MANAGEMENT

AND COST
ACCOUNTING
SIXTH EDITION

COLIN DRURY

Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8

© 2004 Colin Drury
 Part Two:
Cost accumulation for inventory valuation and profit
measurement

Chapter Four:
Accounting entries for a job costing system

Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8

© 2000 Colin Drury
© 2004 Colin Drury
4.1a

Pricing the issue of raw materials

1.The issue of raw materials involves:

• reducing the value of raw material stocks

• recording the cost of the materials issued to the

appropriate job or overhead account.

2.Difficulty arises in determining which costs should be assigned to material issues.

Example
1 February : 1000 units purchased at £1 per unit
1 March : 1000 units purchased at £2 per unit
30 March : 1000 units sold at £4 per unit

Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8

© 2000 Colin Drury
© 2004 Colin Drury
4.1b

Three alternative issue prices:

First-in, first-out (FIFO) = £1.00 per unit

Last in, first out (LIFO) = £2.00 per unit
Average cost = £1.50 per unit

A summary of the transactions

Raw materials Gross
Sales Cost of sales closing stock profit
£ £ £ £
FIFO 4000 1000 × £1.00 =1000 1000 × £2.00 =2000 3000
LIFO 4000 1000 × £2.00 =2000 1000 × £1.00 =1000 2000
Average
cost 4000 1000 × £1.50 =1500 1000 × £1.50 =1500 2500

Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8

© 2000 Colin Drury
© 2004 Colin Drury
4.2a

ACCOUNTING ENTRIES FOR AN INTEGRATED

ACCOUNTING SYSTEM

Example

The following are the transactions of AB Ltd for the month of April.

1. Raw materials of £182 000 were purchased on credit.

2. Raw materials of £2 000 were returned to the supplier because of

defects.

3. The total of stores requisitions for direct materials issued for the period
was £165 000.

4. The total issues for indirect materials during the period was £10 000.

Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8

© 2000 Colin Drury
© 2004 Colin Drury
4.2b

5. Gross wages of £185 000 were incurred during the period consisting
of:
Wages paid to employees £105 000
PAYE due to Inland Revenue £60 000
National insurance contributions due £20 000

6. All the amounts due in transaction 5 were settled by cash during the
period.

7. The allocation of the g oss wages for the period was as follows:
Direct wages £145 000
Indirect wages £40 000

8. The employer ’s contribution for national insurance deductions was

£25 000.

Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8

© 2000 Colin Drury
© 2004 Colin Drury
4.2c

9. Indirect factory expenses of £41 000 were incurred during the period.

10. 1Depreciation of factory machinery was £30 000.

11. Overhead expenses charged to jobs by means of factory overhead absorption

rates was £140 000 for the period.

12. Non-manufacturing overhead incurred during the period was £40 000.

13. The cost of jobs completed and transferred to finished goods stock was £300
000.

14. The sales value of goods withdrawn from stock and delivered to customers
was £400 000 for the period.

15. The cost of goods withdrawn from stock and delivered to customers was
£240 000 for the period.

Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8

© 2000 Colin Drury
© 2004 Colin Drury
4.3a

Example

1. Purchase of raw materials

Dr Stores ledger control account 182 000
Cr Creditors control account 182 000
2. Return of raw materials
Dr Creditors control account 2 000
Cr Stores ledger control account 2 000
3. Issue of direct materials
Dr Work in progress control account 165 000
Cr Stores ledger control account 165 000
4. Issue of indirect materials
Dr Factory overhead control account 10 000
Cr Stores ledger control account 10 000

Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8

© 2000 Colin Drury
© 2004 Colin Drury
4.3b

Stores ledger control account

1. Creditors a/c 182 000 2.Creditors a/c 2 000

3.Work in progress a/c 165 000
4.Factory overhead a/c 10 000
Balance c/d 5 000
182 000 182 000
Balance b/d 5 000

Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8

© 2000 Colin Drury
© 2004 Colin Drury
4.4a

1. Recording labour costs payable

Dr Wages control account 185 000
Cr Inland Revenue account 60 000
Cr National insurance contribution account 20 000
Cr Wages accrued account 105 000

Note the above accounts will be cleared by crediting cash and debiting each of the
accounts.

2. Recording the allocation of labour costs

Dr Work in progress account 145 000
Dr Factory overhead control account 40 000
Cr Wages control account 185 000

Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8

© 2000 Colin Drury
© 2004 Colin Drury
4.4b

3. Recording the employer ’s national insurance contribution

Dr Factory overhead control account 25 000
Cr cash/bank 25 000

Wages control account

5. Wages accrued a/c 105 000 7.Work in progress a/c 145 000
5. PAYE tax a/c 60 000 7.Factory overhead a/c 40 000
5. National Insurance
a/c 20 000
185 000 185 000

Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8

© 2000 Colin Drury
© 2004 Colin Drury
4.5a

1. Recording the overheads incurred

Dr Factory overhead control account 71 000

Cr Expense creditors control account 41 000
Cr Provision for depreciation 30 000

2. Recording the allocation of overheaads to production

Dr Work in progress control account 140 000

Cr Factory overhead control account 140 000

Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8

© 2000 Colin Drury
© 2004 Colin Drury
4.5b

Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8

© 2000 Colin Drury
© 2004 Colin Drury
4.6

1. Recording non-manufacturing overheads incurred

Dr Non-manufacturing overheads account 40 000
Cr Expense creditors 40 000
Dr Profit and loss account 40 000
Cr Non-manufacturing overheads account 40 000

2. Production completed during the period

Dr Finished goods stock account 300 000
Cr Work in progress control account 300 000

3. Recording sales and cost of goods sold

Dr Debtors control account 400 000
Cr Sales account 400 000
Dr Cost of sales account 240 000
Cr Finished goods stock account 240 000

Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8

© 2000 Colin Drury
© 2004 Colin Drury
4.7a

BACKFLUSH COSTING

Illustration
Purchase of raw materials £1 515 000
Conversion costs £1 010 000
Finished goods manufactured 100 000 units
Sales for the period 98 000 units
No opening stocks
Standard unit cost is £25 (£15 materials and £10 conversion cost)
Zero material variances

Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8

© 2000 Colin Drury
© 2004 Colin Drury
4.7b
Method 1
Trigger point 1 =Purchase of raw materials and components
Trigger point 2 =Manufacture of finished goods

Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8

© 2000 Colin Drury
© 2004 Colin Drury
4.8

BACKFLUSH COSTING

Method 2
1. Only one trigger point =Manufacture of finished product

2. Conversion costs are debited as the actual costs are

incurred.

3. Dr Finished goods inventory

(100 000 × £25) 2500 000
Cr Creditors 1 500 000
Cr Conversion costs 1 000 000
Dr Cost of goods sold 2 450 000
Cr Finished goods inventory 2 450 000

Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8

© 2000 Colin Drury
© 2004 Colin Drury
4.9a

CONTRACT COSTING
1. Contract costing is applied to relatively large cost units which take a long time
to complete (e.g.civil engineering projects).

2. A separate account is maintained for each contract.

• The first section is used to determine cost of sales.

• In the second section cost of sales is compared with sales to derive the
profit to date.
• The third section records future expenses and accrued expenses.

Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8

© 2000 Colin Drury
© 2004 Colin Drury
4.9b

3. Guidelines for determining profit to date on contracts.

• No profit is taken if the contract is at an early stage.

• Prudence concept applied and losses recorded as
• incurred or anticipated.
• If the contract is near completion a proportion of the profit
should be recognized based on the following formula:

Cash received to date × Estimated profit

Contract Price

Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8

© 2000 Colin Drury
© 2004 Colin Drury
4.9c

• Within the 35 –85%stage of completion,the following formula is

recommended to determine profit to date:

*Notional profit = Value of work certified – Cost of work certified

Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8

© 2000 Colin Drury
© 2004 Colin Drury
4.10

CONTRACT COSTING EXAMPLE

Use overhead as transparency

Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8

© 2000 Colin Drury
© 2004 Colin Drury
4.11

CONTRACT COSTING
BALANCE-SHEET ENTRIES

Use overhead as transparency

Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8

© 2000 Colin Drury
© 2004 Colin Drury
4.12a

CONTRACT COSTING - BALANCE SHEET ENTRIES

Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8

© 2000 Colin Drury
© 2004 Colin Drury
4.12b

Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8

© 2000 Colin Drury
© 2004 Colin Drury