response
to the changes in activity level.
(a) Fixed Cost according to CAS-I by ICWA, India, is the cost which does not vary with the
change in the volume of activity in the shbrt run. These costs are not affected by temporary
fluctuation in activity ofan enterprise. These are also known as period costs.The characteristics
offixed costs are: (l) fixed amount within an output range (2) fixed cost per unit decreases
' with increased output. Examples for fixed cost are : salaries, rent, audit fees, depreciation etc.
(b) Variable Cost according to CAS-I by ICWA, India, is the cost of elements which tends to
directly vary with the volume of activity. Variable cost has t\to parts - (a) Variable direct cost;
and (b) Variable indirect costs. Variable indirect costs are termed as variable overhead. The
' characteristics of Yariable Cost are : (l) The variable cost varies directly with volume of
activities or production. (2) Variable cost remains constant per unit within a range ofactivity.
Examples of variable cost are : materials consumed, direct labour, sales commission, utilities,
freight. packing etc.
(c) Semi Variable Costs according to CAS-I by ICWA, India, contain both fixed and variable
elements. They are partly affected by fluctuation in the level of activity. Examples of semi-
variable cost are : Factory supervision, maintenance, power.etc.
(d) A step cost is a cost which is fixed in nature but only within certain levels of activity. Consider
the depreciation of a machinb which may be fixed if production remains below 1,000 units
per month. If production exceeds 1,000 units, a second rirachine may be required, and the
cost of depreciation (on two machines) would go up to a step.
3. Cost behaviour and unit costs : What happens when activity levels rise can be summarised as
follows :
a The variable cobt per unit remains constant

. The fixed cost per unit falls
. The total cost per unit falls
Introdac tion to Co st Ac co unting 11
The above discussion iS summed up in the Exhibit below
EXHIBIT 3 : COST BEHAVIOUR
A. TOTALCOSTS
Fixed Cost Variable Cost TotalCost
t t { Total
Variable
o a U)
o
oo Fixed () Variable oo Fixed
Activity Level: No. of units Activity Level: No. of units Activity Level: No. of units
Stepped Flxed Cost Seml-Varlable Cost I Mlxed Cost

t {
Variable
Fixed Fixed
Fixed
Variabl
Activity Level: No. ol units ,Activity Level: No. of units Activity Level: No. of units
B. COSTS PER UNIT
Fixed Cost p.u.. Variable Cost p.u Total Cost p.u.
{ T
E
c: =C =L
=
a o a
oo
o o
o O
Activity Level: No. of units Activity Level: No. of units Activity Level: No. of units
Costs are classified, on the basis of time, into (l) Historical Costs, and (2) Pre-determined costs
10.1 'HISTORICAL COSTS

Historical Costs according to CAS-I by ICV/A, India are the actual costs of acquiring assets or
producing goods or services. They aie 'postmortem' costs ascertained after they have been incurred
and they represent the costs ofactual operational performance.
10.2 PRE-DETERMINED COSTS

Pre-determined costs according to CAS-I byICWA, India for a product are computed in advance of
production, on the basis ofa specification ofall the factors affecting cost and cost data.
Pre-determined costs are Future Costs determined in advance on the basis of Standards or Estimates.
Thus, pre-determined costs are of two tlpes- (1) Standard Cost, and (2) Estimated Cost.
12 CostAccounting(TYB.Com. : SEM-V)
(1) Standard Cost : Standard Cost is a pre-determined cost calculated on the basis ofstandards of
efficient operations and relevant necessary expenses. Standard Costs are used as a basis offixing
prices and for cost control through analysis ofvariances.
(2) Estimated Cost : According to CAS-I by ICWA, estimated costs are costs calculated in advance
ofproduction or even before accepting sales order. These may be based on past data. These,
however, are not scientifically calculated and hence are less reliable than Standard Costs.
11. CLASSIFICATION FOR MANAGEMENT DECISIONS
Costs may be classified according to the information required by the management for making various
decisions. Such costs are classified as follows:
11,1 MARGINAL COST

According to CAS-I, Marginal Cost is the aggregate of variable costs, i.e. prime cost plus variable
overhead. Marginal Cost is used in Marginal Costing System.
11.2 OPPORTUNITYCOST
Opportunity Cost, according to CA$l by ICWA, is the value of the alternatives foregone by adopting
a particular strategy or employing resources in specific manner. It is the return expected from an
investment other than the present one. The opportunity cost is considered for selection ofa project
or an investment option. Example : A machine is currently being used to produce product P. It can
also be used to produce product Q which can fetch { 60,000 profit. Then the opportunity cost of
using the machine is { 60,000.
11.3 REPLACEMENT COST

Replacement Cost, according to CAS-I by ICWA, is the cost ofan asset in the current market for the
purpose of replacement. Replacement cost is generally used for determining the optimum time of
replacement of an equipment or machine in consideration of maintenance cost of the existing one
and its productive capacity.
11.4 IMPUTED COST

According to CAS-I by ICWA, Imputed Cost is hypothetical or notional cost not involving any
actual cash payment computed only for the purpose of decision - making. Interest on owner's capital
or rent on own propertyare examples ofimputed costs. In manyaspects, these are similar to opporhrnity
costs. These are used for the purpose of decision making by the management, e.g. in evaluation of
projects, expansion plans and so on.
11.5 SUNKCOST
According to CAS-I by ICWA, Sunk Cost is historical cost which is incurred i.e. 'sunk' in the past,
and not relevant to the decision required to be made by the management at present. Thus, the written
down value of machinery is a sunk cost which is not relevant for deciding whether to buy a new
machinery for expansion or not. Sunk costs are not affected by increase or decrease in the volume of
output.
11.6 CONTROLLABLE COST

Controllable Cost is the cost which cannot be influenced or controlled bythe concerned cost centre
or responsibility centre. Thus, overhead expenses incurred by Head Office, but shared by all branches,
cannot be controlled by individual branches. The share ofsuch Head Offrce Expenses borne by each
branch is an Uncontrollable cost. A cost may be uncontrollable for a particular cost centre, but may
be controllable for another cost centre or the management as a whole. For example, Rent for fa0tory
may be beyond control for the production department but can be controlled by the administration
department by negotiations etc. A cost which is uncontrollable in the immediate future may become
Introduction to CostAccounting 13
controliable over a long period. Thus controllable cost is a relative term depending upon the
circumstances.
11.7 RELEVANT COST

According to CAS-I by ICWA, Relevant Cost are costs relevant for a specific purpose or situation.
In the context ofdecision making relating to a specific issue, onlythose costs which are relevant are
considered. A particular cost item may be relevant in a decision making and may be irrelevant in
some other decision making situation. For example, present depreciated cost of machine is relevant
incase of decision of its sale but it is iirelevant in case of decision of its replacement.
11.8 NORMAL COST

According to CAS-I by ICWA, Normal Cost is a cost that is normally incurred at a given level of
output in the conditions in which that level ofoutput is achieved. Normal cost includes those items
of cost which occur in the normal situation of production process or in the normal environment of
the business. The normal idle time is to be included in the ascertainment of normal cost.
11.9 ABNORMAL COST

According to CAS-I by ICWA,Abnormal Cost is an unusual or atlpical cost whose occurrence is
usually irregular and unexpected and due to some abnormal situation ofthe production. Abnormal
cost arises due to idle time for some healybreak down or abnormal process loss. It is not considered
in the cost ofproduction for decision making. It is charged to profit & loss account.
11.10 AVOIDABLE COSTS

According to CAS-I by ICWA, Avoidable Costs are those costs which under given conditions of
performance effrciency should not have been incurfed. Avoidable Costs are logically associated with
some activity or situation and are ascertained by the difference of actual cost with the happening of
the situation and the normal cost. When spoilage occurs in manufacture in excess of normal limit,
the resulting cost of spoilage is avoidable cost. Cost variances which are controllable may be termed
as avoidable cost.
11.11 UNAVOIDABLE COSTS

According to CAS-I by ICWA, Unavoidable Costs are inescapable costs which are essentially to be
incurred, within the limits or norms provided for. It is fixed in nature and inescapable.
11,12 DIFFERENTIAL COST

According to CAS-I by ICWA, Differential Cost is the change in cost due to change in activity from
one level to another. This technique is used in export pricing, new products and pricing goods sought
to be promoted in new markets. The algebraic difference between the relevant cost at two levels of
activities is the differential cost. When the level ofactivityis increased, the differential cost is known
as incremental cost and when the level of activity is decreased, the decrease in cost is known as
decremental cost.
Output Unit Differential Unit TotalCost Differential Differential

f, in Lakhs Cost Cost per unit
in Lakhs ({ in Lakhs) (7 in Lakhs) 7
(a) 1.00 30.00
(b) 1.20 0.20 (b) - (a) 35.00 (+)5.00 (+)25.00
(c) 0.80 0.20 (a) - (c) 26.00 (-) 4.00 (-)20.00
(+) lncremental Cost; (-) Decremental Cost

14 Cost Accounting (TY.B.Com. : SEM-V)
12. CLASSIFICATION ON BASIS OF ELEMENTS
CAS-I lays down the following guidelines in this regard.

(1) Costs should be gathered together in their natural groupings such as material, labour and other
expenses. Items of costs differ on the basis oftheir nature. The elements of cost can be classified
in the following three categories : (i) Material (ii) Labour (iii) Expenses.
EXHIBIT 4 : COST CLASSIFICATION BY NATURE
COST CLASSIFICATION BY NATURE
Material Labour Expenses
(2) Material Cost is the cost of material of any nature used for the purpose of production of a
product or a service. ICMA defines material cost as the cost of commodities supplied to an
undertaking. Material cost includescost ofprocurement, freight inwards, taxes & duties, insurance
etc. directly attributable to the acquisition. Trade discounts, rebates, duty drawbacks, refunds on
account of modvat, cenvat, sales tax and other similar items are deducted in determining the
costs of material.
(3) Labour Cost means the payment made to the employees, permanent or temporary for their
services. ICMA defines labour cost as the cost of remuneration of the employees of the
undertaking. Labour cost includes salaries and wages paid to permanent employees, temporary
employees and also to employees of the contractor. Here, salaries & wages include all fringe
benefits like Provident Fund contribution, gratuity, ESI, overtime,.incentives, bonus, ex-gratia,
leave encashment, wages for holidays and idle time etc.
(4) Expenses are costs other than material cost or labour cost which are involved in an activity.
Expenditure on account ofutilities, payment for bought out services, job processing charges etc.
can be termed as expenses. ICMA defines expenses as the cost of service provided to an
undertaking and the notional cost ofthe use ofowned assets.
ON BASIS OF COST CENTRE/UNIT
13.1 MEANING
According to CAS-I, classification ofcosts, by relation to cost centre, should be on the basis of
method ofallocation to a cost unit. Ifan expenditure can be allocated to a cost centre or a cost unit
then it is called direct; otherwise it will be called indirect. According to this criteria for classification,
material cost is divided into direct material cost and indirect material cost; labour cost into direct
labour cost and indirect labour cost; and expenses into direct expenses and indirect expenses. Indirect
cost is also known as overhead.
13.2 COST CENTRE

CAS-I by ICWA defines Cost Centre as any unit of,an entity selected with a view of accumulating
all costs under that unit. It may be a product, a service, division, department, section, a group of
machineries, a group ofemployees, or a combination of several units. This maybe a budget centre.
Cost object, is defined as - an activity, contract, cost centre, customer, product, process, project,
service or any other object for which costs are ascertained.
According to CAS-I, Cost Centres may be of different tlpes e.g. Personal, Impersonal, Production
or Service.
(1) Personal Cost Centre consists of a person or a group of persons e.g. Production Manager,
Finance Manager etc.
Introdaction to CostAccounti4g 15
(2) Impersonal Cost Centre consists of a location or an equipment (or a group of these) e.g.
Production Centres like Machine Shop, Welding Shop, Assembly Shops; or Service Centres like
Stores, Transport, Tool Room, etc.
(3) Production Cost Centre is that engaged in production e.g. Machine Shop, Welding Shop,
Assembly Shop etc.
(4) Service Cost Centre is for rendering service to production cost centre; e.g. Power House,
Maintenance, Stores, Purchase Offrce etc.
13.3 COST UNIT

CAS-I by ICWA defines cost unit as a form of measurement of volume of production or service.
This unit is generally adopted on the basis ofconvenience and practice in the industry concerned.
Examples are : Power-MW; Cement-MT; Automobiles-No. etc.
13.4 PRIME/DIRECT COSTS

According to CAS-I, Direct Cost has three components - direct material cost, direct labour cost and
direct expenses. Sum ofall direct costs is calledprime cost.
(1) Direct Material Cost, according to CAS-I by the ICWA, is the cost of material which can be
directly allocated to a cost centre or a cost object in an economically feasible way.
Raw materials consumed for production for a product or service which are identifiable in the
product or service form the direct material cost. Direct Material cost includes cost ofprocurement,
freight inwards, taxes & duties, insurance etc. directly attributable to the acquiiition. Trade
discounts, rebates, dutydrawbacks, refunds on account ofmodvat, cenvat, sales tax and other
similar items are deducted in determining the costs of direct material.
(2) Direct Labour Cost, according to CAS-I by the ICWA, is the cost of wages of those workers
who are readily identified or linked with a cost centre or cost object. Here, the wages of the
workers include all fringe benefits like Provident Fund contribution, gratuity, ESI, overtime,
incentives, bonus, ex-gratia, leave encashment, wages for holidays and idle time etc. for the
purpose ofcalculation ofdirect labour cost.
(3) Direct Expenses, according to CAS-I by the ICWA, are the expenses other than dirpct material
or direct labour which can be identified or linked with the cost centre or cost object. Examples of
direct expenses are : Expenses for special moulds required in a particular cost centre; Hiring
charges for tools and equipments for a cost centre; Royalties in connection to a product; Job
processing charges etc.
Prime Cost means the total Direct Costs of a cost centre or cost unit. Thus,
Prime Cost = Direct Material + Direct Labour + Direct Expenses
13.5 OVERHEADS/INDIRECT COSTS

Overheads means the aggregate of indirect costs such as indirect material cost, indirect wages and
indirect expenses (ICMA). Indirect Costs denote the cost of Material, Labour or Expenses which
cannot be directly identified with or attributed to a cost centre or a cost unit. However, these are
apportioned to cost centres or cost units on a suitable basis. Total Indirect Costs are made up of
Indirect Material Costs + Indirect Labour Costs + Indirect Expenses.
(l) Indirect Material Cost, according to CAS-I by the ICWA, is the cost of material which cannot
be directly allocated to a particular cost centre or cost object. Materials which are of small value
and cannot be identified in or allocated to a product / service are classified as indirect materials.
Examples : Consumable spares and parts; Lubricants etc.
(2) Indirect Labour Cost, according to CAS-I by the ICWA, is the wages of the employees which
are not directly allocable to a particulars cost centre. Examples of indirect labour : Salaries of
staffin the administration and accounts department; Salaries of security staffetc.
(3) Indirect Expenses Cost, according to CAS-I. by the ICWA. are the expenses other than of the
nature of material or labour that cannot be directly allocable to a particular cost centre. Examples:
Insurance; Taxes and Duties.
t6 CostAccounting(T.Y.B.Com.: SEM'V)
Overheads mean the total Indirect Costs apportioned to or absorbed by all cost centres or cost units.
Thus,
Overheads = Indirect Material + Indirect Labour + Indirect Expenses
13.6 TOTALCOST
The Total Cost of a Cost Centre or Cost Unit is thus made up of Direct Cost + Indirect Costs.
Total Cost: Direct Cost + Indirect Cost, or : Prime Cost + Overheads.
14. CLASSIFICATION ON BASIS OF
As per CAS-I, Costs should be classified according to the major functions for which the elements
are used into the following major functions: (l) Production, (2) Administration,
(3) Selling, (4) Distribution, and (5) Research & Development.
EXHIBIT 5: COST CLASSIFICATION BY FUNCTION
COST CLASSIFICATION BY FUNCTION
Production Administration Selling Distribution R&D
(1) Production Cost is the cost of all items involved in the production of a product or service. It
includes all direct costs and all'indirect costs related to the production. Production overhead is
the indirect costs involved in the production process. Production overhead is also termed as
factoryoverhead or manufacturing overhead. Examples ofProduction overhead : (l) Salaries of
stafffor production planning, technical supervision, factory administration etc.; (2) Normal idle
time cost; (3) Eipenses for stores management; (4) Security expenses in the factory; (5) Labour
welfare expenses; (6) Dispensaryand canteen expenses; (7) Depreciation ofplant and machineries;
(8) Repair and maintenance of factory building and plant & machineries; (9) Insurance; ( lO)
Quality control etc.
(2) Administration Costs are expenses incurred for general management of an organization. These
are in the nature of indirect costs and are also termed as administrative overhead. Examples of
items to be included in Administrative overhead : (l) Salaries of administrative and accounts
statr; (2) General office expenses like rent, lighting, rates and taxes, telephon'e, stationery, postage
etc.; (3) Bank charges; (4) Audit fees; (5) Legal expenses; (6) Depreciation & repair and
maintenance of office building etc.
(3) Selling Costs are indirect costs related to selling ofproducts or services and include all indirect
costs in sales management for the organization. Selling Costs include all costs relating to regular
sales and sales promotion activities. Examples of expenses which are included in selling cost are:
(1) Salaries, commission and travelling expenses for sales personnel; (2) Advertisement cost;
(3) Legal expenses for debt realization; (4) Market research cost; (5) Royalty on sale; (6) After
sales service cost, etc.
(4) Distribution Costs are the costs incurred in handling a product from thetime it is completed in
the works until it reaches the ultimate consumer. Distribution costs are the costs incurred for
distribution of product to customers. Examples of distribution costs : (l) Transportation cost;
(2) Cost of warehousing salable products; (3) Cost of deliveripg the products to customers etc.
(5) Research & Development Costs are the costs for undertaking research to improve quality of a
present product or improve process ofmanufacture, develop a new product, market research,
etc. and commercialization thereof. Research cosls include cost of finding new uses for known
products, solving technical problems in manufacture, etc. Development costs include costs for
commercialization/implementation of research fi ndings.
Introduction to Cost Accounting t7
Notes :
(l) Primary packaging cosl'is included in production cost whereas secondary packaging cost is
distribution cost.
(2) In exceptional cases, for example in case of heavy industries, equipment supply, installation cost
at delivery sitefor heavy equipments which involves assembling ofparts, testing etc. is included
in production cost but not distribution cost. For example installation cost ofa gas turbine at plant
site is included in the cost ofproduction ofgas turbine.
EXHIBIT 6: COST STRUCTURE
DIRECT COST INDTRECT COST (OVERHEADS)
DIRECT DIHECT DIRECT

ADMIN. R&D SELLING &
OVER- OVER- DISTRIBUTIO
MATERIAL LABOUR EXPENSES OVERHEADS
HEADS HEADS OVERHEADS
PBIME COST
WORKS COST
COST OF PRODUCTION
COST OF SALES
PROFIT OH LOSS
SALES
Note : Opening and closing stocks of raw materials, work-in-process and finished goods need to be
adjusted suitably.
lllustration 1 :
Classify the following items of costs using different classification criteria :

(a) Repairs to machinery (b) Factory rent (c) Freight inward (d) Directors fees (e) Direct wages
(f) Free samples (g) Office stationery
. Solution :
Element Function Traceability Behaviour

Repairs to Machinery Expense Production lndirect Semi{ixed
Factory Rent Expense Production lndirect Fixed
Freight lnward Irlaterial Production Direct Variable
Directors Fees Expense Administrative lndirect Fixed
Direct Wages Labour Production Direct Variable
Free Samples Material Selling lndirect Fixed
Office Expense Administrative lndirect Fixed
18 Cost Accounting (7.Y, B, Com, : SEM-V)
15. CODING SYSTEMS
15.1 CODES
The Chartered Institute of Management Accountants (CIMA) has defined a code as "a system of
symbols designed to be applied to a classified set of items to give a brief account reference, facilitating
entry collation and analysis." Thus, cost classification forms the basis of any cost coding. It helps to
indicate the characteristic of anycost through a short symbol.
15.2 COMPOSITE CODES

Each digit in a composite code of, say 6 digits, may indicate nature of expenditure and the cost
centre. For example a particular cost is given a composite code by a car manufacturing company-
257.830, in which
. The first number 2 refers to bought-out component
. The second number 5 indicates that it is a mechanical component.
a The third number 7 refers to tpe of mechanical component i.e. Gears.
The last three numbers provide details of the cost centre e.g. the first number (8) provides details of
the location ofthe plant (Gujarat), the second number (3) gives detail of the department (assembly)
and the third number (0) indicates that the cost is direct.
15.3 ADVANTAGES OFACODING SYSTEM

The following are some of the advantages ofa well-designed coding system:
l. Saves time - Since the code is, most of the tirnes, briefer than a description, it saves time when
systems are worked upon manually and in case the system is computerised it reduces the data
storage capacity. The illustration above demonstrates this advantage very clearly.
2. Reduce ambiguity -.Acode helps in reducing ambiguity. In case two professionals understand the
same item differently a code will help them objectively.
3 . Facilitate EDP - Unlike detailed descriptions, a code facilitates data processing in computerised
systems.
,.5.4 REQUIREMENTS FORAN EFFICIENT CODING SYSTEM

l. UniqueNumbering-Everynumberusedinthecodeshouldbeuniqueandcertain,i.e.itshould
be easily identified from the structure of the code.
2. Scalabiliry - It should be possible to identifu a code for every item and the coding system should
be capable of expanding to include new items.
3. Brief - The code should be brief and meaningful.
4. Central Control - The maintenance ofthe coding sptem should be centrally controlled, It should
not be possible for individuals to independently add new codes to the existing coding system.
5. Same length - Codification systems should be of the same length. This makes errors easier to
spot and it assists computerised data processing.
16. OF $EMI.VARIABLE COSTS
Semi-variable overheats are made oftwo elements - a fixed element and a variable element. The two
elements need to be separated (segregated) first. Then, the fixed element is added to Fixed Costs and
the variable element is added to the Variable Costs. Basically, the method of analysis and separation
of fixed and variable costs consists in finding out first, the amount of fixed cost in an item of
expenditure and then determining its variabilitywith output. There are several methods available for
the purpose, a few of which are discussed below.
Int rod uc tion to C o st Ac co unt ing t9
16.1 METHOD OF SIMULTANEOUS EQUATIONS
The equations for relating costs to volume isy: mx * c, where y, : total cost, 1n: variable cost per
unit ofoutput, x: volume ofoutput and c: fixed cost. For the purpose ofseparating fixed and
variable expenses, the expenditure against an item is determined at various levels ofoutput and pairs
of values of x and y are fitted in the above formula in order to compute the values of m and c. The
simultaneous equations method is simple and easy, but it has the following limitations'.
(l) It assumes a liner relationship between output and variable overhead costs, viz,that for each unit
of output the same amount ofvariable overhead cost is incurred. In practice, this my not be so.
(2) Different rgsult are obtained by taking different sets of data for volume and overhead cost. It
cannot be definitely said that the particular data selected will give the most accurate result.
lllustration 2 : (Method of Simultaneous Equation)
From the following details, separate the fixed and variable costs by using the method of simultaneous
equations:
Capacity (%) 80 100

Volume (Units) 200 250
Semi-variable expenses (Maintenance of Plant) < 1,300 < 1,375
Solution :
Let Volume (Units) = x

Let Semi-variable expenses (Mainten4nce of Plant) = y
Substituting the two sets of values of x and y in the equation, y = mx + c, we have,
1,300=(mx200)+c
1,375 = (m x 250)+ c
Now solving the equations, we get the following values
Fixed cost, c = ( 1,000.
Variable cost per unit, m = ( 1.50.
Cost formula for separation of Semi-variable expenses is : fixed < 1,000 per period + Variable
{ 1.50 per unit.
16.2 HIGHAND LOW OR RANGE METHOD
High and Low Method also known as Range Method is similar to the method of simultaneous
equations. The difference between the highest and lowest volumes over a particular range and the
difference ofthe corresponding costs are worked out and the variable and fixed costs are separated.
In addition to the limitatioris ofthe method of simultaneous equations discussed above, the high and
low points method has the following drawbacks :
(l) Ifthehigh or low points are at the extreme, the results obtained are not likelyto accurate.
(2) Ifhigh or low levels ofactivities occur for very short periods only, the corresponding data for
overhead costs incurred are not trulyrepresentative.
Under the High and Low Method, the following steps aretaken for separation of semi-variable costs
into fixed and variable elements:
(l) Calculate the highest and lowest volumes of output and the corresponding relevant cost figures.
(2) Calculate the difference of cost between volumes i.e. incremental cost for incremental output.
(3) Calculate the variablecost per unit which is : the incremental cost divided bythe incremental
output.
(4) Calculate the Total variable cost for any level ofoutput [Variable cost per unit x Output].
(5) Calculate the Fixed costs which are equal to the total cost ofthe volume of output less the total
variable cost at the level ofoutput.
lllustration 3 : (High & Low or Range Method)

Work out the variable element in lllustration 2 above by the High & Low Method.
Solution :
Difference in total cost

Variable Cost per unit (m) =
Difference in volume of production (Xz - Xr)
_ 1,375 - 1,300 ]1
= = tr.so
250 - 200 50
FixedCost(c)=TotatCost-VariableCost=1,300-(200x'1.50)=1,300-300={1,000.
Note : This is the method normally used in solving an examination problem.
16.3 SCATTER.GRAPH METHOD

Scatter-graph Method involves preparing a graph, known as a scatter-graph. It is prepared by plotting
several observed levels of cost and their corresponding levels of activity. In this method, the semi-
variable expenses at a number oflevels ofoutput are plotted on a graph, the x-axis ofwhich represents
the volume (expressed in terms of percentage activity, labour hours, units of products, or machine
hours) and y-axis, the amount of expenditure. A straight line, known as the line ofregression or the
liqe of best fit, is drawn between the points plotted by visual inspection in such a manner that there
are equal number ofpoints on both sides ofthe line and as far as practicable, pairs ofpoints on either
side are equidistant from the line. Points falling far beyond the line are erratic and are not considered
for the purpose. Fixed costs are given where the fitted curve cuts the vertical axis. The variable cost
element is found by dividing the balance of the cost at any volume by the volume itself. The point at
which the line ofbest fit touches the ordinate indicates fixed component of the cost. The slope ofthe
line indicated the degree of variability of costs. If the Regression Line is drawn accurately, this
method gives fairly acceptable results.
EXHIBIT 7 : SCATTER GRAPH
F{ x
et Beet
X
o
U> U\$e x
o Variable
O
x X Element
in
P
Fixed
Element
Activity Level
16.4 METHOD OF AVERAGES

Instead ofworking out the cost mathematically, or by fitting in the best line by inspection an in the
scatter diagram, the cost line is drawn on a graph by taking the averages ofselected groups. The
above two points when plotted on a graph represent the cost line from which the fixed and variable
costs may be determined.
16.5 LEAST SQUARES OR SIMPLE LINEAR REGRESSION ANALYSIS METHOD

In scatter-graph method, the line of best fit is drawn by visual inspection; in Least square method,
this line is drawn by a more accurate mathematical method, known as Regression Anallais. Regression
is the measure ofthe average relationship between one or more variable in terms ofthe original units
of the data. Regression Analysis means the use of Regression to estimate the value of one variable
given the value of another. Semi-variable costs are separated using the simple linear regression
analysis. When two variables are plotted on scatter diagram, line of best fit which passes through the
potted point, is called regression line.This regression line is based on equation called regression
equation which gives the beSt estimate of one variable when the other is exactly known or given.
Introduction to Cost Accounting 2l
This method is also known as method of least squares. Though the calculation are complex, this is
the most accurate method.
17. COST ACCOUNTING STANDARDS

Cost Accounting Standard Board (CASB) was set up bythe Institute ofCost and Works Accountants
of India (ICWAD to develop Cost Accounting Standards on important issues/topics relating to Cost
and Management Accounting. These standards aim to (i) assist the Cost Accountants in preparation
ofuniform cost statements; (ii) assist the management to follow the standard cost accounting practices;
and (ii) help Indian industry and the Government towards better cost management. Specified Cost
Accounting Standards shall be mandatorywith effect from period commencing on or after lstApril
2010 for being applied for the preparation and certification of General Purpose Cost Accounting
Statements especially for Cost Audits under the Companies Act. The objective and use of each
standard is summed up in briefin Exhibit below and the provisions ofthe standards are explained at
appropriate places in the concerned chapters.
EXHIBIT 8 : COST ACCOUNTING STANDARDS
CAS No. Tiile Objective

CAS.l Classification of Cost For preparation of Cost Statements
CAS-2 Capacity Determination For determination of capacity
CAS-3 Overheads For Collection, Allocation, Apportionment
and Absorption of overheads.
CAS.4 Cost of Production for To determine the assessable value of
Captive Consumption excisable goods used for captive
consumption.
CAS.5 Average (equalized) To determine averaged/equalized
Cost of Transpoftation transportation cost.
CAS.6 fi4aterialCost To bring uniformity and consistency in the
principles and methods of determining the
material cost with reasonable accuracy in an
economically feasible manner.
CAS.7 Employee Cost To bring uniformity and consistency in the
Employee cost with reasonable accuracy.
CAS.8 Cost of Utilities To bring uniformity and consistency in the
Cost of Utilities with reasonable accuracy.
CAS-9 Packing MaterialCost To bring uniformity and consistency in the
Packing Material Cost with reasonable
accuracy.
cAS-l0 Direct Expenses To bring unitormity and consistency in the
Direct Expenses with reasonable accuraqy
cAS-11 Administrative To bring uniformity and consistency in the
Overheads principles and methods of determining the
Administrative Overheads with reasonable
accuracy.
cAS-l2 Repairs And To bring uniformity and consistency in the
Maintenance Cost principles and methods of determining the
Repairs and Maintenance Cost with
reasonable accuracy.
?7 Cost Accounting (7.Y. B. Com, : SEM-V)
cAS-13 Cost ol Service To bring uniformity and consistency in the

Cost Centre principles and methods of determining the
Cost of Service Cost Centre with reasonable
accuracy.
cAS - 14 Pollution Control Costs To bring uniformity and consistency in the
Pollution Control cost with reasonable
accuracy in an economically feasible
manner.
cAS - 15 Selling and Distribution To bring uniformity and consistency in the
Costs principles and methods of determining the
S & D cost with reasonable accuracy in an
cAS - 16 Depreciation and To bring uniformity and consistency in the
Amoftization principles and methods of determining the
Depreciation and Amortization cost with
reasonable accuracy in an economically
feasible manner.
cAS - 17 lnterest and Financing To bring uniformity and consistency in the
Charges principles and methods of determining the
lnterest and Financing cost with reasonable
accuracy in an economically feasible manner.
cAs - 18 Research and To bring uniformity and consistency in the
Development Costs principles and methods of determining the
Research and Development cost with
reasonable accuracy in an economically
feasible manner.
cAS.- 19 Joint Costs To bring uniformity and consistency in the
Joint cost witli reasonable accuracy in an
cAs - 20 Royalty and Technical To bring uniformity and consistency in the
Know-how Fee principles and methods of determining the
Royalty and Technical know-how Fee cost
with reasonable accuracy in an economically
feasible manner.
cAs - 21 Quality Control To bring uniformity and consistency in the
Quality Control cost with reasonable
accuracy in an economically feasible manner.
cAS - 22 Manufacturing Cost To bring uniformity and consistency in the
Manufacturing cost with reasonable accuracy
in an economically feasible manner.
cAS - 23 Overburden Removal To bring uniformity and consistency in the
Cost principles and methods of determining and
assigning Overburden Removal Cost with
reasonable accuracy.
cAs - 24 Treatment of Revenue To bring uniformity and consistency in the
in Cost Statements principles and methods for treatment of
revenue in cost statements with reasonable
accuracy.
Int roduc tion to C o st Ac co unt ing 23
. EXERCISES
OUTLINE
No. Topic Page
18. Theory Questions [15 Marks] 23
18.1 Descriptive Questions [7 or B Marks] 23
18.2 Short Notes [5 Marks] 24
10 Obiective Questions 25
19.1 Multiple Choice Questions 25
19.2 Fill in the Blanks 29
19.3 Match the Following Columns 30
19.4 State Whether True or False 32
19.5 Answer in Brief (lnternalTests) 33
'19,6 Check Your Answers 35
18. THEORY QUE$TIONS
18.1' DESCRTPTTVE QUESTTONS [7 OR I MARKSI

1. Define and briefly explain the following terms- (a) Cost (b) Costing (c) Cost Accounting
Para ll
2. Explain in brief the objectives of cost accounting. 'il:;.', Para 2l
3. Give the advantages of Cost Accounting. [Ans.: Para 3l
,
4. What are the objections raised against Cost Accounting? Are the objections valid?
[Ans.: Para 4]
5. Evaluate the merits and demerits of Cost Accounting? [Ans.: Para 3, 4]
6. Explain in brief Necessity of Cost Accounting. tAns.: Para 5l
7. Distinguish between Financial Accounting and Cost Acgounting. [Ans.: Para 6]
8. What are the essentials of a sound costing system? [Ans.: Para 7]
9. Explain in brief Classification of costs. [Ans.: Para 8.1]
10. Explain in brief Classification of cost by variability. [Ans.: Para 9]
11. Explain in brief Cost Classification by behaviour. [Ans.: Para 9]
12.What do you understand by variable cost, fixed cost and semi-variable cost?
[Ans.: Para 9]
13. "Fixed Overheads per unit are variable". Comment. [Ans.: Para 9]
14.'Variable cost per unit is fixed'. Comment [Ans.: Para 9]
15. Distinguish between Fixed and Variable Costs. [Ans.: Para 9]
16. Explain in brief classification of cost on Time-Basis. [Ans.: Para 10]
17. Describe how costs are classilied for the purpose of management. [Ans.: Para 11]
18. Discuss in detail the elements of cost. [Ans.: Para 12]
19. Explain in brief - "Operating costs are generally product costs and not period costs.
[Ans.: Para 13]
20. Explain in brief Prime Cost. [Ans.: Para 13.4)
21 . Explain the meaning of Direct and lndirect Costs. [Ans.: Para 13]
22.Explain in brief : (1) Production Cost (2) Administrative Cost (3) Selling Cost (4) Distribution Cost
ti:i;,:,';2"'1,
23.Exprain cost structure.
24. Discuss - classification of costs on the basis of functions. [Ans.: Para 14]
25. Explain in brief Coding System. [Ans.: Para 15]
24 Cost Accounting (T.Y.B.Com. : SEM-V)
26. Explain in briel Advantages of a Coding System. [Ans.: Para 15.3]

27.Whal are the requirements for an efficient coding system ? [Ans.: Para 15.4]
28. Explain in detail - Segregation of semi-variable costs. [Ans.: Para 16]
2g.Explain in brief :(1) tvlethod of Simultaneous Equations (2) High and Low Method (3) Scatter-
Graph lr/ethod (4) Method of Averages [Ans.: Para 16]
30. Explain in brief : Cost Accounting Standards. [Ans.: Para 17]
31 . Enumerate the mandatory Cost Accounting Standards. [Ans.: Exhibit 8]
18.2 SHORT NOTES [5 MARKSI
Write a Short Note on -
1. Basic Objectives of Cost Accounting [Ans.: Para 2.1]
2. lmportance of Cost Accounting [Ans.: Para 3]
3. Advantages of Cost. Accounting [Ans.: Para 3]
4. Utility of Cost Accounting to the Management [Ans.: Para 3.1]
5. Utility of Cost Accounting to the Owners [Ans.: Para 3.1]
6. Utility of Cost Accounting to the Workers [Ans.: Para 3.2]
7. Utility of Cost Accounting to the Government [Ans.: Para 3.3]
8. Objections against Cost Accounting [Ans.: Para 4]
9. Criticisms against Cost Accounting [Ans.: Para 4]
10. Need for Cost Accounting [Ans.: Para 5]
1't. Essentials of Good Costing System [Ans.: Para 7]
12. Classification of Costs on Basis of Behaviour [Ans.: Para 9]
13. Classification of Costs on Basis ot Time [Ans.: Para 10]
14. Classilication of Costs on Basis of Elements [Ans.: Para 12]
15. Classification of Costs on Basis of Cost Centre [Ans.: Para 13]
16. Classification of Costs on Basis of Functions [Ans.: Para 14]
17. Fixed Costs [Ans.: Para 9.1]
lS.Variable Gosts [Ans.: Para 9.2]
1 9. Semi-variable Costs [Ans.: Para 9.3]
20. Historical Costs [Ans.: Para 10.1]
21 . Pre-determined Costs [Ans.: Para 10.2]
22. Marginal Cost [Ans.: Para 11.1]
?3. Opportunity Cost [Ans.: Para 11.2]
24. Replacement Cost [Ans.: Para 11.3]
25.lmputed Cost [Ans.: Para 11.4]
26. Sunk Cost [Ans.: Para 11.5]
2T.Controllable Cost [Ans.: Para 11.6]
28. Relevant Cost [Ans.: Para 11.7]
29. Normal Cost [Ans.: Para 11.8]
30. Abnormal Cost [Ans.: Para 11.9]
31 . Avoidable Costs [Ans.: Para 11.10]
32. Unavoidable Costs [Ans.: Para 11.11]
33. Differential Cost [Ans.: Para 11.12]
34. Cost Centre [Ans.: Para 13.2]
35. Cost Unit [Ans.: Para 13.3]
36. Direct Costs [Ans.: Para 13.4]
37. lndirect Costs [Ans.: Para 13.5]
SS.Composite Codes [Ans.: Para 15.2]
39.Advantages of a Coding System [Ans.: Para 15.3]
40. F{equirements for an Effective Coding System [Ans.: Para 15.4]
41 . Segregation of Semi-variable Costs [Ans.: Para l6]
42. High and Low Method [Ans.: Para 16.2]
43. Least Squares Method [Ans.: Para 16.5]
Int rod uc tion to C o st Ac c o unti ng 25
OBJECTIVE QUESTIONS
19.1 MULTIPLE CHOICE QUESTIONS
A. Conceptual
'l . Which of the following statements is/are true ?
(i) The Financial Accounts do not indicate the profit or loss made on each contract separately.
(ii) Financial Accounts do not show the profit or loss made by each process, division or branch
separately.
(iii) Financial Accounting is based on past records.
(a)only (i) (b) Only (ii)
(c) Only (iii) (d)All
2. Which of the following statements is false ?
(a) The limitations of Financial Accounting have led to the origin and evolution of Cost Accounting
(b) Financial Accounts fail to give a product-wise break-up of profit or loss
. (c) Financial Accounts help to judge the efficiency or productivity of the concern
(d) Cost Accounting Techniques help the management in making decisions or planning for future
3. Cost accounting is directed toward the needs of
(a) Government (b) External users
(c) lnternal users (d) Shareholders
4. Which of the following is not a function of Cost Accounting ?
(a) Cost ascertainment (b) Planning and control
(c) Decision-making (d) External reporting
5. Cost information lacilitates many important decisions except
(a) lntroduction of a product (b) Whether to make or buy
(c) Rate of dividend (d) Exploration of an additional market
6. Measurement, in monetary terms, of the amount of resources used for the purpose of production
of goods or rendering services is known as
(a) Revenue expenditure (b) Capital expenditure
(c) Cost (d) None of the above
7. Process of ascertainment of costs is known as
(a) Costing (b) Cost reporting
(c) Cost control (d) None of the above
8. The guidance and regulation by executive action of the costs of operating an undeftaking is
known as
(a) Operating costing (b) Cost reduction
(c) Cost control (d) None ofthe above
9. Cost Accounting covers
(a) the preparation of statistical data
(b) the application of cost control methods
(c) the ascertainment of the profitability of activities carried out or planned
(d) all the above
10.Which of the following statements is true ?
(a) The word "cost" has the same meaning in all situations in which it is used
(b) Different cost concepts and classifications are used for different purposes
(c) All organizations incur the same types of costs
(d) Costs incurred in one year are always useful in the following yea(s)
11. Cost behavior refers to
(a) how costs react to a change in the level of activity
(b) whether a cost is incurred in a manufacturing, trading, or service company
(c) classifying costs as either product or period costs
(d) whether a particular expense has been incurred honestly
26 Cost Accounting (7.Y. B. Com. : SEM-I)
12. An example of fixed cost is :
(a) Materials consumed (b) Depreciation
(c) Factory power (d) Packing material
13. A cost per unit which increases or decreases when volume of output increases or decreases is
known as
(a) Fixed cost (b) Variable cost
(c) Semi-variable cost (d) None of the above
14. Which of the following would not be considered a fixed cost ?
(a) Rent (b) Depreciation
(c) Cost of bottles used in the production of soft drinks
(d) Property taxes
15. An example of variable cost is
(a) Property taxes (b) lnterest on capital
(c) Direct material cost (d) Depreciation of machinery
16. Variable cost per unit
(a) varies when output varies (b) remains constant
(c) increases when output increases (d) decreases when output decreases
17. Which of the following is not an example of a variable cost ?
(a) Straight-line depreciation on a machine expected to last five years
(b) Piece-rate wages paid to manufacturing workers
(c) Wood used to make furniture
(d) Commissions paid to sales personnel
'18.Which of the following costs will vary directly with the level of production?
(a) Total manufacturing costs (b) Total cost of sales
(c) Variable selling costs (d) Variable product costs
19. lf the level of activity increases,
(a) variable cost per unit and total fixed costs increase
(b) fixed cost per unit and total variable cost increase
(c) total cost will increase and lixed cost per unit will decrease
(d) variable cost per unit and total cost increase
20.When 10,000 units are produced, variable costs are ( 6 per unit. Therefore, when 20,000 units
are produced
(a) variable costs will total { 1,20,000
(b) variable costs will total ( 60,000
(c) variable unit costs will increase to { 12 per unit
(d) variable unit costs will decrease to < 3 per unit
21 . Costs which are ascertained after they have been incurred are known as
(a) lmputed costs (b) Sunk costs
(c) Historical costs (d) Opportunity costs
22.Prime costs plus variable overhead is known as
(a) Production cost (b) tvlarginalcosts
(c) Total cost (d) Cost of sales
23.When premises are owned, a charge in lieu of rent is
(a) an opportunity cost (b) an imputed cost
(c) a sunk cost (d) an avoidable cost
24. Costs which are not relevant for decision-making and are not affected by inctease or decrease
in volume are
(a) lmputed costs (b) Sunk costs
(c) Historical costs (d) Opportunity costs
25.When amount deposited in a bank is withdrawn forfinancing a project, the loss of interest on
bank deposit will be referred to as
(a) Sunk cost (b) Pre-production cost
(c) Opportunity cost (d) Replacement cost
26. The cost of a special device that is necessary if a special order is accepted is a
(a) Relevant cost (b) Sunk cost
(c) Historical cost (d) Opportunity cost
27. A cost centre is
(a) A unit of product or seruice in relation to which costs are ascedained
(b) An amount of expenditure attributable to an activity
(c) A production or service location, function, activity or item of equipment for which costs are
accumulated
(d) A centre for which an individual budget is drawn up
28. A cost unit is
(a) the cost per hour of operating a machine
(b) the cost per unit of electricity consumed
(c) a unit of product or service in relation to which costs are ascertained
(d) a measure of work output in a standard hour
29. Costs that can be easily traced to a specific department are called
(a) Direct costs (b) lndirect costs
(c) Overheads (d) Processing costs
30. The three major elements of product costs are all except
(a) Direct materials (b) Factory overhead
(c) Direct labour (d) lndirect labour
31. lndirect costs
(a) can be traced to a cost object (b) cannot be traced to a particular cost object
(c) are not important (d) are always variable costs
32.lndirect costs are known as
(a) Variable costs (b) Fixed costs
(c) Overheads (d) None ofthe above
33. A functional classification of costs would classify "depreciation on office equipment" as a
(a) Product cost (b) Administrative expense
(c) Selling expense (d) Variable cost
34. Direct material is a
(a) Manufacturing cost (b) Administration cost
(c) Selling and distribution cost (d) Any of the above
35.A particular cost is classified as being semi-variable. What is the efiect on the TOTAL COST if
activity increases by 20%?
(a) Stays the same (b) Decreases by less than 2O"/"
(c) lncreases by 2O% (d) lncreases by less lhan 20"/"
36. Costs that change in response to alternative courses of action are called
(a) Relevant costs (b) Differential costs
(c) Target costs (d) Sunk costs
37.A production worker paid salary of t 700 per month plus an extra { 5 for each unit produced
during the month. This labour cost is best described as
(a) A fixed cost (b) A variable cost
(c) A semi-variable cost (d) A step fixed cost
38. The functional classification of costs include the following except
(a) Prime cost (b) Production cost
(c) Administration cost (d) Marketing cost
39.Which of the following is not included in the administration cost ?
(a) Salaries of general office staff (b) Salaries of foremen
(c) Office supplies and expenses (d) Postage, stationary, telephone, etc.
40.You are given the cost and volume information below :
Volume Cost
l unit < 15
.10
units < 150
100 units < 1,500
28 Cost Accounting (TY.B. Com. : SEM-V)
What type of a cost is given ?

(a) Fixed cost (b) Variable cost
(c) Step cost (d) Mixed cost
41 . Which ol the following statements regarding graphs of fixed and variable costs is true ?
(a) Variable costs can be represented by a straight line where costs are the same for each data
point
(b) Fixed costs can be represented by a straight line starting at the origin and continuing through
each data point
(c) Fixed costs are zero when production is equal to zero
(d) Variable costs are zero when production is equal to zero
B. Numerical
42.From the following details, compute cost of goods manufactured : Cost of goods sold ( 2,00,000;
Opening stock of finished goods ( 50,000; Closing stock of finished goods { 1 ,00,000 and Closing
stock of work-in-progress ( 'l 0,000.
(a) { 2,00,000 (b) < 2,s0,000
(c) ( 2,40,000 (d) < 3,00,000
43.The opening stock of finished goods is < 50,000;closing stock of finished goods is ? 1,00,000
and the cost of goods manufactured is ( 2,00,000. What is cost of goods sold ?
(a) ( 2,00,000 (b) < 2,50,000
(c) { 1,00,000 (d) < 1,50,000
44.Vinayaka Ltd. furnishesthe following information fora period, pertaining to its product'T" :
Cost of production (for 11 ,000 units) < 44,000

Selling expenses (per unit) < 0.40
Sales (for 9,000 units) { 54,000
The profit per unit of the product was
(a) t 1.15 (b) < 1.20
(c) ( 2.60 (d) < 1.60
45. For product A of Shilpa Ltd., the prime cost is t 20 per unit, factory overheads are 20o/" of prime
cost and administration overheads are 25"h of Works cost. lf the company desires to earn a
profit of 25"/" on selling price, the selling price per unit of product A would be
(a) { a0 (b) < 33
(c) t e0 (d) t 30
46.M & Co. used in a particular year( 3,00,000 of direct materials. The year-end direct material
inventory was I 50,000 more than it was at the beginning of the year. Calculate direct materia!
purchases.
(a) ( 3,00,000 (b) < 2,50,000
(c) { 3,50,000 (d) { 4,00,000
47. Consider the following:
Raw material used < 1,40,000
Direct labour < 5,00,000
Total manulacturing overhead ( 6,00,000
Beginning work-in-progress < 15,000
What is the value of the closing work-in-progress?

(a) { 65,000 (b) < 35,000
(c) { 50,000 (d) { 70,000
48. R Company manufactures desks. The beginning balance of Raw Material lnventory was ( 4,500;
raw material purchases of ( 29,600 were made during the month. At month end, t 7,700 of raw
material was on hand. Raw material used during the month was
(a) { 26,400 (b) < 34,100
(c) t 37,300 (d) < 29,600
49. M Company manufactures tables. lf raw material used was < 8O,OOO and Raw Material lnventory
at the beginning and end of the period, respectively, was { 17,000 and { 2'l ,000, what was the
amount of raw material purchased?
t 76,000
(a) (b) < 1,18,000
(c) t 8a,000 (d) < 1,01,000
50. T Company manufactures computer stands. What is the opening stock of Finished Goods il
Cost of Goods Sold is { 1,07,000; the ending balance of Finished Goods lnventory is t 20,000;
and Cost of Goods Manufactured is t 50,000 less than Cost of Goods Sold?
(a) ( 70,000 (b) < 77,000
(c) ( 1,57,000 (d) < 1,27,000
51 . The following data relate to two output levels of a department :
Machine Hours 17,000 18,500
Overheads ({) 2,46,500 2,51,750
The variable overhead rate per hour is < 3.50. The amount of fixed overheads is
(a) { 5,250 (b) ? 59,500
(c) ( 1,87,000 (d) < 2,46,500
19.2 FILL IN THE BLANKS

1. is a measurement, in monetary terms, of the amount of resources used for the purpose
of production of goods or rendering services.
2. - means the process of ascertainment of costs.
3. isthe guidance and regulation by executive action of the costs of operating an undertaking.
4. - the process of accounting for the costs from the point at which expenditure is incurred,
to the establishment of its ultimate relationship with cost centres and cost units.
5.
-
-is of coits is the arrangemenl
nature or purpose.
of items of costs in logical groups having regard to their
6. (Subjective / Objective) Classification of costs is the arrangement of items of costs in

-logical groups having regard to their nature..
7. - (Subjective / Objective) Classification of costs is the arrangement of items of costs in
logical groups having regard to their purpose.
8. Costs are classified, on the basis
- of into Fixed Cost, Variable Cost and Semi-fixed or
Semi-variable cost.
9. Costs are classified, on the basis of behaviour, into Fixed Cost, Variable Cost and Semi-fixed or
Semi-variable cost, depending upon the response to the changes in level.
10. Costs are classified, on the basis of behaviour, into Fixed Cost, Variable Cost and cost.
is the cost which does not vary with the change in the volume of activity in the shon
11 .
run.
-
12. Fixed Cost is the cost which does not vary with the change in the volume of
-
in the short
ru n.
-Cosl
13. Fixed Cost is the cost which does not vary with the change in the volume of activity in the
(long / short) run.
-
14.- Cost is the cost of elements which tends to directly vary with the volume of activity.
-
'15. Variable Cost is the cost of elements which tends to directly vary with the of activity.
16. Variable cost has two parts - (a) Variable cost; and (b) Variable costs.
17.- Costs contain both fixed and variable elements. -
18. Costs are the actual costs of acquiring assets or producing goods or services.
-
19. costs for a product are computgd in advance of production, on the basis of a specification
of all the factors affecting cost and cost data.
-
20.- costs are costs calcu'lated in advance of production or even before accepting sales
-order.
21 . Cost is the aggregate of variable costs.
22.--Cost is the aggregate ol prime cost plus variable overhead.
23.-
-only for Cost is hypothetical or notional cost not involving any actual cash payment computed
the purpose of decision-making.
24.- Cost is historical cost which is incurred in the past, and not relevant to the decision
required to be made by the management at present,
25.-Cost is an unusual or atypical cost whose occurrence is usually irregular and unexpected
and due to some abnormal situation of the production.
30 CostAccounting (TYB.Com. : SEM-V)
26.- Costs are inescapdble costs which are essentially to be incurred, within the limits or
norms provided for.
27 . Cost is the change in cost due to change in activity from one level to another.
28.11 an expenditure can be allocated to a cost centre or a cost unit then it is called
-
29. lndirect cost is also known as
30. Cost is any unit of cost selected with a view of accumulating all costs under that unit.
-.
31 . Cost is a form of measurement of volume of production or service.
-.
32. (Direct / lndirect) Material Cost is the cost of material which can be readily allocated to a
cost centre or a cost object in an economically feasible way.
33.-
- (Direct / lndirect) Labour Cost is the cost of wages of those workers who are readily
identified or linked with a cost centre or cost object.
34. Direct Expenses are the expenses (such as / other than) direct material or direct labour
which can be identified or linked with the cost centre or cost object.
35.- is "a system of symbols designed to be applied to a classified set of items to give a brief
account reference, facilitating entry collation and analysis."
36. A is a unit of product or service in relation to which costs are ascertained.
37.A cost is an expenditure which can be economically identified with and specifically
measured in respect to a relevant cost object.
38.--- cost is the total cost of direct material, direct labour and direct expenses.
39.An or cost is an expenditure on labour, materials or services which cannot be
economically identified with a specific saleable cost unit.
40. Acost
- - is a production or service location, function, activity or item of equipment for which
costs are accumulated.
41 .A-cost is a cost which is incurred for an accounting period andwhichtendstobe
unaffected by fluctuations in the levels of activity.
42. A cost is a cost which is directly related to output.
43. Cost Accounting Standard deals with Material Cost.
-
19.3 MATCH THE FOLLOWING
t4I COLUMN A COLUMN B

1. Amount of resources used for (a) FinancialAccounting
production of goods (b) Capital,expenditure
2. Cost accounting records (c) lnternal records
3. Used by investors, creditors (d) Cost Accounting
4. Cost control (e) Cost
(f) Reduction of costs
(S) Regulation of costs
IB] COLUMN A COLUMN B

1. Total fixed cost (a) Remains constant per unit
2. Total variable cost (b) Cost not assigned to products
3. Unit variable cost (c) What cost should be?
4. Unit fixed cost (d) Remains constant in total
5. Standard cost (e) What costs are expected to be
6. Period cost (0 Decreases with rise in output
7. Actual cost (s) Added value of a new product
L Labour and overhead (h) lncurred cost
9. lncremental cost (i) Cost of conversion
10. Budgeted cost (i) lncrease in proportion to output
Int ro duction to C o st Ac co unt ing 31
tcI COLUMN A COLUMN B

Costs classified on basis of natural (a) Relevant, Differential, Opportunity
elements and Sunk Costs
2. Costs classified on basis of (b) Fixed, Variable and Semi-variable Costs
traceability to object (c) Material, Labour and Expenses
3. Costs classified on basis of Functions (d) Production, Administration, Selling
4. Costs classified on basis of variability and Distribution Costs
5. Costs classified for decision-making (e) Direct and lndirect Costs
[D] Match the terms in Column A with statements in Column B

COLUMN A
1. Cost
2. Costing
3. Cost control
4. Cost Accounting
5. Classification
6. Subjective Classification of costs
7. Objective Classification of costs
8. Classification of costs on basis of behaviour
9. Fixed Cost
10. Variable Cost
11. Semi Variable Cost
12. Historical Costs
1 3. Pre-determined Costs
14. Estimated Costs

15. Marginal Cost
16. lmputed Cost
1 7. Sunk Cost
lS.Abnormal Cost
19. Unavoidable Cost
20. Differential Cost
21. Direct Cost
22. Overhead
23. Cost centre
24. Cost unit
25. Direct Material Cost
26. Direct Labour Cost
27.Direcl Expenses
28. Code
COLUMN B
(i) lnescapable costs which must be incurred.
(ii) The cost of elements which tends to directly vary with the volume of activity.
(iii) A measurement, in monetary terms, of the amount of resources used for the purpose of
production of goods or rendering services.
(iv) The change in cost due to change in activity from one level to another.
(v) Costs containing both fixed and variable elements.
(vi) The process of ascertainment of costs.
(vii) An expenditure that can be allocated to a cost centre or a cost unit.
(viii) The actual costs of acquiring assets or producing goods or services.
(ix) The guidance and regulation by executive action of the costs of operating an undertaking.
(x) lndirect cost
(xi) Costs for a product are computed in advance of production, on the basis of a specification
of all the factors affecting cost and cost data.
32 CostAccounting(T.VB,Com. : SEM-V)
(xii) The process of accounting lor the costs from the point at which expenditure is incurred, to
the establishment of its ultimate relationship wilh cost centres and cost units.
(xiii) Any unit ol cost selected with a view of accumulating all costs under that unit.
(xiv) Costs calculated'in advance of production or even before accepting sales order.
(xv) The arrangement of items of costs in logical groups having regard to their nature or
purpose.
(xvi) Form of measurement of volume of production or service.
(xvii) The aggregate ol variable costs.
(xviii) The arrangement of items of costs in logical groups having regard to their nature,
(xix) Cost of material which can be readily allocated to a cost centre or a cost object in an
economically feasible way.
(xx) Hypothetical or notional cost not involving any actual cash payment computed only lor
the purpose of decision-making.
(xxi) The arrangement of items of costs in logical groups having regard to their purpose.
(xxii) Cost of wages of those workers who are readily identified or linked with a cost centre or
cost oblect.
(xxiii) Historical cost which is incurred and not relevant to the decision required to be made by
the management at present.
(xxiv) Fixed Cost, Variable Cost and Semi-fixed or Semi-variable cost.
(xxv) Expenses other than direct material or direct labour which can be identified or linked with
the cost centre or cost object.
(xxvi) An unusual or atypical cost whose occurrence is usually irregular and unexpected and
due to some abnormal situation of the production.
(xxvii) The cost which does not vary with the change in the volume of activity in the short run.
(xxviii) A system of symbols designed to be applied to a classified set of items to give a brief
account reference, facilitating entry collation and analysis.
19,4 STATE WHETHER TRUE OR FALSE

1. Financial Accounts fail to give a product-wise break-up of prolit or loss.
2. Financial Accounts lail to show whether there was any abnormal waste during the process of
production.
3. Cost Accounting ascertains the individual costs of each contract.
4. Cost Accounting helps the management to control the cost of Materials, Labour and Expenses.
5. Cost Accounting helps in controlling the leakage and wastage of materials.
6. Cost Accounting is used by investors, creditors etc.
7. Cr:sting is a comprehensive term which includes Cost Accounting.
8. Periodical Matching of income and expenses is one of the fundamental assumptions of Cost
Accounting.
9. Cost Accounting provides data for managerial decision-making.
10. Cost Accounting gets its basic data for estimates from the financial accounting system.
11. Cost accounting can be used only in manufacturing concems.
12. Costing, cost accounting and cost accountancy mean one and the same thing.
13. Cost accounting is a branch of financial accounting.
14. Cost accounting provides cost information not only to management but also to shareholders.
15. Cost accounting information locuses on external reporting.
16. A profitable business concem does not need costing system.
17. Cost accounting is not needed by a non-profit organization such as a hospital.
18. Cost accounting is not needed if the price is beyond the control of the firm.
19. Cost accounting assists financial accounting with regard to the valuation of inventory.
20. The scope of cost accounting includes cost ascertainment, cost presentation and cost control.
21 . Since pricing is a matter of managerial policy, cost information is useless for price fixation.
22.Cost accounting provides inlormation forascertaining the financial position as on a particular
date.
23.Cost accounting helps in controlling cost.
24. Costing and cost accounting are the same.
Inlroduction lo Cost Accounting 33
25. Cost Control means a lower amount of profit to the company.

26. Cost reduction is the primary responsibility ol the cost accountant in any organization.
27. All costs are controllable.
28. lnterest on capital, payment for Which is not actually made, is an example of imputed cost.
29. An item of cost which is uncontrollable by one Manager may be controllable by another.
30. Only variable costs are controllable.
31. Variable cost remains constant per unit within a range of activity.
32. Sunk costs are relevant to present decisions.
33.lmputed costs are a type of opportunity costs.
34. Variable overheads vary with time.
35. Fixed costs vary with the level of production or sales volume.
36. Marginal costs are not at all helplul to management for decision-making.
37. Cost Accounting Standard 2 deals with Classification of Cost.
19.s ANSWER rN BR|EF (INTERNAL TESTS)

Q.1 : lndicate whether the following materials are direct or indirect with reference to the final product:
(a) Oil used for lubricating machines
(b) Wire for making electric motors
(c) Bottles used for filling in a soft drink
(d) Gunny bags used for filling in sugar
(e) lgnots used by a foundry making castings
(f) Cushion seats to be fixed in a passenger car
(g) Sugarcane used for making sugar
(h) Speakers in a radio set
(i) Paper used for printing a book
(j) Nails used in a shoe
(k) Milk used for making ice-cream
[Ans.: Direct Materials : (b), (c), (d), (e), (t), (g), (h), (i), (j), (k); lndirect Materials : (a)]
Q.2 : State whether the following items should be classified as direct or indirect labour :
(a) Ovedime premium paid for specific jobs
(b) Wages paid to piece workers
(c) Wages paid to maintenance workers
(d) Directors'fees
(e) Salesmen's Commission
(f) Salaries paid to sweepers
[Ans.: Direct Wages : (aL @); lndirect Wages : (c), (d), (e), (f)]
Q.3 : A company manufactures and retails clothing. You are required to group the costs which are
listed below and numbered 1 to 20 into the following classification : (Each cost is intended to belong
to only one classification).
(a) Direct [t4aterials
(b) Direct Labour
(c) Direct Expenses
(d) lndirect Production Overhead
(e) Selling and Distribution Costs
(f) Research and Development Costs
(g) Finance Cost
(h) Administration Costs
1. Telephone rental plus metered calls
2. Wages of security guards for factory
3. Parcels sent to customers
4. Wages of operatives in cutting depaftment
5. Developing a new product in the laboratory
6. Wage of fork lift truck drivers who handle raw materials
7. Wages of storekeepers in materials store
34 C o st A cc ounting (7. Y. B. Com. : S EM-V)
8. Chief Accountant's salary

9. Cost of Painting Advertising slogans in delivery vans
10. Auditor's fee
11 . Cost of advertising on television
12. Lubricants for sewing machines
13. Floppy disks for general office computer
14. Maintenance contract for office photo copying machine
15. lnterest on bank overdraft
16. Market research undertaken prior to new product launch
lT.Carriage on purchase of raw materials
18. Royalty paid on number of units of a particular product produced
19. Road licences for delivery vehicles
20. Amount payable to a company for broadcasting music throughout the factory (CWA-lnte)
[Ans.:
Cost Element Numbers
Direct Materials 17
Direct Labour 4
Direct Expenses 18
Finance Cost 15
Research and Development Expenses 5
Selling and Distribution Cost 3,9, 11, 76, 19
Administration Cost 1,8, 10, 13, 14
lndirect Production Costs 2, 6, 7, 12, 20 l
Q.4:Fromthefollowingdetails,calculateCostofGoodssold:<
lncrease in Raw Material Stock 15,000
Decrease in Finished Goods Stock 35,000
Raw Materials purchased 4,30,000
Direct Labour 2,00,000
Factory Overheads 3,00,000
Freight Outward 45,000
There was no work-in-progress.
[Ans.: ( 9,50,000]
Opening stock of raw material 80,000

Opening stock of work in process 5'l ,000
Purchases of raw material 2,30,000
Direct labour cost 94,000
Factory overheads 79,000
Closing stock of raw material 66,000
Closing stock of work in process 44,O0O
Compute :
(1) Prime cost
(2) Total Factory cost
[Ans.: Prime Cost - ? 3,38,000, Total Factory Cost - ? 4,07,000
[Hint : (1) 80,000 + 2,30,000 - 66,000 + 94,000 = 3,38,000;
(2) 3,38,000 + 79,000 = 4,07,0001

Opening stock of work in process 46,000
Closing stock of raw material 6'l ,000
Closing stock of work in process 36,000
Introdaction to CostAccounting 35
Compute Cost of Goods Manufactured
[Ans.: ? 4,17,0001
[Hint : 52,000 + 2,55,000 - 61,000 + 85,000 + 76,000 + 46,000 - 96,000 = 4,17,000]
Q.7 : Factory cost is < 3,80,000 and cost of production is { 4,10,000. Office and administrative
overheads are 20o/o of factory overheads. What would be amount of prime cost ? Assume no stock
adjustments. (|CWA lnter, Dec. li, adaptecl)
[Ans.: Administrative OH = ? 4,10,000 - 3,80,000 = ? 30,000; Factory OH = Administrative
OH/20o/o=?30,000f20o/o=?1,50,000;PrimeCost=?3,80,(nO-?1,5O,OOO=?2,30,0001
19.6 CHECKYOURANSWERS
19.1
1 (d) 9. (d) 17. (a) 25. (c) 33. (b) 41. (b) 49 (c)
2 (c) 10. (b) 18. (d) 26. (a) 34. (a) 42. (b) 50 (a)
3 (c) 11. (a) 1e. (c) 27. (c) 35. (d) 43. (d) 51 (c)
4 (d) 12. (b) 20. (a) 28. (c) 36. (b) 44. (d)
5 (c) 13. (a) 21. (c) 2e. (a) 37. (c) 45. (a)
6 (c) 14. (c) 22. (b) 30. (d) 38. (a) 46. (c)
7 (a) 15. (c) 23. (b) 31. (b) 3e. (b) 47. (c)
8 (c) 16. (b) 24. (b) 32. (c) 40. (b) 48. (a)
Hints :
44. [6 - (a.00 + 0.a0)]

45.[(20 + 4 + 6) + 10]
47. [1 ,40,000 + 5,00,000 + 6,00,000 + 15,000 - 12,05,000]
48. [4,500 + 29,600 - 7,700)
49.[80,000 -17,000 + 21,000]
50. [1,07,000 - 57,000 + 20,000]
19.2 (1) Cost (2) Costing (3) Cost control ( ) Cost Accounting (5) Classification (6) Subjective
(7) Objective (8)behaviour(9)activity (10) Semi-variable (11) Fixed (12) Activity (13) Short
(14) Variable (15) Volume (16) Direct; lndirect (17) Semi Variable (18) Historical (19) Pre-
determined (20) Estimated (21) Ivlargin al (22) Marginal (23) lmputed (24) Sunk (25) Abnormal
(26) Unavoid able (27) Differential (28) Direct (29) Overhead (30) Centre (31) Unit (32) Direct
(33) Direct (34) other than (35) Code (36) Cost unit (37) Direct (38) Prime (39) Overhead or
lndirect (40) Centre (41) Fixed (42) Variable (43) 6
1e.3 A : (1) - (e), (z) - (c), (3) - (a), (+) - (s)
B:(1)-(d),(2)-U),(3)-(a),(4)-(f),(5)-(c),(6)-(b),(7)-(h),(8)-(i),(e)-(s),(to)-(e)
c : (1) - (c), (z) - (e), (3) - (d), (4)- (b), (s) - (a)
D:(1)-(iii),(2)-(vi),(3)-(ix),(a)-(xii),(5)-(xv),(6) -(xviii),(7)-(xxi),(8) -(xxiv),
(e)-(xxvii),(10)-(ii),(11)-(v),(12)-(viii),(13)-(xi),(1a)-(xiv),(15)-(xvii),(16)-(xx),
(17)-(xxiii),(18)-(xxvi),(1e)-(i),(20)-(iv),(21)-(vii),(22)'(x),(23)-(xiii),(24)-(xvi),
(25) - (xix), (26) - (xxii), (27) - (xxv), (28) - (xxviii)
19.4 True : 1,2,3, 4,5, 9, 10, 19, 20, 23,28,29, 31, 33
False: 6,7,8,11,12,13, 14, 15, 16, 17,18,21,22,24,25,26,27,30,32,34,35,36,37
36
)
a MATERI AL COS T
UTLIN
No. Page
1. 37
2.1 Meaning
2.2 Objectives and Advantages
2.9 Requisites
2.4 Scope
ar. Receipt of Materials 39
3.1 Procedures
Purchase Requisition
Enquiry for Supply/lnvitations for Tenders
.4 Purchase Order
lnspection of Goods
Receipt of Goods
.7 Valuation of Receipts
A
43
4.3 m uch Quantity can be Requisitioned (B illof Materirals)

4.4 lss ue s to be Valued
E Stock 47
o. lnventory Control 47
7. Stock Levels 47
7.1 Minimum Level
7.2 Maximum Level
7.3 Reorder Level
Muteriul Cost 37
7.5 Danger Level
52
65
Advantages
67
11. 68
12. 69
oe
THE PRINCIPLES
1.1 COSTACCOUNTING STANDARD 6. MATERIAL COST

Materials constitute one of the important elements of production. The ICWA has issued Cost
Accounting Standard (CAS-6) dealing with Material Cost. The principles for material cost according
to CAS-6 are explained below.
1.2 TYPES OF MATERIALS

1. Tlpes: Types of materials covered under CAS-6 are raw materials, process materials / additives,
manufactured / bought out components, sub-assemblies, accessories, semi finished goods,
consumable stores, spares and other indirect materials.
2. Raw Materials: Raw material is a basic/main material used in the manufacture of product. For
example sugar cane is the raw material for production of sugar. Cotton is the raw material for
production of cotton yarn.
3. Process Materials /Additives: Process materials/additives are materials used in the process of
manufacture in addition to raw material. It varies from industry to industry. Process material for
sugar industry is lime, or sulphur; in paper industry claylchina clay is the additive material.
38 CostAccounting (T.YB.Com. : SEM-I)
4. Bought Out Components: Bought out component means a manufactured product, which forms
part of the finished product and is fitted to the product without any further processing, e.g. fan
belt in an automobile. In other words bought components are purchased items used in the assembly
of main product. These items are also available in the market for replacement ofworn out parts
and knbwn as spare partS.
5. Sub-assemblies: "Sub-assembly'' means an assembly of various components with a distinct
identity, and forms part ofthe finished product, for example engine, or steering in an automobile.
6. Accessories: "Accessory" maybe either a component or subassembly, which is not essential for
the basic functioning ofthe product, but supplied as an optional itern (for example an air conditioner
or music system in an automobile).
7. Consumable Stores: Consumable stores are items used in the maintenance of plant for example
lubricant, cotton waste, paint and the like.
1.3 MATERIAL COST

Material cosl is defined as cost of material of any nature used for the purpose of production of a
product or a service. Material cost is "the cost of commodities supplied to an undertaking" (CIMA).
Direct Materials are the materials whose cost can be attributed to a cost object in an economically
feasible way. Indircct Materials arethe materials whose cost cannot be directly bttributed to a particular
cost object.
2. MATERIAL CONTROL
@
Material Control is defined by ICMA as the function of ensuring that sufficient stocks are retained
in stock to meet all requirements without carrying unnecessary stocks. Material control is the
"safeguarding of company's property in the form of materials by a proper system of recording and
also to maintain them at the optimum level considering operating requirements and financial resources
of business". Material Control involves the planning, organising and controlling the receipt, issue
and storage of materials so to as achieve the objectives of effrciency and economy.
2.2 OBJECTIVESANDADVANTAGES
Material Control basically aims to ensure that adequate goods are in stock to meet all requirements
without carrying unnecessarily large stocks. The main objectives of material control are as follows:
l. To avoid under stocking i.e. to provide continuous supply of materials so that the production is
not held up.
2. To avoid over-stocking to reduce carrying costs and avoid surplus and obsolete stocks.
3. To obtain materials of the required quality at minimum cost from a reliable source.
4. To minimise the total cost (i.e. ordering costs & carrying costs).
5. To avoid wastages and losses during storage and usage.
6. To maintain proper and up-to-date records ofinventory.
7. To provide the required information to the management for taking inventory decisions.
2,3 REQUISITES
The essential requirements ofmaterial control are as follows:
l. Co-ordination and co-operation among the various departments concerned viz. purchase,
receiving, inspection, storage, issues, Accounts and Cost departments.
2. Use of standard forms and documents in all the stages of control.
3. classification, coordination, standardization and simplification ofmaterials.
4. Planning ofrequirement ofmaterial.
Material Cost 39
5. Efficient purchase organization.

6. Budgetary control of purchases.
7. Planned storage ofmaterials, physical control, and records to control issues and utilization of
stores in production.
8. System of reporting to management regarding material purchase, storage and utilization.
2.4 SCOPE
Ofthe three elements ofcosts, viz. Material, Labour and Overheads, Material is the most significant
in terms of value. Therefore, Material Control is an important and integral part ofCost Control. If an
organisation is able to control the cost ofmaterials, it is in a position to control, to a great extent, the
final cost of the finished goods. Material Control involves: (l) Control of Receipt of Material
(2) Control of Issue of Material and (3) Control of Storage of Material. Let us study these in detail.
3.1 PROCEDURES
The following procedures / documents are involved for receipt of materials : ( I ) Purchase Requisition;
(2) Enquiry/Tenders; (3) Purchase Oider; (4) Inspection and (5) Receipt.
3.2 PURCHASEREQUISITION
(1) Procedure: Purchase Deparhnent does not purchase anymaterial on its own. It initiates action to
procure an item only when informed in writing by the Stores or the Production Department etc.
Such request for a specific item made in writing to the Purchase Department is called a Purchase
Requisition. A Specimen Purchase Requisition is given below.
(2) Specimen:
EXHIBIT 1 : SPECIMEN PURCHASE REQUISITION
ABC COMPANY
PURCHASE REOUISITION
Sr.No.:xx Date:xx
To : Purchase Department / Officer
From : Stores / Production / x x Department
For : Job No. x i/Contract No. x x Batch No. x x
Item Description Code Unit Quantity Delivery Date Required
Place
xx xxxx xx xx xx xx xx
Signature
xx
Manager
Action by Purchase Depanment lOllicer
EnquiryNo.xxDatedxx
OrderNo.xxDatedxx
xx
Signature
3.3 ENQUIRY FOR SUPPLY/INVITATIONS FOR TENDERS

(1) Procedure: On receipt ofthe Purchase Requisition, the Purchase Department sends out Enquirtes
for Supply to (a) the existing suppliers in respect of standard materials, (b) the concerned
40 CostAccoanting (TYB.Com. : SEM-V)
Government Agency for supply of controlled commodities, (c) the suppliers with whom it has
Rate Contract or Long Term Contract in respect ofthe material required. In case the item cannot
be procured through any ofthe above sources, the Purchase Department has to invite Tenders or
Quotations from a number of parties. The Tenders or Quotations received upto the specified day
and time are carefully studied and a decision is taken to accept that tender which offers the best
terms.
(2) Selection ofTender: All the Tenders received by the stipulated day and time are opened and
examined. All tenders are compared and the contract is awarded to the supplier offering the best
terms. It should be noted that price is not the only factor to be considered in accepting a tender.
Other factors like reliability ofsupply, financial standing ofthe suppliers, discounts, technical
competence, terms of delivery etc. have also to be taken into account. A Comparative Statement
ofTenders is prepared for this purpose.
3.4 PURCHASE ORDER

(1) Procedure: Once the supplier is selected, the Purchase Department issues a Purchase Order to
the supplier for supply of the specified material on the terms and conditions agreed. A Purchase
Order is a key document in the Purchase function. lt is a document having legal as well as
managerial significance. It is a legal document since it is a contract between the purchaser and
the supplier for the supply ofmaterial on agreed terms. It is a managerial document as it is used
by various departments such as Purchase for ensuring the supply of materials, by Stores for
receipt and inspection of materials and by Accounts for approving the Purchase Invoice for
payment. Therefore, the format ofthe Purchase Order should be carefully devised. It should give
all the required details in a clear manner.
(2) Specimen:
EXHIBIT 2: SPECIMEN PURCHASE ORDER
ABC COMPANY
PURCHASE ORDER
Sr.No.:xx Date:xx
Purchase Requisition No. : x x P. R. Date : x x
Enquiry/ lnvitation forTenderNo.: x x Date:x x
Offer/TenderNo.: x x Date:x x
To : XYZ Company
Dear Sirs,
This has reference to your above offer / tender for the supply of materials.
We are pleased to accept your said offer / tender for the supply of the following materials on
terms and conditions stated below.
Item Description Code Unit Quantity Price Amount
Terms and Conditions : Signature
1. Delivery:x x
2.Packing:xx xx
3. Terms of Payments :x x Manager
4. Jurisdiction : Subject to Mumbai Jurisdiction ABC Company
For Office Use only :
Goods lnspection Note No. x x Dated x x
Goods Received Note No. x x Dated x x
Purchase lnvoice No. x x Dated x x
xx
Signature
Msterial Cost 41
(3) Special Points

(a) Linking References: A document should always contain the linking references to previous
and succeeding documents. Hence a Purchase Order should show the (a) Purchase Requisition
No. and date (b) Enquiry for Supply/Invitation for Tender No. and date (c) Tender No. and
date, (d) Goods lnspection Note No. and date, (e) Goods Received Note No. and date,
(f) Purchase Invoice No. and date. These references are useful for managerial follow-up and
control.
(b) Terms and Jurisdiction: The Purchase Order should clearly spell out the terms and conditions
ofsupply. It should also specifythejurisdiction. This is because, ifthere is any legal dispute
between the purchaser and the supplier, the legal suit is to be filed in a Court having the
speci fi ed jurisd icti on.
(c) Copies: One copy each is sent to (a) Supplier (b) Stores and (c) Accounts. A copy is retained
by the Purchase Department for follow-up and records.
3.5 !NSPECTION OF GOODS

(1) Procedure: The material despatched by the supplier is first subjected to Inspection before being
accepted and received in the Stores. The Inspection procedure is as follows-
(a) Acknowledge Supplier's Challan: A copy of the Delivery Challan sent by the supplier is
acknowledged by the Stores and sent to the supplier. This indicates that the material is received
in the Stores subject to inspection and approval.
(b) Inform Inspection Dept.: The Stores informs the Inspectors about the receipt of material.
The inspection may be done by a separate Inspection Department or by an offrcer of the
department which has requisitioned the material.
(c) Inspection: The Inspector makes a detailed inspection of the material as to the description,
quality, quantity, packing conditions etc. The Inspector then prepares a Inspection Note - a
specimen of which is shown below.
(2) Specimen:
EXHIBIT 3: SPECIMEN INSPECTION NOTE
ABC COMPANY
INSPECTION NOTE
Sr.No.:xx Date:xx
Purchase Qrder No. : x x P.O.Date:xx
Supplier'sName:xx
Supplie/s Challan No. : x x ChallanDate:xx
Item Description Quantity Remarks Reasons/ Rej
Accepted / Rejected Code
xx xxxx xx xx
xx xxxx xx xx
Signature
Goods Returned Note No. x x Dated x x [Rejected Goods] xx

Goods Received Note No. x x Dated x x [Accepted Goods] lnspector
Purchase lnvoice No. x x Dated x x [Accepted Goods]
xx
Signature
(3) Special Points

(a) Link References: The Inspection Note should give linking references to earlier documents
. (Purchase Order, Supplier's Challan) and the succeeding documents (Goods ReturnedNote, or
Goods Received Note and Purchase Invoice). This serves the purpose of follow-up and control.
42 Cost Acc o unting (T Y B. C om. : S EM-V)
(b) Reasons for Rejection: The Inspection Note should clearly mention the reason for rejection.
In large organisations, each possible reason for rejection maybe given a specific code. For
example, rejection due to damaged packing may be allotted code of 01. The Inspector has
just to mention the Rejection Code on the Inspection Note.
(c) Copies: One Copy each of the Inspection Note is sent to the Supplier and the Stores. One
copy is retained in the Inspection Department for reference.
3.6 RECEIPT OF GOODS

(1) Procedure: Once the material is inspected and accepted, it is formally received in the Stores.
Stores then issues a document variously known as Goods Received Note, Material Received
Note, Stores Receipt Note etc. Once this document is issued by the Stores the material becomes
the property ofthe purchasing company and the responsibility ofthe Stores.
(2) Specimen:
EXHIBIT 4 : SPECIMEN GOODS RECEIVED NOTE
ABC COMPANY
GOODS RECEIVED NOTE
Sr.No.:xx Date: x x
Purchase Order No. : x x P.O.Date:xx
Supplie/sName:xx
Supplie/s Challan No. : x x Date:xx
lnspectionNote:xx l. N. Date: x x
Received the following material
Item Description Code Unit Quantity Price Amount
xx xxxx xx xx xx XX xx
Signature
Posted in Bin Card on x x xx
Posted in Stock Ledger on x x Store Keeper
Purchase lnvoice No. x x Dated x x ABC Company
xx
Signature
(3) Special Points

(a) Link References: The Goods Received Note should give link references to the earlier
documents (Purchase Order, Supplier's Challan and Inspection Note) as well as the succeeding
documents and procedures (Bin Card, Stock Ledger and Purchase Invoice). This helps in
follow-up and control.
(b) Copies: One copy each is sent to the
(i) Supplier -
- to be returned along with the Invoice;
(ii) Stores Accoants - for posting in the Stock Ledger;
(iii) Purchase Department - to be attached with the Purchase Invoice tobe forwarded toAccounts
for payment. One copy is retained in Stores for making an entry in the Bin Card and for future
reference.
3.7 VALUATION OF RECEIPTS

(1) Include : According to CAS-6 (Materials Cost), the following items are tobe'included'(added)
for the purpose of determining valuation ofreceipt ofmaterials:
l. Purchaseprice;
Material Cost 43
2. Duties and Taxes;

3. Freight Inwards:
4. Insurance;
5. Other expenditure directly attributable to procurement;
6. $elf-manufactured packing materials shall be valued including direct material cost, direct
employee cost, direct expenses, job charges, factory overheads and other directly related
overheads.
(2)Exclude : According to CAS-6, the following items are tobe'excluded'(deducted) for the
purpose of determining valuation of receipt of materials:
l. Trade Discounts'
2. Rebates;
3. Taxes and duties refundable or credited by tax authorities (CENVAT Credits, Credit for
countervailing customs duty, sales tax set off, VAI Credits and other similar items).
Note : Cash Discount being a financial income is not to be netted offagainst cost ofmaterials.
lllustration 'l : (Valuation of Receipt of Material)
Purchase of trlaterials { 4,00,000 (inclusive of Trade Discount t 3,000); Fee on Board { 10,000;
lmport Duty paid { 15,000; Freight inward { 20,000; lnsurance paid for import by sea ( 12,000;
Rebates allowed ( 4,000; Cash discount t 3,000; CENVAT Credit refundable t 7,000; Subsidy
received from the Government for importation of these materials < 18,000; Abnormal loss of materials
< 20,000. Compute the landed cost of material (i.e. value of receipt of material).
Solution | (ICWA lnter, Dec.2015, adapted)
Computation of Landed Cost of Material
Particulars
Purchase price of Material 4,00,000
Add : Fee on Board 10,000
Add : lmport Duty 15,000
Add : Freight lnward during the procurement of material 20,000
Add : lnsurance paid 12.000
Total 4,57,O00
Less : Trade Discount (3,000)
(4,000)
i::: ; BEl,1)i? credit rerundabre ::. ::: .:: :: (7,000)
Less : Subsidy received from the Government for importation of materials (18,000)
Less : Abnormal Loss of Materials
Value of of Material 4,05,000
Notes :
(i) Cash discount is ignored as it is a financial item.

(ii) Subsidy received, rebates and CENVAT Credit refundable (against impoft duty) are to be deducted
for the purpose of computing the material cost.
4. ISSUE OF MATERIALS
I
4.1 OBJECTIVES OF MATERIAL ISSUE CONTROL
Material Issue Control involves taking the right decisions in respect of-
(1) Who can requisition the material: Only an authorised person, for example the production
manager, can requisition material from the Stores. Material should be issued by the Stores Keeper
only on the basis of a written document signed by an authorised person. Such document is called
Material Requisition Note. This is discussed inParu 4.2.2.
(2) How much quantity can be requisitioned: The Store Keeper cannot issue whatever quantity is
requisitioned. Each Job or Contract is sanctioned a fixed total quantity of Materials in the
beginning. The Store Keeper must keep track ofthe quantities issued so far against the sanctioned
44 CostAccounting(T.VB.Com.: SEM-V)
limit and the balance available. A new issue can be made only if it is within the overall limit
sanctioned. The initial sanction ofthe total quantity in respect of a job or contract is made through
a document known as Bill of Materials. This is explained in Para 4.3.
(3) How issue of Material is to be valued: If Material is purchased at different rates over a period
of time, a method has to be evolved and adopted to ascertain the value of each issue. The actual
cost ofmaterial allocated to each job or contract depends on the method ofvaluation adopted.
Principles of valuation of issue of materials as per CAS-6, are explained in Para 4.4. Different
methods of valuation of material issues are explained inPara 12.2.
4.2 WHO CAN REQUISITlON THE MATERIAL
4.2.1 Type of Material

Who can requisition the material depends upon the tlpe of material requisitioned. As seen earlier,
the material received in the Stores may be (a) a standard raw material requisitioned by the Stores
itself, or (b) non-standard item requisitioned by the Production Department, or (c) spares, components
for machinery etc. requisitioned bythe PlanVMaintenance Department, or (d) consumables, stationery
capital items etc. requisitioned by other Departments. All items received, other than standard raw
materials, can be issued by the Stores to the respective departments ifrequisitioned under the authority
of the Head of the concerned department.
The Raw Materials are kept in stock in the Stores and issued to the Production Department as and
when needed. The Procedure and Documentation discussed below are applicable to the Issue ofRaw
Materials.
4.2.2 Material isition Note
(1) Meaning: As a rule, in order to prevent misuse and frauds, no material should be issued from the
Stores without a proper written authority. The document which authorises the issue of material is
known as the Material Requisition Note (or Stores Requisition Note, Material Authorisation
etc.). Normally, the Production Manager or the Manager ofthe concerned Cost Centre is authorised
to place a requisition for the issue ofmaterials with the Stores. The Stores should maintain a list
of authorised persons along with their specimen signatures. Material Requisition Note must be
signed by an authorised person and contain a detailed list ofitems required for a specific cost
centre/cost unit (a Job, Batch or Process).
(2) Specimen:
EXHIBIT 5: SPECIMEN MATERIAL REQUISITION NOTE
ABC COMPANY
MATERIAL REQUISITION NOTE
Sr. No. :x x Date: x x
Cost Centre / Department : x x
Job / Contract / Batch / Process No. : x x
Bill of Material No. : x x Date: x x
Padiculars Cost Accounts
Item Description Code Unit Quantity Rate ( Cost {
xx xxxx xx XX xx xx xx
Authorised Signature
Material lssued on x x
Posted in Bills of Material on x x xx
Posted in Bin Card on x x Manager
Posted in Stock Ledger on x x Cost Centre/Department
xx
Signature
Msterisl Cost 45
(3) Special Points

(a) Lirtk References: The Material Requisition Note should provide link references with earlier
document (Bill of materials, which is explained below) and succeeding documents/procedures
(issue of Material, posting in Bill of Materials, Bin Card and Stock Ledger etc.)
(b) Costing: Material Requisition Note is used by Cost Accounting Section to compute the cost
of material issued. The total cost of the material issued is allocated to the cost unit while
preparing cost accounts. How each issue ofmaterial is priced is explained below in Para 12.2.
(c) Quantity: The Material Requisition Note must clearly specifuthe exact quantity required for
the Job, Batch or Process. The Store Keeper has to veriff this quantity against the Total
Quantity sanctioned for the Job/Contract/Process etc. The sanction for the total quantity is
contained in a document known as Bill of Materials explained below.
(d) Copies: While a copy is retained bythe Requisitioning Department for reference, three copies
are sent to the Stores. The Stores uses one copy for Issue of Material and posting in the Bin
Card. The second copy is sent to Stores Accounting Section for posting in the Bill ofMaterials
and Stock Ledger. The third copy is used by Cost Accounting Department for pricing of the
issue and allocation ofcost ofmaterial used to the particular cost unit.
4.3 HOW MUCH QUANTTTY CAN BE REQUTS|T|ONED [BILL OF MATERTALSI

(1) Meaning: When the company receives an order for a Job or a Contract etc., the Planning
l,-
Department prepares a detailed list of Materials (alongwith quantity of each item) likely to be
required for the entire Job or Contract. The list of the Materials is known as the Bill of Materials.
While in case of Job or contract, the Bill of Materials is made out in respect of each Job or
Contract, in case of a Process it is made out in respect of a period (year, month etc.)
(2) Sanction to Stores for Issue: Bill of Materials contains the answer to the question - how much
quantity can be requisitioned? The copy of Bills of Materials sent by Planning Department to
Stores acts as a sanction to the Stores for issue of Materials against that particular Job or Contract.
The Store Keeper has to ascertain, before issuing any Materials, whether the quantity required is
within the limit as per the Bill of Materials.
(3) Additional Bill of Materials: If the quantity required is more than the limit, the Material
Requisition Note is sent back. The Requisitioning department then has to approach the Planning
Department, explain the need for higher quantity and obtain an additional Bill of Materials.
(4) Control Over Issue: Thus, Bill of Materials helps in keeping a tight control on the issue and
total consumption of Materials in respect ofa Job or a Contract.
(5) Specimen:
EXHIBIT 6: SPECIMEN OF BILLS OF MATERIALS

ABC COMPANY
BILL OF MATERIALS
Sr. No. :x x Date:xx
Cost Centre / Department x x :
Job / Contract / Batch No. : x x
ProcessPeriod:xx
Item Description Code Unit Quantity Rate t Cost t
XX xxxx xx xx xx XX xx
Authorised Signature
Material Requisition Note No. x x Dated x x Quantity x x XX

Material Requisition Note No. x x Dated x x Quantity x Manager
Additional Bill of Materials No. x x Dated x x Planning Department
xx
Signature
46 Cost Accounting (TY.B. Com. : SEM-I)
(6) Difference between Bills of Material and Material Requisition Note
Bills of Material(BOM) Material Requisition Note (MRN)

(1) BOtvl is the document prepared by the MRN is prepared by the Foreman of the
drawing office. consuming department.
(2) BOM is a complete schedule of MRN is a document authorislng store-
component parts and raw materials keeper to issue materials to the
required for a pafticular job or work order. consuming department.
(3) BOM often serves the purpose of a MRN cannot replace a bill of materials.
Material Requisition as it shows the
complete schedule of materials
required for a particular job i.e. it can
replace material requisition.
(4) BOM can be used for the purpose of MRN is useful in arriving at historicalcost
quotations. only.
(5) BOM helps in keeping a quantitative MRN shows the material actually drawn
controlon materials drawn through from stores.
Material Requisition.
4.4 HOW ISSUE OF MATERIAL IS TO BE VALUED

(1) Include : According to CAS-6 (Material Cost), the following items are to be 'included or
considered for the purpose ofdetermining valuation of issues and closing stock:
l. Normal /oss or spoilage prior to receipt at factory gate net of amounts recoverable from
suppliers, insurers, carriers or recoveries from disposal;
2. Normal losses due to shrinkage or evaporation or gain due to elongation or absorption of
moisture before receipt of material;
3. Foreign exchange component ofmaterial cost converted at the rate on the date oftransaction;
4. Subsidy/Grant/Incentive and any similar payments received or receivable which can be
ascertained with certainty shall bereduced;
5. Price Variances when materials are accounted for at standard cost;
6. Self-manufactured components and sub-assemblies to be valued inclu3ive of direct material
cost, direct employee cost, direct expenses, factory overheads and share ofadministrative
overheads relating to production;
7. Materialcostofnormalscrap/defectivestobeincludedinthematerialcostofmanufactured
goods.
(2) Exclude :The follorving items are to be 'excluded'or ignored for the purpose of determining
valuation ofissues and closing stock:
l. Finance costs;
2. Abnormal losses due to shrinkage or evaporation or gain due to elongation or absorption of
moisture before receipt of material;
3. Changes inforeign exchange rate from the rate on date of transaction till date of payment;
4. Demurrage or detention charges or penalty levied by transport or other authorities;
5. Imputed costs;
6. Cost of self-manufactured components and sub-assemblies shall not include share of other
administrative overheads, finance cost and marketing overheads;
7. Material cost of abnormal scrap/defectives.
The methods used for valuation (FIFO and Weighted Average Cost) prescribed in the syllabus, are
explained inPara 12.2.
Muterial Cost 47
5. STOCK VERIFICATION
(1) Verification: The actual stock in hand must be verified periodicallyto prevent theft and frauds.
Normally, stock is physicallyverified at the end ofthe accounting year for the purpose of Balance
Sheet. In case of a large concern, there may be a system of continuous verification of stocks.
(2) Reconciliation: The physical stocks so verified must be further reconciled with the balances
shown in the Stock Ledger and/or the Bin Cards. Thus, the actual Stock must be reconciled with
the Book Stock. The actual stock may be more or less than the book stock. The surplus or the
shortages should be investigated thoroughly. The differences may be due to clerical errors in
writing the Stock Ledger or errors in taking the physical stock or theft or fraud and so on. The
causes for differences may be (a) Abnormal or (b) Normal. Further Normal Causes may be (i)
Avoidable or (ii) Unavoidable.
(a) Abnormal Causes: Differences in actual and book stocks due to abnormal causes beyond
the control of management such as fire, flood etc. have to be written off. These are not charged
to the cost ofproduction.
(b) Normal Causes: The value of surplus or shortages due to normal causes is charged to cost of
production.
(i) Normal, Avoidable Causes: Differences due to normal causes which can be controlled by
the management (i.e. avoidable) should be scrutinised in detail and corrective action taken.
Thus, incorrect measurement ofquantities, negligence in handling of materials, carelessness
in storage of Materials, etc. are normal causes which the management should strive to control
and avoid.
(ii) Normal, Unavoidable Causes: Certain differences, however, are due to normal causes
which are unavoidable. Thus, handling losses, loss due to evaporation, humidity etc., are
unavoidable normal losses. The management fixes in advance the standard or normal
percentage of wastage or loss which is compared with the actual wastage or loss for control.
INVENTORY CONTROL
The main objective of inventory control is to achieve maximum efficiency in proiluction and sales
with the minimum investment in inventory. The techniques commonly applied for inventory control
are as follows: (l) Setting of various stock levels; (2) Fixing economic order quantity; (3) ABC
Analysis and (4) Perpetual inventory and continuous stock verification.
7. STOCK LEVELS
7.1 MINIMUM LEVEL

1. Meaning : Minimum Level indicates the lowest figure of inventory balance, which must be
maintained in hand at all times, so that there is no stoppage of production due to non-availability
ofinventory.
2. Factors: The main factors considered for the fixation of minimum level of inventoryare as
follows:
(a) Maximum consumption and maximum delivery period in respect of each item to determine
its re-order level.
(b) Average rate of consumption for each inventory item.
(c) Average re-order for each item. This period can be calculated by averaging the maximum and
minimum period.
48 CostAccounting (T.Y.B.Com. : SEM-V)
3. Formula : The formula used for its calculation is as follows:

Minimum level of inventory:
Re-order level - (Average consumption x Average re-order period)
Notes:
l. Consumption is also called Usage.
2. Re-order period is also called Lead time.
3. If Normal consumption / period is given, it is used instead of 'average' consumption or period.
7.2 MAXIMUM LEVEL

1. Meaning : Maximum Level indicates the maximum figure of inventory quantity to be held in
stock at any time.
2. Factors : The important factors which should be considered while fixing the maximum level for
various inventory items are as follows:
(a) The re-order level which itself is the product of maximum consumption of inventory item and
its maximum deliveryperiod.
(b) Minimum consumption and minimum delivery period for each inventory item should also be
known.
(c) The economic order quantity. (i.e. the Re-order Quantity - see para 8 below)
(d) Availabilityof funds, storage space, nature of items and their price per unit are also important
for the fixation ofmaximum level.
(e) In the case of imported materials due to their irregular supply, the maximum level should be
high.
Maximum level of inventory:
Re-order-level + Re-order quantity- (Minimum consumption x Minimum re-order period)
7,3 RE.ORDER LEVEL

1. Meaning : Re-order level lies between minimum and the maximum levels in such a way that
before the material ordered is received into the stores, there is sufficient quantity on hand to
cover both normal and abnormal consumption situations. In other words, it is the level at which
fresh order should be placed for replenishment of stock.
Re-order level :
Maximum consumption x Maximum re-order period (or) : Minimum level + (Average
consumption x Average re-order period).
7,4 AVERAGE INVENTORY LEVEL

This level of stock may be determined by using the following formula:
Average inventorylevel = ry
Alternatively, Average stock level : Minimum stock level + (t/z x Re-order quantity)
7.5 DANGER LEVEL

1. Meaning : Danger level is the level at which normal issues of material are stopped and only
emergency issues are made.
2. Formula : Danger Level:Average consumption x Lead time for emergencypurchases
Materiul Cost 49
7.6 BUFFER STOCK

Some quantity held in reserve to meet a sudden order or any such contingency is known as Buffer
Stock.
WORKSHEET 1 : COMPUTING STOCK LEVELS
No. Particulars o.
1. Maximum ConSumption
2. Minimum Consumption
3. Average [(Max. + Min.) I 2l or Normal Consumption
4. Maximum Re-order Period
5. Minimum Re-order Period
6. Average Re-order Period [(Max. + Min.) / 2]
7. Re-order Quantity
A Re-order Level [1 x 4]
B Minimum Level [A - (3 x 6)]
c Maximum Level[A +7 - (2x5)]
D Average Level [(B + C) I 21
lllustration 2 :
ln a company, weekly minimum and maximum consumption of material A are 25 and 75 units
respectively. The reorder quantity as fixed by the company is 300 units. The material is received
within 4 to 6 weeks from issue of supply order. The emergency re-order period is 2 weeks. Calculate
Itlinimum level and Maximum level of Material A, Average level and Danger level. Draw a Stock
level chad.
Solution :
Calculations :
1. Average consumption = (25 + 75) I 2 = 50

2. Average re-order period = (a + 6) / 2 = 5
Reorder Level = lVlaximum consumption x Maximum re-order period
= 75 units x 6 weeks = 450 units
Minimum Level = Re-order level - (Average consumption x Average re-order period)
= 450 units - (50 units x 5 weeks) = 200 units
Maximum Level
= Re-order level + Re-order quantity - (tr4inimum consumption x Minimum re-order period)
= 450 units + 300 units - (25 units x 4 weeks) = 650 units
Average Level = (Minimum Level + lVlaximum Level) + 2
= (200 + 650) + P
= 425
Danger Level = Average consumption x Emergency re-order period
=50x2
= 100 units
50 Cost Accounting (T Y. B. Com. : SEM-V)
The chart of the above stock levels is drawn below
800
700
Maximum (650)
600
500
to
Re-order (450)
Average (425)
.E 400
l
300
200 Minimum (200)

Lead Time
100 Danger (100)
+ <.
123456
Weeks+
lllustration 3 : (Maximum / Minimum)
The lollowing data relates to a firm for the last twelve months:
Minimum usage of a component : 50 units/ week
Maximum usage : 120 units/ weeks
Normal usage : 80 units/ week
Delivery period varies from 4 to 6 weeks. Orders are placed for 500 units at a time. Calculate
maximum level and minimum level for the component. ICWA lnter, adaptedl
Solution :
Re-Order Level = lvlaximum consumption x Maximum re-order period

=120x6=720units
Maximum Level
- (Minimum consumption x Minimum re-order period)
= Re-order level + Re-order quantity
-
= 720 + 500 (50 x 4) =729 + 500 -200 = 1,020 units
Minimum Level = Re-order level - (Normal consumption x Average re-order period)
= 72O - (80 x 5) = 320 units
lllustration 4 : (Re-order / Minimum / Maximum/ Average)
The following information is available in respect of material:
Re-order quantity = 1,500 units
Re-order period = 4 - 6 weeks
Maximum consumption = 400 units per week
Normal consumption = 300 units per week
Minimum consumption = 250 units per week
Emergency Re-order Period = 2 weeks
Calculate :
(a) Re-order level, (b) Minimum level,
(c) Maximum level, (d) Average stock level, and
(e) Danger level
Solution :
(a) Re-order Level = Maximum consumption x Maximum re-order period = 400 x 6 = 2,400 units
(b) Minimum Level = Re-order level - (Normal consumption x Average re-order period)
= 2,400 - (300 x 5) = 2,499 - 1500 = 900 units
Material Cost 51
(c) Maximum Level

= Re-order level + Re-order quantity - (Minimum consumption x Minimum re-order period)
= 2,400 + 1,500 - (250 x )
= 3,900 - 1,000 = 2,900 units
Minimum Level + Maximum Level
(d) Average Stock Level =
2
9oo + 2'9oo 3,800
- 22 - = l.goounirs
Alternatively, Average Stock Level = Minimum level + (1/2 x Re-order quantity)
= 900 + (1 12 x 1,500) = 1 ,659
(e) Danger Leve! = Average consumption x Emergency re-order period
= 300 units x 2 weeks = 600 units
lllustration 5 :
Two components, A and B, are used as follows :

Normal usage 50 units per week each
Minimum usage 25 units per week each
Maximum usage 75 units per week each
Re-order quantity A :300 units
B :500 units
Re-order period A:4to6weeks
B:2to4weeks
Calculate for each component :
(a) Re-order level

(b) Minimum level
(c) trlaximum level and
(d) Average stock level (CA-lnter, May 95; FYBAF Nov. 2017, Mar.2017, adapted)
Solution :
(a) Re-ordering Level = Maximum consumption x lt/laximum re-order period

A =75 x 6 = 450 units
B=75x4=300units
(ii) Minimum Level = Re-orcier level -{Normal consumption x Normal re-order period)
A = 450 - (50 x 5) = 200 units
B = 300 - (50 x 3) = 150 units
(iii) Maximum Level
A = 450 + 300 - (25 x 4) = 650 units
B = 300 + 500 - (25 x 2) = 750 units
(iv) Average Stock Level =
2
2oo + 650
o- = 425 units
2
150 + 750
B= = 450 units
2
lllustration 6 : (2 ltems l Re-order/ Minimum / Maximum / Average)
Forthe manufacture of a certain product two components A and B are used. The following particulars
about these components are available :
AB
Normal usage (per week) 60 nos. 60 nos.
lVlaximum usage (per week) 80 nos. 80 nos.
Minimum usage (per week) 30 nos. 30 nos.
Reorder quantity 400 nos. 600 nos.
Reorder period 4 to 6 weeks 2 to 4 weeks
52 CostAccounting (TYB.Com. : SEM-I)
You are required to calculate for each component :
(i) Reordering Level

(ii) Minimum Level
(iii) Maximum Level
(iv)Average Stock Level. I,CWA lnter, June 2004, adapted]
Solution :
(i) Re-ordering Level = Maximum consumption x Maximum re-order period
A=80x6=480
B=80x4=320
(ii) Minimum Level = Re-order level - (Normal consumption x Average re-order period)
A=480-(60x5)=180
B = 320- (60 x 3) = 140
(iii) Maximum Level
A=480+400-30x4=760
B=320+600-30x2=860
(iv) Average Stock Level = 2
O_ 180+760 =4TO
2
,_ 140+860
=500
2
Alternatively,
Average Stock Level = Minimum level + (1/2 x Re-order quantity)
A = 180 + (1/2x 400) = 380
B = 140 + (1/2x 600) = 440
8. ECONOMTC ORDER QUANTTTY (EOO) I

@
Purchase department in manufacturing concerns is usually faced with the problem of deciding the
'order quantity'. Ifthe order size is big, then the storage cost is higher. On the other hand iforder size
is small, then the ordering cost will be high. In order to minimise ordering and carrying costs it is
necessaryto determine the order quantitywhich minimises these two costs. The size of the order for
which both ordering and carrying costs are minimum is known as economic order quantity. 'Re-order
quantity' (ROQ) is that quantity at the re-order level for an item for which order is placed again and
again. EOQ can be ROQ; but not vice-versa.
8.2 ASSUMPTIONS
The calculation of quantity of economic order of material to be placed is subject to the following
assumptions:
1. Anticipated usage of material in units is known.
2. Cost per unit of the material is constant and is known as well.
3. Ordering cost per order and carrying cost per unit per annum are known and they are fixed.
4. The quantity of material ordered is received irnmediately i.e. the lead time is zero.
@q
EOQ is determined after considering the following factors:
(a) Ordering Costs: The term 'Ordering Costs' refer to the costs incurred for acquiring inputs.
These costs include - (i) Cost of placing an order, (ii) Cost of transportation, (iii) Cost ofreceiving
goods, (iv) Cost olinspecting goods. There is an inverse relationship between order size and
ordering cost. Bigger order quantity means lower ordering costs.
Material Cost 53
(b) Carrying Costs: The term 'Carrying Costs'refer to the costs incurred in maintaining a given
level of inventory. These costs include - (i) Cost of storage space, (ii) Cost ofhandling materials,
(iii) Cost oflnsurance, (iv) Cost ofdeterioration or obsolescence, (v) Cost ofstore staff. There is
positive relationship between order size and carrfng cost. Bigger order quantity means higher
carrying costs.
8.4 LIMITATIONS
I . Expected annual usage may not be same as the actual due to unusual and unexpected demand for
inventory.
2. Rate of usage may not be constant due to unusual and unexpected demand for inventory.
3. Ordering and carrying costs may not be constant due to fluctuations in the costs of various
components comprising costs.
4. Lead-time may not be constant due to reason beyond supplier's control.
8.5 FORMULA
The famous mathematician Wilson derived the formula which is used for determining the size of
order for each of purchases at minimum ordering and carrfng costs.
The formula given by Wilson for calculating economic order quantity is as follows:
EOQ=it2Ao where'
a
A : Annual usage units
O: Ordering cost per order
:
C Annual carrying cost of one unit, i.e., carrfng cost percentage p.a. x cost of one unit.
lllustration 7 :
From the following information, calculate economic order quantity and the number of orders to be
placed in the year according to (a) tabulation method, (b) graphical method, and (c) formula method:
(i) Annual consumption of material 3,000 kg
(ii) Cost of placing an order < 30
(iii)Cost per kg <5
(iv) Storage and carrying cost 10% on average inventory
Solution :
(a) Tabulation Method
Formuta I t \, 4 3 6 718 o
Annual Usage A 3 ,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000
Order Size o 3 ,000 1,500 1,000 750 600 500 428 375 333 300
Ordering Cost
per order o 30 30 30 30 30 30 30 30 30 30
Carrying Cost C
p.u., p.a. = { 5 x 10% 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50
No. of Orders N=A/Q 1 2 3 4 5 6 7 I 9 10
Total Ordering TO
Costs =NxO 30 60 90 120 150 180 210 240 270 300
Total Carrying TC=
Costs Qx1/2xC 750 375 250 188 150 125 107 94 83 75
Tota! Annual TA
Costs =TO+TC 780 435 340 308 300 305 317 334 353 375
Box indicates EOQ 600. When 5 orders of 600 kg each are placed, the carrying cost (t 150) is
equal to the ordering cost (( 150) and the total cost ({ 300) is the lowest.
Note : Tabulation Method is useful for computing EOQ, when (i) the order size / lot is shifted; or
(ii) supplier offers volume discount i.e. higher discount for larger quantities.
54 Cost Accounting (T.Y.B.Coru : SEM-V)
t
(b) Graphic Method
900
800
7 -4
I
700
600 .olr'-4
E
o
soo
EO0
1600 unils
-
A
oo 400
300
1--
-t
I 2
-I
200
100
X< Ordering Cost
0
s00 1,000 1,500 2,000 2,500 3,000 3,500
Order Quantlty (kS)
(c) Formula Method
EoQ =
,tr where,
A = Annual consumption in kg = 3,999

O = Cost of placing an order = { 30
C = Cost of storage and carrying per kg per lear = ( 5 x 10% = 0.50
2x3,000x30
EOQ = = 600kgs
0.50
No. of orders per year = 3,000 - 600 = 5 orders
Hence, the ordering cost and carrying cost are exactly equal when the ordered quantity is 600
kgs. This is the EOQ.
(d) Developing the Formula
From the Table and the Graph, it is clearthat at EOQ, Ordering Costs and Carrying Costs are
equal. lf Q is Quantity per Order,
At EoQ. l,a -ol = Qx 1xc

lo)2
2AO=Q2xC
2AO ^z
C
-W
YC = e. at Eoe.
[Note : Carrying costs are always computed on the Average Stock i.e. O x ] 1
8.6 EOQ VS. RE.ORDER LEVEL

.EXHIBIT 7 : EOQ VS. ROL
Sr.No. EOQ ROL

1 It stands for the number of units to be It helps to initiate fresh purchase.
purchased in an order.
2 It indicates how much is to be ordered It indicates when a purchase order is
to be initiated.
tAo
EOQ = t_ ROL = Maximum consumption x
3.
ll c
Maximum lead time (Re-order Period)
Material Cost 55
8.7 ILLUSTRATIONS
(A) EOQ - Basic
lllustration 8 : (Annual)
From the following particulars find out the Economic Order Quantity :
(i)Annual Demand 12,000 units
(ii) Ordering cost { 90 per order
(iii) lnventory carrying cost per annum per unit { 15
Solution :
liAo
The formula for
, -Tt- C
E.O.Q.
Where
A = Annual usage in units = 12,000
O = Ordering cost per order = 90
C = Annual carrying cost of one unit = 15
E.o.e. =
rry = 3sounits(approx.)
lllustration 9 :
A manufacturer buys certain essential spares from outside suppliers at ( 40 per set. Total annual
requirement are 45,000 sets. The annual cost of investment in inventory is 10% and cost like rent,
stationery, insurance, taxes, etc. per unit per year works out to be { 1. Cost of placing an order is
<5.
Calculate :
1. The EOa (By formula method)
2. No. of orders to be placed. (T.Y.B.Com., Oct. 2014, adapted)
Solution :
A = Annual requirement
= 45,000 sets
= <5
O = Ordering cost per order
C=Carryingcostp.u. = t40x10/100=(4+{1 ={5
t2Ao
t- lz* 45ôoo - 5
E.O.Q. =
t-
ll c Is
300 sets
Annual Consumption
No. of Orders
EOQ
45,000 sets
= 3oo
"ets
= 150 orders
lllustration 10 r (Semi-Annual)
From the following information, calculate Economic order quantity.
Semi-Annual Consumption 6,000 units
Purchase price of input unit { 25
Ordering cost per order { 45
Quarterly carrying cost 3%
Solution :
l2Ao
The formuta for E.O.Q. =
{ a
Where
A = Annual usage in units = 6,000 x 2 = 12,000
O = Ordering cost per order = 45
C - Annual carrying cost of one unit = 25 x 3"/" x 4 = 3
2x12,000x45
E.O.Q. = = 600 units
3
lllustration 11 :
For direct material XXX the following details are available:
Average inventory level 2OO
Orders per year 40
Average daily demand 48
Working days per year 250
Annual ordering costs < 4,000
Annual carrying costs < 6,000
Required :
Determine the annual demand, the cost of placing an order, the annual carrying cost of one unit,
and the economic order quantity.
Solution :
A = Annual demand = Daily Demand x Days per year = 48 x 250 = 12,000

O = Costof placing an order = Ordering coStS + Orders = { 4,000 140 =7100 per order
C = Carrying cost of one unit =Carrying costs +Average inventory = t 6,000 l2O0 = { 30 per unit
t2ô
The formula for E.O.Q. = t-
ll c
'2x12,000x100
E.O.O. = = 283 units (r/o)
30
lllustration 12 : (Monthly Demand)
G. Ltd. produces a product which has a monthly demand of 4,000 units. The product requires a
component X which is purchased at { 20. For every finished product, one unit of component is
required. The ordering cost is { 120 per order and the holding cost is 11o/o p.a. You are required to
calculate the Economic order quantity.
Solution :
Economic order quantity :

A = Annual requirement = 4,000 units per month x 12 months = 48,000
O = Ordering cost per order = < 120
C=Carryingcost = 10o/ox20=72
2x48,000x120
E.o.e. =
,ry 2;400 units
2
lllustration 13 :
The Purchase Manager of an organisation has collected the following data for one of the A class
items.
lnterest of the locked up capital 2Oyo
Order processing cost ({) for each order < 1OO
lnspection cost per lot < 50
Follow up cost for each order { 80
Pilferage while holding inventory S"/o
Other holding cost lS%
Other procurement cost for each order < 170
Annual demand 1,000 units
Cost per item < 10
what should be the EoQ ? (TY.B.com., Nov.2017, tcwA - Finat, adapted)
Solution :
A = Annual Demand = 1,000 units

O = Ordering Cost = 100 + 50 + 80 + 170 = {400 perorder
C = lnventory Carrying Cost = 40"/" (2O% + 5o/o + 15%) of {'10 = t 4.00 per unit
Materiul Cost 57
Eoe=rry=f*'@ffi=447unns
lllustration 14 :
A company manufactures a product from a raw material, which is purchased at ( 60 per kg. The
company incurs a handling cost of { 360 plus freight of ( 390 per order. The incremental carrying
cost of inventory of raw material is { 0.50 per kg. per month. ln addition, the cost of working capital
finance on the investment in inventory ol raw material is ( 9 per kg per annum. The annual production
of the product is 1,00,000 units and 2.5 units are obtained from one kg of raw material.
Calculate the economic order quantity of raw materials. .
(CA lnter, Nou. 2O01, adapted)
Solution :
A = Annual requirement of raw material in kgs.

= 1 kg x 1,00,000 units / 2.5 units = 40,000 kgs
O = Handling and Freight cost per order
=t360+?390=t750
C = Carrying cost per kg. per annum + lnvestment cost per kg. per annum
= (< 0.5 x
'12 months) + t g (lnvestment in inventory per kg. per annum)
={15perkg
2x40,000x750
EOQ = = 2,000 kgs
't5
(B) EOQ and Costs
lllustration 15 :
The following information relating to a type of raw material is available :

Annual demand 2,000 units
Unit price { 20.00
Ordering cost per order < 20.00
Storage cost 2/" p.a.
lnterest rate 8/o p.a.
Calculate economic order quantity and total annual inventory cost of the raw material.
Solution t (CA-IPCC, Nov.2009, adapted)
l2Ao
EOQ= where A=2,000; O=20; C=20x107"=2
il
"
2x2,O0Ox20 _
2
-l I8oôooz
= 200 units
Total Annual Inventory Cost

Cost of 2,000 units @ < 20 (2,000 x 20) 40,000
No. of Orders (2,000 + 20) = 1g
Ordering Cost (10 x 20) 200
Carrying cost of Average lnventory {{ 2 x (20 + 2)} 200
40.400
lllustration 16 :
X Ltd. manufactures a special product'ZED' and provides the following information :

Demand ot ZED is 1,000 units per month.
Semi-annual carrying cost - 6%
Raw-material required per unit of finished product - 2 kg
Ordering cost per order - ( 90
Purchase price of input unit - ( 25 per kg
Required : Calculate (a) Economic order quantity and (b) Total Annual Carrying and Ordering Cost
at that quantity.
Solution :
2x24,000x90
EoQ=rry= 3
= 1,200 kg
A = Annual Consumption of input = 1,000 x 12 x2 = 24,000 kgs

O = Ordering cost per order = ( 90
C = Carrying cost per kg p.a. = { 25x 6% x 2 = ( 3
Tota! Annual Carrying and Ordering Costs
1. No. of orders = A / EOQ = 24,0OO + 1,2OO = 2O
2. Total ordering costs = No. of orders x Order cost = 20 x 90 = 1,800
3. Total carrying costs= EoQx
* *"= 1,200 * I *3 = 1,800
4. Total costs = 1,800 + 1,800 = 3,600;. or
Totatcostsat EOO = J2AOC = x24,000x90x3 = ?3,600
lllustration 17 :
ABC Co. buys a lot of 125 boxes which is a three month supply. The cost per box is ? 125 and
ordering cost is ( 250 per order. The inventory carrying cost is estimaled al 2O"/" of unit value per
annum.
You are required to ascertain :
(i) The total annual cost of existing inventory policy.
(ii) How much money would be saved by employing economic order quantity ?
Solution :
(i) Tota! Annual Costs at Present
(a) Total Demand perannum fAI = x 12 = 500 Boxes

+
1b;
Numoerororders = l'iiiii:T?i,1
t+lI = Quantity = *125
Ordered = 4orders
LO
(c) Total Ordering cost p.a. = No. of orders x Ordering cost
=4x{250=(1,000
(d) Total Carrying cost p.a. = O, * x Carrying cost
1
= * 125 x 20"k of t 125 = ( 1,562.50

i
Total Annual Cost = <'1,000 + T 1,562.50 = t 2,562.50
lrAo
(ii) Economic Order Quantity (EOO) = where,
i a
A = Annual Demand = 500 boxes
O = Ordering Cost per order = < 250
C = Carrying Cost per unit per annum = ( 't 25 x 20o/" = 7 25
12x5oox25o
EOO = = *o,ooo = loo boxes
25
Total Annual Cost if EOQ is employed :
(i) Order Cost = (500 / 100 x { 250) 1,250
(ii) Carrying Cost = (1/2 x 100 x { 25) 1.250
2,500
Alternatively,
Total Annual Cost =
'2xAxOxC
x 500 x 25Ox25 = iGrsopoo = ( 2,500
lf EOQ is employed, cost saving will be : (
Total annual cost under present policy 2,562.50
Total annual cost under EOQ 2.500.00
Saving in Cost 62.50
be noted that under both the policies, the purchase cost per box will remain same. Therefore,
It is to
it has been ignored.
Material Cost 59
lllustration 18 :
ZED Company supplies plastic crockery to fast food restaurants in metropolitan city. One of its
products is a special bowl, disposable after initial use, for serving soups to its customers. Bowls are
sold in pack of 1 0 pieces at a price of ( 50 per pack. The demand for plastic bowl has been forecasted
at a fairly steady rate of 40,000 packs every year. The company purchases the bowl direct from
manufacturer at { 40 per pack. The ordering and related cost is { 8 per order. The storage cost is
10% per annum ol average inventory investment.
Required :
(i) Calculate Economic Order Quantity
(ii) Calculate number of orders needed every year
(iii) Calculate the total cost of ordering and storage of bowls for the year.
Solution : (CA-PE-ll, May 2008, adapted)
(i) Economic Order Quantity
l2Ao
EOQ = A= 40,000; O={8; C={40 x10"h=7 4
{
",where
ry=r/fooôoo=4oopacks
(ii) Number of orders per year
Annual requirements + Economic order quantity = 40,000 + 400 = 100 orders per year
Ordering costs (100 orders x t 8.00) 800

Storage costs (400 I 2) x7 4 800
Total cost of ordering and storage 1.600
lllustration 19 : (EOQ - 2 Items)
The Complete Gardener is deciding on the economic order quantity for two brands ol lawn feftilizer:
Super Grow and Nature's Own. The following information is collected.
Particulars Fertilizer
Annual Demand 2,000 Bags 1,280 Bags

Relevant ordering cost per purchase order < 1,200 < 1,400
Annual relevant cost per < 480 { 560
Required:
(i) Compute EOQ for Super Grow and Nature's Own.
(ii) FortheEOQ,whatisthesumofthetotal annual relevantorderingcostsandtotal annual relevant
carrying costs for Super Grow and Nature's Own ?
(iii) For the EOQ, compute the number of deliveries per year for Super Grow and Nature's Own.
Solution :
(i) E.o.o. = where

,ry
A = Annual demand of ferlilizer bags
O = Relevant ordering cost per purchase order
C = Annual relevant carrying cost per bag
EOQ for Super Grow Fertilizer
2x2,OOObagsx{1,200
< 480
= 100bags
EOQ for Nature's Own Fertilizer
2 xl,28O x { 1,400
t 560 = 8Obags
(ii) Total Annual Relevant Costs

= Total annual relevant ordering costs + Total annual relevant carrying costs
Total annual relevant costs for Super Grow Fertiliser
- l z'ooooags x {1.200 1 . [f x 100baosx<+aol

"
| 100bass I L2 i
= t 24,000 + { 24,000 = ( 48,000
Total annual relevant costs for Nature's Own Fertiliser
- |r'zeooags x{1.400I. [f x8Obaosx<sool

-
I aooass I L2 l
= 7-22,400 + 7 22,4OO= ( 44,800
(iii)Number of Deliveries
Number of deliveries / orders for Super Grow Fertiliser per year
2,000 bags
= 20 orders
1 00 bags
Number of deliveries for Nature's Own Fertiliser per year
1,280 bags
80 bags
= r6 orders
(C) EOQ with Discounts

1. Effects : It is often possible to negotiate a quantitydiscount on the purchase price ifbulk orders
are placed. If a quantity discount is accepted this will have the following effects :
- will decrease.
The annual purchase price
- will increase.
The annual carrying cost
-
The annual ordering cost will decrease.
2. Calculations : To establish whether the discount should be accepted or not, the following
calculations should be carried out.
- CalculateTotal Annual Costs (TAC) with the discount.
- Compare this with the annual costs without the discount (at the EOQ point).
3. Steps : The steps involved in calculating the EOQ when quantity discounts are available are as
follows :
l. Calculate the EOQ, ignoring discounts.

2. Ifthe EOQ is smaller than the minimum purchase quantity to obtain a bulk discount, calculate
the total for the EOQ ofthe annual stockholding costs, stock ordering costs and stock purchase
costs.
3. Recalculate the annual stockholdings costs, stock ordering costs and stock purchase costs for
a purchase order size that is onlyjust large enough to qualify for the bulk discount.
4. Compare the total costs when the order quantity is the EOQ with the total costs when the
order quantity is just large enough to obtain the discount. Select the minimum cost alternative.
5. Ifthere is a further discount available for an even larger order size, repeat the same calculations
for the higher discount level.
lllustration 20 :
KL Limited produces product'M'which has a quarterly demand of 8,000 units. The product requires
3 kgs quantity of material 'X' for every finished unit of product. The other information are follows :
Cost of material 'X' : ( 20 per kg
Cost of placing an order : t 1,000 per order
Carrying cost : 15% per annum of average inventory
Required :
(i) Calculate the Economic Order Quantity for material 'X'.

(ii) Should the company accept an offer of 2 percent discount by the supplier, if he wants to supply
the annual requirement of material 'X'in 4 equal quarterly instalments ?
Material Cos, O,
Solution : (CA-lnter, Nov. 2012, adapted)

Annual Demand of Material 'X'
= 8,000 units (per quarter) x 4 (No. of quarters in a year) x 3 kgs (for every finished product)
= 96,000 kgs
(i) Calculation of Economic Order Quantity (EOO) for material 'X'
2 x Annual demand x cost
EOO
Carrying cost per unit per annum
12
x 96,000k9 x {1000
7 20x15"/"
= 8,000 kg
(ii) Evaluation of Cost under different options of 'order quantity'
Working EOQ Offer
1. Total Purchases (kg.) 96,000 96,000
2. Rate per kg. 20 20
3. Purchase cost @ 20 perkg. 1x2 19,20,000 19,20,000
4. Less: Discount @ 2% 38,400
5. Net Cost ol ltems 3-4 19,20,000 '18,81 ,600
6. Add : Order Cost WN1 12,000 4,000
7. Add: Carrying Cost WN2 12,000 35,280
8. Total Cost (including ltems Costs) 5+6+7 19,44,000 9,20,880
Working Notes :
Particulars
a. No. of orders 96,000 / 8,000 12 Given 4
b. Cost per order 1,000 1,000
1. Total Ordering Costs (a x b) 12,000 4,000
c. Average Stock 8,000 / 2 4,000 24,OOO l2 12,000
d. Carrying Cost p.a. 15o/"x7 20 3 15%x(2Ox98%) 2.94
2. Tota! Carrying Costs (c x d) 12,000 35,280
Advice : The Total Cost is lowerif Company accepts an offer of 2 percent discount by the supplier,
when supply of the annual requirement of material 'X' is made in 4 equal instalments.
lllustration 21 :
Sachin Ltd. furnishes the following information :
(i) Consumption = 300 units per quarter

(ii) Cost per unit t 40
(iii) Cost of processing an order { 6'00
(iv) Obsolescence 1 5% p.a.
(v) lnsurance of inventory 25% p.a..
Compute :
(a) Economic Order Quantity
(b) Number of ordes per year
(c) Time between two consecutive orders
A supplier offers a discount of 5% on a purchase of 600 units. Should it be accepted ?
Solution : FYBAF, March 2018, adapted)
l2ô
(a) Economic Order Quantity (EOA) =
fl a
where A=Annual demand =300x4= 1,200units
O=Orderingcost= {600
c = carrying cost per unit per year = (15% + 25"/") ot 1 49 = t 16
2x1,200x600
EOQ = = 300 units
16
62 Cost Accoun:ting (T.Y.B.Com. : SEM-V)
Annulldgmand
(b)Numberof orders- = !ffi=4orders per year
12 Months 12
(c) Time lag between consecutive orders -
Number of Orders
= 4 =3months
Statement Showing Total Cost at Different Ordering Quantity
3A0 units 600 units

Cost of ltem (1,200 x { 40) 48,000 48,000
Less:Discount@5% 2,400
Net Cost of ltems 48,000 45,600
Add : Order Cost (Note 1) 2,400 1,200
Add : Carrying Cost (Note 2) 2,400 4,560
Total Cost (including ltems .52,800 51,360
It is clear from the above calculation that 5% discount should be accepted. Order size will be 600
units per order. The company will save < 1,440 p.a. (< 52,800 - < 51,360).
Working Notes :
1. (a) Total ordering cost if order size is 300 units :

ffi x 600 = < 2,400
(b)Total ordering cost if order is 600 units # x 600 = < 1,200
1
2. (a) Total carrying cost if order size is 300 units
7 x 300 x 16 = ? 2,400
1
(b) Total carrying cost if order size is 600 units x 600 x (4O%of ( 38) = ( 4,560
7
(D) Table Method
lllustration 22 : (Table Method - Different Lots)
A firm's inventory planning period is one year. lts inventory requirement forthis period is 1,600 units.
Assume that its order costs are t 50 per order. The carrying costs are expected to be t 'l per unit per
year for an item.
The firm can procure inventories in various lots as follows : (i) 1,600 units, (ii) 800 units, (iii) 400
units, (iv) 200 units and (v) 100 units. Which of these order quantities is the economic order quantity?
Use (i) Table Method (ii) Equation Method.
Solution :
(i) Table Method

The calculations of the inventory costs for different order quantities are shown in the following table.
lnventory Cost for Different Order Quantities
Parliculars / LOT Formula 1 2 3 4 5

Annual Usage A '1,600 1,600 1,600 1 600 1,600
Order Size o 1,600 800 400 200 100
Ordering Cost Per Order o 50 50 50 50 50
Carrying Cost p.u., p.a. c 'l 1 1 1 1
No. of Orders N=A/Q 1 2 4 8 16
Total Ordering Costs TO=NxO 50 '100 200 400 800
Total Costs TC=Qx112xC 800 400 200 100 50
Total Annual Costs TA=TO+TC 850 500 400 500 8s0
It can be seen from the table that the carrying and ordering costs taken together are the lowest for
the order size of 400 units. This, therefore, is the economic order quantity.
Material Cost 63
(ii) Equation Method
EoQ.=P= 2x1,600x50
1
= 400
A = Annual requirement = 1,600

O = Ordering cost per order = { 50
C = Carrying cost per unit per annum = { 1
lllustration 23 : (Table Method - Different Lots)

The following details are available.
1. lnventory requirement per year 6,000 units.
2. Cost per unit (otherthan carrying and ordering costs), { 5.
3. Carrying costs per item for one year, { 1.
4. Cost of placing each order, { 60.
5. Alternative order sizes (units) : 2,000; 1,200; 1,000; 600 and 200
Determine the economic order quantity.
Solution :
The EOQ is determined in the following table.

Determination of Economic Order Quantity
Particulars / LOT Formula .,. .''

J 4lS
Annual Usage A 6,000 6,000 6,000 6,000 6,000
Order Size o 2,000 1,200 1,000 600 200
Ordering Cost Per Order o 60 60 60 60 60
Carrying Cost p.u., p.a. C 1 1 1 1 1
No. of Orders N=A/Q 3 5 6 10 30

Total Ordering Costs TO=NxO 180 300 360 600 1,800
Total Carrying Costs TC=Qx1l2xC 1,000 600 500 300 100
Total Annual Costs TA=TO+TC 1,180 900 860 900 1,900
Thus, the EOQ is 1,000 units.

Working Notes :
Demand per year

1. Number of orders =
Qrder size
Order size
2. Average inventory =
-T
3. Total carrying cost = Average inventory x Carrying cost per unit
4. Total ordering cost = Number of orders x Cost per order
5. Total cost = Cost of items purchased + Total carrying and ordering costs
Note : Table Method is used when order sizes are fixed. Using formula method, we get
EoQ =F= 2x6,000x60

1
= 849
Since the lot size is fixed, we cannot order 849 units (we have to order the next lot i.e. 1,000). We
have to use the Table Method to find out the EOQ.
lllustration 24 :
From the following information, calculate Economic Order Quantity by using Formula and Tabulation
Method.
Annual Requirement (Units) 6,400
Ordering Cost (Per order {) 100
Carrying Cost per unit (t) 8
Per Unit Price (t) 80
The firm can procure inventories in various lots such as (i) 6,400 units (ii) 3,200 units (iii) 1,600 units
(iv)800 units (v) 400 units (vi)200 unitsand (vii)'100 units. (T.Y.B.Com. Oct.2014, adapted)
64 Cost Accounting (T.Y.B. Com. : SEM-V)
Solution :
A = Annual requirement = 6,400 kgs

O = Ordering cost per order = < 100
C = Carrying cost p.u. = <8
t2Ao
t_ 2 x 6,400 x'100
E.O.Q. =
ll c 8
400 units
Formula 1 2 3 4 5 6 7
Annual Usage A 6,400 6,400 6,400 6,400 6,400 6,400 6,400
Order Size o 6,400 3,200 1,600 800 400 200 100
Ordering Cost per order o 100 100 100 100 100 100 100
Carrying Cost p.u., p.a. C I 8 8 8 8 8 8
No. of Orders N=A/Q 1 2 4 8 '16 32 64
Total Ordering Costs TO=NxO 100 200 400 800 1,600 3,200 6,400
Total Carring Costs TC
=Qx1/2xC 25,600 12,800 6,400 3,200 1,600 800 400
Total Annual Costs TA=TO+TC 25,700 13,000 6,800 4,000 3,200 4,000 6,800
EOQ = 400 units at the lowest cost of < 3,200.
lllustration 25 : (Table Method - Quantity Discounts)
The Purchase Deparlment of your organisation has received an offer of quantity discounts on its
order of materials as under:
Price per tonne Tonnes
a
' '1,400 Less than 500
1,380 500 and less than 1,000
1,360 1,000 and less than 2,000
1,340 2,000 and less than 3,000
1,320 3,000 and above
The annual requirement of the material is 5,000 tonnes. The delivery cost per order is ( 1,200 and
the annual stock holding cost is estimated at 20 per cent of the average inventory.
The Purchase Department wants you to consider the following purchase options and advise which
among them will be the most economical ordering quantity, presenting the relevant information in a
tabular form.
The purchase quantity options to be considered are 400 tonnes, 500 tonnes, 1,000 tonnes, 2,000
tonn€,s and 3,000 tonnes.
Solution :
The Table Method should be used, when different quantity options are to be examined.
Pafiiculars / LOT Formula 1 2ls 4 5

Annual Usage A 5,000 5,OOOl s,OOo 5,000 5,000
Order Size o 400 5ool 1.ooo 2,000 3,000
Ordering Cost Per Order o 1,200 1,2ool 1:200 1,200 1,200
Price p.u. P 1,400 1,3801 1.360 1,320
1,340
Carrying Cost p.u., p.a. C=P x20"/" 280 2761 272 268 264
No. of Orders N=A/Q 12,50 1o.ool s.oo 2.50 1.67
Total Ordering Costs TO=NxO 15,000 12,OOOl 6,OOO 3,000 2,000
Total Carrying Costs TC=Qx112xC 56,000 6e,oool 1,36,000 2,68,000 3,96,000
Total Annual Costs TA=TO+TC 71,000 81,0001 1,42,000 2,71,OOO 3,98,000
Total Purchase Cost TP=AxP 70,00,000 6e,oo,0oo 168,0o,ooo 67,00,000 ,00,000
Total Cost TC=TA+TP 70,71,000 69,81 ,000169 ,42,OOO 69,71,000 ,98,000
Advice to Purchase Department: From the above table, it is clear that the most economical order
size among the given options is 1,000 tonnes, as at this order size, the total cost is minimum. With
Quantity/Volume Discounts, the Total Cost (and notthe Total Ordering + Carrying Cost) is relevant
for finding the EOQ.
Material Cost 65
lllustration 26 : (Quantity Discounts)
A firm is able to obtain quantity discounts on its orders of material as follows :
Price per kg (t) Kg
8.00 less than 250
7.90 250 and less than 500
7.80 500 and less than 1,000
7.60 1,000 and less than 2,000
7.50 2,000 and above
The annual demand forthe material is 2,000 kg. Stock holding costs are 2\o/oot material cost per
annum. The delivery cost per order is { 8. Minimum ordering quantity is 200.
You are required to calculate the best quantity to order. [CA (nter), Modified]
Solution :
The best quantity to order is computed by Tabular Method as :
Particulars / LOT Formula I 2 3 4 5

Annual Usage A 2,000 2,000 2,000 2,000 2,000
Order Size o 200 250 500 1,000 2,000
Ordering Cost Per Order o 8 8 I 8 8
Price p.u. P 8.00 7.90 7.80 7.60 7.50
Carrying Cost p.u., p.a. c =P x20"/" 1.60 1.58 1.56 1.52 1.50
No. of Orders N =fuQ 10 8 4 2 1
TotalOrdering Costs TO=NxO 80 64 32 16 8

Total Carrying Costs TC = Q xl12xC 160 198 390 760 1,500
Total Annual Costs TA=TO+TC 240 262 422 776 1,508
Total Purchase Cost TP=AxP 16,000 15,800 15,600 15,200 15,000
Total Cost TC=TA+TP 16,240 16,062 16,O22 15,976 16,508
Optimum Ordering Quantity 1 ,000 kg having least total cost of ( 15,976.
9. ABC CLASSIFICATION
9.1 MEANING
ABC Classification or Analysis is a system of inventory control. It helps to control different items of
stores classified on the basis of the investment involved. Usually the items are divided into three
categories according to their importance, namely, their value and frequencyof replenishment during
a period.
1. 'A'Category of items consists of only a small percentage 1.e., about 10o/o of the total items
handled by the stores but require heary investment about 70o/o of inventory value, because of
their high prices or heary requirement or both.
2.'B'Categoryofitemsarerelativelylessimportant; theymaybe20ohofthetotal itemsofmaterial
handled by stores. The percentage of investment required is about 20o/o of thetotal investment in
inventories.
3. 'C' Category of items do not require much investment; it may be about l0% of total inventory
value but they are nearly 70o/o of the total items handled by store.
66 Cost Accounting (T'Y'B'Com' : SEM-V)
This is explained in the following graph (known as Pareto Analysis Graph).
6'
o)
100
*eo
o
E80
o- ClassA(10-70)
;70
o
E60
(l)
c50
.g
e40
L
9so
o ClassB(20-20)
920
6 ClassC(70-10)
0
10 20 30 40 50 60 70 80 90100
Cumulative Number of ltems
in lnventory (Percentage)
9.2 CONTROL
1. 'A'categoryofitemscanbecontrolledinvariouswayse.g.(i)bymakingbudgets(ii) byfixing
certain levels like maximum level, minimum level and re-order level (iii) bydetermining economic
order quantities (iv) by using the techniques ofvalue analysis, variety reduction, standardisation
etc.
2. 'B' category of items are controlled to lesser degree than for ',{ category of items. The orders for
the items in this category may be placed after reviewing their situation periodically.
3. 'C' category of items need not be controlled constantly. Orders for items in this group may be
placed either after six months or once in a year, after ascertaining consumption requirements.
9.3 ADVANTAGES
The advantages ofABC analysis are as shown below:
l. It ensures un-interrupted production as well as minimum investment in inventories of stocks of
materials.
2. The cost of purchase, receipt and storage is minimised
3. Management time is saved since attention need be paid only to the most valuable items rather
than all the items. This is known as the principle of 'management by exception'.
4. Much of the routine purchase work can be handled by clerical staff.
lllustration 27 : (ABC Analysis)
A factory uses 4,000 varieties of inventory. ln terms of inventory holding and inventory usage, the
following information is compiled:
No. of varieties of olo

of inventory usage
3,875 96.875 20 5
110 2.750 30 10
15 0.375 50 85
4,000 100.000 100 100
Classify the items of inventory as per ABC analysis with reasons

Material Cost 67
Solution :
Classification of the items of inventory as per ABC analysis

A : 15 number of varieties of inventory items, should be classified as 'A category items because
of the following reasons:
(i) ConstituteO.375"/"oftotal numberofvarietiesofinventoryitemshandledbystoresoffactory,
which is minimum as per given classification in the table.
(ii) 50% of total use value of inventory holding (average) which is maximum according to the
given table.
(iii) Highest consumption of about 85% of inventory usage (in end-product).
B : 110 number of varieties of inventory items, should be classif ied as 'B'category items because
of the following reasons:
(i) Constitute 2.750% of total number of varieties of inventory items handled by stores of factory.
(ii) Requires moderate investment of about 30% of total use value of inventory holding (average).
(iii) Moderate consumption of about 107" ol inventory usage (in end- product).
C : 3,875 number of varieties of inventory items, should be classified as 'C' category items
because of the following reasons:
(i) Constitute 96.875y. of total varieties of inventory items handled by stores of factory.
(ii) Requires investment ot 2O"h of total use value of inventory holding (average).
(iii) Minimum consumption i.e. about 5% of inventory usage (in end-product).
10. PERPETUAL INVENTORY
10.1 MEANING
ICMA defines Perpetual Inventory as a system of records maintained by the control department
which reflects the physical movement of stocks and their correct balance. Under the Perpetual
lnventory System, closing stock is ascertained, not by taking physical count, but from the stock
ledger itself, after each receipt and issue. The value ofstock is also calculated after each transaction
ofreceipt or issue. Perpetual system thus helps to keep constant track ofhigh-value items.
Under the perpetual system ofinventory, cost ofgoods sold upto a day is ascertained first, as above
and then cost of inventory (on that day) is found by the following formula:
Closing stock on that day: Opening stock + Purchases to-date - Cost ofgoods sold to-date.
This system keeps : (l) Bin Cards, and 1i4 Stores Ledger. This system helps continuous stock taking
(explained below).
10.2 CONDTflONS
The success ofperpetual inventory depends upon the following conditions:
1. The Stores Ledger (showing quantities and amount of each item) is kept accurately on timely
basis.
2. Bin Cards are accurate and up-to-date.
3. Balances shown by bin cards and stock ledger are reconciled.
4. Physical balances of a number of items are checked every day systematically and by rotation.
5. The causes ofdiscrepancies, ifany, between physical balances and book figures are explained
properly.
6. Corrective entries where required are made promptly.
7. The causes ofthe discrepancies are removed.
10.3 ADVA}ITAGES
The main advantages of perpetual inventory are as follows:
1. Physical stocks can be counted and book balances adjusted as and when desired wittrout waiting
for the entire stock-taking to be done.
68 CostAccounting(T.YB.Com.: SEM-V)
2. Profit and Loss Account (for interim period) can be prepared quickly due to prompt availability
ofstock figures.
3. Diflerences are easily located and corrected promptly.
4. It highlights surplus, obsolete and slow-moving items, so that action may be taken in time.
5. Stocks can be kept within limits and purchase requisitions can be made for correct quantity at the
proper time.
10.4 PERIODIC SYSTEM OF INVENTORY

Under the Periodic Inventory System, closing stock is ascertained bytaking an actual physical count
of all the inventory items on hand on a particular date. Alternatively, the quantity may be ascertained
flom the Bin-Card showing quantity details of stock items. The value of stock on such date is equal
to : Quantity of stock so ascertained x Rate.
Under the periodic system ofinventory, cost ofinventory (at the year-end) is ascertained first, as
above and then cost of goods sold (during the year) is found by the following formula:
Cost ofgoods sold during the Opening stock + Purchases during the year - Closing stock.
10.5 DtSTtNCTtON
Sr. Periodic lnvent6ry dystem Perpetua! lnventory System

Nn
1 This system is based on physical It is based on book records.
verification.
2 This system provides information about It provides continuous information about
stock and cost of goods sold at a about stock and cost of sales.
particular date.
3 This system determines first, inventory It determines first, cost of goods sold
and, computes cost of goods sold as and, computes stock as balancing figure
balancing figure.
4 Cost of goods sold includes loss of Closing inventory includes loss of goods
goods as goods not in stock are as all unsold goods hre assumed to be in
assumed to be sold. inventory.
5 Under this method, inventory control is lnventory control is possible under this
not possible. system.
6 This system is simple and less expensive. It is complex and costlier method
7 It requires closure of business for lnventory can be determined without
counting of stock. stopping the operations of the business.
11. CONTINUOUS STOCK VERIFICATION
@
The checking ofphysical inventory is an essential feature ofeverysound system ofmaterial control.
Such a checking may be periodical or continuous. Under the periodic or annual method, closing
stock is counted on a particular date e.g. the year-end. Since all the items have to be counted in a
short time, the production department has to be shut down during those days. There is no element of
surprise that is essential for effective control. The stock discrepancies remain undetected until the
end ofthe period. The system ofcontinuous stock-taking overcomes these disadvantages. Continuous
Stock taking consists of counting and verifting the number of items dailythroughout the year so that
during the year all items ofstores are covered three or four times. The stock verifiers are independent
of the stores, and the stores staffhave no prior knowledge as to the particular items that would be
checked on anyparticular day.
Material Cost 69
11.2 ADVANTAGES
The advantages of continuous stock-taking are:
1. Normal functioning can continue.
2. Whole-time specialised staffcan be engaged for the purpose since the work is spread throughout
the year.
3 . Stock di screpancies can be noticed and corrected in time.
4. It keeps the stores staffalert because there can be a surprise checking.
5. There is less obsolete stock lying in stock for long time.
6. Final Accounts can be ready quickly. Interim accounts can also be prepared any time.
12.1 HOW TO RECORD STOCK MOVEMENTS

(1) Introduction: The Store Keeper is responsible for the Receipt of Materials, Issue of Materials
and the Balance Material in Stock. As seen earlier, the Receipt of Material is recorded in the
Goods Receipt Note and the Issue of Material is recorded in Material Issue Note. These are like
Vouchers used in Financial Accounts for recording dailytransactions. Just as the vouchers are
posted in Journals and Ledgers, these Notes (Material Receipt and Material Issue Notes) are also
posted in (i) Stock Ledger and (ii) Bin Cards. These are explained below.
(2) Stock Ledger: Stock Ledger contains a record of all receipts and issues of all the materials
during a particular period. It shows the Description and Code ofthe item and the various Stock
Levels such as Minimum Level, Maximum Level, Re-order Level and Re-order Quantity. It
contains the details ofthe date ofthe receipt or the issue and the reference ofthe document i.e.
the Material Received Note or the Material Issue Note. It discloses not only the Quantities but
also the Values of the receipts and issues. It may also indicate the quantities expected to be
received against orders placed. A specimen of Stock Ledger is given below:
EXHIBIT 8: SPECIMEN STOCK LEDGER
ABC COMPANY
STOCK LEDGER
FolioNo.:xx
Code:xx
Descriptionxxxx
Maximum Level x x Minimum Level x x
Re-order Level x x Re-order Quantity x x
Date Document Receipts lssues Closing Stock On Order
Ref. No. o
o Value o Value o Value
xx xxxx xx xxx xx xxx xx xxx xx
(3) Bin Card: In large organisations, the Stock Ledger is maintained by the Costing Department
which may be located away from the actual stores. Therefore, the details of receipts, issues and
balance of an item are not readily available with the Store Keeper. The Store Keeper, in such
cases, maintains a Bin Card. Seperate Bin Cards are maintained for each item. Each Bin Card is
attached or fixed to the respective Bin or Shelf The Bin Card contains the record ofthe Quantity
Received, Issued and Balance ofthe item lying in that Bin. ABin Card contains almost the same
columns as in a Stock Ledger. However, only Quantities and no values are mentioned on a Bin
Card. A specimen Bin Card is given below:
70 Cost Acc o unting (7. Y. B. Com. : SEM-V)
EXHIBIT9:BINCARD
ABC COMPANY
BIN CARD
Folio No. :x x
Code:xx
Descriptionxxxx
Maximum Level x x Minimum Level x x
Re-order Level x x Re-order Quantity x x
Date Document Receipts lssues Closing Stock On Order
Ref. No. Qtv. Qtv. Qtv. Qtv.
xx xxxx xx xxx xx xxx xx xxx xx
(4) Difference between Bin Card and Stores Ledger
No. Bin Card Stores Ledger

(1) It is maintained by the storekeeper It is maintained in costing department.
in the store.
(2) It contains only quantitative details It contains information both in quantity
of material received, issued and and value.
returned to stores.
(3) Entries are made when transactions It is always posted after the transaction.
take place.
(4) Each transaction is individually Transactions may be summarised and
posted. then posted.
(s) Inter-department transfers do not Material transfers from one job to another
appear in Bin Card. job are recorded for costing purposes.
12.2 STOCK LEDGER ON FIFOANDWEIGHTEDAVERAGE BASIS
12.2.1 lntroduction
(1) Methods : When Materials have been purchased for a speciflc Job the total Material cost ofthat
specific lot is directly debited to that Job. However, normally, in a large organisation, material is
being continuously purchased and added to the existing stock. Issues are made from such stock
and it is not possible to link a particular issue with a particular purchase. If the materials are
purchased at different rates at different times the problem arises of which rate to use for valuation
of material issued. Various methods have been devised for this purpose.
(2) Factors in Selection : An organisation has a wide choice to select a suitable method for pricing
its material issues. Selection of the right method is important since it affects the valuation of
material issued, valuation of closing stock and the ascertainment of the cost of a job/contract/
batch etc. The lssue Rate worked out by adopting a method should satisflithe following objectives-
(a) It should recover the Cost of Materials.
(b) lt should reflect the Current Market Price.
(c) It should be stable from period to period.
(d) It should avoid adjustments in stock valuation.
(e) It should show the correct profit for the year.
The methods used for valuation (FIFO and Weighted Average Cost) prescribed in the syllabus, are
explained below.
(3) First In First Out [FIFO]
(i) Meaning: This method assumes that the Material received first is issued first.
Materiul Cost 71
(ii) Evaluation: Judged in view of the objectives mentioned above, this method has the following
advantages and disadvantages-
(a) Recovers Purchase Cost: This method recovers the purchase cost. Thus, when all the
quantity is issued out the value also becomes Nil.
(b) Ignores Market Price: The issue rate arrived at by this method does not reflect the
current market price. It reflects the historical cost.
(c) Rate Variation: The issue rate mayvary from period to period. Thus the costs charged to
the same job for the same quantity of material may vary from one period to another. Even
the issue rate for rnaterial in respect of two jobs on the same day may be different under
this method.
(d) Stock Valuation: The valuation of closing stock is done at latest purchase price under
this method. It requires no adjustment in valuation ofclosing stock.
(e) Profits and Changing Prices: In times of rising prices, the value of consumption of
materials is low and the value of closing stock is high. Thus, this method shows higher
profits during periods ofinflation. On the other hand, it shows lower profits in periods of
depressi on.
lllustration 28 :
Let us assume the following transactions to illustrate this method.

Date Receipts lssue Stock
Units Rate Value Units Rate Value Units Rate Value
1-1-2014 10 1.00 10.00
2-1-2014 15 1.20 18.00
3-1-2014 10 1 00 10.00
4-1-2014 5 1 20 6.00 10 1.20 12.00
25 28.00 15 16.00 10 12.00
Thus, the issue of 10 units is valued at { 1 .00 and the issue of 5 units thereafter is valued at { 1 .20
on First ln First Out [FIFO] basis. The Closing stock under this basis gets valued at the latest rate.
(4) Average Cost Price
(i) Types: Average Cost rate may be the (a) Arithmetical Average (b) Weighted Average or (c)
Periodical Average. The Arithmetical Average Rate is computed as follows:
All Purchase Rates
Arithmetical Average Rate :
No. of Purchases
The Weighted Average Rate is computed as follows
Total Purchase Values
Weighted Average Rate = Total Purchase
Quantities
The Periodical Average Rate is the Average Rate fixed for the entire period in advance on the
basis of, say, the opening rate for the period.
(ii) Evaluation: Judged in view ofthe objectives mentioned above, this method has the following
advantages and disadvantages-
(a) Recovers Purchase Cost: This method recovers the purchase cost. Thus when all the
quantity is issued out the value also becomes Nil.
(b) Retlects Market Price: The issue rate arrived at by this method is close to the current
market price.
(c) Rate Variation: This method, being an 'Average', avoids large variations in the issue
rate from one period to another or from onejob to another.
(d) Stock Valuation: The valuation ofclosing stock is done at an average rate. There is no
need to make significant adjustments in stock valuation.
(e) Profits and Changing Prices: Being an Average Method, it avoids fluctuations in profits
due to changes in price level.
72 CostAccounting (T.YB.Com. : SEM-V)
lllustration 29 :
Let us assume the following transactions to illustrate the different types of Average Costs.
Date Receipts /ssues
Value Units Periadical
Ave 'a9e AVe 4ge
1-1-2014 50 2.00 100

(Op. Bal.)
3-1-2014 30 2.00 60.00 2.OO 60.00 2.00 60.00
6-1-2014 80 2.20 176
8-1-2014 40 2.10 84.00 2.12 84.00 2.O0 60.00
130 276 276
(i) Arithmetical Average Rate
The issue on 8-1-2014 will be valued at t 2.10 under this method ,.". 4944
2
= 2.10
(ii) Weighted Average Rate

The issue on 8-'l-2014will be valued al7 2.'l1-arrived at as under - !130 = 2.lZ
(iii)Periodic Average Rate
This is the Rate ol the Opening Balance [Op. Bal.] i.e. ( 2.00.
(5) Illustrations
[Tutorial Note : The syllabus requires preparation of Stock Ledger based only on FIFO and
Weighted Average Cost.l
12.2.2 Basic lllustrations

lllustration 30 :
From the following padiculars, prepare stock record by FIFO and Weighted Average Method.
I Date Transaction Units Rate
o4-1-2014 Purchase 40 30
17 -1-2014 Purchase 60 28
20-1-2014 Sale 50 35
22-1-2014 Purchase 80 29
25-1-2014 Sale 80 33
28-1-2014 Sale 20 34
30-1-2014 Purchase 100 26
31-1-2014 Sale 90 35
The stock on hand on 1st January,2014 was 50 units @ { 25 each.

Solution :
(A)FrFO
STOCK LEDGER
Date lssues Balance
I lnitc , Amount Units Price Amount Units Value
01-1-2014 opng 50 25.00 1,250
04-1-2014 40 30.00 1,200 50 25.00 1,250
40 30.00 1,200
17-1-2014 60 28.00 1,680 50 25.00 1,250
40 30.00 1,200
60 28.00 1,680
20-1-2014 50 25.00 1,250 40 30.00 1,200
60 28.00 1,680
22-1-2014 80 29.00 2,320 40 30.00 1,200
60 28.00 1,680
80 29.00 2,320
Material Cost 73
25-1-2014 40 30.00 1,200 20 28.00 560

40 28.00 1,120 80 29.00 2,320
28-1-2014 20 28.00 560 80 29.00 2,320
30-1-2014 100 26.00 2,600 80l 29.00 2,320
I 1oo I 26.00 2,600
31-1-2014 80 2e.oo I 2,320
10 26.00 I 260 90 26.00 2,340
Therefore, the value of stock as on 31-01-2014 : 9O units @ ( 26 = ( 2,340
(B) Weighted Average (Perpetuat lnventory System)
STOCK LEDGER
/ssues Balance
Units Price Afiount Units Amount Units
01-1-2014 opng -l 50 1,250

o4-1-2014 40 30.00 1,200 -l 90 2,450
17-1-2014 60 28.00 1,680 -l 150 4,'130
20-1-2014 50 27.53 1,377 100 2,753
22-1-2014 80 29.00 2,320 -l 180 5,073
25-1-2014 80 28.18 2,254 100 2,819
28-1-2014 20 28.19 564 80 2,255
30-1-2014 100 26.00 2,600 -l 180 4,855
31-1-2014 90 26.97 2,427 90 2,428
Working Notes :
(1)lssue on January 20 is valued al? 27.53 which is the weighted average rate, arrived at as
follows :
1,250 + 1,200 +'1,680 4'130

50+40+60 - 150
= 27.533 rlo 27.53
(2) lssue on January 25 is valued at t 28.18 per kg. which is the weighted average rate arrived at as
follows:
2'753 + 2'320
100 + 80
- 5'073
180
= 28.183 rlo 28.19
(3) lssue on January 31 is valued al< 26.97 per kg. which is the weighted average rate arrived at as
follows:
2,255 + 2,600 4'855
100 - = 26.971r1o 26.97
80 + 180
Therefore, the value of stock as on 31-1 -2O14 :90 units @ < 26.97 = 7 2,428
(C)Weighted Average (Periodic Inventory System)
(1) Value of opening stock = 50 units x { 25.00 = { 1,250
(2) Ascertaining Total Purchases
Date Pafticulars Quantity Rate Total
04-1-2014 Purchases 40 30.00 1,200
17-1-2014 Purchases 60 28.00 1,680
22-1-2014 Purchases 80 29.00 2,320
30-1-2014 Purchases 100 26.00 2,600
-3oo
-8it
74 Cost Accounting (7. Y.B. Com. : SEM-V)
(3) Value of Closing Stock = x Units
1'1s9 + 7r9oo nl?!o

- 50 + 280 xeo = 330 ,eo =
(2,468
[Note : This is given for additional information. Always use only Perpetual lnventory System in
an examination problem.l
Note : The Stock Book entries for both purchases / receipts and sales / issued are always made at
cost. The selling price, even if given, is to be ignored.
lllustration 31 : (Cost of Goods Sold)
Calculate by FIFO method and Weighted Average Cost of inventory valuation, the cost of goods
sold and value of closing inventory from the following data :
Date Transactions Price
01-01-2013 Opening Stock 1 ,500 20

05-02-2013 Purchases 750 25
10-03-2013 Puqchases 600 22
15-03-2013 Sales 1 ,800 30
12-04-2013 Sales 750 31
16-05-2013 Purchases 600 25
25-06-2013 Sales 750 32
Solution :
(1) First ln First Out (FIFO)

Stores Ledger Account
Purchases Issues Balance

Units Rate Amount Units Rate Amount Units Rate Amaunt
fl a a fl a
01-01-2013 1,500 20 30,000
05-02-2013 750 25 18,750 1,500 20 30,000
750 25 18,750
10-03-2013 600 22 13,200 1,500 20 30,000
750 25 18,750
600 22 13,200
1s-03-2013 1,500 20 30,000 450 25 11,250
300 25 7,500 600 22 13,200
12-O4-2013 450 25 11 ,250
300 22 6,600 300 22 6,600
'16-05-2013 600 25 15,000 300 22 6,600
600 25 15,000
25-06-2013 300 22 6,600
450 25 11,250 150 25 3,750
Total 46,950 73,200 3,750
Cost of goods sold = Opening Stock + Purchases - Closing Stock
= 30,000 + 46,950 - 3,750 = { 73,200
Value of closing inventory < 3,750
Material Cost 75
(2) Weighted Average Cost
' Date Purchases Issues Balance

Rate Amaunt Units w.A.R. Amount Units Amount
r { r f
01-01-20't3 1,500 30,000

0s-02-2013 750 25 18,750 2,250 48,750
10-03-2013 600 22 13,200 2,850 61,950
15-03-2013 1,800 21.74 39,126 1,050 22,824
12-04-2013 750 21.74 16,303 300 6,521
16-05-2013 600 25 15,000 900 21,521
25-06-2013 750 23.91 17,934 150 3,587
Total 46,950 73,363 3,587
Cost of goods sold < 73,363.
Value of Closing inventory = Opening Stock + Purchases - Cost of Goods Sold
= { 30,000 + { 46,950 - < 73,363 = t 3,587.
lllustration 32 :
From the following information relating A to Z item, value closing stock on 31-12-2013 applying -
(a) FIFO, (b) Weighted average
Stocks (kgs) on 1-12-2013 5,000 units @ < 14
Purchases (kgs)
(i) On 18-12-2013 4,200 units @ < 13
(ii) On 23-12-2013 3,800 units @ { 9
Sales (kgs)
(i) On 7-12-2013 1200 units
(ii) On 16-12-2013 2600 units
(iii)On 19-12-2013 1800 units
(iv)On 30-12-2013 3400 units
Solution :
(A) FrFO
STOCK LEDGER
Date Receipts Issues Balance

Units Price Amount Units Amount Units Price I Value
01-12-2013 opno. -l 5,000 14.00 70,000
07-12-2013 1,200 14.00 16,800 3,800 14.00 53,200
16-12-2013 2,600 14.00 36,400 1,200 14.00 16,800
18-12-2013 4,200 13.00 54,600 1 ,200 14.00 16,800
I 4 ,200 13.00
19-12-2013 1,200 I 14.00 16,800
600 | 13.00 7,800 3,600 13.00 46,800
23-12-2013 3,800 9.00 34,200 3 ,600 13.00 46,800
I 3 ,800 9.00 34,200
30-1 2-201 3 3,400 13.00 44,200 200 13.00 2,600
3,800 9.00 34,200
Therefore, the value of stock as on 31-12-201 3 : 4,000 units @ < 36,800
76 CostAccounting (T.Y.B.Com. : SEM-I)
(B)Weighted Average (Perpetual lnventory System)
STOCK LEDGER

Units Price Amount .Units Units Value
Rate
01-12-2013 opng -I 5,000 70,000
07-12-2013 1,200 14.00 16,800 3,800 53,200
16-12-2013 2,600 14.00 36,400 1,200 16,800
18-12-2013 4,200 13.00 54,600 -l 5,400 71,400
19-12-2013 1,800 13.22 23,796 3,600 47,604
23-12:2013 3,800 9.00 34,200 -l 7,400 81,804
30-12-2013 3,400 11.05 37,570 4,000 44,234
Working Notes :
(1) lssue on December 19 is valued al7 13.22 which is the weighted average rate, arrived at as
follows :
16,800 + 54,600 71'4oo
1 ,20O.+ 4,200
- 5,400
= 13.222tto'tg.2z
(2) lssue on December 30 is valued at { 1'1 .05 per kg. which is the weighted average rate arrived at
as follows :
47,604 + 34,200 81'804
3,600 + 3,800
-
7,400
= 11.054 r/o 11.05
Therefore, the value of stock as on 31-12-2013 : 4,000 units @ < 11.05 =< 44,234
lllustration 33 : (Cost of Goods Sold, Profit)
Keep stock record on FIFO, and Weighted Averages basis from the following transactions :
Purchases : March 2014

Date Units Bate Per unit (t)
01 500 18
04 700 20
09 900 18
15 300 25
25 200 20
31 500 25
Sales : March 2014
02 200 22
07 500 25
11 400 21
18 800 28
27 500 25
Find out cost of goods sold and the profit. (FYBAE Oct. 2010, adapted)
Solution :
(A)'FrFO METHOD
STOCK LEDGER
Date Purchases Sales $tock

Units Rate Units Units Rate
01 500 18 500 18 9,000
02 200 300 18 5,400
04 700 20 300 18 5,400
700 20 14,000
19,400
Material Cost 77
07 500 500 20 10,000

09 900 18 s00 20 10,000
900 18 16,200
26,200
11 400 100 20 2,000
900 18 16,200
18,200
15 300 25 100 20 2,000
900 18 16,200
300 25 7,500
25,700
18 800 200 18 3,600
300 25 7,500
11,100
25 200 20 200 18 3,600
300 25 7,500
200 20 4,000
15,100
27 500 200 20 4,000
31 500 25 200 20 4,000
500 25 12,500
16,500
Value of stock under FIFO is < 16,500.
Profit when stock is valued under FIFO basis.
Opening Stock Nit
Add l Purchases
500 x 18 = 9,000
700 x 20 =14,000
900 x 18 16,200
300 x25 = 7,500
200 x20 = 4,000
500 x 25 =12,500 63,200
63,200
Less : Closing Stock (as valued under FIFO) 16,500
Cost of Goods Sold (A) 46,700
Sales
200 x22 = 4,4OO
500x25=12,500
400x21 =8,400
800 x 28 =22,400
500x25=12.500
(B) 60,200
Profit (B - A) 13,500
(B) Weighted Average (Perpetual lnventory System)

STOCK LEDGER
Receipfs lssues Balance
Units Price Amount Units Wt. Avg. Amount Units Value
Rate
01-3-2014 500 18.00 9,000 -l 500 9,000
02-3-2014 200 18.00 3,600 300 5,400
04-3-2014 700 20.00 14,000 I 1,000 19,400
78 Cost Accounting (7.Y. B. Com. : SEM-V)
07-3-2014 500 19.40 9,700 500 9,700

09-3-2014 900 18.00 16,200 1,400 25,900
11-3-2014 400 18.50 7,400 1,000 18,500
15-3-2014 300 25.00 7,500 1,300 26,000
18-3-2014 800 20.00 16,000 500 10,000
25-3-2014 200 20.00 4,000 700 14,000
27-3-2014 500 20.00 '10,000 200 4,000
31-3-2014 500 2s.00 12,500 700 16,500
Total 63,200 46,700
Working Notes :
(1) lssue on Nlarch 7 is valued at ( 19.40 which is the weighted average rate, arrived at as follows
5,400 + '14,000 19'400
700 - = 19.40
300 + 1,000
(2) Issue on March 1'l is valued at T 18.50 which is the weighted average rate arrived at as follows
9,700 + 16,200 25'9oo
500 + 900
- 1,400
= 18.50
(3) lssue on March 18 is valued at { 20 which is the weighted average rate on arrived at as follows
18,500 + 7,500 26,000
20
1,000 + 300 1,300
(4) lssue on March 27 is valued at < 20.00 which is the weighted average rate, arrived at as follows
10,000 + 4,000
500 + 200 =J@=29
700
Therefore, the value of stock as on 31-3-2014 : 700 units { 16,500.
(5) Cost of Goods sold = Opening Stock + Purchases - Closing Stock = 63,200 - 16,500 = 46,700
(6) Profit = Sale - Cost of goods sold = 60,200 - 46,700 = 13,500
lllustration 34 :
Stock of material on 1-3-2013 was 1,000 units at < 10 per unit. The following purchases and issues
were made during the month of March, 2013.
Purchases
2-3-2013 2,000 units at { 11 per unit
3-3-2013 3,000 units at { 12 per unit
11 -3-201 3 4,000 units at { 13 per unit
21-3-2013 5,000 units at ( 14 per unit
!ssues
5-3-2013 5,400 units
3 2,600
15-3-201 units
31-3-2013 5,000 units
You are required to prepare : (1) Stock Ledger fuc under FIFO method. (2) Stock Ledger fuc under
Weighted Average Cost Method. (FYBAE Oct. 2015, adapted)
Solution :
(1) Stores Ledger Account (FIFO Method) :
Date P Issues falan

Units Rate Amount Units Rate Amount Units Rate Amount
01-03-2013 1,000 10 10,000
02-03-2013 2,000 11 22,000 1,000 10 10,000
2,000 11 22,OOO
03-03-2013 3,000 12 36,000 1,000 10 10,000
2,000 11 22,O00
3,000 12 36,000
Msteriul Cost 79
05-03-2013 1,000 10 10,000

2,000 11 22,000
2,400 't2 28,800 600 12 7,200
11 -03-2013 4,000 13 52,000 600 12 7,200
I 4,000 13 52,000
15-03-2013 600 7,200
2 000 t3l 26,000 2,000 13 26,000
21-03-2013 5,000 14 70,000 2,000 13 26,000
I 5,000 14 70,000
31-03-2013 2,000 26,000
3,000 t,l 42,O00 2,000 14 28,000
Closing stock on 31-3-20't 3 as per FIFO was 2,000 units valued at t 28,000
(ii) Stores Ledger Account (Weighted Average Cost)
Date Purchases Issues Balance
Units Rate Amount Units WL Avg. Amount Units Amount
Rate
01-03-2013 -l 1,000 10,000
02-03-2013 2,000 11 22,000 -l 3,000 32,000
03-03-2013 3,000 12 36,000 -l 6,000 68,000
05-03-2013 5,400 11 .33 61,200 600 6,800
11 -03-2013 4,000 13 52,000 I 4,600 58,800
15-03-2013 2,600 12.78 33,235 2,000 25,565
21-03-2013 5,000 14 70,000 -l 7,000 95,565
31-03-2013 5,000 13.65 68,261 2,000 27,304
Closing stock on 31-3-2013 as per Weighted Average was 2,000 units valued al7 27,3O4.
lllustration 35 : (Materials Consumed)
The following information is provided by 'S' Ltd. for the fortnight at April, 2014. Stock on 1-4-2014 ot
material 'X' 100 units @ { 5 Per Unit.
Purchases Units
05-4-2014 300@<6
08-4-2014 500@<7
12-4-2014 600@<8
Sales Units
06-4-2014 250
10-4-2014 400
14-4-2014 500
Calculate using FIFO method of pricing issues
(1) The value of materials consumed during the period and
(2) The value of Stock of Materials as on 14-4-2014.
Solution :
ln the Books of 'S' Ltd.

FIFO METHOD
STORES LEDGER
Date Purchases Receipts ,ssues Balance

Qtv. Rate Amt. Qtv. Rate Amt. Qtv. Rate Amt.
1-4-14 Op. Balance 100 5 s00
5-4-14 Purchases 300 6 1,800 100 5 500
300 6 1,800
2,300
6-4-14 Sales 100 5 500

150 6 900 150 6 900
8-4-14 Purchases 500 7 3,500 150 6 900
500 7 3,s00
4,400
10-4-14 Sales 150 6 900
250 7 1,750 250 7 1,750
12-4-14 Purchases 600 8 4,800 250 7 1,750
600 I 4,800
6,550
14-4-14 Sales 250 7 1,750
250 8 2,000 350 8 2,800
Total 1 ,150 7,800
Notes :
(1) Value of material consumed < 7,800.
(2) Value of closing stock under FIFO is < 2,800.
lllustration 36 : (Cost of Goods Sold)
From the following data of March, 2O14, calculate the cost of goods sold and value of closing stock
using the following methods - FIFO and Weighted Average Price :
Date Purchase Sale

Rate
01 2000 10 06 1200
02 300 12 11 1 000
10 200 14 30 200
22 300 't1
Solution (FYBAE Oct. 2015, adapted)

Stores Ledger Account (FIFO Method)
Date Purchases lssues Balance

Qty. Rate Total Qtv. Rate Total aw. Rate Total
1-3-2014 2,000 10 20,000 2,000 10 20,000
2-3-2014 300 12 3,600 2,000 10 20,000
300 12 3,600
2,300 23,600
6-3-2014 1,200 10 12,000 800 10 8,000
300 12 3,600
1,100 11 ,600
10-3-2014 200 14 2,800 800 10 8,000
300 12 3,600
200 14 2,800
1,300 14 14,400
11-3-2014 800 10 8,000 100 12 1,200
200 12 2,400 200 14 2,800
1,000 10,400 4,000
22-3-2014 300 11 3,300 -300
100 12 1,200
200 14 2,800
300 11 3,300
600 7,300
Material Cost 8t
30-3-2014 100 12 1,200 100 14 1,400
100 14 1,400 300 11 3,300
200 2,600 400 4,700
2,800 29,700 2,400 25,000
Valuation of Closing Stock (FIFO) = < 4100
Cost of Goods sold = ( 25,000
Stores Ledger (Welghted Average Method)
'Purchases Issues Balance
Qty. Rate Amt, Qtv. Rate , Amt. Qtv. Rate Amt,
1-3-2014 2,000 10 20,000 -l 2,000 10.00 20,000
2-3-2014 300 12 3,600 -l 2,300 10.26 23,600
6-3-2014 1,200 10.26 12,312 1 ,100 10.26 11 ,288
10-3-2014 200 14 2,800 -l 1,300 10.84 14,088
11-3-2014 1,000 10.84 10,840 300 10.84 3,248
22-3-2014 300 11 3,300 -l 600 10.91 6,548
30-3-2014 200 10.91 2,182 400 10.91 4,366
Total 2,800 29,700 2,400 24,608
Valuation of Closing Stock (Weighted Average Cost tVlethod) = < 4,366
Cost of Goods sold = ( 24,608
Working Notes :
Calculation of Weighted Average Cost

20,000 + 3,600 23'600
2-3-14 =
2,000 + 300
- 2,300
= 10.2G
11,288 + 2,800 14'088

10-3-1 4
1,'100+ 200
- 1,300
= 10.84
3,248 + 3,300 6,548

22-3-14 =
300 + 300
- 600
= 10.91
lllustration 37 : (Carriage lnward)

M/s Desai & Co. a trader of Plastic Toys had 12,000 toys valued at { 3 per toy. His purchases and
sales during first six months ending 31st December,2013 were as under:
On 22nd July, 2013 Sales 5,000 Toys @ { 20 each
on 23rd July, 2013 Purchased (carriage lnward < 1,000) 10,000 Toys @ < 15 each
On 25th October 2013 Sales 8,000 Toys @ 7 24 each
On 26th October 2013 Purchased (Carriage lnward < 1 ,200) 12,000 Toys @ { 1 8 each
On 31st December 2013 Sales 13,000 Units @ { 29 each
You are required to ascertain :
Cost of stock on hand as on 31st Dec. 2013 under each of the following methods :
(1) FIFO (2) Weighted Average

Solution :
ln the Books of M/s Desai & Co.

(1) F|FO
STORES LEDGER
Date Reeaipts ,ssues

No. Rate Amount A/o. Rate Amount No. aate I Amount
01-07-2013 12,000 3.00 36,000
22-07-2013 5,000 3.00 15,000 7,000 3.00 21,000
23-07-2013 10,000 15.10 1,51 ,000 7,000 3.00 21,000
10,000 15.10 1,51 ,000
82 Cost Accounting (TYB. Com. : SEM-V)
25-1 0-20 1 3 7,000 3.00 21,000

1,000 15.10 15,100 9,000 15.10 1,35,900
26-10-2013 12,000 18.10 2,17,200 9,000 15.10 1,35,900
12,000 18.10 2,17,200
31-12-2013 9,000 15.10 1,35,900
4,000 18.10 72,400 8,000 18.10 1,44,800
(2) WEIGHTED AVERAGE

No. Rates Amount No. Rates Amount No. Amount
01-07-2013 12,000 36,000
22-07-20-t3 5,000 3.00 15,000 7,000 21,000
23-07-2013 10,000 15.1 0 1,51 ,000 17,000 1,72,OOO
25-10-2013 8,000 10.12 80,941 9,000 91,059

26-1 0-201 3 12,000 18.10 2,17,200 21,000 3,08,259
31-12-2013 13,000 14.68 1,90,827 8,000 1,17,432
Note : Cost of stock should include all costs of bringing the goods to their present condition. Hence,
the carriage inward is added to purchase / stock cost.
12.2.3 Returns and Shortages
Materials returned by store to vendor, material returned to store, and shortages are recorded in the
Stock Book as shown below -
Item How to Record in Stores Ledger

1. Materials Returned by Such returns should be entered in the issue column and
Store to Vendor valued at the invoice price.
[Note : The difference between the Stores Ledger Price
which includes freight, etc. and lnvoice Price is charged
as overhead.l
2. Materials Returned to Such returns are entered in the receipt column as if
Store they were fresh purchases at the original issue price
3. Shortages during Shortages of materials found during physical verification
Physical Verif ications should be treated like an issue and entered in the issue
column and valued at the rate as per the method adopted,
i.e., FIFO or weighted average.
4. Excess during Excess on verification should be recorded at the latest
Physical Verif ications purchase price in the Receipt Column.
lllustration 38 : (FIFO : Shortage)

The stock of material on hand on 1st Dec.,2013 was 1300 units @ < 3.50 each. The following
purchases and issuestook place subsequently. Calculate quantity and value ol stock on hand on
31st Dec.,2013 under FIFO method.
Date Purchases Rate Per
Quantity f
2-12-2013 500 units 4.00
4-12-2013 2000 units 5.50
18-12-2013 400 units 5.00
/ssues
6-12-2013 2300 units
8-12-2013 300 units
15-12-2013 700 units
Stock verification revealed shortage of 25 units on 17th Dec., 20't 3.
Material Cost
83
Solution :
FIFO METHOD
STORES LEDGER
Date Issues Balance

Units Rate Amount Units Rate Amount Units Rate Amount
01-12-2013 1,300 3.s0 4,550
02-12-2013 500 4.00 2,000 1,300 3.50 4,550
500 4.00 2,000
04-12-2013 2,000 5.50 11,000 1,300 3.50 4,550
500 4.00 2,000
2,000 5.50 11,000
06-12-2013 1 300 3.50 4,550
500 4.00 2,000
500 5.50 2,750 1,500 5.50 8,250
08-12-2013 300 5.50 1,650 1,200 5.50 6,600
15-12-2013 700 5.50 3,850 500 5.50 2,750
17-12-2013 25 5.50 138 475 5.50 2,612
18-12-2013 400 5.00 2,000 475 5.50 2,612
400 5.00 2,000
Total 875 4,612
Note : Shoftage on 17-12 on verification is recorded/valued as an issue.
lllustration 39 : (FIFO : Returns to Stores and Vendor)
Prepare a stores ledgeron FIFO method :
1-5-2015 Opening stock is 400 units at { 4 per unit
4-5-2015 Purchased 600 units at ( 6 per unit
8-5-2015 lssued 800 units
16-5-2015 Purchased 600 units at ? 8 per unit
20-5-2015 lssued 700 units
25-5-2015 Returned from factory 10 units issued on 20 tVlay
28-5-2015 Returned to vendors 12 units purchased on 16 lVlay
Solution :
SToRES LEDGER ACCOUNT (FrFO)

Date Receipts lssue Stock
Quantitl Rate Amount Quantil Rate Amount Xuantit) Rate Amount
1 400 4.00 1,600
4 600 6.00 3,600 400 4.00 1,600
600 6.00 3,600
8 400 4.00 1,600
400 6.00 2,400 200 6.00 1,200
16 600 8.00 4,800 200 6.00 1,200
600 8.00 4,800
20 200 6.00 1,200
500 8.00 4,000 100 8.00 800
25 10 8.00 80 100 8.00 800
'10 8.00 80
Return
:o stores
28 12 8.00 96 88 8.00 704
Return 10 8.00 80
to vendor
Stock at the end is 98 units valued al7 784.
84 CostAccounting (TYB'Com' : SEM-V)
lllustration 40 : (FIFO : Returns and Shortages)

The following is a summary of the receipts and issue of materials in a lactory during January'
January
1 Opening balance 500 units @ < 25 per unit
3 lssue 70 units
4 lssue 100 units
8 lssue 80 units
13 Received from supplier 200 units @ < 24.0O per unit
14 Returned to store 15 units @ < 24 per unit
16 lssue 180 units
20 Received 240 units @ < 24.75 per unit
24 lssue 304 units
25 Received 320 units @ < 24 Per unit
26 lssue 112 units
27 Returned to store 12 units @ ( 24.50 p.u.
28 Received 100 units @ < 25 per unit.
Work out on the basis of First-in-First-out. On the 1Sth there was a shortage of five units. Again it
was found a shortage of 8 units on 27lh January. (FYBAF Oct. 2005, adapted)
Solution :
STORES LEDGER ACCOUNT (FIFO)

Receipts lssue
Rate Amount Rate Amount
Ja nua ry
1 500 25.00 12,500
3 70 25.00 1,750 430 10,750
4 100 25.00 2,500 330 8,250
I 80 25.00 2,000 250 6,250
13 200 24.OO 4,900 250 25.00 6,250
200 24.00 4,800
14 15 24.0O 360 250 25.00 6,250
Return 200 24.OO 4,800
15 24.OO 360
15 5 25.00 125 245 25.00 6,125
Shoft- 200 24.00 4,800
age 15 24.O0 360
16 180 25.00 4,500 65 25.00 1,625
200 24.OO 4,800
15 24.OO 360
20 240 24.75 5,940 65 25 1,625
200 24 4,800
15 24 360
240 24.75 5,940
24 65 25 1,625
200 24 4,800
't5 24 360
24 24.75 594 216 24.75 5,346
25 320 24 7,680 216 24.75 5,346
320 24 7,680
26 112 24.75 2,772 104 24.75 2,574
320 24 7,680
27 12 24.50 294 104 24.75 2,574
320 24 7,680
12 24.50 294
Msterial Cost 85
27 (8) 24.75 198 96 24.75 2,376
Short- 320 24 7,680
age 12 24.50 294
28 100 25 2,500 96 24.75 2,376
320 24 7,680
12 24.50 294
100 25 2,500
Note : Closing Stock 528 units = { 12,850.
lllustration 41 : (FIFO : Damaged Units + Excess Stock)
The following details are given of a certain material of the month of March 2018 :
March 1 Opening stock - 200 tons at { 460 per ton
March 4 lssue to Job No. 1 - 140 tons
March 6 Purchase - 350 tons at < 450 per ton
March 8 Condemned due to deterioration in quality and transferred to scrap - 30 tons.
March 17 Purchase - 200 tons at T 480
March 20 lssue to Job No.4 - 120 tons
March 25 Purchase - 180 tons at t 470
lVarch 28 lssue to Job No. 5 - 280 tons
March 31 Excess found in stock - 43 tons, reason traced to the use of wrong measure
during the month
Show the stores ledger entries assuming FIFO as the pricing system.
Solution | (FYBAF, Nov. 2017, adapted)
SToRES LEDGER ACCOUNT (F|FO)
Date Receipts ,ssue Stock
Or tanlih Rate Amount Rate Rate Amount
March
1 200 460 92,000
4 140 460 64,400 60 460 27,600
6 350 450 1,57,500 60 460 27,600
3s0 450 1,57,500
8 30 460 13,800 30 460 13,800
Scrap 350 450 1,57,500
I 30 460 13,800
50 450 22,500 300 450 1,35,550
14 210 450 94,500 90 450 40,500
17 200 480 96,000 90 450 40,500
200 480 96,000
20 90 450 40,500
30 480 14,400 170 480 81,600
25 180 470 84,600 170 480 81,600
180 470 84,600
28 170 480 81 600
110 470 61 700 70 470 32,900
3'l 43 470 20,210 113 470 53,110
Excess
Notes :
1. Scrap is valued according to usual issue rate under FIFO.

2. Excess of stock is valued at current issue price, i.e., < 470.
3. Surplus stock will be transferred to Costing Protit and Loss A/c, as it is an abnormal gain due to
avoidable causes.
86 Cost Accounting (T-Y.B.Com. : SEM-V)
lllustration 42 : (FIFO : Damaged Units)

From the following details find out closing stock of Bharat lndustrial Ltd. as per FIFO method :
Purchases Sa/es Pice Per

Unit (
1-11-2013 Balance 40 14.00
2-11-2013 30 15.00
4-11-2013 20 15.00
5-11 -2013 40 18.50
10-11-2013 10 19.00
17-11-2013 3; 16.00
20-11-2013 25 20.00
28-11-2013 u9 13.00
30-11-20'13 40 16.00
On 29-11-2013, two units were found damaged and had to be discarded

Solution :
Stores Ledger Account (FIFO Method)
Date Purchases Issues Balance

Qtv. Rate Amount Qtv. Rate Amount Qtv. Rate Amount
01 -11-2013 40 14 560
o2-11-2013 30 15 450 40 14 560
30 15 450
04-'t1-2013 20 15 300 40 14 560
30 15 450
20 15 300
05-11-2013 40 14 560 30 15 450
20 15 300
10-11-2013 10 15 150 20 15 300
20 15 300
17-11-2013 30 16 480 20 15 300
20 15 300
30 16 480
20-11-2013 25 15 375 15 15 225
30 16 480
28-11-2013 50 13 650 15 15 225
30 16 480
50 13 650
29-11-2013 2 15 30 13 15 195
(dama- 30 16 480
sed) 50 13 6s0
30-11-2013 13 15 195 3 16 48
27 16 432 50 13 650
Total 40 627 53 698
Value of closing stock as on 30th November 2013 under FIFO method for 53 units is { 698.
Note : Damaged units are treated as an issue; and recorded and valued accordingly.
lllustration 43 : (Wt. Avg. : Return)
Prepare stores ledger using weighted average method :
1-12-2014 Opening stock is 500 units at ( 2 each
3-12-2014 Purchased 400 units at ( 2.50 each
5-12-2014 lssued 600 units, vide MR number 15
7-12-2014 Purchased 800 units at t 3.00 each
Material Cost 87
12-12-2014 Returned from issue on 5 December, 20 units
17-12-2014 Purchased 400 units at { 4.00 each
Solution :
Stores Ledger Account (Weighted Average Method)
Date /ssues Balance

Qtv. Rate Amaunt Qtv. Rate Amount Qtv. Rate Amount
01-12-2014 500 2.0000 1,000
03-12-2014 400 2.50 1,000 900 2.2222 2,000
05-12-2014 600 2.2222 1,333 300 2.2233 667
07-12-2014 800 3.00 2,400 1,100 2.7881 3,067
09-12-2014 500 2.7881 1,394 600 2.7883 1,673
12-12-2014 20 2.222 44 620 2.7693 1,717
17-12-2014 400 4.00 1,600 1,020 3.2519 3,317
25-12-2014 600 3.2519 1,951 420 3.2523 1,366
Stock at the end is 420 units valued at t 1,366.
lllustration 44 : (Wt. Avg. : Returns to Stores and Vendors)
From the following details of stores receipts and issues of material ABC in a manufacturing unit,
prepare the stockledger using the weighted aveiage method of valuing the issues.
1 January Opening stock is 2,000 units at ( 2.50 each
3 January lssued 'l ,500 units of production
4 January Received 4,500 unit at ( 3 each
8 January lssued 1,600 units to production
9 January Returned to stores 100 units by production department
(f rom the issue of 3 January)
16 January Received 2,400 units at { 3.25 each

19 January Returned to the supplier 200 units out of the quantity received on 4 January
20 January Received 1,000 units at T 3.50 each
24 January lssued to production 2,100 units
27 January Received 1,200 units at { 3.75 each
29 January lssued to production 2,800 units
Solution :
Date ,ssues
Qtv. Rate I Amount Qtv. Rate Amount uty. Rate Amount
January
1 I 2,000 2.50 5,000
3 -l 1,500 2.50 3,750 500 2.50 1,250
4 4,500 3.00 13,500 5,000 2.95 14,750
8 -l 1,600 2.95 4,720 3,400 2.95 10,030
9 100 2.50 250 3,500 2.93 10,280
16 2,400 3.25 7,800 5,900 3.06 18,080
19 I 200 3.00 600 5,700 3.17 17,480
20 1,000 3.50 3,500 6,700 3.13 20,980
24 -l 2,100 3.13 6,573 4,600 3.13 14,407
27 1,200 3.75 4,500 5,800 3.26 18,907
29 I
2,800 3.26 9,128 3,000 3.26 9,779
88 Cost Accounting (T.Y.B. Com. : SEM-U
lllustration 45 : (Wt. Avg. : Shortages)

The following are the details of receipts and issues of a material of stores in a manufactu ring company
for the period of three months ending 30th June, 2018.
There was 1,500 kg in stock at April 1, 2018 which was valued at t 4.80 per kg'
Receipts :
Date Quantity(kg) Bate (kg)

April 10 1,600 5.00
April 20 2,400 4.90
May 5 1,000 5.'10
May 17 1,100 5.2O
May 25 800 5.25
June 11 900 5.40
June 24 1,400 5.50
lssues :
Date Quantity (kg)

April4 1,100
Aptil24 1,600
May 10 1,500
May 26 1,700
June 15 ,5001
June 25 1,200
lssues are to be priced on the basis of weighted average method. The stock verifier of the company
reporled a shortage of 80 kgs. on 31st May, 2018 and 60 kgs. on 30th June,2018. The shortage is
treated as inflating the price of remaining material on account of shortage.
You are required to prepare a Stores Ledger Account. (CA, Nov. 08; FYBAE Oct. 12, adapted)
Solution :
Date t lssues Balance

Qtv. Rate Amount Qtv. Rate Amount Qtv. Rate Amount
1 1,500 4.80 7,200
April 4 1 ,100 4.80 5,280 400 4.80 1,920
10 1,600 5.OO 8,000 2,000 4.96 9,920
April 20 2,400 4.90 11,760 4,400 4.93 21,680
Aprll24 1,600 4.93 7,888 2,800 4.93 13,792
May 5 1,000 5.10 5,100 3,800 4.97 18,892
tu 10 1,500 4.97 7,455 2,300 4.97 11,437
lVay 17 1 ,100 5.20 5,720 3,400 5.05 17,157
May 25 800 5.25 4,200 4,200 5.09 21,357
M 26 1,700 5.09 8,653 2,500 5.09 12,704
lVay 31 Short- 80 2,420 5.25 12,704
age
June 11 900 5.40 4,860 3,320 5.29 17,564
June 15 1,500 5.29 7,935 1,820 5.29 9,629
June 21 1,200 5.29 6,348 620 5.29 3,281
June 24 1,400 5.50 7,700 2,O20 5.40 10,981
June 30 Short- 60 1,960 5.60 10,981
age
Material Cost 89
Working Notes :
Weighted Average Rates
9,920
1. April 10: Zp00 = 4.96
2.1,680
2. Aprit 20: O6' = 4.93
13,792
3. April 24 i Z,BOO = 4.93
18,892
4. May5: 3^goo =
4'97
11,437
5. May 10 4'97
' 23oo =
17,157
6. May 17
' 3,400 = 5'05
21,357
7. May 25 t 4,200 = 5'09
12,704
8. May 26 :
,5oo = 5'09
12,704
9. May 31 | 2A2O = 5.25
17,564
10. June 11 : 3J20 = 5.29
9,629
11.June 15: l€20 =5.29
3,281
12.June21 : U =5.29
10,981
13.June 24 = 5'40
z,On
10,981
14. June 30 : , ,uo = 5.60
lllustration 46 : (Wt. Avg. : Return and Loss)
From the following pafticulars, prepare Stores Ledger for the month of Janu ary 2018 showing material
issue prices on the Weighted Average Price Method.
Date I Particulars Units Rate

1-'t-2018 Receipts of Material 500 2.00
1-1-2018 lssue of Material 400
10-1-2018 Receipt of tVlaterial 400 3.00
't8-1-2018 Receipts of Material 400 4.00
29-1-2018 Receipts of Material 280 s.00
30-1-2018 Return of 10 units (issued on 15-1 -2018)
31-1-2018 lssue of ltlaterial 375
5 units loss was revealed on 27-1-2018 during stock verification
90 Cost Accounting (7'.Y.8. Com. : SEM-V)
Solution :
Date Receipts lssues Balance

Qty. Rate Amount Qty. Rate Amount Qty. Rate Amount
01-01-2018 500 2.00 1,000 500 2.00 1,000
01-01-2018 400 2.O0 800 100 2.OO 200
10-01-2018 400 3.00 1,200 500 2.80 1,400
1 5-0 1 -201 8 300 2.80 840 200 2.80 560
.18-01-2018 4.00 1,600 600 3.60 2,160
400
22-01-2018 200 3.60 720 400 3.60 1,440
27-O1-2018 5 3.60 18 395 3.60 1,422
Loss
29-01-2018 280 5.00 1,400 675 4.18 2,822
30-01-2018 10 2.80 28 685 4.16 2,850
Return
31 -01-2018 375 4.'t6 1,560 310 4.16 1,290
Illustration 47 : (Wt. Avg. Returns and Loss)

From the following particulars, prepare Stores Ledger for the month of ianu ary 2018 showing material
issue prices on the Weighted Average Price Method :
Materials lssue of Materials

Date Units Rate per unit Date Units
Jan. l, 20'18 500 <2 Jan. 1, 2018 400
Jan. 10,2018 200 <3 Jan. 15,2018 100
Jan. 18,2018 400 <4 Jan.22,2018 200
Jan.28, 2018 300 <5 Jan. 31 ,2018 300
January 29,2O18 - Return of 10 units issued on 1Sth Jan.
2 units loss was revealed on January 28 during'stock verification
Solution :
Ddte Receipts Issues Balance

Qtv. Rate I Amount Qtv. Rate Amount Qtv. Rate
January
1 500 2.oo I 1,000 500 2.00 1,000
1 -l 400 2.O0 800 100 2.OO 200
10 200 3.00 600 300 2.67 800
15 -l 100 2.67 267 200 2.67 533
18 400 4.00 1,600 600 3.56 2,133
22 -l 200 3.56 712 400 3.55 1,421
28 300 5.00 1,500 700 4.17 2,921
28 2 4.17 8 698 4.17 2,913
I Loss
29 10 2.6?l 27 708 4.15 2,940
Return
31 -l 300 4.15 1,245 408 4.15 1,695
Materisl Cost 9l
lllustration 48 : (Shortage - WA)
The stores ledger of a manufacturing company reveals the following entries of a parlicular material:
Rate Amount
January 2018 :
2 4,000 1 80 7,200
5 2,000 1 75 3,500
18 10,000
February 2018 :
3 5,000
14 3, 000 1 85 5,550
18 3, 000 1 90 5,700
20 10,000
Opening stock as on 1-'l -18 was 20,000 units valued at ( 40,000. Closing stock as per physical
verilication on 28-2-18 was 6,950 units.
Complete the account of the material and work out of the value of the closing stock as on 28-2-18 on
the basis of Weighted Average method of valuation.
Solution :
Date Receipts ,ssues Balance

( Ri Amount Qtv. Rate Amount Qtv. frate Amount
01 -01-18 20,000 2.00 40,000
02-01-18 4,000 1.80 7,200 24,000 1.97 47,200
05-01-18 2,000 1.75 3,500 26,000 1.95 50,700
18-01-18 10,000 1.95 19,500 16,000 1.95 31,200
03-c2-18 5,000 1.95 9,750 11 ,000 1.95 21,450
14-02-18 3,000 1.85 5,550 14,000 1.93 27,OOO
18-02-18 3,000 1.90 5,700 17,000 1.92 32,700
20-02-18 10,000 1.92 19,200 7,000 1.93 13,500
28-02-18 50 1.92 96 6,950. 1.93 13,404
shor.t-
age
- Closing Stock given
Illustr6tion 49 : (FiFO + Wt. Avg. : Purchase / Sales Returns)
Following are the purchases and sales of wheat in the months of March, 2014. Prepare a statement
showing valuation of stock on the basis of (i) FIFO and (ii) Weighted Average Cost method.
Date Purchases Rate Sa/es

(Ks.) (o
March 1 600 4.00
4 300
5 300 3.80
.10
200
18 200 4.2;
23 +oo
29 400 4.40
31 300
Out of purchases March 5, 50 Kgs were returned to the supplier on March 8.

Out of Sales on March 23, a customer returned 20 Kgs on tVlarch 26.
(TY.B.Com., Oct. 2015, Nov.2016, adapted)
92 Cost Accounting (T.Y.B.Com, : SEM-V)
Solution :
(i) FrFo
STOCK LEDGER
Date Purchases / Returns Sales / Returns Stock

2014 Units (Kg.) Rate (O Units (Kg) Units x Rate Amt.
Mar. 1 600 4.00 600 x 4.00 2,400
o4 300 300 x 4.00 1,200
05 300 3.80 300 x 4.00 1,200
300 x 3.80 1,140
2,340
08 50 300 x 4.00 1,200
(Returns) 250 x 3.80 950
2,150
(Note - 1)
10 200 100 x 4.00 400
250 x 3.80 950
't,350
18 200 4.20 100 x 4.00 400
250 x 3.80 950
2O0 x 4.20 840
2,190
23 400 150 x 4.20 630
26 20 4.20 170 x 4.20 714
(returns) (Note 2)
29 400 4.40 170 x 4.20 714
4O0 x 4.4O 1,760
2,474
31 300 270 x 4.40 1 ,188
Value of Stock under FIFO is < 1 ,188.
Note : 1
50 Kgs returned on March, 8 are out of March 5 Purchases, hence they are shown as issued at a
rate of 3.8 per Kg. and accordingly stock is calculated.
Note : 2
Sales returns on March 26 are out ol March 23 Sales. Under FIFO method Sales on fvlarch 23 are
outofKg.100@(4+Kg25O@{3.8+K950@(4.2.Hence20Rg.receivedarepricedalT4.2O
per Kg.
Since returns can always be identified with concerned purchase / sale, returns are valued on 'specific
cost' basis, and not FIFO or weighted average.
(B)Weighted Average (Perpetua! lnventory System)
STOCK LEDGER
Date Receipts lssues Ba

Unrts Rate Amount Units Wt. Avg. Amount Units Value
Rate
01-3-2014 600 4.00 2,400 600 2,400
04-3-2014 300 4.00 1,200 300 1,200
05-3-2014 300 3.80 1,140 600 2,340
05-3-2014 50 3.90 195 550 2,145
10-3-2014 200 3.90 780 350 1,365
18-3-2014 200 4.20 840 550 2,205
23-3-2014 400 4.01 1,604 150 601
Materisl Cost 93
26-3-2014 20 4.01 80 170 681

29-3-2014 400 4.40 1,760 570 2,441
31-3-2014 300 4.28 1,284 270 1,157
Working Notes :
(1) lssue on March 5 & March 10 is valued as follows

# = 3.90
'
(2) Purchase returns of 50 kg. are out of the total stock of 600 kg. which was valued at ( 3.90 per kg.
(3) lssue on March 23 is valued as follows,

# = 4.01
(4) Sales on March 23 are out of stock valued at { 4.01 per kg. Hence returns of 20 kg. are also
taken at a rate of ( 4.0'l per kg.
(5) Weighted Average Rate on March 31 is arrived at as follows ,

# = 4.28
Therefore, the value of stock as on 31-3-2014 :27O units @ 7 4.28 = < 1,'l 57
13. INVENTORY TURNOVER RATIO
(1) Meaning : Inventory Turnover Ratio is one of the techniques of inventory control. It expresses
the relationship between the cost of material consumed and the average stock held.
(2) Objective : The objective of computing thg Inventory Turnover Ratio is to determine the efficiency
with which inventories are maintained. The objective is to find out -
(a) Fast Moving Stock i.e. stock in great demand
(b) Slow Moving Stock i.e. stock in low demand
(c) Dormant Stock i.e. stock having no demand at present
(d) Obsolete Stock i.e. stock no longer in demand
(3) Formula : InventoryTurnover Ratio is computed with the help of following formula :
Cost of materials consumed during the period

InventoryTurnover Ratio: C"" : ... times
"
where,
(i) Cost of Materials Consumed :
Opening Stock + Purchases - Closing Stock
(ii) Average Stock = 1/2 (Opening Stock + Closing Stock)
Note : This ratio is usually expressed as 'X' number of times.
365 days
Average No. of days for which an average inventory is held :
Inventory Turnover
(4) Interpretation : It indicates the speed with which the inventory is consumed. In general, a high
ratio indicates fast moving stock and a low ratio indicates slow moving stock. However, too high
ratio and too low ratio call for further investigation. A too high ratio may be the result of a very
low inventory levels which may result in fiequent stock-outs. On the other hand, a too low ratio
may be the result of excessive inventory levels, slow-moving or dormant or obsolete inventory
and thus, the firm may incur high carrying costs. Thus, a firm should have neither a very high nor
a very low stock turnover ratio, it should have a satisfactory level. Tojudge whether the ratio is
satisfactory or not, it should be cornpared with its own past ratios or with the ratio of similar
firms in the same industry or with industry average.
(5) Utility : On the basis of lnventory Turnover Ratio, the management may take the necessary
corrective action such as -
(a) Decision as to how to prevent the under-stocking of fast moving stock items.
(b) Decision as to how to prevent the over-stocking of slow moving stock iterns.
(c) Decision as to whether to retain or scrap the dormant stock items.
(d) Decision as to scrapping or discard of obsolete stock items.
94 CostAccountins (TY.B.Com. : SEM-V)
(6) Classification : According to the turnover rate of different items, materials may be classified
into five categories as under :
(i) Fast-Moving Materials : These are material which may be found to reveal high turnover
(more than the average turnover of all nraterials). Stocks should be maintained at a higher
level in this casc.
(ii) Material with Average Turnover : The turnover rate of these materials may be approximately
the sarne as the turnover rate of all materials taken together.
(iii)Slow-Moving Materials : These materials generally have a low turnover rate. Lower levels
of stock are maintained in these cases.
(iv)Dormant Materials : These materials are found to have no recurring use but maybe required
in future. The following factors should be taken into account while determining the stock
level of dormant items : (a) availability in the market; (b) cost of the item; (c) storage cost
involved; (d) chances of use in future; and (e) procurement time which may be available
when the item is required.
(v) Obsolete Material : Some materials may not be used any longer due to one or more reasons
like its substitution byanother rnaterial, change in the product-design. switch over to a new
product in place of the older one, etc. Obsolete materials should be sold off.
lllustration 50 :
The following data are available in respect of material X for the year ended 31st March, 2015.
Opening Stock 90,000

Purchases during the year 2,7O,O00
Closing Stock 1,10,000
Calculate :
1. lnventory turnover ratio
held.
2. The number of days for which the average inventory is (Delhi 2010, adapted)
Solution :
Cost of Materials Consumed = Opening Stock + Purchases - Closing Stock
= 90,000 + 2,70,000 - 1,10,000 = ( 2,50,000
90,000 + 1,10,000
AverageStock= 2 =(1,00,000
Cost of Materials Consumed
lnventory Turnover Batio = A*rage Stock
< 2'50'ooo
- < 1,00,000
= 2.5 times
Number of days for which Average lnventory is hetd = Sffi#t = 146 days
lllustration 51 :
From the following information calculate stock turnover ratio :
Gross Sales < 5,00,000

Sales Return < 25,000
Opening Stock < 70,000
Closing Stock at Cost < 85,000
Purchase { 3,00,000
Direct Expenses < 1,00,000
Solution :
Cost of Goods Sold

lnventory Turnover Ratio = Average
lnventory at Cost
cost or Goods - crosins Stock
"'o
::?:J1ii::,fiil:iffi';,'l"r1il8""ses
Muterial Cost 95
Opening Stock + Closing Stock

Average Stock =
2
70,000 + 85,000
=( 77,500
2
3,85,000
lnventory Turnover Ratio = ??,SOO =
4.97 times
lllustration 52 :
From the following date forthe year ended 31st December, 2014, calculate the inventory turnover
ratio of two items and put fonryard your comments on them :
Opening Stock (1 January,2014) 20,000 18,000

Purchasing during the year 1,04,000 54,000
C Stock 1st December,2014 12,000 22,OOO
Solution (FYBAE Oct. 2012,2013, adapted)

Computation of lnventory Turnover Ratio of X and Y
Step 1 : Cost of [/aterials Consumed (< 20,000 + ( 1,04,000 (< 18,000 + { 54,000
(Op. St. + Purchase - Cl. St.) - < 12,000) = ( 1,12,000 = ( 50,000
Step 2 : Average lnventory
Opening stock + Closing stock <20,000 + (12,000 (<ta,ooo + {22,ooo)
2
= { 16,000
2
{
tr.l
20,000
=
Step 3 l lnventory Turnover Ratio
Cost of Materials Consumed _ (< t,12,ooo) _ (<so,ooo)
Average lnventory - l. < 16000 , - {. < ,oôoo ]
(Step1*Step2) -7 = 2.5
Result : lnventory tumover is high with respect to material X when compared to that of material Y.
Decision : The management should concentrate on material Y for which turnover ratio is only 2.5.
It has to analyse the causes and take remedial measures immediately as the material Y lies idle for
longer period in stores.
Itlustration 53 :
The inventory records of Suneel Brothers, Delhi, for the year 2014 show the following figures :
Purchases
Material A 700 kg 11 ,500 kg 200 kg
Material B 200 litres 11,000 litres 1,200 litres
Material C 1,000 kg 1,800 kg 1,200 kg
The inventory is valued @ { 1 per kg or litre.
Calculate the material turnover ratios regarding each of these materials and express in number of
days the average inventory held.
Solution :
Materials Consumed = Opening Stock + Purchases - Closing Stock

Material A = 700 + 11,500 - 2OO = 12,000 kg of t 12,000
lVlaterialB = 200 + 11,000 -1,200 = 10,000litres of < 10,000
Material C = 1,000 + 1,800 - 1,200 = 1,600 kg of { 1,600
Average lnventory = (Opening Stock + Closing Stock) / 2
Material 4 = (700 + 200) I 2 = 45O kg of { 450
Material B = (200 + 1,200) I 2 =7OO litres of { 700
MaterialC = ('1,000 + 1,200) l2 = 1,100 kgs of {'1,100
96 Cost Accounting (T Y B. Com. : SEM-V)
Value of materials consumed during a period

Material Turnover Ratio = Value of average inventory held
Materia! A = 12,000 / 450 = 26.67
Material B = 10,000 / 70O = 14.29
Material C = 1,600 / 1,100 = 1.46
Materia! Turnover Ratio expressed in number of days
Value of average inventory x Days of the period
Materials consumed
Days of the period
or
lnventory turnover
Materialo = o:?i:=uu
't2,000 o, t91 = l4daysapprox.
26.6
Materiatt = '9?I:ûu or j9 = 26daysapprox.

10,000 14.29
Materiatc = '''9o^l=tuu
1 ,600
19?
"r. 1.46
= 2sodaysapprox.
lllustration 54 :
The following information relates to year 2013-2014.

Details Material-l Material-ll
Opening Stock 5,00,000 20,00,000
Closing Stock 3,00,000 16,00,000
Net Purchases 42,00,000 50,00,000
Calculate the material turnover ratios regarding each of these materials and express in number of
days the average inventory held. (T.Y.B.Com., Oct. 2014, adapted)
Solution :
Calculation of Material Turnover Ratio
I ll
Opening Stock 5,00,000 20,00,000
Add : Purchases 42,00,000 s0,00,000
47,00,000 70,00,000
Less : Closing Stock 3,00,000 16,00,000
Cost of Materials 44,00,000 54,00,000
Material I (?) Material ll (t)
Opening Stock + Closing Stock 5,00,000 + 3,00,000 20,00,000 + 16,00,000
AverageStock=- 2 2
= 4,00,000 = 18,00,000
Cost of Material 44,00,000 54,00,000
Material Turnover Ratio = A*raS" Sto"k 4,00,000 18,00,000
= 11 times = 3 times
365 365
No. of days the Average lnventory held
l l times 3 times
365
Turnover Ratio = 33.18 days = 121.67 days
Material Cost 97
EXERCISES
OUTLINE
No. Topic Page
14. Theory
14.1 Marksl
14.2
15. Objective
15.1 Multiple
15.2 Fiil
15.3 Following Columns
15.4 State
15.5 Check Your
16. PracticalProblems 106
16.1 Stock Levels 106
16.2 EOQ 108
16.3 EOQ and 112
16.4 113
17. Master Step-By-Step 122
17.1 122
17.2 EOQ 123
17.3 Stock 124
14. THEORY QUESTIONS
14.1 DESCRTPTTVE QUESTTONS [7 OR I MARKSI

1. Define Material Cost. Explain the principles of Material Cost. [Ans.: Para 1]
2. Describe the different types of Materials [Ans.: Para 1.2]
3. What do you mean by Material Control ? What are its objectives and advantages ?
[Ans.: Para 2]
4. What is the scope of Material Control ? What are its essential requirements ? [Ans.: Para 2]
5. Enumerate the procedures involved in Receipt of Materials. Describe any one procedure in
detail. [Ans.: Para 3]
6. specimen.
Explain the procedure for Purchase Requisition and give a [Ans.: Para 3.2]
7. Explain the procedure for Purchase Order and give a specimen. [Ans.: Para 3.4]
8. Explain the procedure for lnspection of Goods. Give a specimen of lnspection Note.
[Ans.: Para 3.5]
9. Explain the procedure for Receipt of Goods. a
Give specimen of Goods Received Note.
[Ans.: Para 3.6]
10. Enumerate the items to be included and excluded for the purpose of Valuation of Receipts.
[Ans.: Para 3.7]
11. What do you mean by a Material Requisition Note ? Draw a specimen. [Ans.: Para 4.2]
12. What do you mean by Bill of Materials ? Explain illustrate
and [Ans.: Para 4.3]
l3.Distinguish between Material Requisition Note and Billof Materials. [Ans.: Para 4.3]
14. Which items are to be included and excluded for the purpose ol valuation of issue of materials ?
[Ans.: Para 4.4]
98 CostAccounting(T.Y.B.Com. : SEM-I)
15. Enumerate the techniques used for lnventory Control. Explain any one in detail. [Ans.: Para 6]
16. Explain how inventory control is achieved through Stock Levels. [Ans.: Para 7]
17. Explain how inventory control is achieved through Economic Order Quantity (EOa).
[Ans.: Para 8]
18.What do you mean by ABC Classification ? What are its advantages ? [Ans.: Para 9]
19. What do you mean by Perpetual lnventory ? Describe the conditions on which its success depends.
What are its main advantages ? [Ans.: Para 10]
20.Explain in brief - Continuous'Stock Verification. [Ans.: Para 11]
21. Describe and distinguish between the two main lnventory Accounting Records.fAns.: Para 12]
22. Describe and distinguish between the two main methods used for maintaining the stock ledger.
[Ans.: Para 12.2]
23. What do you mean by lnventory Turnover Ratio ? What are the objectives ? How is it interpreted?
[Ans.: Para 13]
Write a Short Note.on -
1. The Principles of Material Cost [Ans.: Para 1]
2. Types of Materials [Ans.: Para 1.2]
3. Material Control [Ans.: Para 2]
4. Purchase Requisition [Ans.: Para 3.2]
5. Enquiry for Supply / lnvitations for Tenders [Ans.: Para 3.3]
6. Purchase Order [Ans.: Para 3.4]
7. lnspection of Goods [Ans.: Para 3.5]
8. Goods Received Note [Ans.: Para 3.6]
9. Valuation of Receipts [Ans.: Para 3.7]
l0.Objectives of Material lssue Control [Ans.: Para 4.1]
11. Material Bequisition Note [Ans.: Para 4.2]
12. Bill of Materials [Ans.: Para 4.3]
l3.Valuation of lssue of Materials [Ans.: Para 4.4]
14. Stock Verification [Ans.: Para 5]
15. lnventory Control [Ans.: Para 6]
16. Stock Levels (Oct. 14) [Ans.: Para 7]
17. Minimum Level [Ans.: Para 7.1]
18. Maximum Level [Ans.: Para 7.2]
1 9. Reorder Level
[Ans.: Para 7.3]
20. Economic Order Quantity (EOa) [Ans.: Para 8]
21 . ABC Classification
[Ans.: Para 9]
22. Perpetual lnventory [Ans.: Para 10]
23. Continuous Stock Verification
[Ans.: Para l1]
24. Stock Ledger [Ans.: Para 12.1]
25. Bin Card [Ans.: Para 12.1]
26. FIFO Basis [Ans.: Para 12.2]
27. Weighted Average Basis [Ans.: Para 12.2]
28. lnventory Turnover Ratio
[Ans.: Para 13]
OBJECTIVE QUESTIONS
15.'! MULTTPLE CHOICE QUESTTONS
A Conceptual
1. ln most of the manufacturing industries, the most impoftant element of cost is
(a) Material (b) Labour
(c) Overheads (d) None of the above
Msterial Cost 99
2. Continuous stock taking is a part of
(a) Annual stock taking (b) perpetual inventory
(c) ABC analysis (d) None of the above
3. Which of the following is considered to be a normal loss of material?
(a) Loss due to accidents (b) pilferage
(c) Loss due to careless handling of material (d) Loss due to breaking the bulk
4. Bin card is maintained by the
(a) Accounts depaftment (b) Costing department
(c) Stores (d) None of the above
5. Bin card contains
(a) Details of the price of raw material lying in the Bin
(b) Details of the price and quantity of raw material lying in the Bin
(c) Details of quantity of material lying in the Bin
(d) None of the above
6. Which of the following assumptions are made forthe calculation of Economic Order Quantity?
(a) Anticipated usage of material in units is known
(b) Cost per unit of material is constant and known
(c) Ordering cost per order is fixed
(d) Allthe above
7. Which of the following is an accounting record ?
(a) Bill of l\flaterials (b) Bin card
(c) Stores ledger (d) All of these
8. Which of the following documents is used for issuing materials to production depaftments ?
(a) Purchase Requisition Note (b) Stores requisition Note
(c) Goods Received Note (d) Stores Credit Note
9. Which of the following methods of stock control aims at concentrating efforts on selected items
of materials ?
(a) Perpetual inventory system
(b) Materials turnover
(c) Maximum, minimum and re-order level setting
(d) ABC analysis
10.The classification of items in ABC analysis is made on the basis of
(a) lnvestment value of materials (b) Consumption value of materials
(c) Quantity of materials consumed (d) All of these
11. The storekeeper should initiate a purchase requisition when stock reaches
(a) Minimum level (b) Maximum level
(c) Re-order level (d) Average level
12. Which of the following material losses should be transferred to Costing Profit and Loss Account ?
(a) Loss by evaporation (b) Loss due to improper storage of materials
(c) Loss due to breaking the bulk (d) All of these
13. A written request to a supplier for specified goods at an agreed upon price is called a:
(a) Purchase order (b) Receiving repoft
(c) Purchase requisition (d) tVlaterials requisition form
14.Which ol the following documents in a cost accounting system is designed to exercise control
over the delivery of and accurate recording of the receipt of goods?
(a) Goods received note (b) Material requisition
(c) Order to the supplier (d) Purchase requisition
15.A purchase requisition is raised
(a) to intimate to the supplier the quantity and quality of new material required
(b) when the stock of raw material has fallen to the recorder level
(c) when goods are received from a supplier
(d) to let the accounts department know that an invoice should be expected from a supplier
100 CostAccounting (T.Y'B'Com' : SEM-V)
16.The reorder level is

(a) the number of units that should be ordered
(b) the level of inventory when next order should be placed
(c) the economic order quantitY
(d) both (b) and (c)
17.The costs of goods acquired from suppliers including incoming freight ortransportation costs
are:
(a) Purchasing costs (b) Ordering costs
(c) Stockout costs (d) Carrying costs
18. The costs of preparing, issuing, and placing purchase orders, plus receiving and inspecting the
items included in orders is:
(a) Purchasing costs (b) Ordering costs
(c) Stockout costs (d) Carrying costs
19. The costs that result when a company holds an inventory of goods for sale:
(a) Purchasing costs (b) Carrying costs
(c) Opportunity costs (d) lnterest costs
20. The costs associated with storage are an example of which cost category?
(a) Quality costs (b) Labour costs
(c) Ordering costs (d) Carrying costs
21 .lf there is increase in the size of inventory orders, Number of orders per year will
(a) increase (b) declease
(c) remain same (d) change depending on other factors
22.1t lhere is increase in the size of inventory orders, Total annual carrying costs will
(a) increase (b) decrease
23. lf there is increase in the size of inventory orders, Total annual ordering costs will
(a) increase (b) decrease
24. Continuous stock taking is a part of
(a) Annual stock taking (b) Perpetual inventory
(c) ABC analysis (d) lnventory Turnover Ratio analysis
25. tvlaterial control involves control over
(a) Consumption of material (b) lssue of material
(c) Purchase of material (d) Purchase, storage and issue of material
26. Material requisition is meant for
(a) Purchase of material (b) Supply of material from stores
(c) Sale of material (d) Storage of material
27 . Perpelual inventory system involves
(a) Bin card and Stores ledger (b) Bill of material and Material requisition
(c) Purchase requisition and purchase order (d) lnward and Outward invoices
28. FIFO is
(a) Fast lnvestment in Future Order (b) First ln First Out
(c) Fast ln Fast Out (d) Fast tssue of Fast Order
29. Material is issued by store keeper against
(a) Material requisition (b) Material order
(c) Goods received note (d) Purchase requisition
30. EOQ stands for
(a) Economic Order Quantity (b) Essential Order euantity
(c) Economic Output Quantity (d) Essential Output euantity
31 . The document which is prepared after receiving and inspecting material
(a) [/aterial record note (b) Goods received note
(c) Bill of material (d) lnventory record
Muterial Cost 101
B. Numerical MCQ /Answer in Brief flnternal Tests)
32. Price per unit { 150, annual consumption 2,000 units, ordering cost < 300 per order and other
charges 2O"/" ol cost. What should be the quantity of each order?
(a) 150 units (b) 200 units
(c) 225 units (d) None of the above
33' lf the annual demand is equal to 500 units, ordering cost is equal to 40 and carrying cost is equal
to ( 4 per unit, the EoQ is
(a) 10 (b) 31.62
(c) 100 (d) 37.s
34. lf the EOQ is 400 units, the ordering cost is { 0.20, the carrying cost { 20, how many orders are
placed per year?
(a) 1 (b) s
(c) 2 (d) 4
35. A factory requires 8,000 units of a component every year. The cost of placing and following up
an order is t 100 and the storage cost per annum is { 40. The Economic order Quantity (EOO)
is units.
(a) 300 (b) 2s0
(c) -200 (d) 80
36-37. Expected annual usage ol a particular raw materials is 2,00,000 units and the economic
order quantity is 10,000 units. The invoice cost of each unit is ( 500 and the cost to place are
order is t 80.
36. The average inventory is
(a) 1,00,000 units (b) 5,000 units
(c) 10,000 units (d) 7,500 units
37. The estimated annual order cost is
(a)t1,600 (b)(10,000
(c) { 3,200 (d) t 5,000
38. O Ltd. maintains the inventory records under perpetual system of inventory. Considerthe following
data pertaining to inventory ol O Ltd. held forthe month of March 2014:
Date Particulars Quantity Cost Per unit (t)
Mar. 1 lnventory
Opening 15,400
Mar.4 Purchases 20,450
Mar. 6 Purchases 10,460
lf the company sold 32 units on March24,20'14, closing inventory under FIFO method is
(a) t 5,200 (b) { 5,681
(c) t s,800 (d) ? 5,e50
39.The following are the details regarding purchases of a certain item during the month of January.
Januaryl Purchases200units@t7 < 1,400
JanuaryS Purchases900units@(8 < 7,2OO
January 25 Purchases 300 units @ t 9 < 2,700
January 30 Purchases 400 units @ t 10 < 4,000
< 15,300
A physical inventory of the items taken on January 31 shows that there are 700 units in hand.
The valuation ol inventory as per FIFO method is:
(a) t 5,400 (b) < 6,700
(c) { 8,600 (d) < s,000
40. The annual demand of a certain component bought f rom the market is 1 ,000 units. The cost of
placing an order is ( 60 and the carrying cost per unit is { 3 p.a. The Economic Order Quantity
for the item is
(a) 200 (b) 400
(c) 600 (d) 300
41 .A lirm requires 16,000 Nos. of a certain component, which it t 6[b-a.ih.
placing an order and following it up is t 120 and the annual rlt 10%
the cost of the item. To get maximum benefit the firm should p
time.
102 CostAccounting (TY'B'Com' : SEM-V)
(a) 1,000 (b) e00

(c) 800 (d) 600
42.A manufacturer used 400 units of component every month and he buys them entirely from an
outside supplier @ < 40 per unit. The order placing and receiving cost is { 100 and storage and
carrying cost is 15% of the value of stock. To get maximum benefit, he should place an order for
units at a time.
(a) 300 units (b) 400 units
(c) 450 units (d) 500 units
43. The average annual consumption of material is 20,000 kgs. at a price of { 2 per kg. The storage
cost is 16% on average inventory and the cost of placing one order is ( 50. How much is to be
purchased at a time ?
(a) 2,000 kgs. (b) 2,500 kgs.
(c) 1,800 kgs. (d) 3,000 kgs.
44.The inventory record of a raw material has the following details for a week :
Day Cost (t per unit) Receipts (units) Issues (units)
2 260 18
3 270 12
4 - 10
6--14
The first-in-first-out (FIFO) method is used for pricing issues. There was no raw material at the
stad of day 1.
Which was the value of the inventory on day 5 ?
(a) { 5,200 (b) < 5,220
(c) ( 5,320 (d) < 5,400
45.The purchases of an inventory item in a period were :
Day Units Total Cost (<)
4 250 975
8 500 2,000
12 250 1,125
There was no opening inventory. 700 units were issued on day 15. The first-in-first-out (FIFO)
method is used.
What is the valuation of the closing inventory ?
(a){1,170 (b)<1,17s
(c) ( 1,325 (d) { 1,350
46.A wholesaler uses the first-in-first-out (FIFO) method of pricing inventory issues at each month
end. The following details, relating to product Z, are provided for a month
Opening balance 860 units at a total cost of < 1,892
Purchases 1,000 units at a total cost of < 2,250
Sales - 910 units
What is the cost of sales of product Z in the month ?
(a) 1,892.00 (b) 2,250.00
(c) 358.00 (d) 2,004.50
47.The following data refers to a particular inventory item :
Receipts (units) lssues (units) Total Cost (()
Dayl 2O0 1,100
Day 3 - 140
Day6 i50 - 840
Day 7 - 14O
The weighted average method is used to value inventory issues. A revised weighted average
price is calculated after each purchase.
At what cost price per unit (to two decimal places of Q will the issue on day 7 be made ?
(a) { 5.5a (b) < s.56
(c) { 5.57 (d) { 5.60
Material Cost 103
15.2 FILL lN THE BLANK$

1. A request for a specific item made in writing to the Purchase Department is called a purchase
2. Purchase is a contract between the purchaser and the supplier for the supply of material
on agreed terms.
3. Once is issued by the Stores the material becomes the property of the purchasing company
and the responsibility of the Stores.
4. The initial sanction of the total quantity in respect of a job or contract is made through a document
-
known as
5. Abnormal losses in stock (are I are not) charged to cost of production.
6. Loss due to evaporation is a (normal avoidable / normal unavoidable / abnormal) loss of
materials.
7. fhe formula for calculating economic order quantity is
8. ln ABC analysis,
-
(A I B I C) Category of items are about 10"/o of items having TOoh ot
value.
9. Under the
-.
(Perpetual / Periodical) inventory system, closing stock is ascertained from
the stock ledger itself, after each receipt or issue.
10. Bin card is maintained by the
-
11 . Abnormal losses of materials are charged to
12.- is that level of materials
-. at which a new order for material is to be placed.
13. represents that quantity of material which
-. is normally ordered when the materials reach
ordering level.
14. Under the ABC technique 'A stands for value items.
'l
-
5. Goods Received Note is prepared by the
l6.Quantities of materials on hand as shown by the bin cards should agree with quantities on the
-
17. Under the
-.
tVethod, a new issue price is determined after each purchase.
'l 8.The formula for fixing minimum stock level is
19. The two perpetual
- inventory records are and
-. and issue to facilitate regular checking and to
20. A method of recording balances after every receipt
obviate closing down for stock taking is known as
- -.
2't . Two important opposing factors in fixing the economic order quantity are cost of and cost
of stock.
-.
22.The method of regular physical verification of materials throughout the year is known- as
-
stock-taking.
23. discount is a special type of discount allowed for bulk purchases.
-
24. is a document on which is recorded the transfer of materials from one job or depaftment
-to another.
is a document which authorises and records the issue of materials for use.
25.
26.ln
- method stock is valued at the latest price paid.
27 . - is a document which records the return of unused materials.
-
15.3 MATCH THE FOLLOWING COLUMNS
-
tAI COLUMN A COLUMN B
(A) ABC Analysis 1. Purchase requisition note
(B) Perpetual inventory 2. Selective control
(C) Abnormal material losses 3. Stores requisition note
(D) lVlasterrequisition 4. Costing P&L A/c
(E) lssuing a material item to production 5. Continuousstock-taking
(F) First step in purchase 6. Bill of material
104 CostAccounting (T'Y'B'Com' : SEM-I)
[B] Match the Terms in Column A with Statements in Column B

COLUMN A (Term)
(A) trlaterial
(B) Finished product
(C) Purchase requisition
(D)The maximum stock level
(E) Economic order quantitY
(F) Nlaterials return note
(G)Bill of materials
(H) Perpetual inventory system
(l) Minimum stock level
(J) Re-order levels
COLUMN B (Statement)
1. Maximum consumption x Maximum re-order period
2. All the materials required for a particular job listed by the production department
3. Consumed in the process of manufacture
4. Supplies do not become a pan of
5. The first step in the purchase procedure
6. Maintain materials at the optimum level at of its requirement returned to stores
7. Method of knowing the stock level of every, item of material at all times
8. Be-order level - (Normal consumption x Normal re-order period)
9. Materials issued to a department in excess ol its requirement returned to stores
10. Above which the stock of that material should not generally be allowed to go.
15.4 STATE WHETHER TRUE OR FALSE

1. Stores ledger,is maintained in the stores department.
2. Purchase requisition Note is prepared by the purchasing department.
3. Perpetual inventory system enables management to ascertain stock at any time without the
expense of physical stock-taking.
4. Annual stock-taking confirms that the perpetual inventory is functioning properly.
5. Weighted average method of pricing stores involves adding all the different prices and dividing
by the number of such prices.
6. Bin card shows the quantity and value of a material at any moment of time.
7. Material losses due to careless handling resulting in breakage should be transferred to Costing
Profit and Loss A./c.
8. Bill of Materials is a cash memo sent by the supplier along with the materials.
9. Bin cards are not a part of accounting records.
10.Stores Requisition Note is.not a perpetual inventory record.
11 . When maximum stock level is fixed, the stock in hand should never exceed this level.
'12. Re-ordering level is always fixed somewhere between maximum and minimum stock levels.
13. The economic order quantity is the re-order quantity.

14. ln FIFO method, closing stock is valued at oldest prices of materials.
15. A list of all materials and parts required for a particular job is called production order.
16. The bin card and stores ledger are written up with the same basic documents.
17. ABC analysis is based on the principle of 'management by exception'.
18. Purchase control is exercised by the store-keeper.
l9.Purchase requisition Note is prepared bythe purchasing department.
20. Purchase order is prepared by the stores department.
21 . Purchase order is an order to Purchase department to purchase materials.
22. Purchase order is an order to stores department to issue material.
23. Material requisition note is prepared by the stores department.
24.FIFO method of pricing results in higher profits during the period of falling prices.
25. Weighted average method of pricing stores involves adding all the different prices and dividing
by the number of such prices.
26. Material losses due to fire should be transferred to Costing Profit and Loss A"/c.
Malerial Cost 105
27. Loss due to evaporation are charged to costing profit & Loss Account.
28. Re-order level means the quantity to be ordered.
29' Economic order quantity is that order size at which each of the Ordering Cost and Carrying Cost
is minimum.
30. Under the ABC analysis of material control 'A stands for the highest number of items.
31.The perpetual inventory system enables management to ascertain stock without physical
verification.
32. Bin card is the same as stores ledger.
33. Bin Card is maintained by Accounts departments.
34. Perpetual inventory system and continuous stock taking are synonymous.
35. Bin card shows the money value of material received issued and the balance at any point ol
time.
36.Tender form is issued by the purchasing department.
37. Purchase order is prepared by the purchasing department.
38.Orders should automatically be placed with the supplier quoting the lower price.
39. Lack of efficient material control system increases the material cost of the linished product.
40. A bill of material gives a complete list of all materials required with quantities for a particular job.
15.1
1. (a) 8. (d) 15 (b) 22. (a) 29 (a) 36 (b) 43. (b)

2. (b) 9. (d) 16 (b) 23. (b) 30 (a) 37 (a) 44. (c)
3. (b) 10 (d) 17 (a) 24. (b) 31 (b) 38 (d) 45. (d)
4. (c) 11 (c) 18 (b) 25. (d) 32 (b) 39 (b) 46. (d)
5. (c) 12 (b) 19 (b) 26. (b) 33 (c) 40 (a) 47. (c)
6. (d) 13 (a) 20 (d) 27. (a) 34 (c) 41 (c)
7. (c) 14 (a) 21 (a) 28. (b) 35 (c) 42 (b)
Hints :
38.(10x460)+(3xa50)
39. (400 x 10) + (300 x 9)
12x1,ooox60 2x16,000x120
40.
3
= 200 41
60 x 10/100
= 800
12x4,800x100 2x20,000x50
42.
40 x 15/100
= 400 43.
2 x 161100
= 2,500
44.[(8 units x { 260/unit) + (12 units x ( 270lunit] = ( 5,320
45. [(250 at ( 4.50) + (50 at < 4.00)] = { 1,350
46.[(860 x2.2) = (50 x 2.25)]= { 2,004.50
47.1(1j00200 x 60)+ 8401+ (150 + 60) = { 5.57
15.2 (1) Requisition (2) Order (3) Goods Received Note (4) Bill of Materials (5) are not (6) normal
frAo
avoidable (7) EOO = il a (8) A (9) Perpetual (10) storekeeper (11) Costing Profit and
Loss A/c (12) Re-order level (13) Re-order quantity (1a) High (15) Receiving depaftment
(1 6) Stores ledgeraccount (17) Weighted average (18) Re-order level - (Normal consumption
x Normal re-order period) (19) Bin card; stores ledger (20) Perpetual inventory system (21)
ordering; carrying stock (22) Continuous (23) Quantity or Volume (24) Material transfer note
(25) Material Requisition Note (26) FIFO (27) Materials return note
15.3 A: (A)- (2), (B)-(5), (c)- (4), (D)- (6), (E)-(3), (F) -(1)
B:(A) -(3),(B)-(4),(c)-(5),(D) -(10),(E)-(6),(F) -(e),(G) -(2),(H) -(7),(l) -(8),
(J) - (1)
15.4 True: 3, 7,9,10,12,13,16,17,26, 31, 36, 37, 39, 40
False:1,2,4,5,6,8, 11,14,15,18, 19,20,21,22,23,24,25,27,28'29'30,32,33,34,35,
38
106 CostAccounting (T.Y.B.Com. : SEM'Y)
1. False; Stores ledger is maintained in the cost accounting departmenl and not in the stores
department.
2. False; Purchase requisition note is prepared by the requisitioning department, e.9., stores
department.
3. True; Perpetual inventory system keeps the stock balances up to date.
4. False; Annual stock-taking has nothing to do with perpetual inventory system, rather it is the
continuous stock-taking that confirms the proper functioning ol the perpetual inventory system.
5. Fatse;The weighted average method of pricing averages prices after weighting (i.e., multiplying)
by their quantities.
6. False; Bin card shows only the quantity of material and not its value.
7. True; Breakage of materials due to careless handling is an abnormal loss.
8. False; Bill of materials is a master requisition listing all the materials required for a given job.
10.True; Perpetual inventory records are bin card and stores ledger.
11 . False; Under certain special circumstances, the maximum level may be exceeded.
14. False; Closing stock is valued at the latest prices paid.
15. False; lt is known as Bill of materials.
16.1 STOCK LEVELS

Q.l : From the following particulars calculate : (i) Maximum Stock Level, (ii) Minimum Stock Level,
(iii) Re-order Level and (iv) Average Stock Level.
lvlinimum Consumption - 240 units per day
Maximum Consumption - 420 units per day
Normal Consumption - 300 units per day
Re-order Quantity - 3,600 units per day
Re-order Period - 10 to 'l 5 days
Normal Re-order Period - 12 days (Periyar, B.Com., April/May, 2012)
[Ans.: (i) 7,500 (ii) 2,700 (iii) 6,300 (iv) 5,100]
Q.2 : Material 'A' is used as follows :
Maximum usage in a month - 600 units
Minimum usage in a month - 400 units
Normal usage in a month - 450 units
Lead time : Maximum 6 months, minimum 2 months
Re-order Quantity : 1,500 units
Maximum Re-order Period for Emergency purchases - 1 month.
Calculate : (a) Re-order Level, (b) Maximum Level, (c) Minimum Level, (d) Average Stock Level and
(e) Danger Level.
[Ans.: (a) 3,600 (b) 4,300 (c) 1,800 (d) 3,050 (e) 450]
Q.3 : Calculate (i) Minimum stock level, (ii) Maximum stock level and (iii) Re-ordering level from the
following details :
(i) Minimum consumption = 100 units per day
(ii) tvlaximum consumption = 150 units perday
(iii) Normal consumption = 120 units per day
(iv)Re-order period = 10 - 15 days
(v) Re-order quantity = 'l ,500 units
(vi)Normal re-order period = 12 days
[Ans.: (i) 810 (ii) 2,750 (iii) 2,250]
Q.4 : From the following information calculate (i) maximum, (ii) minimum and (iii) re-order stock
level.
Normal consumption per day - 500 kgs
Minimum consumption per day - 200 kgs
IMaximum consumption per day - 800 kgs
Material Cost 107
Lead Time - 10 to 16 days
Re-order Quantity - 3,000 kgs
[Ans.: (i) 13,800 (i0 6,900 (iii) t2,g0O]
Q.5 : The following information is available in respect of a material :
Normal usage 600 units per week each
Maximum usage 900 units per week each
Minimum usage 300 units per week each
Re-order quantity 7,200 units
Re-order period 2 to 4 weeks
Calculate : (a) Re-order Level, (b) Minimum Level, (c) Maximum Level and (d) Average Stock Level.
[Ans.: (a) 3,600 (b) 1,800 (c) 10,200 (ct) 6,000]
Q.6 : The following information is available :
Re-order quantity 1,500 units
Re-order unit period 4 to 6 weeks
Maximum usage 400 units
Normal usage 325 units
Minimum usage 250 units
Calculate : (a) Re-order Level, (b) Minimum Level, (c) Maximum Level and (d) Average Level.
[Ans.: (a) 2,400 (b) 775 (c) 2,900 (cl) 1,838]
O.7 (ABC) : On analysis of stock the following figures have been extracted :
M-1 1,50,000 2 crores

M-2 20,000 15 crores
M-3 30,000 3 crores
Total 2,00,000 20 crores
Carry out ABC Analysis and advise which material needs strict control.
[Ans.: Material M-2]
Q.8 (2 Components) : Two components A and B are consumed as follows :
Normal usage 100 units each per week
lvlinimum usage 50 units each per week
Maximum usage 200 units each per week
Re-order quantity A :800 units, B : 1,000 units
Re-order period A : 6-8 weeks, B : 3-5 weeks
Calculate for each component the (a) [/linimum Level, (b) Maximum Level and (c) Average Stock
Level. (FYBAE Mar. 2017, adapted)
[Ans.: (a) A - 900, B - 600; (b) A - 2,100, B - 1,850; (c) A - 1,500, B - 1,225]
Q.9 (2 Components) : Two components X and Y are used as follows :
Minimum usage 800 units each per week
Maximum usage 250 units each per week
Re-order quantity X : 4,500 units, Y : 7,500 units
Re-order period X : 4-6 weeks, Y :2-4 weeks
Calculate lor each component the (a) Re-order Level, (b) lvlinimum Level, (c) It/aximum Level and
(d)Average Stock Level. (FYBAF Oct. 2014, adapted)
[Ans.: (a) X - 4,800, Y - 3,200; (b) X - 1,800, Y - 1,400;
(c) X - 8,300, Y - 10,200; (d) X - 5,050, Y - 5,8001
Q.10 (2 Components) : Two components X and Y are used as follows :
Minimum usage 25 units each per week
lVlaximum usage 100 units each per week
Re-order quantity X :500 units, Y : 700 units
Re-order period X : 4-6 weeks, Y :2-4 weeks
108 CostAccounting(T.YB'Com' : SEM-V)
Calculate for each component the (a) Re-order Level, (b) Minimum Level, (c) Maximum Level and
(d) Average Stock Level. GYBAE Nov. 2017, adapted)
[Ans.: (a) X - 6(n, Y - a00; (b) X'350, Y '250;
(c) X - 1,000, Y - 1,050; (cl) X' 675, Y - 6251
16.2 EOQ
(A) Basic
Q.l1 : About 50 items are required every day for a machine. A fixed cost of ( 50 per order is incurred
for placing an order. The inventory carrying cost per item amounts to < 0.02 per day. Compute
Economic Order Quantity.
[Ans.: 500 items]
Q.12 (Annual Usage) : A producer has estimated annual purchase requirement of 30,000 units of
a material. Unit price of material is { 50. Annual cost of carrying inventory is 20%. Ordering cost for
an order is { 60. Find out Economic Order Quantity (EOa). FYBAF Oct. 2015, adapted)
[Ans.:600 units]
Q.13 (Monthly Usage) : From the following information relation to a type of raw material, calculate
EOQ:
Monthly demand 200 units
Unit price <5
Order cost per order < 12
Storage cost 2o/o p.?.
lnterest'rate 10% p.a.
[Ans.: 310 units]
Q.I4 : P Ltd., is engaged in the manufacture of industrial pumps of a standard description. The
company uses about 75,000 valves per year for its production and the usage is fairly constant at
6,250 valves per month. The valves cost { 1.50 per unit when brought in quantities and the carrying
cost is estimated to be 20o/o ol average inventory investment on the annual basis. The cost to place
an order and process the delivery is { 18. You are required to determine the most economical order
quantity. [Ans.: 3,000 units]
Q.15 : Compute the economic order quantity for a company using the following inlormation :
Annual demand for the component 400 units

Order processing cost < 50
Cost of one unit < 100
Rate of interest p.a. 107o
[Ans.: 63 units]
Q.l6 : The average annual consumption of material is 18,250 units at a price of { 36.50 per unit.
The storage cost is 20"/" on an average inventory and the cost of placing an order is { 50. How much
quantity is to be purchased at a time ? (ICWA lnter, Dec. 15, CA lnter, May 2007, adapted)
[Ans.:500 units]
Q.17 : Calculate EOQ and the number of order to be placed per year.
Total consumption per year - 10,000 kgs
Buying cost per order - 50
Cost of material - 2 per kg
carrying and storage cost B% on average inventory. FYBAE oct. 06, oo, 12, adapted)
[Ans.: 2,500 units]
Q.18 : Find out the EOQ and the number of orders per year.
Annual usage - 1,000 units
Cost of material per unit - ( 20
Cost of placing one order - { 40
Annual carrying cost of one unit; 10"k ot inventory value. (FYBAE Oct. 14, adapted)
[Ans.: 200 unrts, Order per year = 5]
Material Cost 109
Q.l9 : Monthly consumption - 4,200 units

Cost per unit - ( 63
Ordering cost - t 125 per order
lnventory carrying cost - 20% of the average inventory
Calculate EOQ.
[Ans.: 1,000 units]
Q.20 : Calculate EOQ from the following :
Annual consumption - 12,000 units
Cost of ordering - t 15 per order
Cost of material - < 1.25 per unit
Storage cost - 20% of average inventory GYBAF, Oct. 13, adapted)
[Ans.: 1,200 units]
Q.21 : The annual requirement of material in a factory is 5,000 units. The interest and carrying cost
is 10% of the cost of materials. Cost per unit is ? 20. Cost of placing an order is { 50. Find out the
EOQ.
[Ans.:500 units]
Q.22 : Calculate economic order quantity from the following information ;
Annual consumption - 1,00,000 units

Ordering cost - < 50 per order
Carrying cost - 8% of Average stock
[Ans.: 2,500 units]
Q.23 : Calculate the EOQ from the following :
Annual usage - 600 units

Ordering cost - { 12 per order
Carrying cost - 20%
[Ans.: 60 units]
Q.24 : Find out the EOQ from the following particulars :
Annual usage - 90,000 units

Cost material per unit - 50
Cost of placing order - 10
Annual carrying cost - 10%
[Ans.:600 units]
Q.25 : The annual requirement of material in a factory is 30,000 units. The interest and carrying cost
is 10% of the cost of material. Cost of placing an order is { 100. Cost of material is t 60 per unit. Find
out the EOQ.
[Ans.: 1,000 units]
Q.26 : A company uses 10,000 units per annum of an item costing ( 5 each. The cost of ordering is
( 1 00 per order and stock holding cost is 2Q"h of average inventory. How much the company buy at
a time (a single order) to minimise the inventory costs ?
[Ans.: 1,414 units]
Q.27 : From the following particulars, find Economic Order Quantity (EOA) :
Annual demand = 3,200 units
Unitcost={6
Cost of carrying inventory = 25o/" p.a.
Cost of one procurement - { 150
[Ans.:800 units]
Q.28 : What is re-order quantity ? Compute re-order quantity from the data given b'elow :
Annual usage of material 600 units

Cost per unit of material < 2.40
Buying cost per order <6
Cost of carrying inventory 20o/"
[Ans.: 122 units (approx.)]
r10 Cost Accounting (T. l'. B. Com. : SEM-V)
(B) EOQ and Costs

Q.29 : From the following information, calculate (a) Economic order quantity and (b) Total Annual
Carrying and Ordering cost at that quantity.
Semi-Annual Consumption 6,000 units
Purchase price of input unit { 25
Quarterly carrying cost 3"/"
[Ans.: 600 units; ? 1,800]
Q.30 : From the following information, calculate (a) Economic order quantity and (b) Total annual
carrying and ordering cost at that quantity.
Quarterly Consumption 750 units
Purchase price of input unit < 25
Semi-annual carrying cost 6%
[Ans.: 300 units; ? 900]
Consumption 250 to 750 units per week
Annual carrying cost 6.5"/"
[Ans.: 2,000 units; ? 2,600]
Annual carrying cost 6.5%
Ordering cost per order { 100
Normal consumption 450 units per week
[Ans.: 1,897 units; ? 2,467]
Q.33 : A company manufactures a product having a monthly demand of 2000 units. For one unit of
finished product 2 kg of a particular raw material item is needed. The purchase price of the materials
is t 20 per kg. The ordering cost is { 120 per order and the holding cost is 10% per annum. Calculate:
(i) Economic order quanity, and
(ii) Annual cost of purchasing and storage of the raw material at that quantity.
[Ans.: 2,400 kgs; 7 9,67,200]
Q.34 : X Ltd. manufactures a special product'ZED'and provides the following information :
Demand ot ZED is 2,000 units per month
Semi-annual carrying cost 6V"
Raw-material required per unit of f inished product 2 kg
Ordering ccst per order < 90
Purchase price of input unit { 25 per kg
Required : Calculate (1) Economic order quantity (2) Number of orders (3) Frequency of orders /
Time-gap between two orders (4) Total ordering costs (5) Total carrying costs and (6) Total annual
cost at that quantity.
[Ans.: (1) 1,200 units (2) 20 (3) 18.25 days (4) ? 1,800 (5) ? 1,800 (6) ? 3,600]
Q.35 : Tulip Ltd. produces a product which has a monthly demand of 4,000 units. The product
requires a component A which is purchased at { 20. For every finished product, one unit of component
A is required. The ordering cost is { 120 per order and the holding cost is 10% per annum.
You are required to calculate -
(i) Economic order quantity, and
(ii) lf the minimum lot size is 4,000 units, what is the extra cost Tulip Ltd. has to incur ?
(C.5. lnter June 2001)
[Ans. : (i) EOA = 2,400 units; (ii) Lot size 4,000 units cost : (12 x 120)
+ (4,000 x % x 20 x 10o/o) = 5,440; EOQ cost : (20 x l2O)
+ (2,400 x % x 20 x 10%) = 4,880; Extra Cost : 5,440 - 4,880 = ? 6401
Material Cost 111
(C) Discounts
Q.36 : PQR Tubes Ltd. are the manufactuier of picture tubes forT.V. The following are the details of
their operations during the year.
Ordering cost { 'l 00 per order
lnventory carrying cost 2Oo/o p.a.
Cost oftubes { 500 per tube
Normal usage 100 tubes per week
Required (i) Economic order quantity, (ii) lf the supplier is willing to supply quarterly 1,500 units at a
discount of 5%, is it worth accepting ? (CA lnter, May 2000, adapted)
[Ans.: (i) Economic order quantity GOq = 1O2; (ii) lt is advisable to accept the offer ol
5o/o discount and save a sum of ? 68,601 .34 (? 26,1 0,198 - ? 25,41 ,596.66)l
Q.37 : A publishing house purchases 2,000 units of a particular items per year at a unit cost of
( 20. The ordering cost per order is { 50 and the inventory carrying cost is 25%. Find the optimal
order quantity and the minimum total cost including purchase cost.
lf 3% discount is offered by the supplierforthe purchase in lots of 1,000 or more, should the publishing
house accept the offer ?
[Ans. : EOQ = 200 units; Cost without Discount : (200 x 10 x 20) + 500
+ (1/z x 200 x 20 x 25/4 = 41,000; Cost with Discount :
(1,000 x 2 x 1 9.40) + 1 00 + (tA x 1,000 x 1 9.40 x 25%io) = 41,3251
Q.38 : Annual requirement of a particular item of inventory is 10,000 units. lnventory carrying cost
per unit per year is 2O"/o and ordering cost is t 40 per order. The price quoted by the supplier is
? 4/unit. However, the supplier is Jeady to give a discount of 5% for orders of 1,500 units or more. ls
it worthwhile to avail of the discount offer ?
[Ans.: EOQ = 1,000 units; Saving on offer - 71,190]
Q.39 : Naitik Limited produces a product which has a weekly demand of 2,500 units. The product
requires 5 kg material for every finished unit of product. Material is purchased at t 104 per unit. The
ordering cost is t 200 per order and the carrying cost is 10% per annum.
1. Calculate Economic Order Quantity.
2. Should the company accept an offer of 3% discount by the supplier who wants to supply the
annual requirement of the material in five equal installmenls ?(ICWA lnter, June 15, adapted)
[Ans.: EOQ = 5,000 kgs.; Saving on offer = 6,76,52,000 - 6,62,28,720 = ? 14,23,280]
Q.40 : (EOQ-Different Quantity Options) RST Limited has received an offer of quantity discount
on its order of materials as under:
ton
Price per Tonnes number
< 9,600 Less than 50
< 9,360 50 and less than 100
< 9,120 100 and less than 200
< 8,880 200 and less than 300
t 8,640 300 and above
The annual requirement for the material is 500 tonnes. The ordering cost per order is ( 12,500 and
the stock holding cost is estimated dl 25"/o of the material cost per anhum. Order lot sizes possible
are 40,50, 100, 200 and 300.
Required : ,
(i) Compute the most economical purchase level.

(ii) Compute EOQ if there are no quantity discounts and the price per tonne is < 10,500.
(CA-PCC, Nov.,2004)
[Ans. : (i) The total cost ot 500 units including ordering and carrying cosf is
minimum (? 46,64,875) where the order size is.300 units. Hence the most
economical purchase level is 300 units. (iil EOA = 69 tonnesl
Q.41 (Volume discount Tabte Method) : The Purchase Department ol your organisation has
-
received an offer of quantity discounts on its order of materials as under :
Price per Ton (t) Tonnes
1,200 Less than 500
80
1 ,1 500 and less than 1 ,000
1,160 1,000 and less than 2,000
1,140 2,000 and less than 3,000
1,'l2O 3,000 and above
The annual requirement for the material is 5,000 tonnes. The ordering cost per order is t 1 ,200 and
the carrying cost is estimated al 20% per annum. Order lot sizes possible are 400; 500; 1,000;
2,000 and 3,000.
You are required to compute the most economic order quantity presenting the information in a
tabular form.
[Ans.: Order Q = 1,000 units]
Q.42 : A company's requirements for next one month are 6,300 units. The basic price is ( 2. The
ordering cost per order is { 'l 0. Maximum 12 orders can be placed in an year. The carrying cost per
unit is { 0.26. The company wants to avail the discount facility offered to it as follows :
Lot size (units) Discount per unit (t)
1- 999 0.000
1 ,000 - 1 ,499 0.010
'r,500 - 2,499 0.0'15
2,500 - 4,999 0.030
5,000 and above 0.050
Find out :
(a) EOa
(b) What should be the order size and how many orders should be placed at minimum cost ?
[Ans.: ({ EOA - 700 units (b) 6 orders of 1,050 units each cost ? 134]
16.3 EOQAND STOCK LEVELS
Q.43 (Stock Levels) : A company manufactures 5000 units of a product per month. The cost of
placing an order is{ 100. The purchase price of the raw material is ? 10 per kg. The re-order period
is 4 to 8 weeks. The consumption of raw materials vari.es from 100 kg to 450 kg per week, the
average consumption being 275 kg. The carrying cost of inventory is 20"/" per annum.
You are required to calculate: (i) Re-order quantity (EOa); (ii) Re-order level; (iii) Maximum level;
(iv) Minimum level ; and (v) Average stock level. (CA-PCC, Nov. 2002)
[Ans.:
2 x 14,300 x?100
(i) Reorder Quantity FOq = = 1,196 Kgs.
72
(ROL)
(ii) Reorder level = 450 kgs x 8 weeks = 3,600 kgs
(iii)Maximum level = 3,600 kgs + 1,196 kgs - [100 kgs. x 4 weeks] = 4,396 kgs.
(iv)Minimum level = 3,600 kgs. - [275 kgs x 6 weeks] = 1,950 kgs.
1
(v) Average stock level = Z [4,396 kgs. + 1,950 kgs.] = 3,173 kgsl
Q.44 (Stock Levels): Shriram Enterprises manufactures a special product "ZED". The following
particulars were collected for the year 1986:
(a) Monthly demand ol ZED - 1,000 units.
(b) Cost of placing an order { 100.
(c) Annual carrying cost per unit ( 15.
(d) Normal usage 50 units per week
(e) Minimum usage 25 units per week.
(f) Maximum range 75 units per week
(g) Re-order period 4 to 6 weeks.
Compute from the above
(1) Re-order Quantity (EOQ)
(2) Re-order level
(i) Minimum Levet
(4) Maximum Level
(5).Average Stock Level
[Ans.:
2x2,600x?100
715 = 186 units (approximately)
2. Re-order Level = 6 weeks x 75 units = 450 units
MutertdCost il3
3. Minimum Level = 450units- i0 unitsxiweeks= 450 units-2s0units =200 units
4. Maximum Level = 450 unit + 186 units
- 25 units x 4 weeks = 536 units
Q.45 : (Re-order Level, EOQ) About 50 items are required every day for a machine. A fixed cost of
{ 50 per order is incurred for placing an order. The inventory carrying cost per item amounts to
? 0.02 per day. The lead period is 32 days compute.
(ii) Re-order level (CA-4CC, Nov. 1996)
[Ans.:
2x x?50
= ? 7.30 = 500 items
(ii) Re-order level = 50 items per day x 32 days =1,600 itemsl
16.4 STOCK LEDGER
(A) Basic (Date-wise Details)

Q.46 : The following details are available in respect of material ZA 234.0
Sept. 1 , 2013 Opening Stock 1,000 kg. @ < 20 per kg.
Sept. 10, 2013 Purchases 500 kg. @ < 23 per kg.
Sept. 15, 2013 lssued 750 kg.
Sept. 20, 2013 Purchases 1,000 kg. @ < 26.25 per kg.
Sept. 30,2013 lssued 750 kg.
Calculate the value of stock as on 30th September, 2010 under the Weighted Average (Perpetual)
Method. [Ans: Value of Closing Stock 1,000 kg. @ 7 24 - 24,000]
Q.47 :
Stock Ledger
Date Quantity Received Rate per unit Quantity issued
Units t Units
3-12-2013 400 2.10
15-12-2013 500 2.20
20-12-2013 500
26-12-2013 600 2.50
28-12-2013 900
Prepare a priced ledger sheet pricing the issues and stock at weighted average method.
[Ans.: Closing Stock = 7 236]
Q.48: From the following transactions extracted from the books of accounts of X Ltd. as on 31st
December, 2013 work out the value of closing stock under the FIFO.
'
Dec. 1 Opening Stock 300 units @ t 9.70 Dec.20 lssue 210 units
Dec.3 Purchases250 units @ <9.80 Dec.25 Purchases 150 units @ < 10.30
Dec. 11 lssue 400 units Dec.26 lssue 100 units
Dec. 15 Purchases 300 units @ { 10.05
[Ans.: FIFO - ? 2,952; WAC - ? 2,925]
Q.49 Calculate by
: FIFO method of inventory valuation, the cost of goods sold and value of ending
inventory from the following data :
Date of Transaction Units Price Per Unit
January 1 Opening Stock 1,500 20
February 2 Purchased 75O 25
March 15 Purchased 600 22
March 15 Sold 1 ,800 30
April10 Sold 750 31
May 15 Purchased 600 25
June 10 Sold 750 32
[Ans: Cost of Goods Sold : (1,500 +
x 20 300 x 25) + (450 x 25 + 300 x 22)
+ (300 x 22 + 450x 25) = 73,200; Cost ol Ending lnventory : 150 x 25 = { 3,7501
Q.50 : The following information is provided by X Ltd. for the month of April,2O14 :
Date Particulars
01 Stock
Opening 100 units @ { 5
05 Purchased 300 units @ { 6
06 Sold 250 units
08 Purchased 500 units @ t 7
10 Sold 400 units
30 Sold 500 units
Calculate using FIFO methods of pricing issues : (a) the cost of goods sold during April (b) value of
closing stock on 30th April.
[Ans: Cost of Goods Sold - FIFO ? 7,800; Value of Closing Stock - FIFO 7 2,800]
Q.51 : From the lollowing data of April 2014, calculate the cost of goods sold and value of closing
inventory using the following methods FIFO and Weighted Average Price.
Date Particulars Quantity Rate Per Unit (t)
01 Purchased 2,000 10
02 Purchased 300 12
06 Sold '1,200
10 Purchased 2OO 14
11 Sold 1 ,000
22 Purchased 300 11
30 Sold 200
(BAE Financial Acct., Nov.2016, adapted)
[Ans: Cost of Goods Sold - FIFO 7 25,000; Weighted Average Price ? 25,333;
Value of Ending lnventory - FIFO ? 4,700; Weighted Average Price 7 4,3661
Q.52 : Slow and Steady Limited Iollows the First ln First Out (FIFO) method of inventory valuation.
The following particulars are available in respect ol an item of raw material for the month of January
2014.
January 1 Opening balance 2,500 kg. @ < 18 per kg.
January 4 Purchases 3,000 kg. @ < 20 per kg.
January 6 lssues 5,000 kg.
January 18 Purchases 10,000 kg. @ ( 21 per kg.
January 28 Purchases 2,000 kg. @ < 22 per kg.
Calculate the value of closing stock on the basis of FIFO method.
[Ans: 7 22,000]
Q.53 : From the following transactions extracted lrom the books of accounts of a manufacturing
concern as on 3'l st December 2013 work out (a) consumption value of raw material in the month,
and (b) value of closing stock as on 31st December 2013 under the FIFO method of pricing issues :
Show the results in a tabulated form'
o uantity in Rate per unit
units in rupees
2013
Decemberl Opening Stock 300 9.70
3 Purchase 250 9.80
11 lssue 400
15 Purchase 300 10.05
20 lssue 210
25 Purchase 150 10.30
29 lssue 100
[Ans.: Closing Stock = ? 2,952]
Material Cost 115
Q.54 : The following transactions took place during the month of January, 2014 in DCM Limited.
Jan. 1 Opening Stock 500 units @ < 35
Jan. 5 Purchases 1,000 units @ { 38
Jan.7 Sales 300 units
Jan.12 Sales 800 units
Jan. 15 Purchases 'l
,200 units @ < 34
Jan. 18 Sales 1,000 units
Jan. 23 Purchases 900 units @ < 30
Jan. 28 Sales 1,200 units
Calculate the value of closing stock based on FIFO method.
[Ans: Value of Closing Stock ? 9,000]
Q.55 : You are required to calculate the value of closing stock from the following information by
using FIFO method.
Period ended Purchase Rate Consumption
(in units) (per unit) (in units)
Balance b/d 600 40
31-3-201 3 1000 44 800
30-6-2013 2100 46 1200
30-9-2013 700 48 1500
31-12-2013 1200 50 900
[Ans.: Closing Stock : 7 60,000]
Q.56 : The following information is extracted from the Stores Ledger:
Material X
Opening Stock Nil
Purchases :
Jan. 1 100@<lperunit
Jan.20 100@<2perunit
lssues :
Jan.22 60 forJob W 16
Jan. 23 60 for Job W 17
Complete the receipts and issues valuation by adopting the (i) First ln First Out (ii) the Weighted
Average Method. Tabulate the values of the closing stock under the methods aforesaid.
[Ans.: Closing Stock (i) FIFO - { 160; (ii) WAC - ( 120]
Basic nsaction-wise Detai!
Q.57: Atthe beginning of December2013, Quality Brush Company had in stock 10,000 brushes
valued at { 10 each. Purchases and lssues during the month were as follows :
Purchases :
Dec.7 4,000 Brushes @ { 12.5

14
Dec. 6,000 Brushes @t 15.0
Dec.24 8,000 Brushes @t 16.5
lssues :
Dec. 16 16,000 Brushes

Dec. 28 10,000 Brushes
You are required to compute the value of closing stock on the basis of (i) FIFO (ii) Weighted Average
Method. [Ans: (i) 33,000; (ii) 30,000]
Q.58 : From the following details, prepare an inventory statement showing receipts, issues and
balances for the months of August as per FIFO method.
2013 01st Aug. Opening Stock 300 units @ { 5 each.
05th Aug. Purchases 500 units @ { 6 each.
12th Aug. Purchases 100 units @ ( 6 each.
18th Aug. lssue 600 units.
25th Aug. Purchases 200 units @ { 7 each.
31st Aug. lssue 300 units
[Ans.: Value of Closing Stock - { 1,400]
Q.59 : Purchases and Sales of a certain product during lvlarch 2014 are set out below :
Purchases :
lvlarchl 100units @<10.00

March 12 100 units @ < 9.80
15
lrlarch 50 units @ < 9.60
March20 100 units @ < 9.40
lssues :
March 10 80 units
March 14 100 units
March 31 90 units
There was no opening inventories. Determine the cost of goods sold for March under two different
valuation methods, viz. FIFO and Weighted Average Cost.
[Ans: FIFO - ?752; Weighted Average - 7761]
Q.60 : A trader has given following data for purchases and issues of condensers. Find out value of
closing stock at December, 31 by using (1) FIFO and (2) Weighted Average Method of valuation.
Dec.2013 Purchases Dec.2013 lssues
Date Units Rate (t) Date Units
4 900 5.00 5 500
10 400 5.50 12 500
11 300 5.50 29 600
19 200 6.00
28 800 4.75
[Ans. : FIFO - ?5,000; WAC - ?5,340]
Q.61 : From the following data, calculate the value of closing inventory according to FIFO on March
31, 2014.
March 1 Stock in hand 400 units @ 7.50 each
Purchases :
March5 600units @{8each

March 15 units
500 @ { 9 each
lVlarch 25 units
400 @ { 8.50 each
March 30 units
300 @ { 9.50 each
lssues :
March 3 300 units
March 10 500 units
March 17 400 units
March 26 500 units
March 3'l 200 units
[Ans: 7 2,850]
(C) Returns and Shortages
(r) FrFo
0.62 (FIFO : Shortage) : Write a store ledger card in the proper form making use of the following
particulars, pricing issues on the principle of FIFO.
Date Transactions Quantity (Kg.) Rate

July 1 Balance 750 2A
July 2 lssued 500
July 6 Beceived 1 000 21
July 10 lssued 500
July 15 Received 750 22
July 20 lssued 1 000
July 25 Received 700 22
Ju 30 lssued 750
A shortage of 10 kg was noticed on 1 2th July.
[Ans.: Closing Stock ? 9,680]
Materisl Cost il7
Q.63 (FIFO : Returns + Damaged Units) : From the following record of receipt and issues of
material 'M' and stores verification report, calculate the prices of issues charged out under FIFO
method.
2018
July 1 Opening balance : 1,000 units @ { 5 per unit
5 lssued 600 units
10 Received'l ,200 units @ < 5.50 per unit
15 lssued 400 units
18 Received back 50 units issued on 5th July
25 lssued 1,050 units
30 Stock verification reveals that 20 units are completely damaged.
[Ans.: Closing Stock { 990]
Q.64 (FIFO : Shortage) r Prepare stores ledger as per First-in-First-out method of pricing of issue
of materials :
Date Transactions Units

April 1 Opening Balance 1,000 5
April 3 Received 5,000 6
April 4 lssued 3,000
April 16 lssued 2,000
April 8 Received 3,000 5
April9 lssued 2,000
The weekly physical stock taking on April 7,2018 showed a shortage of 100 units.
[Ans.: Closing Stock 7 9,500]
0.65 (FIFO : Shortage) : Prepare a stores ledger on FIFO method :
201 8
June 1 Opening stock is 100 units at { 2 per unit
12 Purchased 400 units at { 4 per unit
18 lssued 450 units
28 lssued 325 units
29 Shoftage of 5 units
[Ans.: Closing Stock ? 120]
Q.66 (FIFO : Returns) : Prepare a stores ledger on FIFO method :
201I
March 1 Opening stock is 200 units at ( 2 per unit
14 lssued 500 units
29 lssued 550 units
3'l Beceived back 10 units issued on 29 lr4arch
0.67 (FIFO : Return to Stores and Vendor and Shofiage) : Prepare stores ledger account on the
basis of FIFO method of pricing issue of material, from the following particulars.
March 1 Balance 200 units @ < 15 per unit
March 5 Received 400 units @ { 18 per unit
March 10 lssued 300 units
March 16 Received back from production centre 50 units (lssued on 10th March)
March 18 Received 500 units @ { 20 per unit
Ivlarch 20 Returned to vendor 100 units (Purchased on 5th March)
lVlarch 25 lssued 200 units
On verification at 31st March it was found out that a shortage of 60 units of material.
0.68 (FIFO : Returns to Stores and Vendors and Shortages) : Draw a stores ledger card recording
the following transactions under FIFO method.
201 8
July1 Opening stock is 2,000 units at { 10 each
5 Received 'l ,000 units at { 11 each
6 lssued 500 units
10 Received 5,000 units at t 12 each
12 Received back 50 units out of the issue made on 6 July
14 lssued 600 units
18 Returned to supplier 100 units out of the goods received on 5 July
19 Received back 100 units out of the issue made on 14 July
20 lssued 150 units
25 Received 500 units at { 14 each
28 lssued 300 units
The stock verification report reveals that there was a shortage of 10 units on 18 July and another
shonage of 15 units on 26 July.
Q.69 (Shortage) : Draw a Stores Ledger Account for the following transactions which took place
during the month of March 2018 adopting the FIFO method.
1st March Opening Stock 2,000 units at ( 2 each
5th March Purchases 1,000 units at { 2.20 each
10th March Purchases 1,500 units at { 2.40 each
20th March Purchases 1,800 units at { 2.50
2nd March lssues 1,500 units
7th tMarch lssues 1,000 units
'l 2th
March lssues 1,000 units
28th March lssues 2,000 units
On 25th March a stock verification revealed a shortage of 50 units.
[Ans.: ? 1,875]
O.70 (FIFO : Returns and Freight Inward) : Enterthe following transactions in the Stores Ledger
of Y material using FIFO method.
July 2018 :
1 Balance 250 units @ { 1 per unit
3 lssued 50 units on tt/|.R. No. 61
6 Received 800 units vide G.R. No. 13 @ <.1 .10 per unit
7 lssued 300 units on M.R. No. 63
8 Returned to stores 20 units issued on M.R. No. 6
12 Received 300 units, per G.R. No. 'l 5 @ { 1.20 per unit
'15 lssued 320 units (M.R. No. 83)
18 Fleceived 100 units, vide G.R. Note No. 77 @ < 1.20 per unit
20 lssued 120 units, (lV.R. No. 102)
23 Returned to vendors 40 units from G.R. No. 77 received on 18th
26 Received 200 units on G.R. No. 96 @ { 1 per unit
28 Freight paid on purchase (vide G.R, No. 96) t 50
30 lssued 250 units on M.R. No. 113.
Note : lV.R. - tr4aterial Requisition. G.R. Note - Goods Received Note.
Q.71 (FIFO : With returns and losses of material) : The following is an extract of the record of
receipts and issues of sulphur in a chemical factory during June 2018 :
June 2018 :
1 Opening balance 100 tons @ < 200
8 lssued : 50 tons
14 Received from supplier 40 tons @ < 190
17 lssued : 36 tons
21 Received from supplier 48 tons @ < i80
Muteriul Cost 119
24 lssued : 60 tons
25 Returned to suppliers 10 tons out of goods received on 21st June
26 Received from supplier 64 tons @ { 190
29 lssued : 40 tons
30 Returned from department 6 tons @ { 190
The stock verifier of the factory had found a shortage of 2 tons on 23rd June and left a note accordingly.
You are required to prepare stores ledger account under FIFO method.
Q.72 (FIFO : Returns and Excess Stock) : Prepare a store ledger account from the following
transactions assuming that the issue of stores has been priced on the principle of FIFO.
January :
1 Opening stock 2,000 units at { 26 each

3 lssued 800 units
4 Purchased 1,500 units at { 27.50 each
4 lssued 400 units
5 lssued 320 units
6 Purchased 1,000 units at { 29 each
8 Returns to vendor, purchased on 6th January 30 units
9 Received back from work order, issued on Sth January 40 units
10 lssued 500 units
On 1Oth January when the stock is verified, it is found that the actual stock is more by 20 units.
[Ans.: Closing Stock 7 3,190]
Q.73 (FIFO : Shortage & Returns) : The following is the record of receipts and issues of a certain
material in factory during a week.
December 2011 :
1. Opening Balance 50 tonnes @ < 10.00 per tonne
2. lssued 30 tonnes
3. Received 60 tonnes @ < 10.20 per tonne
4. lssued 25 tonnes (stock verifier reveals loss of one tonne)
5. Received back from work order 10 tonnes (previously issued @ < 9.90 per tonne)
6. lssued 40 tonnes
7. Received 22 tonnes @ { 10.30 per tonne
8. lssued 33 tonnes
tvlake out Stores Ledger fuc using FIFO t\4ethod.
[Ans.: Closing Stock 7134]
Q.74 (FIFO : Shortage, Returns, Replacements & Transfers) : X Ltd. lurnishes the following
store transactions for July,2014 :
1 Opening Balance 200 units value { 2,000
4 Receipts from B & Co. GRN No. 11 300 units @ < 12 per unit
7 lssues to Department X Req. No. 101 400 units
10 Receipts from M @ Co. GRN No. 12 400 units @ < 14 per unit
13 Returned by Department X : Material issued
vide Req. No. 101 - MRN No.21 20 units
(This material was received from B & Co.)
16 Returns to B & Co. 10 units
19 lssues Req. No. 102 300 units
22 Receipts from N & Co. GRN No. 13 200 units @ t 16 per unit
25 Receipts replacement from B & Co. GRN No. 14 10 units
28 lssues Req. No. 't 03 300 units
29 Transfer from job 182 to job 187 in the deptt. MTR No. 6 20 units
30 Shortage in stock taking 20 units
Required : Prepare the Stores Ledger using FIFO method.
[Ans.: Closing Stock 100 - 71,560]
(ll) Weighted Average

Q.75 (Wt. Avg. : Return to Stores): Suganthi Ltd. purchased and issued the material in the following
order :
September 2018 :
1 Opening Balance 50 units at { 3 per unit

4 lssued 2 units
8 Purchased 48 units at { 4 Per unit
9 lssued 20 units
15 Purchased 76 units at { 3 Per unit
22 Received back into stores 19 units out of 20 units issued on 9th September
30 lssued to production 10 units
Prepare a Stores Ledger A/c by adopting the weighted average method of pricing.
[Ans.: Closing Stock 7 528]
Q.76 (Wt. Avg. : Returns to Stores and Vendor): From the following details of store receipts and
issues of material "Exe" in a manufacturing unit, prepare the store ledger using weighted average
method of valuing the issues.
November :
'l Opening stock, 2,000 units @ ( 5 each
3 lssued, 1,500 units to production
4 Received, 4,500 units @ t 6 each
8 lssued, 1,600 units to production
9 Returned to stores,'l 00 units by production department (from the issues of November 13)
16 Received, 2,400 units @ t 6.50 each
19 Returned to supplier, 200 units out of the quantity received on November 4
20 Received 1,000 units @ ( 7.00 each
24 lssued to production, 2,100 units
27 Received, 1,200 units @ ( 7.50 each
29 lssued to production, 2,800 units
Note : Use rates up to two decimal places.
[Ans.: Closing Stock 719,558]
O.77 (Wt. Avg. with returns and losses) : From the following pafticulars in respect of a certain
material during 20'l 8, you are required to draw up the stores ledger account under weighted average
method :
April2018 :
1 Stock inhand 400 units @ t 5

7 lssued 600 units
12 Purchased 200 units @ T 7
16 Returned to stores 100 units (which were issued out of opening stock)
20 Purchased 400 units @ t 8
25 lssued 800 units
28 Returned to vendors 100 units out of purchases made on 20th April.
A shortage of 100 units was noticed and recorded on 26th April.
(D) Turnover Ratio
Q.78 : Calculate Stock Turnover Ratio from the following information
Purchases < 'l ,15,000
Closing Stock < 20,000
[Ans.: 1,25,000 + 25,000 = 5]
Materiul Cost 121
Q.79 : Opening Stock < 29,000

Purchases < Z,42,OOO
Sales < 3,20,000
Gross Profit 25% of Sales
Calculate Stock Turnover Ratio.
[Ans.: 2,40,000 + 30,000 = 8]
Q.80 : The following figures are extracted from the Trading Account of X, you are required to calculate
Stock Turnover Batio :
Opening Stock t 90,000
Purchases < 1,10,000
Direct Expenses < 10,000
Gross Profit { 75,000
Gross Sales < 2,20,000
Sales Return < 10,000
Closing Stock at Cost < 15,000
[Ans.: 1,35,000 + 22,500 = 6]
Q.81 : N supplies you the following information regarding the year ended 31st December, 2014.
Cash Sales < 80,000
Credit Sales < 2,00,000
Return lnward < 10,000
Closing Stock ( 30,000
Gross Profit ratio is 25%. Find out lnventory Turnover.
[Ans.: 2,02,500 + 27,500 = 7.36]
Q.82 : From the following data compute lnventory Turnover :
Particulars
Opening Stock 1,000 1,500

Purchases made during the year 2,000 2,500
Closin Stock 500 1,000
[Ans.: A - 3.33; B.- 2.4]

Q.83 : The following information is available from the books of a company for 2015 :
Opening Stock 1,400 2 ,000

Purchases 23,000 3 ,600
Closin Stock 1,000 2 ,400
Calculate the Material Turnover Ratio of the above types of materials and determine which of the
two materials is more fast-moving.
[Ans.:A-19.5;B-1.5]
Q.84 : From the following data forthe yearended 31st March, 2012, calculate the lnventory Turnover
Ratio of the two items, and put forward your comments on them.
Material A
( t
Opening Stock as al1-4-2011 10,000 9,000
Purchases during the year 52,000 27,000
Closin Stock as al31-3-2012 6,000 11 ,000
[Ans.: A : 7 times / 52 days; B : 2.5 times / 146 days]

t\)
MA$TER KEY. STEP.BY.STEP t\)
17.1" STOCK LEVELS
Para 16 / Q. No. 1 2 3 4 5 6 43 44
1. Maximum Consumption 420 600 150 800 900 400 450 75
2. Minimum Consumption 240 400 100 200 300 250 '100 25
3. Normal or Average Consumption l(1 + 2) I 2l 300 450 120 500 600 325 275 50
4. Maximum Re-order Period 15 6 15 16 4 6 8 6
5. Minimum Re-order Period 10 2 10 10 2 4 4 4
6. Normal or Average Re-order Period [(4 + 6) I 2] 12 4 12 13 3 5 6 5
7. Re-order Quantity / EOQ 3,600 1,500 1,500 3,000 7,200 1,500 1,196 186
A. Re-order Level [1 x 4] 6,300 3,600 2,250 12,800 3,600 2,400 3,600 450
B. N4inimum Level [A - (3 x 6)] 2,700 1,800 810 6,300 1,800 775 1,950 200
C. Maximum Level [A + 7 - (2 x 5)] 7,500 4,300 2,750 13,800 10,200 2,900 4,396 536
D. Average Level [(B + C) I 2] 5,100 3,050 1,780 10,050 6,000 1,838 3,173 368
OR, Average Level [B + (1/2 x A)] 4,500 2,550 1,560 7,800 5,400 1,525 2,548 293 o
\
fi
:t
tr
:.
U)
FN
s
I
I@ G
.:.
Para 16 / Q. No. 11 12 13 14 15 16 29 30
Annual Usage A 18,250 30,000 2,400 75,000 400 18,250 12,000 3,000 S.
4
Ordering cost per order o 50 60 12 18 50 50 45 45
Carrying cost p.u., p.a c 7.3 10 0.6 0.3 10 7.3 3 3
EOQ E= J2Ao tc s00 600 310 3,000 63 500 600 300
No. of orders N=A/E 37 50 I 25 6 37 20 10
Frequency of orders F=365/N 10 7 47 15 58 10 18 37
Total ordering costs TO=NxO 1,825 3,000 93 450 316 1,825 900 450
Total carrying costs TC=Ex1/2xC 1,825 3,000 93 450 316 1,825 900 450
Total Annual Costs TA = TO + TC [or, ffiCI 3,6s0 6,000 186 900 632 3,6s0 1,800 900
Para 16 / Q. No. 31 32 33 34 35 36 37 38 39
Annual Usage A 26,000 23,400 48,000 24,000 48,000 5,200 2,000 10,000 6,50,000
Ordering cost per order o 100 100 120 90 180 100 50 40 200
Carrying cost p.u., p.a c 1.3 1.3 2 3 3 100 5 0.8 10.40
EOO E= J2Ao tc 2,000 1,897 2,400 1,2OO 2,400 102 200 1,000 5,000
No. of orders N=A/E 13 12 20 20 20 51 10 10 't30
Frequency of orders F=365/N 28 30 18 18 't8 7 37 37 3
Total ordering costs TO=NxO 1,300 1,233 2,400 1,800 3,600 5,099 500 400 26,000
Total carrying costs TC=Ex1l2xC 1,300 1,233 2,400 1,800 3,600 5,099 500 400 26,000
Total Annual Costs TA = To + TC [or, .fnocl 2,600 2,467 4,800 3,600 7,200 1 0,1 98 1,00 800 52,000
N
17.3 STOCK LEDGER t!
\
Para 16 / Q: No. 46 47 48 49 50 51 52 53 54
FIFO
Opening / Purchase 20,000 840 2,9't0 30,000 500 20,000 45,000 2,910 17,500
Purchase / (lssue) 11 ,500 't
,100 2,450 18,750 1,800 3,600 60,000 2,450 38,000
Purchase / (lssue) (15,000) (840) (2,e10) 13,200 (500) (12,000) (45,000) (2,910) (10,500)
Purchase / (lssue) 26,250 (220',) (e8o) (30,000) (e00) 2,800 (50,000) (e80) (7,000)
Purchase / (lssue) (5,000) 1,500 3,015 (7,500) 3,500 (8,000) 2,10,000 3,015 (22,800)
Purchase / (lssue) (11 ,500) (880) (1,470) (11,250) (e0o) (2,400) (10,000) (1,47O) 40,800
Purchase / (lssue) (1,2s0) (603) (6,600) (1,750) 3,300 (1,36,500) (603) (15,200)
Purchase / (lssue) 1,545 15,000 4,800 (1,200) 44,000 1,545 (20,400)
Purchase / (lssue) (1,005) (6,600) (1,750) (1,400) (73,500) (1,005) 27,OOO
Purchase / (lssue) (11,250) (2,000) (22,OOO) (20,400)
Purchase / (lssue) (18,000)
Stock 26,250 250 2,952 3,750 2,800 4,70O 22,OOO 2,952 9,000
Wt. Average (Perpetual)
Opening / Purchase 20,000 840 2,910 30,000 500 20,000 45,000 2,910 17,500 S.
Purchase / (lssue) 't't

,500 1,100 2,450 18,750 1,800 3,600 60,000 2,450 38,000 \
o
Purchase / (lssue) (15,750) (1,080) (3,e00) 13,200 (1,438) (12,312) (95,450) (3,e00) (11 ,1 00) a
Purchase / (lssue) 26,250 1,500 3,015 (39,132) 3,500 2,800 2,10,000 3,015 (29,600)
Purchase / (lssue) (18,000) (2,124) (2,087) (16,298) (2,684) (10,840) (1,46,370) (2,087) 40,800 ea
Purchase / (lssue) '1,545 15,000 4,800 3,300 44,000 1,545 (34,750) :.,i
Purchase / (lssue) (1,008) (17,933) (3,810) (2,182) (e5,895) (1,008) 27,OOO F

Purchase / (lssue) (38.280)
o
Stock 24,000 236 2,925 3,588 2,669 4,366 21,285 2,925 9,570 :.
v,
l!
'i\
s
Para 16 / Q. No. 55 56 57 58 59 60 61 69 73 74 S
G
FIFO
s
Opening / Purchase 24,000 100 1,00,000 1,500 1,000 4,500 3,000 4,000 500 2,000
o
s
Purchase / (lssue) 44,000 200 50,000 3,000 (800) (2,500) (2,25O) (3,000) (3oo) 3,600
Purchase / (lssue) (24,000) (60) 90,000 600 980 2,200 4,800 2,200 612 (4,400)
Purchase / (lssue) (8,800) (40) (1,00,000) (1,500) (200) 1,650 (7s0) (1,000) (200) 5,600
Purchase / (lssue) 96,600 (40) (50,000) (1,800) (784) (2,000) (3,200) (1 ,100) (s1) 240
Purchase / (lssue) (35,200) (30,000) 1,400 480 (5so) 4,500 3,600 (10) (120)
Purchase / (lssue) (18,400) 1,32,000 (1,200) 940 1,200 (1,600) (1,100) 99 (4,020)
Purchase / (lssue) 33,600 (60,000) (600) (1e6) 3,800 (1,800) (1,200) (408) 3,200
Purchase / (lssue) (6e,000) (99,000) (480) (3,300) 3,400 4,500 227 120
Purchase / (lssue) 60,000 (188) (2,70O) (120) (143) (4,340)
Purchase / (lssue) (9,200) (1,700) (2,28O) (ee) (320)
Purchase / (lssue) (33,600) 2,850 (2,625) (e3)
Stock 60,000 160 33,000 1,400 752 5,000 2,850 1,875 134 1,560
Wt. Average (Perpetual)
Opening / Purchase 24,O00 100 1,00,000 1,500 1,000 4,500 3,000 4,000 500
Purchase / (lssue) 44,000 200 50,000 3,000 (8oo) (2,500) (2,250) (3,000) (300)
Purchase / (lssue) (34,000) (1 80) 90,000 600 980 2,200 4,800 2,200 612
Purchase / (lssue) 96,600 (1,92,000) (3,402) (e83) 1,650 (3,e65) (2,130) (264)
Purchase / (lssue) (54,036) 1,32,000 1,400 480 (2,660) 4,500 3,600 99
Purchase / (lssue) 33,600 (1,50,000) (1,860) 940 1,200 (3,476) (2,34O) (404)
Purchase / (lssue) (68,850) (856) 3,800 3,400 4,500 227
Purchase / (lssue) 60,000 (2,8s0) (4,290) (5,002) (337)
Purchase / (lssue) (43,416) 2,850
Stock 57,898 120 30,000 1,238 761 5,340 2,741 1,828 133 t\)
126
LABOUR COST
OUTLINE
No. Topic Page
1. Attendance Records 127
1.1 Time-keeping
1.2 Time-booking
Payroll 133
2.1 Steps
2.2 Paying the Wages
2.3 Overview of Statutory Requirements
Overtime tJo
3.1 lr/eaning
J.Z Accounting Treatment
3.3 lVlerits of Overtime
Demerits of Overtime
3.5 Controlof Overtime
ldleTime 1 38
4.1 [/eaning
4.2 Causes and Control of ldle Time
4.3 ldle Time Accounting
139
Meani ng
Methods of Measurement
Causes
Effects
Costs
o RemedialSteps
6. isation of Labour 141
7. Eff iciency Rating Proced u res 142
8. Remuneration Systems
8.1 Time Rate System
iece Rate
Lsbour Cost 127
9. lncentive Schemes
9.1 lvleaning
Factors
Principles
Procedures
Various Schemes
Wage Payments
lndividual Bonus Plans
Group Bonus Plan
10. 152
11. 166
CAS-7
Meaning
11.6
11 .7 Special
11.8 Format of Statement Showing Labour Cost Per Hour / Unit
lllustrations
1. RECORBS
Labour cost is ascertained fiom two types ofrecords - (l) Attendance records and (2) Pa1rolls.
These are discussed below.
@
1.1.1 Meaning and lmportance
Timekeeping means keeping a record of the attendance of the workers and the time spent by them in
actual work, idle time, overtime etc. Timekeeping is important because ofthe following reasons -
(1) Payment of Wages : Normally, payment of wages to workers depends upon the time spent by
them on work. Thus, timekeeping is important for computation ofwages due to the workers.
(2) Legal Record of Service/Attendance : Attendance Records are important in determination and
computation of legal benefits such as Provident fund, Bonus, Worlonen's Compensation,lVlaternity
Leave, Pension etc. Even certain allowance such as Regular Attendance Incentive, Overtime,
Leave Encashment, etc. require uptodate Attendance records.
(3) Discipline : Recording oftime acts as a check on the movement ofworkers. It ensures punctuality
among the workers and avoids idle or wasted time. This leads to increased productivity of labour
and optimum Labour Costs.
(4) Ascertaining and Control of Labour Costs : Timekeeping records help the Costing department
in (i) Ascertaining Labour Costs of each Job, and (ii) Controlling Labour costs. Timekeeping
records help in finding out the time spent by each worker on individual jobs. This facilitates
allocation of Labour Costs to each job. Sometimes Overheads are also apportioned to each job
on the basis of Labour Hour Rate. In such cases, it becomes important to have accurate
Timekeeping records for fixing the Labour Hour rate. Timekeeping also provides valuable data
to management regarding the productive time spent on job, idle time, over time etc. which helps
in controlling total Labour Costs.
128 Cost Accounting (T.VB. Com. : SEM-V)
1.1.2 Procedure
Each organisation has its own procedure for recording the attendance ofworkers, depending upon
its peculiar circumstances. The timekeeping procedure, normally, covers the following aspects-
(1) Who maintains the Timekeeping records : The time-keeping records maybe kept by a separate
Timekeeping Department or the Labour Department or Watch and Ward. The decision regarding
having a separate Timekeeping Department depends upon various factors such as the size of the
organisation, the number ofworker employed, the method ofpayment of wages, the significance
oflabour Costs and so on.
(2) Where Timekeeping records are kept : The time keeping records may be kept at the gate to the
Factory or at each department. Generally, the Timekeeping records are kept at the gate or entrance
ofthe factory itself HoweveE in some cases, Timekeeping records maybe kept at each department.
(3) How Timekeeping records are kept : The time keeping records may be kept manually or
mechanically. The different methods ofmaintaining manual or mechanical Timekeeping records
are explained in detail below.
1.1.3 Manual Timekeeping Records

There are two methods of maintaining Timekeeping records manually - (A) Attendance Register,
and (B) Token, Disk or Check method.
(A) Attendance Register (Muster)
(1) Procedure : In this method ofmaintaining Timekeeping records, the details of attendance ofthe
workers are entered in an Attendance Register or Muster. The Muster may be kept at the gate of
the factory or at each department. The entries against the name of each worker may be made by
an assistant or bythe employees themselves who sign the register whenever they enter and Ieave
the premises.
(2) Evaluation : This method ofrecording affendancethrough Muster orAttendance register has the
main merit ofbeing very simple to operate. It does not involve complicated mechanical operations
like punching cards etc. However, it is open to misuse and frauds. Further, it is difficult to record
details such as idle time, overtime, late arrival, early departure etc. on a simple Attendance register.
Disk or Check Method

(1) Procedure : In this method, each employee is given a Token or a metal disk on which his identity
number is painted or engraved. Just before the opening time of the office or the factory, all disks
or tokens are hung on a board at the gate ofthe factory. As and when an employee arrives at the
gate, he picks up his token or disk and puts it in a separate box or hangs it on another board. This
indicates and records his arrival in time at the factory. After the scheduled arrival time, all the
tokens or disks not put in the box are collected. These indicate the workers who are late or
absent. The workers who come late have to collect their tokens from the Assistant who records
the late arrival of the worker on the Daily Attendance Sheet. Similar procedure is followed at
Lunch Break or at the time of departure. In some cases, the worker, instead of putting the token
in a box at the gate ofthe factory takes the token with him to his department. He then hangs the
token on a board at the entrance to his department. This indicates his physical presence at his
department. This acts as a further check on the movement of the employees within the factory
premises. This is called the Check System of Timekeeping.
(2) El'aluation : Though this method is simple to operate, it too is open to misuse and fraud. It is
possible for one worker to mark the attendance of another worker byjust putting the token of his
fellow worker also in the box. Further, it is not possible to mark details like overtime, idle time
etc. under this system. Since the workers do not sign the Attendance Register, in absence of a
written evidence, there is a possibility of disputes arising in future.
1.1.4 Mechanical Method [Time Clock Method]
(l) Procedure : Under this method the time of arrival and departure is recorded mechanically, i.e.
with the help ofTime Clocks. Generally, each worker given a card with an identitynumber. All
is
the cards are kept on a board at the entrance to the factory. Every time a worker arrives at or
Labour Cost t2g
leaves the factory he takes his card from the board and inserts it into the Time Clock. As soon as
the card is inserted into the Time Clock, the Clock mechanically prints the time on the card.
Some Clocks mayprint late arrivals in red ink etc. The cards still hanging on the board after the
scheduled time indicate absent workers.
(2) Specimen:
EXHIBIT 1 : SPECIMEN TIME CLOCK CARD
ABC Company
Clock Card
Nameof Employee xxxx Card No x x
Week Ending x x
Day ln Out ln Out ln Out Normal Overtime
Monday xx xx XX XX xx xx XX xx
xx XX xx xx xx XX xx XX
Saturday xx xx xx xx xx xx xx xx
Total Wages xxxx Total Time xx Signature x x
(3) Evaluation : The onlydisadvantage ofthis method is the initial heavycapital investrnent required
for purchasing the Time Clock. However, this disadvantage is oflset bythe following advantage-
(a) Accurate : Being a mechanical system, it is very accurate in recording the time of arrival,
departure, overtime etc. It correctly records the late arrival, early departure etc. in respect of
the employees.
(b) Economical : In the long run, this is an economical system, since it avoids recurring expenses
on remuneration to assistants to record attendance at the gate etc.
(c) No Misuse : The system is not open to misuse or frauds. The attendance records cannot be
altered by the workers either on their own or in collusion with the assistants in labour
Department.
(d) Printed Evidence : The Clock cards provide printed evidence ofthe record ofattendance of
an employee. This is useful in obtaining legal borefits like Provident Fund, MaternityBenefits,
Leave Encashment etc. without anydisputes.
1.1.5 Punch Card Aftendance System

(1) Procedure : Punch card attendance system is one of the most popular time clock attendance
systems. A punch card is a paper card with notches which contains digital information. Employees
use this punch card for entry and exit. To use a punch card, employeesjust need to insert or wave
the card near a reader, which then ensures that the correct person is logging in and / or out.
(2) Advantages :
(i) lt prevents the proxy attendance and records the accurate entry I exit time ofeach employee.
(ii) There is no manual intervention which avoids errors.
(iii) There is no scope of manipulation in records.
(3) Disadvantages : Punch card attendance system has a complex software and expensive hardware.
1.1.6 Bio MetricAttendance System

Biometrics uses unique recognising features based on physical or behavioural traits ofan individual.
Recognising an individual on the basis ofphysical traits include identification based on his fingerprint,
face, DNA, eyes, iris, palm, etc., while behavioural traits identification refers to voice or rhythm
recognition. Based on this technologydifferent recognition systems have been designed depending
on different traits.
(1) Fingerprint Recognition System.' This verifies and matches the individual's fingerprints with
the fingerprint database. As fingerprint ofevery person is unique, it offers a very secure and
reliable attendance system. It eliminates proxy attendance.
t30 Cost Accounting (T.Y.B.Com. : SEM-V)
(2) Face Recognition.. It verifies and matches the digital image of an individual face with facial
database present in its software. It is used in highly secured areas.
(3) Time and Attendsnce Tracking Technology .' Time and attendance technology helps the
companies to keep track of the attendance and working hours of the employee in order to make
their payment. This is a real time technology and saves money for all types of business. This
technology is the most preferred automated system.
1.2 TIME BOOKING
1.2.1 Meaning
Time Booking means the recording of the time spent by a worker on different Jobs during his
attendance at the factory. While Timekeeping records the attendance of each worker, Time Booking
allocates the total work time of a worker to the various jobs performed by him.
1.2.2 Objectives
The objectives of Time Booking are -
(1) Ensure Full Utilisation ofWork time : While Timekeeping ensures that each worker is physically
present in the factory, Time Booking ensures that each worker is fully utilised on productive
work as long as he is present in the factory. This leads to Labour effrciency and productivity.
(2) Determine Labour Cost of Each Job : Time Booking enables the management to determine the
Labour Cost ofeach cost centre or cost unit i.e. ofindividualjobs, contract, process, products
etc. Sometimes Overheads are absorbed on the basis of Labour Hour Rates. Time Booking helps
in fixing the Labour Hour Rate for absorption ofoverheads.
(3) Computation of Incentives : Many times, workers are paid incentives linked with productivity.
efficiency, time spent on each job etc. Time Booking helps in computation of such incentives.
(4) Cost Control : Time Booking facilitates the determination of Idle Time, Overtime etc. in respect
of each Job. Management can take corrective action to cut down the Idle time so as to control
costs. Ifthe overtime was done at the instance of the customer to complete a job before time, the
overtime cost can be recovered from the bustomer. The Actual Labour Cost of a job etc. can be
compared with its Budgeted or Standard Labour cost from time to time so as to exercise timely
control.
1.2.3 Time Booking Methods
The following methods are used for time booking :
(1) Daily Time Sheet : In this method, each worker records the time spent by him on the work
during the day, for which a sheet is provided to each worker. The time is recorded daily and
hence accuracy is maintained. However, the main limitation of this method is that lot of paper
work is involved as daily sheets are maintained on daily basis by each worker.
(2) Weekly Time Sheets : The only difference between the daily time sheet and weekly time sheet is
that these time sheets are maintained on weekly basis. This means that each worker prepares
these sheets weekly rather than daily. This helps in reducing the paper work to a great extent. The
only care to be taken is that if the information is not filled up on daily basis, there may be
inaccuracies and hence filling the information should be done on daily basis only.
(3) Job Card : Time booking is basically performed by preparing a Job Card. Job Card is a record
of the work done by a workeq indicating the jobs done by him and the time spent against each
job. A Job Card may be prepared either manually or mechanically. Thus Job Card is the key
document in all methods of Time Booking. A Job Card may be prepared either for each job or for
each worker.
(A) Job Gard for each Worker

(1) Meaning : When a Job Card (also known as Job Ticket) is kept for each workeq it helps in
finding out the time spent by each worker on different jobs during a day or week. In such cases,
each worker is given, in addition to his Time Card, aJob Card (see Specimen below).
Labour Cost 131
(2) Specimen:
EXHIBIT 2 : SPECIMEN OF JOB CARD FOR EACH WORKER
ABC Company
Job Card
Nameof Worker xxxx TokenNo.:xx
Department : x x WageRate:xx WeekEnded:xx
Job No. Job No. Job No Total Cost
Day On off On off On off Normal o.T.
Monday x x x x x x XX xx xx
x x x x x x xx xx xx
Saturday x x x x x x xx xx xx
Total X x x x x X xx xx xx
Checked with Attendance Records
xx xx xx
Signature Signature Signature
(Supervisor) (Labour Dept.) (Cost Dept.)
(3) Procedure
(a) When is Job Card Prepared : Job Card may be prepared either daily or weekly. While large
organisations can prepare Daily Job Card, Weekly Job Card would be suitable for small
organisations.
(b) Who Prepares Job Cards : Job Cards maybe kept with the workers or with an assistant in the
Labour department. When the workers are educated, the Job Card may be filled in by the workers
and submitted to Labour department every day. However, if the workers are careless, the Job
Cards may be torn or mutilated. Further, the details may not be recorded accurately by the workers.
In such cases, it.is desirable to keep the Job Cards with an assistant in the Labour department
who would fill in the details at the end of every day.
(c) How is Job Card Prepared : The total time spent by a worker on each job is, firstly, entered
against that Job. No. This is done by entering the time of starting the Job (On) and completing the
job (otr) against each job no. The time spent on each job is further classified into Normal Time
and Overtime. The Costing department then computes the Labour Cost to be allocated to each
Job as per the formula. Labour Cost of each Job = Time Spent x Wage Rate. The total time
spent on all jobs per day by a worker is also reconciled with the total period ofattendance as per
the attendance records.
(B) Job Gard for each Job

(1) Meaning : When a Job Card is prepared for each worker, as explained above, it is not possible to
directly compute the Total Labour Cost of each job. The Costing department has to prepare a
Summary ofthe Job Cards of all workers to determine the Total Labour Cost of each job. Some
organisations, therefore, prepare a Job Card for each job. This Job Card moves with the worker
from one Job to another. A Job Card for each job readily gives the total hours spent by the worker
on each job and there is no need to prepare a separate summary as in the case of a Job Card for
each worker. However, such Job Cards do not give details oftotal labour hours ofeach worker.
Thus, it is not possible to reconcile such Job Cards with the respective attendance records. Such
Job Cards however, are useful when there are many jobs and each job passes through several
workers.
(2) Specimen:
EXHIBIT 3 : SPECIMEN OF JOB CARD FOR EACH JOB
ABC Company
Job Card
Description of Job x x JobNo.:xx
Job Started On : x x Job Completed On : x x
Dept. Workers Name/ Work Done Time Cost
Token No. On off {
xx xxx x x
xx xxx xx x x x
Total Checked
xx xx xx
Supervisor Labour Dept. Costing Dept.
(3) How Job Cards Help in Determination of Labour Costs: The Labour Cost of each job is
determined bythe Costing Department through an analysis of all Job Cards. The Total Labour
Cost of a Job is : Total Labour Hours x Labour Hour Rate. The Labour Hour Rate may be so
fixed that the Total Labour Cost is equal to the Gross Wages, or it may also cover all allowances,
incentives etc. paid to the workers.
1.2.4 Time Keeping v/s Time Booking
EXHIBIT
Basis of
Distinction
4: TIME KEEPING VS TIME BOOKING
Time Keeping
x Time Booking
1. Meaning Time keeping is a system of Time booking is a system of

recording the arrival and recording the time spent by each
departure time of each worker. worker on various jobs, orders or
processes.
2. Basic Its basic objectives are to Its basic objective is to asceftain
Objective maintain attendance record as the labour cost of a job, order or
per statutory requirements and process.
to provide data for the
preparation of payroll.
3. Methods l. ManualMethods 1. Daily Time Sheet
(i) Attendance Register/ 2. Weekly Time Sheet
Muster Roll 3. Job Card (or Job Ticket)
(ii)Token/Disc Method 4. Combined Time and Job Card
ll. MechanicalMethods 5. Labour Cost Card or Circulating
Time Recording Clocks Job Card
6. Piece Work Card
Labour Cost 133
2.1 STEPS
The hours worked by each employee as reflected on the completed clock cards are entered by an
accounting department staffon the payroll sheet or payroll summary. All employees authorized for
employnent by the personnel department are first listed on the payroll sheet. Hours and hourly rates
are then transferred from the clock cards, and total earnings are computed. After the gross earnings
(that is, the total amount earned by an employee before any deductions are taken into consideration)
have been calculated for everyemployee, deductions are entered on the payroll sheet, and the net
pay of each employee is determined. Payroll deductions are of two kinds, non-tax and tax. Non-tax
deductions are made at the request of the employee or are required by union contracts. Among the
more common examples are union dues, insurance, withholding for the purchase of savings bonds,
and contributions to charities. Tax deductions are made in compliance with Income Tax Act.
2,2 PAYING THE WAGES

The payroll sheet is the basis for the preparation ofa payroll voucher by the accounting department
authorizing disbursements for the net amounts payable to employees. Ifthe number of employees is
large, payments are usually made from a special payroll bank-account. ln each pay period an amount
to cover the net payroll is transferred from the company's general account to a special payroll bank-
account. Cheques payable to the individual employees are then drawn against the payroll account.
Paynents should be made onlyto the employees themselves after proper identification. As a control,
payroll cheques should not be given to factory supervisors or department heads for distribution to
the employees under them. Rather, an individual having no record-keeping functions associatedwith
the payroll (such as the time-keeping function and the preparation of payroll function) should be
assigned the job of distributing pay-cheques. Unclaimed pay-cheques should be investigated to
determine why they have not been picked up by employees.
2,3 OVERVIEWOF STATUTORY REQUIREMENTS

The common statutory requirements in respect of payroll are laid down in (i) The Payment of Wages
Act,1936; (ii) The Minimum Wages Act, 1948; and (iii) The Pal,rnent of Bonus Act,1956.
(1) The Payment of Wages Act, 1936 : The basic provisions ofthe act are as follows :
. The Act is applicable to employees drawing wages upto < 1,600 a month.
. The person responsible for payment of wages shall fix the wage period upto which wage
payment is to be made. No wage-period shall exceed one month.
a All wages shall be paid in current legal tender, that is, in current coin or currency notes or
both. However, the employer may, after obtaining written authorisation ofworkers, pay wages
either by cheque or by crediting the wages in their bank accounts.
o All payment of wages shall be made on a working day. In railways, factories or industrial
establishments employing less than 1,000 persons, wages must be paid before the expiry of
the seventh day after the last date of the wage period. In all other cases, wages must be paid
before the expiry of the tenth day after the last day ofthe wage period. However, the wages of
' a worker whose services have been terminated shall be paid on the next day after such
termination.
. Although the wages of an employed person shall be paid to him without deductions of any
kind, the act allows deductions from the wages ofan employee on the account of the following :
(i) fines;
(ii) absence from duty;
(iii) damage to or loss of goods expressly entrusted to the employee;
(iv) housing accommodation and amenities provided bythe employer;
(v) recovery of advances or adjustment of over-p ayrnents of wages ;
134 CostAccounting (TYB.Cem, : SEM-V)
(vi) recovery of loans made from anyfund constituted for the welfare of labour in accordance
with the rules approved bythe State Government, and the interest due in respect thereof;
(vii) subscriptions to and for repayment of advances from anyprovident fund;
(viii) income-tax;
(ix) payments to co-operative societies approved by the State Government or to a scheme of
insurance maintained bythe lndian Post Office;
(x) deductions made with the written authorisation ofthe employee for payment of anypremium
on his life insurance policy or purchase ofsecurities.
(2) The Minimum Wages Acto 1948 : This Act was enacted to safeguard the interests of workers,
mostly in the unorganised sector by providing for the fixation of minimum wages in certain
specified employments. It binds the employers to pay their workers the minimum wages fixed
under the Act from time to time. Under the act, both the Central Government and the State
Governments are the appropriate governments to fix, revise, review and enforce the payment of
minimum wages to workers in respect of 'scheduled employments' under their respective
jurisdictions. There are 45 scheduled employments in the Central sphere and as many as 1,530 in
State sphere. Minimum wage and an allowance linked to the cost of living index is to be paid in
cash, though payment of wages fully in kind or partly in kind maybe allowed in certain cases.
The minimum rate ofwages consists of a basic wage and a special allowance, known as'Variable
Dearness Allowance (VDA) linked to the Consumer Price Index Number. The allowance is
revised twice a year, once in April and then in October. The fixation ofminimum wages depends
on a number offactors such as level ofincome and pafng capacity, prices of essential commodities,
productivity, local conditions, etc. Since these factors vary from state to state, the wages
accordinglydiffer throughout the country. Hence, in the absence of a uniform national minimum
wage, the Central Government introduced a'national floor level minimum wage'. Initially, this
minimum wage level was fixed at { 35 per day and has been revised periodically. The last revision
being { 66 per day with effect from I -2-2004, on the recommendations of the Central Advisory
Board. All the states /UTs governments are required to ensure that fixation /revision ofminimum
rates of wages in all the scheduled employments is not below this national minimum wage.
(3) The Payment of Bonus Act, 1965 : This act was enacted toprovide for the payment of bonus to
persons employed in certain establishmen(s on the basis of profits or productivity and for the
matters connected therewith. The Act applies to : (i) every factory as defined under the Factories
Act, 1948; and (ii) every other establishment in which twenty or more persons are employed on
any day during an accounting year. However, the government may, after giving two months'
notification in the Official Gazette, make the Act applicable to any factory or establishment
emplolng less than twenty but not less than ten persons.
The key provisions of the Act, are :
. According to the act, the'employee' means "any person employed on a salary or wage not
exceeding three thousand and five hundred per mensem in any industry to do any skilled or
unskilled manual, supervisory managerial, administrative, technical or clerical work for hire
or reward, whether the terms of employrnent be express or implied".
. An employee is entitled to be paid by his employer a bonus in an accounting year subjected to
the condition that he / she has worked for not less than 30 working days ofthat year.
. An employer shall payminimum bonus at the rate of 8.33Yoofthe salaryor wages earned by
an employee in an year or one hundred rupees, whichever is higher. Here it is not required
that the employer has anyallocable surplus in the accounting year. However, where an employee
has not completed fifteen years ofage at the beginning ofthe accounting year, the minimum
bonus payable is 8.33% or sixtyrupees, whichever is higher.
o In any accounting year, ifthe allocable surplus exceeds the amount ofminimum bonus payable
to the employees, the employer shall in lieu of such minimum bonus, be bound to pay bonus
(maximum bonus) equivalent to the amount which shall not exceetl 20%o of the salary or
wages earned by employees.
. In computing the allocable surplus, the amount set on or the amount set offshall be taken into
account. In other words : (i) Il in any accounting year, the allocable surplus exceeds the
Labour Cost 13s
amount of maximum bonus payable to the employees in the establishment, then the excess
surplus is carried forward for being set on in tlie succeeding accounting year and so on upto
an inclusive ofthe fourth accounting year for thepurpose ofpayment ofbonus; or (ii) Ifthere
is no or less allocable surplus in respect ofthat year, then such a shortfall is carried forward
for being set offin the succeeding accounting year and so on upto and inclusive ofthe fourth
accounting year.
o Where in any accounting year, any amount has been carried forward and set on or set ofi, then
in calculating bonus for the succeeding accounting year, the amount ofset on or set offcarried
forward from the earliest accounting year shall first be taken into account.
. All amounts payable to an employee by way of bonus under this Act shall be paid in cash by
his employers within a month from the date on which the award become enforceable or the
settlement comes into operation, in respect of any dispute regarding payment of bonus. But,
in any other case, it shall be paid within a'period of eight months from the close of the
accounting year. However, the Government may order, upon receiving application made to it
by the employer and for sufficient reasons, to extend the said period of eight months to such
further period orperiods as it thinks fit, such that the total period so extended shall not, in any
case, exceed two years.
o An employee shall be disqualified from receiving bonus ifhe / she is dismissed from service
for : (i) fraud; or (ii) riotous or violent behaviour while on the premises of the establishment;
or (iii) theft, misappropriation or sabotage of any property of the establishment.
The statutory provisions regarding deductions from Payroll pertain to Tax Deduction'at Source
(TDS), Professional Tax, PF, and ESI.
(l) TDS : Every employer who is palng salary to employees has to deduct TDS under section 192
of the Income Tax Act, 196 I , if the salary is more than minimum amount exempt from tax. The
employers also need to generate Form 24Q and Form I 6 in time. Some of the salary components
that impact TDS deduction are : HRA, Special allowance, Leave travel allowance, Children
education allowance, Medical allowance, Investments.
(2) Professional Taxes : Professional tax or employment tax is a state-based tax. It is one of the
statutory deductions from the gross income before computing the tax.
(3) Employees State Insurance (ESI) : ESI fund, maintained by ESIC is applicable to employees
earning { 15,000 or less per month to provide the cash and medical benefits to them and their
families. This fund is a contributoryfund in which both the employer and employee contributes
4.7 5% and 1.7 5Yo respectively to make it a total of 6.5%o.
For ESI calculation, the salary comprises of all the monthly payable amounts such as basic pay,
dearness allowance, city compensatoryallowance, HRA, incentive allowance, attendance bonus,
meal allowance and incentive bonus. The salary however, does not include annual bonus,
retrenchment compensation, encashment of leave and gratuity.
ESI calculation : Consider the salary of an employee is { 9,000 p.m. then the ESI calculation for
the employee would be calculated as :
ESI : 9,000 x (1.751100) = 158
Note : Employees contribution is 1.75 percent.
The ESI calculation for the employer's contribution would be calculated as :
ESI:9,000 x (4.75/100)= 428

Note : Employer's contribution is 4.75 percent.
In case the salary goes above < 15,000 p.m. during the contribution period, the ESI would be
calculated on the higher salary. For example, ifthe salaryofan employee is raised to{ 17,000
per month during the ESI contribution period then the ESI would be calculated on ( 17,000
instead oft 15,000.
The EDLI (Employees' Deposit Linked Insurance Scheme) provides assurance benefit (death
insurance cover) to employees along with PF beneht. The employees do not contribute anything
towards EDLI. The employers contribute 0.5Yo of the total wages of employees subject to a
maximum of { 6,500. EDLI applies to all the organisations where EPF scheme applies.
(4) Provident Fund (PF) : PF is a compulsory contributory fund for the future of employees after
their retirement or for their dependants in case oftheir earlydeath. Just like ESI, the Employees
Provident Fund (EPF) is alsb a contributory fund in which both the employee and employer
contribute amount. EPF is a compulsoryand contributoryfund forthe Indian organisations under
The Employees' Provident Fund and Miscellaneous Provisions Act, 1952.
For EFP, both the employee and the employer contributes equal amount, which is 12% of the
salary ofthe employee. However, the employee contributions may differ. Employees can contribute
more than l2o/o of their salary voluntarily. However, in such a case, the employer is not bound to
match the extra contribution ofthe employee.
For PF contribution, the salary comprises of components such as : basic wages, DA, conveyance
allowance and special allowance.
For the PF deduction, the maximum limit of salary of the employee is { 15,000 per month. This
means that even if the employee's salary is above < 15,000 the employer is liable to contribute
only on < 15,000, that is < 1,800. The P.F. is divided into EPF and EPS (Employee Pension
Scheme) contributions. The employees' contribution goes straight to EPF whereas from employer's
contribution, the 8.33% goes to EPS subject to ( 1,250 a month and the rest goes to EPF.
@
Overtime means the work done by a worker beyond his normal working hours. According to the
Factories Act, 1948, every worker is required to work not more than t hours a day or 48 hours in a
week. li due to the urgency of the work, a worker is required to work for more than t hours a day,
excess time over 48 hours i.e. overtime is to be paid to the worker at a higher rate, generally at
double the normal wage rate. The excess rate over normal wage rate is called overtime premium.
Hence Overtime Rate : Normal Rate of Wages + Extra Rate ofWages (called Overtime Premium).
3.2 ACCOUNTINGTREATMENT
Normal Wages are charged to the cost centre or cost unit in the usual way. The extra wages or
Overtime premium is treated as explained below.
(l) Specific Job : Ifthe Overtime was for a specific job, at the instance ofthe customer, it is charged
to the Job. In turn. the amount of Overtime would be recovered from the customer.
(2) Normal : If the Overtime is normal or due to unavoidable causes, it is treated as a Works or
Factory Overhead.
(3) Abnormal : If the Overtime is abnormal, it is treated as an exceptional item and directly debited
to the Costing Profit and Loss Account.
(4) CAS 7: According to CAS 7, Overtime premium shall be assigned directly to the cost object or
treated as overheads depending on the economic feasibility and the specific circumstance requiring
such overtime.
3.3 MERITS OF OVERTIME

Overtime helps the management in -
( I ) Increasing the production by incurring a small exrra cost.
(2) Utilising the plant and machinery more effectively, thus spreading the fixed cost over alarger
output. This reduces the per unit cost ofproduction.
(3) Clearing the backlog of work.
Lubour Cost 137
3.4 DEMERITS OF OVERTIME

However, Overtime has the following derrerits :
( I ) Overtime means additional cost of labour, lighting, repairs for overworked machinery etc.
(2) Overtime work means fatigue for the workers leading to lower and sub-standard output.
(3) Overtime becomes a habit and workers may work less during normal working hours to secure
Overtime.
3.5 CONTROL OF OVERTIME

Overtime must be controlled to reduce the cost oflabour and production. Control of Overtime involves
the following steps :
(1) Record Overtime : First, it is necessary to record Overtime (on the Job card, or separately on
Overtime Cards).
(2) Identify and Classify Causes : Next, the causes giving rise to Overtime should be identified.
The causes can be classified into the following categories :
(a) Production causes: i.e. machine break-down, power failures, more workers as compared
with no. of machines etc. leading to backlog ofwork.
(b) Administrative Causes : i.e. poor planning, worker absenteeism, shortage ofmanpower etc.
(3) Take action : Action should be taken after identifying causes, as explained below
(a) Production causes of Overtime can be avoided by regular maintenance of machinery, setting
up internal sources ofpower generation, properplanning ofproduction in advance, purchase
of new machines etc. to avoid work getting in arrears.
(b) Administrative Causes of Overtime can be controlled by controlling absenteeism (say, by
giving Attendance Bonus), by recruiting more workers, by adding more shifts etc.
lllustration 1 : (Computation and Accounting)
A company's basic wage rate is 1.50 per hour and its overtime rates are :
Evening Time plus one-third time

Weekends Double the time
During ayear the following hours were worked :
Normal time 2,20,000 hours
Evenings 20,000 hours
Weekends 10,000 hours
You are required to compute and explain how overtime is treated in each of the following
circumstances :
(a) Where overtime is worked regularly throughout the year as company policy due to labour shortage.
(b) Where overtime is worked irregularly to meet urgent production requirements from time to time.
(c) Where overtime is worked specifically at the customefs request for quicker delivery.
Solution :
Overtime Rates
11
Evening : Time+
5 Timei.e. 1.50+
5 =t2.00perhour.
Overtime premium 2.00 - 1.50 = { 0.50 per hour.
Weekends : Double the time i.e., 1.50 x 2 = t 3.00 per hour.
Overtime Premium 3.00 - 1.50 = { 1.50 per hour.
Year results : {
1.50 =
Normal time = 2,20,000 x 3,30,000
Evening = 20,000x2.00 = 40,000
Weekends = 10,000x3.00 = 30,000
Total 2,50,000 4,00,000
= < 1.60 per hour

Average rate of wages =
#ffi
(a) In this case, overtime becomes a Part of Labour Cost. Job is to be debited with an inflated rate
(average) of { 1.60 per hour instead of a basic wage rate of t 1.50 per hour.
(b) ln this case, job is to be debited at ( 1.50 per hour. Overtime Premium is to be calculated at
t 0.50 or { 1 .50 depending upon the evening or weekend. Then Overtime Premium Cost is to be
debited to factory overhead a/c.
(c) ln this case, both the basic wages and overtime Premium Cost are to be debited to Job and
charged to the customer.
Note : lf the overtime is done due to abnormal circumstances, the overtime Premium Cost is to be
debited to the Costing P & L A/c.
4. IDLE TIME
4.1 MEANING
Idle Time means the time lost during which the worker does not work. i.e. he is idle. However, still
the worker has to be paid the wages even for such Idle Time. Thus, it is a double loss for the concern.
It should be noted that Idle Time does not include the period the worker is on leave, or weekly-off
etc.
4.2 CAUSES AND CONTROL OF IDLE TIME

Idle Time must be controlled, reduced and eliminated to control the cost of labour and production.
Control of Idle Time involves the following steps :
(1) Record ldle Time : First, it is necessary to record Idle Time (on the Job Card, or separately on
Idle Time cards).
(2) Identify and Classify Causes : Next, the causes giving rise to Idle Time should be identified.
The causes can be classified into the following categories :
(a) Production Causes : i.e. machine break-down, power failure, waiting for work, tools, materials
or instructions etc.
(b) Administrative Causes : i.e. poor planning, bad labour relations leading to strikes, lock-
outs etc. and
(c) Economic Causes: i.e. depression in economy leading to fall in demand and production,
shortage of funds to buy raw materials or to repair machinery and so on.
(3) Take Action : Action should be taken after identifying causes, as explained below.
(a) Production Causes of Idle time can be avoided by regular maintenance of machinery, setting
up internal sources ofpower generation, proper planning ofproduction in advance, proper
planning of material purchases etc.
(b) Administrative Causes of Idle Time can be controlled by proper planning by establishing
good labour-management relations, etc.
(c) Economic Causes of ldle Time can be controlled to some extent by long term planning,
diversification of products etc.
4.3 IDLETIMEACCOUNTING
(1) Tlpes : For the purpose ofaccounting, Idle Time is classified into Normal Idle Time and Abnormal
IdleTime.
(a) Normal ldle Time : Normal idle time is the time lost in walking from the gate to the place of
work, Tea or Lunch Break, time taken to set up and start themachine, waiting for material,
tools or instructions, interval between two jobs, etc. It is also called Unavoidable Idle Time.
(b) Abnormal Idle Time : Abnormal Idle Time is the time lost due to non-availability of raw
materials, break-down of machine, power failure, strike or lock-out in factory fire, floods
etc.
(2) Accounting Treatment : The accounting of Idle Time depends upon the type of Idle Time.
Unavoidable or Normal Idle Time is treated as part of employee cost while arriving at the Labour
Lubour Cost 139
Hour Rate. Abnormal Idle Time is treated as an exceptional item and charged directly to the
Costing Profit and Loss Account.
(3) CAS 7: According to CAS 7, Idle time cost shall be assigned direct to the cost object or treated
as overheads depending on the economic feasibility and the specific circumstances causing such
idle time. Cost of idle time for reasons anticipated like normal lunchtime, holidays etc. ip normally
loaded in the Employee cost while arriving at the cost per hour of an Employee/a group of
Employees whose time is attributed direct to cost objects.
lllustration 2 : (Normal ldle Time)
'X'an employee of ABC Co. gets the following emoluments and benefits :
(a) Basic pay { 1,000 p.m.

(b) Dearness allowance t 200 p.m.
(c) Bonus 7 20"/" ot salary and D.A.
(d) Other allowances { 250 p.m.
(e) Employee's contribution to P.F. 1O"h ol salary and D.A.
'X' works lor 2,4OO hours per annum, out of which 400 hours are non-productive and treated as
normal idle time. You are required to find out the effective hourly cost of employee 'X'.
Solution : (FYBAF, March 2018, adapted)
Statement Showing Computation of Effective Hourly Cost of Employee 'X'
Parliculars Per montf Per year

I a
(i) Earning of Employee'X'
Basic pay 1,000 12,000
Dearness Allowance 200 2,400
Bonus 240 2,880
Employees's contribution to provident fund 120 1,440
Other allowance 250 3,000
'1,810 21,720
(ii) Etfective Working Hours
Annual working hours 2,400
Less : Normal idle time 400
Effective working hours 2,000
(iii) Effective cost of 'X' 21 ,720 + 10.86
5. LABOUR TURNOVER tl
@@
Labour turnover in an organisation is the rate ofchange in the composition oflabour force during a
specified period measured against a suitable index. The standard ofusual labour turnover in the
industry or locality or the labour turnover rate for a past period may be taken as the index or nornl
against which actual turnover rate is compared.
5.2 METHODS OF MEASUREMENT

There are three methods of calculating labour turnover which are given below :
Number of emolovees reolaced

l. Replacementmethod: xtOO
2 Separation method: t*'ft3if#fli?i?"ifli;i;*';f';"i['a'iiii';tIii?i3i' - ,r,

Number of employees separated +
Number of employees added
3. Flux method: x 100
Average number of employees on rolls during the period
5.3 CAUSES
The main causes oflabour turnover in an organisation/industry can be broadly classified under the
following three heads: (a) Personal Causes; (b) Unavoidable Causes; and (c) Avoidable Causes.
Personal causes are those which induce or compel workers to leave their jobs e.g.: (i) change ofjobs
for betterment; (ii) premature retirement due to ill health or old age; (iii) domestic problems and
family responsibilities.
Unavoidable causes are those under which it becomes obligatory on the part of management to ask
one or more oftheir employees to leave the organization e.g.: (i) seasonal nature ofthe business; (ii)
shortage of raw material, power, slack market for the product etc.; (iii) change in the plant location;
(iv) disability making a worker unfit for work; (v) disciplinary measures; (vi) marriage.
Avoidable causes are those which require the attention ofmanagement on a continuous basis so as to
keep the labour turnover ratio as low as possible, such as : (i) dissatisfaction withjob, remuneration,
hours of work, working conditions, etc., (ii) strained relationship with management, supervisors or
fellow workers; (iii) lack oftraining facilities and promotional avenues; (iv) lack ofrecreational and
medical facilities; (v) low wages and allowances.
5.4 EFFECTS
High labour turnover increases the cost of production in the following ways: (i) the even flow of
production is disturbed; (ii) efficiency of new workers is low; productivity of new but experienced
workers is low in the beginning; (iii) there is increased cost of training and induction; (iv) new
workers cause increased breakage oftools, wastage ofmaterials, etc.
s.5 cosrs
Two types of costs which are associated with labour turnover are:
(a) Preventive costs : These include costs incurred to keep the labour turnover at a low level, i. e. cost
ofmedical services, welfare schemes and pension schemes. If a company incurs high preventive
costs, the rate oflabour turnover is usually low.
(b) Replacement costs : These are the costs which arise due to high labour turnover. If men leave
soon after they acquire the necessary training and experience ofgood work, additional costs will
have to be incurred on new workers, i.e., cost of employment, training and induction, abnormal
breakage and scrap and extra wages and overheads due to the inefficiency of new workers.
Thus, a companywill incur veryhigh replacement costs ifthe rate oflabour turnover is high. Similarly,
only adequate preventive costs can keep labour tumover at a low level. Each company must, therefore,
work out the optimum level oflabour turnover keeping in view its personnel policies and the behaviour
ofreplacement cost and preventive costs at various levels oflabour turnover rates.
5.6 REMEDIAL STEPS

The following steps are useful for minimising labour turnover.
l. Exit Interview : An exit interview be arranged with each outgoing employee to know the reasons
for leaving the organisation.
2. Job Analysis : Before recruitment, job analysis and evaluation may be carried out to ascertain
the requirements of each job.
3. System : There should be a scientific system ofrecruitment, selection, placement and promotion
for employees.
4. Working Atmosphere : There should be a healthy working atmosphere. Management should
discuss service rules with workers before their implementation; provide facilities for education
and training ofworkers; and introduce a procedure for settling worker's grievances.
5. Committee : There should be a committee, comprising of members from management and workers,
to discuss issues like control over workers, handling their grievances etc.
Labour Cost t4t
lllustration 3 : (Labour Turnover)
From the following information, calculate Labour turnover rate and Labour flux rate:
No. of workers as on 01 .01.2013 = 7,600
No. of workers as on 31 .12.2013 = 8,400
During the year, 80 workers left while 320 workers were discharged 1,500 workers were recruited
during the year of these, 300 workers were recruited because of exits and the rest were recruited in
accordance with expansion plans. GA-?CC, May 2001)
Solution :
Labour turnover rate :
It comprises of computation of labour turnover by using following methods:
(i) Replacement Method :
_ No. of workers replaced .,

* Oo
Average number of workers
300 x 100
- 8,000 = 3.75o/o
(ii) Separation Method :
_ No. of workers left + No. of workers discharged .,OO

Average number of workers ^
(80 + 320)
x 100
(7,600+8,400) +2
4oo
- 8,000
x 1oo = 57o
(iii)Flux Method :
_ No. of separations + No. of additions

* ., oo
Average number of workers
_ (400 +1,500) , ,oo

(7,600+8,400) +2
1'900
- 8,000
x100 = 23.75"h
6. OF LABOUR
(1) Statement : For identifl,ing utilisation of labour a statement is prepared (generally weekly) for
each department / cost centre. This statement should show the actual time paid for, lhe standard
time (including normal idle time) allowed for production and the abnormal idle time analysed
for causes thereof.
(2) Direct v. Indirect Labour Cost : Any labour cost that is specifically incurred for or can be
readily charged to or identified with a specificjob, contract, work order or any other unit ofcost,
is termed as direct labour cost. It includes : (i) all labour that is engaged in converting raw
materials into manufactured articles in the case ofmanufacturing industries, and (ii) other forms
of labouq wholly or specifically for any particular unit ofproduction and hence, can be readily
identified with the unit ofproduction. (Example : Labour and staffemployed on a construction
job or project). Any labour that does not meet the above test is indirect, e.g. men generally
employed in machine shop such as tool setters, fitters, workers in tool room, stores, etc. Their
wages are charged as indirect expenses. The distinction is one relative to each particular firm or
industry. Labour which is direct in one unit may indeed be indirect in another. Whereas direct
labour can be identified with and charged to thejob, indirect labour has to be treated as part of
the factory overheads to be included in the cost of production on some suitable basis of
apportionment and absorption.
(3) Charging of Labour Cost : For the identification ofutilisation of labour with the cost centre a
wage analysis sheet is prepared. Wage analysis sheet is a columnar statement in which total
wages paid are analysed according to cost centre, jobs, work orders, etc. The data for analysis is
provided by wage sheet, time card, piece work cards and job cards. The preparation of such sheet
serves the following purposes :
(i) It analyse the labour time into direct and indirect labour by cost centres, jobs, work orders.
(ii) It provides detailsof direct labour cost made up ofwages, overtime to be charged as production
cost ofcost centre,jobs or work orders.
(iii) lt provides information for treatment ofindirect iabour cost as overhead expenses.
Wage Analysis Sheet
No. Department / Totai Work in Factory Administration Selling &

week- Cost Centre Progress Overhead Overhead Distribution
ending ControlA/c ControlA/c Overhead Control
Account
(4) Identification of Labour Hours with Work Order or Batches or Capital Job : For identification
of labour hours with work order or batches or capital jobs or overhead work orders the following
points are to be noted :
(i) The direct labour hours can be identified with the particular work order or batches or capital
job or overhead work orders on the basis ofdetails recorded on source document such as time
sheet orjob cards.
(ii) The indirect labour hours cannot be directly identified with the particular work order or
batches or capital jobs or overhead work orders. Therefore, they are traced to cost centre and
then assigned to work order or batches or capital jobs or overhead work orders by using
overhead absorption rate.
lllustration 4 ;
A direct labour employee's wage in week 5 consists of the following :

a
(a) Basic pay for normal nours wo*ed, 36 hours at ( 4 per hour 144
(b) Pay at the basic rate for overtime, 6 hours at ( 4 per hour 24
(c) Overtime shift premium, with overtime paid at 1.25 times
('ll4x6 hours x t 4 per hour) 6
(d) A bonus payment under a group bonus (or'incentive') scheme - bonus for the month 30
Total gross wages in week 5lor 42 hours of work 2O4
Required : Establish which costs are direct costs and which are indirect costs.
Solution :
Items (a) and (b) are direct labour costs of the items produced in the 42 hours worked in week 5.
Overtime premium, item (c), is usually regarded as an overhead expense, because it is 'unfair'to
charge the items produced in overtime hours with the premium. Why should an item made in overtime
be more costly just because, by chance, it was made after the employee normally clocks off for the
day ?
Group bonus scheme payments, item (d); are usually overhead costs, because they cannot normally
be traced directly to individual products or jobs.
ln this example, the labour employee costs were < 168 (144 + 24) in direct costs and ( 36 (6 + 30)
in indirect costs.
7. EFFICIENCY R.ATING PROCEDURES
(1) Efficiency : Efficiency is usually related with performance of an individual worker and may be
computed by comparing the time taken with the standard time allotted to perform the given job/
task. If the time taken by a worker on a job equals or is less than the standard time, then he is
rated efficient. In case he takes more time than the standard time then he is rated as inefficient. It
may be computed as follows:
Timeallowedasperstandard
Efliciency invo = Time taken
* ,oo
Labour Cost 143
(2) Procedure : For effrciency rating of employees the following procedure may be followed:
(i) The first step is to determine the standard time taken by a worker for performing a particular
job/task by using Time & Motion study or Work study techniques.
(ii) For computing effrciency rating it is necessaryto develop a procedure for recording the output
of each worker along with the time taken by him.
(iii) The effrciencyrating of each worker can be computed byus.ing the above mentioned Formula.
(3) Need :
(i) When a firm follows a system of payrnent by results (e.g. Taylor's differential piece work
system, or Emersion efficiency plans) the payment has a direct relationship with the output
given by a worker.
(ii) The efficiency rating also helps the management in preparing labour requirement budget or
for preparing manpower requirements.
(4) Example : Suppose an employee is expected to produce three units in every hour that he works.
I1" during one week, the employee makes 126 units in 40 hours of work the following comments
can be made. Effrciency is a relative measure of the hours actually taken and the hours that
should have been taken to make the output. 126 units should take 42 hours, but did take 40 hours.
Efficiency ratio = 42140 x 100o/o: 105%. Or alternatively, in 40 hours, he should make (40 x 3)
120 units; but did make 126 units. Effrciency ratio : 1261120 x 100oh: 105%. An efficiency
ratio greater than 100% indicates that actual efficiency is better than the expected or'standard'
level of efficiency.
(5) Labour Productivity : Productivity is generally determined by the input i output ratio. In the
case oflabour it is calculated as below :
Actual Output
Actual Productive Hours
Labour productivity is an important measure for rneasuring the effrciency ofthe labour force as
a whole ofa business concern or even ofthe country. It is an index ofefficiencyand a sign of
effectivenes in the utilisation ofresources-men, materials, capital, power and all kinds of services
and facilities. It is measured by the output in relation to input. Productivity can be improved by
reducing the input for a certain quantity or value ofoutput or byincreasing the output fiom the
same given quantity or value of input
(6) Production v. Productivity : Production is the quantity or volume of output produced.
Productiv-ity is a measure of the efficiency with which output has been produced. An increase in
production without an increase in productivity will not reduce unit costs.
(7) Factors : The important factors which must be taken into consideration for increasing labour
productivity / efficiency are as follows :
(i) Employing only those workers who possess the right type,of skill.
(ii) Placing a right type of man on the right job.
(iii) Training young and old workers byproviding them the right tlpes of opportunities.
(iv) Taking appropriate measures to avoid the situation of excess or shortage of labour at the
shop floor.
(v) Carrying out work study for the fixation of wage rate, and for the simplification and
standardisation of work.
Labour is rewarded by way of payment of money, called wages. Wages may be paid either on the
basis of Time spent on work or on thebasis of Output. Thus, there are two methods of remunerating
Labour - Time Rate System and Piece Rate System.
8.1 TIME RATE SYSTEM

(1) Meaning : Time Rate System is related to the number of hours ofWork done by a worker. Thus,
under this system, the Wages = Labour Hours x Labour Hour Rate. The payment depends
solely upon the Time spent on work irrespective of the quantity of output. Overtime, if any is
normally paid at a higher (say 1.5 times) rate. Idle time, if any, has also to be paid for, since the
wages are linked with attendance and not with quantum ofwork done. The computation of the
wages is made on the basis of the Time Cards explained earlier.
(2) Suitability : Time Rate System is suitable in the following cases:
(a) Quantity Unimportant : It is suitable in cases where attendance and quality of work are
more important than the output e.g. Research, Quality Control, Inspection etc.
(b) Quantity Difficult to Measure : Piece Rate System requires setting accurate standards of
output. In many cases it is not possible to do so e.g. Repairs and Maintenance. Time Rate
System is suitable in such cases.
(c) Output Beyond Worker's Control : If the output depends upon team work or on the speed
of machine etc., it is not fair to link wages with output. In such cases, the only fair and just
system ofremunerating the workers would be the Time Rate System.
(3) Evaluation : Time Rate System has the following merits and demerits.
(a) Merits:
(i)Simple : Time Rate System has the merit ofbeing simple to operate.
(ii) Steady Income : The worker is assured of a steady and regular income.
(b) Demerits : However, this system suffers from the following demerits:
(i) Fails to Motivate : It treats both efficient and inefficient workers equally. It does not reward
the efficient worker and hence fails to motivate the workers to produce more output. Since it
is difficult to fix standard time for each job, Labour Incentive Schemes cannot be properly
established or implemented.
(ii) Higher Costs/ Losses : Since even Idle Time has to be paid for, this system leads to higher
Labour Costs. If the time required for completing a job cannot be accurately estimated in
advance, the price quoted for thejob may be unprofitable leading to losses.
(iii) Strict Supervision : Strict Supervision is necessaryto ensure that workers spend their time
in productive work throughout the day.
8.2 PIECE RATE SYSTEM

(1) Meaning : Under the Piece Rate System, each unit, job, operation or process is known as a
'piece'. A 'Piece-Rate'is fixed for each such unit, job, operation or process. The worker is paid
on the basis of the pieces completed by him. Thus, Wages : Pieces Completed x Piece Rate.
The payment depends solelyupon the number ofpieces completed, irrespective ofthe time spent
by the worker on the job. There is no question of payment of Overtime or Idle time, since the
payment is solely related to the quantum of work. The record of the pieces produced by the
workers and accepted by the organisation is kept through a document known as Piece Work
Ticket. Just as a Time Card records the attendance and work time of a worker, Piece Work Ticket
records the output produced by the worker.
Labour Cost 14s
(2) Specimen:
EXHIBIT 5 : SPECIMEN OF PIECE WORK TICKET
ABC Company
Piece Work Ticket
Depaftment x x Workers Name/Ticket No. x x
JobNo.:xx Started on xx Completed on xx
Date Time Output Accepted Piece Rate Cost
xx xx xx XX xx xx
xx xx xx XX xx xx
xx xx xx
Worker Supervisor Costing Dept.
(3) Suitability : The piece rate system is suitable in the following cases :
(a) Quantity Important : Piece Rate is suitable in cases where the output is more important than
attendance and time spent e.g. small standard articles like toys etc.
(b) Quantity Easy to measure : Piece Rate System requires setting accurate standards ofoutput.
Thus in cases where it is possible to accurately fix the Input-Output Ratio, the Piece Rate
System can be used.
(c) Work From Outsiders: Piece Rate System is suitable, when the work is given to outside
workers on temporary or contract basis, where direct supervision is not possible.
(4) Evaluation : Piece Rate System has the following merits and demerits:
(a) Merits:
(i) Simple : Once the Piece Rate is fixed, it is simple to calculate the wages. There are no
problems of keeping elaborate records of attendance, over-time, leave etc. or of applying
special rates for overtime work and so on.
(ii) Motivation : Since the wages are directly linked with tlie output, the worker is motivated to
make greater efforts since he is assured of higher income. It is possible to fix the standard
output and establish and operate Incentive Schemes linked with output and productivity.
(iii) Lower Costs : The Labour Costs are lower due to higher Labour productivity and effrciently
as well as elimination of idle time/overtime etc.
(b) Demerits:
(i) Difficult to Fix Piece Rate: The biggest disadvantage of Piece Rate System is that it is very
difficult to fix the Piece Rate. It is technically difficult, in many cases, to establish the standard
output, and hence to fix the Piece rate. If the rate is too high the organisation would suffer
losses. If, on the other hand, the rate is too low, workers would be unhappy. Generally, the
Piece Rate is fixed after careful research bywayofWork Study(or, Time and Motion Study),
past records, technical estimates etc.
(ii) Quality Ignored : Since the worker is solely concerned with quantity, the aspect of quality
may be ignored. Thus, jobs like research, repairs, quality control, inspection etc. are not
suitable for Piece Rate System.
(iii) No Assured Income/Social Benefits to Workers : The worker is not assured of a steady
regular income nor can he enjoy social benefits like leave allowances etc.
(5) Principles : Important principles which should govern the determination and revision ofpiece
rates are as follows:
l. Different piece rates should be determined for different tlpes ofjobs.
146 CostAccounting(TY.B,Com.: SEM-V)
2. The piece rates determination should give due consideration to factors such as requirement
of jobs, conditions under which jobs rvould be performed, risk involved, efforts involved
while working on the job, etc.
3. The wage rate should be such that it guarantees a minimum living wage to ensure a satisfactory
standard of living.
4. It should redr.rce/stabilize labour turnover on its application.
5. It should act as an incentive to motivate workers in giving a higher output.
6. The wage rate should be able to reduce absenteeism and late coming.
7. It should be acceptable to trade unions.
8. It should be flexible and capable of being adapted to changed circumstances.
9. Piece rates should be revised as and when they are revised by other firms in the industry or
there is an increase in the cost ofliving index.
10. It may be revised at the end of the contract period as settled between management and workers
union.
EI@
An incentive can be defined as the stimulation for effort and effectiveness by offering more money
or facilities. Monetary incentive to labour may be in the form of a bonus. Non-monetary incentives
may improve living and working conditions of the employees. It may be provided individually or
collectively to a group.
9.2 FACTORS
The main factors that should be taken into account before introducing a scheme of incentives are
stated below:
1. Whether there is the need for producing goods of high quality.
2. Whether there exists a system of quality control.
3. Whether there is the need to maximise production.
4. Whether the quantity of work done can be measured precisely.
5. Whether the work is repetitive.
6. Whether the quantity of output is within the control of the worker.
7. The precision with which standards ofperformance can be laid down.
8. The effect of an incentive scheme for one set of workers (e.g. skilled) on other workers (e.g.
unski I led).
9. The system ofwage pa)rynent prevailing in other areas/industries/occupations.
10. The attitude of labour and trade unions towards incentive schemes.
9.3 PRINCIPLES
The following general principles have to be considered while designing a sound system of wage
incentives.
1. The reward for job should be linked with the effort involved in that job.
a
2. The scheme should be just and fair to both employees and employers.
3. The scheme should be clearly defined and be capable of being understood by the employees
easi ly.
4. The standards set should be such that they can be achieved even by average employees.
5. While standards are being set, the workers concerned should be consulted.
Lubour Cost t47
6. As far as possible, no limit should be placed on the amount of additional earnings.
7. The scheme should not be changed or modilled too often.
8. The scheme should take care that the employees are not penalised for reasons beyond their control.
9. The scheme should provide for inspection of output so that only good pieces qualily for incentives.
10. The operation of the scheme should not involte heavyclerical costs.
I l. The scheme should facilitate the introduction ofbudgetarycontrol and standard costing.
12. It should not be against the trade union agreements and other government regulations.
9.4 PROCEDURES
l. There should be time and motion study by specialists fbr fixing the rates of wages for different
operations and the levels of effrciency that must be attained to qualif,i for incentives.
2. The employees should be educated as regards the benefits ofthe proposed scheme through joint
consultation with the leading employees or with union representatives.
3. The scheme should then be publicised extensively with the specimen calculations ofthe rewards
that would arise under it.
4. After the basic scheme has been accepted by all, it should be decided as to how spoiled work will
be treated and the intervals at which payment ofwages will be made.
9.5 VARIOUS SCHEMES

Systems ofWage Payrnent and Incentives are summed up in the following exhibit.
EXHIBIT 6: SYSTEMS OF WAGE PAYMENTAND INCENTIVES
SYSTEMS OF WAGE PAYMENT & INCENTIVES
TIME RATE SYSTEMS PAYMENT BY RESULTS
Time High Measured Differential Piece Combination Premium

Rate Wage Day
Time Flate Work of Time and Bonus
System Plan Work Piece Work Methods
.r-
Halsey
J
Rowan
J
.1,
Barth
Straight Differential
and System System
Piece Work Piece Work
Halsey
,t- J --l Weir
Systems
Thylor Merrick
System System
Gantt Task Emerson's Points Acceleraled

and Bonus Etficiency Scheme Premium
System System
T
t 0
System
Beadaux Haynes
System Syslem
t48 Cost Accounting (T.YB. Com. : SEM-V)
9.6 WAGE PAYMENTS

(a) High wage plan: This plan was first introduced by Ford Motor Company (in USA) in order to
induce workers to exercise extra effort in their work. Under this plan a worker is paid a wage rate
which is much higher than the rate prevailing in the area or in the industry. In return. he is
expected to maintain a very high level of performance, both quantitative and qualitative.
(b) Measured day work: According to this method the hourly rate of the time worker is made up of
two parts viz, fixed and variable. The fixed rate is based on the job requirements. The variable
portion varies for each worker depending upon his merit rating and the cost of living index. The
total of fixed and variable part for a day is termed as Measured day's work rate of a worker. As
the rate is based on two different elements, there are separate time rates not only for each worker
but also for each job.
(c') Differential time rate: According to this method, different hourly rates are fixed for different
levels of efficiency. Up to a certain level of efficiency the normal time or day rate is paid. Based
on effrciency level the hourly rate increases gradually. The following table shows various
differential rates: j
Up to efficiency Normal (< 100 per hr.)
75%o
FromT60/o to 80% efiiciency (t 1 l0 per hr.)

From 8l% to 90%o efficiency (< 120 per hr.)
From 9l% to 100% effrciency (< 130 per hr.)
From 101% to 120o/o effrciency({ 140 per hr.)
(d) Taylor s dffirential piece work system - The Taylor's Differential Piece Rate System aims at
rewarding efficient workers by providing increased piece rate beyond certain level of output.
Under this system two widely diffbring piece-rates are prescribed for each job. The lower rate is
80% of the normal piece rate and the higher rate is l20o/o ofthe normal piece rate. In other words
the higher rate is 150% of the lower rate. The lower rate is given to a level of either 100% or
more. Due to the existence of the two piece rates, the system is known as differential piece rate
system.
Its advantages are :
(i) It is simple to understand and operate.

(ii) The incentive is very good and attractive for effrcient workers.
(iii) It has a beneficial effect where overheads are high as increased production has the effect of
reducing their incidence per unit ofproduction.
However, its main drawbackis that this system is quite harsh to workers, as even a small reduction
in output may result in a large reduction in their wages. This system is no longer in use in its
original form, though the main idea behind it of differentiation is used in manywage schemes.
(e) Merrick dffirential piece rate sytem: Under this system three piece rates for a job are fixed.
None of the fixed rates is below the normal. These three piece rates are as below :
Efficiency Piece Rate Applicable

Upto 83% Normal Rate
Above 83% and upto 1 00% 10% above Normal Rate
Above 100% 2Oo/" above Normal Rate
This system is an improvement over Taylor's Differential Piece Rate System.

Lobour Cost 149
EX4{IBIT 7 : TAYLOR VS. MERRICK
Basis of Distinction Taylor's Differential Merrick's Differential

Piece Rate System Piece Rate System
1. No. of Piece Rate Two piece rates are fixed. Three piece rates are fixed.
2. Penalty for workers It penalises workers It does not penalise worker
producang below producing below standard producing below standard
standard output output by low piece rate. output by low piece rate.
(f) Gantt Task Bonus Plan .' In this method, there is a combination oftime rate, bonus and piece rate
plan. The remuneration is computed as shown below:
. Production below standard - Guaranteed time rate
o Production equal to standard - Bonus of 20% [normally] of time rate / piece rate
. Production above standard - High piece rate for the entire output
This method assures minimum wages for even less effrcient workers. It also offers reasonably
good incentive to efficient workers. However, the main limitation is that the method is complicated
to understand for the workers and hence may create confusion amongst them.
Its advantages are:
(i) lt provides both guarantee as well as incentive. It protects the less efficient by guaranteeing
the time rate. It also provides good incentive for effrcient workers.
(ii) It is simple to understand and operate.
(iii) It helps in better supervision and planning.
However, its main drawback isthat the guaranteed time rate may not encourage a slow worker to
increase his output.
(g) Emerson efficiency system: lJoder this system minimum time wages are guaranteed. But beyond
s
a certain efficiency level, bonus in addition to minimum day wages is given. A worker who is
able to attain efficiency, measured byhis output equal to 2l3rd, of the standard efficiency, or
above, is deemed to be an efficient worker deserving incentive. The worker is paid bonus at a
rising scale at various levels of efficiency, ranging from 66.67% to l50Yo. For a performance
below 66.670/, onlytime rate wages without anybonus are paid. Above 66.67% to 100% efficiency,
bonus varies between 0.01% and20Yo. Above 100% efficiency bonus of 20Yo of basic wages
plus l% for each loZ increase in effrciency is paid. Efficiency / productivity is calculated as
explained in para 7 above.
Qt) Bedeaux system: Under this scheme, firstly the quantum of work that a worker can perform is
expressed in Bedaux points or B's. These points represent the standard time in terms of minutes
required to perform the job. The standard number of points in terms of minutes is ascertained
after a careful and detailed analysis of each operation or job. Each such minute consists of the
time required to complete a fraction of the operation or the job, and also an allowance for rest
due to fatigue. Workers who are not able to complete tasks given to them within the standard time
are paid at the normal daily rate. Those who are able to improve upon the efficiency rate are paid
a bonus, equal to the wages for time saved as indicated by excess ofB's earned (standard minutes
for work done) over actual time. Workers are paid 75o/o of the time saved.
(i) Hayneb system: IJnder this system also the standard is set in minutes. The standard time for the
job is expressed in terms of the standard man-minutes called as "MANIT". Manit stands for
man-minute. In the case of repetitive work the time saved is shared between the worker and the
foreman in the ratio 5 : 1. Ifthe work is of non-repetitive nature, the worker, the employer and the
foreman share the value of time saved in the ratio of 5: 4 : 1. Each worker is paid according to
hourlyrate for the time spent byhim on the job.
{) Accelerated prcmium system: lJnder this system earnings increase with output; the rate of increase
ofearnings itselfincreases progressively with output; in fact the earnings increase in greater
proportion than the increase in production. This system acts as a strong incentive for skilled
workers to earn high wages by increasing output and for production beyond standard.
9.7 INDIVIDUAL BONUS PLANS

In individual bonus plans, the bonus to be paid to each individual worker is computed on the basis of
savings in the hours, i.e. the diftbrence between the time allowed and time taken. The time allowed
is the standard time, which is fixed by conducting a time and motion study by the work-study engineers.
While fixing the standard time, due allowance is given for physical and mental fatigue as well as for
normal idle time. The actual time taken is compared with this standard time and bonus is payable to
the worker ifthe time taken is less than the standard time.
The individual bonus schemes commonly used are - (a) Halsey Premium Plan; (b) Halsey-Weir
Premium Plan; (c) Rowan Plan; and (d) Barth Variable Sharing Plan. In the premiurn bonus plans,
the gain arising out of increased productivity is shared byboth, the employer and employee. These
methods are discussed below:-
(a) Halsey Premium Plan : This plan was introduced by F.A. Halsey, an American engineer. In this
plan, bonus is paid on the basis of time saved. Bonus is paid equal to wages of 50o% of the time
saved. A worker is assured of time wages if he takes longer time than the allowed time. The
formula for computing the total wages is as follows.
Total Earnings:Timewages+ [50% ofTimesaved xTimerate]: [HxR] +[50% (S-H)x R]
R: Rate per hour, S : Standard time
Where, H = Hours worked,
(b) Halsey-Weir Premium Plan : Under this method, there is only one difference as compared to
theHalseyPlanandthatisinsteadof50%bonusforthetimesaved,itis33 l/3rdoloofthetime
saved. Accordingly the formula for this method is modified as follows.
Total EarninCs : (H x R) + 33 I /3 [S - H] R
H: Hours worked. R: Rate per hour, S : Standard time
Its advantuges are'.
(i) The employee gets a guaranteed time rate and also an opportunity for increasing earnings by
increasing production.
(ii) The employer gets a direct return for his efforts in improving production methods andproviding
better equipment.
Its dis adv ant a ge s ar e'.
(i) Incentive is not so strong as with piece rate system. In tbct the more work leads to lower
earnings, the lesser he gets per piece.
(ii) The employees may not like to share the incentive with others.
(c) Rowan Premium Plan : This premium bonus plan was introduced by Mr. James Rowan. It is
similar to that of Halsey Plan in respect of time saved, but bonus hours are calculated as the
proportion of the time taken which the time saved bears to the time allowed and they are pa id for
at time rate. The formula fbr cornputation of total earnings is as follows:-
Total Earnings: [H x R] + [(S-H) / S x H x R]
Where H: Hours worked, R : Rate per hour, S
Standard time. :
The Bonus under Rowan plan is also calculated by the following formula-
Bonus : Time saved x (Time taken / Time allowed) x Time rate : (S H) x (H / S) x R
-
Its advantages are'.
(i) It is a safe system since a worker can never double his earnings even ifthere is bad rate setting.
(ii) It provides a better return for moderate efficiency than under the Halsey plan.
(iii) The sharing principle appeals to the employer as being fair.
Its disadvantages are i
(i) The system is a bit complex.

(ii) The incentive is weak at a high producticin level where the time saved is more than 50% of the
time allowed.
(iii) The sharing principle is not generally welcomed by employees.
Labour Cost tsI
(d) Barth Variable Sharing Plan : In this system, the total earnings are calculated as follows:
Total Earnings: R 1m
H: Hours worked, R = Rate per hour, S : Standard ti
EXHIBIT 8: HALSEYVS. ROWAN
Sr. Time Saved Bonus, Earning per Hour

No. and Labour Cost per Unit
1 When time saved is less than Bonus, rate of increase in per hour earning and
50o/" of standard time. labour cost per unit are higher in Rowan plan
than Halsey Plan.
2. When time saved is 50% of Bonus, earning per hour and labour cost per unit
standard time. are same under both the plans.
3. When time saved is more Bonus, rate of increase in per hour earning, and
than 50% of standard time. labour cost per unit are higher in Halsey Plan
than Rowan Plan.
9.8 GROUP BONUS PLAN

The plans described above are all individual bonus plans. Many times it is not possible to measure
the output ofindividuals. Sinrilarly, the output ofindividual is dependent on the performance ofthe
group. In such cases, rather than having individual bonus systems, group bonus system is introduced.
The total amount of bonus, which is determined according to productivity, can then be shared equally
or in agreed proportion among the group members. The main objects ofgroup bonus system are - (i)
Creation of tearn spirit; (ii) Elimination of excessive waste of materials and time; (iii) Recognition of
group efforts; and (iv) Improving productivity.
Different Group Bonus Schemes in use are as follows:-
(a) Budgeted Expenses Bonus: Under this system, bonus is based on the savings in actual total
expenditure compared with the budgeted expenditure.
(b) Cost Efficiency Bonus: ln this method, standards are set for expenses like material, labour and
overheads. The actual expenditure against these standards is measured and ifthere is a savings in
actual expenditure as compared to the standards, a portion ofsuch savings is distributed as bonus
amongst the workers.
(c) Pristman System: In this method, production standards are set in units or points and actual
production is compared with the standards. Ifthe actual production exceeds the standard, the
workers are paid additional wages equal to the percentage ofoutput over standard. Obviously no
bonus is payable ifactual production does not exceed the standard production. This method is
mainly used in fbundries.
(d) Towne Profit Sharing Plan: In this method standards are set for costs (mainly labour cost) and
the actual cost is compared with the standards. If there is a saving in the costs, the saving is
shared by workers and supervisory staff in agreed proportion. The principle behind this method
is that if there is a saving in the cost, not only the workers but the supervisory staffshould also get
the reward because the cost reduction is the joint efforts of both the tlpes of staff. Hence both,
workers and supervisors share it.
(e) Waste Reduction Bonus: This system ofbonus is based on savings in the material cost. Ifthere
is a saving in the material cost, the workers share the same in the agreed proportion. This system
is generally used in industries where cost of material is very high.
(f) Rucker Plan: The amount of bonus is linked with 'value added' in this system. The 'value
added' is obtained by deducting the cost of material and services llom sales value. In other
words, value added is the total of labour, overheads and profits. Under this plan, employees
receive a constant proportion ofvalue added. For example, ifthe target ratio oflabour cost to
value added is7}Y,,and the actual ratio comes to 680/o, 2%o of the actual value added is distributed
as group bonus, so that the ratio of direct labour cost to value added is maintained aL 70o .
152 CostAccounting (T.YB.Com, : SEM-V)
Normallyinstead of distributing the artire bonus, some proportion is distributed and the remaining
is transferred to reserve fund.
(g) Scanton Plan: This method is similar to the Rucker plan as discussed above except that the ratio
of labour cost to the sales is taken instead of direct labour cost to added value. Normallybonus
is paid based on average of last three years ratios. Apart ofthe bonus maybe transferred to bonus
equalization fund for future use when the workers do not get bonus under this scheme.
lllustration 5 : (Taylor)
Standard production @ 20 units per hour, general wage rate < 2.OO per hour, wage rate if work
executed below standard: 80% oI general rate, wage rate on execution of work equal to standard
12O% ot, general rate; production in 8 hrs of one day by Mr. A: 150 units and by Mr. B :200 units.
Compute total remuneration payable to Mr.A and B under the Taylor plan.
Solution :
Wages for 20 units in t hr is { 2. Wage rate is = < 2120 = { 0.10 per unit
As wages = 150 units x 0.10 x 80% (below standard) = { 12.00 or { 0.08 per unit
B's wages = 200 units x 0.10 x 12Ook (above standard) = ( 24.00 or { 0.12 per unit.
lllustration 6 : (Straight Piece Rate / Taylor)
Calculate the earnings of workers A and B under Straight Piece Rate system and Taylor's Differential
Piece Rate system from the following pafticulars:-
Normal rate per hour - { 1.80
Standard time per unit - 20 seconds
Differentials to be applied are:
80% of the piece rate below the standard;
120o/o of the piece rate above standard.
A produced 1,300 units per day of 8 hours; and B 1,500 units per day of 8 hours.
Solution :
Basic Calculations:
Pieces per minute = 60 I 20 = 3 units
Units per hour = 60 x 3 = 180 units
Normal piece rate = 1.80 / 180 = t 0.0'l
Standard production in actual time = I x 180 = 1,440 units
Earnings under Straight Piece Rate:
Earnings of A = 1,300 x 0.01 = < 13.00
Earnings of B = 1,500 x 0.01 = t 15.00
Earnings under Taylor's Differential Piece Rate:
As efficiency = 1300 I 1440 x 100 = 90.28/, = < 1007o
As Earnings = 1300 x 0.01 x 80% = < 10.40
B's efficiency = 1500 11440 x 100 = 104.17"/o = > 1OO "h
B's Earnings = 1500 x 0.01 x 12Oo/"=718
lllustration 7 :
From the following particulars, calculate the earning of workers X and Y for a day under (a) Straight
Piece Rate System and (b) Taylor's Differential Piece Rate System :
Standard production - 10 units per day
Normal time rate - < 5.00 per hour
Differentials to be applied :
80% of piece rate below standard
12O"/. of piece rate at or above standard
Hours of the day : 8
OutputX:75units
output Y : '100 units (FyBAF, Feb. 2006, oct. 2olo, adapted)
Labour Cost 1s3
Solution :
(a) Earning under Piece Rate System

Standard production per hourI 0 units
Normal time rate ( 5.00 per hour
< 5.00
.'. Piece rate Per unit = -:i6- = ( 0.5
Output of worker X = 75 units
.'. Earning of worker X = 75 x 0.5 = < 37.50
.l
Output of worker Y = 00 units
.'. Earning of Y = 100 x 0.5 = < 50.00
(b) Earning under Taylor's Differential Piece Rate System
Standard output per hour is 10 units
.'. Standard output in 8 hours = 10 x 8 = 80 units
.'. Worker X is below standard and worker Y is above standard
.'. Wage rate per unit of X is ( 0.5, 80 = 0.40

100
120
.'. Wage rate per unit of Y is t 0.5 * 100 =
0.60
Earning of worker X =75 x 0.40 = < 30.00
Earning of worker Y = 100 x 0.60 = < 60.00
lllustration 8 : (Merrick System)
The following particulars apply to a particular job :
Standard production per hour - 6 units
Standard working hours - 8
Normal rate per hour - { 1.20
ltlohan produced 32 units
Ram produces 42 units
Prasad produces 50 units
Calculate the wages of these workers under lVlerrick Differential Piece Rate System.
Solution l
Calculation of wages of workers under Merrick Differential Piece Rate System
Normal Piece rate = 1.2 l6 = 0.20
Standard Production = 6 x 8 hrs = 48 units
lvlohan's efficiency = 32 I 48 x 100 = 66.67% (< 83%)
Mohan's Earnings = 32 x 0.2= ( 6.4
Ram',s efficiency = 42 / 48 x 100 = 87.5"/" (> 83 but < 100%)
Ram's Earnin gs = 42 x 0.2 x 110 / 100 = 7 9.24
Prasad's efficiency = 50/48 x 100 = 104.17 (> 100%)
Prasad's Earnings = 50 x0.20 x 120 I 100 =( 12
lllustration 9 : (Gantt)
The following are the particulars applicable to a process:
TimeRate-(8perhour
High Task - 200 units per week.
ln a 40 hour week, the production of the workers was:
A - 180 units; B - 200 units; C - 205 units
Production above standard-high piece rate of { 2.00 per unit.
Calculate the total earnings of each worker under Gantt's Task Bonus system.
Solution :
Calculation of earnings of the workers under Gantt's Task Bonus System

A - Actual output < High task i.e. below standard
Asearnings=40x8=(320
B - Actual Output = High task i.e. at standard
154 CostAccounting (T.YB.Com. : SEM-I)
B's earnings = (40 x 8) + 20kof (40 x 8) = 320 + 64 = { 384
C - Actual output > High task i.e. above standard
C's Earnings = 205 x 2.00 = ( 410
lllustration 10 : (Emerson's Efficiency Bonus)
ln a manufacturing concern the daily wage rate is { 2.50. The standard output in a 6 day week is 200
units representing 100% efficiency. The daily wage rate is paid without bonus to those woikers who
show up lo 66 213"/" of the efficiency standard. Beyond this there is a bonus payable on a graded
scale as below:-
80% efficiency - 5% bonus
90% Efficiency - 9% bonus
100% efficiency - 20% bonus
Further increase of 1"/" tor every 11" further rise in efficiency. ln a 6 day week A produced 180 units;
B 150 units; C 200 units; D 208 units and E 130 units.
Calculate the earnings of each worker.
Solution :
As efficiency = (180 / 200) x 100 = 90%

As Earnings = (6 x 2.5) + 9"/" ot (6 x 2.5) = { 16.35
B',s efficiency = (150 / 200) x 100 = 75"/"
B',s Earnings = (6 x 2.5) + 5o/o ot (6 x 2.5)= { 15.75
C's efficiency = (200 I 200) x 100 = 100%
C's Earnings = (6 x 2.5) + 2O/" of (6 x 2.5) = < 18.00
D's efficiency = (208 I 200) x 100 = 104%
D',s Earnings = (6 x 2.5) + 24/. of (6 x 2.5) = < 18.60
E',s efficiency = (130 / 200) x '100 = 65"/"
E's Earnings = 6 x 2.5 = < 15.00
lllustration 11 : (Efficiency Bonus)
An employee working under a bonus scheme saves 10 hours in a job for which standard time is 60
hours. Calculate the rate per hourworked and wages payable to him if incentive bonus of 10% on
the hourly rate is payable when standard (namely 100% efficiency) is achieved, and a further incentive
of 1o/" on hourly rate for each 1olo in excess of that 100% efficiency is payable. Assume that normal
rate of payment is t 5 per hour.
Solution :
Efficiencv (%) = St'nd"td ti'" *

' Time taken
1oo
60
--x100=120%
50
Worker will get a bonus of 30% on hourly rate.
Earnings : {
Time wages (TT x TR = 50 x 5) 25O
30
Bonus=25Ox: IUU
75
Total Earnings 325
Earnings per hour = 325 - 5 = t 6.50
lllustration 12 : (Efficiency Bonus at Slab Rates)
The standard production in a factory is 10 units per day of 8 hours. The wages is t 6 per day. Bonus
rated on efficiency is paid according to a scale as follows :
Level ofEfficiency Bonus o/o
Upto 60% of standard Nil

Above 60% and upto 75% 5o/o
Above 75o/o and upto 90% 10"/o
Above 90% and upto 'l 0% 15o/o
For an increase of every 17o efficiency beyond 100% the bonus also rises by 1%. Output of 3
workers on a day was as follows :
A - 40 units, B - 75 units, C - 100 units
Labour Cost .T5J
Calculating the earnings of the workers.

Solution :
Standard production per hour = 10 units

Standard production per day of 8 hours = 10 x 8 = 80 units
workersefficiency(%) = =49!91-outpu]-
; 169
Standard output
40
Worker'A'= x 100 = 50%
;O
75
Worker'B'= x 100 = 93.25o/o
Ad
100
Worker'C'= gO x 100 = 125%
Worker's Earnings :
Worker'A'
t
Time wages per day 6.00
Bonus (efficiency below 60%)
Total 6.00
Worker'B'

Bonus (15% of time wages) 0.90
Total 6.90
Worker'C'
{
Bonus (15 + 25) = 40"/o ot time wages 2.40
Total Earnings 8.40
lltustration 13 : (Efficiency Bonus)'

Calculate total weekly remuneration of workers A, B and C on the basis of following information :
1 . Standard production for each worker - 1,000 units
2. Rate of wage - 10 paise per unit

3. Bonus - ( 5 for each 17" increase over 90% of standard output
4. Dearness allowance per week - { 100 per month.
5. Output of A - 850 units, B - 900 units and C - 960 units. (FYBAE Nov. 2017, adapted)
Solution :
Statement of Earning
Workerg
A B .C
Output 850 900 960

Performance % of Standard 85% 9O"/" 96%
Earning Piece Rate 85.00 90.00 96.00
Production over 907o of Standard 6"/"
Bonus @ ( 5 30.00
Dearness Allowance 100.00 100.00 100.00
Total 185.00 190.00 226.00
156 Cost Accounting (T.Y.B. Com. : SEM-I)
ln a manufacturing concem the daily wages guaranteed for workers is ( 5. The standard output for
the month is 2,000 articles representing 100% efficiency. The rate of wages is paid without bonus to
those workers who show up to 66'?/r% efficiency. Beyond this bonus is payable on a graded scale.
Efficiency Bonus
90"/o 10%
10O% 2O"/o
Further increase ol 1Yo on bonus for ava\ 1o/o further rise in etficiency.
Calculate the total eamings of A, B, C and D who have worked 26 days in a month. A's output 1,000
articles, B's output 1,800 articles, C's output 2,000 articles and D's output 2,400 articles.
Solution | (FYBAE Nov.2017, adapted)
Standard output 2,000 articles per month representing 100% efficiency.
Parliculars A(O BM c(a D

Output Articles 1,000 1,800 2,000 2,400
Efficiency 507o 90% 1O0"/" 120"/"
Percentage of Bonus on Wages Nit 10"/o 20% 40"/"
Wages for 26 days @ ( 5 130 130 130 130
Bonus Nit 13 26 52
Total Earning 130 143 156 182
lllustration 15 :
From the following data calculate total monthly remuneration of 3 workers X, Y and Z :
1 . Standard production per month per worker is 1,000 units
2. Actual production duringa month -X:800 units, Y:700units, Z:900 units
3. Piece-work rate per unit of actual production : 15 paise
4. D.A. { 40 per month (fixed)
5. House rent allowance t 20 per month (fixed)
6. Additional production bonus at the rate of ( 5 for each percentage of actual production exceeding
75"/" ol actual production over standard. (FYBAE Nov. 2017, adapted)
Solution :
Statement of Earning
Workers
Production in units 800 700 900

Piece wages @ 15 paise 120.00 105.00 135.00
D.A. @ 40,000 p.m. 40.00 40.00 40.00
House Rent @ 20.00 p.m. ' 20.00 20.00 20.00
% of Actual Production to Standard 80% 707o 9OY"
Over 75o/" of Standard 5o/" Nil 157o
Bonus @ t 5 for each percentage 25.00 75.00
Total Wages 205 165 270
XYZ Co. employs its workers for a single shift of 8 hours per day for 25 days in a month. The
Company has recently fixed the standard output of 40 units per day per worker for a mass production
item and introduced an incentive scheme to boost output. Details of wages payable to the workers
are as follows :
'L Basic wages : { 3 per unit subject to a guaranteed minimum wages of t 80 per day worked
2. Dearness allowance : ( 40 per day worked
3. lncentive bonus
Upto 80% efficiency : Nil
For efficiency above 80% : { 50 for every 1"/o increase above 80%
Labour Cost 157
The details of pedormance of 2 workers for a particular month are as follows
Workers No. of days worked Output (units)
A 25 820
B 18 5oo
Calculate the total earnings of both the workers for the month.
Solution :
Statement of Total Earning of Each Worker
Days Worked 25 18
Output (units) 820 s00
Basic Wages 2,460 't,500
Dearness Allowance 1,000 720
lncentive 100
Total Earnings 3,560 2,220
Calculation of Efficiency / lncentive
Efficiency for each 80%

820 = B2To
A
25x40 < 100 (@ t 50 for one percent)
B
5oo = 69% Nir
'18 x 40
- Actual output units * ., oo

-
Efficiencv
No. of days worked x ( 40
ln an engineering concern, the employees are paid incentive bonus in addition to their normal
wages at hourly rates. lncentive bonus is calculated in proportion of time taken to time allowed, on
the time saved. The following details are made available in respect of employees X, Y and Z tor a
particular week :
X Y
Normal wages (per hour) <4 <5 <6
Completed units of production 6,000 3,000 4,800
Time allowed per 100 units (houQ 0.8 1.5 1.0
Actual time taken 42 40 48
You are required to work out for each employee : (i) The amount of bonus earned, (ii) The total
amount of wages received and (iii) The total wages cost per 100 units of output.
Solution :
Statement Showing the Amount of Bonus Eamed, Wages Received

and Wages Cost per 100 units of Output
X
Completed units of production 6, 000 3 000 4,800
Time allowed for units produced 48 45 48
Actual time taken (hours) 42 40 48
Time saved (hours) 6 5
Normal wages (per hour) <4 <5 <6
Basic wages (Actual hours x Normal rate) 168 200 288
1. Bonus earned (Time taken / Time allowed) x
Time saved x Wage rate 21 22.22
2. Total wages cost 189 222.22 288
3. Wages cost per 100 units 3.15 7.41 6
tsl CostAccounting(T'Y'B'Com': SEM-V)

The standard hours of Job X is 100 hours. The job has been completed by Amar in 60 hours. Akbar
in 70 hours and Anthony in 95 hours. The bonus system applicable to the job is as follows :
Percentage of time saved to time allowed Bonus
Saving upto 10% 10"/" ot the time saved
From 11% to 2O"/o 15% of the time saved
From 21"/o lo 4O./" 20"/" of the time saved
100%
From 41oh to 25"/" ol the time saved
{ 1 per hour. Calculate
The rate of pay is the total earnings of each worker and also the rate
earnings per hour. (CA'lnter, May 1990, adapted)
Solution :
Statement of Total Earnings and Rate of Earnings Per Hour

Workers
Amar Akbar
Standard hours of job 100 hrs 100 hrs 100 hrs
Time taken on the job (i) 60 hrs 70 hrs 95 hrs
Time saved 40 hrs 30 hrs 5 hrs
Percentage of time saved to time allowed 40"/" 30% 5V"
Bonus (as percentage of time saved) 20% 20% 1Oo/"
Bonus hours (WN 1) (ii) 8 6 0.50
Total hours to be paid (i) + (ii) 68 76 95.5
Total earning @ { 1 per hour <68 ?76 ? 95.s
Rate of earning per hour < 1.113 < 1.0857 ? 1.0005
Working Notes :
1. Computation of bonus hours as percentage of time saved

Amar 40 hours x20"/. = 8 hours
Akbar 30 hours x20"/" = 6 hours
Anthony 5 hours x 10"/" = 0.5 hours
Total earnings
2. Computation of rate of earning per hour = Total time taken on the job
<68
Amar=
60h"*" =t1.133
<78
Akbar=
?oho.rrs =
{ 1'0857
< 95.50
Anthony = 95ho,rrs = ( 1.0005

Workmen of a padicular grade working on 8 hour shift duty are guarantees a wage of t 32. An
incentive scheme is in operation according to which production bonus is earned directly proportional
to performance but only after 100"/o performance is reached. Four workmen A, B, C and D produce
48, 60, 75 and 90 units respectively in 6 hours working on a job which has standard time of 6
minutes per unit as measured work content. Remaining 2 hours of the shift are spent in doing
unmeasured work for which no incentive bonus can be paid. Find for each workman :
1. The production performance level achieved
2. Total earnings for the day.
Solution :
Statement showing Computation of Perlormance

achieved and Total Earnings of 4 Workers
1. Standard Output (6 x 60/6) 60 60 60 60

2. ActualOutput 48 60 75 90
3. Performance Level 80"/" 100"/" 125% 15Oo/o
Labour Cost 159
4. Wages for Measured Work (6 x 4) ... ... ..

5. Bonus lC = 24 x ZS%llDA = 24 x 50%l ..
6. Wages for Unmeasured work
7. Total Earnings (4 + 5 + 6)
lllustration 20 : (Halsey)
Rate per hour = < 1.50
Time allowed for the job = 16 hrs.
Time taken = 12 hrs.
Calculate the total earnings of the worker under Halsey Premium Plan. Find out effective rate of
earning also.
Solution :
Standard time [S] = '16 hrs

Time taken or Hours worked [H] = 12 hrs
Rate [R] = 1.50 Per hour
Total earnings = [H x R] + [50% (S - H) x R] = [12 x 1.50] + [50% (16 - 12) x 1.501
= 18+3=(21 .00
Total effective rate of earning per hour = Total wages / Time taken = { 21.00 l7 12 =7 1.75
lllustration 21 : (Rowan)
Calculate bonus payable under Rowan plan where time allowed is 24 hours, time taken is 18 hours
and time rate is ( 20 per hr.
Solution :
Hours worked [H] = 18

RatelRl=<20
Standard time [S] = 24
Bonus = (S- H)/S x H x R = (24- 18)/ 24x18x20 ={90
OR
Bonus = Time saved x (Time taken / Time allowed) x Time rate
=(S-H)x(H/S)xR
=6x(18 124)x7 20=?90
lllustration 22 : (Halsey / Rowan)
A worker produced 200 units in a week's time. The guaranteed weekly wage payment for 45 hours
is t 81, The expected time to produce one unit is 15 minutes which is raised further by 20o/" under
the incentive scheme. What will be the earnings per hour of that worker under Halsey (50% sharing)
and Rowan bonus schemes? (FYBAE March 2018, adapted)
:::::::J;", hour under Harsey (50olo sharins) Bonus scheme

200 units x 'l 8 minutes
Time allowed for actual weekly production =
60 minutes
(Refer to Working Note 1) = 60 hours
Time saved = Time allowed - Actual time taken
= 60 hours - 45 hours = 15 hours
Earning - [Hours worked x Rate perhour] +flzxTimesaved x Rate perhourl
= [45 hours x { 1.80] + f% x 15 hours x < 1.801
(Refer to Working Note 2)
={8'l +<13.50=<94.50
{ 94.50
Earnings (per hour) =
45
= ( 2.10 per hour
h"*.
Earnings per hour under Rowan Bonus Scheme
Time saved
x Time taken x Rate per hr
Earnings - [Hours worked x Rate per hour] + Tr.e
"llo*"d
= lou norr" x { 1 .80 * 15 hours
I x [45 hours x ( 1.80]
L 6o hours l
r60 Cost Accounting (TY.B.Com. : SEM-V)
< 101 .25

Earning per hour = 45 h* =7 2.25 per hour
Working Notes :
1 . Expected time to produce one unit under incentive scheme = 15 x 120 minutes
= 18 minutes
2. Wage rate per hour ({ 81/45 hours) = < 1.80.
lllustration 23 : (Halsey / Rowan)
Calculate the earnings of a worker under (i) Halsey Plan and (ii) Rowan Plan from the following
particulars:
(1 ) Hourly rate of wages guaranteed t 0.50 per hour.
(2) Standard time for producing one dozen adicles - 3 hours.
(3) Actual time taken by the worker to produce 20 dozen articles - 48 hours.
Solution :
(i) Earnings of a Worker under Halsey Plan

Earnings - [Hrs. worked x Rate per hour] + [1zz Time saved hrs. x Rate per hour]
= [48 hrs. x { 0.50] + f% x 12 hrs. x ( 0.501
(Refer to working note 2)
={24+{3
=7 27
(ii) Earnings of a worker under Rowan Plan
t x Rateperhour * Time saved I
Earnings= x tTime taken hrs. x Rate per hourl
fHrs'worked *n _]
= [48 hrs. x ( 0.50] . [# n" x 48 hrs' x { o'50]

(Refer to working notes 1 & 2)
=t24+t4.80
= { 28.80
Working Notesl
1. Time Allowed to produce 20 dozen articles
Standard time allowed for producing one dozen afticles 3 hours
Standard time allowed for producing 2O dozen articles 60 hours
2. Time saved
Standard time to produce 20 dozen articles 60 hours
Ar:tual time taken by the worker to produce 20 dozen afticles 48 hours
Time saved 12 hours
lllustration 24 :
A worker produced 200 units in a week's time, the guaranteed weekly wages payment for 45 hours
is { 405. The expected time to produce one unit is 15 minutes which is raised f urther by 20ol" under
incentive scheme. What will be the earning per hour of that worker under Halsey (50% sharing) and
Rowan Bonus Scheme ? (T.Y.B.Com., Oct. 2015, adapted)
Solution :
Calculation of Amount Payable to a Worker
Time Taken Time Saved Rate of Wages

60 hours 45 hours 15 hours { 405 for 45 hours i.e. { 9 per hour
Time allowed = 200 units x 18 minutes / 60 minutes = 60 hours
Under lncentive scheme 15 minutes + 207" = 18 minutes
Labour Cost 161
1. Halsey Plan Basis
(a) Basic Wages (Hours worked x Rate per hour) = 45 hrs. x { 9 405
(b) Bonus (50% of Time saved x Rate per hour) = x Rate per hour
Hg
=
60 hrs. - 45 hrs.
X <9
--::-: = 67.50
= 4zz.so
2. Rowan Plan Basis
(a) Basic Wages (Hours worked x Rate per hour) = 45 hrs. x { 9 - 405
(b) Bonus = Time saved x x Rate per hour

ffi
='t5hours*ffi**n = 101.25
= 506.25
lllustration 25 :
From the following information, calculate the earnings of a worker under the Halsey Premium Plan
(50% of time saved) and Rowan Premium Plan separately.
Time taken to complete job 72 hours
Time allowed to complete job 90 hours
Per hour rate of wages < 25
Dearness allowance ( 10 per day of 8 hours' work. (T.Y.B.Com., Oct. 2015, adapted)
Solution :
Allowed Time Taken Time D.A.

90 hours 72 hours 18 hours { 25 per hour { 'l 0 for 8 hours i.e. { 1.25 per hour
1. Halsey Plan Basis
(a) Basic Wages (Hours worked x Rate per hour) = 72 hrs. x7 25 1,800
(b) Dearness Allowance (Hours worked x Rate per hour) = 72 hrs. x ( 1.25 90
Time saved
(c)Bonus(50%ofTimeSavedxRateperhour)=TxRateperhour
90 hrs. - 72nrs.
x t25 225
2
2.115
2. Rowan Plan Basis
(a) Basic Wages (Hours worked x Rate per hour) = 72 hrs. x ( 25 1,800
(b) Dearness Allowance (Hours worked x Rate per hour) = 72 hrs. x { 1 .25 90
(b) Bonus = Time saved x x Rate per hour

ffi
=18hours*ffir<zs = 360
= 2.250
lllustration 26 :
The following are the details as regards a worker who worked for Job No. 444 and 555.
Job No. Time allowed Time Taken
444 26 hours 20 hours
555 30 hours 20 hours
His normal basic rate of wages was { 80 per day of 8 hours and his dearness allowance was < 240
per week of 48 hours.
Calculate the amount payable to him.
1. On Time Basis
162 Cost Accounting (T.YB.Com. : SEM'V)
2. On Halsey Plan Basis (Bonus at 50% of Time saved) and

3. On Rowan Plan Basis (T.Y.B.Com., Nov. 2016' adapted)
Solution :
Job No.444 555

( ?
1. On Time Basis
(a) Basic Wages (Hours worked x Rate per hour)
= 2O Hrs. x {'l 0 200
= 20 Hrs. x { 10 200
(b) Dearness Allowance
Hours worked x Rate per hour
=20Hrs.x{5 100
=20Hrs.x{5 100
Total 300 300
2. On Halsey Plan Basis
(a) Basic Wages + DA as in 1 above 300 300
(b) Bonus (50% of Time saved x Rate per hour)
Time saved
= 2 x Rate per hour
26 Hrs. - 20 Hrs.
x t10 30
2
30 Hrs. - 20 Hrs
x {10 50
2
Total 330 350
3. On Rowan Plan Basis
(a) Basic Wages + DA as in 1 above 300 300
(b) Bonus
Time Taken
* Ti,il Allowea x Rate per hour
= Time Saved
20 Hrs.
=6Hrs.x rUrr" x{10 46.15
20 Hrs.
=10Hrs.x a.rr" x{10 66.67
Total 346.15 366.67
Calculatlon of Amount Payable to a Worker
Job, No. Tiraa Alla,r,a, Time Taken Time Saved Rate of Wages D.A.
444 26 hours 20 hours 6 hours ( 80 per day of t 240 for
555 30 hours 20 hours 10 hours { 8 hours i.e 48 hours i.e
(l0perhour (5 hour
lllustration 27 : (Piece / Halsey / Rowan : Effective Earnings Per Hour)
The standard time allowed to complete a job is 80 hours and the hourly rate of wage payment is ( 5.
The actual time taken by the worker to complete the job is 60 hours. Calculate the total wages of the
worker on the basis of (i) Time rate, (ii) Piece rate (iii) Halsey plan and (iv) Rowan plan.
Also compute the effective earning per hour under above methods.
Solution :
1. Time Rate
Total wages = 60 x t 5 = ? 300.00
2. Piece Wage
Total wages = 80 x ( 5 = ( 400.00
Labour Cost 163
3. Halsey Plan
[r I
Total wases = (60 x < sl * [7 (80 - oo) x s_]
= 300.00 + 50.00 = t 350.00

4. Rowan Plan
rotat wases = (60x. u). (H x oo x <s.oo)
-300.00
=300.00. #
= 300.00 + 75.00 = t 375.00
Eflective Earnings Per Hour
1. Time Rate = < 300.00 + 60 = ( 5.00
2. Price Wage = < 400.00 = 60 = t 6.67
3. Halsey Plan = t350.00 +60= ( 5.83
4. Rowan Plan = ( 375.00 -60 = ( 6.25
lllustration 28 : (Straight - Differential Piece / Halsey / Rowan)
From the following pafticulars work out the earnings for the week of a worker under
(a) Straight Piece Rate
(b) Differential Piece Rate
(c) Halsey Premium System
(d) Rowan System
Number of working hours per week - 48
Wages per hour - < 3.75
Normal time per piece - 20 minutes
Normal output per week - 120 pieces
Actual output for the week - 150 pieces
Differential piece rate - 80% of the piece rate when output is below standard and 120"/" above
standard. (FYBAF, Nov. 2017, March 2017, adapted)
Solution :
Computation of Earnings for the week of a worker

(a) Peice 1s1s = (48 x 3.75)1120 = ( 1.5
Earnings under Straight Piece Rate = 150 x 1 .5 = 7 225
(b) Efficiency = (150/120) x 100 = 125"/" (> 100%)
Earnings under Differential Piece Rate = 150 x 1 .5 x 120/1 00 = 7 27O
(c) Standard time for actual production = 48 x (150/120) = 60 hours
Earnings under Halsey Plan = (48 x 3.75)+ 50/100(60 - 48) x 3.75 = 180 + 22.5 =< 202.5
(d) EarningsunderRowanPlan=(48x3.75)+[(60-48/60)x(3.75x48)]=180+36={216
Alternative Solution :
To produce the Actual Quantity of 150 pieces, Standard Time taken (48 x 150/120 i.e.60 hours) is
longer than Normal Time Taken (12O x 20 minutes/60 i.e. 50 hours), which is usual under incentive
plans. However, the problem can be solved, alternatively, on the basis of Standard Time of 50
hours, in which case, earnings under Halsey and Rowan Plan will be different as shown below :
EarningsunderHalseyPlan=(48x3.75)+50/100(50-48)x3.75=180+3.75=?183.75
Earnings under Rowan Plan = (48 x 3.75) + [(50- 48/50)x (3.75 x 48)]= 18o +7.20 =7187.2o
Illustration 29 : (Straight - Differential Piece / Halsey / Rowan)
From the following particulars work out the earnings for the week of a worker under :

(d) Rowan System
Number of working hour per week - 48
Wages per hour - < 7.50
Normal output per week - 'l 20 pieces

Time allowed for actual production - 60 hours
Differential piece rate - 80% of the piece rate when output is below standard and 120"/" above
standard. (FYBAE OcL 12, adaPted)
Solution :
Using Table Format
Wo*ing r
I. Basic
1. Actual Quantity AQ '150
2. Piece Rate PR 3.00
A. Piece Rate AQxPR 450.00
3. Standard Quantity SO 120
4. Efficiency AQ/SQ 125.OOo/"
Differential Piece Rate = PR x 1.2 DPR 3.60
B. Taylor / Differential Rate AQ x DPR 540.00
ll. Basic Calculations
1. Standard Hours S 60
2. Actual Hours H 48
3. Time Rate R 7.50
4. S-H 60-48 12
s. (S-H)xR 12 x7.50 90.00
6. (S-H)/S o.20
7. Wages 48 x7.50 360.00
Bonus
8. Halsey [50% (S - H) x R] 50% x 90 45.00
9. Rowan t(S - H) / S) x (H x R)l 0.20 x 360 72.OO
Earnings
C. Halsey 360 + 45 405.00
D. Rowan 360 + 72 432.00
lllustration 30 : (All Methods)
Standard Output per hour5, Actual Output in a 40 hourweek is 220 units. Wage Bate perhour is
< 10 per hour. Calculate Total Earnings under:
1. Straight Time Rate
2. Straight Piece Rate
3. Taylor's Differential Piece Rate
4. Merrick's Differential Piece Rate
5. Gantt Task Bonus System
6. Emerson's Efficiency Bonus Plan
7. Halsey Premium System
8. Rowan Premium System
9. Bafth Premium System
Solution :
1. Earnings underStraightTime Rate = (AH x Wage Rate;= (40 x { 10) = ( agg

2. Earnings under Straight Piece Rate = (AQ x Piece Rate) = (220 x fi15) = { 440
3. Earnings under Taylor's Differential Piece Rate
220
Efficiencv*
' - .Actualoutput x100 = x100 = 1.l0%
Standard Output 200
Normal Piece Bate = ( 10/5 = { 2
Applicable Piece Rate = 120% of Normal Piece Rate since efficiency is above 100%
= 120"/" of 7 2 =< 2.4O
Total Earnings = Actual output x ? 2.40 = 220 xT 2.4O =7 528
4. Earnings under Merrick's Differential Rate
Solution is same as underTaylor's Differential Piece Rate since efficiency is above 1OO%, i.e.,
( 528.
5. Earnings under Gantt Tank Bonus System
Solution is same as under Taylor's since efficiency is above 100%, i.e. ( 528.
Labour Cost 165
6. Earnings under Emerson's Efficiency Bonus Plan

220
-
Efficiencvoro - -Actualoutput x 100
Standard Output = 200
x100 = 110%
Since efficiency is above 100%,
Bonus = 20"/o ol Basic wages + 1o/o tor aaLch 1o/" increase in efficiency
New Bonus "h = 20"/" x 1% (110 - 100) = 307"
Total Earning5 = (AH x R) + 30% (AH x R)
= (40 x { 10) + 30% (40 x ( 10) = { 520
7. Earnings under Halsey System = (AH x R) + 50% of (SH - AH) x R
= (40 x { 10) + 50"/" (44- 40) x { 10
=(400+{20={420
8. Earnings under Rowan System = (AH x R).
t[ x (SH - AH) x R
x( + g+-40) x (
= (40 10)
fi x 10
=t400+{36.36=(436.36
9. EarningsunderBarthSystem= R.Ex- = {10J44xlO =(419.52
Illustration 31 : (Job Cost under Halsey / Rowan)
A worker takes 6 hours to complete a job under a scheme of payment by results. The standard time
allowed for the job is t hours. His wage rate is { 1 .50 per hours. Material cost of the job is { 16 and
the overheads are recovered at 150% of the total direct wages. Calculate the factory cost of job
under (a) Rowan and (b) Halsey systems of lncentive.
Solution :
Data :
(i) Standard time for the job [S] = t hours
(ii) Wage rate [B] = ( 1.50 per hour
(iii) Time taken to do the job [H] = 6 hours
Wages under Rowan system = Time wages + [Time saved / Time allowed x Time wages]
= (1.50x 6) + [(9 -6)/9 x 1.50 x 6]= 9.00 + 3.00 = ( 12.00
Wages under Halsey system = Time wages + [50% of Time saved x Time rate]
= (1.50 x 6) + [50% x (9 - 6) x 1.50]
=9.00+2.25=<11.25
Factory cost of the job under two different systems of incentive payments:
Materials 16.00 16.00

Direct wages 12.00 11.25
Overhead @ 150% of direct wages 18.00 16.88
Total Cost 46.00 44.13
lllustration 32 : (Work-back)
A skilled worker is paid a guaranteed wage rate of ? 150.00 per hour. The standard time allowed for
a job is 50 hours. He gets an effective hourly rate of wages of ? 180.00 under Rowan lncentive Plan
due to saving in time. For the same saving in time, calculate the hourly rate of wages he will get, if
he is placed under Halsey Premium Scheme (50%).
Solution : (CA'lnter, Nov.20l7, adapted)
lncrease in hourly rate of wages under Rowan Plan is ? 30 i.e. (t 180 - < 150)
Time Saved
x ( 150 = t 30 (Refer WN)
Time Allowed
Time Saved
O, SOn* xt150=<30
1,500
Or Time saved = lE6- = 10 hours
Therefore, Time Taken is 40 hours i.e. (50 hours - 10 hours)
Effective Hourly Rate under Halsey System

Time saved = 10 hours
Bonus @ 5O7" = 10 hours x 50o/o x ( 150 = t 750
Total Wages = (< 150 x 40 hours + t 750) = ? 6,750
Effective Hourly Rate = < 6,750 + 40 hours = { 168.75
Working Note :
Effective Hourly Rate
Time Taken
(Time taken x Rate per hour) + x Time Saved x Rate per hour
Time
Time Taken
Or, t 180
JimeJ-aken. x Time saved x Rate per hour

Time taken x Rate hour Time Allowed
+
Time Taken Time Taken
Time taken x Rate per hour
Or, ? 180 - Time Taken
Time Taken
= Tl;;;r6m- x Time saved x Rate per nour x ,*;f,p;
Time Saved
Or,{180-{150= Time Allowed
x { 150
11.1 CAS-7
Cost Accounting Standard - 7 (CAS-7) issued by the Council of The Institute of Cost and Works
Accountants of India on "Empioyee Cost", deals with the principles and methods of determining the
Employee cost. It deals with the principles and methods of classification, measurement and assignment
of Employee cost, for determination of the Cost of product or service, and the presentation and
disclosure in cost statements. Following discussion is based on CAS-7.
@
Employee Cost is the aggregate ofall kinds bfconsideration paid or payable for the services rendered
byemployees of an enterprise (including temporary part time and contract employees). Consideration
includes wages, salary, contractual paynents and benefits, as applicable or anypayment made on behalf
ofemployee. This is also known as [abour Cost. Employee cost includes payment made in cash or kind.
11.3 COMPOSTTTON
l. Employee cost - Cash

o Salaries and wages.
a Bonus.
o Other cash benefits.
2. Employee cost - Non-cash
o Bonus in kind.
a Othernon cash benefits.
3. Employee cost - Future benefits
o Gratuity.
I Leave encashment.
a Other retirement/separation benefits.
. VRS/ other deferred Employee cost.
o Other future benefits.
Labour Cost 167
4. Benefits generally include:

. Paidholidays.
. Leave with pay.
o Insurance, such as employer's contribution to Employees State Insurance Scheme.
. Employer's contribution to provident fund or any contributory fund.
a Retirement benefits which include: Provident fund, Superannuation/ pension, Gratuity, kave
encashment benefit on retirement, Post-retirement health and welfare scheme.
. Statutoryprovisions for insurance against accident or health scheme.
o Statutory provisions for workman's compensation.
. Medical and surgical benefits to the Employees and dependents.
o Free or subsidised food.
o Free or subsidised housing.
. Free or subsidised education to children.
o Free or subsidised canteen, creches and recreational facilities.
o Free or subsidised conveyance.
o Leave travel concession.
o Any other free or subsidised facility.
11.4 MEASUREMENT
1. Gross Pay, Allowances and Benefits: Employee Cost shall be ascertained taking into account
the gross pay including all allowances payable along with the cost to the employer of all the
benefits.
2. Bonus and Ex-gratia: Bonus whether payable as a Statutory Minimum or on a sharing of surplus
shall be treated as part of employee cost. Ex gratia payable in lieu of or in addition to Bonus shall
also be treated as part ofthe employee cost.
3. Managerial Remuneration: Remuneration payableto Managerial Personnel i.e. Directors and
other officers of a corporate bodyunder a statute will be considered as part 0f the Employee Cost
whether the whole or part ofthe remuneration is computed as a percentage ofprofits.
4. Imputed Costs: Employee cost may include imputed costs not considered in financial accounts.
Such costs which are not recognized in financial accounts maybe determined byimputing a cost
to the usage or by measuring the benefit from an alternate use ofthe resource.
5. Cost of Idle Time: Idle Time is the difference between the time for which the employees are paid
and the employees'time booked against the cost object. The time for which the employees are
paid includes holidays, paid leave and other allowable time offs such as lunch, tea breaks. Cost
of Idle time is ascertained by the number of hours of idle time multiplied by the hourly rate
applicable to the idle employee or a group of employees.
6. Standard Cost: Where Employee cost is accounted at standard cost, the portion of variances
due to normal reasons related to Employee cost shall be treated as part of Employee cost. Variances
due to abnormal reasons shall be treated as part ofabnormal cost.
7. Subsidy/Grant/Incentive: Any Subsidy/Grant/Incentive or any such payment received/receivable
with respect to any Employee cost shall be reduced for ascertainment of the cost of the cost
object to which such amounts are related.
8. Abnormal Cost: Anyabnormal cost where it is material and quantifiable shall not form part of
the Employee cost.
9. Penalties and Damages: Penalties, damages paid to statutory authorities or other third parties
shall not form part of the Employee cost.
10. Recovery: Any recovery from the employee towards any benefit provided e.g. housing shall be
reduced from the employee cost.
168 CostAccounting (TYB.Com : SEM-Y)
11. Change in Accounting: Any change in the cost accounting principles applied for the determination
of the Employee cost should be made only if it is required by law or for compliance with the
requirements of a cost accounting standard or a change would result in a more appropriate
preparation or presentation ofcost statements ofan enterprise.
11.5 ITEMS INCLUDEDAND EXCLUDED

(1) Inctuded : The following items are to be 'included'for the purpose ofmeasuring employee cost:
' l. Any payrnent made to an employee either in cash or kind
2. Gross payments including all allowances, perquisites and benefits
3. Bonus, ex-gratia, sharing of surplus, remuneration payable to Managerial personnel
including Executive Directors and other officers.
4. Any amount of amortization arising out of voluntary retirement, retrenchment, termination,
etc.
5. Variance in employee payments/costs, due to normal reasons (if standard costing system is
followed).
(2) Excluded: The following items are to be 'excluded' for the purpose ofmeasuring employee cost:
l. Remuneration paid to Non-Executive Director.
2. Cost of abnormal idle time [: Hours spent as idle time x hourlyrate].
3. Variance in employee payments/costs, due to abnormal reasons (if standard costing system is
followed).
4. Any abnormal pal,rnents to an employee - which are material and quantifiable.
5. Penalties, damages paid to statutory authorities or third parties.
6. Recoveries from employees towards benefits provided to be adjusted/reduced from the
employee cost.
7. Cost related to labour turnover - recruitment cost, training cost and etc.
8. Unamortized amount related to discontinued operations.
11.6 ASSIGNMENT OF COSTS

1. Direct Costs: Where the Employee services are traceable to a cost object, such Employees'cost
shall be assigned to the cost object on the basis such as time consumed or number of employees
engaged etc. or similar identifiable measure.
2. Materiality: While determining whether a particular Employee cost is chargeable to a separate
cost object, the principle of materiality shall be adhered to.
3. Indirect Costs: Where the Employee costs are not directly traceable to the cost object, these
may be assigned on suitable basis like time spent.
4. Amortized Voluntary Retirement Cost: The amortized voluntary retirement cost for the period
shall be treated as indirect cost and assigned to the cost objects in an appropriate manner. However
such a cost, ifassociated with discontinued operations, shall not be treated as cost.
5. Recruitment, Training, Labour Turnover Costs: Recruitment costs, training cost, labour
turnover cost and other such costs should be treated as overheads and dealt with accordingly.
6. Overtime Premium: Overtime is the time spent byond the normal working hours which is
usually paid at a higher rate than the normal time rate. The extra amount beyond the normal
wages and salaries paid is called overtime premium. Overtime premium shall be assigned directly
to the cost object or treated as overheads depending on the economic feasibility and the specific
circumstance requiring such overtime.
7. Idle Time Cost: Idle time cost shall be assigned direct to the cost object or treated as overheads
depending on the economic feasibility and the specific circumstances causing such idle time.
Cost of idle time for reasons anticipated like normal lunchtime, holidays etc. is normallyloaded
in the Employee cost while arriving at the cost per hour of an Employee/a group of Employees
whose time is attributed direct to cost objects.
Lsbour Cost 169
11.7 SPECIAL EMPLOYEE COSTS

(1) Supervisors salary / Foreman's Salary: The supervisor / foreman salary is included inworks
overhead.It is apportioned on the basis of degree of supervision required on machine or men.
(2) Bonus under Payment of Bonus Act, 1965: The Payment of Bonus Act, 1965 provides that a
minimum bonus @8-ll3Yo of gross annual earning will have to be paid to the eligible employees
irrespective ofprofits made or losses incurred. Ifthere is adequate profit a higher bonus is paid
but up-to the maximum limit of20% of gross earnings. The minimum bonus is a charge against
profit and according to the classification oflabour-direct or indirect- should be included in direct
labour cost or production overhead.The additional bonus above the minimum is based on profit
and should be charged offto Costing Profit and Loss Account and not taken into the cost at all.
(3) Leave Travel Assistance: Leave Travel Assistance, depending on whether it is payable to direct
labour, indirect labour or staffshould be treated as Direct Labour Cost, Production Overhead
Cost or Administrative or Selling Overhead Cost and should be appropriately charged.
(4) Night Shift Allowance: Night shift allowance caused by general pressure of work in excess of
normal capacity is charged to general production overhead because otherwisejob performed
during dala will be cheaper than the jobs completed during night. Ifthe additional expenditure is
incurred due to demands from customers such expenditure should directlybe charged tothejob
concerned. However, if the night shifts are run for a fault ofthe particular department the night
shift allowance should be charged asthe departmental overhead applicable to the concerned
department.
(5)Fringe Benefits: Fringe benefits spent for employee welfare do not form a part of their pay
packet, e.g., ESI contribution made by an employer. Such expenses may be recovered separately
as a percentage on labour cost or at an hourly rate. Alternatively, those may be treated as overheads
and apportioned to cost centres on the basis ofwages/salary cost.
(6) Work on Holidays and Weekly off Days: Usually work on such days is to be paid at a higher
rate than the normal days'rate. The extra payment involved is treated in the same manner as in
the cases of overtime premium as stated before (refer treatment of overtime). Normal wages are
charged direct to the work orders/job/process handled during the period.
(7) Attendance Bonus: This is paid to workers based on satisfactory attendance during the period
and is a fringe benefit. The cost is charged as a departmental overhead as the expenses cannot be
allocated to cost units directly.
(8) Employer's contribution to Employees' Provident Fund: This is a statutory charge under the
Employees Provident FundAct of 1952. This should be treated as part of wages of workers.
(9) Lost time due to a major overhauling of a machine as result of severe breakdowns: A sudden
breakdown of machines may upset the production plan and require major overhaul of machine.
All costs related to the breakdown and overhaul, being abnormal, should be transferred to the
costing Profit and Loss Account.
11.8 FORMAT OF STATEMENT SHOWING LABOUR COST PER HOUR/ UNIT
Statement Showing the Labour Cost Per Hour and Per Unit
Particulars
A. Normal Wages xx
B. Dearness Allowances (D / A) xx
C. Bonus xx
D. Any Other Allowance Payable in Cash xx
(e.g. Housci Rent Allowance, City Compensatory Allowance)
E. Employer's Contribution to P.F. xx
F. Employer's Contribution to ESI xx
G. Leave Salary [Based on Normal wages and D / A] xx
H. Expenditure on Benefits / Amenities xx
l. Total Labour Cost xxx
170 CostAccounting (TVB.Com. : SEM-V1
J. Working Hours )o(
K. Output )o(
L. Labour Cost per Hour [ / J] xx
M. Labour Cost per Unit of Output [ / K] xx
lllustration 33 : (Measurement ot Employee Cost)

Basic pay t 7,00,000; Lease rent paid for accommodation provided to an employee { 2,00,000,
amount recovered from employee t 40,000, Employer's Contribution to P.F. ( 75,000, Employee's
Contribution to P.F. t 75,000; Reimbursement of Medicalexpenses < 67,000, Hospitalisation expenses
of employee's family member bome by the employer < 19,000, Festival Bonus t 20,000, Festival
Advance { 30,000. Compute the Employee cost.
Solution :
Computation of Employee Cost
Basic Pay 7,00,000

Add : Net cost to employer towards lease rent paid 1,60,000
Add : Employer's Contribution to PF 75,000
Add : Reimbursement of Medical Expenses 67,000
Add : Hospitalisation expenses ol employee's family member paid by the employer 19,000
Add : Festival Bonus 20,000
Cost 10,41 ,000
Notes :
1. Net cost to employer towards lease rent paid for accommodation provided to an employee
[= lease rent paid less amount recovered from employee] = [2,00,000 - 40,000].
2. Employee's contribution to PF is a deduction on behalf of the employee. lt is not a cost to the
employer, hence not considered.
3. Festival advance is a recoverable amount, hence not included in employee cost.
Illustration 34 : (Wages and Overtime)
Calculate normal overtime and total wages payable to a worker from the particulars given below:
Days Hours worked
Monday 10
Tuesday 9
Wednesday 8
Thursday '12
Friday I
Saturday 4
Normal working hours = 8 per day
Normal rate = ? 50 per hour
Overtime rate = Up to t hours perday-single rate; beyond g Hours a day-double rate.
Solution :
Computation of Earnings
Hours Hours worked
Monday 8 10 8 1
Tuesday 8 9 8 1
Wednesday 8 8 8
Thursday 8 12 8 'l 3
Labour Cost 171
Friday 8 I I
Saturday 4 4 4 i
52 44 4 4
Rate (t) 50 50 100
Amount (Q 2,2OO 200 400
Total \Itlages =2,2OO + 200 + 4fi) = ( 2,800
lllustration 35 : (Labour Gost Per Day)
A worker is paid (
100 per month and a dearness allowance of t 200 p.m. There is a provident fund
@ 81/r7" and the employer also contributes the same amount as the employee. The Employees
State lnsurance Corporation premium is 11/rY" of wages of which 112/o is paid by the employees.
Thenumberof workingdaysin ayeararc 300of 8hourseach.Outof thesetheworkerisentitledto
15 days leave on lull pay. lt is the firm's practice to pay 2 months'wages as bonus each year.
Calculate the wage rate per hour for costing purposes.
Solution :
f,
Wages paid to worker during the year (300 x 12) 3,600
Provident fund (8.33% x 3,600) 300
E.S.l. Premium (1% x 3,600) 36
Bonus at 2 months'wages (300 x 2) 600
Total 4,536
Effective hours per year : 285 x 8 = 2,280
Wage-rate per hour (for costing purpose) : { 4,536 / 2,280 hours = < 1.989.
lllustration 36 : (Labour Cost Per Day)
From the following data prepare a statement showing the cost per day of 8 hours of engaging a
particular type of labour :
(a) Monthly salary (basic + dearness allowance) - < 200
(b) Leave salary payable to the workman - 5% of salary
(c) Employe/s contribution to P.F. - 8% of salary [item (a) and (b)]
(d) Employer's contribution to State lnsurance - 211r"/" of salary (item a + b)
(e) Expenditure on amenities - { 17.95 per head per month
(f) No. of working hours in a month - 200
Solution
' atatement of cost per Day of g Hours
f
Monthly salary 200.00
Leave salary - 5% of salary 10.00
Employer's contribution to P.F. - 8% of { 210 16.80
Employer's contribution to State lnsurance - 2112"/o of { 210 5.25
Expenbiture on amenities 17.95
Total 2s0.00
Cost per day of 8 hours - 250 + 25 = ( 10.00.

lllustration 37 : (Earnings and Cost)
From the following information available you are required to calculate the Net Wage Bill as well as
Total Wages Cost :
i) As per the time cards the gross earnings of the workmen is ( 3,00,000.
ii) The various deductions from the gross earnings are as under:
f
Employees' contribution to Provident Fund 25,000
ESI - Employees' contribution 4,000
Advances against wages 8,000
172 CostAccoanting (T.Y.B.Com. : SEM-V)
Co-operative dues 6,000

Canteen charges 1,000
lncome Tax 5,000
iii) Company's contribution to Provident Fund and ESI are ? 25,000 and { 8,000 respectively.
Solution :
Computation of Earnings and Cost to Company
f, ? I
Gross Earnings 3,00,000
Less : Deductions
Employees' contrib'ution to P.F. 25,000
Employees' contribution to E,S.l. 4,000
Advance against wages 8,000
Co-operatives dues 6,000
Canteen charges 1,000
lncome Tax 5,000 49,000)
Net Earnings of Employees 2,51,000
Total Wages
Gross earnings of Workmen 3,00,000
Add ; Employer's contribution to P.F. 25,000
Add : Employer's contribution to E.S.l 8,000 33,000
Total Wage Cost to 3,33,000
lllustration 38 : (Labour Cost Per Hour)

'A', an employee of XYZ Co. gets the following emoluments and benefits:
(b) Dearness Allowance (D.A.) < 5,250 per month

(c) Employers' contribution to
Provident Fund 8% of Salary and D.A.
E.S.l. 4% of Salary and D.A.
(d) Bonus 20% of Salary and D.A.
(e) Other allowances < 27,250 per annum
A works lor 2,400 hours per annum, out of which 400 hours are non-productive but treated as
normal idle time. You are requested to find out the Effective hourly cost of 'A'.
Solution | (FYBAF, March 2018, adapted)
Computation of Labour Cost per Hour
ofA Working r
Salary 2,500 p.m.
D.A. 5.250 p.m.
Salary + DA p.m. 7,750 p.m.
Salary & D.A. p.a. 7,750 x 12 93,000 p.a.
Employers' contribution to PF 93,000 x 8% 7,440
Employers' contribution to ESI 93,000 x 4% 3,720
Bonus 93,000 x 20% 18,600
Other Allowances
Total Cost to Company 1 ,50,010 p.a.
Working hours (Gross) 2,400 hours
Less - Normal ldle time (400)
Effective worki hou rs 2,000 hours
Effective hourly cost of A = ? 1,50,010 12,000 = t 75.01 per hour
Lsbour Cost 173
lllustration 39 :
Mr. Jeet, an employee of the company gets the following emoluments and
benefits :
Basic Wages < 35,000 per month
Dearness Allowance 100% of basic
Employer's contribution to Provident Fund 10% of basic
Employer's contribution to E.S.l. 4% of basic
Bonus 15% of basic
Other Allowances ? 42,500 p.a.
He works for 3,000 hours per annum, out of which 600 hours are normal idle time. Mr. Jeet worked
30 effective hours on a job 'B'where the cost of direct material is t 50,000 and overheads are 60%
of combined cost of material and labour. The sale value of job is quoted to earn prolllZ5o/o on cost.
You are required to find out effective hourly cost of Mr. Jeet and the expected sales value of job ,8,.
Solution : (T.yB.com., oct. 201s, Nov.2017, adapted)
(i) Computation of Effective Hourly Cost of Mr. Jeet
Basic Wages < 35,000 p.m. x 12 months 4,20,000

D.A. (100% of Basic Wages) 100% of < 4,20,000 000
Basic + D.A. (p.a.) 8,40,000
Employeds Contribution to P.F. { 4,20,000 x 10 / 100 42,000
Employer's Contribution to E.S.l <4,20,000x411OO 16,800
Bonus < 4,20,000 x 15 / 100 63,000
Other Allowances 42,500
10,04,300
Working Hours 3,000
Less : Normal ldle Time Hours 600
Effective Working Hours 2AOO
{ 10,04,300
Effective Hourly Cost = ,/00 h"*" = ( 418;46 per hr.
lJffl,H:l?rli,.
Prime Cost
.r""tr (r 418 46 x 30 hours) -flH
62,554
Add : Overheads (60% of Prime Cost) 37.532
Total Cost 1,00,086
Add : Profit (25% on Cost) 25.022
Sales 1.25.108
lllustration 40 :
Calculate the earnings of Rakesh and Ramesh from the following particulars for the month of March
2016 and allocate the labour cost to each Job No. 1 00 and Job No. 101 .
Rakesh Ramesh
Basic Wages < 15,000 < 18,000
D.A. (on Basic) 80% 80%
Employees Contribution to P.F. (on Basic) 10% 10'/"
Employees Contribution to E.S.l. (on Basic) 37o 3%
Overtime Hours 18 15
iture on Amenities < 600 ( 700
The normal working hours for the month are 225. Overtime is paid at double the total of basic and
D.A. Employer's contribution to State lnsurance (E.S.l.) and P.F. are at equal rate with employees'
contribution. There were two workers employed on Job No) 100 and Job No. 101 in the following
proportion.
174 Cost Accounting (TVB. Com. : SEM-V)
Name ol Warker Job No. 1A0

Rakesh 4O"/" 60"/"
Ramesh 20% 80%
Ovedime was done on Job No. 100. (T.YB.Com., Nov. 201 6, adaPted)
Solution :
(i) Statement Showing Earnings and Cost

Rakesh Bamesh
{ fl
Basic Wages 15,000 18,000
D.A. (80% on Basic) 12,000 14,400
Overtime Wages 4,320 4,320
Gross Wages 31,320 36,720
Less : Employee Contribution to
- P.F. (10% on Basic) 1,500 1,800
- E.S.l. (8olo on Basic) 450 540
Net Wages Payable 29,370 34,380
Statement of Labour Cost :
Gross Wages (Excluding overtime) 27,O00 32,400
Add : Employeds Contribution to
- P.F. (10olo on Basic) 1,500 1,800
- E.S.l. (18% on Basic) 450 540
Expenditure on Amenities 600 700
Total Labour Cost 29,550 35,440
29,550 35,440
225 225
Labour Rate Hour 131.33 157.51
(i i) Statement Showing Allocation of Wages to Jobs
Tatal: Job Job 1 0l

t
Rakesh Ordinary Wages (4:6) 29,550 11 ,820 17,730
Ovefiime 4,320 4,320
Ramesh Ordinary Wages (2 :8) 35,440 7,088 28,352
Overtime 4,320 4,320
73,630 27,548 46,O82
(iii) Calculation of Overtime Wages

2x(9itgic + D'A') + t12,000)
Rakesh -
225
x18hrs.
hours - 2x((15,000
225 hours
x18hrs. = <4,g20
Ramesh _ 2x(Balic + D.A.) x15hrs. _ 2x({18,000 + {14,400) x15hrs. = (4,320

225 hours 225 hours
lllustration 41 : (Earnings of 1 Worker; Allocation to 3 Jobs)
ln a factory working six days in a week and eight hours each day, a worker is paid at the rate of ( 100
per day basic plus D.A. @ 12O7o ol basic. He is allowed to take 30 minutes off during his 8 hours
shift for meals-break and a 10 minutes recess for rest. During a week, his card showed that his time
was chargeable to :
Job X 15 hrs.
Job Y 12 hrs.
JobZ 13 hrs.
The time not booked was wasted while waiting for a job. ln Cost Accounting, how would you allocate
the wages of the workers for the week ?
Labour Cost 175
Solution :
(i) Totaleffective hours in a week: [(8 hours - (30 mins. + 10 mins.)]x 6 days = 44 hours
(ii) Total wages for a week : ({ 100 + 120"/" of t 100) x 6 days = ? 1,320
(iii) Wages rate per hour : (1 ,320 + 44) = <30
(iv)Time wasted waiting for job (Abnormal idle time) :
44 hours - (15 hours + 12 hours + 13 hours) = 4 hours
Allocation of Wages in Cost Accounting
a
Allocated to Job X (15 hours x t 30) 450
Allocated to Job Y (12 hours x { 30) 360
Allocated to Job Z (13 hours x t 30) 390
Charged to Costing Profit & Loss tuc (4 hours x { 30) 120
Total 1,320
lllustration 42 : [Earnings (2 Workers) and Cost (3 Jobs)]
Calculate the earnings of A and B from the following padiculars for a month and allocate the labour
cost to each job X, Y and Z :
AB
(i) Wages
Basic < 100 160
(ii) Dearness Allowance 507o 507"
(iii)Contributlon to Provident Fund (on basic wages) 8%
8o/o
(iv)Contribution to Employees' State lnsurance (on basic wages) 2"h
2%
(v) Overtime Hours 10
The Normal working hours for the month are 200. Overtime is paid at double the total of normal
wages and dearness allowance. Employer's and Employees' contribution to State lnsurance and
Provident Fund are at equal rates. The two workers were employed on jobs X, Y and Z in the
following proportions:
Jobs
XYZ
Workers A 40o/o 307o 30%
Worker B 50% 2O"/o 30%
Overtime was done on job Y at the request of the customer. (T.Y.B.Com., Oct. 2014, adapted)
Solution :
Statement Showing Earnings and Cost
Earnings
Basic Wages 100.00 160.00

Dearness Allowance (50% of Basic Wages) 50.0 80.00
Overtime Wages (Refer to Working Note 1) 15.00
Gross Wages earned 165.00 240.00
Less : Employee's Contribution
(a) Provident Fund - 8% of Basic wages
(b) ESI - 2/" ol Basic wage 10.00 16.00
Net Wages Paid 155.00 224.OO
of Labour Cost: fl
Gross Wages (excluding overtime) 150.00 240.00
Employer's Contribution to P.F. and E.S.l 10.00 16.00
'160.00 256.00
Ordinary wages
Labour Rate Per Hour 0.80 1.28
160/200) (?
176 Cost Acc o unting (7. Y B- Com. : S EM-V)
Statement Showing Allocation of Wages to Jobs

Jobs
Y Z
r , r
Worker A:
Ordinary Wages (4:3:3) 160.00 64.00 48.00 48.00
Overtime 15.00 15.00
Workers B:
Ordinary Wages (5:2:3) 256.00 128.00 51.20 76.80
431.00 192.00 114.20 124.80
Working Notes :
1. Normal Wages are considered as basic wages.

2 x (Basic wage + D.A)
2. Overtime = x 10 hours = 2 x (< 150/200) x 10 hours = { 15.
200
lllustration 43 : (Gross and Net Wages; Labour Cost Per Hour / Unit)
A Production Department provides the following information about a worker :
Days Hours Worked

Monday 8
Tuesday I
Wednesday 10
Thursday 11
Friday 10
Saturday 8
Normal Working Hours per day - I
Normal Rate per Hour - 50 paise
Overtime Rate - Upto t hours in a day at single rate and over t hours in a day
at double rate or upto 48 hours in a week at single rate and
over 48 hours at double rate, whichever is more beneficial to
the workman
Dearness Allowance - 15O"/" of normal wages
Bonus - 107" of normal wages and D/A
Employer's Contribution to P.F. 13% of normal wages and D/A
Employer's Contribution to ESI - 3% of normal wages and D/A
Expenditure on amenities per
worker per week - < 18.09
Employee's Contribution to P.F. and to ESI is same as that of employer. Output in the week was 32
units. The company allows statutory leave of 2 weeks per year with pay.
You are required to calculate :
(a) Gross Wages earned and Net Wages payable to a worker this week.
(b) Cost of labour per hour and per unit of output.
Solution :
Statement Showing Calculation of Normal and Overtime Wages
Normal Normal Hrs. At

Hours Wages Double
vorKea Rate Rate Rate
Monday I 8 4.00
Tuesday o I 4.00 ; 0.5;
Wednesday 10 8 4.00 1 1 1.50
Thursday 11 8 4.00 1 2 2.50
Friday 10 8 4.00 1 1.50
Saturday 8 8 4.00 i
Total 56 48 24.00 4 4 6.00
Labour Cost 177
TotalWages lst Option Option
A. Normal Wages 24.OO 24.OO
B. Overtime Wages 6.00 8.00
30.00 32.00
Thus, 2nd option is beneficial to the workman.
Statement Showing the Gross Wages and Net Wages
A. NormalWages [a8 x t 0.50] 24.O0

B. Dearness Allowance 11500/" of 7 241 36.00
C. Bonus [10% ol (7 24 + { 36)] 6.00
t
D. Overtime W.ages [8 x 1.00] 8.00
E. Gross Wages earned by a worker [A + B + C + D] 74.O0
F. Less : Deductions from wages :
(a) Employee's contribution to P.F. [13% of (2a + 36) < 60] ... ... .. 7.80
(b) Employee's contribution to ESI [3% of (2a + 36) < 60] . ... ... .. 1.80 9.60
G. le to a worker [E - F] 64.40
Statement Showing the Labour Cost per Hour and Per Output
A. Normal Wages 24.00

B. Dearness Allowance 36.00
c. Bonus 6.00
D. Employer's contribution to P.F. [13% ol (24 + 36) < 60] 7.80
E. Employer's contribution to ESI [3% ol (24 + 36) < 60] 1.80
F. Leave Salary [(2a + 36) t 60 x 2/52] 2.31
G. Expenditure on amenities 18.09
H. Total Labour Cost 96.00
t. Working Hours 48.00
J. Output 32 units
K. Labour Cost per Hour fi 96/481 { 2 per hour
L. Labour Cost per Unit of Output 96/3 <3 unit
lllustration 44 : (4 Employees - Gross and Net Wages; Labour Cost of Job)
Following are the particulars for April 2014, relating to four employees working in Department 'tvl' of
a factory, exclusively for Job. No. 120.
Name Designation Wases,{{) :
A Foreman 8,000 lvlonth

B Mechanic 150 Day
c Machine Operator 't20 Day
D Workman 100 Day
The normal working hours per week of six days are 48, or 8 hours per day. Sundays are paid
holidays. (There are no other holidays during the month).
Provident Fund contribution was 8% of monthly wages by employee.
Provident Fund contribution was 8% of monthly wages by employer.
Employee State lnsurance Contribution was 3% of monthly wages by employee and 5% of monthly
wages by employer.
From the foregoing data, calculate :
(a) Net wages payable by the employer for the month.
(b) The total amount of Provident Fund contribution to be deposited by employer.
(c) Employee State lnsurance contribution to be deposited by employer.
(d) Total labour cost to the employer for the month of April, chargeable to the job; and
(e) The total cost ol the |ob il materials required are valued at { 60,000 and overheads at 50% of
prlme cost. (CA lnter, May 2010, adapted)
Cost Accounting (T.YB.Con" : SEM'V)
178
Solution :
(a) Catculation of Net Wages Payable lor the Month

i r
Gross wages for APril, 2014
A. Foreman @ t 8,000 P.m. 8,000
B. Mechanic @ < 150 Per daY x 30 daYs 4,500
C. Machine Operator.@ { 120 per day x 30 days 3,600
19,100
D. Workman @ < 100 Per daY x 30 daYs 3,000
Less : Deductions for Employees Contribution
(i) Provident Fund Contribution @ 8% of ( 19,100 by employees 1,528
(ii) ESI Contribution @ 3"/o ol < 19,100 by employees '.. 573 2,101
Net Payable 16,999
7
(b) Employe/s share of Provident Fund (8"/o of ? 19'100) 1,528
Employee's share of Provident Fund (8% of ( 19'100) 1.528
Totalamount of Provident Fund contribution tg be deposited by employer 3.056
(Both contributions are to be deposited by the employer, as per law.)
(c) Employe/s share of ESI (5% of ? 19,100) 955
Employee's share of ESI (3olo of t 19,100) 573
ESlcontribution to be deposited by employer 1.528
(Both contributions are to be deposited by the employer, as per law.)
(d) Total Labour Cost to Employer
Total gross wages 19,100
Add : Employer's contribution towards P.F. 1,528
Add : Employe/s contribution towards ESI 955
21.583
(e) Total Cost of Job
Material 60,000
Labour Cost as per (d) above 21.583
prime Cost 81,583
Overheads at 50% of Prime Cost 40.791
Total cost of the Job 1.22.374
lllustration 45 : (Allocation)
A worker is paid { 50 per hour and the 5 days working week contains 42 hours. The daily allowance
for approved absence from his place of work, maintenance of machine, etc. is 12 minutes and his
job card shows that his time chargeable during the week to various jobs is as follows :
Job No. 305 20 hours
Job No. 310 10 hours
Job No. 32O 8 hours
The unaccounted time is caused by a power failure. Show how his wages for the week would be
dealt with in cost accounts.
Solution :
Total wages payable to the worker for the week = ? 2,100 (42 hrs @ ? 50 per hour)
Worker's wages are to be dealt with in the cost accounts as follows :
f,
1. Wages chargeable to Job No. 305 (20 hours @ t 50) 1,000
2. Wages chargeable to Job No. 310 (10 hours @ ( 50) 500
3. Wages chargeable to Job No. 320 (8 hours @ ( 50) 400
4. Wages for approved absence for 5 days @ 12 minute per day taken as normal
idle time to be recovered as factory overhead (1 hour wages @ < 50) 50
5. Wages lor time wasted due to power failure taken as abnormal loss transferred to
costing profit and loss account (3 hours @ <50) (Hours 42 - 20 - 10 - 8 - 1 = 3 hrs) 150
Total 2,1 00
Labour Cost 179
lllustration 46 : (Time, Piece, Halsey and Rowan)

Wage negotiations are going on with the recognised Labour Union and the Management wants you
as the Cost Accountant of the Company to formulate an incentive scheme with a view to increase
productivity.
The case of three typical workers Achyuta, Ananta and Govinda who produce respectively 't 80, 120
and 100 units of the company's product in a normal day of 8 hours is taken up for study.
Assuming that day wages would be guaranteed at 75 paise per hour and the piece rate would be
based on a standard hourly output of 10 units calculate the earnings of each of the three workers
and the labour cost per 100 pieces under (i) Day wages, (ii) Piece rate, (iii) Halsey scheme and (iv)
The Rowan scheme.
Also calculate under the above schemes the average cost of labour for the company to produce 1 00
pieces.
Solution :
(i) Days Wages
Achyuta 6 00 180 3.33

Ananta 6 120 s.00
Govinda 6 00 100 6.00
Total 18.00 400
Average Cost of Labour for the Company to produce 100 pieces
TotalWages paid {'8 *100 T4.50
TotalOutput
x100 = 400
=
(ii) Piece Rate
10a pieces
Achyuta 180 0.075 13.50 7.s0

Ananta 120 0.075 9.00 7.50
Govinda 100 0.075 7.50 7.50
Total 400 30.00
Average Cost of Labour for the Company to produce 100 pieces = x 100 = < 7.50
#
(iii)Halsey Scheme
Name Actual Standard Actual Time Time Bonus Hrs. baur

Output Time for for actuat Saved (50% of Cosl
ActuatOutput Output time saved)
(units) Hrs. Hrs. Hrs. Hrs. ( ,F
Achyuta 180 18 8 1 0 5 9.75 5.42

Ananta 120 12 I 4 2 7.50 6.25
Govinda 100 10 8 2 1 6.75 6.75
24.00
Average cost of labour for the company to produce 100 pieces = (< 24 / 400) x 100 = ( 6.00
*Total wages (Actual hours worked + Bonus hours) x Rate per hour
=
Hence total wages of Achyuta are : (8 + 5) x ( 0.75 = t 9.75
Similarly, the total wages of Ananta and Govinda are ( 7.50 and { 6.75 respectively.
l
(iv)Rowan Scheme
Name Actual Standarc Actual Time Bonus* Wages Bonus @ Total Labour
Output ltme Time Saved hours ror actua 0.75 per Earning Cost
(units) for actua taken in (hours) hrs. @ Bonus per 100
output hours 0.75 p. hour pieces
(hours) per hout
7 a f r
(2) (3) {4) (5) (6) (7) (8) 7+8=(9)
Achyuta 180 't8 8 1 0 4.44 6.00 3.33 9.33 5.18
Ananta 120 12 8 4 2.67 6.00 2.00 8.00 6.67
Govinda 100 10 8 2 1.60 6.00 1.20 7.20 7.20
24.53
Average Cost of Labour to the company for 100 pieces = x 100 = < 6.13
#
Time saved
*
Bonus hours = Time taken *
Standard time
8 hours x 10 hours
Bonus hours of Achyuta - 18 hours
= 4.44
Similarly, bonus hours of Ananta and Govinda are 2.67 hours and 1.6 hours respectively.
Labour Cost
181
EXERCISES
Page
13. 181
181
.2 rt 182
14. 182
182
185
185
False 185
nswer in Brief (lnternalTests) 186
14.6 Check Your Answers t88
15. Practical Problems 190
lb. Master Key - Check Your Answers Step-By-Step 2OO
13.1 DESCRTPTTVE QUESTIONS [7 OR 8 MARKS]

1. Discuss the objectives of time keeping & time booking. [Ans.: Para 1]
2. Discuss the effect of overtime payment on productivity. [Ans,: Para 3]
3. Explain the meaning of and the reasons for ldle time and discuss its treatment in cost accounting.
[Ans.: Para 4]
4. What do you understand by Overtime Premium ? What is the effect of overtime payment on
productivity and cost ? Discuss the treatment of overtime premium in cost accounts and suggest
a procedure for control of overtimework. [Ans.: Para 3]
5. ?
What do you understand by labour turnover ? How is it measured [Ans.: Para 5.1 A 5.2]
6. Discuss the three methods of calculating labour turnover. [Ans.: Para 5.2]
7. turnover.
Discuss two types of Costs which are associated with labour [Ans.: Para 5.5]
8. ltshouldbemanagement'sendeavourtoincreaseinventorytumoverbuttoreducelabourturnover.
Expand and illustrate the idea contained in this statement. [Ans.: Para 5]
9. What is the impact of 'Labour Turnover' on a manufacturing organisation's working ?
[Ans.: Para 5]
10. What is meant by Labour Turnover ? What are its causes ? (Oct. 14) [Ans.: Para 5]
11. State the circumstances in which time rate system of wage paymentcan be preferred in a factory.
[Ans.: Para 8.1]
12.What is piece-rate ? What advantages and disadvantages are attributed to their use ? What
principles should govern the determination and revision of piece-rates ? [Ans.: Para 8.2]
13. List the factors to be considered before introducing a scheme oI incentive to workers.
[Ans.: Para 9.2]
l4.Discuss the Gantt task and bonus system as a system of wage payment and incentives.
[Ans.: Para 9.5]
15.What are the main features of Halsey and Rowan method of payment of remuneration ? State
how Rowan Scheme is better than Halsey Scheme. [Ans.: Para 9]
182 Cost Accounting (T,Y.B. Com. : SEM-V)
13.2 SHORT NOTES [5 MARKS]

1. Time-keeping [Ans.: Para 1.1]
2. Time-booking [Ans.: Para 1.2]
3. Job Card (Oct.09) [Ans.: Para 1.2.3]
4. Token Method [Ans.: Para 1.1.3 (A)]
5. Overtime [Ans.: Para 3]
6. ldle Time [Ans.: Para 4]
7. Labour Turnover [Ans.: Para 5]
8. Efficiency Rating [Ans.: Para 7]
9. Labour Productivity [Ans.: Para 8]
10.Time Rate Wages [Ans.: Para 8.1]
11. Piece Rate Wages [Ans.: Para 8.2]
12. lncentive Schemes [Ans.: Para 9.1-9.3]
13.Halsey Premium Plan [Ans.: Para 9.6]
14. Rowan System [Ans.: Para 9.6]
15. Gantt's Task Bonus Plan (Oct. l4) [Ans.: Para 9.6]
'l 6. Composition of Labour Cost
[Ans.: Para 11.3]
14. OBJECTIVE QUESTIONS

1. ln which of the following incentive plans of wage payment, wages on time basis are NOT
guaranteed?
(a) Halsey plan (b) Rowan plan
(c) Taylor's differential piece rate system (d) Gantt's task and bonus system
2. Under the high wage plan, a worker is paid
(a) at a time rate higher than the usual rate (b) according to his efficiency
(c) at a double rate for overtime (d) normal wages plus bonus
3. Which of the following methods of wage payment is most suitable where quality and accuracy of
work is of primary importance ?
(a) Piece rate system (b) Time rate system
(c) Differential piece work system (d) Halsey premium system
4. Cost of idle time arising due to non-availability of raw materials is
(a) charged to Costing profit and Loss A/c (b) charged to factory overheads
(c) recovered by inflating the wage rate (d) ignored
5. When overtime is required for meeting urgent orders, overtime premium should be
(a) Charged to Costing Profit and Loss A/c (b) Charged to overhead costs
(c) Charged to respective jobs (d) ignored
6. Wage sheet is prepared by
(a) time-keeping department (b) personnel department
(c) payroll department (d) cost accounting department
7. Time and motion study is conducted by the
(a) time-keeping department (b) personnel department
(c) payroll depanment (d) engineering department
8. Labour productivity is measured by comparing
(a) Actualtime with standard time
(b) Total output with total man hours
(c) Added value for the product with total wage cost
(d) All of the above
Labour Cost 183
9. Labour turnover is measured by

(a) Number of workers replaced average number of workers
(b) Number of workers left / number in the beginning plus number at the end.
(c) Number of workers jointing / number in the beginning of the period.
(d)Allof these
10. Labour turnover is
(a) Productivity of labour (b) Efficiency of the labour
(c) Change in labour force (d) Total cost of the labour
11 . Time study is for
(a) Measurement of work (b) Fixation of standard time
(c) Ascertainment of actual hours (d) Ascertainment of labour cost
12.ldle time is
(a) time spent by workers in factory (b) time spent by workers in office
(c) time spent by workers off their work (d) time spent by workers on their job
13. Over time is
(a) actual hours being more than normal time
(b) actual hours being more than standard time
(c) standard hours being more than actual hours
(d) actual hours being less than standard time
14. Time keeping refers to
(a) time spent by worker on their job (b) time spent by workers in the factory
(c) time spent by workers without work (d) time spent by workers off their job
15.Time booking refers to
(a) time spent by worker on their job (b) time spent by workers in the factory
(c) time spent by workers without work (d) time spent by workers off their job
16. Difference between attendance time and job time is
(a) Standard Time (b) Overtime
(c) ActualTime (d) ldle time
'17. Piece workers are paid on the basis of
(a) Output sold (b) Output produced

(c) Output in stock (d) lnput received
18. Time wages are paid on the basis of
(a)Actual time (b) Standard time
(c) Time saved (d) Oveftime
19. Differential piece wages means
(a) different wages for different level of performance
(b) different wages for different lime consumed
(c) different wages for different types of workers
(d) different wages for different types of industries
20.For calculation of labour turnover under separation method
(a) only the number of employees left from the organisation is considered
(b) only the number of employees replaced are considered
(c) only the number of employees retrenched are considered
(d) only the number of employees who are new to the organisation is considered
21 . The cost which is incurred to prevent the labour turnover
(a) Management Cost (b) Replacement Cost
(c) Preventive Cost (d) Compensation Cost
22. Normal idle time
(a) can be avoided (b) can be minimised
(c) cannot be avoided (d) can be controlled
23. An employee is eligible for getting overtime wage if he / she works for more than
(a) 6 hours a day (b) 8 hours a daY
(c) t hours a day (d) 12 hours a daY
24.Labour productivity cannot be measured by comparing

(a) actual time with standard time
(b) total output with total man hours
(c) added value for the product with total wage cost
(d) total wage and total output
25,Wage sheet is prepared by
(a) Time keeping department (b) Personnel department
(c) Payroll department (d) Cost accounting department
26.Time and motion study is conducted by
(a) Tinie keeping department (b) Personnel department
(c) Payroll department (d) Engineering department
27. Comparing Rowan plan and Halsey plan, it is seen that when the time saved is less than 50% of
the standard time
(a) Rowan plan allows more wages to a worker than Halsey plan
(b) Rowan plan allows less wages to a worker than Halsey plan
(c) Rowan and Halsey plan allow equal wages to a worker
(d) Rowan plan and Halsey plan are equal to ordinary time wage
28. Halsey premium plan is
(a) lndividual incentive scheme (b) Group incentive scheme
(c) Time and piece wage system (d) Differential piece wage system
29. Bonus under Rowan scheme is paid
(a) as a proportion of standard time to actual time
(b) as a proportion of actual time to standard time
(c) as a proportion of time saved to standard time
(d) as a proportion of standard time to time saved
30. Number of methods available for calculation of labour turnover is
(a) Two (b) Three
(c) Four (d) Five
31. Merricks multiple piece rate system has
(a) Two rates (b) Three rates
(c) Four rates (d) Five rates
32. How many rate are used to calculate wages under Taylor's differential piece rate system ?
(a)Two (b)Three
(c) Four (d) Five
33. When time saved is more than 40% of the standard time, Halsey plan allows.
(a) more wages than Rowan plan (b) less wages than Rowan plan
(c) equal wages as compared to Rowan plan(d) None of the above
34. Wages under rowan and Halsey plan are exactly when time saved is
(a) nil (b) 50% of the standard time
(c) both (a) and (b) (d) None of the above
35. Under Gantts task and bonus plan no bonus is payable to a worker if his efficiency ls less than
(a) 50% (b) 60%
(c) 83.5% (d) 100%
36. Bonus under Halsey plan is paid
(a) at 50% of time saved (b) at75% of time saved
(c) at 80% of time saved (d) at 90% of time saved
37. Overtime premium is paid
(a) at normal rate (b) below the normal rate
(c) at 50% of the normal rate (d) at double normal rate
38. Under Emerson's efficiency System, no bonus is payable when efficiency is upto
(a) 50% (b) 66 2/3"/"
(c) 83113/" (d) 100%
Labour Cost 185

1. '-' means keeping a record of the attendance of the workers and the time spent by them in
actual work, idle time, overtime, etc.
2. '-' means the recording of the time spent by a worker on different Jobs during his attendance
at the factory.
3. Time booking is basically performed by preparing a Card.
4. '-' Card is a record of the work done by a worker, indicating the jobs done by him and the
time spent against each job.
5. lf the Overtime is
-
(normal / abnormal), it debited to Costing Profit & Loss Account.
6. '-' is the time spent beyond the normal working hours which is usually paid at a higher rate
than the normal time rate.
7. -
time is the difference between the time for which the employees are paid and the
employees' time booked against the cost object.
8. Labour Efficiency (%) = (Iime Allowed as per standard / Time
- x 100.
system
9. Time rate (is / is not) suitable in case of quality control.
system
10. Piece rate
-)
(is / is not) suitable if the outpul depends on team work.
Under
11. (Time / Piece) Rate System, worker assured of a steady and regular income.
12.- (Time / Piece) Rate System treats both efficient ans inefficient workers equally.
Match the Terms in A with the Statements in B

COLUMN A (Terms)
1. High wage plan
2. lvleasured day work
3. Differential time rate
4. Taylor's differential piece work system
5. Gantt task and bonus system
6. Emerson's efficiency system
7. Points scheme or Bedeaux system
8. Hayne's system
9. Accelerated premium system
10. Halsey system
11. Halsey Weir system
COLUMN B (Statements)
(a) Bonus equal to 30 percent of the wages of time saved.
(b) A worker is paid a wage rate which is much higher than the rate prevailing in the area or in the
industry. ln return, he is expected to maintain a very high level of performance.
(c) Bonus equal to 50 percent of the wages of time saved.
(d) Workers are paid bonus @ 75% ol the time saved.
(e) ln the case of repetitive work the time saved is shared between the worker and the foreman in
the ratio 5:1.
(f) The hourly rate of the time worker is made up of two parts viz, fixed and variable.
(g) Minimum time wages are guaranteed. But beyond a certain efficiency level, bonus in addition to
minimum day wages is given.
(h) Rewarding efficient workers by providing increased piece rate beyond certain level of output.
(i) Combination of time and piece work system.
(j) Earnings increase in greater proportion than the increase in production.
(k) Different hourly rates are fixed for different levels of efficiency.

1. Payroll department gathers and records each worker's time of arrival and departure for the
pulpose of attendance.
2. Metal disc method of time-keeping can be profitably used in very large undertakings.
186 CostAccounting (T.YB.Com. : SEM'V)
3. ln Taylor's differential Piece Rate plan, time wages are guaranteed to each worker'
4. Overtime wages are to be paid at double the normal wage rate.
5. Rowan incentive plan distributes the benefit of time saved equally between employee and
employer.
6. When wages are paid on piece basis, the quality of work deteriorates.
7. All overtime is not unusual.
8. Cost of idle time due to labour strike should be treated as factory overhead.
9. Wages of a crane operator in a factory are direct wages.
10. Out-workers are those who are appointed on a temporary basis.
11.When Time-cum-Job Card is maintained, there may be no need ol keeping a separate Time
Clock Card.
12.Job evaluation is the comparative appraisal of workers on different jobs.
13.ldle time is the difference between time clocked and time booked.
14. Time booking is done by the time-keeper at the factory gate.
15.Time booking is not necessary in the case of piece workers.
16. Direct wages is a fixed cost.
17. ln Halsey Premium Plan, time wages are guaranteed.
18.|n Emerson's Efficiency System, bonus is paid only when efficiency is 100%.
19. Merrick's Differential Prece Rate System is less punitive than Taylor's system.
20. Labour rate is inflated to cover the cost of abnormal idle time.
21. Under the Rowan Plan, bonus is a fixed percentage.
22.When the time saved is 50% of the standard time, both the Rowan and Halsey plans pay the
same amount of bonus.
23. The purpose of work measurement is to determine the standard time for doing a task.
24.Clock Card is a useful time booking record.
25. Casual workers are usually indirect works.
26. Labour productivity automatically increases when production increases.
27. Cost of normal idle time may be treated as productions overhead.
28. Oveftime premium is always treated as a factory overhead.
29. The cost of paid leave to workers is transferred to Costing Profit and Loss Account.
30. The amount of minimum bonus payable to direct workers should be included in the direct labour
cost and that payable to indirect workers should be charged to overhead.
31.ldle time arises when workers are paid on time basis or piece basis.
'14.5 NUMERICAL MCQ / ANSWER lN BRTEF (INTERNAL TESTS)

.t
. When standard output is 'l 0 units per hour and actual output is 12 units per hour, the efficiency
iS
(a)80% (b) 100%
(c)120% (d) 12%
2-3. Standard output is 100 units per ddy of 8 hours and the piece rates are 20 paise per unit and 15
paise per unit under Taylor's differential piece rate system.
2. What will be amount of wages if a worker produces 95 units in a day ?
(a) { 14.00 (b) < 14.25
(c) { 18.50 (d) < 19.00
3. What will be the amount of wages under Taylor's differential piece rate system, if a worker
produces 10'l units in a day ?
(a) ( 15.15 (b) { 20.00
(c) t 20.1s (d){ 20.20
4. Standard time is 60 hours and guaranteed time rate is 30 paise per hour. What is the amount of
wages if job is completed in 48 hours ? Rowan plan is in use.
(a) t 24.00 (b) { 26.80
(c) { 28.80 (d) { s0.00
Lsbour Cost 187
5. A worker has a time rate of t 15 / hr. He makes 720 units of a component (standard time : 5
minutes / unit) in a week of 48 hours. His total wages including Rowan bonus for the week is
(a)77e2 (b) < 820
(c) ( 840 (d) < 864
6. The standard time required per unit of a product is 20 minutes. ln a day of I working hours a
worker gives an output of 30 units. lf he gets a time rate of t 20 / hr., his total earnings under
Halsey bonus scheme was :
(a) { 200 (b) < 1e2

(c) { 180 (d)< 160
7. ln a company, the hourly rate of wages guaranteed is 0.50 paise per hour. The standard time for
producing one dozen articles is 3 hours. The actual time taken by the worker to produce 20
dozen articles is 48 hours. The earnings of a worker under Rowan plan is :
(a) 7 27 (b) < 28
(c) ? 28.80 (d) { 30
8. A firm employs 5 workers at an hourly rate of { 2.00. During the week, they worked for four days
for a total period ol 40 hours each and completed the job for which the standard time was 48
hours for each worker. The labour cost under Halsey bonus plan is :
(a) { aaO (b) < 467
(c) T 480 (d) < 420
9. A worker is allowed 10 hours to complete a job on daily wages. He takes 6 hours to complete the
job under a scheme of payment by results. His day rate is { 6 per hour and piece rate is T 36. The
material cost of the product is { 40 and overheads are charged at 150% of the total direct wages.
The factory cost of the product under Rowan plan is :
(a) t 130 (6) < 166
(c) ( 160 (d) { 170
10. A company pays direct operatives a basic wage of ( 8.50 per hour plus a productivity bonus. The
bonus is calculated as : [(Time allowed - Time Taken) x (Basic Rate per Hour * 3)1.
Thetime allowed is 2.4 minutes perunitof output. An operative produced 1,065 units ina37/z
hour week.
What were the total earnings of the operative in the week ?
(a) ( 318.75 (b) < 333.20
(c) ( 340.40 (d)< 362.10
11. A differential piecework scheme has a basic rate of ( 0.50 per unit. Output in addition to 500
units is paid at higher rates. The premiums over and above the basic rate, which apply only to
additional unils over the previous threshold, are
Output (units) Premium (per unit)
501-600 { 0.05
Above 600 < 0.10
What is the total amount paid if output is 620 units ?
(a) ( 317 (b) < 318
(c) 1 322 (d) < 372
12.A job cost estimate includes 630 productive labour hours. ln addition, it is anticipated that idle
time will be 10% of the total hours paid forthe job. The wage rate is { 12 per hour.
What is the total estimated labour cost for the job ?
(a) { 6,804 (b) < 7,s60
(c) t 8,316 (d) < 8,400
13. The gross wages of the direct operatives in a production cost centre for a period are analysed as
follows :
Direct Operatives (t)

Productive hours at basic rate 37,640
Overtime premium 2,440
ldle time 590
Group bonuses 3,130
How much of the gross wages would normally be accounted for as direct labour ?
(a) ( 37,640 (b) { 40,080
(
(c) 40,670 (d) < 43,210
188 CostAccounting (T.Y.B.Com" : SEM-V)
14. An incentive scheme is in operation for each direct worker in a factory. The basic rate of pay is
t 8 per hour for an 8-hour day with a bonus if hours worked are less than the standard hours for
the output achieved. The bonus is 50% of the time saved against standard, paid at the basic
rate. A single product is manufactured and the standard time is 10 minutes per unit.
What is the bonus for a worker who manufactures 60 units in an 8-hour day ?
(a)to (b)<4
(c) <8 (d)<16
15.|f an employee earns { 10 per hour and receives 1.5 times for hours worked in excess of 40
hours per week, in a week when 45 hours were worked the overtime premium would be
(a) ( 25 (b) { 50
(c) { 10 (d) < 5
(e) None of the above
16. Sathya company employs workers on time wages cum piece wages basis. Workers get payment
as per the method more beneficial for them. During a week of 44 hours, production was as
under:
Gopu - 100 units; Somu - 140 units
Time Rate = 7 2.5 hour; Piece Rate < 1 p.u.
Calculate the earnings of each worker.
17.X Company has set 5 units per hours as the standard output, each unit having a piece rate
( 3. ln a normal day of 8 hours, Kokila produces 35 units and Kalai produces 50 units. The usual
hourly rate applicable to all workers is ( 15. Find outthe earnings of Kokila and Kalai.
(a) lf only time rate system is used
(b) lf only piece rate system is used
(c) lf piece rate with guaranteed time rate is applied.
18. Mr. Moorthy a worker in a factory is paid on time basis. During the month of October he worked
for 200 hours. His hourly wages rate is t 10 per hour.
Mr. Sathya another employee ol the company is paid on the basis of piece wages. During the
month of October his output was 1,000 units. Rate of wages per piece is { 3. Calculate the
wages of respective workers for the month of October.
19.|n a factory, workers are paid at { 50 per hour. During the month of April, there were 25 working
days of 8 hours each. There is also a'piece work plan'wherein ( 10 is to be paid per piece
produced. During the month worker'X' produced on average 48 pieces per working day.
Asceftain the wages of worker'X' under
(a) Times wages
(b) Piece wages
20. Calculate weekly wages of two workers by Taylor's differential piece rate system from the following:
Standard output per week - 150 units
Piece rates are { 4 and { 6 per unit
Worker 1 produced 'l 70 units and Worker ll produced 140 units.
14.6 CHECK YOUR ANSWERS

14.1
1. (c) 7. (d) 13 (a) 19. (a) 25. (c) 31. (b) 37. (a)
2. (a) 8. (d) 14 (b) 20. (a) 26. (d) 32. (b) 38. (b)
3. (b) 9. (a) 't5 (a) 21. (c) 27. (a) 33. (a)
4. (a) 10 (c) 16 (d) 22. (c) 28. (a) 34. (b)
5. (b) 11 (b) 17 (b) 23. (c) 2e. (b) 35. (d)
6. (c) 12 (c) 18 (a) 24. (d) 30. (b) 36. (a)
14.2 (1) Time keeping (2) Time Booking (3) Job (4) Job (5) Abnormat (6) Overtime (7) tdte (8)
taken (9)is (10)is not (11) Time (12) Time
14.3 (1)-(b),(2) -(f),(3)-(k),(4) -(h),(5)-(i),(o) -(s),(z)-(d),(8)-(e),(e)-(j),(10) -(c),
(1t) - (a)
14.4 True : 4, 6,7, 11 , 13, 17, 19, 22, 23,25,27, 30
False : 1, 2, 3,5, 8, 9, 10, 12, 14, 15, 16, 18, 20, 21, 24, 26, 28, 29, 31
Labour Cost 189
1. False; payroll department determines the gross and net amount of eamings of each worker.
2. False; Metal disc method can be profitably used only in small and medium size concerns.
3. False; Taylor's Plan does not guarantee time wages but pays only on the basis of efficiency of
workers.
4. True; This is according to Factories Act.
5. False; Worker's bonus is equal to : Time wages x Time saved
7. True; Overtime due to pressure of work or during the season is quite usual.
8. False; lt should be transferred to costing P&L A/c.
9. False; lt is indirect wages as crane helps production only in a general way.
10. False; Out-workers are those who go out of the factory to work.
11 . True;Time-cum-Job card shows the attendance records as well as etfective time work of each.
12. False; Job evaluation is a comparative appraisal of jobs and not of workers.
14. False; Time booking is done by the supervisor in the department.
15.False; tn addition to calculation of wages of individual workers, time booking is useful in other
costing areas.
16. False; Direct wages is a variable cost.
18. False; Bonus is payable at efficiency ol 66 213"/".
19.True; Merrick's system has three piece rates and none of the rates is fixed below the normal.
20. False; Cost of abnormal idle time is transferred to Costing Profit and Loss Account.
21 . False; Bonus percentage varies according to the time saved.
24. False; Clock card is a time-keeping record.
26. False;lncrease in production may or may not be accompanied by increase in labour productivity.
28. False; Treatment of overtime premium depends upon the purpose of overtime.
29. False;Wages for leave period is treated as indirect labourcost and charged to factory overhead.
31 . False; ldle time arises only in case of workers paid on time basis.
14.5
1 (c) 4 (c) 7 (c) 10. (b) 13. (a)

2 (b) 5 (d) 8 (a) 11. (a) 14. (c)
3 (d) 6 (c) I (b) 12. (d) 15. (a)
Hints :
5. (48 x 15) + = ao+

[#,*xrs)
jq)=
6. (8x20) + (r^rr, reo
t. (48 x 0.50) + ]3x48xo.5o = 28.80

60
5o x+ox2
8. (200 x 2) +
100
= 44O
(t \
e. (i) wages:(6x o1* [ro x 0 x o.J = 50.40,
(ii) Factory Cost = 40 + 50.40 + 150% of 50.40 = 166

10.Time allowed = 1,065 units x (2.4 + 60) = 42.6 hours
Bonus = (42.6 - 37.5 hours)x ({ 8.50 + 3)= < 14.45
Basic Pay = 37.5 hours at t 8.50 = { 318.75
Total Earnings = { 333.20 (< 318.75 + '14.45)
11.(620 x 0.50) + (100 x 0.05) + (20 x 0.10) = ( 317
12. [(630 + 0.9 hours) x t 'l 2/hour] = { 8,400
14.[(10-8)x0.5x8]=8
15.(112 x { 10) (45 - 40)= ( 25
16.Gopu : Time wages = Hours x Time ,als = 44 x 2.5 = 110
Somu : Piece wages = Piece produced x Piece 12ls = 140 x 1 = 140
190 CostAccounting (I)Y.B.Com. : SEM-V)
17.Kokita and Kalai : Timewages = Hoursx Time rate = 8 x 15 = 120

Kokila : PieceWages = Piece produced x Piece rate = 35 x 3= 105
Kalai : Piecewages = Piece produced x Piece rate =50 x 3 = 150
18. Mr. Moorthy : Hours worked x Rate per hour = 200 x 10 = 2,000
Mr. Sathya : No. of pieces x Rate per piece = 1,000 x 3 = 3,000
19.(a) Time Wages = 25 x 8 x 50 = { 10,000
(b) Piece Wages = Pieces produced x Price rate = 48 x 25 x 10 = { 12,000
20..'. Wages forworker I = 17Ox 6 = ( 1,020
.'. Wages for worker ll = 140 x 4 = { 560
15. PRACTICAL
(A) Remuneration / !ncentives

Q.l (Time / Piece Rate) : The output of worker A is 64 units in a 40 hours week. Guaranteed time
rate is { 5 per hour. Ordinary piece rate is ( 2 per unit. Show the earnings of worker A under piece
rate and time rate systems.
[Ans.: Piece wages = 64 x ? 2 = ? 1 28, Time wages = 40 x ? 5 = ? 200]
Q.2 (Efficlency Bonus) : ln an engineering works the standard time for a job is 16 hours and the
basic wages is two rupees per hour.. A bonus scheme is instituted so that the worker is to receive his
normal rate for hours actually worked and in addition for half the hours saved.
Calculation wages and effective rate of earnings per hour if the job is completed (i) in 12 hours and
(ii) in 14 hours.
[Ans.: (i) 12 Hours = ?2.33, (ii) 14 Hours = ?2.14]
Q.3 (Efficiency Bonus) : ln a manufacturing concem, the daily wages guaranteed for workers is
{ 40. The standard output for a month is 1,000 articles, representing 100o/o efficiency. The rate of
wages is paid without bonus to those workers who show up to 66'?/.% efficiency. Beyond this, bonus
is payable in a graded scale :
(o/d
Efficiency Bonus (%)
90 10
100 20
A further increase ol 1"/o ol bonus is provided for every 1% increase in efficiency. Calculate the total
earnings of A, B, C and D who have worked 26 days in a month with the following productivity : A -
500 units, B - 900 units, C - 1,000 units and D - 1,200 units. (FYBAE Nov. 2017, adapted)
[Ans.: Earnings or workers : A (only time wages) - 26 x 40 = 71,040;
B - 1,O40 + 10Vo of 1,040 = ?1,144; C - 1,040 + 20o/o of 1,040 = 71,248;
D - 1,040 + 40o/o of 1,040 = ? 1,4561
Q.4 (Efficiency Bonus) : ln a manufacturing unit, a muftiple piece rate plan is operated as under :
1. Basic price rate up to 85% efficiency;
2. 115"/o basic piece rate between 90% and 100% effiiciency;
3. 125"/0 basic piece rate above 100% efficiency.
The workers are eligible for a "Guaranteed Day Rate" which is equal to75o/" efficiency and the piece
rate is { 2.00 per piece.
Compute the labourcost per peice al7O"/o,95% and 115% efficiency, assuming that at 1OO% efficiency
60 pieces are produced per day. (ICWA-lnter, Dec. 1997, adapted)
[Ans.: 70o/o : ? 2.14; 95o/o : ? 2.30; 11 5o/o : ? 2.501
Q.5 (Piece Rate Wages + Efficlency Bonus) : Calculate the total monthly remuneration ol three
workers, P, Q and R who are working in a factory based on the following data :
(i) Standard production per month worker : 2,000 units
(ii) Piece work rate { 0.50 per unit
(iii) Production bonus to be given as follows:
Up to 85o/o efflciency = Nil.
-
Between 85o/o and 100o/o efficiency lncentive bonus at ? 40 for every 5% increase above
85%.
Above 100o/o efficiency - lncentive bonus at ? 40 for every 5% increase above 85% plus 20%
additional bonus on the incentive earned
Labour Cost 191
(iv)P,4, and R has a production ol 1,600 units,2,000 units and 2,200 units respectively during
January,2013.
[Ans.: 800; 1,000 + 120; 1,100 + 24O]
Q.6 (Piece Rate Wages + Efficiency Bonus) : A factory has a piece-work scheme for mass
production of a certain component for a TV manufacturer. The standard production fixed for a day of
8 hours is 40 units. The piece work rate is ( 4 per piece. The details of remuneration payable to the
workers are as follows:
No. Productian Wancs lncentive bonus

(1) Upto 80% PW wages @ of {4 per piece Nit
Efficiency subject to Guaranteed minimum
Wages of T 100/day
(2) Above 80% do ( 40/ for every 1"/" increase in
efficien above 80%
Three workers Ram, Salim, Tom gave the following performance for May 2013:
Name of the worker No. of days worked Output (units)
Ram 20 480
Salim 24 864
Tom 25 1,100
Calculate their total earnings. (ICWA-lnter, June 2007, adapted)
[Ans.: 2,000; (3,456 + 400); (4,400 + 1,200)]
Q.7 (Wages + Efficiency Bonus) : XYZ Ltd. employs its workers for a single shift of 8 hours for 25
days in a month. The company has recently fixed the standard output for a mass production item
and introduced an incentive scheme to boost output. Details of wages payable to the workers are
as follows :
(i) Basic wages/piece work wages @ 7 2 per unit subject to a guaranteed minimum wages of { 60
per day.
(ii) lncentive bonus : Standard output perday per worker : 40 units;
lncentive bonus up to 80% efiiciency : Nil;
lncentive bonus for efficiency above 80% : { 50 for every 1"/" increase above 80%
The details of performance of four workers for the month of April 2015 are as follows :
Worker No. of days worked Output (units)
A 25 820
B 18 500
c 25 910
D 24 780
Calculate the total earnings of each of the workers.
[Ans.: A = 1,640 + 100; B = 1,080 + Nil; C = 1,820 + 550; D = 1,560 + 50]
Q.8 (Taylor) : From the following particulars, calculate the earnings of workers X and Y and their
labour cost per unit.
Standard time allowed : 20 units per hour
Normal time rate : ( 30 per hour
Differential Rate to be applied:
80"/" of piece rate when below standard
120"/" of piece rate at or above standard
ln a particular day of 8 hours, X produces 140 units while Y produces 1 65 units.
[Ans.: Earnings X - 80o/o x 210 = ? 168; Y - 120o/o x 247.50 - ?297]
Q.9 (Piece Rate / Taylor) : Calculate wages for workers X and Y by (i) Piece rate method and
(ii) Taylo/s differential piece rate method from the following :
Standard time per unit is 15 minutes.
Normal rate per hour is { 9.
Differential piece rates are that 80% of piece rate for below standard workers and 12O"/" of piece
rate for above standard workers.
ln a day x produced 30 units and Y produced 40 units. Normal working hours per day is 8.
[Ans.: (i) X : 67.50; Y : 90 (ii) X : 54; Y : 108]
Q.10 (Piece Rate / Taylor) : Calculate the earnings of workers X and Y under (A) Straight piece rate
system and (B) Taylor's differential piece rate system from the following details.
Standard time per unit = 12 minutes
Standard rate per hour = { 60
Differentials to be used 8O7o and 2O"/".
ln a pafticular day of 8 hours, worker'X' produced 30 units and worker 'Y' produced 50 units.
[Ans.: (A) X :360;Y :600 (B) X :288; Y :720]
Q.l1 (Piece Rate / Taylor) : K Ltd. follows Taylor's differential piece rate system 8O"/" and 12O"h
being the differential lor below standard and above standard work. From the following ascertain the
earnings of workers X and Y.
Standard time = 15 minutes per unit
Timeworked=Shours
Units produced = X : 28; Y = 35
Normal piece rate per unit T 2
[Ans.:X:44.80;Y:84]
Q.l2 (Merrick) : Calculate the earnings of workers A, B and C under (a) Straight Piece Rate System
and (b) Merrick's Multiple Piece Rate System from the following particulars:
Normal Rate per Hour ( 5.40
Standard Time per Unit 1 Nlinute
Standard Output per Day 480 Units
Output per day is as follows:
WorkerA-390Units
WorkerB-450Units
WorkerC-600Units
Working hours per day are 8.
[Ans.: (a) 35.10, 40.50, 54.00 (b) 35.10 @ 10070, 44.55 @ 110o/", 64.80 @ 120%]
Q.l3 (Merrick): Calculate earnings of 3 workers, A, B and C underthe Merrick's plan of multiple
piece rate system give the following :
Standard production - 120 units

Production of 'A' - 90 units
Production of 'B'- 100 units
Production of 'C' - 130 units
Ordinary piece rate - < 0.10
[Ans.: A : 9; B : 11; C : 15.60]
Q.l4 (Merrick) : Calculate earnings of 3 workers, A, B and C under Merrick's multiple piece rate
system, given the following :
Standard production = 150 units
Normal piece rate = { 0.50 per unit
Production of workers on a particular day :
A : 120 units
B : 140 units
C : 160 units
[Ans.: A : 60; B : 77; C : 96]
Q.l5 (Taylor and Merrick) : X, Y andZare three workers working in a manufacturing company and
their output during a parlicular 40 hours week was 96, 111 and 1 26 units respectively. The guaranteed
rate per hour is t 10 per hour, standard output is 100 units and piece rate is { 6 per unit. Compute
the total earnings and labour cost per unit under Taylor and Merrick Task Bonus Plan.
[Ans.:
Worker Basic Efficiency Taylor Merrick
X 576 960/o 460.80 633.60
Y 666 1110/" 799.20 799.20
z 756 1260/o 907.20 907.201
Laboar Cost 19i
Q.l6 (Taylor and Merrick) : The following particulars apply to a lactory where A, B, C and D work:
Normal Flate Per Hour = { 5
Standard Time Per Unit = 12 minutes
ln a 40 hour week, the output was as follows:
ABCD
66 units 166 units 200 units 220 units
Required: Calculate the earnings per worker and cost per unit under:
(i) Straight Time Rate System (ii) Straight Piece Rate System
(iii)Taylor's Differential Piece Rate System (iv)Merrick's Differential Piece Rate System
[Ans.: Earnings A, B, C, D: (i) 200 each (ii) 66, 166,200,220
(ii| 52.80, 132.80, 240, 264 (iv) 66, 166, 220, 2641
Q.17 (Gantt) : From the information given below, calculate the earnings of three workers X, Y and
Z under Gantt's task bonus plan.
(a) Time rate T 15 per hour
(b) High task per day of 8 hours - 80 units
(c) High piece rate { 2 per unit
(d) Day's output X : 70 units, Y : 80 units, Z : 90 units
[Ans.: A :120; B: 144; C: 180]
Q.18 (Gantt) : The following are the particulars applicable to a work process :
Time rate { 5 per hour
High task 40 units per week
Piece rate above the high task { 6.5 per unit.
ln a 40 hour week, the production of the workers was as follows :
A : 35 units B :40 units
C :41 units D : 52 units
Calculate the wages of the workers under Gantt's task bonus plan.
[Ans.: A : 200; B : 240; C : 266.50; D : 338]
Q.l9 (Gantt) : Standard output for a day of 8 hours is 60 units. Time rate is { 4 per hour and the High
task piece rate is { 0.80. Production of four workers is given below :
Rajan - 52 units, Baman - 60 units, Ravi - 65 units, Ramesh - 70 units
Calculate their earnings under Gantt's task bonus plan.
[Ans.: 32; 38.40; 52; 56]
Q.20 (Halsey) : Time allowed for a job is 48 hours; a worker takes 40 hours to complete the job.
Time rate per hour is { 15. Compute the total earnings of the worker.
[Ans.:?600+?60=?660]
Q.21 (Halsey) : A worker is allowed 60 hours to complete a job on a guaranteed wage of { 10 per
hour. He completes the job in 48 hours. For the saving in time, how much he will get under Halsey
Premium Plan (@ 50% Bonus)?
[Ans.:480+60=7540]
Q.22 : From the following data calculate the total wages Halsey premium plan.
HourlyRate :{3
Standard Time : 16 hours
Time taken : 12 hours
[Ans.:42]
Q.23 : Using the following information calculate under Halsey plan (i) Wages (ii) Effective hourly
rate of earning.
Time allowed = 72 hours
Time taken = 60 hours
Rate per hour = ( 1
[Ans.: (i) 66 (ii) t.t]
Q.24 : Calculate earnings of a worker under Halsey premium plan.
Time allowed 48 hours
Time taken 40 hours
Rate ( 'l 0 Per hour
[Ans.: 440]
Q.25 : Calculate the earnings of a worker from the following as per Halsey Plan.
(a) Standard time - 12 hours, Actual time : Worker A - 10 hours, Worker B - 8 hours, Worker C -
6 hours. Hourly rate { 8
(b) Hourly rate of wages t 10
Standard time for production of a dozen unit of production = 2 hours
Actual time taken by the worker X to produce 25 dozen 40 hours
(c) Articles manufactured by Mr. S a worker in a lactory 300
Standard time allowed 10 minutes per unit
Actual time 44 hours
Standard rate ( 5 per hour
[Ans.: (a) A : 88; B : 80; C : 72 (b) X : 450 (c) S : 235]
Q.26 : Calculate wages for workers A, B and C by Halsey-Weir premium plan from the following
particulars.
Standard time : 50 hours
Standard rate : 9 per hour
Actual time taken by A - 45 hours
[Ans.:405+15=420]
Q.27 : From the following data calculate the total wages of a worker under :
Halsey : Weir premium plan

Time allowed : 48 hours
Time taken : 40 hours
Rate per hour : { 3
Halsey : Weir premium plan
[Ans.:120+8=128]
Q.28 : Time allowed 12 hours, Time taken 8 hours, Rate per hour2. Calculate total earnings and
effective wage rate per hour under Halsey-Weir Plan.
[Ans.: 16 + 2.67 = 18.67]
Q.29 : Standard time 24 hours, Time taken 20 hours, Rate per hour 1. Calculate the Halsey-Weir
Plan.
[Ans.: 20 + 1.33 = 21.33]
Q.30 : Calculate the total earnings from the following data under (i) Halsey Plan and under
(ii) Halsey-Weir Plan.
Timetaken:Shours
Time rate : t 2.50 per hour
[Ans.: (i) 20 + 2.50 = 22.50 (ii) 20 + 1.67 - 21.67]
Q.31 (Rowan): A worker has produced'l 54 units in 10 hours instead of 15 hours. lf the normal
wages rate is { 30 per hour find his remuneration under Rowan Premium Plan.
(ICWA lnter, Dec. 15, adapted)
[Ans.: 7 400]
Q.32 : The following particulars applied to a job
Timerate:{2hours
Timetaken:Shours
Calculation earning under Bowan system.
[Ans.: 19.2]
Q.33 : The following particulars applied to a job :
Rate per hour = { 'l .50 per hour

Find earnings under Rowan Plan.
[Ans.: 28.13]
Labour Cost US
Q'34 : From the following particulars, calculate earnings of a worker under Rowan plan.
Time allowed = 80
Rate per hour = { 2
[Ans.: 137.5]
Q.35 : From the following particulars, calculate earnings of a worker under Rowan plan.
Rate of wage = ( 10
[Ans.: 455]
Q.36 : From the following particulars, calculate earnings of a worker under Rowan plan.
Standard time = 50 hours
Wages per hour = t 3
[Ans.: 96]
Q.37 (Rowan) : Under Rowan Plan, calculate the total earnings and effective rate of earnings per
hour of three operators X, Y and Z from the following particulars :
The actual time taken by three operators are as follows :
X 90 hours
Y 80 hours
Z 60 hours
The standard time fixed for producing 1 dozen articles is 100 hours. The rate of wages is ( 2 per
hour. (ICWA lnter, Dec. lS, adatped)
[Ans.: Total 7198; 192; 168; Ettective 7 2.20; 2.40; 2.80]
Q.38 (Time Rate / Piece Rate / Bowan) : A Company is undecided as to what kind of wage scheme
should be introduced. The following particulars have been compiled in respect of three systems,
which are under consideration of the management.
c
Actual hours worked in a week 40 34
Hourly rate of wages T5 < 7.20
Production in units
Product P ... 21 60
Product Q 135
Product R 25
Standard time allowed per unit of each product is: P R
Minutes 18 30
For the purpose of piece rate, each minute is valued at ( 0.10
You are required to calculate the wages of each worker under:
(i) Guaranteed hourly rates basis
(ii) Piece work earnings basis, but guaranteed a|75"/" of basic pay (guaranteed hourly rate) if his
earnings are less than 50% of basic pay.
(iii) Premium bonus basis where the worker receives bonus based on Rowan scheme.
(CA-PCC, Nov.2002)
[Ans.:
(i) 38x6 40x5 34 x 7.20

(ii) (1 .20 x 21) + (1.80 x 36) + (3 x 46) (3 x 25) (1.20x60)+(1.80x135)
38xO 40x5 x +
Q.39 (Halsey/Rowan) : The standard time required per unit of a product is 20 minutes. lf in a day of
8 working hours, a worker gives an output of 30 units calculate his earnings under Halsey Bonus
Scheme and Rowan Bonus Scheme. He gets a time rate of ( 20 per hour. [Ans.: 7180; 7192]
196 Cost Accounting (T'Y'B'Com' : SEM-I)
e.40 (Halsey/Rowan) : The firm employs 5 workers at an hourly rate of { 2.00 during the week they
worked for 4 days for a total period of 40 hours each and completed a job for which the standard
time was 48 hours for each worker.
Calculate the labour cost under the Halsey method and Rowan methods of incentive plan payments'
[Ans.: ?440; (466.67]
e.41 : Calculate the earnings of worker under (i) Halsey plan and (ii) Rowan plan from the following
data:
allowed
Time 40 hours
taken
Time 30 hours
Rate {3Perhour
[Ans.: (i) 105 (ii) 112.50]
Q.42 : Calculate the earnings of a worker under (i) Halsey plan and (ii) Rowan plan'
Actual time = 30 hours
Rate per hour = { 10
[Ans.: (i) 330 (ii) 350]
Q.43 : A worker takes 80 hours to do a job for which the time allowed is 100 hours his daily rate is
2.50 per hour. Calculate the works cost of the job under the following methods of payment of wages
(i) Time Rate
(ii) Halsey Plan and
(iii) Rowan Plan
Additional information :
(a) Material cost { 120

(b) Factory overhead 125% wages
[Ans.: (i) 200 (ii) 225 (iii) 240]
Q.44 (Time / Piece / Halsey / Rowan) : ln a factory guaranteed wages at the rate of t 1.80 per hour
are paid in a 48 hour week. By time and motion study it is estimated that to manufacture one unit of
a particular product 25 minutes are taken. During the week A produced 180 units of the product.
Calculate his wages under the following methods:
(a) Time Rate. (b) Piece Rate with a guaranteed weekly wage.
(c) Halsey premium Bonus. (d) Rowan Premium Bonus.
[Ans.: (a) 48 x 1.8; (b) 180 x 0.75; (c) 86.40 + 24.30; (d) 86.40 + 31.10]
Q,45 (Halsey / Rowan) : Under a scheme of payment by result, a worker takes 8 hours to complete
a job. The wages is t 24 per hour. Material Cost of the job is t 150 and overheads are recovered at
25"/o o't the total direct wages. Standard time allowed forthe job 12 hours. You are required to
calculate the factory cost of the job under Rowan system and Halsey system of incentive plan.
(ICWA lnter, Dec. 15, adapted)
[Ans.: (R) 150 + 256 + 64 = ?a70; (H) 150 + 240 + 60 = ?450]
Q.46 (Straight - Differentia! Piece / Halsey / Rowan) : From the following particulars work out the
earnings for the week of a worker under :
(d) Rowan System
Number of working hours per week - 48
Wages per hour - { t5
Piece Rate per unit - t 6
Normal time per piece - 20 Min (to be used for computing Standard Hours)
Normal outputperweek - 120 pieces (to be used forcomputing Standard Quantity)
Differential piece rate - 80% of the piece rate when output is below standard and 12Oo/o above
standard. (FYBAE March 2OtZ, adpated)
[Ans.: (a) 150 x 6 (b) 150 x 7.20 (c) 720 + tS (d) 720 + 28.80]
Labour Cost 197
Q.47 : A worker is paid a basic rate of t 20 per hour. ln addition he gets < 2,000 per week of 4g hours
as dearness allowances..He completes a job with standard time of 60 hours during the week of 4g
hours. Ascertain his earnings under:
(a) Halsey Premium Plan
(b) Rowan Premium Plan
[Ans.: (a) 3,080 (b) 3,152]
Q.48 : From the following particulars calculate the earnings of A and B under (i) Halsey plan and
(ii) Rowan plan.
Time rate = { 'l per hour
Time taken = t hours by A, 8 hours by B
[Ans.: (i) A : 9.5; B : 9 (ii) A : 9.90; B : 9.60]
Q.49 (Halsey / Rowan) : Calculate the total earnings and effective rate of earnings per hour of three
operators under Rowan system and Halsey system from the following padiculars.
The standard time fixed for producing 1 dozen a(icles is 50 hours. The rate of wages is { 1/- per
hour.
The actual time taken by three is as follows :
A 45 hours
B 40 hours
C 30 hours
[Ans.: Earnings : Halsey A - 47.50; B - 45; C - 40; Bowan A - 49.50; B - 48; C - 42]
Q.50 (Halsey / Rowan) : The following particulars apply to a factory where P, Q, R and S work:
Normal rate per hour = { 5
Standard output per hour = 5
ln order to produce 200 units, time taken was as follows (in hours):
PQRS
10 20 30 40
Required: Calculate the earnings per worker under:
(i) Halsey Premium System
(ii) Rowan Premium System
[Ans.: e Q, R, S (i) 125, 150, 175, 200 (ii) 87.50, 150, 187.50, 200]
(B) Labour Cost Statements
Q.51 [Measurement of Employee Cost (with special items)] : Gross pay 7 12,20,000 (including
cost of idle time hours paid to employee ? 25,000); Accommodation provided to employee free of
cost [this accommodation is owned by employer, depreciation of accommodation < 1,00,000,
maintenance charges of the accommodation < 90,000, municipal tax paid for this accommodation
< 3,0001, Employer's Contribution to P.F. ? 1,00,000 (including a penalty of ( 2,000 for violation of
PF rules), Employee's Contribution to P.F. ( 75,000. Compute the Employee cost.
[Ans.: 1 1,95,000 + 1,93,0(N + 98,000 = ? I 4,86,000]
Q.52 (Gash lor Wages) : From the following particulars, find the amount of cash required for payment
of wages in a factory for a particular month :
?
1. Wages for normal hours worked 40,000
2. wages
Overtime 10,500
3. Leave wages 5,000
4. Contribution to Provident Fund :
Share
Employee's 4,000
Share
Employer's 3,500
5. House rent to be recovered from 10 employees @ t 200 per month
[Ans.: 40,000 + 10,500 + 5,000 - 4,000 - 2'000 = 49'500]
IgE CostAccounting (T'Y'B'Com' : SEM'I)
Q.53 (Employee cost) : From the details below, compute the employee cost-
?
Materials consumed 25,00,000
Salaries 18,00,000
ElBi?ffi,'iiliiifi::
Contribution to Gratuity Fund
Lease rent for accommodation provided to employees
r
::::: :::
2,00,000
4,s0,000
4,00,000
3,00,000
Festival Bonus 50,000
Unamortised amount of Employee cost related to a discontinued operation 90,000
Special Subsidy received from Government towards Employee salary... 2,75,OOO
Recoverable amount from Employee out of isites extended 35,000
[Ans.:18,OO,OOO+4,15,000+3,00,000+50,000+4,00,000-2,75,000={26,90,000]
Q.54 (Labour cost) : From the following data, prepare a statement showing the cost per day of 8
hours of engaging a particular type of labour.
(a) Monthly salary (basic plus D.A.) - < 400.
(b) Leave salary payable to workmen 5olo of salary.
(c) Employer's contribution to Provident Fund 8olo of salary (a + b).
(d) Employe/s contribution to State lnsurance 2o/" ol salary (a + b).
(e) Expenditure on amenities to labour < 16.60 per head per month.
(f) Number of working hours in month - 200.
400 + 20 + 33.60 + 8.40 + 16.60
[Ans.: . ,s =19.14]
Q.55 (Labour Cost) : ln an engineering works, the standard time for a job is 16 hours and the basic
wage is ( 'l per hour. A bonus scheme is instituted so that worker is to receive his normal rate for
hour actually worked and 50% for the hours saved.
Materials for the job cost ( 20 and overheads are charged on a basis of ( 2 per labour hour.
Calculate the wage and effective rate of earning per hour if the job is completed (i) in 12 hours and
(ii) in 1 hours. Also ascertain lactory cost of the job on the same basis.
[Ans.: (i)Wages = (12 x 1)+ (1/2 x4 xl) = 14, Factory cost= 14 + 20 +24= 58
(ii) Wages = (14 x 1) + (12 x 2 x 1) = 15, Factory cost = 20 + 15 + 28 = 631
Q.56 (Net Wages Payable and Labour Cost) : A worker's (a) Basic wage rate is t 300 per month.
(b) D.A.80% on basic wages. (c) House rent allowance2O"/" on (a) and (b).(d) Overtime wages
< 170. (e) Deduction towards P.F. 60/o on (a), (b) and (c). (f) ESI premium deduction 1 .5% on (a) (b)
and (c). (g) The employer is also contributing the same amount towards P.F. but is contributing only
2% towards ESl. (h) Cost of labour amenities is ( 35 per worker per month. Find out net wages
payable to the worker and the labour cost per month.
[Ans.: Net Wages 7 804.40; Labour Cost ? 904.84]
Q.57 (Efficiency lncentive Bonus; Earnings and Job Cost) : The standard labourtime required
for the production of a certain component has been fixed as 4 hours. An incentive scheme was
introduced recently to raise labour productivity. The relevant details of the scheme are as follows :
Efficiency lncentive as a percentage of basic wages
Below 100% No incentive
100% (i.e. 4 hrs./unit) 1O"/o
Above '100% 1% additional incentive for every 17" increase in Efficiency above
100%, fractions excluded.
Fourworkers A, B, C and D produced 16, 12, 14 and 10 units respectively in a particularweek of 48
hours. The basic wages of all the workers is t 15 per hour.
Calculate the efficiency, incentive bonus, total earnings and labour cost per unit in respect of each
of the above four workers. (ICWA-lnter, Dec. 2003, adapted)
[Ans.: Total Earnings : A - 1,029.60; B - 792.00; C - 907.20; D - 720]
LabourCost lgg
Q.58 (Labour Turnover) : The following information relates to work force in a factory during the
year 2017-18 :
Number of workers on April 1,2017 2,gSO
Number of workers on March 31 , 2Ol8 2,g50
Number of workers who quit on their own ZOO
Number of workers who availed golden handshake opportunity 100
Number of workers employed during 2017-18 including those employed due to expansion 800
Calculate annual labourturnover rate and equivalent monthly turnover rate underdifferent methods.
(FYBAF March 201A, adapted)
ttethod, xtoo = n.s4o/o,

tr;r#ffi -. ,
100
(b) Replacement Method t 4600
x 100 = 3.85o/o,
400
(c) Flux Method, 2,600 x 100 = 15.39701
Q.59 (Labour Turnover) : From the following data given by the personnel department, calculate
the labour turnover rate applying :
(a) Separation Method
(b) Replacement Method
(c) Flux Method
No. of workers on the payroll :
At the beginning of the month : 900
At the end of the month : 1,'100
During the month 10 workers left, 40 were discharged and 250 workers were recruited. Of these, 25
workers are recruited in the vacancies of those leaving, while the rest were engaged foran expansion
scheme. (FYBAE March 2018, adapted)
10+40
[Ans.: (a) Separation Method : x 1,000 = 5o/o
(900+1,100)+2
25
(b) Replacement Method , t@O x 100 = 2.5o/o,
(c) Flux Method,
W x loo = 7.5%ol
\J
S
S
Para 15 / Q. No. 8-X 8-Y 9-X 9-Y 10-x 10-Y 11-X 11-Y
TAYLOR
1. AO 140 165 30 40 30 50 28 35
2. PR 1.50 1.50 2.25 2.25 12.00 12.00 2.00 2.00
3. SQ 160 160 32 32 40 40 32 32
4. Efficiency [AO/SO] 87.50"/" 103.13% 93.75"/" 125.OO"/" 75.00"/o 125.00o/" 87.50% 109.38%
Efficiency below 100o/" [@ PR x 0.8] 168.00 54.00 288.00 44.80
Efficiency 100% + [@PR x 1.2] 297.OO 108.00 720.OO 84.00
Para 15 / Q. No. 12-A 12-B 12-C 13-A 13-B 13-C 14-A 14-B 14-C
MERRICK
1. AQ 390 4s0 600 90 100 130 120 140 160
o
.2. PR 0.50
0.09 0.09 0.09 0.10 0.10 0.10 0.50 0.50 u,
3. SO 480 480 480 120 120 120 150 150 150

\
G
4. Efficiency [AO/SO] 81.25% 93.75"/" 125.O0"/" 75.00"/" 83.33% 108.33% 80.00% 93.33% 106.67"h
Efficiency below 83% [@ PR] 35.10 9.00 60.00
0,a
Efticiency 83-100% [@PR x 1.1] 44.55 11.00 77.O0 !.i

Efficiency > l00o/o [@PR x 1.2] 64.80 15.60 96.00
F
U)
F]
t
s
F
Para 15 / Q. No. 15-X 15-Y 15-Z 16-A 1 6-8 16-C 16-D
s.
S
A. TAYLOR
1. AQ 96 111 126 66 166 200 220 o
S
4
2, PR 6.00 6.00 6.00 1.00 1.00 1.00 1.00
3. SO 100 100 100 200 200 200 200
4. Efficiency [AO/SO] 96.00% 111.00% 126.0O"/" 33.00% 83.00% 100.00% 110.00%
Efficiency below 100o/o [@ PR x 0.8] 460.80 52.80 132.80
Efficiency 100% + [@PR x 1.2] 799.20 907.20 240.00 264.00
B. MERRICK
1. AQ 96 11 126 66 166 200 220
2. PR 6.00 6.00 6.00 1.00 1.00 1.00 1.00
3. SO 100 100 100 200 200 200 200
4. Efficiency [AO/SO] 96.00% 111.00% 126.O0"/" 33.00% 83.00% 100.00% 110.00%
Efficiency below 83o/o [@ PR] 66.00 166.00
Efficiency 83-100% [@PR x 1.1] 633.60 220.00
Efficiency > 100o/o [@PR x 1.2] 799.20 907.20 264.00
t\)
S
t\)
Para 15 / Q. No. 17-A 17-B 17-C 18-A 18-B 18-C 18-D 19-1 19-2 19-3 19-4 S
t\)
GANTT
1. AH 8 B I 40 40 40 40 I I 8 8
2. TR 15.00 15.00 15.00 5.00 5.00 5.00 5.00 4.00 4.00 4.00 4.00
3. AQ 70 80 90 35 40 41 52 52 60 65 70
4. SO [HrO] 80 80 80 40 40 40 40 60 60 60 60
5. PR [HPR] 2.00 2.00 2.00 6.50 6.50 6.50 6.50 0.80 0.80 0.80 0.80
6. Efficiency [AO / SO] 87.50% 100.00% 112.500/" 87.50% 100.00% 102.50o/" 130.00% 86.67"/" 100.00% 108.33% 116.67"/o
Efticiency below 100%
[AH x TR] 120.00 200.00 32.00
Efficiency 100o/o
[AHxTRx1.2] 144.00 240.00 38.40
Efficiency > 100o/o [AQ x PR] 180.00 266.50 338.00 52.00 56.00
o
q
\
0O
:.i
tr
U1
t
25-A
F
ss.
Para 15 / Q. No. 20 21 22 23 24 25-B 25-C 25-X 25-S 26
't
S
Standard Hours (S) 48.00 60.00 16.00 72.00 48.00 12.00 2.00 12.00 50.00 50.00 50.00 E
Actual Hours (H) 40.00 48.00 12.00 60.00 40.00 10.00 8.00 6.00 40.00 44.OO 45.00 s'
Ut
Rate (R) 15.00 10.00 3.00 1.00 10.00 8.00 8.00 8.00 10.00 5.00 9.00
Wages [H x R] 600.00 480.00 36.00 60.00 400.00 80.00 64.00 48.00 400.00 220.00 405.00
Bonus
- Hasley (50"/o (S - H) x RI 60.00 60.00 6.00 6.00 40.00 8.00 16.00 24.OO 50.00 15.00
- Rowan t(S - HYS x (H x R)l
Para 15 / Q. No. 27 28 29 30 31 32 33 34 35 36
Standard Hours (S) 48.00 12.00 24.00 10.00 15.00 10.00 20.00 80.00 50.00 50.00
Actual Hours (H) 40.00 8.00 20.00 8.00 10.00 8.00 15.00 50.00 35.00 20.00
Rate (R) 3.00 2.00 1.00 2.50 30.00 2.00 1.50 2.00 10.00 3.00
Wages [H x R] 120.00 16.00 20.00 20.00 300.00 16.00 22.50 100.00 350.00 60.00
Bonus
- H) x R]
Halsey [50ol. (S 2.50
Rowanl(S-H)/Sx(HxR)l 100.00 3.20 5.63 37.50 105.00 36.00
t\)
S
\)
S
Para 15 / Q. No. 37-X 37-Y 37-Z 38-A 38-B 38-C 39 40 41 42 43 \
Standard Hours (S) '100.00 100.00 100.00 38.00 12.50 52.50 10.00 240.00 40.00 36.00 100.00
Actual Hours (H) 90.00 80.00 60.00 38.00 40.00 34.00 8.00 200.00 30.00 30.00 80.00
Rate (R) 2.00 2.O0 2.00 6.00 5.00 7.20 20.00 2.00 3.00 10.00 2.50
Wages [H x R] 180.00 160.00 120.00 228.00 200.00 244.80 't60.00 400.00 90.00 300.00 200.00
Bonus
- Hasley (50% (S - H) x Rl 20.00 40.00 30.00 25.00
- Rowan (S - HyS x (H x R)l 18.00 32.00 48.00 86.26 32.00 66.67 22.50 50.00 40.00
Para 15 / Q. No. 44 47 48-A 48-B 49-1 49-2 49-3 50-P s0-Q 50-R s0-s
Standard Hours (S) 75.00 60.00 10.00 10.00 50.00 50.00 50.00 40.00 40.00 40.00 40.00
Actua! Hours (H) 8.00 48.00 9.00 8.00 45.00 40.00 30.00 10.00 20.00 30.00 40.00
Rate (R) 1.80 20.00 1.00 1.00 1.00 1.00 1.00 5.00 5.00 5.00 5.00
Wages [H x R] 86.40 960.00 9.00 8.00 45.00 40.00 30.00 50.00 100.00 150.00 200.00
h
Bonus $i
- H) x R]
Halsey [s0% (S 24.30 120.00 0.50 't.00 2.50 5.00 10.00 75.00 50.00 25.00 0.00
Rowan(S-H)/Sx(HxR)l 31.10 '192.00 0.90 1.60 4.50 8.00 '12.00 37.50 50.00 37.50 0.00
Oa
:t
B
o
V)
tll
I
$
20s
OVERHEADS
OUTLINE
No Topic Page
1. Overheads - The Concept 205
2. Classification of Overheads 206
3. Absorption Costing 2A7
4. Allocation of Overheads 207
5. Apportionment and Absorption of Overheads 207
6. Production Overheads 208
7. Production Overheads Absorption Rates 226
8. Machine Hour Rate lr/ 228
9. Admin istrative Overheads 242
10. Selling & Distribution Overheads 245
11. Special ltems of Overheads 247
12. Under/ Over - Absorption of Overheads 249
1. OVERHEADS . THE CONCEPT
(1) Definition : CAS-3 "Overheads", issued by the ICWA, India states that : overheads comprise of
indirect materials, indirect employee costs and indirect expenses which are not directly identifiable
or allocable to a cost object in an economically feasible way. Overheads were also known as
Oncosts or Burden etc. in the past.
(2) Accounting : Overhead Accounting aims to absorb the overheads in the product units produced
by the firm. Overhead Accounting involves the following-
(a) Collection, Classification and Codification of Overheads.
(b) Allocation, Apportionment and Reapportionment of overheads.
(c) Absorption of Overheads.
(3) Collection : Collection of overheads means the collecting of indirect items of expenses from
books ofaccount and other records in logical groups having regard to their nature and purpose.
Overheads are collected on the basis ofpre-planned.groupings, called cost pools (groups or
heads). Source document and the nature of overheads are summed up below.
206 Cost Accounting (T.YB. Com. : SEM-V)
Source Document Overhead Costs Collected Nature

Stores lssue note, lndirect material Consumables, lubricants,
purchase voucher etc.
Payroll sheets, time lndirect labour Wages, salaries, contribution
sheets to statutory benefits, bonus,
incentives, idle time
Cash books lndirect material, lndirect Alltype of costs
labour & indirect expenses
Subsidiary records - lndirect material, lndirect For provisions of costs that
Journal labour & indirect expenses are not actually paid for
Other reports lndirect expenses Depreciation, scrap,
wastage, etc.
(4) Codification : Codification involves giving a code number to each item ofoverheads. Codification
helps in easy identification of different items of overheads. Codification can be done by allotting
numerical codes or alphabetical codes or a combination ofboth. The system should be simple to
understand and easyto implement.
ExHlBlT 1 : CODIFICATION OF OVERHEADS
Cost Centre Codes Department Name

11001 Turning Department
12001 Grinding Department
13001 Components Manufacturing
14001 Assembly
21001 Maintenance
22001 Quality Control
23001 Stores
31001 HR & Administration
32001 Accounts
All codes starting with I are production departments, all codes starting with 2 are factory related
services and all codes starting with 3 are general services. This coding helps collection ofcosts on
functional basis and also to identifr an item of expense directly to a department or cost centre.
Classification of Overheads means the process of grouping Overheads according to their common
characteristics. Overheads can be classified in different ways as follows :
(1) On Basis of Behaviour - (a) Fixed and (b) Variable.
(2) On Basis ofFunction -
(a) Production Overheads
(b) Selling and Distribution Overheads and
(c) Administration Overheads
We have already studied these in Chapter l.
Any items of overheads arising out of abnormal situation in business activity should not be treated as
overheads. They are charged to Costing Profit and Loss Account. Items not related to business
activities such as donation, loss/profit on sale ofassets etc. are also not to be treated as overheads.
Borrowing cost and other financial charges including foreign exchange fluctuations will not form
part ofoverheads.
Overheads 207
The obiective ofabsorption costing is to include ('absorb') in the total cost of a product an appropriate
share ofthe organisation's total overhead. An appropriate share is generallytaken to mean un urnount
which shows the amount oftime and effort that has gone into producing a unit. An organisation with
one production department that produces identical units will divide the total overheads among the
total units produced. Absorption costing is a method for sharing overheads between different products
on a fair basis. The mair, reasons for using absorption costing are for inventory valuations, pricing
decisions, and establishing the profitability of different products. The three stages of absorption
costing are :
a Allocation
o Apportionment
o Absorption
According to CAS-3, allocation of overheads is assigning a whole item of cost directly to a cost
centre. An item ofexpense which can be directly related.to a cost centre is to be allocated to the cost
centre. For example, depreciation of a particular machine should be allocated to a particular cost
centre if the machine is directly attached to the cost centre.
(1) Apportionment : According to CAS-3, apportionment ofoverhead is distribution of overheads

to more than one cost centre on some equitable basis.
(2) Need : The common expenses incurred for two or more departments have to be apportioned over
each department. This is known as the'departmentalisation of overheadsr. Even the allocated
expenses incurred for a particular department have to be apportioned over, say, all the machines
in that department. For example, the expenditure on general repair and maintenance pertaining to
a department can be allocated to that department but has to be apportioned to various machines
(Cost Centres) in the department.
(3) Allocation v. Apportionment : The allocation or apportionment of an expense depends on the
relationship between the expense and the cost centre. The terms are different in following respects -
. Allocation deals with the whole items of cost, which are identifiable with any one department.
For example, details of indirect wages of all departments are separately collected and hence
each department will be charged by the respective amount of wages individually. On the
other hand apportionment deals with the proportions of an item of cost; for example the cost
of a service department will be divided between those departments which have used those
services.
. Allocation is a direct process of charging expenses to different cost centres whereas
apportionment is an indirect process because there is a need to find out the portion of an
expense to be borne by the different departments benefited.
(4) Absorption : Absorption ofoverheads is charging ofoverheads from cost centres to products or
services by means of absorption rate for each cost centre which is calculated as follows :
Total overheads of the cost centre
overhead Absorption Rate = Total quantum of base (units)
The base (denominator) is selected on the basis oftype ofthe cost centre and its contribution to
the products or services, for example, machine hours, labour hours, quantityproduced etc.
Overhead absorbed: Overhead absorption rate x Units ofproduct or service.
208 Cost Accounting (TYB. Com, : SEM-V)
6. PRODUCTION OVERHEADS
(1) Principles : Overheads are to be apportioned to different cost centres based on following two
principles :
(a) Cause and Effect.. Cause is the process or operation or activity and effect is the incurrence of
cost. Apportionment ofoverheads based on this criterion ensures better rationality as it is
guided bythe relationship between cost object and cost.
(b) Benefits received : Overheads are to be apportioned to the various cost centres in proportion
to the benefits received by them.
(2) Departments: There are two tlpes of departments or cost centres - production cost centres and
service cost centres. CAS 13 defines Service Cost Centre as the cost centre which primarily
provides auxiliary services across the enterprise. A Service Cost Centre provides services to
Production, Operation or other Service Cost Centres but is itself not directly engaged in
manufacturing process or operation. Examples of service cost centres are engineering, workshop,
research & development, qualitycontrol, quality assurance, desigting, laboratory, welfare services,
safety, transport, Component, Tool stores, Pollution Control, Computer Cell, dispensary school,
crdche, township, Security etc. The costs ofservices are required to be apportioned to the relevant
cost centres. The most appropriate basis ofdistribution ofcoSt ofa service cost centre to the cost
centres consuming services is the usage ofthe service rendered.
(3) Advantages of Departmentalisation of Overheads : As seen above, allocation of overheads
over various departments is known as 'departmentalisation'. Following are the advantages of
departmentalisation :
(i) Better Estimation of Expenses .' Expenses which relate to the departments will be estimated
almost on an exact basis and, to that extent, the estimation of overheads will be accurate.
(ri) Ascertaining of Costfor each Department; If the expenses incurred in the departments
through which the product has passed are known, it helps in ascertaining the cost of that
product. It helps to charge the appropriate share ofindirect expenses to the cost ofthe product.
Aproduct does notpass through all the departments. The work required in each department is
not the same for all products. Hence a product should be charged for the expenses ofonly
those departments that have done work on that product. This can be done only ifoverheads
for each department are known separately.
(iii) Suitable Method of Costing : A suitable method of costing can be followed differently for
each department e.g., batch costing when a part is manufactured, but single or output costing
when the product is assembled.
(iv) Better Contrul ; If the overheads in relation to each department are separately available, it
helps to control expenses in that department. If information about expenses is available only
for factory as a whole, it will not be possible to know which department has been over spending.
(4) Primary and Secondary Distribution of Overheads : First step to be followed is to apportion
the production overheads to different departments ahd then second step is to re-apportion the
costs ofservice departments to production departments on an equitable basis. The apportionment
in the first step is termed as'primarydistribution'and the re-apportionment in the second step is
termed as'secondary distribution' of overheads.
(5) Basis of Primary Distribution of Production Overheads : Basis ofprimary apportionment of
items of production overheads to distribute them among the cost centres is to be selected following
the above two principles. Basis ofapportionment must be rational to distribute overheads. Once
the base is selected, the same is to be followed consistently and uniformly. Following Table
shows some examples of basis of primarydistribution of some items of production overheads -
Overheads 209
TABLE 1 : APPORTIONMENT/ PRIMARY DISTRIBUTION OF OVERHEAD
Overhead Basis of Apportionment

(i) Rent and other building expenses Floor area
(ii) Lighting and heating
(iii) Fire precaution service
(iv) Air-conditioning
2. (i) Perquisites Number of workers
(ii) Labour welfare expenses
(iii) Time keeping
(iv) Personneloffice
(v) Supervision
3. (i) Compensation to workers Direct wages
(ii) Holiday pay
(iii) ESI and PF contribution
(iv) Perquisites
4. (i) Depreciation of plant and machinery Capital values of assets
( ii) Repairs and maintenance of plant
and machinery
5. lnsurance of stock Stock Value
6. Lighting expenses No. of light points, or Area or Metered
units
7. Electric power Horse power of machines, or Number of
machine hour, or Value of machines or
Units consumed
8. (i) lvlaterial handing Weight of materials, or volume of materials,
(ii) Stores overhead or value of materials or unit of materials
9. General overhead Direct labour hour, or Direct wages, or
Machine hours
10. Other Technical estimates, surveys, analysis
(6) Secondary Distribution of Production Overheads : After the primary distribution as shown
above is over, the next step is to re-distribute the service department costs over the production
departments. This re-apportionment also needs to be done on some suitable basis, as there may
not be a direct linkage between services and production activity. This process is called secondary
dis tribution of ov erheads.
Some examples of the bases that can be used to distribute cost of different service departments :
TABLE 2 : RE-APPORTIONMENT/ SECONDARY DISTRIBUTION
Cost of the Service Departments Basis

1. Maintenance and Repair Shop Direct Labour Hours, Machine Hours,
2. Planning and Progress Direct Labour Wages,
3. Tool Room (x Hours Worked)
4. Canteen and Welfare
5. Hospitaland Dispensary No. of Direct Workers
6. PersonnelDepartment No. of Employees, etc.
7. Time-keeping
8. Computer Section No. of card punched, Computer hours,
Specific allocation to depafiments
9. Power House (Electric Lighting Cost) Floor area, Cubic content, No. of Electric
Points, Wattage
210 Cost Accounting (T.YB. Com, : SEM-V)
10. Power House (Electric Power Cost) Horse Power, Kwh

Horse Power x Machine Hours
Kwh x Machine Hours
11. Stores Department No. of Requisitions,
Weight or value of lvlaterials issued
1 2. Transport Department Crane hours, Truck hours, Truck mileage,
Truck tonnage, Truck ton-hours, Tonnage
handled, No. of packages of Standard size
13. Fire Protection Capital Values of Assets
14. lnspection / Quality lnspection Hours
1 5. Purchase Department No. of Purchase Orders, Value of Purchases
This is not an exhaustive list and could differ from companyto company. Manytimes percentage
estimation is also done for such distribution ifthe service cannot be measured on the basis ofany
ofthe above bases.
Direct Distribution Method for Re-apportionment : This method is based on the assumption
that one service department does not give service to other service department/s. Thus between
service departments there is no reciprocal service exchange. Hence under this method, service
costs are directly loaded onto the production departments. This is also known as non-reciprocal
method.
[Tutorial Note : Other methods (Step Distribution, Repeated Distribution, Simultaneous
Equation), used when a service department renders services to other service departments also,
are, in the opinion of the authors, beyond the scope of the syllabus which mentions only
apportionment of 'primary' overheads. ]
(7) Basis for Absorption: After apportionment, the next step is absorption. The following Table
shows some examples of the common bases for absorption of Production overheads from
production cost centres to products or services.
TABLE 3
Basis of Denominator Applicability

Unit of Production When single product is produced or various products
are similar in specification.
Direct labour cost When conversion process is labour intensive and
wage rates are substantially uniform
Direct labour hour When conversion process is labour intensive
Machine Hour When production mainly depends on performance of
the machine
(8) Absorption of Fixed and Variable Production Overheads : Production Overheads can be
analysed into variable overheads and fixed overheads. The variable production overheads shall
be absorbed to products or services based on actual capacily utilisation. The fixed production
overheads and other similar items of fixed costs such as quality control cost shall be absorbed in
the production cost on the basis of th e normal capacity or actual capacity utilization of the plant,
whichever is higher. In case ofless production than normal, under-absorption ofoverheads shall
be adjusted with Costing Profit & Loss Account. In case of higher production than normal, the
over-absorption of overheads shall also be adjusted with Costing Profit & Loss Account. Notmal
Capacity is the production achieved or achievable on an average over a period or season
under normal circumstances taking into account the loss of capacity resulting from planned
maintenance (CAS-2).
Overheads 2It
(9) Absorption of Production overheads : Production Overheads absorption rate for each cost
centre is to be determined with the help of quantum base as indicated above and the formula as
indicated below:
Fixedoverheads
Fixedoverheadsabsorotionrate
' = Normal or actual quantum of base, whichever is higher
variable overheads
variabre overheads absomtion rate
' -
Acutual quantum of base
The above discussion is summed up in the following chart.
EXHIBIT 2: ALLOCATION, APPORTIONMENT ANDABSORPTION OF PRODUCTION OH
PRODUCTION OVERHEADS
Aselgnment to Single Common lor Two or More

Department Departments
Allocation Apportlonment
Primary Distribution
Production Depafiments Service Departments
r5
6'E
t=
c-o
P1 P2 P3 S1 S2 S3
8E
ET
Absorptlon Rates Be-apportionment
Cost Units
(A) PrimaryDistribution AllDepartments

lllustration 1 : (Basis for Apportionment)
A departmental store has several departments. What bases would you recommend for apportioning
the following items of expense to its departments ?
1 Fire insurance of Building 2. Rent
3 Delivery Expenses 4. Pu rchase Department Expenses
5 Credit Department Expenses 6. General Administration Expenses
7 Advertisement 8. Sales Assistants Salaries
9 Personal Department exPenses 10. Sales Commission
Solution :
Items of expenses Basis For apportioning

1. Fire lnsurance of Building Floor Area
2. Rent Floor Area
3. Delivery Expenses Volume or Distance or Weight
4. Purchase department ExPenses No. of Purchase order/Value of Purchases
5. Credit Department ExPenses Credit Sales Value
6. General Administration Expenses Works cost
7. Advertisement Actual sales
212 Cost Accounting (TVB. Com. : SEM'V)
8. Sales Assistants Salaries Actual/Time devoted

9. Personal Department exPenses No. of Employees
10. Sales Commission Actual Sales
lllustration 2 :
A factory has 3 production departments (P1, P2,P3) and 2 service departments (S1 & S2)' The
following overheads and other information are extracted from the books for the month of January
2014.
Expense Amount { Expense Amount {

Rent 6,000 Supervision 9,000
Repair 3,600 Fire lnsurance for stock 3,000
Depreciation 2,700 ESI contribution 900
Lighting 600 Power 5,400
rs P1 P2 P3 s7 S2
Area sq. ft. 400 300 270 150 80
No. of workers 54 48 36 24 18
Wages 18,000 15,000 12,000 9,000 6,000
Value of plant 72,O00 54,000 48,000 6,000
Stock Value 45,000 27,O00 18,000
Horse rof lant 600 400 300 150 50
Allocate or apporlion the overheads among the various departments on suitable basis
Solution :
Primary Overheads Distribution Summary
Expense Basis Total P1 P2 P3 s, S2

7 ( f, ? 7
Wages Allocated 15,000 9,000 6,000
Rent Area sq. ft. 6,000 2,000 1,500 1,350 750 400
Repair Plant value 3,600 1,440 1,080 960 120
Depreciation Plant value 2,700 1,080 810 720 90
Lighting Area sq ft 600 200 150 135 75 40
Supervision No. of workers 9,000 2,700 2,400 1,800 1,200 900
Fire lnsurance Stock value 3,000 1,500 900 600
ESI contribution Wages 900 270 22s 180 135 90
Power Horse power 5,400 2,1 60 1,440 1,080 540 180
Total OH 46,200 11 ,350 8,505 6,825 1'1,910 7,610
Note : Direct Wages of Production Departments are not overheads. On the other hand, all costs of
Service Departments (including Direct Wages) are overheads.
Illustration 3 :
The following information is supplied from the costing records of a company :
Particulars ( Particulars r
Rent 2,000 lnsurance (Stock) 1,000
Maintenance 1,200 Employer's contribution to P.F. 300
Depreciation 900 Energy 1,800
L 200 Supervision 3,000
Pafiiculars
A B D
Floor space (sq. mtr.) 150 110 90 50
Number of workers 24 16 12 8
Total direct wages (() 8,000 6,000 4,000 2,000
Cost of machinery fi) 24,000 18,000 12,000 6,000
Stock of 15,000 9,000 6,000
Overheads 213
Prepare a statement showing apportionment of costs to various departments.
Solution 1 FyBAF, Oct.l4, adapted)
Basis of A C D
Apportionment r a r a I
Rent Floor Space 2,000 750 550 450 250
Maintenance Cost of Machinery 1,200 480 360 240 120
Depreciation Cost of Machinery 900 360 270 180 90
Lighting Floor Space 200 75 55 45
Insurance Stock of goods 1,000 500 300 200
Employer's
contribution
to P.F. Direct wages 300 120 90 60 30
Energy Cost of Machinery 1,800 720 540 360 180
Supervision No. of workers 3,000 1,200 800 600 400
Total oH '10,400 4,205 2,965 2,135 1,095
lllustration 4 :
Amit company has five departments; P, N, R and S are producing departments, and T is a service
department. The actual costs for a period are as follows :
Repairs 2,000
Rent 2,500
Depreciation 1,200
Supervision 4,000
lnsurance 1,500
Employer's Liability of Employees' lnsurance 1,200
Light 3,600
The following data are also available regarding the five departments
N R S T
Area (square feet) 140 120 110 90 40
Number of Workers 25 20 10 10 5
TotalWages (t) 10,000 8,000 5,000 5,000 2,000
Value of Plant ({) 20,000 18,000 16,000 10,000 6,000
Value of Stock 15,000 10,000 5,000 2,000
Apportion the costs to various departments on an equitable basis. (FYBAF, Mar. 17, Oct.08, adapted)
Solution :
Apportionment of Costs to Departments
N
Repairs Plant Value 2,000 572 514 457 286 171
(10:9:8:5:3)
Rent Area 2,500 700 600 550 450 200
(14:12:11:9:4)
Depreciation Plant Value 1,200 343 308 274 172 103
0:9:8:5:3)
('t
Supervision Workers 4,000 1,429 1 ,'143 571 571 286
(5:4:2:2:1)
lnsurance Stock Value 1,500 703 469 234 94
(15:10:5:2)
Wages Allocated 2,000 2,000
214 Cost Accounting (T.Y B. Com. : SEM-V)
Employer's
lnsurance
Wages 't,200 400 320 200 200 80
Liability
('10:8:5:5:2)
Light Area 3,600 1,008 464 792 648 688
(14:12:11 :9:4)
Total OH 18,000 5,1s5 3,818 3,078 2,421 3,528
lllustration 5 :
The Modern Company is divided into four departments : A, B and C are production departments and
D is a service department. The actual costs for a period are as follows :
Paiiculars { Particulars {
Rent 10,000 Fire insurance (Stock) 5,000
Repairs to plant 6,000 Power 9,000
Depreciation of plant 4,500 Light 1,000
S 1,500 Employer's lnsurance Liability 15,000
The following information are available in respect of the four departments
A B c D
Area (sq. ft.) 1,500 '1,100 900 500
Number of employees 20 15 10 15
Horsepower of machines 800 s00 200
Totalwages ({) 60,000 40,000 30,000 20,000
Value of plant ({) 2,40,000 1,80,000 1,20,000 60,000
Value of stock (t) 1,50,000 90,000 60,000
os. 40 30 20 10
Apportion the costs of lhe various departments by the most equitable method.
Solution : (T.Y.B.Com., Oct.20l4, adapted)
Item of Basis of Distribution Total P rod uctio n De partme nts Service

Expenditure Amount
A C
T r f
Rent Area occupied 10,000 3,750 2,750 2,250 1,250
(15: 11 :9 :5)
Repairs to plant Value of plant 6,000 2,400 1,800 1,200 600
(4:3:2:1)
Depreciation of Value of plant
plant (4:3:2:1) 4,500 1,800 1,350 900 450
Employer's Wages of employees 15,000 6,000 4,000 3,000 2,000
lnsurance Liabili (6:4:3:2)
Fire lnsurance Value of stock (5 : 3 : 2) 5,000 2,500 1,500 1,000
Power H.P. of machines (8 : 5 : 2) 9,000 4,800 3,000 1,200
Light No. of points (4 :3 : 2 : 1 ) 1,000 400 300 200 100
Supervision No. of employees 't,500 500 375 250 375
(4:3:2:3)
Wages Allocated 20,000 20,000
TotalOH 72,OO0 22,150 15,075 10,000 24,775
Note : Direct Wages of Production Departments are not overheads. On the other hand, al! costs of
Overheqds 2lS
lllustration 6 :
MM Ltd. has three production departments X,Y,Z and two service departments S and C. The
following details are extracted from the books of accounts in respect of indirect expenses incurred
during April 2014 :
Indirect Cost :
lndirect Wages 9,000
Lighting 1,200
Rent and Rates 12,000
Electric Power 6,000
Depreciation 24,000
Sundry Expenses 7,800
60,000
Following further details are collected for distribution of the above costs
x Y Z s c
Value of machinery (in t '000) 60 50 80 10
Horse power of machines 40 45 60 5
Light points (Nos.) 20 30 40 20 10
Floor space (sq. metres) 150 200 250 100 50
Direct <,0 30 20 40 4 6
Prepare Primary Overheads Distribution Summary. (CWA lnter, Dec.2005,06, adapted)
Solution :
Basis of Total Production Dept.
Apportionment x Y Z S
f ( ( { (
Direct Wages Allocated 10,000 4,000 6,000
lndirect Wages Direct wages 9,000 2,700 1,800 3,600 360 540
Lighting Light points 1,200 200 300 400 200 100
Rent and Rates Floor space 12,000 2,400 3,200 4,000 1,600 800
Electric Power H.P. of machines 6,000 1,600 1,800 2,400 200
Depreciation Value of mach. 24,OO0 7,200 6,000 9,600 1,200
Sundry Direct wages 7,800 2,340 1,560 3,120 312 468
Total OH 70,000 16,440 14,660 23,120 7,872 7,908
Note : Direct Wages of Production Deparlments are not overheads. On the other hand, all costs of
Service Depaftments (including Direct Wages) are overheads.
lllustration 7 :
The Modern Company has four departments. A, B and C are the production departments and D is a
servicing depaftment. The actual costs for a period are as follows :
lndirect Materials
Production Department A 950
B 1,200
c 200
Seruicing Department : D 1,500
lndirect Wages
Production Department : A 900
B 1,'100
C 300
Seruicing Department D 1,000
Rent 2,000
216 Cost Accounting (T.Y.B. Com. : SEM'V)
Repair 1,200
Depreciation 900
Light 200
Supervision 3,000
lnsurance 1,000
Employee's lnsurance (Employe/s Liability) 300
Power 1,800
The following data are also available in respect of four departments
A B C D
( a r (
Area (sq. ft.) 150 110 90 50
No. of workers (Nos.) 24 16 12 8
Direct wages ('000) 8,000 6,000 4,000 2,000
Value of plant ('000) 24,OOO 18,000 12,000 6,000
Value of stock ('000) 15,000 9,000 6,000
Apportion the above costs to the various departments on the most equitable method
Notes :
1. lnsurance has been taken for stock.

2. Power expenses are to be apportioned on the basis of value of plant.
Solution :
Departmental Distribution Summary

Basis of Total Production Dept. Seruice
Apportionment B C D
? (ooo) ? rc1a) 7 ('000) ?
Direct Wages Allocation 6,000 4,000 2,000
lndirect Materials Allocation 3,850 95; 1,200 200 1,500
lndirect Wages Allocation 3,300 900 1,100 300 '1,000
Rent Area 2,000 750 50 450 250
Repairs Plant value 1,200 480 360 240 120
Depreciation Plant value 900 360 270 180 90
Light Area 200 75 55 45 25
Supervision No. of workers 3,000 1,200 800 600 400
lnsurance Value of stock 1,000 500 300 200
Employees lnsurance Wages 300 120 90 60 30
Power Plant value 1,800 720 540 360 180
Total 23,550 6,055 5,265 6,635 5,595
lllustration 8 :
A company is having two production departments namely A and B and two service departments S-
'l and S-2. The expenses incurred during the month of March, 2o14
are as follows:
Expenses Amount ({)
Electricity 3,600
lnsurance on Assets g,0OO
Power 15,000
Rent and Taxes 28,000
Depreciation 18,OOO
Canteen Expenses S,4OO
Overheads 217
The following information is also available for the above departments
B s-,
Floor Space (sq. ft.) 6,000 4,000 2,000 2,000
No. of Workers 100 50 50 25
H.P. of Machine 120 60 30 15
Direct Wages ({) 10,000 10,000 5,000 3,000
Value of Assets ({ in thousands) 10 4 3 1
Direct Materials (() 15,000 10,000 5,000
No. of Light Points 30 15 10 5
Prepare a statement showing Primary Distribution of Overheads.
Solution | (T.Y.B.Com., Oct. 2014, adapted)
Statement Showing Primary Distribution of Overheads
Items Basis of Tatal Production Dept. Sewice

Apportionment A B s-1 --z
? r t
Direct Materials Allocation Given 5,000 5 000
Direct Wages Allocation Given 8,000 5 000 3,000
Electricity No. of light points 3,600 1,800 900 600 300
(6 :3 :2 : 1)
lnsurance on Assets Value of Assets 9,000 5,000 2,000 1,500 500
(10:4:3:1)
Power H.P. ol Machine 15,000 8,000 4,000 2,000 1,000
(8:4:2:1)
Rent and Taxes Floor Space 28,000 12,000 8,000 4,OOO 4,000
(3:2:1:1)
Depreciation Value of Assets 18,000 10,000 4,000 3,000 1,000
(10:4:3:1)
Canteen Expenses No. of Workers 5,400 2,400 1,200 1,200 600
(4 :2:2: 1)
Total 92,000 39,200 20,100 22,300 10,400
Note : Direct lvlaterials and Direct Wages of Production Departments are not overheads. On the
other hand, all costs of Service Departments (including Direct Materials and Direct Wages) are
overheads.
lllustration 9 :
Ambar Ltd. has five departments; P, N, R and S are production departments and T is a service
department. The actual cost for a period are as follows :
a
Bepairs 35,OOO
Rent 25,000
Depreciation 42,0OO
Supervision 40,000
lnsurance 16,000
Light 18,000
Employer's liability of employees' insurance 6,000
The following information is also available in respect of the five depaftments :
Service
Area (Sq. ft.) 1,400 1,200 1,100 900 400

No. of Workers 250 300 100 100 50
Total Wages 1,00,000 80,000 50,000 50,000 20,000
Value of Plant 2,00,000 I 1,80,000 | 1,60,000 | 1,00,000 60,000

No. of Light Points 50 I 401 351 30 25
Value of Stock 1,50,000 I 1,oo,ooo I so,ooo I 20,000
Prepare a statement showing Primary Distribution of Overheads'

Solution : F.YB-Com, Oct.2015, Nov.2017, adapted)
Basis of Tbtal Production Dept. Service Dept.

Allocation Amaunt
P N R 5 T
( f a r a (
Repairs Value of Plant 35,000 10,000 9,000 8,000 5,000 3,000

(10:9 :8 :5 :3)
Rent Area (Sq. ft.) 25,000 7,000 6,000 5,500 4,500 2,000
(14:12: 11 :9 :4)
Depreciation Value of Plant 42,000 't2,000 't0,800 9,600 6,000 3,600
(10:9:8:5:3)
Supervision No. of Workers 40,000 12,500 15,000 5,000 5,000 2,s00
(5:6:2:2:1)
lnsurance Value of Stock 16,000 7,500 5,000 2,500 1,000
(15: 10:5 :2 : -)
Light No. of points 18,000 5,000 4,000 3,500 3,000 2,500
(10 :8 :7 :6 :5)
Employees'lns Total Wages 6,000 2,000 1,600 1,000 1,000 400
('10 :8 :5 :5 :2)
Wages Allocation 70,000 50,000 20,000
Total 2,52,000 56,000 5'1,400 35,100 75,500 34,000
Seryice Departments (including Direct Wages) are overheads.
lllusration 10 :
A company is having three production departments namely A, B and C and two service departments
51 and 52. The expenses incurred during the month of March 2015 are as follows:
a
Supervision 30,000
Fire lnsurance 10,000
Power 18,000
Light 6,000
Hent 10,000
Repairs and Maintenance 17,000
Depreciation on Plant 8,500
The following information is also available for above departments
Dept. A Dept. B Dept. C Dept. 51 Dept. 32

Floor Space (sq. ft.) 1,500 1,000 900 500 100
No. of Workers 20 10 10 15 5
H.P. of Machine 8 5 2
Direct Wages ({) 3,000 2,000 2,000 1,000 1 ,000
Value of Plant (t) 12,000 9,000 6,000 3,000 4 ,oo:
Value of Stock (t) 15,000 9,000 6,000
ht Points 4 2 2 1 1
Prepare a statement showing Primary Distribution of Overheads.

Overheads 219
Solution : (T.Y.B.Com., Oct. 2015, Nov.2017, adapted)
Total Production Dept. Service

Amount A B C s-7 s-2
( f, ? { a (
Direct Wages Actual 2,000 1,000 1,000
Supervision No. of Workers 30,000 10,000 5,000 5,000 7,500 2,500
(4:2:2:3:1)
Fire lnsurance Value of Stock 10,000 5,OOO 3,000 2,000
(5:3:2:_:_)
Power H.P. of Machines 18,000 9,600 6,000 2,400
(8:5:2:_:_)
Light No. of light points 6,000 2,400 1,200 1,200 600 600
(4:2:2: 1 : 1)
Rent Floor Space
(sq.ft.) 10,000 3,750 2,500 2,250 1,250 250
(15: 10:9:5: 1)
Repairs and Value of Plant 17,000 6,000 4,500 3,000 1,500 2,000
Maintenance (12:9 :6 :3 :4)
Depreciation Value of Plant 8,500 3,000 2,250 1,500 750 1.000
on Plant (12:9 :6:3 :4)
Total 1,01 ,500 39,750 24,450 17,350 12,600 7,350
lllustration 11 :
KVD Ltd. has five departments : P, A, i and S are production departments and S-1 is a service
department. The actual costs are as follows :
{
Supervision 4,00,000
lnsurance on Stock 1,60,000
Lighting 1,80,000
Employer's liability of employees' insurance 60,000
Repairs 3,50,000
Rent 2,50,000
4,20,000
The following information is also available in respect of the five departments
P roduction De partme nts

P o R S s-,
Area (sq. ft.) 1,400 1,200 1,100 900 400
No. of Workers 250 300 100 100 50
TotalWages (() 1,00,000 80,000 50,000 50,000 20,000
Value of Plant (t) 2,00,000 1,80,000 1,60,000 1,00,000 60,000
No. of Light Points 50 40 35 30 25
Value of Stock 1,50,000 1,00,000 50,000 20,000
Prepare a statement showing Primary Distribution of Overheads
220 Cost Accounting (T.Y.B. Com. : SEM-I)
Solution (LY.B.Com., Nov. 16, Nov' 2017, adapted)

Basis of Totat Production Dept. Service

Atlocation
P o S s-7
f, r f, f,
Supervision No. of Workers 4,00,000 1,25,000 1,50,000 50,000 50,000 25,000
(5:6:2:2:1)
lnsurance Value of Stock 1,60,000 75,000 50,000 2s,000 10,000
(15: 10:5:2: -)
Light No. of Light
Points 1,80,000 50,000 40,000 35,000 30,000 25,000
(10:8:7:6:5)
Employer's Total Wages 60,000 20,000 16,000 10,000 10,000 4,000
Liability of (10:8 :5 :5 : 2)
Employees'lns.
Repairs Value of Plant 3,50,000 1,00,000 90,000 80,000 s0,000 30,000
(10:9 :8 :5 :3)
Rent Area Sq. ft 2,50,000 70,000 60,o00 55,000 45,000 20,000
(14:12:11 :9:4)
Depreciation Value of Plant 4,20,000 1,20,000 1,08,000 96,000 60,000 36,000
(10:9 :8 :5 : 3)
Wages Allocation 20,000 20,000
Total 18,40,000 5,60,000 5,14,000 3,51,000 2,55,000 1,60,000
Seruice Departments (including Direct Wages) are overheads.
(B) Service Department Distribution - Direct
lllustration 12 : (Dlrect Re-apportionment)
Calculate the overhead allocable to production departments A and B from the following :
TherearetwoservicedepartmentsXandY.XrendersservicetoAandBintheratioof3:2andY
renders service to A and B in the ratio of 9 : 1. Overhead as per primary overhead distribution is :
A- ( 49,800; B - t 29,600;X - ( 15,600;Y - < 10,800.

Solution :
Secondary Overhead Distribution Summary
Padiculars Total Production ovt vlvc

A B X Y
i a ( f, a
Overhead as per Primary Distribution 1,05,800 49,800 29,600 15,600 10,800
Service Department'X' O.H. 3 : 2 to A & B 9,360 6,240 (15,600)
Seruice Department iY' O.H. 9 : 1 to A& B 9,720 1,080 10,8
Total Overhead of Production De anments 1,05,800 68,880 36,920
lllustration 13 : (Only SD)
Small Company Ltd. has three production departments and fourservice departments. The expenses
for these departments as per Primary Distribution Summary were :
Pafticulars r r
Production Departments
A 15,000
B 13,000
C 12,000 40,000
Overheads 221
Service Departments :
Stores 2,000
Time-keeping 1,500
Canteen 500
Power 800 4,800
Total 44,800
The following information are also available in respect of the production departments
B
Horsepower of machines 300 300 200
Number of workers 20 15 15
Value of stores requisitioned (() 2,500 1,500 1,000
Apportion the costs of the various seruice departments to the production departments
Solution :
Secondary Overheads Distribution Summary
Ba s i s ol Ap po t'ti on me nt Total
B
a r {
Primary Distribution Summary 40,000 5 ,000 13,000 12,000
Stores Stores requisitioned (5 : 3 : 2) 2,000 1 ,000 600 400
Time-keeping Number of workers (4 : 3 : 3) 1,500 600 450 450
Canteen Number of workers (4 : 3 : 3) 500 200 150 150
Power H.P. of machines (3 : 3 : 2) 800 300 300 200
TotalOH 44,800 17,100 14,500 13,200
Note : Thus, afterthe secondary distribution, all overheads are now apportioned only to the production
depaftments. ln the next step, these OH can be divided among the units produced.
lllustration 14 : (Primary + Secondary)
M & Co. has 3 production departments and 2 service departments. The expenses are as given
below:
Total
Consumable Stores 15,400
Supervision 22,800
Rent & Rates 10,000
lnsurance 2,000
Depreciation 30,000
Power 9,000
Light & Heat 4,000
Total 93,200
The following information is available
Direct Materials 34o/o 39"/" 13"/" 47" 10%

Direct Wages 35o/" 22"/" 27o/o 1OY" tlo
Area (sq. ft.) 5,250 3,500 4,375 1,750 2,625
Asset Value 2,00,000 2,25,000 s0,000 12,500 12,500
H.P.xHoursxLF '10,800 7,200
(a) Prepare the Primary Distribution Statement using the most appropriate basis for apportionment.
(b) The Machine Shop, Assembly Shop and Finishing Departments have issued stores requisitions
intheratioofg:6:5,andrepairsrequestsintheratioot2:3:l.PreparetheSecondary
Distribution Statement on non-reciprocal (direct distribution) basis.
Solution :
(a) Primary Distribution (All Departments)
Basis of Total Producl

Apportionment fi Machine Assembly Finishing Stores Repairs
Shop Shop Dept.
Consumable Direct Materials 15,400 5,200 6,000 2,000 600 1,600
Supervision Direct Wages 22,800 7,900 5,1 00 6,100 2,200 1,500
Rent & Rates Area 10,000 3,000 2,000 2,500 1,000 1,500
lnsurance Asset Value 2,000 800 900 200 50 50
Depreciation Asset Value 30,000 12,000 13,500 3,000 750 750
Power H.PxHoursxLF 9,000 5,400 3,600 0
Light & Heat Area 4,000 1,200 800 1,000 400 600
Total OH 93,200 35,500 31,900 14,800 5,000 6,000
(b) Secondary Distribution (Service Departments)
Basis of Total P rod uctio n De partments Service

Apportionment (() Machine Assembly Finishing Sfores Repairs
Shop Shop Dept.
Primary dist. (earlier Table) 93,200 35,500 31,900 14,800 5,000 6,000
Stores (9:6:5) 2,250 1,500 1,250 (s,000)
Repairs (2 :3 : 1) 2,000 3,000 1,000 (6,000)
TotalOH 93,200 39, 750 36.400 17,050 Nit Nit
lllustration 15 :
ln an engineering factory, the following particulars have been extracted forthe yearen ded 31-12-2017
Pafticulars Service Dt
A B C x Y
Direct Wages ({) 30,000 45,000 60,000 1s,000 30,000
Direct Materials (() 15,000 30,000 30,000 22,500 22,500
Staff Number 1,500 2,250 2,250 750 750
Electricity (kwh) 6,000 4,500 3,000 1,500 1,500
Asset Value ({) 60,000 40,000 30,000 10,000 10,000
Light Prints 10 16 4 6 4
Area uare meters) 150 250 50 50 50
The expenses for the period were as follows :
Parliculars 7 Particulars a
Power 1 100 Depreciation 30,000
Lighting 200 Repairs 6,000
Stores Overhead 800 General Overheads 12,000
Welfare to Staff 3, 000 Rent and Taxes 550
Apportion the expenses of service department Y according to direct wages and those of service
depanment X in the ratio 5 : 3 : 2 to the production departments.
You are required to prepare on Overhead Distribution Summary.
(FYBAE Mar. 17, Oct. 12, 10, 05, Jan. 09, adaptecl)
Overheads 223
Solution :
Overhead Distribution Summary
Item Basis of Total Production Departments Departmeits

Apportionment A B C X Y
@ @ ({) ({) (?)
Direct Wages Actual 45,000 15,000 30,000
Direct Materials Actual 45,000 22,500 22,500
Power Electricity (kwh) 1,100 400 300 200 100 100
Lighting Light Points 200 50 80 20 30 20
Stores Overhead Dir. Materials 800 100 200 200 150 150
Welfare to Staff Staff Number 3,000 600 900 900 300 300
Depreciation Asset Value 30,000 't2,000 8,000 6,000 2,000 2,000
Repairs Asset Value 6,000 2,400 1,600 1,200 400 400
General Overheads Direct Wages 12,000 2,000 3,000 4,000 1,000 2,000
Rent and Taxes Area 550 150 250 50 50 50
Primary Distri. 1,43,650 17,700 14,330 12,570 41,530 57,520
(Total)
Department X 5:3:2 20,765 12,459 8,306 (41,530)
Depaftment Y 2:3'. 4 12,782 19,173 25,565 57
TotalOH 1,43,650 51,247 45,962 46,441
Note : Direct Materials and Direct Wages of Production Departments are not overheads. On the
other hand, a!l costs of Seruice Departments (including Direct Materials and Direct Wages) are
overheads.
lllustration 16 : (Comprehensive : Allocation, Apportionment and Absorption Rate)
Radha Enterprises has three production departments A, B and C and one service department S.
The following figures are available for one month of 25 working days of 8 hours each day. All
departments worked all these days with full attendance.
Expenses Total Serviee Production

Dept. A B C
f ( a f,
Power and Lighting 1,100 300 200 250 350
Supervisor's Salary 1,500
Rent 600
Canteen Expenses 500
Others 1,100 140 210 470 280
4,800
The following additional information is available
Service
Dept. A c
Supervisor's Salary 207o 20"/" 3O"/" 3O"/"
Floor Area in sq. feet :.: 800 700 900 600
Number of workers 20 30 30 20
Service rendered by service department
to roduction departments 20% 30% 50"/"
You are required to calculate the labour hour rate of each of the depanment A, B and C.
Solution :
Allocation, Apportionment and Absorption Rate
Expenses Easls Total Service Departments

Dept.
s A B C
a 7 r f a
A. Allocation
1. Power and Lighting Given 1,100 300 200 250 3s0
2. Others Given 1,100 140 210 470 280
B. Primary
1. Supervisor's Salary 7o as given 1,500 300 300 450 450
2. Rent Floor Area 600 160 140 180 120
3. Canteen Expenses No. of workers s00 100 150 150 100
Tota! 4,800 1,000 1,000 1,500 1,300
C. Secondary
Expenses of Seruice % as given
Dept. apportioned
to Production Dept. (-) 1,000 200 300 500
TotalOH 4,800 Nir 't,200 1,800 1,800
D. OH Absorption Rate
1. Labour hours 25xSxworkers = 6,000 = 6,000 = 4,000
Total overhead 1,200 1,800 1,800
2. Labour hour rate
Labour hours 6,000 6,000 4,000
= 0.20 = 0.30 0.45
lllustration 17 :
Superclass Co. Ltd. has three production departments; X, Y and Z, and two service departments; A
and B. The following estimated figures for a certain period have been made available :
Particulars
Lighting and Electricity 1,200
Power 3,000
Depreciation of Machinery 20,000
Other Expenses and Sundries 20,000
The following details are provided by the firm
Tatal
x Y 7 A B
Floor Space (sq. rnt.) 10,000 2,000 2,500 3,000 2,000 500
Lighting Point (Nos.) 120 20 30 40 20 10
Direct Wages (() 20,000 6,000 4,000 6,000 3,000 1,000
Horsepower of Machines 300 120 60 100 20
Cost of Machinery (() 1,00,000 24,000 32,000 40,000 2,000 2,000
Hours 4,670 3,020 3,050
The expenses of the service departments A and B are to be allocated as follows :
x Y Z A B
A 20"/" 30% 40Yo 10%
B 40% 20% 30% 10%
You are required to calculate the overhead absorption rate per hour in respect of the three production
departments. What will be the total cost of an article with material cost of { 80 and direct labour cost
of t 40 which passes through X, Y and Z for 2,3 and 4 hours respectively.
(FYBAE Oct. 06, ICWA-lnter, adapted)
Overheads 225
Solution :
SUPERCLASS COMPANY LTD.

(A) Departmental Primary Distribution Summary
Expenses Basis of Production 9e, Yt9\
Apportionment {o x(o z (?) A (()

Rent and Rates Floor Area 10,000 2,000 2,500 3,000 2,000 500
Lighting &
Electricity Light Points 1,200 200 300 400 200 100
lndirect Wages Direct Wages 3,000 900 600 900 450 150
Power Machines HP 3,000 1,200 600 1 000 200
Depreciation oI Cost of
Machinery Machine 20,000 4,800 6,400 8,000 400 400
Other Expenses
& Sundries Direct Wages 20,000 6,000 4,000 6,000 3,000 1,000
Direct Wages
of Service
Departments Allocation 4,000 3,000 1,000
Total 61,200 15,100 14,400 19,300 9,250 3,1 50
(B) Secondary Distribution Summary
Particulars x(?) I vro I zto A(fl B

Allocated and Apportioned 15,100 14,400 19,300 9,250 3,1 50
Reapportionment of A 2,056 3,083 4,111 (9,250)
Reapportionment of B 1,400 700 1,050
Total 18,556 18,183 24,461
Note : Parenthesis denotes deduction.
(C) Overhead Absorption Rate Per Hour
X Y Z
TotalOverhead ({) 18,556 18,1 83 24,461
Working Hours 4,670 3,020 3,050
Rate Per Hour (() 3.9734 6.0209 8.0200
(D) Statement of Cost Per Unit
fl r
Material Cost 80.00
Direct Labour Cost 40.00 120.00
Prime Cost
Overhead :
- X(2x3.9734) 7.95
- Y(3x6.0209) 18.06
- Z(4x8.0200) 32.08
Total Production Cost 178.09
226 Cost Accounting (T.YB. Com. : SEM-V)
7. OVERHEADS ABSORPTION
(1) Blanket (Single) Overhead Rate: A single overhead rate for the entire factory is known as
factory wide or Blanket Overhead Rate.
OverheadCost for the Factory
BlanketRate =
Total Quantum of the Base
Blanket Rate of overheads is suitable in small size concerns. Blanket Rates are easy to compute.
The use of a single blanket rate makes the apportionment ofoverhead costs unnecessary. However,
the use ofBlanket Rate ofoverheads gives wrong results, where several products pass through
manydepartments. With Blanket Rate of overhead, tight managerial control is not possible.
(2) Departmental / Multiple Rates: A concern may use multiple overhead rates, i.e. separate rates:
(i) for each producing department; (ii) for each service department; (iii) for each Cost Centre;
and (iv) for each product line. The multiple rates are worked out according to the formula :
Overhead cost allocated and apportioned to each product, dept. or base
Overhead Rate =
Total quantum of that product, dept. or base
The number of overhead rates a firm may compute would be fixed taking into consideration of
two opposing factors viz. clerical costs involved and the degree ofaccuracy level desired.
(3) Blanket Overhead Rate v. Departmental Overhead Rate :
Basis Blanket Overhead Rdte Departmental Overhead Rate

1. Meaning It is a single rate of overhead There are the separate rate of
absorption computed for the overhead absoption computed
entire factory. for each individual departmenV
cost centre.
2. Single vs. There is only a single rate. There are multiple rates.
Multiple
3. Factoryvs. It is computed for the entire These are computed for each
Departmental factory of the departments.
4. Suitability It is sutable where one product is These rates are suitable where
manufactured or where work two or more products are
performed is more or less manufactured or where work
uniform. performed in different
departments is diff erent.
(4) Production Unit Method: Under this method, the total overheads are divided by the total units
produced. In a manufacturing concern the total overheads areT 7,20,000 and total units processed
are 1,20,000. The overhead absorption rate is : 7,20,00011,20,000 i.e. { 6 per unit. If this rate is
based on the budgeted costs and number ofunits, and ifthe factory now gets an order for 2,500
units, the amount of production overheads to be charged to that order will be (2500 x 6) i.e.
< 15,000.
(5) Percentage of Direct Wages: Under this method, overhead for a job is recovered on the basis of
a predetermined percentage ofdirect wages. This method is used when the direct wages percentage
in total cost is high. Ifthe overhead to be absorbed is { 12,00,000 and the direct wages are
estimated at < 80,00,000, the predetermined rate will be calculated as (12,00,000/80,00,000 x
100) i.e. l5%. lf an order is received where direct wages are estimated at { 90,000 then the
production overheads to be absorbed will be l5% of { 90,000 i.e. { 13,500. This method is
useful ifthe direct labour hours can be standardised and the labour rates do not fluctuate too
much. However, this method ignores the contribution made by other resources like machinery.
The method also ignores the fact that there maybe different types or grades of workers and each
may cost differently. It also ignores the fact that most of the production overheads are time-
related.
Overhesds 227
(6) Percentage of Direct Material Cost: Here the absorption rate is expressed as a percentage of
direct material cost. This method is useful when the proportion of material cost is very high. It is
useful ifmaterial grades and rates do not fluctuate too much. Ifproduction overhead to be absorbed
is ( 20,000 and the material cost is expected to be { 40,000, then the absorption rate will be
(20,000 i 40,000 x 100) i.e.50o/o of direct material cost. Thus for a jobrequiring direct material
of { 2,000, the production overheads to be absorbed will be < 1,000 i.e. 50Yo of{ 2,000. However,
many overhead items bear no relationship with material cost, and also the time factor is ignored
bythis method.
(7) Percentage of.Prime Cost: This method combines the benefits ofdirect wages and direct material
cost methods. Prime cost means direct material plus direct wages plus direct expenses. This
method could be used when prime cost constitutes a major proportion ofthe cost and the rates of
material and labour are stable. It is necessary that the product made is standard product. Ifthe
prime cost is expected to be { 50,000 and the production overheads are estimated at t 2,500, then
the absorption rate will be 5% of prime cost. If a job has a prime cost of{ 800, then overhead
absorbed on that job will be ? 40.
However, the method of absorbing overhead costs on the basis of prime cost does not take into
consideration the time factor. Manufacturing expenses are incurred in providing the necessary
facilities and service to workers employed in the production process. They depend on the length
of time during which workers make use ofthe facilities.
(8) Direct Labour Hour: Under this method, the absorption rate is calculated by dividing the overhead
amount by the actual or predetermined direct labour hours. This is extremely useful when the
production is labour intensive. This method is superior to the earlier ones, because it considers
the time factor. Ifthe direcl labour hours for a month amount to 10,000 and the overheads to be
absorbed are t 5,000, then the absorption rate is ( 0.50 per hour (i.e. 5,000/10,000). Ifajob is
going to require a labour time of 250 hours, the production overheads to be toaded on the job will
be < 125 (i.e. 250 x 0.50). The data related to labour hours has to be properly collected or
estimated. The labour hour rate maybe calculated as a single rate or different for different groups
of workers.
(9) Machine Hour Rate: This is the most widelyused rate; and hence discussed separatelybelow.
(10) Factors influencing the selection of Overhead Recoyery Rate: Selection ofthe most equitable
method is ofparamount importance since a method that is not suitable will distort costs and thus
make them useless for control and decision making purpose. Selection of Overhead Recovery
Rates depends on the following factor's:-
o Nature of the product and process of manufacture.
a Nature ofoverhead expenses.
. Organisational set-up ofthe undertaking into departments and or cost centres.
o Individual requirements with regard to the circumstances prevailing.
. Policyofthe management.
. Accuracy vis-a-vis cost of using the method.
(11) Features: The main features of a satisfactory overhead rate are as follows:-
a Simple, easy to operate, practical and accurate;
. Economic in application;
o Fairly stable so that cost from period to period does not fluctuate;
. Related to time factor as far as possible;
o Departmental rates are preferable to blanket rates;
. Area of activity selected for computation of the rate should be homogeneous cost unit;
o Base for the rate should lay stress on the main production element of the concern.
228 Cost Accounting (TYB. Com. : SEM-V)
(1) Meaning: Machine Hour Rate (MIn) is the cost of running a machine for one hour. Under this
method machines hours are used as the basis for production overhead absgrption rate. The rate is
calculated as follows:
Production Overheads
MHR =
Machine Hours
(2) Suitabitity: This method is suitablewhere major portion ofproduction is performedbymachinery.
(3) Advantages:
(i) It takes into account time factor.
(ii) It is suitable when major portion of production is performed by machines.
(iii) It facilitates the ascertainment ofaccurate and reliable costs.
(iv) The under-absorption of overheads would indicate the idle capacity of machines.
(4) Disadvantages:
(i) It is not suitable where major part of production is done by manual labour.
(ii) It requires the detailed records of machines for each job or operation.
(iii) It is difficult to understand and calculate.
(iv) It is quite diffrcult to estimate machine hours in advance.
(5) Example: Factoryoverheads{ 12,000, MachineHours 1,000.AJobNo. l0l requires l00Machine
hours.
MHR =
Production Overheads 12,000 _ = t.
\ lz
Machine Hours 1,000
-
OH absorbed by Job No. l0l.: 100 x 12 =7 1,200

(6) Computation: Computation of Machine Hour Rate involves the following steps-
(i) Treat each machine as a separate cost centre.
(ii) Apportion Standing (Fixed) Charges as shown below :
No. Standing Charges Basis of Apportionment

1 Rent & Rates Floor Area occupied
2 Heating & lighting No. of light points or Floor area
occupied
3 Superuision Tlme devoted by the supervisor
4 lnsurance lnsured value of each machine
5 Lubricating oil & consumable stores Machine hours
6 Cleaning Materials No. of Machines
7 Miscellaneous expenses Equitable basis based on facts
Note: Standing / Fixed Charges varywith time; not with use of machine.
(iii) Calculate Machine Hours of each machine for a particular period (year, quarter, month
or week) as follows:
A. No. of Working Days (365 - Holidays)
B. No. of Working Hours available per day
C. Total No. of Working Hours (Ax B)
D. Less.' Hours required for maintenance
E. Productive Machine Hours (if set up time is given / assumed to be productive)
F. Less I Unproductive Set up time (ifgiven / assumed to be unproductive)
G. Machine Hours (E - F)
Overheads 229
Total Standing Charges

(iv) Standing charges per Machine Hour = Machine Hours
(v) Calculate Running charges for each machinel some charges may be apportioned as shown
below:
No Running Charges Basis of Apportionment
1 Depreciation Value / Useful life (in hours)
2 Repairs and maintenance Machine hours
3 Power Meter reading / HP / Machine hours
4 Miscellaneous expenses Equitable basis based on facts
Note: Running charges varywith use of machine; more use means more running charges.
(vi) Calculate hourly rate for Running expenses per machine as follows:
Total Running charges
Running Chargesper Machine Hour = Machine Hours
(vii) Calculate Machine Hour Rate as follows:
Fixed / Standing Charges per hour + Running charges per hour = Machine Hour Rate.
[Tutorial Note : The final machine hour rate is used in Absorption Costing. The distinction between
Standing (Fixed) Charges and Running (Variable) Charges is important in Marginal Costing (which
you will be studying in the next semester.l
(7) Format: The following format can be used for computing the Machine Hour Rate :
a
A. Standing Charges:
(a) Rent & Rates xx
(b) Heating & lighting xx
(c) Supervision xx
(d) lnsurance xx
(e) Lubricating oil& Consumable stores xx
(f) Sundry supplies / Cleaning materials xx
(g) Department & General overheads xx
Total Fixed/Standing Charges xx
Fixed/Standing Charges per hour xx
B. Running Charges:
(a) Depreciation xx
(b) Repair & Maintenance xx
(c) Power xx
(d) Machine operator* xx
(e) Other running expenses xA
C. Machine Hour Rate xx
* Note : When wages paid to the machine operator are included, it is known as 'Comprehensive'
Machine Hour Rate.
(8) Illustrations :
tAI Basic Machine Hour Rate

lllustration 18 : (Machine Hours)
Calculate Effective Machine Hours for the purpose of computing Machine Hour Rate in each of the
following alternative cases :
Case (a) Budgeted working hours 2,400, Maintenance hours 5%
Case (b) Budgeted working hours 8 hours per day for 300 days, Maintenance hours 5%
Case (c) There are 13 holidays on account forfestivals and national holidays not falling on Sundays.
The factor works 8 hours a day. Maintenance hours 57"
230 Cost Accounling (T, Y B. Com, : SEM-V)
Case (d) There are 12 holidays on account of festivals and national holidays not falling on Sundays
and Saturdays. The factory works 8 hours a day and 4 hours on Saturday. Maintenance
hours 5%.
Case (e) There are 12 holidays on account of festivals and national holidays not falling on Sundays
and Saturdays. The factory works 8 hours a day and 4 hours on Saturday. Maintenance
hours 5"/o, Machine room normally works on 90% capacity throughout the year.
Case (f) week
Total working hours available per 44 hours
above
Maintenance hours included in 4 hours
Setting up time (productive) 5o/"
Machine hour rate is worked out at the beginning of a year on the basis of 13 week period
which is equal to 3 calendar months.
week
Case (g) Total working hours available per 44 hours
above
Maintenance hours included in 4 hours
Setting up time (unproductive) 5"/.
Machine hour rate is worked out at the beginning of a year on the basis of 13 week period
which is equal to 3 calendar months.
Solution :
Case (a) Effective Machine Hours = Budgeted working hours - Maintenance hours
= 2,4OO hours - 5"/o ol 2,400 hours = 2,280 hours
Case (b) Etfective Machine hours = Budgeted working hours - Maintenance hours
= (300 days x 8 hours) -5"/o o12400 hours
= 2,280 hours
Case (c) A. No. of working days in a year [365 - Holidays = 365 - (13 + 52)] 300 days
B. No. of working hours per day 8 hours
C. Total No. of working hours (A x B) [300 days x 8 hours] 2,400
D. Less : Maintenance hours @ 5% 12O
E. Effective Machine Hours 2.280
Case (d) A. No. of fullworking days in a year= 365 - Holidays = 365 - (12+ 52 + 52) 249 days
C. Total No. of working hours on fullworking days (249 x 8) 1,992
D. No. of woking hours on Saturdays (52 x 4) 208
E. Total No. of working hours 2,200
F. Less : Maintenance hours @ 5% 110
G. Effective Machine hours ,OrO
Case (e) A. No. of working days in ayeat =365- Holidays =365 - (12+52+52\ 249days
C. Total No. of working hours on full working days (249 x 8) 1,992
D. No. of working hours on Saturdays (52 x $ 208
E. Total No. of working hours 2,200
F. Less: Maintenance hours 110
G. Total No. of hours per machine 2,090
H. Less : ldle capacity @ 10% 209
l. Effective Machine hours 1.881
Case (f) A. No. of working weeks 13 weeks
B. No. of working hours per week 44 hours
C. Total No. of working hours for 13 week period (13 x 44) 572
D. Less : Maintenance hours (13 x 4) 52
E. Effective Machine Hours 520
Case (g) A. No. of working weeks 13 weeks
B. No. of working hours per week 44 hours
C. Total No. of working hours for 13 week period (13 x 44) 572
D. Less : Maintenance hours (1 3 x 4) 52
E. Total Machine hours 520
F. Less : Unproductive set up time 26
G. Effective Machine hours 494
Overheads 231
lllustration 19 : (Operator Cost)
Calculate the Cost of operator per hour per machine in each of the following alternative cases :
Case (a) Total wages of an operator who attends to two machines ? 60,000 per year effective
machine hours during the year 1,000 hours
Case (b) Two operators control the operation of the machine together with five other similar
machines. Their combined weekly wages amount to { 'l 2,000.
Effective Machine hours on the basis of 50 weeks - 1,000 hours
Case (c) Hours run on production 1,800
Hours for setting and adjusting 200
An operator attends to one machine while it is under set up and three machines while
these are under operation.
Wages of an operator is t 480 per day of 8 hours
Solution :
< 60,000 /2
Case (a) Wages of operator per hour = --T,000 = { 30 per hour
(<tz'o-o9l!so)/0
case (b) wages of operator per hour- = t 100 per hour
(200 x t60) + (1,800 x {20)
Case (c) Wages of operator per hour = 13OO =7 26.67
!!lustration 20 :
The following particulars relate to a new machine : a

Purchase Price 4,00,000
lnstallation Expenses 1,00,000
Rent per quarter 3,750
General Lighting for the total area 1,000 per month
Foreman's Salary 30,000 per annum
lnsurance Premium for the machine 3,000 per annum
Departmental Overheads for the machine 5,000 per annum
Consumable Stores 4,000 per annum
Power 2 units
- per hour at 50 paise per unit.
The estimated life of the machine is 10 years and scrap value at the end of 1Oth year is < 1 ,00,000.
The machine is expected to run 20,000 hours in its life time. The machine occupies 25% of total
area. The loreman devotes 1/6th of his time for the machine.
Solution :
Computation of Machine Hour Rate
Working Per Anntn C)^. LJa,,.
( r
A. Standing Charges
Rent (3,750 x 4) x 25o/o arca 3,750
Foreman's Salary (30,000 / 6) 5,000
Departmental Overheads 5,000
Consumable Stores 4,000
Lighting (1 ,000 x 12) x 25o/" area 3,000
lnsurance 3,000
TotalStanding Charges 23,750
Standing Charges per Hour (23,75O + 2,000) 11 .875
B. Running Charges
Depreciation
4,00,000 + 1,00,000 - 1,00,000
20.000
20,000 hours
Power (2 units @ 50 paise per unit) 1.000 21.000
C. Machine Hour Rate 32.875
232 CostAccounting (TY.B.Com. : SEM-V)
lllustration 21 :
From the following information, compute machine hour rate :
Cost of machine < 44,000

Scrap value < 4,000
Rent for the workshop < 25,000 per annum
General lighting for the workshop ( 160 per month
Power consumption 20 units per hour @< 20 per every 100 units
Administrative expenses allocated to the machine { 4,000 per annum
Repairs and maintenance 757" of depreciation
Workshop supervisor's salary < 3,000 per month
Estimated working time per year 50 weeks of 40 hours each
Setting up time which is regarded as productive time 200 hours per year
Effective life of the machine 'l
0 years
The machine occupies 1l4lh area of the workshop. The supervisor is expected to devote 1/3rd of his
time in supervising the machine.
Solution :
Warking Per Annun Per Hour

a (
A. Standing Charges
Rent for workshop (25,000 + 4) 6,250
/too
t-t x tz \
General lighting for the workshop l.+ )
480
Administrative expenses
allocated to the machine 4,000
(s,ooo x tz
Workshop supervisor's salary (.3 ) 12,000
Total standing charges per an 22,700

Standing Charges per Hour (22,700 + 2,000) 11.37
B. Running Charges
44,000 - 4,000
Depreciation 2.00
10 x 2,000
Repairs and Maintenance (75% ol Depreciation) 1.50
(zoxzox1,8oo)
Power t-l 3.60 7.10
[ 100 x 2,000 )
Note : Machine Hours : 50 x 40 = 2,000. lt is presumed that no electric current is used by the
machine during setting-up time.
lllustration 22 :
From the following information, calculate the machine hour rate for the machine : I
Purchase price of the Machine 4,50,000
lnstallation Charges 5O,0OO
Rent per quarter 30,000
General lighting for the total area (per month) 2,000
lnsurance premium forthe machine (per annum) 6,000
Foreman's Salary (per annum) 60,000
Estimated repairs for the machine (per annum) 18,000
Power-2 units per hour @ t 500 per 1,000 units.
Estimated life of the machine is 10 years and the estimated value at the end of the 1Oth year is { 1
lakh.
The machine is expected to run 20,000 hours in its life time. The machine occupies 1/4th ot the total
area. The foreman devotes 1/6th of his time for the machine.
Overheads 233
Solution : (T.Y.B.Com., Oct.2015, FYBAE March 2018, adapted)
Working Per Annun

a r
A. Standing Charges
Rent <30,000x4x1/4 30,000
General Lighting < 2,000 x 12 x 114 6,000
lnsurance Premium 6,000
Foreman's Salary ? 60,000 x'l16 10,000
Total 52,000
< 52,000
Standing Charges per Hour 26.00
2,000 hours
B. Running Charges
Estimated Repairs { 18,000/2,000 hours 9.00
{500 x 2units
Power ( 1^000 rnt. 1.00
Depreciation
4,50,000 + 50,000 - 1,00,000
10 years
< 40,000/2,000 hours. 20.00
20,000 hours in life time

*Working Hours
= @ = 2,000 hours
tBI Computing Machine Hours

lllustration 23 :
Compute the machine hour rate from the following data : {

Cost of machine 1,00,000
lnstallation charges 10,000
Estimated scrap value after the expiry of its life (15 years) 5,000
Rent and rates for the shop per month 200
General lighting for the shop per month 300
lnsurance premium forthe machine per annum 960
Repairs and maintenance expenses per annum 1,000
Power consumption - 10 units per hour
Rate of power per 100 units 20
Estimated working hours per annum - 2,200
(This includes non-productive setting up time of 200 hrs)
Shop supervisor's salary per month 600
The machine occupies '1l4th of the total area of the shop. The supervisor is expected to devote
1/Sth of his time for supervising the machine.
Solution :
Per Hour
A. Standing Charges
1
Rent and Rates 2OOx12x

i 600
General Lighting 300x12x 1 900

4
234 Cost Acco unting (T.Y. B. Com, : SEM-V)
lnsurance Premium 960
Shop Supervisors Salary (uoo *,, - +) 1,440

B. Running Charges
(4r,0') 2.00
Power (100 )
/t,ooo)
t-t
Repairs and Maintenance 0.50
Iz,ooo.J
Depreciation
1,00,000 + 10,000 - 5,000
3.50 6.00
15 x 2,000 )
Machine Hours = 2,2OO - 200 = 2,000
lllustration 24 : (Set-up time - Productive)
From the following particulars, calculate machine hour rate :
(i) Cost of Machine < 1,00,000

Estimated Lile 10 years
Scrap Value < 10,000
(ii) Estimated working time - 50 weeks of 44 hours each. lt includes the following :
(a) Time taken up in maintenance 200 hrs
(b) Setting up time 100 hrs
However, setting up time is regarded as productive time.
(iii) Power used during production is 16 units per hour @ 9 paise per unit. No current is taken during
maintenance or setting up time.
(iv) The machine requires a chemical solution which is replaced at the end of each week at a cost of
( 20 each time.
(v) Cost of maintenance - { 1,200 per annum.
(vi)A supervisor oversees the operation of this machine together with five other identical machines.
His weekly salary amounts to { 120.
(vii) General work overheads allocated to this machine for the year amount to t 2,000.
Solution : (Delhi 2006, 2007, adapted)
Working Per Annun
{
A. Standing Charges
General Works Overheads
allocated 2,000
Supervisor's Salary ( 120x50x16 1,000

B. Running Charges
(<r,oo,ooo - 1o,ooo)
Depreciation
t 10 , ,oôoo l 4.50
Maintenance (1,200 + 2,000) 0.60
/zoxso\
,-t
Chemicals 0.50
I z,ooo .i
'1,900 x 16 x 9
Power 1.37 6.97
2,000 x't00
0verheads 235
Working Note :
Calculation of Effective Machine Hours
Annual working hours (50 x 44) = 2,200 hours
Less : Time taken up in maintenance = 200 hours
2.000 hours
Note : As setting-up time is regarded as productive time, it will not be deducted in calculating
effective hours.
lllustration 25 :
From the following data of textile factory machine room, compute an hourly machine rate, assuming
that the machine room will work on 90% capacity throughout the year and that a breakdown ol 10"/o
is reasonable. There are three days holiday at Deepawali, 2 days at Holi and 2 days at Christmas
exclusive of Sundays. The factory works 8 hours a day and 4 hours on Saturday. Numberof machines
(each of the same type) - 40.
Expenses per annum : {
Power 3,12,000
Light 64,000
Salaries to loreman 1,20,000
Lubricating oil 6,600
Repairs to machine 1,44,600
Depreciation 78,560 (Delhi 2006,2007, adapted)
Solution :
(
A. Standing Charges
Light 64,000
Salaries to foreman 1,20,000
Lubrication oil (Assumed fixed) 6,600
Total Standing Charges 1,90,600 2.364
B. Running Charges
Power (3,12,000 / 80,640) 3.869
Repair (1,44,600 / 80,640) 1.793
Depreciation (78,560 / 80,640) 0.974 7.636
Working Note :
Calculation of Effective Machine Hours Hrs.

Total Hours (365 x 8) 2,920
Less : Saturday only 4 hours works (52 x 4) 208
Sundays Holiday (52 x 5) 416
Holiday on Deepawali, Holi and Christmas (3 + 2 + 2)x 8 56 680
Machine Hours worked 2,240
Less : 10% Break Down (Normal) 224
Effective Machine Hour per Machine 2.016
rotar Machine Hours machine x Number or machines
: 2E[:tf.ir:"X,ffiH:.per
ICI Many Machines
lllusilation 26 : (5ldentical Machines)
ln a machine department of a factory there are five identical machines. From the particulars given
below; prepare the machine hour rate for one of the machines.
236 CostAccounting(T'YB'Com': SEM-V)
Space of the department 10,000 sq'mts'

Space occupied by the machine 2,000 sq'mts'
Cost of the machine (t) 20'300
Scrap value of the machine (t) 300
Estimated life of the machine 13 years
Depreciation charged at 7 .5 o/" p.a.
Normal running of the machins 2,000 hours
Power consumed by the machine as shown by the meter 3,600 p.a.
Estimated repairs and maintenance throughout the
working life of the machine ({) 5,200
Other expenses of the department are ;
(
Lighting (to be apportioned according to workers employed) 400
Supervision 1,250
Other charges 5,000
It is ascertained that the degree of superuision required by the machine is 2/5th and 3/5th being
devoted to other machines.
There are 16 workers in the department of whom 4 attended to the machine and the remaining to
the other machines.
Solution :
Parliculars Working Per Hour

a f,
A. Standing Charges
Rent & Rates 9,000x(2,000/10,000) 1,800
Lighting a00 x (a /16) 100
Supervision 1,250 x (215) 500
Other Charges 5,000 x (1/5) 1,000
Total per machine 3,400
Standing charges per hour 3,400/ 2,000 1.70
B. Running Charges
Depreciation (20,000 x7.5"/") x 2,000 o.75
Power (3,600 / 2,000) 1.80
Repairs & Maintenance (5,200/13)x2,000 0.20 2.75
C. Machine Hour Rate 4-45
lllustration 27 :
A machine costs { 12,00,000 and is deemed to have a scrap value of 1O"/" al the end of its effective
life (12 years). Ordinarily the machine is expected to run for 1 ,800 hours per year but it is estimated
that 200 hours of the time will be lost for normal repairs and maintenance. Other details in respect
of machine shop are as und'er :
a
Annual wages, bonus and provident fund contribution of each of two operators
(each operator is in-charge of three machines 1,50,000
Rent of shop per year 1,20,000
General lighting of the shop per month 6,000
lnsurance premium for one machine per annum 28,000
Shop Superuisofs monthly remuneration . 15,000
Cost of repairs and maintenance per machine per quarter 6,000
Other factory overheads attributable to the shop per annum 96,000
Power con of machine hour 15 units @ { 6 unit
There are six identical machines in the shop. The supervisor is expected to devote one{ifth of time
for supervising the machine.
Compute the machine hour rate from the above details. (tY.B.Com., Nov. 2016, adapted)
Overheads
237
Solution :
Computation of Machirie Hour Rate
t' Working Per Annun 'Per'Hour

a
A. Charges
Rent < 1,20,000/6 20,000
General Lighting l<o,oooxrzto 12,000
lnsurance Premium 28,000
Supervisor's Remuneration < 15,000 x 12 x 115 36,000
Other Factory Overheads < 96,000/6 16,000
Total 1,12,000
? 1,12,000
Standing Charges per Hour 70.00
1,600 hours
B. Running Charges
Depreciation < 90,000/1,600 hours 56.25
Annual Wages, Bonus and I
t 1,50,000/3
P.F. Contribution of Operators 31.25
1,600
Repairs and Maintenance < 6,000 x 4/'1,600 hours 15.00
Power {6x15units 90.00
uepreclatlon =
Cost of Machine - Scrap Value (10% of Cost)
Est-*ted Effe"tir. Lif"
<12,00,000 - {1,20,000
12 Years
= { 90,000 p.a.
lllustration 28 : (3 Different Machines)
Particulars of three machines used in a factory are as under (six week period, 160 hours working)
fl
Cost of Machine 10,000 15,000 20,000
No. of Workers 2 5 10
Direct Wages < 300 < 800 < 1,200
Power <45 {80 < 150
Light Points 2 4 6
Area 100 sq. ft. 250 sq. ft. ft.
The expenses incurred during the period were as follows

a
Power 275
Lighting 48
Rent and Rates 450
Depreciation 1,350
Repairs 1,800
lndirect Wages 460
Canteen Expenses 51
Sundries 300
Total 4.734
Compute the Basic machine hour rate for each machine.
238 CostAccounting (TYB.Com. : SEM'V)
Solution
Total Machine
x Y
r { r I a
Power Actuals 275 45 80 150
Lighting Lighting Points 41 8 16 24
Rent and Rates Area 450 60 150 240
Depreciation Cost oI Machine 1,350 300 450 600
Repairs Cost of Machine 1,800 400 600 800
lndirect Wages Direct Wages 460 60 160 240
Canteen Expenses No. of workers 51 6 15 30
Sundries Area 300 40 100 160
Total (a) 4,734 919 1,571 2,244
Working Hours (b) 160 160 160
Machine Hour Rate (atb) 5.744 9.819 14.O25
R/O 5.74 9.82 14.03
Note: Students should classify between Standing Charges and Running Charges as an exercise.
Direct wages (of machine operator) are included only when computing comprehensive MHR; not for
basrb MHR.
IDI Comprehensive Machine Hour Rate

lllustration 29 :
Calculate the comprehensive machine hour rate from the following details:
Bought machinery < 45,000
lnstallation charges < 5,000
Life of machine 5 years
Working hours per year 2,500
Repair charges 75"/" of depreciation
Electric power consumed: 10 units per hour @ 15 paise per unit
Lubricant oil { 4 per day of 8 hrs
Consumable stores @ { 10 per day of 8 hrs
Wages of machine operator @ { 8 per day of 8 hrs
Solution :

Working Rate Per hour
fl|7
A. Standing Charges
Lubricating oil 4
Consumable stores 10
14
Standing Charges per hour (14 I 8l 't.75
B. Running Charges
Depreciation (4s,000 + 5,000) / (5 x 2,500) 4.00
Repairs (7 5o/" ot depreciation ) 3.00
Power (1 0 units @ 0.15 per unit) 1.50
Wages of machine operator ((8/8 hrs) 1.00 9.50
lllustration 30 : (Computing Machine Hours)
Compute a comprehensive machine hour rate for a machine in Production department'A of factory
from the following details:
Overheads Xg
Machine:
Cost including installation charges < 2O,OO,OO0
Estimated useful life 10 years
Estimated salvage value fi%
Working Hours :
Number of working days 300
Number of shift per day 2
Etfective working hrs. per shift 7
Stoppages for repairs and maintenance 200 hrs.
Operating & Other Costs:
1. Wages of two operators (one for each shift) @ { 5,000 p.m.
2. Salary of supervisor (one for each shift) @ < 7,500. (Only one{ifth of the supervisor's time
devoted to this machine)
3. Electric Power : 20 units per hour, each unit costing ( 3.20
4. lnsurance Charges : { 5,000 per annum
5. Repairs and Maintenance (estimated) : ? 12,500 p.m.
6. Rent, rates & taxes (allocated) : < 10,000 p a.
7. General lighting etc. (allocated) : ( 750 p.m.
8. Other factory overheads (allocated) ; { 1,40,000 p a.
Solution :
Working Per annum Per hour

I
?lr
A. Standing Charges
1. Salary of supetuisor 1/Sth of (2 x 7 ,5OO x 12\ 36,000
2. lnsurance charges 5,000
3. Rent, rates & taxes allocated 10,000
4. General lighting, etc. 75O x 12 9,000
5. Other factory overheads allocated 1,40,000
Total(A) 2,00,000 50.00
B. Running Charges
1. Wages of operators 5,000 x 12 x 2 1,20,000
2. Power 20x4,000x3.20 2,56,000
3. Repairs and maintenance 12,5OO x 12 1,50,000
4. Depreciation (20,00,000 - 2,00,000) / 10 1,80,000
Total(B) 7,06,000 176.50
C. Machine Hour Rate
+ 9,06,000 226.50
Machine Hours : Estimated working hours (300 x 2 x 7) - 200 = 4,000
lE] OtherAbsorptionRates
lllustration 31 :
The following information relates to the activities of a production department of factory for a cedain
period.
?
Material used 36,000
Direct Wages 30,000
Labour hours 12,000
Hours of Machinery-operation 20,000
Dept.
Overhead Chargeable to the 25,000
On one order carried out in the department during the period the relevant data were:-
Material used (t) - 6,000
Direct Wages (<) - 4,950
240 Cost Accounting (T.YB.Com. : SEM-V)
Labour hours worked - 'l ,650 Hrs.

I\tlachine Hours - 1,200
Calculate the overheads chargeable to the job by four commonly used methods.
Solution :
Methods: The four commonly used methods of absorbing or recovering overheads are as follows:
1. '/, ot overheads on material = (25,000 / 36,000) x 100 = 69.44/"
2. "/o ot overheads on direct wages = (25,000 / 30,000) x 100 = 83.33%
3. Overhead rate per labour hour = 25,000 I 12,000 = 2.083
4. Machine hour rate method = 25,000 1 2g,ggg = 1.25
Charged to Job: The overheads amount chargeable to job under the above methods is as follows:
1. Material = 6,000 x69.447" = 4,166.40
2. Wages = 4,950 x 83.33% = 4,125
3. Labour hour rate = 1650 x 2.083 = 7 3,437
4. Machine hour rate = 1,200 x 1.25 = { 1,500
lllustration 32 :
Vijay Engineering Co. Ltd. provides the following budgeted figures :
Budgeted Figures :
Estimated Factory Overheads t 1,45,000
Estimated Direct Labour { 1,81 ,250
Estimated Labour Hours 36,250 Hours
Estimated Machine Hours 29,000 Hours
Prepare :
Normal Overhead Recovery rate using | "
'l . Direct Labour Cost Method
2. Labour Hours Rate Method

3. Machine Hour Rate Method
The company has received an order for the product. What would be the cost of such product if :
Cost oI Materials used 3,780
Direct Wages 4,050
Direct Labour Hours 900 Hours
Machine Hours 600 Hours
Prepare a comparative statement using the above information for the executing the order and also
show the overhead recovery rate on budgeted figures. (FYBAE OcL 14, 15, adapted)
Solution :
A. Ascertain Overhead Recovery Rate on Budgeted Figures :
1. Direct Labour Cost Percentage =

#ffi x 100 = 1l!'0m * 1gg
= 8Oo/" of Direct Wages
2. LabourHourRate= #ffi =
# =?4perhour
3.
olitn?lo - l '4s'000 (
Machine Hour Rate- = - .,
Machine Hours ,9"ooo = 5 Per hour
B. Comparative Statement of Cost of an Order
Machine
Hour Rate
+
Material lssued 3,780 3,780 3,780
Direct Wages 4,050 4,050 4,050
Prime Cost 7,830 7,830 7,830
Overheads
241
Factory Overhead (Recovery)
(a) Direct Labour Cost : 80% of Direct Wages
(4,505 x 80%) 3,240
(b) Labour Hour Rate : { 4 per hour
(900x4=3,600) 3,600
(c) Machine Hour Rate ? 5 per hour
(600x5=3,000) 3,000
Works Cost or Cost of Production 11 ,070 11,430 10,830
lllustration 33 :
Atlas Engineering Ltd. accepts a variety of jobs which require both manual and machine operations.
The budgeted Profit and Loss Account forthe period 20'14-15 is as follows :
(ln lakhs of rupees)
Sales Zs
Cost:
Directmaterials 10
Directlabour 5
Prime Cost 15
Production Overhead 30
Production Cost 45
Administrative, Selling and Distribution Overhead 15 60
Profit 15
Other budgeted data :
Labour hours for the period 2,500
Machine hours for the period 1,500
No. of jobs lor the period 300
You are required to calculate by different methods, six overhead absorption rates for absorption of
production overhead.
Solution :
ATLAS ENGINEERING LTD.
OH Rate Under Different Methods
No. A/tethods of Absorption Working

1 Direct Labour Hour (t 30 lakh * 2,500) < 1,200
2 Machine Hour Rate (t 30 lakh + 1,500) { 2,000
3 Percentage of direct materials cost (( 30 lakh + ( 10 lakh) x 100 3OOY"
4 Percentage of direct wages cost ({30lakh*t5lakh)x100 600%
5 Percentage of Prime Cost (t 30 lakh * ( 15 lakh) x 100 20O"/"
6 Production Unit (Per Job) { 30 lakh + 300 I < 10,000
lllustration 34 : (Plantwise v. Departmentwlse)

A Manufacturing Company makes several product lines which are processed through three production
departments - X, Y and Z.
The information concerning the relevant data for an year is as follows :
Department X 1,24,000 80,000 1,60,000

Department 2,30,000 1,15,000 2,41,500
z 5,46,000 1,05,000 1
Production records at the end of the year indicated the following for the product line "Krish"
Units produced (20,000)

Prime Cost 45,000 10;500 59,500
Direct Labour Hours 10,000 5,000 30,000
Cost Accounting (TYB.Com. : SEM-V)
242
You are required to :
hours.
1. Calculate the departmental and plantwise overhead rate based on direct labour
2. Compute the cost of "Krish" line lor the year by using
(a) Plantwide rate
(b) Department rates
3. Comment on the results. @elhi 2011' adapted)
Solution :
1. Rates
Total factory overheads of departments X, Y and Z
Plantwide Rate = Total direct labour hours of department X, Y andZ
t 1,24,000 + (2,30,000 + (5,46,000
80,000 hours + 1 ,15,000 hours + 'l
,05,000 hours
{ 9,00,000
3,0O,OOO hours - '" 1 Per labour hour
Total overheads of the department
Departmental Rate=ffi
< 1,24,000
Departmental Rate X = 80,000 hours = ? 1.55
< 2,30,000
Departmental Rate Y = 1,15,000 hours = { 2.00
{ 5,46,000
Departmental Rate Z = 1,os,ooo hours =
? 5.20
2. Calculation of Cost of Product line "Krish" :
(a) Using Plantwide Rate :

Overheads Department X = 10,000 hours x { 3 = { 30,000
Overheads Department Y = 5,000 hours x ? 3 = ? 15,000
Overheads DepartmentZ = 30,000 hours x { 3 = ( 90,000
Total overheads = ( 1,35,000
Cost of Krish = Total Prime Cost + Total Overheads
= (<45,000 + ( 10,500 + ( 59,500) + ( 1,35,000
= t 1,15,000 + t 1,35,000 = ( 2,50,000
(b) Using Departmental Rates :
Overheads DepartmentX = 10,000 hours x { 1.55 = ( 15,500

Overheads Department Y = 5,000 hours x { 2 = ? 10,000
Overheads Department Z = 30,000 hours x { 5.20 = < 1,56,000
TotalOverheads = ( 1,81,500
Cost of Krish = Total Prime Cost + Total Overheads
= ( 1,15,000 + { 1,81,500 = ( 2,96,000
3. Comments:
The total cost of Krish is different under the two methods because overheads have been charged
using a single rate under the plantwide method whereas individual departmental rates have
been used under the second method.
o OVERHEADS
(1) CAS-ll: The latest CAS I I (Administrative Overheads) contains the following guidelines -
(a) Meaning: Administrative Overheads is the Cost ofall activities relatihg to general management
and administration of an organisation. Administrative overheads shall exclude production
overheads, marketing overheads and finance cost. Production overheads include administration
cost relating to production, factory, works or manufacturing.
Overheads 243
(b) Principles of Measurement:
(i) Includes: Administrative overheads shall be the aggregate ofcost ofresources consumed
in activities relating to general management and administration ofan organisation. It usually
represents the cost of shared services, cost of infrastructure and general management
costs. Administrative overheads comprise items such as enrployee costs, utilities, offrce
supplies, legal expenses and outside services.
(ii) Lease: Incase ofleased assets, ifthe lease is an operating lease, the entire rentals shall be
included in the administrative overheads. If the lease is a financial lease, the finance cost
portion shall be segregated and treated as part offinance costs.
(iii)Software: The cost of software (developed in house, purchased, licensed or customised),
including up-gradation cost shall be amortised over its estimated useful life.
(iv)Services: The cost of administrative services procured from outside shall be determined
at invoice or agreed price including duties and taxes, and other expenditure directly
attributable thereto net ofdiscounts (other than cash discount), taxes and duties refundable
or to be credited.
(v) Subsidy: Any Subsidy/Grant/lncentive or any amount of similar nature received/ receivable
with respect to any Administrative overheads shall be reduced for ascertainment of the
cost of the cost object to which such amounts are related. For example: Subsidyreceivable
for any social service, such as crdche, schooling, community centre etc. may be reduced
from the cost ofsuch services, while ascertaining the cbst ofthe administrative overheads.
(vi)Abnormal: Administrative overheads shall not include any abnormal administrative cost.
Example: Expense incurred in a situation of natural calamity.
(vii) Fines: Fines, penalties, damages and similar levies paid to statutory authorities or other
third parties shall not form part of the administrative overheads.
(viii) Credits: Credits/recoveries relating to the administrative overheads shall be deducted
to arrive at the net administrative overheads.
(ix) Changes: Any change in the cost accounting principles applied for the measurement of
the administrative overheads should be made only if it is required by law or for compliance
with the requirements of a cost accounting standard or a change would result in a more
appropriate preparation or presentation ofcost statements ofan organisation.
(x) Valuation: Indirect materials should valued as per CAS-6 (Materials). Indirect wages
and salaries should be valued as per CAS-7 (Employee Cost). Utilities consumed by
administrative c.ost centres are to be collected and measured in accordance with principles
laid down by CAS-S. Repair and maintenance cost should be measured in accordance
with principles laid down byCAS -12.
(c) Examples: The Guidance Note on CAS I 1, issued by the ICWA, contains the following
examples of administrative overheads (or cost pools) -
Expenses of follorving departments:
o General Administration
o Human Resources
o Finance and Accounts
I Cost Accounts
o Internal Audit
o Secretarial
a Law and Taxation
o Information Technology
o Security
Corporate Office Expenses:
o Directors' sitting fees, remuneration and commission;
o Directors' travelling expenses;
. Meeting and other board expenses.
Cost Accounting (T'YB'Com' : SEM'V)
244
Other Administrative ExPenses :
. Printing and stationerY

o Travelling&Local ConveYance
o MembershiP fee
o Computer maintenance expenses for administration
o Vehicle maintenance expenses
o Salaries and fiinge benefits of general and administrative personnel.
. Casual labour;
o Licence fees;
a Insurance expenses;
o Training expenses;
. Printing ofthe Annual RePort;
o Telephone;
o Bankcharges;
o Printing and stationery;
o Vehicle maintenance expenses;
. Travelling and local conveyance for staff;
a Water charges;
o Electricitycharges;
. Subscription and membership fee;
. Books and periodicals;
. Inspection fees;
o Computer maintenance expensesl
o Gas charges;
o Cleaningandplantwatering;
. Advertisement (related to recruitment);
o Stipend and trainee expenses:
. Gifts and presents;
. Depreciation and repair & maintenance of administrative fixed assets (machines and
furniture located in HO; and
o Other miscellaneous expenses, such as Reception; Companypartyto celebrate functions.
(d) Assignment of Cost:
(i) Traceability: While assigning administrative overheads, traceability to a cost object
in an eLonomically feasible manner shall be the guiding principle.
(ii) Principles: Assignment of administrative overheads to the cost objects shall be based on
either of the following two principles-
(a) Cause and Effect; Cause is the process or operation or activity and effect is the
incurrence ofcost.
(b1 Benefits received: overheads are to be apportioned to the various cost objects in
proportion to the benefits received by them.
(iii) Shared services: The costs of shared services should be assigned to user activities
on the basis ofactual usage.
(iv) Infrastructure resources: Where the resources by way ofinfrastructure are shared the
cost should be assigned on a readiness to serve basis.
(v) General Management: General management costs should be assigned on rational basis.
For example: Number of employees, turnover, investment size etc.
Overheuds 24s
(vi) Example - Cause and Effect: A computer technology department provides technical
support to other departments of an organization. The costs of the department may be
assigned to other departments on a cause-and effect basis through two steps. In the first
step, the costs are assigned to the activities ofthe department, such as hardware installation
and maintenance, software development and installation, or programming adjustments.
In the second step, the costs of these activities are further assigned to other departments
based on their usage ofthe technical services.
(vii) Example - Benefits received: A corporate wide advertising programme promotes the
general image of corporation rather than an individual product. The costs of such
programme may be allocated on the basis ofdivision sales in the beliefthat divisions with
higher sales levels are more likely to benefit than divisions with lower sales levels.
(e) Bases: Following are the bases used for assignment of administrative expenses:
Expenses Basis
Office rent, rates and taxes Floor area
Depreciation of office building Floor area
Legal expenses Number of cases handled / time basis for consultancy
Salaries and allowances Number of enrployees
(2) Distribution : Administrative overheads are to be further analysed into two - one for production
activities and other for sales and distribution activities. Costs collected under the cost pools
indicated above are to be distributed to administrative overheads relating to production activities
and administrative overheads relating to selling and distribution activities on rational basis for
each cost pool.
(3) Apportionment : Administrative overheads relating to production activities are to be apportioned
to different production cost centres on the basis ofconversion costs ofproduction cost centres.
The apportioned overheads are absorbed to products on the basis of the normal capacity or
actual capacity, whichever is higher. In case of under-absorption or over-absorption of
administrative overheads relating to production, the same shall also be adjusted with Costing
Profit & Loss Account.
10. SELLING & DISTRIBUTTON OVERHEADS
(1) CAS 15: The latest CAS l5 Selling and Distribution Overheads (effective from lstApril, 2013)
lays down the following guidelines-
(a) Marketing Overheads: Marketing Overheads comprises Selling Overheads and Distribution
Overheads.
(b) Selling Overheads: Selling Overheads are the costs related to sale ofproducts and include
all Indirect Expenses in sales management for the organization. For example: Salaries of
sales personnel; Travelling expenses of sales personnel; Commission to sales agents; Sales
and brand promotion expenses including advertisement, publicity, sponsorships, endorsements;
Receivable collection costs; After sales service costs; Warranty costs.
(c) Distribution overheads: Dishibution Overheads are the costs incurred in handling a product
or service from the time it is ready for delivery until it reaches the ultimate consumer. For
example: Packing, repacking / labelling at an intermediate storage location; Transportation
cost; Cost ofwarehousing (depots, godowns, storage yards, stock yards etc.).
(d) Principles of Measurement:
(i) Inctusions: Selling and Distribution Overheads shall be the total cost of resources
consumed in the selling and distribution activities of the entity. The cost of resources
procured from outside shall be determined at invoice or agreed price including duties and
taxes, and other expenditure directly attributable thereto net of discounts (other than
cash discounts), taxes and duties refundable or to be credited bythe Tax Authorities. Post
246 CostAccounting (TY.B.Com. : SEM-V)
sales costs such as warranty cost, product liabilitycost, after sales service shall be estimated
on a reasonable basis.
(ii) Amortization: Selling and Distribution Overheads, the benefits ofwhich are expected to
be derived over a long period, shall be amortised on a rational basis.
(iii) Imputed Cost: Selling and distribution overheads shall not include imputed cost.
(iv) After-Sale Service: Cost of after Sales Service provided in terms of sale agreement
for a class oftransactions, shall be determined on rational and scientific basis, net ofany
recovery on the service.
(v) Subsidy: Any Subsidy I Grant I Incentive or any such payment received / receivable with
respect to any Selling and Distribution Overheads shall be reduced from the cost ofthe
sales ofthe cost object.
(vi)Abnormal: Any abnormal cost relating to selling and distribution activity shall be excluded
liom the Selling and Distribution Overheads.
(vii) Demurrage: Any demurrage or detention charges, or penalty levied bytransportation or
other authorities in respect ofdistribution activity shall not form part ofthe Selling and
Distribution Overhead.
(viii) Penalties: Penalties and damages paid to statutory authorities or other third parties
shall not form part of the Selling and Distribution Overheads.
(ix)Credits: Credits / recoveries relating to the Selling and Distribution Overheads including
thoserendered without any consideration, material and quantifiable, shall be deducted
to arrive at the net Selling and Distribution Overheads.
(x) Change: Any change in the cost accounting principles applied for the measurement of
the Selling and Distribution Overheads shall be made only if it is required by law or for
compliance with the requirements of a cost accounting standard or a change would result
in a more appropriate preparation or presentation of cost statements of an entity.
(e) Assignment of Cost:
(i) Traceable: Selling and Distribution Overheads directly traceable shall be assigned to the
relevant product sold or services rendered.
(ii) Transportation: Transportation cost relating to distribution shall be assigned as per CAS-
5, where relevant and applicable.
(iii) Principles: Assignment of Selling and Distribution Overheads to the cost objects shall
be based on either of the following two principles;
a. Cause and Effect: Cause is the process or operation or activity and effect is the
incurrence ofcost.
b. Benefits received: Overheads are to be apportioned to the various cost objects in
proportion to the benefits received by them.
(2) Cost Pools : The selling overheads and distribution overheads are collected under different cost
pools such as: (A) Selling Overheads: (i) Sales Employees cost; (ii) Rent; (iii) Travelling expenses;
(iv) Warranty claim; (v) Brokerage & Commission; (vi) Advertisernent relating to sales and sales
promotion; (vii) Sales incentive; (viii) Bad debt etc. (B) Distibution Overheads: (i) Secondary
Packaging; (ii) Freight & forwarding; (iii) Warehousing & Storage; (iv) Insurance etc.
(3) Apportionment : Some items of selling overheads and distribution overheads are directly
identified and absorbed to products or services and remaining part ofselling and distribution
overhead along with the with share of administration overheads relating to selling and distribution
activities are to be apportioned to various products orjobs or services on the basis ofnet actual
sales value (i.e. Gross sales value less excise duty, sales tax and other governmbnt levies).
Overheads 247
lllustration 35 :
The following data relating to selling and distribution activities of M/s ABC Ltd. is available from its
books of accounts:
(
Direct selling expenses 3,60,000
Advertisement 1,20,000
Sales overheads (office expenses) 4,20,O00
Ordering and billing 60,000
Decorative packing 5,40.000
Storage (godown rent) 1,44,000
Transport 1,80,000
The following additional data relating to the company's operations are also available
B C
Sales turnover (t) 60,00,000 90,00,000 1,20,00,000
Units sold 15,00,000 12,00,000 20,00,000
Advertising space 40V" 25o/" 35"/"
No. of invoices 600 400 800
No. of packages delivered 20,000 30,000 40,000
Average storage days 15 10 25
Salesmen's time 30o/o 25o/" 45"/"
Based on the above data, prepare a statement showing distribution of selling and distribution costs.
Solution :
Distribution of Selling and Distribution Costs

Basis of Apporlionment Products
Total
\ \ { f
Direct selling expenses Salesmen's time 1,08,000 90,000 1,62,000 3,60,000
Advertisement Advertisement space 48,000 30,000 42,000 1,20,000
Sales overhead Sales value 93,333 1,40,000 1,86,667 4,20,000
Ordering and billing No. of invoices 20,000 13,333 26,667 60,000
Decoralive Packing Sales turnover 1,20,000 1,80,000 2,40,000 5,40,000
Storage (Godown rent) Average storage days 43,200 28,800 72,O00 1,44,OOO
Transport No. of packages 40,000 60,000 80,000 1,80,000
Total OH 4,72,533 5,42,133 8,09,334 8,24,000
11, SPECIAL
(1) After Sales Service: This relates to services rendered after a product is sold. Ifthe service rs
rendered during the warranty period, it is normally free of cost. The cost of in-warranty service
is treated as S & D Overhead and accounted for accordingly. The services provided after expiry
of warranty period, are normally charged to the customer. In such cases, the actual cost incurred
on such service is collected as per element in the routine way and treated as cost ofproduction of
the service. Let us take sale of a car as an example. Usually, there is one year warranty for
manufacturing defects and many companies also provide 3 year or 40,000 km servicing free. The
cost of this service being free is treated as S & D Overhead. The services after that period will be
billed to the customer. Ajob card is issued for each car when it comes for servicing and the costs
of parts, consumables and labour time are booked against that job number. This cost will be
charged offagainst the billing done for service.
(2) Packing Costs: Packing may refer to primary packing and secondary pd cking. Primary packing
is the minimum necessary without which a product cannot be handled. Liquid products must
either have bottles or sachets. This primarypacking is considered as direct material cost. These
245 CostAccounting(T'Y'B'Com': SEM'I)
bottles may be further kept in bigger boxes or cartons (secondary packing) for ease of
transportation, which is nothing but a distribution cost. This packing cost is treated as S & D
Overhead.
(3) Advertising Expenses: Advertising could be done for different purposes. A recruitment
advertisemen t or a corporale advertisement is treated as Administration Overhead. Aproduct
specific advertisement is treated as selling cost. A big advertisement campaign the benefits of
which are expected to accrue over a longer term may be treated as deferred revenue expenditure.
(4) Market Research: Market Research (a study of potential market for products aimed at finding
the customer needs, their habits, changing market for the products, technological changes in the
product, competition etc.) is treated as S & D co.st.
(5) Bad Debts: Normalbaddebts maybe considered as selling expense and included in the cost. An
exceptional case like bankruptcy of a big institution, being abnormal expenses, may be excluded
from cost.
(6) Tool Set Up Costs: If the set up is related to specific product or a job, such cost may be treated
as a direct cost of the job. But if the set is related to dffirent products, it maybe charged as a part
of factory overheads.
(7) Royalties: Royalties paid to acquire the right to manufacturz a product should be treated as
direct cost ofthe particular product. However, the royalty paid to obtain the right to sel/ should
be treated as selling and distribution cost and included in selling overheads. Ifroyalty is paid
both for production and sales the cost ofsuch royalty should be apportioned between production
costs and selling cost on some equitable and appropriate basis.
(8) Spoiled Work: The loss by spoilage may be inherent to the nature of the product or it may be
caused by normal circumstances. If it is of an inherent nature and cannot be avoided, it would be
charged either to the specific job in which it is accrued or should be recovered as overhead
charge from the entire production, where there is no specificjob or work order. In case it has
been caused by abnormal circumstances, it should be charged to the Costing Profit and Loss
Account. While accounting for loss by spoilage, any proceeds of the scrap should be accounted
for either as a deduction from spoilage or by crediting it to the account which has been debited
with the spoilage.
(9) Cost of Containers Relating to Materials Purchased: Usually the cost of the containers
containing the materials purchased is included in the cost ofmaterials and therefore is automatically
forms a part ofmaterial cost. The containers maybe returnable or non returnable. The cost ofthe
non returnable containers should be charged as a part ofthe materials cost and ultimately would
go into the Prime Cost or FactoryOverhead depending upon the usage of the materials as direct
or indirect. In the case ofreturnable containers the cost ofthem should not be included either in
cost of materials or in any other head, because when they are returned to the supplier, full credit
would be received. If, however, container becomes damaged, it should be charged to the cost of
the materials
(10) Obsolete Inventory: Obsolete inventory may consist ofraw materials. stores of finished goods
is written offby direct de bit to Costing Profit and Loss Account and no charge is made to cost of
production.
(11) Insurance Charges: The insurance premium paid may cover several kinds of insurances.
(a) The amount ofpremium paid on insuran ce offixed assets is allocated to particular departments
or cost centres where the assets are located, as items ofoverhead costs.
(b) Premium for insurance of material and process goods is treated as factory or manufacturing
overhead and charged to production costs.
(c) Premium for insurance of finished goods in stock or in transit is absorbed as distribution
overhead.
(d) Premium for other types of insurance such as those relating tofire, burylaty etc., are treated
as general administration overhead.
Overheads 24g
(12) Rectification Cost / Re-Work Cost: Rectification cost fbr normal defectives may be treated as
part of the product cost if this is identifiable with any specific product or process; otherwise this
may be treated as manufacturing overhead. Rectification cost of abnormal defectives is not to be
charged in Cost Accounts but to the Costing Profit and Loss Account.
,12, UNDER / OVER
(1) Actuat Rate : The Overheads Absorption Rate applied for charging the Overheads to products
may be Actual or Pre-determined. For example, suppose the Actual Overheads for March are {
20,000. These may be divided by the Actual Machine Hours Worked during March, say 1,000.
The Machine Hour Rate i.e. 20,000/1,000 : < 20 is the Actual Rate. If product A has used 750
Machine Hours and product B has used 250 Machine Hours during the month, the Total Overheads
of ( 20,000 will be completely absorbed by product A (< 15,000) and product B (t 5,000). Hence
when Actual Overhead Absorption Rate is used : Actual Overheads: Absorbed Overheads, and
so there are no Under - absorbed or Over-absorbed Overhead.
(2) Pre-determined Rate :
(a) Meaning : However, it is quite difficult to work out the Actual Rate every month. Thus, the
concern maydecide to absorb the Overheads on a Pre-determined Rate basis. Apre-determined
rate for absorption of overhead may be used on a provisional basis for internal management
decision making such as cost estimated for quotation, fixation of selling price etc. These rates
are to be calculated for each cost centre for a particular period. Budgeted overheads for the
base for the period as denominator for determining the rate.
Budgeted overheads for the period

pre - determined overhead Rate = Budgeted normal base for the period
The amount of total overheads absorbed by a product, service or activity will be the sum total
ofthe overhead absorbed from individual cost centres on pre-determined basis. The difference
between overheads absorbed on pre-determined basis and the actual overheads incurred is
the under-or over-absorption of overheads.
The under-or over-absorption of overheads is mainly due to variation between the estimation
and actual.
(b) Example : Continuing the above example, the Actual Rate of { 20 per Machine Hour may be
applied for charging the Overheads to products for the next months also. In April, suppose
the Machine Hours worked are 800. By applying the pre-determined rate of { 20 to 800
machine hours, the amount of Overheads absorbed will be = 20 x 800 : { 16,000. The product
costs will be worked out by charging total Overheads of { 16,000 at this Rate. The actual
Overheads however, may be different, say, { 24,000 or { 12,000.
(c) Computation: Predetermined Rate is computed by dividing the budgeted overhead expenses
for the accounting period bythe budgeted base (quantity, hours, etc.)'
Budgeted overhead Expenses for the period
overhead Rate = Budgeted Base for the period
(d) Advantages:
o Enables prompt preparation of cost estimates, quotations and fixation of selling prices.
o Cost data is available to management along with financial data.
. In case of Cost - plus contracts prompt billing is possible through pre-determined recovery
rates.
In concerns having budgetary control system, no extra clerical efforts are required in computing
the pre-determined overhead rate.
250 CostAccounting(T'Y'B'Com': SEM-V)
(3) Actual Overhead Rate v. Pre-determined Overhead Rate:
Basis of Distinction ActualOverhead Rate Pre-determined Overhead Rate

1. Meaning Actual Overhead rate is Pre-determined overhead rate is
calculated by dividing the calculated by dividing the
actual overheads by actual budgered overhead by the
base. budgeted base.
ActualOverheads Budgeted Overheads
2. Formula Actual Hours or Quantity Budgeted Hours or Quantity
3. Useofoverheads Actual ovderheads are used Budgeted overheads are used
4. Useofbase Actualbase (Hours or Budgeted base (Hours or
Quantity) is used. Quantity) is used.
5. When It is computed after the It is computed before the
computed ? expenses have been incurred. expenses are incurred.
6. Preparation of It does not facilitate the It facilitates the prompt
Cost Sheets/ prompt preparation of cost preparation of cost sheeU
Quotations sheeVquotations. quotations.
7. Cost Control It does not facilitate cost It facilitates cost control by
control. comparison of actual overheads
with predetermined overheads
recovered.
(4) Under-Absorption : The difference between the Actual Overheads and Absorbed Overheads
results in Under-absorption or Over-absorption ofOverheads. Thus when the Overheads absorbed
are ( 16,000 and the Actual Overheads are ( 24,000 there will be under-absorption of Overheads
by( 24,000 - < 16,000 : { 8,000; Thus,
Under Absorbed Overheads = Actual Overheads - Absorbed Overheads
(5) Over-Absorption : If the actual Overheads are, say, ( 12,000, this will result in over absorption
of Overheadsby{ 16,000 -< 12,000:{4,000.Thus
Over Absorbed Overheads : Absorbed Overheads - Actual Overheads
(6) Reconciliation : Thus, the absorption of Overheads on the basis of pre-determined rates may
lead to Under-absorption or Over-absorption ofOverheads. The difference between the absorbed
overheads and actual overheads is known as overhead variances. Further, such variances result in
difference between the Financial records and Cost records. The Financial Profits are based on
Actual Overheads, while the Cost Profits are based on theAbsorbed Overheads. This naturally
leads to difference between the financial profits and the cost profits. The two profits need to be
reconciled for such under or over absorption ofOverheads.
Note : Absorption of Overheads is also known as Recoveryof Overheads. Thus under-absorption
is known as under-recovery and Over-absorption is known as over-recovery ofOverheads.
(7) Causes : Under or over absorption of overhead may arise due to any of the causes given below:-
(a) Error in estimating overhead expenses.
(b) Error in estimating the level of production, i.e. the base.
(c) Major unanticipated changes in the methods of production.
(d) Unforeseen changes in the production capacity.
(e) Seasonal fluctuations in the overhead expenses from period to period.
(f) Overhead rate may be applied to the Normal Capacity which may be less than the full operating
capacity of the undertaking.
Overheads 251
(8) Treatment : There are three ways to handle over or under-absorption.

(a)Write-off (in case of under absorption) or write back (in case of over-absorption) to the
P & L Account. This treatment is valid ifmost ofthe overhead items are related to time. Ifthe
under or over-absorption is due to abnormal reasons, e.g. defective planning, it is written off
to the Costing P & LAlc.
(b) Canyforutard to the next period through q reserue qccount.Thii method is not recommended
on the logic that it is inconsistent with Accounting Standards.
(c) tJse of supplementaty rqtes to adjust the effect to the cost of sales, finished stocks and Work
in Process stocks. This sounds logical as it does not carry forward the unabsorbed or over
absorbed overheads to the next accounting period entirely. It aims at splitting the total effect
between the cost of sale (which is charged to current year's profits) and stocks (which get
carried forward to the next year).
lllustration 36 : (Under/Over Absorption - OH Rate Given)
The factory overhead costs of four production departments of a company engaged in executing job
orders, for an accounting year, are as follows;
Department {
A 19,300
B 4,200
c 4,000
D 2,000
Overhead has been applied as under :
Dept. A { 1.50 per Machine hour for 14,000 hours.

Dept. B { 1.30 per direct labour Cost of < 3,000
Dept. C 80% of Direct Labour Cost of < 6,000
Dept. D t 2 per piece, for 950 pieces.
Find out the amount of department wise Under or Over-absorbed factory overheads.
Solution :
Depaftment Working Absarbed Actual Under absorbed o

r { over absorbed (+) @
{2) (s) (4)=(2)-(3)
A 1.50 x 14,000 21,000 19,300 (+) 1,700
B 1.30 x 3,000 3,900 4,200 (-) 300
C 80% x 6,000 4,800 4,000 (+) 800
D 2x950 1,900 2,000 (-) 100
Total 31,600 29,500 (+) 2,100
lllustration 37 : (Under/Over - Absorption : OH Rate to be worked out)

Based on the data given below compute (i) overhead absorption rate and (ii) the amount of under
or over absorbed overhead :
Budgeted labour hours 8,500
Eudgeted overhead < 1,48,750
Actual labour hours 7,928
Actual Overhead { 1,46,200
Solution :
Overhead Absorption Rate = Budgeted Overhead + Budgeted Labour Hours

= { 1,48,750 + 8,500 = ? 17.50
Overhead Recovered ,= Actual Labour Hours x Overhead Absorption Rate
= 7,928 x 17.50 = < 1,38,740
Actual Overhead = {1,46,200
Under Absorption of Overhead = < (1,46,200 - 1,38,740) = { 7,460
252 CostAccounting(T'YB'Com' : SEM'I)
Illustration 38 : (Machine Rate and Absorption)

The budgeted working conditions for a Cost Centre are as follows :-
Normal working Per week 42 hours

No. of machines 14
Normal weekly loss of hours at 5 hours per machine
No. of weeks worked Per Year 48
Estimated annual overheads < 1,24,320
Actual result in respect of a 4 week period are :
Overheads incurred < 10,200
Machine hours produced 2,000
You are required to calculate :
(a) the overhead rate per machine hour; and
(b) the amount of under-or-over absorption of overheads.
Solution :
(a) Normal working hours per year

14 ttlachines x 42 hours per week x 48 weeks = 28,224 hours
Normal loss of hours per year due to maintenanca = 14 x 5 x 48 = 3,360 hours
Effective hours per !€or = 28,224 - 3360 = 24,864 hours
Estimated annual overhead = 7 1,24,32O
Machine hour rate = 1,24,320 I 24,864 = { 5.00
(b) Overhead absorbed 2,000 hrs x { 5 < 10,000
Overhead incurred { 10.200
Overhead under absorbed < 200
lllustration 39 : (Under-absorption - Treatment)
ln a manufacturing unit, factory overhead was recovered at a pre- determined rate of { 25 per man-
day. The total factory overhead expenses incurred and the man-days actually worked were t 41 .50
lakhs and 'l .5 lakhs man-days respectively. Out of the 40,000 units produced during a period, 30,000
were sold. On analysing the reasons, it was found that 60% of the unabsorbed overheads were due
to defective planning and the rest were attributable to increase in overhead costs.
How would unabsorbed overheads be treated in Cost Accounts? (CA-lnter, Nov. 2011, adapted)
Solution :
Computation of Unabsorbed Overheads

Man-days worked 1,50,000
Overhead actually incurred 41,50,000

Less : Overhead absorbed @ < 25 per man - day (t 25 x 1,50,000) . .. 37,50,000
Unabsorbed Overheads 4,.00ôo0
Unabsorbed Overheads due to defective planning (i.e. 60% of < +,OO,OOOi 2,40,000
Balance of Unabsorbed Overheads 1$OÔOO
Treatment of Unabsorbed Overheads in Cost Accounts

(i) The unabsorbed overheads of t 2,40,000 due to defective planning to be treated as abnormal
and therefore be charged to Costing Profit and Loss Accounts.
(ii) The balance unabsorbed overheads of ( 1,60,000 be charged to production i.e. 40,000 units at
the supplementary overhead absorption rate i.e. t 4/- per unit .
(Refer to Working Note)
?
Charge to Costing Profit and Loss Account as part of the cost of
units sold (30,000 units @ { 4lp.u.) 't,20,000
Add to Closing Stock of Finished Goods (5,000 units @ { a/- p.u.) 20,000
Add to Work in Progress Account (50% x 10,000 x 4) 20,000
Total 1,60,000
Overheads 253
rrqlw -= ll-'60'000 = {4/-P'u'

working Note : Supplementaryoverhead AbsorptionRate
<40ôoo
lllustration 40 :
The following particulars are available in respect of a department of a concern for a month.
Actual overhead expenses - < 1,00,000
(including { 20,000 paid one time on account of an old claim)
Actual machine hours worked - 10,000 hours
Pre-determined overhead recovery rate - { 6 machine hour
On analysis of under-absorbed overheads, it was noted that 70"h ol under-absorption is due to
defective planning and 30% is due to increase in expenditure. The department produced 20,000
units in the month, out of which 15,000 units were sold and 5,000 units remained in stock.
You are required to show treatment of under or over-absorbed overheads in cost accounts.
Solution | (Delhi 2006, adapted)
(
Net Overhead (1,00,000 - 20,000) (Actual) 80,000
Less : Overhead Absorbed (10,000 hours @ { 6 per hour) 60,000
Under-absorbed Overheads 20,000
Less : Transfer to Profit and Loss Alc (70% of { 20,000) 14,000
Charge to Cost (30% ol < 20,000) 6,000
Out of this < 6,000,
Charge to Gost of Goods Sold = 6,000 x ( 4,500

ffi =
5,000
Charge to Stock = 6,000 x = ? 1,500
EXERGISES
OUTLINE
No. Topic Page
Theory Questions ['15 Marks] 254
13.1 Descriptive Questions [7 or 8 Marks] 254
255
14. lffii::lI:ffJ**' 256
256
14.1 Multiple Choice Questions
14.2 Match The Following Columns 259
14.3 State Whether True Or False 259
14.4 Numerical t\4CQ / Answer in Brief (lnterna I Tests) 260
14-5 Check Your Answers 262
15. Practical Problems
1 5.1 Primary Distribution
1 5.2 Service Department Distribution -
1 5.3 Jt/achine Hour Rate
1 5.4 Other OH Rates
1 5.5 Under / Over Absorption
13. THEORY " T15 MAR.KSI
13.1 DESCRIPTIVEQUESTIONS oR I MARKSI

1. What do you mean by Allocation of overheads. [Ans.: Para 4]
2. What are the different basis of allocating overheads ? [Ans.: Para 4]
3. Explain over absorption and under absorption of overheads. [Ans.: Para 13]
4. Explain'classification', 'allocation'and 'absorption'of overheads. How does it help in controlling
overheads ? [Ans.: Para2-i]
5. Explain what is meant by Cost Apportionment and Cost Absorption. lllustrate each with two
examples. Discuss the methods of cost absorption and state which method do you consider to
be the best and why ? [Ans.: Para 5]
6. Distinguish between allocation, apportionment and absorption of overheads. [Ans..' Para 4-5]
7. lndicate the base or bases that you would recommend to apportion overhead costs to production
department ;
(i) Supplies (ii) Repairs
(iii) Maintenance of Building (iv) Executive salaries
(v) Rent (vi) Power and light
(vii) Fire insurance (vii) lndirect labour. [Ans.: Para 5]
8. A departmental store has several departments. What bases would you recommend for
apportioning the following items of expenses to its departments : ('l ) Fire insurance of Building
(2) Rent (3) Delivery Expenses (4) Purchase Department Expenses (5) Credit Depa(ment
Expenses (6) General Administration Expenses (7) Advertisement (8) Sales Assistants Salaries
(9) Personal Department Expenses (10) Sales Commission. [Ans.: Para 5]
9. Define administration overheads and state briefly the treatment of such overheads in Cost
Accounts. [Ans.: Para 9]
Overheads 255
10.Define Selling and Distribution Expenses. Discuss the accounting for selling and distribution
expenses. [Ans.: Para 10]
11. What do you understand by the term "pre-determined rate of recovery of overheads" ? What are
the bases that are usually advocated for such pre-determination ? How do over - absorptlon and
under-absorption of overheads arise and how are they disposed off in Cost Accounts ?
[Ans.: Para l2]
12.What do you mean by the term under/over absorption of production overhead ? How does it
arise ? How is ittreated in cost account ? [Ans.: Para 12]
13.2 SHORT NOTES [5 MARKS]
1. Collection of Overheads [Ans.: Para 1]
2. Codification of Overheads [Ans.: Para 1]
3. Functional Classification of Overheads [Ans.: Para 2]
4. Allocation of Overheads [Ans.: Para 4]
5. Apportionment of Overheads [Ans.: Para 5]
6. Allocation v. Apportionment [Ans.: Para 5]
7. ProductionOverheads [Ans.: Para 6]
8. Primary v. Secondary Distribution [Ans.: Para 6]
9. Departmentalisation of Overheads [Ans.: Para 6]
10. Primary Distribution of Overheads [Ans.: Para 6]
11. Secondary Distribution of Overheads [Ans.: Para 6]
12. Re-apportionment of Overheads [Ans.: Para 6]
13. Production Department v. Seruice Department [Ans.: Para 6]
l4.Various Basis of Apportionment of Overheads [Ans.: Para 6]
l5.Various Basis of Re-apportionment of Overheads [Ans.: Para 6]
1 6. Direct Distribution Method [Ans.: Para 6]
17. Absorption of Production Overheads [Ans.: Para 6]
l8.Absorption of Fixed and Variable Production Overheads [Ans.: Para 6]
19. Production Overhead Absorption Rates [Ans.: Para 6]
20. Blanket Overhead Rate [Ans.: Para 7]
21. Departmental Overhead Rate [Ans.: Para 7]
22. Blanket v. Departmental Overhead Rate [Ans.: Para 7]
23. Direct Labour Hour Method of Overhead Rate [Ans.: Para 7]
24. Selection of Overhead Recovery Rate [Ans.: Para 7]
25. Features of a Satisfactory Overhead Recovery Rate [Ans.: Para 7]
26. Machine Hour Rate [Ans.: Para 8]
2T.Standing Charges v. Running Charges [Ans.: Para 8]
28. Admin istrative Overheads [Ans.: Para 9]
29. Principles of [Vleasurement of Administrative Overheads [Ans.: Para 9]
30. Examples of Administrative Overheads [Ans.: Para 9]
31 . Assignment of Administrative Overheads [Ans.: Para 9]
32. Bases used for assignment of Administrative Overheads [Ans.: Para 9]
33. Selling and Distribution Overheads [Ans.: Para 10]
34. Principles of Measurement of Selling and Distribution Overheads [Ans.: Para 10]
35.Assignment of Selling and Distribution Overheads [Ans.: Para l0]
36. Treatment of After Sales Service [Ans.: Para 11 - (1)]
3T.Treatment of Packing Costs [Ans.: Para ll - (2)]
38. Treatment of Adve(ising Expenses [Ans.: Para 11 - (3)]
39. Treatment of Boyalties [Ans.: Para 11 - (7)]
40.Treatment of Spoiled Work [Ans.: Para ll - (8)]
4'l .Treatment of Containers for Purchases [Ans.: Para 11 - (9)]
42. Treatment of lnsurance [Ans.: Para 1l - (11)]
43. Pre-determined Rate of Overhead Absorption [Ans.: Para 12]
44.Actual v. Pre-determined Rate of Overhead Absorption [Ans.: Para 12]
45. Under-Absorption of Overheads [Ans.: Para 12]

46. Over-Absorption of Overheads [Ans.: Para 12]
47. Under Absorption v. Over Absorption of Overheads [Ans.: Para 12]
48. Treatment of Over or Under Absorption of Overheads [Ans.: Para 12]
49. Reconciliation of Overheads [Ans.: Para 12]
50. Causes of Over or Under Absorption of Overheads (Oct. 14) [Ans.: Para 12]

1. The allotment of whole items of cost to cost centresor cost units is called
(a) Cost allocation (b) Cost appottionment
(c) Overhead absorption (d) None of the above
2. Packing cost is a
(a) Production cost (b) Selling cost
(c) Distribution cost (d) lt may be any of the above
3. Directors' remuneration and expenses form a part of
(a) Production overhead (b) Administration overhead
(c) Selling overhead (d) Distribution overhead
4. Salary of a foreman should be classified as a
(a) Fixed overhead (b) Variable overhead
(c) Semi{ixed or semi-variable overhead
5. Charging to a cost centre those overheads that result solely from the existence of that cost
centre is known as
(a) Allocation (b) Apportionment
(c) Absorption (d) Allotment
6. Absorption means
(a) Charging of overheads to cost cqntres
(b) Charging of overheads to cost units
(c) Charging of overheads to cost centres or cost units
7. Which method of absorption of factory overheads do you suggest in a concern which produces
only one uniform item of product ?
(a) Percentage of direct wages basis (b) Direct labour hour rate
(c) Irlachine hour rate (d) A rate per unit of output
8. When the amount of under-or over-absorption is significant, it should be disposed of by
(a) Transferring to Costing profit and Loss A/c
(b) The use of supplementary rates
(c) Carrying over as a deferred charge to the next accounting year.
(d) None of above
9. When the amount of overhead absorbed is less than the amount of overhead incurred, it is
called
(a) Under-absorption of overhead (b) Over-absorption of overhead
(c) Proper absorption of overhead
10. Berd debt is an example of
(a) Production overhead (b) Administration overhead
(c) Selling overhead (d) Distribution overhead
'11. Number of workers employed
is used as a basis for this apportionment of
(a) Time office costs (b) Canteen expenses
(c) Personnel department expenses (d) Any of these
12. Which of the following is a scientific and accurate method of absorption of factory overheads
(a) Percentage on prime cost (b) Percentage on direct labour cost
(c) tVachine hour rate (d) Allof these
Overheuds 257
13. Warehouse expenses is an example of
(a) Production overhead (b) Selling overhead
(c) Distribution overhead (d) None of the above
14. Selling and distribution overheads are absorbed on the basis of
(a) Rate per unit (b) Percentage on works cost
(c) Percentage on selling price of each unit (d) Any of these
15. The least suitable basis for applying overhead is
(a) materials consumed (b) direct labour cost
(c) direct labour hours (d) machine hours
16.Which of the following is referred to as primary distribution of overheads-
(a) reapportioning service dept. overheads to other service dept.
(b) reappoftioning production dept. overheads to other production dept.
(c) apportioning and allocating overheads to all departments on a suitable basis
(d) reapportioning service dept. overheads to production dept.
17. Expenses such as rent and depreciation of a building shared by several depa(ment are
(a) lndirect expenses (b) Direct expenses
(c) Joint expenses (d) All of the above
18. Overhead expenses can be classified according to
(a) Functions (b) Elements
(c) Behaviour (d) All of the above
19. The term cost allocation is described as
(a) The costs that can be identilied with specific cost centers
(b) The costs that cannot be identified with specific cost centers
(c) The total cost of factory overhead needed to be distributed among specific cost centers
(d) None of the given options
20.The distribution of overheads allotted to a particular department or cost centre over the units
produced is called
(a) Allocation (b) Apportionment
(c) Absorption (d) Departmentalisation
21 .lf an item of overhead expenditure is charged specifically to a single department this would be
an example of
(a)Apportionment (b) Allocation
(c) Re-apportionment (d) Absorption
22.Which of the following does not match?
Item of Cost Basis of Cost Allocation
(a) Power H.P. of machine
(b) Supervision of building Value of materials consumed
(c) lnsurance of building Area occupied
(d) Time-keeping Number of employees
23. Which of the following costs is not a factory overhead expense?
(a) Depreciation of equipment used in the research department
(b) Salary of quality control inspector
(c) Overtime premium paid to direct labour
(d) lVachine maintenance cost
24. Which of the following bases would be most appropriate to apportion the cost of electric power
to factory departments?
(a) Number of outlet points (b) Amount metered out
(c) Cubic capacity of premises (d) Kilowatt capacity of machines in depaftment
25.Which of the following is not a means whereby factory overheads can be charged out to
production?
(a) Direct labour rate (b) Overtime rate
(c) Nlachine hour rate (d) Blanket rate
258 Cost Accounting (T.Y.B.Com. : SEM-I)
26.Which of the following bases is not appropriate for apportionment of Transport department's
cost?
(a) Crane hours (b) Crane value
(c) Truck Mileage (d) Truck value
27 . A lypical factory overhead cost is
(a) Distribution (b) lnternal audit
(c) Compensation of plant manger (d) Design
28. ln which of the following center Factory OH cost is NOT incurred ?
(a) Production Center (b) Seruice Center
(c) General Cost Center (d) Head Office
29. Which of the following cannot be used as a base for the determination of overhead absorption
rate ?
(a) Number of units produced (b) Prime cost
(a) Conversion cost (b) Discount Allowed
30. Production OH absorption rate is calculated by the way of
(a) E6timated Production OH CosVDirect labour hours
' (b) Estimated Production OH CosVNo of units produced
.(c) Estimated Production OH CosVPrime Cost
(d) All of the given options
31 . lf an item of overhead expenditure was not charged specifically to a single department this
would be an example of
(a)Apportionment (b) Allocation
(c) Re-apportionment (d) Absorption
32.Which of the following is TRUE regarding the use of blanket rate ?
(a) The use of a single blanket rate makes the apportionment of overhead costs unnecessary
(b) The use of a single blanket rate makes the apportionment of overhead costs necessary
(c) The use of a single blanket rate makes the apportionment of overhead costs uniform
(d) None of the given options
33. Functionally, administration expenses may comprise expenses of the following activities
(a) Secretarial and board of directors (b) Accounting, financing, tax and legal
(c) Audit and personnel (d) All of these
34.Which of the following is not an example of marketing overheads ?
(a) Salary of the foreman (b) Publicity expenses
(c) Salaries of sales staff (d) Secondary packing charges
35. Analysis of selling and distribution overheads is done by
(a) Nature of expenses and functions
(b) Areas, products and salesmen
(c) Types of customer and channels of distribution
36. Selling and distribution overhead does not include
(a) Cost of warehousing (b) Repacking cost
(c) Transportation cost (d) Demurrage charges
37.The following data are available relating to overheads in two production cost centres :
A
Cost Centre Cost Centre B
Budget <54,030 <76,910
Actual ? ?
Absorbed <54,960 {76,250
Over/under-absorbed ? ?520 under-absorbed
What is known on the basis of the available data above ?
(a) Actual overheads in cost centre B were less than budget
(b) Overheads absorbed in cost centre B exceeded actual overheads
(c) Overheads were over-absorbed in cost centre A
(d) Overheads were under-absorbed in cost centre A
Overheuds 2s9
tAl COLUMN A COLUMN B

(A) Advedisement 1 Value of goods in transit
(B) Credit and collection 2 Floor area occupied
(c) Warehouse rent 3 A percentage of cash collection
(D) Royalties 4 No. of orders
(E) Bad debts 5 Sales value
(F) Transit insurance 6 Direct allocation
tBI COLUMN A COLUMN B

(A) Canteen 1. Value of stock
(B) Electric lighting 2. Asset value
(c) Fire prevention in stores 3. No. of employees
(D) Rent, rates, etc. 4. No. of requisition handled
(E) Plant depreciation 5. Technical estimate
(F) Power 6.& Total wages
(G) Accident insurance 7. No. of light points
(H) Storage costs 8. Area

1. Factory overhead includes all production costs other than direct materials and salaries.
2. Departments that assist producing departments indirectly are called service departments.
3. Factory overhead cost applied to a job is usually based on a pre-determined rate.
4. Variable overhead vary with time.
5. When actual overheads are more than absorbed overheads, it is known as over-absorption.
6. Carriage inwards is not really an overhead at all, but is a direct cost.
7. Cash discounts are generally excluded completely from the costs.
8. Cost of indirect materials is apportioned to various depaftments.
9. When the amount of over-or under-absorption is quite large, it is transferred to Costing profit
and Loss Account.
10. A blanket overhead rate is a single overhead rate computed for the entire factory.
11. Wages of delivery van drivers is a selling overhead.
12. Under-absorption of overheads means that actual overheads are more than absorlced overhead.
13. Rent is not included in cost when premises are owned by the company.
'14.Where direct labour rates vary widely, direct labour cost would be more suitable than direct
labour hours in applying factory overheads.
15. Examples of factory overhead are salary of plant manager and departmental heads, depreciation
and wages of foreman.
16.The principal bases used for applying factory overhead are ; units of production, material cost,
direct wages, direct labour hours and machine hours.
17.The application of predetermined overhead rates is a reason forthe difference in costing ahd
financial profit or loss.
18. Allocation of overhead implies the identification of overhead cost centres to which they relate.
lg.Apportionment of overhead is the allotment of whole items of cost to cost centres or cost units.
20. Overhead absorption is the allotment of overhead'to cost units.
21 . The word 'allocation' apportionment' and 'allotment' have exactly the same meaning in costing.
22.llis better to use blanket rate for overhead absorption where several products passing through
a number of different producing departments are manufactured.
23.The use of actual overhead absorption rates results in delay in determining cost of products.
24. Blanket rate of overhead absorption may be suitably applied in small firms which are manufacturing
a single product.
260 CostAccounting(T.YB.Com.: SEM-V)
25. Direct labour cost method of absorption of factory overhead is suitable only in those departments
where work is done by manual labour.
26. Rate per unit of production is the easiest and most suitable of all the methods of absorption.
27. Percentage on direct materials method of absorption of factory overhead can be suitably used
only where one kind of article is produced and material prices remain more or less constant.
28. Machine hour rate is separately computed for each machine.
29. Machine hour method of absorbing overhead can be adopted only for those departments in
which work is mainly done by machines.
30. Administration overheads are usually absorbed as a percentage of prime cost.
31 . Under-absorption of overhead results in under-statement of cost.
32. Where normal business cycle extends over more than one year the amount of under or over-
absorbed overheads may be carried forward to be charged to the next accounting year.
33. When the amount of under or over-absorbed overheads is significant, it is equitably apportiohed
to work in progress, finished stock and cost of sales.
34. Packing cost is a distribution cost.
14.4 NUMERTCAL MCQ /ANSWER rN BRTEF (INTERNAL TESTS)

1. A business always absorbs its overheads on labour hours. ln the current month, 18,000 hours
were worked, actual overheads were ( 2,79,0O0 and there was { 36,000 over-absorption. The
overhead absorption rate per hourwas
(a) ( 15.50 (b) { 17.50
(c) { 18.00 (d) { 13.50
2. B Ltd. estimated that during the year 75,OOO machine hours would be used and it has been
using an overhead absorption rate of < 6.40 per machine hour in its machining depadment.
During the year overhead expenditure amounted to ( 4,72,560 and 72,600 machine hours were
used. Which one of the following statements is correct ?
(a) Overhead was under-absorbed by T 7,44O
(b) Overhead was under-absorbed by { 7,920
(c) Overhead was over-absorbed by < 7,440
(d) Overhead was under-absorbed by { 7,920
3. J Limited's budgeted overhead in the last period was t 1,70,000. lts overhead absorbed and
incurred for the same period were ( 1,80,000 and ( 1,95,000 respectively. What is its amount of
over-or under-absorption of overhead ?
(a) Under-absorption of { 15,000 (b) Under-absorption of { 25,000
(c) Over-absorption of ( 15,000 (d) Over-absorption of { 25,000
4. There are two production cost centres and two service cost centres in a factory. Production
overheads have been allocated and apportioned to cost centres and now require re-apportionment
from service cost centres to production cost centres. Relevant details are :
Service Cost Centre A Service Cost Centre B

Total Overhead < 42,000 < 57,600
% to Production Cost Centre X 40 55
7o to Production Cost Centre Y 60 45
What is the total re-apportionment to Production Cost Centre Y ?
(a)T 42,720 (b) { 48,480
(c) t 51,120 (d) < 56,880
5. Overheads are absorbed at a pre-determined rate based on direct labour hours. The following
additional information is available for a period :
Budget { 1,64,000 overhead expenditure 10,000 direct labour hours
Actual < 1,58,000 overhead eipenditure g,B0O direct labour hours
What was the overhead over/under-absorption in the period ?
(a) 7 2,720 over-absorbed (b) < 3,224 over-absorbed
(c) { 3,280 under-absorbed (d) t 6,000 under-absorbed
Overheads 261
6. Analysis of the gross wages in a factory reveals :
Direct Workers (t) lndirect Workers (t)

Productive hours at basic rate 41,2OO 17,600
Oveftime Premium 1,100 450
ldle Time 760
TotalGross Pay 45.840 18.050

What amount would normally be accounted for as production overhead ?
(a) t 18,050 (b) < 18,810
(c) ( 21,5e0 (d) < 22,690
7. Production cost centre X absorbs overheads on the basis of machine hours and has the following
budgeted and actual figures :
Budget Actual
Overheads <20,290 <19,110
Machine Hours 560 514
What is the predetermined production overhead absorption rate in production cost centre X (to
two decimal places) ?
(a) ( 34.13 (b) < 36.23
(c) { 37.18 (d) < 3e.47
8. There are two production cost centres in a factory. Production overhead absorption rates are:
Cost Centre A < 10.60 per direct labour hour
Cost Centre B < 36.20 per machine hour
Product P requires the following hours per unit of finished product in each cost centre.
Cost Centre (A) Cost Centre (B)
Direct Labour Hours 3.0 0.s
Machine Hours 0.2 1.3
What is the total production overhead cost per unit of Product P ?
(a) { 78.86 (b) < 91.40
(c) ( ee.08 (d) < 234.00
9. A company has two production cost centres (PC, and PCr) and two service cost centres (SC,
and SCr). Overhead allocation and apportionment is as follows for a period :
PC, PC, sc,

Overheads < 4,60,200 < 5,20,800 < 1,22,000 < 96,600
Re-apportionment of sc' 35% 45o/" 20Y"
30"/, 70"/"
What are the total overheads in PC, after reappoftionment of the service cost centre overheads?
(a) ( 6,05,500 (b) < 6,43,320
(c) t 6,60,400 (d) < 6,67,720
10. A cost centre is charged with the following actual overhead costs for a period :
Allocated costs < 28,720
Apportioned costs < 10,260
Overheads were absorbed in the cost centre over the period on 1 ,760 actual labour hours at a
pre-determined absorption rate of t 21.50 per hour. Actual labour hours worked in the period
were 90 hours above budget.
What was the overhead over/under absorption in the cost centre ?
(a)(1,1a0 (b)<1,e3s
(c) ( 3,055 (d) < e,120
11. P Corporation expects to incur < 70,OOO of factory overhead and { 60,000 of general and
administrative costs next year. Direct labour costs at t 5 per hour are expected to total t 50,000.
lf factory overhead is to be applied per direct labour hour, how much overhead will be applied to
a job incurring 20 hours of direct labour ?
(a) { 28 (b) < 120
(c) t 140
12. A company applies factory overhead on the basis of direct labour hours. Budget and actual data
for direct labour and overhead for the year are as follows :
262 CostAccounting (T.YB.Con : SEM-V)
Budget Actual
Direct Labour Hours 6,00,000 6,50,000
Factory Overhead Costs (t) 7,20,000 7,60,000
What is the over/under-applied lactory overhead for the year ?
13. A companyestimated DepartmentA's overhead at(2,55,000 forthe period based on an estimated
volume of 1,00,000 direct labour hours. At the end of the period, the factory overhead for
Department A was ( 2,65,500; Actual direct labour hours were 1,05,000. What was the over or
under applied overhead for the period ?
l4.Overheads.in a factory are apportioned to four production cost centres (A, B, C and D). Direct
labour hours are used to absorb overheads in A and B and machine hours are used in C and D.
The following information is available.
A C D
Overhead Expenditure ({) 18,757 29,O25 46,340 42,293
Direct Labour Hours 3,080 6,750 3,760 2,420
Machine Hours 580 1,310 3,380 2,640
Which cost centres has the highest hourly overhead absorption rate ?
15.An overhead absorption rate of t 12.00 per direct labour hour was established based on a
budget of 2,100 hours. Actual direct labour hours worked were 2,180 and actual overhead
expenditure was < 25,470. What was the over/under absorption of overhead ?
1 6. The following production overhead costs relate to a production cost centre :
Budget < 1,24,000
Actual < 1,26,740
Absorbed { 1,25,200
What is the overhead over/under absorption ?
'l 7.
Overheads in a production cost centre for a period are :
Budget < 74,600
Absorbed { 71,890
Actual < 73,220
What is the overhead over/under absorption ?
18. Machine hours are used to absorb overheads in a production cost centre. Overheads allocated
and apportioned to cost centre are :
Allocated 13,122
Apportioned 7,920
Re-apportioned from service cost centres 2,988
2,16,000 units of product are manufactured at rate of 120 units per machine hour.
What is the overhead absorption rate per machine hour ?
19.The following details relate to production overheads lor a period :
Absorption rate = ( 15.00 per machine hour
Actual machine hours = 4,220
Budgeted machine hours = 4,130
Over-absorption = < 230
What was the actual production overhead expenditure in the period ?
14.1
1 (a) 7. (d) 13. (c) 19 (a) 25. (b) 31 (a) 37. (a)
2 (d) 8. (b) 14. (d) 20 (c) 26. (b) 32 (a)
3 (b) 9. (a) 15. (a) 21 (b) 27. (c) 33 (d)
4 (c) 10. (c) 16. (c) 22 (b) 28. (d) 34 (a)
5 (a) '11. (d) 17. (a) 23 (a) 29. (d) 35 (d)
6 (b) 12. (c) 18. (d) 24 (b) 30. (d) 36 (d)
Overheads 263
14.2 A: (A)-(5), (B) -(4), (c) - (2), (D)-(6), (E)-(3), (F) -(1)
B : (A) - (3), (B) - (7), (c) - (1), (D) - (8), (E) - (2), (F) - (5), (c) - (8), (H) - (4)
14.3 True : 2, 3, 6,7, 10, 12,1 5, 1 6, 27, 18, 20,23,24,27,28, 29,31, 92, 33
False : 1,4,5,8, 9, 11 , 13,14, 19,21,22,25,26, 30, 34
1. False; Factory overhead includes all items other than direct materials, direct.wages and direct
expenses.
4. False; Variable overheads vary with production.
5. False;W hen actual overheads are less than absorbed overheads, or in other words, overheads
absorbed are more than the amount of actual overheads, it is known as over-absorption.
6. True; lt is a direct cost in the sense that it is added to the purchase price of materials.
7 . True; Cash discount is a form of interest and as such is a financial item.
8. False; Cost of indirect materials is allocated and not apportioned.
9. False; lt is disposed of by the use of supplementary rates.
10.True; lt is calculated by factory overheads dividend by total units of base throughout the factory.
11 . False; lt is a distribution overhead and not a selling overhead.
12.True; When actual overheads are more than absorbed overheads or, in other words, when
overheads absorbed are less than actual amount of overheads, it is known as under-absorption.
13.False; When premises are owned by the company, a charge in lieu of rent is made in cost
accounts.
14. False; When labour rates vary widely, direct labour hours may be more suitable than direct cost
as a basis of absorption.
17.True; This is because overhead applied at predetermined rate will be different from that of
actual amount of overhead.
19. False; Apportionment is the allotment of the proportions of items to cost centres or cost units.
21 . False; ln the terminology of costing, these terms have different meanings.
22. Fatse; ln such a case it is better to use multiple rates.
25. False; This method is suitably used in any department.
26. False;This method is suitable only in cedain industries like mining, brick laying, shoe industries
like mining, brick laying, shoe industry etc.
30. False; Administration overheads are usually absorbed as a percentage of works cost.
34.False; Packing cost may be a manufacturing cost, selling cost or distribution cost, depending
upon the purpose of packing.
14.4
1. (b) 3 (a) 5 (a) 7. (b) I (c) 11. (c)

2. (a) 4 (c) b (d) 8. (a) (a)
Hints :
4. (< 42,000 x 0.6) + (< 57,600 x 0.45) = { 51,120
5. {tF 1,64,000 + 0,000 hrs) x 9,800 hrsl - ( 1,58,000} =? 2,72O over'absorbed
1
6. < 17,600 + 450+ 760 + 2,780+ 1,100) =t 22,690

7. 20,2901560 = 36.23
8. (3.0 x 10.60) + (1.3 x 36.20) = 78.86
9. < 5,20,800 + {(1,22,000 x 0.45) + (96,600 +24,4oo x 0.7)} = t 6,60,400
10.(< 28,72O+ ( 10,260) - (1,760 units x < 21.50 per unit) = ( 1,140
11. Direct labour hours budgeted for next year are 10,000 ({ 50,000 total + ( 5 per hour). Factory
overhead is applied at the rate of t 7 per direct labour. 7 x 20 =7 'l4O
12.7,20,000t6,00,000 x 6,50,000 = 7,80,000 (Applied) less 7,60,000 (Actual) = 20,000 (Over'applied)
13.2,55,000/1 ,OO,OO0 x 1 ,05,000 =2,67,750 (Applied) less 2,65,500 (Actual) = 2,250 (Over-applied)
14. Production Cost Centre (D) z $2,293 + 2,640 = ( 16.02 per machine hour) - Highest rate
15.2,180 x 1 2.00 - 25,470 = ( 690
1 6.< 1,25,2OO - 1,26,7 40 = { 1,540 (under'absorbed)
17.< 79,220 - 71 ,890 = 1 ,330 (under-absorbed because absorbed < actual)

18. (24,030 + 1,800) = 13.35
19.(4,220 x ( 15) - < 230 = 63,070
264 sEM-V)
15. PRACTICAL PROBLEMS
15.1 PR!MARYDISTRIBUTION
Q.l (Base for Apportionment) : lndicate the base that you would recommend to apportion following
overhead costs to production department:
(i) Supplies (ii) RePairs
(iii) Building Repairs (iv) Salaries
(v) Rent (vi) Power
(vii) Fire lnsurance (viii) lndirect Labour
[Ans.: (i) Actual supplies, (ii) Plant value, (iii) Floor area, (iv) Actual basis,
(v) Floor area, (vi) KW hours or H P (power), (vit) Capital cost, (viii) Direct labour costl
Q.2 : Cadila Co. Ltd. has three production departments A, B and C and two service departments D
and E. The following figures are extracted lrom the records ol the company :
Particulars 7 Particulars f,
Rent and Rates 5,000 General Lighting 600
lndirect Wages 1,500 Power 1,500
Depreciation of Machinery 10,000 Sundries 10,000
The following further details are available
Pariiculars Total A B D E
Floor Space (sq.ft.) 10,000 2,000 2,500 3,000 2,000 500
Light Points (Nos.) 20 '10 5
60 10 15
Direct Wages ({) 10,000 3,000 2,000 3,000 1,500 500
H.P. of Machines 150 60 30 50 10
Value of Machin 2,50,000 60,000 80,000 1,00,000 5,000 s,000
Appoftion the costs to various departments on the most equitable basis.
[Ans.:A:7,550;B:7,2O0;C:9,650;D:4,625;E:l,5TSincl.DirectWagestorD&E]
Q.3 (Allocation and Apportionment) : The overhead expenses recorded in the books of a
manufacturing company for the year ended 30th June, 2014 are given below :
Pafticulars Production Depts. rvice Departments

Total Machine Packing General Maintenance
Shop Ptant and Stores
a f, a 7 a
lndirect Labour 29,300 8,000 6,000 4,000 11 ,300
Maintenance Materials 10,040 3,600 1,400 2,040 3,000
Miscellaneous Supplies 3,500 800 2,000 300 400
Superuisor's Salary 8,000 8,000
Cost and Payroll Salaries 20,000 20,000
Power 16,000
Rent 24,000
Heat and Fuel 12,000
lnsurance 2,000
Taxes 4,000
Depreciation 2,00,000
3,28,840 12,400 9,400 34,340 14,700
The following data are also available
Radiator Value of H.P, X

Section Hours
Machine Shop 1,000 90 40 64,000 3,500
Packing 400 180 20 20,000 s00
Overheuds 265
General Plant 200 60 6 1,000
lvlaintenance and Stores 800 120 't0 15,000 1,000
2,400 450 76 1,00,000 5,000
Show the primary distribution of overheads to production and seruice departments.
[Ans.: Machine Shop - 1,67,840; Packing - 61,000;
General Plant - 40,(XN; Maintenance and Stores - 60,(n0l
Q.4 : A company has 3 production departments A, B and C and two service departments X and Y.
The following data are extracted from the records of the company for a particular given period.
(a) (i) Rent and Rates < 25,000 Lighting
(ii) General < 3,000
Wages
(iii) Indirect < 7,500 Power
(iv) < 7,500
(v) Depreciation on Machinery t 50,000 (vi)Sundries { 50,000
(b) Additional data, department-wise
Total
A C Y
Direct wages (t) 50,000 15,000 10,000 15,000 7,500 2,500
Horsepower of machines used 150 60 30 50 10
Cost of Machinery (t) 12,50,0003,00,000 4,00,000 5,00,000 25,000 25,000
Production hours worked 6,226 4,O28 4,066
Floor space used (sq. mtr.) 10,000 2,000 2,500 3,000 2,000 50;
Lighting points (nos.) 60 10 15 20 10 5
You are required to prepare the Primary Overheads Distribution Statement. lndirect wages and
Sundries are to be apportioned on the basis of direct wages.
[Ans.:A-37,750;B-36,000;C-48,250;X-23,125;Y-T,STSincl.DirectWagestorX&Y]
Q.5 : M/s Sunlight & Co. Ltd. has three production departments X, Y, Z and two service departments
P and Q.
The following pafticulars extracted from the books of the company : f
Depreciation on Machinery 10,000
General Lighting 500
Power 1,000
Sundries 12,000
The following further details are available :
Total Depaftments
X Y Z P o
Floor Space (sq. ft.) 10,000 2,000 2,500 3,000 2,000 s00
Light Points 50 10 15 15 5 5
Direct Wages ({) 10,000 3,000 2,000 3,000 1,500 500
HP of tvlachinery 100 50 10 30 5 5
Value of Machine (<) 2,50,000 60,000 80,000 1,00,000 5,000 5,000
Apportion the overhead costs to various departments on the most equitable basis.
[Ans.:X-8,2o0;y-7,s00;Z-t,,ti0;p-4,e00;o-1,7st?Il!iir7:;r',il'J'!rliTfi!,
,15.2 SERVICE DEPARTMENT DISTRIBUTION . DIRECT
Q.6 : A factory has three production departments A, B and C and two service depanments X and Y
the overhead costs of the different depafiments incurred during March 2017 are as follows :
Department Cost (t)
A 10,000
B 8,000
c 6,000
x 5,000
Y 3,000
The cost of Departments X have to be charged in the ratio 2 : 2 : 1 and those of department Y
equally to Departments A, B and C respectively. Find production department overheads.
[Ans.: A: 13,000; B : 11,000; C :8,000]
Q.7 : Calculate the overheads allocable to production department A, B and C from the following.
TherearetwoservicesdepartmentsXandY.XrendersservicestoA,BandCintheratio4:3:3
. and Y renders seruices A, B and C in the ratio 7 :6:5. Overheads as per primary overhead distribution
as following : A - 15,000; B - 12,000; C - 11,000; X - 8,200; Y - 6,500.
[Ans.: A:11,396; B: 8,663; C :7,341]
Q.8 : The primary distribution statement of Kumar and Co. Ltd. for the month January 2017 shows
the following details :
Production Department (t)
A 64,000
B 20,000
c 43,000
Service Depanment
x 24,000
Y 11,000
The cost of service department.X is apportioned in the ralio2:3 : 2 and of Y is apportioned in the
ratio 3: 1 :3 forthe production depadments X, Y and Z respectively.
Prepare a statement showing'the apportionment of the expenses by direct distribution method.
[Ans.: A : 40,200; B : 25,700; C : 24,600]
Q.9 : Calculate the overheads allocable to production department A, B and C from the following.
There aretwoservicesdepartmentsX andY. X renders seruicestoA, B andC inthe ratio 1 :3:5
andYrendersservicesA,BandCintheratio4:3:l.Overheadsasperprimaryoverheaddistribution
is A: 10,000; B :7,000;C : 9,000; X : 12,000;Y : 11,000.
[Ans.: A : 12,443; B : 10,523; C : 9,859]
Q.10 : A manufacturing company has three production departments and two service departments.
Following information is available from depaftmental distribution summary :
Production Departments A 7,500

B 12,000
C 4.500 24,OOO
Service Departments X 4,000
2,600 6,600
Total 30,600
The expenses of service depailments are charged on a percentage basis as follows
Department A B c x Y
X 3O"/" 40% 20Yo 1O7"
1O"/" 207o 50"/" 2O"/"
Show the distribution of seruice department eost under Repeated Distribution Method.
[Ans.: A :9,190; B: 14,457; C :6,953]
Q.11 : A manufacturing company has three production departments and two service departments.
The departmental distribution summary for a particular period gives the following details :
( (
Production Departments P1 10,000
P2 8,000
P3 7.000 25,000
Service Departments s1 3,500
s2 2,100 5,600
Total 30,600
Overheads 267
The company has decided to apportion the service departments costs on the basis of the following
percentages :
Department P1 P2 P3 s,ls,
s1 40% 30% 20"/" 1OY"
10% 2O"/" 50% 20"/"
Find out the overheads of production departments using Simultaneous Equation Method.
[Ans.: Pr: ?11,850, Pr: 79,700, Pr: ?9,050]
Q.l2 (Allocation and Apportionment) : Calculate the overheads allocable to production departments
X and Y. There are also two seruice departments A and B.
A renders service to X and Y as 3 : 2. B renders service to X and Y as 9 : 1.
Y
Floor Space (sq.ft.) 5,000 4,000 1,000 2,000
Assets ({ in lakh) 10 5 3 1
H.P. of Machines 'r,000 500 400 100

Number of Workers 100 50 50 25
ht 50 30 20 20
Expenses and Charges are :
Depreciation { 1,90,000 Power { 20,000

Rent, Rates and Taxes < 36,000 Canteen Expenses { 10,800
lnsurance < 15,200 Electricity < 4,800
[Ans.: X - 1,83,180; Y - 93,620]
Q.13 : The following data were obtained from the books of Flakt Engineering Company for the half-
year ended 30th September,2O14. Prepare an overhead distribution Summary :
Production Dept. Seruice Dept.

A B v xlv
Direct Wages 7,000 6,000 5,000 1,000 1,000
Direct Materials 3,000 2,500 2,000 1,500 1,000
Employees Nos. 200 150 150 50 50
Electricity Kwh. 8,000 6,000 6,000 2,000 3,000
.t0
Light Points Nos. 15 15 5 5
Assets Values 50,000 30,000 20,000 10,000 10,000
Area Occupied Sq. mtrs. 800 600 600 200 200
The expenses for 6 months were
Pafticulars ( Particulars | f,
Stores overhead 400 Depreciation 6,000
Motive power 1,500 Repairs and Maintenance 1,200
Electric Lighting 200 General Overheads 10,000
Labour Welfare 3,000 Rent and Taxes 600
ApportiontheexpensesofDepartmentXintheratio4:3:3andthatofDepartmentYinproportion
to direct wages, to department A, B and C respectively.
[Ans;.: A - 11,396; B - 8,663; C - 7,341]
Q.l4 : Company's production costs for the current period ending March 31 are given below :
Praduction Seruice Total

,P1
t f,
Direct wages 20,000 25,000 30,000 75,000
Direct materials 30,000 35,000 45,000 1 ,10,000
lndirect materials 2,000 3,000 3,000 1,000 2,000 2,000 13,000
lndirect wages 3,000 3,000 4,000 10,000 10,000 s,000 35,000
Area (sq. metres) 200 250 300 150 100 250 1,250
Book value of machinery | 30,000 | 35,000 | 25,000 | 15 ,000 ,05,000
Total H.P. of machines I ts I I
Zo zs I 5 65
Machine-hours worked | 10,000 | 20,000 | 15,000 | 5 ,000 50,000
The other expenses are as follows :
Rent < 12,500 Power < 3,800

lnsurance { 1,050 Light < 1,250
Depreciation (15 percent of value of machinery)
You are required to prepare an overhead analysis sheet for the deparlments showing clearly the
basis of apportionment where necessary.
[Ans.: P, - 22,588; Pr- 29,434; Pr- 30,328]
Q.15 (Absorption on Direct Wages Basis) : ln a Light Engineering Factory, the following particulars
have been collected forthe three monthly period ended 31-12-2015. Compute the departmental
overhead rates for each of the production departments, assuming that overheads are recovered as
a percentage of direct wages.
Production Depts. Service Depts.

A B C D E
Direct Wages ({) 2,000 3,000 4,000 1,000 2,000
Direct Materials (t) 1,000 2,000 2,000 1,500 1,500
Staff (Nos.) 100 150 150 50 50
Electricity (kwh) 4,000 3,000 2,000 1,000 1,000
Lighr Points (<) 10 't6 4 6 4
Assets Value ({) 60,000 40,000 30,000 10,000 10,000
Area Occu mts 150 250 50 50 50
The expenses for the period were :
Particulars a Parliculars 7
Motive Power 550 Amenities to Staff 1,500
Lighting Power 100 Repairs and Maintenance 3,000
Store Overhead 400 General Overhead 6,000
Depreciation 15,000 Rent and Taxes 275
Apportion the expenses of service department E proportionate to direct wages and that of service
department D in the ratio of 5 :3:2 to departments A, B and C respectively.
(FYBAE Mar. 2017, Oct. 12, Oct. 10, Jan.09, Oct. 05, adapted)
[Ans.: A - I 2,443; B - 10,253; C - 9,859]
15.3 MACHINE HOUR RATE
15.3.1 Basic
Q.16 : Calculate the machine hour rate from the following informations :
Cost of machine < 20,000

Scrap Value < 2,000
Repairs and maintenance per month < 200
Standing charges per month < 100
Effective working life 10,000 hours
Running time per month 200 hours
Power used 5 units at 20 paise a unit per hour.
[Ans.:0.50 + 1.80 + 1.00 + 1.00 - ?4.30]
Q.17 : Calculate machine hour rate from the following data :
Cost of Machine { 1 ,16,000
Estimated scrap value < 16,000

Estimated working life 20,000 hrs.
Overheads 269
Estimated maintenance cost during working life of machins < 2,400
Power used per machine ( 1 per hour
Rent rates per month (10% to be charged to machine) < 3,000
Normal machine running hours during a month 1gO
Standing charges other than rent, rates, etc. per month < 400
(Oct.2014, adapted) [Ans.: (8,400 +2,160) + S + 0.12 + I ?10.01]
=
Q.18: From the following particulars given below, compute Machine hour rate fora machine.
(a) Cost < 24,000
(b) Scrap value { 4,000
(c) Estimated Working life 40,000 hours
(d) Estimated cost of repairs and maintenance during the whole life { 2,000
(e) Standing charges of the shop per month t 3,000
(f) Working hours per month 100 hours
(g) No. of machines in the shop each of which is liable for equal charge are 30 machines.
(h) Power used per hour 4 units @ 10 p. per unit.
[Ans.:1.00 + (0.50 + 0.05 + 0.40) = ?1.95]
Q.19 : From the following particulars, calculate the machine hour rate of a machine installed in a
department:-
Cost of Machine < 16,000
Estimated scrap value after expiry of its life (15 Years) < 1,000
Estimated working hours of the machine per year 2000 hours
Monthly salary of a Foreman engaged in supervision of this
lttlachine and another two identical machines ( 1,500
Flepairs & Maintenance for the machine < 2,400 per year
lnsurance premium for the machine t 120 per year
Department rent and rates are { 1,200 per year. The space occupied by the machine is 1/6th of the
floor space of the department. Power consumption of the machine is 2 units per hour @ 10 paise
per units.
[Ans.: 0.50 + 3.00 + 1.20 + 0.06 + 0.10 + 0.20 = 5.06]
Q.20 : From the data given below, calculate the machine hour rate :
Per annum (()
Rent of the department (space occupied by machine 1/5th of the depaftment) 78O
Lighting (numberof men in the department 12,two men engage on this machine) 288
lnsurance, etc. 36
Cotton waste, oil, etc. 60
Salary of foreman (one-fourth of the foreman's time is occupied by
this machine and the remainder equally by the othertwo machines) 6,000
The cost of the machine is { 9,200 and it has an estimated scrap value of { 200.
It is ascertained from past experience (i) that the machine will work for 1,800 hours per annum; (ii)
that it will incur expenditure of < 1 ,125 in respect of repairs and maintenance; (iii) that it consumes
5 units of power per hour at the cost of 'l 6 paise per unit, and (iv) that the working life of the machine
will be 18,000 hours.
[Ans.: (1,800 + 1,800) + (0.50 + 0.06 + 0.80) - 7 2.36]
15,3.2Computi Machine Hours
Q.21 (Comprehensive MHR) : Calculate the comprehensive Machine Hour Rate of a machine from
the following:
(i) Cost of the machine ( 25 lakhs, having a scrap value of t 1 lakh after 10 years.
(ii) The machine will be operated for three shifts of 7 hrs. each for 300 working days in a year of
which 300 hours will be utilised for minor repairs and maintenance.
(iii) Wages Payable: < 8,000 p.m. for an operator and { 3,000 p.m. for a helper for every shift.
< 1 6,000 per month to one supervisor per shift for the department accommodating four machines
including the above machine.
(iv) Other details:
Power consumption: 25 units (KWH) @ < 4.80 per unit
Bepairs and maintenance: ( 30,000 per annum
\
General lighting & heating: t 4,000 p.m. for the whole depanment having the four machines
lnsurance : ( 18,000 per machine per annum
Rent, Rates & Taxes : { 3,000 p.m. for the department
Factory overhead : { 36,000 per annum for the department (ICWA lnter, June 2007, adapted)
[Ans.: 15,78,000 + 6,000 = 263]
Q.22 (Non-Productive Hours) : A machine costing { 10 lakhs was purchased on 1-4-2014.The
expected life of the machine is 10 years. At the end of this period its scrap value is likely to be
< 10,000. The total cost of all the machines including new one was ( 90 lakhs.
The other information is given as follows :
(i) Working hours of the machine for the year was 4,200 including 200 non-productive hours.
(ii) Repairs and maintenance for the new machine during the year was < 5,000.
(iii) lnsurance Premium was paid for all the machines < 9,000.
(iv) New machine consumes 8 units of electricity per hour, the rate per unit being { 3.75.
(v) The new machine occupies 1i1 0 area of the department. Rent of the department is {2,400 per
month.
(vi) Depreciation is charged on straight line basis.
Compute machine hour rate for the new machine. (CA lnter, May 2012, adapted)
[Ans.: (3,880 + 4,000) + (1.25 + 24.75 + 30) = ( 56.97]
Q.23 : From the undernoted data calculate the machine-hour rate of a Mailing Machine.
Cost of Machine < 30,500 (Estimated life 12 years)
Scrap Value < 2,500 (Estimated life 12 years)
Effective Work days 200 days of 8 hours
100 days of 6 hours
lVlaintenance and Repairs 7.5o/o ol Capital cost
Stores consumed < 1,000
Power consumption ( 2 per operating hour
lnsurance Premium 1% of Capital cost
Supervision Expenses t 7,500
ldle time estimated 10%
[Ans.: (13,425.83 + 1,980) + 2.00 = ? 8.78]
Q.24 (Non-Productive Setting-up Time) : From the following pafticulars compute Machine Hour
Rate :
a
Cost of machine 1 ,14,900
lnstallation charges 5,400

Anticipated life of machine 10 years
Residual value at the end of 10 years 5,000
Rent and rates per annum 12,000
lnsurance of the machine p.a. 3,000
Repairs and maintenance p.a. 9,640
Consumable stores p.a. 1,ZOO
Total production services p.a. 1,OgO
Power cost is 5 units per working hour @ 40 paise per unit
Setting up time (Non-productive) 400 hrs. p.a.
There are 300 working days of eight hours each in a year.
[Ans.: (25,920 + 2,000) + (5.76 + 2) = ? 20.72]
Q.25 (Maintenance + Produetive Set-up Time) : The following particulars relate to processing
machine treating a typical material :
(a) Cost of machine - < 10,000
(b) Estimated life - 10 years
(c) Scrap value - < 1,000
(d) Yearly working time (50 weeks of 44 hours each) - 2,200 hours
(e) Machine maintenance - 200 hours p.a.
(f) Setting up time estimated at 5% of total productive time and is regarded as productive time
(g) Electricity is 16 units per hour at 10 paise per unit
Overheads 271
(h) Chemical required weekly - t 20

(i) Maintenance cost per year - < 1,200
(j) A supervisor oversees the operations of machine together with 6 other machines. His weekly
salary is t 140.
(k) Depaftmental overhead allocated to this machine per annum - < 2,000
You are required to calculate the machine hour rate.
[Ans.: (3,000 + 2,000) + (0.45 + 0.60 + 0.50 + 1.60) = ? 4.65]
Q.26 (Comprehensive MHR) : A machine costs < 90,000 and is deemed to have a scrap value of
5% at the end of its effective life (19 years). Ordinarily, the machine is expected to run for 2,400
hours per annum but it is estimated that 150 hours will be lost for normal repairs and maintenance
and further 750 hours will be lost due to staggering. The other details in respect of the machine shop
ate'.
a
(a) Wages, Bonus and Provident Fund contribution of each of two operators 6,000 per year
(each operator is in charge of two machines)
(b) Rent and Rates of the shop 3,000 per year
(c) General Lighting of the shop 250 per month
(d) lnsurance Premium for the machine 200 per quarter
(e) Cost of Bepairs and Maintenance per machine 250 per month
(f) Shop Supervisor's Salary 500 per quarter
(g) Power Consumption of the machine per hour 20 units; Rate of power per 100 units t 10.
(h) Other factory overhead attributable to the shop < 4,000 per annum.
There are four identical machines in the shop. The Supervisor is expected to devote one-fifth of his
time for supervising machine. Compute a comprehensive machine hour rate from the above details.
[Ans.: (4,500 + 1,500) + (2 + 2 + 2 + 3) = ? 12]
Q.27 : Work out the Machine Hour Rate for the following machine whose scrap value is nil :
7
Cost of machine 1,90,000
Freight and installation charges 10,000
Working life 5 years
Repairs and maintenance 4Oo/o of depreciation
Annual power expenses @ 25 paise per unit 6,000
Eight hourly day charges :
(1) Power 24
(2) Lubrication oil 20
(3) Consumable stores 28
(4) Supervision 80
[Ans.:2.50 + 3.50 + 10 + 20 + I + 3 = 747]
Q.28 (Comprehensive MHR) : The following information is made available from the costing recbrds
of a factory :
(i) The original cost of the machine < 1,00,000
Estimated life 10 years
Residual value { 5,000
Factory operates for 48 hours per week - 52 weeks in a year
Allow 15% towards machine maintenance downtime. 57" may be allowed as setting up time.
(ii) Electricity used by the machine is 10 units per hour at a cost of 50 paise per unit.
(iii) Repairs and maintenance cost is t 500 per month.
(iv)Two operators attend the machine during operation along with two other machines. Their total
wages, including fringe benefits, amount to ( 5,000 per month.
(v) Other overheads attributable to the machine are { 10,431 per year.
Using the above data, calculate the comprehensive machine hour rate. (Delhi 2000, adapted)
[Ans.: MHR = (30,431 + 1,997)+ 4.76 + 3 + 5 - ?28; MH = (48 x 52)- 374 - 125 = 1,997]
,7) Cost Accounting (7. YB. Com. : SEM-I)
\
15.3.3 Many Machines
Q.29 (Total 8 Machines) : The following expenses were incurred annually in respect of a factory
having 8 machines of similar nature :
Lighting for the factory < 800
General overheads < 900
Repairs < 2,400
Rent and Rates < 4,000
Supervisors : Two persons looking after eight machines paid @ { 60 per month each
lnterest paid on loan < 2,000
Power consumed for the shop at 10 paise per unit < 9,600
Depreciation per machine < 300
Sundry supplies for factory < 24O
Each machine consumes 10 units of power in an hour. Calculate machine hour rate if a machine
runs for 1,200 hours in a year. [Ans.: (9,780 +8 + 1,200) + (0.25 + 1) - ?2.27]
Q.30 (Many Machines) : A machine was purchased January 1,2014, for 5 lakhs. The total cost of
all machinery inclusive of the new machine was ( 75 lakhs. The following fufther particulars are
available :
Expected life of the machine 10 years.
Scrap value at the end of ten years < 5,000.
Repairs and maintenance for the machine during the year { 2,000. Expected number of working
hours of the machine per year 4,000 hours. lnsurance premium annually for all the machines
< 4,500.
Electricity consumption for the machine per hour (@ 75 paise per unit) 25 units.
Area occupied by the machine 100 sq. ft.
Area occupied by other machines 1,500 sq. ft.
Rent per month of the depaftment { 800.
Lighting charges for 20 points for the whole depaftment, out of which three points are forthe machine
t 120 per month.
Compute the machine hour rate for the new machine on the basis of the data given above.
[Ans.: (52,616 + 4,000) + (25 x 0.75) = ? 31.904]
O.31 (3 Different Machines - Comprehensive MHR) : A department is having 3 machines. The
figures indicate the departmental expenses. Calculate the comprehensive machine hour rate in
respect of these machines from the informations given below :
a
Depreciation of Machinery 12,000
Depreciation of Building 2,880
Repairs to Machinery 4,000
lnsurance of Machinery 800
Power 6,000
Lighting 800
Miscellaneous Expenditure 4.200
36.680
Additional !nformation :
Machine Machine
A B C
Direct Wages ({) 1,200 2,400 2,400
Power Units 30,000 10,000 20,000
No. of Workers 4 8 8
Light Points 8 24 48
Space 400 sq. ft. 800 sq. ft. 800 sq.ft.
Cost of Machine ({) 3,00,000 1,20,000 1,80,000
Hours Worked 200 300 300
[Ans.: A - (9,832 + 200) = 70.48; B - (12,752 + 300) = 32.77;
C - (36,680 + 300) = 42.51 Basic + 8.00 Direct Wages = ? 50.51 Comprehensive MHRI
Overheads 273
15,4 OTHER OH RATES

O.32 (OH Rates) : The following information relate to the activities of a Production Department of a
Factory for a certain period :
Labour hours worked 24,0OO

Hours of machine operation 20,000
Overhead Chargeable to the Department < 25,000
On the order carried out in the department during the period, the relevant data was :
Material used - <2,000
Directwages - <1,650
Labour hours worked 1,650
Hours of machine operation 1,200
Calculate by three different methods the overhead chargeable to the job.
25,000 1
[Ans.: (i) gOpOO x 100 = 83 , % of wages; OH = ? 1,375,
25,000
(ii) 1.0417 per labour hour worked; OH = ( 1,719,
24pOO =
25,000
(iii) 1.25 per Machine hour; OH = 7 1,5001
*,OOO =
Q.33 : From the budgeted figures of Maharashtra Metal Works :
A. Prepare Normal Overhead Application Rate using :

1. Direct Labour Hour Method
2. Direct Labour Cost Method
3. Machine Hour Rate Method
Budgeted Figures :
Estimated Factory Overheads for the year T 58,000
Estimated Direct Labour Hours for the year 1,34,600 Hours
Estimated Direct Labour Cost for the year < 97,500
Estimated Machine Hours for the year 50,500 Hours
2. Prepare a comparative statement of cost showing the result application of each of the above
rates to Job No. 48 from the data given below :
Cost of Direct Materials Consumed { 420
Direct Wages { 450
Direct Labour Hours 300 Hours
lvlachine Hours 600 Hours
(FYBAF, Oct. 14, 15, adapted)
[Ans.: Prime Cost : 420 + 450 = $/Q; OH : (1) LR - 0.43 x 300 = 7 129;
(2) LC - 59.500/" x 450 = ? 267.75; (3) MHR - 1.15 x 200 = 7 2301
O.34 (S & D OH) : Following details are available with regard to turnover, costs and activity for the
year ending 30 June 2013 : Overhead costs and basis of apportionment are:
R s.
Sales Turnover , < 6,00,000 < 10,00,000 < 5,00,000 < 9,00,000
Cost of Sales < 3,50,000 < 8,00,000 < 3,70,000 < 4,80,000
Storage Area (sq. Mt.) 40,000 60,000 70,000 30,000
No. of Cartons sold 2,00,000 3,00,000 1,50,000 3,50,000
No of Bills Raised 1,00,000 1,20,000 80,000 1,00,000
\
274 Cost Accounting (T VB. Com. : SEM-I)
Basrs
Fixed Expenses:
Administrative wages and salaries No. of Bills raised 1,00,000
Salesmen's Salaries and Expenses Sales Turnover 1,20,000
Rent and lnsurance Storage area 60,000
Depreciation No. of Cartons 20,000
Variable Costs:
Commission 4% of sales
Packing materials and wages 50 P per Carton
20P r Bill
Based on the above data you are required to prepare a statement showing summary of Selling and
Distribution Costs apportioned to the Products.
[Ans.: P : 1,44,000 + 65,000; Q : 2,14,000 + 94,000;
R : 1,11,000 + 64,000; S : 2,31,000 + 77,0001
15.5 UNDER/ OVERABSORPTION

Q.35 : P Ltd. has 3 production departments (X, Y and Z). After all overheads allocation and
apportionment, the production department budget for the year included the following :
Y Z
Overhead Costs ({) 51,240_ 87,120 66,816
Direct Labour Hours 11 ,520
Machine Hours 4,200 5,280
A predetermined overhead absorption rate is established lor each production department each
year. Actual data for January 2014 included :
Department
X Y Z
Overhead Costs ({) 4,410 7,190 5,610
Direct Labour Hours 985
Machine Hours 340 426
Required :
(a) Calculate, from the data provided, an appropriate predetermined overhead absorption rate for
each production department for year 2014.
(b) Calculate the amount of the over / under absorption of overhead in January in each production
department and in total for the factory. fYBAF, March 2018, adapted)
[Ans.: MHR : X - 12.20; Y - 16.50; DLH : Z = 5.80;
Over / (Under) : (262) + (161 ) + 103 - (320)l
Q.36 : The pre-determined production overhead rates for the period, used to absorb overheads are:
Pl - < 246 per machine hour
P2 - < 134 per direct labour hour
P3 - < 108 per direct labour hour
lr4achine hours and direct labour hours in each production department are :
Departmenl Actual Macbine Hours Direct Labour Hours

Actual Budqeted Actual
P1 1,99,89,100 81,000 82,500 36,500 36,800
P 1,16,59,200 '19,600 18,800 86,500 84,400
1,70,94,700 36,100 37,200 1,56,000 1,59,900
Calculate for the period for each production department :
(i) The amount of overhead absorbed.
(ii) The amount of any over or under absorption of overheads.
[Ans.: (i) Pr - 82,500 x 246; P2- 84,4(n x 134; Pr- 1,59,900 x 108
(li) Over / (Under) : 3,05,900 + (3,49,60O) + 1,74,5001
Overheads 275
Q.37 : ln a factory, there are two production departments X and Y. Overheads allocated, apportioned
and re-apportioned of these two production departments for a period were as follows :
Budgeted 2,42,730 '1,45,665

Actual 2,44,785 1,44,495
A machine hour rate is used in production department X and a direct labour hour rate in production
department Y. Machine and direct labour activity in each production department is :
Machine Hours :
Budget 8,700 1 76 0
Actual 8,960 1 72 5
Direct Labour Hours
Budget 6,220 8,300
Actual 6,276 7,870
You are required to calculate for each production department for the period :
(i) The pre-determined production overhead absorption rate

(ii) The production overheads absorbed
(iii) The over / under absorption ol production overhead.
[Ans.:(i)X-27.90;Y-17.55(ii)X-2,49,984;Y-1,38,119(iii)X-5,199;Y-(6,376)]
Q.38 (Machine Hour Rate / Under-absorption) : The budget of a Machine Shop for 2013-14 is as
follows :
Normal working week 42 hours

Number of machines 15
Hours spent on maintenance in a week (normal loss) 5 hours per machine
Estimated annual overhead ( 5,55,000
Estimated direct wages rate t 3 per machine hour
Number of working wejeks in 2013-14 50
The actuals in respect of a 4-week period in 2003-14 are :
Overhead incurred < 49,000
Wages paid < 7,500
Machine hours operated 2,4OO
Calculate (i) the overhead rate per machine hour for 2013-14, (ii) the amount of under or over-
absorption ol overhead and wages in respect of the 4-week period.
[Ans.: (i) (42 - 5) = 37; (37 x 50 x 15) = 27,750; 5n55,000 + 27,750 = ? 20
(ii) Under-absorption of Overhead (49,000 - 48,000) = ? 1,000;
Under-absorption of Wages = (7,500 - 7,020) = ? 3001
Q.39 (Under-absorption) : The total overhead expenses of a factory are ( 4,46,380. Taking into
account the normal working of the factory, overhead was recovered in production at ( 1 .25 per hour.
The actual hours worked were 2,93,104. How would you proceedto close the books of accounts,
assuming that besides 7,800 units produced of which 7,000 were sold, there were 200 equivalent
units in work-in-progress ?
On investigation, it was found that 50% of the unabsorbed overhead was on account of increase in
the cost of indirect materials and indirect labour and the remaining 50% was due to factory inefficiency.
Also give the profit implication of the method suggested. (CA-PCC, November 2000)
[Ans.: 4,46,380 - (2,93,104 x 1.25) = 80,000; Distribution - Cost of Sales - (7,000 x 5);
Finished Goocl (800 x 5); W-I-P (200 x 5); P & L A/c '40,0001
276
of Costing
Different
frorn Cost Sheet
286
Element-wise Cost Sheet
Sheet
ClassiJication of Costs and Cost Sheets 277
1,1 MEANING
1. According to CAS-I bythe ICWA, costs are also classified on the basis of nature of production
or manufacturing process.
2. Batch Cost is the aggregate cost related to a cost unit which consist of a group of similar articles
which maintain its identity throughout one or rtore stages of production.
3. When the production process is such that goods are produced from a sequence ofcontinuous or
repetitive operations or processes, the cost incurred during a period is considered as Process
Cost. The process cost per unit is derived bydividing the process cost bynumber of units produced
in the process during the period.
4. Operation Cost is the cost a specific operation involved in a production process or business
activity. When there are distinctly separate operations involved in a process, cost for each operation
is found out for effective control mechanism.
5. Operating Cost is the cost incurred in conducting a business activity. Operating costs refer to
the cost ofundertakings which do not manufacture anyproduct but which provide services.
6. Contract Cost is the cost of contract with some terms and condition of adjustment agreed upon
beetween the contractee and the contractor.
7. Joint Costs are the common cost of facilities or services employed in the output oftwo or more
simultaneously produced or otherwise closely related operations, commodities or services.
[Tutorial Note : You have already studied Cost C lassi fication on different basis such as Behaviour,
Time, Decisions, Elements etc. in Chapter - L]
1.2 METHODS OF COSTING

Costing means the process of ascertainment ofcosts. Methods ofCosting therefore, mean the methods
used for ascertainment of costs. Methods of costing involve the methods and procedures used in
different industries in -
(l)Collection of Costs liom different sources such as Stores, Labour Department, Accounts
departmentl
(2) Classification of Costs into Material, Labour and Overheads; and
(3) Ascertaining Cost Per Unit by
(a) Allocation of Direct Costs
(b) Apportionment of Costs to Cost Centres, and finally
(c) Absorption of Overheads by individual units.
1.3 DIFFERENT METHODS FOR DIFFERENT INDUSTRIES

Different methods of costing are used in different industries. The method of costing used depends
upon the nature of industry. Thus, for example, the costing method employed by a construction
company building different types of bungalows will be different from the costing method employed
by a chemical company manufacturing a standard drug.
1.4 JOB COSTING

The construction company is interested in determining the cost of each bungalow separately. Its
costing method will treat each bungalow as a cost unit. The costs will be collected, classified and
determined bungalow-wise. The method of costing used in such cases is called Job Costing. Job
Costing Method is applicable where work consists of separate jobs or orders, contracts or batches.
Job Costing is used to ascertain the cost of non-standard jobs undertaken against customer's specific
orders. It is employed in industries where separate records can be kept in respect ofeach order from
the beginning to the end. The main object of Job Costing is to ascertain the cost (and profit or loss)
278 CostAccounting(T.Y'B'Com' : SEM-V)
ofeach Job, Contract etc., and control its costs during its execution. Job Costing is also known as
'Job Order Costing', Terminal Costing, Specific Costing etc. Following are the different tlpes ofJob
Costing : ( 1) Job Order Costing, (2) Contract Costing and (3) Batch Costing. ICMA has defined Job
Order bostin g as'. that form of specific order costing which applies where wrtrk is undertaken to
cttstomer's special requirements and each order is comparatively of short duration (compared to
with those to which contract costing applies).ICMA has defined Batch Costingasi thatform of
specific order costing which consists of a group of similar articles which maintain its identity
throughout one or more stages of production.
1.5 PROCESS COSTING

The chemical company, on the other hand, is not interested in finding out the cost of each individual
unit of drug produced. The Production of drugs may, however, involve three processes - say, Powder
Making, Mixing and Packing in Capsules. The companywill be interested in ascertaining the separate
cost of each process rather than of each unit of drug. Its costing method will therefore treat each
process as a cost unit. The costs will be collected, classified and determined process-wise. The
method of costing used in such cases is known as Process Costing.
1.6 OTHER METHODS

Job Costing and Process Costing are the two basic methods of costing employed depending upon the
nature ofindustry. Job Costing is used where the cost units are different or distinct from one another
e.g. construction jobs, printing jobs, batches etc. Process Costing is used where the cost units (products)
are identical and the production involves two or more processes or operations, e.g. Chemical Industries,
Service Industries etc. All other methods of costing are tlpes of combination of these two main
methods. The Chart below shows the different methods of costing falling under these two main
methods. r
1.7 EXHIBIT 1 : METHODS OF COSTING
)(
METHOOS OF COSTING
\ JOB COSTING PROCESS COSTING
1. Job Order Costing 1. Process Costing
2. Contrac't Costing 2. Unit Costing
3. Batch Costing 3. Operating Costing
COMBINATION
COMPOSITE COSTING
2. OUTPUT COSTING & UNIT COSTING
2.1 MEANINGANDAPPLICABILITY
When the concern produces onlya single item the costing method is called single or output costing
which is a form or rype of Unit Costing. Unit Costing is employed when the manufacturing is
continuous and the units produced are identical. It is a method ofcosting used to ascertain the cost
per unit produced. Unit Costing is applicable to many industries where the output is expressed in
natural units such as Numbers, Tonnes, Kilograms, Litres, Metres and so on. Thus Unit Costing
Classijication of Costs and Cost Shee* 279
Methods are applicable to industries such as Steel, Mines, Quarries, Collieries, BrickMaking, Kilns,
CementWorks, FlourMills, Breweries, Paper Mills, Textiles, Spinning Mills, Sugar Mills and soon.
Unit Costing is also applied when the concern produces different grades of product or in assembly
tlpe production of automobiles, computers, offices equipments etc. Unit Costing is also called a
variant or type ofProcess Costing since in both methods an identical or standard item is produced.
Howeveq Process Costing is more complex in nature than Unit Costing.
2.2 UNITS USED IN DIFFERENT INDUSTRIES

As explained above, in Unit Costing the output is measured in 'natural units'. Following is a list of
the natural units used in various industries emplolng Unit Costing :
EXHIBIT 2: DIFFERENT UNITS

Unit lndustries Product
Tonne Steel Steel Bars, lngots
Collieries Coal
Quarries Stone
Mines MineralOre
Kilns Lime Stones
Sugar Mills Sugar
Cement Cement
K.G Paper Mill Paper
Spinning Mills Yarn
Sacks Flour Mills Flour
Barrels Breweries Beer, Wines
1,000 No. Brick Making Bricks
Metre/ Yards Textile Mills Cloth
WORKSHEETl:COSTSHEET
The pro-forma Cost Sheet based on the latest, mandatory Cost Accounting Standards would appear
as follows :
COST SHEET
STEP ELEMENTOFCOST ? 7
A. Direct Materials :
Opening Stock of Raw Materials xx
Add: Purchases of Raw Materials xx
Expenses on Freight etc. xx
Less: Closing Stock of Raw Materials (xx)
Net Materials Consumed xx
B. Direct Wages xx
c. Direct Expenses xx
D. PRIMECOST[A+B+C] xxx
E. Works Overheads xx
F. Less: Sale of Scrap / Waste / Recoveries (xx)
XX
G. Work in Progress:
Add: Opening Stock xx
Less : Closing Stock xxx
--Ixx)
H. WORKSCOST[D+E-F+G] xxx
t. Quality ControlCosts xxx
J. R & D Costs xxx
280 Cost Accounting (T.Y. B. Com. : SEM-V)
K. Off ice/Ad m i n istrative Overheads xxx

L. COST OF PRODUCTION [H + I + J + K] xxx
M. Finished Goods:
Add: Opening Stock xx
Less: Closing Stock (xx)
N. COST OF GOODS SOLD [L + M] xxx
o. Sales/Distribution Overheads xxx
P. COST OF SALES [N + O] xxx
o. (+) PRoFIT/ G) LOSS xxx
R. SALES [P * A] xxx
2.3 COST PER UNIT

The Cost Per Unit at each stage is obtained as follows:
Total Prime Cost
Prime Cost Per Unit: Total Units Produced
Total Works Cost
Works Cost Per Unit :
Total Units Produced
Total Cost of Production
Cost of Production Per Unit :
Total Units Produced
Thus, the costs upto the stage of production are divided by Total Units Produced to determine the
Cost Per Unit.
2.4 ADJUSTING UNITS OF FINISHED GOODS STOCK

The Total No. of Units produced are thereafter adjusted for the opening and closing stock of finished
goods to arrive at the Quantity of Units Sold. Thus,
WORKSHEET 2: ADJUSTING FINISHED STOCK UNITS
Particulars Quantity
No. of Units Produced xxx
Add: No. of Units in Opening Stock xxx
xxx
Less: No. of Units in Closing Stock (xxx)
= No. of Units Sold xxx
Costof Goods SoldPerUnit:

ffi
cost of Sates per Unit : '",ti1t"tl i,f :"'it,
Total No. of Units Sold
Thus, the costs pertaining to Sales are divided by Units Sold to arrive at the Cost Per Unit.
Note : lf the value of closing stock of finished goods is not given, it is to be determined by the
following formula:
Units of Closing Stock x Cost of Production Per Unit
Thus, Closing Stock of Finished Goods has always to be valued at the cost of production.
2.5 ITEMS EXCLUDED FROM COST SHEET

Purely financial items (incomes / expenses / losses / appropriations) such as interest, loss on sale of
fixed assets, dividends paid etc. are not shown in the cost sheet. (see Chapter 6,Para 3 for detailed
list of such items).
Classijication of Costs and Cost Sheets 281
2.6 PROFIT CENTRE

Profit centres are similar to cost centres but are accountable for costs and revenues. We have seen
that a cost centre is where costs are collected. Some organisations, however, work on a profit centre
basis. Profit centre managers should normally have control over how revenue is raised and how
costs are incurred. Often, several cost centres will comprise one profit centre. The profit centre
manager will be able to make decisions about both purchasing and selling and will be expected to do
both as profitably as possible. A profit centre manager will want information regarding both revenues
and costs. He will be judged on the profit margin achieved byhis division. In practice, it may be that
there are fixed costs which he cannot control, so he should be judged on contribution, which is
revenue less variable costs. In this case he will want information about which products yield the
highest contribution.
2.7 INVESTMENT CENTRE

An investment centre is a profit centre with additional responsibilities for capital investment and
possibly for financing, and whose performance is measured by its return on investment. An investment
centre manager will take the same decisions as a profit centre manager but he also has additional
responsibility for investment. So he will be judged additionally on his handling of cash surpluses
and he will seek to make only those investments which yield a higher percentage than the company's
notional cost of capital. So the investment centre manager will want the same information as the
profit centre manager and in addition he will require quite detailed appraisals of possible investments
and information regarding the results of investments already undertaken. He will have to make
decisions regarding the purchase or lease ofnon-current assets and the investment ofcash surpluses.
Most of these decisions involve large sums of money.
2.8 DIFFERENT COST SHEETS

A cost sheet prepared for a cost centre will show only the cost ofsales. A cost sheet prepared for a
profit centre will also show the sales and the''profit'. A cost sheet prepared for an investment centre
may show financial costs - actual as well as notional costs of funds.
2.9 COSTACCOUNTINGSTANDARDS
2.9.1 Cost of Production (CAS .4) / Manufacturing Cost (CAS-22)

CAS-4 (Cost of Production) I CAS-22 (Manufacturing of Cost) issued by the ICWA, India contains
the following guidelines for computing Total / Per Unit Cost of Production :
1. Cost of Production : Cost of production shall consist of Material Consumed, Direct Wages and
Salaries, Direct Expenses, Works Overheads, Quality Control cost, Research and Development
Cost, Packing cost, Administrative Overheads relating to production. To arrive at cost of
production, adjustment for stock ofwork-in-process, finished goods, recoveries for sales ofscrap,
wastage etc. shall be made. The term t The term'Manufacturing Cost' and'Cost of Production' is
used interchangeably. To determine the cost of production, calculations of different cost
components and adjustments are explained below :
2. Material Consumed : Material Consumed shall include materials directlyidentified for production
ofgoods such as :
( l) Indigenous materials
(2) Imported Materials
(3) Bought out items
(4) Self manufactured items
(5) Process materials and other items.
Cost of materials consumed shall consist of cost of material, duties and taxes, freight inwards,
insurance and other expenditure directly attributable to procurement. Trade discount, rebates
and other similar items will be deducted for determining the cost of materials. Cenvat credit,
282 CostAccounting (T'YB'Com' : SEM-V)
credit for countervailing customs duty, Sales Tax set off, VAI, duty draw back and other similar
duties subsequently recovered / recoverable by the enterprise shall also the deducted.
3. Direct Wages and Salaries : Direct Wages and salaries shall include house rent allowance,
overtime and incentive payments made to employees directly engaged in the manufacturing
activities. Direct wages and salaries include ffinge benefits such as :
(l ) Contribution to provident fund and ESIS.
(2) Bonus I ex-gratia payment to employees.
(3) Provision for retirement benefits such as gratuity and superannuation.
(4) Medical benefits
(5) Subsidised food
(6) Leave with pay and holiday payment
(7) Leave encashment
(8) Other allowances as children's education allowance, conveyance allowance which are payable
to employees in the normal course of business etc.
4. Direct Expenses : Direct expenses are the expenses other than direct material cost and direct
employees costs which can be identified with the product. Direct expenses include :
(l) Cost of utilities such as fuel, power, water, steam etc.
(2) Royalty based on production.
(3) Technical Assistance / know - how fees.
(4) Amortized cost of moulds, patterns, patents etc.
(5) Job charges.
(6) Hire charges for tools and equipment.
(7) Charges for a particular product designing etc.
5. Works Overheads : Works overheads are the indirect costs incurred in the production process.
The terms Manufacturing Overheads, Factory Overheads, Work Overheads and Production
Overheads have the same meaning and are used interchangeably. Work overhead include the
following expenses :
(l) Consumable stores and spares.
(2) Depreciation of plant and machinery, factory building etc.
(3) Lease rent ofproduction assets.
(4) Repair and maintenance ofplant and machinery, factory building etc.
(5) Indirect employees cost connected with production activities.
(6) Drawing and Designing department cost.
(7) Insurance of plant and machinery, factory building, stock of raw material & WIP etc.
(8) Amortized cost ofjigs, fixtures, tooling etc.
(9) Service department cost such as Tool Room, Engineering & Maintenance, Pollution control etc.
6. Quality Control Cost : The Quality Control Cost is the expenses incurred relating to quality
control activities for adhering to qualitystandards.
7. Research and Development Cost : The Research and Development Cost incurred for
development and improvement of the process or the existing product shall be included in the cost
ofproduction.
8. Administrative Overheads : Administrative overheads needs to be divided in relation to
production activities and other activities. Administrative overheads in relation to production
activities shall be included in the cost of production. Administrative overheads in relation to
activities other than manufacturing activities e.g. marketing, projects management, corporate
office expenses etc. shall be excluded fiom the cost of production.
[Tutorial Note : In absence of specific instruction / details in an examination problem,
Administrative Expenses are assumed to relate to production and included in Cost ofProduction.]
Classiftcation of Costs and Cost Sheets 2gj
9. Absorption of Overheads : Overheads shall be analysed into variable overheads and fixed
overheads. Variable Overheads are the items which change with the change in volume of
production, such as cost of utilities etc. Fixed Overheads are the items whose value do not change
with the change in volume of production such as salaries, rent etc. The variable production
overheads shall be absorbed in production cost based on actual capacity utilisation. The fixed
production overheads and other similar item offixed costs such as quality control cost, research
and development costs, administrative overheads relating to manufacturing shall be absorbed in
the production cost on the basis of the normal capacity or actual capacity utilization of the plant,
whichever is higher.
10. Valuation of Stock of work-in-progress and finished goods : Stock ofwork-in-progress shall
be valued at cost on the basis of stages of completion as per the cost accounting principles.
Similarly, stock of finished goods shall be valued at cost. Opening and closing stock of work-in-
progress shall be adjusted for calculation ofcost ofgoods produced and similarly opening and
closing stock offinished goods shall be adjusted for calculation ofgoods despatched. In case the
cost of a shorter period is to be determined, where the figures of opening and closing stock are
not readily available, the adjustment of figures of opening and closing stock may be ignored.
11. Treatment of Scrap or Waste : The production process may generate scrap or waste. Realized
or realizable value ofscrap or waste shall be credited to the cost ofproduction. In case scrap or
waste does not have ready market and it is used for reprocessing, the scrap or waste value is
taken at a rate ofinput cost depending upon the stage at which such scrap or waste is recycled.
The expenses incurred for making the scrap suitable for reprocessing shall be deducted from
value ofscrap or waste.
12. Miscellaneous Income : Miscellaneous income relating to production shall be adjusted in the
calculation of cost of production for example, income from sale of empty containers used for
despatch ofthe goods produced under reference.
13. Interest and Financial Charges : Interest and financial charges being a financial charge shall
not be considered to be a part ofcost ofproduction.
14. Abnormal and Non-recurring Cost : Abnormal and non-recurring cost arising due to unusual
or unexpected occurrence ofevents, such as heavybreak down ofplants, accident, market condition
restricting sales below normal level, abnormal idle capacity, abnormal process loss, abnormal
scrap and wastage, payments like VRS, retrenchment compensation, lay-offwages etc. shall not
form the part ofcost ofproduction
2.9.2 Material Cost ICAS-61
The following rules are laid down in CAS-6 for measurement and presentation of Material Cost in a
cost statement.
1. Spares which are specific to an item of equipment shall not be taken to inventory (i.e. shall not be
taken as material cost), but shall be capitalized with the cost ofthe specific equipment.
2. Normal /oss or spoilage of material prior to reaching the factory shall be absorbed in the cost of
balance materials.
3. Losses due to shrinkage or evaporation and gain due to elongation or absorption of moisture
etc.. before the material is received shall be absorbed in material cost to the extent they are
normal, with corresponding adjustment in the quantity.
4. Theforeign exchange component of imported material cost shall be converted at the rate on the
date ofthe transaction. Any subsequent change in the exchange rate till payrnent or otherwise
shall not form part of the material cost.
5. Any demuruage or detention charges,or penalty levied bytransport or other authorities shall not
form part of the cost of materials.
6. Subsidy/Grant/Incentive and any such paynent received/receivable with respect to any material
shall be reduced from cost.
7. Any abnormal cosl shall be excluded from the material cost'
8. The material cost of normal scrap/ defectives which are rejects shall be included in the
material cost of goods manufactured.
284 CostAccounting(T.Y.B.Com.: SEM-V)
9. The material cost of actual scrap / defectives, not exceeding the normal shall be adjusted in the
material cost of good production.
10. Material Cost of abnormal scrap /defectives should not be included in material cost but treated
as loss after giving credit to the realizable value ofsuch scrap / defectives.
ll.Where a material is processed or part manufactured by a third party according to
specifications provided by the buyer, the processing/zandacturing charges payable to the
third party shall be treated as part of the material cost.
12.Wherever part of the manufacturing operations / activity is subcontracted, thesubcontract
charges related to materials shall be treated as direct expenses.
13.The cost of materials like catalysts, dies, tools, moulds, patterns etc., which arerelatable
to production over a period of time shall be amortized over the production units benefited by
such cost.
14.The cost of indirect material with lift exceeding one year shall be included in cost over the
useful life ofthe material.
l5.DirectMaterialsshalltr-classifiedinthecoststatementundersuitableheadse.g. 1i)Rawmaterials,
(ii) Components, (iii) Semi finished goods and (iv) Sub-assemblies.
2.9.3 Employee Cost [CAS-71
The following rules are laid dowir in CAS-7 for measurement and presentation ofEmployee Cost in
a cost statement.
l. Employee Cost shall be ascertained taking into account the gross pay including all allowances
payable along with the cost to the employer of all the benefits.
2. Bonus whether payable as a Statutory Minimum or as a sharing ofsurplus or as Ex-gratia payable
in lieu of or in addition to Bonus shall be treated as part of the employee cost.
3. Remuneration payable to Managerial Personnel including Executive Directors on the Board
and other offrcers of a corporate body under a statute will be considered as part of the Employee
Cost of the year under reference whether the whole or part ofthe remuneration is computed as a
percentage ofprofits.
4. Remuneration paid to non executive directors shall not form part of Employee Cost but shall
form part ofAdministrative Overheads.
5. Separation costs relatdto voluntaryretirement, retrenchment, termination etc. shall be amortized
over the period benefiting from such costs.
6. The amortized separation cosls related to voluntary retirement, retrenchment, and termination
etc. for the period shall be treated as indirect cost and assigned to the cost objects in an appropriate
manner.
7. However unamortized amount related to discontinued operations, shall not be treated as employee
cost.
8. Employee cost shall not include imputed costs
9. Where Employee cost is accounted,at standard cost, variances due to normal reasons related to
Employee cost shall be treated as part ofEmployee cost. Variances due to abnormal reasons shall
be treated as part ofabnormal cost.
10. Any SaDsidy, Grant, Incentive or any such payment received or receivable with respect to any
Employee cost shall be reduced for ascertainment ofcost ofthe cost objectto which such amounts
are related.
ll . Any abnormal cost where it is material and quantifiable shall not form part of the Employee cost.
12. Penalties, damages paid to statutory authorities or other third parties shall not form part of the
Employee cost.
13.The costoffreehousing,freeconveyanceandanyothersimilarbenefitsprovidedtoanemployee
shall be determined at the total cost of all resources consumed in providing such benefits. Any
recovery from the employee towards any benefit provided e.g. housing shall be reduced from the
employee cost.
Classiftcatian of Costs and Cost Shee$ 285
14. Recruitment costs, training cost and other such costs shall be treated as overheads and dealt with
accordingly.
15. Overtime premium shall be assigned directlyto the cost object or treated as overheads depending
on the economic feasibility and the specific circumstance requiring such overtime.
16. Cost of ldle time is ascertained bythe idle hours multiplied by the hourly rate applicable to the
idle employee or a group of employees. Idle time cost shall be assigned direct to the cost object
or treated as overheads depending on the economic feasibility and the specific circumstances
causing such idle t'ime. Cost of idle time for reasons anticipated like normal lunchtime, holidays
etc. is normally loaded in the Employee cost while arriving at the cost per hour of an Employee/
a group of Employees whose time is attributed direct to cost objects.
2.9.4 Direct Expenses ICAS-I01

The following rules are laid down in CAS- I 0 for measurement and presentation of Direct Expenses
in a cost statement.
l. Direct expenses incurred for the use of bought out resources shall be determined at invoice or
agreed price including duties and taxes, andotherexpenditure directlyattributabletheretonet
oftrade discounts, rebates, taxes and duties refundable or to be credited.
2. Incaseofdiesandtoolsproducedintemally,thecostofsuchdiesandtoolswill include direct
material cost, direct employee cost, direct expenses, factory overheads including share of
administrative overheads relating to production comprising factory management and
administration.
3. In the case of research and development cost, the amount traceable to the cost object for
development and improvement of the process for the existing product shall be included in
Direct Expenses.
4. Direct Expenses paid or incurred in lump-sum or which are in the nature of 'one -time'pal,rnent,
shall be amortized on the basis ofthe estimated output or benefit to be derived from such direct
expenses. Example: Royalty or kchnical know-howfees, or drawing or designingfees, are paid
for which the benefit will arise in the future period. In such case, the production / service volumes
shall be estimated for the effective period and based on volume achieved during the Cost
Accounting period, the charge for amortization shall be determined.
5. IfanitemofDirectExpensesisnotmaterial,itcanbetreatedaspartofoverheads.
6. Finance costs incurred in connection with the selfgenerated or procured resourses shall not
form part ofDirect Expenses.
7. Direct Expenses shall not include imputed costs.
8. Any Subsidy/Grant/Incentive or any such payment received/receivablewithrespecttoany
Direct Expenses shall be reduced.
9. Any abnormal portionof the direct expenses where it is material and quantifiable shall not form
part of the Direct Expenses.
l0.Penalties, damages paid to statutory authorities or other third parties shall notformpartof
the Direct Expenses.
2.9.5 Packing MaterialGosts [GAS-9]

The following rules are laid down in CAS-9 for measurement and presentation ofPacking Cost in a
cost statement.
l. Packing Materials are materials used to hold, identiff, describe, store, protect, display, transport,
promote and make the prodqct marketable and communicate with the consumer.
2. Packing Materials are classified into primary and secondary packing materials.
3. Primary Packing Material is the packing material which is essential to hold the product and
bring it to a condition in which it can be used by or sold to a customer. For example:
o Phaimaceutical industry: Foils for strips oftablets/capsules, vials.
. Industrial gases: Cylinders / bottles used for filling the gaseous products.
a Confectionary Industry: Butter paper and wrappers.
286 CostAccounting(T,ll,B.Com. : SEM-V)
4. Cost of primary packing materials shall form part of the cost of production.
5. Secondaryt Packing Material is the packing material that enables to store, transport, inform the
customer, promote and otherwise make the product marketable. For example:
o Pharmaceutical industry: Cartons used for holding strips oftablets and card board boxes used
. for holding cartons.
. Textile industry: Card board boxes used for holding cones on which yarn is woven.
o Confectionary Industry: Jars for holding wrapped chocolates, Cartons containing packs of
biscuits.
6. Cost ofsecondarypacking materials shall form partofdistribution overheads.
7 . Reusable Packing Material is the packing materials that are used more than once to pack the
product. The packing material cost ofreusable packing shall be assigned to the cost object taking
into account the number of times or the period over which it is expected to be reused.
lllustration 1 :
tr/ilk is produced in a factory and packed in half liter sachets. 1OO sachets are packed in eacfr
metallic reusable container and the containers are transported to milk depots in airconditioned
trucks, refrigerated in the depots and sold in retail. State the element of cost under which the factory
has to classify the following items as per Cost Accountancy Standards.
1. Cost of the Sachets
2. Cost of the Containers
3. Transportation Costs
4. Refrigeration Costs
5. Depot's Expenses - like rent, salary of staff, etc.
6. Cost of advertising for the milk (ICWA lnter, Dec. 15, adapted)
Solution :
1 . Cost of the Sachets Primary Packing Material Production Overhead

2. Cost of the Containers Secondary Packing Material Selling and Distribution Overhead
3. Transportation Costs Relates to Finished Goods Distribution Overhead
4. Refrigeration Costs Storage of Finished Goods Distribution Overhead
5. Depot's Expenses Marketing Cost Selling and Distribution Overhead
6. Advertisement Cost Sellin and Distribution Overhead
3.1 ELEMENT-WISE COST SHEET

lllustration 2 : (Stock of Materials)
From the books of accounfs of M/s. Avdhoot Enterprises, the following details have been extracted
for the Quarter Ending 31-3-2014 :
Stock of Materials - Opening 1; r' t 2,70,000

Stock of Materials - Closing D.^. '- 3,00,000
Purchases of Materials (}'^ 12,48,000
Direct Wages 1l
3,57,600
1,20,000
24,OO0
Salaries to Administrative Staff .6?j 60,000
Carriage lnwards o{'. 48,000
Carriage Outwards5 aI a--, 37,500
Manager's Salary 72,OOO
General Charges ? (J' 37,200
Legal Charges for'Criminal sdiv 20,000
Classiftcation of Costs and Cost Sheets 287
'
Commission on Sales - " 28,000
fud "i- 96,000
Electricity Charges (Factory) 72,000
Directors'Fees C 36,000
Repairs to Plant and trlachinery 63,000
Rent, Ratds and Taxes - Factory 18,000
Rent, Rates and Taxes - Office 9,600
Depreciation on Plant and Machinery 45,000
Depreciation on Furnilure 3,600
Salesmen's Salaries 50,000
Audit Fees 18,000
(1) The Manage/s time is shared between the factory and the office in the ratio of 20 : 80.
(2) Carriage outwards include < 7,500 being carriage inwarf,s on Plant and Machinery.
(3) Selling Price is 120o/o of the cost price. ':-" t"
From the above details prepare detailed cost sheet for the quarter ending 31-12-2014 and ascertain
sales. (T.YB.Com., March 2006, adapted)
Soluiion: )r1 .onj"*
M/s. Avdhoot Enterprises
Cost Sheet [For the Quartgr Year Ended 31-3-20141
A. Direct Materials :
Opening Stock 2,70,000
Purchases 12,48,000
Carriage lnwards 48,000
15,66,000
Less : Closing Stock 3,00,000
Net Direct Materials 12,66,000
B. Direct Wages 3,57,600
C. Direct Expenses 1,20,000
D. PRIME COST [A + B + C] 17,43,600
E. Works Overheads :
lndirect Wages 24,O40
Manager's Salary (20%) 14,400
Fuel 96,000
Electricity 72,OO0
Repairs - Plant 63,000
Factory Rent etc. 18,000
Depreciation - Plant 45,000
Total Works Overheads 3,32,400
F. WORKS COST [D + E] 2T,76366
G. Administrative Overheads :
Salaries to Staff 60,000
Managefs Salary (80'/d 57,600
General Charges 37,200
Directors Fees 36,000
Office Rent etc. 9,600
Depreciation - Fumiture 3,600
Audit Fees 18,000
Total Ad m in i strati ve Ove rh e ad s 2,22,OOO
H. COST OF PRODUCTION [F + GI 22,98,000
l. Sales / Distribution Overheads:
Carriage Outward (37,500 - 7,500) 30,000
Commission on Sales 28,000
Salesmen's Salaries s0,000
Total Sales / Distribution Overheads 1,08,000

J. COST OF SALES [H + l] 24,06,000
K. PROFIT (Bal. Fig.) 4,81,200
L. SALES 2oo/o x 24,OG + 28,87,200
Working Notes :
(1) Legal charges for criminal suit (( 20,000) will be ignored while preparing cost sheet.
(2) Carriage on machinery will be capitalised and so will be ignored in cost sheet.
lllustration 3 : (Stock of RM)
The following particulars have been extracted from the books of M/s. Sohan Manufacturing Company
forthe year ended 31-03-200'14 :
i
Opening Stock of Raw Materials 2,35,000
Closing Stock of Raw Materials 2,50,000
Raw Materials Purchase 10,4Q,000
Drawing Office Salaries 48,000
Royalty on Production 70,000
Cash Discount Allowed 17,000
Repairs to Plant & Machinery 53,000
Rent, Rates & Taxes (Factory) 15,000
Rent, Rates & Taxes (Office) 8,000
Office Conveyance 15,500
Salesmen's Salaries & Commission 42,000
Productive Wages 7,00,000
Depreciation on Plant & Machinery 35,500
Depreciation on Office Furniture 3,000
Gas and Water Charges (Factory) 7,500
Gas and Water Charges (Otfice) '1,500
Manger's Salaries 60,000
Cost of Catalogues Printing 10,000
Loose Tools Written off 8,000
Trade-Fair NSES 10,000
Out of 48 hours in a week, Manager devotes 40 hours for factory and 8 hours for office per week for
the whole year.
The Management has fixed the selling Price @ 110o/o of cost.
Prepare detailed cost statement for the year ended 31 -03-2014. (T.Y.B.Com., Man 08, adapted)
Solution :
BOOKS OF M/S SOHAN MANUFACTUHING COMPANY

COST SHEET FOR THE YEAR ENDED 31.03.2014
ELEMENT OF COST
A Direct Materials
Opening Stock [Raw Materials] 2,35,000
Purchases 10,40,000
Carriage lnwards 41.000
13,16,000
Less: Closing Stock [Raw Materials] (2,50,000)
B. Direct Wages
C. Direct Expenses
Royalty on Production 70.000
D. PRIME COST 18,36,000
E. Works Overheads
Drawing Office Salaries 48,000
Repairs to Plant & Machinery 53,000
Factory Rent, Rates & Taxes 15,000
Factory Gas and Water Charges 7,500
Manager's Salary 50,000
Loose Tools Written Off 8.000
TotalWorks OH
F. WORKS COST 20,53,000
G. Admin. Overheads
Office Rent, Rates & Taxes 8,000
Office Conveyance 15,500
Depreciation - Office Fumiture 3,000
Office Gas and Water Charges 1,500
Manager's Salary 10.000
TotalAdmn. OH
H. COST OF PRODUCTION 21,21,000
!. Sales/Distr.Overheads
Salesmen Salary & Commission 42,000
Catalogue Printing 10,000
Trade Fair Expenses 10.000
TotalS & D OH
J. COSTOFSALES 21,83,000
K. PROFIT (10olo of Cost) 2,18,300
L. SALES 10o/o ol 24,01,300
Working Notes :
1. Cash Discount is Financial Expense.

2. Drawing office is an Engineering office, hence part of factory.
3. Manager's Salary
Total for 48 Hours per week 60,000
For Factory @O148 x 60,000) 50,000
For Office (8/48 x 60,000) 10,000
lllustration 4 :
The following data have been extracted from the books of Shri Ganesh lndustries Ltd. for the year
2017 :
(
Opening Stock of Raw Materials 25,000
Purchases of Raw Materials 85,000
Closing Stock of Raw Material 40,000
Wages (Direct) 75,000
Wages (lndirect) 10,000
Other Direct Charges 15,000
Rent and Rates :
- Fictirry 5,000
- Office 500
lndirect Consumption of Material 500
Depreciation on Plant 1,500
Depreciation on Office Furniture 100
Salary :
- Office 2,500
- Salesman 2,000
Other Factory Expenses 5,700
Other Office Expenses 900
Managing Directot's Remuneration 12,000
Other Selling Expenses 1,000
290 Cost Accounting (T Y.B. Com. : SEM-I)
Travelling Expenses of Salesman 1,100
Carriage Outwards 1,000
Sales 2,50,000
Advance lncome Tax Paid 15,000
Advertisement 2,000
The Managing Director's Remuneration is to be allocated < 4,000 to factory, < 2,000 to the office
and t 6,000 to selling departments. From the above information prepare a statement of cost showing
(a) Prime Cost; (b) Works Cost; (c) Cost of Production; (d) Cost of Sales; (e) Net Profit.
Solution : (SYBAF, Oct.2005,2008, adapted)
BOOKS OF SHRI GANESH INDUSTRIES LTD.
COST SHEET FOR THE YEAR 2017
r
A. Direct Materials
Opening Stock [Raw Materials] 25,000
Purchases 85,000
1,15,000
Less: Closing Stock [Baw Materials] (40,000)
Net Direct Materials 75,000
B. Direct Wages 75,000
C. Other Direct Cfiarges 15.000
E. Factory Overheads
lndirect Material 500
Depreciation on Plant 1,s00
Other Factory Expenses 5,700
Managing Director's Remuneration 4.000
Total Factory OH
G. Administrative Overheads
Rent and Rates s00
Salary 2,500
Other Office Expenses 900
Managing Director's Remuneration 2.000
TotalAdmn. OH
l. Sales / Distribution Overheads
Salary 2,000
Managing Directods Remuneration 6,000
Other Selling Expenses 1,000
Travelling Expenses of Salesman 1,100
Carriage Outward 1,000
Advertisement 2.000
TotalS & D OH
J. COSTOFSALES 2,10,800
K. PROFIT (Balancing Figure) 39,200
L. SALES (Given) 2,50,000
Working Note : Advance lncome Tax is a financial item so it will not included in cost sheet.
lllustration 5 :
From the following particulars you are required : (a) to prepare a statement showing the total cost.
(b) To state what percentage - (i) the manulacturing cost (ii) the management oncost (iii) the selling
oncost bear to the total cost of the goods sold.
a
Opening Stock of Direct Materials 61,700
Wo* in Progress at Commencement 1,21,700
Purchase of Direct Materials 2,86,500
Direct Wages 3,57,000
Factory on Cost 1,99,500
Selling on Cost 70,000
Management on Cost 1,10,000
Sales 12,50,000
Closing Stock of Direct Materials 75,400
Closing Work in Progress 1,35,600
Sale of Scrap 1,350
on Direct Material 5,950
Solution (SYBAE Oct. 201 4, adapted)
COST SHEET
A. Direct Materials
Purchases 2,86,500
Carriage lnward 5.950
3,54,150
Less: Closing Stock (75.400)
B. Direct Wages 3.57.000
C. PRIME COST 6,35,750
D. Work Overheads
Factory oncost 1,99,500
Less : Sale of Scrap 1,350
1,98,150
Work-in-Progress
Add :Opening Stock 1,21,700
3,19,850
Less : Closing Stock 1.35.600
TotalFactoty OH
E. WORKSCOST 8,20,000
F. Administrative Overheads
Management oncost
G. COST OF PRODUCTION 9,30,000
H. Sales/Distr.Overheads
Selling oncost
I. COST OF SALES 0,00,000
J. PROFIT 2,s0,000
K. SALES 2,50,000
Working Notes :
1. Percentage of Manulacturing Cost to Total Cost =

ffi x 100 = 82olo
2. Percentage of Management oncostto Total cost = *ffi x 100 = 11%
3. Percentage of Selling Oncostto Total Cost = x 1oo =77o

ffi
lllustration 6 : (Stock of RM + FG + W'l'P)

From the following particulars prepare cost sheet showing various elements of cost :
?
Opening Stock of Raw Materials 1,10,000
Purchases of Raw Materials 8,25,000
Direct Power 25,840
Technical Directors Salary 40,590
Factory Rent, Rates & lnsurance 10,'140
Sale of Factory Scraps 1,460
Depreciation on Factory Buildings 75,200
Closing Work in Progress 1,20,260
Factory Stationary 12,340
Opening Stock of Finished Goods 45,280
Closing Stock of Raw Materials 36,920
Fees to Brand Ambassador. 2,00,000
Stationery and Printing 12,200
Staff Salaries 6,30,000
Trade Discount 1,20,000
Office Rent 60,000
Free Sample Expenses 20,320
Stock of Finished Goods 50,240
Sales are made to eam profit @ 10/o on Cost Price. (T.Y.B.Com., Oct. 2006, adapted)
solution
' sheet
"ost
ELEMENT OF COST
A Direct Materials:
Opening Stock 1 ,10,000
Purchases 8,25.000
9,35,000
Less: Closing Stock (36.e20) 8,98,080
B. Direct Wages 4,21,400
C. Direct Expenses (Power)
D. PRIME COST [A + B + C] 13,45,320
E. Works Overheads:
Technical Directors Salary 40,590
Factory Rent, Rates and lnsurance 10,140
Depreciation on Factory Building 75,200
Factory Stationery 12.340
1,38,270
Less : Sale of Scrap (1.460) 1,36,810
F. Work in Progress:
Less: Closing Stock of W-l-P
G. WORKS COST [D + E + F] 13,61,870
H. Office/Administrative Overheads:
Printing and Stationery 12,200
Office Rent 60,000
Staff Salaries,
6.30.000
L COST OF PRODUCTION [G + H] 20,64,070
J. Finished Goods:
Add:Opening Stock 45.280
21,09,350
Less: Closing Stock
K. COSTOFGOODS SOLD[+ J] 20,59,11 0
L. Sales / Distribution Overheads:
Fees Paid to Brand Ambassador 2,00,000
Free Samples 20.320 2.48.820
Classilication of Costs qnd Cost Sheets 293
M. TOTALCOST/COST OF SALES 123,07,930
N. PROFIT (10% x 23,07,930) I z.so.zgs
O. SALES [M + N] 12fi8,?n
Notes :
(1) Quantity Produced = Quantity Sold

(2) Trade discount is not recorded as cost.
lllustration 7 : (Stock of RM + FG + W-l-P)
From the following particulars, prepare a cost sheet showing the components of total cost and prcifit
for the year ended 31st March, 2014.
Stock of finished goods on 1-4-2013 6,000

Stock of finished goods on 31-3-2014 15,000
Stock of raw materials on 1-4-2O13 40,000
Stock of raw materials on 31-3-20'14 50,000
Work in progress on 1-4-2013 15,000
Purchases of raw materials 4,75,000
Carriage inwards 12,500
Wages 1,75,000
Works Manager's Salary 30,000
Factory Employee's Salaries 60,000
Factory Rent,'Taxes & lnsurance 7,250
Power expenses 9,500
Other production expenses 43,000
Sales for the year 8,60,000
lncome tax 5,000
Dividend received 2,500
lnterest on debentures 10,000
Transfer to Sinking Fund 20,000
Goodwill written off 10,500
Selling Expenses 16,000
General Expenses 32,500
Solution :
Cost Sheet [For the Year Ended 31-3-2014]
Direct Materials :
Purchases 4,75,OO0
Carriage lnward 12.500
5,27,500
Less: Closing Stock (50,000) 4,77,500
B. Direct Wages 1.75.000
C. PRIME COST [A + B] 6,52,500
D. Works Overheads :
Works Manager's Salary 30,000
Factory Employee's Salary 60,000
Factory Rent, Taxes & lnsurance 7,250
Power Expenses 9,500
Other Production Expenses 43.000
E. Work in Progress: 1,49,750
Add: Opening Stock 15,000
Less: Closing Stock (10.000) 1.54.750
F. WORKS COST [C + D + E] 8,O7,250
G. Office/Administrative Overheads
General Expenses 32.500
H. COST OF PRODUCTION [F + G] 8,39,750
294 Cost Accounting (7.Y. B.Com- : SEM-V)
l. Finished Goods:
Add:Opening Stock 6.000
8,45,750
Less: Closing Stock (15.000)
J. COST OF GOODS SOLD [H + l] 8,30,750
K. Sales/Distrib ution Overheads:
L. COST OF SALES U + Kl 8,46,750
M. PROFIT 13.250
N. SALES [L + 8,60,000
Note : Following items are excluded from Cost Sheet: 1 . lncomelax,2. Dividend received,3. lnterest
on debentures, 4. Transfer to Sinking Fund, 5. Goodwill Written off
lllustration 8 :
From the following information, prepare detailed Cost Statement for the year ended 31'3-2014.
Opening Stock - Raw Materials 20,000

- Finished Goods 30,000
Power 99,500
Carriage on Purchase of Raw Materials 20,000
Cost of a Special Design 50,000
Custom Duty and Octroi on Raw Materials 60,000
Rent and Rates - Office 50,000
- Factory 70,000
Telephone Expenses 30,000
Advertisement 75,000
Electricity - Office 15,000
Factory 30,000
Machinery Lost in Fire 1,00,000
Depreciation - Plant and Machinery 80,000
- Delivery Van 20,000
lncome Tax 1,20,000
Salaries 2,50,000
Donations 70,000
Establishment Expenses 1,00,000
Rent of Showroom 65,000
lnterest on Loan 45,000
Sale of Factory Scrap 7,500
Dividend Received 17,500
Mailing Charges of Sale Literature 10,000
Closing Stock - Raw Materials 1,85,000
- Finished Goods 30,000
Other lnformatlon :
(a) 60% of Telephone Expenses relate to Office and 40o/o lo Sales Department.
(b) Salaries to be allocated to the Factory, Office and Sales Department in the ratio ol 1 : 2: 1.
(c) Establishment Expenses are to be apportioned equally between Office and Sales Department.
(d) Sales are made to eam Profit @ 20% on Selling Price. (IYB.Com., Oct. 10, adaptecl)
Solution :
COST SHEET
A. Direct Materials
Opening Stock
Purchases 15,00,000
Classitication of Costs and Cost Sheets 295
Carriage lnward 20,000
Custom duty & Octroi 60.000
16,00,000
Less: Closing Stock (1.8s.000) 14,1 5,000
B. Dlrect Wages 12,00,000
C. Direct Expenses (Special Design)
E. Works Overheads
Power 99
Factory Rent 70,000
Factory Electricity 30
Factory Salaries 3,42,OO0
Less : Sale of Scrap 3.34.500
F. WORKS COST 29,99,s00
G. Office/Administrative Overheads
Office Rent 50,000
Telephone 18,000
Office Electricity 15,000
Salaries 1,25,000
Establishment expenses 50,000
Directors fees 3.18,000
l. Flnished Goods
Add: Opening Stock 30.000
33,47,500
Less: Closing Stock
J. COSTOFGOODSSOLD 33,17,500
K. Selling & Distribution Overheads
Advertisement 75,000
Depreciation - Delivery Van 20,000
Salaries 62,500
Showroom Rent 65,000
Telephone 12,000
Mailing charges 2.94.500
L. TOTALCOST/COST OF SALES 36,12,000
M. PROFIT (20olo on S.P.) 9,03,000
N. SALES 45,15,000
.
lllustration 9 :
From the books of accounts of Viburaj Enterprises the following details have been extracted for the
year ended 31st March, 2014.
Corporate Manager Salary 11 ,10,000

Rent of Plant 't,27,500
Sale of defective Raw Material 8,500
Hire charges for special equipment 57,000
Otfice Rent 84,700
Purchase of Raw Materials 4,85,230
lndirect Materials 2,35,600
Office Expenses 41,000
lnsurance premium for stock of Raw Material 22,600
lnsurance premium for computer 12,:700
lnsurance premium for Delivery van 11 ,500
Opening stock of Raw Material 78,175
Closing stock of Raw Material 76,230
Sale of factory scrap 16,800
Carriage outward 1 ,1 0,000
296 Cost Accounting (T.Y B. Com, : SEM-V)
Depreciation on Delivery van 28,000

Depreciation on Computer 87,300
Salaries to office staff 1,15,300
Salaries to Drawing and Designing department 1,85,700
Opening work in progress 94,300
Closing work in progress 96,500
Brand Ambassador Remuneration 4,80,000
Direct wages - Skilled labour 3,15,s00
- Unskilled labour 1,24,500
Cost of catalogue printing 57,500
Opening stock of finished goods 6,40,000
Closing stock of finished goods 7,50,000
to van 35,500
Other lnformation :
1 .
The corporate Manager's salary to be apportioned between the factory and the office in the ratio
of 1 :9.
2. Selling price is 12Oo/" ol Cost Price.
From the above details prepare Cost Sheet showing various elements of cost.
Solution : (TY.B.Com., Oct. 2012, adapted)
COST SHEET
A. Direct Materials
Add: Purchases 4,85,230
Add: Caniage inwards 24,325
Less: Sale of defectives (8,500)
Less: Closing Stock (76,230) 5,03,000
B. Direct Wages
Skilled Labour 3,15,500
Unskilled Labour 1,24,500 4,40,000
C. Direct Expenses
Hire charges - Sp. Equipment 57,000
E. Works Overheads
Corporate manager salary (1/10) 1 ,11 ,000
Rent of plant 1,27,500
lndirect Material 2,35,600
lnsurance - raw material stock 22,600
Salary-drawing&design 1,85,700
Less: Sale of Scrap (16,800)
W-I-P
Add: Opening Stock 94,300
Less : Glosing Stock 6,63,400
G. Admln. Overheads
Corporate manager salary (9/1 0) 9,99,000
Office rent 84,700
Office expenses 41,000
lnsurance - computer 12,700
Depreciation - computer 87,300
Salary - office staff 1 ,15,300
TotalAdmn. oH
l. Finished Goods
Add:Opening Stock 6,40,000
Less: Closing Stock of Finished Goods ,50,000
J. COSTOFGOODSSOLD 28,93,400
Classification of Costs and Cost Sheet 297
K. Sales/Dlstr.Overheads
lnsurance - delivery van 11 ,500
Carriage outward 1,10,000
Depreciation - delivery van 28,000
Remuneration - brand ambassador 4,80,000
Printing - catalogue 57,500
Repairs - delivery van 35,500
TotalS & D OH 7,22,500
L. COSTOFSALES 15,900
M. PROFIT [20olo Of Gost] 7,23,180
N. SALES 43,39,080
lllustration 10 : (Hidden lnformation)
From the following information, prepare a cost sheel for the month of December, 2014
Stock on Hand - 1st Dec.2014 :

Raw Materials 25,000
Work-in-Progress 8,200
Finished Goods 17,300
Raw Materials consumed during Dec. 2014 21,800
Works Cost for the month (after adjusting work-in-progress) 48,400
Cost of Production of Goods sold 53,200
Purchase of Raw Materials 21,900
Carriage on Purchases 1,100
Sale of Finished Goods 72,300
Direct Wages 17,200
Direct Expenses 1,200
Factory Overheads 9,100
Admin istration Overheads 3,200
Selling and Distribution Overheads 4,200
Solution :
Cost Sheet for the Month of December 2014
?
Direct Materials
Opening Stock of Raw Materials 25,000
Add : Purchase of Raw Materials 21,900
Add : Carriage on Purchases 1,100
48,000
Less : Closing Stock of Raw Materials (Bal. Fig ttt.::: - 21,800) 26.200
Cost of Raw Materials consumed 21,800
B. Direct Wages 17,200
c. Direct Expenses 1.200
D. PRIME COST 40,200
E. Factory Overheads 9.100
Gross Works Cost ::::: 49,300
F. Work-in-Progess
Add : Opening Work-in-Progress 8.200
57,500
Less : Closing Work-in-Progress (Bal Fig.) (57,500 - iA,i60i 9.100
G. WORKSCOST 48,400
H. Administrative Overheads . 3,200
I. COST OF PRODUCTION 51,600
Add : Opening Stock of Finished Goods 17.300
68,900
Less : Closing Stock of Finished Goods (Bal. Fig.) (68,900 - 53,200) 15,700
J. COST OF GOODS SOLD 53,200
K. Selling and Distribution Overheads 4.200
298 Cost Accounting (7.Y. B, Com. : SEM-V)
L. COSTOFSALES 57,400
M. PROFIT (Bal. Fig.) 14.900
N. SALES 72,300
Note : Since closing stock of raw materials, work-in-progress and finished goods are not given in
the question, they must be found as, 'Balancing Figures' at the respective stages in the cost sheet,
using the extra information given like material consumed, works cost and cost of production of
goods sold.
3.2 COST PER UNIT

lllustration 11 : (Royalty, Works OH @ Machine Hour)
Dunkel Ltd. Started a factory in Navi Mumbai on 'l st April 2013. Following details are furnished
about its activity during the year ended 31st tvlarch, 2014 :
Raw Material consumed - 40,000 units @ { 7 per unit.
Direct Wages :-
(a) Skilled worker ( 9 per unit.
(b) Unskilled worker { 6 per unit.
Royalty (on raw material consumed) @ t 3 per unit.
Works overheads @ ( 8 per machine hour.
ttlachine Hours worked : 25,000
Office Overheads at 1/3rd of Works cost.
Sales Commission @ t4 per unit.
Units produced 40,000.
Stock of Units at the end : 4,000 units to be valued at cost of production per unit.
Sale price is { 50 per unit.
Prepare cost sheet showing the various elements of cost both in total and per unit.
Solution : (SYBAE Nov. 2017, adapted)
DUNKEL LIMITED
Cost Sheet For the Year Ended 31-3-2014
lOutput :40,000 Unitsl
ELEMENT OF COST Total Cos Units
r ( No.
A. Direct Materials
Raw Materials (40,000 x 7) 2,80,000 40,000 7.00
B. Direct Wages
- Skilled Workers (40,000 x 9) 3,60,000
- Unskilled Workers (40,000 x 6) 2.40.000 6,00,000 40,000 15.00
C. Direct Expenses
Royatty on Raw Materials (a0,000 x 3) 1.20.000 40,000 3.00
D. PRIME COST 10,00,000 40,000 25.00
E. Works Overheads (25,000 x 8) 2,00.000 40.000 5.00
F. WORKS COST 12,00,000 40,000 30.00
G. Office Overheads (1/3 of Works Cost) 4,00.000 40.000 10.00
H. COST OF PRODUCTION '16,00,000 40,000 40.00
I. Less: Stock of Finished Goods
(4,000 x a0) 1,60.000 4.000
J. COST OF GOODS SOLD 14,40,000 36,000 40.00
K. Sales Overheads:
- Sales Commission (36,000 x ) 1.44.000 36,000 4.00
L. COSTOFSALES 15,84,000 36,000 44.00
M. PROFIT 2,16.000 36,000 6.00
N. SALES 18,00,000 36,000 50.00
lllustration 12 :
From the following particulars prepare a Cost Sheet showing the cost per item and total cost per ton
forthe period ended 31st March,2018 :
Classitication of Costs and Cost Sheets 299
Raw Materials 33,000 Water Supply 1,200

Productive Wages 35,000 Factory lnsurance 1 ,100
Unproductive Wages 10,500 Office lnsurance 500
Factory Rent and Taxes 7,500 Legal Expenses 400
Factory Lighting 2,200 Direct Expenses 3,000
Factory Heating 1,500 Rent of Warehouse 300
Motor Power 4,400 Depreciation of Plant & Machinery 2,000
Haulage 3,000 Depreciation on Office Building 1,000
Directors Fees - Works 1,000 Depreciation on Delivery Vans 200
Director Fees - Office 2,000 Bad Debts 100
Factory Cleaning 500 Advertising 300
Sundry Office Expenses 200 Sales Department, Salary 1,500
Factory Stationery 750 Upkeep of Delivery Van 700
O.ffice Stationery 900 Bank Charges 50
Loose Tools Written Off 600 Commission on Sales 't,500
Rent and Taxes - Office 500
Note : The total output for the period has been 15,000 tons. (SYBAE Feb. 2006, adapted)
Solution :
Cost Sheet For the Year ended 31st March, 2018

[Output - 15,000 tons]
A. Direct Material : Raw Material 33,000 2.200

B. Direct Labour: Productive Wages . ... ... 35,000 2.333
c. Direct Expense 0.200
D. PRIME COST 71,000 4.733
E. Factory Overheads :
Unproductive Wages 10,500 0.700
Factory Rent and Taxes 7,500 0.500
Factory Lighting 2,200 0.147
Factory Heating 1,500 0.1 00
Motor Power 4,400 0.294
Haulage 3,000 0.200
Director's Fees (Works) ... 1,000 0.067
Factory Cleaning 500 0.033
Factory Stationery 750 0.050
Loose Tools written off 600 0.040
Water Supply 1,200 0.080
Factory lnsurance 1,100 0.073
Depreciation of Plant and Machinery
F. WORKS COST 1,07,250 7.150
G. Office Overheads :
Director's Fees (Office) 0.1 33
Sundry Expenses 0.013
Office Stationery 0.060
Rent and Taxes 0.033
Office Expenses 0.033
Legal Expenses o.o27
Bank Charges . 0.004
Depreciation of Office Building
H. COST OF PRODUCTION 7.520
t. Sales Overheads :
Rent of Warehouse 300 0.020
Depreciation of Delivery Vans ... 200 0.013
Bad Debts 100 0.007
Advertising 300 0.020
Sales Department Salaries ... 1,500 0.100
Upkeep of Delivery Vans || 700

1.500
II 4.600II
o.o47
o.1oo
|
I 0.307
Commission on Sales
J TOTAL COST l- l- 1 ,1 ?/oo l- | ? ,Bn
lllustration 13 : (Computing each Element of Direct Cost)
Prepare a cost sheet showing the total and per tonne cost of paper manufactured by Times Paper
Mills Ltd. for the month of March, 2014. There were 26 working days in the month. Also find the
profit earned by the company. The details are as under :-
Direct Raw materials:
Paper pulp : 6,000 tons @ ( 900 tonne.
Direct labour:
280 Skilled workmen : { 250 per day
300 Semiskilled workmen : { 150 per day
470 Unskilled workmen : { 100 per day
Direct expenses'.
Special equipments hire charges : { 12,000 per day
Special dyes : { 250 per tonne of total raw material input
Work overheads: Variable : @50% of direct wages
Fixed : {2,70,000p.m.
Administration overheads : @12o/" of works cost
Selling and distribution Overheads : {80 per tonne sold.
Opening stock of paper : 500 tonnes valued @ < 2,501.60 per ton
Closing stock of paper i 300 tonnes valued at cost of production
The paper is sold @ < 3,000 per tonne.
Solution :
TIMES PAPER MILLS LIMITED

Cost Sheet Forthe Month Ended 31-3-2014
A. Direct Materials:
- Raw Materials (6,000 x 900) 54,00,000 6,000 900
B. Direct Wages :
- S(lled Workmen (280 x 250 x 26) 18,20,000
- Semi-skilled Workmen (300 x 150 x 26) 11,70,000
- Unskilled Workmen (470 x 100 x 26) 12.22.000 42,12,000 6,000 702
C. Direct Expenses:
- Equipment Hire Charges (12,O00 x 26) 3,12,000
- Special Dyes (250 x 6,000) 15.00.000 1 8,12.000 6,000 302
D. PRIME COST 1,14,24,000 6,000 1,904
E. Works Overheads
- Variable (50% of Direct Wages) 21;06,000
- Fixed 2,70.000 23,76.000 6,000 396
F. WORKS COST 't,38,00,000 6,000 2,300
G. Administrative Overheads 16.56.000 6.000 276
(12% ot Works Cost)
H. COST OF PRODUCTION 1,54,56,000 6,000 2.576
l. Add: Opening Stock of Finished Goods
(500 x 2,501.60) 12.50.800 s00
1,67,06,800 6,500
J. Less: Closing Stock of Finished goods 7.72.800 300
(300 x 2,576)
K. COSTOFGOODSSOLD 1,59,34,000 6,200 2,570
L. Selling & Distribution O/H (80 x 6,200) 4,96.000 6,200 80
M. COSTOFSALES 1,64,30,000 6,200 2,650
N. PROFIT 21.70.000 6.200 350
O. SALES 1,86,00,000 6,200 3,000
Classijication of Costs and Cost Sheeb 301
Note: The rate for Equipment hire charges has been given on per day basis. Hence they have been
computed only for 26 working days.
lllustration 14 : (Dual Pricing)
The State Government granted licence to Sweet Sugar Ltd. to manufacture and sell sugar with a
stipulation lhal 4Oo/" of the output should be sold to the State Government at a controlle-d price of
< 3,000 per ton and the balance Output can be sold in the open market at any price. Following are
the details of Sweet Sugar Ltd. for the year ended 31st March, 2014.
During the year 3,600 tons Sugarcane was consumed @ < 1,000 per ton.
Direct labour amounted to ( 825 per ton of sugar produced.
The details of other expenditure are as follows :-
Direct Expenses 4,20,O00

Telephone Charges 3,52,695
Office Computer purchased 2,75,350
Factory Rent and lnsurance 3,54,760
Machinery purchased 4,25,560
Machinery Repairs 98,847
Commission on Sales 3,37,650
Factory Salaries 2,19,588
Carriage Outward 1,54,090
Packing Expenses 1,94,450
Bank lnterest 1,65,895
Factory Electricity 2,61,880
Delivery Van Expenses 1,06,850
Coal Consumed 3,80,125
Depreciation on Machinery 2,49,600
Depreciation on Computer 2,04,180
Depreciation on Delivery Van 1,57,360
Office Salaries 1,89,325
Printin and Stationery 1,13,000
During the year 2,400 tons of sugar was produced.
The Company's Profit target for the year, for fixing the open market selling price on the basis of cost
sheet, is 1O'h ot its average paid-up Capital of { 1,42,56,000.
Prepare cost sheet and find various components of total cost and per unit cost and suggest the
Selling Price for Open-Market. (T.Y.B.Com., April2000, SYBAE Oct.2012, adapted)
Solution :
SWEET SUGAR LIMITED

Cost Sheet For the Year Ended 31st March 2014
lOutput : 2400 Tonsl
Tatal
f, f Tons a
A. Direct Material : Sugarcane 36,00,000 2,400 1,500
B. Direct Labour 19,80,000 2,400 825
C. Direct Expense 2,400 175
D. PRIME COST 60,00,000 2,400 2,500
Factory Rent 3,54,760
Coal Consumed 3,80,125
Factory Salary 2,19,588
Machinery Repairs 98,847
Factory Electricity 2,61,880
Machinery Depreciation 2.49.600 15.64,800 2,400 652
F. WORKS COST 75,64,800 2,400 3,152
G. Office Overheads :
Salary 1,89,325
Printing and stationery ... ::: :.. ..: ..: 1,13,000
Telephone 3,52,695
Depreciation on Computer 2.04.180 2,400 358
H. COST OF PRODUCTION 24,OOO 2,400 3,510
I. Sales Overheads :
Commission 3,37,650
Carriage Outward 1,54,090
Packing Expenses 1,94,450
Delivery Van Expenses ... 1,06,850
Depreciation on Vans 1.57.360 2,400 396
J. COST OF SALES 93,74,400 2,400 3,906
Less : Sold to Govt. (960 tons x 3000) 28.80.000 960
64,94,400 1,440
K. PROFIT (10% of < '1,42r56,000)... ... ... 14.25,600
L. SALES (Open Marke$ ... ... ... 79,20,000 1,440 5,500
lllustration 15 : (Working back sales)

Following details are furnished by K.K. Ltd. of expenses incurred during the year ended 31 st March,
2014.
Direct wages 1,10,000

Purchases of Raw materials 2,40,000
Factory Rent 35,000
Cost of Catalogues 17,100
Sundry Expenses 18,500
Opening stock of Raw materials 25,000
Repairs to office lurniture 12,500
Carriage outwards 25,650
lnterest on Loans 12,700
Closing stock of Raw materials 15,000
Distribution of Free samples 13,775
Audit Fees 11,500
Demonstration Expenses 13,300
Furniture Loss by Fire 8,000
lndirect Materials 26,000
Office Salaries 27,500
Store keeper's salary 9,000
Depreciation on Office Equipments 10,000
Commission of Sales 15,675
Material Handling Charges 11,000
Ivlachine Purchased 1,40,000
Other lnformation :
(a) Stock of finished goods at the end 500 units to be valued at cost of production.
(b) Number of units sold during the year were 9500.
(c) Profit desired on sales is 2O"/"
Prepare Cost Sheet showing the various elements of cost both in total and per unit and also find out
the total profit and per unit profit. (T.Y.B.Com., April2010, adapted)
Solution :
COST SHEET
Total? Units
A. Direct Material
Opening Stock of Raw Materials 2s,000
ClassiJication of Costs and Cost Sheefr 303
Less : Closing Stock of Raw Materials (15,0
Net Direct Materials 2,50,000 10,000 25.00
B. Direct Wages ... .. 1 ,10,000 10,000 11.00
c. Direct Expenses 90,000 10,000 9.00
D. PRIME COST 4,50,000 10,000 45.00
E. Works Overheads
Factory Rent 35,000 10,000 3.50
Depreciation - Plant & tvlachinery 19,000 10,000 't.90
lndirect Materials 26,000 10,000 2.60
Material handling Charges 11 ,000 10,000 1.10
Store Keeper's Salary 9,000 10,000 0.90
TotalWorks OH 1,00,000 10,000 10.00
F. WORKS COST 5,50,000 10,000 55.00
G. Admin. Overheads
Sundry Expenses 18,500 10,000 1.85
Repairs to Office Furniture 12,500 10,000 1.25
Audit Fees 11 ,500 10,000 1.15
Office Salaries ... .. 27,500 10,000 2.75
Depreciation- Office Equipments 10,000 10,000 1.00
TotalAdmn. OH 80,000 10,000 8.00
H. COST OF PRODUCTION 6,30,000 10,000 63.00
t. Less: Closing Stock of Finished Goods ... (31,500) (500) 63.00
K. Sales/Distr. Overheads
Cost of Catalogues 17,1 00 9,500 1.80
Carriage Outward 25,650 9,500 2.70
Distribution of free samples 13,775 9,500 1.45
Demonstration Expenses 13,300 9,500 1.40
Commission on Sales 15,675 9,500 1.65
TotalS & D OH 85,500 9,500 9.00
L. COST OF SALES 6,84,000 9,500 72.OO
M. PROFIT (25% on Cost) 1,71 ,000 9,500 18.00

N. SALES g,55,ooo 9,500 90.00
Note : Financial items - lnterest on Loan, Furniture lost by fire, Machinery purchases are to be
ignored.
lllustration 16 :
Following details are furnished by MBA Ltd. of expenses incurred during the year ended 31st March,
2014.
Direct Material 3,40,000

Opening Stock of Finished Goods (1,000 units) 85,250
Closing Stock of Finished Goods (2,000 units) ?
Depreciation on Plant and Machinery 96,Q00
Loss on Sale of Machinery 17,500
Trade Fair Expenses 85,500
Direct Expenses 1,60,000
General Manager's Salary 3,80,000
Dividend Paid 7,800
Depreciation on ComPuters 1,72,000
Drawing and Designing ExPenses 54,000
Purchase of Machinery 1,90,000
Depreciation on Delivery Van 1,14,000
Office Maintenance Charges 1,88,000

Factory Rent 1,50,000
Sales (19,000 Units) 22,80,000
Closing Stock of Finished Goods to be valued at Cost of Production.

You are required to prepare Cost Sheet showing various elements of cost both in total and per unit
and also find out Total Profit and Per Unit Profit.
Solution : (tYB.Com., March 2011, oct.2014, $YBAE March 2018, adapted)
Cost Sheet
Units Total
t-)nit ( {
A. Direct Materials 20,000 17.00 3,40,000
B. Direct Wages .:. .:: .:. 20,000 13.00 2,60,000
c. Direct Expenses 20,000 8.00 1,60,000
D. PRIME COST 20,000 38.00 7,60,000
E. Works Overheads
Depreciation - Plant and Machinery 20,000 4.80 96,000
Drawing and Designing Expenses 20,000 2.70 54,000
Factory Rent 20,000 7.50 1,50,000
Total Works Overheads 20,000 15.00 3,00,000
20,000 53.00 't 0,60,000
F. WORKS COST
G. Off ice/Admi nistrative Overheads
General Manager's Salary 20,000 19.00 3,80,000
Depreciation - Office Equipments 20,000 8.60 1,72,000
Office Maintenance 20,000 9.40 1,88,000
Total Adm inistrative Overheads 20,000 37.00 7,40,000
H. COST OF PRODUCTION 20,000 90.00 18,00,000
t. Finished Goods
Add:Opening Stock 1,000 85.25 85,250
Less: Closing Stock (2,000) 90.00
J. COST OF GOODS SOLD 19,000 89.75 17,05,250
K. Selling & Distribution Overheads
Trade Fair Expenses 19,000 4.50 85,500
Advedisement 19,000 9.75 1,85,250
Depreciation - Delivery Van 19,000 6.00 1 ,1 4,000
Total Seiling & Distribution Overheads... ... ... 19,000 20.25 3,84,750
L. TOTAL COST/COST OF SALES 19,000 11 0.00 ,90,000
M. PROFIT 19,000 10.00 1,90,000
N. SALES 19,000 120.00 22,80,000
Notes :
'l . Financial ltems - Loss on Sale of tvlachinery, Dividend Paid, Machinery Purchases are to be
ignored.
2. Drawing and Designing Expenses are treated as Works Overheads as per CAS-4.
lllustration 17 :
Following details are furnished by NY Ltd. of Expenses incurred during the year ended 31st March,
2014.
Particulars a
Salesman Salary 6,47,500
Opening Stock of Finished Goods (2000 units) 7,60,000
Director's Fees 9,73,700
lndirect Wages 9,76,300
Repairs to Office Furniture 4,O1,700
Works Managers Salary 11,94,700
Showroom Expenses 10,68,750
ClassiJication of Costs und Cost Sheets 30s
Depreciation on Computer 12,12,900

Depreciation on Plant and Machinery 4,77,100
Advertisements 15,33,750
Office Salary 7,91 ,700
Direct Materials 18,82,400
Stock of finished u ?
Other lnformation :
1. Closing stock of finished goods to be valued at cost of production.

2. Profit desired on sales is 2O"h.
3. Number of units sold during the year was 25,000.
the total profit and per unit profit for the year ended 31st March, 2014.
Solution : (TY.B.Com., Mar. 12, adapted)
COST SHEET
T Total Units Rate Per Unit

.lr
A. Direct Materials 18,82,400 26,000 72.40
B. Dlrect Wages 10,01,000 26,000 38.50
C. Direct Expenses 4.96.600 26,000 1 9.'t 0
D. PRIME COST 33,80,000 130.00
E. Works Overheads
lndirectWages I 9,76,300 26,000 . 37.55
Works Manager's Salary 11 ,94,700 26,000 45.95
lndirect Materials 7,31,900 26,000 28.15
Depreciation' Plant & Machinery 4.77.100 26,000 18.35
Total Works Overheads 33,80,000 26,000 130.00
F. WORKS COST 67,60,000 26,000 260.00
G. Office/Administrative
Director's Fees 9,73,700 26,000 37.45
Repairs - Office Furniture 4,O1,700 26,000 15.45
Depreciation - Computer 12,12,900 26,000 46.65
Office Salaries 7.91.700 26,000 30.45
Total Adm in istrative Overheads 33,80,000 26,000 130.00
H. COST OF PRODUCTION 1,01,40,000 26,000 390.00
l. Finished Goods
Add: Opening Stock 7,60,000 2,000
Less: Closing Stock (11 ,70,000) (3,000) 390.00
K. Selling & Distribution
Salesman Salaries 6,47,500 25,000 2s.90
Showroom Expenses 't0,68,750 25,000 42.75
Advedisements 15.33.750 25,000 61.35
Total Selling & Distribution 32,50,000 25,000 130.00
L. TOTALCOST/COST OF SALES 1,29,80,000 25,000 519.20
M. PROFIT [25% of Cost] 32,45,000 25,000 129.80
N. SALES 1,62,25,000 25,000 649.00
Note :
Direct Material Units = Production + Closing Stock - Opening Stock
= 25,000 + 3,000 - 2,000 = 26,000
lllustration 18 :
From the details given below, prepare a comparative cost sheet for the first and second half of the
year 2014, showing cost per unit in each case, at all stages.
Particulars
30-6-14 31 -12-14
Direct Materials Consumed 50,000 70,000
Wages 60,000 80,000
Chargeable Expenses 10,000 12,000
Depreciation of Factory Machines 16,000 20,000
lndirect Wages in Factory 20,000 30,000
Rent: Factory 5,000 4,000
Office 8,000 8,000
Repairs :
Factory 6,000 4,000
Office 9,000 2,000
Sundry Otfice Expenses 16,000 20,000
Output during the period in Units 20,000 25,000
Units Units
Solution :
Half year ended

3A-6-14 31-12-14
Units
Tbtal Per Unit Tatal
7 r Tons a
A. Direct Material Consumed ... 50,000 2.50 70,000 2.80
B. Wages 60,000 3.00 80,000 3.20
C. Chargeable Expenses 10,000 0.50 12,000 0.48
D. PRIME COST 1,20,000 6.00 1,62,000 6.48
Depreciation of Factory Machines 16,000 0.80 20,000 0.80
lndirect Factory Wages 20,000 1.00 30,000 1.20
Factory Rent 5,000 o.25 4,000 0.16
Factory Repairs 6,000 0.30 4,000 0.16
F. WORKS COST 1,67,000 8.35 2,20,000 8.80
G. Administration Expenses :
Oftice Rent 8,000 0.40 8,000 0.32
Office Repairs 9,000 o.45 2,000 0.08
Sundry Office Expenses 16,000 0.80 20,000 0.80
H. COST OF PRODUCTION 2,00,000 10.00 2,50,000 10.00
Illustration 19 :
Following details are furnished by Deepak Ltd. of expenses incurred during the yearended 31st
March,2014.
a
Opening Stock of Finished Goods (1,000 units) 85,250
Closing Stock of Finished Goods (2,000 units) ?
Loss on Sale of Machinery 17,500
General Manager's Salary 3,80,000
Classijication of Costs and Cost Sheets 307
Dividend Paid 7,800
Works Managers Salary 1,00,000
Depreciation on Computers 1,72,000
Purchase of Machinery 1,90,000
Depreciation on Delivery Van 1 ,14,000
Office Maintenance Charges 1,88,000
Other Factory Overheads 2,04,000
Sales 9,000 Units 22,80,000
Closing Stock of Finished Goods to be valued at Cost of Production.
You are required to prepare Cost Sheet showing various elements of cost both in total and per unit
and also find out Total Profit and Per Unit Profit.
Solution : (T.YB.Com., Oct.14, SYBAE Man lB, adapted)
Deepak Ltd.
[Production : 20,000 units]
A. Direct Material 3,00,000 15.00

B. Direct Wages 2,00,000 10.00
C. Direct Expenses 1.60.000 8.00
D. PRIME COST 6,60,000 33.00
Depreciation on Plant and Machinery 96,000 4.80
Works [vlanager's Salary 1,00,000 5.00
Other Factory Overhebds 2,04.000 10.20
4,00.000
F. WORKS COST 10,60,000 53.00
G. Office / Administration Overheads
General Mangers Salary 3,80,000 19.00
Depreciation on Computers 1,72,O00 8.60
Office Maintenance Charges 1,88,000 9.40
7.40.000
H. COST OF PRODUCTION 18,00,000 90.00
l. Add : Opening Stock of Finished Goods 85,250 85.25
(1,000 units)
J. Less : Closing Stock of Finished Goods (1.80,000)
(2,000 units @ < 90 per unit)
K. COST OF GOODS SOLD 17,05,250 89.75
L. Selling and Distribution Overheads
Demonstration Expense 85,500 4.50
Advertisement 1,85,250 9.75
Depreciation on Delivery Van 1.14.000 6.00
3.84.750
M, TOTAL COST/COST OF SALES 20,90,000 't10.00
N. PROFIT 1.90,000
L. SALES / SELLING PRIGE 19,000 units) 22,80,000 120.00
Units sold out =

Opening Stock + Production - Closing Stock
19,000 units =
1,000 units + ? 200 units
Production = 20,000 units
lllustration 20 :
Following particulars have heen extracted forthe yearended 31 st March,2015 from the books of
Mis Ashwin Manufacturing Co. Ltd.
Purchase of Raw Materials

E4,95,000
Carriage Outwards 2,80,120
Sales 16,00,000
Opening Stock - Raw Materials 1,80,000
- Finished Goods (6,000 Units) 44,910
- Work-in-Progress 66,000
Travelling Expenses 11,920
lnterest on Capital 30,000
Advertising 29,800
Power 10,500
lncome Tax 95,000
Agent's Commission 46,190
Plant Maintenance 37,500
Rent and Lighting (9/1Oth lor Factory) 1,05,000
Rent Received 3,000
Rent of Warehouse 5,960
Sundry Expenses - Factory 13,500
- Office 25,500
Building Repairs (1/1Oth lor Office) 1,05,000
Manage/s Salary (for Factory { 12,000) 22,500
Depreciation on - Plant 19,s00
- Factory Building 7,500
- Office Building 9,000
Sale ol Scrap 4,500
Closing Stock of Raw Materials { 1,95,000 and Work-in-Progress T78,000. During the year 1,50,000
units were preduced out ol which 7,000 units remained unsold.
Prepare Cost Sheet and show the total and per unit cost and total profit and per unit profit earned.
Solutlon : (T.Y.B.Com., Oct. 2015, adapted)
M/S ASHWIN MANUFACTURING CO. LTD.
[Production : 1,50,000 units]
Per Unit
a ? r
A. Direct Material
Raw Materials Consumed :
Opening Stock of Raw Materials . ... .. 1,80,000 1.20
Add: Purchases 4,9s,000 3.30
Carriage lnwa.rds 3,000 o.o2
Less : Closing Stock of Raw Materials
Raw Materials Consumed 4,83,000 3.22
B. Direct Wages
c. PRIME COST 8,01,000 5.34
D. Factory Overheads
Power 10,500 0.07
Plant Maintenance 37,500 0.25
Rent and Lighting (9/1Oth for Factory) 94,500 0.63
Sundry Expenses 13,500 0.09
Building Repairs (9/1Oth for Factory) 94,500 0.63
Manager's Salary 12,000 0.08
Depreciation on Plant 19,500 0.13
Depreciation on Factory Building 7,500 0.05
Less : Sale of Scrap (4,500) (0.03)
Add : Opening Stock of Work-in-Progress 66,000 0.44
Less : Closing Stock of Work-in-Progress
E. FACTORY/WORKSCOST 0,74,000 7.16

F. Office Overheads :
Otfice Salaries ... ... .. 94,500 0.63
Rent and Lighting (1/1Oth for Office) 10,500 0.07
Sundry Expenses 25,500 0.17
Building Repairs (1/1Oth for Office) 10,500 0.07
Manage/s Salary 10,500 0.07
Depreciation on Office BuiEing... ... ..

H. Add : Opening Stock of
Finished Goods (6,000) 44,910
L Less : Closing Stock of
Finished Goods (7,000 units
@ < 8.23 per unit)
J. COSTOFGOODSSOLD 2,21,800 8.20
Carriage Outwards 2,80j20 1.88
Travelling Expenses 11,920 0.08
Advertising 29,800 o.20
Agent's Commission 46,190 0.31
Rent of Warehouse 0.04
K. COST OF SALES 5,95,790 10.71

L. PROFIT
M. SALES 6,00,000 10.74
lllustration 21 :
Bharat Electronics Ltd. produces a standard product and provides you the following information for
the year ending 31st lrlarch 2016 :
r
Raw Materials
Purchases 8,45,000
Closing Stock 40,000
Custom Duty 5,000
Chargeable Expenses 1,00,000
Haulage Charges 10,000
Loose tools written off 20,000
Works Manager's Salary 1,65,000
Cost of Rectification 5,000
Office Overheads 10% of works overheads

Selling Expenses t 4 per unit sold
Finished Goods :
Opening Stock 1,000 Units (< 1,59,920)
Produced during the year 10,000 Units
Closing Stock 2,000 Units
Profit desired on cost 257o
total profit and per unit profit. (T.YB.Com., Nov. 2016, adapted)
Solution :
BHARAT ELECTRONICS LTD.

[Production : 10,000 units and Sold : 9,000 units]
ELEMENT OF COST Per Unit
r ( (
A. Direct Material
Raw Materials Consumed :
Opening Stock of Raw Materials . ... .. 1,00,000 10.00
Add: Purchases 8,45,000 84.50
Custom Duty 5,000 0.50
Less : Closing Stock of Raw Materials (40.000) (4.00)
Raw Materials Consumed 9,10,000 91.00
B. Direct Wages ... ... .. 2,00,000 20.00
c. Chargeable Expenses 1.00.000 10.00
D. PRIME COST 12,1 0,000 121.00
Haulage Charges 10,000 1.00
Loose Tools written off 20,000 2.00
Works Manager's Salary 1,65,000 16.50
Cost of Rectification 5.000 0.50
2.00.000
F, FACTORY /WORKS COST :.. ::: ::: ::: 14,10,000 141.00
G. Office Overheads (10% of Factory O/H) 20.000
H. COST OF PRODUCTION 14,30,000 143.00
l. Add : Opening Stock of
Finished Goods (1,000 units) 1,59,920
J. Less : Closing Stock of
Finished Goods (2,000 units
@ < 143 per unit) (2.86.000)
K. COSTOFGOODSSOLD 13,03,920 144.88
L. Add : Selling Overheads
(( 4 per unit sold) 36.000
M. COST OF SALES 13,39,920 148.88
N. PROFIT (25% on Cost) 3.34.980
O. SALES 16,74,900 1 86.1 0
3.3 TWO PRODUCTS

lllustration 22 : (Working back sales)
M/s. Vishal Manufacturing Company manufacturestwo types of products viz. Aand B. The information
for the year ended on 31st March, 2014 is as under.
r r
Direct material per unit 100 20
Direct labour per unit 60 50
Direct SES unit 40 80
Additional information :
(1) Factory expenses are charged al 2O"/o of prime cost.

(2) Office expenses are charged al 25"/o of works cost.
(3) 2,000 units of product A were produced of which 1 ,500 units were sold and 5,000 units of product
B were produced of which 4,500 units were sold.
ClassiJication of Costs und Cost Sheets 3l t
(4) Selling expenses are { 1 5 per unit for product A and ? 2o per unit for product B.
(5) Company charges a proflt al 20% on sales for both the products.
Prepare a cost sheet showing the cost and profit in total as well as in per unit.
Solution : (SyBAF, Oct. 2016, adapted)
M/S VISHAL MANUFACTURING COMPANY
Total Tatal Unit

Cost Cost
( r
A. Direct Materials 100x2,000 2,00,000 2,000 100.00 120x5,000 6,00,000 5,000 120.00
B. Direct Wages 60x2,000 1,20,000 2,000 60.00 50x5,000 2,50,000 s,000 50.00
C. Direct Expenses 40x2,000 80,000 2,000 40.00 80x5,000 4.00.000 s,000 80.00
D. PRIME COST 4,00,000 2,000 200.00 12,50,000 5,000 250.00
E. Factory Overheads 80.000 2,000 40.00 2.50.000 5,000 50.00
(2O"/" ot Prime Cost)
F, WORKS COST 4,80,000 2,000 240.00 15,00,000 5,000 300.00
G. Office Overheads 1.20.000 2,000 60.00 3.75.000 5,000 75.00
(25"/o ot Works Cost)
H. COST OF
PRODUCTION 6,00,000 300.00 18,75,000 375.00
Less: Closing Stock
of Finished Goods 300x500 1.50,000 500 375 x 500 1.87.500 500
r. cosr oF GooDs
SOLD 4,50,000 1 ,500 300.00 16,87,500 4,500 375.00
J. Selling Overheads 15x1 ,500 _22.5O0 1 ,500 15.00 20 x4,500 90.000 4,500 20.00
K. COST OF SALES 4,72,500 315.00 17,77,500 395.00
L. PROFIT
(2Oo/o on Sales =
25olo on Cost) '1
.18. 125 1 ,500 78.75 4.44.375 4,500 98.75
M. SALES 5,90,625 1 ,500 393.75 22,21 ,875 4,500 493.75
lllustration 23 : (Using Equations for Cost Allocation)

M/s. Vidya Pen Company manufactures two types of pens "Sharada" and "Viveka". The pailiculars
for the year ended 31st March, 2014 were as follows :
a
Total Sales 10,00,000
There was no work-in-progress at the beginning or at the end ol the year. On the study it is ascertained
that -
(1) Direct Material per unit in "sharada Pen" consists twice as much as that in type "Viveka Pen".
(2) The Direct Wages per unit for "Viveka Pen" were 40% ol those for "Sharada Pen".
(3) Direct Expenses were same per unit for Viveka as well as Sharada Pen.
(4) Factory Overheads wae 20o/o of the prime cost.
(5) Administrative Overheads were 50% of Direct Wages.
(6) 2,500 units of Sharada Pen were produced of which 2,000 were sold and 5,000 units of Viveka
Pen were produced of which 4,000 were sold, during the year.
(7) Selling Overheads were < 8 per unit for Sharada Pen and T 9 per unit for Viveka Pen.
(8) Selling price per unit for Sharada Pen was { 250 and Viveka Pen was t 125 respectively.
You are required to prepare a statement showing cost and profit in total as well as per unit for
Sharada Pen and Viveka Pen.
312 Cost Accounting (TY. B. Com. : SEM-V)
Solution
M/s. VIDYA PEN CO.
Cost Sheet For the Year Ended 3'lst March 2014
Sharda Pen Viveka Pen

Produced :2500 units Produced :500A units
Sotd :200A units Units
lotal uosi Units Unit Cost Total Cog Units Unit Cost
i No. r r No. { I
A. Direct Material (Note 1) 2,50,000 2,500 100 2,50,000 5,000 50
B. Direct Wages (Note 2) 1,25,000 2,500 50 1,00,000 s,000 20
C. Direct Expenses 25,000 2.500 10 50.000 5.000 10
D. PRIME COST 4,00,000 2,500 160 4,00,000 5,000 80
E. Factory Overheads 80.000 2.500 32 80.000 5.000 16
F. WORKS COST 4,80,000 2,500 't92 4,80,000 5,000 96
G. Administrative Overheads 62.500 2.500 25 s0,000 5.000 10
H. COST OF PRODUCTION 5,42,500 2,500 217 5,30,000 5,000 106
Less : Closing Stock of
Finished Goods 1.08.500 500 1.06.000 1.000
I. COST OF GOODS SOLD 4,34,000 2,000 217 4,24,000 4,000 106
Selling Overheads 16.000 2.000 8 36.000 4.000 9
J. TOTAL COST 4,50,000 2,000 225 4,60,000 4,000 115
K. PROFIT 50.000 2.000 25 40.000 4.000 '10
L. SALES 5,00,000 2,000 250 5,00,000 4,000 125
Notes :
('l) Calculation of Direct Materia!
Let the cost of material per unit in Sharada be 2m.
Let the cost of material per unit in Viveka be m.
.'. m (5,000) + 2m (2,500) = 5,00,000
10,000 m = 5,00,000
m=50
.'. Viveka = { 50 per unit
Sharada = { 100 per unit (2 x 50)
(2) Calculation of Direct Wages
Let direct wages per unit in 'Sharada' be w.
.'. Direct wages per unit in 'Viveka' = 40o/o of { w = 0.4w
w (2,500) + 0.4 w (5,000) = 2,25,000
2500w+2000w=2,25,000
4500 w = 2,25,000
w=50
Wages in Sharada = { 50 per unit
Wages in Viveka = { 20 per unit (40% of { 50)
(3) Direct expenses per unit of production remain the same.
< 75,000 + 7,500 units = t 10 per unit for both pens.
3.4 ESTIMATED COST SHEET

lllustration 24 : (Rectificafion of Defectlve Work)
Super Vision Company furnishes you with the following information about its 1000 TV sets
manufactured and sold during the year :
f Pafticulars r
Materials x) A 8,00,000 Office and Administration Expe 6,80,000
Direct Wages e-, _ 0,00,000 Selling & Distribution Expenses 1,20,000
i i)
.
Power and Stores 2,40,000 Sale of Scrap " 40,000

lndirect Wages I 3,00,0001 Sale ol 1000 TV sets. 62,00,000

Lighting
r-. || 60,000
Factory 1,20,000 |
Repairs and depreciation ot
Cost of rectifying defective work |
Machinery ?-O 2,00,000
Prepare the cost sheet for the above yeal showing the elements of cost per unit. Prepare also the
estimated cost sheet for'-the.next year assuming that :
r/
(1 ) Materials cost and direct'wages cost will increase by 10% and 15% respectively. "
6,5 n]^-<'t-" .1''
1w-.,,.nr',s.'
(2) Factory overheads will be recovered as a percentage of qjr._e_cl wages, as last year.
(3) Office overheads and selling overhead6 witlbe iecovered'as irercentage of works cost, A's'tast
,.) IiLffi--;irr be nrglu.gg-Q*tffi.6,600

-_-ffi:,.-
each in the next year.
Solution : (T.YB.ebm., April 2002, SYBA'E Oct.08, Feb.09, adapted)
Cost Sheet For the Year Ended .....
I e- tCro @
. lUnits Produced / Sold : 1,000I
-1*)o 1v:
Per Unit
f f
A. Direct Materials 18,00,000 1,800.00
d. Direct Wages 10.00.000
c. PRIME COST [A+a] 28,00,000 2,800.00
D. Works Overheads 1 8.80.000 880.00
E. WORKS COST [G +.D] 36,80,000 3,680.00
F. Office and Administration Expenses 6.80.000 680.00
tr. COST OF PRODUCTION [E + F] 43,60,000 4,360.00
H. Selling and Distribution Expenses 1.20.000 120.00
t. COST OF SALES 44,80,000 4,480.00
J. Profit [K - l] 17.20.000
K. SALES 62,00,000 6,200.00
Estimated Cost Sheet For the Year Ended .....
[Units Produced / Sold : 1,500]
{ r
A. Direct Materials -{ 29,70,000 1,980.00
B. Direct Wages w-g- 17,25.000 1 .1 50.00
c. PRIME COST [A + B] 46,95,000 3,130.00

D. Factory / Works Ovelh-eads 4 15.18.000 1 ,0't2.00
E. woRKs coST [c + D] 62,13,000 4,142.OO

F. Office Overheads 5 11,48.054 765.37
G. COST OF PRODUCTION [E + F] 73,61,054 4,907.37
H. Selling Overheads 6 2.02.598 135.06
t. COST OF SALES [G + H] 75,63,652 5,042.43
J. Profit 23.36.348 't.557.57
K. SALES 99,00,000 6,600.00
Working Notes :
(1) Works Overheads (
Power and Stores 2,40,000
lndirect Wages 3,00,000
Factory Lighting 1,20,000
Repairs and Depreciation of Machinery 2,00,000
Cost of Rectifying Defective Work 60.000
9,20,000
Less : Sale of Scrap 40.000
8.80.000
314 Cost Accounting (T.Y B. Com. : SEM-V1
(2) Direct Materials

Cost per unit will rise by '10%
Cost per unit previous year 1,800

Rise by 10% 180
lncreased Cost 1.980
(3) Direct Wages
Cost per unit will rise by 15%
Cost per unit previous year 1,000
Rise by 15% 150
lncreased Cost 1,150
(4) Works Over,heads
Takbn as a percentage of Direct Wages
Total cost of work overheads previous year
x Total cost of Direct Wages current year
Total cost of Direct Wages previous year
= 10,00,000
ltO,O,O,O, x 17,25,000 = 15,18,000
(5) Office Overheads

Taken as a percentage of Works Cost
- - x Total Works Cost current year

Total cost of office overheads previous year
Total Works Cost previous year
6'80'000
- 36,80,000
x62,13,000 = 11,48,054
(6) Selling Overheads

Taken as a percentage of Works Cost
]4oloo,o, x62,13,000 = 2,oz,sel

36,80,000
lllustration 25 : (Changes in OH Rates)
ln respect of a factory the following figures have been obtained for the year 2013 :
f,
Cost of Materials 12,00,000
Selling Overheads 4,48,000
Distribution Overheads 2,80,000
Administrative Overheads 6,72,000
Profit 8,40,000
A work order has been executed in 2014 and the following expenses have been incurred:
lVlaterials < 16,000 and Wages < 10,000.
Assuming that in 2014 the rate of Iactory overheads has increased by 2O"h, distribution overheads
have gone down by 10% and selling and administrative overheads have each gone up by 12Vzo/o, at
what price should the product be sold as to earn the same rate of profit on the selling price as in
20'l 3? Factory overheads are based on direct wages while all other overheads are based on factory
cost. (T.Y.B.Com., Oct.2002, adapted)
Solution :
Cost Sheet For the Work Order Executed in 2014
COST r
A. Direct Materials 16,000
B. Direct Wages 10.000 26.000
C. PRIME COST 26,000
D. Add : Factory Overheads (WN 3) 7.200
E. WORKS COST 33,200
F. Add : Administrative Overheads (WN 4) 8,964
G. COST OF PRODUCTION 42,164
H. Add : Sales / Distribution Overheads

Selling Overheads (WN 5) 5,976
Distribution Overheads (WN 6) 2.988 8.964
!. COST OF SALES 51 ,128
J. Add : Profit (1/5th on Cost of Sales) 10.226
K. SALES 61,354
The product should be sold for ( 61,354 to earn the same rate of profit on the selling price as in the
year 2013 i.e. 1l6th on sales.
Working Notes :
(1) Cost Sheet For the Year 2013
STEP ELEMENTOFCOST f,
A. Direct Materials 12,00,000
B. Direct Wages
D. Add : Factory Overheads
E. WORKS COST 28,00,000
F. Add : Administrative Overheads 6.72.000
H. Add : Sales / Distribution Overheads
Selling Overheads 4,48,000
Distribution Overheads 7.28.000
I. COST OF SALES 42,00,000
J. Add : Profit 8.40.000
K. SALES 50,40,000
(2) Calculation of Percentage of Profit
Cost of Sales 42,00,000
Profit 8,4o,ooo
sales 5o,4o,ooo
I a,+o,ooo I
x too_]
... Profit as a percentage of sales rc.67%or 1/6th on sales orl/5 on cost of
Lffi
sales
(3) Calculation of Factory Overheads (Based on 7" to Direct Wages)
?6'00'000-x1oo
Rate of Overheads in the year 20'13 = il0p0I0o = 6o%
Rate of Overheads for the year 2014 = 60% + 2O"/" of 60%
= 72o/, on direct wages
.'. Factory Overheads = 72"/" x t 10,000 =<7'200
(4) Calculation of Administrative Overheads (Based on 7" to Factory Cost)
< 6,72,000
Rate of Overheads as a proportion to Factory Cost =
x 1oo = 24"/"
ffi,
.'. Administrative Overheads for the year 2O14
@ 24"/" on Factory Cost = { 33,200 x 24"/o = < 7,968
... Administrative Overheads for 2014 = t 7,968 + 12.5"/o of t 7,968
= { 8,964
(5) Calculation of Selling Overheads (Based on "/o lo Factory Cost)
{ 4,48,000
RateofoverheadsaSaproponiontoFactoryCost=ffix100=16%
Selling Overheads for the year 2O14
@ 16"/0 on Factory Cost = (33,200x167o=<5,312
Selling Overheads lor 2O14 = < 5,312 + 12.5o/o of t 5,312
= ( 5,976
316 CostAccounting(T'YB'Com': SEM-V)
o/o of Factory Cost)
(6) Calculation of Distribution Overheads (Based on
< 2,80,000
RateofoverheadsasaproportiontoFactoryCost=ffix100=10o/"
Distribution Overheads for the year 2014
@ 1O"/" on Factory Cost { 33,200 x 10olo = < 3,320
Distribution Overheads lor 2O14 < 3,320 - 10olo of < 3,320
< 2,988
lllustration 26 :
The Trading Profit and Loss Account of Vijaya Manufacturing company forthe year ending 31-12-2013
was as follows :-
Dr. Trading Profit and Loss Account For the Year ended 31'12'2013 Cr.
Particulars r Particulars ?
To Raw Material Purchased 80,000 By Sales (2500 units) 2,50,000
To Direct Wages 30,000 By Closing Stock of Raw Material 5,000
To Direct Expenses 25,000
To Factory Expenses 40,000
To Gross Profit c/d 80,000
2,55,000 2,55,000
To Office Salaries 25pOO By Gross Profit b/d 80,000
To Office Rent 12,000 By Dividend Received 10,000
To Selling Expenses 12,500 By Discount Received 7,500
To Preliminary Expenses Written-off 2,500
To Goodwill Written-off 5,500
To Net Profit c/d 40,000
97,500 97,500
For the yeat 2O14, it is estimated that -
(1) Units produced and sold will rise by 20o/".
(2) Prices of Raw Material per unit will rise by 10o/o.
(3) Direct Wages per unit will increase by 25"/".
(4) Direct Expenses will increase by { 5,000 in total.
(5) Factory Expenses per unit will increase by 25"/".
(6) The Office premises which was on rental basis in 201 3 would be purchased by the company, on
which depreciation would be { 6,000 in 2014.
(7) Selling Expenses per unit will remain same.
You are required to prepare a statement showing estimated cost and profit for the year ended
31-12-2014 considering that company shall charge a profit al20o/o on sales.
Solution : (TYB.Com., March 03, adapted)
VIJAYA MANUFACTURING
Cost Sheet Showing Present and Estimated Cost
2013 2014
STEP ELEMENTOFCOST 2500 Units Units
Unit Total Unit
fl { 7
A. Direct Material 75,000 30.00 99,000 33.00
B. Direct Wages 30,000 12.00 45,000 15.00
C. Direct Expenses 25.000 10.00 30.000 10.00
D. PRIME COST 1,30,000 52.00 1,74,000 58.00
E. Factory Expenses 40.000 16.00 60.000 20.00 4
F. FACTORYCOST 1,70,000 68.00 2,34,OO0 78.00
Classification of Costs and Cost Shee$ 317
G. Office & Administration Expenses
Oftice Salaries ... 25,000 25,000 5
Office Rent 12,000 6
Depreciation 6,000 6
37.000 14.80 31.000 10.33
H. COST OF PRODUCNON :. 2,O7,000 82.80 2,65,000 88.33
t. Sales Expenses 12.500 5.00 15.000 5.00
J. COST OF SALES 2,19,500 87.80 2,80,000 93.33
K. PROFIT 12.20 23.33 9
L. SALES 2,50,000 100.00 3,50,000 11 6.66
Notes :
(1) Units to be produced in 2014 willrise by 2O"/" i.e.2,500 + 500 = 3,000.
(2) Per unit cost of Raw Material in 2013, will increase by 10%in 2014 i.e. 30 + 10% ot ( 30 = ( 33.
(3) Per unit direct wages will increase by 25% i.e. 12 + 25"/o = 15
(4) Per unit cost of factory expense will increase by 25"h in 2014 i.e. { 16 + 1t4 ol t 16 = t 20.
(5) Salary is assumed to be the same in 2014 as in 2013.
(6) The premises which was on rental basis in 2013 is assumed to be purchasedin2Ol4 and hence
otfice rent will not appear in 2O'l'4. lnstead depreciation of ( 6,000 would be charged.
(7) Preliminary expenses written off and goodwill written off are financial expenses /.losses and
hence will not be shown in the cost sheet.
(8) Dividend received and discount received are financial incomes and hence will not be shown in
the cost sheet.
(9) Profit for year 2013 is a balancing figure. For year 2014 profit is 2Oo/o on sales i.e. 80 (cost) + 20
(profit) = 100 (S. P.). Profit is 1/4 or 2Oh ol cost in 2014.
.-
l[usilration 27 :
Dr. Trading and Profit and Loss Accounts of MK & Co. Cr.
For the Year Ended 31st March 2013
To Materials Consumed 3,75,000 By Sales (15,000 units) 15,00,000

To Direct Wages 2,25,000
To Factory Overheads 3,00,000
To Gross Profit c/d 6,00,000
15,00,000 15,00,000
To Office Rent 90,000 By Gross Profit b/d 6,00,000
To General Expenses 75,000 By Dividend Received 13,500
To Management Expenses 60,000 By lnterest on lnvestment 6,500
To Goodwill w/off 22,500
To Advertisement 1,31 ,250
To Salesmen Commission 1,50,000
To lnterest on Loan 14,500
To Net Profit c/d 76,750
6,20,000 6,20,000
For the year ending 31st March, 2014 following estimates have been made :
(a) Production and sales units will be doubled.
(b) Direct material cost per unit will rise by 20%.
(c) Direct wages per unit will increase by 40%.
(d) Of the factory overheads, < 1,50,000 are Fixed and would remain at the same level but variable
thereof would be in same proportion to direct wages as in 2012-1 3.
(e) Total office and administrative overheads would increase by 40%.
(f) Selling and Distribution overheads per unit will increase by 20o/".
(g) Selling price per unit would rise by 1Oel".
You are require to prepare :
(i) Cost Sheet forthe year ended 31st March,2013 showing cost per unit and total cost and
(ii) Projected cost sheet for the year ending 31st March, 201 4 showing cost per unit and total cost.
318 Cost Accounting (T.Y B, Com. : SEM-V)
Solution (T.Y.B.Com., Oct. 2011, adaPted)

COST SHEET
31-3-2013 31-3-2414
llnits : 15,00a lJnits :
r Rate { Rate
Per Unit Per Unit
A. Direct Materials 3,75,000 25.00 9,00,000 30.00
B. Direct Wages . 2,25,O00 't5.00 6,30,000 21.00
c. PRIME COST 6,00,000 40.00 15,30,000 51.00
D. Add: Factory Overheads
Fixed 1,50,000 10.00 1,50,000 5.00
Variable 1,50,000 10.00 4,20,000 14.00
Total Works Overheads 3,00,000 20.00 5,70,000 19.00
E. WORKS COST 9,00,000 60.00 21,00,000 70.00
F. Add : Office/Administrative Overheads
Office Rent 90,000
Management Expenses 60,000
Total Admini strative Overheads... 2,25,000 15.00 3,15,000 10.50
G. COST OF PRODUCTION 11 ,25,000 75.00 24,15,000 80.50
H. Selling & Distribution Overheads
Advertisement 1,31 ,250 8.75 3,15,000 10.50
Salesmen Commission 1,50,000 10.00 3,60,000 12.00
Total Selling & Distribution Overheads 2,81,250 18.75 6,75,000 22.50
t. TOTAL COST/COST OF SALES ... ... .. 14,06,250 93.75 30,90,000 103.00
J, PROFIT 93,750 6.25 2,10,000 7.00
K. SALES 15,00,000 100.00 33,00,000 11 0.00
Notes :
1 . Material Per Unit : 25 + 20"/" = ( 30 per unit
2. Wages Per Unit : 15 + 40"/" = T 21 per unit

3. Factory Overheads :
Fixed : Remain same i.e. < 1,50,000
Variable : in proportion to direct wages (21 x 10 / 15) = < 14 per unit
4. Total Administrative Overheads : 2,25,000 + 40"k = 3,15,000
5. Selling Overheads : Advertisement = 8.75 + 2Oo/o = { 10.50 per unit
Salesmen Commission = 10 + 20o/" = { 12 per unit
6. Selling Price = 100 + 10% = { 1''l 0 per unit
lllustration 28 : (Fixed and Variable OH)
KT manufacturing company gives you the following particulars for the year 2014. Production and
"- sales during the yearwas 10,000 units.
Pafticulars {
Materials t-vJ 2,50,000
Administrative overhead (fixed),, 1,00,000
Sales 12,00,00b._
Profit 2,s0,000
Factory Overheads :-
Fixed 1,00,000
Variable 2,00,000
Selling and Distribution Overheads :-
Fixed 60,000
Variable 90,000
The company has worked to its maximum capacity of t0,OCi0 units during 2014.Ther"r"g"ffi-
has decided to increase production capacity to 15,000 units for the year 2015 and it is estimated
that :
(i) There will be allround rise in all variables expenditure by 1O%.
(ii) There wifl be increase ol 20o/o in all fixed overheads.
(iii) There will be no need to change the selling price for the year 2015.
Prepare a statement showing total as well as unit cost and profit for 2014. Also prepare a statement
showing estimated profit for 2015 taking into consideration the changes in 2015.
Solution : (T.YB.Com., Oct.2003, SYBAE Oct.2015, aclapted)
Ittl/s. KT MANUFACTURING COMPANY
Gost Sheet Forthe Year Ended 31st Mareh 2014 & 2015
2014 2015
10,000 Units 15,000lJnits
Total Cos Unit Cost Total Cos Unit Casl
( f, f, I
A. Direct Material 2,50,000 25.00 4,12,500 27.50 1
B. Direct Wages 1.50.000 15.00 2.47.500 16.50 2

c. PRIME COST 4,00,000 40.00 6,60,000 44.00
D. Factory Overheads :
- Fixed 1;00,000 10.00 1,20,000 8.00 3
- Variable 2.00,000 20.00 3.30.000 22.00 4
E. FACTORY COST 7,00,000 70.00 11,10,000 74.OO
F. Administrative Overheads 1,00.000 10.00 1,20,000 8.00 5
G. COST OF PRODUCTION 8,00,000 80.00 12,30,000 82.00
H. Selling Overheads :
- Fixed 60,000 6.00 72,000 4.80 6
- Variable 90.000 9.00 1.48.500 9.90 7
t. COST OF SALES 9,50,000 95.00 14,50,500 96.70
J. PROFIT 2.50.000 25.00 3.49.500 23.30
K. SALES 12,00,000 120.00 18,00,000 120.00
Working Notes: (Changes in 2015)

Assumption : lncrease in "all" variable "expenditure" means increase in even direct material and
direct labour cost in addition to 'overheads'; as 'expenditure' covers both 'costs' and 'overheads'.
Alternatively, it may be assumed that only Factory Variable Expenses and Sales Variable Expenses
increase by 10%.
(1 ) tvlaterial Unit Cost = 25.00 + 2.50 =1 27.50; lncrease = 10"/o of 25 = 2.5
(2) Wages UnitCost = 15.00 + 1.50 = { 16.50; lncrease = 10o/o of 15 = 1.50
(3) Factory Overheads (Fixed) = 1,00,000 + 20,000 = { 1,20,000; lncrease =2O/" of 1,00,000 =
20,000
(4) Factory Overheads (Variable) = Unit Cost = 20 + 2.O0 = 22
Unit Cost = 2,00,000 + 10,000 = 20
lncrease = 1O"/" of 2O = 2
(5) Administration Overheads (Fixed) = 1,00,00O + 20,000 = 1,20,000
lncrease - 20% of 1,00,000 = 20,000
(6) Selling Overheads (Fixed) = 60,000 + 12,000 =72'0OO
lncrease =2O"/o of 60,000 = 12,000
(7) Selling Overheads (Variable) = 9 + 0.90 = 9.90
Unit Cost = 90,000 + 10,000 = 9
lncrease = 10"/oof 9 = 0.90
lllustration 29 : (Working Back Sale Price)
Following information is available from cost records for the year ended 31st March, 2014 :
Direct Material ( 36 Per Unit
Direct Labour ( 28 Per Unit
Chargeable Expenses { 11 Per Unit
320 Cost Accounting (TY.B. Com, : SEM-V)
Factory Overheads Fixed { 15,00,000,

Variable ( 10 Per Unit
Office Overheads Fixed { 12,50,000
Selling Overheads Fixed t 5,00,000,
Variable ( 25 Per Unit
Units Produced and Sold 50,000
Selling Price Per Unit { 210
Following changes are anticipated during the year ended 31st March, 2015.
(1) Production and Sales will increase by 60%.
(2) Direct Material cost per unit will increase by 12.5%.
(3) Direct Labour per unit will decrease by 5%.
(4) Chargeable expenses per unit will decrease by 1O"h.
(5) Variable factory overheads per unit will increase by 25"/".
(6) Variable selling overheads will decrease by 25"/..
(7) All fixed overheads will increase by 2O"/".
(8) 75"/" ol the output will be sold in Domestic Market at a prof it of 20"/" on sales.
(9) Balance 25% output will be sold in Exporl Market at a profit of 50% on sales.
You are required to :
(1 ) Prepare a Cost sheet for the year ended 31st March, 2O14 and estimated cost sheet for the year
ended 31st tt4arch, 2015, showing total and per unit cost.
(2) Calculate total and per unit profit for the year ended 31st March, 2014.
(3) Calculate total sales and profit for Domestic N4arket and Export Market.
Solution ; (T.Y.B.Com., Oct.2005, adapted)
Cost Sheet
2014 2015 WN
STEP ELEMENTOFCOST 50,A00 Units 80,004 Units
f, a f ,
A. Direct Material 18,00,000 36.00 32,40,000 40.50 1
B. Direct Labour ... ... 14,00,000 28.00 21,28,000 26.60 2

C. Chargeable Expenses ... 5,50,000 11 .00 7,92,OOO 9.90 3
D. PRIME COST 37,50,000 75.00 61,60,000 77.00
- Fixed 15,00,000 30.00 18,00,000 22.50 4

- Variable 5,00,000 10,00 10,00,000 12.50 5
F. WORKS COST 57,50,000 115.00 89,60,000 112.00
Office Overheads
- Fixed 12,50,000 25.00 15,00,000 18.75 6
G. COST OF PRODUCTION 70,00,000 140.00 1,04,60,000 130.75
H. Selling Overheads :
- Fixed 5,00,000 10.00 6,00,000 7.50 7

- Variable 12,50,000 25.00 15,00,000 18.75 8
I. COST OF SALES 87,50,000 '175.00 1,25,60,000 157.00
J. PROFIT 't7,50,000 35.00 54,95,000
K. SALES 1,05,00,000 210.00 1,80,55,000 9
Working Notes :
(1) Direct Material Cost Per Unit in 2015 : 36 x 112.5oh = 40.50
(2) Direct Labour Cost Per Unit in 2O15 : 28 x 95% = 26.60
(3) Chargeable Expenses Per Unit in 2015: 11 x g0% = 9.90
(4) Fixed Factory Overheads in 2015 : 15,00,000 x 12O"k = 18,00,000
(5) Variable Factory Overheads in 2015 10 x 125o/o = 12.50
=
(6) Fixed Office Overheads in 2015 : 12,50,000 x 120% = 15,00,000
Classffication of Costs snd Cost Sheets 321
(7) Fixed Selling Overheads in 20I5 : 5,00,000 x 1r2o"/o = 6,00,000
(8) Variable Selling Overheads in 201 5 : 25 x 7So/o = 1 g.75
(9) Sale in 2015 :
Unit sold in 2015 = 50,000 x 160% = 80,000
Domestic Sales in 2015 = 80,000 xTSo/o = 60,000
Exports in 2015 = 80,000 x 25% = 20,000
Sale price per Domestic unit :
Price Cost
100 80
? 157
- 157
80
x 100 = 190.2s
Sale Price Per Export Unit :
Price Cost
100 50
? 157
- 157
50
x 1oo = 314
.'. Domestic Sale= 60,000 x 196.25 = I,17,75,000
Exports 20,000 x 314 62,80,000
'1,80,55,000
Total =
lllustration 30 : (Fixed and Variable OH)
The Management of a manufacturing concern has approached the Costing Department to find out
the cost ot 6,000 units. The cost analysis of 4,000 units gives the following results :
Materials < 90,000, Labour < 50,000, Direct Expenses < 1,000, Factory Overheads < 2,000,
Administration Overheads < 1,600 and Selling and Distribution Overheads ( 800.
The further details in this connection are as follows:
(a) An increase of 10% is expected in.the cost of raw material and 5% in the cost of labour.
(b) 70% of the factory overheads are fixed and 30% are variable.
(c) The ratio of fixed and variable part of Administration overheads is 60 : 40.
(d) 50% of the Selling and Distribution overheads are fixed.
The Management desires to chargb 25o/o prolil on sale price.
Prepare cost statement with maximum break up of cost and ascertain selling price forthe production
of 6000 units. (T.Y.B.Com., Mar. 07, adapted)
Solution :
Cost Statement
4,000 Units
OF COST TotatCostl Unit Cost Working Unrt Cost
it ( f, f
A. Direct Materials 90,000 22.50 22.5O + 1O"/" 24.75 1,48,500
B. Direct Wages 50,000 12.50 12.50 + 5"/o 13.13 78,780
C. Direct Expenses 1,000 0.25 Same 0.25 1,500
D. PRIME COST 1,41 ,000 35.25 38.13 2,28,78;O
E. Factory Overheads 2,000 0.50
- Fixed 2,000 x70% 0.23 1,400
- Variable 0.50 x 30% 0.15 900
F. WORKS COST 1,43,000 35.75 38.51 2,31,080
G. Admin. Overheads 1,600 0.40
- Fixed 1,600 x 60% 0.16 960
- Variable 0.4O x 40/o 0.16 960
H. COST OF PRODUCTION 1,44,600 36.15 38.83 2,33,000

l. Sales/Distr. Overheads 800 0.20
- Fixed 800 x 50% o.07 400
- Variable O.20 x50/" 0.10 600
J. COST OF SALES 1,45,400 36.35 39.00
'13.00
2,34,OOO
K. PROFIT 1/3 on Cost 78,000
L. SALES 52.00 3,12,000
lllustration 31 :
Swadeshi Electronics Ltd. furnishes to you the following information for the year ended 31st March,
zilq
Production and Sales 15,000 units
Sales < 12,75,000
Direct Wages < 2,70,000
Direct Materials < 3,30,000
Factory Overheads < 2,25,000
Administrative Overheads < 1,05,000
Sales Overheads < 90,000
On account of intense competition following changes are estimated in the subsequent year :
(1) Production and sales activity will be increased by one third.
(2) Material rate will be lower by 25"/". However there will be increase in consumption by 20% due
to quality difference.
(3) Direct wages cost would be reduced by 2O"h due to automation.
(4) Out of the above factory overheads, ( 45,000 are of fixed nature. The remaining factory expenses
are variable in proportion to the number of units produced.
(5) Total administrative overheads will be lower by 40"h.
(6) Sales overheads per unit would remain the same.
(7) Sale price per unit would be lower by 20%.
Prepare a statement of cost for both the years ending 31st March,2014 and 31st March, 2015
showing maximum possible details of cost.
Solution :
SWADESHI ELECTRONICS LIMITED

Cost Sheet For the Year Ended 31-3-2014 [Output : 15,000 Units]
ELEMENT OF COST Total Cost
A. Direct Materials 3,30,000 22.O0

B. Direct Wages 18.00
C. PRIME COST 6,00,000 40.00
D- Factory Overheads 15.00
E. WORKS COST 8,25,000 55.00
F. AdministrativeOverheads 7.O0
G. COST OF PRODUCTION 9,30,000 62.00
H. Sales Overheads 6.00
I. COST OF SALES 10,20,000 68.00
J. PROFIT 't
7.00
K. SALES 12,75,000 85.00
Estimated Cost Sheet For the Year Ended 31-3-2015 [Output : 20,000 Units]
STEP ELEMENTOFCOST
f
A. Direct Materials (2) 3,96,000 19.80
B. Direct Wages (3) 2,88.000 14.40
C. PRIME COST 6,84,000 34.20
D. Factory Overheads (4) 2.85,000 14.25
E. WORKS COST 9,69,000 48.45
F. AdministrativeOverheads (5) 63.000 3.15
H. Sales Overheads 1,20.000 6.00
I. COST OF SALES ,52,000
11 57.60
J. PROFIT 2.08,000 10.40
K. SALES 13,60,000 68.00
Working Notes :
2014 201 5
1. Production & Sales (Units) 15,000
Add: 1/3 increase 5.000 20,000
2. Material Unit Cost 22.00
Less: 25% reduction in price 5.50
16.50
Add:'2Q"/" increase in consumption 3.30 19.80
3. Direct Wages Unit Cost 18.00
Less: 20% reduction 3.60 14.40
4. Factory Overheads
Fixed 45,000 45,000
Variable (Per Unit t 12 x Units) 't,80.000 2.40,000
Total 2,25,000 2,85,000
5. Administrative Cost 1,05,000
Less: 40% reduction 42.OOO 63,000
6. Sale Overheads Per Unit (t 6) is same for both the years
7. Sale Price 85
Less: 20% reduction 17 68
lllustration 32 : (Working back Sales and Selling OH)
Domestic Appliances manufactures Pressure Cookers. For the year ending 31st March,2013,
expenses incurred are as follows for an output of 2,000 units.
a
Raw materials consumed 2,00,000
Factory overheads 1,60,000
Administrative overheads 46,000
Selling overheads (10% of sales value) 70,200
Distribution ove rheads 36,000
During the year, 200 units lvere unsold.
For the year 2014, the following changes were estimated :
(a) Raw materials price would rise by 10% but consumption per unit would decrease by 5%.
(b) Direct wages would rise by 3.5%.
(c) Of the factory overheads < 60,000 are fixed and would remain at the same level but the variable
thereof would be in same proporlion to Direct wages as in 2013.
(d) Administrative overheads would rise by 20%.
(e) Selling overheads as a percentage of sales value would remain at the same level and distribution
overheads would remain same per unit as in 2013.
(f) The output and sales would be 3,000 pressure cookers.
(g) Expected profit in the year 2014 is 40% ol sales.
From the above information prepare :
(1) Cost-sheet of the year 2013 and projected cost sheet of the year 2014 showing per unit and total
cost.
(2) Working notes for the projected cost sheet.
(3) Projected sales price. (T.Y.B.Com., April2001, adapted)
324 Cost Accounting (7. Y. B. Com. : SEM-I)
Solution :
M/s. DOMESTIC APPLIANCES

Cost Sheet
2013 201 4
ELEAIENTS OF COST : 2,000 units Produced :3,0A0 units
Units
Total Cost Units Unit Cost Total Cost Units Unit Cost
a No. f, No. f,
A. Direct Material 2,00,000 2, 000 100.00 3,13,500 3,000 104.50
B. Direct Wages 1,00.000 2, 000 50.00 1.55,250 3,000 51.75
C. PRIME COST 3,00,000 2, 000 150.00 4,68,750 3,000 156.25
Fixed 60,000 2,000 30.00 60,000 3,000 20.00

Variable 1,00.000 2,000 50.00 1.55.250 3,000 51.75
E. FACTORYCOST 4,60,000 2,000 230.00 6,84,000 3,000 228.00
F. Administrative Overheads 46,000 2,000 23.00 55.200 3,000 18.40
G. COST OF PRODUCTION 5,06,000 253.00 7,39,200 246.40
H. Less : Closing Stock of
Finished Goods 50.600 200
I. COST OF GOODS SOLD 4,55,400 1,800 253.00 7,39,200 3,000 246.40
J. Selling Overheads 70,200 1,800 39.00 1,59,840 3,000 53.28
K. Distribution Overheads 36.000 1,800 20.00 60.000 3,000 20.00
L. COSTOFSALES 5,61,600 1,800 312.00 9,59,040 3,000 319.68
M. PROFIT 1.40.400 1,800 78.00 6.39,360 3,000 213.12
N. SALES 7,02,OO0 1,800 390.00 15,98,400 3,000 532.80
Notes :
(1) Raw MaterialCost:

Raw Material P. U.
ln 2013 100
Add : lncrease by 10% 10
110
Less : Decrease by 5% 5.5
ln 2014 104.5
(2) Direct wages per unit rises by 3.5%.
(3) Factory Variable Overheads in 2014 (in proportions of direct wages as in 2013).
I1,00,000
?? ??9 x 1,oo,ooo = 1,55,250
Wages Variable Overheads

ln 2003 1,00,000 1,00,000
ln 2OO4 1,55,250 ?
Total (1,55,250 + 60,000) 2,15,250
(4) Administrative overheads will increase by 20% i.e. 2O"/o rise in the amount of hdministrative
expense.
(5) Selling overheads as a percentage of sales is 1 0% in 2013. Profit is 40"/o ot sales (given).
Let sales be 100.
.'. Selling overheads (10% of 100) 10
Total cost excluding selling overheads wil be 50.
Cost Sales
50 100
(246.4 + 20.00) 266.40 ? (532.80)
.'. Selling price per unit = 532.80
Sales = 532.80 x 3,000 = 15,99,400
Selling overheads = 1Oo/o of 15,98,400 = 1,59,g40
ClossiJication of Costs and Cost Sheets j2S
lllustration 33 :
Sagar manufacturing company gives you the following particulars for the year 2012. Production and
sales during the year was 20,000 units.
Pafiiculars f Pafticulars a
Material 5,00,000 Factory Overheads
Direct Wages 3,00,000 - Fixed 2,00,000
Administrative Overheads (Fixed) 2,00,000 - Variable 4,00,000
Sales 24,00,000 Selling and Distribution Overheads
Profit 5,00,000 - Fixed 1,20,000
- Variable 1,80,000
The company has worked to its maximum capacity of 20,000 units during the year 2012. The
management has decided to increase production capacity to 30,000 units for the year 2013 and it is
estimated that :
(a) There will be all round rise in all variable expenditure by 10%.
(b) There will be increase of 20% in all fixed overheads.
(c) There will be no need to change the selling price for the year 2013.
Prepare Cost Sheet for the year 2012 with cost per unit column and also prepare estimated Cost
Sheet for the year 2013 with cost per unit column. (T.Y.B.Com., April 2014, adapted)
Solution :
COST SHEET
STEP ELEMENTOFCOST Production / Sales Production / Sales

20,000 units 30,000 units
Cost f, Cost
Per Unit Per Unit
A. Direct Materials 5,00;000 25.00 8, 25 ,0 00 27.50
B. Direct Wages . 3,00,000 15.00 4, 95 ,0 00 16.50
c. PRIME COST 8,00,000 40.00 13,20,000 44.OO
D. Add : Factory Overheads
Fixed 2,00,000 10.00 2,40,000 8.00
Variable 4,00,000 20.00 6,60,000 22.OO
Total Works Overheads 6,00,000 30.00 9,00,000 30.00
E. WORKS COST 14,00,000 70.00 22,20,000 74.O0
F. Add : Office/Administrative Overheads 2,00,000 10.00 2,40,000 8.00
lJ. COST OF PRODUCTION 16,00,000 80.00 24,60,000 82.00
H. Selling & Distribution Overheads
Fixed 1,20,000 6.00 1,44,000 4.80
Variable 1,80,000 9.00 2,97,000 9.90
Total Selling & Distribution Overheads 3,00,000 15.00 4,41,000 14.70
l. TOTAL COST / COST OF SALES ... ... .. 19,00,000 95.00 29,01,000 96.70
J. PROFIT 5,00,000 25.00 6,99,000 23.30
K. SALES 24,00,000 120.00 36,00,000 120.00
lllustration 34 :
Following particulars are revealed from the costing records of tvl/s Jupiter & Co. Ltd. in the year
2014:
Production - 15,000 Units
{
Raw Material Cost 3,00,000
Labour Cost 1,80,000
Office Overheads 60,000
Sellin Expenses 15,000
Rate of prolit25"/" on selling price.

Now the management decided to produce 20,000 units in 2015. As per Co.'s estimate, cost of raw
materials will be increased by 25"/. and labour cost will also increase by 15%. 50% of overhead
charges are fixed and the rest is variable. The selling expenses per unit will also be reduced by
25"/".
There will be no changa{n rate of profit.
Prepare Cost Statements for both the years 2Q14 and 2015. (ICWA lnter, Dec. 15, adapted)
Solution :
Statement of Cost and Profit (Cost Sheet) For the Year Ended 31-3-2014
[Output : 15,000 Units]
Unit Cost
f
A. Raw Materials 3,00,000 20.00
B. Labour 12.00
C. PRIME COST 4,80,000 32.00
D. Add : Factory Overheads 8.00
E. WOHKS COST 6,00,000 40.00
F. Add : Office Overheads 4.00
G. COST OF PRODUCTION 6,60,000 44.O0
H. Add: Selling Expenses 1.00
I. COST OF SALES 6,75,000 45.00
J. Add : PROFIT (331/3 x Cost) 15.00
K. SALES 9,00,000 60.00
Statement of Cost and Profit (Cost Sheet) For the Year Ended 31-3-2015
lOutput :20,000 Unitsl
STEP ELEMENTOFCOST
(Note)
A. Raw Materials (1) 5,00,000 25.00
B. Labour (21 2.76.000 13.80
C. PRIME COST 7,76,000 38.80
D. Add : Factory Overheads (3) 1.40,000 7.00
E. WORKS COST 9,16,000 45.80
F. Add : Office Overheads (4) 70.000 3.50
H. Add : Selling Expenses (5) 15.000 0.75
I. COST OF SALES '10,01,000 50.05
J. Add : PROFIT (331/3 x Cost) 3,33.600 16.68
K. SALES 13,34,600 66.73
Working Notes :
1. Raw Materials = ( 20 x 125"hx20,000 = { 5,00,000

2. Labour= { 12 x 1150/"x20,000 = t 2,76,000
60'ooo
3. Factoryoverheads = [?1'20'009 i.e. roo,oool +
2 [{ x 2o,ooo i.e. t eo.oool
15,000
L ]L l
= < 1,40,000
4. .
[. ry
orrice overheads = i.e. < so,ooo_]r x 20,000 i.e. < +o,oooj
[. H#
= ? 70,000
5. Selling Expenses = [F 1 x (100 - 25)%] x 20,0001= t 15,000
Classification of Costs und Cost Sheets J27
lllustration 35 :
ML Auto Ltd. is a manufacturer of auto components and the details of its expenses for the year 2014
are given below :
1. Opening Stock of Material 1,50,000

2. Closing Stock of Material 2,00,000
3. Purchase of Material 18,50,000
4. Direct Labour 9,50,000
5. Factory Overhead 3,80,000
6. Administrative Overhead 2,50,400
During 2015, the company has received an order from a Car Manufacturer where it estimates that
the Cost of Material and Labour will be ( 8,00,000 and < 4,50,000 respectively. ML Auto Ltd. charges
Factory Overhead as a Percentage of Direct Labour and Administrative Overhead as a Percentage
of Factory Cost based on previous year's cost. Cost of delivery of the components at Customer's
Premises is estimated at ? 45,000.
You are required to -
'l . Calculate the Overhead Recovery Rates based on actual costs for 201 4.
2. Prepare a detailed Cost Statement for the order received in 2015 and the price to be quoted if
the company wants to earn a profit of 10% on sales.
(CA lnter, Nov. 15, adapted)
Solution :
(i) Overhead Recovery Rate

Factory Overhead Recovery Rate
Factory Overheads in 2014 3'80'ooo
Direct Labour Cost in 20'14
x 1oo = 9,50,000
x 1oo
= 4oo/o of Direct Labour

Administrative Overhead Recovery Rate
Administrative Overheads in 201 4 <2'50'4oo
Factory cosrs in 2014 (wN)
xioo - < 31,30,000
xloo
= 8o/o ol Factory Cost
Working Note :
Opening Stock of Material 1,50,000

Add : Purchase of Material 18,50,000
Less : Closing Stock of Material
Ittlaterial Consumed 18,00,000
Direct Labour
Prime Cost 27,50,000
Factory Overhead
Factory Cost 31,30,000
(ii) Detailed Cost Statement for the Order received from M.L. Auto Ltd. during 2015
r
Ivlaterial 8,00,000
Labour 4,50,000
Factory Overhead (40"/. of < 4,50,000) 1.80,000
Factory Cost 14,30,000
Administrative Overhead (8% of < 14,30,000) 1,14,400
Cost of Delivery 45.000
Total Cost 15,89,400
Add:Profit @ 1O"/" of Salesor11.11%of costorl/9of 15,89,400 1.76,600
Sales Value (Price to be d for the order) (t 15,89,400/0.9) 17,66,000
Hence the price to be quoted is ( 17,66,000 if the company wants to earn a profit of 10olo on sales.
3.5 SEGREGATION OF SEMI-VARIABLE COSTS
Illustration 36 :
Vaijnath Polymers manufactures and sells a typical brand of tiffin boxes under its own brand name.
The installed capacity of the plant is 1,20,000 units per year, distributable evenly over each month
of calendar year. The Cost Accountant of the company has informed you about the cost structure of
the product, which is as follows :
Raw Materials ( 20 per unit
Direct Labour t 12 per unit
Direct Expenses { 2 per unit
Variable Overheads { 16 per unit
Fixed Overheads for the year t 3,00,000.
Semi-Variable Overheads are as follows :
(a) { 7,500 per month upto 50% capacity and
(b) Additional < 2,500 per month for every additional 25"/" capacily utilisation or part thereof.
The plant was operating at 50% capacity during the first seven months of the calendar year 2013
and at 100% capacity in the remaining months of the year.
The selling price for the period from 1st January 2013 to 31st July, 2013 was f ixed at ( 69 per unit.
The firm has been monitoring the profitability and revising the selling price to meet its annual profit
targetof?8lacs.
You are required to suggest the selling price per unit for the period from 1st August, 2013 to 31st
December, 2013.
Prepare cost sheet clearly showing the total and per unit cost and also profit for the period :
(a) From 1st January 2013 to 31st July 2013.
(b) From 1 st August 2013 to 31st December 201 3. (TY.B.Com., Oct. 2000, adapted)
Solution :
M/s. VAIJANATH POLYMERS

Cost Sheet For the Year Ended 31st December 2013
Jan-Jd 2a13 :7 Months :5 Months

ELEMENTS OF.COST Units Produced :35,000 Units Produced :5a,000
Total Cosi Units ut ltl vuna lJnit Cost
I No. a f,
A. Direct Material 7,00,000 35,000 20.00 10,00,000 50 ,0 00 20.00
B. Dircct Wages 4,20,000 35,000 12.00 6,00,000 50 ,0 00 12.00
C. Direct Expenses 70.000 35,000 2.00 1.00,000 50 ,0 00 2.OO
D. PRIME COST 11,90,000 35,000 34.00 17,00,000 50 ,0 00 34.00
Fixed (Note 2) 1,75,000 35,000 5.00 1,25,000 50 ,0 00 2.50

Variable 5,60,000 35,000 16.00 8,00,000 50 ,0 00 16.00
Semi-Variable (Note 3) 52.500 35,000 1.50 62,500 50 ,0 00 1.25
F. TOTALCOST 19,77,500 35,000 56.50 26,87,500 50 ,0 00 53.75
G. PROFIT (Note 4) 4.37.500 35,000 12.50 3.62.500 50 ,0 00 7.25
H. SALES 24,15,000 35,000 69.00 30,50,000 50 ,0 00 61.00
Notes :
(1) Units Produced

10rl% Capacity = |,29,990,n't"
50% Capacity = 60,000 units
First 7 months - 50% capacity. .'. 60,000 ,| =35,000 units

5
Next 5 months - 10O% capacity. .'. 1,20,000,
1p = 50,000 units
(2) Fixed overheads are allocated on time basis i.e. 7 : 5.
(3) Semi-variable expenses
Capacity Expense per month
0-50% 7,500
51 -75 o/a 10,000 (7,500 + 2,500)
76 - 100 % 12,500 (10,000 + 2,500)
... First 7 months =7 x7,500 = 52,500
Next 5 months = 5 x 12,500 = 62,500
(4) Profit
Targeted profit for the year 8,00,000
Estimated profit in the first 7 months 4,37.500
.'. Profit forthe next 5 months should be 3.62,500
lllustration 37 :
A Factory manufactures a uniform type of article and has a capacity of 10,000 units per week. The
following information shows the different elements of cost for three consecutive weeks when the
output has changed every week.
Units Direct Direct Factory overheads
Produced Materials Labour (Part Variable & Paft Fixed)
No.{a
2,000 12,000 6,000 12,500
2,800 16,800 8,400 16,500
3,700 22,200 11 ,100 21 ,000
The factory has received an order for 5,000 units and it desires a profit of 16 213"/" on selling price.
Find out the price at which each unit should be sold.
Solution :
Notes: Computation of the elements of costs is to be done in the manner illustrated below :
(1) DTRECT MATERTAL

Total Material Units Per Unit
Cost
12,000 2,000 6.00
16,800 2,800 6.00
22,200 3,700 6.00
Thus, the per unit cost of direct materials is ( 6.00.
(2) DTRECT LABOUR COST
Total Labour Units Per Unit
Cost
6,000 2,000 3.00
8,400 2,800 3.00
11 ,1 00 3,700 3.00
Thus, the per unit cost of direct labour is { 3.00
(3) FACTORY OVERHEADS
(i) Variable Factory Overheads
Change in Amount Change in Quantity Variable Overheads
16,500 - 12,500 =4,000 2,800 -2,000 =800 =4,000+800= 5
21,000 - 16,500 = 4,500 3,700 - 2,800 = 900 =4,500 +900 = 5
Thus, Variable Factory Overheads are ? 5 per Unit.
(ii) Fixed Factory Overheads
Total Overheads
Variable Fixed Overheads
Overheads Units Rate Total (Total - Variable)
12,500 2,000 5 10,000 2,500
16,500 2,800 5 14,000 2,500
21 ,000 3,700 5 18,500 2,500
Thus, the Fixed Factory Overheads are ( 2,500. These costs will remain fixed upto the
production oI 10,000 units.
330 Cost Accounting (7. Y. B. Com. : SEM-V)
Now we can proceed to prepare the Cost Sheet.

Cost Sheet
{
A. Direct Materials 5,000 6.00 30,000
B. Direct Labour 5,000 3.00 15.000
C. PRIME COST [A + B] 5,000 9.00 45,000
D. Factory Overheads
Fixed 2,500
Variable 5,000 5.00 25,000
E. TOTAL COST [C + D] 5,000 72,500
F. PROFIT [16 - 213y" On Sales -- 2Oo/o on c 14.500
G. SALES 87
Selling price 87,000/5,000 = < 17.40 per unit.
3.6 ADPITIONALILLUSTRATIONS
Refer Chapter - 6,Para 10.5 for additional illustrations on preparing cost sheets.
a
Classffication of Costs snd Cost Sheets 331
EXERCISES
OUTLINE
Descriptive Questions [7 or
Short [5 Marks]
Element-wise Cost
6.3
6.4
6.5
b.o Segregation of Semi-Variable Costs
o.t Add itional Practical Problems 352
7. Answers
4.1 DESCRTPTTVE QUESTTONS [7 OR I MARKS]

1. Explain - Cost classification based on nature of production or manufacturing process.
[Ans.: Para 1.1]
2. Describe the different costing methods used in different industries. [Ans.: Para 1]
3. Enumerate the different units of measurement used in different industries. [Ans.: Exhibit 2]
4. Describe the guidelines for computing cost of production. [Ans.: Para 2.9.1]
5. Describe the rules for measurement and presentation of material cost in the cost sheet.
[Ans.: Para 2.9.2]
6. Describe the rules for measurement and presentation of direct expenses in the cost sheet.
[Ans.: Para 2.9.4]
4.2 SHORT NOTES [s MARKS]
1. Methods of Costing (Oct. 09) [Ans.: Para 1]
2. Job Costing [Ans.: Para 1.4]
3. Process Cqsting [Ans.: Para 1.5]
4. Output Costing [Ans.: Para 2]
5. Unit Costing [Ans.: Para 2]
6. Cost of Production [Ans.: Para 2.9.1]
7. Material Consumed [Ans.: Para 2.9.1]
8. Direct Wages in Cost Sheet [Ans.: Para 2.9.1]
9. Direct Expenses in Cost Sheet [Ans.: Para 2.9.1]
'l
0.Works Overhead in Cost Sheet [Ans.: Para 2.9.1]
1'l . Valuation of Stock in Cost Sheet [Ans.: Para 2.9.1]
l2.Treatment of Scrap in Cost Sheet [Ans.: Para 2.9.1]
13. Packing lVlaterial Cost in Cost Sheet [Ans.: Para 2.9.5]
'14. Profit Centre [Ans.: Para 2.6]
15. lnvestment Centre [Ans.: Para 2.7]
16. Different Cost Sheets for Different Purposes [Ans.: Para 2.8]
5. QUESTIONS
5.1 MULT!PLE CHOICE QUESTIONS
A" Conceptual
1 . Form of specific order costing where work is undertaken to customer's special requirements and
each order is comparatively of short duration.
(a) Job Order CostinS (b) Batch Costing
(c) Contract Costing (d) Process Costing
2. Form of specific order costing which consists of a group of similar articles which maintain its
identity throughout one or more stages of production.
(a) Job Order CostinS (b) Batch Costing
(c) Contract Costing (d) Process Costing
3. Which of the following items is not included in preparation of a cost sheet?
(a) Carriage inward (b) Purchase returns
(c) Sales commission (d) lnterest paid
4. Which of the following items is not excluded while pieparing a cost sheet?
(a) Goodwill written off (b) Provision for taxation
(c) Property tax on Factory Building (d) Transfer to reserves
5. Which ol the following are direct expenses?
(i) The cost of special designs, drawing or layouts
(ii) The hire of tools or equipment tor a particular job
(iii) Salesman's wages
(iv)Rent, rates and insurance of a factory
(a) (i) and (ii) (b) (i) and (iii)
(c) (i) and (iv) (d) (iii) and (iv)
6. A company has to pay ( 10,000 per unit royalty to the designer of a product which it manufactures
and sells. The royalty charge would be classified as a
(a) Direct expense (b) Production overhead
(c) Administrative overhead (d) Selling overhead
7. Wherever part of the manufacturing operation is subcontracted, the subcontract charges related
to materials shall be
(a) ignored (b) treated as cost of materials
(c) treated as works overheads (d) treated as direct expenses
8. Research and development cost relating to an existing product
(a) shall be treated as Capital Expenditure
(b) shall be treated as deferred revenue expenditure
(c) shall be treated as Direct Expenses
(d) shall be ignored
9. Which of the following are prime costs?
(i) Direct materials (ii) Direct labour
(iii) lndirect labour (iv)lndirect expenses
(a) (i) and (ii) (b) (i) and (iii)
(c) (ii) and (iii) (d) (ii) and (iv)
10. What is prime cost ?
(a) Total direct costs only (b) Total indirect costs only
(c) Total non-production costs (d) Total production costs
11. Which of the following costs are part of the prime cost for a manufacturing company ?
(a) Cost of transporting raw materials from the supplier's premises
(b) Wages of factory workers engaged in machine maintenance
(c) Depreciation of lorries used for deliveries to customers
(d) Cost of indirect production materials
12. Prime cost is
(a) all costs incurred in manufacturing a product
(b) the total of direct costs
(c) the material cost of a product (d) the cost of operating a department
'l
3. Which of the following is not a component of prime cost ?
(a) Direct materials (b) Direct labour
(c) Direct expenses (d) Overhead
14. The term "prime cost" refers to
(a) all manulacturing costs incurred to produce units of output
(b) all manufacturing costs other than direct labor and raw material costs
(c) raw material purchased and direct labor costs
(d) the raw material used and direct labor costs
'l
5. Overheads consist of all the following except
(a) lndirect materials (b) Factory utilities
(c) Direct labour (d) lndirect labour
16. Recruitment costs
(a) shall form part of Prime Cost (b) shall form part of Works cost
(c) shall form pad of Overheads (d) shall be ignored
17. Cost of goods manufactured will include opening and closing stock for
(a) raw materials and work in progress only
(b) work in progress only (c) raw materials only
(d) raw materials, work in progress, and finished goods
18. ln the cost sheet, lncome from sale of empty containers used for despatch of the goods produced
shall be
(a) added to cost of production (b) deducted from cost of production
(c) added to sales (d) ignored
19. ln the cost sheet, abnormal costs e.g. due to accident shall be
(a) added to cost of production (b) deducted from cost of production
(c) deducted from sales (d) ignored
20. Direct materials + Direct labour + Direct expenses = ........
(a) Works cost (b) Cost of production
(c) Cost of sales (d) Prime cost
21. Prime cost + Factory Overhead
(a) Fixed Cost (b) Works cost
(c) Cost of production (d) Cost of goods sold
Z2.Prime cost + Factory overhead + Administration overhead = ........
(a) Works cost (b) Cost of production
(c) Prime Cost (d) Cost of sales
23.Total cost - Selling and distribution overheads = ........
(a) Cost of goods sold (b) Closing stock
(c) Cost of production (d) Net profit
24. Cost of production - Administration overheads = ........
(a) Prime Cost (b) Cost of sales
(c) Works cost (d) Work-in-progress
25. Prime cost + Overheads = ........
(a) Works cost (b) Total cost
(c) Cost of sales (d) Cost of production
26.Total cost + Profit = ........

(a) Selling price (b) Cost of goods sold
(c) Selling and distribution overheads (d) Gross Profit
B. Numerical(lnternalTests)
27 .From the following details, compute cost of goods manufactured : Cost of goods sold ( 2,00,000;
Opening stock of finished goods ? 50,000; Closing stock of finished goods { 1 ,00,000 and Closing
stock of work-in-progress ( 10,000.
(a){ 2,00,000 (b) < 2,50,000
(c) { 2,40,000 (d) < 3,00,000
28. The opening stock of f inished goods is < 50,000; closing stock of finished ,goods is t 1,00,000
{
2,00,000. What is cost of goods sold ?
and the cost of goods manufactured is
(a) { 2,00,000 (b) < 2,s0,000
(c) t 1,00,000 (d) T 1,50,000
2g.Vinayaka Ltd. furnishes the following information for a period, peftaining to its product'T" :
Cost of production (for 11 ,000 units) < 44,000 r
Sales (for 9,000 units) < 54,000

The profit per unit of the product was
(a){1.15 (b){1.20
(c) { 2.60 (d) { 1.60
30. For product A of Shilpa Ltd., the prime cost is ( 20 per unit, factory overheads are 20"/" of prime
cost and administration overheads are 25o/o of Works cost. ll the company desires to earn a
profit of 25o/o on selling price, the selling price per unit of product A would be
(a) t 40 (b) t 33
(c) ( e0 (d) < 30
31 . M & Co. used in a particular year { 3,00,000 of direct materials. The year-end direct material
inventory was t 50,000 more than it was at the beginning of the year. Calculate direct material
purchases.
(a) { 3,00,000 (b) < 2,50,000
(c) { 3,50,000 (d) < 4,00,000
32. Consider the following:
Raw material used < 1,40,000
Direct labour < 5,00,000
Total manufacturing overhead < 6,00,000
Beginning work-in-progress < 15,000
Cost of goods sold < '12,05,000
What is the value of the closing work-in-progress?
(a) { 65,000 (b) < 35,000
(c) { s0,000 (d) < 70,000
33. R Company manufactures desks. The beginning balance of Raw Material lnventory was T4,500;
raw material purchases of T 29,600 were made during the month. At month end, { 7,700 of raw
material was on hand. Raw material used during the month was
(a) { 26,400 (b) < 34,100
(c) { 37,300 (d) < 2e,600
34. M Company manufactures tables. lf raw material used was < 80,000 and Raw Material lnventory
at the beginning and end of the period, respectively, was { 17,000 and < 21,000, what was the
amount of raw material purchased?
(a){ 76,000 (b)< 1,18,000
(c) { 84,000 (d) < 1,01,000
35.T Company manufactures computer stands. What is the opening stock of Finished Goods if
Cost of Goods Sold is { 'l ,07,000; the ending balance of Finished Goods lnventory is ( 20,000;
and Cost of Goods Manufactured is ( 50,000 less than Cost of Goods Sold?
(a) T 70,000 (b) < 77,000
(c) ( 1,57,000 (d) < 1,27,000
ClassiJication of Costs und Cost Sheets 33s
5.2. FILL IN THE BLANKS

1 . The variable production overheads shall be absorbed in production cost based on (actual/
normal) capacity.
2. Any demurrage charges levied by transport (shall / shall not) form part of the cost of
-
materials.
3. Subsidy receivable with respect to any material shall be (added to / reduced from) cost of
materials.
4. Cost of primary packing materials (shall / shall not) form part of the cost of production.
5. Cost of secondary packing materials shall form part of-(works / distribution) overheads.
6. Material cost (includes / excludes) cost of procurement, freight inwards, taxes & duties,
insurance etc. directly attributable to the acquisition.
7. Trade discounts, rebates, duty drawbacks, refunds on account of modvat, cenvat, sales tax and
-
other similar items are (added / deducted) in determining the costs of material.
8. Labour cost (includes / excludes) salaries and wages paid to temporary employees.
9. Labour cost (includes / excludes) salaries and wages paid to employees of the contractor.
l0.Production 15,000 units, Closing Stock of linished Goods 8,000 units. Opening Stock 3,000
-
units, Cost of Sales @ < 15 per unit, Profit @ 25yo on sales. Sales amount to t
-
11 . Sales < 2,40,000, Opening Stock 200 units, and Closing Stock 2,200 units, Selling Price ( 30 per
unit. The number of units produced
12. Prime Cost ( 4,77,0O0, Direct Labour Cost { 2,90,000, Direct Expenses ( 7,000; Cost of Raw-
-.
materials consumed is (
13.Prime Cost ( 72,000, Direct Material Cost < 45,000, Direct Expenses ? 12,000. Direct Labour
-.
14. Work Cost ( 80,000, Factory Overheads ? 8,000. Prime Cost is t
15. Direct Labour Cost { 17,500 being 1757" of works overheads. Factory overheads are (
16.Cost of Goods produced < 2,00,000, Office & Administrative Overheads 25o/" ol Works Cost.
-.
Works cost is (
t
-.
17. Works Cost 1 ,00,000, Office & Adm. Overheads25"/o of Work Cost. Cost of goods produced is
?_. -.
18.Office & Adm. Overheads { 1,00,000 being25% of Work Cost. Cost of goods produced is
?_.
19'Sales<1,20'000,Prolil2o"/"onSales.CostofSalesare<_.
20.Sales<1'20,000,Prolil2o"/ooncost.CostofSalesare<.
21.CostofSales<1,20,000,Prolit20"/"onSales'Profitis<.
22. Sales < 1,20,000, Prolil2O"/" on Cost. Profit is t
23. Cost of Sales < 1,20,000, Protil20o/o on Sales. Sales amount to ?
24.Profil @ 20y" on Cost amounted to ( 20,000. Sales amount to t-.
5.3 MATCH THE FOLLOWING -.
-
tAl COLUMN A (Method ) COLUMN B (Applicable)
1. Job costing (a) Where Job is large and executed on site
2. Batch Costing (not in-house)
3. Contract Costing (b) Ascertainment of Costs in cases where
4. Single or Output Costing services are rendered
5, Process Costing (c) The cost of production at each stage is
6. Operating Costing ascertained separately
7. Multiple Costing (d) Where all costs can be directly charged
to a specific job
(e) Combination of two or more methods
of costing
(f) Where all costs can be directly charged
to a group of products
(s) Cost ascertainment for a single product
336 Cost Accounting (T,YB. Com, : SEM-V)
IB] COLUMN A (lndustry) COLUMN B (Costing Method)

1. Transport (a) Unit Costing
2. Steel (b) Job Costing
3. Coal (c) Multiple Costing
4. Toy-making (d) Operating Costing
5. T.V. (e) Contract Costing
6. Advertising (f) Process Costing
7. Bridge Construction (g) Batch Costing
tcI COLUMN A (lndustry) COLUMN B (Cost Unit)

1. Automobile (a) Kilometres
2. Cement (b) Cubic Metres
3. Petroleum (c) Tonnes
4. Gas (d) Numbers
5. Electricity (e) Litres
6. Transport (f) Sacks
7. Flour (S) Kilowatts
ID] COLUMN A (lndustry) COLUMN B (Cost Unit)

1. Liquor (a) Pairs
2. Bricks (b) Barrels
3. Cloth (c) Ream
4. Carpets (d) Bales
5. Pencils (e) Square leet
6. Cotton (f) Metres
7. Timber (s) 1,000 No.
8. Shoes (h) Cubic feet
9. Paper (i) Gross
tE1 COLUMN A COLUMN B

1. Temporary labour employed to (a) Administration overheads
increase production (b) Costing Profit & Loss items
2. Uniforms of sanitary workers (c) Distribution overheads
3. Salary of the accountant (d) Prime cost
4. Consultation fee of advertisement (e) Selling overheads
designer (0 Factory overheads
5. Rent of godown lor storing finished
goods
6. Loss due to accidental falling of the
roof of a section of the factory
IF] COLUMN A COLUMN B

1 Freight on purchase of raw material (a) Selling overheads
2 Raw Material, Godown, Chowkidar (b) Prime cost
salary (c) Factory overheads
3 Remuneration for legal advice (d) Costing Profit & Loss items
4 Secondary packing with the name of (e) Admin istration overheads
the company (r) Distribution overheads
5 Packing of boxes of finished product
in wooden crates for transportation
6 Dividends received on investments
tGI COLUMN A COLUMN B

1. lncome from sale of bags in which (a) Prime cost
raw materials were procured (b) Selling overheads
2. Rent of godown for storing raw (c) Factory overheads
materials (d) Costing Profit & Loss items
3. Primary packing to keep the product (e) Admin istration overheads
crisp
4. Bad debts
5. Cost of stolen materials
tHI COLUMN A COLUMN B

1 Carriage lnward (a) Costing Profit & Loss items
2 Depreciation of pattems and dies (b) Prime cost
3 Amount paid to lawyer for appearing (c) Selling overheads
before a Labour Tribunal (d) Factory overheads
4 Commission paid io salesman as a (e) Administration overheads
percentage of sale price
5 Allowance made to customers for
late deliveries of goods
tlI COLUMN A COLUMN B

1. Abnormal Loss of Raw-materials (a) Not shown in cost sheet but credited to
2. Abnormal Loss of Finished Output Profit & Loss Account
3. Scrap value of Abnormal Loss of (b) Treated as Direct Expense
Raw-materials (c) Not shown in cost sheet but debited to
4. Cost of rectification of Normal Profit & Loss Account
defective output (d) Deducted from the cost of material
5. Cost of rectification of Abnormal purchased
defective output (e) Treated as Direct Expenses
6. Cost of Normal ldle Time in factory (f) Treated as part of Selling & Distribution
7. Royalty on units produced Expenses
8. Royalty on units sold (s) Added to the Cost of [vlaterials
9. lnsurance of Raw-material Purchased
10. Special tvloulds for casting taken (h) Added to Factory Cost
on hire (i) Deducted from the cost of goods
produced
(i) Treated as part of factory expenses
tJI COLUMN A COLUMN B

1. Scrap value of Normal Loss of (a) Not shown in cost sheet but debited to
Raw-materials Profit & Loss Account
2. Scrap value of Normal Loss of (b) Treated as part of Factory Expenses
Finished Output (c) Deducted from the cost of goods
3. Cash Discount Received produced
4. Cost of Abnormal ldle Time in factory (d) Treated as Direct Expenses
5. Hire of Special Tools (e) Not shown in cost sheet but credited to
6. Drawing Office Expenses Profit & Loss Account
7. Secondary Packing Materials (f) Treated as part of Selling Expenses
Consumed (s) Treated as part of Distribution Expenses
8. Estimating Expenses of Tender (h) Deducted from the cost of materials
purchased
338 Cost Accounting (TYB. Com- : SEM-V)
tKI COLUMN A COLUMN B

1. Primary Packing Materials Consumed (a) Not shown in cost sheet but debited to
2. Captive Power Plant Expenses Profit & Loss Aacount
3. Cash Discount Allowed (b) Forms part of bdce & Adm. Expenses
4. Scrap value of Abnormal Loss of (c) Forms part of selling expenses
Finished Output (d) Treated as pan of Factory Expenses
5. Cost of Free Samples of (e) Treated as Direct Expenses
Products Distributed (f) Not shown in cost sheet but credited to
6. Depreciation on Computer purchased Profit & Loss Account
for Office
IL] COLUMN A COLUMN B

.
'1
Direct materials (a) lnterest on bank overdraft
2. Direct labour (b) Maintenance contract for office photo
3. Direct expenses copying machine
4. Finance cost (c) Developing new product in laboratary
5. Research and development expenses (d) Carriage on purchase of 1aw materials
6. Selling and distribution cost (e) Royalty paid on number of units ol a
7. Administration cost particular product produced
8. lndirect production costs (f) Road licences for delivery vehicles
(s) Lubricants for machine
(h) Wages ol machine operators in factory

1. Factory Cost = Prime Cost + Office overheads
2. Prime Cost = Direct Cost
3. Total Cost = Prime Cost + All lndirect Costs
4. Cost of Production - Factory Cost + Selling & Distribution Overheads
5. Cost of Sales - Factory Cost + Selling & Distribution Overheads
6. Closing stock ol work-in-progress should be valued on the basis ol prime cost.
7. Closing stock of finished goods should be valued on the basis of cost of sales.
8. Selling and distribution overheads are incurred on the cost of production of goods produced.
9. Selling and distribution overheads are recovered on the basis of percentage to cost of production.
10. Prime cost is the total of direct materials, direct wages and production overheads.
11 . Production cost includes only direct costs related to the production.
12.Primary packaging cost is included in distribution cost.
13. Secondary packaging cost is not production but distribution cost.
14. The combined total of labor and overhead is called prime cost.
15. Administration cost is not included in the cost of work-in-progress.
16. Raw material inventory consists ol products partially completed at the end of a period.
17. Overheads include only fixed cost.
18. Cost of production is equal to prime cost plus works cost.
19. Abnormal Loss of Material is treated as part of material cost.
20. ln Cost Sheet, net realizable value of normal scrap of direct materials is deducted from factory
overheads.
21 .ln a Cost Sheet, Stocks of Wott- in-progress are adjusted with Works Cost to arrive at Office
Cost.
22.1n a Cost Sheet, Stocks of Finished Goods are adjusted with Gross Works Cost to arrive af net
Works Cost.
23.|n a Cost Sheet, Selling & Distribution Overheads are added to Factory Cost to arrive at Cost of
Sales.
24.|n a Cost Sheet total Selling & Distribution Overheads are divided by the total number of units
produced to arrive at Selling & Distribution Overheads per unit.
25. lnterest is shown in the cost sheet.
ClassiJication of Costs and Cost Sheets i39
5.5 CHECK YOUR ANSWERS
5.1
1. (a) 6. (a) 11. (a) 't

6. (c) 21 (b) 26. (a) 31. (c)
2. (b) 7. (d) 12. (b) 17. (a) 22 (b) 27. (b) 32. (c)
3. (d) 8. (c) 13. (d) 18. (b) 23 (c) 28. (d) 33. (a)
4. (c) e. (a) 14. (d) 1e. (d) 24 (c) 2e. (d) 34. (c)
5. (a) 10. (a) 15. (c) 20. (d) 25 (b) 30. (a) 35. (a)
Hints :
2e. [6 - (a.00 + 0.a0)]

30.[(20 + 4 + 6) + 10]
32. [1 ,40,000 + 5,00,000 + 6,00,000 + 15,000 - 12,05,000]
33. [4,500 + 29,600 - 7,7OO)
34.[80,000 -17,000 + 21,000]
35. [1 ,07,000 - 57,000 + 20,000]
5.2 (1)actual (2) shall not (3) reduced from (4) shall (5) distribution (6) includes (7) deducted
(8) includes (9) includes (10) 2,00,000 (11)10,000 (12) 1,80,000 (13) 15,000 (14)72,ooo
(15) 10,000 (16) 1,60,000 (17) 1 ,25,000 (18) 5,00,000 (1e) 96,000 (20) 1 ,00,000 (21) 30,000
(22) 2O,O00 (23) 1,50,000 (24) 1,20,000
5.3 A: (1)- (d), (2) -(0, (3) - (a), (+)-G), (s)- (c), (6) -(b), (z) -(e)
B:(1 ) - (d), (2) - (0, (3) - (a), (+) - (s), (s) - (c), (6) - (b), (z) -(e)
c: (1 ) - (d), (2) - (c), (3) - (e), (+) - (b), (5) - (s), (o) - (a), (z) -(f)
D: (1 )-(b),(2)-(s),(3)-(f),(4)-(e),(5)-(i),(6)-(d),(7)-(h),(8)-(a),(e)-(c)
E:(1 ) - (d), (2) - (f), (3) - (a), (+) - (e), (s) - (c), (6) - (o)
F: (1)- (b), (2)- (c), (3) - (e), (+)- (a), (s)- (f), (6) - (d)
G: (1)- (a), (z) - (c), (3) - (e), (+) - (b), (5) - (d)
H: (1)- (b), (2) - (d), (3)- (e), (+) - (c), (5) - (a)
l:(1)-(d),(2)-(i),(3)-(a),(+)-(h),(5)-(c),(6) -(j),(7)-(b),(8)-(f),(e)-(g),(t0)-(e)
J : (1)- (h), (2) - (c), (3)- (e), (+) - (a), (5) - (d), (6)- (b), (7) - (s), (a) - (t)
K: (1) - (e), (2) - (d), (3) - (a), (4)- (f), (5) - (c), (o) - (b)
L : (1) - (d), (2) - (h), (3)- (e), (+)- (a), (s) - (c), (6) - (f), (7) - (b), (a)- (s)
5.4 True :2, 3, 13, 15
False : 1, 4, 5, 6, 7, 8, 9, 1 0, 11, 12, 14, 16, 17, 1 8, 19, 20, 21, 22, 23, 24, 25
6.1 ANSWER lN BRI.EF ilNTERNALTESTSI

Q.1 : From the following details, calculate Cost of Goods sold
lncrease in Raw tvlaterial Stock 15,000
Decrease in Finished Goods Stock 35,000
Raw Materials purchased 4,30,000
Freight Outward 45,000
There was no work-in-progress.
[Ans.: ? 9,50,000]
Q.2:
Opening stock of work in process 51,000
340 CostAccounting (T.YB'Com' : SEM-V)
Closing stock of raw material 66,000

Closing stock of work in process 44'000
Compute :
(1) Prime cost
(2) Total Factory cost
[Ans.: Prime Cost - 7 3,38,000, Total Factory Cost' { 4,07,000
[Hint : (1) 80,000 + 2,30,000 '66,000 + 94,000 = 3,38,000;
(2) 3,38,000 + 79,000 = 4,07,0001

Opening stock of work in process 46'000
Direct labour cost 85'ooo
Factory overheads 76'000
Closing stock of raw material 61 ,000
Closing stock of work in process 36'000
Compute Cost of Goods Manufactured
[Ans.: ?4,17,000]
[Hint : 52,OOO ,000 + 85,000 + 76,000 + 46,000 - 36,000 = 4,17,000]
+ 2,55,000 - 61
Q.4 : A Limited purchased materials of ( 4,40,000 and incurred direct labour of { 3,20,000 during
the year ended June 30, 2010. Factory overheads for the year were < 2,80,000.
The inventory balances are as follows :
July 1,2009 June 30,2010
Finished goods 90,000 1,05,000

Work in process 1,21 ,OOO 1 ,1O,0OO
Materials 1,00,000 1,05,000
Compute :
(1) Cost of Goods Manufactured
(2) Cost of Goods Sold
[Ans.: Cost of Goods Manufactured - ? 10,46,000; Cost ot Goods Sold - ? 10,31 ,000]
[Hint: (l) 1,00,000 + 4,40,000'1,05,000 + 3,20,000 + 2,80,000 + 1'21'000
- 1,10,000 = 10,46,000; (2) 10,46,000 + 90,000 - 1,05,000 = 1Opl,A00l
Q.5:33,300 units of a product were manufactured in a period during which 33,950 units were sold
for a total revenue of t 13,91 ,950. Opening stock of the product was 1 ,700 units. The company uses
absorption costing. Unit costs of the product were :
Variable manufacturing costs ? 16.30
Fixed manufacturing costs < 11.60
Variable selling and administration costs < 3.40
Fixed selling and administration costs < 7.10
What was the change in the value of finished goods stock over the period?
[Ans.: { 18,135]
[Hint : Decrease in stock = 33,300
- 33,950 units = 650 units
x ?27.90 per unit = ?18,1351
Q.6 : A company currently produces 6,000 units of its single product each period, incurring total
variable costs of < 60,000 and fixed costs of < 42,000. Production will increase to 8,000 units per
period if the company expands capacity resulting in changes both to the variable costs per unit and
to the total fixed costs. For production of 8,000 units per period total variable costs would be
< 76,000 and lixed costs ( 50,000. What is the reduction in total cost per unit comparing the costs for
8,000 units per period with the unit costs currently being incurred?
[Ans.: 1.25] [Hint : (102 + 6) - (126 + 8)]
Q.7 : A company sold 56,000 units of its single product in a period for a total revenue of
< 7,00,000. Finished stock increased by 4,000 units in the period. Costs in the period were :
Variable production { 3.60 per unit
Fixed production < 2,58,000 (absorbed on the actual number of units produced)
Fixed non-production { 1,44,000
What was the profit for the period ?
[Ans.: ? 1,13,600] {Hint : 7,00,000 - K56,OOO + 7.9) + l,44,OOOil
Q.8 : A company rnanufactures and sells 4,000 units of a product each month at a selling price of
7 22 per unit. The prime cost of the product is ( 't 1.60 per unit and the monthly overhead6 are:
?
Variable production 7,200
administration
Variable selling and 5,200
Fixed production 16,400
administration
Fixed selling and 6,g00
What is the product's gross profit margin (to one decimal place) ?
[Ans.:20.5W {Hlnt: ?22/unit- fl.6 - K77,200 + 16,4O0) +4,000 units] x 100 +22}
Q.9 : Factory cost is < 3,80,000 and cost of production is { 4,10,000. Office and administrative
overheads are 20o/o of factory overheads. What would be amount of prime cost ? Assume no stock
adjustments. (\CWA lnter, Dec. lS, adapted)
[Ans.: Administrative OH = ? 4,10,000 - 3,80,000 ? 30,000; Factory OH = Administrative
=
OH/20o/o=?30,000/200/o=71,50,000;PrimeCost=?3,80,000-?t,SO,OOO=?2,30,0001
6.2 ELEMENT-WISE COST SHEET [7 orB MARKS]
Q.10 (Stock of RM + FG) : From the following figures, prepare a Cost Sheet and ascertain the cost
of materials consumed and the cost of goods sold.
7 Particulars {
To Stock : By Sales 13,44,000
Finished Goods 1,28,000 By Closing Stock :
Raw materials 38.400 Finished Goods 1 ,12,000
1,66,400 Raw Materials 44,800 1,56,800
To Purchases 3,84,000
To Wages 6,49,600
To Carriage lnward 32,000
To Gross Profit 2,68,800
15,00,800 15,00,800
Q.11 (Stock of RM + W-l-P) : From the following particulars you are required: (a) to prepare a
statement showing the total cost. (b) to state what percentages (i) the manufacturing cost (ii) the
management (on cost) (iii) the selling on cost bear to the Total cost of the goods sold.
(
Opening stock of Direct Materials 61,700
Work in Progress at commencement 1,21,700
Purchase ol Direct Materials 2,86,500
Factory on cost 1,99,500
Selling on cost 70,000
Management on cost 1,10,000
Sales '12,50,000
Closing Stock.of direct materials 75,400
Closing Work in progress 1,35,600
Sale of Scrap 1,350
Carri on Direct Material 5,950
(SYBAE Oct. 2014, adapted)
Q.l2 (Stock of RM + FG) : From the following particulars, prepare a Cost Sheet showing the (1)
prime cost (2) works cost (3) total cost (4) cost of sales and (5) selling price.
a
Opening Stock of Raw Material 60,000
Opening Stock of Finished Goods 1,20,000
Purchase of Raw Materials 3,40,000
Wages 1,50,000
Stock of Finished Articles at end 30,000

Factory Expenses 1 6,000
,1
Otfice Expenses 94,000

Stock of Raw Materials at end 90,000
The selling price is so fixed as to leave a profit ol 25o/o on selling price.

Q.l3 (Stock of RM + FG + W-l-P): From the following balances prepare the Cost Sheet showing
(a)the prime cost, (b) the works cost, (c) total cost of production, (d) profit on goods sold and (e) net
profit for the year. Stock of Work-in-Progress is valued at Prime Cost.
a
Opening Stock:
- Raw Materials 75,000
- Work-in-Progress 28,500
- Finished Goods 54.000 1,57,500
Wages:
- Direct 52,000
- lndirect 2.750 54,750
Purchases of Raw Materials 66,000
Sales 2,11,000
Factory Rent and Power 15,000
Depreciation on Piant and Machinery 3,500
Buying Expenses 1,500
Factory Expenses 10,000
Office Rent and Rate 2,500
Office Expenses 6,s00
Commission and Advertising 10,000
Closing Stock :
Work-in-progress 35,000
Finished Goods 31,000 1,57,500
Q.14 (Stock of RM + FG + W-l-P): Chandragupta & Co. submits the following data on 31st March,
2014.
Sales for the year 2,75,000

lnventories at the beginning of the year :
- Finished goods 70,000
- Work in progress 4,000
Purchase of raw material 1 ,1 0,000
Raw Materials lnventory (opening) 3,000
Raw Materials lnventory (closing) 4,000
Direct Labour 6,500
Factory overhead to be taken @ 60% of direct labour cost
lnventories at the end of the year :
- Work in progress 6,000
- Finished goods 8,000
Other expenses for the year : Selling Expenses 10% of Sales
Administration expenses 5ol" of Sales
Prepare a Statement of Cost and Profits.
O.15 (FG Stock Valuation @ COP) : The following details are available forthe yearending 31-3-2014.
Direct Wages 60,000

Purchase of lrlaterial 72,OO0
lndirect Materials 3,600
ClassiJicotion of Costs and Cost Sheets 343
Employer's contribution to Employees State lnsurance Corporation 600

Printing and Stationery 1,200
Power and Fuel 5,400
Legal Charges 864
Office Rent 1,200
Sales (9000 units) 1,80,000
Opening Stock :
Work in Progress 2,880
Finished Goods (600 units at the rate of { 16.25 per unit)
Closing Stock :
Finished Stock (1200 units) ?
Value the finished Stock at Cost of Production.

Prepare a cost sheet showing different elements of cost. (T.Y.B.Com., Mar. 2005, adap6d)
[Ans.: Profit - ? 39,525]
Q.l6 : Popeye Company is a metal and wood cutting manufacturer, selling products to the home
construction market. Consider the following data for the month ol October, 20'14 :
Sandpaper 5,000
Material-handling Costs 1,75,000
Lubricants and Coolants 12,500
Miscellaneous lndirect Manufacturing Labour 1,00,000
Direct Manufacturing Labour 7,50,000
Direct Materials, October 1,2014 '1,00,000
Direct Materials, October 31,2014 1,25,000
Finished Goods, October 1, 2014 2,50,000
Finished Goods, October 31,2014 3,75,000
Work-in-Process, October 1, 2O1 4 25,000
Work-in-Process, October 31 ,2O14 35,000
Plant-leasing Costs 1,35,000
Depreciation-Plant Equipment 90,000
Property Taxes on Plant Equipment 10,000
Fire lnsurance on Plant Equipment 7,500
Direct Materials Purchased 11,50,000
Sales Revenues 34,00,000
Marketing Promotions 1,50,000
Marketing Salaries 2,50,000
Distribution Costs 1,75,000
Customer-Service Costs 2,50,000
Required : Prepare Cost Sheet. (CA, Nov. 2004, adapted)
[Ans.: Proftt - 7 3,00,000]
6.3 COST PER UNIT [1s MARKSI
Q.l7 : The following extracts of costing information relate to commodity A for the year ending
31-3-2014:
Purchase of Raw Material 48,000
Direct wages 40,000
Stock on 1-4-2013 of Raw Material 8,000
of Finished Goods 1,600 quintals 6,400
Stock on 31-3-2014 of Raw Material 8,800
of Finished goods 3,200 quintals
Works on cost 16,800
Work in progress: 1st April2013 1,920
31st March 2014 6,400
Office and Administrative overheads 3,200

Sales (Finished Product) 1,20,000
Advertising discount allowed and selling cost is { 0.40 per quintal. During the year 25,600 quintals
of commodity were produced.
Calculate cost of production and extend the cost sheet to include profit also so that it may also be
called Production Statement.
[Ans: Profit ? 14,118]
Q.18 : Victory lndustries manufactures a product. On 1st January,2013 there were 5,000 units of
finished product in stock. Other stocks on 1st January,2013 were as follows:
Raw Materials 'l
,16,200
The information available from cost records for the year ended 31st December, 2013 was as follows:
I
Freight on Raw Materials purchased 55,700
lndirect Labour 1,21,600
Other factory overheads 3,17,300
Stock of Raw Materials on 31-12-2013 96,400
Sales (1,50,000 units) 30,00,000
There are 15,000 units of finished stock in hand on 31st December,2013. You are required to
prepare: A statement of cost and profit for 1991 assuming that opening stock of finished goods is to
be valued at the same cost per unit as the finished stock at the end of the period.
[Ans: Production 1,60,000 units; Profit 711,80,500]
Q.l9 : Work out in cost sheet form the unit cost of production per ton of special paper, manufactured
by a Paper Mill in December 2013 from the following data :
Direct lvlaterials
. Paper Pulp - 500 tons @ { 50 per ton
. Other Materials - 100 tons @ < 30 per ton.
Direct Labour
. 80 skilled men @ { 3 per day for 25 days
. 40 unskilled men @ { 2 per day for 25 days
Direct Expenses
. Special Equipment < 3,000
' Special dyes ( 1,000
Works overhead @ 160% on Direct wages.
Administration overhead @ 10"/o and Selling and Distribution overhead @ 15"/" on works cost.400
tons of special paper manufactured and { 800 was realised by the sale of waste material during the
course of manufacture. The scrap value of the special equipment after utilisation in manufacture is
nil.
[Ans.: Total Cost ? 65,000; Cost Per Ton - 7 162.50]
Q.20 : A factory produced a standard product. The following information is given to you from which
you are required to prepare "Cost Sheet" for the period ended 31-3-2014.
Consumable Materials:
Purchases 85,000
Closing Stock 4,000
Direct Wages 2O,O0O
Other Direct Expenses 10,000
Factory overheads 100% of Direct Labour.
Office overheads 10% of Works Cost.
Classification of Costs and Cost Sheets 345
Selling and Distribution expenses { 2 per unit sold:

Units of Finished Products
ln hand at the beginning of the period (value < 16,000) 1,000
Produced during the period 10,000
ln hand at the end of the period 2,000
Also find out selling price per unit on the basis that profit mark up is uniformally made to yield a profit
ol 2O"/o of the selling price. There was no work in progress either at the beginning or at the end of the
period.
[Ans: Total Sales 7 1 ,97,600; Selling price per unit ? 21.99]
Q.21 : The following figures are extracted from the books of Pragati Fashions Ltd. for the year
ended 31-3-2014. Prepare a cost sheet showing clearly the total cost and the cost per unit under
prime cost, factory cost and ofiice cost. Also calculate the profit or loss made.
Particulars 7 Particulars a
Direct Materials 2,40,000 Salary :
Direct Labour . 50,000 - Sales Manager 2,500

Depreciation : - Factory Engineer 2,s00
- Factory Building 1,500 - Production Department 25,000
- Office Buiding 800 Finished Goods - Warehouse
- Staff Cars 1,200 Expenses 2,000
Branch Office Expenses 4,000 Electricity (including { 400 for
lnsurance : Administrative Office) 4,000
- Statf Cars 150 Adveftisement 2,000
- Office Building 120 Sundry Factory Expenses 34,000
- Factory Building 150 Sales Promotion 500
Delivery Van : Running and Office Administration 5,000
Maintenance Expenses 1,000 Expenses for Participating in an
Exhibition 't,000
Sales 4,20,000
Units produced 1,000.
[Ans.: Profit - ?42,580]
Q.22 : From the following particulars of a product, prepare a cost sheet, indicating cost per unit also:
f,
Raw Material - Opening Stock 20,000
- Purchases 1,50,000
- Closing Stock 10,000
Direct Labour 60,000
Factory Overhead 22,500
Office Overhead 27,500
Finished Stock : Opening Stock 500 units @ '11.20 per unit.
Closing Stock 1,500 units @ current cost price.
Profit on Sales 2O7,
Selling and Distributive Expenses < 20,000
Units produced 25,000
[Ans.: CPU : 8.80 + 0.90 + 1.10 + 0.84 = 11.64; Profit - ?69,850]
6.4 TWO PRODUCTS [15 MARKSI
Q.23 : Varun Cars makes two distinct types of vehicles Zip and Zoom. The total expenses during a
period shown by the books for assembly of 600 of Zip and 800 of Zoom are as under :
Material 1,98,000
Wages 12,000
't9,800
Stores overhead
Running Expenses of Machine 4,400
Depreciation 2,200
Labour amenities 1,500

Works General Expenses 30,000
Adm. and Selling Expenses 26,800
Other information : Zip : Zoom

Material cost ratio per unit 1 : 2
Wages 2 : 3
Machine utilisation per unit 1 : 2
Calculate the cost of each vehicle giving reasons for the basis of apportionment adopted by you.
[Ans: Total cost : Vehicle Zip 7 83,273; Vehicle Zoom 7 2,11,427]
Q.24 : The following information is available from the records of a company making two types of
electric ovens i.e., Delux type and Economy type:
Materials consumed 20,00,000
Factory overheads 10.00.000
42,00,000
Other lnformation : (i) Materials cost per unit in the Delux type was twice as much as in the Economy
type. (ii) Direct wages per unit in the Economy type were 50% of the Direct Wages per unit in the
Delux type. (iii) Factory overheads are the same per unit both in the Delux type and Economy type.
(iv) Adrninistrative overheads are to be taken a120"/" of Direct Wages both in Delux type and Economy
type. (v) Selling overheads are to be taken at ( 20 per unit sold in Delux type and Economy type. (vi)
Production during the year was 7,500 delux and 5,000 Economy and all the units produced were
sold. (vii) Prof it charged is 25"/o of selling price in Delux type and 20"/" ot Selling price in Economy
type. Prepare a cost statement with maximum possible break-up of cost per unit and total cost both
for Delux type and Economy type.
[Ans:
Particulars Delux Economy
Cost of Sales 33,30,000 13,60,000
Profit 11,10,000 3,40,A001
Q.25 : From the following particulars, prepare statement of cost per gross of 'Black' and 'Coloured'
pencils. Output during the year was'Black' 24;000 gross and'Coloured'8,400 gross.
Raw Materials: Factory Finishing wages:
Opening Stock 38,150 Black 20,000
Purchase during the year 1,07,100 Coloured 5,600
Closing Stock 49,400 Consumables (Finishing):
Factory Wages: Opening Stock 7,200
Black 42,000 Purchase during the year 33,700
Coloured 13,650 Closing Stock 8,900
Factory charges 37,100 Finishing Charges 19,200
Raw Materials in the factory and the General expenses are to be apportioned in the ratio of output,
factory charges in the ratio of factory wages, finishing consumables and finishing charges in the
ratio of finishing wages. Also state what profit per gross is made if 'Black' is sold at { 10 per gross
and 'Coloured' at t 9.50 per gross.
[Ans: Black Coloured
Cost
(a) Total 2,28,000 73,850
(b) Protit 12,000 5,9501
Q.26 (Using Equations for Cost Allocation) : A Co. manufactures two types of products viz, A
and B. The following information is available for the year ended 31st March, 2014 :
Direct material { 6,75,000
Direct wages < 9,90,000
Works overheads { 1,95,000
(1) Direct material used per unit in Product A were 3 times that of Product B.
(2) Direct wages per unit in Product B were 213 lhal of Product A.
(3) Works overheads per unit were the same for both the products.
(4) Administration overheads were 1O0% ol the Prime Cost in each of the products.
(5) Selling and Distribution cost per unit was T 6 for both A & B.
Classification of Costs and Cost Sheee 347
(6) 35,000 units of Product A were produced, out of which 32,000 units were sold @ < 1OO/- per unit.
(7) 30,000 units of Product B were produced, out of which 25,OOO units were sold @ T 65/- per unit.
Prepare cost sheet showing total cost and cost per unit for both the products.
[Ans.: A : 24,00,000 + 32,000 = ? 75; B : 10,7i,000 + 25,(N0 - ? 49]
6.5 ESTTMATED COST SHEET 115 MARKSI
Q.27 : Goodluck Ltd. intends to submit a tender. You are given the following particulars.
Stock of Finished goods as on 1st April 2013 77,500

Stock of raw materials as on 31st March 2014 93,000
Stock of raw materials as on 1st April 2013 33,280
Stock of finished goods as on 31st March 2014 95,000
Purchase of raw materials 4,59,720
Office overhead expenses 37,500
Works overhead charges 70,000
Productive wages 2,80,000
Sales 9,62,500
You are requested to prepare a cost sheet on the basis of the above information. Using the percentage
of works overheads to productive Wages, office overheads to works cost and the net profits
percentage,you arealso requestedtoprepareaTendersheetonthe basisof thefollowing information:
(a) Cost of raw materials to be used ( 80,000.
(b) Wages to be paid to workers < 40,000.
Q.28 : The following cost date are available from the books of a factory for the year ended 31st
March,2014 :

Profit 6,09,000
Selling and Distribution overheads 5,25,000
Administrative Overhead 4,20,000
Factory Overhead 4,50,000
Required :
(a) Prepare a Cost Sheet indicating the Prime Cost, Works Cost, Production Cost, Cost of Sales
and Sales value.
(b) The factory has received an order for a number of jobs tor 2O14-15.|t is estimated that the direct
materials would {12,00,000 and direct labour would cost {7,50,000. What would be the price for
these jobs if the factory intends to earn the same rate of profit on sales, assuming that the selling
and distribution overhead has gone up by 15%? The factory recovers factory overhead as a
percentage of direct wages and administrative and selling and distribution overheads as a
percentage of works cost, based on the cost rates prevalent in the previous year.
Q.29 : Bajaj Electrical Ltd. manufactured and sold 1,000 Electric lrons during the year ended on
31st December 2013. Following were the expenses for manufacture of 1 ,000 Electric lrons.
Particulars {
Materials 80,000
[\Ianufacturing cost 50,000
Other overhead expenses 90,000
For the year ending on 31st December 2013 it was estimated that:
(a) Output and sales will be 1,500 Electric lrons.
(b) Cost of materials will rise by 25"h per unit.
(c) Wages per unit will decrease by 1O"/".
(d) Manufacturing cost will rise in proportion to the combined cost of materials and wages.
348 CostAccounting (TY.B.Com. : SEM-I)
(e) Selling Expenses per unit will remain unchanged.

(f) Other overheads will increase by t 60,000.
Prepare cost statement, showing price at which the Electric lrons should be marked so as to show
profit of 2Oo/o on selling price. Working will form part of the answers.
[Ans: Sales { 7,50,000; S.P ? 500 per unit]
Q.30 : The Trading and Profit and Loss Account of lndrajit Mfg. Co. for the year ending 31-12-2013
are as follows :
Trading and Profit and Loss Account
Particulars { Parliculars (
To Raw Materials purchased 68,000 By Sales 2,50,000
To Carriage inward 3,000 By Closing Stock of raw materials 4,000
To Productive Wages 36,000
To Railway Freight 3,000
To Production expenses 14,000
2,54,000 2,54,000
To Office salaries 16,000 By Gross Profit b/d 1,30,000
To Office rent 15,000 By lnterest 10,000
To Other Adm. expenses 9,000 By Discount received 1,000
To Advertising 3,000 By Sundry receipts 2,500
To Distribution cost 6,000
To Other Selling cost 5,470
To Commission on sales 15,000
(per unit ( 6)
To Net Profit 74,030
1,43,500 1,43,500
Estimates for the year 2014 are as under :
(1) Output and sales will rise by 4O"h.
(2) Price of material will rise by 12.5'k carriage inward and railway freight will rise in proportion to
output.
(3) Because of increase in output, five new workers will be recruited and each will be paid a salary
of ( 1 50 per month.
(a) Half the production cost is variable. Fixed cost will rise by 25o/o.
(5) The company has purchased the rented house from 1-1-2014 in respect of which the municipality
has assessed rates and taxes t 6,000.
(6) Office salaries will rise by 8%.
(7) Distribution cost includes packing charge at the rate of { 1 per unit.
Prepare a statement showing selling price per unit tor 2O14 if the sales are to be made so as to
make a profit of 207" on selling price.
[Ans.: Selling Price P.U. - ( 86.25]
Q.31 :FollowingistheProfitandLossAccountfortheyearended3lstlVarch,2Ol4ot lV/s.Cool
and Comforts Ltd., manufacturers of Table Fans. They manufactured and sold during the year 2010
fans.
Profit and Loss Account For the Year Ended 31st March,2014
{ Particulars r
To Materials Consumed 1,20,000 By Sales 6,00,000
To Wages 1,80,000
To Manufacturing Exp. 75,000
6,00,000 6,00,000
To Rent, Rates & Taxes 15,000 By Gross Profit b/d 2,25,O00
To General Expenses 30,000
To Management Expenses 90,000
To Sales & Distribution Expenses
To Net Profit
|I 45,0001
4s.ooo l
tt
Totalt I z,zs,ooo I totat < 2,25,000
Their estimates for the next year ending 31st March 2015 are as under -
(1) The production and sales would increase to 3000 fans.
(2) The prices of materials per fan would increase by 20%.
(3) The labour cost per fan would go up by 10%.
(4) The manufacturing expenses would remain in the same proportion to materials consumed and
wages as in the previous year.
(5) The selling and distribution expenses per fan would remain unchanged.
(6) The other expenses would remain unaffected on account of increase in the production.
Prepare a statement for the two years, 2013-1 4 and 2014-15 showing cost and profit per fan and
total cost and total profit, giving maximum possible break-up of cost. (SYBAF Feb.2006, adapted)
Q.32 : From the cost Ledser of yosesh rndustries tne

year 201 3:
rorrowilf,T;ffi"ffiT: ! Jril!t;{if;??l!
(
Rates and Taxes for factory premises 2,800
Lighting ol the factory 5,200
Depreciation (Plant) 7,000
Staff salaries 24,OOO
Management salaries 12,000
Power (Variable) 9,000
lndirect wages 24,500
Repairs and maintenance (Plant) 20,000
Cost of rectification of defective work (Variable) 5,600
Consumable stores (Variable) 15,000
Selling expenses 14,660
General expenses 9,200
Receipt from sale of scrap (Variable) 2,400
Profit from uest house 1,000
Production was 1,00,000 Units and the prime cost per unit was : Materials - < 1.80 and Wages -
< 1.20. The net selling price was { 4.70 per unit. All the units were sold.
As from 1stJanuary,2014 the selling price was reduced to (4.50 per unit. lt was estimated that
production could be increased in 2004 by 50 per cent without incurring any overtime or extra shift
working.
Prepare statements showing (1 ) Different elements of cost for 2013, (2) Estimated costs and profit'
for 2014, assuming that 1,50,000 Units will be produced and sold in the year. Except for the items
stated to be variable, all other items of expenses are fixed in nature. Delectives are normal.
Q.33 : The following information forthe year ending 31st March, 2013 is taken from the books of
Sajjan Company which manufactures cycle :
Direct Materials consumed 7,50,000

lndirect Materials Consumed 35,000
Depreciation on Machinery 26,500
Technical Directot's Fees 17,500
Other Factory Expenses 2,34,500
Commission to Salesmen 1,58,500
Otfice Staff Salaries 1,85,000
Audit Fees 22,000
Showroom Expenses 1,44,700
Other Administrative Expenses 1,68,000
3s0 Cost Accounting (T. Y. B. Com. : SEM-V)
Advertisements 1,15,100
Preliminary Expenses Written off. 22,500
Provision for Tax 1,50,000
Sales 30,00,000
During the year ending 31st March,2013, 1500 cycles were Produced and Sold.
FollowinE estimates have been made for the year ended 31 st March, 2014 :
(a) Production and sale of cycles will be doubled.
(b) Direct materials cost per unit will rise by 50%.
(c) Direct wages per unit will increase by 25"/".
(d) Direct expenses per unit will be in the same proportion to Direct wages as in the previous year.
(e) Total factory overheads will be in the same proportion to Prime Cost, Total Administrative
overheads in the same proportion to works cost and total selling and distribution overheads in
the same proportion to cost of production as in the previous year.
(f) The management desires to charge profit on sales price in the same proportion as in the previous
year.
You are required to prepare :
(a) Cost sheet for the year ending 31st March, 2013 showing total cost and cost per unit and also
total profit and per unit profit.
(b) Estimated Cost Sheet showing total cost and cost per unit for the year ending 31st March, 2014
with projected Selling Price and Profit. (T.YB.Com., Oct.2009, adapted)
[Ans..'S.P - 2013 : ?27,00,000; 2014: ?74,25,000;
Profit - 201 3 : ? 3,00,000; 2014 : ? 8,25,0001
Q.34 : The managing director of a small manufacturing company consults you as to the minimum
price at which he can sell his output. The company's records show the following particulars for the
past year :
Production and Sales 100 Units
Material 13,000
Direct Labour 7,000
Direct Charges 1,000
Works Overheads 7,000
Selling Overheads 3,200
Prolit 5.000
39,000
40"/" ol the works overheads dnd 70"/" of the selling overheads fluctuate with sales. lt is anticipated
that the department would produce and sell 500 units per annum and that direct labour charges per
unit will be reduced by 2O"h, while fixed works overhead charges will increase by { 3,000. Office
overheads and fixed selling overhead charges are expected to show an increase of 25%, but otheruvise
no changes are anticipated. Suggest him the minimum price that he can charge per unit of output.
[Ans.: S.P. - ? 309.94 per unit]
Q.35 : On 30th April, 2013 Ovens Ltd. was required to quote for a contract to supply 2,000 Electric
Stoves. From the lollowing date prepare a statement showing the price to be quoted to give the
same percentage of net profit on turnover as was realised during the year ended on 31st March
2013:
Particulars r
Stock of Materials 1st October,2012 70,000
Stock of Materials 31st March,2013 9,800
Purchase of Materials, six months to 31-3-2013 1,05,000
Direct Wages '1,90,000
Completed Stock in hand 1st October, 2012 Nit
Completed Stock in hand 31st March, 2013 70,000
Sales 3,78,000
ClassiJication of Costs and Cost Sheets j|t
The number of stoves manufactured during the year was 8,000 including those sold and those in
stock at the close of the period. The stoves to be quoted are of uniform quality and make, and
similar to those manufactured during the year 31st March, 2013. As from 1st April, 2013 the cost of
direct wages has increased by 10% and material cost by 2O%.
fAns: Profit 712,908]
Q.36 : Raj Dulara intends to submit a tender. You are given the following particulars:
Stock of Finished Goods as on 31-12-2013 72,800

Stock of Raw Materials as on 30-6-2014 35,360
Stock of Raw tvlaterials as on 31-12-2013 33,280
Stock of Finished Goods as on 30-6-2014 78,000
Purchase of Raw lr/aterials 7,59,200
Office overheads expenses 70,161
Works overheads charges 1,29,220
Sale of Finished goods 15,39,200
From the above details please find out:
(a) The Percentage of works oncost to productive wages.
(b) The Percentage of office oncost to works cost.
(c) On the basis of the above percentages, please prepare a tender sheet after taking into
consideration the following particulars.
(i) Cost of Raw Materials to be consumed < 52,000.
(ii) Wages to be paid to workmen < 31,200.
(iii) Net Profit to be provided a|20"/o on Selling price.
[Ans: Protit ? 23,888]
Q. 37 : Electronics Ltd. f urnish the following information for 10,000 TV valves manufactured during
the year 2013 :
Materials 90,000
Direct Wages 60,000
Power 12,000
Factory indirect wages 15,000
Lighting of factory 5,500
Defective work (cost of rectification) 3,000
Clerical salaries and management expenses 33,500
Sale proceeds of scrap 2,000
Plant depreciation 11,500
The net selling price was { 31.60 per unit sold and all units were sold. As from 1st January 2014lhe
selling price was reduced to t 31 per unit. lt was estimated that production could be increased in
2014 by 50% due to spare capacity. Rates for materials and direct wages will increase by 10%. You
are required to prepare:
(a) Cost Sheet for the year 2013 showing various elements of cost per unit; and (b) estimated cost
and profit tor 2014, assuming that 15,000 units will be recovered and sold during the year and
factory overhead will be recovered as a percentage of direct wages and office and selling expenses
as a percentage of works costs. (SYBAE Feb.2009, Oct.2008, adapted)
[Ans: Sales {4,65,000]
Q.38 : The following data relate to the manufacture of a Standard product during the four weeks to
July 31 ,2014 :
Raw Materials Consumed < 25,000
Manual and Machine Labour Wages Chargeable)
(Directly < 15,000
Machine Hours Worke6 1,000

Machine Hour Rate < 2.5
Expenses
Establishment and General < 4'700
352 CostAccounting (T.Y.B.Com. : SEM-Y)
Selling and Distribution Overhead per unit 8 Paise

Units Produced 10,000
Units Sold 8,000
Selling Price per unit < 6
(1) You are required to prepare a Cost Sheet in respect of the above showing therein the cost per
unit under each element of cost and the profit for the period. Also show the percentage that the
works overhead cost bears to the Manual and lvlachine Labour Wages and the percentage that
the Establishment & General Expenses bears to the Works Cost.
(2) What price should the Company quote to produce 1,000 units of another product which will
require an expenditure of { 8,000 for raw materials and t 6,000 for direct wages, so that it will
yield profit ot 25% on the Cost of Sales ?
[Ans.: (1) CPU :4.45 + 0.25 + 0.4V + 0.08 = 5.25iTotal Profit- ?6,000
(2) Unit S. P. : 7 20.73 (r/o)l
6.6 SEGREGATTON OF SEMI-VARTABLE COSTS [15 MARKS]

Q.39 : A Factory produced uniform type of articles and has a capacity of 3000 units per week. The
following information shows the different elements of cost for 3 consecutive weeks when the output
has changed from week to week.
Units Direct Direct Factory overheads
Produced Materials Labour (partly variable & paftly fixed)
800 3,200 1,200 5,600
1,000 4,000 1,500 6,400
1,600 6,400 2,400 8,800
The Factory has received an order lor 2,400 of the selling price of which it wants a profit of 25%.
Find out which price per unit it should quote'
[Ans: price per unitto be quoted t r4]
Q.40 : A factory manufactures standard uniform "Lungies" and has a capacity of 4,000 Units per
week. The following information shows elements of cost for three consecutive weeks:
Units Direct Direct Factory Overheads
Week Produced l/aterials Labour (Padly variable & padly fixed)
First 1,200 6,000 2,400 9,000

Second 2,000 10,000 4,000 13,000
Third 2,500 12,500 5,000 15,500
The factory intends to quote value for the supply of 3,000 units, on which value it wants to earn a
Profit of 50%. You are requested to quote proper value.
[Ans : Value to be guoted ?78,000 i.e. ( 29 per unit]
6.7 ADDITIONAL PRACTICAL PROBLEMS
Refer Chapter - 6, Para 13.5, for additional practical problems on preparation of cost sheet.
7. CHECK YOUR ANSWERS STEP.BY-STEP a
rl
Q. No Prime Cost Works Cost Cost of Production Cost of Goods Sold Cost of Sales ProfiU (Loss) Sales
10 10,59,200 10,59,200 10,59,200 10,75,200 10,75,200 2,68,800 13,44,000
11 6,35,750 8,20,000 9,30,000 10,00,000 10,00,000 2,s0,000 12,50,000
12 4,80,000 5,96,000 6,90,000 7,80,000 7,80,000 2,60,000 10,40,000
13 96,500 1,27,750 1,36,750 1,59,750 1,72,250 38,750 2,11 ,000
14 1 ,15,500 1,17,400 1,31 ,150 1 ,93,150 2,20,650 54,350 2,75,OO0
15 1,30,656 1,38,936 1,49,400 1,40,475 1,40,475 39,525 1,80,000

b
16 18,75,000 24,10,000 24,00,000 22,75,000 31,00,000 3,00,000 34,00,000
17 87,200 99,520 1,02,720 96,282 1,05,882 14,118 1,20,000
18 13,08,800 19,40,800 19,40,800 18,19,500 18,19,500 11 ,80,500 30,00,000
19 39,200 52,000 57,200 57,200 65,000
't
20 1,21 ,000 1,41 ,000 ,55,100 1,40,080 1,58,080 39,520 1,97,600
21 2,90,000 3,56,750 3,68,420 3,68,420 3,77,420 42,580 4,20,000
22 2,20,000 2,42,500 2,70,000 2,59,400 2,79,400 69,850 3,49,250
23A 58,000 75,700 83,273 83,273 83,273
238 1,52,000 1,92,200 2,11,427 2,11,427 2,1't,427

24D 24,00,000 30,00,000 31,80,000 31,80,000 33,30,000 11 ,1 0,000 44,40,O00
24E 8,00,000 12,00,000 12,60,000 12,60,000 13,60,000 3,40,000 17,00,000

25A 91,000 2,01 ,000 2,28,000 2,28,000 2,28,000 12,000 2,40,000
258 30,450 64,400 73,850 73,850 73,850 5,950 79,800
26A 11 ,55,000 12,60,000 24,15,000 22,08,000 24,00,000 8,00,000 32,00,000
268 5,10,000 6,00,000 11 ,1 0,000 9,25,000 10,75,000 5,50,000 16,25,000
q
Q. No. Prime Cost Works Cost Cost of Production Cost of Goods Sold Cost of Sales ProliU (Loss) Sales \
274 6,80,000 7,50,000 7,87,500 7,70,000 7,70,O00 1,92,500 9,62,500
278 1,20,000 1,30,000 1,36,500 1,36,500 1,36,500 34,125 1,70,625
284 16,s0,000 21,00,000 25,20,000 30,45,000 30,45,000 6,09,000 36,54,000
288 19,50,000 24,00,000 28,80,000 35,70,000 35,70,000 7,'14,000 42,84,000
294 2,00,000 2,50,000 3,40,000 3,40,000 3,80,000 (2,000) 3,78,000
298 3,12,000 3,90,000 5,40,000 5,40,000 6,00,000 1,50,000 7,50,000
30 1,54,200 1,72,750 2,05,030 2,41,500 2,41,500 60,375 3,01,875
31A 3,00,000 3,75,000 5,10,000 5,10,000 5,55,000 45,000 6,00,000
31B 5,1 3,000 6,41,250 7,76,250 7,76,250 8,43,750 56,250 9,00,000
324 3,00,000 3,86,700 4,31,900 4,46,560 4,46,560 23,440 4,70,000
32tJ 4,50,000 5,50,300 5,95,500 6,10,1 60 6,10,160 64,840 6,75,000
33A 15,00,000 18,75,000 22,50,000 27,00,000 27,00,000 3,00,000 30,00,000
338 41,25,000 51,56,250 61,87,500 74,25,000 74,25,000 8,25,000 82,50,000
344 21,000 28,000 30,800 30,800 34,000 5,000 39,000
\o
34B 98,000 1 ,19,200 1,22,700 1,22,700 1,35,100 19,868 1,54,968 o
35A 3,55,200 3,90,200 4,10,200 3,40,200 3,40,200 37,800 3,78,000
358 1,02,430 1,11 ,180 1 ,16,180 1 1 6 1 80 1,16,'t80 12,908 1,29,088 Oa
36A 12,74,OO0 14,03,220 14,73,381 14,73,381 14,73,381

36B 83,200 91,000 95,550 95,550 95,550 23,888 1 ,19,438
37A 1,50,000 1,95,000 2,28,500 2,28,500 2,34,000 82,000 3,16,000
378 2,47,500 3,21,750 3,86,100 3,86,100 3,86,100 78,900 4,65,000 U)
38 44,500 47,000 51,700 41,360 42,O00 6,000 48,000 I
\J
355
RECONCILIATION OF COST
6 AND FINANCIAL ACCOUNTS
o UTLINE
No. Page
1. Need For Reconciliation 356
2. Reasons For Difference in Cost A/c & Financial A/c
3. ltems Appearing in FinancialAccounts Only
3.1 Financial Expenses/Losses/Appropriations
3.2 lncome Credited in Financial Accounts only
4. ttems Appearing in Cost Accounts only 357
5. DifferentTreatment in Two Accounts 358
5.1 M ethods o{ Val uation of Stocks
5.2 Methods ot Charging Depreciation
c.J P e
6. Proced ure For Reco ation 359
6.1 Basic Rule
6.2 Items Causing Difference
7 Reconciliation (Starting with Financiat Profits) 361
8. Reconciliation (Starting with Cost Profit) 362
9. Reconciliation(StartingwithFinancialLoss) 362
1 0. lllustrations 363
10.1 From Financialand Cost Accounts
10.2 From Costing Profit Figures
10.3 From FinancialProfit Figures
10.4 FromP&LA/c+Cost
10.5 FromP&LA/c+Cost Prepared
10.6 Preparing P & L Alc + Cost Sheet
1. NEED FOR RECONCILIATION
In the previous chapter we have studied how Cost Accounts (or Cost Sheets) help to ascertain the
cost ofproducts. Cost Accounts also reveal the profit or loss in respect ofthe products. Such profit
or loss as per the cost Accounts is, however, likely to be different ftom the profit or loss shown by the
Financial Accounts ofthe concern for many reasons. Broadly speaking, the difference may be due to-
(I ) Some items of income and expenses,appearing only in the Financial Accounts and not in the Cost
Accounts e.g. Income from dividends, Goodwill written offetc.
(2) Some items of income and expenses appearing only in Cost Accounts, e.g. Notional lnterest on
Owner's capital etc. and
(3) Different treatment given to some items in the two sets of Accounts. e.g. different methods of
valuation ofstock, different methods ofcharging depreciation, or the Overheads being taken on
estimated basis in Cost Accounts etc.
Al1 these factors lead to difference in the figures of profit as per Cost Accounts and profit as per
Financial Accounts. It should be noted that some concerns maintain Integrated System of Accounts
in which the Financial Accounts and Cost Accounts are integrated or kept in the same set of books.
In such cases, the financial profits and costing profits will always tally and there will be no such need
for reconciliation. However, in Non-integrated System of Accounting, since the financial records
and costing records are distinct and separate, reconciliation ofcosting profits and financial profits
becomes necessary. Reconciliation, in such cases, ensures accuracy ofcosting data furnished to the
management on which many important decisions will be based. Reconciliation also acts as a cross
check on both sets of accounts and makes them more reliable.
2. REASONS FOR DIFFERENCE IN COST A/C & FINANCIAL AJC
The main reasons for difference in the profits (or losses) disclosed by the Cost Accounts and the
Financial Accounts are as follows:
(1) Items Appearing In Financial Accounts Only
(I) Expenses/Losses/Appropriations Debited in Financial Accounts only.
(2) Income Credited in Financial Accounts only.
(2) Item Appearing In Cost Accounts Only
(l) Expenses Debited in CostAccounts only.
(2) Income Credited in Cost Accounts only.
(3) Different Treatment in Two Accounts
(l)
Valuation of Opening and Closing Stocks.
(2) Methods of Charging Depreciation.
(3) Methods of Recovery/Absorption of Prime Cost/Overheads in Cost Accounts.
These items giving rise to differences between thetwo accounts- CostAccounts and Financial Accounts
- are explained in detail below.
3. ITEMS APPEARING IN FINANCIAL ACCOUNTS ONLY
Financial Accounts cover all the items of Income and Expenses pertaining to the organisation as a
whole. Cost Accounts, on the other hand, are limited in scope. Cost Accounts take into consideration
onlythe items of income and costs pertaining to the cost unit i.e. product, process, contract etc. Cost
Accounts therefore ignore itetns of income or expenses not specifically related to the product, process
or contract. Such items appear only in Financial Accounts and are ignored and excluded in Cost
Accounts. These are enumerated and elaborated below.
Reconciliation of Cost and FinsncialAccoants 357
3.1 FINANCIALEXPENSES/LOSSES/APPROPRIATIONS
These items are debited only in the Financial Accounts and not in the Cost Accounts since these are
not connected with any cost unit i.e. product etc. Following are the instances of such items.
(1) Financial Expenses :
- Interest paid on Loans, Fixed Deposits, Debentures.

- Expenses on Issue ofShares, Debentures etc.
- Discount on Issue ofShares, Debentures etc.
- Underwriting Commission on Issue of Shares.
(2) Financial Losses :
- Capital Losses such as Loss on sale of fixed assets, Loss on sale oflnvestment, Loss ofassets
by fire or flood, Machinery Scrapped etc.
- Penalties and Fines.
- Damages paid as ordered by Court.
(3) Appropriations Out of Profits :
- Donations.
- Writing OffFictitious Assets e.g. Goodwill, PreliminaryExpenses, etc.
- Income Tax.
- Transfers to Sinking Funds.
- Dividends - both Preference and Equity.
- Transfer to Reserves.
3.2 INCOME CREDITED IN FINANCIALACCOUNTS ONLY

These items are credited only in the Financial Accounts and not in the Cost Accounts, since these too
are not directly related to the product etc. Following are the instances of such items -
- lnterest Received on Loans i Fixed Deposits / Bank Deposits / Debentures etc.
- Dividend Received on Investments made in Shares.
- Premium on Issue of Shares / Debentures credited to the Profit and Loss Account.
- Rent Received.
- Transfer Fees Received in respect of Share Transfers.
- Capital Gains such as Profit on sale of fixed assets, profit on sale of Investments.
- Penalties and Fines or Discounts Received from customers etc.
- Damages Received as ordered by Court.
ITEMS APPEARING IN COST ACCOUNTS ONLY
Similarly, there are certain items of Income and E,xpenses which appear only in Cost Accounts and
not in Financial Accounts. These are generallynotional or fictional items and not actual ones. These
items are included in Cost Accounts in cases where the Sale Price is fixed by the Government on the
basis of Cost data submitted by the company (e.g. Fertilisers Industry), or in cases where the sale
price is fixed on the basis of Cost plus contracts. These items are detailed below.
(1) EXPENSES DEBITED IN COSTACCOUNTS ONLY
- Notional Interest on Owner's Capital.
- Notional Remuneration to Owner for his Labour and Management.
- Notional Rent to Owner fbr use of his premises for business.
(2) INCOME CREDITED IN COSTACCOUNTS ONLY
- Notional Interest charged to orvner lbr drawings (debit balance in Capital Account).
- Notional Rent charged to owner for personal use of business premises.
There are several items of income and expenses which are treated differently in the two sets of
accounts viz. the Cost Accounts and the Financial Accounts. The amounts of such items in two sets
of accounts are different due to the different treatment. The difference in the amounts has to be
ascertained and adjusted in order to reconcile the respective profits as per the two accounts. These
items are explained in detail below.
5.1 METHODS OF VALUATION OF STOCKS

Different types of stock such as Raw Materials, Finished Goods, Work in progress etc. may be
valued by one method in the Cost Accounts and another in the Financial Accounts. Thus
(l ) Raw Materials may be valued on FIFO basis in Cost Accounts and LIFO basis in Financial
Accounts.
(2) Finished Goods may be valued at Cost of Production including Office Overheads in Cost
Accounts, while in Financial Accounts, they may be valued at production cost excluding Office
expenses. Further, Finished goods may be valued in the Financial Accounts at market price if it
is lower than cost. Hou.ever, in Cost Accounts, Finished Goods may be valued only at Cost,
irrespective of the market price.
(3) Work in Progress maybe valued at actual prime cost plus an estimated percentage of overheads
in Cost Accounts, while in Financial Accounts, work-in-progress may be valued only at prime
cost. The work in progress in respect of a long term contract, may be valued by different methods
in the Cost Accounts and the Financial Accounts.
5,2 METHODS OF CHARGING DEPRECIATION

The method adopted for charging depreciation in the two accounts - Cost Accounts and Financial
Accounts - may be different. Thus, while the Cost Accounts may follow the Straight Line Method,
Financial Accounts may follow the Written Down Value Method. This obviously leads to either
Overcharging or Undercharging of depreciation in the Financial Accounts.
5.3 REGOVERY OF PRIME COST / OVERHEADS

(1) Materials : Sometimes in CostAccounts, the cost of Materials, Labour or Overheads is taken at
an estimated or pre-determined value instead ofthe actual expenditure. Thus Raw Materials may
be taken at a cost equal to Actual Quantity Consumed x Fixed Rate. The actual cost of raw
materials debited in the Financial Accounts will be different from such cost of materials debited
in the Cost Accounts. Some difference in the value of consumption of materials may also arise
due to different treatment of Wastage and Loss ofmaterials in the two sets of accounts.
(2) Wages : Like materials, Wages too may be debited in the Cost Accounts at an estimated amount
equal to Actual labour Hours x Fixed Wage Rate. The actual amount of Wages debited in the
Financial Accounts will be different from the Wages debited in the Cost Accounts. Further, the
treatment of Idle Time and Overtime may be different in the two sets of accounts leading to
difference between the Financial Proiits and the Costing Profits.
(3) Overheads : Overheads are frequently debited or charged to products, processes etc. on estimated
basis in Cost Accounts. We have sben in Chapter 5, how the overheads are recovered or absorbed
on the basis of percentage of Material/Wages/Prime Cost/Sale Value and so on. The amount of
overheads thus recovered or absorbed in the Cost Accounts is bound to be different from the
actual amount of overheads appearing in the Financial Accounts. The overheads are likely to be
either over recovered or under recovered in the CostAccounts leading to difference between the
Financial Profit and the Cost Profit.
Reconcilistion of Cost and Financial Accoants 359
6. PROCEDURE FOR RECONCILIATION
6.1 BASIC RULE

The basic rule for preparing the Reconciliation Statement is Do As The Other Has Done. Thus,
when we start with the Financial Profit, we have to do as the Cost Accounts have done. Thus we have
to start with the Financial Profits, and
- exclude the items which were ignored by Cost Accounts,
- consider the items accounted only in Cost Accounts,
- adopt the same amounts in respect ofstocks, depreciation, overheads etc. as adopted by Cost
Accounts, and
- finally adjust the Financial Profits accordingly.
This process of Doing What the Other has Done will finally reconcile the Financial Profits with the
Costing Profits.
6.2 ITEMS CAUSING DIFFERENCE

Let us study in detail how the various iterns described above are reconciled, with Financial Profits
as the starting point.
6.2.1 ltemsAppearing on ly in Financial Accounts

(1) Expenses etc. Debited OnIy in the Financial Accounts: These items are ignored and excluded
in the Cost Accounts. As per onr rule - Do As The Other Has Done, we also must ignore and
exclude these items. When expenses, losses, and appropriations are excluded, the financial profit
increases. Hence the expenses, losses and appropriations debited only in Financial Account are
added to Financial Profits in the reconciliation statement.
(2) Income credited Only in the Financial Accounts : These items are ignored and excluded in the
Cost Accounts. As per our rule - Do As the Other Has Done, we must also ignore and exclude
these items. When income is excluded, the financial profit decreases. Hence the items of incorre
credited only in Financial Accounts are deducted from Financial Profits in the reconciliation
statement.
(3) Reconciliation : Thus.
Financial Profit as per Financial Accounts
Add : Expenses/Losses/Appropriations Debited in Financial Accounts Only
Less : Income Credited in Financial Accounts Only
Costing Profit as per Cost Accounts
6.2.2 ltemsAppearing only in CostAccounts

(1) Income Credited only in Cost Accounts : These items are considered only in the Cost Accounts.
As per our rule - Do as The Other Has Done - we must also consider these items of Incorne.
When these items of income are considered and included, the financial profit will go up. Hence
the items of income credited only in the Cost Accounts are added to the Financial Prot'its in the
reconci liation statement.
(2) Expenses Debited Only in Cost Accounts : These items have been considered only in the Cost
Accounts. As per our rule - Do As The Other Has Done - we must also consider these items of
expenses. When these items ofexpenses are considered, the financial profit will go down. Hence
the items of expenses debited only in the Cost Accounts are deducted from the Financial Profit in
the reconci I iation statement.
(3) Reconciliation : Thus,
Add : Income Credited Only in Cost Accounts
Less : Expenses Debited Only in Cost Accounts

6.2.3 Different Treatment in Two Accounts

(1) Valuation of Closing and Opening Stock
(a) Ctosing Stock Undervalued in Financial Accounts : This item indicates that the value of
closing stock is higher in Cost Accounts as compared to that in the Financial Accounts. As per
our Rule - Do As The Other Has Done - we have to adopt the higher value of closing stock
as per the Cost Accounts. lncrease in the value of closing stock means increase in Financial
Profits. Hence, the amount of undervaluation of closing stock in Financial Accounts is added
to Financial Profits in the reconciliation statement.
(tl) Opening Stock Overvalued in Financial Accounts : This items indicates that the value of
opening stock is lower in Cost Accounts as compared to that in the Financial Accounts. As
per our Rule - Do As The Other Has Done - we have to adopt the lower value of opening
stock as per the Cost Accounts. Decrease in the value of opening stock means increase in
Financial Profits. Hence, the amount of overvaluation of opening stock in FinancialAccounts
is added to Financial Profits in the reconciliation statement.
(c) Closing Stock Overvalued in Financial Accounts : This item indicates that the value of
closing stock is lower in Cost Accounts as compared to that in the Financial Accounts. As per
our rule - Do As The Other Has Done - we have to adopt the lower value of closing stock as
per the Cost Accounts. Decrease in the value of the closing stock means decrease in Financial
Profits. Hence, the amount ofovervaluation of closing stock in Financial Accounts is deducted
from Financial Profits in the reconciliation statement.
(d) Opening Stock Underyalued in Financial Accounts : This item indicates that the value of
opening stock is higher in Cost Accounts as compared to that in the Financial Accounts. As
per our Rule - Do As The Other Has Done - we have to adopt the higher value of opening
stock as per the Cost Accounts. Increase in the value of opening stock means decrease in
Financial Profits. Hence, the amount ofundervaluation ofopening stock in Financial Accounts
is deducted from Financial Profits in the reconciliation statement.
(e) Reconciliation : Thus,
Add : Closing Stock Undervalued in Financial Accounts
Opening Stock Overvalued in Financial Accounts
Less : Closing Stock Overvalued in Financial Accounts
Opening Stock Undervalued in Financial Accounts
: Costing Profit as per Cost Accounts
(2) Methods of Charging Depreciation
(a) Depreciation Overcharged in Financial Accounts : This item indicates that the amount of
depreciation is lower in Cost Accounts as compared to that in the Financial Accounts. As per
our Rule - Do As The Other Has Done - we have to adopt the lower amount of depreciation
as per the CostAccounts. Decrease in the amount of depreciation means addition to Financial
Profits. Hence, the amount of depreciation overcharged in Financial Accounts is added to
financial profit in the reconciliation statement.
(b) Depreciation Undercharged in Financial Accounts : This item indicates that the amount
of depreciation is higher in Cost Accounts as compared to that in the Financial Accounts. As
per our Rule - Do As The Other Has Done - we have to adopt the higher amount of depreciation
as per the Cost Accounts. Increase in the amount of depreciation means decrease in Financial
Profits. Hence, the amount ofdepreciation undercharged in FinancialAccounts is deducted
from financial profits in the reconciliation statement.
(c) Reconciliation : Thus,
Add : Depreciation Overcharged in Financial Accounts
Reconciliution of Cost and Financial Accounts 361
Less : Depreciation Undercharged in Financial Accounts

(3) Recovery of Prime Cost / Overheads
(a) Cost / Overheads Under-recovered in Cost Accounts : This item indicates that the amount
of prime cost/overheads is lower in Cost Accounts as compared to that in the Financial
Accounts. As per our Rule - DoAs The Other Has Done we have to adopt the lower amount
of overheads etc. as per the Cost Accounts. Decrease in the amount of Overheads etc. means
increase in Financial Profits. Hence, the amount ofoverheads etc. under recovered in Cost
Accounts is added to Financial Profits in the reconciliation statement.
(b) Cost / Overheads Over-recovered in Cost Accounts : This item indicates that the amount
of overheads (or prime cost) is higher in Cost Accounts as compared to that in the Financial
Accounts. As per our Rule - Do As The Other Has Done we have to adopt the higher amount
of overheads etc., as per the Cost Accounts. Increase in the amount of Overheads etc., means
decrease in Financial Profits. Hence, the amount ofoverheads over-recovered in CostAccounts
is deducted from Financial Profits in the reconciliation statement.
(c) Reconciliation : Thr-rs,
Add : Prime Cost/Overheads Under-Recovered in Cost Accounts
Less : Prime Cost/Overheads Over-Recovered in Cost Accounts
7. RECONCIL|AT|ON [START|NG wlTH FINANCTAL PROFTTSI
(1) Introduction : l'he Statement of Reconciliation between Financial Profits and Costing Profits is
prepared in the format given belor,',. It is similar to a Bank Reconciliation Statement. The
Reconciliation Statement can be prepared in two ways - starting with Financial Profits or starting
with Costing Profits. Let us first see how the Reconciliation Statement appears when prepared
with Financial Profits as the starting point in the light of our earlier discussions (in para 6). The
pro-forma statement is given below -
(2) Proforma:
@
Statement of Reconciliation
Between Financial Profit And Costing Profit For the Year Ending x x x x
Parliculars f fl
F!NANCIAL PROFIT xx
Add:
Expenses / Losses / Appropriations
Debited only in Financial A,/cs xx
Closing Stock Undervalued in Financial A,/cs xx
Opening Stock Overvalued in Financial A,/cs xx
Depreciation Overcharged in Financial A,/cs xx
Overheads Under-recovered in Cost A'lcs xx
lncome Credited only in Cost A'lcs xx
Less:
lncome Credited only in Financial A'lcs xx
Closing Stock Overvalued in Financial A"/cs xx
Opening Stock Undervalued in Financial fucs xx
Depreciation Undercharged in Financial A'lcs xx
Overheads Over-recovered in Cost fucs XX
Expenses Debited only in Cost A'lcs (xx)

COSTING PROFIT xx
362 Cost Accounting (7.Y. B. Com. : SEM -l)
8. RECONCTLhTION [STARTING WlrH COST PROFITS]
(l) Introduction : The basic rule for preparing the Reconciliation Statement i.e. Do As The Other
Has Done is equally applicable in this case too. Thus, when we start with the Costing Profits, we
have to do as the Financial Accounts have done. We have to start with the Cost Profits, and
- exclude the items which were ignored by Financial Accounts,
- consider the items accounted only in Financial Accounts,
- adopt the amounts ofstocks, depreciation, overheads etc. adopted byFinancial Accounts,
- and finally adjust the Costing Profits accordingly.
This process of 'Doing What the Other has Done'will finally reconcile the Costing Profits with the
Financial Profits.
(2) Pro-Forma :
@
Between Costing Profit and Financial Profits For the Year Ending x x x x
Particulars 7 a
COSTING PROFIT xx
Add :
lncome Credited only in Financial fucs xx
Closing Stock Overvalued in Financial fucs XX
Opening Stock Undervalued in Financial fucs XX
Depreciation Undercharged in Financial fucs xx
Overheads Over-recovered in Cost fucs xx
Expenses Debited only in Cost fucs XX
Less:
Debited only in Financial fucs xx
Closing Stock Undervalued in Financial A,/cs xx
Opening Stock Overvalued in Financial A"/cs xx
Depreciation Overcharged in Financial A,/cs XX
Overheads Under-recovered in Cost A,/cs xx
lncome Credited only in Cost A,/cs xx (xx)
F!NANCIAL PROFIT XX
9. RECONCTLTATTON [STARTTNG W|TH F|NANC|AL LOSSI
(1) Introduction : In case Financial Accounts show a Loss, the pro-forma Statement of reconciliation
will appear as given below. It is clear that this is similar to the Statement prepared above in para
8 when we take the Costing Profit as the starting point. The Rule of Reconciliation viz - Do As
The Other Has Done, remains equally valid in this case too. [In some cases, the Cost Accounts
may disclose profits even when the Financial Accounts show a loss, due to different treatment of
items in the two sets of accounts.
(2) Proforma :
@
Between Financial Loss And Costing Loss / Profit For the Year Ending x x x x
FINANCIAL LOSS xx
Add :
lncome Credited Only in Financial A./cs xx
Reconciliation of Cost and FinsncialAccoants 363
Closing Stock Overvalued in Financial A,/cs xx

Opening Stock Undervalued in Financial A"/cs xx
Depreciation Undercharged in Financial A,/cs xx
Overheads Over-recovered in Cost fucs xx
Expenses Debited only in Cost A,/cs xx
Less:
Debited only in financialA,/cs xx
Closing Stock Undervalued in Financial fucs xx
Opening Stock Overvalued in Financial A,/cs xx
Depreciation Overcharged in Financial A./cs xx
Overheads Under-recovered in Cost A"/cs xx
lncome Credited only in Cost A,/cs (xx)
COSTING LOSS / PROFIT xx
10.1 FROM FINANCIALAND COSTACCOUNTS
lllustration 1 : (Both Accounts show Profits)

The Net Profit oI a company for the year ended on 31st March 2014 was ( 56,600 as shown by the
Financial Books. The Cost Accounts disclosed a profit of ( 59,650 for the same period. On an
examination of both the sets of accounts, the following facts were discovered :
(a) Goodwill written off in Financial Accounts - < 1,500.
(b) Transfer fees received during the year ( 200.
(c) Depreciation charged in financial accounts ? 750.
(d) Depreciation recovered in cost statements < 1,000.
(e) Opening stock as on 't st April 2013 as per financial records < 13,000.
(f) Opening stock as on 1st April 2013 as per cost statement t 12,000.
(g) Closing stock as on 31st March 2014 as per financial records < 14,000.
(h) Closing stock as on 31st March 2014 as per cost statement ( 15,000.
Prepare a Reconciliation statement reconciling the profit as shown by financial and cost books
taking (i) Financial profit as the starting point, (ii) Costing profit as the starting point.
Solution :
(i) Statement of Reconciliation

Between Financial Profit and Costing Profit For the Year Ending g1-g-2014
F!NANC!AL PROFIT 56,600

Add:
1. Amounts Debited in Financial A"/cs only
- Goodwill written off ,500
2. Closing Stock Undervalued in Financial A,/cs ,000
(< 15,000 - ( 14,000)
3. Opening Stock Overvalued in Financial fucs 1,000 3.500
(< 13,000 - < 12,000)
60,100
Less:
1. lncome Credited only in Financial A/cs
- Transfer Fees Received ... ... ... 200
2. Depreciation Undercharged in Financial A/cs ({ 1,000 - < 750) 250 450
COSTING PROFIT 59,650
364 C ost A cco unting (7. Y. B. C om. : SEM -l)
(i i) Statement of Reconciliation
Between Costing and Financial Profit for the Year Ending 31-3-2014
Particulars
Add:
1. lncome Credited in Financial fucs only
- Transfer Fees Received ... ... ... 200
2. Depreciation Undercharged in Financial A/cs (t 1,000 - < 750) 250 450
60,100
Less :
'l . Amounts Debited in Financial fucs only
- Goodwill written off
2. Closing Stock Undervalued in Financial A/cs
(< 15,000 - < 14,000)
3. Opening Stock Overvalued in Financial A/cs 1,000 3,500
({ 13,ooo - { 12,000)
F!NANCIAL PROFIT 56,600
lllustration 2 : (Both Accounts show Losses)

From the following, prepare a statement of reconciliation and find-out profit/loss as per financial
records.
Parliculars {
Net loss as per cost records 1,72,400
Works overhead under-recovered in costing 3,1 20
Administrative overheads over-recovered in costing 1,700
Depreciation in Financial A/c 11,200
Depreciation in Cost A/c 12,500
lnterest received 8,750
Obsolescence Loss in Financial A/c 5,700
Provision for lncome Tax 40,300
Opening Stock :
- Financial Records 52,600
- Cost Records 54,000
Closing Stock :
- Financial Records 52,000
- Cost Records 49,600
lnterest charges in Cost Account only 6,000
Preliminary Expenses w/off 950
Solution (T.YB.Com., Oct. 2001, adapted)
Statement of Reconciliation Between Costing Loss and Financial Loss
Particulars f {
COSTING LOSS 1,72,400
Add :
'l . Expenses/Losses/Appropriations Debited in Financial fuc Only
- Obsolescence Loss 5,700
- Provision for lncome Tax 40,300
- Preliminary Expenses Written Off 950
2. Overheads Under recovered in Cost fucs
- Works Overheads 3.120 50,070
2,22,470
Less :
'l . lncome Credited in Financial A,/cs
- lnterest Received 8,750
2. Closing Stock Overvalued in Financial A"/cs 2,400
3. Opening Stock Undervalued in Financial A,/cs 't,400
Reconciliation of Cost and Financial Accounts 365
4. Depreciation Under Charged in Financial fucs 1,300
5. Overheads Over-recovered in Cost A/cs
- Administrative Overheads 1,700
6. Expenses Debited only in Cost fucs
- lnterest Charges 6.000 21,550
FINANCIAL LOSS 2,00,920
lllustration 3 :
The net profit of Dhura Ltd. shown by cost accounts for the year ended 31st March 2015 was
< 10,35,000 and by financial accounts for the same period was ( 5,00,200.
A scrutiny of the figures of the financial accounts and the cost accounts revealed the following facts:
f
1. Administrative overhead under recovered in cost accounts 14,800
2. Factory overhead over-recovered in cost accounts 20,000
3. Depreciation over charged in financial accounts 40,000
4. lnterest on lnvestment 20,000
5. Loss due to absolescence charged in financial accounts 24,O00
6. Abnormal labour wastage charged in financial accounts 2,00,000
7. lncome tax provided in financial accounts 2,80,000
8. Bank interest credited in financial accounts 4,000
9. Stocks adjustment credited in financial accounts 28,000
10. Loss due to depreciation in stock values cha ed in financial accounts .. 48,000
Prepare Reconciliation Statement. (ICWA lnter, June 15, adapted)
Solution :
Reconciliation Statement as on 31-3-2015
a 7
PROFIT AS PER FINANCIAL ACCOUNTS 5,00,200
Add:
1. Administration overhead under recovered 14,800
2. Over recovery of depreciation 40,000
3. Loss due to obsolescence considered 24,000
4. Abnormal labour wastage 2,00,000
5. lncome Tax 2,80,000
6. Loss due to Depreciation in Stock 48,000 6,06,800
11,07,000
Less:
1. Factory overhead over recovery 20,000
2. lnterest on investment 20,000
3. Bank lnterest 4,000
4. Stock adjustment 28,000 72,OOO
PROFIT AS PER COST ACCOUNTS 10,35,000
,10.2 FROM COSTING PROFIT FIGURES
lllustration 4 :
The following information is available from Cost and Financial Accounts in respect of Progressive
Co. Ltd. forthe year ended 31st December, 2013. You are required to prepare a statement reconciling
the profit or loss from the same. The following items are shown in Financial Accounts but not in Cost
Accounts.
\
Loss due to obsolescence of assets 3,700
Provision for incometax 38,000
Reduction in value of stock 6,000
Debenture interest 4,000
Loss by lire 1,050

lnterest on investments 6,000
Bdnk interest and transfer fees 1,225
Rent received of staff quarters 2,000
The additional information is as follows :
(a) ln Cost Accounts, works overheads are estimated at { 26,000, while in Financial Accounts they
are charged at { 29,120.
(b) ln Cost Accounts, administration overheads are estimated at t 20,000, while in financial accounts
they are debited at ( 18,300.
(c) ln Cost Accounts, excess charge for depreciation is ( 1,300 compared to Financial Accounts.
(d) Profit as shown by Financial Accounts does not agree with the profit shown by Cost Accounts.
Profit as per Cost Accounts is 7 1 ,72,40O.
Solution :
PROGRESSIVE CO. LTD.
Statement of Reconciliation Between Costing Profit and Financial Profit
COSTING PROFIT 1,72,400

Add:
1. lncome Credited in Financial A,/cs only
- lnterest on lnvestments 6,
- Bank lnterest & Transfer Fees 1,
- Rent Received 2,
2. Depreciation Undercharged in Financial A,/cs 1,
(i.e. overcharged in Cost A/cs)
3. Overheads Over recovered in Cost A/cs
- Administration Overheads (t 20,000 - < 18,300) 12,225
1,84,625
Less:
1. Expenses/Losses/Appropriations Debited in Financial A/cs Only
- Loss due to obsolescence of assets 3,700
- Provision for lncome Tax 38,000
- Reduction in Value ol stock 6,000
- Debenture lnterest 4,000
- Loss by Fire 1,050
2. Overheads Under recovered in Cost A,/cs
- Works Overheads (< 29,120 - { 26,000) 3.120 55,870
FINANCIAL PROFIT 1,28,755
10.3 FROM FINANCIAL PROFIT FIGURES

lllustration 5 :
From the following particulars, prepare Reconciliation Statement and Asceftain Costing Profit/Loss.
Net Profit as per financial P & L A/c. < 50,000, Opening Stock was overvalued by T 2,000 in Cost
Accounts as compared to financial accounts. Administrative overheads charged in Financial Books
< 20,000 but recovered in Cost < 40,000.
lncome Tax Provision < 1,200.
Notional Salary of Proprietor in Cost { 20,000.
lnterest Received { 'l 2,000.
Closing Stock as per financial books { 16,200.
whereas in cost books it was { 'l 9,000. (T.Y.B.com., March 2aog, adapted)
Reconciliation of Cost and Financial Accoants 367
Solution :
f
FINANCIAL PROFIT 50,000
Add :
'1. lncome Tax Provision (only in FA) 1,200
2. Difference in Closing Stock 2,800
54,000
Less:
1. Opening Stock Overvalued 2,000
2. Administration Expenses Overabsorbed 20,000
3. NotionalSalary (only in CA) 20,000
4. lnterest Received (only in FA) 12,000 54,000
COSTING PROFIT NIL
lllustration 6 :
From the following, prepare Reconciliation Statement of M/s. XYZ and Company as on 30-6-2014 :
(1) Net Profit as per Financial Accounts < 40,340.
(2) lncome Tax Provision made { 30,000.
(3) Materials Purchases of 5,000 units were recorded in cost at standard cost { 24 per unit whereas
in Finance it was recorded at actual cost { 22 per unit.
(4) Old Bad debts recovered { 20,500.
(5) Loss on sale of furniture was ( 4,120. (TY.B.Com., Oct.2006, SYBAE Oct.20t4, adapted)
Solution :
Statement of Reconciliation of Profits

Add :
1. lncome Tax Provision not recorded in cost books 30,000
2. Loss on Sale of Furniture not included in Cost Sheet 4,120 34,120
74,460
Less :
1. Old Bad Debt recovered recorded in Financial Books only 20,500
2. Material purchased overcharged in cost books 10,000 (30,500)
lllustration 7 :
From the following information you are required to prepare a statement reconciling the results of
Cost Books :
I
Net profit as per Financial Books 51,052
Works overheads under recovery in cost book 1,001
Depreciation charged in Financial Books 13,000
Depreciation charged in Cost Book 14,326
Obsolescence loss charged in Financial Books Only 2,021
lncome-tax provided in Financial Books only 2,626
lnterest received but not recorded in Cost Book 3,031
Bank interest debited in Financial Books only 292
368 Cost Acco unting (7.Y. B. Com. : SEM-I)
Solution :
Statement of Reconciliation Between Financial Profit and Costing Profit
Particulars
FINANCIAL PROFIT 51,0s2
Add :
1. Overheads under recovered in Cost fucs
- Works overhead 1,001
2. Expenses/Losses/Appropriations Debited in Financial A,/cs only
- Obsolescence loss 2,021
- lncome tax 2,626
- Bank lnterest 292 5,940
56,992
Less :
1. Depreciation Undercharged in Financial A/cs (( 14,326 - < 13,000) 1,326

2. lncome credited in Financial A,/cs only
- lnterest income 3.031 4,357
lllustration 8 :
The net prof it of a company amounted to ( 60,412 for the year ending 31st December, 2013 as per
its financial records. The cost records, revealed a different figure. A scrutiny of the two sets of
accounts disclosed the following facts :
(a) Works overhead recovered in Cost Accounts during the period amounted to ( 28,450 while the
actual amount of these expenses was { 21,390 only.
(b) Actual office expenses for the period were < 19,850, whereas the office overhead recovered in
Cost Accounts amounted to t 14,500.
(c) The annual rental value of premises owned by the company amounting to { 10,800 was charged
in Cost Accounts but not in Financial Accounts.
(d) Selling and distribution expenses for the period amounting to < 16,490 were excluded from
costing records.
(e) Excess depreciation charged in Cost Accounts < 2,4O0.
(f) Expenses not included in Cost Accounts and shown in Financial Accounts
Bank Charges 160
Director's Fees 750
Penalty due to late completion of contract 2,500
(g) Gains during the year not included in Cost Accounts
Transfer fees 45
Profit on sale of investment 4,250
lnterest on investment 9,450
(h) The following appropriation had been made before arriving at the profit figure of < 60,412, shown
above.
Transfer to Dividend Equalisation Fund 10,500
Transfer to lncome Tax Reserve 6,400
Transfer to Debenture Redemption Fund 9,000
(i) A sum of { 10,000 given as donation to the Prime Minister's Relief Fund had been charged to
Profit and Loss Account as business expense.
Prepare a Reconciliation Statement and find the amount of net profiVloss as perthe costing records.
Reconciliation of Cost and Financiql Accoants 369
Solution :
Between Financial Profit and Costing Profit For the Year Ending 31-12-2013

Add:
1. Expenses/Losses /Appropriations Debited tn Financial A,/cs only
Expenses :
- Selling and Distribution expenses 16,490
- lnterest on bank loan 1,600
- Bank charges 160
- Director's fees 750
- Penalty on contract 2,500
Appropriations :
- Dividend equalisation fund 10,500
- lncome tax reserve 6,400
- Debenture redemption fund 9,000
- Donations to Prime Minister's Relief Fund 10,000
2. Overheads under recovered in Cost A/cs
Office Overheads (T 19,850 - < 14,500) 5.350 62,750
1,23,162
Less:
1. lncome Credited in Financial A/cs only
- Transfer fees 45
- Profit on sale of investments 4,250
- lnterest on investments 9,450
2. Depreciation Under-charged in Financial A/cs 2,400
(i.e. Overcharged in Cost A/cs)
3. Overheads Over recovered in Cost A,/cs 7,060
- Works Overheads (< 28,450 - { 21,390)
4. Expenses Debited in Cost A/cs only
- Flent for own premises 10,800 34,005
10.4 FROM P & LA/C + COST PROFIT FIGURE
lllustration 9 :
A Firm's Trading and Profit and Loss Account is as follows
r Padiculars f,
Purchase 37,815 Sales 75,000 Units
Less: Closing Stock 6.120 31,695 @ ( 1.50 each 1 ,1 2,500
Wages [Direct] 15,750 Profit on Sale of Machinery 3,900
Works Expenses 18,'t95
Ad ministration Expenses 8,010
Depreciation 1,650
Net Profit 30,450
1,16,400 1 ,16,400
The Profit as per Cost Accounts was < 29,655. Prepare Reconciliation Statement to reconcile Cost
Profit with Financial Profits. Further information as per Cost Accounts:
(a) Closing Stock was taken at < 6,420.
(b) The Works Expenses were taken at 100% of Direct Wages.
(c) Selling and Administration Expenses were charged al 107. of sales and at < 0.10 per unit
respectively.
(d) Depreciation was taken at < 'l ,200.
Solution
a f,
F!NANCIAL PROFIT 30,450
Add :
1. Closing Stock Undervalued in Financial A./cs 300
((6,420-<6,120)
2. Depreciation Overcharged in Financial A,/cs 450
(<1,650-<1,200)
- Works Expenses (< 18,195 - < 15,750) 2,445
- Admn. Expenses K 8,010 - < 7,500) 510 3,705
34,155
Less :
1. lncome Credited in Financial A'lcs only
- Profit on Sale of Machinery 3,900
2. Overheads Over recovered in Cost A,/cs
- Selling Expenses (< 11 ,250 - < 10,650) 600 4,500
lllustration 10 : (Factory OH as Bal. Fig. in Costing P & L A/c)

Following is the Profit and Loss Account of M/s. Anubhav Manufacturing Company for the year
ended 31st December, 201 3.
Particulars f Particulars fl
To Opening stock ol By Sales 9,20,000
Raw Materials 60,000 By Closing Stock:
Work in Process 35,000 Raw Materials 60,000
Finished Goods 80,000 1,75,000 Work in Process 41,000
To Purchases 2,40,000 Finished goods 30,000 1,31 ,000
To Factory Wages 60,000
To Electricity Charges 66,000
To FactoryOverheads 90,000
10,51,000 10,51,000
To Administrative Expenses 25,000 By Gross Prolit b/d 4,20,000
To Selling and Distr. Expenses 1,15,000 By Miscellaneous lncome 20,000
To Bad debts 30,000
To Net Profit 2,70,000
Total 4,40,000 Total 4,40,000
Their Cost Account showed a profit of t
2,81,750. On scrutiny of their Costing Profit and Loss
Account, it was found that -
(1 ) Their Opening Stocks and Closing stocks were valued as under :-
Opening stock of Closing stock of
Raw materials 80,000
{ Raw Materials < 70,000
Work in Process 40,000
< Work in Process < 44,000
Finished Goods 60,000
< Finished Goods < 2O,OOO
(2) They charged administrative expenses at ( 18,000 and Selling and distribution expenses at
< 1,27,000.
(3) They had charged depreciation @ 25"/o on Written Down Value Method on its plant which was
purchased on 1st July 2010 for < 80,000. ln Financial accounts, however, the depreciation was
provided on Straight Line Method and the same was included in the Factory overheads of
< 90,000. Prepare a statement reconciling the difference in the profits as disclosed by the two
records.
Solution :
M/S ANUBHAV MANUFACTURING COMPANY

Statement of Reconciliation for the Year Ending g1-12-2019
fl (
Add:
1. Misc. lncome credited only in F.A. 20,000
2. Closing Stock overvalued in F.A.
- Finished goods (30,000 - 20,000) 10,000
3. Opening Stocks undervalued in F.A.
- Raw Materials (80,000 - 60,000) 20,000
- Work-in-Process (40,000 - 35,000) 5,000
4. Selling & Distr. Exp. Over-recovered in C.A. (1 ,27,000 - 1,15,000) 12.000 67,000
3,48,750
Less:
1. Bad debts w/off only in F.A. 30,000
Opening stock overvalued in F.A.
- Finished goods (80,000 - 60,000) 20,000
3. Closing stock undervalued in F.A.
- Raw materials (70,000 - 60,000) 10,000
- Work-in-process (44,000 - 41,000) 3,000
4. Depreciation overcharged in F.A. (20,000 - 9,844) 10,156
5. Overheads under recovered in C.A.
- Administrative expenses (25,000 - 18,000) 7.000 80,156
2,68,594
Add: Factory Overheads [71,406 - (90,000 - 20,000)] (WN 3) 1,406
FINANC!AL PROFIT 2,70,000
Notes :
(1) Depreciation as per P & L Aic : 80,000 x 25o/o = 20,000
(2) Depreciation as per Cost Accounts (C.A.) :
1-7-2010 Machine purchased 80,000
31-12-2010 Depreciation @ 25% (for 6 months) 10,000
1-1-2011 W.D.V. 70,000
31-12-2011 Depreciation @ 25"/o 17,500
1-1-2002 W.D.V. 52,500

31-12-2002 Depreciation @ 25"/" 13,125
1-1-2003 W.D.V. 39,375

31-12-2003 Depreciation @ 25"/" 9,844
(3) lf we prepare Costing P & L A/c, the balancing figure will be presumed to be
Factory Overheads < 71,406 [(9,20,000 + 70,000 + 44,000 + 20,000) - (80,000 + 40,000 +
60,000 + 66,000 + 9,844 + 18,000 + 1,27,O0O + 2,81,750)1. Factory Overheads vide F.A. =
T 90,000 - Depreciation 20,000 = 70,000.
10.5 FROM P & LA/C + COST SHEET TO BE PREPARED
lllustration 11 :
A Firm's Trading and Profit and Loss Account was as following:
(
To Opening Stock 1,00,000 By Sales 1,75,000
To Purchases 80,000
1,80,000
Less: Closing Stock 80,000
1,00,000
To Direct Wages 20,000

To Factory Expenses 15,000
To Gross Prolit c/f 40,000
Total 1,75,000 Total 1,75,000
To Administrative Expenses 10,000 By Gross Profit 40,000
To Selling Expenses 15,000
Total 40,000 Total 40,000
Costing records show the following :
(a) Stock Ledger Closing balance < 89,000

(b) Direct Labour < 23,000
(c) FactoryOverheads < 13,000
(d) Administrative overheads and selling expenses each are calculated at 8 percent of the selling
price.
Prepare Costing Profit and Loss Account and the statement of reconciliation between the profit and
loss as per the two accounts.
Solution :
Statement of Cost and Profit
Cost
Direct Materials
Purchases 80,000
1,80,000
Less: Closing Stock 89,000 91,000
Direct Wages 23.000
Prime Cost 1,14,000
Works Cost 1,27,O00
Ad min istrative Overheads 14.000
Cost of Production 1,41 ,000
Selling Overheads 14.000
Cost of Sales 1,55,000
Costing Profit 20.000
Sales 1,75,000
Particulars
Add :
1. Closing Stock Undervalued in Financial A,/cs
- Raw Materials (89,000 - 80,000) 9,000
- Factory Overheads (15,000 - 13,000) 2,000
- Selling Overheads (15,000 - 14,000) 1.000 12,000
27,O00
Less :
1. Overheads Over recovered in Cost A,/cs
- Direct Wages (23,000 - 20,000) 3,000
- Administrative Overheads (14,000 - 10,000) 4.000 7,000
COSTING PROFITS 20,000
Illustration 12 :
Details of lncome and Expenses of Chetan Ltd. for the year ended 31 -12-2013 was as under:
( Parliculars {
To Office Expenses 39,200 By Gross Profit 60,950
To Selling Expenses 23,000 By lnterest on Deposit 2,500
To Loss on Sale of Machinery 1,250 By Dividend 3,450
To Depreciation on Machinery 1,800 By Net Loss 1,850
To Depreciation on Building 2,300
To Debenture Discount 400
To Preliminary Expenses 800
68,750 68,750
As compared to Cost Accounts, Office indirect expenses are 12/o more in Financial accounts while
Selling indireci expenses are 87o less.
Depreciation on machinery was over-estimated by { 350, while depreciation on building was under
estimated by { 150.
Prepare ('l ) Statement of Cost and ProfiVloss and (2) Statement showing reconciliation of profit or
loss of Cost Accounts with that of Financial Accounts.
Solution :
(a) Statement of Cost and Profit / Loss
GROSS PROFIT 60,950

Less:
39'2oo
* I oo
112
Selling Overheads 25,000
23,000
* too
92
Depreciation
- Machinery (1,800 + 350) 2,150
- Building (2,300 - 150) 2.150 64,300
COSTING LOSS 3,3s0
(b) Statement of Reconciliation Between Financial Loss and Costing Loss
FINANCIAL LOSS 1,850

Add:
1. lncome Credited in Financial A/cs only
- lnterest on Deposits 2,500
- Dividends 3,450
2. Depreciation Undercharged in Financial fucs
- Machinery (overcharged in Cost A/cs) 350
3. Overheads Over recovered in Cost fucs
- Selling Overheads (< 25,000 - < 23,000) 2,000 8,300
10,150
Less :
1. Expenses/Losses/Appropriations Debited in Financial fucs only

- Loss on Sale of Machinery 1,250
- Debenture Discount 400
- Preliminary Expenses w/o
2. Depreciation Overcharged in Financial A/cs
- Buildings (Undercharged in Cost fucs) 150
3. Overheads Under recovered in Cost A/cs
- Office Overheads (< 39,200 - < 35,000) 4.200 6,800
COSTING LOSS 3,350
lllustration'13 :
Given below is the Trading and Profit and Loss Account of Vikas Electronics for the accounting year
31-3-20'14.
Particulars { Particulars i
To Materials consumed 3,00,000 By Sales (2,50,000 units) 7,50,000
To Factory Expenses 1,20,000
To Office Expenses 40,000
To Selling and distribution
Expenses 80,000
7,50,000 7,50,000
Normal output of the factory is 2,00,000 units. Factory overheads are fixed upto t 60,000 and office
expenses are fixed. Selling and distribution expenses are fixed to the extent of ( 50,000; the rest
are variable.
Prepare a statement reconciling profit as per Cost Accounts and Financial accounts.
Solution : (SYBAE Nov.20l7, adapted)
Cost Sheet
{
Direct Wages
PRIME COST 5,00,000
Factory Overheads
Variable (< 1,20,000 - 60,000) 60,000
Fixed (60,000 x 2,50,000 / 2,00,000) 75,000
WORKS COST 6,35,000
Office Overheads (40,000 x 2,50,000 / 2,00,000)
COST OF PRODUCTION 6,85,000
Sales/Distribution Ove rheads
Variable (80,000 - 50,000) 30,000
Fixed (50,000 x 2,50,000 / 2,00,000) 62,500 92.500
COST OF SALES 7,77 ,500
COSTING LOSS
SAI.ES 7,50,000
Note: Overheads are fixed for normal output of 2,00,000 units. Hence for output of 2,50,000 fixed
overheads will increase (pro-rata).
Statement of Reconciliation Between Financial Prolit and Costing Proflt
?
Less:
Overheads over recovered in Cost A,/cs
- Factory overheads (1,35,000 - 1,20,000) 15,000
- Office overheads (50,000 - 40,000) 10,000
- Selling and distribution overheads (92,500 - 80,000) 12.500 37,500
COSTING LOSS 27,500
lllustration 14 :
RST Ltd. has furnished the following information from the financial books for the year ended 31st
March, 2012. .
Reconciliation of Cost and FinancialAccounts 375
Dr. Trading and profit and Loss A/c Cr.
I Particulars fl
To Opening Stock 2,50,000 By Sales (47,500 units) 59,85,000
(Finished goods 2500 units) By Closing Stock 5,00,000
To Raw Materials 20,80,000 (Finished Goods 5000 units)
To Direct Wages 15,1 5,000 By Commission Received 35,000
To Factory Expenses 10,1 8,000 By Bad Debts Recovered 12,000
To Otfice and Administrative 8,45,000 By Net Loss 36,000
To Selling and Distribution 7,00,000
To GoodwillMoff 60,000
To Loss on Sale of lnvestments 1,00,000
6558.000 65.68^000
The following information is revealed from the cost records for year ended 31st March, 2012 :
(a) Raw material consumption is t 40 per unit of Production.
(b) Direct wages are 707" of Direct Materials.
(c) Factory overheads are recovered @ 50% of Direct Materials.
(d) Administrative overheads are taken @ 20% of Works cost.
(e) Selling and Distribution overheads are recovered t 15 per unit.
(f) Opening stock of Finished goods is valued at {'101.80 per unit.
(g) Closing stock of Finished goods is to be valued at cost of Production.
(h) Selling price is recorded at ( 125 per unit.
Prepare : (i) Detailed Cost Statement showing total cost, per unit cost and profit.
(ii) Statement of Reconciliation (TY.B.Com., Mar. 13, adapted)
Solution :
(i) Statement of Cost For the Year Ended 31st March, 2012
50,000 Units
Per unit f,
Direct Materials (50,000 x 40) 40.00 20,00,000
Direct Wages (7Oo/" ol Materials) 28.00 14.00.000
PRIME COST 68.00 34,00,000
Factory Overheads (20,00,000 x 50%) 20.00
WORKS COST 88.00 ,00,000
Administrative Overheads (20%) 't 7.60
COST OF PRODUCTION 105.60 ,80,000

Add : Opening Stock of Finished Goods (101.80) 2.54.500
55,34,500
Less : Closing Stock of Finished Goods 5.28.000
COST OF GOODS SOLD 105.40 50,06,500
Add: Selling & Distribution Overheads (47,500 x 15) 15.00 7.12.500
COST OF SALES 120.40 57,19,000
Profit 4.60
Sales 125.00 59,37,500
(ii) Statement of Reconciliation as on 31st March, 2012
Net Profit as per Cost A"/c 2,18,500

Add :
Over Valuation of Opening Stock in Costing (2,54,000 - 2,50,000) 4,500
Office Expenses charged mcire in Costing (8,80,000 - 8,45,000) 35,000
Selling Expenses charged more in Costing (7,12,50O - 7,00,000) 12,500
Sales taken Less in Costing (59,85,000 - 59,37,500) 47,500
Commission Received Credited in Financial A/c 35,000
Bad Debts Recovered in Financial A'lcs 12,000 1,46,500
3,65,000
376 Cost Accounting (T.VB.Com. : SEM-I)
Less :
Over Valuation ol Closing Stock in Cost fucs (5,28,000 - 5,00,000) 28,000
Raw Material charged less in cost fuc (20,80,000 - 20,00,000) 80,000
Direct Wages charged less in Cost tuc (15,15,000 - 14,00'000) 1,15,000
Factory Expenses charged less in Cost A/c (10,18,000 - 10,00,000) 18,000
Goodwill w/off in Financial A/c 60,000
Loss on Sale of lnvestment charged in Financial A'lcs 1,00,000 4,01,000
Loss as Per Financial Accounts 36,000
lllustration 15 :
Following is the Profit and Loss Account, as per Financial records, of fvl/s Tirupati Traders for the
year ended 31st lr4arch, 2014 :
Pafticulars a Particulars {
To Opening Stock 59,760 By Sales 11,70,000
(Finished - 6,000 units) (90,000 units)
To Raw Materials Consumed 5,19,400 By Closing Stock 52,776
To Carriage lnwards 5,100 (Finished - 4,500 units)
To Direct Wages 72,872 By Bank lnterest 410
To Salesmen Commission 38,520 By Dividend 6,900
To Office Salaries 25,368
To Motor Car Expenses 18,384
To Adveftisement 61,920
To Directors Remuneration :
Office 12,000
Works 12,000
Sales 14.400 38,400
To lndirect Wages 20,268
To Plant Depreciation 11,472
To Workmen Compensation
Reserve 13,275
To Office Rent 6,900
To After Sales Seruice Expenses 4,476
To lnterest 6,000
To Showroom Rent 9,000
To Carriage Outward 6,240
To Depreciation on Delivery Van 5,040
To Factory Fuel 4,248
To Packing & Forwarding 3,270
To trlisc. Factory Expenses 3,270
To Preliminary Exp. w/off 4,200
To Audit Fees 2,520
To General Office Expenses 1,500
To Factory Rent 18,720
To Loss on Sale of lnvestments 4,017
To lnsurance :
Office 300
Sales 72O
Factory 1.800 2,820
To Printing & Stationery 72O
To Depreciation :
Factory Furniture 600

Office Furniture 900
Showroom Furniture 420 1,920
To Telephone Charges :
Office 129
Sales 627 756
To Legal Fees 504
To Net Profit c/d to B/S 2,59,226
12,30,086 12,30,086
Closing stock in cost Accounts is valued at cost of production. However opening stock in cost records
is same as per financial records.
Prepare ;-
(a) Detailed cost statement showing total cost (excluding per unit) and profit.
(b) Reconciliation statement showing reconciliation of Profits. (T.Y.B.Com., Mar. 09, adapted)
Solution :
COST SHEET
M/s. Tirupati Traders
Production - 88,500 Units Sales - 90, 000 Units
Raw material consumed 5,19,400

Carriage lnwards 5,100 5,24,500
Direct Wages 72.872
PRIME COST 5,97,372
Factory Overheads
Directors Remuneration (works) 12,000
Plant Depreciation 11,472
Factory Fuel 4,248
Miscellaneous Factory Expenses 3,270
Factory Rent 18,720
Factory lnsurance 1,800
Depreciation on Factory Furniture 600 72.378
WORKS COST 6,69,750
Office and Administrative Overheads
Otfice Salaries 25,368
Motor Car Expenses 18,384
Directors Remuneration 12,000
Office Rent 6,900
Audit Fees 2,520
General Office Expenses 1,500
Office lnsurance 300
Printing and Stationery 720
Office Telephone 129
Legal Fees 504 69.225
Less : Closing Stock (7,38,975 x 4,500/88,500) (37,575)
COST OF GOODS SOLD 7,61 ,160
Selling and Distribution Overheads
Salesmen Commission 38,520
Advertisements 61,920
Directors Remuneration (Sales) 14,400
After Sales Services Expenses 4,476
Showroom Rent 9,000
Depreciation on delivery Van 5,040
Packing and Forwarding 3,270
Sales Office lnsurance 720
Depreciation on Showroom Furniture 420
Sales Office Telephone 627 1.44.633
COST OF SALES 9,05,793
Add : Profit (balance)
Sales 11,70,000
378 Cost Accounting (T.Y.B, Com. : SEM-V)
a a
Add:
(l) lncome Gredited in Financial Profit and Loss
Account but not in Cost Record
- Bank lnterest 410
- Dividend 6,900
(ii) Overvaluation of closing stock in flnancial records
(Undervaluation in cost records) 15.201 22.511
2,86,718
Less :
Expenses charged to financial profit and loss
account but not in cost records
- Workmen Compensation Reserve 13,275
- lnterest 6,000
- Preliminary Expenses written off 4,200
- Loss on Sale of lnvestments 4.017 27.492
lllustration 16 :
Following is the Profit and Loss Account as per financial records of M/s Niyati Enterprises for the
year ended 31 st March, 201 3.
Dr. { Parliculars Cr. (

To Opening Stock 2,50,000 By Sales 30,00,000
(Finished Goods 2,000 units) (Selling Price @ ( 125 p.u.)
To Direct Materials consumed 12,00,000 By Closing Stock 2,20,000
To Carriage Outward 30,000 (Finished Goods 2,000 units)
To Direct Wages 8,00,000 By Dividend Received 10,000
To Demonstration Expenses 30,000
To Legal Charges 40,000
To Haulage of Machinery 20,000
To Depreciation (Plant & Machinery) 1,50,000
To Printing and Stationery 40,000
To Adveilisement Expenses 60,000
To Other lndirect Expenses
Works 80,000
Office 80,000
Sales 2,40,000
To Drawing Office Expenses 60,000
To Aud[t Fees 40,000
To Preliminary Expenses w/off 1,00,000
32,30,000 32,30,000
Forthe same period, Cost Accounting records showed the following :
'l .
Depreciation on Plant and Machinery was recorded at t 40,000.
2. Opening Stock ol Finished Goods has been valued at { 2,00,000.
3. Closing Stock of Finished Goods has been valued at cost of production.
Prepare :
1 . Detailed cost statement for the year ended 31st March, 2013 showing total cost (excluding per
unit) and profit.
2. Statement of Reconciliation of Profits (Starting with Profit as per Cost Sheet).
(T.Y.B.Com., Oct. lS, adapted)
Reconciliation of Cost and Finsncial Accounts 379
Solution
Cost Sheet of M/s Niyati Enterprises for the year ended 31st March,2013
COST ( r
Direct Materials '12,00,000
Direct Wages 8.00.000
PRIME COST 20,00,000
Add : Works Overheads
Haulage of Machinery 20,000
lndirect Expenses (Factory) 80,000
Drawing Office Expenses 60.000 2.00.000
WORKS COST 22,00,000
Add : Office & Administration Overheads
Legal Charges 40,000
Printing & Stationery 40,000
lndirect Expenses (Office) 80,000
Audit Fees 40.000 2,00.000
Add : Opening Stock of Finished Goods 2,00,000
26,00,000
Less : Closing Stock of Finished Goods 2,00,000
(24,00,000 I 24,O0O x 2,000)
COST OF GOODS SOLD 24,00,000
Add : Selling & Distribution Overheads
Advertisement Expenses 60,000
lndirect Expenses (Sales) 80.000 2.00,000
cosT oF SALES (TOTAL COST) 26,00,000
PROFIT 4,00,000
SALES 30,00,000
Statement of Reconciliation of Profits for the Year 2012-13
Profit as Per Cost Records 4,00,000

Add :
1. Dividend received credited only in Financial Bobks 10,000
2. Closing Stock of finished goods overvalued in
Financial Books (2,20,000 - 2,00,000) 20,000 30,000
4,30,000
Less :
1. Opening Stock of finished goods overvalued in
Financial Books (2,50,000 - 2,00,000) 50,000
2. Depreciation over charged in Financial Books 1 ,10,000
(1,s0,000 - 40,000)
3. Preliminary Expenses w/off not recorded in Cost Sheet... ... . 1,00,000 2,60,000
Profit as Per Financial Books 1,70,000
lllustration 17 :
Chinu Enterprise has furnished the following information from the financial books for the year ended
on 31st March, 2015 :
Parliculars ? Pafticulars a
Opening Stock 1,40,000 Sales (10250 units) ,70,000
(1000 units @ T 140 each) Closing Stock 1,50,000
Material Consumed 10,40,000 (750 Units @ t 200 each)
Wages 6,00,000
Gross Profit c/d 12,40,000
30,20,000 ,000
Factory Expenses 3,79,000 Gross Profit b/d 12,40,000
Administration Expenses 4,24,000 Bad Debts recovered 5,000
Selling Expenses 2,20,000 Rent Received 40,000
Bad Debts 16,000
Discount Allowed 20,000
Net Profit 2,26,000
12,85,000 12,85,000
The cost sheet shows the cost of materials at{ 104 per unit and the labour costat ( 60 per unit. The
factory overheads are absorbed at 60% of labour cost and administration overheads at 20"k ot
factory cost. Selling expenses are charged at < 25 per unit. The opening stock of finished goods is
valued at { 180 per unit.
1 . A statement showing profit as per Cost Accounts for the year ended on 31st tvlarch 2015; and
2. A statement showing the reconciliation of profit as disclosed in Cost Accounts with the profit
shown in Financial Accounts. (ICWA lnter, Dec. 15, adapted)
Solution :
Statement of Profit as per Cost Accounts
Units f
Opening Stock @ { 180 per unit 1,000 1,80,000
Cost of Production @ < 240 per unit (WN 1) 10.000
Total 11 ,000 25,80,000
Less : Closing Stock @ < 240 per unit 750
Cost of Goods Sold 10,250 24,00,000
Selling Expense @ < 25 per unit 2.56.250
Cost of Sales ,56,250
Profit (Balancing Figure)
Sales 10,250 28,70,000
Reconciliation Statement For the Year Ending 31-3-2015
PROFIT AS PER COST ACCOUNTS 2,13,750

Add:
1. Over valuation of Opening Stock in Cost Accounts 40,000
(1,80,000 - 1,40,000)
2. Over recovery of Selling Expenses in Cost Accounts 36,250
(2,56,250 - 2,20,000)
3. lncome included only in Financial Accounts
Bad Debt recovered 5,000
Rent received 40,000 1,21,250
3,35,000
Less:
1. Over valuation of Closing Stock in Cost Accounts 30,000
(1,80,000 - 1,s0,000)
2. Under recovery of Factory Overheads in Cost Accounts 19,000
(3,79,000 - 3,60,000)
3. Under recovery of Admin. Overheads in Cost Accounts.. 24,000
(4,24,000 - 4,00,000)
4. Expenses included only in Financial Accounts
Bad Debts 16,000
Discount Allowed 20,000 1,09,000
PROFIT AS PER FINANCIAL ACCOUNTS 2,26,000
Reconciliation of Cost und Financial Accounts 381
Working Note : Statement of Cost (10,000 Units)
l\/aterials 0,40,000 104

Wages 6,00,000 60
Factory Overhead 60% of Wages 36
Factory Cost ,00,000 200
Administrative Overhead 20"/o of Factory Cost 40
Total Cost ,00,000 240
lllustration 18 :
Following is the summarised Profit and Loss Account of XYZ lndustries for the year ended 31 -3-201 4.
Profit and Loss Account for the year ended 31st March, 2014
To lt/aterials Consumed 2,00,000 By Sales (12,000 units) 4,80,000

To Wages 75,400 By Closing Stock 66,000
To Factory Expenses Paid 52,400 (Finished Goods 3,000 units)
Add : Outstanding 2.200 54,600 By lnterest on Securities 17,000
To Administrative Overheads 52,500 By Profit on Sale of Assets 1,20,000
To Selling and Distribution Overheads 96,000
To lnterest on Loans 14,000
To lncome Tax 7,500
6,83,000 6,83,000
The cost accounting record for the above period showed the following :
(a) It/laterial consumed @ < 10 per unit produced.
(b) Direct wages @ t 6 per unit produced.
(c) Factory overheads were absorbed @ 25% of Prime Cost.
(d) Administrative overheads were absorbed @ t 5 per unit produced.
(e) Selling and Distribution overheads were absorbed @ 7 7 per unit sold.
You are required to prepare the detailed Cost Sheet for the year ended 31 -3-2014 and a Statement
of Reconciliation. (T.Y.B.Com., Oct.2014, Nov.2017, adapted)
Solution :
ln the Books ot XYZ lndustries

Statement of Cost for the Year Ended 31st March, 2013 (Production - 15,000 units)
tvlaterials Consumed (15,000 x t 10) 1,50,000 10

Direct Wages (15,000 x { 6) 90,000 6
Prime Cost 2,40,000 16

Factory Overheads (25% ot Prime Cost) 60,000 4
Factory Cost 3,00,000 20
Administrative Overheads (15,000 x ( 5) 75,000 5
Cost of Production 3,75,000 25
Less : Closing Stock of Finished goods (3,000 units @ { 25 per unit) (75,000) 25
Cost of Goods Sold 3,00,000 25

Selling and Distribution Overheads (12,000 x { 7) 84,000 7
Cost of Sales 3,84,000 32

Profit 96,000 I
Sales / Selling Price 4,80,000 40
382 Cost Accounting (7. Y. B. Com. : SEM -V)
Statement of Reconciliation for the Year Ending 31st March, 2013
Particulars
Profit as Per Cost Records 96,000
Add:
1. Direct Wages over recovered in Cost Records 14,600
2. Factory Overhead over recovered in Cost Records 5,400
3. Administration Overhead recovered in Cost Records 22,500
4. lncome credited only in Financial A/c
- lnterest on Securities 17,000
- Profit on Sale of Assets 1,20.000
2,75,500
Less:
1. [Vlaterials Consumed under recovered in Cost Records 50,000
2. Over Valuation of Closing Stock in Cost Records 9,000
3. Selling and Distribution Overhead under recovered in Cost Records 12,000
4. Expenses debited only in Financial Profit and Loss A/c
- lnterest on Loan 14,000
- lncome Tax 7.500
Profit as r Financial Accounts 1,93,000
!llustration 19 :
Following is the summarised Profit and Loss Account of M/s Star Manufacturing Co. Ltd. for the year
ended 31 st Dec. 201 4.
Profit and Loss Account for the year ended 31st Dec., 20'14
Particulars ( Pafticulars
To Wages 1,51,000 By Sales (12,000 units) 6,00,000
To Materials used 2,74,O00 By Closing Stock of Finished Goods 16,000
To Factory Expenses 83,000 (400 units)
To Expenses on Administration 38,240 By Closing Stock of
To Selling Expenses 45,000 Work-in-Progress 12,000
To Goodwillwritten off 2,000 By Dividend Received 1,800
To Prelimlnary Expenses written off 4,000
6,29,800 6,29,800
ln the cost accounts :
1. Factoiy expenses have been allocated to the production at 20% on prime cost.
2. Expenses of administration at { 3 per unit produced.
3. Selling expenses at { 4 per unit sold.
You are required to prepare Cost Sheet of the company and reconcile the profits disclosed by Cost
Accounts and those shown by Financial Accounts. (T.Y.B.Com., Oct.20l5, adapted)
Solution :
M/S STAR MANUFACTURING CO. LTD.

Cost Sheet Forthe Year Ended 31st December2Ol4
[Production :'l2,4OO units and Sold :12,000 units]
STEP ELETIENT OF CAST r (
A. Direct Material
Materials Used 2,74,OOO
B. Direct Wages 1,51 ,000
20"k ot Prime Cost 85,000
Less : Closing stock of Work-in-Progress 12, 73,000
Reconciliation of Cost and Finqncial Accounts 383
E. FACTORY/WORKS COST 4,98,000
F. AdministrativeOverheads (t 3 p.u. produced)
12,400 units x { 3 per unit 37,200
H. Less : Closing Stock of Finished Goods
/i { 5.35.200
'--'-- x400unitsl r
\ 12,400 units )
(17,265)
I. COST OF GOODS SOLD 5,17,935
J. Selling Expenses : (( 4 p.u. sold)
12,000 units x { 4 per unit 48,000
K. COST OF SALES 5,65,935
L. PROFIT 34,065
M. SALES 6,00,000
Statement of Reconciliation for the Year Ending 31-12-2014
f
Net Profit as per Cost Accounts 34,065
Add:
'l . Dividend received recorded in P & L A,/c only 1,800
2. Factory overheads over recorded in cost accounts
(<85,000-<83,000) 2,000
3. Selling overheads over recorded in cost accounts
(<48,000-{45,000) 3,000 6,800
40,865
Less:
1. Administration overheads under recovered in cost accounts
(<38,240-<37,200) 1,040
2. Goodwill written off recorded in Financial accounts only .. ... ... .. 2,000
3. Preliminary expenses written off recorded In financial
accounts only 4,000
4. Closing stock adjustment ({ 17,265 - < 16,000) 1.265 (8,30s)
Net Profit as per Financial Accounts 32,560
lllustration 20 :
Following is the summarised Profit and Loss Account of Govind lndustries Ltd. for the year ended
31-3-2016.
Profit and Loss Account for the year ended 31-3-2016
Particulars f Particulars ?
To Direct lVlaterial 20,000 By Sales (6,000 units) 48,000
To Wages 7,540 By Closing Stock of Finished Goods 6,600
To Factory Expenses 5,460 (1,500 units)
To Office Overheads 5,250 By lnterest on lnvestments 17,700
To Selling & Distributlon Overheads 9,600 By Profit on Sale of Furniture 12,000
To Interest on Loan 1,400
To lncome Tax 750
84,300 84,300
The cost accounting records for the above period showed the following :
1. Direct material @ t 5 per unit produced. .
2. Direct wages @ ( 6 per unit produced.

3. Factoryoverheadswereabsorbed @z1"hofcombinedcostof DirectMaterial andDirectWages.
4. Administrative overheads were absorbed @ < 2.5 per unit produced.
5. Selling and Distribution Overheads were absorbed @ < 3.5 per unit sold.
You are required to prepare the detailed Cost Sheet for the year ended 31-3-2016 and a Statement
of Fleconciliation. (T.Y.B.Com., Nov. 2016, adapted)
Solution :
GOVIND INDUSTRIES. LTD.

[Output : 7,500 units]
a
A. Direct Material 37,500
B. Direct Labour 45,000
C. PRIME COST 82,500
25"h ol Prime Cost 20,625
E. FACTORY/WORKS COST 1 ,03,'r25
F. Office and Administrative Overheads
7,500 units x ? 2.50 per unit 18,750
H. Less : Closing Stock of Finished Goods
( <t
'zt 'a75
x 1.500 units l
[ 7,500 units )
5
I. COST OF GOODS SOLD 97,500

J. Selling and Distribution Overheads
6,000 units x { 3.5 per unit 21,000
K. COST OF SALES 1,18,500
L. LOSS (Bal. Fig.)
M. SALES / SELLING PRICE 48,000
Statement of Reconciliation for the Year Ending 31-12-2014
Net Profit as per Financial Accounts 34,300

Add:
1. Expenses debited to Financial fucs only
lncome Tax 750
2. Closing Stock of Finished Goods under valued
in Financial Alcs (24,375 - 6,600) 17.775 19,925
54,225
Less:
1. ttlaterials over recovered in Cost Accounts (37,500 - 20,000) 't7,500
2. Wages over recovered in Cost Accounts (45,000 - 7,540) 37,460
3. Factory Overheads over recovered in Cost Accounts (20,625 - 5,460) 15,165
4. Office Overheads over recovered in Cost Accounts (.l8,750 - 5,250) 13,500
5. Selling and Distribution over recovered in Cost Accounts
(21,000 - 9,600) 11 ,400
6. lncome Credited only in Financial Accounts :
- lnterest on lnvestments 17,700
- Profit on Sale of Furniture 12,000 1,24,725)
Net Loss as r Cost Accounts 70,500
Reconciliation of Cost and Financisl Accounts J85
10.6 PREPARING P & LA/C + COST SHEET

lllustration 21 :
From the following particulars prepare:

(a) A Statement of Cost of tt/anufacture for the year ended 2013;
(b) A Statement of Profit as per Cost Accounts;
(c) Profit and Loss Account in the Financial Books; and
(d) Show how you would attribute the difference in the profit as shown by (b) and (c).
Particulars
Opening stock of Raw Materials 2,88,000
Opening stock of Finished Articles 5,76,000
Purchases of Raw Materials 17,28,OOO
Stock of Raw tVlaterials at the end 4,32,000
Stock of Finished Ar.ticles at the end 1,44,000
7,20,000
Calculate factory oncost al2O"/o on prime cost, and office on cost at 80% on factory on cost. Actual
works expenses amounted to { 4,54,300 and office expenses amounted to ( 3,71,900. The selling
price was fixed at a profit o'f 207" on cost.
Solution :
Cost Sheet
ELEMENT OF COST
Direbt lVlaterials
Purchases 17,28.000
20,16,000
Less : Closing Stock 4.32,000
lt/aterial Consumed 15,84,000
Direct Wages
PRIME COST 23,04,000
Factory Overheads (20"/" on Prime Cost)
WOHKS COST 27,64,800
Office Overheads (80% of Factory Overheads)
COST OF PRODUCT!ON 31,33,440
Finished Goods :
Add :Opening Stock
37,09,440
Less : Closing Stock
COSTING PROFIT (20% of Cost)
SALES 42,78,528
Profit and Loss Account in Financial Books
Particulars r Particulars {
To Opening Stock: By Sales 42,78,528
Raw Materials 2,88,000 By Closing Stock :
Finished Adicles 5,76,000 Raw materials 4,32,000

To Purchases 17,28,000 Finished Articles 1,44,000
To Wages 7,20,000
To Works expenses 4,54,300
To Office expenses 3,71,900
48,54,528 ,54,528
386 C ost Ac co unting (T. Y B. Co m. : S EM-V)

Particulars ?
Add :
Overheads Under recovered in Cost A,/cs
- Office overheads (3,71,900 - 3,68,640) 3,260
7,19,588
Less :
Overheads Over recovered in Cost fucs
- Factory overheads (4,60,800 - 4,54,300) 6,500
COST!NG PROFIT 7,13,088
lllustration 22 :
The following data is available f rom the financial accounts of a firm for the year ending 31st December,
201 3.
Particutars
Material Consumed 5,20,000
Factory Expenses 3,60,000
Administration Expenses 5,00,000
Selling and Distribution Expenses 9,60,000
Bad Debts written off 40,000
Loss on Sale of lnvestments 30,000
lnterest and Dividend received 1,20,000
Sales [1,20,000 Units] 19,20,000
Closing stock [40,000 Units] 4,00,000
Work in progress 31-12-2013 1,60,000
The following information was revealed by the cost accounts :
(1) Direct Materials consumption was { 5,70,000.
(2) Factory Overheads were taken dl 2Oo/" on Prime Cost.
(3) Administration expenses have been taken at { 4 per unit of production.
(4) Selling and Distribution Expenses were taken at ? 6.50 per unit sold.
Prepare : (a) Statement of Cost and Profit. (b) Financial Profit and Loss Account.
(c) Statement reconciling the difference in profiUloss as per cost records and as perfinancial accounts.
Solution : (SrBAE Oct. 2OlS, adapted)
Statement of Cost and Profits
COST
Direct Materials Consumed 5,70,000
Direct Wages 2,40.000
PRIME COST 8,10,000
Factory Overheads (20% ol 8,1 0,000) 1,62,000
Work in Progress :
Add : Opening Stock Nit

Less : Closing Stock '1.60.000 2,000
WORKS COST 8,12,000
Administrative Overheads (1,60,000 Units x t 4) 6.40.000
COST OF PRODUCTION (1,60,000 Units) 14,52,OO0
Finished Goods :
Add : Opening Stock Nit
Less : Closing Stock (40,000 Units)
14.52.000
1,60,000
COST OF GOODS SOLD (1,20,000 Units) 10,89,000
Sales/Distr. Overheads (1,20,000 Units x < 6.50) 7.80.000
SALES 19.20.000
Financial Profit and Loss Account
Pafticulars fl Pafticulars :
f
To Materials 5,20,000 By Sales 19,20,000
To Wages 2,40,000 By Closing Stock 4,00,000
To Factory Expenses 3,60,000 By Work in Progress 1,60,000
To Administration Expenses 5,00,000 By lnterest & Dividend 1,20,000
To Selling & Distribution Exp. 9,60,000 By Loss 50,000
To Bad Debts doff 40,000
To Loss on Sale of lnvestments 30,000
26,50,000 265opOO
Statement of Reconciliation Between Financial Loss and Costing profit
r
FINANCIAL LOSS 50,000
Add :
- lnterest & Dividend 1,20,000
Closing Stock Overvalued in Financial A,/cs 37,000
ct 4,00,000 - < 3,63,000)
2. Costs/Overheads Over recovered in Cost A,/cs
- Materials (5,70,000 - 5,20,000) 50,000
- Admn. Overheads (6,40,000 - 5,00,000) 1,40.000 3,47,000
3,97,000
Less :
1. Expenses/Losses/Approprialions Debited in Financial A,/cs only
- Bad Debts Moff 40,000
- Loss on Sale of lnvestments 30,000
- Factory Overheads (3,60,000 - 1,62,000) 1,98,000
- Selling & Distribution Overheads (9,60,000 - 7,80,000).. ... ... . 1.80.000 4,48,000
lllustration 23 :
From the following details-of KT & Co. compute profit as per Prolit & Loss A/c as well as, as per cost
sheet and reconcile profit between cost sheet and Profit & Loss fuc showing clearly the reasons for
the variation of the two profit figures.
{
Sales 20,000
Purchase ol material 3,000
Closing Stock of material 500
Direct Wages 1,000
lndirect Wages 500
lndirect Factory Expenses 2,000
Bad Debts 100
lnterest on Overdraft 50
Profit on sale of Assets 1,000
Distribution Expenses 1,000
ln cost sheet manufacturing overheads are recovered at 300% of direct wages, selling overheads at
< 1,500 and distribution overheads at t 700. (SYBAE Oct. 2016, adapted)
Solution
Cost Sheet
a
Direct Materials
Purchases 3,000
Less : Closing Stock
Consumption 2,500
Direct Wages
PRIME COST 3,500
Works Overheads (Direct Wages x 3)
WORKS COST 6,500
Administration Overheads
COST OF PRODUCTION 6,500
Sales/Distribution Overheads (1,500 + 700)
COST OF SALES 8,700
PROF!T 11 ,300
SALES 20,000
Dr. Trading, Profit and Loss Account Cr.
f Particulars a
Purchases 3,000 Sales 20 ,000
Wages 1,000 Profit on Sale of Asset 1 ,000
lndirect Wages 500 Closing Stock [RM] 500
Sales Expenses 2,000
Distribution Expenses 1,000
lnterest 50
Bad Debts 100
9,650
Net Profit c/d 11,850
21,500 21,500
Reconciliation Statement
f
FINANCIAL PROFIT 11 ,850
Add:
1. ltems Debited in Financial A,/cs only
- lnterest 50
- Bad Debts 100
2. Under-recovery in Cost A/c
- Sales & Distribution Overheads (2,000 + 1,000 - 2,2oo) ... ... .. 800 950
12,800
Less:
1. lncome Credited only in Financial A,/cs
- Profit on Sale of Assets 1,000
2. Over-recovery in Cost A/c
- Factory Overheads (3,000 - 500 - 2,000) 500 1,500
lllustration 24 :
M/s Enthusiasts commenced business on 1st April, 2013. Cost and Financial records are maintained
for the year ended 31st tr4arch, 2014. From the following information prepare statements :
(a) Showing the result as per costing records.
(b) Showing result as per financial records and
(c) Reconciling these results.
Reconciliution of Cost and FinancialAccounts 389
Material consumed (20,000 Kgs.) { 28.50 per Kg. ( 26 per Kg.

Direct Wages (3,000 man days) ? 80 per man day { 85 per man day
Factory Overheads 207" of the Prime Cost < 3,60,000
Administrative Overheads t 30 per Kg. of output < 4,00,000
Produced
Sales Overheads ( 50 per Kg. of output sold { 9,60,000
Stock (of output produced) as on At Cost of Production < 1,50,000
31.03.2014 2,000 Kgs.
Work in Process as on 31 .03.2014 < 1,62,000 < 1,62,000
Sales (16,000 Kgs.) { '130 per Kg. < 129.50 per Kg
Rent lncome < 1,20,000
lncome-tax < 30,000
Solution : (TYB.Com., Mar. 2004, adapted)

M/S:ENTHUSIASTS
(Quantity produced 18,000 Kgs.)
(a) Cost Sheet for the Year Ended 31st March 2014
Cost
Material consumed (20,000 x 28.50) 5,70,000 31.67
Direct Wages (3,000 x 80) 13.33
PRIME COST 8,10,000 45.00
Add: Factory oncost/overheads (20% x 8,10;000) 9.00
9,72,000 54.00
Less: Closing Stock of work-in-progress 9.00
FACTORY/WORKS COST 8,10,000 45.00
Add : Administrative overheads (18,000 x 30) 30.00
COST OF PRODUCTION 13,50,000 75.00
Less : Closing stock of finished goods (2,000 x 75)
COST OF GOODS SOLD 12,00,000 '75.00
Add : Selling overheads (16,000 x 50) 50.00
TOTAL COST 20,00,000 125.00
Add: PROFIT 5.00
SALES (16,000 x 130) 20,80,000 130.00
Note:Quantityproduced=Sales+Closingstock-Openingstock=16,000+2,000-NlL=18,000
(b) Trading, Profit & Loss Account for the Year Ended 31st March 2014
Pariiculars a Pafticulars {
To Material Consumed (20,000 x 26) 5,20,000 By Sales (16,000 x 129.50) 20,72,O00
To Direct Wages (3,000 x 85) 2,55,000 By Rent lncome 1,20,000
To Factory Overheads 3,60,000 By Closing Stock
To Administration Overhead 4,00,000 Finished Goods (2,000 x 125) 1,50,000
To Sales Overheads 9,60,000 Work-in-Progress 1,62,000
To lncome-tax 30,000 By Net Loss 21,000
25,25,000 25,25,000
f a
Add:
(1) Material consumed overabsorbed in cost books 50,000
(2) Administrative overheads overabsorbed in cost books ... 1,40,000
(3) Rent income recorded in finance books only 1,20.000 3,10,000
3,90,000
Less :
(1) Wages Under recovered in cost books 15,000
(2) Factory overheads under recovered in cost books 1,98,000
(3) Selling overheads under recovered in cost books 1,60,000
(4) lncome-tax in finance books only 30,000
(5) Sale Price per unit higher in Cost Books @ t 0.50
(< 130 - < 129.50) 8.000 (4,11,000)
FINANCIAL LOSS lr1-ooo)
lllustration 25 :
The following figures have been extracted from the Financial Accounts of Bawa Manufacturing
Company for the first year of its operations :
fl
Direct Material Consumption 50,00,000
Administrative Overheads 7,00,000
Selling & Distribution Overheads 9,60,000
Provision for Bad Debts 80,000
Donations 40,000
Dividend Received 1,00,000
lnterest received on Deposits 20,000
Sales (1,20,000 units) 1;20,00,000
Closing Stock :
Finished Goods (4000 units) 3,20,000
Work in P 2,40,000
The Cost Accounts for the same period reveal that the Direct Material consumption was t 56,00,000.
Factory overheads are recovered al20/" on Prime Cost. Administrative overheads are recovered at
(
? 6 per unit of production. Selling & Distribution overheads are recovered at 8 per unit sold.
Prepare the Profit & Loss Account as per Financial Records and cost sheet as per cost records.
Reconcile the prolit as per the two records. The cost accounts value closing stock of linished goods
at cost of production. (TY.B.Com., Oct. 2004, adapted)
Solution :
Cost Sheet
ELEMENT OF COST f, fl
A. Direct Materials 56,00,000
B. Direct Wages 30.00,000
C. PRIME COST [A + B] 86,00,000
D. Works Overheads @ ZOY" ol Prime Cost 17,20,OOO
Less : Closing Stock of work-in-progress 2.40,000 14:80.000
E. WORKS COST [C + D] (1,24,000 Units) 1,00,80,000
F. Office and Administration Overhead @ { 6 each 7,44.OO0
G. COST OF PRODUCTION [E + F] 1,08,24,000
H. Less : Closing Stock of Finished Goods (4,000 units) ,161
l. COST OF GOODS SOLD [G - H] (1,20,000 Units) 1,04,74,839
J. Sales and Distribution Overhead @ ( 8 each ,000
K. COST OF SALES [ + J] (1,20,000 Units) 1 ,14,34,839
L. COSTING PROFIT (Balancing Figure) 5,65,161
M. SALES [K + L] (1,20,000 Units) 1,20 000
Valuation of Closing Stock of Finished Goods
= ''9?'?1'9=oo
1,24,000
x 4,ooo = 3,4e,161
Dr. Trading, Profit & Loss Account Cr.
Particulars lr Particulars fry

To Material Consumption 50,00,000 By Sales 1,20,00,000
To Wages 30,00,000 By Closing Stock
To Factory Expenses 16,00,000 - Finished Goods 3,20,000
To Administrative Expenses 7,00,000 - Work-in-Progress 2,40,0OO
To Selling Expenses 9,60,000 By lnterest on Deposits 20,000
To Bad Debts 80,000 By Dividends 1,00,000
To Donations 40,000
1,26,80,000 1,26,80,000
Statement of Reconciliation Between Financial Profit and Costing profit
a
Add:
1. Expenses / Losses / Appropriations Debited in Financial A,/cs only
- Bad Debts 80,000
- Donations 40.000 1,20,000
2. Over-valuation of Closing stock in Cost A,/cs (3,49,161 - 3,20,000) 29,161
14,49,161
Less :
- lnterest received 20,000
- Dividends 1,00,000
2. Cost Over recovered in Cost A,/cs
- Material Consumption 6,00,000
- Factory Overheads 1,20,000
- Administrative Overheads 44,000 8,84,000
lllustration 26 :
Following is the Trading and Profit and Loss Account of ItI/s Vishal Enterprises for the year ended
31-3-2014.
7 Particulars 7
To Opening Stocks (500 units) 17,500 By Sales (10250 units) 7,17 ,500
To Materials 2,60,000 By Closing Stock (250 units) 12,500
To Wages 1,50,000
To Factory Overheads 94,750
To Gross Profit c/fd 2,O7,750
7,30,000 7,30,000
To Administrative Overheads 1,06,000 By Gross Profit c/d 2,07,750
To Selling Overheads 55,000 By Dividend Received on
To Loss on Revaluation of Assets 9,000 lnvestments 't0,250
Total 2,18,000 2,18,000
ln Cost Accounts, materials charged @ < 251- per unit and wages @ < 15/- per unit. Factory overheads
taken @ 60% of wages. Administrative overheads applied @ 20% of works cost. Selling overheads
taken @ ( 6/- per unit sold.
(a) Statement of Cost showing total cost and cost per unit.
(b) Statement of Reconciliation of Profit / Loss. (T.Y.B.Com., Oct. 07, adapted)
Solution :
Cost Sheet
Total units CPU

A. Direct Materials 2,50,000 25.00
B. Direct Wages 1,50,000 15.00
C. PRIME COST 4,00,000 40.00
D. Works Overheads 90,000 9.00
E. WORKS COST 4,90,000 49.00
F. Admn. Overheads 98,000 9.80
G. COST OF PRODUCTION 5,88,000 10,000 58.80
H. Finished Goods (At COP)
Add : Opening Stock 17,500 500 35.00
Less : Closing Stock (14,700) (250) 58.80
I. COST OF GOODS SOLD 5,90,800 10,250 57.64
J. Sales/Distr.Overheads 61,500 6.00
K. COST OF SALES 6,s2,300 10,250 63.64
L. PROFTT / (LOSS) 65,200 6.36
M. SALES 7,17 ,500 10,250 70.00
? {
A. COSTING PROFIT 65,200
B. ADD
1. Dividend Received 10,250
2. Selling & Distribution OH
Costing 61,500
Financial 55,000 6,500 16,750
81,950
C. LESS
1. Loss on Revaluation 9,000
2. Material
Financial 2,60,000
Costing 2.50.000 10,000
3. Factory OH
Financial 94,750
Costing 90.000 4,750
4. Administrative OH
Financial 1,06,000
Costing 98.000 8,000
5. Closing Stock
Costing 14,700
Financial 12,500 2,200 33,950
D. FINANCIAL PROFIT 000
Illustration 27 : (Cost Sheet for Many Products)
Find out the profit as per costing records and financial accounts lrom the following information and
reconr:ile the results.
Number of Units produced and sold 600 400

Total direct materials 3,600 2,800
Total direct wages 3,000 2,400
Selli unit 25 30
The works oncost is charged at 80% of the direct wages and office oncost al25o/o of works cost. The
actual works expenses amounted to { 4,500 and office expenses { 3,900. There was no opening or
closing stock.
Reconcilistion of Cost and Financial Accounts 393
Solution :
Cost Sheet
Total
f, ( t
Direct Materials 3,600 2,800 6,400
Direct Wages 3.000 2.400 5.400
PRIME COST 6,600 5,200 11 ,800
Works Overheads (@ 80% of Wages) 2.400 1.920 4.320
WORKS COST 9,000 7,120 16,120
Off ice/Adrnin istration Overheads
(@ 25Y" of Works Cost) 2.250 1.780 4.030
COST OF PRODUCTION 11 ,250 8,900 20,150
COST]NG PROFIT 3,750 3.100 6,850
SALES 15,000 12,000 27,000
Financial Profit and Loss Account
f Particulars
To Materials 6,400 By Sales 27,000
To Wages 5,400
To Works Expenses 4,500
To Office Expenses 3,900
To Net Profit 6,800
27,000 27,O00

Add :
Overheads Under recovered in Cost A,/cs
- Works Overheads (4,500 - 4,320) 180
6980
Less :
Overheads Over recovered in Cost A,/cs
- Ofiice Overheads (4,030 - 3,900) 130
EXERCISES
OUTLINE
No. Topic Page
11. Theory Questions [15 Marks] 394
11.1 Descriptive Questions [7 or B Marks] 394
11.2 Short Notes [5 tvlarks] 394
Objective Questions 39s
12.1 ltllultiple Choice Questions 395
12.2 Fill in the Blanks 397
12.3 Match the Following Columns 398
12.4 State Whether True or False 399
12.5 Check Your Answers 399
Practical Problems 400
13.1 Answer in Brief flnternalTests] 4oa
13.2 From Financial and Cost Accounts [7 or B [t/arks] 402
13.3 From Costing Profit Figures [7 or 8 Marks] 403
13.4 From Financial Profit Figures [7 or B Marks] 403
13.5 From P & L A/c + Cost Profit Figure [7 or B Marks] 404
13.6 From P & L A/c + Cost Sheet to be Prepared [15 Marks] 405
13.7 Preparing P & L A/c + Cost Sheet [15 Marks] 407
14, Check Your Answers Step-By-Step 4',11
11. THEORY QUESTIONS [15 MARKSI
11.1 DESCRTPTTVE QUESTTONS [7 OR 8 MARKSI

1. Enumerate any'10 ltems of Reconciliation between Financial Statements and Cost Records.
(Apri12000,2003) [Ans.: Para 2]
2. Why do Cost Accounts and Financial Accounts disclose different profit/loss for the same
accounting year ? (Oct. 2000) [Ans.: Para 2]
3. Enumerate the reasons for differences between Financial Profit and Cost Profit.
(Oct. 06,Mar.09) [Ans.: Para 2]
4. Describe the purpose of Reconciliation of Cost and Financial Accounting. (Mar. 07)
[Ans.: Para 2]
1. ltems oI Reconciliation between Cost and Financial Accounts [Ans, Para 2l
2. Reasons for difierence between Cost and Financial Accounts [Ans. Para 2l
3. Purpose of Reconciliation between Cost and Financial Accounts [Ans. Para 2l
4. lmportance of Reconciliation Statemenl (Oct.09) [Ans, Para 2l
Reconcilintion of Cost and Finunciul Accounts 395
12. OBJECTIVE QUESTIONS
,12.i MULTIPLECHOICE QUESTIONS
A. Conceptual
1. ln Reconciliation statement, Expenses shown only in Financial Accounts are
(a) added to financial profit (b) deducted from financial profit
(c) ignored ' (d) added to costing profit
2. ln Reconciliation Statement, Expenses shown only in Cost Accounts are
(a) added to linancial profit (b) deducted from financial profit
(c) ignored (d) deducted from costing profit
3. ln Reconciliation Statement, transfers to reserves are
(c) ignored (d) added to costing profit
4. ln Reconciliation Statement, Incomes shown only in Financial Accounts are
(c) ignored (d) deducted lrom costing profit
5. ln Reconciliation Statement, Closing Stock Undervalued in Financial Accounts is
(c) ignored (d) added to costing profit.
6. ln Reconciliation Statement, Closing Stock Overualued in Financial Accounts is
7. ln Reconciliation Statement, Opening Stock Overualued in Financial Accounts is
(a) added to financial profit (b) deducted from financial prolit
8. ln Reconciliation Statement, Opening Stock Underualued in Financial Accounts is
(c) ignored (d) deducted from costinE profit
9. ln Reconciliation Statement, Depreciation Overcharged in Financial Accounts is
10. ln Reconciliation Statement, Depreciation Undercharged in Financial Accounts is
11. ln Reconciliation Statement, Overheads Under-Recovered in Cost Accounts are
12.In Reconciliation Statement, Overheads Over-Recovered in Cost Accounts are
(a) added to financial profit (b) deducted lrom financial profit
13.|n Reconciliation Statement, Expenses shown only in Financial Accounts are
(a) added to costing profit (b) deducted from financial profit
(c) added to financial loss (d) deducted from costing profit
14.|n Reconciliation Statement, Expenses shown only in Cost Accounts are
(a) added to financial profit (b) deducted from costing profit
(c) deducted from financial loss (d) added to costing profit
15. ln Reconciliation Statement, lncomes shown only in Financial Accounts are
(c) deducted from financialloss (d) added to costing profit
16. ln Reconciliation Statement, Closing Stock Undervalued in Financial Accounts is
(c) added to financial loss (d) deducted lrom costing profit
396 Cost Acco itnting (T Y. B. Com. : SEM-I)
17. ln Reconciliation Statement, Closing Stock Overvalued in Financial Accounts is
(a) added to financial'profit (b) deducled from costing profit
18. ln Reconciliation Statement, Opening Stock Overualued in Financial Accounts is
19.1n Reconciliation Statement, Opening Stock Undervalued in Financial.Accounts is
20.ln Reconciliation Statement, Depreciation Overcharged in Financial Accounts is
2'l .ln Reconciliation Statement, Depreciation Undercharged in Financial Accounts is
(c) deducted from financialloss (d) added to costing profit
22. ln Reconciliation Statement, Overheads Under-Recovered in Cost Accounts are
23.ln Reconciliation Statement, Overheads Over-Recovered in Cost Accounts are
(c) deducted from financial loss (d) added to costing profil
24. ln Reconciliation Sthtement, Expenses debited only. in the Financial Accounts are
(a) added to Finacial Profit (b) deducted from Financial Loss
(c) deducted from Costing Profit (d) added to Costing Loss
(e) any of the above
25. ln Reconciliation Statement, Closing Stock Undervalued in Financial A/cs is
(a)added to Finacial Profit (b) deducted from Financial Loss
(c) deducted from Costing Profit (d) deducted from Costing Loss
(e) any of the above except (d)
26.1n Reconciliation Statement, Opening Stock Undervalued in Financial A/cs is
(a) deducted from Financial Profit (b) added to Financial Loss
(c) added to Costing Profit (d) deducted from Costing Loss
(e) any of the above
27. ln Reconciliation Statement, Depreciation Undercharged in Financial A/cs is
(a) deducted from Financial Profit (b) added to Financial Loss
(c) deducted lrom Costing Profit (d) deducted from Costing Loss
(e) any of the above except (c)
28.ln Reconciliation Statement, Overheads Over-recovered in Cost A./cs are
(a) added to Finacial Profit (b) deducted from Financial Loss
(c) deducted from Costing Profit (d) added to Costing Loss
(e) none of the above
B. Numerical
29. Profit as per Financial Accounts 57,240
Over recovery of works overheads Z4O
Under recovery of office expenses 240
Reconciliation statement will show
(a) Profit as per cost Accoi;nts - s7,240 (b) profit as per cost Accounts - s7]20
(c) Profit as per cost Accounts - 56,760 (d) Loss as per cost Accounls - s7,240
30. Profit as per Financial Accounts 69,77,500
Under recovery of FOH 97,500
Over valuation of Closing Stock in Cost accounts 4,53,125
Over recovery of AOH 3,96,g75
Reconciliationof Costand FinuncialAcc,ounts 3g7
(a) Profit as per Cost Accounts - 68,36 250
(b) Prolit as per Cost Accounts - 61,25 000
(c) Profit as per Cost Accounts - 78,25,000
(d) Profit as per Cost Accounts - 70,31,250
31 . Profit as per Financial Books g,2g,7SO
Factory overheads in cost accounts 2,O0,OOO
Factory expenses in financial accounts 1,93,750
Office overheads under-absorbed in cost accounts 2,500
(a) Profit as per cost Accounts - ( 3,37,500 (b) Profit as per cost Accounts - { 3,32,500
(c) Profit as per cost Accounts - ( 3,25,000 (d) Profit as per cost Accounts - ( 5,20,000
32. Profit as per cost records < 43,000
Works overhead less charged < 1,000
Office expenses overcharged { 8,000
(a) Profit as per financial books t 52,000 (b) Profit as per financial books { 34,000
(c) Profit as per financial books { 50,000 (d) Profit as per financial books t 36,000
33. Profit as per Cost Accounts 1 ,10,400
Over-absorption of administrative overheads in cost accounts 30,000
Dividends received recorded in financial accounts only 6,000
Over valuation of closing stock 32,400
Unde,r absorption of direct Expenses in c:ost accounts 48,000
Reconciliation statement will shbw
(a) Profit as per financial accounts < 66,000 (b) Profit as per financial accounts ( 6,000
(c) Profit as per financial accounts < 54,C)00 (d) Profit as per financial accounts { 1,62,000
34. Profit as per cost accounts 4,000
lncome from investments in financial accounts 10,000
Wages underabsorbed in cost accounts 5,000
Loss on sale of fixed assets in financial accounts 20,000
(a) Loss as per financial accounts < 21,000 (b) Profit as per financial accounts < 11,000
(c) Loss as per f inancial accounts < 11 ,000 (d) Profit as per financial accounts < 29,000
35. Loss as per cost records 1,47 ,440
Loss on sale of Fixed Assets 8,40,000
lncome From lnvestments .4,00,000
(a) Loss as per Financial records - 13,87,44O(b) Profit as per financial records - 2,92,560
(c) Profitasperfinancial records-5,87,4,+0 (d) LossasperFinancial records-587,440

1. lnterest paid on Loans appears only in (financial / cost) accounts.
2. Notional Remuneration to Owner appears only in (financial / cost) accounts.
3. Discount on lssue of Debentures appears - only in (financial / cost) accounts.
4. Notional lnterest charged to ownerfor drawings appears only in (financial /cost) accounts.
5. Loss on sale of lnvestment appears only in (financial / cost) accounts.
6. lncome Tax appears only in (financial / cost) accounts.-
7. Dividend received appears only in (financial / cost) accounts.
8. Damages awarded by Court appear only in (financial / cost).accounts.
9. Expenses which appear only in Cost Accounts and not in Financial Accounts are generally
(notional / actual) items.
10. Under system, there is no need of reconciliation of cost and financial accounts.
12.3 MATCHTHE FOLLOWING
tAl COLUMN A COLUMN B

1. lnterest paid on Loans (a) lncome credited only in Cost Accounts
2. Donations (b) Expenses debited only in the Financial
3. lnterest Received on Loans Accounts
4. Notional lhterest on Owner's Capital (c) Debited in both financial and cost
5. Notional lnterest charged to owner accounts
for drawings (d) lgnored in both financial and cost
accounts
(e) Appropriations only in Financial Accounts
(f) lncome credited only in Financial
Accounts
(g) Credited in both financial and cost
accounts
(h) Expenses debited only in Cost Accounts
tBI COLUMN A COLUMN B

1 lnterest paid on Debentures (a) lncome credited only in Financial
2 Writing Off Goodwill Accounts
3 lnterest Received on Fixed Deposits (b) lncome credited only in Cost Accounts
4 Notional Remuneration to Owner (c) Expenses debited only in the Financial
5 Notional Rent charged to owner Accounts
(d) Credited in both financial and cost
accounts
(e) lgnored in both financlal and cost
accounts
(f) Expenses debited only in Cost Accounts
(s) Appropriations only in Financial Accounts
(h) Debited in both financial and cost
accounts
tcI COLUMN A COLUMN B

1 lnterest paid on Fixed Deposits (a)- Income credited only in Financial
2 Writing Off Preliminary Expenses Accounts
3 Dividend Received on lnvestments (b) Credited in both financial and cost
made in Shares accounts
4 Notional Rent charged to Owner (c) Excess profits as per Cost Accounts
5 Costing Closing stock over-valued (d) Expenses debited only in the Financial
Accounts
(e) Expenses debited only in Cost Accounts
(f) Debited in both financial and cost
accounts
(s) lgnored in both financial and cost
accounts
(h) Appropriations only in Fihancial Accounts
tDI COLUTTN A COLUMN B

1 Expenses on lssue of Shares (a) lncome credited only in Cost Accounts
2 Machinery scrapped (b) Debited in both financial and cost
3 Premium on lssue of Shares accounts
4 lncome Tax (c) Credited in both financial and cost
5 Overh eads over-recovered accounts
(d) Losses debited only in the Financial
Accounts
(e) lgnored in both financial and cost
accounts
(f) Appropriations only in Financial Accounts
(s) Less profits as per Cost Accounts
(h) Expenses debited only in the Financial
Accounts
(i) lncome credited only in Financial
Accounts

1. Profit as per cost accounts is the same as profit as per the financial accounts.
2. Notional interest on Owner's capital appears only in financial profit and loss a/c.
3. Goodwill written off appears only in cost accounts.
4. Overheads are taken on estimated basis in Financial Accounts.
5. Profitaspercostaccountsisthesameasprofitasperthefinancial accounts,incaseofintegrated
system of accounts.
6. Reconciliation of cost and financial accounts is necessary, in case of non-integrated system of
accounts.
7. Expenses which appear only in Financial Accounts and not in Cost Accounts are generally
notional items.
8. Need for Reconciliation arises in case of lntegrated System of Accounts.
9. Need for Reconciliation does not arise in case of Non-lntegral system of Accounts.
10. Closing Stock of finished goods in Cost Books is valued at cost or net realizable value whichever
lower.
11 .Closing Stock of work-in-progress in financial books is generally valued at cost of goods produced.
12.The under / over recovery of overheads may result in ditference between Financial profit and
Cost profit when such under / over recovery is charged to Costing Profit & Loss Account.
13. Divided paid is a financial income.
l4.Transfer to general reserve is credited to financial profit and loss a/c.
12.5, GHECK YOUR ANSWERS

12.1
1. (a) 6. (b) 11 (a) 16. (d) 21. (d) 26. (e) 31. (c)
2. (b) 7. (a) 12 (b) 17. (d) 22. (d) 27. (e) 32. (c)
3. (a) 8. (b) 13 (d) 18. (d) 23. (d) 28. (e) 33. (a)
4. (b) e. (a) 14 (d) 19. (d) 24. (e) 2e. (a) 34. (c)
5. (a) 10. (b) 't5 (d) 20. (d) 25. (e) 30. (d) 35. (d)
Hints :
29.157,240+240-24ol
30. [68,77,500 + 97,500 + 4,53,125 - 3,96,875]
31. [3,28,750 + 2,500 - (2,00,000 - 1,93,750)]
32. [43,000 - 1,000 + 8,000]
33. [1 ,10,400 + 30,000 + 6,000 - 32,4OO - 48,000]
34. [10,000 + 4,000 - s,000 - 20,000]
35.11,47,440 + 8,40,000 - 4,00,000I
400 Cost Acco unting (T Y.B. Com. : SEM-I)
12.2 (1) financial (2) cost (3) financial (4) cost (5) financial (6) financial (7) financial (8) financial
(9) notional (10) integrated
12.3 A: (1) - (b), (2) - (e), (3)- (f), (4)- (h), (s) -(a)
B: (1)-(c), (z) -(s), (3)- (a), (+)- (f), (s) -(b)
c : (1) - (d), (2) - (h), (3)- (a), (+)- (e), (5) - (c)
D: (1) - (h), (2)- (d), (3)- (i), (4) - (t), (s) - (s)
12.4 True : 5, 6
False : 1 , 2, 3, 4, 7, 8,9, 10, 11 , 12, 13, 14
13. PRACTICAL PROBLEMS
13.1 ANSWER rN BRIEF [INTERNAL TESTS]
Q.1 (Financial Profit Given) : The net profit shown by financial accounts of a Co. amounted to
< 37,100. The following details are available :
.?
(a) Directo/s fe-e not charged in cost accounts 1,300
(b) A provision for bad and doubtful debts 1,140
(c) Bank interest 60
(d) Overheads' in cost accounts were estimated at 17,000
The charge shown by financial books was 16,640
Prepare statement showing profit shown by the cost accounts.
[Ans.:37,100 + 1,300 + 1,140 - 60 - (17,0(n - 16,640) = 39,120]
Q.2 (Costing Profit Given) : The profit of a company appeared at t 86,352 as per costing records.
The following details are available I
(1) Depreciation charged in financial accounts t 5,600 and recovered in costs < 6,250.
(2) Loss of asset due to fire charged in financial records t 2,850.
(3) lncome tax paid < 20,150.
(4) Transfer fees received < 375.
Calculate the profit or loss as per financial records.
[Ans.: 86,352 + (6,250 - 5,600) + 375 - 2,850 - 20,150 = 64,377]
O.3 (P & L Extract Given) : The following extract of the profit and loss account is available :
Profit and Loss Appropriation Account For the Year Ending 31-12-2013
( Particulars f
To Fine 200 By Dividend Received 400

To Discount on debentures 100 By lnterest on bank deposit 150
The Net profit carried to the balance sheet is ( 17,940. Prepare statement showing profit shown by
the cost accounts.
[Ans.: 17,940 + 200 + 100 - 400 - 150 = 17,690]
O.4 (P & L A/c Given) : The financial Profit and Loss Account of a manufacturing Company for the
year ended 31st March, 2014 is as follows :
Parliculars f Parliculars {
To Work expenses 12,000 By Profit 39,000
To Administration expenses 4,500
To Selling and distribution expenses 6,500
To Debenture interest 1,000
39^0oo 39,000
Upon detailed comparison of the two sets of accounts it is found that -
(a) Amounts charged in the cost accounts - factory overheads t 11,500, Office overheads T 4,S9O,
Selling and distribution expenses < 6,640.
(b) No charge has been made in the cost accounts in respect of loan interest.
You are required to determine the profits shown by the cost accounts.
[Ans.:15,000+1,000+(12,000-tl,i00)-(4,590:4,SOO)-(6,640-6,500)=16,270]
Q.5 (Under/Over-recoveries Given) : The net profit of Cimmo Ltd. shown by Cost accounts for the
year ended 31st March, 2014 was < 2,28,000. A scrutiny ol the figures of the Financial Accounts and
Cost Accounts revealed the following facts:
Administrative overhead under recovered in Cest Accounts 3,700

Factory overhead over recovered in Cost Accounts 5,000
Depreciation over charged in Financial Accounts 10,000
Stores adjustment credited in Financial Account 2,000
Prepare a statement showing reconciliation between the figure of net profit as per Cost accounts
and the figure of net profit to be calculated for the Financial Account.
[Ans.: 2,28,000 + 5,000 + 2,000 - 3,700 - lO,OO:O = 2,21,300]
Q.6 (Financial Loss) : From the following figures prepare a reconciliation statement:
7
Net loss as per Financial records 2,08,045
Depreciation charged in Financial records 11 ,200
Depreciation recovered in Costing 12,500
Value of Opening Stock : Cost accounts 52,600
Financial Accounts 54,000
lnterest charged in cost accounts but not in Financial accounts 6,000
Preliminary expenses written off in Financial accounts 800
Calculate the figure of profit or loss as per cost records.
[Ans.:(2,08,045)+800+(54,000-52,600)-(12,500-11,200)-6,000=(2,13,145)]
Q.7 (Costing Profit) : From the following data compute profit or loss as per financial records-
Profit as per Cost accounts 1,1 8,500

Overvaluation of opening stock in Cost accounts 15,000
Overvaluation of closing stock in Cost Accounts 7,500
Rent received during the year 27,000
Bad debts written off during the year 9,000
[Ans.: 1,18,500 + 15,000 + 27,000 - 7,500 - 9,000 = 1,44,000]

Q.8 : From the following information find out Profit or Loss as per Cost Records :
Profit as per Financial Records 1,45,000

Overabsorption of lndirect Wages 12,000
Overvaluation of Opening Stock of Finished Goods in Cost Accounts ... ... 5,000
Excess Depreciation charged in Financial Accounts 3,500
Undera of Sel Overheads 7,500
tY.B.Com., Oct. 10, adaPted)

-
[Ans.: 1,45,000 + 3,500 + 7,500 12,000 - 5,000 = 71,39,000]
Q.9 : From the following information, find out Profit or Loss as per Financial Records :
r
Overabsorption of Selling and Distribution Overheads 3,000
Overvaluation of Closing Stock in Cost Accounts 13,800
Underabsorption of Office and Administrative Overheads 24,700
Loss as per Cost Accounts 85,000
Excess Depreciation charged in Financial Accounts 4,500
(T.Y.B.Com., Mar. 11, adapted)
[Ans.: (Ss,Odq + 3,000 - 24,700 - 13,800 - 4,500 = ? 1,25,000]
Q.l0 : From the following information find out Proflt and Loss as per Financial Accounts :
a
Loss as per Cost Records 12,900
Under recovery of Depreciation in Cost Account .:. ... .'. ... . 4,900
Notional Salary of Proprietor not considered in Financial Profit and Loss Account 12,000
Overvaluation of Closing Stock in Financial Accounts 1,200
Over absorption of Factory Overheads 7,000
(T.Y.B.Com., Oct. 11, adapted)
[Ans.: 12,900 + 4,900 - 7,000 - 1,200 - 12,000 = ? 2,400]
13.2 FROM FINANCIAL AND COST ACCOUNTS [7 or 8 MARKSI

Q.11 (Both Accounts show Profits) : The net profit of the Bharat Engineering Co. Ltd. appeared at
< 1,15,755 as per the financial records for the year ended 31-12-2013. The cost books, however,
showed a net profit ol 7 1 ,72,400 for the same period. A scrutiny of the figures lrom both setS of
accounts revealed the following facts:
.f
Work overhead under recovered in cost 3,120
Administration overhead over recovered 1,700
Depreciation charged in financial accounts 11,200
lnterest on investment not included in costs 8,000
Loss due to obsolescence charged in linancial A/c 5,700
lncome tax provided in financial accounts 40,300
Bank interest and transler fees in financial A/c 250
Stores adjustmenis (credit in financial accounts) 475
Loss due to depreciation in stock values (charged in financial accounts) .. 6,750
You are required to prepare a statement reconciling both the figures of net profits starting with
Costing Profit.
Q.12 (Both Accounts show Losses) : A manufacturing company disclosed a Net Loss of ( 5,72,000
as per their Cost Accounts for the year ended ilrlarch, 31 , 2O14. The Financial Accounts however
disclosed a net loss of { 8,84,000 for the same period. The following information was revealed as a
result of scrutiny of the figures of both the sets of Books :
(1 ) Factory overheads over-absorbed 16,000

(2) Administration overheads under absorbed 24,OOO
(3) Depreciation charged in Financial Accounts 2,20,000
(4) Depreciation charged in Cost Accounts 2,45,000
(5) lnterest on lnvestments not included in Cost Accounts 64,000
(6) lncome-tax provided 1,54,000
(7) lnterest on loan funds in Financial Accounts 2,63,000
(8) Transfer Fees (Credit in Financial Books) 16,000
Stores ustment (Credit in Financial Boo 8,000
Prepare a Reconciliation statemenl. (cA lnter, Nov. 2002, adapted)
Q.13 : The.net profit ol Mutual Company Limited as per financial records for the year ending with
30th June 2014 is < 1,03i850. The cost books however, showed a net prolit of ? 1,32,520 for the
same period.
The following facts were disclosed :
Works overheads over absorbed in cost books 2,980

Administration overheads under absorbed in books 1,250
lnterest on lnvestments 6,400
lncome tax provided in financial accounts 35,000
Transfer fees (Financial A/c) 500
Reconciliution of Cost and Financiul Accounts 403
Stock valuations as per cost books :
on 1-7-2013 materials 32,500

on 30-6-2014 materials 29,400
Stock valuation as per financial books
on 1-7-2013 materials 33,600
on 30-6-2014 materials 28,200
Prepare (i) a statement reconciling both the profits, and (ii) a Memorandum Reconciliation Account.
13.3 FROM COSTING PROFIT FIGURES [7 or8 MARKS]

Q.l4 : The following information is extracted from the Financial Accounts of a company for the year
ending on 31-12-2013:
Materials 5,000
Carriage 100
Factory charges 1,200
Selling expenses 650
Sales 12,400
Direct wages 3.400
Administration expenses 450
Debenture interest 100
The Cost Accounts showed a profit of { 1,627 forthe year. ln Cost Accounts indirect expenses are
recovered as under :
a
Works overhead 1 ,150
Office overhead 459
Selling and Distribution overhead 664
Prepare a Reconciliation Statement of Cost Accounts and Financial Accounts
13.4 FROM FINANCIAL PROFIT FIGURES [7 or'8 MARKS]

Q.15 : The net profit of a manufacturing company during a particular year appeared at ? 64,500 as
per financial records. The cost books however showed a different net profit. From the following
particulars prepare a reconciliation statement and asceftain the profits as per cost records.
f
Income tax provided in financial books 20,000
Bank lnterest in financial books (Cr.) 250
Administrative overheads over recovered 850
Works overhead under recovered 1,550
lnterest on investment in financial books (Cr.) 4,000
Q.l6 : The P & L A/c of M/s. A. G. Trading Corporation Ltd. showed net profit of t 9,00,000 for the
year ending 31st December 201 3. From the further examination of cost and financial records, the
following facts were discovered :
Works on cost under rdcovered in cost 16,240
Office expenses over recovered in cost 4,000
lnterest on loans advanced not included in cost 16,000
You are required to prepare reconciliation statement showing the profit as per costing books.
Q.l7 : The profit of M/s. E.C.Corporation as per financial records is { 2,00,000. The following details
ascertained on comparison of financial accounts with cost books:
Cost
{
Opening Stock :
Raw Materials 20,000 15,000
Finished Goods 18,000 20,000
Closing Stock :
Raw Materials 15,000 14,000
lndirect Expenses 90,000 85,500
The further details are as under :

(a) lnterest charged but not paid amounting to { 8,000 appears in cost books only.
(b) Preliminary expenses < 5,000 and goodwill < 6,000 is written off during the period.
(c) During the period dividend of t 1,700 was received from the Unit Trust of lndia.
(d) During the period under consideration, provision for income tax was made at < 30,000 and this
item does not appear in cost books. Find profit as percosting books by preparing a reconciliation
statement.
Q.l8 : The profit as per Financial Accounts is { 1,58,500. The following details are ascertained on
comparison of cost and financial accounts :
Cost Financial
Particulars Accounts Accounts
a f
(a) Qpening stock
Materials 32,600 33,000
Work in progress 20,000 21,000
(b) Closing stocks :
Materials 36,000 34,400
Work in progress 16,000 't5,200
(c) lnterest remitted - < 800
(d) lnterest charged but not considered in
financial accounts - < 6,000
(e) Preliminary expenses written off - { 13,000
(f) lndirect expenses charged in financial accounts are
< 1 ,21 ,20O but overheads recovered in cost
accounts is { 1,26,000
Find out the prolit as per Cost Accounts by drawing up a Reconciliation Statement.
13.5 FROM P & LA/C + COST PROFIT FIGURE [7 or 8 MARKS]

Q.l9 : A Firm's Trading and Profit and Loss Account was as follows
Pafiiculars 7 Parliculars a
To Purchases 25,210 By Sales : 50,000 units
Less : Closing stock 4.080 @ { 1.50 each 75,000
2't ,130 By Discount received 260
To Direct wages 10,500 By Profit on sale of Land 2,340
To Works expenses 12,130
To Selling expenses 7,100
To Administration expenses 5,340
To Depreciation 1,100
To Net profit 20,300
77,600 77,600
The profit as per ccist accounts was only < 19,770. Reconcile the financial and cost profits using the
following information :
(a) Cost accounts valued closing stock at < 4,28O.
(b) The work expenses in the cost accounts were taken at 100% of direct wages.
(c) Selling and administration expenses were charged in the cost accounts al 1Oo/o of sales and
{ 0.10 per unit respectively.
(d) Depreciation in the cost accounts was t 800.
Q.20 : The'financial Profit and Loss Account of a manufacturing firm for the year ended 31st March,
2014 is given below :
Reconciliution of Cost and Financial Accounts 40s
Pafticulars f, Pafticulars f
To Opening Stock: By Sales 4,60,000
Raw Materials 25,000 By Closing Stock
Finished Stock 40,000 Raw Materials 30,000
Work in Progress 12,500 Finished stock 15,000
To Purchase 1,20,000 Work in Progress 20,700
To Wages (factory) 30,000
To Electric Power (Factory) 6s,000
To Factory Overheads 45,000
5,25,700 5,25,700
To Selling and Administration By Gross Profit b/d 1,88,200
Expenses 46,500 By Miscellaneous Revenue 26,800
To Bad Debts 15,600
To lncome-tax 20,500
2,15,000 2,15,000
The cost accounts of the concern showed a profit of ( 1,32,200.
It is seen that the costing profit and loss account is arrived at on the basis of f igures furnished below:
Opening stock of Raw materials, Finished Stock and Work in progress < 90,800.
Closing stock of Flaw materials, Finished Stock and work in progress < 69,500.
You are required to prepare Memorandum Reconciliation Account and reconcile the difference in
the Profit and Loss Accounts.
Q.21 : The financial Profit and Loss Account of M/s Beta, for the year ended 31st December, 2013
is as follows :
a Particulars {
To Materials consumed 50,000 By Sales 1,24,000
To Direct Wages 35,000 By Share transfer fees 100
To Works Expenses 12,000
To Administration Expenses 4,500
To Sales and Distribution Expenses 6,600
To Loan lnterest 1,000
To Net Prolit 15,000
1,24,100 1,24,100
The Net Profit as shown by the Cost Accounts for the year is < 15,760.
Following additional informations are supplied :
(1) ln cost accounts, following estimated overheads were charged
(
Works expenses 11,500
Administrative expenses 4,590
Sales and distribution expenses 6,650
(2) ln cost accounts, the rent of owned building used in business was charged by { 500
Prepare reconciliation statement.
13.6 FROM P & LA/C + COST SHEET TO BE PREPARED [15 MARKS,

Q.22 : M/s. S. V. & Co. has furnished you the following information from the financial books for the
year ended 30th June, 2014.
Profit and Loss Account (Forthe year ended 30th June, 2014)
Pafticulars ? Particulars a
Opening Stocks: 500 Units 17,500 Sales 10,250 units 7,17,500
' at ( 35 each Closing stock : 250 units
Materials consumed 2,60,000 at { 50 each 12,500
Wages 1,50,000
406 Cost Accounting (TY. B. Com. : SEM-I)
Gross Profit c/d 3,02,500
7,30,000 7,30,000
Factory overheads Gross Profit b/d 3,02,500
't,06,000
Admn. overheads -,?50 lnterest
Rent received
250
10,000
Bad debts 4,000
Loss of Machinery by Fire 5,000
Net Profit 48,000
M 3,12,750
The cost sheet shows the cost of materials as { 26 per unit and the labour cost as ( 15 per unit. The
factory overheads are absorbed at 60% of labour cost and administration overheads al 2Oo/" ol
factory cost. Selling expenses are charged at ? 6 per unit. The opening stock of finished goods is
valued at { 45 per unit.
You are required to prepare :.
(i) A statement showing profit as per cost accounts for the year ended 30th June, 2014.
(ii) A statement showing the reconciliation of profit disclosed in cost accounts with the profits shown
in financial accounts.
Q.23 : M/s. Modern company Limited furnishes the summary of lncome and Expenditure for the
Year ended 31st December, 201 3.
{ Particulars (
To Raw Materials 1,39,600 By Sales 12,000 units 4,80,000
To Direct wages 76,200 By Finished stock 200 units 8,000
To Production overhead 42,600 By Work in progress :
To Selling & distribution overheads 42,700 Itlaterials 28,200
To Admn. overheads 39,100 Wages 11 ,796
To Preliminary expenses written off 2,200 Production overheads 7.999 47,995
To GoodwillWoff 2,501 By lnterest on Security (Gross) 6,000
To Dividend (net) 3,000
To lncome tax 4,100
5,41,995 5,41,995
The company manufactures a standard unit. Scrutiny of cost records for the same period shows
that:
(i) Factory overheads have been allocated to the production at 20% on prime cost.
(ii) Administration overheads have been charged at { 3 per unit on units produced.
(iii) Selling and distribution expenses have been charged at ( 4 per unit on units sold.
You are required to prepare a statement of cost and work out profit as per cost accounts and to
reconcile the same with that shown in the financial accounts.
Q.24 : Following is the Trading and Profit and Loss A,/c of a factory producing a particular unit.
Trading And Profit and Loss Account
( Pafticulars a
To tVlaterials 2,00,000 By Sales (1,00,000 units) 4,00,000
To Works expenses 60,000
To Office expenses 18,000
To Selling and distribution expenses 12,000
4,00,000 4,00,000
The normal output of the factory is 1,50,000 units. Works expenses are fixed to the extent of
< 36,000. Office expenses for all practical purposes are constant. Selling expenses. are variable to
the extent of { 6,000.
Prepare a cost sheet and a reconciliation statement.
Q.25 : Following is the Summarised Trading and Profit and Loss Account of Sheetal lndustries for
the year ended 31 -03-201 4.
Trading and Profit and Loss Account for the year ended 31-Og-2014
f, Particulars r
To Opening Stock of Raw Materials 9,000 By Sales (12000 Units) 4,80,000
To Purchases of Raw lr/laterials 2,10,000 By Closing Stock
To Carriage lnwards 5,000 Finished Goods (3000 Units) 66,000
To Wages 75,400 Raw Materials 24,000
To Factory Expenses By lnterest on Securities 17,000
Paid 52,400 By Profit on Sale of Assets 1,20,000
Add : Outstanding 2.200 54,600
To Administrative Overheads 52,500
To Selling and Distribution
Overheads 96,000
To Goodwill written-off 12,500
To lnterest on Loans 1,500
To Dividend 2,500
To lncome Tax 5,000
Total 7,O7,OO0 Total 7,07,000
A slandard unit was manufactured during the year. The cost accounting records showed the followings:
(a) Materials consumed @ ? 10 per unit produced.
(b) Direct Wages @ ( 6 per unit produced
(c) Factory Overheads were obserued @ 25o/" of Prime Cost.
(d) Administration Overheads were absorbed @ T 5 per unit produced.
(e) Selling and Distribution Overheads were absorbed @ ( 7 per unit sold.
You are required to prepare the detailed cost statement for the year ended 31 -3-2014 and a statement
of reconcilia'tion. (TYB.Com., Oct.2008, adapted)
13.7 PREPARING P & LA/C + COST SHEET [15 MARKSI

Q.26 : ln a.factory, the works overhead is absorbed at 60% of labour and office expenses @ 2O"/" ot
works cost. The total expenditure is as follows:
?
Materials 2,00,000
Labour 1,50,000
Office Expenses 85,000
5,33,000
10% of the output is in stock and the sales total up to { 5,10,000.
Prepare a cost sheet and a reconciliation statement.
[Ans.: Cost Sheet : Cost of Production '5,28,000;
Closing stock = 52,800 (10%); Costing Profit = 34,8001
Q.27 : From the following particulars prepare (a) a profit and loss account, (b) a statement showing
the cost of manufacture and percentage of each item of cost to total cost, calculating factory oncost
al 25o/" on prime cost and office oncost al 75"/" on factory oncost (c) a statement reconciling the
profit shown by cost accounts with that shown by the profit and loss account. The selling price is
fixed at cost plus 25%.
Particulars
Stock on 1st January 2013
Raw Materials 4,000
Finished Afticles 8,000
Works Expenses 7,750
Purchase of Raw Materials 24,000
Wages 10,000
408 Cost Accounting (TYB.Com. : SEM-V)
Sales 65,000
Office Expenses 6,1 00
Stock on 31st December 2013
Raw Materials 6,000
Finished Articles 2,000
Q.28 : The following figures have been extracted from the Financial Accounts of a Manufacturing
firm for the first year ol operation :
{
Direct Materials Consu mption 50,00,000
Admin istrative Overheads 7,00,000
Selling and Distribution Overheads 9,60,000
Bad Debts 80,000
Preliminary Expenses written off 40,000
Legal charges 10,000
Dividend received 1,00,000
lnterest received on Deposits 20,000
Sales (1,20,000 units) 1,20,00,000
Closing Stocks :
Finished Goods (4,000 units) 3,20,000
Work in Progress 2,40,000
The cost accounts for the same period reveal that the direct material consumption was T 56,00,000.
Factory overhead is recovered al 20"/" on prime cost. Administration overhead is recovered at { 6
per unit of production. Selling and Distribution overheads are recovered at { 8 per unit sold.
Prepare the Prof it and Loss Account both as per financial records and as per cost records. Reconcile
the profits as per the two records.
Q.29 : From the following particulars of M/s. Sporlstar, calculate the profit in (i) financial accounts,
(ii) cost accounts, (iii) reconciliation statement reconciling the profit as between cost accounts and
financial accounts showing clearly the reasons for the variation of the two profit figures
Parliculars fl
Sales 15,000
Purchase of raw materials 4,000
Closing stock of raw materials 1,000
Direct Wages 2,000
Preliminary expenses written off 250
Dividend received from Unit Trust of lndia 100
Profit on sale of investments 500
Penalty for the evasion of income tax 200
Selling Expenses 850
Distribution Expenses 400
ln cost accounts works overheads was recovered at 150% of direct wages. Selling overhead recovered
{'700. Distribution overhead recovered { 500.
Q.30 : The following balances have been extracted from the financial books of M/s. Bipin Bros.
Particulars Units
Sales 2,50,000 20,000
Materials 1,00,000
Wages 50,000
Office and Administration Overheads 26,000
Selling and Distribution Overheads 18,000
Closing Stock :
Reconciliation of Cost and Finuncial Accounts 409
Work in Progress :
Materials 3,000
Wages 2,000
Factory Overheads 2.000 7,000
lnterest on 2,000
ln costing books factory overheads is charged at 1OO% on wages, administration overhead allOo/o
of factory cost and selling and distribution at the rate of {
1 per unit sold. Prepare a statement
reconciling the profit as per cost and financial accounts.
Q.31 : The following figu.res are available from the financial accounts for the year ended 31st October,
201 3.
Direct material consumption 2,25,000

Diiect wages 80,000
Admin istrative overheads 2,25,000
Selling and distribution overheads 3,20,000
Bad debts 12,000
Legal charges 6,000
Preliminary expenses (written off) 10,000
lnterest on Deposit (received) 10,000
Sales 1,00,000 units 9,00,000
Closi stock of finished oods 1,25,000
The Cost Accounts reveal :
(1) Direct material consumption < 2,25,000 (including { 25,OOO for partly finished goods). Direct
Wages < 80,000 (including < 5,000 for partly finished goods).
(2) Factory overheads recovered al 20o/o on prime cost.
(3) Administrative overhead at { 2 per unit of production.
(4) Selling and distribution overhead at ( 3 per unit sold.
(5) Stock of partly finished goods is valued at factory cost as per Cost Accounts and the same value
is taken into consideration in Financial Accounts also.
(6) Closing stock of finished goods in Cost Accounts is taken as per the valuation in Financial
Accounts.
Prepare:
(1) Cost Sheet (2) Financial Profit and Loss Account (3) Statement reconciling the profits disclosed
by the Cost sheet and Financial Profit and Loss Account.
Q.32 : ln a.factory, works overheads are absorbed at 60% of Labour cost and Office overheads are
2O"/" of Works Cost.
Prepare (i) Cost Sheet (ii) Trading and Prolit & Loss Account and (iii) Reconciliation Statement if
total expenditure consists of Material { 2,00,000; Wages ( 1,50,000; Factory Expenses < 1,00,000
and Office Expenses < 85,000. 10% ot the Output is Stock at the end and Sales are ( 5,20,000.
Q.33 : From the following particulars prepare a statement reconciling the profits shown by Cost and
Financial Accounts:
Particulars
Opening Stock of Materials 1,44,000
Opening Stock of Finished Goods 2,88,000
Purchase of Materials 8,64,000
Closing Stock of Raw Materials 2,1 6,000
Closing Stock of Finished Goods 72,OOO
Wages 3,60,000
Factory oncost 2O7" on Prime cost
Oflice oncost 80% on factory on cost
Selling price 20"h above the cost price
Actual Works Expenses 2,27,150
Actual Office Ex 1,85,950
410 CostAccounting (T.YB.Cottt : SEM-V)
O.34 : The following figures are available from financial accounts for the year ended 31 st March,
2014:.
Parliculars
Direct materials consumption 2,50,000
Admin istration overheads 2,50,000
Selling and distribution overheads 4,80,000
Bad debts 20,000
Prelimihary expenses (written off) 10,000
Legal charges 5,000
lnterest on deposit received 10,000
Sales 1,20,000 units 7,00,000
Closing stock :
Finished stock 40,000 units 1,20,000
Work in rESS 80,000
The cost accounts reveal :
Direct materials consumpticln t 2,80,000
Factory overhead recovered at20"/" on prime cost.
Administration overhead at T 3 per unit of production.
Selling and distribution overhead at t 4 per unit sold.
Prepare :
(1) Costing profit and loss account.
(2) Financial profit and loss account.
(3) Statement reconciling the profit disclosed by the costing profit and loss account and financial
profit and loss account.
Q.35 (Two Products) : In a factory, two types of air cooler are manufactured, viz. Kohinoor and
Shahjad. From the following particulars, prepare a statement showing cost and profit per air cooler
sold. There is no opening or closing stock.
Kohinoor {
Labour 23,400 1,04,880
tMaterial 54,600 2,17,360
Works expenses are charged at 80% on labour and office expenses arc 15"/o on works cost. The
selling price of both the types of air coolers is { 1,900. 78 Kohinoor and 286 Shahjad air coolers
were sold.
Find out profit as per the cost accounts and financial accounts assuming the actual total works
expenses amounted to t 1,35,000 and office expenses to( 75,000. Prepare a Reconciliation
Statement.
[Ans.: Costing Profit : Kohinoor ? 36,972 + Shahjad ? 76,i94 = Total ? 1,13,306;
Financial Profits = ?81,3601
!G
14. CHECK YOUR STEP.BY-STEP
o
Q. No. FP Reco. ltems [A] Reco. ltems [B] CP
S
11 1,'15,755 1 1 ,200 + 5,700 + 40,300 + 6,750 + 3,1 20 8,000 + 25O + 475 + 1,700 1,72,400
12 (8,84,000) 25,000 + 16,000 + 64,000 + 16,000 + 8,000 24,00O + 1,54,000 + 2,63,000 (5,72,000)
13 1,03,850 35,000 + 1,200 + 1,100 + 1,250 6,400+500+2,980 1,32,520
14 1,500 100 + 50 9+14 1,627
15 64,500 20,000 + 1,550 4,000+250+850 80,950
16 9,00,000 16,240 16,000 + 4,000 8,96,240
30,000 + 5,000 + 6,000 + 3,000 + 5,000 + 4,500 1,700 + 1,000 + 2,000 + 8,000 F
17 2,00,000 2,40,800
o
18 1,58,500 800 + 13,000 + 1,600 + 800 + 400 + 1,000 4,800 + 6,000 1,65,300
19 20,300 200+300+1,630+340 260+2,340+400 19,770 \
20 1,32,400 20,500+15,600+3,800 26,800 + 13,300 1,32,200
21 15,000 1,000 + 500 100+90+50+500 15,760
22 48,000 4,000 + 5,000 + 2,500 + 4,750 + 6,000 250 + 10,000 + 5,000 + 6,500 48,500
23 1,89,994 2,2OO + 2,501 + 3,000 + 4,100 + 2,500 6,000 + 3,942 + 560 + 5,300 1,88,493
24 10,000 12,000+6,000+2,000 30,000
25 1,83,000 12,500 + 1,500 + 2,500 + 5,000 17,000 + 1,20,000 + 14,600 + 5,400 + 22,500 96,000
+ 50,000 + 12,000 + 9,000
26 30,300 8,000 500 + 3,000 34,800
27 13,150 100 250 13,000
28 12,90,000 40,000 + 10,000 + 80,000 + 29,161 20,000 + 1,00,000 + 1,20,000 + 44,000 + 6,00,000 5,65,16't
29 6,900 250+200+150 100 + 500 + 1,000 + 100 5,800
30 11 ,000 2,000+20,000+6,700 2,700 + 5,000 + 2,000 30,000
31 73,000 12,000 + 6,000 + 10,000 + 1,04,000 + 20,000 10,000+45,000+25,000 1,45,000
32 30,000 7,800 + 10,000 3,000 44,800
33 3,58,164 1,630 3,250 3,56,544
34 (5,35,000) 10,000 + 5,000 + 20,000 + 94,000 + 3,04,000 10,000 + 50,000 + 2,30,000 + 30,000 (4,22,0OO) \
35 81,360 32,376 430 1,13,306
FP = Financial Profits, CP - Costing Profits Note : FP + [A]- [B]= CP, or CP + [B] - [A]= FP
TEST BANK
[Objective Questions from University Question Papers (October 2014

to November 2017)l
-
ocroBER - 2014
A. MULTIPLE CHOICE QUESTIONS

1. Prime cost is
(a) All costs incurred in manufacturing a product
(b)Total of direct costs
(c) Material cost of a product
(d) Cost of operating a department
2. is most likely to be a fixed cost.
(a) Cost oI material used in production (b) Rent
-(c) Assembly labour cost (d) Commissions
3. Process of ascertainment of cost is known as
(a) Costing (b) Cost Reporting
(c) Cost Control (d)
-. None of the above
4. Cost which can be identilied easily is called as
(a) lndirect Cost (b) Direct Cost
(c) Manufacturing Cost (d) Fixed Cost
5. Good Received Note is prepared by
(a) Purchase Department (b) Stores Department
(c) Finance Department -. (d) Sales Department
6. lnterest on investment increases
(a) Financial Profit (b) Ass6ts
(c) Costing.Profit (d) None of the above
7. Tea and Lunch break is
(a) Normal ldle Time (b) Abnormal ldle Time
(c) Overtime (d) None of the above
8. Warehouse expense is an example of
(a) Production overhead (b) Selling overhead
(c) Distribution overhead (d) None of the above
-.
9. Payroll shows
(a) Gross Wages (b) Deductions
(c) Net Wages (d) AIlof the above
10. Under perpetual inventory control
(a) Stock is verified continuously
(b) Stock is verified periodically
(c) Stock is verified at the end of every quarter
(d) Stock is verified at half yearly
B. STATEWHETHERTRUEORFALSE
1 . Sunk costs are relevant for decision making.
2. Administr.ation costs are mostly variable cost.
3. The cost ol abnormal wastages is added to the cost of product.
4. Earnings under Halsey and Rowan Plan are the same.
Test Bank 41i
5. Cost Accounting is a branch of Financial Accounting.
6. Under/Over absorption of overheads take place only when a predetermined rate of overheads is
used.
7. Reconciliation of cost and financial accounts is necessary in case of non-integrated system of
accounts.
8. Secondary packaging cost is not production cost but distribution cost.
9. Purchase Requisition Note is prepared by the Stgres department.
10. Stores Ledger is maintained in the cost accounting department.
ocToBER 201s

1. The aggregate of all direct costs is termed as cost.
(a) Works (b) Prime
(c) Total (d)
- Production
2. Order should be placed with the supplier when the inventory touches
(a) Maximum level (b) Re-order level
(c) trlinimum level (d) Danger level
3. Under perpetual inventory system stock is asceftained
(a) Periodically (b) Continuously
(c) At the end of the year (d) None ofthe above
4. Labour turnover is caused by
(a) Low wages (b) Discharge
(c) Dissatisfaction with job -. (d) Allof the above
5. ldle time is
(a) Paid by the employer (b) Time wasted by workers
(c) Not paid by employer (d) All of the above
6. is not excluded while preparing a cost sheet.
(a) Goodwill written off (b) Provision for Taxation
(c)
- lnterest on capital (d) Property tax on office building
7. Total of indirect materials, indirect labour and indirect expenses is called as
(a) Prime cost (b) Overhead cost
(c) Works cost (d) Chargeable cost -.
8. When overheads recovered in costing are more than actual overheads incurred it is called as
of overheads.
(a) Under absorption (b) Over absorption
(c) Proper absorption (d) None of the above
9. Dock charges is a
(a) Direct cost (b) lndirect cost
(c) Urgent cost -. (d) Production cost
10. Over valuation of closing stock in cost accounts
(a) lncreases costing profit (b) Decreases costing profit
(c) lncreases financial profit Decreases financial profit
(d)-.
B. STATE WHETHER TRUE OR FALSE
1. ln ABC analysis 'A' class items are costliest.

2. Economic Order Quantity can be Fle-order Quantity but not vice-versa.
3. Overtime increases labour cost.
4. Preliminary expenses written off appear only in Financial Accounts.
5. Primary Packaging Charges is an example of selling and distribution overheads.
6. Over absorption of overheads increases Costing Profit'
7. Fixed Cost per unit remains fixed irrespective of level of output.
8. Strikes and lockout is abnormal idle time.

9. Drawing Office Salaries is an item of Factory Overheads.
10. Profit on sale of asset is shown in financial accounts.
NOVEMBER 2016

1. Cost Accounting is directed towards the need of
(a) Government (b) External users
(c) lnternal users (d) Shareholders
-.
2. Cost of Production is equal to
(a) Factory Cost + Administrative Overheads
(b) Factory Cost + Prime Cost -.
(c) Administrative Overheads + Selling Overheads
(d) Prime Cost + Selling Overheads
3. Variable cost increases in total due to
(a) lncrease in sales (b) lncrease in profit
(c) lncrease in volume of production -. (d) All of the above
4. Tenders and quotations are usually based on
(a) Cost Statement alone
(b) Profit alone
(c) Future estimates
(d) Previous period's cost adjusted for future forecasts
5. Labour turnover is caused by
(a) Dissatisfaction with job (b) Low wages
(c) Discharge -. (d) All of the above
6. Stores department issues material to the production department based on
(a) Purchase order (b) Goods received note
(c) Ivlaterial transfer note (d) Material requisition note
7. Economic order quantity refers to
(a) Quantity to be used economically
(b) The quantity of materials to be maintained
-.
(c) The quantity of materials to be recorded
(d) The quantity of materials to be ordered at a time
8. Time-booking means
(a) Time spent by workers to record their entry into the factory
(b) A technique to analyse time spent by workers in firm
(c) Time spent by workers on their jobs
9. Appropriate basis of apportionment of material handling charges is
(a) Material consumed (b) Material in opening stock
(c) Material in WIP (d) Material in closing stock
'10. Warehouse expenses is an example of
-.
(a) Selling Overhead (b) Distribution Overhead
(c) Production Overhead (d) None of the above
-.
1. Cost Accounting is used only in manufacturing industry.
2. High labour turnover rate denotes good human relations.
3. Under absorption of overheads decreases profit in costing books
4. Conversion cost is equal to direct wages plus factory overheads.
5, Bin Card is same as Stores Ledger.
Test Bank 415
6. Wages are paid for idle time.
7. Stores Ledger is maintained by the stores department.
8. Overheads are first charged to the department where they are incurred.
9. Transfer to General Reserve is an item of cost accounts.
10. Power is a machine expense.
NOVEMBER 2017

'l .
The purpose of inventory control is
(a) To control flow of raw material (b) To control invention
(c) To maintain optimum level of inventory (d) None of these
-.
2. When the actual.overhead is more than the absorbed overhead. lt is called
(a) Over absorption (b) Under absorption
(c) Capacity cost (d) None of these
3. lnterest on investment increases
(a) Costing profit (b) Financial profit
(c) Financialloss (d) Assets
4. Factory overheads are recovered as
(a) % ot Direct wages (b) % of Cost of production
(c) % of Sales -. (d) None of the above
5. Variable Costs change
(a)With change in fixed cost (b) With change in selling price
(c) Proportionately with -.
the change of output (d) None of the above
6. lndirect Costs are known as
(a) Variable Costs (b) Fixed Costs
(c) Overheads -. (d) None of the above
7. Labour Turnover is measured by
(a) Replacement Method (b) Separation Method
(c) Flux Method -. (d) All of the above
8. Deductions allowed as per Payment of Wages Act include
(a) House Rent (b) lncome Tax
(c) P.F. Deductions (d) Allof the above
9. Under Perpetual lnventory System, stock is ascertained
(a) Periodically (b) Continuously
(c) At end of the year (d) None of the above
10. Payment to other parties is called as
(a) Out of Pocket Cost (b) Book Cost
(c) Future Cost -. (d) Postponable Cost
1. Carriage inwards is an overheads.
2. Abnormal idle time wages are included in the cost of production.
3. The terms 'Allocation' and 'Apportionment' have the same meaning in costing.
4. Financial Accounts give product wise break-up of profit and loss.
5. Cost Accounting is a branch of Financial Accounting.
6. Stores Ledger is maintained in the Cost Accounting Department.
7. Purchase Requisition Note is prepared by the Stores Department.
8. Reconciliation of Cost and Financial accounts is necessary in case of non-integrated system of
accounts.
g. Under / Over absorption of overheads take place only when pre-determined rate of overheads is
used.
10.Total Cost = Prime Cost + All lndirect Costs.
ANSWERS
ocToBER 2014
A.
1 (b) 2 (b) 3. (a) 4. (b) 5. (b) 6. (a) 7. (a)
8 (c) I (d) 10 (a)
B. True : 6,7, 8,9,'10; False : 1, 2, 3, 4, 5
ocroBER 201s
A.
.I
(b) 2. (b) 3 (b) 4. (d) 5. (a) 6. (d) 7. (b)
8 (b) 9. (a) 10 (a)
B. True : 1,2,3,4, 8, 9, 10; False : 5, 6, 7
NOVEMBER 2016
A.
1 (c) 2. (a) 3. (c) 4. (d) 5. (d) 6. (d) 7. (d)
8 (c) e. (a) 10. (b)
B. True : 4, 6, 8, 10; False : 1 ,2,3,5, 7, I
A.
1 (c) 2 (b) 3. (b) 4. (a) 5. (c) 6. (c) 7. (d)
8 (d) I (b) 10 (a)
B. True : 6,7, 8,9, 10; False : 1,2, 3, 4, 5

5 - Cost Accounting (T.Y.B.com Sem-V)

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

5 - Cost Accounting (T.Y.B.com Sem-V)

Uploaded by

Copyright:

Available Formats

We are happy to present the First Edition of "Cost Accounting" to the students of

The Exercises Section is designed as a complete Do-it-Youfself (DlY) Home Study

A separate section 'Answer in Brief' containing numerical MCQs / short practical

We welcome constructive suggestions for improvement. Kindly e-mail your suggestions

1. lntroduction to Cost Accounting

Maximum Marks: 100

(A) Sub questions to be asked 12 and to be answered any 10

Q.3 Full Length Practical Question 15

o.4 Full Length Practical Question 15

Q.s Full Length Practical Question 15

Prin. Vasant Govind Natu

I was a stranger, and you took me in.

4. Overheads 205 254

THEORY AND ILLUSTRATIONS

5.2 Cost Control

10. Classification on Basis of Time 11

4,. Classification on Basis of Elements 14

1,4 COST REPORTINGAND CONTROL

2. OBJECTIVES AND SCOPE

2.1 BASIC OBJECTIVES

2.2 OTHER OBJECTIVES

3. IMPORTANCE AND ADVANTAGES

3.3 GOVERNMENT / CONSUMERS / PUBLIC

FOR CO$T ACCOUNTING

5.1 ASCERTAINING ITEM.WISECOST/PROFITABILITY

5.2 COST CONTROL

5.4 DECISION MAKING AND PLANNING

r u.r6,*,r, : FINANCIAL ACCOUNTING VS. COST ACCOUNTING

(6) Rcports FA results are shown in P & L CA results are shown in

8. CLASSIFICATION / PURPOSES OF GOSTS

EXHIBIT 2 : COST CLASSIFICATION

BEHAVIOUR TIME FOR MANAGEMENT ELEMENTS

1. Fixed Cost. 1. Historical Cost 1. Marginal Cost Nature-wise

8.2 DIFFERENT COSTS FOR DIFFERENT PURPOSES

Purpose Relevant Cost lnformation

9. CLASSIFICATION ON BASIS OF BEHAVIOUR

a The variable cobt per unit remains constant

The above discussion iS summed up in the Exhibit below

EXHIBIT 3 : COST BEHAVIOUR

Stepped Flxed Cost Seml-Varlable Cost I Mlxed Cost

10.1 'HISTORICAL COSTS

10.2 PRE-DETERMINED COSTS

11. CLASSIFICATION FOR MANAGEMENT DECISIONS

11,1 MARGINAL COST

11.3 REPLACEMENT COST

11.4 IMPUTED COST

11.6 CONTROLLABLE COST

11.7 RELEVANT COST

11.8 NORMAL COST

11.9 ABNORMAL COST

11.10 AVOIDABLE COSTS

11.11 UNAVOIDABLE COSTS

11,12 DIFFERENTIAL COST

Output Unit Differential Unit TotalCost Differential Differential

(+) lncremental Cost; (-) Decremental Cost

12. CLASSIFICATION ON BASIS OF ELEMENTS

CAS-I lays down the following guidelines in this regard.

EXHIBIT 4 : COST CLASSIFICATION BY NATURE

COST CLASSIFICATION BY NATURE

Material Labour Expenses

ON BASIS OF COST CENTRE/UNIT

13.2 COST CENTRE

13.3 COST UNIT